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RNS
Interserve PLC  -  IRV   

Final Results

Released 07:00 30-Apr-2018

RNS Number : 4704M
Interserve PLC
30 April 2018
 

News Release

 

 

30 April 2018

 

                            

Creating a platform for future growth

Annual Results 2017

 

 

Interserve, the international support services and construction group, reports on a difficult year for the Group, with its annual results for the year ended 31 December 2017.

  

 

 

 

2017

2016¹

Revenue

 

£3,250.8m

£3,244.6m

Total operating profit²

 

£74.9m

£155.0m

Profit / (loss) before tax

 

(£244.4m)

(£94.1m)

Headline earnings per share2

 

29.0p

84.5p

Net debt

 

(£502.6m)

(£274.4m)

 

Highlights

 

 

·     Full debt refinancing secured with committed borrowing facilities of £834 million, through to 2021

 

·     2017 trading and Energy from Waste (EfW) contract performance consistent with October update

 

·     Revenue stable at £3.25 billion, while operating profit was adversely impacted by poor performance in Support Services and Construction with continued good growth in Equipment Services

 

·     Net debt increased to £502.6 million, driven by EfW cash outflows, non-underlying charges, a more normalised working capital position and foreign exchange movements

 

·     Completed contract review and business review, resulting in a £86.1 million write down, of which over half will have no future cash impact

 

·     Balance sheet review resulted in non-cash goodwill and asset write downs of £76.7 million

 

·     Fit for Growth self-help plan underway and expected to deliver at least £40-50 million annual benefit to Group operating profit by 2020 with £15 million benefit expected in 2018

 

·     Key contract wins with new and existing clients including the Ministry of Defence, Ministry of Justice, Department of Work and Pensions, Network Rail, BBC, Jumeirah Group (Dubai), Liwa Plastics (Oman) and Doha Festival City (Qatar)

 

·     Future workload of £7.6 billion.

 

Debbie White, Interserve's Chief Executive, said:

 

2017 was a difficult year for Interserve, but it was also a year of significant progress. As a new management team, we have stabilised the business and taken the first actions to establish a solid foundation from which we can both serve our customers effectively and underpin improved future operational and financial performance.

 

This work has focused on refinancing, conducting a thorough assessment of the contract portfolio, and introducing new management disciplines, processes and cost controls under the 'Fit for Growth' programme. We are confident that the cost savings and management actions identified will contribute at least £40-50 million to Group operating profit by 2020, with the 2018 benefit estimated to be £15 million.

 

The refinancing we recently agreed with our lenders is a major step in securing a firm financial platform to underpin the Group's future. Of course there is much still to do.  However, we are encouraged by the support from our lenders and the new facilities will allow us to execute our business plan, focus on delivering a good service for customers, drive improved operational and financial performance."

 

- Ends -

 

 

For further information please contact:

 

Robin O'Kelly, Interserve               +44 (0) 7786 702526

 

Martin Robinson                           +44 (0) 207 3534200

Tulchan Communications                        

 

 

About Interserve

 

Interserve is one of the world's foremost support services and construction companies. Everything we do is shaped by our core values. We are a leader in innovative and sustainable outcomes for our clients and a great place to work for our people. We offer advice, design, construction, equipment, facilities management and frontline public services. We are headquartered in the UK and FTSE-listed. We have gross revenues of £3.7 billion and a workforce of circa 75,000 people worldwide.

www.interserve.com

 

For news follow @interservenews

 

This announcement contains inside information

LEI: 549300MVYY4EZCRFHZ09

¹Comparatives have been restated. See note 14 to the condensed consolidated financial statements

²This news release and the Annual Report include a number of non-statutory measures to reflect the impact of non-trading and non-recurring items. See note 16 to the condensed consolidated financial statements for a reconciliation of these measures to their statutory equivalents and note 9 for calculation of earnings per share.



 

CHAIRMAN'S STATEMENT

 

Usually in this statement I reflect on the key matters which have occurred in the previous fiscal year. On this occasion my comments will also cover the first few months of 2018 in view of the significant events which have taken place in that period.

 

In the last sixteen months Interserve has suffered unprecedented levels of disruption and faced a number of significant challenges. The Company was affected by general market headwinds and external events, however much of this resulted from self-inflicted mistakes of the past. The resulting stress and uncertainty have led to anxiety amongst our staff, suppliers and customers and significant loss of value for our shareholders from the fall in our share price.

 

The changes in our executive team, the completion of our debt restructuring and the commencement of the 'Fit for Growth' programme are the first steps along the road to restoring stability, future financial success and underlying resilience in Interserve and to rebuilding trust with all our stakeholders.

 

I comment on each of these points in a little more detail below.

 

FINANCIAL PERFORMANCE

 

Overall the Group's financial performance in 2017 was extremely poor with headline profit falling to £52.4 million. An inefficient operating model and excessive cost structure left the Group exposed to weaknesses in the UK performance of Support Services and Construction in addition to a further deterioration in Energy from Waste during the middle of the year. The combination of these issues outweighed the excellent performance from our Equipment Services division and good results from our International construction business.

 

Success in our business requires discipline over the selection and pricing of bid opportunities, strong operational control over margin and cash generation, and an efficient, competitive cost infrastructure. It is clear to me that these disciplines have been inadequate in Interserve for a number of years. This is reflected not only in the underlying weak performance last year, but also by the provisions in these accounts against certain contracts resulting from our recent contract review. It is of no consolation to observe that many of these issues are also reflected in the performance of some of our competitors in construction and support services. 

 

When executed well, there are huge benefits to society from a strong and efficient outsourcing industry, bringing enhanced efficiency, predictable performance and quality to the client. It is to be hoped that events over the last year or so will encourage the necessary changes in approach from all participants in this market.

 

MANAGEMENT CHANGES

 

In March 2017 we announced that Debbie White would succeed Adrian Ringrose as Chief Executive and she joined us in September last year. A month later, our new Chief Financial Officer, Mark Whiteling, also joined us, replacing Tim Haywood. Under Debbie's leadership the team has moved swiftly to identify and begin to deal with the operational and financial challenges facing Interserve. 

 



 

The Chief Executive's Statement and Operational Review in the Annual Report provide more detail, but some highlights include:

 

-      Completion of a Group-wide strategic review

-      Completion of a review of our major contracts

-      Establishing the 'Fit for Growth' transformation plan to streamline the Group and improve efficiency and agility

-      Development of a comprehensive and realistic three-year business plan

-      Changing the leadership structure of Support Services and beginning to address the key issues described above

-      Strengthening the controls around construction contract bid approval and improving management oversight of ongoing operations

 

Achieving so much in such a short time would be admirable in normal circumstances but of course Debbie, Mark and the rest of the executive team have also had to deal with one of the most complex debt refinancing negotiations in recent times and bring it to a successful conclusion. We are extremely fortunate to have secured the services of Debbie and Mark and I am hugely grateful for what they have already achieved.

 

DEBT REFINANCING

 

In 2017 we took the decision to suspend the dividend to preserve liquidity in the Group. However, ongoing deterioration in Energy from Waste combined with weakness in our Support Services and Construction businesses, meant that our liquidity came under increasing pressure towards the end of the year and there was a possibility of default on our year-end debt covenant. Furthermore, in my view, aggressive working capital management to operate within such a constrained environment is unfair on our suppliers and unsustainable. 

 

We therefore sought temporary relief from our lenders and we were able to announce on 13 December 2017 an increase in our borrowing facilities and a deferral of our covenant testing to 31 March 2018 (subsequently extended to 30 April). This was designed to give us time to negotiate a longer-term debt structure to support the business.

 

I am delighted that, as we announced on 27 April 2018, these negotiations have come to a conclusion and we now have confirmed lending facilities through to September 2021. That we have been able to achieve such a complex refinancing in such a difficult environment is a testament to Debbie and her team and the integrity and robustness of their business plan.

 

On behalf of the Board I would like to express my gratitude to those lenders who have supported us in this refinancing.

 

BOARD AND GOVERNANCE

 

During the year Adrian Ringrose, Tim Haywood and Bruce Melizan left the Board.

 

Keith Ludeman has indicated that he does not wish to stand for re-election as a non-executive director at the AGM as he is taking on increased responsibilities elsewhere and will be unable to devote appropriate time to Interserve. I am extremely grateful to Keith for his excellent contribution to the Board and his Chairmanship of the Remuneration Committee.  I am pleased to announce that Nick Salmon has agreed to take over as Chairman of the Remuneration Committee.

 

OUR PEOPLE

 

I have highlighted the challenges that the leadership team have faced in recent months, but inevitably the impact of those changes has been felt by people throughout the business. These are difficult times for the Company and the sectors it operates in. Dealing with these challenges will necessitate changes for all staff and some will be impacted personally. Across Interserve our people have shown great resilience and loyalty. They have embraced the need for change and I thank them for this and their continued support.

 

LOOKING AHEAD

 

The turmoil of the past 16 months is behind us, but the hard work is not.  We have made good progress in dealing with the challenges of progressing our exit from Energy from Waste but significant risks clearly remain.

 

The tasks of improving Interserve's business, restoring financial resilience to our balance sheet and rebuilding trust with, and value for, our shareholders are just beginning.  I am confident that we now have the necessary leadership to succeed.

 

Once again, I would like to thank our staff, customers and suppliers for their support during this difficult period. I would also express my appreciation to those shareholders and lenders who have continued to support us throughout and those new stakeholders who have invested more recently.

 

Glyn Barker

Chairman

27 April 2018

 



 

CHIEF EXECUTIVE OFFICER'S STATEMENT

 

2017 was clearly an extremely challenging year for Interserve. Throughout this period the Group has benefited enormously from its underlying strengths - our dedicated and hard-working employees, the depth of our client relationships, the underlying business models, and the strong support of our financial stakeholders.

 

On our number one priority, the health and safety of our employees, I am pleased to say the Group's performance improved in the year. While there will always be more to do through ongoing improvements, our Accident Incident Rate¹ fell from 128 in 2016 to 95 in 2017.

 

Whilst the majority of my first six months as Chief Executive has been spent establishing the long-term financial stability of the Group, I have had some opportunity to spend time visiting our operations.  It is very clear that we have extremely strong delivery capability and client relationships.  Interserve will be able to build on this as we seek to leverage the best of what we do across the Group.

 

During the last six months, we have completed a full strategic review and developed a three-year business plan for the Group.  In the course of this, we have addressed the key questions of which markets and services we wish to be in and deliver, what capabilities we currently have and will need going forward and finally, how do we win in what is an ever-changing competitive landscape.

 

In terms of our markets and services, each of the main businesses of the Group has a key role to play going forward.  The business and financial models are currently complementary, many of the skills and capabilities of our people are transferable between them and if we leverage our back-office activities across the business, we can gain significant synergies.

 

There were some good customer wins in the year, an example of which being the five-year contract we were awarded to provide facilities management services for the Department for Work and Pensions (DWP).  The five-year contract is worth £227 million over its life and was successfully mobilised in 2018. In the Middle East, we were awarded major new contracts with, among others, the Jumeirah Group and Liwa Plastics.

 

During the course of 2018, we will refine and communicate our strategic plan further, but it is based on four strategic priorities:

 

1.  Fit for Growth - improving cost efficiency

2.  Strengthening our competitive customer value proposition

3.  Standardising operational delivery

4.  Developing our people and a consistent, 'One Interserve' culture

 

The first priority is 'Fit for Growth', our programme to ensure Interserve has the right strength, depth and level of resources going forward and leverages the scale of the Group.  One of Interserve's historic fundamental issues is that the cost base of the Group has not been fit for purpose.  Our purchasing practices, the organisational design and the cost choices made, will not enable us even to achieve margins consistent with our peers in the industry.  We have started to address all of these issues through our transformation plan, which began with an initial cost-out programme in late 2017 and initiatives such as a group-wide organisational design project, already underway in 2018.  We anticipate that the impact of this programme will deliver £15 million to Group operating profit in 2018, and at least £40-£50 million by 2020, the majority of this benefit being in Support Services.  The cost of this programme in 2017 was £16.5 million and is expected to incur a further cost of circa £15 million in 2018.

 

Key to the long-term success of the business is our second strategic priority; it is imperative that we have a competitive customer value proposition in each of the markets we choose to operate in.  This must bring a depth of expertise and knowledge to our customers enabling them to deliver their own strategic goals.  In the coming months and years, these value propositions will be strengthened and leveraged creating value for our clients, employees and shareholders.  We will refocus our energy on where these propositions best meet the needs of our customers; a key component of this is the deepening of our relationships with clients, moving from single-service operations to a broader, deeper span of services. 

 

In terms of operational delivery, to maintain and improve our financial performance, it is key to have a standard way of delivering what we do and to not 'reinvent the wheel'.  Some progress has been made on the 'Interserve way' in the past, but this is not fully developed nor fully implemented, and embedding this is our third strategic priority.

 

The key to the delivery of the strategy and the business plan is our people.  We must implement a standard approach to leadership, to performance management, to training and development and to reward and recognition.  The historic fragmented and federalised nature of our business has not allowed for the best development opportunities for our teams.  Unlocking these aspects and creating a common Interserve culture is our fourth strategic priority.

 

Turning to Interserve's 2017 financial results, the performance was extremely poor.  A significant proportion of our Support Services business consists of high volume, and relatively low margin contracts.  Historic selection and pricing in this sector has not been as disciplined as it will be in the future and the contract provision and poor performance is reflective of this. In addition, the operational discipline needs to be strengthened to ensure predictable and resilient results.

 

Having confirmed the intention to hold and further develop our Equipment Services division following the strategic review in 2016, its performance in the period was very good, with strong growth momentum contributing to a 12 per cent increase in total operating profit to £54.4 million.

 

Underlying performance in our UK Construction business was poor, with challenging market conditions and pockets of underperformance leading to a net loss for the year. This division has also historically suffered from poor decision making in project targeting and inadequate project control, reflected in the significant provisions we have made against a number of outstanding projects following our contract review.  Internationally, we delivered a strong performance in improving markets, stimulated by local development plans and the ongoing need for infrastructure development across the region.

 

The outlook on some of our Energy from Waste contracts deteriorated during the year leading to the increase in our provision announced last September.  We have nevertheless made good progress in dealing with the challenges of completing our exit from the sector. Our target to complete the construction phase on all remaining projects in the first half of 2018 remains on track and specifically on the Derby project we achieved the necessary ROCs accreditation in March 2018 as scheduled. Despite this progress, risks clearly remain and we continue to expend every effort to bring these projects to a satisfactory conclusion.

 

Strengthening our leadership team has been a key activity with new appointments of Mark Whiteling as CFO, Sally Cabrini as Director of Transformation, IT and People and Andy McDonald as General Counsel and Company Secretary.  The Group will continue to invest in strong capability in its core areas in the coming years by both the development of internal candidates and by bringing in new talent.

 

As we look to the future, there is significant opportunity with the new strategy and business plan and in leveraging the Interserve values to transform the Group.  The result will be a more focussed, higher margin, cash generative business delivering value to its customers, employees and shareholders.

 

OUTLOOK

 

The completion of our refinancing means that the business now has the platform to execute its Fit for Growth plans and rebuild momentum in its underlying performance. Whilst this refinancing has come at a considerable cost, delivery of the agreed business plan will enable us to consider options for achieving a more secure financial foundation. The Board's expectations for the current year remain broadly unchanged.

 

Debbie White

 

Chief Executive Officer

 

27 April 2018

 

¹Accident Incident Rate is based on the number of injuries meeting the RIDDOR reporting requirements per 100,000 workforce and includes associate entities.



 


STRATEGIC REPORT  

OPERATIONAL REVIEW

 

The Operational Review refers to a number of alternative performance metrics; it is considered that these better reflect the underlying performance of the business. See note 16 for the basis of calculation. Additional disclosure is made in the Financial Review of non-underlying items and why the directors believe it is appropriate to exclude these in considering operating performance. Certain comparatives are restated within these statements (see note 14).

 

Support Services

 

Support Services focuses on the management and delivery of operational services for both public and private-sector clients in the UK and internationally.

 

Results summary

2017

2016

Change

Revenue

 

 

 

-   UK

£1,687.5m

£1,718.1m

-2%

-   International1

£193.9m

£267.9m

-28%

 

 

 

 

Contribution to total operating profit

£41.7m

£89.5m

-54%

-   UK

£38.9m

£80.1m

-51%

-   International1

£2.8m

£9.4m

-70%

 

 

 

 

Operating margin

 

 

 

-   UK

2.3%

4.7%

 

-   International2

1.7%

3.6%

 

 

 

 

 

Future workload3

 

 

 

-   UK

£6.1bn

£5.7bn

 

-   International1

£218m

£192m

 

 

These figures exclude non-underlying items

 

1Including share of associates.

2Operating margin is calculated based on the underlying operating margin of associates and the reported operating margin of subsidiaries.

3Future workload comprises forward orders and pipeline. Forward orders are those for which we have secured contracts in place and pipeline covers contracts for which we are in bilateral negotiations and on which final terms are being agreed.

 

UK

 

Support Services UK delivered a disappointing performance, largely due to the impact of regulatory changes, challenging contract mobilisations, excessive historical overheads and a cost base that has not been flexible enough.

 

Revenue was stable at £1.7 billion, reflecting good work winning and contract retentions but, as expected, operating profit was negatively impacted by regulatory-driven costs including the National Minimum Living Wage increases (introduced in April 2016), the Apprenticeship Levy, increased IAS 19 pension service charges and changes to the application of holiday pay and travelling time on our large workforce.

 

Profits were specifically impacted by a number of large contract mobilisations, contract performance in the justice business and some underperforming accounts which are being remedied through 'Fit for Growth' - the three-year programme launched by the new management team in October 2017 focused on increasing the Group's organisational efficiency, improving Group-wide procurement processes and ensuring greater standardisation and simplification across the business.

