REG - Babcock Intnl Group - Half-year Report
22/11/2022 07:00
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RNS Number : 1846H Babcock International Group PLC 22 November 2022
Babcock International Group PLC
Half year results for the six months ended 30 September 2022
22 November 2022
Driving operational improvement, building resilience, and pursuing growth
Statutory results
30 September 2022 30 September 2021 (restated)*
Revenue £2,144.0m £2,126.1m
Operating profit £72.8m £75.4m
Basic earnings per share 6.8p 10.3p
Cash generated from operations £75.2m £(10.5)m
Underlying results (note ii)
30 September 2022 30 September 2021 (restated)*
Contract backlog (note iii) £9.9bn £10.4bn
Underlying operating profit (note iv) £121.7m £115.3m
Operating margin 5.7% 5.4%
Underlying basic earnings per share 15.8p 15.3p
Free cash flow £(24.7)m £(160.6)m
Net debt £(1,039.4)m £(1,346.9)m
Net debt excluding operating leases £(629.3)m £(938.3)m
Net debt/EBITDA (covenant basis) 1.9x 2.8x
* Prior period restatement is outlined in note i on page 3.
David Lockwood, Chief Executive Officer, said:
"Babcock has made strong progress over the past six months. We have enhanced
our operational efficiency, cash flow performance and financial resilience,
whilst improving delivery for our customers. Whilst there is still more to be
done, the significant contracts won this year underpin our confidence in our
potential to deliver sustained growth and capture margin upside over the
medium term.
"We are operating in a macro economic and geopolitical environment that
remains volatile. We are focused on effectively addressing the challenges our
business faces, most notably inflationary pressures, whilst also ensuring we
maximise the increased opportunity set we are seeing in a market backdrop that
is supportive for defence. Babcock now has a solid, well-defined foundation
from which to deliver our customers' key requirements of availability,
affordability and capability."
Financial highlights (note ii)
· Strong contract backlog maintained through the period at £9.9 billion with
over 90% FY23 revenue under contract at 30 September 2022. Backlog reduced
from HY22 due to the impact of disposals and trading of long-term contracts
· Revenue up 5% organically to £2,144 million. Organic growth across all
divisions
· Underlying operating profit up 10% organically to £121.7 million due to
revenue growth and cost management. Underlying operating margin increased 30
basis points to 5.7%
· Statutory operating profit of £72.8 million compares to £75.4 million in
HY22
· Underlying basic earnings per share up 3% to 15.8p. Profit growth and lower
net interest costs were partially offset by lower joint venture profits and
£6 million 'other income' in HY22, which was non-recurring
· Improved underlying free cash flow: an outflow of £24.7 million (HY22:
£160.6m outflow), better than expected due to favourable timing of customer
receipts, lower net capital expenditure and other timing related factors
· Balance sheet resilience, with Net debt to EBITDA (covenant basis): 1.9x
(HY22: 2.8x) better than originally expected at this point and within our
target range of 1.0x to 2.0x
Outlook
· FY23 outlook. We are maintaining our overall financial expectations for the
current year:
o With over 90% of FY23 revenue contracted as at 30 September 2022, we have good
visibility of the top line
o External macroeconomic challenges remain, including ongoing wage inflation
challenges. For FY23, we continue to expect to offset inflationary pressure
through operating efficiencies
o Turning free cash flow positive in the second half of FY23 (for retained
Group)
Key highlights
Entering the period, we outlined three strategic pillars for the business: to
further stabilise our foundations; to optimise execution; and to pursue growth
opportunities. We have made significant progress against each.
Stabilise
We are concluding our portfolio alignment programme with the agreement to sell
part of our Aerial Emergency Services and civil training businesses. With the
balance sheet now stronger and our new operating model, people strategy and
ESG strategy in place, we have largely achieved our aim of stabilising the
business as we progress through the second year of our turnaround.
Execute
Driving operational excellence
o Risk management process for global procurement implemented
o Increasing operational performance and improving customer delivery
demonstrated by transformation of Defence Support Group (DSG) contract
o Introduced a new centre-led commercial function with a focus on optimising
commercial risk management
o Launched a global Business Management System designed to standardise processes
across the Group
o Significant progress in driving cultural change, completing first Group-wide
survey of employees in more than 10 years, with high response rates
o Increased focus on ESG to achieve targets, mitigate risk and win business, as
we embed environmental factors more frequently in bidding
Enhancing resilience
o Largely mitigated inflation effects during the period through efficiencies and
savings, with visibility through FY23 from UK pay deal (93% agreed) and
improved commercial process to minimise future pricing risks
o Strengthened balance sheet with the repayment of €550 million Euro bond in
October 2022, and reduced exposure to interest rate fluctuations with around
85% of the Group's debt at fixed rates, up from c.70%. No requirement for
refinancing until 2026 for c.£1.5 billion debt facilities
Grow
· Actions taken to create a more focused Group, capable of delivering our
customers' need for affordability, availability and capability, mean Babcock
is well placed to capture emerging near and longer-term growth opportunities
against an increasingly supportive defence backdrop:
o Secured two further contracts in HY23 relating to Poland's MIECZNIK frigate
programme, and in active discussions with other potential Arrowhead 140 export
customers
o Signed a c.£500 million, 10-year contract to upgrade, operate and support
Australia's defence high frequency communications capability
o Won a six-year contract with the Royal Navy to install and provide in-service
support for the maritime Communications Electronic Support Measures capability
on Type 23 frigates
o Won five-year contract to manage the sustainment of Royal Australian Navy
ships
o Supporting the UK MOD's short-term operational requirements in Eastern Europe,
including demand for training and equipment refurbishment
Results presentation:
A webcast presentation for investors and analysts will be held on 22 November
2022 at 09:00 am (UK time). The presentation will be webcast live and
subsequently 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.
A conference call dial-in is also available for analyst Q&A:
International Access: +44 (0) 33 0551 0200
UK Toll Free: 0808 109 0700
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
Notes to statutory and underlying results on page 1
Note i - Prior period adjustments: As announced in the FY22 preliminary
results, the Group has re-examined the presentation of revenue and cost of
revenue in relation to pass-through revenue on three of the Group's contracts.
The Group had previously taken the judgement that it acted as a principal in
these arrangements, informed by the contractual terms and practical delivery
of the contract to the customer. This approach was disclosed as a judgemental
area in the annual report. Following the transition to the Group's new
auditors, this has been further considered and the Group has reassessed this
judgement, which had always been a finely balanced one. This change of
judgement, means that revenue and cost of revenue are now presented net for
these contracts. Restatement of the financial information in accordance with
the new accounting policy results in a decrease in revenue and a decrease in
cost of revenue of £97 million in the six months ended 30 September 2021 (no
impact on profit). The restatement also removed pass-through revenue from the
contract backlog of £510 million.
Further detail on prior period restatements is given in Note 3 to the interim
financial statements.
Note ii - Alternative performance measures: The Group provides alternative
performance measures, which we use to monitor the underlying performance of
the Group. These measures are not defined by International Financial Reporting
Standards (IFRS) and are therefore considered to be non-GAAP (Generally
Accepted Accounting Principles) measures. The Group has defined and outlined
the purpose of its alternative performance measures in the Financial Glossary
starting on page 24. The Group's alternative performance measures are
consistent with the period ended 30 September 2021 except for Contract Backlog
which is redefined to be consistent with the revenue accounting policy change
(note (i) above).
Note iii - Contract backlog: 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 (HY22: £3.0
billion).
Note iv - Underlying operating profit: Underlying operating profit is a key
alternative performance measure (described in note ii) for the Group. It is
defined as IFRS statutory operating profit adjusted for specific adjusting
items. See page 9 for a reconciliation of underlying operating profit to
statutory operating profit and Note 2 of the interim financial statement for
an analysis of specific adjusting items.
CEO STATEMENT
We are starting to see good progress from our focus on better execution, with
improvements in both our financial resilience and operational delivery. This
puts us on a stronger footing to deliver sustained, profitable growth, with
new business wins demonstrating our ability to provide solutions that meet our
customers' needs of affordability, availability and capability. I believe we
are now well-placed to capture the near and longer-term opportunities emerging
in our core defence market.
The first 18 months of the turnaround have delivered significant improvements
in transparency and standardisation across the Group. This has helped us have
more control over the activities within the Group, which has become even more
important given the increasingly uncertain and volatile macro economic and
geopolitical environment we are facing. The changes we have effected mean we
are better placed to manage the challenges our business faces, most notably
from persistently elevated inflation (see below for more details), whilst also
ensuring that we maximise the increased opportunity set we are seeing in
global defence markets as a consequence of heightened national security
concerns.
In the period, improvements to both underlying operating profit and operating
margin reflect the increased efficiency and cost savings achieved as we
continue to embed our new operating model. Although there is still much to be
done, overall trading is in line with our expectations with a strong organic
profit performance in Marine and Land, up 22% and 40% respectively. This more
than offset weaker performance in Nuclear, due to an additional £6 million
programme provision, and Aviation, due largely to higher fuel costs. Our
stronger focus on cash flow is changing how programmes are negotiated and
implemented to improve cash flow in the business.
Stabilise: strengthened base
We have continued to build on the positive momentum set in motion in FY22, our
first year of turnaround.
The portfolio alignment programme is now broadly complete, with the agreements
to sell our Spanish, Italian, Portuguese and Scandinavian Aerial Emergency
Services (AES) and Land civil training businesses, which are expected to
complete in the coming months. As a result, defence will comprise more than
two-thirds of our portfolio, with the remainder being the provision of
critical services in the civil sector.
Our net debt to EBITDA gearing ratio is 1.9x on covenant basis (HY22: 2.8x),
lower than we expected at this stage and within our target range of 1.0x to
2.0x, despite significant cash outflow related to pension deficit "catch-up"
payments. We have £1.2 billion of financial liquidity headroom following
repayment of the €550 million bond that matured on 6 October, and c.£1.5
billion of our bonds and debt facilities do not expire until 2026, giving us a
strong funding base with little near-term refinancing risk.
Execute: improving operational delivery
We have taken further steps to improve operational delivery across the Group,
benefiting from the greater focus provided by our operating model. These
revised ways of working are enhancing our ability to deliver effectively and
decreasing performance risks within our business. Whilst our businesses are
not all expected to improve performance at the same rate, our focus on
operational excellence has been evidenced in Land, for example, where the
transformation programme within the DSG contract has led to improved delivery.
This has enhanced our ability to support our British Army customer as it plans
for the future of equipment support.
We continue to drive cultural change across the business with the introduction
of new processes and systems. We have formed a centre-led Commercial function
to drive commonality and best practice across the Group, with a focus on
commercial risk management and the development of our commercial talent. We
are developing a new Internal Audit, Risk Assurance and Insurance function to
enhance our controls, governance and risk management across the business, and
our global Procurement and Supply Chain function is actively working with the
supply chain to manage sourcing pressures. We have established a centre-led
Programme Management Function to professionalise the planning, estimating,
execution and control of our projects. We have also launched the first phase
of a global Business Management System designed to improve execution by
standardising processes across the Group.
In October, we concluded the first Group-wide survey of employees for more
than 10 years. The wide-ranging survey achieved an impressive response rate of
79%, showing a willingness of employees to get involved. Its results will
inform the action plans being developed as part of our comprehensive People
Strategy. I am delighted that around 80% of respondents were familiar with our
Principles and our Purpose: to create a safe and secure world, together.
Our Purpose is also helping anchor our focus on ESG, which increasingly is a
differentiated part of our bid submissions. The independent report by Oxford
Economics published earlier this month concluded that the Group makes a
significant contribution to the UK economy. In FY22 we provided a £3.3
billion contribution to the UK's GDP, supported 56,800 UK jobs and spent £290
million with suppliers in areas classified as a 'high priority' for the UK
Government's Levelling Up fund.
Execute: managing financial risk
The actions taken to stabilise the Group's financial base taken in FY22 have
enabled us to proactively manage financial risks and enhance our resilience in
HY23 against a volatile macro-economic environment.
On inflation and supply chain: Approximately 70% of our revenue base has some
measure of protection for inflation - either because costs can be fully
recovered or there are indexation allowances, or similar, within these
contracts. Of the remaining c.30% of revenue the group has assumed the
inflation risk through "firm" fixed price contracts. The largest contract has
approximately three years remaining, but many of the fixed price contracts are
short term (1-2 years), giving us the opportunity to replace them with
improved terms and/or updated pricing.
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. As previously announced, the Group addressed
labour cost in the UK for FY23 with an innovative pay deal from 1 April 2022
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 the costs that could be recovered through extant
contracts. We are expecting to offset this through operating efficiencies in
FY23.
