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Sustaining resilience
Strategic report
Financial highlights
Babcock at a glance
Chair’s review
Strategy:
Our strategic framework
Our strategic priorities
Business model:
Our business model
Delivering across long-term contracts
Our capital allocation policy
Technology
Key performance indicators
Chief Executive's review
Strategic Partnering Programme
s172(1) Statement and
Stakeholder engagement
Market review
Sustainable business:
CEO statement
Non-financial information statement
ESG strategy
Clean inputs
Responsible consumption
being babcock
People and potential
Community engagement
Corporate integrity
Diverse and robust supply chains
Women in Babcock
Financial review
2
4
6
10
12
14
16
17
18
20
24
28
30
32
36
37
38
40
41
43
44
47
49
50
52
56
Operational review:
Marine
Nuclear
Land
Aviation
Principal risks and management
controls
Viability statement
Governance statement
Chair’s introduction:
Compliance with the UK Corporate
Governance Code
Board of Directors
Executive Committee
Key areas of Board focus
Our governance framework
Nominations Committee
Audit and Risk Committee
Remuneration Committee
Additional statutory information:
Directors’ responsibility statement
68
72
74
76
80
93
96
97
98
100
101
102
106
108
113
137
142
Financial statements
Independent auditors’
report to the members of
Babcock International Group PLC
Group financial statements:
Group income statement
Group statement of
comprehensive income
Group statement of changes
in equity
Group statement of
financial position
Group cash flow statement
Notes to the Group
financial statements
Company financial statements:
Company statement of
financial position
Company statement of
changes in equity
Notes to the Company
financial statements
Other information
Shareholder information
Five-year financial record
146
157
158
158
159
160
161
215
216
217
222
223
Front cover: Vanguard class submarine
babcockinternational.com
Sustaining resilience
Babcock operates in three critical markets –
defence, emergency services and civil
nuclear – working to meet the needs of
customers for whom failure is not an option.
We know that to serve our customers
successfully we must understand them
inside out, building close partnerships
based on a deep knowledge of their
operations, assets and technology.
We are trusted to find solutions that
address our customers’ most demanding
requirements, ensuring that they can
perform at their best wherever and
whenever they are needed.
Financial highlights
Key highlights from FY20
Statutory results
Group revenue
Operating profit / (loss)
Cash from operations
Basic earnings per share
£4,449.5m
£(164.9)m
£474.2m
(38.6)p
,
4
1
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.
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16
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20
16
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19
20
Group revenue as defined in
the income statement on
page 157.
Operating profit as defined in
the income statement on
page 157.
Cash from operations as
defined in the cash flow on
page 160.
Basic earnings per share
as defined in Note 10 on
page 181.
2
Babcock International Group PLC Annual Report and Accounts 2020
Underlying results*
Group revenue
Operating profit
Free cash flow
Basic earnings per share
£4,871.7m
£524.2m
£192.2m
69.1p
,
5
3
6
2
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20
Underlying Group revenue as
defined on page 60.
Underlying operating profit as
defined on page 60.
Underlying free cash flow as
defined on page 61.
Underlying basic earnings per
share as defined on page 20.
*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 IFRIC 12 which is
presented as financial income in the
Income statement. A reconciliation of
statutory to underlying results is set out
on page 57.
Underlying free cash flow is after
adjusting for exceptional cash flows,
see page 61 for a reconciliation.
Babcock International Group PLC Annual Report and Accounts 2020
3
Strategic reportGovernanceFinancial statements
Babcock at a glance
What we do
Revenue
Civil vs defence
Public vs private
Defence
52%
Civil
48%
Public
82%
Private
18%
UK vs international
UK
69%
International
International
31%
Europe
34%
South Africa
24%
Australasia
16%
North America
13%
Rest of the world
13%
We solve our customers’ challenges of
maintaining national security and saving lives,
sustaining critical and complex assets, and
delivering critical services. We do this by:
Delivering critical programmes
• Providing through-life support for our customers’ assets
• Delivering material improvements in the performance, availability and
cost of supporting these assets
• Designing and manufacturing a range of equipment
Delivering critical services
• Providing complex engineering support
• Supporting naval and air bases
• Delivering world class emergency services
• Delivering complex nuclear services
Delivering critical training
• Providing training across defence forces from navies to air forces
to armies
• Training police officers and firefighters
• Providing training to allow our nuclear customers to operate safely
Sustainable business
• Enabling our customers to increase the performance, efficiency and
lifespan of their assets and services
• Driving a growth agenda through engagement with, and support of,
local communities and small businesses
• Investing in engineering through our apprenticeship programmes and
STEM activities
4
Babcock International Group PLC Annual Report and Accounts 2020
Our work is focused on three markets that
account for around three quarters of
our business. Around a quarter of our
work is in adjacent markets.
Defence
• #2 UK supplier
• Substantial positions in Australia,
Canada, New Zealand and France
• Export markets include USA, Spain
and South Korea
See page 32 for more details
on our markets >
Emergency services
• #1 emergency services provider
in Europe
• Manage and own a fleet of over
500 aircraft
• Fleet management and technical
training to UK police and
firefighting forces
See page 33 for more details on
our markets >
Civil nuclear
• Involved in all stages of nuclear
lifecycle from new build to
decommissioning
• Managing one of Europe’s largest
and most complex
decommissioning projects
See page 33 for more details
on our markets >
Delivered across
our sectors:
Marine
Defence
Adjacent markets
% of revenue
77%
23%
See page 68 for more details >
Nuclear
Defence
Civil nuclear
% of revenue
66%
34%
See page 72 for more details >
Land
Defence
Emergency services
Adjacent markets
% of revenue
42%
5%
53%
See page 74 for more details >
Aviation
Defence
Emergency services
Adjacent markets
% of revenue
26%
61%
13%
See page 76 for more details >
Babcock International Group PLC Annual Report and Accounts 2020
5
Strategic reportGovernanceFinancial statements Chair’s review
a team, a supply chain and a technical
solution that meets our customers’
requirements, building on our deep
understanding of our customers’ business
and the challenges they face.
I have also met with our customers,
including senior government
representatives. I am pleased to confirm
that their relationship with the Company
is positive, and that the importance of
our support is strongly recognised.
With the UK Government, over the
last couple of years we have made real
progress on the ways in which we work
together, further strengthening and
deepening our relationship. This has
been driven in particular by the shared
principles embodied in the Strategic
Partnering Programme (SPP) of
transformation, joint problem-solving
and mutual trust. This programme is
described in more detail in this report.
As part of my induction to the business,
I have also undertaken a number of
internal reviews. These included looking
at senior-level talent within the business
to confirm that we have the appropriate
management strength and depth,
underpinning our approach to succession
planning. This work was undertaken as
part of a wider review of talent
management across the Group.
Additionally, mindful of the complexities
of long-term contract accounting, I asked
an external provider to undertake a
review of significant contracts. They
looked at a selection of our top
contracts, representing around a third
of annual Group revenue, and concluded
as anticipated that our approach to
long-term contract accounting is
appropriately conservative.
FY20 and COVID-19
As I write, we are all living through an
extraordinarily challenging period in our
personal and our professional lives. You
will see a number of pieces in this report
on how the Group has been impacted by
the pandemic so far, and how we have
been contributing to the fight against the
Coronavirus (COVID-19).
I would like to express my deep
appreciation of our management and all
our staff for the exceptional ways in
which they have responded. It is precisely
in times like these, through the actions of
our people, that you can see the true
spirit of an organisation. I have seen an
extraordinary commitment and
dedication from across our whole
Ruth Cairnie
Chair
Committed to
the customers and
communities we serve
We serve customers responsible for
maintaining vital services. Our work
saves lives and protects communities.
I was proud and delighted to take up the
role of Chair of Babcock last July. Over
the year I have met a wide range of
internal and external stakeholders and a
common question has been, “What was
it about Babcock that made you want
to join?”
My initial response is always, Babcock is a
company that really matters. We serve
customers responsible for maintaining
vital services. It’s no exaggeration to say
that our critical work in national defence,
in emergency services and in nuclear
power saves lives and protects
communities. For our customers,
failure is not an option.
During the year I have been building my
understanding of every aspect of the
business: from its people and culture to
its operations, its customers worldwide,
and its strategy for the future. I have
visited some of our key sites, both in the
UK and internationally, and have met
with employees at all levels from senior
management to apprentices.
On every visit I have been struck by the
customer-driven service mindset. Across
the Group I have found a deep
commitment to the long-term relation-
ships we have with our customers and
the communities we serve. We pride
ourselves on being able to put together
6
Babcock International Group PLC Annual Report and Accounts 2020
organisation and I know our customers
and partners appreciate our flexibility
and our willingness to stand beside them
in this most difficult period.
I’m also delighted that we have
been able to contribute to the fight
against the virus by developing new
technology solutions.
The effective application of technology
is one of our strategic priorities and we
have been seeing this in action: for
example, our engineers applied the
hard-won experience gained in
emergency services in Italy and Spain to
our operations elsewhere, whilst our
defence team in the UK created
innovative supply-chain solutions to
manufacture a new ventilator designed
to meet the NHS’ requirements.
The pandemic only began to affect
Babcock at the very end of the financial
year on which we are reporting, so the
impact on this year’s results is limited.
Our financial performance in FY20 was
broadly as expected except for weakness
in Aviation that meant we had to take
some exceptional charges and a write-down
on goodwill. Including a small impact
from COVID-19 in the final months of
the year, we fell short of our profit and
cash guidance.
We made good progress on the strategic
priorities outlined below, had some
encouraging contract wins, and took
action in response to the pandemic to
ensure the Company is in a strong and
well-funded position.
As we came to the end of the financial
year, the impact of the pandemic was
being felt across all markets. However we
continued to support to our customers
by keeping critical programmes and
services operating, demonstrating the
underlying strength of the business.
Strategy
The medium term strategy was set out in
last year’s Capital Markets Day. In this
year’s annual strategy process we used
external consultants to test and refine
our thinking on the market opportunities
we had identified.
The Board was fully involved in the
detailed review, which focused on the
Group’s capabilities and their linkage to
opportunities, particularly in the
international growth pipeline.
Last year we had some pleasing
international successes including in
Australia, Canada, Norway and France.
Community engagement: Anglesey
Our partnership with the
communities in which we
operate is at the core of
Babcock’s business. It’s
truly a partnership – we
need each other’s support
to thrive and grow.
Working to inspire the next
generation is an important part
of that relationship. At RAF Valley
in Anglesey, we have developed
strong relationships with the local
schools and colleges.
We regularly attend career fairs and
events to show students of all ages
the breadth of opportunities
available, both within the aviation
industry and locally in Anglesey.
We work hard to capture each
student’s attention and imagination,
taking along aircraft parts and
survival equipment such as pilot
helmets which people are always
keen to try on. These items help to
start a conversation; often students
are surprised when they learn about
the range of opportunities within
the sector and the local area.
Apprenticeship schemes are
another way we invest in the future.
At RAF Valley we work in partnership
with local college Grŵp Llandrillo
Menai, to develop a highly skilled
local workforce to meet the
growing demands of the RAF’s
Fast Jet Training scheme.
In 2016 we launched an
Aeronautical Engineering
Apprenticeship scheme with Grŵp
Llandrillo Menai. So far, over 20
young people have completed their
training and been offered full-time
positions with Babcock at RAF
Valley, while another 22 are
currently in training. A further
12 apprentices will join the
scheme this year.
Babcock International Group PLC Annual Report and Accounts 2020
7
Strategic reportGovernanceFinancial statements Chair’s review continued
The strategy is set out in this report
and we remain confident that the
fundamentals of our markets and
opportunities will continue to support
our medium term approach despite the
inevitable near-term impact of COVID-19.
From experience, I have seen how diverse
teams result in better business decisions,
and how an inclusive approach delivers a
stronger company, better able to devise
the innovative solutions for future
challenges and opportunities.
The Board will continue to focus on
delivery of the strategy, in particular
through reviews of progress on our six
strategic priorities:
• Operational excellence
• Growing our international businesses in
focused markets
• Growing our market share and
expanding our offering in the UK
• Developing our people, including talent
management and increased diversity
• Using technology to strengthen
our offering
• Focusing on value creation, with clear
actions to protect margins, generate
cash, reduce gearing and deliver
our targets.
Sustainable business
You will see that sustainable business is
much more prominent in this year’s report.
We are in no doubt that sustainability is
important and becoming more so, to all
of our stakeholders. It is a fundamental
part of our strategy, and is an integral
part of our day-to-day operations.
Our customers expect nothing less.
This year we have published a new
Environmental, Social and Governance
(ESG) Charter, which sets out in detail our
areas of focus.
In some respects our business could be
said to be inherently sustainable – after
all we save lives, we enable our customers
to increase the performance, efficiency
and lifespan of their assets, and we have
long recognised the need to partner with
the communities we serve. However,
we believe that the clear articulation of
our ESG strategy at Group level will
catalyse an increased focus on driving
performance and good practices across
our sectors and geographies.
One area to address in the coming year is
our diversity strategy, which is captured
directly within our strategic priorities.
The benefits of diversity are particularly
relevant in the markets we serve, where
we work within a complex array of
partnerships, rapidly changing technologies
and increasing digitisation. We can see
innumerable opportunities to harness the
fresh thinking that should follow from
having a more diverse organisation.
In the area of gender diversity
there is much to be done and I am
determined to see progress across
the organisation, including at the
executive pipeline and mid-tier
management levels, where women
are particularly under-represented.
Shareholders
Over the last year I have met with many
shareholders and potential investors to
hear and understand their views, and I
look forward to meeting more in the
coming year. Their support is vital to
our success.
These conversations have been
constructive and informative in
identifying priorities for positioning the
Company in the future. The strong
fundamentals of the business, including
long-term partnerships with customers,
specialisation in non-discretionary work
and valued technical expertise and
know-how, are well recognised, as is our
continued success in winning new
business in the UK and internationally.
However, it is clear that over recent years
we have not delivered the value for our
shareholders that we set out to achieve.
The most important shift to address this
will be consistently to set budgets and
guidance that can be delivered, and this
will be our clear intention as soon as the
exceptional uncertainties relating to
COVID-19 have receded.
Board
A strong Board with the right mix of
skills and experience is essential to our
long-term success. Since taking up my
role as Chair, securing the services of
new Board members to succeed
long-serving members who are retiring
has been a priority.
Ian Duncan and Jeff Randall intend to step
down from the Board at the forthcoming
AGM after nine and six years respectively,
and I would like to thank them for their
dedicated service. I am delighted to
welcome Russ Houlden, our new Audit
Committee Chair, and Carl-Peter Forster,
our new Senior Independent Director,
replacing Sir David Omand who has
held the role for eight years. Sir David’s
government experience is greatly valued,
8
Babcock International Group PLC Annual Report and Accounts 2020
and he has kindly agreed to remain as a
Director of the Group while we finalise
the search for a suitable successor.
We are also progressing the search for
a new CEO following Archie Bethel’s
decision to retire after 16 years with
the Group.
Archie has been instrumental in
growing Babcock from a small cap
company to a leading defence business,
and his experience has been invaluable
in developing the Group’s strategic
direction. He is a proven and respected
leader whose knowledge and
understanding of the sector is second
to none. I’m very pleased that he has
agreed to stay on until a suitable
successor is found.
For more on the Board, see page 98.
Looking forward
Worldwide, all markets and sectors are
facing deep uncertainty as to the impact
of COVID-19, both in severity and
duration. This means that, as for many
companies, it is impossible for us to make
firm projections for the future. We are
therefore unable to give financial
guidance for the year ahead at this stage.
Given the current level of uncertainty,
the Board has also decided to defer the
decision on our final dividend for the year
ended 31 March 2020. We recognise
the importance of our dividend to our
shareholders, and the Board will keep this
under review during the financial year as
the impact of COVID-19 becomes clearer.
Nonetheless, what we are seeing so far
underscores the strong fundamentals
of the business, with our long-term
contracts continuing to operate and
provide critical support to our customers.
We are making continual progress in
fine-tuning our new ways of operating,
within the new constraints of social
distancing and protection of our staff,
to drive improving profitability. With the
measures taken to protect our funding
position, we approach the year ahead
with confidence.
See Section 172(1) Statement and
Stakeholder engagement on page 30
HMS Portland following refit work as part of the Type 23 life extension programme
Babcock International Group PLC Annual Report and Accounts 2020
9
Strategic reportGovernanceFinancial statements Strategy
Our strategic framework
Our purpose
We serve customers responsible for national defence, emergency
services and nuclear power. We exist to meet the needs of
customers for whom failure is not an option.
What we do
We are a leading provider of critical, complex engineering services
across defence, emergency services and civil nuclear markets in
the UK and increasingly internationally.
e focus m arkets
Emergency
services
re
h
t
s
s
o
r
c
A
Defence
y
d b
Support e
Technology
and
expertise
o ur strategic p
ri
o
r
i
t
i
e
s
Delivering for
stakeholders
Civil nuclear
W
e
a
p
p
l
y
o
u
r
Owned
infrastructure
c
o
r
e
s
t
r
e
n
g
t
h
s
Successful
operating
model
Deliver
critical
services
Sustain
critical
and complex
assets
Maintain
national
security and
save lives
To solve customer c h a l
s
l e n g e
Read more about our three focus markets in the Market review on pages 32 to 33
Read more on how we engage with stakeholders on pages 30 to 31
10
Babcock International Group PLC Annual Report and Accounts 2020
Our strategic priorities
Our strategy is delivered across our four sectors: Marine,
Nuclear, Land and Aviation. We have set strategic priorities to
ensure a focus on delivery. These priorities follow on from the
strategy outlined at our Capital Markets Day in June 2019.
Deliver operational excellence for our customer
Grow our international businesses in focus markets
Grow market share and expand offering in the UK
Develop our people
Use technology to strengthen our offering
Focus on value creation
See overleaf for more detail on our strategic priorities
To deliver our medium term financial targets
• Earnings growth of 3% to 4% CAGR
• Sustain margins at around 11%
• Increase cash flows each year in line with earnings
• Generate around £1.4 billion of free cash flow over the next five years
• Continue to reduce net debt and increase flexibility
• Improve ROIC
• Sustainable dividend
Given the uncertain impact of COVID-19, these medium term targets will
not be achieved in the current financial year. The drivers of our strategy
remain unchanged and the long term characteristics of our business remain
strong. We will continually assess our medium term targets as we emerge
from the pandemic and they are aiming points for us to return to.
Babcock International Group PLC Annual Report and Accounts 2020
11
Strategic reportGovernanceFinancial statements Strategy continued
Our strategic priorities
We focus on strategic priorities to deliver our strategy.
These priorities are actioned by each sector and reviewed
by the Board and Exco on a regular basis.
Our strategic priorities
Medium term vision
Deliver operational excellence for
our customers
We partner with our customers to solve their challenges and
delivering operational excellence for them at every stage remains
our key focus across programmes.
Grow our international businesses
in focus markets
International markets are a key growth driver for the Group, both in
terms of current markets and expansion into new markets.
Grow market share and expand our
offering in the UK
We aim to grow our market share over the medium term through
expanding our product and service offering.
Develop our people
Our people are our main asset in delivering for our customers and
we aim to increase employee engagement, improve diversity and
ensure we have the best talent across the Group.
Use technology to strengthen our offering
Technology underpins all that we do and our strategy is to embed it
across all businesses. It supports growth in our sectors and helps us
sustain margins as we continue to offer customers increased value.
Focus on value creation
A focus on value creation sits at the heart of every decision we make,
from the work we decide to bid on, through contract performance,
a continuous focus on cost reduction and the efficient allocation
of capital across the Group. We continually look at the balance
of the portfolio to ensure it is delivering maximum value for
our stakeholders.
12
Babcock International Group PLC Annual Report and Accounts 2020
• Embedded as a long-term, sustainable
partner for our customers
• Trusted to deliver by all customers
• Key programmes delivered on time
and to budget
• Anticipating and meeting customers’
emerging requirements
• Over 40% of Group revenue from
international businesses
• Develop multi-sector, multi-market
opportunities in Australia, Canada
and France
• Deliver value-enhancing growth in
other countries
• Deliver on key defence programmes
for the UK
• Grow share of existing markets
• Expand our offering into new markets
• Enhanced employee engagement
across the Group
• Significant improvement in diversity
across the Group
• Leading talent and training
programmes
• Technology embedded across
all sectors
• Technology driving performance,
efficiency and savings
• Babcock seen as a benchmark for
technical innovation
• Allocate capital efficiently
• Continue to focus our portfolio
• Maximise Group synergy with one IT
system, greater use of our shared
service centre and a continuous cost
savings programme
Progress in FY20
Priorities for FY21
• Continued development of our Strategic Partnering
• Continue to deliver and improve performance on major
Programme (see page 28)
customer programmes
• Continuous improvement in performance on major
customer programmes
• Improvements in health and safety with lower total
injuries rate
• Continue to develop the Strategic Partnering Programme
• Launch new Strategic Customer Management process
• Begin to deliver our ESG strategy (see page 38 for details)
• Started Aviation operations in Canada and Norway
• Expanded our defence offering in France
• Started to deliver on maintaining the largest ships of the
Australian Navy
• Win new contracts for defence work in Australia, Canada
and France
• Expand emergency services reach in North America
• Won the contract to build Type 31 frigates for the
Royal Navy
• Expanded our offering in emergency services with the
award of a contract to train London’s police
• Maintained our win rates
• Secure key rebids
• Start to deliver on the Type 31 programme
• Secure new opportunities at target win rates
• Re-energised employee engagement programme with
• Measure employee engagement Group-wide to help
focus groups across sectors
track progress
• Developed the Babcock Academy for our next generation
of leaders
• Continued to reduce gender pay gap
• Became a founding signatory of the UK Women in
Defence Charter
• Technology group working across all four sector teams
• Our technology offering was crucial in our award of the
contract to build Type 31 frigates for the Royal Navy, the
Australia LHD ships and Australian submarine programme
• High growth in technology products businesses
• Improve diversity across the Group
• Further reduction in our gender pay gap
• Continue high growth in products businesses
• Use technology to support Group bids
• Developed our capital allocation model
• Completed the sale of Context for over £100 million
• Continued our cost savings programme across the Group
• Fix our Aviation sector by rightsizing the cost base and
rationalising our fleet
• Continue to reduce net debt to provide flexibility within
our capital allocation model (see page 17)
• Continued focus on our portfolio
Babcock International Group PLC Annual Report and Accounts 2020
13
Strategic reportGovernanceFinancial statements Business model
Our business model
We serve customers responsible for national defence, emergency
services and nuclear power. We exist to meet the needs of customers
for whom failure is not an option.
Customer challenges
Our inputs
What we do
Our customers look to us to
help solve their challenges and
we work alongside them
throughout delivery.
We apply our strengths to
solve these customer
challenges, with inputs from
our people, our assets and our
technology and know-how.
We apply our strengths and
inputs to solve customer
challenges across three
main areas.
Maintain national security
and save lives
Our customers across the world
look to maintain national security
and save lives across emergency
services, from air ambulance
services to firefighting.
Our people
We rely on our people to deliver for
our customers. We have a service
mindset of listening to the
customer and adapting to their
changing needs to solve
evolving challenges.
Deliver critical programmes
We provide through-life support
for customers’ assets to deliver
improvements in performance,
availability and cost. We design
and build a range of equipment,
from warships to weapons
handling systems.
Sustain critical and
complex assets
Our customers have complex and
valuable assets that need to be
available for as long as possible.
Many defence assets need constant
sustainment to ensure there are no
gaps in capability.
Our assets
Our assets include critical national
infrastructure such as the
Devonport and Rosyth dockyards.
We own and operate complex
engineering facilities and operate
over 500 aircraft.
Deliver critical services
We deliver critical services for all
our customers, from supporting
naval and air base operations
through to delivering world-class
emergency services and complex
nuclear services.
Deliver critical services
Our customers need a highly
trained workforce to succeed. This
training can be highly complex and
ever-evolving.
Our technology and
know-how
We have a deep understanding
of our customers’ assets and are able
to integrate multiple technologies.
Deliver critical training
We provide training across defence
forces from navies to air forces to
armies. We train police officers and
firefighters and we provide training
to allow our nuclear customers to
operate safely.
These challenges need to be met where:
Failure is not an option.
Cost efficiency is key.
Whether it is maintaining the UK’s
Continuous At Sea Deterrent or flying
missions to save lives in southern Europe
– we cannot fail.
All of our customers face budget
pressures and look to us to help
maximise availability and outputs while
minimising costs.
Safely and regulatory compliance
underpins all work.
Our customers operate in environments
that are heavily regulated and health and
safety is the number one priority in all
that they do and all that we do.
See page 30 for details on how we engage with stakeholders across our business model
Sustainability applies across the whole business model. See pages 36 to 53 for more
14
Babcock International Group PLC Annual Report and Accounts 2020
How we do it
Our strategic enablers ensure we continually do things better
for our customers and help us deliver our strategy.
See page 10 for our strategy >
d
n
People a
cultur e
d
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e fficiency
O p
People and culture
• Health and safety is our number
one priority
• Active management and development
of talent, including updated training
programmes across the business, with
senior personnel and graduates
managed from the centre
• Addressing skills gaps and improving
diversity across the business
Customer delivery excellence
• Customer-focused long-term
collaborative relationships
• Ongoing senior customer engagement
plan through the Strategic Partnering
Programme, see page 28
• Group-wide sharing of customer
requirements, solutions and
best practice
• Sustainability strategy to align with
our customers
Capability developments
• Investing in differentiating technology
as a key driver of productivity,
performance improvement and growth
• Sharing technology across our sectors
• Using data and digital technology to
make things more effective, and
adding to our capability
Operational efficiency
• Strong governance process for
contract bids
• Cost saving and margin improvement
plans across the business
• Deploying Group-wide shared services
and a single ERP system
• Delivering procurement savings across
the business
Creating
stakeholder value
Customers
Solving customer challenges
without failure, at the best cost and
continuously adapting approaches.
Investors
Creating shareholder value through
growth, cash generation and the
efficient allocation of capital.
Delivering shareholder returns.
Employees
Creating a workplace where
employees are valued and
motivated at all times while
ensuring the health and safety
of every employee every day.
Regulatory and
industry bodies
Never compromising on safety
and complying with regulations
at all times.
Supply chains
Creating jobs and nurturing
investment through collaboration
with our supply chain. Aligning with
the Prompt Payment Code.
Communities
Providing jobs and investment across
the UK and ensuring we act
responsibly at all times in the
interests of local communities
around our sites.
See Section 172(1) Statement and more
on our stakeholders on pages 30 to 31
See page 30 for details on how we engage with stakeholders across our business model
Sustainability applies across the whole business model. See pages 36 to 53 for more
Babcock International Group PLC Annual Report and Accounts 2020
15
Strategic reportGovernanceFinancial statements
Business model continued
Delivering across long-term contracts
The majority of our work is performed in long-term contracts which balance risk and
reward. This type of work accounts for around 80% of our business, with the rest a
combination of short cycle work and procurement-related activity on behalf of
customers. We continually win new work to replace old work in our contract cycle.
Our contract cycle
Tracking
pipeline
Bidding
pipeline
Investing
each year
Order
book
Profit and
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
c.£17 billion and mostly represents
opportunities in our three focus markets,
which account for 86% of the total.
International bids account for 48% 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 £17.6
billion provides a base level of revenue
for the years ahead. Further revenue
comes from 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.
Profit and cash flow
Performance across contracts drives
the profit we make on each contract.
Cash flow varies throughout the year
and depends on invoice dates, payment
terms and governance gates 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,
assets and IT systems. Our cash generation
also supports a strong balance sheet and
a sustainable dividend.
Delivering alongside our customers
Around 80% of work is carried out for
government customers, with the majority
of other work being for blue chip
companies in highly regulated markets.
We work collaboratively with all
customers day in, day out as part of
crucial long-term partnerships. Our work
balances risk and reward through focused
delivery and risk mitigation and contracts
are generally target-cost contracts.
Target cost contracts, typical for many
of our larger contracts, incentivise
us to remove cost via a pain-share/
gain-share mechanism.
16
Babcock International Group PLC Annual Report and Accounts 2020
Our capital allocation policy
Our business model is supported by our capital allocation policy to ensure we
invest and grow the business, while delivering for our shareholders and
ensuring we fund our pension schemes and safeguard our credit rating.
Organically invest in the business
Ensure Group liquidity
Given the current challenging environment from the impact of COVID-19, our
immediate focus is ensuring the Group has sufficient capital and liquidity to cope with
COVID-19 and other risks. If these are met then the capital allocation policy we set out
in November 2019 still applies.
If the above are satisfied, then...
Fund pension schemes / safeguard credit rating
Sustainable ordinary dividend to shareholders
Highly selective
bolt-on
acquisitive growth
Capital
return to
shareholders
Bolt on M&A considered against hurdle
rates and current Group valuation
Share buyback / special dividend
Babcock International Group PLC Annual Report and Accounts 2020
17
Strategic reportGovernanceFinancial statements Technology
If we want to get more life out of an
advanced gas reactor, we’ve got to think,
what are the tools and techniques we
can apply to increase its reliable lifespan?
If we look at the Type 23 frigates used by
the Royal Navy, we have to think about all
the ways that we can get more capability
on the ship.
We’ve always been good at making savings
for our customers by working more
effectively and helping people do their jobs
more efficiently. But that only gets you so
far, and data and digital enablement is
allowing us to make the next step.
For Babcock, the key to data is the
engineering insight we bring. You generally
hear about big data – people using
petabytes of data to find patterns that
allow them to sell more product. But in
our critical markets, the data is either not
fully available or is of poor quality, so we
need to find ways of putting it together
with a white box model where we have a
system engineering understanding of the
asset. We know what’s important and
what will probably affect its performance
and maintainability and cost, and we can
fit the right data together with that
understanding. It’s not something
everyone could do.
It means we can be a technical authority
and be able and trusted to make difficult
technical decisions about our customers’
assets and their operability and maintenance
requirements. Regardless of whether
they’ve been designed by us or by any
OEM, we can put that understanding and
capability at the service of our customer.
Engineering insight
For Babcock, it’s about being a technically
intelligent and informed partner, so that
when our customers need more life or
more capability from their assets, we can
make that happen or we can advise them
on how they can make that happen.
It’s about deploying our high-integrity
manufacturing capability, investing in
innovative manufacturing technologies
like robotic welding or bringing
production tools to the component rather
than the other way around.
And it’s about collaboration with others,
from business technology partners to very
long-term academic research partnerships.
This allows us to drive the focus on innovation
throughout our business and to do what,
ultimately, it’s all about – meeting the
needs of customers for whom failure is
not an option.
Jon Hall, PhD
Managing Director for Technology
Trusted to make the
difficult decisions
Our customers always need more
performance, more efficiency; and
they need their assets to be able to
work harder for longer.
Technology is changing the landscape in
which we operate; and it is changing the
services that we can offer our customers.
That’s why using technology to
strengthen our offering is a strategic
priority for the Board.
Taking advantage of the opportunities to
give our customer better outcomes means
putting an innovative approach to data at
the heart of our technology strategy.
We work with big, expensive and
complicated assets with a long lifecycle.
These are assets on which our customers
rely – when you’re working with warships
or aircraft or nuclear power stations, you
need to really understand the asset.
Our customers always need more
performance, more efficiency; and they
need their assets to be able to work
harder for longer. That’s our challenge,
and meeting it is driving a significant
amount of innovation throughout
our business.
Our technology strategy informs all our
operations – we seek to improve the
effectiveness of how we manage assets,
infrastructure and people so we can
better meet the evolving needs of
our customers.
And technology lets us add value and scope
to our range of activities, enhancing and
expanding our core support services or
adding specialist systems or technical
services around that core support.
18
Babcock International Group PLC Annual Report and Accounts 2020
iSupport360: a dynamic new way of interpreting information
iSupport360 is Babcock’s approach to the application of
digital technologies and data analytics to drive maximum
value for our customers in the way we manage and support
their critical and complex assets.
