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SRP Serco Group Plc

190.80
1.60 (0.85%)
Last Updated: 14:51:10
Delayed by 15 minutes
Share Name Share Symbol Market Type Share ISIN Share Description
Serco Group Plc LSE:SRP London Ordinary Share GB0007973794 ORD 2P
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  1.60 0.85% 190.80 190.70 190.90 190.90 188.50 188.90 304,606 14:51:10
Industry Sector Turnover Profit EPS - Basic PE Ratio Market Cap
General Government, Nec 4.87B 202.4M 0.1834 10.38 2.1B

Serco Group PLC Half-year Report (9639M)

03/08/2017 7:01am

UK Regulatory


Serco (LSE:SRP)
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TIDMSRP

RNS Number : 9639M

Serco Group PLC

03 August 2017

3 August 2017

Serco Group plc

LEI: 549300PT2CIHYN5GWJ21

2017 half year results

 
Six months ended 30 June                                       2017(5)      2016(6) 
=========================================================  ===========  =========== 
Revenue - continuing and discontinued operations(1)        GBP1,508.2m  GBP1,517.9m 
Reported Revenue (continuing operations only)(1)           GBP1,508.2m  GBP1,493.2m 
---------------------------------------------------------  -----------  ----------- 
Underlying Trading Profit (UTP)(2)                            GBP35.3m     GBP50.6m 
Reported Operating Profit/(Loss) (after exceptional 
 items; continuing operations only)(2)                        GBP21.7m     GBP64.8m 
---------------------------------------------------------  -----------  ----------- 
Underlying EPS, basic(3)                                         1.55p        3.30p 
Reported EPS, basic (after exceptional items; continuing 
 and discontinued operations)                                  (1.68p)        4.27p 
Free Cash Flow(4)                                           (GBP26.8m)   (GBP22.5m) 
---------------------------------------------------------  -----------  ----------- 
Net Debt (including that for assets and liabilities 
 held for sale)                                              GBP148.9m     GBP99.7m 
---------------------------------------------------------  -----------  ----------- 
 

-- Reported Revenue(1) was broadly flat at GBP1,508m, comprising a 7.6% organic decline from net contract attrition, offset by an 8.2% currency benefit.

-- Order intake increased substantially to GBP2.4bn (2016: GBP0.9bn), including our largest ever contract at GBP1.5bn for Grafton prison in Australia. Together with GBP1.6bn booked in the second half of 2016, order intake over last 12 months of GBP4bn is the largest since 2012 and represents a book-to-bill ratio of around 130%. Closing order book increased to GBP10.8bn, up by over GBP1bn year-on-year.

-- As previously explained, H1 2017 profits and earnings have challenging comparators due to H1 2016 profits benefiting from:

o GBP11m of non-recurring trading items within UTP(2) , such as commercial arrangements negotiated as part of contract closure;

o GBP21m of non-underlying items within Trading Profit(2) and Reported Operating Profit(2) , predominantly Onerous Contract Provision releases;

o In addition, Reported EPS reflects a GBP27m adverse year-on-year movement in non-cash deferred tax adjustments related to pension assets. The largest adjustment arose as a result of the purchase of a bulk annuity for Serco's main defined benefit scheme.

-- As a result of these factors, UTP(2) declined against H1 2016 by GBP15m to GBP35m, but was slightly ahead of the GBP32m recorded for H2 2016; Reported Operating Profit(2) declined by GBP43m; Underlying EPS(3) declined 1.75p to 1.55p, and Reported EPS fell 5.95p to a loss of 1.68p.

-- Free Cash Flow(4) of negative GBP27m includes GBP8m of unwind of our receivables financing facility; the utilisation is now GBPnil (2016: GBP30m). Cash outflow related to exceptional items was GBP20m.

-- Closing Net Debt increased by GBP40m during the period to GBP149m. Of the GBP49m increase in Net Debt during the last twelve months, GBP30m relates to fully unwinding the receivables financing facility. Net Debt : EBITDA leverage of 1.4x remains well within our medium term target of 1-2x.

-- Continued progress reducing burden of loss-making contracts: OCP utilisation of GBP40m (2016: GBP47m); closing balance sheet liability now GBP180m (30 June 2016: GBP239m).

-- Operating costs reduced in proportion to the scale of underlying revenue reduction; we remain on track to achieve savings in our shared services and overheads of around GBP20m for the year, which would take the total savings achieved over the last three years to around GBP100m.

-- Pipeline of larger new bid opportunities now at GBP7.9bn, down GBP0.5bn, with an encouraging GBP1.5bn of new opportunities being promoted into the pipeline to partially offset the exceptionally strong order intake.

-- Guidance for 2017 unchanged - Revenue of GBP3.1bn and Underlying Trading Profit of between GBP65m and GBP70m; the movement in currency since our February statement may, if sustained, have a small negative effect.

Rupert Soames, Serco Group Chief Executive, said: "Notwithstanding the well-flagged decline in profits compared with the first half of 2016, trading in the first half of 2017 keeps us on track to achieve our expectations for the full year, and represents an improvement in Underlying Trading Profit on the second half of 2016.

"The most striking element is the order intake, which for two successive periods has been very strong, totalling some GBP4bn in the last twelve months, and we have succeeded in maintaining the pipeline at broadly similar levels despite strong order conversion. However, as we said in June, we remain sensibly cautious in the light of the political environment in several of our markets becoming markedly more unpredictable.

"We continue to make good progress implementing the 'Transformation' phase of our strategy, which includes further strengthening our service propositions, driving improvement in our capabilities, infrastructure and processes, as well as eking out further efficiencies from our cost base."

For further information please contact Serco:

Stuart Ford, Head of Investor Relations T +44 (0) 1256 386 227

Marcus De Ville, Head of Media Relations T +44 (0) 1256 386 226

Presentation:

A presentation for institutional investors and analysts will be held today at JPMorgan, 60 Victoria Embankment, London EC4Y 0JP, starting at 9.00am. The presentation will be webcast live on www.serco.com and subsequently available on demand. A dial-in facility is also available on +44(0)20 3427 1919 (USA: +1 646 254 3361) with participant pin code 4822723.

Notes to summary table of financial results:

(1) Revenue is as defined under IFRS, which excludes Serco's share of revenue of its joint ventures and associates. Revenue including that from discontinued operations (GBPnil in 2017 and GBP24.7m in 2016) is shown for consistency with previous disclosures. Reported Revenue excludes revenue from discontinued operations. Organic revenue growth is the change at constant currency in Revenue after adjusting to exclude the impact of acquisitions or disposals. Change at constant currency is calculated by translating non-Sterling values for the six months ended 30 June 2017 into Sterling at the average exchange rate for the six months ended 30 June 2016.

(2) Trading Profit is defined as IFRS Operating Profit adjusted for (i) amortisation and impairment of intangibles arising on acquisition and (ii) exceptional items; it includes the impact of discontinued operations in 2016. Consistent with IFRS, it includes Serco's share of profit after interest and tax of its joint ventures and associates. Underlying Trading Profit additionally excludes Contract and Balance Sheet Review adjustments (principally Onerous Contract Provision (OCP) releases or charges), as well as the beneficial treatment of depreciation and amortisation of assets held for sale during 2016, and other material one-time items such as the pension scheme settlement in the first half of 2016 related to the profit on early exit from a UK local authority contract that occurred in the second half of 2015. A reconciliation of Underlying Trading Profit to Reported Operating Profit is as follows:

 
Six months ended 30 June 
 GBPm                                                       2017   2016 
========================================================  ======  ===== 
Underlying Trading Profit                                   35.3   50.6 
Include: non-underlying items 
  Onerous contract and Balance Sheet Review adjustments        -   17.0 
  Benefit from non-depreciation and non-amortisation 
   of assets held for sale                                     -    0.2 
  Other one-time items                                         -    3.5 
                                                          ------  ----- 
Trading Profit                                              35.3   71.3 
Amortisation and impairment of intangibles arising 
 on acquisition                                            (2.2)  (2.0) 
                                                          ------  ----- 
Operating Profit Before Exceptional Items (continuing 
 and discontinued operations)                               33.1   69.3 
Exclude: Operating Loss/(Profit) Before Exceptional 
 Items from discontinued operations                            -    3.2 
                                                          ------  ----- 
Reported Operating Profit Before Exceptional Items 
 (continuing operations only)                               33.1   72.5 
Operating Exceptional Items (continuing operations 
 only)                                                    (11.4)  (7.7) 
                                                          ------  ----- 
Reported Operating Profit (after exceptional items; 
 continuing operations only)                                21.7   64.8 
--------------------------------------------------------  ------  ----- 
 

(3) Underlying EPS reflects the Underlying Trading Profit measure after deducting pre-exceptional net finance costs and related tax effects. For the six months ended 30 June 2016, the underlying tax charge has been restated so that the deferred tax adjustment related to pension asset movements is treated as non-underlying.

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

(5) The Global Services division, representing private sector BPO operations, was classified as a discontinued operation in 2015 and 2016. Disposal of one of the two remaining elements of the offshore business was completed in March 2016 and the final element completed in December 2016. The residual UK onshore private sector BPO operations were sold or exited in 2016 with the exception of one business, consisting of a single contract, which completed in July 2017. Total revenues for the remaining operations were GBP5.3m and UTP was GBP0.1m for the six months ended 30 June 2017, and therefore the results have been included in continuing operations in 2017 on the grounds of materiality.

(6) Consistent with the restatement of the results for the year ended 31 December 2015, the results for the six months ended 30 June 2016 have been restated for a change in accounting policy related to foreign exchange movements on investment and financing arrangements. This provides more relevant information about the impact of underlying transactions and, within net debt, now takes account of the currency hedging in place. This is particularly relevant at a time when we have had significant currency volatility, and, helpfully, more closely aligns our reported net debt with our debt covenant definitions. This change in accounting policy has the following effects for the six months ended 30 June 2016: reduces Trading and Operating Profit measures by GBP0.4m, with an equal and opposite impact recognised within Net Finance Costs; reduces Free Cash Flow (FCF) by GBP24.0m, with an equal and opposite impact recognised below FCF; and reduces closing net debt at 30 June 2016 by GBP20.5m, to reflect the hedging effect of derivative financial instruments designed to mitigate the effect of foreign exchange movements on our net debt. Further detail on the restatement is included in the Finance Review on page 14.

Reconciliations and further detail of financial performance are included in the Finance Review on pages 13 to 31. This includes full definitions and explanations of the purpose and usefulness of each non-IFRS Alternative Performance Measure (APM) used by the Group. The consolidated financial statements and accompanying notes are on pages 34 to 64.

Forward looking statements:

This announcement contains statements which are, or may be deemed to be, "forward looking statements" which are prospective in nature. All statements other than statements of historical fact are forward looking statements. Generally, words such as "expect", "anticipate", "may", "should", "will", "aspire", "aim", "plan", "target", "goal", "ambition" and similar expressions identify forward looking statements. By their nature, these forward looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements. Factors which may cause future outcomes to differ from those foreseen or implied in forward looking statements include, but are not limited to: general economic conditions and business conditions in Serco's markets; contracts awarded to Serco; customers' acceptance of Serco's products and services; operational problems; the actions of competitors, trading partners, creditors, rating agencies and others; the success or otherwise of partnering; changes in laws and governmental regulations; regulatory or legal actions, including the types of enforcement action pursued and the nature of remedies sought or imposed; the receipt of relevant third party and/or regulatory approvals; exchange rate fluctuations; the development and use of new technology; changes in public expectations and other changes to business conditions; wars and acts of terrorism; and cyber-attacks. Many of these factors are beyond Serco's control or influence. These forward looking statements speak only as of the date of this announcement and have not been audited or otherwise independently verified. Past performance should not be taken as an indication or guarantee of future results and no representation or warranty, express or implied, is made regarding future performance. Except as required by any applicable law or regulation, Serco expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this announcement to reflect any change in Serco's expectations or any change in events, conditions or circumstances on which any such statement is based after the date of this announcement, or to keep current any other information contained in this announcement. Accordingly, undue reliance should not be placed on the forward looking statements.

Chief Executive's Review

Summary of financial performance

Revenue and Trading Profit

Reported Revenue was GBP1,508m (2016: GBP1,493m); this measure excludes Serco's share of revenue from joint ventures and associates of GBP180m (2016: GBP294m); also excluded in the comparable period is revenue of GBP25m from discontinued operations, which reflected the residual run-off of the private sector BPO division. Net currency movements provided a GBP122m benefit or an 8.2% increase. At constant currency and adjusting for disposals, the organic revenue decline was GBP113m or 7.6%; around half of this organic decline relates to no longer recognising as revenue the value of goods purchased on behalf of customers following changes to two health procurement services contracts in the UK; the balance of the decline relates to the ending or transfer of contracts such as those for the UK Defence Science and Technology Laboratory (DSTL), Virginia Department of Transportation (VDOT), US Army transition assistance (SFLTAP) and Western Australia Court Security and Custodial Services (WACSCS). These and the effect of other smaller contract attrition was only partially offset by growth elsewhere including that from the phased start of new services during the period at Barts Health NHS Trust.

Underlying Trading Profit was GBP35.3m (2016: GBP50.6m), a decline of GBP15.3m or, excluding the GBP6.1m net currency benefit, a decline of GBP21.4m. The reduction was driven by the first half of last year benefitting from GBP11m of non-recurring trading items, which included: the higher shareholding and therefore a larger share of the profits in the prior period of the Atomic Weapons Establishment (AWE); the final settlement arrangements on the transfer of the Northern Rail franchise; the conclusion of the VDOT and SFLTAP operations; and the spike in activity in the comparable period on a defence logistics contract in the Middle East. In addition, as a consequence of the rapid growth of the bid pipeline, there has been an increase in bidding costs in the latest period.

Within our performance for the period, we are on track to deliver around GBP20m of cost savings this year from efficiencies in central support functions and overheads. Cumulatively over three years, this will mean approximately GBP100m of cost has been removed through our programmes to deliver savings by reducing the number of management layers, implementing better procurement and driving greater efficiency in the operation of shared services. These savings are central to our efforts to reduce the scale of Serco's cost base in proportion to the scale of the revenue reduction incurred through the loss of contracts and the disposals undertaken.

There being no adjustment items between Trading Profit and Underlying Trading Profit, the two measures were the same at GBP35.3m. In the comparable period there was a difference of GBP20.7m between the two measures comprising three items which were excluded from Underlying Trading Profit, none of which recurred in the latest period. First, in 2016 there was a GBP17.0m credit arising from the review of OCPs and other Contract and Balance Sheet Review items; no OCPs have required adjustment in the first half of 2017. Second, there was a GBP3.5m benefit in the first half of last year of a one-time pension settlement negotiated as part of the early termination of the Thurrock contract. Third, there was the beneficial impact of GBP0.2m related to depreciation and amortisation treatment of assets still classified as held for sale during the first half of last year. Trading Profit was therefore GBP71.3m for the first half of 2016.

As with the comparable period, Underlying Trading Profit benefited from the utilisation of OCPs, which have the effect of neutralising losses on previously identified onerous contracts; the GBP40m utilised in the period was in line with our expectations of around GBP80m utilisation for the year as a whole, and was lower than the GBP47m utilised in the comparable period. The closing balance of OCPs now stands at GBP180m, compared to GBP239m at 30 June 2016 and the initial charge of GBP447m taken in the second half of 2014.

Finance, pensions, tax and exceptional costs

Pre-exceptional net finance costs were GBP7.6m (2016: GBP6.7m), with the small increase including the effect of the average net debt increasing by GBP63m versus the comparable period. Cash net interest paid was GBP9.2m (2016: GBP10.5m).

Within net finance costs is a net credit of GBP1.6m (2016: GBP2.3m) related to the strong funding position of Serco's pension schemes. However, this net credit will be much smaller in the future following the purchase in June 2017 by the Trustees of the Serco Pension and Life Assurance Scheme (SPLAS) of a bulk annuity from an insurer, which, for a significant proportion of scheme members, has the effect of fully removing longevity, investment and accounting risks. Assets of the pension scheme have been transferred to the insurer to purchase the annuity, resulting in a reduction in the IAS19 net balance sheet asset. The gross liability remains recognised on our balance sheet, but there is now an equal and opposite insurance asset reflecting the perfect hedge established by the transaction.

The result after the transaction is that the overall pension scheme net balance sheet asset, before tax, was GBP1m at 30 June 2017 on a gross asset base of GBP1,418m. As described below, this transaction resulted in an exceptional tax charge of GBP16.1m reflecting a non-cash deferred tax adjustment related to the pension asset movements. Further details of Serco's pension funding and the bulk annuity purchase are described more fully in the Finance Review.

Pre-exceptional tax costs were GBP16.4m (2016: GBP3.8m). Cash net tax paid was GBP7.9m (2016: GBP6.6m).

The underlying effective tax cost was GBP10.7m (2016: GBP8.1m); this represents an underlying effective rate of 38.6% (2016: 18.5%) based upon GBP27.7m (2016: GBP43.9m) of Underlying Trading Profit less pre-exceptional net finance costs. The rate reflects the tax charges at locally prevailing rates in the international divisions (which tend to be higher than the UK's rate), while in the UK there was no deferred tax credit taken against losses made in the period; the resulting effective rate in the first half of 2017 is lower than the approximate 50% rate that we continue to anticipate for the financial year as a whole, mainly due to a one-off effect of UK tax legislation enactment which will take place in the second half and so can only be taken into account at that time.

Although we expect our cash tax rate to be reasonably predictable in future periods, our underlying effective tax rate is likely to be volatile until we are able to show sufficient profitability in our UK business to be able to recognise on our balance sheet the very significant UK tax asset arising from losses in 2014 and 2015 principally as a result of the Contract and Balance Sheet Review. We expect future years' effective tax rate will be high until UK tax losses can be recognised.

Tax on non-underlying items was a charge of GBP5.7m (2016: credit of GBP4.3m); this principally reflects non-cash deferred tax adjustments amounting to GBP6.3m (2016: credit of GBP4.4m) related to pension asset movements aside from the GBP16.1m resulting from the bulk annuity transaction which is treated as exceptional; in comparing the reported performance in the first half of 2017 versus the first half of 2016, the aggregate year-on-year impact of these non-cash deferred tax adjustments was therefore GBP26.8m.

The Group incurred operating exceptional costs of GBP11.4m (2016: GBP7.7m), mainly comprising restructuring costs related to the Transformation stage of our strategy, including redundancy charges, asset impairments and other incremental costs. There was an exceptional tax charge of GBP16.1m reflecting a non-cash deferred tax adjustment related to the pension asset movements on the bulk annuity purchase; exceptional tax on other items was a credit of GBP0.2m (2016: charge of GBP0.1m). Exceptional items related to discontinued operations were GBPnil (2016: GBP4.6m). Total net exceptional costs were therefore GBP27.3m (2016: GBP12.4m).

Reported result for the period

The reported result for the period, as presented at the bottom of the Group's Consolidated Income Statement on page 34, was a loss of GBP18.2m (2016: profit of GBP46.4m). This reflects: Trading Profit of GBP35.3m (2016: GBP71.3m); amortisation of intangibles arising on acquisition of GBP2.2m (2016: GBP2.0m); pre-exceptional net finance costs of GBP7.6m (2016: GBP6.7m); pre-exceptional tax costs of GBP16.4m (2016: GBP3.8m); and total net exceptional costs of GBP27.3m (2016: GBP12.4m).

Earnings Per Share (EPS)

Underlying EPS, which reflects the Underlying Trading Profit measure after deducting pre-exceptional finance costs and related tax effects, was 1.55p (2016: 3.30p). The reduction reflects the lower Underlying Trading Profit, together with the higher underlying effective tax rate; the weighted average number of shares in issue was broadly unchanged at 1,091.1m (2016: 1,088.8m). Reported EPS, which includes the impact of the GBP26.8m aggregate non-cash deferred tax adjustments related to pension assets, was a loss per share of 1.68p (2016: profit per share of 4.27p).

Cash Flow and Net Debt

Free Cash Flow was negative GBP26.8m (2016: negative GBP22.5m). Cash generated from Underlying Trading Profit was largely offset by the outflows related to loss-making contracts subject to Onerous Contract Provisions. These cash outflows lessened versus the comparable period, as reflected in the lower rate of OCP utilisation. There was a working capital outflow of GBP15m, which included GBP8m (2016: GBPnil) of reduction in the utilisation of the Group's receivables financing facility; at 30 June 2017 there was no utilisation of the GBP30m facility, whereas the full GBP30m was utilised at 30 June 2016. Of the GBP49m increase in Net Debt during the last twelve months, GBP30m of this outflow relates therefore to the unwinding of the receivables financing facility.

Closing net debt at 30 June 2016 increased to GBP148.9m, having been GBP109.3m at the start of the period; the increase includes the Free Cash outflow, together with a GBP20m cash outflow related to exceptional items. There was a beneficial gross currency translation effect on net debt of GBP9m, predominantly reflecting the Group's US Private Placement debt, however this was partially offset by a GBP2m adverse movement on hedging instruments. The closing net debt of GBP149m compares to a daily average of GBP178m for the period (2016: GBP115m) and a peak net debt of GBP243m (2016: GBP165m).

At the closing balance sheet date, our leverage for debt covenant purposes was 1.4x EBITDA (2016: 0.8x), which compares with the covenant requirement to be less than 3.5x and remains within our medium term target range of 1-2x.

Dividends

The Board has not declared an interim dividend for 2017. The Board's appraisal of the appropriateness of dividend payments takes into account the Group's underlying earnings, cash flows and financial leverage, together with the requirement to maintain an appropriate level of dividend cover and the prevailing market outlook. Although the Board is committed to resuming dividend payments as soon as it believes it prudent to do so, in assessing whether we should resume dividend payments in respect of 2017, we have been mindful of the fact that our forecasts for 2017 anticipate a reduction in earnings, a free cash outflow and an increase in net debt. In these circumstances, the Board believes that it would not be prudent to resume dividend payments at the current juncture.

The Revenue and Trading Profit performances are described further in the Divisional Reviews. More detailed analysis of earnings, cash flow, financing and related matters are described further in the Finance Review.

Contract awards, order book, rebids and pipeline

Contract awards

The Group signed contracts with a total value of GBP2.4bn during the period (2016: GBP0.9bn), which was an exceptionally strong performance. With GBP1.6bn booked in the second half of 2016, order intake for the 12 months to 30 June 2017 has been GBP4bn; this is the largest 12-month order intake for Serco since 2012, and represents a book-to-bill ratio of approximately 130%. There were 16 contract awards worth more than GBP10m each in the period. The large value of new business won resulted in this being approximately 80% of the total value signed, with the balance represented by the value of secured extensions or rebids of existing work; the latter was also an abnormally small balance by virtue of there being a relatively small amount of contracts coming up for rebid or extension during the period.

The largest new contract signed in the period was to operate the New Grafton Correctional Centre (NGCC) in New South Wales, which, when completed, will be the largest correctional facility in Australia; the estimated total contract value to Serco over a 20-year term is approximately AUD2.6bn (equivalent to approximately GBP1.5bn, based upon the period end exchange rate of 1 GBP = 1.69 AUD). The second largest new contract was with University Hospital Southampton NHS Foundation Trust to transform catering and cleaning, with an estimated value of GBP125m over the ten-year term. The third largest was in the Americas division to provide three Navy Fleet Readiness Centers with supply chain management services for hazardous materials, valued at a total of $101m for the base period and four one-year option periods. Smaller new bids won included environmental services for Rushmoor Borough Council, facilities management for Abu Dhabi Investment Authority, and numerous US Navy ship and shore defence equipment modernisation task orders.

Of rebids and extensions secured, the largest was for the US Patent & Trademark Office (USPTO) for a further ten years, with others including fleet services for Louisville Gas & Electric Company, air navigation services in Bahrain and Iraq, and support to passenger information services for the Western Australia Public Transport Authority.

Win rates by volume were over 50% for new bids and over 90% for rebids and extensions. Win rates by value saw significant improvement to around 80% for new work given the bias from the sheer scale of the Grafton win and no losses of large bids, and was approximately 90% for securing existing work.

Order book

The Group's order book, now stands at an estimated GBP10.8bn, up by over GBP1bn year-on-year. There is now GBP2.8bn of revenue already delivered or secured in the order book for 2017, equivalent to around 95% visibility of a GBP3.0bn revenue estimate at current exchange rates. The secured order book is GBP1.9bn for 2018 and GBP1.4bn for 2019.

Rebids

Through to the end of 2020, across the Group there are around 60 contracts in our order book with annual revenue of over GBP5m where an extension or rebid will be required, representing current annual revenue of approximately GBP1.5bn in aggregate or around 50% of the Group's 2017 GBP3.0bn revenue estimate at current exchange rates. This proportion of revenue that requires securing at some point over the next three and a half years is not unusual given our average contract length of around seven years (or approximately ten years on average on a revenue-weighted basis, as larger contracts typically have longer terms). Contracts that could potentially end at some point by the end of 2017 have aggregate annual revenue of around GBP50m. In 2018, this increases to around GBP500m, with the greater amount driven in particular by the US Affordable Care Act contract becoming due for full rebid in that year, and with the next largest being Northern Isles Ferries. In 2019, it is around GBP700m, with Australian immigration services, the Dubai Metro, one of our US Navy installation contracts, COMPASS and PECS also all expected to become due for rebid or potential extension. In 2020, it is around GBP200m, with no particularly large contracts currently anticipated to become due in that year.

Pipeline

Our pipeline is defined as new bid opportunities with estimated Annual Contract Value (ACV) of at least GBP10m and which we expect to bid and to be adjudicated within a rolling 24-month timeframe. The TCV of individual opportunities is capped at GBP1bn. The definition does not include rebids and extension opportunities. It is therefore a relatively small proportion of the total universe of opportunities, many of which either have annual revenues less than GBP10m, or are likely to be decided beyond the next 24 months, or are rebids and extensions. It should also be remembered that in the Americas division in particular, we have numerous arrangements which are classed as 'IDIQ' - Indefinite Delivery / Indefinite Quantity - which are essentially framework agreements under which the customer issues task orders one at a time; whilst the ultimate value of such an agreement contract may be very large and run over many years, a value is only recorded in our order book as individual task orders are contracted, and few of them would appear in the pipeline as they tend to be individually less than GBP10m and contracted on short lead times.

Following several years of decline in the value of the bid pipeline, in 2015 it began to grow again from its nadir of around GBP5bn, increasing to GBP6.5bn at the start of 2016, and stood at GBP8.4bn at the start of 2017. During the year to date, GBP2.0bn has come out of the pipeline, predominantly due to wins such as Grafton prison (which was capped in the pipeline at GBP1bn) and Southampton NHS Foundation Trust, and the removal of an immigration services opportunity in the US. A number of new opportunities have now matured to the stage where they meet our pipeline definition, adding in aggregate GBP1.5bn. As a result, the pipeline currently stands at GBP7.9bn, which consists of over 30 bids that have an ACV averaging approximately GBP30m and a contract length averaging around eight years. In the services industry which Serco serves, pipelines are often lumpy, as individual opportunities can be very large, and when they come in and out of the pipeline they can have a material effect on reported values.

Currently, our pipeline has a number of large bids, and a high proportion of them are due to be decided in the next six months, giving an unusually high degree of "front loading". It is therefore unlikely that we will be able to immediately replace the approaching GBP5bn of bids that are likely to drop out of the pipeline over the next six months and its value will likely be noticeably lower at the end of 2017, and could continue to be so through 2018. Provided we win one or more of these current large opportunities, a lower pipeline is not a matter of undue concern: growing our pipeline should not be expected to be a smooth progression given the effects of the timing and scale of individual awards.

Key opportunities in the pipeline are described further in the Divisional Reviews.

Risks associated with Serco's trading environment

We have previously reported on the risks and opportunities presented by Brexit. In terms of our business directly serving European bodies which accounts for around 5% of Serco's revenue, we think that the risks are likely to be small, since our services are typically delivered by EU-domiciled subsidiaries. There is also a possible impact on UK labour costs, and while only 4% of our employees in the UK are Continental EU nationals, there may be a wider impact on labour availability and cost. Third and most importantly, our business with the UK Central Government, which accounts for about a quarter of our revenue, depends on the administration's priorities. Brexit has been described by the Head of the Civil Service as the greatest peacetime challenge ever faced by the Civil Service, and it is clear that their priority is going to be focused in this direction for several years to come. However, in the medium term the repatriation of swathes of regulatory functions may lead to important opportunities, and many of our largest customers - most notably the Ministry of Defence, the Ministry of Justice and the Home Office - still have pressing needs to reduce costs and increase efficiency.