 

New management has already taken decisive action to address the division's excessive cost base, including cutting the division's headcount as part of Fit for Growth. The margin absorbed the substantial rise in the UK National Minimum Living Wage (NMLW), one of the factors contributing to the fall to 2.3 per cent.

 

Despite the cost headwinds absorbed by the division during the year, it won £2.1 billion of new work and the division's future workload grew 7 per cent to £6.1 billion. The UK Government has been our largest customer for many years, and we continue to be one of its largest suppliers, winning a number of important new accounts during the year, demonstrating the Government's ongoing faith in our ability to continue to mobilise and deliver large-scale contracts.

 

We strengthened our position as one of the Ministry of Defence's largest infrastructure partners during the period, winning a two-year contract extension worth up to £265 million to continue as the infrastructure support provider for four overseas UK Armed Forces bases (in the Falkland Islands and Ascension Island in the South Atlantic Ocean, as well as Gibraltar and Cyprus in the Mediterranean). We were also awarded a five-year contract worth £227 million to provide facilities management services for the Department for Work and Pensions, which is currently being mobilised. This contract will see us providing services to over 700 buildings throughout the UK, covering over 1.3 million square metres of space.

 

In the transport sector we secured a further five-year facilities management contract with Network Rail worth £65 million, which sees us deliver a range of facilities services across 11 of Network Rail's managed stations in London, Reading and Bristol, which include eight of the UK's 10 busiest stations. The new contract builds upon Interserve's existing relationship with Network Rail, which has included providing cleaning services across the organisation's estate for the last five years. We also won a new five-year contract worth £90 million to provide total facilities management services for the Department for Transport and nine of its agencies, plus the Environment Agency.

 

We achieved a notable contract extension, winning a £140 million contract with the BBC to continue providing facilities services until 2023. This latest four-year extension to the account, which was first awarded in 2014, will see us continue to provide services from critical broadcast engineering, energy and utilities management through to cleaning, portering and security at 150 BBC sites, including the corporation's major offices and production facilities at MediaCityUK in Salford and Broadcasting House in Portland Place, London.

 

More broadly in the commercial sector we won new facilities management contracts with power generation group RWE, travel retailer Dufry and law firm Irwin Mitchell.

 

Our learning and skills business (Interserve Learning & Employment) had a busy year following the introduction of the UK Apprenticeship Levy and we further invested in this area to maximise the significant opportunities presented by this reform. Our capability in designing, delivering and evaluating apprenticeship training within this business is now playing an increasingly valuable role as higher employment costs and regulatory requirements drive employers to invest more in training and skills, either to defray their Apprenticeship Levy or to upskill and gain additional productivity from an increasingly costly workforce. During the year we won new contracts with DHL, Countrywide, BT Group, Stagecoach Group, Grafton and Unilever.

 

In the justice sector, we won a contract to run a range of employment training schemes at Wrexham's HMP Berwyn, where inmates can improve their skills, employability and qualifications to ensure they are work-ready when they are released.

 

Our healthcare business, which provides nursing care in the home for high-acuity patients, delivered a resilient, profitable performance during the year and achieved a notable contract extension with healthcare firm, Baxter.

 

For Interserve, 2018 will principally be characterised by our transformation plans for the business and this is especially relevant to our Support Services division as we look to improve profitability. We will be reviewing organisational design, building on the work already started in 2017, to ensure an effective and efficient operating model. We will also look to improve governance and process to ensure a disciplined approach to work-winning and contract management. As part of our new strategy for Support Services, we will also focus on select sectors and service offerings.

 

2018 has started with major contract mobilisations for the Department for Work and Pensions and the Department for Transport and we continue to win work, building on a significant order book of £6.1 billion. While some uncertainties remain, specifically the outcome of Brexit negotiations, we remain a key strategic supplier to UK Government and we fully expect to build on this over the course of the year. Through a focus on cost reduction and stronger discipline on contract management, we would expect to see some benefits delivered in 2018.

 

International

 

The division performed creditably, delivering an improved profit performance in the second half of the year of £1.9 million (H1 2017: £0.9 million). This follows the action taken to reduce the size and cost base of the division in 2016 which we saw the benefits of during 2017. We also diversified our operations in Qatar and Oman in response to challenging market conditions and to reflect continued low oil prices and the cumulative impact on clients' spending.

 

As a result, the smaller, leaner division delivered revenues of £193.9 million (2016: £267.9 million) over the year. The division reported a profit of £2.8 million (2016: £9.4 million), demonstrating that we can still deliver a profit with a lower cost base and reduced volumes.

 

Market conditions in the Middle East facilities management market - in which we delivered a profit during the period - improved during the year, enabling us to leverage our extensive UK experience and longstanding customer relationships in the region. This was highlighted through our success in securing a £34 million facilities management contract with Musanada, which delivers maintenance and infrastructure projects for the Abu Dhabi government. We also won a £10 million contract to provide facilities management services at Qatar's Doha Festival City Mall and a £5 million support services contract with Emirates Aluminium.

 

We also won facilities management contracts with several private sector firms including accounts with Ford Middle East and Africa and retail group Al Shaya in the UAE.

 

The division's future workload at the end of December 2017 was up 13.5 per cent at £218 million (2016: £192 million) as the market stabilises and adapts to a 'new normal' oil price.

 

Given the reduction in size and cost base for our International Support Services business in 2017, we expect 2018 to be a year of consolidation, as a smaller, yet profitable business. While still a relatively small business, we still view our FM work in the Middle East to be an important medium to long-term value opportunity and we will continue to target profitable growth in this area in 2018.

 

Equipment Services

 

Equipment Services, which trades globally as RMD Kwikform (RMDK), provides engineering solutions in the specialist field of temporary structures needed to deliver major infrastructure and building projects. It is a global market leader and our engineers solve complex problems for our customers, through the application of world-class design and logistics capabilities, backed up by technology and an extensive fleet of specialist equipment. Our activities have a broad geographic spread, the mix of which can change quickly, hence we manage our equipment fleet globally, combining our scale and expertise with agility and responsiveness to meet customers' needs and safeguard our operational efficiency.

 

Results summary¹                          2017                       2016                     Change

Revenue

           £229.0m

£224.1m

  +2%

Contribution to total operating profit

            £54.4m

  £48.6m

  +12%

Margin

             23.8%

    21.7%

 

 

¹Excludes Exited Business

 

Our strong growth momentum continued as contribution to total operating profit increased by 12 per cent to £54.4 million, and margins improved to 23.8 per cent, reflecting healthy demand, strong pricing and market positioning across the broad range of global infrastructure markets in which we operate.

 

The division continues to have good momentum across its international markets, particularly the Middle East and UK and it was pleasing to see that we achieved growth across a broad range of our markets, rather than in any one individual territory during the period.

 

In Asia-Pacific, we delivered a good performance in Hong Kong, driven by our ongoing work on large-scale infrastructure projects, including the Kowloon Rail Terminus and the Hong Kong Macau Bridge, on which we completed our work during the period. We again performed well in the Middle East, with demand continuing to grow in the UAE where we won work on the Dubai Ports Bridge project, and in Saudi Arabia, where we continue to work on the Riyadh Metro scheme.

 

We delivered a strong performance in the UK, with work on several major projects continuing, including the Defence National Rehabilitation Centre in Loughborough and on sizeable rail improvement projects in Reading and on the Stockley Viaduct project near Heathrow airport. We also completed major long-term projects during the period, including work on the Mersey Gateway Bridge and the Medway crossing. Last year's launch of new products in the UK ground-shoring market has gone well and we expect to make further progress in this market in 2018.

 

As highlighted in our strategic review of the RMDK business in 2016, we have exited some of our smaller, less attractive markets including Singapore and Colombia and have also rationalised parts of the product range. 

 

Our adaptation of new technologies sets us apart in the temporary works sector and we continue to exploit our capability in 3D design and engineering, providing rapid visualisation tools to enable customers to quickly and easily visualise our solutions.

 

Over the next 12 months, Equipment Services will continue to pursue the recommendations of our 2016 strategic review, developing new opportunities such as ground-shoring, while also exiting some geographies based on evolving demand for our services. Macro uncertainties, such as the Qatar trade blockade may impact trading, but we would expect to maintain a similar level of performance from the division in 2018 despite some currency headwinds.

 

Construction

 

We offer design and construction services to create whole-life, sustainable solutions for building and infrastructure projects. Our focus is on forming long-term relationships and delivering repeat business through commercial structures such as framework agreements and project-financed schemes.

 

Our presence in the Middle East (in UAE, Qatar and Oman) is structured through longstanding joint-venture partnerships, enabling us to form enduring relationships with clients and to combine our international experience with our partners' local knowledge to deliver outstanding service.

 

Results summary

2017

2016

Change

Revenue

 

 

 

-   UK1

£1,048.2m

£870.8m

+20%

-   International2

£290.5m

£296.9m

-2%

 

 

 

 

Contribution to total operating profit

(£0.2m)

£42.1m

 

-   UK1

(£19.4m)

£25.2m

 

-   International2

£19.2m

£16.9m

 

 

 

 

 

Operating margin

 

 

 

-   UK1

-1.9%

2.9%

 

-   International3

7.0%

5.5%

 

 

 

 

 

Future workload

 

 

 

-   UK1

£1.0bn

£1.2bn

 

-   International2

£236m

£365m

 

 

1 Excluding Exited Business.

2 Share of associates.

3 Operating margin is calculated based on the underlying operating margin of associates.

 



 

UK

 

2017 was another difficult year for our UK Construction business due to the ongoing period of challenging market conditions and continued pockets of underperformance in operational delivery in a number of contracts, which resulted in a net loss result for the division.

 

We have continued to narrow our work-winning focus onto core sectors and activities and have refined the risk profile of work that we take on. Despite this, revenue rose 20.4 per cent during the year as we traded through legacy contracts. Revenue is expected to fall in 2018 as the shrinkage of the order book works through - during the year the orderbook fell 16.7 per cent to £1.0 billion. Going forward, we expect the division to be a smaller business by revenue but one capable of consistent profit margins in line with industry norms.

 

In the final quarter of 2017 the business conducted a contract review and balance sheet review. As part of this review the business identified the need for significant balance sheet write-downs principally in relation to work-in-progress and receivables. The majority of the value of these write-downs related to UK Construction. These write-downs were recorded as non-underlying and are not reported in the underlying numbers reported above. Please see the Financial Review section for further details.

 

During the year we further strengthened our cost, pricing and bidding controls and narrowed our strategic focus, restricting work-winning activity to select sectors, regions and activities and have refined our risk appetite in new work that we take on. We also instigated a number of changes to better manage the risks from future work, such as establishing a Contracts and Investments Committee, which approves all contracts requiring a Parent Company Guarantee, a bond, or is worth in excess of £5 million.

 

Our operating model continues to combine a strong regional presence and exposure to framework agreements with infrastructure and public-sector customers, in core sectors such as defence, education and healthcare, along with a growing presence in fit-out markets.

 

Reflecting this increased selectivity in work winning our future workload fell for the third year running, a substantial portion of which is focused on low-risk projects, constructing a range of buildings and infrastructure often under framework agreements with public-sector customers and utility companies.

 

We secured a place on a new construction framework launched by specialist healthcare property company, Prime, and Yeovil District Hospital NHS Foundation Trust (YDH). This continues our 15-year role on UK health frameworks, through which we have delivered over £1 billion of diverse healthcare facilities across more than 250 projects, which includes the UK's first Proton Beam therapy unit, currently under construction at The Christie in Manchester.

 

We also won a place on the Homes and Communities Agency's £8 billion Delivery Partner Panel 3 (DPP3) Framework - the four-year framework is divided into regional lots, and Interserve - a new entrant into the DPP framework - is appointed to all five. We also won a place on major highway and infrastructure frameworks in Manchester and across the Yorkshire and Humber Region, with the lots to which we have been appointed having a potential value in excess of £500 million.

 

In another of our longstanding core markets, education, an Interserve-led consortium was selected for an £85 million project by Durham University to finance, design, build and operate two new colleges in Durham City. The consortium, made up of Interserve, fund and asset management firm, Equitix, and on-campus student accommodation developer and operator, Campus Living Villages UK (CLV), will finance, build and operate the two new facilities for up to 50 years. We also won contracts with an average value of c£20 million to build four schools in Yorkshire and Wales.

 

The division was named Construction Company of the Year for the second year running at the National Centre for Diversity's annual awards.

 

Despite disappointing results in 2017, considerable work has been done to return the Construction business in the UK to a stable platform and this will continue through 2018. We are working to improve organisational structure and capability and we expect to improve our performance. Our focus remains on quality contracts, targeting profits and not revenue and we will restructure the cost base accordingly; the division is likely to face working capital challenges as we create efficiencies in the model, but we will manage these accordingly.

 

International

 

International Construction delivered a strong performance in improving markets stimulated by development plans such as those for Expo 2020 in the UAE and the ongoing need for infrastructure development across the region.

 

Contribution to operating profit in our associate businesses rose by 13.6 per cent to £19.2 million (2016: £16.9 million), with margins strengthening to 7.0 per cent (2016: 5.5 per cent). Future workload, however, fell to £236 million (2016: £365 million).

 

Market conditions in the UAE were largely good with key contract wins including refurbishment and fit-out work worth c£80 million with the Jumeirah Group (Jumeirah Beach Hotel) and Dubai Properties (Double Tree Hilton). We also won a range of fit-out contracts and further work on the Mall of the Emirates following the completion of our work to extend the facility last year.

 

In Qatar, we won a £102 million contract to build a range of substations and continue to make good progress (with our joint-venture partner, ALEC) in delivering Doha Festival City. We also won a £23 million contract to build a sewage treatment plant for Hyundai Rotem and some large fit-out contracts with local retailers and private individuals.

 

The recent political developments in the region have led to some isolated project deferrals in Qatar and remain a risk to the business that could impact during the year. However, with the Qatari government awarding more work to local companies following the trade blockage we are optimistic that more opportunities could open up for us given our joint-venture partner in Qatar (Gulf Contracting Company) is a well-established local company.

 

During the period we won contracts for civil and building works for the new 445 MW combined power plant in Oman for SEPCO and for £74 million worth of buildings, civils and underground piping work on the Liwa Plastics project, which is part-funded with the support of UK Export Finance.

 

In our International Construction business, trading has seen an impact from political developments in Qatar, albeit to a small degree, but upcoming events such as Expo 2020 in Dubai will continue to support work winning in 2018. Our International Construction division remains a well-performing business and our experience in the Middle East region continues to stand us in good stead.

 

Energy from Waste                     2017           2016

Revenue

 

 

 

-    UK Exited Business

(Consolidated revenue)

 

      £48.6m

     £91.0m

 

Total pre-tax non-underlying loss

      £35.1m

    £160.0m

 

 

Further progress was made on our remaining Energy from Waste (EfW) contracts during the year. However, we saw a slippage in the anticipated completion date for some of the contracts and, as previously announced in October 2017, we now expect that an additional £35.1 million provision - in addition to the £160 million provided in 2016 - is required to enable us to complete the outstanding projects in Derby, Margam, Templeborough and Dunbar. We expect to complete substantially the construction of the projects in the first half of 2018, though significant uncertainty remains on the timing of commissioning.

 

During the period we completed the construction of the Derby EfW plant and commissioning is progressing well. The plant started receiving municipal waste in January, generating electricity in February and has now received its Renewable Obligations Certifcate from OFGEM. While significant risks remain, we are making good progress towards final commissioning.

 

We expect cash flow during 2018 to be broadly neutral over the full year. However we anticipate a substantial cash outflow in the first half of the year, as construction continues on these projects, which is expected to be offset by insurance and other recoveries in the second half of the year.

 

We remain very focused on the challenges of exiting our remaining EFW projects and we will vigorously pursue our legal entitlements in closing these contracts out and to progress insurance claims and negotiated settlements where appropriate.

 

Group Services

 

All central costs, including those related to our financing activities, are disclosed within the Group Services segment.

 

Group Services' net costs of £21.0 million include the financial impact of our PFI investments. During the year the Group disposed of the entirety of its investment in Addiewell PFI, realising a profit on disposal of £7.5 million.

 

Group Services' gross costs rose 5 per cent to £28.5 million (2016: £27.1 million), due principally to investment in back-office capabilities, IT infrastructure, people development and communications.

 

 

 



 

PRINCIPAL RISKS AND UNCERTAINTIES

 

We operate in a business environment in which a number of risks and uncertainties exist. While it is not possible to eliminate these completely, the established risk-management and internal control procedures, which are regularly reviewed by the Group Risk Committee on behalf of the Board, are designed to manage their effects and thus contribute to the preservation and creation of value for the Group's shareholders as we pursue our business objectives. Given the events of 2017, we have updated the Principal Risks and Uncertainties to reflect the Group's current financial position and evolving strategy.

 

The Group continues to be dependent on effective maintenance of its systems and controls. The table below details the principal risks and uncertainties which the Group addresses through its risk-management measures. The changes to these risks relative to the last bi-annual review undertaken by the Board in August 2017 are depicted in the column entitled "Risk Environment".

 

 

RISK

 

POTENTIAL IMPACT

RISK ENVIRONMENT

 

MITIGATION AND MONITORING

BUSINESS, ECONOMIC AND POLITICAL ENVIRONMENT

Among the changes which could affect our business are:

 

·     shifts in the economic climate both in the UK and internationally;

·     changes in the UK Government's policy with regard to employment costs, expenditure on improving public infrastructure, buildings, services and modes of service delivery (including appetite to outsource services) and delays in or cancellation of the procurement of government-related projects;

·     Brexit, in particular our reliance on the large number of EU nationals within our workforce;

·     the imposition of unusually onerous contract conditions by major clients;

·     changes in our competitors' behaviour;

·     a deterioration in the profile of our counterparty risk; and

·     civil unrest and/or shifts in the political climate in some of the regions in which we operate

 

Any one or more of which might result in a failure to win new or sufficiently profitable contracts in our chosen markets or to deliver contracts with sufficient profitability.

