Half-year Report

RNS Number : 2932V

Serco Group PLC

06 August 2020

 

2020 half year results

6 August 2020

Serco Group plc

LEI: 549300PT2CIHYN5GWJ21

Six months ended 30 June	2020	2019	Change at reported currency	Change at constant currency
Revenue(1)	£1,822.2m	£1,475.5m	+24%	+24%
Underlying Trading Profit (UTP)(2)	£77.6m	£50.6m	+53%	+53%
Reported Operating Profit (i.e. after exceptional items)(2)	£89.1m	£17.2m	+418%	+417%
Underlying Earnings Per Share (EPS), diluted(3)	3.86p	2.62p	+47%	+46%
Reported EPS (i.e. after exceptional items), diluted	5.66p	(0.15p)
Free Cash Flow(4)	£80.9m	£0.4m
Adjusted Net Debt, 2019 pro-forma(5)	£142.9m	£200.6m
Reported Net Debt(6)	£502.8m	£206.7m

Very strong first half; guidance maintained for 2020.

Highlights

●	Revenue (1) : grew by 24% to £1.8bn, with organic growth of 15% and a 9% uplift from the acquisition of the Naval Systems Business Unit of Alion in North America (NSBU).
●	Underlying Trading Profit (2) : increased by 53% to £78m, with NSBU adding 20%. Group margin increased from 3.4% to 4.3%.
●	Reported Operating Profit: increased by £72m to £89m as a result of the strong increase in underlying profit and exceptional items.
●	Underlying EPS : increased by 47%, reflecting the growth in Underlying Trading Profit, partially offset by higher interest and tax.
●	Free Cash Flow(4): improved to £81m, or £32m excluding the deferral of £49m of tax payments.
●	Adjusted Net Debt(5): fell £58m to £143m. Underlying leverage stands at 0.7x EBITDA or 0.9x excluding tax deferrals.
●	Order Intake: strong at £1.9bn; >100% book-to-bill. Approximately 60% of the order intake related to existing contracts being rebid or extended and 40% was new work.
●	Order Book: increased from £14.1bn at the end of 2019 to £14.5bn.
●	Pipeline: value of larger new bid opportunities has reduced from £4.9bn to £4.1bn, reflecting recent contract wins.
●	Government support: subject to circumstances at the time our intention is to pay taxes deferred by government by year end; we are not planning to apply for UK government re-employment incentives.

Rupert Soames, Serco Group Chief Executive, said: "Operationally, the first half has been dominated by the rapid adjustments which have had to be made in the way we deliver our services as a consequence of Covid-19.  The response of colleagues has been exemplary and they have worked throughout with the same courage, dedication and commitment as their public-sector co-workers on the front line in prisons, hospitals, trains, ferries, defence establishments and immigration facilities.  As a result of the significant investments we have made in recent years, our management teams, business processes and systems have shown themselves to be capable of responding at great speed and effectiveness to governments' needs.  We commissioned the UK's first drive-through test centre in two days; in Australia accommodation was provided for more than 1,300 quarantined travellers on one week's notice; and as part of the NHS Test & Trace programme we mobilised 10,500 contact tracers in a four-week period.  Worldwide, we have mustered over 15,000 full and part-time people to help governments respond to the crisis.  We think that these and other examples will reinforce in our customers' minds the value Serco can bring and the need more generally of governments to have vibrant, resilient and secure supply chains that can support public services in good times and bad.  

Financially, the performance in the first half has been exceptionally strong, largely as a result of contract wins in 2019 and the acquisition of the Naval Systems Business Unit of Alion last August; Covid-19 has had little effect on profits; although there have been some dramatic impacts, positive and negative, on individual contracts, in aggregate the "ups" on profits have balanced the "downs".  Revenues were up 24% and Underlying Trading Profit increased by 53%; Reported Operating Profit increased from £17m to £89m.  Pleasingly, at a time when a number of tenders have been delayed as a result of the crisis, our order intake was once again ahead of our revenues giving us a positive book-to-bill ratio.  Free Cash Flow increased by £80m year-on-year, and Adjusted Net Debt fell by £58m to £143m; cashflow benefitted from tax payment deferrals of around £49m; excluding the temporary benefit of these deferrals, our underlying leverage would stand at 0.9x EBITDA, slightly below our target range of 1-2x.  Subject to trading in the second half, it would be our intention to pay taxes deferred by the end of the year, even if not strictly required to do so, and we do not intend to take advantage of the UK government's £1,000 per person re-employment incentive as we do not think it right that we should take money from the taxpayer to employ people who will be delivering services paid for by the taxpayer.

Serco's strategy of focusing on supporting governments around the world in the delivery of public services is working well for us.  In the Outlook sections we describe some of our thinking on how the current crisis will change our business in the years ahead as governments grapple with conflicting needs: to help people get back to work; to build quality and resilience into public services; to tame ballooning deficits.  In other words, how to deliver more, and better, for less - an approach we have been promoting since 2014.

We re-instated guidance for 2020 in our trading update on 17^th June, saying that we expected revenue to be around £3.7bn (2019: £3.2bn), and Underlying Trading Profit of £135-£150m (2019: £120m).  Nothing in recent weeks has changed our view, although, as set out in our Outlook section, Covid-19 has introduced a greater degree of risk around our guidance than would normally be the case."

	FY 2020 guidance as at 6th August 2020	Movement to prior guidance as at 17th June 2020
Revenue	~£3.7bn	Unchanged
Organic sales growth	~9%	Unchanged
Underlying Trading Profit	£135m-£150m	Unchanged
Net Finance Costs	~£27m	Unchanged
Underlying effective tax rate	~25%	Unchanged
Free Cash Flow	Broadly similar to 2019 at +£62m	Unchanged
Adjusted Net Debt	~£200m	Unchanged

Notes: Cash flow and net debt guidance assume repayment of deferred tax by the end of the year, where possible.  The guidance uses an average GBP:USD exchange rate of 1.28 in 2020 and GBP:AUD of 1.88.

For further information please contact Serco:

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

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

Presentation:

A virtual presentation for institutional investors and analysts will be held today starting at 09.30am.  The presentation will be webcast live on www.serco.com and subsequently available on demand.  A dial-in facility is also available on [phone] (USA: [phone]) with participant pin code 5675917.

Notes to summary table of financial results:

(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 six months ended 30 June 2020 into sterling at the average exchange rates for the six months ended 30 June 2019.

(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 historic 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:

Six months ended 30 June £m	2020	2019
Underlying Trading Profit	77.6	50.6
Include: non-underlying items
Contract & Balance Sheet Review adjustments	2.9	-
Trading Profit	80.5	50.6
Amortisation of intangibles arising on acquisition	(5.0)	(2.3)
Operating Profit Before Exceptional Items	75.5	48.3
Operating Exceptional Items	13.6	(31.1)
Reported Operating Profit (after exceptional items)	89.1	17.2

(3) Underlying EPS reflects the Underlying Trading Profit measure after deducting 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 Condensed Consolidated Cash Flow Statement, adding 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. 

(5) Adjusted Net Debt is 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.  A pro forma measure of Adjusted Net Debt is also presented for 30 June 2019; this removes the £138.7m of net proceeds of the Equity Placing that were received in May that were subsequently used to fund the NSBU acquisition.

(6) Reported Net Debt includes all lease liabilities including those recognised under IFRS16.  Reported Net Debt in June 2019 also includes the £138.7m of net proceeds of the Equity Placing that were received in May and subsequently used to fund the NSBU acquisition.  A reconciliation of Adjusted Net Debt to Reported Net Debt is as follows: 

As at £m	30 June 2020	30 June 2019	31 Dec 2019
Adjusted Net Debt, pro forma	142.9	200.6	214.5
Include: net proceeds from Equity Placing received in May 2019	n/a	(138.7)	n/a
Adjusted Net Debt	142.9	61.9	214.5
Include: all lease liabilities accounted for in accordance with IFRS16	359.9	144.8	369.9
Reported Net Debt	502.8	206.7	584.4

Reconciliations and further detail of financial performance are included in the Finance Review on pages 14-31.  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 34-63.

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; cyber-attacks; and pandemics, epidemics or natural disasters.  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.

Chief Executive's Review

Summary of financial performance

Revenue and Trading Profit

Our reported revenue increased by £347m, or 24%, to £1,822m (2019: £1,476m), with the UK & Europe, Americas and Asia Pacific all contributing to growth, underlining the importance of our geographic diversification.  Of the 24% growth,15% (£221m) was organic; the acquisition of the Naval Systems Business Unit of Alion in North America contributed 9% (£130m); currency movements were a drag of less than 1% (-£7m). The high level of organic growth was mainly due to large new contracts that started in the second half of last year, including the Asylum Accommodation and Support Services Contracts (AASC) in the UK and the Australian Defence Force Health Services Contract (AHSC), as well as additional work related to Covid-19 in the second quarter. Revenues arising directly from Covid-19 amounted to about £130m across new and existing contracts, which was partially offset by declines in reported revenue of around £50m in areas such as leisure (UK), rail (UK), air traffic control & airport services (Middle East), and driver licence administration (Canada).  The net impact of Covid-19 on our reported revenue was growth of 5%. There were, however, also revenue declines in our Merseyrail joint venture and in Leisure Trusts, whose revenues are not included in our accounts.

Underlying Trading Profit (UTP) increased by £27m or 53% to £77.6m (2019: £51m), with negligible net impact from currency.  The Americas, ASPAC and the UK all increased their profits substantially; the impact of Covid-19 on profits was similar to revenues - increases in some areas were offset by losses in others.  In the Americas, the NSBU acquisition added around £10m to our profit, in line with our expectations at the time of acquisition, and our CMS contract benefitted as the temporary uplift in volume related work we saw last year persisted for longer than expected. The principal driver of profit growth in the UK was the AASC asylum-seeker contract, as the significant losses incurred during mobilisation of the new contract in the first half of 2019 turned to profits in the first half of 2020.  The Group's Underlying Trading Profit margin increased from 3.4% to 4.3%, due to good operational leverage on our overheads and improved contract profitability. The utilisation of Onerous Contract Provisions (OCPs) fell from £42.1m in the first half of last year to £1.7m this year.  We have very nearly completed our task of managing the £447m of loss-making onerous contracts identified in 2014.

Trading Profit was £80.5m (2019: £50.6m), which comprises UTP plus a net £2.9m credit in contract & balance sheet review and one-time items (2019: £nil).

Reported Operating Profit and exceptional costs

Reported Operating Profit of £89.1m (2019: £17.2m) was £8.6m higher than Trading Profit as £5.0m (2019: £2.3m) of amortisation of intangibles arising on acquisition was more than offset by a net credit of £13.6m from exceptional operating items, the largest portion of which related to our exit from the Viapath pathology services joint venture. There were no exceptional restructuring costs (2019: £5.1m).

Finance costs

Net Finance Costs were £12.7m (2019: £10.5m), including £4.8m (2019: £2.4m) of interest payable on leases.  On a daily average basis, adjusted net debt was £283m (2019: £219m). Movements in net debt are commented on below.  Cash net interest paid was £12.6m (2019: £10.5m).

Pensions

Serco's pension schemes are in a strong funding position, and show an accounting surplus, before tax, of £90m (31 December 2019: £54m) on scheme gross assets of £1.6bn and gross liabilities of £1.5bn.  The opening net asset position led to a net credit within net finance costs of £0.6m (2019: £1.1m).  For the Group's main scheme, the Serco Pension and Life Assurance Scheme (SPLAS), the purchase of a bulk annuity from an insurer, which covers around half of all scheme members, has the effect of fully removing longevity, investment and accounting risks for those members; the gross liability remains recognised on our balance sheet, but there is an equal and opposite insurance asset reflecting the perfect hedge established by the annuity.

Tax

The underlying effective tax cost was £17.0m (2019: £9.8m), representing an underlying effective rate of 26.2% (2019: 24.4%) based upon £77.6m (2019: £40.1m) of Underlying Trading Profit less net finance costs of £12.7m (2019 £10.5m).  The rate is higher than the UK statutory rate of corporation tax as the tax rates in our international divisions tend to be higher than the UK's rate. This is only 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 is higher than the comparable period primarily due to an increase in the proportion of the Group's profits arising in the US and subject to higher rates of tax. We expect the rate to continue at around 25%, although this is sensitive to the geographic mix of our profits.

The tax on non-underlying items was a credit of £11.3m (2019: credit of £1.3m); total pre-exceptional tax costs were therefore £5.7m (2019: £8.5m).  Of the £11.3m credit, there was a tax impact of amortisation of intangibles arising on acquisition of £0.9m and £10.4m related to non-underlying items. The non-underlying items element resulted from an £8.0m credit due to movements in the pension fund and a £2.4m credit on revaluation of the UK deferred tax asset to reflect the future corporate tax rate increasing from a prospective 17% to 19%. Net cash tax paid reduced to £12.0m (2019: £17.2m) due to deferred corporation tax payments related to Covid-19 and earlier receipts in connection with losses sold to joint ventures and associates.

Reported result for the period

The reported result for the period, as presented at the bottom of the Group's Condensed Consolidated Income Statement on page 34, was a profit of £70.3m (2019: loss of £1.4m).  This reflects Operating Profit of £89.1m (2019: £17.2m), Profit Before Tax of £76.4m (2019: £6.7m) less tax of £6.1m (2019: £8.1m).

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 47% to 3.86p (2019: 2.62p).  The improvement reflects the 53% increase in Underlying Trading Profit at reported currency partially offset by higher interest and tax. Reported EPS, which includes the impact of the other non-underlying items and exceptional costs, was 5.66p (2019: loss per share of 0.15p). The weighted average number of shares in issue, after the dilutive effect of share options, increased to 1,226.5m (2019: 1,146.3m) largely as a result of having a full six months of the additional shares issued in the placing on 28 May 2019. 

Cash flow and net debt

Free cash flow was £80.9m (2019: £0.4m).  Cash flow has benefitted from a significant reduction in loss-making contracts subject to OCPs, which is reflected in the lower rate of OCP utilisation for in-period losses of £1.7m (2019: £29.5m, excluding £12m of IFRS16-related accelerated utilisation).  Working capital benefitted from a £45m benefit from deferred tax payments, principally UK VAT, but this was partially offset by the flows related to the significant increase in revenues; debtor and creditor days were at comparable levels to those seen in 2019; 87% of UK supplier invoices were paid in under 30 days (2019: 87%) and 96% were paid in under 60 days (2019: 96%).  Other movements within Free Cash Flow to note; cash tax paid was lower, largely due to deferred corporation tax payments related to Covid-19, while capital expenditure was higher, partly due to timing effects.  The Group has not utilised any working capital financing facilities in this or the prior year. 

Our measure of Adjusted Net Debt excludes all lease liabilities, which now total £360m (31 December 2019: £370m) the majority relating to the AASC contract, and aligns closely with the measure used for covenant purposes of our financing facilities.  Adjusted Net Debt at 30 June 2020 decreased to £142.9m (31 December 2019: £214.5m, 30 June 2019 pro forma: £200.6m). The year-on-year decrease in Adjusted Net Debt of £72m includes the free cash inflow of £81m and a £7m net inflow from the disposal and acquisition of subsidiaries, offset partially by a £4m (2019: £12m) cash outflow related to exceptional items and a net adverse currency translation effect of £12m, predominantly reflecting the Group's US$ Private Placement debt.

At the closing balance sheet date, our leverage for debt covenant purposes was 0.7x EBITDA (2019: 1.37x on an underlying pro forma basis excluding the proceeds of the equity placing, or 0.43x on a reported basis).  This compares with the covenant requirement for net debt to be less than 3.5x EBITDA and our normal target range of 1-2x.

There was an unusually large difference between peak (£356m), average daily (£283m), and period end (£143m) Adjusted Net Debt.  This was the result of a number of factors: first, in response to Covid-19 and government requests we mobilised and paid for a large amount of additional resources from March onwards, and it took until June for the contractual paperwork and the payments to catch up, so we carried an unusually high amount of working capital for much of the period; second, there were delays in processing billings on our FEMA contract in the US in Q1, which improved in Q2; third, in Q2 we had the benefit of government tax deferrals and the completion of the Viapath disposal, which reduced the period-end net-debt.  We have not used any financing or efforts out of the ordinary to reduce period end net debt.

Dividends

At the time of our full year 2019 results on 26 February, we recommended paying a final dividend in respect of the 2019 financial year.  This would have been the first time for five years we had paid a dividend, and the recommendation was based on a strong performance in 2019 and the prospect of further good progress in 2020. However, on 2nd April, and in response to the Covid-19 crisis, we withdrew our guidance for the year and announced that the payment of management bonuses would be deferred and the dividend would be withdrawn and consideration would be given to reinstating it when appropriate.  We had decided to take advantage of government schemes to support companies' liquidity by deferring tax payments, and took the view that it would be inappropriate to use that cash for anything other than its intended purpose of protecting the financial strength and resilience of our business.

Since then, the business has continued to perform well, we have reinstated guidance for the year, and levels of net debt within the business have declined.  However, as described in the Outlook section significant uncertainty remains, there is a wide range of possible outcomes for the year, and prudence would dictate that we continue to take advantage of government liquidity support, probably into the fourth quarter.  If circumstances allow and we can sensibly repay the deferred taxes towards the end of the year, the Board believes that it will then be in a position to consider whether it should distribute all or part of what would have been paid as the final dividend in respect of 2019.  Under the same logic, it has also decided to defer a decision on whether we should pay any interim dividend in respect of 2020 until the fourth quarter as well.

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.

