REG - Babcock Intnl Group - Full year results for the year ended 31 March 2023
20/07/2023 07:30
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230720:nRST6417Ga&default-theme=true
RNS Number : 6417G Babcock International Group PLC 20 July 2023
Babcock International Group PLC
Full year results for the year ended 31 March 2023
20 July 2023
Building momentum
Statutory results
31 March 2023 31 March 2022
Revenue £4,438.6m £4,101.8m
Operating profit £45.5m £226.8m
Basic earnings per share (6.9)p 32.5p
Cash generated from operations £348.9m £41.8m
Underlying results (ii)
31 March 2023 31 March 2022
Contract backlog (i) £9.5bn £9.9bn
Underlying operating profit (iii) £177.9m £237.7m
of which Type 31 loss (iv) £(100.1)m -
Underlying operating profit excluding the Type 31 loss £278.0m £237.7m
Underlying operating margin excluding the Type 31 loss 6.3% 5.8%
Underlying basic earnings per share 17.7p 30.7p
Underlying basic earnings per share excluding Type 31 loss 33.8p 30.7p
Underlying free cash flow £75.3m £(191.3)m
Net debt £564.4m £968.7m
Net debt excluding operating leases £346.2m £556.7m
Net debt/EBITDA (covenant basis) 1.5x 1.8x
David Lockwood, Chief Executive Officer, said:
"We've made excellent progress this year, with better-than-expected cash
generation, margin expansion and double-digit revenue growth. When we started
our transformation, my first goal was to stabilise and strengthen the balance
sheet and I'm delighted to say that work is complete. Babcock is now a
higher-quality, lower-risk and more predictable business, with a clear focus
on execution.
"In a world of significant instability, national security has never been more
important. With defence making up two-thirds of the Group, the combination of
capability, availability and affordability we offer is increasingly relevant.
I'm excited by the momentum building across the business, and that confidence
is reflected in our expectation of continuing cash-backed profitable growth,
and reintroducing a dividend in FY24."
Financial highlights
- Contract backlog £9.5 billion, up 7% organically
- Revenue up 8% to £4,438.6 million, up 10% organically, with growth
across all sectors
- Statutory operating profit of £45.5 million, down due to a loss on
disposal and related items and the £100.1 million Type 31 loss, announced in
the April trading update
- Excluding the Type 31 loss:
- Underlying operating profit up to £278.0 million, driven by a
strong performance in Land, including a £12 million one-off credit
- Underlying basic earnings per share (ii)(iii) up 10% to 33.8p
- Underlying free cash flow of £75.3 million, better than expected due
to strong operating cash performance. 110% operating cash conversion,
excluding the Type 31 loss
- Net debt to EBITDA (covenant basis) 1.5x, within our target range of
1.0x to 2.0x (1.1x excluding the Type 31 loss from EBITDA)
Outlook (v)
- FY23 baseline: Our FY24 outlook and medium-term guidance is based on
FY23 results excluding the impact of disposed businesses, the Type 31 loss and
the £12 million one-off credit in Land. Excluding these items, FY23 revenue
was c.£4 billion, underlying operating profit was c. £265 million, and
underlying operating margin was 6.6%.
- FY24: Our expectations for FY24 profitability and cash flow are
unchanged, although operating cash flow may be weighted to the second half
given the FY23 overperformance. With c.£2.8 billion of revenue under
contract at 1 April 2023 and around £700 million of framework orders expected
to be delivered in FY24, we are confident of another year of organic revenue
growth and further underlying margin expansion. We also expect to reinstate a
dividend in FY24, as indicated in the April trading update.
- Medium term guidance: We have increased confidence in the growth,
profitability and cash generation potential of the business in the medium
term. Over the next three-to-five years we believe we can:
- Deliver average underlying operating cash conversion of at least 80%
- Achieve underlying operating margins of at least 8%
- Deliver average annual revenue growth in the mid-single digits
- A number of factors could influence the pace of achieving these
targets, for example mobilisation of large new programmes and phasing of lower
capital intensity work that could accelerate revenue but slow margin
expansion.
Strategic highlights
- Completed portfolio realignment programme, with over two thirds of
the Group's revenue now in defence
- Further investment in improving the control environment and project
risk management
- Progressed delivery of our ESG strategy and commitments. Integrated
ESG into our long-term planning process and performance framework
- Published capital allocation policy with a commitment to reinstate a
dividend in FY24
- Achievements to date and confidence in our future has enabled us to
set medium term guidance
Operational highlights
Marine
- Growing naval warship support in the UK and Australia - new
contracts, extensions, increased operational tempo
- Developing digital defence offering in the UK Skynet programme
- Progressing naval shipbuilding programmes - Type 31 in the
UK/MIECZNIK frigate programme in Poland
- Strong demand for our LGE equipment and developing the aftermarket
opportunity
Nuclear
- Major upgrades to UK submarine infrastructure in preparation for the
next 50+ years of submarine support requirements
- Launched Submarine Availability Partnership with the UK MOD and
Submarine Delivery Agency to improve availability
- Concluded the first LIFEX deep maintenance programme of a Vanguard
Class submarine
- Awarded initial contract for second Vanguard Class submarine refit
after the year end on a full cost recovery basis
- Developing strategic relationships for global decommissioning
opportunities eg Japan
Land
- Significantly improved operational delivery of the key DSG contract
with option years being discussed
- Strengthened position in secure communications market: Australian
Defence High Frequency Comms
- Delivered urgent operational requirements to revalidate/modernise
gifted equipment in support of operations in Ukraine
- Secured new production contract with the UK MOD for 70 protected
mobility vehicles, with potential for requirement to grow
- Expanded operational role in France through award to support air
transit and aircraft operation equipment across 26 military bases
Aviation
- Significantly progressed our French defence offering, delivering
fixed and rotary wing aircraft for support and training programmes
- Increased Canadian Aerial Emergency Services activity with 10-year
air ambulance contract for British Columbia
- Submitted bid with Leonardo for Canada's Future Air Crew Training
(FAcT) programme for the Canadian Royal Air Force
- Partnering with the UK Royal Air Force to progress sustainable
aviation technologies to reduce environmental impact
Notes to statutory and underlying results on page 1
((i)) Contract backlog: The £9.5 billion contract backlog represents amounts
of future revenue under contract. This measure does not include £3.4 billion
of work expected to be done by Babcock as part of framework agreements (FY22:
£3.2 billion). Contract backlog and framework definitions can be found in the
Financial Glossary on page 28.
(ii) Alternative Performance Measures (APMs):
The Group provides APMs, including underlying operating profit, underlying
margin, underlying earnings per share, underlying operating cash flow,
underlying free cash flow, and net debt to EBITDA to enable users to have a
more consistent view of the performance and earnings trends of the Group.
These measures are considered to provide a consistent measure of business
performance from year to year. They are used by management to assess operating
performance and as a basis for forecasting and decision-making, as well as the
planning and allocation of capital resources. They are also understood to be
used by investors in analysing business performance.
The Group's APMs are not defined by IFRS and are therefore considered to be
non-GAAP measures. The measures may not be comparable to similar measures used
by other companies, and they are not intended to be a substitute for, or
superior to, measures defined under IFRS. The Group's APMs are consistent with
the year ended 31 March 2022. The Group has defined and outlined the purpose
of its APMs in the Financial Glossary on page 28.
(iii) Underlying operating profit: Underlying operating profit is a key APM
(described in (ii)) for the Group. It is defined as IFRS statutory operating
profit adjusted for specific adjusting items. See page 11 for a reconciliation
of underlying operating profit to statutory operating profit and note 2 of the
preliminary financial statements for an analysis of specific adjusting items.
(iv) Type 31 loss: As described in our trading update in April 2023, this is
the loss in the year due to additional forecast costs that were not foreseen
at contract inception. Following the commencement of a dispute resolution
process (DRP) in April 2023 over responsibility for these incremental costs,
we have reassessed the contract outturn on the basis that these are not
recovered. This has resulted in the recording of a £100.1 million loss in the
year, representing a £42.6 million reversal of revenue, £1.6 million asset
impairment and the recognition of a £55.9 million onerous contract loss. The
DRP is ongoing. See Note 1 of the preliminary financial statements for more
details.
(v) FY23 baseline for outlook and guidance: Our FY24 outlook and medium-term
guidance is based on FY23 results excluding the impact of disposals, the Type
31 loss and the £12 million one-off credit in Land. Excluding these items,
FY23 revenue was c.£4 billion, underlying operating profit was c.£265
million, and underlying operating margin was 6.6%.
Results presentation:
A webcast presentation for investors and analysts will be held on 20 July 2023
at 09:00 am (UK time). The presentation will be webcast live and will be
available on demand at
www.babcockinternational.com/investors/results-and-presentations
(http://www.babcockinternational.com/investors/results-and-presentations) .
A transcript of the presentation and Q&A will also be made available on
our website.
For further information:
Andrew Gollan, Director of Investor Relations +44 (0)7850 978 741
Kate Hill, Group Director of Communications +44 (0)20 7355 5312
Tulchan Communications +44 (0)20 7353 4200
CEO STATEMENT
Introduction
Our transformation is delivering results. In FY23, we successfully delivered
double-digit organic revenue growth, underlying margin((1)(2)) expansion and a
significantly better than expected cash performance against a backdrop of
economic turbulence.
Following completion of the portfolio alignment programme, over two-thirds of
the Group's revenue is now concentrated on defence, with this percentage
expected to increase over time. We have significantly strengthened the balance
sheet and enhanced risk management systems, underpinned by our work to embed a
new corporate culture focused on execution and growth, aligned with our ESG
strategy. While we have further to go, Babcock is now more stable, more
resilient, and better able to capture the many growth opportunities before us.
As a result, the Board expects to reinstate a dividend in FY24 after a
three-and-a-half-year hiatus. Over the medium term we are targeting average
annual organic revenue growth((3)) in the mid-single digits, an underlying
operating margin((1)(2)(3)) of at least 8% and underlying operating cash
conversion((1)(3)) of at least 80%.
Strong underlying FY23 results
Our second full year of turnaround delivered strong underlying performance
excluding the £100.1 million loss on the UK Ministry of Defence (MOD) Type 31
programme, where we have entered a Dispute Resolution Process (DRP). We have
delivered organic revenue growth of 10%((1)(2)), a 50 basis point increase in
underlying operating margin((1)(2)), underlying operating cash conversion((1))
((2)) of 110%, and underlying free cash flow((1)) of £75.3 million,
significantly ahead of expectations, despite ongoing macroeconomic headwinds.
Due to our strong cash performance, we accelerated pension deficit payments by
an additional £35 million and reduced our net debt excluding operating leases
by £211 million. At 1.5x, our net debt to EBITDA((1)) gearing ratio remains
within our target range of 1.0x to 2.0x (on a covenant basis) (FY22: 1.8x).
Excluding the Type 31 loss our gearing ratio would have been 1.1x.
Our contract backlog of £9.5 billion, grew organically by 7%, reflecting the
demand for our specialist capabilities in our core defence and security
markets and underpinning our confidence in the future.
A better Babcock
In the last two years since we began our turnaround programme, we have made
excellent progress across our three pillars of Stabilise, Execute and Grow.
Stabilise: balance sheet strengthened
The sale of the European Aerial Emergency Services business (AES) to Ancala
Partners in February 2023 completed a two-year portfolio alignment programme
to strengthen the balance sheet and focus on the Group's chosen markets.
The programme realised total cash proceeds of c.£640 million, well exceeding
our initial target of above £400 million, and reduced lease liabilities by
c.£340 million. As a result of this and a better-than-expected operating cash
performance, net debt at 31 March 2023 was £564 million, representing an
aggregate reduction of £789 million over two years. Over the same period, our
net debt to EBITDA(1)(2) gearing ratio (on a covenant basis) reduced from 2.5x
at March 2021 to 1.5x at March 2023. During the period we have also fully paid
off c.£400 million of deferred creditors and supply chain financing
arrangements.
A focused and differentiated portfolio
Our portfolio is now aligned with our strategy to leverage our capabilities in
growth areas of defence and security. On a proforma basis(3), 68% of FY23
revenue is derived from the defence market, which we expect to steadily
increase over time.
We are predominately focused on services, with most of our business providing
complex programme support to UK and international customers in support of
their requirements of capability, affordability and availability. The balance
of our operations comprises the design, manufacturing and integration of
specialist equipment and technologies for our defence and civil customers.
With Stabilisation complete, our strategy is now firmly focused on delivering
value through continual operational improvement and sustainable growth.
Execute: ongoing operational improvement
We have made further progress in operational delivery across the Group,
underpinned by a strengthened corporate culture which drives better outcomes
for all our stakeholders. Our work to drive cultural change centres on our
people. In October 2022, we concluded the first Group-wide survey of employees
for more than 10 years. This achieved a response rate of 79%, demonstrating a
high level of engagement. The survey results have driven the development and
implementation of action plans as part of our overarching People Strategy.
Examples include the launch of a Babcock Role Framework to transform the
employee experience, defining and standardising role categorisation and
opening professional development pathways and career opportunities.
We are fostering a consistent Group-wide risk-based control approach, aiming
for predictability and optimisation of performance through investment in
systems, controls and the expertise of our people. While there is still much
to do, operational improvement will continue to be a key driver of margin
expansion, cash generation and higher returns over the coming years.
Enhanced control environment
During the year we launched a number of Group-wide process and control
initiatives and functional changes developed to improve efficiency, enhance
our control environment, and fundamentally reduce risk in the business. We
designed and implemented a Global Project Management Framework to standardise
and professionalise project management across the Group. This framework
includes our Integrated Project Controls processes which enhance our ability
to make data-driven decisions, which is key to improved delivery and
mitigation of risk in our major projects.
We have also introduced a new centre-led commercial function tasked with
optimising commercial risk management and have implemented 15 key 'Blueprint'
fundamental management review controls which mitigate significant contract
management, commercial and financial reporting risks. We also launched a
Group-wide Global Business Management System which will drive commonality and
best practice across the business.
Enhanced delivery
We are proactively managing exposure to historically onerous long-term
contracts and focusing on replacing them with higher quality orders with
improved terms and/or a lower execution risk profile. At the beginning of the
turnaround, we identified a small group of higher risk legacy contracts that
generated zero margin. Associated revenue from these contracts continues to
reduce from over £400 million in FY22 to less than £300 million expected in
FY24, through a combination of contract completion and delivery, such as the
Vanguard life extension (LIFEX), and efficiency improvements, such as DSG,
both described below.
We recently concluded the Devonport elements of the highly complex - and first
of its kind - LIFEX of a Vanguard Class submarine, with the first vessel
returned to the UK Royal Navy in May 2023 after seven years. This was one of
the largest and most complex submarine engineering projects undertaken in the
UK, with HMS Vanguard being the first of her class to receive an extensive
life-extension and upgrade package - essentially a rebuild rather than a
traditional refit. We have learned many lessons in how to scope contracts,
mobilise and deliver such a complex project. The novel and significant risk
associated with this unique project is now behind us. Mobilisation for the
next submarine in the programme, HMS Victorious, is now underway, on contract
terms that allow us to manage programme risk more effectively and improve
delivery.
A successful example of the turnaround improving programme delivery is the
10-year DSG contract awarded in 2015 for the maintenance, repair and overhaul
(MRO) of British Army land vehicles and equipment. Following a radical
overhaul of the operation to raise productivity, we have markedly improved
operating performance and delivery for our UK MOD customer, who has formally
notified us of their intention to exercise up to five option years with
modifications that will contribute to better outcomes for the customer and for
Babcock. We continue to evolve complex vehicle support and maintenance
solutions that could lead to future opportunities in the UK and
internationally.
Earlier this month we were awarded an initial one-year, c.£50 million
contract, with options to extend, by the UK MOD to support urgent operational
requirements for Ukraine's military land assets as part of the UK's support
for the country.
Further advancing our ESG strategy
Over the year, we have made progress in the delivery of our ESG strategy and
corporate commitments, while increasing disclosure on key sustainability
interests. In April 2023, we submitted our interim and Net Zero carbon
reduction targets to the Science Based Targets initiative (SBTi) and we
conducted a strategic climate-related risk assessment as input to our
five-year planning process. We are also continuing to integrate our five ESG
priorities, which provide a comprehensive framework for integrating
sustainability into the business:
1. Reduce emissions and set Net Zero 2040 targets
2. Integrate environmental sustainability into programmes
3. Ensure the safety and well-being of our people
4. Improve communities, and provide high-quality jobs
5. Be a collaborative, trusted partner across the supply chain
In addition, we have further embedded ESG into our performance framework with
remuneration linked to our Net Zero emissions target and diversity and
inclusion targets, measured through our KPIs.
More broadly, we have a critical role in global defence and national security
in the countries in which we operate. As global instability and political
turmoil increases, we support the view that democracies need to be able to
defend themselves from aggressors. Without the stability provided by strong
defence, it is challenging for governments to progress environmental or social
improvement measures.
Nuclear power, and in some instances nuclear deterrent, form a crucial part of
the resiliency framework developed by many democratically elected Governments.
Babcock has been supporting the UK's commitment to its Continuous-At-Sea
Deterrent for over 50 years, while also delivering critical civil nuclear
engineering. We will continue to support our customers, both with their
defence agenda and their commitment to generate low emission power from
nuclear energy.
Financial risks being better managed
Inflation: The macro-economic environment remains volatile, although there are
signs that the extreme inflationary pressures experienced over the last year
are beginning to recede, albeit slowly. Approximately two-thirds of our
revenue base has some measure of protection for inflation. The remainder are,
"firm", fixed-price contracts which retain some inflation risk. Many are
relatively short term (one to two years), giving us the opportunity to replace
them with improved terms.
The Group's largest exposure to inflation is rising labour costs
(approximately 50% of the cost base of the fixed-price contracts),
particularly within the UK. The Group addressed labour cost in the UK for FY23
with a pay deal that targeted all but the higher paid employees to assist in
the cost-of-living increases. This pay deal resulted in a c.£25 million FY23
cost increase over and above costs that could be recovered through extant
contracts, which we have offset through other efficiencies. The FY24 pay cycle
has commenced and we continue to expect to offset unrecoverable increases
through targeted efficiencies.
Grow - building momentum
Our portfolio is now aligned with our growth strategy. This will leverage our
technical capability to grow our defence and services business, both
internationally and in the UK. The defence market backdrop remains supportive,
driven by geopolitical instability and a heightened threat environment,
although global financial pressures do also remain acute.
Whether it be through engineering support such as maintaining or extending the
life of complex assets, through the design and manufacture of specialist
equipment, or through the integration of new technologies into innovative and
cost-effective solutions, we see significant opportunities in our defence and
adjacent markets.
Growth drivers
It is becoming clear that the events in Eastern Europe and growing tension in
the Asia-Pacific region are driving planned increases in global defence
expenditure. Whilst some additional funding will go to new equipment, there is
a realisation that increasing the availability and capability of current
military assets is crucial. As we are largely platform-agnostic, we partner
with delivery agencies - in some cases as a Design or Technical Authority - to
support them as they make critical decisions to modernise and life-extend
ageing assets and platforms.
As defence operations modernise, so too will the support required to deliver
campaigns. The outsourcing of frontline support and services that require
skilled, engineering-based capabilities will continue to grow, as will the
need for specialist training.
The rapid pace of technology and ever-changing threat environment is driving
the need to deliver military capability with agility and at pace. Our
technology and systems integration expertise, including capability insertion
and equipment modernisation, continue to drive growth.
Evidenced through our sectors
Marine - increasing naval support and technology opportunities in the UK and
internationally
As a leading provider of naval ship and submarine support and maintenance to
UK, Canadian, Australian, US and New Zealand navies, we see opportunities
emerging in the short term as a result of the increased operational tempo and,
over the longer term, through life-extension and naval fleet modernisation
strategies. In the UK, our ability to deliver complex, cost-effective support
has allowed us to secure several new naval support contracts in the year,
including a critical 10-year docking contract for the Queen Elizabeth Class
aircraft carriers and a contract to support the UK Government's research
vessel fleet.
In Australia, following our appointment as the Regional Maintenance Provider
with responsibility for managing the support of Royal Australia Navy (RAN)
vessels in Western Australia, further opportunities are emerging as the RAN
re-organises its ship support model. Elsewhere we are seeing opportunities to
support our international customers, for example, following our recent
programme to regenerate ex-UK Royal Navy Sandown Class mine countermeasures
vessels for Ukraine.
We are continuing to experience international interest for the proven
Arrowhead 140 naval ship design used on the UK Type 31 frigate programme, both
in our focus countries and other export markets, driven by demand for
affordable naval power.
The investments we have made in our advanced manufacturing facility in Rosyth
are not only allowing us to deliver new performance standards in UK warship
build but are drawing interest from other domestic and international customers
who value our flexible, scalable advanced and modular manufacturing
capabilities. A key part of that capability is the delivery of missile tube
assembles for the UK Dreadnought and US Columbia Class submarine programmes
where Rosyth is the programme centre of excellence for tube manufacture as a
result of investments in advanced robotic solutions.
Demand for our Liquid Gas Engineering (LGE) products and innovative
technologies for the processing, handling and storage of liquefied gas remains
strong as our customers look to satisfy the growing global demand for cleaner
energy solutions to replace traditional fossil fuels such as coal. We continue
to innovate in this area, seeking commercially scalable technologies for the
transport and management of gas and liquid fuels that can help to reduce the
industry's carbon emission burden.
We command a strong position in the defence digital market. In the year, we
were awarded a six-year c.£400 million contract to manage and operate Skynet,
the UK's military satellite communications system, part of the MOD's c.£6
billion Skynet 6 programme, marking a significant opportunity in the space
domain.
Nuclear - growth across defence and civil nuclear markets
Babcock sustains the entirety of the UK Royal Navy's nuclear-powered submarine
fleet. The major programme to modernise submarine infrastructure across
Devonport continues to grow as the UK progresses a multi-year phase of class
transition, which will lead to concurrent support of four classes of
nuclear-powered submarine - Trafalgar, Vanguard, Astute and, ultimately,
Dreadnought. Our upgraded facilities will support and maintain the UK's
critical subsea and nuclear deterrent capability for decades to come.
During the year, we launched the Submarine Availability Partnership with the
UK MOD and Submarine Delivery Agency (SDA) to improve submarine availability
over the long term. We are currently in discussions with the SDA and the Royal
Navy with the intention of finalising a long-term strategic partnership to
ensure the stable, safe, effective and efficient delivery of deep and base
maintenance of submarines.
We welcome the announcement from the Australian, UK, and US Governments
(AUKUS) regarding the decision for acquisition of nuclear-powered submarines.
We play a critical role in all three countries' submarine programmes today.
Our experience of nuclear infrastructure, workforce upskilling, and regulatory
and safety stewardship, combined with our unique expertise in nuclear
submarine design and through-life support positions us ideally to help to
deliver a nuclear-powered submarine capability for the RAN.
In civil nuclear, we recently secured a contract with the Japan Atomic Energy
Agency (JAEA) to provide specialist capability in support of the
decommissioning of the Monju Prototype Fast Reactor (PFR) in Fukui Prefecture.
In the UK, through our specialist nuclear capabilities and our advanced
manufacturing experience, we are well positioned for opportunities to support
the build of the new fleet of advanced or small modular reactors to be
developed.
Land - MRO and training contract wins underpin growth
Demand for our specialist land equipment MRO and fleet management capabilities
is strong. Our work to deliver urgent operational requirements to revalidate
and modernise land assets and gifted equipment in support of operations in
eastern Ukraine has recently led to the award of an initial one-year contract
to support Ukraine's military land equipment, including maintenance of
critical military vehicles, training of Ukrainian personnel, and management of
supply chains and spares.
Our global reputation for asset support is allowing us to expand our
operational role in France. We are pursuing a number of emerging opportunities
following the award of our first land support contract in France, a 10-year
contract to support to air transit and aircraft operations equipment across 26
military bases.
Training personnel is a critical component to support new defence equipment
and asset modernisation programmes. We see significant opportunities for
partnership and growth. In the UK, we are collaborating with training partners
for the British Army's £1.3 billion Collective Training Transformation
programme.
Through our relationship with the UK's Supacat, we are delivering 70 High
Mobility Transporters for the British Army, with a potential total requirement
of up to 240 of these light armoured vehicles, through a new dedicated
production line, providing an operationally capable and cost-effective
protected mobility vehicle. There is international interest in this platform
with the opportunity to develop an export sales pipeline. We are also
supporting the UK MOD and British Army's shift to electric vehicles (EV) from
2030 through a new contract for EV conversion and trials of Land Rover
vehicles, to help the Army to understand the applications and constraints of
electric propulsion.
