Interim Results

Serco Group PLC
31 August 2000

 

        INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2000

 
                    ACHIEVEMENT HIGHLIGHTS 
 
 
 
 Turnover up 16.2% to £454.9m (1999 - £391.5m) 
 
 Profit before tax (pre FRS 10) up 19.6% to £18.6m (1999 - £15.6m) 
 
 Earnings per share (pre FRS 10) up 20.6% to 3.34p (1999 - 2.77p restated*) 
 
 Dividend per share up 13.6% to 0.5p per ordinary share (1999 - 0.44p
 restated*) 



Richard White, Executive Chairman, stated:

'We are on track for another good year and are confident of sustaining our
strong record of performance in the foreseeable future. Our confidence stems
from continued success in winning new business while extending and broadening
our existing contracts. We are greatly encouraged by our increasing ability
to bid for very large and technically demanding contracts, often in
association with major partners and subcontractors.' 
  

Notes to Editors 

Serco Group plc is an international provider of management services to
government and industry, covering a comprehensive range of engineering and
support activities across many applications. 
 
For further information please contact Serco Group plc:

Tel: [phone] 

Richard White         -      Executive Chairman       
Kevin Beeston         -      Chief Executive 
Christopher Hyman     -      Finance Director 
 
The Serco Group plc Interim Report 2000 is available from today on our
internet site at www.serco.com 
 
* Restated to take account of the capitalisation issue in April 2000 of five
new ordinary shares for each existing share held. 



                      SERCO GROUP PLC 
 

        INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2000

 

A Message from the Board

Serco continues to perform strongly. We are successfully applying our
management skills and processes to a growing range of activities, on an
increasing scale, in markets around the world. 
 
In the six months to 30 June 2000, turnover was £454.9 million - an increase
of 16.2% on the first half of 1999. Pre-tax profits grew 19.6% to £18.6
million before goodwill and by 12.8% to £16.9 million after goodwill. This
raises earnings per share by 20.6% to 3.34p before goodwill and by 11.5%
after goodwill. The tax rate remained at 32.5%. 
 
The interim dividend of 0.5p per ordinary share - an increase of 13.6% - will
be paid on 13 October 2000 to shareholders on the register at close of
business on 15 September 2000. In April 2000 we undertook a share
capitalisation with five new ordinary shares being issued for each existing
ordinary share already held. 
 
To support our growth, it is increasingly important to identify best practice
and share it worldwide through communication and training. We continue to
invest in building the capability and capacity of the Serco Best Practice
Centre, and in extending its influence throughout Serco worldwide. 
 
We are also enthusiastic users of technology to maintain and improve the
effectiveness of our business operations. In partnership with BT, we are
developing a global intranet and virtual office environment that helps people
to share knowledge and fosters informal contact and 'open doors' throughout
the organisation. This will help us to maintain our open and personal
management style as Serco grows ever larger and more diverse.  
 
This year in the UK we have phased-in, on schedule, three particularly large
contracts: the management and operation of the Atomic Weapons Establishment
(AWE), the newly-built Ministry of Defence Joint Services Command and Staff
College (JSCSC), and our infrastructure maintenance contract for Railtrack. 
 
While contracts like these made the headlines, our many less publicised
successes reflect the fundamental strength of the traditional business. We
maintained our success rate of over 90% in retaining contracts as they came
up for renewal - significant renewals in the UK included Her Majesty's Prison
Doncaster and the Defence Procurement Agency in Abbey Wood. We are also
negotiating an extension for a further two years of our contract to manage
the National Physical Laboratory (NPL).  
 
We continued to build on existing contracts by extending their scope, or
winning related new business. An interesting example in the UK was a contract
from the Defence Evaluation and Research Agency (DERA) to crew, operate and
maintain its new experimental research vessel RV Triton - a revolutionary
trimaran that will be used to test the triple hull concept for future Royal
Navy warships. This contract grew directly from our successful operation of
another DERA research vessel, the RV Colonel Templer. 
 
With this and many other new business wins, we are broadening our
competencies to encompass an increasing variety of advanced technologies.
Important new IT activity includes the award of a significant contract to
form a strategic partnership in the UK with the National Crime Squad: under
this £65 million contract starting later this year, we will provide a
wide-ranging information management and communication service.  
 
We also began supporting the entire IT infrastructure for the body that
oversees the Italian Stock Exchange and public companies. And in the
Netherlands, we took on two new scientific support contracts for the European
Space Research and Technology Centre. Additionally we are at an advanced
stage in negotiations with the Highways Agency for a contract to build and
operate its Traffic Control Centre. This will allow the strategic management
of traffic on England's core trunk road network, monitor traffic and journey
times, and distribute traffic and travel information through existing and new
media.  
 