Contract awards, order book, rebids and pipeline

Contract awards

At £1.9bn, the Group's order intake has been strong in the first half of 2020. This is slightly ahead of our revenue despite the challenges posed by Covid-19.  There were over 20 contract awards worth more than £10m each and three with a total contract value of more than £200m. Of the order intake, approximately 60% was represented by the value of rebids and extensions of existing work and 40% comprised new business.  Around 55% of order intake came from the UK, with around 25% from Asia Pacific and the remaining 20% from customers of our Americas, Middle East and continental European operations.

The largest award was our £450m contract to continue to operate the Northern Isles Ferry Services. First announced in September 2019, the contract was not included in our order intake until a procurement challenge from the unsuccessful bidder was resolved earlier this year.  In Australia, we signed a six-year A$730m (~£370m) extension to our contract to deliver support services at Fiona Stanley Hospital in Perth. The UK business won an eight-year contract valued at just over £200m to manage the Gatwick Immigration Removal Centres.  We agreed and mobilised a range of work related to helping governments tackle Covid-19. This included contracts in the UK to support the NHS Test & Trace programme, testing facilities in the UK, temporary hospitals in the UK and the Middle East, and quarantine hotels in Western Australia. In total, the Covid-19 work has a contracted value of approaching £200m.  Given the nature of this work, and the circumstances in which it was awarded, these contracts will tend to generate lower-than-average-margins. Other notable contract awards included a nine-year £116m environmental services contract with three councils in Norfolk, a new win worth £47m to provide deep space surveillance support in the USA and a two-year extension to our contract to provide contact centre services for the Australian Tax Office, valued at £44m. We were also awarded a new contract to deliver front line customer services at Dubai Airport. However, as a result of the airport closing and subsequent lower passenger volumes due to Covid-19, the contract is yet to start, so we have not included it in our order intake in the period.

Bids for new work that were unsuccessful in the period included Air Traffic Controller training for the Federal Aviation  Administration in North America and support services for Kowloon West Cluster Hospital Authority in Hong Kong.  The win rate by value for new work, which has averaged slightly less than 30% over the last five years, was unusually high at 43%.  Conversely, the win rate by value for securing existing work was 60%, which is considerably lower than the 80-90% we typically see, as a result of the Viapath joint venture, in which we had a 33% interest, not being selected as the preferred bidder for pathology services in London. We have subsequently sold down our interest in the joint venture.  In our wholly-owned operations, the win rate by value for existing work was over 90%.  Win rates by number of tenders were nearly 60% for new bids and over 90% for rebids and extensions.

Order book

The Group's order book is now an estimated £14.5bn, up by £0.4bn versus £14.1bn at the start of the year.  Our order book definition gives our assessment of the future revenue expected to be recognised from the remaining performance obligations on existing contractual arrangements.  It is worth noting that this excludes unsigned extension periods; the £14.5bn would be £15.6bn 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, as noted in the above section on contract award.  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 £1.2bn if included within our order book, driven by the current pricing period of the AWE operations and the Merseyrail franchise. There is now £3.6bn of revenue already delivered or secured in the order book for 2020, equivalent to over 90% visibility of our £3.7bn revenue guidance.

Rebids

As we look ahead to the end of 2022, there are around 60 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 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. 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, which is higher than normal as a result of work related to the Covid-19 response, which is expected to be short-term in nature.  In 2021, the aggregate annual value of contracts due for extension or recompete is currently around £600m, with this including our operations for the Dubai Metro, which accounts for 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 £600m. 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

Our 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 reported pipeline.  It measures only opportunities for new business that have an estimated annual contract value (ACV) of at least £10m and which we expect to bid and to be 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 our pipeline as the opportunities arise.  It is thus a relatively small proportion of the total universe of opportunities, many of which have annual revenues less than £10m, are likely to be decided beyond the next 24 months or are rebids and extensions. 

On this definition our pipeline stood at £4.9bn at the beginning of 2020.  This year has been particularly unusual with Covid-19 leading to changing timings on expected work in the pipeline plus new work helping governments respond to the pandemic. We have also had our usual flow of wins and losses, as well as changes from opportunities no longer meeting our definition and new opportunities maturing to the stage where they meet our pipeline definition.  The pipeline currently stands at £4.1bn, which consists of just over 20 bids that have an ACV averaging approximately £30m and a contract length averaging around six years.

The pipeline of opportunities for new business that have an estimated ACV of less than £10m has increased from £1.6bn at the beginning of the year to £1.8bn. The pipeline including both large and smaller opportunities has reduced from £6.5bn to £5.9bn.

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.

Covid-19

The Covid-19 pandemic has had a small net financial impact on our business so far, but this does not reflect the effect it has had on us operationally. It has caused large fluctuations in demand for some of our services, placed huge pressure on our employees, especially those working on the front-line, and introduced new complexity into both how we manage our supply chain and deliver our services. The business has shown remarkable agility and effectiveness in response to this intense pressure. Much of this has been made possible by the significant investments we have made in people and systems in the last few years.  While working hard on navigating these immediate challenges we are also planning for the longer term implications for our business, both in terms of operational delivery and customer demand.

Short-term outlook

We are maintaining our guidance for 2020 as re-instated in our trading update on 17th June, namely: we expect Revenue to be around £3.7bn (2019: £3.2bn), and Underlying Trading Profit of £135-£150m (2019: £120m); other elements of guidance are shown on page 2 of the statement.  The relatively wide range of UTP outcomes reflects the continuing uncertainty which we think is likely to persist well into 2021 as the world grapples with recurring outbreaks of infection.  We are already seeing in Australia and in North America that these secondary upsurges are hard to contain and can have a disruptive impact on workplaces, which in turn can affect both our revenue and profit.  It is also worth noting that our guidance for profits in 2020 has stayed at levels similar to our pre-pandemic expectations mainly because of our success in winning enough work from governments to support their Covid-19 response to offset the significant negative impact of the pandemic in other parts of our business.  These contracts are by their nature short-term, which means they are unlikely to continue much into 2021. The variable nature of this work introduces a greater degree of near-term risk in our planning.

Medium and long-term outlook

It is a truism that the global economic and human catastrophe brought about by Covid-19 is likely to have a dramatic impact on the way we all do everything; some say that no stone of our lives will be left unturned, and nothing will ever be the same again.  We take a more nuanced view as far as our business is concerned and are inclined to believe that in the long term more will stay the same than will be different.

First, it is true that recent experience might make some governments consider doing more in-house rather than outsourcing service provision.  We don't think that this will happen meaningfully, in part because the private sector has responded extremely well to governments' emergency requirements: thousands of ventilators have been delivered, tens of millions of items of PPE have been manufactured, massive additional hospital bed capacity built, vaccine development accelerated.  For our part, we have stood up drive-through test facilities in two days; recruited 10,500 tracers in four weeks, provided accommodation for more than 1,300 quarantined travellers in five days, found accommodation for 2,700 asylum seekers. These successes in delivering critical public services will, hopefully, remind governments of the value of resilient, robust supply chains who can support them in both ordinary and extra-ordinary times.

Second, for many people reading this report, the most memorable thing about the impact of the crisis on our work life has been the discovery that, thanks to the wonders of modern IT, we can work quite effectively from home and don't need to spend hours every day commuting; this will surely drive fundamental changes in office-based work.  But in Serco, around 90% of our colleagues work on the front line in prisons, call centres, hospitals, defence establishments, trains or ferries.  From your kitchen table you cannot make a patient's bed, or unlock a wing, or tow an aircraft carrier into port, and we don't see demand for these services, in aggregate, diminishing.  We therefore do not see a lot of change in our basic business model of offering public services delivered by people supported by good systems and processes.

What of our customers?  As far as governments themselves are concerned, the only things we know for sure are, first, that they will be massively more indebted than they were before the crisis, and that, secondly, citizens will be more conscious of the contribution that public services make to their quality of life.  The chorus of the "Four Forces", which we have previously described as driving demand for our services will, we think, have been amplified by the crisis: increasing and changing demand for public services; heightened expectations around the quality and resilience of public services; increased fiscal deficits; the dire political consequences of increasing taxes.  These will continue to drive governments to want to deliver more public services, of higher quality, for less money.  We believe that this imperative to provide more, and better, for less will become even more urgent in the years ahead, and to deliver those objectives governments will need the skills, resources, innovation and nimbleness of the private sector.

Other things that will not change: most of our contracts have low margins, but make a respectable return on capital because they have very little capital employed and risk should not be extreme; demand, in aggregate, is unlikely to diminish for years ahead; there will always be some customers who are unreasonable or who want to transfer unmanageable risk, but we have the choice to say no; government policy can sometimes seem fickle and perverse, but our international footprint enables us to shift our investment in bidding to focus on the best opportunities; bidding costs are high, but the resulting contracts are both large and long term; we carry large forward order-books.

In summary, we are not complacent.  We are thinking very carefully about the future, and so far our conclusion is that whilst the pandemic will bring significant short term disruption and risk, in the long term whilst the crisis will bring much change, more will stay the same than will change.  As the writer Jean-Baptiste Karr said a year after the 1848 French Revolution:    Plus ça change, plus c'est la même chose.

Rupert Soames

Group Chief Executive

Serco - and proud of it.

Divisional Reviews

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

Six months ended 30 June 2020 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	783.6	542.1	332.0	164.5	-	1,822.2
Change	+19%	+46%	+19%	(1%)		+24%
Change at constant currency	+19%	+43%	+25%	(2%)		+24%
Organic change at constant currency	+19%	+8%	+25%	(2%)		+15%
UTP	26.5	53.4	13.3	7.0	(22.6)	77.6
Margin	3.4%	9.9%	4.0%	4.3%	n/a	4.3%
Contract & Balance Sheet Review adjustments	2.9	-	-	-	-	2.9
Trading Profit/(Loss)	29.4	53.4	13.3	7.0	(22.6)	80.5
Amortisation of intangibles arising on acquisition	(1.5)	(3.5)	(0.0)	-	-	(5.0)
Operating profit/(loss) before exceptionals	27.9	49.9	13.3	7.0	(22.6)	75.5

Six months ended 30 June 2019 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	657.9	372.3	279.7	165.6	-	1,475.5
UTP	15.2	37.7	11.8	7.4	(21.5)	50.6
Margin	2.3%	10.1%	4.2%	4.5%	n/a	3.4%
Contract & Balance Sheet Review adjustments	(2.7)	2.7	-	-	-	-
Trading Profit/(Loss)	12.5	40.4	11.8	7.4	(21.5)	50.6
Amortisation of intangibles arising on acquisition	(0.6)	(1.6)	(0.1)	-	-	(2.3)
Operating profit/(loss) before exceptionals	11.9	38.8	11.7	7.4	(21.5)	48.3

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
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	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

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 14-31.  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 34-63.

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 European institutions, including the European Commission and European Space Agency.  Serco's operations in the UK represent approximately 40% of the Group's reported revenue, and those across the rest of Europe approximately 3%.

Revenue for the first half of 2020 was £783.7m (2019: £657.9m), an increase of 19%.  Reported revenue excludes that from our joint venture and associate holdings which largely comprise the operations of AWE and Merseyrail.  At constant currency, the growth in revenue was also 19%, or £126m, all of which was organic.  The high organic growth resulted from a combination of our Asylum Accommodation and Support Services Contracts (AASC) contracts and additional work related to Covid-19. Work supporting our customers response to Covid-19 included the NHS Test & Trace programme, drive-through and mobile testing facilities, and increased customer service work, including NHS 111. There was a reduction in revenue in our Healthcare operations due to the end of our contract at Plymouth Hospital. Covid-19 caused an abrupt reduction in demand in our Leisure business and on our contract to operate the Northern Isles Ferries. Although the Caledonian Sleepers contract saw a reduction in passenger volumes, it entered an Emergency Measures Arrangement, which was agreed with the customer part way through the period. The EMA comes to an end in September 2020 and we have commenced discussions with the customer about the future trading arrangement, including the possibility of an extension or a second EMA.

Underlying Trading Profit was £26.5m (2019: £15.2m), representing a margin of 3.4% (2019: 2.3%) and growth of 74% at constant currency and organically.  Trading profit includes the profit contribution of joint ventures and associates, from which interest and tax have already been deducted; if the £188m (2019: £193m) proportional share of revenue from joint ventures and associates was also included and if the £1.6m (2019: £3.0m) share of interest and tax cost was excluded, the overall divisional margin would have been 2.9% (2019: 2.1%).  The joint venture and associate profit contribution was lower at £7.6m (2019: £13.5m), as a result of the negative impact on Merseyrail of Covid-19 and lower pricing at AWE.  The increase in our profit was driven by our AASC contracts moving from losing money in the first half of 2019, as mobilisation costs were incurred, to profitability, and, to a lesser extent, by our additional Covid-19 work. Given the exceptional circumstances, we have agreed to perform the Covid-19 related work on an open-book basis and at margins below our normal expectations. There was a £2m non-recurring benefit to UTP as we exited our Viapath joint venture. 

Within Underlying Trading Profit, the rate of OCP utilisation declined significantly to £2m (2019: £23m), as we draw towards the end of our efforts over the last six years to reduce these large loss-making contracts.  Contract & Balance Sheet Review and other one-time items totalled a credit of £2.9m (2019: £2.7m net charge) to Trading Profit, resulting from the release of OCPs on the prisoner escorting contract, so Trading Profit was above Underlying Trading Profit at £29.4m (2019: £12.5m).

The UK & Europe division's order intake was around £1bn, or around 55% of that for the whole Group.  The largest award was our £450m contract to continue to operate the Northern Isles Ferry Services. First announced in September 2019, the contract was not included in our order intake until a procurement challenge from the unsuccessful bidder was resolved earlier this year. The second largest contract award in the period was a new agreement to manage the Gatwick Immigration Centres, valued at approximately £200m. We also agreed various contracts with the government to provide services in response to Covid-19.

Of existing work where an extension or rebid will be required at some point before the end of 2022, there are less than 20 contracts with annual revenue of over £5m within the division. In aggregate, these represent around 25% of the current level of annual revenue for the division.  The largest is the NHS Test & Trace contract, which, due to its nature, we don't expect to continue, at least at its current level.  The larger contracts to rebid include, in 2021, our strategic partnership contract supporting Hertfordshire County Council and, in 2022, our Royal Navy fleet support contract known as Future Provision of Marine Services (FPMS) and our UK MOD Skynet satellite support operations.

Opportunities in the new bid Pipeline include several defence support opportunities, justice tenders including the new build prison manage and operate contracts, and environmental services work in Citizen Services.  Following a string of important contract wins in the last two years, replenishing the UK & Europe pipeline across each of our five sectors of operation remains a key focus of the business.

Americas

Our Americas division accounts for 30% of Serco's reported revenue, and provides professional, technology and management services focused on Defence, Transport, and Citizen Services.  The US federal government is our largest customer, including the military, civilian agencies and the national intelligence community.  We also provide services to the Canadian government and to some US state and municipal governments.

Revenue for the first half of 2020 was £542.1m (2019: £372.3m), an increase of £170m or 46% in reported currency.  In US dollars, the main currency for operations of the division, revenue for the period was equivalent to $691m (2019: $484m).  The strengthening of local currencies against sterling increased revenue by £11m or 3%, with growth of £159m, or 43% at constant currency. The acquisition in August 2019 of the Naval Systems Business Unit of Alion added £130m, or 35%, to revenue and there was organic growth of £29m, or 8%. The organic growth resulted from a mixture of new wins and additional work on existing contracts. The US Federal Emergency Management Agency (FEMA) contract framework and the US Pension Benefit Guaranty Corporation (PBGC), both of which started in the first half of 2019, contributed positively. Our health insurance eligibility support contract for the US Department of Health and Human Services, Center for Medicare & Medicaid Services (CMS) benefitted as the temporary uplift in volume related work we saw last year persisted for longer than expected. We experienced lower activity, however, on the Consolidated Afloat Networks Enterprise Services (CANES) indefinite delivery, indefinite quantity (ID/IQ) multiple-award contract. The first half of 2019 had seen particularly strong demand and new task order wins.

Underlying Trading Profit was £53.4m (2019: £37.7m), representing a margin of 9.9% (2019: 10.1%) and growth of £16m, or 42%. Excluding the favourable currency movement of £1.0m, growth at constant currency was £15m, or 40%. The NSBU Naval business, acquired in Q3 2019, is performing in line with our expectations and contributed around £10m of the growth in UTP, including the effect of efficiencies in indirect overheads. On the CMS contract, we saw higher than expected volumes and stable margins. The circumstances that led to the extra work have now been resolved. We now expect a step down in volumes and margins.

Within Underlying Trading Profit there was no OCP utilisation (2019: £4m), as the Ontario Driver Examination Services (DES) contract is no longer an onerous contract.  There were no Contract & Balance Sheet Review adjustments (2019: £2.7m net credit), so Trading Profit was £53.4m (2019: £40.4m), the same as Underlying Trading Profit.

Americas represented around £0.3bn ($0.3bn) or 15% of the Group's order intake.  The largest award for new work was from the U.S. Space Force to manage, operate and maintain the Ground-Based Electro-Optical Deep Space Surveillance (GEODSS) system.  The contract has an eight-month base period and six one-year option years with a total value of $57m.

Within awards that were rebid or extended were those for parking enforcement in West Hollywood and our contract to support the US Army's civilian readiness training and talent management efforts. We 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. 

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 2021 include the Federal Aviation Administration's (FAA) Contract Tower (FCT) Program, the Anti-Terrorism/Force Protection (ATFP) framework contract for the US Naval Facilities Command and our support services at the 5 Wing Canadian Forces Base in Goose Bay; and in 2022, resecuring a position on the successor framework for CANES.  The NSBU business 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 remains a target.

