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The trusted partner
Annual Report and Accounts 2019
The trusted partner.
Babcock is a leading provider of critical, complex
engineering services which support national
defence, save lives and protect communities.
We focus on three highly regulated markets –
defence, aerial emergency services and civil
nuclear – delivering vital services and managing
complex assets in the UK and internationally.
We are a trusted partner who understands the
key roles that our technology, our expertise, our
infrastructure and our assets play in ensuring our
customers can deliver. We share risk with them in
delivering innovation, and we share the benefits.
152
Group financial statements
Group income statement
Group statement of
153
comprehensive income
Group statement of changes in equity 153
154
Group balance sheet
Group cash flow statement
155
Notes to the Group financial
statements
156
Company financial statements
Company balance sheet
Company statement of
changes in equity
Notes to the Company
financial statements
Other information
Shareholder information
Five‑year financial record
208
209
210
215
216
babcockinternational.com
Strategic report
Financial and operational highlights
Chairman’s review
Strategic framework
Babcock at a glance
Business model
Strategy
Market review
Defence
Aerial emergency services
Civil nuclear
Chief Executive’s review
Strategic Partnering Programme
Key Performance Indicators
Financial review
Operational review:
Marine
Land
Aviation
Cavendish Nuclear
Sustainability
Principal risks and
management controls
Viability statement
Governance statement
Chairman’s introduction
Leadership:
Governance framework
Board of Directors
Executive Committee
Effectiveness:
Report of the Nominations
Committee
Accountability:
Report of the Audit and
Risk Committee
Remuneration:
1
2
5
6
8
10
12
12
16
18
22
24
26
28
40
40
43
46
49
54
70
81
84
86
88
90
94
96
Report of the Remuneration
Committee
Relations with Shareholders
Additional statutory information:
Directors’ responsibility statement
Independent auditors’
report to the members of
Babcock International Group PLC
101
132
133
138
142
Financial and operational highlights
A partner for progress
Statutory results
Group revenue
£4,474.8m
-4%
,
4
5
4
7
1
.
,
3
9
9
6
6
.
,
4
1
5
8
4
.
,
4
6
5
9
6
.
,
4
4
7
4
8
.
Operating profit
£196.5m
-47%
3
5
2
3
.
3
5
2
5
.
3
5
9
6
.
3
7
0
6
.
1
9
6
5
.
Cash from operations
£507.9m
+13%
Basic earnings per share
39.5p
-41%
4
9
0
3
.
5
0
4
0
.
5
0
7
9
.
4
4
7
9
.
4
2
6
8
.
6
6
6
.
6
1
8
.
5
7
0
.
5
2
9
.
3
9
5
.
15 16 17 18 19
15 16 17 18 19
15 16 17 18 19
15 16 17 18 19
Underlying results*
Group revenue
£5,160.6m
-4%
,
5
2
1
6
6
.
,
5
3
6
2
8
.
,
5
1
6
0
6
.
,
4
8
4
2
1
.
,
4
5
0
3
3
.
Operating profit
£588.4m
+1%
5
7
4
8
.
5
8
4
6
.
5
8
8
4
.
5
3
9
7
.
5
1
8
7
.
Free cash flow
£323.7m
+29%
3
2
3
7
.
2
7
5
7
.
2
8
2
7
.
2
5
0
2
.
2
2
4
1
.
Basic earnings per share
84.0p
+1%
8
0
1
.
8
3
0
.
8
4
0
.
7
4
2
.
6
8
5
.
15 16 17 18 19
15 16 17 18 19
15 16 17 18 19
15 16 17 18 19
Strengthening the Group
We have continued to deliver across new and existing contracts,
demonstrating the quality of our operations and the resilience
of our business. Our combined order book and pipeline of
£31 billion supports the future of our business. This year, we
also took action to strengthen the Group, including reshaping
our Oil and Gas business, and restructuring across the Group.
Full year dividend
30.0p
+1.7%
2
5
8
.
2
3
6
.
2
9
5
.
3
0
0
.
.
2
8
1
5
15
16
17
18
19
*Underlying
The adjustments described below, collectively, are made
to derive the underlying operating results of the Group. The
underlying figures provide a consistent measure of business
performance year to year. They are used by management to
measure operating performance and as a basis for forecasting
and the Group believes they are used by investors in analysing
business performance.
Throughout the Strategic report, unless otherwise stated,
revenue, operating profit, operating margin, net finance costs,
profit before tax and earnings per share refer to results before
amortisation of acquired intangibles and exceptional items.
Underlying revenue, operating profit, operating margins and net
finance costs also include the Group’s share of equity accounted
joint ventures and associates. Underlying operating profit and
operating margin include investment income arising under
IFRIC12 which is presented as financial income in the Income
Statement. A reconciliation of statutory to underlying results
is set out on page 29.
Babcock International Group PLC Annual Report and Accounts 2019 1
Strategic reportGovernanceFinancial statements Chairman’s review
Building an
engineering champion
Trusted to deliver
Our financial stability and the cash-
generative power of our business are
reflected in our continued deleveraging
since Avincis. Our excellent prospects are
embodied in our immensely strong order
book and pipeline of £31 billion.
These numbers reflect the outstanding
leadership of our executive team, led first
by Peter Rogers and Bill Tame and now
by Archie Bethel and Franco Martinelli.
They would be the first to acknowledge
that Babcock’s sustained success has
been made possible by the dedication,
commitment and skill of our people.
They have earned our right to be
trusted to deliver.
I believe the single metric that says
most about Babcock’s high quality of
business and earnings is our underlying
Group margin, which remains in
double-digits and which increased
last year to 11%. This level of margin
highlights the vast gulf between Babcock
and the commoditised outsourcers with
which we were inappropriately grouped
before our recent move to the FTSE
Aerospace and Defence sector.
Babcock earns its margin through our
pre-eminent position as the UK leader
in critical, technology-based engineering
services and our track record of improving
service and reducing costs for our
customers, with whom we nurture
long-standing, close relationships.
Decision-making responsibility,
exercised from the highest level of
the Company, will continue to play a
crucial role in our success.
This is a long-term contractual business
and the executive team has always been
first-class in assessing which contracts to
pursue, at what price and on what terms.
This discipline is maintained after we
secure a contract through our
conservative accounting.
Mike Turner CBE, Chairman
“A great business which can and will go on to
achieve so much more.”
I write this, my final Chairman’s review,
with a mixture of pride and regret. Pride
because of the extraordinary growth of
the Company over the 10 years since I
became Chairman; regret because I am
leaving a great business which can and
will go on to achieve so much more for
our shareholders and other stakeholders
as we build on our growth platform in
the years ahead.
I have been involved with Babcock for
most of the last 23 years. When I first
joined the Board in the late 1990s, the
Company was one of the many fallen
British industrial giants struggling to
secure its future. We were just taking
our first step into engineering services
through the acquisition of the Rosyth
yard from the UK Government.
When I returned in 2008 from
BAE Systems to succeed Babcock’s
inspirational chairman, the late
Gordon Campbell, the Company
had just acquired Devonport and
was immersed in implementing
Gordon’s vision to become a leader
in the growing market for
engineering services.
We had a long way to go. Babcock
was a mid-sized company with annual
revenues of £1.56 billion, underlying
pre-tax profits of £95.5 million, basic
earnings per share of 33.4 pence
and was paying a full-year dividend
of 11.5 pence per share. The share
price when I became Chairman was
340 pence, struggling in the aftermath
of the financial crisis.
This year, our revenue was £5.2 billion,
underlying operating profit was
£588 million, basic earnings were
84 pence and we are recommending
a final dividend of 22.9 pence, making
a total full year dividend of 30.0 pence
– the 17th successive year that we have
increased the dividend.
Our international revenues last year
exceeded the entire Group revenues
in 2008, due to the combination of the
carefully-targeted export of our defence
know-how and the very significant
contribution of the aerial emergency
services business we acquired with
Avincis five years ago.
2 Babcock International Group PLC Annual Report and Accounts 2019
We maintain risk registers which ensure
that we never take profit in line with
revenue – as some companies have
done to their shareholders’ cost – but
instead take profit in line with risk. Profit
is therefore back-end loaded because
risk reduces towards the end of a
contract. This rigorous approach
explains why, when the accounting
standard IFRS 15 was introduced,
Babcock was unusual in incurring no
impact on previously reported profits.
It is clear that Babcock’s attributes
have not been reflected in our share
price since investors turned bearish on
UK stocks in general and outsourcing
companies in particular over the past
several years. I’m disappointed to be
leaving at a time when the share price
doesn’t truly reflect the strength of
the business, but the experience of my
corporate career leaves me in no doubt
that, over time, Babcock’s outstanding
business model will be recognised by
the market.
We have management strength
in depth and I am confident that,
whatever challenges the team faces,
they will deliver for you, the shareholders.
Babcock International is a great company
and I am honoured to have served you
as its Chairman.
Mike Turner CBE
Chairman
Ruth Cairnie, Chair designate
Ruth Cairnie joined the Board in
April 2019. Initially a Non-Executive
Director, she will succeed Mike
Turner as Chair upon his retirement
at the Company’s Annual General
Meeting in July.
Ruth has extensive experience
of the engineering sector, gained
from a 37-year international career
spanning senior functional and
line roles at Royal Dutch Shell plc,
including Executive Vice President
for Group Strategy & Planning.
She has substantial experience of
advising government departments
on strategic development and
capability building.
Ruth is also a champion of diversity,
and is Chair of POWERful Women,
an initiative to advance gender
diversity within the energy sector.
She is also a trustee of Windsor
Leadership and a member of the
finance committee of the University
of Cambridge, where she studied
for her Master of Advanced Studies
in Mathematics.
Welcoming her to the Board,
Mike said: “Ruth is a strategic
thinker and a strong leader, and
we look forward to her bringing
her in-depth experience, gained
from a broad range of executive
and non-executive roles at leading
international industrial companies.”
Ruth said: “I am delighted to be
joining the Babcock team and I look
forward to working with the Board
and the executive team to deliver
shareholder value, and to help
maximise future opportunities.
“I am hugely enthusiastic about
the opportunity to oversee the next
stage of Babcock’s development
as a major company delivering
complex engineering to support
its clients, both in the UK and
internationally.”
In addition to her role at Babcock,
Ruth is currently the Senior
Independent Director of Associated
British Foods plc and a Non-Executive
Director of Rolls-Royce Holdings plc
and ContourGlobal plc.
Babcock International Group PLC Annual Report and Accounts 2019 3
Strategic reportGovernanceFinancial statements Our strategic
framework
Our purpose
We are a leading provider of critical, complex engineering services
across defence, aerial emergency services and civil nuclear markets
in the UK and increasingly internationally
We apply our
core strengths:
Technology
and expertise
To solve customer
challenges:
Maintain national
security and
save lives
Across three
focus markets:
Defence
Owned infrastructure
and assets
Sustain critical and
complex assets
Aerial emergency
services
Successful
operating model
Deliver critical
services
Civil nuclear
See page 8 for business model
See page 6 for At a glance
See page 12 for market review
Supported by our focused strategy
1
Build strategic
partnerships
with our
customers
2
3
4
Focus on three
key markets
Maintain and
grow our
UK business
Expand
internationally
5
Embed
technology
across all
businesses
6
Manage
adjacent
markets
for value
7
Relentless
focus on
operational
excellence to
sustain margins
See page 10 for strategy
Delivering for customers, employees and shareholders
Babcock International Group PLC Annual Report and Accounts 2019 5
Strategic reportGovernanceFinancial statements Babcock at a glance
What we do
We apply our strengths to solve our customers’ challenges,
focused on three markets and delivered across four sectors.
Solve customer
challenges:
Maintain
national
security and
save lives
• We deliver major UK and international strategic defence programmes
• We support the defence of nations across maritime, air, land
and cyber
• We enable navies, air forces and armies to do their job with our training
• We contribute to front line support and sponsor reserves
Sustain critical
and complex
assets
• We provide through-life support for our customers’ assets
• We apply technology and advance the engineering support offering
• We increase our customers’ asset availability
• We deliver significant cost savings on large programmes
Deliver critical
services
• We deliver world class emergency services
• We provide training to allow our customers to operate safely
• We are the number one UK civil nuclear engineer
Revenue
Civil vs defence
Public vs private
UK vs international
International
46%
54%
18%
30%
82%
70%
Civil
Defence
Public
Private
International
UK
43%
12%
13%
9%
23%
Europe
South Africa
Australasia
North America
Rest of world
6 Babcock International Group PLC Annual Report and Accounts 2019
Focused on three markets:
Defence
#2 UK supplier
Large positions in Australia, Canada,
New Zealand and France
See page 12 for more details
Aerial emergency
services
#1 in Europe, new entry into Canada
Manage and own a fleet of over 500
aircraft across c.320 bases
Provide maintenance and upgrade
fixed and rotary wing aircraft
See page 16 for more details
Civil nuclear
Involved in all civil nuclear stages,
from new build to decommissioning
Involved in almost every
nuclear site in the UK
Managing Europe’s largest and most
complex decommissioning project
See page 18 for more details
Delivered across
four sectors:
Marine
Defence
Adjacent
% of
revenue
85%
15%
See page 40 for more details
Land
Defence
Adjacent
% of
revenue
38%
62%
See page 43 for more details
% of
Aviation
revenue
35%
Defence
Aerial emergency services 47%
18%
Adjacent
See page 46 for more details
Nuclear
Civil nuclear
Defence
% of
revenue
95%
5%
See page 49 for more details
Employees
>35,000
Our employees have unique technical and sector-specific
expertise. We work in collaborative partnerships with our
customers, sharing risk and reward.
New reporting for the year ending
31 March 2020
From 1 April 2019, the nuclear defence
business is included in our Nuclear sector
rather than our Marine sector.
For more information please see our Capital
Markets Day material available online at
www.babcockinternational.com/investors.
Babcock International Group PLC Annual Report and Accounts 2019 7
Strategic reportGovernanceFinancial statements Business model
Our business model
Our business is built upon our core strengths which enable us
to solve complex problems for our customers, to improve their
performance while reducing costs. This is done through both
Group businesses and joint ventures and involves a mixture of
long-term contracts and short cycle work.
Built on our core
strengths:
Technology and
expertise
• Deep sector-specific expertise and know-how
• Successfully operate in highly regulated environments
• Integrate multiple technologies
• Critical, complex engineering
Owned infrastructure
and assets
• Own strategic infrastructure across focus markets including Devonport and
Rosyth dockyards
• Complex engineering facilities
• Over 500 aircraft in our fleet
Successful operating
model
• Customer-focused long-term collaborative relationships
• Strategic Partnering Programme (see page 24)
• Long-term contracts balancing risk and reward
• Output based availability contracts
with safety and regulatory compliance underpinning all that we do
Delivered in long-term partnerships with our customers:
Our customers tend to be government
departments, public bodies, highly
regulated industries or blue chip
companies and we work collaboratively
with them day in, day out as part of
crucial long-term partnerships. For
example, we work side by side with
the Royal Navy and Ministry of Defence
in upgrading the UK’s naval fleet and
we work in combination with health
services across Europe to save lives
on each mission.
Our work balances risk and reward and
we aim to operate through long-term
integrated output-based contracts.
We believe this approach creates a
commercial framework which fairly
balances risk and reward between
us and our customers. Target cost
contracts, typical for many of our larger
contracts, incentivise us to remove cost
via a pain-share/gain-share mechanism.
Our business is a mixture of long-term
contracts (typically around 80% of the
order book at the beginning of the year)
and short cycle work, continually won
through a bidding cycle.
8 Babcock International Group PLC Annual Report and Accounts 2019
Tracking
pipeline
Bidding
pipeline
Investing
each year
Order book
and pipeline
£31bn
Order
book
Cash flow
Revenue
Tracking pipeline
We continually monitor opportunities
across our markets, for new and
existing customers. We have a tightly
controlled governance process for
bids with a multi-gate review process
at each stage to ensure the Group
only bids on value creating work. Any
contract worth more than £25 million,
or lasting five years or more, requires
approval from the Chief Executive and
Group Finance Director.
Bidding pipeline
Our pipeline represents those bids
formally in process, including new bids
and rebids. Our pipeline is currently
£14 billion and mostly represents
opportunities in our three focus
markets, which account for 83% of the
total. International bids account for
over 40% of our pipeline.
Order book
Our order book represents contracts
won and signed. Over the long term,
we typically win over 90% of rebids
and over 40% of new bids. Contract
extensions and variations also add to
the order book over time. This order
book of £17 billion provides a base
level of revenue for the years ahead
which is then added to with new
business wins, in contract growth
and short cycle work.
Revenue
Revenue is recognised as we deliver
on our contracts and performance
obligations are satisfied. Once a
contract is underway, it is subject to
regular reviews at business unit, sector
and Group level to ensure we are on
track, both in terms of operational
delivery and financial performance.
Cash flow
Performance across contracts drives
revenue and cash generation, helped by
our consistent and sustainable margins.
Cash flow varies throughout the year and
depends on invoice dates and payment
terms, leading to working capital
variations throughout the year.
Investing each year
We invest each year to maintain our
leadership positions. Investment is
focused in three areas: infrastructure,
aircraft and IT systems. Our cash
generation also supports a strong
balance sheet and a sustainable dividend.
Creating value for stakeholders
Customers
Employees
Shareholders
We create value for our customer
through reducing the cost of
delivering key services, increasing
asset availability or providing
life extensions and providing
technical knowledge and skills to
manage complex transformation
programmes. We also pride
ourselves on conducting business
responsibly, looking after suppliers
and considering our environmental
impact. See Sustainability section on
page 54.
A strong Babcock culture
integrates our values and beliefs
into every aspect of our business
to ensure we create value for our
over 35,000-strong workforce.
We focus on creating a safe
working environment every day
while also providing continuous
professional development
and equal opportunities for all.
See People and potential section
on page 59.
We seek to create value for
shareholders by investing in and
growing the business. Our business
model focuses on generating cash,
ensuring a strong balance sheet and
supporting a sustainable dividend.
Babcock International Group PLC Annual Report and Accounts 2019 9
Strategic reportGovernanceFinancial statements Strategy
Our strategy
Our strategy is based on our core strengths which support leadership
positions in our main markets. We work closely with customers to
solve challenges and deliver value. This is supported by technology
and operational excellence. We look to expand in the UK and
internationally as we continue to deliver for all stakeholders.
Build strategic
partnerships with
our customers
We understand the critical role that our customers’ assets
and infrastructure play in delivering their business. We
partner with them to share risk and deliver innovative
efficiencies together so that we are both incentivised
to perform and share the benefits.
Supported by
our capital
allocation
model:
Focus on our three
key markets
Our three key markets account for over 70% of our revenue
and offer sustainable growth opportunities built on our core
strengths and leadership positions. As we focus on these
markets, we are exiting a number of non-strategic businesses.
Maintain and grow
our UK business
Our primary market remains UK defence and we are working
with the UK Government and Ministry of Defence to ensure
the needs of our armed forces are met as they grow in size
and complexity. This is supported by our Strategic Partnering
Programme discussed on page 24.
Expand
internationally
International markets are a key growth driver for the Group,
both in terms of current markets and expansion into
new markets. Our bidding pipeline includes significant
opportunities in international defence and aerial emergency
services markets.
Embed technology
across all businesses
Technology underpins all that we do and our strategy is to
embed it across all businesses. It supports growth in our sectors,
both through supporting bids and through direct sales of
technology equipment and services. It also helps sustain
margins as we continue to offer customers increased value.
Manage adjacent
markets for value
We manage these markets for value. This means improving
the operating efficiency to deliver for customers and sustain
margins. We continue to pursue attractive opportunities
where they exist.
Relentless focus on
operational excellence
to sustain margins
We continue to invest in building standardised IT systems
and shared service centres for back office functions which,
combined with procurement category management, help
support our margin.
10 Babcock International Group PLC Annual Report and Accounts 2019
t in the b u si n
s
e
v
n
I
.
1
3
s
s
e
2. De-g
includin
e
a
r
g
t
h
Capital
allocation
priorities
p
e
e
n
b
s
a
i
o
n
l
a
n
c
e
s
h
e
e
t
f
u
n
d
in
g
olders
h
e
r
.
R
eturn capital to s h a
Delivering for shareholders over the medium term
Long-term revenue growth
Sustained margins
Improving cash generation
Improving ROIC
Sustainable dividend
Babcock International Group PLC Annual Report and Accounts 2019 11
Strategic reportGovernanceFinancial statements
Market review
Trusted for
Defence
Babcock is a trusted partner
for key defence programmes
around the world with leading
positions in focused areas.
We are the market leader for defence support in
the UK and have a significant presence in many
overseas markets, predominantly in Australia,
New Zealand, Canada and France. Each country’s
defence market shares similar characteristics:
• A resurgence of evolving threats to national
security across sea, land, air, cyber
infrastructure and now space
• Budgets under consistent pressure to deliver
value for money
• Upward budget pressure from US and
NATO rhetoric
• Increasing demand for technology to
drive efficiency
• Continued naval shipbuilding programmes
• Air forces driving advanced training on new fleets
• Large land fleets require upgrading and
life-extension
• Personnel require technical training to meet
modern threats head-on
• Industry increasingly required to deliver
frontline services
Over the last few years, we have built up strategic
geographical positions and capabilities to offer
international support to the UK forces overseas
and the wider defence market. We specialise in
delivering availability and technical training for
complex equipment through our unique expertise,
infrastructure and operating model. We deliver
defence engineering in Canada, Australia,
New Zealand, France and Oman, with defence
exports to the USA, Spain and Korea, and further
international exposure through adjacent markets.
Global defence
spend 2018
2%
10%
UK defence
spend 2018
15.2%
15.6%
28%
£1.8tn
40%
19.3%
£36.6bn
18.7%
20%
31.2%
Africa Americas
Asia and Oceania
Europe Middle East
Specialist equipment
Support Personnel
Infrastructure, property and
equipment Other
Source: SIPRI
Source: UK MOD
12 Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2019 13
14 Babcock International Group PLC Annual Report and Accounts 2019
UK defence
Our primary market is UK defence where
we provide critical assets and services
to all of the UK’s armed forces every
day with the Ministry of Defence (MOD).
We are the UK’s second largest defence
supplier and, as part of the Strategic
Partnering Programme, we are working
with the UK Government and MOD to
ensure the needs of our armed forces are
met as they grow in size and complexity.
While we are well placed for long-term
growth of the UK defence market,
growth each year is partly dependent
on the phasing of MOD spend.
Over the last year, the UK defence
market, the largest in Europe, has seen
significant progress and milestones
achieved across major programmes.
Of the £36.6 billion spent on defence
in 2018, an estimated £15.8 billion
was spent on MOD equipment, a small
increase on the previous year. Around
19% of the total defence spending,
£6.8 billion, was designated to
supporting MOD equipment, an increase
of around £200 million from the previous
year. During the year the government
pledged to mobilise, modernise and
transform defence and we have seen
increased debate on budget,
investment and capability.
In June 2018, the extent of the
contribution that defence has to
UK prosperity was discussed in an
MOD report and a budget uplift of
around £1.8 billion was secured in the
Autumn budget. In December 2018,
the MOD published the long-awaited
Modernising Defence Programmes
statement, confirming commitments
made in the 2015 Strategic Defence
and Security Review.
In April 2019, the world’s most
successful alliance, NATO, turned 70.
The UK, one of the founding members of
NATO, reiterated its pledge to maintain
defence spending at 2% of GDP.
The MOD’s equipment plan highlighted
the UK’s commitment to defence,
outlining a £186.4 billion budget
allocated to defence equipment and
support over 10 years. The devaluation
of the pound has exacerbated the gap
in the MOD’s 10-year Equipment Plan to
around £7.0 billion and the department
is aiming to achieve cost savings of
around £13.4 billion in efficiencies
delivered across new equipment
programmes and support packages
over the next 10 years.
Babcock is involved in some of the UK’s
largest defence programmes. In naval
nuclear programmes, we are seeing the
transition of classes in both the nuclear
deterrent programme (Vanguard
Class to Dreadnought Class) and attack
submarines (Trafalgar Class to Astute
Class). Across surface ship programmes,
we are supporting current classes such
as Type 23 frigates and amphibious fleets
while new platforms such as the Queen
Elizabeth Class aircraft carriers and
Type 26 frigates are commissioned.
The UK naval market remains stable,
with the MOD’s 10-year Equipment Plan
continuing to forecast a planned spend
of around £20 billion over the next
decade on procurement and support
for surface ships and £44 billion on
submarine programmes.
With continuing pressure on support
budgets, the MOD is working closely
with industry partners to deliver better
military capability and value for money
in a sustainable way. This includes
seeking opportunities for industry to
expand its role in the delivery of core
support capabilities. Additionally, the
review of the implementation of the
National Shipbuilding Strategy is
expected this summer and we remain in
the bidding process, as part of consortia,
for both the Future Solid Support vessels
and Type 31e frigate programmes,
providing opportunities in the UK and
internationally within the growing global
light frigate market.
In Aviation, we deliver fixed and rotary
wing pilot training for all three armed
forces, and in Land, we deliver large-
scale royal military engineer training
and vehicle life-extensions and support
programmes. Babcock continues to be
the UK’s largest support provider and
we are committed to supporting the
government to deliver efficiency through
strategic partnering. See the Strategic
Partnering Programme on page 24.
During the centenary year of the Royal
Air Force, the UK Combat Air Strategy
was published, promising to maximise
economic benefits while promoting the
development of cutting-edge combat
aircraft. The MOD also disclosed a
10-year budget of £46 billion across
air support, combat air and helicopters.
Progress was made across new platforms,
including the first tranches of F-35s
landing on the new QEC aircraft carrier,
however, in March 2019 the MOD
cancelled current plans to compete
its in-house aggressor air training
programme in the medium term.
Large vehicle upgrade programmes for
the British Army continue to experience
delays while Defence, Equipment &
Support (DE&S) discuss design maturity
with the Tier 1 suppliers. The Warrior
upgrade programme continues
to experience delays while the
assessment phase has begun on the
heavy armoured Challenger II main
battle tank. The longer-term outlook
for UK land defence has been framed
with a £18.4 billion budget set on
land equipment and support.
Within the cyber, intelligence and
security market we continue to see
growth in the demand for support in
the intelligence and security sectors,
while the rise in UK military spending
on Command, Control, Communications,
Computers, Intelligence, Surveillance
and Reconnaissance (C4ISR) continues
to present opportunities.
International defence
International defence markets offer
significant long-term potential, both
in terms of increased spend in current
markets and expansion into new
markets. Our pipeline of work includes
many opportunities in international
defence markets and we see this part
of our business increasing in size and
importance over the medium term.
In Australia, the national shipbuilding
strategy is well underway as it
continues activity on SEA1000, and
places orders for UK Type 26 Class
vessels. The support market is also
increasing on both submarine and
surface ship activity. During the year,
we won a significant contract to
maintain Australia’s fleet of amphibious
landing ships.
In Canada, the naval marine market
continues to be buoyant with significant
expenditure on both new build and
in-service support. We continue to
leverage our Group presence in Canada
for future military aviation opportunities,
including a large opportunity in our
pipeline to provide aggressor air training.
In Europe, there are many significant
long-term opportunities. In France,
the defence market is seeing increasing
demand for both fixed and rotary wing
training, providing opportunity for us
to capitalise on our successful training
operations in Cognac. Across Europe,
we continue to see positive opportunities
from a number of submarine programmes
which could benefit from our expertise.
In Oman, the overall market environment
remains positive as we are able to support
the UK and US forces to maintain a naval
presence in the Gulf.
In our export markets, demand for our
technology remains strong. During the
year, General Dynamics Electric Boat
expanded our contract to supply missile
tubes for the US/UK Common Missile
Compartment programme.
Babcock International Group PLC Annual Report and Accounts 2019 15
Strategic reportGovernanceFinancial statements Market review
Trusted for
Aerial
emergency
services
Babcock is a trusted partner to
governments across the world
delivering highly critical aerial
emergency services.
Demand for increasingly complex and technical
aerial emergency services continues to grow across
the world. As Europe’s leading provider, we are
well placed for growth and in April 2019 we
started aerial firefighting operations in Canada,
our first North American presence. The markets in
which we operate are typically non-discretionary.
As a country’s GDP grows, so too does its public
and private spending, capability and reach to
provide aerial emergency medical services,
search and rescue, aerial firefighting and aerial
civil protection for its citizens. Trends include:
• Aerial emergency medical services is a large and
growing global market, funded predominantly by
national and regional governments and charities
• Government budget pressure typically drives
outsourcing of critical emergency services
• Technology is enabling a more effective approach,
reaction and delivery
• Increasing regulatory and safety culture creates
high barriers to entry
• Centralised medical centres create requirement
for aerial transport
• Wildfires are increasing in frequency and ferocity
presenting a very serious global issue
Aerial emergency medical services
Markets across the world vary in structure. Regional
authorities in Europe continue to provide a source
of steady revenue and limited growth opportunity
while the UK is an intensely competitive market
serving the charitable sector. In the Nordics, gradual
outsourcing continues for both fixed and rotary wing
services and we have recently entered this market.
In Canada, regional governments are beginning to
support market consolidation and Australia continues
to have many opportunities.
Aerial firefighting
In Southern Europe, our main area of operation, there
is a trend towards additional aircraft and flying hours
and, over time, the benefits of our large fleet will
become more and more important as the trend
towards crossing borders in firefighting operations
continues. The North American market is maturing
with more outsourcing contracts coming to market.
Our contract in Manitoba, Canada, represents an entry
into this market from which we hope to build a far
larger presence.
Search and rescue
Demand for specialised search and rescue continues
to be robust as customers seek to work with those
providers with the integrated mission equipment
technologies required.
16 Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2019 17
Market review
Trusted for
Civil nuclear
Operational support
The nuclear services market saw modest growth
during the period. The EDF fleet continues to
produce base load power requirements although
platforms will soon come offline and require
decommissioning as new larger platforms come
online to meet the power requirement.
Decommissioning
The UK Government’s Business, Energy and Industrial
Strategy (BEIS) departmental spend on the Nuclear
Decommissioning Authority (NDA) during the year
reduced to £2.1 billion.
The decrease may mean future funding constraints
and pressure to deliver efficient programmes. BEIS
manages the liabilities for the decommissioning of
all present and future nuclear sites. In 2018, these
future obligations were calculated to be c.£265
billion. Sellafield, accounting for around 75% of
the liabilities, continues to be an opportunity for
engineering packages. In August 2019, the NDA
will take the Magnox contract to decommission
12 nuclear sites in-house. We expect the NDA,
under pressure from BEIS, to deliver cost savings,
will repackage the work into smaller contracts
and re-tender to the market.
The civil nuclear market
remains a long-term growth
opportunity.
Civil nuclear remains a significant long-term growth
opportunity as ageing power stations come offline
and new power stations are built. However, many
opportunities in this space have been delayed.
Political and economic factors have affected
several key milestones and decisions in the UK
across nuclear new build, generation, operational
support and decommissioning. Trends include:
• UK Government has signalled a 20% base load
power requirement to be nuclear generated
• Target for nuclear to be a major contributor to
the longer-term energy mix
• Ageing power stations coming offline to be
replaced with Generation III programme of new
build power stations over the next two decades
• UK Government working to ensure a smooth exit
for the nuclear sector from Euratom, delivering
arrangements to facilitate trade and collaboration
• Consolidation in the industry expected to
invigorate competition across the sector
New build
In June 2018, the UK Government announced its
negotiations with Hitachi on the proposed Wylfa
Newydd power station, although no decision has
been taken yet to proceed. It plans to consider
direct investment alongside Hitachi and other
parties. The Government is also engaging with
other developers on proposals for further projects.
18 Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2019 19
Victoria, Canada
Our trusted teams’
work ensures the
watertight integrity
of the submarine
and in turn the
safety of the crew
Fast Facts
Contract name: Victoria Class Submarine In
Service Support Contract (VISSC)
Length of contract: 10 years plus 3 plus 1 plus 1
Output of contract: Naval In Service Support
Sector: Marine
“Watertight hatches
and pressure hull
structures form the
life sustaining
barrier between
the crew and the
deep ocean. Our
work allows the
crew to focus on
their mission, with
the assurance that
their equipment
has been repaired
to the highest
standard possible.”
Silvia Penkova
Team Lead Naval Architect
Victoria Class Submarine In Service
Support Contract
20 Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2019 21
Chief Executive’s review
Progressing on
our strategy
Archie Bethel CBE, Chief Executive
Babcock has enviable market positions built
on our core strengths. We continue to focus
on our strategy to deliver for customers and
shareholders and made some significant
progress in the year while delivering profit
growth and strong cash generation.
Overview
We delivered a robust performance this
year: operating profit is in line with our
expectations, we have sustained our
strong margins and we have improved
our cash generation.
More importantly for the delivery
of our strategic goals and our future
performance, we have sharpened
our focus on our three key markets of
defence, aerial emergency services and
civil nuclear. We have strengthened our
business model in these areas with some
important contracts wins that partially
offset the upcoming completion of the
QEC contract and the loss of the Magnox
contract and we have delivered further
growth in our international businesses.
In addition, we have exited businesses
outside of the three key markets, which
do not have synergy with the rest of the
Group, and we have reshaped our oil
and gas business.
Operational performance
While the current challenging conditions
have impacted short cycle work, we
continue to make significant progress
on our long-term contracts. Highlights in
the year:
• Continued work on the UK’s aircraft
carriers with HMS Prince of Wales now
structurally complete and HMS Queen
Elizabeth completing her initial sea
trials before her first maintenance
period at our Rosyth dockyard
• The Type 23 frigate life-extension
programme at our Devonport facilities
continues at pace with five ships
undergoing deep maintenance and
structural upgrade work simultaneously
• The largest Revalidation and Assisted
Maintenance Period (RAMP) ever
undertaken at Devonport on a Trafalgar
Class submarine and we are also
progressing on the first life extension
of the Vanguard Class of submarines
22 Babcock International Group PLC Annual Report and Accounts 2019
• The US/UK Common Missile
Compartment programme has
continued with the latest delivery of
Babcock built missile tubes dispatched
from our Rosyth facility and the
contract expanded
• Won the contract to support the
largest vessels in the Royal Australian
Navy: two flagship Canberra Class
Landing Helicopter Docks and
their 12 associated amphibious
landing crafts
• Won two pieces of additional work
within DSG and we continue to
support the British Army in support
and delivery of training to around
20,000 service personnel
• New integrated IT systems for DSG
progressing well to completion
• Awarded a contract in Australia
for counter-chemical, biological,
radiological, nuclear and explosive
(C-CBRNE) asset management
• Selected as preferred bidder for a ten
year contract for track and rail systems
in Scotland followed by a contract for
signalling work
• French military training support
contract progressing well with all
aircraft and simulators on site at the
French Air Force base in Cognac
• Entered the North American aerial
emergency services market following
the award of a ten year contract for
firefighting in Canada
• Commenced the mobilisation of our
fixed wing air ambulance service in
Norway where the first aircraft are
completing medical fit-out
• Received the licence from the Office
of Nuclear Regulation (ONR) to put
the Bradwell site into care and
maintenance
• Silo Maintenance Facility project at
Sellafield was completed with an NDA
category of ‘Excellent’
Order book and pipeline
Our business is supported by a significant
order book, based on signed contracts
for work. This order book of around
£17 billion (March 2018: £18 billion)
provides a base level of revenue for the
years ahead which is then added to with
new business wins, contract growth and
short cycle work. Our pipeline represents
those bids formally in process, following
our rigorous governance process. Our
pipeline is currently around £14 billion,
an increase of around £1 billion from a
year ago following large additions in the
year such as Marine training, UK defence
fleet vehicles and some significant
defence opportunities in Australia.
Progress on our strategy
Our three focus markets are defence,
aerial emergency services and civil
nuclear. They account for over 70% of
our revenue and offer sustainable growth
opportunities built on our core strengths
and leadership positions. As we focus on
these markets, we are exiting a number
of non-strategic businesses:
• Last year, we sold our civil infrastructure
businesses and started to exit renewables
• In the first half of this year, we exited
our North American mining and
construction support business, scaled
down the powerlines business in
South Africa, and we sold our media
services business for net proceeds of
£26 million
• In the second half, we exited the
Surrey Schools education business,
UK Cabling, UK Telecoms Infrastructure
Support and our South African
powerlines business, all of which were
in our Land sector. We also sold our
50% stake in the Helidax joint venture
for €10 million (c.£9 million) in our
Aviation sector
At the half year, we announced the
reshaping of our Oil and Gas business
to manage the overcapacity which
exists in this market, along with changes
to further improve the efficiency of
the business.
International growth remains a core
element of our strategy and our
international businesses now represent
30% of Group revenue, compared to
28% last year.
Being Babcock
Babcock is a well-founded business
with a solid track record of delivering
engineering and operational solutions
for our customers. The vast majority
of the work we do – which very few
people can do – isn’t optional; we
enable the delivery of the vital services
which help safeguard both countries
and communities.
We make sure that navies are ready
to sail, that air forces are fit to fly
and that armies are ready to respond
when needed. We provide the technical
training that helps the Armed Forces
to serve, we support the nuclear power
stations that generate energy for the UK,
and we decommission them when they
come to the end of their life. We are the
trusted partner.
We can do all of this because we own
and operate extensive equipment,
facilities and infrastructure, and within
our over 35,000-strong workforce, we
protect and develop our intellectual
property and hard-earned know-how by
having one of the highest concentrations
of qualified technician and professional
engineers in our sector. And that’s as well
as employing over 1,000 qualified pilots.
Fundamentally, we support our
customers, doing critical work in
challenging and highly regulated
environments. We are the UK Ministry
of Defence’s largest provider of complex
engineering support, we are the UK’s
largest provider of nuclear engineering
services, and we are Europe’s largest
integrated supplier of aerial emergency
services, operating a fleet of over 500
helicopters and fixed wing aircraft.
This unique profile, with its high barriers
to entry and our focus on our areas of
expertise, sets us apart in many ways. It
drives our ability to maintain relationships
with our customers over decades and
even generations, and to deliver returns
and cash to our shareholders.
Creating shareholder value
Our focus remains on protecting
margins, improving returns and
delivering strong cash flow – which
is of course how management are
incentivised. Maintaining a strong
balance sheet is also crucially important
and we continued to reduce net debt
this year.
While this year has been challenging,
particularly in our shorter cycle
businesses, we delivered against
our expectations for profit and cash.
Next year is challenging but we believe
we have a business that will create
significant value for shareholders over
the medium term.
Health and safety remains a key focus
for the Group and my colleagues and I
were deeply saddened by the accident to
one of our emergency service helicopters
in Portugal in December 2018, which
resulted in the death of four people:
the two pilots and their two passengers.
My thoughts and sympathies remain
with their families and friends.
Outlook
As in 2018/19, in the coming year we
will continue to build a stronger business
platform for the future and I want to
thank my colleagues across Babcock
for their hard work this year and their
commitment to the Group in the
coming year.
Babcock International Group PLC Annual Report and Accounts 2019 23
Strategic reportGovernanceFinancial statements Strategic Partnering Programme
Partnering with the
UK Government
Tom Newman, Managing Director
“The Strategic Partnering Programme represents
an important and exciting opportunity for the
Group and I expect to see more successes from the
programme throughout 2019.”
In November 2018, Babcock and the
UK Government signed a Joint Ways of
Working Charter. This signalled the start
of our Strategic Partnering Programme
(SPP), working closely with the Cabinet
Office and UK Government (HMG)
departments, particularly the Ministry
of Defence, to develop collaborative
relationships across the full scope of
Babcock’s UK public sector business.
This Charter reflects how important we
are to each other: the UK Government
is Babcock’s biggest single customer and
we are the Ministry of Defence’s second
largest supplier, providing specialist
services that are vital to the well-being
of the UK.
Shared principles
The Charter is a sign of our renewed
commitment to each other, and to using
a shared set of principles and behaviours
to deliver these important programmes
for decades to come.
At the core of the charter are a series
of practices and behaviours that will
support ensuring:
• Babcock and UK Government teams
are empowered to focus on
operational delivery
• We operate in a clear engagement
framework, with a coherent set
of relationships at all levels of
the business
• We have shared performance systems
and improvement plans where they
are required
Working in close collaboration with the
UK Cabinet Office, we will embark on a
wide-ranging programme of activities
across our UK Government business
which will enhance our delivery of
these critical contracts.
24 Babcock International Group PLC Annual Report and Accounts 2019
The programme aligns with Babcock’s
strategy of creating customer-focused
long-term relationships. These new,
shared ways of working will ultimately
allow us to be closer to our customer,
leading to higher levels of engagement
and collaboration and to our
mutual success.
To underline the importance of this
collaborative approach, the SPP is
led and reviewed at the Group’s
Executive Committee.
Shared purpose
The programme is now well underway,
with Babcock and UK Government teams
working collaboratively on several of
our most critical and complex contracts
to deliver the best outcome for the
customer. Initial results from these
first set of engagements have been very
positive, and have helped to underscore
the sense of shared purpose that Babcock
and UK Government teams feel towards
service delivery.
In one example, a joint delivery team
used the SPP approach to redefine and
simplify the way complex elements of
a service were being delivered, resulting
in a more efficient and effective way
of working and an improved outcome
for the end user. We see many more
opportunities for such outcomes over
the wide range of services Babcock
delivers to the UK Government.
As the programme develops, we
anticipate using the core principles
from the SPP across our entire
organisation to ensure that best practice
in collaboration and joint working is
shared wherever Babcock does business.
The SPP represents an important and
exciting opportunity for the Group and
I expect to see more successes from the
programme throughout 2019.
Tom Newman
Managing Director
Strategic Partnering Programme
The Joint Ways of Working Charter details the cooperative behaviours which underpin how we work
with the UK Government consistently and on an enduring basis: One Team, One Plan, One Voice
Every day
We work together on a
consistent and continuous
basis, day in, day out
Unbiased and open
We are honest and
transparent, sharing
information based on facts
and objective opinions
One team/one plan
We exemplify cooperation,
rejecting a ‘them and us’
mentality
Proactive
We resolve issues with a
‘how can I?’ approach
Enthusiastic
We believe in our relationship
and promote our joint success
Listening
We hear and understand
the motivations of others
and what they are trying
to achieve
Reciprocating
We help each other,
going the extra mile to earn
mutual trust
Win-win
We are relentless in the
search for mutual advantage
Competent
We make sure the right
people with the right
attitudes are in the right jobs
Structured
We provide clear, simple
and good governance at
every level
Short term and
long term
We dare to make the
big decisions; delivering
today in pursuit of long-
term objectives
Delivering
We honour the promises
we make as individuals and
as teams
Babcock International Group PLC Annual Report and Accounts 2019 25
Strategic reportGovernanceFinancial statements Key Performance Indicators
Delivering on our strategy
We have identified a number of Group and sector level
financial and non-financial key performance indicators (KPIs)
that reflect the internal benchmarks we use to measure the
success of our business and strategy. These enable investors
and other stakeholders to measure our progress.
Operating cash
conversion (%)
104%
Net debt to EBITDA
(times)
1.4x
Operating
margin (%)
11.4%
Revenue
growth (%)
-3.8%
1
0
4
8
3
8
3
8
6 8
2
2
2
.
2
0
.
.
1
8 1
1
1
5
.
1
1
1
.
1
1
0
.
1
0
9
.
1
1
4
.
2
6
9
.
.
6 1
4
.
7
5
.
7
7
.
.
2
8 -
3
8
.
15 16 17 18 19
15 16 17 18 19
15 16 17 18 19
15 16 17 18 19
n
o
i
t
i
n
i
f
e
D
Operating cash conversion
is defined as underlying
operating cash flow after
capital expenditure as a
percentage of underlying
operating profit before
JV operating profit and
IFRIC 12 income (page 32).
y
r
a
t
n
e
m
m
o
C
We now consider operating
cash conversion post-capex,
instead of pre-capex, in
order to measure cash
movements within direct
management control.
The conversion has improved
in the year, driven by strong
working capital performance.
Net debt to EBITDA is
calculated as net debt
divided by underlying
earnings before interest, tax,
depreciation and amortisation
(page 34). JV debt is non-
recourse and is therefore
excluded from net debt.
We generated £158m of net
cash during the year leading
to a reduction in net debt
and this, along with the
increase in EBITDA led to
a decrease in net debt to
EBITDA of 0.2 times.
Operating margin is defined
as underlying operating
profit expressed as a
percentage of underlying
revenue (page 29).
Underlying revenue growth
is defined as the increase in
revenue, including JVs, when
compared to that of the
previous year (page 29).
Margin expansion reflects
increased joint venture
contributions, good contract
performance and the exit of
low margin businesses.
Revenue decline driven
by exits, disposals and
lower activity in the short
cycle parts of our business.
Performance across long-term
contracts remained strong.
Link to strategy
3
Link to strategy
5
Link to strategy
2
Link to strategy
1
Non-financial statistics and measures
In addition to our KPIs we have a number of non-financial
statistics and measures
570
Number of graduates
902
Number of
apprentices
26 Babcock International Group PLC Annual Report and Accounts 2019
Key to strategy
1
2
3
4
5
6
Long-term revenue growth
Sustained margins
Improving cash generation
Improving ROIC
De-gear the balance sheet
Safety
More information: Read our
strategy on page 10.
Return on invested
capital (ROIC) (%)
15.2%
Total injuries rate per
100,000 hours worked
1.47
4
2
3
8
3
3
1
4
0
.
1
4
2
.
1
4
5
.
1
4
5
.
1
5
2
.
.
2
2
3
.
1
9
2
.
1
5
8 1
3
5
.
.
1
4
7
Gearing
(%)
33%
5
6
4
8
Interest
cover (times)
14.9x
1
4
9
.
1
4
5
.
1
3
5
.
.
1
1
71
0
0
.
15 16 17 18 19
15 16 17 18 19
15 16 17 18 19
15 16 17 18 19
n
o
i
t
i
n
i
f
e
D
Interest cover is underlying
earnings before interest,
tax, depreciation and
amortisation (page 34),
divided by net Group finance
costs (income statement).
y
r
a
t
n
e
m
m
o
C
Interest cover improved with
both EBITDA increasing and
net finance costs reducing.
The reduction in net finance
costs reflects the benefit of
reduced levels of debt, partly
offset by the impact of higher
interest rates.
Gearing measures the extent
to which a company is funded
by debt, calculated as net
debt (page 34) divided by
shareholder funds (balance
sheet), excluding retirement
benefit deficits or surpluses
(note 25).
Return on invested capital
is defined as underlying
operating profit (page 29)
divided by net debt and
shareholder funds (balance
sheet) excluding retirement
benefit deficits or surpluses
(note 25).
Health and safety is a core
value for Babcock. The
data includes all injuries
reported each year across
the entire Group.
We generated £158m of net
cash during the year, leading
to a reduction in net debt
and this led to a reduction
in gearing.
JV finance costs are excluded
from this measure reflecting
the non-recourse nature of
the debt.
ROIC improvement reflects
the underlying operating
profit growth and the
reduction in capital achieved.
This year we are disappointed
that we have seen a rise
in the number of injuries,
although the Group’s
performance remains
better than industry norms.
Link to strategy
5
Link to strategy
5
Link to strategy
4
Link to strategy
6
Operational performance measures
In the operational reviews we used the following KPIs
to measure each sector’s performance.
Underlying operating margin
Underlying operating profit expressed as a percentage
of revenue.
Revenue growth
The percentage increase in the sector’s continuing underlying
revenue when compared to that of the previous year.
More information: Read the operational reviews starting
on page 40.
Babcock International Group PLC Annual Report and Accounts 2019 27
Strategic reportGovernanceFinancial statements Financial review
Robust performance as
we deliver our strategy
Overview
Despite revenue behind our initial
expectations, a strong margin
performance across the Group
delivered operating profit growth.
This robust margin, combined with
improved working capital, led to
increased free cash flow which
contributed to further debt reduction.
Income statement
Statutory performance
Statutory revenue for the year was
£4,474.8 million (2018: £4,659.6 million),
a decline of 4.0%. There was a statutory
operating profit of £196.5 million (2018:
£370.6 million) and a statutory profit
before tax of £235.2 million (2018:
£391.1 million), reflecting the impact of
exceptional charges of £160.8 million.
Basic earnings per share, as defined
by IAS 33, was 39.5 pence (2018:
66.6 pence) per share.
Underlying revenue performance
Underlying revenue for the year was
£5,160.6 million (2018: £5,362.8
million), a decrease of 3.8%. Excluding
exits, underlying organic revenue growth
at constant exchange rates was -1.0%.
Although below our initial expectations,
the underperformance was mainly in
the short cycle parts of our business
and not in the core long-term contract
parts, which continued to perform well.
Organic revenue growth at constant
rates and excluding exits, procurement
and Queen Elizabeth Class (QEC) was
0.5%. The key elements for the lower
revenue in the year were:
• The £111 million impact of our
programme of exits and disposals and
the £38 million translation impact of
exchange rates
• Lower activity in our Rail business
as we entered the transition period
to a replacement contract earlier
than expected
• Lower revenue in our South African
business which was caused by delayed
scheduled power station outages
Franco Martinelli, Group Finance Director
• Lower levels of equipment pass-
through procurement spend in our
Land Defence businesses, where we
do not control the level of spend.
As expected, the Marine sector saw
lower revenue due to the step down
in QEC revenue and the impact of the
exit from our renewables business.
Underlying organic revenue growth
was -4.5% at constant exchange rates
but grew by 0.1% excluding QEC and
exits. The Land sector’s underlying
organic revenue growth at constant
exchange rates was -7.6%, reflecting
defence procurement activity, lower
activity in our Rail business, a weak
trading environment in our South African
power business with no planned power
station outages and an £86 million
impact from business exits and disposals.
Aviation’s underlying organic revenue
growth at constant rates was 11.9%,
primarily reflecting strong growth from
the Fomedec contract as we delivered
aircraft and simulators to the customer.
Cavendish Nuclear’s underlying
organic revenue growth at constant
rates was 0.6%, with lower levels
of decommissioning work offset by
good growth across nuclear services.
Underlying revenue in the financial year
was broadly spread evenly between the
first and second half. For the next financial
year, we expect a similar weighting.
Underlying operating profit
performance
Despite the small decline in revenue,
the Group’s underlying operating profit
grew by 0.7% to £588.4 million (2018:
£584.6 million) with margin improving
to 11.4% (2018: 10.9%). The margin
expansion reflects the exit of low margin
businesses, the increased contribution
from joint ventures, and strong contract
performances and continuous cost
reduction in Land and Aviation. At
constant exchange rates, organic growth
in Group operating profit was 1.3%.
In the Marine sector, underlying
operating profit decreased at a similar
pace to revenue with margin remaining
broadly flat at 12.9%. This reflects
the negative impact of lower QEC and
renewables revenue, which have low
margins, offset by business mix and lower
contract profit. The Land sector achieved
higher underlying operating profit due to
higher contributions from joint ventures,
partly from cumulative contract profit
performance pick-up in our Holdfast
(RSME) joint venture. Operating profit
was also helped by margin expansion in
Group operations, helped by improved
contract profit (in non-defence
contracts), continuous cost savings,
improved profitability in our South
African equipment business and gains
on property disposals.
28 Babcock International Group PLC Annual Report and Accounts 2019
Statutory to underlying reconciliation
Joint ventures and associates
Revenue and
operating
profit
£m
Statutory
£m
Finance
costs
£m
IFRIC 12
income
£m
Amortisation
of acquired
intangibles
£m
Tax
£m
Exceptional
items
£m
Change in
tax rate
£m
Underlying
£m
31 March 2019
Revenue
Operating profit
Share of profit from JV
Investment income
Net finance costs
Profit before tax
Tax
Profit after tax
Return on revenue
31 March 2018
Revenue
Operating profit
Share of profit from JV
Investment income
Net finance costs
Profit before tax
Tax
Profit after tax
Return on revenue
4,474.8
196.5
83.8
1.3
(46.4)
235.2
(35.4)
199.8
4.4%
4,659.6
370.6
68.5
1.9
(49.9)
391.1
(53.4)
337.7
8.0%
685.8
106.8
(106.8)
24.1
20.9
(24.1)
–
–
–
–
20.9
(20.9)
–
29.1
(27.8)
(1.3)
160.8
95.2
5.8
–
–
101.0
(21.5)
79.5
160.8
(16.7)
144.1
–
1.3
1.3
703.2
85.9
(85.9)
22.2
17.5
(22.2)
–
–
–
–
17.5
(17.5)
–
30.0
(28.1)
(1.9)
98.1
5.8
–
–
103.9
(22.2)
81.7
–
–
–
0.8
0.8
5,160.6
588.4
–
–
(70.5)
517.9
(93.2)
424.7
11.4%
5,362.8
584.6
–
–
(72.1)
512.5
(92.3)
420.2
10.9%
The Aviation sector’s underlying
operating profit increased mainly due
to an increased contribution from joint
ventures. Profitability across the sector,
both Group and joint ventures, was
helped by improved contract profits.
Cavendish Nuclear’s underlying operating
profit declined by 6.7%, mainly reflecting
the previous financial year benefiting
from strong contract performance.
Underlying operating profit in the
financial year was weighted slightly
to the second half. We expect a similar
weighting in the next financial year.
Exceptional costs
Following a detailed strategic review, we
recognised £120 million of exceptional
charges in the first half of this year
reflecting the reshaping of our Oil and
Gas business, capacity reductions and
restructuring across the Group and the
costs of our programme of exits and
disposals, partly offset by the gain on
disposal of our Media business.
Following continuing difficulties in the oil
and gas sector and with the continued
lack of oil and gas demand for EC225/
Super Puma aircraft, the Group initiated
a strategic review over the summer of
2018. Competitor and leasing company
difficulties, despite an improving
oil price, meant the market has not
recovered as had been hoped. The
strategic review, completed at the time
of the half year results announcement,
resolved to manage the business for
value including our existing asset base.
As a result of the review, we took an
asset impairment charge of £38 million
to reduce owned oil and gas assets to
their market value and recognised an
onerous lease provision of £42 million
against leased assets to reflect the cost of
these commitments versus market rates.
In the first half we made some significant
changes to surplus capacity across some
business areas. In Marine, we announced
the exit from the Appledore shipyard
following the completion of work on Irish
offshore patrol vessels and we rightsized
capacity in other Marine facilities. In
Land, we reduced surplus capacity in
our Rail business ahead of our bid for
the new CP6 contract and in Nuclear
we restructured our business related
to Magnox.
Our programme of business exits has
associated costs. In the first half, these
costs related to the exit of renewables,
North American mining and construction
support, media services and our
powerlines business in South Africa.
In the second half of the year,
we recognised additional charges
including a charge of £3 million
related to restructuring costs and a
charge of £6 million relating to exits.
These costs relate to additional exits
and restructuring in our Land and
Aviation sectors. An additional
charge of £31 million related to an
adjustment to our pension liabilities.
Of this adjustment, £26 million related
Babcock International Group PLC Annual Report and Accounts 2019 29
Strategic reportGovernanceFinancial statements Financial review continued
Exceptional costs summary
Oil and Gas
• Asset impairment
• Onerous lease provisions
Oil and Gas total
Capacity reductions & restructuring
Exits
Business disposals
Subtotal
Pensions: GMP equalisation and bulk transfer
Total
Tax on exceptional costs within operating profit
Tax on Brexit related Aviation restructuring
Net
to equalising guaranteed minimum
pension (GMP) benefits for men and
women and £5 million related to the
bulk transfer of £110 million of liabilities
to the Primary Civil Service pension
scheme. In addition to this, we incurred
an exceptional tax charge of £10 million
in relation to the restructuring of the
Group ahead of the UK exiting the
European Union.
The total related net cash cost of all of
these charges, excluding pensions, is
expected to be around £26 million.
This is after tax, disposals and expected
helicopter sales. Total expected gross
cash costs, excluding pensions, are
expected to be around £86 million.
The net cash cost this financial year
was £11 million. We expect a net cash
cost of around £28 million in the next
financial year. Cash from expected asset
sales is expected to lead to net cash
inflows in future years.
Finance costs
Total net finance costs reduced to
£70.5 million (2018: £72.1 million)
with a £0.9 million reduction in
Group interest costs and a £2.6 million
movement in the IAS 19 pension interest
charge being offset by a £1.9 million
increase in finance costs related to joint
ventures. The £0.9 million reduction in
Group interest costs reflects the benefit
of reduced levels of debt offset by the
impact of higher interest rates. If
interest rates had been stable year on
year, Group interest costs would have
reduced by £1.6 million, with the
reduction limited by our low marginal
interest rate of around 1%.
Underlying profit before tax
Underlying profit before tax increased
by 1.1% to £517.9 million (2018:
£512.5 million) reflecting both the
increased underlying operating profit
and the lower net finance costs.
Tax charge
The underlying tax charge, including
the Group’s share of joint venture tax
of £20.9 million (2018: £17.5 million),
totalled £93.2 million (2018: £92.3 million),
representing an effective underlying rate
of tax of 18.0% (2018: 18.0%). The
effective tax rate is calculated by using
the Group’s underlying profit before tax
and therefore excludes the tax effect of
amortisation of acquired intangibles,
together with the tax credit in respect
of exceptional items and the tax effect
of changes in tax rates.
Pensions
The Group’s net pension deficit moved to
£28.0 million (2018: £5.0 million), with
the increase in deficit due to a reduction
in discount rates, an increase in inflation
30 Babcock International Group PLC Annual Report and Accounts 2019
H1 income
statement
charge
H2 income
statement
charge
31 March 2019
income
statement
charge
£38.2m
£42.1m
£80.3m
£39.6m
£15.7m
(£15.2m)
£120.4m
–
£120.4m
(£19.8m)
–
£100.6m
£0.8m
–
£0.8m
£2.8m
£5.7m
£0.4m
£9.7m
£30.7m
£40.4m
(£6.9m)
£10.0m
£43.5m
£39.0m
£42.1m
£81.1m
£42.4m
£21.4m
(£14.8m)
£130.1m
£30.7m
£160.8m
(£26.7m)
£10.0m
£144.1m
rates and a £26 million increase in
liabilities related to an adjustment to our
pension liabilities to equalise guaranteed
minimum pension benefits for men and
women. In addition, the bulk transfer of
£110 million of liabilities to the Primary
Civil Service pension scheme increased
the deficit by £5 million. The projected
pension charge within operating profit
for 2019/20 is £43.2 million (2018/19:
£42.7 million).
Amortisation of acquired intangibles
Amortisation of acquired intangibles
was £95.2 million (2018: £98.1 million).
This represents the amortisation of the
value attributed on business acquisitions
to customer relationships (both contractual
and non-contractual) and acquired brands.
Exchange rates
The impact of foreign currency
movements over the year resulted in
a decrease in underlying revenue of
£38.1 million and a corresponding
£3.1 million decrease in underlying
operating profit. The main currencies
that impact our results are the Euro,
the South African Rand and the
Canadian Dollar:
• A 10% movement in the Euro against
Sterling would affect full year
underlying revenue by around £53
million and underlying operating profit
by around £6 million
Underlying organic growth
Underlying revenue
31 March 2018
Exchange adjustment
Disposals
Exits
Organic growth
31 March 2019
Underlying revenue growth
Organic growth at constant exchange rates
Organic growth excl. exits at constant exchange rates
Underlying operating profit
31 March 2018
Exchange adjustment
Disposals
Organic growth
31 March 2019
Underlying operating profit growth
Organic growth at constant exchange rates
• A 10% movement in the South African
Rand against Sterling would affect full
year underlying revenue by around
£33 million and underlying operating
profit by around £2 million
• A 10% movement in the Canadian
Dollar against Sterling would affect
full year underlying revenue by around
£14 million and underlying operating
profit by around £1 million
Earnings per share
Underlying earnings per share for the
year was 84.0 pence (2018: 83.0
pence), an increase of 1.2%. Basic
continuing earnings per share, as
defined by IAS 33, was 39.5 pence
(2018: 66.6 pence).
Dividend
The Board is recommending a final
dividend of 22.9 pence (2018: 22.65
pence). If approved by shareholders at
the AGM on 18 July 2019, this will give
a total dividend for the year of 30.0 pence
(2018: 29.5 pence), an increase of
1.7%. The final dividend will be paid
on 9 August 2019 to shareholders on
the register at 5 July 2019.
Marine
£m
Land
£m
Aviation
£m
Nuclear
Unallocated
£m
£m
Total
£m
1,788.9
(2.4)
–
(25.0)
(54.9)
1,706.6
–4.6%
–4.5%
–3.1%
1,849.1
(27.7)
(60.3)
(25.5)
(115.4)
1,620.2
–12.4%
–7.6%
–6.2%
1,022.1
(8.0)
–
–
121.4
1,135.5
11.1%
11.9%
11.9%
235.1
(0.3)
–
(14.3)
220.5
–6.2%
–6.1%
140.1
(1.7)
(0.6)
8.2
146.0
4.2%
5.9%
144.3
(1.1)
–
17.3
160.5
11.2%
12.0%
702.7
–
–
–
(4.4)
698.3
–0.6%
–0.6%
–0.6%
68.8
–
–
(4.6)
64.2
–6.7%
–6.7%
–
–
–
–
–
–
–
(3.7)
–
–
0.9
(2.8)
24.3%
24.3%
5,362.8
(38.1)
(60.3)
(50.5)
(53.3)
5,160.6
–3.8%
–1.9%
–1.0%
584.6
(3.1)
(0.6)
7.5
588.4
0.7%
1.3%
Cash flow and net debt
The Group achieved its target of
delivering pre-capital expenditure cash
conversion of over 100% and around
80% post capital expenditure. Our cash
generation over the past 12 months
delivered a £157 million reduction
in net debt to £958 million as of
31 March 2019. This represents a
net debt to EBITDA ratio of 1.4 times.
The analysis below reconciles the
management KPI for cash conversion.
Cash performance
Underlying cash generated from
operations was £562.0 million
(2018: £447.9 million), from which
the Group’s operating cash flow
calculation is derived. Underlying
operating cash flow after movements
in working capital was up 24.8% to
£617.8 million (2018: £495.2 million),
led by an improved working capital
performance compared to last year.
The Group achieved a conversion rate
of underlying operating cash flow
after movements in working capital
and capital expenditure to underlying
operating profit of 104% (2018: 82%).
Working capital
Total working capital cash inflows for
the year, excluding excess retirement
benefits, were £86.8 million compared
to a £54.4 million outflow last year. The
key drivers of this strong working capital
performance were:
• The expected £50 million unwind
of working capital related to our
Fomedec contract. The financial year
ended 31 March 2018 was impacted
by Fomedec working capital outflows
of £109.3 million in debtors offset by
£58.9 million in creditors, with a net
effect of a £50.4 million outflow.
This effect unwound in full over this
financial year.
• A £28 million reduction in trade
receivables
• A £119 million reduction in total
unbilled receivables, including the
Fomedec reversal and a reduction
within our Devonport business, partly
offset by an increase in accrued
income within DSG which is expected
to reverse in the first half of the next
financial year
Babcock International Group PLC Annual Report and Accounts 2019 31
Strategic reportGovernanceFinancial statements Financial review continued
Cash flow and net debt
31 March 2019
31 March 2018
Operating profit before amortisation of acquired intangibles
Amortisation, depreciation and impairments
Other non-cash items
Working capital (excluding excess retirement benefits)
Provisions
Operating cash flow
Cash conversion %
Capital expenditure (net)
Operating cash flow after capital expenditure
Cash conversion % – after capital expenditure
Interest paid (net)
Taxation
Dividends from joint ventures
Free cash flow before pension contribution in excess
of income statement
Retirement benefit contributions in excess of income statement
Free cash flow after pension contribution in excess
of income statement
Acquisitions and disposals net of cash/debt acquired
Investments in joint ventures
Movement in own shares
Dividends paid
Other
Exceptional cash movement
Net cash inflow
Net debt reconciliation
Opening net debt
Net cash inflow
Exchange difference
Closing net debt
Underlying
£m
452.5
108.6
(1.4)
86.8
(28.7)
617.8
137%
(148.5)
469.3
104%
(47.5)
(86.9)
44.6
379.5
(55.8)
323.7
(0.8)
0.1
–
(153.3)
(0.5)
(10.9)
158.3
Exceptional
items
£m
(160.8)
29.3
(14.8)
22.1
39.4
(84.8)
–
–
(84.8)
–
–
12.9
–
(71.9)
30.7
(41.2)
30.3
–
–
–
–
10.9
–
Statutory
£m
291.7
137.9
(16.2)
108.9
10.7
533.0
183%
(148.5)
384.5
132%
(47.5)
(74.0)
44.6
307.6
(25.1)
282.5
29.5
0.1
–
(153.3)
(0.5)
–
158.3
Statutory
£m
468.7
104.3
4.3
(54.4)
(27.7)
495.2
106%
(112.7)
382.5
82%
(53.6)
(74.3)
42.9
297.5
(47.3)
250.2
(0.2)
(6.0)
(4.2)
(147.7)
–
–
92.1
(1,115.0)
158.3
(1.0)
(957.7)
(1,173.5)
92.1
(33.6)
(1,115.0)
Working capital outflow in 2018 includes a £50.4 million outflow in respect of Fomedec, the French air training contract, with an
associated inflow in 2019.
The table below provides the reconciliation between the statutory cash flow and trading cash flow table above.
Cash generated from operations
Retirement benefit contributions in excess of income statement
Operating cash flow
2019
Exceptional
items
£m
(54.1)
(30.7)
(84.8)
2018
Statutory
Statutory
£m
507.9
25.1
533.0
£m
447.9
47.3
495.2
Underlying
£m
562.0
55.8
617.8
32 Babcock International Group PLC Annual Report and Accounts 2019
• Trade creditors decreased but this
Pensions
was mostly offset by accruals
• An increase in inventory related to
mobilising our Norway contract,
Fomedec entering the operational
phase, inventory build in South Africa
and inventory build across markets in
anticipation of the UK’s exit from the
European Union
We expect working capital for the next
financial year to return to an outflow.
Provisions
Underlying operating cash flow includes
£28.7 million of provision movements
(2018: £27.7 million) relating to
contracts, onerous leases, personnel
(taxation and reorganisation) and
property. The level of non-exceptional
provision outflow in 2019/20 is
expected to be around £15 million.
During the period the net underlying
credit to the income statement was
£4.0 million.
Capital expenditure
Net capital expenditure during the year
was £148.5 million (2018: £112.7
million) with the increase year-on-year
led by the timing of aircraft deposits and
deliveries which will reverse in the next
financial year as they are converted to
operating leases. Net capital expenditure
comprises purchase of property, plant
and equipment of £194.3 million
plus purchase of intangible assets of
£32.7 million less proceeds on disposal
of property, plant and equipment of
£78.5 million.
Capital expenditure for the year was
1.4 times the Group’s depreciation
and amortisation (excluding acquired
intangibles) charge of £108.6 million.
For the 2019/20 financial year, capital
expenditure as a multiple of depreciation
and amortisation is expected to be
around 1.0 times.
Cash interest paid
Net Group cash interest paid, excluding
that paid by joint ventures, was
£47.5 million (2018: £53.6 million).
Pension cash outflow in excess of the
income statement charge excluding
exceptionals was £55.8 million after
allowing for contract balances (2018:
£47.3 million). The Rosyth scheme
negotiations are currently ongoing
and will require increased funding. The
regulatory environment around pensions
remains difficult and this, combined
with the uneven distribution of funding
deficits between our three large
schemes, will result in more volatility
in pensions funding over the coming
years despite the improved overall
funding levels. For the next financial
year the cash outflow in excess of the
income statement charge is expected
to increase. An estimate of the current
technical provisions funding basis
deficit is around £400 million,
reflecting more prudent assumptions
compared to IAS 19.
Taxation
Underlying cash tax payments of
£86.9 million (2018: £74.3 million)
increased, partly due to the settlement
of a tax dispute in Spain relating to
pre-acquisition activity.
Free cash flow
Underlying free cash flow, which
includes pension payments in excess of
the income statement charge, increased
by 29.4% to £323.7 million (2018:
£250.2 million), led by the strong
working capital performance.
Free cash flow generation in the year
was weighted to the second half of this
financial year and we expect a similar
weighting in the next financial year.
Dividends
During the period the Group received
£44.6 million in dividends from its
joint ventures (2018: £42.9 million).
Cash dividends (including to minorities
of £2.8 million) paid out in the
year totalled £153.3 million (2018:
£147.7 million). We expect dividends
from joint ventures to be stable in the
2019/20 financial year.
Exceptional cash movement
There was a cash outflow of
£10.9 million in the year related to
exceptional charges.
Net debt
The Group’s net cash inflow was
£158.3 million (2018: £92.1 million).
Net debt at 31 March 2019 was
£958 million, a reduction of
£157 million over the last 12 months
(2018: £1,115 million). This gives a
net debt to EBITDA ratio of 1.4 times
(2018: 1.6 times).
ROIC
Return on invested capital (ROIC) is
defined as underlying operating profit
divided by net debt and shareholder
funds excluding retirement deficits or
surpluses. Post tax, ROIC for the year was
12.5%, an increase from 11.9% last year.
This improvement reflects the underlying
operating profit growth, strong cash
generation in the year and the asset
write downs.
Pensions
The IAS 19 valuation for accounting
purposes showed a market value
of assets of £4,582.2 million in
comparison to a valuation of the
liabilities based on AA corporate bond
yields of £4,610.2 million. The total
accounting deficit, pre-tax, of the
Group’s combined defined benefit
pension schemes showed an increase
to £28.0 million (31 March 2018:
£5.0 million). As at 31 March 2019,
the key assumptions used in valuing
pension liabilities were:
Discount rate
Inflation rate (RPI)
2.4% (2018: 2.6%)
3.2% (2018: 3.1%)
On 26 October, the High Court handed
down a judgment involving the Lloyds
Banking Group’s defined benefit pension
schemes. The judgment concluded the
schemes should be amended to equalise
pension benefits for men and women in
relation to guaranteed minimum pension
benefits. The issues determined by the
judgment arise in relation to many other
defined benefit pension schemes.
