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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Interserve | LSE:IRV | London | Ordinary Share | GB0001528156 | ORD 0.1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 6.30 | 5.795 | 6.30 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From May 2019 to May 2024
TIDMIRV
RNS Number : 2591R
Interserve PLC
27 February 2019
For a printer friendly copy of this announcement, please click on the link below to open a PDF version
http://www.rns-pdf.londonstockexchange.com/rns/2591R_1-2019-2-27.pdf
Interserve PLC Full Year Results Announcement 2018
27 February 2019
Interserve, the international support services, construction and equipment services group, today announces its unaudited financial and operational results for the year ended 31 December 2018.
Hot Features
Premium
2018 2017 %
Revenue GBP2,904.0m GBP3,250.8m (10.7%)
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Total Operating profit
*1, 2 GBP92.7m GBP84.5m 9.7%
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Margin % *1 3.2% 2.6% 0.6%
----------------------- ----------------------- -------------------
Loss before tax (GBP111.3m) (GBP244.4m) 54.5%
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EPS *1 1.1p 35.6p (96.9)%
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Statutory EPS (89.2p) (176.0p) 49.3%
----------------------- ----------------------- -------------------
Net Debt GBP631.2m GBP502.6m (25.6%)
----------------------- ----------------------- -------------------
*1 before non-underlying items and amortisation of acquired intangible assets.
*2 2017 Restated for exited businesses from GBP74.9m to GBP84.5m
Deleveraging Plan to secure long-term future of Interserve
-- Prospectus to be issued on the date of this announcement, setting out the Deleveraging Plan in detail
-- The Directors believe the proposed Deleveraging Plan will provide the Group with sufficient liquidity to service its short-term cash obligations, create a strong and competitive balance sheet and a fundamentally solid foundation from which the Group can improve its business and deliver on its long-term strategy
-- The Deleveraging Plan is a consensual restructuring of Interserve, which is required to provide sufficient liquidity, cash and bonding facilities to allow the Group to service short term obligations to avoid a default in the Existing Financing Arrangements. Such a default, were it to occur, would be expected to have material adverse consequences for stakeholders and, in particular, for existing shareholders
-- The Deleveraging Plan fully preserves the pre-emption rights of existing shareholders. If they take up their entitlements in the equity raise their ownership will not be diluted and they will participate on the same terms as lenders
-- The Deleveraging Plan will be subject to approval by Interserve's shareholders on 15 March 2019
Financial performance
-- Significant operating profit *1 improvement up 9.7 % to GBP92.7m (2017: GBP84.5m) -- Loss before tax reduced from GBP244.4m to GBP111.3m
-- Revenues declined 10.7% to GBP2,904.0m (2017: GBP3,250.8m) due to a fall in UK Construction and a more disciplined and commercially focused Group-wide bidding process
-- Operating profit margin *1 increased by 23% from 2.6% to 3.2%
-- The 'Fit for Growth' programme is delivering material cost savings and improving efficiency and effectiveness across the Group. The programme delivered GBP20m of savings in 2018 and is on track to deliver at least GBP40-50m in annual savings by 2021
-- Net debt increased to GBP631.2m within the expected range of GBP625-650m, primarily driven by:
o incremental cash costs from Energy from Waste contracts;
o incremental exceptional costs on a number of Construction projects;
o delays in collecting receipts from certain Middle Eastern customers;
o an unwind in the UK Construction business working capital as the division's revenue continued to decline, partly due to the Group's disciplined approach to pursuing work but more so as the Group's financial position started to impact its ability to successfully win contracts, this has accelerated in the first half of 2019.
Transformation programme delivering strong operational progress and strategic momentum
-- The Group's Health and Safety performance improved in the year with our Lost Time Incident Rate falling by 25% to 0.98 in 2018
-- Future workload of GBP7.1bn (December 2017: GBP7.6bn), with steady momentum particularly in Support Services Defence, Healthcare and Regulated Sectors
-- Operating profit in Support Services increased by 38.9% from GBP42.2m to GBP58.6m as a result of a multi-year operational improvement plan
-- In 2018, UK Construction secured access to Government framework pipeline sales opportunity of GBP1.0bn
-- International Construction business secured a number of contract wins in the period particularly in the UAE
-- Equipment Services revenue lower as major UK infrastructure projects not repeated in 2018 and impact of Qatar embargo; strengthened competitive position through roll-out of new product ranges
-- Continued progress on closing out remaining Energy from Waste projects
Debbie White, Chief Executive Officer, Interserve plc said:
"Despite extremely challenging circumstances, Interserve has made significant progress in 2018. Following the successful completion of the refinancing in April 2018, the business has traded robustly in some difficult markets and continued to win significant new contracts. The 'Fit for Growth' programme is delivering material cost savings and a simpler and more effective business structure. The implementation of the Group's strategy remains on track and we have delivered a significantly improved operating profit this year in line with our plan.
Interserve remains focused on positioning the Group for long-term, sustainable success. This means continuing the operational progress we are making to put legacy issues behind us. However, the Group remains over-leveraged and the successful implementation of the Deleveraging Plan is critical to our future, as it will ensure that Interserve has a competitive financial structure for its future growth. I would urge our shareholders to vote in favour of the Deleveraging Plan.
Interserve has significant opportunities as a best-in-class partner to the public and private sector, and we are making good progress putting in place the right services, governance and financing to deliver a stronger future for our customers and our 68,000 people."
Interserve will be holding a webcast presentation for analysts and investors with Debbie White, CEO, and Mark Whiteling, CFO, at 09.15 GMT, which can be accessed at: https://3xscreen.videosync.fi/2019-02-25-interserve-fy-results-2018
Participant dial in numbers:
Dial in: 0800 358 9473
Participant Access Code: 42379575#
International participants can check the correct international dial in codes here.
The replay of the webcast will be available after the event at: www.interserve.com
STHIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION RELATING TO INTERSERVE PLC.
LEI: 549300MVYY4EZCRFHZ09
For further information please contact:
Jonathan Refoy +44 (0) 7880 315877
Interserve plc
Martin Robinson +44 (0) 207 3534200
Toby Bates
Lisa Jarrett-Kerr
Tulchan Communications
About Interserve
Interserve is one of the world's foremost support services and construction companies. Everything we do is shaped by our core values. We are a leader in innovative and sustainable outcomes for our clients and a great place to work for our people. We offer advice, design, construction, equipment, facilities management and frontline public services. We are headquartered in the UK and FTSE-listed. We have consolidated revenues of GBP2.9bn and a workforce of circa 68,000 people worldwide.
www.interserve.com
For news follow @interservenews
CHAIRMAN'S STATEMENT
My comments will cover the previous fiscal year and the first few months of 2019 in view of the significant events which have taken place in that period. The period has been the most difficult in Interserve's history since the Group was established in 1884.
The resulting stress and uncertainty have led to anxiety amongst our staff, suppliers and customers and significant loss of value for our shareholders from the fall in our share price. I would like to thank them for their support during this challenging period.
Interserve remains one of the world's foremost support services, construction and equipment companies delivering a range of services for our clients helping them to improve their efficiency and productivity. It is a business with a strong purpose, providing important and valued services that enhance people's lives on a daily basis.
However, over the years, the business lost its operating and financial discipline, became too federated and inefficient, lacked a coherent approach and entered some businesses it shouldn't have done.
Debbie White and her management team have made excellent progress over the last eighteen months addressing the problems. The proposed Deleveraging Plan and the continuing progress of the 'Fit for Growth' programme are significant steps towards restoring stability, future financial success and underlying resilience in Interserve and to rebuilding trust with all our stakeholders. I comment on each of these points in more detail below.
DELEVERAGING PLAN
The Board believes the Deleveraging Plan will provide Interserve with a strong balance sheet and the platform to deliver on its strategy. Agreeing the key commercial terms of the Deleveraging Plan with our lenders, bonding providers and Pension Trustee was a significant step forward in our plans to strengthen the balance sheet. The Board believes that this agreement will secure a strong future for Interserve. This proposal has been achieved following a long period of intensive negotiation and has the support of our financial stakeholders and UK Government. The Deleveraging Plan is subject to approval by Interserve's shareholders.
Its successful implementation is critical to the Interserve Group's future and all of its stakeholders and without its successful implementation there will be significant disruption to the business.
The Deleveraging Plan will, alongside our 'Fit for Growth' programme, place us in a strong position to deliver our strategy, be competitive in the marketplace and provide a secure future for the Interserve Group's employees, customers and suppliers and the Board recommends that shareholders vote in favour of it.
FINANCIAL PERFORMANCE
The business has traded robustly in some challenging markets and continued to win significant new contracts. This has been achieved in an environment which is challenging for the sector and particularly so for Interserve. The 'Fit for Growth' programme is delivering material cost savings and a simpler and more effective business structure.
The Board remains focused on positioning the Group for long-term, sustainable success. This means continuing the operational progress we are making to put legacy issues behind us, particularly in closing out and exiting the Energy from Waste business. It also means reducing debt and putting a strong long-term capital structure in place through the proposed Deleveraging Plan.
MANAGEMENT CHANGES
There were three senior management changes in the year, with the departure of Robin O'Kelly, Director of Communications, Yvonne Thomas, Managing Director Citizen Services and Gordon Kew, UK Construction Director.
BOARD AND GOVERNANCE
The Company now runs through clear business structures and accountabilities in its three operating divisions: Support Services, Construction and Equipment Services.
Following the departure of Keith Ludeman from the Board in May, Nick Salmon has taken on the chairmanship of the Remuneration Committee. We also welcomed Nicholas Pollard as a Non-Executive Director to the Board in June. Dougie Sutherland has also left the Board in February 2019.
OUR PEOPLE
I have highlighted the challenges that the leadership team have faced in recent months, but inevitably the impact of those changes has been felt by people throughout the business. These are difficult times for the Company and the sectors it operates in. Dealing with these challenges will necessitate changes for all staff. Across Interserve, our people have shown great resilience and loyalty. They have embraced the need for change and I thank them for this and their continued support.
LOOKING AHEAD
Following the challenges of 2017, this year has been about creating a stable platform for the future growth of the Group. Major progress has been made, but we recognise there is still much to do, and the leadership remain focussed on the job in hand.
The successful handover of all its remaining Energy from Waste projects remains a core priority for the Group.
The proposed Deleveraging plan will, if implemented, restore financial resilience to our balance sheet, but the process of rebuilding trust with, and value for, our shareholders is just beginning.
Once again, I would like to thank our staff, customers and suppliers for their support during this difficult period. I would also like to express my appreciation to those shareholders and lenders who have continued to support us.
Glyn Barker, Chairman
CHIEF EXECUTIVE OFFICER'S STATEMENT
Throughout 2018 and the early months of 2019 it has been an extremely difficult time for Interserve and the Group has faced an unprecedented level of challenges. However, it has also been a period of considerable progress. The Group has benefited enormously from its hard-working employees who are our greatest source of competitive advantage, the depth of our client relationships, the underlying business strategy, and the strong support of our stakeholders.
Our most important priority remains the health and safety of our employees. I am pleased to say the Group's performance improved in the year. While there will always be more that can be achieved through ongoing actions, our Lost Time Incident Rate improved by 25% falling to 0.98 in 2018.
Whilst the majority of my first eighteen months as Chief Executive Officer has been spent establishing the long-term financial stability of the Group, I have had the opportunity to spend time visiting our UK and international operations. There is a lot to be excited about: It is very clear we have extremely strong delivery capability and client relationships. Interserve has significant opportunities as a best-in-class partner to the public and private sector, and we are working with all stakeholders to put in place the right standards, services, governance and financing to deliver a stronger future for Interserve's customers and our 68,000 people.
Progress on deleveraging plan
On 6 February 2019, Interserve announced that the key commercial terms of the proposed Deleveraging Plan, which the Directors believe will provide the Group with sufficient liquidity to service its short-term cash obligations, create a strong balance sheet and a competitive financial structure from which the Group can improve its business and deliver on its long-term strategy.
The Deleveraging Plan is a consensual restructuring of Interserve, which is urgently required to avoid a default in the existing financing arrangements and to provide sufficient liquidity, cash and bonding facilities to allow the Group to service short-term obligations and secure a stable platform. Such a default, were it to occur, would be expected to have material adverse consequences for all stakeholders and, in particular, for existing shareholders.
The Board considers the Deleveraging Plan to be in the best interests of the Group and its shareholders as a whole. The Deleveraging Plan preserves fully the pre-emption rights of existing shareholders. If shareholders take up their entitlements in the equity raise their ownership will not be diluted and they will participate on the same terms as lenders.
The Board believes that the Deleveraging Plan will secure a strong future for Interserve. This proposal has been achieved following a long period of intensive negotiation and has the support of our financial stakeholders and Government. Its successful implementation is critical to Interserve's future and all the Company's stakeholders. The Deleveraging Plan will, alongside our 'Fit for Growth' programme, place us in a strong position to deliver our strategy, be competitive in the marketplace and provide a secure future for the Interserve Group's employees, customers and suppliers.
The Deleveraging Plan will be subject to approval by Interserve's shareholders.
Building a better Interserve - strategic priorities
Strategic Review and Transformation Programme
In April 2018, Interserve announced that it had completed a Group-wide strategic review and launched a strategic plan, based on four priorities:
1. Fit for Growth - improving cost efficiency and effectiveness; 2. Strengthening Interserve's competitive value proposition; 3. Standardising operational delivery; and 4. Developing its people and a consistent, 'One Interserve' culture.
Progress against our four strategic priorities
Fit for Growth
The three phase 'Fit for Growth' programme was designed to ensure that the Group has the right strength, depth and level of resources to consistently win and consistently deliver services for our customers. The programme is delivering material cost savings and a simpler and more effective business and operating structure. The programme over delivered its target of GBP15m savings by 33% to GBP20m in 2018 and is on track to deliver at least GBP40-50m annual benefit to Group performance by 2021.
Phases one and two of the programme have now been successfully completed. An initial cost-out programme was undertaken in late 2017 and a Group-wide organisational design project was implemented in 2018 and completed in early 2019. In addition, Interserve has focused on improving governance, key processes and efficiency across the Group.
Phase three of the programme is about continuing to deliver on our promises to achieve our savings targets for both cash and the P&L. Key objectives include simplifying our technology, standards and processes to improve efficiency as well as driving one way of doing things across Interserve. Improving the performance of our business and our culture remains a key priority across the Group.
Competitive Value Proposition
The Group's second strategic priority is to have competitive customer value propositions in each of the markets the Group chooses to operate in. A key component of a competitive value proposition is the strength of our balance sheet, our proposed Deleveraging Plan will deliver us this.
Interserve is focused on bringing the depth of our expertise and knowledge to its customers, enabling them to deliver strategic goals. We have made progress toward achieving this objective, such as in Support Services developing our customer experience proposition to ensure we add value for our customers and in the interchange model we have developed to improve how our rehabilitative companies support our service users, but we also realise that more needs to be done. There will be a greater focus on where these propositions best meet the needs of Interserve's customers; a major aspect of this approach is the deepening of relationships with our clients. We are moving away from our traditional reliance on single-service operations to the provision of a broader, deeper span of services which have an emphasis on the formation of long-term relationships.
Operational Delivery
In order to achieve this within Support Services, Interserve has successfully reorganised its business teams to align to the four focus segments of Government and Defence, Private Sector, Communities and Citizen Services. The Group has also completed a review of its service offerings to ensure that they are appropriate for these customer segments and that it is best positioned to offer and deliver consistent integrated facilities management services. Interserve has started to wind down service offerings that are not core to its future offering and will continue to do this proactively and as contracts end. In UK Construction we have developed a focused approach to the market which will be rolled out during 2019.
One Interserve
Our 'Fit for Growth' programme involves creating a One Interserve culture. The aim of One Interserve is to enable our colleagues to work and collaborate together to deliver better services for our customers.
One Interserve addresses the fact that historically Interserve was fragmented and federalised, which frustrated the business's ability to develop and realise opportunities for growth. Unlocking these aspects and building a common company culture is our fourth strategic priority and will enable Interserve to bring the very best of the Group's capabilities and service expertise to customers in its three sectors. A key component of the culture will be strong governance and accountability.
The plan includes a focus on the self-delivery of services - which is an important part of margin development and control.
A final aspect of One Interserve involves following a standard approach to leadership, to performance management, to training and development and to reward and recognition in order to streamline the business and ensure we are in the best possible shape to serve our customers.
The key to the delivery of the strategy and the business plan is Interserve's people. Our most recent staff survey elicited a strong and positive engagement score of 72 per cent. More than 78 per cent of our colleagues said that their manager cared about them, while almost 80 per cent said that what they do matters. Action planning around feedback is helping us drive continuous improvement.
2018 financial results
Despite challenging market conditions, the Directors believe that Interserve has made significant operational progress in 2018. Following the successful completion of the refinancing in April, the business has traded robustly in some challenging markets and continued to win significant new contracts. The 'Fit for Growth' programme is delivering material cost savings and a simpler and more effective business structure.
The implementation of the Group's strategy remains on track and we have delivered a significantly improved operating profit up 9.7% to GBP92.7m, driven by cost savings and increased margins. Net debt increased to GBP631.2m and was within the expected range of GBP625-650m as revised in November. This was driven by UK Construction, Energy from Waste outflows, non-underlying charges and delayed payments on certain Middle East projects.
Since 31 December 2018 the Group's net debt position has increased, partly in line with expected seasonality, but also as a consequence of the recognition of costs associated with the deleveraging transaction, a further deterioration in the Middle East relating to receivables for Support Services and RMDK and further working capital unwind in the construction business, which in aggregate represent a deterioration of approximately GBP107m above the expected increase in net debt due to seasonality. These items as well as an updated expectation with respect to the Energy from Waste projects have driven the requirement for new liquidity within the Group and the lenders agreeing to provide a further facility of GBP110m as part of the Deleveraging Plan. If the Deleveraging Plan is not passed on 15 March 2019, the Group will have an immediate working capital shortfall, regardless of whether the Lenders have demanded the repayment of the Group's borrowings under the Existing Cash Financing Arrangements.
Our transformation programme is delivering strong operational momentum. The Group has a future workload of GBP7.1bn as of 31 December 2018, with steady growth particularly in Support Services.
The Board remains focused on positioning the Group for long-term, sustainable success. This means continuing the operational progress we are making to put legacy issues behind us, particularly in closing out and exiting the Energy from Waste business.
