REG - Babcock Intnl Group - Results for the six months ended 30 September 2023
14/11/2023 07:15
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RNS Number : 3093T Babcock International Group PLC 14 November 2023
Babcock International Group PLC
Half year results for the six months ended 30 September 2023
14 November 2023
Strong start to the year, full year expectations unchanged
Statutory results
30 September 2023 30 September 2022
Revenue £2,177.0m £2,144.0m
Operating profit £144.2m £72.8m
Basic earnings per share 20.4p 6.8p
Cash generated from operations £163.2m £75.2m
Underlying results (ii)
30 September 2023 30 September 2022
Contract backlog (i) £9.6bn £9.9bn
Underlying operating profit £154.4m £121.7m
Underlying operating margin 7.1% 5.7%
Underlying basic earnings per share 20.6p 15.8p
Dividend per share 1.7p -
Underlying free cash flow £67.2m £(24.7)m
Net debt £(492.5)m £(1,039.4)m
Net debt excluding operating leases £(287.8)m £(629.3)m
Net debt/EBITDA (covenant basis) 1.1x 1.9x
David Lockwood, Chief Executive Officer, said:
"We have made a strong start to the year, as we continue to build on the
exciting momentum we see across the Group. We are delivering for our
customers, reducing risk and positioning for growth through a number of
significant new global teaming agreements.
"We have a clear capital allocation policy, which is providing the Group with
the flexibility it needs to capture the growing number of value creation
opportunities we see ahead. We are reinstating our dividend following a
four-year hiatus, reflecting our confidence in the future, and our
expectations for the full year remain unchanged."
Financial highlights
- Contract backlog £9.6 billion, down year-on-year due to the impact
of disposals, up slightly since year end
- Revenue up 2% to £2,177 million. Organic growth of 18%, including
major infrastructure programme growth, offset FY23 disposals
- Underlying operating profit up 27% to £154 million, ahead of
expectations, primarily due to earlier than anticipated receipt of licence
income from the Polish frigate programme
- Underlying operating margin increased 140 basis points to 7.1%,
boosted by the licence income
- Underlying basic earnings per share up 30% to 20.6p
- Underlying free cash flow of £67 million, driven by 82% underlying
operating cash conversion
- Net debt to EBITDA reduced to 1.1x on a covenant basis (FY23: 1.5x).
Net debt reduced by £72 million to £493 million
- Dividend reinstated following a four-year hiatus. The interim
dividend of 1.7 pence per share is expected to be around a third of the full
year dividend
Outlook
The Board's expectations for another year of organic revenue growth,
underlying operating margin expansion and positive cash flow generation are
unchanged, and we continue to build momentum to achieve the medium-term
guidance set out within our FY23 results.
Strategic highlights
- Strategic cooperation agreement with Saab, including the
development of an advanced naval corvette design
- Collaboration agreement with Huntington Ingalls Industries (HII)
for US and UK naval and civil nuclear opportunities
- Teaming partnership with HII to collaborate on nuclear-powered
submarine capabilities to support the AUKUS endeavour
- Babcock Skills Academy launched in Devonport to develop
submarine support capabilities in our growing workforce
- Babcock General Logistics Vehicle (GLV) launched to target the
upcoming UK Army Land Rover replacement programme
- Established partnership with Zero Petroleum to explore the use
of synthetic fuels across air defence platforms
Operational highlights
Marine
- Type 31: HMS Venturer (ship 1) superstructure progressing, keel
laid for HMS Active (ship 2)
- Critical Design Review completed for the UK Royal Navy's
next-generation Maritime Electronic Warfare Programme
- Cut steel on first MIECZNIK Class frigate for the Polish Navy.
Three Arrowhead 140 licences delivered
Nuclear
- Major Infrastructure Programme (MIP) continuing to ramp up
across Devonport Dockyard - revenue more than doubled to £218 million.
Further contract (£750 million over four years) signed in November 2023
- Commenced deep maintenance and LIFEX on the second of the UK's
Vanguard Class nuclear submarines, HMS Victorious
- Five-year contract with the UK MOD to collaborate on the Ship
Submersible Nuclear AUKUS (SSN-A) submarine detailed design
Land
- Awarded second land defence contract to manage and maintain
ground support equipment at military bases across France
- Babcock's contract to support UK-gifted platforms to Ukraine now
operating at full capability
- Secured rebid on the six-year Royal Electro-Mechanical Engineers
(REME) contract
Aviation
- Two additional H160 helicopters modified and delivered to the
French Navy as part of a 10-year contract
- Secured a four-year contract extension with the South Australian
Government for aerial emergency services
- Awarded a four-year support contract for H145 aircraft with
French Securité Civile, partnered with Airbus
Notes to statutory and underlying results on page 1
(i) Contract backlog: The £9.6 billion contract backlog represents amounts of
future revenue under contract. This measure does not include £3.0 billion of
work expected to be done by Babcock as part of framework agreements (HY23:
£3.4 billion). Contract backlog and framework definitions can be found in the
Financial Glossary on page 25.
(ii) Alternative Performance Measures (APMs):
The Group provides APMs, including underlying operating profit, underlying
operating margin, underlying earnings per share, underlying operating cash
flow, underlying free cash flow, and net debt to EBITDA to enable users to
have a more consistent view of the performance and earnings trends of the
Group. These measures are considered to provide a consistent measure of
business performance from year to year. They are used by management to assess
operating performance and as a basis for forecasting and decision-making, as
well as the planning and allocation of capital resources. They are also
understood to be used by investors in analysing business performance.
The Group's APMs are not defined by IFRS and are therefore considered to be
non-GAAP measures. The measures may not be comparable to similar measures used
by other companies, and they are not intended to be a substitute for, or
superior to, measures defined under IFRS. The Group's APMs are consistent with
the year ended 31 March 2023. The Group has defined and outlined the purpose
of its APMs in the Financial Glossary on page 25.
Results presentation:
A webcast presentation for investors and analysts will be held on 14 November
2023 at 09:00 am (UK time). The presentation will be webcast live and will be
available on demand at
www.babcockinternational.com/investors/results-and-presentations
(http://www.babcockinternational.com/investors/results-and-presentations) .
A transcript of the presentation and Q&A will also be made available on
our website.
For further information:
Andrew Gollan, Babcock Director of Investor Relations +44 (0)7936 039 004
Kate Hill, Babcock Group Director of Communications +44 (0)20 7355 5312
Olivia Peters / Harry Cameron, Teneo +44 (0)20 7353 4200
CEO STATEMENT
The first half of FY24 has been another period of progress for the Group, both
operationally and financially, as we continued to build on the good momentum
with which we entered the financial year. We have delivered 18% organic
revenue growth, 140 basis points of underlying operating margin(1) expansion
and 82% underlying operating cash conversion(1), boosted by the receipt of
licence fee income. Beyond the strong financial performance in the half, we
have also made excellent operational and strategic progress, delivering on
existing contract milestones and entering into some significant long-term
partnerships, such as our wide-ranging Strategic Cooperation Agreement with
Saab, which includes the development of an advanced corvette design and an
agreement with HII to collaborate in naval and nuclear opportunities in the
UK, US and Australia.
Equally critical, given that our people are paramount to our success, is the
progress we have made in enhancing and strengthening our corporate culture. We
were delighted with the increased levels of engagement and satisfaction we saw
reflected in our recent Group wide employee survey and were proud to have been
named in The Engineer's 'Top Ten Employers 2023' list in October. We enter the
second half of the year with a strong order book and continue to be excited by
the positive underlying trends and expanding opportunity set for the Group,
which make us more confident than ever in the prospects for the business
across the short, medium and long term.
HY24 results
We delivered strong financial results for the first six months of the
financial year. Group revenue of £2,177 million was slightly up on the prior
year. Organic revenue growth of 18%, including double-digit growth in three of
our four sectors, more than offset the impact of disposals. Underlying
operating margin(1) of 7.1% (HY23: 5.7%) and underlying free cash flow(1) of
£67 million were both ahead of expectations, albeit largely due to earlier
than expected licence receipts on the Polish MIECZNIK frigate programme. While
the licences are one-off in nature, they demonstrate further progress on a key
naval programme and, more broadly, the attractiveness to international markets
of the modular Arrowhead 140 frigate design and our flexible acquisition
model.
In April 2023, the Board stated its intention to reinstate a dividend in FY24,
underpinned by our strengthened balance sheet and cash outlook. The Board has
declared an interim dividend of 1.7 pence per share payable on 19 January
2024.
Increasing momentum and reducing risk
The global threat environment and geopolitical situation remains unstable,
meaning that the services and products we provide across our diverse
international footprint have never been more important, as reflected by the
good operating and financial momentum across the Group. Our contract backlog
of £9.6 billion was £0.3 billion lower than a year ago due to the impact of
disposals. However, contract backlog increased slightly in H1 compared to the
end of March, despite the trading of long-term contracts, reflecting multiple
new contract awards and agreements that will help drive future growth.
We play a critical role in support of the UK's nuclear deterrent, which lies
at the heart of the nation's defence. We have now completed the highly
complex, multi-year life-extension (LIFEX) programme on the first Vanguard
Class submarine, HMS Vanguard, representing a major reduction in fixed price
contract risk. In July, we signed an initial contract with the MOD for the
second Vanguard boat, HMS Victorious, enabling deep maintenance of the complex
submarine to begin at our Devonport dockyard. We expect the full cost recovery
agreement to be replaced with a contract covering the entire programme on
similar terms in the coming months.
The Vanguard Class submarines will begin to transition to the UK's next
generation nuclear deterrent submarine, the Dreadnought Class, in the early
2030s. Babcock is playing an important role in the Dreadnought programme,
specifically in support of the design and future support solutions. In the
period, we also won a contract to deliver weapons handling launch systems
(WHLS) and specialist equipment for these future submarines.
In October 2023, we also signed a five-year contract with the MOD to provide
input in the detailed design for the new Ship Submersible Nuclear AUKUS
(SSN-A) submarine, which will replace the Astute Class in the UK Royal Navy
and is planned to be the design on which the Australian Navy builds its future
fleet. Ensuring that future support is properly considered at the design stage
is expected to result in increased availability throughout the life of the
submarine.
The Major Infrastructure Programme (MIP), to modernise submarine
infrastructure across Devonport, ramped up further during the period, driving
strong revenue growth. In November 2023, we signed a four-year £750 million
contract to secure the capability required to support and sustain the UK's
submarines for decades to come. The upgraded dockyard facilities will support
all current and future UK submarine classes as the fleet progresses through a
multi-year class transition, including commencement of deep maintenance of the
Astute Class in the next few years. In the period, the first Astute boat to
undergo in-dock maintenance at Devonport arrived for surveying works ahead of
its programme of work.
In Poland, we finalised the design licence agreement with the PGZ-MIECZNIK
consortium, which allows for the build of three frigates for the Polish Navy.
First steel-cut for MIECZNIK ship one was held at the PGZ shipyard in Gdynia
in August. We also signed a framework agreement as the next step to a
potential joint venture which could see Babcock support MIECZNIK through the
complete design and build programme. The agreement further strengthens our
strategic partnership with the Polish Armaments Group PGZ SA, one of the
largest defence groups in Europe, supporting ambitions for wider international
naval and defence opportunities.
Multiple new international contracts are driving growth in the Land sector.
Ramp up of the Australian Defence High Frequency Communication System (DHFC)
programme almost doubled our Australian Land revenues compared to HY23. In
France, we were awarded a second Land contract to provide in-service support
to airfield support equipment throughout France's national and international
military bases for seven years. In July, we were awarded an initial 12-month
contract from the MOD to support UK-gifted platforms to Ukraine, covering the
provision of operational support to armoured vehicles, training of Ukrainian
personnel and management of vital equipment, supply chains and spares. After
the period end, we opened an office in-country where a dedicated team will
focus on supporting Ukraine and our industry partners.
Positioning for the longer-term growth - the right capabilities in a
supportive market
Our long-term growth strategy is to leverage our technical capability to grow
our defence business, both internationally and in the UK. We have made
excellent progress in the period, establishing a number of strategic
relationships that position the Group for longer-term opportunities.
In Marine, we signed a wide-ranging strategic cooperation agreement with Saab,
including the development of an advanced naval corvette design. The joint
development will benefit from Babcock's expertise in platform design and
integration, to create a new class-leading capability, and Saab's expertise in
naval combat management systems and composite structures.
In Nuclear, discussions continue with the UK Submarine Delivery Agency (SDA)
and the Royal Navy with the intention to finalise a long-term strategic
partnership to ensure the stable, safe, effective and efficient delivery of
deep and base maintenance of submarines. We expect to replace current
commercial arrangements, currently under the Future Maritime Support Programme
(FMSP), by March 2025.
In recognition of increasing long-term capacity requirements in the Nuclear
sector, we launched the Babcock Skills Academy at Devonport to enhance our
growing workforce's capabilities. Focusing on submarine support and critical
nuclear expertise, the Skills Academy's training facilities enable learning of
the complex requirements to perform submarine deep maintenance. More than
2,000 people are expected to pass through the Academy in its first three years
and a further 10,000 over the following five years.
We have entered into a strategic agreement with US-based HII to collaborate on
naval and civil nuclear decommissioning and construction opportunities in the
UK and US. Under a memorandum of understanding both companies will apply their
complementary capabilities to existing nuclear decommissioning contracts for
US ships and UK submarines, as well as explore opportunities for cooperation
in civil nuclear, including power plant and component design, fabrication and
construction in North America and the UK.
We have already built on the HII agreement above, with a further agreement to
combine forces in Australia to develop the optimal models for submarine
capability to support the long-term ambitions of the AUKUS programme,
including infrastructure, sustainment and the necessary skills development to
support the future programme.
The Land sector is leading the strategy to strengthen our data capabilities in
defence with a new data platform aimed at transforming, capturing,
integrating, modelling and building data-driven solutions across all areas of
our defence business. For example, in our Land DSG support contract, we are
combining this smart data approach with our deep engineering expertise to
improve fleet availability and real time identification of any issues
throughout the asset lifecycle.
In Aviation, Babcock France announced an MOU with light jet company AERALIS to
explore the operation of a flexible aircraft 'as a service' in support of
March's UK France Joint Leaders Declaration on Anglo-French interoperability
of future air systems.
Underpinned by enhanced execution and risk reduction
We made further progress in the period improving operational delivery, which
was underpinned by a strengthened corporate culture. In October, our second
Group-wide people survey since we began our turnaround saw increased levels of
engagement and satisfaction. Following the first survey in 2022 we have been
developing and implementing action plans to transform the employee experience,
including the launch of a framework to standardise role categorisation and
open development pathways and career opportunities across the Group.
There is still much to do, but I believe we are creating a more integrated,
unified and aligned workforce with common purpose and common processes that
will support significant value creation in the future.
