2024 full year results

Serco Group plc ("Serco" or the "Company")

27 February 2025

Strong performance in 2024, good momentum into 2025

Strong performance in 2024

Good momentum into 2025

Mark Irwin, Serco Group Chief Executive, said:

"Our 2024 results reflect another year of strong operational and financial delivery across the Group.

We accelerated trading momentum through the second half of the year, which allowed us to achieve full year revenue in line with guidance, underlying operating profit up 10%, a 60 basis point increase in margins and deliver significantly more free cash flow than initially expected. We had excellent order intake of £4.9bn resulting in a robust £13bn order book, and we ended the year with a strong pipeline of qualified new business opportunities exceeding £11bn to underpin future growth.

Our strong balance sheet has enabled delivery against all our capital allocation priorities by investing in organic business development, increasing our dividend by 22% and completing the planned share buyback of £140m; and, as announced in January, we have agreed the strategically important and financially compelling acquisition of MT&S from Northrup Grumman, which we expect to complete in mid-2025. MT&S will transform our capabilities in the critical areas of technology-enabled military training and satellite ground network software services. The combination of Serco and MT&S further enhances the growth potential of our US platform and our international defence business.

Our people have always been at the heart of our business, and we are pleased that colleague engagement improved from already high levels, attrition rates are markedly reduced and importantly, we have achieved significant improvement in safety outcomes across the business. I am immensely proud of the commitment of all my Serco colleagues around the world and remain deeply grateful for their contribution to our success.

In a global environment of continuous change and increasing complexity, Serco's purpose to impact a better future by enabling more efficiency and greater agility in the delivery of critical services for governments has never been more relevant. We enter 2025 with confidence that we will continue to deliver profitable growth and make further progress in executing our strategy to create value for customers and shareholders."

Guidance for 2025

Our focus in 2025 remains steadfast on reinforcing our market positioning by concentrating on growth, operational excellence and competitiveness. The outlook for 2025 anticipates revenue will be similar to 2024 with underlying organic growth of 7% offsetting reductions in the UK and Australian immigration contracts. Underlying operating profit will reduce only slightly despite previously advised headwinds from immigration and higher UK national insurance contributions. The conversion of profit to cash will continue to be strong at over 80%, contributing to a strong balance sheet.

As we look ahead to 2025, we have the highest level of potential new work in our pipeline in more than a decade at £11.2bn. Post the period end we were awarded a landmark UK Armed Forces Recruitment Service contract with an estimated value of £1.0bn over the initial seven-year term and up to £1.5bn should the Ministry of Defence elect to exercise all three one-year extension options beyond the initial term.

The acquisition of MT&S is expected to complete in mid-2025, subject to regulatory approvals, and will be included in guidance at that point.

NB: The guidance uses an average GBP:USD exchange rate of 1.26 in 2025, GBP:EUR of 1.20 and GBP:AUD of 1.98. We expect a weighted average number of shares in 2025 of 1,015m for basic EPS and 1,035m for diluted EPS.

For further information please contact Serco:

Paul Checketts, Head of Investor Relations | +44 (0) 7718 195 074 | paul.checketts@serco.com

Jamie Hastings, Head of Investor Relations (new) | +44 (0) 7718 195 074 | jamie.hastings@serco.com

Scot Marchbank, Group Communications and Marketing Director | +44 (0) 7958 675 706 | scot.marchbank@serco.com

Presentation:

A presentation for institutional investors and analysts will be held at RBC Capital Markets, 100 Bishopsgate, London, EC2N 4AA today at 10.00 UKT. The presentation will be webcast live at https://sparklive.lseg.com/SercoGroup/events/f1f455da-bf2f-4af3-be40-00e78d18da2d/serco-2024-full-year-results and subsequently available on demand. To be able to ask questions please use our dial-in facility accessed on https://registrations.events/direct/LON444406

Notes to financial results summary table and highlights:

The trading performance and outlook for each Division are described on pages 13 to 17. Reconciliations and further detail of financial performance are included in the additional information on pages 42 to 48. This includes full definitions and explanations of the purpose of each non-IFRS Alternative Performance Measure (APM) used by the Group.

About Serco

Serco brings together the right people, the right technology, and the right partners to create innovative solutions that make a positive impact and address some of the most urgent and complex challenges facing the modern world.

With a primary focus on serving governments globally, Serco's services are powered by more than 50,000 people working across defence, space, migration, justice, healthcare, mobility, and customer services.

Serco's core capabilities include service design and advisory, resourcing, complex programme management, systems integration, case management, engineering, and asset & facilities management.

Underpinned by Serco's unique operating model, Serco drives innovation and supports customers from service discovery through to delivery.

More information can be found at www.serco.com

LEI: 549300PT2CIHYN5GWJ21

Chief Executive's update

We delivered strong financial and operational results in 2024, a year that presented a dynamic operating environment framed by unprecedented political change, as voters in more than 60 countries went to the polls. Despite some headwinds, we delivered revenue in line with guidance, we materially increased underlying operating profit, generated excellent cash flow, and we improved colleague safety and engagement.

Our focus has been on reinforcing our market positioning by concentrating on growth, operational excellence and competitiveness. We made demonstrable progress in all three areas in 2024.

On growth, we entered the year with a robust pipeline of new business opportunities and a clear focus on effective execution. Momentum grew as we moved through the year with an improving trend in organic revenue and strengthened order intake. In the UK & Europe we offset the expected organic revenue reduction from exiting a variety of lower margin contracts in 2023, with good growth in our European business. North America, a core strategic focus area for us, was the standout performer. Strong order intake - book-to-bill was 1.6x in the year - saw organic revenue growth step up to 5% in the second half and sets the business up for good growth in 2025; and in January 2025, we agreed to acquire MT&S, a leading provider to the US military of advanced mission training services, and software that makes satellite ground networks more efficient. MT&S grows our North American business to beyond US$2bn of revenue and US$200m of profit. It brings new capabilities and access to a broader base of customers, which will provide further opportunities for Serco to grow organically in both North America and internationally.

Operational excellence was focused on the safety, engagement and productivity of colleagues as a critical enabler to provide exceptional service to our customers. The high importance we placed on keeping our colleagues safe in 2024 resulted in a 22% reduction in lost time injuries and 31% reduction in lost working days. As we continue to evolve our employee value proposition, it was encouraging to see vacancy rates drop from approximately 13% to 5% over the past two years, voluntary attrition reduce by 5 percentage points, and employee engagement increase to 72.