It brings together cutting edge technologies and our
engineering insight to support our customers, whether it’s
managing their surface ships, submarines, ground fleets,
critical infrastructure or even people. It’s an approach that
offers us a powerful and dynamic new way of interpreting
information, and it gives our customers a complete and
interactive view of that intelligent support.
That’s why we’ve designed iSupport360 into the Type 31
programme from the outset; building in advanced analytics
and connected sensors which will make it easier and more
efficient to maintain and operate throughout its whole life.
Scaleable and flexible
iSupport360 draws on the concept of the Digital Thread,
which develops with an asset through its lifecycle. It isn’t
just an approach we are using in defence. To support
technology growth across our markets, we have ensured it is
both scaleable and flexible, enabling Babcock to:
• Use advanced analytics to lessen operational risk through
predictive maintenance modelling.
• Drive efficiencies through the automation of repetitive
tasks, such as business or manufacturing processes.
Digital Thread
The Digital Thread is a holistic view of an asset’s data
throughout its entire lifecycle – its digital DNA. The typical
lifecycle of an asset starts in design, then build and onto the
operational phase, including maintenance and refits/life
extension and finally disposal. So we need to create a
powerful framework of digital technologies encompassing
all elements: concept, design, manufacturing, operation,
post-life, and retirement. All of the multiple sources of digital
data need to come together to allow a seamless transition of
information from one phase of a project to another.
Working at this scale, it is essential that we collaborate
effectively with our partners, supply chain and industry, and
the Digital Thread methodology allows us to do that. In the
Type 31 programme, we are responsible for the design and
build of the five frigates, while also being a key long-term
partner supporting the warships through life. So a consistent
Digital Thread will allow us to successfully transition from the
start of the programme through to the operational phase.
Delivering value through data
During design and build, we employ Industry 4.0 practices to
help provide a seamless data flow which delivers efficiencies
during the construction phase. During the support and
maintenance phase, we will apply our own range of digital
technologies and data analytics to deliver value for our
customers through our iSupport360 framework.
• Be more proactive in our support through prediction,
modelling and simulation, for example, using digital
twinning to simulate how the asset will perform, using
data from real-time monitoring of assets and operations.
• Offer both flexibility and agility in the complex work
we undertake.
iSupport360 provides a benefit to people too, whether they
are a ship maintainer or data analyst in one of our training
contracts. The range of digital technologies we use is
designed to enhance the ability of our people, allowing
them to make better informed decisions, and equipping
them with the best understanding of asset performance and
material condition.
From data analytics to digital twins, from AI to VR, we’re
ensuring our people have the right skills. Investing in these
technologies also means we can invest more in our people.
The advanced analytics that underpin iSupport360 help us
simplify complex problems, reduce risk and inform the
customer at every stage of the asset’s life, providing a fully
immersive support service. Real-time analysis also means we
can optimise maintenance and increase the asset’s efficiency
and availability. We have to look at how all our technologies
and capabilities can work across any of the assets we manage
– be they ship, submarine, critical infrastructure, or people.
To deliver this Digital Thread, we need to invest in our people
and give them the skills to embrace advances in technology.
We recognise we will need new skills to support this
technology growth, and so we are working closely with
partners such as Strathclyde, Edinburgh and Cranfield
Universities. Whatever the engineering or technology
challenges, physical or digital, we know as engineers we
have the ability to solve them.
Babcock International Group PLC Annual Report and Accounts 2020
19
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.
2020 results
Underlying revenue
growth (%)
Underlying operating
margin (%)
Underlying EPS (p)
Underlying operating cash
conversion (%)
10.8%
69.1p
83%
1
1
1
.
1
1
0
.
1
0
9
.
1
1
4
.
1
0
8
.
8
3
0
.
8
4
0
.
8
0
1
.
7
4
2
.
6
9
1
.
1
0
4
8
3
8
6
8
2
8
3
(5.6)%
7
5
.
7
7
.
2
8
.
(
3
8
)
.
(
5
6
)
.
16
17
18
19
20
16
17
18
19
20
16
17
18
19
20
16
17
18
19
20
Underlying revenue growth is
defined as the increase/
decrease in revenue,
including JVs, when compared
to that of the previous year.
Refer to page 57 for a
reconciliation of statutory to
underlying revenue and note
1 for details of our revenue
recognition policy.
Underlying operating margin
is defined as underlying
operating profit expressed as
a percentage of underlying
revenue. Refer to page 57 for
a reconciliation of statutory to
underlying operating profit.
Underlying earnings after tax
divided by the weighted
average number of ordinary
shares. Refer to note 10.
Revenue decline was driven
by the impact of step downs
related to the end of QEC and
Magnox contracts and exits
and disposals made in the last
financial year. Excluding
these, underlying revenue
grew by 2.7%.
The underlying margin of
10.8% includes the benefit of
IFRS 16, which had a positive
0.5 percentage point impact.
The majority of the decline
in underlying margin related
to performance in the
Aviation sector.
The decline in underlying
EPS primarily reflects the
lower underlying operating
profit. The adoption of IFRS 16
had a minimal impact on
underlying EPS, with higher
operating profit offset by
higher finance charges.
Grow in the UK and
internationally
Focus on value creation
Grow in the UK and
Internationally
Focus on value creation
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Underlying 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. Refer to page 61 for
a calculation.
The movement in the year
has normalised as expected
following anticipated strong
working capital performance
during the last financial year.
The definition this year has
changed to reflect adoption
of IFRS 16 and prior years
have not been restated as the
standard has been adopted
prospectively, in line with our
statutory accounting policy.
Focus on value creation
Linked to management remuneration
Our remuneration policy, as detailed on pages 118 to 124, includes reference to underlying EPS,
underlying operating cash flow and underlying ROCE.
20
Babcock International Group PLC Annual Report and Accounts 2020
Changes to our KPIs
We updated our KPIs this year to better reflect our strategy
as outlined at the Capital Markets Day in June 2019. We
now include CO2e emissions to recognise an increased focus
on ESG and sustainability, and underlying earnings per share
(EPS) as it is a key way we monitor the success of our
strategy and is therefore linked with our remuneration
policy. We have removed two debt related KPIs as we
believe the net debt to EBITDA ratio is the best measure of
performance and is a key measure in our capital allocation
policy set out on page 17.
Underlying net debt
to EBITDA
Underlying return on
invested capital (ROIC) (%)
15.0%
1.7x
2
2
.
2
0
.
1
8
.
Total
injuries rate
1.24
.
1
9
2
CO2e emissions
(tCO2e/£m)
55.7
1
7
.
1
6
.
1
4
2
.
1
4
5
.
1
4
5
.
1
5
2
.
1
5
0
.
.
1
5
8
.
1
4
7
.
1
3
5
.
1
2
4
5
0
4
.
5
0
0
.
6
6
0
.
5
8
9
.
5
5
7
.
16
17
18
19
20
16
17
18
19
20
16
17
18
19
20
16
17
18
19
20
n
o
i
t
i
n
i
f
e
D
Underlying net debt to
EBTIDA is calculated as net
debt (excluding lease
obligations) divided by
underlying earnings before
interest, tax, depreciation and
amortisation (excluding JVs),
plus JV dividends received.
Refer to page 63 for a
calculation. JV debt is
non-recourse and is therefore
excluded from net debt.
y
r
a
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n
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m
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C
Net debt excluding leases
payable at 31 March 2020
was £922.1 million, giving a
net debt to EBITDA ratio of
1.7 times, well within our
covenant levels of 3.5 times.
Underlying return on
invested capital is defined
as underlying operating
profit divided by net debt
(excluding lease obligations)
and shareholder funds,
excluding retirement benefit
deficits or surpluses. Refer to
page 64 for a calculation.
The return on invested capital
reduction reflects the reduction
in underlying operating profit.
Note that JV finance costs are
excluded from this measure
reflecting the non-recourse
nature of the debt.
Reported injuries across
the entire Group for every
100,000 hours worked
by Babcock employees
(excluding JVs).
Estimated tonnes of CO2e
emitted as a direct result
of revenue-generating
operations (excluding JVs).
Our total injury rate has
reduced by 16% compared to
the previous year, reflecting
efforts across the Group to
improve performance. Sadly
however one employee died
this year following an incident
involving inspections on an
armoured vehicle. This tragic
incident underlines the
importance of our efforts to
do better every year.
We continue to reduce our
emissions year on year, both
the intensity ratio and in
absolute terms. This reflects
the efforts made across all
sectors to reduce emissions,
partly through the increased
use of technology. Prior to
2018, some data associated
with overseas operations
was unavailable.
Focus on value creation
Focus on value creation
Use technology to
strengthen our offering
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Operational performance measures
In the operational reviews, we used the following
KPIs to measure each sector’s performance:
• Underlying revenue growth
• Underlying operating margin
Babcock International Group PLC Annual Report and Accounts 2020
21
Strategic reportGovernanceFinancial statements
Critical support:
defence
HMS Portland in the Frigate Support Centre dry dock during the Type 23 life-extension programme
22
Babcock International Group PLC Annual Report and Accounts 2020
Felicity Knell
Dynamic Survey Team Leader, Type 23 life-extension project
We work collaboratively
with our customer, to
deliver highly capable
platforms back to the
Royal Navy as part of the
Type 23 life-extension
programme.
The work at our
Devonport facilities
continues at pace, with
parallel programmes of
deep maintenance and
structural upgrade work
on Type 23s happening
simultaneously.”
Babcock International Group PLC Annual Report and Accounts 2020
23
Strategic reportGovernanceFinancial statements Chief Executive’s review
Archie Bethel CBE
Chief Executive
Resilient business model
ready for the year ahead
At Babcock we pride ourselves on
the fact that we support customers
responsible for providing critical
services: our work saves lives,
supports national defence and
protects communities.
24
Babcock International Group PLC Annual Report and Accounts 2020
Overview
I am immensely proud of the way our
people have responded in these
challenging times. At Babcock we pride
ourselves on the fact that we support
customers responsible for providing
critical services: our work in defence and
aerial emergency services saves lives,
supports national defence and protects
communities. As always, my priority, and
the priority of the Group, is to keep our
people safe whilst making sure that those
vital services can continue.
We end a busy year in a strong position
to deal with the current Coronavirus
(COVID-19) uncertainty. We saw strong
performances across our Marine, Nuclear
and Land sectors and have taken action
to address weaknesses in Aviation,
including writing down goodwill to
reflect our updated expectations of the
oil and gas market. The early impact of
the global COVID-19 pandemic had a
limited impact on the Group in the last
financial year but is creating uncertainty
as we head into this new financial year.
I am also extremely grateful to HM
Government and in particular the
Cabinet Office and Ministry of Defence
who acted quickly and decisively to
ensure that contracts continue to be
funded and that cash flowed effectively
through the main suppliers and down
into the supply chain. Also, working with
us and other major suppliers, we have
together quickly developed safe working
solutions at site level supported by our
employees, trades unions and regulators.
These solutions are being widely shared
to ensure that the entire sector is
benefiting from the experiences of
individual companies.
The majority of our work has been
declared to be critical and our people
designated as key workers. All of our
major sites have remained open, and we
have worked closely with our customers
to understand and support their
changing requirements and operational
priorities. Whether working on site or at
home, we have continued to work on
major defence programmes, to design
new systems, to provide emergency
services and to keep nuclear power sites
operational. Across Europe our
emergency medical services teams have
worked courageously alongside national
health services in the transport by air of
critically ill patients to hospital.
We have also contributed to the
fight against the pandemic with
new innovative technical solutions.
We pioneered the introduction of
biocontainment isolation stretcher units
which allow virus positive patients to be
transported safely, and new in-helicopter
barrier systems that provide added
protection to flight crews and medical
staff. We have shared the experiences
gained in Italy, Spain and France with our
teams elsewhere, including Sweden where
we refitted one of our aircraft to create a
dedicated COVID-19 air ambulance.
By establishing strong safety protocols,
many of our contracts have continued to
operate throughout the crisis. The business
impact of the virus will be felt most
significantly in our short-cycle work and
adjacent market businesses. We have put
mitigation measures into place, including
reducing and deferring non-essential
operating and capital expenditure to
protect the business in the short term. We
continue to model a number of scenarios
around the ongoing impact of the virus.
We have also developed detailed plans to
return to productive operating capacity in
response to government guidance and
customer need as the countries in which
we operate begin to emerge from varied
restrictions.
Looking back over last year, we made solid
progress in driving our strategy forward.
We achieved good revenue growth across
our defence businesses and won significant
opportunities, including building the next
generation of UK warships, securing long
term positions on major submarine projects
for the USA and Australia, and expanding
our aviation defence operations in France.
Our expanding technology capabilities
were crucial in these wins, and I am really
pleased with the high level of growth seen
across our technology businesses this year.
Our area of weakness was in the Oil and Gas
aviation business. The global oil and gas
market has become even more competitive
and we have written down the value of
assets in that business to reflect this and
impaired Aviation goodwill to reflect how
the market has changed and that we do
not expect any recovery any time soon.
We have also addressed the cost base of our
civil aviation and civil nuclear businesses to
right size them for the future given the
weaker oil and gas market, price and cost
pressures in our emergency services business
and the smaller civil nuclear business
following the end of the Magnox contract
and a slowing UK civil nuclear market,
exacerbated by COVID-19.
Our strategy
We outlined our strategy at our Capital
Markets Day in June 2019. We are a
leading provider of critical, complex
engineering services for customers for
whom failure is not an option. We focus
on three markets where we enjoy
leadership positions: defence, emergency
services and civil nuclear. These markets
make up around three-quarters of our
business. We also operate in adjacent
markets where we apply our engineering
capabilities to a range of activities.
Our strategy is delivered across our four
sectors and we focus on a set of strategic
priorities to ensure delivery:
• Deliver operational excellence for
our customers
• Grow our international businesses in
focus markets
• Grow market share and expand
offering in the UK
• Develop our people
• Use technology to strengthen
our offering
• Focus on value creation
This will deliver our medium term
financial targets:
• Earnings growth of 3% to 4% CAGR
• Sustain margins at around 11%
• Increase cash flows each year in line
with earnings
• Generate around £1.4 billion of free
cash flow over the next five years
• Continue to reduce net debt and
increase flexibility
• Improve ROIC from FY20
• Sustainable dividend
Given the uncertain impact of COVID-19,
these medium term targets will not be
achieved in the current financial year.
The drivers of our strategy remain
unchanged and the long term
characteristics of our business remain
strong. We will continually assess our
medium term targets as we emerge from
the pandemic and they are aiming points
for us to return to.
Progress in the year
We made good progress in the year on
our strategy. We delivered operational
excellence for customers across
programmes with continuous improvement
exemplified through the development
of our Strategic Partnering Programme.
We had some significant contract wins
in the UK including the design and
build of Type 31 frigates in Defence,
Met Police training in Emergency Services
and additional scope in our Ascent
aviation contract, and we maintained
our win rates for bids in the UK overall in
the year.
International expansion is a key part of
our strategy. This year we increased our
international presence with Aviation
operations starting in Norway and Canada
and we won our second defence contract
in France. International markets
represented 31% of underlying revenue in
the year and account for around 48% of
our pipeline with significant opportunities
in all of our focus markets.
The use of technology to strengthen our
offering was crucial in many winning bids
this year, most notably the Type 31
frigates. The technology products
businesses in our Marine sector had a
particularly strong year with very high
revenue growth.
Throughout the year we kept a focus on
value creation. We continue to run our
adjacent markets for value and saw
revenue growth in our Marine and Land
adjacent markets. In March 2020, we
completed the sale of Context for net
proceeds of £102 million.
We have, however, seen some significant
pressures on our business this year.
As well as the impact of COVID-19,
we saw increasingly tough trading
conditions in our civil aviation and
civil nuclear businesses and have taken
actions to right-size these businesses
to ensure we remain on track to deliver
for the medium term.
Sale of Holdfast
In June 2020, we completed the sale of
our 74% shareholding in Holdfast Training
Services Ltd (“Holdfast”) to HICL
Infrastructure PLC (“HICL”) for a cash
consideration of £85 million. Holdfast
was a joint venture in the Babcock Group
created in 2008 to undertake a 30-year
contract for the Ministry of Defence to
provide training infrastructure and
services for the Royal School of Military
Engineering (“RSME”). Babcock will
continue to provide services for RSME on
its existing subcontract.
Babcock International Group PLC Annual Report and Accounts 2020
25
Strategic reportGovernanceFinancial statements Chief Executive’s review continued
Order book and pipeline
Our combined order book and pipeline
remains at the record level of around
£35 billion. The Group continued to win
work across all sectors in the year, with
win rates in line with our targets. For new
business, win rates exceeded 40% while
win rates for rebids and extensions in our
focus markets exceeded 90%.
Our order book is based on contracted
and committed work. This order book
provides a base level of revenue for the
years ahead which is then complemented
by contract growth and short-cycle work.
The Group’s order book at 31 March
2020 was £17.6 billion with an order
book intake of £5.3 billion in the year
more than replenishing £4.9 billion of
revenue. Over £1 billion of order intake
this year came through contract growth
and not through the bid pipeline.
The Group’s pipeline represents those
bids formally in process, following our
rigorous stage gate approvals. The
Group’s pipeline at 31 March 2020 was
£17 billion compared to around £14
billion at 31 March 2019. The £3 billion
increase relates to a range of
opportunities predominantly in UK and
international defence.
Health and safety
The health and safety of our employees is
of paramount importance, and we work
hard to ensure all our people get home
safe every day. I was therefore deeply
saddened by the death of one of our
colleagues in January, following an
incident involving inspections on an
armoured vehicle. This tragic incident
serves to strengthen our focus on
ensuring that we have a world class
safety culture. In Spain, one of our air
ambulance pilots tragically died after
contracting the COVID-19 virus. He had
been working with us for over 12 years,
carrying out numerous flights with the
utmost professionalism and commitment
to service.
ESG strategy
This year we have introduced a new
ESG strategy for the Group. Sustainability
is at the heart of our business, and is a
key part of our planning, our operational
delivery and our approach to through-life
support. We are committed to minimising
the impact of our operations on the
environment, focusing on the safety of
our people and ensuring a positive
impact in the communities in which we
operate. Full details of our ESG strategy
and the progress we are making is be
available on pages 36 to 53.
Looking ahead
We enter the new financial year facing
uncertain times but the long term
characteristics of our business remain
strong. We provide some commentary
on the year ahead across our sectors but
are unable to provide detailed financial
guidance at this time. Given this
uncertainty, the Board has deferred the
decision on our final dividend until there
is greater certainty on the impact
COVID-19 will have on our business
and stakeholders.
During the year, I announced my
intention to retire as Chief Executive.
The search for a new CEO is progressing,
and I have agreed to stay on until a new
person is in place to ensure an orderly
transition. It has been an honour and a
privilege to have served at for Babcock
for 16 years and I am proud to have
helped it grow into the company it is
today, providing vital services for national
defence, saving lives and protecting
communities. This gives me the
confidence to know that, despite the
current uncertainty, the Group’s strong
liquidity position, robust business model,
record order book and focus on critical
services will allow us to continue to
deliver for all our stakeholders next year
and beyond.
26
Babcock International Group PLC Annual Report and Accounts 2020
COVID-19 impacts and mitigations
Our focus remains firmly on the health,
safety and wellbeing of our employees
and those we work alongside – our
customers, our supply chain partners
and our communities. All employees
who can work from home are doing so
and across our sites we are following
strict safety measures in line with
evolving government guidance and
are working closely with our
customers, governments, trade unions
and regulators.
The majority of our service delivery is
non-discretionary and critical to our
customers’ operations. Major sites
including the Devonport Royal
Dockyard, Clyde Naval Base, Rosyth
Royal Dockyard and many Army and
RAF land and air bases have remained
operational during this crisis, as well as
key civil nuclear sites around the UK.
Where we continue to operate sites,
we comply with government guidance
as it evolves and have worked with our
customers, regulators, staff and trade
unions to establish new flexible work
patterns and procedures on a
site-by-site basis. As such most of
our work has continued during this
crisis, including:
• Our defence businesses providing
crucial support to the national
defence of all the countries we
operate in
• Continued work on key defence
programmes such as submarine and
surface ship refits and life
extensions, design and build of new
submarine equipment, design of the
Type 31 frigates and critical defence
training activities
• Our Emergency Services businesses
have kept all bases open as they
operate on the front line of this crisis
and our aerial firefighting businesses
are preparing for a new season
• Our Nuclear businesses continue
to support the safe operation of
nuclear power stations and
decommissioned sites
• Our South African business continues
to provide the maintenance and
engineering support that keeps the
power stations running
In the UK, many of our people are
working from home, enabled by IT
solutions with video and teleconferencing
playing a critical role in making working
from home an effective solution.
We have also helped our customers
by sharing our experience from other
countries and regions. In Italy, we
pioneered the use of biocontainment
isolation stretchers that allow infected
patients to be transported to hospital
by air, while at the same time
protecting the flight and medical
crews from infection. Once proven in
Italy, similar approaches have been
introduced in Spain, France, Sweden
and the UK. In Spain we developed a
new internal helicopter barrier
arrangement that isolates aircrew from
patients being transported and this has
now been shared with our customers
in the UK.
Babcock joined forces with a leading
medical equipment company to
design, manufacture and supply
critical care ventilators in response to
the UK Government’s urgent request
for help from industry. Working round
the clock, our specialists developed a
brand-new design. And when the
technical requirements changed, we
were able to make sure that our
ground-breaking Zephyr Plus ventilator
was flexible enough to meet the UK’s
need. Combining our engineering
expertise and ability to create
innovative supply chain solutions with
developments in medical technology
has resulted in a solution that could
help medics in these extreme
circumstances. We are incredibly
proud of what our people, our
suppliers, and everyone who has been
involved in the project, has achieved in
such a short space of time.
While many areas of our business
continue to operate, they are
experiencing lower levels of
productivity due to staff absence and
social distancing measures. There are
some areas of our business that have
been particularly affected by lower
levels of demand, including:
• Many parts of our short cycle work
such as our rail and power in the UK
and our airports businesses are
running at significantly lower levels
of activity
• Lower levels of flying in our aerial
emergency services business
following lockdowns and lower
flying hours in our Oil and Gas
business
• Reduced activity at some civil
nuclear sites with only essential
safety works taking place
• Training activity, both defence and
civil, has reduced with some
programmes paused and others
operating at reduced levels
This led to a small financial impact to
our results for the year ended 31
March 2020. The ongoing crisis
creates significant uncertainty for the
year ahead and while the financial
impact cannot yet be quantified, we
have taken many steps to mitigate the
impact to the Group to ensure a
prudent approach to protect the long
term health of the Group for all
stakeholders. These steps include:
• Deferring non-essential operating
and capital expenditure and
tightening rules around spending
across the business
• Accelerating restructuring plans in
our Aviation and Nuclear sectors
• Limited use of furloughing staff in a
few areas such as our airports and
civil training businesses
• Senior executive management have
taken a temporary 20% reduction in
basic salary and the annual bonus
and pay rise for the new financial
year have been deferred
• Non-Executive Board members have
taken a temporary 20% reduction in
fees and will have no increase in
fees for this new financial year
• Decision on final dividend deferred
until there is greater certainty
We are also preparing for the gradual
easing of restrictions over the next few
months that will allow more of our
people to return safely to their
workplaces in strict accordance with
evolving government guidance.
Babcock International Group PLC Annual Report and Accounts 2020
27
Strategic reportGovernanceFinancial statements Strategic Partnering Programme
Tom Newman
Managing Director, Strategic
Partnering Programme
Partnering with the
UK Government:
a year of progress
At the end of 2018, Babcock and the UK
Government signed a Joint Ways of Working
Charter and launched a programme to develop
collaborative relationships across the Group’s
UK public sector business. Now one year on,
the programme has brought renewed focus
and energy across the Group.
The Babcock and UK Government
Strategic Partnering Programme (SPP) has
now been underway for over a year, and
our relationship continues to grow in
strength. We are working closely with
teams from the Cabinet Office and
Ministry of Defence on projects of mutual
interest and value.
The Joint Ways of Working Charter
underpins the deep commitment each
party has to the other, and by focusing
on ensuring successful operational
delivery in some of our most critical
contracts we are empowering our teams
to achieve excellent results.
A wide range of projects are now
underway across the Defence business in
our Marine, Land and Nuclear sectors,
and the programme is gaining excellent
traction. We have been delighted to find
28
Babcock International Group PLC Annual Report and Accounts 2020
that both customer and Babcock staff
have been keen to participate in a
programme that supports our
joint success.
One great example of the progress we
have made together is in the work going
on in the Defence Support Group, where
a combined team has improved the
availability of critical equipment for our
end user, the Army. You can see more
detail on that on the next page.
Operational excellence
The SPP also enables Babcock to get
feedback from across our UK Government
customer base in a unique way that
ensures common areas of strength and
opportunity are identified. Cabinet
Office-led workshops, conferences and
other events allow Babcock to
demonstrate the broad range of the
capability we deliver. They also allow
representatives across the UK
Government to hear about how Babcock
teams are solving complex challenges
that may not be widely understood.
These events are supported by twice-
yearly executive reviews that have
ensured alignment around priorities at
the most senior level. We have also
worked closely with the Cabinet Office to
deliver against its social value agenda,
helping to bring greater emphasis on
Diversity and Inclusion, SME supply chain
involvement and the Environment.
Strong alignment
The SPP programme aligns strongly with
Babcock’s aim to deliver operational
excellence, and to continue to improve
how we serve our customers. This
includes making sure that we take the
time to listen to them, to hear and
understand their views. One year on, we
can see that the launch of the SPP has
brought renewed focus and energy to
our drive to improve.
Work is now underway to ensure that the
best practice developed on our UK
Government contracts can be brought to
bear wherever Babcock does business,
with the launch of a new Strategic
Customer Management process. This will
use the latest technology and thinking to
ensure that our customers remain at the
heart of everything we do.
Training session at Bovington
The solution
Strategic Partnering Programme in Land Defence
Babcock has delivered
the Land Equipment
Service Provision and
Transformation Contract for
the UK Ministry of Defence
(MOD) since 2015.
The MOD was approached by the
Cabinet Office during the early rollout
of the Strategic Partnering Programme.
It was recognised that this would be a
great opportunity to refocus and
improve, and the SPP ‘workstream’
approach was adopted.
The contract involves Babcock’s
Defence Support Group (DSG)
business supplying vehicle support
to the British Army across eight service
categories, including Maintenance
Repair & Overhaul, Inventory & Repair
Management and the Training
Uplift Fleet.
The UK MOD wanted DSG to provide
them with a transformed equipment
support environment, together with
an intelligent partner who would
flexibly and efficiently meet the
needs of the Army.
The challenge
At the start of the contract it became
apparent that there was a lack of clarity
over delivery requirements. Babcock
was achieving all its key performance
indicators in the contract, but this wasn’t
meeting the customer’s real need.
Babcock was achieving all the key
performance indicators in the
contract, but that wasn’t meeting its
customer’s real need. Several unilateral
attempts were made to solve the
mismatch of expectations, but these
didn’t address the complex and
interdependent nature of the contract.
Joint teams were formed, consisting
of the people involved in delivering
the service on a day-to-day basis.
Over a period of several months
these teams conducted joint root
cause analysis which ensured they
understood each other’s issues,
requirements, constraints and
dependencies. From the root cause
analysis, the teams were then able to
develop joint solutions which were
gradually refined, implemented and
reflected within the contract.
As a result of the workstream approach,
the Inventory & Repair Management
service was able to jointly develop a
complete ‘user guide’, known as the
Joint Service Manual.
This 200-page manual articulates all of
the interface processes for the Inventory
& Repair Management service:
providing process maps, detailed
descriptions, and clear timelines and
responsibilities for all parties.
Fundamentally, the manual has removed
operational ambiguity from the service
– something that wouldn’t have been
possible without the customer and
Babcock working together. The SPP
and workstreaming approach not only
enabled the teams to arrive at this
output together, it also helped to
ensure that the conclusions were
mutually beneficial; thereby ensuring
everyone was committed to
embedding the improvements.
The results
The improvement work undertaken as
part of the SPP has delivered service
improvements and contract amendments
to the transformation contract, making
it much more effective.
What started as a way to fix a
problem has now progressed into a
collaborative focus on continuous
improvement, transformation and
value, with all parties now working
together more effectively.
The benefits have included deeper
and more transparent forecasting,
a new KPI to accurately measure
performance and improvements in
key front line metrics.
The process has resulted in a
strengthening of the relationship
between Babcock and the customer,
and a team which is now much better
placed to support the British Army’s
ability to train and fight.
Babcock International Group PLC Annual Report and Accounts 2020
29
Strategic reportGovernanceFinancial statements s172(1) Statement and Stakeholder engagement
s172(1) Statement and
Stakeholder engagement
Why they matter to us
Their issues
Customers
Babcock works with public and private customers.
By focusing on their needs, we aim to improve our
performance and build our relationships in order
to promote the long-term success of the Group.
• Delivery
• Safety
• Value for money
• Relationship
Investors
The support of our investors is vital to
the long-term performance of the Company.
• Financial performance
• Governance
• People and culture
Employees
With some 35,000 employees across the globe,
Babcock’s long-term success depends on the
engagement of its employees.
• Remuneration and reward
• Employee development
• Reputation
• Health & Safety
• Diversity & Inclusion
Regulators and industry bodies
We manage complex assets in highly regulated
sectors, for example, nuclear, defence and aviation.
We have to maintain positive and constructive
relationships with regulators in order to be able to
operate as we do.
• Regulations, policies &
standards
• Governance & transparency
• Trust & ethics
• Compliance
How Babcock engages
with its stakeholders
• Babcock engages at all levels with
its customers from the front line,
where we deliver our services
alongside our customers, to the
Board
• Annual Report and Accounts
• AGM
• Investor section of Babcock website
• Investor roadshows
• Results presentations
• Stock exchange announcements
• Investor visits
• Through sector and business unit
line managers
• Inductions
• Employee training
• being babcock programme
• Babcock Code of Conduct
• HSE teams
• Dedicated compliance teams
• Participation in industry bodies
The Board continually works to foster its relationships with customers. During the year, in order to understand their priorities,
the Board, principally through the Chair and the Executive Directors, have had regular meetings with the Group’s key customers.
The Board received briefings on these engagements at its monthly meetings. In addition, it heard the reports on the wider
customer relationship from the Sector CEOs, who attend each Board meeting.
The Board considered these priorities in all its decisions. For example, during the year, the Board reviewed specific strategic bids.
The Board assessed whether these bids, in particular the T31, addressed the customer’s key issues. In addition, over the year, the
Board has overseen the development of the Strategic Supplier Partnership with the Group’s principal customer. This programme
has enhanced the Group’s relationship with its key customer. The Board is now looking to take the lessons learnt from this
programme to see if they are relevant to other customer relationships.
Acting in a way that the Board believes is most likely to promote the Group’s success for the benefit of its members as a whole is at the
heart of the Board’s actions. During the year, the Board sought to understand the priorities of the Babcock shareholders through its
dedicated investor relations team. At its meeting to review and decide on the strategy, performance and culture of the Group, the Board
took into account the feedback it received.
For example, the Board approved the messaging in the Group’s Capital Markets Day in June 2019, including those around our strategy,
our core strengths, our key markets and our medium term financial targets.
The Board is well aware that the Group’s long-term success depends on the engagement of its employees, which in turn depends on the
Board taking into account their interests in its decision making process. During the year, the Board sought to understand the interests of
its employees through a number of different channels.
Babcock has established a formal workforce advisory panel, the Group Employee Forum, with representatives from across Babcock’s UK
and European operations. Senior management attended its meetings to listen to employee concerns and reported those concerns to the
Board. The Board, particularly through the Remuneration Committee, considered these in its review of the Group’s resource strategy
(please see page 124 for more information) and its remuneration structures during the year, including in its decisions on the
remuneration of the senior executive team (for more information, please see page 121). During the year, the Board was keen to enhance
its engagement with employees and decided to hold a number of employee focus groups to understand better its employees’
viewpoints and their priorities. The Board will receive the feedback from these sessions during the course of the year.
