2023 full year
results
Serco Group plc
29 February 2024
Strong performance in 2023, positive outlook for 2024 and
medium-term
Year ended 31 December
|
2023
|
2022
|
Change at reported
currency
|
Change at constant
currency
|
|
unaudited
|
|
|
|
Revenue(1)
|
£4,874m
|
£4,534m
|
7%
|
8%
|
Underlying operating
profit(2)
|
£249m
|
£237m
|
5%
|
5%
|
Reported operating
profit(2)
|
£272m
|
£217m
|
25%
|
|
Underlying earnings per share
(EPS), diluted(3)
|
15.36p
|
13.92p
|
10%
|
|
Reported EPS (i.e. after
exceptional items), diluted
|
17.93p
|
12.79p
|
40%
|
|
Dividend per share
(recommended)
|
3.41p
|
2.86p
|
19%
|
|
Free cash
flow(4)
|
£209m
|
£159m
|
31%
|
|
Adjusted net
debt(5)
|
£109m
|
£204m
|
(47)%
|
|
Reported net
debt(6)
|
£562m
|
£650m
|
(13)%
|
|
Highlights
•
Revenue: grew by 7% to £4.9bn,
organic revenue growth of 4%
|
•
Underlying
operating profit: increased by 5% to
£249m, a margin of 5.1%. More than 60% of Group underlying
operating profit derived from outside the
UK(7)
|
•
Underlying
earnings per share: increased by 10%
to 15.36p
|
•
Cash
flow: free cash flow very strong at
£209m, trading cash conversion of 111%
|
•
Adjusted net
debt: better than previous guidance
at £109m; covenant leverage at 0.5x EBITDA
|
•
Order
intake: £4.6bn of wins, order book
remains strong at £13.6bn
|
•
Pipeline: pipeline of potential
new work of £10.1bn, +28% since half year, highest level in a
decade
|
•
Dividend per
share: recommended final dividend
per share of 2.27p, +18% year on year
|
•
New £140m share
buyback in 2024: continuing to
return capital to shareholders as a result of strong trading and
cash conversion consistent with our capital allocation
priorities.
|
•
Updated guidance
for 2024: Revenue and underlying
operating profit unchanged, net debt updated to include better 2023
outcome and new share buyback
|
Mark Irwin, Serco
Group Chief Executive, said:
"We are making
good progress in building a resilient international platform for
growth in the government services sector. Our strong results for
2023 reflect this progress, with another year of
growth in revenue and profit and continued excellent cash
generation. We enhanced our customer
relationships and improved our win rates compared to the prior
year, delivered better safety outcomes for our colleagues, and
announced two strategic acquisitions to strengthen our
capabilities.
We have entered 2024 with
increased execution focus on service excellence to our customers,
effective conversion of a substantial pipeline of opportunities,
the safety and productivity of our colleagues, and progressing the
technology-enablement of our business, all aligned to delivery of
our medium-term goals."
Guidance for 2024
We update our guidance for
2024. Revenue and underlying operating profit guidance are
unchanged. Net debt guidance is updated to reflect a stronger
outcome on free cash flow than expected in 2023 and the new £140m
share buyback announced with these results.
|
2023 Actual
unaudited
|
2024 Initial
guidance
14 December
2023
|
2024 New
guidance
|
Revenue
|
£4.9bn
|
~£4.8bn
|
~£4.8bn
|
Organic sales growth
|
4%
|
~(3)%
|
~(3)%
|
Underlying operating profit
|
£249m
|
~£260m
|
~£260m
|
Net finance costs
|
£25m
|
~£33m
|
~£35m
|
Underlying effective tax rate
|
23%
|
~25%
|
~25%
|
Free Cash Flow
|
£209m
|
~£140m
|
~£140m
|
Adjusted Net Debt
|
£109m
|
~£85m
|
~£175m
|
NB: The guidance uses an average
GBP:USD exchange rate of 1.26 in 2024, GBP:AUD of 1.93 and GBP:EUR
of 1.17(8). We expect a weighted average number of
shares in 2024 of 1,065m for basic EPS and 1,085m for diluted
EPS.
Medium-term financial targets
-
|
Revenues to grow at ~4-6% per year
over the medium term
|
-
|
Profits to grow faster than
revenue with margins of 5-6%
|
-
|
At least 80% of profit converted
into cash
|
-
|
Returns to shareholders will grow
faster than profits.
|
For further information please contact
Serco:
Paul Checketts, Head of Investor
Relations, tel: +44 (0) 7718 195 074 or email:
paul.checketts@serco.com
Marcus De Ville, Head of Media
Relations; tel +44 (0) 7738 898 550 or email:
marcus.deville@serco.com
Presentation:
A presentation for institutional
investors and analysts will be held at H/Advisors Maitland, 3
Pancras Square, London, N1C 4AG today at 10.00
UKT. The
presentation will be webcast live at https://edge.media-server.com/mmc/p/pg7tzizn
and subsequently available on demand. A dial-in facility is
available on
https://register.vevent.com/register/BI91351cd9c6f7468781113fb5ea697036
Notes to financial results summary table and
highlights:
(1) Revenue
is as defined under IFRS, which excludes Serco's share of revenue
of its joint ventures and associates. Organic revenue growth is the
change at constant currency after adjusting to exclude the impact
of relevant acquisitions or disposals. Change at constant currency
is calculated by translating non-sterling values for the year ended
31 December 2023 into sterling at the average exchange rates for
the prior year.
(2) Underlying
operating profit is defined as IFRS Operating Profit excluding
amortisation of intangibles arising on acquisition and exceptional
items (and in the prior year other non-underlying items).
Consistent with IFRS, it includes Serco's share of profit after
interest and tax of its joint ventures and associates. A
reconciliation of underlying operating profit to reported operating
profit is as follows:
Year ended 31 December
|
2023
|
2022
|
£m
|
unaudited
|
|
Underlying operating
profit
|
248.7
|
237.0
|
Amortisation and impairment of
intangibles arising on acquisition
|
(30.9)
|
(21.6)
|
Exceptional operating
items
|
53.8
|
(2.4)
|
Other non-underlying
items
|
-
|
4.2
|
Reported operating profit
|
271.6
|
217.2
|
(3) Underlying EPS is derived from the underlying operating
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 adjusted to remove
the impact of non-underlying cash flows from operating activities,
adding dividends we receive from joint ventures and associates and
deducting net interest, net capital expenditure on tangible and
intangible asset purchases and the purchase of own shares to
satisfy share awards.
(5) Adjusted net
debt is used by Serco as an additional non-IFRS Alternative
Performance Measure (APM). This measure more closely aligns with
the covenant measure for the Group's financing facilities than
reported net debt because it excludes all lease liabilities
including those recognised under IFRS 16
Leases.
(6) Reported net
debt includes all lease liabilities, including those recognised
under IFRS 16 Leases. A reconciliation of adjusted net debt to
reported net debt is as follows:
As
at 31 December
|
2023
|
2022
|
£m
|
unaudited
|
|
Adjusted net debt
|
108.7
|
203.9
|
Include: all lease
liabilities
|
453.7
|
446.0
|
Reported net debt
|
562.4
|
649.9
|
(7) Refers to
non-UK underlying operating profit as a proportion of Group
underlying operating profit before corporate costs. Our underlying
operating profit before corporate costs in 2023 was
£298.0m.
(8) The currency rates used for our
2024 outlook, along with their estimated impact on revenue and
underlying operating profit are:
Year ended 31 December (unaudited)
|
2024
outlook
|
2023
actual
|
2022
actual
|
Average FX rates:
|
|
|
|
US Dollar
|
1.26
|
1.24
|
1.24
|
Australian
Dollar
|
1.93
|
1.87
|
1.78
|
Euro
|
1.17
|
1.15
|
1.18
|
|
|
|
|
Year-on-year impact:
|
|
|
|
Revenue
|
£(48)m
|
£(33)m
|
£175m
|
Underlying operating
profit
|
£(4)m
|
£(0)m
|
£14m
|
Reconciliations and further detail
of financial performance are included in the Finance Review on
pages 17-29 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 30-51.
Chief Executive's update
In 2023 we made good progress
towards building a resilient international platform for growth in
the government services sector. We delivered growth in revenue,
profit and cash, with all three financial performance measures
ending the year better than our initial guidance. We have also made
good progress executing our strategy with clarity about our Purpose
- to impact a better future; our Vision - to be the partner of
choice to governments globally; and our Mission - to bring together
the right people, the right technology and the right partners to
support our government customers with solving some of the most
complex problems that they face.
We grew revenue by 7% to £4.9bn,
with organic growth of 4%, acquisitions adding another 4% and a 1%
drag from currency. Underlying operating profit increased by 5% to
£249m and our cash generation was again very strong, with 111%
profit to trading cash conversion.
In North America, which generates
close to half our profit, organic revenue growth was strong. We
secured the rebid for our CMS contract, one of the largest and
strategically crucial contracts in the Group and we strengthened
our order book with excellent rebid success. Within North America,
Canada continues to grow, and we are seeing our focus on global
collaboration bear fruit with success in winning employment
services work in Ontario, as we entered the sector for the first
time by leveraging our longstanding work in the UK.
Our UK business delivered high
organic revenue growth, margin improvement and good conversion
rates for new wins and recompetes. In Europe, the successful
integration of ORS, which is now delivering revenue more than
double the level prior to us acquiring it, has strengthened our
position in immigration services. We have followed that with the
acquisition of European Homecare, a German immigration services
provider which will complement the work we do to support
governments in the UK, Australia and across Europe.
Our Middle East business had a
good year. Although profit reduced slightly, order intake was high
as we saw success in executing our strategy of repositioning Serco
for higher margin growth in the most dynamic markets in the region.
The development of an advisory business has helped us win work in
new segments, such as sustainability services at the Red Sea Global
megaproject and has expanded our presence in the exciting new
giga-cities of Saudi Arabia.
Our Asia Pacific business had a
difficult year. Volume-variable work, which as part of a portfolio
we expect to ebb and flow, reduced in the period, tight labour
markets created operational challenges and new business wins did
not meet our expectations. We took appropriate action, appointing a
new CEO for the business and implementing the necessary business
changes to ensure we are well positioned for future opportunities
in what remains an important market for Serco.
In summary, we are pleased with
the full year results for 2023 which were the direct result of the
hard work and dedication of more than 50,000 colleagues across the
Group. For that we remain grateful, as we do for the continued
trust of our customers and the support of our
shareholders.
After my first full year as Group
Chief Executive, I am confident that we enter this next stage of
Serco's development with strong foundations and a strategy aimed at
delivering profitable, sustainable growth aligned to our
medium-term goals. We enter 2024 with the largest pipeline of
potential new work in a decade, a business plan to deliver margin
improvement from a rigorous approach to operational efficiency, a
network of partnerships to support technology enablement and a
robust balance sheet providing good optionality for capital
allocation. We therefore see clear opportunity to sustain the
consistent positive results reported in recent years.
Mark Irwin
Group Chief Executive
Serco - Impact a better
future
Group Review
Summary of financial performance
Revenue, underlying operating profit and underlying earnings
per share
Revenue increased by 7%, or £340m,
to £4,874m (2022: £4,534m). Organic revenue growth was 4% (£199m), acquisitions
added 4% (£174m) and currency was a drag of 1% (£33m). Revenue has
increased organically as growth in the immigration and defence
sectors, areas we have invested in significantly in recent years,
more than offset Covid-related work which concluded in 2022. Were
revenue from our joint ventures to be included, it would add a
further 5% to the Group's organic revenue growth, as our VIVO
Defence Services work for the UK's Defence Infrastructure
Organisation continues to experience robust demand.
Underlying operating profit
increased by 5% to £249m (2022: £237m), and growth on a constant
currency basis was also 5%. Ongoing demand for
immigration services in the UK and Europe, operational
improvement in our existing portfolio, as well as the successful
ramp up of new business signed in prior years, more than offset a
7% impact from Covid-related work, as well as lower volumes in Asia
Pacific. Improved margins in the UK & Europe
division broadly offset lower margins in the other regions,
underlining the benefit of our geographic and
sectoral diversity, and the overall resilience this brings
to our business.
Reported operating profit increased by 25% to
£272m. The growth rate was greater than for underlying operating
profit because of positive exceptional operating items. Exceptional
operating items of £54m resulted from the release of £44m of
provisions held for indemnities provided on businesses disposed of
in 2015, predominantly due to the claims period ending, and £10m
compensation we received on the early termination of a
contract.
Diluted underlying earnings per
share increased by 10% to 15.36p (2022: 13.92p). The percentage
improvement was higher than the increase in underlying operating
profit as a 7% reduction in the weighted average number of shares,
due to our share buybacks in 2022 and 2023, more than offset higher
net finance costs.
The revenue and underlying operating profit performances are
discussed in more detail in the Divisional
Reviews.
Cash flow and net debt
Free cash flow was very strong at
£209m. This was 31% better than the prior year (2022: £159m), which
itself had been a particularly good outcome. Trading cash
conversion was also very strong at 111%. High conversion of profit
to cash in recent years has been achieved, in part, by intense
focus on the cash management process. An important element of this
has been increased focus on the timeliness and accuracy of issuing
sales invoices, which enables our customers to pay us on
time. In 2023, cash flow benefitted from continued good
performance on working capital, including successful collection of
some older debt, the timing of payments on some large contracts,
contract mobilisation dynamics, and the working capital unwind of
lower work levels in Asia Pacific. Average working capital days
were at attractive levels with debtor days of 16 (2022: 22 days)
and creditor days of 20 (2022: 21 days). The reduction in debtor
days reflects the factors mentioned above, some of which are
temporary. Including accrued income and other unbilled receivables,
day sales outstanding for 2023 were 38 days (2022: 48 days). Of all
UK supplier invoices, 94% were paid in under 30 days (2022: 87%)
and 98% were paid in under 60 days (2022: 95%). No working capital
financing facilities were utilised in this or the prior
year.
Adjusted net debt was £109m at the
end of December. This was a reduction of £95m (December 2022:
£204m) despite £34m of dividend payments to shareholders and £89m
being spent on our share buyback programme, net of fees.
The period end adjusted net debt
compares to a daily average of £232m (2022: £231m) and a peak of
£362m (2022: £377m). The variance reflects free cash flow being
generated across the year, while returns to shareholders - our
share buyback and final dividend - were concentrated in the first
half. Receipts towards the end of the period supported the closing balance being lower than prior
guidance.
Our measure of adjusted net debt
excludes lease liabilities, which aligns closely with the covenants
on our financing facilities. Lease liabilities totalled £454m at
the end of December (2022: £446m), the majority being leases on
housing for asylum seekers under our Asylum Accommodation and
Support Services Contract (AASC). The terms of these leases do not
extend beyond the expected life of the contract we have with the
customer.
At the closing balance sheet date,
our leverage for debt covenant purposes was 0.5x EBITDA (2022:
0.8x). This compares with the covenant requirement for net debt to
be less than 3.5x EBITDA and our target range of 1-2x.
On 27 February 2024, we issued
$150m (£118m) of US Private Placement loan notes. The notes
are equally split into two series of $75m each with maturities of
five and ten years, giving an average maturity of seven and a half
years. The average interest rate on the new loan notes is
fixed at 6.58%, which compares to a blended rate of 3.97% for the
existing notes.
More detailed analysis of earnings, cash flow, financing and
related matters is included in the Divisional Reviews and 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 to
reward shareholders with a growing and sustainable income
stream.
|
-
|
Selectively invest in strategic
acquisitions that add capability, scale or access to new markets,
enhance the Group's future potential organic growth and have
attractive returns.
|
-
|
Return any surplus cash to
shareholders through share buybacks or other means.
|
Our capital allocation framework
was actively applied in 2023:
-
|
Invest to support organic growth:
significant investment has been put into business development,
which has supported our healthy pipeline of new opportunities. In
the Middle East, we have invested in developing an advisory
capability and this has generated good new business wins in the
year. We also invested in new pilot programmes to partner with both
start-up and established technology businesses, as well as academic
and research institutions to create a broader capability ecosystem
from which to deliver future growth.
|
-
|
Increase ordinary dividends: the
Board is recommending a final dividend of 2.27p per share.
Following the interim dividend of 1.14p, this results in a full
year dividend of 3.41p, an increase of 19% compared to 2022, as we
continue on our path to reduce dividend cover progressively towards
3x over the coming years.
|
-
|
Invest in acquisitions: we agreed
to acquire European Homecare (EHC), a leading provider of
immigration services in Germany, and we also agreed to acquire
Climatize, a small but fast-growing business that operates in the
United Arab Emirates and the Kingdom of Saudi Arabia offering
'zero-carbon' advisory and related engineering services. The
Climatize acquisition completed in January 2024 and EHC is expected
to complete in March 2024. We continue to assess other
opportunities that are aligned to our strategy and provide
potential to enhance future organic growth.
|
-
|
Return surplus cash to
shareholders: in 2023 we completed a £90m share buyback and the
Board has agreed that it intends to buy back a further £140m of the
Company's shares during 2024. Net debt to EBITDA was 0.5x at the
end of 2023 and the £140m buyback, applied retrospectively, would
take leverage to 1.0x, the low end of our preferred 1-2x range and
the level below which we consider capital to be surplus.
|
Contract awards, order book, rebids and
pipeline
Contract
awards
Order intake in 2023 was £4.6bn, a
book-to-bill rate of 95%. Book-to-bill of slightly below 100%
reflects a significant number of bids currently submitted and
awaiting decision. Our win rates in the year improved and have
rebounded to the levels we have delivered on average over recent
years, following a dip in the second half of 2022.