As we said in June, the political environment in three of our major markets has become markedly more unpredictable in recent months, which in turn makes it harder to forecast outcomes for our business. In the US, there is no clear determination of the future of the Affordable Care Act (ACA), and the shape of the budget for Federal Government spending remains unsettled; this is particularly important given the promised increases in Defence expenditure, which would be helpful to our North American business. In the UK, the recent General Election has left the administration weakened and less able to carry out a domestic reform agenda at the pace they might have hoped. And in the Middle East, the dispute between Qatar and neighbouring countries has unsettled the region.

Serco's long-term contracts and our role in providing critical public services should give us some protection from short-term vicissitudes. Importantly, our breadth of operations, and our strong presence in multiple international markets, helps to diversify our risk and give us choices as to where we invest our resources. As we have shown, even in a difficult environment, we have signed GBP4bn of business over the last 12 months. However, given the current geo-political uncertainties, we remain sensibly cautious.

Guidance and outlook

At the end of June we reiterated our 2017 full year guidance for Revenue of approximately GBP3.1bn and Underlying Trading Profit of between GBP65m and GBP70m, although the movement in currency since our previous statement in February may, if sustained, have a small negative effect. We do, however, repeat that the potential outcomes for the year remain wider than the stated profit range, both to the upside and the downside, due to the sensitivity of our profits to even small percentage changes in either revenues or costs, as well as movements in currency.

Our previous estimate of closing net debt of between GBP150m and GBP200m at the end of 2017 is similarly unchanged, and is equivalent to leverage for covenant purposes of between 1.4 and 1.8x EBITDA.

The trading outlook for 2018 remains unchanged from our statement in February, which was that we expect to see some modest improvement in margins. As described above, the pipeline remains very "front-loaded", with around 60% of the GBP7.9bn expected to be decided in the next six months. It is therefore likely that our pipeline in 2018 will run at lower levels than those seen in the first half of 2017.

Concluding thoughts

Our overarching objective is to secure Serco's position as a world-class international supplier of services to governments in our chosen sectors of Defence, Justice & Immigration, Transport, Health and Citizen Services. Our strategy has been based on the three stages of 'Stabilise - Transform - Grow'. The first stage was completed in 2015, and we are working hard to deliver our planned 'Transformation' phase. Our recent order intake has been very strong, totalling some GBP4bn in the last twelve months, thus returning the business back to a book-to-bill ratio of over 100% for the first time since 2012. While much still remains to be done to execute the long-term turnaround of Serco, we have established a good track record of delivery against our plans. The environment in several of our markets has become markedly more unpredictable in recent months, and this leads us to be sensibly cautious, but thus far we continue to track to our plan and make good progress against our strategy.

Rupert Soames

Group Chief Executive Officer

Serco - and proud of it.

Divisional Reviews

Serco's operations are reported as five divisions: UK Central Government (CG); UK & Europe Local & Regional Government (LRG); the Asia Pacific region (AsPac); the Middle East; and the Americas. The Global Services division previously consisted of Serco's private sector BPO operations, which for statutory reporting purposes were classified in 2015 and 2016 as discontinued operations following the previously announced strategic exit from this market and the subsequent disposals. Serco presents alternative measures to include the Revenue and Trading Profit of these discontinued operations in prior periods for consistency with previous disclosures. Reflecting statutory reporting requirements, Serco's share of revenue from its joint ventures and associates is not included in revenue, while Serco's share of joint ventures and associates' profit after interest and tax is included in Underlying Trading Profit. As previously disclosed and for consistency with guidance, Serco's Underlying Trading Profit measure excludes Contract and Balance Sheet Review adjustments (principally OCP releases or charges), and the benefit in 2015 and 2016 from not depreciating and amortising assets held for sale and other one-time items such as those related to the early exit from the Thurrock contract.

 
Six months ended 30 June               CG                                                Total 
 2017                                                     Middle            Corporate 
 GBPm                                         LRG  AsPac    East  Americas      costs 
Revenue                             323.3   334.8  307.4   174.2     368.5          -  1,508.2 
Change                               (7%)   (11%)    +8%    +13%      +12%          -       1% 
Change at constant currency          (7%)   (13%)   (8%)    (1%)      (2%)          -     (7%) 
Organic change at constant 
 currency                            (7%)   (15%)   (8%)    (1%)      (2%)          -     (8%) 
 
Underlying Trading Profit/(Loss)     20.9   (4.9)   10.5     6.8      22.2     (20.2)     35.3 
Change                              (37%)     n/a   +38%   (30%)      +13%       +11%    (36%) 
Change at constant currency         (37%)     n/a   +14%   (39%)      (2%)       +11%    (47%) 
Margin                               6.5%  (1.5%)   3.4%    3.9%      6.0%        n/a     2.3% 
 
Contract and Balance Sheet 
 Review adjustments                     -       -      -       -         -          -        - 
Assets held for sale depreciation 
 and amortisation                       -       -      -       -         -          -        - 
Other one-time items                    -       -      -       -         -          -        - 
Trading Profit/(Loss)                20.9   (4.9)   10.5     6.8      22.2     (20.2)     35.3 
Amortisation of intangibles 
 arising on acquisition                 -       -  (0.7)       -     (1.5)          -    (2.2) 
Operating profit/(loss) 
 before exceptionals                 20.9   (4.9)    9.8     6.8      20.7     (20.2)     33.1 
----------------------------------  -----  ------  -----  ------  --------  ---------  ------- 
 
 
Six months ended 30 June               CG                                               Sub-total 
 2016                                                    Middle            Corporate   continuing     Global 
 GBPm                                        LRG  AsPac    East  Americas      costs                Services    Total 
Revenue including discontinued 
 operations                         349.0  376.7  284.7   153.9     328.9          -      1,493.2       24.7  1,517.9 
Discontinued operations 
 adjustment*                            -      -      -       -         -          -            -     (24.7)   (24.7) 
----------------------------------  -----  -----  -----  ------  --------  ---------  -----------  ---------  ------- 
Revenue                             349.0  376.7  284.7   153.9     328.9          -      1,493.2          -  1,493.2 
----------------------------------  -----  -----  -----  ------  --------  ---------  -----------  ---------  ------- 
 
Underlying Trading Profit/(Loss)     33.4    2.7    7.6     9.7      19.6     (18.2)         54.8      (4.2)     50.6 
Margin                               9.6%   0.7%   2.7%    6.3%      6.0%        n/a         3.7%    (17.0%)     3.3% 
 
Contract and Balance Sheet 
 Review adjustments                  18.6  (1.1)    0.3     1.8     (2.8)      (0.7)         16.1        0.9     17.0 
Assets held for sale depreciation 
 and amortisation                       -      -      -       -         -          -            -        0.2      0.2 
Other one-time items                    -    3.5      -       -         -          -          3.5          -      3.5 
Trading Profit/(Loss)                52.0    5.1    7.9    11.5      16.8     (18.9)         74.4      (3.1)     71.3 
Amortisation of intangibles 
 arising on acquisition                 -      -  (0.6)       -     (1.3)          -        (1.9)      (0.1)    (2.0) 
Discontinued operations 
 adjustment*                            -      -      -       -         -          -            -        3.2      3.2 
----------------------------------  -----  -----  -----  ------  --------  ---------  -----------  ---------  ------- 
Operating profit/(loss) 
 before exceptionals                 52.0    5.1    7.3    11.5      15.5     (18.9)         72.5          -     72.5 
----------------------------------  -----  -----  -----  ------  --------  ---------  -----------  ---------  ------- 
 

* Statutory reporting only includes the post-tax result of discontinued operations as a single line in the Consolidated Income Statement.

 
Year ended 31 December 2016            CG                 Middle            Corporate    Sub-total     Global 
 GBPm                                         LRG  AsPac    East  Americas      costs   continuing   Services    Total 
Revenue including discontinued 
 operations                         678.6   696.5  619.7   324.8     691.4          -      3,011.0       36.8  3,047.8 
Discontinued operations 
 adjustment*                            -       -      -       -         -          -            -     (36.8)   (36.8) 
----------------------------------  -----  ------  -----  ------  --------  ---------  -----------  ---------  ------- 
Revenue                             678.6   696.5  619.7   324.8     691.4          -      3,011.0          -  3,011.0 
----------------------------------  -----  ------  -----  ------  --------  ---------  -----------  ---------  ------- 
 
Underlying Trading Profit/(Loss)     52.2   (6.5)   24.9    16.6      43.0     (43.5)         86.7      (4.6)     82.1 
Margin                               7.7%  (0.9%)   4.0%    5.1%      6.2%        n/a         2.9%    (12.5%)     2.7% 
 
Contract and Balance Sheet 
 Review adjustments                  42.7   (7.4)    9.3     2.2    (36.6)        3.2         13.4        0.8     14.2 
Assets held for sale depreciation 
 and amortisation                       -       -      -       -         -          -            -        0.5      0.5 
Other one-time items                    -     3.5      -       -         -          -          3.5          -      3.5 
Trading Profit/(Loss)                94.9  (10.4)   34.2    18.8       6.4     (40.3)        103.6      (3.3)    100.3 
Amortisation of intangibles 
 arising on acquisition             (0.3)       -  (2.0)       -     (2.8)          -        (5.1)          -    (5.1) 
Discontinued operations 
 adjustment*                            -       -      -       -         -          -            -        3.3      3.3 
----------------------------------  -----  ------  -----  ------  --------  ---------  -----------  ---------  ------- 
Operating profit/(loss) 
 before exceptionals                 94.6  (10.4)   32.2    18.8       3.6     (40.3)         98.5          -     98.5 
----------------------------------  -----  ------  -----  ------  --------  ---------  -----------  ---------  ------- 
 

* Statutory reporting only includes the post-tax result of discontinued operations as a single line in the Consolidated Income Statement.

The trading performance and outlook for each division are described on the following pages. Reconciliations and further detail of financial performance are included in the Finance Review on pages 13 to 31. This includes full definitions and explanations of the purpose of each non-IFRS Alternative Performance Measure (APM) used by the Group. The consolidated financial statements and accompanying notes are on pages 34 to 64.

UK Central Government

The UK Central Government division includes our UK operations in Defence, Justice & Immigration and Transport.

Revenue for the first half of 2017 was GBP323.3m (2016: GBP349.0m), a decline of 7%; reported revenue excludes that from our joint venture and associate holdings at AWE, Merseyrail and previously Northern Rail, with these representing the vast majority of the Group's activity in joint ventures and associates. The principal driver of the revenue reduction was last year's phased transfer back of services that Serco had previously been providing to the Defence Science and Technology Laboratory (DSTL), together with the Defence Business Services arrangement which also ended in 2016. There was limited new growth to offset this attrition.

Underlying Trading Profit was GBP20.9m (2016: GBP33.4m), representing an implied margin of 6.5% (2016: 9.6%). Trading Profit includes the profit contribution (from which tax and interest have already been deducted) of joint ventures and associates; if the GBP157m proportional share of revenue from joint ventures and associates was also included and if the GBP3.2m share of interest and tax cost was excluded, the overall divisional margin would have been 5.0% (2016: 5.9%). The joint venture and associate profit contribution of GBP13.6m (2016: GBP17.1m) was GBP3.5m lower, reflecting the end of the Northern Rail franchise in March 2016 and the lower shareholding of AWE from the second half of last year. The reduction in Underlying Trading Profit included the impact of other contract attrition, some increase in bidding costs, as well as the lower contribution from joint ventures and associates. Within Underlying Trading Profit there was GBP22m of OCP utilisation (2016: GBP18m), which served to offset the Division's loss-making contracts principally COMPASS, FPMS, Caledonian Sleeper and PECS.

UK Central Government represented around GBP0.1bn of the Group's aggregate total value of signed contracts during the period, comprising a number of smaller rebids and extensions predominantly for various defence support services. There were no larger rebids or major new bid pipeline decisions in the period. However, we expect the next six months to be much busier in terms of bid determinations, with tenders for immigration escorting for the Home Office and the Defence Fire & Risk Management Organisation both likely to be decided by the end of 2017; other opportunities include programmes to provide various support services to the Ministry of Defence, prisoner escorting services in Scotland and the operation of an immigration removal centre. Over the longer term, we await greater clarity on public service reform by the UK Government to assess what further opportunities may arise in the Justice & Immigration, Transport and Defence sectors.

Of existing work where an extension or rebid will be required at some point before the end of 2020, there are 11 contracts with annual revenue of over GBP5m within the UK Central Government division; in aggregate, these represent approximately 40% of the current level of annual revenue for the division. The largest of these are the Northern Isles Ferries operations that would become due for potential extension or rebid in 2018, PECS which is assumed to be rebid in 2019 if further extension options are not exercised by the customer, and COMPASS also in 2019.

The comparison between the first half of 2016 and 2017 is particularly ugly in Central Government, as 2016 benefited from a number of advantageous commercial settlements. Looking forward, we expect that revenues and margins in the second half will stabilise on a comparative and sequential basis, reflecting the Division getting itself onto firmer ground.

UK & Europe Local & Regional Government

The UK & Europe Local & Regional Government division (LRG) includes our UK Health and UK and European Citizen Services sectors. The Health business provides primarily non-clinical support services to hospitals; the Citizen Services business provides environmental and leisure services, as well as a wide range of other front, middle and back-office services to Local Authorities, and IT services to European institutions.

Revenue for the first half of 2017 was GBP334.8m (2016: GBP376.7m), a decline of 11%. At constant currency, the organic decline was 15%. Over GBP50m of decline reflected no longer recognising as revenue the value of goods purchased on our customers' behalf following changes to two procurement services contracts in our Health business. We also saw reducing volumes in our Child Maintenance Group operations; and the ending or reduced scale of various other BPO and IT support services contracts. These revenue reductions were only partially offset from growth elsewhere, namely the start of hospital facility management services for Barts Health NHS Trust, as well as some growth in our European agency operations and from the new Skills Support for the Workforce (SSW) contracts.

There was an Underlying Trading Loss of GBP4.9m (2016: profit of GBP2.7m), representing a margin of -1.5% (2016: +0.7%). There was an impact from contract attrition as well as other in-contract reductions. Within Underlying Trading Profit there was GBP8m of OCP utilisation (2016: GBP13m), with the reduction principally reflecting lower losses on the Lincolnshire County Council operations as costs reduced from the levels seen in 2016 with the implementation of a new ERP system.

LRG represented around GBP0.2bn of the Group's aggregate total value of signed contracts during the period. The largest award was a new contract to transform catering and cleaning for University Hospital Southampton NHS Foundation Trust, with an estimated value of GBP125m over the ten-year term. Smaller awards included a new contract for environmental services to Rushmoor Borough Council, and several rebids and extensions for citizen services support to customers including Invest Northern Ireland, the Department of Health and the Skills Funding Agency. There were no other larger rebids or major new bid pipeline decisions made in the period.

Of existing work where an extension or rebid will be required at some point before the end of 2020, there are 17 contracts with annual revenue of over GBP5m within the LRG division; in aggregate, these represent approximately 30% of the current level of annual revenue for the division; this excludes Glasgow ACCESS which, as previously noted, is assumed to expire in March 2018. The largest of these are back office support services to Hertfordshire County Council and a European agency contract both potentially due in 2019, and for the Anglia Support Partnership healthcare shared services operations in 2020.

Our success in the last 12 months winning Barts and Southampton NHS Trusts, has left our pipeline of major new bid opportunities due for decision within the next 24 months largely denuded, though we expect to 'reload' with some further tenders for hospital facilities management and environmental services during the second half of the year. We continue to evaluate developments and the potential for further public service reform in the other sectors of operation within LRG, including other Citizen Services work and our European business providing various operational support to government agencies.

For 2017 as a whole, we expect the rate of revenue decline to significantly moderate as the effect of the health procurement contracts annualises and the growth contribution from the Barts and Southampton hospital facilities management contracts increases; we also expect the level of Underlying Trading Loss to improve and we are hopeful that the Division will be modestly profitable in the second half of the year.

AsPac

Operations in the Asia Pacific division include Justice, Immigration, Defence, Health, Transport and Citizen Services in Australia, New Zealand and Hong Kong. Serco's operations in Australia are by far the largest element of the division; the country represents approximately 20% of total Revenue for the Group.

Revenue for the first half of 2017 was GBP307.4m (2016: GBP284.7m), an increase of 8%. In Australian dollars, the main currency for operations of the division, revenue for the period was equivalent to approximately A$516m (2016: A$560m). The movements in local currencies against Sterling increased revenue by GBP45m or 16%; the organic change at constant currency was therefore a decline of 8%. This reduction was driven by the end of the Western Australia Court Security and Custodial Services (WACSCS), Armidale Class Patrol Boat (ACPB) and Mount Eden contracts, together with some smaller reductions from other contracts ending or reducing in scope, with little growth to offset this attrition.

Underlying Trading Profit was GBP10.5m (2016: GBP7.6m), representing a margin of 3.4% (2016: 2.7%). The improvement in profitability included a favourable currency movement of GBP1.8m, with the net of other movements reflecting attrition and other margin pressures offset by progress on cost efficiencies. Within Underlying Trading Profit there was GBP7m of OCP utilisation (2016: GBP8m).

AsPac represented around GBP1.7bn of the Group's aggregate total value of signed contracts during the period. By far the largest element of this was approximately GBP1.5bn for the 20-year contract valued at A$2.6bn for the operation of New Grafton Correctional Centre (NGCC) which is expected to commence in 2020; NGCC will be the largest correctional centre in Australia, consisting of a total of 1,700 beds in three individual security categories, and draws upon Serco's experience of managing correctional facilities in the UK, New Zealand and elsewhere in Australia, which includes Australia's current largest facility, Acacia Prison. Other extensions and rebids awarded in the period included passenger and integrated transport information services for transport authorities in Western Australia and New South Wales. There were no other larger rebids or major new bid pipeline decisions made in the period.

Of existing work where an extension or rebid will be required at some point before the end of 2020, there are 10 contracts with annual revenue of over GBP5m within the AsPac division; in aggregate, these represent over 50% of the current level of annual revenue for the division; this high proportion reflects that the Australia onshore immigration services contract requires rebid or extension at the end of 2019, with this accounting for over 30% of current divisional revenue.

Our pipeline of major new bid opportunities due for decision within the next 24 months includes some further (but far smaller than Grafton) Justice & Immigration opportunities, as well as others in Citizen Services, Defence and Transport support services, with potential opportunities in non-clinical health services also being explored.

For 2017 as a whole, we expect the rate of organic revenue decline to increase as there will be a greater effect from the end of the WACSCS, ACPB and Mount Eden contracts over the balance of the year, though these should not unduly impact progress on Underlying Trading Profit given ACPB and Mount Eden were onerous contracts.

Middle East

Operations in the Middle East division include Transport, Defence, Health and Citizen Services.

Revenue for the first half of 2017 was GBP174.2m (2016: GBP153.9m), an increase of 13%. The strengthening of local currencies against Sterling provided growth of GBP23m or 14%; the organic change at constant currency was therefore a decline of 1%. There was some growth from new contracts for facilities management at Dubai Airport and for Abu Dhabi Investment Authority, though these were offset by reductions related to the Dubai Air Navigation Services and the Staff College training for the Qatar Armed Forces contracts, as well as a small number of other operations reducing in scope or volume including the Middle East Logistics and Base Support (MELABS) contract that supports the Australian Defence Force in the region.

Underlying Trading Profit was GBP6.8m (2016: GBP9.7m), representing a margin of 3.9% (2016: 6.3%). While there was a GBP0.9m favourable currency movement, there was an overall reduction in profitability due in large part to the heavy costs of bidding three large rail opportunities simultaneously, as well as the non-repeat of the higher defence logistics volumes experienced in the comparable period, together with the impact of other contract scope reductions and attrition. There are no OCP contracts in the division and therefore no OCP utilisation within Underlying Trading Profit.

The Middle East represented around GBP0.1bn of the Group's aggregate total value of signed contracts during the period. Amongst smaller contract awards were wins to provide facilities management for Abu Dhabi Investment Authority and defence training support in Qatar, whilst extensions to existing work included air navigation services and training in Bahrain and in Iraq. There were no larger rebids or major new bid pipeline decisions due in the period.

Of existing work where an extension or rebid will be required at some point before the end of 2020, there are 12 contracts with annual revenue of over GBP5m within the Middle East division; in aggregate, these represent well over half of the current level of annual revenue for the division. There is a high proportion of work to secure in 2019, when the Dubai Metro, MELABS and Cleveland Clinic Abu Dhabi contracts each require extending or rebidding.

Our pipeline of major new bid opportunities due for decision within the next 24 months includes three major light rail and tram operations in the region; in aggregate, these represent approximately 30% of the value of the Group's pipeline. There are also other smaller opportunities in defence support services and in non-clinical health facilities management in the current pipeline.

For 2017 as a whole, the organic revenue profile is expected to improve modestly as the pressures from the small amount of attrition and scope changes ease in the second half and as there will also be an increased contribution from the smaller new wins secured in recent months. Profitability in the second half will however be shaped to a greater extent by the cost to progress, and the outcomes of, the major rail opportunities in the region.

Americas

Our Americas division provides professional, technology and management services focused on Defence, Transport, and Citizen Services. The US Federal Government, including the military, civilian agencies and the national intelligence community, are our largest customers. We also provide services to the Canadian Government and to some US state and municipal governments.

Revenue for the first half of 2017 was GBP368.5m (2016: GBP328.9m), an increase of 12%. In US dollars, the main currency for operations of the division, revenue for the year was equivalent to approximately US$465m (2016: US$470m). The strengthening of local currencies against Sterling increased revenue by GBP47m or 14%; the organic change at constant currency was therefore a decline of 2%. The decline was driven by the end of the contracts for the Virginia Department of Transportation (VDOT) and for US Army transition assistance (SFLTAP). These and other smaller reductions were largely offset by growth from the start of the US Air Force High Altitude Electromagnetic Pulse (HEMP) Protection of Ballistic Missile Early Warnings Systems radar facility contract that started in the second half of last year and some increases elsewhere in the volume of workload or task orders.

Underlying Trading Profit was GBP22.2m (2016: GBP19.6m), representing a margin of 6.0% (2016: 6.0%). The increase includes a GBP2.9m favourable currency movement; the impact from the benefit in the first half of last year from the longer running of the VDOT and SFLTAP contracts was only partially offset by other growth and cost efficiencies. Within Underlying Trading Profit there was GBP3m (2016: GBP5m) of OCP utilisation, which reflects the offset of losses on the Ontario Driver Examination Services contract.

Americas represented around GBP0.3bn of the Group's aggregate total value of signed contracts during the period. The largest new award was to provide supply chain management services for hazardous materials at three US Navy Fleet Readiness Centers, valued at a total of $101m for the base period and four one-year options. Smaller new awards included numerous US Navy ship and shore defence equipment modernisation task orders. Of rebids and extensions secured, the largest was for the US Patent & Trademark Office (USPTO) for a further ten years, albeit the new contract is for a reduced volume of work, with others secured including fleet services for Louisville Gas & Electric Company, parking meter management in San Francisco and support services for the US Government Accountability Office. There were no other larger rebids or major new pipeline decisions during the period.

Of existing work where an extension or rebid will be required at some point before the end of 2020, there are ten contracts with annual revenue of over GBP5m within the Americas division; in aggregate, these represent around 50% of the current level of annual revenue for the division; this high proportion reflects that our contract supporting the US Affordable Care Act (ACA), which currently accounts for around 30% of divisional revenue, requires rebidding from 30 June 2018; the Global Installation Contract covering areas of our defence ship modernisation work also requires securing in 2019, while our support to the Federal Aviation Administration's (FAA) Contract Tower (FCT) Program will become due for rebid once again in 2020.

Our pipeline of major new bid opportunities due for decision within the next 24 months includes important opportunities to provide various support functions to the US Navy, one of which is due for adjudication before the end of this year and two others due in 2018. A further defence opportunity to support US Air Force radar systems has recently been added, as has a further tender for transport operational support. Opportunities for immigration services have been removed from our pipeline due to delays in tender processes.

For 2017 as a whole, the organic revenue profile is expected to improve modestly as the pressure from contract attrition eases in the second half and as there will also be an increased contribution from the new wins secured in recent months. Profitability in the second half will however be shaped to a greater extent by the cost to progress, and the outcomes of, the major new bid opportunities in the region, as well as the scale of operation of the ACA contract and its absorption of overhead costs. Our current view is that structural changes to the ACA will be implemented over a matter of years rather than months, and we expect the customer to launch in the near future a tender to provide services beyond the expiry of the current contract in June 2018.

Serco was pleased to announce in June that David J. Dacquino would become Chief Executive Officer of the Americas division, with Dan Allen having informed the business back in February of his intention to retire. Dave Dacquino joined Serco in 2015 to lead the Americas' Defence business, bringing deep knowledge and experience from across the defence, aeronautics, logistics and technical services industries.

Corporate Costs

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

Corporate costs for the first half of 2017 were GBP20.2m (2016: GBP18.2m). The increase versus the first half of last year largely reflects the phasing of various costs, which is expected to reverse in the second half of the year, therefore still resulting in an overall lower cost in 2017 than 2016.

Finance Review

 
                                                                     Amortisation 
                                                                              and 
                                                                       impairment 
                                                                               of                                       Continuing 
                                                                      intangibles           Less                               and           Less 
                                             Non                          arising   discontinued         Statutory    discontinued   discontinued 
 For the six                          underlying                               on            pre               pre     exceptional    exceptional 
 months ended           Underlying         items           Trading    acquisition   exceptional*       exceptional           items         items*         Statutory 
 30 June 2017                 GBPm          GBPm              GBPm           GBPm           GBPm              GBPm            GBPm           GBPm              GBPm 
----------------  ----------------  ------------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Revenue                   1,508.2             -           1,508.2              -              -           1,508.2               -              -           1,508.2 
 Cost of sales           (1,374.8)             -         (1,374.8)              -              -         (1,374.8)               -              -         (1,374.8) 
----------------  ----------------  ------------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Gross profit                133.4             -             133.4              -              -             133.4               -              -             133.4 
 Administrative 
  expenses                 (112.7)             -           (112.7)          (2.2)              -           (114.9)          (11.4)              -           (126.3) 
 Share of 
  profits in 
  joint 
  ventures and 
  associates, 
  net of 
  interest and 
  tax                         14.6             -              14.6              -              -              14.6               -              -              14.6 
----------------  ----------------  ------------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Profit before 
  interest 
  and tax                     35.3             -              35.3          (2.2)              -              33.1          (11.4)              -              21.7 
----------------  ----------------  ------------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Margin                       2.3%                            2.3%                                            2.2%                                             1.4% 
 Net finance 
  costs                      (7.6)             -             (7.6)              -              -             (7.6)               -              -             (7.6) 
 Profit before 
  tax                         27.7             -              27.7          (2.2)              -              25.5          (11.4)              -              14.1 
 Tax charge                 (10.7)         (6.3)            (17.0)            0.6              -            (16.4)          (15.9)              -            (32.3) 
 Effective tax 
  rate                     (38.6%)                         (61.4%)                                         (64.3%)                                         (229.1%) 
----------------  ----------------  ------------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Profit / (loss) 
  for the 
  period                      17.0         (6.3)              10.7          (1.6)              -               9.1          (27.3)              -            (18.2) 
----------------  ----------------  ------------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Minority 
  interest                     0.1             -               0.1              -              -               0.1               -              -               0.1 
----------------  ----------------  ------------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Earnings / 
  (loss) per 
  share (pence)               1.55                            0.97                                            0.82                                           (1.68) 
----------------  ----------------  ------------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 
   *   No amounts are recorded as discontinued operations for the six months ended 30 June 2017. 
 