The sectors maintain dedicated functions in order to manage the Group’s compliance requirements. During the year, the Board
received monthly updates as part of each sector’s operational review on any significant engagement with regulators. For
example, the relationship between the Nuclear sector and the Office of Nuclear Regulation is of particular importance for our
operations in Devonport. The Nuclear sector CEO included a status update as part of his monthly report to the Board.
Supply chains
Our external supply chains are an important
part of our performance.
• Good working relationships
• Prompt payment
• Group procurement function
• Supplier Code of Conduct
• Supplier conferences & workshops
• Supplier due diligence
Babcock has a centralised procurement function. During the year, the Board received a briefing from the Group Head of
Procurement to ensure that the Board understood its supply chain risk. The Board applied its understanding of supply chain risk in
its reviews during the year of the Group’s major tenders, as supply chain strategy and plans for these projects was a key factor.
Communities
Where we have major operations, such as at Plymouth,
Faslane or Rosyth, we are often one of the largest
employers in the local area. We are aware of the
impact that we have on those communities.
• Employment
• Health & Safety
• Environment
• Armed Forces Reservists
Support
• Sponsorship
• Employee volunteering
• University partnerships
• STEM Ambassadors
Babcock aims to build positive relationships with the communities which host its businesses. In the main, the sectors hold these
relationships at a local level where the most relevant knowledge is. Relevant developments in community relationships are
included in the monthly sector reports to the Board. For more information, please see page 47. However, during the year, the
Board was keen to bring more focus to these relationships and decided to introduce a Group-wide ESG strategy. For more
information, please see page 38.
30
Babcock International Group PLC Annual Report and Accounts 2020
Customers
Babcock works with public and private customers.
By focusing on their needs, we aim to improve our
performance and build our relationships in order
to promote the long-term success of the Group.
• Delivery
• Safety
• Value for money
• Relationship
• Babcock engages at all levels with
its customers from the front line,
where we deliver our services
alongside our customers, to the
Board
Investors
The support of our investors is vital to
the long-term performance of the Company.
• Financial performance
• Annual Report and Accounts
• Governance
• AGM
• People and culture
• Investor section of Babcock website
Employees
With some 35,000 employees across the globe,
Babcock’s long-term success depends on the
engagement of its employees.
• Employee development
• Reputation
• Health & Safety
• Diversity & Inclusion
• Remuneration and reward
• Through sector and business unit
• Investor roadshows
• Results presentations
• Stock exchange announcements
• Investor visits
line managers
• Inductions
• Employee training
• being babcock programme
• Babcock Code of Conduct
• HSE teams
Regulators and industry bodies
• Regulations, policies &
• Dedicated compliance teams
• Participation in industry bodies
We manage complex assets in highly regulated
• Governance & transparency
sectors, for example, nuclear, defence and aviation.
We have to maintain positive and constructive
relationships with regulators in order to be able to
operate as we do.
standards
• Trust & ethics
• Compliance
Supply chains
Our external supply chains are an important
part of our performance.
• Good working relationships
• Group procurement function
• Prompt payment
• Supplier Code of Conduct
• Supplier conferences & workshops
• Supplier due diligence
Communities
Where we have major operations, such as at Plymouth,
Faslane or Rosyth, we are often one of the largest
employers in the local area. We are aware of the
impact that we have on those communities.
• Employment
• Health & Safety
• Environment
Support
• Sponsorship
• Employee volunteering
• University partnerships
• Armed Forces Reservists
• STEM Ambassadors
The Directors have acted in a way that they consider, in good faith, to be most likely to promote
the long-term success of the Company for the benefit of the Shareholders as a whole while having
regard for all stakeholders. We describe how they have done so in the table below. The Directors
believe that stakeholder engagement remains vital to building a sustainable business. Further
information can also be found in the Sustainable business section on pages 36 to 53.
How the Board fulfilled its s172 duties
The Board continually works to foster its relationships with customers. During the year, in order to understand their priorities,
the Board, principally through the Chair and the Executive Directors, have had regular meetings with the Group’s key customers.
The Board received briefings on these engagements at its monthly meetings. In addition, it heard the reports on the wider
customer relationship from the Sector CEOs, who attend each Board meeting.
The Board considered these priorities in all its decisions. For example, during the year, the Board reviewed specific strategic bids.
The Board assessed whether these bids, in particular the T31, addressed the customer’s key issues. In addition, over the year, the
Board has overseen the development of the Strategic Supplier Partnership with the Group’s principal customer. This programme
has enhanced the Group’s relationship with its key customer. The Board is now looking to take the lessons learnt from this
programme to see if they are relevant to other customer relationships.
Acting in a way that the Board believes is most likely to promote the Group’s success for the benefit of its members as a whole is at the
heart of the Board’s actions. During the year, the Board sought to understand the priorities of the Babcock shareholders through its
dedicated investor relations team. At its meeting to review and decide on the strategy, performance and culture of the Group, the Board
took into account the feedback it received.
For example, the Board approved the messaging in the Group’s Capital Markets Day in June 2019, including those around our strategy,
our core strengths, our key markets and our medium term financial targets.
The Board is well aware that the Group’s long-term success depends on the engagement of its employees, which in turn depends on the
Board taking into account their interests in its decision making process. During the year, the Board sought to understand the interests of
its employees through a number of different channels.
Babcock has established a formal workforce advisory panel, the Group Employee Forum, with representatives from across Babcock’s UK
and European operations. Senior management attended its meetings to listen to employee concerns and reported those concerns to the
Board. The Board, particularly through the Remuneration Committee, considered these in its review of the Group’s resource strategy
(please see page 124 for more information) and its remuneration structures during the year, including in its decisions on the
remuneration of the senior executive team (for more information, please see page 121). During the year, the Board was keen to enhance
its engagement with employees and decided to hold a number of employee focus groups to understand better its employees’
viewpoints and their priorities. The Board will receive the feedback from these sessions during the course of the year.
The sectors maintain dedicated functions in order to manage the Group’s compliance requirements. During the year, the Board
received monthly updates as part of each sector’s operational review on any significant engagement with regulators. For
example, the relationship between the Nuclear sector and the Office of Nuclear Regulation is of particular importance for our
operations in Devonport. The Nuclear sector CEO included a status update as part of his monthly report to the Board.
Babcock has a centralised procurement function. During the year, the Board received a briefing from the Group Head of
Procurement to ensure that the Board understood its supply chain risk. The Board applied its understanding of supply chain risk in
its reviews during the year of the Group’s major tenders, as supply chain strategy and plans for these projects was a key factor.
Babcock aims to build positive relationships with the communities which host its businesses. In the main, the sectors hold these
relationships at a local level where the most relevant knowledge is. Relevant developments in community relationships are
included in the monthly sector reports to the Board. For more information, please see page 47. However, during the year, the
Board was keen to bring more focus to these relationships and decided to introduce a Group-wide ESG strategy. For more
information, please see page 38.
Babcock International Group PLC Annual Report and Accounts 2020
31
Strategic reportGovernanceFinancial statements
Market review
Intelligent support
across...
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Babcock is a trusted partner for key defence programmes
around the world.
We are the market leader for defence support in the
UK, and have a significant presence in many overseas
markets, all of which share similar characteristics:
• Evolving threats to national security
• Budgets under consistent pressure to deliver value
• Upward budget pressure from NATO commitments
• Demand for technology to drive efficiency
• Growth in naval shipbuilding programmes
• Air forces requiring advanced training on new fleets
• Large land fleets requiring through-life support and
life extensions
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. 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 across more critical programmes than any
other provider, 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 market, the growth in any individual year is partly
dependent on the phasing of MOD spend.
Over the last year, the UK market has seen an
increased budget, and milestones achieved across
major programmes. The continued drive is the UK’s
continued commitment to meet the objectives
outlined in the Strategic Defence and Security Review
(SDSR) 2015 and a renewed commitment to meet the
NATO spending target of at least 2% of GDP.
UK defence spend 2019
£38.0bn
Personnel
31%
Equipment support
19%
Specialist equipment
16%
Infrastructure
11%
Property
9%
Other
14%
Defence spending in the UK rose last year to £38.0 billion,
£1.4 billion higher than 2018, with £16.1 billion spent
on MOD equipment and support. Around 19% of the
total defence spend, £7.1 billion, was designated to
supporting MOD equipment, an increase of around
£300 million. This is the main area of spend where
Babcock operates.
In March 2020, the MOD’s equipment plan outlined a
£180.7 billion available budget allocated to equipment
and support over the next ten years. The MOD came
under scrutiny to address last year’s deficit and has
since successfully reduced the shortfall to £2.9 billion.
The reduced forecast is the product of identifying and
delivering efficiency initiatives and improving
forecasting, rather than reductions in procurement or
support programmes. In 2019, the Government
uplifted the budget by an additional £2.2 billion.
The Government also identified a requirement to
accelerate their pledge to mobilise, modernise and
transform defence, improving productivity, reducing
costs and delivering next generation capabilities.
The forthcoming Integrated Review, though delayed
by the impacts of COVID-19, will provide the UK with
opportunities to update and validate equipment
and support requirements and deliver efficiency to
ensure the UK retains capabilities to defend against
modern threats.
International defence
International markets offer significant long-term
potential, both in terms of increased spend in current
markets and expansion into new markets, and our bid
pipeline includes many opportunities. Australia
continues its major procurement of sea, land and air
assets, as well as significant capability upgrades to
cyber and command, control, communications,
computers and intelligence (C4I) systems. 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. In Europe, there are many significant
long-term opportunities. In France, the market is seeing
increasing demand for both fixed and rotary wing
training, providing opportunity for us to capitalise on
our successful training operations.
Source: UK MOD
32
Babcock International Group PLC Annual Report and Accounts 2020
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Babcock is a trusted partner
to governments across the
world delivering highly-critical
emergency services.
Demand for increasingly complex and technical
emergency services continues to grow across
the world.
Emergency medical services
Markets across the world vary in structure.
Regional authorities in Europe provide a source
of steady demand, though market growth in
each country is limited. This year saw delays in
the award of new contracts in Italy and Spain,
partly due to increased regulatory processes and
partly due to competitor challenges. Our growth
is supported by entering new markets, and this
year we started services in Norway. We see other
opportunities across Europe to expand our
offering over the coming years.
We are actively exploring opportunities to enter
the market in Canada, building from our entry
into firefighting this year.
Firefighting
In aerial firefighting, activity levels in our markets
were lower this year, with fewer fires in our
countries compared to last year, given wetter
weather conditions. However, the demand for
aerial firefighting remains high as the global
climate changes. The trend towards crossing
borders in firefighting operations continues
across Europe, and this year we provided support
to other countries at the request of the
European Union, such as flying missions across
Greece, Sweden and Israel in support of their
firefighting activities.
We started operations in North America this year
with our entry into Manitoba, Canada. The North
American market is maturing, with more
outsourcing contracts coming to market as the
spread of fires go beyond state and province
responsibility. Our work in Manitoba has allowed
us to showcase our expertise, and we hope to
build on this further.
Police
We entered a new market this year and will be
training police officers for the first time working
with the London Metropolitan police force. This
complements the work we do on looking after
London’s fleet of police vehicles.
l
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The civil nuclear market
remains a long-term growth
opportunity but is challenged
in the short term.
The civil nuclear market remains a significant
long-term growth opportunity both in the UK
and, increasingly, overseas, as ageing power
stations have their generating life extended or
are brought offline, and as new power stations
are built.
In the UK, however, many of the opportunities in
this space continue to see delays. Political and
economic factors have affected several key
milestones and decisions in the UK across
generation, operational support,
decommissioning and, in particular, nuclear new
build. Developments overseas, particularly in
Canada, offer significant opportunity to expand
and demonstrate internationally our unique UK
experience and capability, however our exposure
is currently limited.
During the year, the civil nuclear industry saw
further consolidation of the supply chain across the
market, changing the competitive landscape in
the UK and overseas with some major acquisitions.
Decommissioning
The Nuclear Decommissioning Authority (NDA)
budget during the year saw a modest increase to
£2.2 billion, but should see a further increase to
around £2.7 billion of funding next year. BEIS
continues to manage the liabilities for
decommissioning all nuclear sites. In 2019,
these obligations were calculated at around
£157 billion. Sellafield, accounting for the
majority of the liabilities, continues to be an
opportunity for engineering packages.
The launch of the consultation on the new
NDA business plan for 2020-2023 and its
implementation will likely be a focus over
the short term. A key part of the business
plan is focused to ensure Magnox, transferred
back to NDA control in September 2019,
is managed effectively.
Babcock International Group PLC Annual Report and Accounts 2020
33
Strategic reportGovernanceFinancial statements
Critical support:
emergency services
Beechcraft King Air 250 air ambulance landing at Tromsø airport, Norway
34
Babcock International Group PLC Annual Report and Accounts 2020
Agneta Karlfeldt
COO/Chief Flight Nurse Fixed Wing, Scandinavian Air Ambulance
We work around the clock
in the harshest weather
conditions and most remote
locations – from the
Arctic Circle to the most
inaccessible areas of the
Mediterranean coast. The
terrain often makes road
travel long and circuitous.
Our air ambulance
services are vital to local
communities, who would
otherwise not be able to
access the hospital
services they need.
Our customers trust us
because they know we
have the specialist
expertise required to
work in these complex
environments where
emergencies happen.”
Babcock International Group PLC Annual Report and Accounts 2020
35
Strategic reportGovernanceFinancial statements Sustainable business
The health and safety of our employees is
of paramount importance, and we work
hard to ensure all our people get home
safe every day. I was therefore deeply
saddened by the death of one of our
colleagues in January, following an
incident involving inspections on an
armoured vehicle. This tragic incident
serves to strengthen our focus on
ensuring that we have a world class
safety culture.
Our delivery programmes are by their
very nature long term, and we are
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. In support,
we continue to invest in technical
apprenticeships, graduate schemes,
management training and talent
development programmes.
We are also committed to providing a
fair, equal and inclusive environment for
all of our people. We run employee
Diversity & Inclusion networks across our
operations, and we ask for employee
feedback through sector questionnaires
and Group-wide focus groups to ensure
we actively address questions and concerns.
Our STEM Ambassadors have been
continuing their volunteer outreach
activities in local schools and colleges, to
engage and inspire the next generation.
Local initiatives are a key feature of the
value that Babcock brings, not just to our
customers and employees but to the
wider community. We actively engage
with communities in which we operate,
to become a part of the environment and
to enhance social cohesion.
Governance
Babcock has always been and will always
be committed to doing business honestly
and openly. We hold our leaders to
account for ensuring their businesses
operate according to the standards
we expect.
Our Group-wide Code of Business
Conduct lays out our policy of strict
ethical conduct, highlighting the
fundamental importance of conducting
all business activities to the highest
standards of honesty and integrity.
A key contributor to our ability to deliver
effectively is our corporate values,
expressed in being babcock (see page
43), which underpin our activities so that
we operate in a safe, respectful and
trusted environment.
Archie Bethel CBE
Chief Executive
Sustainability is at the
heart of our business
Sustainability is a key part of our
planning, our operational delivery and
our approach to through-life support.
It’s about thinking and acting for the
long term – for all our stakeholders.
The global sustainability agenda is
increasingly important to our customers,
our employees and our shareholders, and
we take our responsibility to operate
ethically and deliver in a sustainable
manner seriously.
Sustainability is an integral part of our
business. We think and act for the long
term, and we are a trusted partner to our
customers. We also work closely with our
suppliers to ensure the same standards
apply throughout our supply chain.
As we display in case studies throughout
this report, our businesses actively assess
the impact that our operations have on
our wider stakeholder base.
This year, we have enhanced our
Group-wide approach by introducing a
new role – Group Head of Sustainability
– and I am delighted to champion the
Sustainability agenda at Board level.
Environmental responsibility
Incorporating sustainability into our
everyday operations is key to ensure
successful, long-term delivery outcomes,
and we have a responsibility to leave a
positive impact on our environment.
We recognise the impact of CO2 and
other greenhouse gases on our
environment, and we are committing to
reducing the impact associated with our
own energy usage.
We will continue to enhance the use of
technology to reduce our current
footprint. We are also addressing water
and waste management activities, and
are working with our supply chains to
promote sustainable delivery.
Social responsibility
We rely on the support and collaboration
of local communities, small businesses
and our people where we live and work.
36
Babcock International Group PLC Annual Report and Accounts 2020
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 content of the non-financial information disclosure has been expanded from previous years as we are providing greater
transparency into our policies, standards and governance approach to operational activities. We are committed to increasing this
transparency over the upcoming years and have structured the sustainable business report to provide insights based on global
standardised reporting standards in three key areas: Environment, Social and Governance.
Reporting requirement
Policies and standards
Additional information
Environmental matters
Health, Safety and Environment Policy*
Energy Policy*
Procurement Environmental Policy*
Clean inputs
Responsible consumption
Health, safety and environmental risk
Employees
Code of Conduct**
Health, Safety and Environment Policy*
HR Matters Policy*
being babcock (see page 43)
Joint Ways of Working Charter
People and potential
Gender diversity and pay gap
Corporate integrity
Women in Babcock
People risk
s172(1) statement
Remuneration
Note 25 - Share based payments
Human rights
Social matters
Code of Conduct**
Supplier Code of Conduct**
Modern Slavery Statement**
Corporate Integrity
Diverse and robust supply chains
Anti-Bribery and Corruption/
Ethical Policy**
Code of Conduct**
Diversity and Inclusion Charter*
Canada Indigenous Peoples Policy*
People and potential
Corporate integrity
Community engagement
s172(1) statement
Anti-bribery and
corruption
Anti-Bribery and Corruption/
Ethical Policy**
Whistleblowing structure
Supplier Code of Conduct**
Diverse and robust supply chains
Corporate integrity
Principal risks and management controls
Governance statement
Description of principal
risks and impact on
business activity
Business model
Non-financial KPIs
Principal risks and management controls
Our business model
Delivering on our strategy
* Available to employees through the Babcock intranet but not published externally.
** Available on the Babcock website and available to employees through the Babcock intranet.
Page
40
41
87
44
46
49
52
88
30
121
199
49
50
44
49
7, 47
30
50
49
80
96
80
14
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Babcock International Group PLC Annual Report and Accounts 2020
37
Strategic reportGovernanceFinancial statements
Sustainable business continued
ESG strategy
We are committed to delivering in a sustainable way for all our stakeholders.
Saving lives and enabling our customers to increase the performance, efficiency
and lifespan of their critical assets and services are inherently sustainable
activities. We augment our operational delivery by minimising the impact of our
operations on the environment, focusing on the safety of our people and
ensuring a positive impact in communities in which we operate.
This year we have introduced a new
Group-wide ESG strategy. Although a
significant number of activities take place
within contract teams and business units,
this Group-wide strategy enables us to
leverage the experience and scale of
the organisation, to more effectively
contribute to the communities in which
we operate and the environment in
which we live.
We are aligning our activities to the UN
Sustainable Development Goals so that
we can demonstrate the ways in which
our actions actively contribute toward
these global objectives.
We are also seeking to enhance
transparency, including providing insight
into our governance, processes and
metrics. These metrics are being
established across each of our key
Sustainability principles, and will enable
us to clearly articulate the impact our
activities and operations have on the
environment and the people who are so
crucial to our future. We aim to
communicate these metrics in
association with global standards and
industry specific disclosures.
This strategy is championed by the Group
Chief Executive and signed off by the
Board. Operational metrics and key areas
of focus are reviewed at Executive
Committee meetings.
Social
Our sustainability charter
The safety and
wellbeing of our
people is our priority.
We encourage a
diverse and inclusive
employee base
where each person
feels respected and
able to fill their
potential.
We play an active
part in our local
communities to
enhance
development and
inspire the next
generation.
We partner with our
supply chains to
identify innovative
solution and ensure
timely delivery of
quality products and
services.
Cle
inp
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P e o
t p o t e
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iv
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g rity
pply chains
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Governa n c e
E
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We use innovative
solutions to reduce
our energy needs,
while focusing on
cleaner energy and
other natural
resources.
We integrate
environmental
sustainability into our
programme design,
optimise use of
resources and
minimise waste
through increased
re-use and recycling.
We believe that
ethical behaviour
underpins our
sustainability activities.
We establish robust
processes and controls
to identify
opportunities and
manage corporate
risks.
38
Babcock International Group PLC Annual Report and Accounts 2020
Sustainability
at Babcock
Alignment
to UN SDGs
Environmental
Clean inputs
Social
Responsible
consumption
People and
potential
Community
engagement
Governance
Diverse and robust
supply chains
Commercial
integrity
Using our technology skills in the fight against COVID-19
Focus areas
Clean electricity, alternative
energy
C02e outputs, water
consumption, waste disposal
Home safe everyday,
employee feedback,
Diversity and Inclusion,
talent and development
Volunteering, corporate
sponsorship, university
partnerships
Due diligence, cyber
essentials, modern slavery
Prompt payment, anti-
bribery and corruption
Our engineers were proud to use
their technical skills to develop new
solutions in the global fight against
the virus.
Ventilator challenge
Babcock joined forces with a leading
medical equipment company to
design, manufacture and supply
critical care ventilators in response to
the UK Government’s urgent request
for help from industry.
Working round the clock, our
specialists developed a brand-new
design. And when the technical
requirements changed, we were able
to make sure that our ground-breaking
Zephyr Plus ventilator was flexible
enough to meet the UK’s need.
Combining our engineering expertise
and ability to create innovative supply
chain solutions with developments in
medical technology has resulted in a
solution that can help medics in these
extreme circumstances.
We are incredibly proud of what our
people, our suppliers, and everyone
involved in the project has achieved
in such a short space of time.
Air ambulance innovations
Babcock has been providing aerial
emergency medical services
throughout the crisis.
To help patients reach the hospital
care they needed, we were able to
create, test and certify the use of new
isolation stretchers. These pods allow
the safe transportation of COVID-19
patients, protecting the crew and
others against exposure to the virus.
We drew on the experience and
innovation of our experts to create a
new framework system which enables
the pods to work seamlessly with the
onboard medical systems.
Our engineers in the UK and Spain
also collaborated to design and
develop a new on-board barrier which
effectively separates the medical
teams from the flight crews across our
fleet of life-saving aircraft.
Projects like these would normally
take several months, but working
with new guidance from the
European Union Aviation Safety
Agency and national regulators, we
were able to accelerate the process
to just a few weeks.
Babcock International Group PLC Annual Report and Accounts 2020
39
Strategic reportGovernanceFinancial statements
Sustainable business continued
Environmental
Clean inputs
We use innovative
solutions to reduce our
energy needs, while
focusing on cleaner
energy and other
natural resources.
We recognise that working sustainably
makes strategic business sense.
Groupwide activities support increasing
local focus on managing clean inputs.
Our sectors and business units also
drive this agenda through activities
that directly support our customers’
needs. Sustainability is embedded
throughout the organisation and is a
central consideration in the decision
making process.
Babcock’s Board and senior management
are committed to delivering continual
environmental improvements across
the organisation.
Energy governance
At Group level, an energy and
environmental working group meets
quarterly with representatives from each
sector. The working group, chaired by
the Group Energy Manager, designs and
reviews the energy and environmental
policy and shares best practice.
Sectors and business units set KPIs
appropriate to their individual businesses.
Energy consumption data is collated
into a central database, enabling
reduction targets to be established
and monitored regularly.
Babcock has held the Carbon Trust
Standard for its UK operations since
2010, and will be seeking reaccreditation
in 2020. The continuous monitoring of
energy consumption and the attention to
environmental policies ensure that the
environmental impact of the Company’s
operations is minimised.
Energy management and
procurement
We have advanced energy management
practices in place across the organisation
which allow us to effectively manage our
consumptions and emissions. We have
implemented a Metering, Monitoring
and Targeting (MM&T) strategy which
allows us to easily identify and remediate
any inefficiencies.
Our Group-wide energy database is key
to managing our energy consumption,
and provides us with a holistic view of
our impact.
The procurement of electricity for our UK
activities has been largely centralised for
some time, providing benefits including
the avoidance of costs.
Babcock has committed to purchasing
its power for UK operations in a
responsible manner.
Biomass, which features a carbon
footprint less than 15% of coal-fired
electricity, is our primary energy source.
This form of renewable energy also
supports healthy, sustainably managed
working forests which help to fight
climate change.
We also benefit from local alternative
energy solutions as demonstrated at
Devonport Dockyard. Under a Power
Purchase Agreement (PPA), Devonport
Dockyard purchases 100% of its power
and a major percentage of its steam
requirements from the adjacent MVV,
energy from waste, CHP plant.
The facility takes in waste from the local
area and converts it into electrical and
steam energy. This bespoke arrangement
reduces the carbon footprint and
environmental impacts of our operations.
In our Aviation business, we are
working with our customers and
supply chain to identify opportunities
to add OEM-approved bio-jet fuel in
order to use Sustainable Aviation
Fuel (SAF) in our Emergency Medical
Service, Aerial Firefighting and Oil and
Gas-related activities.
Energy improvements in civil nuclear
This year we introduced a range of
energy improvements at our sites in
Chester and Whetstone.
In Chester, we installed new air
compressors which require less
power to run and produce a higher
capacity of compressed air. As well
as LED lighting in the high bay
workshop, we’ve installed new
gas-fired warm air heaters with
timers, winter/summer modes and
an automatic roller shutter door in
the main workshop area.
40
Babcock International Group PLC Annual Report and Accounts 2020
Using more efficient heaters
together with new doors to keep
the heat in resulted in our using 33%
less electricity and 41% less gas than
the previous year.
In Whetstone, we have installed a
new boiler and immersion heater
and new electric heaters. We’ve also
made some repairs to reduce heat
loss, and now control both lighting
and heating with timers.
As a result, in 2019/20 we used
14% less electricity and 12% less gas
than in 2018/19.
Environmental
Responsible consumption
We take our responsibility
for managing the impact
of our operations and those
of our supply chain on the
environment seriously.
We are currently working to implement
standards for good practice across the
Group: on reducing waste and on increasing
recycling and the use of recycled, low-impact
and recovered materials.
We are also focused on improving
efficiency in our energy use across all of the
Group’s operations. We are pleased that
our actions in managing local demand
have improved our energy consumption
and emissions figures. These also reflect
reductions in business travel due to
COVID-19.
We have a diverse range of operations,
some of which are within highly regulated
arenas where the potential for environmental
harm is significant. To ensure risks are
appropriately managed and impacts
minimised, we operate Environmental
Management Systems across the
organisation. We currently have 23
business units operating ISO14001
accredited EMS. Our management systems
allow us to understand, monitor and
manage our environmental impacts, while
delivering continual improvements.
Climate change impact
We recognise that climate change will
result in consequences, not just to our
business but to the environment in which
we operate. Issues that might affect
Babcock include floods, hurricanes, fires
and droughts. We identify the risks of
climate change on our operations at a
contract level and this is reviewed at
business unit and sector Board level. We
then communicate any material risks to
the Audit and Risk Committee on a
bi-annual basis.
Having reviewed climate-related risks, we
do not believe that there will be direct
material adverse impact on our operations
over the short or medium term. We will
continue to assess emerging climate-
related risks and will identify appropriate
mitigation activities. Our improvement
plans for 2020/21 include performing
long-term risk assessments on the
assumption of an increase in CO2.
We also recognise that climate change
could result in an increased demand for
our services and products in response to
climate-related challenges. For example,
in our LGE business which provides
optimised solutions for the transportation
of liquefied gas as an alternative to more
polluting fuels and in our aerial emergency
services (medical transportation and
firefighting activities in Europe, Australia
and North America).
Supply chain
Our supply chain has an important part to
play in supporting our efforts to reduce
emissions. This year, we introduced a
Group-wide procurement policy that
requires environmental aspects to be
taken into account as part of the
competitive tender process. We are working
closely with our suppliers to reduce
packaging where feasible. We have also
implemented more recycling and re-use
initiatives in order to minimise waste.
Carbon emissions
We recognise the impact that greenhouse
gas emissions have on our environment.
We are committed to reducing our impact
and will review appropriate, accredited
targets over the coming year.
Babcock Group Energy Consumption and Emissions
UK/UK offshore
Scope 1: Direct emissions from owned/controlled operations
Scope 2: Indirect emissions from the use of electricity and steam
Scope 3: Emissions – business travel, electric transmission and distribution
Total emissions
Underlying energy consumption used to calculate emissions
Global (excluding UK/UK offshore)
Scope 1: Direct emissions from owned/controlled operations
Scope 2: Indirect emissions from the use of electricity and steam
Scope 3: Emissions – business travel, electric transmission and distribution
Total emissions
Underlying energy consumption used to calculate emissions
Babcock Group Total (UK/UK offshore and Global)
Scope 1: Direct emissions from owned/controlled operations
Scope 2: Indirect emissions from the use of electricity and steam
Scope 3: Emissions – business travel, electric transmission and distribution
Total emissions
Underlying energy consumption used to calculate emissions
2017/18
2018/19
2019/20
76,614.3
96,251.5
20,790.8
70,515.9
73,416.0
17,723.2
62,754.5
59,721.3
13,304.4
193,656.5
161,655.2
135,780.2
644,939,237.2
595,419,932.2 530,000,509.8
105,010.5
94,405.1
107,205.4
8,144.8
850.1
7,314.3
319.9
4,572.7
361.2
114,005.4
102,039.2
112,139.3
446,044,504.7
401,624,794.3 450,404,800.4
tCO2e
tCO2e
tCO2e
tCO2e
kWh
tCO2e
tCO2e
tCO2e
tCO2e
kWh
181,624.8
104,396.3
tCO2e
tCO2e
tCO2e
tCO2e
kWh 1,090,983,741.9
307,661.9
21,640.8
164,921.0
169,959.9
80,730.4
18,043.1
64,294.0
13,665.6
263,694.5
247,919.5
997,044,726.4 980,405,310.1
Revenue
Intensity Ratio
£m
tCO2e/£m
4,659.6
66.0
4,474.8
58.9
4,449.5
55.7
Our emissions data is reported in line with the Greenhouse Gas Protocol Corporate Accounting & Reporting Standard under the ‘Operational Control’ approach.
Figures for UK operations follow conversion factors published by BEIS. Non-UK operations use emission factors applicable to the fuel source and location.
Appropriate conversion factors have been used to calculate the underlying energy consumption figures. Scope 1, 2 and 3 sources have been divided by the
annual revenue to provide the intensity ratio (tCO2e per £m). Figures for prior years have been adjusted to include data unavailable last year, and figures for this
year include an element of estimated data. Certain data, estimated to be immaterial to the Group’s emissions, has been omitted as it has not been practical to
obtain (operations in Oman, South Korea, Canada and Australia). Metering and monitoring improvements are being implemented to capture these data streams.
Babcock International Group PLC Annual Report and Accounts 2020
41
Strategic reportGovernanceFinancial statements
Sustainable business continued
Environmental
Responsible consumption continued
Sustainable buildings
Across the organisation we continue to
develop and improve our built estate and
we strive to achieve excellent
sustainability credentials with all
developments. Sustainability
considerations are at the core of the
design and decision making process. We
aim to deliver high quality assets which
meet the current and future needs of our
staff and customers whilst minimising our
environmental impacts.
In 2019 we opened the Babcock
Technology Centre in Bristol, which
houses 850 people and is home to staff
from across all four of our sectors. The
accommodation is over five floors and
the facilities include a gym and canteen.
The building was designed and built to
Building Research Establishment
Environmental Assessment Method
(BREEAM) Excellent standard, as were the
recent new buildings at our sites in
Devonport and Rosyth.
This year RAF Valley and RAF Cranwell
also achieved Defence Related
Environmental Assessment Method
(DREAM) accreditations for construction.
Zero to landfill
All Babcock businesses are committed to
minimising waste across their operations.
For example, our dockyard in Rosyth has
been zero to landfill for a number of
years now.
Last year our power business in the UK,
Babcock Networks Limited, achieved
100% diversion of construction waste
from landfill across all overhead line
projects, equating to 39,462 tonnes.
Over the coming year, we will improve
our recycling and re-use activities. We
will also assess the opportunity to attain
zero to landfill in other business areas.
Waste management
We also actively help our customers meet
their waste management targets.
Babcock manages the rental leases for
the UK MOD’s white fleet, and is
supporting the MOD and the UK
Government in the transition to ‘Road to
Zero’, which includes a commitment to
convert 25 per cent of combustion
engines to ultra-low emission by 2022,
and 100 per cent by 2030.