Outside of labour costs, the Group has incurred increases in other costs such
as aviation fuel, energy and raw materials. Whilst these are, overall,
smaller categories of cost, businesses and programmes incurring such costs
intend to offset these increases through efficiencies or commercial
negotiation over the course of the year. Through the new centre-led Commercial
function, the Group has limited the commercial risk of future inflation in new
contracts where it cannot be mitigated
Planning for FY24 is in the early stages and the FY24 pay cycle is yet to
commence, so the level of mitigation achievable through other efficiencies and
commercial discussions with customers/suppliers has not yet been determined.
Once completed, this will then be used to update estimates to complete on
programmes that are accounted for as long-term contracts.
Our new Procurement and Supply Chain organisation continues to closely monitor
and manage supplier resilience as a key risk. We have implemented technology
solutions to monitor resilience within our supplier ecosystem, which is
supported by a process to mitigate identified risks. Some of our suppliers are
experiencing increases in input-cost inflation coupled with shortages of
supply. To overcome this, we continue to work closely with our key suppliers
to deliver solutions that can offset costs and de-risk the supply chain.
On the balance sheet, we have reduced gross debt, repaying the €550 million
Euro bond in October 2022 using proceeds from our disposal programme. We
further reduced our exposure to current fluctuations in interest rate with
around 85% of our £793 million total bond debt now fixed rate, which would
have been c.70% without action, and meaning that only £125 million of our
drawn debt is exposed to variable interest rates.
On pensions, we made £76 million of pension deficit payments in the first
half as planned. In late September and October, the UK gilt market experienced
significant volatility. The Group's three largest pension schemes have
liability driven investment portfolios (LDIs). The Trustees of these schemes
actively managed the collateral positions of these portfolios to ensure
sufficient headroom throughout this volatile period. In common with many
schemes, the Trustees of our three main UK schemes decided, in consultation
with us, to reduced inflation hedging from between 88% and 96% to between 60%
and 84% (of the deficits on a self-sufficiency basis) to limit the amount of
asset disposals required to fund collateral positions and provide the headroom
they felt required in the volatile environment. The intention is to rebuild
this hedging position.
Grow: capturing opportunities
The market environment remains supportive for defence, and opportunities
continue to emerge as our customers reassess their defence and security
priorities. Global financial pressures mean that our ability to provide
affordable solutions which still deliver the capability and availability
customers require is increasingly important.
Our successes in the period include:
o Securing two further contracts relating to Poland's MIECZNIK (Swordfish)
frigate programme. We are in active discussions with several other potential
Arrowhead 140 (T31 export variant) frigate customers
o Signed a major c.£500 million, 10-year contract to upgrade, operate and
support Australia's high frequency communications capability for the Australia
Defence Force. Babcock is now a leading provider of strategic defence high
frequency communications in the world, built on a common mission system
architecture that is both scalable and interoperable
o Selected to manage the sustainment of Royal Australian Navy ships at the
country's new Regional Maintenance Centre West over the next five years
through our newly fully consolidated Naval Ship Management (NSM) business in
Australia
o Won a six-year contract with the UK Royal Navy to install and provide
in-service support for the maritime Communications Electronic Support Measures
capability on Type 23 frigates
o Supporting the UK MOD's short-term operational requirements in Eastern Europe,
including demand for training and equipment refurbishment
Outlook
We expect to see continued operational progress from our focus on execution
and growth. We are maintaining our overall financial expectations for the
current year. The disciplined execution of our strategy, together with a
streamlined portfolio, gives the Board confidence in its expectations of
delivering increasingly profitable growth and improved cash flow into the
medium term.
Over the medium and long-term, we are focused on delivering value for all our
stakeholders, including:
· Improved outcomes for our customers: consistent delivery and partnering with
customers to solve their challenges
· A better place to work for our employees: an open, collaborative and diverse
workplace that engages our employees
· Returns for our shareholders: a return to growth with improving margins and
better cash conversion
David Lockwood OBE
Chief Executive
OTHER INFORMATION
Dividend
No ordinary dividends have been paid or declared for the six months ended 30
September 2022.
Board changes
Two Non-Executive Directors retired in the period. In July 2022 Russ Holden
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 October the Board
announced the appointment of Jane Moriarty as Non-Executive Director with
effect from 1 December 2022.
FINANCIAL REVIEW
Group statutory results
30 September 2022 30 September 2021 (restated)*
£m
£m
Revenue 2,144.0 2,126.1
Operating profit 72.8 75.4
Other income - 6.2
Share of results of joint ventures and associates 6.6 9.6
Investment income 0.4 0.4
Other net finance costs (28.6) (32.8)
Profit before tax 51.2 58.8
Income tax expense (14.2) (4.6)
Profit after tax for the year 37.0 54.2
Basic EPS 6.8p 10.3p
Diluted EPS 6.7p 10.2p
* Refer to Note 3 of the interim financial statements for details regarding
the prior period restatement
Statutory performance
Revenue increased by 1% to £2,144 million, comprising 5% organic growth, a 5%
reduction due to the net effect of disposals and an acquisition, and a small
positive impact from foreign exchange translation. The year-on-year increase
reflects organic growth in all divisions, as well as sales consolidated from
NSM, acquired in March 2022.
The £2.6 million reduction in statutory operating profit to £72.8 million
was down due to the effect of disposals (£(6) million) and a non-cash
mark-to-market movement on currency derivative contracts of £28.7 million,
which offset higher underlying profit and positive impacts from the NSM
acquisition (£6 million) and completion of restructuring in the prior period
(HY22: charge £9.4 million).
Other income of £6.2 million in HY22 related to pre-completion guarantee fees
received in relation to the disposal of the Oil and Gas business.
The Group's share of results in JVs and associates was a profit after tax of
£6.6 million (HY22: £9.6 million). The disposal of our 15.4% stake in
AirTanker Holdings in February 2022 and removal of NSM, which was fully
consolidated from March 2022, were the primary reasons for the year-on-year
reduction. AirTanker Holdings and NSM contributed £1.8 million and £2.0
million respectively, to the HY22 share of results of JVs and associates.
Net finance costs decreased to £28.6 million (HY22: £32.8 million), due to
lower borrowings and a pension interest credit of £3.6 million (HY22 charge:
£2.6 million), partly offset by higher finance charge associated with
non-cash movements in derivatives hedging foreign leases.
Basic earnings per share, as defined by IAS 33, was 6.8 pence per share (HY22:
10.3 pence per share), on lower profit before tax and a higher reported tax
charge.
A full statutory income statement can be found on page 29.
Underlying results
Statutory to underlying
As described in the 'Financial Glossary - alternative performance measures' on
page 24, the Group provides underlying measures to better understand the
performance and earnings trends of the Group. Underlying operating profit and
underlying earnings per share exclude certain specific adjusting items that
can distort the reporting of underlying business performance, as set out in
Note 2 of the interim statement on page 36. The reconciliation from the IFRS
statutory income statement to underlying income statement is shown below:
30 September 2022 30 September 2021 (restated)*
Underlying Specific Statutory Underlying Specific Statutory
£m
adjusting items
£m
£m
adjusting items
£m
£m
£m
Revenue 2,144.0 - 2,144.0 2,126.1 - 2,126.1
Operating profit/(loss) 121.7 (48.9) 72.8 115.3 (39.9) 75.4
Other income - - - 6.2 - 6.2
Share of results of joint ventures and associates 6.6 - 6.6 9.6 - 9.6
Investment income 0.4 - 0.4 0.4 - 0.4
Other net finance costs (23.1) (5.5) (28.6) (32.8) - (32.8)
Profit/(loss) before tax 105.6 (54.4) 51.2 98.7 (39.9) 58.8
Income tax (expense)/benefit (23.1) 8.9 (14.2) (19.6) 15.0 (4.6)
Profit/(loss) after tax for the year 82.5 (45.5) 37.0 79.1 (24.9) 54.2
Basic EPS 15.8p (9.0)p 6.8p 15.3p (5.0)p 10.3p
Diluted EPS 15.5p (8.8)p 6.7p 15.1p (4.9)p 10.2p
* Refer to Note 3 of the interim financial statements for details regarding
the prior period restatement
Specific adjusting items
Specific adjusting items within operating profit of £(48.9) million (HY22:
£(39.9) million) includes amortisation of acquired intangibles of £8.1
million (HY22: £10.6m), charges resulting from acquisitions and disposals of
£12.1 million (HY22: £21.1 million), and a non-cash charge on revaluation of
derivative contracts of £28.7 million (HY22: £nil) within operating profit
and £5.5 million (HY22: nil) within net finance costs. There were no material
restructuring charges in the period (HY22: £9.4 million).
Underlying results
30 September 2022 £m 30 September 2021 (restated)* £m
Revenue 2,144.0 2,126.1
Underlying operating profit 121.7 115.3
Other income - 6.2
Share of results of joint ventures and associates 6.6 9.6
Investment income 0.4 0.4
Other net finance costs (23.1) (32.8)
Underlying profit before tax 105.6 98.7
Income tax (23.1) (19.6)
Underlying profit after tax 82.5 79.1
Non-controlling interests (2.4) (2.0)
Underlying profit attributable to shareholders 80.1 77.1
Underlying basic EPS 15.8p 15.3p
* Refer to Note 3 of the interim financial statements for details regarding
the prior period restatement
Revenue performance
30 September 2021 (restated)* FX impact Acquisitions & disposals Other trading 30 September 2022
£m £m £m £m £m
Marine 627.4 8.2 18.8 12.0 666.4
Nuclear 516.3 - - 41.9 558.2
Land 510.1 3.6 (43.9) 8.4 478.2
Aviation 472.3 2.3 (79.0) 45.6 441.2
Total 2,126.1 14.1 (104.1) 107.9 2,144.0
* Refer to Note 3 of the interim financial statements for details regarding
the prior period restatement
Revenue increased 5% on an organic basis. Growth was led by strong
year-on-year increases in Nuclear and Aviation driven by the continued ramp up
of infrastructure activity and new contracts, respectively.
The main variances year-on-year are:
· FX impact 1% - primarily relates to foreign exchange translation on our
businesses in Canada, South Africa and Australia.
· Acquisitions and disposals (5)% - Reflects the net impact from acquisitions
and disposals in the prior period: Oil and Gas Aviation (sold in August 2021 -
Aviation), Frazer-Nash Consultancy Ltd (sold in October 2021 - Marine), UK
Power (sold in December 2021 - Land), and a £64 million contribution from
NSM (acquired in March 2022 - Marine).
· Other trading 5% - All sectors grew organically: Marine up 2%, Nuclear up 8%,
Land up 2%, and Aviation 10%.
Underlying operating profit performance
30 September 2021 FX impact Acquisitions & disposals Other trading 30 September 2022
£m
£m
£m £m £m
Marine 38.9 0.6 (0.9) 8.7 47.3
Nuclear 36.2 - - (6.1) 30.1
Land 29.8 0.4 (4.0) 11.8 38.0
Aviation 10.4 0.5 (2.2) (2.4) 6.3
Total 115.3 1.5 (7.1) 12.0 121.7
Underlying operating profit increased 10% on an organic basis. The
year-on-year increase was driven by revenue growth and further cost savings
and efficiencies across the Group. Strong performance in Marine and Land more
than offset a decline in Nuclear, as a due to a programme provision of £6
million, and Aviation, due to higher fuel costs.
Underlying operating margin increased 30 basis points to 5.7%. Marine margin
increased by 90 basis points to 7.1% and Land increased by 210 basis points to
7.9%, Nuclear margin declined by 160 basis points to 5.4% and Aviation
declined by 80 basis points to 1.4%.
The main variances year-on-year are:
· FX impact 1% - primarily relates to foreign exchange translation on the
results, most notably Canada, South Africa, Southern Europe and Australia.
· Acquisitions and disposals (6)% - lower net contribution following completed
transactions in the prior period.
· Other trading 10% - as described above.
Further analysis of our revenue and underlying operating profit performance is
included in each sector's operating review on page 17 to 23.
Net finance costs
Underlying net finance costs of £23.1 million (HY22: £32.8 million) reduced
due to lower borrowings and a pension interest credit of £3.6 million (HY22:
charge: £2.6 million).
Tax charge
The tax charge on underlying profits was £23.1 million (HY22: £19.6 million)
representing an effective underlying tax rate of 23% (HY22: 24%). The
underlying effective tax rate is calculated on underlying profit before tax
excluding the share of income from JVs 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 and the timing of the completion of
the AES disposal announced in July 2022. The current assumption is 23% to 25%.
In the medium term, we expect our effective tax rate to increase in
conjunction with UK corporation tax rate increases.
Exchange rates
The translation impact of foreign currency movements, in particular recent
weakness of GBP, resulted in an increase in revenue of £14.1 million and an
increase in underlying operating profit of £1.5 million. The main currencies
that have impacted our results are the Canadian Dollar, South African Rand,
Euro and Australian Dollar. The currencies with the greatest potential to
impact our results are the Euro, the South African Rand and the Canadian
Dollar:
· A 10% movement in the Euro against Sterling would affect revenue by around
£25 million and underlying operating profit by around £0.5 million per
annum.