                                                                    Amortisation 
                                                                             and 
                                                                      impairment 
                                                                              of                                       Continuing 
 For the six                                                         intangibles           Less                               and           Less 
 months ended                               Non                          arising   discontinued         Statutory    discontinued   discontinued 
 30 June 2016                        underlying                               on            pre               pre     exceptional    exceptional 
 (restated*             Underlying        items           Trading    acquisition    exceptional       exceptional           items          items         Statutory 
 ** ***)                      GBPm         GBPm              GBPm           GBPm           GBPm              GBPm            GBPm           GBPm              GBPm 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Revenue                   1,517.9            -           1,517.9              -         (24.7)           1,493.2               -              -           1,493.2 
 Cost of sales*          (1,378.2)         20.7         (1,357.5)              -           24.5         (1,333.0)               -              -         (1,333.0) 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Gross profit*               139.7         20.7             160.4              -          (0.2)             160.2               -              -             160.2 
 Administrative 
  expenses* 
  **                       (106.8)            -           (106.8)          (2.0)            3.4           (105.4)          (11.9)            4.2           (113.1) 
 Share of 
  profits in 
  joint 
  ventures and 
  associates, 
  net of 
  interest and 
  tax                         17.7            -              17.7              -              -              17.7               -              -              17.7 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Profit before 
  interest 
  and tax**                   50.6         20.7              71.3          (2.0)            3.2              72.5          (11.9)            4.2              64.8 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Margin                       3.3%                           4.7%                                            4.9%                                             4.3% 
 Net finance 
  costs**                    (6.7)            -             (6.7)              -              -             (6.7)           (0.4)            0.4             (6.7) 
 Profit before 
  tax                         43.9         20.7              64.6          (2.0)            3.2              65.8          (12.3)            4.6              58.1 
 Tax (charge) / 
  credit***                  (8.1)          3.7             (4.4)            0.6            0.1             (3.7)           (0.1)              -             (3.8) 
 Effective tax 
  rate***                    18.5%                           6.8%                                            5.6%                                             6.5% 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Profit for the 
  period 
  from 
  continuing 
  operations***               35.8         24.4              60.2          (1.4)            3.3              62.1          (12.4)            4.6              54.3 
 Loss for the 
  period from 
  discontinued 
  operations                     -            -                 -              -          (3.3)             (3.3)               -          (4.6)             (7.9) 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Profit for the 
  period***                   35.8         24.4              60.2          (1.4)              -              58.8          (12.4)              -              46.4 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Minority 
  interest                   (0.1)            -             (0.1)              -              -             (0.1)               -              -             (0.1) 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Earnings per 
  share 
  (pence)***                  3.30                           5.54                                            5.40                                             4.27 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 

* Costs included within costs of sales and general and administrative expenses have been reallocated, resulting in a restatement. See note 1 to the Consolidated Financial Statements.

** Administrative expenses and net finance costs have been restated following the change in accounting policy in H2 2016 regarding foreign exchange movements on investment and financing arrangements. See note 1 to the Consolidated Financial Statements.

*** The underlying tax charge has been restated to reflect the deferred tax impact of the movements in the defined benefit pension scheme valuations, as explained in the tax section of this Finance Review. This has resulted in the restatement of the post tax underlying profit for the period, the underlying effective tax rate and Underlying EPS.

 
                                                                    Amortisation 
                                                                             and 
                                                                      impairment 
                                                                              of                                       Continuing 
 For the year                                                        intangibles           Less                               and           Less 
 ended                                      Non                          arising   discontinued         Statutory    discontinued   discontinued 
 31 December                         underlying                               on            pre               pre     exceptional    exceptional 
 2016                   Underlying        items           Trading    acquisition    exceptional       exceptional           items          items         Statutory 
 (restated*)                  GBPm         GBPm              GBPm           GBPm           GBPm              GBPm            GBPm           GBPm              GBPm 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Revenue                   3,047.8            -           3,047.8              -         (36.8)           3,011.0               -              -           3,011.0 
 Cost of sales*          (2,782.9)         18.2         (2,764.7)              -           40.1         (2,724.6)               -              -         (2,724.6) 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Gross profit*               264.9         18.2             283.1              -            3.3             286.4               -              -             286.4 
 Administrative 
  expenses*                (216.2)            -           (216.2)          (5.1)              -           (221.3)          (70.5)           14.2           (277.6) 
 Share of 
  profits in 
  joint 
  ventures and 
  associates, 
  net of 
  interest and 
  tax                         33.4            -              33.4              -              -              33.4               -              -              33.4 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Profit before 
  interest 
  and tax                     82.1         18.2             100.3          (5.1)            3.3              98.5          (70.5)           14.2              42.2 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Margin                       2.7%                           3.3%                                            3.3%                                             1.4% 
 Net finance 
  costs                     (12.6)            -            (12.6)              -              -            (12.6)           (0.4)            0.4            (12.6) 
 Profit before 
  tax                         69.5         18.2              87.7          (5.1)            3.3              85.9          (70.9)           14.6              29.6 
 Tax charge                 (24.4)          6.7            (17.7)            1.8            0.1            (15.8)             3.1              -            (12.7) 
 Effective tax 
  rate                       35.2%                          20.2%                                           18.4%                                            42.9% 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Profit for the 
  year from 
  continuing 
  operations                  45.1         24.9              70.0            3.3            3.4              70.1          (67.8)           14.6              16.9 
 Loss for the 
  year from 
  discontinued 
  operations                     -            -                 -              -          (3.4)             (3.4)               -         (14.6)            (18.0) 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Profit / (loss) 
  for the 
  year                        45.1         24.9              70.0            3.3              -              66.7          (67.8)              -             (1.1) 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Minority 
  interest                     0.1            -               0.1              -              -               0.1               -              -               0.1 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 Earnings / 
  (loss) per 
  share (pence)               4.13                           6.42                                            6.12                                           (0.11) 
----------------  ----------------  -----------  ----------------  -------------  -------------  ----------------  --------------  -------------  ---------------- 
 

* Costs included within costs of sales and general and administrative expenses have been reallocated, resulting in a restatement. See note 1 to the Consolidated Financial Statements.

Change in accounting policy for foreign exchange movements on investment and financing activities

In order to provide more relevant information about the impact of the underlying transactions of trading operations, the accounting policy regarding the classification of foreign exchange movements on investment and financing arrangements was changed in the second half of 2016. These movements are excluded from Trading Profit and included instead within net finance costs. As a result of this change in accounting policy, the income statement and cash flow statement for the six months ended 30 June 2016 have been restated, together with the definition of Net Debt which now includes derivatives relating to Net Debt components. The impact of this change has been to increase Trading Profit in the six months ended 30 June 2017 by GBP0.1m (six months ended 30 June 2016: decrease by GBP0.4m), with an equal and opposite impact recognised within net finance costs, increase Free Cash Flow by GBP1.6m (six months ended 30 June 2016: decrease by GBP24.0m), with an equal and opposite impact recognised below Free Cash Flow, and decrease Net Debt by GBP13.1m (six months ended 30 June 2016: decrease by GBP20.5m).

Change in accounting policy regarding the classification of cost items within cost of sales and administrative expenses

The Group has undergone a programme of work on its financial data structures to appropriately allocate and charge costs to the relevant divisions and between cost of sales and administration expenses. As a result of the activities performed in this area, the Group's accounting policy for the classification of cost items in the income statement has changed. The prior periods' results have been restated to reflect the current year accounting policy, in addition to a reclassification for the full year results in 2016, where no reallocation of costs was made. The change in policy has no impact on operating profit, any other item below this on the income statement, or any of the Group's performance measures.

Cost of sales are considered to be the direct costs of operating ongoing contracts. This includes the unavoidable costs of servicing contracts and all costs that a contract would incur purely on its own without a parent company, regardless of how those services are delivered within the wider Group, such as IT or Human Resource management services provided centrally.

Alternative Performance Measures (APMs) and other related definitions

Overview

APMs used by the Group are reviewed below to provide a definition and reconciliation from each non-IFRS APM to its IFRS equivalent, and to explain the purpose and usefulness of each APM.

In general, APMs are presented externally to meet investors' requirements for further clarity and transparency of the Group's financial performance. The APMs are also used internally in the management of our business performance, budgeting and forecasting, and for determining Directors' remuneration and that of other management throughout the business.

APMs are non-IFRS measures. Where additional revenue is being included in an APM, this reflects revenues presented elsewhere within the reported financial information, except where amounts are recalculated to reflect constant currency. Where items of profits or costs are being excluded in an APM, these are included elsewhere in our reported financial information as they represent actual profits or costs of the Group. As a result, APMs allow investors and other readers to review different kinds of revenue, profits and costs and should not be used in isolation. Other commentary within this announcement, including the other sections of this Finance Review, as well as the Condensed Consolidated Financial Statements and their accompanying notes, should be referred to in order to fully appreciate all the factors that affect our business. We strongly encourage readers not to rely on any single financial measure, but to carefully review our reporting in its entirety.

The methodology applied to calculating the APMs has not changed during the period for any measure, but the APMs do reflect the impact of the prior period restatement.

Alternative revenue measures

Reported revenue at constant currency

Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 34, reflects revenue translated at the average exchange rates for the period. In order to provide a comparable movement on the previous periods' results, reported revenue is recalculated by translating non-Sterling values for each of the six months to 30 June 2017 into Sterling at the average exchange rate for the six months ended 30 June 2016.

 
                                                         Six months 
                                                              ended 
                                                            30 June 
                                                               2017 
                                                               GBPm 
---------------------------------------------------  -------------- 
 Reported revenue at constant currency (continuing 
  activities only)                                          1,385.7 
 Foreign exchange differences                                 122.5 
---------------------------------------------------  -------------- 
 Reported revenue at reported currency (continuing 
  activities only)                                          1,508.2 
---------------------------------------------------  -------------- 
 

Organic Revenue at constant currency

Reported revenue may include revenue generated by businesses acquired during a particular period and/or by businesses sold during a particular period up to the date of disposal. In order to provide a comparable movement which ignores the effect of both acquisitions and disposals, Organic Revenue at constant currency is recalculated by excluding the impact of any acquisitions or disposals. For the six months ended 30 June 2017, the only adjustment required was for a UK private sector BPO business, consisting of a single contract, sold on 3 July 2017. This business was previously reported within discontinued operations but included as continuing in 2017 as it does not have a material impact on the Group's results, and is considered to be a disposal within these calculations due to the proximity to the period end of the transaction closing. No adjustments were required for the six months ended 30 June 2016 nor the year ended 31 December 2016 as no disposed businesses were included within continuing operations and no acquisitions generated third party revenues.

Organic Revenue growth is calculated by comparing the current period Organic Revenue at constant currency exchanges rates with the prior period Organic Revenue at reported currency exchange rates.

 
                                                         Six months      Six months 
                                                              ended           ended 
                                                            30 June         30 June 
                                                               2017            2016 
                                                               GBPm            GBPm 
---------------------------------------------------  --------------  -------------- 
 Organic Revenue at constant currency                       1,380.4             N/A 
 Foreign exchange differences                                 122.5             N/A 
---------------------------------------------------  --------------  -------------- 
 Organic Revenue at reported currency                       1,502.9         1,493.2 
 Impact of any acquisitions or disposals or                     5.3               - 
  discontinued operations on reported revenue 
  at reported currency 
---------------------------------------------------  --------------  -------------- 
 Reported revenue at reported currency (continuing 
  activities only)                                          1,508.2         1,493.2 
---------------------------------------------------  --------------  -------------- 
 

Revenue from continuing and discontinued operations

Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 34, reflects only that from continuing operations, with the post tax result of discontinued operations consolidated as a single line at the bottom of the Condensed Consolidated Income Statement. The alternative measure includes discontinued operations for the benefit of consistency with previously reported results and to reflect the overall change in scale of the Group's operations. The alternative measure allows the performance of the discontinued operations themselves, and their impact on the Group as a whole, to be evaluated on measures other than just the post tax result. No operations were classified as discontinued in 2017 as there was a single remaining business as at 1 January 2017 which generated insignificant revenue and profit in the period. Discontinued operations in prior periods reflect the former Global Services division which consisted of our private sector BPO operations.

 
                                                     Six months      Six months 
                                                          ended           ended      Year ended 
                                                        30 June         30 June     31 December 
                                                           2017            2016            2016 
                                                           GBPm            GBPm            GBPm 
-----------------------------------------------  --------------  --------------  -------------- 
 Revenue from continuing and discontinued 
  operations                                            1,508.2         1,517.9         3,047.8 
 Exclude revenue from discontinued operations                 -          (24.7)          (36.8) 
-----------------------------------------------  --------------  --------------  -------------- 
 Reported revenue (continuing activities only)          1,508.2         1,493.2         3,011.0 
-----------------------------------------------  --------------  --------------  -------------- 
 

Revenue from continuing operations, including share of joint ventures and associates

Reported revenue, as shown on the Group's Condensed Consolidated Income Statement on page 34, excludes the Group's share of revenue from joint ventures and associates, with Serco's share of profits in joint ventures and associates (net of interest and tax) consolidated within operating profit as a single line further down the Condensed Consolidated Income Statement. The alternative measure includes the share of revenues from joint ventures and associates for the benefit of reflecting the overall change in scale of the Group's ongoing operations, which is particularly relevant for evaluating Serco's presence in market sectors such as Defence and Transport. The alternative measure allows the performance of the joint venture and associate operations themselves, and their impact on the Group as a whole, to be evaluated on measures other than just the post tax result.

 
                                                     Six months      Six months 
                                                          ended           ended      Year ended 
                                                        30 June         30 June     31 December 
                                                           2017            2016            2016 
                                                           GBPm            GBPm            GBPm 
-----------------------------------------------  --------------  --------------  -------------- 
 Revenue from continuing operations, including 
  share of joint ventures and associates                1,688.4         1,786.8         3,491.8 
 Exclude share of revenue from joint ventures 
  and associates                                        (180.2)         (293.6)         (480.8) 
-----------------------------------------------  --------------  --------------  -------------- 
 Reported revenue (continuing activities only)          1,508.2         1,493.2         3,011.0 
-----------------------------------------------  --------------  --------------  -------------- 
 

Alternative profit measures

 
                                                                        Six months 
                                                                             ended 
                                                                           30 June 
                                                                              2016 
                                                         Six months 
                                                              ended                    Year ended 
                                                            30 June                   31 December 
                                                               2017    (restated*)           2016 
                                                               GBPm           GBPm           GBPm 
----------------------------------------------------  -------------  -------------  ------------- 
 Underlying Trading Profit*                                    35.3           50.6           82.1 
 Non-underlying items: 
  Include OCP charges and releases                                -           13.4            9.6 
  Include other Contract and Balance Sheet 
   Review adjustments                                             -            3.6            4.6 
  Include benefit from non-depreciation and 
   amortisation of assets held for sale                           -            0.2            0.5 
  Include other one-time items                                    -            3.5            3.5 
----------------------------------------------------  -------------  -------------  ------------- 
                                                                  -           20.7           18.2 
----------------------------------------------------  -------------  -------------  ------------- 
 Trading Profit*                                               35.3           71.3          100.3 
 Include operating exceptional items (continuing 
  operations only)                                           (11.4)          (7.7)         (56.3) 
 Include amortisation and impairment of intangibles 
  arising on acquisition from continuing and 
  discontinued operations                                     (2.2)          (2.0)          (5.1) 
 Exclude operating loss from discontinued 
  operations                                                      -            3.2            3.3 
----------------------------------------------------  -------------  -------------  ------------- 
 Operating profit (continuing activities only)*                21.7           64.8           42.2 
----------------------------------------------------  -------------  -------------  ------------- 
 

* Profit measures down to operating profit have been restated following the change in accounting policy to exclude foreign exchange movements on investment and financing arrangements, including them instead in net finance costs.

Trading Profit

The Group uses Trading Profit as an alternative measure to operating profit, as shown on the Group's Condensed Consolidated Income Statement on page 34, by making three adjustments. Trading Profit is a metric used to determine the performance and remuneration of the Executive Directors.

Firstly, Trading Profit excludes exceptional items, being those considered material, non-recurring and outside of the normal operating practice of the Company. These require separate presentation and detailed explanation.

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

Thirdly, the Trading Profit of discontinued operations is included, since as with our alternative measure of revenue, this benefits from consistency with previously reported results, reflects the overall change in scale of the Group's operations and takes account of the performance of the discontinued operations themselves. This allows their impact on the Group as a whole to be evaluated on measures other than just the post tax result.

Underlying Trading Profit (UTP)

The Group uses a further alternative measure, Underlying Trading Profit, to make adjustments for unusual items that occur within Trading Profit and to remove the impact of historical issues. UTP therefore provides a measure of the underlying performance of the business in the current period. For 2016 and 2015 there were four items excluded from UTP, none of which required adjustment in the six months ended 30 June 2017.

Releases and charges on all Onerous Contract Provisions (OCPs) are excluded in the current and prior periods. OCP charges and releases reflect the future multiple year cost of delivering onerous contracts and do not reflect therefore just the current cost of operating the contract in the latest individual period. It should be noted that, as for operating profit, UTP benefits from OCP utilisation (of GBP40.4m in the six months ended 2017 and GBP47.3m in the six months ended 30 June 2016) which neutralises the losses on previously identified onerous contracts, therefore it is only the initial or subsequent charges or releases of OCPs that are adjusted for.

In addition, revisions to accounting estimates and judgements which arose during the 2014 Contract and Balance Sheet Review were excluded in 2015 and 2016.

Both OCP adjustments and other Contract and Balance Sheet Review adjustments are identified and separated from the APM in order to give clarity of the underlying performance of the Group and to separately disclose the progress made on these items. As expected, Contract and Balance Sheet Review adjustments were insignificant for the first six months of 2017, and will no longer be separately reported unless they are individually material.

The benefit of depreciation and amortisation charges not being taken in the Group accounts in relation to assets held for sale were excluded in prior periods. Such charges were being taken in the subsidiary accounts to reflect the reduction in value of the underlying assets, and we consider it relevant to show the effect this would have on the Group performance measure. No assets are included as held for sale in 2017 and therefore no adjustment is required for the six months ended 30 June 2017.

Finally, any other significant items that have a one-time financial impact are excluded, which for the periods under review are the benefit of a profit on early exit of a UK local authority contract in 2015 and the associated one-time pension settlement in 2016. These one-time items are distinct from exceptional items in that they have arisen from normal contract exit conditions. No such one-time items exist in the six months ended 30 June 2017.

Underling trading margin is calculated as UTP divided by revenue from continuing and discontinued operations.

The non-underlying column in the summary income statement on page 13 includes the tax impact of the above items and tax items that in themselves are considered to be non-underlying. Further detail of such items is provided in the tax section below.

UTP at constant currency

UTP disclosed above has been translated at the average foreign exchange rates for the period. In order to provide a comparable movement on the previous period's results, UTP is recalculated by translating non-Sterling values for each of the six months to 30 June 2017 into Sterling at the average exchange rate for the six months ended 30 June 2016.

 
                                                   Six months 
                                                        ended 
                                                      30 June 
                                                         2017 
                                                         GBPm 
------------------------------------------------  ----------- 
 Underlying Trading Profit at constant currency          29.2 
 Foreign exchange differences                             6.1 
------------------------------------------------  ----------- 
 Underlying Trading Profit at reported currency          35.3 
------------------------------------------------  ----------- 
 

Alternative Earnings or Loss Per Share (EPS) measures

 
                                                                     Six months 
                                                                          ended 
                                                                        30 June 
                                                                           2016 
                                                      Six months 
                                                           ended                    Year ended 
                                                         30 June                   31 December 
                                                            2017    (restated*)           2016 
                                                           pence          pence          pence 
-------------------------------------------------  -------------  -------------  ------------- 
 Underlying EPS from continuing and discontinued 
  operations, basic*                                        1.55           3.30           4.13 
 Impact of non-underlying items and amortisation 
  and impairment of intangibles arising on 
  acquisition*                                            (0.73)           2.10           1.99 
-------------------------------------------------  -------------  -------------  ------------- 
 EPS from continuing and discontinued operations 
  before exceptional items                                  0.82           5.40           6.12 
 Impact of exceptional items                              (2.50)         (1.13)         (6.23) 
-------------------------------------------------  -------------  -------------  ------------- 
 Reported EPS from continuing and discontinued 
  operations, basic                                       (1.68)           4.27         (0.11) 
-------------------------------------------------  -------------  -------------  ------------- 
 

* As explained in the tax charge section of this Finance Review, the underlying tax charge for the six months ended 30 June 2016 has been restated to reflect the deferred tax impact of movements in the defined benefit pension scheme valuations, resulting in a restatement of Underlying EPS.

EPS from continuing and discontinued operations before exceptional items

EPS from continuing and discontinued operations, as shown on the Group's Condensed Consolidated Income Statement on page 34, includes exceptional items charged or credited to the income statement in the period. EPS before exceptional items aids consistency with historical results and is a metric used in assessing the performance and remuneration of the Executive Directors.

Underlying EPS from continuing and discontinued operations

Reflecting the same adjustments made to operating profit to calculate UTP as described above, and including the related tax effects of each adjustment and any other non underlying tax adjustments as described in the tax charge section below, an alternative measure of EPS is presented. This aids consistency with historical results, and enables performance to be evaluated before the unusual or one-time effects described above. The full reconciliation between statutory EPS and Underlying EPS from continuing and discontinued operations is provided in the summary income statements on page 13.

Alternative cash flow and net debt measures

Free Cash Flow (FCF)

We present an alternative measure for cash flow to reflect net cash inflow from operating activities before exceptional items, which is the measure shown on the Condensed Consolidated Cash Flow Statement on page 38, but adjusting this IFRS measure to include dividends we receive from joint ventures and associates and deducting net interest paid and net capital expenditure on tangible and intangible asset purchases. FCF is considered relevant to reflect the cash performance of business operations after meeting usual obligations of financing and tax. It is therefore a measure that is before all other remaining cash flows, being those related to exceptional items, acquisitions and disposals, other equity-related and debt-related funding movements, and foreign exchange impacts on financing and investing activities. FCF is therefore a measure to assess the cash flow generated by the business and aids consistency for comparison to historical results. FCF is a metric used to determine the performance and remuneration of the Executive Directors.

 
                                                                 Six months 
                                                                      ended 
                                                                    30 June 
                                                                       2016 
                                                  Six months 
                                                       ended                    Year ended 
                                                     30 June                   31 December 
                                                        2017    (restated*)           2016 
                                                        GBPm           GBPm           GBPm 
---------------------------------------------  -------------  -------------  ------------- 
 Free Cash Flow*                                      (26.8)         (22.5)         (33.0) 
 Exclude dividends from joint ventures and 
  associates                                          (13.8)         (19.7)         (40.0) 
 Exclude net interest paid                               9.2           10.2           18.7 
 Exclude capitalised finance costs paid                    -            0.3            0.3 
 Exclude purchase of intangible and tangible 
  assets net of proceeds from disposal                  18.1           14.4           31.6 
---------------------------------------------  -------------  -------------  ------------- 
 Cash flow from operating activities before 
  exceptional items*                                  (13.3)         (17.3)         (22.4) 
 Exceptional operating cash flows                     (19.7)         (32.1)         (39.9) 
---------------------------------------------  -------------  -------------  ------------- 
 Cash flow from operating activities*                 (33.0)         (49.4)         (62.3) 
---------------------------------------------  -------------  -------------  ------------- 
 

* Free Cash Flow has been restated following the change in accounting policy to exclude foreign exchange movements on investment and financing arrangements.

UTP cash conversion

FCF as defined above includes interest and tax cash flows. In order to calculate an appropriate cash conversion metric equivalent to UTP, Trading Cash Flow is derived from the FCF by excluding tax and interest items. UTP cash conversion therefore provides a measure of the efficiency of the business in terms of converting profit into cash before taking account of the impact of interest, tax and exceptional items. As Trading Cash Flow is currently an outflow, a conversion percentage of UTP is not shown.

 
                                                                Six months 
                                                                  ended 30 
                                                                 June 2016 
                                                 Six months                    Year ended 
                                                   ended 30                   31 December 
                                                  June 2017    (restated*)           2016 
                                                       GBPm           GBPm           GBPm 
--------------------------------------------  -------------  -------------  ------------- 
 Free Cash Flow*                                     (26.8)         (22.5)         (33.0) 
 Add back: 
 Tax paid                                               7.9            6.6            5.6 
 Non-cash R&D expenditure                                 -            0.1            0.4 
 Net interest paid                                      9.2           10.2           18.7 
 Capitalised finance costs paid                           -            0.3            0.3 
--------------------------------------------  -------------  -------------  ------------- 
 Trading Cash Flow*                                   (9.7)          (5.3)          (8.0) 
--------------------------------------------  -------------  -------------  ------------- 
 Underlying Trading Profit*                            35.3           50.6           82.1 
--------------------------------------------  -------------  -------------  ------------- 
 Underlying Trading Profit cash conversion*             N/A            N/A            N/A 
--------------------------------------------  -------------  -------------  ------------- 
 

* As explained above, FCF and UTP have been restated, resulting in a restatement of Trading Cash Flow and the Underlying Trading Profit cash conversion.

Net Debt including assets held for sale

We present an alternative measure to bring together the various funding sources that are included on the Group's Condensed Consolidated Balance Sheet on page 37 and the accompanying notes. Net Debt is a measure to reflect the net indebtedness of the Group and includes all cash and cash equivalents and any debt or debt like items, including any derivatives entered into in order to manage risk exposures on these items.

 
                                                                           Six months 
                                                                                ended 
                                                                              30 June 
                                                                                 2016 
                                                           Six months 
                                                                ended                      Year ended 
                                                              30 June                     31 December 
                                                                 2017     (restated*)            2016 
                                                                 GBPm            GBPm            GBPm 
-----------------------------------------------------  --------------  --------------  -------------- 
 Cash and cash equivalents                                      117.7           166.2           177.8 
 Loans receivable                                                23.5            20.4            22.9 
 Loans payable                                                (281.7)         (273.5)         (299.9) 
 Obligations under finance leases                              (21.5)          (35.7)          (28.2) 
 Derivatives relating to Net Debt*                               13.1            20.5            18.1 
-----------------------------------------------------  --------------  --------------  -------------- 
 Net Debt (excluding assets and liabilities 
  held for sale)*                                             (148.9)         (102.1)         (109.3) 
 Net Debt balances within assets held for                           -             2.4               - 
  sale** 
-----------------------------------------------------  --------------  --------------  -------------- 
 Net Debt (including that for assets and liabilities 
  held for sale)*                                             (148.9)          (99.7)         (109.3) 
-----------------------------------------------------  --------------  --------------  -------------- 
 

* Net Debt has been restated to include derivative financial instruments that relate to other components of Net Debt.

** There were no assets or liabilities held for sale on the balance sheet as at 30 June 2017 or 31 December 2016.

Pre-tax Return on Invested Capital (ROIC)

ROIC is a measure used to assess the efficiency of the resources used by the Group and to determine the performance and remuneration of the Executive Directors. ROIC is calculated based on UTP and Trading Profit using the Income Statement for the twelve months to the closing balance sheet date and a two point average of the closing balance sheet and the balance sheet twelve months ago. The composition of Invested Capital and calculation of ROIC are summarised in the table below.