We continue to see improved operational delivery across existing contracts,
for example the 10-year DSG contract to support the British Army land vehicles
fleet, where an overhaul of operations over the last few years has further
improved contract delivery and operating margin. Following formal notification
by our UK MOD customer of its intention to exercise up to five option years,
we continue to negotiate contract terms that will contribute to better
outcomes for all stakeholders.
There was no material change in the period in the impact of onerous contracts,
which will diminish over the coming years as they trade out. We continue to
focus on replacing them with higher quality orders through our enhanced
bidding and programme risk management processes, as highlighted by the new
initial submarine deep maintenance support contract for the second Vanguard
Class nuclear submarine.
We continue to meet production milestones on the Type 31 programme with the
first in class ship, HMS Venturer, progressing through construction and
assembly, and the keel laid on ship two, HMS Active, in September. The dispute
resolution process (DRP) relating to the Type 31 contract has been paused
following customer discussions. Both parties are currently working towards a
collaborative solution.
During the period we were pleased to announce the appointment to the Board of
Sir Kevin Smith CBE as a Non-Executive Director. In addition, Paul Armstrong
was appointed CEO of our Marine business and Harry Holt was appointed CEO of
our Nuclear business.
Capital allocation - dividend reinstated
In our FY23 results, we set out a refreshed capital allocation framework
underpinned by a commitment to maintain a strong balance sheet and investment
grade credit rating, with a target leverage of 1.0x to 2.0x net debt to
EBITDA. The framework is aligned with our strategy to maximise value for our
shareholders while balancing near-term performance and long-term growth
objectives.
As part of our capital allocation strategy, in April 2023, the Board stated
its intention to reinstate a dividend in FY24, with the return to the dividend
payers' list an important milestone in the turnaround of Babcock. As such, the
Board has declared an interim dividend of 1.7 pence per share, with the
interim dividend expected to be around one third of the full year dividend.
The Group's aim is to deliver long-term dividend growth via a progressive
dividend. The level at which the dividend has been reinstated also reflects a
desire for there to be ongoing strengthening of the balance sheet and for
prioritisation to be given to investment for organic growth in the business.
Outlook
With over 90% of FY24 forecast revenue under contract at the end of September,
we enter the second half of the year with good momentum. The Board's
expectations for another year of organic revenue growth, further underlying
operating margin expansion and positive cash flow generation are unchanged,
and we continue to build momentum to achieve the medium term guidance set out
within our FY23 results.
David Lockwood OBE
Chief Executive
Notes to CEO Statement
(1) A defined Alternative Performance Measure (APM) as set out in
the Financial Glossary on pages 25 to 27.
OTHER INFORMATION
Dividend
An interim dividend of 1.7 pence per ordinary share (HY23: nil) is payable on
19 January 2024 to shareholders whose names appear on the register at the
close of business on 24 November 2023. Shareholders may participate in the
dividend re-investment plan and elections must be made by 28 December 2023.
Details of the dividend re-investment plan can be found, and shareholders can
make elections, at www.babcock-shares.com (http://www.babcock-shares.com) .
FINANCIAL REVIEW
As described in the Financial Glossary on page 25, the Group provides
Alternative Performance Measures (APMs), including underlying operating
profit, underlying operating margin, underlying earnings per share, underlying
operating cash flow, underlying free cash flow, and net debt to EBITDA, to
enable users to better understand the performance and earnings trends of the
Group. These measures are considered to provide a consistent measure of
business performance from year to year. The reconciliation from the IFRS
statutory income statement to underlying income statement is shown below.
Income statement
30 September 2023 30 September 2022
Underlying Specific adjusting items Statutory Underlying Specific adjusting items Statutory
£m
£m
£m £m £m
£m
Revenue 2,177.0 - 2,177.0 2,144.0 - 2,144.0
Operating profit 154.4 (10.2) 144.2 121.7 (48.9) 72.8
Share of results of joint ventures and associates 6.0 - 6.0 6.6 - 6.6
Net finance costs (20.0) 5.9 (14.1) (22.7) (5.5) (28.2)
Profit before tax 140.4 (4.3) 136.1 105.6 (54.4) 51.2
Income tax expense (35.3) 3.3 (32.0) (23.1) 8.9 (14.2)
Profit after tax for the period 105.1 (1.0) 104.1 82.5 (45.5) 37.0
Attributable to non-controlling interests 1.6 - 1.6 2.4 - 2.4
Profit after tax attributable to shareholders 103.5 (1.0) 102.5 80.1 (45.5) 34.6
Basic EPS 20.6p (0.2)p 20.4p 15.8p (9.0)p 6.8p
Diluted EPS 20.1p (0.2)p 19.9p 15.5p (8.8)p 6.7p
A full statutory income statement can be found on page 30.
Statutory operating profit includes specific adjusting items (SAIs) that are
not included in underlying operating profit, which is a key APM for the Group.
A reconciliation of statutory operating profit to underlying operating profit
is shown in the table below and in note 2 of the interim financial statements.
Reconciliation of statutory to underlying operating profit
30 September 2023 30 September 2022
£m
£m
Operating profit 144.2 72.8
Amortisation of acquired intangibles 5.6 8.1
Business acquisition, merger and divestment related items 0.2 12.1
Fair value loss on forward rate contracts to be settled in future periods 4.4 28.7
Specific adjusting items impacting operating profit 10.2 48.9
Underlying operating profit 154.4 121.7
Revenue increased by 2% to £2,177 million, up 18% on an organic basis, offset
by the impact of disposals in the prior year. We delivered double digit
organic growth in Marine, Nuclear and Land (see sector performance tables on
page 15).
Statutory operating profit increased to £144.2 million (HY23: £72.8
million). The key drivers were strong underlying operating profit and lower
specific adjusting items.
Underlying operating profit: Underlying operating profit increased by 27% to
£154.4 million (33% on an organic basis), reflecting revenue growth,
including high margin licence fees associated with the Polish MIECZNIK frigate
programme, improved performance on a number of contracts and non-recurrence of
a £6 million programme write-off in Nuclear in HY23.
Underlying operating margin increased by 140 basis points to 7.1% (HY23:
5.7%), boosted by the MIECZNIK licences. Further analysis of our revenue and
underlying operating profit performance is included in each sector's
operational review on pages 16 to 24.
Joint ventures and associates: The Group's share of results of joint ventures
and associates reduced slightly from the prior year to a profit after tax of
£6.0 million (HY23: £6.6 million).
Net finance costs decreased to £20.0 million on an underlying basis (HY23:
£22.7 million) driven by lower net debt and interest charge on leases, partly
offset by a £4.0 million change in IAS 19 retirement benefit interest. The
decrease in reported net finance costs to
£14.1 million (HY23: £28.2 million) also reflects changes in derivative fair
value movements.
Taxation: The Group tax charge was £32.0 million. Tax on underlying profits
was £35.3 million representing an underlying effective tax rate of 26%, in
line with our assumption for this financial year.
Earnings per share: Basic earnings per share, on a statutory basis, increased
to 20.4 pence (HY23: 6.8 pence). Underlying earnings per share increased 30%
to 20.6 pence (HY23: 15.8 pence).
Dividend: An interim dividend of 1.7 pence per ordinary share (HY23: nil) is
payable on 19 January 2024 to shareholders whose names appear on the register
at the close of business on 24 November 2023. Shareholders may participate in
the dividend re-investment plan and elections must be made by 28 December
2023. Details of the dividend re-investment plan can be found, and
shareholders can make elections, at www.babcock-shares.com
(http://www.babcock-shares.com) .
Exchange rates
The translation impact of foreign currency movements resulted in a decrease in
revenue of £44.0 million and a decrease in underlying operating profit of
£4.4 million. The main currencies that have impacted our results are the
South African Rand, Australian Dollar and Canadian Dollar. Following disposal
of the European AES businesses, the currencies with the greatest potential to
impact results are the South African Rand and the Australian and Canadian
Dollar:
· A 10% movement in the South African Rand against Sterling would
affect revenue by around £31 million and underlying operating profit by
around £2 million per annum
· A 10% movement in the Australian Dollar against Sterling would
affect revenue by around £34 million and underlying operating profit by
around £2 million per annum
· A 10% movement in the Canadian Dollar against Sterling would
affect revenue by around £14 million and underlying operating profit by
around £1 million per annum
Cash flow and net debt
Underlying cash flow and net debt
Underlying cash flows are used by the Group to measure operating performance
as they provide a more consistent measure of business performance from year to
year.
30 September 2023 30 September 2022
£m £m
Operating profit 144.2 72.8
Add back: specific adjusting items 10.2 48.9
Underlying operating profit 154.4 121.7
Right of use asset depreciation 18.9 52.5
Other depreciation & amortisation 30.1 45.7
Non-cash items 7.2 (2.2)
Working capital movements (5.6) (48.8)
Provisions (2.0) (0.8)
Net capital expenditure (51.9) (36.9)
Lease principal payments (24.5) (54.2)
Underlying operating cash flow 126.6 77.0
Cash conversion % 82% 63%
Pension contributions in excess of income statement (39.6) (76.2)
Interest paid (net) (13.5) (14.1)
Tax paid (12.9) (12.2)
Dividends from joint ventures and associates 6.8 5.1
Cash flows related to exceptional items (0.2) (4.3)
Underlying free cash flow 67.2 (24.7)
Net acquisitions and disposals of subsidiaries - (12.1)
Purchase of own shares (7.5) -
Lease principal payments 24.5 54.2
Net new lease arrangements (16.4) (37.0)
Other non-cash debt movements (1.8) (0.8)
Clarification of net debt definition - (36.1)
Fair value movement in debt and related derivatives 1.7 31.7
Exchange movements 4.2 (45.9)
Movement in net debt 71.9 (70.7)
Opening net debt (564.4) (968.7)
Closing net debt (492.5) (1,039.4)
Add back: operating leases 204.7 410.1
Closing net debt excluding operating leases (287.8) (629.3)
A full statutory cash flow statement can be found on page 34 and a
reconciliation to net debt on page 12.
Reconciliation of underlying operating cash flow to statutory net cash flows
from operating activities
30 September 2023 30 September 2022
£m
£m
Underlying operating cash flow 126.6 77.0
Add: net capex 51.9 36.9
Add: capital element of lease payments 24.5 54.2
Less: pension contributions in excess of income statement (39.6) (76.2)
Non-operating cash items (excluded from underlying cash flow) (0.2) (16.7)
Cash generated from operations 163.2 75.2
Tax paid (12.9) (12.2)
Net interest paid (13.5) (14.1)
Net cash flows from operating activities 136.8 48.9
Underlying operating cash flow
Underlying operating cash flow (after capital expenditure) increased to
£126.6 million (HY23: £77.0 million), a conversion ratio to underlying
operating profit of 82% (HY23: 63%). The higher conversion ratio mainly
reflects improved working capital performance described below, offset by an
increase in net capex.
- Working capital outflow of £5.6 million reduced from a £48.8
million outflow in HY23. This reflects our continued focus on cash flow as a
performance measure and phasing of programmes, including c.£35 million net
inflow on the H160 contract from the sale of receivables relating to aircraft
delivered and accepted by the customer. The prior year working capital
performance was also negatively impacted by completion of payments associated
with the unwind of the past practice of period-end management of working
capital.
- Capital expenditure: Net capital expenditure increased to £51.9
million (HY23: £36.9 million). The increase reflects higher investment in
intangible assets, including our SAP roll-out, and lower receipts from asset
disposals (£9.8 million verses HY23: £22.7 million), primarily linked to
aircraft sales in our Aviation sector. We still expect FY24 gross capital
expenditure to be in the £120-£150 million range as we continue to invest in
our submarine infrastructure in Devonport and roll-out of improved systems.
- Lease principal payments, representing the capital element of
payments on lease obligations, reduced to £24.5 million (HY23: £54.2
million) following divestments in our Aviation business. This is reversed out
below underlying free cash flow as the payment reduces our lease liability
(i.e. no net effect on net debt).
Underlying free cash flow
Underlying free cash inflow of £67.2 million compares to an outflow of £24.7
million in the prior year, reflecting higher underlying operating cash flow
and lower pension deficit payments.
- Pension cash contribution in excess of the income statement charge
reduced to £39.6 million (HY23: £76.2 million), as expected. We continue to
expect the FY24 pension cash outflow in excess of the income statement charge
to be around £65 million.
- Interest: Net interest paid, excluding that paid by JVs and
associates, reduced to £13.5 million (HY23: £14.1 million), reflecting lower
net debt and lower interest on leases.
- Taxation: Tax paid in the period was £12.9 million (HY23 £12.2
million). We expect a cash tax outflow in the current financial year of
approximately £30 million.
- Dividends received from joint ventures and associates increased
slightly to £6.8 million (HY23: £5.1 million). We continue to expect
dividends from JVs and associates to be broadly stable in FY24.
New lease arrangements
In addition to net capital expenditure, and not included in underlying free
cash flow, £16.4 million (HY23: £37.0 million) of additional leases were
entered into in the period. These represent new lease obligations and so are
included in our net debt figure but do not involve any cash outflows at
inception.
Net debt
Net debt at 30 September 2023 was £492.5 million, representing a reduction of
£71.9 million compared to the beginning of the financial year. This reduction
was driven by positive cash flow. The reconciliation of net cash flow to net
debt is shown in the table below.
Excluding operating leases, net debt was £287.8 million, representing a
reduction of £58.4 million compared to the beginning of the year.
Movement in net debt - reconciliation of statutory cash flows to net debt
30 September 2023 30 September 2022
£m
£m
Net cash flows from operating activities 136.8 48.9
Net cash flows from investing activities (38.0) (29.8)
Net cash flows from financing activities (45.0) 38.4
Net increase/(decrease) in cash, cash equivalents and bank overdrafts 53.8 57.5
Cash flows from the (increase)/decrease in debt 8.4 (54.4)
Change in net funds resulting from cash flows 62.2 3.1
Additional lease obligations (10.4) (37.0)
New leases granted 16.0 14.3
Other non-cash movements and changes in fair value (0.1) 30.9
Clarification of net debt definition - (36.1)
Foreign currency translation differences 4.2 (45.9)
Movement in net debt in the period 71.9 (70.7)
Opening net debt (564.4) (968.7)
Closing net debt (492.5) (1,039.4)
Funding and liquidity
As of 30 September 2023, the Group had access to a total of £1.9 billion of
borrowings and facilities of mostly long-term maturities. These comprised:
- £300 million revolving cash facility (RCF), cancelled by
Babcock on 24 October 2023
- £775 million RCF, with £45 million maturing on 28 August 2025
and £730 million extended to 28 August 2026
- £300 million bond maturing on 5 October 2026
- €550 million bond, hedged at £493 million, maturing on 13
September 2027
- Two committed overdraft facilities totalling £100 million
At 30 September 2023, the Group's net cash balance was £480 million. This,
combined with the undrawn amounts under our committed RCFs and overdraft
facilities, gave us liquidity headroom of around £1.7 billion.