There were around 60 contract
awards worth £10m or more each. As in 2022, North America had the
strongest book-to-bill at 154%, with robust new order intake in
Defence and Citizen Services as well as the strategically important
rebid of our Centers for Medicare & Medicaid Services (CMS)
contract.
Our Middle East business showed
strong momentum, with full year book-to-bill of 150%, supported by
order intake in the second half approaching 2x revenue. Around
£2.1bn, or 45%, of the order intake came from North America,
£1.9bn, or 41%, from the UK & Europe, and the Middle East and
Asia Pacific both contributed £0.3bn, or 7%.
Approximately 40% of the order
intake value was new business and 60% was rebids or extensions of
existing work. The win rate by value for new work was approaching
35%, while the win rate by value for retaining
existing work was approximately 90%.
New wins included a £350m
five-year contract to deliver functional health assessments in the
south-west of England for the Department of Work and Pensions to
determine disability benefits and a contract to deliver electronic
monitoring services in England and Wales that is expected to be
worth £200m over its initial six-year term. We also secured a
£140m, five-year contract with the Government of Ontario to assist
job seekers develop their skills and match them to employment
opportunities, and a £78m, nine-year contract with the UK Home
Office to run the Derwentside Immigration Removal Centre. In the
UK, increases in the numbers of service users led to us securing
additional immigration accommodation work that is expected to
generate around £300m of revenue in 2024. We also successfully
rebid our CMS contract where we support eligibility determinations
for citizens purchasing health insurance through the Federal Health
Insurance Exchanges. The estimated total value to Serco, subject to
workload volumes, is approximately $690m (£570m) over its term of
just over four and a half years, if all option periods are
exercised. Other notable retained work in the year included our
driver examination services contract in Ontario, where we secured a
three-year extension worth an estimated £220m, an agreement with
the Australian Defence Force to continue to provide logistics and a
full suite of base services for their locations in the Middle East,
and our force protection work for the US Navy, with the new
five-year contract expected to be worth approximately
£160m.
Order book
The order book remains strong at
£13.6bn at the end of December (2022: £14.8bn). The reduction
during the year primarily reflected book-to-bill being slightly
below 1.0x. 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 £2.6bn (2022: £1.9bn) higher
if option periods in our US business, which typically tend to be
exercised, were included. If joint venture work was included this
would add a further £1.9bn (2022: £2.0bn) to our order
book.
Rebids
In our portfolio of existing work,
we have around 85 contracts with annual revenue of £5m or more
where an extension or rebid will be required before the end of
2026, with an aggregate annual revenue of £1.9bn. Contracts that
will either need to be rebid or extended in 2024 have an annual
contract value of around £0.7bn, including our
immigration services work in Australia, which is currently
contracted until December 2024. The annual value of rebids is
approximately £0.6bn in both 2025 and in 2026.
New business
pipeline
Our measure of pipeline 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 small proportion of the total universe of
opportunities, as many opportunities have annual revenues less than
£10m, are likely to be decided beyond the next 24 months or are
rebids and extensions.
Our pipeline was £10.1bn at the
end of December, 20% higher than the £8.4bn level at the end of
2022, an increase of nearly 30% since the end of June 2023, and is
now more than double its pre-Covid level. The pipeline consists of
around 45 bids with an ACV averaging around £40m and an average
contract length of around six years. The pipeline of opportunities
for new business with an estimated ACV of less than £10m totalled
£2.6bn at the end of December, a 4% increase from the £2.5bn value
at the end of 2022.
Acquisitions
We continue to view acquisitions
as an important part of our strategic toolkit,
which, if deployed correctly, can add significant value to the
business. They should therefore supplement and be capable of
delivering new opportunities for organic growth. Generally
speaking, we regard acquisitions as higher risk
than organic growth, so any potential opportunities have to
meet our stringent criteria of being both financially and
strategically compelling. We judge potential acquisitions against three criteria: do they add new, or
strengthen existing, capability? Do they add scale which we
can use to increase efficiency? Do they bring us access to new and
desirable customers and markets? We also recognise that acquisition
opportunities come in different shapes, sizes and sectors, and a
small one can be strategically important to a region, but not
necessarily significant at Group level. But large or small, the
execution of all acquisitions is centrally managed by Group and
follows the same rigorous process. Equal focus and discipline is
applied to post-acquisition value drivers such as effective
integration and value realisation from synergy and
growth.
We announced two acquisitions in
2023:
-
|
In December we agreed to acquire
European Homecare (EHC), for a consideration of €40m (£34m). EHC is
a leading private provider of immigration services in Germany. In
conjunction with ORS, the Swiss-based business we acquired in 2022,
this strategic acquisition will create a strong partner for
European governments in immigration services and complement the
support we already provide to government customers in the UK and
Australia. The acquisition has received competition clearance and
is expected to complete in March 2024.
|
-
|
We agreed in December and completed
in January 2024, the acquisition of Climatize, for an initial cash
consideration of AED 9m (£2m) and a contingent consideration of up
to AED 51m (£11m), payable on achieving certain financial targets.
Climatize is a small but fast-growing business that operates in the
United Arab Emirates and Saudi Arabia offering 'zero-carbon'
advisory and related engineering services. The business will
significantly boost Serco's sustainability advisory capability in
the Middle East with possible scalability to other
markets.
|
We continue to seek out and
evaluate new opportunities for acquisition which fit our criteria,
and focus on delivering value from those acquisitions already
executed.
Our market
The market for private sector
delivery of government services is large and growing. Independent
research has put low estimates of Serco's addressable market at
around £715bn. Further growth is predicted as governments around
the world are facing ever more complex challenges.
We believe that the imperative to
provide more, and better, for less will become even more urgent in
the years ahead. And to deliver those objectives governments will
need to access the skills, resources, innovation and agility of a
partnership ecosystem. At the same time, the supply-side is
fragmented and even Serco, as a leading international provider, has
only a small market share. This gives us an opportunity to grow
within, as well as with, the market.
Our strategy
We embark on the next stage of
Serco's development from a strong position; our foundations are
solid and the strategy is working as demonstrated by the results
delivered over recent years. Our focus in the period ahead is on
the execution of our strategy to make our business even better and
achieve our medium-term growth goal to grow revenue faster than the
market, profit faster than revenue and convert
that profit into cash.
Last year we laid out three
strategic enablers, Customers, Colleagues and Capabilities, where
we see opportunity to create value by driving enhanced execution.
We have made good progress in 2023.
Customers
Our power to drive innovation and
support customers from service discovery through
to delivery is underpinned by Serco's unique operating
model, which features three components: Impact Pathway,
Partnership, and Global data and insights.
Impact Pathway factors in the
perspectives of citizens, communities, customers and operators - to
inform service innovation and deliver measurable improvement in
outcomes. Our highly collaborative approach to Partnership brings
our people together with government, along with network partners -
including start-ups, enterprise level technology companies,
academia and third sector organisations - to
design and deliver end-to-end solutions and learn collectively from
our experience.
Finally, we draw on a global pool
of data and insights, deep domain knowledge, and global operating
experience to inform the design of solutions we know will work in
the real world.
Bringing these together allows us
to support our government customers with solving some of the most
complex problems they face.
By way of example, we will continue
to invest in our advisory-to-operate business in Saudi Arabia,
which has shown early success and is focussed on supporting the
country in its development of sustainable future cities. With more
than 100 advisory colleagues already active on the giga projects
during the planning and construction phases, we are working to
build the trust of our customers to make a long-term contribution
to delivery of the Kingdom's Vision 2030.
Colleagues
During 2023, our People and
Culture function was reorganised to ensure that it is structured to
confront the current and emerging workforce challenges impacting
government service providers, while continuing our work to progress
inclusivity, equity and diversity. Health, safety, and well-being
feature as priorities in the development of a high-performance
culture and will remain central to strategic decisions that affect
our people including recruitment, development, digital inclusivity
and compensation.
In the past year we have made key
appointments to give us a stronger and more diverse executive team,
and taken a data driven approach to addressing People and Culture
challenges and opportunities. We have effectively resourced
successful mobilisation of key contracts such as the newly built
HMP Fosse Way, and pleasingly saw a reduction in employee attrition
which has created operational challenges for our business in recent
years. And we have proudly welcomed more than two thousand new
colleagues in our growing immigration business in
Europe.
As we press ahead, ongoing
execution of our People and Culture strategy is crucial to our
long-term success. Continually evolving our Employee Value
Proposition from its purpose-led and values-driven foundations to
remain relevant, attractive, and exciting is a key element to that
execution.
Colleagues are, and have always
been, at the heart of Serco.
Capabilities
We have begun to optimise existing
IT platforms and align investment to business and growth needs such
as selectively piloting AI systems, as outlined below. The appointment of a Chief Data
and Technology Officer to the Group's Executive Committee will be a
critical enabler to the next stage of developing and delivering our
technology roadmap. As we explore the positive impacts AI can have
on our operations, we are mindful that AI is also enabling an
expanded cyber threat landscape that requires adaptive risk and
response management, and continuous vigilance throughout the
business and into our supply chain. We will continue to invest in
technology pilots as well as strategic partnerships with technology
companies to drive productivity and open new revenue
opportunities.
Artificial intelligence pilot programs
Microsoft
Partnership
In December 2023, we signed a
strategic memorandum of understanding with Microsoft UK to drive
Serco's digital transformation, leverage opportunities for
co-innovation and joint business development. This includes a pilot
project to use Microsoft's VisionAI products to automatically
identify, classify, and retrieve prisoner property - this will
potentially improve processing time as well as enable the
identification of signs of bullying and potential gang activity.
Once this product has been fully tested, Serco will aim to deploy
it for similar use cases in its prison and immigration estate
globally. This is an example of Serco partnering to impact a better
future for our government customers globally.
AutogenAI
Serco's first technology pilot in
2023 with AutogenAI (a UK-based start-up) has already resulted in a
global partnership agreement. Initial tests, during the pilot, have
shown up to a very significant time saving when managing and
collating knowledge about Serco's capabilities worldwide. If
deployed at scale, Serco believes the technology could produce
significant productivity improvements; increase global
collaboration; and lead to more innovative solutions for Serco's
customers. Serco has already used AutogenAI's technology over 6,000
times during the pilot phase in the UK & Europe Division. It
will now be deployed globally to support better knowledge
management across the Group.
Guidance for 2024
Our guidance for 2024 is updated
from our pre-close trading statement on 14 December 2023, to
reflect the strong cash performance and share buyback
announced today. We
expect revenue in 2024 to be slightly below 2023, underlying
operating profit to grow by around 5% and the conversion of profit
to cash to be consistent with our medium-term target of at least
80%.
Revenue: We expect revenue to
be around £4.8bn, slightly below the £4.9bn outturn for 2023, with a 3% organic contraction, a 2%
contribution from acquisitions and a 1% adverse impact of
currency. Revenue is expected to be lower organically due to our CMS
contract now being in its new five-year agreement, the
annualisation of our previously announced exit from certain
low-margin contracts, and contract mix change in immigration, as we
support the UK Government's efforts to reduce the number of asylum
seekers being accommodated in hotels. These factors will be
partially offset by increased contribution from newer contracts
ramping up, new business and growth in the existing
portfolio. EHC, the leading provider of immigration services in Germany
we have agreed to acquire, is expected to complete in March 2024
and to contribute revenue of around £100m.
Underlying operating profit: Underlying operating profit is expected to grow by around 5%
to £260m, including an expected currency drag of £4m, with margins
increasing by around 30 basis points. The year will benefit from
new contracts ramping up, operational efficiency improvements
across the existing portfolio and a contribution from acquisitions.
We expect these to more than offset the mobilisation costs on new
work, lower immigration volumes in the UK and Australia, and CMS
operating in its new contract term. Following our success in
winning the Functional Assessment Services and electronic
monitoring contracts in the UK in the fourth quarter, we expect
around £13m of mobilisation costs relating to these in
2024.
Net finance costs and tax: Net
finance costs are expected to be around £35m. This is more than
2023 due to higher interest rates, increased
volume of lease-related interest and acquisition spend. The
underlying effective tax rate is expected to be around 25%,
although this is sensitive to the geographic mix of our profit and
any changes to current corporate tax rates.
Financial position: Free cash
flow is again expected to be strong at around £140m in the year,
consistent with our ongoing expectation of converting at least 80%
of profit into cash. This is below 2023, as this included the
benefit of actions taken to structurally improve our working
capital. We expect adjusted net debt to end the year at around
£175m, including the acquisitions of EHC and Climatize, and the
£140m share buyback announced today.
Summary of guidance for 2024
|
2023 Actual
unaudited
|
2024 Initial
guidance
14 December
2023
|
2024 New
guidance
|
Revenue
|
£4.9bn
|
~£4.8bn
|
~£4.8bn
|
Organic sales growth
|
4%
|
~(3)%
|
~(3)%
|
Underlying operating profit
|
£249m
|
~£260m
|
~£260m
|
Net finance costs
|
£25m
|
~£33m
|
~£35m
|
Underlying effective tax rate
|
23%
|
~25%
|
~25%
|
Free Cash Flow
|
£209m
|
~£140m
|
~£140m
|
Adjusted Net Debt
|
£109m
|
~£85m
|
~£175m
|
NB: The guidance uses an average
GBP:USD exchange rate of 1.26 in 2024, GBP:AUD of 1.93 and GBP:EUR
of 1.17(8). We expect a weighted average number of
shares in 2024 of 1,065m for basic EPS and 1,085m for diluted
EPS.
Outlook for growth in the
medium-term
Our medium-term targets remain unchanged. We
expect to grow revenue at an average of 4-6% a year. Our focus on
productivity and efficiency will help us increase our
margins. At
least 80% of our operating profit will be converted into
cash.
Divisional Reviews
Serco's operations are reported as
four regional divisions: North America; UK & Europe (UK&E);
the Asia Pacific region; 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 operating profit.
Year ended 31 December 2023
|
North
America
|
UK&E
|
Asia
Pacific
|
Middle
East
|
Corporate
costs
|
Total
|
unaudited
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Revenue
|
1,362.8
|
2,439.5
|
845.1
|
226.4
|
-
|
4,873.8
|
Change
|
+7%
|
+16%
|
(11)%
|
+8%
|
|
+7%
|
Change at constant currency
|
+8%
|
+16%
|
(7)%
|
+9%
|
|
+8%
|
Organic change at constant currency
|
+8%
|
+7%
|
(7)%
|
+9%
|
|
+4%
|
|
|
|
.
|
|
|
|
Underlying operating profit / (loss)
|
138.2
|
120.8
|
23.7
|
15.3
|
(49.3)
|
248.7
|
Margin
|
10.1%
|
5.0%
|
2.8%
|
6.8%
|
(1.0)%
|
5.1%
|
Change
|
1%
|
68%
|
(58)%
|
(4)%
|
11%
|
5%
|
|
|
|
|
|
|
|
Amortisation of intangibles arising
on acquisition
|
(16.0)
|
(3.4)
|
(11.5)
|
-
|
-
|
(30.9)
|
Exceptional operating
items
|
-
|
9.9
|
-
|
-
|
43.9
|
53.8
|
Reported operating profit / (loss)
|
122.2
|
127.3
|
12.2
|
15.3
|
(5.4)
|
271.6
|
Year ended 31 December 2022
|
North
America
|
UK&E
|
Asia
Pacific
|
Middle
East
|
Corporate
costs
|
Total
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Revenue
|
1,269.8
|
2,100.2
|
954.6
|
209.4
|
-
|
4,534.0
|
|
|
|
|
|
|
|
Underlying operating profit / (loss)
|
136.6
|
72.1
|
56.9
|
16.0
|
(44.6)
|
237.0
|
Margin
|
10.8%
|
3.4%
|
6.0%
|
7.6%
|
(1.0)%
|
5.2%
|
|
|
|
|
|
|
|
Amortisation of intangibles arising
on acquisition
|
(16.5)
|
(1.5)
|
(3.6)
|
-
|
-
|
(21.6)
|
Exceptional operating
items
|
(1.2)
|
(1.2)
|
-
|
-
|
-
|
(2.4)
|
Other non-underlying
items
|
0.1
|
4.1
|
-
|
-
|
-
|
4.2
|
Reported operating profit / (loss)
|
119.0
|
73.5
|
53.3
|
16.0
|
(44.6)
|
217.2
|
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 17 to 29. 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 30 to
51. Included in note 2 to the Group's 2022 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.
North America (28% of revenue, 46% of underlying operating
profit)
Year ended 31 December
|
2023
|
2022
|
Growth
|
£m
|
unaudited
|
|
|
Revenue
|
1,362.8
|
1,269.8
|
7%
|
Organic change
|
8%
|
(1)%
|
|
Acquisitions
|
-%
|
3%
|
|
Currency
|
(1)%
|
11%
|
|
Underlying operating profit
|
138.2
|
136.6
|
1%
|
Organic change
|
1%
|
6%
|
|
Acquisitions
|
-%
|
-%
|
|
Currency
|
-%
|
11%
|
|
Margin
|
10.1%
|
10.8%
|
(62)bps
|
Revenue grew by 7% to £1,363m
(2022: £1,270m), with organic growth of 8% and a 1% adverse
translational effect of currency. The two main sectors for our
North America business are Defence and Citizen Services, and both
saw growth in the period. Our Defence business delivered organic
revenue growth of 8% as the high level of new work secured in 2022
ramped up. Citizen Services also showed good progress with 7%
organic revenue growth, driven by higher demand for our case
management services and the start of our new employment services
work in Canada. These contracts with the Government of Ontario were
secured by leveraging the work we do in the UK for the Department
of Work and Pensions.