· A 10% movement in the South African Rand against Sterling would affect revenue
by around £14 million and underlying operating profit by around £1.7 million
per annum
· A 10% movement in the Australian Dollar against Sterling would affect revenue
by around £11 million and underlying operating profit by around £0.6 million
per annum
· A 10% movement in the Canadian Dollar against Sterling would affect revenue by
around £6 million and underlying operating profit by around £0.5 million per
annum
Disposal programme
Our plan for disposals has been assessed and does not meet the criteria for
any assets to be classed as held for sale under IFRS 5.
Cash flow and net debt
Statutory cash flow summary
30 September 2022 30 September 2021
£m
(restated)*
£m
Profit for the year 37.0 54.2
Net cash flows from operating activities 48.9 (40.3)
Net cash flows from investing activities (29.8) (38.8)
Net cash flows from financing activities 38.4 (86.5)
Net increase/(decrease) in cash, cash equivalents and bank overdrafts 57.5 (165.6)
* Refer to Note 3 of the interim financial statements for details regarding
the prior period restatement
Cash flows from operating activities
Net cash from operating activities of £48.9 million inflow compared to a
£40.3 million outflow last year due mainly to the timing of customer receipts
and prepayments and lower outflows associated with the unwinding of historical
working capital management practices around period ends. Pension deficit
payments in excess of income statement of £76.2 million reduced slightly on
the prior period, as expected. We continue to expect a total pensions outflow
of around £100m in the current financial year.
Cash flows from investing activities
Net cash outflow from investing activities of £29.8 million was down on the
prior period (HY22: £38.8 million), due to lower gross capex of £52.8
million (HY22: £77.7 million), higher proceeds from fixed asset disposals of
£22.7 million (HY22: £10.3 million), and disposal proceeds of £8.0 million
in the prior period from sale of the Oil and Gas, offset by lower dividends
from JVs of £5.1 million (HY22: £24.7 million).
Cash flows from financing activities
Net cash inflow from financing activities of £38.4 million compared to an
outflow in HY22 of £86.5 million, reflecting lower lease principal payments
following disposal of the Oil and Gas business in August 2021, and net
drawdowns/paybacks of cash from/to borrowing facilities in the period. A full
statutory cash flow statement can be found on page 33.
Movement in net debt
30 September 2022 30 September 2021 (restated)*
£m £m
Net increase/(decrease) in cash in the year 57.5 (165.6)
Cash flow from the (increase) / decrease in debt (54.4) 76.1
Change in net debt resulting from cash flows 3.1 (89.5)
Net additional lease obligations (37.0) (21.7)
New leases granted 14.3 -
Disposal of subsidiaries - 129.7
Other non-cash movements and changes in fair value (5.2) 3.2
Foreign currency translation differences (45.9) (15.0)
Movement in net debt in the year (70.7) 6.7
Opening net debt (968.7) (1,353.6)
Closing net debt (1,039.4) (1,346.9)
* Refer to Note 3 of the interim financial statements for details regarding
the prior period restatement
Underlying cash flow and net debt
Our underlying cash flows are used by management to measure operating
performance as they provide a more consistent measure of business performance
year to year.
30 September 2022 30 September 2021
Underlying Underlying
£m
£m
Operating profit 72.8 75.4
Add back: specific adjusting items 48.9 39.9
Underlying operating profit 121.7 115.3
Other income - 6.2
Depreciation & amortisation 45.7 39.9
ROU asset depreciation 52.5 59.7
Non-cash items (2.2) 3.0
Working capital movements (48.8) (140.1)
Provisions (0.8) (1.2)
Net capital expenditure (36.9) (72.1)
Lease principal payments (54.2) (69.6)
Underlying operating cash flow 77.0 (58.9)
Cash conversion % excl. one-off CPBS adjustment 63% (51)%
Pension contributions in excess of income statement (76.2) (88.5)
Interest paid (14.1) (18.4)
Tax paid (12.2) (10.3)
Dividends from joint ventures and associates 5.1 24.7
Cash flows related to exceptional items (4.3) (9.2)
Underlying free cash flow (24.7) (160.6)
Net acquisitions and disposals of subsidiaries (12.1) 8.0
Cash outflow from settlement of derivative - (5.4)
Lease principal payments 54.2 69.6
Leases disposed of with subsidiaries - 129.7
Other non-cash debt movements (0.8) -
Fair value movement in debt and related derivatives (4.4) -
Net new lease arrangements (37.0) (19.6)
Exchange movements (45.9) (15.0)
Movement in net debt (70.7) 6.7
Opening net debt (968.7) (1,353.6)
Closing net debt (1,039.4) (1,346.9)
Add back: operating leases 410.1 408.6
Closing net debt excluding operating leases (629.3) (938.3)
Underlying cash performance
Underlying operating cash flow
Underlying operating cash flow for the period after capital expenditure was an
inflow of £77.0 million, compared to an outflow of £58.9 million in the
prior period. This represented operating cash conversion of 63% (HY22: (51) %)
on the underlying operating profit. Underlying operating cash flow is defined
as cash flow before pension deficit payments, dividends from JVs, interest and
tax payments, and cash flows related to exceptional items.
Movements in working capital
The movement in working capital for the period was an outflow of £48.8
million compared to an outflow of £140.1 million last year, which included
higher payments associated with the unwind of the past practice of period-end
management of working capital. In addition, HY23 included earlier than
anticipated customer receipts on large contracts.
Capital expenditure
Net capital expenditure decreased to £36.9 million (HY22: £72.1) million).
Gross capex of £52.8 million (HY22: £77.7 million) was lower than
anticipated due to project phasing. In addition, the period included higher
receipts from asset disposals (£22.7 million verses HY22: £10.3 million),
primarily reflecting aircraft sales in our Aviation sector. We continue to
expect that gross capital expenditure will remain at an elevated level in
FY23, as a result of further investment in submarine infrastructure in
Devonport and roll-out of enterprise resource planning (ERP) in Nuclear.
Lease principal payments
The lower level of lease principal payments of £54.2 million in the period
(HY22: £69.6 million), representing the capital element of payments on lease
obligations, reflects lower leasing requirements following disposal of the Oil
& Gas Aviation business in 2022. This is reversed out below underlying
free cash flow as the payment reduces our lease liability (ie. no net effect
on net debt).
Pensions
Pension cash outflow in excess of the income statement charge was £76.2
million (HY22: £88.5 million). We continue to expect the pension cash outflow
in excess of the income statement charge to be around £100 million in FY23.
Interest
Net interest paid, excluding that paid by JVs and associates, decreased to
£14.1 million (HY22: £18.4 million) due to lower net debt and a reduction in
interest on leases as a result of the divestment in the Oil and Gas business.
Taxation
Cash tax paid in the year was £12.2 million (HY22: £10.3 million). We expect
a cash tax outflow in the current financial year of approximately £15 million
to £20 million.
Dividends from joint ventures and associates
During the period the Group received £5.1 million in dividends from its JVs
and associates (HY22: £24.7 million). The reduction reflects the disposal of
AirTanker Holdings and acquisition of NSM, and close-out dividends on the
termination of the ALC and Dounreay JVs in HY22. We expect dividends from JVs
and associates to be around £8 million in FY23.
Exceptional cash flows
The cash outflow related to exceptional items was £4.3 million in the period
(HY22: £9.2 million) relating to restructuring costs charged in the prior
period.
Underlying free cash flow
Underlying free cash outflow of £24.7 million (HY22: £160.6 million outflow)
reflects the reduction in working capital outflow and lower capex and
principal lease payments.
New lease arrangements
In addition to net capital expenditure, and not included in free cash flow,
£37.0 million (HY22: £19.6 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 30 September 2022 was £1,039.4 million, or £629.3 million
excluding operating leases. The £70.7 million increase in net debt since 31
March 2022 reflects the free cash outflow and foreign exchange impacts on
translation of debt.
Funding and liquidity
As of 30 September 2022, the Group had access to a total of £2.3 billion of
borrowings and facilities of mostly long-term maturities. These comprised:
· €550 million bond maturing 6 October 2022, hedged at £482 million
· £300 million 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
At 30 September 2022, the Group's net cash balance was £815 million. This was
used, in part, to repay the €550m bond maturing 6 October 2022. After this
action, with remaining cash and undrawn amounts under our committed revolving
credit facilities (RCF) gave us liquidity headroom of around £1.2 billion.
Capital structure
While there are several facets to balance sheet strength, the primary
measurement relevant to Babcock is the net debt/EBITDA gearing ratio within
our debt covenant of 3.5x. The net debt/EBITDA gearing ratio at 30 September
2022 of 1.9x is better than we expected at the start of the period, and within
our medium-term target of between 1.0x and 2.0x. The slight increase since the
FY22 results reflects the timing of final pension deficit "catch-up" payments
and completion of planned business disposals.
Net debt to EBITDA (covenant basis)
This is the measure used in the covenant in our RCF and makes a number of
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
1.9 times for HY23 driven by the reduction in net debt.
30 September 2022 30 September 2021
£m
£m
Last twelve months Last twelve months
Underlying operating profit 244.1 231.6
Depreciation and amortisation 80.2 99.0
Covenant adjustments(1) 16.4 (15.2)
EBITDA 340.7 315.4
JV and associate dividends 22.0 46.5
EBITDA + JV and associates dividends (covenant basis) 362.7 361.9
Net debt (629.3) (938.3)
Covenant adjustments(2) (56.4) (77.9)
Net debt (covenant basis) (685.7) (1,016.2)
Net debt/EBITDA 1.9x 2.8x
(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, with a covenant level of
4.0 times.
30 September 2022 30 September 2021
£m
£m
Last twelve months Last tewlve months
EBITDA (covenant basis) + JV and associate dividends 362.7 361.9
Net finance costs (66.6) (61.0)
Covenant adjustments 15.7 20.0
Net Group finance costs (50.9) (41.0)
Interest cover 7.1x 8.8x
Return on invested capital, pre-tax (ROIC)
This measure is one of the Group's key performance indicators.
30 September 2022 30 September 2021
£m
£m
Last twelve months Last twelve months
Underlying operating profit 244.1 231.6
Share of JV PAT 17.1 21.7
Underlying operating profit plus share of JV PAT 261.2 253.3
Net debt excluding operating leases 629.3 938.3
Operating leases 410.1 408.6
Shareholder funds 662.5 388.6
Retirement (surplus)/deficit (147.4) 79.0
Invested capital 1,554.5 1,814.5
ROIC 16.8% 14.0%
Pensions
IAS 19
At 30 September 2022, the IAS 19 valuation for accounting purposes was a net
surplus of £147.4 million (31 March 2022 of £191.6 million). In the first
half, pension liabilities reduced by £1,206.8 million to £3,334.7 million,
primarily as result of higher discount rates. Negative net asset returns drove
a c.£1,251.0 million decrease in the fair value of plan assets to £3,482.1
million. The key movements in fair value of the assets and liabilities of the
Group pension schemes at 30 September 2022 are set out in note 14 of the
interim statement.
30 September 2022 31 March 2022
£m
£m
Fair value of plan assets 3,482.1 4,733.1
Present value of benefit obligations (3,334.7) (4,541.5)
Net surplus/(deficit) at 30 September 147.4 191.6
As at 30 September 2022 the key assumptions used in valuing pension
liabilities were:
Discount rate 4.7% - 5.1% (31 March 2022: 2.7%, 30 September 2021: 2.0%)
Inflation rate (RPI) 12.2% for one-year and long-term rates of 3.5% - 3.7% (31 March 2022: 3.4% -
3.7%, 30 September 2021: 3.4%)
Income statement charge
The charge included within underlying operating profit in HY23 was £(16.5)
million (HY22: £19.5 million), of which £13.1 million (HY22: £15.8 million)
related to service costs and £3.4 million (HY22: £3.7 million) related to
expenses. In addition to this, there was an pension interest credit of £3.6
million (HY22: charge of £2.6 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, was approximately £300
million at 30 September 2022 (31 March 2022: 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 30 September 2022
for each of the three main schemes and does not fully allow for the impact of
RPI reform which will be fully reflected in future technical provisions
valuations.
The valuation dates of the three largest schemes are set so that only one
scheme is undertaking its valuation in any one year, in order to spread the
financial impact of market conditions. The valuation of the Devonport Royal
Dockyard Pension Scheme as at 31 March 2020 completed in the last half of
FY21, the valuation of the Rosyth Royal Dockyard Pension Scheme as at 31 March
2021 was completed in HY23, and work commenced on the valuation of the Babcock
International Group Pension Scheme at 31 March 2022.