Asia Pacific

Serco operates in Australia, New Zealand and Hong Kong in the Asia Pacific region, providing services in the Justice, Immigration, Defence, Health, Transport and Citizen Services sectors.  The Asia Pacific division accounts for 18% of the reported revenue for the Group.

Revenue for the first half of 2020 was £332m (2019: £280m), an increase of 19% in reported currency.  In Australian dollars, the main currency for operations of the division, revenue for the period was equivalent to approximately A$641m (2019: A$512m).  The weakening of local currencies against sterling reduced revenue by £18m or 6%. Organically, the business grew by 25%, or £70m.  We saw strong growth in our Citizen Services and Justice & Immigration sectors. New work contributed significantly to our step up in revenue, including the AHSC defence garrison healthcare services contract in Australia, Adelaide Remand Centre, both of which started in the second half of last year, and Clarence Correctional Centre. Growth was also supported by extra work with Services Australia (formerly the Department of Human Services) and the Australian Taxation Office.

Underlying Trading Profit was £13.3m (2019: £11.8m), representing a margin of 4.0% (2019: 4.2%). This was 13% higher year-on-year on a reported basis and 19% at constant currency. The new wins and expanded work mentioned above materially increased our profits, with the AHSC being the largest contributor as it moved from losing money in the first half of 2019 as mobilisation costs were incurred, to profitability in the first six months of 2020.   

There was OCP utilisation of £0.2m (2019: £2m) within Underlying Trading Profit and no Contract & Balance Sheet Review adjustments (2019: £nil). Trading profit was therefore £13.3m (2019: £11.8m), the same as Underlying Trading Profit.

AsPac represented around £0.5bn or 25% of the Group's order intake. Having had significant success in winning in recent years, it was a relatively quiet period for new work. We did however agree work with the government for services in response to Covid-19, including to provide accommodation for more than 1,300 quarantined travellers in Western Australia and additional contact centre work. An important extension was secured as we signed a six-year contract with the government of Western Australia to continue delivering support services at Fiona Stanley Hospital in Perth.  The contract extension has an estimated value of approximately $730m (~£370m) over its six-year term, including indexation. We also extended our contract to provide contact centre services to the Australian Tax Office.

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 just 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 25% of current divisional revenue.  Others that will require extending or rebidding include, in 2020, the Services Australia framework contract, and, in 2021, Acacia Prison, South Queensland Correctional Centre and the Tax Office framework contract. 

In October 2019, AsPac responded to the tender for the Royal Australian Navy contracts to replace the existing Fleet Marine Services contracts, to be known as the Defence Marine Support Services (DMSS) contracts.  The DMSS contacts awards had been anticipated to be announced in the first half of 2020 but is now expected in the second half.  Serco's current Fleet Marine Services contract will continue to operate until 30 September 2021.

The largest opportunity in our pipeline of new bid opportunities is to provide primary health services to all prisons in the state of Victoria.  Rebuilding the pipeline across the Justice & Immigration, Defence, Citizen Services, Transport and Health sectors remains a target.

Middle East

Operations in the Middle East division include Transport, Defence, Health and Citizen Services, with the region accounting for approximately 9% of the Group's reported revenue.

Revenue for the first half of 2020 was £164.5m (2019: £165.6m), a decrease of 1% in reported currency.  The strengthening of local currency against sterling increased revenue by £2.4m or 1%; the organic change at constant currency was therefore a decline of 2%.  The Middle East segment has faced the largest negative impact from Covid-19 as there has been a sudden reduction in activity in parts of the transport portfolio and, unlike in the UK, limited Covid-19 response work to act as a counterbalance. There was growth in revenue from expanded services in our Dubai Metro and Zayed University contracts. These were outweighed by Covid-19 leading to reduced revenue on various contracts including Baghdad Air Traffic Control, health FM in Saudi Arabia, Dubai Air Navigation Systems and Dubai Airport facilities management.

Underlying Trading Profit was £7.0m (2019: £7.4m), a decline of 5%, representing a margin of 4.3% (2019: 4.5%). The decline at constant currency was 4%.  This decline was driven by the reduction in revenue on our air traffic control work and health FM contracts in Saudi Arabia.  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 comparable period.  Trading Profit was therefore £7.0m (2019: £7.4m).

The Middle East represented £0.1bn, or 4%, of the Group's order intake, not helped by disruption from Covid-19. We were awarded a new contract to deliver front line hospitality customer services at Dubai Airport. However, as a result of the airport closing and subsequent lower passenger volumes due to Covid-19, the contract is yet to start. As a result, we have not included it in our order intake in the period. We did, however, secure an extension on our Dubai Airports facilities management contract.

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 Middle East division. In aggregate, these represent well over half of the current level of annual revenue for the division.  The high proportion reflects that the Dubai Metro contract becomes due for rebid in September 2021, with this accounting for around 35% 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 work in the Health, Citizen Services and Transport sectors. 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 established a new ExperienceLab, building on what we have in the UK, for user-centred design to deliver exciting improvements to existing and new customers.

Corporate costs

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

Corporate costs increased by £1.1m to £22.6m (2019: £21.5m).

Risk management and Covid-19 impacts

Our risk management processes have operated throughout the pandemic at a Group and divisional level to assess the Covid-19 impact and associated emerging risks. We have reviewed the impact on the controls of each of our Principal Risks and completed an assessment of the coverage of our assurance mechanisms across the three lines of defence, adjusting the focus of our controls and compliance assurance plans where necessary.

The impact of Covid-19 is being monitored across all risks but, in particular, we are focused on any disruption to our supply chain, including the operations of strategic partners, as well as the complex and fluid legal landscape in relation to Health and Safety and Covid-19 safe practices across each division.

We consider Covid-19 to have increased our risk profile. However, we are confident in our control environment and do not see this increase as being replicated more broadly in our residual risk. 

We have made one significant amendment to our risk profile, separating Health, Safety and Well-being as a standalone new Principal risk to clearly articulate our focus and ongoing commitment to the health and wellbeing of our workforce and service users.

Finance Review

For the six months ended 30 June 2020	Underlying £m	Non underlying items £m	Trading £m	Amortisation and impairment of intangibles arising on acquisition £m	Statutory pre exceptional £m	Exceptional items £m	Statutory £m
Revenue	1,822.2	-	1,822.2	-	1,822.2	-	1,822.2
Cost of sales	(1,645.9)	2.9	(1,643.0)	-	(1,643.0)	-	(1,643.0)
Gross profit	176.3	2.9	179.2	-	179.2	-	179.2
Administrative expenses	(105.7)	-	(105.7)	(5.0)	(110.7)	2.6	(108.1)
Exceptional profit on disposal of subsidiaries and operations	-	-	-	-	-	11.0	11.0
Total administrative expenses	(105.7)	-	(105.7)	(5.0)	(110.7)	13.6	(97.1)
Share of profits in joint ventures and associates, net of interest and tax	7.0	-	7.0	-	7.0	-	7.0
Profit before interest and tax	77.6	2.9	80.5	(5.0)	75.5	13.6	89.1
Margin	4.3%		4.4%		4.1%		4.9%
Net finance costs	(12.7)	-	(12.7)	-	(12.7)	-	(12.7)
Profit before tax	64.9	2.9	67.8	(5.0)	62.8	13.6	76.4
Tax charge	(17.0)	10.4	(6.6)	0.9	(5.7)	(0.4)	(6.1)
Effective tax rate	26.2%		9.7%		9.1%		8.0%
Profit/(loss) for the period	47.9	13.3	61.2	(4.1)	57.1	13.2	70.3
Non controlling interest	(0.1)		(0.1)		(0.1)		(0.1)
Earnings per share - basic (pence)	3.91		5.00		4.66		5.74
Earnings per share - diluted (pence)	3.86		4.92		4.60		5.66

For the six months ended 30 June 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	1,475.5	-	1,475.5	-	1,475.5	-	1,475.5
Cost of sales	(1,336.9)	-	(1,336.9)	-	(1,336.9)	-	(1,336.9)
Gross profit	138.6	-	138.6	-	138.6	-	138.6
Administrative expenses	(101.5)	-	(101.5)	(2.3)	(103.8)	(31.1)	(134.9)
Share of profits in joint ventures and associates, net of interest and tax	13.5	-	13.5	-	13.5		13.5
Profit before interest and tax	50.6	-	50.6	(2.3)	48.3	(31.1)	17.2
Margin	3.4%		3.4%		3.3%		1.2%
Net finance costs	(10.5)	-	(10.5)	-	(10.5)	-	(10.5)
Profit before tax	40.1	-	40.1	(2.3)	37.8	(31.1)	6.7
Tax charge	(9.8)	0.9	(8.9)	0.4	(8.5)	0.4	(8.1)
Effective tax rate	24.4%		22.2%		22.5%		120.9%
Profit/(loss) for the period	30.3	0.9	31.2	(1.9)	29.3	(30.7)	(1.4)
Non controlling interest	0.3		0.3		0.3		0.3
Earnings/(loss) per share - basic (pence)	2.67		2.75		2.58		(0.15)
Earnings/(loss) per share - diluted (pence)	2.62		2.70		2.53		(0.15)

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
Non controlling 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

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 this announcement, including the other sections of this Finance Review, as well as the Condensed Consolidated Financial Statements and their accompanying notes, should be referred to in order to fully appreciate all the factors that affect our business. We strongly encourage readers not to rely on any single financial measure, but to carefully review our reporting in its entirety.

The methodology applied to calculating the APMs has not changed since 31 December 2019.

Alternative revenue measures

Reported revenue at constant currency

Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 34, reflects revenue translated at the average exchange rates for the period. In order to provide a comparable movement on the previous period's results, reported revenue is recalculated by translating non-Sterling values for the six months ended 30 June 2020 into Sterling at the average exchange rate for the six months ended 30 June 2019.

For the six months ended 30 June	2020 £m
Reported revenue at constant currency	1,826.6
Foreign exchange differences	(4.4)
Reported revenue at reported currency	1,822.2

Organic Revenue at constant currency

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

There is one acquisition excluded for the calculation of Organic Revenue in the period to 30 June 2020, which is the acquisition of the Naval Systems Business Unit (NSBU) from Alion Science and Technology Corporation on 1 August 2019.

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

Organic Revenue growth is calculated by comparing the current year Organic Revenue at constant currency exchange rates with the prior period Organic Revenue at reported currency exchange rates. This results in Organic Revenue growth on a constant currency basis in the 6 months to 30 June 2020 of 15.0%.

For the six months ended 30 June	2020 £m
Organic Revenue at constant currency	1,696.9
Foreign exchange differences	(7.0)
Organic Revenue at reported currency	1,689.9
Impact of relevant acquisitions or disposals	132.3
Reported revenue at reported currency	1,822.2

For the six months ended 30 June	2019 £m
Comparable Organic Revenue at reported currency	1,475.5
Impact of relevant acquisitions or disposals	-
Reported revenue at reported currency	1,475.5

Revenue plus share of joint ventures and associates

Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 34, 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 Condensed 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.

	Six months ended 30 June 2020 £m	Six months ended 30 June  2019 £m	Year ended 31 December 2019 £m
Revenue plus share of joint ventures and associates	2,010.1	1,668.4	3,643.0
Exclude share of revenue from joint ventures and associates	(187.9)	(192.9)	(394.6)
Reported revenue	1,822.2	1,475.5	3,248.4

Alternative profit measures

	Six months ended 30 June 2020 £m	Six months ended 30 June  2019 £m	Year ended 31 December 2019 £m
Underlying Trading Profit	77.6	50.6	120.2
Non-underlying items:
OCP charges and releases	2.9	-	0.8
Other Contract & Balance Sheet Review adjustments and one-time items	-	-	12.4
Total non-underlying items	2.9	-	13.2
Trading Profit	80.5	50.6	133.4
Operating exceptional items	13.6	(31.1)	(23.4)
Amortisation and impairment of intangibles arising on acquisition	(5.0)	(2.3)	(7.5)
Operating profit	89.1	17.2	102.5

Underlying Trading Profit (UTP)

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

Charges and releases on all Onerous Contract Provisions (OCPs) that arose during the 2014 Contract and Balance Sheet Review are excluded from UTP in the current and prior periods. Charges associated with the creation of new OCPs identified are included within UTP to the extent that they are not considered sufficiently material to require separate disclosure on an individual basis. 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 period. It should be noted that, as for operating profit, UTP benefits from OCP utilisation of £1.7m in 2020 (2019: £42.1m). The utilisation, which neutralises the in period losses on previously identified onerous contracts, does not include any accelerated utilisation associated with the impairment of right of use assets on onerous contracts created during the 6 months to 30 June 2020 (2019: utilisation of £12.6m), however includes £1.7m (2019: £29.5m) against trading losses.

Revisions to accounting estimates and judgements which arose during the 2014 Contract & Balance Sheet Review and other one-time items are separately reported where the impact of an individual item is material. The £12.4m recognised during the year ended 31 December 2019 included the impairment of assets created in accordance with IFRS16 Leases 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 Defence Fire and Rescue Project settlement amounting to £9.6m. No such items have occurred in the six months to 30 June 2020.

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 revenue.

The non-underlying column in the summary income statement on page 14 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 Condensed Consolidated Income Statement on page 34, by making two adjustments.

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

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

UTP at constant currency

UTP disclosed above has been translated at the average foreign exchange rates for the period. In order to provide a comparable movement on the previous period's results, UTP is recalculated by translating non-Sterling values for the six months to 30 June 2020 into Sterling at the average exchange rate for the six months ended 30 June 2019.

For the six months ended 30 June	2020 £m
Underlying Trading Profit at constant currency	77.4
Foreign exchange differences	0.2
Underlying Trading Profit at reported currency	77.6

Alternative Earnings or Loss Per Share (EPS) measures

	Six months ended 30 June 2020 pence	Six months ended 30 June 2019 pence	Year ended 31 December 2019 pence
Underlying EPS, basic	3.91	2.67	6.31
Net impact of non-underlying items and amortisation and impairment of intangibles arising on acquisition	0.75	(0.09)	0.23
EPS before exceptional items, basic	4.66	2.58	6.54
Impact of exceptional items	1.08	(2.73)	(2.23)
Reported EPS, basic	5.74	(0.15)	4.31

	Six months ended 30 June 2020 Pence	Six months ended 30 June 2019 pence	Year 31 December 2019 pence
Underlying EPS, diluted	3.86	2.62	6.16
Net impact of non-underlying items and amortisation and impairment of intangibles arising on acquisition	0.74	(0.09)	0.23
EPS before exceptional items, diluted	4.60	2.53	6.39
Impact of exceptional items	1.06	(2.68)	(2.18)
Reported EPS, diluted	5.66	(0.15)	4.21

EPS before exceptional items

EPS, as shown on the Group's Condensed Consolidated Income Statement on page 34, includes exceptional items charged or credited to the income statement. 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 14.

Alternative cash flow and Net Debt measures

Free Cash Flow (FCF)

We present an alternative measure for cash flow to reflect net cash inflow from operating activities before exceptional items, which is the measure shown on the Condensed Consolidated Cash Flow Statement on page 38. 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.

	Six months ended  30 June 2020 £m	Six months ended  30 June 2019 £m	Year ended 31 December 2019 £m
Free Cash Flow	80.9	0.4	62.0
Exclude dividends from joint ventures and associates	(12.4)	(13.4)	(25.4)
Exclude net interest paid	12.6	9.6	21.0
Exclude capitalised finance costs paid	-	0.9	1.2
Exclude capital element of lease repayments	52.8	22.3	70.2
Exclude proceeds received from exercise of share options	(0.1)	(0.1)	(0.2)
Exclude purchase of intangible and tangible assets net of proceeds from disposal	20.6	11.7	23.3
Cash flow from operating activities before exceptional items	154.4	31.4	152.1
Exceptional operating cash flows	(4.2)	(12.1)	(49.2)
Cash flow from operating activities	150.2	19.3	102.9

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.

	Six months ended  30 June 2020 £m	Six months ended  30 June 2019 £m	Year ended 31 December 2019 £m
Free Cash Flow	80.9	0.4	62.0
Add back:
Tax paid	12.0	17.2	31.2
Non-cash R&D expenditure	-	-	0.1
Net interest paid	12.6	9.6	21.0
Capitalised finance costs paid	-	0.9	1.2
Trading Cash Flow	105.5	28.1	115.5
Underlying Trading Profit	77.6	50.6	120.2
Underlying Trading Profit cash conversion	136%	56%	96%

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 Condensed Consolidated Balance Sheet on page 37 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 Leases and therefore the Group also presents the alternative measure of Adjusted Net Debt which excludes all lease liabilities recognised under IFRS16.

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

	30 June 2020 £m	30 June 2019 £m	31 December 2019 £m
Cash and cash equivalents	244.9	173.4	89.5
Loans payable	(390.4)	(240.6)	(305.0)
Lease liabilities	(359.9)	(144.8)	(369.9)
Derivatives relating to Net Debt	2.6	5.3	1.0
Net Debt	(502.8)	(206.7)	(584.4)
Add back: Lease liabilities	359.9	144.8	369.9
Adjusted Net Debt	(142.9)	(61.9)	(214.5)

At 30 June 2019, Adjusted Net Debt included the proceeds from the share issue in May 2019 of £138.7m. Excluding this amount, the pro-forma Adjusted Net Debt, referred to in the prior year, was £200.6m.

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

Invested Capital excludes right of use assets recognised under IFRS16 Leases. This is because the Invested Capital of the company are those items within which resources are, or have been, committed, which is not the case for many leases which would have been classed as operating leases under IAS17 Leases where termination options exist and commitments for expenditure are in future years.