Net debt to EBITDA (covenant basis)
This measure is used in the covenant in our RCF facilities and includes
several adjustments from reported net debt and EBITDA. The covenant level is
3.5 times. As set out below, our net debt to EBITDA (covenant basis) decreased
to 1.1x times for HY24, within our medium-term target of between 1.0x and
2.0x.
30 September 2023 30 September 2022
£m
£m
Last twelve months Last twelve months
Underlying operating profit 210.8 244.1
Depreciation and amortisation 69.3 80.2
Covenant adjustments(1) (5.9) 16.4
EBITDA (covenant basis) 274.2 340.7
JV and associate dividends 10.4 22.0
EBITDA (covenant basis) + JV and associate dividends 284.6 362.7
Net debt (excluding operating leases) (287.8) (629.3)
Covenant adjustments(2) (33.9) (56.4)
Net debt (covenant basis) (321.7) (685.7)
Net debt/EBITDA 1.1x 1.9x
(1)Various adjustments made to EBITDA to reflect accounting standards at the
time of inception of the original RCF agreement. The main adjustments are to
the treatment of leases within operating profit and pension costs.
(2)Removing loans to JVs, finance lease receivables.
Interest cover (covenant basis)
This measure is also used in the covenant in our RCF facilities, with a
covenant level of 4.0 times.
30 September 2023 30 September 2022
£m
£m
Last twelve months Last twelve months
EBITDA (covenant basis) + JV and associate dividends 284.6 362.7
Net finance costs (34.5) (66.6)
Covenant adjustments(3) 8.9 15.7
Net finance costs (covenant basis) (25.6) (50.9)
Interest cover 11.1x 7.1x
(3)Various adjustments made to reflect accounting standards at the time of
inception of the original RCF agreement, including lease and retirement
benefit interest.
Return on invested capital, pre-tax (ROIC)
This measure is one of the Group's key performance indicators.
30 September 2023 30 September 2022
£m
£m
Last twelve months Last twelve months
Underlying operating profit 210.8 244.1
Share of results of joint ventures and associates 8.8 17.1
Underlying operating profit plus share of JV PAT 219.5 261.2
Net debt excluding operating leases 287.8 629.3
Operating leases 204.7 410.1
Shareholder funds 370.8 662.5
Retirement deficit/(surplus) 154.9 (147.4)
Invested capital 1,018.2 1,554.5
ROIC 21.6% 16.8%
Pensions
The Group has a number of defined benefit pension schemes. The principal
defined benefit pension schemes in the UK are the Devonport Royal Dockyard
Pension Scheme, the Babcock International Group Pension Scheme and the Rosyth
Royal Dockyard Pension Scheme (the Principal schemes).
IAS 19
At 30 September 2023, the IAS 19 valuation for accounting purposes was a net
deficit of £154.9 million (FY23: £61.4 million), reflecting plan assets of
£2,871.0m (FY23: £3,188.0m) and defined benefit obligations of £3,025.9m
(FY23: £3,249.4m). Liabilities have decreased by £223.5m, primarily due to
the increase in the discount rate from 4.8% at March 23 to 5.5-5.7% at
September 23. Assets have decreased by £317.0m, a greater amount despite
contributions of £51.2m in the period. The net actuarial loss of £132.7m
reflects the different bases of valuing assets (fair value) and liabilities
(discounted based on corporate bond yields). The fair value of the assets and
liabilities of the Group pension schemes at 30 September 2023 and the key
assumptions used in the IAS 19 valuation of our schemes are set out in Note 13
of the interim financial statements.
30 September 2023 30 March 2023
£m
£m
Fair value of plan assets 2,871.0 3,188.0
Present value of benefit obligations (3,025.9) (3,249.4)
Net deficit (154.9) (61.4)
As at 31 March 2023 the key assumptions used in valuing pension liabilities
for the three largest schemes were:
- Discount rate: 30 September 2023: 5.5%-5.7% (31 March 2023:
4.8%)
- Inflation rate (RPI): 30 September 2023: 3.2%-3.4% after year 1
(31 March 2023: 3.3% after year 1)
Income statement charge
The charge included within underlying operating profit in HY24 was £11.6
million (HY23: £16.5 million), of which £7.4 million (HY23: £13.1 million)
related to current service costs and £4.2 million (HY23: £3.4 million)
related to expenses. In addition to this, there was a pension interest charge
of £0.4 million (HY23: credit of £3.6 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, as at HY24 was approximately
£300 million (FY23: c.£400 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 2023 for each of the three main
schemes.
Actuarial valuations are carried out every three years to determine the
Group's cash contributions to the schemes. The valuation dates of the three
largest schemes are set so that only one scheme is undertaking its valuation
in any one year, to spread the financial impact of market conditions. The
valuation of the Rosyth Royal Dockyard Pension Scheme at 31 March 2021 was
completed in FY22, the valuation of the Babcock International Group Pension
Scheme at 31 March 2022 has been completed since the last year end, and work
has commenced on the valuation of the Devonport Royal Dockyard Pension Scheme
at 31 March 2023.
Cash contributions
Cash contributions made by the Group into the defined benefit pension schemes,
excluding expenses and salary sacrifice contributions, during the last
financial year are set out in the table below.
31 March 2024e 30 September 2023 30 September 2022
£m
£m
£m
Future service contributions 18.0 9.7 10.1
Deficit recovery 47.8 26.9 67.4
Longevity swap 15.2 7.6 8.0
Total cash contributions 81.0 44.2 85.5
SEGMENTAL ANALYSIS
The Group reports its performance through four reporting sectors.
30 September 2023 Marine Nuclear Land Aviation Total
£m £m £m £m £m
Revenue 750.1 710.8 545.6 170.5 2,177.0
Operating profit 55.1 45.2 37.3 6.6 144.2
Operating profit margin 7.3% 6.4% 6.8% 3.9% 6.6%
Underlying operating profit 63.0 45.2 37.5 8.7 154.4
Underlying operating margin 8.4% 6.4% 6.9% 5.1% 7.1%
Contract backlog 2,929 2,400 2,734 1,573 9,636
30 September 2022 Marine Nuclear Land Aviation Total
£m £m £m £m £m
Revenue 666.4 558.2 478.2 441.2 2,144.0
Operating profit 4.4 30.2 37.1 1.1 72.8
Operating profit margin 0.7% 5.4% 7.8% 0.2% 3.4%
Underlying operating profit 47.3 30.1 38.0 6.3 121.7
Underlying operating margin 7.1% 5.4% 7.9% 1.4% 5.7%
Contract backlog 2,426 2,547 2,429 2,450 9,852
30 September 2022 Marine Nuclear Land Aviation Total
Retained business post disposals £m £m £m £m £m
Revenue 666.4 558.2 456.8 215.0 1,896.4
Operating profit 4.4 30.2 37.4 15.9 87.9
Operating profit margin 0.7% 5.4% 8.2% 7.4% 4.6%
Underlying operating profit 47.3 30.1 36.5 6.8 120.7
Underlying operating margin 7.1% 5.4% 8.0% 3.2% 6.4%
Contract backlog 2,426 2,547 2,421 1,358 8,752
OPERATIONAL REVIEWS
Marine
Operational highlights
- Type 31: HMS Venturer superstructure progressing, laid the keel
for HMS Active
- Steel cut on first MIECZNIK-Class frigate for the Polish Navy.
Three Arrowhead 140 licences delivered
- Strategic cooperation agreement signed with Saab to develop an
advanced naval corvette design
- Started the Regional Maintenance Provider West contract to
deliver ship support for the Royal Australian Navy
- QEC aircraft carrier HMS Prince of Wales, departed Rosyth ready
for operations
- Achieved Critical Design Review for the UK Royal Navy's
next-generation Maritime Electronic Warfare Programme
- Extended Canadian submarine support contract, Victoria Class
In-Service Support (VISSC) to 2027
Financial review
30 September 2022 FX impact Acquisitions & disposals £m Organic 30 September 2023
£m £m £m £m
Contract backlog* 2,426 2,929
Revenue 666.4 (12.7) - 96.4 750.1
Underlying operating profit* 47.3 (1.0) - 16.7 63.0
Underlying operating margin* 7.1% 8.4%
*Alternative Performance Measures are defined in the Financial Glossary on
page 25
Revenue increased by 13% to £750.1 million, up 15% on an organic basis.
Growth was driven by licences associated with the Polish MIECZNIK frigate
programme, phasing of the UK Type 31 programme and support of the UK Royal
Navy's Queen Elizabeth Class (QEC) aircraft carrier docking. This was partly
offset by lower contract volume in our LGE business, which is expected to
recover over the coming months, and phasing of the South Korean submarine
programme.
Underlying operating profit increased to £63.0 million (HY23: £47.3
million), up 36% on an organic basis, representing an underlying operating
margin of 8.4% (HY23: 7.1%). The increase was driven mainly by the Polish
licence fee, offsetting the impact of lower LGE volume and phasing of the
South Korean submarine programme, completion of a high margin Mission Systems
contract in the prior year and further investment in strengthening our control
environment.
Contract backlog was up 21% compared to the prior year to £2,929 million
(HY23: £2,426 million). A four-year extension of the Canadian VISSC submarine
support contract and strong order intake in our LGE business at the end of the
period, offset trading of long-term contracts.
Operational review
UK defence
We continue to deliver on the Type 31 Inspiration Class frigate programme. HMS
Venturer is progressing through construction and assembly with the complete
hull now in place and the superstructure taking shape. Main engines, gear
boxes and diesel generators are installed with supporting systems being fitted
around them. The next major milestone will be float-off, expected in the first
half of 2024. The keel has now been laid on ship two, HMS Active, with first
double bottom blocks in the build cradle.
Following award of the 10-year warship support contract for the UK Royal
Navy's QEC aircraft carriers, HMS Prince of Wales departed our Rosyth dockyard
in August following a docking period to repair shaft lines, as well as
undertaking planned activities on other underwater equipment and systems.
In Devonport, the Type 23 frigate life-extension (LIFEX) programme continues
to progress with HMS Iron Duke achieving Ready for Sea date and HMS Argyll
achieving her undock date ahead of schedule. HMS Argyll is the first Type 23
to undergo a post-LIFEX upkeep under Project RENOWN, tasked with reducing the
amount of time in dock. Also in the period, we completed repairs and
unscheduled docking activity on HMS Somerset, and commenced the use of new
survey technology to complete hull and structure material state understanding
on HMS Richmond.
We continue to prepare for the arrival of the first Type 26 frigate,
establishing the first remote office at BAE's Scotstoun shipyard to support
the transition of the Type 26 Class to in-service support, with the new fleet
of frigates base-ported at our Devonport dockyard.
We completed the regeneration of Sandown Class Mine Counter Measure Vessels
(MCMVs) at our Rosyth dockyard for onward sale from the Royal Navy to new
international customers. Two of the vessels have been successfully handed over
to the Ukrainian Navy and the remaining two have been sold to the Romanian
Navy. Babcock will continue to assist both navies with practical and technical
support.
In Mission Systems, we have provided support for the Royal Navy's Phalanx
Close-In Weapon System since 2006. During the period, we were awarded a
three-year extension to continue our critical support for up to 41 systems
including nine overhauls and upgrades.
On the Skynet programme, we continue the mobilisation phase work closely with
our customer, culminating in a recent design definition review event which was
a positive step towards operational service commencement in 2024.
We achieved the Critical Design Review in the delivery of the UK Royal Navy's
next-generation Maritime Electronic Warfare Systems Integrated Capability
(MEWSIC) to install cutting edge radar and electronic command and control
systems across the new Type 31 and Type 26 frigates, Type 45 air-defence
destroyers and QEC aircraft carriers.
Babcock is now on contract to deliver major systems modules for all four
Dreadnought Class submarines with a contract uplift for the remaining boats.
We continue to explore additional opportunities on the programme. During the
period, we demonstrated our complex new submarine Weapons Stowage Equipment
(WSE) which will also be installed on the next-generation Dreadnought Class
submarines.
The US-UK common missile compartment tube assembly programme continues
successfully with regular deliveries to our customer General Dynamics Electric
Boat in the US, supporting both the UK Dreadnought and US Columbia submarine
programmes. Deployment of advanced manufacturing technology continues to
underpin our market leading role in submarine missile tube assembly, with
installation of robotics and additional machining capability at our Rosyth
dockyard. Our ongoing engagement with the US Navy in examining support and
logistics solutions at Rosyth continues.
International defence
We support international defence markets from our UK operations and from our
businesses in Canada, Australia, New Zealand, Oman and South Korea.
In Poland, the design licence agreement with the PGZ-MIECZNIK consortium was
finalised, which allows for the build of three frigates for the Polish Navy.
The steel-cut for MIECZNIK ship one was held at the PGZ shipyard in Gdynia,
where we recently opened a new Babcock office. At this milestone event,
together with PGZ, Babcock entered into a framework agreement with the
intention of forming a joint venture that will further strengthen our
strategic partnership. Combining our shipbuilding and equipment support
capabilities, Babcock will work more closely with PGZ to deliver the MIECZNIK
frigate programme.
In Indonesia, with our customer PT PAL, we attended the keel laying ceremony
for the first of the two new frigates for the Indonesian Navy, which are based
on our Arrowhead 140 design.
In Oman, delivered through our global sustainment and support arrangements, we
completed fleet time support for a Type 23 frigate at Duqm Naval Dockyard for
the UK Royal Navy. We continue to grow our support offering in the Middle East
and are awaiting outcomes of tenders submitted to the US and Royal Navy of
Oman.
In Brazil, our in-country project team continue to support the Marinha do
Brasil's flagship vessel. Through our engineering expertise, we are training
the NAM Atlantico staff in maintenance, repair and operation of key systems
and equipment. Working with the customer, our team is preparing for the upkeep
work package in readiness for docking in August 2024.
In Canada, Babcock continues to deliver on its Victoria Class submarine in
service support contract. Babcock is currently undertaking HMCS Victoria's
Extended Docking Work Period.
In South Korea, our WHLS team is delivering hardware for boat four of the
nine-boat Jangbogo-III Class submarine programme. Babcock is working with the
Republic of Korea Navy and Hanwha Ocean to develop an in-service support
strategy for the Class.
In Australia, Babcock commenced the Regional Maintenance Provider (RMP) West
contract in June 2023, to provide support and sustainment of Royal Australian
Navy ships in Western Australia over the next five years. External maintenance
periods will commence in the second half of FY24.
In August 2023, we commenced construction of an integrated manufacturing,
warehouse and office facility in Adelaide that will underpin support and
delivery to land and naval defence programs, including the in-service support
for the Collins Class submarine fleet.