 

 

 

 

 

 

 

 

 

 

 

 

We seek to mitigate these risks in a number of ways. These include:

·      by fostering long-term relationships with our clients and partners;

·      the development of additional capabilities to meet anticipated demand in new growth areas;

·      maintaining a flexible cost base;

·      effective supply-chain management; and

·      geographic diversity through the markets in which we operate.

 

The business plan created this year included a detailed strategy review and competitive assessment. This has informed our focus on those market segments with the greatest growth opportunities and the ability for us to earn appropriate margins.

 

As part of our competitive assessment, we assess our success rate in competitive situations. Whether we win, lose or retain a contract we analyse the reasons for our success or shortcomings and feed the information back at both tactical and strategic levels. We have launched a major transformation programme, 'Fit for Growth', as part of ensuring that our cost base is appropriate for the services we offer and to enable us to be cost competitive.

 

We monitor and assess levels of political risk and have contingency plans to mitigate some of these risks.

 

 

 

IT SYSTEMS/ SECURITY

As our IT systems become ever more critical to business success and to meet customer expectations, there is an increasing need to:

 

·    prevent service failures;

·    ensure confidentiality, availability and integrity of data;

·    protect our staff and systems from cyber-attack; and

·    recover critical systems in a timely and effective manner.

 

 

 

 

 

 

 

 

We are committed to ensuring that our IT applications and infrastructure and the IT organisation that manages them are provided with the necessary skills and tools to maintain the health of our IT services.

 

We operate robust monitoring and preventative maintenance regimes to minimise the potential impact of IT failures or security incidents in accordance with good industry practice.

 

Where necessary, we also ensure that both ISO 27001 and CES certifications are obtained for key contracts.

 

 

DATA MANAGEMENT

As we continue to onboard new customers, increasingly collaborate across our organisation and its supply chain and enable mobility for  our diverse workforce, there is an increasing need to ensure that our customer, supplier and employee data is:

 

·    classified appropriately;

·    processed securely; and

·    stored in accordance with legal and contractual requirements.

 

The increasing reliance on our data to provide commercial opportunity and enhanced risk management is driving more diverse use of our data across the Group.

 

 

 

Our Group-wide information security programme continues to improve our staff's awareness of the need for effective data management activity.

 

Initiatives include management and end- user training, contingency planning and detailed risk-management activities that address many difference types of data loss.

 

We have a broad programme to address the forthcoming General Data Protection Regulation (GDPR) obligations that come into force in May 2018. This will be supported by an extensive internal training programme.

 

OPERATING SYSTEM

We enjoy demonstrable success in working with third parties both through joint ventures and associated companies in the UK and abroad.  This success results in a material proportion of our profits and cash flow being generated from businesses in which we do not have overall control. The alignment of the Group's interests and the interests of our partners is critical to that success.  Any weakening of our strong relationships with these business partners could have an effect on our profits and cash flow.

 

 

We have a proven track record of developing and re-enforcing such relationships in a mutually beneficial way over a long period of time and our experience of this places us well to preserve existing relationships and create new ones as part of our business model. The measures taken to limit risk in this area include: board representation, shareholders' agreements, management secondments, local borrowings and rights of audit in addition to investing time in personal relationships.

 

FINANCIAL RISKS

 

 

 

 

The Group, due to a number of factors, has found itself with very high levels of debt relative to its earnings and cashflow. This has necessitated the refinancing of the existing debt structure and the injection of further additional debt funding. This is discussed in the Financial Review. This high level of debt is anticipated to continue until the Group is able to achieve a deleveraging of its balance sheet and as such in this period of time, we are inevitability not as financially resilient.


We have policies in place to monitor the effective management of working capital, including the production of daily balances, weekly cash reports and forecasts together with monthly management reporting.

 

The Contracts and Investments Committee (as discussed under 'Major Contracts') considers the implications of new business opportunities relative to the financial constraints as part of its assessment and review process.

 

 

 

MAJOR CONTRACTS

In Support Services our strategy is to focus on offering a broad range of services to large scale customers whilst our construction business focuses on contracts between £5 million - £50 million. Termination of large contracts which account for a significant portion of our revenue would be likely to reduce our revenue and profit. In addition, the management of such contracts entails a range of potential risks. These include: mis-pricing; inaccurate specification; poor mobilisation of new contracts leading to non-delivery of promised cost or efficiency improvements; poor control of costs or of service delivery; sub-contractor performance and/or insolvency.

 

In PFI/PPP contracts, which can last for periods of around 30 years, there may be increases in costs, including wage inflation, beyond those anticipated, or clients under financial pressure seeking to implement alternative interpretations of the contract in order to reduce payments.

 

 

 

 

 

 

 

Among our mitigation strategies are targeting work within, or complementary to, our existing competencies, engagement of experts to effectively deploy both business and cultural change requirements, the fostering of long-term relationships with clients, operating an authority matrix for the approval of large bids, monthly management reporting with key performance indicators at contract and business level, the use of monthly cost-value reconciliation, supply-chain management and ensuring that periodic benchmarking and/or market testing are included in long-term contracts.

 

We monitor the risk on contractual counterparties to avoid over-dependency on any one customer or sub-contractor.

 

In conjunction with our financing deal signed in December 2017, we commissioned an independent review of approximately 125 of our largest contracts. We continue to take action to minimise the consequences for those contracts with potential risks and potential underperformance.

 

As part of our Fit for Growth programme all new tenders requiring bonding or other security instruments are referred to the Contract & Investment Committee (CIC), comprising the CEO, CFO and General Counsel, who deliberate and consider approval based on assessment of commercial terms, profitability and risk.

 

Our Fit for Growth Programme will ensure we are fit to compete in increasingly challenging environments and markets by focusing on how we can improve our governance and processes, simplify our structures and improve efficiency across the whole Group.

 

 

DAMAGE TO REPUTATION

 

 

 

 

 

 

 

 

Issues arising within contracts, from the management of our businesses or from the behaviour of our employees at all levels, can have broader repercussions on the Group's reputation than simply their direct impact and may have an adverse impact upon the Group's "licence to operate".

 

This risk increases as we expand the range of frontline services being delivered, some of which are high profile and/or politically sensitive. 

 


Control procedures and checks governing the operation of our contracts and of our businesses, supported by business continuity plans, are in place. With the expansion of our frontline services there is even more emphasis placed upon assessing reputational risk before entering into such contracts, having proper procedures in place to monitor performance, escalate issues and monitor our response, promoting a good understanding of our brand amongst stakeholders through timely, clear and consistent communications.

                                

We have a clear set of core values which we strive to embed within our organisation and set ourselves the goals of creating a culture of innovation in sustainability and offering transparency to clients on public-sector projects.

 

KEY PEOPLE

The success of our business is dependent on recruiting, retaining, developing, motivating and communicating with sufficient numbers of appropriately skilled, competent people of integrity at all levels of the organisation. This is particularly relevant during periods of change and when improvement to profitability and competitiveness is required.

 

 

 

 

 

 

We are focused on engaging with all of our people at all levels and wherever they work in the organisation to ensure that they continue to deliver great customer service for our clients.

 

As part of our Fit for Growth programme we will design and build a more effective and efficient organisation in which skilled and engaged employees can thrive.

 

We have various incentive schemes and run a broad range of training courses for people at all stages in their careers. With active people management and Investors in People accreditation in many parts of the Group, we manage our people professionally and encourage them to develop and fulfil their maximum potential with the Group.

 

As part of our commitment to a diverse and inclusive workforce we are keen to offer 'Opportunities for All' and our approach focuses on how we can deliver, and work with others, to provide disadvantaged groups with the skills and employment opportunities that will help to turn their lives around.

 

 

HEALTH AND SAFETY REGIME

The nature of the businesses conducted by the Group means that employees and third parties are exposed to potential health and safety risks.  Management of these risks is critical to the success of the business and they are addressed through the adoption and maintenance of occupational health and safety procedures and operating standards setting out 'ways of working'.

 

 

 

 

A commitment to Health, Safety & Environment (HS&E) is embedded in all our core values and the subject leads every Board meeting both at Group and divisional level. Group and Divisional HS&E Governance committees meet quarterly to evaluate current risks for relevance and conduct independent reviews of high potential HS&E events and investigations. Each member of the Executive Board undertakes dedicated visits to review health and safety measures in place at our operational sites and we have ongoing training and communication campaigns across the Group emphasising its importance.

 

The new Group Head of Health, Safety & Environment has completed a review of all divisional programmes and we have now standardised our reported metrics across the business. Over the course of the current year, we are looking to increase the use of forward-looking metrics to reduce the risk of incidents.

 

 

The Group is exposed to operational currency risk in its International and Equipment Services businesses. These are not material on a net basis. In addition, the Group has foreign currency exposure in relation to its existing US Private Placement borrowings and the interest cost of servicing those borrowings. Whilst it does not trade in commodities, the Group does operate in countries where their economies depend upon commodity extraction and are therefore subject to volatility in commodity prices. The Group's principal businesses operate in countries which we regard as politically stable.

 

 



 

Financial review

 

This has been a difficult year for Interserve with a substantial reported loss and a reduced underlying trading performance. Notwithstanding these pressures, from the second half of 2017 onwards we have made significant progress to place the business on a more stable footing:

 

1.     In order to ensure an appropriate rigour and clarity in the reported numbers we have carried out a contract and balance sheet review exercise (the Contract Review). The process behind this and the results from it are discussed in further detail below.

 

2.     In April 2018 we concluded the refinancing of the Group, extending our committed borrowing facilities to £834 million (based on exchange rates at the time) and extending the maturity date to September 2021.

 

Having gained greater clarity on the underlying issues facing the business and secured our funding structure, we are well placed to move forward with our Fit for Growth agenda to tackle the underlying issues and improve financial performance.

 

The Financial Review does not deal with the underlying operating profit and revenue of each individual trading division. For commentary on these underlying operational results please refer to the Operational Review section of the Strategic Report.

 

REPORTED FINANCIAL PERFORMANCE

 

£million

2017

2016

Consolidated revenue

3,250.8

3,244.6

 

Total operating profit pre-amortisation and non-underlying items

74.9

155.0

 

Amortisation of acquired intangible assets

(21.6)

(29.9)

Goodwill and other asset impairments

(76.7)

-

Contract and balance sheet review charges

(86.1)

(30.8)

Energy from Waste

(35.1)

(160.0)

Property development

(26.0)

-

Restructuring costs

(33.2)

-

Professional adviser fees

(13.9)

-

Strategic review of Equipment Services

(7.1)

(10.7)

Total operating loss

(224.8)

(76.4)

 

Consolidated revenue was broadly flat at £3,250.8 million (2016: £3,244.6 million).  After amortisation of acquired intangible assets, goodwill impairment and other non-underlying items, analysed in further detail in note 4 to the consolidated financial statements and discussed further below, the operating loss was £224.8 million (2016: loss £76.4 million).

 

GOODWILL AND OTHER ASSET IMPAIRMENTS

 

Management reassessed the valuation of other intangible assets and a total impairment of £60.0 million has been recognised against goodwill in the period. This follows a reassessment of the relevant cash generation units and the separate identification of delivery of support services to the private sector and its associated intangible assets that principally relate to the acquisition of Initial Facilities in 2014.

 

A further £16.7 million write-down has been taken with regard to capitalised IT development costs. During 2017 the associated programmes were cancelled with no future benefit expected to be derived from the work carried out to date, as such the assets have been fully written off.

 

CONTRACT review AND BALANCE SHEET REVIEW

 

The new management team, with the approval of the Board, commissioned a comprehensive Contract Review, with the independent support of PwC, which reviewed the most material balance sheet judgements in relation to long-term contract accounting, accrued income, work-in-progress and mobilisation. This Contract Review identified the need for an additional £42.4 million of balance sheet write-downs principally in relation to work-in-progress and receivables beyond existing provisions. In the main these adjustments relate to contracts that were substantially complete at the end of 2016 but where additional information has come to light since the signing of the prior-year financial statements.

 

These provisions and write-downs relate to 18 individual contract issues. Of these, as at the date of the signing of these financial statements, nine are regarded as financially complete. Financially complete is defined as the point at which Interserve is no longer providing significant services to the client and final account negotiations have been concluded. A further seven are regarded as operationally complete. Operationally complete is defined as the point at which Interserve has ceased to provide significant services to the client but final account negotiations have not concluded. The remaining two contracts are regarded as neither operationally nor financially complete. These same contracts contributed a loss of £33.2 million in 2016.

 

The Contract Review also identified the need for £43.7 million of additional provisions in respect of loss-making or onerous contracts (these same contracts contributed a profit of £2.4 million in 2016). For the avoidance of doubt, the discrete contracts included here had results in previous periods and, where relevant, will continue to report results in future periods. Any such results will be presented consistently with this treatment. These accounts therefore include a total of £86.1 million of charges in respect of the Contract Review being £42.4 million of balance sheet write-downs plus £43.7 million in respect of onerous contract provisioning. Over half of this total cost reflects cash already expended with no future cash implications. Of the remaining balance approximately one-third will flow out during 2018 as onerous contract obligations are fulfilled with the remaining two-thirds anticipated in 2019 and beyond.

 

Further details of these adjustments, along with other non-underlying items not considered to be directly linked to the Contract Review, can be found in note 4 to the consolidated financial statements.

 

The Board notes that the results of the Contract Review have led to a number of asset impairments and large write-offs of a non-recurring nature and the difficulties this can cause in assessing underlying operating performance. This ability to assess underlying operating performance is recognised as a key focus for investors and other stakeholders.  Where appropriate, the 2016 figures are adjusted for the non-underlying items to assist comparability with 2017. There is no impact on comparative net assets or statutory profit before taxation. The Group has also utilised a number of non-statutory alternative performance metrics to further increase transparency and comparability. See note 16 for further details.

 



 

ENERGY FROM WASTE

 

During 2016 we took the decision to exit business where we take contractual responsibility for process risk on the construction of Energy from Waste (EfW) facilities. This Exited Business comprises six contracts with aggregate whole-life revenues of £430 million that we entered into between mid-2012 and early 2015. These contracts, most notably the project in Glasgow, have been impacted by issues relating to the design, procurement and installation of the gasification plant. Progress on these issues was adversely affected by sub-contractor insolvencies and the consequential impacts on project timing and costs. During 2016 we recognised a non-underlying loss of £160.0 million and restated 2015 comparatives to show a gross loss of £21.5 million. These losses reflected costs incurred to that date, estimates of costs to complete, and damages. This was stated net of expectations for further contractual income entitlements from our customers and recoveries from professional indemnity insurance policies on a number of separate issues relating to design.

 

During 2017, as announced in October 2017, a further £35.1 million of losses have been recognised on these contracts, taking the aggregate 2015-2017 losses to £216.6 million. As previously stated, these losses reflect costs incurred to date, estimates of costs to complete, and damages. This is stated net of expectations for further contractual income entitlements from our customers and recoveries from professional indemnity insurance policies on a number of separate issues relating to design. During 2017 significant insurance payments were received in respect of claims on the Glasgow project. The receipt of further insurance income remains a key judgement for the Group; see note 1 to the financial statements for further details on key judgements. The increase in loss from 2016 is predominantly due to an acceleration of certain projects to achieve key milestone dates.

 

We continue to expect to complete substantially all of our works during 2018 and that the impact of these contracts will be contained within the non-underlying losses recognised to date. We expect cash flow during 2018 to be broadly neutral over the full year. There is likely to be a substantial cash outflow in the first half of the year, as construction continues on these projects, which is expected to be offset by insurance and other recoveries in the second half of the year. These amounts are inherently judgemental but are based on legal and professional advice received and reflect our current best estimates of the most probable net outflows. We will vigorously pursue our legal entitlements in closing these contracts out. Managing the challenges of exiting from these complex projects remains the sole priority for the large, experienced team of commercial, operational and legal experts we have deployed and will remain an area of critical focus for the Board during 2018.

 

PROPERTY DEVELOPMENT

 

During the year, as part of a review of assets held, we took the decision to exit the business of Property Development. As a result of that decision, and a review of carrying value of property assets, it has become necessary to impair those carrying values by £26.0 million (2016: £nil) to bring them into line with estimated net recoverable amounts.

 

In March 2018 we commenced the marketing of our remaining development asset (the Haymarket site in Edinburgh). Encouragingly, we have received a number of indicative offers. We anticipate being able to complete a deal in connection with this site within the next six months and anticipate gross proceeds in excess of £40 million, depending upon the final offer which is accepted.



 

restructuring costs

 

The Group has embarked on a three-year plan, 'Fit For Growth', to increase the Group's organisational efficiency, improve Group-wide procurement processes and ensure greater standardisation and simplification across the business. During the year it incurred termination costs of £16.5 million (2016: £nil) in respect of former employees and directors along with recruitment costs for the new management team. In addition to this, £16.7 million (2016: £nil) of cost has been incurred in respect of a property consolidation exercise based mainly around a new Midlands hub office but also in the consolidation of regional networks. These costs include provisions for the remainder of onerous lease terms and dilapidations costs in respect of exited properties as we seek to right size and appropriately locate our operations to meet future needs.

 

PROFESSIONAL ADVISER FEES

 

Professional fees incurred in connection with the strategic review and the short-term refinancing secured towards the end of the year totalled £13.9 million in the year (2016: £nil). We anticipate further costs in 2018 totalling £25 million to complete the refinancing.

 

STRATEGIC REVIEW OF EQUIPMENT SERVICES

 

Consistent with the disclosure at last year end, further closure costs of £7.1 million (2016: £10.7 million) in the year resulted from the strategic review of Equipment Services and the decision to exit a number of smaller, less attractive markets. This brings total costs to just over the £17.0 million that was announced at the time of the review.