For the 12 months ended	30 June 2020 £m	30 June 2019 £m	31 December 2019 ** £m
ROIC excluding right of use assets
Non current assets
Goodwill	710.3	581.4	674.2
Other intangible assets	91.3	58.5	96.5
Property, plant and equipment	58.6	40.4	47.3
Interest in joint ventures and associates	19.6	21.1	23.6
Trade and other receivables	25.1	30.9	26.5
Current assets
Inventory	20.3	18.9	18.3
Contract assets, trade and other receivables	677.8	592.4	607.4
Total invested capital assets	1,603.0	1,343.6	1,493.8
Current liabilities
Contract liabilities, trade and other payables	(635.0)	(522.4)	(557.0)
Non current liabilities
Contract liabilities, trade and other payables	(66.3)	(95.7)	(72.7)
Total invested capital liabilities	(701.3)	(618.1)	(629.7)
Invested Capital	901.7	725.5	864.1
Two point average of opening and closing Invested Capital	813.6	730.0	782.7
Trading Profit, 12 months ended *	163.3	121.9	133.4
ROIC%	20.1%	16.7%	17.0%
Underlying Trading Profit, 12 months ended *	147.2	106.1	120.2
Underlying ROIC%	18.1%	14.5%	15.4%

* Trading Profit and Underlying Trading Profit are both measured here on a rolling twelve-month basis. For the twelve months to 30 June 2019, the first six months are in accordance with IAS17 Leases, whilst the remaining six months are in accordance with its successor IFRS16 Leases.

** During the six months ended 30 June 2020, the Group finalised fair value adjustments associated with the acquisition of NSBU which was effective 1 August 2019. As a result, goodwill has been remeasured and the fair value of acquired assets and liabilities have been adjusted, resulting in an amendment to their carrying value as at 31 December 2019. Further information on the fair value adjustments can be found in Note 5 to the Condensed Consolidated Financial Statements.

Overview of financial performance

Revenue

Reported revenue increased by 23.5% to £1,822.2m when compared with the same six-month period in the prior year (2019: £1,475.5m), a 23.8% increase in constant currency.

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 in the six months was £80.5m (2019: £50.6m).

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 £77.6m ( 2019: £50.6m), up 53.4%. At constant currency, UTP was £77.4m, up 53.0%.

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

In the six months to 30 June 2020 there was a net release of £2.9m from OCPs created as a result of the 2014 Contract & Balance Sheet Review excluded from UTP (2019: £nil) following the detailed reassessment undertaken during the period.

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 and Balance Sheet Review is within 2% of the 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 below.

Joint ventures   and associates - share of results

In 2020, 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 £9.1m (2019: £10.0m) and £1.5m (2019: £3.4m) respectively. Total revenues generated by these businesses were £539.0m (2019: £524.7m) and £75.7m (2019: £84.2m) respectively.

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

	Six months ended  30 June 2020 £m	Six months ended 30 June 2019 £m	Year ended 31 December 2019 £m
Revenue	187.9	192.9	394.6
Operating profit	8.6	16.5	33.8
Net investment revenue	0.1	0.1	0.3
Income tax expense	(1.7)	(3.1)	(6.6)
Profit after tax	7.0	13.5	27.5
Dividends received from joint ventures and associates	12.4	13.4	25.4

The change in revenue and profits on the prior year is due to changes in the underlying operating performance of the Group's material joint ventures particularly with respect to the impact of Covid-19 on Merseyrail, as well as the disposal, on 31 May 2020, of the Group's interest in Viapath. The dividends received from joint ventures in the period to 30 June 2020 are in respect of prior period reserves and activity before the impact of Covid-19. Future dividends received from the joint ventures are likely to take into consideration operating performance as a result of the pandemic and to maintain an appropriate level of cash resources within the entity given the impact of Covid-19, most notably in respect of the Merseyrail joint venture.

Exceptional items

Exceptional items are items of financial performance that are outside normal operations and are material to the results of the Group either by virtue of size or nature. 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.

	Six months ended  30 June 2020 £m	Six months ended 30 June 2019 £m	Year ended 31 December 2019 £m
Exceptional items arising
Exceptional profit on disposal of subsidiaries and operations	11.0	-	-
Other exceptional operating items
Reversal of impairment of interest in joint venture and related loan balances	2.5	-	-
Restructuring costs	0.1	(5.4)	(12.8)
Costs related to UK Government review and SFO investigation	(1.2)	(24.0)	(25.2)
Release of other provisions and other items	2.6	-	19.3
Costs associated with the acquisition of Naval Systems Business Unit	(1.4)	(1.7)	(4.7)
Other exceptional operating items	2.6	(31.1)	(23.4)
Exceptional operating items	13.6	(31.1)	(23.4)
Exceptional tax	(0.4)	0.4	(2.7)
Total exceptional items net of tax	13.2	(30.7)	(26.1)

Exceptional items arising

The Group disposed of its interest in Viapath with effect from 31 May 2020. The Group had historically impaired its investment in Viapath as it was not receiving any returns from this joint venture due to the level of investment being made back into the business, therefore the carrying value of the Group's investment in Viapath was nil. Following the announcement during the first half of 2020 that Viapath had been unsuccessful in the tender process to provide pathology services to five South East London hospitals as well as associated GP surgeries, the Group exited the joint venture, selling its stake to the remaining two investors. In May 2020, the proceeds received by the Group in exchange for its holding in the joint venture represents the profit on disposal of £11.0m.

Other exceptional operating items

At the same time as disposing of the Group's interest in Viapath, certain historical balances were recovered which had previously been impaired. Since the impairments associated with those balances were historically treated as exceptional items, the reversals of these impairments have been treated consistently. The exceptional credit of £2.5m consists of the recovery of a loan from the Group into the joint venture of £1.2m and the recovery of profit share which was previously considered to be irrecoverable.

The Group recognised the final costs associated with the Strategy Review during 2019 and, on review, certain costs which had not been incurred were released back to exceptional operating items resulting in a credit to exceptional items of £0.1m during the six months ended 30 June 2020 (2019: exceptional restructuring costs of £5.4m). Non-exceptional restructuring charges are incurred by the business as part of normal operational activity, which in the period totalled £3.4m (2019: £2.2m) and were included within operating profit before exceptional items.

There were exceptional costs totalling £1.2m (2019: £24.0m) associated with the UK Government reviews and the programme of Corporate Renewal. These costs have historically been treated as exceptional and consistent treatment is applied in 2020. The cost in the first half of 2019 included £22.9m for the fine which resulted from the SFO's investigation into Serco companies.

During 2019, the Group reached a legal settlement in relation to a commercial dispute which resulted in the release of a provision which accounted for the majority of the £19.3m exceptional credit. The treatment of the release as exceptional was consistent with the recognition of the charge associated with the same legal matter in 2014. During the six months ended 30 June 2020, the Group reached an agreement with its insurer for the reimbursement of £2.6m of legal fees associated with the matter and, consistent with the treatment of other associated amounts, this has been treated as an exceptional credit.

The Group completed the acquisition of the Naval Systems Business Unit (NSBU) from Alion Science and Technology in 2019. The transaction and implementation costs incurred during the six months ended 30 June 2020 of £1.4m have been treated as exceptional costs in line with the Group's accounting policy and the treatment of similar costs incurred during the year ended 31 December 2019.

Exceptional Tax

Exceptional tax for the period was a tax charge of £0.4m (2019: £0.4m credit) which arises on exceptional items within operating profit.

The net exceptional gain only gave rise to a charge of £0.4m, as the majority of these items were incurred in the UK where they only impact our unrecognised deferred tax in relation to losses.

Finance costs and investment revenue

Investment revenue of £0.7m (2019: £1.5m) consists primarily of interest accruing on net retirement benefit assets of £0.6m (2019: £1.1m). The finance costs of £13.4m (2019: £12.0m) include interest incurred on the USPP loans and the Revolving Credit Facility of £7.4m (2019: £6.7m) and lease interest payable of £4.8m (2019: £2.4m) as well as other financing related costs including the impact of foreign exchange on financing activities.

Of the increase in lease interest paid, £2.3m relates to the Group's AASC contract. The lease costs on the COMPASS contract (the predecessor contract to AASC) in 2019 were recorded as operating lease costs due to the short-term transitional arrangement under IFRS16 Leases and any interest costs for longer term leases being offset by OCP utilisation as COMPASS was an onerous contract.

Tax

Tax charge

Underlying Tax

An underlying tax charge of £17.0m is recognised on Underlying Trading Profit after net finance costs. The effective tax rate (26.2%) is slightly higher than in 2019 (24.4%).  This is due primarily to a change in the mix of where profits and losses have been made including a notable increase in profits in the Americas, together with the impact of movements in provisions as part of our regular reassessment of tax exposures across the Group.

Pre-exceptional tax

A tax charge of £5.7m (2019: £8.5m) has been recognised on pre-exceptional profits which includes underlying tax of £17.0m, the tax impact of amortisation of intangibles arising on acquisition of £0.9m and a £10.4m credit on non-underlying items. Of the credit related to non-underlying items, £8.0m relates to the pension scheme.  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 they 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 increase in the deferred tax liability associated with the pension scheme (with the cost reported in the SOCI) leads to a corresponding increase in the deferred tax asset to match the future profit forecasts.  Such an increase in the deferred tax asset therefore leads to a credit 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.  The remaining credit on non-underlying items of £2.4m relates to a revaluation of the UK deferred tax asset to reflect that the expected future UK corporate tax rate will now remain at 19%.

The tax rate on profits before exceptional items at 9.1% is lower than the UK standard corporation tax rate of 19%.  This is mainly due to the impact of non-underlying credits discussed above together with the use of unrecognised deferred tax assets brought forward to offset current year profits and the impact of our joint ventures whose post-tax results are included in our pre-tax profit reducing the rate.  This is partially offset by higher rates of tax on profits arising on our international operations.

Exceptional tax

An analysis of exceptional tax is provided in relation to exceptional items above.

Deferred tax assets

At 30 June 2020 there is a net deferred tax asset of £37.4m (December 2019: £37.2).  This consists of a deferred tax asset of £68.5m (December 2019: £63.9m) and a deferred tax liability of £31.1m (December 2019: £26.7m).

A £23.5m UK tax asset has been recognised at 30 June 2020 (December 2019: £21.1m) on the basis of forecast utilisation against future taxable profits. The increase in the asset during the period is due to a change in expected future UK tax rate from 17% to 19%.

At June 2020, the Group has an estimated unrecognised deferred tax asset in relation to UK losses of £144m which is contingent on future improvements in the UK profit forecast.

Taxes paid

Net corporate income tax of £12.0m was paid during the period, relating primarily to our operations in AsPac (£11.3m), North America (£1.9m), Europe (£0.7m) and Middle East (£0.3m). 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 £2.2m.

The amount of tax paid (£12.0m) differs from the tax charge in the period (£6.1m) mainly due to corporate tax deferral schemes which have allowed the deferral of £3.9m of tax payments globally as well as timing differences between tax credits arising and the corresponding reduction in cash tax.  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 resulting in a net tax inflow.

Dividends

At the time of our full year 2019 results on 26 February 2020, the Group recommended paying a final dividend in respect of the 2019 financial year.  This would have been the first time for five years the Group had paid a dividend, and the recommendation was based on a strong performance in 2019 and the prospect of further good progress in increasing underlying earnings, reducing financial leverage and lower outflows of cash related to onerous contracts. However, on 2 April 2020, and in response to the Covid-19 crisis, guidance was withdrawn for the year and it was announced that the payment of management bonuses would be deferred, the dividend would be withdrawn and consideration would be given to reinstating it when appropriate.  The Group had decided to take advantage of government schemes to support companies' liquidity by deferring tax payments, and took the view that it would be inappropriate to use that cash for anything other than its intended purpose of protecting the financial strength and resilience of our business.

Since then, the business has continued to perform well, guidance for the year has been reinstated, and levels of net debt within the business have declined.  However, significant uncertainty remains, there is a wide range of possible outcomes for the year, and we think that prudence would dictate that we continue to take advantage of Government liquidity support, probably into the fourth quarter. If circumstances allow, and the Group can sensibly repay the deferred taxes towards the end of the year, the Board believes that it will then be in a position to consider whether it should distribute all or part of what would have been paid as the final dividend in respect of 2019. Under the same logic, it has also decided to defer a decision on whether the Group should pay any interim dividend in respect of 2020 until the fourth quarter as well.

Share count and EPS

The weighted average number of shares for EPS purposes was 1,226.5m for the six months ended 30 June 2020 (2019: 1,122.0m) and diluted weighted average number of shares was 1,244.7m (2019: 1,146.3m).

In March 2020, 10,000,000 shares were issued to the Employee Share Ownership Trust to satisfy awards under the Group's share award schemes (March 2019:  13,600,000 shares).  In May 2019, the company completed a placement of 111,216,400 new ordinary shares of 2p each raising net proceeds of £138.7m.

Basic EPS before exceptional items was 4.66p per share (2019: 2.58p); including the impact of exceptional items, Basic EPS was 5.74p (2019: loss of 0.15p). Basic Underlying EPS was 3.91p (2019: 2.67p).

Diluted EPS before exceptional items was 4.60p (2019: 2.53p); including the impact of exceptional items, Diluted EPS was 5.66p (2019: loss of 0.15). Diluted Underlying EPS was 3.86p (2019: 2.62p).

Cash flows

The UTP of £77.6m (2019: £50.6m) converts into a trading cash inflow of £105.5m (2019: £28.1m). The improvement in 2020 cash conversion reflects the increase in profitability from revenue growth, albeit tempered by the increase in associated working capital requirements. Working capital movements in total have resulted in a net inflow of £19.2m, however this includes the benefit from tax deferrals of £45.1m as governments across a number of the Group's operating locations provide deferral schemes for direct or indirect taxes, or both. Excluding this, the working capital requirements associated with growth have led to an outflow of £25.9m (2019: £7.5m). As the Group's OCPs reduce, utilisation has also reduced to the extent that OCP utilisation in the period reduced by £40.4m to £1.7m (2019: £42.1m).  In 2019, £12.6m of the utilisation was not a cash item but rather was related to the impairment of right of use assets created on adoption of IFRS16 Leases within onerous contracts.  There has been no such impairment in 2020.

The table below shows the operating profit and FCF reconciled to movements in Net Debt. FCF for the period was an inflow of £80.9m compared to an inflow of £0.4m in 2019. The improvement in FCF is largely as a result of improved trading cash inflows as discussed above. The improvement in trading cash flows, as shown above, is further improved through a reduction in taxes paid but offset partially by an increase in interest paid. Taxes paid benefit from the deferral schemes described above, whilst interest has increased due to an increase in the value of lease liabilities outstanding throughout the period.

Adjusted Net Debt decreased by £71.6m in 2020, a reconciliation of which is provided at the bottom of the following table.

The net cash inflow on acquisition and disposal of subsidiaries of £7.4m (2019: outflow of £9.3m) includes £11.0m of consideration received by the Group for its share of the Viapath joint venture. Offsetting this are costs associated with the acquisition of NSBU including deferred consideration and working capital adjustments.

Exceptional cash outflows of £4.2m as shown below differ to the net exceptional credit to the income statement of £13.2m due to the cash associated with the disposal of Viapath being shown as a net cash inflow on disposal of subsidiaries and operations and the presence of cash outflows associated with costs provided for during the prior year.

	Six months ended 30 June 2020 £m	Six months ended 30 June 2019 £m	Year ended 31 December 2019 £m
Operating profit	89.1	17.2	102.5
Remove exceptional items	(13.6)	31.1	23.4
Operating profit before exceptional items	75.5	48.3	125.9
Less: profit from joint ventures and associates	(7.0)	(13.5)	(27.5)
Movement in provisions	5.6	(35.4)	(43.1)
Depreciation, amortisation and impairment of leased property, plant and equipment and intangible assets	46.4	32.5	75.6
Depreciation, amortisation and impairment of owned property, plant and equipment and intangible assets	20.3	18.6	43.3
Other non-cash movements	6.4	5.6	9.3
Operating cash inflow before movements in working capital, exceptional items and tax	147.2	56.1	183.5
Working capital movements	19.2	(7.5)	(0.1)
Tax paid	(12.0)	(17.2)	(31.2)
Non-cash R&D expenditure	-	-	(0.1)
Cash flow from operating activities before exceptional items	154.4	31.4	152.1
Dividends from joint ventures and associates	12.4	13.4	25.4
Interest received	0.1	0.1	0.4
Interest paid	(12.7)	(9.7)	(21.4)
Capital element of lease repayments	(52.8)	(22.3)	(70.2)
Capitalised finance costs paid	-	(0.9)	(1.2)
Purchase of intangible and tangible assets net of proceeds from disposals	(20.6)	(11.7)	(23.3)
Proceeds received from exercise of share options	0.1	0.1	0.2
Free Cash Flow	80.9	0.4	62.0
Net cash inflow/(outflow) on acquisition and disposal of subsidiaries and operations	7.4	(9.3)	(193.2)
Issue of share capital	-	138.7	138.7
Other movements on investment balances	1.2	(0.1)	0.2
Capitalisation and amortisation of loan costs	(0.6)	0.4	0.1
Exceptional items	(4.2)	(12.1)	(49.2)
Cash movements on hedging instruments	(0.9)	(7.0)	(2.0)
Foreign exchange (loss)/gain on Adjusted Net Debt	(12.2)	0.3	2.1
Movement in Adjusted Net Debt	71.6	111.3	(41.3)
Opening Adjusted Net Debt	(214.5)	(173.2)	(173.2)
Closing Adjusted Net Debt	(142.9)	(61.9)	(214.5)
Lease Liabilities	(359.9)	(144.8)	(369.9)
Closing Net Debt	(502.8)	(206.7)	(584.4)

Net Debt

	As at 30 June 2020 £m	As at 30 June 2019 £m	As at 31 December 2019 £m
Cash and cash equivalents	244.9	173.4	89.5
Loans payable	(390.4)	(240.6)	(305.0)
Lease liabilities	(359.9)	(144.8)	(369.9)
Derivatives relating to Net Debt	2.6	5.3	1.0
Net Debt	(502.8)	(206.7)	(584.4)
Exclude Lease liabilities	359.9	144.8	369.9
Adjusted Net Debt	(142.9)	(61.9)	(214.5)

Average Adjusted Net Debt as calculated on a daily basis for the six months ended 30 June 2020 was £283m (2019: £219m excluding the £138.7m net inflow from the placement of shares in May 2019). Peak Adjusted Net Debt was £356m (2019: £279m). The difference between the average Adjusted Net Debt throughout the period and the Adjusted Net Debt as at 30 June 2020 reflects working capital improvements in the Americas division, particularly in relation to new contracts which saw a significant improvement toward the end of the period, as improved billing processes began to deliver benefits, as well as the deferral of tax payments from March 2020, the most significant of which were towards the end of the period.