Babcock International Group PLC Annual Report and Accounts 2019 33
Strategic reportGovernanceFinancial statements Financial review continued
Net debt to EBITDA
Underlying operating profit
Depreciation
Amortisation of software and development costs
Non-controlling interests
EBITDA
Net debt
Net debt to EBITDA
Interest cover
EBITDA
Finance costs
Finance income
Net Group finance costs
Interest cover
ROIC and gearing
Underlying operating profit
Tax at 18.0%
Underlying operating profit post tax
Net debt
Shareholder funds
Retirement benefit deficit
Invested capital
ROIC (pre-tax)
ROIC (post-tax)
Gearing (net debt / shareholder funds excluding
retirement benefit deficit)
31 March 2019
31 March 2018
£m
588.4
93.8
14.6
(0.4)
696.4
957.7
1.4x
£m
584.6
91.3
13.0
(1.4)
687.5
1,115.0
1.6x
31 March 2019
31 March 2018
£m
696.4
62.7
(16.0)
46.7
14.9x
£m
687.5
61.9
(14.3)
47.6
14.5x
31 March 2019
31 March 2018
£m
588.4
(105.9)
482.5
957.7
2,885.3
28.0
3,870.6
15.2%
12.5%
£m
584.6
(105.2)
479.4
1,115.0
2,911.0
5.0
4,031.0
14.5%
11.9%
33%
38%
The impact to our pension liabilities
was an increase of £26 million.
In addition, the bulk transfer of
£110 million of liabilities to the
Primary Civil Service pension scheme
increased the pension liabilities by
£5 million.
Outlook for the year ending
31 March 2020
The year ending 31 March 2020 will
be affected by a number of step downs.
In total, these step downs will reduce
revenue by £410 million and reduce
operating profit by £63 million.
The Group’s guidance reflects these
step downs and the current market
conditions, including the weakness in
short cycle contracts experienced this
financial year.
• We expect underlying revenue to be
around £4.9 billion
• We expect to maintain our underlying
margin (incl. JVs) at between 10.7%
and 11.0%
• Underlying operating profit is expected
to be in the range of £515 million to
£535 million
• Free cash flow is expected to be over
£250 million and we expect to
continue to reduce net debt
• As with previous years, performance
for the Group will be weighted to the
second half, especially for cash
generation
IFRS 16
IFRS 16 is effective for the year ending
31 March 2020 and requires almost all
operating leases to be capitalised on the
balance sheet. Minimum future lease
payments will be recognised as a lease
liability with a corresponding right-of-use
asset depreciated on a straight-line basis
over the lease term. The operating lease
charge will be replaced by a depreciation
charge on the asset and an interest
charge on the liability. For the Group,
78% of the operating lease balance
relates to aircraft within the Aviation
sector where, in the main, operating
lease terms are matched to customer
contract length.
On 1 April 2019 the Group recognised
a lease liability of £606 million and a
right-of-use asset of £559 million.
The estimated impact to the year ending
31 March 2020 is:
• Increase in operating profit of
c.£25 million
• Increase in interest of c.£25 million
• Minimal impact to earnings per share
• Increase in EBITDA of c.£150 million
• Increases net debt to EBITDA by c.0.5x
Contingent liabilities
The Group’s contingent liabilities are set
out in note 32.
In February 2019, the Italian
Competition Authority (the ICA) notified
Babcock Mission Critical Services Italia
SpA (BMCS Italia) of its decision to fine
a number of companies, which provide
helicopter services in Italy and are
members of the Italian Helicopter
Association (the Association), for
anti-trust violations. The ICA found that
a number of companies, but not BMCS
Italia, had engaged in bid-rigging
activities in the aerial rotary wing
fire-fighting sector, a sector in which
BMCS Italia does not operate. At the
same time, the ICA, after investigation,
34 Babcock International Group PLC Annual Report and Accounts 2019
found that there was no bid-rigging in
the helicopter emergency medical
services sector, the sector in which
BMCS Italia does operate. However,
during the course of its investigation, the
ICA became aware of a publicly available
“tariff list” produced by the Association
since 2001 and, on the basis of the
list, decided to fine the members of the
Association, including BMCS Italia. The
fine for BMCS Italia was €51 million.
BMCS Italia has appealed the ICA’s
decision and has reasonable grounds
to believe the court will either overturn
the fine all together or substantially
reduce it. Accordingly, no provision
for settlement has been made as
31 March 2019 as the Directors do not
believe any settlement will be material.
Available financial capital
The Company defines available financial
capital (AFC) as shareholder equity and
net debt plus undrawn committed
borrowing facilities.
Objective
To ensure an appropriate level of AFC to:
I. maintain operational flexibility and
meet financial obligations
II. fund the Group’s organic and
acquisitive growth
III. maintain necessary headroom to
cover the peaks and troughs in the
Group’s working capital cycle
IV. provide sufficient liquidity to see
the Group through any periods of
tightened liquidity in the market.
Policy
The Board aims to maintain a balance
between equity and debt capital which
optimises the Group’s cost of capital
whilst allowing access to both equity
and debt capital markets at optimum
pricing when appropriate. The Group,
in considering its capital structure and
financial capital, views net debt to
EBITDA at circa 2.0 times or below as
being steady state and sustainable in
normal market and economic conditions.
This level may be tempered in periods of
market volatility and economic and/or
political uncertainty. This is not to rule
out acquisition spikes above 2.0 times,
as illustrated by previous acquisitions,
but only if the Group can see a clear
path to reducing net debt to EBITDA
back to circa 2.0 times or below within
a reasonable time frame.
Performance
The Group’s gearing and debt cover
ratios, used by the Group to
evaluate capital, saw an improvement
to 1.4 times net debt to EBITDA at
31 March 2019 (31 March 2018:
1.6 times), demonstrating further
progress in bringing gearing down,
both in the pay down of debt and
through increasing profits attributable
to shareholders. Debt ratios are below
covenanted levels and gearing has
continued to reduce, leaving sufficient
headroom for the funding of growth. The
Company believes that capital markets
remain accessible if or when required.
Treasury
Treasury activities within the Group
are managed in accordance with
the parameters set out in the treasury
policies and guidelines approved by
the Board. A key principle within the
treasury policy is that trading in
financial instruments for the purpose
of profit generation is prohibited, with
all financial instruments being used
solely for risk management purposes.
The Group only enters into financial
instruments where it has a high level
of confidence in the hedged item
occurring. Both the treasury department
and the divisions have responsibility for
monitoring compliance within the
Group to ensure adherence to the
principal treasury policies and guidelines.
The Group’s treasury policies in respect of
the management of debt, interest rates,
liquidity and currency are outlined below.
The Group’s treasury policies are kept
under close review, given the current
economic and market uncertainty.
Debt
Objective
With debt as a key component
of available financial capital, the
Group seeks to ensure that there is
an appropriate balance between
continuity, flexibility and cost of debt
funding through the use of borrowings,
whilst also diversifying the sources
of these borrowings with a range of
maturities and rates of interest, to reflect
the long-term nature of the Group’s
contracts, commitments and risk profile.
Policy
All the Group’s material borrowings are
arranged by the treasury department,
and funds raised are lent onward to
operating subsidiaries as required. It
remains the Group’s policy to ensure
the business is prudently funded and
that sufficient headroom is maintained
on its facilities to fund its future growth.
Performance
The Group continues to keep under
review its capital structure to ensure
that the sources, tenor and availability
of finance are sufficient to meet its
stated objective. During the financial
year, no new corporate debt was raised,
as the current Group capital structure of
committed facilities and headroom was
deemed sufficient to meet the Group’s
ongoing commitments. The Group’s
main corporate facilities comprise the
following: a £300m Sterling bond
maturing October 2026, a €550 million
Eurobond maturing October 2022, a
£100m Term Debt Facility maturing
August 2020, a £40 million loan note
maturing January 2020, US$500 million
US private placement notes maturing
March 2021, and a Revolving Credit
Facility of £750 million maturing
December 2021. Taken together,
these debt facilities provide the Group
with a total of c.£2.0 billion of available
committed banking facilities and loan
notes. For further information see note 2
to the Group financial statements.
Babcock International Group PLC Annual Report and Accounts 2019 35
Strategic reportGovernanceFinancial statements Financial review continued
Interest rates
Objective
To manage exposure to interest rate
fluctuations on borrowings by varying
the proportion of fixed rate debt
relative to floating rate debt to reflect
the underlying nature of the Group’s
commitments and obligations. As a
result, the Group does not maintain
a specific set proportion of fixed versus
floating debt, but monitors the mix
to ensure that it is compatible with
its business requirements and
capital structure.
Policy
Interest hedging and the monitoring of
the mix between fixed and floating rates
is the responsibility of the treasury
department and is subject to the policy
and guidelines set by the Board.
Performance
As at 31 March 2019, the Group had
74% fixed rate debt (31 March 2018:
69%) and 26% floating rate debt
(31 March 2018: 31%) based on
gross debt of £1,336.4 million
(31 March 2018: £1,475.6 million).
For further information see note 2
to the Group financial statements.
Liquidity
Objective
I. To maintain adequate undrawn
committed borrowing facilities.
II. To monitor and manage bank credit
risk, and credit capacity utilisation.
III. To diversify the sources of financing
with a range of maturities and interest
rates, to reflect the long-term nature
of Group contracts, commitments and
risk profile.
Policy
All the Group’s material borrowings are
arranged by the treasury department and
funds raised are lent onward to operating
subsidiaries as required.
To ensure that the Group has sufficient
cash on hand and that its committed RCF
is appropriately sized and has sufficient
term to meet the Group’s general
corporate funding requirements. Each
of the business sectors in the Group
provides regular cash forecasts for both
management and liquidity purposes.
These cash forecasts are used to monitor
and identify the liquidity requirements
of the Group and ensure that there is
sufficient cash to meet operational
needs while maintaining sufficient
headroom on the Group’s committed
borrowing facilities. The cash
performance of the business sectors
is a key performance indicator.
The Group adopts a conservative
approach to the investment of its
surplus cash. It is deposited with
financial institutions only for short
durations, and the bank counter-party
credit risk is monitored closely on a
systematic and ongoing basis.
A credit limit is allocated to each
institution taking account of its credit
rating and market information.
Performance
The Group continues to keep under review
its capital structure to ensure that the
sources, tenor and availability of finance
are sufficient to meet its stated objectives.
No new corporate debt was raised during
the course of the financial year.
The Group had cash and cash equivalents
as at 31 March 2019 of £275.2 million
(2018: £286.3 million).
For further information see note 2 to the
Group financial statements.
Foreign exchange
Objective
To reduce exposure to volatility in
earnings and cash flows from movements
in foreign currency exchange rates. The
Group is exposed to a number of foreign
currencies, the most significant being the
Euro, US Dollar, South African Rand and
increasingly the Australian Dollar,
Canadian Dollar, Norwegian Krone,
Omani Rial and Swedish Krona.
Policy – Transaction risk
The Group is exposed to movements
in foreign currency exchange rates in
respect of foreign currency denominated
transactions. To mitigate this risk, the
Group’s policy is to hedge all material
transactional exposures, using financial
instruments where appropriate. Where
possible, the Group seeks to apply IFRS 9
hedge accounting treatment to all
derivatives that hedge material foreign
currency transaction exposures.
Policy – Translation risk
The Group is exposed to movements
in foreign currency exchange rates in
respect of the translation of net assets and
income statements of foreign subsidiaries
and equity accounted investments. It is not
the Group’s policy to hedge through the
use of derivatives the translation effect of
exchange rate movements on the income
statement or balance sheet of overseas
subsidiaries and equity accounted
investments it regards as long-term
investments. However, where the Group
has material assets denominated in a
foreign currency, it will consider some
matching of those aforementioned assets
with foreign currency denominated debt.
Performance
There was a net foreign exchange gain
of £5.9 million in the income statement
for the year ending 31 March 2019
(2018: £16.1 million loss). For further
information see note 2 to the Group
financial statements.
Pensions
The Group provides a number of defined
benefit and defined contribution pension
schemes for its employees. The largest
schemes are the Babcock International
Group Pension Scheme, the Devonport
Royal Dockyard Pension Scheme and the
Rosyth Royal Dockyard Pension Scheme
whose combined assets are £4.1 billion,
representing 90% of the total assets of
the Group’s defined benefit schemes. It
also has employees in two industry-wide
schemes, the Railways Pension Scheme
and the Cavendish Nuclear section of the
Magnox Group of the Electricity Supply
Pension Scheme, as well as employees
in other smaller occupational defined
benefit schemes and local and central
government schemes. All the
occupational defined benefit schemes
36 Babcock International Group PLC Annual Report and Accounts 2019
have been closed to new members for
some years. The Group continues to
review all options to reduce the risks
inherent in such schemes. In the last
financial year, it implemented changes
to better share costs with employees
at one of the largest schemes, and is
consulting with some employees in the
Babcock International Group pension
scheme this year with regard to closing
the scheme to future accrual. The Group
also provides an occupational defined
contribution scheme used to comply
with the automatic enrolment legislation
across the Group for all new employees
and for those not in a defined benefit
scheme. Over 75% of its UK employees
are now members of the defined
contribution scheme. The Group pays
contributions to these schemes based
on a percentage of employees’ pay.
It has no legal obligations to pay any
additional contributions. All investment
risk is borne by the employees.
Investment strategy
The Group has agreed a long-term
investment strategy with trustees across
the three largest schemes designed to
generate sufficient assets by April 2037
to be fully self-sufficient, although our
expectation is that this target will be
met significantly earlier. It also operates
within an agreed risk budget to ensure
the level of risk taken is appropriate.
An investment committee operating
across the three schemes, which
includes Group representation, has
been established for a number of years
to maximise effectiveness and to ensure
consistency. To implement the strategy,
the committee has divided the schemes’
assets into growth assets, low risk assets
and matching assets, with the proportion
of assets held in each category varying
by scheme reflecting the schemes’
different maturities. The growth assets
are systematically de-risked over time by
comparing and equating the expected
and required returns each month. The
matching assets are used to hedge
against falls in interest rates or rises in
expected inflation. The level of hedging
is steadily increased as the funding level
on the self-sufficiency measure increases,
and this approach has protected the
schemes against the falls in interest
rates over the last few years.
Funding valuations
Actuarial valuations are carried out
every three years in order 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, in order to
spread the financial impact of market
conditions. The valuation of the Rosyth
scheme as at 31 March 2018 is nearing
completion, and work has commenced
on the valuation of the Babcock
International Group scheme as at
31 March 2019.
Cash contributions
2019
£m
2018
£m
48.4
36.4
10.7
47.2
41.5
10.7
Future service
contributions
Deficit recovery
Longevity swap
Total cash
contributions –
employer
schemes during 2009/10 to mitigate the
financial impact of increasing longevity.
The total cash cost in excess of the
charge within the income statement is
expected to increase over the medium
term. The current level of bond yields
and inflation expectations has increased
cash service costs for pension schemes.
Accounting valuations
The IAS 19 valuation for accounting
purposes showed a market value of
assets of £4,582.2 million, net of longevity
swaps, in comparison to a valuation
of the liabilities based on AA corporate
bond yields of £4,610.2 million. The
total net accounting deficit, pre deferred
tax, at 31 March 2019, was £28.0 million
(2018: £5.0 million), representing
a 99.4% funding level. A summary of
the key assumptions used to value the
largest schemes is shown below. The most
significant assumptions that impact on
the results are the discount rate, the rate
of future pensionable salary increases and
the expected rate of inflation. The impact
of the longevity swaps transacted during
2009/10 has helped to mitigate the risk
of increasing allowances for longevity.
95.5
99.4
Governance
Cash contributions made by the Group
into the defined benefit pension schemes
during the year are set out in the table
above. In the 2019/20 financial year,
the total cash contributions expected
to be paid by the Group into the
defined benefit pension schemes are
£103.1 million. £10.0 million of this
is for salary sacrifice contributions,
£30.6 million is in respect of the cost
of future service accrual, £47.2 million
is to recover deficits over periods of time
agreed with the Trustee and £15.3 million
is in respect of the three longevity swaps
transacted for each of the largest
Accounting valuations
The Group believes that the complexity
of defined benefit schemes requires
effective governance and supports an
increasingly professional approach. It
has appointed an independent chairman
across the three largest schemes as well
as an independent professional trustee
in each scheme and has appointed
professional trustees with specialist
investment expertise. The Group
established a governance committee
across the schemes to improve the
effectiveness of the trustee boards as
well as enhancing trustees’ knowledge
and decision-making.
Discount rate %
Rate of increase in pensionable salaries %
Rate of increase in pensions in payment %
Life expectancy of current pensioners
aged 65 years
Devonport
Babcock
Rosyth
2019
2.4
2.3
2.2
2018
2.6
2.2
2.2
2019
2.4
2.3
3.0
2018
2.6
2.2
2.9
2019
2.4
2.3
3.3
2018
2.6
2.2
3.2
20.6 21.1
21.7 22.2
19.7 20.2
Babcock International Group PLC Annual Report and Accounts 2019 37
Strategic reportGovernanceFinancial statements
Donnington, Telford, UK
Our engineering
support plays a key
role in ensuring the
operational readiness
of the British Army
“We provide complex
engineering services for the
British Army’s vehicles and
equipment, maintaining around
32,000 military vehicles each
year and ensuring the availability
of 210,000 spares lines.
Working from customer barracks,
DSG workshops and through
mobile support, the end
product we deliver is critical
to supporting Army personnel
as they are deployed.”
Kevin Ashley
Head of Supplier Quality, DSG
Fast Facts
Contract name: DSG, Service Provision Contract
Length of contract: 10 years from April 2015
Output of contract: Storage, maintenance, repair and
overhaul of military vehicles and equipment for the
Ministry of Defence
Sector: Land
38 Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2019 39
Operational review
Marine
Our Marine sector provides critical support to the Royal Navy –
from sustaining its fleet to life extending submarines and surface ships.
Our Marine sector supports the navies of Australia, New Zealand
and Canada, and our technology is provided to a range of customers
around the world, both defence and civil.
2019 Underlying performance highlights
Revenue % of Group
Operating margin
33%
12.9%
Revenue growth
-5%
Key highlights
• Continued work on the
UK’s aircraft carriers with
HMS Prince of Wales now
structurally complete
and HMS Queen Elizabeth
completing her initial
sea trials before her first
maintenance period at our
Rosyth dockyard
• The Type 23 frigate life-
extension programme at
our Devonport facilities
continues at pace with
five ships undergoing
deep maintenance and
structural upgrading
work simultaneously
• Completed the largest
Revalidation and Assisted
Maintenance Period (RAMP)
ever undertaken at Devonport
on a Trafalgar Class submarine
while progressing on the first
life extension of the Vanguard
Class of submarines
• Rightsized capacity across
our facilities, including the
exit of Appledore shipyard
• The US/UK Common Missile
Compartment programme
has continued with the latest
delivery of Babcock built
missile tubes dispatched
from our Rosyth facility
and the contract expanded
• Won the contract to support
the largest vessels in the
Royal Australian Navy: two
flagship Canberra Class
Landing Helicopter Docks
and their 12 associated
amphibious landing crafts
40 Babcock International Group PLC Annual Report and Accounts 2019
Underlying revenue
Underlying operating profit
Underlying operating margin
Group
JV
Total
Total excluding exits
Group
JV
Total
Group
JV
Total
31 March
31 March
Change
2019
£20.3m
2018
£1,686.3m £1,766.5m
£22.4m
£1,706.6m £1,788.9m
£1,705.6m £1,762.9m
£231.3m
£3.8m
£235.1m
13.1%
17.0%
13.1%
£217.2m
£3.3m
£220.5m
12.9%
16.3%
12.9%
+/–
–4.5%
–9.4%
–4.6%
–3.3%
–6.1%
–13.2%
–6.2%
JV revenue is after deducting an appropriate portion of JV revenue to reflect revenue already included in Group revenue.
Operational review
UK defence
Revenue related to serving the UK
defence market was lower in the year
reflecting the step down in revenue
from the QEC aircraft carrier programme.
HMS Prince of Wales is now structurally
complete and the commissioning of her
on-board systems has started ahead
of sea trials later this year. HMS Queen
Elizabeth became increasingly
operational, helped by Babcock
providing expertise as part of the
Marine Systems Support Partner (MSSP)
contract. HMS Queen Elizabeth has
since been welcomed back at Rosyth to
complete her first dry-dock maintenance,
including a hull survey and maintenance
of underwater systems.
We continue to perform in line with
expectations on our key contract, the
Maritime Support Delivery Framework
(MSDF), with continued efficiencies
and cost reductions on track. We are
in discussions with the MOD on the
next five year period within our Terms of
Business Agreement (TOBA) from 2020
until 2025, and expect to sign this Future
Maritime Support Programme (FMSP)
contract by the end of the calendar year.
The Type 23 frigate life-extension
programme at our Devonport
facilities continues at pace with five
ships undergoing deep maintenance
and structural upgrading work
simultaneously. In the first half, we
completed the fourth offshore patrol
vessel for the Irish Navy at Appledore
and have now exited the shipyard. We
also completed significant work on the
amphibious assault ship HMS Albion and
helped prepare HMS Ocean as part of her
sale to Brazil.
Financial review
Underlying revenue in our Marine sector
declined by 4.6%. The decline is the
result of the exit of the renewables
business in the last financial year and
the continued step down in revenue
related to the Queen Elizabeth Class
(QEC) aircraft carriers of around £60
million. Organic underlying revenue
growth at constant exchange rates was
-4.5%. Excluding QEC and the renewables
exit, organic underlying revenue growth
at constant exchange rates was 0.1%.
Underlying revenue was helped by
increased activity on UK naval ships,
including the life extension of Type 23
frigates and our fleet support services,
and continued growth in our technology
businesses. Offsetting this was the impact
of the completion of building Irish
offshore patrol vessels and lower levels
of work for the Korean Navy’s Jangbogo
submarines ahead of the next phase.
Underlying revenue was also impacted
by changes in the expected phasing
of infrastructure and equipment spend
related to UK defence programmes, as
we flagged in our July Trading Update.
These programmes have now started
in part.
Underlying operating profit declined by
6.2% with the underlying margin broadly
maintained. This reflects the margin
benefit of lower QEC and renewables
revenue, which have low margins, offset
by changes in business and contract mix.
Babcock International Group PLC Annual Report and Accounts 2019 41
Strategic reportGovernanceFinancial statements
Operational review continued
During the year, we saw growth in the
volume of orders from the MOD to
support Royal Navy operations for the
Type 45 and QEC fleets and we are
bidding for the Royal Navy’s Type 31e
general purpose light frigate programme
after the process was restarted. Also in
the period, we secured a five year Naval
Design Partnership (NDP) contract with
the MOD with options for extension. This
important long-term contract provides
leadership for the industry development
of new naval platforms and mission
systems on behalf of the MOD.
We had another busy year supporting
the UK’s submarine fleet. We completed
the largest Revalidation and Assisted
Maintenance Period (RAMP) ever
undertaken at Devonport on a
Trafalgar Class submarine and we are
progressing on the first life extension of
the Vanguard Class. We have now begun
work on the infrastructure design for
the deep maintenance of the Astute
Class of submarines in Devonport in
the mid-2020s.
Our work on the next generation of
submarines continues with the first
weapons handling system modules
for the Dreadnought Class submarine
programme delivered to the customer
and a contract awarded to continue
the development of the future support
solution. The US/UK Common Missile
Compartment programme has continued
with the latest delivery of Babcock
built complex missile tube assemblies
dispatched from our Rosyth facility. The
quality of the initial batch has led General
Dynamics Electric Boat to extend their
order, and our contract to supply
missile tube assemblies now exceeds
£230 million.
We continued to deliver training to
the UK Navy and we have been down-
selected as a bidder for Project Selborne,
which will bring together multiple legacy
contracts into a single arrangement for
the training of Royal Navy personnel for
the next 10-12 years. This will replace
our existing training contract and offers
increased scope. During the year, we also
secured a five year Maritime Training
VISSC is the largest naval in service
support contract in Canada and
includes project management, refits
and maintenance, capability upgrades,
logistics, configuration/safety records
and engineering support.
In our export markets, in addition
to supplying missile tubes for the US
Columbia Class submarine programme,
we delivered the weapons handling
system on time for integration into the
first of S80 class Spanish submarines and
opened an office in Korea to support the
weapons handling system programme
for the Jangbogo-III submarines. We also
completed the capability upgrade on the
first of three Estonian Navy minehunter
vessels in the period.
Adjacent markets
In our adjacent markets of Energy
and Marine, we secured the sale of a
further eight of our patented ecoSMRT®
systems, bringing the total sold to date
to 23. ecoSMRT®, the liquefied natural
gas (LNG) single mixed refrigerant (SMR)
solution, developed in collaboration with
HHI, is now the market leading solution
for LNG boil-off gas management,
attracting both global ship owners
and shipyards.
Our Bernhard Schulte joint venture LNG
gas supply vessel, Kairos, is operating
successfully in the Baltic Sea region and
performed her first ship-to-ship transfer of
LNG in early March 2019.
Outlook
We expect good underlying revenue
growth excluding the £80 million impact
of the end of the QEC contract. The
sector’s underlying margin is expected to
be slightly lower, reflecting contract mix
and phasing.
Systems Through-Life Availability &
Support Service (MARTASS) contract with
the MOD to manage the integration of
new training technology across naval
bases and air stations.
International defence
We support international defence
markets from our UK operations and
from our businesses in Australia, Canada,
New Zealand and Oman.
In Australia, contract performance was
strong throughout the year. Naval Ship
Management (our 50% joint venture) was
appointed to support the largest vessels
in the Royal Australian Navy: two flagship
Canberra Class Landing Helicopter
Docks (LHD) and their 12 associated
amphibious landing craft. Work will begin
to sustain and support these vessels in
July 2019 as part of a 15 year contract
(five years plus two extensions) worth
around AUD $1.5 billion.
In Canada, trading was broadly in line
with last year. In the first half of the year,
we secured a CAD $400m three year
extension to our existing submarine
support contract with the Canadian
Department of National Defence for its
fleet of four Victoria Class submarines.
42 Babcock International Group PLC Annual Report and Accounts 2019
Land
Our Land sector provides large-scale critical vehicle fleet management,
equipment support for all British Army vehicles and technical training
for military engineers. We also deliver engineering services in adjacent
markets of Rail, Emergency Services, Airports and South Africa.
2019 Underlying performance highlights
Revenue % of Group
31%
Operating margin
9.0%
Revenue growth
-12%
Key highlights
Key highlights
• Won two pieces of additional
• Won two pieces of
additional work within DSG
work within DSG and continue
and continue to support the
to support the British Army in
the delivery of training to
British Army in the delivery
around 20,000 service
of training to around 20,000
service personnel
personnel
• New integrated IT systems
• New integrated IT systems for
for DSG progressing well
DSG progressing well
• Awarded a contract in
• Awarded a contract in
Australia for counter-
Australia for counter-
chemical, biological,
chemical, biological,
radiological, nuclear and
radiological, nuclear and
explosive (C-CBRNE) asset
explosive (C-CBRNE) asset
management
management
• Selected as preferred bidder
• Selected as preferred bidder
for a ten year contract for
for a ten year contract for
track and rail systems in
track and rail systems in
Scotland followed by a
Scotland followed by a
contract for signalling work
contract for signalling work
• Continued to exit non-
• Continued to exit non-
strategic businesses
strategic businesses
Babcock International Group PLC Annual Report and Accounts 2019 43
Strategic reportGovernanceFinancial statements Operational review continued
Underlying revenue
Underlying operating profit
Underlying operating margin
Group
JV
Total
Total excluding exits and disposals
Group
JV
Total
Group
JV
Total
31 March
31 March
Change
2019
£60.2m
2018
£1,560.0m £1,760.4m
£88.7m
£1,620.2m £1,849.1m
£1,554.1m £1,697.4m
£108.7m
£31.4m
£140.1m
6.2%
35.4%
7.6%
£105.1m
£40.9m
£146.0m
6.7%
67.9%
9.0%
+/–
–11.4%
–32.1%
–12.4%
–8.4%
–3.3%
30.3%
4.2%
JV revenue is after deducting an appropriate portion of JV revenue to reflect revenue already included in Group revenue. The effect of this is that there is no
revenue recognised in relation to our Holdfast (RSME) JV.
Financial review
Underlying revenue in our Land sector
was 12.4% lower than last year, with an
£85.8 million impact from business exits
and disposals and a £27.7 million impact
from foreign exchange movements.
Organic underlying revenue growth at
constant exchange rates was -7.6%, or
-6.2% adjusting for business exits.
Lower underlying revenues reflect
reduced defence procurement activity,
lower activity in our Rail business and
power generation weakness in South
Africa with no scheduled power station
outages. JV revenue declined following
lower levels of rail electrification work
in our ABC joint venture. The profit
contribution from ABC was mainly
through the subcontract with Babcock
and not in the joint venture.
Underlying operating profit increased
to £146 million with the increase
coming from a higher JV contribution.
This mostly reflects cumulative contract
profit performance in our Holdfast (RSME)
joint venture, which will normalise
next year resulting in a step down of
£17 million. Underlying operating profit
from Group operations was broadly flat
despite the revenue decline. This margin
expansion was helped by improved
contract performances (in non-defence
contracts) and continuous cost savings as
well as improved profitability in our South
African equipment business and a gain on
the disposals of property.
Operational review
Defence
Revenue related to serving the UK
defence market was lower in the year,
mainly reflecting lower levels of
procurement spend.
We have continued to provide key
support services to the British Army in
vehicle fleet management and training.
During the year our Defence Support
Group (DSG) business has been
collaborating with the UK MOD to drive
further operational improvements across
the workshop and procurement activities
and these initiatives, together with our
investment in technology, provide a
strong platform for further growth in
the scope of DSG services. We won two
pieces of additional work within DSG
via amendments to our existing Service
Provision and Transformation Contract
in the year. We agreed a £72 million
increase in scope to deliver UK and
international maintenance to land
equipment and cadet weapons in
support to the UK 1 Division. From
April 2019, we will deliver maintenance,
repair and overhaul support to the British
Army’s protected mobility vehicle fleet.
Our ALC JV continues to perform well
and we are bidding for Project MITER,
an increased scope replacement which
will come into operation in 2021.
We continue to support the British Army
in support and delivery of training to
around 20,000 service personnel and
are engaging with the customer as
they develop their Collective Training
Transformation Programme. Our Holdfast
(RSME) joint venture, which provides
training to the Royal School of Military
Engineering, continues to drive
savings programmes.
Adjacent markets
The Land sector operates a range of
contracts across markets adjacent to
our key markets, all benefitting from
our engineering capabilities.
In our adjacent market of Rail, trading
was tough in the year as we experienced
lower activity towards the end of a five
year contract and there was a lower level
of electrification. During the year, we
won a £130 million eight year contract
with Translink for the provision of rail
services in Northern Ireland and we
were selected as preferred bidder for the
North Alliance (Scotland route) to deliver
Network Rail’s CP6/CP7 track and rail
systems contracts. This ten year contract
(initial five years with an option to
extend) is worth up to £1 billion over
a ten-year period, from August 2019
to 2029. We also won a £100 million
framework contract for signalling in
Scotland in the period.
44 Babcock International Group PLC Annual Report and Accounts 2019
Outlook
We expect slight underlying revenue
growth excluding the £65 million impact
of exits and disposals. Underlying margin
is expected to be maintained excluding
the normalisation of the Holdfast (RSME)
joint venture profit contribution.
Our business in South Africa had
a mixed year with lower revenue,
reflecting the difficult macroeconomic
environment and the impact of Eskom
difficulties. As previously highlighted,
changes at Eskom have resulted in power
station outage delays which impacted
the business throughout the financial
year, with no recovery in the second half.
The Volvo equipment business supplying
vehicles to the mining and construction
industries has continued to perform
excellently, gaining market share in
a growing market and increasing
profits. Our DAF truck franchise is
also performing well and gaining
market share.
The Land sector serves the Land
emergency services market. During
the year we received an extension
to our fleet support contract for the
Metropolitan Police Service (MPS)
valued at around £50 million and
we have been working closely with
the London Fire Brigade to support
their effort to modernise its fleet to be
low carbon and our training contract has
continued to perform well. Our
apprentice training business saw lower
revenues this year following lower
apprentice training volumes across the
country. We made good progress across
our Airports businesses in delivering a
number of major projects at Heathrow
and Gatwick to install new hold
baggage screening machines. We
were unsuccessful in our rebid for
British Airways ground support
equipment as the customer’s
business capital model changed.
Babcock International Group PLC Annual Report and Accounts 2019 45
Strategic reportGovernanceFinancial statements Operational review continued
Aviation
Our Aviation sector delivers critical services in the defence and aerial
emergency services markets. In defence we train pilots and manage
and maintain fleets of fixed and rotary wing aircraft in the UK and France.
In aerial emergency services we apply technology to deliver aerial
emergency medical services, aerial firefighting and search and rescue.
2019 Underlying performance highlights
Revenue % of Group
Operating margin
22%
14.1%
Revenue growth
+11%
Key highlights
• French military training
support contract
progressing well with all
aircraft and simulators on
site at the French Air Force
base in Cognac
• Reshaped our Oil and
Gas business to reflect
market conditions
• Entered the North American
aerial emergency services
market following the award
of a ten year contract for
aerial firefighting in Canada
• Commenced the
mobilisation of our fixed
wing air ambulance service
in Norway and the first
aircraft are completing
their medical fit-out
46 Babcock International Group PLC Annual Report and Accounts 2019
Underlying revenue
Underlying operating profit
Underlying operating margin
Group
JV
Total
Group
JV
Total
Group
JV
Total
31 March
31 March
Change
2019
£995.9m
£139.6m
2018
£921.1m
£101.0m
£1,135.5m £1,022.1m
£103.1m
£41.2m
£144.3m
11.2%
40.8%
14.1%
£107.1m
£53.4m
£160.5m
10.8%
38.3%
14.1%
+/–
8.1%
38.2%
11.1%
3.9%
29.6%
11.2%
JV revenue is after deducting an appropriate portion of JV revenue to reflect revenue already included in Group revenue.
During the period the bidding process
for the RAF Air Support to Defence
Operational Training (ASDOT)
opportunity to provide adversary air
combat training was cancelled by the
MOD. This opportunity was in our
pipeline at around £400 million.
International defence
Revenue in our international defence
markets grew strongly in the year
driven by our Fomedec training support
contract, with all aircraft and simulation
devices on site at the French Air Force
base in Cognac and accepted by the
customer authority.
In March 2019, we sold our 50% share
of Helidax to our joint venture partner for
€10 million (£9 million). Our share of the
JV net debt was £29 million. This has no
impact on our other operations in France.
Expanding our services across
international defence markets remains
a key part of our strategy and reflects a
significant part of our pipeline, including
defence flying training opportunities in
Canada and France.
Financial review
Strong underlying revenue growth in
our Aviation sector mainly relates to
aircraft and simulator revenue on our
Fomedec training support contract with
the French Air Force. This growth was
partly offset by lower firefighting activity
in Southern Europe and the lapping of
higher revenue at the end of last year
from the completion of the initial phase
of our UK Military Flying Training System
subcontract. The phasing of Fomedec
revenue combined with lower levels of
firefighting resulted in broadly flat
underlying revenues in the second half
of this year.
Underlying operating profit increased to
£161 million mainly due to an increased
contribution from joint ventures.
Profitability across the sector, both
Group and joint ventures, was helped
by improved contract performances
and cost reduction programmes.
Operational review
UK defence
Higher revenue this year was driven
by our HADES contract, which
provides technical support at 17 RAF
air bases, becoming fully operational
in September 2018 and also increased
revenue from our Ascent training joint
venture. Offsetting this, we saw lower
revenues related to the UK Military Flying
Training System (UKMFTS) subcontract
following the finalisation of the initial
phase last year.
Babcock International Group PLC Annual Report and Accounts 2019 47
Strategic reportGovernanceFinancial statements
Operational review continued
Aerial emergency services
Revenue across our aerial emergency
services markets grew over the year
but was impacted by lower levels
of firefighting.
Trading in Italy was down slightly, mainly
reflecting lower firefighting activity
levels. In France, we successfully rebid
our largest medical emergency services
contract, Samu PACA (Provence-Alpes-
Côte d’Azur), while in Portugal, we
won key rebids for both firefighting and
medical emergency services. In Spain,
we won some new bids but lost some
rebids in medical emergency services
and search and rescue in the second half
of the year. In the first half we renewed
SASEMAR, our flagship search and rescue
contract along the Spanish coastline, for
at least four years.
In the Nordics, mobilisation and
operations for the air ambulance
contract in Gothenburg, Sweden is
proceeding on schedule and we were
awarded a five year air ambulance
contract in Finland. In Norway, we
commenced the mobilisation of our
fixed wing air ambulance service and the
first aircraft are completing their medical
fit-out. We expect to be operational in
July 2019.
During the year, we restructured our
European operations to comply with
AOC ownership and control obligations.
We will be reviewing how to make the
new structure more efficient on an
ongoing basis.
We have now entered the North
American aerial emergency services
market following the award of a ten
year contract for aerial firefighting in
Manitoba, Canada. We will manage,
maintain and operate Manitoba’s fleet
of seven firefighting amphibious aircraft
and provide three of our own aircraft.
This business provides the platform for
future aerial emergency services
opportunities across North America.
Adjacent markets
Our Aviation business also serves the
oil and gas market. Revenue across
this market in the period grew slightly,
helped by a pick-up in activity in the
‘pay as you go’ spot market, along with
the addition of a new customer which
offset the loss of another. Trading
continues to be impacted by challenging
industry conditions with oversupply and
intense competition. We recently lost
two contracts on price competition as
we continue to ensure the business
delivers value.
Outlook
We expect slight underlying revenue
growth with a stable underlying margin,
excluding the £10 million of Brexit-
related costs.
48 Babcock International Group PLC Annual Report and Accounts 2019
Cavendish Nuclear
Cavendish Nuclear delivers complex nuclear engineering on major nuclear
decommissioning programmes and projects across the UK, as well as nuclear
engineering services in training and operation support, new build programme
management, design and installation and critical safety training to both
public and private customers in the UK.
2019 Underlying performance highlights
Revenue % of Group
14%
Operating margin
9.2%
Revenue growth
-1%
Key highlights
• Received the licence from the
Office of Nuclear Regulation
(ONR) to put the Bradwell site
into care and maintenance
• Silo Maintenance Facility
project at Sellafield was
completed with an NDA
category of ‘Excellent’
• Restructured ahead of the
end of the Magnox contract
Babcock International Group PLC Annual Report and Accounts 2019 49
Strategic reportGovernanceFinancial statements Operational review continued
Underlying revenue
Underlying operating profit
Underlying operating margin
Group
JV
Total
Group
JV
Total
Group
JV
Total
31 March
31 March
Change
2019
£232.6m
£465.7m
£698.3m
£27.2m
£37.0m
£64.2m
11.7%
7.9%
9.2%
2018
£211.6m
£491.1m
£702.7m
£31.2m
£37.6m
£68.8m
14.7%
7.7%
9.8%
+/–
9.9%
–5.2%
–0.6%
–12.8%
–1.6%
–6.7%
JV revenue is after deducting an appropriate portion of JV revenue to reflect revenue already included in Group revenue.
Financial review
As expected, Cavendish Nuclear’s
underlying revenue was broadly flat
over the year with lower levels of
decommissioning work being offset by
good growth across nuclear services.
Underlying operating profit decreased
with the margin declining to 9.2%
despite a favourable mix impact of
lower joint venture revenues. This
decline mainly reflects the previous
financial year benefiting from strong
contract performance.
Operational review
Civil nuclear – decommissioning
Revenue from decommissioning work
was lower than last year, reflecting lower
levels of customer in-year funding.
Magnox, a joint venture with Fluor in
which we have a 65% share, performed
well over the year with similar levels
of work to last year. We received the
licence from the Office of Nuclear
Regulation (ONR) to put the Bradwell
site into care and maintenance which
is a significant milestone as it is the
first Magnox site to reach this target.
All other key milestones on this 12-site
UK-wide decommissioning contract
are progressing to plan and we are
preparing to hand back control to the
NDA in August 2019 as the contract
comes to an end. As set out in our half
year announcement, we do not see
any immediate material opportunities
across Magnox sites beyond the end
of the contract.
50 Babcock International Group PLC Annual Report and Accounts 2019
Civil nuclear – new build
Revenue from services related to new
builds is a small part of the sector today.
Revenue grew in the year as a result of
the expected ramp up of the Hinkley
Point C project.
New build opportunities remain
significant in the long term but medium
term opportunities have been dampened
by the decision earlier this year by
Horizon to postpone the Wylfa project.
Outlook
We expect slight underlying revenue
growth excluding the £256 million
impact of the end of the Magnox
contract. We expect a higher
underlying margin, reflecting the
changed business mix.
Dounreay, a joint venture with Jacobs
and Aecom in which we have a 50%
share, continues to deliver on its revised
scope with the Waste Removal Project
as part of the UK Government’s strategy.
Civil nuclear – nuclear services
We saw strong growth across nuclear
services this year with increased activity
levels across our business offsetting the
impact of the completion of the Silo
Maintenance Facility project at Sellafield.
We saw good performance across our
Sellafield projects, including Pile Fuel
Cladding Silo and Design Services
Alliance projects. Sellafield continues
to be a key customer for our projects
business, despite us not winning the
Sellafield Programme and Project
Partners (PPP) bid in the period, and we
expect this to continue to be the case.
During the year, the Silo Maintenance
Facility project at Sellafield was
completed, with an NDA category
of ‘Excellent’.
We delivered our element of the
scheduled outage at the EDF Dungeness
site on time and, during the period,
we won the contract to carry out
the dismantling and demolition of
Dounreay’s nuclear reactor as part
of the final phase of decommissioning
the Dounreay Materials Test Reactor.
Babcock International Group PLC Annual Report and Accounts 2019 51
Strategic reportGovernanceFinancial statements 52 Babcock International Group PLC Annual Report and Accounts 2019
Valencia, Spain
We provide critical
search and rescue
services, assisting those
who need help at sea
“We are ready to respond
to calls for help at any time
of the day or night – even
in the most inaccessible
areas of the Mediterranean
coast. In the north, we
communicate with the base
of Reus, in the east, with
Palma de Mallorca and in
the south, with Almería. If a
base is inoperative or needs
reinforcements, we work
together in order to save
as many lives as possible.”
Isabel Martí Cisneros
Search and Rescue Pilot
Babcock Spain
Fast Facts
Contract name: SASEMAR (Spanish Maritime Safety Agency)
Length of contract: The contract was reawarded in 2018
for 4 years with options to extend for a further 2 years
Output services: The contract provides search and rescue
missions, aircraft maintenance and medical services to the
regional Galician Government and the Central Government
Sector: Aviation
Babcock International Group PLC Annual Report and Accounts 2019 53
Sustainability
Delivering a
sustainable future
table opposite details where our
non-financial information statement
disclosures can be found.
The nature of our work means that the
health and safety of our employees and
those affected by our operations is of
paramount importance in all we do; we
work hard to get all our people home
safe, every day. We strive for a holistic
approach to health and safety, seeking
to avoid or minimise any adverse effect
our work might have on the surrounding
environment. A significant amount of
work is undertaken to deliver long-term
energy savings and efficiencies for both
ourselves and our customers in a way
that is mindful of environmental impacts.
We are proud to have achieved
certification with the Carbon Trust
Standard for all of our UK operations
and continue to work hard to reduce
our carbon footprint as we grow.
Babcock has always been – and will
always be – committed to doing
business honestly and openly. Our
Group-wide Code of Business Conduct
lays out our policy of strict ethical
conduct, highlighting the fundamental
importance of conducting all aspects
of our business to the highest standards
of honesty and integrity. We reinforce
this by supplementing the Code with
appropriate training and guidance.
As well as being the right and proper
way to do business, our Code of
Conduct supports our long-term
success by minimising financial risk
and sustaining our reputation.
Our people
We are wholeheartedly committed
to investing in our people throughout
their careers in order to ensure we
have the right people in place now and
in the years to come. Our projects are, by
their very nature, long term, so we view
the active support and development
of our people as fundamental to the
future success of the Company. Our
determination to recruit and retain
the best people is supported by our
continuing investment in technical
apprenticeships, graduate schemes,
management training and talent
development programmes. Our
tailored Babcock MBA programme,
our Industrial Partnership with Cranfield
University and our Prosperity Partnership
with the University of Strathclyde are all
concrete ways in which we empower and
develop our people in the workplace
while providing value to our customers.
Developing cross-sector awareness of
the sheer scale and complexity of our
operations is another important part
of engaging our employees. This year,
we established the Group-wide ‘We
are Babcock’ campaign, consisting of a
programme of workshops and a year-long
series of themed interviews with our
employees. The programme aims to
reinforce our values and purpose as a
business by highlighting the breadth of
the work we deliver and exploring what
makes Babcock unique and different to
our competitors.
We are committed to providing a fair, equal
and inclusive environment for all of our
people, whether they are male or female.
This year, we are pleased to report a
reduction in the gender pay gap following
the introduction of Gender Pay Gap
reporting. As well as taking action at a
Group level to address the historic under-
representation of women, each of our
businesses continues to develop specific
plans to help us close their gender pay gap.
Our employee Diversity & Inclusion
Networks continue to flourish and
expand into new Babcock sites. As
Partners of the UK Government’s Year of
Engineering campaign, this year has been
a particularly busy one for our Group-
wide network of STEM Ambassadors as
they continue their volunteer outreach
work in local schools and colleges. 2018
also saw the establishment of our STEM
Returners programme, supported by
the Institute of Marine Engineering,
Science & Technology and the Women’s
Engineering Society. We were delighted
with the programme’s success in helping
candidates transition back into STEM
roles after career breaks through paid
short-term placements, refresher training
and bespoke mentoring and look forward
to the future of the scheme.
Archie Bethel CBE
Chief Executive
Archie Bethel CBE,
Chief Executive
We work in complex,
highly regulated
environments,
supporting the
critical infrastructure
and assets of countries
and communities
around the world.
We therefore have a responsibility
to carefully consider the interests
and concerns of a diverse range of
stakeholders as we look to the future.
These considerations are core to how
we implement our plans, achieve our
goals and deliver performance in a
sustainable way, from our regard for
the environment to our code of ethics.
Non-financial information
statement
Reporting on material yet non-financial
measures is important in understanding
the performance, opportunities and
long-term sustainability of generating
value for all our stakeholders. We
address the disclosure of non-financial
information in the following pages and
throughout the Strategic report. The
54 Babcock International Group PLC Annual Report and Accounts 2019
Our approach
to sustainability
Profit and
performance
How our investment in:
building long-term relationships;
delivering critical through-life
support; using high performing
and ethical suppliers; and
supporting local and diverse
economies supports our target of
building market leading positions
and delivering value to our
customers, our colleagues and
our investors.
People and
potential
How our focus on:
discovering and developing
diverse talent and progression
routes; inspiring and
encouraging the next generation
of engineers; and our open
dialogue with management
delivers measurable benefits
to a sustainable business and
its communities.
Environment
and ethics
How our commitment to the
standards set out in our Code
of Conduct underpins how
we act with our customers,
our workforce and our suppliers
as well as the communities
and environments we work in.
Non-financial information statement
Reporting requirement Policies and standards
Additional information
Page
Environmental matters
Health, Safety and Environment Policy1
Energy Policy1
Employees
Code of Conduct2
Health, Safety and Environment Policy1
HR Matters Policy1
‘being babcock’ (see page 58)
Joint Ways of Working Charter
(see page 25)
Human rights
Social matters
Code of Conduct2
Supplier Code of Conduct2
Modern Slavery Statement2
Ethical Policy2
Code of Conduct2
Anti-bribery and corruption Anti-Bribery and Corruption/Ethical Policy2
Whistleblowing structure
Supplier Code of Conduct2
Description of principal
risks and impact on
business activity
Business model
Non-financial KPIs
Environment and ethics
Health, safety and environmental risk
Remuneration:
Annual bonus scheme metric
People and potential
People risk
Governance statement
Remuneration:
Non-financial measures
Annual bonus scheme metric
Note 24. Share-based payments
Environment and ethics
Profit and performance
People and potential
Trusted to support reserves, veterans and
service leavers
Trusted for STEM careers
Governance statement
Environment and ethics
Principal risks and management controls
Governance statement
Our principal risks and how we manage them
Accountability
Our business model
Delivering on our strategy
62
77
125
59
78
84
119
125
192
62
56
59
66
68
84
62
70
84
70
96
8
26
1. Available to all employees through the Babcock intranet. Not published externally.
2. Available both on our website www.babcockinternational.com and to employees through the Babcock intranet.
Babcock International Group PLC Annual Report and Accounts 2019 55
Strategic reportGovernanceFinancial statements
Sustainability continued
Profit and
performance
Profit and performance
Our procurement and supply chain
function identifies and delivers the
optimal supply chain solution for our
customers, including supplier led
innovation, demand management,
sourcing, economic and environmental
sustainability, supplier engagement and
contract management, enabling us to
return value to our customers, colleagues
and investors.
We buy a wide range of goods and
services and need reliable, high-
performing suppliers across all aspects
of our supply chain. Babcock seeks to
ensure that our customers’ money is
spent efficiently and responsibly and
that our supply contracts are managed
effectively. We expect our supply
chain to adhere to our Supplier Code
of Conduct, a sustainable approach
including our standards of ethical
behaviour, and our environmental, health
and safety and other working practices.
Profit
Profit is largely delivered through our
ability to manage our operations
effectively. A significant part of this is
driven through our relationships with
suppliers. External expenditure via third
party suppliers, including with Original
Equipment Manufacturers (OEMs),
accounts for approximately 50% of our
turnover and our approach and ability
to manage these relationships impact
our ability to deliver performance
and margin.
We continue to drive efficiencies
through our supply chain. This has
included contract efficiencies through
upfront procurement, involvement in
the bid process, operational productivity
through increased innovation and quality,
and streamlined internal processes.
Babcock has implemented a rigorous
programme across our procurement and
supply chain function. The objective has
been to drive best practices across
the organisation.
As a result of this initiative, procurement
is engaging earlier in order to help
provide our customers with the best
possible solution, while improving
profitability. Early pre-bid engagement
by the procurement function allows our
bid teams to understand potential market
capabilities, while engagement as part
of the team means we can aim to put
together a proposal for our customers
that meets their needs and requirements
in the most efficient way possible,
while establishing supplier relationships
that are robust and sustainable in the
long term. The output of successful
procurement activities is better value
for our customers and Shareholders,
through the delivery of effective and
efficient sourcing activities. Our focus is
on ongoing efforts to obtain efficiencies
and lower our cost base to increase
profitability. Key metrics are approved
by each business unit Finance Director
and reported on a quarterly basis to the
Executive Committee.
Performance
Building long-term relationships
We are always looking for better,
innovative ways of serving our customers.
Our responsibility is to provide them
with the best options to ensure success.
When we identify a more efficient way
of servicing their requirements we discuss
these options and work in collaboration
with our customers to bring efficiency
benefits, while delivering a quality
service. The procurement and supply
chain team is actively engaged in the
bidding process with existing and
new customers, enabling us to
identify optimal supplier led solutions
and continuous through-contract
improvements. Where feasible we
leverage arrangements with existing
suppliers on a cross-sector basis.
We believe that establishing long-term
relationships with our suppliers is an
important part of building long-term
relationships with our customers. As
part of a structured programme across
business units and Group categories, the
procurement and supply chain function
is raising commercial capability by
engaging in supplier relationship
management programmes with
strategic suppliers.
We have over 10,000 suppliers; however,
we have strategic relationships with
around 300 of them. We are building
an appropriate engagement model with
these partners and preferred suppliers
to effectively drive quality and innovation
across our supplier base. Strategic
suppliers are key partners in our ability
to deliver quality service. As a result,
we work closely with these suppliers to
ensure optimal performance, ongoing
improvement and innovation support.
We continue to develop end-to-end
procurement tools that enable us to
transact efficiently with our suppliers.
These tools also provide a common
approach, which helps us to share best
practice across the organisation. We are
able to use business intelligence which
allows us to work collaboratively with
our suppliers and focus on innovation
and other value-add initiatives.
The e-procurement tools that we are
implementing provide a faster and more
effective way of transacting with our
supply base resulting in sustainable
relationships that are based on
operationally robust processes.
We want to spend time talking to our
suppliers about new ideas, operational
performance and total cost opportunities
– not about payment. We understand the
importance of predictable customer
payments when running a business.
Delivering critical support using
high-performing, ethical suppliers
Our customers rely on our ability to
provide a robust and effective supply
chain. We take this responsibility very
seriously and work in collaboration
with other industry leaders to effectively
manage risk whilst encouraging the
use of SMEs. Potential suppliers must
demonstrate that they are both fit for
business with financial, commercial
and governance capability and fit for
purpose with technical, health and
safety capability, to meet our contractual
requirements. We also look for a clear
demonstration of commitment to
corporate social responsibility. Certain
suppliers will be selected for audit and
56 Babcock International Group PLC Annual Report and Accounts 2019
close monitoring, based on risk
assessment or supplier performance.
Planned reviews of supply chain risk
are undertaken by our businesses.
Protecting the information and
physical assets of our customers is an
increasingly important part of what
we do. We always expect the highest
controls of commercial confidentiality.
For certain types of supply, we
are developing exacting standards
of security compliance. For these
companies, we need to be certain
that information is well managed and
protected throughout the supply chain.
We expect high standards of conduct
from our suppliers in what they do for
us or our customers and will not accept
any behaviour contrary to our codes,
including bribery, corruption and fraud,
threats to health and safety, conflicts of
interest or other improper practices.
Babcock is a key member of the joint
MOD/industry initiative to deliver an
effective Defence Cyber Protection
Partnership. The Group is tasked with
improving the protection of the defence
supply chain from cyber threat. Babcock
is represented on working groups for
each of the three core work strands:
information sharing, measurements and
standards, and supply chain awareness.
A primary objective has been to define
a number of risk-based controls to be
applied across the relevant supplier base.
Babcock is committed to creating a safe
working environment that aims to enable
all those working on, or visiting, Babcock
operations to be able to return ‘Home
Safe Every Day’. We seek to work only
with suppliers who, we believe, are able
to both meet and promote our standards
– those that share our commitment
to safe behaviour and performance in
delivering services and solutions for our
customers. Our teams aim to work with
suppliers on safety and share continuous
improvement practices to reduce or
prevent accidents and injuries.
Supporting local economies by using
diverse, locally procured services
Critical supply partner for
through-life support
We take our responsibility to support local
economies seriously. The varied nature
of what we do means that we depend on
a wide range of talents and abilities from
a wide range of suppliers. As part of our
supplier programme, we have been
managing compliance through a system
of preferred suppliers. This approach
is enhancing our supplier relationships
and allows us to focus on effective
management of our SME supplier base.
Supplier credibility, responsibility, quality
and service performance matter. Many of
our suppliers are small and medium-sized
enterprises. We select and manage
suppliers to support our own experienced
workforce in delivering complex, critical
and often bespoke engineering services.
Diversification of supply, where possible,
makes our supply chain more robust in
helping us to deliver for our customers.
Joint teams from Babcock and our supply
chain engage on a wide range of issues
such as maintenance planning, supply
support, support and test equipment,
training and training devices, and
technical data. Targeted supply
relationships use data dashboards to
monitor performance and progress.
Babcock is actively involved with our
suppliers in the Aerospace, Defence
and Security Supply Chain development
programme. We also lead dialogue with
Government, suppliers and skills agencies
to help address the skills requirement
agenda, with the aim of ensuring that
there are enough people with the right
skills to fill our own vacancies and those
in our supply chain.
Engaging with SMEs in nuclear
We developed a plan to involve
small and medium-sized enterprises
in our work to produce glove box
systems for Sellafield, including
extending our existing development
measures and introducing some
new features. This allows us to
support the NDA 2020 target of
spending a third of its budget with
SMEs and provides the leadership
and dedicated resources that will
deliver our SME action plan. It also
supports UK Government targets.
Working more closely with SMEs
gives us access to a wider base
of potential suppliers, increases
competition, flexibility and agility
and promotes the use of innovation.
We are also working with Bath
University supporting SMEs in the
nuclear sector through a 10-month
development programme, involving
masterclasses, job shadowing
and action learning, designed to
stimulate SME productivity growth.
Babcock International Group PLC Annual Report and Accounts 2019 57
Strategic reportGovernanceFinancial statements Sustainability continued
being babcock
The eight principles that make up being babcock aren’t new. In fact, they may
seem rather obvious. That’s because they already live and breathe within our
business. They’re what we do when we’re working at our best, and they are a
key contributor to building trust with our customers.
being
babcock
58 Babcock International Group PLC Annual Report and Accounts 2019
People
and potential
To underpin and sustain long-term
strategic growth, Babcock must ensure
that it has the right people to be able
and trusted to deliver to customers on
technically complex, long-term contracts,
both today and in the future. This means
that the development of our people is
a critical part of our business strategy.
Our Group Director of Organisation and
Development coordinates this activity
across the Group, ensuring that each of
our sectors has appropriate strategies in
place to resource and develop the skills
required. Our business arrangements
require us to deliver services across an
array of projects and assets. Our people
need to have a range of experience,
skills and competencies: engineering,
management, technical, commercial,
administrative and developmental,
to name but a few. We recognise that
it is the skills and commitment of
our employees that characterise our
uniqueness and our ability to deliver
services to our customers.
Planning for growth and
succession
Succession planning is a key focus
throughout the businesses, from
apprentices to Board level. We have
plans in place that identify immediate
and/or future potential successors to
key senior management posts, with
personal training and development
plans for those identified. Through our
annually refreshed resource planning
process, we assess whether we have
the right number of staff with the
necessary skills and capabilities, both
now and for the future. This process is
based on data and assumptions such as
workforce demographics, attrition and
business growth and feeds into our
resourcing strategies.
We continue to invest in our people
through initiatives to develop talent,
recognise achievements and increase
diversity, for example through our Talent
Management Framework programme in
Land and the provision of senior leader
mentoring support. In Aviation our talent
and capability management programme
has embedded internationally with an
increasing number of international
placement opportunities available.
Our Leadership programme has been
extended internationally to further
support and equip leaders working in
fast paced, cross-cultural and complex
environments.
Engagement
It’s our people that make us great
and employee engagement remains
vital to building a sustainable
business. Accordingly we maintain
regular engagement with our people
through the Babcock International
Group Employee Forum and Trade
Unions across the business. We also
run a series of sector surveys and
CEO listening forums to maintain
an open dialogue with our workforce.
Additionally, to further develop our
employee engagement we are setting
up a series of Employee Focus Groups.
Our business is diverse, so it’s
important that our workforce remain
informed of key news, project status,
achievements and initiatives. We have
a number of channels to communicate
with our workforce including quarterly
sector magazines.
This year we launched a series of ‘We
are Babcock’ programmes across the
business which feature the range of
skills within our business with real-life
examples illustrating what our people
do and the breadth of the Group’s
capabilities, promoting an understanding
of what makes Babcock unique and
different to our competitors.
We continue to invite our employees to
connect with our business strategy and
share in our success by joining our
Employee Share Plan.
Focus on recruitment, retention
and development of talent
We have found our existing employees to
be great advocates for our organisation
and we have used their experiences
to underpin some of our recruitment
campaigns, particularly for graduates.
Working with our recruitment partners,
a variety of routes are used to ensure
vacancies are marketed to the widest
possible audience. Our aim is that
candidates experience a professional,
efficient and friendly recruitment and
‘on-boarding’ procedure.
Sectors and business units place
significant emphasis on the retention
and development of talent, with
processes in place to identify
potential for the future. In addition
to local development programmes,
we have a number of Group-wide
management development resources:
Babcock offers executive development
opportunities to our high potential
employees. To date, 50 employees
have completed our accredited MBA
programme with Strathclyde University
and a further 18 have been nominated
for development programmes with
Harvard. We continue to invest in the
capability of our leaders and managers
through a variety of programmes such
as our First Line Leader Development
Programme, which is designed to
develop our leadership capability and
maximise the potential in our teams.
Babcock has always been a strong
supporter of apprenticeships and
will make increasing use of higher
apprenticeships to both retain existing
employees and invest in future talent.
We have further developed our
degree apprenticeship programmes
with a framework of university partners.
During the year we saw our first degree
apprentices commence their studies and
we began work on a broader range of
programmes at degree level to be
launched in 2019/20.
The success of our graduate
campaign was recognised this year
with national awards, including
winning Best Graduate Recruitment
Strategy at the Recruiter Awards.
Babcock International Group PLC Annual Report and Accounts 2019 59
Strategic reportGovernanceFinancial statements Sustainability continued
Diversity
At Babcock, we believe diversity is about
embracing the advantages different
experiences, skills and outlooks can bring.
Our diversity initiative, ‘All together
different’, is championed by a Diversity
Steering Group, which drives our diversity
agenda and coordinates our diversity
conference, ‘Dialogue’. Dialogue Week
focused on improving diversity across the
business with events held in all sectors.
Diversity is driven by a nominated director
who regularly reports to the Executive
Committee. Across the organisation a
number of employee networks are
supported such as the Babcock Women’s
Network and Pride in Babcock and we will
continue to use these and other groups to
motivate and sustain energy around the
topic of diversity. As a business, it is
imperative that we ensure access to the
widest pool of talent available, selecting
the best candidates based on their
ability to do the job. Working with these
expectations for diversity enables us to
deliver our best for our customers and to
safeguard the future of Babcock. Babcock
operates principally in sectors that have
until recently traditionally been regarded
as ‘male’ such as engineering, aviation
and the Armed Forces. Inevitably,
companies with this background will tend
to be starting from a level of relatively
low female participation, especially in
management positions. However, we
are working hard to change this: 18.2%
(6,287) of our total workforce is female,
(male: 28,291) with 21.4% (104) female
Diversity
Total workforce
diversity
Green energy engineering
Graduate trainee engineer
Chantel Maynard believes nuclear
energy is vital for our future.
“I developed an interest in green
energy, which expanded my
horizons and made it clear how
much I could help people and
society with my skills,
“Nuclear fascinated me because
the way it operates and the concerns
it generates are so different from
the way other sectors work.”
Chantel had the opportunity to
work alongside our UK-based team
supporting the Fukushima clean-up
operation. “That work provides vital
experience but it also has a moral
purpose. The fact is, we’re going to
need nuclear energy if we want
to carry on living life as we
currently do. Fukushima reminded
us why safety and security are
the most critical considerations
in everything we do.”
She helped to plan Cavendish
Nuclear’s participation at the Big
Bang Fair 2019, which took place
in March.
“There’s still a lot of misunderstanding
in schools about what engineering is,”
says Chantel. “It’s important to reach
out to students and also to teachers
and parents, so they see how what is
learned at school and university
can be applied in the real world.
18.2%
81.8%
Male
Female
Senior Executive
diversity
Board diversity
Graduate diversity
18.2%
21.4%
81.8%
78.6%
Male
Female
60 Babcock International Group PLC Annual Report and Accounts 2019
33%
67%
22%
78%
senior executives (male: 381), and, since
April 2019, four (33%) female Directors
on our Board (male: eight). We have
continued to work on the challenges of
being a woman within our organisation.
A series of actions and development
programmes are being implemented
across the organisation to address this.
We focus our graduate recruitment
programme, particularly for engineering
graduates, on those universities that
have a richer gender mix. In 2019,
22% (2018: 21%) of those employed
on our graduate scheme were female.
We are encouraged that we have managed
to reduce the gender pay gap compared
to last year, with a mean pay gap of 14.1%
(2018: 16.2%) and a median pay gap of
16.0% (2018: 16.5%). This compares to a
UK average of 17.9%. Whilst this is a step
in the right direction, we are committed
to continuing our efforts to further reduce
the gap by growing our talent pipeline,
attracting the best female talent available
and enabling our female employees to
fulfil their potential. More information
can be found in our 2018 Gender Pay
Gap report, available on our website
www.babcockinternational.com.
In Marine, HMS Bulwark provided the
backdrop for a ‘Women in Engineering’
event with the Royal Navy, and
Devonport Safety Engineer Dr Lorna
Dallas was voted one of the UK’s top 50
Women Engineers. In Aviation, driving
gender equity has retained strong focus
through our ‘Fly High’ initiative and all
countries are now represented by
Change Agents who support and lead
local events and initiatives. Two of our
engineers won prestigious awards at the
Women in Nuclear UK Conference, for
their achievements in promoting gender
balance and diversity in the industry.
Our commitment to the
Armed Forces
As a holder of the Gold Award from
the Armed Forces Covenant Employer
Recognition Scheme (ERS), we are
committed to the Total Support Force
and actively recruit service leavers and
reservists. See more information on
page 66.
Maintaining London’s fire engines
Babcock technician Luke Sims,
19, was able to put his love for
mechanics into practice working
with London Fire Brigade vehicles
on a Babcock apprenticeship.
With his three-year apprenticeship
working on the London Fire Brigade
(LFB) fleet contract now behind
him, Luke has honed a keen and
professional interest in the inner
workings of the emergency and
back-up vehicles operated by LFB.
Today, Luke continues to work on
fire engines while developing his
technical skills.
His workshop manager Alan
Chivers says he is “both technically
able and very committed; a real
asset to the business”.
Luke describes his first rebuild of
an all-important pump on a LFB fire
appliance as one of the highlights
of his time working on the fleet.
“Working with a skilled technician
on something as technically complex
as a fire engine pump takes some
getting used to,” he says. “Helping
to fix something that was totally
seized up and seeing it back in
action and working properly was
a great source of pride to me and
something I won’t forget.”
Babcock International Group PLC Annual Report and Accounts 2019 61
Strategic reportGovernanceFinancial statements Sustainability continued
Environment
and ethics
Ethics and governance
We understand that our reputation and
good name are amongst our greatest
assets, which could easily be lost by
actual or suspected unethical behaviour.
To protect the Company and reduce
these risks, we have set out a policy
on how we should conduct business,
which we summarise in the form
of the Babcock Code of Business
Conduct. Compliance with this policy
is compulsory for our employees,
business advisors and business partners
(or, in the case of business advisors and
partners, they must have equivalent
standards and procedures in their own
businesses). The Babcock Supplier Code
of Conduct further promotes these values
throughout our supply chain. The policy
comprises a detailed manual, available
on the Group’s intranet, that contains
guidelines, authorisation and other
procedures aimed at identifying and
reducing ethical risks. The controls that
we have in place form an integral part
of our risk management arrangements
and include the training of employees,
regular risk assessments throughout
the business and availability of
whistleblowing hotlines.
More details of these risk management
procedures can be found on pages 70
to 81 and the Ethics Policy and Code of
Business Conduct and Suppliers’ Code
of Conduct are on our website. Further
information about our whistleblowing
process can be found on page 72.
Human rights
As an international business, we
recognise our responsibility for upholding
and protecting the human rights of our
employees and other individuals with
whom we deal in our operations around
the world. While we continue to believe
that our exposure to the risks of human
rights abuses and modern slavery is
low within our own business and supply
chain, we welcome the opportunity we
have to contribute positively to global
efforts to ensure that human rights are
understood and observed. We believe
that a culture of respect for, and
promotion of, human rights is embedded
throughout our business and can be
demonstrated by our commitment to
ethical conduct in everything we do.
The Group’s Modern Slavery Transparency
Statement, which is published annually
on our website, details action taken
to support the elimination of modern
slavery and human trafficking.
Safety the Babcock way
Governance
We are committed to ensuring that
Babcock sets and achieves high standards
for safety across all its operations. Our
goal is for everybody to go ‘home safe
every day’. The key principles that guide
us to achieve this goal are:
• Looking after yourself and each other
• Caring about how we deliver, as well
as what we deliver
• Setting an example to others by
not walking past an unsafe act or
unsafe condition
• Continually improving our safety.
Sector safety leadership teams and the
Corporate Safety Steering Group oversee
implementation of policy, strategy and
initiatives across all of our businesses.
The Group Executive Committee reviews
monthly commentary and performance
reports and the Board receives half yearly
commentary and performance reports.
62 Babcock International Group PLC Annual Report and Accounts 2019
• Business unit learning across
the Group, supporting
continual improvement
• A consistent Babcock approach
to safety and sharing best practice.
Formal audit reports are provided
to the business units, with feedback
also provided to the Group
Executive Committee.
A further audit was implemented in
the final quarter of the period. Its scope
was to assess the design and operating
effectiveness of the process and controls
in place for the accurate and consistent
reporting, recording, collection and
analysis of injury data that occurs
across the Group. This internal audit
has not highlighted any significant
inaccuracies in the reporting of injury
data to the Group.
In Aviation, we have continued to
develop and implement an industry
leading Safety Management System
across the sector, applying relevant
global good practise within both our
civil and defence businesses. The
Aviation safety culture stresses the
importance of learning from
experience and working to develop
and maintain an effective and efficient
learning cycle through communication,
reporting and feedback. The Safety
Behaviours & Expectations programme
this year has focused on and delivered
improved staff engagement and hazard
awareness. Our Rosyth site was awarded
its 12th consecutive Sword of Honour
from the British Safety Council,
Devonport’s Refuel Group achieved
five years of zero lost time accidents
and at Bristol we received accreditation
to ISO 45001, the new Occupational
Health and Safety Standard. Cavendish
Nuclear won its eighth consecutive
RoSPA Occupational Health and Safety
Gold Award and fifth Fleet Safety Award.
We continue to develop safety
initiatives targeted at specific risk
mitigation, and have launched a
sector-wide strategic programme
focused on our top operational risks.
We continue to be the global leader
in the implementation of aviation
fatigue risk and pilot mental wellbeing
management systems in advance
of regulation.
Babcock International Group PLC Annual Report and Accounts 2019 63
The annual Group Safety Conference
promotes the Group safety vision, the
sharing of best practice and rewards
notable achievements.
Our internal safety audit programme
aims to ensure:
• Alignment of business safety policy
with the Group safety policy and
capability to discharge duties therein
• Compliance with Babcock’s Safety
Behaviours and Expectations
• Adequate safety improvement plans
are implemented, based on a balanced
assessment of safety performance
that delivers the commitment to
continuous improvement
Strategic reportGovernanceFinancial statements Sustainability continued
Review
In December 2018, one of our helicopters crashed in Portugal. Tragically, the accident
resulted in the death of two Babcock pilots and two passengers. The incident is being
investigated by the authorities.
Safety continues to be a core value for the Group and we monitor performance through
many measures. This year we are disappointed that we have seen a rise in the number of
injuries, although the Group’s performance remains better than industry norms. The
Health and Safety Executive Summary Statistics Report 2018 for the manufacturing
sector, which includes shipbuilding and repairs, shows an injury/incidence rate of
2.18 injuries per 100,000 hours worked whereas the injury/incidence rate for the Group
is 1.35 injuries per 100,000 hours worked. However, in response, the Corporate Safety
Steering Group and our business units have refreshed and reinforced the basic
messages at the Group’s sites and are aiming further to improve performance.
