Half-year Report

RNS Number : 8568U

Serco Group PLC

04 August 2022

 

2022 half year results

4 August 2022

Serco Group plc

LEI: 549300PT2CIHYN5GWJ21

Growth in many parts of the business more than offsets wind-down of Test & Trace and exit from AWE. Profits up 6% and trading margin increased. Interim dividend increased by 18%.

Six months ended 30 June	2022	2021	Change at reported currency	Change at constant currency
Revenue(1)	£2,178m	£2,168m	1%	(1%)
Underlying Trading Profit (UTP)(2)	£130m	£123m	6%	2%
Trading Profit	£134m	£126m	6%
Operating Profit(2)	£123m	£116m	6%
Underlying Earnings Per Share (EPS), diluted(3)	7.71p	6.75p	14%
Reported EPS (i.e. after exceptional items), diluted	7.41p	18.77p	(61%)
Interim Dividend Per Share	0.94p	0.80p	18%
Free Cash Flow(4)	£96m	£130m	(26%)
Adjusted Net Debt(5)	£164m	£225m	(27%)
Reported Net Debt(6)	£596m	£651m	(8%)

Highlights

·	Revenues: strong growth across the business offsets revenue reductions from Test & Trace. Revenue excluding Test & Trace up 12%.
·	Underlying Trading Margin increases : up from 5.7% to 5.9%.
·	Underlying Trading Profit, Trading Profit and Operating Profit all up 6% .  More than three-quarters of our profit earned outside of the UK(7).
·	Underlying Earnings per Share up 14% : growing faster than UTP due to lower interest and tax.
·	Reported Earnings per Share : prior year included recognition of £145m UK deferred tax asset.
·	Interim Dividend per Share up 18%.
·	Underlying trading profit cash conversion: >100%.
·	Reduced Adjusted Net Debt : down £61m to £164m. Covenant leverage 0.5x EBITDA (2021: 1.0x).
·	Return on Invested Capital: 21.5%, same as prior year.
·	Order book up £0.5bn on prior year to £14.6bn.   Order intake £2.0bn, book-to-bill 94%.
·	Healthy New Business Pipeline at £8.1bn, up around 40% year-on-year.
·	Full year guidance slightly increased to reflect trading in May and June, and additional FX benefit.

Rupert Soames, Serco Group Chief Executive, commented:

We did much better in the first half than we expected in January, and as a consequence also expect to do better than we originally anticipated in the full year.  In the first six months we have maintained revenues year-on-year despite losing around £220m, or 10%, of our revenues as a result of the wind-down in Test & Trace.  Excluding Test & Trace, revenues grew by over 12%.  Profits increased by 6%, despite a £25m, or 21%, negative impact of the exit from AWE in June 2021 and Test & Trace.  Increased demand for case management in North America, employment services in the UK, immigration services in both Australia and the UK, as well as our acquisition of WBB in April 2021, more than offset the impact of Test & Trace and AWE on revenues and profit. 

Our order book remains very strong at £14.6bn, up £0.5bn over the prior year with the positive effect of wins, indexation and currency more than offsetting revenue earned over the last twelve months.  Order intake in the first half of £2.0bn represented a book-to-bill ratio of 94%, and would have been well over 100% but for unusually low levels of contract rebids and extensions being due in the first half.  New business wins, on the other hand, were above average levels.  The pipeline has reduced from the start of the year but at over £8bn stands at a very healthy level, and is up around 40% year-on-year.

Looking at the first half performance in the round - robust revenues despite the wind-down in Test & Trace, strong margins, large and growing order book, healthy pipeline, strong cash conversion and balance sheet - tells of the agility of Serco's Business-to-Government platform and the advantages of our differentiated business model and international footprint.

We employ around 57,000 people delivering services to governments and so the balance of supply and demand in labour markets is important to us.  It is our sense that the dislocation in labour markets we saw last year is beginning to ease, as more people return to work, and we have seen a reduction in our vacancy levels.  However, staff turnover remains high in some contracts, and unpredictable absence levels, driven by waves of Covid-19, mean that operational management of the business remains very demanding.

I am delighted to report that we have made significant progress on our diversity and equality strategy. Since 2017, the proportion of women in our senior leadership team (around 350 leaders) has increased from 17% to 33%, while the proportion of colleagues with a declared disability or health condition has more than doubled in recent years and now stands at 5%.  In the UK our median gender pay gap has fallen from 12.9% to 6.9%.

As a result of the recent surge in inflation we are increasing pay faster than we budgeted and we will be distributing an additional £9m in the coming weeks in one-off payments to all our colleagues outside management grades, recognising the pressure many people, particularly the lower paid, are under at this time.  Increasing pay is one of the reasons why costs are expected to be higher, and profits lower, in the second half than in the first.  We do have mechanisms in many of our contracts which will over time help us mitigate the effects of cost increases, but inflation that goes from 2% to 10% in 12 months, and is then forecast to fall back to 2% by the end of 2024 makes it hard for companies, customers and employees to balance their long term interests and expectations.

Guidance for 2022

We significantly increased our guidance for the full year in an unscheduled trading update on 26 May.  UTP guidance was raised by 15% from £195m to £225m, and today we are slightly increasing UTP guidance to £230m to reflect further FX movement since the last update and trading in May and June.  We also strengthen guidance for Free Cash Flow and Adjusted Net Debt.  For the year, we expect currency movements to contribute around £150m to revenues and £12m to profits.

	2021	2022
	Actual	Previous guidance 26 May 2022	New guidance 4 August 2022
Revenue	£4.4bn	£4.3bn-£4.4bn	Unchanged
Organic sales growth	10%	~(5)%	Unchanged
Underlying Trading Profit	£229m	~£225m	~£230m
Net finance costs	£24m	~£25m	~£23m
Underlying effective tax rate	24%	~25%	~24%
Free Cash Flow	£190m	~£120m	~£140m
Adjusted Net Debt	£178m	~£200m	~£190m

NB: The guidance uses an average GBP:USD exchange rate of 1.25 in 2022 and GBP:AUD of 1.78, which is based on currency rates as 30 June 2022.  Adjusted Net Debt guidance includes the £90m share buyback programme.  We expect a weighted average number of shares in 2022 of 1,195m for basic EPS and 1,220m for diluted EPS.

Looking ahead

Serco's resilience and strong trading performance stands in sharp contrast to a geo-political and economic landscape which continues to be miserable and dominated by the malign influence of two "black swan" events.  In March 2020, Covid-19 up-ended the world.  Almost exactly two years later, the Russian invasion of Ukraine has brought death and destruction, nine million refugees, inflation, food shortages, and world-wide disruption of efforts to rebuild after the pandemic.

The concatenation of these two catastrophes will shape public policy for years to come.  Governments are struggling to square promises to invest in energy transition and to "build back better" with the realities of materially increased levels of public debt incurred mitigating the impact of Covid-19; the need to increase defence expenditure; and inflation, with its outriders of unplanned increases in debt service and other costs - notably in pay for public servants.  In squaring these circles governments will need more than ever the innovation, efficiency and skilled operational management the private sector can bring to the effective delivery of public services.

We have got off to a much better start than we expected against the five-year plan we presented at our Capital Markets Day in December 2021.  Our expectation then was that, from a base year in 2022 of UTP of £195m and margin of around 4.7%, we would over the four years to 2026 grow revenues at an average of 4-6% a year, with margins rising to 5-6%.  Whilst it may be tempting to rebase our objectives to a higher 2022 starting point, any sensible plan has to allow for humps, when we do better than the average, and bumps, when we do worse; 2022 will clearly be a hump, and our margins in particular are stronger, at an earlier point in the plan, than we expected.  Overall, we believe that we remain on course, even if our strong start means that we are travelling towards our destination a little faster than we expected.  Importantly, the experience of the last two years, and the outlook for 2022, confirms our belief in the resilience of our model and the ability of our Business-to-Government platform to enable us to adapt to the changing requirements of governments, whilst delivering growing returns to shareholders, rewarding careers to our employees, and high-quality public services to our customers.

For further information please contact Serco:

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

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

Presentation:

A presentation for institutional investors and analysts will be held at Maitland/AMO, 3 Pancras Square, London,

N1C 4AG today, starting at 10.00am.  The presentation will be webcast live at https://edge.media-server.com/mmc/p/72gqvd9g and subsequently available on demand.  A dial-in facility is available on https://register.vevent.com/register/BI26239113466b42deba7b6d01a65ac9da .

Notes to financial results summary table and highlights:

(1) Revenue is as defined under IFRS, which excludes Serco's share of revenue of its joint ventures and associates.  Organic revenue growth is the change at constant currency after adjusting to exclude the impact of relevant acquisitions or disposals.  Change at constant currency is calculated by translating non-sterling values for the six months ended 30 June 2022 into sterling at the average exchange rates for the six months ended 30 June 2021.

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

Six months ended 30 June £m	2022	2021
Underlying Trading Profit	129.5	122.7
Include: non-underlying items
OCP charges and releases
Other Contract & Balance Sheet Review adjustments and one-time items	4.2	2.9
Trading Profit	133.7	125.6
Amortisation of intangibles arising on acquisition	(9.6)	(6.6)
Operating Profit before exceptional items	124.1	119.0
Operating exceptional items	(0.9)	(2.7)
Reported Operating Profit	123.2	116.3

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

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

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

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

As at £m	30 June 2022	30 June 2021	31 Dec 2021
Adjusted Net Debt	163.6	225.2	178.0
Include: all lease liabilities	432.5	425.7	430.3
Reported Net Debt	596.1	650.9	608.3

(7) Refers to non-UK Underlying Trading Profit as a proportion of group Underlying Trading Profit before corporate costs. Our Underlying Trading Profit before corporate costs in the first half of 2022 was £153.5m.

Reconciliations and further detail of financial performance are included in the Finance Review on pages 14-24. 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 28-43.

Chief Executive's Review

Summary of financial performance

Revenue, Underlying Trading Profit and Underlying Earnings Per Share

Revenue increased by 1%, or £10m, to £2,178m (2021: £2,168m).  An organic contraction of 3% (£70m) was more than offset by an acquisition contribution from WBB of 2% (£46m) and favourable currency movements that added 2% (£34m). The organic decline was driven by the wind down in Test & Trace, which ended in April, and the ending of the Dubai Metro contract in September 2021.  These contracts reduced revenue by around £280m, or 13%, year-on-year.  Most of this decline was offset by strong growth in other contracts, including immigration in Australia and the UK, case management in North America and employment services in the UK; excluding Test & Trace revenues grew by 12%, of which 8% was organic.

Underlying Trading Profit (UTP) increased by 6%, or £7m, to £130m (2021: £123m). Excluding the favourable currency contribution of £4m, growth at constant currency was 2%.  Acquisitions added 4%, or £5m, of the growth, with an organic decline of 1%.  The organic reduction primarily resulted from lower levels of Test & Trace work and the end of our Atomic Weapons Establishment contract in June 2021.  These were offset by growth in a range of other areas, including in Justice & Immigration, Citizens Services and improvement across parts of the Transport and Health sectors that had been negatively impacted by Covid-19.  The Americas, Asia Pacific and Middle East regions all improved their Underlying Trading Profit margins, which offset the impact of lower margins in the UK & Europe division, meaning our UTP margin increased from 5.7% to 5.9%.

Six months ended 30 June 2022 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	991.5	622.3	472.0	92.6	-	2,178.4
Change	(5%)	+18%	+3%	(35%)		+0.5%
Change at constant currency	(4%)	+11%	+4%	(38%)		(1.0%)
Organic change at constant currency	(5%)	+3%	+3%	(38%)		(3.6%)
Underlying Trading Profit	37.5	75.7	31.6	8.7	(24.0)	129.5
Margin	3.8%	12.2%	6.7%	9.4%	(1.1%)	5.9%
Change	(33%)	+33%	+26%	+21%	+6%	+5.5%
Contract & Balance Sheet Review adjustments	4.2	-	-	-	-	4.2
Other one-time items	-	-	-	-	-	-
Trading Profit/(Loss)	41.7	75.7	31.6	8.7	(24.0)	133.7
Amortisation of intangibles arising on acquisition	(0.4)	(7.4)	(1.8)	-	-	(9.6)
Operating profit/(loss) before exceptionals	41.3	68.3	29.8	8.7	(24.0)	124.1

Diluted Underlying Earnings Per Share increased by 14% to 7.71p (2021: 6.75p).  The percentage improvement was higher than the increase in UTP due to a reduced finance cost, a decrease in the effective tax rate and a lower number of shares, due to our buyback programme.

The Revenue and Underlying Trading Profit performances are discussed in more detail in the Divisional Reviews, starting on page 9. 