The Group remains over-leveraged and the successful implementation of the Deleveraging Plan is critical to our future.
The Board considers the Deleveraging Plan to be in the best interests of Interserve and will preserve maximum value for employees, pensioners, lenders, suppliers, customers and shareholders. Alongside the company-wide 'Fit for Growth' programme, it will provide a strong platform for Interserve's future growth.
Contract wins
Despite challenging market conditions and concerns arising out of our financial condition, we still continued to make progress winning new work in the year. In our Support Services division we secured the following contracts: AENA (GBP37m), King George Hospital (GBP35m), Ministry of Justice (GBP25m) and the Foreign and Commonwealth Office (GBP67m), among others. In our Construction division major contracts included: Durham University (GBP78m), Liverpool Women's NHS Foundation Trust (GBP15m) and Prince Charles Hospital, Merthyr (GBP25m). In our Equipment Services division, contract wins included: Royal Atlantis Residences in Dubai (GBP5m) and the Las Vegas Raiders Stadium (GBP1.2m).
Divisional performance
Considerable work has been put into focusing Interserve's core capabilities to create value for its customers. Following the strategic review in 2018, the Company completed the streamlining of its divisional structure from more than 40 to three divisions in December 2018, replacing the federated entity that existed up until the end of 2017. This reorganisation is helping us to be leaner and better aligned to our customers, increasing leadership accountability and importantly making Interserve even more competitive.
Support Services
Support Services UK delivered a robust performance over the year as it continued to implement the 'Fit for Growth' programme and had excellent client retention in the UK. A decrease in revenue was counterbalanced by increased margins and profits. This included leveraging the Group wide back office systems and processes, implementing a clearly defined market strategy leading to the divestment of non-core operations, exiting poorly performing market sectors, increasing self-delivery, and laying the foundations for greater operational standardisation across the business. As we outlined in our 2017 Annual report we have focused on cost reduction and stronger discipline on contract management governance helping us realise the benefits in 2018 and ensuring we enter 2019 with a solid platform for growth. Revenue increased in target sectors following key contract retentions, organic contract growth, and successful delivery of key contract mobilisations. Interserve's international support services business was negatively impacted by a debtor balance of GBP36m by one of its clients.
Construction
2018 was a challenging year for our UK construction business with a decrease in revenues being counterbalanced by higher margins. Progress has been made in closing out some complex projects and legacy accounts. We have successfully exited the London Construction market as part of our strategy to focus on our core sectors. Our regional building business, infrastructure business and engineering services business all made solid returns, which resulted in a return to profit for the division.
We continue to focus on core sectors and activities and ensure that the risk profile of work that we take on is commensurate with levels of return. Revenue is expected to fall in 2019 as some of the larger legacy contracts complete and due to some of the wider financial challenges the Group faced in 2018. Whilst we expect the division to be a smaller business by revenue in 2019, we believe it will be one which is more agile and capable of consistent profit margins in line with industry norms going forward.
Whilst the order book for the International construction business, particularly in Qatar, continues to be lower than expected, the business secured a number of contract wins in the period, particularly in the UAE where a strengthened oil price provides a more favourable backdrop for this competitive market.
Equipment Services
Challenging market conditions in several of our core markets through 2018 as well as supply chain challenges have slowed our overall rate of growth. Through 2018 we have seen the UK construction sector hit by the uncertainty of the Brexit talks with the consequence of investment and work on major infrastructure projects being delayed. RMDK remains a highly profitable business and has strengthened its competitive position during the period with the roll-out of new product ranges in the UK.
Energy from Waste
Interserve is continuing to pursue its strategy to exit from unprofitable businesses as rapidly as possible. The construction of all of our Energy from Waste projects was substantially completed during 2018, but while the Company expects to fully exit its Energy from Waste business during the first half of 2019, significant uncertainty remains on the timing of those remaining projects.
Interserve continues to expect to benefit from significant further insurance proceeds arising from these projects in 2019. The receipt of further insurance income remains a key focus for the Group.
Outlook
Interserve's ability to deliver its strategy and business plan, will be significantly influenced by our ability to successfully implement the Deleveraging Plan, thereby providing it with sufficient liquidity and giving it a foundation for financial stability.
Interserve will continue to implement its multi-year 'Fit for Growth' programme and 2019 will be the second year of the overall transformation programme. This will be a transitional year for the three operational divisions as Interserve continues to focus on exiting non-core areas and implementing the Group's cost and efficiency programme.
This year, through the outstanding expertise of our people, we will continue to deliver projects safely and ensure that we are best placed to serve our customers. The significant improvements we have made as part of our 'Fit for Growth' programme will ensure we continue to make progress in 2019 with the transformation of Interserve.
Debbie White, Chief Executive Officer
STRATEGIC REPORT
OPERATIONAL REVIEW
The Operational Review refers to a number of alternative performance metrics; it is considered that these better reflect the underlying performance of the business. See note 16 for the basis of calculation. Additional disclosure is made in the Financial Review of non-underlying items and why the Directors believe it is appropriate to exclude these in considering operating performance. Certain comparatives are restated within these statements (see note 4).
Support services
Support Services focus on the management and delivery of facilities management services for both public and private-sector clients in the UK and internationally.
Results summary 2018 2017 Change
Revenue
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- UK GBP1,597.7m GBP1,642.3m -3%
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- International(1) GBP172.1m GBP193.9m -11%
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Contribution to total
operating profit GBP58.6m GBP42.2m 39%
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- UK GBP51.4m GBP39.4m 30%
----------- ----------- ------
- International(1) GBP7.2m GBP2.8m 157%
----------- ----------- ------
Operating margin
----------- ----------- ------
- UK 3.2% 2.4%
----------- ----------- ------
- International(2) 4.2% 1.4%
----------- ----------- ------
Future workload(3)
----------- ----------- ------
- UK GBP5.8bn GBP6.1bn
----------- ----------- ------
- International(1) GBP168.0m GBP225.0m
----------- ----------- ------
These figures exclude non-underlying items
1 Including share of associates.
2 Operating margin is calculated based on the underlying operating margin of associates and the reported operating margin of subsidiaries.
3 Future workload comprises forward orders and pipeline. Forward orders are those for which we have secured contracts in place and pipeline covers contracts for which we are in bilateral negotiations and on which final terms are being agreed.
UK
Support Services UK delivered a robust performance successfully delivering its plans for Fit for Growth, leveraging the Group wide back office systems and processes, formulating and beginning the implementation of a clearly defined market strategy leading to the divestment of non-core operations, exiting poorly performing market sectors, increasing self-delivery and laying the foundations for operational standardisation across the business. As we outlined in our 2017 Annual report we have focused on cost reduction and stronger discipline on contract management governance helping us realise the benefits in 2018 and ensuring we enter 2019 on a sound platform for growth.
Revenue was GBP1,597.7m, following key contract retentions, organic contract growth, solid work winning and successful delivery of key contract mobilisations. We divested ourselves of our Industrial Access and Hard Services business and continued to successfully deliver our planned withdrawal from the High Street Retail market. We have concentrated our work winning strategy around large complex integrated service opportunities in our chosen market sectors and are seeing steady growth in our bid pipeline particularly in Defence, Healthcare and Regulated Sectors.
Savings of GBP20m were achieved through Fit for Growth - the three-year programme launched by the new management team in October 2017 focused on increasing the Group's organisational efficiency and increased ownership and accountability, improving Group-wide procurement processes and ensuring greater standardisation and simplification across the business. These actions contributed to a margin increase of 30 %.
The UK Government has been our largest customer for many years, and we continue to be one of its largest suppliers, retaining our pan European contract with the Foreign & Commonwealth Office which we have held for over ten years and successfully mobilising key new accounts such as the UK wide contracts for the Department for Works & Pensions, the Department for Transport and the Ministry of Justice. These new and retained accounts demonstrate the Government's ongoing faith in our ability to continue to mobilise and deliver large-scale contracts.
We had major wins in our other key market sectors including a large long term multi service contract with Barking, Havering & Redbridge University Hospitals Trust, a full facilities management contract with Westgate Shopping Alliance, a national facilities management contract for Thomas Cook and major extensions to our ongoing relationships with British Airways, Philipps 66/Pepsico and the Metropolitan Police amongst others.
Interserve's Citizen Services delivers vocational training, healthcare at home, probation services and support into employment in the UK and Saudi Arabia. Quality standards have remained high during 2018 with Interserve Learning and Employment, Healthcare and ILE International achieving "good" ratings from their respective inspectorates. Our Apprenticeship Levy business has achieved a forward order book of GBP35m, and in healthcare we retained a major client contract renewal against keen competition. In our Justice division, we renegotiated our probation contracts with the MOJ, and mobilised a new contract for prison industries in HMP Berwyn.
International
The oil price recovery earlier in the year has renewed enquiry levels particularly in the UAE (Abu Dhabi), however the political situation in Qatar has prevented this from improving activity levels in this market. We recorded reduced turnover because of the actions taken previously to right size the business and diversify into other industrial markets. As a result, the division delivered revenues of GBP172.1m and a profit of GBP7.2m.
With oil price levels above $60pb many of the oil companies have made firm commitments to field development and/or enhancements so the outlook is more promising.
Our Middle East facilities management businesses are now aligned with our UK Support Services teams and have begun working closely together to further develop our market strategies and capabilities, leveraging our UK expertise and ensuring consistently high standards of service delivery.
During 2018, we were pleased to secure a number of new awards including an integrated facilities management services contract for the prestigious five star Serenia Residences on the Palm, Jumeirah, technical maintenance services for the Qatar National Convention Centre and their National Theatre, together with a mobile maintenance service account for Alshaya, a leading retailer, for all of their retail stores in the UAE and Qatar.
We continue to enjoy strong sales pipeline opportunities in the UAE and KSA and remain optimistic that our focus on the region, increasing capabilities and customer satisfaction will lead to an ever increasing presence in the Middle East FM market.
Equipment Services
Equipment Services, which trades globally as RMD Kwikform (RMDK), provides engineering solutions in the specialist field of temporary structures needed to deliver major infrastructure and building projects. It is a global market leader and our engineers solve complex problems for our customers, through the application of world-class design and logistics capabilities, backed up by technology and an extensive fleet of specialist equipment. Our activities have a broad geographic spread, the mix of which can change quickly, hence we manage our equipment fleet globally, combining our scale and expertise with agility and responsiveness to meet customers' needs and safeguard our operational efficiency.
Results summary(1) 2018 2017 Change
Revenue GBP195.5m GBP229.0m -15%
--------- --------- ------
Contribution to
total
operating profit GBP39.6m GBP54.4m -27%
--------- --------- ------
Margin 20.3% 23.8%
--------- --------- ------
1 Excludes Exited Businesses
Challenging market conditions in several of our core markets through 2018 have slowed our overall rate of growth.
Through 2018 we have seen the UK construction sector hit by the uncertainty of the Brexit talks with the consequence of investment and work on major infrastructure projects being delayed.
Across Asia-Pacific we have seen a strong recovery in our Australian business, where we have won work across a significant spread of sectors, including infrastructure and commercial building. Hong Kong, which saw the completion of two huge infrastructure projects in 2017, now awaits the mobilisation of the next wave of infrastructure spending. The performance in the Middle East has been hampered by the trade blockade placed on Qatar by other GCC countries and delays to project announcements in KSA. The UAE continues to be a strong market although due to weakening or other Middle Eastern markets has become significantly more competitive.
Our investment in ground shoring products continues, with a launch into Hong Kong and the Middle East regions. Products landed in country in the final quarter of 2018 and this continues to be a focus of our expansion plans. The year also saw the RMDK exit Spain and Panama, as a consequence of our recent strategic review.
The Directors believe that the next 12 months will continue to see the expansion of the ground shoring products into new markets, and the further development of our product offering into the commercial building sector which will help us reduce the impact of project delays in
the infrastructure sector.
Construction
We offer design and construction services to create whole-life, sustainable solutions for building and infrastructure projects. Our focus is on forming long-term relationships and delivering repeat business through commercial structures such as framework agreements and project-financed schemes.
Our presence in the Middle East (in UAE, Qatar and Oman) is structured through longstanding joint-venture partnerships, enabling us to form enduring relationships with clients and to combine our international experience with our partners' local knowledge to deliver outstanding service.
Results summary 2018 2017 Change
Revenue
--------- --------- ------
- UK(1) GBP756.6m GBP972.8m -22%
--------- --------- ------
- International(2) GBP246.6m GBP290.5m -15%
--------- --------- ------
Contribution to GBP15.5m GBP8.9m
total operating
profit
--------- --------- ------
- UK(1) GBP2.2m -GBP10.3m
--------- --------- ------
- International(2) GBP13.3m GBP19.2m
--------- --------- ------
Operating margin
--------- --------- ------
- UK(1) 0.3% -1.1%
--------- --------- ------
- International(3) 5.4% 6.6%
--------- --------- ------
Future workload
--------- --------- ------
- UK(1) GBP0.9bn GBP1.0bn
--------- --------- ------
- International(2) GBP233.0m GBP236.0m
--------- --------- ------
1 Excluding Exited Business.
2 Includes share of associates.
3 Operating margin is calculated based on the underlying operating margin of associates.
UK
Interserve's construction business offers design and construction services to create whole-life solutions including client needs analysis, business case support, design, construction and FM (provided though Support Services), maintenance, remodel, refurb and eventual demolition and estates planning sustainable solutions for building and infrastructure projects.
The UK construction market, while benefiting from major infrastructure improvements and housing investment, remains volatile at a macro level from Brexit, resources and associated headwinds but also construction confidence generally, post-Carillion.
The construction business strategy to focus on low risk, principally government assets and infrastructure is a partial hedge against economic downturn, post Brexit. Growth in government infrastructure is driven by policy and demographic changes in the UK with expected long-term investments from the UK Government in order to support economic growth as described in the Government Construction Sector Deal. In addition, digital technology and long-term trends in travel and freight are creating demand for the construction of transport infrastructure such as logistics centres and airports. Similarly, demographic changes are expected to create demand for schools and universities as well as medical services facilities. Across the sectors, there has been a movement in recent years towards the increased use of modern methods of construction, which offer faster, more reliable and more efficient production.
The construction business's focus is on forming long-term relationships and delivering repeat business through commercial structures such as framework agreements.
2018 was a better year for our UK Construction business despite the ongoing period of challenging market conditions. Good progress has been made in closing out some challenging projects and legacy accounts. Our regional building business, infrastructure business and engineering services business all made solid returns, which resulted in a return to profit for the division.
We continue to focus on core sectors and activities and ensure that the risk profile of work that we take on is commensurate with levels of return. Revenue is expected to fall in 2019 as some of the larger legacy contracts complete and also due partly to some of the wider challenges the Group faced in 2018. Whilst we expect the division to be a smaller business by revenue in 2019 it will be capable of consistent profit margins in line with industry norms and capable of steady growth going forward.
During the year we continued to focus on cost, pricing and bidding controls, a narrow strategic focus, restricting work-winning activity to select sectors, regions and activities.
Our operating model continues to combine a strong regional presence and exposure to framework agreements with infrastructure and public-sector customers, in core sectors such as the defence, education, healthcare and fit-out markets.
In the last 12 months, UK Construction has also secured further new construction frameworks including Dept of Work and Pensions, Dept for Education, Crown Commercial (Government Property Unit Framework) and Welsh Government Healthcare framework, adding to the existing portfolio of customers. This gives a combined forward opportunity pipeline in excess of GBP1.2bn per annum from which tender opportunities are carefully selected through a PLC governed selection process. Revenue is 70% with public or arm's length public bodies aligned to the lower risk defensive strategy.
Plans are in place to improve organisational structure and capability to support future profitability and performance and will be rolled out early 2019. Our focus remains on quality contracts, targeting profits and not revenue.
Energy from Waste 2018 2017
Revenue - GBP32.5m GBP48.6m
UK Exited Business (consolidated
revenue)
-------- --------
Total pre-tax GBP12.6m GBP35.1m
non-underlying loss
-------- --------
FINANCIAL CONDUCT AUTHORITY INVESTIGATION UPDATE
As notified to the market on 11 May 2018, Interserve is the subject of an investigation by the Enforcement Division of the Financial Conduct Authority (FCA) in connection with the Company's handling of inside information and its market disclosures in relation to its exited Energy from Waste business during the period from 15 July 2016 to 20 February 2017.
The Company is co-operating fully with the investigation. As with any regulatory investigation of this nature it is difficult to predict when the investigation will be completed or its outcome. If the FCA takes further action, members of the Group and/or their current or former directors or employees could face regulatory or compensatory sanctions, which could result in adverse publicity and/or reputational damage and which could have a material adverse effect on the Group's business, results of operations and financial condition.
PRINCIPAL RISKS AND UNCERTAINTIES
We operate in a business environment in which a number of risks and uncertainties exist. While it is not possible to eliminate these completely, the established risk-management and internal control procedures, which are regularly reviewed by the Group Risk Committee on behalf of the Board, are designed to manage their effects and thus contribute to the preservation and creation of value for the Group's shareholders as we pursue our business objectives.
The Group continues to be dependent on effective maintenance of its systems and controls. The table below details the principal risks and uncertainties which the Group addresses through its risk-management measures. The changes to these risks relative to the last bi-annual review undertaken by the Board in August 2018 are depicted in the column entitled "Risk Environment".
RISK
RISK POTENTIAL IMPACT ENVIRONMENT MITIGATION AND MONITORING
DELEVERAGING On 6 February 2019, Interserve The Board considers the
PLAN announced that the key Ý Deleveraging Plan to be
commercial terms of the in the best interests of
proposed Deleveraging the Group and its shareholders
Plan. The Deleveraging as a whole. The Deleveraging
Plan is a consensual restructuring Plan preserves fully the
of Interserve, which is pre-emption rights of existing
urgently required to avoid shareholders. If shareholders
a default in the existing take up their entitlements
financing arrangements in the equity raise their
and to provide sufficient ownership will not be diluted
liquidity, cash and bonding and they will participate
facilities to allow the on the same terms as lenders.
Group to service short-term
obligations and secure The Board believes that
a stable platform. the Deleveraging Plan will
secure a strong future
Such a default, were it for Interserve. This proposal
to occur, would be expected has been achieved following
to have material adverse a long period of intensive
consequences for all stakeholders negotiation and has the
and, in particular, for support of our financial
existing shareholders. stakeholders and Government.
Its successful implementation
is critical to Interserve's
future.
The Deleveraging Plan will
be subject to approval
by Interserve's shareholders.