 

Net FINANCE COSTS

 

The net finance cost for the year of £19.6 million can be analysed as follows:

 

£million

2017

2016

Net
interest on Group debt

(21.4)

(18.8)

Foreign exchange gain on US private placement notes

2.9

-

Pension finance (charge) / credit

(1.1)

1.1

Group net interest charge

(19.6)

(17.7)

 


 

Higher net interest on Group debt of £21.4 million (2016: £18.8 million) reflects the higher average net debt levels in 2017. Please see the net debt section later within this review for further detail. We anticipate interest costs to increase substantially in 2018, reflecting both increased average net debt levels and increased interest rates following the April 2018 refinancing. Please see the Treasury Risk Management section later within this Financial Review for details of the refinancing carried out in 2018.

 

Within net debt the Group carries $350 million of US private placement notes. For the majority of the year these were fully hedged in sterling. On 13 December 2017 the Group disposed of all hedging instruments resulting in the free float of the borrowings; all subsequent retranslation gains or losses on the value of this debt are recognised through the income statement as a non-underlying item. During the final 18 days of 2017 this led to a credit of £2.9 million. The $350 million private placement has a GBP value of £258.9 million as at the balance sheet date, reflecting the closing rate of 1.35 USD : 1 GBP.

 

The IAS 19 pension deficit position results in a non-cash pension finance charge of £1.1 million (2016: £1.1 million credit). See note 10 to the consolidated financial statements for further details.

 

Taxation

 

The tax charge for the year of £10.0 million represents an effective rate of 15.5 per cent on headline profit before tax.

 

£million

2017

2016

 

Profit

Tax

Rate

Profit

Tax

Rate

Subsidiary companies

26.9

(8.1)

30.1%

111.5

(12.2)

10.9%

Joint ventures and associates1

25.5

-

-

25.8

-

-

Headline profit before tax

52.4

(8.1)

15.5%

137.3

(12.2)

8.9%

Amortisation of intangible assets

(21.6)

3.6

16.7%

(29.9)

4.7

15.7%

Goodwill impairment

(60.0)

-

-

-

-

-

Exited business and non-underlying items

(215.2)

(5.5)

(2.6%)

(201.5)

-

n/a

Effective tax charge and rate

(244.4)

(10.0)

4.1%

(94.1)

(7.5)

8.0%

1The Group's share of the post-tax results of joint ventures and associates is included in profit before tax in accordance with IFRS.

 

The subsidiary companies' effective rate stands at 30.1 per cent. This is considerably higher than the UK rate, principally driven by the impact of unrelieved UK losses. For further disclosure on the non-underlying items and amortisation see note 4 to the consolidated financial statements. See note 7 for further tax disclosures.

 

Dividend

 

The dividend remains suspended with no interim dividend paid or final dividend due to be paid. Under the terms of our new financing facilities, no dividend is payable until historical net debt to EBITDA is below 2.5 times.



 

cash flow

 

Year-end net debt stands at £502.6 million (2016: £274.4 million), an increase of £228.2 million. The key factors driving this outflow are £95.9 million of EfW associated outflows, £64.7 million of cash outflows associated with other non-underlying items, £32.0 million of investments into joint ventures and a £46.8 million working capital outflow as the 2016 year-end working capital stretch was not repeated and partially reversed.

 

£million

 

2017

2016


Operating profit before non-underlying items and amortisation of intangible assets

 

74.9

155.0


Depreciation and amortisation

 

41.1

39.0


EBITDA

 

116.0

194.0


Net capital expenditure

 

(25.3)

(39.0)


Gain on disposal of property, plant and equipment

 

(22.4)

(16.0)


Investment disposals in excess of the income statement charge

 

4.8

4.6


Other

 

2.1

2.7


Working capital movement

 

(46.8)

96.1


Dividends received from associates and joint ventures in excess / (deficit) of profits

 

(8.3)

11.5


Gross operating cash flow

 

20.1

253.9


Energy from Waste

 

(95.9)

(116.9)


Non-underlying items

 

(64.7)

(17.8)


Pension contributions in excess of the income statement charge

 

(15.9)

(19.5)


Interest and tax

 

(30.0)

(29.0)


Dividends paid

 

-

(37.1)


Investment in joint-venture entities

 

(32.0)

(9.8)


Disposal of hedging instruments

 

44.1

-


Foreign exchange

 

(53.9)

10.9


Other non-recurring

 

-

(0.3)


Decrease / (increase) in net debt

 

(228.2)

34.4


Year-end net debt

 

(502.6)

(274.4)


 

 


 


Underlying trading generated EBITDA of £116.0 million. For commentary on the underlying operational results please refer to the Operational Review section of the Strategic Report.

 

Capex of £25.3 million (2016: £39.0 million) was circa 62 per cent of depreciation and amortisation as the Group exercised investment restraint in a cash constrained climate. Key areas of investment were the upgrade of back-office IT systems, purchase of operational assets and investments related to our Midlands office consolidation.

 

Gains on disposal of fixed assets of £22.4 million (£16.0 million) almost entirely relate to sales of ex-hire fleet within Equipment Services. This is an integral part of the divisional business model and represents both a standard route to market and a consistent income statement and cash flow item.

 

Investment disposals in excess of the income statement charge of £4.8 million (2016: £4.6 million) represent the impact of the aggregate disposal proceeds on Addiewell PFI (£12.3 million), less the portion of these already included within operating profit (£7.5 million).

 

Working capital outflows of £46.8 million (2016: £96.1 million inflow) reflected a reversal of the 2016 year-end inflows on creditors as the Group returned to a more normal year-end payments profile. In January and February 2018, the Group had significant working capital outflows in respect of the settlement of Time to Pay obligations to HMRC (£10.8 million). Consistent with normal quarterly payment timescales, the Group also settled the Q4 VAT payment of £22.5 million on 3 January 2018. After adjusting for these post-year-end items the Group is considered to have returned to a steadier working capital position without year-end working capital stretch. The Group does not use factoring or reverse factoring arrangements.

 

Joint venture and associate (JVA) dividends received were £8.3 million in deficit of profits, a partial reversion of an extremely strong 2016 (£11.5 million in excess). In aggregate across 2016 and 2017, JVA dividends have been equal to 100 per cent of JVA underlying operating profits. Underlying JVA cashflows, the vast majority of which relate to our operations in the Middle East, remain strong. Aggregate debt and work-in-progress days in our Middle East joint ventures and associates remain broadly in line with 2016.

 

EfW net outflows of £95.9 million in the year reflect our continued efforts to close out these projects. In December 2017 we received a significant insurance receipt, constituting partial payment on a number of claim items. Further gross cash outflows are expected in the first half of 2018 as we complete operational works. Over the entirety of 2018 the EfW projects are expected to be broadly cash neutral, with receipts from claims against insurers and other parties offsetting the gross cash outflows.

 

Non-underlying cash outflows of £64.7 million represent the in-period cash impact of those items, other than EfW, that are classified as non-underlying items. £15.9 million of this balance relates to restructuring costs associated with the Group's Fit for Growth plans, £13.9 million relates to adviser and other professional fees and the remaining balance predominantly relates to the cash impact of non-underlying contract losses. See note 4 to the consolidated financial statements, and earlier within this Financial Review, for further details of non-underlying items.

 

Investments in joint-venture entities of £32.0 million (2016: £9.8 million) reflects further equity injections into our Derby Waste and Haymarket projects.

 

NET DEBT

 

Average net debt for the full year, calculated as a rolling 12 month of month-end balances, stood at £501.1 million. H1 average net debt was £457.3 million and H2 average net debt £545.0 million, the increase driven by ongoing cash outflows on EfW and a non-repeat of the reporting period end cash pushes. We anticipate, given the items discussed above, that H1 2018 net debt will be in the range of £650 - £680 million, subject to timing on asset disposals. This is then expected to reduce in the second half of the year as the first half outflows on EfW are matched with similar levels of anticipated inflows later in the year. The Group typically has a c£55 million variance between net debt and gross debt, reflecting restricted cash that is not included within the Group cash pooling arrangements. Intra-month net debt is typically at a higher level than month-end net debt, reflecting the timing of the majority of customer receipts.

 

Following the successful conclusion of our lender negotiations in April 2018 the Group has arranged access to committed facilities of £834 million (including $350 million at 1.4 USD : 1 GBP) which are considered adequate to satisfy the ongoing liquidity demands of the Group. See the 'Treasury Risk Management' section below for further details.

 

Pensions

 

At 31 December 2017 the Group had an IAS 19 pension deficit of £48.0 million (2016: £52.4 million net deficit).

 

£million

2017

2016

Gross liabilities

(1,064.1)

(1,044.6)

Insurance policy assets

342.7

368.7

Defined benefit obligation net of insurance assets

(721.4)

(675.9)

Other assets

673.4

623.5

Total deficit

(48.0)

(52.4)

 


 

The Group is committed to paying deficit-reduction contributions to the Interserve section of the Interserve Pension Scheme of £14.1 million during 2018 and £14.6 million during 2019.  Contributions for years 2020 and beyond will be agreed between the Group and Trustee as part of the actuarial valuation due with an effective date of 31 December 2017; contributions in 2020 and 2021 will be at least £15 million per year.  In addition, the Group pays contributions relating to the cost of accrual in the scheme (broadly equivalent to the Service Cost shown in these accounts), and also pays the expenses incurred by the scheme.

 

The pension figures set out in this report are required to comply with IAS19, which promotes consistency of accounting disclosures to facilitate comparisons between companies, and so the IAS19 assumptions underlying the projected benefit payments to members are intended to be "best estimates".  In contrast, the funding valuations used to determine the level of contributions paid into a pension scheme, are required to be based on explicitly prudent assumptions. For example, the prudent funding assumption regarding how long pensioners will live in retirement implies a longer period than used in the IAS19 numbers shown above.

 

The investment strategy for the scheme incorporates a number of de-risking measures put in place to reduce the volatility of the pensions deficit, in particular the buyin policy asset and the bespoke LDI fund.  Details of these investments, and the risks hedged, are included within the main pensions disclosure.

 

NEW ACCOUNTING STANDARDS

 

IFRS 9 Financial instruments

The directors have completed the impact assessment of IFRS 9 Financial instruments and have concluded that under the new standard, which will be adopted for the financial year ending 31 December 2018, the Group will be able to continue to record movements in its financial assets held within its PFI joint ventures through other comprehensive income (OCI) using the fair value through OCI category. This is because these financial assets are held within a business model whose objective at Group level is achieved by both collecting contractual cash flows and selling financial assets and the contractual terms of the financial asset meet the "solely payments of principal and interest on the principal outstanding" criterion. Therefore, there will be no quantitative impact on the Group upon adoption of IFRS 9 at 1 January 2018.

 

IFRS 15 Revenue from contracts with customers

The new standard replaces IAS 18 Revenue and IAS 11 Construction contracts. It became effective for accounting periods on or after 1 January 2018, at the earliest. The main impact of the standard is to require the recognition and disclosure of revenue to be based around the principle of disaggregation of discrete performance obligations. The Group has conducted a detailed review to quantify the impact of adoption of the standard and does not currently anticipate any material impact.

 

IFRS 16 Leases

The new standard will replace IAS 17 Leases. It will become effective for accounting periods on or after 1 January 2019, at the earliest. It will require nearly all leases to be recognised on the balance sheet as liabilities, including those currently recognised as operating leases, with corresponding assets being created. The Group is conducting a systematic review to quantify the exact impact of adoption of the standard.

 

Additional disclosure on the adoption of IFRS 15 will be provided in the full Annual Report.  Except for IFRS 9, IFRS 15 and IFRS 16 noted above, the directors do not currently anticipate that the adoption of any other standard and interpretation that has been issued but is not yet effective will have a material impact on the financial statements of the Group in future periods.

 

TAX STRATEGY AND RISK MANAGEMENT

 

Governance

The Group seeks constantly to evolve its systems, processes and procedures as they relate to taxation to ensure that confidence is maintained in the Group's ability to process and deal with its taxation affairs. All tax decisions and considerations are routed through the specialist Group Tax Department prior to being considered further and, when appropriate, put forward for approval at Board level. All tax disclosures and errors are reported to the Group Tax Department which also forms the principal point of contact between the Group and HMRC.

 

The Group has a robust system of documented controls which are regularly reviewed to ensure they remain fit for their intended purpose and which ensure that we are able to meet our taxation obligations and the requirements of the Senior Accounting Officer (SAO) reporting obligations. A comprehensive review is undertaken each year of adherence to SAO requirements before considering whether it is necessary to draw attention to errors which may have affected the Group's ability to account for the correct amount of tax.

 

Responsibility for the execution of the Group's tax strategy rests with the Chief Financial Officer and the Head of Tax and Treasury.

 

Planning

Efficient management of the tax base of the Group involves structuring the Group's affairs efficiently for tax and conducting the Group's affairs in accordance with tax legislation, but does not involve or permit the use of risky or aggressive tax structures or schemes.

 



 

The Group's tax strategy is determined by the Board and is summarised in the following statement:

 

"The Group will seek to manage the tax it pays (i) by abiding by legal and regulatory principles, (ii) by considering acceptability to stakeholders, and (iii) by avoiding any acts inconsistent with the Group's reputation."

 

The Group seeks to create value for its shareholders and efficient management of the tax base of the Group is an integral part of that value creation, subject to the principles outlined above.

 

Relationship with UK tax authorities

Interserve seeks to maintain an open dialogue in the UK with HMRC regarding its plans and tax affairs, discussing potential tax issues which may arise in the business as well as initiating discussion around the suitability of the systems and controls in place to control and manage its tax position.

 

During Q4 2017 the Group entered into a Time to Pay (TTP) agreement with HMRC. The substance of this agreement was to defer payment of certain payroll taxes to HMRC. As at 31 December 2017 the Group had residual liabilities under this agreement of £10.8 million. These were settled in full by 7 February 2018.

 

Treasury risk management

 

We operate a centralised Treasury function whose primary role is to manage interest rate, liquidity and foreign exchange risks. The Treasury function is not a profit centre and it does not enter into speculative transactions.  Where possible it aims to reduce financial risk by the use of hedging instruments, operating within a framework of policies and guidelines approved by the Board. 

 

Liquidity risk

 

We seek to maintain sufficient facilities to ensure access to funding for our current and anticipated future requirements, determined from budgets and medium-term plans.

 

During 2017 the Group had access to committed debt facilities comprising of a $350 million US private placement and £433 million of committed loan facilities. For the majority of the year the US private placement was fully swapped into GBP, giving an effective value of £207 million. These aggregate facilities of £640 million had a weighted average expiry date of April 2022.

On 13 December 2017 the Group secured interim financing from its lenders. The additional facilities, totalling £180 million, comprised a £37.5 million committed revolving credit facility, £37 million of committed ancillary facilities, committed bonding facilities of £93 million and £12.5 million of additional funding available by agreement with the lenders. These facilities were scheduled to expire on 30 March 2018 (and subsequently extended to 30 April 2018). In order to obtain these facilities, Interserve agreed to close out its cross-currency swaps, which hedged exchange rate exposure on the existing US private placement loan notes, generating proceeds of £44.1 million. These £44.1 million of proceeds were then used to repay existing committed facilities, resulting in aggregate facilities at the year end of £685.0 million.

As a result of the disposal of the cross-currency swaps the US private placement became free floating with all subsequent retranslation gains or losses on the value of this debt recognised through the income statement as a non-underlying item. See the section 'Net Interest Charge' earlier within this Financial Review for further details.

 

Following the successful conclusion of our lender negotiations in April 2018, and expiry of the £37.5 million of short-term facilities, the Group has arranged access to committed borrowing facilities of £834 million which are considered adequate to satisfy the ongoing liquidity demands of the Group.

 

These committed borrowing facilities consist of a renewal of existing revolving credit facilities of £388.6 million, $350 million of US loan notes, £175 million new term loan and £21.5 million of money market lines. The term loan is repayable in instalments with £150.0 million of repayments (including from disposals) due before or during 2019 and £60.0 million in 2020. The balance of funding is committed until September 2021 and is subject to a covenant to reduce gross borrowings to below £450 million by 30 June 2020.

 

These facilities are subject to interest at the following rates:

 

 

Cash payment

Payment in kind

Total

Revolving credit facility

LIBOR + 3.00%

1.43% + 2.00% until September 2019 if net leverage is above 3.0x and then subject to a ratchet increase

LIBOR + 6.43%

US$ loan notes

Weighted average of 5.61%

2.00% until September 2019 if net leverage is above 3.0x and then subject to a ratchet increase

Weighted average of 7.61%

New term loan

LIBOR + 3.25%

5.50%

LIBOR + 8.75%

 

As part of the refinancing the Company will issue warrants to the providers of the new term loan and bonding facilities to buy shares at 10 pence per share (the nominal price of each share). If exercised, this would provide the warrant holders with an interest of up to 20 per cent of the post-issue share capital. The issue of these warrants will result in a charge to the income statement over the life of the new money equivalent to their fair value.

 

The company has also agreed with the lenders that, as part of any significant equity fundraising to deleverage the group, they will be given a priority right to participate in up to 20 per cent of value of the equity fundraising by way of a conversion of a proportion of their debt into new equity at the same issue price as other investors. This participation right is conditional on the lenders retaining their lending commitment until any such equity fundraising. There is no certainty that the lenders will take up this right and in addition this right can be withdrawn if the company, having taken advice from its corporate brokers and independent equity adviser, believes it would be likely to adversely impact success of any such equity fundraise.

 

The Group also secured additional bonding facilities of up to £95 million as part of the arrangements which attract a cash margin of 2.00% with payment in kind charges of 5.50% whilst net leverage exceeds 3.0x. Existing bonding also attracts a 0.50% uplift on existing pricing and 2.00% payment in kind charges until September 2019 or net leverage falls below 3.0x and then subject to a ratchet. Payment in kind charges are capitalised to the balance sheet as a liability and become payable on a subsequent re-financing.