Total number of injuries
Fatalities
Major injuries
Over-three-day injuries
Babcock riddor1 totals
Total injury rates per
100,000 hours worked
.
2
2
3
.
1
9
2
2014/15
2,054
0
41
127
168
2015/16
2,084
1
38
164
202
2016/17
1,720
7
27
107
141
2017/18
1,389
2
12
101
115
2018/19
1,452
4
24
145
173
Babcock riddor1 rate per
100,000 hours worked
.
0
1
9
.
0
1
8
.
0
1
8
.
1
5
8 1
3
5
.
.
1
4
7
.
0
1
3 0
1
1
.
15 16 17 18 19
15 16 17 18 19
1. In 2012, the UK Health and Safety Executive changed riddor reporting from time lost through injury
from three days to seven days. We have, however, continued to monitor and report on the lower
three-day threshold and record this as ‘Babcock riddor’.
Electric cars at Devonport
initially on 10 diesel vans that
had low mileage and range, ideal
conditions for EVs. We found we could
potentially reduce our CO2 emissions
by an estimated 7.6 tonnes, which
equates to around 45 trees.
If the Devonport trial is successful,
we could see significant benefit
from increasing our electric fleet
across the wider business, leading to
sizeable reductions in emissions and
localised improvements in air quality.
In 2018 we began a project to
examine the potential to increase
the use of electric vehicles (EVs)
within Devonport. The focus was
64 Babcock International Group PLC Annual Report and Accounts 2019
Reducing waste
at Dungeness B
In our nuclear business, we
work with the supply chain to
minimise waste and reduce
the carbon footprint of
materials and components
wherever possible.
At Dungeness B Power Station,
we have introduced a waste
reduction initiative for the
supply of Neutron Scatter Plugs
(NSP). Each of these plugs was
supplied in a wooden crate
which used to be disposed of,
but is now reused, reducing
the amount of wood and waste
required and reducing costs.
Reducing waste also means
moving materials more
efficiently, and so we plan
vehicle deliveries to site and
between supply-chain members
carefully to ensure that they
don’t leave the site empty
after unloading, for example
returning packaging or moving
other items. We encourage
suppliers to incorporate this
philosophy into their own
supply chains so that sourcing
is carried out in a responsible
and ethical way from top
to bottom.
We expect our suppliers
to implement recycling and
energy saving measures at their
own sites.
Managing environmental
impacts
Babcock seeks to achieve the highest
standards in the management of
environmental matters. We recognise
the impact our operations may have on
the environment and seek to minimise
or eliminate adverse effects.
An Energy and Environmental
Working Group meets quarterly with
representatives of each sector attending
and is chaired by the Group Energy
Manager. The working group reviews
energy and environmental policy and
seeks to share best practice. Sectors
and business units within the Group set
environmental policies and KPIs that are
appropriate to their business. Our Group
level performance indicator for energy
consumption is to reduce our overall CO2
emissions year on year against a metric
of tCO2/£m revenue.
Energy consumption data is collated
into a central software database that
can be accessed by all stakeholders
enabling reduction targets to be set
and monitored regularly. The continuous
monitoring of energy consumption and
the attention to environmental policies
ensure that the environmental impact of
the Company’s operations is minimised.
During the year Babcock once again
achieved reaccreditation for its UK
operations to the Carbon Trust, a
standard that it has held since 2010.
We regularly review our built estate
requirements to ensure that the
requirements of our customers can be
efficiently met while providing a good
standard of environmental conditions
for our employees. Utility markets are
tracked to enable our utility requirements
to be purchased at the best cost. Forward
contingency planning ensures that should
we lose a utility supply to any of our built
estate the impact to our customers
is minimised.
During the year we undertook energy
audits across the built estate and
embarked on reviewing transport
provision to enable Energy Savings
Opportunities Scheme compliance.
Babcock committed to developing
sustainable office accommodation
During the year a new development of
the office accommodation at Devonport
Dockyard replaced old and inefficient
office accommodation, joining Rosyth
with the achievement of a BREEAM
(Building Research Establishment
Environment Assessment Method)
Excellent rating. The new accommodation
has been constructed to a very high
standard to ensure the buildings are
energy efficient whilst providing an
excellent environment for our staff and
visitors. A new office is being constructed
in Bristol to the same high standards.
Building the
DREAM at RAF
Shawbury
RAF Shawbury new build
operational support facility
(Flight Training School) was
awarded a DREAM ‘Excellent’
level Certificate for Sustainability
at the Construction Stage by
The Defence Infrastructure
Organisation.
DREAM helps create a
sustainable built environment
by supporting clients, designers
and project managers through
the design, construction and
facility management processes.
Its holistic approach ensures
environmental issues are
dealt with positively, whole
life costs are reduced, and
better living and working
conditions are delivered.
Total Group emissions – UK and overseas
Year ending
Scope 1: Direct emissions from owned/controlled operations
Scope 2: Indirect emissions from the use of purchased electricity and steam
Scope 3: Emissions – business travel
Absolute footprint
Revenue
Intensity ratio
tCO2e
tCO2e
tCO2e
tCO2e
£m
tCO2e/£m
March 2018
170,476.3
104,074.8
22,033.7
296,584.8
4,659.6
63.7
March 2019
144,350.7
75,647.1
17,627.2
237,625.0
4,474.8
53.1
Due to the highly diverse nature of the Company’s business, the metric of ‘tonnes of CO2e per £m revenue’ has been used to provide a more meaningful
measure of energy use throughout the business. The total emissions from Scope 1, 2 and 3 sources have been divided by the annual revenue to provide
a final benchmark. The prior year numbers have been adjusted to include additional consumption data for direct emissions from aviation fuel used in our
operations in Scandinavia, Spain, Italy and Australasia and unavailable last year.
Babcock International Group PLC Annual Report and Accounts 2019 65
Strategic reportGovernanceFinancial statements
Trusted to support reserves,
veterans and service leavers
Striving to support service families
Members of the Armed Forces Community such
as service leavers, veterans, reservists, uniformed
cadet instructors and their families can rely on our
support and understanding.
We offer a degree of flexibility in granting leave
for service spouses and partners before, during
and after a partner’s deployment, and will
consider special paid leave for employees who
have been bereaved or whose spouse or partner
has been injured.
We work closely with the Career Transition
Partnership to ensure employment opportunities
are made available to veterans and participate in
Careers Fairs for those leaving the Armed Forces.
We understand the need for flexibility forces spouses
require when their service partner is posted to a
new location, and we do our best to find alternative
employment within the business if our employees
need to move to accompany their partner to a
new posting.
Promoting and supporting the Reserve Forces
With over 150 reserves within the business, Babcock is one of the top four
employers of reservists in the UK. We actively support our reservist employees,
providing a minimum of 10 days special paid leave per year for reserves or
uniformed cadet instructors with a full training commitment.
We also maintain a force of sponsored reserves to support Corps of Royal
Electrical and Mechanical Engineers (REME), as well as promoting reserve service
to all those in the Group, including our graduates and apprentices.
Committed to the British Armed Forces
We are proud to be a major employer of service leavers, veterans and reserves.
As an early signatory to the Armed Forces Covenant, we are wholeheartedly
committed to supporting the Armed Forces Community. We recognise the value
of the contribution serving personnel, veterans and military families make to our
business and our country.
As part of our commitment to the Armed Forces Covenant, all service leavers,
veterans and members of a volunteer reserve are guaranteed a job interview
if they meet the minimum requirement for an advertised role at Babcock.
Babcock has held the Gold Employers Recognition Award from Defence
Relationship Management since 2015. The scheme recognises employers
who actively support defence activities, while encouraging other organisations
to adopt the same behaviours in their workplace.
Trusted for STEM careers
The Year of Engineering
We partnered with the UK
Government in 2018 to promote
STEM careers and inspire the next
generation of engineers. By joining
activities, initiatives and events across
the country as well as establishing
a new recruitment programme,
our focus throughout the year was
to change common perceptions about
working in engineering and encourage
more young people into STEM.
STEM Returners
In 2018, we established a STEM Returners
programme to help recruit, retain and
develop the best people for our business
by broadening our talent pool. Through
paid employment placements and
bespoke mentoring schemes, the
programme offers qualified, experienced
candidates a supported route back to
their careers after a break.
The 13 week placements are
supplemented by career coaching and
networking opportunities and candidates
are offered the opportunity to restart
their career in a permanent role
at the end of the programme. The
project is co-supported by IMarEST and
the Women’s Engineering Society with
the shared goal of creating a diverse,
highly skilled STEM talent pool in the UK.
Big Bang Fair 2019
The Big Bang UK Young Scientists &
Engineers Fair aims to show young
people aged 7 to 19 the exciting
and rewarding opportunities
a career in STEM can offer by
bringing classroom learning to life.
This year, we showcased
technology and engineering
activities from our four sectors
at the fair. Exhibits included
contamination monitors
demonstrating nuclear safety
technology, a miniature wind
tunnel showing how forces act
on an aircraft and the effect of lift
on the weight of a model aircraft,
and a LEGO submarine!
Principal risks and management controls
Our principal risks and
how we manage them
Babcock has an
established process
that aims to identify
and evaluate risks
and how they are to
be managed. A range
of internal control
processes is in place
as part of the risk
management regime.
Franco Martinelli, Group Finance Director
and reduce the potential impact of
the risks the Company takes to ensure,
so far as possible, that the assets and
reputation of the Group are protected.
The Group’s risk management and
internal control systems can, however,
only seek to manage, not eliminate,
the risk of failure to achieve business
objectives, as any system can only
provide reasonable, not absolute,
assurance against material
misstatement or loss.
The Board, principally through the Audit
and Risk Committee, keeps under review
the risks facing the Group, including the
appropriateness of the level of risk the
Group may accept in order to achieve its
strategic objectives. The Board ensures
that it controls the risk appetite of the
Group through its delegated authorities,
which impose strict controls on the
Group – for example, all acquisitions and
disposals, all material capital expenditure,
all material non-ordinary course tenders
(material ordinary course tenders are
approved by the Chief Executive and the
Group Finance Director) and all financing
arrangements (unless delegated to the
Board’s Finance Committee) must be
approved by the Board. The Board
reviews the controls and mitigation plans
in place; these are intended to manage
70 Babcock International Group PLC Annual Report and Accounts 2019
Risk management framework
Board
Executive Committee
Audit and Risk
Committee
Group Security
Committee
The Executive Committee considers a
monthly report from the Chief Executive,
the Group Finance Director and each of the
sector Chief Executives on the operational
and financial performance of their respective
areas of responsibility.
Babcock has a Group Security Committee
made up of senior functional and operational
managers with responsibility for security
and information assurance at Group and
operational level. They meet regularly
to discuss cyber and other security and
information assurance issues and threats
facing the Group. The Committee oversees
the Group’s security and information
assurance management infrastructure
and specific security projects. The
Group Finance Director is Chairman of the
Committee, and each meeting is attended
by the Group’s Chief Information Officer and
Chief Information Security Officer. The Board
receives regular reports on security and
information assurance matters.
The Board is ultimately responsible for
the Company’s risk management and
internal control system. This is overseen
on its behalf by the Audit and Risk
Committee (which is currently usually
attended by all Board members).
The Audit and Risk Committee
reviews aspects of the risk management
and control system at its meetings
and, at least once a year, formally
reviews the system’s effectiveness as a
whole on behalf of the Board (see the
effectiveness review statement on
page 138). It also receives in-depth
presentations on individual major risks
throughout the year.
The Audit and Risk Committee receives
regular reports from Ernst & Young, the
internal audit function provider, and
management reports relating to internal
control and risk issues.
Internal Audit
Group risk
management
Employees undertake a selection of
compulsory risk management training
programmes (for example: security,
data protection and anti-bribery and
corruption training) appropriate to their
roles in order to increase awareness of
potential risks.
Company employees
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Operationally, internal control systems are
monitored by senior Group management
with sector Chief Executives having
responsibility for risk identification and
risk management in their businesses.
Read more on page 72.
The Group Risk and Insurance Manager
(who reports to the Group Finance
Director), working with senior operational
management teams, keeps the risk
register and risk assessment and evaluation
process under review and development.
We seek to ensure a coherent and
consistent Group best practice approach
to risk assessment and risk management.
Risk assessments made at business unit
level are subject to regular review and
challenge by Group senior management.
Babcock International Group PLC Annual Report and Accounts 2019 71
Strategic reportGovernanceFinancial statements
Principal risks and management controls continued
Our internal controls include:
Budget process
Management and
financial reporting
Annual budgets and medium-term financial plans are reviewed by Group management before
submission to the Board for approval. Updated forecasts for the year are prepared at least quarterly.
The Board receives details of monthly actual financial performance compared against budget,
forecast and the prior year, with a written commentary on significant variances from
approved plans.
The Chief Executive, Group Finance Director and sector Chief Executives report to each Board
meeting on operating performance and matters of potential strategic significance.
Group senior management receive a monthly narrative operating report from all business units.
Security and information
governance structure
There is a security and information assurance governance structure in place to oversee and manage
security and similar risks.
Clear delegation and
limits of authority
The Board regularly reviews and approves a schedule of delegated authorities setting out levels of
specific financial decision-making authority delegated by it.
Insurance
Claims and litigation
reporting
Credit controls
Code of Conduct and ethical,
anti-bribery and corruption
policies and procedures
Group policies
and procedures
Whistleblowing hotline
Critical supplier reviews
The Group has a large and comprehensive insurance programme, preferring to place risk in
the insurance market, where available on acceptable terms, rather than to self-insure or make
significant use of captive insurance. The Group has a full-time Risk and Insurance Manager who
reports annually to the Board on the strategic approach being taken to insurance and on the
placing of the programme.
The Board and the Group Executive Committee receive monthly summaries of material disputes
and actual or potential claims, their progress and potential outcomes. The Group has an internal
legal service.
All significant credit risks are reviewed by Group Finance and an Executive Director, and, where
appropriate and available, risk limitation actions are taken.
The Group has a Code of Conduct, summarising ethical and anti-bribery and corruption policies,
making clear its commitment to the highest ethical standards and the ethical standards it demands
from its employees and those who work for it and with whom it does business. In addition, there
is an anti-bribery and corruption governance structure in place and detailed policy and procedures
(available on the Babcock website), with supporting training programmes, which the Company
believes meet the requirements of ‘adequate procedures’ under the Bribery Act 2010. Due
diligence is carried out on actual or potential business partners as appropriate. Those working on
our behalf or in consortium with us are required to abide by our Code of Conduct (or an equivalent)
and to undertake not to behave corruptly.
The Group has written policies and procedures, which are kept under review, covering a range
of matters intended to reduce or mitigate risk, such as health, safety and environmental policies,
security and information assurance, export controls, contracting requirements and guidelines, and
legal, financial and accounting matters. These policies and procedures are available to employees
on the Group intranet and are supplemented at sector level by further business unit specific policies
and procedures.
All employees have access to a confidential whistleblowing hotline with the opportunity to call,
email or write letters detailing any area of concern (whether financial irregularities, non-compliance
with laws, breaches of our Code of Business Conduct, threats to health and safety, conflicts of
interest or improper practices) to be brought to the attention of senior management if they feel
unable to raise them with line management or if they have raised matters, but are not satisfied with
the response. A report on all whistleblowing cases and the resultant investigations and conclusions
is submitted to each Audit and Risk Committee meeting – see page 98.
Sectors regularly review the vulnerability of key supply chain partners whose continued ability to supply
the Group is considered critical to its business performance, and also consider fall-back plans when first
deciding to appoint such suppliers.
Business continuity and
disaster recovery plans
All sectors, business units and Group functions are required to consider the need for, and put in place,
appropriate plans to minimise the risk of interruption to business and contract performance in the event
of a major disruption to normal functioning arrangements.
72 Babcock International Group PLC Annual Report and Accounts 2019
Principal risks, risk mitigation
and controls
The risks and uncertainties described
below through to page 81 are those
that the Board currently considers to
be of greatest significance to Babcock
in that they have the potential to affect
materially and adversely Babcock’s
business, the delivery of its strategy
and/or its financial results, condition or
prospects. For each risk there is a short
description of the Company’s view of the
possible impact of the risk on the Group
were it to occur, and the mitigation and
control processes in place to manage
the risk (which should be read in
conjunction with the information
above about our risk management
approach and general controls).
evaluation of the significance of
existing risks changing or being better
appreciated and understood. This
means that the risks identified below
are not and cannot be an exhaustive
list of all principal risks that could
affect the Group.
Babcock is, however, a large and
developing group of businesses, and
factual circumstances, business and
operating environments will change
with new risks being identified or the
Risks and uncertainties which might
affect businesses in general and that
are not specific to the Group are not
included, but Babcock, of course,
faces such risks as well.
Our customer profile
We rely heavily on winning and retaining large contracts with a relatively limited number of major customers, whether in the
UK or overseas. Many of our major customers are (directly or indirectly) owned or controlled by government (national or local)
and/or are (wholly or partly) publicly funded. Our single biggest customer is currently the UK Ministry of Defence (MOD).
These customers are affected by political and public spending decisions. Commercial customers are also affected by
conditions in their market sector which affect their levels of, and priorities for, spending.
Risk description
Policy changes (following a change of
political administration or otherwise) and
spending constraints on customers are
material factors for the Group’s business
and outlook.
Potential impact
Periods of uncertainty or changes
as to the course of customer policy
and spending can result in the delay,
suspension or withdrawal of tendering
processes and the award of contracts.
Whilst the Board believes that policy
changes, spending reviews and restraints
can offer significant opportunities to the
Group to assist in the delivery of services
to customers more efficiently and at
lower cost, these factors inevitably
also carry risk.
Whilst customer policy changes or
spending constraints can potentially offer
more outsourcing opportunities for us
to pursue, they can also be a risk in that
they could lead to changes in customer
outsourcing strategy and spend, which
could include:
Large customers, whether public
or private sector, have significant
bargaining power and the ability
(contractual or otherwise) to cancel
contracts without, or on short, notice,
often without cause, or they can
exert pressure to renegotiate them
in their favour.
The consequences for the Group’s
business of the UK vote to leave the
European Union are difficult to predict,
as there is likely to be a period of
uncertainty over the effects on the
nature, timing and scope of the policies
and procurement plans of both our
current and potential customers in
the UK and overseas.
• reductions in the number,
frequency, size, scope, profitability
and/or duration of future contract
opportunities
• in the case of existing contracts,
early termination, non-extension or
non-renewal or lower contract spend
than anticipated and pressure to
renegotiate contract terms in the
customer’s favour
• favouring the retention or return
of in-house service provision, either
generally or in the sectors in which
we operate
• favouring of small or medium-sized
suppliers or adopting a more
transactional rather than a
cooperative, partnering approach to
customer/supplier relationships; and
• imposing new or extra eligibility
requirements as a condition of doing
business with the customer that we
may not be able readily to comply with
or that might involve significant extra
costs, thereby impacting the profitability
of doing business with them.
Mitigation
We have extensive and regular dialogue
with key customers, involving, as
appropriate, our Chief Executive, sector
Chief Executives and/or other members
of the senior management team.
In respect of the UK Government,
the Group has formalised its ongoing
relationship by signing a ‘Joint Ways of
Working Charter’ agreement as part
of the UK Government/MOD Strategic
Partner/Strategic Supplier Management
Programme. The Programme outlines
how the Group and the UK Government/
MOD intend to work together and
includes regular meetings at senior
levels to ensure open dialogue between
the Group and its principal customer.
During the year, a new senior role in
the Group was created, reporting to
the Chief Executive, with responsibility
for the Programme for the Company
and to drive progress within the Group.
We actively monitor actual and potential
political and other developments and
spending constraints that might affect
our customers’ demand for our services.
We aim to be innovative and responsive
in helping customers meet their needs
and challenges.
Babcock International Group PLC Annual Report and Accounts 2019 73
Strategic reportGovernanceFinancial statements Principal risks and management controls continued
The nature of our contracts, bid processes and markets
We seek to win relatively long-term contracts for the provision of complex and integrated services to our customers.
Bidding for these contracts typically involves a protracted and detailed tendering process, often under public procurement
rules. There are typically only a relatively limited number of customers in each of the market sectors we serve. The
contracts we bid for often entail a substantial transfer of risk from the customer to the supplier.
Failure to realise the pipeline of opportunities and to secure rebids can mean missed opportunities for growth and loss
of revenue.
Mitigation
We have a clear business strategy to
target a large bid pipeline, both in the UK
and internationally, and will only tender
bids for contracts we consider have a
clear alignment with the Group strategy
and where we believe we stand a realistic
chance of success, both in the UK
and overseas.
There are formal and rigorous reviews
and gating processes. Those at key
stages of each material bid are intended
to reduce the risk of underestimating risks
and costs and ensure that limited bid
resources are targeted at opportunities
where we consider that we have the best
prospects of winning or retaining business.
Group policies and procedures set a
commercial, financial and legal framework
for all bids.
Contractual performance is continuously
under review (at a business unit, sector
and/or senior Group executive level as
appropriate) with a view to highlighting
at an early stage risks to delivery
and profitability.
Risk description
Bidding requires a substantial investment
in terms of manpower resource and is
very expensive. Bids can be subject to
cancellation, delays or changes in scope.
Contract award decisions made under
public procurement rules can be subject
to legal challenge by losing bidders.
Given the size and often long-term
nature of the contracts we bid for
and the relatively limited numbers
of customers in the markets we serve,
significant contracting opportunities
tend not to arise on a regular or
frequent basis.
When we are bidding for such contracts
we have to price for the long term and
for risk transfer, and the scope for later
price adjustment may be limited or
not exist.
Our contracts typically impose strict
performance conditions and use key
performance indicators (KPIs) that if not
complied with trigger compensation for
the customer and/or may result in loss
of the contract.
Bid and rebid success rates determine
how much of the pipeline of
opportunities is realised and turned
into profitable business and how
much existing business is retained.
Potential impact
If we lose a bid or a bid process is
aborted by the customer or we withdraw
due to scope changes as it progresses,
this is a significant waste of limited
resource and substantial expenditure
that has to be written off.
If we win a public procurement bid and
this is challenged, this could lead to
delay in contract award, expensive legal
proceedings or the competition having
to be re-run.
Not winning a new bid can be a significant
missed opportunity for growth which
may not soon be replaced by another.
Not winning rebids could mean the
loss of significant existing revenue and
profit streams.
If we underestimate or under-price actual
risk exposure or the cost of performance,
this could significantly and adversely
affect our future profitability, cash
generation and growth.
Compensation to the customer for poor
KPI performance could significantly
impair profitability under the contract
and damages following termination
could be substantial.
Unsuccessful bids or rebids may adversely
impact the strategic development and
growth plans of the Group.
A lack of success in exporting the Group’s
business model outside the UK and its
current core markets could adversely
impact the growth prospects and
strategic development of the Group.
74 Babcock International Group PLC Annual Report and Accounts 2019
Reputation
Given the nature of our customers and the markets in which we operate, our reputation is a fundamental business asset.
Our businesses include activities that have a high public profile and/or if they were to involve adverse incidents or
accidents, they could attract a high level of publicity.
Potential impact
Given our dependence on individual
major customers and the relatively
narrow customer base in the markets
in which we currently operate, loss of
our reputation (whether justified or not)
with a major customer or more generally
could put at risk substantial existing
business streams and the prospect of
securing future business from that or
other customers in that or other sectors.
Non-compliance with anti-bribery
and corruption laws could result in
debarment from bidding as well as
criminal penalties.
Mitigation
Senior management at Group and
sector level are keenly aware of
reputational risks, which can come
from many sources. Our risk control
procedures relating to contract
performance, anti-bribery and corruption,
health and safety performance and other
matters that could impact our reputation
are described elsewhere on pages 54
to 65. (See also health, safety and
environmental risks on page 77.)
Risk description
We have a relatively limited number of
customers and potential customers in
our market sectors and they typically
have high public profiles.
We are involved in the direct delivery to
the public on behalf of our customers
of high-profile and sensitive services. We
also provide services which are critical to
our customers’ ability to discharge their
own public responsibilities or deliver
critical services to their customers.
Failings or misconduct (perceived or
real) in dealing with a customer or in
providing services to them or on their
behalf could substantially damage our
reputation with that customer or more
generally. The same would be true of
high-profile incidents or accidents.
Attitudes to the outsourcing of services
generally or in a particular sector can
also be adversely affected by the poor
performance or behaviour of other
service providers or incidents in which
we are not involved.
As well as our reputation for service
delivery, our ethical reputation is key.
Babcock International Group PLC Annual Report and Accounts 2019 75
Strategic reportGovernanceFinancial statements Principal risks and management controls continued
Regulatory and compliance burden
Our major businesses are dependent on being able to comply with applicable customer or industry-specific requirements
or regulations. Following the UK vote to leave the European Union, the terms of British exit will have implications for the
requirements or regulations that are applicable to the business of the Group, including where a licence to operate in the
European Union is required.
Potential impact
Failure to maintain compliance with
applicable requirements could result
in the loss of substantial business
streams (and possible damages
claims) and opportunities for
future business.
A change in requirements could
entail substantial expenditure which
may not be recoverable (either fully
or at all) under customer contracts.
Changing international
circumstances could result in
the rise of trade protectionism
and reduce the Group’s access
to non-UK markets.
Risk description
The cost of compliance can be high.
Requirements can change.
Compliance with some regulatory
requirements is a precondition for
being able to carry on a business
activity at all. For example:
• Our Aviation business is subject to a
high degree of regulation relating to
aircraft airworthiness and certification
and also to ownership and control
requirements (for example, European
air operators must be majority-owned
and controlled by European
Economic Area nationals.
• Our civil and defence-related
nuclear businesses operate in a
highly regulated environment.
Geopolitical factors, for example the
terms of the UK’s exit from the EU,
could lead to significant tensions
between trading countries.
Mitigation
We seek to maintain a clear understanding
of ongoing regulatory requirements and
to maintain good working relationships
with regulators.
We have suitably qualified and experienced
employees and/or expert external advisors to
advise and assist on regulatory compliance.
We have management systems involving
competent personnel with clear accountabilities
for operational regulatory compliance.
However, during the year under review, we
have restructured our EU Aviation business in
order to take account of the EU requirement
that all European air operators must be majority-
owned and controlled by European Economic
Area (EEA) nationals. Under Regulation (EC) No.
1008/2008 (the Regulation), no undertaking
may carry passengers, mail and/or cargo for
remuneration and/or hire unless it has an
operating licence from an EU aviation authority.
One of the terms of such a licence is that the
relevant undertaking must be majority-owned
and majority-controlled by EEA nationals.
Our Aviation sector currently holds eight such
operating licences, which cover certain of the
Aviation sector’s operations in those territories.
If the UK were to leave the EU, the Company,
depending on the terms of any exit, may no
longer be considered as an EEA national and
this could mean that the EU aviation authorities
may revoke operating licences, which would
have a material adverse effect on the business,
financial condition and operations of the Group.
In order to mitigate this risk, the operations
of those Babcock companies which hold an
EU operating licence have been reorganised
to separate those parts of their business
which need to be conducted by a licensed
undertaking from those parts which do not.
The companies holding the licences were,
once reorganised, transferred to a new
sub-group, parented by an EU based
holding company. Subsequently, an EU
investor subscribed for 50.2% of the voting
shares in the EU holding company. The Board
believes that this current structure satisfies
the nationality requirements of the Regulation.
However, as the ultimate decision to grant
or revoke a licence rests with the aviation
authorities, there can be no guarantee that
this will prove to be the case.
76 Babcock International Group PLC Annual Report and Accounts 2019
Health, safety and environmental
Some of our operations entail the potential risk of significant harm to people, property or the environment.
Risk description
Many of our businesses (for example,
our nuclear operations) involve working
in potentially hazardous operations or
environments, which need to be properly
managed and controlled to minimise the
risk of injury or damage.
Some, for example, our aerial emergency
services operations, involve an inherent
degree of risk that is compounded by
the nature of the services provided
(firefighting, search and rescue, air
ambulance and emergency services
and offshore oil and gas crew change
services) or the environments in which
they operate (low-altitude flying
in adverse weather, terrain or
operational conditions).
Potential impact
Serious accidents can have a major
impact on the lives of those directly
involved and on their families, friends,
colleagues and community, as can
serious environmental incidents.
To the extent that we have caused or
contributed to an incident as a result
of failings on our part, or because as a
matter of law we would be strictly
liable without fault, the Group could
be exposed to substantial damages
claims, not all of which exposure may
be insured against, and also to criminal
proceedings which could result in
substantial penalties.
Such incidents (which may have a high
public profile given the nature of our
operations) may also seriously and
adversely affect the reputation of the
Group or its brand (whether that would
be justified or not), which could lead to
a significant loss of business or future
business opportunities.
Mitigation
Health, safety and environmental
performance receives close and
continuous attention and oversight
from the senior management team.
We have specific health, safety and
environmental governance structures
in place and extensive and ongoing
education and training programmes
for staff.
The Board receives half-yearly reviews
of health and safety and environmental
performance and the management reports
tabled at each of its meetings also address
health, safety and environmental issues
on an ongoing basis.
We believe we have appropriate insurance
cover against civil liability exposures.
Nuclear risks: we believe, having regard
to the statutory regime for nuclear
liability in the UK, the terms on which we
do nuclear engineering business and the
terms of indemnities given to us by the
UK Nuclear Decommissioning Authority
and the UK MOD in respect of the nuclear
site licensee companies in which we are
interested, that the Group would have
adequate protection against risk of
liability for injury or damage caused by
nuclear contamination or incidents, but a
reputational risk as a result of any serious
incident would remain.
Babcock International Group PLC Annual Report and Accounts 2019 77
Strategic reportGovernanceFinancial statements Principal risks and management controls continued
People
Our business delivery and future growth depend on our ability adequately and successfully to plan for management
succession and for our continuing and future need to recruit, develop and retain experienced senior managers, business
development teams and highly skilled employees (such as suitably qualified and experienced engineers, technicians, pilots
and other specialist skills groups).
Risk description
Competition for the skilled and
experienced personnel we need is
intense and they are likely to remain in
limited supply for the foreseeable future.
This poses risks in both recruiting and
retaining such staff.
Mitigation
We give a high priority and devote
significant resources to recruiting skilled
professionals, training and development,
succession planning and talent
management.
The Board, the Nominations Committee
and the Group Executive Committee
regularly receive reports on and/or
discuss these matters.
Apprentice and graduate recruitment
programmes are run in all sectors.
Further information about this subject
and how we address it is on pages 59
to 61 of this Annual Report.
Potential impact
Losing experienced senior managers
for any reason without plans for their
replacement could have a material
adverse effect on the prospects for,
or performance of, the Group and the
delivery of our strategy.
If we have insufficient experienced
business development or bidding
personnel, this could impair our ability
to achieve strategic aims and financial
targets or to pursue business in
new areas.
If we have insufficient qualified and
experienced employees, this could
impair our service delivery to customers
or our ability to pursue new business,
with consequent risks to our financial
results, growth, strategy and reputation
and the risk of contract claims.
The cost of recruiting or retaining the
suitably qualified and experienced
employees we need might increase
significantly depending on market
conditions, and this could impact our
contract profitability.
78 Babcock International Group PLC Annual Report and Accounts 2019
Pensions
The Group has significant defined benefit pension schemes. These provide for a specified level of pension benefits to
scheme members, the cost of which is met from both member and employer contributions paid into pension scheme
funds and the investment returns made in those funds over time.
Risk description
The level of our contributions is based on
various assumptions, which are subject
to change, such as life expectancy of
members, investment returns, inflation,
regulatory environment, etc. Based on
the assumptions used at any time, there
is always a risk of a significant shortfall in
the schemes’ assets below the calculated
cost of the pension obligations.
When accounting for our defined benefit
schemes, we have to use corporate
bond-related discount rates to value the
pension liabilities. Variations in bond
yields and inflationary expectations can
materially affect the pensions charge in
our income statement from year to year
as well as the value of the net difference
between the pension assets and liabilities
shown on our balance sheet.
Potential impact
Should the assets in the pension schemes
be judged insufficient to meet pension
liabilities, we may be required to make
increased contributions and/or lump sum
cash payments into the schemes. This
may reduce the cash available to meet
the Group’s other obligations or business
needs, and may restrict the future growth
of the business.
Accounting standards for pension
liabilities can lead to significant
accounting volatility from year to year
due to the need to take account of
macro-economic circumstances beyond
the control of the Company.
There is a risk that future accounting,
regulatory and legislative changes may
also adversely impact pension valuations,
both accounting and funding and, hence,
costs and cash for the Group.
Mitigation
Continuous strategic monitoring and
evaluation is undertaken by Group
senior management of the assets and
liabilities of the pension scheme and,
as appropriate, the execution of
mitigation opportunities.
The Company and the schemes’ trustees
have agreed a long-term investment
strategy and risk framework intended
to reduce the potential impact of the
schemes’ exposure to changes in inflation
and interest rates.
Longevity swaps have been used to limit
the potential impact of the schemes’
exposure to increasing life expectancy.
Babcock International Group PLC Annual Report and Accounts 2019 79
Strategic reportGovernanceFinancial statements Principal risks and management controls continued
IT and security
Our ability to deliver secure IT and other information assurance systems to maintain the confidentiality of sensitive
information is a key factor for our customers.
The Group is rolling out a new Enterprise Resource Planning (ERP) application for our ‘back office’ operations which also
provides some front end functionality.
Risk description
Despite controls designed to protect
such information, there can be no
guarantee that security measures
will be sufficient to prevent all risk of
security breaches or cyber-attacks being
successful in their attempts to penetrate
our network security and misappropriate
confidential information. The risk of
loss of information or data by other
means is also a risk that cannot be
entirely eliminated.
Installing major new IT systems
carries the risk of key system failures
and disruption.
Potential impact
A breach or compromise of IT system
security or physical security at a
physical site could lead to loss of
reputation, loss of business advantage,
disruptions in business operations and
inability to meet contractual obligations.
This could have an adverse effect
on the Group’s ability to win future
contracts and, consequently, on our
results of operations and overall
financial condition.
Failure adequately to plan and resource
the implementation of the new ERP
systems or difficulties experienced in
doing so could cause both trading and
financial reporting difficulties that could
be material.
Mitigation
We have made and will continue to make
significant investment in enhancing IT
security and security awareness generally.
We have formal security and information
assurance governance structures in place
to oversee and manage cyber-security
and similar risks.
The Board receives reports at least
quarterly on security and information
assurance matters.
The ERP implementation project is
overseen and closely monitored by
steering and working groups, is regularly
reported on to the Group Executive
Committee and will be implemented in
a phased approach (with parallel running
of old and new systems for a period) to
what we believe is a realistic timetable.
Currency exchange rates
As we expand outside the UK, our financial results are increasingly exposed to the impact of currency exchange rates.
Risk description
We prepare our consolidated results in
Sterling and translate the value of assets,
liabilities and turnover reported or
accounted for in non-Sterling currencies.
Exchange rate movements can therefore
affect the Sterling financial statements
and results of the Group.
Expenses or commitments may be
incurred in a currency that is different
from the related turnover or income
needed to discharge them.
Non-Sterling currencies to which we
are currently most exposed are the Euro,
US Dollar, South African Rand and,
increasingly, Australian Dollar, Canadian
Dollar, Norwegian Krone, Omani Rial and
Swedish Krona.
Potential impact
If the currencies in which our non-UK
business is conducted are weak or
weaken against the value of Sterling,
this will adversely affect our reported
results and the value of any dividend
income received by the Company from
non-UK operations. If the cost of an
operation or a contractual commitment
is denominated or incurred in a currency
different from the currency of the
income received from that operation or
that is being relied on to discharge that
commitment, movements in exchange
rates can reduce the profitability of the
operation and increase the effective cost
of discharging the commitment.
Mitigation
We seek to mitigate exposure to
movements in exchange rates in
respect of material foreign currency
denominated transactions (for example,
through use of derivative instruments).
However, we do not use derivatives to
hedge against the currency effect of
translating our financial statements or
our net assets and income of non-UK
subsidiaries and long-term equity
accounted investments. We maintain
some foreign currency borrowings
to limit, in part, the net foreign
currency exposure.
80 Babcock International Group PLC Annual Report and Accounts 2019
Acquisitions
The Group has grown and expects to continue to grow by making acquisitions as well as organically.
Risk description
The financial benefits of acquisitions
may not be realised as quickly and as
efficiently as expected.
Potential impact
Failure to realise the anticipated
benefits of an acquisition, or delay or
higher than expected costs in so doing,
could adversely affect the strategic
development, business, financial
condition, results of operations or
prospects of the Group.
The diversion of management attention
to unexpected difficulties encountered
with acquisitions could adversely affect
the Group’s business.
Post-acquisition performance of the
acquired business may not meet the
financial performance expected at the
time the acquisition terms were agreed
and could fail to justify the price paid,
which could adversely affect the Group’s
future results and financial position.
Mitigation
Full financial and other due diligence
is conducted as far as may reasonably
be achievable in the context of each
acquisition and a detailed business
case, with forward looking projections,
is submitted to the Board in respect
of each acquisition. Integration risk is
considered at an early stage as part of
the review of acquisition opportunities
and detailed integration planning
takes place before completion of
the acquisition.
Viability statement
The purpose of the viability
assessment is to consider the
question of solvency and liquidity
over a longer period than the going
concern assessment. Consistent with
previous years, the Directors have
assessed the Company’s viability over
a three-year period to March 2022.
The Directors elected to make their
assessment on this basis as it is the
period of the Group’s budget and
forecasting review process, which
the Directors believe gives the
appropriate level of visibility for them
to make their assessment, although
the degree of certainty reduces over
this longer period.
In considering the Company’s
long-term prospects over the
assessment period to March 2022,
the Directors considered the
Company’s business model as set
out on pages 8 to 9, including, in
particular, the core strengths of the
Company. The Directors assessed the
Company’s business model and
strategy in light of the principal
strategic, financial and operational
risks, including the principal risks
listed on pages 73 to 81, the Group’s
solvency and liquidity risks that were
identified within the Group’s risk
management framework in the
context of the controls and mitigating
matters described on pages 70 to 72.
In considering the Company’s
principal risks, the Directors assessed
the robustness of the Company’s risk
management framework in identifying
the risks, their mitigation and the
extent to which monitoring of the
effectiveness of the mitigation
measures was in place.
Having assessed the risks facing the
Company, the Directors considered
the Group’s budget, including the
projected cash generation and the
projected reduction in net debt.
The Directors took into account the
Group’s committed facilities and the
availability and continued access to
debt markets, and expects to be able
to refinance at acceptable rates. The
Directors then considered certain
scenarios, such as the Company being
unable to access the debt markets to
renew term debt facilities, a change
in UK Government policy, the loss
of a significant contract, and a
significant increase in interest rates,
coupled with a significant devaluation
of Sterling, to assess whether there
were any scenarios that were plausible,
the potential impact of which, taking
account of the Company’s controls
and mitigating actions, would
threaten the ability of the Group
to meet its liabilities over the
three-year period.
The Directors have a reasonable
expectation that the Company and
the Group will be able to continue in
operation and meet all their liabilities
as they fall due up to March 2022.
Babcock International Group PLC Annual Report and Accounts 2019 81
Strategic reportGovernanceFinancial statements Hartlepool Power Station, UK
We ensure the
maintenance and
operation of AGR Core
Monitoring Equipment
systems and deployment
hoists at all seven of EDF
Energy’s AGR sites, which
provide most of the UK’s
nuclear capacity.
“This critical equipment
enables channel bore
measurements as well as
visual inspections in a CO2
environment simultaneously,
greatly reducing historical
outage programme
schedules, and ultimately
delivering nuclear safer,
faster, at lower cost.”
Alex Elsdon
Mechanical Station Lead
Cavendish Nuclear
Fast Facts
Contract name: Graphite Inspection Equipment Reliability
and Operations
Length of contract: Five years
Output of contract: Assured supply of graphite inspection
services and improved equipment reliability.
Sector: Cavendish Nuclear
82 Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2019 83
Governance statement
Chairman’s
introduction
the independence of Sir David Omand,
who joined the Board in 2009. The Board
remains satisfied that Sir David continues
to be independent. The Board also noted
that Ian Duncan, our Chair of the Audit
and Risk Committee, will have served
nine years in November 2019. In its
discussions, the Nominations Committee
was keen to maintain continuity during
the handover to a new Chair. However,
it is not expected that either will wish
to seek reappointment at the Company’s
2020 AGM. The required governance
and regulatory assurances are provided
throughout this Governance statement
and in some cases in other parts of the
Annual Report. The Additional statutory
information section on page 133
provides further cross references to
where in this Annual Report disclosures
under the Disclosure and Transparency
Rules and Listing Rules can be found.
Company values
A key role of the Board is to reinforce
the values of the Company. The values
of the Company are clearly set out in our
Code of Business Conduct and require us
as a company, amongst other things, to
respect our fellow employees, to ensure
the safety of each other at work, to
minimise our impact on the environment,
and to abide by our ethics policy in our
business dealings. The Board seeks to
ensure that these values are embedded
within all parts of the Company’s
business, by ensuring that our ethics
policy is available to all on our website
and appropriate training is given to our
employees as to the standards that we
expect from them under the policy. As
described on page 98, the Audit and
Risk Committee reviews and monitors all
reports to our whistleblowing line, which
encourages all employees to report any
breach of our Code of Conduct or our
ethics policy.
Mike Turner CBE, Chairman
The Board is committed to working in an effective,
transparent and ethical manner so that it can set
and implement strategy in a way it believes will
benefit Shareholders by promoting and maintaining
the long-term success of the Company while having
regard to other stakeholders.
Introduction
As I have said in my Chairman’s review,
this is my last year as Chairman of
Babcock. I am convinced that part of
the extraordinary growth of the Company
over the time that I have been Chairman
is due to the Company’s commitment
to corporate governance and doing
business in an effective, transparent and
ethical manner. I believe that this will
be as true in the future as in the past.
The Board welcomed the introduction
of the new UK Corporate Governance
Code by the Financial Reporting Council
in July 2018 (the revised Code) and
believes that its approach will provide a
constructive guide to good governance
in the UK.
Compliance with the UK
Corporate Governance Code
This year the Company is reporting
under the UK Corporate Governance
Code published in June 2016 (the Code).
The Code contains broad principles
and specific provisions which set out
standards of good governance practice
in relation to leadership, effectiveness,
remuneration, accountability and
relations with Shareholders. The Board
considers that the Company complied
with all the provisions of the Code
throughout the year to 31 March 2019.
We are satisfied as a Board that all our
Non-Executive Directors are independent
for UK Corporate Governance Code
purposes and have the necessary time
to devote to their duties. As it did last
year, the Board, in particular, considered
84 Babcock International Group PLC Annual Report and Accounts 2019
• Governing bodies and regulators –
we manage complex assets in highly
regulated environments. This means
that we must maintain positive and
constructive relationships with a
number of regulators across the globe.
These relationships are usually held at
the sector or contract level. We aim
to keep the dialogue between our
business and the relevant regulators
as open as possible.
Mike Turner CBE
Chairman
Stakeholders
The revised Code emphasises the
requirement for Directors to consider
their statutory duty to the Company’s
many stakeholders. As a Board, we
understand that stakeholder engagement
is vital to building a sustainable business
and that stakeholders have an interest
in how we interact with them. The list
below identifies some of our stakeholders
and how we, as a Board and a Company,
engage with them:
• Customers – a key focus for the
Company is that we are “trusted
to deliver” by our customers. The
Company engages with its customers
at all levels from the shop floor, as
we deliver our services alongside our
customer, to the Board. In respect of
the Board, its engagement is mainly
through the Executive Directors, but I
also meet with our principal customer.
This year, the Board was particularly
pleased that the Company formalised
further its ongoing relationship with
the UK MOD by signing a “Joint Ways
of Working Charter” as part of the UK
Government/MOD Strategic Partner
Programme/Strategic Supplier
Management Programme. For
more detail, please see page 24.
• Investors – the support of our
Shareholders is vital to the long-
term performance of the Company.
The Board works to ensure that our
investors and the wider investment
community understand our strategy
and our performance. The Executive
Directors meet regularly with our
investors as described on page 132.
The Board also receives a regular report
from the Head of Investor Relations,
which details his engagement with
investors, together with their feedback.
This year, there will also be a capital
markets day on 5 June, more detail
about which can be found on page 7.
• Employees – we have spoken about
our engagement with our workforce
and the efforts we make to maintain
an open dialogue with our workforce
on page 59. In order to meet
the guidance in the revised Code
concerning our engagement with
the workforce, we host the Babcock
International Group Employee Forum.
The Forum meets twice a year
and is attended by representatives
from across our European business
operations. Senior management
attend the Forum and update it about
developments in the management
of the Group. In addition, the
remuneration policy for Executive
Directors is presented to the Forum
and any feedback from the Forum
is taken back to the Remuneration
Committee for its consideration.
• Business partners – our partners, both
in our external supply chains and in our
joint ventures, are an important part of
our performance. We engage with our
joint venture partners at multiple levels
– working alongside them in the joint
ventures themselves and also at a
more general relationship level. With
our supply chain, we are always looking
to deliver the optimal solution for
our customers which means working
closely with our suppliers, both at a
central level and at a contract level.
More information about our supply
chain can be found on page 56.
• Communities – where we have major
operations, such as at Devonport,
Faslane or Rosyth, we are often one
of the largest employers in the local
area and, therefore, we are aware
of the impact that we have on those
communities. We aim to build positive
relationships with those communities
and support local groups that we
believe are relevant to our operations.
Babcock International Group PLC Annual Report and Accounts 2019 85
Financial statementsStrategic reportGovernance Leadership
Creating the right culture through
our governance framework
Babcock’s culture is
defined through ‘being
babcock’ and our Code
of Conduct. Together,
these set out what our
Company stands for,
what we expect from
our workforce and how
we expect our business
to deliver our strategy.
The Board recognises
that strong governance
underpins a healthy
culture and it is
important that the Board
leads by example, setting
the tone from the top
and championing the
behaviours we expect
to see.
Board
The Board of Directors
of Babcock International
Group PLC (the Board)
is collectively responsible
to the Company’s
Shareholders for the
long-term success of
the Company. This
responsibility includes
matters of strategy,
performance, resources,
standards of conduct
and accountability. The
Board also has ultimate
responsibility for corporate
governance, which it
discharges either directly
or through its Committees,
as well as the structures
described in this
Governance statement.
Executive
Responsible for
implementing the strategy,
led by the Chief Executive.
86 Babcock International Group PLC Annual Report and Accounts 2019
Chairman
The Chairman is responsible for the
leadership and overall effectiveness of
the Board. In particular, his role is to:
• With the Chief Executive,
demonstrate ethical leadership
and promote the highest standards
of integrity throughout the business
• Ensure effective operation of
the Board, and its Committees
• Set the agenda, style and tone
of Board discussions in order to
promote constructive debate
and effective decision-making
• Foster effective working
relationships between the
Executive and Non-Executive
Directors, support the Chief
Executive in his development
of strategy and, more broadly,
support and advise the
Chief Executive
• Ensure effective communication
with Shareholders and other key
stakeholders and make the Board
aware of their views.
Chief Executive
The Chief Executive is responsible
for the day to day leadership of the
business. In particular, his role is to:
• Develop strategic proposals for
recommendation to the Board and
implement the agreed strategies
• Develop an organisational structure,
establishing processes and systems
to ensure that the Company has the
capabilities and resources required
to achieve its plans
• Be responsible to the Board for
the performance of the business
consistent with agreed plans,
strategies and policies
• Oversee the application of Group
policies and governance procedures
• Develop and promote effective
communication with Shareholders
and other key stakeholders.
Remuneration Committee
Oversees the remuneration
arrangements for Babcock’s Directors
and senior employees across all sectors.
The Committee is keenly conscious
of the importance of having in place
a fair remuneration structure, one
that strikes a balance between
rewarding employees’ hard work
and Shareholders’ interests.
Nominations Committee
Refreshing the Board and
succession planning are issues
which the Committee, and the Board
as a whole, see as important aspects
of its governance of the Company.
Group Finance Committee
Approves borrowing, guarantees,
treasury and related matters within its
terms of reference delegated by the
Board. Comprises any two Directors,
one of whom must be the Group
Finance Director.
Sector Management Boards
Each of our four business sectors
have their own management boards
responsible for: setting sector strategy
and objectives; ensuring adequate
financial and human resources to
achieve those objectives; reviewing
sector performance; and ensuring the
sector’s obligations to Shareholders
and other stakeholders are understood
and met.
Senior Independent Director
Sir David Omand is currently and has
throughout the year been the Senior
Independent Director. Shareholders
can bring matters to his attention, if
they have concerns, which have not
been resolved through the normal
channels of Chairman, Chief Executive
or Group Finance Director, or if these
channels are not deemed appropriate.
The Chairman looks to the Senior
Independent Director as a sounding
board and he is available as an
intermediary between the other
Directors and the Chairman. The Senior
Independent Director is also responsible
for leading the Non-Executive Directors
in the annual performance evaluation
of the Chairman. The specific role of
the Senior Independent Director has
been set out in writing and approved
by the Board.
Non-Executive Directors
The Non-Executive Directors bring
external perspectives and insight to
the deliberations of the Board and
its Committees, providing a range
of knowledge and business or other
experience from different sectors and
undertakings (see their biographies on
pages 88 to 89). They play an important
role in the formulation and progression
of the Board’s agreed strategy, and
review and monitor the performance
of the executive management in the
implementation of this strategy.
Audit and Risk Committee
Responsible for overseeing the
Company’s systems for internal
financial control, risk management
and financial reporting.
Group Executive Committee
The Group Executive Committee
reviews and discusses all matters of
material significance to the Group’s
management, operational and financial
performance as well as strategic
development. It is not a formal Board
Committee but the minutes of its
meetings are circulated to Board
members. For membership of the
Committee see page 90.
Steering Groups
Group Security Committee: chaired by
the Group Finance Director and made
up of senior functional and operational
managers with responsibility for security
and information assurance at Group and
operational level. See page 71.
Diversity Steering Group: coordinates
the implementation of our equality and
diversity policy. See page 60.
Corporate Safety Steering Group:
ensures the delivery of Group policy and
initiatives relating to all matters relevant
to the health and safety of the Group’s
employees and any other persons
affected by the Group’s undertakings.
See pages 62 to 64.
Energy/Environmental Working Group:
responsible for developing and sharing
best practice for cost effective energy
and environmental control and for
developing strategy for meeting
energy and environmental targets.
See page 65.
Babcock International Group PLC Annual Report and Accounts 2019 87
Financial statementsStrategic reportGovernance Leadership continued
Board of Directors
N
N
A
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Mike Turner CBE
Chairman
Ruth Cairnie
Independent Non-Executive Director
Sir David Omand GCB
Senior Independent Director
Appointed: June 2008 as a Non-Executive
Director and November 2008 as Chairman
Tenure: 11 years
Nationality: British
Experience: Mike brings extensive aerospace
and defence industry experience.
External appointments: Mike is a member
of the UK Government’s Apprenticeship
Ambassadors Network.
Previous roles: He was a Non-Executive Director
of Barclays PLC until 2 May 2019 and formerly
Chairman of GKN PLC and the UK Defence
Industries Council (DIC), Chief Executive of BAE
Systems PLC and a Non-Executive Director of
Lazard Limited.
Qualifications: Whilst working for Hawker
Siddeley Aviation, as an undergraduate
Commercial Apprentice, Mike gained a BA
Honours degree from Manchester Metropolitan
University. Mike has honorary degrees from
Manchester Metropolitan, Cranfield and
Loughborough universities.
Appointed: April 2019
Tenure: One month
Nationality: British
Experience: Ruth brings extensive experience
of the engineering sector gained from a 37-year
international career spanning senior functional
and line roles at Royal Dutch Shell plc, with
experience advising government departments
on strategic development and capability building.
External appointments: Ruth is currently
the Senior Independent Director of Associated
British Foods plc and a Non-Executive Director of
Rolls-Royce Holdings plc and ContourGlobal plc.
She is the Chair of POWERful Women, an initiative
to advance gender diversity within the energy
sector. Ruth is also a trustee of Windsor Leadership
and a member of the finance committee of the
University of Cambridge.
Qualifications: Ruth is a Master of Advance
Studies of Mathematics from the University
of Cambridge.
Appointed: April 2009 and Senior Independent
Director January 2012
Tenure: 10 years
Nationality: British
Experience: Sir David brings extensive UK
intelligence and change management experience.
External appointments: Sir David is a visiting
professor in the Department of War Studies,
King’s College London, and PSIA Sciences Po in
Paris, where he teaches intelligence studies. He
is a senior advisor to Paladin Capital Group LLP,
investing in the cyber security sector.
Previous roles: He served in various senior
roles in the UK Government service, including
as UK Government Security and Intelligence
Coordinator, Permanent Secretary of the
Home Office, Director of GCHQ (the UK Signals
Intelligence and Information Assurance Agency)
and Deputy Under-Secretary of State for Policy
in the Ministry of Defence.
Qualifications: Sir David holds a degree in
Economics from Cambridge University, has an
honorary Doctorate from Birmingham University
and he recently completed a degree in Mathematics
and Theoretical Physics with the Open University.
A
R
N
A
R
N
A
R
N
Prof. Victoire de Margerie
Independent Non-Executive Director
Ian Duncan
Independent Non-Executive Director
Lucy Dimes
Independent Non-Executive Director
Appointed: February 2016
Appointed: November 2010
Tenure: 3 years
Nationality: French
Tenure: 8 years
Nationality: British
Appointed: April 2018
Tenure: 1 year
Nationality: British
Experience: Victoire brings strong international
strategic and commercial experience.
Experience: Ian brings extensive financial and
change management experience.
External appointments: Victoire is the
Executive Chairman of Rondol (France),
a start up developing micro machinery for
advanced industry applications. She is also a
Non-Executive Director of Eurazeo S.A. (France)
and Arkema (France).
Previous roles: She was a Non-Executive Director
of Banque Transatlantique, Italcementi S.p.A
(Italy), Morgan Advanced Materials PLC (UK),
Norsk Hydro ASA (Norway) and Outokumpu OyJ
(Finland). During her earlier executive career,
Victoire held senior management positions in
France, Germany and the USA, with Atochem,
Carnaud MetalBox and Pechiney.
Qualifications: Victoire holds a PhD in Strategic
Management from Université Panthéon-Assas
and a Master in Business Administration from
HEC Paris.
External appointments: Ian is currently the
Senior Independent Director of Bodycote PLC,
as well as being the Chairman of its Audit
Committee. He is also a Non-Executive Director
and Audit Committee Chair of SIG PLC.
Previous roles: He is a former Group Finance
Director of Royal Mail Holdings PLC and has
also formerly been the Corporate Finance
Director at British Nuclear Fuels, the Chief
Financial Officer and Senior Vice President
at Westinghouse Electric Company LLC in
Pennsylvania, USA, and a Non-Executive Director
and the Chairman of the Audit Committee of
Fiberweb PLC, Mouchel Group and WANdisco PLC.
Qualifications: Ian is a Chartered Accountant
and holds an MA from Oxford University.
Experience: Lucy brings experience in industries
at the forefront of growth and technology-based
innovation and an understanding of complex
outsourcing and long-term global strategic
partnerships.
Previous roles: She was a Non-Executive Director
of Berendsen PLC and a member of its Audit,
Remuneration and Nominations Committees.
In her executive career, Lucy was Chief Executive
Officer of UBM EMEA until September 2018
and was previously Chief Executive Officer, UK
& Ireland, of Fujitsu, the Chief Operating Officer
and Executive Director of Equiniti Group, Chief
Executive Officer UK & Ireland of Alcatel Lucent
(now Nokia) and had a 19-year career at BT,
where she held various senior roles, including
Managing Director of Group and Openreach
Service Operations.
Qualifications: Lucy holds an MBA from
London Business School and a First Class Honours
Degree in Business Studies from Manchester
Metropolitan University.
88 Babcock International Group PLC Annual Report and Accounts 2019
E
A
R
N
Executive Committee
Audit and Risk Committee
Remuneration Committee
Nominations Committee
Board Committee Chairperson
A
R
N
A
R
N
A
R
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Myles Lee
Independent Non-Executive Director
Kjersti Wiklund
Independent Non-Executive Director
Jeff Randall
Independent Non-Executive Director
Appointed: April 2015
Tenure: 4 years
Nationality: Irish
Experience: Myles brings extensive global
experience in management, M&A and finance.
External appointments: Myles is a Non-
Executive Director of UDG Healthcare PLC
and Ingersoll Rand PLC, which is listed on the
New York Stock Exchange.
Previous roles: He was Chief Executive Officer
(from 2009 to 2013) and Finance Director
(from 2003 to 2008) of CRH PLC.
Qualifications: Myles holds a degree in
Civil Engineering and is a Fellow of the
Institute of Chartered Accountants in Ireland.
Appointed: April 2018
Tenure: 1 year
Nationality: Norwegian
Appointed: April 2014
Tenure: 5 years
Nationality: British
Experience: Kjersti brings broad technology
and business experience gained across Europe,
Eastern Europe/Russia and Asia.
Experience: Jeff brings extensive experience
of the media, particularly in politics, business
and finance.
External appointments: Kjersti is a Non-
Executive Director of Laird PLC and Spectris PLC.
Previous roles: She has held senior roles,
including Director, Group Technology Operations
of Vodafone, and Chief Operating Officer of
VimpelCom Russia, Deputy Chief Executive
Officer and Chief Technology Officer of Kyivstar
in Ukraine, Executive Vice President and Chief
Technology Officer of Digi Telecommunications
in Malaysia, and Executive Vice President and
Chief Information Officer at Telenor in Norway.
Kjersti was also a Non-Executive Director of
Cxense ASA and Fast Search & Transfer ASA
in Norway and Telescience Inc in the US.
Qualifications: Kjersti holds a Master of Business
Management from BI Norwegian Business School
and an MSc in Electronical Engineering from
Chalmers University of Technology, Sweden.
External appointments: Jeff is an Independent
Non Executive (INE) at BDO, the accounting and
business-services firm, and a Visiting Fellow at
Oxford University’s Saïd Business School.
Previous roles: He worked at Sky News and
was editor-at-large of the Daily Telegraph. Jeff
was business editor of the BBC, the launch editor
of Sunday Business and, for six years, City Editor
of the Sunday Times. He is a former director of
Times Newspapers.
Qualifications: Jeff holds a degree in Economics
from the University of Nottingham, where he is an
Honorary Professor in the School of Economics.
E
E
E
Archie Bethel CBE
Chief Executive
Franco Martinelli
Group Finance Director
John Davies
Chief Executive, Land
Appointed: Board Director May 2010 and
Chief Executive September 2016
Tenure: 9 years
Nationality: British
Experience: Archie was Chief Executive, Marine
and Technology division, from June 2007,
having joined the Group in January 2004. He was
appointed Chief Executive on 1 September 2016.
He is President of the Society of Maritime Industries
and is a Lay Member of the Court of the University
of Strathclyde.
Previous roles: He held various senior roles
working for Vetco Gray, Lanarkshire Development
Agency and Motherwell Bridge.
Qualifications: Archie is a Chartered Engineer
and a Fellow of the Royal Academy of Engineering.
Appointed: Board Director August 2014
Appointed: Board Director January 2013
Tenure: 5 years
Nationality: British
Tenure: 6 years
Nationality: British
Experience: Franco served 12 years with the
Group as Group Financial Controller, prior to his
appointment as Group Finance Director. Before
joining Babcock, Franco worked across the
support services and engineering sector.
Previous roles: He was Group Financial Controller
at Powell Duffryn PLC and before that he held
divisional and group roles at Courtaulds, James
Capel and BP.
Qualifications: Franco is a Chartered Accountant
and has a degree in Physics from Exeter University.
Experience: John joined Babcock in 2010,
following the acquisition of VT Group, and was
appointed Divisional Chief Executive of the then
Defence and Security division. He joined the
Group Board on 1 January 2013. In November
2015 he moved to lead the Support Services
division and is now sector CEO, Land.
Previous roles: He worked extensively across
the support services and defence sectors within
Bombardier, BAE Systems and VT Group.
Qualifications: John is a lawyer by background
and a graduate of the University of Manchester
and Chester Law College.
Babcock International Group PLC Annual Report and Accounts 2019 89
Financial statementsStrategic reportGovernance Leadership continued
Executive Committee
B
B
B
B
Board
Biographies for Archie Bethel CBE,
Franco Martinelli and John Davies
are on page 89.
Archie Bethel CBE
Chief Executive
Franco Martinelli
Group Finance Director
John Davies
Chief Executive, Land
Roger Hardy
Chief Executive, Aviation
John Howie MBE
Chief Executive, Marine
Simon Bowen
Chief Executive, Nuclear
Jon Hall
Managing Director,
Technology
Kevin Goodman
Group Director of
Organisation and
Development
Jack Borrett
Group Company Secretary
and General Counsel
Kate Hill
Group Director of
Communications
Simon Bowen
Appointed: Executive Committee April 2017
Kevin Goodman
Appointed: Executive Committee July 2010
Roger Hardy
Appointed: Executive Committee
November 2015
Experience: Roger started in Devonport
30 years ago and joined Babcock in 2007
following Babcock’s acquisition of Devonport,
when he was appointed Managing Director of
Babcock’s Submarine Business. In 2010, Roger
took up a new role as Managing Director for
Cavendish Nuclear, Babcock’s civil nuclear
business, before moving in 2015 to be Chief
Executive of the then Defence and Security
division. In April 2017 Roger was appointed
to sector Chief Executive, Aviation, leading
Babcock’s military and civil aviation businesses.
Experience: Simon is responsible for our
nuclear capability in Defence, including
Babcock’s submarine operations, and Civil. He
joined Babcock in December 2015 as Managing
Director of Cavendish Nuclear. Simon was
previously the Managing Director of Urenco UK,
which he joined in 2010. Prior to this, Simon
worked at BP, undertaking a variety of senior
roles, culminating in his appointment as Vice
President of Manufacturing and Procurement
for Petrochemicals. In the early part of his
career Simon was an Engineering Officer in
the Royal Navy on operating submarines.
John Howie
Appointed: Executive Committee April 2016
Jon Hall
Appointed: Executive Committee April 2017
Experience: John joined Babcock in April 2001.
He has been sector CEO for Marine since 2016
and has responsibility for Babcock’s warship
operations as well as the commercial and
international marine operations. John is a Visiting
Professor at Strathclyde University, a Director
of the Society of Maritime Industries, a member
of the Glasgow Economic Leadership Board
and Acting Chair of Maritime Research &
Innovation UK.
Experience: Jon joined Babcock in 2008 as
Managing Director, Technology. Prior to that,
Jon held senior roles within the Weir Group,
covering defence, nuclear and commercial
sectors and, before that, worked in the power and
process sectors with Balfour Beatty International
and Monenco Inc. Jon is a Chartered Engineer and
Fellow of the Institution of Mechanical Engineers,
and holds a PhD from Bath University for research
work in technology.
90 Babcock International Group PLC Annual Report and Accounts 2019
Experience: Kevin joined Babcock in 2001.
He was a Director of both our Defence and
Security and Marine and Technology divisions
prior to his current Group appointment. In his
present role, he is responsible for remuneration,
talent management, executive development
and diversity. He is a trustee of the Babcock
International Group pension scheme.
Jack Borrett
Appointed: Executive Committee April 2016
Experience: Jack joined Babcock in 2004 and
from 2010 was Deputy Group General Counsel,
until his appointment as Group General Counsel
and Company Secretary in April 2016. He is
Secretary to the Board and to the Remuneration,
Audit and Risk, and Nominations Committees and
a member of the Executive Committee. Prior to
joining Babcock, Jack was a solicitor at law firm,
Clifford Chance.
Kate Hill
Appointed: Executive Committee April 2017
Experience: Kate joined Babcock following
its acquisition of Avincis, and subsequently
was appointed as the Group’s Director
of Communications.
Prior to that, she was a Partner in the financial
PR consultancy Kreab Gavin Anderson, which
she joined from Royal Dutch Shell plc. Originally
trained as a journalist, Kate has also held a
variety of roles managing communications in
the rail industry.
Attendance at Board meetings
Chairman
Mike Turner
Executive Directors
Archie Bethel
Franco Martinelli
John Davies
Non-Executive Directors
Sir David Omand
Victoire de Margerie*
Ian Duncan
Lucy Dimes
Myles Lee
Kjersti Wiklund*
Jeff Randall
12 of 12
12 of 12
12 of 12
12 of 12
12 of 12
11 of 12
12 of 12
12 of 12
12 of 12
11 of 12
12 of 12
* Victoire de Margerie and Kjersti Wiklund were unable to attend one meeting due to pre-existing
business commitments.
Composition of the Board
The composition of the Board during the year, and as it currently stands, is
shown below:
Date
1 April 2018 – 2 April 2019
3 April 2019 – 21 May 2019
Chairman
Executive
Directors
Independent
Non-Executive
Directors
1
1
3
3
7
8
During the financial year and up to the date of this report, the only change to the
Board was the appointment of Ruth Cairnie on 3 April 2019.
Board of Directors
The Board is satisfied that each
Director has the necessary time to
devote to the effective discharge of
their responsibilities and that, between
them, the Directors have a blend of
skills, experience, knowledge and
independence suited to the Company’s
needs and its continuing development.
The powers of the Directors are set out
in the Company’s Articles of Association
(the Articles), which may be amended
by way of a Special Resolution of the
members of the Company. The Board
may exercise all powers conferred on
it by the Articles, in accordance with
the Companies Act 2006 and other
applicable legislation. The Articles
are available for inspection online at
www.babcockinternational.com and
can also be seen at the Company’s
registered office.
Board meeting attendance
The Board has at least 10 scheduled
full Board meetings each financial year,
with two other meetings devoted solely
to strategy. The Chairman also meets
separately with Non-Executive Directors
without Executive Directors or other
managers present. Debate and
discussion at Board and committee
meetings is encouraged to be open,
challenging and constructive. Directors
regularly receive presentations by senior
managers. In the annual Board and
Committee evaluation review, no
Directors expressed dissatisfaction with
the timing or quality of information
provided to them.
Babcock International Group PLC Annual Report and Accounts 2019 91
Financial statementsStrategic reportGovernance
Effectiveness
Board matters and delegation
The Board has established a formal
schedule of matters specifically reserved
for its approval. It has delegated other
specific responsibilities to its Committees
and these are clearly defined within their
terms of reference.
Summary of key Board
reserved matters
• Group strategy and resourcing
• Interim and final results
announcements and the Annual Report
and financial statements
• Dividend policy
• Acquisitions, disposals and other
transactions outside delegated limits
• Significant contracts not in the
ordinary course of business
• Major changes to the Group’s
management or control structure
• Changes relating to the Company’s
capital structure or status as a
listed PLC
• Annual budgets
• Major capital expenditure
• Major changes in governance,
accounting, tax or treasury policies
• Internal controls and risk
management systems (advised by
the Audit and Risk Committee)
• Major press releases and
Shareholder circulars.
Board Committee terms of reference
and other delegated authorities are
formalised and reviewed from time
to time, usually at least once a year.
Key Committee terms of reference
are available to view on our website:
www.babcockinternational.com.
Key areas of focus during the year
During the year, key areas focused on by the Board included:
Strategy and business
development
• Group strategy, with particular
reference to the Group’s
international development,
which included two special
Board meetings dedicated
to strategy
• Business unit strategy updates
and presentations
• Financial planning, including
budgets and dividend policy
• Business development
opportunities and pipeline review
• Succession planning and
(through the Remuneration
Committee) Executive
Directors’ remuneration
Risk
• Review (either by itself and/or
through the Audit and Risk
Committee) of the Company’s
principal risks to determine the
nature, and extent of, the risks the
Company is willing to take and to
review the management of those
risks, including internal controls and
risk management
• Assessment of viability, as well as
considering the principal risks to the
Group’s solvency and viability
• Succession planning and talent
development
• Consideration of the implications of
political developments and outlook
• Cyber-security and information
assurance risk management
• Legal updates and litigation reports
• Insurance strategy
In addition to the principal Committees
of the Board – the Remuneration
Committee, the Audit and Risk
Committee and the Nominations
Committee – and the Finance Committee
operating under its terms of reference,
the Board from time to time establishes
Committees to deal with specific matters
on its behalf. The Board also allows for
routine matters, or the implementation
of formal steps for matters approved
in principle by the Board, to be dealt
with by a Board meeting of any two
Directors, but these are later ratified by
the full Board.
Board effectiveness
The Board and its Committees review
their skills, experience, independence
and knowledge to enable the discharge
of their duties and responsibilities
effectively. In order to monitor the
Board’s effectiveness, the Board conducts
an evaluation every year. The evaluation
for the financial year ending 31 March
2019 was carried out internally by the
Company Secretary. He carried out
confidential one on one meetings with
each Director and other senior managers.
The review considered the balance of
skills, experience, independence and
knowledge on the Board; its diversity;
how the Board, its Committees, the
Chairman and individual Directors
performed and how they worked
together; as well as other factors relevant
to effectiveness. The review found that
92 Babcock International Group PLC Annual Report and Accounts 2019
Information and support
for the Board
The Chairman, with the assistance of the
Company Secretary, ensures appropriate
information flows to the Board and its
Committees to facilitate their discussions
and allow fully informed decisions to be
made. Non-Executive Directors receive
copies of minutes of meetings of the
Group Executive Committee and sector
Boards and monthly sector operating
reports which also cover health,
safety and environmental matters
and compliance with the Group’s
ethical and security standards. The
Company Secretary attends all Board
meetings and all Directors have access
to his advice and, if necessary, to
independent professional advice at
the Company’s expense to assist with
the discharge of their responsibilities
as Directors.
Election of Directors
The rules relating to the appointment
and replacement of Directors are
contained within the Articles. The
Articles provide that Directors may be
appointed by an ordinary resolution of
the members or by a resolution of the
Directors, provided that, in the latter
instance, a Director appointed in
that way retires and is submitted for
election at the first AGM following their
appointment. In compliance with the UK
Corporate Governance Code, all existing
Directors will be seeking re-election
at the 2019 AGM. The names and
biographical details of each of the
Directors are set out on pages 88
and 89.