Protecting biodiversity
Babcock’s work to refurbish the
overhead power line from Landulph
to Exeter involved going through
a number of Sites of Special
Scientific Interest.
The area included the habitats of
wildlife such as great crested newts,
dormice and protected birds, and
even a goshawk nest.
Our environmental advisor identified
at an early stage that the ecological
surveys provided to us lacked
scope and detail, and so we took a
proactive approach to make sure we
could protect the habitats without
incurring undue delays.
We deployed a specialist ecologist
who conducted additional surveys
and consulted with key stakeholders
like Natural England.
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Babcock International Group PLC Annual Report and Accounts 2020
An example of effective management of
emissions can be seen in our Type 31
build work, where we are transporting
steel, rebar and concrete to Rosyth by
sea instead of by road. This reduces the
number of lorries on our roads by
approximately 3,500 over the three
month-period it would have taken to
deliver the material, thereby reducing
CO2 emissions, noise impact and
enhancing road and site safety.
At RAF Brize Norton, we challenged
well-established processes to make
significant environmental improvements
to our use of water. Demonstrating that
we were able to use waste potable water
to conduct hyper-sterilisation tasks has
reduced water wastage by almost
500,000 litres per year.
Protocols have been developed and
validated which reduce the fluid used in
testing and preparing the anti-icing
delivery vehicle used by AirTanker from
an average of 80,000 litres a year to
around 30,000 litres.
These improvements have had a direct
impact on our local environment, as
previously all applied de-icing fluid and
unused water went into the RAF Brize
Norton ground water system.
We used the latest methodology
– Environmental DNA surveys – and
additional dormice surveys, and
used these to plan our work,
calculating the permanent and
temporary habit impact at the
design stage.
We even liaised with a goshawk
specialist and with the agreement of
the Forestry Commission we were
able to do the essential work safely
and without any impact to the birds
of Haldon Forest.
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
Babcock International Group PLC Annual Report and Accounts 2020
43
Strategic reportGovernanceFinancial statements Sustainable business continued
Social
People and potential
We recognise that our
people are critical to
our ability to deliver our
strategic goals. We need
to ensure that their
workplace is safe, is
inclusive, welcomes
diversity and offers
everyone the chance
to develop to their
full potential.
In order to serve our customers
effectively, we need to have the right
people, with the right skills, and the right
behaviours, in the right place.
Safety at Babcock
Home safe every day
Safety is, without question, our number
one priority. We are committed to
continuing our efforts to make sure that
every one of our people, and the people
whom we work alongside, goes Home
safe every day. Safety is at the heart of
our drive to deliver operational
excellence for our customers. We believe
that focusing on safety is essential to
having a high-performing, open and
constructive safety culture, where our
people can speak up, be heard, invested
in and trusted.
Governance
The Group’s Board and Executive
Committee review safety commentary
and performance reports on a monthly
basis. The Board additionally receives
half-yearly reports on our safety
performance and initiatives.
Our Corporate Safety Steering Group
(CSSG) is the highest level of professional,
collective management of health and
safety issues within the Group. Its role
is to:
• Recommend and set Group safety
strategy, policy and standards for all
matters relevant to the protection of
the environment and the health and
safety of the Group’s employees and
any other persons affected by our
undertakings
• Assure the Group Executive Committee
and the Board of Directors of the
delivery of these policies and standards
Safety review
In January, an incident involving inspections on an armoured vehicle resulted in the
tragic death of one of our long-serving colleagues. This is currently under investigation
by the appropriate authorities. In Spain, whilst we have recorded zero work-related
fatalities an EMS captain from our Ciudad Real base died after contracting the
COVID-19 virus. He had been working with us for over 12 years, carrying out numerous
flights with the utmost professionalism and commitment to the service.
Our incident reductions this year demonstrate Babcock’s refocused safety culture and
the continual improvement from our people. The number of Injuries In the period has
reduced by 21%, and the more serious ‘Babcock riddor’ injuries have reduced by 24%
compared to the previous year. Similarly, our total injury rate (injuries per 100,000
hours worked) has reduced by 16% and the Babcock riddor injury rate by 22%.
While we continue to strive for further improvements, the Group’s performance
continues to be better than industry norms, with an injury rate of 1.24 per 100,000
hours compared to 2.44 for the manufacturing sector, including shipbuilding and
repairs, as reported in the 2019 Health and Safety Executive statistics.
Total number of injuries
Fatalities
Major injuries
Over-three-day injuries
Babcock riddor1 totals
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
2019/20
1,141
1
20
111
132
Total injury rates per
100,000 hours worked
Babcock riddor1 rate per
100,000 hours worked
.
1
9
2
.
1
5
8
.
1
4
7
.
1
3
5
.
1
2
4
.
0
1
9
.
0
1
8
.
0
1
4
.
0
1
3
.
0
1
1
16
17
18
19
20
16
17
18
19
20
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’.
• Facilitate and enable corporate
learning around the Group, raising
awareness of appropriate topics
throughout the business
• Own and deliver Group-wide health,
safety and environmental initiatives
and projects.
Sector safety leadership teams
implement these Group policies and
standards, as well as their own more
detailed plans specific to their individual
activities and territories.
There are also sector specific industry
standards and regulations that must be
adhered to, for example, Nuclear,
Aviation and Product safety, and the
sectors have subject matter experts to
address this.
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
• Safety improvement plans are
implemented, based on a balanced
assessment of safety performance that
delivers the commitment to
continuous improvement
• Business unit learning across the
Group, supporting continual
improvement
• A consistent Babcock approach to
safety and a sharing best practice.
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Babcock International Group PLC Annual Report and Accounts 2020
Apprentices at Rosyth
This year saw Modern Apprentices
Luke Day and Caitlin Thompson join
us at Rosyth.
Electrical apprentice Luke has been
fascinated by all things electrical
since he was a young boy.
“Working on-site has definitely
been the highlight of my time
here to date. The skills that people
have at Rosyth are unbelievable,
and the level of engineering
which went into building the site
itself is phenomenal.”
Electrical Technical Design
apprentice Caitlin is following in her
family’s footsteps, joining both her
father and uncle at the site. Caitlin
has known she wanted to be an
engineer since primary school.
“I did a Foundation Apprenticeship
in Manufacturing Engineering when
I was at school. It has really helped
with my current Modern
Apprenticeship, as it gave me a
much better idea of what
engineering entailed.”
Babcock apprentice Luke Day
Babcock apprentice Caitlin Thompson
Formal audit reports are issued to the
business units, with feedback provided to
the Group Executive Committee.
The annual Group Safety Conference
promotes the Group safety vision, the
sharing of health and safety initiatives
and activities. It also recognises the
efforts made every day by Babcock
personnel, customers and suppliers. Last
year’s event (our thirteenth) had the
theme of ‘Empower, Lead, Succeed’.
Safety leadership is the primary driver for
a positive safety culture. When we have a
positive safety culture, we create an
environment where we listen and take
notice, we don’t walk by and we take
time to stop and think. We collectively
learn from our mistakes and successes to
achieve our goals safely.
Diversity & Inclusion
At Babcock we believe diversity is about
embracing the advantages people with
different experiences, skills and outlooks
can bring to our teams.
Respect, Women in Babcock and
Family Friendly Working
Our initiative, ‘All together different’,
continues to drive our diversity agenda,
led by our cross-business Diversity
Steering Group, chaired by senior
executives. This year we focused on three
diversity initiatives: Respect, Women in
Babcock and Family Friendly Working.
The Respect initiative sets to drive
cultural change to deliver the respect
element of being babcock.
Women in Babcock focuses on reducing
the gender balance disparity in the
workplace by improving gender equity.
The global Family Friendly Working
initiative aims to recognise the evolution
of the working day and family life and
explore how technology can be utilised
to adapt our way of working.
In Nuclear, the Cavendish Gateway
Scheme, a work experience programme,
delivered over 150 work placements,
including placements for young women
from disadvantaged areas. In Aviation, a
sector-wide Respect survey was
undertaken to assess employee views.
The results from the survey will be used
to inform future policy. Our Marine and
Land sectors conducted reviews of their
family friendly policies.
Babcock International Group PLC Annual Report and Accounts 2020
45
Strategic reportGovernanceFinancial statements Sustainable business continued
Social
People and potential continued
Employee networks
Babcock has a range of employee
networks in place across the business.
This year saw the development of the
Neuro-diversity and Young Professionals
Network. The Company is affiliated with
Stonewall and our Pride in Babcock
network continues to be very active,
undertaking awareness-raising activities,
as well as celebrating Pride month. During
our Dialogue Week, we hold events across
the Group, which this year included a
presentation to our Devonport workforce
on unconscious bias from retired
footballer John Barnes.
We encourage our employees to engage
with these networks as a way of
promoting momentum around diversity
and inclusion. For the organisation, it is
not only crucial that we are able to
recruit from the widest pool of talent but
also to ensure that we can retain and
reward those most suitable for the job.
This will allow us to deliver our best for
our customers and to safeguard the
future of Babcock.
Gender diversity and pay gap
Like others in the defence, engineering
and aviation industry, recruiting female
employees with Science, Technology,
Engineering and Maths (STEM)
qualifications and experience can be a
challenge, because of the relatively low
numbers of women who choose careers in
STEM. This, coupled with a low staff
turnover, affects our ability to improve
our gender mix. We are working hard to
change this: 18.8% (6,155) of our total
workforce is female, (male: 26,664) with
26% (23) female senior managers (male:
64), and, we have 4 (33.3%) female
Board Directors (male: 8).
We have continued to work to improve the
environment for women within our
organisation, and are implementing a series
of actions and development programmes
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 2020, 22% 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 13.4 % (2018: 14.1%) and a
median pay gap of 15.8% (2018: 16.0%).
This compares to a UK average of 17.3%.
Whilst this is a step in the right direction,
we are committed to grow our talent
pipeline in the longer term through our
STEM engagement programme and to
attract the best diverse talent available.
We will also focus on helping all our
employees to fulfil their potential. More
details can be found in our 2019 Gender
Pay Gap report, available on our website.
Training and education
We have found our existing employees to
be great advocates for our organisation,
and so we have used their experiences
to give colour to 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.
We offer 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. A further cohort started studying
for the Babcock MBA this year.
Diversity
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 is
making increasing use of higher and
degree apprenticeships, both to retain
existing employees and to invest in future
talent. We currently offer around 50
apprenticeship routes across all levels,
from two to seven, although our focus
remains on creating opportunities for
those seeking to join the workforce and,
as such, 80% of our apprentices study at
levels two and three.
We have further developed our degree
apprenticeship programmes with our
framework of university partners. Last
year we launched degree-level
programmes in digital, engineering,
business and commercial disciplines.
561
Graduates on programme
Graduates recruited in 2019/20: 202
1,175
Apprentices on programme
Apprentices recruited in
2019/20: 445
Total workforce diversity
Senior manager diversity*
Board diversity
Male
81%
Female
19%
Male
67%
Female
33%
Graduate diversity
Male
74%
Female
26%
Male
78%
Female
22%
46
Babcock International Group PLC Annual Report and Accounts 2020
* Executive Committee and direct reports.
Social
Community engagement
Our partnership with the
communities in which we
operate is at the core of
Babcock’s business. It’s
truly a partnership – we
need each other’s support
to thrive and grow.
University engagement
We partner with a broad range of
academic establishments to support
funded research, PhDs or their advisory
boards. Examples of current partnerships
include Strathclyde University Advanced
Nuclear Research Centre, Cranfield
University Through-life Engineering
Services Centre, Bristol University South
West Nuclear Hub, University of Exeter,
University of Valencia and Centum
Research and Technology. Key areas that
we are working on include digitally
enabled asset management; advanced
manufacturing and maintenance
techniques; digital twins and analytics;
and artificial intelligence.
STEM
Babcock supports its employees to
become trained STEM Ambassadors so
they can support our extensive schools
engagement programme. Over the past
12 months, we have conducted over
500 employee days of STEM activity, with
270 events engaging nearly 30,000
students. We have delivered activities in
schools such as ‘guess my job’, hosted
work experience weeks, attended careers
fairs, judged awards such as the F1 in
Schools National Finals, and supported
cross-school programmes such as the
Tomorrow’s Engineers EEP Robotics
Challenge, and the Big Brick Build.
Playing noughts and crosses with the Devonport
divers on annual Bring Your Child to Work Day
We also support STEM-focused
educational initiatives and charities
through the year. We supported the UK’s
Year of Engineering and participated in
larger events like the Plymouth Armed
Forces day and the Big Bang UK Young
Scientists and Engineers Fair, showcasing
technology and engineering activities
from across the Group. Our exhibits
included demonstration of nuclear
safety, a miniature wind tunnel showing
how air forces act on aircraft and a
LEGO submarine.
We also supported National Storytelling
Week, attended various local events
such as the Devon County show and
participated in the STEM event hosted
on board the new Prince of Wales
aircraft carrier.
Our Marine sector has successfully
worked with the Royal Navy to deliver
joint STEM events to around 600 pupils,
and 3,220 students have attended
activities hosted by our Plymouth-based
STEM Ambassadors.
Indigenous activities
We have specific policies and approaches
designed to meet local community
needs, especially in Canada, South Africa
and Australasia.
Babcock is committed to strengthening
the relationship with indigenous peoples,
building partnerships with them through
a framework which focuses on skills
development, workforce inclusion
and procurement.
We consult with indigenous peoples
when we undertake activities, to ensure
that our projects are carried out in a way
that respects their rights and traditions.
In Canada, Babcock works with
the Canadian Council for Aboriginal
Business (CCAB) to further strengthen
its involvement with Indigenous
communities. We donated to the
First Nations Technical Institute (FNTI),
which is an Indigenous-owned and
governed post-secondary institute located
on the Tyendinaga Mohawk Territory.
Collaboration in the Caithness Community
The Cavendish Dounreay Partnership is responsible for delivering the safe and secure clean-up of the Dounreay nuclear
site on behalf of the Nuclear Decommissioning Authority. As part of the parent body team (PBO), Cavendish Nuclear is
actively engaged in supporting key initiatives in the local area, working as part of the Caithness and North Sunderland
Regeneration Programme, established to combat the job losses that will result from the Dounreay’s decommissioning.
Since 2015, through its socio-economic programme, Cavendish Nuclear has been actively involved in the Wick Harbour
project, one of the key enabling projects on the CNSRP programme. Wick Harbour Authority (WHA) identified the
potential to secure the Operations and Maintenance base for the Beatrice Offshore Windfarm (BOWL). As the Board of
WHA is voluntary, they recognised that to turn this into a reality they would require a project manager and so Cavendish
Nuclear funded the secondment of a project manager. In 2017, WHA & BOWL signed an initial 25-year contract which
has seen the creation of around 150 jobs. Our project manager continues to support WHA on future opportunities.
Babcock International Group PLC Annual Report and Accounts 2020
47
Strategic reportGovernanceFinancial statements Sustainable business continued
Social
Community engagement continued
FNTI started the Aviation programme for
indigenous people in 1990 in response
to an absence of indigenous pilots in
northern communities. Today they have
over 150 graduates in various positions
in the aviation industry and a current
enrolment of 40% indigenous women.
UK Whole Force by Design
Babcock is committed to supporting
the MOD and our Armed Forces in
the implementation of Whole Force
By Design.
We hold the Gold award from Defence
Relationship Management in recognition
of our support to Reserves, Service
Leavers and Veterans. With over 150
Volunteer Reserves, we employ one of
the largest bodies of reserves of any
commercial organisation.
We have active Sponsored Reserve forces
supporting the Army (REME) and, through
our Joint Venture AirTanker, the RAF.
We have provided Contractors on
Deployment and have contracted to
support future requirements.
Porty’s Whizzing Recovery
Senior Support Engineer, Katherine
Terris, who works on HMS Bulwark
in Plymouth, has written a children’s
picture book about Devonport
Royal Dockyard. Entitled ‘Porty’s
Whizzing Recovery’, it is illustrated
by local student April Howard. The
story focuses on marine-themed
characters, from young ship Porty,
to Simon the seagull and Trevor the
submarine. It aims to take young
readers on a journey of discovery
about some of the work that takes
place on the Devonport site.
Katherine, who is also a STEM
ambassador and advocate for
encouraging women into STEM-
based careers, felt inspired to share
her experience of working at
Devonport. “The idea of writing a
children’s book to raise awareness
about what we do in an age-
appropriate way really appealed to
me. It is important that more young
people learn about STEM-based
careers, and that is what I’ve tried
to introduce, recognising that
readers are of primary school age.
“There are also a large number of
children around the Plymouth area
whose parents work for Babcock,
and the book helps them to learn
more about what happens when
they head off to work.”
Running Clyde
Our team at HMNB Clyde is
now in its fourth year of
association with the Babcock
10K race series. The race
series provides an ideal
platform to build a variety of
activities, from walking
challenges to blood pressure
checks and dietary advice.
It’s across the local community
where our support is most
welcome. The three events
that make up the series on the
west coast of Scotland give
local athletics a welcome
boost and encourage people
in the community to give
running a try.
Support for the Armed Forces
community
We are proud to be a major employer of
service leavers, veterans and reserves.
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.
Members of the Armed Forces
community 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 our
employment opportunities are made
available to service leavers and veterans.
We also participate in careers fairs for
those leaving the Armed Forces.
We understand that Armed Forces
spouses need flexibility 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.
Support for the Reserve Forces
We actively support our reservist
employees, providing a minimum of ten
days special paid leave per year for
reserves or uniformed cadet instructors
with a full training commitment.
We promote reserve service to all those
in the Group, including all our new
graduates and apprentices.
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Babcock International Group PLC Annual Report and Accounts 2020
Governance
Corporate integrity
We are committed to
conducting business
honestly and openly, and
with integrity. As well as
being the right and
proper way to behave,
this supports our long-
term success.
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 ensure good governance and ethical
behaviour across our Group, we have
developed a series of Group policies to
guide our actions and those of our
employees, suppliers and partners. An
outline of our controls can be found on
page 82.
Code of Business Conduct
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 Code of Business Conduct 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 whistleblowing hotlines.
We implement and observe appropriate
training and procedures designed to
ensure that we and others working for us
understand what our Code of Business
Conduct and our Suppliers’ Code of
Business Conduct means for them in
practice. We treat seriously breaches of
our Codes or associated guidance.
Employees can raise (confidentially if
they wish) without fear of unfavourable
consequences for themselves, any
concerns they have that our Code
or its associated guidance is not
being followed.
More details of our risk management
procedures can be found on pages 80 to
92 and the Ethics Policy and Code of
Business Conduct and Suppliers’ Code of
Conduct can be found on our website.
Further information about the
whistleblowing process can be found on
page 82.
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.
Our Modern Slavery Transparency
Statement is reviewed and approved
annually by the Board. It is available on
our website.
Cyber security
Our ability to deliver secure IT and other
information assurance systems to
maintain the confidentiality of sensitive
information is critical for our customers.
Babcock’s Group Security Board meets
quarterly to provide governance covering
cyber and other security and
informational assurance risks, issues and
threats facing the Group.
Babcock is a key member of the joint
MOD and industry Defence Cyber
Protection Partnership which is an
initiative to ensure the defence supply
chain understands the cyber threat and is
appropriately protected against attack.
Babcock is represented on all the working
groups and DCPP Executive committee.
Babcock’s core IT Services are certified to
ISO27001 (Information Security) and
ISO22301 (Business Continuity).
Always wear your pass
Babcock International Group PLC Annual Report and Accounts 2020
49
Strategic reportGovernanceFinancial statements Sustainable business continued
Governance
Diverse and robust supply chains
Diverse and robust supply
chains enable us to
provide quality and timely
delivery. We work closely
with our suppliers to
develop and deliver
innovative solutions
that drive value to
our customers.
External expenditure via third-party
suppliers, including Original Equipment
Manufacturers (OEMs), accounts for
approximately 50% of our turnover and
our approach and ability to manage
these relationships impacts our ability to
deliver performance and margin.
Our procurement and supply chain
function develops and delivers optimal
supply chain solutions which enable
us to return value to our customers,
shareholders and communities.
We buy a wide range of goods and services
and need reliable, high performing
suppliers across our supply chain.
We work with over 10,000 suppliers.
These range from OEMs to Small and
Mid-size Enterprises (SMEs). Of these
suppliers, 300 are strategic, and are
key partners in our ability to deliver
continuous improvement and innovative
quality outputs.
Effective engagement
Our activities ensure that we continue to
deliver value through working effectively
with our supply chains.
By improving upfront supply chain
involvement in bid processes, we have
been able to engage earlier with
potential suppliers.
This enables our suppliers to actively
support the design and implementation
stages with innovative solutions and
deliver enhanced productivity and
increased quality.
We use our business intelligence tools,
which include ratings agencies, ERP
systems and spend analytics, to enable us
to work collaboratively with our suppliers
and focus on innovation and other
value-add initiatives.
The e--procurement tools that we are
implementing will embed and in some
cases improve our robust processes
that enable us to ensure sustainable
relationships with our suppliers.
Small and Mid-size Enterprises
We recognise the value that SMEs play in
the wider economy and we actively
encourage them to engage with us.
Working closely with SMEs ensures that
we have access to optimal solutions and
provides enhanced flexibility and agility.
See case study below for further
examples of our engagement with SMEs.
Governance
The development and execution of our
supply strategy is aligned with the overall
business requirements, for both short and
longer term.
To ensure a robust supply chain, we have
developed a series of procedures that
guide our Group-wide procurement
activity. In addition, each sector has
supporting policies which outline their
operating principles and ways of working.
Our supply base design is balanced to
meet our customer, regulatory and
financial performance requirements.
It considers supply chain risk and addresses
appropriate mitigating actions.
Business critical suppliers are reviewed
with the Audit and Risk Committee
on an annual basis to address any risks
or concerns.
Supporting Small and Mid-size Enterprises
We recognise the value that working with SME suppliers can bring, and we
actively engage with SMEs as part of our supply chain design activities.
Procurement teams lead market-warming activities before letting contracts.
This enables SMEs to understand the opportunities available and also allows us
to offer guidance on the bidding process. We run industry supplier days to
maintain and develop a strong working relationship with SMEs which identifies
their capabilities for current and future opportunities. “Lunch and learn”
sessions have been held with SMEs to share best practice across a range
of topics.
Our procurement teams attend national and local conferences and exhibitions,
including DPRTE, DSEI and Farnborough to seek out new suppliers and discuss
opportunities during ‘meet the buyer’ events.
50
Babcock International Group PLC Annual Report and Accounts 2020
Governance
Diverse and robust supply chains
Prompt payment
We understand the importance of
predictable payments when running a
business and encourage good practice
across the Group. Twenty-one legal
entities submit returns to Companies
House according to the Payment
Practices and Performance Regulations.
Average payment for these entities over
the past six months is 34.5 days.
We support the Prompt Payment code
and encourage our suppliers to adopt the
code themselves and promote adoption
of the code throughout their own
supply chains.
COVID-19 supply risk
We are working closely with our supply
chain to determine the impact of
COVID-19 lockdown on their business
and the deeper supply chain. At this time,
we have not identified material supply
chain risk, however, we maintain an
open channel of communication with
our suppliers,
Supplier code of conduct
Our Group-wide Suppliers’ Code of
Conduct (available on the Group’s website)
is designed to provide clarity about our
expectations of suppliers, including
compliance with all applicable laws.
While we recognise that our suppliers
operate in different geographic and
economic environments, we expect that
products and services are delivered in a
way that support Babcock’s high standards
and contribute to the reputation of
Babcock and our customers.
The Code reflects the same standards
that we hold ourselves and enables a
consistent approach to our customers in
delivering to the highest ethical standards.
Suppliers and the extended supply
chain are expected to meet these
standards at all times, and should either
be willing to subscribe to our Code
or have equivalent standards and
procedures in their own businesses.
Our intention is to be a good partner
and to work with suppliers to support
necessary improvements, but we will not
accept any behaviour which is contrary
to our ethical codes or health, safety and
environmental working practices.
Supplier due diligence
Before engaging with suppliers, we assess
their ability to demonstrate that they
are ‘fit for business’, with financial,
commercial, safety and governance
capability. We also look for potential
suppliers to support our social purpose
and sustainability agenda.
Suppliers also demonstrate they are ‘fit
for purpose’, with technical, health and
safety capability and security compliance
to meet our contractual requirements.
Businesses use appropriate processes to
qualify, on-board and periodically
revalidate suppliers to ensure compliance
with commercial, regulatory and legal
requirements.
Protecting the information and physical
assets of our customers is an important
part of what we do. We always expect
high standards of commercial confidentiality.
For certain types of supply we have and
continue to develop exacting standards
of security compliance.
In the UK, we use the JOSCAR due
diligence tool, which is a shared
industry-wide management system for
defence contractors that collects
standardised information about individual
suppliers across the UK supply chain.
Certain suppliers will be selected for an
audit based on risk assessment. These
checks will assess suppliers’ approach to
human rights, data protection, modern
slavery, health, safety and environmental
issues. If risks are identified, we work with
suppliers to address them.
Modern Slavery training: supply chain
An important part of our vigilance regarding Modern Slavery
relates to scrutiny of our supply chain.
This year, we have developed bespoke e-Learning modules
for key procurement and supply chain employees. This aims
to ensure staff are alert to any potential for modern slavery in
the supply chain and to provide advice on how they can
address concerns, including by contacting an independent
whistleblowing hotline.
Employees involved in supplier selection and engagement
are now required to complete the awareness training
programme.
Babcock International Group PLC Annual Report and Accounts 2020
51
Strategic reportGovernanceFinancial statements Sustainable business continued
Women in Babcock
Like others in the engineering sector, we face challenges recruiting
female employees with STEM qualifications and experience, not least
because fewer women study these subjects than men. This, coupled
with a low turnover of staff, means it will take time to close the
gender gap – but we are committed and focused on doing just that.
Women in Defence
Babcock was proud to be one of
the founder signatories to the
Women in Defence Charter in
2019. Launched by the UK’s
Minister for Defence Procurement
and the Charter’s Patron, Babcock
Chair Ruth Cairnie, the Charter
commits defence companies, the
MOD and the Armed Forces to
drive diversity and inclusivity within
their organisations and provide
opportunities for women to
succeed at all levels.
The Charter aims to enable women
to thrive in the sector, enhancing
the individual and collective
impact of women across defence,
and in doing so, improve the
overall output of defence. Each
signatory has pledged to report on
their progress in improving gender
balance in the defence community.
52
Babcock International Group PLC Annual Report and Accounts 2020
Women in Aviation
Babcock has joined over 100
organisations in signing the
Women in Aviation and Aerospace
Charter, a Government-supported
initiative to make aviation a fairer
and more gender-balanced sector.
Since signing, Babcock has attended
numerous workshops and events
linked to the Charter, including at
the House of Commons, and is
supporting the work to mature
benchmarking and initiative targets
which will help organisations in the
industry achieve gender equity.
Our membership of the Charter
complements our internal ‘Fly High’
initiative, which works to increase
applications from women to our
Aviation graduate schemes.
Women in Nuclear
We are part of the industry
initiative to achieve a target of
having 40% of the nuclear sector’s
workforce being made up of
women by 2030. Currently 29%
of Cavendish Nuclear’s Board of
Directors are women, well above
the industry average.
In January, Cavendish Nuclear’s
Strategy Director Lynsey Valentine
took up the role of President
of Women in Nuclear UK,
demonstrating our continued
commitment to drive and lead
change to maintain an inclusive
workforce culture.
Babcock International Group PLC Annual Report and Accounts 2020
53
Strategic reportGovernanceFinancial statements Critical support:
defence
HMS Trenchant (UK MOD Crown Copyright)
54
Babcock International Group PLC Annual Report and Accounts 2020
Daniel Carlson
Graduate Mechanical Engineer, Defence Systems Technology
I develop new
submarine concepts
which demonstrate our
design capability and
help us deliver for
customers globally.
Our team works
across key defence
partnerships, and we use
events and conferences
to showcase our depth
of expertise in design,
engineering practice
and submarine upkeep.”
Babcock International Group PLC Annual Report and Accounts 2020
55
Strategic reportGovernanceFinancial statements Financial review
Franco Martinelli
Group Finance Director
Strong performances
across our defence
businesses, weakness
in Aviation
56
Babcock International Group PLC Annual Report and Accounts 2020
Overview
Underlying revenue and underlying
operating profit were in line with our
expectations set out in our April trading
update after a small impact from
COVID-19 and exchange rates in the final
months of the year. Performance in our
Marine sector was particularly strong and
exceeded our expectations at the start of
the year, with growth across every
business area. Our Land sector delivered
solid results while our defence businesses
in Nuclear and Aviation had strong years.
We saw increasing challenges in parts of
the business during the year. The oil and
gas aviation market has deteriorated
while we saw delays and increased cost
pressures in aerial emergency services.
Because of these pressures we have taken
action to further reduce our Oil and Gas
fleet and restructure our Aviation sector.
We have also recognised a significant
goodwill impairment charge to reflect our
current expectations of the oil and gas
market and the deterioration in the
business since the acquisition of Avincis in
2014. A slowing in the UK civil nuclear
market combined with a smaller business
following the end of the Magnox contract
has also led us to restructure our Nuclear
sector, including closer integration of our
civil and naval nuclear activities under a
single management team.
We continue to generate significant
free cash flow however the impact of
COVID-19 resulted in free cash flow
below our expectations for the year.
COVID-19 impacted customer receipts
and invoicing in the final month of the
year and also stopped some asset sales
completing in March which led to higher
than expected net capital expenditure.
Net debt excluding lease obligations was
£922 million, after paying our ordinary
dividend last year, and we end the year
well-placed for the future with a net debt
to EBITDA of 1.7 times.
COVID-19 and outlook
for next year
The impact of the Coronavirus (COVID-19)
pandemic creates uncertainty as we enter
the year ahead. However, the very nature
of Babcock’s business – supporting
non-discretionary defence, emergency
services and nuclear power programmes
and services – has ensured that the
majority of our work has continued
throughout the pandemic, with our
employees designated as critical workers by
governments in the UK and internationally.
All our major sites have remained
operational throughout, and our aerial
emergency medical services business in
particular has played a vital role in the
response to the pandemic, particularly in
Italy, Spain and France.
As a critical supplier to governments in
the UK and internationally, we are
working very closely with our customers
to ensure we continue to support them
as countries start to ease lock-down
measures. Looking ahead, we will
continue to deliver critical services across
all three markets, although we expect to
see lower productivity levels as our
customers prioritise their critical
programmes. Work in our short cycle
businesses and our adjacent markets is
more uncertain and is likely to see a
greater impact.
Given the uncertain impact of COVID-19,
our medium term targets, outlined on
page 27 will not be achieved in the
current financial year. The drivers of our
strategy remain unchanged and the long
term characteristics of our business
remain strong. We will continually assess
our medium term targets as we emerge
from the pandemic and they are aiming
points for us to return to.
We enter the new financial year faced
with uncertain times. We provide some
commentary on the year ahead across
our sector operational reviews, set out on
pages 68 to 77, but we are unable to
provide detailed financial guidance at
this time. Given the current uncertainty,
the Board has deferred the decision on
our final dividend until there is greater
certainty on the impact COVID-19 will
have on our business and stakeholders.
We will provide an update in our AGM
trading statement on 4 August 2020.
Adjustments between statutory
and underlying
Our underlying results include some
adjustments to our statutory results that
we make to provide a consistent measure
of business performance year to year.
Underlying results 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.
The adjustments made are:
• Underlying revenue, underlying
operating profit and underlying net
finance costs include the Group’s share
of equity-accounted joint ventures and
associates. These are included as they
are a key part of our business and the
way work is conducted in the markets
in which we operate, with joint
venture structures common in the
defence industry. Our bidding pipeline
includes the potential for more joint
ventures to be added to the Group in
the future and they remain a key part
of our strategy.
• Underlying operating profit includes
investment income arising under
IFRIC 12 which is presented as financial
income in the Income Statement.
Like joint ventures, the income we
receive under IFRIC 12 relates to
key parts of our business and its
contribution is dependent on the
performance of the business.