Aviation - opportunities in all our disciplines (training, MRO, aerial
emergency services and aviation technologies)
We see potential to materially grow our Canadian aviation business. Initially,
through the recent award of a c.£200 million, 10-year helicopter emergency
medical services contract commencing in 2025. Also, through our bid with joint
venture partner Leonardo in response to Canada's Future Aircrew Training
(FAcT) programme for military pilot training over 25 years. If successful,
this would further strengthen our international aviation training capabilities
and result in the Group delivering both new platforms and new capabilities to
the Royal Canadian Air Force. The outcome is expected to be declared later in
2023.
In the UK, we are partnering with the UK Royal Air Force's Rapid Capability
Office to progress a range of sustainable aviation technologies that could
minimise the environmental impact of light aircraft flying training, for
example sustainable aviation fuel.
Trading in the first quarter of FY24
Trading in the first quarter ended 30 June 2023 was in line with expectations.
Outlook ((4))
FY24 outlook: Our expectations for FY24 profitability and cash flow are
unchanged, although operating cash flow may be weighted to the second half
given the FY23 overperformance. With c.£2.8 billion of revenue under
contract at 1 April 2023 and around £700 million of framework orders expected
to be delivered in FY24, we are confident of another year of organic revenue
growth and further underlying margin expansion. We also expect to reinstate a
dividend in FY24, as indicated in the April trading update.
Medium term guidance
Looking ahead, having successfully stabilised the Group and through the
ongoing execution of operational improvements to enhance the risk profile of
the business, over the next three-to-five years, we believe we can:
· Deliver underlying operating cash conversion of at least 80%
· Achieve underlying operating margins of at least 8%
· Deliver average annual revenue growth in the mid-single digits
Year to year, there are a number of factors that could influence the pace of
achieving these targets, for example mobilisation of large new programmes and
phasing of lower capital intensity work, such as Nuclear infrastructure, that
could accelerate revenue but slow margin expansion. We will continue to enter
into new contracts giving due consideration in each case to all relevant
factors to maximise shareholder value, and in particular to growth, risk and
capital intensity criteria.
Capital allocation
Our refreshed capital allocation framework is underpinned by a commitment to
maintain strong balance sheet and investment-grade credit rating, with a
target leverage of 1.0x to 2.0x net debt to EBITDA.
The framework is aligned with our strategy to maximise value for our
shareholders while balancing near-term performance and long-term growth
objectives.
Capital allocation framework
Priority Policy FY23
1. Organic investment Organic investment to strengthen and grow the business Ongoing investment in business improvement
2. Financial strength Maintain strong balance sheet and investment grade credit rating Leverage reduced to 1.5x
S&P credit rating upgraded to BBB stable
3. Ordinary dividend Pay an ordinary dividend Commitment to reinstate a dividend in FY24
Any further capital could be applied to the following three areas, prioritised
according to the prevailing circumstances at the time that is assessed by the
Board to maximise shareholder value:
· Bolt on M&A - Opportunities that have a strong fit with the
Group
· Pensions - Acceleration of our pension scheme obligations
· Returns - Further returns to shareholders of surplus capital
David Lockwood OBE
Chief Executive
OTHER INFORMATION
Dividend
No ordinary dividends have been paid or declared for the year ended 31 March
2023. We expect to reinstate a dividend in FY24.
Board changes
Two Non-Executive Directors retired in the period. In July 2022, Russ Houlden
retired after two years of service and Kjersti Wiklund retired in September
2022, after four years of service. Kjersti was succeeded in her role as
Remuneration Committee Chair by Carl-Peter Forster.
In December 2022, we welcomed Jane Moriarty as Non-Executive Director. In May
2023, the Board announced the appointment of Sir Kevin Smith as Non-Executive
Director with effect from 1 June 2023.
Notes to CEO Statement
(1) A defined Alternative Performance Measure (APM) as set out
in the Financial Glossary on pages 28 to 30
(2) Excludes Type 31 loss of £100.1 million as described on
page 3 and Note 1 of the preliminary financial statement
(3) Pro forma - excluding the revenue from disposed businesses
of £421.6 million: UK civil training of £35.1 million and European AES of
£386.5 million, both sold in February 2023
(4) Our FY24 outlook and medium-term guidance is based on FY23
results excluding the impact of disposals, the Type 31 loss and a £11.6
million one-off credit in Land. Excluding these items, FY23 revenue was c.£4
billion, underlying operating profit was c.£265 million, and underlying
operating margin was 6.6%
FINANCIAL REVIEW
As described in the Financial Glossary on page 28, the Group provides
alternative performance measures (APMs), including underlying operating
profit, underlying margin, underlying earnings per share, underlying operating
cash flow, underlying free cash flow, and net debt to EBITDA, to enable users
to better understand the performance and earnings trends of the Group. These
measures are considered to provide a consistent measure of business
performance from year to year. The reconciliation from the IFRS statutory
income statement to underlying income statement is shown below.
Income statement
31 March 2023 31 March 2022
Underlying Specific adjusting items Statutory Underlying Specific adjusting items Statutory
£m
£m
£m £m £m
£m
Revenue 4,438.6 - 4,438.6 4,101.8 - 4,101.8
Operating profit/(loss) 177.9 (132.4) 45.5 237.7 (10.9) 226.8
Other income - - - 6.2 - 6.2
Share of results of joint ventures and associates 9.3 - 9.3 20.1 - 20.1
Net finance costs (58.3) 9.7 (48.6) (61.2) (9.6) (70.8)
Profit/(loss) before tax 128.9 (122.7) 6.2 202.8 (20.5) 182.3
Income tax (expense)/benefit (37.7) (1.8) (39.5) (43.9) 29.5 (14.4)
Profit/(loss) after tax for the year 91.2 (124.5) (33.3) 158.9 9.0 167.9
Basic EPS 17.7p (6.9)p 30.7p 32.5p
Diluted EPS 17.4p (6.9)p 30.4p 32.1p
Type 31 loss 100.1
Underlying operating profit excl. Type 31 loss 278.0
Underlying basic EPS excl. Type 31 loss 33.8p
A full statutory income statement can be found on page 35.
Type 31 loss: As described in the Notes to statutory and underlying results on
page 3 and in Note 1 of the preliminary financial statement, the Marine
business has incurred a £100.1 million loss in FY23, which is due to
additional forecast costs that were not foreseen at contract inception.
Following the commencement of a dispute resolution process (DRP) in April 2023
over responsibility for these incremental costs, we have reassessed the
contract outturn on the basis that these are not recovered. This has resulted
in the recording of a £100.1 million loss in the year, representing a £42.6
million reversal of revenue, £1.6 million asset impairment and the
recognition of a £55.9 million onerous contract loss. The DRP is ongoing.
Revenue increased by 8% to £4,438.6 million comprising 10% organic growth and
a 2% reduction due to the net impact of acquisitions and disposals. The
organic increase was delivered across all four sectors (see sector performance
tables on page 18).
Statutory operating profit decreased to £45.5 million (FY22: £226.8
million). The key drivers in FY23 were the £100.1 million loss on the Type 31
programme and £117.7 million loss on disposals and related items, mainly
European AES, which more than offset a strong operating performance, led by
Land.
FY22 statutory operating profit included £163.1 million profit on disposal,
£118.8 million exceptional charges, of which
£123.6 million related to impairment of tangible and intangible assets, and
£33.8 million restructuring costs. There were no exceptional items recorded
in FY23. See Note 2 of the preliminary financial statement for more detail.
As described on page 3, statutory operating profit includes specific adjusting
items (SAIs) that are not included in underlying operating profit, which is a
key APM for the Group. A reconciliation of statutory operating profit to
underlying operating profit is shown in the table below and in note 2 of the
preliminary financial statements.
Reconciliation of statutory to underlying operating profit
31 March 2023 31 March 2022
£m
£m
Operating profit 45.5 226.8
Amortisation of acquired intangibles 15.8 21.4
Business acquisition, merger and divestment related items 117.7 (163.1)
Restructuring costs - 33.8
Exceptional items - 118.8
Fair value movement on derivatives (1.1) -
Specific adjusting items impacting operating profit 132.4 10.9
Underlying operating profit 177.9 237.7
Type 31 loss 100.1 -
Underlying operating profit excluding Type 31 loss 278.0 237.7
Underlying operating profit: Underlying operating profit decreased by 25% to
£177.9 million, due to the Type 31 loss, a 4% reduction from the net impact
of acquisitions and disposals, and further costs of implementing a stronger
control environment, which more than offset the strong operational
performance.
Excluding the Type 31 loss, underlying operating profit increased to £278.0
million, driven by improved performance in Land, enhanced by a £12 million
one-off credit, and good growth in Marine and Aviation. Underlying operating
profit in Nuclear was in line with the prior year (see sector performance
tables on page 18).
Underlying operating margin decreased to 4.0% (FY22: 5.8%) due to the Type 31
loss. Excluding this, underlying operating margin increased by 50 basis points
to 6.3%.
Further analysis of our revenue and underlying operating profit performance is
included in each sector's operational reviews on page 19 to 27.
Other income of £6.2 million in FY22 related to pre-completion guarantee fees
received in relation to the disposal of the Aviation Oil and Gas business (in
October 2021).
Joint ventures and associates: The Group's share of results of joint ventures
and associates reduced from the prior year to a profit after tax of £9.3
million (FY22: £20.1 million) due to the disposal of our 15.4% stake in
AirTanker Holdings in February 2022 and reclassification of NSM, which was
fully consolidated from March 2022.
Net finance costs decreased to £58.3 million on an underlying basis (FY22:
£61.2 million), driven by lower net interest costs on reduced debt and higher
cash balances, and a £7.5 million pension interest credit, partly offset by a
£12 million charge associated with financing of defence contract receivables
(described below). Reported net finance costs of £48.6 million included a
£9.7 million non-cash credit due to fair value movements in derivatives and
related items.
Our Mentor military aviation contract in France is for the provision of
Pilatus PC-21 aircraft to the Direction générale de l'armement (DGA),
followed by maintenance support until 2027. The aircraft have been delivered
to and accepted by DGA in the year, with no remaining performance risk for
Babcock. As payment for the aircraft is not due from DGA until 2027 under the
contract terms, we have sold the receivables for these aircraft in the year
for €122 million on a non-recourse basis, incurring a one-off finance cost
of €14 million (£12 million). The net overall impact on FY23 operating cash
flow is broadly neutral after cash paid to purchase the aircraft in the year.
Taxation: The Group tax charge was £39.5 million. Tax on underlying profits
was £37.7 million representing an effective underlying tax rate of 32%.
Excluding the impact of the Type 31 loss the effective tax rate was 26% (FY22:
24%), slightly higher than expected due to the geographical mix of profits and
unrelieved losses in the European AES business. The underlying effective tax
rate is calculated on underlying profit before tax excluding the share of
income from joint ventures and associates (which is a post-tax number). The
Group's effective underlying rate of tax for this financial year will be
dependent on country profit mix. The current assumption is around 26%.
Earnings per share: Basic earnings per share, on a statutory basis, declined
to a 6.9 pence loss (FY22: 32.5 pence) reflecting lower profit before tax and
a higher UK tax rate. Underlying earnings per share declined to 17.7 pence
(FY22: 30.7 pence) primarily due to the Type 31 loss. Excluding this,
underlying earnings per share increased by 10% to 33.8 pence.
Reconciliation of statutory profit/(loss) and basic EPS to underlying profit
and basic EPS
31 March 2023 31 March 2022
£m Basic EPS £m Basic EPS
(Loss)/profit after tax for the year (33.3) (6.9)p 167.9 32.5p
Specific adjusting items, net of tax 124.5 24.6p (9.0) (1.8)p
Underlying profit after tax for the year 91.2 17.7p 158.9 30.7p
Type 31 loss, net of tax 81.1 16.1p - -
Underlying profit after tax for the year excl. Type 31 loss 172.3 33.8p 158.9 30.7p
Exchange rates
The translation impact of foreign currency movements resulted in an increase
in revenue of £23.5 million and an increase in underlying operating profit of
£1.6 million. The main currencies that have impacted our results are the
Canadian Dollar, South African Rand, Euro and Australian Dollar. Following
disposal of the European AES businesses, the currencies with the greatest
potential to impact results are the South African Rand and the Australian and
Canadian Dollar:
· A 10% movement in the South African Rand against Sterling would affect revenue
by around £30 million and underlying operating profit by around £4 million
per annum
· A 10% movement in the Australian Dollar against Sterling would affect revenue
by around £25 million and underlying operating profit by around £2 million
per annum
· A 10% movement in the Canadian Dollar against Sterling would affect revenue by
around £15 million and underlying operating profit by around £1 million per
annum
Cash flow and net debt
Underlying cash flow and net debt
Underlying cash flows are used by the Group to measure operating performance
as they provide a more consistent measure of business performance from year to
year.
31 March 2023 31 March 2022
£m £m
Operating profit 45.5 226.8
Add back: specific adjusting items 132.4 10.9
Underlying operating profit 177.9 237.7
Right of use asset depreciation 91.3 123.1
Other depreciation & amortisation 84.9 74.4
Non-cash items 6.9 0.6
Working capital movements 103.5 (173.9)
Provisions 37.2 (9.3)
Net capital expenditure (86.2) (135.2)
Lease principal payments (108.5) (113.0)
Underlying operating cash flow 307.0 4.4
Cash conversion % 173% 2%
Pension contributions in excess of income statement (141.9) (151.7)
Interest paid (net) (62.2) (45.0)
Tax paid (25.4) 10.0
Dividends from joint ventures and associates 8.7 41.6
Cash flows related to exceptional items (10.9) (50.6)
Underlying free cash flow 75.3 (191.3)
Net acquisitions and disposals of subsidiaries 158.6 417.2
Acquisitions/investments in joint ventures and associates - (18.1)
Dividends paid (including non-controlling interests) (2.2) (1.1)
Lease principal payments 108.5 113.0
Net new lease arrangements (115.1) (71.2)
Leases disposed of/(acquired) with subsidiaries 218.1 136.6
Other non-cash debt movements (1.8) (2.4)
Clarification of net debt definition (36.1) -
Fair value movement in debt and related derivatives 56.0 (11.8)
Exchange movements (57.0) 12.8
Movement in net debt 404.3 383.7
Opening net debt (968.7) (1,352.4)
Closing net debt (564.4) (968.7)
Add back: operating leases 218.2 412.0
Closing net debt excluding operating leases (346.2) (556.7)
A full statutory cash flow statement can be found on page 38 and a
reconciliation to net debt on page 64.
Reconciliation of underlying operating cash flow to statutory net cash flow
from operations
31 March 2023 31 March 2022
£m
£m
Underlying operating cash flow 307.0 4.4
Add: net capex 86.2 135.2
Add: capital element of lease payments 108.5 113.0
Less: pension contributions in excess of income statement (141.9) (151.7)
Non-operating cash items (excluded from underlying cash flow) (10.9) (59.1)
Cash generated from operations (statutory) 348.9 41.8
Tax (paid)/received (25.4) 10.0
Less: net interest paid (62.2) (45.0)
Net cash flow from operating activities (statutory) 261.3 6.8
Underlying operating cash flow
Underlying operating cash flow after capital expenditure increased to £307.0
million (FY22: £4.4 million), a conversion ratio to underlying operating
profit of 173% (FY22: 2%). Excluding the Type 31 loss, underlying operating
cash conversion was 110%. The higher conversion ratio reflects reduced working
capital and lower than expected capital expenditure.
- Working capital: An inflow of £103.5 million compared to an outflow
of £173.9 million last year. This reflects a strong focus on cash flow as a
performance measure coupled with cash flow phasing on programmes, and customer
receipts of c.£70 million received earlier than expected. The outflow in FY22
included payments associated with the unwind of the past practice of
period-end management of working capital (withholding of creditors). We have
sold receivables relating to the provision of aircraft on our Mentor contract
in France for €122m in the year. This is to match receipts and payments for
the aircraft in the period, such that the net impact on operating cash flow is
broadly neutral. The factoring is on a non-recourse basis and there is no
remaining performance risk for Babcock.
- Capital expenditure: Net capital expenditure decreased to £86.2
million (FY22: £135.2 million). This was a result of gross capex of £125.1
million (FY22: £203.2 million) being lower than expected due to project
phasing, which more than offset a c.£30 million reduction in proceeds from
asset disposals primarily relating to the timing of aircraft sales in our
Aviation sector. We expect FY24 gross capital expenditure to be approximately
£120-£150 million depending on phasing, reflecting continued investment in
our submarine infrastructure in Devonport and roll-out of enterprise resource
planning (ERP).
- Lease principal payments, representing the capital element of payments
on lease obligations, reduced slightly to £108.5 million (FY22: £113.0
million), following divestments in our Aviation business. This is reversed out
below underlying free cash flow as the payment reduces our lease liability
(i.e. no net effect on net debt).
Underlying free cash flow
Underlying free cash inflow of £75.3 million compares to an outflow of
£191.3 million in the prior year, primarily reflecting higher underlying
operating cash flow.
- Pension cash outflow in excess of the income statement charge of
£141.9 million (FY22: £151.7 million) was higher than previous guidance of
c.£100 million due to acceleration of £35 million of future years scheduled
payments at the year end. As a result, we expect the pension cash outflow in
excess of the income statement charge to reduce to around £65 million in
FY24.
- Interest: Net interest paid, excluding that paid by JVs and
associates, increased to £62.2 million (FY22: £45.0 million) primarily due
to the €14 million (£12 million) finance charge associated with the
financing of a French defence contract receivable described above.
- Taxation: Tax paid in the year was £25.4 million. The £10.0 million
cash tax receipt in FY22 was a result of the settlement of several open years'
tax computations with the authorities. We expect a cash tax outflow in the
current financial year of approximately £35 million.
- Dividends received from joint ventures and associates decreased to
£8.7 million as expected (FY22: £41.6 million) reflecting the disposal of
our stake in AirTanker Holdings, the acquisition and subsequent consolidation
of NSM, and the non-repeat of close out dividends on the termination of JV's
in the prior year. We expect dividends from JVs and associates to be broadly
stable in FY24.
- Exceptional cash flows: The £10.9 million (FY22: £50.6 million)
exceptional cash outflow in the year was the conclusion of the large prior
year restructuring programme.
Acquisitions and disposals
The net cash inflow from disposals in the year, after costs, was £158.6
million. This included gross proceeds (net of cash disposed) of £176.6
million from the sale of the European AES business in February 2023, which
included around £60 million net completion adjustments, and £2.9 million
from the sale of Civil Training, also in February 2023, less transaction
costs.
The net cash inflow from acquisitions and disposals in FY22 was £417.2
million, including gross proceeds (net of cash disposed) from the sale of Oil
& Gas (£10.0 million). Frazer Nash Consultancy (£286.8 million), UK
Power (£45.8 million) and our 15.4% shareholding in AirTanker Holdings
Limited (£95.6 million), less £15.5 million net consideration paid for the
acquisition of the remaining 50% of NSM and transaction costs.
New lease arrangements
In addition to net capital expenditure, and not included in underlying free
cash flow, £117.0 million (FY22: £93.8 million) of additional leases were
entered into in the period. These represent new lease obligations and so are
included in our main net debt figure but do not involve any cash outflows at
inception.
Net debt
Net debt at 31 March 2023 was £564.4 million, representing a reduction of
£404.3 million compared to the beginning of the year. This reduction was
driven by underlying free cash flow, proceeds from disposals and £218.1
million of operating leases that were transferred with the European AES
disposal. The reconciliation of net cash flow to net debt is shown in the
table below.
Excluding operating leases, net debt was £346.2 million, representing a
reduction of £210.5 million compared to the beginning of the year.
Movement in net debt - reconciliation of statutory cash flows to net debt
31 March 2023 31 March 2022
£m
£m
Net cash flow from operating activities (statutory) 261.3 6.8
Net cash flow from investing activities (statutory) 83.5 338.6
Net cash flow from financing activities (statutory) (666.1) (122.7)
Net increase/(decrease) in cash, cash equivalents and bank overdrafts (321.3) 222.7
(statutory)
Cash flow from the (increase)/decrease in debt 629.6 55.1
Change in net funds resulting from cash flows 308.3 277.8
Additional lease obligations (117.0) (93.8)
New leases granted 28.5 41.9
Debt held by disposed subsidiaries 219.7 137.1
Other non-cash movements and changes in fair value 57.9 7.9
Clarification of net debt definition (36.1) -
Foreign currency translation differences (57.0) 12.8
Movement in net debt in the year 404.3 383.7
Opening net debt (968.7) (1,352.4)
Closing net debt (564.4) (968.7)
Funding and liquidity
As of 31 March 2023, the Group had access to a total of £1.9 billion of
borrowings and facilities of mostly long-term maturities. These comprised:
· £300 million revolving cash facility (RCF) maturing 20 May 2024
· £775 million RCF, with £45 million maturing 28 August 2025 and
£730 million extended to 28 August 2026
· £300 million bond maturing 5 October 2026
· €550 million bond, hedged at £493 million, maturing 13
September 2027
· Two committed overdraft facilities totalling £100 million
At 31 March 2023, the Group's net cash balance was £430 million. This
combined with the undrawn amounts under our committed RCFs and overdraft
facilities, gave us liquidity headroom of around £1.6 billion.
Capital structure
While there are several facets to balance sheet strength, a primary
measurement relevant to Babcock is the net debt/EBITDA gearing ratio within
our debt covenant of 3.5x. Due to strong underlying operating cash flow, the
net debt/EBITDA gearing ratio at 31 March 2023 of 1.5x is lower than at the
start of the year despite the £100 million Type 31 loss recognised within
EBITDA in the year. This is still within our medium-term target of between
1.0x and 2.0x. Excluding the Type 31 loss, the net debt/EBITDA gearing ratio
at 31 March 2023 would have been 1.1x.
Net debt to EBITDA (covenant basis)
This measure is used in the covenant in our RCF facilities and includes
several adjustments from reported net debt and EBITDA. The covenant level is
3.5 times. As set out below, our net debt to EBITDA (covenant basis) decreased
to 1.5 times for FY23 despite the impact of the Type 31 loss on underlying
operating profit.
31 March 2023 31 March 2022
£m
£m
Last twelve months Last twelve months
Underlying operating profit 177.9 237.7
Depreciation and amortisation 84.9 74.4
Covenant adjustments(1) (8.4) (12.9)
EBITDA 254.4 299.1
JV and associate dividends 8.7 41.6
EBITDA + JV and associate dividends (covenant basis) 263.1 340.8
Net debt (346.2) (556.7)
Covenant adjustments(2) (49.3) (60.0)
Net debt (covenant basis) (395.5) (616.7)
Net debt/EBITDA 1.5x 1.8x
(1)Various adjustments made to EBITDA to reflect accounting standards at the
time of inception of the original RCF agreement. The main adjustments are to
the treatment of leases within operating profit and pension costs.
(2)Removing loans to JVs, finance lease receivables.
Interest cover (covenant basis)
This measure is also used in the covenant in our RCF facilities, with a
covenant level of 4.0 times.
31 March 2023 31 March 2022
£m
£m
Last twelve months Last twelve months
EBITDA (covenant basis) + JV and associate dividends 263.1 340.8
Net finance costs (48.6) (70.8)
Covenant adjustments(3) 7.1 18.7
Net Group finance costs (41.5) (52.1)
Interest cover 6.3x 6.5x
(3)Various adjustments made to reflect accounting standards at the time of
inception of the original RCF agreement, including lease and retirement
benefit interest.
Return on invested capital, pre-tax (ROIC)
This measure is one of the Group's key performance indicators.
31 March 2023 31 March 2022
£m
£m
Last twelve months Last twelve months
Underlying operating profit 177.9 237.7
Share of results of joint ventures and associates 9.3 20.1
Underlying operating profit plus share of JV PAT 187.2 257.8
Net debt excluding operating leases 346.2 556.7
Operating leases 218.2 412.0
Shareholder funds 370.9 701.5
Retirement deficit/(surplus) 61.4 (191.6)
Invested capital 996.7 1,478.7
ROIC 18.8% 17.4%
Pensions
The Group has a number of defined benefit pension schemes. The principal
defined benefit pension schemes in the UK are the Devonport Royal Dockyard
Pension Scheme, the Babcock International Group Pension Scheme and the Rosyth
Royal Dockyard Pension Scheme (the Principal schemes).