 

It is anticipated that the total interest expense in 2018 will be approximately £67 million (including the amortisation of costs associated with the warrants) of which circa £34 million will be cash interest. The increased cost of bonding instruments already issued will be circa £3.2 million, of which the cash impact is less than £1 million.

 

The borrowings are subject to a number of financial covenants including absolute EBITDA and cash flow available for debt servicing along with net leverage and cash interest cover. The calculation of EBITDA is subject to a cap on the level of non-underlying items that are excluded for covenant calculation purposes. Net leverage requirements for net debt relative to EBITDA start at a maximum of 6.5x and trend downwards to below 4.0x over the duration of the funding. Interest cover requirement is broadly for EBIT to cover interest by at least 3.5x. These covenants are tested quarterly on a rolling twelve months basis. There is also a minimum net worth covenant that is effective from December 2019.

 

In addition to the general financial covenants, the Group is subject to specific covenants on delivering EfW projects to within a £20 million tolerance on outturn cash flows, achieving milestones in a de-leveraging timetable, numerous periodic reporting requirements and avoiding a qualification of its consolidated audit report. Alongside these requirements it is committed to achieving prescribed levels of disposals of non-core assets and businesses by prescribed dates.

 

The Group has granted security in respect of the new, and some of the existing debt, in the form of share pledges over material subsidiaries and floating charges over various intercompany funding arrangements.

 

Market price risk

 

The objectives of our interest rate policy are to match funding costs with operational revenue performance and to ensure that adequate interest cover is maintained, in line with Board-approved targets and banking covenants.

 

Foreign currency risk

 

Transactional currency translation

The revenues and costs of our trading entities are typically denominated in their functional currency.  The impact of retranslating any entity's non-functional currency balances into its functional currency was not material.

 

Consolidation currency translation

We do not hedge the impact of translating overseas entities' trading results or net assets into the consolidation currency.

 

As at the balance sheet date the $350 million of debt relating to the US private placement was unhedged with the hedging instruments having been disposed of as a condition to secure the interim financing discussed above.

 

The impact of changes in the year-end exchange rates, compared to the rates used in preparing the 2017 consolidated financial statements, has led to a decrease in net assets attributable to equity holders of £34.8 million (2016: £67.7 million increase).

 



 

VIABILITY STATEMENT

 

This statement is made against a background of considerable market turbulence in the UK Support Services and Construction sectors, sectors that form the operating environment for the two largest revenue generating divisions of Interserve. The collapse into liquidation of Carillion and the announcement of a £700 million rights issue by Capita are clearly significant events for the sector as a whole. These events come against a backdrop of profit warnings from a number of other sector players in recent years.

 

The directors have reviewed the viability of the Group over a three-year period to December 2020. The choice of a three-year period reflects the long-term secured nature of the Group's revenues with £4.1 billion of work already secured in the order book covering the period up until the end of 2020. It also accords with the period covered by the annual strategic planning process which is discussed in greater detail below. The three-year period takes the Group until December 2020, nine months before expiry of the entirety of the current committed borrowing facilities.

 

Strategy and key judgements

 

The strategy of the Group is disclosed within this Annual Report and consists of four key priorities:

 

1.  Fit for Growth - improving cost efficiency

2.  Strengthening our competitive customer value proposition

3.  Standardising operational delivery

4.  Developing our people and a consistent, 'One Interserve' culture

 

The principal risks and uncertainties associated with this plan are discussed in more detail separately within the Strategic Report.

 

In generating its plan the Board has considered both the overall strategy of the Group and also the principal risks and uncertainties inherent within the business as well as making a number of key strategic planning assumptions which are discussed below:

 

1.  No significant political changes in the UK, in particular around the appetite for public sector outsourcing, or in the Middle East, in particular around the relationship between Qatar and other countries in the region.

2.  Margin improvement driven by efficiencies within overhead costs.

3.  Interserve will make non-core asset disposals during 2018 and beyond.

4.  The Company will be successful in its current professional indemnity insurance claims relating to the construction of the Glasgow EfW plant.

5.  The Company has not, as yet, recognised any material value for professional indemnity insurance claims relating to the construction of the Derby EfW plant.

6.  Dunbar, Margam and Rotherham EfW plants - solvency of joint venture partner.

7.  Future losses on the Ministry of Justice CRC contracts will fall within provided levels.

8.  Future losses on the US Forces Prime contract will fall within provided levels.

9.  Both customer and supplier payment terms will remain within historic norms.

10. Significant de-leveraging event or equity raise achieved within the timeframe of this review.

 

A number of these assumptions are discussed further within the detail on key judgements in note 1 to the consolidated financial statements which should be read as an integral part of this statement.

 

As part of its recently concluded re-financing, the Group has also had to commit to a number of significant requirements over the next three years which are summarised below. Non-compliance would be an event of default under the terms of these financing arrangements and has the potential to impact on the ability of the business to remain as a going concern and/or to remain viable.

 


2018

2019

2020

Term loan step downs


£70 million

£60 million

Gross debt



To be less than £450 million by June 2020

Approved non-core asset and business disposals (net proceeds to pay down loan)

Reasonable endeavours to achieve sales target

Best endeavours to realise £75 million by April 2019 and committed proceeds of £80 million by July 2019


Financial covenants

Absolute EBITDA (with capped non-underlying items), absolute cashflow, leverage and interest cover - all to within a minimum circa 20% adverse tolerance of the business plan and tested quarterly on LTM basis. Minimum net worth requirement.

De-leveraging

Compliance with key milestones to an agreed timetable

Energy from Waste net operating cash flow forecast variances

Less than £20 million deterioration in total life project forecast cashflow

Audit report

No qualification of consolidated audit report

 

The Group currently has plans in place to comply with these requirements but it cannot be considered to be without risk. Most significantly within a twelve month timeframe, from the signing of these financial statements, the Group has committed to:

 

1.  Make a £50 million repayment of the newly drawn term loan by February 2019 (included within £70 million above with the remaining £20 million due later in 2019). The Group's ability to do this may depend on its ability to achieve asset sales and other collections within this timeframe which may be outside of the control of the directors.

2.  Have used its best endeavours to achieve a determined amount of sales proceeds from approved non-core business disposals, and reasonable endeavours to dispose of other assets, which again may involve factors beyond the control of the directors.

3.  Comply with financial covenants on a quarterly basis benchmarked against a business plan containing challenging cost reduction and efficiency targets that may either not be deliverable or take longer to deliver than anticipated.

4.  No significant deterioration in forecast outturn for Energy from Waste projects including as a result of insolvency, or insolvency proceedings, against any of the Group's joint ventures partner in this sector. Whilst significant efforts and resources are being directed at the conclusion of these projects over the next twelve months, the directors cannot preclude the development of other unforeseen factors or events beyond their control and the forecasts on which the directors are reaching their conclusions, which whilst their best estimate, include significant assumptions about ultimate contract settlements, insurance settlements and project timetables that may be outside of their control. Note 1 to the financial statements contains additional disclosure of key judgements in this respect. The directors are aware of potential solvency issues at a joint venture partner, with whom we share joint and several liability for project completion on three projects.  The joint venture partner has launched a rights issue to raise additional funding which is due to complete on April 30, 2018. This rights issue is underwritten by a significant shareholder in the joint venture partner. Accordingly, although the ongoing solvency of the joint venture partner is beyond the directors' control, they do not currently anticipate an adverse outcome.

5.  As discussed in note 1 to the financial statements, significant judgements have also been taken with respect to the anticipated outcome of other contracts. In particular, that contract losses on the US Forces Prime contract and the Ministry of Justice CRC contracts will fall within anticipated and provided levels. This relies upon, as yet, unsecured negotiations to settle or de-scope contracts. Conclusion of these negotiations is at least partially outside the control of the directors and could have a material adverse impact on the Group.

 

In addition, it should be noted that the current level of uncertainty has been, and is potentially disruptive to confidence from customers, suppliers, employees and all stakeholders. The continuation of this level of uncertainty may disrupt the ability of the Group to perform to expectations.

 

Looking beyond the twelve month timeframe, to the remainder of 2019 and 2020, there are additional key requirements that may ultimately be beyond the control of the directors as set out in the table above. A failure to achieve any of these items would almost certainly bring an adverse conclusion to the viability of the Group.

 

Notwithstanding these significant standalone risks and requirements, the Group has carried out a comprehensive business planning exercise on all other aspects of its business. The approach adopted and sensitivities considered are discussed further below.

 

Assessment process

 

The future prospects and implementation of this strategy are assessed primarily through the annual strategic planning process. This entails a series of detailed operational reviews. These culminate with divisional reviews involving the Group CEO, Group CFO and divisional management team. The results of these reviews are then submitted to the Board in the form of a plan summary document for debate and approval.

 

The output is a full set of income statement, cashflow and balance sheet projections for each of the reporting entities of the Group. These exist at monthly frequency for the first year of the strategic plan (2018), at a quarterly frequency for the second year of the strategic plan (2019) and annually for the final year (2020). This process was concluded in December 2017.

 

Progress against this strategic plan is monitored on a monthly basis, primarily via the Group's monthly management accounts which are submitted to the Board and the lender group.

 

Subsequent to December 2017 the projections of the plan were amended to reflect the results of the Contract and Balance Sheet Review carried out by the Group, which is discussed in more detail earlier within this Financial Review. They were also amended to reflect expectations of the financing agreement to be reached with the Group's debt holders and the approximately £40m of adviser fees associated with this.

 

Following these amendments the plan produced envisages average net debt of c£650 million in H1 2018 and c£620 million in H2 2018. 2018 full-year average net debt is at c£630 million. 2019 full-year average net debt is forecast at c£525 million with 2020 net debt lower still. The Group typically has a c£55 million variance between net debt and gross debt, reflecting restricted cash that is not included within the Group cash pooling arrangements. Intra-month net debt is typically at a higher level than month-end net debt, reflecting the timing of the majority of customer receipts. The Group committed debt facilities stand at £834 million.

 

Assessment of viability

 

Although they consider that the output of the annual strategic planning process represents the best estimate of future prospects of the Group, the directors have also stress tested the future viability of the Group by considering a number of sensitivities to the plan, grouped into a number of potential scenarios.

 

These scenarios have been informed with reference to both the Principal Risks and Uncertainties of the Group and the key strategic planning assumptions. The scenarios are:

 

Scenario

Linkage to the key judgements and the principal risks or uncertainty

Sensitivity modelled

1 - Significantly reduced work winning from a combination of a downturn in market conditions, changes in the political appetite for outsourcing, political pressures in the Middle East or from reduced overall customer confidence in Interserve.

Key strategic planning assumption: 1, 2

 

Principal risks and uncertainties; business, economic and political environment, IT systems / security, operating system, health and safety regime, financial risks, damage to reputation

Shortfall on 2018 work to win volumes leading to reduced revenue and increased working capital outflows in the UK Construction business. Failure to cut overheads fully in line with revenue reductions.  Aggregate Group 2018 EBIT reduced by c25%.

Similar levels of adjustments applied in 2019/20.

2 - Fit for Growth plans not fully implemented to reduce overhead and increase procurement efficiency.

Key strategic planning assumption: 2

 

Principal risks and uncertainties; operating system, key people, financial risks

Costs of change incurred as planned but with reduced benefits.

3 - Failure to achieve planned levels of 2018 asset disposals

Key strategic planning assumption: 3

 

Principal risks and uncertainties; financial risks

Planned disposals of PFI and property assets are assumed to be delayed by 6 months from current expectations.

4 - Energy from Waste -insurance proceeds lower than assumed at Glasgow and higher at Derby and delays completing the commissioning at Derby

Key strategic planning assumption: 4, 5, 6

 

Principal risks and uncertainties: major contracts

Glasgow professional indemnity proceeds at 50% of expected level. Derby professional indemnity offsets shortfall at Glasgow.

5 - Failure to deliver expected levels of contractual performance

Key strategic planning assumption: 7, 8

 

Principal risks and uncertainties; operating system, key people, major contracts

2018 total operating profit reduced by c10% with similar absolute reductions applied in 2019/20.

6 - Both supplier and customer payment terms move adversely from historic norms, resulting in working capital outflows

Key strategic planning assumption: 9

 

Principal risks and uncertainties: financial risks

Aggregate working capital balances are £25 million adverse to planned levels by December 2018. This working capital outflow does not reverse in 2019/20.

 

The Company is able to sustain up to 5 of these scenarios in combination whilst forecasting to remain within absolute committed facility limits and within covenant tests. Application of all scenarios simultaneously will result in the Company breaching committed facilities and/or banking covenants. Additional unmodeled scenarios exist that could cause breaches of either the absolute committed facilities or covenants. These principally involve either significant adverse macroeconomic events or a significant worsening in the cost to complete or final account settlements within the EfW business. The directors have applied the assumption that more than 5 of the modelled scenarios will not occur simultaneously and that the unmodeled scenarios will not occur.

 

Viability statement

 

As outlined above, and elsewhere within this report, the Group faces a number of material uncertainties in the latter part of the three year period under review with a number of events that may ultimately be beyond the control of the directors. It has plans in place that have been stress tested with a number of reasonable scenarios however there can be no certainty that it will remain viable and there are credible scenarios identified in which it will not remain so. The directors have a credible plan which they are implementing but they acknowledge the inherent risks of delivery, some of which are outside their control.

 

GOING CONCERN STATEMENT

 

On the preceding pages the directors have carried out a detailed review of the viability of the Group over the period to December 2020. This review has involved stress testing of the current strategic plan of the Group under a number of scenarios and has considered risks and uncertainties to both the near and medium term.

 

Based on this analysis the directors have a reasonable expectation that the Group has adequate resources to continue as a going concern for the foreseeable future, representing a period of at least twelve months from the date of this report. Based on current expectations the directors consider it appropriate to continue to adopt the going concern basis in preparing the financial statements.

 

The strategic report was approved by the Board of Directors on 27 April 2018 and signed on their behalf by:

 

D J White                                             M A Whiteling

Director                                               Director

 

 

 


 

 

INCOME STATEMENT

Consolidated income statement

For the year ended 31 December 2017

 

 



Year  ended 31 December 2017

Year  ended 31 December 2016



Before non-underlying items and amortisation of acquired intangible assets

Non-underlying items and amortisation of acquired intangible assets

Total

Before non-underlying items and amortisation of acquired intangible

assets #

Non-underlying items and amortisation of acquired

intangible

assets #

Total


Notes

£million

£million

£million

£million

£million

£million

Continuing operations
















Revenue including share of associates and joint ventures


3,529.2

137.7

3,666.9

3,409.0

276.2

3,685.2

Less: Share of associates and joint ventures


(416.1)

-

(416.1)

(440.6)

-

(440.6)

Consolidated revenue

3

3,113.1

137.7

3,250.8

2,968.4

276.2

3,244.6

Cost of sales


(2,717.1)

(246.1)

(2,963.2)

(2,543.1)

(423.7)

(2,966.8)

Gross profit


396.0

(108.4)

287.6

425.3

(147.5)

277.8









Administration expenses


(346.6)

(79.1)

(425.7)

(296.1)

(50.8)

(346.9)

Amortisation of acquired intangible assets

4

-

(21.5)

(21.5)

-

(29.8)

(29.8)

Impairment of goodwill


-

(60.0)

(60.0)

-

-

-

Total administration expenses


(346.6)

(160.6)

(507.2)

(296.1)

(80.6)

(376.7)









Operating profit/(loss)


49.4

(269.0)

(219.6)

129.2

(228.1)

(98.9)









Share of result of associates and joint ventures


25.5

(30.6)

(5.1)

25.8

(3.2)

22.6

Amortisation of acquired intangible assets

4

-

(0.1)

(0.1)

-

(0.1)

(0.1)

Total share of result of associates and joint ventures


25.5

(30.7)

(5.2)

25.8

(3.3)

22.5

Total operating profit/(loss)


74.9

(299.7)

(224.8)

155.0

(231.4)

(76.4)









Investment revenue

5

5.9

2.9

8.8

5.6

-

5.6

Finance costs

6

(28.4)

-

(28.4)

(23.3)

-

(23.3)

Profit/(loss) before tax


52.4

(296.8)

(244.4)

137.3

(231.4)

(94.1)









Tax (charge)/credit

7

(8.1)

(1.9)

(10.0)

(12.2)

4.7

(7.5)

Profit/(loss) for the year


44.3

(298.7)

(254.4)

125.1

(226.7)

(101.6)









Attributable to:








Equity holders of the parent


42.3

(298.7)

(256.4)

123.0

(226.7)

(103.7)

Non-controlling interests


2.0

-

2.0

2.1

-

2.1



44.3

(298.7)

(254.4)

125.1

(226.7)

(101.6)









Earnings per share

9















Basic




(176.0p)



(71.2p)

Diluted




(176.0p)



(71.2p)

 

# - restated (note 14)



Consolidated statement of comprehensive income

For the year ended 31 December 2017

 



Notes

Year ended 31

December 2017

Year ended 31

December 2016




£million

£million

Profit/(loss) for the year



(254.4)

(101.6)






Items that will not be reclassified subsequently to profit or loss:




Actuarial gains/(losses) on defined benefit pension schemes


(10.4)

(90.2)

Deferred tax on above items taken directly to equity

7

1.8

15.3



(8.6)

(74.9)





Items that may be reclassified subsequently to profit or loss:




Exchange differences on translation of foreign operations


(34.8)

67.7

(Losses)/gains on cash flow hedging instruments (excluding joint ventures)


(23.0)

42.0

Recycling of cash flow hedge reserve to profit and loss account


22.7

(48.4)