Executive Directors are entitled under
their service agreements to 12 months’
notice of termination of employment
from the Company; Non-Executive
Directors, including the Chairman, have
letters of appointment which can be
terminated at will.
Shareholder
relations
• Annual Report and Accounts,
and half-year results
• Annual General Meeting
• Independent investor relations
surveys and feedback reports
• Monthly investor relations and
Shareholder engagement reports
• Review of analyst reports
Governance
• Annual review of Board,
Committee and Director
effectiveness
• Health and safety management
reports, and annual and
half-yearly reviews
• Annual anti-bribery and
corruption and risk
management update
• Review of terms of reference of
Board Committees
• Monthly management reports
• Tax affairs
• Review of delegated authorities
• Potential conflicts of interest
of Directors
• Consideration of revisions to the
Corporate Governance Code
the feedback from Board members was
positive and concluded that the Board
was functioning well and effectively. No
significant concerns were expressed by
Board or Committee members as to the
way in which the Board or its Committees
functioned, the support given to them,
the matters covered at their meetings or
how they were dealt with, or as to the
contribution of any individual Director.
The Board discussed the evaluation at its
meeting in March 2019. At the meeting,
the Board agreed that it was improving
its ways of working and agreed to
review how the Board may work more
effectively in the coming year. At a
private meeting, Sir David Omand,
SID, led a review of the Chairman’s
performance and concluded that the
Chairman continued to be effective.
Board induction
and development
New Non-Executive Directors receive
comprehensive and tailored induction
programmes. During the financial year
ending 31 March 2019, Lucy Dimes and
Kjersti Wiklund visited our main operating
sites, both in the UK and in Europe. They
have also met with all members of the
senior executive team to understand
their respective areas of responsibility.
In addition, the Company Secretary
arranges training and ongoing updates
as requested or as required. For example,
during the year under review, he updated
the Board on the revised UK Corporate
Governance Code. Non-Executive
Directors may at any time make visits to
any Group business and presentations are
made to the Board during the year. This
year, the Board conducted an in-depth
review of our Australia business.
Babcock International Group PLC Annual Report and Accounts 2019 93
Financial statementsStrategic reportGovernance Effectiveness continued
Nominations Committee
Committee membership
and attendance
Mike Turner (Chairman)
Sir David Omand
Victoire de Margerie*
Ian Duncan
Lucy Dimes
Myles Lee
Kjersti Wiklund*
Jeff Randall
6 of 6
6 of 6
5 of 6
6 of 6
6 of 6
6 of 6
5 of 6
6 of 6
* Victoire de Margerie and Kjersti Wiklund
were unable to attend one meeting due to
pre-existing business commitments.
Mike Turner CBE, Chairman
Membership of the Committee
The Nominations Committee was during
the year, and at the date of this report
is, made up entirely of independent
Non-Executive Directors, chaired by the
Company’s Chairman. The Committee
sometimes invites Executive Directors
to attend meetings of the Committee,
if appropriate. Committee membership
and its attendance at its meetings in the
year are set out above.
No individual participates in discussion
or decision-making when the matter
under consideration relates to him or her.
The Company Secretary is Secretary to
the Committee.
In addition to its formal meetings,
members of the Committee also met
together informally to discuss senior
executive succession planning.
Matters within the Committee’s remit
are also sometimes taken as specific
items at full Board meetings, principally
consideration of succession planning
more widely within the Group and
talent identification, management
and development.
94 Babcock International Group PLC Annual Report and Accounts 2019
Activities undertaken by the
Committee during the year
During the year ended 31 March 2019,
the Committee:
• Managed the succession of Ruth
Cairnie as Chair designate following
Mike Turner’s decision to retire from
the Board. The Committee asked
Sir David Omand, SID, to lead the
search, which he did, supported by
Ian Duncan and Kjersti Wiklund.
• Considered the continued
independence of Sir David Omand
and the reappointment of Myles
Lee and Victoire de Margerie as
Non-Executive Directors.
In the search for the new Chairman,
the Committee set the candidate
specification and reviewed a number
of potential candidates, using the
services and advice of Egon Zehnder
as search consultants. Egon Zehnder
does not have any connection with the
Group other than as a senior recruitment
consultant. The Committee will continue
to focus on ensuring that the Board
has the appropriate balance of skills,
experience, independence and
knowledge of the Company in order
to meet the Company’s strategic goals.
Mike Turner CBE
Committee Chairman
Responsibilities of
the Committee
The Committee is responsible for making
recommendations to the Board, within
its agreed terms of reference, on
appointments to the Board. The terms
of reference of the Committee are
available on the Company’s website.
The Committee also assists the Board
in discharging its responsibilities in
respect of:
• Regularly reviewing and evaluating
the size, structure and composition
(including the balance of skills,
diversity, knowledge and
experience) of the Board and
making recommendations to the
Board with regard to any changes
• Considering succession planning for
Directors and other senior executives,
taking into account the challenges and
opportunities facing the Company and
the skills and expertise needed on the
Board in the future
• Reviewing the leadership needs
of the Group, both executive and
non-executive, with a view to
ensuring the continued ability of
the Group to compete effectively
in the marketplace
• Identifying and making
recommendations for the approval
of the Board regarding candidates
to fill Board vacancies and reviewing
the time required from Non-Executive
Directors for the performance of their
duties to the Company.
Diversity
When considering recommendations
for appointment to the Board, the
Committee has in mind the strategic
plans and the development of the
business in both existing and new
market sectors and with new, and
new types of, customers, both in the
UK and internationally, and the need
to maintain the Board’s credibility in its
chosen business areas. The Committee
also takes into account as part of its
deliberations the Board’s policy to
foster and encourage greater diversity of
gender, outlook, background, perception
and experience at Board level.
The Board has a clear objective to
see an increasing number of women
in senior executive management roles
and throughout the workforce as a
whole. However, we believe that diversity
should not be about firm quotas or solely
a gender debate and that instead we
should look at a wide-ranging approach.
For this reason the Board has chosen
not to set any specific targets but will
continue to maintain its practice of
embracing diversity in all its forms
when compiling a shortlist of suitable
candidates and recommending any
future Board appointments. Further
insight into the work being done to foster
female participation in the industries in
which we operate is provided in the
Strategic report on pages 54 and 60.
Talent and succession
The Committee is mindful of its
responsibilities to consider succession
planning for the senior executive team
and annually reviews the Company’s
talent pipeline in order to ensure that the
Company and the sectors are identifying
near and medium term candidates for all
the key roles. The Committee also looks
to see if those who are identified as
candidates are being given the right
attention and training to make sure that
they are progressing in their careers.
Babcock International Group PLC Annual Report and Accounts 2019 95
Financial statementsStrategic reportGovernance Accountability
Audit and Risk
Committee
Ian Duncan, Chairman
I am pleased to present the 2019 report
of the Audit and Risk Committee. The
report describes how the Committee has
carried out its responsibilities during
the year.
Membership of the Committee
The Audit and Risk Committee was during
the year, and at the date of this report
is, made up entirely of independent
Non-Executive Directors. Committee
membership, as well as attendance at
its meetings in the year, is set out above.
Unless otherwise stated, members
were members throughout the year.
Further details of the backgrounds and
qualifications of the members of the
Committee can be found on pages 88
and 89. The Group Company Secretary
and General Counsel was Secretary to
the Committee throughout the year.
The Board is satisfied that Ian Duncan,
who has been Chairman of the
Committee since July 2011, has recent
and relevant financial experience and
that the Committee complies with the
UK Corporate Governance Code. Ian is a
chartered accountant and former Group
Finance Director of Royal Mail Holdings
PLC. Currently, Ian is the Chairman of the
Audit Committee of Bodycote PLC and
SIG PLC. He has also formerly been
Corporate Finance Director at British
Nuclear Fuels PLC, and CFO and Senior
Vice President at Westinghouse Electric
Company LLC in Pennsylvania, USA.
Role of the Committee
The principal responsibilities of the
Audit and Risk Committee are to:
• Monitor the integrity of the full-year
and half-year financial statements and
any formal announcements relating to
the Company’s financial performance
• Provide advice on whether the
Annual Report and Accounts, taken
as a whole, is fair, balanced and
understandable, and provides the
information necessary for Shareholders
to assess the Company’s position
and performance, business model
and strategy
• Review the statement in the Annual
Report confirming that the Directors
have carried out a robust assessment
of the principal and emerging risks
facing the Company and how they
are being managed or mitigated
• Make recommendations to the Board,
for it to put to the Shareholders for
their approval in general meeting,
in relation to the appointment of
the external auditor
96 Babcock International Group PLC Annual Report and Accounts 2019
Committee membership
and attendance
Ian Duncan (Chairman)
Sir David Omand
Victoire de Margerie*
Lucy Dimes
Myles Lee
Kjersti Wiklund
Jeff Randall
5 of 5
5 of 5
4 of 5
5 of 5
5 of 5
5 of 5
5 of 5
* Victoire de Margerie was unable to
attend one meeting due to a pre-existing
business commitment.
• Review and monitor at least
once a year the external auditor’s
independence and objectivity, as
well as the effectiveness of the audit
process, taking into consideration
relevant UK professional and
regulatory requirements
• Approve the engagement of the
external auditor to supply non-audit
services, in line with policy (see
page 100)
• Keep under review the adequacy and
effectiveness of the Company’s internal
financial controls, as well as its internal
control and risk management systems
• Monitor and keep under review the
effectiveness of the Company’s internal
audit service
• Report to the Board, identifying any
matters in respect of which it considers
that action or improvement is needed,
and make recommendations as to the
steps to be taken.
The full terms of reference for the
Committee can be found on the
Company’s website.
Who attends Committee meetings?
In addition to the members of the
Committee, the Committee, at its
discretion, usually invites the Group
Chairman, the Chief Executive, the
Group Finance Director, the sector
Chief Executives and the Group Financial
Controller. The Committee is satisfied
that having these invited attendees
present does not influence or
constrain the Committee’s discussions
or compromise the Committee’s
independence. Their presence ensures
that all Board Directors and the senior
management of the Group are directly
aware of the Committee’s deliberations,
how it goes about discharging its
responsibilities on behalf of the full
Board and any areas of concern or
focus for the Committee. It also
assists the Committee by allowing
direct questioning of executives on
matters that the Committee thinks
need further challenge, clarification,
explanation or justification. Should
a situation arise where the presence
of any such attendee would be
inappropriate or might compromise
discussion, the Committee would either
not invite the attendee concerned or
request that they not attend the
relevant part of that meeting.
The Group Risk Manager attended
Committee meetings for its discussion
of Group risk reports and related items.
During the year to 31 March 2019,
Ernst & Young LLP (EY) provided internal
audit services to the Company and
PricewaterhouseCoopers LLP (PwC)
was the Group’s external auditor. Both
auditors attended the Committee’s
meetings during the year to 31 March
2019. The Committee Chairman also
met PwC and EY in the absence of
executive management before every
meeting. The auditors are also invited
to address the Committee without
executives present at least once a year.
The Committee’s terms of reference
were reviewed during the year to
ensure that they are in line with best
practice guidelines.
Activities undertaken by the
Committee during the year
During the year to 31 March 2019 the
Committee met five times. The agenda
for each meeting is set by the Committee
Chairman in conjunction with the Group
Company Secretary and General Counsel
and other members of the Committee
as appropriate. At these meetings,
the following matters and issues
were considered:
Financial results
• full-year and half-year financial
statements and related results
announcements
• reports and reviews from the
external auditors
• matters that required the exercise of
a significant element of management
judgement in relation to the
financial statements for the year to
31 March 2019 (see pages 98 and 99)
• review of the assessment that the
Company’s financial statements are
presented on a going concern basis
• the Company’s approach to the
requirement on the Company to
examine the Company’s longer-term
solvency and viability (please see
page 81 for further details).
Fair, balanced and understandable
assessment
Advice to the Board on the requirement
for a statement from it that the Annual
Report and Accounts for the year to
31 March 2019 are fair, balanced
and understandable and provide the
information necessary for Shareholders
to assess the Company’s position,
performance, business model and
strategy during the relevant period. The
Committee satisfies itself that this is so
by circulating to Board members draft
wording at an early stage with sufficient
time and detailed content to allow for
an assessment of the content against
the reports and accounts provided to
the Board and its discussions throughout
the relevant period. Before drafts are
submitted to the Board, the Group
Director of Investor Relations and
Group Director of Communications
review the content of the Strategic
report to ensure consistency with other
financial statements made by the Group
during the year and that the necessary
information is included in the draft. In
addition, the Committee asks the Group
Financial Controller to prepare a formal
written report for the Committee
reviewing the relevant draft, its
consistency with his knowledge and
understanding of matters and the
appropriateness of the weighting given
to them, and confirming that the draft,
taken as a whole, is fair, balanced
and understandable and provides the
information necessary for Shareholders
to assess the Group’s performance,
business model and strategy.
Audit Quality Review
During the year, the Audit Quality
Review team of the Financial Reporting
Council (FRC) reviewed the work
performed by PwC for the audit of
the Company for the year ended
31 March 2018. The FRC has provided
a copy of their confidential report to
the Chairman of the Committee, which
has been reviewed and discussed by
the Committee and with PwC. Areas
of the external audit procedures were
identified as requiring improvement
and the Committee is satisfied with the
responses implemented by PwC for the
audit of the Group’s financial statements
for the year ended 31 March 2019
and the Committee is content that the
matters raised do not give it concerns
over the future quality, objectivity or
independence of the audit.
Babcock International Group PLC Annual Report and Accounts 2019 97
Financial statementsStrategic reportGovernance Accountability continued
Correspondence with the FRC
Risk and internal controls
The FRC sent a letter in March to the
Company, suggesting areas where
the Company might consider making
improvements in respect of its Annual
Report and Accounts. The Company,
under the Committee’s oversight,
responded to the letter and
made changes to its Annual Report
and Accounts for the year ending
31 March 2019 in order to address
points made by the FRC. The FRC has
confirmed that the matter is now closed.
Audit plans
Internal and external audit plans for
the year were reviewed and approved.
Internal audit
At each meeting, the Committee
receives internal audit reports on
findings from internal audit visits to
business units, which look at matters
including accounting and financial
controls, anti-bribery and corruption
controls, business continuity, contract
performance and contract bidding risks.
These include follow-up reports on any
matters identified in earlier reports as
requiring attention or improvement. The
reports contain tracking information to
enable the Committee easily to see the
control performance of business units
over time and how quickly any matters
are addressed.
• review of the principal and emerging
risks facing the Company and how they
are being managed or mitigated
• review of the Group’s risk management
and internal control systems and
consideration of their effectiveness
• regular detailed reports identifying
areas of risk at business unit, sector
and Group level, assessing and
prioritising potential impact, risk
mitigation steps in place and the
pre and post-mitigation risk levels
• in-depth reviews of selected specific
risks. This year, the Committee
considered the Company’s
customer profile risk, in particular, the
relationship with the UK Government,
the UK’s exit from the EU and the
Group’s joint ventures.
Fraud
Reports covering any suspected incidents
of fraud, their investigation and any
remedial or preventative action.
Whistleblowing
The Committee monitors the Group
whistleblowing policy on behalf of the
Board and receives regular reports of
calls and emails to the Group’s external
independent whistleblowing services
and how these have been investigated
and concluded. The total number of
whistleblowing reports in the year to
31 March 2019 was 71 (2018: 66). For
further explanation of the whistleblowing
procedure please see page 72.
Audit/non-audit fees and
auditor independence
Audit and non-audit fees for the external
auditor were reviewed by the Committee
and considered in relation to their
effect on auditor independence. The
Committee is satisfied that independence
was maintained throughout the year.
IFRS16 – leases
IFRS16 – leases was adopted by the
Group on 1 April 2019. The Committee
considered the impact of IFRS16 on
the future reporting of the Group. The
expected impact is set out in note 31
on pages 199 to 200.
Significant issues considered
by the Committee in relation
to the financial statements
We are required to provide an
explanation of the significant issues
the Committee considered in relation
to the financial statements for the year
to 31 March 2019 and how these issues
were addressed, having regard to matters
communicated to the Committee by the
external auditor.
In planning the year end audit, the
Committee considered with
management and the Company’s
auditors the key areas of focus for the
audit having in mind their significance
to the Group’s reporting of results and
the degree of judgement involved
in their evaluation. The significant
issues considered in relation to the
financial statements for the year ended
31 March 2019 and how the Committee
addressed them are set out in the table
on the opposite page.
98 Babcock International Group PLC Annual Report and Accounts 2019
Significant issue
How the Committee addressed it
Contract accounting and
revenue recognition
Cash generating units
goodwill assessment
Exceptional items
Pensions accounting –
the choice of assumptions in
the valuation for accounting
purposes of the liabilities of
the Group’s defined benefit
schemes
Adoption of IFRS15 – revenue
from contracts with customers
The Committee considered the Group’s material contracts. These require a significant degree of
management judgement that could materially affect the appropriate accounting treatment for
these contracts; these were the subject of discussion and challenge with management to ensure
that the Committee was satisfied as to the reasonableness of those judgements.
Goodwill is allocated to the Group’s cash generating units, Marine, Land, Aviation and Nuclear.
The Committee reviewed and challenged management’s assessment of the goodwill balance
by considering, amongst other matters, management’s evaluation of the cash flows resulting
from the Group’s budget together with the terminal value assessment. After consideration, the
Committee was satisfied that the underlying assumptions used in management’s evaluation
were reasonable and those assumptions left more than sufficient headroom for the Committee
to conclude that no impairment was required. Note 11 on page 176 provides information on
key assumptions and sensitivity analyses performed.
The Group recognised exceptional charges of £161m on a pre-tax basis, together with a £10m
tax charge relating to our reorganisation of our Aviation sector in order to prepare for the UK’s
exit from the EU. The exceptional charges related to the reshaping of the Group’s Oil and Gas
helicopter business, certain exits and disposals, costs associated with the Guaranteed Minimum
Pensions Equalisation charge and restructuring across the sectors. The Committee considered
all the charges to assess whether their classification as exceptional was appropriate. Additionally,
the Committee reviewed the costs associated with the reshaping of the Group’s Oil and Gas
helicopter business, including the appropriateness of the asset impairment charges and onerous
lease provisions. After consideration, the Committee was satisfied with the quantum of
exceptional charges and that the treatment of the charges as exceptional was appropriate.
The Committee assessed the particular assumptions proposed by management and their impact
on scheme assets and liabilities in the context of assumptions being used in respect of the same
factors by other companies and the pensions industry more widely. After consideration, the
Committee was satisfied that the assumptions fell within acceptable ranges. See note 25
on pages 193 to 197.
The Company had announced in December 2017 that it had completed a detailed review of all
material contracts and had concluded that the adoption of IFRS15 would not result in a material
change to the timing of revenue or profit recognition on the Group’s contracts. The Committee
remains satisfied that the standard does not drive any material change to the timing of revenue
or profit recognition for the Group.
Internal controls and
risk management
The Committee believes that the
identification, control, mitigation and
reporting of risk is central to the delivery
of the Company’s strategy. The way that
the Company manages risk is set out in
the Strategic report on pages 70 to 72,
with the principal risks facing the Group
described on pages 73 to 81. The
Committee has conducted a rigorous
and robust review of the ongoing
effectiveness of the Company’s risk
management processes in light of
the Code (and the Financial Reporting
Council’s associated Guidance on
Risk Management, Internal Control
and Related Financial and Business
Reporting). As part of its review, the
Committee asked management to
review the risk management and
reporting arrangements to ensure
that the Group continued to meet
best practice. After the review, the
Committee was satisfied that the
detailed bottom up risk identification
process, which includes review and
challenge by Group senior management,
did allow the Committee to identify and
evaluate the Company’s principal and
emerging risks. The Committee approved
the development of an assurance map
to set out more clearly the sources of
assurance in respect of the Group’s
principal risks. These sources of assurance
were measured against a “three lines
of defence” model: the first line being
management control, policies and
procedures, together with management
oversight; the second being internal
assurance activities, such as the review
of the sector risk assessments by Group
senior management; and the third
being assurance obtained from
external sources.
A statement regarding the effectiveness
of the internal controls and control
processes, including those over financial
reporting, can be found on page 138.
Babcock International Group PLC Annual Report and Accounts 2019 99
Financial statementsStrategic reportGovernance For the year ended 31 March 2019, the
Committee has approved the payment
to PwC of fees of £2.5 million for audit
services (£0.6 million of which was for
the statutory audit of the Company’s
consolidated financial statements).
A breakdown of fees paid to the auditor
is set out in note 4 on page 171.
Ian Duncan
Committee Chairman
Accountability continued
Non-audit fees
The Committee regularly considers the
engagement of, and level of fees payable
to, the auditor for non-audit work,
considering potential conflicts and the
possibility of actual or perceived threats
to their independence. The Company’s
policy is to consider whether to place
material non-audit services work with the
external auditor on a case-by-case basis,
based on an assessment of who is best
placed to do the work having regard
to availability, resources, capability,
experience and any conflicts of interest
of potential candidate firms for the
work. The Committee makes the choice
based on what it considers to be in the
Company’s best interest overall, having
regard to potential independence issues
if the work is placed with the Company’s
auditor. Non-audit services offered to
the auditor would not include the
design or operation of financial
information systems, internal audit
services, maintenance or preparation
of accounting records or financial
statements that would be subject
to external audit, or work that the
Committee considers is reasonably
capable of compromising its
independence as auditor. Any fee for
non-audit work must be approved by
the Committee Chairman, subject to
the Group Financial Controller being
able to approve any single expenditure
of £10,000 or less, provided that, in
any year, he may not approve more
than £50,000 in aggregate. Having
considered the non-audit services
provided by the auditor during the year
ended 31 March 2019, the Committee
is satisfied that these services were
provided effectively and did not
prejudice the objectivity or
independence of the auditor.
Internal audit
The Committee considers that it is still
appropriate to have an internal audit
service provided by an external advisor,
but keeps this under review. In the year
to 31 March 2019, the Committee was
satisfied with the service provided by
EY acting as internal auditor.
External audit
The Committee manages the relationship
with the external auditor on behalf of
the Board and monitors the auditor’s
independence and objectivity, along
with the effectiveness of the external
audit, on an annual basis. Audit fees are
re-evaluated periodically.
For the year to 31 March 2019, PwC
has been the Group’s external auditor,
having been reappointed by Shareholders
at the AGM on 19 July 2018 on the
recommendation of the Board. The
Chairman and the Committee regularly
assess PwC’s effectiveness in the
provision of audit services in their
meetings with PwC. After each annual
audit, there is a rigorous review of PwC’s
audit services in that audit, examining
the level and consistency of expertise
and resources, the effectiveness of
the audit (including, inter alia, the
understanding of our business and
reporting processes for subsidiary audit
teams), and PwC’s independence and
leadership. The review includes the
provision to PwC, and discussion with it,
of detailed feedback from those exposed
to the audit process within the Group.
The question of PwC’s continuing
independence in the provision of audit
services is considered and discussed
with PwC, including the basis upon
which that assessment can reasonably
be made and supported.
The Company expects to tender the
external audit within two years and PwC,
having been auditor since 2002, will not
be invited to participate in that tender.
The Committee confirms that the Group
is in compliance with the Statutory Audit
Services for Large Companies Market
Investigation (Mandatory Use of
Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014.
100 Babcock International Group PLC Annual Report and Accounts 2019
Remuneration
Report of the
Remuneration Committee
Committee membership
and attendance
Jeff Randall (Chair)
Sir David Omand
Victoire de Margerie*
Ian Duncan
Lucy Dimes
Myles Lee
Kjersti Wiklund
6 of 6
6 of 6
5 of 6
6 of 6
6 of 6
6 of 6
6 of 6
* Victoire de Margerie was unable to
attend one meeting due to a pre-existing
business commitment.
Jeff Randall, Committee Chair
Annual Statement
of the Remuneration
Committee Chair
Dear Shareholder
I am pleased to present the Directors’
Remuneration report for 2018/19.
This Directors’ Remuneration report
has three parts: this, the Chair’s Annual
Statement, a Policy Report and an Annual
Report on Remuneration. Together, they
present full and transparent disclosure of
the Company’s intentions as to Directors’
remuneration and how our remuneration
arrangements operate. Our current
Remuneration policy was approved
at the 2017 AGM and is set out on
pages 104 to 113 below.
During the course of this financial year,
I will be consulting with Shareholders
about our current policy before putting
any proposed changes to Shareholders
at the 2020 AGM. We will, however,
be seeking an advisory vote as to your
approval of this Annual Statement and
the Annual Report on Remuneration
at this year’s AGM on Thursday,
18 July 2019.
Activities undertaken by the
Committee during the year
The current Remuneration policy is
structured to align with the Committee’s
policy of setting fixed remuneration at or
below median with total remuneration
remaining capable of delivering upper
quartile reward for upper quartile
performance. The Committee believes
that this policy continues to support
appropriately the strategic focus of the
Company and remains fit-for-purpose.
Remuneration outcomes
for 2018/19
This year, when deciding on the
remuneration outcomes for 2018/19,
the Committee was very aware of the
particular emphasis that the revised UK
Corporate Governance Code places on
the exercise of independent judgement
and discretion. The Committee believes
that it does review remuneration
outcomes to ensure they reflect the
broader context, including Shareholders’
experience. Against the background
reported in the Chairman’s statement
earlier in this Annual Report, the
Committee has reviewed the resulting
outcomes for 2018/19. After due
consideration, including in particular,
the consideration of the impact of the
exceptional costs, which have been
described on page 29, the Committee
has decided:
• annual bonus payments in respect of
the year to 31 March 2019 ranged
from 54.6% to 60.9% of maximum
(see page 118 for more detail); and
• performance over the longer-term
performance period from 1 April 2016
to 31 March 2019 is expected to
result in 15.1% vesting of the PSP
awards made in 2016 (see page 121
for more detail).
2019 salary review
The Committee has reviewed the
salary levels of the Executive Directors
in conjunction with its review of the
remuneration policies relating to the
general workforce and has set the base
salary increase at 2%, which is below
the increase for the wider UK workforce
(see page 121 for more detail).
Babcock International Group PLC Annual Report and Accounts 2019 101
Financial statementsStrategic reportGovernance Remuneration continued
The revised UK Corporate
Governance Code (Code)
In July 2018 the Financial Reporting
Council issued its revised Code. The
Committee considered those elements
that were relevant to remuneration.
As the Committee will be submitting
its Remuneration policy to shareholders
at the Company’s 2020 AGM, the
Committee will use its wider review
of the Remuneration policy in order
to assess how it should take the revised
Code into account. In particular, the
Committee will give further consideration
to a post-employment shareholding
policy and the policy on pension
contribution levels for Executive
Directors. However, as a start, the
Committee has determined that the
pension contribution for any Executive
Director appointed after 1 April 2019
will be aligned with that available to the
wider workforce in the relevant market.
The Committee will seek to engage with
Shareholders as widely as practicable
over the coming year in order to
understand their priorities for the new
Remuneration policy to be proposed
at the Company’s 2020 AGM.
Jeff Randall
Committee Chair
2019/20 annual bonus
The Committee has also reviewed the
plans for the annual bonus for Executive
Directors for 2019/20 and has decided
to retain the same financial measures of
EPS, PBT and OCF as well as the same
non-financial measures as in 2018/19.
In addition, it has decided to retain the
same weighting between the financial
measures (80%) and the non-financial
measures (20%). However, in order
to support the emphasis placed by
the Board on cash generation, it has
increased the weighting for OCF
from 20% of annual bonus to 30%
and decreased the weighting of EPS
from 40% of annual bonus to 30%
(see page 122 for more detail).
In addition, after consideration of
recent investor guidance, the
Committee reduced the maximum
payment that may be earned for the
achievement of target from 55% to 50%.
2019/20 PSP awards
As well as reviewing the annual bonus
measures, the Committee has also
considered the measures and targets
of the Company’s PSP. The Committee
continues to believe that the performance
measures of EPS, TSR and ROCE, along
with their respective weighting of one
third each, represent the best alignment
with our strategy and Shareholder
interests. As part of this review, the
Committee considered the respective
targets associated with each performance
measure to ensure that they continued
to be stretching. In respect of TSR, the
Committee decided that the target and
performance measure would remain
unchanged from 2018/19.
In respect of the EPS targets, the
Committee considered the forward
impact of the loss of the Magnox
contract and decided that it would be
more appropriate to set a cumulative
three-year EPS performance range of
between 231.5p and 248.0p for
2019/20 PSP awards, in the belief that
a cumulative range will help to reinforce
the maximisation of EPS in each year of
the performance period. In respect of
the ROCE target (based on the average
return over the performance period) the
Committee has decided to reduce the
threshold of the range to 11%, whilst
maintaining the maximum of the range
at 14%. For more detail see page 122.
Due to the fall in the share price since
the 2018/19 PSP grant, the Committee
has decided that 2019/20 PSP awards
should be scaled back by 20% in value;
awards will therefore be granted to the
Executive Directors over a face value of
a maximum of 160% of salary rather than
the normal award value of 200%.
New PSP rules
The rules of the current PSP were
approved by Shareholders on 9 July
2009 and will expire on 9 July 2019.
The Committee continues to believe
that the PSP incentivises executives to
guard against short-term steps and to
maximise the long-term sustainability of
the Company’s future performance, and
that it appropriately aligns the interests
of executives with those of Shareholders.
Accordingly, the Company will be asking
Shareholders at its 2019 AGM to approve
a new set of PSP rules for awards made
after 9 July 2019. The new rules mirror
the existing PSP rules, with the only
changes being minor in nature and
intended to reflect changes of law or
UK corporate governance since 2009.
102 Babcock International Group PLC Annual Report and Accounts 2019
Glossary of terms
As used in this Remuneration report
CSOP
DBP
DBMP
EBIT
EPS
OCF
PSP
PBT
PBIT
ROCE
TSR
means the 2009 Babcock Company Share Option Plan
means the 2009 Babcock Deferred Bonus Plan
means the 2012 Babcock Deferred Bonus Matching Plan
means Earnings Before Interest and Tax
means basic underlying Earnings Per Share
means Operating Cash Flow as determined for management purposes
means the 2009 Babcock Performance Share Plan
means underlying Profit Before Tax
means underlying Profit Before Interest and Tax
means Return on Capital Employed
means Total Shareholder Return
Remuneration Committee (the Committee)
Terms of reference for the Committee are available for inspection on the Company’s website and were reviewed during the year.
Duties of the Committee include the review of the policy for the remuneration of the Executive Directors and the Chair, as well
as their specific remuneration packages. In determining the Remuneration policy, the Committee takes into account all factors
which it deems necessary to ensure that members of the senior executive management of the Group are provided with appropriate
incentives to encourage strong performance and that they are rewarded for their individual contributions to the success of the
Company in a fair and responsible manner.
The composition of the Committee (see page 101) and its terms of reference comply with the provisions of the UK Corporate
Governance Code.
Compliance statement
This report covers the reporting period from 1 April 2018 to 31 March 2019 and provides details of the Committee’s membership,
its deliberations on executive remuneration during the year under review and the Remuneration policy for the Company. This
report has been prepared by the Committee according to the requirements of the Companies Act 2006 (the Act), Regulation 11
and Schedule 8 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013
(the Regulations) and other relevant requirements of the FCA Listing Rules. In addition, the Committee has applied the principles
of good corporate governance set out in the UK Corporate Governance Code 2016, and has considered guidelines issued by its
leading Shareholders and bodies such as the Investment Association, Institutional Shareholder Services and the Pensions and Lifetime
Savings Association. In accordance with Section 439 of the Act, an advisory resolution to approve this Annual Statement and the
Annual Report on Remuneration will be proposed at the Annual General Meeting on 18 July 2019.
This report contains both auditable and non-auditable information. The information subject to audit is so marked.
The Regulations require the Company’s auditors to report that the ‘Audited information’ in this report has been properly prepared
in accordance with the Regulations.
Babcock International Group PLC Annual Report and Accounts 2019 103
Financial statementsStrategic reportGovernance Remuneration continued
Remuneration Policy Report
Our current Remuneration policy was approved at the 2017 AGM and it is intended that this policy will apply for three years
from that date. The Policy Report that follows is unchanged from that published in last year’s Annual Report save for the
following changes:
• Update to page references
• Update to pay scenario charts
• Update to reference dates, as appropriate.
Key principles of the Remuneration policy
Objective
To provide fair remuneration arrangements that allow for enhanced rewards for delivery of superior performance by allowing for
the possibility of upper quartile rewards for upper quartile performance, that align Directors’ and Shareholders’ interests and take
account of risk.
Our policy for executives reflects a preference that we believe is shared by the majority of our Shareholders – to rely more heavily
on the value of variable performance-related rewards, rather than on the fixed elements of pay. The rationale is to incentivise and
reward success.
Weighting towards long-term, performance-related pay
The focus of our executive remuneration is, therefore, weighted towards performance-related pay with a significant element
weighted towards long-term rather than short-term performance. We believe that, properly structured and with suitable safeguards,
variable, performance-related rewards are the best way of linking pay to strategy, risk management and Shareholders’ interests.
Directors’ Remuneration policy
Summary of the Remuneration policy for Executive Directors (Policy Table)
Purpose and link to strategy
Operation
Opportunity
Performance metrics
Fixed pay
Base salary
Should be at a level
that is (i) fair and
(ii) capable, when
taken with the
gearing effect of
performance-related
pay, of delivering
upper quartile actual
remuneration for
upper quartile
performance.
Base salaries are
In respect of existing Executive Directors, it is
reviewed annually,
with reference to
the individual’s role,
experience and
performance; salary
levels at relevant
comparators are
considered, but do
not in themselves
drive decision-making.
anticipated that decisions on any salary increases
will be guided by the increases for the wider
employee population over the term of this policy. In
certain circumstances (including, but not limited to, a
material increase in job size or complexity, market forces,
promotion or recruitment), the Committee has discretion
to make appropriate adjustments to salary levels to ensure
they remain fair and competitive.
Latest salaries are set out in the Annual Report on
Remuneration on page 121.
Business and
individual
performance are
considerations in
setting base salary.
104 Babcock International Group PLC Annual Report and Accounts 2019
Purpose and link to strategy
Operation
Opportunity
Performance metrics
Fixed pay
Pension
To provide market
competitive
retirement benefits.
Cash supplement in lieu wholly or
partly of pension benefits for ongoing
service and/or membership of the
Group’s Defined Benefit or Defined
Contribution pension scheme.
All the Executive Directors currently
receive a cash supplement of 25% of
base pay in lieu of all pension benefits.
Not performance-
related.
The cash supplement payable is set
having regard to market practice, and
in the context of the other elements
of the remuneration package, notably
base salary. Other than in exceptional
cases (such as to replace existing
arrangements for new recruits),
the Committee does not anticipate
employer contributions into a defined
contribution pension scheme or cash
in lieu of benefit as being at a cost to
the Company that would exceed 25%
of base salary.
Benefits
Designed to be
competitive in the
market in which the
individual is employed
or to meet costs
effectively incurred
at the Company’s
request.
Not performance-
related.
A range of benefits is provided which
may include: life insurance; medical
insurance; car and fuel benefits and
allowances; home to work travel and
related costs, if agreed on an individual
basis or if incurred at the request of the
Company; accommodation benefits
and related costs, if based away from
home at the request of the Company;
Board function-related costs; and, in
certain circumstances, cash allowances
in respect of the tax charge on
accommodation or travel to work
benefit, if incurred at the request of
the Company or with its prior approval.
Other benefits (e.g. relocation) may be
offered if considered appropriate and
reasonable by the Committee.
Benefit values vary by role and are
periodically reviewed and set at a
level which the Committee considers
appropriate in light of relevant
market practice for the role and
individual circumstances.
The cost of the benefits provided
changes in accordance with market
conditions and will, therefore, determine
the maximum amount that would be
paid in the form of benefits during the
period of this policy. The Committee
retains the discretion to approve a
higher cost in certain circumstances
(e.g. relocation) or in circumstances
where factors outside the Company’s
control have changed materially.
Babcock International Group PLC Annual Report and Accounts 2019 105
Financial statementsStrategic reportGovernance
Remuneration continued
Purpose and link to strategy
Operation
Opportunity
Performance metrics
Variable pay
Annual bonus
To underpin delivery
of year on year
financial performance
and progress towards
strategic non-financial
objectives, being
structured to motivate
delivery against targets
and achievement
of stretching
outperformance,
whilst mindful of
achievement of
long-term strategy
and longer-term risks
to the Company.
The requirement to
defer a substantial part
of bonus into Company
shares strengthens
the link to long-term
sustainable growth.
Performance targets are set at the start of the year
and reflect the responsibilities of the executive in
relation to the delivery of our strategy.
At the end of the year, the Committee determines
the extent to which these targets have been
achieved. The Committee has the discretion to
adjust the outcome (up or down) within the limits
of the plan for corporate transactions, unforeseen
events, factors outside reasonable management
control, changes to business priorities or operational
arrangements, to ensure targets represent and
remain a fair measure of performance. In addition,
the Committee considers health and safety
performance and it may reduce or cancel any annual
bonus otherwise payable if it considers it appropriate
to do so in light of that performance.
At least 40% of annual bonus payments for Executive
Directors must be deferred into awards over Company
shares for three years. Mandatory deferred bonus
awards are subject to potential forfeiture if the holder
leaves before the awards vest. Malus and clawback
apply to cash and deferred bonus awards: if the
accounts used to determine the bonus level have to be
materially corrected; if the Committee subsequently
comes to a view that bonus year performance was
materially worse than originally believed; in the event
of gross misconduct; or if the award holder leaves
employment in circumstances in which the deferred
bonus did not lapse and facts emerge which, if known
at the time, would have caused the deferred bonus to
lapse on leaving or caused the Committee to exercise
any discretion differently.
Maximum bonus
Performance is
opportunity is 150%
of salary.
For achievement of
threshold, up to 15%
of maximum bonus is
earned; for achievement
of target up to 55%
of maximum bonus
is earned (reduced
to 50% for the
2019/20 bonus).
determined by the
Committee on an
annual basis by
reference to Group
and/or sector financial
measures, e.g. EPS
growth, PBT, OCF,
as well as the
achievement of non-
financial objectives.
The financial and
personal/strategic
objectives are typically
weighted 80% and
20% of maximum,
respectively.
The Committee retains
discretion to vary the
financial measures
and their weightings
annually, to ensure
alignment with the
business priorities for
the year.
Measures used for the
2018/19 annual bonus
and proposed for
2019/20 are included
in the Annual Report on
Remuneration on pages
118 and 122.
106 Babcock International Group PLC Annual Report and Accounts 2019
Purpose and link to strategy
Operation
Opportunity
Performance metrics
Variable pay
Performance Share Plan (PSP)
Vesting of PSP awards
is subject to continued
employment and
Company performance
over a three-year
performance period.
2019/20 PSP awards
will be based on the
achievement of
stretching EPS, TSR
and ROCE targets.
The Committee
will review the
performance measures,
their weightings, and
performance targets
annually to ensure
continued alignment
with Company strategy.
Details of measures and
targets used for specific
PSP grants are included
in the Annual Report on
Remuneration on pages
123 to 124.
Not performance-
related.
To incentivise delivery
of top quartile
Shareholder returns
and earnings growth
over the longer term.
Long-term measures
guard against short-
term steps being taken
to maximise annual
rewards at the expense
of future performance.
The Committee has the ability to grant nil-cost
Maximum annual PSP
awards of up to 200%
of base pay (reduced to
160% for the 2019/20
PSP award).
For each performance
condition applying to
an award, 16.7% of the
maximum award will
vest for threshold
performance.
options or conditional share awards under the PSP.
The award levels and performance conditions, on
which vesting depends, are reviewed from time to
time to ensure they remain appropriate.
Participants will receive cash or shares equal to the
value of any dividends that would have been paid
over the vesting period on awards that vest.
The Committee has the ability to exercise discretion
to override the PSP outcome in circumstances where
strict application of the performance conditions would
produce a result inconsistent with the Company’s
remuneration principles.
An additional two-year holding period will apply
to Executive Directors’ vested shares before they
are released.
Malus and clawback apply to PSP awards: if there is
a misstatement of the Group’s financial results for
any period; if the Committee subsequently comes to
a view that performance was materially worse than
originally believed; in the event of gross misconduct;
or if the award holder leaves employment in
circumstances in which the award did not lapse and
facts emerge which, if known at the time, would have
caused the award to lapse on leaving or caused the
Committee to exercise any discretion differently.
All-employee plans – Babcock Employee Share Plan
To encourage
employee ownership
of Company shares.
Open to all UK tax resident employees of
participating Group companies. Executive Directors
are eligible to participate.
The plan is an HMRC approved share incentive plan
that allows an employee to purchase shares (through
the plan trustees) out of pre-tax salary which, if held
for periods of time approved by HMRC (currently
three to five years), are taxed on a favourable basis.
The Company can match purchased shares with an
award of free shares. Matching shares are forfeited
if employees leave within three years of their award
(other than for ‘good leaver’ reasons).
Participants can
purchase shares
up to the prevailing
HMRC limit at the time
employees are invited
to participate.
The Company
currently offers to
match purchases
made through the
plan at the rate of
one free matching
share for every 10
shares purchased.
The matching rate is
reviewed periodically,
and any future offer
will be bound by the
prevailing HMRC limit.
Babcock International Group PLC Annual Report and Accounts 2019 107
Financial statementsStrategic reportGovernance
Remuneration continued
Approach to recruitment remuneration – (Recruitment policy)
In the case of hiring or appointing a new Executive Director, the Committee may make use of any of the existing components of
remuneration, as follows:
Pay element
Salary
Pension
Benefits
Annual bonus
Performance Share
Plan
All-employee plans
Other
Policy on recruitment
Based on size and nature of responsibilities of the proposed role; the candidate’s
experience; implications for total remuneration positioning vs. market pay levels
for comparable roles; internal relativities; and the candidate’s current salary.
Membership of pension scheme or salary supplement on a similar basis to other
executives, as described in the policy table, subject to any pension contribution
or salary supplement being aligned to those of the wider UK workforce.
Provision of benefits on a similar basis to other executives, as described in
the policy table.
As described in the policy table, and may be pro-rated for proportion of
year served.
New appointees may be granted awards under the PSP on similar terms to
other executives.
Maximum
N/A
N/A
N/A
150% of salary
200% of salary
New appointees may be granted awards under all-employee plans on similar
terms to other executives.
As per Policy Table
N/A
In determining appropriate remuneration for new Executive Directors, the
Committee will take into consideration all relevant factors (including quantum,
the nature of remuneration and where the candidate was recruited from) to
ensure that arrangements are in the best interests of the Company and its
Shareholders. The Committee may also make an award in respect of a new
appointment to ‘replace’ incentive arrangements forfeited on leaving a previous
employer. In doing so, the Committee will consider relevant factors, including
any performance conditions attached to these awards, time to vesting and the
likelihood of those conditions being met. The fair value of the compensatory award
would not be greater than the awards being replaced. In order to facilitate like for
like compensatory awards on recruitment, the Committee may avail itself of Listing
Rule 9.4.2(2), if required.
Other recruitment events
Internal promotion
When appointing a new Executive Director by way of promotion from an internal
role, the Committee will be consistent with the policy for external hires detailed
above. Where an individual has contractual commitments, outstanding incentive
awards and/or pension arrangements prior to their promotion to Executive
Director, the Company may honour those arrangements; however, where
appropriate, these would be expected to transition over time to the arrangements
stated above.
N/A
Non-Executive Director When recruiting a new Non-Executive Director, the Committee or Board will
N/A
structure pay in line with the existing policy, namely a base fee in line with
the current fee schedule, with additional fees for fulfilling the role of Senior
Independent Director and Chairmanship of the Audit and Risk, and
Remuneration Committees.
108 Babcock International Group PLC Annual Report and Accounts 2019
Payments from existing awards and commitments
Executive Directors are eligible to receive payment from any award or other commitment made prior to the approval and
implementation of the Remuneration policy detailed in this report.
Performance measure selection and approach to target setting
The measures used under annual bonus plans are selected annually to reflect the Group’s main strategic objectives for the year
and reflect both financial and non-financial priorities. Performance targets are set to be stretching but achievable, taking into
account the Company’s strategic priorities and the economic environment in which the Company operates. Financial targets are
set taking into account a range of reference points, including the Group’s strategic and operating plan.
The Committee considers at length the appropriate financial conditions and non-financial objectives to attach to annual
bonus awards as well as the financial targets to attach to share awards to ensure they continue to be: (i) relevant to the Group’s
strategic objectives and aligned with Shareholders’ interests, mindful of risk management; and (ii) fair by being suitably stretching
whilst realistic.
The Committee believes that TSR, EPS and ROCE continue to be effective measures of long-term performance for the Company,
providing a good balance between Shareholder value creation and line of sight for executives.
The TSR performance measure is tested by reference to the Company’s relative long-term share price performance against suitable
peers. The Committee believes that the use of relative TSR provides strong alignment with Shareholders’ interests by incentivising
management for the delivery of above-market returns. The TSR calculation would normally use a 12-month average for opening
and closing share prices adjusted for dividends paid during the period. The Company feels that this is the most appropriate period
because a 12-month average ensures both that short-term market volatility is excluded and that for each company a 12-month
period will capture the impact of the announcement of results and payment of dividends. A shorter period would not capture all
these events and would not necessarily put all companies on an equal footing.
The use of an EPS growth performance measure, in the opinion of the Committee, focuses management on continued strong
financial performance and is heavily dependent on the Company’s success in achieving its strategic goals. The Committee believes
that ROCE reinforces the focus on returns for Shareholders and encourages capital discipline.
The Remuneration Committee has the discretion to make adjustments to the calculation of short and long-term performance
outcomes in circumstances where application of the formula would produce a result inconsistent with the Company’s remuneration
principles. Such circumstances may include: changes in accounting standards and certain major corporate events such as rights
issues, share buybacks, special dividends, corporate restructurings, acquisitions and disposals.
The Committee reviews the performance conditions for share awards prior to the start of each cycle to ensure they remain
appropriate. No material reduction in long-term incentive targets for future awards would be made without prior consultation with
our major Shareholders.
Babcock International Group PLC Annual Report and Accounts 2019 109
Financial statementsStrategic reportGovernance Remuneration continued
Differences between Executive Director and general employee remuneration
The policy and practice with regard to the remuneration of senior executives below the Board is consistent with that for the
Executive Directors. Senior executives generally participate in the same long-term incentives as the Executive Directors with similar
performance measures applied. The Remuneration policy for our Executive Directors is considered with the remuneration philosophy
and principles that underpin remuneration for the wider Group in mind. The remuneration arrangements for other employees
reflect local market practice and seniority of each role. As a result, the levels and structure of remuneration for different groups
of employees will differ from the policy for executives as set out above but with the common intention that remuneration
arrangements for all groups might reasonably be considered to be fair having regard to such factors.
Balance of remuneration for Executive Directors
The charts below provide an estimate of the potential future reward opportunities for the Executive Directors, and the potential
split between the different elements of remuneration under three different performance scenarios: ‘Minimum’, ‘On-target’
and ‘Maximum’.
Potential reward opportunities are based on the Company’s Remuneration policy and implementation in 2019/20, as outlined in
the Chairman’s statement and later in the Annual Report on Remuneration, applied to base salaries as at 1 April 2019. Note that
the projected values exclude the impact of any share price movements. For this reason, were the PSP shares to vest in full, actual
total remuneration may exceed the value shown in the chart below.
Chief Executive
Archie Bethel (£’000)
Group Finance Director
Franco Martinelli (£’000)
Chief Executive, Land
John Davies (£’000)
Maximum
33%
32%
35% £3,684
Maximum
29%
34%
37% £1,941
Maximum
30%
34%
36% £1,895
On-target
60%
30%
10%
£2,026
On-target
55%
33%
12%
£1,012
On-target
56%
32%
12%
£999
Minimum
100% £1,216
Minimum
100% £559
Minimum
100% £562
0
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
0
500
1,000
1,500
2,000
0
500
1,000
1,500
2,000
Fixed remuneration
Annual variable remuneration
Long-term incentives
The ‘Minimum’ scenario shows base salary, pension (and/or pay in lieu of pension) and benefits (i.e. fixed remuneration). These are
the only elements of the Executive Directors’ remuneration packages which are not at risk.
The ‘On-target’ scenario reflects fixed remuneration as above, plus a pay-out of 50% of the annual bonus and threshold vesting of
16.7% of the maximum award under the PSP.
The ‘Maximum’ scenario reflects fixed remuneration, plus full pay-out of all incentives.
110 Babcock International Group PLC Annual Report and Accounts 2019
Shareholding guidelines for Executive Directors
The Committee sets shareholding guidelines for Executive Directors. The current guideline is to build and maintain, over time, a
personal (and/or spousal) holding of shares in the Company equivalent in value to at least twice the Executive Director’s annual
base salary (three times for the CEO).
The guidelines also state that an Executive Director is expected to retain at least half of any shares acquired on the exercise of
a share award that remain after the sale of sufficient shares to cover tax and national insurance triggered by the exercise (and
associated dealing costs) until the guideline level is achieved and thereafter maintained. The Executive Directors’ compliance
with these guidelines is shown in the table on page 128.
Details of Directors’ service contracts and exit payments and treatment of awards on a change of control
The following summarises the key terms (excluding remuneration) of the Directors’ service contracts or terms of appointment:
Executive Directors
Name
Date of service contract
Notice period
Archie Bethel (Chief Executive)
1 April 2016
12 months from Company, 12 months from Director
Franco Martinelli (Group Finance Director)
1 August 2014
12 months from Company, 12 months from Director
John Davies (Chief Executive, Land)
20 December 2012
12 months from Company, 12 months from Director
The latest service contracts are available for inspection at the Company’s registered office and will also be available at the
Company’s Annual General Meeting.
The Company’s policy is that Executive Directors’ service contracts should be capable of being terminated by the Company on
not more than 12 months’ notice. The Executive Directors’ service contracts entitle the Company to terminate their employment
without notice by making a payment of salary and benefits in lieu of notice. Under the Executive Directors’ contracts, the Company
may choose to make the payment in lieu by monthly instalments and mitigation applies such that the Committee may decide to
reduce or discontinue further instalments.
In addition to the contractual provisions regarding payment on termination set out above, the Company’s incentive plans contain
provisions for termination of employment, where the Committee has the discretion to determine the level of award vesting.
Component
Treatment on a change of control
Treatment for a good leaver*
Treatment for other leavers
Annual bonus
Deferred bonus
awards
PSP
Will be paid a time pro-rated
proportion, subject to
performance during the year,
generally paid immediately,
with Committee discretion
to treat otherwise.
Awards may be exercised in
full on the change of control,
with Committee discretion to
treat otherwise.
Awards generally vest
immediately and, for
performance-related awards,
will be pro-rated for time and
remain subject to performance
conditions, with Committee
discretion to treat otherwise.
Will be paid a time pro-rated proportion,
subject to performance during the year,
generally paid at the year end, with
Committee discretion to treat otherwise.
No annual bonus entitlement,
unless the Committee
exercises discretion to
treat otherwise.
Entitled to retain any award which
Outstanding awards are
will generally vest at the normal vesting
date, with Committee discretion to
treat otherwise.
forfeited unless the Committee
exercises its discretion to
treat otherwise.
Entitled to retain a time pro-rated
Outstanding awards are
proportion, which remains subject to
performance conditions tested at the
normal vesting date. In very exceptional
circumstances, the Committee has
discretion to allow immediate vesting
but time pro-rating will always apply.
forfeited, unless the Committee
exercises discretion to
treat otherwise.
* An individual would generally be considered a ‘good leaver’ if they leave the Group’s employment by reason of injury, ill-health, disability, redundancy or
retirement. The treatment of share awards held by Directors who leave on other grounds is entirely at the discretion of the Committee and in deciding
whether (and the extent to which) it would be appropriate to exercise that discretion the Committee will have regard to all the circumstances.
Babcock International Group PLC Annual Report and Accounts 2019 111
Financial statementsStrategic reportGovernance Remuneration continued
External appointments of Executive Directors
The Executive Directors may accept external appointments with the prior approval of the Chair, provided that such appointments
do not prejudice the individual’s ability to fulfil their duties at the Group. Any fees for outside appointments are retained by
the Director.
Chairman and Non-Executive Directors
Name
Mike Turner (Chair)
Ruth Cairnie
Sir David Omand
Ian Duncan
Jeff Randall
Myles Lee
Victoire de Margerie
Lucy Dimes
Kjersti Wiklund
Date of appointment as a Director
Date of current appointment letters
Anticipated expiry of present term of
appointment (subject to annual re-election)
1 June 2008
3 April 2019
1 April 2009
10 November 2010
1 April 2014
1 April 2015
1 February 2016
1 April 2018
1 April 2018
22 February 2017
2 April 2019
17 May 2018
1 April 2019
22 February 2017
17 May 2018
1 April 2019
5 March 2018
5 March 2018
AGM 2019
AGM 2022
AGM 2020
AGM 2020
AGM 2020
AGM 2021
AGM 2022
AGM 2021
AGM 2021
The latest written terms of appointment are available for inspection at the Company’s registered office and at the Company’s Annual
General Meeting. The expected time commitment of Non-Executive Directors is set out in their current written terms of appointment.
The Group’s Non-Executive Directors serve under letters of appointment as detailed in the table above, normally for no more than
three-year terms at a time; however, in all cases appointments are terminable at will at any time by the Company or the Director.
All Non-Executive Directors are subject to annual re-election by the Company in general meeting in line with the UK Corporate
Governance Code.
Details of the Non-Executive Directors’ terms of appointment are shown in the table. The appointment and re-appointment, and the
remuneration of Non-Executive Directors are matters reserved for the Nominations Committee and Executive Directors, respectively.
The Non-Executive Directors’ fees have been set at a level to reflect the amount of time and level of involvement required in order
to carry out their duties as members of the Board and its Committees. The Non-Executive Directors are not eligible to participate in
the Company’s performance-related incentive plans and do not receive any pension contributions.
112 Babcock International Group PLC Annual Report and Accounts 2019
Details of the policy on fees paid to our Non-Executive Directors are set out in the table below:
Function
Operation
Opportunity
Performance measures
To attract and
retain high-calibre
Non-Executive
Directors with
commercial and
other experience
relevant to the
Company
Fee levels are reviewed against market practice from
time to time (by the Chair and the Executive Directors
in the case of Non-Executive Director fees and by
the Committee in respect of fees payable to the
Chair), with any adjustments normally being made
on 1 April in the review year. Additional fees are
payable for acting as Chair of the Audit and Risk,
and Remuneration Committees.
Non-Executive Directors do not participate in any
incentive schemes, nor do they receive any pension
or benefits (other than the cost of nominal travel
and accommodation expenses).
Fee levels are reviewed by reference to FTSE listed
companies of similar size and complexity. Time
commitment, level of involvement required and
responsibility are taken into account when reviewing
fee levels. This may result in higher fee levels for
overseas Directors.
Fees for the year ending 31 March 2019 and those
for the year ending 31 March 2020 are set out in the
Annual Report on Remuneration on page 117 and
page 126 respectively.
Non-Executive Director fee
increases are applied in line
with the outcome of the
periodic fee review.
None
Any increases to the Non-
Executive Director fee will
typically be in line with general
movements in market levels of
Non-Executive Director fees.
In the event that there is a
material misalignment with
the market or a change in the
complexity, responsibility or
time commitment required to
fulfil a Non-Executive Director
role, the Board has discretion to
make an appropriate adjustment
to the fee level.
Consideration of employee views
When reviewing Executive Directors’ remuneration, the Committee is aware of the proposals for review of remuneration of all
employees. The Committee receives regular updates on salary increases, bonus and share awards made to employees throughout
the Group. These matters are considered when conducting the annual review of executive remuneration.
The Company seeks to promote and maintain good relationships with employee representative bodies as part of its employee
engagement strategy and consults on matters affecting employees and business performance as required in each case by law
and regulation in the jurisdictions in which the Company operates. The Company now formally presents a summary of its policy
for remuneration arrangements for Executive Directors to the Babcock Employee Forum, which is attended by representatives
from across the business operations, and will consider any feedback from that Forum.
Consideration of Shareholder views
When determining remuneration, the Committee takes into account views of leading Shareholders and best practice guidelines
issued by institutional Shareholder bodies. The Committee welcomes feedback from Shareholders on Remuneration policy and
arrangements and commits to undergoing consultation with leading Shareholders in advance of any significant changes to
Remuneration policy. The Committee will continue to monitor trends and developments in corporate governance and market
practice to ensure the structure of the executive remuneration remains appropriate.
Further details of the votes received on the 2017 Directors’ Remuneration policy report and the 2018 Annual Report on
Remuneration are provided on page 115.
Babcock International Group PLC Annual Report and Accounts 2019 113
Financial statementsStrategic reportGovernance Remuneration continued
Annual Report on Remuneration
The Committee
The members of the Committee are appointed by the Board on the recommendation of the Nominations Committee and, in
accordance with the UK Corporate Governance Code, the Committee is made up of the independent Non-Executive Directors.
The membership of the Committee currently and during the year to 31 March 2019 (with each member serving throughout the
year) as well as attendance at Committee meetings in the year is shown on page 101. The Company Secretary attends as Secretary
to the Committee.
The Group Chairman and the Chief Executive normally attend meetings by invitation, as does the Group Finance Director on
occasion, but they are not present when their own remuneration is being decided. The Group Director of Organisation and
Development also attends meetings.
Advisors
Mercer | Kepler (which is part of the MMC group of companies) was appointed by the Committee in late 2008, following a
selection process, including interviewing a number of candidate firms, to provide it with objective and independent analysis,
information and advice on all aspects of executive remuneration and market practice, within the context of the objectives and
policy set by the Committee. Mercer | Kepler reports directly to the Committee Chairman. A representative from Mercer | Kepler
typically attends Committee meetings. Mercer | Kepler also provides participant communications, performance reporting, and
Non-Executive Directors’ fee benchmarking services to the Company. Mercer | Kepler is a member of the Remuneration Consultants
Group and is a signatory to the Code of Conduct for consultants to remuneration committees of UK listed companies, details of
which can be found at www.remunerationconsultantsgroup.com. Mercer | Kepler adheres to this Code of Conduct. The fees paid to
Mercer | Kepler in respect of work for the Committee carried out in the year under review totalled £78,000 on the basis of time and
materials, excluding expenses and VAT.
The Committee reviews Mercer | Kepler’s involvement each year and considers any other relationships that Mercer | Kepler’s
parent company has with the Company that may limit its independence. The Committee is satisfied that the advice provided
by Mercer | Kepler is objective and independent and that any services provided by its parent to the Company do not impair
its independence.
How often it meets
In total there were six meetings in the year to 31 March 2019. The Committee plans to meet at least six times in the year to
31 March 2020.
114 Babcock International Group PLC Annual Report and Accounts 2019
Matters considered
The Committee considered a number of matters during the year to 31 March 2019, including:
• agreeing Executive Director salaries for the financial year 2019/20
• reviewing the Committee’s terms of reference
• considering trends in executive remuneration, remuneration governance and investor views
• making share awards under the Company’s share plans
• reviewing the performance measures and targets to be applied under the Company’s share plans
• finalising performance targets and non-financial objectives for the 2018/19 annual bonus plan
• agreeing the level of vesting of PSP and DBMP awards granted in 2015
• considering performance against the measures applied to, and level of pay-out of, the 2017/18 annual bonus
• agreeing the level of 2018 PSP awards
• reviewing share ownership guidelines for senior executives
• agreeing pay review outcomes for other senior executives for the year to 31 March 2020
• reviewing the Directors’ Remuneration report
• approving the procedure for the authorisation of Chairman and CEO expenses
• reviewing the continued appointment of the Committee’s independent advisors.
Summary of Shareholder voting
The following table shows the results of the last binding Shareholder vote on the Remuneration policy (at the 2017 AGM) and the
advisory Shareholder vote on the 2018 Annual Report on Remuneration at the 2018 AGM:
Votes cast
For (including discretionary)
Against
Total votes cast (excluding withheld votes)
Votes withheld
Total votes cast (including withheld votes)
2017 Remuneration policy
2018 Annual Report on Remuneration
% of votes cast for
% of votes cast for
Total number of votes
368,814,605
13,528,165
382,342,770
4,341,748
386,684,518
& against
96.5%
3.5%
100.0%
Total number of votes
319,644,636
4,265,699
323,910,335
13,868,456
337,778,791
& against
98.7%
1.3%
100.0%
Babcock International Group PLC Annual Report and Accounts 2019 115
Financial statementsStrategic reportGovernance
Remuneration continued
Single total figure of remuneration for Executive Directors (audited)
The table below sets out a single figure for the total remuneration received by each Executive Director for the years ending
31 March 2019 and 31 March 2018.
Fixed remuneration
1. Salary
2. Benefits in kind and cash
3. Pension
Annual variable remuneration
4. Annual bonus (cash or voluntarily
deferred bonus)
5. DBP (deferred annual bonus)
Long-term incentives
6. DBMP (matching awards)
7. PSP
8. Dividends
Total (of which)
Fixed remuneration1,2,3
Annual variable remuneration4,5
Long-term incentives6,7,8
Archie Bethel
£’000
Franco Martinelli
£’000
John Davies
£’000
18/19
17/18
18/19
17/18
18/19
17/18
780
221
195
409
273
n/a
89
14
1,981
1,196
682
103
765
227
191
422
281
80
96
16
2,079
1,183
704
192
437
1
109
240
160
n/a
68
11
1,026
547
400
79
428
1
107
238
159
35
96
12
1,076
536
397
143
421
24
106
207
138
n/a
65
10
971
551
345
75
413
43
103
211
141
66
92
14
1,083
559
352
172
The figures have been calculated as follows:
1. Salary: basic salary amount paid in the year.
2. Benefits in kind and cash: the value of benefits and salary supplements (other than those in lieu of pensions) including medical insurance, home to work
travel expenses incurred at the request of the Company, accommodation-related benefits, car and fuel benefits and costs in connection with accommodation.
Archie Bethel in 18/19 received £218,181 (17/18: £225,728) in connection with his accommodation costs in London, at the Company’s request, to enable
him to lead the business effectively. John Davies received a similar allowance in 17/18 of £20,789, but no longer receives the allowance as he is not based
away from home.
3. Pension: for all Executive Directors the numbers above represent for each year the value of the cash supplement of 25% of salary paid to each of them.
4. Annual bonus (cash or voluntarily deferred bonus): this is the part of total annual bonus earned for performance during the year (see page 118) that is
not required to be mandatorily deferred into a basic award of shares under the DBMP (see page 119) and that is paid in cash.
5. DBP deferred annual bonus: this is the mandatorily deferred element of the annual bonus earned for performance during the year, which will vest after
three years.
6. DBMP (matching awards): the Company stopped making matching awards in 16/17. Note: the difference between the DBMP figures shown for 2017/18
in the table above and the equivalent numbers disclosed in last year’s Annual Report on Remuneration reflects trueing up for the actual share price on
subsequent actual vesting of 862.4p on 11 June 2018.
7. PSP: for 18/19, represents the market value of the 2016 awards that vest on performance to 31 March 2019: based on vesting as to 15.1% of the total
award (see page 120) and an average share price in the three months to 31 March 2019 of 531.6p. Note: the difference between the PSP figures shown
for 2017/18 in the table above and the equivalent numbers disclosed in last year’s Annual Report on Remuneration reflects the actual share price on
subsequent actual vesting of 862.4p on 11 June 2018 for all awards except Franco Martinelli’s PSP award granted on 29 January 2015 that vested on
29 January 2018 when the share price was 731.4p.
8. Dividends: the total value of dividends accruing on long-term incentive awards (other than on mandatory and voluntary deferral of bonus awards under
the DBMP) vesting on performance to 31 March 2019 (for 18/19) and 31 March 2018 (for 17/18), payable in cash on exercise of the award.
116 Babcock International Group PLC Annual Report and Accounts 2019
Single total figure of remuneration for Non-Executive Directors (audited)
The table below sets out a single figure for the total remuneration received by each Non-Executive Director for the year ended
31 March 2019 and the prior year:
Mike Turner
Sir David Omand
Ian Duncan
Jeff Randall
Myles Lee
Victoire de Margerie
Lucy Dimes
Kjersti Wiklund
Base fee
£000
Additional fees1
£000
Total
£000
18/19
330
71
60
60
64
64
60
60
17/18
330
71
60
60
64
64
n/a
n/a
18/19
0
0
15
15
0
0
0
0
17/18
0
0
15
15
0
0
n/a
n/a
18/19
330
71
60
60
64
64
60
60
17/18
330
71
75
75
64
64
n/a
n/a
1. Relating to Chairmanship of the Audit and Risk Committee (Ian Duncan), and Remuneration Committee (Jeff Randall).
Pensions
None of the Executive Directors participated in a Group pension scheme or otherwise received pension benefits from the Group
for service during the year to 31 March 2019. They instead received a cash supplement equal to 25% of their base salary in lieu of
pension benefits. There are no additional early retirement benefits.
Supplements paid in lieu of pension do not count for pension, share award or bonus purposes.
Babcock International Group Pension Scheme (the Scheme) (audited)
Archie Bethel was an active member of the executive tier of the Scheme until 31 March 2012. Franco Martinelli was an active
member of the executive tier of the Scheme until 31 March 2015. Whilst still members of the Scheme, Archie Bethel and Franco
Martinelli accrued benefits at the rate of one-forty-fifth of pensionable salary for each year of service, with a cash supplement on
earnings over the applicable scheme earnings cap. Archie Bethel transferred his benefits out of the Scheme during the prior financial
year on the standard terms offered under the Scheme.
Until 31 March 2016, John Davies was a member of the VT Upper Section Ex-Short Brothers section of the Scheme and accrued
benefits on earnings up to the scheme earnings cap at the rate of one-sixtieth of pensionable salary for each year of service.
John Davies transferred his benefit out of the Scheme during the financial year under review on the standard terms offered under
the scheme.
Pension entitlements under the Scheme (defined benefit) for the year to 31 March 2019 are set out in the following table:
Director1
Franco Martinelli
Accrued pension at 31 March 2019
Normal retirement age2
£ pa
64
65
1. None of the Executive Directors were active members of the scheme during the year.
2. Age from which payment can be drawn with no actuarial reduction.
Note: The figures in the above table make no allowance for the cost of death in service benefits under the Scheme, or for any
benefits in respect of earnings in excess of the earnings cap. In calculating the above figures no account has been taken of any
retained benefits that the Director may have from previous employments.
Directors also benefit from life assurance cover of four times base salary. The cost of providing that life assurance cover was:
Director
Archie Bethel
John Davies
Franco Martinelli
2018/19
£’000
5
3
3
2017/18
£’000
5
3
3
Babcock International Group PLC Annual Report and Accounts 2019 117
Financial statementsStrategic reportGovernance
Remuneration continued
Annual bonus
2018/19 Annual bonus (audited)
For our Executive Directors’ annual bonus plans in 2018/19, as in previous years, a mix of financial and non-financial measures was
used. The financial element of the 2018/19 annual bonus was based on the Group’s underlying PBT and EPS performance, as well
as its cash flow against budget. The non-financial measures were principally based on the key themes that the Committee considers
to be of material importance to the continued success of the Company. Objectives for the 2018/19 bonus were set by the
Committee at the beginning of the year.
The table below sets out the annual bonus plan in place for the Executive Directors and the outturn under them in 2018/19. The
figures in EPS and Group PBT performance in the table below for actual outturn exclude the effect of changes in exchange rates.
Bonus element
Threshold
Target
Maximum
Actual
outturn
EPS1 performance stretching
targets, with a sliding scale
between threshold and maximum
83.1p
85.6p
88.2p
84.5p
Archie
Bethel
Franco
Martinelli
60%
60%
John
Davies
60%
28.4%
28.4%
28.4%
Maximum potential
(% of salary)
Outturn
(% of salary)
Achieving budgeted Group
cash flow
95% of
budget
Budget
(£422.6m)
105% of
budget
£469.3m
Maximum potential
(% of salary)
30%
30%
15%
Achieving budgeted Group PBT2
97% of
budget
Budget
(£528.9m)
103% of
budget
£521m
Maximum potential
(% of salary)
30%
30%
15%
Outturn
(% of salary)
30%
30%
15%
Achieving budgeted sector
cash flow
95% of
budget
Budget3 105% of
budget
Achieving budgeted sector PBIT2
97% of
budget
Budget3 103% of
budget
Non-financial objectives4
Total
Outturn
(% of salary)
Maximum potential
(% of salary)
Outturn
(% of salary)
Maximum potential
(% of salary)
Outturn
(% of salary)
Maximum potential
(% of salary)
Outturn
(% of salary)
Maximum potential
(% of salary)
Outturn
(% of salary)
9.0%
9.0%
4.5%
15%
7.5%
15%
7.5%
30%
30%
30%
20%
24%
19%
150%
150%
150%
87.4%
91.4%
81.9%
1. Threshold vesting is 10% of maximum for each financial bonus element except for EPS performance, where 28% of maximum vests at threshold. In line with
our policy, overall vesting at threshold is no more than 15% when all measures are taken into account.
2. Before amortisation of acquired intangibles. The treatment of exceptional items is at the discretion of the Committee.
3. The Committee considers that the sector budgets remain commercially sensitive given the strategic nature of some of our customers or their activities, and
they would also be of assistance to competitors, and will not be published.
4. Further details on the non-financial objectives set for 18/19 are set out on the following page.
118 Babcock International Group PLC Annual Report and Accounts 2019
Non-financial measures
The Committee sets non-financial objectives at the start of each year around strategic and risk management ‘Themes’. For 18/19,
the Themes were Growth, Technology, Resources, Reputation and Processes. At the end of the bonus year, the Committee
conducted a review of the achievement of the objectives set for the Themes, having regard to all relevant circumstances and
adjudicating the appropriate pay-out for the non-financial measures element. In making its assessment in respect of the award
under the non-financial measures, the Committee considered the following context in respect of each Theme:
Growth: As described in the Strategic report, despite a number of headwinds, the Group has continued to develop with each
of the sectors having won important new contracts during the period, both in the UK and internationally. Marine has secured 21
market leading ecoSMRT liquefied natural gas refrigeration systems with Hyundai Heavy Industries; and MV Kairos, the world’s largest
liquefied natural gas bunker supply vessel, a 50:50 joint venture with Bernhard Schulte Shipmanagement, undertook its first fuelling
operation. It successfully secured the first six-week maintenance period for the HMS Queen Elizabeth at Rosyth. Marine also delivered
the first missile launch assembly to General Dynamics Electric Boats, part of the UK/US Common Missile Compartment of the future
submarine programme. In Australia, the business, through its joint venture, won a significant contract to maintain Australia’s fleet of
amphibious landing ships. In Land, Network Rail selected Rail to deliver its North Alliance programme, whilst continuing to expand
DSG contract services. In Aviation, the HADES RAF support contract was mobilised across 17 bases. Outside the UK, it mobilised its
Norway fixed wing aerial emergency service contract and won the Manitoba Wildfire Suppression Contract, giving the sector its
first foothold in North America. In Cavendish Nuclear, the sector’s joint venture moved the first Magnox site (Bradwell) into care
and maintenance, whilst the Silo Maintenance Facility project at Sellafield was completed with an NDA category of “Excellent”.