We see in-contract operational performance as the foundation to retaining business across multiple contracting cycles. We achieved high levels of success on rebids and extensions of existing work through the year securing around £3bn of awards with retention rates in excess of 90% in our two largest markets.

The exception across the Group was the disappointing outcome of the Australian immigration rebid as notified in November. We will learn from this loss, and Management is actively resetting the cost base of the business, which we still expect to deliver approximately £700m of revenue in 2025. Beyond immigration, the underlying performance of the Australian portfolio has improved during the year, we have retained key contracts and we continue to work to ensure we are well positioned in a market where we see opportunity to grow, particularly noting the importance of the country for geopolitical security.

Our focus on competitiveness in the year included concerted efforts to improve the productivity and efficiency of the business. We are pleased with the ramp up in our progress, which included an increase of 120 basis points (bp) in the second half compared to the same period in the prior year and where every region delivered higher underlying operating profit compared to the same period in 2023. The UK & Europe was the leading contributor to the Group, delivering a margin of 6.0% over the full year, 110bp higher than in 2023. Overall, at the Group level we increased our underlying operating profit margin by 60bp in 2024, an improvement driven by better gross profit. This was achieved through a combination of improvements on underperforming contracts, increased contract productivity, agreeing new contract terms with customers, and in-contract organic revenue growth. We are confident these improvements pave the way for additional opportunities in the future.

Strong financial performance enabled us to deliver all aspects of our capital allocation strategy: investing in the business to drive growth and efficiency; increasing returns to shareholders by raising dividends; maintaining adequate headroom to fund strategic bolt-on acquisitions; using share buybacks to keep our leverage within our target range of 1-2x EBITDA. We expect strong cash generation to continue and will regularly assess the opportunity for further buybacks.

In summary, we are proud of the progress made in 2024, with strong financial performance, positive employee metrics and high-quality delivery of important services to customers in a dynamic environment. Strong drivers of demand in our markets have resulted in a record pipeline of potential new work and the momentum in our business. This supports our confidence in delivering our medium-term goals.

In January, it was announced I would be retiring as Group Chief Executive, having served as a member of the Executive leadership team for the past 12 years. It has been a true privilege to lead this remarkable Company. I am delighted with the progress we have made in the last few years and particularly proud of what has been achieved to keep our colleagues safer, deliver consistently strong financial performance and develop the biggest pipeline in more than a decade to meet our strategic growth goals. I know that my successor, Anthony Kirby, will continue to build on these solid foundations. I remain deeply grateful for the hard work and dedication of more than 50,000 colleagues across the Group, for the continued trust of our customers, and for the ongoing support of our shareholders.

Looking forward, governments and citizens are facing changes that are complex and challenging. Governments need to balance fiscal constraint with responding to growing demand for citizen services, critical infrastructure, AI-driven transformation, defence and broader national security including cyber resilience, among others. The need to be agile, adaptive and efficient in the delivery of critical services has never been clearer. Serco is well positioned to help navigate these changes and our opportunity to grow has never been more compelling.

Mark Irwin

Group Chief Executive

Serco - Impact a better future

Group Review

Summary of financial performance

Revenue, underlying operating profit and underlying earnings per share

Revenue was £4,787m, which was 2%, or £87m, lower than the £4,874m reported in 2023, or flat on a constant currency basis.  Organically, revenue declined by 3% (£123m), while acquisitions added 3% (£121m) and currency was a drag of 2% (£85m). We saw good growth from new and expanded contracts in Defence, Justice and Citizen Services sectors. The reduction reflects lower volume-variable work in the Immigration sector in both the UK and Australia, our Centers for Medicare & Medicaid Services (CMS) contract being in its new five-year agreement and the annualisation of our previously announced exit from certain low-margin contracts.

Despite revenue reducing in the year, we increased underlying operating profit by 10% to £274m (2023: £249m); and taking account of a 2%, or £6m, adverse impact of currency, on a constant currency basis, underlying operating profit increased by 12%. There were also higher costs associated with mobilising our electronic monitoring contract. We more than offset these with our efforts to improve the productivity and efficiency of the business and the positive contribution from acquisitions. It was pleasing to see increasing momentum as the year progressed.  In the second six months of the year, every region delivered higher underlying operating profit compared to the same period in 2023. Our margin was 60bp higher in the year as a whole and increased by 120bp in the second half alone.

Reported operating profit reduced by 52% to £130m (2023:£272m). The decline was because of a £115m impairment charge in Asia Pacific following the loss of our immigration contract. Underlying profit after net finance costs and tax, both of which were higher in the year, increased by 4% to £180m (2023: £173m).

Diluted underlying earnings per share increased by 9% to 16.67p (2023: 15.36p). The growth was higher than underlying profit after tax as our share buybacks in 2023 and 2024 led to a 4% reduction in our weighted average number of shares in the year.

The revenue and underlying operating profit performances are discussed in more detail in the Divisional Reviews.

Cash flow and net debt

Free cash flow was £228m (2023: £209m). Over recent years we have created a system and culture around invoicing and cash collection that has structurally improved our working capital. This continued efficiency, in conjunction with cash received for mobilisation costs and this being a period of catch up of dividends from joint ventures, delivered cash conversion of more than 100%. The ongoing rigour on cash management means we expect the business to convert at least 80% of profit into cash on an ongoing basis. Average working capital days were at attractive levels with debtor days of 17 (2023: 16 days) and creditor days of 19 (2023: 20 days). Including accrued income and other unbilled receivables, day sales outstanding were 39 days (2023: 38 days). Of all UK supplier invoices, 92% were paid in under 30 days (2023: 94%) and 97% were paid in under 60 days (2023: 98%). No working capital financing facilities were utilised in this or the prior year.

Adjusted net debt was £100m at the end of December. This was a reduction in the year of £9m (December 2023: £109m) despite £38m of dividend payments, a £21m net cash outflow for acquisitions and £141m being spent on our share buyback programme, including fees.

The period end adjusted net debt compares to a daily average of £146m (2023: £232m) and a peak of £212m (2023: £362m). The difference between average and peak figures reflected working capital fluctuations. These can be caused when certain discrete outflows - for example payroll, supplier payments, VAT payments on account - occur in a short timeframe. Variances like this are normal for the Group.

Our measure of adjusted net debt excludes lease liabilities, which aligns closely with the covenants on our financing facilities. Lease liabilities totalled £530m at the end of December (2023: £454m), the majority being leases on housing for asylum seekers under our Asylum Accommodation and Support Services Contract (AASC). These leases are serviced with contracted revenue from the customer and their terms do not extend beyond the expected life of the contract we have.