Cash flow and Net Debt

Free Cash Flow was again strong at £96m (2021: £130m) and underlying trading profit cash conversion in the half was 101% (2021: 137%).  The first six months of 2021 benefitted from cash collections on some older receivables, shorter payment terms on Covid-19 related work and favourable timing effects.  Average working capital days reduced with debtor days of 21 (2021: 23 days) and creditor days of 21 (2021: 24 days).  85% of UK supplier invoices were paid in under 30 days (2021: 89%) and 94% were paid in under 60 days (2021: 95%).  No working capital financing facilities were utilised in this or the prior year. 

Adjusted Net Debt reduced to £164m at 30 June (31 December 2021: £178m, 30 June 2021: £225m).  The £14m reduction since the prior year end occurred despite £19m of dividend payments and £42m of share purchases, including those for employee share schemes, during the period.

The period end Adjusted Net Debt compares to a daily average of £201m (2021: £178m) and a peak of £258m (2021: £346m).  This is a typical range for our net debt over the first half of a year, with the period end number lower due to the timing of receipts; the difference between period end and daily average debt is in any case immaterial at around 1.5% of revenues in the period.  As usual, we have not used any financing or efforts out of the ordinary to reduce period end debt.

Our measure of Adjusted Net Debt excludes lease liabilities, which are included in Statutory Net Debt, and aligns closely with the covenants on our financing facilities. Lease liabilities totalled £433m at the end of June (2021: £426m), the majority being leases on housing for asylum seekers under the AASC contract. The terms of these leases are generally aligned to the contract we have with the customer.

At the closing balance sheet date, our leverage for debt covenant purposes was 0.5x EBITDA (2021: 1.0x).  This compares with the covenant requirement for net debt to be less than 3.5x EBITDA and our target range of 1-2x.

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

Capital allocation and returns to shareholders

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

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

In 2022 we continue to deliver our capital allocation policy:

·	Invest to support organic growth : we have continued to invest in our infrastructure and capabilities.  Significant investment has also been put into business development, which has supported our healthy pipeline of new opportunities. Our investment in IT systems has been increased, and we have rolled out further our workforce management system; we have also restarted our Oxford Management Training programme, including the development of a specific programme to support Women in Leadership.
·	Increase ordinary dividends : we will be paying an interim dividend of 0.94p per share, 18% higher than the prior year, as we continue on our path to reduce dividend cover progressively towards 3x over the coming years.
·	Invest in acquisitions : on 12 July we completed the small, bolt-on acquisition of Sapienza, a leading European provider of services in the space sector, and we continue to assess multiple other opportunities.
·	Return surplus cash to shareholders : in the first half, we completed £25m of the £90m share buyback announced at the full year results in February.

Contract awards, order book, rebids and pipeline

Contract awards

Order intake was £2.0bn in the first half, a book-to-bill rate of around 95%.  This was lower than in the prior two years, due to a low level of contract rebids and extensions being due in the period.  New business awards, on the other hand were strong.  There were around 30 contract awards worth more than £10m each and 3 with a total contract value of more than £200m. Around half of the order intake came from the UK & Europe, just over 40% from the Americas and 4% from both Asia Pacific and the Middle East.

Of the order intake, approaching 70% was represented by the value of new business and around 30% was rebids and extensions of existing work.  The win rate by value for new work, which has averaged around 35% over the last five years, was again at this level in the period.  Rebids and extensions on which we bid in the first six months totalled around £800m, compared to £1.9bn in the first half of 2020 and £2.3bn in the same period in 2021.  The win rate by value for securing existing work was within our normal range of 80-90%.

The largest award was our contract to manage the new HMP Fosse Way prison (previously known as HMP Glen Parva) on behalf of the UK Ministry of Justice, which we expect to generate more than £400m. Also in the Justice & Immigration sector, we secured an estimated £200m of additional immigration work, reflecting the large numbers of service-users having to be temporarily accommodated.  VIVO Defence Services, our joint venture with Equans, followed on from its success in 2021 by securing contracts from the UK Ministry of Defence (MOD) Defence Infrastructure Organisation (DIO) to deliver asset and facilities management services to the United States Visiting Forces (USVF).  These have an estimated value to Serco of around £60m over the initial three-year period.  Also in the UK, we successfully rebid our contract to provide facilities management services at Norfolk and Norwich University Hospital, with an estimated value of £130m over five years.  Our North American business won the Ship Acquisition Programme / Project Management (SHAPM) contract from the US Navy, which we expect to be worth £280m over five years and a £60m, 2.5-year contract for detail design, prototype construction and demonstration of a large and highly sophisticated unmanned ship as part of the No Manning Required Ship (NOMARS) programme.  In addition, since the period end, we have been notified we were successful in the rebid of our US Navy SEA21 contract.  The new contract is expected to be worth around $400m over five years, and will see us provide technical services related to international fleet support, surface ship modernisation, surface ship in-service readiness and surface training systems.

Bids for work that were unsuccessful in the period included a contract to deliver vehicle licensing and registration for the State of Victoria transport department, services as part of the redevelopment of Frankston Hospital, also in Victoria, and the contract to provide estate management and other services to the Ministry of Defence's Training Estate.  In addition, we withdrew from the competition to build three new Fleet Solid Support ships for the Royal Navy.

Order book

The closing order book stood at £14.6bn (30 June 2021: £14.1bn, 31 December 2021: £13.7bn) with the positive effect of wins, indexation and currency more than offsetting revenue earned over the last twelve months.  Our order book definition gives our assessment of the future revenue expected to be recognised from the remaining performance obligations on existing contractual arrangements.  This excludes unsigned extension periods, and the order book would be £1.5bn (2021: £1.2bn) higher if option periods on contracts in our US business, which always tend to be exercised, were included.  

Rebids

In our portfolio of existing work, we have around 80 contracts with annual revenue of £5m or more where an extension or rebid will be required before the end of 2024.  Contracts that will either end or need to be extended in 2022 have an annual contract value of around £0.4bn.  The annual value rises in 2023 to approximately £0.9bn, which includes our Centers for Medicare & Medicaid Services (CMS) in the US and our Immigration Services contract in Australia, two of our largest contracts, before reducing to £0.6bn in 2024.  The current CMS and Immigration Services contracts end, respectively, in July and December 2023, and we will be re-bidding both.  Because revenues from CMS tend to be first half weighted, and the Immigration services contract does not end until December 2023, we would expect outcomes on these contracts, positive or negative, to be more significant in 2024 than 2023.

Pipeline

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

Our pipeline was £8.1bn at the end of June, a reduction, as expected, from the record £9.9bn level at the end of 2021 but still around 40% higher than the £5.8bn at the end of June 2021 and almost double the level of two years ago.  It is pleasing to see the pipeline at such a healthy level given 2021 was a strong year for wins and with several large bids having exited the pipeline in the first half of 2022. The pipeline now consists of over 40 bids with an ACV averaging around £30m and an average contract length of more than six years.  The pipeline of opportunities for new business that have an estimated ACV of less than £10m has continued to increase, now totalling £2.5bn.  This is around 20% higher than the £2.0bn at the end of 2021 and approximately 50% more than 12 months ago.

End of Deferred Prosecution Agreement

In July 2022, the Serious Fraud Office (SFO) announced the expiry of the Deferred Prosecution Agreement (DPA) with Serco Geografix Ltd, one of Serco's UK subsidiaries, and of the obligations under the Letter of Undertakings with Serco Group. The DPA, agreed in July 2019, arose from issues concerning Serco's Electronic Monitoring contract which were reported by Serco to the SFO and the UK Ministry of Justice in November 2013.  The SFO confirmed that Serco has co-operated fully with the SFO and has fulfilled all its obligations agreed as part of the DPA, including reviewing, improving and enhancing aspects of our Group-wide compliance programme related to internal controls, compliance policies, and procedures.  

Market outlook

We set out a comprehensive description of our views on the market in our Capital Markets Day in December 2021, and in our Annual Report for 2021 .  Since then, Russia has invaded Ukraine and that has brought with it intensified inflationary pressures on government expenditure, which may result in government expenditure on outsourced services growing faster in the next few years than the 2-3% nominal growth-rate we suggested at the Capital Markets Day.  Inflation adjustments should also have a positive impact on our revenues.  However, whilst we believed that we could grow our revenues at twice an assumed market rate of 2-3%, were nominal government expenditure to grow much faster as a result of inflation, for example 5%, we would not expect to grow our revenues twice as fast on a nominal basis but we would expect to grow faster than the market in real terms.

Guidance for 2022

The business traded strongly in the first half of the year, with all four regions performing above their budgets, leading to us to upgrade guidance in May.  Despite a significant drag on revenue and profit from our work on the UK Test & Trace programme ending, and on profit from the ending of the AWE contract, we have largely replaced these contracts with other government work around the world.  I t is hard to forecast the precise impact of inflation on revenues and costs, but most of our contracts have some form of inflation protection although there will be timing differences between cost increases and receiving the benefit of indexation.  Guidance for the full year is set out below.

Revenue: we expect revenue to be £4.3bn-£4.4bn, similar to the £4.4bn in 2021.  This assumes a 1% contribution from acquisitions and a 3% benefit from currency.  We expect an organic contraction of around 5%, with lower demand for Covid-19 related services in 2022 reducing our revenue by around £480m, or 11%, partially offset by organic growth on non-Covid work of around 6%, ahead of our medium-term growth targets. 

Underlying Trading Profit (UTP): we expect UTP of around £230m.  As well as the impact of reduced Test & Trace revenues noted above, UTP will be reduced by the ending of the AWE contract in June 2021; we also expect the increase in employers' National Insurance contributions in the UK to cost around £5 million on an annualised basis.  The impact of these factors is largely offset by increased demand for immigration services in the UK and Australia, a full six months impact of the increase in employers' National Insurance contributions in the UK, strong trading in our case management work in North America, the positive effect of new work secured in 2021, such as the DWP Restart Programme and the Defence Infrastructure Organisation contracts, moving into profitability. 

Second half profit is expected to be lower than the first six months due to our Test & Trace work having ended, usual seasonality on some contracts including our CMS healthcare eligibility contract in the US, lower volumes on our immigration services contract in Australia, above-budget pay increases and one off payments to non-management staff.  The first-half second-half split of profits in 2022 is expected to be similar to 2021.

Net finance costs and tax: net finance costs are expected to be around £23m, slightly lower than 2021.  The underlying effective tax rate is expected to be around 24%, although this is sensitive to the geographic mix of our profit and any changes to current corporate tax rates.  This is lower than the prior guidance of 25% as the first half benefited from a discrete reduction in provisions for uncertain tax positions.

Financial position: free cash flow is expected to remain strong at around £140m, with underlying trading profit cash conversion continuing to be above 90%. We expect Adjusted Net Debt to end the year at around £190m.

Returns to shareholders: although it is anticipated earnings will be broadly stable in 2022, it is our intention to continue on our path of increasing dividends to shareholders as part of our policy of progressively reducing dividend cover towards 3x over the coming years.  We will continue to execute the £90m share buyback announced in March, of which we executed £25m in the first half.  The Board will keep future buybacks under review in line with our capital allocation framework and target leverage of 1-2x net debt to EBITDA.

Summary and concluding thoughts

It seems that "black swan" events behave like buses and taxis: ages pass without seeing one, and then two arrive at the same time.  The concatenation of Covid-19 and the Russian invasion of Ukraine has set back almost every positive aspect of global development.  But they stand as reminders that governments matter, and that they have enormous resources and the power to do immense good, and immense harm.  It has been governments who mobilised and organised healthcare and social services to defang Covid-19; it is a government that is responsible for attacking Europe and bringing misery to millions; it is governments who have cooperated to help the Ukrainians stop the invaders.

It is also a reminder of the sheer scale and breadth of what we expect governments to deliver - whether it be running health services, collecting our rubbish, managing justice and immigration, defending the realm, or building and maintaining vital infrastructure.  To do all these things governments need the private sector to help them, and for those companies who are prepared to invest in satisfying the very specific requirements of delivering public services it is a huge and resilient market.

Companies that thrive in this sector need to be agile, resilient, have deep expertise and capability in public services, strong management, and effective governance. These are all attributes which we work hard to excel at, as do our peers.  But Serco has a number of points of differentiation from the majority of our competitors:

First, we serve only governments, so we are specialists and completely focused on governments', often unique, requirements.  Culturally, we have public service in our corporate DNA, with a set of values and a public service ethos that comes from the fact that many of our colleagues come from careers in public service.

Second, we have an international footprint which allows us to access many more opportunities than would be the case if we operated in a single jurisdiction.  In the first six months of the 2022, almost three-quarters of our profits arose from outside the UK.

Third, we have the scale to have developed a unique Business-to-Government platform which allows us to drive agility, efficiency and resilience.  