Public Private Partnerships (PPPs) remain a significant source of opportunity
for us. In the UK, we have formally entered the bidding for the National Air
Traffic Services PPP; bidders will table their best and final offers in
January 2001. We continue to develop PPP proposals for AWE that would extend
the contract from 10 to 25 years and enable us to further redevelop the
facilities. 
 
Our ability to bid for contracts of this scale - with world-class partners
where appropriate - reflects Serco's increasing strength in worldwide
markets. We look forward to continued good growth and progress in the second
half of the year. 
 
 

Review of Operations


Maximising growth opportunities

Our continued strong growth comes not only from winning new contracts; by
implementing and operating them effectively, we are able to retain, grow and
extend them. 
 
This year we have successfully implemented three very large contracts. Our
joint venture with Lockheed Martin and British Nuclear Fuels has begun
managing AWE and its staff of over 4,000. At JSCSC, under a 30-year contract
worth some £180 million, we have invested in a joint venture to build the £90
million facility and recruited 300 staff to manage and operate it. Our
infrastructure maintenance contract for Railtrack covers about 1,200 miles of
track and now employs some 600 people.  
 
In addition to JSCSC, six other UK PPP projects are now operating
successfully - four prisons, the Manchester Metrolink transport system, and
the Medium Support Helicopter Aircrew Training Facility at RAF Benson.
Meanwhile, at NPL, we have begun transferring staff into the new laboratory
facilities which are due for completion next year. Her Majesty's Prison
Dovegate, Norfolk and Norwich Hospital and Wishaw General Hospital are on
schedule for completion in 2001. 
 
Rebids provide an important growth opportunity. A significant example this
year was a seven-year renewal of our contract at the UK Defence Procurement
Agency in Abbey Wood near Bristol. With work services management added to our
previous contract, we will have over 350 people delivering a total corporate
support service. 
 
Often we broaden the scope of our activities during the life of a contract.
For example, since the start of our infrastructure maintenance contract with
Railtrack in April this year, we have already won an additional contract to
include bridges and related structures. In Wales, we extended our facilities
management contract with the stainless steel company Avesta Sheffield after
successfully growing the contract since 1992. And in New Zealand we extended
our contract to provide property maintenance and building services at 4,000
sites for Telecom New Zealand, the country's largest business; this contract
has grown to include Telecom's preventive maintenance programme, and in the
past two years we have earned substantial incentive payments for achieving
cost savings. 
 
This kind of measurable contribution to our customers' bottom line helps us
extend the duration of contracts - as at ScotRail, where our train
information and telesales contract was recently extended after we increased
revenues by over 30% in two years. 
 
In Hong Kong, we won our third consecutive contract to manage the Lion Rock
and Airport Tunnels. The new contract - which is for six years - will employ
over 200 staff. 
 
We strive to build contractual relationships into long-term partnerships. A
good example is our arrangement with DERA at its weapons testing ranges in
Scotland. This began with a small two-man contract in the Hebrides in the
early 1970s, which developed into a series of contracts for individual
ranges. We have now pulled these contracts together into a partnering
arrangement in which both parties share risks and benefits - with DERA
extending its commitment so that we can increase our investment with
confidence. This arrangement, employing over 200 Serco staff, is modelled on
a similar relationship we have already established for DERA's other test and
evaluation ranges. 
 
Sometimes the capabilities from one contract can be used to win another. At
the Royal New Zealand Air Force's Woodbourne base we have four contracts
including grounds maintenance. Using the same management and equipment, we
won two contracts - renewed and extended this year - to maintain the local
council's parks and reserves. A similar approach enabled us to win a
substantial open area management contract with Manukau City. 
In the Netherlands, we extended our mainframe computer support contract with
the European Patent Office. We also successfully extended our IT contracts
with the European Commission. These cover PC user support to over 15,000
staff in some 30 buildings in Brussels and Luxembourg, and continue to
achieve good organic growth. 
 

Winning new contracts

While making the most of our existing contract base, we have also maintained
an exciting flow of new business across the spectrum of our capabilities. 
 
One key to our growth is our ability to apply and manage high technology.
This is part of our heritage - we began by maintaining the UK Ballistic
Missile Early Warning System - and makes us credible custodians of sensitive
and technically demanding operations such as AWE and NPL. Later this year we
begin a major partnership with the National Crime Squad. Under this newly
awarded 10-year contract, we will develop a strategy for the National Crime
Squad's information management and communications needs. This complex
technical task ranges from the provision of data centres to the storage and
tracking of vital evidence. We will provide a comprehensive, highly secure
and integrated solution to meet the National Crime Squad's business
requirement. 
 