At the closing balance sheet date, our leverage for debt covenant purposes was 0.3x EBITDA (2023: 0.5x). This compares with the covenant requirement for net debt to be less than 3.5x EBITDA and our target range of 1-2x.

In February 2024, we issued US$150m (£118m) of US private placement loan notes. The notes were equally split into two series of US$75m each with maturities of five and ten years, giving an average maturity of seven and a half years. The average interest rate on the new loan notes was fixed at 6.58%. On 14 May 2024, we repaid US$66m (£53m) of maturing US private placement loan notes which had a coupon of 5.08%. The blended rate on US private placement loan notes in issue at the end of December 2024 was 4.88% (December 2023: 3.97%).

Capital allocation and returns to shareholders

Our capital allocation framework was actively applied in 2024:

Contract awards, order book, rebids and pipeline

Contract awards

Order intake was £4.9bn (2023: £4.6bn), a book-to-bill rate of 102%. Consistent with the momentum we saw generally across our business, order intake was much improved in the second half. Book-to-bill was 82% in the first half and 121% in the second.

There were around 65 contract awards worth £10m or more each. North America had the strongest book-to-bill at 165%, with wins across the Defence and Citizen Services sectors. Unsuccessful bids and some existing work being extended rather than proceeding with the tender left the UK & Europe book-to-bill at 78%. After strong order intake in 2023, our Middle East business experienced a period of lower wins, with book-to-bill reducing to 93%. In Asia Pacific, we had the disappointing news in November 2024 that we were unsuccessful in rebidding the contract for immigration services. As is the nature of larger binary decisions, the loss depressed book-to-bill, with the year ending at 74%. Encouragingly, momentum did improve through the year, with book-to-bill of 35% in the first half and 113% in the second six months.

North America had order intake of £2.2bn, or approximately 45% of the total for the Group, the UK & Europe contributed £1.9bn, or approximately 40%, Asia Pacific secured £0.6bn, or approximately 10% and the Middle East £0.2bn, or approximately 5%.

Approximately 35% of the order intake value was new business and 65% was rebids or extensions of existing work. The win rate by value for new work was approximately 25%, which was at the lower end of the range we have delivered over recent years as some larger bids were unsuccessful. The win rate by value for retaining existing work was approximately 75%. Having had a success rate of more than 90% on rebids in 2023 and the first half of 2024, the full year rate was depressed by the unsuccessful Australian immigration rebid. Excluding this, the rate for the year would have been approximately 95%.

New wins included a US$320m four-year contract to upgrade Defence infrastructure at the US Space Force's Pituffik Space Base in Greenland, a US$247m contract to support soldier readiness and performance within the US Army's Holistic Health and Fitness (H2F) System, which has an eight-month base period plus four one-year options, a c.£90m six and a half year contract to deliver emergency response services in the NEOM economic zone in the Kingdom of Saudi Arabia, a £70m six-year agreement to operate and maintain the Shing Mun Tunnels and Tseung Kwan O Tunnel in Hong Kong, and a further £50m five-year contract with the Government of Ontario to help job seekers develop their skills and match them to employment opportunities. We successfully rebid our contract to manage HMP Ashfield in the UK. The new contract has an estimated value to Serco of £200m over its initial ten-year period. Also in the UK, we extended parts of our immigration accommodation work and retained our contract to provide facilities management services at Forth Valley Royal Hospital, which is worth approximately £150m over seven years.

In the US, we won the rebid of our contract to provide customer support services to the US Pension Benefit Guaranty Corporation. The contract has a one-year base period and four option years with a value of approximately £180m if all options years are exercised. Our contracts with the UK Department for Work and Pensions to help people find jobs in the West Central region and Wales as part of the Restart programme, were extended for a further two years, with an estimated value of £130m.

Following the year end, as announced on 6 February 2025, we were selected by the UK Ministry of Defence to deliver its next-generation recruitment solution for the Royal Navy, the British Army, the Royal Air Force and Strategic Command. The contract has an estimated value of £1.0bn over the initial seven-year term and up to £1.5bn should the Ministry of Defence elect to exercise all three one-year extension options beyond the initial term. A 21-month mobilisation period is expected to begin in April 2025 with most of the costs charged to profit as they are incurred. The new service is scheduled to commence in early 2027.

Order book

The order book remains strong at £13.3bn at the end of December (2023: £13.6bn). Our order book definition gives our assessment of the future revenue expected to be recognised from the remaining performance obligations on existing contractual arrangements. This excludes unsigned extension periods, and the order book would be £3.0bn (2023: £2.6bn) higher if option periods in our US business, which typically tend to be exercised, were included. If joint venture work was included this would add a further £1.9bn (2023: £1.9bn) to our order book.

Rebids

In our portfolio of existing work, we have around 75 contracts with annual revenue of £5m or more where an extension or rebid will be required before the end of 2027, with an aggregate annual revenue of £1.5bn. At around 30% of the Group's 2024 revenue guidance, this proportion of work that will be up for rebid is at the low end of the range we have seen over recent years. Contracts that will either need to be rebid or extended in 2025 have an annual contract value of around £0.4bn. The annual value of rebids is approximately £0.6bn in both 2026 and 2027. The largest contract that is scheduled to be rebid in the next three years represents around 2.5% of Group revenue. This is the only contract with annual revenue of more than £100m, or 2% of Group revenue, scheduled to be rebid before 2028.

New business pipeline

Our measure of pipeline includes only opportunities for new business that have an estimated annual contract value (ACV) of at least £10m and which we expect to bid and to be adjudicated within a rolling 24-month timeframe. We cap the total contract value (TCV) of individual opportunities at £1bn, to lessen the impact of single large opportunities. The definition does not include rebids and extension opportunities, and in the case of framework, or call-off, contracts such as Indefinite Delivery/Indefinite Quantity contracts (ID/IQ), which are common in the US, we only take the value of individual task orders into our pipeline as the customer confirms them. Our published pipeline is thus a small proportion of the total universe of opportunities, as many opportunities have annual revenues less than £10m, are likely to be decided beyond the next 24 months, or are rebids and extensions.

Our pipeline was £11.2bn at the end of December 2024, 11% higher than the £10.1bn level at the end of December 2023. This is the largest pipeline of potential new work we have had in more than a decade. The pipeline consists of over 50 bids with an average ACV of £36m and an average contract length of around six years. The pipeline of opportunities for new business with an estimated ACV of less than £10m totalled £2.0bn at the end of December (2023: £2.6bn).