Serco's strong performance over the last few years has been largely due to these differentiators, and we work daily to build and strengthen them.  In so doing we can thrive in a very large and growing market, and be able to deliver growing returns to shareholders, rewarding careers to our employees, and high-quality public services to our customers.

Rupert Soames

Group Chief Executive

Serco - and proud of it.

Divisional Reviews

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

Six months ended 30 June 2022 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	991.5	622.3	472.0	92.6	-	2,178.4
Change	(5%)	+18%	+3%	(35%)		+0.5%
Change at constant currency	(4%)	+11%	+4%	(38%)		(1.0%)
Organic change at constant currency	(5%)	+3%	+3%	(38%)		(3.6%)
UTP	37.5	75.7	31.6	8.7	(24.0)	129.5
Margin	3.8%	12.2%	6.7%	9.4%	(1.1%)	5.9%
Change	(33%)	+33%	+26%	+21%	+6%	+5.5%
Contract & Balance Sheet Review adjustments	4.2	-	-	-	-	4.2
Other one-time items	-	-	-	-	-	-
Trading Profit/(Loss)	41.7	75.7	31.6	8.7	(24.0)	133.7
Amortisation of intangibles arising on acquisition	(0.4)	(7.4)	(1.8)	-	-	(9.6)
Operating profit/(loss) before exceptionals	41.3	68.3	29.8	8.7	(24.0)	124.1

Six months ended 30 June 2021 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	1,038.5	528.6	457.9	142.5	-	2,167.5
UTP	56.1	57.1	25.0	7.2	(22.7)	122.7
Margin	5.4%	10.8%	5.5%	5.1%	(1.0%)	5.7%
Contract & Balance Sheet Review adjustments	2.9	-	-	-	-	2.9
Other one-time items
Trading Profit/(Loss)	59.0	57.1	25.0	7.2	(22.7)	125.6
Amortisation of intangibles arising on acquisition	(0.4)	(4.5)	(1.7)	-	-	(6.6)
Operating profit/(loss) before exceptionals	58.6	52.6	23.3	7.2	(22.7)	119.0

Year ended 31 December 2021 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	2,131.6	1,120.0	908.4	264.6	-	4,424.6
UTP	96.0	117.8	51.3	13.7	(49.9)	228.9
Margin	4.5%	10.5%	5.6%	5.2%	(1.1%)	5.2%
Contract & Balance Sheet Review adjustments	1.3	-	-	-	-	1.3
Other one-time items	2.5	-	0.7	-	-	3.2
Trading Profit/(Loss)	99.8	117.8	52.0	13.7	(49.9)	233.4
Amortisation of intangibles arising on acquisition	(0.8)	(11.7)	(3.5)	-	-	(16.0)
Operating profit/(loss) before exceptionals	99.0	106.1	48.5	13.7	(49.9)	217.4

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 14-24.  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 28-43. Included in note 2 to the Group's Consolidated Financial Statements are the Group's policies on recognising revenue across the various revenue streams associated with the diverse range of goods and services discussed within the Divisional Reviews.  The various revenue recognition policies are applied to each individual circumstance as relevant, taking into account the nature of the Group's obligations under the contract with the customer and the method of delivering value to the customer in line with the terms of the contract.

UK & Europe (45% of revenue, 24% of Underlying Trading Profit⁽⁷⁾)

Six months ended 30 June £m	2022	2021	Growth
Revenue	991.5	1038.5	(5%)
Organic change	(5%)	33%
Acquisitions	0%	0%
Currency	0%	0%
Underlying Trading Profit	37.5	56.1	(33%)
Organic change	(34%)	112%
Acquisitions	1%	0%
Currency	0%	0%
Margin	3.8%	5.4%	(160bps)

Revenue declined by 5% to £992m (2021: £1,039m), with the reduction being almost entirely organic.  The lower revenue was due to our Covid-19 Test & Trace services coming to an end part way through the first half.  In total this was a drag on revenue of around 21%, with the net reduction being significantly less as we saw growth in other Citizen Services work, Justice & Immigration, Transport and Defence.  We experienced particularly strong demand for immigration services and, from a revenue perspective, our contract to provide accommodation for asylum seekers is now the largest in the group.

Underlying Trading Profit reduced to £38m (2021: £56m), representing a margin of 3.8% (2021: 5.4%).  The step down in profit was due to lower levels of Covid-19 work, the cessation of our Atomic Weapons Establishment contract in June 2021, which together were a drag of £25m, as well as broader market related challenges such as higher utility costs in our asylum seeker accommodation and driver shortages impacting our prisoner escorting work.  These factors contributed to the margin reducing by around 160bp compared to the first half of 2021, although it was around 40bp higher than the same period in 2020.

Underlying Trading Profit includes the profit contribution of joint ventures and associates, from which interest and tax have already been deducted. If the proportional share of revenue from joint ventures and associates was included and the share of interest and tax cost was excluded, the overall divisional margin would have been 3.5% (2021: 4.7%).  The joint venture and associate profit contribution was lower at £3m (2021: £6m), as a result of the Atomic Weapons Establishment contract ending in June 2021, partially offset by some recovery in Merseyrail and the start of contracts with the UK Defence Infrastructure Organisation, which are delivered by our VIVO joint venture.

Order intake was around £1.0bn, a book-to-bill ratio of 1.0x and around 50% of the total intake for the Group.  New wins were approximately 75% of the order intake.  Agreements signed included a contract with the UK Ministry of Justice to run HMP Fosse Way, a new prison in the UK, previously known as Glen Parva.  The new contract has an estimated value of more than £400m over the initial ten-year term.  Also in the Justice & Immigration sector, we secured an estimated £200m of additional  immigration work, reflecting the large numbers of service-users having to be temporarily accommodated.  VIVO Defence Services, our joint venture with Equans, continued its success of 2021, being awarded four of the five contracts being tendered to deliver asset and facilities management services to the Defence Infrastructure Organisation (DIO) at the UK military establishments that host US Visiting Forces. We estimate the work will have a value of around £60m over the initial three-year period.  We also successfully rebid our agreement to provide facilities management services at Norfolk and Norwich University Hospital, with an estimated value of £130m over four years.

The pipeline of new opportunities in the UK & Europe remains healthy, with significant new opportunities across Defence, Space, Justice & Immigration and Citizen Services.

Americas (29% of revenue, 49% of Underlying Trading Profit⁽⁷⁾)

Six months ended 30 June £m	2022	2021	Growth
Revenue	622.3	528.6	18%
Organic change	3%	0%
Acquisitions	8%	5%
Currency	7%	(8%)
Underlying Trading Profit	75.7	57.1	33%
Organic change	20%	10%
Acquisitions	6%	6%
Currency	7%	(9%)
Margin	12.2%	10.8%	140bps

Revenue grew by 18% to £622m (2021: £529m), with organic growth of 3%, an acquisition contribution of 8% and a 7% favourable translational effect of currency.  The acquisition growth came from WBB, a leading provider of advisory, engineering and technical services to the US Department of Defense.  This acquisition completed at the end of April 2021 and contributed £42m to revenue growth in the first half of 2022 at constant currency.  The two main sectors for our Americas business are Defence and Citizen Services.  Excluding WBB, our Defence business saw a modest decline in revenue as some work programs approached their planned end and growth continued to be held back by delays in the award of new contracts.  Citizen Services, however, saw good growth supported by increased demand for our case management services and recovery in driver examination activities, which had been negatively impacted by Covid-19.

Underlying Trading Profit grew faster than revenue, increasing by 33% to £76m (2021: £57m).  Excluding the favourable currency movement of £4m, UTP growth at constant currency was 26%, of which 20% was organic. Margins increased from 10.8% to 12.2%, due to the good growth in our Citizen Services sector and better profitability in Defence, despite lower revenues.

Order intake was strong at £0.9bn, approximately half of the total for the Group and a book-to-bill ratio of approaching 1.4x.  New business wins represented around 60% of the order intake and included important programmes such as the Ship Acquisition Programme / Project Management (SHAPM) contract from the US Navy, under which we will deliver design, acquisition and programme management to the US Navy's submarine build and sustainment programmes; we expect this contract to be worth £280m over four years.  We also won a £60m, 2.5-year contract from the Defense Advanced Research Projects Agency (DARPA) for detail design, prototype construction and demonstration of a large and highly sophisticated unmanned ship as part of the No Manning Required Ship (NOMARS) programme.  In addition, since the period end, we have been notified we were successful in the rebid of our US Navy SEA21 contract. The new contract is expected to be worth around $400m over five years, and will see us provide technical services related to international fleet support, surface ship modernisation, surface ship in-service readiness, surface training systems and inactive ships.

The pipeline of major new bid opportunities due for decision within the next 24 months in the Americas has increased from £2.2bn at the end of 2021 to £3.1bn at the end of June, meaning it now represents approximately 40% of the Group total. A combination of new opportunities joining the pipeline and award decisions being delayed has driven the increase.  Defence makes up the bulk of the Americas pipeline, with a broad spread of types of work, while Citizen Services opportunities represent the remainder.

Asia Pacific (22% of revenue, 21% of Underlying Trading Profit⁽⁷⁾)

Six months ended 30 June £m	2022	2021	Growth
Revenue	472.0	457.9	3%
Organic change	3%	12%
Acquisitions	1%	17%
Currency	(1%)	9%
Underlying Trading Profit	31.6	25.0	26%
Organic change	29%	52%
Acquisitions	(3%)	23%
Currency	0%	13%
Margin	6.7%	5.5%	120bps

Revenue increased by 3% to £472m (2021: £458m).  Organic growth was 3%, the FFA acquisition from 2021 contributed 1%, while currency reduced reported revenue by 1%.  The growth was driven by Justice & Immigration, where we saw increased demand for our immigration services, and Citizen Services.  This more than offset lower revenues in Health, as some services at Fiona Stanley Hospital were taken back in-house in the second half of 2021.

Underlying Trading Profit increased by 26% to £32m (2021: £25m), representing a margin of 6.7% (2021: 5.5%). Currency had only a minor negative impact, leaving growth at constant currency also 26%.  The biggest driver of the increase was our immigration services work.

Despite an active period of bidding in the first half, order intake was just £0.1bn, 4% of the Group total, as we were unsuccessful in bids to run driver licensing and vehicle registration at the transport department in Victoria, and facilities management at Frankston Hospital.  We did however have a very high rate of success in retaining existing work, including our contract to provide contact centre services to the Australian Tax Office, which has been extended to June 2023.

Our pipeline for new business reduced in the period, due to the lost bids mentioned above, but contains significant opportunities in the Defence, Justice & Immigration, Citizen Services and Transport sectors.

Middle East (4% of revenue, 6% of Underlying Trading Profit ⁽⁷⁾)

Six months ended 30 June £m	2022	2021	Growth
Revenue	92.6	142.5	(35%)
Organic change	(38%)	(7%)
Acquisitions	0%	0%
Currency	3%	(6%)
Underlying Trading Profit	8.7	7.2	21%
Organic change	17%	0%
Acquisitions	0%	0%
Currency	4%	3%
Margin	9.4%	5.1%	430bps

Revenue fell by 35% to £93m (2021: £143m).  An organic reduction of 38% was modestly offset by favourable currency moves adding 3% to revenues.  The end of our contract to operate the Dubai Metro, which we exited in September, led to a large reduction in revenue for the division, which outweighed growth in other parts of the Transport sector including Dubai Airport and air traffic control services in the region.

Despite the sharp revenue contraction, Underlying Trading Profit improved to £9m (2021: £7m).  This favourable profit outcome was supported by improvement in parts of the Transport sector, as demand recovered following a reduction in Covid-19 cases.  This, plus a successful exit from the low-margin Dubai Metro contract, meant margins increased from 5.1% to 9.4%.

Order intake was around £0.1bn, or 4% of the total for the Group. Just over 60% of this was rebids, which included our contract to provide air traffic control services to Dubai Air Navigation Services (dans), the organisation responsible for Air Traffic Management at airports in Dubai and the Northern Emirates. New business included a £10m, five-year contract to provide a facilities management managing agent service to Riyadh International Airport.

Our pipeline of new bid opportunities in the Middle East includes work in the Citizen Services, Transport and Defence sectors.

Corporate costs

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

Corporate costs increased by £1.3m to £24.0m (2021: £22.7m).  The higher amount resulted from increased spending on travel, as Covid-19 restrictions were eased, and other activity that had been put on hold as a result of the pandemic, such as our in-person management training courses. 

Dividend calendar

Ex-dividend date: 8 September 2022

Record date: 9 September 2022

Interim dividend payable: 6 October 2022

LEI code: 549300PT2CIHYN5GWJ21

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.

