27 February 2008
International success builds on UK strengths
Serco Group plc - 2007 Preliminary Results
2007 2006
Revenue £2,811m £2,548m up 10.3%
Adjusted profit before tax £123.2m £105.0m up 17.3%
Profit before tax £114.6m £107.4m up 6.7%
Adjusted earnings per share 18.57p 15.92p up 16.6%
Earnings per share 16.98p 16.62p up 2.2%
Dividend per share 4.25p 3.60p up 18.1%
Group free cash flow £97.6m £85.4m up 14.3%
Success across our markets
Signed £3.6bn of contracts and appointed preferred bidder for a further £1.0bn
Record level of international awards including Dubai Metro (preferred bidder, £
400m), US Postal Service ($260m), LOGCAP IV ($225m) and Borallon Correctional
Centre (Aus$100m)
Significant progress in other new markets, including Glasgow City Council
strategic partnership (preferred bidder, £265m) in local authority market and
e-Borders (£200m) in homeland security
Excellent progress in existing markets, including Marine Services (£750m) in UK
defence, Forth Valley (£450m) in UK integrated facilities management and Yarl's
Wood (£85m) in UK home affairs
Maintained rebid win rate at more than 90% and continued to win one in two new
bids
Strong margin and cash performance
Adjusted PBT margin up from 4.1% to 4.4%
Group free cash flow increased by 14.3% to £97.6m
Strong balance sheet with Group recourse net debt reduced to £137.9m
Broad pipeline supports excellent visibility
Order book at new record of £14.7bn at 31 December 2007
Contracts valued at an additional £1.0bn at preferred bidder stage
Visibility of 91% of planned revenue for 2008, 76% for 2009 and 63% for 2010
£27bn of further opportunities identified
Growing markets and higher margins underpin positive outlook
UK and international markets continue to generate increasing opportunities
Confident of double-digit revenue growth for the foreseeable future
Guidance for Adjusted PBT margin of 30 basis point increase for both 2008 and
2009
Christopher Hyman, Chief Executive of Serco Group plc, said: "2007 was an
excellent year. We were awarded significant contracts in existing markets and
used skills developed in the UK to build positions in markets such as
Australian home affairs and Middle Eastern transport. We also reaped the
benefits of the capabilities we have acquired in recent years, winning record
levels of work in the US, securing the prestigious e-Borders programme in the
UK and one of the first local authority strategic partnerships. At the same
time, we further increased our margins. This success underpins our optimism for
2008 and beyond."
Note: Adjusted profit before tax and Adjusted earnings per share shown above
are before amortisation of acquired intangibles and the £11.4m gain on sale of
PFI investments in 2006 as shown on the face of the Group's income statement.
Group free cash flow is from subsidiaries and joint venture dividends and is
reconciled in Section 3 of the Finance Review.
For further information please contact Serco Group plc: +44 (0) 1256 745 900
Richard Hollins, Head of Investor Relations
Dominic Cheetham, Corporate Communications Director
www.serco.com
Presentation
A presentation for investors and analysts will be held at JP Morgan Cazenove,
20 Moorgate, London EC2R 6DA at 9.30 am today.
A preliminary results interview with Christopher Hyman, Chief Executive, will
be available at 7.00 am at www.serco.com or www.cantos.com.
Overview
2007 was an excellent year for Serco. We won important contracts in existing
markets, continued to build our positions in new markets and were awarded
record levels of international business. These contributed to another year of
strong financial performance.
We grew revenue by 10.3% to £2,811m, Adjusted profit before tax (Adjusted PBT)
rose by 17.3% to £123.2m and Adjusted earnings per share grew 16.6% to 18.57p.
The Adjusted PBT margin increased from 4.1% to 4.4%, benefiting from our
management of the contract portfolio and continued efficiency improvements.
Profit before tax rose by 6.7% to £114.6m and earnings per share were 2.2%
higher at 16.98p. Profit before tax and earnings per share in 2006 included the
benefit of the one-off gain on sale of our PFI investments.
Our cash performance continued to be strong, with Group free cash flow
increasing by 14.3% to £97.6m. This contributed to a reduction in Group
recourse net debt of £34m to £137.9m. The strength of our balance sheet was
further enhanced by the decline in our net pension liabilities.
Serco's policy is to increase the total dividend each year broadly in line with
the increase in underlying earnings. The Board has proposed a final dividend of
3.02p per share, representing an increase on the 2006 final dividend of 18.4%
and bringing the total dividend for the year to 4.25p, growth of 18.1%. The
final dividend will be paid on 21 May to shareholders on the register on 7
March 2008.
Success depends on our ability to meet - and often exceed - the expectations of
our customers. Serco's delivery of excellent service was once again reflected
in our contract win rates. During 2007, we maintained our win rates at more
than 90% for rebids and one in two for new bids. In total, we signed £3.6bn of
contracts and were appointed preferred bidder for contracts valued at around £
1.0bn.
Among the significant wins in existing markets, we signed a contract with the
UK Ministry of Defence (MoD) to provide marine services to the Royal Navy. The
contract is valued at around £750m over 15 years, a sizeable increase on our
previous contract. We signed a £450m, 30-year contract to provide services to
the new NHS Forth Valley Acute Hospital, which includes a number of
technological innovations. The contract will begin in 2010. We also commenced
work at Yarl's Wood Immigration Removal Centre under an eight-year, £85m
contract with the UK Home Office. We were, however, disappointed by the
cancellation of the Leicester Pathway PFI project for which we had been
appointed preferred bidder in 2004.
We made inroads into new, high-value markets during the year, reaping the
benefits of the technology capabilities we acquired in 2005 and our ability to
bring together the skills of different divisions to create a compelling
offering for our customers. Trusted Borders, a consortium of which Serco is a
key member, was awarded a ten-year contract by the UK Home Office to develop
and implement the e-Borders project. The contract is valued at around £200m to
Serco. Glasgow City Council approved the creation of a strategic partnership
with Serco, to provide property and information and communication technology
services. The partnership is valued at £265m to Serco over ten years and also
positions us to support the Council on other transformational work.
We also won a record level of work in international markets, in particular in
the United States. We renewed and significantly increased our contract with the
US Postal Service to provide engineering, technical, project management and IT
services. Over ten years it has a potential value of $260m. The US Army
selected Serco for the $225m LOGCAP IV contract to provide cost analysis,
logistics planning and supply chain consulting services worldwide. In addition,
the Space and Naval Warfare Systems Center awarded us two contracts to assist
with anti-terrorism systems. The first has a potential value of $64m over five
years. The second contract has a potential value of $115m over five and a half
years.