Failure to secure shareholder
approval represents a material
uncertainty that may cast
significant doubt over
the Group's ability to
continue as a going concern.
=========================================================== ============ ============================================================
BUSINESS, Among the changes which We seek to mitigate these
ECONOMIC could affect our business Ý risks in a number of ways.
AND are: These include:
POLITICAL
ENVIRONMENT * risk of the company not achieving its strategic * by fostering long-term relationships with our clients
objectives to focus on core profitable services, and partners;
completing its Fit for Growth transitional programme
and disposal of non-core assets, which may not resul
t * the development of additional capabilities to meet
in the expected anticipated benefits. anticipated demand in new growth areas;
* shifts in the economic climate both in the UK and * maintaining a flexible cost base;
internationally;
* effective supply-chain management; and
* changes in the UK Government's policy with regard to
employment costs, expenditure on improving public
infrastructure, buildings, services and modes of * Strong management and leadership with our Fit for
service delivery (including appetite to outsource Growth and other transitional programmes.
services) and delays in or cancellation of the
procurement of Government-related projects;
We have continued to maintain
* Changing market practices following the Carillion strong dialogue with our
Liquidation and resulting attitudes towards the key clients and partners
Sector. in relation to our delivery
of services and the status
of our transformation programmes
* Brexit, in particular our reliance on the large to help maintain confidence
number of EU nationals within our workforce as well with our business.
as its impact on the economy and public spending;
As part of our competitive
* the imposition of unusually onerous contract assessment, we assess our
conditions by major clients; success rate in competitive
situations. Whether we
win, lose or retain a contract
* changes in the behavior of our suppliers, we analyse the reasons
sub-contractors and our competitors' behaviour; for our success or shortcomings
and feed the information
back at both tactical and
* a deterioration in the profile of our counterparty strategic levels. Our major
risk; and transformation programme,
'Fit for Growth', remains
on track to deliver the
* civil unrest and/or shifts in the political climate savings required to ensure
in some of the regions in which we operate that our cost base is appropriate
for the services we offer
and to enable us to be
cost competitive.
any one or more of which
might result in a failure We monitor and assess levels
to win new or sufficiently of political risk and have
profitable contracts in contingency plans to mitigate
our chosen markets or some of these risks.
to deliver contracts with
sufficient profitability.
=========================================================== ============ ============================================================
IT SYSTEMS/ As our IT systems become We are committed to ensuring
SECURITY ever more critical to Ý that our IT applications
business success and to and infrastructure and
meet customer expectations, the IT organisation that
there is an increasing manages them are provided
need to: with the necessary skills
and tools to maintain the
* prevent service failures; health of our IT services.
We are currently undertaking
* ensure confidentiality, availability and integrity o a review of our IT
f Infrastructure
data; and processes to ensure
we can operate best practice,
cost effective solutions
* protect our staff and systems from cyber-attack; and across our group. We have
launched an IT Investment
Committee to provide greater
* recover critical systems in a timely and effective governance over our IT
manner Infrastructure expenditure,
with committee approval
required for expenditure.
We operate robust monitoring
and preventative maintenance
regimes to minimise the
potential impact of IT
failures or security
incidents
in accordance with good
industry practice.
Where necessary, we also
ensure that both ISO 27001
and CES certifications
are obtained for key
contracts.
DATA MANAGEMENT As we continue to onboard Our Group-wide information
new customers, increasingly Ý security programme continues
collaborate across our to improve our staff's
organisation and its supply awareness of the need for
chain and enable mobility effective data management
for our diverse workforce, activity.
there is an increasing
need to ensure that our Initiatives include management
customer, supplier and and end- user training,
employee data is: contingency planning and
detailed risk-management
* classified appropriately; activities that address
many difference types of
data loss.
* processed securely; and
We implemented a broad
programme to address the
* stored in accordance with legal and contractual General Data Protection
requirements. Regulations which came
into force in May 2018.
This has been supported
by an extensive internal
The increasing reliance training programme.
on our data to provide
commercial opportunity In addition, a working
and enhanced risk management group has been established,
is driving more diverse to meet regularly to drive
use of our data across policy, procedure, training
the Group. and the sharing of best
practice.
OPERATING We enjoy demonstrable We have a proven track
SYSTEM success in working with ÛÜ record of developing and
third parties both through re-enforcing such relationships
joint ventures and associated in a mutually beneficial
companies in the UK and way over a long period
abroad. This success results of time and our experience
in a material proportion of this places us well
of our profits and cash to preserve existing relationships
flow being generated from and create new ones as
businesses in which we part of our business model.
do not have overall control. The measures taken to limit
The alignment of the Group's risk in this area include:
interests and the interests board representation, shareholders'
of our partners is critical agreements, management
to that success. Any weakening secondments, local borrowings
of our strong relationships and rights of audit in
with these business partners addition to investing time
could have an effect on in personal relationships.
our profits and cash flow.
FINANCIAL The Group, due to a number The Group has put into
RISKS of factors, has found Ý place additional policies
itself with very high and resources to monitor
levels of debt relative the effective management
to its earnings and cash of working capital, including
flow. This has necessitated the production of daily
the refinancing of the balances, weekly cash reports
existing debt structure and forecasts together
and the injection of further with monthly management
additional debt funding. reporting.
This is discussed in the
Financial Review. The The Contract and Investment
Group has agreed to meet Committee (as discussed
a number of covenants under 'Major Contracts'
as part of its Re-financing overleaf) considers the
arrangements, including implications of new business
commitments on repayment opportunities relative
of debts, disposals of to the financial constraints
assets, savings associated as part of its assessment
with transformation programmes and review process.
and the provision of information
to its Lenders.
MAJOR CONTRACTS In Support Services our Among our mitigation strategies
strategy is to focus on Ý are targeting work within,
offering a broad range or complementary to, our
of services to large-scale existing competencies,
customers whilst our construction engagement of experts to
business focuses on lower effectively deploy both
risk infrastructure and business and cultural change
assets. Termination of requirements, the fostering
large contracts which of long-term relationships
account for a significant with clients, operating
portion of our revenue an authority matrix for
would be likely to reduce the approval of large bids,
our revenue and profit. monthly management reporting
with key performance indicators
In addition, the management at contract and business
of contracts entails a level, the use of monthly
range of potential risks. cost-value reconciliation,
These include: mis-pricing; supply-chain management
inaccurate specification; and ensuring that periodic
poor mobilisation of new benchmarking and/or market
contracts leading to non-delivery testing are included in
of promised cost or efficiency long-term contracts.
improvements; poor control
of costs or of service We monitor the risk on
delivery; sub-contractor contractual counterparties
performance and/or insolvency, to avoid over-dependency
under delivery of performance, on any one customer or
any of which could have sub-contractor.
adverse financial implications.
The Group is focused on
In relation to Energy the completion of the Energy
from Waste, the construction from Waste programme with
of all projects has now dedicated resources to
reached physical completion, manage the delivery of
although risks remain the contracts, recoveries
on further delays with from Insurers and ongoing
the completion of the dialogue to resolve outstanding
contractual programme issues.
and associated costs.
As part of our Fit for
In PFI/PPP contracts, Growth programme all new
which can last for periods tenders requiring bonding
of around 30 years, there or other security instruments
may be increases in costs, are referred to the Contract
including wage inflation, and Investment Committee
beyond those anticipated (CIC), comprising the CEO,
or clients under financial CFO and General Counsel,
pressure seeking to implement who deliberate and consider
alternative interpretations approval based on assessment
of the contract in order of commercial terms, profitability
to reduce payments. and risk.
Risk of recoveries of Our Fit for Growth Programme
payments from material will ensure we are fit
debtors of major contracts. to compete in increasingly
challenging environments
and markets by focusing
on how we can improve our
governance and processes,
simplify our structures
and improve efficiency
across the whole Group.
The Group continues to
monitor the repayment of
material debtors. In relation
to the Middle East the
Company is focused on repayment
of material debts outstanding
in the region.
DAMAGE TO Challenges with the markets
REPUTATION perception of our Group Ý We have maintained dialogue
and Sector because of with our key clients and
the Carillion Liquidation partners in relation to
as well as negative publicity our delivery of services
about the Group's financial and the status of our transformation
condition, impacting the programmes to help maintain
Groups ability to trade confidence with our business.
normally.
Control procedures and
Issues arising within checks governing the operation
contracts, from the management of our contracts and of
of our businesses or from our businesses, supported
the behaviour of our employees by business continuity
at all levels, can have plans, are in place. With
broader repercussions the expansion of our frontline
on the Group's reputation services there is even
than simply their direct more emphasis placed upon
impact and may have an assessing reputational
adverse impact upon the risk before entering into
Group's "licence to operate". such contracts, having
proper procedures in place
This risk increases as to monitor performance,
we expand the range of escalate issues and monitor
frontline services being our response, promoting
delivered, some of which a good understanding of
are high profile and/or our brand amongst stakeholders
politically sensitive. through timely, clear and
consistent communications.
Risks that our clients
and suppliers will modify We have a clear set of
their behavior as a result core values which we strive
of negative publicity to embed within our organisation
surrounding the financial and set ourselves the goals
condition of the group, of creating a culture of
for example, tightening innovation in sustainability
of credit terms, cancellation and offering transparency
or deferral of projects to clients on public-sector
and failing to qualify projects.
or not being invited to
bid for contracts. The Company is cooperating
fully with the FCA and
See Financial Conduct continually monitors its
Authority Investigation disclosure obligations
Update above: There is under MAR.
a risk of adverse publicity
and reputational damage
to the Group should the
FCA impose regulatory
or compensatory sanctions
on members of the Group
and/or their current or
former directors or employees
which could have a material
adverse effect on the
Group's business, results
of operations and financial
condition
KEY PEOPLE The success of our business We are focused on engaging
is dependent on recruiting, Ý with all of our people
retaining, developing, at all levels and wherever
motivating and communicating they work in the organisation
with sufficient numbers to ensure that they continue
of appropriately skilled, to deliver great customer
competent people of integrity service for our clients.
at all levels of the organisation.
This is particularly relevant As part of our Fit for
during periods of financial Growth programme we will
instability and change design and build a more
when improvement to profitability effective and efficient
and competitiveness is organisation in which skilled
required. and engaged employees can
thrive.
Risks with the high number
of shareholdings by lenders We have various incentive
following a successful schemes and run a broad
implementation of the range of training courses
de-leveraging plan and for people at all stages
their potential influence in their careers. With
on management. active people management
and Investors in People
accreditation in many parts
of the Group, we manage
our people professionally
and encourage them to develop
and fulfil their maximum
potential with the Group.
As part of our commitment
to a diverse and inclusive
workforce we are keen to
offer 'Opportunities for
All' and our approach focuses
on how we can deliver,
and work with others, to
provide disadvantaged groups
with the skills and employment
opportunities that will
help to turn their lives
around.
Strong governance will
be maintained by the Board
on its responsibilities
as Directors to Shareholders.
HEALTH AND The nature of the businesses A commitment to Health,
SAFETY REGIME conducted by the Group ÛÜ Safety & Environment (HS&E)
means that employees and is embedded in all our
third parties are exposed core values and the subject
to potential health and leads every Board meeting
safety risks. Management both at Group and divisional
of these risks is critical level. Group and Divisional
to the success of the HS&E Governance committees
business and they are meet quarterly to evaluate
addressed through the current risks for relevance
adoption and maintenance and conduct independent
of occupational health reviews of high potential
and safety procedures HS&E events and investigations.
and operating standards Each member of the Executive
setting out 'ways of working'. Board undertakes dedicated
visits to review health
and safety measures in
place at our operational
sites and we have ongoing
training and communication
campaigns across the Group
emphasizing its importance.
The move in 2018 to leading
based and common reporting
metrics has resulted in
our employee lost time
injury frequency rate reducing
by 25% during 2018. The
employee accident incident
rate has also reduced by
5% during the same period.
The Group is exposed to operational currency risk in its International and Equipment Services businesses. These are not material on a net basis. In addition, the Group has foreign currency exposure in relation to its historical US Private Placement borrowings and the interest cost of servicing those borrowings. Whilst it does not trade in commodities, the Group does operate in countries where their economies depend upon commodity extraction and are therefore subject to volatility in commodity prices. The Group's principal businesses operate in countries which we regard as politically stable.
Financial Review
2018 has seen an improved operating performance for the Group as we have focused on executing our fit for growth programme and delivered savings from the simplification of our businesses. This is despite the decline in revenue and reflects the focus on quality of business within our UK Construction business.
Net debt increased in the year as we have continued to address the EfW contracts as well as the exiting of London and South East regional building business. This has also been impacted by the GBP43.0 million of adviser fees related to the April 2018 refinancing as well as the GBP42.8 million cash interest cost in the year resulting from the higher finance costs and increased debt levels.
The Financial Review does not deal with the underlying operating profit and revenue of each individual trading division. For commentary on these underlying operational results please refer to the Operational Review section of the Strategic Report.
REPORTED FINANCIAL PERFORMANCE
GBPmillion 2018 2017 ----------------------------------------- -------- -------- Consolidated revenue 2,904.0 3,250.8 Total operating profit pre-amortisation and non-underlying items 92.7 84.5 Amortisation of acquired intangible assets (18.7) (21.6) Goodwill and other asset impairments (55.2) (76.7) Contract and balance sheet review charges (5.2) (86.1) Energy from Waste (12.6) (35.1) Property development 17.0 (26.0) London Construction (24.8) (10.3) Restructuring costs (20.0) (33.2) Professional adviser fees (43.0) (13.9) Strategic review of Equipment Services - (7.1) Exit from Site Services and Power businesses (6.7) 0.7 Pension indexation gain 70.6 - Total operating (loss) (5.9) (224.8) ----------------------------------------- -------- --------
2018 consolidated revenue of GBP2,904.0 million was 10.7% lower than in 2017 (GBP3,250.8 million) with a substantial reduction (GBP216.2 million) in UK Construction driven by lower activity levels as we have struggled to win new work and EfW projects completing. After amortisation of acquired intangible assets, goodwill impairment and other non-underlying items, analysed in further detail in note 4 to the consolidated financial statements and discussed further below, the operating loss was GBP5.9 million (2017: loss GBP224.8 million).
AMORTISATION OF ACQUIRED INTANGIBLE ASSETS
Intangible assets acquired as part of historic acquisitions of businesses are amortised over their useful economic life and during 2018 GBP18.7 million of amortisation was charged to the income statement (2017: GBP21.6 million).
GOODWILL AND OTHER ASSET IMPAIRMENTS
During 2018 the carrying value of the Industrial Services business was impaired by GBP15.0 million and a further GBP7.1 million loss incurred on its final disposal.
As part of the Group's 31 December 2018 annual goodwill and intangible assets impairment review, further write-downs of the carrying values of its Support Services Private Sector cash generating unit (GBP26.9 million) principally related to the acquisition of Initial Facilities in 2014 and a further GBP6.2 million on its Learning and Education business.
CONTRACT review AND BALANCE SHEET REVIEW
During 2018 a further net GBP5.2 million of contract review provisions were made being largely GBP11.4 million on the CRC Transforming Rehabilitation contracts, partly offset by an GBP8.0 million release of provisions against the US Prime Forces onerous contract.
ENERGY FROM WASTE
A further net GBP12.6 million of provision for losses from our Energy from Waste facilities have been made during 2018 which relates principally to further costs to complete our Derby City and County Councils facilities. Insurance proceeds totalling GBP35 million were received during 2018 on Energy from Waste contracts.
PROPERTY DEVELOPMENT
As announced in the 2017 year-end results, we took the decision at the end of last year to exit from the business of Property Development. During 2018 we have sold our one remaining development asset (the Haymarket site in Edinburgh) for net proceeds of GBP47.0 million and realised a gain of GBP17.0 million on disposal.
LONDON CONSTRUCTION
We took the decision during 2018 to exit from activities in the London construction market but will continue to offer fit-out but not building projects in the London region. Costs associated with this exit and anticipated losses on the close out of contracts within this business amounted to GBP24.8 million. We anticipate that this exit and the associated cash outflows will conclude in 2019.
restructuring costs
The Group has embarked on a 3-year plan, "Fit for Growth", to increase the Group's organisational efficiency, improve Group-wide procurement processes and ensure greater standardisation and simplification across the business. During the year it incurred termination costs in respect of former employees and directors, property rationalisation expenses and other business closure costs amounting to GBP20.0 million.
PROFESSIONAL ADVISER FEES
Professional fees incurred in connection with our refinancing totalled GBP43.0 million during the year. We anticipate that we will incur a further circa GBP33 million of fees in connection with the Deleveraging plan.
EXIT FROM SITE SERVICES AND POWER BUSINESSES
During the year we took the decision to exit from the Power business in Support Services and the Site Services business in Construction at a cost of GBP4.2 million and GBP2.5 million respectively.
PENSION INDEXATION GAIN
During 2018, following discussions in recent years between the Company and the Trustee of the Interserve Pension Scheme, the Trustee agreed to change scheme terms relating to the inflation reference index used to calculate increases to some members benefits in the scheme from RPI to CPI. The gain arising from this change in inflation index during 2018 amounted to GBP70.6 million.
Net FINANCE COSTS
The net finance cost for the year of GBP105.4 million can be analysed as follows:
GBPmillion 2018 2017 ---------------------------------- -------- ------- Net interest on Group debt (79.4) (21.4) Foreign exchange (loss)/ gain on US private placement loan (26.4) 2.9 Pension finance credit (charge) 0.4 (1.1) Group net interest charge (105.4) (19.6) ---------------------------------- -------- -------
Higher net interest on Group debt of GBP79.4 million (2017: GBP21.4 million) reflects the much higher average prevailing net debt levels during 2018 and the substantially higher interest rates on group debt following the April 2018 refinancing.
Within net debt the Group carries $348.3 million of US private placement notes. On 13 December 2017 the Group disposed of all hedging instruments resulting in the free float of the borrowings with all subsequent retranslation gains or losses on the value of this debt being recognised through the income statement as a non-underlying item. During 2018 this resulted in a loss of GBP26.4 million (2017; gain of GBP2.9 million). The $348.3 million private placement has a GBP value of GBP272.3 million as at the balance sheet date, reflecting the closing rate of 1.28 USD 1 GBP.
The IAS 19 pension credit position results in a non-cash pension finance income of GBP0.4 million (2017: GBP1.1 million cost). See note 5/6 for further details.