Underlying operating profit grew
by 1% in the year to £138m (2022: £137m). Currency had a negligible
impact, meaning underlying operating profit on a constant currency
basis also grew by1%. The profit outcome was lower than revenue as
good performance in case management was more than offset by new
contracts being in a lower margin, mobilisation stage, and some
defence IT management work transitioning from its more profitable
installation phase to sustainment operations. Margins reduced from
10.8% to 10.1% as a result.
Order intake was strong at £2.1bn,
around 45% of the total for the Group and a book-to-bill ratio of
1.5x. Of this, new business wins were around 25% of the order
intake, continuing the strong momentum of 2022. The largest single
new business win was in Canada. Following on from our success in
2022, we were again selected by the Government of Ontario to
support part of their Employment Services Transformation program,
which will help unemployed people back into work.
The contract signed this year is
expected to be worth around £140m over five years. It was an active
period for rebids and extensions, and we were pleased to achieve a
win rate of around 95% on these, above our usual 80-90% range. This
included the successful rebid of our Centers for Medicare &
Medicaid Services (CMS) work, which sees us continue to support
eligibility determinations for citizens purchasing health insurance
through the Federal Health Insurance Exchanges.
The new contract started on 1 July
2023 and has an estimated total value to Serco, subject to workload
volumes, of approximately $690m (£570m), if all option periods are
exercised over its term of just over four and a half years. Other
notable retained work in the year included our driver examination
services contract in Ontario, where we secured a three-year
extension worth an estimated £220m and our force protection work
for the US Navy, with the new five-year contract expected to be
worth approximately £160m.
The pipeline of major new bid
opportunities due for decision within the next 24 months in North
America has increased from £2.5bn at the end of 2022 to £3.2bn at
the end of 2023. It is pleasing to see the pipeline at such a
healthy level given the high order intake in both 2022 and 2023.
North America represents approximately 35% of the total Group
pipeline. Defence makes up the largest proportion of the North
American pipeline, with a broad spread of types of work. There are
also significant opportunities in Citizen Services, where we have
been actively seeking to grow.
UK
& Europe (50% of revenue, 41% of underlying operating
profit)
Year ended 31 December
|
2023
|
2022
|
Growth
|
£m
|
unaudited
|
|
|
Revenue
|
2,439.5
|
2,100.2
|
16%
|
Organic change
|
7%
|
(5)%
|
|
Acquisitions
|
8%
|
3%
|
|
Currency
|
1%
|
-%
|
|
Underlying operating profit
|
120.8
|
72.1
|
68%
|
Organic change
|
55%
|
(27)%
|
|
Acquisitions
|
12%
|
2%
|
|
Currency
|
1%
|
-%
|
|
Margin
|
5.0%
|
3.4%
|
152bps
|
Revenue increased by 16% to
£2,440m (2022: £2,100m),
with 7% organic growth, an 8% contribution from acquisitions and a
1% favourable translational effect of currency. ORS, the business
we acquired in September 2022 to enter the European immigration
services market, traded ahead of expectations with robust
underlying demand due to global migration patterns. Covid-related
work, which fully concluded in the first half of 2022, was a drag
of £79m, or 4%. This was more than offset by strong growth for our
immigration services in both the UK and Europe, and good growth in
our defence and justice businesses. We exclude the revenue from our
joint ventures, however, our VIVO Defence Services work for the
Defence Infrastructure Organisation, which when won in 2021
included one of the largest contracts ever secured by Serco,
continued to ramp up. Were revenue from our joint ventures to be
included, it would add a further 10% to organic revenue growth, as
our VIVO work experienced robust demand.
Underlying operating profit
increased by 68% to £121m (2022: £72m). Strong demand for
immigration services, the ramp up of contracts signed in prior
years, improved performance across a range of existing contracts
and the ORS acquisition more than offset the drag from
Covid-related work. The year also benefitted from a £6m one-off
settlement of a dispute on a contract. The margin increased by
around 150bps to 5.0% (2022: 3.4%) because of these
factors.
Underlying operating 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 4.5% (2022: 3.2%).
The joint venture and associate profit contribution increased to
£29m (2022: £12m) due to our VIVO work continuing to ramp up,
Merseyrail seeing improved performance and the one-off settlement
mentioned above being included.
Order intake was around £1.9bn, a
book-to-bill ratio of 0.8x and around 40% of the total intake for
the Group. The low book-to-bill reflected 2023 being relatively
quiet in terms of rebids and contract award decisions for new work.
Our win rates, having dipped in the second half of 2022, rebounded
in 2023. New business represented nearly 60% of the order intake
and our win rate on new work was around 60%. Our win rate by value
on rebids and extensions was more than 95%. Agreements signed
included a £350m five-year contract to deliver functional health
assessments in the south-west of England for the Department of Work
and Pensions to determine disability benefits, a contract to
deliver electronic monitoring services in England and Wales that is
expected to be worth £200m over its initial six-year term, and a
contract with the UK Home Office to run the Derwentside Immigration
Removal Centre. The new contract has an estimated value of around
£80m over the initial nine-year term. Also in the Justice &
Immigration sector, increases in the numbers of service users
led to us securing additional immigration
accommodation work that is expected to
generate around £300m of revenue in 2024.
The pipeline of new opportunities
in the UK & Europe increased by around 30% to £4.8bn (December
2022: £3.7bn), with significant new opportunities across Justice
& Immigration, Defence and Citizen Services.
Asia Pacific (17% of revenue, 8% of underlying operating
profit)
Year ended 31 December
|
2023
|
2022
|
Growth
|
£m
|
unaudited
|
|
|
Revenue
|
845.1
|
954.6
|
(11)%
|
Organic change
|
(7)%
|
-%
|
|
Acquisitions
|
-%
|
2%
|
|
Currency
|
(4)%
|
3%
|
|
Underlying operating profit
|
23.7
|
56.9
|
(58)%
|
Organic change
|
(56)%
|
13%
|
|
Acquisitions
|
-%
|
(6)%
|
|
Currency
|
(2)%
|
4%
|
|
Margin
|
2.8%
|
6.0%
|
(316)bps
|
Our Asia Pacific business had a
difficult year. Volume-variable work, which as part of a portfolio
we expect to ebb and flow, reduced in the period, tight labour
markets created operational challenges and new business wins did
not meet our expectations. We have appointed a new CEO for the
business, Andrew Head, identified actions and designed what we
believe to be an achievable plan to ensure the business is well
positioned for the opportunities we expect in the coming years.
Asia Pacific remains an important market for Serco.
Revenue reduced by 11% to £845m
(2022: £955m). The business contracted by 7% organically and
adverse currency moves had a 4% impact.
Revenue fell because of lower volume-variable work
in parts of the immigration network, reduced work in facilities
management and a combination of tight labour markets and some lost
work in the Citizen Services sector.
Underlying operating profit
reduced by 58% to £24m (2022: £57m), representing a margin of 2.8%
(2022: 6.0%). Profit fell more than revenue
due to a negative mix impact from the lower immigration volumes,
some initial stranded costs on lost contracts and labour market
disruption making it difficult to recruit enough people to meet
customer headcount targets.
Order intake was £0.3bn,
continuing a recent record of low win rates on new work. Our
investor pipeline for new business currently stands at £1.3bn in
the year. Defence makes up around 90% of the pipeline with
opportunities also in the transport and health sectors.
Our immigration services work in
Australia, which is contracted until December 2024, and one of the
largest contracts in the Group, is currently in a competitive rebid
process. Serco has been providing immigration services as a partner
to the Australian Government since October 2009, with our work
having been successfully rebid and extended over this period. Our
performance levels have been high on the current contract and we
believe we have submitted a compelling bid. The final outcome of
the tender process is expected before the end of the third quarter
of 2024.
Middle East (5% of revenue, 5% of underlying operating
profit)
Year ended 31 December
|
2023
|
2022
|
Growth
|
|
£m
|
unaudited
|
|
|
|
Revenue
|
226.4
|
209.4
|
8%
|
|
Organic change
|
9%
|
(28)%
|
|
|
Acquisitions
|
-%
|
-%
|
|
|
Currency
|
(1)%
|
8%
|
|
|
Underlying operating profit
|
15.3
|
16.0
|
(4)%
|
|
Organic change
|
(2)%
|
8%
|
|
|
Acquisitions
|
-%
|
-%
|
|
|
Currency
|
(2)%
|
9%
|
|
|
Margin
|
6.8%
|
7.6%
|
(88)bps
|
|
Revenue grew by 8% to £226m (2022:
£209m). The business grew by 9% organically and currency moves had
a 1% adverse impact. Organic growth was driven by the Citizen
Services sector, where our new advisory business unit is gaining
traction. Underlying operating profit reduced to £15m (2022: £16m).
Profit was negatively impacted by stopping services with a customer
where we had debtor collection issues and by costs on some health
and facilities management work we exited. These more than offset
the higher margins being achieved on our advisory work. Margins
decreased from 7.6% to 6.8% as a
result.
Order intake was around £0.3bn, or
7% of the total for the Group and a book-to-bill ratio of 1.5x.
Around 60% of the order intake was new business. The largest win was a contract to provide Fire Rescue,
Emergency and Ambulatory Services in the NEOM economic zone in
Saudi Arabia, which is estimated to be worth around £50m over eight
years, and we also won a £40m, five-year, contract with Red Sea
Global to act as the managing agent for their full suite of
sustainable mobility services across Saudi Arabia's visionary new
tourism destination. In addition, we secured a three-year contract
worth approximately £30m to provide Customer Experience services
within Terminal A of the newly opened Zayed International Airport
in Abu Dhabi. Since the end of our contract to run the Dubai Metro,
our Middle East business has been exploring new potential areas of
demand and has invested in developing an advisory business in the
region. The year saw this begin to pay off with several agreements
being secured to advise customers in the region as they embark on
ambitious new multi-year projects.
We were successful on all our key
rebids in the period, including renewing our agreement with the
Australian Defence Force to continue to provide logistics and a
full suite of base services for their locations in the Middle East,
which has an estimated value of approaching £60m over three years.
We also secured a three-year extension to our contract for the
delivery of integrated facilities and support services at the
United Arab Emirates University in Al Ain, which is expected to be
worth around £50m.
Our pipeline of major new bid
opportunities in the Middle East totals around £0.8bn and includes
increasing opportunities in Defence and potential work in the
Citizen Service sector.
_____________________________________________________________________________________________________
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. Underlying corporate costs
increased by £4.7m to £49.3m (2022: £44.6m). The higher level in
2023 was primarily related to an increase in audit fees and the
transition of Group Chief Executive, as Rupert Soames, who stepped
down as Group Chief Executive on 31 December 2022, acted as a
strategic adviser to the Group in 2023 until his retirement in
September 2023.
Dividend calendar, if approved at the AGM
Ex-dividend date 18 April
2024
Record date 19 April
2024
Final dividend payable 10 May
2024.
LEI:
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" or, in each case, their
negative or other variations or comparable terminology 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 (including under the UK Listing Rules and the
Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority), 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 year ended 31 December
|
Underlying
|
Non Underlying
items
|
Reported
|
Underlying
|
Non
Underlying items
|
Reported
|
2023
|
2023
|
2023
|
2022
|
2022
|
2022
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
unaudited
|
unaudited
|
unaudited
|
|
|
|
Revenue
|
4,873.8
|
-
|
4,873.8
|
4,534.0
|
-
|
4,534.0
|
Cost of sales
|
(4,378.3)
|
-
|
(4,378.3)
|
(4,044.7)
|
4.2
|
(4,040.5)
|
Gross profit
|
495.5
|
-
|
495.5
|
489.3
|
4.2
|
493.5
|
Administrative expenses
|
(275.8)
|
-
|
(275.8)
|
(264.3)
|
-
|
(264.3)
|
Exceptional operating
items
|
-
|
53.8
|
53.8
|
-
|
(2.4)
|
(2.4)
|
Amortisation and impairment of
intangibles arising on acquisition
|
-
|
(30.9)
|
(30.9)
|
-
|
(21.6)
|
(21.6)
|
Share of results of joint ventures
and associates, net of interest and tax
|
29.0
|
-
|
29.0
|
12.0
|
-
|
12.0
|
Operating profit / (loss)
|
248.7
|
22.9
|
271.6
|
237.0
|
(19.8)
|
217.2
|
Margin
|
5.1%
|
|
5.6%
|
5.2%
|
|
4.8%
|
Net finance costs
|
(24.6)
|
-
|
(24.6)
|
(20.4)
|
-
|
(20.4)
|
Profit before tax
|
224.1
|
22.9
|
247.0
|
216.6
|
(19.8)
|
196.8
|
Tax (charge)/credit
|
(50.8)
|
6.2
|
(44.6)
|
(47.9)
|
6.1
|
(41.8)
|
Effective tax rate
|
22.7%
|
|
18.1%
|
22.1%
|
|
21.2%
|
Profit for the period
|
173.3
|
29.1
|
202.4
|
168.7
|
(13.7)
|
155.0
|
Attributable to:
|
|
|
|
|
|
|
Equity attributable to owners of the
Company
|
173.3
|
29.1
|
202.4
|
169.1
|
(13.7)
|
155.4
|
Non-controlling interest
|
-
|
-
|
-
|
(0.4)
|
-
|
(0.4)
|
Earnings per share (EPS)
|
|
|
|
|
|
|
Basic EPS
|
15.61p
|
|
18.23p
|
14.18p
|
|
13.03p
|
Diluted EPS
|
15.36p
|
|
17.93p
|
13.92p
|
|
12.79p
|
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 income or expense are being
excluded in an APM, these are included elsewhere in our reported
financial information as they represent actual income or expense 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 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.
Consolidation of profit measures
The Group is simplifying its
profit measures by removing Trading Profit and renaming underlying
trading profit (UTP) to underlying operating profit (UOP). The
historic UOP presented is consistent with the equivalent reported
UTP in that period.
The UTP definition was introduced
in 2015 to exclude onerous contract provision (OCP) releases or
charges, other Contract and Balance Sheet Review adjustments,
depreciation and amortisation of assets held for sale, and some
other one-time items. It was maintained to ensure there was
transparency outside the underlying results of large charges and
releases from the portfolio of onerous contracts recorded in 2014.
These definitions are no longer required as the Contract and
Balance Sheet Review Adjustments recorded in 2014 are now at an
insignificant level. In the future, no items will be recorded
between UTP and Trading Profit, meaning the additional measure no
longer adds any value.
Items excluded from UOP will be
the amortisation and impairment of intangibles arising on
acquisition and exceptional operating items (and in the prior year
other non-underlying items), which is consistent with the items
previously excluded from Trading Profit. The methodology applied to
calculating other APMs has not changed since 31 December
2022.