In the United Arab Emirates, we were appointed preferred bidder to operate and
maintain the Dubai Metro. The contract is valued at more than £400m over 12.5
years, with passenger operations due to commence in autumn 2009. In Australia,
the Queensland Department of Corrective Services appointed us to run Borallon
Correctional Centre, under a contract valued at around Aus$100m over five
years. The Victoria Department of Justice selected us for a four-year safety
camera contract valued at Aus$90m.
A key strength of our business model is the visibility of future revenues. At
31 December 2007 we had visibility of 91% of planned revenue for 2008, 76% for
2009 and 63% for 2010. Our order book stood at a record £14.7bn and we were
preferred bidder on contracts valued at £1.0bn. In addition, we have identified
a pipeline of further opportunities across our markets estimated at £27bn.
Our actions to increase margins will deliver further improvements in the next
few years. We continue to manage our contract portfolio by not renewing
contracts and exiting businesses which do not fit our business model. We have
introduced a range of measures to improve our operating efficiency, such as the
roll-out of our new SAP system and the introduction of strategic sourcing of
goods and services. Going forward, winning higher-value work will increasingly
contribute to our margins. As a consequence of these actions, we expect our
Adjusted PBT margin to increase by 30 basis points in both 2008 and 2009.
Serco has made a positive start to 2008. Although we were disappointed that the
Oman Ministry of Defence no longer wishes to proceed with its project to
develop a military training college, we were delighted to announce in February
the signing of the £265m Glasgow City Council strategic partnership and a
significant environmental services contract with the London Borough of
Hammersmith and Fulham, valued at around £140m over 14 years.
Operating Review
Civil Government
Civil Government is our largest segment and includes home affairs, information
technology and business process outsourcing, integrated facilities management,
consulting and much of our work in the private sector. 2007 saw an increasing
requirement for technological content in these markets, as customers looked to
procure more sophisticated services. Segmental revenue increased by 8.8% to £
952m, representing 34% of Group revenue (2006: 34%).
Home Affairs
We had two notable successes with the UK Home Office. Trusted Borders, a
consortium of which Serco is a key member, signed a contract to develop and
implement the nation's e-Borders project, an advanced border control and
management programme. Serco is responsible for infrastructure and service
management. The contract is valued at around £200m to Serco over ten years. We
also won a contract to manage and operate Yarl's Wood Immigration Removal
Centre. The contract began in April 2007 for an initial three years, with
optional extensions for up to eight years. Over the full eight years, the
contract is valued at around £85m.
We continued to build our presence in the Australian home affairs market,
winning contracts to manage and operate Borallon Correctional Centre and to
provide safety camera services. Borallon, near Brisbane, accommodates 500 male
prisoners. This contract with the Queensland Department of Corrective Services
is valued at around Aus$100 million over five years, with the potential for a
further five-year extension. The safety camera contract is with the Victoria
Department of Justice. The four-year contract is valued at Aus$90m, with the
potential for a three-year extension.
IT and BPO Services
In UK local government, Glasgow City Council approved the creation of a
partnership with Serco, to transform the Council's land, property and
information and communications technology (ICT) services. The partnership will
be worth £265m to Serco over ten years, and will also position us to support
the Council on transformational projects to improve the Council's efficiency
and service delivery. The partnership is the first of its kind in Scotland and
is expected to save the Council more than £70m. We also secured a £30m,
ten-year partnership with Ealing Council, to provide ICT support, and Southwark
Council selected Serco to provide and support its ICT infrastructure in a
five-year deal valued at £26m.
Severn Trent - one of the world's largest private water companies - awarded
Serco a five-year IT infrastructure framework contract valued at around £40m.
We will provide programme and project management, consulting, technical
delivery, IT engineering and technology refresh services.
We continued to enhance our position as the leader in the UK business support
market, winning a contract with the South West Regional Development Agency to
provide the Business Link service for Cornwall, Devon and Somerset. The
contract is for 28 months and is valued at around £15m.
The US Postal Service Engineering Organization appointed Serco to provide
engineering, technical, project management and IT services. The two-year
contract has four two-year options and over the full ten years has a potential
value of $260m, a sizeable increase over our previous contract. The latest
contract broadens our role to include management services focused on enhancing
efficiencies, quality assurance services and testing of mail processing
equipment.
Integrated Facilities Management
Our integrated facilities management business had several notable successes. We
signed a £450m, 30-year contract to provide support to the new NHS Forth Valley
Acute Hospital, drawing on our healthcare experience to influence the
hospital's design and thereby enhance infection control. Innovations include
segregation of patient, visitor and goods traffic as well as the introduction
of proven robotic technology to support the movement of goods around the
hospital site. The contract will begin in 2010.
We signed contracts to provide operational management to the United Arab
Emirates University in Al Ain (£70m over ten years) and to deliver property
management and support services to State Street Bank (£50m over five years).
Mid Suffolk and Babergh District Councils awarded us a contract in a
groundbreaking shared services partnership for waste and recycling services.
The contract is for up to 21 years and is valued at around £80m. Mid Sussex
District Council also appointed us to provide refuse, recycling and street
cleaning services. The contract is for up to 21 years and is valued at around £
74m.
Consulting
We developed our consulting business with the acquisition of Cornwell
Management Consultants plc, adding new capabilities in information and
knowledge management, while increasing our capacity in project and programme
management and enterprise architecture. We also acquired ER Consultants Limited
as part of our building of capability in the area of sustainable change. ER
brings experience and skills in leadership development and organisation design
and development. These are key issues for many organisations and the
acquisition enhances our ability to help our current customers and also to
target new blue chip customers in the commercial sector.
Our consulting expertise resulted in our selection for a number of important
frameworks in 2007. We were one of ten firms chosen to provide consultancy to
UK government departments looking to undertake transformational projects as
part of the four-year, £1.5bn Catalist framework. Serco was one of only two
suppliers included in all five categories of the Metropolitan Police's
four-year, £200m Development Services Framework. We were one of ten suppliers
selected for the MoD's four-year, £100m "Catalogue" framework, the main route
for the MoD to acquire consultancy services. We also qualified as one of only
four providers of project and programme management resources to the Department
for Environment, Food and Rural Affairs. The potential value of the framework
to the qualified suppliers is £80m over four years.
Defence
Revenue in Defence increased by 11.8% to £721m, representing 26% of Group
revenue (2006: 25%). 2007 was a year of strong organic growth in defence,
supplemented by demand for our value-added services.
United Kingdom
We had a highly-successful year in winning new business in the UK defence
market, primarily in support of the Royal Navy and Royal Air Force.