Deferred tax on above items taken directly to equity

7

0.2

0.9

Net impact of items relating to joint-venture entities


3.0

(5.3)



(31.9)

56.9

Other comprehensive income/(loss) net of tax


(40.5)

(18.0)






Total comprehensive income/(loss)



(294.9)

(119.6)






Attributable to:





Equity holders of the parent



(297.3)

(122.0)

Non-controlling interests



2.4

2.4




(294.9)

(119.6)

 



Consolidated balance sheet

At 31 December 2017

 



31 December 2017

31 December 2016

31 December 2015


Notes

£million

£million

£million

Non-current assets





Goodwill


372.9

437.0

428.6

Other intangible assets


54.5

77.0

91.6

Property, plant and equipment


228.6

250.4

218.1

Interests in joint-venture entities


46.5

41.6

40.9

Interests in associated undertakings


78.4

85.3

91.0

Retirement benefit surplus

10

-

-

17.2

Deferred tax asset


23.4

18.6

1.3



804.3

909.9

888.7






Current assets





Inventories


34.0

36.5

40.1

Trade and other receivables


722.0

724.4

774.9

Derivative financial instruments


-

67.1

25.1

Cash and deposits


155.1

113.3

86.1



911.1

941.3

926.2






Total assets


1,715.4

1,851.2

1,814.9






Current liabilities





Borrowings


(6.8)

(11.1)

(15.5)

Trade and other payables


(798.6)

(899.3)

(788.0)

Current tax liabilities


(7.2)

(2.6)

(6.1)

Short-term provisions


(50.2)

(21.8)

(27.4)



(862.8)

(934.8)

(837.0)






Net current assets


48.3

6.5

89.2






Non-current liabilities





Borrowings


(647.5)

(449.4)

(406.1)

Trade and other payables


(14.5)

(16.6)

(15.9)

Long-term provisions


(80.0)

(42.9)

(43.3)

Retirement benefit obligation

10

(48.0)

(52.4)

-



(790.0)

(561.3)

(465.3)






Total liabilities


(1,652.8)

(1,496.1)

(1,302.3)






Net assets


62.6

355.1

512.6






Equity





Share capital

11

14.6

14.6

14.5

Share premium account


116.5

116.5

116.5

Capital redemption reserve


0.1

0.1

0.1

Merger reserve


121.4

121.4

121.4

Hedging and revaluation reserve


(5.9)

(8.8)

2.0

Translation reserve


74.5

109.7

42.3

Investment in own shares


(1.9)

(1.9)

(1.5)

Retained earnings


(272.0)

(9.4)

205.2

Equity attributable to equity holders of the parent


47.3

342.2

500.5

Non-controlling interests


15.3

12.9

12.1

Total equity


62.6

355.1

512.6

 


Consolidated statement of changes in equity


Share capital

Share premium

Capital redemption reserve

Merger reserve (1)

Hedging and revaluation reserve (2)

Translation reserve

Investment in own shares (3)

Retained earnings

Attributable to equity holders of the parent

Non-

controlling interests

Total


£million

£million

£million

£million

£million

£million

£million

£million

£million

£million

£million

Balance at 1 January 2016

14.5

116.5

0.1

121.4

2.0

42.3

(1.5)

205.2

500.5

12.1

512.6

Profit/(loss) for the year

-

-

-

-

-

-

-

(103.7)

(103.7)

2.1

(101.6)

Other comprehensive income

-

-

-

-

(10.8)

67.4

-

(74.9)

(18.3)

0.3

(18.0)

Total comprehensive income

-

-

-

-

(10.8)

67.4

-

(178.6)

(122.0)

2.4

(119.6)

Dividends paid

-

-

-

-

-

-

-

(35.5)

(35.5)

(1.6)

(37.1)

Shares issued

0.1

-

-

-

-

-

-

-

0.1

-

0.1

Purchase of Company shares

-

-

-

-

-

-

(0.4)

-

(0.4)

-

(0.4)

Company shares used to settle share-based payment obligations

-

-

-

-

-

-

-

(0.5)

(0.5)

-

(0.5)

Share-based payments

-

-

-

-

-

-

-

-

-

-

-

Transactions with owners

0.1

-

-

-

-

-

(0.4)

(36.0)

(36.3)

(1.6)

(37.9)

Balance at 31 December 2016

14.6

116.5

0.1

121.4

(8.8)

109.7

(1.9)

(9.4)

342.2

12.9

355.1

Profit/(loss) for the year

-

-

-

-

-

-

-

(256.4)

(256.4)

2.0

(254.4)

Other comprehensive income

-

-

-

-

2.9

(35.2)

-

(8.6)

(40.9)

0.4

(40.5)

Total comprehensive income

-

-

-

-

2.9

(35.2)

-

(265.0)

(297.3)

2.4

(294.9)

Dividends paid

-

-

-

-

-

-

-

-

-

-

-

Shares issued

-

-

-

-

-

-

-

-

-

-

-

Purchase of Company shares

-

-

-

-

-

-

-

-

-

-

-

Company shares used to settle share-based payment obligations

-

-

-

-

-

-

-

-

-

-

-

Share-based payments

-

-

-

-

-

-

-

2.4

2.4

-

2.4

Transactions with owners

-

-

-

-

-

-

-

2.4

2.4

-

2.4

Balance at 31 December 2017

14.6

116.5

0.1

121.4

(5.9)

74.5

(1.9)

(272.0)

47.3

15.3

62.6













(1)The £121.4 million merger reserve represents £16.4 million premium on the shares issued on the acquisition of Robert M. Douglas Holdings Plc in 1991, £32.6 million premium on the shares issued on the acquisition of MacLellan Group Plc in 2006 and £72.4 million premium on the shares placed to partially fund the acquisition of Initial Facilities in 2014.

 

(2) The hedging and revaluation reserve includes £16.0 million relating to the revaluation of available-for-sale financial assets within the joint ventures (2016: £19.9 million).

 

(3) The investment in own shares reserve represents the cost of shares in Interserve Plc held by the trustees of the Interserve Employee Benefit Trust. The number of shares held at 31 December 2017 was 466,909 (2016: 473,920), with the market value of these shares at 31 December 2017 being £0.4 million (2016: £1.6 million).


Consolidated cash flow statement

For the year ended 31 December 2017


Year ended 31 December 2017

Year ended 31 December 2016


Notes

£million

£million

Operating activities




Total operating profit/(loss)


(224.8)

(76.4)

Adjustments for:




Amortisation of acquired intangible assets


21.5

29.8

Impairment of goodwill


60.0

-

Amortisation of capitalised software development


1.6

1.4

Impairment of capitalised software development


6.3

-

Depreciation of property, plant and equipment


39.5

37.6

Impairment of capitalised IT development


9.4

-

(Profit)/loss on disposal of investments in joint ventures


(7.5)

(2.9)

Proceeds on disposal of investments


12.3

7.5

Other non-current asset non-cash impairment items


1.4

-

Pension payments in excess of the income statement charge


(15.9)

(19.5)

Share of results of associates and joint ventures


5.2

(22.5)

Charge relating to share-based payments


2.1

(0.2)

Gain on disposal of plant and equipment - hire fleet


(22.2)

(16.0)

Gain on disposal of plant and equipment - other


(0.2)

-

Operating cash flows before movements in working capital


(111.3)

(61.2)

(Increase)/decrease in inventories


0.5

9.4

(Increase)/decrease in receivables


(11.1)

80.8

Increase/(decrease) in payables


(77.3)

83.8

Increase/(decrease) in provisions  


50.9

(8.2)

Capital expenditure - hire fleet


(17.8)

(30.9)

Proceeds on disposal of plant and equipment - hire fleet


30.2

21.6

Cash generated by operations


(135.9)

95.3

Cash used by operations - Energy from Waste exited business


(95.9)

(116.9)

Cash used by operations - other non-underlying


(64.7)

(17.8)

Cash generated by operations - ongoing business


24.7

230.0

Taxes paid


(8.6)

(10.2)

Net cash from operating activities


(144.5)

85.1





Investing activities




Interest received


5.9

4.5

Dividends received from associates and joint ventures


17.2

34.1

Proceeds on disposal of plant and equipment - non-hire fleet


1.6

8.6

Capital expenditure - non-hire fleet


(39.3)

(38.3)

Investment in joint-venture entities


(32.7)

(9.8)

Receipt of loan repayment - Investments


0.7

-

Net cash from/(used in) investing activities


(46.6)

(0.9)





Financing activities




Interest paid


(27.3)

(23.3)

Dividends paid to equity shareholders

8

-

(35.5)

Dividends paid to non-controlling interests


-

(1.6)

Proceeds from issue of shares and exercise of share options


-

0.1

Purchase of own shares 


-

(0.4)

Proceeds from disposal of derivatives


44.1

-

Increase in bank loans


223.6

(5.0)

Movement in obligations under finance leases


(1.0)

2.2

Net cash used in financing activities


239.4

(63.5)





Net increase/(decrease) in cash and cash equivalents


48.3

20.7

Cash and cash equivalents at beginning of period


102.2

70.6

Effect of foreign exchange rate changes


(2.2)

10.9

Cash and cash equivalents at end of period


148.3

102.2





Cash and cash equivalents comprise




Cash and deposits


155.1

113.3

Bank overdrafts


(6.8)

(11.1)



148.3

102.2





Reconciliation of net cash flow to movement in net debt




Net increase/(decrease) in cash and cash equivalents


48.3

20.7

(Increase)/decrease  in bank loans


(223.6)

5.0

Movement in obligations under finance leases


1.0

(2.2)

Change in net debt resulting from cash flows


(174.3)

23.5

Effect of foreign exchange rate changes


(53.9)

10.9

Movement in net debt during the period


(228.2)

34.4

Net cash/(debt) - opening


(274.4)

(308.8)

Net cash/(debt) - closing


(502.6)

(274.4)

Notes to the Consolidated Financial Statements

For the year ended 31 December 2017

 

1.         General information and critical accounting judgements

 

General information

 

Interserve Plc (the Company) is a company incorporated in the United Kingdom. The financial information in this announcement, which was approved by the Board of Directors on 27 April 2018, does not constitute the Company's statutory financial statements for the years ended 31 December 2017 or 2016 but is derived from these accounts.

 

Statutory accounts for 2016 have been delivered to the Registrar of Companies and those for 2017 will be delivered following the Company's annual general meeting. The auditors have reported on these accounts; their reports were unqualified and did not contain statements under section 498(2), (3) or (4) of the Companies Act 2006. The Company expects to publish its statutory accounts that comply by the end of May 2018.

 

Critical accounting judgements

 

In the preparation of the consolidated financial statements management makes certain judgements and estimates that impact the financial statements. While these judgements and estimates are continually reviewed the facts and circumstances underlying them may change and that could impact the results of the Group. In particular:

 

Judgements

 

Glasgow Energy from Waste plant (EfW) - significant judgements

In July 2012 Interserve was appointed by Viridor as the EPC contractor for the construction of the Glasgow EfW plant. In December 2016 this contract was terminated by the client.

The Company has made a number of key judgements on the out-turn of various issues arising from the Glasgow EfW contract, the principal ones being;

 

·      The Company will make further significant recoveries from professional indemnity insurers

The Company is currently engaged in negotiating a number of professional indemnity (PI) claims with our insurers. The claims relate to design failures by the key sub-contractors responsible for the odour-control system and the power plant. These failures gave rise to additional costs and delays and were the greatest cause of both the losses recorded on this project and the termination of the contract by the client.

Glasgow EfW has been a significantly loss-making contract for Interserve and, as required under IAS 11, a forward loss provision was recognised in 2016. This forward loss provision assumes significant insurance recoveries under these PI claims. Failure to achieve this will result in an increased loss on the contract. A significant cash receipt, in excess of £20m, which was allocated as a series of part payments against a number of the aspects of these claims, was received in December 2017.

The directors have prepared the 2017 accounts on the basis of the judgement that these further significant PI insurance receipts will be received. The majority of the events have been accepted in principle by the insurers and the claims are robust, well supported and well developed. Some payments have already been received and positive discussions are continuing.

·      Final account settlement will crystallise within current expected parameters

The judgements in this regard have been based upon appropriate legal and technical advice and the directors regard them as appropriate. The directors are hopeful of achieving a negotiated settlement with the client but, failing this, arbitration is likely which carries further uncertainty.

 

 

Derby EfW - significant judgements

Interserve is currently involved in the construction of an EfW plant on behalf of Derby City and County Councils. The contract for the construction and operation of this plant was awarded to a special purpose vehicle (SPV), formed as a 50:50 joint venture between Interserve and Renewi, in August 2014. This SPV subsequently awarded an Engineer Procure Construct (EPC) contract to Interserve Construction for the construction of Derby EfW plant.

 

The Company has taken a number of key judgements on the contractual the out-turn on the Derby EfW plant, the principal ones being:

 

·      The contract will complete within the current projected timescale and current allowances around contractual cost to complete, exposure to liquidated damages and required levels of warranty provision are adequate.

Construction and commissioning at Derby are expected to complete by H1 2018 with the contract having incurred >90% of the total cost to complete as at the end of February 2018. Failure to meet this timeframe will result in increased labour and sub-contractor costs and an increased exposure to liquidated damages (LDs).

Post the completion of commissioning Interserve will retain a defects liability for up to two years. The current cost to complete estimate for Derby waste includes an allowance for maintenance costs over this period, representing the best estimate by management of the future liability.

·      The Company has, as yet, not recognised any material value for PI insurance claims relating to the construction of the Derby EfW plant

This contract has been significantly loss making and, as required under IAS 11, a forward loss provision has been taken. This forward loss provision does not assume significant insurance recoveries from PI insurance claims. Interserve considers that, as for Glasgow EfW, there will ultimately be significant PI recoveries on Derby Waste. A notification has been made to the PI insurer of claims. These centre around alleged design negligence of key sub-contractors and are conceptually similar to those on Glasgow. The majority of the PI claims by value are expected to focus on design deficiencies around the Advanced Conversion Facility (ACF) power plant.

Although the directors believe these claims will ultimately be successful they have not included the benefit of any material recoveries from these claims in their estimation of the net loss on the project. The PI claims on Derby Waste are at an earlier stage of development than those on Glasgow. Additionally, unlike Glasgow, no cash has yet been received from the PI insurers. As such the directors do not consider the claims are yet sufficiently well progressed to recognise material value. The directors will revisit this judgement in 2018 as the claims continue to progress.

 

 

 

 

 

 

 

 

 

Dunbar, Margam and Rotherham EfW - ongoing viability of joint-venture partner

Interserve is currently constructing EfW plants at three other sites (Dunbar, Margam and Rotherham) in joint venture with Babcock & Wilcox Volund (BWV). Both Interserve and BWV are jointly and severally liable under the terms of these contracts. For each plant the JV partners have an agreement in place cross indemnifying each other against different aspects of the risks of construction, the substance of which is to transfer engineering process risk onto BWV and risk around the civil engineering aspects of construction onto Interserve. The obligations of BWV are guaranteed by their ultimate parent, Babcock & Wilcox Enterprises Inc (BW). 

 

A financial failure of BW could result in the negation of these cross-indemnity agreements, with Interserve required to assume full responsibility for all aspects of construction. This would include the engineering process risk and all associated accrued liabilities and costs.

 

In March 2018 BW released Q4 2017 results prepared on a going concern basis. These results noted uncertainties relating to the ongoing financing of BW but also contained details of the steps in place, including an underwritten share issue and asset disposals, to remedy these uncertainties. Although noting the signs of financial strain on BW the directors of Interserve continue to believe it is an appropriate judgement to assume they will remain a solvent counterparty.

 

Future losses on the Ministry of Justice CRC contracts will fall within provided levels

Interserve is involved in providing probation and rehabilitation services to the Ministry of Justice (MoJ). These services are provided via five community rehabilitation companies (CRCs) each of which holds a contract to provide services in a given geographic area. These contracts provide a number of ways to measure the level of services provided by Interserve, chief among which is the Weighted Annual Volume (WAV) level.

 

The historic WAV level of services provided by two of the CRCs are at a level that triggers a contractual right for those CRCs to renegotiate the contract price payable for April 2018 onwards. Interserve has accordingly opened discussions with the MoJ. In addition, various other commercial issues associated with all five of the contracts are currently under discussion with the MoJ.

 

The 2017 financial statements have been prepared in the expectation that the commercial issues currently under discussion with the MoJ will be resolved by reaching a settlement with the MoJ or determined by means of the dispute resolution procedure. This judgement results in four of the five contracts being loss-making, and the remaining one being marginally profitable, over the remaining life of the contracts. A forward loss provision has accordingly been booked in the 2017 financial statements for the loss-making contracts.

 

The directors consider this judgement to be appropriate, based on their expectations of reaching a suitable settlement with the MoJ or, if necessary, obtaining a determination under the dispute resolution procedure. It is difficult to predict with accuracy what the final value will be of the matters being discussed with the MoJ as negotiations remain at an early stage and the range of potential outcomes remains wide.

 

Future losses on the US Forces Prime contract will fall within provided levels

Interserve is involved in providing facilities management and other services to the US Forces Prime via a contract with the UK Ministry of Defence. Currently this contract is loss-making and as part of the contract review carried out in 2017, a significant forward loss provision was taken. The measurement of potential future liability is complicated with negotiations underway to potentially de-scope certain services and contractual claims by Interserve also underway. The forward loss provision recognised is based on the mostly likely final outcome, and is considered appropriate by the directors, but negotiations remain at an early stage and the range of potential outcomes remains wide.

 

The Group will make asset disposals in 2018

This judgement applies principally to the assessments of Viability and Going Concern, see the Financial Review for further details.

 

The strategic plan assumes a level of asset disposals in 2018; these are discussed in more detail in the Viability Statement. These disposals reflect the ongoing Group strategic priorities around reduction in overall net debt and disposal of non-core activities and assets. In the light of prior year asset disposals, including fixed asset disposals, achieved the directors consider this judgement appropriate. The Group remains in constructive negotiations around disposals of a number of non-core assets.

