ANNUAL REPORT 2016 - Interserve

1 REGISTERED OFFICEI nterserve Plc Interserve House Ruscombe Park Twyford Reading Berkshire RG10 9 JUT.+44 (0)118 932 0123 F. +44 (0)118 932 Plc ANNUAL REPORT 2016 INGENUITY AT WORKANNUAL REPORT 201610848 INT AR Cover 2016_ 123/03/2017 17:52 CONTENTSADRIAN RINGROSE CHIEF EXECUTIVEFOR FURTHER INVESTOR INFORMATION: OVER THE LAST FIVE YEARS WE HAVE MADE SUBSTANTIAL STRATEGIC PROGRESS CREATING A BROADER, STRONGER BUSINESS. OUR PERFORMANCE IN 2015 WAS GOOD, RESULTING IN 12 PER CENT OPERATING PROFIT GROWTH IN MARKETS THAT CONTINUE TO OFFER BOTH OPPORTUNITIES AND CHALLENGES. OVERALL, WE EXPECT 2016 TO BE BROADLY STEADY COMPARED TO 2015. ANNUAL REPORT 2015 Financial StatementsINDEPENDENT AUDITOR S REPORT90 CONSOLIDATED FINANCIAL STATEMENTS98 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS104 COMPANY FINANCIAL STATEMENTS147 NOTES TO THE COMPANY FINANCIAL STATEMENTS149 RELATED UNDERTAKINGS164 FIVE-YEAR ANALYSIS171 SHAREHOLDER INFORMATION173 GovernanceBOARD OF DIRECTORS38 ADVISERS41 CORPORATE GOVERNANCE42 AUDIT COMMITTEE REPORT51 DIRECTORS REMUNERATION REPORT56 DIRECTORS REPORT80 DIRECTORS RESPONSIBILITY STATEMENT87 Strategic ReportOUR STRATEGY06 OPERATIONS AT A GLANCE08 OUR BUSINESS MODEL10 WHERE WE OPERATE12 PERFORMANCE14 OPERATIONAL REVIEW16 PRINCIPAL RISKS AND UNCERTAINTIES28 FINANCIAL REVIEW32 overview HIGHLIGHTS 01 CHAIRMAN S STATEMENT02 Interserve ANNUAL REPORT 2015 OVERVIEWCONTENTSCOMMUNITY CENTREThis ANNUAL REPORT was printed in the UK by CPI Colour

2 Limited, using vegetable based inks. The printer and paper mill are accredited with ISO 14001 Environmental management Systems and are Forest Stewardship Council chain-of-custody registered. The paper is 100% recycled, produced from de-inked post consumer waste. The silk laminate used on the outer cover is and produced by* This ANNUAL REPORT includes a number of non-statutory measures to reflect the impact of non-trading and non-recurring items. See note 32 to the consolidated financial statement for a reconciliation of these measures to their statutory equivalents and note 11 for calculation of earnings per HIGHLIGHTS REVENUE 3, PRE-TAX PROFIT* (LOSS) BEFORE TAX( 9 )FULL-YEAR DIVIDEND8 .1pHEADLINE TOTAL OPERATING PROFIT* EARNINGS PER SHARE* MARKET POSITIONS AND HEALTHY FUTURE WORKLOAD 2016 was a mixed year for the Group.

3 We delivered a strong cash performance and the majority of our businesses performed well despite political and economic uncertainties, together with the impact of the National Living Wage in the UK. However, the performance of our UK Construction business was disappointing, and we are focusing our efforts on improving and re-shaping this the challenges of exiting from the Energy from Waste sector remains a significant priority. As previously announced, we have increased the exceptional provision for exiting this market and the associated contracts to 160 million. We expect to complete substantially all of the construction and commissioning of the projects during 2017, although our contractual obligations in respect of warranties and the resolution of claims will continue for a period liquidity available to the Group is adequate, having put in place new banking facilities that expand and extend our debt capacity, the Board has a medium-term objective to reduce our overall indebtedness and enhance liquidity levels further whilst continuing to invest in our core businesses.

4 We have therefore taken the difficult decision to suspend the dividend the increased uncertainty following the UK s EU referendum, our outlook for the current year remains positive. This, together with our strong market positions and healthy future workload, underpins the Board s confidence in our medium-term prospects. Adrian Ringrose Chief Executive 10848 - INT AR16 01 Overview_02 Strategic Report_p1-37 118/03/2017 12:2510848 INT AR Cover 2016_ 223/03/2017 17:52 Financial StatementsGovernanceStrategic REPORT OverviewFinancial StatementsGovernanceOverview Highlights 01 Chairman s statement 02 Strategic REPORT Business model 06 Our strategy 08 Where we operate 10 Performance 12 Operational review 14 Principal risks and uncertainties 26 Financial review 30 GovernanceBoard of directors 40 Advisers 43 Corporate governance 44 Audit Committee REPORT 54 Directors remuneration REPORT 60 Directors REPORT 87 Directors responsibility statement 95 Financial StatementsIndependent auditor s REPORT 98 Consolidated financial statements 106 Notes to the consolidated financial statements 112 Company financial statements 162 Notes to the Company financial statements 164 Related undertakings 179 Five-year analysis 187 Shareholder information 189 Revenue constant at billion Strong performances