IAS 19
At 31 March 2023, the IAS 19 valuation for accounting purposes was a net
deficit of £61.4 million (FY22: a surplus of £191.6 million). The move to a
net accounting deficit is a result of a greater reduction in the fair value of
plan assets (by £1,545.1 million to £3,188.0 million, net of £241.9 million
longevity swaps), compared to the reduction in present value of pension
benefit obligations (by £1,292.1 million to £3,249.4 million). The reduction
in fair value of plan assets was driven by negative net asset returns coupled
with the impact on the assets held from the UK market volatility experienced
by pension schemes in September 2022, partly offset by scheme contributions.
The reduction in pension liabilities was primarily a result of higher discount
rates. The fair value of the assets and liabilities of the Group pension
schemes at 31 March 2023 and the key assumptions used in the IAS 19 valuation
of our schemes are set out in Note 18 of the preliminary financial statements.
31 March 2023 31 March 2022
£m
£m
Fair value of plan assets 3,188.0 4,733.1
Present value of benefit obligations (3,249.4) (4,541.5)
Net surplus/(deficit) at 31 March (61.4) 191.6
As at 31 March 2023 the key assumptions used in valuing pension liabilities
for the three largest schemes were:
Discount rate 31 March 2023: 4.8% (31 March 2022: 2.7%)
Inflation rate (RPI) 31 March 2023: 3.2% (after year 1) (31 March 2022: 3.7%)
Income statement charge
The charge included within underlying operating profit in FY23 was £32.6
million (FY22: £38.5 million), of which £25.8 million (FY22: £31.1 million)
related to service costs and £6.8 million (FY22: £7.4 million) related to
expenses. In addition to this, there was an interest credit of £7.5 million
(FY22: charge of £3.7 million).
Actuarial valuations
An estimate of the actuarial deficits of the Group's defined benefit pension
schemes, including all longevity swap funding gaps, calculated using each
Scheme's respective technical provisions basis, as at FY23 was approximately
£400 million (FY22: c.£350 million). Such valuations use discount rates
based on UK gilts - which differs from the corporate bond approach of IAS 19.
This technical provision estimate is based on the assumptions used within the
latest agreed valuation prior to 31 March 2023 for each of the three main
schemes.
Actuarial valuations are carried out every three years to determine the
Group's cash contributions to the schemes. The valuation dates of the three
largest schemes are set so that only one scheme is undertaking its valuation
in any one year, to spread the financial impact of market conditions. The
valuation of the Rosyth Royal Dockyard Pension Scheme at 31 March 2021 was
completed in the last financial year, the valuation of the Babcock
International Group Pension Scheme at 31 March 2022 has been completed since
the year end, and work has commenced on the valuation of the Devonport Royal
Dockyard Pension Scheme at 31 March 2023.
Cash contributions
Cash contributions made by the Group into the defined benefit pension schemes,
excluding expenses and salary sacrifice contributions, during the last
financial year are set out in the table below.
31 March 2024e 31 March 2023 31 March 2022
£m
£m
£m
Future service contributions 18.0 20.0 21.1
Deficit recovery 47.8 123.5 135.2
Longevity swap 15.2 15.6 16.8
Total cash contributions - employer 81.0 159.1 173.1
SEGMENTAL ANALYSIS
The Group reports its performance through four reporting sectors.
31 March 2023 Marine Nuclear Land Aviation Total
£m £m £m £m £m
Revenue 1,439.6 1,179.2 1,017.1 802.7 4,438.6
Operating profit 5.8 63.6 80.9 (104.8) 45.5
Operating profit margin 0.4% 5.4% 8.0% (13.1)% 1.0%
Underlying operating profit 12.7 63.5 85.9 15.8 177.9
Underlying operating margin 0.9% 5.4% 8.4% 2.0% 4.0%
Contract backlog 2,580.7 2,453.8 2,809.8 1,633.0 9,477.3
Excluding Type 31 loss
Type 31 loss 100.1 100.1
Underlying operating profit 112.8 278.0
Underlying operating margin 7.8% 6.3%
31 March 2022 Marine Nuclear Land Aviation Total
£m £m £m £m £m
Revenue 1,259.3 1,009.7 1,015.5 817.3 4,101.8
Operating profit 309.7 56.9 36.2 (176.0) 226.8
Operating profit margin 24.6% 5.6% 3.6% (21.5)% 5.5%
Underlying operating profit 98.0 62.4 58.8 18.5 237.7
Underlying operating margin 7.8% 6.2% 5.8% 2.3% 5.8%
Contract backlog 2,491.8 2,788.8 2,309.0 2,293.6 9,883.2
OPERATIONAL REVIEWS
Marine
Operational highlights
- Secured two further contracts on the Polish Miecznik (Swordfish)
frigate programme
- Awarded a six-year c.£400 million contract to manage and operate
Skynet, the UK's military satellite communications system
- Awarded 10-year contract for the UK Royal Navy's Queen Elizabeth
Class, aircraft carrier docking periods
- Awarded a contract to maintain the UK's fleet of scientific Royal
Research Ships
- Awarded the Regional Maintenance Provider (RMP) West contract to
deliver ship support to the Royal Australian Navy
- Awarded a six-year contract to deliver, install and provide
in-service support for the maritime Communications Electronic Support Measures
(CESM) capability on UK Type 23 frigates
- Won 55 Liquid Gas Engineering (LGE) system orders worth over £250
million for LPG, Ethane, and LNG technologies
- The Naval Ship Management (NSM) business, fully acquired last year,
has now been integrated into our Australian business
Financial review
31 March 2022 FX impact Acquisitions & disposals £m Other trading 31 March 2023
£m £m £m £m
Contract backlog* 2,491.8 2,580.7
Revenue 1,259.3 12.3 72.4 95.6 1,439.6
Underlying operating profit* 98.0 1.0 (0.2) (86.1) 12.7
Underlying margin* 7.8% 0.9%
Type 31 loss 100.1
Underlying operating profit excl. Type 31 loss* 112.8
Underlying margin excl. Type 31 loss* 7.8%
*Alternative Performance Measures are defined in the Financial Glossary on
page 28
In an otherwise promising year, Marine results were significantly impacted by
a £100.1 million loss on the Type 31 contract, representing a £42.6 million
reversal of revenue, £1.6 million asset impairment and the recognition of a
£55.9 million onerous contract loss. The programme has been impacted by
additional forecast costs that were not foreseen at contract inception. In
April 2023, following discussions with the customer, we entered a Dispute
Resolution Process regarding the responsibility for these costs.
Revenue increased by 14% to £1,439.6 million, comprising organic growth of 8%
and the net impact from the acquisition of NSM in March 2022 and disposal of
Frazer Nash Consultancy in October 2021. Organic growth was broad based,
driven by continued strong demand for our LGE products, higher activity in
warship support and on the South Korean (SK) submarine programme, as well as
ramp up of several new contracts through the second half, such as the Queen
Elizabeth Class aircraft carrier support and the early enabling contracts for
the Poland frigate programme.
Underlying operating profit decreased to £12.7 million as a result of the
Type 31 loss, representing an underlying operating margin of 0.9% (FY22:
7.8%). Excluding this, underlying operating profit increased to £112.8
million, representing an underlying operating margin of 7.8%. The increase was
driven by revenue growth in ship support and South Korea submarine work and a
c.£9 million benefit from a contract settlement. The prior year margin was
supported by international license fees on AH140.
Contract backlog was up 4% in the year to £2,581 million (FY22: £2,492
million). Positive order momentum through the second half, including the
c.£400 million Skynet award, more than offset trading revenue on long-term
contracts. At 1 April 2023, Marine had around £900 million of FY24 expected
revenue under contract and an additional c.£350 million under framework
agreements, a similar position to FY22.
Operational review
UK defence
Despite the ongoing dispute resolution process, we continued to deliver on the
Type 31 Inspiration Class frigate programme. Keel laying took place for the
first ship - HMS Venturer - in April 2022, and whole ship assembly and
outfitting progressed as planned. Ship two - HMS Active - steel cutting took
place in January 2023.
Warship support advanced in the year as we secured a 10-year contract to
provide dry-dock maintenance for the Royal Navy's Queen Elizabeth Class
aircraft carriers, including contingency dockings where routine maintenance
and repairs cannot be carried out afloat. In Devonport, the Type 23 frigate
life-extension (LIFEX) programme continues at pace while the LIFEX and fleet
time support to the amphibious assault ships is making good progress. In
readiness for the first Type 26 Frigate base-ported at Devonport later this
decade, we have established the Type 26 Class Output Management system to
prepare for the through-life sustainment of the platforms as they enter
service.
Through our global sustainment and support arrangements, we marked four years
of delivering support to Type 23 Class ship HMS Montrose during her forward
deployment in the Middle East, enabling the vessel to achieve more operational
days at sea than any other frigate since 2019. In the period, the mine
countermeasure vessel team has delivered four simultaneous ship regenerations
for onward sale from the Royal Navy to new international customers. All four
vessels are former Sandown Class mine hunters which are all undergoing work
packages to provide modern warships, tailored to the new clients' requirements
while providing future support opportunities.
In Mission Systems, we were awarded a contract to manage and operate Skynet,
the UK's military satellite communications system. The six-year contract,
which commenced in March 2023, forms part of the MOD's c.£6 billion Skynet 6
programme and is sustaining more than 400 jobs in the south-west of the UK.
Additionally, a six-year contract was awarded to deliver, install and provide
in-service support for Ardent Wolf, the maritime Communications Electronic
Support Measures (CESM) capability for the Royal Navy's Type 23 frigates.
We signed a Memorandum of Understanding (MoU) with Rafael Advanced Defence
Systems to deliver capability into the UK MOD's wider Land Ground Based Air
Defence (GBAD) programme and signed a further MoU with Israel Aerospace
Industries' (IAI) Group and Subsidiary ELTA Systems to offer a deep-find radar
solution for the UK MODs SERPENS programme for a next generation weapons
locating system.
At our Bristol Mission Systems site, the opening of a new build hall has
boosted efficiency, enabling us to deliver major system modules for Boat 2 of
the Dreadnought Class submarine, a significant milestone on the programme,
ahead of schedule.
Deployment of advanced manufacturing technology continues to underpin our
market leading role in submarine missile tube assembly, with installation of
robotics and additional machining capability at our Rosyth facility. The
missile tube programme continues successfully, supporting both the UK
Dreadnought and US Columbia submarine programmes.
International defence
We support international defence markets from our UK operations and from our
businesses in Canada, Australia, New Zealand, Oman and South Korea.
In Poland, building on our selection as Design & Technology Partner to PGZ
(the Polish prime contractor), we secured two further contracts on the
MIECZNIK (Swordfish) frigate programme, which is based on the proven Arrowhead
140 naval ship design used on the UK Type 31. The Class Design Contract and
the Transfer of Knowledge & Technology framework agreement further support
the development of the programme and shipbuilding capability in Poland.
Working in collaboration with the PGZ-MIECZNIK Consortium, we have also agreed
an extension to oversee the programme.
In Ukraine, having signed the tripartite agreement with the UK and Ukrainian
Governments as lead industry partner on the Ukrainian Naval Capabilities
Enhancement Programme, we continue to support our Ukrainian customer with
their requirements, such as the mine counter measure vessels, which were
formally handed over to the Ukrainian Navy in the year.
In Oman, we delivered several maintenance, repair and overhaul activities for
the US Navy. The Duqm Naval Dockyard JV continues to bid for work with the US
and Royal Navy of Oman, while we continue to deliver deployed support for the
UK Royal Navy.
In Brazil, we established an in-country project team to deliver through-life
support to the Marinha do Brasil's (Brazilian Navy) flagship vessel, NAM
Atlantico, formerly the UK Royal Navy aircraft carrier platform HMS Ocean, and
continue to explore future opportunities with the Marinha do Brasil and other
international navies as part of our global support and export programmes.
In Canada, Babcock continues to deliver the Victoria Class In-Service Support
(VISSC) contract which was extended to 2027.
In South Korea, our weapon handling and launch team successfully completed the
final milestone on the Korean Navy's Jang-Bogo III Class submarine - with all
122 Category A milestones delivered on time or ahead of schedule over the
10-year period. We continue to deliver the equipment systems for boats four
and five. In September 2022, we received a first maintenance contract from
Daewoo Shipbuilding and Marine Engineering (DSME) to support the Jang Bogo III
Class - Boat 1 systems, with a second phase of this work secured in October.
In Australia, we completed the integration of the Naval Ship Management (NSM)
business following acquisition of the remainder of the business in March 2022.
NSM strengthens Babcock's support to the Royal Australian Navy's (RAN) future
maritime support model, Plan Galileo. Babcock is now the premier warship
sustainment organisation in Australasia.
In October 2022, Babcock was announced as the preferred tenderer for the
Regional Maintenance Provider (RMP) West, to manage the sustainment of RAN
ships in Western Australia over the next five years.
In February 2023, Babcock signed a contract with BAE Systems to provide the
air weapons handling system for the first batch of Hunter Class frigates for
the RAN. The scope includes the design, build, testing and installation
support of air weapons handling based on a modified Type 26 design.
In New Zealand, the new Maritime Fleet Sustainment Services (MFSS) contract
with New Zealand Defence Force formally began.
Energy and Marine
Our Liquid Gas Engineering business (LGE) continues to support its customers
on transition to Net Zero carbon with LPG and Ethane fuel gas supply systems
for ships' main engine supply, replacing fuel oil. Our ecoFGSS-FLEX®
ammonia/LPG fuel gas system will enable the use of zero carbon fuels, whilst
our ecoCO(2) - liquefied CO(2) cargo handling - system will enable the
transportation and storage of CO(2) from current emitters.
In the period, LGE furthered the development of aftermarket services to
provide enhanced through-life support for ship-owners.
During the year, our Rosyth dockyard was awarded c.£45 million to maintain
the UK's fleet of scientific research vessels - RRS Sir David Attenborough,
RRS Discovery and RRS James Cook. The three vessels are involved in some of
the most pressing research across the globe, visiting polar regions and depths
of tropical oceans. This year RRS Discovery and the RRS Sir David Attenborough
will have planned maintenance periods.
Nuclear
Operational highlights
- Significant ramp up on the Major Infrastructure Programme continuing
across Devonport Dockyard
- Concluded first Vanguard Class life-extension with the first vessel
returned to the UK Royal Navy post year end, and an initial contract and
mobilisation phase for the next submarine, HMS Victorious, is now underway
- Launched the Submarine Availability Partnership with the UK MOD and
Submarine Delivery Agency to progress availability
- First Astute Class submarine arrived at Devonport Dockyard ready for
a Base Maintenance Period (BMP)
- Awarded a framework agreement with the Japan Atomic Energy Agency to
deliver the Monju sodium treatment project
Financial review
31 March 2022 FX impact Acquisitions & disposals £m Other trading 31 March 2023
£m £m £m £m
Contract backlog* 2,788.8 2,453.8
Revenue 1,009.7 - - 169.5 1,179.2
Underlying operating profit* 62.4 - - 1.1 63.5
Underlying margin* 6.2% 5.4%
*Alternative Performance Measures are defined in the Financial Glossary on
page 28
Revenue grew by 17%, driven principally by the further strong ramp up of the
Major Infrastructure Programme (MIP) at Devonport dockyard, as well as
increased Future Maritime Support Programme (FMSP) submarine support activity
at Faslane naval base and new defence contracts in our civil nuclear business.
MIP revenue doubled in the year to £267 million (FY22: £134 million).
Underlying operating profit increased by 2% to £63.5 million. Profit from MIP
growth and a lower programme write-off compared to FY22, more than offset the
impact of future inflation assumptions on programmes and further investment in
strengthening the control environment. The programme write-off in FY23,
resulting from a final assessment of completion costs, was £16 million (FY22:
£22 million). This contract is expected to complete soon. Operating margin
declined to 5.4%, reflecting the impact of future inflation and higher MIP
revenue, which is lower margin.
Contract backlog decreased 12% in the year to £2,454 million (FY22: £2,789
million) due to the trading of long-term contracts, specifically FMSP,
although it was flat in the second half due to strong order intake. At 1 April
2023, Nuclear had around £1 billion of FY24 expected revenue under contract,
and an additional c.£150 million under framework agreements, both above the
position in the previous year.
Operational review
Defence
The UK is going through a phase of class transition for nuclear submarines.
Astute Class submarines are currently replacing the Trafalgar Class and the
future Dreadnought Class will replace the Vanguard Class. Good progress has
been made in the year in meeting the current and future requirements of the
MOD. We are working closely with the MOD to jointly develop long-term
strategies for people, infrastructure and transformation, to meet the evolving
requirements for the future of the Royal Navy.
At Devonport, the MIP has ramped up significantly over the year. The programme
is designed to deliver substantial upgrades to existing infrastructure over
the next ten years, to ensure the future capability requirements of the Royal
Navy and the submarine enterprise are met for decades to come from
state-of-the-art facilities. The programme will enable the dockyard to deliver
base maintenance periods (BMP) and deep maintenance periods (DMP) for new
classes of submarine, including nuclear defuel and refuel of current and
future classes, and life-extension programmes (LIFEX), crucial to the UK
submarine programme. During the year, key MIP delivery dates have been agreed
with the customer to meet continued and future submarine docking, through-life
support and fleet availability.
The concept design phase for 10 Dock is now complete and construction is
underway to transform a large dry dock, traditionally used for large ship
refit, into a seismically qualified dock in alignment with strict nuclear
regulation, capable of enabling delivery of the first DMP of an Astute Class
submarine. Currently, planning permission has been granted with customer
approval for the development of the facility which is starting with demolition
of ageing assets to create space for new facilities.
Work on the MIP at 9 Dock continues where we are upgrading, improving and
life-extending the facility which will enable us to continue delivering the
Vanguard Class submarines LIFEX programme, including defuel and refuel while
planning for future class support.
Since the start of the FMSP contract, productivity during maintenance projects
has continually increased and this has been further supported by the
introduction of round the clock working patterns for engineering support staff
and greater collaboration with the Royal Navy and Submarine Delivery Agency.
The Devonport elements of the first Vanguard Class LIFEX DMP concluded during
the year, and HMS Vanguard was handed back to the Royal Navy in May 2023. The
mobilisation phase for the next DMP (HMS Victorious) is now underway following
initial contract award on a full cost recovery basis.
Additionally, we have welcomed the first Astute Class submarine ready for the
start of a BMP and we successfully completed a Revalidation Assisted
Maintenance Period (RAMP) programme for a Trafalgar Class submarine.
At Clyde, we have delivered strong performance on several support programmes
for our customer. This has included several Vanguard Class BMPs, which were
completed ahead of schedule. Engineering support to Astute Class submarines
has also been delivered at the naval base and abroad, supporting the global
operational needs of the Royal Navy. At Rosyth, delivery of the submarine
dismantling and disposal programme has continued in line with schedule.
Civil Nuclear
In decommissioning, we have been selected as the preferred bidder for the
Magnox Hinkley Point A Vault Retrievals Phase 2 project. This project builds
upon our strong relationship with Magnox and our history of delivering
retrievals projects on Magnox sites. The five-year contract is to provide the
design and delivery of an automated solution to safely retrieve, process and
package waste from vaults within Magnox's Hinkley Point A site, ready for safe
storage.
In Japan, we are continuing our growth plans for nuclear decommissioning
services and in April 2023, we signed a framework agreement with the Japan
Atomic Energy Agency (JAEA) to deliver the Monju sodium treatment project over
five years, starting in 2024.
In nuclear support, we worked in collaboration with our EDF customer, to
successfully complete the Dungeness B Power Station pre-defueling outage. We
have also secured an extension to the Lifetime Enterprise Agreement.
During the year, the new Process, Plant and Equipment (PP&E) contract
commenced in the UK. Our role is to lead the design, installation and
commissioning of complex plant and equipment engineering, enabling the
customer to safely process and deliver their production line. We expect to see
the framework contract continue to ramp up in FY24 while the programme remains
a key enabler for further opportunities across the wider facility as they
develop.
Our Cavendish Nuclear business continues to focus on several growth
opportunities in the UK and internationally. In the clean energy space, we are
continuing to support X-energy as their UK deployment partner. The partnership
complements our civil nuclear business' support to all three nuclear streams
of the UK Government's Energy Security Strategy: Large Gigawatt Reactors,
Small Modular Reactors, and Advanced Modular Reactors, such as High
Temperature Gas-Cooled Reactors with the capability to focus on industrial
heat and hydrogen.
In the US, Cavendish Nuclear partnered with Amentum and Fluor, has
successfully secured the Portsmouth Gaseous Diffusion Plant Decontamination
and Decommissioning Contract in Ohio, USA.
Fusion energy is at a transition point moving from science to engineering
deployment, and through Cavendish Nuclear we are seeking to become an early
member of this developing industry, including positioning for a role on the
whole plant partner procurement with the UKAEA on their Spherical Tokamak for
Energy Production programme.
Land
Operational highlights
- Awarded Australian Defence High Frequency Comms contract for c.£500
million over 10 years
- In discussions with UK MOD for five option years on the DSG contract
to 2030
- Awarded initial UK MOD contract to build 'Jackal' vehicles with
Supacat in Devonport
- Awarded initial c.£50 million one-year contract by the UK MOD to
support UK Gifted platforms to Ukraine
- Awarded contract to help the British Army improve operational
performance and extend the life of its Land Rover fleet
- Secured first Land win in France to deliver ground support equipment
support to the French Navy, Army and Air Force
- Completed the sale of our non-core Civil Training business
Financial review
31 March 2022 FX impact Acquisitions & disposals £m One-off credit Other trading 31 March 2023
£m £m £m £m £m
Contract backlog* 2,309.0 2,809.8
Revenue 1,015.5 1.8 (67.1) 11.6 55.3 1,017.1
Underlying operating profit* 58.8 0.0 (2.5) 11.6 18.0 85.9
Underlying margin* 5.8% 8.4%
Alternative Performance Measures are defined in the Financial Glossary on page
28
Revenue was in line with the prior year with organic growth of 5% offset by
the impact of disposals (UK Power in December 2021 and Civil Training in
February 2023). Growth was driven by ramp up of the Australian Defence High
Frequency Communication (DHFC) system, continued strong demand for mining
equipment and aftermarket sales in South Africa and higher volumes in Rail and
Emergency Services training, which more than offset the end of the Eskom
contract in South Africa in March 2022.
Underlying operating profit grew to £85.9 million, representing an underlying
operating margin of 8.4%. The increase was driven by the ramp up of the
Australian DHFC system contract, higher volumes in our South Africa business
and Emergency Services training, and a £12 million one-off credit. Excluding
the one-off credit, margin would have been 7.4%.
Contract backlog increased 24% organically to £2,810 million (FY22: £2,309
million) driven by the Australian DHFC system and good order momentum in the
second half of the year. At 1 April 2023, Land had around £640 million of
FY24 expected revenue under contract, and an additional c.£180 million under
framework agreements, both above the position in the previous year.
Operational review
Defence
Performance in defence equipment activity improved in the period, including
our DSG contract where we maintain, repair, overhaul and upgrade the British
Army's armoured vehicles and tanks. Following a successful transformation
programme, we continue to support our British Army customer as they plan for
the future of their equipment and support. We are now in detailed discussions
regarding execution of the five option years with modifications that will
contribute to better outcomes for the customer and for the Group. In addition,
we successfully extended our Phoenix II contract which delivers the UK MOD's
'white fleet' service for a further two years with strong performance.
In February, we announced that we will be working in collaboration with
Devon-based Supacat, to deliver an order of 70 High Mobility Transporters (HMT
400 series) from the MOD. With this initial order, the contract award could
lead to the production of as many as 240 of the light armoured vehicles,
should operational requirements demand. The contract is to be delivered from
our Devonport site in Plymouth, where we will create 90 new jobs.
We have been awarded a one-year contract by the MOD to help the British Army
improve operational performance and extend the life of its Land Rover fleet.
Partnering with Electric Vehicles experts, Electrogenic, we will convert four
in-service military Land Rovers, two protected vehicles and two general
service vehicles, from diesel-fueled to electric using a drop-in kit and
modified battery system.
This year we established our Advanced Manufacturing business in response to
growing obsolescence and commercial strains in the supply chain. We fitted our
first additively manufactured metal parts onto a military vehicle having
established an approval and safety case process in collaboration with the MOD
and the British Army. We have signed a partnership agreement with a specialist
advanced manufacturing business, Additure, and are now scaling this capability
working with our British Army customer and across the Group.