 

Retirement benefit obligations

The Group has assessed that no further liability arises under IFRIC 14 IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction. This conclusion was reached because the trustees of the Interserve Pension Scheme, which represented 97% of the Group's total defined benefit obligations at 31 December 2017, do not have a unilateral power to wind up the schemes and the schemes' rules allow the Group an unconditional right to refunds assuming the gradual settlement of plan liabilities over time until all members have left the scheme.

 

Judgement is also exercised in establishing the fair value of retirement benefit assets, most notably the valuation of the buy-in contract to insure some of the benefits of a subset of the pension membership of the scheme provided by the insurer. This requires judgement of the proportion of the buy-in contract that exactly matches the amount and timing of benefits payable and the choice of an appropriate valuation technique in accordance with IFRS 13.

 

Non-underlying item presentation

IAS 1 requires material items to be disclosed separately in a way that enables users to assess the quality of a company's profitability. In practice, these are commonly referred to as 'exceptional' or 'non-underlying' items, but this is not a concept defined by IFRS and therefore there is a level of judgement involved in determining what to include in headline profit. We consider items which are non-recurring and significant in size or in nature to be suitable for separate presentation (see note 4).

 

 

2.         Accounting policies

 

These financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments.

 

The annual financial statements have been prepared on a going concern basis in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. 

 

The accounting policies and methods of computation followed in these financial statements are consistent with those as published in the Group's Annual Report and Financial Statements for the year ended 31 December 2016 which are available on the Company's website at www.interserve.com. In addition, the accounting policies used are consistent with those that the directors have used in the Annual Report and Financial Statements for the year ending 31 December 2017.

 

3.         Business and geographical segments

 

The Group is organised into three operating divisions, as set out below. Information reported to the Executive Board for the purposes of resource allocation and assessment of segment performance is based on the products and services provided.

 

·    Support Services: provision of outsourced support services to public- and private-sector clients, both in the UK and internationally.

·    Construction: design, construction and maintenance of buildings and infrastructure, both in the UK and internationally.

·    Equipment Services: design, hire and sale of formwork, falsework and associated access equipment.


Costs of central services, including those relating to managing our PFI investments and central bidding activities, are shown in "Group Services".

 

 

 

 

 

 

 



Notes to the Consolidated Financial Statements
For the year ended 31 December 2017

 

Business segments

 


Revenue including share of associates and joint ventures

Consolidated revenue

Result


2017

2016 #

2017

2016 #

2017

2016 #


£million

£million

£million

£million

£million

£million








Support Services - UK

1,687.5

1,718.1

1,670.7

1,694.7

38.9

80.1

Support Services - International

193.9

267.9

142.2

211.9

2.8

9.4

Support Services

1,881.4

1,986.0

1,812.9

1,906.6

41.7

89.5








Construction - UK

1,048.2

870.8

1,048.2

870.8

(19.4)

25.2

Construction - International

290.5

296.9

-

-

19.2

16.9

Construction

1,338.7

1,167.7

1,048.2

870.8

(0.2)

42.1








Equipment Services

229.0

224.1

229.0

224.1

54.4

48.6

Group Services

92.1

81.3

35.0

17.0

(21.0)

(25.2)

Inter-segment elimination

(12.0)

(50.1)

(12.0)

(50.1)

-

-


3,529.2

3,409.0

3,113.1

2,968.4

74.9

155.0

Non-underlying items and amortisation of acquired intangible assets (note 4)

137.7

276.2

137.7

276.2

(299.7)

(231.4)

Revenue/Total operating profit/(loss)

3,666.9

3,685.2

3,250.8

3,244.6

(224.8)

(76.4)

Investment revenue





8.8

5.6

Finance costs





(28.4)

(23.3)

Profit/(loss) before tax





(244.4)

(94.1)

Tax





(10.0)

(7.5)

Profit/(loss) for the year





(254.4)

(101.6)

 

# - restated (note 14)

 

 


Segment assets

Segment liabilities

Net assets/ (liabilities)


2017

2016

2017

2016

2017

2016


£million

£million

£million

£million

£million

£million








Support Services - UK

423.1

372.4

(382.8)

(383.5)

40.3

(11.1)

Support Services - International

109.4

128.6

(51.4)

(73.4)

58.0

55.2

Support Services

532.5

501.0

(434.2)

(456.9)

98.3

44.1








Construction - UK

231.5

255.4

(350.4)

(434.6)

(118.9)

(179.2)

Construction - International

55.9

63.6

-

-

55.9

63.6

Construction

287.4

319.0

(350.4)

(434.6)

(63.0)

(115.6)








Equipment Services

255.1

290.8

(56.2)

(64.4)

198.9

226.4


1,075.0

1,110.8

(840.8)

(955.9)

234.2

154.9

Group Services, goodwill and acquired intangible assets

484.0

553.9

(168.3)

(92.2)

315.7

461.7


1,559.0

1,664.7

(1,009.1)

(1,048.1)

549.9

616.6








Net debt





(502.6)

(274.4)








Net assets (excluding non-controlling interests)





47.3

342.2

 

 



Notes to the Consolidated Financial Statements - continued

For year ended 31 December 2017

 


Depreciation and amortisation

Additions to property, plant and equipment and intangible assets

 


2017

2016

2017

2016


£million

£million

£million

£million






Support Services - UK

13.5

12.4

23.3

29.5

Support Services - International

3.9

4.5

1.1

2.1

Support Services

17.4

16.9

24.4

31.6






Construction - UK

3.0

3.1

0.7

3.7

Construction - International

-

-

-

-

Construction

3.0

3.1

0.7

3.7






Equipment Services

17.6

17.8

16.3

28.4


38.0

37.8

41.4

63.7

Group Services

24.7

31.1

15.7

5.5


62.7

68.9

57.1

69.2

 



Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2017

 

Geographical segments

 

The Support Services and Construction divisions are located in the United Kingdom and the Middle East. Equipment Services has operations in all of the geographic segments listed below.

 

The table below provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods/services.

 


Revenue including




share of associates

Consolidated

Total operating


and joint ventures

Revenue

profit









2017

2016 #

2017

2016 #

2017

2016 #


£million

£million

£million

£million

£million

£million








United Kingdom

2,672.7

2,557.1

2,655.9

2,533.7

27.4

108.2

Rest of Europe

63.4

54.1

63.4

54.1

2.7

3.1

Middle East and Africa

627.5

675.4

285.3

322.5

52.7

48.8

Australasia

31.1

29.4

31.1

29.4

6.3

6.4

Far East

16.8

26.0

16.8

26.0

4.6

11.7

Americas

37.6

35.8

37.6

35.8

2.2

2.0

Group Services

92.1

81.3

35.0

17.0

(21.0)

(25.2)

Inter-segment elimination

(12.0)

(50.1)

(12.0)

(50.1)

-

-


3,529.2

3,409.0

3,113.1

2,968.4

74.9

155.0

Non-underlying items and amortisation of acquired intangible assets (note 4)

137.7

276.2

137.7

276.2

(299.7)

(231.4)


3,666.9

3,685.2

3,250.8

3,244.6

(224.8)

(76.4)

 

# - restated (note 14)

 


Non-current assets


2017

2016


£million

£million




United Kingdom

137.9

124.8

Rest of Europe

6.1

4.9

Middle East and Africa

177.7

186.6

Australasia

16.4

17.9

Far East

13.3

17.8

Americas

30.8

34.1

Group Services, goodwill and acquired intangible assets

398.7

505.2


780.9

891.3

Deferred tax asset

23.4

18.6


804.3

909.9

 



 


Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2017

 

4.      Non-underlying items and amortisation of acquired intangible assets

 


2017


Exited businesses1








Energy from waste

Strategic review of Equipment Services

Property development

Restructuring costs

Professional adviser fees

Contract Review

Asset impairments

Foreign exchange gain/(loss) on retranslation of loan notes

Amortisation of acquired intangible assets

Total













£million

£million

£million

£million

£million

£million

£million

£million

£million

£million

Consolidated revenue

48.6

4.5

-

-

-

84.6

-

-

-

137.7

Cost of sales

(81.6)

(7.2)

-

(0.4)

-

(156.9)

-

-

-

(246.1)

Gross profit/(loss)

(33.0)

(2.7)

-

(0.4)

-

(72.3)

-

-

-

(108.4)

     Administration expenses

(2.1)

(4.4)

-

(32.8)

(13.9)

(9.2)

(16.7)

-

-

(79.1)

     Amortisation of acquired intangible assets

-

-

-

-

-

-

-

-

(21.5)

(21.5)

     Impairment of goodwill

-

-

-

-

-

-

(60.0)

-

-

(60.0)

Total administration expenses

(2.1)

(4.4)

-

(32.8)

(13.9)

(9.2)

(76.7)

-

(21.5)

(160.6)

Operating profit/(loss)

(35.1)

(7.1)

-

(33.2)

(13.9)

(81.5)

(76.7)

-

(21.5)

(269.0)

Share of results of associates and joint ventures

-

-

(26.0)

-

-

(4.6)

-

-

-

(30.6)

Amortisation of acquired intangible assets of associates

-

-

-

-

-

-

-

-

(0.1)

(0.1)

Total operating profit/(loss)

(35.1)

(7.1)

(26.0)

(33.2)

(13.9)

(86.1)

(76.7)

-

(21.6)

(299.7)

Net finance costs

-

-

-

-

-

-

-

2.9

-

2.9

Total profit/(loss)

(35.1)

(7.1)

(26.0)

(33.2)

(13.9)

(86.1)

(76.7)

2.9

(21.6)

(296.8)












Tax on non-underlying items











     Prior period adjustments

-

-

-

-

-

-

(5.5)

-

-

(5.5)

     Amortisation of acquired intangible assets

-

-

-

-

-

-

-

-

3.6

3.6

Tax on non-underlying items

-

-

-

-

-

-

(5.5)

-

3.6

(1.9)












Profit/(loss) after taxation

(35.1)

(7.1)

(26.0)

(33.2)

(13.9)

(86.1)

(82.2)

2.9

(18.0)

(298.7)












(1) The construction of Energy from Waste facilities, where there was contractual responsibility taken for process risk, and business streams exited as a result of the strategic review of Equipment Services and the decision to exit property development, along with directly associated costs, are considered to be Exited Businesses. Exited Businesses are presented as non-underlying items and are excluded from the calculation of headline earnings per share (reflecting their material and non-recurring nature). The Exited Businesses do not meet the definition of discontinued operations as stipulated by IFRS 5 Non-current assets held for sale and discontinued operations because the business has not been disposed of and there are no assets classified as held for sale. Accordingly the disclosures within non-underlying items differ from those applicable for discontinued operations.


Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2017

 

Non-underlying items and amortisation of acquired intangible assets (continued)

 

 


2016 #


Exited businesses1








Energy from waste

Strategic review of Equipment Services

Property development

Restructuring costs

Professional adviser fees

Contract Review

Asset impairments

Foreign exchange gain/(loss) on retranslation of loan notes

Amortisation of acquired intangible assets

Total













£million

£million

£million

£million

£million

£million

£million

£million

£million

£million

Consolidated revenue

91.0

4.3

-

-

-

180.9

-

-

-

276.2

Cost of sales

(251.0)

(2.1)

-

-

-

(170.6)

-

-

-

(423.7)

Gross profit/(loss)

(160.0)

2.2

-

-

-

10.3

-

-

-

(147.5)

     Administration expenses

-

(12.9)

-

-

-

(37.9)

-

-

-

(50.8)

     Amortisation of acquired intangible assets

-

-

-

-

-

-

-

-

(29.8)

(29.8)

     Impairment of goodwill

-

-

-

-

-

-

-

-

-

-

Total administration expenses

-

(12.9)

-

-

-

(37.9)

-

-

(29.8)

(80.6)

Operating profit/(loss)

(160.0)

(10.7)

-

-

-

(27.6)

-

-

-

(228.1)

Share of results of associates and joint ventures

-

-

-

-

-

(3.2)

-

-

-

(3.2)

Amortisation of acquired intangible assets of associates

-

-

-

-

-

-

-

-

(0.1)

(0.1)

Total operating profit/(loss)

(160.0)

(10.7)

-

-

-

(30.8)

-

-

(29.9)

(231.4)

Net finance costs

-

-

-

-

-

-

-

-

-

-

Total profit/(loss)

(160.0)

(10.7)

-

-

-

(30.8)

-

-

(29.9)

(231.4)












Tax on non-underlying items











     Prior period adjustments

-

-

-

-

-

-

-

-

-

-

     Amortisation of acquired intangible assets

-

-

-

-

-

-

-

-

4.7

4.7

Tax on non-underlying items

-

-

-

-

-

-

-

-

4.7

4.7












Profit/(loss) after taxation

(160.0)

(10.7)

-

-

-

(30.8)

-

-

(25.2)

(226.7)

 

(1) The construction of Energy from Waste facilities, where there was contractual responsibility taken for process risk, and business streams exited as a result of the strategic review of Equipment Services and the decision to exit property development, along with directly associated costs, are considered to be Exited Businesses. Exited Businesses are presented as non-underlying items and are excluded from the calculation of headline earnings per share (reflecting their material and non-recurring nature). The Exited Businesses do not meet the definition of discontinued operations as stipulated by IFRS 5 Non-current assets held for sale and discontinued operations because the business has not been disposed of and there are no assets classified as held for sale. Accordingly the disclosures within non-underlying items differ from those applicable for discontinued operations.

 

# - restated (note 14)


Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2017

 

Non-underlying items and amortisation of acquired intangible assets (continued)

 

Exit from Energy from Waste

 

During 2016 we took the decision to exit business where we take contractual responsibility for process risk on the construction of Energy from Waste facilities. This Exited Business comprises six contracts with aggregate whole-life revenues of £430 million that we entered into between mid-2012 and early 2015. These contracts, most notably the project in Glasgow, have been impacted by issues relating to the design, procurement and installation of the gasification plant. Progress on these issues was adversely affected by sub-contractor insolvencies and the consequential impacts on project timing and costs. During 2016 we recognised a non-underlying loss of £160 million and restated 2015 comparatives to show a gross loss of £21.5 million. These losses reflected costs incurred to that date, estimates of costs to complete, and damages. This was stated net of expectations for further contractual income entitlements from our customers and recoveries from professional indemnity insurance policies on a number of separate issues relating to design.

 

During 2017 a further £35.1 million of losses have been recognised on these contracts, taking the aggregate 2015-17 losses to £216.6 million. As previously stated, these losses reflect costs incurred to date, estimates of costs to complete, and damages. This is stated net of expectations for further contractual income entitlements from our customers and recoveries from professional indemnity insurance policies on a number of separate issues relating to design. During 2017 significant insurance payments were received in respect of claims on the Glasgow project. The receipt of further insurance income remains a key judgement for the Group, see note 1 to the financial statements for further details on key judgements. The increase in loss from 2016 is predominantly due to an acceleration of certain projects to achieve key milestone dates.

 

We continue to expect to complete substantially all of our works during 2018 and that the impact of these contracts will be contained within the non-underlying losses recognised to date. We expect cash flow during 2018 to be broadly neutral over the full year. There is likely to be a substantial cash outflow in the first half of the year, as construction continues on these projects, which is expected to be offset by insurance and other recoveries in the second half of the year. These amounts are inherently judgemental but are based on legal and professional advice received and reflect our current best estimates of the most probable net outflows. We will vigorously pursue our legal entitlements in closing these contracts out. Managing the challenges of exiting from these complex projects remains the sole priority for the large, experienced team of commercial, operational and legal experts we have deployed and will remain an area of critical focus for the Board during 2018.

 

Strategic review of Equipment Services

 

Consistent with the disclosure at last year end, further closure costs of £7.1 million (2016: £10.7 million) in the year resulted from the strategic review of Equipment Services and the decision to exit a number of smaller less attractive markets. This brings total costs to just over the £17.0 million that was announced at the time of the review.

 

Property development

 

During the year, as part of a review of assets held, we took the decision to exit the business of property development. As a result of that decision, and a review of carrying value of property assets, it has become necessary to impair those carrying values by £26.0 million to bring them into line with estimated net recoverable amounts.

 

Restructuring costs

 

The Group has embarked on a three year plan, "Fit For Growth", to increase the Group's organisational efficiency, improve Group-wide procurement processes and ensure greater standardisation and simplification across the business. During the year it incurred termination costs of £16.5 million (2016: £nil) in respect of former employees and directors along with recruitment costs for the new management team. In addition to this, £16.7 million (2016: £nil) of cost has been incurred in respect of a property consolidation exercise based mainly around a new Midlands hub office but also in the consolidation of regional networks. These costs include provisions for the remainder of onerous lease terms and dilapidations costs in respect of exited properties as we seek to right size and appropriately locate our operations to meet future needs.

 

Professional adviser fees

 

Professional fees incurred in connection with the strategic review and the short term refinancing secured towards the end of the year totalled £13.9 million in the year (2016: £nil). 

 

Contract Review

 

The new management team, with the approval of the Audit Committee, commissioned a comprehensive Contract Review, with the independent support of PwC, which reviewed the most material balance sheet judgements in relation to long-term contract accounting, accrued income, work-in-progress and mobilisation. This Contract Review identified the need for an additional £42.4 million of balance sheet writedowns principally in relation to work-in-progress and receivables. In the main these adjustments relate to contracts that were substantially complete at the end of last year but where additional information has come to light since the signing of the prior year financial statements. These provisions and write-downs relate to 18 individual contract issues. Of these, as at the date of the signing of these financial statements, nine are regarded as financially complete. Financially complete is defined as the point at which Interserve is no longer providing significant services to the client and final account negotiations have been concluded. A further seven are regarded as operationally complete. Operationally complete is defined as the point at which Interserve has ceased to provide significant services to the client but final account negotiations have not concluded. The remaining two contracts are regarded as neither operationally nor financially complete. These same contracts contributed a loss of £33.2 million in 2016. The Contract Review also identified the need for £43.7 million of additional provisions in respect of loss-making or onerous contracts (these same contracts contributed a profit of £2.4 million in 2016).