5 From Equipment Services and Construction International and resilience in Support Services UK, offset by weak performance from UK Construction Exited Energy from Waste business: exceptional charge of 160 million Equipment Services strategic review concluded and updated strategy being implemented Strong underlying cash generation, gross operating cash flow of million (FY 2015: million) Strong future workload of billion Dividend per share no final dividend proposed in order to enhance liquidity levels while continuing to invest in our core businesses Key contract wins with both new and existing clients including the Defence Infrastructure Organisation, the Home Office, BBC, JLL, Land Securities, Severn Trent, Meraas (Dubai), SEPCO (Oman) and InterContinental Hotels Group (Qatar)FOR FURTHER INVESTOR INFORMATION: HIGHLIGHTSSUSTAINABILITY ICONSO verviewStrategic REPORT Build more skills and more opportunitiesCreate places that benefit peopleDeliver public service in the public interestAchieve sustainable growthGenerate a positive environmental impact01 10848 - INT AR16 01 Overview_02 Strategic Report_p1-37 123/03/2017 17.

6 43 RESULTS AND DIVIDENDI nterserve Plc today announced its preliminary results for 2016 , the first year under my Chairmanship. 2016 was a challenging year for Interserve . We had solid results in our core businesses, with a strong year for Equipment Services, continued growth in International Construction and further good progress in frontline and support services, backed by an improved cash performance. This performance was overshadowed by the serious challenges posed by the legacy of our participation in the Energy from Waste (EfW) business and the escalation in the costs of exiting that sector. These contracts have been beset with contractual problems, failures in our supply chain and complex technical issues. We have undertaken a further detailed review of this exited business, including the potential impact of our termination on the Glasgow contract and the insolvency of one of our major subcontractors.

7 As a result, we announced last week that it was necessary to increase the exceptional loss by a further 90 million from that recognised in the 2016 half-year results, giving an aggregate loss of 160 million. In arriving at this position, we have undertaken a detailed and thorough analysis of the situation and made a reasonable, prudent assessment of the potential outcomes. I must stress, however, there remains a range of possible outcomes and it will be some time before we have full visibility of the actual final cost of resolution. I can assure you of three things, however: our construction teams will leave no stone unturned to try to ensure that we complete the ongoing EfW contracts as efficiently as possible; we have an excellent team of legal and technical experts who will do all that is necessary to protect our position and resolutely pursue our rights in the disputed areas; and the overwhelming majority of the Interserve leadership and employees will remain focused on continuing to improve and grow our core businesses by competing effectively in the marketplace and continuing to provide outstanding customer service.

8 During 2016 we undertook a strategic review of our Equipment Services business, RMD Kwikform (RMDK). We concluded that RMDK is a strong, attractive business with good growth potential. We will continue to invest in this business which is founded on innovation and engineering expertise coupled with the application of world-class design and logistics Chairman s statement WE DELIVERED SOLID RESULTS IN OUR CORE BUSINESSES, WITH A STRONG YEAR FOR EQUIPMENT SERVICES, CONTINUED GROWTH IN INTERNATIONAL CONSTRUCTION AND FURTHER GOOD PROGRESS IN UK FRONTLINE SERVICES GLYN BARKER CHAIRMAN REVENUE 3, 10848 - INT AR16 01 Overview_02 Strategic Report_p1-37 223/03/2017 17:43 Financial StatementsGovernanceStrategic REPORT OverviewWe have implemented a greater focus on cash flow during the year and this has become all the more important as the impact of the exited business has been increasingly onerous.

9 In recognition of the exceptional, short-term increased cash demands of the EfW exit we have also successfully secured additional bank facilities of 133 million, which raises our total available facilities and US Private Placement Notes to 640 liquidity available to the Group is adequate, the Board has a medium-term objective to reduce our overall indebtedness and enhance liquidity levels further whilst continuing to invest in our core businesses. We have therefore taken the difficult decision to suspend the dividend temporarily. I regret this has become necessary, but we took this decision only after examining scrupulously all alternatives. The need to ensure that future dividends are sustainable and covered by operating cash generation and a strong balance sheet is fundamental. Improving the Group s performance and prospects amidst continuing economic uncertainty also requires that we continue to invest and grow the level and flexibility of liquid CHANGESIn November we announced that Adrian Ringrose will step down from the Board and leave the Company once a successor has been appointed.

10 Adrian has played a key role in the growth and reshaping of the business during his 13 years as Chief Executive and I would like to thank him for his contribution and for his continued loyalty and dedication to the Company. I am very conscious that our shareholders and our employees are keen to learn the result of our CEO selection process. We have undertaken a comprehensive search and selection process which is now nearing its conclusion and I hope to be in a position to make a further announcement shortly. I am delighted to welcome Gareth Edwards, who joined the Board on 1 February 2017 as a non-executive director. Gareth has extensive experience as an adviser to Boards and CEOs and considerable commercial and international experience and I am confident he will make an excellent contribution to the recognise the vital importance of our social and community responsibilities, our employee brand, and our environmental impact.