Technology: During the year under review, the Group technology team, working with the technology & innovation leads across
the sectors, has progressed the fundamental pillars of the Babcock Technology strategy. In relation to ‘technology awareness and
application’, formal arrangements have been made with selected Academic/Government organisations for collaborative work on
technologies relevant to our core business; and the first technology horizon scanning work packages were completed. On ‘data and
digital technology exploitation’, particular focus has been given to the iSupport programme in Marine, to predictive modelling of
asset condition in Nuclear, and to information exploitation in Land for equipment management and training services. Work around
the ‘culture and communications’ pillar has included internal webinars and intranet communications on selected technology and
innovation work; plus a range of external events and articles. This work has been effected via the Technology Executive Group which
delivers technology communication, coordination and programme management across all sectors and the international businesses,
and which was fully established this year.
Resources: The engineering sector presents certain challenges to improving the diversity of the Group’s workforce. Despite these
challenges, the Group still managed to improve the diversity of its workforce, as shown by the publication of its recent gender pay
gap and the increase in female graduates.
Reputation: Each sector has delivered a good year of operational performance to customers. The Group is particularly pleased
with the work that it has done under the Cabinet Office’s Strategic Partnering Programme to reinforce even further the relationship
between the Group and its key customer.
Processes: During the year, the Group has improved its IT infrastructure with the further introduction of IT platforms for employee
management and procurement across most of its UK businesses. In addition, the Group has also continued with the roll out of the
Group Enterprise Resource Planning platform, which is now operational in its UK defence and nuclear businesses. This platform will
allow for the adoption of a common systems approach and will increase the effectiveness of the Group’s operations.
The annual bonus outcome is primarily determined by the extent to which the financial targets and non-financial objectives are met.
However, the Committee is clear that the key underpin to the annual bonus scheme is the Group’s health and safety performance.
The Committee reviewed the health and safety record for the Group during the year 2018/19 and, as a consequence, reduced the
bonus of Archie Bethel and John Davies.
Annual bonus deferral into shares (audited)
To ensure that a substantial part of the Directors’ annual bonus is exposed to the longer-term impact of decision-making and further
to align their interests with Shareholders, 40% of any annual bonus earned by Executive Directors (and other senior executives) must
be deferred into Company shares (by means of an award of nil-cost options).
Mandatorily deferred annual bonus awards (Basic Awards) are subject to potential forfeiture if the holder leaves before the awards
vest (other than by reason of death, disability, redundancy, retirement or the company or business in which they are employed
ceasing to be part of the Group). Details of DBP awards made in respect of the annual bonus for 18/19 will be disclosed in next
year’s Annual Report on Remuneration.
Babcock International Group PLC Annual Report and Accounts 2019 119
Financial statementsStrategic reportGovernance Remuneration continued
Long-term incentive schemes (PSP)
PSP awards made in 2018/19* (audited)
Director
Archie Bethel
Franco Martinelli
John Davies
Basis
As per the policy.
Performance measures and
targets are set out below.
Number of shares
Face value (£)1
181,605 £1,560,592
£874,140
101,723
£842,156
98,043
1. Based for Directors on three-day average share price (of 859.33p) at time of grant.
2. Expressed as a percentage of salary at the date of the award (13 June 2018).
*
In the form of nil-cost options.
Face value
(% of salary)2
200%
200%
200%
% of award
receivable
for threshold
performance
End of performance
period
16.7% 31 March 2021
16.7% 31 March 2021
16.7% 31 March 2021
The performance targets that were attached to these awards – split equally between TSR performance relative to the peer group,
EPS growth and ROCE – are illustrated in the charts below:
ROCE element
(33% of award)
100%
TSR element
(33% of award)
100%
l
t
n
e
m
e
e
E
C
O
R
f
o
%
75%
50%
25%
0%
16.7%
12%
14%
4%
11%
Babcock’s three-year annualised
EPS growth (% p.a.)
Babcock’s three-year average
ROCE (% p.a.)
t
n
e
m
e
e
R
S
T
l
f
o
%
75%
50%
25%
0%
16.7%
Median
Median +9%
Babcock’s three-year TSR outperformance
of FTSE 350 Median (% p.a.)
Note: TSR comparators are the companies that comprise the FTSE 350 (excluding investment trusts and financial services
companies). Threshold vesting (16.7% of this element) for the EPS element was set at growth of 4% per annum and maximum
vesting at growth of 11% per annum. We believe that growth of 11% would represent exceptional performance. For the
comparative TSR element, threshold vesting (16.7% of this element) would be for performance in line with the median of the
FTSE 350 (excluding investment trusts and financial services companies) and maximum vesting would be for 9% pa outperformance
of the median, representing upper quartile performance. For the ROCE element, the target for maximum vesting of these awards
was set at 14% and for threshold vesting at 12%.
Deferred Bonus Plan awards made in 2018/19* (audited)
Director
Archie Bethel
Franco Martinelli
John Davies
Basis
As per the policy.
No additional performance
conditions required for vesting.
Number of shares
32,749
18,483
16,399
Face value (£)1
£281,423
£158,831
£140,922
1. Based for Directors on three-day average share price of 859.33p at time of grant.
2. Expressed as a percentage of salary at the date of award (13 June 2018).
* In the form of nil-cost options.
Face value
(% of salary)2
36%
36%
33%
% of award
receivable
for threshold
performance
n/a
n/a
n/a
End of performance
period
n/a
n/a
n/a
120 Babcock International Group PLC Annual Report and Accounts 2019
EPS element
(33% of award)
100%
t
n
e
m
e
e
S
P
E
l
f
o
%
75%
50%
25%
0%
16.7%
2016 PSP awards vesting (audited)
Awards granted in 2016 under the PSP were subject to three-year TSR and EPS targets outlined on page 123. Performance against
these measures, and resulting vesting, is as follows:
Outcome of three-year TSR to 31 March 2019
Outcome of three-year adjusted basic
underlying EPS growth to 31 March 2019
Outcome of three-year average ROCE
2016 PSP awards expected to vest to Executive Directors in June 2019:
15.3% pa below median TSR for the FTSE 350
(excluding investment trusts and financial services)
4.2% pa (historical EPS numbers were restated to
ensure they were on the same accounting basis)
12.3%
Director
Archie Bethel
Franco Martinelli
John Davies
Sourcing of shares
% weighting on
each element
% of each element
vesting
33%
33%
33%
0%
19.3%
26.0%
15.1%
Award Number expected to vest
16,657
12,719
12,265
PSP 2016
PSP 2016
PSP 2016
Shares needed to satisfy share awards for Directors are either shares that are newly issued to the Group’s employee share trusts to
meet share awards or purchased in the market by the trusts using funds advanced by the Company. The source selection is finalised
on or before vesting, the choice being based on what the Board considers is in the best interests of the Company at the time, and
what is permissible within available headroom and dilution limits.
Executive Directors’ remuneration for 2019/20
The Committee has set the remuneration for Executive Directors for 2019/20 in line with the Group’s policy, as approved by
Shareholders at the 2017 AGM.
Base salary
Executive Directors’ base salaries are reviewed each year with any changes usually taking effect from 1 April. The Remuneration
policy is pitched to deliver fixed remuneration at or below median and total remuneration capable of delivering upper quartile pay
for upper quartile performance. The increase in Executive Directors’ salaries for 2018/19 was in line with increases for the wider UK
workforce (see below).
Archie Bethel
Franco Martinelli
John Davies1
1. John Davies also receives car and fuel benefits.
Internal relativity
Salary 2019/20 £
796,000
446,000
430,000
Salary 2018/19 £
780,300
437,070
421,260
As noted in our Remuneration policy, when reviewing Executive Directors’ remuneration, the Committee takes note of proposals
for pay in the wider Group. Each business within the Group determines its own pay structures and remuneration in light of its own
position and the employment market in which it operates.
The overall average salary increase for employees in the UK generally for the year to 31 March 2020 is expected to be between
2.5% and 3% (although, in certain specific cases, individuals may receive above this amount) dependent on business and personal
performance and local market conditions. The salary increase for the Executive Directors has been set at 2%.
Babcock International Group PLC Annual Report and Accounts 2019 121
Financial statementsStrategic reportGovernance
Remuneration continued
2019/20 Annual bonus
Executive Directors’ annual bonus plans for 2019/20 are largely unchanged from the structure adopted in 2018/19 as set out
on page 118, other than for revisions to the weighting of EPS (reduced from 40% to 30%) and OCF (increased from 20% to 30%).
PBT and non-financial objectives each continue to be weighted 20%. For John Davies, a portion of the PBT and OCF element will be
based on performance of his area of the business. In addition, the Committee decided to reduce the maximum payment that may
be earned for the achievement of target from 55% to 50%. The Committee intends to disclose the Group financial performance
targets for 2019/20 and non-financial objectives retrospectively in next year’s Annual Report on Remuneration, subject to these
no longer being considered by the Board to be commercially sensitive. Non-financial objectives will continue to fall under the
categories of:
• Growth: continue delivery of value-creating growth
• Technology: improve our technical offering, build barriers to entry and drive cross-sector synergies
• Resources: develop robust resourcing plans to meet the future growth plans of the business
• Reputation: deliver value to our customers, enhance our reputation and sustain operational performance
• Processes: continually improve our systems, technologies and processes to maximise business opportunities.
For all Executive Directors, 40% of any earned bonus will continue to be deferred into shares for three years.
PSP awards for 2019/20
Due to the fall in the share price since the 2018/19 PSP grant, the Committee has decided that 2019/20 PSP awards should be
scaled back by 20% in value. Consequently, the Committee intends to grant awards in 2019/20 under the PSP with a maximum
face value of 160% of salary for all Executive Directors, with the performance measures and targets as follows: in respect of the
EPS targets, the Committee, having considered the forward impact of the loss of the Magnox contract and wishing to reinforce the
maximisation of EPS in each year of the performance period, set a cumulative three-year EPS performance range of between 231.5p
and 248.0p for 2019/20 PSP awards; a TSR performance range of median to median+9% relative to the peer group (i.e. unchanged
from 2018/19 awards); and a ROCE performance range (based on the average ROCE over the performance period) of 11% to 14%.
Summary of the structure of Executive Directors’ remuneration
Based on the Committee’s policy, the principal elements of the remuneration arrangements for Executive Directors in the year to
31 March 2020 and for the year to 31 March 2019 are (other than pension benefits or supplements in lieu of pension benefits)
summarised in the table below.
Director
Archie Bethel
Franco Martinelli
John Davies
2019/20
Annual bonus
potential (% of salary)
150%
150%
150%
Base pay £
796,000
446,000
430,000
Performance share
awards (% of salary)
160%
160%
160%
2018/19
Annual bonus potential
(% of salary)
150%
150%
150%
Base pay £
780,300
437,070
421,260
Performance share
awards (% of salary)
200%
200%
200%
122 Babcock International Group PLC Annual Report and Accounts 2019
Outstanding share award summaries: grants made up to and during 2018
The following tables on pages 123 to 124 summarise the performance targets (if applicable) and other information about the plans
relevant to currently outstanding share awards held by Executive Directors (i.e. those awards yet to vest).
Scheme
Performance Share Plan (nil price options)
Performance period For the 2016 awards: 1 April 2016 to 31 March 2019 (expected to vest in June 2019 as to 15.1%)
For the 2017 awards: 1 April 2017 to 31 March 2020
For the 2018 awards: 1 April 2018 to 31 March 2021
General performance target
EPS growth test
Comparative TSR test
ROCE test
Maximum
Compound annual
growth: 11% or more
Threshold
Compound annual
growth: 4% or more
Intermediate
growth between
the above points
Proportion of total award that
can vest under each measure
33% on EPS, TSR and ROCE
Outperformance of the
median TSR performance
for the peer group taken
as a whole by 9% or more
2016 awards: ROCE of
more than 15%, 2017
awards: ROCE of more
than 14.5%, 2018 awards:
ROCE of more than 14%
TSR performance
equivalent to the
median for the peer
group as a whole
Intermediate
ranking between
the above points
ROCE of 12%
5.6%
Intermediate
ROCE between
the above points
ROCE of less than
threshold
Straight-line basis
between 5.6% and 33%
0%
Compound annual growth
below threshold
Performance less than
equivalent to median for
the whole peer group
TSR comparator
group
For the TSR element the peer group is the FTSE 350 (excluding investment trusts and financial services).
This group was chosen after careful review due to the fact that Babcock’s closest peers straddle multiple
sectors and the broader group makes the calibration more robust.
Babcock International Group PLC Annual Report and Accounts 2019 123
Financial statementsStrategic reportGovernance
Remuneration continued
Performance Share Plan (nil price options) 2016-2018 continued
Other information
The awards are not subject to re-testing. The TSR element will vest only to the extent the Committee is
satisfied that the recorded TSR is a genuine reflection of the underlying performance of the Company over
the performance period.
EPS is adjusted to exclude acquired intangible amortisation, but, unless the Committee decides otherwise
in respect of any item, is before exceptional items.
ROCE is underlying EBIT after amortisation of acquired intangibles but before exceptional items and including
IFRIC 12 investment income and the Group’s share of the EBIT of JVs, as a percentage of Average Capital
Employed over the Performance Period where Capital Employed is calculated as Total Shareholders’ Equity
plus Net Debt (or minus Net Funds), as stated in the Company’s consolidated audited accounts for the relevant
Financial Year; and Average Capital Employed will be calculated as the average of the opening and closing
value of Capital Employed for each year of the applicable Performance Period. ROCE targets set at the start of
each cycle represent challenging returns in relation to the capital structure at that time, including the impact
of any acquisitions or disposals made in the period prior to grant. The Committee has discretion to adjust
the ROCE outcome for significant changes to the capital structure made during the performance period
(e.g. acquisitions and disposals) to ensure a fair outcome for participants and Shareholders.
The awards carry the right to receive on vesting a payment equal to the value of any dividends in the period
between grant and vesting but this right applies only to the shares that actually vest under the award.
Exercise periods commence not less than three years from actual or nominal award grant date.
124 Babcock International Group PLC Annual Report and Accounts 2019
Linkage of remuneration to strategic objectives, risk management and alignment with
Shareholder interests
The Committee links the remuneration of executives to the long-term interests of Shareholders and key strategic and risk management
objectives by the performance criteria it uses in the annual bonus and long-term incentive plans. Examples include the following:
Strategic objective (SO)/Risk (R)
Annual bonus scheme metric
Long-term incentive metric
SO/R: Delivering superior and sustainable
value for our Shareholders, whilst
balancing risk and reward.
Financial measures focused on annual
delivery of sustainable earnings and/or
profits with stretch targets, whilst
maintaining strict control of cash.
Incentivising delivery of top quartile
Shareholder returns and earnings growth
over the longer term.
Long-term measures and deferral of
significant part of annual bonus to guard
against short-term steps being taken to
maximise annual rewards at the expense
of future performance.
SO: Growth.
SO: Developing and maintaining leading
market positions in the UK and selected
overseas markets.
SO: Building and maintaining customer
focused, long-term relationships with
strategically important customers.
R: Loss of business reputation, poor
contract performance.
Setting challenging budgets and stretch
targets, as well as non-financial measures
specifically aimed at:
• laying the foundations for sustainable
growth in specific existing and new
geographical business markets
• winning key bids and rebids
• fostering strategically important
partnering arrangements.
Specific non-financial objectives for:
• progressing plans for entry into or
expansion in targeted domestic and
overseas markets
• securing key business development
milestones.
Non-financial objectives linked to:
• customer satisfaction
• continuing improvement of
management processes
• meeting and planning for existing
and future customer expectations
on capability and compliance, for
example, in the field of security and
information assurance.
Non-financial objectives linked to
Retentive nature of the long-term plans.
SO/R: Ensuring the Group will continue
to retain and attract the suitably qualified
and experienced people it needs to deliver
its growth and strategic plans, maintain
and develop its technical and
management expertise.
recruitment and development, resource
and succession planning, and fostering
diversity and employee engagement.
Retentive nature of the requirement
for deferral into shares of 40% of annual
bonuses earned by senior executives.
SO/R: Maintenance of an excellent health,
safety and environmental record.
Overriding health, safety and
environmental performance criteria
in annual bonus plans.
Exit payments made in year (audited)
No exit payments were made to Executive Directors during the year under review.
Babcock International Group PLC Annual Report and Accounts 2019 125
Financial statementsStrategic reportGovernance
Remuneration continued
Payments to past Directors (audited)
Peter Rogers retired from the Company on 31 August 2016. During the year under review, 23.9% and 20.0% of his retained
interests in the 2015 PSP and 2015 DBMP matching awards, totalling 45,584 shares, vested at the normal time and in line with
other participants, on 11 June 2018. In addition to the vesting of these shares, Mr Rogers was paid a cash sum of £35,966,
representing the total value of dividends accruing on his 2015 PSP and DBMP matching awards.
Bill Tame retired from the Company on 30 June 2018, having previously stepped down as an Executive Director on 31 March 2018.
During the year under review, he received a salary of £118,660, benefits in kind and cash of £2,364, a pension cash supplement
of £26,781 and a cash payment of £209,774 in respect of his 2017/18 annual bonus (disclosed in last year’s Annual Report on
Remuneration). 23.9% and 20.0% of his retained interests in the 2015 PSP and 2015 DBMP matching awards, totalling 34,972
shares, vested at the normal time and in line with other participants, on 11 June 2018. Mr Tame was also paid a cash sum of
£27,593, representing the total value of dividends accruing on his 2015 PSP and DBMP matching awards.
Kevin Thomas retired from the Company on 31 March 2016, having previously served as an Executive Director until stepping
down on 31 December 2015. During the year under review, 23.9% and 20.0% of his retained interests in the 2015 PSP and 2015
DBMP matching awards, totalling 26,660 shares, vested at the normal time and in line with other participants on 11 June 2018.
Mr Thomas was also paid a cash sum of £21,035, representing the total value of dividends accruing on his 2015 PSP and DBMP
matching awards.
Non-Executive Directors’ fees (including the Chairman)
The Chairman and Non-Executive Directors receive fixed fees. These fees are reviewed against market practice. From this year the
review will take place annually (by the Chairman and the Executive Directors in the case of the Non-Executive Director fees and by
the Committee in respect of the fees payable to the Chairman). The Chairman and Non-Executive Director fees were reviewed and
set as of 1 April 2019. Prior to this, they were last increased in April 2017.
Annual rate of fees
Chairman
Senior Independent Director (inclusive of basic fee)
Basic Non-Executive Director’s fee (UK based Directors)1
Chairmanship of Audit and Risk Committee2
Chairmanship of Remuneration Committee2
Year to
31 March 2020 £
336,000
72,000
61,000
15,000
15,000
Year to
31 March 2019 £
330,000
71,000
60,000
15,000
15,000
% change since last review
(% p.a.)
2%
1%
1%
0%
0%
1. Fees for non-UK based Directors will be set having regard to the extra time commitment involved in attending meetings. For Myles Lee, appointed
1 April 2015 and based in Ireland, and for Victoire de Margerie, appointed 1 February 2016 and based in France, the fee has been set at £65,000 for
the year to 31 March 2020.
2. Committee chairmanship fees are paid in addition to the basic applicable Non-Executive Director’s fee. No additional fees are paid for membership
of Committees.
Percentage change in Chief Executive’s remuneration
The table below shows the percentage change in the Chief Executive’s remuneration (as disclosed in the single total figure
of remuneration table on page 116) from the prior year compared to the average percentage change in remuneration for
other employees.
The analysis is based on UK employees as they are operating in the same geography and macro-economic background as the
Chief Executive.
Base salary
Taxable benefits
Single-year variable
% change 2017/18 to 2018/19
Chief Executive
2%
3%
3%
Other employees
1.9%
(7.7)%
(34)%
126 Babcock International Group PLC Annual Report and Accounts 2019
Relative importance of spend on pay
Distribution to Shareholders
Employee remuneration
2018/19
£151m
£1,607m
2017/18
£144m
£1,588m
% change
4.9%
1.2%
Performance graphs
The following graph shows the TSR for the Company compared to the FTSE 250 and FTSE 350 Aerospace & Defence Indices,
assuming £100 was invested on 1 April 2009. This investment in the Company was worth £167 on 31 March 2019. The Board
considers that the FTSE 250 Index (excluding investment trusts) and FTSE 350 Aerospace & Defence Index currently represent
the most appropriate indices (of which Babcock is a constituent) against which to compare Babcock’s performance.
The table below details the CEO’s single figure remuneration and actual variable pay outcomes over the same period.
Babcock vs. FTSE 250 Index vs. FTSE 350 Aerospace & Defence Index
9
0
0
2
l
i
r
p
A
1
n
o
d
e
t
s
e
v
n
i
0
0
1
£
f
o
e
u
a
V
l
400
350
300
250
200
150
100
50
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Babcock
FTSE 250 Index
FTSE 350 Aerospace & Defence Index
CEO single figure of remuneration and % of variable awards vesting
2012/13
2011/12
2010/11
2009/10
2013/14
2014/15
2015/16
2016/17
2017/18
2018/19
Peter Rogers1
Single figure (£’000)
Bonus vesting (% max)
DBMP matching shares vesting (% max)
PSP/CSOP vesting (% max)
Archie Bethel2
Single figure (£’000)
Bonus vesting (% max)
DBMP matching shares vesting (% max)
PSP vesting (% max)
1,706
97%
n/a
100%
1,792
98%
n/a
82.9%
2,185
99%
n/a
57.8%
2,731
99%
n/a
58.8%
3,809
93%
n/a
94.7%
4,448
78%
88.4%
83.5%
2,491
60%
57.8%
37.3%
1,091
66%
17.0%
26.5%
1,844
66%
17.0%
26.5%
2,079
61%
20.0%
23.9%
1,981
58%
n/a
15.1%
1. Until retirement on 31 August 2016.
2. Includes remuneration received whilst undertaking the role of Chief Operating Officer until August 2016.
Babcock International Group PLC Annual Report and Accounts 2019 127
Financial statementsStrategic reportGovernance
Remuneration continued
Directors’ share ownership
Directors’ interests in shares (audited)
The interests of the Directors (and/or their spouses) in the ordinary shares of the Company as at 31 March 2019 and Directors’
interests in shares and options under the Company’s long-term incentives are set out in the sections below:
At 31 March 2019
Vested
but not
exercised
0
0
0
Unvested and
subject to
performance
conditions
463,505
282,073
271,908
Options held
Unvested and
subject to
continued
employment
75,096
49,713
42,860
Vested but
subject to
holding
period
0
0
0
S/holding req.
(% salary)
300%
200%
200%
Current
shareholding
(% of salary)2 Req. met?2
Yes
Yes
Yes
316%
424%
278%
At 31 March 2018
Shares held
Shares held
Director
Archie Bethel
Franco Martinelli
John Davies
Mike Turner
Jeff Randall
Sir David Omand
Ian Duncan
Myles Lee
Victoire de Margerie
Lucy Dimes
Kjersti Wiklund
Owned
outright by
Director or
spouse1
388,191
300,219
177,246
84,884
5,520
0
0
10,000
3,000
n/a
n/a
Owned
outright by
Director or
spouse1
424,063
322,509
197,202
107,384
5,758
0
0
20,000
4,800
5,000
2,100
1. Beneficially held shares (of Director and/or spouse).
2. Current shareholdings for comparison with the shareholding requirements for Executive Directors are calculated based on salary as at 31 March 2019 and
by reference to shares owned outright by Director or spouse, options vested but subject to holding periods, options vested but not exercised and options
unvested but subject only to continued employment. Holdings are valued assuming options are exercised on 31 March 2019 and a three-month average
share price to 31 March 2019 of 531.6p, and calculated post-tax.
There have been no changes to the continuing Directors’ (or their spouses’) shareholdings between 31 March 2019 and
22 May 2019.
128 Babcock International Group PLC Annual Report and Accounts 2019
Directors’ share-based awards and options (audited)
The tables below show the various share awards held by Directors under the Company’s various share plans. The Company’s
mid-market share price at close of business on 29 March 2019 was 493.5p. The highest and lowest mid-market share prices in the
year ended 31 March 2019 were 862.4p and 472.8p, respectively.
Director
Archie
Bethel
Plan1 and year of award
PSP 2015
DBMP 2015
(basic award)
DBMP 2015 (basic
matching award)
DBMP 2015
(voluntary
deferral award)
DBMP 2015
(voluntary deferral
matching award)
PSP 2016
DBP 2016
PSP 2017
DBP 2017
PSP 2018
DBP 2018
Number of
shares subject
to award at
1 April 2018
46,519
Granted
during
the year
Exercised
during
the year
Lapsed
during
the year
11,118 35,401
12,187
12,187
24,374
4,874 19,500
10,955
10,955
4,382 17,528
21,910
110,312
13,162
171,588
29,185
181,605
32,749
Number of
shares subject
to award at
31 March 2019
0
0
0
0
0
110,312
13,162
171,588
29,185
181,605
32,749
Market value of
each share at
date of award
(pence)
Exercise price
(pence)2
Exercisable
from3
1,141.00 Jun 2018
Expiry
date4
Jun 2019
1,141.00 Jun 2018
Jun 2019
1,141.00 Jun 2018
Jun 2019
1,141.00 Jun 2018
Jun 2019
Jun 2019
1,141.00 Jun 2018
Jun 2022
997.17 Jun 2021
997.17 Jun 2021
Jun 2022
891.67 Jun 2022 Jun 2023
Jun 2023
891.67 Jun 2022
859.33 Jun 2023 Jun 2024
859.33 Jun 2023 Jun 2024
(a) Market value of each share at date of exercise (13 Jun 2018) = 856.57p.
For other notes to the table see page 130.
Director
Franco
Martinelli
Plan1 and year of award
PSP 2014
PSP 2015
DBMP 2015
(basic award)
DBMP 2015 (basic
matching award)
PSP 2016
DBP 2016
PSP 2017
DBP 2017
PSP 2018
DBP 2018
Number of
shares subject
to award at
1 April 2018
3,761
46,519
Granted
during
the year
Exercised
during
the year
3,761
Lapsed
during
the year
11,118 35,401
Number of
shares subject
to award at
31 March 2019
0
0
Market value of
each share at
date of award
(pence)
Exercise price
(pence)2
Exercisable
from3
Expiry
date4
1,015.00 Jan 2018 Jan 2019
1,141.00 Jun 2018 Jun 2019
10,042
10,042
0
1,141.00 Jun 2018 Jun 2019
4,016 16,068
20,084
84,238
12,843
96,112
18,387
101,723
18,483
0
84,238
12,843
96,112
18,387
101,723
18,483
1,141.00 Jun 2018 Jun 2019
997.17 Jun 2021 Jun 2022
997.17 Jun 2021 Jun 2022
891.67 Jun 2022 Jun 2023
891.67 Jun 2022 Jun 2023
859.33 Jun 2023 Jun 2024
859.33 Jun 2023 Jun 2024
(a) Market value of each share at date of exercise (13 Jun 2018) = 856.57p.
For other notes to the table see page 130.
Babcock International Group PLC Annual Report and Accounts 2019 129
Financial statementsStrategic reportGovernance
Remuneration continued
Director
John
Davies
Plan1 and year of award
PSP 2015
DBMP 2015 (basic
award)
DBMP 2015 (basic
matching award)
DBMP 2015
(voluntary deferral
award)
DBMP 2015
(voluntary deferral
matching award)
PSP 2016
DBP 2016
PSP 2017
DBP 2017
PSP 2018
DBP 2018
Number of
shares subject
to award at
1 April 2018
44,447
Granted
during
the year
Exercised
during
the year
Lapsed
during
the year
10,622 33,825
11,785
11,785
23,570
4,714 18,856
7,366
7,366
2,946 11,786
14,732
81,230
13,571
92,635
12,890
98,043
16,399
Number of
shares subject
to award at
31 March 2019
0
0
0
0
0
81,230
13,571
92,635
12,890
98,043
16,399
Market value of
each share at
date of award
(pence)
Exercise price
(pence)2
Expiry
date4
1,141.00 Jun 2018 Jun 2019
Exercisable
from3
1,141.00 Jun 2018 Jun 2019
1,141.00 Jun 2018 Jun 2019
1,141.00 Jun 2018 Jun 2019
1,141.00 Jun 2018 Jun 2019
997.17 Jun 2021 Jun 2022
997.17 Jun 2021 Jun 2022
891.67 Jun 2022 Jun 2023
891.67 Jun 2022 Jun 2023
859.33 Jun 2023 Jun 2024
859.33 Jun 2023 Jun 2024
(a) Market value of each share at date of exercise (13 Jun 2018) = 856.57p.
Notes applicable to all tables on pages 129 to 130.
1. PSP = 2009 Performance Share Plan; DBMP = 2012 Deferred Bonus Matching Plan; DBP = 2012 Deferred Bonus Plan. Further details about these plans and,
where applicable, performance conditions attaching to the awards listed are to be found on pages 123 to 124.
2. The PSP and DBMP awards are structured as nil priced options. DBMP basic awards represent the amount of the annual bonus mandatorily deferred and DBMP
voluntary deferral awards represent the amount voluntarily deferred by the Director, in each case converted into shares at their value at the award date.
3. Subject to the rules of the plan concerned, including as to meeting performance targets for PSP and DBMP matching awards.
4. Where this date is less than 10 years from the date of award, the Committee may extend the expiry date on one or more occasions, but not beyond the
10th anniversary of the award.
General notes:
1. ‘Dividend equivalent cash’ (an amount representing dividends earned) of 78.9p per vested share had accrued on the PSP 2015
awards and on the DBMP 2015 awards, in each case for the period between grant and vesting. It is payable by the Company to
the award holder on exercise of the award concerned.
2. Closing share price on the last dealing date before vesting was 862.4p (11 June 2018) for PSP 2015 and DBMP 2015 awards.
130 Babcock International Group PLC Annual Report and Accounts 2019
Summary of share-based awards and options vested during the year
During the year to 31 March 2019 the following awards vested:
Director
Archie
Bethel
Franco
Martinelli
John
Davies
Award
PSP 2015
DBMP 2015 (basic award)
DBMP 2015 (basic matching award)
DBMP 2015 (voluntary deferral award)
DBMP 2015 (voluntary deferral matching award)
PSP 2015
DBMP 2015 (basic award)
DBMP 2015 (basic matching award)
PSP 2015
DBMP 2015 (basic award)
DBMP 2015 (basic matching award)
DBMP 2015 (voluntary deferral award)
DBMP 2015 (voluntary deferral matching award)
Number vesting
Vesting date
11,118 11 Jun 2018
12,187 11 Jun 2018
4,874 11 Jun 2018
10,955 11 Jun 2018
4,382 11 Jun 2018
11,118 11 Jun 2018
10,042 11 Jun 2018
4,016 11 Jun 2018
10,622 11 Jun 2018
11,785 11 Jun 2018
4,714 11 Jun 2018
7,366 11 Jun 2018
2,946 11 Jun 2018
Market value of
vested shares on
award £
£126,856
£139,054
£55,612
£124,997
£49,999
£126,856
£114,579
£45,823
£121,197
£134,467
£53,787
£84,046
£33,614
Market value of
vested shares on
vesting date £
£95,882
£105,101
£42,033
£94,476
£37,790
£95,882
£86,602
£34,634
£91,604
£101,634
£40,654
£63,524
£25,406
Exercise price
payable for
vested shares
(if any) £
Other interests
None of the Directors had an interest in the shares of any subsidiary undertaking of the Company or in any significant contracts of
the Group.
External appointments of Executive Directors in 2018/19
None of the Executive Directors received a fee for any external appointment during the year.
This Remuneration report was approved by the Board on 21 May 2019 and signed on its behalf by:
Jeff Randall
Chairman of the Remuneration Committee
Babcock International Group PLC Annual Report and Accounts 2019 131
Financial statementsStrategic reportGovernance
Relations with Shareholders
Dialogue with Shareholders
The Board believes it is important
to maintain open and constructive
relationships with all of its Shareholders
– large and small, institutional and
private. The Investor Relations team
organises a full investor calendar
throughout the year including meeting
with existing and potential Shareholders
at results presentations, results
roadshows, conferences and directly
arranged ad hoc meetings. These
meetings normally include the Chief
Executive, the Group Finance Director
and the Director of Investor Relations
and include a discussion of the Group’s
strategy and financial performance. In
addition to this, the Company arranges
site visits to showcase some of its
operations throughout the year. These
events are complemented by regular
interaction with sell-side analysts
and sales teams. During the year
the Chairman wrote to our largest
Shareholders inviting them to meet with
him to discuss strategy, performance and
corporate governance matters. The
Chairman of the Remuneration
Committee was also in contact with
leading Shareholders as further explained
in his annual statement on pages 101
and 102. Both the Chairman and Sir
David Omand, the Senior Independent
Director, are available to Shareholders
should they have any concerns where
contact through the normal channels
is deemed inappropriate or where
Shareholders believe a matter has not
been adequately resolved.
How we communicate
Results and trading updates
(available as audiocasts at www.babcockinternational.com/investors)
Full-year and half-year results: announcement and presentation
Trading updates and conference calls with Chief Executive and
Group Finance Director
When
May and November 2018
July 2018, September 2018 and
February 2019
Other presentations
Site visit to our Aviation business in Spain including a presentation by the
sector Chief Executive
Site visit to our Marine business in Devonport including a presentation by
the sector Chief Executive
Group Finance Director presentations at broker organised conferences and events June and July 2018
October 2018
March 2019
When
Dealings with Shareholders, investors and analysts
Resolutions of AGM available at www.babcockinternational.com/investors When
Meetings with Shareholders and potential investors
Meetings with sell-side analysts and sales teams
Letter from the Group Chairman to our Shareholders
Annual General Meeting
Roadshows in London, Edinburgh, Paris, New York, Boston, Chicago, Kansas
and Toronto
Throughout
Throughout
December 2018
July 2018
May, June, November
and December 2018
Over 97% of Babcock shares are held
by institutional Shareholders. Whilst it is
normal practice for institutional funds
to have a greater degree of contact
with the Company, all Shareholders are
welcome to raise questions with the
Board at the Annual General Meeting.
In addition, on a day to day basis, our
investor relations team engages with
Shareholders on a wide range of issues
on a variety of platforms. To assist our
private and international Shareholders,
the investor relations team makes
sure that all price-sensitive information
is released in accordance with the
applicable legal and regulatory
requirements. All announcements and
major presentations given to institutional
Shareholders, along with annual reports,
shareholder circulars, shareholder
services information, other stock
exchange releases and share price
information, are made available to
all Shareholders through the Babcock
website (www.babcockinternational.com/
investors). The Company ensures that the
Board has an up to date perspective on
the views and opinions of Shareholders
and the investment market. An investor
relations report is presented at each
Board meeting, including a summary
of share price performance, sector
developments, changes to the Share
Register, analyst research, consensus
expectations and progress on the
investor relations strategy.
Annual General Meeting
The 2019 AGM will be held at
11:00 am on Thursday 18 July 2019
at the Grosvenor House Hotel, Park Lane,
London W1K 7TN. The Company will
send notice of the AGM and any related
papers at least 20 working days prior to
the date of the meeting in accordance
with best practice standards.
All Shareholders are welcome. The event
provides a platform for the Chairman
and Chief Executive to explain how the
Company has progressed during the year.
It also provides all Shareholders with
the opportunity to put questions to the
Chairman of the Board, the Chairmen
of the Audit and Risk, Nominations and
Remuneration Committees, and the
Senior Independent Director. At these
meetings, a poll is conducted on each
Resolution. Shareholders also have the
opportunity to cast their votes by proxy
in advance of the meeting. Directors
also make themselves available before
and after the AGM to talk informally to
Shareholders. Following each AGM the
results of the polls are published on the
Company’s website and released to the
London Stock Exchange.
132 Babcock International Group PLC Annual Report and Accounts 2019
Additional statutory information
Directors’ report and other disclosures
The Directors’ report comprises this section, as well as the rest of the Governance
section and those sections incorporated by reference below.
Disclosures required by LR 9.8.4 R and which form part of the Directors’ report can be
found at the locations provided in the table below:
Listing Rule
Topic
Location
9.8.4 (1)
Interest capitalised by the Group
during the year
Financial statements, note 13
on page 178
9.8.4 (12-13)
Shareholder waivers of dividends
and future dividends
Financial statements, note 23
on page 190
Other disclosure requirements set out in LR 9.8.4 R are not applicable to the Company.
Other information that is also relevant and which is incorporated by reference can be
located as follows:
Topic
Location
Financial risk management regarding financial instruments Note 2, pages 164 to 167
Greenhouse gas emissions
Employee involvement
Post balance sheet events
Page 65
Pages 59 to 61
Note 35, page 202
Likely future developments in the business of the Group
Strategic report
Details of important events affecting the Group
Strategic report
For the purposes of DTR 4.1.5 R (2) and DTR 4.1.8 R the required content of the
Management report can be found in the Strategic report and the Directors’ report
including the sections of the Annual Report and Accounts incorporated by reference.
The Company
Babcock International Group PLC, registered and domiciled in England and Wales,
with the registered number 2342138, is the holding company for the Babcock
International Group of companies.
Results and dividends
The profit attributable to the owners of the Company for the financial year was
£199.4 million (2018: £336.3 million). An interim dividend of 7.10 pence per
60 pence ordinary share was declared in the year (2018: 6.85 pence). The Directors
are recommending that Shareholders approve at the forthcoming Annual General
Meeting a final dividend for the year of 22.9 pence (2018: 22.65 pence) on each of
the ordinary shares of 60 pence to be paid on 9 August 2019 to those Shareholders
on the register at the close of business on 5 July 2019.
Major shareholdings
As at 31 March 2019, the Company has been notified pursuant to the Disclosure and
Transparency Rules (DTR) of the following major interests in voting rights attached to
its ordinary shares.
Number of 60 pence ordinary
shares on date of notification
% of issued share capital on
date of notification
Employment of
disabled persons/equal
opportunities
Babcock is committed to equal
opportunities and will not discriminate
on the basis of disability, age, race,
colour, ethnic origin, gender, marital
status, religious or political beliefs or
sexual orientation.
We believe that only by encouraging
applicants from the widest pool of talent
possible, and then selecting the best
candidate based on their ability to do
the job, can we ensure we continue to
deliver our best for our customers and
safeguard the future of Babcock.
Research and
development
The Group commits resources to
research and development to the extent
management considers necessary for the
evolution and growth of its business.
Political donations
No donations were made during the year
for political purposes.
Authority to purchase
own shares
At the Annual General Meeting in
July 2018, members authorised the
Company to make market purchases of
up to 50,559,659 of its own ordinary
shares of 60 pence each.
That authority expires at the forthcoming
Annual General Meeting in July 2019
when a Resolution will be put to renew
it so as to allow purchases of up to a
maximum of no more than 10% of the
Company’s issued share capital. No
shares in the Company have been
purchased by the Company in the period
from 19 July 2018 (the date the current
authority was granted) to the date of this
Report. The Company currently does not
hold any treasury shares.
Name
Invesco Ltd
The Capital Group Companies Inc.
Standard Life Aberdeen PLC
Woodford Investment Management LLP
50,381,712
24,488,028
30,759,102
25,474,689
9.96%
4.84%
6.08%
5.04%
Details of purchases of the Company’s
shares made in the year to 31 March
2019 by the Babcock Employee Share
Trust in connection with the Company’s
executive share plans are to be found in
note 23 on pages 190 to 191.
The holdings set out above relate only to notifications of interests in the issued share
capital received by the Company pursuant to DTR 5 and consequently do not
necessarily represent current levels of interest.
Babcock International Group PLC Annual Report and Accounts 2019 133
Financial statementsStrategic reportGovernance
£1,800,000,000 Euro Medium-Term
Note Programme
The Company has in place a Euro
Medium-Term Note Programme under
which the Company could issue notes
up to £1,800,000,000. Under the Note
Programme, the Company has in issue
€550,000,000 1.75% Notes due in
2022 as well as £300,000,000 1.875%
Notes due in 2026.
If there is a change of control of the
Company and the Notes then in issue
carry an investment-grade credit rating
which is either downgraded to non-
investment-grade, or carry a non-
investment-grade rating which is further
downgraded or withdrawn, or do not
carry an investment-grade rating and the
Company does not obtain an investment-
grade rating for the Notes, a Note holder
may require that the Company redeem
or, at the Company’s option, repurchase
the Notes.
Share plans
The Company’s share plans contain
provisions as a result of which options
and awards may vest and become
exercisable on a change of control of the
Company in accordance with the rules of
the plans.
Contracts with employees
or Directors
A description of those agreements with
Directors that contain provisions relating
to payments in the event of a termination
of employment following a change of
control of the Company is set out on
pages 111 and 112.
Additional statutory information continued
Qualifying third-party
indemnity provisions
The Company has entered into deeds of
indemnity with each of its Directors (who
served during the year and/or who are
currently Directors) which are qualifying
third-party indemnity provisions for the
purpose of the Companies Act 2006
in respect of their Directorships of
the Company and, if applicable, of
its subsidiaries.
Under their respective Articles of
Association, Directors of Group UK
subsidiary companies may be indemnified
by the company concerned of which they
are or were Directors against liabilities
and costs incurred in connection with
the execution of their duties or the
exercise of their powers, to the extent
permitted by the Companies Act 2006.
Qualifying pension scheme indemnity
provisions are also in place for the
benefit of Directors of the Group
companies that act as trustees of
Group pension schemes.
Significant agreements
that take effect, alter
or terminate upon a
change of control
Many agreements entered into by the
Company or its subsidiaries contain
provisions entitling the other parties
to terminate them in the event of a
change of control of the Group company
concerned, which can often be triggered
by a takeover of the Company.
Although the Group has some contracts
that on their own are not significant to
the Group, several may be with the same
customer. If, upon a change of control,
the customer decided to terminate all
such agreements, the aggregate impact
could be significant.
The following agreements are those
individual agreements which the
Company considers to be significant
to the Group as a whole that contain
provisions giving the other party a
specific right to terminate them if
the Company is subject to a change
of control.
Group
Borrowing facilities
The Company extended the maturity date
of its five-year £750,000,000 Revolving
Credit Facility by a further year, from
December 2019 to December 2020.
The facility provides funds for general
corporate and working capital purposes.
In the event of a change of control of
the Company, the facility agreement
provides that the lenders may, within
a certain period, call for the payment
of any outstanding loans and cancel
the credit facility.
In February 2018, the Company entered
into a two and half year £100,000,000
credit facility with Lloyds Bank PLC. The
Company may use the facility for general
corporate and working capital purposes.
On a change of control of the Company,
Lloyds Bank PLC may, within a certain
period, call for payment of any outstanding
amount and cancel the facility.
Multi-Currency Loan Note facility
The Company has in issue £40 million
5.405% Series B Shelf Notes due
21 January 2020 (the Notes), a facility
which is unsecured and unsubordinated
and ranks pari passu with all other
unsecured and unsubordinated financial
indebtedness obligations of the Company.
Unless previously redeemed or purchased
and cancelled, the Company will redeem
the Notes on 21 January 2020 at their
principal amount. In the event of a change
of control of the Company before then, the
Company must offer to repay the Notes
together with a make-whole premium.
US Dollar Loan Notes
The Company has in issue US$500 million
aggregate principal amount of 5.64%
Series B Senior Notes due 17 March
2021. The Notes are unsecured and
unsubordinated and rank pari passu with
all other unsecured and unsubordinated
financial indebtedness obligations of the
Company. In the event of a change of
control of the Company before then,
the Company must offer to purchase
the Notes.
134 Babcock International Group PLC Annual Report and Accounts 2019
Marine
Articles of Association of Devonport
Royal Dockyard Limited and Rosyth
Royal Dockyard Limited
The Articles of Association of Devonport
Royal Dockyard Limited (DRDL) and
Rosyth Royal Dockyard Limited (RRDL),
both subsidiaries of the Company, grant
the MOD as the holder of a special share
in each of those companies certain rights
in certain circumstances. Such rights
include the right to require the sale
of shares in, and the right to remove
Directors of, the company concerned.
The circumstances in which such rights
might arise include where the MOD
considers that unacceptable ownership,
influence or control (domestic or foreign)
has been acquired over the company in
question and that this is contrary to the
essential security interests of the UK.
This might apply, for example, in
circumstances where any non-UK
person(s) directly or indirectly acquire
control over more than 30% of the shares
of the relevant subsidiary, although
such a situation is not of itself such a
circumstance unless the MOD in the
given situation considers it to be so.
Any level of ownership by particular
foreign or domestic persons may, on
the facts of the case, be so treated.
Under its Articles of Association RRDL is
not entitled to redeem the special share.
Terms of Business Agreement (ToBA)
dated 25 March 2010 between
(1) The Secretary of State for
Defence (2) Babcock International
Group PLC (3) Devonport Royal
Dockyard Limited (4) Babcock
Marine (Clyde) Limited and
(5) Babcock Marine (Rosyth) Limited
The ToBA confirms Babcock as a key
support partner of MOD in the maritime
sector and covers the 15-year period
from 2010 to 2025. The MOD may
terminate the ToBA in the event of a
change in control of the Company in
circumstances where, acting on the
grounds of national security, the MOD
considers that it is inappropriate for the
new owners of the Company to become
involved, or interested, in the Marine
division. ‘Change in control’ occurs
where a person or group of persons
that controls the Company ceases to
do so or if another person or group of
persons acquires control of the Company.
Maritime Support Delivery
Framework Agreement dated
1 October 2014 between
(1) The Secretary of State for
Defence (2) Devonport Royal
Dockyard Limited (3) Babcock
Marine (Clyde) Limited and
(4) Babcock Marine (Rosyth) Limited
In October 2014, Babcock signed the
Maritime Support Delivery Framework
(MSDF) with MOD. Working within the
ToBA, which runs through to 2025, MSDF
confirms the continuation of Babcock’s
contract to deliver services at HMNB
Clyde and HMNB Devonport to March
2020, replacing Babcock’s Warship
Support Modernisation Initiative (WSMI)
contracts. The MSDF agreement also
covers a number of surface ship projects
which will be delivered through the
Surface Ship Support Alliance. MOD
can terminate the MSDF in the event
of a change in control of the Company.
The provisions follow those in ToBA in
this respect.
Nuclear
Parent Body Agreement between
Cavendish Fluor Partnership (CFP)
and the Nuclear Decommissioning
Authority (NDA) dated 27 August 2014
CFP, a joint venture between Cavendish
Nuclear, part of Babcock International,
and US-based Fluor Corporation, with
ownership split 65:35 to Cavendish and
Fluor respectively, is the parent body
organisation (PBO) for the site licence
company Magnox Limited.
Magnox Limited is responsible for 10
Magnox nuclear power plants, as well
as the Harwell and Winfrith research
centres. The sites are all owned by the
Nuclear Decommissioning Authority
(NDA). The NDA has appointed CFP as
the PBO in respect of the management
of the 12 UK nuclear sites and their
respective decommissioning
programmes. Under the terms of
appointment the NDA may terminate
CFP’s appointment if there is a change
of control to which it has not consented.
Share capital and
rights attaching to
the Company’s shares
General
Under the Company’s Articles of
Association, any share in the Company
may be issued with such rights or
restrictions, whether in regard to
dividend, voting, return of capital or
otherwise, as the Company may from
time to time by ordinary resolution
determine (or, in the absence of any
such determination, as the Directors
may determine). The Directors’ practice
is to seek authority from Shareholders at
each year’s Annual General Meeting to
allot shares (including authority to allot
free of statutory pre-emption rights) up
to specified amounts and also to buy
back the Company’s shares, again up to
a specified amount.
At a general meeting of the Company,
every member has one vote on a show
of hands and, on a poll, one vote for
each share held. The notice of general
meeting specifies deadlines for exercising
voting rights, either by proxy or by
being present in person, in relation
to resolutions to be proposed at a
general meeting.
No member is, unless the Board decides
otherwise, entitled to attend or vote,
either personally or by proxy, at a general
meeting or to exercise any other right
conferred by being a shareholder if they
or any person with an interest in their
shares has been sent a notice under
Section 793 of the Companies Act 2006
(which confers upon public companies
the power to require the provision of
information with respect to interests
in their voting shares) and they or any
interested person have failed to supply
the Company with the information
requested within 14 days after delivery
of that notice. The Board may also decide
that no dividend is payable in respect
of those defaulting shares and that no
transfer of any defaulting shares shall be
registered. These restrictions end seven
days after receipt by the Company of
a notice of an approved transfer of the
shares or all the information required
by the relevant Section 793 notice,
whichever is the earlier.
Babcock International Group PLC Annual Report and Accounts 2019 135
Financial statementsStrategic reportGovernance Additional statutory information continued
The Directors may refuse to register
any transfer of any share which is not a
fully-paid share, although such discretion
may not be exercised in a way which the
Financial Conduct Authority regards as
preventing dealings in the shares of the
relevant class or classes from taking place
on an open or proper basis. The Directors
may likewise refuse to register any
transfer of a share in favour of more
than four persons jointly.
The Company is not aware of any other
restrictions on the transfer of shares
in the Company other than certain
restrictions that may from time to time
be imposed by laws and regulations
(for example, insider trading laws) or by
the nationality-related restrictions, more
particularly described later on this page.
The Company is not aware of any
agreements between Shareholders
that may result in restrictions on the
transfer of securities or voting rights in
the Company.
At the date of this report 505,596,597
ordinary shares of 60 pence each have
been issued and are fully paid up and are
quoted on the London Stock Exchange.
Nationality-related restrictions
on share ownership
Those Group companies which provide
aviation services in the EU, must comply
with the requirements of EC Regulation
1008/2008 (the Regulation) which,
amongst other matters, requires those
companies to be majority-owned and
majority-controlled by EEA nationals
(the licensed companies).
At the Company’s Annual General
Meeting in July 2014, Shareholders
approved the amendment of the
Company’s Articles of Association (the
Articles) to include provisions intended
to assist the Company in ensuring
continuing compliance with these
obligations by giving the Company and
the Directors powers to monitor and,
in certain circumstances, actively
manage nationality requirements as
regards ownership of its shares with
a view to protecting the value of the
Group undertakings that hold the
relevant operating licences. A
summary of these powers is set out
below. Reference should, however,
also be made to the Company’s Articles,
a copy of which may be found on its
website at www.babcockinternational.
com. In the event of any conflict
between the Articles and this
summary, the Articles shall prevail.
Relevant Shares
Relevant Shares are any shares which
the Directors have determined or the
holders have acknowledged are shares
owned by non-EEA nationals for the
purposes of the Regulation (Relevant
Shares). It is open to shareholders to
make representations to the Directors
with a view to demonstrating that shares
should not be treated as Relevant Shares.
Maintenance of a register of
non-EEA shareholders
The Company maintains a register
(which is separate from the statutory
register of members) containing details
of Relevant Shares. This assists the
Directors in assessing, on an ongoing
basis, whether the number of Relevant
Shares is such that action (as outlined
below) may be required to prevent or
remedy a breach of the Regulation.
The Directors will remove, from the
separate register, particulars of shares
where they are satisfied that either the
share is no longer a Relevant Share or
that the nature of the interest in the
share is such that the share should not
be treated as a Relevant Share.
Disclosure obligations on share
ownership
The Articles empower the Company
to, at any time, require a Shareholder
(or other person with a confirmed or
apparent interest in the shares) to
provide in writing such information
as the Directors determine is necessary
or desirable to ascertain such person’s
nationality and, accordingly, whether
details of the shares should be entered
in the separate register as Relevant
Shares or are capable of being
‘Affected Shares’ (see below).
If the recipient of a nationality
information request from the Company
does not respond satisfactorily to the
request within the prescribed period
(being 21 days from the receipt of the
notice), the Company has the power to
suspend the right of such Shareholder to
attend or speak (whether by proxy or in
person) at any general or class meeting
of the Company or to vote or exercise
any other right attaching to the shares
in question. Where the shares represent
at least 0.25% of the aggregate nominal
value of the Company’s share capital,
the Company may also (subject to certain
exceptions) refuse to register the transfer
of such shares.
The Articles also require that a
declaration (in a form prescribed by
the Directors) relating to the nationality
of the transferee is provided to the
Directors upon the transfer of any
shares in the Company, failing which
the Directors may refuse to register
such transfer (see further below).
Power to treat shares as
‘Affected Shares’
The Articles empower the Directors,
in certain circumstances, to treat shares
as ‘Affected Shares’. If the Directors
determine that any shares are to be
treated as Affected Shares, they may
serve an ‘Affected Share Notice’ on the
registered Shareholder and any other
person that appears to have an interest
in those shares. The recipients of an
Affected Share Notice are entitled to
make representations to the Directors
with a view to demonstrating that such
shares should not be treated as Affected
Shares. The Directors may withdraw
an Affected Share Notice if they resolve
that the circumstances giving rise to the
shares being treated as Affected Shares
no longer exist.
136 Babcock International Group PLC Annual Report and Accounts 2019
Consequences of holding or having
an interest in Affected Shares
A holder of Affected Shares is not
entitled, in respect of those shares, to
attend or speak (whether by proxy or in
person) at any general or class meeting
of the Company or to vote or to exercise
any other right at such meetings and
the rights attaching to such shares will
vest in the Chairman of the relevant
meeting (who may exercise, or refrain
from exercising, such rights at his
sole discretion).
The Affected Shares Notice may, if the
Directors determine, also require that
the Affected Shares must be disposed of
within 10 days of receiving such notice
(or such longer period as the Directors
may specify) such that the Affected
Shares become owned by an EEA
national, failing which the Directors may
arrange for the sale of the relevant shares
at the best price reasonably obtainable at
the time. The net proceeds of any sale of
Affected Shares would be held on trust
and paid (together with such rate
of interest as the Directors deem
appropriate) to the former registered
holder upon surrender of the relevant
share certificate in respect of the shares.
Circumstances in which the
Directors may determine that shares
are Affected Shares
The Articles provide that where the
Directors determine that it is necessary
to take steps in order to protect an
operating licence of the Group they
may: (i) seek to identify those shares
which have given rise to the
determination and to deal with such
shares as Affected Shares; and/or (ii)
specify a maximum number of shares
(which will be less than 50% of the
Company’s issued share capital) that may
be owned by non-EEA nationals and then
to treat any shares owned by non-EEA
nationals in excess of that limit as
Affected Shares (the Directors will publish
a notice of any specified maximum within
two business days of resolving to impose
such limit). In deciding which shares are
to be dealt with as Affected Shares the
Directors shall be entitled to determine
which Relevant Shares in their sole
opinion have directly or indirectly
caused the relevant determination.
However, so far as practicable, the
Directors shall have regard to the
chronological order in which the
Relevant Shares have been entered in
the separate register.
Right to refuse registration
The Articles provide the Directors with
the power to refuse registration of a
share transfer if, in their reasonable
opinion, such transfer would result in
shares being treated or continuing to
be treated as Affected Shares.
The Articles also provide that the
Directors shall not register any person
as a holder of any share in the Company
unless the Directors receive a declaration
of nationality relating to such person
and such further information as they may
reasonably request with respect to that
nationality declaration.
The Directors believe that currently
the nationality requirements, set out in
the Regulation, are met and, based on
the Company’s understanding of the
application of the Regulation and of its
Shareholder base, more than 70% of the
share capital of those companies which
are required to be majority-EEA-owned
and controlled is owned by EEA nationals
or funds managed in the EEA. There can
however, be no guarantee that this will
continue to be their assessment and
that it will not be necessary to declare
a Permitted Maximum or exercise
any other of their or the Company’s
powers in the Articles referred to above.
However, if the UK were to leave the EU,
it is likely that the licensed companies
will no longer satisfy the requirements
of the Regulation. In order to mitigate
this risk, the Company has reorganised
the licensed companies as described
on page 76.
Directors’ duty to avoid
conflicts of interest
The Company has adopted a formal
procedure for the disclosure, review,
authorisation and management of
Directors’ conflicts of interest and
potential conflicts of interest in
accordance with the provisions of
the Companies Act 2006.
The procedure requires Directors
formally to notify the Board (via the
Company Secretary) as soon as they
become aware of any actual or potential
conflict of interest with their duties to
the Company or of any material change
in existing actual or potential conflicts
that may have been authorised by the
Board. Notified actual or potential
conflicts will be reviewed by the Board as
soon as possible. The Board will consider
whether a conflict or potential conflict
does, in fact, exist and, if so, whether it
is in the interest of the Company that it
be authorised and, if so, on what terms.
In making their judgement on this, the
other Directors must have regard to their
general duties to the Company. A register
is maintained for the Board of all such
disclosures and the terms of any
such authorisation.
Authorisations may be revoked, or
the terms on which they were given
varied, at any time. Cleared conflicts
will in any event be reviewed annually
by the Board. In the event of any
actual conflict arising in respect of any
matter, mitigating action would also be
considered (for example, non-attendance
of the Director concerned at all or part of
Board meetings and non-circulation to
him or her of relevant papers).
Babcock International Group PLC Annual Report and Accounts 2019 137
Financial statementsStrategic reportGovernance Additional statutory information continued
Internal controls and
risk management
There has been a process for identifying,
evaluating and managing principal risks
throughout the year to 31 March 2019
and up to the date of the approval of
the financial statements for that year.
In respect of our financial reporting
process and the process for preparing
our consolidated accounts, management
monitors the processes underpinning
the Group’s financial reporting systems
through regular reporting and review,
and data for consolidation into the
Group’s financial statements is reviewed
by management to ensure that it reflects
a true and fair view of the Group’s results
in compliance with applicable
accounting policies.
The Board, through the Audit and Risk
Committee, reviews the effectiveness
of the Company’s internal control
processes formally at least once a year.
The Group Financial Controller is asked
to report on the effectiveness of the
Group’s internal controls and the Audit
and Risk Committee reviews this report
in light of all the other information
supplied to it during the course of the
year including internal audit reports,
risk reports and monthly financial
and operational reports. The Board
considers the system to be effective
and in accordance with Guidance for
Risk Management, Internal Control, and
Related Financial and Business reporting.
Further information on the principal
internal controls in use in the Company
is to be found on pages 70 to 72.
Going concern
statement
The going concern assessment
considers whether it is appropriate to
prepare the financial statements on a
going concern basis.
The Group’s forecasts and projections,
taking into account reasonably possible
changes in trading performance,
show that the Group has sufficient
financial resources. The Directors
have reasonable expectations that
the Company and the Group are well
placed to manage business risks and
to continue in operational existence
for the foreseeable future (which
accounting standards require to be at
least a year from the date of this report)
and have not identified any material
uncertainties to the Company’s and the
Group’s ability to do so.
For these reasons, they continue to
adopt the going concern basis in
preparing the financial statements.
Auditor and disclosure
of relevant audit
information
So far as the Directors who are in office
at the time of the approval of this report
are aware, there is no relevant audit
information (namely, information needed
by the Company’s auditor in connection
with the preparation of its auditor’s
report) of which the auditor is unaware.
Each such Director has taken all steps
that he or she ought to have taken as
a Director in order to make himself or
herself aware of any relevant audit
information and to establish that the
auditor is aware of that information.
PricewaterhouseCoopers LLP is willing to
continue in office as independent auditor
of the Company and a resolution to
reappoint it will be proposed at the
forthcoming Annual General Meeting.
Directors’ responsibility
statement
The Directors are responsible for
preparing the Annual Report and the
financial statements in accordance with
applicable law and regulation.
Company law requires the Directors to
prepare financial statements for each
financial year. Under that law, the
Directors have prepared the Group
financial statements in accordance
with International Financial Reporting
Standards (IFRS) as adopted by the
European Union and the Company
financial statements in accordance
with UK Generally Accepted Accounting
Practice (United Kingdom Accounting
Standards, comprising FRS 101 Reduced
Disclosure Framework, and applicable
law). Under company law the Directors
must not approve the financial
statements unless they are satisfied that
they give a true and fair view of the state
of affairs of the Group and the Company
and of the profit or loss of the Group and
Company for that period. In preparing
the financial statements the Directors are
required to:
• select suitable accounting policies
and then apply them consistently
• state whether applicable IFRS as
adopted by the European Union have
been followed for the Group financial
statements and United Kingdom
Accounting Standards, comprising
FRS 101, have been followed for
the Company financial statements,
subject to any material departures
disclosed and explained in the
financial statements
• make judgements and accounting
estimates that are reasonable
and prudent
• prepare the financial statements on
the going concern basis, unless it is
inappropriate to presume that the
Group and Company will continue
in business.
138 Babcock International Group PLC Annual Report and Accounts 2019
In addition, each of the Directors
listed below considers that the
Annual Report, taken as a whole, is
fair, balanced and understandable and
provides the information necessary for
Shareholders to assess the Company’s
position, performance, business model
and strategy.
Mike Turner
Chairman
Non-Executive Director
Ruth Cairnie
Sir David Omand Non-Executive Director
Non-Executive Director
Prof. Victoire
de Margerie
Non-Executive Director
Ian Duncan
Non-Executive Director
Lucy Dimes
Myles Lee
Non-Executive Director
Kjersti Wiklund Non-Executive Director
Non-Executive Director
Jeff Randall
Archie Bethel
Chief Executive
Franco Martinelli Group Finance Director
John Davies
Chief Executive, Land
Approval of the Strategic report
and the Directors’ report
The Strategic report and the Directors’
report (pages 1 to 139) for the year
ending 31 March 2019 have been
approved by the Board and signed on
its behalf by:
Mike Turner CBE
Chairman
21 May 2019
The Directors are responsible for
keeping adequate accounting records
that are sufficient to show and explain
the Group and Company’s transactions
and disclose with reasonable accuracy
at any time the financial position of the
Group and the Company, and enable
them to ensure that the Group’s
financial statements and the Directors’
Remuneration report comply with the
Companies Act 2006 and, as regards the
Group financial statements, Article 4 of
the IAS Regulation.
The Directors are also responsible for
safeguarding the assets of the Group
and the Company, and hence for taking
reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the
Company’s website. Legislation in
the United Kingdom governing the
preparation and dissemination of
financial statements may differ from
legislation in other jurisdictions.
The Directors consider that the Annual
Report and Accounts, taken as a whole,
is fair, balanced and understandable and
provides the information necessary for
Shareholders to assess the Group and
Company’s performance, business model
and strategy.
Each of the Directors, whose names
and functions are listed in the Directors’
report, confirm that, to the best of
their knowledge:
• the Company financial statements,
which have been prepared in
accordance with United Kingdom
Generally Accepted Accounting
Practice (United Kingdom Accounting
Standards, comprising FRS 101
Reduced Disclosure Framework, and
applicable law), give a true and fair
view of the assets, liabilities, financial
position and profit of the Company
• the Group financial statements, which
have been prepared in accordance
with IFRS as adopted by the European
Union, give a true and fair view of the
assets, liabilities, financial position and
profit of the Group
• the Directors’ report includes a
fair review of the development and
performance of the business and the
position of the Group and Company,
together with a description of the
principal risks and uncertainties that
it faces.
In the case of each Director in office
at the date the Directors’ report
is approved:
• so far as the Director is aware, there
is no relevant audit information of
which the Group and Company’s
auditors are unaware;
• they have taken all the steps that they
ought to have taken as a Director in
order to make themselves aware of
any relevant audit information and
to establish that the Group and
Company’s auditors are aware of
that information.
Each of the Directors listed below
(being the Board of Directors at the date
of this Annual Report and these financial
statements) confirms that to the best of
his or her knowledge:
• the Group financial statements (set out
on pages 152 to 207 which have been
prepared in accordance with IFRS as
adopted by the EU, give a true and fair
view of the assets, liabilities, financial
position and profit of the Group taken
as a whole; and the Strategic report
and Directors’ report contained on
pages 1 to 139 include a fair review
of the development and performance
of the business and the position of the
Group, together with a description of
the principal risks and uncertainties
that it faces.
Babcock International Group PLC Annual Report and Accounts 2019 139
Financial statementsStrategic reportGovernance HMNB Devonport, Plymouth, UK
We deliver capable
platforms back to the
Royal Navy at Devonport,
as well as providing the
management of the
Naval Base facilities
“This involves the maintenance
and development of our
unique infrastructure,
including our nuclear
licensed site where work
on submarines is carried
out, and the Frigate Support
Centre, home to three
docks where we refit
Type 23 warships.”
Alex Thomas
Senior Electrical Control and Instrumentation Engineer
Maritime Support Delivery Framework (MSDF)
Fast Facts
Contract name: Maritime Support Delivery Framework (MSDF)
Length of contract: Five and a half years
Output of contract: Managing critical infrastructure and
nuclear facilities, providing maintenance, upgrades and repairs
to Royal Navy vessels
Sector: Marine
140 Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2019 141
Independent auditors’ report to the members of Babcock International Group PLC
Report on the audit of the financial statements
Opinion
In our opinion:
• Babcock International Group PLC’s Group financial statements and Company financial statements (the “financial statements”) give
a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 March 2019 and of the Group’s profit and
cash flows for the year then ended;
• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union;
• the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards
the Group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise:
the Group and Company balance sheet as at 31 March 2019; the Group income statement and statement of comprehensive
income, the Group cash flow statement, and the Group and Company statements of changes in equity for the year then ended;
and the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit and Risk Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not
provided to the Group or the Company.
Other than those disclosed in the Directors’ report, we have provided no non-audit services to the Group or the Company in the
period from 1 April 2018 to 31 March 2019.
Our audit approach
Overview
Materiality
• Overall Group materiality: £26 million (2018: £26 million), based on 5% of profit before tax, adjusted for amortisation of acquired
intangible assets and exceptional items.
• Overall Company materiality: £25 million (2018: £20 million), based on a restricted allocation of component materiality for the
purposes of our group audit.
Audit scope
• We conducted our audit work over the complete financial information for 26 of the largest and higher risk reporting components
located in the UK, Europe and South Africa, including one financially significant component, Devonport, and one joint venture,
Holdfast Training Services Limited.
• In addition, we performed the audit of specific balances and transactions at one further reporting component and for the Group’s
share of the results of four joint ventures, selected based on their relative contribution to the Group results.
• Where the operating businesses were located outside the UK, we worked together with our network firms located in the relevant
territories to ensure we had sufficient evidence upon which to base our audit opinion.
• Taken together, the reporting components and central functions where we performed our audit work accounted for 80% of
Group revenue and 72% of Group profit before tax, adjusted for amortisation of acquired intangibles and exceptional items,
which included 81% of the Group’s share of results of joint ventures and associates. We also performed work over amortisation
of acquired intangibles and exceptional items. Overall, our audit work accounted for 86% of the Group profit before tax.
Key audit matters
• Contract accounting and revenue/profit recognition (Group);
• Goodwill impairment (Group);
• Valuation of defined benefit pension liabilities (Group); and
• Presentation of exceptional items (Group).
142 Babcock International Group PLC Annual Report and Accounts 2019
142 Babcock International Group PLC Annual Report and Accounts 2019
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting
estimates that involved making assumptions and considering future events that are inherently uncertain.
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and
regulations related (but were not limited) to; aviation and nuclear industry legislation and regulation, defence contracting, taxation,
anti-bribery and corruption legislation, and health and safety, and we considered the extent to which non-compliance might have
a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the
preparation of the financial statements such as the Companies Act 2006. We evaluated management’s incentives and opportunities
for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal
risks were related to manipulation of results to achieve performance targets through improper revenue/profit recognition, given the
judgemental nature of contract accounting (included as a key audit matter), and inappropriate recording of costs or expenses given
the complex nature of the industries in which the Group operates. The Group engagement team shared this risk assessment with
the component auditors so that they could include appropriate audit procedures in response to such risks in their work.
Our audit procedures included, but were not limited to: understanding management’s policies and processes; enquiries of
management; testing journals and central adjustments; review of correspondence with legal advisors and enquiries of legal counsel;
review of correspondence with regulators, and review of internal audit reports. We also agreed financial statement disclosures to
underlying supporting documentation and performed a review of component auditor’s working papers. Our testing of balances and
transactions (in addition to those listed as key audit matters below) focussed on areas that are subject to estimation and judgement,
to understand thematically any issues within the Group and evaluate whether there was evidence of bias by the Directors that
represented a risk of material misstatement due to fraud.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and
regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error,
as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of
resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results
of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by
our audit.
Babcock International Group PLC Annual Report and Accounts 2019 143
Babcock International Group PLC Annual Report and Accounts 2019 143
Financial statementsGovernanceStrategic report
Independent auditors’ report to the members of Babcock International Group PLC
continued
Key audit matter
How our audit addressed the key audit matter
Contract accounting and revenue/profit
recognition (Group)
Refer to notes 1 and 3 of the Group financial
statements and to the Report of the Audit
and Risk Committee on page 96.
The Group’s business involves entering into
contractual relationships with customers to
provide a range of services with a significant
proportion of the Group’s revenues and profits
derived from long term contracts.
Due to the contracting nature of the business,
revenue and profit recognition involves a
significant degree of judgement and a number
of assumptions to be made, including to:
• Estimate total contract costs;
• Estimate the stage of completion of
the contract;
• Forecast the profit margin, after
consideration of additional revenue
relating to cost and time completion
incentive targets;
• Forecast contract variations and the outcome
of disputes/claims, depending on stage of
negotiation or agreement with the customer;
and
• Appropriately provide for loss
making contracts.
There is a broad range of acceptable outcomes
resulting from these estimates and judgements
that could lead to different revenue and profit
being reported in the financial statements.
We read the relevant clauses within new and amended key contracts and
discussed each with management to obtain a full understanding of the specific
terms and risks, which informed our consideration as to whether revenue and
profit for these contracts were appropriately recognised.