• Underlying operating profit excludes the
amortisation of acquired intangibles.
This item is excluded from underlying
results as it is a non-cash item that
does not change each year based on
the performance of the business.
• Underlying operating profit excludes
exceptional items. Details of these items
are included on the following page.
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 2020
Revenue
Operating (loss)/profit
Share of profit from JV
Investment income
Net finance costs
(Loss)/Profit before tax
Tax
(Loss)/Profit after tax
Return on revenue
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
4,449.5
(164.9)
58.6
1.1
(73.0)
(178.2)
(15.0)
(193.2)
(3.7)%
4,474.8
196.5
83.8
1.3
(46.4)
235.2
(35.4)
199.8
4.4%
422.2
79.8
(79.8)
22.8
16.4
(22.8)
–
–
–
–
16.4
(16.4)
–
27.0
(25.9)
(1.1)
81.5
5.8
500.8
2.1
–
–
87.3
(18.4)
68.9
502.9
(26.1)
476.8
–
(1.2)
(1.2)
685.8
106.8
(106.8)
24.1
20.9
(24.1)
–
–
–
–
20.9
(20.9)
–
29.1
(27.8)
(1.3)
95.2
5.8
160.8
–
–
101.0
(21.5)
79.5
160.8
(16.7)
144.1
–
1.3
1.3
4,871.7
524.2
–
–
(95.8)
428.4
(77.1)
351.3
10.8%
5,160.6
588.4
–
–
(70.5)
517.9
(93.2)
424.7
11.4%
Babcock International Group PLC Annual Report and Accounts 2020
57
Strategic reportGovernanceFinancial statements
Financial review continued
Income statement
Statutory performance
Statutory revenue was £4,449.5 million
(2019: £4,474.8 million) and reflects the
step downs in our QEC contract as well
as the impact of exits and disposals in the
last financial year. Statutory operating
loss was £(164.9) million (2019 profit:
£196.5 million) and statutory loss before
tax was £(178.2) million (2019 profit:
£235.2 million), reflecting higher
exceptional charges in the current year
compared to the prior year. Basic
earnings per share, as defined by IAS 33,
was (38.6) pence (2019: 39.5 pence)
per share.
Underlying revenue performance
Underlying revenue for the year was
£4,871.7 million (2019: £5,160.6
million), down £288.9 million. This
reduction reflects the impact of £428.4
million of step downs including foreign
exchange movements. Excluding these,
underlying revenue grew by 2.7%.
Underlying operating profit
performance
The Group’s underlying operating profit
performance reflects strong trading in
our Marine sector offset by weakness in
our Aviation sector and a small impact
from COVID-19.
Underlying operating profit includes a
£23.6 million benefit from the adoption
of IFRS 16. Excluding this, underlying
operating profit of £500.6 million was
down £87.8 million on last year. This
reduction includes a combined £60.0
million impact of step downs as detailed
below. These step downs relate to:
• The end of our contract for design and
build of the Queen Elizabeth Class (QEC)
aircraft carriers and the step down in
revenue and profit year-on-year
• The end of our Magnox contract and
the step down in revenue
• The impact of exits and disposals with
the step down being the absence of
revenue and profit contribution in the
FY20 year
• The normalisation of the profit
contribution from our Holdfast (RSME)
joint venture
• The additional costs incurred in the
FY20 financial year as a result of our
Brexit-related restructure in Aviation
• The adverse impact of foreign
exchange in the 2020 financial year
FY20 step downs
Excluding IFRS 16, step downs and
exchange rates, underlying operating
profit was down 4.7%, mainly due to
performance in our Aviation sector and a
small impact from COVID-19.
QEC
Magnox
Exits and disposals
Normalisation of Holdfast profit contribution
Brexit-related Aviation restructuring
Total impact of step downs
Impact of foreign exchange movements
Total impact of step downs including foreign
exchange movements
Exceptional items
Aviation
• Goodwill impairment
• Asset impairment (Oil and Gas)
• Right of use asset impairment and onerous
customer contracts (Oil and Gas)
• Exit of Ghana and Congo (Oil and Gas)
• Aviation restructuring
• Aviation other (including Italy anti-trust fine)
Total Aviation
Capacity restructuring (Nuclear and Rail)
Exits and disposals
Total
Tax
Net
Revenue
£m
(50.4)
(270.8)
(70.8)
–
–
(392.0)
(36.4)
Operating
profit
£m
(2.0)
(25.0)
(9.6)
(10.2)
(10.0)
(56.8)
(3.2)
(428.4)
(60.0)
Income
statement
charge /
(credit)
£395.0m
£22.2m
£31.2m
£7.1m
£26.5m
£55.8m
£537.8m
£24.3m
(£59.2m)
£502.9m
(£26.1m)
£476.8m
In response to the further deterioration in
the oil and gas aviation market and
business challenges in our Aviation and
Nuclear sectors, we have taken action
this year to stabilise the business for the
medium and long term. These actions
have incurred exceptional charges which
were partly offset by the gain on the sale
of Context in March 2020.
58
Babcock International Group PLC Annual Report and Accounts 2020
Aviation market
Our Aviation sector operates in the
defence, emergency services and oil and
gas markets. While the defence market
has remained robust, and the emergency
services market remains attractive in the
medium term, the oil and gas market
deteriorated significantly during the year.
Two of the three large providers of
helicopter services who operate
worldwide in oil and gas emerged from
Chapter 11 bankruptcy protection with
reduced debt and written-down assets.
This effectively reset global market
pricing levels and forced us to respond
quickly to remain competitive.
Furthermore, with a significant fall in the
price of oil, we do not expect any
recovery in this market any time soon.
Aviation: Goodwill impairment
The further deterioration in the oil and
gas market contributed significantly to
our review of goodwill in the Aviation
sector, which relates to the acquisition of
Avincis in 2014. As a result of this review,
we have taken an impairment charge of
£395.0 million to reflect revised estimates
of the future performance of the sector
given the change in market conditions.
Aviation: Oil and Gas
We have written down assets in our Oil
and Gas business by £22.2 million and
recognised costs of £31.2 million in
relation to the impairment of right of use
assets and onerous customer contracts.
We also exited our oil and gas businesses
in Ghana and Congo and incurred
charges of £7.1 million in relation to this.
Aviation: Restructuring
The impact of trading in our Oil and Gas
aviation business combined with the
impact of delays in our aerial emergency
services business led us to take action to
reduce the cost base as a whole for the
Aviation sector, creating a simplified
European structure to create an agile
business competitive for the medium
term. The Aviation restructuring charge
was £26.5 million and primarily relates
to redundancy costs.
Aviation: Other (including Italy
anti-trust fine)
Other charges in our Aviation sector relate
to a fine in Italy and associated legal costs,
plus additional costs from our Brexit-related
restructure in addition to those recognised
in the prior financial year.
We have recognised a provision of
£46 million in respect of a €51 million
fine issued by the Italian Competition
Authority to our subsidiary, Babcock
Mission Critical Services Italia S.p.A
(“BMCS Italy”) following an unsuccessful
first instance court decision. This matter
was previously a contingent liability to
the Group. The fine relates to a publicly
available “tariff list” dating back to 2001
produced by a trade association of which
BMCS Italy was a member. BMCS Italy
does not accept the basis of this decision.
In particular, BMCS Italy is convinced
that the tariff list never related to the
helicopter emergency medical services
(“HEMS”) and, indeed, this lack of
relevance was explicitly stated on the
front of the list from 2012, two years
prior to the acquisition of BMCS Italy by
Babcock in 2014. BMCS Italy will appeal
this decision.
Capacity restructuring
This relates to restructuring programmes
outside the Aviation section. The end of
the Magnox contract in our civil nuclear
business and the ongoing trading
environment in the UK civil nuclear
market has led us to take action to
reduce the cost base of our civil nuclear
business. The Nuclear restructuring
charge was £16.5 million. We have also
further restructured our Rail business.
The total restructuring cost of £24.3m
primarily relates to redundancy costs.
Exits and disposals
The total net credit related to exits and
disposals was £59.2 million, consisting of
a £74.7 million gain on the sale of
Context partially offset by additional
costs from exits in the last financial year
and the costs of exiting areas of our
nuclear manufacturing business.
Cash costs of exceptional items
The net exceptional cash inflow in
the year ended 31 March 2020 was
£23.1 million, consisting of £37.8 million
of costs from exceptional items identified
in the 2019 financial year and a net cash
inflow of £60.9 million from the 2020
financial year exceptionals, which included
net cash proceeds from the sale of
Context of £102 million.
Looking ahead, we expect net
exceptional cash costs for the 2021
financial year of around £100 million,
consisting of around £50 million of cash
costs from restructuring programmes,
the payment of the Italy anti-trust fine
and other smaller cash costs partly offset
by a saving in cash tax. This is before
the £85 million proceeds from the sale
of Holdfast.
We expect a small exceptional cash
inflow in the 2022 financial year as
cash tax savings offset small cash costs.
In addition to this, we expect to make
additional payments into the Rosyth
pension scheme of around £90 million
over the next two financial years. These
payments will be treated as exceptional
cash flows.
Finance costs
Total net finance costs increased to
£95.8 million (2019: £70.5 million),
mainly reflecting the impact of adoption
of IFRS 16 and the group refinancing in
September 2019, which increased group
costs, partly offset by lower JV finance costs.
The Group’s share of joint venture net
interest expense decreased to £22.8
million (2019: £24.1 million), following
the pay down of joint venture debt.
The IAS 19 pension finance charge was
£0.1 million (2019: £0.3 million credit).
The refinancing in 2019 increased group
finance costs by around £5 million
year-on-year and is expected to increase
finance costs further in the 2021 financial
year by around another £2 million.
Babcock International Group PLC Annual Report and Accounts 2020
59
Strategic reportGovernanceFinancial statements Financial review continued
Underlying organic growth
Underlying revenue
31 March 2019
Exchange adjustment
Disposals
Step downs excl. disposals
Organic growth excl. step downs
31 March 2020
Underlying revenue growth
Organic growth at constant exchange rates
Organic growth excl. step downs at constant exchange rates
Underlying operating profit
31 March 2019
IFRS 16 impact
Exchange adjustment
Disposals
Step downs excl. disposals
Organic growth excl. step downs
31 March 2020
Underlying operating profit growth (pre-IFRS 16)
Organic growth at constant exchange rates (pre-IFRS 16)
Organic growth excl. step downs at constant exchange rates
(pre-IFRS 16)
Marine
£m
Nuclear
£m
Land
£m
Aviation
£m
Unallocated
£m
Total
£m
1,086.0
(0.1)
–
(51.4)
172.4
1,206.9
11.1%
11.1%
15.9%
1,318.9
–
–
(270.8)
62.8
1,110.9
– 15.8%
– 15.8%
4.8%
1,620.2
(24.0)
(37.9)
(23.2)
18.5
1,553.6
– 4.1%
– 0.3%
1.1%
1,135.5
(12.3)
(8.7)
–
(114.2)
1,000.3
– 11.9%
– 10.1%
– 10.1%
–
–
–
–
–
–
–
–
–
141.2
2.2
(0.1)
–
(2.0)
2.7
144.0
0.4%
0.5%
143.5
0.8
–
–
(25.0)
7.0
126.3
– 12.5%
– 12.5%
146.0
2.6
(1.6)
(4.3)
(12.5)
3.7
133.9
– 10.1%
– 6.0%
160.5
17.9
(1.5)
(3.0)
(10.0)
(42.9)
121.0
– 35.8%
– 33.0%
(2.8)
0.1
–
–
–
1.7
(1.0)
– 57.1%
5,160.6
(36.4)
(46.6)
(345.4)
139.5
4,871.7
– 5.6%
– 4.0%
2.7%
588.4
23.6
(3.2)
(7.3)
(49.5)
(27.8)
524.2
– 14.9%
– 13.1%
1.9%
4.9%
2.5%
– 26.7%
– 4.7%
Tax charge
The underlying tax charge, including the
Group’s share of joint venture tax of £16.4
million (2019: £20.9 million), totalled
£77.1 million (2019: £93.2 million),
representing an effective underlying tax
rate of 18.0% (2019: 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.
The underlying tax rate for the year
ending 31 March 2021 will be dependent
on country mix post COVID-19 but is not
expected to exceed 19%.
Pensions
The Group’s net pension position
moved to a surplus of £145.2 million
(2019: £28.0 million deficit), with the
movement due to slightly higher
discount rates and significantly lower
inflation rate assumptions.
Amortisation of acquired intangibles
Amortisation of acquired intangibles was
£81.5 million (2019: £95.2 million). This
represents the amortisation of the value
attributed on business acquisitions to
customer relationships (both contractual
and non-contractual).
Exchange rates
The impact of foreign currency
movements over the year resulted in a
decrease in underlying revenue of £36.4
million and a corresponding £3.2 million
decrease in underlying operating profit.
The main currencies that have impacted
our results are the South African Rand
and the Euro. The currencies with the
greatest potential to impact our results
are the Euro, the South African Rand and
the Canadian Dollar:
• A 10% movement in the Euro against
Sterling would affect underlying
revenue by around £39 million and
underlying operating profit by around
£3 million
• A 10% movement in the South African
Rand against Sterling would affect
underlying revenue by around £33
million and underlying operating profit
by around £4 million
• A 10% movement in the Canadian
Dollar against Sterling would affect
underlying revenue by around £15
million and underlying operating profit
by around £2 million
Earnings per share
Underlying earnings per share for the
year was 69.1 pence (2019: 84.0
pence), reflecting the lower underlying
operating profit. The adoption of IFRS 16
had a minimal impact on underlying EPS,
with higher operating profit offset by
higher finance charges.
Basic continuing earnings per share,
as defined by IAS 33, was (38.6) pence
(2019: 39.5 pence) reflecting statutory
earnings which included exceptional items.
Dividend
Given the current level of uncertainty
over the impact of COVID-19, the Board
has decided to defer the decision on
our final dividend for the year ended
31 March 2020. We recognise the
importance of the dividend to our
shareholders and the Board will keep
this under review during the financial
year as the impact of COVID-19
becomes clearer.
60
Babcock International Group PLC Annual Report and Accounts 2020
Cash flow and net debt
The table below compares our underlying and statutory cash flows. Our underlying cash flows are used by management to measure
operating performance as they provide a more consistent measure of business performance year to year.
Operating profit before amortisation of acquired intangibles
Amortisation, depreciation and impairments
Depreciation of right of use asset – IFRS 16
Profit on disposal of subsidiaries
Other non-cash items
Working capital (excluding excess retirement benefits)
Provisions
Operating cash flow
Capital expenditure (net)
IFRS 16 additions less exceptional payments**
Operating cash flow after capital expenditure
Cash conversion % – after capital expenditure
Interest paid (net)
Interest paid – IFRS 16
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
Exceptional cash movement
Movement in net debt excluding exchange rates
Net debt reconciliation
Opening net debt
IFRS 16 transition
Net cash flow
Exchange difference
Closing net debt
2020
Underlying
adjustments*
£m
(582.3)
490.0
14.2
(74.7)
2.1
14.9
81.8
(54.0)
3.0
(18.3)
(69.3)
–
–
–
(9.8)
–
(79.1)
(3.3)
(82.4)
105.5
–
–
–
(23.1)
–
Underlying
£m
417.4
95.7
129.4
–
5.4
(26.8)
(19.4)
601.7
(147.5)
(109.8)
344.4
83%
(46.7)
(24.7)
(62.6)
52.0
262.4
(70.2)
192.2
(0.8)
(0.3)
(2.9)
(153.9)
23.1
57.4
2019
2019
Underlying
£m
452.5
108.6
–
Statutory
£m
291.7
137.9
–
(1.4)
86.8
(28.7)
617.8
(148.5)
–
469.3
104%
(47.5)
–
(86.9)
44.6
379.5
(55.8)
323.7
(0.8)
0.1
–
(153.3)
(11.4)
158.3
(16.2)
108.9
10.7
533.0
(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
(164.9)
585.7
143.6
(74.7)
7.5
(11.9)
62.4
547.7
(144.5)
(128.1)
275.1
(167)%
(46.7)
(24.7)
(72.4)
52.0
183.3
(73.5)
109.8
104.7
(0.3)
(2.9)
(153.9)
–
57.4
(957.7) (1,115.0)
(640.8)
–
158.3
57.4
(1.0)
(53.8)
(957.7)
(1,594.9)
* Adjustments for exceptional cash flows (including lease payments) and acquired intangible amortisation.
** Additional leases entered into during the year less exceptional payments which we include in underlying cash flow for the purpose of explaining net
debt movement.
Our underlying free cash flow excludes exceptional lease cash payments. Cash flows relating to onerous leases before the adoption
of IFRS 16 continue to be considered exceptional cash flows. The IFRS 16 additions line has been adjusted by the amount of
exceptional lease payments; being defined as the net increase to lease obligations (additions) after underlying lease principal
payments and foreign exchange impact are removed. 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
2020
Exceptional
items
£m
(57.3)
3.3
(54.0)
Underlying
£m
531.5
70.2
601.7
2019
2019
Statutory
£m
474.2
73.5
547.7
Underlying
£m
562.0
55.8
617.8
Statutory
£m
507.9
25.1
533.0
Babcock International Group PLC Annual Report and Accounts 2020
61
Strategic reportGovernanceFinancial statements
Financial review continued
IFRS 16 impact
IFRS 16 impacts various cash flows.
There was an additional £23.6 million
of operating profit, a £129.4 million
depreciation charge of the right of use
assets, £109.8 million of IFRS 16 additions
less exceptional payments and £24.7
million interest on the lease liabilities.
The PPE depreciation charge excludes
£10.3 million related to leases
designated as finance leases prior to the
adoption of IFRS 16. This is now included
in the depreciation of right of use assets.
The net impact of these was to increase
free cash flow by £8.2 million.
Operating cash flow
Underlying operating cash flow in the
period was £601.7 million which
includes a benefit of £129.4 million of
right of use asset depreciation this year.
Underlying operating cash flow after
capital expenditure was £344.4 million,
representing cash conversion of 83%. This
compares to underlying operating cash
flow after capital expenditure of £469.3
million last year, which included a
significant contribution of over £50
million from working capital inflows
related to our Fomedec contract.
Working capital
Total underlying working capital cash
outflows for the period, excluding excess
retirement benefits, were £26.8 million
compared to a £86.8 million inflow last
year, which benefited from the Fomedec
working capital unwind. The working
capital out flow this year represents a
£23.0 million outflow in receivables and
a £10.9 million outflow in inventories
partly offset by a £7.4 million inflow
in payables.
Within receivables, we saw increased
capitalised contract costs related to
Norway, Canada and the Type 31 frigate
programme and VAT timing differences
partly related to COVID-19. We made
good progress this year on reducing
amounts due for contract work but the
reduction was less than expected as
COVID-19 impacted invoicing to
customers in the final month of the year.
Trade receivables were slightly higher
year-on-year as COVID-19 led to delays in
customer receipts at the end of the year.
The Group factors receivables in its
Southern European Aviation operations.
At 31 March 2020, the level of factoring
was similar to last year at around
£100 million.
Within payables, lower activity levels
were partly offset by higher contract cost
accruals, due to the Type 31 programme,
and an increase in advanced customer
payments in our LGE business.
The outflow in inventory primarily relates
to increased stock levels in our South
African business reflecting the expected
higher activity levels.
Provisions
Underlying operating cash flow
includes a £19.4 million outflow due
to underlying provision movements
(2019: £28.7 million outflow) relating
to contracts, onerous leases, personnel
(taxation and reorganisation) and
property. During the year £1.0 million of
net underlying provisions were credited
to the income statement. The level of
non-exceptional provision outflow in the
next financial year is expected to be
around £10 million.
Capital expenditure
Excluding IFRS 16, net capital
expenditure was £147.5 million in the
year (2019: £148.5 million) comprised
of gross capital expenditure of £174.6
million (2019: £227.0 million) and asset
disposals, mainly related to the sale and
leaseback of new aircraft of £27.1
million (2019: £78.5 million). Net capital
expenditure of 1.5 times depreciation
was slightly higher than last year and
higher than the 1.0 times depreciation
we had expected. This was due to lower
assets disposals as COVID-19 led to
some asset sales on delayed contracts
in Southern Europe not completing
as both lessors and customers
experienced difficulties.
In addition to net capital expenditure,
£128.1 million of additional operating
leases were entered into in the period.
This, less £18.3 million of onerous lease
payments, led to £109.8 million of other
IFRS 16 cash flows included within our
underlying free cash flow. Onerous lease
payments are not included in our underlying
free cash flow as cash flows relating to
what would have been onerous leases
before the adoption of IFRS 16 continue
to be considered exceptional.
Cash interest paid
Net Group cash interest paid, excluding
that paid by joint ventures, was £71.4
million (2019: £47.5 million).
Taxation
Underlying cash tax payments of £62.6
million (2019: £86.9 million) decreased,
reflecting lower underlying profit before
tax and comparison to higher tax
payments last year following the
settlement of a tax dispute in Spain
relating to pre-acquisition activity. In
addition to this, we saw an increase in
R&D tax credits received.
Pensions
Pension cash outflow in excess of the
income statement charge excluding
exceptionals was £70.2 million (2019:
£55.8 million).
The uneven distribution of funding
deficits between our three large
schemes, will result in more volatility in
pensions funding over the coming years.
An estimate of the current technical
provisions actuarial deficit for the three
main schemes is around £500 million,
predominantly reflecting discount rates
based on UK gilts. This differs from the
accounting valuation which is based on
discounting using corporate bond yields
where credit spreads have increased.
This resulted in an IAS 19 position
of a £145.2 million net surplus at
31 March 2020.
We expect to make additional pension
payments into the Rosyth scheme of
around £90 million over two years, with
the starting point yet to be determined.
For the next financial year the cash
outflow in excess of the income
statement charge is expected to be
around £75 million excluding the Rosyth
additional payments, which will be
treated as exceptional cash items.
Dividends
During the period the Group received
£52.0 million in dividends from its
joint ventures (2019: £44.6 million).
Cash dividends (including to minorities of
£1.8 million) paid out in the year totalled
£153.9 million (2019: £153.3 million).
We expect dividends from joint ventures
to be around £30 million in the next
financial year before increasing in the
following year.
62
Babcock International Group PLC Annual Report and Accounts 2020
Free cash flow
Pre IFRS 16 (per debt covenants):
Free cash flow was £192.2 million
compared to £323.7 million last year,
primarily reflecting the lower operating
profit and the movement in working
capital described above.
Exceptional cash movement
There was a cash inflow of £23.1 million
in the year with the proceeds from
the sale of Context partly offset by
exceptional cash costs relates to 2019
and 2020 exceptional charges.
Net debt
The Group’s net cash inflow was £57.4
million (2019: £158.3 million). Net debt
at 31 March 2020 was £1,594.9 million.
Net debt excluding lease obligations
was £922.1 million. This measure now
excludes £40 million of lease obligations
which were previously treated as
finance leases.
Looking ahead at our forecasts for next
year, we expect average net debt to be
around £300 million higher than the year
end position, reflecting the normal
phasing of our business.
Net debt to EBITDA
We have redefined our net debt to
EBITDA on a basis comparable to that
used in the covenants for some of our
debt. This gearing measure compares net
debt (excluding non-recourse JV debt and
all leases) to Group EBITDA (excluding our
share of JV’s EBITDA) plus joint venture
dividends. The tables below show the
calculation as well as the calculation on
an IFRS 16 basis.
Net debt to EBITDA saw a small increase
to 1.7 times this year with the reduction
in EBITDA partially offset by higher joint
venture dividends and lower net debt.
This level remains below our covenant
level of 3.5 times. On an IFRS 16 basis,
net debt to EBITDA was 2.3 times.
Underlying operating profit excl. JVs (pre-IFRS 16)
Depreciation (pre-IFRS 16)
Amortisation of software and development costs
Group IFRIC 12 income
EBITDA
JV dividends
EBITDA + JV dividends
Net debt excl. lease obligations
Net debt / EBITDA
Post-IFRS 16:
EBITDA + JV dividends (pre-IFRS 16)
IFRS 16 EBITDA adjustment
EBITDA + JV dividends (post-IFRS 16)
Net debt excl. leases payable
Leases payable
Net debt (post-IFRS 16)
Net debt / EBITDA
Interest cover
Pre IFRS 16 (per debt covenants):
EBITDA + JV dividends (pre-IFRS 16) (as above)
Finance costs (pre-IFRS 16)
Finance income
Net group finance costs (pre-IFRS 16)
Interest cover
31 March
2020
£m
393.8
80.7
15.0
1.1
490.6
52.0
542.6
922.1
1.7x
31 March
2019
£m
452.5
93.8
14.6
1.3
562.2
44.6
606.8
957.7
1.6x
31 March
2020
£m
542.6
153.0
695.6
922.0
672.8
1,594.9
2.3x
31 March
2020
£m
542.6
61.2
(13.0)
48.2
11.3x
31 March
2019
£m
606.8
62.7
(16.0)
46.7
13.0x
Interest cover pre-IFRS 16 is another
metric used in the covenants for some of
our debt. This year interest cover was
11.3 times, lower than last year due to
lower profits and a small increase in net
finance costs following our refinancing in
September 2019. The interest cover in
the debt covenants is four times.
Babcock International Group PLC Annual Report and Accounts 2020
63
Strategic reportGovernanceFinancial statements
Financial review continued
Return on invested capital (ROIC)
Pre IFRS 16:
Underlying operating profit
Tax at 18.0%
Underlying operating profit post tax
Net debt excl. lease obligations
Shareholder funds
Retirement deficit / (surplus)
Invested capital
ROIC (pre-tax)
ROIC (post-tax)
Post-IFRS 16:
Underlying operating profit
Tax at 18.0%
Underlying operating profit post tax
Net debt excl. lease obligations
Lease liabilities
Shareholder funds
Retirement deficit
Invested capital
ROIC (pre-tax)
ROIC (post-tax)
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
12.3%, a slight decrease from 12.5%
last year. This small decrease primarily
reflects lower underlying operating
profit this year offset by the impairment
of assets.
31 March
2020
£m
500.6
(90.1)
410.5
922.1
2,550.0
(145.2)
3,326.9
15.0%
12.3%
31 March
2019
£m
588.4
(105.9)
482.5
957.7
2,884.9
28.0
3,870.6
15.2%
12.5%
31 March
2020
£m
524.2
(94.4)
429.8
922.1
672.8
2,550.0
(145.2)
3,999.7
13.1%
10.7%
Pensions
The IAS 19 valuation for accounting
purposes showed a market value of assets
of £4,411.3 million in comparison to a
valuation of the liabilities based on AA
corporate bond yields of £4,266.1
million. The net accounting position,
pre-tax, of the Group’s combined defined
benefit pension schemes moved from
a deficit to a surplus of £145.2 million
(31 March 2019: deficit of £28.0 million).
Discount rate
Inflation rate
(RPI)
2.4%
(31 March 2019: 2.4%)
2.6%
(31 March 2019: 3.2%)
Available financial capital
The Company defines available financial
capital (AFC) as shareholder equity, net
debt plus undrawn committed borrowing
facilities. Available financial capital also
includes surplus cash held on deposit as a
result of fully drawing the revolving credit
facility in March 2020.
Objective
To ensure an appropriate level of AFC to:
i. provide sufficient liquidity to see the
Group through any periods of
tightened liquidity in the market
ii. maintain operational flexibility and
meet financial obligations
iii. fund the Group’s organic and
acquisitive growth
iv. maintain necessary headroom to cover
the peaks and troughs in the Group’s
working capital cycle
Policy
The Board aims to maintain a balance
between equity and debt capital which
optimises the Group’s cost of carry whilst
allowing access to both equity and debt
capital markets at optimum pricing when
appropriate. During the current COVID-19
crisis the Group has fully drawn its revolving
credit facility to ensure availability of
funds. The Group, in considering its
capital structure and financial capital,
views net debt to EBITDA between
1.0 And 1.5 times as our target range
and sustainable in normal market and
economic conditions, while providing
financial flexibility to the Group.
Performance
The Group’s gearing, used by the Group
to monitor capital, was at 1.7 times net
debt to EBITDA (see KPIs on page 21)
in 2019/20 (2019: 1.6 times), slightly
outside our target range. Debt ratios
continue to be well below covenanted
levels, ensuring sufficient headroom.
The Company believes that capital
markets remain accessible if or when
required, even with the current
economic uncertainty.
64
Babcock International Group PLC Annual Report and Accounts 2020
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.
Updates this year
The Group continues to keep its capital
structure under review to ensure that the
sources, tenor and availability of finance
are sufficient to meet its stated objective.
During the financial year, the Group was
able to take advantage of favourable
market conditions to refinance and term
out the maturity of some of its debt at
attractive terms. The Group amended its
committed Revolving Credit Facility
(RCF), increasing the facility’s size to
£775 million and extended the facility’s
maturity for another five years to August
2024. The Group also issued a €550
million Eurobond (hedged at £493m),
maturing in September 2027, and used
the proceeds to fully repay a £100
million Term Debt Facility and a
£40 million loan note and repay
its RCF facility.
The Group’s other main corporate debt
comprise of the following: a £300m
Sterling bond, maturing October 2026,
a €550 million Eurobond, maturing
October 2022, and US$500 million of
US private placement notes (hedged at
£307m), maturing March 2021. Taken
together, these debt facilities provide
Debt maturity profile (£m)
Total facility
amount
7
7
5
5
0
0
3
0
7
4
9
3
3
0
0
the Group with a total of around
£2.4 billion of available committed
banking facilities and loan notes. For
further information see note 2 of the
Group financial statements.
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 2020, the Group had
60% fixed rate debt (2019: 74%) and
40% floating rate debt (2019: 26%)
based on gross debt including derivatives
of £3,019.1 million (2019: £1,336.4
million). The percentages for this year
include the fully drawn down revolving
credit facility which if excluded would
result in 80% fixed rate debt and 20%
floating rate debt.
Liquidity
Objective
i. To maintain adequate committed
borrowing facilities
ii. 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
iii. To monitor and manage bank credit
risk, and credit capacity utilisation
2020
2021
2022
2023
2024
2025
2026
2027
2028
USPP
GBP bond
Euro bond
RCF
Babcock International Group PLC Annual Report and Accounts 2020
65
Strategic reportGovernanceFinancial statements
Financial review continued
Policy
All the Group’s material borrowings
are arranged by the treasury department
and funds raised are lent onward to
operating subsidiaries as required.
Each of the Group’s sectors 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 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. In March 2020, the Group’s
RCF was fully drawn down as a liquidity
contingency measure given the current
economic and market uncertainty. This
led to the Group holding a significantly
higher cash balance than in previous
years of £1.35 billion at 31 March 2020.
Surplus cash was invested in short term
deposits diversified across several well
credit rated financial institutions. We
expected to payback the revolving credit
facilities in the short term.
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
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 loss of
£12.7 million in the income statement
for the year ending 31 March 2020
(2019: £5.9 million gain). 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 £4.2 billion,
representing 90% of the total assets of
the Group’s defined benefit pension
schemes. It also has employees in two
industry-wide pension 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 pension
schemes have been closed to new
members for some years. The Group
continues to review its options to reduce
the risks inherent in such schemes. In the
last financial year, it closed the Babcock
International Group Pension Scheme to
future accrual for some employees, and is
consulting with employees who are in
the Rosyth Royal Dockyard Pension
Scheme 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 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 in the
defined contribution pension scheme is
borne by the employees.
Investment strategy
The Group has previously agreed
long-term investment strategies with
trustees across the three largest schemes
designed to generate sufficient assets
by April 2037 to be fully self-sufficient,
although the expectation is that this
target will be met significantly earlier.
In the last financial year the Group
agreed a revised strategy with the
trustees of the Babcock International
Group Pension Scheme designed to
target the scheme being self-sufficient
by 2026. It also operates within
an agreed risk budget to ensure
the level of risk taken is appropriate.
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Babcock International Group PLC Annual Report and Accounts 2020
To implement the investment strategies,
each of the three largest schemes’
Investment Committees has divided its
scheme’s assets into growth assets, low
risk assets and matching assets, with the
proportion of assets held in each
category differing by scheme reflecting
the schemes’ different characteristics.