OPERATIONAL REVIEWS
Marine
Financial review
30 September 2022 30 September 2021
Contract backlog £2.4bn £2.6bn
Revenue £666.4m £627.4m
Underlying operating profit £47.3m £38.9m
Underlying margin 7.1% 6.2%
Revenue and underlying operating profit bridge:
30 September 2021 FX Acquisitions and disposals Other trading 30 September 2022
£m
£m
£m
£m
Impact
£m
Revenue 627.4 8.2 18.8 12.0 666.4
Underlying operating profit 38.9 0.6 (0.9) 8.7 47.3
Revenue grew by 6% to £666 million, or 2% on an organic basis. Growth was
mainly from our Mission Systems business, including for current military
operations, continued strong demand for our LGE products and higher activity
on our South Korean submarine contract, partly offset by lower revenue on Type
31 due to programme phasing. The combined net impact of the NSM acquisition in
March 2022 and disposal of Frazer Nash Consultancy Ltd in August 2021 was a 3%
increase in revenue.
Underlying operating profit grew by 22% to £47.3 million on a reported and
organic basis. The year-on-year increase was driven by growth in higher margin
revenues outlined above and cost savings from restructuring in the prior
period with some improved cost recoveries in the period. Underlying operating
margin improved by 90 basis points to 7.1%.
Integration of NSM with our Australian operations is on track. The business
contributed revenue of c.£64 million in the first half.
Contract backlog was largely flat over the period at £2,426 million (FY22:
£2,491 million) but down 7% on the prior year, as disposals and trading of
contracts more than offset new orders.
Operational review
UK defence
The Type 31, Inspiration Class frigate programme remains on schedule, with
keel laying on the first ship, HMS Venturer, and the first 177-tonne block of
eight positioned, marking the start of the whole ship assembly.
Warship support activity remained elevated across our sites. During the
period, we secured a 10-year contract to provide dry-dock maintenance for the
Royal Navy's Queen Elizabeth Class (QEC) aircraft carriers with October seeing
HMS Prince of Wales return for docking. The Type 23 frigate life-extension
(LIFEX) programme at Devonport continues at pace, including the first
post-LIFEX upkeep on a Type 23 with overhaul of equipment and design changes
for new capabilities. Additionally, through Mission Systems, Babcock was
awarded a six-year contract to deliver, install and provide in-service support
for Ardent Wolf, the maritime Communications Electronic Support Measures
(CESM) capability for the UK Royal Navy's Type 23 frigates.
In Mission Systems, we are continuing to build our scope for the next
generation UK submarine programme, working closely with BAE Systems to explore
the future requirements for handling and launch systems. In defence digital
and electronic warfare, the overall programme performance continues to improve
after a challenging mobilisation period. We are building confidence with our
customers and remain focused on achieving the required milestones throughout
2023.
Our Logistics Support Contract has been successfully mobilised and is moving
into a steady operational delivery phase. We maintained a strong delivery
performance in the period, attaining achievement on all KPIs and delivery
milestones to date. Additionally in Mission Systems, we signed a Memorandum of
Understanding (MoU) with Rafael Advanced Defence Systems to deliver capability
into the UK Ministry of Defence's wider Land Ground Based Air Defence (GBAD)
programme and signed a further MoU with Israel Aerospace Industries' (IAI)
Group to offer a deep-find radar solution for the UK MODs SERPENS programme.
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 Australia, we are integrating the NSM business into our wider operations.
After the period end NSM was selected as the preferred Regional Maintenance
Provider West, to manage the sustainment of Royal Australian Navy ships in
Western Australia over the next five years.
Following selection as preferred tenderer in late 2022, we have been awarded a
c.£500 million contract for the upgrade and sustainment of the Defence High
Frequency Communication System (DHFC) to support the Australian armed forces
over the next 10 years.
In New Zealand, the new Maritime Fleet Sustainment Services (MFSS) contract
with New Zealand Defence Force formally began in September 2022.
In Canada, Babcock continues to deliver on its Victoria Class In-Service
Support (VISSC) contract and is preparing to support HMCS Cornerbrook's sea
trials this autumn, before returning the submarine to the Royal Canadian Navy
later this year. Planning and preparations are also underway for the deep
maintenance period for HMCS Victoria.
In Poland, Babcock secured two further contracts on the Polish MIECZNIK
(Swordfish) frigate programme, building on our selection as Design &
Technology Partner to PGZ (the Polish Prime Contractor). The Class Design
Contract and the Transfer of Knowledge & Technology (TOKAT) framework
agreement, respectively support further development of the programme and
shipbuilding capability in Poland.
In Indonesia, we continue to progress our design licence agreement with PT PAL
for the AH140 frigate. The design licence will enable PAL to build two
frigates in Indonesia with bespoke design modifications for the Indonesian
Navy.
In South Korea, in June we commenced our first contract with the Republic of
Korea Government (ROKG) Agency for Defence Development. In September, we
received a first maintenance contract from Daewoo Shipbuilding and Marine
Engineering (DSME) to support the first of the Jangbogo-III Class submarines,
with a second phase of this work secured in October.
In Oman, our joint venture operation in Duqm successfully delivered fleet-time
support to international navies.
In Brazil, we established an in-country project team to deliver through-life
support to the Marinha do Brasil's flagship vessel, NAM Atlantico, formerly
the UK Royal Navy platform HMS Ocean, and continue to explore future
opportunities with the Marinha do Brasil's and other international navies as
part of our global support programme.
Energy and Marine
Our Energy and Marine business (LGE) experienced continued success in the
period, securing a further 20 contracts and projects together worth over £110
million in the LPG, LNG and ethane markets. We are also partnering to develop
liquefied CO(2) carrier designs which support the global adoption of carbon
capture and storage - a crucial step towards decarbonisation - with the
ability to transport large quantities of liquefied CO(2) by ship.
Nuclear
Financial review
30 September 2022 30 September 2021
Contract backlog £2.5bn £3.0bn
Revenue £558.2m £516.3m
Underlying operating profit £30.1m £36.2m
Underlying margin 5.4% 7.0%
Revenue and underlying operating profit bridge:
30 September 2021 FX Acquisitions and disposals Other trading 30 September 2022
£m
£m
£m
£m
Impact
£m
Revenue 516.3 - - 41.9 558.2
Underlying operating profit 36.2 - - (6.1) 30.1
Revenue grew by 8% driven primarily by the continued strong ramp up in
submarine infrastructure programmes on the Devonport site, as well as
increased activity in civil nuclear.
Underlying operating profit fell by 17%, mainly due to an additional £6
million programme provision. Infrastructure revenue earns a lower margin (as
it has lower delivery risk) and this, coupled with slightly lower margin on
submarine support led to underlying margin falling to 5.4%.
Contract backlog unwound 9% in the period to £2,547 million (FY22: £2,789
million) and by 16% compared to the prior period, due to the trading of
long-term contracts, specifically FMSP.
Operational review
Defence
The infrastructure programme at Devonport to support future submarine demand
has seen good progress in the period. In addition to major work to evolve 10
Dock for the future Astute Class, work is now also underway at 9 Dock to
deliver improvements in the maintenance, life extension and facility
capability for the Vanguard Class submarines.
We are continuing to target and deliver improvements to ensure the ongoing
availability of the Royal Navy platforms within the Future Maritime Support
Programme (FMSP) contract. At Faslane, Scotland, we continue to successfully
support the UK's enduring defence priority, Continuous At Sea Deterrent
(CASD), from HMNB Clyde alongside Astute and Trafalgar Class submarines. Base
Maintenance Periods have been completed on schedule on Vanguard and Astute
Class submarines. Our submarine work has benefitted from collaboration with
the Royal Navy and the Submarine Delivery Agency (SDA). All of these
projects have been supported by the introduction of revised working patterns
as part of transformative changes being implemented within the FMSP contract.
We have signed up to the Submarine Availability Partnership (SMAP) with the
SDA to deliver a further step change in submarine availability for the UK,
building on the good work already achieved across both organisations and
bringing together existing plans to accelerate and enhance delivery in mission
critical areas.
Civil
We are seeing continued momentum in the civil nuclear market and the business
continues to position for future opportunities. Building on our experience and
existing role at Hinkley Point C, we are continuing to engage on opportunities
relating to the execution of the new Sizewell C Nuclear Power station.
A Memorandum of Understanding (MoU) has been signed with US nuclear reactor
and fuel design engineering company X-energy to act as its deployment partner
for High Temperature Gas Reactors in the UK. The MoU 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.
Recognising the similarities in UK and US nuclear plant design and operations,
and the opportunity to collaborate with US partners to leverage our proven
track record of managing UK nuclear sites comparable in size and scope, we
have established a footprint in the US, opening an office in Arlington,
Virginia.
Land
Financial review
30 September 2022 30 September 2021 (restated)*
Contract backlog £2.4bn £2.4bn
Revenue £478.2m £510.1m
Underlying operating profit £38.0m £29.8m
Underlying margin 7.9% 5.8%
* Refer to Note 3 of the interim financial statements for details regarding
the prior period restatement
Revenue and underlying operating profit bridge:
30 September 2021 (restated)* FX Acquisitions and disposals Other trading 30 September 2022
£m
£m
£m
£m
Impact
£m
Revenue 510.1 3.6 (43.9) 8.4 478.2
Underlying operating profit 29.8 0.4 (4.0) 11.8 38.0
* Refer to Note 3 of the interim financial statements for details regarding
the prior period restatement
Revenue declined 6%, with 2% organic growth offset by the impact of the UK
Power disposal in December 2021. Higher rail volumes and increased demand
for vehicles in the mining sector in South Africa were the key growth drivers,
partially offset by the loss of the Eskom contract in South Africa in FY22.
Underlying operating profit increased 28% to £38.0 million, or 40%
organically, reflecting revenue growth in South Africa and higher margin sales
linked to short-term military operations, , a one-off profit adjustment of £3
million (net) and improved margins in UK fleet management and training. These
resulted in a 210 basis point increase in underlying margin to 7.9%.
Contract backlog increased 5% in the period to £2,429 million (FY22: £2,309
million) and was broadly flat compared to a year ago. HY22 was restated to
remove reclassified pass-through revenue (principal versus agent) of
c.£510million.
Operational review
Defence
Performance in our defence equipment activity improved in the period,
including our DSG contract following a successful transformation programme and
we continue to support our British Army customer as they plan for the future
of their equipment and how it is supported. Discussions have commenced on the
extension of the contract. In addition, we successfully extended our Phoenix 2
contract which delivers the MoD's 'white fleet' service for a further two
years. We continue to invest in our defence fleet management capability and
are now tracking a number of defence equipment support opportunities in our
core territories.
Through our existing contracts Babcock contributed to the British Army's
support to the Armed Forces of Ukraine, 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.
Our Defence Training business performed well across all contracts with new
models of delivery post-COVID continuing to offer operational benefits for our
customers. We have been working closely with our customers to contextualise
the training we deliver in light of the conflict in Ukraine and are closely
supporting the British Army's Mobilise campaign. We have submitted a rebid for
our Armour Support Centre (ASC) contract and anticipate the result in the
coming months. A range of significant opportunities exist in our UK pipeline
including the Collective Training Transformation Programme (CTTP) and Next
Generation Trade Training (NGTT).
Internationally, we continue to deliver and pursue Land defence opportunities
in Australia. Babcock is one of four short-listed tenderers for the LAND-125
Phase 4 - Integrated Soldier System program, to integrate a wide range of
connected technologies including un-crewed ground and aerial systems and
self-learning machines for Australian soldiers.
Emergency Services
In our Assets business 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 on 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.
Our training contracts also performed well in the period, with significant
demand in both LFB and MPS contracts as both customers seek to meet
recruitment targets. Our MPS PEQF training programme is now well established
and performing well.
South Africa
Our business in South Africa had a strong half year with a record performance
in the equipment business mainly driven by demand from the mining industry
which has been created from energy supply shortages as well as battery
minerals. This increase in demand is expected to be short-term, but has offset
the loss of the Eskom Boilerserve contract in FY22.
Other civil markets
Our Rail business had a good start to the year, and we continue to focus on
delivery in our two key regions of Scotland and Northern Ireland. In September
we agreed to sell our civil training business to Inspirit Capital. We expect
to complete the transaction in the coming months.
Aviation
Financial review
30 September 2022 30 September 2021
Contract backlog £2.4bn £2.4bn
Revenue £441.2m £472.3m
Underlying operating profit £6.3m £10.4m
Underlying margin 1.4% 2.2%
Revenue and underlying operating profit bridge:
30 September 2021 FX Acquisitions and disposals Other trading 30 September 2022
£m
£m
£m
£m
Impact
£m
Revenue 472.3 2.3 (79.0) 45.6 441.2
Underlying operating profit 10.4 0.5 (2.2) (2.4) 6.3
Revenue declined by 7% to £441 million, primarily due to the disposal of our
Oil and Gas business in August 2021. Organic growth of 10% was driven by
continued ramp-up of our French defence contracts (Mentor and H160) and higher
activity in the Italian Aerial Emergency Services (AES) business.