We evaluated the design, implementation and operation of controls designed to
address the accuracy and timing of revenue recognised in the financial
statements, including:
• Contract reviews, which are performed by management, reviewed and signed
off at both a Group and Sector level, and include the estimation of total costs,
stage of completion, profit margin and profitability; and
• Transactional controls that underpin the production of underlying contract
related cost balances, including the purchase to pay and payroll cycles.
We found the controls to be satisfactory for the purposes of our audit.
We performed procedures for a sample of contracts, based on quantitative and
qualitative factors including size and risk. These procedures varied according
to the facts and circumstances of the contract and the relevant areas of
judgement and estimation uncertainty. Where applicable, we:
• Attended management’s contract review meetings and, through discussions
with the contract project teams, we obtained an understanding of the
performance and status of the contracts;
• Evaluated management’s positions through the examination of externally
generated evidence, such as customer correspondence (including the
validation of any incentives or contract variations), acceptance certificates
and/or milestone agreements;
• Performed procedures over management’s models, testing the mathematical
accuracy and agreeing amounts back to underlying contracts;
• Discussed and understood management’s estimates for total contract costs
and forecast costs to complete, including taking into account the historical
accuracy of such estimates;
• Evaluated any correspondence in respect of customer disputes/claims, including
discussion with internal legal counsel at a Group and component level;
• Compared management’s position on the recognition of any cost and time
completion incentive target amounts with the actual costs incurred and
current progress of the contract;
• Evaluated the work performed by external experts on which management
placed reliance;
• Evaluated management’s calculations of provisions for onerous commitments,
where these relate to a contract; and
• Agreed contract positions to amounts recognised in the financial statements,
including amounts due from/to customers for contract work on the balance
sheet, and considered the valuation and recoverability of asset balances and
the completeness of liability balances.
Our testing did not identify any factors that management had not taken into
account in their estimates of the total contract costs, stage of completion and
expected profit margin of each contract (including the expected losses on loss
making contracts). Overall, we consider the contract positions taken by
management to be reasonable.
We assessed the related disclosures, including those required under IFRS 15,
contained in the Group financial statements, and consider them to be appropriate.
144 Babcock International Group PLC Annual Report and Accounts 2019
144 Babcock International Group PLC Annual Report and Accounts 2019
Key audit matter
How our audit addressed the area of focus
Valuation of defined benefit pension liabilities (Group)
Refer to note 25 of the Group financial statements and to
the Report of the Audit and Risk Committee on page 96.
The Group operates a number of defined benefit pension plans,
giving rise to net and gross pension liabilities of £28m (2018: £5m)
and £4,610m (2018: £4,740m) respectively, which are significant
in the context of the overall balance sheet of the Group.
The valuation of pension liabilities requires judgement and
technical expertise in choosing appropriate assumptions such
as salary increases, mortality rates, discount rates and inflation
levels. Management engaged external actuarial specialists to
assist them in selecting appropriate assumptions and to
calculate the liabilities.
Inappropriate selection of assumptions or methodologies for
calculating the pension liabilities could result in a material
difference in the value of the liabilities.
Goodwill impairment (Group)
Refer to note 11 of the Group financial statements and to
the Report of the Audit and Risk Committee on page 96.
The Group has goodwill of £2,584m (2018: £2,601m),
principally related to the acquisitions of the VT Group in 2010
and Avincis in 2015, which is subject to an annual impairment
review. No impairment charge has been recorded against these
balances in the current financial year.
The impairment assessments used to support the carrying value
of the Group’s four goodwill cash generating units (‘CGUs’)
involves the application of subjective judgement about future
business performance. We considered certain assumptions
made by management in the value in use calculations
supporting the impairment assessments to be key areas of
judgement, including the forecast cash flows, the short and
longer term growth rates and the discount rates applied.
Changes to the key assumptions used by management could
result in the calculated value in use being lower than the
carrying value of the CGU, therefore indicating an impairment.
We used our actuarial specialists to assess whether the assumptions
used in calculating the pension liabilities were reasonable, by:
• Assessing whether salary increases and mortality rate
assumptions were consistent with the specifics of each plan
and, where applicable, with relevant UK industry benchmarks;
• Verifying that the discount and inflation rate assumptions
were consistent with our internally developed benchmarks,
based on national data and other companies’ recent external
reporting; and
• Reviewing the calculations prepared by external actuaries to
assess the consistency of the assumptions used.
Based on our procedures, we found no exceptions and overall
considered management’s key assumptions to be within
acceptable ranges.
We assessed the related disclosures included in the Group
financial statements, and consider them to be appropriate.
We evaluated management’s cash flow forecasts, and the
process by which they were determined and approved.
This included confirming that the forecasts were consistent
with the latest Board approved budgets and checking the
mathematical accuracy of the underlying calculations, with
no exceptions identified.
We evaluated the inputs included in the value in use calculations,
and challenged the key assumptions, by obtaining evidence
including in respect of:
• The growth rates used in the cash flow forecasts, by comparing
them with historical results, economic forecasts and our
understanding of the related Sector’s order book and pipeline;
• The key market-related assumptions, including discount rates
and long term growth rates, by benchmarking these against
external data, using our valuation expertise; and
• The reliability of cash flow forecasts, through a review of actual
past performance and comparison to previous forecasts.
We tested the mathematical accuracy of the value in use
calculations, and performed sensitivity analyses of the key
inputs and assumptions, including the market-related
assumptions and the key driver of the cash flow forecasts,
being the operating profit.
Our work found that management’s assessment that there
were no material impairments to be reasonable, and considered
management’s key assumptions to be within reasonable ranges.
We assessed the related disclosures included in the Group financial
statements, including the sensitivities provided in respect of the
Aviation Sector CGU, and consider them to be appropriate.
Babcock International Group PLC Annual Report and Accounts 2019 145
Babcock International Group PLC Annual Report and Accounts 2019 145
Financial statementsGovernanceStrategic report
Independent auditors’ report to the members of Babcock International Group PLC
continued
Key audit matter
How our audit addressed the area of focus
Presentation of exceptional items (Group)
Refer to notes 1 and 5 of the Group financial statements and
to the Report of the Audit and Risk Committee on page 96.
The Group has recognised net exceptional items, before tax,
related to business reorganisation, capacity restructuring,
exits and disposals and one-off pension items (including GMP
equalisation) of £161m for the year ended 31 March 2019.
These costs comprise impairment of assets (£39m),
onerous lease provisions (£42m), exit costs (£21m), capacity
restructuring costs (£43m) and one-off pension items (£31m),
offset by a profit on disposal of subsidiaries of £15m.
As required by accounting standards, management
performed impairment assessments of the assets, having
identified impairment indicators arising from the Group’s
strategic decision to reshape the Oil and Gas business. The
determination of the recoverable amount of tangible assets
requires judgements, particularly management’s view on
determining an appropriate asset market value, or key inputs
and assumptions made in cash flow forecasts, including long-
term growth rates, where value in use calculations were used
to determine the level of impairment required.
Provisions for onerous lease contracts were recorded in respect
of underperforming assets, where management identified that
the expected future cash inflows were lower than the contractual
lease obligations. The provisions were calculated based on
the judgements applied by management in determining
the expected future cash inflows over the remaining lease
terms compared to the contractual lease obligations.
Determining the business capacity restructuring and exit costs
required management to make judgements over the key inputs
and assumptions, including the amount and timing of expected
costs that will be incurred.
As with the valuation of defined benefit pension liabilities above,
the methodology and assumptions applied to calculate one-off
pension items – in particular for Guaranteed Minimum Pension
(‘GMP’) equalisation – requires judgement and technical expertise.
Changes to the key assumptions used by management could
result in the calculated impairment charge, onerous lease
provision, or business capacity restructuring and exit costs
being different to those reported in the financial statements.
Another specific area of focus was to assess whether the
items identified by management as exceptional met the
definition in the Group’s accounting policy and have been
treated consistently, as the identification of such items
requires judgement by management.
We considered management’s programme for the business
reorganisation, capacity restructuring, exits and disposals.
We agreed the carrying value of tangible assets that were
assessed for impairment to underlying financial records. We
considered management’s view on the appropriate asset fair
value by reference to available external market data, including
alternative sources of information. Where applicable, we tested
the discounted cash flow models used by management to
determine the amount of asset impairment required, and
checked the accuracy of the calculations. We assessed the
cash flow forecasts through a review of actual past performance
and comparison with previous forecasts, and understanding the
commercial prospects of the assets, including, where possible,
comparison of assumptions with external data sources.
We tested the accuracy and completeness of the data used by
management in the onerous lease calculations by agreeing key
inputs, such as the cash flow forecasts for individual leases, to
underlying lease contracts.
We assessed the key inputs and assumptions used by
management in calculating business exit and capacity
restructuring costs. Where appropriate, on a sample basis we
validated the inputs and assumptions to internal and external
data sources, such as payroll records, internal and external
announcements, and correspondence received from third
parties. We evaluated whether the inputs and assumptions
were appropriate based on the evidence available, and
whether the costs and provisions recorded met the
requirements of the applicable accounting standards.
We assessed whether the methodology and assumptions used
in calculating the GMP equalisation and other one-off pension
items were reasonable, which we found to be appropriate.
We challenged management’s rationale for the designation of
certain items as exceptional and assessed such items against the
Group’s accounting policy, considering the nature and value of
these items.
We assessed the appropriateness and completeness of the
disclosures included in the Group financial statements, and
checked that these reflected the output of management’s
calculations and positions taken, noting no significant deviations
from our expectations. We also considered whether there were
items that were recorded within underlying profit that we
determined to be exceptional in nature and should have been
reported within ‘exceptional items’. No such material items
were identified.
We determined that there were no key audit matters applicable to the Company to communicate in our report.
146 Babcock International Group PLC Annual Report and Accounts 2019
146 Babcock International Group PLC Annual Report and Accounts 2019
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls,
and the industry in which they operate.
The Group is primarily structured and managed across four Sectors: Marine, Land, Aviation and Cavendish Nuclear. The Group
financial statements are a consolidation of multiple reporting components, including both operating businesses and central functions.
The Group’s reporting components vary significantly in size and we identified 26 components that, in our view, required an audit
of their complete financial information due to their size and/or risk. This included one component, Devonport, whose results were
individually financially significant to the Group, and one joint venture, Holdfast Training Services. Specific risk-based audit procedures
were performed at one further reporting component and over the Group’s share of the results of four joint ventures. In scope
reporting components, including joint ventures, were based in six countries: the UK, France, Spain, Italy, South Africa and Canada.
Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit
work at those locations to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our
opinion on the Group financial statements as a whole. We issued formal, written instructions to component auditors setting out the
work to be performed by each of them and maintained regular communication throughout the audit cycle.
The Group engagement leader and senior members of the Group team undertook visits to eight components in the UK, France and
South Africa during the audit, including the Group’s only financially significant component, Devonport. Senior team members also
attended the Devonport and the four Sector clearance meetings in person. During both the site visits and the clearance meetings,
the findings reported by all component teams were discussed. The Group team also evaluated the sufficiency of the audit evidence
obtained through discussions with, and review of the work performed by, component teams.
This, together with additional procedures performed at the Group level (including audit procedures over material head office
entities, pensions, impairment assessments, financial statement disclosures, tax, treasury, share based payments and consolidation
adjustments), gave us the evidence we needed for our opinion on the financial statements as a whole. Taken together, the reporting
components and functions where we performed our audit work accounted for 80% of Group revenue and 72% of Group profit
before tax adjusted for amortisation of acquired intangibles, which included 81% of the Group’s share of results of joint ventures
and associates. We also performed work over amortisation of acquired intangibles and exceptional items. Overall, our audit work
accounted for 86% of the Group profit before tax.
Babcock International Group PLC Annual Report and Accounts 2019 147
Babcock International Group PLC Annual Report and Accounts 2019 147
Financial statementsGovernanceStrategic report
Independent auditors’ report to the members of Babcock International Group PLC
continued
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of
our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements,
both individually and in aggregate, on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
How we determined it
Rationale for benchmark applied
Group financial statements
£26 million (2018: £26 million).
Company financial statements
£25 million (2018: £20 million).
5% of profit before tax, adjusted for
amortisation of acquired intangibles assets
and exceptional items.
Given the contractual nature of the business,
we adjusted for amortisation of acquired
intangible assets and exceptional items,
as this better reflects the underlying
performance and nature of operations.
We consider an adjusted measure to be
one of the principal considerations for
the members of Babcock International
Group PLC in assessing the recurring
financial performance of the Group.
We calculated a stand-alone materiality
of £61 million (2018: £59 million) for the
Company financial statements, based on
1% of total assets.
We restricted this to £25 million, based on
our calculation and allocation of component
materiality for the group audit.
The results of procedures performed over
balances and transactions contributing to the
Group’s overall results were used to support
our group opinion.
We consider a total asset measure to reflect
the nature of the Company, which primarily
acts as a holding company for the Group’s
investments.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The
range of materiality allocated across components was between £1 million to £25 million. Certain components were audited to a
local statutory audit materiality that was also less than our overall Group materiality.
We agreed with the Audit and Risk Committee that we would report to them misstatements identified during our audit above
£1.0 million (Group audit) (2018: £1.2 million) and £1.0 million (Company audit) (2018: £1.2 million) as well as misstatements
below those amounts that, in our view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
We are required to report if we have anything material to add or
draw attention to in respect of the Directors’ statement in the
financial statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting in
preparing the financial statements and the Directors’ identification
of any material uncertainties to the Group’s and the Company’s
ability to continue as a going concern over a period of at least
twelve months from the date of approval of the financial statements.
Outcome
We have nothing material to add or to draw attention to.
As not all future events or conditions can be predicted,
this statement is not a guarantee as to the Group’s and
Company’s ability to continue as a going concern. For
example, the terms on which the United Kingdom may
withdraw from the European Union are not clear, and it is
difficult to evaluate all of the potential implications on the
Group’s trade, customers, suppliers and the wider economy.
We are required to report if the Directors’ statement relating to
Going concern in accordance with Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge obtained in the audit.
We have nothing to report.
148 Babcock International Group PLC Annual Report and Accounts 2019
148 Babcock International Group PLC Annual Report and Accounts 2019
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’
report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the
other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this
report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06),
ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as
described below (required by ISAs (UK) unless otherwise stated).
Strategic report and Directors’ report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’
report for the year ended 31 March 2019 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit,
we did not identify any material misstatements in the Strategic report and Directors’ report. (CA06)
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or
liquidity of the Group
We have nothing material to add or draw attention to regarding:
• The Directors’ confirmation on page 70 of the Annual Report that they have carried out a robust assessment of the principal risks
facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The Directors’ explanation on page 70 of the Annual Report as to how they have assessed the prospects of the Group, over what
period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment
of the principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was
substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting
their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code
(the “Code”); and considering whether the statements are consistent with the knowledge and understanding of the Group and
Company and their environment obtained in the course of the audit. (Listing Rules)
Babcock International Group PLC Annual Report and Accounts 2019 149
Babcock International Group PLC Annual Report and Accounts 2019 149
Financial statementsGovernanceStrategic report
Independent auditors’ report to the members of Babcock International Group PLC
continued
Reporting on other information (continued)
Other Code provisions
We have nothing to report in respect of our responsibility to report when:
• The statement given by the Directors, on page 138, that they consider the Annual Report taken as a whole to be fair, balanced
and understandable, and provides the information necessary for the members to assess the Group’s and Company’s position and
performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company obtained in
the course of performing our audit.
• The section of the Annual Report on page 96 describing the work of the Audit and Risk Committee does not appropriately address
matters communicated by us to the Audit and Risk Committee.
• The Directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a
relevant provision of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
Responsibilities for the financial statements and the audit
Responsibilities of the Directors for the financial statements
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial
statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are
also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Company’s ability to continue
as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting
unless the Directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative
but to do so.
Auditors’ responsibility for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
150 Babcock International Group PLC Annual Report and Accounts 2019
150 Babcock International Group PLC Annual Report and Accounts 2019
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from
branches not visited by us; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• the Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with
the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit and Risk Committee, we were originally appointed by the members to audit the financial
statements for the year ended 31 March 2003 and subsequent financial periods. Following an audit tender, we were reappointed
by the members on 25 May 2016 to audit the financial statements for the year ended 31 March 2017 and subsequent financial
periods. The period of total uninterrupted engagement is 17 years, covering the years ended 31 March 2003 to 31 March 2019.
John Waters (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
21 May 2019
Babcock International Group PLC Annual Report and Accounts 2019 151
Babcock International Group PLC Annual Report and Accounts 2019 151
Financial statementsGovernanceStrategic report
Group income statement
For the year ended 31 March 2019
Revenue1
Cost of revenue
Gross profit
Distribution expenses
Administration expenses
Operating profit before share of results of joint ventures and associates
Share of results of joint ventures and associates
Note
3
3, 4
3, 14
Group and joint ventures and associates
Operating profit before amortisation of acquired intangibles
Investment income
Underlying operating profit2
Amortisation of acquired intangibles
Exceptional items
Group investment income
Joint ventures and associates finance costs
Joint ventures and associates income tax expense
Operating profit
Finance costs
Investment income
Retirement benefit interest
Finance costs
Finance income
Profit before tax
Income tax expense
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interest
Earnings per share
Basic
Diluted
3
5
5
3
25
6
6
3
8
10
2019
£m
Total
£m
4,474.8
(3,928.3)
546.5
(11.9)
(338.1)
196.5
83.8
2018
£m
Total
£m
4,659.6
(3,971.7)
687.9
(12.8)
(304.5)
370.6
68.5
559.3
29.1
588.4
(101.0)
(160.8)
(1.3)
(24.1)
(20.9)
1.3
0.3
(62.7)
16.0
554.6
30.0
584.6
(103.9)
–
(1.9)
(22.2)
(17.5)
280.3
439.1
1.9
(2.3)
(61.9)
14.3
(45.1)
235.2
(35.4)
199.8
199.4
0.4
199.8
39.5p
39.4p
(48.0)
391.1
(53.4)
337.7
336.3
1.4
337.7
66.6p
66.5p
1. Revenue does not include the Group’s share of revenue from joint ventures and associates of £685.8 million (2018: £703.2 million).
2. Including IFRIC 12 investment income but before exceptional items and amortisation of acquired intangibles.
152 Babcock International Group PLC Annual Report and Accounts 2019
152 Babcock International Group PLC Annual Report and Accounts 2019
Group statement of comprehensive income
For the year ended 31 March 2019
Profit for the year
Other comprehensive income
Items that may be subsequently reclassified to income statement
Currency translation differences
Fair value adjustment of interest rate and foreign exchange hedges
Tax on fair value adjustment of interest rate and foreign exchange hedges
Hedging gains reclassified to profit or loss
Fair value adjustment of joint ventures and associates derivatives
Tax, including rate change impact, on fair value adjustment of joint ventures and associates
derivatives
Items that will not be reclassified to income statement
Remeasurement of retirement benefit obligations
Tax on remeasurement of retirement benefit obligations
Impact of change in UK tax rates
Other comprehensive income, net of tax
Total comprehensive income
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interest
Total comprehensive income
Group statement of changes in equity
For the year ended 31 March 2019
At 31 March 2017
Total comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Transactions with
non-controlling interests
Own shares and other
Net movement in equity
At 31 March 2018
Total comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Transactions with non-
controlling interests (note 30)
Net movement in equity
At 31 March 2019
Share
capital
£m
303.4
–
–
–
–
–
–
–
303.4
–
–
–
–
–
–
303.4
Share
premium
£m
873.0
–
–
–
–
–
–
–
873.0
–
–
–
–
–
–
873.0
Other
reserve
£m
768.8
–
–
–
–
–
–
–
768.8
–
–
–
–
–
–
768.8
Capital
redemption
£m
30.6
–
–
–
–
–
–
–
30.6
–
–
–
–
–
–
30.6
Retained
earnings
£m
757.9
377.5
(143.9)
6.4
1.9
(0.7)
(4.2)
237.0
994.9
151.0
(150.5)
2.4
2.4
(2.0)
3.3
998.2
Hedging
reserve
£m
(86.5)
12.0
–
–
–
–
–
12.0
(74.5)
0.1
–
–
–
–
0.1
(74.4)
Note
2019
£m
199.8
2018
£m
337.7
14
14
25
(31.0)
(0.5)
0.4
(1.3)
1.8
(25.9)
(7.5)
1.2
1.4
24.3
(0.3)
(7.4)
(58.4)
10.4
(0.4)
(79.3)
120.5
122.3
(1.8)
120.5
49.7
(10.3)
1.9
27.4
365.1
363.6
1.5
365.1
Translation
reserve
£m
Owners
of the
parent
£m
22.6 2,669.8
(25.9) 363.6
(143.9)
6.4
1.9
–
–
–
–
–
(0.7)
(4.2)
(25.9) 223.1
(3.3) 2,892.9
(28.8) 122.3
(150.5)
2.4
2.4
–
–
–
Non-
controlling
interest
£m
Total
equity
£m
22.4 2,692.2
365.1
(147.7)
6.4
1.9
1.5
(3.8)
–
–
(2.7)
(2.0)
(4.2)
–
(4.3)
218.8
18.1 2,911.0
120.5
(1.8)
(153.3)
(2.8)
2.4
–
2.4
–
(2.0)
–
(28.8)
(25.4)
(32.1) 2,867.5
1.9
3.9
(0.7)
(26.1)
17.4 2,884.9
The other reserve relates to the rights issue of new ordinary shares on 7 May 2014 and the capital redemption reserve relates to the
issue and redemption of redeemable ‘B’ preference shares in 2001.
Babcock International Group PLC Annual Report and Accounts 2019 153
Babcock International Group PLC Annual Report and Accounts 2019 153
Financial statementsGovernanceStrategic report
Group balance sheet
As at 31 March 2019
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investment in joint ventures and associates
Loan to joint ventures and associates
Retirement benefits
Trade and other receivables
IFRIC 12 financial assets
Other financial assets
Deferred tax asset
Current assets
Inventories
Trade and other receivables
Income tax recoverable
Other financial assets
Cash and cash equivalents
Total assets
Equity and liabilities
Equity attributable to owners of the parent
Share capital
Share premium
Capital redemption and other reserves
Retained earnings
Non-controlling interest
Total equity
Non-current liabilities
Bank and other borrowings
Trade and other payables
Deferred tax liabilities
Other financial liabilities
Retirement liabilities
Provisions for other liabilities
Current liabilities
Bank and other borrowings
Trade and other payables
Income tax payable
Other financial liabilities
Provisions for other liabilities
Total liabilities
Total equity and liabilities
Note
2019
£m
2018
£m
11
12
13
14
14
25
17
21
15
16
17
21
18, 27
23
20
19
15
21
25
22
20
19
21
22
2,584.2
448.9
1,014.3
153.2
42.5
226.9
9.3
15.5
93.8
150.9
4,739.5
196.5
907.8
11.1
48.0
275.2
1,438.6
6,178.1
303.4
873.0
692.9
998.2
2,867.5
17.4
2,884.9
1,357.6
2.0
103.2
9.3
254.9
40.5
1,767.5
53.9
1,381.4
22.1
4.9
63.4
1,525.7
3,293.2
6,178.1
2,600.9
529.3
1,028.4
119.3
27.8
240.1
6.7
17.8
76.0
104.0
4,750.3
181.4
1,060.1
15.4
27.5
286.3
1,570.7
6,321.0
303.4
873.0
721.6
994.9
2,892.9
18.1
2,911.0
1,485.2
2.3
112.8
5.0
245.1
61.1
1,911.5
38.1
1,392.1
21.7
11.9
34.7
1,498.5
3,410.0
6,321.0
The notes on pages 156 to 207 are an integral part of the consolidated financial statements. The Group financial statements on
pages 152 to 207 were approved by the Board of Directors on 21 May 2019 and are signed on its behalf by:
A Bethel
Director
F Martinelli
Director
154 Babcock International Group PLC Annual Report and Accounts 2019
154 Babcock International Group PLC Annual Report and Accounts 2019
Group cash flow statement
For the year ended 31 March 2019
Cash flows from operating activities
Operating profit before amortisation of acquired intangible and exceptional items
Amortisation of acquired intangible and exceptional items
Operating profit before share of results of joint ventures and associates
Depreciation and impairment of property, plant and equipment
Amortisation of intangible assets
Investment income
Equity share-based payments
Profit on disposal of subsidiaries, businesses and joint ventures and associates
Profit on disposal of property, plant and equipment
Loss on disposal of intangible assets
Cash generated from operations before movement in working capital
Increase in inventories
Decrease/(increase) in receivables
Increase in payables
Increase/decrease in provisions
Retirement benefit contributions in excess of income statement
Cash generated from operations
Income tax paid
Interest paid
Interest received
Net cash flows from operating activities
Cash flows from investing activities
Disposal of subsidiaries and joint ventures and associates, net of cash disposed
Dividends received from joint ventures and associates
Proceeds on disposal of property, plant and equipment
Purchases of property, plant and equipment
Purchases of intangible assets
Investment in, loan movements and interest received from joint ventures and associates
Net cash flows from investing activities
Cash flows from financing activities
Dividends paid
Finance lease principal payments
Finance lease assets issued and repaid
Bank loans repaid
Loans raised
Dividends paid to non-controlling interest
Transactions with non-controlling interest
Movement on own shares
Net cash flows from financing activities
Net (decrease)/increase in cash, cash equivalents and bank overdrafts
Cash, cash equivalents and bank overdrafts at beginning of year
Effects of exchange rate fluctuations
Cash, cash equivalents and bank overdrafts at end of year
Note
2019
£m
2018
£m
452.5
(256.0)
196.5
123.1
110.0
1.3
2.4
(14.8)
(5.4)
0.3
413.4
(34.0)
138.8
4.1
10.7
(25.1)
507.9
(74.0)
(63.1)
15.6
386.4
29.5
44.6
78.5
(194.3)
(32.7)
(14.6)
(89.0)
(150.5)
(26.4)
(19.4)
(103.4)
–
(2.8)
(0.5)
–
(303.0)
(5.6)
286.3
(5.5)
275.2
5
3
3
29
29
14
9
27
27
27
30
27
468.7
(98.1)
370.6
91.3
111.1
1.9
6.4
–
(4.1)
–
577.2
(19.5)
(137.4)
102.6
(27.7)
(47.3)
447.9
(74.3)
(67.9)
14.3
320.0
(0.2)
42.9
70.0
(150.4)
(32.3)
(1.5)
(71.5)
(143.9)
(27.5)
9.6
(88.4)
121.9
(3.8)
(5.3)
(4.2)
(141.6)
106.9
185.6
(6.2)
286.3
Babcock International Group PLC Annual Report and Accounts 2019 155
Babcock International Group PLC Annual Report and Accounts 2019 155
Financial statementsGovernanceStrategic report
Notes to the Group financial statements
1. Basis of preparation and significant accounting policies
Basis of preparation
The consolidated financial statements have been prepared on a going concern basis, as set out in the Directors’ report on page 138,
and in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee interpretations as
adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of
certain financial instruments. Babcock International Group PLC is listed on the London Stock Exchange and is incorporated and
domiciled in the UK.
Significant accounting policies
The significant accounting policies adopted by the Group are set out below. They have been applied consistently throughout the
year and the comparative period except as specified below.
New and amended standards adopted by the Group
The Group applied the following standards and amendments for the first time for the period beginning on 1 April 2018:
• IFRS 9: ‘Financial instruments’
• IFRS 15: ‘Revenue from contracts with customers’
The impact of adoption of these standards and the key changes to the accounting policies are disclosed below.
The following standards and amendments to IFRSs became effective for the period beginning on 1 April 2018 and did not have a
material impact on the consolidated financial statements:
• IFRIC 22: Foreign Currency Transactions and Advance Consideration;
• Classification and Measurement of Share-Based Payment Transactions – Amendments to IFRS 2;
• Annual Improvements 2014-2016 Cycle; and
• Transfers of Investment Property – Amendments to IAS 40.
(a) IFRS 9
The Group adopted IFRS 9 from 1 April 2018. In accordance with the transition provisions in the Standard, comparatives have not
been restated.
Classification of financial assets
IFRS 9 requires the use of two criteria to determine the classification of financial assets: the entity’s business model for the financial
assets and the contractual cash flow characteristics of the financial assets. The Standard goes on to identify three categories of financial
assets – amortised cost; fair value through profit or loss (FVTPL); and fair value through other comprehensive income (FVOCI).
The adoption of IFRS 9 has not impacted the measurement of the Group’s financial assets: derivative financial assets continue to be
held at FVTPL (except those subject to hedge accounting) and the Group’s other financial assets continue to be held at amortised cost.
Impairment of financial assets
IFRS 9 introduces an expected credit loss approach to impairment. The Group applies the IFRS 9 simplified approach to measuring
expected credit losses, which uses a lifetime expected loss allowance for all trade receivables and contract assets.
No material adjustments to the Group’s impairment provisions were made on transition to IFRS 9. The majority of trade receivables
are with government, government backed institutions or blue chip corporations and as such credit risk is considered small. Where
an appropriate approach was already applied to establish impairment provisions, the inclusion of specific expected credit loss
considerations did not have a material impact.
Hedge accounting
Updated IFRS 9 hedge accounting requirements have not had a material impact on the Group, but additional disclosure
requirements have been met.
(b) IFRS 15
The Group adopted IFRS 15: ‘Revenue from contracts with customers’ from 1 April 2018 using the fully retrospective approach. The
accounting policies have been updated to reflect the five-step approach to revenue recognition required by IFRS 15. This resulted in
no impact on the cumulative amount of revenue recognised at 1 April 2018 or for the year ended 31 March 2019.
Following adoption of IFRS 15, capitalised contract costs are now presented separately within trade and other receivables. These
amounts were previously included within amounts due from customers for contract work.
156 Babcock International Group PLC Annual Report and Accounts 2019
156 Babcock International Group PLC Annual Report and Accounts 2019
1. Basis of preparation and significant accounting policies (continued)
Basis of consolidation
The consolidated financial statements comprise the Company financial statements and its subsidiary undertakings together with its
share of joint ventures and associates results. Intra-group transactions, balances, income and expenses are eliminated on consolidation.
(a) Subsidiaries
A subsidiary is an entity controlled by the Group. An entity is controlled by the Group regardless of the level of the Group’s equity
interest in the entity, when the Group is exposed or has rights to variable returns from its involvement with the entity and has the
ability to impact those returns through its power over the entity.
In determining whether control exists, the Group considers all relevant facts and circumstances to assess its control over an entity
such as contractual commitments and potential voting rights held by the Group if they are substantive.
Subsidiaries are fully consolidated from the date control has been transferred to the Group and de-consolidated from the date
control ceases. Where control ceases the results for the year up to the date of relinquishing control or closure are analysed as
continuing or discontinued operations.
(b) Joint ventures and associates
Associates are those entities over which the Group exercises its significant influence when it has the power to participate in the
financial and operating policy decisions of the entity but it does not have the power to control or jointly control the entity.
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets
of the arrangement, rather than rights to its assets and obligations for its liabilities.
The Group’s interests in joint ventures and associates are accounted for by the equity method of accounting and are initially
recorded at cost. The Group’s investment in joint ventures and associates includes goodwill (net of any accumulated impairment
loss) identified on acquisition.
The Group’s share of its joint ventures and associates post-acquisition profits or losses after tax is recognised in the income
statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition
movements are adjusted against the carrying amount of the investment.
Unrealised gains and losses on transactions between the Group and its joint ventures and associates are eliminated to the extent of
the Group’s interest in the joint venture and associate. The Group’s share of joint venture revenue is disclosed after elimination of
sales to that joint venture. Loans to joint ventures are valued at amortised cost.
Critical accounting estimates and judgements
In the course of preparation of the financial statements no judgements have been made in applying the Group’s accounting policies,
other than those involving estimates, that have had a material effect on the amounts recognised in the financial statements. The
application of the Group’s accounting policies requires the use of estimates and the inherent uncertainty in certain forward looking
estimates may result in a material adjustment to the carrying amounts of assets and liabilities in the next financial year. Critical
accounting estimates are subject to continuing evaluation and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable in light of known circumstances. Critical accounting estimates
in relation to these financial statements are considered below:
• Revenue and profit recognition
Revenue and profit recognition on contracts is based on estimates of outturn revenues and costs on a contract-by-contract basis.
Both of these estimates can involve significant levels of estimation uncertainty. Estimating contract revenues can involve
judgements around whether the Group will meet performance targets, earn incentives and the pricing of any scope changes,
variations or claims under the contract. When considering variations to contracts, the Group must make a judgement as to
whether the variation should be accounted for as a separate, distinct contract or be considered, and accounted for, as part of
the original contract. This judgement will depend on the scope of the variation, its pricing and the contractual terms. Contract
outturn assessments are carried out by suitably qualified and experienced Group personnel and include assessments of variable
consideration and contract contingencies arising out of technical, commercial, operational and other risks. When considering
variations, claims and contingencies, the Group analyses various factors including the contractual terms, status of negotiations
with the customer and historic experience with that customer and with similar contracts. The assessments of all significant
contracts are subject to review and challenge. As contracts near completion, often less judgement is needed to determine the
expected outturn. The level of estimation uncertainty in the financial statements as a whole is therefore mitigated by the size
of the Group’s portfolio of contracts, which are of various types and at various stages of completion. Nevertheless, the levels of
estimation can be significant and material changes in estimates made could affect the profitability of individual contracts. Further
information is set out in the Revenue accounting policy below.
Babcock International Group PLC Annual Report and Accounts 2019 157
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Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Critical accounting estimates (continued)
• Defined benefit pension schemes defined benefit obligations
The Group’s defined benefit pension schemes are assessed annually in accordance with IAS 19 and the valuation of the defined
benefit 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
obligations. Further information on the key assumptions and sensitivities is included at note 25.
• Deferred tax
The Group has carried forward losses for tax purposes in a number of jurisdictions and has recognised deferred tax assets to the
extent that it is considered that the losses will be utilised. That assessment is reached by prudently estimating the future taxable
profits in the jurisdictions in question (or the particular company in question, where the utilisation of losses is entity-restricted) and
assessing these against the jurisdiction-specific rules around the carry forward and utilisation of tax losses. In circumstances where
the Group considers that either of those tests (future profitability or future availability of carried forward losses) might not be
passed, no deferred tax asset is recognised to that extent. Further information on the level of tax losses recognised and
unrecognised is given in note 15.
• The carrying value of goodwill
Goodwill is tested annually for impairment, in accordance with IAS 36, and the impairment assessment is based on assumptions
in relation to the cashflows expected to be generated by cash generating units, together with appropriate discounting of the
cashflows. Whilst the Group does not believe that a reasonably possible change in assumptions could generate a material
impairment in the coming financial year, the carrying value of goodwill is included as a critical accounting estimate as a result of
the significance of the goodwill held and the inherent judgemental nature of impairment testing. Note 11 provides information
on key assumptions and sensitivity analyses performed.
Revenue
Revenue recognised represents income derived from contracts with customers for the provision of goods and services in the
ordinary course of the Group’s activities. The Group recognises revenue in line with IFRS 15, Revenue from Contracts with
Customers. IFRS 15 requires the identification of performance obligations in contracts, allocation of the contract price to
the performance obligations and recognition of revenue as performance obligations are satisfied.
(a) Performance obligations
Contracts are assessed to identify each promise to transfer either a distinct good or service or a series of distinct goods or
services that are substantially the same and have the same pattern of transfer to the customer. Goods and services are distinct
and accounted for as separate performance obligations if the customer can benefit from them either on their own or together with
other resources readily available to the customer and they are separately identifiable in the contract. The integrated output nature
of many of the services provided by the Group can result in contracts with one performance obligation.
(b) Allocation of contract price to performance obligations
The contract price represents the amount of consideration which the Group expects to receive in exchange for delivering the
promised goods or services to the customer. Variable consideration is included in the contract price on the most likely outcome
basis but only to the extent that it is highly probable that it will not reverse in the future. Given the bespoke nature of many of the
goods and services the Group provides, stand-alone selling prices are generally not available and, in these circumstances, the Group
allocates the contract price to performance obligations based on cost plus margin. The Group’s contracts typically do not include
significant financing components.
(c) Revenue and profit recognition
Performance obligations are satisfied, and revenue recognised, as control of goods and services is transferred to the customer.
Control can be transferred at a point in time or over time and the Group determines, for each performance obligation, whether it is
satisfied over time or at a point in time. Performance obligations are satisfied over time if any of the following criteria are satisfied:
• the customer simultaneously receives and consumes the benefits of the Group’s performance as it performs; or
• the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to
payment for work done; or
• the Group’s performance creates or enhances an asset controlled by the customer.
Most of the Group’s contracts meet the requirements to satisfy performance obligations and recognise revenue over time either
because the customer simultaneously receives and consumes the benefits of the Group’s performance as it performs or the Group’s
performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for
work done.
158 Babcock International Group PLC Annual Report and Accounts 2019
158 Babcock International Group PLC Annual Report and Accounts 2019
1. Basis of preparation and significant accounting policies (continued)
Revenue (continued)
(c) Revenue and profit recognition (continued)
Where the Group satisfies performance obligations over time, revenue is recognised using costs incurred as a proportion of total estimated
costs to assess stage of completion, but with the stage of completion and revenue assessed in relation to each performance obligation. In
some circumstances the Group also uses an output based earned value approach, as an indicator, to validate the cost based input approach
and this approach uses suitably qualified and experienced Group personnel to assess the stage of completion of performance obligations.
If a performance obligation is not satisfied over time, then revenue is recognised at the point in time that control is transferred to the
customer. Point in time recognition mainly applies to sale of goods. Control typically transfers to the customer when the customer has legal
title to the goods and this is usually coincident with delivery of the goods to the customer and right to payment by the Group. As can be
seen from note 3, sale of goods represents approximately 15% of Group revenues. These revenues are delivered predominantly by the Land
sector and include sales of equipment to commercial customers and procurement of consumables on behalf of the Ministry of Defence
(MOD). The procurement of consumables for MOD is within the scope of the principal versus agent consideration at paragraph (f) below.
Profit is recognised to the extent that the final outcome on contracts can be reliably assessed. Contract outturn assessments
are carried out on a contract-by-contract basis, including consideration of technical and other risks, by suitably qualified and
experienced Group personnel and the assessments of all significant contracts are subject to review and challenge. Assessment of
outcomes is in relation to separate performance obligations and includes variable consideration, which can include judgements on
contract variations and claims, measured using the most likely outcome approach, to the extent that it is highly probable that there
will not be a reversal in the amount of cumulative revenue recognised. Judgement on contract variations and claims may consider,
amongst other matters, the contract terms and conditions, previous experience with customers and the status of negotiations at
the time the judgement is made. Any expected loss on a contract is recognised immediately in the income statement.
The Group operates in a partnering environment with some customers and certain contracts include pain/gain share arrangements
under which cost under/over spends against the contract target cost are shared with the customer. These contract sharing
arrangements are included in the assessment of contract outturns.
In circumstances where costs incurred plus recognised profits (less recognised losses) exceed progress billings the Group presents
as an asset the gross amount due from customers as “amounts due from customers for contract work”. Similarly, in circumstances
where progress billings exceed costs incurred plus recognised profits (less recognised losses), the Group presents as a liability the
gross amount due to customers as “amounts due to customers for contract work”.
(d) Costs of obtaining a contract
Pre-contract costs are recognised as expenses as incurred, except that directly attributable costs incurred from the point that it can
be reliably expected that a contract will be obtained, typically at preferred bidder stage, are recognised as an asset in Capitalised
contract costs and amortised to cost of revenue over the life of the contract provided that the contract is expected to result in
future net cash inflows.
(e) Contract mobilisation costs
Post-contract award but pre-contract operational start-up mobilisation costs are recognised as an asset in capitalised contract costs
and amortised to cost of revenue over the life of the contract. These mobilisation costs are included within the contract value and
relate to ensuring that assets and resources are mobilised as necessary to support delivery of performance obligations in accordance
with contract requirements.
(f) Principal versus agent considerations
A number of the Group’s contracts include performance obligations in relation to procurement activity undertaken on behalf of customers
at low or nil margin, together with other performance obligations. For such procurement activity, management exercises judgement in
the consideration of principal versus agent based on an assessment as to whether the Group controls goods or services 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 gainshare
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 contract by contract basis.
Exceptional items
Items that are exceptional in size or nature are presented as exceptional items within the consolidated income statement. The
separate reporting of exceptional items helps provide a better indication of the Group’s underlying business performance. Events
which may give rise to the classification of items as exceptional include gains or losses on the disposal of businesses, material
acquisition costs along with the restructuring of businesses and asset impairments.
Transactions with non-controlling interest
The Group’s policy is to treat transactions with non-controlling interest as transactions with owners of the parent which are therefore
reflected in movements in reserves.
Babcock International Group PLC Annual Report and Accounts 2019 159
Babcock International Group PLC Annual Report and Accounts 2019 159
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, it is
probable that an outflow of economic benefits will be required to settle the obligation and the amount can be reliably estimated. If the
effect is material, provisions are determined by discounting the expected future cash flows at an appropriate discount rate.
A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the
restructuring has either commenced or has been publicly announced. Future operating costs are not provided for.
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower
than the unavoidable cost of meeting its obligations under the contract. A provision for warranties is recognised on completed
contracts and disposals when there is a realistic expectation of the Group incurring further costs.
Provisions for losses on contracts are recorded when it becomes probable that total estimated contract costs will exceed total contract revenues.
Such provisions are recorded as write downs of contract balances for that portion of the work which has already been completed, and as liability
provisions for the remainder. Losses are determined on the basis of estimated results on completion of contracts and are updated regularly.
A provision is made where operating leases are deemed to be onerous.
A provision for deferred consideration on acquisitions is recognised at the fair value at acquisition. Fair value is based on an
assessment of the likelihood of payment.
A provision for employee benefits is recognised when there is a probable outflow of economic benefits that can be reliably estimated.
Goodwill and intangible assets
(a) Goodwill
When the fair value of the consideration for an acquired undertaking exceeds the fair value of its separable net assets, the difference
is treated as purchased goodwill and is capitalised. When the fair value of the consideration for an acquired undertaking is less than
the fair value of its separable net assets, the difference is taken directly to the income statement.
Goodwill relating to acquisitions prior to 1 April 2004 is maintained at its net book value on the date of transition to IFRS. From that
date goodwill is not amortised but is reviewed at least annually for impairment.
Annual impairment reviews are performed as outlined in note 11.
(b) Acquired intangibles
Acquired intangibles are the estimated fair value of customer relationships and brands which are in part contractual, represented by the value of the
acquired order book, and in part non-contractual, represented by the risk adjusted value of future orders expected to arise from the relationships.
The carrying value of the contracted element is amortised straight-line over the remaining period of the orders that are in process or
the future period in which the orders will be fulfilled, as the case may be. The amortisation periods, reflecting the lengths of the various
contracts, are mainly in the range one year to five years, with a minority of contracts and hence amortisation periods, up to fifteen years.
The carrying value of the non-contracted element is amortised over the period in which it is estimated that the relationships are likely to
bring economic benefit via future orders. The method of amortisation is tailored to the expectations of the timing of the receipt of specific
future orders and therefore the charge to the income statement matches the timing of value likely to be generated in those years.
Relationships are valued on a contract-by-contract and customer-by-customer basis and the pattern of amortisation reflects the expected pattern
of benefit in each case. The amortisation profile is determined on a case-by-case basis and in all cases results in a front-loaded profile, reflecting the
greater certainty of future orders in the near term compared with the longer term. The amortisation period is in the range one year to fifteen years.
Acquired brand names are valued dependent on the characteristics of the market in which they operate and the likely value a third
party would place on them. Useful lives are likewise dependent on market characteristics of the acquired business brand. These are
amortised on a straight-line basis up to five years.
(c) Research and development
Research expenditure is recognised as an expense as incurred. Costs incurred on development projects are recognised as intangible assets
when it is probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be
measured reliably. Other development expenditure is recognised as an expense as incurred. Development costs previously recognised as an
expense are not recognised as an asset in a subsequent period. Development costs that have been capitalised are amortised from the date
the product is available for use on a straight-line basis over the period of its expected benefit but not exceeding seven years.
(d) Computer software
Computer software, excluding the Group’s Enterprise Resource Planning (ERP) system, includes software licences acquired plus the
costs incurred in bringing the software into use and is shown at cost less accumulated amortisation and is amortised over its
expected useful life of between three and five years.
The Group is implementing an ERP system in phases over several years. The ERP system is amortised over its useful life of 10 years from the
date when the asset is available for use, which occurs once the implementation has been completed for each respective phase.
160 Babcock International Group PLC Annual Report and Accounts 2019
160 Babcock International Group PLC Annual Report and Accounts 2019
1. Basis of preparation and significant accounting policies (continued)
Property, plant and equipment (PPE)
Property, plant and equipment is shown at cost less subsequent depreciation and impairment, except for land, which is shown at
cost less impairment. Cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is provided
on a straight-line basis to write off the cost of PPE over the estimated useful lives to their estimated residual value (reassessed at each
balance sheet date) at the following annual rates:
Freehold property
Leasehold property
Plant and equipment
Aircraft airframes
Aircraft components
2% to 8%
Lease term
6.6% to 33.3%
3.33%
14% to 33.3%
PPE is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the fixed asset
may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying
amount exceeds the higher of an asset’s fair value less cost to sell or value in use.
Net debt
Net debt consists of the total of loans, bank overdrafts, cash and cash equivalents, joint venture and associate loans and finance
leases granted or received plus any derivatives whose objective is to fair value hedge the underlying debt. This will include swaps
of the currency of the debt into the functional currency of the company carrying the debt and fair value hedges.
Leases
Assets under finance leases are capitalised and the outstanding capital element of instalments is included in borrowings. The interest
element is charged against profits so as to produce a constant periodic rate of charge on the outstanding obligations. Depreciation
is calculated to write the assets off over their expected useful lives or over the lease terms where these are shorter.
Operating lease payments are recognised as an expense in the income statement on a straight-line basis. A provision is made where
the operating leases are deemed to be onerous.
As a lessor, the Group recognises assets held under a finance lease in the balance sheet as a financial asset. The lease payment
receivable is treated as finance income and a repayment of principal including initial direct costs. Finance income is allocated over
the lease term, with the gross receivable being reviewed for impairment on a regular basis.
Inventory and work in progress
Inventory is valued at the lower of cost and net realisable value. Cost is determined on a first-in first-out basis. In the case of finished
goods and work in progress, cost comprises direct material and labour and an appropriate proportion of overheads.
Taxation
(a) Current income tax
Current tax, including UK Corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws
that have been enacted or substantively enacted by the balance sheet date.
(b) Deferred income tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax basis of assets
and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from
initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction
affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates
(and laws) that have been enacted, or substantively enacted, by the balance sheet date and are expected to apply when the
related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which
the temporary differences can be utilised.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the
timing of the reversal of the temporary difference is controlled by the Group, and it is probable that the temporary difference will
not reverse in the foreseeable future.
Tax is recognised in the income statement except to the extent that it relates to items recognised directly in either other
comprehensive income or in equity.
Babcock International Group PLC Annual Report and Accounts 2019 161
Babcock International Group PLC Annual Report and Accounts 2019 161
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Foreign currencies
(a) Functional and presentational currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Sterling,
which is the Company’s functional and presentational currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the local currency at the year end
exchange rates.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at exchange rates
ruling at the balance sheet date of monetary assets and liabilities denominated in foreign currencies are recognised in the income
statement except when deferred in equity as part of the net investment of a foreign operation.
Exchange differences arising from the translation of the balance sheets and income statements of foreign operations into Sterling
are recognised as a separate component of equity on consolidation. Results of foreign subsidiary undertakings are translated using
the average exchange rate for the month of the applicable results. When a foreign operation is sold, such exchange differences are
recognised in the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign
entity and translated at period end exchange rates.
Finance costs
Finance costs are recognised as an expense in the period in which they are incurred unless they are attributable to an asset under
construction, in which case finance costs are capitalised.
Employee benefits
(a) Pension obligations
The Group operates a number of pension schemes. The schemes are generally funded through payments to trustee-administered funds, determined
by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that
defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of
service and compensation. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity.
Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred.
For defined benefit pension schemes, the cost of providing benefits is determined using the projected unit credit actuarial valuation
method. The service cost and associated administration costs of the Group’s pension schemes are charged to operating profit.
In addition, a retirement benefit interest charge on the net pension deficit is charged to the income statement as a finance cost.
Actuarial gains and losses are recognised directly in equity through the statement of comprehensive income so that the Group’s
balance sheet reflects the IAS 19 measurement of the schemes’ surpluses or deficits at the balance sheet date.
(b) Share-based compensation
The Group operates equity-settled, share-based compensation plans. The economic cost of awarding shares and share options to employees
is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value is determined by
reference to option pricing models. The charge is recognised in the income statement over the vesting period of the award.
The shares purchased by the Group’s ESOP trusts are recognised as a deduction to equity.
(c) Holiday pay
Paid holidays are regarded as an employee benefit and as such are charged to the income statement as the benefits are earned.
Financial instruments
(a) Financial assets and liabilities at amortised cost
Cash and cash equivalents, trade receivables, amounts due from related parties and other debtors are classified as financial assets
held at amortised cost. Trade creditors, amounts due to related parties, other creditors, accruals and bank loans and overdrafts are
classified as financial liabilities held at amortised cost.
The Company assesses on a forward looking basis the expected credit losses associated with financial assets held at amortised cost.
The impairment methodology applied depends on whether there has been a significant increase in credit risk.
(b) Derivative financial instruments
Derivatives are initially recognised at fair value on the date a derivative is entered into and are subsequently remeasured at fair
value. The Group designates certain of the derivative instruments within its portfolio to be hedges of the fair value of recognised
assets or liabilities or unrecognised firm commitments.
162 Babcock International Group PLC Annual Report and Accounts 2019
162 Babcock International Group PLC Annual Report and Accounts 2019
1. Basis of preparation and significant accounting policies (continued)
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement,
together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
For derivatives that qualify as cash flow hedges, gains and losses are deferred in equity until such time as the firm commitment is
recognised, at which point any deferred gain or loss is included in the asset’s carrying amount. These gains or losses are then realised
through the income statement as the asset is sold.
Service concession arrangements
IFRIC 12 ‘Service concession arrangements’ addresses the accounting by private sector operators involved in the provision of public
sector infrastructure assets and services. For all arrangements falling within the scope of the Interpretation (essentially those where
the infrastructure assets are not controlled by the operator), the infrastructure assets are not recognised as property, plant and
equipment of the operator. Rather, depending on the terms of the arrangement, the operator recognises:
• a financial asset – where the operator has an unconditional right to receive a specified amount of cash or other financial asset
over the life of the arrangement; or
• an intangible asset – where the operator’s future cash flows are not specified (eg where they will vary according to usage of the
infrastructure asset); or
• both a financial asset and an intangible asset where the operator’s return is provided partially by a financial asset and partially by
an intangible asset.
As a consequence of this treatment the operator recognises investment income in respect of the financial asset on an effective
interest basis and amortisation of any intangible asset arising.
Derivative financial instruments
Derivatives are initially recognised at fair value on the date a derivative is entered into and are subsequently remeasured at their fair
value. The Group designates certain derivative instruments within its portfolio to be hedges of the fair value of recognised assets or
liabilities or unrecognised firm commitments.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement,
together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
For derivatives that qualify as cash flow hedges, gains and losses are deferred in equity until such time as the firm commitment is
recognised, at which point any deferred gain or loss is included in the assets’ carrying amount. These gains or losses are then realised
through the income statement as the asset is sold.
Certain derivatives do not qualify or are not designated as hedging instruments and any movement in their fair values is recognised
in the income statement immediately.
Dividends
Dividends are recognised as a liability in the Group’s financial statements in the period in which they are approved. Interim dividends
are recognised when paid.
Standards, amendments and interpretations to published standards
Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the
Group’s accounting periods beginning on or after 1 April 2019 or later periods but which the Group has not early adopted.
(a) Standards, amendments and interpretations that are not yet effective and the impact on the Group’s operations is
currently being assessed but is not expected to be significant:
• IFRS 17, ‘Insurance Contracts’, May 2017 issue, effective 1 April 2021.
• IAS 1, ‘Presentation of Financial Statements’, and IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’,
October 2018 amendments regarding the definition of material, effective 1 April 2020.
• IFRS 3, ‘Business Combinations’, October 2018 amendment to clarify the definition of a business, effective 1 April 2020.
• IAS 28, ‘Investments in Associates and Joint Ventures’, October 2017 amendment, effective 1 April 2019.
• 2017 Annual improvements, effective 1 April 2019.
Babcock International Group PLC Annual Report and Accounts 2019 163
Babcock International Group PLC Annual Report and Accounts 2019 163
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
(b) Standards, amendments and interpretations that are not yet effective and the impact on the Group’s operations is
currently being assessed:
• IFRS 16, ‘Leases’, became effective on 1 April 2019, replacing IAS 17, ‘Leases’, and the Group has adopted the new standard
from 1 April 2019. The modified retrospective transition approach has been adopted so prior year financial information will
not be restated. The new standard requires almost all leases to be recognised on the balance sheet with a right-of-use asset
capitalised and depreciated over the estimated lease term with a corresponding liability that will reduce over the same period.
The operating lease charge that was previously recognised in the income statement under IAS 17 will be replaced by depreciation
and interest expenses. Details of the estimated impact of IFRS 16 on the financial statements are disclosed in note 31.
• IAS 19, ‘Employee Benefits’, May 2018 amendment, effective 1 April 2019.
2. Financial risk management
The Group’s treasury and capital policies in respect of the management of debt, interest rates, liquidity, and currency are outlined below.
The Group’s treasury policies are kept under close review given the continuing volatility and uncertainty in the financial markets.
Capital availability
The Company defines capital as shareholder equity plus net debt but in addition considers available financial capital which adds
committed undrawn facilities to capital as a measure.
Objective
on available
financial
capital
Policy
To ensure an appropriate level of capital and available financial capital to maintain operational flexibility and meet
financial obligations whilst funding the Group’s organic and acquisitive growth. The Group seeks to maintain the
necessary headroom to cover the peaks and troughs in its working capital cycle, and sufficient liquidity to see it
through any periods of tightened liquidity in the market.
The Board aims to maintain a balance between equity and debt capital which optimises the Group’s cost of capital
whilst allowing access to both equity and debt capital markets at optimum pricing when appropriate. The Group,
in considering its capital structure and financial capital, views net debt to EBITDA at circa two times or below as
being steady state and sustainable in normal market and economic conditions. This level may be tempered in
periods of market volatility and economic and/or political uncertainty. This is not to rule out acquisition spikes
above two times, as illustrated by previous acquisitions, but only to the extent that the Group can see a clear
path to reducing net debt to EBITDA back to circa two times or below within a reasonable time frame.
Performance The gearing, interest cover and net debt to EBITDA ratios, used by the Group to evaluate capital, are set out below.
These align with the Group’s key performance indicators as set out and defined on pages 26 and 27. Net debt to
EBITDA improved to 1.4 times in 2019 (2018: 1.6 times), demonstrating further progress in reducing gearing,
both through the pay down of debt and increasing profits attributable to shareholders.
Interest cover
Net debt to EBITDA
Gearing
2019
14.9
1.4x
33%
2018
14.5
1.6x
38%
The Group has interest cover and net debt to EBITDA covenants that utilise JV dividends rather than share of JV
profits included in the Group’s key performance indicators and these ratios are below covenanted levels. The
reduced gearing leaves sufficient headroom for bolt-on acquisitions and funding of organic growth. The Group
considers that capital markets remain accessible, if or when required.
Financial risk management
Financial instruments, in particular forward currency contracts and interest rate swaps, are used to manage the financial risks arising
from the business activities of the Group and the financing of those activities.
The Group looks in the first instance to prime rated counterparties with which to carry out treasury transactions, including
investments of cash and cash equivalents.
The Group’s customers are mainly from government, government backed institutions or blue chip corporations and as such credit
risk is considered small.
Treasury activities within the Group are managed in accordance with the parameters set out in the treasury policies and guidelines
approved by the Board. A key principle within the treasury policy is that trading in financial instruments for the purpose of profit
generation is prohibited, with all financial instruments being used solely for risk management purposes.
The Group only enters into financial instruments where it has a high level of confidence of the hedged item occurring. Both the
treasury department and the business sectors have responsibility for monitoring compliance within the Group to ensure adherence
with the principal treasury policies and guidelines.
164 Babcock International Group PLC Annual Report and Accounts 2019
164 Babcock International Group PLC Annual Report and Accounts 2019
2. Financial risk management (continued)
Management of capital
The Group’s capital structure is derived from equity and net debt and is overseen by the Board through the Group Finance Committee.
All the Group’s material borrowings are arranged by the treasury department, and funds raised are lent onward to operating
subsidiaries as required.
A range of gearing and liquidity ratios are used to monitor and measure capital structure and performance, including: Net debt to
EBITDA (defined as net debt divided by underlying earnings before interest, tax, depreciation and amortisation), Gearing (defined as
net debt, divided by shareholders funds, excluding retirement benefit deficits or surpluses), ROIC (defined as underlying operating
profit divided by net debt and by shareholder funds excluding retirement benefit deficits or surpluses) and interest cover (defined
as underlying earnings before interest, tax, depreciation and amortisation divided by net Group finance costs). These ratios are
discussed under the Financial review.
Through the monitoring of these metrics it remains the Group’s intention to ensure the business is prudently funded, balancing risk
and price on the capital markets and retaining sufficient flexibility to fund future organic and acquisitive growth.
Foreign exchange risk
The functional and presentational currency of Babcock International Group PLC and its UK subsidiaries is Sterling. The Group has
exposure primarily to EUR, USD, ZAR and increasingly AUD, CAD, NOK, OMR and SEK. The USD exposure arises firstly through the
US$500 million US Private Placements which are swapped into Sterling and secondly, through a number of activities in the Babcock
Mission Critical Services business, where it has some revenue and costs denominated in USD. The EUR exposure is largely due to the
activities of the Babcock Mission Critical Services business in Europe, where both translational and transactional exposure exists. The
ZAR exposure arises from the activities of Babcock’s subsidiaries in South Africa where both translational and transactional exposure
exist. The increasing AUD, CAD, NOK, OMR and SEK exposure arises from the activities of Babcock’s subsidiaries in those countries
where both transactional and translational exposure exists.
Objective
Policy –
Transactional risk
Policy –
Translational risk
Performance
To reduce exposure to volatility in earnings and cash flows from movements in foreign currency exchange
rates. The Group is exposed to a number of foreign currencies, the most significant being the Euro, US Dollar
and South African Rand.
The Group is exposed to movements in foreign currency exchange rates in respect of foreign currency
denominated transactions. To mitigate this risk, the Group’s policy is to hedge all material transactional
exposures, using financial instruments where appropriate. Where possible, the Group seeks to apply IFRS 9
hedge accounting treatment to all derivatives that hedge material foreign currency transaction exposures.
The Group is exposed to movements in foreign currency exchange rates in respect of the translation of net
assets and income statements of foreign subsidiaries and joint ventures and associates. It is not the Group’s
policy to hedge through the use of derivatives the translation effect of exchange rate movements on the
income statements or balance sheets of overseas subsidiaries and joint ventures and associates it regards as
long-term investments. However, where the Group has material assets denominated in a foreign currency,
it will consider matching the aforementioned assets with foreign currency denominated debt.
There have been no material unhedged foreign exchange losses in the year.
A key principle within the treasury policy is that trading in financial instruments for the purpose of profit generation is prohibited,
with all financial instruments being used solely for risk management purposes.
The Group only enters into financial instruments where it has a high level of confidence of the hedged item occurring. Both the
treasury department and the business sectors have responsibility for monitoring compliance within the Group to ensure adherence
with the principal treasury policies and guidelines.
The largest foreign exchange exposure of Group entities on the net monetary position against their respective functional currencies
results from exposure of Euro to US Dollars, being £15.2 million (2018: Euro to US Dollars £25.7 million).
The pre-tax effect on profit and equity, increase or decrease, if the rates moved up or down by an appropriate percentage volatility,
assuming all other variables remained constant, would in total be £0.5 million (2018: £0.2 million). The reasonable shifts in
exchange rates are based on historical volatility and range from 10% for Sterling and US Dollars; 15% for Euro and Omani Rial;
and 25% for Canadian and Australian Dollars and South African Rand.
Babcock International Group PLC Annual Report and Accounts 2019 165
Babcock International Group PLC Annual Report and Accounts 2019 165
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
2. Financial risk management (continued)
Interest rate risk
The fair values of debt, and related hedging instruments are affected by movements in interest rates. The following table illustrates
the sensitivity in interest rate-sensitive instruments and associated debt to a hypothetical parallel shift of the forward interest rate
curves of ±50bp (2018: ±50bp), with pre-tax effect annualised and an additional shift in variable rates for the floating rate element
of the gross debt. All other variables are held constant. The Group believes ±50bp is an appropriate measure of volatility at this time.
Net results for the year
Equity
2019
£m +50bp
(2.0)
1.9
£m –50bp
2.0
(1.9)
2018
£m +50bp
(2.3)
2.1
£m –50bp
2.3
(2.1)
Interest rate risk is managed through the maintenance of a mixture of fixed and floating rate debt and interest rate swaps, each
being reviewed on a regular basis to ensure the appropriate mix is maintained.
Objective
Policy
Performance
To manage exposure to interest rate fluctuations on borrowings by varying the proportion of fixed rate debt
relative to floating rate debt to reflect the underlying nature of its commitments and obligations. As a result,
the Group does not maintain a specific set proportion of fixed versus floating debt, but monitors the mix to
ensure that it is compatible with its business requirements and capital structure.
Interest hedging and the monitoring of the mix between fixed and floating rates are the responsibility of the
treasury department, and are subject to the policy and guidelines set by the Board.
As at 31 March 2019, the Group had 74% fixed rate debt (2018: 69%) and 26% floating rate debt
(2018: 31%) based on gross debt including derivatives of £1,336.4 million (2018: £1,475.6 million).
For further information see note 21.
Liquidity risk
Liquidity risk management includes maintaining sufficient cash and the availability of funding from an adequate amount of
committed credit facilities. Due to the dynamic nature of the underlying businesses, Group treasury maintains flexibility in funding
by maintaining availability under committed credit lines (see note 20).
Each of the sectors in the Group provides regular cash forecasts for both management and liquidity purposes. These cash forecasts
are used to monitor and identify the liquidity requirements of the Group, and ensure that there is sufficient cash to meet operational
needs while maintaining sufficient headroom on the Group’s committed borrowing facilities. The cash performance of the business
sectors is a KPI.
The Group adopts a conservative approach to the investment of its surplus cash. It is deposited with strong financial institutions for
short periods, with bank counterparty credit risk being monitored closely on a systematic and ongoing basis. A credit limit is
allocated to each institution taking account of its market capitalisation and credit rating.
Objective
Policy
With debt as a key component of available capital, the Group seeks to ensure that there is an appropriate balance
between continuity, flexibility and cost of debt funding through the use of borrowings, whilst also diversifying the
sources of these borrowings with a range of maturities and rates of interest, to reflect the long-term nature of the
Group’s contracts and commitments and its risk profile.
All the Group’s material borrowings are arranged by the treasury department, and funds raised are lent onward to
operating subsidiaries as required. It remains the Group’s policy to ensure the business is prudently funded and that
sufficient headroom is maintained on its facilities to fund its future growth.
Performance The Group continues to keep under review its capital structure to ensure that the sources, tenor and availability of
finance are sufficient to meet its stated objective. The Group’s main debt facilities include: a £750 million Revolving
Credit Facility maturing in December 2021, a £40 million loan note maturing in January 2020, US$500 million
US private placement notes maturing in March 2021, a EUR 550 million Eurobond maturing in October 2022,
a £100 million Term Debt Facility maturing in August 2020 and a £300 million ten year Sterling bond maturing in
October 2026. These debt facilities provide the Group with total available committed banking facilities and loan
notes of £1.97 billion and sufficient sources of liquidity and headroom to meet the Group’s ongoing commitments.
For further information see note 20.
166 Babcock International Group PLC Annual Report and Accounts 2019
166 Babcock International Group PLC Annual Report and Accounts 2019
2. Financial risk management (continued)
Liquidity risk (continued)
The table below analyses the Group’s liabilities that will be settled on a net basis into relevant maturity groupings based on the
remaining period at the balance sheet date to the contract maturity date. The amounts disclosed in the table are the contractual
undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of interest is not significant.
At 31 March 2019
Bank and other borrowings*
Derivative financial instruments
Trade and other payables**
At 31 March 2018
Bank and other borrowings*
Derivative financial instruments
Trade and other payables**
Less than
1 year
£m
Between
1 and 2 years
£m
Between
2 and 5 years
£m
62.9
(1.2)
1,142.6
47.0
(7.5)
1,141.4
424.1
74.1
0.5
632.6
(4.7)
0.4
81.9
(1.5)
0.6
1,095.8
50.3
0.4
Over
5 years
£m
316.3
(1.5)
0.8
322.5
(1.2)
0.9
Includes fixed rate committed interest
*
** Does not include amounts due to customers for contract work, deferred income, payroll taxes and social security.
The table below analyses the Group’s derivative financial instruments that will be settled on a gross basis into relevant maturity
groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the
table are the contractual undiscounted cash flows. Held for trading contracts are economic hedges and not hedge accounted.
At 31 March 2019
Forward derivative contracts – hedges:
– outflow
– inflow
Forward derivative contracts – held for trading:
– outflow
– inflow
At 31 March 2018
Forward derivative contracts – hedges:
– outflow
– inflow
Forward derivative contracts – held for trading:
– outflow
– inflow
Less than
1 year
£m
Between
1 and 2 years
£m
Between
2 and 5 years
£m
Over
5 years
£m
392.6
391.4
418.0
493.3
117.9
113.6
–
–
–
–
–
–
461.3
443.5
1.2
1.3
141.5
140.0
360.1
409.8
–
–
–
–
16.2
15.1
–
–
17.5
16.9
–
–
Babcock International Group PLC Annual Report and Accounts 2019 167
Babcock International Group PLC Annual Report and Accounts 2019 167
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
3. Segmental information
The Group has four reporting segments, determined by reference to the goods and services they provide and the markets they serve.
Marine – through life support of submarines, naval ships and infrastructure in the UK and internationally.
Land – large scale critical vehicle fleet management, equipment support and training for military and civil customers worldwide.
Aviation – critical engineering services to defence and civil customers worldwide, including pilot training, equipment support,
airbase management and operation of aviation fleets delivering emergency and offshore services.
Nuclear – complex engineering services in support of major decommissioning programmes and projects, training and operation
support, new build programme management and design and installation in the UK and, increasingly, internationally.
The Group Chief Executive, the chief operating decision maker as defined by IAS 8, monitors the results of these reporting segments
and makes decisions about the allocation of resources. The Group’s business in South Africa meets the definition of an operating
segment, as defined by IAS 8. However the business represents less than 10% of the Group’s revenues, profits and assets and, as
permitted by IAS 8, the Group therefore includes the business in the Land sector reportable segment on the basis that they have
similar economic characteristics (assessed with reference to their operating profit margins) and that the nature of the services
provided, the type of customer and the methods used to deliver services are similar to those in the sector in which they are included.
2019
Revenue including joint ventures and associates
Less: joint ventures and associates revenue
Revenue
Operating profit/(loss) before share of results of joint
ventures and associates
Exceptional items
Acquired intangible amortisation
Operating profit*
IFRIC 12 investment income – Group
Share of operating profit – joint ventures and associates
Share of IFRIC 12 investment income – joint ventures
and associates
Underlying operating profit
Share of finance costs – joint ventures and associates
Share of tax – joint ventures and associates
Acquired intangible amortisation – Group
Share of acquired intangible amortisation – joint ventures
and associates
Net finance costs – Group
Exceptional items
Profit before tax
* Before amortisation of acquired intangibles and exceptional items.
Marine
£m
1,706.6
20.3
1,686.3
Land
£m
1,620.2
60.2
1,560.0
Aviation
£m
1,135.5
139.6
995.9
Nuclear
£m
698.3
465.7
232.6
Unallocated
£m
–
–
–
Total
£m
5,160.6
685.8
4,474.8
178.6
33.6
4.7
216.9
0.3
3.3
–
220.5
(0.4)
(1.3)
(4.7)
–
–
(33.6)
180.5
42.3
17.7
44.1
104.1
1.0
39.5
1.4
146.0
(0.1)
(7.1)
(44.1)
(2.0)
–
(17.7)
75.0
(25.0)
86.4
45.7
107.1
–
27.0
26.4
160.5
(23.6)
(5.3)
(45.7)
(3.8)
–
(86.4)
(4.3)
21.6
4.9
0.7
27.2
–
37.0
–
64.2
–
(7.2)
(0.7)
–
–
(4.9)
51.4
(21.0)
18.2
–
(2.8)
–
–
–
(2.8)
–
–
–
196.5
160.8
95.2
452.5
1.3
106.8
27.8
588.4
(24.1)
(20.9)
(95.2)
–
(46.4)
(18.2)
(67.4)
(5.8)
(46.4)
(160.8)
235.2
168 Babcock International Group PLC Annual Report and Accounts 2019
168 Babcock International Group PLC Annual Report and Accounts 2019
3. Segmental information (continued)
2018
Revenue including joint ventures and associates
Less: joint ventures and associates revenue
Revenue
Operating profit/(loss) before share of results of joint
ventures and associates
Acquired intangible amortisation
Operating profit*
IFRIC 12 investment income – Group
Share of operating profit – joint ventures and associates
Share of IFRIC 12 investment income – joint ventures
and associates
Underlying operating profit
Share of finance costs – joint ventures and associates
Share of tax – joint ventures and associates
Acquired intangible amortisation – Group
Share of acquired intangible amortisation – joint ventures
and associates
Net finance costs – Group
Profit before tax
* Before amortisation of acquired intangibles and exceptional items.
Inter divisional revenue is immaterial.