The growth assets are de-risked over time
by comparing and equating the expected
and required returns each month, as at
31 March 2020 growth assets were 22%
of the total assets held across the three
largest schemes. 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 adverse
changes in interest rates and inflation.
Actuarial 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 Babcock International
Group Pension Scheme as at 31 March
2019 was completed, work continues on
the valuation of the Rosyth Royal Dockyard
Pension Scheme as at 31 March 2018,
and work has commenced on the valuation
of the Devonport Royal Dockyard Pension
Scheme as at 31 March 2020.
Cash contributions
Future service
contributions
Deficit recovery
Longevity swap
Total cash
contributions
— employer
2020
£m
2019
£m
26.0 48.4
47.3 36.4
15.3 10.7
88.6 95.5
Cash contributions made by the Group
into the defined benefit pension schemes
during the year are set out in the table
above. In the 2020/21 financial year,
the total cash contributions expected to
be paid by the Group into the defined
benefit pension schemes are £102.4
million. £9.3 million of this is for salary
sacrifice contributions, £26.3 million is in
respect of the cost of future service
accrual substantially reduced as sections
of the Babcock group scheme were
closed to future accrual during the year,
£51.6 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 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 not expected to increase
significantly over the medium term
except for possible top up payments for
the Rosyth Royal Dockyard Pension
Scheme of around £90m expected to be
paid over two years. 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 £4,411.3 million, net of longevity
swaps, in comparison to a valuation of
the liabilities based on AA corporate
bond yields of £4,266.1 million. The
total net accounting surplus, pre deferred
tax, at 31 March 2020, was £145.2
million (2019: deficit of £28.0 million),
representing a 104.3% 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 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.
Governance
The Group believes that the complexity
of defined benefit schemes requires
effective governance and supports an
increasingly professional approach. It has
appointed independent trustees in each
of the largest schemes, and in addition
has appointed professional trustees with
specialist investment expertise.
Accounting valuations
Discount rate %
Inflation rate (RPI)
Inflation rate (CPI)
Rate of increase in pensions in payment %
Life expectancy of male currently aged 65 years
Devonport
Babcock
Rosyth
2020
2.4
2.6
1.8
2.0
20.7
2019
2.4
3.2
2.1
2.2
20.6
2020
2.4
2.6
1.8
2.6
22.1
2019
2.4
3.2
2.1
3.0
21.7
2020
2.4
2.6
1.8
2.8
19.8
2019
2.4
3.2
2.1
3.3
19.7
Babcock International Group PLC Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements
Operational review
Marine
HMS Queen Elizabeth aircraft carrier (UK MOD Crown Copyright)
68
Babcock International Group PLC Annual Report and Accounts 2020
2020 underlying performance highlights
Revenue as %
of Group
Operating
margin
Revenue
growth
25%
11.9%
+11.1%
We ensure the UK
Royal Navy goes
to sea safely by
supporting their ships
and crews around
the world
We support navies
around the world
through the delivery
of complex ship
and submarine
sustainment
programmes
We deliver marine
technology solutions
to improve our
customers’ complex,
safety-critical
operations
Underlying
revenue
Underlying
operating profit
Underlying
operating margin
Group
JV
Total
Group
JV
Total
Group
JV
Total
£43.1m
31 March
2020
IFRS 16 basis
31 March
2019
pre-IFRS 16 basis
£1,163.8m £1,065.7m
£20.3m
£1,206.9m £1,086.0m
£137.9m
£3.3m
£141.2m
12.9%
16.3%
13.0%
£140.7m
£3.3m
£144.0m
12.1%
7.7%
11.9%
The adoption of IFRS 16 increases operating profit by £2.2 million in the year.
JV revenue is after deducting an appropriate portion of JV revenue to reflect revenue already
included in Group revenue.
Financial review
Our Marine sector had a very strong
year and exceeded our expectations.
Strong revenue growth of 11.1% was
led by strong growth in our
technology businesses, increased
warship support activity and the start
of work on the Type 31 frigate
programme. The increase in joint
venture revenue reflects the start of
work supporting Australia’s LHD ships.
The strong revenue growth in the year
was despite a step down in revenue
related to the QEC programme of
£50.4 million.
There was no material trading impact
from COVID-19 in the financial year.
Underlying operating profit of £144.0
million includes a small uplift from
IFRS 16. Excluding this, underlying
operating profit increased by £0.6
million with the total underlying
margin falling year-on-year as
expected, from 13.0% to 11.9%. This
mainly reflects comparison to some
contract outperformances last year
and some lower profit take in the early
stages of contracts this year, both for
Group and joint ventures.
Operational review
UK Defence
Revenue across our businesses in UK
Defence was higher in the year as
increased warship support activity,
higher volumes of technology
products and the start of Type 31
work offset the step down in QEC
revenues and the end of our Irish OPV
contract, which was completed in the
previous financial year.
The Queen Elizabeth Class (QEC) build
programme completed this year with
HMS Prince of Wales leaving our
Rosyth facility in September 2019 for
sea trials. Work on the QEC ships will
continue into the future and in April
2019 HMS Queen Elizabeth returned
to Rosyth for a planned six-week dry
docking and inspection work package.
The Type 23 frigate life-extension
programme at our Devonport facilities
continues with a number of vessels
undergoing deep maintenance and
structural upgrade work simultaneously.
During the year, HMS Lancaster was
successfully returned to the fleet
following her life extension package,
HMS Richmond completed a power
generation and machinery controls
upgrade. HMS Portland is in the final
stages of her refit. Our iFrigate
support product underwent
pioneering trials in the year on HMS
Sutherland. iFrigate is an innovative
smart technology used to predict
and support future maintenance
and through-life support decisions.
We have also continued refit work for
the UK’s minehunter vessels during
the year.
Babcock International Group PLC Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements
Operational review continued
Marine continued
We continue to deliver training support to
the Royal Navy under our FOAP contract
and we are one of two parties down-
selected for Project Selborne, which will
consolidate the majority of Royal Navy
training contracts into a single contract
for the next 10-12 years.
We saw strong revenue growth across our
defence technology businesses with
increased activity on weapons handling
systems and higher volumes on our MSSP
contract, which supports the Type 45 and
QEC platforms.
The US/UK Common Missile
Compartment programme has continued
well and in the year additional orders
have been received to take our total
contract to supply missile tube assemblies
to over £250 million. This includes an
award of a further 18 tubes placed in
March 2020.
We see many opportunities for further
growth in our technology businesses with
some large opportunities in our pipeline.
This includes a bid for the Maritime
Electronic Warfare Programme and the
Skynet 6 Service Delivery Wrap contract
that will support the next generation of
UK military satellite communications. We
are also engaged with a range of partners
bidding on opportunities on the £3.2
billion Morpheus programme which aims
to deliver the next generation of land
environment Tactical Communication and
Information Systems (TacCIS) for the UK
Armed Forces.
International Defence
We saw good revenue growth across
our international businesses this year,
helped by the start of the LHD contract
in Australia and higher activity levels
in Canada.
In Australia, our Naval Ship Management
joint venture started work in July 2019 on
the contract to sustain and support the
largest vessels in the Royal Australian
Navy: two flagship Canberra Class Landing
Helicopter Docks (LHD) and their twelve
associated amphibious landing craft. We
have also secured the weapons handling
and launch system contract for the
Australian Attack class submarines. The
initial design phase will be completed in
Bristol, UK while the latter design phase
and manufacture will be done in Osborne,
HMS Ambush (UK MOD Crown Copyright)
Australia. Revenue from this programme
will be small in the early years but we
expect work to be over £1 billion over the
decades-long lifetime of the programme.
In New Zealand, we won a 20-year
contract with the Ministry of Defence to
procure, deliver and support the country’s
high frequency communications network.
High frequency communications
represents a great opportunity for the
sector and we have large bids in place in
the UK and Australia.
In Canada, work continues on the HMCS
Corner Brook extended docking work
period as part of the Victoria Class in
Service Support Contract (VISSC) and we
have been pre-qualified for the VISSC II
re-bid competition that starts in 2022.
In South Korea, we will now be providing
our weapons handling and launch systems
for the fourth boat in the Jangbogo-III
Submarine programme. We have built up
our Korea office and have invested in an
in-service support facility in Busan from
where we will continue to develop our
presence and in country capability.
Looking ahead we see opportunities for
export orders for our Arrowhead 140
frigate design used for the Type 31
programme and we are working with a
cross UK Government General Purpose
Frigate Export Working Group to explore
opportunities around the world.
Adjacent markets: Energy and Marine
Revenue growth was strong across our
Energy and Marine businesses in the year
led by high demand for complex liquid
gas transportation systems.
We continue to win contracts across
our LGE business, with both LPG and
ecoSMRT® systems, with orders of
over £200 million in the year. We have
now sold seventeen of our patented
ecoSMRT® systems, bringing the total
sold to date to 39. In the year we sold
23 reliquefaction systems for liquefied
petroleum gas (LPG) ships.
Outlook for the year ending
31 March 2021
Around 75% of the work we do in the
Marine sector relates to defence, mostly
delivered through long term contracts,
and this work continues throughout the
COVID-19 pandemic. The defence
support we provide in the UK, Australia
and Canada is vital to national defence as
are the defence programmes we are
involved with across the world. Work on
the Type 31 frigate programme will
continue to ramp up. We expect our
Energy and Marine business to see a
greater impact from COVID-19 due to
weaker demand.
Operating profit for the sector will be
impacted by any revenue impact from
COVID-19, as well as the sector margin
impact from lower demand and
productivity levels.
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Babcock International Group PLC Annual Report and Accounts 2020
Key Platform Characteristics:
Length overall
138.7m
Beam, maximum
19.8m
Design draft
5.0m
Displacement
6,095te
Main engine power 32.8 - 40MW
Speed
28+ Knots
36 metres
At 36 metres from keel to mast, each
frigate will be roughly six times the
height of a giraffe
26,000 metres
There are 26,000 metres of pipe on
each vessel; three times the height
of Everest
139m long
At 139m long, each frigate will be
seven times as long as a cricket pitch
Type 31: a proven platform design
Babcock Team 31 has been contracted
by the UK Ministry of Defence to deliver
five Type 31 Frigates, with the first ship
scheduled to be in the water in 2023.
The contract was awarded in November
2019, kick-starting another decade of
ship-build activity for the historic
dockyard at Rosyth.
Babcock is the prime contractor and the
programme lead, working with major
suppliers like Thales, Lloyds Register,
TYCO and Raytheon to meet the
challenging Type 31 programme, and
potential international customer needs.
We have a fully integrated project team
based in Bristol, Rosyth and Crawley with
extensive ship design and build experience.
The ship is based on the design of the
Iver-Huitfeldt class currently in service
with the Danish Navy, and will leverage
the skills of an existing and experienced
workforce at Rosyth and around the UK.
Its smart build credentials means it is
designed for pre-outfitting, enabling
rapid assembly and supporting time and
cost efficiencies. We have developed a
dynamic and flexible build strategy
Carrier programme, we have begun
construction works for a new Module
Assembly Hall, capable of housing two
Type 31 Frigates for parallel build and
assembly activity.
The building will enable productivity gains
from improved access, digital connectivity
and a dry benign environment.
Digital transformation is at the heart of
the site’s growth. We are investing in
facilities and advanced manufacturing
equipment to support the integration of
technology and new working practices,
creating a dynamic, effective and
efficient digitally enabled facility.
A new ‘pulse line’ will be installed,
providing a state-of-the-art automated
panel manufacturing line. This is a
cornerstone of the digital transformation
on-site, creating a paradigm shift in the
manufacturing process.
that will enable the concurrent assembly
of different modules and on-time
delivery capability
Our Arrowhead 140 solution provides
the Royal Navy a new class of ship with
proven ability to deliver a range of
peacekeeping, humanitarian and
warfighting capabilities whilst offering
communities and supplies chains
throughout the UK a wide range of
economic and employment opportunities.
We are committed to a programme of
investments to deliver prosperity in line
with the UK’s National Shipbuilding
Strategy. At its height, the programme
will use a workforce of around 1,250
highly skilled roles, and support an
additional 1,250 roles within the wider
supply chain.
Build
Over the past decade Babcock has
invested substantially in its Rosyth facility
transforming the dockyard into one of
the UK’s most modern maritime support
facilities. Building on the knowledge and
expertise developed during the Aircraft
Babcock International Group PLC Annual Report and Accounts 2020
71
Strategic reportGovernanceFinancial statements Operational review continued
Nuclear
We have supported
the Continuous At
Sea Deterrent for
50 years
We sustain the
entirety of the UK’s
submarine fleet
We take a leading role
in all civil nuclear:
from new build, to
operational support,
to decommissioning
The Low Level Refuel Facility at our Devonport site
Financial review
Underlying revenue in our Nuclear
sector was down 15.8% due to the
£270.8 million step down in revenue
from our Magnox JV which ended in
August 2019. Excluding Magnox,
revenue grew by 6.0% with a small
decline in civil nuclear offset by good
growth across the defence business.
There was a small impact from
COVID-19 in the period as activity
levels across our civil nuclear business
were reduced.
Underlying operating profit of £126.3
million includes a small uplift from IFRS
16. Excluding this, underlying
operating profit was £18.0 million
lower than last year with a strong
performance in Defence offsetting a
£25.0 million step down in Magnox.
The sector total margin increased to
11.4% reflecting a stable Group margin
and a mix impact from lower joint
venture revenue.
Due to the ongoing challenges across
the UK civil nuclear market and to
right-size our business following the
end of the Magnox contract, we have
implemented a restructuring
programme across the Nuclear sector.
This is focused on reducing overheads
and simplifying our structure.
Operational review
Defence
The Defence business saw strong
growth in the year supported by higher
levels of activity in submarine support,
design work for the Dreadnought Class
and the start of work on the strategic
infrastructure programme.
Our performance on our key contract,
the Maritime Support Delivery
Framework (MSDF) remains in line
with expectations, with efficiencies
and cost reductions being delivered.
The replacement Future Maritime
Support Programme (FMSP) contract is
being developed and will be within our
Terms of Business Agreement (TOBA)
that runs to 2025.
We support the UK’s submarine fleet
at both HMNB Clyde and HMNB
Devonport. Activity levels in Clyde have
been higher throughout the year as we
work closely with the customer across
three submarine classes. In Devonport,
we continue to work on the
Revalidation Assisted Maintenance
Period (RAMP) programmes for the
Trafalgar Class and the first life-
extension of the Vanguard Class.
Work started this year on the
infrastructure design for the deep
maintenance of the Astute Class of
submarines in Devonport in the
mid-2020s and we are engaging
with the customer on further
infrastructure upgrades at HMNB
Clyde and HMNB Devonport.
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Babcock International Group PLC Annual Report and Accounts 2020
2020 underlying performance highlights
Revenue as %
of Group
23%
Operating
margin
11.4%
Revenue
growth
-15.8%
Underlying
revenue
Underlying
operating profit
Underlying
operating margin
Group
JV
Total
Group
JV
Total
Group
JV
Total
31 March
2020
IFRS 16 basis
£898.4m
£212.5m
31 March
2019
pre-IFRS 16 basis
£853.2m
£465.7m
£1,110.9m £1,318.9m
£106.5m
£37.0m
£143.5m
12.5%
7.9%
10.9%
£114.1m
£12.2m
£126.3m
12.7%
5.7%
11.4%
The adoption of IFRS 16 increases operating profit by £0.8 million in the year.
JV revenue is after deducting an appropriate portion of JV revenue to reflect revenue already
included in Group revenue.
Civil Nuclear
Excluding Magnox, revenue across our
Civil Nuclear businesses was lower this
year reflecting lower levels of customer
funding as the civil nuclear market in
the UK remains tough.
In decommissioning, all Magnox sites
were handed back to the customer as
planned at the end of August 2019
while work at Dounreay continues to
deliver on its revised scope. The scope
of our Dounreay joint venture continues
to reduce each year as
decommissioning work progresses.
We saw lower levels of activity in our
nuclear services business in the period
with lower levels of customer funding
and some project delays at Sellafield.
We continued to support EDF power
stations through a challenging year of
extended outages which impacted our
levels of work activity.
Work on new build nuclear power
stations is a small but strategically
significant part of our business for the
long term. In August 2019, the MEH
Alliance was launched. This alliance will
work across the Hinkley Point C site to
integrate and coordinate the delivery of
all the main MEH (Mechanical, Electrical
and HVAC) activity. Our share of this
work will be around £300 million
over a five to six year period starting
in 2022.
Civil nuclear work for our UK defence
customer is a significant opportunity
for the medium term and during
the year we were selected as the
Nuclear Technical Service Provider
for HMNB Clyde.
We continued to make progress in
building a presence in international
markets this year. We secured a small
contract in Japan and have won a
series of small consultancy contracts
in Canada.
Outlook for the year ending
31 March 2021
Defence accounts for the significant
majority of the work we do in nuclear
and is delivered through long term
contracts. The support we provide to
the Royal Navy’s submarine fleet is
critical to the UK’s national defence and
has been prioritised. Design work on
new submarine classes and work on the
strategic infrastructure programme will
continue. The outlook for our civil
nuclear business is tougher as a slowing
UK market combined with the impacts
of COVID-19 are expected to impact
revenue. Year on year comparison will
also be impacted by the completion of
our Magnox contract in the year ended
31 March 2020.
Operating profit for the sector will be
impacted by any revenue impact from
COVID-19, as well as the sector margin
impact from lower demand and
productivity levels.
Babcock International Group PLC Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements
Operational review continued
Land
We ensure the British Army can focus on their
missions safely by supporting all of their vehicles
We enable the British Army to do their job with
our technical training programmes
Our people support the British Army by
contributing to front-line support and joining
reserve forces
EMTC vehicle diagnostics lesson at MOD Lyneham
Financial review
Underlying revenue was slightly lower
in the year due to a £61.1 million
impact from exits and disposals and a
£24.0 million negative impact from
foreign exchange movements.
Excluding these, underlying revenue
grew by 1.2% with stronger trading in
South Africa and higher defence
procurement revenues partly offset by
a lower contribution from JVs following
the end of our ABC JV.
There was a small impact to revenue in
the final month of the year from
COVID-19 as training activities were
suspended and we saw lower activity in
our short-cycle areas including Airports
and UK rail and power. We also saw
lower procurement-related revenue.
Underlying operating profit of £133.9
million was slightly ahead of our
expectations and includes the impact
of £18.4 million of step downs. These
relate to foreign exchange movements,
exits and disposals, and a £10.2 million
reduction in profits from our Holdfast
(RSME) JV. Excluding these step downs
and the benefit of IFRS 16, underlying
operating profit increased by £3.7 million.
This increase represents the strong
performance of South Africa and an
improved performance in our ALC JV.
The step down in the Holdfast (RSME)
profit contribution was less than
originally expected as we were able to
realise more lifecycle operating cost
savings in the year.
The increase in the JV margin in the
year reflects the absence of ABC JV
revenue, which ended in the last
financial year, and an improved
performance in our ALC JV. Revenue
from the Holdfast (RSME) JV is not
included in JV revenue, as it is already
included in Group revenue as the work
is performed by Babcock Group on
behalf of the JV. The operating profit is
included in JV operating profit and this
leads to the high JV margin for Land.
Operational review
Defence
We saw a strong performance across
our defence businesses in the year with
revenue growth led by higher defence
procurement revenues, although these
fell in the final month of the year.
We made great progress in our
Defence Support Group (DSG) business,
helped by working collaboratively with
the MOD as part of the Cabinet Office’s
Strategic Partnering Programme. We
continue to invest in a new ERP system
to drive further efficiencies in our
vehicle maintenance and spares
procurement activities. During the
year, we secured new orders worth
around £80 million in equipment
support activities, including additional
Warrior platforms and we continue to
discuss further initiatives for fleet
support for future years.
We had a good year across Defence
training, where we support the British
Army in delivering training to around
20,000 service personnel. We continued
to drive efficiencies in training for the
Royal School of Mechanical Engineers
(RSME) though our Holdfast JV and we
were able to realise more lifecycle
operating cost savings. We secured a
two-year extension to our Defence
College of Technical Training contract
and a three-year extension to our
Training, Maintenance and Support
Services contract. We continue to work
closely with our customer as they
develop their Collective Training
Transformation Programme, including
mobilising Project Hannibal to develop
a dynamic opposing force for the
Army to train against in a realistic
synthetic environment.
Additionally, we secured a two-year
extension to our contract to support
the British Army in Germany and have
successfully pre-qualified for the
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Babcock International Group PLC Annual Report and Accounts 2020
2020 underlying performance highlights
Revenue as %
of Group
Operating
margin
32%
8.6%
Revenue
growth
-4.1%
Underlying
revenue
Underlying
operating profit
Underlying
operating margin
Group
JV
Total
Group
JV
Total
Group
JV
Total
31 March 2020
IFRS 16 basis
£1,534.7m
£18.9m
£1,553.6m
£100.5m
£33.4m
£133.9m
6.5%
176.7%
8.6%
31 March 2019
pre-IFRS 16 basis
£1,560,0m
£60.2m
£1,620.2m
£105.1m
£40.9m
£146.0m
6.7%
67.9%
9.0%
The adoption of IFRS 16 increases operating profit by £2.6 million in the year.
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.
National Training Estate opportunity,
which will come to market later
in FY21.
Our ALC JV continued to perform well
in the period but we were unsuccessful
in the bid for Project Miter, the
replacement contract for ALC. As such,
our work supporting the Army’s C
vehicles will end in May 2021.
Emergency Services
Trading across our Emergency Services
businesses was strong over the period
with good revenue growth and a
significant new contract win.
Our fleet support and training
contracts for the London Fire Brigade
(LFB) continue to perform well and
during the year we acquired and
introduced a number of new vehicles
into the LFB fleet to help them meet
their low carbon initiatives.
Our fleet support contract for London’s
Metropolitan Police Service (MPS) also
performed well in the year and we
completed the move to a dedicated
new workshop facility to support
further improvements in contract
delivery. In November 2019, we won a
new contract worth around £300
million to act as the MPS’s learning
partner. This partnership to support the
UK’s largest police service with its new
training recruits will last at least eight
years and starts during FY21.
Adjacent markets
The Land sector operates a range of
contracts across markets adjacent to
our key markets, all benefiting from our
engineering capabilities.
In line with our strategy, we continue
to exit non-strategic areas of our
business. In June 2019 we concluded
our services for British Airways ground
support and in December 2019 we
exited our final aggregates and cement
fleet management contract. These
exits are in addition to the set of exits
and disposals made in the 2019
financial year.
In Rail, work has now started on the
new ten-year CP6/7 contract for track
works in Scotland, a contract worth up
to £1 billion over its life. We were also
awarded a signals and telecoms
framework contract by Network Rail
worth £65 million over five years.
Our Airports business had a solid year
of contract performance and was
successful in the rebid of the Schiphol
Baggage Maintenance contract. Our
rebid for Heathrow baggage handling
was unsuccessful, with the existing
contract ending in October 2020.
Our business in South Africa delivered
a record year with good revenue
growth, record margins and significant
improvements in health and safety.
However, the devaluation of the rand,
particularly in the final months of the
year, reduced the Group pound sterling
benefit. Revenue growth came from the
energy business which saw increased
work with Eskom. The construction and
mining equipment supply business saw
lower revenue reflecting overall market
demand but we were able to grow our
market share.
Outlook for the year ending
31 March 2021
Work on defence programmes, which
make up around 40% of work in our
Land sector, continues during the
COVID-19 pandemic and is delivered
across long term contracts. Work
across our South African energy
business and emergency services
businesses also continues with
relatively little disruption. The impact
from COVID-19 will be greater across
our adjacent markets, particularly in
civil training, rail, power, airports and
our South African equipment business.
Operating profit for the sector will be
impacted by any revenue impact from
COVID-19, as well as the sector margin
impact from lower demand and
productivity levels. Operating profit will
also reflect only two months of
contribution from our Holdfast (RSME)
JV following the sale of our interest in
June 2020.
Babcock International Group PLC Annual Report and Accounts 2020
75
Strategic reportGovernanceFinancial statementsStrategic reportGovernanceFinancial statements
Operational review continued
Aviation
We save lives with
our aerial emergency
medical and search
and rescue services
We protect
communities with our
firefighting operations
We support the
defence of nations by
supporting air forces
in the UK and
overseas
Post-flight checks on a UK Royal Air Force Hawk T1 at RAF Valley
Financial review
Underlying revenue of £1,000.3 million
was £135.2 million lower than last year,
which included around £125 million of
asset sales in our Fomedec contract, plus
revenue from the Helidax joint venture
which was disposed of in March 2019.
Excluding Fomedec and Helidax, revenue
for the sector was broadly flat over the
year following a stronger second half of
trading in our defence and aerial
emergency services businesses.
There was a small impact from
COVID-19 in the final two months of
the year as we saw reduced flying
hours and increased costs in our aerial
medical services businesses.
Underlying operating profit of £121.0
million includes a £17.9 million benefit
from the adoption of IFRS 16. Excluding
this, operating profit is £57.4 million
lower than last year. The reduction in
operating profit reflects the lower
revenue across the sector combined
with a fall in margin, with the sector
margin falling to 12.1%, or 7.5%
excluding joint ventures. These lower
margins reflect the pressures in our
Oil and Gas business, the impact of
contract delays both in pricing and costs
in aerial medical emergency services in
Italy and Spain and a comparison to
some contract outperformances in the
sector in the last financial year. The
profit contribution from joint ventures
was slightly higher with an improved
contract performance in Ascent and
better than expected contract
performance in AirTanker offsetting the
end of contributions from Helidax.
To address the lower margins in the sector
this year we have reduced our fleet in Oil
and Gas and implemented a restructuring
programme across the sector. We have
impaired the value of goodwill to reflect
changes to market conditions.
Operational review
Defence
As expected, revenue in our Defence
business was lower given the impact of
Fomedec equipment sales last year.
Our defence business across the UK had
a good year. Our HADES contract, which
provides technical support at 17 RAF air
bases, has now been fully operational
for over a year and we signed a
three-year extension to our existing
Light Aircraft Flying Task contract to
provide our Babcock-owned Grob 115
aircraft through to March 2022.
Our Ascent joint venture performed
well in the period with key milestones
met and it was awarded a contract
uplift, with our share worth around
£100 million, to provide additional
helicopter flight training. Work will
start in the March 2022 financial year.
Expanding our services across
international defence markets remains a
key part of our strategy. In France, our
Fomedec contract has performed well
and we are exploring opportunities to
expand the scope of work. In December
2019 we won our second defence
contract in France. We will provide four
H160 helicopters to the French Navy for
search and rescue operations and be
responsible for modifications and
through-life support over the ten-year
contract worth at least £100 million.
International opportunities remain a
significant part of our pipeline, including
defence flying training opportunities in
Canada and France.
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Babcock International Group PLC Annual Report and Accounts 2020
2020 underlying performance highlights
Revenue as %
of Group
Operating
margin
Revenue
growth
20%
12.1%
-11.9%
Underlying
revenue
Underlying
operating profit
Underlying
operating margin
Group
JV
Total
Group
JV
Total
Group
JV
Total
31 March 2020
IFRS 16 basis
£852.6m
£147.7m
£1,000.3m
£64.2m
£56.8m
£121.0m
7.5%
38.5%
12.1%
31 March 2019
pre-IFRS 16 basis
£995.9m
£139.6m
£1,135.5m
£107.1m
£53.4m
£160.5m
10.8%
38.3%
14.1%
The adoption of IFRS 16 increases operating profit by £17.9 million in the year.
JV revenue is after deducting an appropriate portion of JV revenue to reflect revenue already
included in Group revenue.
Aerial Emergency Services
Revenue across our aerial emergency
services was flat over the year as the
positive impact of the start of
operations in Norway and Canada were
offset by the impact of delayed
contracts in Southern Europe and lower
flying hours in the final months of the
year as COVID-19 lockdowns led to
fewer primary emergency missions in
Italy, Spain and France. We have,
however, continued to provide aerial
emergency services in all geographies,
introducing new safety measures to
keep crew and patients safe.
Across Italy and Spain we saw delays
this year in the award of new aerial
medical emergency services contracts.
These delays were a mix of rebids and
new regions and were caused by
customer decisions and appeals from
other bidders. In addition, we are
increasingly seeing customers demand
additional and more complex services
without full budgets. We are addressing
the impact this has on profitability with
the restructuring programme across
the sector.
Our firefighting operations in Europe
had a successful year of operations
though total flying hours were lower
than last year. We have expanded our
market presence in Spain with a
contract expansion in the Andalucía
region. As part of efforts to help
countries outside our operations this
year we flew operations in Greece and
Israel to assist with their fire season.
We entered two new countries in the
year. The Norwegian fixed wing contract
began operations in July 2019 with
11 aircraft providing aerial medical
emergency services. We also entered
the Canadian market, with the start of
our firefighting contract in April 2019
in Manitoba. We manage, maintain and
operate Manitoba’s fleet of seven
firefighting amphibious aircraft and
provide three of our own aircraft.
Adjacent markets: Oil and Gas
Our Oil and Gas business continues to
face challenging market conditions and
revenue was down significantly this year
following the loss of some key contracts,
lower pricing and lower flying activity.
We are addressing the difficult trading
environment through the restructuring
actions we are taking. We have significantly
rationalised our fleet, removing many
heavy helicopters. We have returned
seven S92s and five EC225 leased
assets. This rationalisation programme
has enabled us to significantly improve
our fleet utilisation across all bases. In
March 2020 we won a five year
contract in the North Sea with three
operators starting in July, albeit at
pricing reflective of the tough
environment and current lease rates.
Outlook for the year ending
31 March 2021
Defence accounts for around 30% of
the work we do in our Aviation sector
and work continues throughout the
COVID-19 pandemic. Lower
productivity is expected to impact
operating profit however.
Despite directly contributing to the
fight against COVID-19, our Emergency
Services business is seeing lower flying
hours. The response to COVID-19 has
created additional costs on top of the
pressures on our cost base from
contract delays in Southern Europe.
The market for oil and gas aviation is
expected to remain weak and revenue
will be lower next year due to contracts
lost in the last financial year, plus some
impact from COVID-19.
Operating profit for the sector
will be impacted by any revenue
impact from COVID-19, as well as
the sector margin impact from lower
demand and productivity levels.
We will look to accelerate fleet
rationalisation to drive cash generation
and future cost reduction.
Babcock International Group PLC Annual Report and Accounts 2020
77
Strategic reportGovernanceFinancial statements
Critical support:
emergency services
Metropolitan Police motorcyclist at a Babcock maintenance facility
78
Babcock International Group PLC Annual Report and Accounts 2020
Laura Molyneux
Head of Curriculum, Police Education Qualifications Framework contract
Working in close
collaboration with the
Metropolitan Police
Service and our Higher
Education Institute
partners, we designed
two unique education
programmes that will
equip the growing
number of new officers
for the challenges of
policing London.
These programmes will
deliver a highly trained,
skilled and diverse
workforce who are
passionate about making
a difference to London’s
communities and
keeping the city safe.”
Babcock International Group PLC Annual Report and Accounts 2020
79
Strategic reportGovernanceFinancial statements Principal risks and management controls
This means that the risks identified on
pages 83 to 92 are not and cannot be
an exhaustive list of all the principal risks
that could affect the Group.
Risks and uncertainties which might
affect businesses in general or which
are not specific to the Group are not
included, but Babcock, of course,
faces such risks as well.
Principal and emerging risks,
risk mitigation and controls
The Board has identified the risks and
uncertainties that it currently considers
to be of greatest significance to Babcock
and these are described overleaf from
page 83 to page 92. These risks 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 opposite and overleaf about
our risk management approach and
general controls). The Board has
identified these principal risks, having
reviewed the Group’s risk register, a
process that combines a bottom-up
review, starting at business unit level,
with challenge and review by senior
management, as well as a top-down
strategic review by Group management.
These reviews include, as a matter of
course, emerging risks, which are “new”
risks that may challenge the Group in the
future. They may begin to evolve rapidly
or simply not materialise. The Group’s risk
reviews include a scan of the horizon to
identify any such emerging risks.