In the UK, we won a 10-year contract to manage the Manchester Aquatic
Centres. Built to host the Commonwealth Games in 2002 and to provide a
community legacy, this has one of the largest indoor water areas in Europe
and is the most technically advanced pool complex in the world. We also won a
10-year extension to our management and operation contract at Tenterden
Leisure Centre in Kent, which will include significant investment in new
facilities. 
 
We began a new contract for CONSOB, the National Commission that oversees the
Italian Stock Exchange and public companies. We are supporting its entire IT
infrastructure for 450 employees at two offices in Rome and one in Milan. 
 
In Germany, Elekluft - acquired in September 1999 and renamed Serco GmbH &
Co. KG - is integrating well with our other activities. It is supporting the
first of two new high-tech contracts at the European Space Research and
Technology Centre in the Netherlands. The first provides support services in
thermal microgravity instruments, robotics and optics laboratories; the
second is for radiation and quality testing of satellite components. 
 
We won our largest Swedish contract to date, for facilities management at
Forsmark nuclear power station. This covers a wide range of activities, from
decontamination services to managing some 700 accommodation units. 
 
We were awarded a four-year contract for the Royal Netherlands Navy,
providing Lynx helicopter avionics engineers both on land and at sea. Our
invitation to bid for this contract was based on the recommendation of a
Dutch naval officer who had been able to judge our performance at first hand
on an exchange assignment with the Royal Navy. 
 
Information technology is increasingly important to the efficient operation
of transport infrastructures, and is a significant growth area for us. In the
UK, we won the contract to run the Association of Train Operating Companies'
Communication Centre, which collects and distributes rail information from
Railtrack and Train Operators. We are currently developing a web-based system
to make the service more accessible. We also bid successfully to expand the
scope of Scotland's National Driver Information and Control System. 
 
 
In Australia, we are the preferred tenderer for the management and operation
of the Transinfo passenger information service shared by Queensland
Transport, Queensland Rail and Brisbane City Council. The proposed five-year
contract is based on installing voice recognition technology which will
support the management of call growth. 
 
Although the majority of our contracts have traditionally come from the
public sector, there is increasingly wide recognition that we can bring
comparable benefits to the commercial and industrial sectors.  
 
Under a new contract with Bombardier, we will shortly begin acceptance
testing of new non-tilting and tilting trains for Virgin CrossCountry
services. We have also secured a new contract from ALSTOM for acceptance
testing of its Class 180 diesel trains. 
 
In Ireland, the influx of US companies represents a significant opportunity
for us, and our clients there already include IBM. In January we began a
facilities management contract with Microsoft, covering a wide range of
services in the company's 11 Dublin premises which include its European
operations and product localisation centres. 
 
In the US, we built on our existing vehicle fleet maintenance contract with
Dayton Power & Light to win an additional contract to provide mobile tanker
refuelling for its 900-strong vehicle fleet. We enhanced our mobile
maintenance service by introducing hand-held data terminals and a wireless
internet management information system.  
 

Prospects

We are on track for another good year and are confident of sustaining our
strong record of performance in the foreseeable future. Our confidence stems
from continued success in winning new business while extending and broadening
our existing contracts. We are greatly encouraged by our increasing ability
to bid for very large and technically demanding contracts, often in
association with major partners and subcontractors. 
 
The UK market is particularly exciting; we continue to broaden our range of
public sector customers and activities. At the same time, our overseas
markets in Continental Europe, North America and Asia Pacific are becoming
increasingly sophisticated in their public sector outsourcing - and Serco is
playing its part in shaping these developments. 
 
In responding to these emerging opportunities, we will maintain our focus on
areas where we can add value for our customers and where the entry criteria
remain high.

Summary Consolidated Profit and Loss Account 
For the six months ended 30 June 2000 
 

                                                                              
                                          6 Months      6 Months      Year to 
                                        to 30.6.00    to 30.6.99     31.12.99 
                                             £'000         £'000        £'000 
  Turnover: Group and share of joint       454,933       391,546      807,544 
  ventures - continuing operations                                            
  Less: Share of joint ventures            (77,640)      (69,154)    (138,982)
  Group turnover                           377,293       322,392      668,562 
  Cost of sales                           (327,490)     (280,159)    (580,586)
  Gross profit                              49,803        42,233       87,976 
  Administrative expenses                  (34,763)      (29,839)     (61,732)
  Amortisation of goodwill                  (1,750)         (615)      (2,092)
  Operating profit - continuing             13,290        11,779       24,152 
  operations                                                                  
  Share of operating profit in joint         8,901         5,684       11,121 
  ventures                                                                    
  Gross operating profit                    22,191        17,463       35,273 
  Net interest                                                                
       Group                                (1,592)       (1,172)      (2,643)
       Share of joint ventures              (3,744)       (1,353)      (3,298)
  Profit on ordinary activities             16,855        14,938       29,332 
  before taxation                                                             
  Taxation on profit on ordinary            (5,478)       (4,855)      (9,538)
  activities                                                                  
  Profit on ordinary activities             11,377        10,083       19,794 
  after taxation                                                              
  Dividends                                 (1,964)       (1,738)      (5,593)
  Retained profit                            9,413         8,345       14,201 
                                                        Restated     Restated 
  Earnings per Ordinary Share of 2p                                           
  each:                                                                       
  Basic earnings per share, after            2.90p         2.60p        5.10p 
  amortisation of goodwill                                                    
  Basic earnings per share, before           3.34p         2.77p        5.63p 
  amortisation of goodwill                                                    
  Fully diluted earnings per share,          2.88p         2.58p        5.07p 
  after amortisation of goodwill                                              
  Fully diluted earnings per share,          3.32p         2.73p        5.60p 
  before amortisation of goodwill                                             
  Dividend per share                         0.50p         0.44p        1.43p 
 