Underlying operating profit decreased to £6.3 million (HY22: £10.4 million)
despite further cost savings, due to increased fuel costs in our European AES
business (£4 million) and continued high bid costs on a tender due to be
submitted in H2. Underlying operating margin decreased by 80 basis points to
1.4%.
Contract backlog increased 7% in the period to £2,450 million (FY22: £2,294
million), due largely to renewal of the multi-year Hawk support contract.
Operational review
Defence
Activity across UK defence remains steady. In this period, our military
business secured an 11-year contract with BAE Systems to continue supporting
the Hawk TMk1 and TMk2 aircraft at RAF Valley. Aviation also won a new
contract to support the Royal Air Force Aerobatics Team (Red Arrows) with line
and depth maintenance from RAF Waddington.
Performance of HADES (RAF support) and LAFT2 (Light Aircraft Flying Task)
remains good, with contract extensions secured on both contracts in FY22.
Tutor recovery is making strong progress with 80 aircraft available to the
customer.
Babcock will fulfil the critical role of support partner for the H175M Task
Force, the UK-based industry team created to offer, supply and support the
British-produced H175M helicopter for the UK's New Medium Helicopter (NMH)
requirement.
In France, activity continues to ramp up on the Mentor contract, with delivery
of the first two PC21 aircraft due in December. We have delivered around
28,000 flight hours and around 18,000 simulator hours to date as part of
FOMEDEC contract in France. In addition, we delivered the first H160 aircraft
to the French Navy and expect to deliver another unit in H2. During the first
half we were awarded a new maintenance, repair and overhaul MRO contract
awarded by The Spanish Army for the inspection and maintenance of eight EC135
helicopters.
Aerial emergency services
During the half year, our emergency services business secured a number of
contract extensions. In the UK, we signed a five-year extension with the Great
Western Air Ambulance and were awarded a three-year extension with the
Hampshire and Isle of Wight Air Ambulance.
In Europe our crews helped extinguish around 1,800 fires, in a highly intense
firefighting season across Europe, particularly Italy. Tragically in October
two of our pilots lost their lives following an accident during a firefighting
mission in Sicily.
In France, two EC135 aircraft were delivered to French Customs as part of
the seven-year contract to service and support the French Customs and
Gendarmerie Nationale fleet. While in Canada, this year's wildfire season in
Manitoba saw fewer flying hours.
In Australia, Babcock submitted a tender for the South Australian State Police
Ambulance & Rescue Aviation Service, which combines both fixed and rotary
wing aviation emergency services under a single prime contract. We are
currently the provider of the rotary wing rescue emergency services element to
the South Australian Government.
In July 2022, we entered into an agreement to sell our European (Spanish, Italian, Portuguese and Scandinavian) AES businesses to Ancala Partners for a gross consideration of €136.2 million (c.£115 million) subject to closing adjustments. We continue to expect the sale completion in the coming months.
Financial Glossary - Alternative performance measures
The Group provides alternative performance measures, including underlying
operating profit, 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. 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.
Further information on the Group's specific adjusting items, which is a
critical accounting judgement, can be found in Note 2.
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 period
ended 30 September 2021.
Measure Closest equivalent IFRS measure Definition and purpose Adjustments to reconcile to IFRS measure (and reference to reconciliation)
Revenue measures
Organic 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 IFRS15 Contracted revenue excluding variable revenue, expected contract renewals,
expected revenue from framework agreements and impact of termination for
convenience clauses.
- Used to measure revenue under contract as a good indicator of revenue
visibility
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 9
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 sadjusting items(1) specific adjusting items(1)
- To provide an alternative measure of underlying finance costs excluding - See table on page 9
items such as 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 adjusting items on profit before tax - See table on page 9
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 9
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. It includes the Group's specific adjusting items(1)
post-tax share of results of joint ventures and associates
- See table on page 9
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 Cash and cash equivalents and short-term investments, less bank and other - See table on page 12
borrowings, operating leases and net derivative financial instruments
- See table on page 13
- 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 excluding lease liabilities as defined by IAS 17, the relevant - See table on page 13
standard at the inception of the banking facility. This net debt figure also
includes finance lease (as defined by IAS 17) receivables and payables, loans -
from the Group to joint ventures and supply chain financing balances (of HY22:
£2 million, HY22: £25 million).
- 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, - See table on page 16
finance lease receivables and adjusting for an average FX rate for the
previous 12 months
- Used by debt investors
- 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
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, shareholders' funds and retirement 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
Return on invested capital excluding one-off CPBS adjustments (pre-tax) No direct equivalent Underlying operating profit plus share of JV PAT excluding one-off CPBS Ratio - N/A
adjustments, divided by the sum of net debt, shareholders' funds and
retirement deficit (surplus) - See table on page 16
- Used as a measure of profit earned by the Group excluding the one-off impact
of CPBS adjustments generated by the debt and equity capital invested, to
indicate the efficiency at which capital is allocated
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
- Includes 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 interim financial statements)
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 2022, 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 2022 in full. The Group's principal risks and
uncertainties are:
Existing markets: we rely heavily on winning and retaining large contracts
with a relatively limited number of major clients, whether in the UK,
particularly the Ministry of Defence, or overseas, many of whom are (directly
or indirectly) owned or controlled by government (national or local) and/or
are (wholly or partly) publicly funded
New markets: We seek new markets and contracts for our services both with
existing and new customers, whether in territories where we are already
established or in territories where we are not
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, covenant headroom and credit risks)
Contract performance: We operate large contracts, which often requires us to
price for the long term and for risk transfer. Our contracts may include fixed
price which assumes inflation risk
Business interruption: Failure to withstand the impact of an event or a
combination of events may significantly disrupt all or a substantial part of
the Group's business
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
rationalisation 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
Health, safety and environmental: Our operations entail the potential risk of
significant harm to people, property or the environment, wherever we operate
across the world
Regulatory and compliance burden: Our businesses are subject to the laws,
regulations and restrictions of the many jurisdictions in which they operate
People: We operate in many specialised engineering and technical domains,
which require appropriate skills and experience
Pensions: The Group has significant defined benefit pension schemes in the UK,
which provide for a specified level of pension funds to scheme members
IT and 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
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
Emerging risks: In addition, as part of its risk work, the Group is monitoring
two further risks. Both risks are not standalone risks but affect several of
the Group's principal risks. The two risks are:
Inflation: The global economy is experiencing increasing inflationary
pressure, both in terms of supplier costs and in terms of labour rates. The
inflationary environment may be exacerbated by the conflict in Ukraine. The
Group has a number of long-term contracts, which may include fixed price
elements or saving commitments. We also have collective bargaining agreements
with our workforce at certain sites. If we experience increased costs, which
we are not able to pass on, this will affect the profitability of the
contracts concerned and could mean that they become loss-making or that we are
unable to meet our contractual commitments, leading to an adverse financial
impact and a longer-term reputational impact.
Supplier resilience: Our supply chain is subject to the same global
inflationary pressures. Furthermore, the global supply of raw materials and
parts has not fully recovered from the Covid-19 pandemic and Brexit
disruption, leading to supply interruptions. As with inflation, this could be
exacerbated by the conflict in Ukraine. As a result, there is a risk that our
suppliers may suffer financial distress and not be able to fulfil their
contracted supply agreements with us. This could add additional cost and time
to our programmes, which we may not be able to pass onto our end-customer. See
comments in the CEO Statement on page 5 for an update on pensions, inflation
and supply chain risks in HY23.
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 22
November 2022 and are signed on its behalf by:
D Lockwood D Mellors
Director Director
Condensed consolidated income statement (unaudited)
Note Six months ended Six months ended
30 September 2022
30 September 2021 (restated *)
£m £m
Revenue 2,4 2,144.0 2,126.1
Cost of revenue (1,920.7) (1,889.2)
Gross profit 223.3 236.9
Administration and distribution expenses (150.5) (145.2)
Loss on divestments 15 - (16.3)
Operating profit 2,4 72.8 75.4
Other income - 6.2
Share of results of joint ventures and associates 2,4 6.6 9.6
Finance income 5 10.1 5.6
Finance costs 5 (38.3) (38.0)
Profit before tax 51.2 58.8
Income tax expense 6 (14.2) (4.6)
Profit for the period 37.0 54.2
Attributable to:
Owners of the parent 34.6 52.2
Non-controlling interest 2.4 2.0
37.0 54.2
Earnings per share 2
Basic 6.8p 10.3p
Diluted 6.7p 10.2p
In the six months ended 30 September 2022, the Group restated the prior period
financial information. Details of the restatement are contained in note 3.
Condensed consolidated statement of changes in equity (unaudited)
Note Six months ended Six months
30 September
ended
2022
30 September
£m
2021 (restated *)
£m
Profit for the period 37.0 54.2
Other comprehensive (loss)/income
Items that may be subsequently reclassified to income statement
Currency translation differences 7.7 (6.9)
Reclassification of cumulative currency translation reserve on disposal - (7.3)
Fair value adjustment of interest rate and foreign exchange hedges - (7.8)
Tax, including rate change impact, on fair value adjustment of interest rate - 3.8
and foreign exchange hedges
Hedging gains/(losses) reclassified to profit and loss 2.9 (3.1)
Share of other comprehensive income of joint ventures and associates 3.1 2.7
Items that will not be subsequently reclassified to income statement
Remeasurement of retirement benefit obligations (124.0) 113.7
Tax, including rate change impact, on remeasurement of retirement benefit 31.0 (13.5)
obligations
Other comprehensive (loss)/income, net of tax (79.3) 81.6
Total comprehensive (loss)/income (42.3) 135.8
Total comprehensive (loss)/income attributable to:
Owners of the parent (44.0) 133.8
Non-controlling interest 1.7 2.0
Total comprehensive (loss)/income (42.3) 135.8
In the six months ended 30 September 2022, the Group restated the prior period
financial information. Details of the restatement are contained in note 3.
Condensed consolidated statement of changes in equity (unaudited)
Share Share premium Other reserve Capital redemption Retained earnings Hedging reserve Translation reserve Owners of the parent Non-controlling interest Total
capital
£m
£m
£m
£m
£m
£m
£m
£m
equity
£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 period - - - - 52.2 - - 52.2 2.0 54.2
Other comprehensive income (as restated **)
- - - - 100.2 (4.4) (14.2) 81.6 - 81.6
Total comprehensive income - - - - 152.4 (4.4) (14.2) 133.8 2.0 135.8
Share-based payments - - - - 2.0 - - 2.0 - 2.0
Tax on shared-based payments - - - - 0.9 - - 0.9 - 0.9
Net movement in equity - - - - 155.3 (4.4) (14.2) 136.7 2.0 138.7
At 30 September 2021 restated 303.4 873.0 768.8 30.6 (1,516.4) (47.1) (62.6) 349.7 18.0 367.7
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
Profit for the period - - - - 34.6 - - 34.6 2.4 37.0
Other comprehensive (loss)/income
- - - - (93.0) 6.0 8.4 (78.6) (0.7) (79.3)
Total comprehensive (loss) - - - - (58.4) 6.0 8.4 (44.0) 1.7 (42.3)
Share-based payments - - - - 4.0 - - 4.0 - 4.0
Tax on shared-based payments - - - - (0.7) - - (0.7) - (0.7)
Net movement in equity - - - - (55.1) 6.0 8.4 (40.7) 1.7 (39.0)
At 30 September 2022 303.4 873.0 768.8 30.6 (1,296.5) 10.0 (48.0) 641.3 21.2 662.5
*Amount included in this line relates to amounts stated in the annual report
for the year ended 31 March 2022.
** Other comprehensive income has been restated for the six months ended 30
September 2021. Further detail is included in note 3.
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.
Condensed consolidated statement of financial position (unaudited)
Note As at As at
30 September
31 March
2022
2022 (restated *)
£m
£m
Assets
Non-current assets
Goodwill 7 783.1 782.9
Other intangible assets 174.6 177.3
Property, plant and equipment 725.1 710.6
Right of use assets 312.9 334.3
Investment in joint ventures and associates 58.7 54.3
Loans to joint ventures and associates 10.1 12.1
Retirement benefit surpluses 14 177.4 300.9
Other financial assets 9.5 10.0
Lease receivables 23.2 24.1
Derivatives 11.1 -
Deferred tax asset 75.4 47.3
Trade and other receivables 9 10.8 9.7
2,371.9 2,463.5
Current assets
Inventories 141.7 142.7
Trade and other receivables 9 510.1 488.8
Contract assets 9 406.3 299.3
Income tax recoverable 18.8 25.4
Lease receivables 22.2 23.3
Derivatives 32.2 11.4
Cash and cash equivalents 13 1,137.9 1,146.3
2,269.2 2,137.2
Total assets 4,641.1 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 761.4 747.0
Retained losses (1,296.5) (1,241.4)
Total equity attributable to owners of the parent 641.3 682.0
Non-controlling interest 21.2 19.5
Total equity 662.5 701.5
Non-current liabilities
Bank and other borrowings 963.8 847.7
Lease liabilities 263.3 329.3
Trade and other payables 10 1.1 1.0
Deferred tax liabilities 9.4 9.6
Derivatives 46.0 59.3
Retirement benefit deficits 14 30.0 109.3
Provisions for other liabilities 12 50.4 60.3
1,364.0 1,416.5
Current liabilities
Bank and other borrowings 805.7 863.4
Lease liabilities 166.3 104.8
Trade and other payables 10 1,003.1 888.1
Contract liabilities 10 493.1 518.3
Income tax payable 23.7 17.7
Derivatives 60.4 34.8
Provisions for other liabilities 12 62.3 55.6
2,614.6 2,482.7
Total liabilities 3,978.6 3,899.2
Total equity and liabilities 4,641.1 4,600.7
The Group has restated the statement of financial position at 31 March 2022.