COVID-19 is an example of such an
emerging risk. This pandemic presents
a number of different risks across our
business – it impacts our employees and
the way we work; it impacts our customers
and their priorities. We describe on page
27, and the pages following, those
impacts and their effect on our principal
risks. We also describe our responses to
these impacts. However, the full scale of
the disruption caused by COVID-19 is still
evolving. While it does, we will continue
with our approach of protecting the
Group and its key stakeholders and will
prioritise the health and safety of our
employees, the needs of our customers,
financial discipline and business continuity.
Franco Martinelli
Group Finance Director
Our principal risks and
how we manage them
Babcock has an established process that
aims to identify, evaluate and manage risk.
Internal control processes are in place as
part of the risk management regime.
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 controls the risk appetite
of the Group through its delegated
authorities, which impose strict controls.
For example, the Board must approve
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, although
they are reviewed by the whole Board
prior to submission) and all financing
arrangements (unless delegated to
the Board’s Finance Committee).
The Board reviews the controls and
mitigation plans in place; these are
intended to manage 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.
Babcock is, however, a large and
developing group of businesses. Factual
circumstances, business and operating
environments will change. On an ongoing
basis, the Group might identify new risks
or better understand the significance
of existing risks or a change in a risk.
80
Babcock International Group PLC Annual Report and Accounts 2020
Risk management
framework
Board
Executive
Committee
Audit and Risk
Committee
Group Security
Committee
Internal Audit
Group risk
management
Company
employees
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 Chair of the
Committee, and the Group’s Chief
Information Officer and Chief
Information Security Officer attend
each meeting. The Board receives
regular reports on security and
information assurance matters.
Senior Group management (with
sector Chief Executives having
responsibility for risk identification
and risk management in their
businesses) monitor the internal
control systems.
Read more on page 82.
I
n
t
e
r
n
a
l
c
o
n
t
r
o
l
s
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.
The Board is ultimately
responsible for the Company’s
risk management and internal
control system. The Board
delegates oversight of certain
risk management activities to the
Audit and Risk Committee.
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 142. It also receives
in-depth presentations on
individual major risks throughout
the year.
The Audit and Risk Committee
receives regular reports from the
internal audit function provider,
which was Ernst & Young in the
financial year to 31 March 2020,
as well as management reports
relating to internal control and
risk issues.
The Group Risk and Insurance Manager
(who reports to the Group Finance
Director), working with senior
operational management teams, is
responsible for the risk register and
seeks to ensure a coherent and
consistent Group best practice
approach to risk assessment and risk
management. We build the risk register
through both bottom-up and top-down
reviews. Each business unit and then
each sector identifies the risks,
including emerging risks, relevant to
their specific area, along with the
controls and assurance activities in
place to mitigate those risks. These risk
assessments are subject to regular
review and challenge by Group senior
management that overlays on the
bottom-up review an assessment of the
strategic risks facing the Group, for
example, technology, disruptors and
change in government policy, to
create the risk register. The Audit and
Risk Committee reviews the risk
register at least once every year.
Babcock International Group PLC Annual Report and Accounts 2020
81
Strategic reportGovernanceFinancial statements
Principal risks and management controls continued
Our internal controls include:
Budget process
Group management review annual budgets and medium-term financial plans before submission to
the Board for approval. Management prepare updated forecasts for the year at least quarterly.
Management and
financial reporting
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 receives 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 to insurance and on the placing of the programme.
The Board and the Group Executive Committee receive monthly summaries of material actual or
potential disputes, their progress and potential outcomes. The Group has an internal legal service.
Group Finance and an Executive Director review all significant credit risks and take appropriate risk
limitation actions.
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 with whom it does business. In addition, there is an anti-bribery and
corruption governance structure in place with detailed policy and procedures (available on the
Babcock website), supported by 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. We require those working on our behalf or in
consortium with us 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, as
well as legal, financial and accounting matters. These policies and procedures are available to
employees on the Group intranet. The sectors supplement these by further business unit-specific
policies and procedures.
All employees have access to a confidential whistleblowing hotline. They may call, email or write a
letter 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). The hotline sends all reports received to the Company Secretary, who is
responsible for ensuring the Group investigates them. He submits a report to the Board of all the
investigations and their result. See page 110.
Sectors regularly review the vulnerability of their key supply chain partners whose continued ability
to supply the Group the sector considers critical to its business performance. The sectors 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.
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Babcock International Group PLC Annual Report and Accounts 2020
Principal risks, risk mitigation
and controls
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. It follows that the responses of our customers to the
COVID-19 outbreak in the territories we operate in may have a significant financial or operational impact on us.
Risk description
Potential impact
Mitigation
In the ordinary course of our business, 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.
Following the COVID-19 outbreak,
we have worked even more closely with
our customers in order to understand
their priorities in response to the
pandemic. All our regions have their
business continuity plans in place to help
us manage the disruption. We have
implemented those plans in consultation
with our key customers. The Board will
continue to monitor the impact and
disruption caused by COVID-19 and
will continue to implement a range of
measures to mitigate the operational,
financial and commercial impacts as
they emerge.
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.
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.
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’s exit from 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.
In addition, the counter measures
adopted by governments and our other
customers around the world as they
seek to manage the disruption caused
by the COVID-19 outbreak will impact
our operations and may decrease
revenues whilst increasing costs,
causing a negative impact on profits
and cash flows.
Whether caused by COVID-19 or not,
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 as well as a
reduction in spend.
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:
• 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 co-
operative, partnering approach to
customer/supplier relationships
• 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.
Babcock International Group PLC Annual Report and Accounts 2020
83
Strategic reportGovernanceFinancial statements Principal risks and management controls continued
The nature of our contracts, bid processes and markets
We seek to win and operate long-term high-value contracts for the provision of complex and integrated services to our customers.
This has a number of key risks. Bidding for these contracts typically involves a protracted and detailed tendering process, often under
public procurement rules. There are usually only a relatively limited number of customers in each of our market sectors. Failure to
realise the pipeline of opportunities and to secure rebids can mean missed opportunities for growth and loss of revenue. The contracts
we bid for often entail a substantial transfer of risk from the customer to the supplier. Mobilisation of contracts may be difficult and
the transitioning from mobilisation to business as usual may not be effective. We may not deliver the contractual requirements due
to ineffective contract change management or the failure to manage our supply chain. COVID-19 may increase the likelihood of
each of these key risks arising.
Risk description
Potential impact
Mitigation
Bidding requires a substantial investment
in terms of 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 our markets, 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. 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.
We have a clear business strategy to
target a large bid pipeline, both in the UK
and internationally. We 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. We are maintaining our
dialogue with our customers to
understand their intentions regarding
their pipeline.
We are also maintaining our formal and
rigorous reviews and gating processes at
key stages of each material bid to reduce
the risk of underestimating risks and costs
and to ensure that we target limited bid
resources at opportunities where we
consider that we have the best prospects
of winning or retaining business.
Group policies and procedures continue
to 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. These reviews also consider
the performance of our supply chain.
In the current circumstances, a particular
focus is the impact of COVID-19 on it.
If we lose a bid or the customer aborts
a bid process or we withdraw due to
scope changes as it progresses, this is a
significant waste of limited resource with
substantial expenditure written off.
If we win a public procurement bid and a
losing bidder challenges the award, 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 we
may not replace soon with 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,
whether by us or by our supply chain, 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.
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Culture and values
Given the nature of our customers and the markets in which we operate, our culture and values are central to our business.
Indeed, we believe that 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, could attract a high level of publicity.
Risk description
Potential impact
Mitigation
Given our dependence on individual
major customers and the relatively
narrow customer base in our markets,
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.
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 36
to 51. (See also health, safety and
environmental risks on page 87.)
We seek to reinforce to all employees
through a number of different processes
our values, for example, our induction
training and our “being babcock”
programme. We encourage all our
employees to use our whistleblowing
reporting lines where they see evidence
of behaviour which is not in keeping with
our values. The Board monitors and
reviews all reports and their investigations.
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.
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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’s exit from the European Union, the terms of the UK’s future relationship with the EU 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.
Risk description
Potential impact
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 highly regulated
environments.
Geopolitical factors, for example the
terms of the UK’s exit from the EU,
could lead to significant tensions
between trading countries.
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.
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.
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
or cargo for remuneration 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. Following the UK’s exit
from the EU, the EU authorities may,
depending on the terms of any exit, no
longer consider the Company as an EEA
national and 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, we have reorganised
the operations of those Babcock
companies which hold an EU operating
licence, to separate those parts of their
business which need a licence, from
those parts which do not. We transferred
the companies holding the licences once
reorganised, 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.
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Health, safety and environmental
We are a multi-national company based in a number of locations worldwide. Some of our operations entail the potential risk of
significant harm to people, property or the environment.
Risk description
Potential impact
Many of our businesses (for example, our
nuclear operations) involve working in
potentially hazardous operations or
environments, which we must manage
and control 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).
As a global company, we are dependent
on the ability of our personnel to maintain
their physical health and wellbeing in
order to carry out their roles either from
our work sites or from remote locations.
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.
If we have caused or contributed to an
incident because 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 may be insured
against, as well as potentially 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.
Business disruption may occur when
personnel are not able to work or
communicate due to a pandemic such
as the current COVID-19 outbreak.
Mitigation
Our goal is for everyone to go
“home safe every day”. Accordingly,
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. Sector safety leadership teams and
the Corporate Safety Steering Group
(CSSG) oversee the implementation of
policy, strategy and initiatives across all
our businesses. An internal safety audit
programme reviews different businesses
throughout the year and reports back to
the CSSG.
The Board receives half-yearly reviews
of health and safety and environmental
performance. In addition, 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 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.
In respect of the current COVID-19
outbreak, we have taken a number of
measures across the Group. Our first
priority is the safety of our employees.
Our employees deliver essential services
on which our customers and the wider
community rely. The continuation of
these services is key. We have reviewed
our methods of working across the Group
to institute the appropriate protective
measures, including issuing new work
guidelines, asking employees to work
from home where they can, changing
shift schedules, instituting infection
control at work sites and ordering the
wearing of protective equipment.
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People
Our business delivery and future growth depend on our ability 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
Potential impact
Mitigation
Competition for the skilled and
experienced personnel we need is
intense and is likely to remain so for the
foreseeable future. This poses risks in
both recruiting and retaining such staff.
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 45
and 46 of this Annual Report.
Losing experienced senior managers
for any reason without plans for their
replacement could have a material
adverse effect on the prospects and
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. This could impact our
contract profitability.
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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
Potential impact
Mitigation
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.
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.
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.
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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 an Enterprise Resource Planning (ERP) application for our ‘back office’ operations which also provides some
front-end functionality.
Risk description
Potential impact
Mitigation
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.
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 ERP system or
difficulties experienced in doing so could
cause both trading and financial reporting
difficulties that could be material.
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 is being implemented in
a phased approach (with parallel running
of old and new systems for a period) to
what we believe is a realistic timetable.
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Currency exchange rates
As we expand outside the UK, our financial results are increasingly exposed to the impact of currency exchange rates.
Risk description
Potential impact
Mitigation
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 and South African Rand,
as well as increasingly, Australian Dollar,
Canadian Dollar, Norwegian Krone and
Swedish Krona.
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.
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.
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Growth and acquisitions
Our strategy is to build on our core strengths in order to enable us to solve complex problems for our customers, improving their
performance and reducing their costs. We have built our core strengths organically or by acquisition.
Risk description
Potential impact
Mitigation
We look to develop innovative service
offerings and products underpinned
by technology, which focus on the
higher- value contracts. Inevitably, this
means a focus on larger customers in
certain territories. However, these offerings
and products may not differentiate us
from more commoditised competitors or
we may lose contracts or growth
opportunities through price.
Our services and products may not
differentiate us from more commoditised
competitors or we may lose contracts or
growth opportunities through price.
Where we have acquired a strength
through acquisition, the financial benefits
of acquisitions may not be realised as
quickly and as efficiently as expected and
be a diversion to management.
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.
We are in constant dialogue with our
customers at all levels, from the Board
down to the frontline, in order to ensure
that we understand their key needs and
drivers. Through this engagement,
we aim to focus on those services and
products, which we believe will deliver
real improvements and efficiencies to our
customers. If we acquire a strength
through acquisitions, management
submit a detailed business case, with
forward-looking projections, to the Board
in respect of each acquisition.
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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 2023. 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 2023, the Directors considered
the Company’s business model as set out
on pages , including, in particular, the
core strengths of the Company, such as
its long-term contracts, which account
for around 80% of its business, as well as
its order book of around £17.6 billion
and its bidding pipeline of around £17
billion. 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 83 to 92,
and the Group’s solvency and liquidity
risks identified within the Group’s risk
management framework in the context
of the controls and mitigating matters
described on pages 80 to 82.
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, which are a £775 million
five-year multi-currency revolving credit
facility, US$500 million loan notes, and
three tranches of notes (€550 million
1.75% notes, £300 million 1.875% notes
and €550 million 1.375% notes) issued
under the Group’s Eurobond programme,
as well as the availability and continued
access to debt markets.
The Directors then considered the impact
that the COVID-19 outbreak might have
on the Group’s business model and
budget and mapped out certain
scenarios of varying severity and impact
on the Group, including changes in
Government spending. The scenarios
assume an appropriate management
response, including deferral of non-
essential capital and revenue expenditure
as well as the deferral of dividends. The
cashflow impacts of these scenarios were
overlaid on the budget and forecast to
assess the impact on the Group’s liquidity
and solvency, in particular to stress test
the headroom available to the Group
under its existing borrowing facilities.
The Directors also considered a
deterioration in the relationship with the
Group’s principal customer, the loss of a
significant contract and a significant
increase in interest rates, coupled with a
significant devaluation of Sterling to the
Euro by around 20% 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 a three year period.
Having considered these scenarios, 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 2023. In making this statement,
the Directors have assumed that
maturing facilities will be refinanced on
commercially acceptable terms and the
Group is able to drawdown its existing
facilities as required.
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civil nuclear
Gas circulator fluid drive being lifted at Dungeness B
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Joseph Hicks
Mechanical Engineer, Dungeness B
We have a strategic
relationship with EDF
Energy supporting their
fleet of nuclear reactors,
which is of national
importance.
We provide services on
fuel route optimisation
and maintenance
optimisation, all of
which contribute to
supporting the UK’s
energy supply and
keeping the country’s
lights on.”
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I have also met with a number of our
major customers. I see it as an important
part of the Chair’s role to have a strong
relationship with key customers that
complements the depth and breadth of
the Group’s management relationships,
through a programme of regular
senior-level meetings. I intend to develop
this role further, and am committed to
supporting the continued improving
momentum of dialogue with our primary
customers. We have been pleased to
welcome customers to participate in a
number of contract reviews at the Board
during the year.
I have also enjoyed meeting many of
Babcock’s shareholders to hear, directly
from them, their views, concerns and
priorities. The Board and I are clear about
the importance of corporate governance
and its role in the long-term success of
the Group.
Purpose and culture
At the Board we recognise the essential
role that a clear purpose and a strong
corporate culture play in assuring the
Group’s long-term success. During the
year the Board has worked to clarify
Babcock’s purpose, which we describe on
page 10, and we expect to do more on
this over the coming year. This purpose is
underpinned by the corporate culture,
based on strong values that I found in
evidence across my induction visits.
A key role of the Board is to ensure that
the Company’s purpose, strategy, culture
and values are coherent, and reinforce
each other. Our values are clearly set out
in our Code of Business Conduct and are
described in our being babcock principles
on page 43.
They require us, 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
has mechanisms in place to check the
progress on embedding these values
within all parts of the Company’s
business. For example, our ethics policy
is available to all on the website and
appropriate training is given on the
standards expected of our employees;
as described on page 49, the Board
reviews and monitors all reports to our
whistleblowing line, which encourages
employees to report any breach of our
Code of Conduct or our ethics policy.
Ruth Cairnie
Chair
Chair’s introduction
I am pleased to present my first
Chair’s report on the work of the
Babcock Board. Since joining the
Board in April last year, I have focused
much time engaging with Babcock’s
stakeholders in order to get a real
understanding of the Company.
My induction into the Group over the
last year has been designed to give me
insights into all aspects of the Company,
including importantly our ways of
working and our governance in practice.
In addition to familiarising myself with all
of our governance structures and processes,
I have been keen to understand first-hand
how we interface with key stakeholder
groups and what their views are.
To understand more about the work
we undertake, the experiences of our
workforce and the ways in which we
interact with them, over the course
of my first year I have visited key sites
within every sector, both in the UK
and internationally; some of the locations
are shown on the following page.
I plan to continue with a programme of
regular visits across the business, as soon
as this becomes possible again.
These visits have given me the
opportunity to meet and talk with a
range of our employees from sector
management to local managers and
the front line, as well as groups of
graduates and apprentices, and diversity
networks. Across the operations, I have
been struck by our employees’ deep
understanding of our customers’ needs,
as well as their absolute commitment
to deliver. As covered in the Strategic
report, this culture of customer focus
and service has underpinned the many
ways in which we have responded to
the COVID-19 pandemic.
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All our stakeholders, from our employees
to our government customers, are
placing increasing emphasis on the
global sustainability agenda. We expect
this will only grow in importance as time
goes on. The Board has sought to ensure
that we have the appropriate level of
focus on these matters and we were
pleased to support a new Group-wide
environmental, social and governance
(ESG) strategy this year. This has allowed
us to bring together much of the activity
that is being driven at sector level; you
will see this work reflected in this Annual
Report. The Board will continue to review
the strategy and monitor progress in
implementation. For example, this will
include actions to increase the diversity
of our people across the organisation.
Compliance with the UK
Corporate Governance Code
My first year as Chair coincides with the
first year that Babcock is reporting under
the new UK Corporate Governance Code.
The new Code places an increased
emphasis on corporate purpose and
culture, as addressed above, and risk.
It also asks companies to provide
information that enables shareholders to
assess how directors have performed
their duty under section 172 of the
Companies Act 2006, as well as
encouraging companies to engage
with its employees.
In this report we describe our
governance structure on pages 102 and
103, including the responsibilities of the
Chair, the Board, the Non-Executive
Directors and the Executive Directors.
We also describe the purpose and
principal responsibilities of the Audit
and Risk Committee, the Remuneration
Committee and the Nominations
Committee. The reports of those
Committees follow on pages 106 to
136. We set out our s172(1) statement
and our statement on stakeholder
engagement on pages 30 and 31.
The Board considers that the Company
complied with all the provisions of the
Code throughout the year to 31 March
2020. 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 137
provides further cross references.
Board developments
I would like to take this opportunity to
thank Ian Duncan and Jeff Randall for
their service to the Group, as they step
down from the Board after the AGM. Ian
has served for nine years and Jeff for six.
Russ Houlden, who joined the Board on
1 April 2020, will take over Ian’s role as
Chair of the Audit and Risk Committee.
Russ is well qualified for the role as the
current Chief Financial Officer of United
Utilities Group PLC, until he retires in July.
Kjersti Wiklund has taken over Jeff’s
role as Chair of the Remuneration
Committee. She has served on Babcock’s
Remuneration Committee for over a year
and is also the Chair of the Remuneration
Committee of Trainline plc.
In addition to Russ joining the Board,
I am also pleased to welcome Carl-Peter
Forster who joined the Board on 1 June
2020 and will become our new Senior
Independent Director at the AGM. He is
currently the Chair of Chemring Group
PLC and the Senior Independent Director
at IMI plc. Sir David Omand will step
down from the role of Senior Independent
Director at the AGM, and has stepped
down as a member of the Audit and
Risk and Remuneration Committees;
he will remain a member of the Board
while we conclude the appointment
of a successor with strong government
experience and insights, and the
Nominations Committee has determined
his continued independence.
2021
I have described above some of the actions
that the Board has taken in the last year
in progressing our work on governance.
Developing and fine-tuning our governance
will be an ongoing exercise and since the
year end, we have already taken some
further steps. The executive membership
of the Board has been simplified with
John Davies, Land sector CEO, stepping
down. We have also reduced the
memberships of both the Audit and Risk
Committee and the Remuneration
Committee with a view to making their
workings more flexible and efficient.
Looking forward, we will keep the
effectiveness of our governance under
review. This is particularly relevant as we
work through the impacts of the pandemic,
which have brought into sharp focus the
importance of paying attention to the
needs of all our stakeholders.
Chair induction visits to date
• Bovington to visit Land’s DSG operations
• Faslane to visit Marine’s operations at the Clyde Naval Base
• Rosyth to visit Marine’s Rosyth Royal Dockyard
• Albacete to visit Aviation’s HEMS operations
• Bristol to visit Marine’s Technology operations
• Plymouth to visit Marine’s Devonport Royal Dockyard
• Wick to visit Nuclear’s operations at Dounreay
• Anglesey to visit Aviation’s operations at RAF Valley
• London to visit Land’s Park Royal operations for the Metropolitan Police
• Donnington to visit Land’s DSG operations
Babcock International Group PLC Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements Governance statement continued
Board of Directors
N
N
R
N
Ruth Cairnie
Chair
Appointed: April 2019
Tenure: One year
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. She has
experience advising government departments on
strategic development and capability building.
External appointments: Ruth is currently the
Senior Independent Director of Associated British
Foods plc. She is Patron of the Women in Defence
Charter, the Chair of POWERful Women, an
initiative to advance gender diversity within the
energy sector and a trustee of Windsor Leadership.
Previous roles: She has been a Non-Executive
Director of Rolls Royce Holdings plc, ContourGlobal
plc and Keller Group PLC and a member of the
finance committee of the University of Cambridge.
Qualifications: She is a Master of Advanced
Studies in Mathematics from the University of
Cambridge and holds a BSc Joint Honours in
Mathematics and Physics from the University
of Bristol.
Sir David Omand GCB
Senior Independent Director
Prof. Victoire de Margerie
Independent Non-Executive Director
Appointed: April 2009 and Senior Independent
Director January 2012
Tenure: 11 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.
Appointed: February 2016
Tenure: 4 years
Nationality: French
Experience: Victoire brings strong international
strategic and commercial 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.
A
N
A
N
A
R
N
Ian Duncan
Independent Non-Executive Director
Lucy Dimes
Independent Non-Executive Director
Russ Houlden
Independent Non-Executive Director
Appointed: November 2010
Appointed: April 2018
Appointed: April 2020
Tenure: 9 years. Ian will retire from the Board at
the 2020 AGM.
Tenure: 2 years
Nationality: British
Tenure: 2 months
Nationality: British
Nationality: British
Experience: Ian brings extensive financial and
change management experience.
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 at 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 is currently the Group
Transformation Officer at Virgin Money UK PLC
and brings experience in industries at the forefront
of growth and technology-based innovation and
an understanding of complex outsourcing and
global strategic partnerships.
Previous roles: She was a Non-Executive Director
of Berendsen PLC and, in her executive career,
Lucy was Chief Executive Officer of UBM EMEA
until September 2018 and 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 prior to
that had a 19-year career at BT.
Qualifications: Lucy holds an MBA from
London Business School and a First Class
Honours Degree in Business Studies from
Manchester Metropolitan University.
Experience: Russ brings accounting and treasury
management experience along with his extensive
knowledge of driving performance improvement.
External appointments: Russ is currently the
Audit Committee Chairman of Orange Polska SA,
which is listed on the Warsaw Stock Exchange.
Previous roles: He was Chairman of the Financial
Reporting Committee of the 100 Group (from
2013 to March 2020), Chief Financial Officer
(from 2010 to July 2020) of United Utilities Group
PLC and Chief Financial Officer of Telecom New
Zealand (from 2008 to 2010).
Qualifications: Russ holds a first class honours
degree in Management Sciences from Warwick
Business School and is a Fellow of the Chartered
Institute of Management Accountants, a Chartered
Global Management Accountant and a Fellow of
the Association of Corporate Treasurers.
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Babcock International Group PLC Annual Report and Accounts 2020
E
A
R
Executive Committee
N
Nominations Committee
Audit and Risk Committee
Board Committee Chair
Remuneration Committee
A
N
A
R
N
R
N
Myles Lee
Independent Non-Executive Director
Kjersti Wiklund
Independent Non-Executive Director
Jeff Randall
Independent Non-Executive Director
Appointed: April 2015
Tenure: 5 years
Nationality: Irish
Appointed: April 2018
Tenure: 2 years
Nationality: Norwegian
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 Trane
Technologies plc, which is listed on the New York
Stock Exchange.
Experience: Kjersti brings broad technology
and business experience gained across Europe,
Eastern Europe/Russia and Asia.
External appointments: Kjersti is a Non-
Executive Director of Spectris PLC, Trainline plc
and Zegona Communications PLC.
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.
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.
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.
Appointed: April 2014
Tenure: 6 years. Jeff will retire from the Board at
the 2020 AGM.
Nationality: British
Experience: Jeff brings extensive experience
of the media, particularly in politics, business
and finance.
External appointments: Jeff is an Independent
Non-Executive at BDO, the accounting and
business-services firm, and Fundsmith, 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.
R
N
E
E
Carl-Peter Forster
Independent Non-Executive Director
Archie Bethel CBE
Chief Executive
Franco Martinelli
Group Finance Director
Appointed: June 2020
Nationality: German
Experience: Carl-Peter brings extensive
manufacturing and international experience.
External Appointments: Carl-Peter is currently
the Chairman of Chemring Group PLC and Senior
Independent Director of IMI plc.
Previous roles: Carl-Peter held senior leadership
positions in some of the world’s largest automotive
manufacturers, including BMW, General Motors
and Tata Motors (including Jaguar Land Rover).
He was also previously a Non-Executive Director of
Rexam PLC and Rolls-Royce plc.
Qualifications: Carl-Peter holds a Diploma in
Economics from Bonn University and a Diploma in
Aeronautical Engineering from the Technical
University in Munich.
Appointed: Board Director May 2010 and
Chief Executive September 2016
Tenure: 10 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 Engineering and
Senior Management roles in Vetco Gray
International Inc. in both the UK and US. He was
also Chief Executive of Scottish Enterprise
Lanarkshire and Chief Operating Officer of
Motherwell Bridge Group.
Qualifications: BSc, MBA and DSc (h.c.) from
University of Strathclyde. Archie is a Chartered
Mechanical Engineer, a Fellow of the Royal
Academy of Engineering and a Fellow of the Royal
Society of Edinburgh.
Appointed: Board Director August 2014
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.
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Strategic reportGovernanceFinancial statements Governance statement continued
Executive Committee
B
B
B
Board
Biographies for Archie Bethel
CBE and Franco Martinelli are
on page 99.
Archie Bethel CBE
Chief Executive
Franco Martinelli
Group Finance Director
John Howie MBE
Chief Executive, Marine
Simon Bowen
Chief Executive, Nuclear
John Davies
Chief Executive, Land
Neal Misell
Chief Executive, Aviation
Jon Hall
Managing Director,
Technology
Kevin Goodman
Group Director of
Organisation and Development
Kate Hill
Group Director of
Communications
Jack Borrett
Group Company Secretary
and General Counsel
John Howie MBE
Appointed: April 2016
John Davies
Appointed: July 2010
Jon Hall
Appointed: April 2017
Kate Hill
Appointed: 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.
Simon Bowen
Appointed: April 2017
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
that, 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.
Experience: John joined Babcock in
2010 on the acquisition of VT
Group, and was appointed Divisional
Chief Executive of the then Defence
and Security division. In November
2015, he moved to lead the
Support Services division and is now
sector CEO, Land. Previously John
worked extensively across the
support services and defence sectors
within Bombardier, BAE Systems and
VT Group. John is a lawyer by
background and a graduate of the
University of Manchester and
Chester Law College.
Neal Misell
Appointed: April 2020
Experience: Neal is the sector CEO
for Aviation. He joined Babcock
following the acquisition of VT
Group in 2010. Neal worked initially
as the Integration Director bringing
together the Babcock and VT Group
non-defence businesses. In 2011,
he was appointed Managing
Director of the Critical Services
business which covered Babcock’s
vehicle and asset management
contracts in Emergency Services and
Airports. In February 2016, Neal was
appointed Managing Director of the
Military Aviation business focused on
the RAF, French Air Force and Royal
Navy. Neal is also a Board Director
of the Ascent and Airtanker
Joint Ventures.
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 a Fellow
of the Institution of Mechanical
Engineers. He holds a PhD from
Bath University for research work
in technology.
Kevin Goodman
Appointed: July 2010
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.
Experience: Kate joined Babcock
in 2014 on the acquisition of the
Avincis Group. She was subsequently
appointed Babock’s Group Director
of Communications. Prior to her
role as Communications Director
at Avincis, she was a Partner in a
financial PR consultancy, which she
joined from Royal Dutch Shell plc
where she held a number of senior
communications roles. Trained as a
journalist, Kate is a member of the
Chartered Institute of Public Relations.
Jack Borrett
Appointed: 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.
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Babcock International Group PLC Annual Report and Accounts 2020
Key areas of Board focus
during the year
Key matters
considered
Outcome
Review of
Group’s
strategy
The Board reviewed the Group’s strategy at an offsite all-day meeting in November. This year, the review
included testing the strategy against the medium-term targets set out at the Group’s Capital Markets Day.
The Board received regular updates on performance against strategy during the year and reviewed the Group’s
strategic projects such as T31.
Environmental,
social &
governance
(ESG)
The Board initiated a review of the Group’s ESG activities and strategy. The Board considered the review and
approved the introduction of the new Group-wide ESG strategy. The strategy demonstrates the Board’s
commitment to delivering the Group’s business model in a sustainable way. The strategy sets out a clear
framework for our ESG priorities across the Group and allows us to focus our activities to share more effectively
the positive impact within the communities in which we work and serve.
Principal and
emerging risk,
and risk
appetite
The Board, either by itself or through the Audit and Risk Committee, reviewed the major risks that the Group
faces in its business model and its appetite for those risks. As part of that review, the Board considered and
approved the Group’s risk management system.
Monthly
operational
reports
The Board considered at its monthly meetings an operational report from the Chief Executive, supported by a
monthly report from each of the sector CEOs, who attend the monthly meetings. Due to the importance of the
relationship, the Board received regular updates from Tom Newman, the senior executive who is dedicated to
working on progressing the Strategic Partnering Programme with the UK Government.
Budget review,
trading
statements,
results
The Board agreed the Group’s budget and received a monthly report from the Group Finance Director on the
Group’s performance against that budget. It reviewed and approved all the trading statements and results
announcements before their release. This year, the Board focused on its liquidity strength by renewing the
Group’s five-year revolving credit facility of up to £775 million and issuing €550 million of eight-year bonds
expiring in 2027. In addition, the Board refined its capital allocation approach, which it announced at the
half year.
Ethics review,
health & safety
review
Health and safety is at the forefront of everything that the Group does. The Board received monthly reports on
performance to ensure that the Group is living up to its aim of “Home Safe Every Day”.
The Board also recognises the importance of its reputation. It conducted its annual ethics review and assured
itself that Babcock’s Code of Conduct was understood and complied with throughout the Group. The Board
reviewed all reports to the Group’s whistleblowing line quarterly to make sure that they were appropriately
dealt with and no issue had been reported that has a Group significance.
Babcock International Group PLC Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements
Governance statement continued
Our governance framework
Board
Chair
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.
The Chair is responsible for the leadership and overall
effectiveness of the Board. In particular, her 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.
Executive
Chief Executive
Responsible for implementing the
strategy, led by the 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.
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Babcock International Group PLC Annual Report and Accounts 2020
Chair
Chief Executive
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
Reviews the structure, size and
composition of the Board and
Committees and oversees succession
planning for the Board and across
the Group.
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 has its
own management board 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
Shareholders can bring matters to his
attention, if they have concerns, which
have not been resolved through the
normal channels of Chair, Chief Executive
or Group Finance Director, or if they
believe these channels are inappropriate.
The Chair looks to the Senior Independent
Director as a sounding board and he is
available as an intermediary between the
other Directors and the Chair. The Senior
Independent Director is also responsible
for leading the Non-Executive Directors in
the annual performance evaluation of the
Chair. 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 98 to 99). They play an important
role in the formulation and progression of
the Board’s agreed strategy 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. For its
membership, please see page 100.