Earnings per share

The calculation of basic and fully diluted earnings per Ordinary Share after
goodwill is based on profits of £11,377,000 for the six months ended 30 June
2000 (1999 - £10,083,000) and the weighted average number of Ordinary Shares
of 2p each in issue during the period. 
 
The calculation of basic and fully diluted earnings per Ordinary Share before
goodwill is based on profits of £13,127,000 for the six months ended 30 June
2000 (1999 - £10,698,000) and the weighted average number of Ordinary Shares
of 2p each in issue during the period. 

Share capitalisation

The comparative calculations of basic and fully diluted earnings per Ordinary
Share have been restated to take account of the capitalisation issue of five
new Ordinary Shares for each existing Ordinary Share already held. The
comparative for dividend per share has also been restated. 


Summary Consolidated Balance Sheet 
As at 30 June 2000 
 

                                                                              
                                    As at            As at            As at 
                                   30.6.00          30.06.99         31.12.99 
                                     £'000            £'000             £'000 
                   
  Fixed assets                                                                
  Intangible asset: Goodwill        65,199           25,989            66,854 
  Tangible assets                   45,775           26,043            36,508 
  Investments in joint              25,023           12,464            18,022 
  ventures                                                                    
  Total fixed assets               135,997           64,496           121,384
 
  Current assets/(liabilities)                                                
  Stocks                            23,527            9,328            26,830 
  Debtors                          163,992          176,986           161,900 
  Cash (net of overdraft)           22,686           26,836            35,187 
  Trade and other creditors        (99,853)         (84,321)         (105,565)
  Accruals and deferred income     (72,876)         (59,024)          (74,970)


  Net current assets                37,476           69,805            43,382 
  Long term creditors              (47,053)         (47,903)          (47,232)
  Provisions for liabilities       (26,403)          (3,805)          (25,906)
  and charges                                                                 
  Equity shareholders' funds       100,017           82,593            91,628 
 

Summary Consolidated Cash Flow Statement 
For the six months ended 30 June 2000 
 

                                                                              
                                           6 Months      6 Months     Year to 
                                         to 30.6.00    to 30.6.99    31.12.99 
                                              £'000         £'000       £'000 
  Net cash inflow from operating             11,080         1,360      36,818 
  activities                                                                  
  Dividends received from joint               1,971           874       2,156 
  ventures                                                                    
  Returns on investments and                 (1,729)       (1,624)     (3,482)
  servicing of finance                                                        
  Taxation                                   (1,253)       (1,002)     (7,279)
  Capital expenditure and financial          (9,967)      (10,809)     (4,627)
  investment                                                                  
  Acquisitions and disposals                 (7,944)         (914)    (26,288)
  Equity dividends paid                      (3,861)       (3,299)     (5,018)
  Net cash outflow before financing         (11,703)      (15,414)     (7,720)
  Financing                                    (798)       (1,741)     (1,084)
  Decrease in cash                          (12,501)      (17,155)     (8,804)
  Opening balance                            35,187        43,991      43,991 
  Closing balance                            22,686        26,836      35,187 
 
 
 

Interim Report

As required by Section 240 of the Companies Act 1985, notification is hereby
given that the accounting information contained in the Interim Report for
2000 does not comprise a full set of accounts and that no full accounts have
been delivered to the Registrar of Companies. The interim results for both
1999 and 2000 are unaudited whilst the results for the 1999 full year were
audited, and an unqualified audit report was made. The 1999 full year
accounts have been delivered to the Registrar of Companies. 
 

Distribution of Report

Copies of the Report are being sent to all shareholders of Serco Group plc.
Copies can be obtained from our Internet site at www.serco.com or on request
from the Registered Office:  
 
Serco Group plc 
Dolphin House 
Windmill Road 
Sunbury-on-Thames 
Middlesex 
TW16 7HT 
United Kingdom