Details of the restatements are contained in note 3.
Condensed consolidated cash flow statement (unaudited)
Note Six months Six months
ended
ended
30 September
30 September
2022
2021 (restated *)
£m
£m
Cash flows from operating activities
Profit for the period 37.0 54.2
Share of results of joint ventures and associates (6.6) (9.6)
Income tax expense 6 14.2 4.6
Finance income 5 (10.1) (5.6)
Finance costs 5 38.3 38.0
Depreciation and impairment of property, plant and equipment 37.2 31.4
Depreciation and impairment of right of use assets 52.5 62.4
Amortisation and impairment of intangible assets 16.6 18.3
Equity share based payments 4.0 2.0
Net derivative fair value movement through profit or loss 23.2 0.1
Loss on disposal of subsidiaries, businesses and joint ventures and associates 15 - 16.3
(Profit)/loss on disposal of property, plant and equipment (0.6) 0.4
Profit on disposal of right of use assets (0.1) -
Loss on disposal of intangible assets - 0.5
Cash generated from operations before movement in working capital and 205.6 213.0
retirement benefit payments
Decrease/(increase) in inventories 1.1 (8.9)
Increase in receivables (109.3) (11.7)
Increase/(decrease) in payables 59.1 (110.7)
Decrease in provisions (5.1) (3.7)
Retirement benefit payments in excess of income statement (76.2) (88.5)
Cash generated from operations 75.2 (10.5)
Income tax paid (12.2) (10.3)
Interest paid (20.9) (23.9)
Interest received 6.8 4.4
Net cash flows from operating activities 48.9 (40.3)
Cash flows from investing activities
Disposal of subsidiaries and joint ventures and associates, net of cash 15 - 8.0
disposed
Dividends received from joint ventures and associates 5.1 24.7
Proceeds on disposal of property, plant and equipment 22.7 10.3
Purchases of property, plant and equipment (52.8) (77.7)
Purchases of intangible assets (6.8) (4.7)
Loans repaid by joint ventures and associates 2.0 0.6
Net cash flows from investing activities (29.8) (38.8)
Cash flows from financing activities
Lease principal payments (54.2) (69.6)
Cash outflow from non-hedging derivatives - (5.4)
Bank loans repaid (60.7) (15.3)
Loans raised and facilities drawn down 153.3 3.8
Net cash flows from financing activities 38.4 (86.5)
Net increase/(decrease) in cash, cash equivalents and bank overdrafts 13 57.5 (165.6)
Cash, cash equivalents and bank overdrafts at beginning of period 756.5 530.9
Effects of exchange rate fluctuations 1.1 1.2
Cash, cash equivalents and bank overdrafts at end of period 13 815.1 366.5
In the six months ended 30 September 2022, the Group restated the prior period
financial information. Details of the restatement are contained in note 3.
Notes to the consolidated financial statements continued (unaudited)
1. Basis of preparation and significant accounting policies
These condensed consolidated half year financial statements have been prepared
in accordance with IAS 34, Interim Financial Reporting and the Disclosures and
Transparency Rules of the Financial Services Authority, the Listing Rules and
UK adopted International Financial Reporting Standards (IFRS). They should be
read in conjunction with the Annual Report and financial statements for the
year ended 31 March 2022, which were prepared in accordance with IFRS and the
applicable legal requirements of the Companies Act 2006. These condensed
consolidated half-yearly financial statements do not comprise statutory
accounts within the meaning of Section 435 of the Companies Act 2006. The
annual report and financial statements for the year ended 31 March 2022 were
reported upon by the Group's auditor and delivered to the registrar of
companies. The report of the auditor on the annual report and financial
statements for the year ended 31 March 2022 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 accounting policies used
and presentation of these condensed consolidated half year financial
statements are consistent with the accounting policies applied by the Group in
its consolidated annual report and financial statements as at, and for the
year ended, 31 March 2022, and comply with amendments to IFRS.
The half year report for the six months ended 30 September 2022 was approved
by the Directors on 22 November 2022.
Significant accounting policies
New and amended standards adopted by the Group
There are no new standards, amendments or interpretations that are not yet
effective that are expected to have a material impact on the Group's
operations.
Basis of preparation
The Directors consider it appropriate to adopt the going concern basis of
accounting in preparing the interim financial information.
In assessing the appropriateness of the going concern basis of accounting, the
Directors have considered whether the Group has adequate resources to continue
in operational existence for at least 12 months from the date of signing. The
Directors reviewed the resources available to the Group in the form of cash
and committed facilities. As of 30 September 2022, the Group's committed
facilities and bonds totalling £2.3 billion were the £300 million revolving
credit facility (RCF), the £775 million five-year multi-currency RCF, and the
three tranches of notes (€550 million 1.75% notes, £300m million 1.875%
notes and €550 million 1.375% notes) issued under the Group's Eurobond
programme. The €550 million 1.75% notes matured on 6 October 2022 and were
settled using cash available in the balance sheet (being £1,137.9m cash,
offset by £322.8m of overdrafts). The going concern assessment, and
forecasting of covenants below, reflected this post balance sheet date event.
The RCFs are the only facilities with covenants attached. The key covenant
ratios are (i) net debt to EBITDA (gearing ratio) and (ii) EBITDA to net
interest (interest cover). These are measured twice per year, on 30 September
and 31 March. To assess the level of headroom within the available facilities,
a reverse stress test was performed to determine the level of performance
deterioration against the base case budget (in both EBITDA and net debt) that
would be required to challenge covenant levels. Of the remaining measurement
points within the five-year period approved by the Board, the lowest required
reduction in forecast EBITDA to hit the covenant level was 60% and the lowest
net debt increase was 90%. Given the mitigating actions that are available and
within management's control, such movements are not considered plausible.
There have been no breaches of debt covenants during the reporting period.
The Directors have also considered the Group's forecasts when assessing going
concern, having considered the 18-month period from the date of signing the
Group's condensed consolidated financial statements for the six months ended
30 September 2022. These are prepared using a bottom-up approach, aggregating
the budgets for the individual business units into Sector budgets. The Sector
budgets and the consolidated Group budget is then reviewed by the Board and
used to monitor business performance. The impacts of current economic
conditions, including inflation, have been incorporated into the forecasts.
The Directors have performed sensitivity analyses on the latest Group forecast
for the duration of the assessment period. These sensitivities include a
reduction in bid pipeline closure (business winning), a reduction in the
assumed restructuring savings, a deterioration in large programme performance
across the Group, a deterioration in profitability arising from cost base
inflation, 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. These sensitivities did not present any material uncertainties in
relation to the Group's ability to continue as a going concern.
Having considered these matters, 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.
Key sources of estimation uncertainty
The application of the Group's accounting policies requires the use of
estimates. The key sources of estimation uncertainty at the end of the
reporting period that may have a significant risk of causing a material
adjustment to the carrying amount of assets and liabilities within the next
financial year are set out below:
· Revenue and profit recognition: The Group's revenue recognition policies are
set out in note 1 of the annual report for the year ended 31 March 2022.
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 and adjustments are made
where necessary. As contracts near completion, often less judgement is
required to determine the expected outturn. One key contract for the Group
includes a critical estimate around the realisation of future transformational
savings. If these savings fail to be realised, this will impact on the margin
for this contract and could result in a reduction to revenue and contract
assets, and therefore profit, of £18 million.
· Defined benefit pension schemes obligation: 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 and discount rate actuarial 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
obligation. In addition to the inflation and discount rate estimates, a key
estimation relates to the expected availability of future accounting surpluses
under IFRIC 14. In the annual report and financial statements for the year
ended 31 March 2022, note 27 provided a sensitivity analysis of the Group's
defined benefit pension schemes.
· The carrying value of goodwill: Goodwill is tested annually for impairment
based on assumptions in relation to the cash flows expected to be generated by
cash generating units, together with appropriate discounting of the cash
flows. The assessment of the carrying value of goodwill 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. In the annual report and financial statements
for the year ended 31 March 2022, note 12 provided a sensitivity indicator
regarding the impairment of goodwill.
· 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 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.
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:
· Revenue and profit recognition: 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 cost of revenue.
· Determining the Group's cash generating units: Management exercises judgement
in determining the Group's operating segments. This determination is generally
straightforward and factual, however in some cases judgement is required.
There have been no changes to the operating segments in the current period.
Identification of prior period restatements
The results of the Group have been restated where practicable by
retrospectively restating the Group's prior period results for the affected
periods. Any restatements identified relating to reporting periods before 1
April 2021 have been corrected by cumulatively restating the impacted balance
sheet line item, including retained earnings, at 1 April 2021.
2. Adjustments between statutory and underlying information
Definition of underlying measures and exceptional items
The Group provides alternative performance measures, including underlying
operating profit, 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. 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 2022.
Underlying operating profit
Underlying operating profit excludes certain specific adjusting items that
distort the reporting of underlying business performance measures if they are
not adjusted for. 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 and large, infrequent restructuring
programmes. Transactions such as these may happen regularly and could be lumpy
and may be profits or losses. specific adjusting items include:
· Amortisation of acquired intangibles;
· Business acquisition, merger and divestment related items (being acquisitions
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 open forward rate contracts that will be settled in
future periods; 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
Six months ended 30 September 2022 Six months ended 30 September 2021 (restated)
Underlying Specific Statutory Underlying Specific Statutory
£m
£m
£m
£m
Adjusting Adjusting
Items Items
£m
£m
Revenue 2,144.0 - 2,144.0 2,126.1 - 2,126.1
Operating profit/(loss) 121.7 (48.9) 72.8 115.3 (39.9) 75.4
Other income - - - 6.2 - 6.2
Share of results of joint ventures and associates 6.6 - 6.6 9.6 - 9.6
Net finance costs (22.7) (5.5) (28.2) (32.4) - (32.4)
Profit/(loss) before tax 105.6 (54.4) 51.2 98.7 (39.9) 58.8
Income tax (expense)/benefit (23.1) 8.9 (14.2) (19.6) 15.0 (4.6)
Profit/(loss) after tax for the year 82.5 (45.5) 37.0 79.1 (24.9) 54.2
Earnings per share including underlying measures
Six months ended 30 September 2022 Six months ended 30 September 2021 (restated)
Underlying Specific Statutory Underlying Specific Statutory
£m
£m
£m
£m
adjusting adjusting
items items
£m
£m
Profit/(loss) after tax for the year 82.5 (45.5) 37.0 79.1 (24.9) 54.2
Amount attributable to owners of the parent 80.1 (45.5) 34.6 77.1 (24.9) 52.2
Amount attributable to non-controlling interests
2.4 - 2.4 2.0 - 2.0
Weighted average number of shares (m) 505.3 505.3 505.0 505.0
Effect of dilutive securities (m) 9.9 9.9 6.3 6.3
Diluted weighted average number of shares (m) 515.2 515.2 511.3 511.3
Basic EPS 15.8p (9.0)p 6.8p 15.3p (5.0)p 10.3p
Diluted EPS 15.5p (8.8)p 6.7p 15.1p (4.9)p 10.2p
Details of specific adjusting items
The impact of specific adjusting Items is set out below:
Six months ended 30 September 2022 Six months ended 30 September 2021 (restated)
£m
£m
Amortisation of acquired intangibles (8.1) (10.6)
Business acquisition, merger and divestment related items (12.1) (21.1)
Fair value loss on forward rate contracts to be settled in future periods (28.7) -
Derivative fair value movement and foreign exchange retranslation in respect (5.5) -
of leases
Restructuring - (9.4)
Exceptional items - 1.2
(54.4) (39.9)
Income tax benefit
Amortisation of acquired intangibles 2.1 2.6
Business acquisition, merger and divestment related items 1.7 -
Fair value loss on forward rate contracts 5.1 -
Restructuring - 1.7
Tax on exceptional items - (0.5)
Exceptional tax items - change in UK tax rate - 11.2
8.9 15.0
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. 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.