Alternative revenue measures
|
2023
|
2022
|
For the year ended 31 December
|
£m
|
£m
|
|
unaudited
|
|
Reported revenue at constant
currency1
|
4,906.3
|
4,534.0
|
Foreign exchange
differences
|
(32.5)
|
-
|
Reported revenue at reported
currency
|
4,873.8
|
4,534.0
|
1
|
In order to provide a comparable
movement on the previous year's results, reported revenue is
recalculated by translating non-Sterling values into Sterling at
the average exchange rates for the year ended 31 December
2022.
|
|
Organic
Revenue1
|
Organic
Revenue1
|
Revenue plus share of joint
ventures and associates2
|
Revenue plus share of joint
ventures and associates2
|
|
2023
|
2022
|
2023
|
2022
|
For the year ended 31 December
|
£m
|
£m
|
£m
|
£m
|
|
unaudited
|
|
unaudited
|
|
Alternative revenue measure at
constant currency3
|
4,663.9
|
4,465.1
|
5,379.7
|
4,771.9
|
Foreign exchange
differences
|
(43.5)
|
-
|
(32.5)
|
-
|
Alternative revenue measure at
reported currency
|
4,620.4
|
4,465.1
|
5,347.2
|
4,771.9
|
Impact of relevant acquisitions or
disposals
|
253.4
|
68.9
|
-
|
-
|
Share of joint venture and
associates
|
-
|
-
|
(473.4)
|
(237.9)
|
Reported revenue at reported currency
|
4,873.8
|
4,534.0
|
4,873.8
|
4,534.0
|
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 relevant acquisitions or disposals. There
are two acquisitions excluded for the calculation of organic
revenue in the year to 31 December 2023 being the acquisitions of
OXZ Holdings AG (ORS) and Sapienza Consulting Holdings BV
(Sapienza). The prior year figure is recalculated on a consistent
basis to the acquisitions or disposals removed in the current year
and therefore may not agree to the organic revenue previously
reported.
|
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.
|
3
|
In order to provide a comparable
movement on the previous period's results, the alternative revenue
measures are recalculated by translating non-Sterling values into
Sterling at the average exchange rates for the year ended 31
December 2022.
|
Alternative profit measures
|
2023
|
2022
|
For the year ended 31 December
|
£m
|
£m
|
|
unaudited
|
|
Underlying operating profit at
constant currency1
|
248.9
|
237.0
|
Foreign exchange
differences1
|
(0.2)
|
-
|
Underlying operating profit at reported
currency2
|
248.7
|
237.0
|
Non-underlying items:
|
|
|
Amortisation and impairment of
intangibles arising on acquisition3
|
(30.9)
|
(21.6)
|
Exceptional operating
items4
|
53.8
|
(2.4)
|
Other non-underlying
items4
|
-
|
4.2
|
Reported operating profit
|
271.6
|
217.2
|
1
|
In order to provide a comparable
movement on the previous period's results, reported UOP is
recalculated by translating non-Sterling values into Sterling at
the average exchange rates for the year ended 31 December
2022.
|
2
|
The Group uses an alternative
measure, UOP, to make adjustments for items considered material and
outside of the normal operating practice of the Group to be
suitable for separate presentation and detailed
explanation.
|
3
|
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.
|
4
|
Exceptional operating items (and in
the prior year other non-underlying items) are those items
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 is to
ensure they are treated consistently with prior periods.
|
Alternative Earnings per share (EPS)
measures
|
2023
|
2022
|
2023
|
2022
|
For the year ended 31 December
|
basic
pence
|
basic
pence
|
diluted
pence
|
diluted
pence
|
|
unaudited
|
|
unaudited
|
|
Underlying EPS1
|
15.61
|
14.18
|
15.36
|
13.92
|
Non-underlying items:
|
|
|
|
|
Net impact of non-underlying
operating items, non underlying tax and amortisation and impairment
of intangibles arising on acquisition
|
(2.02)
|
(0.97)
|
(1.99)
|
(0.95)
|
Exceptional operating items, net of
tax
|
4.64
|
(0.18)
|
4.56
|
(0.18)
|
Reported EPS
|
18.23
|
13.03
|
17.93
|
12.79
|
1
|
Reflecting the same adjustments
made to operating profit to calculate UOP 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 one-time effects described
above.
|
Alternative cash flow and Net Debt measures
Free cash flow
(FCF)
|
2023
|
2022
|
For the year ended 31 December
|
£m
|
£m
|
|
unaudited
|
|
Free cash flow1
|
209.2
|
159.1
|
Exclude dividends from joint
ventures and associates
|
(21.1)
|
(9.1)
|
Exclude net interest
paid
|
26.5
|
22.5
|
Exclude capitalised finance costs
paid
|
-
|
2.6
|
Exclude capital element of lease
repayments
|
124.4
|
120.5
|
Exclude proceeds received from
exercise of share options
|
-
|
(0.1)
|
Exclude purchase of own shares to
satisfy share awards
|
22.9
|
15.9
|
Exclude purchase of intangible and
tangible assets net of proceeds from disposal
|
21.9
|
18.7
|
Net cash inflow from underlying operating
activities
|
383.8
|
330.1
|
Non-underlying cash flows from
operating activities
|
9.3
|
(2.9)
|
Net cash inflow from operating activities
|
393.1
|
327.2
|
1
|
Free cash flow is the net cash flow
from operating activities adjusted to remove the impact of
non-underlying cash flows from operating activities, adding
dividends we receive from joint ventures and associates and
deducting net interest, net capital expenditure on tangible and
intangible asset purchases and the purchase of own shares to
satisfy share awards.
|
Trading cash
conversion
|
2023
|
2022
|
For the year ended 31 December
|
£m
|
£m
|
|
unaudited
|
|
Free cash flow1
|
209.2
|
159.1
|
Add back:
|
|
|
Tax paid
|
41.1
|
44.2
|
Non-cash R&D
expenditure
|
0.4
|
0.4
|
Net interest paid
|
26.5
|
22.5
|
Capitalised finance costs
paid
|
-
|
2.6
|
Trading cash flow
|
277.2
|
228.8
|
Underlying operating profit
|
248.7
|
237.0
|
Trading cash conversion1
|
111%
|
97%
|
1
|
In order to calculate an
appropriate cash conversion metric equivalent to UOP, trading cash
flow is derived from FCF by excluding capitalised finance costs,
interest, non-cash R&D expenditure and tax items. Trading 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 capitalised finance costs, interest,
non-cash R&D expenditure, tax and non-underlying
items.
|
Net Debt and Adjusted Net
Debt
|
2023
|
2022
|
As
at 31 December
|
£m
|
£m
|
|
unaudited
|
|
Cash and cash
equivalents
|
94.4
|
57.2
|
Loans payable
|
(206.2)
|
(262.9)
|
Lease liabilities
|
(453.7)
|
(446.0)
|
Derivatives relating to Net
debt
|
3.1
|
1.8
|
Net debt1
|
(562.4)
|
(649.9)
|
Add back: Lease
liabilities
|
453.7
|
446.0
|
Adjusted net debt2
|
(108.7)
|
(203.9)
|
1
|
Alternative measures bring together
the various funding sources that are included on the Group's
Consolidated Balance Sheet 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 IFRS 16 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.
|
Return on invested capital (ROIC)
|
2023
|
2022
|
For the year ended 31 December
|
£m
|
£m
|
|
unaudited
|
|
ROIC excluding right of use assets
|
|
|
Non current assets
|
|
|
Goodwill
|
906.7
|
945.0
|
Other intangible assets -
owned
|
115.6
|
158.0
|
Property, plant and equipment -
owned
|
44.3
|
48.1
|
Interest in joint
ventures
|
32.1
|
23.3
|
Loans to joint ventures
|
-
|
10.0
|
Contract assets, trade and other
receivables
|
14.8
|
16.1
|
Current assets
|
|
|
Inventory
|
24.1
|
22.4
|
Loans to joint ventures
|
10.0
|
-
|
Contract assets, trade and other
receivables
|
625.6
|
719.6
|
Total invested capital assets
|
1,773.2
|
1,942.5
|
Current liabilities
|
|
|
Contract liabilities, trade and
other payables
|
(593.8)
|
(683.3)
|
Non current liabilities
|
|
|
Contract liabilities, trade and
other payables
|
(68.5)
|
(42.8)
|
Total invested capital liabilities
|
(662.3)
|
(726.1)
|
Invested capital1
|
1,110.9
|
1,216.4
|
Two point average of opening and closing invested
capital
|
1,163.7
|
1,151.8
|
Underlying operating profit 12 months
|
248.7
|
237.0
|
Underlying ROIC %2
|
21.4%
|
20.6%
|
1
|
Invested capital excludes right of
use assets recognised under IFRS 16 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 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 UOP, 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
Reported revenue increased by 7.5%
in the year to £4,873.8m (2022: £4,534.0m), a 8.2% increase at
constant currency. Organic revenue at constant currency increased
by 4.4%. This is in line with the trading update issued on 14
December 2023 where revenue was expected to be at least £4.8bn for
the year ended 31 December 2023. Revenue including the Group's share of joint ventures has
increased by 12.1% in the year to £5,347.2m (2022: £4,771.9m) a
12.7% increase at constant currency.
Commentary on the revenue
performance of the Group is provided in the Chief Executive's
Review and the Divisional Reviews sections.
Underlying operating profit (UOP)
UOP increased by 4.9% in the year
to £248.7m (2022: £237.0m), a 5.0% increase at constant currency.
This is marginally higher than the trading update issued on 14
December 2023 where UOP was expected to be around £245m for the
year ended 31 December 2023.
Commentary on the underlying
performance of the Group is provided in the Chief Executive's
Review and the Divisional Reviews sections.
Exceptional operating items
Exceptional operating 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 2023, the total exceptional credit net
of tax was £51.5m (2022: charge of £2.1m).
The Group released provisions held
for indemnities provided on disposed businesses totalling £43.9m
predominantly due to the claims period ending. The Group also
received £9.9m compensation on the early termination of a contract
which, due to the size of the settlement, has been disclosed as
exceptional.
Exceptional tax for the period was
a tax charge of £2.3m (2022: credit of £0.3m) which arises on
exceptional operating items within operating profit.
Finance costs and investment revenue
Net finance costs recognised in
the income statement were £24.6m (2022: £20.4m), consisting of
investment revenue of £7.0m, less finance costs of
£31.6m.
Investment revenue of £7.0m (2022:
£4.7m) consists of interest accruing on net retirement benefit
assets of £3.1m (2022: £2.7m) and interest income of £3.9m (2022:
£1.9m).
Finance costs of £31.6m (2022:
£25.1m) include interest incurred on loans, primarily the US
private placement loan notes and the revolving credit facility of
£15.6m (2022: £15.2m) and lease interest expense of £13.1m (2022:
£7.9m) as well as other financing related costs including the
impact of foreign exchange on financing activities.
Net interest paid recognised in
the cash flow statement was £26.5m (2022: £22.5m), consisting of
interest received of £3.9m less interest paid of £30.4m.
Tax
Underlying tax
The underlying tax charge
recognised in the year was £50.8m (2022: £47.9m). The effective tax
rate of 22.7% is marginally higher than in 2022 (22.1%). The
increase compared with 2022 is due to smaller credits recognised in
2023 in connection with the finalisation of tax filings and
movement in provisions as part of the regular reassessment of tax
exposures across the Group. This has been offset by the change in
mix of where profits have arisen.
The tax rate at 22.7% is slightly
lower than the UK standard corporation tax rate of 23.5%. This is
mainly due to the impact of the profits of joint ventures and
associates whose post-tax profits are included in the Group's
profit before tax (reducing the rate by 3.0%) together with the
reduction in provisions held for uncertain tax positions which
reduced the rate by 0.4%. This is partially offset by the impact of
the higher statutory rate of tax on overseas profits (increasing
the rate by 0.9%), the impact of unprovided UK deferred tax in a
company that ceased trading in the year (0.5% increase in the
rate), the impact of unprovided overseas deferred tax (increasing
the rate by 0.2%), and tax disallowable costs (increase the rate by
0.4%). Other smaller items result in a net increase to the rate of
0.6%.
Non-underlying tax
A tax credit of £6.2m (2022: £6.1m)
arises on non-underlying items which comprises of:
-
|
A tax credit of £8.5m (2022: £5.8m)
due to tax deductions associated with the amortisation of
intangibles arising on acquisitions.
|
-
|
A non-underlying exceptional tax
charge for the period of £2.3m arising on compensation received for
early termination of a contract. The other exceptional credits,
which arise in the UK on the release of the indemnities, are not
subject to tax.
|
Deferred tax assets
At 31 December 2023, the Group has
recognised a net deferred tax asset of £184.8m (2022: £190.4m).
This consists of a deferred tax asset of £235.7m (2022: £244.2m)
and a deferred tax liability of £50.9m (2022: £53.8m). A £179.9m UK
deferred tax asset has been recognised on the Group's balance sheet
at 31 December 2023 (2022: £186.9m) on the basis that the
performance in the underlying UK business indicates sustained
profitability which will enable the accumulated tax losses within
the UK to be utilised.
Taxes paid
Net corporate income tax of £41.1m
(2022: £44.2m) was paid during the year, relating to the Group's
operations in Asia Pacific (£12.3m), North America (£24.1m), UK
(£2.7m), Europe (£0.9m) and the Middle East (£1.1m). The payments
made in the UK consisted of £3.6m to HMRC, offset by £0.9m received
from the Group's joint ventures and associates for losses sold to
them. The amount of tax paid, £41.1m, differs slightly from the tax
charge in the period, £44.6m, mainly because taxes paid/received
from Tax Authorities can arise in later periods to the associated
tax charge/credit. This is particularly the case with regards to
movements in deferred tax, such as on the use of prior year losses,
and provisions for uncertain tax positions.
Total tax contribution
The Group's published tax strategy
of paying the appropriate amount of tax as determined by local
legislation in the countries in which it operates means that a
variety of taxes are paid across the globe. To increase the
transparency of the Group's tax profile, the cash taxes that have
been paid across its regional markets is shown below.
In total during 2023, Serco
globally contributed £914.5m of tax to government in the
jurisdictions in which it operates.
Taxes by category
unaudited
|
Taxes
borne
£m
|
Taxes
collected
£m
|
Total
£m
|
Total of Corporate Income
Tax
|
41.8
|
-
|
41.8
|
Total of VAT and similar
|
11.6
|
277.0
|
288.6
|
Total of People Taxes
|
165.9
|
401.2
|
567.1
|
Total Other Taxes
|
16.7
|
0.3
|
17.0
|
|
236.0
|
678.5
|
914.5
|
Taxes by region
unaudited
|
Taxes
borne
£m
|
Taxes
collected
£m
|
Total
£m
|
UK & Europe
|
126.3
|
362.8
|
489.1
|
Asia Pacific
|
39.4
|
176.8
|
216.2
|
North America
|
67.5
|
131.3
|
198.8
|
Middle East
|
2.8
|
7.6
|
10.4
|
|
236.0
|
678.5
|
914.5
|
Corporation tax, which is the only
cost to be separately disclosed in our Financial Statements, is
only one element of the Group's tax contribution. For every
£1 of corporate tax paid directly by the Group (tax borne), a
further £4.65 is borne in other business taxes. The largest
proportion of these is in connection with employing
people.
In addition, for every £1 of tax
borne, £2.88 is collected on behalf of national governments (taxes
collected). This amount is directly impacted by the number of
people employed and the sales made.
Dividend, share buyback and share count
During the year to
31 December 2023, the Group paid dividends of £33.7m (2022:
£30.3m) in respect of the final dividend for the year ended
31 December 2022 and the interim dividend for the year ended
31 December 2023. As noted in the
Chief Executive's Review, the Board has decided to declare a final
dividend of 2.27p per share in respect of
the year ended 31 December 2023
(2022:1.92p per share).
On 28 February 2023, the Group
announced its intention to repurchase ordinary shares with a value
of up to £90m. The buyback programme took place between 3 March and
22 June 2023. During this period, the Group repurchased 58,956,118
shares at an average cost of £1.51 for total cost including fees of
£88.8m. All shares held in treasury at 31 December 2022 and those
purchased in 2023 have been cancelled.
The weighted average number of
shares for EPS purposes was 1,110.2m for the year ended
31 December 2023 (2022: 1,192.2m) and diluted weighted average
number of shares was 1,128.6m (2022: 1,214.8m). The decrease in the
weighted average number of shares is primarily due to the full year
impact of therepurchase of 55,506,704 shares in 2022 and the impact
of the repurchase of 58,956,118 shares during 2023 which were all
cancelled in year.
Cash flows and net debt
UOP of £248.7m (2022: £237.0m)
converts into a trading cash inflow of £277.2m (2022: £228.8m). The
increase in trading cash inflows is mainly due to a £30.1m inflow
of working capital compared to an outflow of £24.4m in 2022. The
improvement in working capital is driven by 2023 benefiting from
some aged debt collection on ceased contracts and better payment
terms being experienced within our immigration contracts.
The Group saw a decrease in the debtor days from
22 days (2022) to 16 days (2023) and a decrease in creditor days
from 21 days (2022) to 20 days (2023) during the year, as the Group
continues to ensure its suppliers are paid on time. Including
accrued income and other unbilled receivables, day sales
outstanding for 2023 were 37.9 days (2022: 48.4
days).
The table below shows the cash
flow from underlying operating activities and Free Cash Flow (FCF)
reconciled to movements in Net Debt. FCF for the period was an
inflow of £209.2m compared to £159.1m in 2022. The movement
compared to 2022 is consistent with the increase in trading cash
flow above.