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2017

 

For the avoidance of doubt, the discrete contracts included here had results in previous periods and, where relevant, will continue to report results in future periods. Any such results will be presented consistently with the treatment here.

 

Asset impairments

 

As part of the Contract Review, management also reassessed the valuation of other intangible assets and a total impairment of £60.0 million has been recognised against goodwill in the period. This follows a reassessment of the relevant cash generation units and the separate identification of delivery of support services to the private sector and its associated intangible assets that principally relate to the acquisition of Initial Facilities in 2014.

 

A further £16.7 million write-down has been taken with regard to capitalised IT development costs. During 2017 the associated programmes were cancelled with no future benefit expected to be derived from the work carried out to date, as such the assets have been fully written off. £6.3 million has been written off Other intangible assets, £9.4m has been written off Property, plant and equipment, with £1.0m written off working capital.

 

A further £5.5 million of deferred tax assets relating to losses have been impaired in the period following a review of likely utilisation timescales.

 

Foreign exchange gain/(loss) on retranslation of loan notes

 

From 13 December 2017, the Group's US$ 350 million US Private Placement loan notes are retranslated at current exchange rates, with profit or loss on translation being taken to profit or loss. Up to that date, these loans were swapped to a fixed sterling equivalent, using derivatives that were designated as cash flow hedges.

 

5.      Investment revenue

 


2017

2016


£million

£million




Bank interest

3.0

3.1

Interest income from joint-venture investments

2.2

0.7

Net return on defined benefit pension assets (note 10)

-

1.1

Foreign exchange gain on US private placement loan

2.9

-

Other interest

0.7

0.7


8.8

5.6

 

6.      Finance costs

 


2017

2016


£million

£million




Borrowings and overdrafts

(27.3)

(23.3)

Net interest cost on pension obligation

(1.1)

-


(28.4)

(23.3)

 

 

 

 



 

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2017

 

7.      Tax

 


2017

2016


£million

£million




Current tax - UK

5.8

2.1

Current tax - overseas

6.9

6.4

Deferred tax

(2.7)

(1.0)

Tax charge for the year                                                                          

10.0

7.5

 




Tax charge before prior period adjustments         

2.9

7.2

Prior period adjustments - charges/(credits)

7.1

0.3

                                                                                                             

10.0

7.5

 


2017

2016


Profit

Tax

Effective rate

Profit

Tax

Effective rate


£million

£million

%

£million

£million

%








Subsidiary undertakings' profit before tax, excluding one-offs

26.9

8.1

30.1%

111.5

12.2

10.9%

Group share of profit after tax of associates and joint ventures

25.5

-

-

25.8

-

-


52.4

8.1

15.5%

137.3

12.2

8.9%








Other non-underlying items

(215.2)

5.5

(2.6%)

(201.5)

-

-

Goodwill impairment

(60.0)

-

-

-

-

-

Amortisation

(21.6)

(3.6)

16.7%

(29.9)

(4.7)

15.7%

Profit/(loss) before tax

(244.4)

10.0

(4.1%)

(94.1)

(8.0%)

 

UK corporation tax is calculated at 19.25% (2016: 20.0%) of the estimated taxable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.

 

The total charge for the year can be reconciled to the profit per the income statement as follows:

 


2017

2016

 


£million

%

£million

%






Profit/(loss) before tax

(244.4)


(94.1)







Tax at the UK income tax rate of 19.25% (2016: 20.0%)

(47.0)

19.2%

 

(18.8)

20.0%






Tax effect of expenses not deductible in determining taxable profit

(1.5)

0.6%

1.2

(1.3%)

Non-tax-effected non-underlying items

33.4

(13.7%)

34.1

(36.2%)

Tax effect of share of results of associates

1.0

(0.4%)

(4.5)

4.8%

Effect of overseas tax rates and unrelieved losses

16.3

(6.7%)

(4.2)

4.5%

Effect of change in rate of deferred tax

0.7

(0.3%)

(0.6)

0.6%

Prior period adjustments

7.1

(2.9%)

0.3

(0.3%)

Tax charge and effective tax rate for the year

10.0

(4.1%)

7.5

(8.0%)

 

In addition to the income tax charged to the income statement, the following deferred tax charges/(credits) have been recorded directly to equity in the year:

 


2017

2016


£million

£million




Tax on actuarial losses/gains on pension liability

(1.8)

(15.3)

Tax on movements in cash flow hedging instruments

(4.0)

6.4

Tax on exchange movements on hedged financial instruments

3.8

(7.3)

Tax on the intrinsic value of share-based payments

-

0.1

Total

(2.0)

(16.1)

 

 

 

 

 

 

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2017

 

8.      Dividends

 


Dividend per share

2017

2016


Pence

£million

£million





Final dividend for the year ended 31 December 2015

16.4

-

23.7

Interim dividend for the year ended 31 December 2016

8.1

-

11.8

Amount recognised as distribution to equity holders in the period


-

35.5

 

 

9.      Earnings per share

 

Calculation of earnings per share is based on the following data:

 


2017

2016 #


£million

£million

Earnings



Net profit attributable to equity holders of the parent (for basic and diluted basic earnings per share)

(256.4)

(103.7)

Adjustments:



Non-underlying items and amortisation of acquired intangible assets (note 4)

298.7

226.7

Headline earnings (for headline and diluted headline earnings per share)

42.3

123.0




Number of shares


2017

2016


Number

Number




Weighted average number of ordinary shares for the purposes of basic and headline earnings per share

145,714,120

145,606,147




Effect of dilutive potential ordinary shares:



Share options and awards1

6,781,433

291,221




Weighted average number of ordinary shares for the purposes of diluted basic1 and diluted headline earnings per share

152,495,553

145,897,368




Earnings per share

2017

2016 #


Pence

Pence




Basic earnings per share

(176.0)

(71.2)

Diluted basic earnings per share

(176.0)

(71.2)




Headline earnings per share

29.0

84.5

Diluted headline earnings per share

27.7

84.3




1 Due to basic earnings per share being a loss in 2017 and 2016 these adjustments are anti-dilutive and are therefore ignored in calculating diluted basic earnings per share for 2017 and 2016.

# - restated (note 14)


Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2017

 

10.    Retirement benefit schemes

 

The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation.

 


2017

2016

2015

Significant actuarial assumptions




Retail price inflation (pa)

3.2%

3.3%

3.1%

Discount rate (pa)

2.5%

2.8%

3.8%

Post-retirement mortality (life expectancy in years)




   Male currently aged 65

87.7

87.6

87.6

   Female currently aged 65

89.6

89.5

89.4

   Male aged 65 in 20 years' time

89.5

89.4

89.3

   Female aged 65 in 20 years' time

91.0

91.0

90.9





Other related actuarial assumptions




Consumer price index (pa)

2.2%

2.3%

2.1%

Pension increases in payment (pa):




  LPI/RPI

3.1%/3.2%

3.1%/3.3%

3.0%/3.1%

  Fixed 5%

5.0%

5.0%

5.0%

  3% or RPI if higher (capped at 5%)

3.7%

3.7%

3.6%

General salary increases (pa)

2.7%

2.8%

2.6%

The amount included in the balance sheet arising from the Group's obligations in respect of the various pension schemes is as follows:

 


2017

2016

2015


£million

£million

£million

Present value of defined benefit obligation

1,064.1

1,044.6

880.9

Fair value of schemes' assets

(1,016.1)

(992.2)

(898.1)

(Asset)/liability recognised in the balance sheet

48.0

52.4

(17.2)

 

The amounts recognised in the income statement are as follows:

 


2017

2016


£million

 

£million

 




Employer's part of current service cost

5.2

5.7

Net interest (income)/expense on the net pension liability/(asset)

1.1

(1.1)

Administration costs

1.6

0.9

Past service cost/(credit)

-

(2.6)

Losses/(gains) on settlements

-

(0.1)

Total expense recognised in the income statement

7.9

2.8

 

The current service cost and administration costs are included within operating profit. The interest cost is included within financing costs.

 

 

 

 

 

 

Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2017

 

11.       Share capital


Shares

Share capital


thousands

£million




As at 1 January 2016

145,207.5

14.5




Share awards issued in 2016

506.6

0.1




At 31 December 2016

145,714.1

14.6




Share awards issued in 2017

-

-




At 31 December 2017

145,714.1

14.6

 

12.       Related parties

 

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. During the period, Group companies entered into the following transactions with related parties who are not members of the Group:

 


Sales of goods

Purchases of goods

Amounts due from

Amounts owed 


and services

and services

related parties

to related parties











2017

2016

2017

2016

2017

2016

2017

2016


£million

£million

£million

£million

£million

£million

£million

£million










Joint-venture entities

43.7

118.1

-

-

14.5

7.8

-

-










Associates

7.6

11.6

2.2

1.2

4.8

4.6

0.7

0.5

 

Sales and purchases of goods and services to related parties were made on normal trading terms.

 

The amounts outstanding shown in the above table are unsecured and will be settled in cash. No guarantees have been given or received on these amounts. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.

 

13.    Contingent liabilities

 

The Company and its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. Appropriate provision has been made in these accounts for all material uninsured liabilities resulting from proceedings that are, in the opinion of the directors, likely to materialise.

 

The Company and certain subsidiary undertakings have, in the normal course of business, given performance guarantees and provided indemnities to third parties in relation to performance bonds and other contract-related guarantees. These relate to the Group's own contracts and to the Group's share of the contractual obligations of certain joint ventures and associated undertakings. The Group acts as guarantor for the following:

 


Maximum guarantee

Amounts utilised


2017

2016

2017

2016


£million

£million

£million

£million






Joint venture and associates





Borrowings

18.9

17.7

1.7

-

Bonds and guarantees

226.0

284.2

138.3

172.2


244.9

301.9

140.0

172.2

 

 

Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2017

 

14.    Restatement of comparatives

 

The new management team, with the approval of the Audit Committee, commissioned a comprehensive Contract Review, with the independent support of PwC, which reviewed the most material balance sheet judgements in relation to long-term contract accounting, accrued income, work-in-progress and mobilisation. This Contract Review identified the need for additional balance sheet writedowns principally in relation to work-in-progress and receivables. In the main these adjustments relate to contracts that were substantially complete at the end of last year but where additional information has come to light since last year's financial statements were signed. The Contract Review also identified the need for additional provisions in respect of loss making or onerous contracts  The impact of the Contract Review is presented as non-underlying items (see note 4) and is excluded from the calculation of headline earnings per share (see note 9). The presentation of comparative information has been restated to be consistent with this presentation. There is no impact on comparative net assets or statutory profit before taxation.

 

15.    Events after the balance sheet date

 

Following the successful conclusion of our lender negotiations in April 2018, and expiry of the £37.5 million of short-term facilities, the Group has arranged access to committed borrowing facilities of £834 million which are considered adequate to satisfy the ongoing liquidity demands of the Group (see Financial Review).

 

 

16.    Reconciliation of non-statutory measures

 

The Group uses a number of non-statutory measures to monitor the performance of its business. This note reconciles these measures to individual lines in the financial statements.

 

(a) Headline pre-tax profit

2017

2016

2015


£million

£million

£million

Profit/(loss) before tax

(244.4)

(94.1)

79.5

Adjusted for:




Amortisation of acquired intangible assets

21.5

29.8

31.0

Share of associates amortisation of acquired intangible assets

0.1

0.1

0.1

Non-underlying items - exited business - Energy from Waste

35.1

160.0

10.6

Non-underlying items - exited business - strategic review of Equipment Services

7.1

10.7

2.6

Non-underlying items - exited business - property development

26.0

-

-

Non-underlying items - restructuring costs

33.2

-

-

Non-underlying items - professional adviser fees

13.9

-

-

Non-underlying items - contract review

86.1

30.8

-

Non-underlying items - asset impairments

76.7

-

-

Non-underlying items - transaction and integration costs

-

-

4.8

Non-underlying items - exchange gain/loss on retranslation of loan notes

(2.9)

-

-

Headline pre-tax profit

52.4

137.3

128.6

 

(b) Operating cash flow

2017

2016

2015


£million

£million

£million

Cash generated by operations

(135.9)

95.3

38.7

Adjusted for:




Cash used by operations - exited business - Energy from Waste

95.9

116.9

10.4

Cash used by operations - other non-underlying

64.7

17.8

5.6

Pension contributions in excess of income statement charge

15.9

19.5

16.1

Proceeds on disposal of plant and equipment - non-hire fleet

1.6

8.6

1.6

Capital expenditure - non-hire fleet

(39.3)

(38.3)

(31.2)

Operating cash flow

2.9

219.8

41.2

 

 

 

 

Notes to the Consolidated Financial Statements - continued
For the year ended 31 December 2017

 

(c) Free cash flow





2017

£million

2016

£million

2015

£million

Operating cash flow

2.9

219.8

41.2

Adjusted for:




Pension contributions in excess of income statement charge

(15.9)

(19.5)

(16.1)

Taxes paid

(8.6)

(10.2)

(6.8)

Dividends received from associates and joint ventures

17.2

34.1

13.6

Interest received

5.9

4.5

4.4

Interest paid

(27.3)

(23.3)

(21.1)

Effect of foreign exchange rate change

(2.2)

10.9

0.1

Free cash flow

(28.0)

216.3

15.3

 

(d) Operating cash conversion

 

2017

 

2016

 

2015


£million

£million

£million

Operating cash flow

2.9

219.8

41.2

Operating profit, before non-underlying items and amortisation of acquired intangible items

49.4

129.2

122.4

Full-year operating cash conversion

5.9%

170.1%

33.7%





(e) Gross operating cash conversion

2017

2016

2015


£million

£million

£million

Operating cash flow

2.9

219.8

41.2

Dividends received from associates and joint ventures

17.2

34.1

13.6

Gross operating cash flow

20.1

253.9

54.8





Operating profit before non-underlying items and amortisation of acquired intangible assets

49.4

129.2

122.4

Share of results of associates and joint ventures, before non-underlying items and amortisation of acquired intangible assets

25.5

25.8

22.6

Total operating profit before non-underlying items and amortisation of acquired intangible assets

74.9

155.0

145.0

Full-year gross operating cash conversion

26.8%

163.8%

37.8%





(f) Gross revenue

2017

2016

2015


£million

£million

£million

Consolidated revenue

3,250.8

3,244.6

3,204.6

Share of revenues of associates and joint ventures

416.1

440.6

424.3

Gross revenue

3,666.9

3,685.2

3,628.9

 

(g) Net debt

2017

2016

2015


£million

£million

£million

Cash and deposits                                                                           A

155.1

113.3

86.1





Bank overdrafts

(6.8)

(11.1)

(15.5)

Bank loans

(388.6)

(165.0)

(170.0)

US Private Placement Loans

(258.9)

(284.4)

(236.1)


(654.3)

(460.5)

(421.6)

Finance leases

(3.4)

(4.4)

(2.2)

Total borrowings                                                                             B

(657.7)

(464.9)

(423.8)









Per balance sheet                                                                       A+B

(502.6)

(351.6)

(337.7)

less: Impact of hedges on US Private Placement loan notes

-

77.2

28.9

Net debt

(502.6)

(274.4)

(308.8)





 

Non-statutory accounts

 

The information in this annual results announcement does not constitute statutory accounts within the meaning of section 435 of the Companies Act 2006 (the "Act"). The statutory accounts for the year ended 31 December 2017 will be delivered to the Registrar of Companies in England and Wales in accordance with section 441 of the Act. The auditor has reported on those accounts. Its report was unqualified and did not contain a statement under section 498(2), (3) or (4) of the Act.

 

Annual report

 

The Company's annual report and accounts for the year ended 31 December 2017 is expected to be posted to shareholders by the end of May 2018. Copies of both this announcement and the annual report and accounts will be available to the public at the Company's registered office at Interserve House, Ruscombe Park, Twyford, Reading, Berkshire RG10 9JU and through the Company's website at www.interserve.com.

 

Cautionary statement

 

Statements made in these Annual Financial Results ("Results") reflect the knowledge and information available at the time of their preparation. The Results contain forward-looking statements in respect of the Group's operations, performance, prospects and financial condition. By their nature, these statements involve uncertainty. In particular, outcomes often differ from plans or expectations expressed through forward-looking statements and such differences may be significant. Assurance cannot be given that any particular expectation will be met. No responsibility is accepted to update or revise any forward-looking statement resulting from new information, future events or otherwise. Liability arising from anything in the Results shall be governed by English Law. Nothing in the Results should be construed as a profit forecast.

 

Responsibility statement of the directors in respect of the annual results announcement

 

The Annual Report contains the following statements regarding responsibility for the financial statements and Directors' Report included in the annual report:

 

"The directors confirm that, to the best of their knowledge:

 

a)      the parent company and Group financial statements in this Annual Report, which have been prepared in accordance with UK GAAP, including the requirements of FRS 101 Reduced Disclosure Framework and IFRS, respectively, give a true and fair view of the assets, liabilities, financial position and profit of the parent company and of the Group taken as a whole; 

(b)     the management report required by paragraph 4.1.8 R of the FCA's Disclosure and Transparency Rules (contained in the Strategic Report and the Directors' Report) includes a fair review of the development and performance of the business and the position of the parent company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face; and

c)       the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's position and performance, business model and strategy."

 

By order of the Board

 

 

 

D J White                                                                                  M A Whiteling

Chief Executive                                                                         Chief Financial Officer

 

27 April 2018

                                         

- END -

 

 


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