In New Zealand, the Marine Fleet Sustainment Services (MFSS) contract -
providing support to the entire Royal New Zealand Navy fleet - has entered the
second phase (1 July 2023 - 30 June 2024) of a total of eight relevant
periods. In addition, in April 2023, Babcock completed the regeneration and
modification of two decommissioned Royal New Zealand Navy inshore patrol
vessels for handover to the Irish Naval Service.
Energy and Marine
Our Liquid Gas Engineering business (LGE) marked two significant milestones
for our ecoSMRT® programme, securing over 100 orders since the product was
launched four years ago, with 50 systems now manufactured and delivered for
installation on Liquefied Natural Gas (LNG) carriers for a range of global
shipowners.
We were also awarded a cutting-edge ecoCO2® cargo handling system contract
for two 22,000m³ liquefied CO2 (LCO2) carriers, a first for our South Korean
customer.
During the period, contracts were secured for 15 Very Large Ethane Carriers
(VLECs) at Jiangnan Shipyard for shipowners Tianjin Southwest and Pacific Gas.
Our LGE business also signed an Agreement in Principle from classification
society Lloyd's Register for its multi-fuel gas supply and CO2 carrier
designs.
Also at Rosyth dockyard, we welcomed two of the UK's fleet of scientific
research vessels for planned maintenance. RRS Discovery and RRS Sir David
Attenborough spent a total of 16 weeks at Rosyth undergoing through-life
support. All three scientific research vessels will return to Rosyth in 2024.
Nuclear
Operational highlights
- Significant ramp up on the Major Infrastructure Programme
continuing across Devonport Dockyard. Further contract
(£750 million over four years) signed in November 2023.
- Commenced deep maintenance and LIFEX on the second of the UK's
Vanguard Class nuclear submarines, HMS Victorious
- Launched the Babcock Skills Academy, to meet evolving capability
requirements for our growing workforce
- Awarded contract from UK MOD to collaborate on support
requirements for the future Dreadnought Class submarines
- Awarded a five-year contract from UK MOD to collaborate on the
detailed design for the Ship Submersible Nuclear AUKUS
- Awarded a five-year civil nuclear Magnox decommissioning project
at Hinkley Point A
- Entered into a strategic agreement with HII to collaborate on
naval and civil nuclear opportunities in the UK and US
- Teaming partnership with HII to collaborate on nuclear-powered
submarine capability to support the AUKUS endeavour
Financial review
30 September 2022 FX impact Acquisitions & disposals £m Organic 30 September 2023
£m £m £m £m
Contract backlog* 2,547 2,400
Revenue 558.2 - - 152.6 710.8
Underlying operating profit* 30.1 - - 15.1 45.2
Underlying operating margin* 5.4% 6.4%
*Alternative Performance Measures are defined in the Financial Glossary on
page 25
Revenue grew by 27% to £710.8 million, driven principally by the further ramp
up of the Major Infrastructure Programme (MIP) at Devonport dockyard, as well
as increased submarine support activity at the Faslane naval base and
continued growth in our civil nuclear business. MIP revenue more than doubled
in the period to £218 million (HY23: £105 million).
Underlying operating profit increased to £45.2 million from £30.1 million in
HY23, which included a £6 million programme provision. The increase over the
prior period was also driven by a higher contribution from MIP revenue (which
is lower margin) and increased civil nuclear activity, which more than offset
the impact of future inflation assumptions on programmes. As a result,
operating margin increased to 6.4% (HY23: 5.4%).
Contract backlog decreased 6% year on year to £2,400 million (HY23: £2,547
million) due to the trading of long-term contracts, specifically our Future
Maritime Support Programme (FMSP) contract. In November 2023, we signed a
further contract with the UK MOD's Submarine Delivery Agency (SDA) worth £750
million over four years for the delivery of infrastructure in Devonport to
support future submarine maintenance.
Operational review
Defence
The UK is going through a phase of class transition for nuclear submarines.
Astute Class submarines are currently replacing the Trafalgar Class and the
future Dreadnought Class will replace the Vanguard Class. Good progress has
been made in the period in meeting the current and future requirements of the
MOD. We are working closely with the MOD to jointly develop long-term
strategies for people, infrastructure and transformation, to meet the evolving
requirements for the future of the Royal Navy.
At Devonport, we are ensuring the future capability requirements of the Royal
Navy and the submarine enterprise are met for decades to come with the MIP.
During the period, we completed enabling works on the site-wide upgrade
programme to ensure the right foundations are in place for the construction
works to be delivered at pace.
The programme has entered the formal construction phase, which will deliver a
new dock, berth, logistics and production support facilities, and underpins
the wider role Babcock performs in sustaining the entirety of the UK submarine
fleet. The MIP will enable the delivery of base maintenance periods (BMP) and
deep maintenance periods (DMP) at Devonport, including nuclear defuel of
current and future classes, and life-extension programmes (LIFEX), crucial to
the UK submarine programme.
We are continuing to deliver good performance and ongoing improvements against
our FMSP contract. This includes demonstrating to our customer how the
positive impact will be maintained for the remainder of the contract and
beyond, an example of which is the significant increase in productive
utilisation being delivered at Clyde. Deep maintenance and life-extension on
the second of the UK's Vanguard Class nuclear submarines, HMS Victorious, is
now underway at Babcock's facility at Devonport. This follows the completion
this year of HMS Vanguard, which left Devonport after the most complex
life-extension programme that has ever been delivered within the submarine
enterprise. The first Astute Class submarine has also been received in
Devonport and is currently undergoing surveys and work ahead of an in-dock
maintenance period.
At Clyde, we are continuing to deliver a strong performance on several
important submarine base maintenance periods for our customer. This includes
ongoing work on high priority vessels, some of which support the Continuous At
Sea Deterrent (CASD).
Building on the support we are providing to the Dreadnought Class submarines
that will replace the Vanguard Class in the early 2030s, we have now signed a
contract with the UK MOD to provide input into the support requirements for
this Class. This involves drawing on our historical expertise and technical
experience of in-service support and maintenance to advise on the transition
into service.
The value of our expertise in submarine design and support has also been
recognised in the signing of a five-year contract with the UK MOD to provide
input into the detailed design for the new Ship Submersible Nuclear AUKUS
(SSN-A) submarines, which will replace the Astute Class from the late 2030s.
Babcock continues to support the Submarine Delivery Agency (SDA) on the
Submarine Dismantling Project (SDP). Babcock and the SDA achieved a disposal
milestone as HMS Swiftsure was dry-docked in Rosyth to begin preparations for
final dismantling. It will be the first UK nuclear-powered submarine to be
fully dismantled by the end of 2026.
During the period, we entered into a strategic Memorandum of Understanding
(MOU) with HII to collaborate on naval and civil nuclear decommissioning and
construction opportunities in the UK and US. The MOU also identifies
opportunities for cooperation in civil nuclear power plant and component
design, fabrication and construction in North America and the UK. In addition,
in September 2023, we announced a teaming partnership with HII to collaborate
on the optimal models for nuclear-powered submarine capability, including
infrastructure, sustainment and the necessary skills development to support
the AUKUS endeavour.
During the summer, we launched the Babcock Skills Academy, which uses a hybrid
teaching model that combines cutting-edge digital resources and hands on
training, to rapidly equip our people to deliver the critical capabilities our
customers need - now and in the future. Operating in partnership with local
education establishments and complementing our award-winning early careers
programmes, this has been launched initially at our Devonport dockyard, with a
focus on submarine support and critical nuclear skills to enable learning of
complex skills required to perform submarine deep maintenance. More than 2,000
people will pass through the Skills Academy in its first three years, and a
further 10,000 over the following five years. By focusing on targeted
learning, the Skills Academy will accelerate time to competence, compared to
traditional training methods.
Civil Nuclear
In decommissioning, we have now signed a contract for the Magnox Hinkley Point
A Vault Retrievals Phase 2 project. Over this five-year contract we will
provide the design and delivery of an automated solution to safely retrieve,
process and package waste from the site's vaults, ready for safe storage.
Sellafield engineers have used new equipment, designed and installed by our
civil nuclear business, Cavendish Nuclear, and partners, to retrieve waste
from the UK's oldest waste storage building, the Pile Fuel Cladding Silo, a
programme which represents one of the most complex and challenging
decommissioning projects in the world and one of the highest priorities for
Sellafield and the Nuclear Decommissioning Authority (NDA).
In the US, our Cavendish Nuclear business, and joint venture partners Amentum
and Fluor, have been awarded a 10-year Portsmouth Gaseous Diffusion Plant
Decontamination and Decommissioning Contract in Piketon, Ohio. In addition to
demolishing and disposing of gaseous diffusion plant facilities, the team will
deploy proven technologies to address water treatment and soil remediation.
In Japan, work is now underway to deliver the 10-year contract we secured
earlier in the year with Japan Atomic Energy Agency (JAEA), to provide
specialist capability in support of the decommissioning of the Monju Prototype
Fast Reactor (PFR) in Fukui Prefecture, Japan.
In nuclear support, we continue to support EDF with Large Gigawatt Reactor
delivery at Hinkley Point C and Sizewell C, and X-energy as their UK Advanced
Modular Reactor (AMR) deployment partner. We are also supporting Rolls Royce
and GE-Hitachi, two of the six Small Modular Reactor (SMR) vendors whose
designs have recently advanced to the next phase of the UK's SMR competition,
a fast-track measure that could result in a Government contract as part of a
strategy to deliver operational SMRs by the mid-2030s.
Work continues on delivering the Process, Plant and Equipment (PP&E)
contract, with Babcock leading the design, installation and commissioning of
complex plant and equipment engineering, enabling the customer to safely
process and deliver their production line. We continue to see the framework
contract ramp up in FY24 and the programme remains a key enabler for further
opportunities across the wider facility as site capabilities are updated to
meet future demands.
Land
Operational highlights
- Discussions with UK MOD for five option years on the DSG
contract out to 2030 continue to progress
- Launched Babcock General Logistics Vehicle targeting an upcoming
UK MOD tender to replace the Army Land Rover fleet
- Secured the rebid on the six-year Royal Electro-Mechanical
Engineers apprenticeships contract
- Awarded second land defence contract to manage and maintain
ground support equipment at military bases across France
- Awarded a three-year extension for our Australian sustainment
and acquisition C-CBRNE capabilities contract
Financial review
30 September 2022 FX impact Acquisitions & disposals £m Organic 30 September 2023
£m £m £m £m
Contract backlog* 2,429 2,734
Revenue 478.2 (25.4) (21.4) 114.2 545.6
Underlying operating profit* 38.0 (3.0) (1.5) 4.0 37.5
Underlying operating margin* 7.9% 6.9%
*Alternative Performance Measures are defined in the Financial Glossary on
page 25
Revenue increased to £545.6 million, up 26% on an organic basis. The key
drivers were strong growth in our South African business, driven by continued
demand for mining equipment and aftermarket sales, further ramp-up of the
Australian Defence High Frequency Communication (DHFC) system contract and
higher contract volumes in Rail, vehicle engineering and military training.
Reported revenue growth of 14% was adversely impacted by FX translation (5%)
from the weakening of the South African Rand against the British Pound, and
disposal of the Civil Training business in FY23 (4%).
Underlying operating profit was flat compared to HY23, which included a £3.0
million one off profit adjustment. Underlying operating profit increased 12%
organically, which was offset by FX and the impact of the Civil Training
disposal in FY23. Organic growth was driven by strong sales in South Africa
and profit generated from increased volume and improved performance across a
number of our Land contracts. Higher revenue and flat profit resulted in an
underlying operating margin of 6.9% (HY23: 7.9%), which also reflected
increased investment in strengthening our control environment and bidding
activity.
Contract backlog increased 13% to £2,734 million (HY23: £2,429 million)
driven by the Australian DHFC system in H2 23 and a number of smaller orders
in the period.
Operational review
Defence
Performance in our Defence Equipment business continues to go from strength to
strength. Investment in new data capabilities is aimed at transforming,
capturing, integrating, modelling and building data-driven solutions across
all areas of our defence business. For example, in our DSG support contract,
we are combining this smart data approach with our deep engineering expertise
to improve fleet availability and real time identification of any issues
throughout the asset lifecycle. Discussions with the UK MOD regarding the
execution of five option-years on the DSG contract are progressing well and we
anticipate them to be executed in line with the agreed timetable.
We continue to develop leading edge capabilities. Most notably we were
recently able to announce an Enterprise Agreement with Palantir Technologies
UK. The agreement is strengthening Babcock's integrated planning function by
enhancing our digital capabilities across the Sector.
In response to growing obsolescence of critical parts and the increased
commercial strains within the defence supply chain, our advanced manufacturing
capability is now well established, and we have the ability to fully
re-engineer and manufacture obsolete material across all domains.
During the period, our contract to manage the UK MOD's 'white fleet' vehicles
through the Phoenix II contract has successfully converted 25% of the fleet to
electric vehicles, in alignment with the schedule. This programme is creating
greater fuel efficiencies and supporting the MOD's sustainability goals.
We have reached full operational capability ahead of schedule in our support
of the UK's gifted platforms to Ukraine. Through our existing contract, we
contributed to the British Army's support to Ukraine's Armed Forces, through
equipment refurbishment and regeneration along with training support for
Ukrainian nationals in a range of domains.
Our ambition to develop a portfolio of product-based offerings remains on
track. In February 2023, we were awarded a contract from the UK MOD, in
collaboration with Devon-based Supacat, to deliver an order of 70 High
Mobility Transporters (HMT 400 series). The contract mobilisation is well
underway, with a new production line established to manufacture the platforms
within the free port of Devonport. Discussions are underway with the UK MOD
for a follow-on order for a further 80 HMTs.
The Babcock General Logistics Vehicle (GLV) was launched at the UK's Defence
Security and Equipment International conference (DSEI) in September 2023. The
GLV is designed to target the upcoming UK MOD tender to replace the current
British Army Land Rover fleet. The successful launch event also initiated
additional opportunities worldwide. The ground-breaking GLV is built around
the proven Toyota Land Cruiser 70 series platform which is used by militaries
and aid agencies around the world.
In our Vehicle Engineering business, we have secured all competed UK
Government contracts to procure Toyota LC300 Civilian Armoured Vehicles.
Our Defence Training business performed well across all contracts. We secured
the rebid on the six-year long Royal Electro-Mechanical Engineering
Apprenticeships contract (REME) out to August 2029. We were also awarded an
additional six-month extension of our Training Maintenance And Support
Services (TMASS) contract while we continue to await the outcome of the Armour
Support Centre contract. We continue to have positive engagement with the
customer as part of the bid process as they develop their Army Collective
Training System.
During the period, we have been awarded a three-year contract, in support of
Mabway, for the provision of support to the design, preparation and delivery
of training exercises, expected to replace our current Hannibal contract.