Adjusted net debt decreased by
£95.2m in the year to 31 December 2023, 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 year ended
31 December 2023 was £232.2m (2022: £231.0m). Peak Adjusted net
debt was £362.2m (2022: £376.8m)
For the year ended 31 December
|
2023
£m
|
2022
£m
|
|
unaudited
|
|
Underlying operating profit
|
248.7
|
237.0
|
Less: Share of profit from joint
ventures and associates
|
(29.0)
|
(12.0)
|
Movement in provisions
|
12.6
|
4.0
|
Depreciation, amortisation and
impairment of property, plant and equipment and intangible
assets
|
25.7
|
33.1
|
Depreciation and impairment of
right of use assets
|
126.1
|
121.7
|
Other non-cash movements
|
11.1
|
15.3
|
Working capital
movements
|
30.1
|
(24.4)
|
Tax paid
|
(41.1)
|
(44.2)
|
Non-cash R&D
expenditure
|
(0.4)
|
(0.4)
|
Net cash inflow from underlying operating
activities
|
383.8
|
330.1
|
Dividends received from joint
ventures and associates
|
21.1
|
9.1
|
Interest received
|
3.9
|
1.9
|
Interest paid
|
(30.4)
|
(24.4)
|
Capital element of lease
repayments
|
(124.4)
|
(120.5)
|
Capitalised finance costs
paid
|
-
|
(2.6)
|
Purchase of intangible and tangible
assets net of proceeds from disposals
|
(21.9)
|
(18.7)
|
Purchase of own shares to satisfy
share awards
|
(22.9)
|
(15.9)
|
Proceeds received from exercise of
share options
|
-
|
0.1
|
Free cash flow
|
209.2
|
159.1
|
Net cash outflow on acquisition and
disposal of subsidiaries, joint ventures and associates
|
(7.5)
|
(19.2)
|
Net increase in debt items on
acquisition and disposal of subsidiaries, joint ventures and
associates
|
-
|
(6.5)
|
Dividends paid to non-controlling
interests
|
(1.7)
|
-
|
Dividends paid to
shareholders
|
(33.7)
|
(30.3)
|
Purchase of own shares
|
(88.8)
|
(91.2)
|
Movements on other investment
balances
|
(0.7)
|
1.6
|
Loans to joint venture
|
-
|
(10.0)
|
Capitalisation and amortisation of
loan costs
|
(0.8)
|
1.4
|
Exceptional items
|
9.2
|
(2.9)
|
Cash movements on hedging
instruments
|
(1.5)
|
(2.7)
|
Foreign exchange gain/(loss) on
Adjusted net debt
|
11.5
|
(25.2)
|
Movement in Adjusted net debt
|
95.2
|
(25.9)
|
Opening Adjusted net
debt
|
(203.9)
|
(178.0)
|
Closing Adjusted net debt
|
(108.7)
|
(203.9)
|
Lease liabilities
|
(453.7)
|
(446.0)
|
Closing Net debt
|
(562.4)
|
(649.9)
|
Risk management and treasury operations
The Group's operations expose it to
a variety of financial risks that include access to 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 seek 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
which are reviewed annually. Financial instruments are only used
for hedging purposes and speculation is not permitted. A monthly
report is provided to senior management outlining performance
against the Treasury Policy.
Liquidity and funding
As at 31 December 2023, the Group
had committed funding of £558.8m (at 31 December 2022: £616.4m),
comprising £208.8m of US private placement loan notes, and a
£350.0m revolving credit facility which was undrawn. The US private
placement loan notes are repayable in bullet payments between 2024
and 2032. The Group does not engage in any external financing
arrangements associated with either receivables or
payables.
During the year ended 31 December
2023 total repayments of debt were £44.5m which related to US
private placement loan notes.
The Group's revolving credit
facility provides £350.0m of committed funding for five years from
the arrangement date in November 2022. The facility includes an
accordion option, providing a further £100.0m of funding
(uncommitted and therefore not incurring any fees) if required
without the need for additional documentation. This option has not
been included in the Group's assessment of available liquidity as
approvals are required to access the funding.
Interest rate risk
The Group has a preference for
fixed rate debt to reduce the volatility of net finance costs. The
Group's Treasury Policy requires it to maintain a minimum
proportion of fixed rate debt as a proportion of overall Adjusted
Net Debt and for this proportion to increase as the ratio of EBITDA
to interest expense falls. As at 31 December 2023, £208.8m of debt
was held at fixed rates and Adjusted Net Debt was
£108.7m.
Foreign exchange risk
The Group is subject to currency
exposure on the translation to Sterling of its net investments in
overseas subsidiaries. The Group seeks to manage this risk, where
appropriate, by borrowing in the same currency as those
investments. Group borrowings are predominantly denominated in
Sterling and US Dollars. The Group seeks to manage its currency
cash flows to minimise foreign exchange risk arising on
transactions denominated in foreign currencies and uses forward
contracts where appropriate to hedge net currency cash
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 US 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 covenant net finance costs of 3.0 times, tested
semi-annually. A reconciliation of the basis of calculation is set
out in the table below.
The covenants exclude the impact
of IFRS 16 Leases on the Group's results.
|
2023
|
2022
|
For the year ended 31 December
|
£m
|
£m
|
|
unaudited
|
|
|
|
|
Operating Profit
|
271.6
|
217.2
|
Remove: Exceptional
items
|
(53.8)
|
2.4
|
Remove: Amortisation and
impairment of intangibles arising on acquisition
|
30.9
|
21.6
|
Exclude: Share of joint
venture post-tax profits
|
(29.0)
|
(12.0)
|
Include: Dividends from joint
ventures
|
21.1
|
9.1
|
Add back: Net non-exceptional
charges/(releases) to OCPs
|
8.2
|
(1.0)
|
Add back: Net covenant OCP
utilisation
|
(3.2)
|
(1.3)
|
Add back: Depreciation,
mortization and impairment of owned property, plant and equipment
and non acquisition intangible assets
|
25.7
|
33.1
|
Add back: Depreciation,
mortization and impairment of property, plant and equipment and non
acquisition intangible assets held under finance leases - in
accordance with IAS17 Leases
|
4.3
|
4.8
|
Add back: Foreign exchange on
investing and financing arrangements
|
(0.9)
|
0.4
|
Add back: Share-based payment
expense
|
13.5
|
15.6
|
Net Other covenant adjustments to
EBITDA
|
(11.5)
|
(1.0)
|
Covenant EBITDA
|
276.9
|
288.9
|
Net finance costs
|
24.6
|
20.4
|
Exclude: Net interest
receivable on retirement benefit obligations
|
3.1
|
2.7
|
Exclude: Movement in discount
on other debtors
|
-
|
0.1
|
Exclude: Foreign exchange on
investing and financing arrangements
|
(0.9)
|
0.4
|
Other covenant adjustments to net
finance costs
|
(12.7)
|
(7.5)
|
Covenant net finance costs
|
14.1
|
16.1
|
Adjusted Net Debt
|
108.7
|
203.9
|
Obligations under finance leases -
in accordance with IAS17 Leases
|
17.4
|
21.8
|
Recourse Net Debt
|
126.1
|
225.7
|
Add back: Disposal vendor
loan note, encumbered cash and other adjustments
|
5.9
|
6.9
|
Covenant adjustment for average FX
rates
|
5.6
|
(8.2)
|
CTNB
|
137.6
|
224.4
|
CTNB / covenant EBITDA (not to exceed 3.5x)
|
0.50x
|
0.78x
|
Covenant EBITDA / Covenant net finance costs (at least
3.0x)
|
19.64x
|
17.94x
|
Net assets
At 31 December 2023, the
consolidated balance sheet shown on page 33 had net assets of £1,033.7m, a
movement of £4.0m from the closing net asset position of £1,029.7m
as at 31 December 2022. Whilst the Group generated total
comprehensive income of £138.5m during the year, returns to
shareholders totalled £122.5m through share buybacks and dividend
payments.
Key movements since
31 December 2022 on the consolidated balance sheet shown on
page 33 include:
-
|
A decrease in goodwill of £38.3m
driven predominantly by foreign exchange movements.
|
-
|
A reduction in other intangible
assets of £42.4m due to amortisation of £30.5m, the impairment of
customer relationships arising on the acquisition of £8.1m and a
revision to the provisional fair values of intangibles arising on
acquisition of ORS of £6.9m.
|
-
|
A decrease in the net retirement
benefit asset of £26.3m primarily in respect of SPLAS; further
details are provided in the pensions section below.
|
-
|
Provisions have reduced by £38.1m
predominately due to the £43.9m exceptional release of provisions
previously held for indemnities given on disposed
businesses.
|
-
|
Cash and cash equivalents have
increased by £37.2m. In the period the Group generated cash of
£383.8m from underlying operations. The net repayment of loans was
£44.5m and the capital element of lease repayments in the period
was £124.4m. Including associated costs, the spend on shares
repurchased during the year totalled £111.7m (£88.8m share buyback
and £22.9m to fund employee share options) and dividends totalling
£33.7m have been paid to shareholders.
|
-
|
Net loan balances have decreased by
£56.7m due to the £44.5m repayment of the US Private Placement loan
notes.
|
-
|
The movement in contract assets,
trade receivables and other assets, and, contract liabilities,
trade payables and other liabilities are as a result of normal
working capital movements.
|
Acquisitions
On 14 December 2023, Serco agreed
to acquire 100% of the share capital of European Homecare (EHC), a
specialist provider of immigration services to public sector
customers in Germany. The business will be acquired from
Korte-Stiftung for €40m (£34m) subject to final fair value
assessments. Subsequent to the balance
sheet date clearance has been obtained from the competition
authority and the acquisition is expected to complete on 1 March
2024.
On 14 December 2023, Serco agreed
to acquire 100% of the share capital of Climatize, a small but
fast-growing business that operates in the United Arab Emirates and
the Kingdom of Saudi Arabia offering 'zero-carbon' advisory and
related engineering services. The acquisition completed on 31
January 2024 for cash consideration of AED 9.0m (£1.9m) and
contingent consideration of up to AED 51.0m (£10.9m), payable on
achieving certain financial targets. Due to the timing of
completion, the measurement of the fair value of net assets
acquired and any goodwill to be recognised as a result of the
acquisition is in progress.
Pensions
During the year there continued to
be a high degree of volatility in the pensions market. Discount
rates and short-term inflation rates had been rising since 31
December 2021. Concerns over high global inflation, recession,
rising interest rates and sharp rises in bond yields continued
through to the third quarter of 2023 and, as inflation fell and
interest rates rose, bond yields fell slightly below the levels at
31 December 2022.
Despite the volatility, Serco's
pension schemes remain in a strong funding position and have an
accounting surplus, before tax, of £24.5m (2022: £50.8m), on scheme
gross assets of £1.1bn (2022 : £1.1bn) and gross liabilities of
£1.0bn (2022 £1.0bn). The decrease in the net retirement benefit
asset of £26.3m is primarily due to the Group's largest scheme,
Serco Pension and Life Assurance Scheme (SPLAS), and is as a result
of the following:
-
|
Discount rates being lower than
prior year resulting in an increase in pension
obligation
|
-
|
Actual inflation in 2023 was
higher than prior year assumptions resulting in an experience
adjustment increasing pension obligations
|
-
|
Updated mortality assumptions to
reflect the latest available actuarial projections resulting in a
reduction to pension obligations
|
-
|
Reductions to long term RPI
inflation assumptions have resulted in a decrease to pension
obligations
|
Based on the 2021 actuarial
funding valuation which was finalised in 2022 for SPLAS, the Group
has committed to make deficit recovery payments of £6.6m per year
from 2022 to 2030.
On 25 June 2023 the contract for
Caledonian Sleepers was transferred back to the Scottish Government
which included the transfer of obligations under the section of the
share costs pension scheme under the franchise agreement. In line
with the accounting under IAS 19 the Group held no liability for
this scheme on the balance sheet and therefore there is no gain or
loss through the income statement.
The opening net asset position led
to a net interest income within net finance costs of £3.1m (2022:
£2.7m).
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. As the claim progresses, 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
Condensed Consolidated Financial Statements
Consolidated Income Statement
For the year ended 31 December
2023 (unaudited)
|
Underlying
|
Non Underlying
items
|
Reported
|
Underlying
|
Non
Underlying items
|
Reported
|
|
2023
|
2023
|
2023
|
2022
|
2022
|
2022
|
|
unaudited
|
unaudited
|
unaudited
|
audited
|
audited
|
audited
|
For the year ended 31 December
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Revenue
|
4,873.8
|
-
|
4,873.8
|
4,534.0
|
-
|
4,534.0
|
Cost of sales
|
(4,378.3)
|
-
|
(4,378.3)
|
(4,044.7)
|
4.2
|
(4,040.5)
|
Gross profit
|
495.5
|
-
|
495.5
|
489.3
|
4.2
|
493.5
|
Administrative expenses
|
(275.8)
|
-
|
(275.8)
|
(264.3)
|
-
|
(264.3)
|
Exceptional operating
items
|
-
|
53.8
|
53.8
|
-
|
(2.4)
|
(2.4)
|
Amortisation and impairment of
intangibles arising on acquisition
|
-
|
(30.9)
|
(30.9)
|
-
|
(21.6)
|
(21.6)
|
Share of results of joint ventures
and associates, net of interest and tax
|
29.0
|
-
|
29.0
|
12.0
|
-
|
12.0
|
Operating profit / (loss)
|
248.7
|
22.9
|
271.6
|
237.0
|
(19.8)
|
217.2
|
Investment revenue
|
7.0
|
-
|
7.0
|
4.7
|
-
|
4.7
|
Finance costs
|
(31.6)
|
-
|
(31.6)
|
(25.1)
|
-
|
(25.1)
|
Net finance costs
|
(24.6)
|
-
|
(24.6)
|
(20.4)
|
-
|
(20.4)
|
Profit before tax
|
224.1
|
22.9
|
247.0
|
216.6
|
(19.8)
|
196.8
|
Tax (charge)/credit
|
(50.8)
|
6.2
|
(44.6)
|
(47.9)
|
6.1
|
(41.8)
|
Profit for the period
|
173.3
|
29.1
|
202.4
|
168.7
|
(13.7)
|
155.0
|
Attributable to:
|
|
|
|
|
|
|
Equity attributable to owners of the
Company
|
173.3
|
29.1
|
202.4
|
169.1
|
(13.7)
|
155.4
|
Non-controlling interest
|
-
|
-
|
-
|
(0.4)
|
-
|
(0.4)
|
Earnings per share (EPS)
|
|
|
|
|
|
|
Basic EPS
|
15.61p
|
|
18.23p
|
14.18p
|
|
13.03p
|
Diluted EPS
|
15.36p
|
|
17.93p
|
13.92p
|
|
12.79p
|
Consolidated Statement of Comprehensive
Income
For the year ended 31 December
2023 (unaudited)
|
|
2023
|
2022
|
|
|
unaudited
|
audited
|
|
|
£m
|
£m
|
Profit for the year
|
|
202.4
|
155.0
|
|
|
|
|
Other comprehensive income/(loss) for the
period:
|
|
|
|
|
|
|
|
Items that will not be reclassified subsequently to profit or
loss:
|
|
|
|
Share of other comprehensive income
in joint ventures and associates
|
|
1.1
|
2.9
|
Remeasurements of post-employment
benefit obligations1
|
|
(29.1)
|
(93.8)
|
Actuarial loss on reimbursable
rights1
|
|
(3.0)
|
(12.3)
|
Income tax relating to components of
other comprehensive income that will not be reclassified
subsequently to profit or loss
|
|
6.1
|
27.1
|
|
|
|
|
Items that may be reclassified subsequently to profit or
loss:
|
|
|
|
Net exchange (loss)/gain on
translation of foreign operations2
|
|
(38.4)
|
60.2
|
Fair value (loss)/gain on cash flow
hedges during the year2
|
|
(0.8)
|
0.6
|
Tax relating to items that may be
reclassified2
|
|
0.2
|
(0.1)
|
Total other comprehensive loss for the year
|
|
(63.9)
|
(15.4)
|
|
|
|
|
Total comprehensive income for the year
|
|
138.5
|
139.6
|
Attributable to:
|
|
|
|
Equity owners of the
Company
|
|
138.4
|
139.8
|
Non-controlling interest
|
|
0.1
|
(0.2)
|
1
|
Recorded in retirement benefit
obligations reserve in the Consolidated Statement of Changes in
Equity.
|
2
|
Recorded in hedging and translation
reserve in the Consolidated Statement of Changes in
Equity.