 
                                                                              30 June 
                                                                                 2016 
                                                              30 June                     31 December 
                                                                 2017     (restated*)            2016 
                                                                 GBPm            GBPm            GBPm 
---------------------------------------------  ----------------------  --------------  -------------- 
 Non-current assets 
 Goodwill                                                       564.4           545.2           577.9 
 Other intangible assets                                         75.5            88.5            83.6 
 Property, plant and equipment                                   66.6            70.7            69.3 
 Interest in joint ventures and associates                       16.0            12.6            14.4 
 Trade and other receivables                                     51.1            46.9            44.4 
 Current assets 
 Inventory                                                       16.6            27.6            22.4 
 Trade and other receivables                                    563.0           561.2           543.5 
 Assets classified as held for sale                                 -            19.7             - - 
---------------------------------------------  ----------------------  --------------  -------------- 
 Total invested capital assets                                1,353.2         1,372.4         1,355.5 
---------------------------------------------  ----------------------  --------------  -------------- 
 Current liabilities 
 Trade and other payables                                     (512.4)         (550.5)         (524.5) 
 Liabilities classified as held for sale                            -           (5.6)             - - 
 Non-current liabilities 
 Trade and other payables                                      (26.0)          (18.7)          (16.8) 
---------------------------------------------  ----------------------  --------------  -------------- 
 Total invested capital liabilities                           (538.4)         (574.8)         (541.3) 
---------------------------------------------  ----------------------  --------------  -------------- 
 Invested capital                                               814.8           797.6           814.2 
---------------------------------------------  ----------------------  --------------  -------------- 
 Two point average of opening and closing 
  invested capital                                              806.2           897.9           768.7 
---------------------------------------------  ----------------------  --------------  -------------- 
 Trading Profit for the prior twelve months*                     64.3           147.3           100.3 
---------------------------------------------  ----------------------  --------------  -------------- 
 ROIC%*                                                          8.0%           16.4%           13.0% 
---------------------------------------------  ----------------------  --------------  -------------- 
 Underlying Trading Profit for the prior 
  twelve months*                                                 66.8           100.8            82.1 
---------------------------------------------  ----------------------  --------------  -------------- 
 Underlying ROIC%*                                               8.3%           11.2%           10.7% 
---------------------------------------------  ----------------------  --------------  -------------- 
 

* Profit measures have been restated following the change in accounting policy to include foreign exchange movements on investment and financing arrangements in net finance costs. As a result, Trading Profit, ROIC, UTP and Underlying ROIC have been restated.

Overview of financial performance for the six months ended 30 June 2017

Revenue

Reported revenue increased by 1% in the six month period to GBP1,508.2m (2016: GBP1,493.2m), a 7% reduction in constant currency.

No revenue arose in the six month period from operations classified as discontinued, with total revenues in the six month period ended 30 June 2016 from continuing and discontinued operations being GBP1,517.9m.

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

Trading Profit

Trading Profit for the six month period was GBP35.3m (2016 restated: GBP71.3m), a 50% reduction when compared with the same period in the prior year. Trading Profit in the six month ended 30 June 2016 included a loss arising on discontinued operations of GBP3.1m.

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

Underlying Trading Profit

UTP was GBP35.3m (2016 restated: GBP50.6m), down 30%. At constant currency UTP was GBP21.4m lower than 2016 at GBP29.2m, with a movement of GBP4.2m relating to the results of discontinued operations in 2016.

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

Trading Profit and UTP were the same in the six months ended 30 June 2017, compared with GBP20.7m of profit included in Trading Profit and excluded from UTP in the same period in 2016. In 2017 there have been no charges or releases to OCPs, compared with net releases of GBP13.4m in the period same period in 2016. Excluded from UTP in 2016 were net releases of GBP3.6m relating to other provisions and accruals for items identified during the 2014 Contract and Balance Sheet Review. Such items are expected to reduce in scale as these provisions and accruals are utilised and we will only disclose any profit impact separately if any items are individually material. UTP also excluded the benefit arising from the non-depreciation of assets classified as held for sale in 2016 of GBP0.2m; there were no such assets in 2017. Other one-time items of GBP3.5m excluded from UTP in 2016 related to a pension scheme settlement arising from the early exit of a UK Local Authority contract in 2015; there were no adjustments necessary for one-time items in 2017.

The tax impact of items in UTP and other non underlying tax items are discussed in the tax section of this Finance Review.

Discontinued operations

The Global Services division, representing private sector BPO operations, was classified as a discontinued operation in 2015 and 2016. The most significant part of this business was disposed in 2015, and the disposal of one of the two remaining elements of the offshore business was completed in March 2016 and the final element completed in December 2016. The residual UK onshore private sector BPO operations were sold or exited in 2016 with the exception of one business for which the disposal completed in July 2017. Total revenues for the remaining operations were GBP5.3m and UTP was GBP0.1m for the six months ended 30 June 2017, and therefore the results have been included in continuing operations in 2017 on the grounds of immateriality.

The amounts reported as discontinued operations were as follows:

 
                                                        Six months    Six months 
                                                             ended         ended     Year ended 
                                                           30 June       30 June    31 December 
                                                              2017          2016           2016 
                                                              GBPm          GBPm           GBPm 
----------------------------------------------------  ------------  ------------  ------------- 
 Revenue                                                         -          24.7           36.8 
----------------------------------------------------  ------------  ------------  ------------- 
 Underlying Trading Loss                                         -         (4.2)          (4.6) 
 Onerous contract and Balance Sheet Review 
  adjustments                                                    -           0.9            0.8 
 Benefit from non-depreciation and non-amortisation 
  of assets held for sale                                        -           0.2            0.5 
----------------------------------------------------  ------------  ------------  ------------- 
 Trading Loss                                                    -         (3.1)          (3.3) 
 Amortisation and impairment of intangibles                      -         (0.1)              - 
  arising on acquisition 
----------------------------------------------------  ------------  ------------  ------------- 
 Operating loss before exceptional items                         -         (3.2)          (3.3) 
----------------------------------------------------  ------------  ------------  ------------- 
 Exceptional loss on disposal of subsidiaries 
  and operations                                                 -         (0.3)          (2.8) 
 Other exceptional operating items                               -         (3.9)         (11.4) 
----------------------------------------------------  ------------  ------------  ------------- 
 Exceptional operating items                                     -         (4.2)         (14.2) 
----------------------------------------------------  ------------  ------------  ------------- 
 Operating loss                                                  -         (7.4)         (17.5) 
----------------------------------------------------  ------------  ------------  ------------- 
 Exceptional finance costs                                       -         (0.4)          (0.4) 
----------------------------------------------------  ------------  ------------  ------------- 
 Loss before tax                                                 -         (7.8)         (17.9) 
 Tax charge                                                      -         (0.1)          (0.1) 
----------------------------------------------------  ------------  ------------  ------------- 
 Net loss on discontinued operations (attributable 
  to equity owners of the Company) as presented 
  in the income statement                                        -         (7.9)         (18.0) 
----------------------------------------------------  ------------  ------------  ------------- 
 

Joint ventures and associates - share of results for the six months ended 30 June 2017

In 2017 the most significant joint ventures and associates in terms of scale of operations were AWE Management Limited and Merseyrail Services Holding Company Limited, with dividends received of GBP9.9m (2016: GBP12.2m) and GBP3.3m (2016: GBP7.2m) respectively. Total revenues generated by these businesses were GBP480.2m (2016: GBP508.9m) and GBP78.2m (2016: GBP75.6m) respectively. From September 2016 there was a change in the AWE Management Limited shareholding structure, with the Group's shareholding reducing from 33.3% to 24.5% by way of a return of shares.

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

 
                                                Six months    Six months 
                                                     ended         ended     Year ended 
                                                   30 June       30 June    31 December 
                                                      2017          2016           2016 
                                                      GBPm          GBPm           GBPm 
--------------------------------------------  ------------  ------------  ------------- 
 Revenue                                             180.2         293.6          480.8 
--------------------------------------------  ------------  ------------  ------------- 
 Operating profit                                     17.8          21.4           40.7 
 Net investment finance costs                            -         (0.3)          (0.6) 
 Income tax expense                                  (3.2)         (3.4)          (6.7) 
--------------------------------------------  ------------  ------------  ------------- 
 Profit after tax                                     14.6          17.7           33.4 
--------------------------------------------  ------------  ------------  ------------- 
 Dividends received from joint ventures and 
  associates                                          13.8          19.7           40.0 
--------------------------------------------  ------------  ------------  ------------- 
 

Exceptional items for the six months ended 30 June 2017

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

Exceptional items arose on both the continuing and discontinued operations of the Group in 2016. Exceptional items arising on discontinued operations are disclosed on the face of the Condensed Consolidated Income Statement within the profit or loss attributable to discontinued operations. There were no discontinued operations in 2017.

 
                                                          Six months     Six months 
                                                               ended          ended     Year ended 
                                                             30 June        30 June    31 December 
                                                                2017           2016           2016 
                                                                GBPm           GBPm           GBPm 
-----------------------------------------------------  -------------  -------------  ------------- 
 Exceptional items arising on continuing operations 
 Exceptional profit / (loss) on disposal of 
  subsidiaries and operations                                    0.1          (0.9)            2.9 
 Other exceptional operating items on continuing 
  operations 
 Impairment of goodwill                                            -              -         (17.8) 
 Restructuring costs                                          (13.3)          (6.2)         (17.2) 
 Aborted transaction costs                                         -            0.3          (0.1) 
 Costs associated with UK Government review                    (0.4)          (0.9)          (0.1) 
 Release of UK frontline clinical health contract 
  provisions                                                       -              -            0.6 
 Settlement of defined benefit pension obligations                 -              -         (10.7) 
 Impairment of interest in joint venture and 
  related loan balances                                          2.2              -         (13.9) 
-----------------------------------------------------  -------------  -------------  ------------- 
 Other exceptional operating items                            (11.5)          (6.8)         (59.2) 
-----------------------------------------------------  -------------  -------------  ------------- 
 Exceptional operating items arising on continuing 
  operations                                                  (11.4)          (7.7)         (56.3) 
-----------------------------------------------------  -------------  -------------  ------------- 
 Exceptional items arising on discontinued 
  operations 
 Exceptional loss on disposal of subsidiaries 
  and operations                                                   -          (0.3)          (2.8) 
 Other exceptional operating items on discontinued 
  operations 
 Restructuring costs                                               -          (0.4)          (1.1) 
 Movements in indemnities provided on business 
  disposals                                                        -          (7.8)         (13.7) 
 Movement in the fair value of assets transferred 
  to held for sale                                                 -            4.3            3.4 
-----------------------------------------------------  -------------  -------------  ------------- 
 Other exceptional operating items                                 -          (3.9)         (11.4) 
-----------------------------------------------------  -------------  -------------  ------------- 
 Exceptional operating items arising on discontinued 
  operations                                                       -          (4.2)         (14.2) 
-----------------------------------------------------  -------------  -------------  ------------- 
 Exceptional operating items arising on continuing 
  and discontinued operations                                      -         (11.9)         (70.5) 
 Exceptional finance costs - discontinued                          -          (0.4)          (0.4) 
 Exceptional tax - continuing                                 (15.9)          (0.1)            3.1 
 Total operating and financing exceptional 
  items in continuing and discontinued operations             (27.3)         (12.4)         (67.8) 
-----------------------------------------------------  -------------  -------------  ------------- 
 

Exceptional profit / (loss) on disposals of continuing operations

There were no material disposals of continuing operations in the six months ended 30 June 2017 or the six months ended 30 June 2016.

Other exceptional operating items arising on continuing operations

In the six months ended 30 June 2017, a charge of GBP13.3m (2016: GBP6.2m) arose in relation to the restructuring programme resulting from the Strategy Review, as discussed in the Chief Executive's Review in the Group's 2016 Annual Report and Accounts. This included redundancy charges, asset impairments and other incremental costs. Due to the nature and scale of the impact of the transformation stage of our Strategy Review, the incremental costs associated with this programme were considered to be exceptional in the prior year and have been treated consistently in 2017.

There were exceptional costs totalling GBP0.4m (2016: GBP0.9m) associated with the UK Government reviews and the programme of Corporate Renewal. These costs were treated as exceptional when the matter first arose and consistent treatment is applied in 2017.

In the second half of 2016 the equity investment of a joint venture and the related loan balances with this business were impaired. In the six months ended 30 June 2017 a payment of GBP2.2m was received against the impaired loan.

Exceptional tax

Exceptional tax items resulted in a tax charge of GBP15.9m (2016: charge of GBP0.1m on continuing operations), including a GBP0.2m credit on exceptional items within operating profit and a GBP16.1m charge in respect of other exceptional tax items.

The other exceptional tax items relate to the tax impact of the pension buy-in disclosed in note 15 to the Consolidated Financial Statements, which led to a GBP95.0m reduction in the IFRS valuation of the Group's defined benefit pension schemes and consequently to a deferred tax charge to the income statement of GBP16.1m. Further detail of the impact of movements in the valuation of defined benefit pension schemes is discussed in the tax section of this Finance Review.

Pre exceptional finance costs and investment revenue for the six months ended 30 June 2017

Investment revenue of GBP3.6m (2016: GBP4.7m) includes interest accruing on net retirement benefit assets of GBP1.6m (2016: GBP2.3m), interest earned on deposits and other receivables of GBP1.4m (2016: GBP1.9m) and the movement in discounting of other receivables of GBP0.6m (2016: GBP0.5m).

Finance costs of GBP11.2m (2016 restated: GBP11.4m) includes loan interest incurred on the USPP loans of GBP7.2m (2016: GBP7.9m), facility fees and other charges of GBP1.4m (2016: GBP2.0m), interest payable on finance leases of GBP0.8m (2016: GBP1.0m), the movement in discount on provisions of GBP1.7m (2016: GBP0.9m) and a charge for foreign exchange on financing activities of GBP0.1m (2016: credit of GBP0.4m). The last of these items was previously included in operating profit for the six months ended 30 June 2016 and therefore represents a restatement on the previously reported results.

Tax charge for the six months ended 30 June 2017

 
                                                             Six months 
                                                                  ended 
                                                                30 June 
                                                                   2016 
                                 Six months 
                                      ended                                              Year ended 
                                    30 June                                             31 December 
                                       2017                 (restated*)                        2016 
                                       GBPm                        GBPm                        GBPm 
                                -----------  -----------  -------------  -----------  -------------  ----------- 
                                     Profit   Tax charge         Profit   Tax charge         Profit   Tax charge 
                                     before                      before                      before 
                                        tax                         tax                         tax 
------------------------------  -----------  -----------  -------------  -----------  -------------  ----------- 
 Underlying profit before 
  tax*                                 27.7       (10.7)           43.9        (8.1)           69.5       (24.4) 
 Effective tax rate*                               38.6%                       18.5%                       35.2% 
 Non underlying items                     -            -           20.7        (0.7)           18.2          6.7 
 Impact of pension deferred 
  tax movement on tax charge* 
  **                                      -        (6.3)              -          4.4              -            - 
 Amortisation and impairment 
  of intangibles arising 
  on acquisition                      (2.2)          0.6          (2.0)          0.6          (5.1)          1.8 
 Discontinued pre exceptional             -            -            3.2          0.1            3.3          0.1 
------------------------------  -----------  -----------  -------------  -----------  -------------  ----------- 
 Profit before tax, pre 
  exceptional items                    25.5       (16.4)           65.8        (3.7)           85.9       (15.8) 
 Effective tax rate                                64.3%                        5.6%                       18.4% 
 Exceptional items**                 (11.4)       (15.9)         (12.3)        (0.1)         (70.9)          3.1 
 Discontinued exceptional 
  items                                   -            -            4.6            -           14.6            - 
------------------------------  -----------  -----------  -------------  -----------  -------------  ----------- 
 Statutory (continuing 
  operations only)                     14.1       (32.3)           58.1        (3.8)           29.6       (12.7) 
------------------------------  -----------  -----------  -------------  -----------  -------------  ----------- 
 

* As explained in more detail below, the underlying tax charge for the six months ended 30 June 2016 has been restated to reflect the deferred tax impact of movements in the defined benefit pension scheme valuations.

** The total impact of pension deferred tax movements in the six months ended 30 June 2017 was a charge of GBP22.4m, GBP16.1m of which relates to the pension buy-in disclosed in note 15 to the Consolidated Financial Statements, which is included in the exceptional tax charge for the period.

The tax charge on an underlying basis, reflecting UTP of GBP35.3m (2016 restated: GBP50.6m) net of finance costs of GBP7.6m (2016: GBP6.7m), was GBP10.7m (2016 restated: GBP8.1m), representing an underlying effective tax rate of 38.6% (2016 restated: 18.5%). The increase in rate is primarily due to differences in the proportions of profits and losses made in the various geographic regions in which we operate which affects the tax charge due to both the varying tax rates and the impact of not recognising the tax benefits arising on UK losses.

In the six months ended 30 June 2017, a total tax charge of GBP32.3m (2016: GBP3.9m) was recognised, being GBP32.3m (2016: GBP3.8m) on continuing operations profit of GBP14.1m (2016: GBP58.1m) and GBPnil (2016: GBP0.1m) on discontinued operations losses of GBPnil (2016: GBP7.8m).

In respect of the results of our continuing operations, the profit before interest, exceptional items and tax of GBP33.1m (2016: GBP72.5m) less pre-exceptional finance costs of GBP7.6m (2016 : GBP6.7m) is GBP25.5m (2016: GBP65.8m), which incurs a tax charge of GBP16.4m (2016: GBP3.7m), giving a tax rate of 64.3% (2016: 5.6%).

The principal reasons why the tax rate on profit before exceptional items and tax from continuing operations at 64.3% is higher than the UK standard corporation tax rate of 19.25% is due to the pension movement commented on below. In addition, higher rates of tax on profits arise on our international operations, and there is an absence of a deferred tax credit for losses incurred in the UK, because a deferred tax asset cannot be recognised against these losses until we can confidently forecast these losses being utilised against future profits (which includes the result of UK divisions and the majority of corporate costs). These factors are partially offset by the impact of our joint ventures whose post-tax results are included in our pre-tax profit.

Our tax charge continues to be materially impacted by our accounting for UK deferred taxes. To the extent that future UK tax losses are incurred and are not recognised, our effective tax rate will be higher than prevailing standard corporation tax rates as we will not be able to recognise the associated tax benefits arising. When our UK business returns to sustainable profitability our existing UK tax losses will be recognised or utilised, and the effective rate will be reduced.

Movements in the valuation of the Group's defined benefit pension schemes and the associated deferred tax impact are reported in the Statement of Comprehensive Income (SOCI) and do not flow through the income statement, therefore do not impact profit before tax or the tax charge. However, the net amount of deferred tax recognised in the balance sheet relates to both the pension accounting and other timing differences, such as recoverable losses. As the net deferred tax balance sheet position is capped at the level supported by future profit forecasts, the decrease in the deferred tax liability associated with the pension changes (with the benefit reported in the SOCI) leads to a corresponding decrease in the deferred tax asset to match the future profit forecasts. Such a reduction in the deferred tax asset therefore leads to a charge to tax in the income statement. Where deferred tax charges or releases are the result of movements in the pension scheme valuations rather than trading activity, these are excluded from the calculation of tax on underlying profit in the six months ended 30 June 2017, and the underlying effective tax rate for the six months ended 30 June 2016 has been restated to be presented on a comparable basis. Although the net impact of the restatement is zero for the full year 2016 results, for the six months ended 30 June 2017, the total impact of such movements on the statutory tax charge was GBP22.4m, GBP16.1m of which arose as a result of the pension buy-in disclosed in note 15 to the Consolidated Financial Statements and has been treated as an exceptional tax item, and GBP6.3m relates to other pension movements and is treated as an adjustment to the underlying tax charge.

Deferred tax assets as at 30 June 2017

As at 30 June 2017 there is a net deferred tax asset of GBP20.0m, this consists of a deferred tax asset of GBP54.1m and deferred tax liability of GBP34.1m.

A GBP10.0m UK deferred tax asset has been recognised at 30 June 2017 (2016: GBP10.5m) on the basis of forecast utilisation against future taxable profits. An expected change in the UK loss utilisation laws in the second half of 2017 is estimated to reduce the value of this deferred tax asset by GBP3.7m; this will be reported in the second half of the year once the change in legislation has been passed.

Taxes paid in the six months ended 30 June 2017

Net corporate income tax of GBP7.9m was paid during the six months ended 30 June 2017, relating primarily to our operations in AsPac (GBP3.6m), Europe (GBP1.3m), Middle East (GBP0.9m) and Americas (GBP2.0m).

The amount of tax paid (GBP7.9m) differs from the tax charge in the period (GBP10.7m) mainly due to the effect of future expected cash tax outflows for which a charge has been taken in the current period and the impact of the time lag on receipts of cash from joint ventures and associates for losses transferred to them.

Dividends

The Board has not declared an interim dividend for 2017. The Board's appraisal of the appropriateness of dividend payments takes into account the Group's underlying earnings, cash flows and financial leverage, together with the requirement to maintain an appropriate level of dividend cover and the prevailing market outlook. Although the Board is committed to resuming dividend payments as soon as it believes it prudent to do so, in assessing whether we should resume dividend payments in respect of 2017, we have been mindful of the fact that our forecasts for 2017 anticipate a reduction in earnings, a free cash outflow and an increase in net debt. In these circumstances, the Board believes that it would not be prudent to resume dividend payments at the current juncture.

Share count and EPS

The weighted average number of shares for EPS purposes was 1,091.1m at 30 June 2017 compared to 1,088.8m at 30 June 2016. EPS before exceptional items from both continuing and discontinued operations was 0.82p per share (2016: 5.40p); including the impact of exceptional items EPS was a loss of 1.68p (2016: profit of 4.27p). Underlying EPS was 1.55p per share (2016 restated: 3.28p).

Cash flows

UTP of GBP35.3m for the six months ended 30 June 2017 (2016 restated: GBP50.6m) converts into a trading cash outflow of GBP9.7m (2016 restated: outflow of GBP5.3m). The negative conversion is primarily due to the cash outflows arising on the utilisation of contract provisions of GBP40.4m (2016: GBP44.8m).

The table below shows the operating profit and FCF reconciled to movements in Net Debt. FCF for the six months ended 30 June 2017 was an outflow of GBP26.8m (2016 restated: GBP22.5m). Commentary on the FCF performance of the Group is provided in the Chief Executive's Review. It should be noted that during the half year 2017, within the working capital movement of GBP15.1m, we unwound GBP7.7m of the receivables financing facility, which has a zero balance at 30 June 2017.

The movement in Net Debt since 31 December 2016 is an increase of GBP39.6m in 2017, primarily relating to GBP26.8m of FCF outflow and GBP19.7m of exceptional items, together with foreign exchange gains on items included in Net Debt of GBP8.5m.

 
                                                                        Six months 
                                                                             ended 
                                                                           30 June 
                                                                              2016 
                                                        Six months 
                                                             ended                      Year ended 
                                                           30 June                     31 December 
                                                              2017     (restated*)            2016 
                                                              GBPm            GBPm            GBPm 
--------------------------------------------------  --------------  --------------  -------------- 
 Operating profit on continuing operations*                   21.7            64.8            42.2 
 Operating loss on discontinued operations                       -           (7.4)          (17.5) 
 Remove exceptional items                                     11.4            11.9            70.5 
--------------------------------------------------  --------------  --------------  -------------- 
 Operating profit before exceptional items 
  on continuing and discontinued operations*                  33.1            69.3            95.2 
 Less: profit from joint ventures and associates            (14.6)          (17.7)          (33.4) 
 Movement in provisions                                     (42.1)          (77.8)         (118.4) 
 Depreciation, amortisation and impairment 
  of property, plant and equipment and intangible 
  assets                                                      26.5            24.3            52.4 
 Other non-cash movements*                                     6.8             5.5            11.5 
--------------------------------------------------  --------------  --------------  -------------- 
 Operating cash inflow before movements in 
  working capital, exceptional items and tax*                  9.7             3.6             7.3 
 Working capital movements                                  (15.1)          (14.2)          (23.7) 
 Tax paid                                                    (7.9)           (6.6)           (5.6) 
 Non-cash R&D expenditure                                        -           (0.1)           (0.4) 
--------------------------------------------------  --------------  --------------  -------------- 
 Cash flow from operating activities before 
  exceptional items*                                        (13.3)          (17.3)          (22.4) 
 Dividends from joint ventures and associates                 13.8            19.7            40.0 
 Interest received                                             0.3             0.9             1.4 
 Interest paid                                               (9.5)          (11.1)          (20.1) 
 Capitalised finance costs paid                                  -           (0.3)           (0.3) 
 Purchase of intangible and tangible assets 
  net of proceeds from disposals                            (18.1)          (14.4)          (31.6) 
--------------------------------------------------  --------------  --------------  -------------- 
 Free Cash Flow*                                            (26.8)          (22.5)          (33.0) 
 Net cash inflow on acquisition and disposal 
  of subsidiaries                                              0.8            11.1            19.2 
 Purchase of own shares net of share option                      -             0.1               - 
  proceeds 
 Other movements on investment balances                          -             0.2             0.7 
 Capitalisation and amortisation of loan costs               (0.4)           (0.2)           (0.7) 
 Unwind of discounting and capitalisation 
  of interest on loans receivable                              0.6             0.4             2.9 
 New, acquired and disposed finance leases                   (1.0)               -           (0.5) 
 Exceptional items                                          (19.7)          (32.4)          (40.2) 
 Cash movements on hedging instruments*                      (1.6)            24.0            47.0 
 Foreign exchange loss on Net Debt*                            8.5          (17.5)          (41.8) 
--------------------------------------------------  --------------  --------------  -------------- 
 Movement in Net Debt including assets and 
  liabilities held for sale*                                (39.6)          (36.8)          (46.4) 
 Assets held for sale movement in Net Debt                       -             2.3             4.7 
 Net Debt at 1 January*                                    (109.3)          (67.6)          (67.6) 
--------------------------------------------------  --------------  --------------  -------------- 
 Net Debt at end of period*                                (148.9)         (102.1)         (109.3) 
--------------------------------------------------  --------------  --------------  -------------- 
 Net Debt at 1 January including assets and 
  liabilities held for sale*                               (109.3)          (62.9)          (62.9) 
--------------------------------------------------  --------------  --------------  -------------- 
 Net Debt at end of period including assets 
  and liabilities held for sale*                           (148.9)          (99.7)         (109.3) 
--------------------------------------------------  --------------  --------------  -------------- 
 

* Operating profit, other non-cash movements, cash movements on hedging instruments, foreign exchange loss on Net Debt and Net Debt have been restated following the change in accounting policy regarding foreign exchange movements on investment and financing arrangements and the change in definition of Net Debt to include derivative financial instruments that relate to other components of Net Debt. The sub totals including Free Cash Flow have changed as a result.

Net Debt

 
                                                                           Including          Including 
                                                        Including             assets             assets 
                                                           assets    and liabilities    and liabilities 
                                                  and liabilities           held for           held for 
                                                         held for            sale as            sale as 
                                                          sale as              at 30              at 31 
                                                            at 30          June 2016           December 
                                                        June 2017        (restated*)               2016 
                                                             GBPm               GBPm               GBPm 
----------------------------------------------  -----------------  -----------------  ----------------- 
 Cash and cash equivalents                                  117.7              168.9              177.8 
 Loans receivable                                            23.5               20.4               22.9 
 Other loans                                              (281.7)            (273.5)            (299.9) 
 Obligations under finance leases                          (21.5)             (36.0)             (28.2) 
 Derivatives relating to Net Debt components*                13.1               20.5               18.1 
----------------------------------------------  -----------------  -----------------  ----------------- 
 Net Debt*                                                (148.9)             (99.7)            (109.3) 
----------------------------------------------  -----------------  -----------------  ----------------- 
 

* As explained above, Net Debt has been restated to include derivative financial instruments that relate to other components of Net Debt.

Average Net Debt as calculated on a daily basis for the six months ended 30 June 2017 was GBP178.2m (2016 restated: GBP115.4m), compared with the opening and closing positions of GBP109.3m and GBP148.9m respectively. Peak Net Debt was GBP242.7m (2016 restated: GBP165.2m).

Treasury operations and risk management

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

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

Liquidity and funding

As at 30 June 2017, the Group had committed funding of GBP751m (31 December 2016: GBP770m), comprising GBP271m of private placement notes and a GBP480m revolving credit facility with a syndicate of banks which was undrawn. In addition, the Group had a receivables financing facility of GBP30.0m, which was fully utilised as at 30 June 2016 but was unutilised as at 30 June 2017 (31 December 2016: GBP7.7m utilised).

Following the further small disposal relating to the private sector BPO business, the Group was required to offer two thirds of the net disposal proceeds to the debt holders in prepayment. As a result of this process, GBP3.7m ($4.9m) of private placement notes were repaid at par on 29 June 2017.

Interest rate risk

Given the nature of the Group's business, we have a preference for fixed rate debt to reduce the volatility of net finance costs. Our treasury policies require us to maintain a minimum proportion of fixed rate debt as a proportion of overall Net Debt and for this proportion to increase as the ratio of EBITDA to interest expense falls. As at 30 June 2017, more than 100% of the Group's Net Debt was at fixed rates. Interest on the revolving credit facility is at floating rate, however it was undrawn.