In France, we have successfully completed the transition of the ground support
equipment contract for assets and equipment across the French Army, Navy and
Air Force through a 10-year contract. Programme performance after six months
is good and remains in line with customer expectations, delivering support
activities from 22 sites across mainland France. In addition, we have been
awarded a second contract, to provide in-service support to airfield support
equipment throughout the military bases in France's mainland and overseas
bases for seven years. The contract will see the Group investing in key
systems, infrastructure, and people across France, supported by capability
transfer from our UK businesses, which will reinforce our in-country growth
strategy.
In Australia, the Defence High Frequency Communication (DHFC) System, to
support the Australian armed forces over the next 10 years, successfully
achieved the operational date in June 2023, on schedule. Babcock is prime
contractor for the operation and support of the customer's existing
capability, in addition to delivering a comprehensive technology upgrade
programme. The initial system design milestone for the enhanced capability was
achieved during the period.
In September, we signed a three-year contract extension with the Australian
Department of Defence, streamlining sustainment and acquisition processes for
Counter - Chemical, Biological, Radiological, Nuclear and Explosive (C-CBRNE)
capability using Babcock's industry-leading asset management systems.
In June 2023, Babcock submitted a tender response to the Commonwealth of
Australia for the delivery of sustainment management services for a wide range
of defence assets and fleets.
Emergency Services
Both the London Fire Brigade (LFB) and London Metropolitan Police Service
(MPS) Training contracts have performed well in the period. We have however
seen a decline in volumes across the MPS contract as the customer seeks to
meet challenging recruitment targets.
South Africa
Performance was better than expected supported by high commodity prices in the
mining sector driving increased equipment volumes and aftermarket activity.
Results for the Engineering and Plant businesses were in line with forecast.
Work continues with ongoing improvements through operational excellence
initiatives combined with enhancing our people performance, experience,
development and capability throughout the Africa business.
Other civil markets
Our Rail business performed well during the period with further work in our
Translink framework. We continue to focus on delivery in our two key regions
of Scotland and Northern Ireland.
Aviation
- Two additional H160 military helicopters modified and delivered
to the French Navy as part of a 10-year contract
- Awarded a four-year extension with the South Australian
Government for aerial emergency services
- Signed the Defence Aviation Net Zero Charter to demonstrate our
commitment to sustainability
- Partnered with Zero Petroleum to explore the use of synthetic
fuels across air defence platforms
- Awarded a four-year contract for support of H145 aircraft with
French Securité Civile, partnered with Airbus
Financial review
30 September 2022 FX impact Acquisitions & disposals £m Organic 30 September 2023
£m £m £m £m
Contract backlog* 2,450 1,573
Revenue 441.2 (5.9) (226.2) (38.6) 170.5
Underlying operating profit* 6.3 (0.4) 0.5 2.3 8.7
Underlying operating margin* 1.4% 5.1%
*Alternative Performance Measures are defined in the Financial Glossary on
page 25
Revenue decreased to £170.5 million (HY23: 441.2 million) reflecting the
impact of the European Aerial Emergency Services (AES) disposal completed in
February 2023. On an organic basis, revenue declined 18% primarily due to the
sales mix of our French defence contracts, particularly Mentor, between
aircraft delivery and service phases.
Underlying operating profit increased to £8.7 million (HY23: £6.3 million),
up 36% on an organic basis, representing an underlying operating margin of
5.1% (HY23: 1.4%). The improved margin performance was driven by mix (lower
aircraft delivery revenue), a one-off inflationary impact relating to a
military contract and lower bid costs on a large tender that has ended.
Contract backlog decreased to £1,573 million (HY23: £2,450 million), mainly
due to the impact of the European AES disposal (c.£1,100 million). The
retained business contract backlog grew by 16%, predominantly driven by new
AES contracts (Australia and Canada), and renewals and extensions of long-term
defence contracts (UK Hawk and Light Aircraft Flying Task) in H2 23.
Operational review
Defence
Performance on the RAF HADES engineering support contract remains strong
against a background of customer site laydown and base closures. We have
successfully transitioned into the extension period and have commenced
discussions with our customer regarding a further extension to the service.
Despite fleet challenges, operations on the RAF Light Aircraft Flying contract
(LAFT2), have now successfully resumed, following a period of technical issues
on the fleet. Babcock has also adapted support through its Light Aircraft
training service to meet then UK's commitment to support the training of
Ukrainian pilots.
We have signed the Defence Aviation Net Zero Charter, setting out our
commitment to help UK Defence meet the challenges of climate change and
partnered with Zero Petroleum to advance the testing of synthetic fuels in the
military environment across air defence platforms.
Additionally, we continue to work with the RAF's Rapid Capability Office on
Project MONET, a two-year research and development project to explore the
application of emerging technologies that could minimise the environmental
impact of light aircraft flying training. Collaborating with UK SMEs, we are
engaged in exploring Defence utilisation of synthetic net zero fuels and
materials circularity in Defence.
We continue to develop our partnership with the Airbus H175M Task Force - a
UK-based industry team created to supply and support the British-produced
H175M helicopter for the UK's new medium helicopter requirement.
In France, following delivery of aircraft, support activity continues to ramp
up on the Mentor contract and flying hours are above expectations. We are now
managing a total of 26 PC21 aircraft delivering training to French Air Force
fighter pilots. On the FOMEDEC contract, an additional simulator has been set
up to deliver an additional 1,500 hours of training to the customer.
During the first half of the year, two additional Airbus H160 helicopters were
delivered and accepted by the French Navy as part of our contract with the
French MOD. The aircraft will be deployed on demanding search and rescue
missions. We've also opened the first H160 site for search and rescue
operations in the world, located in Cherbourg.
Bidding activity on defence tenders remains buoyant as we bid for Mentor II, a
contract for the outsourcing of initial training of French military pilots and
another contract for the outsourcing of French Air Force tactical and combat
training.
In Canada, during the period, we learned that Babcock Leonardo Canadian
Aircrew Training joint venture was not selected to deliver the Future Aircrew
Training (FAcT) programme. Babcock continues to explore opportunities to
support the Royal Canadian Air Force in the future.
Aerial emergency services
Following completion of the sale of certain of our European AES businesses to
Ancala Partners on 28 February 2023, Babcock has retained its AES businesses
in its focus countries of the UK, France, Canada and Australia, where the
Group also operates defence businesses.
In Australia, we were awarded a four-year extension in October 2023 for the
delivery of emergency medical services, search and rescue and airborne law
enforcement services for the South Australian State Rescue Helicopter Service
(SRHS). The existing fleet of three Bell 412 helicopters will be strengthened
by an additional Airbus H145 helicopter to be utilised by the South Australian
Police, expected to be in service by mid-2024.
The State Government is continuing the process to replace the SRHS contract
under a new State Police, Ambulance and Rescue Aviation service (SPARAS)
contract, bringing together three existing services that deliver rescue
helicopter services, South Australian Police's fixed wing services and the
South Australian Ambulance Service's fixed wing emergency aero-medical
retrieval services. Babcock remains actively involved in the SPARAS
procurement process having submitted a formal response in September 2023.
In France, we've seen an increase in our helicopter emergency services
activity. Additional maintenance work has been delivered to French Customs as
part of the seven-year service contract. Flying activity is also above
expectations.
In Canada, Babcock Canada has successfully completed the 2023 aerial
firefighting season. This year Canada experienced an unprecedented number of
wildfires, which saw Babcock Canada deliver over 1,500 flight hours in support
of firefighting efforts across Manitoba and in surrounding provinces and
territories.
In FY23, Babcock Canada won a c.£200m contract, as a subcontractor to Ascent
Helicopters, for helicopter emergency medical services (HEMS). We are nearing
the completion of the design process for the five HEMS facilities across
Vancouver, Prince Rupert, Prince George, Parksville, and Kamloops. We expect
to begin construction in FY24/25.
Financial Glossary - Alternative Performance Measures
The Group provides Alternative Performance Measures (APMs), including
underlying operating profit, underlying operating margin, underlying earnings
per share, underlying operating cash flow, underlying free cash flow, and net
debt to EBITDA to enable users to have a more consistent view of the
performance and earnings trends of the Group. These measures are considered to
provide a consistent measure of business performance from year to year. They
are used by management to assess operating performance and as a basis for
forecasting and decision-making, as well as the planning and allocation of
capital resources. They are also understood to be used by investors in
analysing business performance.
The Group's APMs are not defined by IFRS and are therefore considered to be
non-GAAP measures. The measures may not be comparable to similar measures used
by other companies, and they are not intended to be a substitute for, or
superior to, measures defined under IFRS. The Group's APMs are consistent with
the year ended 31 March 2023. Further information on the Group's specific
adjusting items, which is a critical accounting judgement, can be found in
Note 2 of the interim financial statements.
Measure Closest equivalent IFRS measure Definition and purpose Adjustments to reconcile to IFRS measure (and reference to reconciliation)
Revenue measures
Organic revenue growth Revenue growth year-on-year Growth excluding the impact of foreign exchange (FX), and contribution from FX, contribution of acquisitions and disposals in the current and prior period
acquisitions and disposals over the prior and current year
- Used to measure the year-on-year movement in Group revenue
- It is a good indicator of business growth
- Group KPI
Contract backlog Transaction price under IFRS 15 on customer contracts allocated to unsatisfied Contracted revenue excluding variable revenue, expected contract renewals, Contract backlog is based on the full contract term whereas the IFRS measure
/ partially satisfied performance obligations expected revenue from framework agreements and impact of termination for may be based on shorter periods where the customer has the ability to exit
convenience clauses contracts early
- Used to measure revenue under contract as a good indicator of revenue
visibility
Framework agreements No direct equivalent Funded and unfunded unexecuted customer contracts. Unfunded orders include the
elements of contracts for which funding has not been authorised by the
customer
Profit measures
Underlying operating profit Operating profit Operating profit before the impact of specific adjusting items(1) Specific adjusting items(1)
- Underlying operating profit is the headline measure of the Group's - See table on page 8
performance
- See Note 2
Underlying organic profit growth Operating profit 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 underlying operating
profit
- It is a good indicator of profit growth
Underlying operating margin No direct equivalent Underlying operating profit as a percentage of revenue Ratio - N/A
- To provide a measure of operating profitability, excluding one-off items
- Operating margin is an important indicator of operating efficiency across
the Group
- Group KPI
Underlying net finance costs Net finance costs Net finance costs excluding specific adjusting items(1) Specific adjusting items(1)
- To provide an alternative measure of finance costs excluding items such as - See table on page 8
fair value measurements which can fluctuate significantly on inputs outside of
management's control
Underlying profit before tax Profit before tax Profit before tax adjusted for Specific adjusting items(1)
- The summation of the impact of all specific adjusting items on profit before - See table on page 8
tax
Measure Closest equivalent IFRS measure Definition and purpose Adjustments to reconcile to IFRS measure (and reference to reconciliation)
Profit measures continued
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 8
income from joint ventures and associates
- To provide an indication of the ongoing tax rate across the Group, excluding
one-off items
Underlying basic earnings per share Basic earnings per share Based on the Group's underlying profit before tax and underlying effective tax Specific adjusting items(1)
rate
- See table on page 8
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 13
Balance sheet
Net debt No direct equivalent Loans, including the interest rate and foreign exchange derivatives which - See table on page 10
hedge the loans, bank overdrafts, cash and cash equivalents, loans to joint
ventures and associates, lease receivables and lease obligations
- Used as a general measure of the progress in generating cash and
strengthening of the Group's balance sheet position
Net debt (excluding operating leases) No direct equivalent Net debt (defined above) excluding operating lease liabilities as previously - See table on page 10
defined by IAS 17.
- Used by management to monitor the strength of the Group's balance sheet
position and to ensure the Group's capital structure is appropriate
- Used by credit agencies
Net debt (covenant basis) No direct equivalent Net debt (excluding operating leases), excluding loans to joint ventures and - See table on page 13
associates and finance lease receivables
- Used for covenants over Revolving Credit Facility
- Used by credit agencies
Net debt/EBITDA (covenant basis) No direct equivalent Net debt (covenant basis) divided by EBITDA Ratio - N/A
- A measure of the Group's ability to meet its payment obligations - See table on page 13
- 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 (excluding operating leases), shareholders' funds and retirement benefit
deficit / (surplus) - See table on page 13
- 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
Measure Closest equivalent IFRS measure Definition and purpose Adjustments to reconcile to IFRS measure (and reference to reconciliation)
Cash flow measures
Net capital expenditure No direct equivalent Property, plant and equipment and intangible assets, less proceeds on disposal
of property, plant and equipment
- Included in underlying operating cash flow to calculate underlying operating
cash conversion
Underlying operating cash conversion No direct equivalent Underlying operating cash flow after capital expenditure as a percentage of Ratio - N/A
underlying operating profit
- Used as a measure of the Group's efficiency in converting profits into cash
Underlying free cash flow No direct equivalent Underlying free cash flow includes cash flows from exceptional items and the - See page 10
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 2023, which should be read in conjunction with this announcement
when published. This list is not a substitute for reading the Company's Annual
Report and Financial Statements 2023 in full. The Group's principal risks and
uncertainties are:
Contract and project performance: We execute large contracts, which often
require us to price for the long term and for risk transfer. Our contracts can
include fixed prices. Risk Appetite: Medium. This reflects the complex
nature of the work within the defence and emergency services sectors. Whilst
we aim to ensure our contracts only accept risk that can be managed, risk
remains in the contract or project delivery.
Existing & new markets: We rely on winning and retaining large contracts
in both existing and new markets both of which are often characterised by a
relatively small number of major customers many of whom are owned, controlled,
or funded by local or national government. Risk Appetite: Medium. This
reflects that, whilst the maintenance of a secure and assured pipeline is
essential for continued growth, we may choose to embrace the risks that we can
confidently and securely manage.
IT & security: A key factor for our customers is our ability to deliver
secure IT and other information assurance systems to maintain the
confidentiality of sensitive information. Risk Appetite: Low. IT and Cyber
Security are fundamental components to Babcock's operations, we continually
review the emergence of cyber threats, in an effort to eradicate and mitigate
the risk as far as possible.
Pensions: The Group has significant defined benefit pension schemes in the UK,
which provide for a specified level of pension benefits to scheme members.
Risk Appetite: Low. Babcock utilise engagement with the Pensions schemes
trustees and a balanced pension management approach that looks to mitigate and
reduce the risks associated with pensions over the journey to settling the
pension obligations.
Supply chain management: The Group is exposed to several risks within its
supply chain, and these can typically be the following. Macroeconomic
condition such as high inflation and Brexit. Disruption events to
established supply chains such as natural disasters, wars, and strikes.