Acquisitions

We view acquisitions as an important part of our strategic toolkit, which, if deployed correctly, can add significant value to the business. They should therefore supplement and be capable of delivering new opportunities for organic growth. Generally speaking, we regard acquisitions as higher risk than organic growth, so any potential opportunities have to meet our stringent criteria of being both financially and strategically compelling. We judge potential acquisitions against three criteria: Do they add new, or strengthen existing, capability? Do they add scale which we can use to increase efficiency? Do they bring us access to new and desirable customers and markets? We also recognise that acquisition opportunities come in different shapes, sizes and sectors, and a small one can be strategically important to a region, but not necessarily significant at Group level. But large or small, the execution of all acquisitions is centrally managed and follows the same rigorous process. Equal focus and discipline are applied to post-acquisition value drivers such as effective integration and value realisation from synergy and growth. Our approach of selectively adding acquisitions to our organic strategy has enabled us to accelerate growth, strengthen the business and improve its future growth potential in North America and in Europe.

In Europe, we have grown our business from approximately £100m of revenue in 2020 to more than £500m in 2024. Acquisitions in the Immigration and Defence sectors gave us positions that would have been very difficult to achieve organically; and being part of Serco has enabled the acquired businesses to scale up in a way that would not have been possible as standalone entities. We see strong potential for further growth in Europe.

In North America, we have approximately doubled revenue and more than trebled profit between 2017 and 2024 through a successful combination of organic growth and strategic acquisitions. This demonstrates the success of our M&A strategy, which is that acquisitions should provide access to new markets and bring new capabilities that broaden the opportunities for further organic growth and improve profitability.

Equally importantly, we have transformed the business from a low-margin portfolio of contracts largely performing front-line installation work on industrial systems back in 2017. The acquisition of NSBU in 2019 added a strong US Navy business. We are now the leading naval architecture firm in the US and have capability in upfront engineering and asset-light management. WBB, which we acquired in 2021, brought strong positions with the Air Force, Space Force, and the Army.

Today, Serco is a leading provider of services to the US Navy and that has strengthened positions with Army, Air Force, and Space Force, and has capabilities in government site program support, high-end engineering, equipment support, and technology-enabled frontline services.

The proposed acquisition of MT&S, covered below, will continue this growth through new capabilities and access to new markets and customers, providing exciting opportunities for future organic growth.

Two acquisitions completed in 2024

In March, we acquired European Homecare (EHC), for an enterprise value of €40m (£34m). EHC is a leading private provider of immigration services in Germany. In conjunction with ORS, the Swiss-based business we acquired in 2022, this strategic acquisition creates a strong partner for European governments in immigration services and complements the support we already provide to government customers in the UK and Australia.

In January, we acquired Climatize, for an initial consideration of AED9m (£2m) and a contingent consideration of up to AED51m (£11m), payable on achieving certain financial targets. Climatize is a small, fast-growing business that operates in the United Arab Emirates and the Kingdom of Saudi Arabia offering 'zero-carbon' advisory and related engineering services.

Acquisition of MT&S in 2025

Following the year end, in January 2025, we agreed to acquire Northrop Grumman's mission training and satellite ground network communications software business (MT&S) for US$327m (£264m). The acquisition is expected to complete in mid-2025, subject to regulatory approvals.

MT&S provides the US military with advanced mission training services, and software that makes satellite ground networks more efficient. With expertise in training services and software engineering, and a track record of innovation, it supports programmes across the US Army, Space Force, Air Force, Navy, Combatant Commands and international partners.

The acquisition will build additional scale for Serco in North America, growing our business to beyond US$2bn of revenue and US$200m of profit. It brings new capabilities and access to a broader base of customers, which will provide further opportunities for Serco to grow organically in both North America and internationally.

We continue to seek out and evaluate new opportunities for acquisitions that fit our criteria and focus on delivering value from those acquisitions already executed.

Asia Pacific segment

The 2024 results include a £115m non-cash, non-underlying, impairment charge in respect of the Asia Pacific goodwill balance, which has been triggered by the loss of the immigration rebid in November 2024. The Directors recognise that the Asia Pacific business has performed below expectations but continue to be committed to the market and believe that they have a strong platform to grow the business.

A number of changes have been made that have started to show improvements in 2024. Further plans are being developed and executed to strengthen the business. The stage of development of these plans means that for accounting purposes, and to be compliant with IAS36, they are not considered in the goodwill valuation.

Guidance for 2025

In 2025, our focus remains steadfast on reinforcing our market positioning by concentrating on growth, operational excellence and cost competitiveness. We expect revenue in 2025 will be similar to 2024 despite a 7% revenue reduction relating to the UK and Australian immigration contracts, while underlying operating profit will reduce only slightly despite known headwinds. The conversion of profit to cash will continue to be strong and our pipeline of new business opportunities is healthy. The acquisition of MT&S is expected to complete in mid-2025 and will be included in guidance at that point.

Revenue: We anticipate revenue of around £4.8bn with flat organic revenue growth and a c.1% contribution from businesses acquired in 2024. Having had a success rate of more than 90% on rebids in 2023 and the first half of 2024, it was disappointing to be unsuccessful in rebidding the contract for immigration services in Australia. In the UK, we expect to continue supporting the UK Government's efforts to reduce the number of asylum seekers being accommodated in hotels. These two impacts are expected to reduce revenue by approximately 7% in 2025, however,  the business is making good progress elsewhere in the portfolio to offset this impact. Growth is anticipated to be strongest in the North American market where we expect mid-single digit organic growth after securing new work in the defence sector in 2024 and early 2025. In addition, contracts mobilised during 2024 in the UK justice and citizen services sectors will contribute further in 2025.

Underlying operating profit: Underlying operating profit is expected to be around £260m, compared to the £274m delivered in 2024. This is a relatively small reduction given the previously disclosed headwinds from our Australian immigration contract ending, lower activity levels within our UK immigration business and higher UK national insurance contributions. Significant progress is expected from the ramp up and reduced costs on newly mobilised contracts, and continued opportunities to improve productivity and efficiency across the portfolio. These support our margin which is expected to be around the mid-point of our medium-term target of 5-6%.

Net finance costs and tax: Net finance costs are expected to increase to around £40m. This is more than 2024 due to the increased volume of lease interest, particularly in relation to immigration services in the UK. The underlying effective tax rate is expected to be around 25%, although this is sensitive to the geographic mix of our profit and any changes to current corporate tax rates.

Financial position: Free cash flow is again expected to be strong at around £135m in the year, in line with our medium-term target of converting at least 80% of profit into cash. This is below 2024 as the prior year included cash received on contracts in their mobilisation phase and a catch up of dividends from joint ventures. The current year includes one-off end of contract cash costs of £20m in relation to our Australian immigration contract, which were expensed in previous years. We expect adjusted net debt to end the year at around £10m.