Foreign exchange risk

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

Credit risk

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

Debt covenants

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

 
                                                                                 Twelve 
                                                             Twelve              months 
                                                             months               ended     Year ended 
                                                           ended 30             30 June    31 December 
                                                          June 2017    2016 (restated*)           2016 
                                                               GBPm                GBPm           GBPm 
----------------------------------------------------  -------------  ------------------  ------------- 
 Operating profit before exceptional items 
  on continuing and discontinued operations*                   59.0               143.3           95.2 
 Remove: Amortisation and impairment of intangibles 
  arising on acquisition                                        5.3                 4.0            5.1 
----------------------------------------------------  -------------  ------------------  ------------- 
 Trading Profit*                                               64.3               147.3          100.3 
 Exclude: Share of joint venture post-tax 
  profits                                                    (30.3)              (40.8)         (33.4) 
 Include: Dividends from joint ventures                        34.1                36.4           40.0 
 Add back: Depreciation, amortisation and 
  impairment of property, plant and equipment 
  and non acquisition intangible assets                        49.3                64.9           47.3 
 Add back: Foreign exchange on investing 
  and financing arrangements*                                   0.7               (0.7)            1.2 
 Add back: Share based payment expense                         11.7                10.6            9.7 
 Covenant EBITDA                                              129.8               217.7          165.1 
----------------------------------------------------  -------------  ------------------  ------------- 
 Net finance costs on continuing and discontinued 
  operations*                                                  13.5                21.2           12.6 
 Exclude: Net interest receivable on retirement 
  benefit obligations                                           4.0                 4.7            4.7 
 Exclude: Movement in discount on other debtors                 1.1                 0.6            1.0 
 Exclude: Foreign exchange on investing and 
  financing arrangements*                                       0.7               (0.7)            1.2 
 Add back: Movement in discount on provisions                 (3.2)               (3.6)          (2.4) 
----------------------------------------------------  -------------  ------------------  ------------- 
 Covenant net finance costs                                    16.1                22.2           17.1 
----------------------------------------------------  -------------  ------------------  ------------- 
 Recourse net debt (including assets and 
  liabilities held for sale)*                                 148.9                99.7          109.3 
 Less: Disposal vendor loan note, encumbered 
  cash and other adjustments                                   27.5                36.0           28.5 
 Covenant adjustment for average FX rates                       3.7              (20.1)         (23.0) 
----------------------------------------------------  -------------  ------------------  ------------- 
 CTNB                                                         180.1               115.6          114.8 
----------------------------------------------------  -------------  ------------------  ------------- 
 CTNB / covenant EBITDA (not to exceed 3.5x)                   1.4x                0.5x           0.7x 
----------------------------------------------------  -------------  ------------------  ------------- 
 Covenant EBITDA / Covenant net finance costs 
  (at least 3.0x)                                              8.1x                9.8x           9.7x 
----------------------------------------------------  -------------  ------------------  ------------- 
 

* As explained above, operating profit, Trading Profit and net finance costs have been restated following the change in accounting policy regarding foreign exchange movements on investment and financing arrangements. These adjustments have been reversed in order to maintain the definition of EBITDA and net finance costs per the covenant. CTNB is consistent with the new definition of Net Debt and is unaffected by the change in accounting policy.

Net assets summary

 
                                          30 June           30 June        30 June           30 June       31 December 
                                             2017              2016           2016              2016              2016 
                                             GBPm              GBPm           GBPm              GBPm              GBPm 
                                 ----------------  ----------------  -------------  ----------------  ---------------- 
                                                          Including     Adjustment 
                                                             assets     for assets 
                                                           held for       held for 
                                     As reported*              sale           sale       As reported      As reported* 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
 Non-current assets 
 Goodwill                                   564.4             547.6          (2.4)             545.2             577.9 
 Other intangible assets                     75.5              88.5              -              88.5              83.6 
 Property, plant and equipment               66.6              70.7              -              70.7              69.3 
 Other non-current assets                    71.6              70.2              -              70.2              73.0 
 Deferred tax assets                         54.1              42.5              -              42.5              50.8 
 Retirement benefit assets                   18.3             153.9              -             153.9             150.4 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
                                            850.5             973.4          (2.4)             971.0           1,005.0 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
 Current assets 
 Inventories                                 16.6              27.6              -              27.6              22.4 
 Trade and other current 
  assets                                    574.6             585.9          (9.9)             576.0             548.4 
 Current tax                                 14.1              12.9          (4.7)               8.2              11.0 
 Cash and cash equivalents                  117.7             168.9          (2.7)             166.2             177.8 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
                                            723.0             795.3         (17.3)             778.0             759.6 
 Assets classified as 
  held for sale                                 -                 -           19.7              19.7                 - 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
 Total current assets                       723.0             795.3            2.4             797.7             759.6 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
 Total assets                             1,573.5           1,768.7              -           1,768.7           1,764.6 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
 Current liabilities 
 Trade and other current 
  liabilities                             (515.4)           (557.9)            3.2           (554.7)           (525.1) 
 Current tax liabilities                   (28.2)            (11.5)            0.1            (11.4)            (25.9) 
 Provisions                               (156.4)           (153.9)            1.1           (152.8)           (172.3) 
 Obligations under finance 
  leases                                    (9.6)            (15.6)            0.3            (15.3)            (12.3) 
 Loans                                     (33.1)             (9.7)              -             (9.7)             (9.7) 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
                                          (742.7)           (748.6)            4.7           (743.9)           (745.3) 
 Amounts classified as 
  held for sale                                 -                 -          (5.6)             (5.6)                 - 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
 Total current liabilities                (742.7)           (748.6)          (0.9)           (749.5)           (745.3) 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
 Non-current liabilities 
 Other non-current liabilities             (26.0)            (18.7)              -            (18.7)            (16.8) 
 Deferred tax liabilities                  (34.1)            (28.6)              -            (28.6)            (30.5) 
 Provisions                               (220.2)           (274.6)            0.9           (273.7)           (249.4) 
 Obligations under finance 
  leases                                   (11.9)            (20.4)              -            (20.4)            (15.9) 
 Loans                                    (248.6)           (263.8)              -           (263.8)           (290.2) 
 Retirement benefit obligations            (17.5)            (13.6)              -            (13.6)            (17.7) 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
                                          (558.3)           (619.7)            0.9           (618.8)           (620.5) 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
 Total liabilities                      (1,301.0)         (1,368.3)              -         (1,368.3)         (1,365.8) 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
 Net assets                                 272.5             400.4              -             400.4             398.8 
-------------------------------  ----------------  ----------------  -------------  ----------------  ---------------- 
 
   *      No amounts were included in held for sale as at 30 June 2017 or as at 31 December 2016. 

The breakdown of the Group's net assets is summarised above, showing the impact of the assets and liabilities held for sale for each line item for 30 June 2016.

At 30 June 2017 the balance sheet had net assets of GBP272.5m, a movement of GBP126.3m from the closing net asset position of GBP398.8m as at 31 December 2016. The decrease in net assets is mainly due to the following movements:

-- A decrease in the retirement benefit assets of Group funded defined benefit pension schemes of GBP131.9m. In June 2017, the Trustees of the Group's primary defined benefit pension scheme entered into a bulk annuity purchase whereby an insurer will fund future benefit payments to the relevant members. The liability to pay the members remains with the pension scheme, which therefore continues to include the relevant pension liabilities, but an insurance asset is held which is an equal and opposite amount to the liability. This removes the risk of longevity and investment movements for this portion of the scheme on a funding basis, and also removes the accounting risk of movements in underlying assumptions on the liabilities. The transaction resulted in a significant reduction in the surplus of the pension scheme under IFRS accounting convention, but resulted in a reduction in the deficit that is actuarially assessed for funding purposes of approximately GBP12m.

-- A decrease in provisions of GBP45.1m. Further details on the provision balance is provided below.

-- Trade and other current assets and liabilities increased by GBP35.9m, and Net Debt increased by GBP39.6m. Further details of these movements are provided in the cash flow and Net Debt sections above.

   --      A decrease in goodwill by GBP13.5m caused by movements in foreign exchange rates. 

Provisions

The total of current and non-current provisions has decreased by GBP45.1m since 31 December 2016. The movement is primarily due to a decrease in contract provisions of GBP39.9m as set out below:

 
                                     Onerous 
                                    Contract 
                                  Provisions 
                                        GBPm 
----------------------------  -------------- 
 At 1 January 2017                   (220.2) 
 Utilised during the period             40.4 
 Unwinding of discount                 (1.7) 
 FX                                      1.2 
 At 30 June 2017                     (180.3) 
----------------------------  -------------- 
 

In the first half of the year we have analysed the performance of the contracts with OCPs to assess whether there have been any triggering events that would require the provisions to be re-calculated. Our assessment is that there have been no triggering events in the first half of the year. However, we are aware that there are a number of material milestones in the second half of the year, including negotiations with customers, closing out contracts that end in the period, the implementation of new technology and the impact on operating performance. The outcomes of these material milestones could result in the provisions being re-assessed. At this point in time, our assessment is that any potential risks and opportunities associated with these outcomes are balanced across our contract portfolio.

Angus Cockburn

Group Chief Financial Officer

3 August 2017

Principal risks and uncertainties

The principal risks and uncertainties that could materially affect Serco's results and operations are set out on pages 16 to 23 of the 2016 Annual Report and Accounts and the key headline risks for the remainder of 2017 are restated below. This summary is not intended, and should not be used, as a substitute for reading the appropriate pages of the 2016 Annual Report and Accounts which include further commentary on the risks and the Group's management of them.

   --      Failure to grow profitably 
   --      Failure to build our reputation or act with integrity 
   --      Failure to transform and deliver the Group strategy 
   --      Financial control failure and finance IT systems failure 
   --      Major information security breach 
   --      Misreporting of performance 
   --      Failure to attract and retain leaders fit for the future 
   --      Catastrophic event 
   --      Contract non-compliance and contract non-performance 
   --      Material legal and regulatory compliance failure 

In addition to the principal risks and uncertainties listed above, there may be additional risks unknown to Serco and other risks, currently believed to be immaterial, which could turn out to be material. These risks, whether they materialise individually or simultaneously, could significantly affect the Group's business and financial results.

Responsibility statement

We confirm to the best of our knowledge:

a. the condensed set of financial statements has been prepared in accordance with IAS34 Interim financial reporting;

b. the interim management report includes a fair review of the information required by the DTR 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

c. the interim management report includes a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board,

 
 Rupert Soames            Angus Cockburn 
  Group Chief Executive    Group Chief Financial Officer 
  3 August 2017 
 

Independent review report to Serco Group PLC

Conclusion

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Cash Flow Statement and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 is not prepared, in all material respects, in accordance with IAS34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS34 as adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Stephen Wardell

for and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square, London, E14 5GL

3 August 2017

 
 Financial Statements 
  Condensed consolidated income statement 
 
 
                                                                     Six months    Year ended 
                                                                       ended 30   31 December 
                                                                      June 2016          2016 
                                                       Six months 
                                                         ended 30    (restated*    (restated* 
                                                        June 2017           **)           **) 
                                                      (unaudited)   (unaudited)     (audited) 
Continuing operations                                        GBPm          GBPm          GBPm 
---------------------------------------------------  ------------  ------------  ------------ 
Revenue                                                   1,508.2       1,493.2       3,011.0 
Cost of sales**                                         (1,374.8)     (1,333.0)     (2,724.6) 
---------------------------------------------------  ------------  ------------  ------------ 
Gross profit**                                              133.4         160.2         286.4 
Administrative expenses 
General and administrative expenses* **                   (112.7)       (103.5)       (216.2) 
Exceptional profit / (loss) on disposal of 
 subsidiaries and operations                                  0.1         (0.9)           2.9 
Other exceptional operating items                          (11.5)         (6.8)        (59.2) 
Other expenses - amortisation and impairment 
 of intangibles arising on acquisition                      (2.2)         (1.9)         (5.1) 
---------------------------------------------------  ------------  ------------  ------------ 
Total administrative expenses* **                         (126.3)       (113.1)       (277.6) 
Share of profits in joint ventures and associates, 
 net of interest and tax                                     14.6          17.7          33.4 
---------------------------------------------------  ------------  ------------  ------------ 
Operating profit*                                            21.7          64.8          42.2 
---------------------------------------------------  ------------  ------------  ------------ 
Operating profit before exceptional items*                   33.1          72.5          98.5 
---------------------------------------------------  ------------  ------------  ------------ 
Investment revenue                                            3.6           4.7           9.3 
Finance costs*                                             (11.2)        (11.4)        (21.9) 
Total net finance costs*                                    (7.6)         (6.7)        (12.6) 
---------------------------------------------------  ------------  ------------  ------------ 
Profit before tax                                            14.1          58.1          29.6 
---------------------------------------------------  ------------  ------------  ------------ 
Tax on profit before exceptional items                     (16.4)         (3.7)        (15.8) 
Exceptional tax                                            (15.9)         (0.1)           3.1 
---------------------------------------------------  ------------  ------------  ------------ 
Tax charge                                                 (32.3)         (3.8)        (12.7) 
---------------------------------------------------  ------------  ------------  ------------ 
(Loss) / profit for the period from continuing 
 operations                                                (18.2)          54.3          16.9 
Loss for the period from discontinued operations                -         (7.9)        (18.0) 
---------------------------------------------------  ------------  ------------  ------------ 
(Loss) / profit for the period                             (18.2)          46.4         (1.1) 
---------------------------------------------------  ------------  ------------  ------------ 
Attributable to: 
Equity owners of the Company                               (18.3)          46.5         (1.2) 
Non controlling interests                                     0.1         (0.1)           0.1 
---------------------------------------------------  ------------  ------------  ------------ 
(Loss) / Earnings Per share (EPS) 
Basic EPS from continuing operations                      (1.68p)         5.00p         1.55p 
Diluted EPS from continuing operations                    (1.68p)         4.82p         1.50p 
Basic EPS from discontinued operations                          -       (0.73p)       (1.66p) 
Diluted EPS from discontinued operations                        -       (0.70p)       (1.66p) 
Basic EPS from continuing and discontinued 
 operations                                               (1.68p)         4.27p       (0.11p) 
Diluted EPS from continuing and discontinued 
 operations                                               (1.68p)         4.12p       (0.11p) 
---------------------------------------------------  ------------  ------------  ------------ 
 

* General and administrative expenses and net finance costs have been restated following the change in accounting policy regarding foreign exchange movements on investment and financing arrangements. See note 1.

** Costs included within costs of sales and general and administrative expenses have been reallocated, resulting in a restatement. See note 1.

 
 Condensed consolidated statement of comprehensive income 
 
 
                                                     Six months    Six months    Year ended 
                                                       ended 30      ended 30   31 December 
                                                      June 2017     June 2016          2016 
                                                    (unaudited)   (unaudited)     (audited) 
                                                           GBPm          GBPm          GBPm 
-------------------------------------------------  ------------  ------------  ------------ 
(Loss) / profit for the period                           (18.2)          46.4         (1.1) 
 
Other comprehensive income for the period: 
 
Items that will not be reclassified subsequently 
 to profit or loss: 
Net actuarial (loss) / gain on defined benefit 
 pension schemes*                                       (130.8)          21.7           9.0 
Actuarial gain on reimbursable rights*                        -           0.8           2.9 
Tax relating to items not reclassified*                    22.4         (4.4)         (1.7) 
Share of other comprehensive income in joint 
 ventures and associates                                    0.8           0.2          14.8 
 
Items that may be reclassified subsequently 
 to profit or loss: 
Net exchange (loss) / gain on translation 
 of foreign operations**                                  (7.2)          44.0          80.3 
Fair value (loss) / gain on cash flow hedges 
 during the period**                                      (0.3)           4.2           2.3 
Tax relating to items that may be reclassified**            0.1         (0.1)             - 
Share of other comprehensive income in joint 
 ventures and associates                                      -           0.6           1.0 
-------------------------------------------------  ------------  ------------  ------------ 
Total other comprehensive (expense) / income 
 for the period                                         (115.0)          67.0         108.6 
 
Total comprehensive (loss) / income for the 
 period                                                 (133.2)         113.4         107.5 
-------------------------------------------------  ------------  ------------  ------------ 
Attributable to: 
Equity owners of the Company                            (133.2)         113.4         107.1 
Non controlling interest                                      -             -           0.4 
-------------------------------------------------  ------------  ------------  ------------ 
 

* Recorded in retirement benefit obligations reserve in the Consolidated Statement of Changes in Equity.

** Recorded in hedging and translation reserve in the Consolidated Statement of Changes in Equity.

 
 Condensed consolidated statement of changes in equity 
 
 
                                                         Retirement    Share               Hedging 
                           Share     Capital                benefit    based      Own          and          Total          Non 
                  Share  premium  redemption  Retained  obligations  payment   shares  translation  shareholders'  controlling 
                capital  account     reserve  earnings      reserve  reserve  reserve      reserve         equity     interest 
                   GBPm     GBPm        GBPm      GBPm         GBPm     GBPm     GBPm         GBPm           GBPm         GBPm 
--------------  -------  -------  ----------  --------  -----------  -------  -------  -----------  -------------  ----------- 
At 1 January 
 2016              22.0    327.9         0.1      68.5      (101.3)     80.9   (59.8)       (57.7)          280.6          1.5 
 
Total 
 comprehensive 
 income for 
 the 
 period               -        -           -      47.3         18.1        -        -         48.0          113.4            - 
 
Shares 
 transferred 
 to option 
 holders 
 on exercise 
 of 
 share options        -        -           -         -            -    (0.3)      0.3            -              -            - 
 
Expense in 
 relation 
 to share 
 based 
 payments             -        -           -         -            -      4.9        -            -            4.9            - 
 
At 30 June 
 2016 
 (unaudited)       22.0    327.9         0.1     115.8       (83.2)     85.5   (59.5)        (9.7)          398.9          1.5 
 
Total 
 comprehensive 
 income for 
 the 
 period               -        -           -    (32.7)        (7.9)        -        -         34.3          (6.3)          0.4 
 
Shares 
 transferred 
 to option 
 holders 
 on exercise 
 of 
 share options        -        -           -         -            -    (7.4)      7.4            -              -            - 
 
Expense in 
 relation 
 to share 
 based 
 payments             -        -           -         -            -      4.8        -            -            4.8            - 
 
Change in non 
 controlling 
 interest             -        -           -         -            -        -        -            -              -        (0.5) 
 
At 31 December 
 2016 
 (audited)         22.0    327.9         0.1      83.1       (91.1)     82.9   (52.1)         24.6          397.4          1.4 
 
Total 
 comprehensive 
 income for 
 the 
 period               -        -           -    (17.3)      (108.4)        -        -        (7.5)        (133.2)            - 
 
Shares 
 transferred 
 to option 
 holders 
 on exercise 
 of 
 share options        -        -           -         -            -    (1.1)      1.1            -              -            - 
 
Expense in 
 relation 
 to share 
 based 
 payments             -        -           -         -            -      6.9        -            -            6.9            - 
 
Change in non         -        -           -         -            -        -        -            -              -            - 
controlling 
interest 
 
At 30 June 
 2017 
 (unaudited)       22.0    327.9         0.1      65.8      (199.5)     88.7   (51.0)         17.1          271.1          1.4 
--------------  -------  -------  ----------  --------  -----------  -------  -------  -----------  -------------  ----------- 
 
 
 
 
   Condensed consolidated balance sheet 
 
 
                                               At 30 June    At 30 June  At 31 December 
                                                     2017          2016            2016 
                                              (unaudited)   (unaudited)       (audited) 
                                                     GBPm          GBPm            GBPm 
-------------------------------------------  ------------  ------------  -------------- 
Non-current assets 
Goodwill                                            564.4         545.2           577.9 
Other intangible assets                              75.5          88.5            83.6 
Property, plant and equipment                        66.6          70.7            69.3 
Interests in joint ventures and associates           16.0          12.6            14.4 
Trade and other receivables                          51.1          46.9            44.4 
Derivative financial instruments                      4.5          10.7            14.2 
Deferred tax assets                                  54.1          42.5            50.8 
Retirement benefit assets                            18.3         153.9           150.4 
-------------------------------------------  ------------  ------------  -------------- 
                                                    850.5         971.0         1,005.0 
-------------------------------------------  ------------  ------------  -------------- 
Current assets 
Inventories                                          16.6          27.6            22.4 
Trade and other receivables                         563.0         561.2           543.5 
Current tax assets                                   14.1           8.2            11.0 
Cash and cash equivalents                           117.7         166.2           177.8 
Derivative financial instruments                     11.6          14.8             4.9 
-------------------------------------------  ------------  ------------  -------------- 
                                                    723.0         778.0           759.6 
Assets classified as held for sale                      -          19.7               - 
-------------------------------------------  ------------  ------------  -------------- 
                                                    723.0         797.7           759.6 
-------------------------------------------  ------------  ------------  -------------- 
Total assets                                      1,573.5       1,768.7         1,764.6 
-------------------------------------------  ------------  ------------  -------------- 
Current liabilities 
Trade and other payables                          (512.4)       (550.5)         (524.5) 
Derivative financial instruments                    (3.0)         (4.2)           (0.6) 
Current tax liabilities                            (28.2)        (11.4)          (25.9) 
Provisions                                        (156.4)       (152.8)         (172.3) 
Obligations under finance leases                    (9.6)        (15.3)          (12.3) 
Loans                                              (33.1)         (9.7)           (9.7) 
-------------------------------------------  ------------  ------------  -------------- 
                                                  (742.7)       (743.9)         (745.3) 
Liabilities directly associated with                    -         (5.6)               - 
 assets classified as held for sale 
-------------------------------------------  ------------  ------------  -------------- 
                                                  (742.7)       (749.5)         (745.3) 
-------------------------------------------  ------------  ------------  -------------- 
Non-current liabilities 
Trade and other payables                           (26.0)        (18.7)          (16.8) 
Deferred tax liabilities                           (34.1)        (28.6)          (30.5) 
Provisions                                        (220.2)       (273.7)         (249.4) 
Obligations under finance leases                   (11.9)        (20.4)          (15.9) 
Loans                                             (248.6)       (263.8)         (290.2) 
Retirement benefit obligations                     (17.5)        (13.6)          (17.7) 
-------------------------------------------  ------------  ------------  -------------- 
                                                  (558.3)       (618.8)         (620.5) 
-------------------------------------------  ------------  ------------  -------------- 
Total liabilities                               (1,301.0)     (1,368.3)       (1,365.8) 
-------------------------------------------  ------------  ------------  -------------- 
Net assets                                          272.5         400.4           398.8 
-------------------------------------------  ------------  ------------  -------------- 
Equity 
Share capital                                        22.0          22.0            22.0 
Share premium account                               327.9         327.9           327.9 
Capital redemption reserve                            0.1           0.1             0.1 
Retained earnings                                    65.8         115.8            83.1 
Retirement benefit obligations reserve            (199.5)        (83.2)          (91.1) 
Share based payment reserve                          88.7          85.5            82.9 
Own shares reserve                                 (51.0)        (59.5)          (52.1) 
Hedging and translation reserve                      17.1         (9.7)            24.6 
-------------------------------------------  ------------  ------------  -------------- 
Equity attributable to owners of the 
 Company                                            271.1         398.9           397.4 
Non-controlling interest                              1.4           1.5             1.4 
-------------------------------------------  ------------  ------------  -------------- 
Total equity                                        272.5         400.4           398.8 
-------------------------------------------  ------------  ------------  -------------- 
 
 
 Condensed consolidated cash flow statement 
 
 
                                                        Six months     Six months    Year ended 
                                                          ended 30       ended 30   31 December 
                                                         June 2017      June 2016          2016 
                                                                      (restated*) 
                                                       (unaudited)    (unaudited)     (audited) 
                                                              GBPm           GBPm          GBPm 
----------------------------------------------------  ------------  -------------  ------------ 
Net cash outflow from operating activities 
 before exceptional items*                                  (13.3)         (17.3)        (22.4) 
Exceptional items                                           (19.7)         (32.1)        (39.9) 
----------------------------------------------------  ------------  -------------  ------------ 
Net cash outflow from operating activities*                 (33.0)         (49.4)        (62.3) 
----------------------------------------------------  ------------  -------------  ------------ 
Investing activities 
Interest received                                              0.3            0.9           1.4 
Decrease in security deposits                                    -              -         (0.4) 
Dividends received from joint ventures and 
 associates                                                   13.8           19.7          40.0 
Proceeds from disposal of property, plant and 
 equipment                                                     0.3            0.1           0.6 
Proceeds from disposal of intangible assets                    0.1            0.1           0.1 
Proceeds on disposal of subsidiaries and operations            0.8           11.2          19.4 
Acquisition of subsidiaries, net of cash acquired                -          (0.1)         (0.2) 
Purchase of other intangible assets                          (8.3)          (6.8)        (15.1) 
Purchase of property, plant and equipment                   (10.2)          (7.8)        (17.2) 
----------------------------------------------------  ------------  -------------  ------------ 
Net cash (outflow) / inflow from investing 
 activities                                                  (3.2)           17.3          28.6 
----------------------------------------------------  ------------  -------------  ------------ 
Financing activities 
Interest paid                                                (9.5)         (10.7)        (20.1) 
Exceptional finance costs paid                                   -          (0.3)         (0.3) 
Capitalised finance costs paid                                   -          (0.3)         (0.3) 
Repayment of loans                                           (3.8)        (135.8)       (135.5) 
Decrease in loans to joint ventures and associates               -            0.2           1.1 
Capital element of finance lease repayments                  (7.6)          (8.6)        (17.0) 
Cash (loss) / gains from hedging instruments*                (1.6)           24.0          47.0 
Proceeds from issue of other share capital                       -            0.1             - 
 and exercise of share options 
----------------------------------------------------  ------------  -------------  ------------ 
Net cash outflow from financing activities*                 (22.5)        (131.4)       (125.1) 
----------------------------------------------------  ------------  -------------  ------------ 
Net decrease in cash and cash equivalents                   (58.7)        (163.5)       (158.8) 
Cash and cash equivalents at beginning of period             177.8          323.6         323.6 
Net exchange (loss) / gain                                   (1.4)            3.6           7.8 
Cash reclassified to assets held for sale                        -            2.5           5.2 
----------------------------------------------------  ------------  -------------  ------------ 
Cash and cash equivalents at end of period                   117.7          166.2         177.8 
----------------------------------------------------  ------------  -------------  ------------ 
 

* Net cash outflow from operating activities and net cash (outflow) / inflow from financing activities have been restated following the change in accounting policy regarding foreign exchange movements on investment and financing arrangements. See note 1.

Notes to the Consolidated Financial Statements

1. General information, going concern and accounting policies

The basis of preparation in this preliminary announcement is set out below.

The information contained herein for the year ended 31 December 2016 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified and did not contain statements made under s498(2) or (3) of the Companies Act 2006 and did not draw attention to any matters by way of emphasis of matter.

The annual financial statements of Serco Group plc are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The condensed set of financial statements included in this half yearly financial report has been prepared in accordance with International Accounting Standard (IAS) 34 Interim financial reporting, as adopted by the EU.

In the six months ended 30 June 2017, there have been no significant changes to accounting under IFRS which have impacted the Group's consolidated financial statements. The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements except for as noted below. The significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2016.

The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

IFRS15 Revenue from contracts with customers

IFRS15 has been endorsed by the EU and will be effective from 1 January 2018.

This new standard supersedes: IAS11 Construction contracts; IAS18 Revenue; IFRIC13 Customer loyalty programmes; IFRIC15 Agreements for the construction of real estate; IFRIC18 Transfers of assets from customers; and SIC-31 Revenue - Barter transactions involving advertising services.

The new standard is intended to bring greater transparency and comparability to financial reporting.