Supplier specific challenges as we have seen increasing disruption from
cyber-attacks on suppliers i.e., financial failure of suppliers. Part
availability for aged customer assets for maintenance of customer assets that
are so old that it is not possible to source key parts or components, or the
cost of minimum quantities becomes cost or lead-time prohibitive. Risk
Appetite: Low. Babcock recognises the adverse effects of the financial
resilience risk on our balance sheet and investments, our aim being to
eliminate the risk where possible.
Operational resilience: We are undertaking multiple change programmes with the
introduction of a new strategy, a new operating model to restructure the shape
of the Group, and a new People strategy, as well as undertaking the alignment
of both the business portfolio and our property portfolio. Additionally, there
are several new material opportunities that the Group may pursue - some in new
geographies - that may further stretch management bandwidth. Risk Appetite:
Low. Given the materially adverse nature of the risk to Operational
Resilience, Babcock looks to recognise and eradicate the emergence of risks to
operations where possible, hence risk appetite being set as low.
Financial resilience: The Group is exposed to a number of financial risks,
some of which are of a macroeconomic nature (for example, foreign currency,
interest rates) and some of which are more specific to the Group (for example,
liquidity and credit risks). Risk Appetite: Low. Babcock recognises the
adverse effects of the financial resilience risk on our balance sheet and
actively manages this risk via its capital allocation policy, substantial
committed debt facilities and maintaining an investment grade credit rating
allowing access to debt capital markets. However, this risk cannot be entirely
eliminated and will aways require management.
Health and safety: Our operations entail the potential risk of significant
harm to people and property, wherever we operate across the world. Risk
Appetite: Low. For both moral, financial and reputational reasons we would
wish to keep the risk as low as possible. Through the eyes of the HSE and high
hazard regulators we are legally mandated to keep the risk as low as
reasonably practicable.
Climate and sustainability: Sustainability is an integral part of our
corporate strategy, and our global business employs short, medium, and long
terms control measures to manage climate risks. Risk Appetite: Low. Our
probability and impact scorings for the risks related to Climate and
Sustainability are based on a scenario-based methodology. We determined that
the most significant transition risk is labour, which is expected to rise,
however our risk appetite allocation remains low as this situation is likely
to materialise in the medium and long term and gives us time to implement
activities to mitigate.
Technological disruption: We have identified three main attributes to
potential technological disruption that potentially effects Babcock. The
digital change agenda both within our customers and internal to Babcock, our
approach to data management and finally the disruption of new technology
offerings. Risk Appetite: Low. Given the materially adverse nature of
digital and data risks, Babcock look to recognise and eradicate the emergence
of risks to operations where possible, hence risk appetite being set at low.
Exploiting new technology in an appropriate manner can open new markets.
However, Babcock does survey the market for new technology to develop into new
opportunities. These are assessed for benefit individually and if deemed of
interest, integrated into our research and development programme and managed
with project management.
Regulatory & compliance: Our businesses are subject to the laws,
regulations and restrictions of the many jurisdictions in which they
operate. Risk Appetite: Low. Babcock always endeavours to act in line with
best practices and regulatory requirements. Babcock has zero tolerance for
regulatory risk around risks such as anti-bribery and corruption and modern
slavery, the risk appetite allocation is therefore set at low
Talent management, retention and upskilling: We operate in many specialised
engineering and technical domains, which require appropriate skills and
experience. Risk Appetite: Medium. Avoidance of the risk would increase
costs and necessitate over-resourcing resulting in potential negative
workforce engagement and retention. Some risk is accepted given by sharing
capability across our business and compensating for skills shortages in
particular areas.
Acquisitions and disposals: We have built our core strengths organically and
through acquisition. Decisions to acquire companies, as well as the process of
their acquisition and integration, are complex, time-consuming, and expensive.
If we believe that a business is not 'core', we may decide to sell that
business. Risk Appetite: Medium. Babcock will continue to review potential
opportunities within the market in a considered and measured way, M&A
activity continues to be inherently high risk, future M&A activity will be
undertaken only where it is possible to reduce inherent risk to its lowest
level balanced against potential rewards and opportunity.
The risks listed above, together with their potential impacts and mitigating
actions we have taken in respect of them, have not changed since FY23 and are
explained and described in more detail in the 2023 Annual Report, a copy of
which will be available at www.babcockinternational.com
(http://www.babcockinternational.com)
Condensed consolidated income statement (unaudited)
Note Six months ended Six months ended
30 September 2023
30 September 2022
£m £m
Revenue 2,3 2,177.0 2,144.0
Operating costs (2,032.8) (2,071.2)
Operating profit 2,3 144.2 72.8
Share of results of joint ventures and associates 2,3 6.0 6.6
Finance income 4 10.2 10.1
Finance costs 4 (24.3) (38.3)
Profit before tax 2,3 136.1 51.2
Income tax expense 2,5 (32.0) (14.2)
Profit for the period 2 104.1 37.0
Attributable to:
Owners of the parent 2 102.5 34.6
Non-controlling interest 2 1.6 2.4
104.1 37.0
Earnings per share
Basic 2 20.4p 6.8p
Diluted 2 19.9p 6.7p
Condensed consolidated statement of comprehensive income (unaudited)
Six months ended Six months ended
30 September
30 September
2023
2022
£m
£m
Profit for the period 104.1 37.0
Other comprehensive loss
Items that may be subsequently reclassified to income statement
Currency translation differences (5.4) 7.7
Fair value adjustment of interest rate and foreign exchange hedges 3.1 -
Hedging (losses)/gains reclassified to profit and loss (1.1) 2.9
Share of other comprehensive income of joint ventures and associates 0.4 3.1
Tax on items that may be subsequently reclassified to income statement (1.5) -
Items that will not be subsequently reclassified to income statement
Remeasurement of retirement benefit obligations (note 13) (132.7) (124.0)
Tax, including rate change impact, on remeasurement of retirement benefit 33.2 31.0
obligations
Other comprehensive loss, net of tax (104.0) (79.3)
Total comprehensive income/(loss) 0.1 (42.3)
Total comprehensive income/(loss) attributable to:
Owners of the parent (0.8) (44.0)
Non-controlling interest 0.9 1.7
Total comprehensive income/(loss) 0.1 (42.3)
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 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
At 1 April 2023 303.4 873.0 768.8 30.6 (1,568.8) 3.0 (56.1) 353.9 17.0 370.9
Profit for the period - - - - 102.5 - - 102.5 1.6 104.1
Other comprehensive (loss)/income
- - - - (99.5) 2.0 (5.8) (103.3) (0.7) (104.0)
Total comprehensive income - - - - 3.0 2.0 (5.8) (0.8) 0.9 0.1
Purchase of own shares - - - - (7.5) - - (7.5) - (7.5)
Share-based payments - - - - 5.2 - - 5.2 - 5.2
Tax on shared-based payments - - - - 2.1 - - 2.1 - 2.1
Net movement in equity - - - - 2.8 2.0 (5.8) (1.0) 0.9 (0.1)
At 30 September 2023 303.4 873.0 768.8 30.6 (1,566.0) 5.0 (61.9) 352.9 17.9 370.8
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 30 September 2023 £m As at 31 March
2023 £m
Assets
Non-current assets
Goodwill 6 780.7 781.4
Other intangible assets 145.2 140.8
Property, plant and equipment 487.3 478.5
Right of use assets 150.4 159.1
Investment in joint ventures and associates 57.0 57.4
Loans to joint ventures and associates 2.0 9.5
Retirement benefit surpluses 13 43.5 94.8
Other financial assets 6.7 7.3
Lease receivables 18.3 22.2
Derivatives 0.9 2.6
Deferred tax asset 129.5 112.2
Trade and other receivables 8 6.2 6.4
1,827.7 1,872.2
Current assets
Inventories 128.5 126.8
Trade and other receivables 8 542.0 506.9
Contract assets 8 340.0 322.5
Income tax receivable 3.2 7.7
Lease receivables 11.8 16.4
Assets held for sale 2.9 -
Other financial assets 1.0 1.4
Derivatives 3.8 4.3
Cash and cash equivalents 12 480.5 451.7
1,513.7 1,437.7
Total assets 3,341.4 3,309.9
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 742.5 746.3
Retained losses (1,566.0) (1,568.8)
Total equity attributable to owners of the parent 352.9 353.9
Non-controlling interest 17.9 17.0
Total equity 370.8 370.9
Non-current liabilities
Bank and other borrowings 746.7 768.4
Lease liabilities 170.6 178.9
Trade and other payables 9 0.9 0.9
Deferred tax liabilities 6.8 7.0
Derivatives 52.0 53.3
Retirement benefit deficits 13 198.4 156.2
Provisions for other liabilities 11 86.0 80.8
1,261.4 1,245.5
Current liabilities
Bank and other borrowings 0.1 19.6
Lease liabilities 42.4 49.9
Trade and other payables 9 966.9 911.1
Contract liabilities 9 609.6 616.4
Income tax payable 13.9 15.8
Derivatives 15.2 12.8
Provisions for other liabilities 11 61.1 67.9
1,709.2 1,693.5
Total liabilities 2,970.6 2,939.0
Total equity and liabilities 3,341.4 3,309.9
Condensed consolidated cash flow statement (unaudited)
Note Six months Six months
ended
ended
30 September
30 September
2023
2022
£m
£m
Cash flows from operating activities
Profit for the period 2 104.1 37.0
Share of results of joint ventures and associates 2,3 (6.0) (6.6)
Income tax expense 5 32.0 14.2
Finance income 4 (10.2) (10.1)
Finance costs 4 24.3 38.3
Depreciation and impairment of property, plant and equipment 25.2 37.2
Depreciation and impairment of right of use assets 18.9 52.5
Amortisation and impairment of intangible assets 10.5 16.6
Equity share-based payments 5.2 4.0
Net derivative fair value and currency movement through profit or loss 6.7 23.2
Profit on disposal of property, plant and equipment (0.1) (0.6)
Profit on disposal of right of use assets (0.2) (0.1)
Cash generated from operations before movement in working capital and 210.4 205.6
retirement benefit payments
(Increase)/decrease in inventories (4.6) 1.1
Increase in receivables (31.9) (8.7)
Increase in contract assets (19.4) (100.6)
Increase in payables 55.3 85.4
Decrease in contract liabilities (5.0) (26.3)
Decrease in provisions (2.0) (5.1)
Retirement benefit payments in excess of income statement charge (39.6) (76.2)
Cash generated from operations 163.2 75.2
Income tax paid (12.9) (12.2)
Interest paid (24.6) (20.9)
Interest received 11.1 6.8
Net cash flows from operating activities 136.8 48.9
Cash flows from investing activities
Dividends received from joint ventures and associates 6.8 5.1
Proceeds on disposal of property, plant and equipment 9.8 22.7
Purchases of property, plant and equipment (47.4) (52.8)
Purchases of intangible assets (14.3) (6.8)
Loans repaid by joint ventures and associates 7.1 2.0
Net cash flows from investing activities (38.0) (29.8)
Cash flows from financing activities
Lease principal payments 12 (24.5) (54.2)
Bank loans repaid 12 (13.0) (60.7)
Purchase of own shares (7.5) -
Loans raised and facilities drawn down - 153.3
Net cash flows from financing activities (45.0) 38.4
Net increase in cash, cash equivalents and bank overdrafts 12 53.8 57.5
Cash, cash equivalents and bank overdrafts at beginning of period 12 429.5 756.5
Effects of exchange rate fluctuations 12 (2.9) 1.1
Cash, cash equivalents and bank overdrafts at end of period 12 480.4 815.1
Notes to the consolidated financial statements (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 2023, which were prepared in accordance with IFRS and the
applicable legal requirements of the Companies Act 2006. These condensed
consolidated half year 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 2023 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 2023 was unqualified, did not include a reference to any
matters to which the auditor drew attention by way of emphasis of matter
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 2023, and comply with amendments to IFRS effective since that
date.
The half year report for the six months ended 30 September 2023 was approved
by the Directors on 13 November 2023.
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 condensed consolidated half year financial
statements. 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 approval of these consolidated half year financial statements. The
Directors reviewed the resources available to the Group in the form of cash
and committed facilities. As of 30 September 2023, the Group's committed
facilities and bonds totalling £1.75 billion were the £300 million revolving
credit facility (RCF), the £775 million five-year multi-currency RCF, and two
tranches of notes (£300m million 1.875% notes and €550 million 1.375%
notes) issued under the Group's Eurobond programme. In October 2023, the
Group has closed the £300 million RCF reducing available facilities to £1.45
billion. The going concern assessment, and forecasting of covenants below,
reflected this change in financing.
The £775 million RCF is the only remaining facility containing financial
covenants. The key covenant ratios are (i) net debt to EBITDA (gearing ratio)
and (ii) EBITDA to net interest (interest cover) with tests set to less than
3.5x and greater than 4.0x respectively. 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 assess the level
of performance deterioration against the base case budget (in both EBITDA and
net debt) required to challenge covenant levels. Of the remaining measurement
points within the five-year period approved by the Board, the smallest
required reduction in forecast EBITDA to reach the covenant level was 65% and
the smallest net debt increase was 230%. Given the mitigating actions that are
available and within management's control, such adverse 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 2023. On an annual basis, budgets 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. This annual
process comprises the budget for the coming financial year and a 5-year plan.
Between annual budget cycles, the Group prepares rolling forecasts on a
monthly basis covering an updated assessment of the remainder of the current
financial year. The impacts of current economic conditions, including
inflation, are incorporated into the annual budget process and the rolling
forecasts. Where changes in economic conditions are significant, these would
also be incorporated into the 5-year plan for the purpose of the going concern
assessment.
The Directors have performed sensitivity analyses on the latest Group rolling
forecast for the duration of the assessment period. These involve a range of
downside events both individually and in combination under a range of severe,
but plausible downside scenarios. Such sensitivities include a reduction in
bid pipeline closure (business winning), a deterioration in large programme
performance across the Group (including further inflation cost increases, or
related failures in supplier resilience, as per our principal risks), a
deterioration in the Group's working capital position and a regulatory risk
relating to a reduction in access to R&D tax incentive credits.
If such a severe downturn were to occur in the Group's performance, the Board
would take mitigation measures to protect the Group in the short term as
described in the going concern assessment on page 104 of the annual report and
financial statements for the year ended 31 March 2023. Despite the severity of
the combined severe, but plausible scenarios, these sensitivities did not give
rise to any material uncertainties in relation to the Group's ability to
continue as a going concern. Based on our review, the Directors have a
reasonable expectation that the Group has adequate resources to continue as a
going concern for at least 12 months from the date of these condensed
consolidated half year financial statements. As such, these financial
statements have been prepared on the going concern basis. The Directors do not
believe there are any material uncertainties to disclose in relation to the
Group's ability to continue as a going concern.
