Financial review This has been a diffjcult year for Interserve with - PDF document

STRATEGIC REPORT Financial review This has been a diffjcult year for Interserve with a REPORTED FINANCIAL PERFORMANCE substantial reported loss and a reduced underlying trading performance. Notwithstanding these £million 2017 2016 pressures, from the second half of 2017 onwards we Consolidated revenue 3,250.8 3,244.6 have made signifjcant progress to place the business on a more stable footing: Total operating profjt 74.9 155.0 pre-amortisation and • In order to ensure an appropriate rigour and non-underlying items clarity in the reported numbers we have carried Amortisation of acquired (21.6) (29.9) out a contract and balance sheet review exercise intangible assets (the Contract Review). The process behind this and the results from it are discussed in further Goodwill and other asset (76.7) – detail below. impairments • In April 2018 we concluded the refjnancing of Contract and balance sheet (86.1) (30.8) the Group, extending our committed borrowing review charges facilities to £834 million (based on exchange rates Energy from Waste (35.1) (160.0) at the time) and extending the maturity date to September 2021. Property development (26.0) – Restructuring costs (33.2) – Having gained greater clarity on the underlying Professional adviser fees (13.9) – issues facing the business and secured our funding structure, we are well placed to move forward with Strategic review of (7.1) (10.7) our Fit for Growth agenda to tackle the underlying Equipment Services issues and improve fjnancial performance. Total operating loss (224.8) (76.4) The Financial Review does not deal with the Consolidated revenue was broadly fmat at underlying operating profjt and revenue of each individual trading division. For commentary £3,250.8 million (2016: £3,244.6 million). After amortisation of acquired intangible assets, on these underlying operational results please refer to the Operational Review section of the goodwill impairment and other non-underlying items, analysed in further detail in note 5 to the Strategic Report. consolidated fjnancial statements and discussed further below, the operating loss was £224.8 million (2016: loss £76.4 million). “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. ” 32

Overview Strategic Report Governance Financial Statements The Contract Review also identifjed the need for GOODWILL AND OTHER ASSET IMPAIRMENTS £43.7 million of additional provisions in respect Management reassessed the valuation of other of loss-making or onerous contracts (these same intangible assets and a total impairment of contracts contributed a profjt of £2.4 million in £60.0 million has been recognised against goodwill 2016). For the avoidance of doubt, the discrete in the period. This follows a reassessment of the contracts included here had results in previous relevant cash generation units and the separate periods and, where relevant, will continue to report identifjcation of delivery of support services to the results in future periods. Any such results will be private sector and its associated intangible assets presented consistently with this treatment. that principally relate to the acquisition of Initial Facilities in 2014. These accounts therefore include a total of £86.1 million of charges in respect of the Contract A further £16.7 million write-down has been taken Review being £42.4 million of balance sheet write- with regard to capitalised IT development costs. downs plus £43.7 million in respect of onerous During 2017 the associated programmes were contract provisioning. Over half of this total cost cancelled with no future benefjt expected to be refmects cash already expended with no future derived from the work carried out to date, as such cash implications. Of the remaining balance the assets have been fully written off. approximately one-third will fmow out during 2018 as onerous contract obligations are fulfjlled with CONTRACT REVIEW AND BALANCE SHEET the remaining two-thirds anticipated in 2019 REVIEW and beyond. The new management team, with the approval Further details of these adjustments, along with of the Board, commissioned a comprehensive other non-underlying items not considered to be Contract Review, with the independent support of directly linked to the Contract Review, can be found PwC, which reviewed the most material balance in note 5 to the consolidated fjnancial statements. sheet judgements in relation to long-term contract accounting, accrued income, work-in-progress and The Board notes that the results of the Contract mobilisation. This Contract Review identifjed the Review have led to a number of asset impairments need for an additional £42.4 million of balance and large write-offs of a non-recurring nature sheet write-downs principally in relation to and the diffjculties this can cause in assessing work-in-progress and receivables beyond existing underlying operating performance. This ability provisions. In the main these adjustments relate to assess underlying operating performance is to contracts that were substantially complete at recognised as a key focus for investors and other the end of 2016 but where additional information stakeholders. Where appropriate, the 2016 fjgures has come to light since the signing of the prior-year are adjusted for the non-underlying items to assist fjnancial statements. comparability with 2017. There is no impact on comparative net assets or statutory profjt before These provisions and write-downs relate to taxation. The Group has also utilised a number of 18 individual contract issues. Of these, as at the non-statutory alternative performance metrics to date of the signing of these fjnancial statements, further increase transparency and comparability. nine are regarded as fjnancially complete. See note 32 for further details. Financially complete is defjned as the point at which Interserve is no longer providing signifjcant services to the client and fjnal account negotiations have been concluded. A further seven are regarded as operationally complete. Operationally complete is defjned as the point at which Interserve has ceased to provide signifjcant services to the client but fjnal account negotiations have not concluded. The remaining two contracts are regarded as neither operationally nor fjnancially complete. These same contracts contributed a loss of £33.2 million in 2016. 33