Some areas of accounting in the outsourcing sector could be significantly impacted by IFRS15. However, due to the composition of our contract base and the impact of our Contract and Balance Sheet Review in 2014 and our current accounting policies, the impact for Serco from the adoption of IFRS15 is not expected to fundamentally change the presentation of our income statement or the level of profit recognised in the periods disclosed. In addition, some of the Group's most complex contracts which could be impacted by IFRS15 have OCPs and therefore any adjustment to profits under IFRS15 does not impact the profitability of the Group since 2014. Contracts with OCPs by their very nature are reported at a break even position, such that any increase or decrease in profitability as a result of IFRS15 would impact only the initial OCP calculations determined in 2014, unless the adjustments are so significant to have turned a loss making contract into a profitable one. This level of adjustment is not expected for the Group's contracts.

IFRS15 could result in a delay of revenues and profits over those previously recognised, in particular with respect of percentage to completion accounting, which is not a significant area of accounting for the Group, or where elements of revenues associated with transition activities (also referred to as 'phase in') have been recognised in the early stages of contracts. Such transition payments, or payments made to compensate for expenditure on bid activity may be made by customers to match with a company's up-front investment, but under IFRS15 such cash flows are less likely to result in revenue being recognised than under historic accounting. IFRS15 is of more relevance to the Group in relation to the accounting for new contracts rather than those which were in place at the time of adoption of the new standard.

A project to assess the full impact of the new standard is well advanced and will be completed in the second half of the year and subject to audit by the Group's external auditors.

Under the transition rules IFRS15 will be applied retrospectively to the prior period in accordance with IAS8 Accounting policies, changes in accounting estimates and errors, subject to the following expedients:

-- contracts completed prior to 1 January 2018 and that begin and end within the same annual reporting period will not be restated;

-- for contracts that have variable consideration and which have completed prior to 1 January 2018, the revenues recognised will reflect the actual outcome, rather than being estimated and trued up; and

-- the disclosures required for comparative periods in respect of amount of revenue allocated to the remaining performance obligations and an explanation of when that amount is expected to be recognised will not be made.

The cumulative effect of initially applying the standard will be shown as an adjustment to brought forward retained earnings as at 1 January 2017.

Prior period restatements

Change in accounting policy regarding the classification of foreign exchange movements on investment and financing arrangements

In order to provide more relevant information about the impact of the underlying transactions of trading operations, the accounting policy regarding the classification of foreign exchange movements on investment and financing arrangements was changed in the second half of 2016. The new policy is to include foreign exchange movements on investment and financing arrangements within investment revenue or finance costs as appropriate. Such transactions include foreign exchange movements on non Sterling cash and financing arrangements, related derivative financial instruments and any income or costs associated with such balances. As a result of this change in accounting policy, the prior period income statement and cash flow statement have been restated, together with the Net Debt definition which has been changed to include derivative financial instruments that relate to other components of Net Debt. No restatement was required to the balance sheet as a result of the change in policy.

The impact on the relevant line items in the consolidated financial statements and Net Debt for the six months ended 30 June 2016 is as follows:

 
                                           Six months              Six months 
                                             ended 30                ended 30 
                                            June 2016               June 2016 
                                        as previously                      as 
                                               stated  Adjustment    restated 
Consolidated income statement                    GBPm        GBPm        GBPm 
-------------------------------------  --------------  ----------  ---------- 
General and administrative expenses*          (109.4)       (0.4)     (109.8) 
Finance costs                                  (11.8)         0.4      (11.4) 
-------------------------------------  --------------  ----------  ---------- 
 

* General and administrative expenses are further restated by GBP6.3m to GBP103.5m as noted in the change in accounting policy regarding the classification of cost items within cost of sales and administrative expenses below.

 
                                                 Six months               Six months 
                                                   ended 30               ended 2016 
                                                  June 2016                  30 June 
                                              as previously                       as 
                                                     stated  Adjustment     restated 
 Consolidated cash flow statement                      GBPm        GBPm         GBPm 
-------------------------------------------  --------------  ----------  ----------- 
Net cash outflow from operating activities           (25.4)      (24.0)       (49.4) 
Net cash outflow from financing activities          (155.4)        24.0      (131.4) 
-------------------------------------------  --------------  ----------  ----------- 
 
 
                                       At 30 June 
                                             2016                At 30 June 
                                    as previously                      2016 
                                           stated  Adjustment   as restated 
Analysis of Net Debt                         GBPm        GBPm          GBPm 
---------------------------------  --------------  ----------  ------------ 
Cash and cash equivalents                   166.2           -         166.2 
Loan receivables                             20.4           -          20.4 
Loans payable                             (273.5)           -       (273.5) 
Obligations under finance leases           (35.7)           -        (35.7) 
Derivatives relating to Net Debt                -        20.5          20.5 
---------------------------------  --------------  ----------  ------------ 
                                          (122.6)        20.5       (102.1) 
---------------------------------  --------------  ----------  ------------ 
 

Change in accounting policy regarding the classification of cost items within cost of sales and administrative expenses

The Group has undergone a programme of work on its financial data structures to appropriately allocate and charge costs to the relevant divisions and between cost of sales and administration expenses. As a result of the activities performed in this area, the Group's accounting policy for the classification of cost items in the income statement has changed. The prior periods' results have been restated to reflect the current year accounting policy, in addition to a reclassification for the full year results in 2016, where no reallocation of costs was made.

Cost of sales are considered to be the direct costs of operating ongoing contracts. This includes the unavoidable costs of servicing contracts and all costs that a contract would incur purely on its own without a parent company, regardless of how those services are delivered within the wider Group, such as IT or Human Resource management services provided centrally.

The impact on the relevant line items in the consolidated income statement for the six months ended 30 June 2016 and the year ended 31 December 2016 is as follows:

 
                                           Six months              Six months 
                                             ended 30                ended 30 
                                            June 2016               June 2016 
                                        as previously                      as 
                                               stated  Adjustment    restated 
Consolidated income statement                    GBPm        GBPm        GBPm 
-------------------------------------  --------------  ----------  ---------- 
Cost of sales                               (1,326.7)       (6.3)   (1,333.0) 
Gross profit                                    166.5       (6.3)       160.2 
General and administrative expenses*          (109.8)         6.3     (103.5) 
-------------------------------------  --------------  ----------  ---------- 
 

* Restated from the reported actual of GBP109.4m as covered above in the change in accounting policy regarding the classification of foreign exchange movements on investment and financing arrangements above.

 
                                        Year ended 
                                       31 December                 Year ended 
                                           2016 as                31 December 
                                        previously                    2016 as 
                                            stated  Adjustment       restated 
Consolidated income statement                 GBPm        GBPm           GBPm 
------------------------------------  ------------  ----------  ------------- 
Cost of sales                            (2,767.6)        43.0      (2,724.6) 
Gross profit                                 243.4        43.0          286.4 
General and administrative expenses        (173.2)      (43.0)        (216.2) 
------------------------------------  ------------  ----------  ------------- 
 

Going concern

The Directors have a reasonable expectation that the Company and the Group will be able to operate within the level of available facilities and cash for the foreseeable future and accordingly believe that it is appropriate to prepare the financial statements on a going concern basis.

In assessing the basis of preparation of the financial statements for the six months ended 30 June 2017, the Directors have considered the principles of the Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, 2014'; namely assessing the applicability of the going concern basis, the review period and disclosures. The Directors have undertaken a rigorous assessment of going concern and liquidity, taking into account financial forecasts. In order to satisfy themselves that they have adequate resources for the future, the Directors have reviewed the Group's existing debt levels, the committed funding and liquidity positions under our debt covenants, and our ability to generate cash from trading activities. The Group's current principal debt facilities at the period end comprised a GBP480m revolving credit facility, and GBP271m of US private placement notes. As at 30 June 2017, the Group had GBP751m of committed credit facilities and committed headroom of GBP593m.

In undertaking this review the Directors have considered the business plans which provide financial projections for the foreseeable future. For the purposes of this review, we consider that to be the period ending 31 December 2018.

Critical accounting judgements and key sources of estimation uncertainty

In the process of applying the Group's accounting policies, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements. As described below, many of these areas of judgement also involve a high level of estimation uncertainty.

Prior period restatement: Change in accounting policies

The accounting policy regarding the classification of foreign exchange movements in relation to investment and financing arrangements was changed in the second half of the prior year. The accounting policy regarding the classification of cost items within cost of sales and administrative expenses was changed in the six months ended 30 June 2017. Judgement was applied in reaching the conclusion that these changes provide more relevant financial information to the users of these financial statements.

Use of Alternative Performance Measures: Operating profit before exceptional items

IAS1 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' items, but this is not a concept defined by IFRS and therefore there is a level of judgement involved in arriving at an Alternative Performance Measure which excludes such exceptional items. We consider items which are material, non-recurring and outside of the normal operating practice of the Company to be suitable for separate presentation and explanation.

The segmental analysis of continuing operations in note 3 includes the additional performance measure of Trading Profit on continuing operations which is reconciled to operating profit in that note. The Group uses Trading Profit as an alternative measure to operating profit by making the following two adjustments. Firstly, Trading Profit excludes exceptional items, as described above. Secondly, amortisation and impairment of intangibles arising on acquisitions are excluded, because these charges are based on judgments about the value and economic life of assets that, in the case of items such as customer relationships, would not be capitalised in normal operating practice. The Chief Operating Decision Maker (CODM) reviews the segmental analysis for continuing operations together with discontinued operations.

Provisions for onerous contracts

Determining whether provisions are required for loss making contracts requires significant judgements to be made regarding the ability of the company to maintain or improve operational performance. Judgements can also be made regarding the outcome of matters dependent on the behaviour of the customer in question or other parties involved in delivering the contract.

The level of uncertainty in the estimates made, either in determining whether a provision is required, or in the calculation of a provision booked, is linked to the complexity of the underlying contract and the form of service delivery.

In the six months ended 30 June 2017, no revisions have been made to contract provisions.

To mitigate the level of uncertainty in making these estimates, Management regularly compares actual performance of the contracts against previous forecasts and considers whether there have been any changes to significant judgements. A detailed bottom up review of the provisions is performed as part of the Group's formal annual budgeting process.

The individual provisions are discounted where the impact is assessed to be material. Discount rates used are calculated based on the estimated risk free rate of interest for the region in which the provision is located and matched against the ageing profile of the provision. Rates applied are in the range of 0.17% and 3.30%.

Impairment of assets

Identifying whether there are indicators of impairment for assets involves a high level of judgement and a good understanding of the drivers of value behind the asset. At each reporting period an assessment is performed in order to determine whether there are any such indicators, which involves considering the performance of our business and any significant changes to the markets in which we operate.

We seek to mitigate the risk associated with this judgement by putting in place processes and guidance for the finance community and internal review procedures.

Determining whether assets with impairment indicators require an actual impairment involves an estimation of the expected value in use of the asset (or CGU to which the asset relates). The value in use calculation involves an estimation of future cash flows and also the selection of appropriate discount rates, both of which involve considerable judgement. The future cash flows are derived from approved forecasts, with the key assumptions being revenue growth, margins and cash conversion rates. Discount rates are calculated with reference to the specific risks associated with the assets and are based on advice provided by external experts. Our calculation of discount rates are performed based on a risk free rate of interest appropriate to the geographic location of the cash flows related to the asset being tested, which is subsequently adjusted to factor in local market risks and risks specific to Serco and the asset itself. Discount rates used for internal purposes are post tax rates, however for the purpose of impairment testing in accordance with IAS36 Impairment of assets we calculate a pre tax rate based on post tax targets.

A key area of focus in recent years has been in the impairment testing of goodwill as a result of the pressure on the results of the Group. However, no impairment of goodwill was noted in the six months ended 30 June 2017.

Deferred tax

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits. Recognition has been based on forecast future taxable profits.

Current tax

Liabilities for tax contingencies require management judgement and estimates in respect of tax audits and also tax exposures in each of the jurisdictions in which we operate. Management is also required to make an estimate of the current tax liability together with an assessment of the temporary differences that arise as a consequence of different accounting and tax treatments. Key judgement areas include the correct allocation of profits and losses between the countries in which we operate and the pricing of intercompany services. Where management conclude that a tax position is uncertain, a current tax liability is held for anticipated taxes that are considered probable based on the current information available.

These liabilities can be built up over a long period of time but the ultimate resolution of tax exposures usually occurs at a point in time, and given the inherent uncertainties in assessing the outcomes of these exposures, these estimates are prone to change in future periods. It is not currently possible to estimate the timing of potential cash outflows, but on resolution, to the extent this differs from the liability held, this will be reflected through the tax charge/(credit) for that period. Each potential liability and contingency is revisited on an annual basis and adjusted to reflect any changes in positions taken by the company, local tax audits, the expiry of the statute of limitations following the passage of time and any change in the broader tax environment.

On the basis of the currently available information, the Group does not anticipate a material change to the estimated liability in the short term.

Retirement benefit obligations

Identifying whether the Group has a retirement benefit obligation as a result of contractual arrangements entered into requires a level of judgement, largely driven by the legal position held between the Group, the customer and the relevant pension scheme.

The calculation of retirement benefit obligations is dependent on material key assumptions including discount rates, mortality rates, inflation rates and future contribution rates.

In accounting for the defined benefit schemes, the Group has applied the following principles:

-- The asset recognised for the Serco Pension and Life Assurance Scheme is based on the assumption that the full surplus will ultimately be available to the Group as a future refund of surplus.

-- No foreign exchange item is shown in the disclosures as the non UK liabilities are not material.

   --      No pension assets are invested in the Group's own financial instruments or property. 

-- Pension annuity assets are remeasured to fair value at each reporting date based on the share of the defined benefit obligation covered by the insurance contract.

2. Discontinued operations

The Global Services division, representing private sector BPO operations, was classified as a discontinued operation in 2015 and 2016. The most significant part of this business was disposed in 2015, and the disposal of one of the two remaining elements of the offshore business was completed in March 2016 and the final element completed in December 2016. The residual UK onshore private sector BPO operations were sold or exited in 2016 with the exception of one business consisting of a single contract, where disposal was completed in July 2017. Total revenues for the remaining operations were GBP5.3m and UTP was GBP0.1m for the six months ended 30 June 2017, and therefore the results have been included in continuing operations in 2017 due to their relative immateriality.

The results of the discontinued operations in prior periods were as follows:

 
                                                     Six months    Six months    Year ended 
                                                       ended 30      ended 30   31 December 
                                                      June 2017     June 2016          2016 
                                                    (unaudited)   (unaudited)     (audited) 
                                                           GBPm          GBPm          GBPm 
-------------------------------------------------  ------------  ------------  ------------ 
Revenue                                                       -          24.7          36.8 
Expenses                                                      -        (27.9)        (40.1) 
-------------------------------------------------  ------------  ------------  ------------ 
Operating loss before exceptional items                       -         (3.2)         (3.3) 
Exceptional loss on disposal of subsidiaries 
 and operations                                               -         (0.3)         (2.8) 
Other exceptional operating items                             -         (3.9)        (11.4) 
-------------------------------------------------  ------------  ------------  ------------ 
Operating loss                                                -         (7.4)        (17.5) 
Investment revenue                                            -             -             - 
Finance costs                                                 -             -             - 
Exceptional finance costs                                     -         (0.4)         (0.4) 
-------------------------------------------------  ------------  ------------  ------------ 
Loss before tax                                               -         (7.8)        (17.9) 
Tax charge on loss before exceptional items                   -         (0.1)         (0.1) 
Tax credit on exceptional items                               -             -             - 
-------------------------------------------------  ------------  ------------  ------------ 
Net loss attributable to discontinued operations 
 presented in the income statement                            -         (7.9)        (18.0) 
-------------------------------------------------  ------------  ------------  ------------ 
 
Attributable to: 
Equity owners of the Company                                  -         (7.9)        (18.1) 
Non controlling interests                                     -             -           0.1 
-------------------------------------------------  ------------  ------------  ------------ 
 

Included above were items classified as exceptional as they were considered to be material, non recurring and outside of the normal course of business. These were summarised as follows:

 
                                                        Six months    Six months    Year ended 
                                                          ended 30      ended 30   31 December 
                                                         June 2017     June 2016          2016 
                                                       (unaudited)   (unaudited)     (audited) 
                                                              GBPm          GBPm          GBPm 
----------------------------------------------------  ------------  ------------  ------------ 
Exceptional items arising on discontinued 
 operations 
Exceptional loss on disposal                                     -         (0.3)         (2.8) 
 
Other exceptional operating items 
Restructuring costs                                              -         (0.4)         (1.1) 
Movements in indemnities provided on business 
 disposals                                                       -         (7.8)        (13.7) 
Movement in the fair value of assets transferred 
 to held for sale                                                -           4.3           3.4 
Other exceptional operating items                                -         (3.9)        (11.4) 
----------------------------------------------------  ------------  ------------  ------------ 
Exceptional operating items arising on discontinued 
 operations                                                      -         (4.2)        (14.2) 
----------------------------------------------------  ------------  ------------  ------------ 
 

3. Segmental information

The Group's operating segments reflecting the information reported to the Board in 2017 under IFRS 8 Operating segments are as set out below.

 
Reportable segments     Operating segments 
----------------------  -------------------------------------------------------------- 
UK Central Government   Services for sectors including Defence, Justice & Immigration 
                         and Transport delivered to the UK Government and devolved 
                         authorities; 
----------------------  -------------------------------------------------------------- 
UK & Europe Local       Services for sectors including Health and Citizen Services 
 & Regional Government   delivered to UK and European public sector customers; 
----------------------  -------------------------------------------------------------- 
AsPac                   Services for sectors including Defence, Justice & Immigration, 
                         Transport, Health and Citizen Services in the Asia Pacific 
                         region including Australia, New Zealand and Hong Kong; 
----------------------  -------------------------------------------------------------- 
Middle East             Services for sectors including Defence, Transport, Health 
                         and Citizen Services in the Middle East region; 
----------------------  -------------------------------------------------------------- 
Americas                Services for sectors including Defence, Transport and 
                         Citizen Services delivered to US federal and civilian 
                         agencies, selected state and municipal governments and 
                         the Canadian Government; and 
----------------------  -------------------------------------------------------------- 
Corporate               Central and head office costs. 
----------------------  -------------------------------------------------------------- 
 

Each operating segment is focused on a narrow group of customers in a specific geographic region and is run by a local management team which report directly to the CODM on a regular basis. As a result of this focus, the sectors in each region have similar economic characteristics and are aggregated at the operating segment level in these financial statements. The accounting policies of the reportable segments are the same as the Group's accounting policies.

Geographic information

 
                    Six months                 Six months 
                      ended 30                   ended 30 
                          June                       June 
                                                                          Year ended 
                                                                         31 December 
                          2017                       2016                       2016 
                   (unaudited)                (unaudited)                  (audited) 
                  ------------  -----------  ------------  -----------  ------------  ----------- 
                                Non current                Non current                Non current 
                       Revenue      assets*       Revenue      assets*       Revenue      assets* 
                          GBPm         GBPm          GBPm         GBPm          GBPm         GBPm 
----------------  ------------  -----------  ------------  -----------  ------------  ----------- 
United Kingdom           583.1        308.9         665.5        448.5       1,244.9        444.7 
United States            335.3        286.4         300.3        283.2         632.9        309.1 
Australia                296.0        155.2         271.6        139.2         593.1        146.0 
Middle East              173.9         20.0         153.8         21.0         324.8         19.7 
Other countries          119.9         21.5         102.0         18.5         215.3         20.4 
----------------  ------------  -----------  ------------  -----------  ------------  ----------- 
                       1,508.2        792.0       1,493.2        910.4       3,011.0        939.9 
----------------  ------------  -----------  ------------  -----------  ------------  ----------- 
 

* Non current assets exclude financial instruments, deferred tax assets and loans to joint ventures and associates.

Revenues from external customers are attributed to individual countries on the basis of the location of the customer.

Information about major customers

The Group has three major governmental customers which each represent more than 10% of Group revenues. The customers' revenues were GBP574.7m for the UK Government across the UK Central Government and UK & Europe Local & Regional Government segments, GBP304.6m for the US Government within the Americas segment, and GBP294.7m for the Australian Government within the AsPac and Middle East segments.

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

 
                                                              Middle 
Six months ended 30 June 2017               CG    LRG  AsPac    East  Americas  Corporate    Total 
 (unaudited)                              GBPm   GBPm   GBPm    GBPm      GBPm       GBPm     GBPm 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Revenue                                  323.3  334.8  307.4   174.2     368.5          -  1,508.2 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Result 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Trading profit / (loss) from 
 continuing operations*                   20.9  (4.9)   10.5     6.8      22.2     (20.2)     35.3 
Amortisation and impairment 
 of intangibles arising on acquisition       -      -  (0.7)       -     (1.5)          -    (2.2) 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Operating profit / (loss) before 
 exceptional items                        20.9  (4.9)    9.8     6.8      20.7     (20.2)     33.1 
Exceptional profit / (loss) 
 on disposal of subsidiaries 
 and operations                            0.1      -      -       -         -          -      0.1 
Other exceptional operating 
 items**                                     -    1.0  (0.7)       -         -     (11.8)   (11.5) 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Operating profit / (loss)                 21.0  (3.9)    9.1     6.8      20.7     (32.0)     21.7 
Investment revenue                                                                             3.6 
Finance costs                                                                               (11.2) 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Loss before tax                                                                               14.1 
Tax charge                                                                                  (32.3) 
Tax on exceptional items                                                                         - 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Loss for the period from continuing 
 operations                                                                                 (18.2) 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
 

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

** Exceptional items incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider business.

 
Supplementary information 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Share of profits in joint ventures 
 and associates, net of interest 
 and tax                                13.6      0.4      0.6       -        -        -       14.6 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Depreciation of plant, property 
 and equipment                         (1.2)    (6.6)    (2.6)   (0.4)    (1.6)    (0.7)     (13.1) 
Impairment of plant, property              -        -        -       -        -        -          - 
 and equipment 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Total depreciation and impairment 
 of plant, property and equipment      (1.2)    (6.6)    (2.6)   (0.4)    (1.6)    (0.7)     (13.1) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Amortisation of intangible assets 
 arising on acquisition                    -        -    (0.7)       -    (1.5)        -      (2.2) 
Amortisation of other intangible 
 assets                                (0.1)    (0.5)    (2.3)   (0.1)    (0.8)    (7.4)     (11.2) 
Impairment and write down of 
 other intangible assets                   -        -        -       -        -    (2.8)      (2.8) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Total amortisation and impairment 
 of intangible assets                  (0.1)    (0.5)    (3.0)   (0.1)    (2.3)   (10.2)     (16.2) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Segment assets 
Interests in joint ventures 
 and associates                         13.5        -      2.1     0.4        -        -       16.0 
Other segment assets***                162.1    313.2    249.1   113.8    417.2    100.0    1,355.4 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Total segment assets                   175.6    313.2    251.2   114.2    417.2    100.0    1,371.4 
Unallocated assets                                                                            202.1 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Consolidated total assets                                                                   1,573.5 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Segment liabilities 
Segment liabilities***               (239.4)  (162.0)  (184.6)  (84.2)  (139.2)  (132.2)    (941.6) 
Unallocated liabilities                                                                     (359.4) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Consolidated total liabilities                                                            (1,301.0) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
 

*** The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group, including defined benefit pension schemes and corporate intangible assets.

 
                                                              Middle 
Six months ended 30 June 2016               CG    LRG  AsPac    East  Americas  Corporate    Total 
 (restated*) (unaudited)                  GBPm   GBPm   GBPm    GBPm      GBPm       GBPm     GBPm 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Revenue                                  349.0  376.7  284.7   153.9     328.9          -  1,493.2 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Result 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Trading profit / (loss) from 
 continuing operations* **                52.0    5.1    7.9    11.5      16.8     (18.9)     74.4 
Amortisation and impairment 
 of intangibles arising on acquisition       -      -  (0.6)       -     (1.3)          -    (1.9) 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Operating profit / (loss) before 
 exceptional items*                       52.0    5.1    7.3    11.5      15.5     (18.9)     72.5 
Exceptional profit / (loss) 
 on disposal of subsidiaries 
 and operations                              -    0.6    0.4       -         -      (1.9)    (0.9) 
Other exceptional operating 
 items***                                    -  (0.1)      -   (0.1)         -      (6.6)    (6.8) 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Operating profit / (loss)*                52.0    5.6    7.7    11.4      15.5     (27.4)     64.8 
Investment revenue                                                                             4.7 
Finance costs*                                                                              (11.4) 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Profit before tax                                                                             58.1 
Tax charge                                                                                   (3.7) 
Tax on exceptional items                                                                     (0.1) 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
Profit for the period from continuing 
 operations                                                                                   54.3 
---------------------------------------  -----  -----  -----  ------  --------  ---------  ------- 
 

* Administrative expenses included within Trading Profit and operating profit has been restated following the change in accounting policy regarding foreign exchange movements on investment and financing arrangements which has also resulted in a restatement of finance costs. See note 1.

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

*** Exceptional items incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider business.

 
Supplementary information 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Share of profits in joint ventures 
 and associates, net of interest 
 and tax                                17.0      0.3      0.4       -        -        -       17.7 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Depreciation of plant, property 
 and equipment                         (1.0)    (6.5)    (1.9)   (0.4)    (1.5)    (0.6)     (11.9) 
Impairment of plant, property 
 and equipment                         (0.1)        -    (0.2)       -        -        -      (0.3) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Total depreciation and impairment 
 of plant, property and equipment      (1.1)    (6.5)    (2.1)   (0.4)    (1.5)    (0.6)     (12.2) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Amortisation of intangible assets 
 arising on acquisition                    -        -    (0.6)       -    (1.3)        -      (1.9) 
Amortisation of other intangible 
 assets                                (0.1)    (0.2)    (0.8)   (0.3)    (0.7)    (7.6)      (9.7) 
Impairment and write down of               -        -        -       -        -        -          - 
 other intangible assets 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Total amortisation and impairment 
 of intangible assets                  (0.1)    (0.2)    (1.4)   (0.3)    (2.0)    (7.6)     (11.6) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Segment assets 
Interests in joint ventures 
 and associates                          2.7      6.7      2.8     0.4        -        -       12.6 
Other segment assets****               200.6    306.6    247.7   105.0    406.3    220.0    1,486.2 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Total segment assets                   203.3    313.3    250.5   105.4    406.3    220.0    1,498.8 
Unallocated assets, including 
 assets held for sale                                                                         269.9 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Consolidated total assets                                                                   1,768.7 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Segment liabilities 
Segment liabilities****              (315.4)  (165.7)  (199.0)  (81.3)  (109.6)  (138.3)  (1,009.3) 
Unallocated liabilities, including 
 liabilities held for sale                                                                  (359.0) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Consolidated total liabilities                                                            (1,368.3) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
 

**** The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group, including defined benefit pension schemes and corporate intangible assets.