The key win in the UK was a contract with the MoD to deliver marine services to
the Royal Navy. The MoD selected our joint venture with Denholm Shipping and
Infrastructure Investors (I2) for a 15-year private finance initiative (PFI)
contract valued at around £1bn, of which Serco's operating contract represents
£750m. This is a sizeable increase on our previous operating contract, under
which we have provided marine services to the Royal Navy since 1996.
Serco will manage, operate and maintain a fleet of around 110 vessels,
providing services that enable the Royal Navy to put to sea. The joint venture
will also bring over 30 new vessels into service during the early years of the
contract, enhancing service flexibility and responsiveness and helping to meet
the Royal Navy's demanding operational requirements. Serco chose I2 in 2006 to
become its strategic partner for financing and investment in PFIs. In this
project, I2 will provide all the subordinated debt and the largest proportion
of the equity (49%). Serco retains 41% of the equity as well as day-to-day
management of the joint venture, so as to implement the successful transition
of the project over the first 18 months.
The MoD awarded us a contract to manage the maintenance, repair and operation
of the UK Armed Forces' estate facilities in Gibraltar. The contract is valued
at around £50m over five years, with a further two option years and the
potential for additional work. We will also provide military logistics,
workshops and marine services support to the naval base and other MoD
operations.
The Naval Air Command appointed Serco preferred bidder for a partnering
contract valued at around £7m per annum. We will provide aviation, engineering
and aircraft support at two Royal Naval Air Stations, Yeovilton and Culdrose,
improving the availability of aircraft and trained aircrew to the Fleet Air Arm
at a time of considerable operational pressure. The work will build on the
operational support we already provide to the Royal Navy's aircraft.
We were also awarded a contract to provide a range of services at RAF Lyneham,
home to the UK's tactical Air Transport force of Hercules aircraft and one of
the largest and busiest operational stations in the RAF. In addition to
providing base support, facilities management and logistics services, Serco
will support the No 1 Air Mobility Wing, Tactical Medical Wing and No 4 Force
Protection Wing. This win will further strengthen Serco's relationships with
Air Command and key equipment manufacturers such as Rolls Royce. The contract
is for four years with three option years and is valued at around £34m over the
full seven years.
We were awarded the Apache helicopter Interim Support Arrangement contract by
AgustaWestland, the prime contractor for Apache depth' maintenance at
Wattisham in the UK. Depth maintenance involves stripping the aircraft down and
reassembling with repaired or new parts as necessary. The contract is valued at
around £15m to Serco over three years.
United States
Our North American defence business won a record level of new contracts against
a continued backdrop of pressure on non-combat operations. The US Army awarded
us a contract to provide cost analysis, logistics planning and supply chain
consulting services, under the Logistics Civil Augmentation Program IV (LOGCAP
IV). The indefinite delivery/indefinite quantity (IDIQ) contract has a one-year
base period with four annual options, for a five-year total period and a
potential value of $225m.
The Space and Naval Warfare Systems Center (SPAWAR) awarded us two contracts to
assist the Navy and other government agencies with anti-terrorism systems.
Under the first contract we will evaluate, integrate and install advanced
anti-terrorism systems at Navy ports around the world. The IDIQ contract has a
total potential value of $64m over five years. The second contract extends that
relationship with SPAWAR to other government agencies. The contract is valued
at around $62m over three years, and could reach $115m if all five of the
six-month award options are exercised.
The US Navy selected us for the major portion of the "Sea Enterprise" contract.
The IDIQ contract is to provide engineering and installation services for
command, control, communication, computers, intelligence and reconnaissance
systems at ship, shore and submarine locations on the West Coast of the United
States. It has a one-year base period with four annual options, for a maximum
term of five years and a potential value of around $156m. A key objective is to
reduce the costs of installations by improving productivity and achieving
long-term efficiencies.
Transport
Transport revenues grew by 4.7% to £655m, representing 23% of Group revenue
(2006: 25%). A key feature of the year was the use of our UK skills to secure
international opportunities.
Light Rail
The Dubai Government Roads and Transport Authority (RTA) selected Serco as
preferred bidder to operate and maintain the initial two lines of the new Dubai
Metro, the first such system in the region and an important development for the
city. The contract includes pre-launch consultancy and planning, with
operations and maintenance running for five years from autumn 2009 and the
potential for a further five-year extension. The contract is valued at more
than £400m over this 12.5 year period.
Serco will run the operations control centre, maintain rolling stock, track and
station facilities and provide train attendants and all station staff. The
lines will cover 76 kilometres of track and are predicted to carry 200m
passengers per year. Ultimately, the RTA intends to extend the Dubai Metro to
more than 300 kilometres, making it the world's largest driverless metro
system.
During the year, we finished our contracts to operate the Manchester Metrolink
and the Copenhagen Metro. We did not renew the contracts at rebid, as we
continue to actively manage our contract portfolio.
Heavy Rail
Northern Rail, which we operate in a joint venture with NedRailways, carried
nearly 79m passengers in 2007 and achieved a strong operational performance
despite the severe floods in the summer. Northern Rail's success has led to it
winning two prestigious national awards: Public Transport Operator of the Year
at the National Transport Awards 2007 and the Example of Excellence in the
Rural Action category at the 2007 Business in the Community awards. Our other
joint venture with NedRailways - Merseyrail - was the best performing railway
in the country in terms of reliability and punctuality, surpassing its previous
best performance in 2005.
Great Southern Rail, our Australian rail operation, performed well in 2007,
with good growth on both The Ghan and Indian Pacific services. The Overland
service between Melbourne and Adelaide was re-launched in May 2007, since when
its patronage has increased by more than 50%.
Traffic Management
In the UK, we successfully rebid our contract with Transport for London to
maintain traffic signal control equipment and provide related services. The
contract is for five years with the potential for a further two-year extension,
and is valued at around £60m over the seven years. Serco will provide cover for
all traffic control equipment including traffic signals, crossings, automatic
number plate recognition cameras and traffic information signs. The services
cover central London and the City, including important transport link points
for the 2012 Olympics.
Serco operates the National Traffic Control Centre (NTCC) on behalf of the
Highways Agency. We were pleased that the NTCC achieved final completion in May
2007, recognising the delivery of quality services and continuing innovation at
this world-first facility. We have successfully rolled out the travel time
variable messaging system, providing valuable real-time information for
drivers.
In the US, the Georgia Department of Transportation appointed us to run the
state's Traffic Management Center. This is Serco's first traffic management
contract in North America. The contract is for up to four years and is valued
at $12m.
Science
Science revenues grew by 19.9% to £483m, representing 17% of Group revenue
(2006: 16%). Technology and innovation are at the heart of our offering in this
market.