|
Consolidated Statement of Changes in Equity
For the year ended 31 December
2023 (unaudited)
|
Share
capital
|
Share premium
account
|
Retained
earnings
|
Other
Reserves
|
Total shareholders'
equity
|
Non-controlling
interest
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Audited balance at 1 January 2022
|
24.4
|
463.1
|
542.8
|
(23.6)
|
1,006.7
|
1.7
|
Total comprehensive income/(loss)
for the year
|
-
|
-
|
158.1
|
(18.3)
|
139.8
|
(0.2)
|
Dividends paid
|
-
|
-
|
(30.3)
|
-
|
(30.3)
|
-
|
Shares purchased and held in own
share reserve
|
-
|
-
|
-
|
(15.9)
|
(15.9)
|
-
|
Shares purchased and held in
Treasury
|
-
|
-
|
-
|
(91.2)
|
(91.2)
|
-
|
Shares transferred to award holders
on exercise of share awards
|
-
|
-
|
-
|
0.1
|
0.1
|
-
|
Expense in relation to share-based
payments
|
-
|
-
|
-
|
15.6
|
15.6
|
-
|
Tax credit on items taken directly
to equity
|
-
|
-
|
-
|
3.4
|
3.4
|
-
|
Audited balance at 1 January 2023
|
24.4
|
463.1
|
670.6
|
(129.9)
|
1,028.2
|
1.5
|
Total comprehensive income/(loss)
for the year
|
-
|
-
|
203.4
|
(65.0)
|
138.4
|
0.1
|
Dividends paid
|
-
|
-
|
(33.7)
|
-
|
(33.7)
|
(1.7)
|
Shares purchased and held in own
share reserve
|
-
|
-
|
-
|
(22.9)
|
(22.9)
|
-
|
Shares purchased and held in
Treasury until cancelled
|
-
|
-
|
-
|
(88.8)
|
(88.8)
|
-
|
Cancellation of shares held in
Treasury
|
(2.3)
|
-
|
(180.0)
|
182.3
|
-
|
-
|
Change in non-controlling
interests
|
-
|
-
|
(1.2)
|
-
|
(1.2)
|
(0.2)
|
Expense in relation to share-based
payments
|
-
|
-
|
-
|
13.5
|
13.5
|
-
|
Tax credit on items taken directly
to equity
|
-
|
-
|
-
|
0.5
|
0.5
|
-
|
Unaudited balance at 31 December 2023
|
22.1
|
463.1
|
659.1
|
(110.3)
|
1,034.0
|
(0.3)
|
Consolidated Balance Sheet
For the year ended 31 December
2023 (unaudited)
|
|
At 31
December
|
At 31
December
|
|
|
2023
|
2022
|
|
|
unaudited
|
audited
|
|
|
£m
|
£m
|
Non-current assets
|
|
|
|
Goodwill
|
|
906.7
|
945.0
|
Other intangible assets
|
|
115.6
|
158.0
|
Property, plant and
equipment
|
|
44.3
|
48.1
|
Right of use assets
|
|
440.9
|
434.2
|
Interests in joint ventures and
associates
|
|
32.1
|
23.3
|
Loan to joint ventures
|
|
-
|
10.0
|
Trade and other
receivables
|
|
14.8
|
16.1
|
Derivative financial
instruments
|
|
-
|
0.3
|
Deferred tax assets
|
|
235.7
|
244.2
|
Retirement benefit assets
|
|
37.4
|
57.0
|
|
|
1,827.5
|
1,936.2
|
Current assets
|
|
|
|
Inventories
|
|
24.1
|
22.4
|
Contract assets
|
|
296.6
|
345.0
|
Trade and other
receivables
|
|
329.0
|
374.6
|
Loan to joint ventures
|
|
10.0
|
-
|
Current tax assets
|
|
23.8
|
11.5
|
Cash and cash equivalents
|
|
94.4
|
57.2
|
Derivative financial
instruments
|
|
4.9
|
3.3
|
|
|
782.8
|
814.0
|
Total assets
|
|
2,610.3
|
2,750.2
|
Current liabilities
|
|
|
|
Contract liabilities
|
|
(35.8)
|
(60.5)
|
Trade and other payables
|
|
(558.0)
|
(622.8)
|
Derivative financial
instruments
|
|
(1.7)
|
(1.1)
|
Current tax liabilities
|
|
(18.4)
|
(16.0)
|
Provisions
|
|
(92.9)
|
(134.9)
|
Obligations under leases
|
|
(140.0)
|
(144.4)
|
Loans
|
|
(51.0)
|
(44.5)
|
|
|
(897.8)
|
(1,024.2)
|
Non-current liabilities
|
|
|
|
Contract liabilities
|
|
(59.3)
|
(36.3)
|
Trade and other payables
|
|
(9.2)
|
(6.5)
|
Derivative financial
instruments
|
|
(0.2)
|
-
|
Deferred tax liabilities
|
|
(50.9)
|
(53.8)
|
Provisions
|
|
(77.4)
|
(73.5)
|
Obligations under leases
|
|
(313.7)
|
(301.6)
|
Loans
|
|
(155.2)
|
(218.4)
|
Retirement benefit
obligations
|
|
(12.9)
|
(6.2)
|
|
|
(678.8)
|
(696.3)
|
Total liabilities
|
|
(1,576.6)
|
(1,720.5)
|
Net
assets
|
|
1,033.7
|
1,029.7
|
|
|
|
|
|
|
At 31
December
|
At 31
December
|
|
|
2023
|
2022
|
|
|
unaudited
|
audited
|
|
|
£m
|
£m
|
Equity
|
|
|
|
Share capital
|
|
22.1
|
24.4
|
Share premium account
|
|
463.1
|
463.1
|
Retained earnings
|
|
659.1
|
670.6
|
Other reserves
|
|
(110.3)
|
(129.9)
|
Equity attributable to owners of the
Company
|
|
1,034.0
|
1,028.2
|
Non-controlling interest
|
|
(0.3)
|
1.5
|
Total equity
|
|
1,033.7
|
1,029.7
|
Consolidated Cash Flow Statement
For the year ended 31 December
2023 (unaudited)
|
|
2023
|
2022
|
|
|
unaudited
|
audited
|
|
|
£m
|
£m
|
Net
cash inflow from underlying operating activities
|
|
383.8
|
330.1
|
Non-underlying items
|
|
9.3
|
(2.9)
|
Net
cash inflow from operating activities
|
|
393.1
|
327.2
|
Investing activities
|
|
|
|
Interest received
|
|
3.9
|
1.9
|
Dividends received from joint
ventures and associates
|
|
21.1
|
9.1
|
Loan to pension scheme relating to
collateral calls
|
|
-
|
(60.0)
|
Repayment from pension scheme of
loan relating to collateral calls
|
|
-
|
60.0
|
Loan to joint venture
|
|
-
|
(10.0)
|
Purchase of other intangible
assets
|
|
(8.8)
|
(7.0)
|
Purchase of property, plant and
equipment
|
|
(15.9)
|
(12.4)
|
Proceeds from disposal of property,
plant and equipment
|
|
1.4
|
0.7
|
Proceeds from disposal of intangible
assets
|
|
1.3
|
-
|
Proceeds from disposal of
subsidiary
|
|
0.2
|
-
|
Acquisition of subsidiaries, net of
cash acquired
|
|
(7.7)
|
(19.2)
|
Other investing
activities
|
|
(0.9)
|
1.6
|
Net
cash outflow from investing activities
|
|
(5.4)
|
(35.3)
|
Financing activities
|
|
|
|
Interest paid
|
|
(30.4)
|
(24.4)
|
Capitalised finance costs
paid
|
|
-
|
(2.6)
|
Advances of loans
|
|
-
|
205.0
|
Repayments of loans
|
|
(44.5)
|
(354.3)
|
Capital element of lease
repayments
|
|
(124.4)
|
(120.5)
|
Cash movements on hedging
instruments
|
|
(1.5)
|
(2.7)
|
Dividends paid to
shareholders
|
|
(33.7)
|
(30.3)
|
Dividends paid to non-controlling
interests
|
|
(1.7)
|
-
|
Purchase of Own Shares for Employee
Share Ownership Trust
|
|
(22.9)
|
(15.9)
|
Own shares repurchased
|
|
(88.8)
|
(91.2)
|
Proceeds received from exercise of
share options
|
|
-
|
0.1
|
Net
cash outflow from financing activities
|
|
(347.9)
|
(436.8)
|
Net
increase/(decrease) in cash and cash equivalents
|
|
39.8
|
(144.9)
|
Cash and cash equivalents at beginning of
year
|
|
57.2
|
198.4
|
Net exchange (loss)/gain
|
|
(2.6)
|
3.7
|
Cash and cash equivalents at end of year
|
|
94.4
|
57.2
|
Notes to the Condensed Consolidated Financial
Statements
1. Basis of preparation and accounting
policies
Basis of preparation
The financial information in this
announcement does not constitute the Group's or the Company's
statutory accounts as defined in section 434 of the Companies Act
2006 for the years ended 31 December 2023 or 2022 The financial
information for 2022 is derived from the statutory accounts for
2022 which have been delivered to the registrar of companies. The
auditor has reported on the 2022 accounts; their report was (i)
unqualified, (ii) did not include a reference to any matters to
which the auditor drew attention by way of emphasis without
qualifying their report and (iii) did not contain a statement under
section 498 (2) or (3) of the Companies Act 2006. The statutory
accounts for 2023 will be finalised on the basis of the financial
information presented by the directors in this preliminary
announcement and will be delivered to the registrar of companies in
due course.
The preliminary announcement has
been prepared in accordance with UK-adopted International
Accounting Standards (IAS), UK-adopted International Financial
Reporting Standards (IFRS) and with the requirements of the
Companies Act 2006 as applicable to companies reporting under those
standards.
Going concern
In assessing the basis of
preparation of the financial statements for the year ended 31
December 2023, 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 31 December 2023, the Group's
principal debt facilities comprised a £350.0m revolving credit
facility maturing in November 2027 (of which £nil was drawn), and
£208.8m of US private placement notes, giving £558.8m of committed
credit facilities and committed headroom of £444.4m, being the
undrawn revolving credit facility plus cash of £94.4m. The
principal financial covenant ratios are consistent across the US
Private Placement loan notes and revolving credit facility and are
outlined on page 27. As at 31 December 2023, 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 to 2x at 0.50x.
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.
As noted in post balance sheet
events within note 15, subsequent to the balance sheet date the
Group issued a further £118m ($150m) of US private placement notes
which have been included in the Directors liquidity forecast
supporting this assessment.
The basis of the assessment
continues to be the Board-approved budget which 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
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 or cash
flow.
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
£51m due to mature during the assessment period is repaid, and that
no additional refinancing occurs after the date of approval of the
financial statements, the Group can afford to be unsuccessful on
80% 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 by volume over the last two years, therefore a
reduction of 80% 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 of 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 80
basis points (bps) versus the Group's budget is not considered
plausible within the assessment period combined with an 80%
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.
Accounting policies, estimates and
judgements
In the year ended 31 December 2023,
the same accounting policies, presentation and methods of
computation are followed in the condensed set of financial
statements as applied in the Group's 2022 audited financial
statements with the exception of the change to alternative profit
measures (APMs) as set out below.
No new or amended accounting
standards had a material impact on the Group for the 31 December
2023 reporting period.
In preparing these condensed
consolidated financial statements, there have been no changes to
the critical accounting judgements and key sources of estimation
uncertainty from those disclosed in the Group's 2022 audited
financial statements.
Consolidation of profit measures
The Group has simplified its profit
measures by removing Trading Profit and renaming underlying trading
profit (UTP) to underlying operating profit (UOP). The historic UOP
will be the same as the reported UTP.
The UTP definition was introduced
in 2015 to exclude onerous contract provision (OCP) releases or
charges, other Contract and Balance Sheet Review adjustments,
depreciation and amortisation of assets held for sale, and some
other one-time items. It was maintained to ensure that there was
transparency outside the underlying results of large charges and
releases from the portfolio of onerous contracts recorded in 2014.
These definitions are no longer required as the Contract and
Balance Sheet Adjustments recorded in 2014 are now at an
insignificant level. In the future, no items will be recorded
between UTP and Trading Profit, meaning the additional measure no
longer adds any value.
Items excluded from UOP will be the
amortisation and impairment of intangibles arising on acquisition
and exceptional operating items (and in the prior year other
non-underlying items), which is consistent with the items currently
excluded from Trading Profit.
The methodology applied to
calculating other APMs has not changed since 31 December
2022.
2.
Segmental information
The Group's operating segments
reflecting the information reported to the Board in 2023 under IFRS
8 Operating Segments are consistent with those reported in the
Group's 2022 audited financial statements. An analysis of the
Group's revenue from its key market sectors is as
follows:
Year ended 31 December 2023 (unaudited)
|
UK&E
|
North
America
|
Asia
Pacific
|
Middle East
|
Total
|
£m
|
£m
|
£m
|
£m
|
£m
|
Key
sectors
|
|
|
|
|
|
Defence
|
355.0
|
931.9
|
156.7
|
30.9
|
1,474.5
|
Justice & Immigration
|
1,329.8
|
-
|
351.3
|
-
|
1,681.1
|
Transport
|
148.7
|
102.5
|
12.2
|
71.3
|
334.7
|
Health & Other Facilities
Management
|
227.4
|
-
|
196.5
|
103.2
|
527.1
|
Citizen Services
|
378.6
|
328.4
|
128.4
|
21.0
|
856.4
|
|
2,439.5
|
1,362.8
|
845.1
|
226.4
|
4,873.8
|
Year ended 31 December 2022 (audited)
|
UK&E
|
North
America
|
Asia
Pacific
|
Middle East
|
Total
|
£m
|
£m
|
£m
|
£m
|
£m
|
Key
sectors
|
|
|
|
|
|
Defence
|
315.8
|
863.0
|
147.9
|
30.5
|
1,357.2
|
Justice & Immigration
|
798.9
|
-
|
412.9
|
-
|
1,211.8
|
Transport
|
173.9
|
95.9
|
9.8
|
70.0
|
349.6
|
Health & Other Facilities
Management
|
264.4
|
-
|
225.3
|
103.0
|
592.7
|
Citizen Services
|
547.2
|
310.9
|
158.7
|
5.9
|
1,022.7
|
|
2,100.2
|
1,269.8
|
954.6
|
209.4
|
4,534.0
|
The following is an analysis of
the Group's revenue, results, assets and liabilities by reportable
operating segment:
Year ended 31 December 2023 (unaudited)
|
UK&E
|
North
America
|
Asia
Pacific
|
Middle
East
|
Corporate
|
Total
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Revenue
|
2,439.5
|
1,362.8
|
845.1
|
226.4
|
-
|
4,873.8
|
Result
|
|
|
|
|
|
|
Underlying operating
profit/(loss)1
|
120.8
|
138.2
|
23.7
|
15.3
|
(49.3)
|
248.7
|
Amortisation and impairment of
intangibles arising on acquisition
|
(3.4)
|
(16.0)
|
(11.5)
|
-
|
-
|
(30.9)
|
Exceptional operating
items2
|
9.9
|
-
|
-
|
-
|
43.9
|
53.8
|
Operating profit/(loss)
|
127.3
|
122.2
|
12.2
|
15.3
|
(5.4)
|
271.6
|
Net finance cost
|
|
|
|
|
|
(24.6)
|
Profit before tax
|
|
|
|
|
|
247.0
|
Tax (charge)/credit
|
|
|
|
|
|
(42.3)
|
Tax on exceptional items
|
|
|
|
|
|
(2.3)
|
Profit for the year
|
|
|
|
|
|
202.4
|
Supplementary Information
|
|
|
|
|
|
|
Share of profits in joint ventures
and associates, net of interest and tax
|
29.0
|
-
|
-
|
-
|
-
|
29.0
|
Total depreciation and impairment of
plant, property and equipment and right of use assets
|
(99.4)
|
(20.6)
|
(10.0)
|
(2.1)
|
(11.9)
|
(144.0)
|
Amortisation and impairment of
intangible assets
|
(1.9)
|
(0.9)
|
(1.1)
|
(0.1)
|
(3.6)
|
(7.6)
|
1
|
Underlying operating profit/(loss)
is defined as operating profit/(loss) before exceptional items (and
in the prior year other non-underlying items) and amortisation and
impairment of intangible assets arising on acquisition.
|
2
|
Included within exceptional
operating items are releases of provisions previously held for
indemnities given on disposed businesses of £43.9m and compensation
received on the early termination of a contract of £9.9m.
Exceptional items incurred by the Corporate segment are not
allocated to other segments. Such items may represent costs that
will benefit the wider business.
|
|
|
Year ended 31 December 2022 (audited)
|
UK&E
|
North
America
|
Asia
Pacific
|
Middle
East
|
Corporate
|
Total
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Revenue
|
2,100.2
|
1,269.8
|
954.6
|
209.4
|
-
|
4,534.0
|
Result
|
|
|
|
|
|
|
Underlying operating
profit/(loss)1
|
72.1
|
136.6
|
56.9
|
16.0
|
(44.6)
|
237.0
|
Other non-underlying
items2
|
4.1
|
0.1
|
-
|
-
|
-
|
4.2
|
Amortisation and impairment of
intangibles arising on acquisition
|
(1.5)
|
(16.5)
|
(3.6)
|
-
|
-
|
(21.6)
|
Exceptional operating
items3
|
(1.2)
|
(1.2)
|
-
|
-
|
-
|
(2.4)
|
Operating profit/(loss)
|
73.5
|
119.0
|
53.3
|
16.0
|
(44.6)
|
217.2
|
Net finance cost
|
|
|
|
|
|
(20.4)
|
Profit before tax
|
|
|
|
|
|
196.8
|
Tax (charge)/credit
|
|
|
|
|
|
(42.1)
|
Tax on exceptional items
|
|
|
|
|
|
0.3
|
Profit for the year
|
|
|
|
|
|
155.0
|
Supplementary Information
|
|
|
|
|
|
|
Share of profits in joint ventures
and associates, net of interest and tax
|
12.0
|
-
|
-
|
-
|
-
|
12.0
|
Total depreciation and impairment of
plant, property and equipment and right of use assets
|
(86.4)
|
(26.7)
|
(12.6)
|
(1.9)
|
(12.9)
|
(140.5)
|
Amortisation and impairment of
intangible assets
|
(1.3)
|
(1.0)
|
(2.1)
|
(0.1)
|
(5.6)
|
(10.1)
|
1
|
Underlying operating profit/(Loss)
is defined as operating profit/(loss) before exceptional items (and
in the prior year other non-underlying items) and amortisation and
impairment of intangible assets arising on acquisition.
|
2
|
Non-underlying items include 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.
|
3
|
Included within exceptional
operating items are total acquisition related costs of
£2.4m.