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 30 June 2020, the Group had committed funding of £518m (at 31 December 2019: £508m), comprising £223m of private placement notes, a £45m acquisition loan facility which was fully drawn and a £250m revolving credit facility (RCF), of which £125m was undrawn.

The Group's RCF provides £250m of committed funding for five years from the arrangement date in December 2018. The private placement notes are repayable in bullet payments between 2021 and 2024.

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 30 June 2020, 100% (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. The Group's customer base is predominantly Government or Government-backed and as a result the Group's expected credit loss at a given point in time across the entirety of the customer base is immaterial.

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 Revenue from Contracts with Customers. The covenants continue to exclude the impact of IFRS16 Leases on the Group's results.

	12 months ended 30 June  2020 £m	12 months ended 30 June 2019 * £m	Year ended 31 December 2019 £m
Operating profit before exceptional items	153.1	117.2	125.9
Remove: Amortisation and impairment of intangibles arising on acquisition	10.2	4.7	7.5
Trading Profit	163.3	121.9	133.4
Exclude: Share of joint venture post-tax profits	(21.0)	(27.3)	(27.5)
Include: Dividends from joint ventures	24.4	27.0	25.4
Add back: Net non-exceptional charges to OCPs	6.6	-	7.2
Add back: Depreciation, amortisation and impairment of owned property, plant and equipment and non-acquisition intangible assets	34.8	31.6	35.8
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	5.7	6.4	5.8
Add back: Foreign exchange credit on investing and financing arrangements	(0.1)	(0.9)	(0.8)
Add back: Share based payment expense	11.9	13.4	11.6
Other covenant adjustments to EBITDA	(2.9)	(1.6)	9.8
Covenant EBITDA	222.7	170.5	200.7
Net finance costs	24.0	18.1	21.8
Exclude: Net interest receivable on retirement benefit obligations	1.6	1.5	2.1
Exclude: Movement in discount on other debtors	-	0.6	0.1
Exclude: Foreign exchange on investing and financing arrangements	(0.1)	(0.9)	(0.8)
Add back: Movement in discount on provisions	(0.1)	(1.3)	(1.2)
Other covenant adjustments to net finance costs resulting from IFRS16 Leases	(9.1)	(2.2)	(6.6)
Covenant net finance costs	16.3	15.8	15.4
Adjusted Net Debt	142.9	61.9	214.5
Obligations under finance leases - in accordance with IAS17 Leases	6.8	11.7	8.9
Recourse Net Debt	149.7	73.6	223.4
Exclude: Disposal vendor loan note, encumbered cash and other adjustments	5.3	4.2	4.1
Covenant adjustment for average FX rates	(6.4)	(4.4)	7.6
CTNB	148.6	73.4	235.1
CTNB/covenant EBITDA (not to exceed 3.5x)	0.67x	0.43x	1.17x
Covenant EBITDA/covenant net finance costs (at least 3.0x)	13.7x	10.8x	13.0x

* Results for the 12 months ended 30 June 2019 have been adjusted to apply consistent presentation of covenant adjustments to EBITDA with the other reported periods.  There is no overall impact to covenant EBITDA.

Had the Group made tax payments of £49.0m during the six months to 30 June 2020, rather than deferring them, the Consolidated Total Net Borrowings would have been £49.0m higher at £197.6m. The result would have been a multiple of 0.89x as opposed to the multiple of 0.67x as shown above. The Group would still have remained well within its covenant requirements which require the ratio to stay below 3.5x.

Net assets summary

	As at 30 June 2020 £m	As at 30 June 2019 £m	As at 31 December 2019 * £m
Non current assets
Goodwill	710.3	581.4	674.2
Other intangible assets	91.3	58.5	96.5
Property, plant and equipment	399.3	161.3	392.6
Other non current assets	44.8	52.1	50.1
Deferred tax assets	68.5	69.9	63.9
Retirement benefit assets	125.1	95.2 1,18	78.3
Total non current assets	1,439.3	1,018.4	1,355.6
Current assets
Inventories	20.3	18.9	18.3
Contract assets, trade receivables and other current assets	682.1	600.1	610.4
Current tax assets	5.5	7.0	6.8
Cash and cash equivalents	244.9	173.4	89.5
Total current assets	952.8	799.4	725.0
Total assets	2,392.1	1,817.8	2,080.6
Current liabilities
Contract liabilities, trade payables and other current liabilities	(636.5)	(524.5)	(558.9)
Current tax liabilities	(20.5)	(20.9)	(18.7)
Provisions	(56.9)	(123.5)	(58.4)
Lease obligations	(86.8)	(52.0)	(84.6)
Loans	(176.7)	(28.4)	(56.1)
Total current liabilities	(977.4)	(749.3)	(776.7)
Non current liabilities
Contract liabilities, trade payables and other non current liabilities	(66.3)	(95.7)	(72.7)
Deferred tax liabilities	(31.1)	(25.0)	(26.7)
Provisions	(112.6)	(91.2)	(103.4)
Lease obligations	(273.1)	(92.8)	(285.3)
Loans	(213.7)	(212.2)	(248.9)
Retirement benefit obligations	(34.7)	(19.7)	(24.0)
Total non current liabilities	(731.5)	(536.6)	(761.0)
Total liabilities	(1,708.9)	(1,285.9)	(1,537.7)
Net assets	683.2	531.9	542.9

*  During the six months ended 30 June 2020, the Group finalised fair value adjustments associated with the acquisition of NSBU which was effective 1 August 2019. As a result, goodwill has been remeasured and the fair value of acquired assets and liabilities have been adjusted, resulting in an amendment to their carrying value as at 31 December 2019. Further information on the fair value adjustments can be found in Note 5 to the Condensed Consolidated Financial Statements.

At 30 June 2020, the balance sheet had net assets of £683.2m, a movement of £140.3m from the closing net asset position of £542.9m as at 31 December 2019. The movement in net assets is mainly due to the following movements:

●	An increase in goodwill of £36.1m due to the impact of foreign exchange.
●	An increase in the net retirement benefit asset of £36.1m due to the return on assets held by the various pension schemes in which the Group is involved exceeding the increase in the associated defined benefit liabilities arising from changes in actuarial assumptions.
●	An increase in contract assets, trade receivables and other current assets of £71.7m, which includes an increase in contract assets of £37.7m and an increase in trade receivables of £32.7m which have arisen as a result of increased operational activity and timing differences in receipts from certain key customers between the 2019 year end and 30 June 2020.
●	Cash and cash equivalents have increased by £155.4m. Since the year end, the Group has generated cash inflows of £154.4m from its operations, including £19.2m from movements in working capital. Net spend on tangible and intangible assets has been £20.6m and the capital element of lease repayments during the six months was £52.8m. The Group has also benefitted from £49.0m of tax deferrals of amounts that would typically have been paid to governments during the six months ended 30 June 2020. The £45.1m of liabilities associated with payroll tax, employment tax and indirect tax deferrals are currently included in other current liabilities. In addition, following the onset of the Covid-19 pandemic, the Group made the decision to hold cash in hand to a level higher than has been seen over recent years to ensure sufficient liquidity availability should it be required without notice.
●	Net loan balances have increased by £85.4m following the decision to hold increased cash in hand balances as well as adverse foreign exchange movements in relation to the Group's US dollar denominated private placement debt.

Provisions

The total of current and non-current provisions has increased by £7.7m since 31 December 2019. The movement is predominantly due to:

●	An increase in restructuring provisions of £6.4m which includes a net charge of £4.9m within UTP and a foreign exchange impact of £1.5m as a large proportion of the Group's restructuring provisions are held in the AsPac and Americas divisions. The restructuring provisions relate to ongoing corporate restructuring plans, typically aimed at improving operational efficiency.
●	An increase of £5.2m across employee terminal gratuity and long service award provisions where charges associated with ongoing services to the Group of £5.4m are higher than amounts utilised during the year at £2.7m. As these provisions are concentrated in the AsPac and Middle East divisions, there has also been a currency impact of £2.5m which has increased the provisions.
●	A decrease of £2.2m in onerous contract provisions as described below.
●	The balance of OCPs at 30 June 2020 was £14.3m (2019: £26.7m). 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 release to OCPs was £0.6m in 2020 (2019: £nil) and utilisation was £1.7m (2019: £42.1m).

In 2020, 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 £2.4m (2019: £3.9m) have been made in respect of future losses on 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 are resulting in charges to existing onerous contract provisions.

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 period is £2.3m (2019: £nil) at the Underlying Trading Profit level within the Corporate costs segment. The Trading Loss for the Corporate segment after this charge is £22.6m (2019: £21.5m). This increase is due to the risks associated with the Group's UK leisure business which has been significantly impacted by Covid-19. Negotiations continue with the Group's customers to mitigate these losses and enable the leisure centres to open in the safest way possible. However, due to the short term remaining on some of these contracts the Directors believe that the risk of one contract becoming onerous in this portfolio is more likely than not.

Disposals

On 31 May 2020, the Group disposed of its 33% interest in Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP (together "Viapath").

The Group had historically impaired its investment in Viapath as it was not receiving any returns from this joint venture due to the level of investment being made back into the business, therefore the carrying value of the Group's investment in Viapath was nil. Following the announcement during the first half of 2020 that Viapath had been unsuccessful in the tender process to provide pathology services to five South East London hospitals as well as associated GP surgeries, the Group exited the joint venture, selling its stake to the remaining two investors. Total cash receipts on the date of the disposal were £15.1m. Of the £15.1m, £1.2m was in respect of a loan that had previously been impaired through exceptional costs and so the reversal has been recognised as an exceptional gain. An additional amount of £2.9m was received as a profit share which, because the Group's investment in Viapath was fully impaired, resulted in a profit being recognised. Since £1.0m of the impairment was recorded within exceptional items in prior years, the associated profit was treated as exceptional with the remainder being recognised within Underlying Trading Profit. The remaining £11.0m was received in respect of the Group's interest in Viapath and so, with no carrying value attributed to Viapath, this has been recognised as a gain on disposal of the investment in the joint venture.

Covid-19

Coronavirus (Covid-19) was originally identified as a disease in China late in 2019. Following global transmission of the disease early in 2020, Europe and other continents began identifying cases which continued to rise in number such that on 12 March 2020 the World Health organisation characterised the outbreak of Covid-19 as a global pandemic.

The net impact of Covid-19 on the profitability of Serco has been limited as explained in the CEO review. Most of the Group's contracts deliver critical services to governments and the delivery requirements of these have not been impacted by Covid-19. However, a small number of contracts within the Group have been impacted by; lower volumes within its UK Transport business; higher levels of absenteeism and increased service performance in its UK Health contracts; closure of operations including leisure centres in the UK and the Driver Examination Services contract in Canada; and delays in project work such as the delivery of the Antarctic Supply Research Vessel in Australia. The negative impact from these contracts has been offset to some extent by additional services being delivered to assist governments with their management and recovery from the Covid-19 pandemic, and financial support from its customers. It is evident that the most significant impact on the Group's operations has been within the UK.

Prior to the extent of the impact of Covid-19 being known, the Group took the following steps to strengthen its liquidity position during the first half:

●	Deferred, and subsequently withdrew, proposed 2019 final dividend of 1p per share with a cash saving of £12m;
●	Deferred payment of the bonuses of its Executive Directors until the earlier of either a dividend being paid to shareholders or the end of 2020;
●	Deferred VAT payments in the UK to the value of £38m, with the intention being that these are repaid during the second half of 2020, ahead of the 31 March 2021 deadline;
●	Benefitted from further tax deferrals in North America and Australia of £10m which will be repaid to the extent possible in the second half of 2020; and
●	Received c.£5m of support from the Coronavirus Job Retention Scheme, mainly in respect of employees within the UK Leisure business. The Group does not intend on taking the £1,000 per person cash incentive available from the UK Government for employees returning to work, most notably after leisure centres in the UK reopened.

As a result of the steps taken and good operating performance, the Group's liquidity has remained strong since the emergence of Covid-19. As at 30 June 2020, the Group had £518m of committed credit facilities and committed headroom of £366m.

Claim for losses in respect of the 2013 share price reduction

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.

Angus Cockburn
Group Chief Financial Officer

5 August 2020

Statement of Directors' Responsibilities

We confirm that to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

· the interim management report includes a fair review of the information required by:

o  DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

o  DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board:

Rupert Soames  Angus Cockburn

Group Chief Executive   Group Chief Financial Officer

INDEPENDENT REVIEW REPORT TO SERCO GROUP PLC

Conclusion
 

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidation Statement of Changes in Equity, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Cash Flow Statement and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UKFCA").

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required 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 review work, for this report, or for the conclusions we have reached.

John Luke

for and on behalf of KPMG LLP

15 Canada Square

London
E14 5GL

5 August 2020

Financial Statements

Condensed Consolidated Income Statement

	Six months ended 30 June 2020 (unaudited) £m	Six months ended 30 June 2019 (unaudited) £m	Year ended 31 December 2019 (audited) £m
Revenue	1,822.2	1,475.5	3,248.4
Cost of sales	(1,643.0)	(1,336.9)	(2,928.3)
Gross profit	179.2	138.6	320.1
Administrative expenses
Administrative expenses	(105.7)	(101.5)	(214.2)
Exceptional profit on disposal of subsidiaries and operations	11.0	-	-
Other exceptional operating items	2.6	(31.1)	(23.4)
Other expenses - amortisation and impairment of intangibles arising on acquisition	(5.0)	(2.3)	(7.5)
Total administrative expenses	(97.1)	(134.9)	(245.1)
Share of profits in joint ventures and associates, net of interest and tax	7.0	13.5	27.5
Operating profit	89.1	17.2	102.5
Operating profit before exceptional items	75.5	48.3	125.9
Investment revenue	0.7	1.5	2.7
Finance costs	(13.4)	(12.0)	(24.5)
Net finance costs	(12.7)	(10.5)	(21.8)
Profit before tax	76.4	6.7	80.7
Profit before tax and exceptional items	62.8	37.8	104.1
Tax on profit before exceptional items	(5.7)	(8.5)	(27.4)
Exceptional tax	(0.4)	0.4	(2.7)
Tax charge	(6.1)	(8.1)	(30.1)
Profit/(loss) for the period	70.3	(1.4)	50.6
Attributable to:
Equity owners of the Company	70.4	(1.7)	50.4
Non controlling interest	(0.1)	0.3	0.2
Earnings/(loss) per share (EPS)
Basic EPS	5.74p	(0.15)p	4.31p
Diluted EPS	5.66p	(0.15)p	4.21p

Condensed Consolidated Statement of Comprehensive Income

	Six months ended 30 June 2020 (unaudited) £m	Six months ended 30 June 2019 (unaudited) £m	Year ended 31 December 2019 (audited) £m
Profit/(loss) for the period	70.3	(1.4)	50.6
Other comprehensive income for the period:
Items that will not be reclassified subsequently to profit or loss:
Net actuarial gain/(loss) on defined benefit pension schemes*	29.4	1.9	(20.3)
Actuarial gain on reimbursable rights*	3.0	1.9	3.2
Tax relating to items not reclassified*	(8.0)	(0.9)	2.7
Share of other comprehensive income in joint ventures and associates	1.4	0.7	1.3
Items that may be reclassified subsequently to profit or loss:
Net exchange gain/(loss) on translation of foreign operations**	37.9	(2.4)	(33.3)
Fair value gain/(loss) on cash flow hedges**	0.3	(0.6)	(0.1)
Total other comprehensive income/(loss) for the period	64.0	0.6	(46.5)
Total comprehensive income/(loss) for the period	134.3	(0.8)	4.1
Attributable to:
Equity owners of the Company	134.3	(1.1)	4.0
Non controlling interest	-	0.3	0.1