Taxation
The underlying tax charge for the year of GBP8.7 million on the headline profit before tax represents an effective rate of 63.5 per cent.
GBPmillion 2018 2017
Profit Tax Rate Profit Tax Rate
==================================== ======== ======= ========= ======== ======= ======
Subsidiary companies (3.6) (8.7) 0.0% 36.5 (8.1) 22.2%
Joint ventures and associates(1) 17.3 - 0.0% 25.5 - 0.0%
------------------------------------ -------- ------- --------- -------- ------- ------
Headline profit before
tax 13.7 (8.7) 63.5% 62.0 (8.1) 13.1%
Amortisation of intangible
assets (18.7) 3.1 16.6% (21.6) 3.6 16.7%
Goodwill impairment (33.1) - - (60.0) - -
Exited business and non-underlying
items (73.2) (12.0) n/a (224.8) (5.5) n/a
------------------------------------ -------- ------- --------- -------- ------- ------
Effective tax charge and
rate (111.3) (17.6) n/a (244.4) (10.0) n/a
------------------------------------ -------- ------- --------- -------- ------- ------
(1) The Group's share of the post-tax results of joint ventures and associates is included in profit before tax in accordance with IFRS.
The subsidiary companies' tax is considerably higher than the UK rate of 19%, principally driven by the impact of unrelieved UK losses. For further disclosure on the non-underlying items and amortisation see note 5 to the consolidated financial statements. See note 9 for further tax disclosures.
Dividend
The dividend remains suspended with no interim or final dividend due to be paid. Under the terms of our existing financing facilities, no dividend is payable until historical net debt to EBITDA is below 2.5 times. This will change under the Deleveraging Plan which will require more than two-thirds of the new money lenders and more than two-thirds of the new money bonders to approve any dividend.
cash flow
Year-end net debt stands at GBP631.2 million (2017: GBP502.6 million), an increase of GBP128.6 million.
GBP million 2018 2017
-------------------------------------------------------------------
Operating cash flows before movements
in working capital 17.6 (111.3)
Movements in working capital (77.5) (37.0)
Net capital expenditure - hire fleet (0.3) 12.4
------- --------
Cash generated by operations (60.2) (135.9)
Taxes paid (11.4) (8.6)
------- --------
Net cash from operating activities (71.6) (144.5)
Net interest paid (39.6) (21.4)
Dividends received from associates and
joint ventures 11.8 17.2
Dividends paid to non-controlling interests (3.7) -
Proceeds from issue of warrants and shares 35.7 -
Proceeds on disposal of non-hire fleet
plant & equipment 8.9 1.6
Capital expenditure - non-hire fleet (19.6) (39.3)
Net investments in joint venture entities (0.8) (32.0)
Proceeds from disposal of subsidiary 2.5 -
Proceeds from disposal of derivatives - 44.1
Foreign exchange (13.7) (53.9)
------- --------
(Increase) in net debt (90.1) (228.2)
------- --------
Opening net debt (502.6)
Movement in net debt above (90.1)
Unwinding of discount on debt (13.8)
Capitalised PIK interest (24.7)
Closing net debt (631.2)
--------
In 2018 there has been a much stronger operating cash flow performance (before movements in working capital) than in 2017 (+GBP17.6 million vs -GBP111.3 million) driven to a large extent by a reduction in the EFW cash outflows in the current year vs 2017 of GBP66.2 million.
Net interest paid in 2018 of GBP39.6 million has increased significantly compared to 2017 (GBP21.4 million) in line with much higher average Group borrowings during the year and significant increases in the interest rates charged post the debt re-financing in April 2018.
As part of the re-financing of the Group's borrowings in April 2018 we issued warrants to the providers of debt and bonding facilities with fair value proceeds of GBP35.7 million including GBP0.4 million from the exercise of warrants.
Capital expenditure on non-hire fleet of GBP19.6 million principally relating to spend on Ingenuity House and vehicles, was significantly lower in 2018 compared to GBP39.3 million in 2017 as the Group exercised investment restraint in a cash constrained climate.
Net working capital outflows of GBP77.5 million (2017: GBP37.0 million outflow) are largely made up of the following: a favourable movement in receivables of GBP59.2 million being mainly improved cash management in Support Services and the unwinding of debtors in Construction as a result of a reduction in the size of their business ; and a GBP135.0 million decrease in trade payables which reflects a more normalised year end payment process compared to the prior year and the close out of a number of large projects in Construction during 2018.
Pensions
At 31 December 2018 the Group had an IAS 19 pension surplus of GBP93.9 million (2017: GBP48.0 million net deficit).
GBPmillion 2018 2017 ========================= ======== ========== Gross liabilities (844.8) (1,064.1) Gross assets 938.7 1,016.1 ------------------------- -------- ---------- Total surplus/(deficit) 93.9 (48.0) ------------------------- -------- ----------
The IAS 19 accounting position on the Group's defined benefit pension scheme increased from a deficit of GBP48.0 million to a surplus of GBP93.9 million largely due to a change in the basis of indexation on future pension increases from RPI to CPI (GBP70.6 million) together with an actuarial valuation gain of GBP54.0 million.
NEW ACCOUNTING STANDARDS
IFRS 9 Financial instruments
We have adopted IFRS 9 Financial instruments from the beginning of this period. During the period we concluded our review of the implications of the adoption of IFRS 9 Financial Instruments which we adopted from the beginning of the period. The review included a review of the classification of assets previously held as available for sale under IAS 39, and the application of an expected credit loss model under IFRS 9. The review comprising the assessment of amounts receivable from the sale of goods and services and amounts due from construction contract customers concluded that the adoption of IFRS 9 did not result in any material change. As disclosed in the 2017 Annual Report, there was no quantitative impact on the Group upon adoption.
IFRS 15 Revenue from contracts with customers
During the period we concluded our review of the implications of the adoption of IFRS 15 Revenue from contracts with customers which we adopted from the beginning of this period. As disclosed in the 2017 Annual Report, we identified no material change in the way that we recognise revenue on contracts with customers.
However, we did identify an issue with the transition from IAS 11 Construction contracts whereby costs that we had previously capitalised under that standard on contracts that were ultimately onerous, where future recovery was anticipated from a third party other than the customer, are not covered by similar provisions in IFRS 15. As such the recognition of an asset in these circumstances falls to the more restrictive requirements of IAS 37 Provisions, contingent liabilities and contingent assets. In order to recognise the asset IAS 37 requires recovery to be virtually certain rather than expected, otherwise it falls to be treated as a contingent asset and disclosed rather than recognised. Whilst we remain confident of recovery and our ultimate expectation is unchanged, we are not able to meet the requirement of virtually certain which we have interpreted as being as close to 100% as to make any remaining uncertainty insignificant.
We have adopted IFRS 15 through the "modified retrospective adoption" approach and as such have booked a cumulative catch up adjustment to the opening balance sheet (charge to equity and increase in provisions) of GBP37.5 million without altering comparatives. These recoveries will now flow through the income statement as received (in effect the GBP37.5 million became an unrecognised contingent asset). Had IFRS 15 not been adopted, 2018 revenue would have increased by approximately GBP32.5 million.
We have made a number of other immaterial adjustments as a result of the application of IFRS 15, including minor amendments to revenue recognition where we believe that it is not highly probable that amounts will not be reversed.
At the date of authorisation of these financial statements the following standards and interpretations were in issue but not yet effective, and therefore have not been applied in these year-end financial statements.
IFRS 16 Leases
The new standard will replace IAS 17 Leases. It will become effective for accounting periods on or after 1 January 2019, at the earliest. It will require nearly all leases to be recognised on the balance sheet as liabilities, including those currently recognised as operating leases, with corresponding assets being created.
The Group has assessed the estimated impact that initial application of IFRS 16 will have
on its consolidated financial statements, as described below. The actual impacts of adopting
the standard may change because:
- the Group has not finalised the testing and assessment of controls over its new IT systems;
and
* the new accounting policies are subject to change
until the Group presents its first financial
statements that include the date of initial
application.
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee
recognises a right-of-use asset representing its right to use the underlying asset and a lease
liability representing its obligation to make lease payments. There are recognition exemptions
for short-term leases and leases of low-value items. Lessor accounting remains similar to
the current standard - i.e. lessors continue to classify leases as finance or operating leases.
Based on the information currently available, the Group estimates that it will recognise additional
lease liabilities of between GBP125 million and GBP150 million as at 1 January 2019 and that
IFRS 16 will increase the Group's EBITDA by approximately GBP30 million and reduce profits
before tax by around GBP2 million.
Except for IFRS 16 noted above, the directors do not currently anticipate that the adoption
of any other standard and interpretation that has been issued but is not yet effective will
have a material impact on the financial statements of the Group in future periods.
TAX STRATEGY AND RISK MANAGEMENT
Governance
The Group seeks constantly to evolve its systems, processes and procedures as they relate to taxation to ensure that confidence is maintained in the Group's ability to process and deal with its taxation affairs. All tax decisions and considerations are routed through the specialist Group Tax Department prior to being considered further and, when appropriate, put forward for approval at Board level. All tax disclosures and errors are reported to the Group Tax Department which also forms the principal point of contact between the Group and HMRC.
The Group has a robust system of documented controls which are regularly reviewed to ensure they remain fit for their intended purpose and which ensure that we are able to meet our taxation obligations and the requirements of the Senior Accounting Officer (SAO) reporting obligations. A comprehensive review is undertaken each year of adherence to SAO requirements before considering whether it is necessary to draw attention to errors which may have affected the Group's ability to account for the correct amount of tax.
Responsibility for the execution of the Group's tax strategy rests with the Chief Financial Officer and the Head of Tax and Treasury.
Planning
Efficient management of the tax base of the Group involves structuring the Group's affairs efficiently for tax and conducting the Group's affairs in accordance with tax legislation but does not involve or permit the use of risky or aggressive tax structures or schemes.
The Group's tax strategy is determined by the Board and is summarised in the following statement:
"The Group will seek to manage the tax it pays (i) by abiding by legal and regulatory principles, (ii) by considering acceptability to stakeholders, and (iii) by avoiding any acts inconsistent with the Group's reputation."
The Group seeks to create value for its shareholders and efficient management of the tax base of the Group is an integral part of that value creation, subject to the principles outlined above.
Relationship with UK tax authorities
Interserve seeks to maintain an open dialogue in the UK with HMRC regarding its plans and tax affairs, discussing potential tax issues which may arise in the business as well as initiating discussion around the suitability of the systems and controls in place to control and manage its tax position.
Treasury risk management
We operate a centralised Treasury function whose primary role is to manage interest rate, liquidity and foreign exchange risks. The Treasury function is not a profit centre and it does not enter into speculative transactions. Where possible it aims to reduce financial risk by the use of hedging instruments, operating within a framework of policies and guidelines approved by the Board.
Liquidity risk
We seek to maintain sufficient facilities to ensure access to funding for our current and anticipated future requirements, determined from budgets and medium-term plans.
During 2018 the Group had access to committed debt facilities comprising a $350 million US private placement and GBP583 million of committed bank facilities. The US private placement was translated into GBP at the prevailing exchange rate at the 31 December 2018. During the year GBP33.2 million of committed facilities were prepaid and cancelled. The aggregate facilities of GBP824.3 million at the year-end date had a weighted average expiry date of September 2021.
On 27 April 2018 the Group secured new financing from its lenders. The additional facilities, totalling GBP196.5 million, comprised a term loan of GBP175 million and GBP21.5 million of money market lines and committed bonding facilities of GBP95 million. These facilities are scheduled to expire in September 2021.
Additionally, as part of the proposed deal terms, the company issued warrants to the providers of the new cash and bonding facilities to buy shares at 10 pence per share (the nominal price of each share). If exercised, this would provide the warrant holders with an interest of up to 20% of the post-issue share capital.
The agreement by the lenders to provide new facilities contains provisions to charge interest on the facilities which does not become payable until the maturity of the facilities. The interest is capitalised on each quarter end date and forms part of the debt balance at the balance sheet date. The value of interest capitalised on loan facilities in 2018 was GBP24.7 million. The value of interest accrued in respect of issued instruments drawn on the committed facilities was GBP4.3 million.
Market price risk
The objectives of our interest rate policy are to match funding costs with operational revenue performance and to ensure that adequate interest cover is maintained, in line with Board-approved targets and banking covenants.
Foreign currency risk
Transactional currency translation
The revenues and costs of our trading entities are typically denominated in their functional currency. The impact of retranslating any entity's non-functional currency balances into its functional currency was not material.
Consolidation currency translation
We do not hedge the impact of translating overseas entities' trading results or net assets into the consolidation currency.
As at the balance sheet date the $348.3 million of debt relating to the US private placement was unhedged.
The impact of changes in the 31 December 2018 year-end exchange rates, compared to the rates used in preparing the 2017 consolidated financial statements, has been an increase in net assets attributable to equity holders of GBP14.0 million (2017: GBP35.2 million decrease).
VIABILITY STATEMENT
This statement is made against a background of challenging market conditions in the UK support services and construction sectors and the collapse into liquidation of a major competitor, Carillion in early 2018. In the face of adverse media speculation, Interserve, Capita, Kier and others in similar markets have taken steps to improve balance sheet strength and resilience.
The directors have reviewed the viability of the Group over a three-year period to December 2021. The choice of a three-year period reflects the secured nature of the Group's revenues with GBP7.1 billion (of which GBP5.5 billion is secured) of work in the order book. There is a negligible amount of secured work outside of this timeframe in the Construction division and only 35 per cent in the Support Services division. The viability period chosen aligns with the annual planning process.
Strategy and key judgements
In April 2018 the Group announced a multi-year strategy with four key priorities:
1. Fit for Growth - a simplified organization that will deliver reduced overhead costs 2. A competitive customer value proposition 3. Standardised operational delivery
4. One Interserve - a consistent approach to leadership, performance management, reward and recognition
In creating its plan, the Board has considered the principal risks and uncertainties in the implementation of the Group strategy as well as those inherent in the business. The key planning assumptions are outlined below:
1. The new financing structure is concluded with necessary consent obtained from lenders and shareholders
2. No significant political changes in the UK or overseas that will impact public sector outsourcing.
3. Continued progress in improving margins and operating profit driven by targeted cost savings and selective contract bidding.
4. Success in recovering professional indemnity insurance claims relating to the construction of the Derby EFW plant. This follows a successful outcome in relation to similar claims in 2018 in respect of the Glasgow EFW plant.
5. Termination account payments on the Glasgow EFW plant will be within the allowance made, a sum that is materially lower than amounts claimed by the client. This is considered in further detail in this statement.
6. Trade debt with Saudi colleges will be fully recoverable in line with previous debt recovery experience in the region.
7. The plans for dealing with loss making contracts within the profitable PFI portfolio in the Support Services division will be successful in reducing any future losses.
8. Both customer and supplier payment terms will improve following the refinancing.
As part of the planned re-financing, the Group and / or its subsidiaries will be making undertakings to its lenders which are summarised below. Plans have been made to meet all the requirements but it is noted that non-compliance would be an event of default under the terms of these financing arrangements and would potentially impact on the ability of the Group and / or its subsidiaries to continue trading as going concerns.
A condition of the additional lending are financial covenants, starting in December 2019 for the Interserve Group excluding RMDK, and in June 2019 for RMDK.
For the Interserve Group, excluding RMDK, there is a proposed minimum EBITDA covenant: Dec-19: GBP50 million, Jun-20: GBP60 million, Dec-20: GBP60 million, Jun-21: GBP70 million, Dec-21: GBP70 million. Also, a minimum cashflow available for debt service Dec-19: GBP (145) million, Jun-20: GBP20 million, Dec-20: GBP45milion, Jun-21: GBP50 million, Dec-21: GBP50 million. The loan maturity is 2022.
For the RMDK facility (non-recourse to the rest of the Interserve Group) there is a maximum leverage covenant being multiples of EBITDA: Dec-19: 3.1, Mar-20: 2.6, Jun 20: 2.6, Sep-20: 2.3 and Dec-20: 2.0. Also a minimum liquidity requirement of GBP3 million from September 19. The loan maturity is 2023.
In addition, the Group has committed to provide a funding proposal in respect of any Energy from Waste settlements greater than those currently forecast in the business plan.
It is also required to engage with lenders within three weeks of submitting two consecutive short-term cash flow forecasts that predict a cash requirement not covered by the debt facility.
As discussed in note 1 to the financial statements, significant judgements have also been taken with respect to the outcome of other contracts and there is an assumption that costs will fall within anticipated and provided levels. This relies upon, as yet, unsecured negotiations to settle or de-scope contracts. Conclusion of these negotiations, is at least, partially outside the control of the directors and could have a sizeable adverse impact on the Group.
It is management's view that the Deleveraging Plan, if approved by shareholders on 15(th) March 2019, will place the Group in a strong position to deliver the strategy, be competitive in the marketplace and provide a secure future for the Group's employees, customers and suppliers.
Prior to successful conclusion of the Deleveraging Plan, the level of uncertainty around the Group's financial position has been adversely impacting customer and supplier confidence as well as influencing employee morale and credit ratings. If confidence is slow to return it will be detrimental to the Group's recovery plans in 2019.
Looking beyond the twelve-month timeframe, to the remainder of 2020 and 2021, there are additional assumptions about market stability in the UK and overseas which are outside the control of the directors. A significant deterioration in these markets would impact the Group's long-term viability.
The Group has carried out a comprehensive business planning exercise on all other aspects of its business. The approach that has been adopted and the sensitivities considered are discussed further below.
Assessment process
The future prospects of the Group are assessed primarily through the annual planning process. This entails a series of detailed operational reviews culminating with divisional reviews involving the Group CEO, Group CFO and divisional management team. The results of these reviews are then submitted to the Board in the form of a plan summary document for debate and approval.
The output is a full set of income statement, cashflow and balance sheet projections for each of the reporting entities of the Group. These exist at monthly frequency for the first two years of the strategic plan (2019 & 2020) and annually for the final year (2021).
This year, the outputs were reviewed and reported on by advisers acting on behalf of the Group's Lenders.
Progress against this plan is monitored, on a monthly basis, via monthly divisional business reviews with the Chief Executive and Chief Financial Officer and management accounts which are submitted to the Board.
Subsequent to December 2018 the plan was amended to reflect the de-leveraging proposal presented to the Group's debt holders and the approximately GBP33 million of adviser fees associated with this.