Through our existing contracts, we contributed to the British Army's support
to Ukraine's Armed Forces, refurbishing and regenerating equipment that has
been gifted in kind by the UK Government and supporting the training of
Ukrainian nationals in a range of domains. We were recently awarded an initial
12-month contract to support the equipment, including the supply of spares and
technical support.
Our defence training business performed well across all contracts and
continued to offer operational benefits for our customers. We have been
working closely with the British Army throughout the year to support their
Mobilise campaign and successfully delivered training to partnering nations.
We continue to invest and develop innovative training and have recently
submitted our proposal around threat identification.
We have successfully delivered Exercise Cerberus 22, the British Army's
largest and most ambitious field army exercise in Europe for a decade.
Following a successful campaign in 2022, we participated in the British Army's
2023 Army Warfighting Experiment where we showcased our Human Insight
Performance System.
In France, we secured our first major Land contract in this focus country for
the Group. We will support around 5,000 ground support equipment assets across
the French Army, Navy and Air Force through a 10-year contract. The contract
represents the first outsourcing for the provision of maintenance, repair and
overhaul; supply chain and logistics; technical and obsolescence management;
as well as asset renewal. The contract will see the Group investing in key
systems, infrastructure, and people across France, supported by capability
transfer from our UK businesses, which will reinforce our in-country growth
strategy.
In Australia, in October 2022, we signed a contract with the Government to
upgrade and sustain the Defence High Frequency Communication System to support
the Australian armed forces over the next 10 years. The c.£500 million
contract starting in October 2023, will see Babcock lead the operation and
support of the customer's existing capability, while delivering a
comprehensive technology upgrade programme. The new system will provide
Australian and allied armed forces with the ability to securely communicate
using voice and other data from almost any location across the globe.
We continue to deliver and pursue Land defence opportunities in Australia. The
Group is one of four short-listed tenderers for the LAND-125 Phase 4 -
Integrated Soldier System programme, to integrate a wide range of connected
technologies including uncrewed ground and aerial systems and self-learning
machines for Australian soldiers.
Emergency Services
We have seen good performance in our London Fire Brigade (LFB) contract, with
recognition for our support during the summer 2022 heatwave, which saw the
busiest operational period for the LFB since World War Two. Delivery of our
Metropolitan Police (MPS) contract has been stable through a challenging
period that included a significant surge in demand during the funeral of HM
Queen Elizabeth II. The MPS fleet management contract will end in October
2023.
Our LFB and MPS training contracts also performed well in the period, with
significant demand in volumes as both customers seek to meet recruitment
targets. Our new MPS training programme is now well established and performing
well.
South Africa
Performance for the South African business was better than expected driven by
high demand in the equipment business as a result of a strong market in the
mining sector. This more than offset the ending of the Eskom engineering
contract. Work continues on ongoing improvements through operational
excellence initiatives throughout the business.
Other civil markets
Our Rail business had strong performance during the year with further work in
our Translink framework. We continue to focus on delivery in our two key
regions of Scotland and Northern Ireland.
In February 2023, we completed the sale of our civil training business to
Inspirit Capital.
Aviation
- First two of six H160 helicopters modified and delivered to the
French Navy as part of a 10-year contract
- Completed delivery of nine PC21 aircraft and commenced operational
flights on the French Mentor contract
- Secured an 11-year extension to support the UK Hawk TMk1 and TMk2
aircraft and the Red Arrows
- Secured extensions from the UK MOD to operate the Light Aircraft
Flying Task (LAFT2) and RAF base support contract, Hades
- Awarded R&D funding from the UK MOD to explore technologies that
minimise the environmental impact of light, fixed wing training aircraft
- Awarded Queensland Health contract in Australia for helicopter
emergency medical services (HEMS) for 12 years
- Awarded a HEMS contract in Canada for c.£200 million, starting in
FY25
Financial review
31 March 2022 FX impact Acquisitions & disposals £m Other trading 31 March 2023
£m £m £m £m
Contract backlog* 2,293.6 1,633.0
Revenue 817.3 9.4 (97.6) 73.6 802.7
Underlying operating profit* 18.5 0.6 (6.6) 3.3 15.8
Underlying margin* 2.3% 2.0%
*Alternative Performance Measures are defined in the Financial Glossary on
page 28
Revenue decreased 2% in the year. Organic growth of 9% was driven by phasing
in our French defence contracts, in particular Mentor, which included aircraft
sales to the customer. This was offset by the impact of disposals (Oil and Gas
in September 2021 and European Aerial Emergency Services (AES) on 28 February
2023). The divested European AES contributed revenue of £386 million during
the 11 months of ownership in FY23 (FY22: £405 million).
Underlying operating profit decreased to £15.8 million, driven by the impact
of disposals, primarily European AES, which contributed a loss of £1.1
million in the 11 months of ownership compared to a profit of £3.3 million in
FY22, due to higher fuel costs. Underlying operating margin declined by 30
basis points to 2.0%, primarily due to weaker performance of the disposed
European AES businesses.
The retained business within Aviation generated revenue of £416 million
(FY22: £337 million), up by 24%, and underlying operating profit of £17
million (FY22: £14 million), representing an operating margin of 4.1% (FY22:
4.1%). Growth was driven by our French defence contracts, as described above,
with associated profit offset by continued high bid costs on a large contract
tender that has recently been submitted.
Contract backlog decreased to £1,633 million (FY22: £2,294 million), mainly
due to the impact of the AES disposal (c.£975 million). The retained business
contract backlog grew by 24%, driven by new contracts (Australia and Canada
HEMS) and renewal/extension of long-term contracts (UK Hawk and LAFT2 - Light
Aircraft flying Task). At 1 April 2023, Aviation had around c.£240 million of
FY24 expected revenue under contract, lower than the prior year position on a
like-for-like basis, due to high FY23 military aircraft deliveries in France.
Operational review
Defence
Across UK defence, activity has continued at a steady pace. Our military
business secured an 11-year contract extension with BAE Systems to support the
Hawk TMk1 and TMk2 aircraft at Royal Air Force (RAF) Valley and won a new
contract to support the RAF Aerobatics Team (Red Arrows) with line and depth
maintenance at RAF Waddington. Extensions were also secured on our RAF Hades
support and Light Aircraft Flying Task contracts with performance remaining
strong. Progress continues to be made on the Tutor programme with 80 aircraft
available to the customer. Our UK Military Flying Training System contract saw
good progress in the year.
We are continuing to develop our partnership with the Airbus H175M Task Force
- a UK-based industry team created to supply and support the British-produced
H175M helicopter for the UK's new medium helicopter requirement.
During the year, we were awarded two years of research and development funding
from the RAF's Rapid Capability Office. Project Monet is designed to explore
and progress the application of a range of sustainable aviation technologies,
including the potential for synthetic fuelled internal combustion engines,
hydrogen cell, and hybrid.
In France, activity continues to ramp up on the Mentor contract, with the
delivery of nine PC21 aircraft and the start of operational flights.
Availability continues to remain good, further enhancing the training
delivery. On the FOMEDEC contract, we delivered circa 35,000 flight hours and
23,000 simulator hours to the customer.
During the year the first two Airbus H160 helicopters were delivered to and
accepted by the French Navy as part of our contract with the French MOD. In
partnership with Airbus and Safran, we'll provide a total of six modified H160
aircraft and through-life support for 10 years. The aircraft will be used by
the French Navy on demanding search and rescue missions. The customer pays for
the aircraft over 10 years after acceptance. We will discount the customer
receivables for all 6 aircraft in FY24 on a non-recourse basis once the
aircraft are delivered and accepted.
Through Babcock's joint venture with Leonardo Canada, Babcock Leonardo
Canadian Aircrew Training has submitted a bid to deliver Canada's Future
Aircrew Training (FAcT) opportunity, with an award decision expected in late
2023.
Aerial emergency services
On 28 February 2023, we completed the sale of certain of our European
(Spanish, Italian, Portuguese and Scandinavian) Aerial Emergency Services
(AES) businesses to Ancala Partners for a gross consideration of €136.2
million (c.£120 million), with an additional c.£60 million of completion
adjustments. Babcock has retained its AES businesses in its focus countries of
the UK, France, Canada and Australia, where the Group also operates defence
businesses.
Our operations in the UK secured several successful extensions, with Hampshire
and Isle of Wight Air Ambulance, Great Western Air Ambulance, and Northwest
Air Ambulance.
In Australia, Babcock was awarded a contract with Queensland Health for the
Torres Strait and Northern Cape York Peninsula Emergency Helicopter Service in
December 2022. Operating from Horn Island, Babcock will provide 24/7 services
across the region including aeromedical retrieval and search and rescue. The
aircraft will also be available to support taskings from other government
departments including Queensland Fire and Emergency Services and Queensland
Police. The 12-year contract continues a 15-year relationship between
Queensland Health and Babcock in the Torres Strait and will represent a
significant uplift in capability to the region.
In France, we've continued to develop our service offering extending
operations to 24 hours coverage. We also delivered four EC135 helicopters to
our French Customs customer, including initial maintenance and inspection of
the assets delivered as part of the contract to support the French Customs and
Gendarmerie Nationale's helicopter fleet.
In Canada, Babcock is continuing to deliver air ambulance and wildfire
suppression services in the Province of Manitoba, helping to protect citizens,
communities, and natural resources. In 2022 alone, Babcock dropped over 18
million litres of water on the wildfires in Manitoba and completed over 268
aerial firefighting missions.
During the year, we were selected as the in-service support provider for
British Columbia's new fleet of AW169 aircraft. The 10-year contract is worth
around £200 million and will start in FY25.
Financial Glossary - Alternative Performance Measures
The Group provides Alternative Performance Measures (APMs), including
underlying operating profit, underlying margin, underlying earnings per share,
underlying operating cash flow, underlying free cash flow, and net debt to
EBITDA to enable users to have a more consistent view of the performance and
earnings trends of the Group. These measures are considered to provide a
consistent measure of business performance from year to year. They are used by
management to assess operating performance and as a basis for forecasting and
decision-making, as well as the planning and allocation of capital resources.
They are also understood to be used by investors in analysing business
performance.
The Group's APMs are not defined by IFRS and are therefore considered to be
non-GAAP measures. The measures may not be comparable to similar measures used
by other companies and they are not intended to be a substitute for, or
superior to, measures defined under IFRS. The Group's APMs are consistent with
the year ended 31 March 2022 with the addition of measures excluding the Type
31 loss. Further information on the Group's specific adjusting items, which is
a critical accounting judgement, can be found in Note 2.
Measure Closest equivalent IFRS measure Definition and purpose Adjustments to reconcile to IFRS measure (and reference to reconciliation)
Revenue measures
Organic revenue growth Revenue growth year-on-year Growth excluding the impact of foreign exchange (FX), and contribution from FX, contribution of acquisitions and disposals in the current and prior period
acquisitions and disposals over the prior and current year
- Used to measure the year-on-year movement in Group revenue
- It is a good indicator of business growth
- Group KPI
Contract backlog Transaction price under IFRS 15 on customer contracts allocated to unsatisfied Contracted revenue excluding variable revenue, expected contract renewals, Contract backlog is based on the full contract term whereas the IFRS measure
/ partially satisfied performance obligations expected revenue from framework agreements and impact of termination for may be based on shorter periods where the customer has the ability to exit
convenience clauses contracts early
- Used to measure revenue under contract as a good indicator of revenue
visibility
Framework agreements No direct equivalent Funded and unfunded unexecuted customer contracts. Unfunded orders include the
elements of contracts for which funding has not been authorised by the
customer
Profit measures
Underlying operating profit Operating profit Operating profit before the impact of specific adjusting items(1) Specific adjusting items(1)
- Underlying operating profit is the headline measure of the Group's - See table on page 10
performance
- See Note 2
Underlying operating margin No direct equivalent Underlying operating profit as a percentage of revenue Ratio - N/A
- To provide a measure of operating profitability, excluding one-off items
- Operating margin is an important indicator of operating efficiency across
the Group
- Group KPI
Underlying net finance costs Net finance costs Net finance costs excluding specific adjusting items(1) Specific adjusting items(1)
- To provide an alternative measure of finance costs excluding items such as - See table on page 10
fair value measurements which can fluctuate significantly on inputs outside of
management's control
Underlying profit before tax Profit before tax Profit before tax adjusted for Specific adjusting items(1)
- The summation of the impact of all specific adjusting items on profit before - See table on page 10
tax
Underlying effective tax rate Effective tax rate Tax expense excluding the tax impact of specific adjusting items(1), as a Specific adjusting items(1)
percentage of underlying profit before tax (being the summation of the impact
of all adjusting items on profit before tax) excluding the share of post-tax - See table on page 10
income from joint ventures and associates
- To provide an indication of the ongoing tax rate across the Group, excluding
one-off items
Underlying basic earnings per share Basic earnings per share Based on the Group's underlying profit before tax and underlying effective tax Specific adjusting items(1)
rate
- See table on page 10
Underlying operating profit excluding the Type 31 loss Operating profit Operating profit, excluding the Type 31 loss, before the impact of specific Specific adjusting items(1)
adjusting items(1)
- See table on page 10
- Eliminates the Type 31 loss for a better measure of the Group's underlying
operating profit performance, given the one-off nature of the loss - See Note 2
Underlying operating margin excluding the Type 31 loss No direct equivalent Underlying operating profit, excluding the Type 31 loss, divided by revenue Ratio - N/A
- Eliminates the Type 31 loss for a better measure of the Group's underling
operating margin performance, given the one-off nature of the loss
Underlying basic earnings per share excluding the Type 31 loss Basic earnings per share Based on the Group's underlying profit before tax, excluding the Type 31 loss, Specific adjusting items(1)
and underlying effective tax rate.
- See table on page 12
- Eliminates the Type 31 loss for a better measure of the Group's basic
earnings per share performance, given the one-off nature of the loss
EBITDA Operating profit Underlying operating profit, plus depreciation and amortisation, and various Specific adjusting items(1)
covenant adjustments linked to the Revolving Credit Facility including the
treatment of leases within operating profit and pension costs Depreciation and amortisation
- Used as the basis to derive the gearing ratio net debt/EBITDA, which is a Covenant adjustments
key measure of balance sheet strength and the basis of our debt covenant
calculations - See table on page 16
Balance sheet
Net debt No direct equivalent Loans, including the interest rate and foreign exchange derivatives which - See table on page 15
hedge the loans, bank overdrafts, cash and cash equivalents, loans to joint
ventures and associates, lease receivables and lease obligations
- Used as a general measure of the progress in generating cash and
strengthening of the Group's balance sheet position
Net debt (excluding operating leases) No direct equivalent Net debt (defined above) excluding operating lease liabilities as previously - See table on page 16
defined by IAS 17.
- Used by management to monitor the strength of the Group's balance sheet
position and to ensure the Group's capital structure is appropriate
- Used by credit agencies
Net debt (covenant basis) No direct equivalent Net debt (excluding operating leases), excluding loans to joint ventures and - See table on page 16
associates and finance lease receivables
- Used for covenants over Revolving Credit Facility
- Used by credit agencies
Net debt/EBITDA (covenant basis) No direct equivalent Net debt (covenant basis) divided by EBITDA Ratio - N/A
- A measure of the Group's ability to meet its payment obligations - See table on page 16
- Used by analysts and credit agencies
- Group KPI
Net debt/EBITDA excluding Type 31 No direct equivalent Net debt (covenant basis) divided by EBITDA, excluding the Type 31 loss
- Eliminates the Type 31 EBITDA loss for a better measure of the Group's
balance sheet, given the one-off nature of the loss
Return on invested capital (pre-tax) (ROIC) No direct equivalent Underlying operating profit plus share of JV PAT, divided by the sum of net Ratio - N/A
debt (excluding operating leases), shareholders' funds and retirement benefit
deficit (surplus) - See table on page 16
- Used as a measure of profit earned by the Group generated by the debt and
equity capital invested, to indicate the efficiency at which capital is
allocated
- Group KPI
Cash flow measures
Net capital expenditure No direct equivalent Property, plant and equipment and intangible assets, less proceeds on disposal
of property, plant and equipment
- Included in underlying operating cash flow to calculate underlying operating
cash conversion
Underlying operating cash conversion No direct equivalent Underlying operating cash flow after capital expenditure as a percentage of Ratio - N/A
underlying operating profit
- Used as a measure of the Group's efficiency in converting profits into cash
Underlying free cash flow No direct equivalent Underlying free cash flow includes cash flows from exceptional items and the - See page 13
capital element of lease payment cash flows (rather than net new lease
commitments, which are reflected as a debt movement)
- Provides a measure of cash generated by the Group's operations after
servicing debt and tax obligations, available for use in line with the Group's
capital allocation policy
1. Refer to Note 2 in the financial statements
Going concern and viability statement
Overview
The Directors have undertaken reviews of the business financial forecasts, in
order to assess whether the Group has adequate resources to continue in
operational existence for the foreseeable future and as such can continue to
adopt the going concern basis of accounting.
The Directors have also looked further out to consider the viability of the
business to test whether they have a reasonable expectation that the Group
will continue in operation and meet its liabilities as they fall due.
For assessing going concern, the Board considered the 12 month period from the
date of signing the Group's financial statements for the year ended 31 March
2023. For viability, the Board looked at a five-year view as this is the
period over which the Group prepares its strategic plan forecasts.
The use of a five-year period provides a planning tool against which long-term
decisions can be made concerning strategic priorities, addressing the Group's
stated net zero target and climate-related risks and opportunities, funding
requirements (including commitments to Group pension schemes), returns made to
shareholders, capital expenditure and resource planning.
The annually prepared budgets and forecasts are compiled using a bottom-up
process, aggregating those from the individual business units into sector
level budgets and forecasts. Those sector submissions and the consolidated
Group budget and forecasts are then reviewed by the Board and used to monitor
business performance.
The Board considered the budgets alongside the Group's available finances,
strategy, business model, market outlook and principal risks. The process for
identifying and managing the principal risks of the Group is set out in the
Principal risks and management controls section, in the forthcoming Annual
Report. The Board also considered the mitigation measures being put in place
and potential for further mitigation.
The Board considers that the long-term prospects of the Group underpin its
conclusions on viability. In the forthcoming Annual Report, we outline our
strategy, business model and markets summaries. Our prospects are supported
by:
· a diverse portfolio of businesses based on well-established market positions,
focussed on naval engineering, support and systems, and on critical services
in our core defence and civil markets. In FY23 62% of Group sales were defence
related and 38% civil;
· a geographically diverse business with a high proportion of sales to
governments and other major prime defence contractors. In FY23, 61% of sales
were to defence and civil customers in the UK, and 39% were international;
· long-term visibility of sales and future sale prospects through an order
backlog of £9.5 billion as at 31 March 2023, including incumbent positions on
major defence programmes; and
· market positions underpinned by a highly skilled workforce, intellectual
property assets and proprietary know-how, which are safeguarded and developed
for the future by customer and Group-funded investment.
Available financing
As at 31 March 2023, net debt excluding operating leases was £346.2 million
and the Group therefore had liquidity headroom of £1.6 billion, including net
cash of £0.4 billion and undrawn facilities of £1.2 billion. These
facilities are considered more than adequate to meet current and other
liabilities as they fall due, and supports the Group's negative working
capital position largely arising from securing customer advances ahead of
contract work starting. All of the Group's facilities mature during the
viability period, and therefore in assessing liquidity in future periods we
have assumed that it will be possible to re-finance the Group's facilities at
current market rates.
As of July 2023, the Group's committed facilities and bonds totalling £1.9
billion were as follows:
· £300 million three-year RCF maturing 20 May 2024
· Existing £775 million revolving credit facility (RCF), of which
£45 million matures on 28 August 2025 and £730 million matures 28 August
2026
· £300 million bond maturing 5 October 2026
· €550 million bond, hedged at £493 million, maturing 13
September 2027
· Two committed overdraft facilities totalling £100 million
The RCFs are the only facilities with covenants attached. The key covenant
ratios are (i) net debt to EBITDA (gearing ratio) of 3.5x (ii) and EBITDA to
net interest (interest cover) of 4.0x. These are measured twice per year - on
30 September and 31 March.
The RCF lenders are fully committed to advance funds under the RCF to the
Group, provided that the Group has satisfied the usual ongoing undertakings,
and the creditworthiness of the Group's relationship banks is closely
monitored. Based on their credit ratings we have no credit concerns with our
relationship banks. Given the importance of the RCFs to the Group's liquidity
position, our assessments of going concern and viability have tested the
Group's gearing ratio, interest cover and liquidity headroom throughout the
period under review up to their current maturity dates.
Base case scenario
The base case budget shows significant levels of headroom against both
financial covenants and liquidity headroom based on the current committed
facilities outlined above. That base case largely assumes we maintain our
incumbent programme positions if re-let during the five year period, with
margin recovery if they are currently below the Group average. Many
opportunities available to the Group, where we do not yet have high conviction
of securing the work, have been excluded from the Base Case to seek to
maintain a degree of caution.
It also assumes that the impact of current inflationary pressures can be
managed within contract estimates assumed in our planning. The base case
assumes no further reshaping of the business portfolio, so it is not dependent
upon any future cash proceeds from divestments. It also maintains pension
deficit contributions in excess of income statement charges of around £63
million relating to FY24 and around £63 million relating to FY25.
Reverse stress testing of the base case
To assess the level of headroom within the available facilities, a reverse
stress test was performed to see what level of performance deterioration
against the base case budgets and forecasts (in both EBITDA and net debt) was
required to challenge covenant levels.
Of the remaining measurement points within the available facility period, the
lowest required reduction in forecast EBITDA to hit the gearing covenant level
was £115 million and the lowest net debt increase was 67%. The lowest
required reduction in forecast EBITDA to hit the interest cover covenant was
£174 million. Given the mitigating actions that are available and within
management's control, such movements are not considered plausible.
Severe but plausible downside scenarios
The Directors also considered a series of severe but plausible downside
scenarios which are sensitivities run against the base case budget and
forecasts for the duration of the assessment period. These sensitivities
include - separately - a reduction in bid pipeline closure (business winning),
a deterioration in large programme performance across the Group (including
further inflation cost increases, or related failures in supplier resilience,
as per our principal risks), a deterioration in the Group's working capital
position and a regulator imposed cessation in flying two of the largest
aircraft fleets in the Group. All of these separate scenarios showed
compliance with the financial covenants throughout the period.
As with any company or group, it would be possible, however unlikely, to model
individual risks or combinations of risks that would threaten the financial
viability of the Group. The Board has not sought to model events where it
considers the likelihood of such events not to be plausible. In preparing a
combined severe but plausible (SBP) downside case, the Board considered the
feed of individual risks from the sectors covering the above sensitivities.
Overall there were c.90 profit and cash flow risks identified.
A simple aggregation of all of these risks is not considered plausible as the
Group operates businesses and contracts which run largely independently of
each other, albeit with a relatively small number of customers within each
geography.
The majority of these identified risks were seen as 'sector independent' (ie
there is no direct read across from one sector to another). A small number are
deemed 'non independent' eg inflation, FX etc. The Board decided to include in
its combined SBP downside all the 'non independent' risks without reduction,
but reduced the aggregation of the 'sector independent' risks by 25% to
reflect the implausibility of all such risks fully crystallising within the
same period.
If such a severe downturn were to occur in the Group's performance, the Board
would take mitigation measures to protect the Group in the short term. Such
profit and cash mitigation measures that are deemed entirely within the
control of the Group and identified as part of the sector budgeting exercise
have been included in the SBP scenario (eg cancelling pay rises and bonus
awards, curtailing uncommitted capital expenditure and operational spend
including R&D and other investment).
Despite the severity of the above combined SBP scenario, the Group maintained
a sufficient amount of headroom against the financial covenants within its
borrowing facilities, and sufficient liquidity when compared against existing
facilities.
Based on our review, the Directors have a reasonable expectation that the
Group has adequate resources to continue as a going concern for at least 12
months from the date of these financial statements.
As such, these financial statements have been prepared on the going concern
basis. The Directors do not believe there are any material uncertainties to
disclose in relation to the Group's ability to continue as a going concern.
In concluding on the financial viability of the Group, having considered the
scenarios outlined above, the Directors have a reasonable expectation that the
Company and the Group will be able to continue in operation and meet all its
liabilities as they fall due up to March 2028.