Surplus capital in 2025: Consistent with our capital allocation priorities, we have a preferred financial leverage range of 1-2x net debt to EBITDA. If we are below 1.0x leverage we consider the business to be in a position of having surplus capital, which will be returned to our shareholders through share buybacks or other means. Leverage at the year end was 0.3x net debt to EBITDA and on a pro forma basis, including the proposed acquisition of MT&S that was announced in January, leverage was 1.2x. Although we are not currently in a position of surplus capital, we are only modestly above the threshold and have an established track record of strong cash flow reducing our leverage. We will review the capital position again at the half year.

Summary of guidance for 2025

NB: The guidance uses an average GBP:USD exchange rate of 1.26 in 2025, GBP:EUR of 1.20 and GBP:AUD of 1.98. We expect a weighted average number of shares in 2025 of 1,015m for basic EPS and 1,035m for diluted EPS.

Outlook for growth in the medium-term

Our medium-term targets remain unchanged:

Divisional Reviews

Serco's operations are reported through four geographic divisions: North America, UK & Europe (UK&E), the Asia Pacific region and the Middle East. Reflecting statutory reporting requirements, Serco's share of revenue from its joint ventures and associates is not included in revenue, while Serco's share of joint ventures and associates' profit after interest and tax is included in underlying operating profit.

The trading performance and outlook for each Division are described on the following pages. Reconciliations and further details of financial performance are included in the additional information on pages 42 to 48. This includes full definitions and explanations of the purpose of each non-IFRS Alternative Performance Measure (APM) used by the Group. The Condensed Consolidated Financial Statements and accompanying notes are on pages 22 to 42.

Included in note 2 to the Group's 2023 Consolidated Financial Statements are the Group's policies on recognising revenue across the various revenue streams associated with the diverse range of goods and services discussed within the Divisional Reviews. The various revenue recognition policies are applied to each individual circumstance as relevant, taking into account the nature of the Group's obligations under the contract with the customer and the method of delivering value to the customer in line with the terms of the contract.

North America (28% of revenue, 42% of underlying operating profit)

Revenue declined by 3% to £1,326m (2023:£1,363m), with organic growth of 1% more than offset by a 4% adverse translational effect of currency. Growth in our Defence business, drove the organic revenue increase for the division overall. There were positive contributions from new work ramping up, maritime services and anti-terrorist force protection for the navy. We were pleased to see this more than offset the effect of our CMS contract being in its new five-year agreement and lower revenue in the transport sector. Momentum improved as the year progressed with an organic revenue decline of 4% in the first half shifting to 5% growth in the second six months.

Underlying operating profit reduced by 2% to £136m (2023: £138m). Currency had a 4% adverse impact, with underlying operating profit up 2% on a constant currency basis. Good progress in our Defence business and in Canada, more than offset lower profit from the new CMS contract. Margins increased from 10.1% to 10.3% as a result. We saw momentum improve in the year. Underlying operating profit was 13% lower in the first half but increased by 14% in the second half, compared to the same period in 2023.

Order intake was strong at £2.2bn, which was 45% of the total for the Group and a book-to-bill ratio of 1.6x. New business wins were around 55% of the order intake. Our largest new win was a US$320m four-year contract to upgrade Defence infrastructure at the US Space Force's Pituffik Space Base in Greenland. We were also successful in being awarded a US$247m contract to support soldier readiness and performance within the US Army's Holistic Health and Fitness (H2F) System, which has an eight-month base period plus four one-year options.

Following on from our success in 2022 and 2023, we secured a further £50m five-year contract with the Government of Ontario to help job seekers develop their skills and match them to employment opportunities. We won the rebid of our contract with the US Pension Benefit Guaranty Corporation. We provide benefits administration and customer support for over one million individuals whose defined benefits plans have been disrupted. The contract has a one-year base period and four option years with a value of approximately £180m if all options years are exercised.

We also successfully rebid our IT support contract with the US Air Force. The new agreement has a one-year base period and four one-year option periods, and a value of approximately £70m if all options are exercised. As the NexGen Information Technology (IT) Service Provider, Serco will manage, configure, deploy, operate, sustain, and enhance the NexGen IT program solutions for Air Force Civil Engineering activities. This includes delivering the largest implementation of the IBM TRIRIGA software application in the world, to enable data-driven decisions for the Air Force.

As we worked through and successfully converted a lot of the pipeline of new bid opportunities in 2024, the pipeline reduced from £3.2bn at the end of 2023 to £2.1bn at the end of 2024. We are actively looking to replenish the pipeline through 2025. Defence makes up around 75% of the North American pipeline and Citizen Services is approximately 25%.

UK & Europe (51% of revenue, 46% of underlying operating profit)

Revenue was stable at £2,446m (2023: £2,440m), with an organic decline of 5% offset by a 5% contribution from acquisitions. EHC, the German immigration services business we acquired in March 2024, traded strongly with robust demand due to global migration patterns. The organic decline resulted from us exiting a variety of contracts in 2023, several of which had margins below the level we see as appropriate for the services we deliver. These contracts were in different sectors, so revenue declined in Citizen Services, Transport and Health & Facilities Management as we exited this work. Elsewhere we saw growth in Justice & Immigration and Defence.

Underlying operating profit increased by 22% to £148m (2023: £121m). The good underlying operating profit outcome was supported by immigration, where the EHC acquisition contributed and performance in the UK was better than originally anticipated, successful mobilisation of the newly built Fosse Way prison and from our focus on productivity and improving the underlying performance of our portfolio. Our Health & Facilities Management business, in particular, saw much improved profitability compared to the prior year. These factors more than offset higher costs associated with the ongoing mobilisation of our electronic monitoring contract. Margin performance in the period was strong,with it increasing by around 110bp to 6.0%(2023: 5.0%).

Underlying operating profit includes the profit contribution of joint ventures, from which interest and tax have already been deducted. If the proportional share of revenue from joint ventures was included and the share of interest and tax cost was excluded, the overall divisional margin would have been 5.3% (2023: 4.5%). The joint venture profit contribution reduced to £23m (2023: £29m) due to a one-off settlement being included in the prior year.