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 2023. The
following represent the notable assumptions impacting upon revenue and profit
recognition as a result of the Group's contracts with customers:
· Stage of completion & costs to complete - The Group's revenue
recognition policies require an estimate of the cost to complete long-term
contracts. Outturn costs are estimated on a contract-by-contract basis and
estimates are carried out by suitably qualified and experienced personnel.
Estimates of cost to complete include the assessment of contract contingencies
arising out of technical, commercial, operational and other risks. The
assessments of all significant contract outturns are subject to review and
challenge, and judgements and estimates are reviewed regularly throughout the
contract life based on latest available information with adjustments made
where necessary. As contracts near completion, often less judgement is
required to determine the expected outturn. The most significant estimate of
contract outturn relates to the Type 31 programme as outlined below.
· Variable consideration - the Group's contracts are often subject
to variable consideration including performance-based penalties and
incentives, gain/pain share arrangements and other items. Variable
consideration is added to the transaction price only to the extent that it is
highly probable that there will not be a significant reversal in the amount of
cumulative revenue recognised once the underlying uncertainty is resolved.
· Inflation - The level to which the Group's revenue and cost for
each contract will be impacted by inflation is a key accounting estimate, as
this could cause the revenue and cost of contract delivery to differ from
previous estimates. The Group's contracts are exposed to inflation due to
rising employment costs, as well as increased costs of raw materials. The
Group endeavours to include cost recovery mechanisms or index-linked pricing
within its contracts with customers in order to mitigate any inflation risk
arising from increasing employment and raw material costs. In the most
significant contract where there is no mechanism to recover an increase in
costs due to inflation, revenue and profit in the year would be impacted by
£4 million for each 1% change in personnel costs.
Type 31 Programme estimates
A £100m loss was recorded during the year ended 31 March 2023, primarily by
reducing revenue and creating an onerous contract provision. Determining the
contract outturn, and therefore revenue and onerous contract provision
recognised, requires assumptions and complex judgements to be made about
future performance of the contract. The level of uncertainty in the estimates
made in assessing the outturn is linked to the complexity of the underlying
contract. The key sources of estimates in assessing the outturn are:
· The results of the dispute resolution process, and any
reimbursements agreed with the customer;
· The build costs over the production schedule and estimate of
efficiencies arising from the 'learner' effect through performing work over
multiple ships;
· The ability to maintain or improve operational performance
through process efficiencies and improvements over the five ships;
· The impact of inflation on the build cost; and
· The achievement of the build schedule to completion and final
acceptance.
These estimates are inter-related. The range of possible future outcomes in
respect of assumptions made to determine the contract outturn could result in
a material increase or decrease in revenue and the value of the onerous
contract provision, and hence on the Group's profitability, in the current and
next financial year. With c£1bn of estimated costs to go over the life of the
contract, if actual recoveries or costs were to differ from those assumed by
5-10%, the potential impact on the contract outturn could be £50-£100m. To
mitigate this, comparisons of actual contract performance and previous
forecasts used to assess the contract outturn are performed regularly, with
consideration given to whether any revisions to assumptions are required. In
the next financial year, design activities will be finalised and the
construction of the first ship will be substantially complete. This will
reduce the uncertainty over the contract outturn, but a significant element
will remain due to the substantial activity which extends over a further 4
years. In a major ship build programme of this nature, it is inherently
possible that there may be changes in circumstances which cannot reasonably be
foreseen at the present time.
Defined benefit pension schemes obligation: The Group's defined benefit
pension schemes are assessed annually in accordance with IAS 19. 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 judgment
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 2023, note 26 provided a sensitivity analysis of the impact of
assumptions used in the Group's defined benefit pension schemes.
The carrying value of goodwill: Goodwill is tested annually for impairment, in
accordance with IAS 36, Impairment of Assets ('IAS 36'). The impairment
assessment is based on assumptions in relation to the cash flows expected to
be generated by cash generating units ("CGUs"), together with appropriate
discounting of the cash flows. The assessment of the carrying value of
goodwill in the Aviation CGU is included as a critical accounting estimate
given the significance of the remaining carrying value of goodwill and the
inherent level of estimation uncertainty required to undertake impairment
testing. The assessment of the recoverable value of goodwill in other CGUs is
not considered a critical accounting estimate as a result of the headroom
within these CGUs.
The key assumptions in estimating the carrying value of goodwill are discount
rate, long-term growth rate and growth in the short-term cash flows. Inflation
rates are incorporated into the impairment assessment through their inclusion
within the growth rates in cash inflows and outflows and through the
methodology by which discount rates are determined. Were inflation to impact
upon all cash flows equally, the impairment assessment should be neutral to
the impact of inflation. The Group has a number of protections and exposures
to the impact of inflation across its portfolio of revenue arrangements and
supply chain agreements resulting in an indirect impact of inflation on the
impairment outturn.
In the annual report and financial statements for the year ended 31 March
2023, note 10 provided a sensitivity analysis regarding the impairment of
goodwill.
Critical accounting judgements
Critical accounting judgements, apart from those involving estimations, that
are applied in the preparation of the condensed consolidated financial
statements are discussed below:
Acting as a principal or agent: A number of the Group's contracts include
promises in relation to procurement activity undertaken on behalf of customers
at low or nil margin, sub-contractor arrangements, and other pass-through
costs. Management is required to exercise judgement over these revenue streams
in considering whether the Group is acting as principal or agent. This is
based on an assessment as to whether the Group controls the relevant goods or
services under the performance obligations prior to transfer to customers.
Factors that influence this judgement include the level of responsibility the
Group has under the contract for the provision of the goods or services, the
extent to which the Group is incentivised to fulfil orders on time and within
budget, either through gain share arrangements or KPI deductions in relation
to the other performance obligations within the contract, and the extent to
which the Group exercises responsibility in determining the selling price of
the goods and services. Taking all factors into consideration, the Group then
comes to a judgement as to whether it acts as principal or agent on a
performance obligation-by-performance obligation basis. Note that any changes
in this judgement would not have a material impact on profit, although there
may be a material impact to revenue and operating costs.
Determining the Group's cash generating units: Management exercises judgement
in determining the Group's cash generating units for the goodwill impairment
assessment. This determination is generally straightforward and factual, but
in some cases, judgement is required. For example, it was determined that
Africa is a separate cash generating unit, whilst operations of the Group in
other territories do not represent separate cash generating units. There have
been no changes to the operating segments in the current period.
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 have a more consistent view of the
performance and earnings trends of the Group. These measures are considered to
provide a consistent measure of business performance from period to period.
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 those
used in the year ended 31 March 2023.
Underlying operating profit
In any given period, the statutory measure of operating profit includes a
number of items which the Group considers to either be one-off in nature or
otherwise not reflective of underlying performance (Specific Adjusting
Items"). Underlying operating profit therefore adjusts statutory operating
profit to provide readers with a measure of business performance which the
Group considers more consistently analyses the underlying performance of the
Group by removing these one-off items that otherwise add volatility to
performance.
Underlying operating profit eliminates potential differences in performance
caused by purchase price allocations on business combinations in prior periods
(amortisation of acquired intangibles), business acquisition, merger and
divestment related items, large, infrequent restructuring programmes and fair
value movements on derivatives. Transactions such as these may happen
regularly and could significantly impact the statutory result in any given
period. Adjustments to underlying operating profit may include both income and
expenditure items.
Specific Adjusting Items include:
• Amortisation of acquired intangibles;
• Business acquisition, merger and divestment related items (being
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.
Income statement including underlying results
Six months ended 30 September 2023 Six months ended 30 September 2022
Underlying Specific Adjusting Items Statutory Underlying Specific Adjusting Statutory
£m
£m
£m
£m
£m
Items
£m
Revenue 2,177.0 - 2,177.0 2,144.0 - 2,144.0
Operating profit 154.4 (10.2) 144.2 121.7 (48.9) 72.8
Share of results of joint ventures and associates 6.0 - 6.0 6.6 - 6.6
Net finance costs (20.0) 5.9 (14.1) (22.7) (5.5) (28.2)
Profit before tax 140.4 (4.3) 136.1 105.6 (54.4) 51.2
Income tax expense (35.3) 3.3 (32.0) (23.1) 8.9 (14.2)
Profit after tax for the period 105.1 (1.0) 104.1 82.5 (45.5) 37.0
Earnings per share including underlying measures
Six months ended 30 September 2023 Six months ended 30 September 2022
Underlying Specific Adjusting items Statutory Underlying Specific Adjusting items Statutory
£m
£m
£m
£m
£m
£m
Profit/(loss) after tax for the period 105.1 (1.0) 104.1 82.5 (45.5) 37.0
Amount attributable to owners of the parent 103.5 (1.0) 102.5 80.1 (45.5) 34.6
Amount attributable to non-controlling interests 1.6 - 1.6 2.4 - 2.4
Weighted average number of shares (m) 503.5 503.5 505.3 505.3
Effect of dilutive securities (m) 12.7 12.7 9.9 9.9
Diluted weighted average number of shares (m) 516.2 516.2 515.2 515.2
Basic EPS 20.6p (0.2)p 20.4p 15.8p (9.0)p 6.8p
Diluted EPS 20.1p (0.2)p 19.9p 15.5p (8.8)p 6.7p
Details of Specific Adjusting Items
The impact of Specific Adjusting Items is set out below:
Six months ended 30 September 2023 Six months ended 30 September 2022
£m
£m
Amortisation of acquired intangibles (5.6) (8.1)
Business acquisition, merger and divestment related items (0.2) (12.1)
Fair value movement on derivatives and related items (4.4) (28.7)
Adjusting items impacting operating profit (10.2) (48.9)
Fair value movement on derivatives and related items 5.9 (5.5)
Adjusting items impacting profit before tax (4.3) (54.4)
Adjusting items impacting income tax expense
Amortisation of acquired intangibles 1.6 2.1
Business acquisition, merger and divestment related items - 1.7
Fair value movement on derivatives and related items (0.4) 5.1
Income tax effect of adjusting items impacting profit before tax 1.2 8.9
Income tax specific adjusting items 2.1 -
Total adjusting items impacting income tax 3.3 8.9
Adjusting items impacting profit after tax (1.0) (45.5)
Explanation of Specific Adjusting Items
Amortisation of acquired intangibles
Underlying operating profit excludes the amortisation of acquired intangibles.
This item is excluded from underlying results as it arises as a result of
purchase price allocations on business combinations and is a non-cash item
which does not change each year dependent on the performance of the business.
It is therefore not considered to represent the underlying activity of the
Group. 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 movement on derivatives and related items
Movements within operating profit arise from 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. These
arrangements are considered to provide an economic hedge, but hedge accounting
under IFRS is not applied. 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 remove the risk to profitability).
Hedge ineffectiveness on debt and debt-related derivatives that are designated
in a hedge relationship under IFRS 15 are also presented as a specific
adjusting item in finance costs. This is presented as a specific adjusting
item as the ineffectiveness is caused by the off-market designation at
inception, although overall the transactions are considered to represent an
economic hedge.
The fair value movement on lease-related derivatives and foreign exchange
movements on lease liabilities are also presented as a specific adjusting item
in finance costs. These arrangements are considered to provide an economic
hedge, but hedge accounting under IFRS is not applied.
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 £0.2 million. This
represents legal and warranty related costs additional to those initially
recorded in the prior period in respect of divestments.
The prior period included a total net loss relating to business acquisition,
merger and divestment related items of £12.1 million. This comprised
professional fees and related costs in respect of the disposal activity
completed in the year ending 31 March 2023 - notably the disposal of the
Group's European Aerial Emergency Services business.
Income tax specific adjusting items
During the period the Group revised its estimates for certain tax-related
provisions, relating to matters arising from previous divestments and business
reorganisations.
3. Segmental information
The Group has four reportable segments, determined by reference to the goods
and services they provide and the markets they serve.
Marine - through-life support of naval ships, equipment and marine
infrastructure in the UK and internationally.
Nuclear - through-life support of submarines and complex engineering services
in support of major decommissioning programmes and projects, training and
operational 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 2023 Marine Nuclear Land Aviation Unallocated Total
£m
£m
£m
£m
£m
£m
Revenue 750.1 710.8 545.6 170.5 - 2,177.0
Underlying operating profit 63.0 45.2 37.5 8.7 - 154.4
Specific Adjusting Items
Amortisation of acquired intangibles (3.8) - - (1.8) - (5.6)
Business acquisition, merger and divestment related items - - (0.2) - - (0.2)
Fair value loss on forward rate contracts (4.1) - - (0.3) - (4.4)
Operating profit 55.1 45.2 37.3 6.6 - 144.2
Share of results of joint ventures and associates 0.3 - - 5.7 - 6.0
Net finance costs - - 0.3 - (14.4) (14.1)
Profit/(loss) before tax 55.4 45.2 37.6 12.3 (14.4) 136.1
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
Geographic analysis of revenue
The geographic analysis of revenue by origin of customer for the periods ended
30 September 2023 and 30 September 2022 is as follows:
Geographic analysis Revenue
Six months ended 30 September 2023 Six months ended
£m
30 September
2022
£m
United Kingdom 1,507.2 1,259.8
Rest of Europe 112.0 335.7
Africa 179.7 169.4
North America 93.9 77.6
Australasia 170.5 163.4
Rest of World 105.7 138.1
Group total 2,177.0 2,144.0
The analysis of revenue for the periods ended 30 September 2023 and 30
September 2022 is as follows:
Six months ended 30 September 2023 Six months ended 30 September 2022
£m
£m
Sale of goods - transferred at a point in time 181.4 163.6
Sale of goods - transferred over time 117.1 130.2
Sale of goods 298.5 293.8
Provision of services - transferred over time 1,872.5 1,823.0
Rental income 6.0 27.2
Revenue 2,177.0 2,144.0
4. Net finance costs
Six months ended 30 September 2023 Six months ended 30 September 2022
£m
£m
Finance costs
Loans, overdrafts and associated interest rate hedges 15.0 22.5
Lease interest and associated hedges 5.3 13.1
Amortisation of issue costs of bank loan 1.5 1.7
Retirement benefit interest 0.4 -
Other 2.1 1.0
Total finance costs 24.3 38.3
Finance income
Bank deposits, loans and leases 9.9 6.1
IFRIC 12 investment income 0.3 0.4
Retirement benefit interest - 3.6
Total finance income 10.2 10.1
Net finance costs 14.1 28.2
5. Income tax expense
Six months ended 30 September 2023 Six months ended 30 September 2022
£m
£m
Income tax expense (32.0) (14.2)
Calculation of underlying effective tax rate
Profit before tax 136.1 51.2
Deduct: Share of results of joint ventures and associates (note 2) (6.0) (6.6)
Add back: specific adjusting items (note 2) 4.3 54.4
Adjusted profit before tax 134.4 99.0
Tax charge 32.0 14.2
Exclude adjusting items impacting income tax (note 2) 3.3 8.9
Adjusted tax charge 35.3 23.1
Underlying effective tax rate 26.3% 23.3%
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 2024 to the half year
pre-tax profit in each jurisdiction in which it operates.