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

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

Condensed 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 2019 (audited)	22.0	327.9	0.1	111.1	(137.4)	75.0	(18.7)	5.4	385.4	1.4
Opening balance adjustment - IFRS16	-	-	-	3.0	-	-	-	-	3.0	-
Total comprehensive income for the period	-	-	-	(1.0)	2.9	-	-	(3.0)	(1.1)	0.3
Issue of share capital	2.5	135.0	-	-	-	-	(0.3)	-	137.2	-
Shares transferred to option holders on exercise of share options	-	-	-	-	-	(9.3)	9.4	-	0.1	-
Expense in relation to share based payments	-	-	-	-	-	5.6	-	-	5.6	-
At 30 June 2019 (unaudited)	24.5	462.9	0.1	113.1	(134.5)	71.3	(9.6)	2.4	530.2	1.7
Total comprehensive income for the period	-	-	-	52.8	(17.3)	-	-	(30.4)	5.1	(0.2)
Shares transferred to option holders on exercise of share options	-	-	-	-	-	(5.1)	5.2	-	0.1	-
Expense in relation to share based payments	-	-	-	-	-	6.0	-	-	6.0	-
At 31 December 2019 (audited)	24.5	462.9	0.1	165.9	(151.8)	72.2	(4.4)	(28.0)	541.4	1.5
Total comprehensive income for the period	-	-	-	71.7	24.4	-	-	38.2	134.3	-
Issue of share capital	0.2						(0.2)		-	-
Shares transferred to option holders on exercise of share options	-	-	-	-	-	(2.1)	2.2	-	0.1	-
Expense in relation to share based payments	-	-	-	-	-	5.9	-	-	5.9	-
At 30 June 2020 (unaudited)	24.7	462.9	0.1	237.6	(127.4)	76.0	(2.4)	10.2	681.7	1.5

Condensed Consolidated Balance Sheet

	As at 30 June 2020 (unaudited) £m	As at 30 June 2019 (unaudited) £m	As at 31 December 2019 * (audited) £m
Non current assets
Goodwill	710.3	581.4	674.2
Other intangible assets	91.3	58.5	96.5
Property, plant and equipment	399.3	161.3	392.6
Interests in joint ventures and associates	19.6	21.1	23.6
Trade and other receivables	25.1	30.9	26.5
Derivative financial instruments	0.1	0.1	-
Deferred tax assets	68.5	69.9	63.9
Retirement benefit assets	125.1	95.2	78.3
	1,439.3	1,018.4	1,355.6
Current assets
Inventories	20.3	18.9	18.3
Contract assets	325.2	277.4	287.5
Trade and other receivables	352.6	315.0	319.9
Current tax assets	5.5	7.0	6.8
Cash and cash equivalents	244.9	173.4	89.5
Derivative financial instruments	4.3	7.7	3.0
	952.8	799.4	725.0
Total assets	2,392.1	1,817.8	2,080.6
Current liabilities
Contract liabilities	(62.3)	(90.8)	(66.8)
Trade and other payables	(572.7)	(431.6)	(490.2)
Derivative financial instruments	(1.5)	(2.1)	(1.9)
Current tax liabilities	(20.5)	(20.9)	(18.7)
Provisions	(56.9)	(123.5)	(58.4)
Lease obligations	(86.8)	(52.0)	(84.6)
Loans	(176.7)	(28.4)	(56.1)
	(977.4)	(749.3)	(776.7)
Non current liabilities
Contract liabilities	(51.4)	(82.4)	(58.2)
Trade and other payables	(14.9)	(13.3)	(14.5)
Deferred tax liabilities	(31.1)	(25.0)	(26.7)
Provisions	(112.6)	(91.2)	(103.4)
Lease obligations	(273.1)	(92.8)	(285.3)
Loans	(213.7)	(212.2)	(248.9)
Retirement benefit obligations	(34.7)	(19.7)	(24.0)
	(731.5)	(536.6)	(761.0)
Total liabilities	(1,708.9)	(1,285.9)	(1,537.7)
Net assets	683.2	531.9	542.9
Equity
Share capital	24.7	24.5	24.5
Share premium account	462.9	462.9	462.9
Capital redemption reserve	0.1	0.1	0.1
Retained earnings	237.6	113.1	165.9
Retirement benefit obligations reserve	(127.4)	(134.5)	(151.8)
Share based payment reserve	76.0	71.3	72.2
Own shares reserve	(2.4)	(9.6)	(4.4)
Hedging and translation reserve	10.2	2.4	(28.0)
Equity attributable to owners of the Company	681.7	530.2	541.4
Non controlling interest	1.5	1.7	1.5
Total equity	683.2	531.9	542.9

*  During the six months ended 30 June 2020, the Group finalised fair value measurements for a number of contracts which had been provisionally valued associated with the acquisition of NSBU which was completed 1 August 2019. As a result, in accordance with IFRS3, goodwill has been revised and the fair value of acquired assets and liabilities have been adjusted, resulting in an amendment to their carrying value as presented as at 31 December 2019. Further information on the fair value revision can be found in Note 5.

Condensed Consolidated Cash Flow Statement

	Six months ended 30 June 2020 (unaudited) £m	Six months ended 30 June 2019 (unaudited) £m	Year ended 31 December 2019 (audited) £m
Net cash inflow from operating activities before exceptional items	154.4	31.4	152.1
Exceptional items	(4.2)	(12.1)	(49.2)
Net cash inflow from operating activities	150.2	19.3	102.9
Investing activities
Interest received	0.1	0.1	0.4
(Decrease)/increase in security deposits	-	(0.1)	0.2
Dividends received from joint ventures and associates	12.4	13.4	25.4
Proceeds from disposal of property, plant and equipment	0.1	-	1.0
Net cash inflow on disposal of subsidiaries and operations	11.0	-	-
Acquisition of subsidiaries, net of cash acquired	(3.6)	(9.3)	(193.2)
Proceeds from loans receivable	1.2	-	-
Purchase of other intangible assets	(3.7)	(2.8)	(6.8)
Purchase of property, plant and equipment	(17.0)	(8.9)	(17.5)
Net cash inflow/(outflow) from investing activities	0.5	(7.6)	(190.5)
Financing activities
Interest paid	(12.7)	(9.7)	(21.4)
Capitalised finance costs paid	-	(0.9)	(1.2)
Advances of loans	68.5	-	72.3
Capital element of lease repayments	(52.8)	(22.3)	(70.2)
Cash movements on hedging instruments	(0.9)	(7.0)	(2.0)
Issue of share capital	-	138.7	138.7
Proceeds received from exercise of share options	0.1	0.1	0.2
Net cash inflow from financing activities	2.2	98.9	116.4
Net increase in cash and cash equivalents	152.9	110.6	28.8
Opening cash and cash equivalents	89.5	62.5	62.5
Net exchange gain/(loss)	2.5	0.3	(1.8)
Closing cash and cash equivalents	244.9	173.4	89.5

Notes to the Condensed Consolidated Financial Statements

1. General information, accounting policies and going concern

The financial information herein for the year ended 31 December 2019 does not constitute the Company's statutory accounts as defined in section 434 of the Companies Act 2006 , but is derived from those accounts. The auditors' report on the 2019 accounts contained no emphasis of matter and did not contain statements under S498 (2) or (3) of the Companies Act 2006 or equivalent preceding legislation.

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

In the six months ended 30 June 2020, the same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements. The significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2019.

Government grants

Government grants are recognised where there is reasonable assurance that the grant will be received. Grants that compensate the Group for expenses incurred are recognised in the income statement as a reduction to the corresponding expense on a systematic basis in the periods in which the expenses are recognised.

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 six months ended 30 June 2020, 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, key uncertainties and sensitivities, including the potential impact of Covid-19 on the future performance of the Group.

Most of the Group's contracts deliver critical services to Governments and the delivery requirements of these have not been impacted by Covid-19. However, a small number of contracts within the Group have been impacted by; lower volumes within its UK transport business; higher levels of absenteeism and increased service requirements in its UK Health contracts; closure of operations including leisure centres in the UK and the Driver Examination Services contract in Canada; and delays in project work such as the delivery of the Antarctic Supply Research Vessel in Australia. The negative impact from these contracts has been offset to some extent by additional services being delivered to assist Governments with their management and recovery from the Covid-19 pandemic, and financial support from its customers. It is evident that the most significant impact on the Group's operations has been within the UK.

In order to model severe but plausible scenarios to stress test the potential impact of Covid-19 on the Group's forecast, the Directors have considered, amongst other scenarios, lower passenger volumes on the Group's train operating contracts, higher costs within the Health portfolio and slower recovery in usage of leisure centres in the UK through to the end of 2021, without mitigations such as the Coronavirus Job Retention Scheme and Emergency Measures Agreements within the rail contracts being in place. The Directors have reviewed the impact on overseas operations and considered the impact of a second wave in Australia which may impact the ability to deliver operations within contact centres, or drive higher absenteeism in the delivery of its larger operations such as the Fiona Stanley Hospital or Department of Immigration and Border Protection contracts. In an extreme case, the Directors have modelled the negative financial impact of Covid-19 estimated in April 2020, without the mitigations outlined above, to the end of 2020, which indicates that the Group has sufficient liquidity to withstand a potential second wave of the virus if the impact is consistent with that experienced during the first wave.

After considering these severe but plausible scenarios, the forecasts 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 its debt covenants, and its ability to generate cash from trading activities and working capital requirements. In order to reverse stress test the headroom available on the Group's debt covenants and liquidity available, the Directors have considered the impact of reductions to expected win rates and lower margins in the period of assessment and concluded that, given the headroom available these do not present a material risk in its ability to continue as a Going Concern.

In making the Going Concern assessment, the Directors have assumed that the US private placement loans of $124m due to mature in 2021 are repaid, however it is the Group's intention for these to be refinanced providing additional liquidity into the assessment.

The Group's current principal debt facilities as at 30 June 2020 comprised a £250m revolving credit facility, a 3 year term acquisition facility of £45m and £223m of US private placement notes. As at 30 June 2020, the Group had £518m of committed credit facilities and committed headroom of £366m. 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 31 December 2021.

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 1 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 calculation of a provision booked, is linked to the complexity of the underlying contract and the form of service delivery. Due to the level of uncertainty and combination of variables associated with those estimates there is a significant risk that there could be material adjustment to the carrying amounts of onerous contract provisions within the next financial reporting period which includes the recognition of onerous contract provisions for contracts which the Directors have assessed do not require a provision as at 30 June 2020.

In the current period no material revisions have been made to onerous contract provisions.

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

●	The ability of the Company to maintain or improve operational performance to ensure costs or performance related penalties are in line with expected levels.
●	Volume driven revenue and costs being within the expected ranges.
●	The outcome of open claims made by or against a customer regarding contractual performance.
●	The ability of suppliers to deliver their contractual obligations on time and on budget.
●	The longer term impact of Covid-19 on contract performance such as the performance and usage of leisure centres or passenger volumes in the UK and the risk that this may be impacted by any second wave of the virus which requires a subsequent lock down period, in the absence of any customer support.

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 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 reporting period, which includes the recognition of onerous contract provisions not currently recorded. 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 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 period is £2.3m (2019: £nil) at the Underlying Trading Profit level within the Corporate costs segment. The Trading Loss for the Corporate segment after this charge is £22.6m (2019: £21.5m). This increase is principally due to the risks associated with the Group's UK leisure business which has been significantly impacted by Covid-19. Negotiations continue with the Group's customers to mitigate these losses and enable the leisure centres to open in the safest way possible. However, due to the short term remaining on some of these contracts the Directors believe that the risk of at least one contract becoming onerous in this portfolio is more likely than not.

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 latest 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 is 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 derived from post tax measures.

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. There have been no indicators of impairment since the full impairment test undertaken for the 2019 year end. Following the designation of the global Covid-19 pandemic ("the pandemic") by the World Health Organisation during March 2020, specific consideration has been given to whether there are any indicators of impairment across the Group's cash generating units (CGUs) relating to the impact of the pandemic. The pandemic itself is not an impairment indicator, however economic shocks resulting from the pandemic could be considered to be indicators which otherwise would not have existed. In assessing for potential indicators of impairment, the Group has gathered information at both macro and micro levels, globally and on the basis of the individual geographies in which the Group operates.

The Group has not been impacted in a manner which would indicate the existence of impairment indicators and will prepare a full goodwill assessment at the end of the year. When considering the potential existence of both internal and external impairment indicators, the Group assessed certain key measures and other sources of available information which included, but were not limited to, in particular the absence of:

●	Any obsolescence indicators within the Group's physical assets;
●	Any plans to dispose of CGUs;
●	Indicators of worse than expected performance to an extent that would have caused an impairment had they been known at the time of the latest full impairment review;
●	Net operating cash outflows or operating losses at a CGU level;
●	A significant decline in market value of the Group; or
●	Carrying amounts of net assets in excess of market capitalisation of the Group.

The existence of a possible impairment indicator does not immediately lead to the requirement to perform an impairment test. As a result, it was considered whether the increase in market interest rates globally, which impact on the Group's discount rates and reduce the present value of future cash flows, was significant enough to trigger the need for an impairment test. Whilst modest increases have been seen across the UK, Europe, Americas and AsPac, a more notable rise was seen in the Middle East. The rise in market interest rates, offset only partially by a fall in risk premiums, meant a potential rise in post-tax discount rates of 1.9%. When combined with the fact that at 31 December 2019, the lowest headroom was identified in relation to the Middle East CGU on an absolute basis, further analysis was performed to assess whether the combination of evidence implied an impairment indicator was present.

Additional sensitivities have been applied to the impairment model used at 31 December 2019 in respect of the Middle East to allow for above expected increase in discount rates and the estimated adverse impact of Covid-19 on cash flows, and still no indicators of impairment have been identified.

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) for that period. Each potential liability and contingency is revisited and adjusted to reflect any changes in positions taken by the Company, progress towards concluding local tax audits, including communications with tax authorities, 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 are covered in note 17.

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 based on the directors' assessment that the full surplus will ultimately be available to the Group as a future refund of surplus.
●	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 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 Group's Chief Operating Decision Maker (CODM) reviews the segmental analysis for operations. 

Claim for losses in respect of the 2013 share price reduction

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 liability as at the date of this disclosure.

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 should 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 10.

3. Segmental information

The Group's operating segments reflecting the information reported to the Board in the six months ended 30 June 2020 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, Health, Justice & Immigration and Transport in the Asia Pacific region including Australia, New Zealand and Hong Kong
Middle East	Services for sectors including Citizen Services, Defence, Health 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 condensed financial statements.

Revenue disaggregation

An analysis of the Group's revenue from its key market sectors is as follows:

Six months ended 30 June 2020		UK&E  m	Americas £m	AsPac  m	Middle East £m	Total £m
Key sectors
Defence		100.8	363.8	64.2	13.4	542.2
Justice & Immigration		179.3	-	140.9	-	320.2
Transport		71.9	42.2	3.8	100.4	218.3
Health		121.5	-	50.0	5.5	177.0
Citizen Services		310.1	136.1	73.1	45.2	564.5
		783.6	542.1	332.0	164.5	1,822.2

Six months ended 30 June 2019		UK&E  m	Americas £m	AsPac  m	Middle East £m	Total £m
Key sectors
Defence		109.0	202.3	23.5	13.6	348.4
Justice & Immigration		136.1	-	134.2	-	270.3
Transport		67.8	50.3	10.0	105.0	233.1
Health		131.9	-	47.7	15.4	195.0
Citizen Services		213.1	119.7	64.3	31.6	428.7
		657.9	372.3	279.7	165.6	1,475.5

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

Information about major customers

The Group has four major governmental customers which each represent more than 5% of Group revenues. The customers' revenues were £654.1m (2019: £509.5m) for the UK Government within the UK & Europe segment, £470.5m (2019: £338.8m) for the US Government within the Americas segment, £326.3m (2019: £265.6m) for the Australian Government within the AsPac segment and £118.6m (2019: £121.2m) 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:

Six months ended 30 June 2020	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m	Total £m
Revenue	783.6	542.1	332.0	164.5	-	1,822.2
Result
Trading profit/(loss) from operations*	29.4	53.4	13.3	7.0	(22.6)	80.5
Amortisation and impairment of intangibles arising on acquisition	(1.5)	(3.5)	-	-	-	(5.0)
Operating profit/(loss) before exceptional items	27.9	49.9	13.3	7.0	(22.6)	75.5
Exceptional profit on disposal of subsidiaries and operations	11.0	-	-	-	-	11.0
Other exceptional operating items**	1.0	1.6	-	-	-	2.6
Operating profit/(loss)	39.9	51.5	13.3	7.0	(22.6)	89.1
Investment revenue						0.7
Finance costs						(13.4)
Profit before tax						76.4
Tax charge						(5.7)
Tax on exceptional items						(0.4)
Profit for the period						70.3

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

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

Six months ended 30 June 2020	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m		Total £m
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax	7.0	-	-	-	-	7.0
Depreciation of plant, property and equipment	(30.0)	(11.5)	(4.4)	(4.0)	(4.1)	(54.0)
Impairment of plant, property and equipment	(0.2)	-	-	-	-	(0.2)
Total depreciation and impairment of plant, property and equipment	(30.2)	(11.5)	(4.4)	(4.0)	(4.1)	(54.2)
Amortisation of intangible assets arising on acquisition	(1.5)	(3.5)	-	-	-	(5.0)
Amortisation of other intangible assets	(0.2)	(0.3)	(1.4)	(0.2)	(5.4)	(7.5)
Total amortisation and impairment of intangible assets	(1.7)	(3.8)	(1.4)	(0.2)	(5.4)	(12.5)
Segment assets
Interests in joint ventures and associates	19.1	-	0.1	0.4	-	19.6
Other segment assets***	680.5	796.4	267.7	131.3	173.3	2,049.2
Total segment assets	699.6	796.4	267.8	131.7	173.3	2,068.8
Unallocated assets						323.3
Consolidated total assets						2,392.1
Segment liabilities
Segment liabilities***	(558.6)	(224.1)	(189.2)	(95.7)	(197.8)	(1,265.4)
Unallocated liabilities						(443.5)
Consolidated total liabilities						(1,708.9)