Risks and uncertainties
The principal risks and uncertainties affecting the Group are listed below and
are set out in more detail in the Company's Annual Report and Financial
Statements 2023, which should be read in conjunction with this announcement
when published. This list is not a substitute for reading the Company's Annual
Report and Financial Statements 2023 in full. The Group's principal risks and
uncertainties are:
Contract and project performance: We execute large contracts, which often
require us to price for the long term and for risk transfer. Our contracts can
include fixed prices. Risk Appetite: Medium. This reflects the complex
nature of the work within the defence and emergency services sectors. Whilst
we aim to ensure our contracts only accept risk that can be managed, risk
remains in the contract/project delivery.
Existing & new markets: We rely on winning and retaining large contracts
in both existing and new markets both of which are often characterised by a
relatively small number of major customers many of whom are owned, controlled,
or funded by local or national government. Risk Appetite: Medium. This
reflects that, whilst the maintenance of a secure and assured pipeline is
essential for continued growth, we may choose to embrace the risks that we can
confidently and securely manage.
IT & security: A key factor for our customers is our ability to deliver
secure IT and other information assurance systems to maintain the
confidentiality of sensitive information. Risk Appetite: Low. IT and Cyber
Security are fundamental components to Babcock's operations, we continually
review the emergence of cyber threats, in an effort to eradicate and mitigate
the risk as far as possible.
Pensions: The Group has significant defined benefit pension schemes in the UK,
which provide for a specified level of pension benefits to scheme members.
Risk Appetite: Low. Babcock utilise engagement with the Pensions schemes
trustees and a balanced pension management approach that looks to mitigate and
reduce the risks associated with pensions over the journey to settling the
pension obligations.
Supply chain management: The Group is exposed to several risks within its
supply chain, and these can typically be the following. Macroeconomic
condition such as high inflation and Brexit. Disruption events to
established supply chains such as natural disasters, wars, and strikes.
Supplier specific challenges as we have seen increasing disruption from
cyber-attacks on suppliers i.e., financial failure of suppliers. Part
availability for aged customer assets for maintenance of customer assets that
are so old that it is not possible to source key parts or components, or the
cost of minimum quantities becomes cost or lead-time prohibitive. Risk
Appetite: Low. Babcock recognises the adverse effects of the financial
resilience risk on our balance sheet and investments, our aim being to
eliminate the risk where possible.
Operational resilience: We are undertaking multiple change programmes with the
introduction of a new strategy, a new operating model to restructure the shape
of the Group, and a new People strategy, as well as undertaking the alignment
of both the business portfolio and our property portfolio. Additionally, there
are several new material opportunities that the Group may pursue - some in new
geographies - that may further stretch management bandwidth. Risk Appetite:
Low. Given the materially adverse nature of the risk to Operational
Resilience, Babcock looks to recognise and eradicate the emergence of risks to
operations where possible, hence risk appetite being set as low.
Financial resilience: The Group is exposed to a number of financial risks,
some of which are of a macroeconomic nature (for example, foreign currency,
interest rates) and some of which are more specific to the Group (for example,
liquidity and credit risks). Risk Appetite: Low. Babcock recognises the
adverse effects of the financial resilience risk on our balance sheet and
actively manages this risk via its capital allocation policy, substantial
committed debt facilities and maintaining an investment grade credit rating
allowing access to debt capital markets. However, this risk cannot be entirely
eliminated and will aways require management.
Health and safety: Our operations entail the potential risk of significant
harm to people and property, wherever we operate across the world. Risk
Appetite: Low. For both moral, financial and reputational reasons we would
wish to keep the risk as low as possible. Through the eyes of the HSE and high
hazard regulators we are legally mandated to keep the risk as low as
reasonably practicable.
Climate and sustainability: Sustainability is an integral part of our
corporate strategy, and our global business employs short, medium, and long
terms control measures to manage climate risks. Risk Appetite: Low. Our
probability and impact scorings for the risks related to Climate and
Sustainability are based on a scenario-based methodology. We determined that
the most significant transition risk is labour, which is expected to rise,
however our risk appetite allocation remains low as this situation is likely
to materialise in the medium and long term and gives us time to implement
activities to mitigate.
Technological disruption: We have identified three main attributes to
potential technological disruption that potentially effects Babcock. The
digital change agenda both within our customers and internal to Babcock, our
approach to data management and finally the disruption of new technology
offerings. Risk Appetite: Low. Given the materially adverse nature of
digital and data risks, Babcock look to recognise and eradicate the emergence
of risks to operations where possible, hence risk appetite being set at low.
Exploiting new technology in an appropriate manner can open new markets.
However, Babcock does survey the market for new technology to develop into new
opportunities. These are assessed for benefit individually and if deemed of
interest, integrated into our research and development programme and managed
with project management.
Regulatory & compliance: Our businesses are subject to the laws,
regulations and restrictions of the many jurisdictions in which they
operate. Risk Appetite: Low. Babcock always endeavours to act in line with
best practices and regulatory requirements. Babcock has zero tolerance for
regulatory risk around risks such as anti-bribery and corruption and modern
slavery, the risk appetite allocation is therefore set at low
Talent management, retention and upskilling: We operate in many specialised
engineering and technical domains, which require appropriate skills and
experience. Risk Appetite: Medium. Avoidance of the risk would increase
costs and necessitate over-resourcing resulting in potential negative
workforce engagement and retention. Some risk is accepted given by sharing
capability across our business and compensating for skills shortages in
particular areas.
Acquisitions and disposals: We have built our core strengths organically and
through acquisition. Decisions to acquire companies, as well as the process of
their acquisition and integration, are complex, time-consuming, and expensive.
If we believe that a business is not 'core', we may decide to sell that
business. Risk Appetite: Medium. Babcock will continue to review potential
opportunities within the market in a considered and measured way, M&A
activity continues to be inherently high risk, future M&A activity will be
undertaken only where it is possible to reduce inherent risk to its lowest
level balanced against potential rewards and opportunity.
The risks listed above, together with their potential impacts and mitigating
actions we have taken in respect of them, are explained and described in more
detail in the 2023 Annual Report, a copy of which will be available at
www.babcockinternational.com (http://www.babcockinternational.com)
Group income statement
For the year ended 31 March Note 2023 2022
£m
£m((1))
Revenue 2,3 4,438.6 4,101.8
Operating costs (4,315.7) (4,040.6)
Goodwill impairment 7 - (7.2)
(Loss)/profit resulting from acquisitions and disposals 20 (77.4) 172.8
Operating profit 45.5 226.8
Other income - 6.2
Share of results of joint ventures and associates 2,3,11 9.3 20.1
Finance income 4 21.9 9.6
Finance costs 4 (70.5) (80.4)
Profit before tax 6.2 182.3
Income tax expense 5 (39.5) (14.4)
(Loss)/profit for the year (33.3) 167.9
Attributable to:
Owners of the parent (35.0) 164.2
Non-controlling interest 1.7 3.7
(Loss)/earnings per share
Basic (6.9)p 32.5p
Diluted (6.9)p 32.1p
((1)) The Group has re-presented the prior period income statement to combine
Cost of revenue and Administration and distribution costs into Operating
costs. Further information is included in note 1.
Group statement of comprehensive income
For the year ended 31 March Note 2023 2022
£m
£m
(Loss)/profit for the year (33.3) 167.9
Other comprehensive income
Items that may be subsequently reclassified to income statement
Currency translation differences (0.5) 0.2
Reclassification of cumulative currency translation reserve on disposal 20 (1.2) (7.3)
Fair value adjustment of interest rate and foreign exchange hedges 9.4 (14.7)
Tax, including rate change impact, on fair value adjustment of interest rate (3.1) (1.0)
and foreign exchange hedges
Hedging (losses)/gains reclassified to profit or loss (10.8) 17.1
Reclassification of cumulative hedge reserve on disposal of joint venture - 20.8
Share of other comprehensive income of joint ventures and associates 11 4.7 30.2
Tax, including rate change impact, on share of other comprehensive income of 11 (1.2) (5.7)
joint ventures and associates
Items that will not be reclassified to income statement
Remeasurement of retirement benefit obligations 18 (402.4) 322.5
Tax on remeasurement of retirement benefit obligations 100.8 (64.2)
Other comprehensive (loss)/ income, net of tax (304.3) 297.9
Total comprehensive (loss)/income (337.6) 465.8
Total comprehensive (loss)/income attributable to:
Owners of the parent (337.3) 461.2
Non-controlling interest (0.3) 4.6
Total comprehensive (loss)/ income (337.6) 465.8
Group statement of changes in equity
Share Share Other Capital Retained Hedging Translation Total equity attributable to owners Non- Total
capital
premium
reserve
redemption
earnings
reserve
reserve
of the
controlling
equity
£m
£m
£m
£m
£m
£m
£m
Company
interest
£m
£m
£m
At 1 April 2021 303.4 873.0 768.8 30.6 (1,671.7) (42.7) (48.4) 213.0 16.0 229.0
Profit for the year - - - - 164.2 - - 164.2 3.7 167.9
Other comprehensive income - - - - 258.3 46.7 (8.0) 297.0 0.9 297.9
Total comprehensive income - - - - 422.5 46.7 (8.0) 461.2 4.6 465.8
Dividends - - - - - - - - (1.1) (1.1)
Share-based payments - - - - 5.5 - - 5.5 - 5.5
Tax on share-based payments - - - - 2.3 - - 2.3 - 2.3
Net movement in equity - - - - 430.3 46.7 (8.0) 469.0 3.5 472.5
At 31 March 2022 303.4 873.0 768.8 30.6 (1,241.4) 4.0 (56.4) 682.0 19.5 701.5
At 1 April 2022 303.4 873.0 768.8 30.6 (1,241.4) 4.0 (56.4) 682.0 19.5 701.5
Loss for the year - - - - (35.0) - - (35.0) 1.7 (33.3)
Other comprehensive (loss)/income - - - - (301.6) (1.0) 0.3 (302.3) (2.0) (304.3)
Total comprehensive income - - - - (336.6) (1.0) 0.3 (337.3) (0.3) (337.6)
Dividends - - - - - - - - (2.2) (2.2)
Share-based payments - - - - 9.4 - - 9.4 - 9.4
Tax on share-based payments - - - - (0.2) - - (0.2) - (0.2)
Net movement in equity - - - - (327.4) (1.0) 0.3 (328.1) (2.5) (330.6)
At 31 March 2023 303.4 873.0 768.8 30.6 (1,568.8) 3.0 (56.1) 353.9 17.0 370.9
The other reserve relates to the rights issue of new ordinary shares on 7 May
2014 and the capital redemption reserve relates to the issue and redemption of
redeemable 'B' preference shares in 2001.
Group statement of financial position
Note 31 March 31 March
2023
2022((1))
£m
£m
Assets
Non-current assets
Goodwill 7 781.4 783.4
Other intangible assets 8 140.8 176.7
Property, plant and equipment 9 478.5 710.6
Right of use assets 10 159.1 334.3
Investment in joint ventures and associates 11 57.4 54.3
Loan to joint ventures and associates 11 9.5 12.1
Retirement benefits surpluses 18 94.8 300.9
Other financial assets 7.3 10.0
Lease receivables 22.2 24.1
Derivatives 2.6 -
Deferred tax asset 112.2 47.4
Trade and other receivables 13 6.4 9.7
1,872.2 2,463.5
Current assets
Inventories 12 126.8 142.7
Trade and other receivables 13 506.9 488.8
Contract assets 13 322.5 299.3
Income tax recoverable 7.7 25.4
Lease receivables 16.4 23.3
Other financial assets 1.4 -
Derivatives 4.3 11.4
Cash and cash equivalents 451.7 1,146.3
1,437.7 2,137.2
Total assets 3,309.9 4,600.7
Equity and liabilities
Equity attributable to owners of the parent
Share capital 303.4 303.4
Share premium 873.0 873.0
Capital redemption and other reserves 746.3 747.0
Retained earnings (1,568.8) (1,241.4)
353.9 682.0
Non-controlling interest 17.0 19.5
Total equity 370.9 701.5
Non-current liabilities
Bank and other borrowings 15 768.4 847.7
Lease liabilities 10 178.9 329.3
Trade and other payables 14 0.9 1.0
Deferred tax liabilities 7.0 9.6
Derivatives 53.3 59.3
Retirement benefit deficits 18 156.2 109.3
Provisions for other liabilities 16 80.8 60.3
1,245.5 1,416.5
Current liabilities
Bank and other borrowings 15 19.6 863.4
Lease liabilities 10 49.9 104.8
Trade and other payables 14 911.1 888.1
Contract liabilities 14 616.4 518.3
Income tax payable 15.8 17.7
Derivatives 12.8 34.8
Provisions for other liabilities 16 67.9 55.6
1,693.5 2,482.7
Total liabilities 2,939.0 3,899.2
Total equity and liabilities 3,309.9 4,600.7
((1)) The 2022 Group Statement of Financial Position has been revised under
IFRS 3 for new information obtained about facts and circumstances that existed
at the acquisition date during the permitted measurement period - see Note 17
for more detail.
Group cash flow statement
For the year ended 31 March Note 2023 2022
£m
£m
Cash flows from operating activities
(Loss)/profit for the year (33.3) 167.9
Share of results of joint ventures and associates 11 (9.3) (20.1)
Income tax expense 5 39.5 14.4
Finance income 4 (21.9) (9.6)
Finance costs 4 70.5 80.4
Depreciation and impairment of property, plant and equipment 9 77.0 117.5
Depreciation and impairment of right of use assets 10 91.3 123.1
Amortisation and impairment of intangible assets 8 37.1 94.7
Goodwill impairment - 7.2
Equity share-based payments 9.4 5.5
Net derivative fair value and currency movement through profit or loss (7.5) (0.9)
Loss/(profit) on disposal of subsidiaries, businesses and joint ventures and 20 77.4 (172.8)
associates
Profit on disposal of property, plant and equipment (2.0) (1.5)
Loss/(profit) on disposal of right of use assets 0.8 (3.2)
Loss on disposal of intangible assets 1.7 0.7
Cash generated from operations before movement in working capital and 330.7 403.3
retirement benefit payments
(Increase)/decrease in inventories (25.7) 10.6
(Increase) in receivables (71.6) (85.2)
(Increase) in contract assets (54.2) (26.5)
Increase/(decrease) in payables 131.4 (202.0)
Increase in contract liabilities 132.3 124.2
Increase/(decrease) in provisions 47.9 (30.9)
Retirement benefit contributions in excess of current period expense (141.9) (151.7)
Cash generated from operations 348.9 41.8
Income tax (paid)/received (25.4) 10.0
Interest paid (77.0) (54.9)
Interest received 14.8 9.9
Net cash flows from operating activities 261.3 6.8
Cash flows from investing activities
Disposal of subsidiaries and joint ventures and associates, net of cash 20 158.6 420.7
disposed
Acquisition of subsidiaries, net of cash acquired - (15.5)
Dividends received from joint ventures and associates 11 8.7 41.6
Proceeds on disposal of property, plant and equipment 38.5 68.0
Proceeds on disposal of intangible assets 0.4 -
Purchases of property, plant and equipment (104.2) (190.8)
Purchases of intangible assets (20.9) (12.4)
Investment in joint ventures 11 - (2.6)
Loans repaid by joint ventures and associates 11 2.4 31.0
Increase in loans to joint ventures and associates - (1.4)
Net cash flows from investing activities 83.5 338.6
Cash flows from financing activities
Lease payments 19 (108.5) (113.0)
Cash inflow from settlement of derivatives 0.8 -
Bank loans repaid 19 (972.8) (31.7)
Loans raised and facilities drawn down 19 416.6 23.1
Dividends paid to non-controlling interest (2.2) (1.1)
Net cash flows from financing activities (666.1) (122.7)
Net (decrease)/increase in cash, cash equivalents and bank overdrafts (321.3) 222.7
Cash, cash equivalents and bank overdrafts at beginning of year 19 756.5 530.9
Effects of exchange rate fluctuations 19 (5.7) 2.9
Cash, cash equivalents and bank overdrafts at end of year 19 429.5 756.5
Notes to the Group financial statements
1. Basis of preparation and significant accounting policies
Basis of preparation
The consolidated financial statements have been prepared on a going concern
basis and in accordance with United Kingdom adopted International Accounting
Standards (IFRS) and the Companies Act 2006 applicable to companies reporting
under IFRS. These condensed consolidated financial statements do not comprise
statutory accounts within the meaning of Section 435 of the Companies Act 2006
and should be read in conjunction with the Annual Report for the year ended 31
March 2023. The comparative figures for the year ended 31 March 2023 are not
the Group's statutory accounts for that financial year. Those financial
statements have been reported upon by the Group's auditor and delivered to the
registrar of companies. The report of the auditor was unqualified, did not
include a reference to any matters to which the auditor drew attention by way
of emphasis without qualifying their report and did not contain statements
under Section 498 (2) or (3) of the Companies Act 2006. The consolidated
financial statements are presented in pounds sterling and, unless stated
otherwise, rounded to the nearest million. They have been prepared under the
historical cost convention, as modified by the revaluation of certain
financial assets and financial liabilities (including derivative instruments).
New and amended standards adopted by the Group
The Group applied the following standards and amendments for the first time
for the year beginning on 1 April 2022:
The following standards and amendments to IFRSs became effective for the
annual reporting period beginning on 1 April 2022 and did not have a material
impact on the consolidated financial statements:
• The Group has adopted the amendments to IAS 37, 'Provisions,
contingent liabilities and contingent assets'. The amendments specify that the
cost of fulfilling a contract comprises the costs that relate directly to the
contract.
• The Group has adopted the amendments to IAS 16, 'Property, plant and
equipment'. The amendments prohibit deducting from the cost of an item of
property, plant and equipment any proceeds from selling items produced before
that asset is available for use and clarifies the meaning of 'testing whether
an asset is functioning properly'.
• The Group has adopted the amendments to IFRS 3, 'Business
Combinations'. The amendment relates to the identification of liabilities
assumed and contingent assets acquired in a business combination.
• The Group has adopted the annual improvements to IFRSs 2018 - 2020
cycle.
Critical accounting estimates and judgements
In the course of preparation of the financial statements, judgements and
estimates have been made in applying the Group's accounting policies that have
had a material effect on the amounts recognised in the financial statements.
The application of the Group's accounting policies requires the use of
estimates and the inherent uncertainty in certain forward-looking estimates
may result in a material adjustment to the carrying amounts of assets and
liabilities in the next financial year. Critical accounting estimates are
subject to continuing evaluation and are based on historical experience and
other factors, including expectations of future events that are believed to be
reasonable in light of known circumstances. Critical accounting estimates and
judgements in relation to these financial statements are considered below:
(a) Critical accounting judgements
Critical accounting judgements, apart from those involving estimations, that
are applied in the preparation of the consolidated financial statements are
discussed below. Detail of the Group's key judgements involving estimates are
included in the Key sources of estimation uncertainty section.
(i) Acting as principal or agent
A number of the Group's contracts include promises in relation to procurement
activity undertaken on behalf of customers at low or nil margin,
sub-contractor arrangements, and other pass-through costs. Management is
required to exercise judgement on these revenue streams in considering whether
the Group is acting as principal or agent. This is based on an assessment as
to whether the Group controls the relevant goods or services under the
performance obligations prior to transfer to customers. Factors that influence
this judgement include the level of responsibility the Group has under the
contract for the provision of the goods or services, the extent to which the
Group is incentivised to fulfil orders on time and within budget, either
through gain share arrangements or KPI deductions in relation to the other
performance obligations within the contract, and the extent to which the Group
exercises responsibility in determining the selling price of the goods and
services. Taking all factors into consideration, the Group then comes to a
judgement as to whether it acts as principal or agent on a performance
obligation-by-performance obligation basis. Note that any changes in this
judgement would not have a material impact on profit, although there may be a
material impact to revenue and operating costs.
(ii) Determining the Group's cash generating units
Management exercises judgement in determining the Group's cash generating
units for the goodwill impairment assessment. This determination is generally
straightforward and factual, however in some cases judgement is required, for
example it was determined that Africa is a separate cash generating unit,
whilst operations of the Group in other territories do not represent separate
cash generating units. Over time management reviews the cash generating units
to ensure they remain appropriate as businesses are acquired and divested and
reporting structures change, including how information is reported to the
Chief Operating Decision Maker. If there was a change in this judgement this
could result in a material adjustment to goodwill. Further detail is included
in notes 3 and 7.
(b) Key sources of estimation uncertainty
The key sources of estimation uncertainty at the reporting period end that may
result in significant risk of material adjustment to the carrying amount of
assets and liabilities within the next financial year are set out below:
(i) Revenue and profit recognition
The following represent the notable assumptions impacting upon revenue and
profit recognition as a result of the Group's contracts with customers:
· Stage of completion & costs to complete - The Group's revenue
recognition policies require management to make an estimate of the cost to
complete for long-term contracts. Management estimates outturn costs on a
contract-by-contract basis and estimates are carried out by suitably qualified
and experienced personnel. Estimates of cost to complete include assessment of
contract contingencies arising out of technical, commercial, operational and
other risks. The assessments of all significant contract outturns are subject
to review and challenge, and judgements and estimates are reviewed regularly
throughout the contract life based on latest available information with
adjustments made where necessary. As contracts near completion, often less
judgement is required to determine the expected outturn. The most significant
estimate of contract outturn relates to the Type 31 programme as outlined
below.
· Variable consideration - the Group's contracts are often subject
to variable consideration including performance-based penalties and
incentives, gain/pain share arrangements and other items. Variable
consideration is added to the transaction price only to the extent that it is
highly probable that there will not be a significant reversal in the amount of
cumulative revenue recognised once the underlying uncertainty is resolved.
· Inflation - The level to which the Group's revenue and cost for
each contract will be impacted by inflation is a key accounting estimate, as
this could cause the revenue and cost of contract delivery to be greater than
was expected at the time of contracting. The Group's contracts are exposed to
inflation due to rising employment costs, as well as increased costs of raw
materials. The Group endeavours to include cost recovery mechanisms or
index-linked pricing within its contracts with customers in order to mitigate
any inflation risk arising from increasing employment and raw material costs.
In the most significant contract where there is no mechanism to recover an
increase in costs due to inflation, revenue and profit in the year would be
impacted by £3-4 million for each 1% change in personnel costs.
Type 31 Programme estimates
During the year significant increases in forecast costs on the Type 31
programme were identified, which were not foreseen at contract inception. A
dispute resolution process has commenced with the customer over responsibility
for these incremental costs. We have reassessed the contract outturn on the
basis that none of these are recovered, given the uncertainty at the early
stage of the process. This has resulted in the recording of a £100m loss in
the year, representing a £43m reversal of revenue, £2m asset impairment and
the recognition of a £55m onerous contract provision. Determining the
contract outturn, and therefore revenue and onerous contract provision
recognised, requires assumptions and complex judgements to be made about
future performance of the contract. The level of uncertainty in the estimates
made in assessing the outturn is linked to the complexity of the underlying
contract.
The key sources of estimates in assessing the outturn are:
1. The results of the dispute resolution process, and any
reimbursements agreed with the customer;
2. The build costs over the production schedule and estimate of
efficiencies arising from the 'learner' effect through performing work over
multiple ships;
3. The ability to maintain or improve operational performance
through process efficiencies and improvements over the five ships;
4. The impact of inflation on the build cost; and
5. The achievement of the build schedule to completion and final
acceptance.
These estimates are inter-related. The range of possible future outcomes in
respect of assumptions made to determine the contract outturn could result in
a material increase or decrease in revenue and the value of the onerous
contract provision, and hence on the Group's profitability, in the next
financial year. With c£1bn of estimated costs to go over the life of the
contract, if actual recoveries or costs were to differ from those assumed by
5-10%, the potential impact on the contract outturn could be £50-£100m.
To mitigate this, comparisons of actual contract performance and previous
forecasts used to assess the contract outturn are performed regularly, with
consideration given to whether any revisions to assumptions are required. In
the next financial year, design activities will be finalised and the
construction of the first ship will be substantially complete. This will
reduce the uncertainty over the contract outturn but a significant element
will remain due to the substantial activity which extends over a further 4
years. In a major ship build programme of this nature, it is inherently
possible that there may be changes in circumstances which cannot reasonably be
foreseen at the present time.