 
                                                                Middle 
Year ended 31 December 2016                  CG     LRG  AsPac    East  Americas  Corporate    Total 
 (audited)                                 GBPm    GBPm   GBPm    GBPm      GBPm       GBPm     GBPm 
---------------------------------------  ------  ------  -----  ------  --------  ---------  ------- 
Revenue                                   678.6   696.5  619.7   324.8     691.4          -  3,011.0 
---------------------------------------  ------  ------  -----  ------  --------  ---------  ------- 
Result 
---------------------------------------  ------  ------  -----  ------  --------  ---------  ------- 
Trading profit / (loss) from 
 continuing operations*                    94.9  (10.4)   34.2    18.8       6.4     (40.3)    103.6 
Amortisation and impairment 
 of intangibles arising on acquisition    (0.3)       -  (2.0)       -     (2.8)          -    (5.1) 
---------------------------------------  ------  ------  -----  ------  --------  ---------  ------- 
Operating profit / (loss) before 
 exceptional items                         94.6  (10.4)   32.2    18.8       3.6     (40.3)     98.5 
Exceptional profit / (loss) 
 on disposal of subsidiaries 
 and operations                           (0.1)     4.5    0.4       -         -      (1.9)      2.9 
Other exceptional operating 
 items**                                 (11.1)  (14.8)  (0.9)       -         -     (32.4)   (59.2) 
---------------------------------------  ------  ------  -----  ------  --------  ---------  ------- 
Operating profit / (loss)                  83.4  (20.7)   31.7    18.8       3.6     (74.6)     42.2 
Investment revenue                                                                               9.3 
Finance costs                                                                                 (21.9) 
---------------------------------------  ------  ------  -----  ------  --------  ---------  ------- 
Profit before tax                                                                               29.6 
Tax charge                                                                                    (15.8) 
Tax on exceptional items                                                                         3.1 
---------------------------------------  ------  ------  -----  ------  --------  ---------  ------- 
Profit for the year from continuing 
 operations                                                                                     16.9 
---------------------------------------  ------  ------  -----  ------  --------  ---------  ------- 
 

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

** Exceptional items incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider business.

 
Supplementary information 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Share of profits in joint ventures 
 and associates, net of interest 
 and tax                                31.3        -      2.0       -        -      0.1       33.4 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Depreciation of plant, property 
 and equipment                         (2.1)   (12.9)    (4.5)   (0.9)    (3.1)    (1.3)     (24.8) 
Impairment of plant, property 
 and equipment                         (0.3)        -    (0.4)       -        -        -      (0.7) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Total depreciation and impairment 
 of plant, property and equipment      (2.4)   (12.9)    (4.9)   (0.9)    (3.1)    (1.3)     (25.5) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Amortisation of intangible assets 
 arising on acquisition                (0.3)        -    (1.3)       -    (2.8)        -      (4.4) 
Impairment and write down of 
 intangible assets arising on 
 acquisition                               -        -    (0.7)       -        -        -      (0.7) 
Amortisation of other intangible 
 assets                                (0.1)    (0.5)    (3.3)   (0.7)    (1.5)   (15.7)     (21.8) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Total amortisation and impairment 
 of intangible assets                  (0.4)    (0.5)    (5.3)   (0.7)    (4.3)   (15.7)     (26.9) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Segment assets 
Interests in joint ventures 
 and associates                         12.3        -      1.7     0.4        -        -       14.4 
Other segment assets***                168.7    298.3    252.1   108.7    428.8    228.6    1,485.2 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Total segment assets                   181.0    298.3    253.8   109.1    428.8    228.6    1,499.6 
Unallocated assets                                                                            265.0 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Consolidated total assets                                                                   1,764.6 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Segment liabilities 
Segment liabilities***               (279.1)  (163.8)  (182.8)  (79.3)  (140.7)  (139.7)    (985.4) 
Unallocated liabilities                                                                     (380.4) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
Consolidated total liabilities                                                            (1,365.8) 
-----------------------------------  -------  -------  -------  ------  -------  -------  --------- 
 

*** The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group, including defined benefit pension schemes and corporate intangible assets.

4. Joint ventures and associates

AWE Management Limited (AWEML), Merseyrail Services Holding Company Limited (MSHCL) and Northern Rail Holdings Limited (NRHL) were the only equity accounted entities which were material to the Group during the six months ended 30 June 2017 and 30 June 2016. Dividends of GBP9.9m (2016: GBP12.2m), GBP3.3m (2016: GBP3.3m) and GBP0.5m (2016: GBP4.0m) respectively were received from these companies in the period. The NRHL franchise ended on 31 March 2016.

Summarised financial information of the material entities and an aggregation of the other equity accounted entities in which the Group has an interest is as follows:

30 June 2017 (unaudited)

 
                                                                                      Group portion 
                                                                    Group portion          of other 
                                    AWEML      MSHCL       NRHL       of material     joint venture 
                                 (100% of   (100% of   (100% of    joint ventures      arrangements 
Summarised financial             results)   results)   results)   and associates*   and associates*    Total 
 information                         GBPm       GBPm       GBPm              GBPm              GBPm     GBPm 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Revenue                             480.2       78.2        0.1             156.8              23.4    180.2 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Operating profit                     49.5        8.2        1.1              16.7               1.1     17.8 
Net investment revenue                0.1          -          -                 -                 -        - 
Income tax charge                   (9.8)      (1.6)          -             (3.2)                 -    (3.2) 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Profit from continuing 
 operations                          39.8        6.6        1.1              13.5               1.1     14.6 
Other comprehensive income              -        1.8          -               0.9             (0.1)      0.8 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Total comprehensive income           39.8        8.4        1.1              14.4               1.0     15.4 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Non-current assets                1,092.5       11.8          -             273.5               3.3    276.8 
Current assets                      155.0       39.4       11.3              62.8              17.4     80.2 
Current liabilities               (139.9)     (35.6)      (7.7)            (55.4)            (14.8)   (70.2) 
Non-current liabilities         (1,090.9)      (1.2)          -           (267.8)             (3.0)  (270.8) 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Net assets                           16.7       14.4        3.6              13.1               2.9     16.0 
Proportion of Group ownership       24.5%      50.0%      50.0%                 -                 -        - 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Carrying amount of investment         4.1        7.2        1.8              13.1               2.9     16.0 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
 
 
                                                                                      Group portion 
                                                                    Group portion          of other 
                                    AWEML      MSHCL       NRHL       of material     joint venture 
                                 (100% of   (100% of   (100% of    joint ventures      arrangements 
                                 results)   results)   results)   and associates*   and associates*  Total 
                                     GBPm       GBPm       GBPm              GBPm              GBPm   GBPm 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ----- 
Cash and cash equivalents            85.6       31.9       11.3              42.6               4.9   47.5 
Current financial liabilities 
 excluding trade and other 
 payables and provisions            (7.8)      (1.6)        0.2             (2.6)             (0.9)  (3.5) 
Non current financial 
 liabilities excluding 
 trade and other payables 
 and provisions                         -      (0.5)          -             (0.3)             (2.9)  (3.2) 
Depreciation and amortisation           -      (1.1)          -             (0.6)             (0.8)  (1.4) 
Interest income                       0.1          -          -                 -                 -      - 
Interest expense                        -          -          -                 -                 -      - 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ----- 
 

* Total results of the joint ventures and associates multiplied by the respective proportion of Group ownership.

30 June 2016 (unaudited)

 
                                                                                            Group portion 
                                                                          Group portion          of other 
                                          AWEML      MSHCL       NRHL       of material     joint venture 
                                          (100%   (100% of   (100% of    joint ventures      arrangements 
                                    of results)   results)   results)   and associates*   and associates*    Total 
Summarised financial information           GBPm       GBPm       GBPm              GBPm              GBPm     GBPm 
---------------------------------  ------------  ---------  ---------  ----------------  ----------------  ------- 
Revenue                                   508.9       75.6      131.5             273.0              20.6    293.6 
---------------------------------  ------------  ---------  ---------  ----------------  ----------------  ------- 
Operating profit                           37.8        7.4        8.4              20.5               0.9     21.4 
Net investment revenue 
 / (finance costs)                          0.2      (0.6)          -             (0.2)             (0.1)    (0.3) 
Income tax charge                         (3.3)      (1.7)      (2.5)             (3.2)             (0.2)    (3.4) 
---------------------------------  ------------  ---------  ---------  ----------------  ----------------  ------- 
Profit from continuing 
 operations                                34.7        5.1        5.9              17.1               0.6     17.7 
Other comprehensive income                    -          -        1.2               0.6               0.2      0.8 
---------------------------------  ------------  ---------  ---------  ----------------  ----------------  ------- 
Total comprehensive income                 34.7        5.1        7.1              17.7               0.8     18.5 
---------------------------------  ------------  ---------  ---------  ----------------  ----------------  ------- 
Non-current assets                        464.5       13.3          -             161.3              12.0    173.3 
Current assets                            168.3       31.1       33.9              88.5              17.5    106.0 
Current liabilities                     (154.0)     (33.1)     (22.5)            (79.1)            (13.9)   (93.0) 
Non-current liabilities                 (462.0)     (33.8)          -           (170.7)             (3.0)  (173.7) 
---------------------------------  ------------  ---------  ---------  ----------------  ----------------  ------- 
Net assets / (liabilities)                 16.8     (22.5)       11.4                 -              12.6     12.6 
Proportion of Group ownership             33.3%      50.0%      50.0%                 -                 -        - 
---------------------------------  ------------  ---------  ---------  ----------------  ----------------  ------- 
Carrying amount of investment               5.6     (11.3)        5.7                 -              12.6     12.6 
---------------------------------  ------------  ---------  ---------  ----------------  ----------------  ------- 
 
 
                                                                                      Group portion 
                                                                    Group portion          of other 
                                    AWEML      MSHCL       NRHL       of material     joint venture 
                                 (100% of   (100% of   (100% of    joint ventures      arrangements 
                                 results)   results)   results)   and associates*   and associates*  Total 
                                     GBPm       GBPm       GBPm              GBPm              GBPm   GBPm 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ----- 
Cash and cash equivalents             0.2        1.8       27.2              14.6              28.5   43.1 
Current financial liabilities 
 excluding trade and other 
 payables and provisions                -      (0.2)      (1.2)             (0.7)             (3.4)  (4.1) 
Non current financial 
 liabilities excluding 
 trade and other payables 
 and provisions                         -      (0.1)          -                 -             (3.1)  (3.1) 
Depreciation and amortisation           -      (1.0)      (1.7)             (1.4)             (0.6)  (2.0) 
Interest income                       0.2      (0.6)          -             (0.2)               0.4    0.2 
Interest expense                        -          -          -                 -             (0.5)  (0.5) 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ----- 
 

* Total results of the joint ventures and associates multiplied by the respective proportion of Group ownership.

31 December 2016 (audited)

 
                                                                                      Group portion 
                                                                    Group portion          of other 
                                    AWEML      MSHCL       NRHL       of material     joint venture 
                                 (100% of   (100% of   (100% of    joint ventures      arrangements 
Summarised financial             results)   results)   results)   and associates*   and associates*    Total 
 information                         GBPm       GBPm       GBPm              GBPm              GBPm     GBPm 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Revenue                             968.1      150.3      132.7             437.5              43.3    480.8 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Operating profit                     72.9       18.9       13.2              37.4               3.3     40.7 
Net investment revenue 
 / (finance costs)                    0.2      (1.3)        0.1             (0.5)             (0.1)    (0.6) 
Income tax (charge) / 
 credit                            (11.3)      (3.7)      (3.4)             (6.8)               0.1    (6.7) 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Profit from continuing 
 operations                          61.8       13.9        9.9              30.1               3.3     33.4 
Other comprehensive income              -       34.0        0.8              17.4             (1.6)     15.8 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Total comprehensive income           61.8       47.9       10.7              47.5               1.7     49.2 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Non-current assets                1,097.0       12.5          -             275.1               3.2    278.3 
Current assets                      149.3       32.8       14.2              60.1              16.0     76.1 
Current liabilities               (133.9)     (31.9)     (10.7)            (54.2)            (14.0)   (68.2) 
Non-current liabilities         (1,095.2)      (0.9)          -           (268.7)             (3.1)  (271.8) 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Net assets                           17.2       12.5        3.5              12.3               2.1     14.4 
                                  33.3% / 
Proportion of group ownership       24.5%      50.0%      50.0%                 -                 -        - 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
Carrying amount of investment         4.2        6.3        1.8              12.3               2.1     14.4 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ------- 
 
 
                                                                                      Group portion 
                                                                    Group portion          of other 
                                    AWEML      MSHCL       NRHL       of material     joint venture 
                                 (100% of   (100% of   (100% of    joint ventures      arrangements 
                                 results)   results)   results)   and associates*   and associates*  Total 
                                     GBPm       GBPm       GBPm              GBPm              GBPm   GBPm 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ----- 
Cash and cash equivalents            72.4       21.1       14.5              35.4               4.7   40.1 
Current financial liabilities 
 excluding trade and other 
 payables and provisions            (7.0)      (2.3)      (0.5)             (3.1)             (0.9)  (4.0) 
Non current financial 
 liabilities excluding 
 trade and other payables 
 and provisions                         -      (0.6)          -             (0.3)             (3.0)  (3.3) 
Depreciation and amortisation           -      (2.3)      (1.7)             (2.1)             (1.0)  (3.1) 
Interest income                       0.2          -        0.1               0.2                 -    0.2 
Interest expense                        -      (1.3)          -             (0.6)             (0.1)  (0.7) 
------------------------------  ---------  ---------  ---------  ----------------  ----------------  ----- 
 

* Total results of the joint ventures and associates multiplied by the respective proportion of Group ownership.

5. Acquisitions

There were no acquisitions in the six months ended 30 June 2017.

6. Exceptional items

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

Exceptional profit / (loss) on disposal of subsidiaries and operations

There were no material disposals of continuing operations in the six months ended 30 June 2017 or the six months ended 30 June 2016.

Other exceptional operating items arising on continuing operations

 
                                                             Six months          Six months 
                                                                  ended               ended        Year ended 
                                                                30 June             30 June       31 December 
                                                       2017 (unaudited)    2016 (unaudited)    2016 (audited) 
                                                                   GBPm                GBPm              GBPm 
---------------------------------------------------  ------------------  ------------------  ---------------- 
 Impairment of goodwill                                               -                   -            (17.8) 
 Restructuring costs                                             (13.3)               (6.2)            (17.2) 
 Costs associated with UK Government review                       (0.4)               (0.9)             (0.1) 
 Aborted transaction costs                                            -                 0.3             (0.1) 
 Release of UK frontline clinical health contract 
  provisions                                                          -                   -               0.6 
 Settlement of defined benefit pension obligations                    -                   -            (10.7) 
 Impairment of interest in joint venture and 
  related loan balances                                             2.2                   -            (13.9) 
---------------------------------------------------  ------------------  ------------------  ---------------- 
 Other exceptional operating items                               (11.5)               (6.8)            (59.2) 
---------------------------------------------------  ------------------  ------------------  ---------------- 
 

In the six months ended 30 June 2017, a charge of GBP13.3m (2016: GBP6.2m) arose in relation to the restructuring programme resulting from the Strategy Review, as discussed in the Chief Executive's Review in the Group's 2016 Annual Report and Accounts. This included redundancy charges, asset impairments and other incremental costs. Due to the nature and scale of the impact of the transformation stage of our Strategy Review, the incremental costs associated with this programme were considered to be exceptional in the prior year and have been treated consistently in 2017.

There were exceptional costs totalling GBP0.4m (2016: GBP0.9m) associated with the UK Government reviews and the programme of Corporate Renewal. These costs were treated as exceptional when the matter first arose and consistent treatment is applied in the 2017.

In the second half of 2016 the equity investment of a joint venture and the related loan balances with this business were impaired. In the six months ended 30 June 2017 a payment of GBP2.2m was received against the impaired loan.

Exceptional tax items in the six months ended 30 June 2017 resulted in a tax charge of GBP15.9m (2016: charge of GBP0.1m on continuing operations), including a GBP0.2m credit on exceptional items within operating profit and a GBP16.1m charge in respect of other exceptional tax items. The other exceptional tax item relates to the tax impact of the pension buy-in disclosed in note 15, which led to a GBP95.0m movement in the valuation of the Group's defined benefit pension schemes and consequently to a deferred tax charge to the income statement of GBP16.1m. Further detail of the reason for the impact of movements in the valuation of defined benefit pension schemes is discussed in the tax section of this Finance Review.

7. Investment revenue

 
                                                                  Six months 
                                                    Six months 
                                                      ended 30      ended 30 
                                                     June 2017     June 2016 
                                                                                   Year ended 
                                                                                  31 December 
                                                   (unaudited)   (unaudited)   2016 (audited) 
                                                          GBPm          GBPm             GBPm 
------------------------------------------------  ------------  ------------  --------------- 
Interest receivable on other loans and deposits            1.4           1.9              3.6 
Net interest receivable on retirement benefit 
 obligations                                               1.6           2.3              4.7 
Movement in discount on other debtors                      0.6           0.5              1.0 
------------------------------------------------  ------------  ------------  --------------- 
                                                           3.6           4.7              9.3 
------------------------------------------------  ------------  ------------  --------------- 
 

8. Finance costs

 
                                                                 Six months 
                                                  Six months 
                                                    ended 30       ended 30 
                                                   June 2017      June 2016 
                                                                                  Year ended 
                                                                (restated*)      31 December 
                                                 (unaudited)    (unaudited)   2016 (audited) 
                                                        GBPm           GBPm             GBPm 
----------------------------------------------  ------------  -------------  --------------- 
Interest payable on obligations under finance 
 leases                                                  0.8            1.0              1.6 
Interest payable on other loans                          7.2            7.9             15.6 
Facility fees and other charges                          1.4            2.0              3.5 
Movement in discount on provisions                       1.7            0.9              2.4 
----------------------------------------------  ------------  -------------  --------------- 
                                                        11.1           11.8             23.1 
Foreign exchange on financing activities*                0.1          (0.4)            (1.2) 
                                                        11.2           11.4             21.9 
----------------------------------------------  ------------  -------------  --------------- 
 

* Finance costs have been restated as a result of the change in treatment of foreign exchange items on investing and financing items as explained in note 1.

9. Tax

In the six months ended 30 June 2017, a total tax charge of GBP32.3m (2016: GBP3.9m) was recognised, being GBP32.3m (2016: GBP3.8m) on continuing operations profit of GBP14.1m (2016: GBP58.1m) and GBPnil (2016: GBP0.1m) on discontinued operations losses of GBPnil (2016: GBP7.8m).

In respect of the results of our continuing operations, the profit before interest, exceptional items and tax of GBP33.1m (2016: GBP72.5m) less pre-exceptional finance costs of GBP7.6m (2016 : GBP7.1m) is GBP25.5m (2016: GBP65.8m), which incurs a tax charge of GBP16.4m (2016: GBP3.7m), giving a tax rate of 64.3% (2016: 5.6%).

The principal reasons why the tax rate on profit before exceptional items and tax from continuing operations at 64.3% is higher than the UK standard corporation tax rate of 19.25% is due to the pension movement commented on below. In addition, higher rates of tax on profits arise on our international operations, and there is an absence of a deferred tax credit for losses incurred in the UK, because a deferred tax asset cannot be recognised against these losses until we can confidently forecast these losses being utilised against future profits (which includes the result of UK divisions and the majority of corporate costs). These factors are partially offset by the impact of our joint ventures whose post-tax results are included in our pre-tax profit.

Our tax charge continues to be materially impacted by our accounting for UK deferred taxes. To the extent that future UK tax losses are incurred and are not recognised, our effective tax rate will be higher than prevailing standard corporation tax rates as we will not be able to recognise the associated tax benefits arising. When our UK business returns to sustainable profitability our existing UK tax losses will be recognised or utilised, and the effective rate will be reduced.

Movements in the valuation of the Group's defined benefit pension schemes and the associated deferred tax impact are reported in the Consolidated Statement of Comprehensive Income (SOCI) and do not flow through the income statement, and therefore do not impact profit before tax or the tax charge. However, the net amount of deferred tax recognised in the balance sheet relates to both the pension accounting and other timing differences, such as recoverable losses. As the net deferred tax balance sheet position is capped at the level supported by future profit forecasts, the decrease in the deferred tax liability associated with the pension changes (with the benefit reported in the SOCI) leads to a corresponding decrease in the deferred tax asset to match the future profit forecasts. Such a reduction in the deferred tax asset therefore leads to a charge to tax in the income statement. For the six months ended 30 June 2017, the total impact of such movements on the statutory tax charge was GBP22.4m, GBP16.1m of which arose as a result of the pension buy-in disclosed in note 15. As this GBP16.1m adjustment is the consequence of a material one off transaction in the period, it is therefore considered to be exceptional.

As at 30 June 2017 there is a net deferred tax asset of GBP20.0m, this consists of a deferred tax asset of GBP54.1m and deferred tax liability of GBP34.1m.

A GBP10.0m UK deferred tax asset has been recognised at 30 June 2017 (2016: GBP10.5m) on the basis of forecast utilisation against future taxable profits. An expected change in the UK loss utilisation laws in the second half of 2017 is estimated to reduce the value of this deferred tax asset by GBP3.7m during the second half of the year.

10. Earnings per share

Basic and diluted EPS has been calculated in accordance with IAS33 Earnings per share.

The calculation of the basic and diluted EPS is based on the following data:

 
                                                  Six months    Six months 
                                                    ended 30      ended 30       Year ended 
                                                   June 2017     June 2016      31 December 
                                                 (unaudited)   (unaudited)   2016 (audited) 
Number of shares                                    millions      millions         millions 
----------------------------------------------  ------------  ------------  --------------- 
Weighted average number of ordinary shares 
 for the purpose of basic EPS                        1,091.1       1,088.8          1,088.3 
Effect of dilutive potential ordinary shares: 
 Share options                                             -          40.2             37.3 
----------------------------------------------  ------------  ------------  --------------- 
Weighted average number of ordinary shares 
 for the purpose of diluted EPS                      1,091.1       1,129.0          1,125.6 
----------------------------------------------  ------------  ------------  --------------- 
 

At 30 June 2017, options over 214,632 (30 June 2016: 310,493) shares were excluded from the weighted average number of shares used for calculating diluted earnings per share because their exercise price was above the average share price for the period and they were, therefore, anti-dilutive.

The impact of dilutive shares has only been applied where a profit has been made.

Earnings per share continuing and discontinued

 
                                         Per share                         Per share 
                         Earnings           amount         Earnings           amount                         Per share 
                          30 June          30 June          30 June          30 June         Earnings           amount 
                             2017             2017             2016             2016      31 December      31 December 
                      (unaudited)      (unaudited)      (unaudited)      (unaudited)   2016 (audited)   2016 (audited) 
Basic EPS                    GBPm            pence             GBPm            pence             GBPm            pence 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
Earnings for the 
 purpose of 
 basic EPS                 (18.3)           (1.68)             46.5             4.27            (1.2)           (0.11) 
Effect of                       -                -                -           (0.15)                -                - 
dilutive 
potential 
ordinary shares 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
Diluted EPS                (18.3)           (1.68)             46.5             4.12            (1.2)           (0.11) 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
 
Basic EPS 
excluding 
exceptional 
items 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
Earnings for the 
 purpose of 
 basic EPS                 (18.3)           (1.68)             46.5             4.27            (1.2)           (0.11) 
Add back 
 exceptional 
 items                       11.4             1.04             12.3             1.13             70.9             6.51 
Add back tax on 
 exceptional 
 items                       15.9             1.46                -                -            (3.1)           (0.28) 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
Earnings 
 excluding 
 exceptional 
 operating items 
 for the purpose 
 of basic EPS                 9.0             0.82             58.8             5.40             66.6             6.12 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
 

Earnings per share continuing

 
                                         Per share                         Per share 
                         Earnings           amount         Earnings           amount                         Per share 
                          30 June          30 June          30 June          30 June         Earnings           amount 
                             2017             2017             2016             2016      31 December      31 December 
                      (unaudited)      (unaudited)      (unaudited)      (unaudited)   2016 (audited)   2016 (audited) 
Basic EPS                    GBPm            pence             GBPm            pence             GBPm            pence 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
Earnings for the 
 purpose of 
 basic EPS                 (18.3)           (1.68)             54.4             5.00             16.9             1.55 
Effect of 
 dilutive 
 potential 
 ordinary shares                -                -                -           (0.18)                -           (0.05) 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
Diluted EPS                (18.3)           (1.68)             54.4             4.82             16.9             1.50 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
 
Basic EPS 
excluding 
exceptional 
items 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
Earnings for the 
 purpose of 
 basic EPS                 (18.3)           (1.68)             54.4             5.00             16.9             1.55 
Add back 
 exceptional 
 items                       11.4             1.04              7.7             0.71             56.3             5.17 
Add back tax on 
 exceptional 
 items                       15.9             1.46              0.1                -            (3.1)           (0.28) 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
Earnings 
 excluding 
 exceptional 
 operating items 
 for the purpose 
 of basic EPS                 9.0             0.82             62.2             5.71             70.1             6.44 
----------------  ---------------  ---------------  ---------------  ---------------  ---------------  --------------- 
 

Earnings per share discontinued

 
                                            Per share                            Per share                   Per share 
                           Earnings            amount          Earnings             amount      Earnings        amount 
                            30 June           30 June           30 June            30 June   31 December   31 December 
                   2017 (unaudited)  2017 (unaudited)  2016 (unaudited)   2016 (unaudited)          2016          2016 
Basic EPS                      GBPm             pence              GBPm              pence          GBPm         pence 
-----------------  ----------------  ----------------  ----------------  -----------------  ------------  ------------ 
Earnings for the 
 purpose of 
 basic EPS                        -                 -             (7.9)             (0.73)        (18.1)        (1.66) 
Effect of                         -                 -                 -               0.03             -             - 
dilutive 
potential 
ordinary shares 
-----------------  ----------------  ----------------  ----------------  -----------------  ------------  ------------ 
Diluted EPS                       -                 -             (7.9)             (0.70)        (18.1)        (1.66) 
-----------------  ----------------  ----------------  ----------------  -----------------  ------------  ------------ 
 
Basic EPS 
excluding 
exceptional 
items 
-----------------  ----------------  ----------------  ----------------  -----------------  ------------  ------------ 
Earnings for the 
 purpose of 
 basic EPS                        -                 -             (7.9)             (0.73)        (18.1)        (1.66) 
Add back 
 exceptional 
 items                            -                 -               4.6               0.43          14.6          1.34 
Add back tax on                   -                 -                 -                  -             -             - 
exceptional 
items 
-----------------  ----------------  ----------------  ----------------  -----------------  ------------  ------------ 
Earnings 
 excluding 
 exceptional 
 operating items 
 for the purpose 
 of basic EPS                     -                 -             (3.3)             (0.30)         (3.5)        (0.32) 
-----------------  ----------------  ----------------  ----------------  -----------------  ------------  ------------ 
 

11. Goodwill

The value of each CGU is based on value in use calculations derived from forecast cash flows based on past experience, adjusted to reflect market trends, economic conditions and key risks. These forecasts include an estimate of new business wins and an assumption that the final year forecast continues on into perpetuity at a CGU specific growth rate.

Goodwill is required to be tested for impairment at least once every financial year, irrespective of whether there is any indication of impairment. The annual impairment review typically takes place in the final quarter of the year. However, if there are indicators of impairment an earlier review is also required.

The political environment in the USA, UK and the Middle East has become more unpredictable in recent months, which in turn makes it harder to forecast outcomes for our business. However, there have been no indicators of impairment since the full impairment test undertaken for 2016 year end.

In the USA, there is no clear determination of the future of the Affordable Care Act (ACA), and the shape of the budget for Federal Government spending remains unsettled. The Group's position is that structural changes to the ACA will be implemented over a matter of years rather than months, and it is expected that the customer will launch in the near future a tender to provide services beyond the expiry of the current contract in June 2018.

12. Analysis of Net Debt

 
                            At 1          Reclassified 
                         January    Cash       as held                               Exchange     Non cash       At 30 
                            2017    flow      for sale  Acquisitions  Disposals   differences    movements   June 2017 
                            GBPm    GBPm          GBPm          GBPm       GBPm          GBPm         GBPm        GBPm 
----------------------  --------  ------  ------------  ------------  ---------  ------------  -----------  ---------- 
Cash and cash 
 equivalents               177.8  (58.7)             -             -          -         (1.4)            -       117.7 
Loan receivables            22.9       -             -             -          -             -          0.6        23.5 
Loans payable            (299.9)     3.8             -             -          -          14.8        (0.4)     (281.7) 
Obligations under 
 finance leases           (28.2)     7.6             -             -          -           0.1        (1.0)      (21.5) 
Derivatives relating 
 to Net Debt                18.1       -             -             -          -         (5.0)            -        13.1 
----------------------  --------  ------  ------------  ------------  ---------  ------------  -----------  ---------- 
                         (109.3)  (47.3)             -             -          -           8.5        (0.8)     (148.9) 
----------------------  --------  ------  ------------  ------------  ---------  ------------  -----------  ---------- 
 
 
                                                                                                                 At 30 
                                  Cash                                                                       June 2016 
                         At 1           Reclassified 
                      January                as held                               Exchange     Non cash 
                         2016     flow      for sale  Acquisitions  Disposals   differences    movements   (restated*) 
                         GBPm     GBPm          GBPm          GBPm       GBPm          GBPm         GBPm          GBPm 
-------------------  --------  -------  ------------  ------------  ---------  ------------  -----------  ------------ 
Cash and cash 
 equivalents            323.6  (160.8)             -             -          -           3.4            -         166.2 
Loan receivables         19.9        -             -             -          -           0.1          0.4          20.4 
Loans payable         (381.9)    135.8             -             -          -        (26.8)        (0.6)       (273.5) 
Obligations under 
 finance leases        (43.8)      8.4             -             -          -         (0.3)            -        (35.7) 
Derivatives 
 relating 
 to Net Debt*            14.6        -             -             -          -           5.9            -          20.5 
-------------------  --------  -------  ------------  ------------  ---------  ------------  -----------  ------------ 
                       (67.6)   (16.6)             -             -          -        (17.7)        (0.2)       (102.1) 
-------------------  --------  -------  ------------  ------------  ---------  ------------  -----------  ------------ 
 

* Net Debt has been restated to include derivative financial instruments that relate to other components of Net Debt. See note 1.