Finance Review

For the six months ended 30 June 2022	Underlying £m	Non underlying items £m	Trading £m	Amortisation and impairment of intangibles arising on acquisition £m	Statutory pre exceptional £m	Exceptional items £m	Statutory £m
Revenue	2,178.4	-	2,178.4	-	2,178.4	-	2,178.4
Cost of sales	(1,927.2)	4.2	(1,923.0)	-	(1,923.0)	-	(1,923.0)
Gross profit	251.2	4.2	255.4	-	255.4	-	255.4
Administrative expenses	(125.1)	-	(125.1)	-	(125.1)	-	(125.1)
Other exceptional operating items	-	-	-	-	-	(0.9)	(0.9)
Other expenses	-	-	-	(9.6)	(9.6)	-	(9.6)
Share of profits in joint ventures and associates, net of interest and tax	3.4	-	3.4	-	3.4	-	3.4
Profit before interest and tax	129.5	4.2	133.7	(9.6)	124.1	(0.9)	123.2
Margin	5.9%		6.1%		5.7%		5.7%
Net finance costs	(9.2)	-	(9.2)	-	(9.2)	-	(9.2)
Profit before tax	120.3	4.2	124.5	(9.6)	114.9	(0.9)	114.0
Tax (charge)/credit	(25.8)	(0.2)	(26.0)	2.6	(23.4)	0.3	(23.1)
Effective tax rate	21.4%		20.9%		20.4%		20.3%
Profit for the period	94.5	4.0	98.5	(7.0)	91.5	(0.6)	90.9
Minority interest	-	-	-	-	-	-	-
Earnings per share (EPS) - basic (pence)	7.83		8.16		7.58		7.53
Earnings per share (EPS) - diluted (pence)	7.71		8.03		7.46		7.41

For the six months ended 30 June 2021	Underlying £m	Non underlying items £m	Trading £m	Amortisation and impairment of intangibles arising on acquisition £m	Statutory pre exceptional £m	Exceptional items £m	Statutory £m
Revenue	2,167.5	-	2,167.5	-	2,167.5	-	2,167.5
Cost of sales	(1,936.6)	2.9	(1,933.7)	-	(1,933.7)	-	(1,933.7)
Gross profit	230.9	2.9	233.8	-	233.8	-	233.8
Administrative expenses	(114.6)	-	(114.6)	-	(114.6)	-	(114.6)
Other exceptional operating items	-	-	-	-	-	(2.7)	(2.7)
Other expenses	-	-	-	(6.6)	(6.6)	-	(6.6)
Share of profits in joint ventures and associates, net of interest and tax	6.4	-	6.4	-	6.4	-	6.4
Profit before interest and tax	122.7	2.9	125.6	(6.6)	119.0	(2.7)	116.3
Margin	5.7%		5.8%		5.5%		5.4%
Net finance costs	(12.6)	-	(12.6)	-	(12.6)	-	(12.6)
Profit before tax	110.1	2.9	113.0	(6.6)	106.4	(2.7)	103.7
Tax (charge)/credit	(25.6)	155.1	129.5	1.2	130.7	0.7	131.4
Effective tax rate	23.3%		(114.6%)		(122.8%)		(126.7%)
Profit for the period	84.5	158.0	242.5	(5.4)	237.1	(2.0)	235.1
Minority interest	-	-	-	-	-	-	-
Earnings per share (EPS) - basic (pence)	6.86		19.68		19.24		19.08
Earnings per share (EPS) - diluted (pence)	6.75		19.36		18.93		18.77

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 2021.

Alternative revenue measures

For the six months ended 30 June	2022 £m	2021 £m
Reported revenue at constant currency1	2,144.0	2,167.5
Foreign exchange differences	34.4	-
Reported revenue at reported currency	2,178.4	2,167.5

1. 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 2022 into Sterling at the average exchange rates for the six months ended 30 June 2021.

For the six months ended 30 June	2022 Organic Revenue1 £m	2021 Organic Revenue1 £m	2022 Revenue plus share of joint ventures and associates2 £m	2021 Revenue plus share of joint ventures and associates2 £m
Alternative revenue measure at constant currency	2,004.4	2,079.7	2,232.9	2,360.2
Foreign exchange differences	30.8	-	34.4	-
Alternative revenue measure at reported currency	2,035.2	2,079.7	2,267.3	2,360.2
Impact of relevant acquisitions or disposals	143.2	87.8	-	-
Share of joint venture and associates	-	-	(88.9)	(192.7)
Reported revenue at reported currency	2,178.4	2,167.5	2,178.4	2,167.5

1. 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.

2. 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.

Alternative profit measures

For the six months ended 30 June	2022 £m	2021 £m
Underlying trading profit at constant currency1	125.4	122.7
Foreign exchange differences	4.1	-
Underlying trading profit at reported currency2	129.5	122.7
Non-underlying items (excluding exceptional items):
OCP charges and releases3	-	0.4
Other Contract & Balance Sheet Review adjustments and one-time items4	4.2	2.5
Trading profit5	133.7	125.6
Amortisation and impairment of intangibles arising on acquisition6	(9.6)	(6.6)
Operating profit before exceptional items	124.1	119.0
Operating exceptional items7	(0.9)	(2.7)
Reported operating profit	123.2	116.3

1. In order to provide a comparable movement on the previous period's results, reported Underlying trading profit is recalculated by translating non-Sterling values for the six months ended 30 June 2022 into Sterling at the average exchange rates for the six months ended 30 June 2021.

2. The Group uses an alternative measure, Underlying trading profit (UTP), to make adjustments for unusual items that occur and to remove the impact of historical issues. UTP therefore provides a measure of the underlying performance of the business in the current period.

3. Charges and releases on all Onerous contract provisions (OCPs) that arose during the 2014 Contract and Balance Sheet Review are excluded from UTP in the current and prior periods. Charges associated with the creation of new OCPs identified are included within UTP to the extent that they are not considered sufficiently material to require separate disclosure on an individual basis.

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

5.   The Group uses Trading profit as an alternative measure to operating profit, as shown in the Group's Condensed Consolidated Income Statement on page 28 . Trading profit is derived by making the two adjustments outlined below in footnote 6 and 7.

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

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

Alternative Earnings per share (EPS) measures

For the six months ended 30 June	2022 basic pence	2021 basic pence	2022 diluted pence	2021 diluted pence
Underlying EPS1	7.83	6.86	7.71	6.75
Net impact of non-underlying operating items, non-underlying tax and amortisation and impairment of intangibles arising on acquisition	(0.25)	12.38	(0.25)	12.18
EPS before exceptional items2	7.58	19.24	7.46	18.93
Impact of exceptional items	(0.05)	(0.16)	(0.05)	(0.16)
Reported EPS	7.53	19.08	7.41	18.77

1. Reflecting the same adjustments made to operating profit to calculate UTP as described above and including the related tax effects of each adjustment and any other non-underlying tax adjustments as described in the tax charge section below, an alternative measure of EPS is presented. This aids consistency with historical results and enables performance to be evaluated before the unusual or one-time effects described above. The full reconciliation between statutory EPS and Underlying EPS is provided in the summary income statements on page 14 .

2. EPS, as shown on the Group's Condensed Consolidated Income Statement on page 28 , includes exceptional items charged or credited to the income statement. EPS before exceptional items aids consistency with historical operating performance.

Alternative cash flow and Net debt measures

Free cash flow (FCF)

For the six months ended 30 June	2022 £m	2021 £m
Free cash flow1	95.6	129.9
Exclude dividends from joint ventures and associates	(3.6)	(9.6)
Exclude net interest paid	10.9	12.8
Exclude capitalised finance costs paid	-	0.6
Exclude capital element of lease repayments	58.1	60.0
Exclude proceeds received from exercise of share options	-	(0.1)
Exclude purchase of own shares to satisfy share awards	15.9	20.3
Exclude purchase of intangible and tangible assets net of proceeds from disposal	8.3	8.7
Cash flow from operating activities before exceptional items	185.2	222.6
Exceptional operating cash flows	(1.1)	(3.7)
Cash flow from operating activities	184.1	218.9

1. We present an alternative measure for cash flow to reflect net cash inflow from operating activities before exceptional items, which is the measure shown on the Condensed Consolidated Cash Flow Statement on page 32 . This IFRS measure is adjusted to include dividends we receive from joint ventures and associates, net interest paid, the capital element of lease payments, cash flows on the purchase of own shares to satisfy share awards and net capital expenditure on tangible and intangible asset purchases.

UTP cash conversion

For the six months ended 30 June	2022 £m	2021 £m
Free cash flow1	95.6	129.9
Add back:
Tax paid	24.9	24.5
Net interest paid	10.9	12.8
Capitalised finance costs paid	-	0.6
Trading cash flow	131.4	167.8
Underlying trading profit	129.5	122.7
Underlying trading profit cash conversion1	101%	137%

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

Net debt and Adjusted net debt

	As at 30 June 2022 £m	As at 31 December 2021 £m
Cash and cash equivalents	178.9	198.4
Loans payable	(338.6)	(377.0)
Lease liabilities	(432.5)	(430.3)
Derivatives relating to Net debt	(3.9)	0.6
Net debt1	(596.1)	(608.3)
Add back: Lease liabilities	432.5	430.3
Adjusted net debt2	(163.6)	(178.0)

1. We present an alternative measure to bring together the various funding sources that are included on the Group's Condensed Consolidated Balance Sheet on page 31 and the accompanying notes. Net debt is a measure to reflect the net indebtedness of the Group and includes all cash and cash equivalents and any debt or debt-like items, including any derivatives entered into in order to manage risk exposures on these items. Net debt includes all lease liabilities, whilst Adjusted net debt is derived from Net debt by excluding liabilities associated with leases.

2. The Adjusted net debt measure was introduced because it more closely aligns to the Consolidated Total Net Borrowings measure used for the Group's debt covenants, which is prepared under accounting standards applicable prior to the adoption of 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.

Pre-tax Return on invested capital (ROIC)

	30 June 2022 £m	31 December 2021 £m	30 June 2021 £m
ROIC excluding right of use assets
Non-current assets
Goodwill	922.7	852.7	826.7
Other intangible assets - owned	143.5	144.0	159.6
Property, plant and equipment - owned	52.3	55.5	54.7
Interest in joint ventures and associates	18.6	17.6	18.5
Loans to joint ventures	7.5	-	-
Contract assets, trade and other receivables	18.8	16.2	25.4
Current assets
Inventory	21.4	19.6	20.5
Contract assets, trade and other receivables	655.5	624.7	624.2
Total invested capital assets	1,840.3	1730.3	1,729.6
Current liabilities
Contract liabilities, trade and other payables	(631.0)	(587.3)	(630.8)
Non-current liabilities
Contract liabilities, trade and other payables	(55.3)	(55.9)	(60.8)
Total invested capital liabilities	(686.3)	(643.2)	(691.6)
Invested capital1	1,154.0	1,087.1	1,038.0
Two-point average of opening and closing Invested capital	1,096.0	967.0	969.9
Trading profit, 12 months ended	241.5	233.4	220.8
ROIC%2	22.0%	24.1%	22.8%
Underlying trading profit, 12 months ended	235.7	228.9	208.2
Underlying ROIC%2	21.5%	23.7%	21.5%

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

2. ROIC is a measure to assess the efficiency of the resources used by the Group and is a metric used to determine the performance and remuneration of the Executive Directors. ROIC is calculated based on UTP and Operating profit before exceptional items, 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 above.

Overview of financial performance

Revenue and Underlying trading profit (UTP)

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

Joint ventures and associates - share of results

In 2022, the most significant joint ventures and associates in terms of scale of operations were Merseyrail Services Holding Company Limited (Merseyrail) and VIVO Defence Services Limited (VIVO), with dividends received of £2.0m and £nil (2021: £nil and £nil), respectively, and total revenues of £90.2m and £96.2m, respectively (2021: £75.0m and £nil).

The split of the share of profits in joint ventures and associates, net of interest and tax for the first six month of 2022 was £3.4m (2021: £6.4m), with Merseyrail £1.7m (2021: loss £1.7m), VIVO £1.4m (2021: £nil) and other joint ventures and associates £0.3m (2021: £8.1m).

VIVO, a joint venture between Serco and Equans, has been awarded by the Defence Infrastructure Organisation (DIO), contracts to provide repairs and maintenance work for Service Family Accommodation (SFA) and asset and facilities management services at the UK military establishments that host US Visiting Forces.

2021 included AWE Management Limited (AWEML), which as announced on 2 November 2020, the Ministry of Defence notified the Group that it would be exercising its ability to terminate services provided by the Group through AWEML on 30 June 2021. During the first six months of 2022 a dividend of £1.6m (2021: £9.6m) was received from AWEML.