Our joint venture with BNFL and Lockheed Martin to operate the UK's Atomic
Weapons Establishment (AWE) continued to perform strongly. The infrastructure
upgrade programme is progressing well, with the facility to house the Orion
research project due to open on schedule in March 2008. This facility will
cover both weapons research and civil science studies such as evolving stars
and super dense matter. The construction of energy-efficient offices for up to
1,400 staff is also on time and on budget. As previously reported, BNFL is in
the process of disposing of its shareholding in AWE and we hope this will be
completed later this year.
Serco Technical and Assurance Services (Serco TAS) won several contracts in the
nuclear market during the year. A consortium led by Serco TAS was awarded a £
15m contract to provide specialist technical and engineering support to Magnox
reactor sites over the next five years. A range of specialist nuclear technical
services will be provided, including safety case management, systems
engineering, analysis of safety-critical structures and systems and technical
advice on waste management.
Serco TAS, in partnership with Golder Associates, was also awarded a £10m
two-year contract to examine and develop plans to clean up contaminated land at
Sellafield. The work will include assessment of the condition of the land and
groundwater, mathematical modelling, development of a strategy for dealing with
the contamination and identifying the technologies and actions needed for clean
up.
The Nuclear Decommissioning Authority (NDA) appointed a consortium led by the
Washington Division of the US company, URS, as preferred bidder to manage the
UK's low-level radioactive waste repository at Drigg in West Cumbria. Serco TAS
is an integrated sub-contractor and will provide regulatory, safety and
environmental technical support to the consortium. The ten-year contract can be
extended to up to 17 years.
Market Development
Serco's markets continue to expand rapidly, as local and national governments
face budget deficits and ever-increasing pressure from citizens to improve
public services. Governments increasingly recognise the benefits of opening up
public service monopolies to competition and innovation. A review by the Serco
Institute of 200 government and academic studies spanning 30 years, 12
countries and five sectors found that competition resulted in typical cost
savings of 20%, with savings as high as 30-40% in some cases. Value for money
in public services is driven by innovation and smarter ways of working. In the
UK, the Government has launched a major study to help it understand the
contribution of the public service industry and how the Government can support
it, including the potential to export the UK's expertise in this area.
Turning to individual markets, we expect to see continued strong growth in home
affairs. In the UK we are well established across all areas and we are
expanding our footprint in Australia. Key drivers include the threat of global
terrorism, concern about immigration, perceptions of rising crime and the
continued rise in prisoner numbers. These will increase governments' use of the
private sector to provide capacity and to develop new capabilities to meet new
threats.
Health and welfare to work' offer major future growth areas for Serco. The
UK's National Health Service needs to deliver efficiency savings and meet
stretching targets and Serco can play a critical supporting role. We plan to
offer better value-for-money clinical services to the primary sector and to
provide fully-managed healthcare solutions that deliver the information and
support needed by clinicians and patients. The UK Government is also
increasingly looking to the private sector to help the jobless move back into
employment. We are well positioned to play a role in this important new market.
UK local authorities face major challenges, creating opportunities for Serco.
The Government's 2007 Comprehensive Spending Review requires councils to
deliver 3% annual efficiency savings, a degree of financial pressure new to
many council leaders and chief executives. They will look to service providers
for innovative and cost-effective solutions. In addition, local government
reorganisation is creating a number of unitary authorities with greater
responsibilities. This inevitably involves back-office consolidation, in
particular in IT-based services. Serco is well placed to help. Finally, local
authorities are being given a greater remit to shape their area and deliver
local priorities, notably through agencies such as the police, health and
highways. Serco's track record in reducing crime and in improving the
environment, school performance and transport gives us a pivotal role, with our
broad understanding of the local agenda placing us in a unique position in the
market.
In defence, the public debate in the UK about the level of funding to equip and
support the armed forces has intensified throughout the year. Our core business
lies in helping government achieve greater value for money, and it is on that
basis that we have continued to work with the MoD as it refreshes its Defence
Industrial Strategy.
Our track record in the provision of operational support services to the front
line commands and our independence from equipment manufacturers, position us
well to deliver significant growth. This will be achieved by using our role as
an integrator of people, infrastructure, training and technology to help the
MoD deliver through-life capability management, and by leveraging our extensive
capabilities in operational support and training into new overseas markets.
We have a significant position in the US defence market, and have broadened our
offerings, which should serve us well as that sector continues to evolve to an
imminent post-Iraq era. In particular, there is a continuing demand for our
services to military personnel and their families, where we have a solid track
record. We are well-positioned to provide logistics services as the military
and other government agencies face greater pressures to reduce costs, and for
advanced port security and other anti-terrorism/force protection applications,
an area where we see continued emphasis in the near future.
In transport, we continue to monitor opportunities to address congestion and
improve traffic efficiency. We have built strong links with customers in the UK
and around the world to further this. In the United Arab Emirates there are
substantial opportunities to grow our presence in the transport market with the
development of the Dubai Metro. This system will be expanded over time and we
anticipate a growing pipeline of opportunities with the rapid expansion of
Dubai and further transport innovation across the Emirates, in particular Abu
Dhabi. Our reputation for service delivery and working closely with clients is
bringing a substantial range of opportunities across both light rail and
traffic control systems that fit within our strategy.
We have engaged with the UK Government on future options for its trading funds
and agencies. These options include the Government-Owned, Contractor-Operated
(GOCO) model, of which our successful operations at AWE and the National
Physical Laboratory are examples. GOCO is an attractive operating model where
it is strategically important to retain a public stake in an organisation, and
we will continue to work with government to examine its full potential while
exploring other contractual mechanisms.
In the UK NDA market, our primary focus is on producing a competitive bid for
Sellafield. SBB Nuclear, the consortium of Serco, Bechtel and The Babcock &
Wilcox Company, is one of four invited by the NDA to submit final tenders.
Tender responses are scheduled to be returned to the NDA in the spring of 2008,
with the announcement of the winning bidder planned for the summer of 2008. SBB
Nuclear is a unique and highly effective team, with a proven track record of
safely and securely delivering high performance at AWE and at nuclear sites in
the US, through partnership with employees and local communities. Together our
consortium has experience of successful transition at 26 major sites in the UK
and US. We look forward to continuing to work with the NDA and the stakeholders
at Sellafield through the concluding stages of the competition process. There
are also a number of other opportunities, including the decommissioning of the
Magnox reactors, Dounreay and other smaller sites. We will continue to review
the attractiveness of these opportunities as the market develops.
We continue to study the potential for our service-led model to be introduced
into a number of new markets. While many of these markets are at an early
stage, China, India and South Africa look likely to present opportunities in
the medium term.
People
Serco's success depends on the quality, skills and dedication of our people.