Marine
£m
1,788.9
22.4
1,766.5
Land
£m
1,849.1
88.7
1,760.4
Aviation
£m
1,022.1
101.0
921.1
Nuclear
£m
702.7
491.1
211.6
Unallocated
£m
–
–
–
Total
£m
5,362.8
703.2
4,659.6
225.6
5.3
230.9
0.4
3.8
–
235.1
–
(1.3)
(5.3)
–
–
228.5
59.7
47.5
107.2
1.5
29.9
1.5
140.1
(0.9)
(5.4)
(47.5)
(2.0)
–
84.3
58.9
44.2
103.1
–
14.6
26.6
144.3
(21.3)
(3.7)
(44.2)
(3.8)
–
71.3
30.1
1.1
31.2
–
37.6
–
68.8
–
(7.1)
(1.1)
–
–
60.6
(3.7)
–
(3.7)
–
–
–
(3.7)
–
–
–
–
(49.9)
(53.6)
370.6
98.1
468.7
1.9
85.9
28.1
584.6
(22.2)
(17.5)
(98.1)
(5.8)
(49.9)
391.1
Revenues of £2.2 billion (2018: £2.4 billion) are derived from a single external customer. These revenues are attributable across
all sectors.
The segment assets and liabilities at 31 March 2019 and 31 March 2018 and capital expenditure for the years then ended are
as follows:
Marine
Land
Aviation
Nuclear
Unallocated
Group total
Assets
Liabilities
Capital expenditure
2019
£m
1,041.2
1,673.2
2,466.9
163.2
833.6
6,178.1
2018
£m
1,062.8
1,744.0
2,561.7
163.4
789.1
6,321.0
2019
£m
546.0
515.5
408.3
26.7
1,796.7
3,293.2
2018
£m
589.6
529.9
367.1
36.3
1,887.1
3,410.0
2019
£m
52.3
16.2
141.4
6.4
10.7
227.0
2018
£m
44.8
22.8
80.2
0.1
34.8
182.7
Capital expenditure represents additions to property, plant and equipment and intangible assets. Proceeds from the sale of assets
totalled £78.5 million (2018: £70.0 million). Proceeds are in the main within the Aviation section. See note 19 relating to the
treatment of amounts payable in respect of capital expenditure.
All assets and liabilities are allocated to their appropriate segments except for cash, cash equivalents, borrowings, income and
deferred tax and retirement benefit surpluses which are included in the unallocated segment.
The segmental analysis of joint ventures and associates is detailed in note 14.
Babcock International Group PLC Annual Report and Accounts 2019 169
Babcock International Group PLC Annual Report and Accounts 2019 169
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
3. Segmental information (continued)
The segmental depreciation on tangible assets and amortisation of intangible assets for the years ended 31 March 2019 and
31 March 2018 is as follows:
Marine
Land
Aviation
Nuclear
Unallocated
Group total
Depreciation
Amortisation of
intangible assets
2019
£m
28.5
17.9
39.9
0.6
6.9
93.8
2018
£m
30.3
17.7
36.0
1.3
6.0
91.3
2019
£m
9.8
46.2
46.6
0.8
6.6
110.0
2018
£m
11.2
49.4
45.1
1.2
4.2
111.1
The geographic analysis for non-current assets by location of those assets for the years ended 31 March 2019 and 31 March 2018 is
as follows:
United Kingdom
Rest of Europe
Africa
North America
Australasia
Rest of World
Non-current segment assets
Retirement benefits
IFRIC 12 financial assets
Other financial assets
Tax
Total non-current assets
2019
£m
2,827.3
1,171.7
34.2
7.0
175.0
37.2
4,252.4
226.9
15.5
93.8
150.9
4,739.5
The geographic analysis by origin of customer for the years ended 31 March 2019 and 31 March 2018 is as follows:
Geographic analysis
United Kingdom
Rest of Europe
Africa
North America
Australasia
Rest of World
Group total
The analysis of revenue for the years ended 31 March 2019 and 31 March 2018 is as follows:
Sales of goods – transferred at a point in time
Sale of goods – transferred over time
Sale of goods
Provision of services – transferred over time
Rental income
Revenue
Revenue
2019
£m
2,954.3
649.4
353.6
181.3
189.2
147.0
4,474.8
2019
£m
635.7
61.8
697.5
3,768.6
8.7
4,474.8
2018
£m
2,817.9
1,226.7
45.9
6.2
176.2
39.5
4,312.4
240.1
17.8
76.0
104.0
4,750.3
2018
£m
3,159.0
586.1
413.5
205.8
162.8
132.4
4,659.6
2018
£m
615.4
25.8
641.2
4,010.3
8.1
4,659.6
The sale of goods at a point in time is mainly in the Land sector. This includes revenue subject to judgement as to whether the
Group operates as principal or agent. The sale of goods over time is in the Marine sector. Provision of services over time is across all
sectors. Further disaggregation of revenue is set out in the Strategic report on page 6.
170 Babcock International Group PLC Annual Report and Accounts 2019
170 Babcock International Group PLC Annual Report and Accounts 2019
4. Operating profit for the year
The following items have been included in arriving at operating profit for the year:
Employee costs (note 7)
Inventories
– cost of inventories recognised as an expense
– increase/(decrease) in inventory provisions
Depreciation of property, plant and equipment (PPE)
– owned assets
– under finance leases
Amortisation of intangible assets
– acquired intangibles
– other
Impairment of goodwill
Profit on disposal of property plant and
equipment
Loss on disposal of intangible assets
Operating lease rentals payable
– property
– vehicles, plant and equipment
Research and development
Trade receivables charged
Net foreign exchange (gain)/loss
2019
£m
1,611.6
2018
£m
1,588.3
504.5
(5.9)
444.0
1.8
81.0
12.8
93.8
95.2
14.8
110.0
–
(5.4)
0.3
32.4
124.4
0.4
1.6
(5.9)
81.7
9.6
91.3
98.1
13.0
111.1
–
(4.1)
–
30.0
115.4
1.0
1.3
16.1
In addition to the vehicle operating lease rentals above is £53.5 million (2018: £53.6 million) for the Phoenix contract where the
leases are directly on behalf of and benefit to the customer.
Services provided by the Group’s auditor and network firms
During the year the Group (including its overseas subsidiaries) obtained the following services from the Group’s auditor as
detailed below:
Audit fees:
Fees payable to the parent auditor and its associates for the audit of the parent company’s individual
and consolidated financial statements
Fees for other services:
Fees payable to the parent auditor and its associates in respect of the audit of the Company’s subsidiaries
Audit related services
Other non-audit services
Total fees paid to the Group’s auditor and network firms
2019
£m
2018
£m
0.6
1.9
–
–
2.5
0.4
1.8
0.2
0.1
2.5
Babcock International Group PLC Annual Report and Accounts 2019 171
Babcock International Group PLC Annual Report and Accounts 2019 171
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
5. Exceptional items and acquired intangible amortisation
Group
Joint ventures and associates
2019
£m
2018
£m
2019
£m
2018
£m
Total
2019
£m
2018
£m
Oil and Gas1
– Asset impairment
– Onerous lease provisions
Oil and Gas – total
Capacity restructuring2
Exit3
Profit on disposal of subsidiaries and businesses (note 29)
Pension GMP equalisation and bulk transfer4
Exceptional items5
Exceptional tax items and tax on exceptional items6
Exceptional items – net of tax
Acquired intangible amortisation
Tax on acquired intangibles amortisation
Acquired intangible amortisation – net of tax
39.0
42.1
81.1
42.4
21.4
(14.8)
30.7
160.8
(16.7)
144.1
95.2
(20.4)
74.8
Exceptional items are those items which are exceptional in nature or size.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
98.1
(21.1)
77.0
5.8
(1.1)
4.7
5.8
(1.1)
4.7
39.0
42.1
81.1
42.4
21.4
(14.8)
30.7
160.8
(16.7)
144.1
101.0
(21.5)
79.5
–
–
–
–
–
–
–
–
–
–
103.9
(22.2)
81.7
1. During the period the Oil and Gas business was reshaped to reflect the current market and to allow for the resultant business
to optimise future cashflows. Assets and leases were marked to current market value to allow for sale, sub lease or alternate use.
The total exceptional charge is £81.1 million and the cash costs are expected to be offset by tax effects and proceeds from the
disposal of assets. Refer to notes 13 and 17 for the asset impairments, and there are also minor impairments to inventory. Refer
to note 22 for the onerous lease provisions.
2. Capacity reduction and restructuring costs reflect the rightsizing, restructuring and closure of businesses across the sectors
including Appledore, Rail and Magnox. Refer to note 22 for related provision movements.
3. The Group continued with its strategy of exiting small, low margin businesses. The costs of exiting renewables, mining and
construction, scaling down powerlines (South Africa), mobile telecom, infrastructure and cabling are reflected within exit costs.
Refer to note 13 for related asset write downs.
4. On 26 October, the High Court handed down a judgment involving the Lloyds Banking Group’s defined benefit pension
schemes. The judgment concluded the schemes should be amended to equalise pension benefits for men and women in
relation to guaranteed minimum pension benefits. The issues determined by the judgment arise in relation to many other
defined benefit pension schemes. The past service costs totalling £25.9 million reflect our estimate of the extent to which
the judgment crystallises additional liabilities for our pension schemes.
The Group also recognised a £4.8 million one off cost for settlement of a pension scheme liability (note 25).
5. £88.9 million of the exceptional charge has been charged through Cost of revenue and the balance of £71.9 million through
Administration expenses.
6. The tax credit of £16.7 million on exceptional items includes a charge of £10.0 million as a result of a reorganisation in
anticipation of Brexit.
172 Babcock International Group PLC Annual Report and Accounts 2019
172 Babcock International Group PLC Annual Report and Accounts 2019
6. Net finance costs
Finance costs
Loans, overdrafts and associated interest rate hedges
Finance leases
Amortisation of issue costs of bank loan
Other
Total finance costs
Finance income
Bank deposits, loans and finance leases
Total finance income
Net finance costs
7. Employee costs
Wages and salaries
Social security costs
Share-based payments (note 24)
Pension costs – defined contribution plans (note 25)
Pension charges – defined benefit plans (note 25)
The average number of people employed by the Group during the year was:
Operations
Administration and management
2019
£m
41.9
5.3
1.4
14.1
62.7
16.0
16.0
46.7
2019
£m
1,319.2
159.9
2.4
69.5
60.6
1,611.6
2019
Number
30,554
4,735
35,289
2018
£m
42.7
5.4
1.7
12.1
61.9
14.3
14.3
47.6
2018
£m
1,306.6
162.4
6.4
65.6
47.3
1,588.3
2018
Number
30,950
4,477
35,427
Emoluments of the Executive Directors are included in employee costs above and reported in the Remuneration report.
Key management compensation
Key management is defined as those employees who are directly responsible for the operational management of the key
cash-generating units. The employees would typically report to the Chief Executive. The key management figures given below
include Directors.
Salaries
Post-employment benefits
Share-based payments
2019
£m
10.3
–
0.2
10.5
2018
£m
10.8
–
1.4
12.2
Babcock International Group PLC Annual Report and Accounts 2019 173
Babcock International Group PLC Annual Report and Accounts 2019 173
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
8. Income tax expense
Analysis of tax charge in the year
Current tax
– UK current year charge
– UK prior year charge
– Overseas current year charge
Deferred tax
– UK current year credit
– Overseas current year credit
– Overseas prior year credit
– Impact of change in UK tax rate
– Impact of change in French (2018: French) tax rate
Total income tax expense
Total
2019
£m
51.6
11.6
22.8
86.0
(33.6)
(1.3)
(17.0)
1.3
–
(50.6)
35.4
2018
£m
67.3
–
26.0
93.3
(22.3)
(18.4)
–
1.3
(0.5)
(39.9)
53.4
The tax for the year is lower (2018: lower) than the standard rate of corporation tax in the UK. The differences are explained below:
Profit before tax
Profit on ordinary activities multiplied by rate of corporation tax in the UK of 19% (2018: 19%)
Effects of:
Expenses not deductible for tax purposes
Re-measurement of deferred tax re change in UK tax rate
Re-measurement of deferred tax re change in French (2018: French) tax rate
Difference in respect of joint venture results
Differences in respect of foreign rates and UK consortium relief rates
Adjustments in respect of earlier years
Other (including effect of exceptional items at effective tax rate)
Total income tax expense
2019
£m
235.2
44.7
0.4
1.3
–
(15.9)
3.4
(5.4)
6.9
35.4
2018
£m
391.1
74.3
0.5
1.3
(0.5)
(13.0)
(5.1)
–
(4.1)
53.4
In the UK 2015 Budget it was announced that the UK corporation tax rate would reduce to 19% from April 2017. It was announced
in the 2016 UK Budget that it will be further reduced to 18% from April 2020. It was subsequently announced in the 2017 budget
that it will be reduced to 17% from April 2020. As a result of this change, UK deferred tax balances have been remeasured at 17% as
this is the tax rate that will apply on reversal. As a result a charge of £1.3 million has been taken to the income statement in respect
of the remeasurement of year end UK deferred tax balances to 17%. A further £0.4 million has been debited to reserves in respect of
the remeasurement of year end UK deferred tax balances to 17%.
The exceptional tax item and the tax effect of the other exceptional items are set out in more detail in note 5.
174 Babcock International Group PLC Annual Report and Accounts 2019
174 Babcock International Group PLC Annual Report and Accounts 2019
9. Dividends
Final dividend for the year ended 31 March 2018 of 22.65p (2017: 21.65p) per 60p share
Interim dividend for the year ended 31 March 2019 of 7.10p (2018: 6.85p) per 60p share
2019
£m
115.5
35.0
150.5
2018
£m
109.2
34.7
143.9
In addition, the Directors are proposing a final dividend in respect of the financial year ended 31 March 2019 of 22.9p (2018:
22.65p) per share which will absorb an estimated £115.7 million (2018: £114.3 million) of shareholders’ equity. It will be paid on
9 August 2019 to shareholders who are on the register of members on 5 July 2019. These financial statements do not reflect this
dividend payable which is subject to approval at the Annual General Meeting on 18 July 2019. The full year declared dividend per
share is 30.0p per 60p ordinary share (2018: 29.5p per 60p ordinary share).
10. Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of
ordinary shares outstanding during the year excluding those held in the Babcock Employee Share Trust.
The calculation of the basic and diluted EPS is based on the following data:
Number of shares
Weighted average number of ordinary shares for the purpose of basic EPS
Effect of dilutive potential ordinary shares: share options
Weighted average number of ordinary shares for the purpose of diluted EPS
Earnings
2019
Number
2018
Number
505,165,728 504,881,495
858,150
506,113,430 505,739,645
947,702
Earnings from continuing operations
Add back:
Amortisation of acquired intangible assets,
net of tax
Exceptional items, net of tax
Impact of change in statutory tax rates
Earnings before amortisation, exceptional
items and other
2019
Earnings
£m
199.4
79.5
144.1
1.3
424.3
2019
Basic
per share
Pence
39.5
15.7
28.5
0.3
84.0
2019
Diluted
per share
Pence
39.4
15.7
28.5
0.3
2018
Earnings
£m
336.3
81.7
–
0.8
83.9
418.8
2018
Basic
per share
Pence
66.6
16.2
–
0.2
83.0
2018
Diluted
per share
Pence
66.5
16.2
–
0.2
82.9
Babcock International Group PLC Annual Report and Accounts 2019 175
Babcock International Group PLC Annual Report and Accounts 2019 175
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
11. Goodwill
Cost
At 1 April
On disposal of subsidiaries (note 29)
Exchange adjustments
At 31 March
Accumulated impairment
At 1 April
On disposal of subsidiaries (note 29)
Impairment
At 31 March
Net book value at 31 March
2019
£m
2018
£m
2,608.0
(9.4)
(9.6)
2,589.0
7.1
(2.3)
–
4.8
2,584.2
2,615.9
–
(7.9)
2,608.0
7.1
–
–
7.1
2,600.9
During the year, goodwill was tested for impairment in accordance with IAS 36. The recoverable amount of the Group’s goodwill
was assessed by reference to value-in-use calculations derived from the three–year budgeted cash flows, and extrapolated cash flows
thereafter based on an estimated growth rate of 3.0% (2018: 3.0%). The process by which the budget is prepared, reviewed and
approved benefits from historical experience, visibility of long–term work programmes in relation to elements of the work
undertaken for the UK government, available government spending information (both UK and overseas) and the Group’s order book
and bid pipeline.
A pre-tax discount rate in the range 9.5% to 10.5% (2018: 8.5% to 9.8%) was used in the value-in-use calculations. The Group’s
weighted average cost of capital post-tax is approximately 7.8% to 8.6% (2018: 7.0% to 8.0%).
Goodwill is allocated to the Group’s cash-generating units (CGUs) as presented below. These align with the Group’s operating
segments and represent the lowest level in the Group at which goodwill is monitored.
Marine
Land
Aviation
Nuclear
2019
£m
524.3
889.7
1,100.2
70.0
2,584.2
2018
£m
522.4
900.0
1,108.5
70.0
2,600.9
Key assumptions in relation to the cashflows included in the value in use models are set out below:
Marine
Land
Aviation
Nuclear
Continuing delivery of work programmes with the UK Ministry of Defence.
Continuing demand for large scale vehicle fleet management, equipment support and training from both military
and civil customers, noting that significant elements of equipment support and training are the subject of long–
term contracts.
Continuing delivery of long–term contracts with the UK Ministry of Defence and growth in aerial emergency
services worldwide where the Group has a number of leadership positions.
Continuing delivery of opportunities in the civil nuclear decommissioning programme together with
maintenance of ongoing spend in provision of nuclear engineering services to operational power stations,
and some growth in support of the UK new build programme.
The value in use calculations present significant headroom in respect of all the operating segments. Sensitivity analyses were carried
out for each of the segments in relation to constraining the rate of growth of the budget cashflows by 28%, reducing the long–term
growth rate by 1% and increasing the discount rate used in the value in use calculations by 1%. In each case significant headroom
remained for each segment. The sensitivities were also applied in the aggregate and in this case a marginal amount of headroom
remained for Aviation and significant headroom remained for the other segments.
176 Babcock International Group PLC Annual Report and Accounts 2019
176 Babcock International Group PLC Annual Report and Accounts 2019
12. Other intangible assets
Cost
At 1 April 2018
Additions
Disposals at cost
Exchange adjustments
At 31 March 2019
Accumulated amortisation
and impairment
At 1 April 2018
Amortisation charge
Amortisation on disposals
Exchange adjustments
At 31 March 2019
Net book value at 31 March 2019
Cost
At 1 April 2017
Additions
Disposals at cost
Exchange adjustments
At 31 March 2018
Accumulated amortisation
and impairment
At 1 April 2017
Amortisation charge
Amortisation on disposals
Exchange adjustments
At 31 March 2018
Net book value at 31 March 2018
Acquired
intangibles –
relationships
£m
Acquired
intangibles –
brands
£m
Acquired
intangibles –
total
£m
Software
development
costs and
licences
£m
Development
costs and
other
£m
1,174.4
–
–
(4.9)
1,169.5
751.5
94.6
–
(2.8)
843.3
326.2
1,175.3
–
–
(0.9)
1,174.4
655.3
97.5
–
(1.3)
751.5
422.9
23.9
–
–
(0.2)
23.7
19.7
0.6
–
(0.1)
20.2
3.5
23.9
–
–
–
23.9
19.2
0.6
–
(0.1)
19.7
4.2
1,198.3
–
–
(5.1)
1,193.2
771.2
95.2
–
(2.9)
863.5
329.7
1,199.2
–
–
(0.9)
1,198.3
674.5
98.1
–
(1.4)
771.2
427.1
153.0
21.4
(2.3)
(0.1)
172.0
57.9
14.3
(1.9)
(0.2)
70.1
101.9
123.4
30.1
(0.3)
(0.2)
153.0
45.8
12.7
(0.3)
(0.3)
57.9
95.1
8.0
10.8
–
(0.2)
18.6
0.9
0.5
–
(0.1)
1.3
17.3
6.2
1.7
–
0.1
8.0
0.5
0.3
–
0.1
0.9
7.1
Total
£m
1,359.3
32.2
(2.3)
(5.4)
1,383.8
830.0
110.0
(1.9)
(3.2)
934.9
448.9
1,328.8
31.8
(0.3)
(1.0)
1,359.3
720.8
111.1
(0.3)
(1.6)
830.0
529.3
Acquired intangible amortisation charges for the year have been charged through cost of revenue.
Babcock International Group PLC Annual Report and Accounts 2019 177
Babcock International Group PLC Annual Report and Accounts 2019 177
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
13. Property, plant and equipment
Cost
At 1 April 2018
On disposal of subsidiaries (note 29)
Additions
Disposals
Reclassification
Capitalised borrowing costs
Exchange adjustments
At 31 March 2019
Accumulated depreciation
At 1 April 2018
On disposal of subsidiaries (note 29)
Charge for the year
Impairment*
Disposals
Exchange adjustments
At 31 March 2019
Net book value at 31 March 2019
Cost
At 1 April 2017
Additions
Disposals
Reclassification
Capitalised borrowing costs
Exchange adjustments
At 31 March 2018
Accumulated depreciation
At 1 April 2017
Charge for the year
Disposals
Exchange adjustments
At 31 March 2018
Net book value at 31 March 2018
Freehold
property
£m
Leasehold
property
£m
Plant and
equipment
£m
Aircraft
fleet
£m
Assets in
course of
construction
£m
124.9
(0.7)
4.2
(2.9)
–
–
(0.4)
125.1
56.8
(0.2)
5.0
–
(1.2)
–
60.4
64.7
117.4
8.0
(0.7)
–
–
0.2
124.9
50.1
6.5
–
0.2
56.8
68.1
35.4
(0.1)
3.6
(0.8)
–
–
(0.1)
38.0
9.1
(0.1)
1.5
–
(0.6)
(0.1)
9.8
28.2
32.4
4.6
(1.9)
–
0.2
0.1
35.4
7.2
2.2
(0.3)
–
9.1
26.3
614.0
(22.8)
45.8
(14.2)
0.1
1.7
(9.4)
615.2
327.5
(18.3)
63.6
–
(13.8)
(4.5)
354.5
260.7
568.3
61.5
(16.3)
0.2
1.6
(1.3)
614.0
282.1
58.8
(12.6)
(0.8)
327.5
286.5
625.4
–
100.7
(76.9)
4.7
–
(9.6)
644.3
67.9
–
23.7
29.3
(22.3)
(1.5)
97.1
547.2
598.1
44.7
(27.8)
9.3
–
1.1
625.4
52.7
23.8
(6.6)
(2.0)
67.9
557.5
90.0
–
47.5
(16.3)
(4.8)
–
(2.9)
113.5
–
–
–
–
–
–
–
113.5
112.8
23.7
(38.6)
(9.5)
–
1.6
90.0
–
–
–
–
–
90.0
Total
£m
1,489.7
(23.6)
201.8
(111.1)
–
1.7
(22.4)
1,536.1
461.3
(18.6)
93.8
29.3
(37.9)
(6.1)
521.8
1,014.3
1,429.0
142.5
(85.3)
–
1.8
1.7
1,489.7
392.1
91.3
(19.5)
(2.6)
461.3
1,028.4
* The Group impaired eight owned helicopters as a result of the reshaping of our Oil and Gas business, as set out in note 5.
The assets have been written down using market values to estimate fair value less costs of disposal observing Level 2 inputs. The
eight assets have been written down to a combined recoverable amount of £39 million.
A capitalisation rate of 3% (2018: 3%) was used to determine the amount of borrowing costs eligible for capitalisation.
Assets held under finance leases have the following net book value within property, plant and equipment:
2019
Cost
Aggregate depreciation
Net book value
2018
Cost
Aggregate depreciation
Net book value
Freehold
property
£m
Leasehold
property
£m
Plant and
equipment
£m
Aircraft
fleet
£m
Assets in
course of
construction
£m
–
–
–
–
–
–
–
–
–
–
–
–
45.1
(18.0)
27.1
49.5
(14.7)
34.8
113.3
(24.8)
88.5
157.0
(28.3)
128.7
–
–
–
–
–
–
Total
£m
158.4
(42.8)
115.6
206.5
(43.0)
163.5
178 Babcock International Group PLC Annual Report and Accounts 2019
178 Babcock International Group PLC Annual Report and Accounts 2019
14. Investment in and loans to joint ventures and associates
Investment in joint ventures
and associates
Loans to joint ventures and
associates
Total
At 1 April
Disposal of joint ventures and associates (note 29)
Loans repaid by joint ventures and associates
Investment in joint ventures and associates
Share of profits
Interest accrued and capitalised
Interest received
Dividends received
Fair value adjustment of derivatives
Tax on fair value adjustment of derivatives
Foreign exchange
At 31 March
2019
£m
119.3
(6.6)
–
–
83.8
–
–
(44.6)
1.8
(0.3)
(0.2)
153.2
2018
£m
71.9
(1.8)
–
6.9
68.5
–
–
(42.9)
24.3
(7.4)
(0.2)
119.3
2019
£m
27.8
–
(2.3)
10.8
–
6.5
(0.3)
–
–
–
–
42.5
2018
£m
32.3
–
(4.5)
–
–
0.9
(0.9)
–
–
–
–
27.8
Included within investment in joint ventures and associates is goodwill of £1.2 million (2018: £1.2 million).
The total investment in joint ventures is attributable to the following segments:
Marine
Land
Aviation
Nuclear
Net book value
2019
£m
147.1
(6.6)
(2.3)
10.8
83.8
6.5
(0.3)
(44.6)
1.8
(0.3)
(0.2)
195.7
2019
£m
6.0
77.4
70.2
42.1
195.7
2018
£m
104.2
(1.8)
(4.5)
6.9
68.5
0.9
(0.9)
(42.9)
24.3
(7.4)
(0.2)
147.1
2018
£m
7.0
49.1
65.6
25.4
147.1
Babcock International Group PLC Annual Report and Accounts 2019 179
Babcock International Group PLC Annual Report and Accounts 2019 179
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
14. Investment in and loans to joint ventures and associates (continued)
Included within joint ventures and associates are:
Country of
incorporation
Assets
£m
Liabilities
£m
Revenue
£m
Operating
profit/(loss)*
£m
Total
comprehensive
income/(loss)
£m
% interest
held
2019
Holdfast Training Services Limited
ALC (Superholdco) Limited
AirTanker Limited
AirTanker Services Limited
Ascent Flight Training (Holdings) Limited
Naval Ship Management (Australia) Pty Limited
Cavendish Dounreay Partnership Limited
Cavendish Fluor Partnership Limited
ABC Electrification Limited
Other
2018
Holdfast Training Services Limited
ALC (Superholdco) Limited
AirTanker Limited
AirTanker Services Limited
Ascent Flight Training (Holdings) Limited
Naval Ship Management (Australia) Pty Limited
Helidax S.A.S.
Cavendish Dounreay Partnership Limited
Cavendish Fluor Partnership Limited
ABC Electrification Limited
Other
* Before amortisation of acquired intangibles.
United Kingdom
46.3
19.1
United Kingdom
United Kingdom 409.3
United Kingdom
32.9
United Kingdom 113.5
5.2
Australia
United Kingdom
39.4
United Kingdom 102.6
2.6
United Kingdom
21.8
792.7
United Kingdom
40.1
18.6
United Kingdom
United Kingdom 421.0
United Kingdom
29.8
United Kingdom 116.5
5.0
Australia
30.2
France
United Kingdom
38.2
United Kingdom 100.1
2.9
United Kingdom
20.2
822.6
(3.6)
–
(390.6)
–
(98.7)
(4.1)
(19.8)
(80.2)
–
–
(597.0)
(14.0)
–
(410.2)
–
(104.7)
(4.3)
(24.7)
(24.8)
(88.2)
–
(4.6)
(675.5)
80.6
19.3
42.5
43.7
61.5
23.7
110.5
390.8
50.7
33.9
857.2
77.4
20.1
29.9
41.3
48.0
26.5
8.6
118.5
395.6
69.4
64.3
899.6
28.4
11.3
13.4
5.0
5.0
4.2
7.8
28.9
(0.2)
3.0
106.8
18.4
10.9
4.0
4.4
3.1
4.3
3.2
5.8
31.8
0.2
(0.2)
85.9
74%
50%
13%
22%
50%
50%
50%
65%
33%
74%
50%
13%
22%
50%
50%
50%
50%
65%
33%
23.6
8.3
10.2
3.1
5.3
2.9
6.2
23.4
(0.2)
1.0
83.8
14.8
7.4
2.6
2.7
5.2
3.0
1.3
4.7
25.8
0.2
0.8
68.5
Joint ventures and associates revenue excluding Group sub-contract revenue is £685.8 million (2018: £703.2 million).
The joint ventures and associates have no significant contingent liabilities to which the Group is exposed.
None (2018: non) of the joint ventures or associates had material amounts of other comprehensive income or profits from discontinued
operations and therefore the total comprehensive income noted in the table above is in line with profits from continuing operations.
Holdfast Training Services Limited and Cavendish Fluor Partnership Limited are equity accounted as unanimous decisions making is
required over key decisions which drive the relevant activities of the business. Both the Holdfast Training Services Limited and Cavendish
Fluor Partnership Limited joint arrangements are shown as joint ventures as the Group has the right to net assets of the joint arrangement
rather than separate rights and obligations to the assets and liabilities of the joint arrangement respectively. Holdfast Training Services
Limited and Cavendish Fluor Partnership Limited had other comprehensive income of £nil in the year (2018: £nil).
AirTanker Limited is shown as an associate due to the level of management input and the relative share ownership. AirTanker
benefitted from an improved cumulative margin position in the year.
The Cavendish Fluor Partnership Limited is deemed material to the Group. All the assets and liabilities are current. Of the assets
shown above £1.8 million (2018: £6.2 million) was cash and cash equivalents. During the year dividends of £12.9 million
(2018: £24.2 million) were received. The retained profit is after income tax expense of £5.5 million (2018: £6.0 million).
180 Babcock International Group PLC Annual Report and Accounts 2019
180 Babcock International Group PLC Annual Report and Accounts 2019
15. Deferred tax
Deferred tax asset
Deferred tax liability
2019
£m
150.9
(103.2)
47.7
2018
£m
104.0
(112.8)
(8.8)
The movements in deferred tax assets and liabilities (prior to offsetting of balances within the same tax jurisdiction as permitted by
IAS 12) during the period are shown below:
At 1 April 2018
Income statement credit
Exceptional credit at 19%
Exceptional credit at 17%
Prior year adjustment
Tax credit to equity
Transfer (to)/from corporation tax
Effect of change in UK tax rate
– income statement
– equity
Exchange differences
At 31 March 2019
At 1 April 2017
Income statement credit
Tax credit to equity
Transfer to corporation tax
Effect of change in UK tax rate
– income statement
– equity
Effect of change in Italian tax rate
– income statement
Exchange differences
At 31 March 2018
Accelerated
tax depreciation
£m
(8.0)
–
3.4
2.2
–
–
–
Retirement
benefit
obligations
£m
0.8
11.4
–
–
–
10.4
(17.4)
(0.2)
–
–
(2.6)
(8.0)
–
–
–
–
–
–
–
(8.0)
–
(0.5)
–
4.7
17.8
9.4
(10.3)
(18.1)
–
2.0
–
–
0.8
Tax losses
£m
41.4
–
–
–
17.0
–
13.8
–
–
–
72.2
37.7
3.7
–
–
–
–
–
–
41.4
Other
£m
(43.0)
11.8
5.8
0.1
–
2.8
(3.4)
(1.1)
0.1
0.3
(26.6)
(69.0)
27.7
3.1
(2.6)
(1.3)
(0.1)
0.5
(1.3)
(43.0)
Total
£m
(8.8)
23.2
9.2
2.3
17.0
13.2
(7.0)
(1.3)
(0.4)
0.3
47.7
(21.5)
40.8
(7.2)
(20.7)
(1.3)
1.9
0.5
(1.3)
(8.8)
The net deferred tax assets of £47.7 million includes deferred tax assets of £99.1 million and deferred tax liabilities of £69.1 million
in respect of the Group’s non-UK operations.
Deferred tax assets have been recognised in respect of tax losses and other temporary differences giving rise to deferred tax assets
because the Directors believe that it is probable that these assets will be recovered.
The net deferred tax liability in respect of ‘Other items’ is primarily made up of the deferred tax liability in respect of intangibles less
deferred tax assets in respect of other short–term timing differences.
Babcock International Group PLC Annual Report and Accounts 2019 181
Babcock International Group PLC Annual Report and Accounts 2019 181
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
15. Deferred tax (continued)
Deferred tax expected to be recovered within 12 months:
Deferred tax liability
2019
£m
(21.5)
(21.5)
2018
£m
(19.6)
(19.6)
At the balance sheet date, deferred tax assets of £72.0 million (2018: £41.4 million) have been recognised in respect of unused tax
losses available for carry forward. This is out of a total potential deferred tax asset in respect of unutilised tax losses (excluding
capital losses) of approximately £80 million.
2019
£m
87.9
7.7
100.9
196.5
2019
£m
255.5
(6.0)
249.5
266.0
133.2
62.9
462.1
9.1
11.4
99.0
76.7
907.8
2018
£m
65.6
5.7
110.1
181.4
2018
(restated)
£m
283.1
(4.9)
278.2
409.3
118.5
53.5
581.3
9.4
13.3
115.1
62.8
1,060.1
9.3
6.7
16. Inventories
Raw materials and spares
Work-in-progress
Finished goods and goods for resale
Total
17. Trade and other receivables
Current assets
Trade receivables
Less: provision for impairment of receivables
Trade receivables – net
Amounts due from customers for contract work
Accrued income
Capitalised contract costs
Contract assets
Retentions
Amounts due from related parties (note 34)
Other debtors
Prepayments
Non-current assets
Other debtors
Trade and other receivables are stated at amortised cost.
182 Babcock International Group PLC Annual Report and Accounts 2019
182 Babcock International Group PLC Annual Report and Accounts 2019
17. Trade and other receivables (continued)
Significant changes in contract assets during the year are as follows:
31 March 2018
Reclassification – IFRS 15 adoption
1 April 2018 – restated
Transfers from contract assets recognised at the beginning of the year
to receivables
Increase due to work done not transferred from contract assets
Amounts capitalised
Amortisation of contract assets
Write down of contract assets*
Other
Exchange adjustment
31 March 2019
31 March 2017
Reclassification – IFRS 15 adoption
31 March 2017 – restated
Transfers from contract assets recognised at the beginning of the year
to receivables
Increase due to work done not transferred from contract assets
Amounts capitalised
Amortisation of contract assets
Exchange adjustment
31 March 2018
Amounts
due from
customers for
contract work
£m
462.8
(53.5)
409.3
Accrued income
£m
118.5
–
118.5
Capitalised
contract costs
£m
–
53.5
53.5
Contract assets
£m
581.3
–
581.3
(394.7)
264.5
–
–
(14.4)
–
1.3
266.0
222.4
(31.2)
191.2
(182.4)
401.4
–
–
(0.9)
409.3
(112.5)
128.5
–
–
–
(1.0)
(0.3)
133.2
124.4
–
124.4
(124.0)
117.9
–
–
0.2
118.5
–
–
26.5
(8.7)
(6.3)
–
(2.1)
62.9
–
31.2
31.2
–
–
29.5
(6.1)
(1.1)
53.5
(507.2)
393.0
26.5
(8.7)
(20.7)
(1.0)
(1.1)
462.1
346.8
–
346.8
(306.4)
519.3
29.5
(6.1)
(1.8)
581.3
* As discussed in note 5, amounts due from customers have been written down in relation to the exit of small low margin businesses and capitalised contract
costs have been written down as a result of the reshaping of our Oil and Gas business. Further to this, minor amounts in other debtors have been written
down in relation to both the reshaping of our Oil and Gas business and the exit of small, low margin businesses.
Under IFRS 15, contract mobilisation costs and costs of obtaining contracts are no longer presented within an overall contract
balance with customers. These have therefore been reclassified at the date of transition to IFRS 15 (1 April 2018) from Amounts
due from customers for contract work to a separate category called Capitalised contract costs.
No material revenue was recognised in 2019 from performance obligations satisfied in previous periods, arising from changes in
stage of completion, or transaction price allocation (2018: No material revenue).
Within the Group’s order book £10.6 billion represents the transaction price allocated to unsatisfied or partially satisfied
performance obligations. Management expects that 28% of the transaction price allocated to unsatisfied performance obligations as
at 31 March 2019 will be recognised as revenue during the next reporting period. A further 48% of the transaction price allocated
to unsatisfied performance obligations is expected to be recognised as revenue in years two to five after 31 March 2019. In addition
there are £3.4 billion of orders where pricing is still to be finalised and £3.0 billion of orders within joint ventures and associates.
Babcock International Group PLC Annual Report and Accounts 2019 183
Babcock International Group PLC Annual Report and Accounts 2019 183
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
17. Trade and other receivables (continued)
Movements on the provision for impairment of trade receivables are as follows:
Balance at 1 April*
Provision for receivables impairment
Receivables written off during the year as uncollectable
Unused amounts reversed
Exchange differences
Balance at 31 March
2019
£m
(4.9)
(1.6)
0.2
0.2
0.1
(6.0)
2018
£m
(6.1)
(1.3)
0.2
2.3
–
(4.9)
* No adjustment to the impairment of trade receivables was required on transition from IAS 39 to IFRS 9.
The creation and release of provisions for impairment of receivables have been included in cost of revenue in the income statement.
Amounts charged to the impairment provision are generally written off when there is no expectation of recovering additional cash.
The total provision held against trade receivables and contract assets is immaterial. No further disclosures relating to impairment
provisions have been included as these are not to be considered material.
The other classes within trade and other receivables do not contain impaired assets.
The maximum exposure to credit risk at the reporting date is the fair value of each class of receivables mentioned above. The Group
does not hold any collateral as security other than retention of title clauses issued as part of the ordinary course of business.
18. Cash and cash equivalents
Cash at bank and in hand
Short-term bank deposits (overnight)
2019
£m
275.0
0.2
275.2
2018
£m
277.3
9.0
286.3
The carrying amount of the Group’s cash and cash equivalents are denominated in the following currencies:
Currency
Sterling
Euro
US Dollar
South African Rand
Canadian Dollar
Omani Rial
Australian Dollar
Norwegian Krone
Swedish Krone
New Zealand Dollar
Brazilian Real
Other currencies
2019
Total
£m
Floating rate
£m
2018
Total
£m
Floating rate
£m
66.4
72.7
5.7
69.4
36.8
5.6
1.2
1.9
3.2
0.1
6.0
6.2
275.2
66.4
72.7
5.7
69.4
36.8
5.6
1.2
1.9
3.2
0.1
6.0
6.2
275.2
62.2
83.6
13.4
65.7
32.9
6.5
3.3
–
2.9
6.8
4.4
4.6
286.3
62.2
83.6
13.4
65.7
32.9
6.5
3.3
–
2.9
6.8
4.4
4.6
286.3
The above balances are typically invested at short-term, floating rates linked to LIBOR in the case of Sterling, EURIBOR in the case of
Euro, the prime rate in the case of South African Rand and the local prime rate for other currencies.
Impairment of cash and cash equivalents has been determined to be trivial.
184 Babcock International Group PLC Annual Report and Accounts 2019
184 Babcock International Group PLC Annual Report and Accounts 2019
19. Trade and other payables
Current liabilities
Contract cost accruals
Amounts due to customers for contract work
Deferred income
Contract liabilities
Trade creditors
Amounts due to related parties (note 34)
Other creditors
Other taxes and social security
Accruals
Non-current liabilities
Other creditors
2019
£m
2018
£m
188.5
192.8
40.0
421.3
510.6
1.0
63.9
125.6
259.0
1,381.4
179.9
173.4
60.0
413.3
545.3
0.8
84.6
119.6
228.5
1,392.1
2.0
2.3
Included in creditors is £19.5 million (2018: £10.8 million) relating to capital expenditure which has therefore not been included in
working capital movements within the cashflow.
Significant changes in contract liabilities during the year are as follows:
31 March 2018
Revenue recognised that was included in the contract liability balance at the
beginning of the year
Increase due to cash received, excluding amounts recognised as revenue
Amounts accrued
Amounts utilised
Disposal
Exchange adjustment
31 March 2019
Contract cost
accrual
£m
179.9
Amounts due to
customers for
contract work
£m
173.4
–
–
183.7
(167.2)
(6.0)
(1.9)
188.5
(143.8)
168.5
–
–
(4.1)
(1.2)
192.8
Deferred
income
£m
60.0
(56.4)
37.4
–
–
–
(1.0)
40.0
Contract
liabilities
£m
413.3
(200.2)
205.9
183.7
(167.2)
(10.1)
(4.1)
421.3
31 March 2017
Revenue recognised that was included in the contract liability balance at the
beginning of the year
Increase due to cash received, excluding amounts recognised as revenue
Amounts accrued
Amounts utilised
Exchange adjustment
31 March 2018
186.0
180.4
66.9
433.3
–
–
181.0
(185.3)
(1.8)
179.9
(168.2)
161.4
–
–
(0.2)
173.4
(66.9)
60.1
–
–
(0.1)
60.0
(235.1)
221.5
181.0
(185.3)
(2.1)
413.3
Babcock International Group PLC Annual Report and Accounts 2019 185
Babcock International Group PLC Annual Report and Accounts 2019 185
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
20. Bank and other borrowings
Current liabilities
Bank loans and overdrafts due within one year or on demand
Secured
Unsecured
Finance lease obligations*
Non-current liabilities
Bank and other borrowings
Secured
Unsecured
Finance lease obligations*
* Finance leases are secured against the assets to which they relate.
The Group has entered into interest rate and currency swaps, details of which are included in note 21.
The carrying amount of the Group’s borrowings are denominated in the following currencies:
2019
£m
2018
£m
0.3
38.3
38.6
15.3
53.9
2.0
20.3
22.3
15.8
38.1
22.0
1,285.1
1,307.1
50.5
1,357.6
38.9
1,371.0
1,409.9
75.3
1,485.2
Currency
Sterling
Euro
US Dollar*
South African Rand
Currency
Sterling
Euro
US Dollar*
South African Rand
Total
£m
505.4
508.1
382.1
15.9
1,411.5
Total
£m
576.3
558.3
354.9
33.8
1,523.3
2019
Floating rate
£m
134.7
19.9
229.3
15.9
399.8
2018
Floating rate
£m
200.8
36.1
212.9
33.8
483.6
Fixed rate
£m
370.7
488.2
152.8
–
1,011.7
Fixed rate
£m
375.5
522.2
142.0
–
1,039.7
* US$500 million (2018: US$500 million) has been swapped into Sterling, with US$300 million (2018: US$300 million) equivalent into floating rates and
US$200 million (2018: US$200 million) equivalent into fixed rate. This is included in the US Dollar amount above.
The weighted average interest rate of Sterling fixed rate borrowings is 2.3%. The weighted average period for which these interest
rates are fixed is four years.
The floating rate for borrowings is linked to LIBOR in the case of Sterling, EURIBOR in the case of Euro, the prime rate in the case of
South African Rand and the local prime rate for other currencies.
The exposure of the Group to interest rate changes when borrowings re-price is as follows:
Total borrowings
As at 31 March 2019
As at 31 March 2018
1 year
£m
352.6
415.4
1–5 years
£m
753.9
317.9
>5 years
£m
305.0
790.0
Total
£m
1,411.5
1,523.3
186 Babcock International Group PLC Annual Report and Accounts 2019
186 Babcock International Group PLC Annual Report and Accounts 2019
20. Bank and other borrowings (continued)
The effective interest rates at the balance sheet dates were as follows:
UK bank overdraft
UK bank borrowings
US private placement – fixed
US private placement – floating
Eurobond
£300 million bond
Other borrowings
Finance leases
Repayment details
The total borrowings of the Group at 31 March are repayable as follows:
Within one year
Between one and two years
Between two and five years
Greater than five years
2019
%
1.3
2.4
6.0
3.1
1.8
1.9
4.8 – 9.7
0.4 – 9.0
2018
%
1.3
1.6
6.0
2.9
1.8
1.9
4.8 – 9.4
0.7 – 9.0
2019
2018
Loans and
overdrafts
£m
38.6
382.2
623.2
301.7
1,345.7
Finance
lease
obligations
£m
15.3
19.2
23.5
7.8
65.8
Loans and
overdrafts
£m
22.3
40.0
1,067.6
302.3
1,432.2
Finance
lease
obligations
£m
15.8
17.5
43.8
14.0
91.1
Borrowing facilities
The Group had the following undrawn committed borrowing facilities available at 31 March:
Expiring in less than one year
Expiring in more than one year but not more than five years
The minimum lease payments under finance leases fall due as follows:
Not later than one year
Later than one year but not more than five years
More than five years
Future finance charges on finance leases
Present value of finance lease liabilities
2019
£m
4.6
778.2
782.8
2019
£m
18.8
46.3
8.0
73.1
(7.3)
65.8
2018
£m
64.0
722.3
786.3
2018
£m
20.3
68.4
14.5
103.2
(12.1)
91.1
Babcock International Group PLC Annual Report and Accounts 2019 187
Babcock International Group PLC Annual Report and Accounts 2019 187
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
21. Other financial assets and liabilities
Financial instruments and finance leases granted
Non-current
US private placement – currency and interest rate swaps
Interest rate hedge
Other currency hedges
Financial derivatives
Finance leases granted
Total non-current other financial assets and liabilities
Current
Interest rate hedge
Other currency hedge
Financial derivatives
Finance leases granted
Total current other financial assets and liabilities
Assets
2019
£m
75.2
–
2.0
77.2
16.6
93.8
–
3.7
3.7
44.3
48.0
Fair value
2018
£m
47.7
1.5
3.5
52.7
23.3
76.0
–
4.3
4.3
23.2
27.5
Liabilities
2019
£m
1.0
0.8
7.5
9.3
–
9.3
0.1
4.8
4.9
–
4.9
2018
£m
–
0.9
4.1
5.0
–
5.0
0.2
11.7
11.9
–
11.9
The Group enters into forward foreign currency contracts to hedge the currency exposures that arise on sales, purchases, deposits
and borrowings denominated in foreign currencies, as the transactions occur. There is no material ineffectiveness on any of the
Group’s hedging activities.
The Group enters into interest rate hedges against interest rate exposure and to create a balance between fixed and floating interest rates.
The fair values of the financial instruments are based on valuation techniques (level 2) using underlying market data and discounted cash flows.
The Group entered into a facility to sell its finance lease debtors on the FOMEDEC equipment supply contract. The Group analysed
the terms of the facility and considers that the facility transfers substantially all the risks and rewards associated with the finance
lease debtors. Finance lease debtors are derecognised at the date they are discounted by the bank. At 31 March 2019 the non-
recourse balance was £137 million which will be recovered over approximately four years.
Interest rate hedges
The notional principal amount of outstanding interest rate swap contracts at 31 March 2019 included £6.3 million of UK interest
rate swaps and interest rate swaps in relation to the US$500 million US$ to GBP cross-currency swap.
The Group held the following interest rate hedges at 31 March 2019:
Hedged
Interest rate swap
Hedged
Cross currency and interest rate swap
Amount
£m
Fixed payable
%
Floating receivable
%
Maturity
4.7
4.745
Six month LIBOR 31/3/2029
Amount
US$m
Amount at
swapped rates
£m
200.0
122.9
Swap
%
Maturity
Fixed 5.64% US$ to
fixed 5.95% GBP
Fixed 5.64% US$ to
floating three-month
LIBOR + margin GBP
17/3/2021
17/3/2021
Cross currency and interest rate swap
300.0
184.3
Total cross currency and interest rate swap
500.0
307.2
Finance leases granted
In South Africa the Group operates its own finance company to facilitate the sale of DAF vehicles. It obtains external borrowings and
sells vehicles on finance leases to external customers. At the year end the present value of the minimum lease receivable amounted
to £24.4 million (2018: £37.2 million), these were split as £7.8 million (2018: £13.9 million) due within one year and £16.6
million (2018: £23.3 million) between one and five years. In addition there is £36.5 million due within one year in respect of our
FOMEDEC contract.
188 Babcock International Group PLC Annual Report and Accounts 2019
188 Babcock International Group PLC Annual Report and Accounts 2019
21. Other financial assets and liabilities (continued)
Fair values of non-current borrowings and loans
The fair values of non-current borrowings and loans at the balance sheet date were:
Fair value of non-current borrowings and loans
Long-term borrowings
Loan to joint venture
2019
2018
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
(1,357.6)
42.5
(1,315.1)
(1,404.6)
42.5
(1,362.1)
(1,485.2)
27.8
(1,457.4)
(1,531.8)
27.8
(1,504.0)
Fair values of long-term borrowings are based on cash flows discounted using a rate of 4% to 5% (2018: 4% to 5%).
22. Provisions for other liabilities
At 1 April 2018
On disposal of subsidiaries (Note 29)
(Released)/charged to income statement
Utilised in year
Foreign exchange
At 31 March 2019
Employee
benefits and
business
reorganisation
costs
(c)
£m
45.7
–
60.7
(40.9)
(0.2)
65.3
Contract/
warranty
(b)
£m
12.8
(0.7)
(2.3)
(0.8)
(0.2)
8.8
Insurance
provisions
(a)
£m
1.0
–
(0.5)
–
–
0.5
Property
and other
(d)
£m
36.3
(0.2)
(2.9)
(3.8)
(0.4)
29.0
Expected
credit losses
£m
–
–
0.4
–
(0.1)
0.3
Provisions have been analysed between current and non-current as follows:
Current
Non-current
2019
£m
63.4
40.5
103.9
Total
provisions
£m
95.8
(0.9)
55.4
(45.5)
(0.9)
103.9
2018
£m
34.7
61.1
95.8
(a) The insurance provisions arise in the Group’s captive insurance companies, Chepstow Insurance Limited, Peterhouse
Insurance Limited and VT Insurance Services Limited. They relate to specific claims assessed in accordance with the advice
of independent actuaries.
(b) The contract/warranty provisions relate to onerous contracts and warranty obligations on completed contracts and disposals.
(c) The employee benefits and reorganisation costs arise mainly in relation to acquired businesses, personnel related costs and
payroll taxes. £59.4 million of provisions were recognised in the year in respect of exceptional costs. At March 2019 there
remains £26.7 million of provisions in respect of the reshaping of our Oil and Gas business (see note 5). In relation to capacity
reductions and restructuring, as discussed in note 5, there remains £12.7 million in provisions at March 2019.
(d) Property and other in the main relate to provisions for onerous leases, dilapidation costs and contractual obligations in respect
of infrastructure.
Included within provisions is £9 million expected to be utilised over approximately ten years. Other than these provisions the
Group’s non-current provisions are expected to be utilised within two to five years.
Babcock International Group PLC Annual Report and Accounts 2019 189
Babcock International Group PLC Annual Report and Accounts 2019 189
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
23. Share capital
Allotted, issued and fully paid
At 1 April 2018 and 31 March 2019
Allotted, issued and fully paid
At 1 April 2017 and 31 March 2018
Ordinary shares of 60p
Number
Total
£m
505,596,597
303.4
505,596,597
303.4
Potential issues of ordinary shares
The table below shows options and conditional share awards existing over the Company’s shares as at 31 March 2019 that are
capable of being met on exercise or vesting by the issue of new shares. They represent outstanding awards granted under the
Company’s executive share plans. The awards were granted directly by the Company and satisfied either by the Trustees of the
Babcock Employee Share Trust (BEST) – a total of 7,747,703 shares (2018: 8,023,002 shares) – or the Trustees of the Peterhouse
Employee Share Trust (PEST) – a total of nil shares (2018: 4,085 shares). The Company decides from time to time whether to satisfy
the awards by way of a fresh issue of shares (either to the award holder or to the employee share trust) or by way of financing the
employee share trusts to purchase already issued shares in the market. This decision is made according to available headroom within
the dilution limits contained in the relevant share plan rules and what the Directors consider to be in the best interest of the
Company at the time.
Grant date
14 June 2014
29 January 2015
14 June 2014
11 June 2015
2 November 2015
11 June 2015
15 June 2016
15 June 2016
15 June 2016
12 October 2016
15 June 2016
14 June 2017
14 June 2017
14 June 2017
14 June 2017
13 June 2018
13 June 2018
13 June 2018
13 June 2018
Type
PSP1
PSP1
DBMP2
PSP1
PSP1
DBMP2
DBP4
DBP3
PSP1
PSP1
DBMP2
DBP3
DBP4
PSP1
PSP1
DBP3
DBP4
PSP1
PSP1
2019
Number
–
–
–
–
24,279
62,845
–
2018
Exercise period
Number
55,731
12/06/2017 – 12/06/2018
3,761
29/01/2018 – 29/01/2019
34,162
12/06/2017 – 12/06/2018
23,897 1,512,199
11/06/2018 – 11/06/2019
27,388
02/11/2018 – 02/11/2019
900,438
11/06/2018 – 11/06/2019
62,845
15/06/2019 – 15/06/2020
15/06/2018 – 15/06/2019
14,714
15/06/2019 – 15/06/2020 1,786,612 1,951,615
12/10/2019 – 12/10/2020
27,578
474,699
15/06/2019 – 15/06/2020
103,246
14/06/2019 – 14/06/2020
14/06/2020 – 14/06/2021
186,949
14/06/2020 – 14/06/2021 1,507,664 1,769,338
839,723
902,424
14/06/2022 – 14/06/2023
–
84,207
13/06/2020 – 13/06/2021
–
13/06/2021 – 13/06/2022
187,433
–
14/06/2021 – 14/06/2022 1,628,113
–
860,157
14/06/2023 – 14/06/2024
7,747,703 8,027,087
27,578
444,648
91,284
179,263
Options granted to Directors are summarised in the Remuneration report on pages 101 to 131 and are included in the outstanding
options set out above.
1. 2009 Performance Share Plan.
2. 2012 Deferred Bonus Matching Plan.
3. Award issued without matching shares, has two–year vesting period.
4. Award issued without matching shares, has three–year vesting period.
190 Babcock International Group PLC Annual Report and Accounts 2019
190 Babcock International Group PLC Annual Report and Accounts 2019
23. Share capital (continued)
The table below shows shares already held by the trustees of the BEST and PEST in order to meet these awards.
BEST
PEST
Total
A reconciliation of PSP and DBMP movements is shown below:
Outstanding at 1 April
Granted
Exercised
Forfeited/lapsed
Outstanding at 31 March
Exercisable at 31 March
2019
2018
Shares newly
issued by the
Company
–
–
–
Shares
bought in
the market
239,862
–
239,862
Shares newly
issued by the
Company
Shares
bought in
the market
– 1,051,973
2,748
15,000
2,748 1,066,973
2019
Number
’000
8,027
2,838
(830)
(2,287)
7,748
48
2018
Number
’000
7,425
3,016
(800)
(1,614)
8,027
94
The weighted average share price for awards exercised during the year was 832.3p per share (2018: 856.3p per share).
During the year no ordinary shares (2018: 600,000 shares) were acquired or subscribed for through either the Babcock Employee
Share Trust or the Peterhouse Employee Share Trust (together ‘the Trusts’). The Trusts hold shares to be used towards satisfying
awards made under the Company’s employee share schemes. During the year ended 31 March 2019, 829,859 shares (2018:
799,726 shares) were disposed of by the Trusts resulting from options exercised. At 31 March 2019, the Trusts held between them
a total of 239,862 ordinary shares (2018: 1,069,721 ordinary shares) at a total market value of £1,183,719 (2018: £7,154,294)
representing 0.05% (2018: 0.21%) of the issued share capital at that date. The Company elected to pay dividends to the Babcock
Employee Share Trust at the rate of 0.001p per share during the year, though full dividends were paid in respect of shares held
by the Peterhouse Employee Share Trust. The Company meets the operating expenses of the Trusts. In July 2018 the Peterhouse
Employee Share Trust was closed and the remaining13,663 ordinary shares were transferred to the Babcock Employee Share Trust.
The Trusts enable shares in the Company to be held or purchased and made available to employees through the exercise of rights or
pursuant to awards made under the Company’s employee share schemes. The Trusts are discretionary settlements for the benefit of
employees within the Group. The Company is excluded from benefiting under them. They are controlled and managed outside the
UK and each has a single corporate trustee which is an independent trustee services organisation. The right to remove and appoint
the trustees rests ultimately with the Company. The trustee of the Babcock Employee Share Trust is required to waive both voting
rights and dividends payable on any share in the Company in excess of 0.001p, unless otherwise directed by the Company, but the
trustee of the Peterhouse Employee Share Trust does not have the power to waive dividends due on Babcock ordinary shares and
therefore receives the full amount of any dividends declared.
Babcock International Group PLC Annual Report and Accounts 2019 191
Babcock International Group PLC Annual Report and Accounts 2019 191
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
24. Share-based payments
The charge to the income statement has been based on the assumptions below and is based on the binomial model as adjusted,
allowing for a closed form numerical-integrated solution, which makes it analogous to the Monte Carlo simulations, including
performance conditions. The detailed description of the plans below is included within the Remuneration report.
During the year the total charge relating to employee share-based payment plans was £2.4 million (2018: £6.4 million), all of which
related to equity-settled share-based payment transactions.
After tax, the income statement charge was £2.0 million (2018: £5.2 million).
The fair value per option granted and the assumptions used in the calculation are as follows:
DBMP, PSPs and DBP1
Options
awarded
Number
860,157
1,699,32
187,433
90,777
902,424
1,769,33
186,949
103,246
479,065
2,085,42
14,714
62,845
27,578
Share price
at grant or
modification
date
Pence
856.0
856.0
856.0
856.0
905.5
905.5
905.5
905.5
974.5
974.5
974.5
974.5
991.0
Expected
volatility
%
14.0%
14.0%
14.0%
14.0%
15.0%
15.0%
15.0%
15.0%
14.0%
14.0%
14.0%
14.0%
14.0%
Expectations
of meeting
performance
criteria –
EPS/ROCE
%
–
–
100%
100%
–
–
100%
100%
13%
15%
100%
100%
15%
Option life
Years
6.0
4.0
4.0
3.0
6.0
4.0
4.0
3.0
4.0
4.0
3.0
4.0
3.75
Fair value
per option –
TSR
Pence
370.9
370.9
–
–
131.2
131.2
–
–
379.1
389.9
–
–
396.4
Fair value
per option –
EPS/ROCE
Pence
856.0
856.0
856.0
856.0
905.5
905.5
905.5
905.5
974.5
974.5
974.5
974.5
991.0
Correlation
%
Grant or
modification
date
56% 13/06/18
56% 13/06/18
56% 13/06/18
56% 13/06/18
46% 14/06/17
46% 14/06/17
46% 14/06/17
46% 14/06/17
46% 15/06/16
46% 15/06/16
46% 15/06/16
46% 15/06/16
46% 12/10/16
2018 PSP
2018 PSP
2018 DBP
2018 DBP
2017 PSP
2017 PSP
2017 DBP
2017 DBP
2016 DBMP Matching
2016 PSP
2016 DBP
2016 DBP
2016 PSP
Both the vesting period and the expected life of all DBMP and PSP awards is three years, but for the DBP it is two years, other than
for Executive Directors where the vesting period is three years. The holders of all awards receive dividends.
The DBMP Matching and PSP awards are split evenly between the performance criteria of TSR, EPS and ROCE, except that in 2015
the PSP awards were split evenly between TSR and EPS. There are no performance conditions attached to the DBP.
The expected volatility is based on historical volatility over the last one to three years. The expected life is the average expected
period to exercise. The risk free rate of return is the yield on zero-coupon government bonds of a term consistent with the assumed
option life.
The Group also operates the Babcock Employee Share Plan which allows employees to contribute up to £150 per month to the
fund, which then purchases shares on the open market on the employees’ behalf. The Group provides matching shares, purchased
on the open market, of one share for every 10 purchased by the employee. During the year the Group bought 92,772 matching
shares (2018: 79,475 matching shares) at a cost of £0.6 million (2018: £0.6 million).
The Group also operates the Babcock Employee Share Plan International which reflects the structure of the UK Plan. During the year
82 matching shares vested (2018: nil) leaving a balance of 918 matching shares (2018: 1,000 matching shares).
1. DBMP = 2012 Deferred Bonus Matching Plan, PSP = 2009 Performance Share Plan and DBP = 2012 Deferred Bonus Plan.
192 Babcock International Group PLC Annual Report and Accounts 2019
192 Babcock International Group PLC Annual Report and Accounts 2019
25. Retirement benefits and liabilities
Defined contribution schemes
Pension costs for defined contribution schemes are as follows:
Defined contribution schemes
Defined benefit schemes
Balance sheet assets and liabilities recognised are as follows:
Retirement benefits – funds in surplus
Retirement benefits – funds in deficit
2019
£m
69.5
2018
£m
65.6
2019
£m
226.9
(254.9)
(28.0)
2018
£m
240.1
(245.1)
(5.0)
The Group provides a number of pension schemes for its employees. The principal defined benefit pension schemes for employees 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). The nature of these schemes is that the employees contribute to the schemes
with the employer paying the balance of the cost required. The contributions required and the assessment of the assets and the
liabilities that have accrued to members and any deficit recovery payments required are agreed by the Group with the trustees
who are advised by independent, qualified actuaries.
The key risks in all of the defined benefit schemes relate primarily to longevity, the expected inflation rate in the future which
impacts on pension increases and indirectly salary increases, and the discount rate used to value the liabilities. The Principal
schemes have mitigated some of these risks by taking out longevity swaps in respect of pensioners and their spouses at the time,
through a common investment strategy which has significantly hedged the interest rate and inflation risk through derivative
instruments, and introduced benefit changes in 2014 and 2015 impacting future service benefits which included capping of
pensionable salaries, capping pension increases, increased normal retirement age in line with state pension ages and increased
the level of members’ contributions.
The Group also participates in the Babcock Rail Shared Cost Section of the Railways Pension Scheme (the Railways scheme). This
scheme is a multi-employer shared cost scheme with the contributions required, the assessment of the assets and the liabilities
that have accrued to members and any deficit recovery payments all agreed with the trustees who are advised by an independent,
qualified actuary. The costs are, in the first instance, shared such that the active employees contribute 40% of the cost of providing
the benefits and the employer contributes 60%. However the assumption is that as the active membership reduces, the liability will
ultimately revert to the Group. The Group’s share of the assets and liabilities is separately identified to those of other employers in
the scheme and therefore the Group cannot be held liable for the obligations of other entities that participate in this scheme.
The schemes are prudently funded by payments to legally separate trustee-administered funds. The trustees of each scheme are
required by law to act in the best interests of each scheme’s members. In addition to determining future contribution requirements
(with the agreement of the Group), the trustees are responsible for setting the schemes’ investment strategy (subject to consultation
with the Group). All the schemes have at least one independent trustee and member nominated trustees. The schemes are subject
to regulation under the funding regime set out in Part III of the Pensions Act 2004. The detail of the latest formal actuarial valuation
of the scheme is as follows. The next valuations of the Babcock International Group Pension Scheme and the Rosyth Royal Dockyard
scheme are currently being undertaken:
Date of last formal completed actuarial valuation
Number of active members at above date
Actuarial valuation method
Results of formal actuarial valuation:
Value of assets
Level of funding
Devonport
Royal Dockyard
Scheme
Babcock
International
Group Scheme
Babcock Rail Ltd
section of the
Railways Pension
Scheme
31/03/2017 31/03/2016 31/03/2015 31/12/2016
279
Projected unit Projected unit Projected unit Projected unit
Rosyth
Royal Dockyard
Scheme
1,103
2,241
829
£1,860.8m £1,230.0m
91%
91%
£714.0m
74%
£253.9m
90%
The Group also participates in or provides a number of other smaller pension schemes including a number of sections of the local
government pension schemes where in most cases the employer contribution rates are fully reimbursed by the administering
authorities. It also participates in the Magnox Electric Group of the Electricity Supply Pension Scheme and runs the Babcock Naval
Services Pension Scheme for which the MOD fully reimburses the contributions payable.
Babcock International Group PLC Annual Report and Accounts 2019 193
Babcock International Group PLC Annual Report and Accounts 2019 193
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
25. Retirement benefits and liabilities (continued)
The Group’s cash contribution rates payable to the schemes are as follows:
Future service contribution rate
Future service cash contributions
Deficit contributions
Longevity swap payments
Expected employer cash costs for 2019/20
Expected salary sacrifice contributions
Expected total employer contributions
Devonport
Royal Dockyard
Scheme
23.7%
£15.8m
£18.6m
£7.3m
£41.7m
£5.7m
£47.4m
Babcock
International
Group
Scheme
29.9%
£8.5m
£8.5m
£3.6m
£20.6m
£1.1m
£21.7m
Rosyth Royal
Dockyard
Scheme
21.5%
£4.4m
£17.5m
£4.4m
£26.3m
£1.8m
£28.1m
Babcock Rail
Ltd section of
the Railways
Pension
Scheme
11.1%
£0.7m
£1.3m
–
£2.0m
£1.2m
£3.2m
Other
–
£1.2m
£1.3m
–
£2.5m
£0.2m
£2.7m
Total
–
£30.6m
£47.2m
£15.3m
£93.1m
£10.0m
£103.1m
Where salary sacrifice arrangements are in place, the Group effectively meets the members’ contributions. The above level of
funding is expected to continue until the next actuarial valuation of each scheme; valuations are carried out every three years.
The expected payments from the schemes are primarily pension payments and lump sums. Most of the pensions increase at a fixed
rate or in line with RPI or CPI inflation when in payment. Benefit payments commence at retirement, death or incapacity and are
predominantly calculated with reference to final salary. The level of deficit contributions reflected above are expected to continue
until technical provisioning funding levels are met either through asset performance or funding. The current discussions regarding
the Rosyth Royal Dockyard Scheme are expected to require an increased level of funding.
Although the Group anticipates that scheme surpluses will be utilised during the life of the scheme to address member benefits, the
Group recognises its retirement benefit surpluses in full in respect of the schemes in surplus, on the basis that it is management’s
judgement that there are no substantive restrictions on the return of residual scheme assets in the event of a winding-up of the
scheme after all member obligations have been met. The Group also considers that the trustees do not have the power to
unilaterally wind up the schemes or vary benefits.
The latest full actuarial valuations of the Group’s defined benefit pension schemes have been updated to 31 March 2019 by
independent qualified actuaries for IAS 19 purposes, on a best estimate basis, using the following assumptions:
March 2019
Rate of increase in pensionable salaries
Rate of increase in pensions (past service)
Discount rate
Inflation rate (RPI)
Inflation rate (CPI)
Weighted average duration of cashflows (years)
Total life expectancy for current pensioners aged 65 (years)
Total life expectancy for future pensioners currently aged 45 (years)
March 2018
Rate of increase in pensionable salaries
Rate of increase in pensions (past service)
Discount rate
Inflation rate (RPI)
Inflation rate (CPI)
Weighted average duration of cashflows (years)
Total life expectancy for current pensioners aged 65 (years)
Total life expectancy for future pensioners currently aged 45 (years)
Devonport
Royal
Dockyard
Scheme
2.3%
2.2%
2.4%
3.2%
2.1%
17
85.6
86.6
Babcock
International
Group Scheme
2.3%
3.0%
2.4%
3.2%
2.1%
16
86.7
87.7
Rosyth Royal
Dockyard
Scheme
2.3%
3.3%
2.4%
3.2%
2.1%
18
84.7
85.7
Babcock Rail
Ltd section of
the Railways
Pension
Scheme
2.3%
2.2%
2.4%
3.2%
2.1%
17
85.7
86.8
2.2%
2.2%
2.6%
3.1%
2.0%
17
86.1
87.2
2.2%
2.9%
2.6%
3.1%
2.0%
15
87.2
88.2
2.2%
3.2%
2.6%
3.1%
2.0%
17
85.2
86.3
2.2%
2.2%
2.6%
3.1%
2.0%
18
86.1
87.4
194 Babcock International Group PLC Annual Report and Accounts 2019
194 Babcock International Group PLC Annual Report and Accounts 2019
25. Retirement benefits and liabilities (continued)
The fair value of the assets and the present value of the liabilities of the Group pension schemes at 31 March were as follows:
2019
2018
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Fair value of plan assets
Growth assets
Equities
Property
Absolute return and multi-strategy
funds
Low risk assets
Bonds
Matching assets*
Active position on longevity swaps
Fair value of assets
Percentage of assets quoted
Percentage of assets unquoted
Present value of defined
benefit obligations
Active members
Deferred pensioners
Pensioners
Total liabilities
Deficit/(surplus)
Present value of unfunded obligations
Net liabilities/(assets) recognised
in the balance sheet
1,267.4
337.2
15.0
5.6
24.9
1.9
1,307.3
344.7
892.2
305.5
15.7
7.8
64.8
7.9
972.7
321.2
127.6
192.1
18.8
338.5
78.5
158.6
16.1
253.2
822.9
1,736.7
(187.1)
4,104.7
100%
–
1,075.0
947.4
2,037.9
4,060.3
(44.4)
–
33.3
0.6
–
246.6
100%
–
93.7
86.2
131.2
311.1
64.5
–
98.3
87.0
–
230.9
100%
–
113.5
63.8
61.5
238.8
7.9
–
954.5
1,824.3
(187.1)
4,582.2
100%
–
1,282.2
1,097.4
2,230.6
4,610.2
28.0
–
1,165.3
1,869.7
(168.0)
4,143.2
100%
–
1,257.1
929.0
1,879.7
4,065.8
(77.4)
–
57.7
–
–
239.8
100%
–
91.1
83.8
123.9
298.8
59.0
–
95.1
168.0
–
351.9
100%
–
201.2
88.3
85.6
375.1
23.2
0.2
1,318.1
2,037.7
(168.0)
4,734.9
100%
–
1,549.4
1,101.1
2,089.2
4,739.7
4.8
0.2
(44.4)
64.5
7.9
28.0
(77.4)
59.0
23.4
5.0
* The matching assets aim to hedge the liabilities and consist of gilts, repos, cash and swaps. They are shown net of repurchase obligations of £1,655 million
(2018: £1,977 million).
The schemes do not invest directly in assets or shares of the Group.
The longevity swaps have been valued in line with assumptions that are consistent with the requirements of IFRS 13, the valuation of
which is equal to the amount of collateral posted by the schemes as at balance sheet date. This is a level 3 derivative and the key
inputs to the valuation are the discount rate and mortality assumptions.