Following these amendments, the plan reflects a reduction in Interserve Group's pro forma net debt from the issuance of GBP480 million of new equity. GBP350 million of existing debt is allocated to RMDK, of which GBP169 million is cash-pay and GBP181 million has been converted into a subordinated non-cash pay debt instrument. The debt allocated to RMDK is non-recourse to the rest of Interserve Group and has maturities extended to 2023. Following the refinancing, Interserve Group excluding RMDK will have a GBP110 committed debt facility which matures in 2022.
Net cash-pay leverage of the Interserve Group (excluding the RMDK non-cash pay debt instrument) is expected to reduce to less than 1 x EBITDA and total net leverage (including the RMDK non-cash pay debt instrument) reduces to less than 2x EBITDA.
Assessment of viability
Although they consider that the output of the annual strategic planning process represents the best estimate of future prospects of the Group, the directors have also stress tested the future viability of the Group by considering a number of sensitivities to the plan.
These scenarios have been informed with reference to both the Principal Risks and Uncertainties of the Group and the key strategic planning assumptions. All scenarios assume the successful completion of the proposed Deleveraging Plan. The scenarios are:
Scenario Linkage to the key judgements Sensitivity modelled
and the principal risks
or uncertainty
1 - Significantly Key strategic planning A shortfall in 2019
reduced work winning assumption: 2 forecast revenue from
from a combination future contract wins
of a downturn Principal risks and leading to reduced
in market conditions, uncertainties; business, revenue and profits
changes in the economic and political in the Support Services
political appetite environment, damage division over a 3-year
for outsourcing, to the company's reputation period. A 25% reduction
political pressures in the revenue in the
in the Middle Construction division
East or from reduced resulting in reduced
overall customer profits and increased
confidence in working capital outflows
Interserve. impacting 2019 to 2021.
------------------------------ ------------------------------
2 - Cost reductions Key strategic planning Costs of change incurred
that form part assumption:3 as planned but with
of the Fit for reduced benefits. Impact
Growth programme Principal risks and of mandatory increases
are not fully uncertainties; operating in UK and Spanish pay
realised or are system, key people, rates.
offset by other financial risks
cost increases.
------------------------------ ------------------------------
3 - Increase in Key strategic planning Planned disposals of
working capital assumption: 4, 8 non-core businesses
requirement are assumed to be delayed
Principal risks and by 3-6 months.
uncertainties; financial The expected improvement
risks in day sales outstanding
in the Support Services
and RMDK divisions
does not occur.
------------------------------ ------------------------------
4 - Energy from Key strategic planning Derby professional
Waste - insurance assumption: 5, 6 indemnity proceeds
proceeds delayed are delayed by 6 months
Derby and final Principal risks and during which time additional
account settlement uncertainties: major costs of GBP1.4M per
higher than assumed contracts month are incurred.
at Glasgow Glasgow final account
settlement is higher
than assumed
------------------------------ ------------------------------
5 - Poor recovery Key strategic planning There are no further
of debts in the assumption: 2 and 6 receipts from education
Middle East contracts in Saudi
Principal risks and Arabia
uncertainties; financial
risks
------------------------------ ------------------------------
With the anticipated Deleveraging Plan in place, the Company would be able to sustain all of these scenarios in combination and still remain within the proposed committed facility limits and comply with the covenant tests. However, additional unmodeled scenarios exist that could cause breaches of either the absolute committed facilities or covenants. These principally involve a failure to secure the proposed financing, a significant worsening in the cost to complete or final account settlements within the EFW business or significant adverse macroeconomic events. The directors have applied the assumption unmodeled scenarios will not occur.
Viability statement
The Group faces a number of uncertainties in relation to the final outcomes on its Energy from Waste contracts and political uncertainties in the Middle East which are detailed in this statement and in the prospectus. It has plans in place that have been stress tested with a number of reasonable worst case scenarios however there can be no certainty that it will remain viable. The directors have a plan which they are implementing but they acknowledge the inherent risks of delivery, some of which are outside their control.
While the directors have every expectation of successful completion of the financial restructuring, this is contingent on approval of the detailed transaction by 50% of shareholders. The Group has been in discussion with lenders and there is every indication that the detail will be agreed and confirmed by the 15(th) March but there is no certainty. The transactions will put to shareholder vote on this date. Failure to conclude the Deleveraging Plan may cast significant doubt over the Group's ability to continue as a going concern, and consequently may cast significant doubt over its viability.
GOING CONCERN STATEMENT
The directors have carried out a detailed review of the viability of the Group over the period to December 2021. This review has involved stress testing of the current strategic plan of the Group under a number of scenarios and has considered risks and uncertainties to both the near and medium term.
Based on this analysis, with no unforeseen deterioration in the remaining EFW projects and approval of the Deleveraging Plan by shareholders, the directors have a reasonable expectation that the Group has adequate resources to continue as a going concern for the foreseeable future, representing a period of at least a year from the date of this statement. The Board of Directors has considered the length of going concern period for this assessment and taking into account the terms of the replacement financing facilities and proposed Deleveraging Plan, have concluded that a going concern period of 12 months remains appropriate.
In making this assessment the directors recognise that there is a material uncertainty in relation to the approval of the Deleveraging Plan by shareholders and failure to secure shareholder approval represents a material uncertainty that may cast significant doubt over the Group's ability to continue as a going concern.
Based on current expectations, and on the basis that the directors have every expectation of successful completion of the financial restructuring, the directors consider it appropriate to continue to adopt the going concern basis in preparing the financial statements.
INCOME STATEMENT
Consolidated income statement
For the year ended 31 December 2018
Unaudited Year ended 31 Audited Year ended 31
December 2018 December 2017
Before Non-underlying Total Before Non-underlying Total
non-underlying items non-underlying items and
items and and items amortisation
amortisation amortisation and of acquired
of acquired of acquired amortisation intangible
intangible intangible of acquired assets
assets assets intangible #
assets
#
Notes GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Continuing
operations
Revenue
including
share of
associates
and joint
ventures 3 3,019.2 206.5 3,225.7 3,408.6 258.3 3,666.9
Less: Share of
associates and
joint ventures (321.7) - (321.7) (416.1) - (416.1)
================= ====== =============== =============== =========== =============== =============== ===========
Consolidated
revenue 3 2,697.5 206.5 2,904.0 2,992.5 258.3 3,250.8
Cost of sales (2,372.2) (242.5) (2,614.7) (2,640.9) (368.7) (3,009.6)
================= ====== =============== =============== =========== =============== =============== ===========
Gross profit 325.3 (36.0) 289.3 351.6 (110.4) 241.2
Administration
expenses (249.9) (27.8) (277.7) (292.6) (86.7) (379.3)
Amortisation of
acquired
intangible
assets 4 - (18.7) (18.7) - (21.5) (21.5)
Impairment of
goodwill 4 - (33.1) (33.1) - (60.0) (60.0)
=============== =============== =========== =============== =============== ===========
Total
administration
expenses (249.9) (79.6) (329.5) (292.6) (168.2) (460.8)
Operating
profit/(loss) 75.4 (115.6) (40.2) 59.0 (278.6) (219.6)
Share of result
of associates
and
joint ventures 17.3 17.0 34.3 25.5 (30.6) (5.1)
Amortisation of
acquired
intangible
assets 4 - - - - (0.1) (0.1)
=============== =============== =========== =============== =============== ===========
Total share of
result of
associates
and joint
ventures 17.3 17.0 34.3 25.5 (30.7) (5.2)
================= ====== =============== =============== =========== =============== =============== ===========
Total operating
profit/(loss) 92.7 (98.6) (5.9) 84.5 (309.3) (224.8)
Investment
revenue 5 3.5 - 3.5 5.9 2.9 8.8
Finance costs 6 (82.5) (26.4) (108.9) (28.4) - (28.4)
================= ====== =============== =============== =========== =============== =============== ===========
Profit/(loss)
before
tax 13.7 (125.0) (111.3) 62.0 (306.4) (244.4)
Tax charge 7 (8.7) (8.9) (17.6) (8.1) (1.9) (10.0)
================= ====== =============== =============== =========== =============== =============== ===========
Profit/(loss)
for
the year 5.0 (133.9) (128.9) 53.9 (308.3) (254.4)
================= ====== =============== =============== =========== =============== =============== ===========
Attributable to:
Equity holders
of the parent 1.7 (133.9) (132.2) 51.9 (308.3) (256.4)
Non-controlling
interests 3.3 - 3.3 2.0 - 2.0
================= ====== =============== =============== =========== =============== =============== ===========
5.0 (133.9) (128.9) 53.9 (308.3) (254.4)
================= ====== =============== =============== =========== =============== =============== ===========
Earnings per
share 9
Basic (89.2p) (176.0p)
================= ====== =============== =============== =========== =============== =============== ===========
Diluted (89.2p) (176.0p)
================= ====== =============== =============== =========== =============== =============== ===========
Headline 1.1p 35.6p
================= ====== =============== =============== =========== =============== =============== ===========
Diluted Headline 0.9p 34.0p
================= ====== =============== =============== =========== =============== =============== ===========
# - restated (note 15)
Consolidated statement of comprehensive income
For the year ended 31 December 2018
Notes Unaudited Year Audited Year
ended ended
31 December 31 December
2018 2017
GBPmillion GBPmillion
Loss for the year (128.9) (254.4)
Items that will not be reclassified
subsequently to profit or loss:
Actuarial gains/(losses) on
defined benefit pension schemes 54.0 (10.4)
Deferred tax on above items
taken directly to equity 7 (9.2) 1.8
====================================== ====== =============== =============
44.8 (8.6)
Items that may be reclassified
subsequently to profit or loss:
Exchange differences on translation
of foreign operations 14.0 (34.8)
(Losses)/gains on cash flow
hedging instruments (excluding
joint ventures) - (23.0)
Recycling of cash flow hedge
reserve to profit and loss
account 10.4 22.7
Deferred tax on above items
taken directly to equity 7 (1.8) 0.2
Net impact of items relating
to joint-venture entities 0.8 3.0
23.4 (31.9)
Other comprehensive income/(loss)
net of tax 68.2 (40.5)
Total comprehensive
income/(loss) (60.7) (294.9)
====================================== ====== =============== =============
Attributable to:
Equity holders
of the parent (64.0) (297.3)
Non-controlling
interests 3.3 2.4
====================================== ====== =============== =============
(60.7) (294.9)
===================================== ====== =============== =============
Consolidated balance sheet
At 31 December 2018
Unaudited Audited
31 December 2018 31 December
2017
Notes GBPmillion GBPmillion
Non-current assets
Goodwill 342.3 372.9
Other intangible assets 30.9 54.5
Property, plant and equipment 209.9 228.6
Interests in joint-venture
entities 33.2 46.5
Interests in associated
undertakings 88.3 78.4
Retirement benefit surplus 11 93.9 -
Deferred tax asset 1.3 23.4
=============================== ====== ================== =============
799.8 804.3
=============================== ====== ================== =============
Current assets
Inventories 35.8 34.0
Trade and other receivables 641.3 722.0
Cash and deposits 196.7 155.1
=============================== ====== ================== =============
873.8 911.1
=============================== ====== ================== =============
Total assets 1,673.6 1,715.4
=============================== ====== ================== =============
Current liabilities
Bank overdrafts - (6.8)
Trade and other payables (741.3) (798.6)
Current tax liabilities (4.5) (7.2)
Short-term provisions 10 (29.3) (50.2)
=============================== ====== ================== =============
(775.1) (862.8)
=============================== ====== ================== =============
Net current assets 98.7 48.3
=============================== ====== ================== =============
Non-current liabilities
Borrowings (827.5) (647.5)
Trade and other payables (12.7) (14.5)
Long-term provisions 10 (59.4) (80.0)
Retirement benefit obligation 11 - (48.0)
(899.6) (790.0)
=============================== ====== ================== =============
Total liabilities (1,674.7) (1,652.8)
=============================== ====== ================== =============
Net assets/(liabilities) (1.1) 62.6
=============================== ====== ================== =============
Equity
Share capital 12 15.0 14.6
Share premium account 116.5 116.5
Warrants in Issue 31.4 -
Capital redemption reserve 0.1 0.1
Merger reserve 121.4 121.4
Hedging and revaluation
reserve 3.5 (5.9)
Translation reserve 88.5 74.5
Investment in own shares - (1.9)
Retained earnings (392.4) (272.0)
=============================== ====== ================== =============
Equity attributable to equity
holders of the parent (16.0) 47.3
Non-controlling interests 14.9 15.3
=============================== ====== ================== =============
Total equity (1.1) 62.6
=============================== ====== ================== =============
Consolidated statement of changes in equity
Share Share Warrants Capital Merger Hedging Translation Investment Retained Attributable Non- Total
capital premium in issue redemption reserve and reserve in own earnings to equity controlling
reserve (1) revaluation shares holders interests
reserve (3) of the
(2) parent
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Audited
Balance at
1 January
2017 14.6 116.5 - 0.1 121.4 (8.8) 109.7 (1.9) (9.4) 342.2 12.9 355.1
=============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ ===========
Profit/(loss)
for
the year - - - - - - - - (256.4) (256.4) 2.0 (254.4)
Other
comprehensive
income - - - - - 2.9 (35.2) - (8.6) (40.9) 0.4 (40.5)
=============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ ===========
Total
comprehensive
income - - - - - 2.9 (35.2) - (265.0) (297.3) 2.4 (294.9)
=============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ ===========
Dividends paid - - - - - - - - - - - -
Shares issued - - - - - - - - - - - -
Purchase of - - - - - - - - - - - -
Company
shares
Company shares - - - - - - - - - - - -
used
to settle
share-based
payment
obligations
Share-based
payments - - - - - - - - 2.4 2.4 - 2.4
=============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ ===========
Transactions
with
owners - - - - - - - - 2.4 2.4 - 2.4
=============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ ===========
Audited
Balance at
31 December
2017 14.6 116.5 - 0.1 121.4 (5.9) 74.5 (1.9) (272.0) 47.3 15.3 62.6
=============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ ===========
Impact of
adoption
of IFRS15 - - - - - - - - (37.5) (37.5) - (37.5)
Balance at 1
January
2018 as
restated 14.6 116.5 - 0.1 121.4 (5.9) 74.5 (1.9) (309.5) 9.8 15.3 25.1
Profit/(loss)
for
the year - - - - - - - - (132.2) (132.2) 3.3 (128.9)
Other
comprehensive
income - - - - - 9.4 14.0 - 44.8 68.2 - 68.2
=============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ ===========
Total
comprehensive
income - - - - - 9.4 14.0 - (87.4) (64.0) 3.3 (60.7)
=============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ =========== Dividends paid - - - - - - - - - - (3.7) (3.7) Shares issued 0.4 - - - - - - - - 0.4 - 0.4 Warrants issued - - 35.3 - - - - - - 35.3 - 35.3 Warrants exercised - - (3.9) - - - - - 3.9 - - - Purchase of - - - - - - - - - - - - Company shares Company shares used to settle share-based payment obligations - - - - - - - 1.9 (1.9) - - - Share-based payments - - - - - - - - 2.5 2.5 - 2.5 =============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ =========== Transactions with owners 0.4 - 31.4 - - - - 1.9 4.5 38.2 (3.7) 34.5 =============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ =========== Unaudited Balance at 31 December 2018 15.0 116.5 31.4 0.1 121.4 3.5 88.5 - (392.4) (16.0) 14.9 (1.1) =============== =========== =========== =========== =========== =========== ============ ============ =========== =========== ============= ============ ===========
(1)The GBP121.4 million merger reserve represents GBP16.4 million premium on the shares issued on the acquisition of Robert M. Douglas Holdings Plc in 1991, GBP32.6 million premium on the shares issued on the acquisition of MacLellan Group Plc in 2006 and GBP72.4 million premium on the shares placed to partially fund the acquisition of Initial Facilities in 2014.
(2) The hedging and revaluation reserve includes GBP14.8 million relating to the revaluation of financial assets within the joint ventures held at fair value through other comprehensive income (2017: GBP16.0 million).
(3) The investment in own shares reserve represents the cost of shares in Interserve Plc held by the trustees of the Interserve Employee Benefit Trust. The number of shares held at 31 December 2018 was 32,144 (2017: 466,909), with the market value of these shares at 31 December 2018 being GBP0.0 million (2017: GBP0.4 million).