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

For the six months ended 30 June	2022 £m	2021 £m
Revenue	88.9	192.7
Operating profit	3.9	8.5
Net investment income	(0.1)	-
Income tax charge	(0.4)	(2.1)
Profit after tax	3.4	6.4
Dividends received from joint ventures and associates	3.6	9.6

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

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

Exceptional items

Exceptional items are items of financial performance that are outside normal operations and are material to the results of the Group either by virtue of size or nature. These require separate disclosure on the face of the income statement to assist in the understanding of the performance of the Group. In 2022, the total exceptional charge for the year net of tax was £0.6m (2021: £2.0m).

The Group completed the acquisition of Whitney, Bradley & Brown, Inc (WBB) in 2021. The transaction and implementation costs incurred during the six months ended 30 June 2022 of £0.9m (2021: £2.0m) have been treated as exceptional costs in line with the Group's accounting policy and the treatment adopted in the prior year.

Exceptional tax for the period was a tax credit of £0.3m (2021: £0.7m) which arises on exceptional items within operating profit.

Finance costs and investment revenue

Net finance costs were £9.2m (2021: £12.6m) and net interest paid was £10.9m (2021: £12.8m).

Investment revenue of £2.0m (2021: £1.3m) consists primarily of interest accruing on net retirement benefit assets of £1.4m (2021: £0.6m), interest receivable of £0.6m (2021: £0.3m) and dividends received of £nil (2021: £0.4m).

The finance costs of £11.2m (2021: £13.9m) include interest incurred on the US private placement loan notes and the revolving credit facility of £6.7m (2021: £7.9m) and lease interest payable of £3.6m (2021: £4.1m) as well as other financing related costs including the impact of foreign exchange on financing activities.

Tax

Underlying tax

An underlying tax charge of £25.8m has been recognised in the period. The effective tax rate (21.4%) is slightly lower than at half year 30 June 2021 (23.3%) and year end 31 December 2021 (23.7%). The rate is lower than December 2021 primarily due to the impact of changes in the geographical location of where profits are made 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 £23.4m (2021: £130.7m credit) on pre-exceptional profits has been recognised which includes an underlying tax charge of £25.8m, a tax credit on amortisation of intangibles arising on acquisition of £2.6m, and a £0.2m charge on non-underlying items. Of the £0.2m charge on non-underlying items, a £0.6m credit arises on the revaluation of the deferred tax asset in the UK, due to changes in estimated timing of its utilisation. The £0.8m non-underlying tax charge relates to tax on non-underlying income.

The tax rate on profits before exceptional items at 20.4% is slightly higher than the UK standard corporation tax rate of 19.0%. This is mainly due to higher rates of tax on profits arising on our international operations which is partially offset by the credit associated with a reduction in provisions for uncertain tax positions noted above.

Exceptional tax

Exceptional tax for the period was a tax credit of £0.3m arising on the transaction and implementation costs associated with the WBB acquisition in 2021.

Deferred tax assets

At 30 June 2022 there is a net deferred tax asset of £181.9m (31 December 2021: £174.0m). This consists of a deferred tax asset of £230.5m (31 December 2021: £214.3m) and a deferred tax liability of £48.6m (31 December 2020: £40.3m). A £174.5m UK tax asset is recognised on the Group's balance sheet at 30 June 2022 (31 December 2021: £162.8m). A significant element of the increase in the balance (£10.7m) is due to reduction in the value of the UK retirement benefits assets during the period and the decrease in the associated deferred tax liability.

Taxes paid

Net corporate income tax of £24.9m was paid during the period, relating primarily to our operations in AsPac (£11.9m), North America (£10.7m), Middle East (£0.5m), UK (£1.6m) and Europe (£0.2m).

The amount of tax paid (£24.9m) differs from the tax charge in the period (£23.1m) partly due to the impact of a reduction in the provision for uncertain tax positions. In addition, taxes paid/received from Tax Authorities can arise in later periods to the associated tax charge/credit, and there is a time lag on receipts of cash from joint ventures and associates for losses transferred to them resulting in a net tax inflow.

Dividends and share buyback

During the six months to 30 June 2022, the Group has paid dividends of £19.3m (2021: £16.8m) in respect of the final dividend for the year ended 31 December 2021. As noted in the Chief Executive's Review, the Board has decided to declare an interim dividend of 0.94p per share in respect of the six months ended 30 June 2022 (2021: 0.8p per share).

On 24 February 2022, the Group announced its intention to repurchase Ordinary Shares with a value of up to £90m. On 8 March 2022, the group confirmed that the repurchase would be split over two tranches, with the first tranche of up to £40m purchased during the period 8 March 2022 to 16 August 2022. The second tranche of a value up to £50m will commence following the first. The buyback programme is expected to complete by December 2022 with the shares either cancelled or held in Treasury.

During the period, the Group had repurchased of 17,524,402 Ordinary Shares of which 16,851,027 Ordinary Shares for total consideration of £25.1m including fees had been settled with cash by 30 June 2022 and are currently held in Treasury. The remaining balance of 673,375 Ordinary Shares for total consideration of £1.2m including fees was settled during July 2022 and is recorded as a liability within trade and other payables at 30 June 2022.

The Group has recognised a liability for £13.8m within trade and other payables as at 30 June 2022 to reflect the remaining commitment to purchase a maximum of £40m of shares related to the first tranche of the buyback. The Group had no legal commitment for the second tranche as at 30 June 2022.

Share count and Earnings per share (EPS)

The weighted average number of shares for EPS purposes was 1,207.2m for the six months ended 30 June 2022 (2021: 1,232.2m) and diluted weighted average number of shares was 1,226.3 (2020: 1,252.6m). The decrease in the weighted average number of shares is primarily due to the full year impact of the 15,371,849 shares repurchased in the first half of 2021 and the repurchase of 17,524,402 shares during 2022 that are now held in treasury.

Basic EPS before exceptional items was 7.58p per share (2021: 19.24p); including the impact of exceptional items, Basic EPS was 7.53p (2021: 19.08p). Basic underlying EPS was 7.83p (2021: 6.86p) which increased due to the movement in Underlying trading profit and reduction in the weighted average number of shares.

Diluted EPS before exceptional items was 7.46p (2021: 18.93p); including the impact of exceptional items, Diluted EPS was 7.41p (2021: 18.77p). Diluted underlying EPS was 7.71p (2021: 6.75p).

Cash flows

UTP of £129.5m (2021: £122.7m) converts into a trading cash inflow of £131.4m (2021: £167.8m). The decrease in 2022 trading cash inflows is mainly due to a reduction in working capital inflows across the Group of £2.9m (2021: £43.6m). The first six months of 2021 benefitted from cash collections on some older receivables, shorter payment terms on Covid-19 related work and favourable timing effects.

The table below shows the cash flow from operating activities before exceptional items and Free cash flow (FCF) reconciled to movements in Net debt. FCF for the period was an inflow of £95.6m compared to £129.9m in 2021. The decrease in 2022 is primarily due to a lower working capital inflow than 2021. The working inflow in 2021 was strong as noted above and this has begun to normalise during the first half of 2022, however this continues to be higher than expectations.

Adjusted net debt decreased by £ 14.4m in the six months to 30 June 2022, a reconciliation of which is provided at the bottom of the following table. Average Adjusted net debt as calculated on a daily basis for the six months ended 30 June 2022 was £201m (2021: £178m). Peak Adjusted net debt was £258m (2021: £346m).

For the six months ended 30 June	2022 £m	2021 £m
Operating profit before exceptional items	124.1	119.0
Less: Share of profit from joint ventures and associates	(3.4)	(6.4)
Movement in provisions	1.5	1.2
Depreciation, amortisation and impairment of property, plant and equipment and intangible assets	25.0	22.0
Depreciation and impairment of right of use assets	52.5	58.8
Other non-cash movements	7.5	8.9
Operating cash inflow before movements in working capital, exceptional items, and tax	207.2	203.5
Working capital movements	2.9	43.6
Tax paid	(24.9)	(24.5)
Cash flow from operating activities before exceptional items	185.2	222.6
Dividends received from joint ventures and associates	3.6	9.6
Interest received	0.7	0.3
Interest paid	(11.6)	(13.1)
Capital element of lease repayments	(58.1)	(60.0)
Capitalised finance costs paid	-	(0.6)
Purchase of intangible and tangible assets net of proceeds from disposals	(8.3)	(8.7)
Purchase of own shares to satisfy share awards1	(15.9)	(20.3)
Proceeds received from exercise of share options	-	0.1
Free cash flow	95.6	129.9
Net cash outflow on acquisition and disposal of subsidiaries, joint ventures and associates	(0.1)	(235.1)
Net increase in debt items on acquisition and disposal of subsidiaries, joint ventures and associates	-	(14.3)
Dividends paid to shareholders	(19.3)	(16.8)
Purchase of own shares1	(25.1)	(20.4)
Movements on other investment balances	-	0.3
Loan to joint venture	(7.5)	-
Capitalisation and amortisation of loan costs	(0.7)	-
Exceptional items	(1.1)	(3.7)
Cash movements on hedging instruments	2.7	(5.9)
Foreign exchange loss on Adjusted net debt	(30.1)	(1.4)
Movement in Adjusted net debt	14.4	(167.4)
Opening Adjusted net debt	(178.0)	(57.8)
Closing Adjusted net debt	(163.6)	(225.2)
Lease liabilities	(432.5)	(425.7)
Closing Net debt	(596.1)	(650.9)

1.  In 2022 the Employee Share Ownership Trust purchased shares directly of £15.9m to satisfy share awards. This purchase is presented separately from the Group's £25.1m repurchase of own shares on the Consolidated Cash Flow Statement on page 32 . In 2021 the Group repurchased shares at a cost of £40.7m as shown on the Consolidated Cash Flow Statement on page 32 and subsequently transferred £20.3m to the Employee Share Ownership Trust to satisfy share awards.

Risk management and treasury operations

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

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

Liquidity and funding

As at 30 June 2022, the Group had committed funding of £590m (at 31 December 2021: £629m), comprising £265m of US private placement loan notes, a total of £75m of term loan facilities which were fully drawn and a £250m revolving credit facility (RCF) which was undrawn. The Group does not engage in any external financing arrangements associated with either receivables or payables.

The Group's RCF provides £250m of committed funding for five years from the arrangement date in December 2018. The US private placement loan notes are repayable in bullet payments between 2023 and 2032.

Interest rate risk

Given the nature of the Group's business, we have a preference for fixed rate debt to reduce the volatility of net finance costs. Our Treasury Policy requires us to maintain a minimum proportion of fixed rate debt as a proportion of overall Adjusted net debt and for this proportion to increase as the ratio of EBITDA to interest expense falls. As at 30 June 2022, £265m of debt was held at fixed rates and Adjusted net debt was £164m.

Foreign exchange risk

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

Credit risk

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

Debt covenants

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

Following the refinancing in December 2018, the debt covenants have been amended to include the impact of IFRS15 Revenue from Contracts with Customers. The covenants continue to exclude the impact of IFRS16 Leases on the Group's results.

For the twelve months ended	30 June  2022 £m	31 December 2021 £m	30 June 2021 £m
Operating profit before exceptional items	222.5	217.4	210.2
Remove: Amortisation and impairment of intangibles arising on acquisition	19.0	16.0	10.6
Trading profit	241.5	233.4	220.8
Exclude: Share of joint venture post-tax profits	(5.7)	(8.7)	(12.1)
Include: Dividends from joint ventures	7.5	13.5	17.0
Add back: Net non-exceptional charges to OCPs	0.9	1.3	6.5
Add back: Net covenant OCP utilisation	(0.7)	(0.6)	(0.9)
Add back: Depreciation, amortisation and impairment of owned property, plant and equipment and non-acquisition intangible assets	31.2	31.2	30.3
Add back: Depreciation, amortisation and impairment of property, plant and equipment and non-acquisition intangible assets held under finance leases - in accordance with IAS17 Leases	5.0	5.0	3.7
Add back: Foreign exchange on investing and financing arrangements	0.1	(0.6)	(1.1)
Add back: Share based payment expense	15.5	15.8	13.4
Other covenant adjustments to EBITDA	3.7	6.3	(4.7)
Covenant EBITDA	299.0	296.6	272.9
Net finance costs	20.6	24.0	25.8
Exclude: Net interest receivable on retirement benefit obligations	1.9	1.1	1.2
Exclude: Movement in discount on other debtors	0.1	0.1	0.1
Exclude: Other dividends received	0.2	0.6	0.8
Exclude: Foreign exchange on investing and financing arrangements	0.1	(0.6)	(1.1)
Add back: Movement in discount on provisions	(0.1)	-	(0.2)
Other covenant adjustments to net finance costs resulting from IFRS16 Leases	(6.9)	(7.3)	(8.2)
Covenant net finance costs	15.9	17.9	18.4
Adjusted net debt	163.6	178.0	225.2
Obligations under finance leases - in accordance with IAS17 Leases	24.1	26.5	28.3
Recourse net debt	187.7	204.5	253.5
Exclude: Disposal vendor loan note, encumbered cash and other adjustments	(2.0)	2.9	(3.8)
Covenant adjustment for average FX rates	(25.5)	(5.7)	9.8
CTNB	160.2	201.7	259.5
CTNB/covenant EBITDA (not to exceed 3.5x)	0.54x	0.68x	0.95x
Covenant EBITDA/covenant net finance costs (at least 3.0x)	18.8x	16.6x	14.8x

Net assets

At 30 June 2022, the condensed consolidated balance sheet shown on page 31 had net assets of £1,058.7m, a movement of £50.3m from the closing net asset position of £1,008.4m as at 31 December 2021. The increase in net assets is driven mainly by the retained profit in the period of £92.1m as well as dividends paid, share purchases including the share buyback programme and foreign exchange movements.