|
Year ended 31 December 2023 (unaudited)
|
UK&E
|
North
America
|
Asia
Pacific
|
Middle
East
|
Corporate
|
Total
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Segment assets
|
|
|
|
|
|
|
Interests in joint ventures and
associates
|
31.8
|
-
|
-
|
0.4
|
-
|
32.2
|
Other segment
assets1
|
891.6
|
897.7
|
254.5
|
62.4
|
113.2
|
2,219.4
|
Total segment assets
|
923.4
|
897.7
|
254.5
|
62.8
|
113.2
|
2,251.6
|
Unallocated
assets2
|
|
|
|
|
|
358.7
|
Consolidated total assets
|
|
|
|
|
|
2,610.3
|
Segment liabilities
|
|
|
|
|
|
|
Segment liabilities
|
(725.1)
|
(172.0)
|
(223.5)
|
(54.1)
|
(124.7)
|
(1,299.4)
|
Unallocated
liabilities2
|
|
|
|
|
|
(277.2)
|
Consolidated total
liabilities
|
|
|
|
|
|
(1,576.6)
|
Supplementary Information
|
|
|
|
|
|
|
Additions to non current
assets3
|
125.3
|
16.7
|
8.0
|
2.6
|
15.7
|
168.3
|
Segment non-current
assets
|
677.1
|
688.6
|
151.9
|
13.5
|
60.8
|
1,591.9
|
Unallocated non-current
assets
|
|
|
|
|
|
235.8
|
Year ended 31 December 2022 (audited)
|
UK&E
|
North
America
|
Asia
Pacific
|
Middle
East
|
Corporate
|
Total
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Segment assets
|
|
|
|
|
|
|
Interests in joint ventures and
associates
|
22.9
|
-
|
-
|
0.4
|
-
|
23.3
|
Other segment
assets1
|
960.8
|
948.0
|
309.6
|
68.7
|
123.3
|
2,410.4
|
Total segment assets
|
983.7
|
948.0
|
309.6
|
69.1
|
123.3
|
2,433.7
|
Unallocated
assets2
|
|
|
|
|
|
316.5
|
Consolidated total assets
|
|
|
|
|
|
2,750.2
|
Segment liabilities
|
|
|
|
|
|
|
Segment liabilities
|
(720.2)
|
(178.3)
|
(248.1)
|
(61.1)
|
(179.0)
|
(1,386.7)
|
Unallocated
liabilities2
|
|
|
|
|
|
(333.8)
|
Consolidated total
liabilities
|
|
|
|
|
|
(1,720.5)
|
Supplementary Information
|
|
|
|
|
|
|
Additions to non current
assets3
|
173.7
|
14.5
|
7.4
|
3.0
|
12.1
|
210.7
|
Segment non-current
assets
|
701.1
|
718.6
|
177.1
|
14.1
|
80.8
|
1,691.7
|
Unallocated non-current
assets
|
|
|
|
|
|
244.5
|
1
|
The Corporate segment assets and
liabilities include balance sheet items which provide benefit to
the wider Group, including defined benefit pension schemes and
corporate intangible assets.
|
2
|
Unallocated assets and liabilities
include deferred tax, cash and cash equivalents, derivative
financial instruments and loans.
|
3
|
Additions to non-current assets
reflects additions and amounts arising on acquisition for goodwill,
other intangible assets, property plant and equipment and right of
use assets.
|
3.
Acquisitions
No acquisitions were completed
during the year. See note 15 for details of acquisitions completed subsequent to the
Balance Sheet date.
During the year, the Group
finalised the integration of OXZ Holdings AG (ORS), completed the
analysis of balances acquired as part of the transaction, and made
closing net working capital settlements with the vendors. As a
result of these activities, the Group revised the fair values of
the acquired assets and liabilities resulting in an increase to
goodwill of £3.3m, a reduction in other intangibles of £6.9m, an
increase to the deferred tax asset of £1.3m, and a cash receipt of
£2.3m for final working capital settlements.
Contingent consideration
recognised on acquisition of ORS in 2022 was CHF12.8m (£11.2m) and
reflected the fair value of the earn-out and over performance
payments based on a range of targets for the full year 2022 EBITDA.
The maximum earn-out and over performance payments were CHF10.0m
and CHF4.0m respectively. The final earn-out and over performance
payments settled at CHF 12.3m (£10.2m) which resulted in a change
to the fair value of the contingent consideration resulting in a
profit of £1.0m including the impact of foreign currency
translation.
During the year the Group
finalised the integration of Sapienza Consulting Holdings BV
(Sapienza), completed the analysis of balances acquired as part of
the transaction, and made closing net working capital settlements
with the vendors. As a result of these activities, the Group
revised the fair values of the acquired assets and liabilities
resulting in a decrease of goodwill of £0.2m, an increase in
provisions of £0.4m, a reduction in trade and other payables of
£0.4m, and a cash receipt of £0.2m for final working capital
settlements.
The total impact of acquisitions
to the Group's cash flow position in the period was as
follows:
|
£m
unaudited
|
Cash received in respect of prior
period acquisitions
|
(2.5)
|
Settlement of deferred consideration
in respect of prior year acquisitions
|
10.2
|
Net
cash outflow in respect of prior year
acquisitions
|
7.7
|
Acquisition related costs
|
1.3
|
Net
cash impact in the year on acquisitions
|
9.0
|
The total transaction and
implementation costs recognised in exceptional items for the year
ended 31 December 2023 was nil (2022 £2.4m).
4.
Exceptional operating
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.
|
2023
|
2022
|
|
unaudited
|
audited
|
Year ended 31 December
|
£m
|
£m
|
Compensation received on the early
termination of contractual services
|
9.9
|
-
|
Release of provisions held for
indemnities given on disposed businesses
|
43.9
|
-
|
Costs associated with successful
acquisitions
|
-
|
(2.4)
|
Exceptional operating items
|
53.8
|
(2.4)
|
Exceptional tax
(charge)/credit
|
(2.3)
|
0.3
|
Total exceptional operating items net of
tax
|
51.5
|
(2.1)
|
5.
Tax
5
(a) Income tax recognised in the income statement
Year ended 31 December
|
Underlying
|
Non-underlying
items
|
Reported
|
Underlying
|
Non-underlying
items
|
Reported
|
2023
|
2023
|
2023
|
2022
|
2022
|
2022
|
unaudited
|
unaudited
|
unaudited
|
audited
|
audited
|
audited
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
Current income tax
|
|
|
|
|
|
|
Current income tax
charge/(credit)
|
34.0
|
(1.5)
|
32.5
|
41.8
|
(4.0)
|
37.8
|
Adjustments in respect of prior
years
|
1.3
|
-
|
1.3
|
3.5
|
-
|
3.5
|
Deferred tax
|
|
|
|
|
|
|
Current year
charge/(credit)
|
16.8
|
(4.7)
|
12.1
|
7.5
|
(2.1)
|
5.4
|
Adjustments in respect of prior
years
|
(1.3)
|
-
|
(1.3)
|
(4.9)
|
-
|
(4.9)
|
|
50.8
|
(6.2)
|
44.6
|
47.9
|
(6.1)
|
41.8
|
The corporate income tax expense
for the year is based on the UK statutory rate of corporation tax
for the period of 23.5% (2022: 19.0%). Taxation for other
jurisdictions is calculated at the rates prevailing in the
respective jurisdictions.
5
(b) Income tax recognised in the
SOCI
|
2023
|
2022
|
|
unaudited
|
audited
|
Year ended 31 December
|
£m
|
£m
|
Current tax
|
|
|
Taken to retirement benefit
obligations reserve
|
1.9
|
2.0
|
Deferred tax
|
|
|
Relating to cash flow
hedges
|
0.2
|
(0.1)
|
Taken to retirement benefit
obligations reserve
|
4.2
|
25.1
|
|
6.3
|
27.0
|
5
(c) Tax on items taken directly to
equity
|
2023
|
2022
|
|
unaudited
|
audited
|
Year ended 31 December
|
£m
|
£m
|
Current tax
|
|
|
Recorded in share-based payment
reserve
|
1.0
|
2.2
|
Deferred tax
|
|
|
Recorded in share-based payment
reserve
|
(0.5)
|
1.2
|
|
0.5
|
3.4
|
6.
Earnings per share
Basic earnings per share is
calculated by dividing the profit after tax attributable to owners
of the Company by the weighted average number of shares in issue
after deducting the own shares held by employee share ownership
trusts and treasury shares and adding back vested share options not
exercised.
In calculating the diluted
earnings per share, unvested share options outstanding have been
taken into account where the impact of these is
dilutive.
The calculation of the basic and
diluted EPS is based on the following data:
|
2023
|
2022
|
|
unaudited
|
audited
|
Number of shares
|
millions
|
millions
|
Weighted average number of ordinary
shares for the purpose of basic EPS
|
1,110.2
|
1,192.2
|
Effect of dilutive potential
ordinary shares: Shares under award
|
18.4
|
22.6
|
Weighted average number of ordinary
shares for the purpose of diluted EPS
|
1,128.6
|
1,214.8
|
Earnings per share
|
Earnings
|
Per share
amount
|
Earnings
|
Per share
amount
|
|
2023
|
2023
|
2022
|
2022
|
|
unaudited
|
unaudited
|
audited
|
audited
|
Basic EPS
|
£m
|
pence
|
£m
|
pence
|
Earnings for the purpose of basic
EPS
|
202.4
|
18.23
|
155.4
|
13.03
|
Effect of dilutive potential
ordinary shares
|
-
|
(0.30)
|
-
|
(0.24)
|
Diluted EPS
|
202.4
|
17.93
|
155.4
|
12.79
|
7.
Goodwill
Movements in the balance since the
prior year end can be seen as follows:
|
Goodwill balance 1 January
2023
|
Acquisitions
|
Disposals
|
Exchange differences
2023
|
Goodwill balance 31 December
2023
|
Headroom on impairment
analysis 2023
|
Headroom on impairment
analysis 2022
|
|
audited
|
|
|
|
unaudited
|
unaudited
|
audited
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
UK & Europe
|
203.8
|
3.1
|
-
|
(0.3)
|
206.6
|
1,051.1
|
811.1
|
North America
|
592.2
|
-
|
-
|
(32.7)
|
559.5
|
644.3
|
360.9
|
Asia Pacific
|
137.8
|
-
|
-
|
(7.6)
|
130.2
|
110.0
|
281.0
|
Middle East
|
11.2
|
-
|
(0.1)
|
(0.7)
|
10.4
|
285.5
|
119.5
|
|
945.0
|
3.1
|
(0.1)
|
(41.3)
|
906.7
|
2,090.9
|
1,572.5
|
Included above is the headroom on
the cash generating units (CGUs) existing at the year end, which
reflects where future discounted cash flows are greater than the
underlying assets and includes all relevant cash flows, including
where provisions have been made for future costs and losses. In all
CGUs, there is sufficient headroom available which is consistent
with 2022.
Sensitivity analysis
Reflecting the assumptions made in
the estimation of future cash flows and the selection of
appropriate discount rates and terminal growth rates, a number of
plausible scenarios have been considered as part of the overall
impairment assessment.
Sensitivity analysis has been
performed by applying a 1% movement in discount rates and a 1%
movement in terminal growth rates which are considered to be
reasonably possible. Both individually and combined, the impact of
these changes in key assumptions does not lead to an impairment in
any CGU (2022: no impairment in any CGU).
A sensitivity analysis has been
performed in respect of short-term growth rates within the
Board-approved five-year plan. The sensitivity applied has been to
assume no growth to cash flows outside of the two year budget
period of the five-year plan. No impairment results from these
changes, even when combined with the additional 1% increase in
discount rates and 1% reduction in terminal growth rates, with the
exception of the Asia Pacific CGU (2022: Asia Pacific CGU) for
which additional sensitivities have been performed below. Given the
visibility of pipeline available, a no growth scenario is unlikely
and would require win and rebid rates to fall below the five-year
averages seen within the business. In order to deliver revenue
growth, amongst other things, the Group continues to invest in
bidding activity in order to ensure it remains competitive within
the markets in which it operates.
Management has also considered the
sensitivity of cash flows in the terminal year for all CGUs and has
determined that a reduction in cash flows of up to 10% in the final
year of the plan is reasonably possible. No impairment results from
this scenario even when combined with an additional 1% increase in
discount rates and a 1% reduction in terminal growth rates though
this is not deemed reasonably possible. Cash flows in the terminal
year would need to reduce by 91% in the Middle East (£32.4m), 32%
in Asia Pacific (£9.8m), 68% in North America (£56.5m) and 79% in
UK & Europe (£102.3m), before an impairment would need to be
recognised.
Asia Pacific CGU
The risk adjusted Board-approved
five-year plan for the Asia Pacific Division supports the headroom
held against the CGU. The key judgements in respect of the
divisional plan are as follows:
-
|
Win rates by value improve from
the current levels experienced by the Division in 2023 of 2% for
new business and 24% for rebids, to the five-year average which are
15% for new business and 63% for rebids.
|
-
|
The immigration rebid, for which
the tender outcome is expected in the first half of 2024, delivers
cash flows beyond 2024.
|
-
|
There is no significant
deterioration within the outsourcing market in the
region
|
Having performed a review of the
market, made local management changes and identified areas where
the business could be more efficient, the Directors believe that
sufficient opportunities exist to deliver the five-year plan and
that win rates can be improved. Whilst tangible cost savings are
expected in the short term, it may take a longer period for an
improvement in pipeline and win rates to be observed. In addition,
the Directors believe on balance that the immigration contract is
likely to be retained given the Group's experience in delivering
the existing contract, and the general rebid rates it achieves.
However, a loss would impact the Division's ability to deliver the
five-year plan if no opportunities are secured to replace the cash
flows delivered by the contract.
In respect of scenarios within the
Asia Pacific CGU:
a
|
Whilst the base case scenario,
which assumes win rates returning to the long-term five-year
average outlined above, results in no impairment, the Directors
note that sustained win rates at the level observed over the last
year combined with the inability to identify sufficient credible
opportunities could lead to an impairment of the entire goodwill
balance of the CGU. Win rates by value would independently have to
reduce to 11% for new business and 46% for rebids over the
five-year period to result in no headroom.
|
b
|
An unsuccessful outcome in respect
of the immigration rebid could result in an impairment in
isolation. However, given the scale of this contract to the CGU, a
fundamental restructuring of the Division may be required to
improve profitability and would mitigate the risk of
impairment.
|
As noted above, win rates not
improving, or the loss of the immigration rebid, would require a
review of the efficiency of the Asia Pacific Division and may
result in a review of the overhead and support structures in place
to ensure that they are appropriate for the scale of business and
opportunities available . Any costs or benefits of restructuring
are not included in the five-year cash flows.
8.
Analysis of Net Debt
The analysis below provides a
reconciliation between the opening and closing positions in the
balance sheet for liabilities arising from financing activities
together with movements in derivatives relating to the items
included in Net Debt. There were no changes in fair value noted in
either the current or prior year.
|
At 1 January
2023
|
Cash flow
|
Exchange
differences
|
Non-cash
movements2
|
At 31 December
2023
|
|
audited
|
|
|
|
unaudited
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
Loans payable
|
(262.9)
|
44.5
|
13.1
|
(0.8)
|
(206.2)
|
Lease obligations
|
(446.0)
|
124.4
|
3.1
|
(135.2)
|
(453.7)
|
Liabilities arising from financing
activities
|
(708.9)
|
168.9
|
16.2
|
(136.0)
|
(659.9)
|
Cash and cash equivalents
|
57.2
|
39.8
|
(2.6)
|
-
|
94.4
|
Derivatives relating to net
debt
|
1.8
|
-
|
1.3
|
-
|
3.1
|
Net
debt
|
(649.9)
|
208.7
|
14.9
|
(136.0)
|
(562.4)
|
1
|
Acquisitions represent the net
cash/(debt) acquired on acquisition.
|
2
|
Non-cash movements on loans payable
relate to movement in capitalised finance costs in the year. For
lease obligations 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
|
Property
|
Contract
|
Claims
|
Other
|
Total
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
At 1 January 2023
(audited)
|
82.5
|
19.6
|
11.6
|
24.2
|
70.5
|
208.4
|
Acquisitions - revision of
provisional fair value estimates
|
-
|
-
|
-
|
-
|
0.4
|
0.4
|
Disposals
|
(1.2)
|
(0.9)
|
-
|
-
|
(0.3)
|
(2.4)
|
Charge capitalised in right of use
assets
|
-
|
0.9
|
-
|
-
|
-
|
0.9
|
Charged to income
statement
|
18.3
|
9.7
|
8.8
|
9.7
|
7.7
|
54.2
|
Released to exceptional
items
|
-
|
-
|
-
|
-
|
(43.9)
|
(43.9)
|
Released to income
statement
|
(2.1)
|
(1.6)
|
(0.6)
|
(3.1)
|
(7.7)
|
(15.1)
|
Utilised during the year
|
(9.2)
|
(4.2)
|
(3.2)
|
(5.2)
|
(5.4)
|
(27.2)
|
Exchange differences
|
(4.4)
|
(0.3)
|
0.1
|
-
|
(0.4)
|
(5.0)
|
At
31 December 2023 (unaudited)
|
83.9
|
23.2
|
16.7
|
25.6
|
20.9
|
170.3
|
Analysed as:
|
|
|
|
|
|
|
Current
|
54.0
|
5.9
|
10.7
|
5.4
|
16.9
|
92.9
|
Non-current
|
29.9
|
17.3
|
6.0
|
20.2
|
4.0
|
77.4
|
|
83.9
|
23.2
|
16.7
|
25.6
|
20.9
|
170.3
|
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. The provisions will be utilised over various periods
driven by attrition and demobilisation of contracts, the timing of
which is uncertain. There are also amounts included in relation to
restructuring.