 
                            At 1           Reclassified                                                          At 31 
                         January     Cash       as held                               Exchange     Non cash   December 
                            2016     flow      for sale  Acquisitions  Disposals   differences    movements       2016 
                            GBPm     GBPm          GBPm          GBPm       GBPm          GBPm         GBPm       GBPm 
----------------------  --------  -------  ------------  ------------  ---------  ------------  -----------  --------- 
Cash and cash 
 equivalents               323.6  (153.7)             -           0.1          -           7.8            -      177.8 
Loan receivables            19.9        -             -             -          -           0.1          2.9       22.9 
Loans payable            (381.9)    135.8             -             -          -        (52.8)        (1.0)    (299.9) 
Obligations under 
 finance leases           (43.8)     16.7         (0.2)             -          -         (0.4)        (0.5)     (28.2) 
Derivatives relating 
 to Net Debt                14.6        -             -             -          -           3.5            -       18.1 
----------------------  --------  -------  ------------  ------------  ---------  ------------  -----------  --------- 
                          (67.6)    (1.2)         (0.2)           0.1          -        (41.8)          1.4    (109.3) 
----------------------  --------  -------  ------------  ------------  ---------  ------------  -----------  --------- 
 

13. Provisions

 
                                Employee 
                                 related   Property   Contract   Other   Total 
                                    GBPm       GBPm       GBPm    GBPm    GBPm 
------------------------------  --------  ---------  ---------  ------  ------ 
At 1 January 2016                   36.4       18.3      302.1   124.9   481.7 
Reclassified to trade and 
 other payables                        -          -     (13.1)       -  (13.1) 
Charged to income statement 
 - exceptional                         -          -          -     7.9     7.9 
Charged to income statement 
 - other                             6.9        1.5        4.4     4.5    17.3 
Released to income statement       (2.3)      (0.1)     (17.7)   (4.8)  (24.9) 
Utilised during the period         (5.6)      (3.0)     (44.8)   (3.6)  (57.0) 
Reclassification                       -      (3.0)        0.7     2.3       - 
Unwinding of discount                  -          -        0.8       -     0.8 
Exchange differences                 2.9        0.8        6.9     3.2    13.8 
------------------------------  --------  ---------  ---------  ------  ------ 
At 30 June 2016 (unaudited)         38.3       14.5      239.3   134.4   426.5 
Acquisitions                           -        0.6       14.0       -    14.6 
Reclassified to trade and 
 other payables                        -          -        1.6   (8.3)   (6.7) 
Charged to income statement 
 - exceptional                       0.4          -          -    14.8    15.2 
Charged to income statement 
 - other                            18.7        2.9       52.2    19.2    93.0 
Released to income statement 
 - exceptional                     (0.2)          -      (0.6)       -   (0.8) 
Released to income statement 
 - other                           (3.0)      (0.2)     (47.2)  (12.4)  (62.8) 
Utilised during the period        (11.9)      (3.2)     (37.2)  (14.1)  (66.4) 
Reclassification                       -        0.1      (8.0)     2.6   (5.3) 
Transfer from assets held 
 for sale                              -          -          -     3.3     3.3 
Eliminated on disposal of 
 subsidiary                            -          -          -   (1.7)   (1.7) 
Unwinding of discount                  -        0.1        1.6       -     1.7 
Exchange differences                 2.8        0.4        4.5     3.4    11.1 
------------------------------  --------  ---------  ---------  ------  ------ 
At 31 December 2016 (audited)       45.1       15.2      220.2   141.2   421.7 
Charged to income statement 
 - exceptional                       2.4          -          -       -     2.4 
Charged to income statement 
 - other                             8.8        0.7          -     2.4    11.9 
Released to income statement 
 - exceptional                     (0.3)          -          -       -   (0.3) 
Released to income statement 
 - other                           (3.1)      (0.4)          -   (3.8)   (7.3) 
Utilised during the period         (4.8)      (1.6)     (40.4)   (2.7)  (49.5) 
Unwinding of discount                  -          -        1.7       -     1.7 
Exchange differences               (0.9)      (0.1)      (1.2)   (1.8)   (4.0) 
------------------------------  --------  ---------  ---------  ------  ------ 
At 30 June 2017 (unaudited)         47.2       13.8      180.3   135.3   376.6 
------------------------------  --------  ---------  ---------  ------  ------ 
Analysed as: 
------------------------------  --------  ---------  ---------  ------  ------ 
Current                             11.9        3.5       70.9    70.1   156.4 
------------------------------  --------  ---------  ---------  ------  ------ 
Non current                         35.3       10.3      109.4    65.2   220.2 
------------------------------  --------  ---------  ---------  ------  ------ 
 

Contract provisions are onerous contract provisions which will be utilised over the life of each individual contract, the longest remaining life which runs until 2024. The present value of the estimated future cash outflows required to settle the contract obligations as they fall due over the respective contracts has been used in determining the provision. The individual provisions are discounted where the impact is assessed to be material. Discount rates used are calculated based on the estimated risk free rate of interest for the region in which the provision is located and matched against the ageing profile of the provision. Rates applied are in the range of 0.17% to 3.30%. A full analysis is performed at least annually of the future profitability of all contracts with marginal performances and of the balance sheet items directly linked to these contracts. Due to the significant size of the balance and the inherent level of uncertainty over the amount and timing of the related cash flows upon which onerous contract provisions are based, if the expected operational performance varies from the best estimates made at the previous balance sheet date, a material change in estimate may be required. The key drivers behind operational performance is the level of activity required to be serviced, which is often directed by the actions of the UK Government, and the efficiency of Group employees and resources.

Employee related provisions are for long-term service awards and terminal gratuities liabilities, which are based on contractual entitlement, together with an estimate of the probabilities that employees will stay until retirement and receive all relevant amounts. There are also amounts included in relation to restructuring. The provisions will be utilised over various periods driven by local legal or regulatory requirements, the timing of which is not certain.

Property provisions relate to leased properties which are either underutilised or vacant and where the unavoidable costs associated with the lease exceed the economic benefits expected to be generated in the future. The provision has been calculated based on the discounted cash outflows required to settle the lease obligations as they fall due, with the longest running lease ending in April 2039.

Other provisions are held for indemnities given on disposed businesses, legal and other costs that the Group expects to incur over an extended period, in respect of past events. These costs are based on past experience of similar items and other known factors and represent management's best estimate of the likely outcome and will be utilised with reference to the specific facts and circumstances, with the majority expecting to be settled by 31 December 2021.

14. Contingent liabilities

At 30 June 2017 the Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures and associates up to a maximum value of GBP4.8m (31 December 2016: GBP20.4m). The actual commitment outstanding at 30 June 2017 was GBP4.8m (31 December 2016: GBP17.9m).

The Company and its subsidiaries have provided certain guarantees and indemnities in respect of performance and other bonds, issued by its banks on its behalf in the ordinary course of business. The total commitment outstanding as at 30 June 2017 was GBP247.9m (31 December 2016: GBP252.1m).

As we have disclosed before, we are under investigation by the UK's Serious Fraud Office. In November 2013, the UK's Serious Fraud Office announced that it had opened an investigation, which remains ongoing, into the Group's Electronic Monitoring Contract. We are cooperating fully with the Serious Fraud Office's investigation but it is not possible to predict the outcome at this time.

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

15. Defined benefit schemes

The costs related to defined benefit pension schemes included within operating profit in the six months ended 30 June 2017 amount to GBP7.3m (2016: GBP7.0m). Included in investment income and finance costs is a credit of GBP1.6m (2016: GBP2.3m) relating to the net interest income on our consolidated pension schemes. Among our non contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The most recent full actuarial valuation of this scheme was undertaken as at 5 April 2015 and resulted in an actuarially assessed deficit of GBP4.0m.

In June 2017 the Trustees of SPLAS entered into a bulk annuity purchase whereby an insurer will fund future benefit payments to the relevant members, commonly referred to as a "buy-in". The liability to pay the members remains with SPLAS and therefore the pension scheme will continue to include the relevant pension liabilities, but an insurance asset is held at fair value, which is an equal and opposite amount to the liability. This removes the risk of longevity and investment movements for this portion of the scheme on a funding basis, and also removes the accounting risk of movements in underlying assumptions on the liabilities. Of the total remeasurements recognised in the statement of other comprehensive income in the six months ended 30 June 2017 of GBP130.8m, GBP95.0m related to the revaluation of the assets and liabilities as a result of this transaction. Whilst the impact substantially reduced the asset on an IAS19 valuation basis, on an actuarial basis the transaction decreased the deficit of the scheme by approximately GBP12m. As a result of the transaction, the scheme also exited a longevity swap arrangement early, at a cost borne by the scheme of GBP7.5m. A summary of the amounts recognised in the statement of other comprehensive income respect of the Group's total defined benefit pension scheme position is set out below.

 
                                                                Six months 
                                                 Six months 
                                                   ended 30       ended 30 
                                                  June 2017      June 2016 
                                                                                 Year ended 
                                                               (restated*)      31 December 
                                                (unaudited)    (unaudited)   2016 (audited) 
Included within the SOCI                               GBPm           GBPm             GBPm 
---------------------------------------------  ------------  -------------  --------------- 
Impact of SPLAS pension buy-in                       (95.0)              -                - 
Cost of exiting the SPLAS longevity swap              (7.5)              -                - 
Actual return on scheme assets                          1.1          199.5            286.1 
Less: interest income on scheme assets               (20.7)         (24.5)           (49.2) 
---------------------------------------------  ------------  -------------  --------------- 
                                                    (122.1)          175.0            236.9 
Effect of changes in demographic assumptions              -              -             26.2 
Effect of changes in financial assumptions           (19.2)        (153.3)          (282.8) 
Effect of experience adjustments                       10.5              -             28.7 
---------------------------------------------  ------------  -------------  --------------- 
Remeasurements recognised in the SOCI               (130.8)           21.7              9.0 
---------------------------------------------  ------------  -------------  --------------- 
Change in franchise adjustment                          0.1            0.5              1.7 
Change in members' share                              (0.1)            0.3              1.2 
---------------------------------------------  ------------  -------------  --------------- 
Actuarial gains on reimbursable rights                    -            0.8              2.9 
---------------------------------------------  ------------  -------------  --------------- 
Total pension (loss) / gain recognised in 
 the SOCI                                           (130.8)           22.5             11.9 
---------------------------------------------  ------------  -------------  --------------- 
 

The assets and liabilities of the schemes are:

 
                                            Contract  Non contract 
                                            specific      specific      Total 
                                             30 June       30 June    30 June 
                                                2017          2017       2017 
Scheme assets at fair value (unaudited)         GBPm          GBPm       GBPm 
-----------------------------------------  ---------  ------------  --------- 
Equities                                         8.7          44.8       53.5 
Bonds except LDI                                 2.8          20.4       23.2 
Liability driven investments (LDI)                 -         761.5      761.5 
Gilts                                              -             -          - 
Property                                         1.3             -        1.3 
Cash and other                                   3.0           3.3        6.3 
Annuity policies                                   -         572.2      572.2 
-----------------------------------------  ---------  ------------  --------- 
Fair value of scheme assets                     15.8       1,402.2    1,418.0 
Present value of scheme liabilities           (22.9)     (1,400.8)  (1,423.7) 
-----------------------------------------  ---------  ------------  --------- 
Net amount recognised                          (7.1)           1.4      (5.7) 
Franchise adjustment*                            3.9             -        3.9 
Members' share of deficit                        2.6             -        2.6 
-----------------------------------------  ---------  ------------  --------- 
Net retirement benefit asset                   (0.6)           1.4        0.8 
-----------------------------------------  ---------  ------------  --------- 
Net pension liability                          (0.6)        (16.9)     (17.5) 
Net pension asset                                  -          18.3       18.3 
Deferred tax liabilities                           -         (0.2)      (0.2) 
-----------------------------------------  ---------  ------------  --------- 
Net retirement benefit asset (after tax)       (0.6)           1.2        0.6 
-----------------------------------------  ---------  ------------  --------- 
 

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

 
                                            Contract  Non contract 
                                            specific      specific      Total 
                                             30 June       30 June    30 June 
                                                2016          2016       2016 
Scheme assets at fair value (unaudited)         GBPm          GBPm       GBPm 
-----------------------------------------  ---------  ------------  --------- 
Equities                                         3.0          47.6       50.6 
Bonds except LDI                                 0.6          19.8       20.4 
Liability driven investments (LDI)                 -       1,308.7    1,308.7 
Gilts                                              -          70.3       70.3 
Property                                         0.6           1.3        1.9 
Cash and other                                   1.0          16.7       17.7 
Annuity policies                                   -          23.2       23.2 
-----------------------------------------  ---------  ------------  --------- 
Fair value of scheme assets                      5.2       1,487.6    1,492.8 
Present value of scheme liabilities            (9.2)     (1,347.3)  (1,356.5) 
-----------------------------------------  ---------  ------------  --------- 
Net amount recognised                          (4.0)         140.3      136.3 
Franchise adjustment*                            2.4             -        2.4 
Members' share of deficit                        1.6             -        1.6 
-----------------------------------------  ---------  ------------  --------- 
Net retirement benefit asset                       -         140.3      140.3 
-----------------------------------------  ---------  ------------  --------- 
Net pension liability                              -        (13.6)     (13.6) 
Net pension asset                                  -         153.9      153.9 
Deferred tax liabilities                           -        (25.2)     (25.2) 
-----------------------------------------  ---------  ------------  --------- 
Net retirement benefit asset (after tax)           -         115.1      115.1 
-----------------------------------------  ---------  ------------  --------- 
 

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

 
                                               Contract  Non contract 
                                               specific      specific         Total 
                                            31 December   31 December   31 December 
                                                   2016          2016          2016 
Scheme assets at fair value (audited)              GBPm          GBPm          GBPm 
-----------------------------------------  ------------  ------------  ------------ 
Equities                                            3.3          43.3          46.6 
Bonds except LDI                                    0.7          20.2          20.9 
Liability driven investments (LDI)                    -       1,390.6       1,390.6 
Gilts                                                 -          72.4          72.4 
Property                                            0.6             -           0.6 
Cash and other                                      1.2           4.2           5.4 
Annuity policies                                      -          20.0          20.0 
-----------------------------------------  ------------  ------------  ------------ 
Fair value of scheme assets                         5.8       1,550.7       1,556.5 
Present value of scheme liabilities              (12.0)     (1,418.0)     (1,430.0) 
-----------------------------------------  ------------  ------------  ------------ 
Net amount recognised                             (6.2)         132.7         126.5 
Franchise adjustment*                               3.7             -           3.7 
Members' share of deficit                           2.5             -           2.5 
-----------------------------------------  ------------  ------------  ------------ 
Net retirement benefit asset                          -         132.7         132.7 
-----------------------------------------  ------------  ------------  ------------ 
Net pension liability                                 -        (17.7)        (17.7) 
Net pension asset                                     -         150.4         150.4 
Deferred tax liabilities                              -        (17.6)        (17.6) 
-----------------------------------------  ------------  ------------  ------------ 
Net retirement benefit asset (after tax)              -         115.1         115.1 
-----------------------------------------  ------------  ------------  ------------ 
 

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

Key pension assumptions:

 
                                30 June 2017       30 June 2016   31 December 2016 
                                 (unaudited)        (unaudited)          (audited) 
Main assumptions                           %                  %                  % 
-------------------------  -----------------  -----------------  ----------------- 
Rate of salary increases                 2.7                2.3                2.8 
Rate of increase in        2.2 (CPI) and 3.2  1.7 (CPI) and 2.7  2.3 (CPI) and 3.3 
 pensions in payment                   (RPI)              (RPI)              (RPI) 
Rate of increase in        2.2 (CPI) and 3.2  1.8 (CPI) and 2.8  2.3 (CPI) and 3.3 
 deferred pensions                     (RPI)              (RPI)              (RPI) 
Inflation assumption       2.2 (CPI) and 3.2  1.8 (CPI) and 2.8  2.3 (CPI) and 3.3 
                                       (RPI)              (RPI)              (RPI) 
Discount rate                            2.6                2.9                2.7 
-------------------------  -----------------  -----------------  ----------------- 
 
 
                            30 June 2017  30 June 2016  31 December 2016 
                             (unaudited)   (unaudited)         (audited) 
Post retirement mortality          years         years             years 
--------------------------  ------------  ------------  ---------------- 
Current pensioners 
 at 65 - male                       22.5          22.6              22.5 
Current pensioners 
 at 65 - female                     25.1          25.2              25.0 
Future pensioners at 
 65 - male                          24.3          24.5              24.2 
Future pensioners at 
 65 - female                        26.9          27.1              26.9 
--------------------------  ------------  ------------  ---------------- 
 

The defined benefit obligation is calculated on the actuarial assumptions agreed as at that date. The sensitivities set out below are calculated by changing each assumption in turn following the methodology above with all other things held constant. The change in the defined benefit obligation from updating the single assumption represents the impact of that assumption on the calculation of the defined benefit obligation.

 
                            30 June 2017  30 June 2016  31 December 2016 
                             (unaudited)   (unaudited)         (audited) 
Pension assumption 
 sensitivities                      GBPm          GBPm              GBPm 
--------------------------  ------------  ------------  ---------------- 
Discount rate - 0.5% 
 increase                        (113.7)       (110.7)           (116.5) 
Discount rate - 0.5% 
 decrease                          128.5         125.2             132.5 
Inflation - 0.5% increase           89.6         110.0             106.1 
Inflation - 0.5% decrease         (86.5)        (99.6)            (87.6) 
Rate of salary increase 
 - 0.5% increase                     7.7          10.8               7.8 
Rate of salary increase 
 - 0.5% decrease                   (7.4)        (10.2)             (7.4) 
Mortality - one year 
 age rating                         42.7          32.8              44.2 
--------------------------  ------------  ------------  ---------------- 
 

16. Notes to the consolidated cash flow statement

 
                                                                               30 June 
                                     30 June                                      2016 
                                        2017                                    Before                         30 June 
                                      Before            30 June  30 June   exceptional            30 June         2016 
                                 exceptional   2017 Exceptional     2017         items   2016 Exceptional        Total 
                                       items              items    Total    (restated)              items   (restated) 
                                        GBPm               GBPm     GBPm          GBPm               GBPm         GBPm 
------------------------------  ------------  -----------------  -------  ------------  -----------------  ----------- 
Operating profit / (loss) for 
 the period - continuing 
 operations*                            33.1             (11.4)     21.7          72.5              (7.7)         64.8 
Operating loss for the period 
 - discontinued operations                 -                  -        -         (3.2)              (4.2)        (7.4) 
Operating profit / (loss) for 
 the period*                            33.1             (11.4)     21.7          69.3             (11.9)         57.4 
Adjustments for: 
Share of profits in joint 
 ventures 
 and associates                       (14.6)                  -   (14.6)        (17.7)                  -       (17.7) 
Share based payment expense              6.9                  -      6.9           4.9                  -          4.9 
Exceptional impairment of 
 property, 
 plant and equipment                       -                  -        -             -              (0.3)        (0.3) 
Impairment of property, plant 
 and equipment                             -                  -        -           0.3                  -          0.3 
Exceptional impairment of 
 intangible 
 assets                                    -                2.8      2.8             -                0.3          0.3 
Depreciation of property, 
 plant 
 and equipment                          13.1                  -     13.1          12.2                  -         12.2 
Amortisation of intangible 
 assets                                 13.4                  -     13.4          11.8                  -         11.8 
Exceptional profit on disposal 
 of subsidiaries and 
 operations                                -              (0.8)    (0.8)             -                1.2          1.2 
Loss on disposal of property, 
 plant and equipment                     0.1                  -      0.1           0.4                  -          0.4 
Loss on disposal of intangible             -                  -        -             -                  -            - 
 assets 
Non cash R&D expenditure 
 offset 
 against intangible assets             (0.4)                  -    (0.4)           0.1                  -          0.1 
Decrease in provisions                (42.1)              (0.6)   (42.7)        (77.8)             (14.5)       (92.3) 
Other non-cash movements*                0.2                  -      0.2           0.1                  -          0.1 
Total non-cash items*                 (23.4)                1.4   (22.0)        (65.7)             (13.3)       (79.0) 
------------------------------  ------------  -----------------  -------  ------------  -----------------  ----------- 
Operating cash inflow / 
 (outflow) 
 before movements in working 
 capital                                 9.7             (10.0)    (0.3)           3.6             (25.2)       (21.6) 
Decrease in inventories                  5.6                  -      5.6           0.3                  -          0.3 
(Increase) / decrease in 
 receivables                          (24.4)              (1.4)   (25.8)           4.5                  -          4.5 
Increase / (decrease) in 
 payables                                3.7              (8.3)    (4.6)        (19.0)              (6.9)       (25.9) 
------------------------------  ------------  -----------------  -------  ------------  -----------------  ----------- 
Movements in working capital          (15.1)              (9.7)   (24.8)        (14.2)              (6.9)       (21.1) 
------------------------------  ------------  -----------------  -------  ------------  -----------------  ----------- 
Cash generated by operations*          (5.4)             (19.7)   (25.1)        (10.6)             (32.1)       (42.7) 
Tax paid                               (7.9)                  -    (7.9)         (6.6)                  -        (6.6) 
Non cash R&D expenditure                   -                  -        -         (0.1)                  -        (0.1) 
------------------------------  ------------  -----------------  -------  ------------  -----------------  ----------- 
Net cash outflow from 
 operating 
 activities*                          (13.3)             (19.7)   (33.0)        (17.3)             (32.1)       (49.4) 
------------------------------  ------------  -----------------  -------  ------------  -----------------  ----------- 
 

* Operating profit and other non-cash items have been restated following the change in accounting policy to include foreign exchange movements on investment and financing arrangements in net finance costs and to reflect the associated cash flows and non-cash movements in a consistent manner.

 
                                                     31 December 
                                                            2016 
                                                          Before        31 December  31 December 
                                                     exceptional   2016 Exceptional         2016 
                                                           items              items        Total 
                                                            GBPm               GBPm         GBPm 
-----------------------------------------------     ------------  -----------------  ----------- 
Operating profit / (loss) for the year 
 - continuing operations                                    98.5             (56.3)         42.2 
Operating loss for the year - discontinued 
 operations                                                (3.3)             (14.2)       (17.5) 
Operating profit / (loss) for the year                      95.2             (70.5)         24.7 
Adjustments for: 
Share of profits in joint ventures and 
 associates                                               (33.4)                  -       (33.4) 
Share based payment expense                                  9.7                  -          9.7 
Exceptional impairment of goodwill                             -               17.8         17.8 
Exceptional impairment of property, plant 
 and equipment                                                 -              (0.8)        (0.8) 
Impairment of property, plant and equipment                  0.7                  -          0.7 
Exceptional impairment of intangible assets                    -                0.3          0.3 
Impairment of intangible assets                              0.7                  -          0.7 
Depreciation of property, plant and equipment               24.8                  -         24.8 
Amortisation of intangible assets                           26.2                  -         26.2 
Exceptional profit on disposal of subsidiaries 
 and operations                                                -              (0.1)        (0.1) 
Loss on disposal of property, plant and 
 equipment                                                   0.4                  -          0.4 
Loss on disposal of intangible assets                        0.8                  -          0.8 
Non cash R&D expenditure offset against 
 intangible assets                                           0.2                  -          0.2 
Decrease in provisions                                   (118.4)              (1.1)      (119.5) 
Other non-cash movements                                     0.4                  -          0.4 
Total non-cash items                                      (54.5)               16.1       (38.4) 
--------------------------------------------------  ------------  -----------------  ----------- 
Operating cash inflow / (outflow) before 
 movements in working capital                                7.3             (54.4)       (47.1) 
Decrease in inventories                                      1.3                  -          1.3 
Decrease in receivables                                     59.0               13.9         72.9 
(Decrease) / increase in payables                         (84.0)                0.6       (83.4) 
--------------------------------------------------  ------------  -----------------  ----------- 
Movements in working capital                              (23.7)               14.5        (9.2) 
--------------------------------------------------  ------------  -----------------  ----------- 
Cash generated by operations                              (16.4)             (39.9)       (56.3) 
Tax paid                                                   (5.6)                  -        (5.6) 
Non cash R&D expenditure                                   (0.4)                  -        (0.4) 
--------------------------------------------------  ------------  -----------------  ----------- 
Net cash outflow from operating activities                (22.4)             (39.9)       (62.3) 
--------------------------------------------------  ------------  -----------------  ----------- 
 

17. Related party transactions

Transactions between the Company and its wholly owned subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint venture undertakings and associates are disclosed below. There have been no related party transactions other than as disclosed.

Group companies entered into the following transactions with joint ventures and associates:

 
                                             Transactions 
                                                  for the 
                                               six months            Current        Non current 
                                                 ended 30        outstanding        outstanding 
                                                June 2017         at 30 June         at 30 June 
                                              (unaudited)   2017 (unaudited)   2017 (unaudited) 
                                                     GBPm               GBPm               GBPm 
-------------------------------------------  ------------  -----------------  ----------------- 
Sale of goods and services 
Joint ventures                                        0.2                  -                  - 
Associates                                            3.4                0.7                  - 
Other 
Dividends received - joint ventures                   3.9                  -                  - 
Dividends received - associates                       9.9                  -                  - 
Receivable from consortium for tax - joint 
 ventures                                             1.0                8.7                  - 
                                                     18.4                9.4                  - 
-------------------------------------------  ------------  -----------------  ----------------- 
 

AWEML was formerly a joint venture but from September 2016 there was a change in the entity's shareholding structure, with the Group's shareholding reducing from 33.3% to 24.5% by way of a return of shares and Lockheed Martin taking a majority holding. Subsequent to the change in share ownership, AWEML has been accounted for as an associate as we continue to have significant influence. In the first half of the prior year, the AWEML transactions and outstanding balances were disclosed within joint ventures below.

 
                                             Transactions 
                                                  for the 
                                               six months            Current        Non current 
                                                 ended 30        outstanding        outstanding 
                                                June 2016         at 30 June         at 30 June 
                                              (unaudited)   2016 (unaudited)   2016 (unaudited) 
                                                     GBPm               GBPm               GBPm 
-------------------------------------------  ------------  -----------------  ----------------- 
Sale of goods and services 
Joint ventures                                        3.3                0.6                  - 
Other 
Dividends received - joint ventures                  19.7                  -                  - 
Receivable from consortium for tax - joint 
 ventures                                             1.2               10.5                  - 
                                                     24.2               11.1                  - 
-------------------------------------------  ------------  -----------------  ----------------- 
 
 
                                                Transactions          Current      Non current 
                                                     for the      outstanding      outstanding 
                                                 31 December   at 31 December   at 31 December 
                                              2016 (audited)   2016 (audited)   2016 (audited) 
                                                        GBPm             GBPm             GBPm 
-------------------------------------------  ---------------  ---------------  --------------- 
Sale of goods and services 
Joint ventures                                           0.5              0.1                - 
Associates                                               6.2              0.5                - 
Other 
Dividends received - joint ventures                     20.4                -                - 
Dividends received - associates                         19.6                -                - 
Receivable from consortium for tax - joint 
 ventures                                                3.2              7.7                - 
                                                        49.9              8.3                - 
-------------------------------------------  ---------------  ---------------  --------------- 
 

Joint venture receivable and loan amounts outstanding have arisen from transactions undertaken during the general course of trading, are unsecured, and will be settled in cash. Interest arising on loans is based on LIBOR, or its equivalent, with an appropriate margin. No guarantee has been given or received. The only loan amounts owed by joint ventures or associates related to a single entity which have been provided for in full.

This information is provided by RNS

The company news service from the London Stock Exchange

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