Consolidated cash flow statement
For the year ended 31 December 2018
Unaudited Audited
Year ended Year ended
31 December 31 December
2018 2017
GBPmillion GBPmillion
Operating activities
Total operating loss (5.9) (224.8)
Adjustments for:
Amortisation of acquired intangible
assets 18.7 21.5
Impairment of goodwill 33.1 60.0
Amortisation of capitalised software
development 6.1 1.6
Impairment of capitalised software
development - 6.3
Depreciation of property, plant and
equipment 35.7 39.5
Impairment of capitalised IT development - 9.4
Loss on disposal of investments in
joint ventures (17.0) (7.5)
Proceeds on disposal of PFI investments 47.0 12.3
Non-cash gain on pension indexation (70.6) -
Other non-current asset non-cash impairment
items 15.0 1.4
Loss on disposal of subsidiary 7.1 -
Pension payments in excess of the
income statement charge (16.9) (15.9)
Share of results of associates and
joint ventures (17.3) 5.2
Charge relating to share-based payments 2.5 2.1
Gain on disposal of plant and equipment
- hire fleet (17.0) (22.2)
Gain on disposal of plant and equipment
- other (2.9) (0.2)
====================================================== ============= =============
Operating cash flows before movements
in working capital 17.6 (111.3)
(Increase)/decrease in inventories (1.7) 0.5
(Increase)/decrease in receivables 59.2 (11.1)
Increase/(decrease) in payables (135.0) (26.4)
Capital expenditure - hire fleet (20.3) (17.8)
Proceeds on disposal of plant and
equipment - hire fleet 20.0 30.2
====================================================== ============= =============
Cash generated by operations (60.2) (135.9)
====================================================== ============= =============
Cash used by operations - Energy from
Waste exited business (29.7) (95.9)
Cash used by operations - other non-underlying (41.8) (72.9)
Cash generated by operations - ongoing
business 11.3 32.9
====================================================== ============= =============
Taxes paid (11.4) (8.6)
====================================================== ============= =============
Net cash from operating activities (71.6) (144.5)
====================================================== ============= =============
Investing activities
Interest received 3.2 5.9
Dividends received from associates
and joint ventures 11.8 17.2
Proceeds on disposal of plant and
equipment - non-hire fleet 8.9 1.6
Capital expenditure - non-hire fleet (19.6) (39.3)
Investment in joint-venture entities (0.8) (32.7)
Proceeds on disposal of subsidiary 2.5 -
Receipt of loan repayment - investments - 0.7
====================================================== ============= =============
Net cash from/(used in) investing
activities 6.0 (46.6)
====================================================== ============= =============
Financing activities
Interest paid (42.8) (27.3)
Dividends paid to non-controlling (3.7) -
interests
Proceeds from issue of warrants 35.3 -
Proceeds from issue of shares and exercise 0.4 -
of warrants
Proceeds from disposal of derivatives - 44.1
Increase in bank loans 163.4 223.6
Repayment of bank loans (36.5) -
Repayment of obligations under finance
leases (3.0) (1.0)
====================================================== ============= =============
Net cash from financing activities 113.1 239.4
====================================================== ============= =============
Net increase in cash and cash equivalents 47.5 48.3
Cash and cash equivalents at beginning
of period 148.3 102.2
Effect of foreign exchange rate changes 0.9 (2.2)
====================================================== ============= =============
Cash and cash equivalents at end of
period 196.7 148.3
====================================================== ============= =============
Cash and cash equivalents comprise
Cash and deposits 196.7 155.1
Bank overdrafts - (6.8)
====================================================== ============= =============
196.7 148.3
==== ============= =============
Notes to the Consolidated Financial
Statements
For the year ended 31 December 2018
=========================================== ============= =============
Unaudited Audited
Year ended Year ended
31 December 31 December
2018 2017
=========================================== ============= =============
Reconciliation of net cash flow to
movement in net debt
Net increase in cash and cash equivalents 47.5 48.3
Increase in bank loans (126.9) (223.6)
Movement in obligations under finance
leases 3.0 1.0
Change in net debt resulting from
cash flows (76.4) (174.3)
Change in PIK interest (non-cash) (24.7) -
Change in discount on debt (non-cash) (13.8) -
Effect of foreign exchange rate changes (13.7) (53.9)
============================================ ============= =============
Movement in net debt during the period (128.6) (228.2)
Net debt - opening (502.6) (274.4)
============================================ ============= =============
Net debt - closing (631.2) (502.6)
============================================ ============= =============
1 General information and critical accounting judgements
General information
Interserve Plc (the Company) is a company incorporated in the United Kingdom. The financial information in this announcement, which was approved by the Board of Directors on 26 February 2019, does not constitute the Company's statutory financial statements for the years ended 31 December 2018 or 2017 but is derived from these accounts.
The financial information for 2017 is derived from the statutory accounts for 2017, which have been delivered to the Registrar of Companies. The auditor has reported on the 2017 accounts; their report was (a) unqualified, (b) did not include a reference to any matter to which the auditor drew attention by way of emphasis of matter, and (c) and did not contain statements under section 498(2), (3) or (4) of the Companies Act 2006.
The statutory accounts for 2018 will be finalised on the basis of the unaudited financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting. The audit report is expected to include reference to a material uncertainty relating to going concern to which the auditor will draw attention by way of emphasis. The Company expects to publish its statutory accounts before the end of March 2019.
Critical accounting judgements
In the preparation of the consolidated financial statements management makes certain judgements and estimates that impact the financial statements. While these judgements and estimates are continually reviewed the facts and circumstances underlying them may change and that could impact the results of the Group. Each judgement identified below also includes, where relevant, an assessment of the key sources of estimation uncertainty. In particular:
Glasgow Energy from Waste (EfW) plant
In July 2012 Interserve was appointed by Viridor as the Engineer Procure Construct (EPC) contractor for the construction of the Glasgow EfW plant. In December 2016 this contract was terminated by the client. During 2018 the Group successfully concluded its professional indemnity insurance claims, with all cash being received in the period. The key remaining judgement remains the final account settlement with Viridor and whether this will crystallise within current expected parameters.
Differences of interpretation of certain contract provisions between the parties exist, which are capable of having a material impact on the liability of the Group for compensation on termination. These issues include, but are not limited to:
i. Application of the liability cap to Viridor's claims;
ii. The order in which limitations on liability are taken into account in the compensation calculation;
iii. The scope of contractual pain-share provisions;
iv. The recovery of Viridor's indirect losses; and v. Viridor's duty to mitigate its costs incurred in completing the works.
The judgements in this regard have been based upon appropriate legal and technical advice and the directors regard them as appropriate. Viridor's parent company's half year results to 30 September 2018 included a net receivable due from Interserve relating to this project of GBP64 million. Since the year end Viridor has submitted a draft termination account to Interserve significantly in excess of this receivable. The Directors believe this has no technical merit. The Glasgow contract contains an overall limit on Interserve's liability to Viridor under the contract which Interserve calculates after deducting payments to date as GBP71.0 million.
The directors have taken the view that the differences between the parties will be substantially narrowed if the interpretation disputes (i), (ii) & (iii) above are resolved. Assuming the director's views on these points are correct, the liability would be between GBPnil and GBP33.5 million. If not, the liability could be higher. The directors consider that their best estimate of the outcome is GBP14.7 million which is the accrued cost in the balance sheet to settle the final account.
Interserve believes that there are strong claims that there are provisions in the contract that limit the scope of the Group's liability. Accordingly, Interserve commenced an adjudication seeking a statement of law in respect of (i), (ii) & (iii) above on 8 February 2019 and expects a decision to be delivered by April 2019. Any decision by the adjudicator could be subsequently challenged through formal arbitration. There can however be no assurances as to the ultimate amount of any liability.
Derby EfW plant
In August 2014 a special purpose vehicle (SPV) (formed as a 50:50 joint venture between Interserve and Renewi), Resource Recovery Solutions (RRS), was awarded the contract by Derby City and County Councils (the Councils) for the construction and operation of the Derby EfW plant. The SPV awarded an EPC contract to Interserve Construction for the construction of the plant.
The Group completed the physical construction of the plant in 2017 and started receiving municipal waste in January 2018, however the project has been delayed past the long stop date of September 2018. During the fourth quarter of 2018 Acceptance testing commenced and discussions are currently ongoing as to how to demonstrate satisfactory completion of the tests. Transfer testing is due to commence shortly once the plant is believed to be capable of performing at the optimum levels.
The key remaining judgements are:
-- The Acceptance and Transfer Tests are passed and independently certified within the current projected timescales
o The Derby EfW plant has been operational since September 2018, excluding periods where defect rectification works have been completed. The directors are confident that the Derby EfW plant will ultimately meet or exceed the required outputs.
o Delays would likely result in increased contractual costs to complete and damages. Depending on the cause, these costs could be recovered from insurers. It is not possible to quantify unknown circumstances which could cause delays, however current rates of costs and damages are cGBP1.5 million per month and the adjustment would increase cost of sales and either provisions or accruals in the balance sheet.
-- Performance and availability damages are not levied as the plant operates at the required contractual levels
-- Interserve is not terminated on the project
o In the event that Interserve and the Councils cannot come to an agreement, the councils may exercise their contractual right to terminate the Project Agreement which in turn would lead to the termination of the Construction Contract.
o Given the stage of completion of the project the Directors do not believe this would be a desirable outcome for all parties.
o The financial impact of such an event would depend on the calculation of the market value of the project, which the directors expect would reduce Interserve's debt and equity return in the SPV but not create a claim against Interserve. Interserve's equity and debt interests in the SPV were valued at GBP12.4 million at 31 December 2018, which is shown as an investment in joint ventures in the balance sheet. In addition, the project finance lenders would seek to recover their losses from Interserve as a result of Interserve's alleged default in terms of failing to achieve completion by the long stop date.
o The directors believe Renewi require Interserve's consent as shareholder of the SPV to terminate Interserve's construction contract.
The Company has, as yet, not recognised any value for professional indemnity (PI) insurance claims relating to the construction of the Derby EfW plant
o This contract has been significantly loss making and, as required under IFRS, a forward loss provision has been taken. This forward loss provision does not assume any PI insurance recoveries. The directors expect that, as on the Glasgow EfW project in 2018, significant PI recoveries on Derby EfW plant will be achieved.
o A notification has been made to the PI insurer of claims. The claims predominantly relate to alleged design deficiencies and negligence of key subcontractors, particularly design deficiencies relating to the Advanced Conversion Facility (ACF) power plant. The claims are conceptually similar to the successful claims made on the Glasgow EfW plant.
o Interserve are yet to fully establish its entitlements as the project has not concluded, and recoveries will be recognised in the income statement when cash is received. It is only at this point the directors deem the likelihood of recovery to meet the virtually certain recognition criteria of IAS 37. The range in outcome from these claims is between GBPnil and GBP50 million, which is the maximum receivable through a single claim under the policy. As at the balance sheet date, the directors expect to receive in excess of GBP30 million, however fully detailed and substantiated submissions have not been submitted. The timing of the resolution of the insurance claims are not fully within the control of the Group, however the directors expect substantial insurance proceeds during the second half of 2019.
Future losses on the Ministry of Justice CRC contracts will fall within acceptable levels
Interserve is involved in providing probation and rehabilitation services to the Ministry of Justice (MoJ). These services are provided via five community rehabilitation companies (CRCs) each of which holds a contract to provide services in a given geographic area. During 2018, a fundamental variation to the contracts was agreed which improved their viability but still left a substantial loss over their remaining life across all five of the contracts. The forward loss provision of GBP12.1 million booked in the prior year has been updated for these developments and continues to be reviewed on a regular basis.
The year-end 31 December 2018 forward loss and impairment provisions of GBP11.4 million included within the other debtors represents a fair assessment of a number of potential outcomes. The sensitivities principally pertain to the Performance by Results income which is impacted by reoffending data published by the Ministry of Justice on a quarterly basis and there are a number of factors which have a material impact on reoffending.
ILE International Saudi debt
Interserve Learning and Employment International (ILE) had GBP36.0 million of outstanding debt at 31 December 2018 including trade debtors and accrued income. Of this, approximately GBP17 million is recorded in deferred income as relating to activities to be undertaken in 2019. GBP15.7 million of the debt was greater than 90 days old at the year and only GBP1.8 million is over a year old.
Since the start of Q4 2018, it has been evident that our immediate customer, Colleges of Excellence ('COE'), has had a funding shortfall from its funding partner, Human Resources Development Fund ('HRDF'). Initially COE commented to us that only 44% of outstanding payments would be made. We received 44% of the amount due on the main COE contract but between the second half of October and 31 December 2018, we have had no further receipts. The Health programme, where we have been paid, is funded by the Ministry of Health.
We believe that we will be paid in full for all of the outstanding sums and that no bad debt provision is necessary at this stage based on the following reasons:
i. The client has verbally assured us on innumerable occasions that we will be paid and that the issue is purely one of timing.
ii. Moreover, the client has asserted in writing on a number of occasions that we have performed all of our obligations, that the sums are due and that subject to the finalisation of its own funding arrangements, these sums will be paid. We are establishing a fact pattern for each contract to affirm the weight of evidence supporting these assertions.
iii. We have now raised breach notices on all contracts and we have had no responses from the customer which would contest our right to raise the breach notices, or entitlement to payment. If they had, such an action would prejudice our right to 100% of the debt.
iv. Our contracts are reasonably straightforward, we have carried out those contracts and have exercised our rights according to these contracts.
v. It is not uncommon for payments to be made relatively slowly in Saudi Arabia and our experience of COE is that whilst payments have been slow, we have historically been paid.
vi. The COE have continually stated throughout this process that Interserve is a strong strategic partner for the programme and that they will shortly be entering into discussion to extend the current contracts, prior to commencing the process of the recommissioning and expansion of the current programme.
vii. We have robustly documented our position and we believe we are in a strong place if ever we were to have to take our case to a higher authority - the Saudi Crown Prince or the Courts.
In the circumstances, we are firmly of the view therefore that we will be paid in full in due course for all of the sums due and this position is supported by the fact that we have recently received approximately GBP13 million of cash in part settlement of the outstanding debt.
Accounting for debt restructuring under IFRS 9
On 27 April 2018 the Group re-negotiated its existing credit facilities which consisted of the renewal of existing Revolving Credit Facilities of GBP388.6 million and $350 million of US Loan Notes and obtaining GBP175 million of new Term Loans (LIBOR + 8.75%) together with GBP21.5 million of Money Market lines. These renewals of the RCF and US $ Loan Notes (together, 'the Override Agreement') were at significantly higher rates of interest than previously (LIBOR + 6.43% for RCF vs average of 2.8% in 2017 and LIBOR + 7.61% for the US$ Loan Notes vs average of 5.6% in 2017).
We concluded that the changes in the terms of the Override Agreement constituted a substantial debt modification under IFRS 9 and therefore existing loans were derecognised and new loan balances were recognised. The Override Agreement was concluded at the same time as the Group securing new lending, under the terms of a new 'Super Senior Agreement'. The substantially modified debt was initially recognised at fair value, calculated based on the expected present value of future cash flows, discounted at an effective interest rate reflecting the Group's cost of borrowing. Our view is that the effective rate of interest on the loan was consistent with the market rates existing in April 2018. A total of twenty three different banks participated as a syndicate on the Revolving Credit Facility and five institutions on the US$ bond. A significant proportion of these banks also participated in the Super Senior Agreement, alongside two lenders who had not previously participated in the syndicate. On the basis of these facts, we concluded that this indicates that the interest rates offered were arms-length in nature based on market-based pricing. The impact of these judgements was that there was no significant gain or loss on refinancing under the terms of the Override Agreement, and that the increased cost of borrowing in the Override Agreement is consistent with the prevailing market rate.
Measurement of impairment of goodwill and intangible assets
The carrying value of goodwill and intangible assets is reviewed for impairment at least annually. In determining whether goodwill is impaired an estimation of the value in use of the cash generating unit (CGU) to which the goodwill has been allocated is required. This calculation of value in use requires estimates to be made relating to the timing and amount of future cash flows expected from the CGU and suitable discount rates based on the Group's weighted average cost of capital adjusted to reflect the specific economic environment of the relevant CGU. These estimates have been used to calculate a GBP33.1 million impairment against goodwill in Support Services.
An impairment review of the Group's investments in associates was also carried out at 31 December 2018. We specifically assessed the impact of the current economic blockade in Qatar as a potential indicator of impairment. We have concluded however that the Qatar blockade is of a temporary nature and that therefore no impairment provision is required at 31 December 2018.
Retirement benefit obligations
The Group has assessed that under IFRIC 14 IAS 19 it is appropriate to recognise a pension asset in the balance sheet at 31 December 2018.
Judgement is exercised in establishing the fair value of retirement benefit assets, most notably the valuation of the buy-in contract to insure some of the benefits of a subset of the pension membership of the scheme provided by the insurer. This requires judgement of the proportion of the buy-in contract that exactly matches the amount and timing of benefits payable and the choice of an appropriate valuation technique in accordance with IFRS 13.
Non-underlying item presentation
IAS 1 requires material items to be disclosed separately in a way that enables users to assess the quality of a company's profitability. In practice, these are commonly referred to as 'exceptional' or 'non-underlying items', but this is not a concept defined by IFRS and therefore there is a level of judgement involved in determining what to include in headline profit. We consider items which relate to non-recurring events and are significant in size or in nature to be suitable for separate presentation (see note 4).
2. Accounting policies
General
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS.
The financial statements are presented in sterling, rounded to the nearest thousand (GBP'000) unless otherwise stated. They have been prepared under the historical cost convention, except for the revaluation of certain financial instruments that have been measured at fair value.
Basis of preparation
The financial statements have been prepared on the going concern basis, which assumes that the Group will continue to be able to meet its liabilities as they fall due for the foreseeable future. In assessing the going concern assumptions, the Board has reviewed the base case plans, identified downsides and anticipated receipt of proceeds from the proposed Deleveraging Plan. Following this assessment, the Board has a reasonable expectation that the Group will be able to operate as a going concern for the foreseeable future.
In undertaking the assessment, the Board has considered the fact that the Deleveraging Plan is subject to a shareholder vote, an event which is outside of the control of the Group. These events and conditions indicate a material uncertainty on the completion of the Deleveraging Plan, which may cast significant doubt about the Group's ability to continue as a going concern.
The going concern basis has been adopted for 2018 because the directors believe that the Group has realistic plans for the future growth of the business and every expectation of successfully completing the Deleveraging Plan by the end of March 2019. The Board believes that, with the Deleveraging Plan in place, even in a reasonable worst-case scenario, the Group will continue to have adequate financial resources to realise their assets and discharge their liabilities as they fall due. Accordingly, the Directors have formed the judgement that it is appropriate to prepare the financial statements on the going concern basis. Therefore, the financial statements do not include any adjustments which would be required if the going concern basis of preparation is inappropriate.
3. Business and geographical segments
The Group is organised into three operating divisions, as set out below. Information reported to the Executive Board for the purposes of resource allocation and assessment of segment performance is based on the products and services provided.
-- Support Services: provision of outsourced support services to public- and private-sector clients, both in the UK and internationally.
-- Construction: design, construction and maintenance of buildings and infrastructure, both in the UK and internationally.
-- Equipment Services: design, hire and sale of formwork, falsework and associated access equipment.
Costs of central services, including those relating to managing our PFI investments and central bidding activities, are shown in "Group Services".