The best recognition of this is in the long-term relationships we build with
our customers, the growth in existing contracts as our customers give us more
work and in the number of customers who want Serco back when our contracts
expire.
The quality of our employees is also reflected in the numerous awards and
commendations that Serco receives. Among these, for the fourth year in a row,
we were voted the UK's most admired support services company in Management
Today's Britain's Most Admired Companies' awards. Serco also ranked as the
fourth most admired company overall. Management Today's awards have become a
benchmark for excellence.
Board
As announced on 31 August 2006, Kevin Beeston moved from Executive Chairman to
Non-Executive Chairman on 1 September 2007. Grant Rumbles, our Chief Operating
Officer, was appointed an Executive Director on 3 July 2007.
DeAnne Julius retired on 29 October 2007 as a Non-Executive Director and from
her post as Senior Independent Director. We extend our thanks to DeAnne for her
considerable contribution to our development and wish her well. Baroness Ford
of Cunninghame was appointed the new Senior Independent Director from the same
date.
Tom Corcoran joined Serco as a Non-Executive Director on 3 December 2007. Tom
is a member of the Remuneration, Audit, Nomination and Training and Development
committees.
Outlook
Our markets continue to generate a broad range of high-quality opportunities
for Serco, both in the UK and internationally. The success we have achieved in
2007 underpins our confidence in delivering double-digit growth for the
foreseeable future. At the same time, our focus on managing our contract
portfolio, enhancing our efficiency and bidding selectively for higher-value
work will allow us to further increase our margins.
Finance Review
1. Financial performance
Serco continued to grow strongly in 2007 with another double-digit increase in
revenue. At the same time, we successfully increased our margins and free cash
flow and further strengthened our balance sheet.
Serco's income statement for the year is summarised in Figure 1 below. This
includes the results of joint ventures which are proportionately consolidated.
As announced in our 2007 interim results, we have adopted a new pro forma
profit measure, profit before tax and amortisation of acquired intangibles
(Adjusted profit before tax). Figure 1 also shows Adjusted earnings per share,
which is calculated before the amortisation of acquired intangibles. For 2006,
the adjusted measures also exclude the gain on sale of our PFI investments of £
11.4m.
Figure 1: Income statement
Year ended 31 December 2007 2006 Increase
£m £m
Revenue 2,810.7 2,548.2 10.3%
Gross profit 406.2 365.7 11.1%
Administrative expenses (264.2) (242.9)
Adjusted operating profit 142.0 122.8 15.6%
Investment revenue and finance costs (18.8) (17.8)
Adjusted profit before tax 123.2 105.0 17.3%
Amortisation of acquired intangibles (8.6) (9.0)
Gain on sale of PFI investments - 11.4
Profit before tax 114.6 107.4 6.7%
Tax (32.2) (27.9)
Profit for the year 82.4 79.5 3.6%
Effective tax rate 28.1% 26.0%
Adjusted earnings per share 18.57p 15.92p 16.6%
Earnings per share 16.98p 16.62p 2.2%
Dividend per share 4.25p 3.60p 18.1%
1.1 Revenue
Revenue grew by 10.3% to £2,810.7m, benefiting from the growth of existing
contracts and the contribution of new wins.
1.2 Gross margin
Gross margin - the average contract margin across our portfolio - was 14.5%, a
small increase on 2006.
1.3 Investment revenue and finance costs
Investment revenue and finance costs totalled a net cost of £18.8m (2006: £
17.8m). In December 2006, we sold a number of our PFI investments to
Infrastructure Investors Limited. The loss of net interest income from these
investments was largely offset by the increase in net interest income from our
retirement benefit obligations.
1.4 Adjusted profit before tax
Adjusted profit before tax was £123.2m, an increase of 17.3%. This represented
a margin of 4.4%, up from 4.1% last year.
1.5 Gain on sale of PFI investments
2006 included an £11.4m one-off gain on the sale of PFI investments. The sale
was part of our creation of a strategic PFI investment partnership with I2.
There was no corresponding gain in 2007.
1.6 Profit before tax
Profit before tax increased by 6.7% to £114.6m. Profit before tax excluding the
gain on sale in 2006 was up by 19.4%.
1.7 Tax
The tax charge of £32.2m (2006: £27.9m) represents an effective rate of 28.1%,
compared with 26.0% in 2006. The underlying rate in 2006 was 29.1% before the
gain on sale of the PFI investments. The decrease in the underlying rate is
primarily due to the mix of taxable profits.
1.8 Earnings per share (EPS)
Adjusted EPS rose by 16.6% to 18.57p. EPS grew by 2.2% to 16.98p.
EPS and Adjusted EPS are calculated on an average share base of 482.4m during
the period (2006: 471.2m). The increase in the average share base resulted from
the exercise of employees' share options.
2. Dividend
Serco's policy is to increase the total dividend each year broadly in line with
the increase in underlying earnings. The Board has proposed a final dividend of
3.02p per share, representing an increase on the 2006 final dividend of 18.4%
and bringing the total dividend for the year to 4.25p, growth of 18.1%. The
final dividend will be paid on 21 May to shareholders on the register on 7
March.
3. Cash flow
The Group generated a free cash inflow of £97.6m (2006: £85.4m), an increase of
14.3%.
Figure 2 analyses the cash flow. As in previous years, we have designed the
analysis to show the true cash performance of the Group - the cash flows
generated by subsidiaries plus the dividends received from joint ventures. It
therefore differs from the consolidated cash flow on page 23, which
proportionately consolidates the cash flows of joint ventures. The adjustment
line in Figure 2 reconciles the movement in Group cash to the consolidated cash
flow.
Figure 2: Cash flow
Year ended 31 December 2007 2006
£m £m
Operating profit excluding joint ventures 92.2 87.9
Non cash items 52.1 35.0
Group EBITDA 144.3 122.9
Working capital movement (4.7) (2.1)
Group operating cash flow 139.6 120.8
Interest (25.6) (10.6)
Tax (5.4) (6.7)
Expenditure on tangible and intangible assets (47.9) (47.7)
Dividends from joint ventures 36.9 29.6
Group free cash flow 97.6 85.4
Disposal of joint ventures 3.3 -
Acquisition of subsidiaries (7.4) -
Cash received on sale of PFI investments - 76.5
Cash disposed of and transaction costs on - (58.3)
sale of PFIs
Other financing (71.0) (98.6)
Special pension contribution (51.0) (19.0)
Dividends paid (17.9) (14.5)
Group net decrease in cash and cash (46.4) (28.5)
equivalents
Adjustment to include joint venture cash 6.7 10.3
impacts
Net decrease in cash and cash equivalents (39.7) (18.2)
Note: Group EBITDA is earnings from subsidiaries (excluding joint ventures)
before interest, tax, depreciation, intangible amortisation and
other non cash items
3.1 Group operating cash flow
Group operating cash flow of £139.6m (2006: £120.8m) reflects a conversion of
Group EBITDA into cash of 97% (2006: 98%). This was a strong cash performance,
given the level of organic growth in the business.