Order intake was £1.9bn, a book-to-bill ratio of 0.8x and around 40% of the total intake for the Group. The book-to-bill reflected some larger bids on new work not landing in our favour. Our win rate by value on new work was around 15% as a result. Offsetting this, our win rate on rebids and extensions was very good at more than 95%. Rebids and extensions represented approximately 85% of the order intake. Agreements signed included the rebid of our contract to manage HMP Ashfield in the UK. The new contract has an estimated value of £200m and by the end of the ten-year period, Serco will have been managing the prison for 29 years. We extended parts of our immigration accommodation work and retained our contract to provide facilities management services at Forth Valley Royal Hospital, which is worth approximately £150m over seven years.

Following the year end, as announced on 6 February 2025, we were selected by the UK Ministry of Defence to deliver its next-generation recruitment solution for the Royal Navy, the British Army, the Royal Air Force and Strategic Command. The contract has an estimated value of £1.0bn over the initial seven-year term and up to £1.5bn if all three one-year extension options are taken.

The pipeline of new opportunities in the UK & Europe increased by more than 30% in the year to £6.4bn (2023: £4.8bn). The Armed Forces Recruitment Service contract, which we have now won, was the largest bid in our pipeline. Excluding this, the pipeline remains very healthy with significant new opportunities across the Justice & Immigration, Defence and Citizen Services sectors.

Asia Pacific (17% of revenue, 8% of underlying operating profit)

We are working through a plan to turn around our Asia Pacific segment and this began to deliver positive results as 2024 progressed. The first half saw us take action to reduce the cost base and improve profitability on some larger contracts, the benefits of which began to come through in the second half of the year. Although it was disappointing to be unsuccessful in rebidding our immigration contract, our turnaround plan is independent of this. We remain committed to the Asia Pacific market and continue to position the business for the opportunities we expect in the coming years.

Revenue reduced by 5% to £799m (2023: £845m). The business contracted by 2% organically and adverse currency moves had a 3% impact. Revenue fell because of reduced work in facilities management, lower volume-variable work in parts of the immigration network and some lost work in the Citizen Services sector.

Underlying operating profit increased by 4% to £25m (2023: £24m), representing an increased margin of 3.1% (2023: 2.8%). Our focus on contract profitability improvements and cost transformation more than offset lower profit in the Justice & Immigration sectors. Progress came through as the year progressed with underlying operating profit down 44% in the first half and up 71% in the second.

Disappointingly, we were unsuccessful in rebidding the contract for the provision of onshore immigration detention facilities and detainee services. Serco is proud to have provided immigration services as a partner to the Australian Government since October 2009.

Our performance levels have been high on the contract and we submitted what we believed to be a compelling bid that would have delivered continued strong performance to the Australian Government as well as meeting our framework for achieving margins appropriate for the services we deliver.

The unsuccessful rebid led to an exceptional £115m goodwill impairment charge for the division, which resulted in a reported operating loss of £90m (2023: profit of £12m).

Order intake was £0.6bn in the year, a book-to-bill rate of 0.7x. Momentum improved through the year, with book-to-bill of 33% in the first six months then stepping up to 113% in the second half.

Larger contributors included a £122m award to continue to provide health services personnel to the Australian Defence Force at garrisons across the country and a £99m three-year award with the National Disability Insurance Agency (NDIA) to continue providing contact centre services. New work included a £70m six-year agreement to operate and maintain the Shing Mun Tunnels and Tseung Kwan O Tunnel in Hong Kong.

The pipeline of potential new business stands at £1.7bn (December 2023: £1.3bn). Defence makes up around 75% of the pipeline, Citizen Services 20%, with smaller opportunities in the Transport and Health sectors.

Middle East (4% of revenue, 4% of underlying operating profit)

Revenue reduced by 5% to £216m (2023: £226m). The business declined by 3% organically, currency moves had a further 3% adverse impact, while acquisitions added 1%. Organic contraction resulted from some lost facilities management work and lower revenue in Defence, where a large contract, which we successfully retained, moved to a reduced scope in its new term. These factors more than offset good growth in our Transport business, which includes fire and rescue work.

Underlying operating profit increased by 5% to £16m (2023: £15m). We managed to deliver higher profit on a lower revenue base through our focus on productivity and improving the underlying performance of our portfolio, and the exited facilities management work being lower margin. Margins increased from 6.8% to 7.4% as a result.

Order intake was around £0.2bn, a book-to-bill ratio of 0.9x. Around 75% of the order intake was new business and 25% rebids and extensions. The largest win was a new contract to provide fire rescue, emergency and ambulance services in the NEOM economic zone in the Kingdom of Saudi Arabia. This followed on from other similar work in the zone and is estimated to be worth around £90m over its six-and-a-half-year term.

Our pipeline of major new bid opportunities in the Middle East totals around £1.0bn (December 2023: £0.8bn) and includes opportunities in Transport, Justice & Immigration and Defence.

Corporate costs

Corporate costs relate to typical central function costs of running the Group, including executive, governance and support functions such as HR, finance and IT. Where appropriate, these costs are stated after allocation of recharges to operating divisions. The costs of Group-wide programmes and initiatives are also incurred centrally. Corporate costs increased by £1.8m to £51.1m (2023: £49.3m). The higher level was due to investments made in the year.

Dividend

The Board has recommended a final dividend of 2.82 pence per share. The dividend, subject to shareholder approval, will be paid on 9 May 2025, with an ex-dividend date of 10 April 2025 and a record date of 11 April 2025.

Other Financial Information

Non-underlying items

Non-underlying items in the year were a charge net of tax of £135.5m (2023: credit net of tax of £29.1m).

Exceptional items - goodwill impairment: The 2024 result includes an impairment charge before tax of £114.5m, non-cash, non-underlying, in respect of the Asia Pacific goodwill balance, which has been triggered by the loss of the Immigration rebid in November 2024. The directors recognise that the Asia Pacific business has performed below expectations but continue to be committed to the market, and recognise that they have a strong platform to grow the business from. A number of changes have been made that have started to show improvements in 2024. Further plans are being developed and executed to strengthen the business, however, for accounting purposes and to be compliant with IAS36, these improvements and plans are not used to support the goodwill valuation (see note 7).

Exceptional items - operating items: In 2023 there was a credit before tax of £53.8m following a release of the provisions held for indemnities provided on disposed businesses totalling £43.9m, due to the claims period ending. The Group also received in 2023, £9.9m compensation on the early termination of a contract which, due to the size of the settlement, had been disclosed as exceptional.

Amortisation and impairment of intangible assets arising on acquisitions of £28.9m (2023: £30.9m).

Non-underlying tax for the year was a credit of £7.9m (2023: credit of £6.2m).

Joint ventures and associates - share of results

During the year, the most significant joint ventures and associates in terms of scale of operations were Merseyrail Services Holding Company Limited (Merseyrail) and VIVO Defence Services Limited (VIVO). Both are incorporated and operated in the UK.