Fair value loss on forward rate contracts to be settled in future periods
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. 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). Gains or losses in
the meantime are only timing related. There is no prior period comparator
given the movement in market values in that period were small.
Derivative fair value movement and foreign exchange retranslation in respect of leases
The fair value movement on lease-related derivatives and foreign exchange
movements on lease liabilities are presented as a specific adjusting item.
This is caused by market imperfections, as it is not possible to match the
full lease term with readily available forward rate contracts due to the
length of the leases.
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 loss relating to business
acquisitions, mergers and divestment related items was £12.1 million. This is
comprised of professional fees and other related costs, including foreign
currency movements on transaction related funding arrangements, incurred for
transactions which are expected to complete during FY23.
The prior period included a total net loss relating to business acquisition,
merger and divestment related items of £21.1 million. Of this, £16.3 million
related to the disposal of the Group's Oil and Gas business. Further detail is
included in note 15. The remaining £4.8 million related to professional fees
and other related costs incurred in relation to the Group's divestment
programme for transactions which were not completed at 30 September 2021.
Restructuring
In the prior period the Group incurred £10.8 million of charges in relation
to the new operating model programme. This was offset by the release of
restructuring provision totalling £1.4 million.
Exceptional items
Exceptional items are those items which are significant, non-recurring and
outside the normal operating practice of the Group.
Six months ended 30 September 2022 Six months ended 30 September 2021 (restated)
£m
£m
Operating costs
Onerous contracts - 0.6
Other - 0.6
Exceptional items - Group - 1.2
Tax on exceptional items - (0.5)
Exceptional items - net of tax - 0.7
3. Prior period restatements
In the year ended 31 March 2022, the Group restated the prior period financial
information. The impact of these restatements on underlying operating profit
for the six months ended 30 September 2022 was £nil million. The restatements
are summarised below:
Impact on the income statement for the six months ended 30 September 2021
Six months ended 30 September 2021 (previously published) (i) Principal vs agent Six months ended 30 September 2021 (restated)
Group income statement
Revenue 2,223.0 (96.9) 2,126.1
Cost of revenue (1,986.1) 96.9 (1,889.2)
Administration and distribution expenses (145.2) - (145.2)
Loss from divestments (16.3) - (16.3)
Other income 6.2 - 6.2
Share of results of joint ventures and associates 9.6 - 9.6
Finance income 5.6 - 5.6
Finance costs (38.0) - (38.0)
Profit before tax 58.8 - 58.8
Income tax expense (4.6) - (4.6)
Profit for the period 54.2 - 54.2
Impact on basic earnings per share (pence) 10.3p - 10.3p
Impact on diluted earnings per share (pence) 10.2p - 10.2p
Six months ended 30 September 2021 - Group statement of other comprehensive income (extract)
Six months ended 30 September 2021 (previously published (ii) Pensions Six months ended 30 September 2021 (restated)
Other comprehensive income/(loss)
Remeasurement of retirement benefit obligations 168.0 (54.3) 113.7
Tax, including rate change impact, on remeasurement of retirement benefit (27.1) 13.6 (13.5)
obligations
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 0.5 782.9
Other intangible assets 175.7 1.6 177.3
Deferred tax asset 47.0 0.3 47.3
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.
i. Principal versus agency assessment
The Group has re-examined the presentation of revenue and cost of revenue in
relation to pass-through revenue on three of the Group's contracts. The Group
had previously taken the judgement that it acted as a principal in these
arrangements, informed by the contractual terms and practical delivery of the
contract to the customer. Following the transition to the Group's new
auditors, this has been further considered and the Group has reassessed this
judgement, which had always been a finely balanced one. This change of
judgement, and the resultant accounting policy, means that revenue and cost of
revenue are now presented net for these contracts. Restatement of the
financial information in accordance with the new accounting policy results in
a decrease in revenue and cost of revenue of £96.9 million in the six months
ended 30 September 2021. There is no impact to reported profit or cash flow as
a result of this adjustment.
ii. Pensions
Allowance for the 2021 pension increases in the 31 March 2021 benefit obligation
Furthermore, a refinement in the calculation of the value of defined benefit
obligation for the principal schemes now allows for the inclusion of the
actual known rate of the next pension increase, rather than using the
longer-term assumed inflation rate of pension increases. This approach was
not followed in the six months ended 30 September 2021. Application of the
correct methodology at 31 March 2021 results in a reduction to the
Remeasurement of retirement benefit obligations through the statement of other
comprehensive income of £54.3 million, due to actual inflation being lower
than assumed long-term inflation as at 30 September 2021.
This approach was followed for the year ended 31 March 2022, therefore there
is no impact on the comparative statement of financial position.
iii. NSM - acquisition accounting
Under IFRS 3, the Group is required to adjust amounts recognised through the
acquisition accounting for new information obtained about facts and
circumstances that existed at the acquisition date. Post-acquisition, we have
determined that assumptions used to calculate a pain/gain share provision 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 £0.5 million,
increased acquired intangibles by £1.6 million, increased deferred tax assets
by £0.3 million at 31 March 2022.
4. 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.
Six months ended 30 September 2022 Marine Nuclear Land Aviation Unallocated Total
£m
£m
£m
£m
£m
£m
Revenue 666.4 558.2 478.2 441.2 - 2,144.0
Underlying operating profit 47.3 30.1 38.0 6.3 - 121.7
Specific adjusting items
Amortisation of acquired intangibles (5.1) - (0.6) (2.4) - (8.1)
Business acquisition, merger and divestment related items - - (0.3) (11.8) - (12.1)
Fair value (loss)/gain on forward rate contracts (37.8) 0.1 - 9.0 (28.7)
Operating profit 4.4 30.2 37.1 1.1 - 72.8
Share of results of joint ventures and associates 0.2 0.7 - 5.7 - 6.6
Net finance costs - - 0.4 - (28.6) (28.2)
Profit/(loss) before tax 4.6 30.9 37.5 6.8 (28.6) 51.2
Six months ended 30 September 2021 (restated *) Marine Nuclear Land Aviation Unallocated Total
£m
£m
£m
£m
£m
£m
Revenue 627.4 516.3 510.1 472.3 - 2,126.1
Underlying operating profit 38.9 36.2 29.8 10.4 - 115.3
Specific adjusting items
Acquired intangible amortisation (0.1) - (0.6) (9.9) - (10.6)
Business acquisition, merger and divestment related items - - - (16.3) (4.8) (21.1)
Restructuring costs (1.7) 1.5 (4.7) (1.4) (3.1) (9.4)
Exceptional items - 0.6 0.3 0.3 - 1.2
Operating profit/(loss) 37.1 38.3 24.8 (16.9) (7.9) 75.4
Other income - - - - 6.2 6.2
Share of results of joint ventures and associates 2.0 - 2.1 5.5 - 9.6
Net finance costs - - 0.4 - (32.8) (32.4)
Profit/(loss) before tax 39.1 38.3 27.3 (11.4) (34.5) 58.8
5. Net finance costs
Six months Six months
ended
ended
30 September
30 September
2022
2021 (restated)
£m
£m
Finance costs
Loans, overdrafts and associated interest rate hedges 22.5 23.0
Lease interest and associated hedges 13.1 10.1
Retirement benefit interest - 2.6
Other 2.7 2.3
Total finance costs 38.3 38.0
Finance income
Bank deposits, loans and leases 6.1 5.2
IFRIC 12 investment income 0.4 0.4
Retirement benefit interest 3.6 -
Total finance income 10.1 5.6
Net finance costs 28.2 32.4
6. Income tax expense
Six months Six months
ended
ended
30 September
30 September
2022
2021
£m
£m
Taxation expense (14.2) (4.6)
Calculation of effective tax rate
Profit before tax 51.2 58.8
Deduct: Equity accounted investments (6.6) (9.6)
Add back specific adjusting items 54.4 39.9
Other income - (6.2)
Adjusted profit before tax 99.0 82.9
Tax 14.2 4.6
charge
Exclude one-off tax benefits - 11.2
Exclude tax adjustments in respect of specific adjusting 8.9 3.8
items
Adjusted tax charge 23.1 19.6
Effective tax rate 23.3% 23.6%
The tax charge has been calculated by applying the effective rate of tax which
the Group expects to incur for the year to 31 March 2023 in each jurisdiction
in which it operates.
As at 30 September 2021, an increase in the UK rate of corporation tax had
been substantively enacted, from 19% to 25%, with effect from 1 April 2023. An
adjustment was made in the financial statements for the six months ended 30
September 2021 to reflect the fact that a portion of UK deferred tax balances
were expected to unwind at 25%. This adjustment was recorded as a
non-recurring gain of £11.2 million in the group income statement within
specific adjusting items together with a non-recurring gain of £6.5 million
in the group statement of comprehensive income.
7. Goodwill
30 September 2022 31 March
£m
2022 (restated)
£m
Cost
At 1 April 2,312.2 2,487.3
On disposal of subsidiaries - (197.9)
Additions - 21.8
Exchange adjustments 0.2 1.0
At 30 September / 31 March 2,312.4 2,312.2
Accumulated impairment
At 1 April 1,529.3 1,531.0
On disposal of subsidiaries - (8.9)
Impairment - 7.2
Exchange adjustments - -
At 30 September / 31 March 1,529.3 1,529.3
Net book value at 30 September / 31 March 783.1 782.9
Goodwill is allocated to the operating segments as set out in the table below:
30 September 31 March
2022 2022
£m
£m
Marine 297.5 297.2
Nuclear 233.1 233.1
Land 218.6 218.6
Aviation 32.0 32.0
Africa 1.9 2.0
783.1 782.9
Goodwill is stated at cost less any provision for impairment and is compared
against the recoverable amount at least annually. The recoverable value of
each cash generating unit was assessed at 31 March 2022 by reference to
value-in-use calculations. The value-in-use calculations were derived from
risk-adjusted cash flows from the Group's five-year plan and nominal growth
rates between 1.8% and 2.5% were used to establish terminal value assessments.
There have been no changes to the Group's key assumptions in the six months
ended 30 September 2022 since the published annual report and financial
statements for the year ending 31 March 2022. The key assumptions can be found
in note 12 of that report. 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 COVID-19, climate change and
inflation.
Goodwill is required to be tested for impairment at least once every financial
year, irrespective of whether there is any indication of impairment. The
Group's annual impairment review typically occurs at year end. However, if
indicators of impairment are present, an earlier review is also required. The
Group has assessed the goodwill balance for both internal and external
impairment indicators and no impairment indicators were identified. Management
will prepare a full goodwill impairment assessment in the final quarter of the
year.
8. Property, plant and equipment
In the six months ended 30th September 2022 the Group made the following
significant additions to property, plant and equipment:
• £15.1 million investment into site improvements at Devonport Royal
Dockyard;
• £12.7 million investment into purchase of CNC machines and other site
improvements at Rosyth; and
• £5.9 million investment into fit out and site improvement at Bristol
Technology Centre.
9. Trade and other receivables and contract assets
30 September 2022 31 March 2022
£m
£m
Non-current assets
Costs to obtain a contract 5.8 8.9
Costs to fulfil a contract 2.2 0.8
Other debtors 2.8 -
Non-current trade and other receivables 10.8 9.7
Current assets
Trade receivables 267.8 311.5
Less: provision for impairment of receivables (12.9) (14.6)
Trade receivables - net 254.9 296.9
Retentions 4.6 4.4
Amounts due from related parties (note 16) 2.7 2.0
Other debtors 147.0 106.2
Prepayments 86.7 71.1
Costs to obtain a contract 1.7 7.6
Costs to fulfil a contract 12.5 0.6
Trade and other receivables 510.1 488.8
Contract assets 406.3 299.3
Current trade and other receivables and contract assets 916.4 788.1
Trade and other receivables are stated at amortised cost less expected credit
loss.
10. Trade and other payables and contract liabilities
30 September 2022 31 March 2022
£m
£m
Current liabilities
Trade creditors 212.6 164.7
Amounts due to related parties (note 16) 0.7 1.5
Other creditors 38.5 26.9
Other taxes and social security 68.9 76.6
Accruals 682.4 618.4
Trade and other payables 1,003.1 888.1
Contract liabilities 493.1 518.3
Trade and other payables and contract liabilities 1,496.2 1,406.4
Non-current liabilities
Other creditors 1.1 1.0
Included in creditors is £19.5 million (31 March 2022: £6.7 million)
relating to capital expenditure which has therefore not been included in
working capital movements within the cash flow.