Notes to the Consolidated Financial Statements
For the year ended 31 December 2018
Business segments
Revenue including Consolidated Result
share of associates revenue
and joint ventures
=========================== ======================== ========================
Unaudited2018 Audited Unaudited Audited Unaudited Audited
2017 2018 2017 2018 2017
# # #
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Support Services - UK 1,597.7 1,642.3 1,584.3 1,625.5 51.4 39.4
Support Services - International 172.1 193.9 138.0 142.2 7.2 2.8
============== =========== =========== =========== =========== ===========
Support Services 1,769.8 1,836.2 1,722.3 1,767.7 58.6 42.2
Construction - UK 756.6 972.8 756.6 972.8 2.2 (10.3)
Construction - International 246.6 290.5 13.5 - 13.3 19.2
============== =========== =========== =========== =========== ===========
Construction 1,003.2 1,263.3 770.1 972.8 15.5 8.9
Equipment Services 195.5 229.0 195.5 229.0 39.6 54.4
Group Services 57.9 92.1 16.8 35.0 (21.0) (21.0)
Inter-segment elimination (7.2) (12.0) (7.2) (12.0) - -
================================== ============== =========== =========== =========== =========== ===========
3,019.2 3,408.6 2,697.5 2,992.5 92.7 84.5
Non-underlying items
and amortisation of acquired
intangible assets (note
4) 206.5 258.3 206.5 258.3 (98.6) (309.3)
================================== ============== =========== =========== =========== =========== ===========
Revenue/Total operating
profit/(loss) 3,225.7 3,666.9 2,904.0 3,250.8 (5.9) (224.8)
================================== ============== =========== =========== ===========
Investment revenue 3.5 8.8
Finance costs (108.9) (28.4)
=========== ===========
Profit/(loss) before
tax (111.3) (244.4)
Tax (17.6) (10.0)
=========== ===========
Profit/(loss) for the
year (128.9) (254.4)
=========== ===========
# - restated (note 15)
Segment assets Segment liabilities Net assets/
(liabilities)
======================== ============================== ==============================
Unaudited Audited Unaudited Audited Unaudited Audited
2018 2017 2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Support Services
- UK 422.2 423.1 (362.6) (382.8) 59.6 40.3
Support Services
- International 107.7 109.4 (46.0) (51.4) 61.7 58.0
=========== =========== ================= =========== =============== ===========
Support Services 529.9 532.5 (408.6) (434.2) 121.3 98.3
Construction - UK 209.1 231.5 (248.7) (350.4) (39.6) (118.9)
Construction -
International 62.9 55.9 - - 62.9 55.9
=========== =========== ================= =========== =============== ===========
Construction 272.0 287.4 (248.7) (350.4) 23.3 (63.0)
Equipment
Services 264.0 255.1 (41.1) (56.2) 222.9 198.9
================== =========== =========== ================= =========== =============== ===========
1,065.9 1,075.0 (698.4) (840.8) 367.5 234.2
Group Services,
goodwill
and acquired
intangible
assets 411.0 484.0 (163.3) (168.3) 247.7 315.7
================== =========== =========== ================= =========== =============== ===========
1,476.9 1,559.0 (861.7) (1,009.1) 615.2 549.9
================== =========== =========== ================= ===========
Net debt (631.2) (502.6)
Net assets
(excluding
non-controlling
interests) (16.0) 47.3
=============== =============
Notes to the Consolidated Financial Statements - continued
For year ended 31 December 2018
Depreciation Additions to
and amortisation property, plant
and equipment
and intangible
assets
======================== ================= ===========
Unaudited Audited Unaudited Audited
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
Support Services - UK 18.0 13.5 13.9 23.3
Support Services - International 2.9 3.9 1.1 1.1
=========== =========== ================= ===========
Support Services 20.9 17.4 15.0 24.4
Construction - UK 2.5 3.0 0.4 0.7
Construction - International - - - -
=========== =========== ================= ===========
Construction 2.5 3.0 0.4 0.7
Equipment Services 17.7 17.6 21.3 16.3
================================== =========== =========== ================= ===========
41.1 38.0 36.7 41.4
Group Services 19.4 24.7 3.2 15.7
================================== =========== =========== ================= ===========
60.5 62.7 39.9 57.1
================================== =========== =========== ================= ===========
Geographical segments
The Support Services and Construction divisions are located in the United Kingdom and the Middle East. Equipment Services has operations in all of the geographic segments listed below.
The following table provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods/services:
Revenue including
share of associates Consolidated Total operating
and joint ventures Revenue profit
======================== ======================== ========================
Unaudited Audited Unaudited Audited Unaudited Audited
2018 2017 2018 2017 2018 2017
# # #
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
United Kingdom 2,270.8 2,552.1 2,257.4 2,535.3 59.5 37.0
Rest of Europe 77.0 63.4 77.0 63.4 3.1 2.7
Middle East and Africa 540.9 627.5 273.7 285.3 41.5 52.7
Australasia 31.3 31.1 31.3 31.1 7.5 6.3
Far East 12.2 16.8 12.2 16.8 (0.3) 4.6
Americas 36.3 37.6 36.3 37.6 2.4 2.2
Group Services 57.9 92.1 16.8 35.0 (21.0) (21.0)
Inter-segment elimination (7.2) (12.0) (7.2) (12.0) - -
=============================== =========== =========== =========== =========== =========== ===========
3,019.2 3,408.6 2,697.5 2,992.5 92.7 84.5
Non-underlying items
and amortisation of acquired
intangible assets (note
4) 206.5 258.3 206.5 258.3 (98.6) (309.3)
=========== =========== =========== =========== =========== ===========
3,225.7 3,666.9 2,904.0 3,250.8 (5.9) (224.8)
=========== =========== =========== =========== =========== ===========
Non-current
assets
========================
Unaudited Audited
2018 2017
GBPmillion GBPmillion
United Kingdom 95.7 137.9
Rest of Europe 9.6 6.1
Middle East and Africa 190.9 177.7
Australasia 15.4 16.4
Far East 10.3 13.3
Americas 33.6 30.8
Group Services, goodwill and acquired
intangible assets 349.1 398.7
======================================= =========== ===========
704.6 780.9
Retirement benefit surplus 93.9 -
Deferred tax asset 1.3 23.4
======================================= =========== ===========
799.8 804.3
======================================= =========== ===========
# - restated (note 15)
Disaggregated revenue
The Group's consolidated revenue has been disaggregated by major service line, primary geographical market and pattern of revenue recognition and the tables below disclose this information by reference to the Group's reportable segments.
The Group's consolidated revenue disaggregated by major service lines is as follows:
Support Support Construction Construction Equipment Group Total
Services Services UK International Services services/
UK International Other
=========== =============== ============= =============== =========== =========== ===========
Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited
2018 2018 2018 2018 2018 2018 2018
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Facilities
management 1,692.9 138.0 13.1 - - 14.9 1,858.9
Construction 2.6 - 819.7 13.5 - (5.2) 830.6
Equipment
sales - - - - 56.3 - 56.3
Equipment
rentals 19.1 - - - 139.2 (0.1) 158.2
1,714.6 138.0 832.8 13.5 195.5 9.6 2,904.0
=========== =============== ============= =============== =========== =========== ===========
The Group's consolidated revenue disaggregated by primary geographical markets is as follows:
Support Support Construction Construction Equipment Group Total
Services Services UK International Services services/
UK International Other
=========== ============== ============= ============== =========== ========== ========
Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited
2018 2018 2018 2018 2018 2018 2018
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
United
Kingdom 1,599.8 - 832.8 - 31.3 9.6 2,473.5
Rest of
Europe 71.7 - - - 5.3 - 77.0
Middle East
and Africa 43.1 138.0 - 13.5 79.1 - 273.7
Australasia - - - - 31.3 - 31.3
Far East - - - - 12.2 - 12.2
Americas - - - - 36.3 - 36.3
1,714.6 138.0 832.8 13.5 195.5 9.6 2,904.0
=========== ============== ============= ============== =========== ========== ========
The Group's consolidated revenue disaggregated by pattern of revenue recognition is as follows:
Support Support Construction Construction Equipment Group Total
Services Services UK International Services services/
UK International Other
=========== ============== ============= ============== =========== ========== ========
Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited
2018 2018 2018 2018 2018 2018 2018
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Single service
with fixed
monthly fee
subject to
non-performance
deductions 374.8 - - - - - 374.8
Bundled services
with fixed
monthly fee
subject to
non-performance
deductions 1,196.6 3.5 - - - (1.9) 1,198.2
Construction
services over
time - 134.5 832.8 13.5 - (5.2) 975.6
Equipment rental
for a period
of time - - - - 139.2 (0.1) 139.1
=========== ============== ============= ============== =========== ========== ========
Goods and
services
transferred
over time 1,571.4 138.0 832.8 13.5 139.2 (7.2) 2,687.7
Service at
schedule of
rates (hours
or tasks) 143.2 - - - - 16.8 160.0
Equipment sales
at a point
in time - - - - 56.3 - 56.3
Goods and
services
transferred
at a point
in time 143.2 - - - 56.3 16.8 216.3
Total 1,714.6 138.0 832.8 13.5 195.5 9.6 2,904.0
=========== ============== ============= ============== =========== ========== ========
Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2018
4. Non-underlying items and amortisation of acquired intangible assets
Unaudited 2018
===========================================================================================================================================================================================
Exited businesses(1)
=======================================================================
Energy Strategic Property London Other Restructuring Professional Contract Asset Pension Foreign Amortisation Total
from review development Construction (Site costs adviser Review impairments/ indexation exchange of acquired
waste of Services/Power) fees disposal gain/(loss) intangible
Equipment of on assets
Services Industrial retranslation
of loan
notes
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Consolidated
revenue 32.5 - - 27.2 19.5 - - 127.3 - - - - 206.5
Cost of sales (45.1) - - (50.0) (23.7) (4.9) - (118.8) - - - - (242.5)
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Gross
profit/(loss) (12.6) - - (22.8) (4.2) (4.9) - 8.5 - - - - (36.0)
=========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Administration
expenses - - - (2.0) (2.5) (15.1) (43.0) (13.7) (22.1) 70.6 - - (27.8)
Amortisation
of acquired
intangible
assets - - - - - - - - - - - (18.7) (18.7)
Impairment
of goodwill - - - - - - - - (33.1) - - - (33.1)
=========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Total
administration
expenses - - - (2.0) (2.5) (15.1) (43.0) (13.7) (55.2) 70.6 - (18.7) (79.6)
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Operating
profit/(loss) (12.6) - - (24.8) (6.7) (20.0) (43.0) (5.2) (55.2) 70.6 - (18.7) (115.6)
Share of
results
of associates
and joint
ventures - - 17.0 - - - - - - - - - 17.0
Amortisation - - - - - - - - - - - - -
of acquired
intangible
assets of
associates
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Total operating
profit/(loss) (12.6) - 17.0 (24.8) (6.7) (20.0) (43.0) (5.2) (55.2) 70.6 - (18.7) (98.6)
Net finance
costs - - - - - - - - - - (26.4) - (26.4)
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Total
profit/(loss) (12.6) - 17.0 (24.8) (6.7) (20.0) (43.0) (5.2) (55.2) 70.6 (26.4) (18.7) (125.0)
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Tax on
non-underlying
items
=========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Prior period - - - - - - - - - - - - -
adjustments
Other - - - - - - - - - (12.0) - - (12.0)
Amortisation
of acquired
intangible
assets - - - - - - - - - - - 3.1 3.1
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= =========== Tax on non-underlying items - - - - - - - - - (12.0) - 3.1 (8.9) ================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= =========== Profit/(loss) after taxation (12.6) - 17.0 (24.8) (6.7) (20.0) (43.0) (5.2) (55.2) 58.6 (26.4) (15.6) (133.9) ================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
(1) The construction of Energy from Waste facilities, where there was contractual responsibility taken for process risk, and business streams exited as a result of the strategic review of Equipment Services and the decision to exit Property Development, and the Power and Site Services businesses, along with directly associated costs, are considered to be Exited Businesses. Exited Businesses are presented as non-underlying items and are excluded from the calculation of headline earnings per share (reflecting their material and non-recurring nature). The Exited Businesses do not meet the definition of discontinued operations as stipulated by IFRS 5 Non-current assets held for sale and discontinued operations because the business has not been disposed of and there are no assets classified as held for sale. Accordingly the disclosures within non-underlying items differ from those applicable for discontinued operations.
Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2018
Non-underlying items and amortisation of acquired intangible assets (continued)
Audited 2017 #
===========================================================================================================================================================================================
Exited businesses(1)
=======================================================================
Energy Strategic Property London Other Restructuring Professional Contract Asset Pension Foreign Amortisation Total
from review development Construction (Site costs adviser Review impairments/ Indexation exchange of acquired
waste of Services/Power) fees disposal gain/(loss) intangible
Equipment of on assets
Services Industrial retranslation
of loan
notes
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Consolidated
revenue 48.6 4.5 - 50.3 40.6 - - 114.3 - - - - 258.3
Cost of sales (81.6) (7.2) - (56.6) (36.3) (0.4) - (186.6) - - - - (368.7)
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Gross
profit/(loss) (33.0) (2.7) - (6.3) 4.3 (0.4) - (72.3) - - - - (110.4)
=========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Administration
expenses (2.1) (4.4) - (4.0) (3.6) (32.8) (13.9) (9.2) (16.7) - - - (86.7)
Amortisation
of acquired
intangible
assets - - - - - - - - - - - (21.5) (21.5)
Impairment of
goodwill - - - - - - - - (60.0) - - - (60.0)
=========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Total
administration
expenses (2.1) (4.4) - (4.0) (3.6) (32.8) (13.9) (9.2) (76.7) - - (21.5) (168.2)
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Operating
profit/(loss) (35.1) (7.1) - (10.3) 0.7 (33.2) (13.9) (81.5) (76.7) - - (21.5) (278.6)
Share of
results
of associates
and joint
ventures - - (26.0) - - - - (4.6) - - - - (30.6)
Amortisation
of acquired
intangible
assets
of associates - - - - - - - - - - - (0.1) (0.1)
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Total operating
profit/(loss) (35.1) (7.1) (26.0) (10.3) 0.7 (33.2) (13.9) (86.1) (76.7) - - (21.6) (309.3)
Net finance
costs - - - - - - - - - 2.9 - 2.9
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Total
profit/(loss) (35.1) (7.1) (26.0) (10.3) 0.7 (33.2) (13.9) (86.1) (76.7) - 2.9 (21.6) (306.4)
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Tax on
non-underlying
items
=========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Prior period
adjustments - - - - - - - - (5.5) - - - (5.5)
Amortisation
of acquired
intangible
assets - - - - - - - - - - - 3.6 3.6
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Tax on
non-underlying
items - - - - - - - - (5.5) - - 3.6 (1.9)
================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
Profit/(loss)
after taxation (35.1) (7.1) (26.0) (10.3) 0.7 (33.2) (13.9) (86.1) (82.2) - 2.9 (18.0) (308.3) ================ =========== =========== ============ ============= ================ ============== ============= =========== ============= =========== ============== ============= ===========
(1) The construction of Energy from Waste facilities, where there was contractual responsibility taken for process risk, and business streams exited as a result of the strategic review of Equipment Services and the decision to exit Property Development, and the Power and Site Services businesses, along with directly associated costs, are considered to be Exited Businesses. Exited Businesses are presented as non-underlying items and are excluded from the calculation of headline earnings per share (reflecting their material and non-recurring nature). The Exited Businesses do not meet the definition of discontinued operations as stipulated by IFRS 5 Non-current assets held for sale and discontinued operations because the business has not been disposed of and there are no assets classified as held for sale. Accordingly the disclosures within non-underlying items differ from those applicable for discontinued operations.
# - restated (note 15)
Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2018
Non-underlying items and amortisation of acquired intangible assets (continued)
Exit from Energy from Waste
During 2018 a further GBP12.6 million of further losses have been recognised on these contracts taking the cumulative 2015 to 2018 losses to GBP229.2 million. During 2018 GBP35 million of insurance proceeds were received in respect of Energy from Waste projects.
During 2017 a further GBP35.1 million of losses were recognised on these contracts which reflected costs incurred to date, estimated costs to complete and damages which took the cumulative losses on these projects to GBP216.6 million.
Strategic review of Equipment Services
Further closure costs of GBP7.1 million resulting from the strategic review of Equipment Services and the decision to exit a number of smaller less attractive businesses were incurred in 2017 bringing total costs to just over GBP17.0 million that was announced at the time of the review.
Property development
During 2017, as part of review of assets held, we took the decision to exit the business of Property Development. As a result of that decision and a review of the carrying value of property assets held, it became necessary to impair those carrying values by GBP26.0 million to bring them in line with their estimated net recoverable amounts.
As announced with the 2017 year end results, we took the decision at the end of last year to exit from the business of Property Development and during 2018 we have sold our one remaining development asset (the Haymarket site in Edinburgh) for net proceeds of GBP47 million and realised a non-underlying profit of GBP17.0 million.
London Construction
We took the decision during the year to exit from activities in the London construction market. We will continue to offer fit out but not building projects in the London region. Costs associated with this exit and anticipated losses on the close out of contracts within this business resulted in losses of GBP24.8 million (2017: GBP10.3 million).
Exit from Site Services and Power businesses
We took the decision during the year to exit from the Power business in Support Services and the Site Services business in Construction at a cost of GBP4.2 million and GBP2.5 million respectively.
Restructuring costs
The Group has embarked on a 3 year plan, "Fit For Growth", to increase the Group's organisational efficiency, improve Group-wide procurement and ensure greater standardisation and simplification across the business. During the year the Group incurred termination costs in respect of former directors and employees, property rationalisation expenses and other business closure costs of GBP20.0 million (2017: GBP33.2 million).
Professional adviser fees
Professional fees incurred during 2018 in connection with our strategic review and short term re-financing totalled GBP43.0 million (2017: GBP13.9 million).
Contract Review
As previously disclosed, the new management team commissioned a comprehensive contract and balance sheet review with the independent support of PWC in the latter part of 2017. The Contract review identified provisions and write-downs relating to 18 individual contract issues. Of these, two contracts were regarded as neither operationally or financially complete. Revenues and costs in respect of these two contracts have been separately identified and disclosed above in 2018, to ensure consistency of presentation. This resulted in 2017 GBP86.1 million of non-underlying charges in respect of balance sheet write-downs and onerous contracts. Within this amount eighteen individual contracts were subject to GBP42.4 million of balance sheet write-downs principally in relation to work-in-progress and receivables beyond existing provisions and impairment charges, and GBP43.7 million was provided in respect of loss-making onerous contracts. During 2018 a further net amount of GBP5.2 million of provision was made against these contracts.
Asset impairments/disposal of Industrial
At 31 December 2018 goodwill and intangible assets in the Support Services segment were impaired by GBP33.1 million (2017: GBP60.0 million).
During the year the carrying value of the Industrial Services business was impaired by GBP15.0 million and a further loss of GBP7.1 million was incurred on final disposal.
During 2017, capitalised IT development costs of GBP16.7 million were written off, as well as GBP5.5 million of deferred tax assets.
Pension indexation
During the year the Trustee of the Interserve Pension Scheme (IPS) agreed to our request to change the schemes' terms relating to basis of indexation for future pension increases in respect of deferred and pensioner members of the scheme. This plan amendment from RPI to CPI resulted in the recognition of a one-off gain of GBP70.6 million.