Key movements since 31 December 2021 on the condensed consolidated balance sheet shown on page 31 include:

●	An increase in goodwill of £70.0m has been driven predominantly by a favourable foreign exchange movement.
●	A decrease in the net retirement benefit asset of £42.9m reflecting the experience adjustment from current salary increases as a result of higher CPI in 2022 compared to the year-end assumption. The impact of the change in demographics and experience adjustment from updated member data following the 2021 actuarial funding valuation of Serco Pension and Life Assurance Scheme (SPLAS), broadly offset.
●	Cash and cash equivalents have decreased by £19.5m which is net of an exchange gain of £2.8m. In the period the Group has generated cash inflows of £185.2m from operations before exceptionals. The net repayment of loans was £67.5m and the capital element of lease repayments in the period was £58.1m. Including associated costs, the spend on shares repurchased totals £41.0m (£25.1m held in treasury and £15.9m for the Employee Share Ownership Trust) and dividends totalling £19.3m have been paid. The net spend on tangible and intangible assets was £8.5m and the Group loaned £7.5m to a joint venture.
●	Net loan balances have decreased by £38.4m due to net repayment of loans in the period offset by impact of foreign exchange on US private placement loan notes.
●	The increase in contract assets, trade receivables and other assets have largely offset increases in contract liabilities, trade payables and other liabilities and are as a result of normal working capital movements.

Pensions

Serco's pension schemes are in a strong funding position, and show an accounting surplus, before tax, of £105.3m (31 December 2021: £148.2m) on scheme gross assets of £1.2bn and gross liabilities of £1.1bn. The opening net asset position led to a net credit within net finance costs of £1.4m (2021: £0.6m).

Based on the 2018 actuarial funding valuation for Serco Pension and Life Assurance Scheme (SPLAS), the Group made deficit recovery payments of £4.4m per year from 2019 to 2021 and was expected to make further payments of £1.7m per year for 2022 to 2028. Following the finalisation of the 2021 actuarial funding valuation in the first half of the year, deficit recovery payments have increased to £6.6m per year for 2022 and 2030, due to the impact of RPI reform on the funding assumptions.

Claim for losses in respect of the 2013 share price reduction

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

Information on other contingent liabilities can be found in note 10 to the Condensed Consolidated Financial Statements.

Nigel Crossley
Group Chief Financial Officer

03 August 2022

Principal risks and uncertainties

Risk Management and Covid Impacts

Since the date of the approval of the Annual Report and Financial statements our risk management process has continued to operate as described on page 92 of our 2021 Annual Report.

The Risk Committee have considered the principal risks and uncertainties of the Group and have determined that those reported in the 2021 Annual Report and Accounts remain valid for the remaining half of the financial year. These and any emerging risks will be reviewed by the Executive Committee in October and remain under review on a quarterly basis by the Risk Committee.

The following summarises the risks and uncertainties detailed further in the Annual Report:

●	Major Information Security Breach (including Cyber-attack), resulting in the loss or compromise of sensitive information or wilful damage;
●	Failure to Grow Profitably as a result of failing to win material bids or renew material contracts profitably, or a lack of opportunities in our chosen markets;
●	Material Legal and Regulatory Compliance that may cause significant loss and damage to the Group including exposure to regulatory prosecution, reputational damage and the potential loss of licences and authorisations;
●	Significant Failure of the Supply Chain that may result in Serco being unable to meet customer obligations, perform business critical operations or win new business;
●	Failure to Act with Integrity including engagement in significant corrupt, illegal or dishonest acts;
●	Contract Non-Compliance including failure to deliver contractual requirements and to meet agreed service performance levels and report against them accurately;
●	Financial Control Failure impacting our ability to accurately report, forecast, create suitable capital structures and make critical financial transactions;
●	Catastrophic Risk focusing on the risk of an event as a result of our actions or failure to respond to an event that results in multiple fatalities, severe property/asset damage or loss or very serious long term environmental damage;
●	Health, Safety and Wellbeing as a result of the diversity of our operations and the inherent risks in our operations in both work and public environments; and
●	Failure to Attract and Retain Good People restricting our ability to deliver customer obligations, execute our strategy and achieve business objectives whilst driving employee pride in the organisation.

We continue to monitor external factors including ongoing Covid-19 status and the war in Ukraine, and their potential impact to our risks and control environment.

Further detail on our principal risks and uncertainties and the associated controls and mitigations can be found on page 95 in our 2021 Annual Report.

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 for use in the UK.
●	The interim management report includes a fair review of the information required by:

-	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
-	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  Nigel Crossley

Group Chief Executive   Group Chief Financial Officer

03 August 2022  03 August 2022

 

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 2022 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Balance Sheet, the Condensed 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 2022 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted for use in the UK and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity ("ISRE (UK) 2410") 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.

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis of conclusion section of this report, nothing has come to our attention that causes us to believe that the directors have inappropriately adopted the going concern basis of accounting, or that the directors have identified material uncertainties relating to going concern that have not been appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410. However, future events or conditions may cause the group to cease to continue as a going concern, and the above conclusions are not a guarantee that the group will continue in operation.

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 latest annual financial statements of the Group are prepared in accordance with International Financial Reporting adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and the next annual financial statements will be prepared in accordance with UK-adopted international accounting standards. 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 for use in the UK.

In preparing the condensed set of financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

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. Our conclusion, including our conclusions relating to going concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for conclusion section of this report.

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

03 August 2022

Financial Statements

Condensed Consolidated Income Statement

For the six months ended 30 June	2022 (unaudited) £m	2021 (unaudited) £m
Revenue	2,178.4	2,167.5
Cost of sales	(1,923.0)	(1,933.7)
Gross profit	255.4	233.8
Administrative expenses	(125.1)	(114.6)
Other exceptional operating items	(0.9)	(2.7)
Other expenses - amortisation and impairment of intangibles arising on acquisition	(9.6)	(6.6)
Share of profits in joint ventures and associates, net of interest and tax	3.4	6.4
Operating profit	123.2	116.3
Operating profit before exceptional items	124.1	119.0
Investment revenue	2.0	1.3
Finance costs	(11.2)	(13.9)
Total net finance costs	(9.2)	(12.6)
Profit before tax	114.0	103.7
Profit before tax and exceptional items	114.9	106.4
Tax on profit before exceptional items	(23.4)	130.7
Exceptional tax	0.3	0.7
Tax (charge)/credit	(23.1)	131.4
Profit for the period	90.9	235.1
Attributable to:
Equity owners of the Company	90.9	235.1
Non controlling interest	-	-
Earnings per share (EPS)
Basic EPS	7.53p	19.08p
Diluted EPS	7.41p	18.77p

The notes on pages 33 to 43 form part of these condensed consolidated financial statements.

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June	2022 (unaudited) £m	2021 (unaudited) £m
Profit for the period	90.9	235.1
Other comprehensive income for the period:
Items that will not be reclassified subsequently to profit or loss:
Share of other comprehensive income in joint ventures and associates	1.3	2.5
Remeasurements of post-employment benefit obligations1	(42.0)	47.1
Actuarial loss on reimbursable rights1	(8.2)	(2.1)
Income tax relating to these items1	12.4	(16.3)
Items that may be reclassified subsequently to profit or loss:
Net exchange gain/(loss) on translation of foreign operations1	58.9	(18.6)
Fair value gain on cash flow hedges during the period1	0.8	-
Income statement items reclassified	-	0.1
Tax relating to items that may be reclassified1	(0.2)	4.0
Total other comprehensive income for the period	23.0	16.7
Total comprehensive income for the period	113.9	251.8
Attributable to:
Equity owners of the Company	113.6	251.8
Non controlling interest	0.3	-

1. Recorded in other reserves in the Condensed Consolidated Statement of Changes in Equity.

The notes on pages 33 to 43 form part of these condensed consolidated financial statements

Condensed Consolidated Statement of Changes in Equity

	Share capital £m	Share premium account £m	Retained earnings £m	Other reserves £m	Total shareholders' equity £m	Non controlling interest £m
At 1 January 2021 (audited)	24.7	463.1	302.4	(76.9)	713.3	1.7
Total comprehensive income for the period	-	-	237.7	14.1	251.8	-
Income statement items reclassified	-	-	-	0.1	0.1	-
Dividends paid	-	-	(16.8)	-	(16.8)	-
Shares purchased and held in Treasury	-	-	-	(40.7)	(40.7)	-
Cancellation of shares held in Treasury	(0.3)	-	(20.4)	20.7	-	-
Shares transferred from Treasury to Own shares reserve	-	-	(20.0)	20.0	-	-
Expense in relation to share based payments	-	-	-	8.1	8.1	-
Tax credit on items taken directly to equity	-	-	-	0.3	0.3	-
At 30 June 2021 (unaudited)	24.4	463.1	482.9	(54.3)	916.1	1.7

	Share capital £m	Share premium account £m	Retained earnings £m	Other reserves £m	Total shareholders' equity £m	Non controlling interest £m
At 1 January 2022 (audited)	24.4	463.1	542.8	(23.6)	1,006.7	1.7
Total comprehensive income for the period	-	-	92.1	21.5	113.6	0.3
Dividends paid	-	-	(19.3)	-	(19.3)	-
Shares purchased and held in Treasury	-	-	-	(25.1)	(25.1)	-
Shares committed to be purchased and held in Treasury	-	-	-	(15.0)	(15.0)	-
Shares purchased and held in own share reserve	-	-	-	(15.9)	(15.9)	-
Expense in relation to share based payments	-	-	-	7.9	7.9	-
Tax credit on items taken directly to equity	-	-	-	3.8	3.8	-
At 30 June 2022 (unaudited)	24.4	463.1	615.6	(46.4)	1,056.7	2.0

The notes on pages 33 to 43 form part of these condensed consolidated financial statements

Condensed Consolidated Balance Sheet

	As at 30 June 2022 (unaudited) £m	As at 31 December 2021 (audited) £m
Non-current assets
Goodwill	922.7	852.7
Other intangible assets	143.5	144.0
Property, plant and equipment	52.3	55.5
Right of use assets	422.9	416.7
Interests in joint ventures and associates	18.6	17.6
Loans to joint ventures	7.5	-
Contract assets	3.0	2.6
Trade and other receivables	15.8	13.6
Derivative financial instruments	0.4	-
Deferred tax assets	230.5	214.3
Retirement benefit assets	107.2	166.2
	1,924.4	1,883.2
Current assets
Inventories	21.4	19.6
Contract assets	319.5	319.0
Trade and other receivables	336.0	305.7
Current tax assets	10.6	5.5
Cash and cash equivalents	178.9	198.4
Derivative financial instruments	3.9	2.6
	870.3	850.8
Total assets	2,794.7	2,734.0
Current liabilities
Contract liabilities	(73.4)	(61.3)
Trade and other payables	(557.6)	(526.0)
Derivative financial instruments	(7.5)	(2.0)
Current tax liabilities	(15.3)	(17.2)
Provisions	(79.9)	(79.6)
Lease obligations	(127.1)	(126.3)
Loans	-	(64.9)
	(860.8)	(877.3)
Non-current liabilities
Contract liabilities	(46.5)	(48.6)
Trade and other payables	(8.8)	(7.3)
Deferred tax liabilities	(48.6)	(40.3)
Provisions	(125.4)	(118.0)
Lease obligations	(305.4)	(304.0)
Loans	(338.6)	(312.1)
Retirement benefit obligations	(1.9)	(18.0)
	(875.2)	(848.3)
Total liabilities	(1,736.0)	(1,725.6)
Net assets	1,058.7	1,008.4
Equity
Share capital	24.4	24.4
Share premium account	463.1	463.1
Retained earnings	615.6	542.8
Other reserves	(46.4)	(23.6)
Equity attributable to owners of the Company	1,056.7	1,006.7
Non controlling interest	2.0	1.7
Total equity	1,058.7	1,008.4

The notes on pages 33 to 43 form part of these condensed consolidated financial statements

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June	2022 (unaudited) £m	2021 (unaudited) £m
Net cash inflow from operating activities before exceptional items	185.2	222.6
Exceptional items	(1.1)	(3.7)
Net cash inflow from operating activities	184.1	218.9
Investing activities
Interest received	0.7	0.3
Increase in other investments	-	(0.1)
Dividends received from joint ventures and associates	3.6	9.6
Loans to joint ventures	(7.5)	-
Other dividends received	-	0.4
Proceeds from disposal of property, plant and equipment	0.2	6.5
Acquisition of subsidiaries, net of cash acquired	(0.1)	(235.1)
Purchase of other intangible assets	(3.3)	(3.8)
Purchase of property, plant and equipment	(5.2)	(11.4)
Net cash outflow from investing activities	(11.6)	(233.6)
Financing activities
Interest paid	(11.6)	(13.1)
Capitalised finance costs paid	-	(0.6)
Advances of loans	60.1	110.0
Repayments of loans	(127.6)	(95.5)
Capital element of lease repayments	(58.1)	(60.0)
Cash movements on hedging instruments	2.7	(5.9)
Dividends paid to shareholders	(19.3)	(16.8)
Purchase of Own Shares by the Employee Share Ownership Trust	(15.9)	-
Own shares repurchased	(25.1)	(40.7)
Proceeds received from exercise of share options	-	0.1
Net cash outflow from financing activities	(194.8)	(122.5)
Net decrease in cash and cash equivalents	(22.3)	(137.2)
Cash and cash equivalents at beginning of period	198.4	335.7
Net exchange gain/(loss)	2.8	(5.2)
Cash and cash equivalents at end of period	178.9	193.3

The notes on pages 33 to 43 form part of these condensed consolidated financial statements

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 2021 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 auditor's report on the 2021 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 United Kingdom. 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 for use in the UK. 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 2022, 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.