6. Goodwill
30 September 2023 31 March 2023
£m
£m
Cost
At 1 April 1,823.3 2,312.7
On disposal of subsidiaries - (488.0)
Exchange adjustments (0.7) (1.4)
At 30 September/ 31 March 1,822.6 1,823.3
Accumulated impairment
At 1 April 1,041.9 1,529.3
On disposal of subsidiaries - (487.4)
At 30 September/ 31 March 1,041.9 1,041.9
Net book value at 30 September / 31 March 780.7 781.4
Goodwill is allocated to the operating segments as set out in the table below:
30 September 2023 31 March 2023
£m
£m
Marine 296.0 296.6
Nuclear 233.1 233.1
Land 218.0 218.0
Aviation 32.0 32.0
Africa 1.6 1.7
780.7 781.4
Goodwill is stated at cost less any provision for impairment. The recoverable
value of each cash generating unit was assessed at 31 March 2023 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 2023 since the published annual report and financial
statements for the year ending 31 March 2023. The key assumptions can be found
in note 10 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 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 at the year end.
7. Non-current assets
In the six months ended 30 September 2023 the Group made the following
significant additions to non-current assets:
• £48.2 million of additions to property plant and equipment including
£25.4 million of site improvements at Devonport Royal Dockyard;
• £15.0 million of additions to intangible assets; and
• £14.0 million of additions to right of use assets representing new
aircraft and property lease arrangements.
8. Trade and other receivables and contract assets
30 September 2023 31 March 2023
£m
£m
Non-current assets
Costs to obtain a contract 2.6 2.8
Costs to fulfil a contract 1.0 1.4
Other debtors 2.6 2.2
Non-current trade and other receivables 6.2 6.4
Current assets
Trade receivables 296.4 307.3
Less: provision for impairment of receivables (8.3) (7.3)
Trade receivables - net 288.1 300.0
Retentions 4.3 6.0
Amounts due from related parties (note 15) 2.6 2.1
Other debtors 145.3 129.4
Prepayments 95.5 63.7
Costs to obtain a contract 0.6 0.6
Costs to fulfil a contract 5.6 5.1
Trade and other receivables 542.0 506.9
Contract assets 340.0 322.5
Current trade and other receivables and contract assets 882.0 829.4
Trade and other receivables are stated at amortised cost less expected credit
loss.
9. Trade and other payables and contract liabilities
30 September 2023 31 March 2023
£m
£m
Current liabilities
Trade creditors 264.7 239.1
Amounts due to related parties (note 15) 0.3 0.8
Other creditors 59.8 41.6
Other taxes and social security 74.7 75.5
Accruals 567.4 554.1
Trade and other payables 966.9 911.1
Contract liabilities 609.6 616.4
Trade and other payables and contract liabilities 1,576.5 1,527.5
Non-current liabilities
Other creditors 0.9 0.9
Included in creditors is £14.3 million (31 March 2023: £12.9 million)
relating to capital expenditure which has therefore not been included in
working capital movements within the cash flow statement.
10. Financial instruments
The following table presents the Group's financial assets and liabilities:
30 September 2023 (£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
Loans to joint ventures and associates - 2.0 - - 2.0 2.0
Other financial assets - 6.7 - - 6.7 6.7
Lease receivables - 18.3 - - 18.3 18.3
Derivatives 0.9 - - - 0.9 0.9
Current financial assets
Trade and other receivables * 1.5 322.5 - - 324.0 324.0
Other financial assets - 1.0 - - 1.0 1.0
Lease receivables - 11.8 - - 11.8 11.8
Derivatives 3.8 - - - 3.8 3.8
Cash and cash equivalents - 480.5 - - 480.5 480.5
Non-current financial liabilities
Bank and other borrowings - - - (746.7) (746.7) (659.3)
Trade and other payables * - - - (0.6) (0.6) (0.6)
Derivatives - - (52.0) - (52.0) (52.0)
Current financial liabilities
Bank and other borrowings - - - (0.1) (0.1) (0.1)
Trade and other payables * - - - (538.2) (538.2) (538.2)
Derivatives - - (15.2) - (15.2) (15.2)
Net financial assets / (financial liabilities) 6.2 842.8 (67.2) (1,285.6) (503.8) (416.4)
31 March 2023 (£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
Loans to joint ventures and associates - 9.5 - - 9.5 9.5
Other financial assets - 7.3 - - 7.3 7.3
Lease receivables - 22.2 - - 22.2 22.2
Derivatives 2.6 - - - 2.6 2.6
Current financial assets
Trade and other receivables * 1.5 345.1 - - 346.6 346.6
Other financial assets - 1.4 - - 1.4 1.4
Lease receivables - 16.4 - - 16.4 16.4
Derivatives 4.3 - - - 4.3 4.3
Cash and cash equivalents - 451.7 - - 451.7 451.7
Non-current financial liabilities
Bank and other borrowings - - - (768.4) (768.4) (670.3)
Derivatives - - (53.3) - (53.3) (53.3)
Current financial liabilities
Bank and other borrowings - - - (19.6) (19.6) (19.6)
Trade and other payables * - - - (511.1) (511.1) (511.1)
Derivatives - - (12.8) - (12.8) (12.8)
Net financial assets / (financial liabilities) 8.4 853.6 (66.1) (1,299.1) (503.2) (405.1)
* Trade and other receivables and trade and other payables only include
balances which meet the definition of a financial instrument.
The fair values of financial instruments held at fair value have been
determined based on available market information at the period end date, and
the valuation methodologies listed below:
• The fair values of forward foreign exchange contracts are calculated
by discounting the contracted forward values and translating at the
appropriate period end rates; and
• The fair values of cross-currency interest rate swaps are calculated
by discounting expected future principal and interest cash flows and
translating at the appropriate period end rates.
11. Provisions for other liabilities
Contract/ Employee benefits and business reorganisation Property Other Total
warranty
(b)
(c)
(d)
£m
(a)
£m
£m
£m
£m
At 31 March 2023 100.4 30.5 15.1 2.7 148.7
Net charge to income statement 10.7 3.3 3.9 0.1 18.0
Utilised in the period (16.9) (2.5) (0.5) (0.1) (20.0)
Unwinding of discount 1.1 0.1 - - 1.2
Foreign exchange (0.4) (0.4) (0.3) 0.3 (0.8)
At 30 September 2023 94.9 31.0 18.2 3.0 147.1
Provisions are analysed between current and non-current as follows:
30 September 2023 31 March 2023
£m
£m
Current 61.1 67.9
Non-current 86.0 80.8
147.1 148.7
(a) The contract/warranty provisions relate to onerous contracts and
warranty obligations on completed contracts and disposals. Warranty provisions
are provided in the normal course of business and are recognised when the
underlying products and services are sold. The provision is based on an
assessment of future claims with reference to historical warranty data and a
weighting of possible outcomes against their associated probabilities.
(b) Employee benefits and business reorganisation costs relate to long
term employee benefits such as long-term sickness and long-term leave, and
business restructuring activities including announced redundancies.
© Property and other provisions primarily relate to dilapidation
costs in respect of leased buildings and contractual obligations in respect of
infrastructure.
(d) Other provisions include provisions for insurance claims arising
within the Group's captive insurance company, Chepstow Insurance Limited.
Provisions relate to specific claims assessed in accordance with the advice
of independent actuaries.
Included within provisions is £6.8 million expected to be utilised over
approximately ten years (31 March 2023: £6.9 million). Other than these
provisions the Group's non-current provisions are expected to be utilised
within two to five years.
12. Changes in net debt
31 March Additional Other non-cash movement Changes in fair value Exchange 30 September
2023
leases
£m
£m
movement
2023
£m Cash flow
£m
£m
£m
£m
Cash and bank balances 451.7 31.7 - - - (2.9) 480.5
Bank overdrafts (22.2) 22.1 - - - - (0.1)
Cash, cash equivalents and bank overdrafts 429.5 53.8 - - - (2.9) 480.4
Debt (765.8) 13.0 - (1.4) (0.4) 7.9 (746.7)
Derivatives hedging debt (47.4) - - - 2.1 - (45.3)
Lease liabilities (228.8) 24.5 (10.4) - - 1.7 (213.0)
Changes in liabilities from financing arrangements (1,042.0) 37.5 (10.4) (1.4) 1.7 9.6 (1,005.0)
Lease receivables 38.6 (22.0) 16.0 - - (2.5) 30.1
Loans to joint ventures and associates 9.5 (7.1) - (0.4) - - 2.0
Net debt (564.4) 62.2 5.6 (1.8) 1.7 4.2 (492.5)
13. Retirement benefits and liabilities
The fair value of the assets and the present value of the liabilities of the
Group's pension schemes at 30 September were as follows:
30 September 2023 31 March 2023
£m
£m
Fair value of plan assets
Growth assets
Equities 89.9 34.1
Property funds 285.0 307.8
High yield bonds/emerging market debt 0.4 0.4
Absolute return and multi-strategy funds 154.5 171.5
Low-risk assets
Bonds 1,355.2 1,368.3
Matching assets* 1,199.2 1,547.8
Longevity swaps (213.2) (241.9)
Fair value of assets 2,871.0 3,188.0
Percentage of assets quoted 73% 80%
Percentage of assets unquoted 27% 20%
Present value of defined benefit obligations
Active members 461.6 518.1
Deferred pensioners 707.1 786.6
Pensioners 1,857.2 1,944.7
Total defined benefit obligations 3,025.9 3,249.4
Net liabilities recognised in the statement of financial position (154.9) (61.4)
* Matching assets primarily comprise a "Liability Driven Investment"
portfolio, which invests in gilts, Network Rail bonds, gilt repurchase
agreements, interest rate and inflation swaps, asset swaps and cash, on a
segregated basis. For certain schemes, there are also investments in
investment grade credit, via both segregated portfolios and pooled investment
vehicles. The various segregated portfolios and pooled investment vehicle each
utilise derivative contracts. The Trustee has 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 is gilt
repurchase agreements, interest rate and inflation swaps in the matching
portfolios and total return swaps in the return seeking portfolios. These
derivatives are included within the matching assets and equities
classifications. Repurchase agreements are entered into with counterparties to
better offset the scheme's exposures to interest and inflation rates, whilst
remaining invested in assets of a similar risk profile.
An analysis of the movement in the Group statement of financial position is
set out below.
30 September 2023 31 March 2023
£m
£m
Fair value of plan assets (including reimbursement rights)
At 1 April 3,188.0 4,733.1
Interest on assets 75.6 126.1
Actuarial loss on assets (349.0) (1,533.1)
Employer contributions 51.2 174.5
Employee contributions 0.1 0.1
Benefits paid (94.9) (256.6)
Settlements - (56.1)
As at period end 2,871.0 3,188.0
Present value of benefit obligations
At 1 April 3,249.4 4,541.5
Service cost 7.4 25.8
Incurred expenses 4.2 6.8
Interest cost 76.0 118.6
Employee contributions 0.1 0.1
Experience losses 36.3 162.9
Actuarial gain - demographics (0.4) (43.5)
Actuarial gain - financial (252.2) (1,250.1)
Benefits paid (including transfers) (94.9) (256.6)
Settlements - (56.1)
As at period end 3,025.9 3,249.4
Net asset liability at period end (154.9) (61.4)
The amounts recognised in the Group income statement are as follows:
30 September 30 September 2022
2023
£m
£m
Current service cost 7.4 13.1
Incurred expenses 4.2 3.4
Total included within operating profit 11.6 16.5
Net interest cost/(credit) - note 4 0.4 (3.6)
Total included within income statement 12.0 12.9
As at 30 September 2023 the key assumptions used in valuing pension
liabilities were:
Discount rate 5.5% - 5.7% (31 March 2023: 4.8%)
Inflation rate (RPI) 8.6% for one year and long-term rates of 3.2% - 3.4% (31 March 2023: 6.9% for
one year and long-term rates of 3.3%)
Inflation rate (CPI) Inflation rate (RPI) - 0.5%
14. Disposals of subsidiaries, businesses and joint ventures and associates
On 19 July 2022, the Group announced it had entered into a sale and purchase
agreement to dispose of part of its Aerial Emergency Services business in
Europe. The disposal group was part of the Aviation sector and provided aerial
emergency services, including medical, firefighting and search & rescue to
customers and communities in Italy, Spain, Portugal, Norway, Sweden and
Finland. The disposal completed on 28 February 2023. The Group received
consideration of £187.1 million.
On 1 September 2022, the Group entered into a sale and purchase agreement to
dispose of its Civil Training business. The disposal group was part of the
Land sector and the disposal completed on 1 February 2023. The Group received
consideration of £5.5 million.
Details of the disposal balance sheet and loss on disposal is included in Note
28 of the annual report and financial statements for the year ended 31 March
2023.
15. Related party transactions
Related party transactions for the six months ended 30 September 2023
represent sales to joint ventures and associates of £31.1 million (six months
ended 30 September 2022: £18.8 million) and purchases from joint ventures and
associates of £nil (six months ended 30 September 2022: £nil).
Key management compensation for the year ended 31 March 2023 is set out in the
Remuneration Report and note 6 in the annual report and financial statements
for the year ended 31 March 2023.
For transactions with Group defined benefit pension schemes, please refer to
note 13 above and note 26 in the annual report and financial statements for
the year ended 31 March 2023.
30 September 2023 Revenue to (£m) Purchases from (£m) Period end receivables balance (£m) Period end payables balance (£m)
Alert Communications Limited 3.5 - 0.9 -
AirTanker Services Limited 13.7 - 0.1 -
Advanced Jet Training Limited 1.3 - 0.2 -
Rear Crew Training Limited 0.7 - - -
Ascent Flight Training (Management) Limited 0.5 - 0.3 -
Ascent Flight Training (Holdings) Limited - - 0.2 -
Fixed Wing Training Limited 3.1 - - -
Rotary Wing Training Limited 4.1 - - -
First Swietelsky Operation and Maintenance 4.1 - 0.8 (0.3)
DUQM Naval Dockyard SAOC 0.1 - 0.1 -
31.1 - 2.6 (0.3)
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 -
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)
16. Contingent liabilities
A contingent liability is a possible obligation arising from past events whose
existence will be confirmed only on the occurrence or non-occurrence of
uncertain future events outside the Group's control, or a present obligation
that is not recognised because it is not probable that an outflow of economic
benefits will occur, or the value of such outflow cannot be measured reliably.
The Group does not recognise contingent liabilities. There are a number of
contingent liabilities that arise in the normal course of business, as
described below.
The nature of the Group's long-term contracts is such 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 for 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.
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 does not 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.
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, for which a provision has not
been recorded, is unlikely to have a material effect on the Group's financial
position.
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 position and performance.
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.
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
13 November 2023
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