The amounts recognised in the Group income statement are as follows:
Current service cost
Incurred expenses
Past service costs
Settlements*
Total included within operating
profit
Net interest (credit)/cost
Total included within income
statement
2019
2018
Principal
schemes
£m
34.2
3.4
24.3
4.8
66.7
(2.3)
64.4
Railways
scheme
£m
2.7
0.2
1.0
–
3.9
1.5
5.4
Other
schemes
£m
2.0
0.2
0.6
(12.8)
(10.0)
0.5
Total
£m
38.9
3.8
25.9
(8.0)
60.6
(0.3)
Principal
schemes
£m
37.7
3.7
–
–
41.4
0.3
(9.5)
60.3
41.7
Railways
scheme
£m
3.2
0.2
–
–
3.4
1.6
5.0
Other
schemes
£m
2.4
0.1
–
–
2.5
0.4
2.9
Total
£m
43.3
4.0
–
–
47.3
2.3
49.6
* Settlement gain in Other schemes is offset by movements in contract balances and is accordingly not classified as exceptional.
Babcock International Group PLC Annual Report and Accounts 2019 195
Babcock International Group PLC Annual Report and Accounts 2019 195
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
25. Retirement benefits and liabilities (continued)
On 26 October, the High Court handed down a judgment involving the Lloyds Banking Group’s defined benefit pension schemes. The judgment
concluded the schemes should be amended to equalise pension benefits for men and women in relation to guaranteed minimum pension benefits.
The issues determined by the judgment arise in relation to many other defined benefit pension schemes. The past service costs totalling
£26.0 million reflect our estimate of the extent to which the judgment crystallises additional liabilities for our pension schemes.
The settlement cost for the Principal schemes is due to a transfer of liability for members who were previously in the Principal Civil
Service Pension Scheme back into that scheme.
The settlement credit for the other schemes is due to the termination of a contract that included employees in a section of the local
government pension schemes. Responsibility for those employees’ pension entitlements has now passed back to the local authority.
When the contract was terminated, the fair value of plan assets was greater than the present value of defined benefit obligations
and the Group was not liable for that difference.
Amounts recorded in the Group statement of comprehensive income
Actual return less interest on pension
scheme assets
Experience (losses)/gains arising on
scheme liabilities
Changes in assumptions on
scheme liabilities
At 31 March
2019
2018
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
110.3
6.1
20.8
137.2
53.5
(1.5)
8.8
60.8
(35.7)
(5.5)
3.0
(38.2)
(35.8)
–
6.2
(29.6)
(131.6)
(57.0)
(5.1)
(4.5)
(20.7)
3.1
(157.4)
(58.4)
33.2
50.9
4.9
3.4
(19.6)
(4.6)
18.5
49.7
Analysis of movement in the Group balance sheet
2019
2018
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Fair value of plan assets (including
reimbursement rights)
At 1 April
Interest on assets
Actuarial gain/(loss) on assets
Employer contributions
Employee contributions
Benefits paid
Settlements
At 31 March
Present value of benefit obligations
At 1 April
Service cost
Incurred expenses
Interest cost
Employee contributions
Experience loss/(gain)
Actuarial (gain)/loss – demographics
Actuarial loss /(gain)– financial
Benefits paid
Past service costs
Settlements
At 31 March
Present value of unfunded obligations
Net deficit/(surplus) at 31 March
4,143.2
105.5
110.3
88.4
0.4
(301.4)
(41.7)
4,104.7
4,065.8
34.2
3.4
103.2
0.4
35.7
(35.4)
167.0
(301.4)
24.3
(36.9)
4,060.3
–
(44.4)
239.8
6.1
6.1
4.4
–
(9.8)
–
246.6
298.8
2.7
0.2
7.6
–
5.5
(9.3)
14.4
(9.8)
1.0
–
311.1
–
64.5
351.9
3.8
20.8
2.7
0.1
(28.2)
(120.2)
230.9
375.1
2.0
0.2
4.3
0.1
(3.0)
(2.5)
23.2
(28.2)
0.6
(133.0)
238.8
–
7.9
4,734.9
115.4
137.2
95.5
0.5
(339.4)
(161.9)
4,582.2
4,739.7
38.9
3.8
115.1
0.5
38.2
(47.2)
204.6
(339.4)
25.9
(169.9)
4,610.2
–
28.0
4,088.9
105.3
53.5
92.4
0.5
(197.4)
–
4,143.2
4,113.1
37.7
3.7
105.6
0.5
35.8
(0.8)
(32.4)
(197.4)
–
–
4,065.8
–
(77.4)
241.4
6.2
(1.5)
4.2
–
(10.5)
–
239.8
303.0
3.2
0.2
7.8
–
–
(1.2)
(3.7)
(10.5)
–
–
298.8
–
59.0
345.9 4,676.2
115.8
60.8
99.4
0.7
(218.0)
–
351.9 4,734.9
4.3
8.8
2.8
0.2
(10.1)
–
2.4
0.1
4.7
0.2
(6.2)
2.1
17.5
(10.1)
–
–
364.4 4,780.5
43.3
4.0
118.1
0.7
29.6
0.1
(18.6)
(218.0)
–
–
375.1 4,739.7
0.2
5.0
0.2
23.4
The movement in net deficits for the year ending 31 March 2019 is as a result of the movement in assets and liabilities shown above.
196 Babcock International Group PLC Annual Report and Accounts 2019
196 Babcock International Group PLC Annual Report and Accounts 2019
25. Retirement benefits and liabilities (continued)
The changes to the Group balance sheet at March 2019 and the charges to the Group income statement for the year to March 2020,
if the assumptions were sensitised by the amounts below, would be:
Initial assumptions
Discount rate assumptions increased by 0.5%
Discount rate assumptions decreased by 0.5%
Inflation rate assumptions increased by 0.5%
Inflation rate assumptions decreased by 0.5%
Total life expectancy increased by half a year
Total life expectancy decreased by half a year
Salary increase assumptions increased by 0.5%
Salary increase assumptions decreased by 0.5%
Defined
benefit
obligations
2019
£m
4,610.2
(355.8)
355.8
284.9
(257.4)
91.1
(91.1)
58.2
(58.2)
Income
statement
2020
£m
43.3
(19.3)
7.7
9.3
(8.6)
2.7
(2.7)
2.5
(2.5)
The figures in the table above have been calculated on an approximate basis, using information about the expected future benefit
payments out of the schemes. The analysis above may not be representative of actual changes to the position since changes in
assumptions are unlikely to happen in isolation. The change in inflation rates is assumed to affect the assumed rate of RPI inflation,
CPI inflation and future pension increases by an equal amount. The fair value of the schemes’ assets (including reimbursement rights)
are assumed not to be affected by any sensitivity changes shown and so the balance sheet values would increase or decrease by the
same amount as the change in the defined benefit obligations.
26. Movement in net debt
(Decrease)/increase in cash in the year
Cash flow from the increase in debt and lease financing
Change in net funds resulting from cash flows
New finance leases – granted
Movement in joint venture and associate loans
Foreign currency translation differences
Movement in net debt in the year
Net debt at the beginning of the year
Net debt at the end of the year
27. Changes in net debt
Cash and bank balances
Bank overdrafts
Cash, cash equivalents and bank overdrafts
Debt
Finance leases – received
Finance leases – granted
Net debt before derivatives and joint ventures
and associates loans
Net debt derivative
Joint ventures and associates loans
Net debt
2019
£m
(5.6)
(27.4)
(33.0)
176.6
14.7
(1.0)
157.3
(1,115.0)
(957.7)
2018
£m
106.9
(43.7)
63.2
28.1
(4.5)
(28.3)
58.5
(1,173.5)
(1,115.0)
31 March
2018
£m
286.3
–
286.3
(1,432.2)
(91.1)
46.5
(1,476.8)
(1,190.5)
47.7
27.8
(1,115.0)
Cash flow
£m
(35.1)
–
(35.1)
103.4
26.4
(157.2)
(27.4)
(62.5)
–
14.7
(47.8)
Disposal of
subsidiaries
£m
29.5
–
29.5
–
–
–
–
29.5
–
–
29.5
New finance
leases
£m
–
–
–
–
–
176.6
176.6
176.6
–
–
176.6
Exchange
movement
£m
(5.5)
–
(5.5)
(16.9)
(1.1)
(5.0)
(23.0)
31 March
2019
£m
275.2
–
275.2
(1,345.7)
(65.8)
60.9
(1,350.6)
(28.5)
27.5
–
(1.0)
(1,075.4)
75.2
42.5
(957.7)
Babcock International Group PLC Annual Report and Accounts 2019 197
Babcock International Group PLC Annual Report and Accounts 2019 197
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
28. Acquisitions
There were no acquisitions in the year nor in the previous year.
29. Disposal of subsidiaries, businesses and joint ventures and associates
In September 2018 the Group disposed of its media business for £28.7 million, which resulted in a profit of £14.0 million. In the
second half of the year three further disposals were made for a total consideration of £11.4 million, which resulted in a profit on
disposal of £0.8 million.
During the previous year the Group disposed of its schools infrastructure business, which resulted in a loss of £0.9 million.
During both the current and previous years the Group paid certain accrued costs on previously disposed of businesses of
£0.8 million (2018: £2.0 million).
Goodwill
Investment in joint ventures and associates
Property, plant and equipment
Inventory
Current assets
Cash, cash equivalents and bank
overdrafts
Current liabilities
Provisions
Net assets disposed
Disposal costs
Deferred consideration
Profit on disposal of subsidiary
Sale proceeds
Sale proceeds less cash disposed of
Less costs paid in the period
Net cash inflow/(outflow)
2019
Babcock
Media
Services
£m
7.1
–
1.4
7.4
4.0
Babcock
4S Limited
£m
–
–
–
–
0.5
Powerlines
£m
–
–
3.6
–
–
Helidax
S.A.S
£m
–
6.6
–
–
–
Previously
disposed of
business
£m
–
–
–
–
–
Schools
Infrastructure
business
£m
–
1.8
–
–
–
Total
£m
7.1
6.6
5.0
7.4
4.5
2.6
(9.6)
–
12.9
1.8
–
14.0
28.7
26.1
(1.8)
24.3
4.9
(2.2)
(0.9)
2.3
1.3
–
(1.5)
2.1
(2.8)
(0.5)
(3.3)
–
–
–
3.6
–
(3.2)
(0.1)
0.3
0.3
–
0.3
–
–
–
6.6
–
–
2.4
9.0
9.0
–
9.0
–
–
–
–
–
–
–
–
–
(0.8)
(0.8)
7.5
(11.8)
(0.9)
25.4
3.1
(3.2)
14.8
40.1
32.6
(3.1)
29.5
–
0.3
–
2.1
0.6
–
(0.9)
1.8
1.8
–
1.8
2018
Previously
disposed of
business
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
(2.0)
(2.0)
Total
£m
–
1.8
–
–
–
–
0.3
–
2.1
0.6
–
(0.9)
1.8
1.8
(2.0)
(0.2)
30. Transactions with non-controlling interests
In September 2018, one of the Group’s subsidiaries in South Africa, Babcock Ntuthuko Engineering, issued an additional 2.9% of its
share capital to its non-controlling interest partner for £1.9 million. It also issued further restricted shares, which employ Notional
Vendor Financing, to give the non-controlling interest partner 48.5% of the business. However, for as long as the Notional Vendor
Amount is greater than zero the holders of the restricted shares shall not be entitled to receive any distributions.
In November 2018 Cognac Formation Aero France was created with a 10% non-controlling interest and the FOMEDEC business was
transferred into this company.
During the previous year the put option in respect of the non-controlling interest in Scandinavian AirAmbulance AB was exercised
resulting in the Group paying £5.3 million plus deferring a further payment of £2.4 million for a year, in order to acquire the balance
of the share capital in that company. The £2.4 million was paid in the year to March 2019.
A reconciliation to the Group statement of changes in equity and the Group cash flow statement is shown below:
Babcock Ntuthuko Engineering
Cognac Formation Aero France
Scandinavian AirAmbulance AB
Total
Cash flow
statement
£m
1.9
–
(2.4)
(0.5)
Retained
earnings
£m
(0.2)
(1.8)
–
(2.0)
Non-controlling
interest
£m
2.1
1.8
–
3.9
Total equity
£m
1.9
–
–
1.9
198 Babcock International Group PLC Annual Report and Accounts 2019
198 Babcock International Group PLC Annual Report and Accounts 2019
31. Operating lease commitments – minimum lease payments
Commitments under non-cancellable operating leases payable:
Within one year
Later than one year and less than five years
After five years
2019
2018
Property
£m
Vehicles, plant
and equipment
£m
29.5
78.8
33.1
141.4
121.5
320.6
102.0
544.1
Property
£m
29.9
82.3
61.6
173.8
Vehicles, plant
and equipment
£m
126.9
287.0
114.2
528.1
The Group leases various offices and warehouses under non-cancellable operating lease agreements. The leases have various terms,
escalation clauses and renewal rights. The Group also leases plant and machinery under non-cancellable operating leases.
Included within the above are £496.9 million (2018: £389.5 million) of operating lease commitments which are matched in time
to customer contracts and are directly attributable to them.
Adoption of IFRS 16, ‘Leases’
IFRS 16 has become effective from 1 January 2019 and replaces IAS 17, ‘Leases’ as the definitive accounting standard for the
recognition, measurement and disclosure of leases. The Group has adopted the standard from 1 April 2019.
Under the new standard, lessees will recognise almost all leases on the balance sheet as the distinction between finance leases and
operating leases is removed. Both short-term leases and low-value leases are exempt from IFRS 16, and instead their lease payments
can be recognised as expenses on a straight-line basis. The approach for lessors remains largely unchanged.
The Group has adopted the modified retrospective transition approach, with the right-of-use assets measured at the amount of the
lease liability on the date of transition for the majority of leases. The lease liability is calculated as the present value of the minimum
lease payments on the date of transition. For a number of high value property and aircraft leases however, the right-of-use assets
have been calculated as if the leases had always existed and their value on the date of transition is measured as the present value
of the minimum lease payments at the inception date less accrued depreciation and any impairments. The difference between the
right-of-use assets and lease liabilities on the date of transition is taken to retained earnings. Comparative figures will not be restated
for the year ended 31 March 2019.
The following practical expedients have been adopted on transition:
• Single discount rates have been applied to portfolios of leases with similar characteristics
• IFRS 16 has only been applied to contracts that were previously classified as leases
• For leases with onerous lease provisions recognised against them immediately prior to the date of transition, the provisions have
been utilised and offset against the right-of-use assets on the date of transition
• Initial direct costs have been excluded from the measurement of right-of-use assets on the date of transition
• The lease term has been determined with the use of hindsight where the contract contains options to extend the lease
The financial impact of adopting the new standard may change from the current estimates detailed below due to:
• Changes in the Group’s lease portfolio, with leases ending and starting frequently throughout the year
• Changes in assumptions relating to lease end dates and future lease payment amounts
• Foreign exchange differences
Impact on financial statements
On 1 April 2019:
• The Group will recognise a lease liability of £605.7 million and a right-of-use asset of £559.2million, with a corresponding debit
to retained earnings of £20.1 million net of a deferred tax asset of £5.0 million and a debit to provisions of £21.4 million in
respect of onerous leases
• The vast majority of the lease liability relates to property and aircraft
For the year ending 31 March 2020:
• Operating profit is expected to increase by approximately £25 million as the depreciation charge is estimated to be lower than
the operating lease charge under IAS 17. However, the increase in finance costs is expected to offset this, causing an immaterial
increase in profit before tax
• EBITDA is expected to increase by an estimated £150 million
The adoption of IFRS 16 does not impact the lending covenants of the Group’s existing facilities as they are based on accounting
standards applicable when the facilities were granted.
Babcock International Group PLC Annual Report and Accounts 2019 199
Babcock International Group PLC Annual Report and Accounts 2019 199
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
31. Operating lease commitments – minimum lease payments (continued)
Adoption of IFRS 16, ‘Leases’ (continued)
The impact on the Group balance sheet at 1 April 2019 is reflected below:
Non-current assets
Right-of-use assets
Deferred tax asset
Total assets
Equity and liabilities
Retained earnings
Total equity
Non-current liabilities
Lease liabilities
Provisions
Total non-current liabilities
Current liabilities
Lease liabilities
Provisions
Total current liabilities
Total equity and liabilities
£m
559.2
5.0
564.2
(20.1)
(20.1)
510.6
(6.7)
503.9
95.1
(14.7)
80.4
564.2
The table below explains the difference between the total operating lease commitments recognised under IAS 17 as at 31 March
2019 and the total lease liability recognised on transition to IFRS 16 as at 1 April 2019.
Operating lease commitments at 31 March 2019
Effect of discounting
Change in assessment of lease term
IFRS lease liability at 1 April 2019
32. Contingent liabilities
£m
685.5
(82.8)
3.0
605.7
(a) In February 2019, the Italian Competition Authority (the ICA) notified Babcock Mission Critical Services Italia SpA (BMCS Italia) of
its decision to fine a number of companies, which provide helicopter services in Italy for anti-trust violations and are members
of the Italian Helicopter Association (the Association). The ICA found that a number of companies, but not BMCS Italia, had
engaged in bid-rigging activities in the aerial rotary wing fire-fighting sector, a sector in which BMCS Italia does not operate.
At the same time, the ICA, after investigation, found that there was no bid-rigging in the helicopter emergency medical services
sector, the sector in which BMCS Italia does operate. However, during the course of its investigation, the ICA became aware of a
publicly available “tariff list” produced by the Association since 2001 and, on the basis of the list, decided to fine the members
of the Association, including BMCS Italia. The fine for BMCS Italia was €51 million.
BMCS Italia has appealed the ICA’s decision and has reasonable grounds to believe the court will either overturn the fine
altogether or substantially reduce it. Accordingly, no provision for settlement has been made as at 31 March 2019 as the
Directors do not believe any likely settlement will be material.
(b) Pursuant to the Rosyth Dockyard privatisation agreement, the MOD will share in the net proceeds of sale or development of the
dockyard following planning enhancement, on terms set out in the asset purchase agreement between the RRDL and the MOD
dated 30 January 1997. By way of security for the MOD’s rights to such share, the Company has granted a fixed charge
(standard security) over the dockyard in favour of the Authority.
(c) The Group has given certain indemnities and warranties in the course of disposing of businesses and companies and in completing
contracts. The Group believes that any liability in respect of these is unlikely to have a material effect on the Group’s financial position.
(d) The Group is involved in disputes and litigation which have arisen in the course of normal trading. The Directors do not believe
that the outcome of these matters will result in any material adverse change in the Group’s financial position.
(e) As part of its role in the Submarine Enterprise Performance Programme, the Group has provided a £9 million financial guarantee
for a supplier to ensure continuity of supply.
200 Babcock International Group PLC Annual Report and Accounts 2019
200 Babcock International Group PLC Annual Report and Accounts 2019
33. Capital and other financial commitments
Contracts placed for future capital expenditure not provided in the financial statements
34. Related party transactions
2019
£m
12.2
2018
£m
11.8
(a) The following related parties either sell to or receive services from the Group. Loans to joint ventures and associates are detailed
in note 14.
2019
Joint ventures and associates
Holdfast Training Services Limited
ABC Electrification Limited
First Swietelsky Operation and Maintenance
FSP (2004) Limited
Ascent Flight Training (Management) Limited
Rotary Wing Training Limited
Fixed Wing Training Limited
Advanced Jet Training Limited
Rear Crew Training Limited
AirTanker Services Limited
Alert Communications Limited
Naval Ship Management (Australia) Pty Limited
Cura Classis (UK) Limited
Cura Classis (US) LLC
Cura Classis Canada (Hold Co) Inc.
Cavendish Dounreay Partnership Limited
Cavendish Fluor Partnership Limited
Cavendish Boccard Nuclear Limited
2019
Revenue to
£m
2019
Purchases
from
£m
2019
Year end
debtor
balance
£m
2019
Year end
creditor
balance
£m
69.6
–
9.9
–
1.1
3.3
4.6
2.4
1.0
12.3
4.1
4.9
1.7
1.5
3.9
5.5
32.9
3.4
162.1
(0.1)
–
–
(0.1)
–
–
–
–
–
–
–
–
–
–
–
(0.1)
(0.1)
–
(0.4)
–
4.6
–
–
5.0
–
0.4
0.3
–
0.3
0.4
–
–
–
–
0.2
0.2
–
11.4
–
–
(0.8)
–
–
–
–
–
–
–
(0.2)
–
–
–
–
–
–
–
(1.0)
Babcock International Group PLC Annual Report and Accounts 2019 201
Babcock International Group PLC Annual Report and Accounts 2019 201
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
34. Related party transactions (continued)
2018
Joint ventures and associates
Holdfast Training Services Limited
ABC Electrification Limited
First Swietelsky Operation and Maintenance
FSP (2004) Limited
Ascent Flight Training (Management) Limited
Ascent Flight Training Holdings Limited
Fixed Wing Training Limited
Rear Crew Training Limited
AirTanker Services Limited
Alert Communications Limited
ALC (Superholdco) Limited
Naval Ship Management (Australia) Pty Limited
Cura Classis (UK) Limited
Cura Classis (US) LLC
Cura Classis Canada (Hold Co) Inc.
Cavendish Dounreay Partnership Limited
Cavendish Fluor Partnership Limited
Cavendish Boccard Nuclear Limited
Duqm Naval Dockyard SAOC
2018
Revenue to
£m
2018
Purchases
from
£m
2018
Year end
debtor
balance
£m
2018
Year end
creditor
balance
£m
72.0
–
10.5
–
0.5
0.8
9.6
4.2
9.1
7.3
–
4.6
3.7
5.0
12.9
3.9
32.3
2.4
–
178.8
–
–
–
(0.3)
–
–
–
–
–
–
–
–
–
–
–
–
(0.2)
–
–
(0.5)
0.3
3.8
0.5
–
–
–
–
–
0.5
0.7
5.3
–
–
–
–
0.3
0.6
0.3
1.0
13.3
–
–
(0.8)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.8)
All transactions noted above arise in the normal course of business.
(b) Defined benefit pension schemes.
Please refer to note 25 for transactions with the Group defined benefit pension schemes.
(c) Key management compensation is shown in note 7.
(d) Transactions in employee benefits trusts are shown in note 24.
35. Post balance sheet events
Details on dividends are given in note 9. There are no further material events subsequent to 31 March 2019 that require disclosure.
202 Babcock International Group PLC Annual Report and Accounts 2019
202 Babcock International Group PLC Annual Report and Accounts 2019
36. Group entities
In accordance with Section 409 of the Companies Act 2006, a full list of subsidiaries and equity accounted investments as at
31 March 2019 is disclosed below. Unless otherwise stated, the Group’s shareholding represents ordinary shares held indirectly by
Babcock International Group PLC, the entities are unlisted, and have one type of ordinary share capital, the year end is 31 March and
the address of the registered office is 33 Wigmore Street, London, W1U 1QX. No subsidiary undertakings have been excluded from
the consolidation.
Babcock Engineering Assessments Limited8
Babcock Land Limited
Babcock Engineering Limited
Babcock Leaseco Limited*
Babcock Environmental Services Limited
Babcock Lifeskills Limited*
Subsidiaries: Incorporated in the
United Kingdom, wholly owned:
Air Power International Limited*
110 Queen Street, Glasgow, G1 3HD, Scotland
Airwork Limited
Alstec Automation Limited*
Alstec Defence Limited*
Alstec Limited*
Appledore Shipbuilders (2004) Limited7
Devonport Royal Dockyard, Devonport, Plymouth,
PL1 4SG
Armstrong Technology Associates Limited
Babcock (UK) Holdings Limited5
Babcock 1234 Limited*
Babcock 2010 Limited*
Babcock Aerospace Limited
Babcock Airports Limited
Babcock Assessments Limited
Babcock Aviation Services
(Holdings) Limited5, 14
Babcock Finance Limited*
Babcock Fire Services (SW) Limited
Babcock Fire Services Limited
Babcock Fire Training
(Avonmouth) Limited
Babcock Group (US Investments) Limited
Babcock Group International Limited
Babcock Group Limited*
Babcock Holdings Limited20
Babcock Information Analytics and
Security Holdings Limited*
Babcock Information Analytics and
Security Limited10
Babcock Infrastructure Holdings LLP
Babcock Integrated Technology
(Korea) Limited
Babcock Managed Security
Services Limited*, 11
Babcock Management Limited
Babcock Marine & Technology
Holdings Limited
Babcock Marine (Clyde) Limited
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
Babcock Marine (Devonport) Limited7
Devonport Royal Dockyard, Devonport,
Plymouth, PL1 4SG
Babcock Marine (Rosyth) Limited
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
Babcock Marine Holdings (UK) Limited10
Babcock Marine Limited*
Babcock Marine Products Limited*
Babcock Marine Training Limited7
Babcock Mission Critical Services Design
and Completions Limited
Babcock Mission Critical Services
Leasing Limited
Babcock Brazil Investments Limited
Babcock Integrated Technology Limited
Babcock Careers Guidance Limited*, 11
Babcock Integration LLP
Babcock Civil Infrastructure Limited
Babcock International Limited10
Babcock Communications Limited
Babcock International Middle East Limited
Babcock Mission Critical Services Ltd
Babcock Contractors Limited*
Babcock Corporate Secretaries Limited*
Babcock Corporate Services Limited
Babcock Critical Assets Holdings LLP
Babcock Critical Services Limited
110 Queen Street, Glasgow, G1 3HD, Scotland
Babcock Defence & Security Holdings LLP
Babcock Defence and Security
Investments Limited
Babcock Defence Systems Limited*
Babcock Design & Technology Limited*
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
Babcock DSG Ltd
Babcock Education & Training Holdings LLP
Babcock Education and Skills Limited
Babcock Education Holdings Limited
Babcock Emergency Services Limited
Babcock International Support
Services Limited
Babcock Investments
(Fire Services) Limited
Babcock Investments
(Number Eight) Limited
Babcock Investments
(Number Four) Limited
Babcock Investments
(Number Nine) Limited
Babcock Investments
(Number Three) Limited
Babcock Investments Limited
Babcock IP Management
(Number One) Limited
Babcock IP Management
(Number Two) Limited
Babcock Mission Critical Services
Offshore Limited
Babcock Mission Critical Services
Onshore Limited
Babcock Mission Critical Services Topco Ltd7
Babcock Mission Critical Services UK Limited
Babcock MSS Limited
Babcock Networks Limited
Babcock Nominees Limited*
Babcock Nuclear Limited*
Babcock Overseas Investments Limited
Babcock Partner No 6 Limited*
Babcock Partner No 7 Limited*
Babcock Partners No 2010 Limited*
Babcock Power Maintenance Limited*
Babcock Project Investments Limited
Babcock International Group PLC Annual Report and Accounts 2019 203
Babcock International Group PLC Annual Report and Accounts 2019 203
Financial statementsGovernanceStrategic report
Certas Limited*
Gibraltar Investments (No. 7) Limited7
Chart Distribution Services Limited*
HCTC Limited*
Notes to the Group financial statements continued
36. Group entities (continued)
Subsidiaries: Incorporated in the
United Kingdom, wholly owned
– continued:
Babcock Project Services Limited*, 7
Babcock Rail Limited
Babcock Services Group Limited
Babcock Services Limited*, 17
Babcock Skills Development and
Training Limited
Babcock Southern Careers Limited*, 8
Babcock Southern Holdings Limited11
Babcock SSD Services Limited
Babcock Support Services
(Investments) Limited
Babcock Support Services Limited15
110 Queen Street, Glasgow, G1 3HD, Scotland
Babcock Systems Limited*
Chart Services Limited*
110 Queen Street, Glasgow, G1 3HD, Scotland
Chart Storage & Transportation Limited*
Context Information Security Limited
11 Westferry Circus, London, E14 4HD
Costpool Limited*
Defence SCS Limited*
Devonport Royal Dockyard, Devonport, Plymouth,
PL1 4SG
Devonport Management Limited*
Devonport Royal Dockyard Limited6
Devonport Royal Dockyard, Devonport, Plymouth,
PL1 4SG
Devonport Royal Dockyard Pension
Trustees Limited*
Devonport Royal Dockyard, Devonport, Plymouth,
PL1 4SG
Eve Construction Limited*
Babcock Technical Services Limited*
Eve Developments Limited*
Babcock Training Limited
Babcock Transmission Limited*, 7
Babcock Trustees Limited*
Babcock UK Finance
Babcock US Investments Limited
Babcock Vehicle Engineering Limited9
Babcock Welbeck Limited*
Babcock Woodall-Duckham
(Overseas) Limited*, 18
Babcock2 Limited
Babcock-Moxey Limited*
Eve Group Limited*
Eve NCI Limited*
Eve Power Limited*
Eve Transmission Limited*
FBM Babcock Marine Holdings
(UK) Limited*
FBM Babcock Marine Limited*
FBM Marine International (UK) Limited*
First Engineering Holdings Limited
Kintail House, 3 Lister Way, Hamilton International
Park, Blantyre, G72 0FT, Scotland
First Engineering Limited*
BCRA Chesterfield Limited*, 18
First Fire and Rescue Service Limited*
BIL Solutions Limited
BMH (2002) Limited*
First Fire and Rescue Service No 2 Limited*
First Projects Limited*
BNS Nuclear Services Limited*
Flagship Fire Fighting Training Limited
BNS Pension Trustees Limited*
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
BNS Pensions Limited*
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
Bond Aviation Leasing Limited
Bond Aviation Topco Limited10
Bond Mission Critical Services PLC
British Nuclear Services Limited*
Brooke Marine Shipbuilders Limited*
Cavendish Nuclear (Overseas) Limited
Cavendish Nuclear Limited10
Cavendish Nuclear Manufacturing Limited
FN Consultancy Limited*
Devonport Royal Dockyard, Devonport,
Plymouth, PL1 4SG
FNC Group Limited*
Devonport Royal Dockyard, Devonport,
Plymouth, PL1 4SG
FNC Limited*
Devonport Royal Dockyard, Devonport,
Plymouth, PL1 4SG
Frazer-Nash Consultancy Group Limited7
Devonport Royal Dockyard, Devonport,
Plymouth, PL1 4SG
Frazer-Nash Consultancy Limited13
Devonport Royal Dockyard, Devonport,
Plymouth, PL1 4SG
FW 1B SPV Limited*, 11
Hiberna Contract Services Limited*
Hiberna Limited*
Hiberna Network Solutions Limited*
INS Innovation Limited*
KML (UK) Limited*
Learning21 Limited*
Liquid Gas Equipment Limited
Rosyth Business Park, Rosyth, Dunfermline, Fife,
K11 2YD, Scotland
Locam Limited*
Lincoln House, Wellington Crescent, Fradley Park,
Lichfield, Staffordshire, WS13 8RZ
Marine Engineering & Fabrications
(Holdings) Limited*
Marine Engineering & Fabrications Limited*
Merlin Communications Group Limited17
Merlin Orfordness Limited*
Municipal Vehicle Hire Limited*
Northern Cable Installations Limited*
Peterhouse Group Limited
Peterhouse5 (Shorco) Limited7
Peterhouse6 (IETG) Limited*
Port Babcock Rosyth Ltd*
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
Rosyth Royal Dockyard Limited19
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
Rosyth Royal Dockyard Pension
Trustees Limited*
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
SBRail Limited*
Scimco Limited
Skills2Learn Ltd
St. Helen’s Securities Limited*
Strachan & Henshaw Limited*
The Stirling Boiler Company Ltd*
110 Queen Street, Glasgow, G1 3HD, Scotland
Touchstone Learning & Skills Limited*
Transfleet Distribution Limited*
Transfleet Truck Rentals Limited*
UKAEA Limited
Vosper-ManTech Limited*, 7
Vosper Thornycroft (UK) Limited
Westminster Education
Consultants Limited*
204 Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2019 204
36. Group entities (continued)
Subsidiaries: Incorporated
overseas, wholly owned:
AUH-Bidco Pty Limited**
Level 9, 70 Franklin Street, Adelaide SA 5000, Australia
Babcock (Ireland) Treasury Limited
Custom House Plaza, Block 6, IFSC, DUBLIN 1, Ireland
Babcock (NZ) Limited
Babcock Central Office, HMNZ Dockyard,
Devonport Naval Base, Queens Parade,
Devonport, Auckland, 0744, New Zealand
Babcock Africa Investments (Pty) Ltd
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Africa Investments BV
Bezuidenhoutseweg 1, 2594 AB The Hague,
The Netherlands
Babcock Australia Holdings Pty Limited
Level 9, 70 Franklin Street, Adelaide SA 5000,
Australia
Babcock Aviation Services Holdings, S.L.
Plaza Pablo Ruiz, Picasso 1, Torre Picasso, 28020,
Madrid, Spain
Babcock B.V.
Bezuidenhoutseweg 1, 2594AB, The Hague,
The Netherlands
Babcock Canada Inc
45 O’Connor Street, Suite 1500,
Ottawa ON K1P 1A4, Canada
Babcock Communications Cyprus Limited
10 Diomidous St, Alpha Mega Building,
3rd Floor, Office 401, CY2024, Nicosia, Cyprus
Babcock Engineering Portugal,
Unipessoal, LDA
Heliporto de Salemas, Lousa, 2670-769, Lisboa,
Loures, Portugal
Babcock Europe Finance Limited7
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara , BKR 3000, Malta
Babcock Holdings (USA) Incorporated12
S32 Loockerman Square, Ste. L-100 Dover,
Delaware, United States
Babcock Integrated Technology GmbH
Berliner Platz 12, 41061, Moenchgladbach, Germany
Babcock International France Aviation SAS
Lieu dit le Portaret, 83340, Le Cannet-des-Maures,
France
Babcock International France SAS
4 rue Lord Byron, 75008 Paris, France
Babcock International France Terre SAS
4 rue Lord Byron, 75008 Paris, France
Babcock International Holdings BV
Bezuidenhoutseweg 1, 2594 AB The Hague,
The Netherlands
Babcock International Holdings Limited7
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara , BKR 3000, Malta
Babcock International Italy S.p.A.
Piazza Castello no.26 – 20121 Milan, Italy
Babcock International Spain S.L.U.
Mutxamel, Alicante, Aeródromo de Mutxamel,
03110, Partida la Almaina 92, Spain
Babcock International US Inc
21001 Great Mills Road, Lexington Park, Maryland
DE 20653, United States
Babcock Ireland Finance Limited
44 Esplanade, St Helier, Jersey, JE4 9WG
Babcock Korea Limited
Regus Busan Jungang-Dong Centre, Office 706,
7F PanOcean Building, 102 Jungang-Daero, Jung-
gu, Busan, 48938, Republic of Korea
Babcock Luxembourg Finance S.a.r.l.
12F rue Guillaume Kroll, L – 1882 Luxembourg,
Luxembourg
Babcock Luxembourg Investments I S.a.r.l.
12F rue Guillaume Kroll, L – 1882 Luxembourg,
Luxembourg
Babcock Luxembourg Investments S.a.r.l.
12F rue Guillaume Kroll, L – 1882 Luxembourg,
Luxembourg
Babcock Luxembourg S.a.r.l.
12F rue Guillaume Kroll, L – 1882 Luxembourg,
Luxembourg
Babcock Malta (Number Two) Limited
44 Esplanade, St Helier, JE4 9WG, Jersey
Babcock Malta Finance
(Number Two) Limited8
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara, BKR 3000, Malta
Babcock Malta Finance Limited8
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara, BKR 3000, Malta
Babcock Malta Holdings
(Number Two) Limited8
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara, BKR 3000, Malta
Babcock Malta Holdings Limited8
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara, BKR 3000, Malta
Babcock Malta Limited
44 Esplanade, St Helier, JE4 9WG, Jersey
Babcock MCS Congo SA
Avenue Charles de Gaulle, PB 5871, Pointe-Noire,
PB 5871, Republic of the Congo
Babcock MCS Fleet Management S.p.A.
Piazza Castello no. 26, 20121, Milan, Italy
Babcock Mission Critical Services Asset
Management SAU
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Mission Critical Services
Australasia Pty Ltd
Level 9, 70 Franklin Street, Adelaide,
SA 5000, Australia
Babcock Mission Critical Services Fleet
Management SAU
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Mission Critical Services
Germany GmbH
Augsburg Airport, Flughafenstrasse 19, 86169
Augsburg, Germany
Babcock Mission Critical Services Group, S.A.U.
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Mission Critical Services
Holdings, S.L.U.
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Mission Critical Services
International SAU
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Mission Critical Services SAU
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Networks Ireland Limited**
Unit 2, Red Cow Interchange Estate, Ballymounth,
Dublin, 22, Ireland
Babcock Norway AS*
Rådhusgata 3, 9008 TROMSØ, Norway
Babcock Offshore Services Australasia Pty Ltd
Level 9, 70 Franklin Street, Adelaide SA 5000,
Australia
Babcock Oman LLC
Al Raid Business Centre, Qurum, PO Box 2315,
Muscat, PC130, Oman
Babcock Pty Limited
Level 9, 70 Franklin Street, Adelaide SA 5000,
Australia
Babcock Scandinavia Holding AB
Flygstationsvägen 4, 972 54, Luleå, Sweden
Babcock Support Services (Canada) Inc.
45 O’Connor Street, Suite 1500,
Ottawa ON K1P 1A4, Canada
Babcock Support Services (USA) LLC
251 Little Falls Drive, Wilmington, DE 19808,
United States
Babcock Support Services GmbH
Berliner Platz 12, 41061,
Moenchengladbach, Germany
Babcock Support Services s.r.l.
Via Foro Buonaparte, 70 20121, Milano, Italy
Babcock US Investments (Number Two) LLC7
160 Greentree Drive, Suite 101, Dover, Kent County,
DE 19904, United States
Babcock US Investments Inc.7
160 Greentree Drive, Suite 101, Dover, Kent County,
DE 19904, United States
BMH Technologies (Holdings) GmbH**, 7
Berliner Platz 12, 41061,
Moenchengladbach, Germany
Cavendish Nuclear Japan KK
GYB Akihabara Room 405, Kandasuda-cho 2-25,
Chiyoda-ku, Tokyo, Japan
Chepstow Insurance Limited
St Martin’s House, Le Bordage, St Peter Port,
GY1 4AU, Guernsey
Conbras Servicos Tecnicos
de Suporte Limiteda
Rua Nilo Pecanha no 50, Suites 314 & 315,
Centro, Rio de Janeiro, 20020.100, Brazil
Context Information Security GmbH
Ernst-Ludwig-Ring 2, Bad Nauheim, 61231,
Amtsgericht Friedberge (Hessen), Germany
Babcock International Group PLC Annual Report and Accounts 2019 205
Babcock International Group PLC Annual Report and Accounts 2019 205
Financial statementsGovernanceStrategic report
Notes to the Group financial statements continued
36. Group entities (continued)
Incorporated overseas, wholly
owned – continued:
Context Information Security LLC7
2711 Centerville Road, Suite 400, Wilmington DE
19808, United States
Frazer-Nash Consultancy (Australia)
Pty Limited*
Level 8, 99 Gawler Place, Adelaide SA 5000inter,
Australia
Heli Aviation (Tianjin) Helicopter
Sales Co., Ltd.**
Room 514/515, The Aviation Industry Support
Center, Comprehensive Free Trade Zone, Airport
Industrial Park, 1 Boahang Riad, Tianjin, China
Heli Aviation China Limited*
World Finance Centre, Kowloon Hong Kong/
Room 1102-1103 11/F, Kowloon Building,
555 Nathan Road, Mongkok, Kowloon, Hong Kong
INAER Helicopter Australia Pty Ltd**
Level 9, 70 Franklin Street,
Adelaide SA 5000, Australia
INAER Helicopter Chile S.A.*
2880 Americo Vespucio Norte Avenue, Suite
1102, Conchali, Santiago, Chile
INAER Helicopter Peru S.A.C.**, 3
Av. De La Floresta No 497 Int., Lima, Peru
Marine Industrial Design Limited
Babcock Central Office, HMNZ Dockyard,
Devonport Naval Base, Queens Parade,
Devonport, Auckland, 0744, New Zealand
National Training Institute LLC4
PO Box 267, Madinat Qaboos, Sultanate of Oman,
115, Oman
Peterhouse GmbH
Berliner Platz 12, 41061,
Moenchengladbach, Germany
PHG Insurance Limited
St Martin’s House, Le Bordage, St Peter Port,
GY1 4AU, Guernsey
Strachan & Henshaw Canada Inc*
45 O’Connor Street, Suite 1500, Ottawa, ON,
K1P 1A4, Canada
Strachan & Henshaw, Inc*
155 Federal Street, Suite 700, Boston
MA 02110, United States
VT Communications GmbH**
Mainzer Landstrasse 16, 60325,
Frankfurt Am Main, Germany
VT Insurance Services Limited
St Martins House, Le Bordage, St Peter Port,
Guernsey, GY1 4AU
Babcock Mission Critical Services
Portugal, Unipessoal, LDA (49.82%)2
Heliporto de Salemas, Lousa, 2670-769, Lisboa,
Loures, Portugal
Babcock Mission Critical Services,
Scandinavia AB (49.82%)2, 7
Ashurst Advokatbyra AB, PO Box 7124 10387,
Stockholm, Sweden
Babcock Moçambique Limitada (90%)1
Av. Samora Macel 3380/1, Mozambique
Babcock Namibia Services Pty Ltd (90%)1
Unit 5, Ground Floor, Dr Agostinho Neto Road,
Ausspannplatz, Windhoek, Namibia
Babcock Ntuthuko Aviation (Pty)
Limited (66.78%)*, 1
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Ntuthuko Engineering
(Proprietary) Limited (64.95%)1
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Ntuthuko Powerlines
(Proprietary) Limited (65.2%)*, 1
Unit G3, Victoria House, Plot 132, Independence
Avenue, Gaborone, Botswana
Babcock Plant Services (Pty) Ltd (64.83%)1, 10
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock SAA FW AB (49.82%)*, 2
Flygstationsvägen 4, 972 54, Luleå, Sweden
Babcock Scandinavian
AirAmbulance AB (49.82%)2
Lägervägen 3, 832 56, Frösön, Sweden
Babcock Scandinavian
AirAmbulance AS (49.82%)2
Rådhusgata 3, 9008 TROMSØ, Norway
Babcock Scandinavian
Aviation Services AS (49.82%)2
Rådhusgata 3, 9008 TROMSØ, Norway
Babcock Scandinavian
Engineering AS (49.82%)2
Rådhusgata 3, 9008 TROMSØ, Norway
Babcock Scandinavian Holding AS (49.82%)2
Rådhusgata 3, 9008 TROMSØ, Norway
Babcock TCM Plant (Proprietary)
Limited (90%)1, 12
Unit G3, Victoria House, Plot 132, Independence
Avenue, Gaborone, Botswana
Capital Careers Limited (88.3%)*
Cognac Formation Aero (90%)
Lieu dit le Portaret, 83340,
Le Cannet des Maures, France
Surrey Careers Services Limited (94.1%)10
Subsidiaries: partly owned:
Airwork Technical Services
& Partners LLC (51%)
PO Box 248 (located at Muaskar Al Murtafa’a
(MAM) Garrison), Muscat, 100, Sultanate of Oman
Babcock Africa (Pty) Limited (90%)1, 12
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Africa Holdings (Pty) Ltd (90%)1, 10
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Africa Services (Pty) Ltd (90%)1
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Aviation Services Holdings
International Limited (49.82%)2, 16
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara , BKR 3000, Malta
Babcock Dyncorp Limited (56%)6
Babcock Education and Training
(Pty) Ltd (90%)1
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Emergencias Aéreas España
Holding, S.L.U. (49.82%)2
Avenida de Burgos, 17, 7a planta, 28036,
Madrid, Spain
Babcock Financial Services (Pty) Ltd (90%)1
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Holdings (Italy) S.p.A. (49.82%)2
Piazza Castello 26, 20121, Milan, Italy
Babcock Learning and Development
Partnership LLP (80.1%)
Babcock MCS Ghana Limited (90%)
2nd Floor, Opeibea House, 37 Liberation Road,
P.O. Box CT 9347, Cantonments, Accra, Ghana
Babcock MCS Mozambique, Limitada (90%)1
Sala no. 2022, 1 Andar, Terminal A, Aeroporto
International do Maputo, Distrito Urbano2,
Mozambique
Babcock Mission Critical Services
(Ireland) Limited (49.82%)2
13-18 City Quay, Dublin 2, Ireland
Babcock Mission Critical Services
España SAU (49.82%)2
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Mission Critical Services
France SA (49.82%)2
Lieu dit le Portaret, 83340,
Le Cannet-des-Maures, France
Babcock Mission Critical Services
Galicia SL (91.1%)
Lugar Lavacolla-Aeropuerto Santiago, S/N, C.P.,
15820, Santiago de Compostela, A Coruna, Spain
Babcock Mission Critical Services
Italia S.p.A. (49.82%)2
Piazza Castello no. 26, 20121, Milan, Italy
206 Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2019 206
36. Group entities (continued)
Cura Classis (UK) Limited (48%)
Cura Classis (US) Hold Co LLC (48%)
251 Little Falls Drive, Wilmington, DE 19808,
United States
Cura Classis (US) LLC (48%)
251 Little Falls Drive, Wilmington, DE 19808,
United States
Cura Classis Canada (Hold Co) Inc. (48%)19
44 Chipman Hill, Suite 1000, PO Box 7289, Stn.
“A”, Saint John, NB E2L 2A9, Canada
Cura Classis UK (Hold Co) Limited (48%)
Debut Services (South West) Limited (50%)
20 Triton Street, Regent’s Place, London, NW1 3BF
Debut Services Limited (15%)
20 Triton Street, Regent’s Place, London, NW1 3BF
Dounreay Site Restoration Limited (50%)7
Building D2003, Dounreay, Thurso, Caithness,
KW14 7TZ, Scotland
Duqm Naval Dockyard SAOC (49%)
Wadi Say, Al-Duqm, Al-Wusta’a, 3972 112, Oman
European Air-Crane S.p.A. (24.41%)
Via Duca D’Aosta no. 20, 50129, Florence, Italy
Fixed Wing Training Holdings Limited (50%)
Fixed Wing Training Limited (50%)
FSP (2004) Limited (50%)7
Kintail House, 3 Lister Way, Hamilton International
Park, Blantyre, G72 0FT, Scotland
Holdfast Training Services Limited (74%)
Magnox Limited (65%)7
Oldbury Technical Centre, Oldbury Naite,
Thornbury, South Gloucestershire, BS35 1RG
Naval Ship Management
(Australia) Pty Ltd (50%)
Level 10, 40 Miller Street, North Sydney, NSW
2060, Australia
Rear Crew Training Holdings Limited (50%)
Rear Crew Training Limited (50%)
Research Sites Restoration Limited (65%)*, 7
Oldbury Technical Centre, Oldbury Naite,
Thornbury, Bristol, United Kingdom
Rotary Wing Training Limited (50%)
S.I.M.A. Societa Italiana de Manutenzioni
Aeronautiche SpA (14.65%)
Via Duca D’Aosta no. 20, 50129, Florence, Italy
Joint ventures and associates
(equity accounted):
ABC Electrification Ltd (33.3%)6
8th Floor, The Place, High Holborn,
London, WC1V 7AA
Advanced Jet Training Holdings
Limited (50%)
Advanced Jet Training Limited (50%)
AirTanker Finance Limited (13.3%)21
6th Floor, London Wall, London, EC2Y 5EB
AirTanker Holdings Limited (13.3%)21
6th Floor, London Wall, London, EC2Y 5EB
AirTanker Limited (13.3%)21
6th Floor, London Wall, London, EC2Y 5EB
AirTanker Services Limited (22.3%)21
Airtanker Hub RAF Brize Norton, Carterton,
Oxfordshire, OX18 3LX
ALC (FMC) Limited (50%)21
3th Floor, Chancery Exchange, 10 Furnival Street,
London, EC4A 1AB
ALC (Holdco) Limited (50%)21
3th Floor, Chancery Exchange, 10 Furnival Street,
London, EC4A 1AB
ALC (SPC) Limited (50%)21
3th Floor, Chancery Exchange, 10 Furnival Street,
London, EC4A 1AB
ALC (Superholdco) Limited (50%)21
3th Floor, Chancery Exchange, 10 Furnival Street,
London, EC4A 1AB
Alert Communications (2006)
Limited (20%)10
Alert Communications (Holdings)
Limited (20%)
Alert Communications Group Holdings
Limited (20%)
Alert Communications Limited (20%)
Ascent Flight Training (Holdings)
Limited (50%)
Ascent Flight Training (Management)
Limited (50%)
Ascent Flight Training (Services)
Limited (50%)
Cavendish Boccard Nuclear Limited (51%)
Cavendish Dounreay Partnership
Limited (50%)6
Cavendish Fluor Partnership Limited (65%)
Cura Classis (Canada) Inc. (48%)
44 Chipman Hill, Suite 1000, PO Box 7289, Stn.
“A”, Saint John, NB E2L 2A9, Canada
Notes
*
**
1.
Dormant entity.
In liquidation.
The Group’s interest in Babcock Africa
Holdings (Pty) Limited, and its subsidiaries,
held via ordinary and preference shares,
carries 90% of the voting rights, and
the right to substantially all of the
distributable profits.
The Group’s interest in Babcock Aviation
Services Holdings International Limited,
and its subsidiaries, carries 49.82% of the
voting rights.
The Group’s interest in INAER Helicopter
Peru S.A.C. carries 70% of the voting
rights, and the rights to substantially
all distributable profits.
The Group’s interest in National Training
Institute LLC carries over 70% of the voting
rights, and the rights to substantially all
distributable profits.
Babcock International Group PLC has direct
holdings in Babcock (UK) Holdings Limited,
and preference shares class A and B in
Babcock Aviation Services (Holdings) Limited.
2.
3.
4.
5.
6. Holding of one type of ordinary share only,
where more than one type of share is
authorised or in issue.
7. Holding of two types of ordinary shares.
8. Holding of three types of ordinary shares.
9. Holding of six types of ordinary shares.
10. Holding of ordinary and preference shares.
11. Holding of ordinary and deferred shares.
12. Holding of ordinary and redeemable
preference shares.
13. Holding of ordinary and two types of
preference shares.
14. Holding of ordinary and three types of
preference shares.
15. Holding of ordinary and five types of
preference shares.
16. Holding of one type of ordinary share
and one type of preference share, where
more than one type of ordinary share and
preference share are authorised or in issue.
17. Holding of two types of ordinary and one
type of preference share.
18. Holding of two types of ordinary and one
type of redeemable preference share.
19. Holding of two types of ordinary shares,
where more than two types of share are
authorised or in issue.
20. Holding of two types of ordinary shares and
two types of preference shares.
21. Year end 31 December.
Babcock International Group PLC Annual Report and Accounts 2019 207
Babcock International Group PLC Annual Report and Accounts 2019 207
Financial statementsGovernanceStrategic report
Company balance sheet
As at 31 March 2019
Fixed assets
Investment in subsidiaries
Current assets
Trade and other receivables
Creditors: Amounts falling due within one year:
Trade and other payables
Net current assets
Total assets less current liabilities
Creditors: Amounts falling due after more than one year:
Trade and other payables
Net assets
Equity
Called up share capital
Share premium account
Capital redemption reserve
Other reserve
Retained earnings
Total shareholders’ funds
Note
2019
£m
2018
£m
5
2,466.5
2,466.5
6
7
7
9
3,660.4
3,433.7
(2,098.0)
1,562.4
4,028.9
(1,813.1)
1,620.6
4,087.1
(1,285.5)
2,743.4
(1,371.7)
2,715.4
303.4
873.0
30.6
768.8
767.6
2,743.4
303.4
873.0
30.6
768.8
739.6
2,715.4
The accompanying notes are an integral part of this Company balance sheet. Company number 02342138.
The Company has taken advantage of the exemption granted by Section 408 of the Companies Act 2006 whereby no
individual profit and loss account of the Company is disclosed. The Company’s profit for the financial year was £184.3 million
(2018: £538.5 million).
The financial statements on pages 208 to 214 were approved by the Board of Directors on 21 May 2019 and are signed on
its behalf by:
A Bethel
Director
F Martinelli
Director
208 Babcock International Group PLC Annual Report and Accounts 2019
208 Babcock International Group PLC Annual Report and Accounts 2019
Company statement of changes in equity
For the year ended 31 March 2019
At 1 April 2017
Profit for the year
Other comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Own shares and other
Net movement in equity
At 31 March 2018
Profit for the year
Other comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Net movement in equity
At 31 March 2019
Share
capital
£m
303.4
–
–
–
–
–
–
–
303.4
–
–
–
–
–
–
303.4
Share
premium
£m
873.0
–
–
–
–
–
–
–
873.0
–
–
–
–
–
–
873.0
Other
reserve
£m
768.8
–
–
–
–
–
–
–
768.8
–
–
–
–
–
–
768.8
Capital
redemption
£m
30.6
–
–
–
–
–
–
–
30.6
–
–
–
–
–
–
30.6
Retained
earnings
£m
330.6
538.5
10.3
(143.9)
6.4
1.9
(4.2)
409.0
739.6
184.3
(10.8)
(150.3)
2.4
2.4
28.0
767.6
Total
equity
£m
2,306.4
538.5
10.3
(143.9)
6.4
1.9
(4.2)
409.0
2,715.4
184.3
(10.8)
(150.3)
2.4
2.4
28.0
2,743.4
Babcock International Group PLC Annual Report and Accounts 2019 209
Babcock International Group PLC Annual Report and Accounts 2019 209
Financial statementsGovernanceStrategic report
Notes to the Company financial statements
1. General information
Babcock International PLC is incorporated and domiciled in the UK. The address of the registered office is 33 Wigmore Street,
London, W1U 1QX.
2. Significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have
been consistently applied to all the years presented.
Basis of accounting
The financial statements have been prepared in accordance with Financial Reporting Standard 101, ‘Reduced Disclosure Framework’
(FRS 101). The financial statements have been prepared under the historical cost convention, as modified by the revaluation of
certain financial instruments on a going concern basis. The financial statements are prepared in Sterling which is the functional
currency of the Company and rounded to the nearest £ million.
The preparation of financial statements in conformity with FRS 101 requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of applying the Company’s accounting policies.
The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements, in
accordance with FRS 101:
• Paragraphs 45(b) and 46 to 52 of IFRS 2, ‘Share based payments’
• IFRS 7, ‘Financial instruments: Disclosures’
• Paragraphs 91 to 99 of IFRS 13, ‘Fair value measurement’ (disclosure of valuation techniques and inputs used for fair value
measurement of assets and liabilities)
• Paragraph 38 of IAS 1, ‘Presentation of financial statements’ comparative information in respect of:
• paragraph 79(a) (iv) of IAS 1, ‘Share capital and reserves’;
• paragraph 73(e) of IAS 16, ‘Property, plant and equipment’; and
• paragraph 118(e) of IAS 38, ‘Intangible assets’ (reconciliations between the carrying amount at the beginning and end of the period).
• The following paragraphs of IAS 1, ‘Presentation of financial statements’:
• 10(d), 10(f), 16, 38, 40, 111, and 134-136.
• IAS 7, ‘Statement of cash flows’
• Paragraphs 30 and 31 of IAS 8, ‘Accounting policies, changes in accounting estimates and errors’
• Paragraph 17 of IAS 24, ‘Related party transactions’ in respect of key management compensation
• The requirements of IAS 24, ‘Related party disclosures’ to disclose related party transactions entered into between two or more
members of a group.
After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in
operational existence for the foreseeable future. Accordingly, the Directors consider it appropriate to continue to adopt the going
concern basis in preparing these financial statements.
New standards adopted by the Company
The Company has applied the following standards and amendments for the first time for its annual reporting period commencing
1 April 2019:
• IFRS 9, ‘Financial instruments’
• IFRS 15, ‘Revenue from contracts with customers’
The adoption of IFRS 9 and IFRS 15 has not had any impact on the amounts recognised in the prior period and is not expected to
affect the current or future periods.
Investments
Fixed asset investments are stated at cost less provision for impairment in value.
Taxation
Current income tax
Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
210 Babcock International Group PLC Annual Report and Accounts 2019
210
Babcock International Group PLC Annual Report and Accounts 2019
2. Significant accounting policies (continued)
Taxation (continued)
Deferred income tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax basis of assets
and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from
initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction
affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates
(and laws) that have been enacted, or substantially enacted by the balance sheet date and are expected to apply when the
related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which
the temporary differences can be utilised.
Tax is recognised in the income statement except to the extent that it relates to items recognised directly in either other
comprehensive income or in equity.
Finance costs
Finance costs are recognised as an expense in the period in which they are incurred.
Employee benefits
(a) Share-based compensation
The Company operates equity-settled, share-based compensation plans which are recharged to the relevant subsidiaries. Full details
of the share-based compensation plans are disclosed in note 24 to the Group financial statements.
(b) Treasury shares
The shares purchased by the Company’s ESOP trusts are recognised as a deduction to equity. See note 23 to the Group financial
statements for further details.
(c) Pension arrangements
The Company operates a multi-employer defined benefit pension scheme, however all assets and liabilities are recognised in the
relevant subsidiary in which the employee operates. See note 25 to the Group financial statements for further details.
Financial instruments
(a) Financial assets and liabilities at amortised cost
Amounts due from subsidiary undertakings and preference shares in subsidiary undertakings are classified as financial assets held at
amortised cost. Amounts due to subsidiary undertakings and bank loans and overdrafts are classified as financial liabilities held at
amortised cost. These balances are initially recognised at fair value and then held at amortised cost using the effective interest
rate method.
The Company assesses on a forward looking basis the expected credit losses associated with financial assets held at amortised cost.
The impairment methodology applied depends on whether there has been a significant increase in credit risk.
(b) Derivative financial instruments
Derivatives are initially recognised at fair value on the date a derivative is entered into and are subsequently remeasured at their fair
value. The Company designates certain of the derivative instruments within its portfolio to be hedges of the fair value of recognised
assets or liabilities or unrecognised firm commitments.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement,
together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
For derivatives that qualify as cash flow hedges, gains and losses are deferred in equity until such time as the firm commitment is
recognised, at which point any deferred gain or loss is included in the assets’ carrying amount. These gains or losses are then realised
through the income statement as the asset is sold.
Certain derivatives do not qualify or are not designated as hedging instruments and any movement in their fair value is recognised in
the profit and loss account immediately.
Financial risk management
All treasury transactions are carried out only with prime rated counterparties as are investments of cash and cash equivalents.
Dividends
Dividends are recognised in the Company’s financial statements in the period in which they are approved and in the case of interim
dividends, when paid.
Babcock International Group PLC Annual Report and Accounts 2019 211
Babcock International Group PLC Annual Report and Accounts 2019 211
Financial statementsGovernanceStrategic report
Notes to the Company financial statements continued
2. Significant accounting policies (continued)
Critical accounting estimates and judgements
The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the
amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during
the year. However, the nature of estimation means that actual outcomes could differ from those estimates.
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of
future events that are believed to be reasonable under the circumstances. There are no key estimate or judgements for the Company.
3. Company profit
The Company has no employees other than the Directors.
The fee payable to the parent auditor and its associates in respect of the audit of the Company’s financial statements was £0.6
million (2018: £0.4 million).
4. Directors’ emoluments
Under Schedule 5 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (Schedule 5),
total Directors’ emoluments, excluding Company pension contributions, were £5.7 million (2018: £6.5 million); these amounts are
calculated on a different basis to emoluments in the Remuneration report which are calculated under Schedule 8 of the Large and
Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (Schedule 8 (2013)). These emoluments
were paid for the Directors’ services on behalf of Babcock International Group. No emoluments relate specifically to their work for
the Company. Under Schedule 5, the aggregate gains made by Directors from the exercise of Long Term Incentive Plans in 2019 as
at the date of exercise was £0.5 million (2018: £0.6 million) and the net aggregate value of assets received by Directors in 2019
from Long Term Incentive Plans as calculated at the date of vesting was £0.5 million (2018: £0.6 million); these amounts are
calculated on a different basis from the valuation of share plan benefits under Schedule 8 (2013) in the Remuneration report.
5. Investment in subsidiary undertakings
At 1 April
Additions
At 31 March
2019
£m
2018
£m
2,466.5
–
2,466.5
2,359.5
107.0
2,466.5
During the previous year preference shares of US$150 million (£107.0 million) converted to increase the investment in Babcock
(UK) Holdings Limited. The Directors believe that the carrying value of the investments is supported by the underlying net assets.
6. Trade and other receivables
Non-current debtors
Amounts due from subsidiary undertakings
Preference shares in a subsidiary undertaking
Other debtors
Current debtors
Amounts due from subsidiary undertakings
Prepayments and accrued income
Income tax recoverable
Deferred tax
Total trade and other receivables
2019
£m
2018
£m
313.8
943.7
0.4
1,257.9
2,386.6
–
6.2
9.7
2,402.5
3,660.4
337.7
926.7
0.6
1,265.0
2,154.6
0.5
6.2
7.4
2,168.7
3,433.7
There are no material provisions held against trade and other receivables under the expected credit loss model. There was no
change to the level of provisions held upon transition to IFRS 9.
212 Babcock International Group PLC Annual Report and Accounts 2019
212 Babcock International Group PLC Annual Report and Accounts 2019
6. Trade and other receivables (continued)
Of the preference shares in a subsidiary undertaking, the B preference shares of US$500 million mature on 17 March 2021
and carry interest at 5.64%. The remaining preference shares in subsidiary undertakings are Euro denominated preference shares,
totalling €652 million, carrying a coupon rate of EURIBOR + 4%, and with a maturity date of 29 July 2019. The A preference shares
of US$150 million matured on 19 March 2018 and carried interest at 4.94%.
Interest rates on amounts owed by subsidiary operations:
EURIBOR + 4%
EURIBOR + 2%
GBP LIBOR + 4%
GBP LIBOR + 5%
LIBOR + 4%
USD LIBOR + 4%
STIBOR + 4%
BBSW + 4%
NIBOR + 4%
4.5%
Interest free
7. Trade and other payables
Amounts due within one year
Bank loans and overdrafts
Amounts due to subsidiary undertakings
Accruals and deferred income
Amounts due after one year
Bank loans and other borrowings
Other creditors
Non-current
Current
2019
£m
85.3
11.8
58.3
140.0
–
5.8
–
12.6
–
–
–
313.8
2018
£m
158.2
11.8
–
140.0
–
22.1
2.7
2.9
–
–
–
337.7
2019
£m
62.8
–
–
–
51.4
–
7.2
3.4
11.8
100.8
2,149.2
2,386.6
2018
£m
24.7
–
–
–
29.2
23.3
27.5
0.5
–
100.8
1,948.6
2,154.6
2019
£m
2018
£m
404.0
1,685.9
8.1
2,098.0
314.8
1,490.4
7.9
1,813.1
1,285.1
0.4
1,285.5
1,371.0
0.7
1,371.7
The Company has £2,047.1 million (2018: £2,026.6 million) of committed borrowing facilities, of which £1,331.9 million
(2018: £1,379.4 million) was drawn at the year end. The interest rate applying to bank loans is 2.4% (2018: 1.6%) and is linked
to LIBOR, the Eurobond is at 1.8% (2018: 1.8%) whilst the interest rate applying to overdrafts is 1.6% (2018: 1.3%).
The amounts due to subsidiary undertakings are repayable on demand and £1,685.9 million (2018: £1,490.4 million) is interest free.
8. Other financial assets and liabilities
The notional principal amount of outstanding interest rate swap contracts at 31 March 2019 included interest rate swaps in relation
to the US$500 million (2018: US$500 million) US$ to GBP cross-currency swap.
The fair values of the financial instruments are based on valuation techniques (level 2) using underlying market data and discounted
cash flows.
The Company has taken advantage of the exemptions within FRS 101 not to disclose all IFRS 7 and IFRS 13 requirements, as it and
its subsidiary undertakings are included by full consolidation in the Group accounts on pages 152 to 207.
Babcock International Group PLC Annual Report and Accounts 2019 213
Babcock International Group PLC Annual Report and Accounts 2019 213
Financial statementsGovernanceStrategic report
Notes to the Company financial statements continued
9. Share capital
Allotted, issued and fully paid
At 1 April 2018 and 31 March 2019
Allotted, issued and fully paid
At 1 April 2017 and 31 March 2018
10. Contingent liabilities
Ordinary shares
of 60p
Number
Total
£m
505,596,597
303.4
505,596,597
303.4
(a) The Company has guaranteed or has joint and several liability for bank facilities with nil utilisation at 31 March 2019 (2018: nil)
provided to certain Group companies.
(b) Throughout the Group, guarantees exist in respect of performance bonds and indemnities issued on behalf of Group companies
by banks and insurance companies in the ordinary course of business. At 31 March 2019 these amounted to £255.4 million
(2018: £252.8 million), of which the Company had counter-indemnified £215.8 million (2018: £184.4 million).
(c) The Company has given guarantees on behalf of Group companies in connection with the completion of contracts
within specification.
11. Group entities
See note 36 of the Group financial statements for further details.
12. Post balance sheet events
The Directors have proposed a final dividend of 22.9p per 60p ordinary share (2018: 22.65p per 60p ordinary share) and it
will be paid on 9 August 2019 to shareholders registered on 5 July 2019, subject to approval at the Annual General Meeting on
18 July 2019.
214 Babcock International Group PLC Annual Report and Accounts 2019
214 Babcock International Group PLC Annual Report and Accounts 2019
Shareholder information
Financial calendar
Financial year end
2018/19 full year results announced
Annual General Meeting
Final dividend payment date (record date 5 July 2019)*
* See also ‘Results and dividends’ on page 133.
31 March 2019
22 May 2019
18 July 2019
9 August 2019
Registered office and
company number
33 Wigmore Street
London, W1U 1QX
Registered in England
Company number 2342138
Registrars
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent, BR3 4TU
Email: enquiries@linkgroup.co.uk.
www.babcock-shares.com
Shareholdings can be managed by
registering for the Share Portal at
www.babcock-shares.com. Alternatively,
shareholder enquiries relating to
shareholding, dividend payments,
change of address, loss of share
certificate etc., can be addressed to Link
Asset Services using their postal or email
addresses given above.
Tel: 0871 664 0300
(Calls cost 12p per minute plus your
phone company’s access charge, from
overseas – call +44 371 664 0300, calls
outside the UK will be charged at the
applicable international rate. Lines are
open 9.00am – 5.30pm, Monday to
Friday excluding public holidays
in England and Wales.)
www.babcock-shares.com.
Independent auditors
PricewaterhouseCoopers LLP
1 Embankment Place
London, WC2N 6RH
Share dealing services
A simple and competitively priced service
to buy and sell shares is provided by
Link Asset Services. There is no need
to pre-register and there are no
complicated application forms to fill in.
For further information on this
service, or to buy and sell shares,
visit www.linksharedeal.com or call
0371 664 0445. (Calls are charged at
the standard geographic rate and will
vary by provider. Calls outside the
United Kingdom will be charged at the
applicable international rate. Lines are
open between 8.00am and 4.30pm,
Monday to Friday excluding public
holidays in England and Wales.)
This is not a recommendation to buy
and sell shares and this service may not
be suitable for all shareholders. The price
of shares can go down as well as up and
you are not guaranteed to get back the
amount you originally invested, Terms,
conditions and risks apply. Link Asset
Services is a trading name of Link Market
Services Trustees Limited which is
authorised and regulated by the Financial
Conduct Authority. This service is only
available to private shareholders resident
in the European Economic Area, the
Channel Islands or the Isle of Man.
Dividend Reinvestment Plan
This is a convenient way to build up
your shareholding by using your cash
dividends to buy more shares in the
Company. If you would prefer to receive
shares for your next dividend instead of
cash, please complete an application
form online at www.babcock-shares.com
or call Link Market Services Trustees
Limited on +44 (0) 371 664 0381.
(Calls are charged at standard
geographic rate and vary by provider,
calls outside the UK are charged at the
applicable international rate. Lines are
open from 9.00am to 5.30pm Monday
to Friday.) Alternatively, email
enquiries@linkgroup.co.uk.
ShareGift
If you have only a small number of shares
which would cost more for you to sell
than they are worth, you may wish to
consider donating them to the charity
ShareGift (Registered Charity 1052686)
which specialises in accepting such
shares as donations.
The relevant stock transfer form can
be obtained from Link Asset Services.
There are no implications for Capital
Gains Tax purposes (no gain or loss) on
gifts of shares to charity and it is also
possible to obtain income tax relief.
Further information about ShareGift may
be obtained on 020 7930 3737 or from
www.ShareGift.org.
Babcock International Group PLC Annual Report and Accounts 2019 215
Babcock International Group PLC Annual Report and Accounts 2019 215
Financial statementsGovernanceStrategic report
Five-year financial record
Continuing revenue
Operating profit from continuing operations
Share of profit from joint ventures
Profit before interest from continuing operations
Net interest and similar charges
Profit before taxation from continuing operations
Income tax expense
Profit from continuing operations
Profit for the year
Non-controlling interest
Profit attributable to owners of parent
Non-current assets
Net current assets/(liabilities)
Non-current liabilities
Total net assets
Equity holders of the parent
Non-controlling interest
Total equity
Total earnings per share – basic
Dividend per share (proposed)
2019
£m
4,474.8
196.5
83.8
280.3
(45.1)
235.2
(35.4)
199.8
199.8
(0.4)
199.4
4,739.5
(87.1)
(1,767.5)
2,884.9
2,867.5
17.4
2,884.9
39.8
30.0p
2018
£m
4,659.6
370.6
68.5
439.1
(48.0)
391.1
(53.4)
337.7
337.7
(1.4)
336.3
4,750.3
72.2
(1,911.5)
2,911.0
2,892.9
18.1
2,911.0
66.6p
29.5p
2017
£m
4,547.1
359.6
56.7
416.3
(54.2)
362.1
(46.5)
315.6
315.6
(3.8)
311.8
4,866.5
(239.9)
(1,934.4)
2,692.2
2,669.8
22.4
2,692.2
61.8p
28.15p
2016
£m
4,158.4
352.5
34.6
387.1
(57.0)
330.1
(39.0)
291.1
291.1
(4.5)
286.6
4,551.8
(245.7)
(1,949.8)
2,356.3
2,338.5
17.8
2,356.3
57.0p
25.8p
2015
£m
3,996.6
352.3
29.4
381.7
(68.6)
313.1
(46.7)
266.4
266.4
(6.2)
260.2
4,499.1
(221.4)
(2,079.6)
2,198.1
2,180.1
18.0
2,198.1
52.9p
23.6p
216 Babcock International Group PLC Annual Report and Accounts 2019
216 Babcock International Group PLC Annual Report and Accounts 2019
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Babcock International Group PLC
33 Wigmore Street
London W1U 1QX
UK
+44 (0)20 7355 5300
www.babcockinternational.com