Merseyrail generated revenue of £215.0m (2023: £217.0m), with the Group's share of profits net of interest and tax for the year being £10.9m (2023: £15.9m). The reduction in Merseyrail revenue and profits is primarily due to a one-off commercial settlement received in 2023. The Group received dividends of £14.1m (2023: £21.1m).

VIVO revenue for the year was £917.8m (2023: £844.9m) with the Group's share of profits net of interest and tax for the year being £11.9m (2023: £13.1m). The increase in VIVO's revenue is largely due to volumes and the impact of indexation. The decrease in profit is due to lower margins on billable work and the mix of margins within different contracts. The Group received dividends of £16.7m (2023: £nil).

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

Finance costs and investment revenue

Net finance costs recognised in the income statement were £33.1m (2023: £24.6m), consisting of investment revenue of £7.7m, less finance costs of £40.8m.

Investment revenue of £7.7m (2023: £7.0m) includes interest accruing on net retirement benefit assets of £1.9m (2023: £3.1m), and interest income of £5.3m (2023: £3.9m).

Finance costs of £40.8m (2023: £31.6m) include interest incurred on loans, primarily the US private placement loan notes and the revolving credit facility of £14.7m (2023: £15.6m) and lease interest expense of £19.9m (2023: £13.1m) as well as other financing related costs including the impact of foreign exchange on financing activities. The increase in lease interest expense year on year is primarily due to the continuing increase in the number of leases for dispersed properties required for our UK asylum contract.

Net interest paid recognised in the cash flow statement was £28.5m (2023: £26.5m), consisting of interest received of £5.3m less interest paid of £33.8m.

Tax

Underlying tax

The underlying tax charge recognised in the year was £60.4m (2023: £50.8m). The effective tax rate of 25.1% is higher than in 2023 (22.7%). The increase compared with 2023 is due to movements in provisions as part of the regular reassessment of tax exposures across the Group together with charges recognised in 2023 in connection with the finalisation of tax filings, withholding taxes suffered for which no tax benefit is expected and the change in mix of where profits have arisen.

The tax rate at 25.1% is slightly higher than the UK standard corporation tax rate of 25%. This is due to withholding taxes suffered to the extent no tax benefit is expected (increasing the rate by 1%), the increase in provisions held for uncertain tax positions (increasing the rate by 0.4%), additional charges on the finalisation of prior year returns (increasing the rate by 0.6%) and the movement in unprovided deferred tax (increasing the rate by 0.2%). This is offset by the impact of profits of joint ventures and associates whose post-tax profits are included in the Group's profit before tax (reducing the rate by 2.4%) together with the impact of lower statutory rates of tax on overseas profits (reducing the rate by 0.3%). Other smaller items result in a net increase to the rate of 0.6%.

Non-underlying tax

A tax credit of £7.9m (2023: £6.2m) arises due to tax deductions associated with the amortisation of intangibles arising on acquisitions. The goodwill impairment during the year is not tax deductible and therefore has no tax credit associated with it.

Deferred tax assets

At 31 December 2024, the Group has recognised a net deferred tax asset of £177.7m (2023: £184.8m). This consists of a deferred tax asset of £229.8m (2023: £235.7m) and a deferred tax liability of £52.1m (2023: £50.9m). A £177.5m UK deferred tax asset has been recognised on the Group's balance sheet at 31 December 2024 (2023: £179.9m) on the basis that the performance in the underlying UK business indicates sustained profitability which will enable the accumulated tax losses within the UK to be utilised.

Taxes paid

Net corporate income tax of £41.3m (2023: £41.1m) was paid during the year, relating to the Group's operations in Asia Pacific (£5.3m), North America (£25.0m), Europe (£9.4m) and the Middle East (£2.2m). The UK has a net repayment of £0.6m in the year, this consisted of a £2.6m payment to HMRC, offset by £3.2m received from the Group's joint ventures and associates for losses sold to them. The amount of tax paid, £41.3m, differs from the tax charge in the period, £52.5m, mainly because taxes paid/received from Tax Authorities can arise in later periods to the associated tax charge/credit. This is particularly the case with regards to movements in deferred tax, such as on the use of prior year losses, and provisions for uncertain tax positions.

Treasury risk management and operations

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

Treasury operations are conducted in accordance with policies and procedures approved by the Board which are reviewed annually. Financial instruments are only used for hedging purposes and speculation is not permitted. A monthly report is provided to senior management outlining performance against key risk management metrics, as required by the Treasury Policy.

Liquidity and funding

As at 31 December 2024, the Group had committed funding of £629.2m (2023: £558.8m), comprising £279.2m of US private placement loan notes, and a £350.0m revolving credit facility which was undrawn. The US private placement loan notes are repayable in bullet payments between October 2025 and February 2034. The Group does not engage in any external financing arrangements associated with either receivables or payables.

During the year ended 31 December 2024 total repayments of debt were £52.8m.

The Group's revolving credit facility provides £350.0m of committed funding for five years from the arrangement date in November 2022. The facility includes an accordion option, providing a further £100.0m of funding (uncommitted and therefore not incurring any fees) if required without the need for additional documentation. This option has not been included in the Group's assessment of available liquidity as approvals are required to access the funding.

Interest rate risk

The Group has a preference for fixed rate debt to reduce the volatility of net finance costs. The Group's Treasury Policy requires it to maintain a minimum proportion of fixed rate debt as a proportion of overall Adjusted Net Debt and for this proportion to increase as the ratio of EBITDA to interest expense falls. As at 31 December 2024, £279.2m of debt was held at fixed rates and Adjusted Net Debt was £99.8m.

Foreign exchange risk

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

Credit risk

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

Net assets

At 31 December 2024, the consolidated balance sheet shown on page 25 had net assets of £842.5m, a movement of £191.2m from the closing net asset position of £1,033.7m as at 31 December 2023. This reduction is a result of returns to shareholders totalling £179.7m through share buybacks and dividend payments, offset by £4.7m of total comprehensive income generated during the year.

Key movements since 31 December 2023 on the consolidated balance sheet shown on page 25 include:

Pensions

Serco's pension schemes have an accounting surplus before tax of £4.0m (2023: £24.5m). The decrease in the net retirement benefit asset of £20.5m is primarily due to market conditions and changes to assumptions on the two UK funded schemes, SPLAS and RPS. Higher yields compared to 2023 resulted in the majority of the £102.6m fall in the fair value of UK schemes assets . The Group's UK schemes liabilities reduced by £79.9m primarily due to the higher yields increasing discount rates.