***  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.

Six months ended 30 June 2019	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m	Total £m
Revenue	657.9	372.3	279.7	165.6	-	1,475.5
Result
Trading profit/(loss) from operations*	12.5	40.4	11.8	7.4	(21.5)	50.6
Amortisation and impairment of intangibles arising on acquisition	(0.6)	(1.6)	(0.1)	-	-	(2.3)
Operating profit/(loss) before exceptional items	11.9	38.8	11.7	7.4	(21.5)	48.3
Other exceptional operating items**	(23.2)	(1.1)	(1.2)	-	(5.6)	(31.1)
Operating profit/(loss)	(11.3)	37.7	10.5	7.4	(27.1)	17.2
Investment revenue						1.5
Finance costs						(12.0)
Profit before tax						6.7
Tax charge						(8.5)
Tax on exceptional items						0.4
Loss for the period						(1.4)

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

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

Six months ended 30 June 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	13.5	-	-	-	-	13.5
Depreciation of plant, property and equipment	(11.3)	(7.1)	(4.1)	(1.6)	(2.7)	(26.8)
Impairment of plant, property and equipment	(12.6)	-	-	-	-	(12.6)
Total depreciation and impairment of plant, property and equipment	(23.9)	(7.1)	(4.1)	(1.6)	(2.7)	(39.4)
Amortisation of intangible assets arising on acquisition	(0.6)	(1.6)	(0.1)	-	-	(2.3)
Amortisation of other intangible assets	(0.1)	(0.9)	(2.5)	(0.2)	(5.7)	(9.4)
Total amortisation and impairment of intangible assets	(0.7)	(2.5)	(2.6)	(0.2)	(5.7)	(11.7)
Segment assets
Interests in joint ventures and associates	20.0	-	0.7	0.4	-	21.1
Other segment assets***	499.9	488.5	257.5	142.7	150.0	1,538.6
Total segment assets	519.9	488.5	258.2	143.1	150.0	1,559.7
Unallocated assets						258.1
Consolidated total assets						1,817.8
Segment liabilities
Segment liabilities***	(391.9)	(189.6)	(172.0)	(92.6)	(151.2)	(997.3)
Unallocated liabilities						(288.6)
Consolidated total liabilities						(1,285.9)

***  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.

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						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 items 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	757.5	227.3	132.0	131.6	1,893.8
Total segment assets	667.8	757.5	228.1	132.4	131.6	1,917.4
Unallocated assets						163.2
Consolidated total assets						2,080.6
Segment liabilities****
Segment liabilities***	(536.3)	(234.0)	(151.8)	(103.0)	(160.3)	(1,185.4)
Unallocated liabilities						(352.3)
Consolidated total liabilities						(1,537.7)

***  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.

**** During the six months ended 30 June 2020, the Group finalised fair value adjustments associated with the acquisition of NSBU which was effective 1 August 2019. As a result, goodwill has been remeasured and the fair value of acquired assets and liabilities have been adjusted, resulting in an amendment to their carrying value as at 31 December 2019. Further information on the fair value adjustments can be found in Note 5.

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 six months ended 30 June 2020 or comparative periods. Dividends of £9.1m (2019: £10.0m) and £1.5m (2019: £3.4m) respectively were received from these companies in the period.

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:

30 June 2020

Summarised financial information	AWEML (100% of results)  m	MSHCL (100% of results) £m	Group portion of material joint ventures and associates* £m		Group portion of other joint venture arrangements and associates* £m		Total £m
Revenue	539.0	75.7	169.9		18.0		187.9
Operating profit/(loss)	37.4	(0.8)	8.8		(0.2)		8.6
Net investment revenue	0.3	-	0.1		-		0.1
Income tax charge	(7.1)	0.3	(1.6)		(0.1)		(1.7)
Profit/(loss) from operations	30.6	(0.5)	7.3		(0.3)		7.0
Other comprehensive income	-	2.9	1.4		-		1.4
Total comprehensive income	30.6	2.4	8.7		(0.3)		8.4
Non current assets	489.5	21.9	130.9		0.2		131.1
Current assets	188.8	51.8	72.1		3.6		75.7
Current liabilities	(171.2)	(37.1)	(60.5)		(1.4)		(61.9)
Non current liabilities	(488.7)	(11.2)	(125.3)		-		(125.3)
Net assets	18.4	25.4	17.2		2.4		19.6
Proportion of Group ownership	24.5%	50.0%	-		-		-
Carrying amount of investment	4.5	12.7	17.2		2.4		19.6
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
Supplementary information
Cash and cash equivalents	77.3	36.7	37.3	1.9		39.2
Current financial liabilities excluding trade and other payables and provisions	(0.7)	(5.4)	(2.9)	(0.5)		(3.4)
Non current financial liabilities excluding trade and other payables and provisions	-	(10.3)	(5.2)	-		(5.2)
Depreciation and amortisation	-	(3.0)	(1.5)	(0.4)		(1.9)
Interest income	0.3	0.1	0.1	-		0.1
Interest expense	-	(0.1)	(0.1)	-		(0.1)

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

The Group's share of liabilities with joint ventures and associates is £187.2m (31 December 2019: £212.2m). Of this, £120.0m (31 December 2019: £124.8m) relates to a defined benefit pension obligation, against which Serco is fully indemnified, £7.6m is lease obligations (31 December 2019: £9.0m) and the remainder 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.

30 June 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	524.7	84.2	170.7	22.2	192.9
Operating profit	47.4	8.9	16.0	0.5	16.5
Net investment revenue	0.4	0.1	0.1	-	0.1
Income tax charge	(9.3)	(1.7)	(3.1)	-	(3.1)
Profit from operations	38.5	7.3	13.0	0.5	13.5
Other comprehensive income	-	1.5	0.7	-	0.7
Total comprehensive income	38.5	8.8	13.7	0.5	14.2
Non current assets	434.8	8.7	110.9	2.4	113.3
Current assets	228.5	53.1	82.5	16.8	99.3
Current liabilities	(211.3)	(43.2)	(73.4)	(13.5)	(86.9)
Non current liabilities	(433.9)	7.6	(102.5)	(2.1)	(104.6)
Net assets	18.1	26.2	17.5	3.6	21.1
Proportion of Group ownership	24.5%	50.0%	-	-	-
Carrying amount of investment	4.4	13.1	17.5	3.6	21.1
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
Supplementary information
Cash and cash equivalents	115.3	39.4	48.0	4.6	52.6
Current financial liabilities excluding trade and other payables and provisions	(6.7)	(1.8)	(2.6)	(0.2)	(2.8)
Non current financial liabilities excluding trade and other payables and provisions	(0.1)	(1.4)	(0.7)	(2.3)	(3.0)
Depreciation and amortisation	-	(0.7)	(0.4)	(0.5)	(0.9)
Interest income	0.4	0.1	0.1	-	0.1

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

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
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
Supplementary information
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.

5. Acquisitions

The Group made no acquisitions during the period.

During the period the Group finalised the integration of NSBU, completed the analysis of balances acquired as part of the transaction and made closing net working capital settlements with the vendor. Two main activities were undertaken that resulted in adjustments to the fair value of acquired assets and liabilities. Firstly, the Group finalised its review of provisional working capital balances which resulted in fair value changes to both receivables and payables. Secondly, one of the acquired fixed price contracts required a revision to the provisional estimate of the costs required to complete the contract. The estimated cost of completion was increased as a result of a technical defect relating to machine parts that had been in place at the acquisition date and which became known through initial testing that completed during the first six months of 2020. As a result of these activities, the Group revised the fair values of the acquired assets and liabilities as at the transaction date as follows:

	Fair value as originally stated £m	Fair value adjustment £m	Revised fair value £m
Goodwill	115.3	3.0	118.3
Acquisition related intangible assets	52.6	-	52.6
Property, plant and equipment	3.6	-	3.6
Trade and other receivables	46.6	(1.8)	44.8
Cash and cash equivalents	0.4	-	0.4
Deferred tax asset	0.9	-	0.9
Trade and other payables	(30.7)	(0.5)	(31.2)
Deferred tax liability	(2.4)	-	(2.4)
Acquisition date fair value of consideration transferred	186.3	0.7	187.0
Satisfied by:
Cash	184.3	-	184.3
Deferred consideration	2.0	0.7	2.7
Total consideration	186.3	0.7	187.0

The total impact of acquisitions made in previous periods to the Group's cash flow position during the current period was as follows:

	£m
Deferred consideration paid in respect of historic acquisition:
Carillion health contracts	0.9
NSBU	2.7
Net cash outflow in relation to acquisitions	3.6
Exceptional acquisition related costs - NSBU	1.0
Net cash impact in the period on acquisitions	4.6

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 Condensed Consolidated Income Statement for the period. The total acquisition related costs recognised in exceptional items for the six-month period ended 30 June 2020 was £1.4m.

6. Disposals

On 31 May 2020, the Group disposed of its 33% interest in Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP (together "Viapath"). As part of the transaction, the Group received an amount of £11.0m for its share in the net assets of the joint venture. A summary of the disposal is as follows:

	Viapath £m
Consideration	11.0
Less: Investment in joint venture disposed of	-
Profit on disposal	11.0

The net cash inflow arising on disposal and the impact on both Net Debt and Adjusted Net Debt is:

	Viapath £m
Consideration	11.0
Less: Costs associated with the disposal	-
Net cash flow on disposal	11.0

As well as consideration for its share of the net assets of Viapath, the Group also received £2.9m for the Group's share of profits and £1.2m for loans due from Viapath.

7. Exceptional items

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

	Six months ended 30 June 2020 £m	Six months ended 30 June 2019 £m	Year ended 31 December 2019 £m
Exceptional items arising
Exceptional profit on disposal of subsidiaries and operations	11.0	-	-
Other exceptional operating items
Reversal of impairment of interest in joint venture and related loan balances	2.5	-	-
Restructuring costs	0.1	(5.4)	(12.8)
Costs related to UK Government review and SFO investigation	(1.2)	(24.0)	(25.2)
Release of other provisions and other items	2.6	-	19.3
Costs associated with the acquisition of Naval Systems Business Unit	(1.4)	(1.7)	(4.7)
Other exceptional operating items	2.6	(31.1)	(23.4)
Exceptional operating items	13.6	(31.1)	(23.4)
Exceptional tax	(0.4)	0.4	(2.7)
Total exceptional items net of tax	13.2	(30.7)	(26.1)

As explained in note 6, the Group disposed of its interest in Viapath with effect from 31 May 2020. The Group had historically impaired its investment in Viapath as it was not receiving any returns from this joint venture due to the level of investment being made back into the business, therefore the carrying value of the Group's investment in Viapath was nil. Following the announcement during the first half of 2020 that Viapath had been unsuccessful in the tender process to provide pathology services to five South East London hospitals as well as associated GP surgeries, the Group exited the joint venture, selling its stake to the remaining two investors. In May 2020, the proceeds received by the Group in exchange for its holding in the joint venture represents the profit on disposal of £11.0m.

At the same time as disposing of the Group's interest in Viapath, certain historical balances were recovered which had previously been impaired. Since the impairments associated with those balances were historically treated as exceptional items, the reversals of these impairments have been treated consistently. The exceptional credit of £2.5m consists of the recovery of a loan from the Group into the joint venture of £1.2m and the recovery of profit share which was previously considered to be irrecoverable.

The Group recognised the final costs associated with the Strategy Review during 2019, and on review, certain costs which had not been incurred were released back to exceptional operating items resulting in a credit to exceptional items of £0.1m during the six months ended 30 June 2020 (2019: exceptional restructuring costs of £5.4m). Non-exceptional restructuring charges are incurred by the business as part of normal operational activity, which in the period totalled £3.4m (2019: £2.2m) and were included within operating profit before exceptional items.

There were exceptional costs totalling £1.2m (2019: £24.0m) associated with the UK Government reviews and the programme of Corporate Renewal. These costs have historically been treated as exceptional and consistent treatment is applied in 2020. The cost in the first half of 2019 included £22.9m for the fine which resulted from the SFO's investigation into Serco companies.

During 2019, the Group reached a legal settlement in relation to a commercial dispute which resulted in the release of a provision which accounted for the majority of the £19.3m exceptional credit. The treatment of the release as exceptional was consistent with the recognition of the charge associated with the same legal matter in 2014. During the six months ended 30 June 2020, the Group reached an agreement with its insurer for the reimbursement of £2.6m of legal fees associated with the matter, and consistent with the treatment of other associated amounts, this has been treated as an exceptional credit.

The Group completed the acquisition of the Naval Systems Business Unit (NSBU) from Alion Science and Technology in 2019. The transaction and implementation costs incurred during the six months ended 30 June 2020 of £1.4m have been treated as exceptional costs in line with the Group's accounting policy and the treatment of similar costs during the year ended 31 December 2019.

Exceptional tax for the period was a tax charge of £0.4m (2019: £0.4m credit) which arises on exceptional items within operating profit. The net exceptional gain only gave rise to a charge of £0.4m, as the majority of these items were incurred in the UK where they only impact our unrecognised deferred tax in relation to losses.

8. Investment revenue

	Six months ended 30 June 2020 £m	Six months ended 30 June 2019 £m	Year ended 31 December 2019 £m
Interest receivable on other loans and deposits	0.1	0.1	0.5
Net interest receivable on retirement benefit obligations (note 17)	0.6	1.1	2.1
Interest arising on customer contracts	-	0.2	-
Movement in discount on other debtors	-	0.1	0.1
	0.7	1.5	2.7

9. Finance costs

	Six months ended 30 June 2020 £m	Six months ended 30 June 2019 £m	Year ended 31 December 2019 £m
Interest payable on lease liabilities	4.8	2.4	6.9
Interest payable on other loans	7.4	6.7	13.9
Facility fees and other charges	1.0	0.9	1.7
Movement in discount on provisions	-	1.1	1.2
Total interest and other finance charges	13.2	11.1	23.7
Foreign exchange on financing activities	0.2	0.9	0.8
	13.4	12.0	24.5

10. Tax

A tax charge of £5.7m (2019: £8.5m) on pre-exceptional profits has been recognised which includes underlying tax of £17.0m, the tax impact of amortisation of intangibles arising on acquisition of £0.9m and a £10.4m credit on non-underlying items. Tax balances have been calculated using the estimated full year effective tax rate.

The £10.4m credit relates to £8.0m tax impact of movements in the valuation of the Group's defined benefit pension scheme which leads to a corresponding adjustment to the deferred tax asset to match the future profit forecasts.  Such a change in the deferred tax asset impacts tax in the income statement.  Where deferred tax charges or releases are the result of movements in pension scheme valuations rather than a trading activity, these are excluded from the calculation of tax on underling profit and the underling effective tax rate. In addition, there is a £2.4m credit associated with the revaluation of the deferred tax asset held in connection with the UK.  This follows the UK Government announcement that the expected fall in tax rate in April 2020 from 19% to 17% would not take place.

The tax rate on profits before exceptional items of 9.1% (2019: 22.5%) is lower than the UK standard corporate tax rate of 19%. This is mainly due to the impact of non-underlying credits discussed above together with the use of unrecognised deferred tax assets brought forward to offset current year profits and the impact of our joint ventures whose post-tax results are included in our pre-tax profit reducing the rate.  This is partially offset by higher rates of tax on profits arising on our international operations.

11. 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	Six months ended 30 June 2020 millions	Six months ended 30 June 2019 millions	Year ended 31 December 2019 millions
Weighted average number of ordinary shares for the purpose of basic EPS	1,226.5	1,122.0	1,171.4
Effect of dilutive potential ordinary shares: Shares under award	18.2	24.3	27.6
Weighted average number of ordinary shares for the purpose of diluted EPS	1,244.7	1,146.3	1,199.0

Basic EPS	Earnings 30 June 2020 £m	Per share amount 30 June 2020 pence	Earnings 30 June 2019 £m	Per share amount 30 June 2019 pence	Earnings 31 December 2019 £m	Per share amount 31 December 2019 pence
Earnings for the purpose of basic EPS	70.4	5.74	(1.7)	(0.15)	50.4	4.31
Effect of dilutive potential ordinary shares		(0.08)		-		(0.10)
Diluted EPS	70.4	5.66	(1.7)	(0.15)	50.4	4.21
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS	70.4	5.74	(1.7)	(0.15)	50.4	4.31
Add back exceptional items	(13.6)	(1.11)	31.1	2.77	23.4	2.00
Add back tax on exceptional items	0.4	0.03	(0.4)	(0.04)	2.7	0.23
Earnings excluding exceptional items for the basis of basic EPS	57.2	4.66	29.0	2.58	76.5	6.54
Effect of dilutive potential ordinary shares		(0.06)		(0.05)		(0.15)
Excluding exceptional items, diluted	57.2	4.60	29.0	2.53	76.5	6.39

12. Goodwill

Goodwill is stated at cost less any provision for impairment and is compared against the associated recoverable amount at least annually. The value of each CGU is based on value in use calculations derived from forecast cash flows based on past experience, adjusted to reflect market trends, economic conditions and key risks. These forecasts include an estimate of new business wins and an assumption that the final year forecast continues on into perpetuity at a CGU specific growth rate.

Goodwill is required to be tested for impairment at least once every financial year, irrespective of whether there is any indication of impairment. The annual impairment review typically takes place in the final quarter of the year. However, if there are indicators of impairment, an earlier review is also required.