(ii) Defined benefit pension schemes obligations
The Group's defined benefit pension schemes are assessed annually in
accordance with IAS 19 and the valuation of the defined benefit pension
obligations is sensitive to the inflation, discount rate, actuarial and life
expectancy assumptions used. There is a range of possible values for the
assumptions and small changes to the assumptions may have a significant impact
on the valuation of the defined benefit pension obligations. In addition to
the inflation, discount rate and life expectancy estimates, management is
required to make an accounting judgement relating to the expected availability
of future accounting surpluses under IFRIC 14. Further information on the key
assumptions and sensitivities is included in note 18.
(iii) The carrying value of goodwill
Goodwill is tested annually for impairment, in accordance with IAS 36,
Impairment of Assets ('IAS 36'). The impairment assessment is based on
assumptions in relation to future cash flows expected to be generated by cash
generating units, together with appropriate discounting of the cash flows. The
assessment of the recoverable amount of goodwill in the Aviation CGU is
included as a critical accounting estimate given the significance of the
remaining carrying value of goodwill and the inherent level of estimation
uncertainty required to undertake impairment testing. The assessment of the
recoverable value of goodwill in other CGUs is not considered a critical
accounting estimate as a result of the headroom within these CGUs. The key
assumptions in estimating the carrying value of goodwill are discount rate,
long-term growth rate and growth rate in the short-term cash flows.
Inflation rates are incorporated into the impairment assessment through their
inclusion within the growth rates in cash inflows and outflows and through the
methodology by which discount rates are determined. Were inflation to impact
upon all cash flows equally, an impairment assessment should be neutral to the
impact of inflation. The Group has a number of protections and exposures to
the impact of inflation across its portfolio of revenue arrangements and
supply chain agreements resulting in an indirect impact of inflation on the
impairment outturn.
(c) Accounting policy change - Presentation of operating profit
In the year ended 31 March 2023 the Group has re-presented the income
statement to combine Cost of revenue and Administration and distribution costs
into Operating costs. The comparative period operating costs of £4,040.6
million were presented as Cost of revenue of £3,756.5 million and
Administration and distribution costs of £284.1 million in the prior period
annual report and financial statements. This change to presenting the costs of
the Group by nature is deemed to be more informative for the users of the
annual report and financial statements as it allows greater comparability of
year-on-year trends.
2. Adjustments between statutory and underlying information
Definition of underlying measures and specific adjusting items
The Group provides alternative performance measures, including underlying
operating profit, to enable users to have a more consistent view of the
performance and earnings trends of the Group. These measures are considered to
provide a consistent measure of business performance from year to year. They
are used by management to assess operating performance and as a basis for
forecasting and decision-making, as well as the planning and allocation of
capital resources. They are also understood to be used by investors in
analysing business performance.
The Group's alternative performance measures are not defined by IFRS and are
therefore considered to be non-GAAP measures. The measures may not be
comparable to similar measures used by other companies and they are not
intended to be a substitute for, or superior to, measures defined under IFRS.
The Group's alternative performance measures are consistent with the year
ended 31 March 2023.
Underlying operating profit
In any given year the statutory measure of operating profit includes a number
of items which the Group considers to either be one-off in nature or otherwise
not reflective of underlying performance. Underlying operating profit
therefore adjusts statutory operating profit to provide readers with a measure
of business performance which the Group considers more consistently analyses
the underlying performance of the Group by removing these one-off items that
otherwise add volatility to performance.
Underlying operating profit eliminates potential differences in performance
caused by purchase price allocations on business combinations in prior periods
(amortisation of acquired intangibles), business acquisition, merger and
divestment related items, large, infrequent restructuring programmes and fair
value movements on derivatives. Transactions such as these may happen
regularly and could significantly impact the statutory result in any given
year. Adjustments to underlying operating profit may include both income and
expenditure items.
Specific adjusting items include:
· Amortisation of acquired intangibles;
· Business acquisition, merger and divestment related items (being amounts
related to corporate transactions and gains or losses on disposal of assets or
businesses);
· Gains, losses and costs directly arising from the Group's withdrawal from a
specific market or geography, including closure costs, severance costs, the
disposal of assets and termination of leases;
· The costs of large restructuring programmes that significantly exceed the
minor restructuring which occurs in most years as part of normal operations.
Restructuring costs incurred as a result of normal operations are included in
operating costs and are not excluded from underlying operating profit;
· Profit or loss from amendment, curtailment, settlement or equalisation of
Group pension schemes;
· Fair value gain/(loss) on forward rate contracts that are open during the
period; and
· Exceptional items that are significant, non-recurring and outside of the
normal operating practice. These items are described as exceptional in order
to appropriately represent the Group's underlying business performance.
Exceptional items are set out in the Exceptional items section below.
Income statement including underlying results
Note Year ended 31 March 2023 Year ended 31 March 2022
Underlying Specific adjusting items Statutory Underlying Specific adjusting items Statutory
£m
£m
£m
£m
£m
£m
Revenue 3 4,438.6 - 4,438.6 4,101.8 - 4,101.8
Operating profit/(loss) 3 177.9 (132.4) 45.5 237.7 (10.9) 226.8
Other income - - - 6.2 - 6.2
Share of results of joint ventures and associates 11 9.3 - 9.3 20.1 - 20.1
Net finance costs 4 (58.3) 9.7 (48.6) (61.2) (9.6) (70.8)
Profit/(loss) before tax 128.9 (122.7) 6.2 202.8 (20.5) 182.3
Income tax (expense)/benefit 5 (37.7) (1.8) (39.5) (43.9) 29.5 (14.4)
Profit/(loss) after tax for the year 91.2 (124.5) (33.3) 158.9 9.0 167.9
Earnings per share including underlying measures
Year ended 31 March 2023 Year ended 31 March 2022
Underlying Specific adjusting items Statutory Underlying Specific adjusting items Statutory
£m
£m
£m
£m
£m
£m
Profit/(loss) after tax for the year 91.2 (124.5) (33.3) 158.9 9.0 167.9
Amount attributable to owners of the parent 89.5 (124.5) (35.0) 155.2 9.0 164.2
Amount attributable to non-controlling interests 1.7 - 1.7 3.7 - 3.7
Weighted average number of shares (m) 505.4 505.4 505.1 505.1
Effect of dilutive securities (m) 9.5 9.5 6.1 6.1
Diluted weighted average number of shares (m) 514.9 514.9 511.2 511.2
Basic EPS 17.7p (6.9)p 30.7p 32.5p
Diluted EPS 17.4p (6.9)p 30.4p 32.1p
Details of specific adjusting items
The impact of specific adjusting items is set out below:
Year ended Year ended
31 March 2023
31 March 2022
£m
£m
Amortisation of acquired intangibles (15.8) (21.4)
Business acquisition, merger and divestment related items (117.7) 163.1
Fair value movement on derivatives and related items 1.1 -
Exceptional items - (118.8)
Restructuring - (33.8)
Adjusting items impacting operating profit/(loss) (132.4) (10.9)
Fair value movement on derivatives and related items 9.7 (9.6)
Adjusting items impacting loss before tax (122.7) (20.5)
Income tax benefit
Amortisation of acquired intangibles 4.1 5.5
Business acquisition, merger and divestment related items (2.1) -
Restructuring - 6.5
Fair value movement on derivatives and related items (2.6) 2.5
Exceptional tax items and tax on exceptional items, including rate change (1.2) 15.0
impact
Income tax (expense)/benefit (1.8) 29.5
Explanation of specific adjusting items
Amortisation of acquired intangibles
Underlying operating profit excludes the amortisation of acquired intangibles.
This item is excluded from underlying results as it arises as a result of
purchase price allocations on business combinations and is a non-cash item
which does not change each year dependent on the performance of the business.
It is therefore not considered to represent the underlying activity of the
Group and is removed to aid comparability with peers who have grown
organically as opposed to through acquisition. Intangible assets arising as a
result of the purchase price allocation on business combinations include
customer lists, technology-based assets, order book and trade names.
Amortisation of internally generated intangible assets is included within
underlying operating profit.
Business acquisition, merger and divestment related items
Transaction related costs and gains or losses on acquisitions, mergers and
divestments of businesses are excluded from underlying operating profit as
business combinations and divestments are not considered to result from
underlying business performance.
The total net loss relating to business acquisition, merger and divestment
related items for the year ended 31 March 2023 was £117.7 million, consisting
of a loss on the disposal of the Aerial Emergency Services business in Europe
of £116.9 million, a loss on disposal of the Group's Civil Training business
of £3.9 million and items relating to the disposal of the Oil & Gas
business in Aviation of £3.1 million.
The prior year included a total net gain of £163.1 million, consisting of a
£172.8 million profit from acquisitions and disposals completed in the year
offset by £9.7 million of costs incurred in relation to the Group's
divestment programme for disposals that had not completed at 31 March 2022.
Restructuring
Major restructuring programmes are not anticipated to recur year-on-year and therefore are not considered to be indicative of underlying performance and hence removed from underlying operating profit.
In the prior period the Group incurred £36.8 million of restructuring costs in relation to the implementation of the new operating model announced and implemented during the year ended 31 March 2022. This was offset by the release of £3.0 million of restructuring provisions created in previous years that were classified as exceptional but are no longer needed.
Fair value movement on derivatives and related items
These are open forward currency contracts, taken out in the ordinary course of business to manage foreign currency exposures, where the transaction will occur in future periods. Hedge accounting under IFRS is not applied, however these do represent economic hedges. On maturity the currency contract will be closed and recognised in full within underlying operating profit at the same time as the hedged sale or purchase. The net result, at that time, will then more appropriately reflect the related sales price or supplier cost being hedged (which is fixed to ensure ultimately profitable outcomes).
Hedge ineffectiveness on debt and debt-related derivatives that are designated in a hedge relationship are also presented as a specific adjusting item in finance costs. This is presented as a specific adjusting item as this ineffectiveness is caused by a historic off-market designation, the transactions are considered by the Group to represent an economic hedge.
The fair value movement on lease-related derivatives and foreign exchange movements on lease liabilities are also presented as a specific adjusting item in finance costs, as hedge accounting under IFRS is also not applied to these transactions but are also considered by the Group to represent an economic hedge.
Tax
Tax comprises a charge of £1.2 million arising from the impact of the increase in the rate of corporation tax to 25% with effect from 1 April 2023.
In the prior year, tax included a £12.1 million credit in relation to exceptional items, and a credit of £2.9 million arising from the impact of the increase in the rate of corporation tax to 25%.
Exceptional items
Exceptional items are those items which are significant, non-recurring and
outside the normal operating practice of the Group.
Year ended Year ended
31 March 2023
31 March 2022
£m
£m
Operating costs
Impairment of goodwill - (7.2)
Impairment of acquired intangibles - (57.6)
Impairment of property, plant and equipment and aircraft fleet rationalisation - (58.8)
Release of onerous contract provisions - 1.8
Release of provisions relating to the Italy fine and related costs - 3.6
Other - (0.6)
Exceptional items - Group - (118.8)
Exceptional tax items and tax on exceptional items - 15.0
Exceptional items - net of tax - (103.8)
Explanation of exceptional items
Impairment of goodwill
The prior year impairment test resulted in a goodwill impairment of £7.2 million in the Aviation operating segment, due to changes in the forecast future business performance informed by the Group's disposal programme.
Impairment of acquired intangibles
In the prior year, an impairment of £57.6 million was recognised in the Aviation operating segment, due to changes in the forecast future business performance informed by the Group's disposal programme.
Impairment of property, plant and equipment
In the prior year, an impairment charge of £58.8 million was recognised on
property, plant and equipment in the Aviation operating segment, due to
changes in the forecast future business performance informed by the Group's
disposal programme.
Onerous contracts
In the prior year, the Group released an onerous contract provision that was
no longer required and was previously classified as exceptional, which
totalled £1.8 million.
Italy fine
In the prior year, the Group received notice that the fine had been set at
€18 million, which was subsequently paid by the Group. This resulted in the
release of unused provision of £3.6 million.
3. Segmental information
The Group has four reportable segments, determined by reference to the goods
and services they provide and the markets they serve.
Marine - through-life support of naval ships, equipment and marine
infrastructure in the UK and internationally.
Nuclear - through-life support of submarines and complex engineering services
in support of major decommissioning programmes and projects, training and
operation support, new build programme management and design and installation
in the UK.
Land - large-scale critical vehicle fleet management, equipment support and
training for military and civil customers.
Aviation - critical engineering services to defence and civil customers
worldwide, including pilot training, equipment support, airbase management and
operation of aviation fleets delivering emergency services.
The Board, the chief operating decision maker as defined by IFRS 8, monitors
the results of these reportable segments and makes decisions about the
allocation of resources. The Group's business in Africa meets the definition
of an operating segment, as defined by IFRS 8. In accordance with IFRS 8, the
Africa operating segment is included in the Land reportable segment.
The table below presents the underlying results for each reportable segment in
accordance with the definition of underlying operating profit, as set out in
note 2, and reconciles the underlying operating profit/(loss) to the statutory
profit/(loss) before tax.
Year ended 31 March 2023 Marine Nuclear Land Aviation Unallocated Total
£m
£m
£m
£m
£m
£m
Revenue 1,439.6 1,179.2 1,017.1 802.7 - 4,438.6
Underlying operating profit 12.7 63.5 85.9 15.8 - 177.9
Specific Adjusting Items (note 2)
Amortisation of acquired intangibles (9.7) - (1.1) (5.0) - (15.8)
Business acquisition, merger and divestment related items - - (4.0) (113.7) - (117.7)
Fair value loss on forward rate contracts to be settled in future periods 2.8 0.1 0.1 (1.9) - 1.1
Operating profit/(loss) 5.8 63.6 80.9 (104.8) - 45.5
Share of results of joint ventures and associates (1.2) 1.1 0.4 9.0 - 9.3
IFRIC 12 investment income - - 0.7 - - 0.7
Other net finance costs* - - - - (49.3) (49.3)
Profit/(loss) before tax 4.6 64.7 82.0 (95.8) (49.3) 6.2
Year ended 31 March 2022 Marine Nuclear Land Aviation Unallocated Total
£m
£m
£m
£m
£m
£m
Revenue 1,259.3 1,009.7 1,015.5 817.3 - 4,101.8
Underlying operating profit 98.0 62.4 58.8 18.5 - 237.7
Specific Adjusting Items (note 2)
Amortisation of acquired intangibles (0.6) - (1.3) (19.5) - (21.4)
Business acquisition, merger and divestment related items 221.3 - (6.1) (52.1) - 163.1
Restructuring costs (8.6) (5.5) (16.9) (2.8) - (33.8)
Exceptional items (0.4) - 1.7 (120.1) (118.8)
Operating profit/(loss) 309.7 56.9 36.2 (176.0) - 226.8
Other income - - - 6.2 - 6.2
Share of results of joint ventures and associates 3.5 0.4 2.5 13.7 - 20.1
IFRIC 12 investment income - - 0.8 - - 0.8
Other net finance costs* - - - - (71.6) (71.6)
Profit/(loss) before tax 313.2 57.3 39.5 (156.1) (71.6) 182.3
* Other net finance costs are not allocated to a specific sector.
Revenues of £2.2 billion (2022: £2.0 billion) are derived from a single
external customer. These revenues are attributable across all reportable
segments.
4. Net finance costs
Year ended Year ended
31 March 2023
31 March 2022
£m
£m
Finance costs
Loans, overdrafts and associated interest rate hedges 29.6 57.3
Lease interest and foreign exchange movements on lease liabilities 21.7 17.4
Amortisation of issue costs of bank loan 3.3 2.0
Retirement benefit interest cost - 3.7
Other 15.9 -
Total finance costs 70.5 80.4
Finance income
Bank deposits, loans and leases 13.7 8.8
IFRIC 12 Investment income 0.7 0.8
Retirement benefit interest income 7.5 -
Total finance income 21.9 9.6
Net finance costs 48.6 70.8
Net finance costs decreased to £48.6 million (2022: £70.8 million). The
current year includes a one-off gain of £18 million relating to the valuation
of interest rate swaps (within loans, overdrafts and associated interest rate
hedges) and a £12 million cost relating to the factoring of receivables for
the Mentor contract in France (within other finance costs).
5. Taxation
Income tax expense
Total
Year ended Year ended
31 March 2023
31 March 2022
£m
£m
Analysis of tax expense in the year
Current tax
• UK current year expense 0.6 1.9
• UK prior year (benefit) - (10.8)
• Overseas current year expense 24.5 19.3
• Overseas prior year expense 2.9 2.5
28.0 12.9
Deferred tax
• UK current year expense 11.1 17.5
• UK prior year (benefit)/expense (3.3) 11.5
• Overseas current year expense/(benefit) 3.6 (25.3)
• Overseas prior year (benefit)/expense (1.1) 0.7
• Impact of changes in tax rates 1.2 (2.9)
11.5 1.5
Total income tax expense 39.5 14.4
The tax for the year is higher (2022: lower) than the standard rate of
corporation tax in the UK. The differences are explained below:
Year ended Year ended
31 March 2023
31 March 2022
£m
£m
Profit before tax 6.2 182.3
Profit on ordinary activities multiplied by rate of corporation tax in the UK 1.2 34.6
of 19% (2022: 19%)
Effects of:
Expenses not deductible for tax purposes 8.6 2.4
Non-deductible write-off of goodwill - 1.4
Re-measurement of deferred tax in respect of statutory rate changes 1.2 (2.9)
Difference in respect of share of results of joint ventures and associates' (1.8) (2.1)
results
Prior year adjustments (1.5) 3.9
Differences in respect of foreign rates 5.8 (0.4)
Unrecognised deferred tax movements 9.0 25.0
Deferred tax not previously recognised/derecognised - (8.1)
Non-taxable profits on disposals and non-deductible losses on disposals 22.4 (37.8)
Other (5.4) (1.6)
Total income tax expense/(benefit) 39.5 14.4
Further information on exceptional items and tax on exceptional items is
detailed in note 2.
During the prior year the Group concluded discussions with certain tax
authorities regarding prior year tax positions, resulting in a tax credit of
£12.6 million.
The Group is subject to taxation in several jurisdictions. The complexity of
applicable rules may result in legitimate differences of interpretation
between the Group and taxing authorities, especially where an economic
judgement or valuation is involved. The principal elements of the Group's
uncertain tax positions relate to the pricing of intra-group transactions and
the allocation of profits in overseas territories. The outcome of tax
authority disputes in such areas is not predictable, and to reflect the effect
of these uncertain tax positions a provision is recorded which represents
management's assessment of the most likely outcome of each issue. At 31 March
2023 the Group held uncertain tax provisions of £20.3 million (2022: £16.5
million).
During the period the Group made disposals that are expected to be exempt from
UK tax due to qualification for the UK substantial shareholding exemption, and
from overseas tax as a consequence of local reliefs.
The increase in the UK rate of corporation tax to 25% with effect from 1 April
2023 was substantively enacted during the year ended 31 March 2022. The effect
has been to increase the Group's net deferred tax asset by £23.1 million
(2022: £1.4 million), comprising a charge to Income Statement of £1.1
million (2022: £2.9 million credit) and a credit to Other Comprehensive
Income of £24.2 million (2022: £2.0 million charge). In the year ended 31
March 2022 there was also a credit to Equity of £0.5 million.
6. (Loss)/earnings per share
Basic (loss)/earnings per share is calculated by dividing the loss
attributable to ordinary shareholders by the weighted average number of
ordinary shares outstanding during the year excluding those held in the
Babcock Employee Share Trust. Where there is a loss arising the effect of
potentially dilutive ordinary shares is anti-dilutive.
The calculation of the basic and diluted (loss)/earnings per share is based on
the following data:
Number of shares
2023 2022
Number
Number
Weighted average number of ordinary shares for the purpose of basic EPS 505,391,563 505,091,970
Effect of dilutive potential ordinary shares: share options 9,528,985 6,083,765
Weighted average number of ordinary shares for the purpose of diluted EPS 514,920,548 511,175,735
Earnings per share
Year ended 31 March 2023 Year ended 31 March 2022
Loss attributable to shareholders Basic Diluted Earnings attributable to shareholders Basic Diluted
£m
per share
per share
£m
per share
per share
Pence
Pence
Pence
Pence
(Loss)/earnings for the year (35.0) (6.9) (6.9) 164.2 32.5 32.1
7. Goodwill
31 March 2023 31 March 2022 (restated)
£m
£m
Cost
At 1 April 2,312.7 2,487.3
On disposal of subsidiaries (note 20) (488.0) (197.9)
Additions (note 20) (revised - note 17) - 22.3
Exchange adjustments (1.4) 1.0
At 31 March (restated - note 17) 1,823.3 2,312.7
Accumulated impairment
At 1 April 1,529.3 1,531.0
On disposal of subsidiaries (note 20) (487.4) (8.9)
Impairment - 7.2
Exchange adjustments - -
At 31 March 1,041.9 1,529.3
Net book value at 31 March (revised - note 17) 781.4 783.4
Goodwill is allocated to the operating segments as set out in the table below:
31 March 2023 31 March 2022
£m
(restated)
£m
Marine 296.6 297.7
Nuclear 233.1 233.1
Land 218.0 218.6
Aviation 32.0 32.0
Africa 1.7 2.0
781.4 783.4
During the year, goodwill was tested for impairment at 31 March 2023 in
accordance with IAS 36. This impairment analysis is performed on an annual
basis at operating segment level, as outlined in the Group's accounting
policies. The Group monitors goodwill at operating segment level.
The goodwill allocated to the Africa operating segment is immaterial and the
Directors do not consider there to be any reasonably possible changes in
estimates that would result in impairment of this goodwill. No further
disclosures are provided in relation to the Africa operating segment.
During the year the Group disposed of goodwill of £0.6 million through the
disposal of part of the Aerial Emergency Services business in Aviation (£nil
million) and the Civil Training business in Land (£0.6 million).
Results of goodwill impairment test
The current year impairment test results have not resulted in an impairment
for any of the Group's cash generating units. The recoverable amount of the
Group's goodwill was assessed by reference to value-in-use calculations. The
value-in-use calculations are derived from risk-adjusted cash flows from the
Group's five-year plan. Terminal value assessments are included based on year
five and an estimated long-term, country-specific growth rate of 1.9 - 4.6%
(2022: 1.8 - 2.5%). The process by which the Group's budget is prepared,
reviewed and approved benefits from historical experience, visibility of long
term work programmes in relation to work undertaken for the UK Government,
available government spending information (both UK and overseas), the Group's
contract backlog, bid pipeline and the Group's tracking pipeline which
monitors opportunities prior to release of tenders. The budget process
includes consideration of risks and opportunities at contract and business
level, and considered matters such as inflation.
Sensitivity
The value-in-use for Marine and Nuclear results in these operating segments
having significant headroom. Assuming no change in the cash flows over the
initial five-year period, it would require a long-term growth of nil combined
with a discount rate in excess of 40% to reduce the headroom in these sectors
to £nil. The Directors do not consider these to be plausible assumptions. In
the Aviation and Land sectors the decrease in headroom that would result from
a change in the discount rate and long-term growth rate are set out in the
table below:
31 March 2023 31 March 2022
Aviation Aviation
Pre-tax discount rate
Increase of 200bps (2022: 100 bps) 63.1 30.2
Long-term growth rate
Decrease of 50bps 12.7 12.5
Management have also identified the growth rate in the short-term cash flows
in the Aviation operating segment as a key assumption. Annual growth in the
underlying cash flows has been determined on a contract-by-contract basis
based on our knowledge of the existing contract base and management judgement
regarding future wins and losses. If the five-year compound growth rate for
the Aviation operating segment decreased by 14% this would cause an impairment
of the goodwill allocated to this sector.