No new or amended accounting standards that became effective during the six months ended 30 June 2022 have had a significant impact on the Group. No new standards or interpretations that have been issued but are not yet effective are expected to have a significant impact on the Group.

Going concern

In assessing the basis of preparation of the condensed set of financial statements for the six months ended 30 June 2022, the Directors have considered the principles of the Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, 2014'; particularly in assessing the applicability of the going concern basis, the review period and disclosures. The period of assessment is considered to be at least 12 months from the date of approval of these financial statements.

At 30 June 2022, the Group's principal debt facilities comprised a £250m revolving credit facility (of which £nil was drawn), term loan facilities totalling £75m (of which £75m was drawn) and £265m of US private placement notes, giving £590m of committed credit facilities and committed headroom of £424m. The principal financial covenant ratios are consistent across the private placement loan notes and revolving credit facility. As at 30 June 2022, the Group's primary restricting covenant, its leverage ratio, is below the covenant of 3.5x and is below the Group's target range of 1x-2x at 0.54x.

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

The basis of the assessment continues to be the Board-approved budget updated to take account of known changes since, including the impact of the Group's results for the six months to 30 June 2022. The budget is prepared annually for the next two-year period and is based on a bottom-up approach to all of the Group's existing contracts, potential new contracts and administrative functions.

Owing to the unprecedented levels of inflation driven by geopolitical factors, the Directors have considered the Group's resilience to rising costs. Due to the contracting nature of the Group's operations, almost all of the revenue base has some form of inflationary protection, whether it be through contractual indexation mechanisms, cost plus billing or being short term in nature. Though the timing of such protections becoming effective may, in the short term, differ from the impact of cost pressures, it is expected that the current inflation levels will not have a material impact on the Group's profitability.

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

This reverse stress test shows that, even after assuming that the US private placement loan of £40.5m due to mature before 31 December 2023 is repaid, and that no additional refinancing occurs, the Group can afford to be unsuccessful on 60% of its bids and extensions, combined with a profit margin 80 basis points below the Group's forecast, and still retain sufficient liquidity to meet all liabilities as they fall due and remain compliant with the Group's financial covenants.

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

In respect to margin reduction, due to the diversified nature of the Group's portfolio of long-term contracts and the fact that the Group has met or exceeded its full year guidance for the last five years, a reduction in margin of 80bps versus the Group's budget is not considered plausible within the assessment period combined with a 60% reduction in bid and extensions rates.

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

2.  Critical accounting judgements and key sources of estimation uncertainty

In the six months ended 30 June 2022, there have been no changes to the critical accounting judgements and key sources of estimation uncertainty from those disclosed in the Group's latest annual audited financial statements.

3.  Segmental information

The Group's operating segments reflecting the information reported to the Board in the six months ended 30 June 2022 and are consistent with those reported in the Group's latest annual audited financial statements.

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

For the six months ended 30 June 2022		UK&E  m	Americas £m	AsPac  m	Middle East £m	Total £m
Key sectors
Defence		125.0	411.5	71.6	14.7	622.8
Justice & Immigration		325.9	-	201.7	-	527.6
Transport		83.4	43.0	3.8	33.1	163.3
Health		130.1	-	112.1	44.1	286.3
Citizen Services		327.1	167.8	82.8	0.7	578.4
		991.5	622.3	472.0	92.6	2,178.4
For the six months ended 30 June 2021 (restated1)		UK&E  m	Americas £m	AsPac  m	Middle East £m	Total £m
Key sectors
Defence		123.8	357.3	74.0	14.9	570.0
Justice & Immigration		201.3	-	185.0	-	386.3
Transport		70.6	40.5	3.5	86.8	201.4
Health		132.9	-	121.9	40.7	295.5
Citizen Services		509.9	130.8	73.5	0.1	714.3
		1,038.5	528.6	457.9	142.5	2,167.5

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

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

For the six months ended 30 June 2022	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m		Total £m
Result
Trading profit/(loss)1	41.7	75.7	31.6	8.7	(24.0)		133.7
Amortisation and impairment of intangibles arising on acquisition	(0.4)	(7.4)	(1.8)	-	-		(9.6)
Other exceptional operating items2	-	(0.9)	0.1	-	(0.1)		(0.9)
Operating profit/(loss)	41.3	67.4	29.9	8.7	(24.1)		123.2
Net finance costs							(9.2)
Profit before tax							114.0
Tax charge							(23.1)
Profit for the period							90.9
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax	3.4	-	-	-	-		3.4
Depreciation and impairment of plant, property and equipment	(36.7)	(13.6)	(6.1)	(0.9)	(5.7)		(63.0)
Amortisation of intangible assets arising on acquisition	(0.4)	(7.4)	(1.8)	-	-	(9.6)
Amortisation of other intangible assets	(0.5)	(0.3)	(1.1)	-	(3.0)		(4.9)

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

2. Included within exceptional operating items are total acquisition related costs of £0.9m. Exceptional items incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider business.

For the six months ended 30 June 2021	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m	Total £m
Result
Trading profit/(loss)1	59.0	57.1	25.0	7.2	(22.7)	125.6
Amortisation and impairment of intangibles arising on acquisition	(0.4)	(4.5)	(1.7)	-	-	(6.6)
Other non-underlying operating items2	0.1	(2.0)	(0.5)	-	(0.3)	(2.7)
Operating profit/(loss)	58.7	50.6	22.8	7.2	(23.0)	116.3
Net finance costs						(12.6)
Profit before tax						103.7
Tax credit						131.4
Profit for the period						235.1
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax (restated3)	6.4	-	-	-	-	6.4
Depreciation of plant, property and equipment	(42.8)	(10.8)	(6.4)	(3.3)	(4.6)	(67.9)
Amortisation of intangible assets arising on acquisition	(0.4)	(4.5)	(1.7)	-	-	(6.6)
Amortisation of other intangible assets	(0.5)	(0.5)	(1.7)	(0.1)	(3.5)	(6.3)

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

2. Included within exceptional operating items are total acquisition related costs of £1.4m. Exceptional items incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider business.

3. Share of profits in joint ventures and associates, net of interest and tax has been restated to allocate tax previously presented under Corporate to UK&E where the joint venture this tax balance relates to is presented. The change has no impact on the condensed consolidated income statement or the condensed consolidated balance sheet of the Group.

As at 30 June 2022	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m	Total £m
Segment assets
Interests in joint ventures and associates	18.2	-	-	0.4	-	18.6
Other segment assets1	830.6	1,002.1	349.4	66.3	103.4	2,351.8
Total segment assets	848.8	1,002.1	349.4	66.7	103.4	2,370.4
Unallocated assets						424.3
Consolidated total assets						2,794.7
Segment liabilities
Segment liabilities1	(671.3)	(196.1)	(267.5)	(55.5)	(135.6)	(1,326.0)
Unallocated liabilities						(410.0)
Consolidated total liabilities						(1,736.0)

1.     The Corporate segment assets and liabilities include balance sheet items which provide benefit to, or are incurred on behalf of, the wider Group, including defined benefit pension schemes and corporate intangible assets.

As at 31 December 2021	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m	Total £m
Segment assets
Interests in joint ventures and associates	17.1	-	0.1	0.4	-	17.6
Other segment assets1	782.5	911.6	313.2	60.8	227.5	2,295.6
Total segment assets	799.6	911.6	313.3	61.2	227.5	2,313.2
Unallocated assets						420.8
Consolidated total assets						2,734.0
Segment liabilities
Segment liabilities1	(641.2)	(187.7)	(224.7)	(53.2)	(182.3)	(1,289.1)
Unallocated liabilities						(436.5)
Consolidated total liabilities						(1,725.6)

1. The Corporate segment assets and liabilities include balance sheet items which provide benefit to, or are incurred on behalf of, the wider Group, including defined benefit pension schemes and corporate intangible assets.

4.  Exceptional Items

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

For the six months ended 30 June	2022 £m	2021 £m
Exceptional operating items
Restructuring costs	-	0.1
Costs associated with UK Government review	-	(0.3)
Costs associated with successful acquisition	(0.9)	(2.5)
Exceptional operating items	(0.9)	(2.7)
Exceptional tax credit	0.3	0.7
Total exceptional items net of tax	(0.6)	(2.0)

The Group completed the acquisition of Whitney, Bradley & Brown, Inc. (WBB) in 2021. The transaction and implementation costs incurred during the six months ended 30 June 2022 of £0.9m have been treated as exceptional costs in line with the Group's accounting policy.

Exceptional tax for the period was a tax credit of £0.3m (2021: £0.7m) which arises on exceptional items within operating profit.

5.  Tax

The tax charge for the six months ended 30 June 2022 is calculated using the full year forecasted effective tax rate by territory, in which the Group has generated profits, and then applying this to the actual profit for the period in each territory. The tax impacts of items specific to the period are then included to provide the half year actual tax charge.

A tax charge of £23.4m (2021: £130.7m credit) on pre-exceptional profits has been recognised which includes an underlying tax charge of £25.8m, a tax credit on amortisation of intangibles arising on acquisition of £2.6m, and a £0.2m credit on non-underlying items.

Of the £0.2m charge on non-underlying items, a £0.6m credit arises on the revaluation of the deferred tax asset in the UK, due to changes in estimated timing of its utilisation. The £0.8m non-underlying tax charge relates to tax on non-underlying income.

The tax rate on profits before exceptional items at 20.4% is slightly higher than the UK standard corporation tax rate of 19.0%. This is mainly due to higher rates of tax on profits arising on our international operations which is partially offset by the credit associated with a reduction in provisions for uncertain tax positions noted, made as part of our regular reassessment of tax exposures across the Group.

A £174.5m UK tax asset is recognised on the Group's balance sheet at 30 June 2022 (31 December 2021: £162.8m). A significant element of the increase in this balance (£10.7m) is due to reduction in the value of the UK retirement benefits assets during the period and the decrease in the associated deferred tax liability.

6.  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 For the six months end 30 June	2022 millions	2021 millions
Weighted average number of ordinary shares for the purpose of basic EPS	1,207.2	1,232.2
Effect of dilutive potential ordinary shares: Shares under award	19.1	20.4
Weighted average number of ordinary shares for the purpose of diluted EPS	1,226.3	1,252.6

Basic EPS For the six months end 30 June	Earnings 2022 £m	Per share amount 2022 pence	Earnings 2021 £m	Per share amount 2021 pence
Earnings for the purpose of basic EPS	90.9	7.53	235.1	19.08
Effect of dilutive potential ordinary shares		(0.12)		(0.31)
Diluted EPS	90.9	7.41	235.1	18.77
Basic EPS excluding exceptional items For the six months end 30 June	Earnings 2022 £m	Per share amount 2022 pence	Earnings 2021 £m	Per share amount 2021 pence
Earnings for the purpose of basic EPS	90.9	7.53	235.1	19.08
Add back exceptional items	0.9	0.07	2.7	0.22
Add back tax on exceptional items	(0.3)	(0.02)	(0.7)	(0.06)
Earnings excluding exceptional items for the basis of basic EPS	91.5	7.58	237.1	19.24
Effect of dilutive potential ordinary shares		(0.12)		(0.31)
Excluding exceptional items, diluted	91.5	7.46	237.1	18.93

 

7.  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 cash generating unit (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 2021 year end. 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 has been the volatility in the macroeconomic environment which has seen unprecedented levels of inflation driven by rising oil and food prices and the political unrest in Europe. These factors have led to increased market risk resulting in higher discount rates across all CGU operating locations and therefore reduce the present value of future cash flows.