Foreign exchange (loss)/gain on retranslation of loan notes
Non-underlying finance costs of GBP26.4 million (2017: GBP2.9 million gain) represent the impact of the retranslation of $350 million US Private Placement Notes to current exchange rates following the termination of exchange rate swaps in 2017, as well as the loss previously recognised in equity on the swaps being recycled to the income statement over the remaining life of the originally hedged instruments. Following the refinancing of the US loan notes on 27 April 2018, which represents a substantial debt modification under IFRS9, the outstanding amount at that date of GBP9.8 million was recycled to the income statement.
Restatement of prior year non-underlying items
The 2017 restatement of non-underlying items relates to GBP10.3m of costs of a decision made to exit from the London construction market during the first half of 2018 and in the second half of 2018 GBP0.5m of Power business closure costs in Support Services and a GBP1.2 million credit in respect of the Site Services business closure in the Construction division.
5. Investment revenue
Unaudited Audited
2018 2017
GBPmillion GBPmillion
Bank interest 1.5 3.0
Interest income from joint-venture investments 1.1 2.2
Net return on defined benefit pension 0.4 -
assets (note 11)
Foreign exchange gain on US private placement
loan - 2.9
Other interest 0.5 0.7
================================================ =========== ===========
3.5 8.8
================================================ =========== ===========
6. Finance costs
Unaudited Audited
2018 2017
GBPmillion GBPmillion
Borrowings and overdrafts (82.5) (27.3)
Net interest cost on pension obligation
(note 11) - (1.1)
Foreign exchange loss on US private placement (26.4) -
loan and recycling of hedging reserve
(note 4)
(108.9) (28.4)
=============================================== =========== ===========
The borrowings and overdrafts costs includes GBP3.4 million (2017: GBP1.6 million) relating to loan facility expenses.
The foreign exchange gain/loss on US private placement loan, representing the impact of the retranslation of $350 million US Private Placement Notes to current exchange rates following the termination of exchange rate swaps in 2017, also includes the loss previously recognised in equity on the swaps being recycled to the income statement over the remaining life of the originally hedged instruments. Following the refinancing of the US loan notes on 27 April 2018, which represents a debt modification under IFRS9, the outstanding amount at that date of GBP9.8 million was fully written off.
Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2018
7. Tax
Unaudited Audited
2018 2017
GBPmillion GBPmillion
Current tax - UK 2.2 5.8
Current tax - overseas 5.5 6.9
Deferred tax 9.9 (2.7)
========================= =========== ===========
Tax charge for the year 17.6 10.0
========================= =========== ===========
Tax charge before prior period adjustments 16.4 2.9
Prior period adjustments - charges/(credits) 1.2 7.1
============================================== ===== =====
17.6 10.0
============================================== ===== =====
Unaudited 2018 Audited 2017
Profit Tax Effective Profit Tax Effective
rate rate
GBPmillion GBPmillion % GBPmillion GBPmillion %
Subsidiary undertakings' profit
before tax, excluding one-offs (3.6) 8.7 0.0% 36.5 8.1 22.2%
Group share of profit after
tax of associates and joint
ventures 17.3 - - 25.5 - -
================================= =========== =========== ========== =========== =========== ==========
13.7 8.7 63.5% 62.0 8.1 13.1%
Other non-underlying items (73.2) 12.0 (16.4%) (224.8) 5.5 (2.4%)
Goodwill impairment (33.1) - - (60.0) - -
Amortisation (18.7) (3.1) 16.6% (21.6) (3.6) 16.7%
================================= =========== =========== ========== =========== =========== ==========
Profit/(loss) before tax (111.3) 17.6 (15.8%) (244.4) 10.0 (4.1%)
================================= =========== =========== ========== =========== =========== ==========
UK corporation tax is calculated at 19% (2017: 19.25%) of the estimated taxable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.
The total charge for the year can be reconciled to the profit per the income statement as follows:
Unaudited 2018 Audited 2017
===================== ============= ========
GBPmillion % GBPmillion %
Loss before tax (111.3) (244.4)
============================================== =========== ======== ============= ========
Tax at the UK income tax rate of 19%
(2017: 19.25%) (21.1) 19.0% (47.0) 19.2%
Tax effect of expenses not deductible
in determining taxable profit 9.8 (8.8%) 18.2 (7.4%)
Current-year losses for which no deferred
tax asset is recognised 38.1 (34.2%) 33.4 (13.7%)
Tax effect of share of results of associates (3.0) 2.7% 1.0 (0.4%)
Effect of tax rates in foreign jurisdictions (6.1) 5.5% (3.4) 1.4%
Effect of change in rate of deferred
tax (1.3) 1.2% 0.7 (0.3%)
Prior period adjustments 1.2 (1.1%) 7.1 (2.9%)
============================================== =========== ======== ============= ========
Tax charge and effective tax rate for
the year 17.6 (15.8%) 10.0 (4.1%)
============================================== =========== ======== ============= ========
In addition to the income tax charged to the income statement, the following deferred tax charges/(credits) have been recorded directly to other comprehensive income and statement of changes in equity in the year:
Unaudited Audited
2018 2017
GBPmillion GBPmillion
Tax on actuarial gains/(losses) on pension
liability 9.2 (1.8)
Tax on movements in cash flow hedging instruments - (4.0)
Tax on exchange movements on hedged financial
instruments 1.8 3.8
Tax on the intrinsic value of share-based - -
payments
=================================================== =========== ===========
11.0 (2.0)
=================================================== =========== ===========
Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2018
8. Dividends
There were no dividends paid in the current year or the prior year. There is no proposed dividend in respect of 2018.
9. Earnings per share
Calculation of earnings per share is based on the following data:
Unaudited Audited
2018 2017 #
GBPmillion GBPmillion
Earnings
Net profit attributable to equity holders
of the parent (for basic and diluted basic
earnings per share) (132.2) (256.4)
Adjustments:
Non-underlying items and amortisation of
acquired intangible assets (note 4) 133.9 308.3
Headline earnings (for headline and diluted
headline earnings per share) 1.7 51.9
============================================= =========== ===========
Number of shares
Unaudited Audited
2018 2017
Number Number
Weighted average number of ordinary
shares for the purposes of basic
and headline earnings per share 148,227,359 145,714,120
Effect of dilutive potential ordinary
shares:
Share options and awards(1) 33,839,453 6,781,433
Weighted average number of ordinary
shares for the purposes of diluted
basic(1) and diluted headline earnings
per share 182,066,812 152,495,553
========================================= ============ ============
Earnings per share Unaudited Audited
2018 2017 #
Pence Pence
Basic earnings per share (89.2) (176.0)
========================================= ============ ============
Diluted basic earnings per share (89.2) (176.0)
========================================= ============ ============
Headline earnings per share 1.1 35.6
========================================= ============ ============
Diluted headline earnings per share 0.9 34.0
========================================= ============ ============
(1) Due to basic earnings per share being a loss in 2017 and 2018 these adjustments are anti-dilutive and are therefore ignored in calculating diluted basic earnings per share for 2017 and 2018.
# - restated (note 15)
10. Provisions
Contract Onerous Insurance Restructuring Property End of Total
rectification contracts claims costs costs service
provisions benefits
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
At 1 January 2017
(Audited) 24.9 3.9 21.9 5.7 2.8 5.5 64.7
Additional
provision
in the year 9.3 37.9 13.4 8.6 16.4 1.4 87.0
Release of
provision (8.0) - - - - - (8.0)
Utilisation of
provision (4.3) (3.4) (3.9) (0.7) (0.3) - (12.6)
Exchange
differences - - - (0.3) - (0.6) (0.9)
================== =============== =========== =========== ============== =========== ============ ============
At 31 December
2017
(Audited) 21.9 38.4 31.4 13.3 18.9 6.3 130.2
Additional
provision
in the year 8.0 13.7 6.5 4.6 4.2 0.2 37.2
Disposals - - - - (0.2) - (0.2)
Reclassification
against
receivables - (11.4) - - - - (11.4)
Release of
provision (8.6) (9.8) (1.8) (3.6) (4.9) - (28.7)
Utilisation of
provision (3.9) (25.8) (3.3) (3.4) (2.4) 0.1 (38.7)
Exchange
differences - - - - - 0.3 0.3
At 31 December
2018
(Unaudited) 17.4 5.1 32.8 10.9 15.6 6.9 88.7
Unaudited Audited
31 December 31 December
2018 2017
GBPmillion GBPmillion
Included in
current
liabilities 29.3 50.2
Included in
non-current
liabilities 59.4 80.0
================== =============== =========== =========== ============== =========== ============ ============
88.7 130.2
================== =============== =========== =========== ============== =========== ============ ============
The impact of discounting is not material.
Contract rectification provisions include costs of construction site clearance, remedial costs required to meet clients contractual terms and potential claims under contract warranties. The main contracts to which these provisions relate are Derby and Glasgow EfW plants (see critical accounting judgments note 1) and DNRC Defence Establishment Maintenance.
Onerous contract provisions are made where the forecast costs of completing a contract exceed the forecast income generated over the life of the project. The main contract to which these provisions relate are US Forces Prime.
Insurance claim provisions mainly represent self insurance via the Group's captive insurance company of part of the Group's potential exposures to employers liability risks and professional indemnity claims which amount to GBP13 million at 31 December 2018 (2017: GBP13 million). These insurance provisions also include public liability excess self insurance which is not covered by the captive insurance company amounting to GBP20 million at 31 December 2018 (2017: GBP17 million).
Restructuring cost provisions largely relate to employee termination and property closure costs that form part of the Group's Fit for Growth cost optimisation programme (see note 4 non-underlying items).
Property cost provisions include costs in relation to remaining onerous office lease terms and dilapidation costs in respect of exited properties in particular the Intersection House, George Road and Redditch offices.
End of service benefits provisions relate to amounts provided in the Middle East region under the requirements of local labour laws to settle staff gratuity payments at the end of their contract of employment.
Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2018
11. Retirement benefit schemes
The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation.
Unaudited Audited
2018 2017
Significant actuarial assumptions
Retail price inflation (pa) 3.2% 3.2%
Discount rate (pa) 3.0% 2.5%
Post-retirement mortality (life expectancy in
years)
Male currently aged 65 86.3 87.7
Female currently aged 65 88.3 89.6
Male aged 65 in 20 years' time 87.3 89.5
Female aged 65 in 20 years' time 89.5 91.0
Other related actuarial assumptions
Consumer price index (pa) 2.1% 2.2%
Pension increases in payment (pa):
RPI 3.2% 3.2%
RPI (minimum 0%, maximum 5%) 3.1% 3.1%
RPI (minimum 3%, maximum 5%) 3.7% 3.7%
CPI 2.1% 2.2%
CPI (minimum 0%, maximum 5%) 2.1% 2.2%
CPI (minimum 3%, maximum 5%) 3.2% n/a
Fixed 5% 5.0% 5.0%
General salary increases (pa) 2.6% 2.7%
The amount included in the balance sheet arising from the Group's obligations in respect of the various pension schemes is as follows:
Unaudited Audited
2018 2017
GBPmillion GBPmillion
Present value of defined
benefit obligation 844.8 1,064.1
Fair value of schemes'
assets (938.7) (1,016.1)
============================== =========== ===========
(Asset)/liability recognised
in the balance sheet (93.9) 48.0
============================== =========== ===========
The amounts recognised in the income statement are as follows:
Unaudited Audited
2018 2017
GBPmillion GBPmillion
Employer's part of current service cost 3.4 5.2
Net interest (income)/expense on the
net pension liability/(asset) (0.4) 1.1
Administration expenses 2.3 1.6
Past service cost/(credit) (70.6) -
Total (income)/expense recognised in
the income statement (65.3) 7.9
========================================= =========== ===========
The current service cost and administration expenses are included within operating profit. The interest cost is included within financing costs.
Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2018
12. Share capital
Shares Share capital
thousands GBPmillion
Audited as at 1 January
2017 145,714.1 14.6
Share awards issued in 2017 - -
Audited at 31 December 2017 145,714.1 14.6
========== ==============
Exercised warrants 4,005.8 0.4
Share awards issued in 2018 - -
Unaudited at 31 December
2018 149,719.9 15.0
============================= ========== ==============
Following approval by shareholders at the AGM on 12 June 2018, our issued share capital of 149,719,938 ordinary 10p shares has been sub-divided into 149,719,938 ordinary shares of 0.1p and 149,719,938 deferred shares of 9.9p.
This sub-division was required to enable the exercise price of the share warrants to be reduced to less than 10p if necessary as a result of certain dilutive events. The economic and voting rights of the ordinary shares remain the same. The deferred shares have no value (economic or otherwise) and have been created to enable the Company to reduce the nominal value of the ordinary shares without going through a process that would require the approval of the Court. The deferred shares were issued to all persons on the Company's register of members as at 12 June 2018 on the basis of one deferred share of 9.9p for each ordinary share held. The deferred shares are not transferable, do not carry any voting or dividend rights and are not expected to have any economic value.
Warrants
As disclosed in our 2017 annual report, the Company issued 36,428,530 warrants during the period, for consideration of GBP35.3 million taken in the form of a discount adjustment to recognise the fair value of the debt issued, to the providers of the new term loan and bonding facilities to buy ordinary shares at 10 pence per share. The warrants are exercisable from the date of issue through the duration of the funding arrangements for which they were consideration (potentially up to September 2021). 4,005,818 of these warrants were exercised during the period for cash consideration of GBP0.4 million and the equivalent number of new shares issued to the holders.
13. Related parties
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its associates are disclosed below.
During the year, Group companies entered in to the following transactions with related parties who are not members of the Group:
Sales of goods Purchases of Amounts due Amounts owed
goods from
and services and services related parties to related parties
======================== ======================== ======================== ========================
Unaudited Audited Unaudited Audited Unaudited Audited Unaudited Audited
2018 2017 2018 2017 2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Joint-venture
entities 3.7 43.7 - - 5.3 14.5 - -
=============== =========== =========== =========== =========== =========== =========== =========== ===========
Associates 3.1 7.6 13.2 2.2 4.1 4.8 5.1 0.7
=============== =========== =========== =========== =========== =========== =========== =========== ===========
Sales and purchases of goods and services to related parties were made on normal trading terms.
The amounts outstanding shown in the above table are unsecured and will be settled in cash. No guarantees have been given or received in respect of the outstanding balances. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.
Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2018
14. Contingent liabilities
The Company and its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. Appropriate provision has been made in these accounts for all material uninsured liabilities resulting from proceedings that are, in the opinion of the directors, likely to materialise.
The Company and certain subsidiary undertakings have, in the normal course of business, given performance guarantees and provided indemnities to third parties in relation to performance bonds and other contract related guarantees. These relate to the Group's own contracts and to the Group's share of the contractual obligations of certain joint ventures and associated undertakings. The Group acts as guarantor for the following:
Maximum guarantee Amounts utilised
======================== ========================
Unaudited Audited Unaudited Audited
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
Joint ventures and associates
Borrowings 20.9 18.9 0.8 1.7
Bonds and guarantees 246.0 226.0 131.1 138.3
=============================== =========== =========== =========== ===========
266.9 244.9 131.9 140.0
=============================== =========== =========== =========== ===========
15. Restatement of comparatives
Certain items treated as non-underlying in the year ended 31 December 2018 financial statements have been restated for 2017 comparison purposes, and they relate to businesses exited in the current year, including London Construction, Site Services and Power. This has reduced underlying revenues in 2017 by GBP90.9 million and increased underlying operating profit by GBP9.6 million, with an equal and opposite impact on non-underlying revenue and operating profits.
16. Events after the balance sheet date
On 6 February 2019, Interserve announced a proposed Deleveraging Plan, which the Directors believe will provide the Group with sufficient liquidity to service its short-term cash obligations, create a strong balance sheet and a fundamentally solid foundation from which the Group can improve its business and deliver on its long-term strategy.
The Deleveraging Plan is a consensual restructuring of Interserve, which is urgently required to avoid a default in the Existing Financing Arrangements and to provide sufficient liquidity, cash and bonding facilities to allow the Group to service short term obligations and secure a stable platform. Such a default, were it to occur, would be expected to have material adverse consequences for stakeholders and, in particular, for existing shareholders.
The Deleveraging Plan preserves fully the pre-emption rights of existing shareholders. If they take up their entitlements in the equity raise their ownership will not be diluted and they will participate on the same terms as lenders
The Deleveraging Plan will be subject to approval by Interserve's shareholders.
17. Reconciliation of non-statutory measures
The Group uses a number of non-statutory measures to monitor the performance of its business. This note reconciles these measures to individual lines in the financial statements.
(a) Headline pre-tax profit Unaudited Audited
2018 2017
GBPmillion GBPmillion
Loss before tax (111.3) (244.4)
Adjusted for:
Amortisation of acquired intangible assets 18.7 21.5
Share of associates amortisation of acquired
intangible assets - 0.1
Non-underlying items - exited business -
Energy from Waste 12.6 35.1
Non-underlying items - exited business -
strategic review of Equipment Services - 7.1
Non-underlying items - exited business -
property development (17.0) 26.0
Non-underlying items - exited business -
London construction 24.8 10.3
Non-underlying items - exited business -
other 6.7 (0.7)
Non-underlying items - restructuring costs 20.0 33.2
Non-underlying items - professional adviser
fees 43.0 13.9
Non-underlying items - contract review 5.2 86.1
Non-underlying items - goodwill impairment 33.1 60.0
Non-underlying items - other asset impairments
and disposal of Industrial 22.1 16.7
Non-underlying items - pension indexation (70.6) -
Non-underlying items - exchange gain/loss
on retranslation of loan notes 26.4 (2.9)
Headline profit before tax 13.7 62.0
=========== ===========
(b) Gross revenue Unaudited Audited
2018 2017
GBPmillion GBPmillion
Consolidated revenue 2,904.0 3,250.8
Share of revenues of associates and joint
ventures 321.7 416.1
=========== ===========
Gross revenue 3,225.7 3,666.9
=========== ===========
(c) Net debt Unaudited Audited
2018 2017
GBPmillion GBPmillion
Cash and deposits A 196.7 155.1
=========== ===========
Bank overdrafts - (6.8)
Bank loans (508.5) (388.6)
Capitalised PIK interest (24.7) -
USD loans (22.0) -
US Private Placement Loans (272.3) (258.9)
=========== ===========
(827.5) (654.3)
Finance leases (0.4) (3.4)
=========== ===========
Total borrowings B (827.9) (657.7)
=========== ===========
Per balance sheet A+B (631.2) (502.6)
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
FR DMGZZRNMGLZG
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February 27, 2019 03:58 ET (08:58 GMT)
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