3.2 Interest
Net interest paid was £25.6m, compared to £10.6m in 2006. The increase is
mainly due to lower cash interest receipts after the disposal of PFI
investments in December 2006.
3.3 Tax
Tax paid was £5.4m (2006: £6.7m). Cash tax is below the equivalent tax charge
in the income statement. This reflects timing differences and the availability
of tax relief on the special pension contributions of £19m in December 2006 and
£51m in January 2007.
3.4 Expenditure on tangible and intangible assets
Expenditure on tangible and intangible assets in the year was £47.9m (2006: £
47.7m). This represents 2.2% of revenue excluding joint ventures (2006: 2.5%).
Expenditure in 2007 included the completion of the roll-out of our SAP system
in the UK.
3.5 Dividends from joint ventures
Dividends received from joint ventures totalled £36.9m (2006: £29.6m), a
conversion rate of 100% (2006: 87%) of joint ventures' profit after tax and
minority interest, excluding costs allocated by Group. Going forward, we expect
conversion in the range of 80-90%.
3.6 Other financing
The movement in other financing resulted from repayments of our loans and the
maturing of one of our private placements in December 2007 for £43.2m.
4. Net debt
Figure 3 analyses Serco's net debt.
Figure 3: Net debt
At 31 December 2007 31 December
2006
£m
£m
Group - cash and cash equivalents 138.1 177.8
Group - loans (263.3) (334.4)
Group - obligations under finance (12.7) (15.3)
leases
Group recourse net debt (137.9) (171.9)
Joint venture recourse net cash 34.9 28.2
Total recourse net debt (103.0) (143.7)
Group non recourse debt (59.3) (62.2)
Total net debt (162.3) (205.9)
4.1 Group recourse net debt
Group recourse net debt decreased from £171.9m to £137.9m, due to the cash
flows generated by the business.
Included within Group recourse net debt is £11.9m (31 December 2006: £10.6m) of
encumbered cash. This is cash of PFI and other project companies securing
credit obligations and customer advance payments.
4.2 Group non recourse debt
The Group's debt is non recourse if no Group company other than the relevant
borrower - such as a special purpose company for a PFI - has an obligation to
repay the debt under a guarantee or other arrangement. The debt is excluded
from all of our credit agreements and other covenant calculations, and
therefore has no impact on the Group's ability to borrow.
Group non recourse debt reduced by £2.9m to £59.3m during the year, due to
scheduled repayments. The non recourse debt relates to the Kilmarnock prison
contract and our Driver Examination Services contract in Canada.
5. Pensions
At 31 December 2006, the net liability included in the balance sheet arising
from our defined benefit pension scheme obligations was £52.2m (2006: £120.0m).
Figure 4 provides further analysis.
Figure 4: Defined benefit pension schemes
At 31 December 31 December
2007 2006
£m £m
Group schemes - non contract (67.9) (157.8)
specific
Contract specific schemes
- reimbursable (60.7) (67.6)
- not certain to be reimbursable (14.0) (23.9)
Net retirement benefit liabilities (142.6) (249.3)
Intangible assets arising from 17.4 20.6
rights to operate franchises and
contracts
Reimbursable rights debtor 60.7 67.6
Deferred tax assets 12.3 41.1
Net balance sheet liabilities (52.2) (120.0)
Serco has three main types of scheme which are accounted for as defined benefit
pension schemes. Each type has its own accounting treatment under International
Financial Reporting Standards. These are:
Non contract specific - schemes which do not relate to specific contracts or
franchises. For these schemes, we charge the actuarial gain or loss for the
period to the consolidated statement of recognised income and expense (the
SORIE)
Reimbursable - schemes where we have a right of full cost reimbursement and
therefore include both the pension scheme deficit and offsetting reimbursable
rights debtor in the balance sheet, and
Not certain to be reimbursable - schemes relating to specific contracts or
franchises, where the deficit will pass back to the customer or on to the next
contractor at the end of the contract. For these schemes, we charge the
actuarial gain or loss on our share of the deficit for the period to the SORIE,
recognise a recoverable intangible asset on the balance sheet at the start of
the contract or franchise and amortise the intangible asset to the income
statement over the contract or franchise life.
Serco has limited commercial risk in relation to the contract specific schemes,
due to either the right of cost reimbursement or because the deficit will pass
back to the customer or on to the next contractor at the end of the contract.
Among our non contract specific schemes, the largest is the Serco Pension and
Life Assurance Scheme (SPLAS). At 31 December 2007, SPLAS had a deficit of £
28.7m (31 December 2006: £117.0m). The reduction in the deficit reflects the
movement in bond yields and the action we have taken to ensure appropriate
funding for the scheme, including the special pension payment of £51m in
January 2007.
Figure 5 shows the sensitivity of the liabilities of our pension schemes to
changes in discount rates and to adjustments in the actuarial assumptions for
the rate of inflation, members' salary increases and life expectancies.
Figure 5: Pension assumption sensitivities
Change in assumption Change in liability
Discount rate +0.5% (9)%
(0.5)% +10%
Price inflation +0.5% +7%
(0.5)% (7)%
Salary +0.5% +3%
(0.5)% (3)%
Longevity Increase by one year +2.75%
6. Treasury
The Group's principal debt finance consists of a £400m bank credit facility
comprising a term loan facility and a revolving credit facility. At 31 December
2007 we had £141m (31 December 2006: £163m) outstanding on the term loans and
the revolving facility was undrawn. Interest is charged at a rate of 45 basis
points over LIBOR on borrowings under the facility. The facility is unsecured
and matures in December 2009.
Serco has also issued loan notes under two private placements. The first
private placement, for £43.2m, matured in December 2007 and was fully repaid.
The second, for £117.0m, amortises evenly from 2011 to 2015.