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 March
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.
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.
While 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 £20.9m 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. The Group released from other provisions indemnities
given on disposed businesses of £43.9m during the year
predominantly due to the claims period ending.
Individual provisions are only
discounted where the impact is assessed to be significant.
Currently, the effect of discounting is not material.
10. Contingent
liabilities
The Group and its subsidiaries
have provided certain guarantees and indemnities in respect of
performance and other bonds, issued by its banks on its behalf in
the ordinary course of business. The total commitment outstanding
as at 31 December 2023 was £214.4m (2022: £222.7m).
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. As the claim progresses, 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.
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.
The Group has guaranteed
overdrafts, finance leases and bonding facilities of its joint
ventures and associates up to a maximum value of £5.7m (2022:
£5.7m). The actual commitment outstanding at 31 December 2023 was
£5.7m (2022: £5.7m).
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 that are
observable for the asset or liability, either directly or
indirectly, other than quoted prices included within Level
1.
Level 3: Inputs are unobservable
inputs for the asset or liability.
Based on the above, the derivative
financial instruments held by the Group at 31 December 2023 and the
comparison fair values for loans, are all considered to fall into
Level 2, with the exception of contingent consideration which is
considered to fall into Level 3. Market prices are sourced from
Bloomberg and third party valuations. The valuation models
incorporate various inputs including foreign exchange spot and
forward rates and interest rate curves.
There have been no transfers
between levels in the year.
12. Retirement benefit
schemes
|
2023
|
2022
|
|
unaudited
|
audited
|
Recognised in the income statement
|
£m
|
£m
|
Current service cost -
employer
|
5.3
|
5.9
|
Past service cost -
employer
|
-
|
0.8
|
Settlement gain
recognised
|
-
|
(0.3)
|
Administrative expenses and
taxes
|
2.0
|
2.4
|
Recognised in arriving at operating profit
|
7.3
|
8.8
|
Interest income on scheme assets -
employer
|
(50.4)
|
(28.3)
|
Interest on franchise
adjustment
|
-
|
(0.2)
|
Interest cost on scheme liabilities
- employer
|
47.3
|
25.8
|
Finance income
|
(3.1)
|
(2.7)
|
Total recognised in the income statement
|
4.2
|
6.1
|
|
2023
|
2022
|
|
unaudited
|
audited
|
Included within the SOCI
|
£m
|
£m
|
Actual return on scheme
assets
|
41.4
|
(539.8)
|
Less: interest income on scheme
assets
|
(50.4)
|
(28.3)
|
Net
return on scheme assets
|
(9.0)
|
(568.1)
|
Effect of changes in demographic
assumptions
|
24.3
|
21.2
|
Effect of changes in financial
assumptions
|
(22.7)
|
530.3
|
Effect of experience
adjustments
|
(21.7)
|
(77.2)
|
Remeasurements
|
(29.1)
|
(93.8)
|
Change in franchise
adjustment
|
(1.8)
|
(7.0)
|
Change in members' share
|
(1.2)
|
(5.3)
|
Release of member share on end of
franchise
|
-
|
-
|
Actuarial loss on reimbursable
rights
|
(3.0)
|
(12.3)
|
Total recognised in the SOCI
|
(32.1)
|
(106.1)
|
The assets and liabilities of the
schemes at 31 December are:
|
Fair value
of
scheme
assets
|
Present value of scheme
liabilities
|
Surplus/(deficit)
|
Fair value
of
scheme
assets
|
Present value of scheme
liabilities
|
Surplus/(deficit)
|
|
2023
|
2023
|
2023
|
2022
|
2022
|
2022
|
|
unaudited
|
unaudited
|
unaudited
|
audited
|
audited
|
audited
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
SPLAS1
|
917.0
|
(886.5)
|
30.5
|
925.3
|
(877.8)
|
47.5
|
ORS
|
68.5
|
(80.5)
|
(12.0)
|
49.8
|
(54.9)
|
(5.1)
|
RPS
|
66.7
|
(60.8)
|
5.9
|
68.4
|
(59.7)
|
8.7
|
Other Schemes in surplus
|
3.8
|
(2.8)
|
1.0
|
3.3
|
(2.5)
|
0.8
|
Other schemes in deficit
|
1.1
|
(2.0)
|
(0.9)
|
1.0
|
(2.1)
|
(1.1)
|
Scheme under Franchise
agreement2
|
-
|
-
|
-
|
11.9
|
(14.9)
|
(3.0)
|
Total
|
1,057.1
|
(1,032.6)
|
24.5
|
1,059.7
|
(1,011.9)
|
47.8
|
Franchise
adjustment2
|
|
|
-
|
|
|
1.8
|
Members' share of deficit
|
|
|
-
|
|
|
1.2
|
Net
retirement benefit asset3
|
|
|
24.5
|
|
|
50.8
|
1
|
The SPLAS Trust Deed gives the
Group an unconditional right to a refund of surplus assets assuming
the gradual settlement of plan liabilities over time until all
members have left the plan. Pension assets are deemed to be
recoverable and there are no adjustments in respect of minimum
funding requirements as economic benefits are available to the
Group either in the form of future refunds or in the form of
possible reductions in future contributions
|
2
|
The franchise adjustment represents
the amount of scheme deficit that is expected to be funded outside
the contract period and therefore no additional funding will be
required by the Group.
|
3
|
The net retirement benefit asset
(before tax) is split in the balance sheet between schemes in
surplus totalling £37.4m (2022: £57.0m) reported in retirement
benefit assets and schemes in deficit totalling £12.9m (2022:
£6.2m) reported in retirement benefit obligations.
|
Actuarial assumptions:
The assumptions set out below are
for SPLAS, which reflects 86% of total liabilities and 87% of total
assets of the defined benefit pension scheme in which the Group
participates. The significant actuarial assumptions with regards to
the determination of the defined benefit obligation are set out
below.
|
2023
|
2022
|
|
unaudited
|
audited
|
Significant actuarial assumptions
|
%
|
%
|
Discount rate
|
4.80
|
5.00
|
Rate of salary increases
|
2.85
|
2.85
|
RPI Inflation
|
3.05
|
3.15
|
CPI Inflation
|
2.35
|
2.35
|
|
2023
|
2022
|
|
unaudited
|
audited
|
Post-retirement mortality1
|
years
|
years
|
Current pensioners at 65 -
male
|
20.9
|
21.5
|
Current pensioners at 65 -
female
|
23.6
|
24.1
|
Future pensioners at 65 -
male
|
22.8
|
23.6
|
Future pensioners at 65 -
female
|
25.6
|
26.2
|
1
|
The mortality assumptions have been
updated to reflect the latest available mortality tables
CMI_2022.
|
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. Transactions between the Group and its joint venture
undertakings and associates are disclosed below.
During the year, Group companies entered into the
following transactions with joint ventures and
associates:
|
Transactions
|
Current
outstanding
at
31
December
|
Non-current
outstanding
at
31
December
|
|
2023
|
2023
|
2023
|
|
unaudited
|
unaudited
|
unaudited
|
|
£m
|
£m
|
£m
|
Sale of goods and services
|
|
|
|
Joint ventures
|
15.4
|
1.1
|
-
|
Other
|
|
|
|
Loan to joint venture
|
-
|
10.0
|
-
|
Dividends received - joint
ventures
|
21.1
|
-
|
-
|
Receivable from consortium for tax -
joint ventures
|
9.9
|
3.7
|
9.4
|
Total
|
46.4
|
14.8
|
9.4
|
Sales of goods and services to
joint ventures relates to services provided including
administrative and back office activities to VIVO. Joint venture
receivable and loan amounts outstanding have arisen from
transactions undertaken during the general course of trading, are
unsecured and will be settled in cash.
|
Transactions
|
Current
outstanding
at
31
December
|
Non-current
outstanding
at
31
December
|
|
2022
|
2022
|
2022
|
|
audited
|
audited
|
audited
|
|
£m
|
£m
|
£m
|
Sale of goods and services
|
|
|
|
Joint ventures
|
10.5
|
3.1
|
-
|
Other
|
|
|
|
Loan to joint venture
|
10.0
|
-
|
10.0
|
Loan to pension scheme
|
60.0
|
-
|
-
|
Dividends received - joint
ventures
|
7.3
|
-
|
-
|
Dividends received -
associates
|
1.8
|
-
|
-
|
Receivable from consortium for tax -
joint ventures
|
3.2
|
0.9
|
3.2
|
Total
|
92.8
|
4.0
|
13.2
|
The Group made a short-term
temporary loan of £60.0m to Serco Pension and Life Assurance Scheme
(SPLAS) in 2022 in order for the scheme to be able to liquidate
assets to meet collateral calls required to ensure that the LDI
hedge was maintained; this loan was repaid in 2022.
14. Notes to the Consolidated Cash Flow
statement
Year ended 31 December
|
2023
Underlying
£m
|
2023
Non
underlying
items
£m
|
2023
Reported
£m
|
2022
Underlying
£m
|
2022
Non
underlying
items
£m
|
2022
Reported
£m
|
|
unaudited
|
unaudited
|
unaudited
|
audited
|
audited
|
audited
|
Profit before tax
|
224.1
|
22.9
|
247.0
|
216.6
|
(19.8)
|
196.8
|
Net finance costs
|
24.6
|
-
|
24.6
|
20.4
|
|
20.4
|
Operating profit for the year
|
248.7
|
22.9
|
271.6
|
237.0
|
(19.8)
|
217.2
|
Adjustments for:
|
|
|
|
|
|
|
Share of profits in joint ventures
and associates
|
(29.0)
|
-
|
(29.0)
|
(12.0)
|
-
|
(12.0)
|
Share-based payment
expense
|
13.5
|
-
|
13.5
|
15.6
|
-
|
15.6
|
Impairment of intangible
assets
|
0.1
|
8.1
|
8.2
|
0.1
|
-
|
0.1
|
Amortisation of intangible
assets
|
7.7
|
22.8
|
30.5
|
10.0
|
21.6
|
31.6
|
Impairment of property, plant and
equipment
|
0.6
|
-
|
0.6
|
2.3
|
-
|
2.3
|
Net impairment/(reversal of
impairment) of right of use assets
|
0.7
|
-
|
0.7
|
2.4
|
(4.2)
|
(1.8)
|
Depreciation of property, plant and
equipment
|
17.3
|
-
|
17.3
|
20.7
|
-
|
20.7
|
Depreciation of right of use
assets
|
125.4
|
-
|
125.4
|
119.3
|
-
|
119.3
|
(Profit)/Loss on disposal of
intangible assets
|
(0.8)
|
-
|
(0.8)
|
0.4
|
-
|
0.4
|
Loss/(profit) on early termination
of leases
|
0.6
|
-
|
0.6
|
(0.2)
|
-
|
(0.2)
|
Profit on disposal of property,
plant and equipment
|
(0.6)
|
-
|
(0.6)
|
(0.5)
|
-
|
(0.5)
|
Other non-cash movements
|
(1.5)
|
-
|
(1.5)
|
-
|
-
|
-
|
Increase/(decrease) in
provisions
|
12.6
|
(44.6)
|
(32.0)
|
4.0
|
(0.6)
|
3.4
|
Total non-cash items
|
146.6
|
(13.7)
|
132.9
|
162.1
|
16.8
|
178.9
|
Operating cash inflow/(outflow)
before movements in working capital
|
395.3
|
9.2
|
404.5
|
399.1
|
(3.0)
|
396.1
|
(Increase) in inventories
|
(2.4)
|
0.1
|
(2.3)
|
(1.5)
|
-
|
(1.5)
|
Decrease in receivables
|
63.1
|
-
|
63.1
|
1.2
|
-
|
1.2
|
(Increase)/decrease in
payables
|
(30.7)
|
-
|
(30.7)
|
(24.0)
|
0.1
|
(23.9)
|
Movements in working capital
|
30.0
|
0.1
|
30.1
|
(24.4)
|
0.1
|
(24.3)
|
Cash generated by
operations
|
425.3
|
9.3
|
434.6
|
374.7
|
(2.9)
|
371.8
|
Tax paid
|
(41.1)
|
-
|
(41.1)
|
(44.2)
|
-
|
(44.2)
|
Non-cash R&D
expenditure
|
(0.4)
|
-
|
(0.4)
|
(0.4)
|
-
|
(0.4)
|
Net
cash inflow/(outflow) from operating activities
|
383.8
|
9.3
|
393.1
|
330.1
|
(2.9)
|
327.2
|
15. Post balance sheet
events
Acquisitions
On 14 December 2023, Serco agreed
to acquire 100% of the share capital of European Homecare (EHC), a
specialist provider of immigration services to public sector
customers in Germany. The business will be acquired from
Korte-Stiftung for €40m (£34m) subject to final fair value
assessments. Subsequent to the balance sheet date
clearance has been obtained from the competition authority and the
acquisition is expected to complete on 1 March
2024.
On 14 December 2023, Serco agreed
to acquire 100% of the share capital of Climatize, a small but
fast-growing business that operates in the United Arab Emirates and
the Kingdom of Saudi Arabia offering 'zero-carbon' advisory and
related engineering services. The acquisition completed on 31
January 2024 for cash consideration of AED 9.0m (£1.9m) and
contingent consideration of up to AED 51.0m (£10.9m), payable on
achieving certain financial targets. Due to the timing of
completion, the measurement of the fair value of net assets
acquired and any goodwill to be recognised as a result of the
acquisition is in progress.
US Private Placement Loan Notes
On 27 February 2024, Serco Group
plc issued $150m (£118m) of US Private Placement loan notes. The
notes are equally split into two series of $75m each with
maturities of 5 and 10 years, giving an average maturity of 7.5
years. The average interest rate on the new loan notes is fixed at
6.58%, which compares to a blended rate of 3.97% for the existing
notes.
Serco share buyback
The Group has announced its
intention to commence a share buyback of up to £140m. Consistent
with the Group's capital allocation policy, the objective of the
programme is to provide additional returns to shareholders as well
as aid the Group in meeting its medium-term leverage targets. The
buyback programme is expected to complete by 31 December 2024 with
the shares either held in treasury or cancelled.
Employee Share Ownership Trust
Subsequent to the year end, the
Group's Employee Share Ownership Trust completed the purchase of
9.3m shares at the cost of £16.2m. These shares will be held in the
own share reserve until they are transferred to award holders on
the exercise of share awards.
Dividends
Subsequent to the year-end, the
Board has recommended the payment of a final dividend in respect of
the year ended 31 December 2023 of 2.27p. The dividend remains
subject to shareholder approval at the Annual General Meeting and
therefore no amounts have been recognised in respect of a dividend
in these Consolidated Financial Statements.
Additional information
We use key performance indicators
(KPIs) to monitor our performance, ensuring that we have a balance
and
an appropriate emphasis to both financial and non-financial
aspects. As part of simplifying our profit measures, we renamed
underlying trading profit (UTP) to underlying operating profit
(UOP). This is explained in more detail in the Finance Review. All
other KPIs are unchanged and therefore there is comparability and
consistency with our focus in the business and the guidance we
issue. The Finance Review provides further detailed definitions and
reconciliations of our use of Alternative Performance Measures
(APMs).
Alternative performance measure
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Relevance to strategy
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Underlying operating profit
(UOP)
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The level of absolute UOP and the
relationship of UOP with revenue - i.e. the margin we earn on what
our customers pay us - is at the heart of our aspiration to be
profitable and sustainable. We believe the delivery of strategic
success has potential to support annual revenue growth of 4-6%, in
the medium term, and trading margins of 5-6%.
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Underlying earnings per share
(EPS), diluted
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EPS builds on the relevance of
UOP, and further reflects the achievement of being profitable and
sustainable by taking into account not just our ability to grow
revenue and margin but also the strength and costs of our financial
funding and tax arrangements. EPS is therefore a measure of
financial return for our shareholders.
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Free cash flow (FCF)
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FCF is a reflection of the
sustainability of the business, by showing how much of our effort
turns into cash to reinvest back into the business or to deploy in
other ways. Our philosophy is we should only win business that
generates appropriate cash returns, and 'executing well' includes
appropriate management of our working capital cash flow
cycles.
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Underlying return on invested
capital (ROIC)
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ROIC measures how efficiently the
Group uses its capital to generate returns from its assets. To be a
sufficiently profitable and sustainable business, a return must be
achieved that is appropriately above a cost of capital hurdle
reflective of the typical returns required by our weighting of
equity and debt capital.
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Pipeline of larger new bid
opportunities
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The pipeline provides a key area
of potential for winning good business and therefore is a major
input to being profitable and sustainable. The size of the pipeline
and our win-rate on the bids within it are at the heart of our
strategy to grow the business.
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Order book
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The order book reflects progress
with winning good business, including retaining existing work and
as a store of future value, it is a key measure to ensure the Group
is profitable and sustainable. The value of how much is added to
the order book compared to how much revenue we are billing our
customers - the book-to-bill ratio - is key to achieving long-term
growth.
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