Based on the 2021 actuarial funding valuation which was finalised in 2022 for SPLAS, the Group has committed to make deficit recovery payments of £6.6m per year from 2022 to 2030.

The opening net asset position led to a net interest income within net finance costs of £1.9m (2023: £3.1m).

Condensed Consolidated Financial Statements

Consolidated Income Statement

For the year ended 31 December 2024

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2024

Consolidated Statement of Changes in Equity

For the year ended 31 December 2024

Consolidated Balance Sheet

For the year ended 31 December 2024

Condensed Cash Flow Statement

For the year ended 31 December 2024

Notes to the Condensed Consolidated Financial Statements

     1.Basis of preparation and accounting policies

Basis of preparation

The financial information in this preliminary announcement does not constitute the Group's or the Company's statutory accounts as defined in section 434 of the Companies Act 2006 for the years ended 31 December 2024 or 2023 The financial information for 2023 is derived from the statutory accounts for 2023 which have been delivered to the registrar of companies, and those for 2024 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The preliminary announcement has been prepared in accordance with UK-adopted International Accounting Standards (IAS), UK-adopted International Financial Reporting Standards (IFRS) and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards. Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full Group and parent company only financial statements that comply with IFRS and FRS101 respectively, in due course and this includes the Group's and parent company's accounting policies.

Going concern

In assessing the basis of preparation of the financial statements for the year ended 31 December 2024, the Directors have considered the principles of the Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, 2014'; particularly in assessing the applicability of the going concern basis, the review period and disclosures. The period of assessment is considered to be at least 12 months from the date of approval of these financial statements.

At 31 December 2024, the Group's principal debt facilities comprised a £350m revolving credit facility maturing in November 2027 (of which £nil was drawn), and £279.2m of US private placement notes (USPP notes), giving £629.2m of committed credit facilities and committed headroom of £533.0m, being the undrawn RCF plus cash of £183.0m. The principal financial covenant ratios are consistent across the USPP notes and revolving credit facility, and are outlined on page 46. As at 31 December 2024, the Group's primary restricting covenant, its leverage ratio, is below the covenant of 3.5x and is below the Group's target range of 1x-2x at 0.33x.

The Directors have undertaken a rigorous assessment of going concern and liquidity, taking into account financial forecasts, as well as the potential impact of key uncertainties and sensitivities on the Group's future performance. In making this assessment the Directors have considered the Group's existing debt levels, the committed funding and liquidity positions under its debt covenants, its ability to generate cash from trading activities and its working capital requirements. The Directors have also identified a series of mitigating actions within their control that could be used to preserve cash in the business should the need arise.

The basis of the assessment continues to be the Board-approved budget which is prepared annually for the next two-year period and is based on a bottom-up approach to all of the Group's existing contracts, potential new contracts and administrative functions.

During the period of assessment, £39.9m of the Group's USPP notes mature. The forecast supporting this statement shows that, on the assumption that these are repaid, there is still sufficient liquidity headroom for the Group to remain a going concern.

The Directors believe that appropriate sensitivities in assessing the Group's ability to continue as a going concern are to model reductions in the Group's win rates for bids and extensions, and reductions in profit margins. Due to the diversity in the Group's operations, the Directors believe that a reverse stress test of these sensitivities to assess the headroom available under the Group's debt covenants and available liquidity provides meaningful analysis of the Group's ability to continue as a going concern. Based on the headroom available, the Directors are then able to assess whether the reductions required to breach the Group's financial covenants, or exhaust available liquidity, are plausible.

This reverse stress test shows that after assuming no additional refinancing occurs after the date of approval of the financial statements, the Group can afford to be unsuccessful on 80% of its budgeted bids and extensions, combined with a profit margin 80 basis points below the Group's forecast, and still retain sufficient liquidity to meet all liabilities as they fall due for a period of 12 months from approval of these financial statements, and remain compliant with the Group's financial covenants.

In respect of win rates, rebids and extensions have a more significant impact on the Group's revenue than new business wins during the assessment period. The Group has won more than 85% of its rebids and available contract extensions by volume over the last two years, therefore a reduction of budgeted bids and extensions by 80% is not considered plausible. The Group does not generally bid for contracts at margins below its target range.

As detailed in post balance sheet events within note 15 to the financial statements, subsequent to the balance sheet date the Group signed a committed 2-year term loan facility of US$250m (c.£199m) on the announcement to acquire Northrop Grumman's mission training and satellite ground network communications software business (MT&S), which has been included in the Directors' liquidity forecast supporting this assessment. The facility provides a source of additional liquidity in the near term, becoming available after the completion of the acquisition, and it will mandatorily cancel in the event of equivalent future debt issuance by the Group. The principal financial covenant ratios of this facility are consistent with the USPP loan notes and revolving credit facility.

Consequently, the Directors are confident that the Group and Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the financial statements and therefore have prepared the financial statements on a going concern basis.

Accounting policies

No new or amended accounting standards had a material impact on the Group for the 31 December 2024 reporting period.

There have been no changes to the Group's accounting policies during the year ended 31 December 2024 with the exception of the following two policies:

Contingent liabilities on business combinations

Any present obligation that exists when a business is acquired is recognised as a liability within provisions measured at its fair value, even if the outflow of economic benefits is not probable.

After initial recognition and until the liability is settled, cancelled, or expires, the liability continues to be measured at the amount initially recognised in the business combination unless the liability becomes probable. Once probable it is then measured at the higher of the amount initially recognised or the amount that would be recognised based on the accounting policy for provisions above.

Share repurchase arrangements

Any shares repurchased (excluding shares repurchased by employee share ownership trusts) are recognised when legal ownership is transferred to the Group. These are measured at cost and are included in the treasury share reserve until used or cancelled.

Any shares that the Group is contractually committed to purchase after the balance sheet date are recognised at the expected cost and included in the treasury share reserve.

When treasury shares are cancelled the cost is transferred from the treasury share reserve into retained earnings.

Shares purchased by employee share ownership trusts are recognised when legal ownership is transferred to the trust. These are measured at cost and are included in the own share reserve until transferred to the share based payment reserve on exercise of share awards.

Estimates and judgements

In preparing these condensed consolidated financial statements, there have been no changes to the critical

accounting judgements and key sources of estimation uncertainty from those disclosed in the Group's 2023

audited financial statements.

2. Segmental information

The Group's operating segments reflecting the information reported to the Board in 2024 under IFRS 8 Operating Segments are consistent with those reported in the Group's 2023 audited financial statements.

An analysis of the Group's revenue from its key market sectors is as follows:

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