8. Other intangible assets
Acquired Internally generated software Internally generated development Total
intangibles -
development
costs and
£m
relationships
costs and
other
£m
licences
£m
£m
Cost
At 1 April 2022 (restated) 1,095.3 222.6 27.6 1,345.5
Additions - 18.1 3.4 21.5
Reclassification to property, plant and equipment - 3.0 0.3 3.3
Disposal of subsidiary undertakings (note 20) (237.0) (4.9) (13.9) (255.8)
Disposals at cost (2.0) (7.4) (3.0) (12.4)
Exchange adjustments 4.7 (0.1) 0.6 5.2
At 31 March 2023 861.0 231.3 15.0 1,107.3
Accumulated amortisation and impairment
At 1 April 2022 1,005.8 156.8 6.2 1,168.8
Amortisation charge 15.8 10.5 1.8 28.1
Impairment - 9.0 - 9.0
Disposal of subsidiary undertakings (note 20) (233.0) (3.1) (0.8) (236.9)
Disposals (2.0) (6.6) (1.7) (10.3)
Exchange adjustments 7.8 (0.1) 0.1 7.8
At 31 March 2023 794.4 166.5 5.6 966.5
Net book value at 31 March 2023 66.6 64.8 9.4 140.8
Cost
At 1 April 2021 (previously stated) 1,031.5 189.3 26.1 1,246.9
Restatement - 30.4 - 30.4
At 1 April 2021 1,031.5 219.7 26.1 1,277.3
On acquisition of subsidiaries (note 20) (restated - note 17) 63.0 - - 63.0
Additions - 7.0 4.4 11.4
Reclassification from property, plant and equipment - 0.1 (1.6) (1.5)
Reclassification - 0.9 (0.9) -
Disposal of subsidiary undertakings (note 20) - (3.9) - (3.9)
Disposals at cost - (1.4) (0.3) (1.7)
Exchange adjustments 0.8 0.2 (0.1) 0.9
At 31 March 2022 (restated - note 17) 1,095.3 222.6 27.6 1,345.5
Accumulated amortisation and impairment
At 1 April 2021 (previously stated) 927.5 115.0 4.5 1,047.0
Restatement - 30.4 - 30.4
At 1 April 2021 927.5 145.4 4.5 1,077.4
Amortisation charge 21.4 13.9 1.8 37.1
Impairment (note 2) 57.6 - - 57.6
Reclassification - 0.1 (0.1) -
Disposal of subsidiary undertakings (note 20) - (1.8) - (1.8)
Disposals - (1.0) - (1.0)
Exchange adjustments (0.7) 0.2 - (0.5)
At 31 March 2022 1,005.8 156.8 6.2 1,168.8
Net book value at 31 March 2022 (restated) 89.5 65.8 21.4 176.7
Acquired intangible amortisation charges for the year are recorded in
operating costs.
During the year ended 31 March 2023, an error has been identified whereby
fully amortised intangible assets were incorrectly presented net. These
restatements have no impact on the total intangible assets balance nor on any
other financial statement area. In addition, the carrying value of acquired
intangibles - relationships as at 31 March 2022 has been revised by £1.0
million as described in Note 17 as a result of new information coming to light
during the assessment period on the acquisition of a business.
Included in Internally generated software development costs and licences is
£38.6 million (2022: £40.7 million) relating to the Group's ERP system,
which is amortised over a 10 year period. Included in the acquired intangible
balance is £52.3 million (2022: £63.6 million) relating to the acquisition
of the NSM joint venture (refer to note 20 for further details). This will be
fully amortised in 20 years.
In the prior year, the Aviation operating segment recorded an impairment to
acquired intangibles of £57.6 million on an acquired intangible that was
initially recognised in relation to the acquisition of the Avincis business.
The Group's disposal programme impacted on the ability of the Aviation
operating segment to share assets, capability and management across the entire
contract and asset base, resulting in reassessment of the value-in-use for the
operating segment in line with an assessment under IAS 36. This asset was
fully impaired.
9. Property, plant and equipment
Freehold Leasehold Plant and Aircraft Assets in Total
property
property
equipment
fleet
course of
£m
£m
£m
£m
£m
construction
£m
Cost
At 1 April 2022 151.8 24.7 524.9 303.1 213.9 1,218.4
On disposal of subsidiaries (note 20) (9.4) (9.0) (32.1) (224.1) (13.9) (288.5)
Additions 0.4 0.2 33.2 27.8 48.3 109.9
Transfer to intangible assets - - - - (3.3) (3.3)
Reclassification 70.0 - 66.0 3.0 (139.0) -
Transfer from Right-of use-assets - - - 19.5 - 19.5
Disposals (0.8) - (13.1) (40.2) (18.8) (72.9)
Capitalised borrowing costs - - - - 0.6 0.6
Exchange adjustments 0.2 (0.7) (7.9) 8.4 3.0 3.0
At 31 March 2023 212.2 15.2 571.0 97.5 90.8 986.7
Accumulated depreciation
At 1 April 2022 70.7 11.1 373.2 52.3 0.5 507.8
On disposal of subsidiaries (note 20) (2.9) (0.5) (14.3) (33.9) - (51.6)
Depreciation charge for the year 7.1 1.5 45.4 18.1 - 72.1
Impairment - - - (0.8) 5.7 4.9
Transfer from Right-of use-assets - - - 11.5 - 11.5
Disposals (0.7) - (11.2) (24.0) (0.5) (36.4)
Exchange adjustments 0.2 - (2.5) 1.7 0.5 (0.1)
At 31 March 2023 74.4 12.1 390.6 24.9 6.2 508.2
Net book value at 31 March 2023 137.8 3.1 180.4 72.6 84.6 478.5
Cost
At 1 April 2021 (previously stated) 159.8 15.8 506.5 365.3 187.6 1,235.0
Restatement * (1.7) 1.6 17.7 (17.5) (32.6) (32.5)
At 1 April 2021 158.1 17.4 524.2 347.8 155.0 1,202.5
On acquisition of subsidiaries (note 20) - - 0.4 - - 0.4
On disposal of subsidiaries (note 20) (7.6) (0.6) (21.6) (17.4) (0.9) (48.1)
Additions 1.8 3.8 32.3 28.9 112.6 179.4
Disposals (2.5) (0.8) (14.2) (56.0) (46.5) (120.0)
Reclassification 1.5 4.9 (1.5) 0.9 (5.8) -
Reclassification from intangible assets 0.4 - 1.1 - - 1.5
Exchange adjustments 0.1 - 4.2 (1.1) (0.5) 2.7
At 31 March 2022 151.8 24.7 524.9 303.1 213.9 1,218.4
Accumulated depreciation
At 1 April 2021 (previously stated) 69.5 10.9 373.1 45.4 1.7 500.6
Restatement * (0.8) 0.6 (15.3) (17.5) 0.5 (32.5)
At 1 April 2021 68.7 11.5 357.8 27.9 2.2 468.1
On disposal of subsidiaries (note 20) (4.7) (0.2) (13.7) (7.7) - (26.3)
Depreciation charge for the year 8.1 0.5 38.1 12.0 - 58.7
Impairment - - - 58.8 - 58.8
Disposals (1.5) (0.7) (10.8) (38.9) (1.6) (53.5)
Exchange adjustments 0.1 - 1.8 0.2 (0.1) 2.0
At 31 March 2022 70.7 11.1 373.2 52.3 0.5 507.8
Net book value at 31 March 2022 81.1 13.6 151.7 250.8 213.4 710.6
In the year ended 31 March 2023 management identified that the prior period
property, plant and equipment disclosure included a historic error which
overstated historic cost and accumulated depreciation by £17.5 million (1
April 2021: £16.8 million). Additionally, an error has been identified in the
classification of cost between asset categories in the prior period totalling
£36.3 million and this has also been restated. These restatements have no
impact on the total property, plant and equipment balance nor on any other
financial statement area.
In the prior year, the Group recognised an impairment charge of £58.8 million
in relation to the aircraft fleet in the Aviation operating segment due to
changes in the future business performance, as informed by the Group's
disposal programme. This change impacted on the ability of the Aviation
operating segment to share assets, capability and management across the entire
contract and asset base. The asset valuations have been calculated based on
estimated discounted cash flows over the remaining useful expected lives of
the assets. The impairment charge of £58.8 million is based on a recoverable
amount for the relevant assets of £220.0 million.
10. Leases
Group as a lessee
Lease liabilities represent rentals payable by the Group for certain
operational, distribution and office properties and other assets such as
aircraft. The leases have varying terms, purchase options, escalation clauses
and renewal rights.
Right of use assets
Leasehold Plant and Aircraft Total
property
equipment
fleet
£m
£m
£m
£m
Cost
At 1 April 2022 127.3 64.7 383.0 575.0
Additions 37.1 9.8 67.7 114.6
Transfer to Property, plant and equipment - - (19.5) (19.5)
Disposals (10.0) (3.7) (24.5) (38.2)
Disposal of subsidiaries (note 20) (11.5) (3.5) (269.8) (284.8)
Exchange adjustments (1.3) 0.4 1.1 0.2
At 31 March 2023 141.6 67.7 138.0 347.3
Accumulated depreciation
At 1 April 2022 42.5 40.9 157.3 240.7
Depreciation charge for the year 20.5 9.1 52.1 81.7
Impairment 0.9 - 8.7 9.6
Disposals (7.0) (3.3) (21.7) (32.0)
Disposal of subsidiaries (note 20) (6.9) (1.3) (94.6) (102.8)
Transfer to Property, plant and equipment - - (11.5) (11.5)
Exchange adjustments (0.5) 0.3 2.7 2.5
At 31 March 2023 49.5 45.7 93.0 188.2
Net book value at 31 March 2023 92.1 22.0 45.0 159.1
Right of use assets (continued)
Leasehold Plant and Aircraft Total
property
equipment
fleet
£m
£m
£m
£m
Cost
At 1 April 2021 152.9 72.1 584.2 809.2
Additions 24.0 3.4 61.2 88.6
Acquisition of subsidiary (note 20) 0.5 - - 0.5
Disposals (31.1) (7.8) (33.0) (71.9)
Disposal of subsidiaries (note 20) (21.1) (3.0) (228.4) (252.5)
Exchange adjustments 2.1 - (1.0) 1.1
At 31 March 2022 127.3 64.7 383.0 575.0
Accumulated depreciation
At 1 April 2021 51.1 42.2 197.6 290.9
Depreciation charge for the year 23.5 9.5 72.1 105.1
Impairment - - 18.0 18.0
Disposals (23.7) (6.9) (21.8) (52.4)
Disposal of subsidiaries (note 20) (9.5) (1.9) (109.5) (120.9)
Reclassification - (2.0) 2.0 -
Exchange adjustments 1.1 - (1.1) -
At 31 March 2022 42.5 40.9 157.3 240.7
Net book value at 31 March 2022 84.8 23.8 225.7 334.3
Lease liabilities
The following tables show the discounted Group lease liabilities and a
reconciliation of opening to closing lease liabilities:
Total
£m
At 1 April 2022 434.1
Additions 117.0
Disposals (5.3)
Disposal of subsidiaries (note 20) (218.1)
Exchange adjustments 9.6
Lease interest 15.9
Lease repayments (124.4)
At 31 March 2023 228.8
Non-current lease liabilities 178.9
Current lease liabilities 49.9
At 31 March 2023 228.8
At 1 April 2021 612.3
Additions 93.8
Acquisition of subsidiaries (note 20) 0.5
Disposals (22.6)
Disposal of subsidiaries (note 20) (137.1)
Exchange adjustments 0.2
Lease interest 17.4
Lease repayments (130.4)
At 31 March 2022 434.1
Non-current lease liabilities 329.3
Current lease liabilities 104.8
At 31 March 2022 434.1
11. Investment in and loans to joint ventures and associates
Investment in joint ventures and associates Loans to joint ventures and associates Total
2023 2022 2023 2022 2023 2022
£m
£m
£m
£m
£m
£m
At 1 April 54.3 73.5 12.1 42.1 66.4 115.6
Acquisition and disposal of joint ventures and associates (note 20) (1.0) (24.5) - - (1.0) (24.5)
Loans repaid by joint ventures and associates - - (2.4) (31.0) (2.4) (31.0)
Increase in loans to joint ventures and associates - - - 1.4 - 1.4
Investment in joint ventures and associates - 2.6 - - - 2.6
Share of profits 9.3 20.1 - - 9.3 20.1
Interest accrued and capitalised - - 1.0 3.2 1.0 3.2
Interest received - - (1.2) (3.6) (1.2) (3.6)
Dividends received (8.7) (41.6) - - (8.7) (41.6)
Fair value adjustment of derivatives 4.7 30.2 - - 4.7 30.2
Tax on fair value adjustment of derivatives (1.2) (5.7) - - (1.2) (5.7)
Foreign exchange - (0.3) - - - (0.3)
At 31 March 57.4 54.3 9.5 12.1 66.9 66.4
The total investments in joint ventures and associates is attributable to the
following reportable segments:
2023 2022
£m
£m
Marine 3.7 4.8
Nuclear 1.4 0.3
Land 0.2 1.5
Aviation 61.6 59.8
Net book value 66.9 66.4
The joint ventures and associates have no significant contingent liabilities
to which the Group is exposed. The Group does not have any commitments that
have been made to the joint ventures or associates and not recognised at the
reporting date.
Joint arrangements are classified as joint ventures as the Group has the right
to net assets of the joint arrangement rather than separate rights and
obligations to the assets and liabilities of the joint arrangement,
respectively.
There has been no impairment to loans to joint ventures and associates during
the year (2022: £nil). Total cumulative expected credit losses in respect of
loans to joint ventures and associates are also £nil (2022: £nil) as the
joint ventures and associates are considered to have low credit risk and as
such impairment risk is considered minimal.
There are no significant restrictions on the ability of joint ventures and
associates to transfer funds to the owners, other than those imposed by the
Companies Act 2006 or equivalent local regulations.
12. Inventories
31 March 2023 31 March 2022
£m
£m
Raw materials and spares 58.6 77.3
Work-in-progress 7.2 4.1
Finished goods and goods for resale 61.0 61.3
Total 126.8 142.7
Write-downs of inventories amounted to £5.4 million (2022: £15.8 million).
These were recognised as an expense during the year ended 31 March 2023 and
included in operating costs in the income statement.
13. Trade and other receivables and contract assets
31 March 2023 31 March 2022
£m
£m
Non-current assets
Costs to obtain a contract 2.8 8.9
Costs to fulfil a contract 1.4 0.8
Other debtors 2.2 -
Non-current trade and other receivables 6.4 9.7
Current assets
Trade receivables 307.3 311.5
Less: provision for impairment of receivables (7.3) (14.6)
Trade receivables - net 300.0 296.9
Retentions 6.0 4.4
Amounts due from related parties 2.1 2.0
Other debtors 129.4 106.2
Prepayments 63.7 71.1
Costs to obtain a contract 0.6 7.6
Costs to fulfil a contract 5.1 0.6
Current trade and other receivables 506.9 488.8
Contract assets 322.5 299.3
Current trade and other receivables and contract assets 829.4 788.1
Trade and other receivables are stated at amortised cost.
The Group recognises that there is an inherent element of estimation
uncertainty and judgement involved in assessing contract profitability, as
disclosed in note 1. Management have taken a best estimate view of contract
outcomes based on the information currently available, after allowing for
contingencies, and have applied a constraint to the variable consideration
within revenue resulting in a revenue estimate that is suitably cautious under
IFRS 15.
14. Trade and other payables and contract liabilities
2023 2022
£m
£m
Current liabilities
Contract liabilities 616.4 518.3
Trade creditors 239.1 164.7
Amounts due to related parties 0.8 1.5
Other creditors 41.6 26.9
Other taxes and social security 75.5 76.6
Accruals 554.1 618.4
Trade and other payables 911.1 888.1
Trade and other payables and contract liabilities 1,527.5 1,406.4
Non-current liabilities
Other creditors 0.9 1.0
Included in creditors is £12.9 million (2022: £6.7 million) relating to
capital expenditure which has therefore not been included in working capital
movements within the cash flow statement.
15. Bank and other borrowings
31 March 2023 31 March 2022
£m
£m
Current liabilities
Bank loans and overdrafts due within one year or on demand
Secured 0.3 0.4
Unsecured 19.3 863.0
19.6 863.4
Lease obligations* 49.9 104.8
69.5 968.2
Non-current liabilities
Bank and other borrowings
Secured 21.0 24.0
Unsecured 747.4 823.7
768.4 847.7
Lease obligations* 178.9 329.3
947.3 1,177.0
* Leases are secured against the assets to which they relate.
Repayment details
The total borrowings of the Group at 31 March are repayable as follows:
31 March 2023 31 March 2022
Loans and Lease Loans and Lease
overdrafts
obligations
overdrafts
obligations
£m
£m
£m
£m
Within one year 19.6 49.9 863.4 104.8
Between one and two years 0.3 40.6 22.6 90.5
Between two and three years 0.6 34.5 0.6 67.9
Between three and four years 300.6 23.4 0.7 46.4
Between four and five years 466.2 19.9 356.4 38.7
Greater than five years 0.7 60.5 467.4 85.8
788.0 228.8 1,711.1 434.1
Borrowing facilities
The Group had the following undrawn committed borrowing facilities available
at 31 March:
31 March 2023 31 March 2022
£m
£m
Expiring in less than one year - -
Expiring in more than one year but not more than five years 1,199.6 1,012.2
1,199.6 1,012.2
16. Provisions for other liabilities
Contract/ Employee benefits and business reorganisation Italian Property Other Total
warranty
costs
anti-trust fine
(d)
(e)
provisions
(a)
(b)
£m
£m
£m
£m
£m (c)
£m
At 1 April 2021 67.1 35.8 20.0 21.5 1.1 145.5
On disposal of subsidiaries (note 20) - (1.3) - (1.2) - (2.5)
On acquisition of subsidiaries (note 20) (restated - note 17) 1.3 - - - - 1.3
Net charge/(release) to income statement (8.6) 40.1 (3.6) 1.8 0.3 30.0
Utilised in year (8.5) (35.4) (16.1) (0.8) - (60.8)
Unwinding of discount - 0.2 - - - 0.2
Foreign exchange (0.2) 0.3 - (0.3) - (0.2)
At 31 March 2022 51.1 39.7 0.3 21.0 1.4 113.5
Prior period adjustment (note 17) 2.4 - - - - 2.4
At 31 March 2022 as restated 53.5 39.7 0.3 21.0 1.4 115.9
On disposal of subsidiaries (note 20) (8.5) (1.2) - (5.8) (0.1) (15.6)
Reclassification (1.0) 1.4 - (4.3) 3.9 -
Net charge/(release) to income statement 76.0 10.4 - 8.4 (0.6) 94.2
Utilised in year (20.2) (19.2) (0.3) (4.8) (1.8) (46.3)
Unwinding of discount - 0.2 - - - 0.2
Foreign exchange 0.6 (0.8) - 0.6 (0.1) 0.3
At 31 March 2023 100.4 30.5 - 15.1 2.7 148.7
a) The contract/warranty provisions relate to onerous contracts and warranty
obligations on completed contracts and disposals. Warranty provisions are
provided in the normal course of business and are recognised when the
underlying products and services are sold. The provision is based on an
assessment of future claims with reference to historical warranty data and a
weighting of possible outcomes against their associated probabilities. Onerous
contracts relate to expected future losses on contracts with customers -
notably T31 as outlined in note 1.
b) Employee benefits and business reorganisation costs relate to business
restructuring activities including announced redundancies in addition to
employee benefits including long-term sickness. The net charge to the employee
benefits and reorganisation provision comprises a charge in the year of £12.8
million and a release of £2.4 million.
c) Italian anti-trust fines pertain to historic court rulings in respect of the
Babcock Mission Critical Services Italia SpA subsidiary. The majority of this
provision was paid in the prior year with remaining amounts paid in FY23.
Property and other provisions primarily relate to dilapidation costs and
contractual obligations in respect of infrastructure.
d) Other provisions include provisions for insurance claims arising within the
Group's captive insurance company, Chepstow Insurance Limited. They relate to
specific claims assessed in accordance with the advice of independent
actuaries.
Provisions have been analysed between current and non-current as follows:
31 March 2023 31 March 2022
£m
£m
Current 67.9 55.6
Non-current 80.8 60.3
148.7 115.9
Included within provisions is £6.9 million (2022: £7.4 million) expected to
be utilised over approximately 10 years. Other than these provisions the
Group's non-current provisions are expected to be utilised within two to five
years.
17. Revisions to historic acquisitions within the IFRS 3 measurement period
Under IFRS 3, when new information obtained about facts and circumstances that
existed at the acquisition date arises within the measurement period, the
Group is required to adjust amounts recognised through the acquisition
accounting. Post-acquisition, we have determined that assumptions used to
calculate a pain/gain share provision in respect of the Naval Ship Management
(Australia) Pty Limited ('NSM') acquisition did not reflect the facts and
circumstances at the acquisition date. This has resulted in an increase to
provisions of £2.4 million at 31 March 2022. The reduction in net assets
acquired has increased the goodwill by £1.0 million, increased acquired
intangibles by £1.0 million, increased deferred tax assets by £0.4 million
at 31 March 2022.
31 March 2022 - Group statement of financial position (extract)
31 March 2022 (previously published) (iii) Acquisition accounting adjustment 31 March 2022 (restated)
Assets
Non-current assets
Goodwill 782.4 1.0 783.4
Other intangible assets 175.7 1.0 176.7
Deferred tax asset 47.0 0.4 47.4
Total non-current assets * 2,461.1 2.4 2,463.5
Liabilities
Current liabilities
Provisions (53.2) (2.4) (55.6)
Current liabilities * (2,480.3) (2.4) (2,482.7)
Equity
Retained earnings (1,241.4) - (1,241.4)
Total equity * 701.5 - 701.5
* The table above includes only those financial statement line items which
have been restated. The total non-current assets, non-current liabilities, and
equity do not therefore represent the sum of the line items presented above.
18. Retirement benefits and liabilities
The Group has a number of defined benefit pension schemes. The principal
defined benefit pension schemes in the UK are the Devonport Royal Dockyard
Pension Scheme, the Babcock International Group Pension Scheme and the Rosyth
Royal Dockyard Pension Scheme (the Principal schemes). Each of these schemes
is predominantly a final salary plan in which future pension levels are
defined relative to number of years' service and final salary. Retirement age
varies by scheme. The nature of these schemes is that the employees only
contribute whilst they active employees of a scheme, with the employer paying
the balance of the cost required. The contributions required and the
assessment of the assets and the liabilities that have accrued to members and
any deficit recovery payments required are agreed by the Group with the
trustees of each scheme who are advised by independent, qualified actuaries.
The Group's balance sheet includes the assets and liabilities of the pension
schemes calculated on an IAS 19 basis. At 31 March 2023, the net position was
a deficit of £61.4 million compared to a net surplus of £191.6 million at 31
March 2022. These valuations are based on discounting using corporate bond
yields.