Consolidated income statement
For the year ended 31 December 2007
Note 2007 2006
£m £m
Continuing operations
Revenue 2 2,810.7 2,548.2
Cost of sales (2,404.5) (2,182.5)
Gross profit 406.2 365.7
Administrative expenses (264.2) (242.9)
Other expenses - amortisation of intangibles (8.6) (9.0)
arising on acquisition
Total administrative expenses (272.8) (251.9)
Gain on sale of PFI investments - 11.4
Operating profit 2 133.4 125.2
Investment revenue 3 12.2 31.7
Finance costs 3 (31.0) (49.5)
Profit before tax 114.6 107.4
Tax (32.2) (27.9)
Profit for the year 82.4 79.5
Attributable to:
Equity holders of the parent 81.9 78.3
Minority interest 0.5 1.2
Earnings per share (EPS)
Basic EPS 4 16.98p 16.62p
Diluted EPS 4 16.74p 16.43p
Consolidated statement of recognised income and expense
For the year ended 31 December 2007
Note 2007 2006
£m £m
Net actuarial gain on defined benefit 7 62.2 78.9
pension schemes
Actuarial loss on reimbursable rights 7 (19.4) (53.4)
Net exchange gain/(loss) on translation of 7 12.8 (12.3)
foreign operations
Fair value gain on cash flow hedges during 7 9.0 2.2
the year
Tax charge on items taken directly to 7 (11.5) (7.0)
equity
Net income recognised directly in equity 53.1 8.4
Profit for the year 82.4 79.5
Total recognised income and expense for the 135.5 87.9
year
Attributable to:
Equity holders of the parent 134.9 87.1
Minority interest 0.6 0.8
Consolidated balance sheet
At 31 December 2007 2007 2006
Note £m £m
Non-current assets
Goodwill 542.1 528.5
Other intangible assets 139.4 126.1
Property, plant and equipment 95.1 93.6
Trade and other receivables 104.6 110.5
Deferred tax assets 51.6 73.7
Derivative financial instruments 1.2 -
934.0 932.4
Current assets
Inventories 46.3 51.7
Trade and other receivables 573.6 463.3
Cash and cash equivalents 185.0 217.9
Derivative financial instruments 1.5 -
806.4 732.9
Total assets 1,740.4 1,665.3
Current liabilities
Trade and other payables (670.0) (541.9)
Current tax liabilities (14.8) (13.0)
Obligations under finance leases (7.7) (8.3)
Loans (13.5) (57.9)
Derivative financial instruments (2.1) (10.6)
(708.1) (631.7)
Non-current liabilities
Trade and other payables (13.3) (10.4)
Obligations under finance leases (8.7) (11.5)
Loans (317.4) (346.1)
Derivative financial instruments (11.2) (14.2)
Retirement benefit obligations (142.6) (249.3)
Provisions (18.6) (22.3)
Deferred tax liabilities (22.0) (19.9)
(533.8) (673.7)
Total liabilities (1,241.9) (1,305.4)
Net assets 498.5 359.9
Equity
Share capital 9.7 9.5
Share premium account 299.3 283.5
Capital redemption reserve 0.1 0.1
Retained earnings 7 260.6 196.6
Retirement benefit obligations 7 (90.2) (119.5)
reserve
Share-based payment reserve 7 34.6 25.5
Own shares reserve 7 (15.1) (16.4)
Hedging and translation reserve 7 (1.8) (21.3)
Equity attributable to equity holders of 497.2 358.0
the parent
Minority interest 1.3 1.9
Total equity 498.5 359.9
Consolidated cash flow statement
For the year ended 31 December 2007
2007 2006
Note £m £m
Net cash inflow from operating activities 5 134.1 159.5
Investing activities
Interest received 10.3 32.4
Disposal of joint ventures 2.5 18.2
Proceeds from disposal of intangible assets 1.7 -
Proceeds from disposal of property, plant 2.9 1.4
and equipment
Acquisition of subsidiaries, net of cash (9.1) -
acquired
Purchase of other intangible assets (30.6) (30.4)
Purchase of property, plant and equipment (26.2) (27.8)
Net cash outflow from investing activities (48.5) (6.2)
Financing activities
Interest paid (34.2) (42.2)
Dividends paid (17.9) (14.5)
Dividend paid to minority interest (1.2) (1.0)
Repayment of borrowings (74.6) (103.4)
New loan advances 2.2 9.4
Capital element of finance lease repayments (8.4) (8.6)
Proceeds from issue of share capital and 17.1 14.1
exercise of share options
Decrease in non recourse loans (8.3) (25.3)
Net cash outflow from financing activities (125.3) (171.5)
Net decrease in cash and cash equivalents (39.7) (18.2)
Cash and cash equivalents at beginning of 217.9 240.7
year
Net exchange gain/(loss) 6.8 (4.6)
Cash and cash equivalents at end of year 6 185.0 217.9
Notes to the Preliminary Announcement
1. General information
The basis of preparation of this preliminary announcement is set out below.
The financial information in this announcement, which was approved by the Board
of Directors on 27 February 2008, does not constitute the Company's statutory
accounts for the years ended 31 December 2007 or 2006, but is derived from
these accounts.
Statutory accounts for 2006 have been delivered to the Register of Companies
and those for 2007 will be delivered following the Company's annual general
meeting. The auditors have reported on these accounts; their reports were
unqualified and did not contain statements under S237 (2) or (3) of the
Companies Act 1985.
The preliminary announcement has been prepared in accordance with International
Financial Reporting Standards (IFRS) adopted for use in the European Union.
Whilst the financial information included in this preliminary announcement has
been computed in accordance with IFRS, this announcement does not itself
contain sufficient information to comply with IFRS. The Company expects to
publish full financial statements that comply with IFRS in April 2008.
The financial statements have been prepared on the historical cost basis.
Previously, amortisation of intangibles was shown separately within
administrative expenses in the income statement and was excluded from the
Adjusted earnings per share calculation. Only amortisation of intangibles
arising on acquisition (amortisation of customer relationships and licences and
franchises) is now shown separately in the income statement and excluded from
the Adjusted earnings per share calculation. The 2006 comparatives have been
re-presented. There is no change to operating profit or administrative costs in
total as a result of this change in presentation.
2. Segmental information
The Group manages its business on a market segment basis and these segments are
the basis on which the Group reports its primary segment information.