11. Financial instruments
The following table presents the Group's assets and liabilities:
30 September 2022 (£m) Financial assets at fair value Financial assets at amortised cost Financial liabilities at fair value Financial liabilities at amortised cost Total carrying amount Fair value
Non-current financial assets
Investment in joint ventures and associates - 58.7 - - 58.7 58.7
Loans to joint ventures and associates - 10.1 - - 10.1 10.1
Financial assets 11.1 9.5 - - 20.6 20.6
Lease receivables - 23.2 - - 23.2 23.2
Current financial assets
Trade and other receivables * - 314.3 - - 314.3 314.3
Lease receivables - 22.2 - - 22.2 22.2
Derivatives 32.2 - - - 32.2 32.2
Cash and cash equivalents - 1,137.9 - - 1,137.9 1,137.9
Non-current financial liabilities
Bank and other borrowings - - - (963.8) (963.8) (817.7)
Trade and other payables - - - (0.9) (0.9) (0.9)
Derivatives - - (46.0) - (46.0) (46.0)
Current financial liabilities
Bank and other borrowings - - - (805.7) (805.7) (805.7)
Trade and other payables * - - - (545.3) (545.3) (545.3)
Derivatives - - (60.4) - (60.4) (60.4)
Net financial assets / (financial liabilities) 43.3 1,575.9 (106.4) (2,315.7) (802.9) (656.8)
* Trade and other receivables and trade and other payables only include
balances which meet the definition of a financial instrument.
31 March 2022 (£m) Financial assets at fair value Financial assets at amortised cost Financial liabilities at fair value Financial liabilities at amortised cost Total carrying amount Fair value
Non-current financial assets
Investment in joint ventures and associates - 54.3 - - 54.3 54.3
Loans to joint ventures and associates - 12.1 - - 12.1 12.1
Financial assets - 10.0 - - 10.0 10.0
Lease receivables - 24.1 - - 24.1 24.1
Current financial assets
Trade and other receivables * - 335.3 - - 335.3 335.3
Lease receivables - 23.3 - - 23.3 23.3
Derivatives 11.4 - - - 11.4 11.4
Cash and cash equivalents - 1,146.3 - - 1,146.3 1,146.3
Non-current financial liabilities
Bank and other borrowings - - - (847.7) (847.7) (819.6)
Derivatives - - (59.3) - (59.3) (59.3)
Current financial liabilities - -
Bank and other borrowings - - - (863.4) (863.4) (833.1)
Trade and other payables * - - - (460.0) (460.0) (460.0)
Derivatives - - (34.8) - (34.8) (34.8)
Net financial assets / (financial liabilities) 11.4 1,605.4 (94.1) (2,171.1) (648.4) (590.0)
* Trade and other receivables and trade and other payables only include
balances which meet the definition of a financial instrument.
12. Provisions for other liabilities
Contract/ Employee benefits and business reorganisation Property Other Total
warranty
costs
(b)
(c)
provisions
(a)
£m
£m
£m
£m
£m
At 31 March 2022 as previously stated 51.1 39.7 21.0 1.7 113.5
Prior period restatement (note 3) 2.4 - - - 2.4
At 31 March 2022 restated 53.5 39.7 21.0 1.7 115.9
Net charge to income statement 2.9 1.4 4.2 0.2 8.7
Utilised in year (4.3) (7.5) (1.1) (0.9) (13.8)
Foreign exchange 1.1 0.2 0.6 - 1.9
At 30 September 2022 53.2 33.8 24.7 1.0 112.7
Provisions are analysed between current and non-current as follows:
30 September 31 March
2022
2022
£m
£m
Current 73.4 55.6
Non-current 39.3 60.3
112.7 115.9
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.
b) Property and other provisions primarily relate to dilapidation costs and
contractual obligations in respect of infrastructure.
c) 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. Also included in other provisions is £0.3 million relating to the
Italian Anti-Trust fine.
Included within provisions is £7.1 million expected to be utilised over
approximately ten years. Other than these provisions the Group's non-current
provisions are expected to be utilised within two to five years.
13. Changes in net debt excluding loans to joint ventures and associates and lease receivables
31 March Additional Other non-cash movement Re-designation of derivative Changes in fair value Exchange 30 September
2022
leases
£m
£m
movement
2022
£m Cash flow
£m £m
£m
£m
£m
Cash and bank balances 1,146.3 (9.5) - - - - 1.1 1,137.9
Bank overdrafts (389.8) 67.0 - - - - - (322.8)
Cash, cash equivalents and bank overdrafts 756.5 57.5 - - - - 1.1 815.1
Debt (1,321.3) (92.6) - (1.6) - - (31.2) (1,446.7)
Lease liabilities (434.1) 54.2 (37.0) 0.8 - - (13.5) (429.6)
Derivative designated as hedge of Group debt (29.3) - - - (36.1) 31.7 - (33.7)
Changes in liabilities from financing arrangements (1,784.7) (38.4) (37.0) (0.8) (36.1) 31.7 (44.7) (1,910.0)
Lease receivables 47.4 (14.0) 14.3 - - - (2.3) 45.4
Net debt before loans to joint ventures and associates (980.8) 5.1 (22.7) (0.8) (36.1) 31.7 (45.9) (1,049.5)
Loans to joint ventures and associates 12.1 (2.0) - - - - - 10.1
Net debt excluding loans to joint ventures and associates and lease (968.7) 3.1 (22.7) (0.8) (36.1) 31.7 (45.9) (1,039.4)
receivables
14. Retirement benefits and liabilities
The fair value of the assets and the present value of the liabilities of the
Group pension schemes at 30 September were as follows:
30 September 2022 31 March 2022
£m
£m
Fair value of plan assets
Growth assets
Equities 30.8 76.5
Property funds 367.4 369.2
High yield bonds/emerging market debt 17.6 44.5
Absolute return and multi-strategy funds 221.5 260.7
Low-risk assets
Bonds 1,842.2 2,078.8
Matching assets* 1,210.4 2,197.1
Longevity swaps (207.8) (293.7)
Fair value of assets 3,482.1 4,733.1
Percentage of assets quoted 100% 100%
Percentage of assets unquoted - -
Present value of defined benefit obligations
Active members 533.4 857.5
Deferred pensioners 855.2 1,292.4
Pensioners 1,946.1 2,391.6
Total defined benefit obligations 3,334.7 4,541.5
Net (liabilities)/assets recognised in the statement of financial position 147.4 191.6
* A number of the Group's pension schemes invest in segregated portfolios,
pooled investment vehicles and derivatives contracts, commonly known as
Liability Driven Investments (LDI's). The trustees have authorised the use of
derivatives by the investment managers for efficient portfolio management
purposes including to reduce certain investment risks such as interest rate
risk and inflation risk. The principal investment in derivatives are gilt
repurchase agreements, interest rate and inflation swaps in the liability
matching portfolio and total return swaps in the return seeking portfolio.
These derivatives are included within the matching assets and equities
classifications. The matching assets category includes gross assets of £3,012
million (March 2022: £3,966 million) and associated repurchase agreement
liabilities of £1,873 million (March 2022: £1,872 million). Repurchase
agreements are entered into with counterparties to better offset the schemes
exposures to interest and inflation rates, whilst remaining invested in assets
of a similar risk profile.
Analysis of movement in the Group statement of financial position.
30 September 2022 31 March 2022
£m
£m
Fair value of plan assets (including reimbursement rights)
At 1 April 4,733.1 4,623.6
Interest on assets 63.2 92.2
Actuarial (loss)/gain on assets (1,262.6) 88.4
Employer contributions 92.7 190.2
Employee contributions 0.1 0.2
Benefits paid (144.4) (261.5)
As at period end 3,482.1 4,733.1
Present value of benefit obligations
At 1 April 4,541.5 4,902.5
Service cost 13.1 31.1
Incurred expenses 3.4 7.4
Interest cost 59.6 95.9
Employee contributions 0.1 0.2
Experience losses 171.7 54.0
Actuarial loss/(gain) - demographics 10.3 (15.0)
Actuarial (gain)/loss - financial (1,320.6) (273.1)
Benefits paid (including transfers) (144.4) (261.5)
As at period end 3,334.7 4,541.5
Net asset at period end 147.4 191.6
The amounts recognised in the Group income statement are as follows:
30 September 2022 30 September 2021
£m
£m
Current service cost 13.1 15.8
Incurred expenses 3.4 3.7
Total included within operating profit 16.5 19.5
Net interest (credit)/cost (3.6) 2.6
Total included within income statement 12.9 22.1
As at 30 September 2022 the key assumptions used in valuing pension
liabilities were:
Discount rate 4.7% - 5.1% (31 March 2022: 2.7%)
Inflation rate (RPI) 12.2% for one year and long-term rates of 3.5% - 3.7% (31 March 2022: 3.7%)
15. Disposals of subsidiaries, businesses and joint ventures and associates
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.
Six months ended 30 September 2021
Oil & Gas
£m
Goodwill 0.7
Property, plant and equipment 15.1
Right-of-use assets 125.8
Deferred tax asset 23.2
Inventory 3.6
Current assets 48.3
Lease liabilities (129.7)
Deferred tax liabilities (13.4)
Current liabilities (40.7)
Provisions for other liabilities and charges (1.3)
Net assets disposed 31.6
Disposal costs 2.0
Cumulative currency translation gain (7.3)
Loss on disposal (16.3)
Sale proceeds 10.0
Less costs paid in the year (2.0)
Net cash inflow 8.0
16. Related party transactions
Related party transactions for the six months ended 30 September 2022 are:
sales to joint ventures and associates of £18.8 million (six months ended 30
September 2021: £18.8 million) and purchases from joint ventures and
associates of £nil million (six months ended 30 September 2021: £0.1
million).
For annualised key management compensation, please refer to note 7 and the
Remuneration Report in the annual report and financial statements for the year
ended 31 March 2022.
For transactions with Group defined benefit pension schemes, please refer to
note 14 above and note 27 in the annual report and financial statements for
the year ended 31 March 2022.
30 September 2022 Revenue to (£m) Purchases from (£m) Period end receivables balance (£m) Period end payables balance (£m)
Alert Communications Limited 4.7 - 0.8 -
Babcock Mission Critical Services Limited - - - -
AirTanker Services Limited 4.9 - - -
Advanced Jet Training Limited 1.0 - 0.2 -
Rear Crew Training Limited 0.3 - - -
Ascent Flight Training (Management) Limited 0.6 - 0.1 -
Fixed Wing Training Limited 1.5 - 0.4 -
Rotary Wing Training Limited 1.9 - - -
First Swietelsky Operation and Maintenance 3.9 - 1.2 (0.7)
18.8 - 2.7 (0.7)
30 September 2021 Revenue to (£m) Purchases from (£m) Period end receivables balance (£m) Period end payables balance (£m)
Alert Communications Limited 2.8 - 0.9 -
Babcock Mission Critical Services Limited - (0.1) - -
AirTanker Services Limited 6.0 - - -
Advanced Jet Training Limited 0.7 - 0.2 -
Rear Crew Training Limited 1.2 - - -
Ascent Flight Training (Management) Limited 1.0 - - -
Fixed Wing Training Limited 1.4 - - -
Rotary Wing Training Limited 2.0 - - -
First Swietelsky Operation and Maintenance 3.7 - 1.5 (1.1)
18.8 (0.1) 2.6 (1.1)
17. Contingent liabilities
A provision is recognised when the Group has a present obligation as a result
of a past event, it is probable that an outflow of economic benefits will
occur and the amount can be reliably estimated. 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, 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 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.
b) 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.
c) 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.
d) 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.
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.
18. Events after the reporting period
On 6 October 2022 the Group repaid a €550 million Eurobond from available
cash resources, being the first tranche under the Eurobond programme. Future
repayment dates for future tranches fall due in 2026 and 2027.
Interim financial information
Having on-boarded a new external auditor in the year ended 31 March 2022 and
embarked on a wide ranging internal controls improvement plan, we intend in
future to ask our external auditors to perform an Interim Review. For this
current Interim Statement we decided, rather than prioritise an Interim
Review, we should invest our time and resource and that of Deloitte, to
complete the detailed planning of the audit for the year ending 31 March 2023
and to progress further the controls improvement plan, as well as filing all
of the Group's subsidiary statutory accounts for the year ended 31 March 2022.
This should enable a more timely publication of our results for the year
ending 31 March 2023.
Statement of Directors' responsibilities
This half year report is the responsibility of the Directors who each confirms
that, to the best of their knowledge:
· this condensed set of financial statements has been prepared in accordance
with United Kingdom adopted IAS 34 (Interim Financial Reporting); and
· the interim management report herein includes a fair review of the information
required by:
· Rule 4.2.7 of the Disclosure & Transparency Rules (indication of the
important events during the first six months, and their impact on the
condensed set of financial statements, and a description of principal risks
and uncertainties for the remaining six months of the year); and
· Rule 4.2.8. of the Disclosure & Transparency Rules (disclosure of related
parties' transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial
position or the performance of the entity during that period; and any changes
in the related parties transactions described in the last annual report that
could have a material effect on the financial position or performance of the
enterprise in the first six months of the current financial year).
Approved by the Board and signed on behalf of the Directors by:
David Lockwood
Chief Executive
David Mellors
Chief Financial Officer
22 November 2022
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