The fair value of the assets and the present value of the liabilities of the
Group pension schemes at 31 March were as follows:
2023 2022
Principal Railways Other Total Principal Railways Other Total
schemes
scheme
schemes
£m
schemes
scheme
schemes
£m
£m
£m
£m
£m
£m
£m
Fair value of plan assets
Growth assets
Equities (3.1) 10.6 26.6 34.1 31.6 14.3 30.6 76.5
Property funds 301.7 0.2 5.9 307.8 364.0 0.1 5.1 369.2
High yield bonds/emerging market debt - - 0.4 0.4 44.1 - 0.4 44.5
Absolute return and multi-strategy funds 6.0 148.0 17.5 171.5 46.0 182.9 31.8 260.7
Low-risk assets
Bonds 1,227.7 95.5 45.1 1,368.3 1,924.1 77.2 77.5 2,078.8
Matching assets* 1,524.7 1.4 21.7 1,547.8 2,094.0 1.3 101.8 2,197.1
Longevity swaps and annuities (231.8) - (10.1) (241.9) (283.5) - (10.2) (293.7)
Fair value of assets 2,825.2 255.7 107.1 3,188.0 4,220.3 275.8 237.0 4,733.1
Percentage of assets quoted 79% 100% 70% 80% 84% 100% 46% 82%
Percentage of assets unquoted 21% - 30% 20% 16% - 54% 18%
Present value of defined benefit obligations
Active members 450.7 45.7 21.7 518.1 756.0 65.7 35.8 857.5
Deferred pensioners 686.6 65.3 34.7 786.6 1,066.2 93.5 132.7 1,292.4
Pensioners 1,773.6 130.5 40.6 1,944.7 2,170.4 167.9 53.3 2,391.6
Total defined benefit obligations 2,910.9 241.5 97.0 3,249.4 3,992.6 327.1 221.8 4,541.5
Net (liabilities)/assets recognised in the statement of financial position (85.7) 14.2 10.1 (61.4) 227.7 (51.3) 15.2 191.6
Analysis of movement in the Group statement of financial position
Year ended 31 March 2023 Year ended 31 March 2022
Principal Railways Other Total Principal Railways Other Total
schemes
scheme
schemes
£m
schemes
scheme
schemes
£m
£m
£m
£m
£m
£m
£m
Fair value of plan assets (including reimbursement rights)
At 1 April 4,220.3 275.8 237.0 4,733.1 4,123.7 265.6 234.3 4,623.6
Interest on assets 113.4 7.3 5.4 126.1 82.3 5.2 4.7 92.2
Actuarial (loss)/gain on assets (1,437.0) (17.1) (79.0) (1,533.1) 77.0 13.1 (1.7) 88.4
Employer contributions 167.4 2.5 4.6 174.5 182.5 2.6 5.1 190.2
Employee contributions 0.1 - - 0.1 0.2 - - 0.2
Benefits paid (239.0) (12.8) (4.8) (256.6) (245.4) (10.7) (5.4) (261.5)
Settlements - - (56.1) (56.1) - - - -
At 31 March 2,825.2 255.7 107.1 3,188.0 4,220.3 275.8 237.0 4,733.1
Present value of benefit obligations
At 1 April 3,992.6 327.1 221.8 4,541.5 4,290.0 369.6 242.9 4,902.5
Service cost 21.7 1.3 2.8 25.8 25.6 2.0 3.5 31.1
Incurred expenses 6.2 0.5 0.1 6.8 6.6 0.5 0.3 7.4
Interest cost 105.0 8.7 4.9 118.6 83.8 7.3 4.8 95.9
Employee contributions 0.1 - - 0.1 0.2 - - 0.2
Experience loss/(gain) 135.6 18.0 9.3 162.9 70.6 (14.2) (2.4) 54.0
Actuarial (gain)/loss - demographics (38.2) (3.6) (1.7) (43.5) (11.5) (3.5) - (15.0)
Actuarial (gain)/loss - financial (1,073.1) (97.7) (79.3) (1,250.1) (227.3) (23.9) (21.9) (273.1)
Benefits paid (239.0) (12.8) (4.8) (256.6) (245.4) (10.7) (5.4) (261.5)
Settlements - - (56.1) (56.1) - - - -
At 31 March 2,910.9 241.5 97.0 3,249.4 3,992.6 327.1 221.8 4,541.5
Net (deficit)/surplus at 31 March (85.7) 14.2 10.1 (61.4) 227.7 (51.3) 15.2 191.6
The latest full actuarial valuations of the Group's defined benefit pension
schemes have been updated to 31 March 2023 by independent qualified actuaries
for IAS 19 purposes, on a best estimate basis, using the following
assumptions:
March 2023 Devonport Babcock Rosyth Royal Babcock Rail
Royal
International
Dockyard
Ltd section of
Dockyard
Group Scheme
Scheme
the Railways
Scheme
Pension
Scheme
Rate of increase in pensionable salaries 3.0% 3.0% - 0.5%
Rate of increase in pensions (past service) 2.8% 3.2% 3.3% 2.9%
Discount rate 4.8% 4.8% 4.8% 4.8%
Inflation rate (RPI) - year 1 6.9% 6.9% 6.9% 6.9%
Inflation rate (RPI) - thereafter 3.3% 3.3% 3.3% 3.3%
Inflation rate (CPI) - year 1 4.7% 4.7% 4.7% 4.7%
Inflation rate (CPI) - thereafter 2.8% 2.8% 2.8% 2.8%
Weighted average duration of cash flows (years) 13 12 13 13
Total life expectancy for current pensioners aged 65 (years) - male 85.5 86.3 84.4 85.0
Total life expectancy for current pensioners aged 65 (years) - female 87.5 88.9 86.8 87.3
Total life expectancy for future pensioners currently aged 45 (years) - male 86.2 86.8 85.6 86.0
Total life expectancy for future pensioners currently aged 45 (years) - female 88.5 89.4 88.1 88.5
March 2022
Rate of increase in pensionable salaries 3.4% 3.4% - 0.5%
Rate of increase in pensions (past service) 3.2% 3.5% 3.7% 3.2%
Discount rate 2.7% 2.7% 2.7% 2.7%
Inflation rate (RPI) 3.7% 3.7% 3.7% 3.6%
Inflation rate (CPI) 3.2% 3.2% 3.2% 3.2%
Weighted average duration of cash flows (years) 16 14 16 17
Total life expectancy for current pensioners aged 65 (years) 85.9 86.8 85.0 85.3
Total life expectancy for future pensioners currently aged 45 (years) 86.6 87.4 85.9 86.4
The schemes do not invest directly in assets or shares of the Group.
The longevity swaps have been valued in line with assumptions that are
consistent with the requirements of IFRS 13 using Level 3 inputs. The key
inputs to the valuation are the discount rate and mortality assumptions.
The amounts recognised in the Group income statement are as follows:
2023 2022
Principal Railways Other Total Principal Railways Other Total
schemes
scheme
schemes
£m
schemes
scheme
schemes
£m
£m
£m
£m
£m
£m
£m
Current service cost 21.7 1.3 2.8 25.8 25.7 2.0 3.4 31.1
Incurred expenses 6.2 0.5 0.1 6.8 6.6 0.5 0.3 7.4
Total included within operating profit 27.9 1.8 2.9 32.6 32.3 2.5 3.7 38.5
Net interest (credit)/cost (8.5) 1.4 (0.4) (7.5) 1.5 2.1 0.1 3.7
Total included within income statement 19.4 3.2 2.5 25.1 33.8 4.6 3.8 42.2
Amounts recorded in the Group statement of comprehensive income
Year ended 31 March 2023 Year ended 31 March 2022
Principal Railways Other Total Principal Railways Other Total
schemes
scheme
schemes
£m
schemes
scheme
schemes
£m
£m
£m
£m
£m
£m
£m
Actual return less interest on pension scheme assets (1,437.0) (17.1) (79.0) (1,533.1) 77.0 13.1 (1.7) 88.4
Experience (losses)/gains arising on scheme liabilities (135.6) (18.0) (9.3) (162.9) (70.6) 14.2 2.4 (54.0)
Changes in assumptions on 1,111.2 101.2 81.2 1,293.6 238.8 27.4 21.9 288.1
scheme liabilities
At 31 March (461.4) 66.1 (7.1) (402.4) 245.2 54.7 22.6 322.5
The movement in net deficits for the year ended 31 March 2023 is as a result
of the movement in assets and liabilities shown above.
The disclosures below relate to post-retirement benefit schemes which are
accounted for as defined benefit schemes in accordance with IAS 19. The
changes to the Group statement of financial position at 31 March 2023 and the
changes to the Group income statement for the year to March 2024, if the
assumptions were sensitised by the amounts below, would be:
Defined Income
benefit
statement
obligations
2024
2023
£m
£m
Initial assumptions 3,249.4 25.0
Discount rate assumptions increased by 0.5% (192.1) (11.5)
Discount rate assumptions decreased by 0.5% 211.1 10.5
Inflation rate assumptions increased by 0.5% 145.7 7.8
Inflation rate assumptions decreased by 0.5% (137.2) (7.4)
Total life expectancy increased by half a year 60.2 3.0
Total life expectancy decreased by half a year (60.2) (3.0)
Salary increase assumptions increased by 0.5% 13.3 0.9
Salary increase assumptions decreased by 0.5% (12.8) (0.9)
The figures in the table above have been calculated on an approximate basis,
using information about the expected future benefit payments out of the
schemes. The analysis above may not be representative of actual changes to the
position since changes in assumptions are unlikely to happen in isolation. The
change in inflation rates is assumed to affect the assumed rate of RPI
inflation, CPI inflation and future pension increases by an equal amount. The
fair value of the schemes' assets (including reimbursement rights) are assumed
not to be affected by any sensitivity changes shown and so the statement of
financial position values would increase or decrease by the same amount as the
change in the defined benefit obligations. There have been no changes in the
methodology for the calculation of the sensitivities since the prior year.
19. Changes in net debt including loans to joint ventures and associates and
lease receivables
31 March Cash flow Additional Other Clarification of net debt definition (2) Changes in fair value Exchange 31 March
2022
£m
leases
non-cash movement (1)
£m
movement
2023
£m
£m
£m £m
£m
£m
Cash and bank balances 1,146.3 (687.9) - - - - (6.7) 451.7
Bank overdrafts (389.8) 366.6 - - - - 1.0 (22.2)
Cash, cash equivalents and bank overdrafts 756.5 (321.3) - - - - (5.7) 429.5
Debt (1,321.3) 556.2 - (1.6) - 37.2 (36.3) (765.8)
Derivatives hedging Group debt (29.3) (0.8) - - - 21.8 - (8.3)
Lease liabilities (434.1) 108.5 (117.0) 223.4 - - (9.6) (228.8)
Changes in liabilities from financing arrangements (1,784.7) 663.9 (117.0) 221.8 -- 59.0 (45.9) (1,002.9)
Lease receivables 47.4 (31.9) 28.5 - - - (5.4) 38.6
Loans to joint ventures and associates 12.1 (2.4) - (0.2) - - - 9.5
Derivatives hedging interest on Group Debt - - - - (36.1) (3.0) - (39.1)
Net debt (968.7) 308.3 (88.5) 221.6 (36.1) 56.0 (57.0) (564.4)
(1) Other non-cash movements predominantly relate to the disposal of lease
liabilities and associated lease receivables as part of the disposal
transactions described in note 20.
(2) During the year the definition of net debt has been clarified, resulting
in the inclusion of the interest rate swap hedging Group debt, which was
excluded in the prior year.
31 March Cash flow Additional Other non-cash movement Changes in fair value Exchange 31 March
2021
£m
leases
£m
£m
movement
2022
£m
£m
£m
£m
Cash and bank balances 904.8 238.6 - - - 2.9 1,146.3
Bank overdrafts (373.9) (15.9) - - - - (389.8)
Cash, cash equivalents and bank overdrafts 530.9 222.7 - - - 2.9 756.5
Debt (1,333.6) 8.6 - (2.0) (1.6) 7.3 (1,321.3)
Derivatives hedging Group debt (19.1) - - - (10.2) - (29.3)
Lease liabilities (612.3) 113.0 (93.8) 159.2 - (0.2) (434.1)
Changes in liabilities from financing arrangements (1,965.0) 121.6 (93.8) 157.2 (11.8) 7.1 (1,784.7)
Lease receivables 39.6 (36.9) 41.9 - - 2.8 47.4
Loans to joint ventures and associates 42.1 (29.6) - (0.4) - - 12.1
Net debt (1,352.4) 277.8 (51.9) 156.8 (11.8) 12.8 (968.7)
20. Acquisition and disposal of subsidiaries, businesses and joint ventures
and associates
Acquisitions
There have been no acquisitions in the year ended 31 March 2023.
In the prior year, the Group acquired the remaining 50% of Naval Ship
Management (Australia) Pty Limited on 15 March 2022. The Group had previously
held a 50% interest in this entity since May 2012 which was classified as a
joint venture. NSM provides repair, engineering and maintenance services to
the Australian Navy. The Group paid cash consideration of £33.1 million
(AUD60 million) for this acquisition.
The fair value of assets and liabilities recognised as a result of the
acquisition were as follows:
Year ended
31 March 2022
(restated)
Naval Ship Management
£m
Fair value gain on previously held interest:
Carrying value of previously held interest 0.7
Fair value gain on previously held interest 32.4
Fair value of previously held interest at acquisition date 33.1
Purchase consideration:
Cash consideration 33.1
Fair value of previously held interest 33.1
Total consideration 66.2
Assets acquired:
Property, plant and equipment 0.4
Right of use assets 0.5
Deferred tax assets 0.7
Contract assets 16.3
Trade and other receivables 11.6
Cash and cash equivalents 17.6
Deferred tax liability (18.9)
Income tax payable (0.4)
Lease liabilities (0.5)
Contract liabilities (8.2)
Trade and other payables (34.5)
Provisions (3.7)
Net identifiable assets acquired (19.1)
Goodwill 22.3
Intangible assets 63.0
Net assets acquired 66.2
Post-acquisition, Naval Ship Management (Australia) Pty Limited contributed
£0.7 million to the profit before tax of the Group for the year ended 31
March 2022. If this entity had been owned for the full financial year the
contribution to profit before tax would have been £10.5 million.
The excess of the fair value of the consideration paid over the fair value of
the assets acquired is represented by intangible assets of £63.0 million,
relating to customer relationships, and goodwill of £22.3 million,
representing potential for future synergies arising from combining the
acquired businesses with the Group's existing business. Goodwill is not
deductible for tax purposes. Post-acquisition, we determined that assumptions
used to calculate a pain/gain share provision did not reflect the facts and
circumstances at the acquisition date. This resulted in an increase to
provisions of £2.4 million at 31 March 2022. The reduction in net assets
acquired has increased the goodwill by £1.0 million, increased acquired
intangibles by £1.0 million, increased deferred tax assets by £0.4 million
at 31 March 2022. Further detail is included in note 17.
Disposals
Year ended 31 March 2023
On 19 July 2022, the Group announced it had entered into a sale and purchase
agreement to dispose of part of its aerial emergency services business in
Europe. The disposal group was part of the Aviation sector and provided Aerial
Emergency Services, including medical, firefighting and search & rescue to
customers and communities, in Italy, Spain, Portugal, Norway, Sweden and
Finland. The disposal completed on 28 February 2023. The Group received
consideration of £187.1 million.
On 1 September 2022, the Group entered into a sale and purchase agreement to
dispose of its Civil Training business. The disposal group was part of the
Land sector and the disposal completed on 1 February 2023. The Group received
consideration of £5.5 million.
Year ended 31 March 2023
Aerial Emergency Services Civil Training Other Total
£m
£m
£m £m
Goodwill - 0.6 - 0.6
Investment in joint ventures and associates 1.0 - - 1.0
Other intangible assets 18.9 - - 18.9
Property, plant and equipment 236.8 0.1 - 236.9
Right of use assets 182.0 - - 182.0
Deferred tax assets 20.6 - - 20.6
Other non-current assets 4.4 - - 4.4
Inventory 35.4 - - 35.4
Trade and other receivables 99.5 9.4 - 108.9
Derivatives 4.2 - - 4.2
Income tax receivable 1.5 - - 1.5
Cash, cash equivalents and bank overdrafts 10.5 2.6 - 13.1
Other non-current liabilities (0.2) - - (0.2)
Bank and other borrowings (1.6) - - (1.6)
Lease liabilities (218.1) - - (218.1)
Deferred tax liability (6.3) - - (6.3)
Income tax payable (0.6) - - (0.6)
Trade and other payables (128.7) (4.6) - (133.3)
Other current liabilities - - - -
Provisions (15.6) - - (15.6)
Net assets disposed 243.7 8.1 - 251.8
Cumulative currency translation loss (1.2) - - (1.2)
Total 242.5 8.1 - 250.6
Consideration 187.1 5.5 - 192.6
Disposal costs (18.1) (1.3) - (19.4)
Net consideration after disposal costs 169.0 4.2 - 173.2
Loss on disposal (73.5) (3.9) - (77.4)
Disposal related items (43.4) - 3.1 (40.3)
Business acquisition, merger and divestment related items (116.9) (3.9) 3.1 (117.7)
Sale proceeds 187.1 5.5 - 192.6
Sale proceeds less cash disposed of 176.6 2.9 - 179.5
Less non-cash proceeds - (1.5) - (1.5)
Less transaction costs (18.1) (1.3) - (19.4)
Net cash inflow 158.5 0.1 - 158.6
Disposal related items in relation to the Aerial Emergency Services disposal
include asset impairments for assets not disposed but relating to the Aerial
Emergency Services businesses whose carrying value exceeded recoverable amount
following the disposal transaction along with provisions for certain warranty
related items.
Disposals
Year ended 31 March 2022
On 11 March 2021, the Group announced that it had entered into a sale and
purchase agreement to dispose of the Oil and Gas business, which provides
offshore Oil and Gas crew transportation services in the UK, Denmark and
Australia. The disposal was made as part of the Group's targeted disposals
programme. The disposal completed on 1 September 2021, on which date control
of the Oil and Gas business passed to CHC Group LLC. The Group received
consideration of £10 million.
On 13 August 2021, the Group announced that it had entered into a sale and
purchase agreement to dispose of Frazer-Nash Consultancy, which provides
engineering and technology solutions across a broad range of critical national
infrastructure. The disposal was made as part of the Group's targeted
disposals programme. The disposal completed on 20 October 2021, on which date
control of Frazer-Nash Consultancy passed to KBR Inc. The Group received
consideration of £291.7 million.
On 24 December 2021, the Group announced the disposal of the Power business to
M Group Services, which provides engineering services in the UK overhead line
electric transmission and distribution industry. The disposal was made as part
of the Group's targeted disposals programme. The disposal completed on 24
December 2021, on which date control passed to M Group Services. The Group
received consideration of £50 million.
On 13 September 2021, the Group announced a definitive agreement with Equitix
Investment Management Limited for the sale of its 15.4% shareholding in
AirTanker Holdings Limited, a joint venture with Airbus, Thales and
Rolls-Royce which owns 14 A330 Voyager aircraft to support air-to-air
refuelling, air transport and ancillary services for the MOD. The Group has
retained its 23.5% shareholding in AirTanker Services Limited, which operates
these aircraft. The disposal was made as part of the Group's targeted
disposals programme. The disposal completed on 9 March 2022, on which date
control passed to Equitix. The Group received consideration of £95.6 million,
and shareholder loans of £31.5 million were repaid.
Year ended 31 March 2022
Oil and Gas business Frazer-Nash Consultancy Power AirTanker Total
£m
£m
£m
£m
£m
Goodwill 0.4 64.5 44.1 80.0 189.0
Investment in joint ventures and associates - - - 23.8 23.8
Other intangible assets - 2.1 - - 2.1
Property, plant and equipment 15.1 2.2 4.5 - 21.8
Right of use assets 125.8 3.9 1.9 - 131.6
Deferred tax assets 18.8 0.5 0.3 - 19.6
Other non-current assets - - - - -
Inventory 3.6 - 0.1 - 3.7
Trade and other receivables 46.5 31.0 9.3 - 86.8
Derivatives - - - - -
Income tax receivable 1.5 2.9 - - 4.4
Cash, cash equivalents and bank overdrafts - 4.9 4.2 - 9.1
Other non-current liabilities - - - - -
Bank and other borrowings - - - - -
Lease liabilities (129.7) (5.4) (2.0) - (137.1)
Deferred tax liability (12.0) - - - (12.0)
Income tax payable (1.0) - - - (1.0)
Trade and other payables (39.6) (13.9) (9.9) - (63.4)
Other current liabilities - - - - -
Provisions (1.3) - (1.2) - (2.5)
Net assets disposed 28.1 92.7 51.3 103.8 275.9
Disposal costs 2.0 10.1 2.7 2.7 17.5
Cumulative currency translation loss (7.3) - - - (7.3)
Recycle of hedge reserve - - - 20.8 20.8
(Loss)/profit on disposal (12.8) 188.9 (4.0) (31.7) 140.4
Sale proceeds 10.0 291.7 50.0 95.6 447.3
Sale proceeds less cash disposed of 10.0 286.8 45.8 95.6 438.2
Less non-cash proceeds
Less transaction costs (2.0) (10.1) (2.7) (2.7) (17.5)
Net cash inflow 8.0 276.7 43.1 92.9 420.7
21. Contingent liabilities
A contingent liability is a possible obligation arising from past events whose
existence will be confirmed only on the occurrence or non-occurrence of
uncertain future events outside the Group's control, or a present obligation
that is not recognised because it is not probable that an outflow of economic
benefits will occur or the value of such outflow cannot be measured reliably.
The Group does not recognise contingent liabilities. There are a number of
contingent liabilities that arise in the normal course of business, including:
a) The nature of the Group's long-term contracts means that there are reasonably
frequent contractual issues, variations and renegotiations that arise in the
ordinary course of business, including liabilities that arise on completion of
contracts and on conclusion of relationships with joint ventures and
associates. The Group takes account of the advice of experts, both internal
and external, in making judgements on contractual issues and whether the
outcome of negotiations will result in an obligation to the Group. The
Directors do not believe that the outcome of these matters will result in any
material adverse change in the Group's financial position.
b) As a large contracting organisation, the Group has a significant number of
contracts with customers to deliver services and products, as well as with its
supply chain, where the Group cannot deliver all those services and products
itself. The Group is involved in disputes and litigation, which have arisen in
the course of its normal trading in connection with these contracts. Whilst
the Directors do not believe that the outcome of these matters will result in
any material adverse change in the Group's financial position, it is possible
that, if any of these disputes come to court, the court may take a different
view to the Group.
c) The Group is subject to corporate and other tax rules in the jurisdictions in
which it operates. Changes in tax rates, tax reliefs and tax laws, or
interpretation of the law, by the relevant tax authorities may result in
financial and reputational damage to the Group. This may affect the Group's
financial condition and performance.
d) The Group has given certain indemnities and warranties in the course of
disposing of businesses and companies and in completing contracts. The Group
believes that any liability in respect of these is unlikely to have a material
effect on the Group's financial position.
e) Corporate rules in those jurisdictions may also extend to compensatory trade
agreements, or economic offset rules, where we may have to commit to use local
content in delivering programmes of work. Delivery of offset is also subject
to interpretations of law and agreement with local authorities, which we
monitor closely but may give rise to financial and reputational damage to the
Group if not undertaken appropriately.
22. Capital and other financial commitments
Capital commitments
31 March 2023 31 March 2022
£m
£m
Contracts placed for future capital expenditure not provided for in the 7.8 21.3
financial statements
23. Events after the reporting period
There were no events after the reporting period which would materially impact
the balances reported in the preliminary financial statement.
Annual General Meeting 2023
This year's Annual General Meeting will be held on 28 September 2023. Details
of the resolutions to be proposed at that meeting will be included in the
Notice of Annual General Meeting that will be published mid-August 2023.
At our Annual General Meeting in 2007 our shareholders unanimously agreed to
proposals to allow us to use electronic communications with them as allowed
for under the Companies Act 2006. For shareholders who agreed, or who are
treated as having agreed, to receive electronic communications, the Company
website is now the main way for them to access shareholder information. These
shareholders will be sent a 'notice of availability' notifying them when the
Annual Report and Accounts and Notice of Annual General Meeting are available
on the Company website www.babcockinternational.com. Hard copies of the Annual
Report and Accounts and Notice of Annual General Meeting will be distributed
to those shareholders who have requested or subsequently request them.
Additional copies will be available from the Company's registered office 33
Wigmore Street, London, W1U 1QX.
Forward-looking statements
Certain statements in this announcement are forward-looking statements. Such
statements may relate to Babcock's business, strategy and plans. Statements
that are not historical facts, including statements about Babcock's or its
management's beliefs and expectations, are forward-looking statements. Words
such as 'believe', 'anticipate', 'estimates', 'expects', 'intends', 'aims',
'potential', 'will', 'would', 'could', 'considered', 'likely', and variations
of these words and similar future or conditional expressions are intended to
identify forward-looking statements but are not the exclusive means of doing
so. By their nature, forward-looking statements involve a number of risks,
uncertainties or assumptions, some known and some unknown, many of which are
beyond Babcock's control that could cause actual results or events to differ
materially from those expressed or implied by the forward-looking statements.
These risks, uncertainties or assumptions could adversely affect the outcome
and financial effects of the plans and events described herein.
Forward-looking statements contained in this announcement regarding past
trends or activities should not be taken as a representation that such trends
or activities will continue in the future. Nor are they indicative of future
performance and Babcock's actual results of operations and financial condition
and the development of the industry and markets in which Babcock operates may
differ materially from those made in or suggested by the forward-looking
statements. You should not place undue reliance on forward-looking statements
because such statements relate to events and depend on circumstances that may
or may not occur in the future. Except as required by law, Babcock is under no
obligation to update (and will not) or keep current the forward-looking
statements contained herein or to correct any inaccuracies which may become
apparent in such forward-looking statements.
Forward-looking statements reflect Babcock's judgement at the time of
preparation of this announcement and are not intended to give any assurance as
to future results.
The Group financial statements were approved by the Board of Directors on 20
July 2023 and are signed on its behalf by:
D Lockwood D Mellors
Director Director
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END FR EAKXEAFFDEEARecent news on Babcock International
See all newsREG - Babcock Intnl Group - FY25 Post-close Trading Update
AnnouncementREG - Babcock Intnl Group - Babcock awarded five-year British Army contract
AnnouncementREG - FTSE Russell Hargreaves Lansdown Babcock Intnl Group JPMorgan EuroG&I PLC - Hargreaves Lansdown
AnnouncementREG - Babcock Intnl Group - Holding(s) in Company
AnnouncementREG - Babcock Intnl Group - Q3 trading update and upgrade of FY25 expectations
Announcement