Market segments Civil Defence Transport Science Total
Government
Year ended 31 December 2007
£m £m £m £m £m
Revenue 952.2 720.5 655.0 483.0 2,810.7
Result
Segment result 46.8 49.8 26.7 45.7 169.0
Unallocated expenses (35.6)
Operating profit 133.4
Investment revenue 12.2
Finance costs (31.0)
Profit before tax 114.6
Tax (32.2)
Profit for the year 82.4
Year ended 31 December 2006 Civil Defence Transport Science Total
Government
£m £m £m £m £m
Revenue 875.0 644.8 625.7 402.7 2,548.2
Result
Segment result 42.0 41.2 26.7 36.9 146.8
Unallocated expenses (33.0)
Gain on sale of PFI 11.4
investments
Operating profit 125.2
Investment revenue 31.7
Finance costs (49.5)
Profit before tax 107.4
Tax (27.9)
Profit for the year 79.5
Geographical segments United North Europe Asia Total
Kingdom America and Pacific
Year ended 31 December 2007 Middle
East
£m £m £m £m £m
Revenue 2,125.6 300.9 222.1 162.1 2,810.7
Year ended 31 December 2006 United North Europe Asia Total
Kingdom America and Pacific
Middle
East
£m £m £m £m £m
Revenue 1,886.5 295.3 213.4 153.0 2,548.2
3. Investment revenue and finance costs
2007 2006
£m £m
Net fair value adjustments on derivative 0.3 -
financial instruments
Interest receivable by PFI companies 3.2 25.6
Interest receivable on other loans and 5.5 6.1
deposits
Net interest receivable on retirement benefit 3.2 -
obligations
Investment revenue 12.2 31.7
Net fair value adjustments on derivative - (0.5)
financial instruments
Interest payable on non recourse loans (3.7) (18.0)
Interest payable on obligations under finance (1.0) (0.6)
leases
Interest payable on other loans (26.3) (28.5)
Net interest payable on retirement benefit - (1.9)
obligations
Finance costs (31.0) (49.5)
Net finance costs (18.8) (17.8)
4. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been calculated in
accordance with IAS 33 Earnings Per Share'. EPS is shown both before and after
amortisation of intangible assets arising on acquisition and the gain on sale
of PFI investments to assist in the understanding of the underlying performance
of the business.
The calculation of the basic and diluted EPS is based on the following data:
Number of shares
2007 2006
millions millions
Weighted average number of ordinary shares for the purpose of 482.4 471.2
basic EPS
Effect of dilutive potential ordinary shares: share options 6.8 5.5
Weighted average number of ordinary shares for the purpose of 489.2 476.7
diluted EPS
Earnings 2007 2006
Earnings Per share Earnings Per
amount share
amount
£m Pence £m Pence
Earnings for the purpose of basic EPS 81.9 16.98 78.3 16.62
being net profit attributable to the
equity holders of the parent
Less:
Gain on sale of PFI investments - - (11.4) (2.42)
Add back:
Amortisation of intangible assets arising 7.7 1.59 8.1 1.72
on acquisition, net of tax of £0.9m (2006
: £0.9m)
Adjusted earnings before amortisation of 89.6 18.57 75.0 15.92
intangible assets and gain on sale of PFI
investments
Earnings for the purpose of basic EPS 81.9 16.98 78.3 16.62
Effect of dilutive potential ordinary - (0.24) - (0.19)
shares
Diluted EPS 81.9 16.74 78.3 16.43
5. Reconciliation of operating profit to net cash inflow from operating
activities
2007 2006
£m £m
Operating profit for the year 133.4 125.2
Adjustments for:
Share-based payment expense 5.0 4.8
Depreciation of property, plant and equipment 30.2 30.0
Amortisation of intangible assets 23.2 16.2
Loss on disposal of property, plant and equipment 1.3 1.1
Profit on disposal of joint ventures (0.7) -
Gain on derivatives (1.1) -
Gain on sale of PFI investments - (11.4)
Operating cash inflow before movements in working 191.3 165.9
capital
Decrease/(increase) in inventories 5.9 (13.9)
(Increase)/decrease in receivables (101.4) 10.7
Increase in payables 108.6 21.8
Movement in provisions (4.3) (4.5)
Special contribution to defined benefit pension (51.0) (19.0)
scheme
Cash generated by operations before PFI debtor 149.1 161.0
movement
Movement on PFI debtor 1.5 17.4
Cash generated by operations after PFI debtor 150.6 178.4
movement
Tax paid (16.5) (18.9)
Net cash inflow from operating activities 134.1 159.5
6. Analysis of net debt
At 1 Cash Acquisitions Exchange Non cash At 31
January flow / differences movements December
2007 £m 2007
£m disposals £m
£m £m
£m
Cash and cash 217.9 (38.3) (1.4) 6.8 - 185.0
equivalents
Non recourse loans (24.8) 2.3 - - - (22.5)
(related to PFI
assets)
Other non recourse (37.4) 6.0 - (5.4) - (36.8)
loans
Other loans (341.8) 72.4 0.2 1.7 (4.1) (271.6)
Obligations under (19.8) 8.4 - (0.4) (4.6) (16.4)
finance leases
(205.9) 50.8 (1.2) 2.7 (8.7) (162.3)
Non cash movements in 2007 primarily relate to fixed assets acquired under
finance leases, and the crystallisation of the fair value adjustment of £4.0m
to the value of one of the private placement loans.
The loan was hedged by forward foreign exchange contracts and cross currency
swaps.
7. Reserves
Retained earnings
2007 2006
£m £m
At 1 January 196.6 132.8
Dividends paid (17.9) (14.5)
Profit for the year attributable to 81.9 78.3
equity holders of the parent
At 31 December 260.6 196.6
Other reserves
Retirement Share-based Own Hedging and Total
benefit payment shares translation
obligations reserve reserve reserve
reserve
£m £m £m £m £m
At 1 January 2007 (119.5) 25.5 (16.4) (21.3) (131.7)
Net actuarial gain on 62.2 - - - 62.2
defined benefit pension
schemes
Actuarial loss on (19.4) - - - (19.4)
reimbursable rights
Credit in relation to - 5.0 - - 5.0
share-based payment expense
Net exchange gain on - - - 12.8 12.8
translation of foreign
operations
Fair value gain on cash flow - - - 9.0 9.0
hedges during the year
Exercise of share options - (0.2) 1.3 - 1.1
Tax charge on cash flow - - - (2.3) *(2.3)
hedges
Tax (charge)/credit on items (13.5) 4.3 - - *(9.2)
taken directly to equity
At 31 December 2007 (90.2) 34.6 (15.1) (1.8) (72.5)
* in 2007 these amounts represent £11.5m of tax charge taken directly to equity
in the SORIE
8. Joint ventures
The Group's interests in joint ventures are reported in the consolidated
financial statements using the proportionate consolidation method.
The effect of the Group's joint ventures on the consolidated income statement
is as follows:
2007 2006
£m £m
Revenue 680.1 643.3
Expenses (638.9) (606.0)
Operating profit 41.2 37.3
Investment revenue 4.9 3.3
Finance costs (0.9) (1.3)
Profit before tax 45.2 39.3
Tax (12.1) (8.6)
Profit for the year 33.1 30.7
Minority interest (0.3) (0.6)
Share of post-tax results of joint ventures 32.8 30.1
Operating profit is after allocating £4.0m (2006: £4.0m) of costs incurred by
Group.
END
SERCO GROUP PLC: Final Results
© 2008 PR Newswire
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