There have been no indicators of impairment since the full impairment test undertaken for the 2019 year end. Following the designation of the global Covid-19 pandemic ("the pandemic") by the World Health Organisation during March 2020, specific consideration has been given to whether there are any indicators of impairment across the Group's cash generating units (CGUs) relating to the impact of the pandemic. The pandemic itself is not an impairment indicator, however economic shocks resulting from the pandemic could be considered to be indicators which otherwise would not have existed. In assessing for potential indicators of impairment, the Group has gathered information at both macro and micro levels, globally and on the basis of the individual geographies in which the Group operates.

The Group has not been impacted in a manner which would indicate the existence of impairment indicators and will prepare a full goodwill assessment at the end of the year. When considering the potential existence of both internal and external impairment indicators, the Group assessed certain key measures and other sources of available information which included, but were not limited to, in particular the absence of:

●	Any obsolescence indicators within the Group's physical assets;
●	Any plans to dispose of CGUs;
●	Indicators of worse than expected performance to an extent that would have caused an impairment had they been known at the time of the latest full impairment review;
●	Net operating cash outflows or operating losses;
●	A significant decline in market value; or
●	Carrying amounts of net assets in excess of market capitalisation.

The potential indicator with the largest possible impact was the increase in market interest rates globally which impact on the Group's discount rates and reduce the present value of future cash flows. Whilst modest increases have been seen across the UK, Europe, Americas and AsPac, a more notable rise was seen in the Middle East. The rise in market interest rates, offset only partially by a fall in risk premiums, meant a potential rise in post-tax discount rates of 1.9%. When combined with the fact that at 31 December 2019, the lowest headroom was identified in relation to the Middle East CGU on an absolute basis, further analysis was performed to assess whether the combination of evidence implied an impairment indicator was present.

Additional sensitivities have been applied to the impairment model used at 31 December 2019 in respect of the Middle East to allow for above expected increase in discount rates and the estimated adverse impact of Covid-19 on cash flows, and still no indicators of impairment have been identified.

13. Analysis of Net Debt

30 June 2020

	As at 1 January 2020 £m	Cash flow £m	Acquisitions* £m	Exchange differences £m	Non-cash movements £m	As at 30 June 2020  m
Loans payable	(305.0)	(68.5)	-	(16.3)	(0.6)	(390.4)
Lease obligations	(369.9)	52.8	-	(6.9)	(35.9)	(359.9)
Liabilities arising from financing activities	(674.9)	(15.7)	-	(23.2)	(36.5)	(750.3)
Cash and cash equivalents	89.5	152.9	-	2.5	-	244.9
Derivatives relating to Net Debt	1.0	-	-	1.6	-	2.6
Net Debt	(584.4)	137.2	-	(19.1)	(36.5)	(502.8)

30 June 2019

	As at 1 January 2019 £m	Opening adjustment - IFRS16 £m	Cash flow £m	Acquisitions* £m	Exchange differences £m	Non-cash movements £m	As at 30 June 2019  m
Loans payable	(239.5)	-	-	-	(1.5)	0.4	(240.6)
Lease obligations	(14.8)	(129.1)	22.3	-	(0.7)	(22.5)	(144.8)
Liabilities arising from financing activities	(254.3)	(129.1)	22.3	-	(2.2)	(22.1)	(385.4)
Cash and cash equivalents	62.5	-	110.6	-	0.3	-	173.4
Derivatives relating to Net Debt	3.8	-	-	-	1.5	-	5.3
Net Debt	(188.0)	(129.1)	132.9	-	(0.4)	(22.1)	(206.7)

31 December 2019

	As at 1 January 2019 £m	Opening adjustment - IFRS16 £m	Cash flow £m	Acquisitions* £m	Exchange differences £m	Non-cash movements £m	As 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)

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

14. Provisions

	Employee related £m	Property  m	Contract £m	Other  m	Total £m
As at 1 January 2020	62.1	13.3	16.5	69.9	161.8
Charged to income statement - exceptional	0.1	-	-	1.0	1.1
Charged to income statement - other	10.7	2.5	2.4	2.6	18.2
Released to income statement - exceptional	(0.1)	-	-	-	(0.1)
Released to income statement - other	(0.1)	(1.9)	(3.0)	(1.9)	(6.9)
Included in the valuation of right of use asset	-	0.8	-	-	0.8
Utilised during the period	(3.0)	(0.8)	(1.7)	(4.5)	(10.0)
Exchange differences	4.0	0.2	0.1	0.3	4.6
As at 30 June 2020	73.7	14.1	14.3	67.4	169.5
Analysed as:
Current	12.0	6.5	13.7	24.7	56.9
Non-current	61.7	7.6	0.6	42.7	112.6
	73.7	14.1	14.3	67.4	169.5

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.

The present value of the estimated future cash outflow required to settle the contract obligations as they fall due over the respective contracts has been used in determining the provision. Individual provisions are only discounted where the impact is assessed to be significant. Currently, no contract provisions are discounted. Discount rates 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.

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 12 months or over a longer period with the majority expected to be settled by 30 June 2023.

15. Contingent liabilities

The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures and associates up to a maximum value of £3.8m (31 December 2019: £4.3m). The actual commitment outstanding at 30 June 2020 was £3.8m (31 December 2019: £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 30 June 2020 was £244.5m (31 December 2019: £257.5m).

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 liability as at the date of this disclosure.

In addition, the Group is also aware that other contingent liabilities may exist where there are other commercial claims and potential claims which involve or may involve legal proceedings from a range of parties in respect of contracts, employment, health and safety and other laws and regulations, and regulatory and compliance matters that arise in the normal course of business. The timing of resolution 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.

16. Financial risk management

The vast majority of financial instruments are held at amortised cost. The classification of the fair value measurement falls into three levels, based on the degree to which the fair value is observable. The levels are as follows:

Level 1: Inputs derived from unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.

Level 3: Inputs are unobservable inputs for the asset or liability.

Based on the above, the derivative financial instruments held by the Group at 30 June 2020 and the comparison fair values for loans and leases, are all considered to fall into Level 2. There are no Level 3 items. As at 30 June 2020, the Group held Level 2 derivative instruments in designated hedge relationships and designated as fair value through the P&L made up of financial assets of £4.4m (31 December 2019: £3.0m) and financial liabilities of £1.5m (31 December 2019: £1.9m). 

There have been no transfers between levels in the six months to 30 June 2020.

17. Defined benefit schemes

Characteristics

Among our non-contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS).  The most recent full actuarial valuation of SPLAS was undertaken as at 5 April 2018 and completed in June 2019.  The actuarially assessed deficit for funding purposes at 5 April 2018 was of £26.0m.  A summary valuation was also undertaken as at 30 June 2020 when the estimated actuarial deficit of SPLAS was £36.0m on the funding basis, whereas the accounting valuation at 30 June 2020 resulted in an asset of £125. 1m.  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. With the agreement of the Trustees the £4.0m payment due before 1 April 2020 was rescheduled over 8 months to preserve cashflow as the extent of Covid-19 was unknown at the time. To the end of May 2020, £1.5m of the £4.0m had been paid into the scheme. Following a further review of the Group's liquidity position it was determined that the final payment of the remaining £2.5m could be made. Payment of the £2.5m was made during June 2020.

Values recognised in total comprehensive income

The total amounts recognised in the financial statements in respect of all schemes are analysed as follows:

Recognised in the income statement	Six months ended 30 June 2020 £m	Six months  ended 30 June 2019 £m	Year ended 31 December 2019 £m
Current service cost - employer	2.4	2.1	4.3
Past service cost	-	1.1	1.4
Administrative expenses and taxes	0.6	0.7	2.0
Recognised in arriving at operating profit after exceptionals	3.0	3.9	7.7
Interest income on scheme assets - employer	(14.6)	(19.0)	(37.9)
Interest on franchise adjustment	(0.1)	(0.1)	(0.1)
Interest cost on scheme liabilities - employer	14.1	18.0	35.9
Finance income	(0.6)	(1.1)	(2.1)

Included within the SOCI	Six months ended 30 June 2020 £m	Six months  ended 30 June 2019 £m	Year ended 31 December 2019 £m
Actual return on scheme assets	152.9	99.9	128.1
Less: interest income on scheme assets	(14.7)	(19.0)	(38.1)
	138.2	80.9	90.0
Effect of changes in demographic assumptions	-	41.7	39.9
Effect of changes in financial assumptions	(114.0)	(119.1)	(148.6)
Effect of experience adjustments	5.2	(1.6)	(1.6)
Remeasurements	29.4	1.9	(20.3)
Change in franchise adjustment	1.9	1.2	2.0
Change in members' share	1.1	0.7	1.2
Actuarial profit on reimbursable rights	3.0	1.9	3.2
Total pension gain/(loss) recognised in the SOCI	32.4	3.8	(17.1)

Balance sheet values

The total assets and liabilities of all schemes are:

Scheme assets at fair value	30 June 2020 £m	30 June 2019 £m	31 December 2019 £m
Equities	52.1	52.6	54.7
Bonds except LDIs	349.0	198.8	264.1
LDIs	425.8	488.8	447.4
Pooled investment vehicles	61.8	18.8	38.1
Property	1.8	1.6	1.7
Cash and other	8.8	56.7	9.2
Annuity policies	663.6	611.1	614.0
Fair value of scheme assets	1,562.9	1,428.4	1,429.2
Present value of scheme liabilities	(1,485.3)	(1,361.1)	(1,384.5)
Net amount recognised	77.6	67.3	44.7
Franchise adjustment*	7.7	4.9	5.8
Members' share of deficit	5.1	3.3	3.8
Net retirement benefit asset	90.4	75.5	54.3
Net pension liability	(34.7)	(19.7)	(24.0)
Net pension asset	125.1	95.2	78.3
Net retirement benefit asset	90.4	75.5	54.3
Deferred tax liabilities	(17.0)	(10.8)	(9.2)
Net retirement benefit asset (after tax)	73.4	64.7	45.1

*   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.

Actuarial assumptions:  SPLAS

The assumptions set out below are for SPLAS, which represents 91% of total liabilities and 94% of total assets of the defined benefit pension schemes 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 continued to update 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 reduced from 0.4% at 31 December 2019 to 0.3% at 30 June 2020, reflecting the assumption that the market has largely priced in forthcoming changes to RPI. For CPI, the Group retained the assumed difference between the RPI and CPI by of an average of 0.6% per annum.

The estimated impact of the change in the methodology is approximately a £10m increase in the defined benefit obligation in respect of the SPLAS scheme.

Main assumptions	30 June 2020  %	30 June 2019  %	31 December 2019  %
Rate of salary increases	2.40	2.70	2.70
Rate of increase in pensions in payment	2.35 (CPI) and 2.70 (RPI)	2.25 (CPI) and 3.05 (RPI)	2.20 (CPI) and 3.00 (RPI)
Rate of increase in deferred pensions	1.90 (CPI) and 2.80 (RPI)	2.20 (CPI) and 3.20 (RPI)	2.30 (CPI) and 3.30 (RPI)
Inflation assumption	1.90 (CPI - pre-retirement), 2.40 (CPI - post-retirement) and 2.80 (RPI)	2.20 (CPI) and 3.20 (RPI)	2.20 (CPI) and 3.20 (RPI)
Discount rate	1.60	2.30	2.10

Post retirement mortality	30 June 2020 years	30 June 2019 years	31 December 2019   years
Current pensioners at 65 - male	21.6	21.6	21.6
Current pensioners at 65 - female	24.2	24.1	24.1
Future pensioners at 65 - male	23.8	23.8	23.8
Future pensioners at 65 - female	26.2	26.2	26.2

Sensitivity analysis

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 30 June 2020 where the Group's 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 Group's defined benefit obligation as at 30 June 2020 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 Group's defined benefit obligation.

Pension assumption sensitivities	30 June 2020 £m	30 June 2019 £m	31 December 2019 £m
Discount rate - 0.5% increase	(119.9)	(109.0)	(108.5)
Discount rate - 0.5% decrease	136.1	118.9	122.9
Inflation - 0.5% increase	103.3	72.0	88.9
Inflation - 0.5% decrease	(91.6)	(69.4)	(83.3)
Rate of salary increase - 0.5% increase	3.6	2.7	3.2
Rate of salary increase - 0.5% decrease	(3.4)	(2.6)	(3.1)
Mortality - one-year age rating	55.6	41.9	48.6

18. 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. The Group also enters into transactions with the Directors, however disclosure of such transactions is only made annually. Transactions between the Group and its joint venture undertakings and associates are disclosed below.

Transactions

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

	Transactions for the six months ended 30 June 2020  m	Current Outstanding at 30 June 2020  m	Non current Outstanding at 30 June 2020  m
Sale of goods and services
Joint ventures	0.1	-	-
Associates	1.2	0.1	-
Other
Dividends received - joint ventures	2.3	-	-
Profit share received - joint ventures	2.9	-	-
Dividends received - associates	9.1	-	-
Receivable from consortium for tax - joint ventures	-	-	2.2
Total	15.6	0.1	2.2

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

	Transactions for the six months ended 30 June 2019  m	Outstanding at 30 June 2019*  m
Sale of goods and services
Joint ventures	0.8	0.1
Associates	3.9	2.0
Other
Dividends received - joint ventures	3.4	-
Dividends received - associates	10.0	-
Receivable from consortium for tax - joint ventures	(0.9)	5.7
Total	17.2	7.8

*  All amounts outstanding as at 30 June 2019 are due within 12 months of the balance sheet date.

	Transactions for the year ended 31 December 2019  m	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

*  All amounts outstanding as at 31 December 2019 are due within 12 months of the balance sheet date.

On 31 May 2020, the Group disposed of its 33% interest in Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP (together "Viapath"). As part of the transaction, the Group received an amount of £11.0m for its share in the net assets of the joint venture.  At the same time as disposing of the Group's interest in Viapath, the Group recovered a loan into the joint venture of £1.2m and £2.9m of profit share which was previously considered to be irrecoverable.

19. Notes to the Condensed Consolidated Cash Flow Statement

Six months ended 30 June	2020 Before exceptional items £m	2020 Exceptional items £m	2020  Total  m	2019  Before exceptional items £m	2019  Exceptional items £m	2019  Total £m
Operating profit for the period	75.5	13.6	89.1	48.3	(31.1)	17.2
Adjustments for:
Share of profits in joint ventures and associates	(7.0)	-	(7.0)	(13.5)	-	(13.5)
Share based payment expense	5.9	-	5.9	5.6	-	5.6
Impairment of property, plant and equipment	0.2	-	0.2	12.6	-	12.6
Depreciation of property, plant and equipment	54.0	-	54.0	26.8	-	26.8
Amortisation of intangible assets	12.5	-	12.5	11.7	-	11.7
Exceptional profit on disposal of subsidiaries and operations	-	(11.0)	(11.0)	-	-	-
Reversal of impairment on loans to JVs	-	(1.2)	(1.2)	-	-	-
Loss on early termination of leases	0.1	-	0.1	-	-	-
Loss on disposal of property, plant and equipment	-	-	-	0.1	-	0.1
Loss on disposal of intangible assets	0.3	-	0.3	-	-	-
Exceptional transaction costs	-	-	-	-	1.7	1.7
Increase/(decrease) in provisions	5.6	(3.4)	2.2	(35.4)	21.7	(13.7)
Other non cash movements	0.1	-	0.1	(0.1)	-	(0.1)
Total non cash items	71.7	(15.6)	56.1	7.8	23.4	31.2
Operating cash inflow/(outflow) before movements in working capital	147.2	(2.0)	145.2	56.1	(7.7)	48.4
(Increase)/decrease in inventories	(1.2)	-	(1.2)	4.1	-	4.1
Decrease/(increase) in receivables	7.5	-	7.5	(44.6)	-	(44.6)
Increase/(decrease) in payables	12.9	(2.2)	10.7	33.0	(4.4)	28.6
Movements in working capital	19.2	(2.2)	17.0	(7.5)	(4.4)	(11.9)
Cash generated by operations	166.4	(4.2)	162.2	48.6	(12.1)	36.5
Tax paid	(12.0)	-	(12.0)	(17.2)	-	(17.2)
Net cash inflow/(outflow) from operating activities	154.4	(4.2)	150.2	31.4	(12.1)	19.3

Year ended 31 December	2019 Before exceptional items £m	2019 Exceptional items £m	2019 Total  m
Operating profit for the year	125.9	(23.4)	102.5
Adjustments for:
Share of profits in joint ventures and associates	(27.5)	-	(27.5)
Share based payment expense	11.6	-	11.6
Impairment of property, plant and equipment	18.9	-	18.9
Depreciation of property, plant and equipment	74.4	-	74.4
Amortisation of intangible assets	25.6	-	25.6
Profit on early termination of leases	(0.9)	-	(0.9)
Profit on disposal of property, plant and equipment	(0.6)	-	(0.6)
Loss on disposal of intangible assets	0.4	-	0.4
Decrease in provisions	(43.1)	(20.5)	(63.6)
Other non cash movements	(1.2)	-	(1.2)
Total non cash items	57.6	(20.5)	37.1
Operating cash inflow/(outflow) before movements in working capital	183.5	(43.9)	139.6
Decrease in inventories	4.4	-	4.4
Increase in receivables	(36.7)	-	(36.7)
Increase/(decrease) in payables	32.2	(5.3)	26.9
Movements in working capital	(0.1)	(5.3)	(5.4)
Cash generated by operations	183.4	(49.2)	134.2
Tax paid	(31.2)	-	(31.2)
Non cash R&D expenditure	(0.1)	-	(0.1)
Net cash inflow/(outflow) from operating activities	152.1	(49.2)	102.9

 

END

 

 

IR UVRARRUUWRUR