Following all the above analysis undertaken, no indicators of impairment have been identified.

8.  Analysis of Net debt

30 June 2022

	As at 1 January 2022 £m	Cash flow £m	Acquisitions £m	Exchange differences £m	Non-cash movements1 £m	As at 30 June 2022  m
Loans payable	(377.0)	67.5	-	(28.4)	(0.7)	(338.6)
Lease obligations	(430.3)	58.1	-	(7.3)	(53.0)	(432.5)
Liabilities arising from financing activities	(807.3)	125.6	-	(35.7)	(53.7)	(771.1)
Cash and cash equivalents	198.4	(22.3)	-	2.8	-	178.9
Derivatives relating to Net debt	0.6	-	-	(4.5)	-	(3.9)
Net debt	(608.3)	103.3	-	(37.4)	(53.7)	(596.1)

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

31 December 2021

	As at 1 January 2021 £m	Cash flow £m	Acquisitions1 £m	Exchange differences £m	Non-cash movements2 £m	As at 31 December 2021  m
Loans payable	(388.8)	29.7	(14.3)	(2.9)	(0.7)	(377.0)
Lease obligations	(402.6)	111.3	(13.8)	(0.5)	(124.7)	(430.3)
Liabilities arising from financing activities	(791.4)	141.0	(28.1)	(3.4)	(125.4)	(807.3)
Cash and cash equivalents	335.7	(145.8)	13.3	(4.8)	-	198.4
Derivatives relating to Net debt	(4.7)	-	-	5.3	-	0.6
Net debt	(460.4)	(4.8)	(14.8)	(2.9)	(125.4)	(608.3)

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

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

9.  Provisions

	Employee related £m	Property £m	Contract £m	Claims  m	Other  m	Total £m
As at 1 January 2022	73.8	19.3	14.2	20.1	70.2	197.6
Arising on acquisition	-	-	-	-	0.4	0.4
Transfer from working capital	-	-	-	-	0.2	0.2
Reclassification between categories	-	(1.1)	-	-	1.1	-
Charged to income statement	6.4	1.1	0.7	4.0	3.2	15.4
Released to income statement	(1.5)	(0.2)	(0.1)	-	(0.9)	(2.7)
Utilised during the period	(3.3)	(1.3)	(0.5)	(0.9)	(5.6)	(11.6)
Unwinding of discount	-	0.1	-	-	-	0.1
Exchange differences	5.0	0.3	-	-	0.6	5.9
As at 30 June 2022	80.4	18.2	14.3	23.2	69.2	205.3
Analysed as:
Current	30.4	5.8	14.3	4.6	24.8	79.9
Non-current	50.0	12.4	-	18.6	44.4	125.4
	80.4	18.2	14.3	23.2	69.2	205.3

Employee-related provisions include amounts for long-term service awards and terminal gratuity liabilities which have been accrued and are based on contractual entitlement, together with an estimate of the probabilities that employees will stay until rewards fall due and receive all relevant amounts. There are also amounts included in relation to restructuring. The provisions will be utilised over various periods driven by local legal or regulatory requirements, the timing of which is uncertain.

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

A contract provision is recorded when a contract is deemed to be unprofitable and therefore is considered onerous. The present value of the estimated future cash outflow required to settle the contract obligations as they fall due over the respective contracts has been used in determining the provision. Individual provisions are only discounted where the impact is assessed to be significant. Currently, no contract provisions are discounted.

Claims provisions relate to claims made against the Group. These claims are varied in nature, although they typically come from either the Group's service users, claimants for vehicle related incidents or the Group's employees. Whilst there is some level of judgement on the amount to be recorded, in almost all instances the variance to the actual claim paid out will not individually be material, however the timing of when the claims are reported and settled is less certain as a process needs to be followed prior to the amounts being paid.

Included within other provisions is:

●

£42.7m related to indemnities provided in respect of a historic business transaction. Within this amount, £36.0m is reserved for potential tax liabilities arising within the disposed company when local tax submissions are reviewed by the relevant authorities which represents Management's best estimate of the likely outcome based on past experiences and other known factors. Under the indemnity, £36.0m is the Group's maximum potential exposure to these tax matters. The timing of utilisation is dependent on future events which could occur within the next twelve months, or over a longer period, with the majority expected to be settled by 31 March 2023.

●

£26.5m related to legal and other costs that the Group expects to incur over an extended period, in respect of past events for which a provision has been recorded, none of which are individually material.

10.  Contingent liabilities

The Group has guaranteed overdrafts, leases and bonding facilities of its joint ventures and associates up to a maximum value of £5.7m (31 December 2021: £5.7m). The actual commitment outstanding at 30 June 2022 was £5.7m (31 December 2021: £5.7m).

The Group has provided certain guarantees and indemnities in respect of performance and other bonds, issued by its banks on its behalf in the ordinary course of business. The total commitment outstanding as at 30 June 2022 was £233.5m (31 December 2021: £263.8m).

Following the announcement during 2020 that the Group has received a claim seeking damages for alleged losses as a result of the reduction in Serco's share price in 2013, the Group has continued to assess the merit, likely outcome and potential impact on the Group of any such litigation that either has been or might potentially be brought against the Group. Any outcome is subject to a number of significant uncertainties and it is therefore not possible to assess the quantum of any such litigation as at the date of this disclosure.

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

11.  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 2022 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 2022, the Group held Level 2 derivative instruments in designated hedge relationships or designated as fair value through the P&L made up of financial assets of £3.5m (31 December 2021: £4.5m) and financial liabilities of £7.5m (31 December 2021: £9.4m).

There have been no transfers between levels in the six months to 30 June 2022.

12.  Defined benefit schemes

Recognised in the income statement:

For the six months ended 30 June	2022 £m	2021 £m
Current service cost - employer	2.5	2.6
Settlement gain recognised	(0.4)	-
Administrative expenses and taxes	0.9	0.5
Recognised in arriving at operating profit before exceptional items	3.0	3.1
Interest income on scheme assets - employer	(14.0)	(11.0)
Interest on franchise adjustment	(0.1)	(0.1)
Interest cost on scheme liabilities - employer	12.7	10.5
Finance income	(1.4)	(0.6)
Total recognised in the income statement	1.6	2.5

Included within the SOCI:

For the six months ended 30 June	2022 £m	2021 £m
Actual return on scheme assets	(367.7)	(24.2)
Less: interest income on scheme assets	(14.0)	(11.0)
	(381.7)	(35.2)
Effect of changes in demographic assumptions	16.0	-
Effect of changes in financial assumptions	399.8	62.7
Effect of experience adjustments	(76.1)	19.6
Remeasurements	(42.0)	47.1
Change in franchise adjustment	(4.7)	(1.1)
Change in members' share	(3.5)	(1.0)
Actuarial loss on reimbursable rights	(8.2)	(2.1)
Total pension (loss)/gain recognised in the SOCI	(50.2)	45.0

The total assets and liabilities of all schemes are:

	As at 30 June 2022 £m	As at 31 December 2021 £m
Fair value of scheme assets	1,202.1	1,592.9
Present value of scheme liabilities	(1,103.4)	(1,459.1)
Net amount recognised	98.7	133.8
Franchise adjustment1	4.0	8.6
Members' share of deficit	2.6	5.8
Net retirement benefit asset2	105.3	148.2
Deferred tax liabilities	( 26.2 )	(36.9)
Net retirement benefit asset (after tax)	79.1	111.3

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

2. Net retirement benefit asset is split between schemeswith a pension asset £107.2m (2021: £166.2m) and a pension liability £1.9m (2021: £18.0m)

Actuarial assumptions:

The assumptions set out below are for Serco Pension and Life Assurance Scheme (SPLAS), which represents 91% of total liabilities and 93% of total assets of the defined benefit pension schemes in which the Group participates.

Main assumptions	30 June 2022  %	31 December 2021  %
Discount rate	3.85	1.80
Rate of salary increases	2.85	2.95
Rate of increase in pensions in payment	2.75 (CPI) and 3.00 (RPI)	2.75 (CPI) and 3.05 (RPI)
Rate of increase in deferred pensions	2.45 (CPI) and 3.35 (RPI)	2.00 (CPI) and 2.90 (RPI)
Inflation assumption - pre-retirement	2.35 (CPI) and 3.15 (RPI)	2.45 (CPI) and 3.35 (RPI)
Inflation assumption - post-retirement	2.75 (CPI) and 3.00 (RPI)	2.75 (CPI) and 3.05 (RPI)

Post retirement mortality	30 June 2022 years	31 December 2021 years
Current pensioners at 65 - male	21.5	21.7
Current pensioners at 65 - female	24.1	24.3
Future pensioners at 65 - male	23.6	23.9
Future pensioners at 65 - female	26.2	26.4

13.  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 2022  m	Current Outstanding at 30 June 2022  m	Non-current Outstanding at 30 June 2022  m
Sale of goods and services
Joint ventures	5.7	-	-
Associates	0.8	0.1	-
Other
Dividends received - joint venture	2.0	-	-
Dividends received - associates	1.6	-	-
Loan receivable from joint ventures	7.5	-	7.5
Receivable from consortium for tax - joint ventures	1.1	0.2	1.9
Total	18.7	0.3	9.4

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 2021  m	Current Outstanding at 31 December 2021  m	Non-current Outstanding at 31 December 2021  m
Sale of goods and services
Joint ventures	-	1.7	-
Associates	0.8	-	-
Other
Dividends received - associate	9.6	-	-
Receivable from consortium for tax - joint ventures	-	0.2	0.8
Total	10.4	1.9	0.8

14.  Notes to the Condensed Consolidated Cash Flow Statement

For the six months ended 30 June	2022 Before exceptional items £m	2022 Exceptional items £m	2022  Total  m	2021 Before exceptional items £m	2021 Exceptional items £m	2021  Total  m
Operating profit for the period	124.1	(0.9)	123.2	119.0	(2.7)	116.3
Adjustments for:
Share of profits in joint ventures and associates	(3.4)	-	(3.4)	(6.4)	-	(6.4)
Share based payment expense	7.8	-	7.8	8.1	-	8.1
Impairment of property, plant and equipment - leased	(4.2)	-	(4.2)	-	-	-
Depreciation of property, plant and equipment -owned	10.5	-	10.5	9.1	-	9.1
Depreciation of property, plant and equipment -leased	56.7	-	56.7	58.8	-	58.8
Amortisation of intangible assets - owned	14.5	-	14.5	12.9	-	12.9
Profit on early termination of leases	(0.1)	-	(0.1)	(0.7)	-	(0.7)
Profit on disposal of property, plant and equipment	(0.1)	-	(0.1)	-	-	-
Loss on disposal of intangible assets	0.1	-	0.1	1.5	-	1.5
Increase/(decrease) in provisions	1.5	(0.2)	1.3	1.2	(0.6)	0.6
Other non-cash movements	(0.2)	-	(0.2)	-	-	-
Total non-cash items	83.1	(0.2)	82.9	84.5	(0.6)	83.9
Operating cash inflow/(outflow) before movements in working capital	207.2	(1.1)	206.1	203.5	(3.3)	200.2
(Increase)/decrease in inventories	(1.1)	-	(1.1)	0.7	-	0.7
Decrease in receivables	9.1	-	9.1	34.1	-	34.1
(Decrease)/increase in payables	(5.1)	-	(5.1)	8.8	(0.4)	8.4
Movements in working capital	2.9	-	2.9	43.6	(0.4)	43.2
Cash generated by operations	210.1	(1.1)	209.0	247.1	(3.7)	243.4
Tax paid	(24.9)	-	(24.9)	(24.5)	-	(24.5)
Net cash inflow/(outflow) from operating activities	185.2	(1.1)	184.1	222.6	(3.7)	218.9

15.  Post balance sheet events

Dividends

Subsequent to the period end, the Board has declared an interim dividend of 0.94p per share in respect of the six months ended 30 June 2022.

Share buyback

During the period 1 July 2022 to 3 August 2022, the Group repurchased a further 5,286,276 Ordinary Shares for total consideration of £9.6m including fees. The Group has a remaining commitment of £4.3m in relation to the first tranche of the buyback.

 

END

 

 

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