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 81.
Diversity Steering Group: co-ordinates the
implementation of our equality and
diversity policy. See page 45.
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 page 44.
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 40.
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Strategic reportGovernanceFinancial statements Governance statement continued
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 ten scheduled full Board
meetings each financial year, with two
other meetings devoted solely to
strategy. The Chair 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.
Attendance at Board meetings
Chair
Mike Turner*
Ruth Cairnie
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
3 of 3
12 of 12
12 of 12
12 of 12
12 of 12
11 of 12
11 of 12
12 of 12
11 of 12
12 of 12
12 of 12
12 of 12
* Mike Turner retired from the Board after the AGM in July 2019.
** Sir David Omand, Victoire de Margerie and Lucy Dimes were unable to attend certain meetings due to
pre-existing commitments.
Composition of the Board
The composition of the Board during the year, and as it currently stands, is
shown below:
Date
1 April 2019 – 2 April 2019
3 April 2019 – 18 July 2019
19 July 2019 – 31 March 2020
1 April 2020 – 31 May 2020
1 June 2020 – 10 June 2020
Chair
Executive
Directors
Independent
Non-Executive
Directors
1
1
1
1
1
3
3
3
2
2
7
8
7
8
9
During the financial year and up to the date of this report, changes to the Board
were the appointment of Ruth Cairnie, the retirement of Mike Turner, John Davies’s
stepping off the Board on 31 March 2020 and the appointments of Russ Houlden
and Carl-Peter Forster as Independent Non-Executive Directors, on 1 April 2020 and
1 June 2020 respectively.
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Babcock International Group PLC Annual Report and Accounts 2020
The main conclusions from the prior
year’s review focused on the pending
change of Chair and need for further
recruitment, given the length of tenure
of both Sir David Omand and Ian Duncan.
Progress is therefore reflected in the
appointments that have been
announced. This year, there was general
satisfaction regarding the way in which
the Board and its Committees function,
the support given to them, the matters
covered at meetings, the way issues are
dealt with, and the contribution of
individual Directors. A number of
developments were noted as positive
including the external input received for
the annual strategy review, the external
review of senior talent, the participation
of customers in some contract reviews
at the Board, and the streamlining of
membership of the Board and Committees.
The Board discussed the evaluation at its
meeting in March 2020. The focus for
the current financial year will be to align
further the Board’s agenda and workings
with the strategy and strategic priorities
set out in the Group’s Capital Markets
Day, to shift the balance of the Board’s
time further towards strategic rather than
operational matters. At a private
meeting, Sir David Omand, SID, led a
review of the Chair’s performance, which
confirmed her effectiveness.
Board induction and
development
New Non-Executive Directors receive
comprehensive and tailored induction
programmes. The Chair’s induction,
parts of which are described on pages 96
and 97, was built using induction
programmes developed previously for
Lucy Dimes and Kjersti Wiklund as a
starting point. The Company Secretary
will set up a similar programme for
Carl-Peter Forster and Russ Houlden
as and when circumstances allow.
The programme will involve:
• Meetings with the Executive Directors
and the sector CEOs
• An overview of the Group’s governance
policies, corporate structure, and
business functions
• Details of risks and operating issues
facing the Group
• Visits to key operational sites, which
will include Devonport, Rosyth, Bristol
and the Group’s EU operations
• Briefings on key contracts and customers.
In addition, the Company Secretary
arranges training and ongoing updates as
requested or as required. Non-Executive
Directors may at any time make visits to
any Group business and presentations are
made to the Board during the year.
Board effectiveness
The Board and its Committees review
their skills, experience, independence
and knowledge to enable the discharge
of their duties and responsibilities
effectively. Each year, an evaluation is
conducted to assess these aspects and
also the effectiveness of the ways of
working at the Board and Committees.
The last two reviews have been
conducted internally by the Company
Secretary and so, in line with the
Corporate Governance Code, this year
the review should have been carried out
by an external evaluator. However, with a
new Chair having been appointed during
the year and with a number of changes
occurring to the Board composition, it
was decided that an external review
would add much more value in a year’s
time once the membership changes, and
a number of procedural changes
introduced by the new Chair, have
bedded down. Therefore, the review for
the financial year ending 31 March 2020
has once again been an internal process
conducted by the Company Secretary.
The Board remains fully committed to
external review, which it sees as a
valuable support to its continuous
development and improvement.
The review was conducted via
confidential one-on-one meetings
between the Company Secretary and
each Director. Topics considered
included the balance of skills, experience,
independence and knowledge on the
Board; its diversity; how the Board, its
Committees, the Chair and individual
Directors performed and how they
worked together; as well as other factors
relevant to effectiveness.
Babcock International Group PLC Annual Report and Accounts 2020
105
Strategic reportGovernanceFinancial statements Nominations Committee
Ruth Cairnie
Chair
Nominations Committee
Introduction
The core function of the Nominations
Committee is to review the structure,
size and composition of the Board and its
Committees and, crucially, to consider
and oversee succession plans for the
Board and across the Group, taking into
account inclusion and diversity. I believe
that effective succession planning,
underpinned by a vibrant talent agenda,
is at the heart of the long-term success of
any company. There should be a clear link
between strategy, succession planning
and the culture of an organisation.
Membership of the Committee
I chair the Committee and all the
independent Non-Executive Directors
are members. Members of the Executive
team, for example the Chief Executive
or the Group Director of Organisation
and Development, attend by invitation
as required.
Responsibilities of the
Committee
The Committee is responsible for:
• Board nominations – the Committee
leads on the appointment process for
Directors and makes recommendations
regarding candidates to the Board
• Board composition – the Committee
considers the balance of skills,
diversity, knowledge and experience of
the Board (as well as the Committees)
and makes recommendations with
regard to any changes
• Succession planning – the Committee
oversees and reviews the succession
planning for Directors and other senior
executives, taking into account the
challenges and opportunities facing the
Company and the skills and expertise
required by the Company for the future.
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Diversity
The Board has a clear objective to see
increasing diversity on the Board, in
senior executive management roles and
throughout the workforce as a whole.
The strategic plans involve developing
the business in both existing and new
market sectors and with new, and new
types of, customers, both in the UK and
internationally. Diversity is important to
underpin our credibility across our
chosen business areas and to support
new thinking and flexibility in our
approach. We recognise that across the
whole organisation we have much work
to do on diversity but progress is being
made, including in gender diversity
(please see pages 45 and 46).
In considering recommendations for
appointments to the Board, the
Committee takes into account the Board’s
policy to foster and encourage greater
diversity of gender, ethnicity, outlook,
background, perception and experience.
This is factored into instructions given to
search consultants and into the short-listing
process. Currently, the Board’s gender
diversity is 33.3% female (4 women out
of 12) and we will aim to maintain a
good representation of women on the
Board. The membership has become
slightly more international with the
appointment of Carl-Peter Forster.
Activities undertaken by the
Committee during the year
This was a busy year for the Committee
with a number of key changes:
Board nominations
At the beginning of the year, the
Committee, led by Sir David Omand,
Senior Independent Director (SID),
oversaw my appointment as Chair and kept
under review my induction programme to
ensure that I met and heard from our
stakeholders. The Committee then
undertook the appointment of Russ Houlden
(effective 1 April 2020) and Carl-Peter
Forster (effective 1 June 2020) to the Board.
Russ Houlden provides valuable expertise
in accounting, reporting and performance
improvement as well as international
experience. He will chair the Company’s
Audit and Risk Committee after Ian
Duncan’s retirement at the AGM.
Carl-Peter brings extensive manufacturing
and international experience to the
Board. He will take over as the Group’s
SID from the AGM at which point
Sir David Omand will step down from
that role.
The Committee has also had to consider
a successor for Chair of the Remuneration
Committee, as Jeff Randall announced his
retirement. The Committee was pleased
to recommend the appointment of
Kjersti Wiklund, who has sat on the
Remuneration Committee for over a year
and has relevant experience as the
current Chair of the Remuneration
Committee of Trainline plc.
Over the latter part of the year, and
ongoing, a key area of focus for the
Committee has been the search for a
new Chief Executive, following Archie
Bethel’s decision to retire.
In the Committee’s searches, the first
step is to develop a candidate specification
that takes into careful consideration
the future needs in terms of skills,
experiences, capabilities, style and
diversity. Independent search consultants
are appointed to support the Committee
through a structured process of
candidate identification, review,
short-listing, interview and referencing.
In its searches for a new Chair of the
Audit and Risk Committee and for a new
SID, the Committee appointed MWM
Consultants. MWM does not have any
connection with the Group other than
as a senior recruitment consultant.
The process for appointing a new Chief
Executive Officer is still in progress and
details will be disclosed in due course.
Board composition
During the year, the Committee reviewed
the composition of the Board and its
Committees to determine the best
structure for the future, taking into
account the challenges and opportunities
facing the Group. This review led to some
recommendations regarding Committee
membership as well as addressing
Executive representation on the Board.
Regarding Executive membership the
Committee recommended that the
Board should be simplified and have
just two Executive Directors, the Chief
Executive Director and the Group Finance
Director. Accordingly, effective 31 March
2020, John Davies stepped down from
the Board. He continues to lead the
Land sector as CEO and remains a key
member of the Group Executive
Committee. The current practice of
having all the sector CEOs attending
Board meetings will continue.
Regarding Committee membership,
past practice has been to have all the
Non-Executive Directors as members
of all the Board’s Committees.
The Committee recommended a
simplification, with fewer members of
the Audit and Risk and Remuneration
Committees. The Committee believes
that the reduced size will improve the
flexibility of each Committee, whilst
retaining the skills and competences to
be effective. The new membership of
the Audit and Risk Committee consists of
Ian Duncan, Russ Houlden, Lucy Dimes,
Myles Lee and Kjersti Wiklund. The new
membership of the Remuneration
Committee consists of Kjersti Wiklund,
Carl-Peter Forster, Jeff Randall, Russ
Houlden and Victoire de Margerie.
All Non-Executive Directors will continue
to sit on the Nomination Committee.
As well as considering the membership
of the Board and its Committees, the
Committee reviewed the continued
independence of Sir David Omand, as he
has served on the Board for over nine
years. The Committee recommended to
the Board that he remains independent.
The Committee welcomes his expertise
and the continuity of support he is
providing as the composition of the
Board evolves. However, Sir David will
step down as Senior Independent Director
with effect from the AGM. In addition,
he will no longer serve on either the
Audit and Risk Committee or the
Remuneration Committee.
Succession planning
The Committee recognises the key role
that succession planning for Directors
and senior management plays in building
a team capable of achieving the Group’s
strategic goals in the short, medium and
longer term. Over the last year we have
undertaken a review of senior talent in
the organisation, as an important ingredient
of the overall talent development
strategy that is one of the Group’s core
enablers. This review was supported by
independent external consultants,
During the current year, the Committee
will look to build on the review by
overseeing the career pathways mapped
out for those in the succession pipeline.
In these reviews, diversity will be a
prominent feature. The Committee is
committed to working hard to have
as broad a list of future candidates
as possible.
Ruth Cairnie
Committee Chair
Nomination Committee
membership and attendance
during the year
Ruth Cairnie
Sir David Omand
Jeff Randall
Ian Duncan
Myles Lee
Victoire de Margerie
Lucy Dimes*
Kjersti Wiklund
5 of 5
5 of 5
5 of 5
5 of 5
5 of 5
5 of 5
4 of 5
5 of 5
* Lucy Dimes was unable to attend
one meeting due to a pre-existing
business commitment.
Babcock International Group PLC Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements Audit and Risk Committee
Ian Duncan
Chair
Audit and Risk
Committee
Introduction
The principal purpose of this report is to
look back over the financial year ending
31 March 2020 and to describe the
Committee’s responsibilities during
that period. Most of the period was not
under the shadow of the Coronavirus
(COVID-19). However, the impact of
COVID-19 was a significant issue, which
the Committee considered in relation to
the financial statements for the year to
31 March 2020. How the Committee
considered the impact is described later
in this report.
This is my final report as Chair of the
Audit and Risk Committee as, having
completed nine years on the Board,
I have decided to step down with effect
from the end of the Company’s next
AGM. As previously announced, my
successor will be Russ Houlden, who
joined the Board on 1 April 2020. Please
see page 98 for further details of his
background and qualifications.
Membership of the Committee
The Audit and Risk Committee was during
the year made up entirely of all the
independent Non-Executive Directors.
Committee membership, as well as
attendance at its meetings in the year,
is set out below. However, with effect
from the beginning of the current
financial year, the Committee decided to
streamline its membership in order to
make its operation more efficient and Sir
David Omand decided to step down as a
member of the Committee after 11 years
of service. Currently, the members of the
Committee are Ian Duncan, Russ Houlden,
Kjersti Wiklund, Myles Lee and Lucy Dimes.
Unless otherwise stated, members were
members throughout the year. Please see
pages 98 and 99 for further details of the
backgrounds and qualifications of the
members of the Committee.
The Board is satisfied that Ian Duncan,
who has been Chair 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.
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Babcock International Group PLC Annual Report and Accounts 2020
Currently, Ian is the Senior Independent
Director of Bodycote PLC, as well as
being the Chair of its Audit Committee.
He is also a Non-Executive Director and
Audit Committee Chair of SIG PLC.
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 the
Company manages them
• 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
• 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 112)
• 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 are on the Company’s website.
Committee meeting attendance
In addition to the members of the
Committee, the Committee, at its
discretion, usually invites the Group
Chair, the Chief Executive, the Group
Finance Director, the sector Chief
Executives and the Group Financial
Controller to attend meetings. 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.
During the year to 31 March 2020,
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
2020. The Committee Chair also met
PwC and EY in the absence of executive
management before every meeting.
The Committee invites the auditors
to address the Committee without
executives present at least once a year.
The Committee reviews its terms of
reference annually 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 2020,
the Committee met four times. At these
meetings, and at additional meetings
after the year end, the Committee
considered the following matters
and issues:
Financial results
Audit plans
• full-year and half-year financial
statements and related results
announcements
The Committee reviewed and approved
internal and external audit plans for
the year.
• reports 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
2020 (see pages 110 and 111)
• 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
93 for further details).
Fair, balanced and understandable
assessment
The Committee advised the Board on the
requirement for a statement from it that
the Annual Report and Accounts for the
year to 31 March 2020 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.
To satisfy itself, the Committee circulates
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.
He reviews the relevant draft, its consistency
with his understanding of matters and
the appropriateness of the weighting
given to them, and confirms 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.
Internal audit
At each meeting, the Committee
received 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 included follow-up reports on any
matters identified in earlier reports as
requiring attention or improvement.
The reports contain tracking information
to enable the Committee to see the
control performance of business units
over time as well as how quickly they
address any matters.
Risk and internal controls
• review of the principal and emerging
risks facing the Company and how they
are managed or mitigated
• review of the Group’s risk management
and internal control systems and
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 COVID-19 outbreak
and the Company’s response to the
outbreak and related lockdown. Earlier
in the year, the Committee had
considered one of the Group’s
principal risks – the nature of its
contracts, bid processes and markets
with particular reference to the
Aviation sector. In addition, the
Committee considered its business-
critical suppliers and the potential
impacts of disruption upon the Group
in the event of one of their failures.
Fraud
Reports covering any suspected incidents
of fraud, their investigation and any
remedial or preventative action.
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Strategic reportGovernanceFinancial statements Audit and Risk Committee continued
Audit/non-audit fees and auditor
independence
The Committee reviews the audit and
non-audit fees for the external auditor
and considers them in relation to auditor
independence. The Committee is
satisfied that PwC maintained its
independence throughout the year.
Whistleblowing
The Committee has monitored the Group
whistleblowing policy on behalf of the
Board. It receives regular reports of calls
and emails to the Group’s external
independent whistleblowing services
and how the Group investigates them.
With effect from 1 April 2020, the Board
has decided that it will review the
whistleblowing reports. The total number
of whistleblowing reports in the year to
31 March 2020 was 66 (2019: 71). For
further explanation of the whistleblowing
procedure, please see page 82.
Significant issues considered by
the Committee in relation to
the financial statements
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 reporting of the Group’s 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
2020 and how the Committee addressed
them are set out in the table below.
Significant issue
Contract accounting and
revenue recognition
Cash generating units and carrying
value of goodwill
How the Committee addressed it
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. Additionally, an external provider conducted a
review of a number of the Group’s most significant and complex long-term contracts.
The results of this review confirmed that the Group’s long-term contract accounting is
consistently conservative.
Goodwill is allocated to the Group’s cash generating units (CGUs): Marine, Land,
Aviation and Nuclear. The Committee reviewed and challenged management’s
assessment of the goodwill held on the Group’s balance sheet by considering,
amongst other matters, management’s evaluation of the cash flows resulting from the
Group’s budget and strategy plan, the terminal value assessment, noting the reduced
long-term growth rate of 2% (2019: 3%) reflecting management’s assessment of the
uncertain economic conditions in which the Group is operating and the appropriateness
of the discount rates used in the value in use calculations. The Committee noted the
highly competitive trading conditions experienced in oil and gas and was satisfied
with adjustments made by management to the budget and strategy plans of the
Aviation CGU in this regard and additionally with the higher discount rate, reflecting
CGU-specific risk factors, of 10.9% (2019:10%) used in the value in use assessment of
this CGU. These adjustments, together with the reduced long-term growth rate
applied to all CGUs, resulted in an impairment charge of £395 million. The value in
use calculations presented significant headroom in respect of the other CGUs. The
Committee discussed the results of its review with the external auditor and was
satisfied with management’s assumptions and with the conclusion to recognise an
impairment charge of £395m in relation to the Aviation CGU and, following
appropriate sensitivity testing of key assumptions, that no impairment charge was
necessary for the other CGUs. The Committee was also satisfied that appropriate
disclosures were included in the financial statements. Note 11 on page 182 to 183
provides information on key assumptions and sensitivity analyses performed.
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Babcock International Group PLC Annual Report and Accounts 2020
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 80
to 82, with the principal risks facing the
Group described on pages 83 to 92.
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
considered the Group’s risk management
process, which identifies the risks, the
controls and the mitigations before
reporting them to the Committee.
During the year, the Committee
continued to develop an assurance map,
which sets out the Group’s principal risks
and considers the sources of assurance
available in relation to them. The Group
measures these sources of assurance
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 our
out-sourced internal auditor, now BDO
previously Ernst & Young.
Detailed and bottom-up risk registers,
which sector and Group review and
challenge, support the Group’s risk
management process. The schedule of
delegated authorities and the Group’s
system of financial reporting add
additional assurance.
Significant issue
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 IFRS16 – Leases
Impact of COVID-19
Disclosure in the financial
statements for the year to
31 March 2020
How the Committee addressed it
The Group recognised exceptional charges of £502.9m on a pre-tax basis. The
Committee reviewed all the charges to assess whether their classification as exceptional
was appropriate. In Aviation Oil and Gas, the market has deteriorated significantly in the
year with pricing levels reduced following the re-emergence of two large helicopter
providers from US Chapter 11 protection. As a result, the business has impaired certain
Oil and Gas right of use assets. In addition, the business had exited from its Oil and Gas
business in Ghana and the Congo. The impact of trading in the oil and gas business
combined with the delay of contract awards in aerial emergency services led to a
reshaping of the Aviation sector cost base. In Nuclear, the end of the Magnox contract,
along with the ongoing trading environment in the civil nuclear market, has also led to
a reshaping of the Cavendish cost base. In addition, there were further restructuring
charges relating to additional costs from actions taken in the prior financial year, as well
as further restructuring in the Rail business. There were charges relating to other exits
and disposals, consisting of a gain on the sale of Context IS, partially offset by additional
costs from exits in the prior financial year and the costs of exiting our nuclear
manufacturing business. There were also other exceptional items, principally relating
to additional costs from Aviation’s Brexit-related restructure and the fine in Italy
together with associated legal costs described on page 59. The Committee was
satisfied with the quantum of the charges and their classification as exceptional.
The Committee assessed the particular assumptions proposed by management and
their impact on scheme assets and liabilities in the context of assumptions used in
respect of the same factors by other companies and the pensions industry more
widely. The Committee was satisfied that the assumptions fell within acceptable
ranges. See note 26 on pages 202 to 204.
The Company adopted IFRS 16 on 1 April 2019. At the Committee’s request, the
Company undertook a completeness exercise across the Group. The Committee asked
PwC to assess the robustness of that exercise. Having considered PwC’s conclusions,
and having discussed with management, the Committee is satisfied that the Company
has implemented IFRS 16 appropriately and duly reflected the new accounting
standard in the financial statements for year to 31 March 2020.
Following the outbreak of COVID-19 and the subsequent national lockdowns, the
Company did experience disruption in its operations. For the year to 31 March 2020,
the impact of those disruptions was not significant. However, the Committee, as part
of its going concern review and its viability review, also had to consider the impact of
COVID-19 on the Group’s future operations. Management prepared a number of
stress tests and scenarios for the Board. The Committee reviewed the assumptions
upon which the management based the tests and scenarios. After its review, the
Committee was satisfied that it was appropriate to prepare the Group’s financial
statements for the year to 31 March 2020 on a going concern basis and to make the
viability statement as set out on page 93.
In the previous financial year, the FRC sent a letter to the Company suggesting areas of
improvement. The Company made changes to its financial statements for the year
ending 31 March 2019 in order to address the points made by the FRC, following which
the FRC closed the matter. This year, the Committee has reviewed the financial
statements to ensure that they continue to reflect the FRC’s comments.
Babcock International Group PLC Annual Report and Accounts 2020
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Audit and Risk Committee continued
These bottom-up risk reviews carried
out by the Sectors also include emerging
risks. However, the Group separately
also considers emerging risk as part
of its strategic or top-down risk review.
Top global emerging risks include
globalisation/geopolitical risk,
environmental risk/climate change,
technological risk, cyber risk and societal
risk. The Group will continue to develop
its approach to the review of emerging
risk during the current year.
The Group’s internal auditors test the
process through an agreed plan, which
the Committee approves on an annual
basis. The internal auditor reported on
progress to every scheduled meeting of
the Committee. Where the internal
auditor does identify areas for
improvement, it reports on the remedial
plans. Follow-up visits assure the
Committee of compliance.
After the review, the Committee was
satisfied that the Group’s risk
identification process did allow the
Committee to identify and evaluate the
Company’s principal and emerging risks.
A statement regarding the effectiveness
of the internal controls and control
processes, including those over financial
reporting, is on page 141 and 142.
Internal audit
The Committee considers that it is
appropriate to have an internal audit
service provided by an external advisor,
but keeps this under review. In the year
to 31 March 2020, the Committee was
satisfied with the service provided by EY
acting as internal auditor. However, as
the Committee wishes EY to participate
in its upcoming tender for the external
audit, EY had to stand down as internal
auditor with effect from 31 March 2020
in order to comply with the FRC’s
December 2019 Revised Ethical Standard.
Accordingly, the Committee conducted a
tender for the internal audit service and,
after a robust process, decided to
appoint BDO as its new internal auditor
with effect from 1 April 2020. BDO has
prepared, and is now working to, its
internal audit plan for the year ending
31 March 2021. The Committee will
review the findings of BDO’s reports
during the course of the current
financial year.
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 2020, PwC
has been the Group’s external auditor,
following its reappointment by
Shareholders at the AGM on 18 July
2019 on the recommendation of the
Board. The Chair 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 continues to expect to
tender the external audit during the
course of the current financial year.
PwC, having been auditor since 2002,
will not participate in any such tender.
The Committee confirms that the
Group complies with the Statutory Audit
Services for Large Companies Market
Investigation (Mandatory Use of
Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014.
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 not offered to
the auditor are those listed in appendix B
of the FRC’s revised ethical standard
2019 including 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. The Committee Chair must
approve any non-audit work, subject to
the Group Financial Controller being able
to approve any single expenditure of
£10,000 or less, although, 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 2020,
the Committee is satisfied that PwC
provided these services effectively and
the services did not prejudice the
objectivity or independence of the auditor.
For the year ended 31 March 2020,
non-audit fees paid to the auditor were
£0.1 million, representing 3% of the
audit fee. A breakdown of fees paid to
the auditor is set out in note 4 on
page 177.
Ian Duncan
Committee Chair
Audit and Risk Committee
membership and attendance
during the year
Ian Duncan (Chair)
Sir David Omand*
Jeff Randall
Myles Lee
Victoire de Margerie
Lucy Dimes
Kjersti Wiklund
4 of 4
3 of 4
4 of 4
4 of 4
4 of 4
4 of 4
4 of 4
* Sir David Omand was unable to attend
one meeting due to a pre-existing
business commitment.
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Babcock International Group PLC Annual Report and Accounts 2020
Remuneration
New Remuneration Policy
Our current remuneration policy (‘Policy’)
was approved at the 2017 AGM and
hence is due for renewal at the 2020
AGM. During 2019 and early 2020, the
Committee reviewed the Policy taking
into account the Company’s desire to
retain and attract top executive talent,
promote the strategic and financial
performance of the business and
maintain executive alignment with
long-term shareholder interests.
The Committee considered feedback
received from shareholders since the
adoption of the current Policy in 2017,
as well as developments in UK corporate
governance and trends in market practice.
The Committee was also mindful of the
need to ensure that the proposed new
remuneration policy is transparent, easy
to understand, consistent with the
Company’s purpose, values and strategy
and provides an appropriate link to
long-term performance.
The Committee’s conclusion is that the
2017 Policy remains broadly fit for
purpose. No changes are therefore
proposed to the overall quantum or
structure, being based on fixed pay,
annual bonus with mandatory deferral
and a performance-based long-term
incentive. We believe the current
arrangements enable the Company to
recruit and retain the best talent as they
are competitive with the remuneration
structures offered by our competitors for
talent. Furthermore, the use of both an
annual bonus and a three-year PSP helps
ensure the variable pay component
reinforces our key shorter-term objectives
as well as capturing long-term value
creation for shareholders. However, the
Committee believes that some revisions
are required to bring the Policy in line
with corporate governance changes and
evolving investor expectations. These are
described in detail below.
Earlier this year, we consulted with
shareholders (representing a total of
c.60% of our issued share capital) and
shareholder representative bodies.
I would like to express my gratitude for
the feedback, which supported our
proposal to maintain the same overall
incentive structure as previously and
helped to shape the changes to the
current Policy, which we have decided
to propose. We had a high level of
engagement and are pleased to report
that virtually all investors who provided
feedback indicated support for the
proposed approach.
Kjersti Wiklund
Chair
Annual Statement of
the Remuneration
Committee Chair
Dear Shareholder
On behalf of the Board, I am pleased to
present the Directors’ Remuneration
Report (“DRR”) for the year ended
31 March 2020, my first following
my appointment as Chair of the
Remuneration Committee on 1 April,
having served on the Committee since I
joined the Board in April 2018. I would
like to thank Jeff Randall, who served as
the Committee Chair up to the end of
the 2019/20 financial year, for his hard
work and commitment to the Committee
over the last six years.
At the time of writing this DRR, I am
mindful that the COVID-19 pandemic
continues to affect Babcock’s employees
and other stakeholders – and society
more generally. As set out elsewhere in
this Annual Report, the last financial year
has had its challenges, but the Group has
made progress in driving forward its
strategy, with revenue growth in its
defence business and the award of
significant opportunities, such as the
contract to build the next generation
of the UK’s warships. However, the
unprecedented situation brought on
by the pandemic has framed the
Committee’s discussions in recent
months and has led the Committee to
defer a number of decisions (details of
which are set out later in this Report).
The Committee nevertheless believes
that the Remuneration Policy proposed
for the next three years (and its
implementation for the 2020/21
financial year) remains fit-for-purpose and
provides sufficient flexibility to reflect the
impact of the pandemic in our approach
to remuneration, in particular how we
incentivise and reinforce success for
Babcock going forward.
Babcock International Group PLC Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements Remuneration continued
Summary of proposed changes to
the Policy
The changes to the Executive Directors’
remuneration policy for 2020 are set
out below.
1. Rebalancing the annual bonus and
PSP performance measures. Every
year the Committee reviews the
performance measures, their
weightings and their targets for both
the annual bonus and the PSP to
ensure their alignment with strategy
and business priorities respectively.
Prior to the COVID-19 outbreak, the
Committee had considered simplifying
the annual bonus by removing the EPS
measure and increasing the weighting
for PBT and Cashflow (both measured
on an underlying basis) to 40% each.
Non-financial measures will continue to
be weighted 20%. For the PSP the
Committee was considering the
inclusion of a new measure focused on
cashflow to ensure the scorecard
better reflects the Group’s strategic
focus. This remains the current
intention. However, for the 2020/21
financial year, due to the pandemic,
the Committee has delayed its
decisions on both the annual bonus
and the PSP, as it may decide to make
adjustments to make sure that they
reflect our priorities as we emerge
from the current crisis. Any revisions to
the current intention will be consistent
with the Policy.
2. Aligning pensions. We have already
committed that new Executive
Director hires will be offered a pension
aligned with that offered to the
general UK workforce, consistent with
investor preferences. In the proposed
2020 Policy, we will be extending this
commitment to the incumbent
Directors, whereby pensions will be
reduced over the course of the life of
the Policy to that of the workforce by
1 April 2023.
3. Promoting long-term share
ownership. Consistent with the new
provisions under the UK Corporate
Governance Code, a new requirement
to maintain a shareholding post-
termination will be adopted in the
2020 Policy. The required level of
post-termination holding will be the
same as the current in-post
shareholding requirement and cover
the 2 years following departure.
Remuneration outcomes for
2019/20
Remuneration for the Executive Directors
in 2019/20 was consistent with the
Remuneration Policy. The Committee
reviewed, and was satisfied that, the
remuneration outcomes reflected
Company performance and the broader
context, including Shareholders’
experience. After due consideration,
and with no discretion required to be
used, the Committee approved the
following outcomes:
2019/20 annual bonus
The 2019/20 annual bonus was
based 80% on underlying financial
performance measures (30% on EPS, 20%
on PBT and 30% on OCF) and 20% on
non-financial measures. While financial
performance for the 2019/20 financial
year was below the threshold levels set
for the Group measures, the Committee
determined that some payout would
ordinarily be warranted by the achievement
of many of the non-financial performance
objectives set at the start of the year
(ranging from 14% to 38% of maximum
bonus for the Executive Directors).
However, the final decision on the
payment of the bonus warranted for
the 2019/20 year will be delayed until
after the Board makes its decision on the
final dividend. Please see page 130 for
more detail.
2017 PSP awards
The vesting of PSP awards granted in
2017 was based on performance
measured over 1 April 2017 to 30 March
2020, with EPS, ROCE (both measured
on an underlying basis) and TSR equally
weighted. Performance against the
targets set at the start of the cycle for
each element was below threshold,
resulting in 2017 PSP awards lapsing in
full. Please see page 130 for more detail.
Remuneration for 2020/21
Decisions made for remuneration in
2020/21 are as follows:
Salary/fees
The Committee reviewed the executive
director salaries in early 2020. The
expectation is that the average increase
in the UK workforce for the current
financial year would be between 2%
and 2.5%. The Committee decided to
set the increase for the Executive
Director salaries at 2%. In light of the
impact on our employees and other
stakeholders of the COVID-19 pandemic,
the Committee accepted a proposal by
the Chief Executive to suspend the
implementation of annual salary
increases and keep this under review
during the 2020/21 financial year. In
addition, the Executive Directors and
other senior executives volunteered a
temporary 20% reduction to their base
salaries. The Non-Executive Directors
volunteered a similar reduction to their
annual fees.
Pension
The pension for incumbent Executive
Directors will reduce to 21.5% of salary,
as the first step in the transition from
the prior arrangement (a contribution
of 25% of salary) to alignment with the
workforce over the new Policy period.
2020/21 annual bonus
It is currently anticipated that the
2020/21 annual bonus will be based
80% on underlying financial performance
measures (40% on PBT and 40% on OCF),
and 20% on non-financial measures.
The Committee will disclose targets in
the 2020/21 Directors’ Remuneration
Report. However, the Committee
decided to defer its final decision on
the annual bonus until it had a better
understanding of the impact of the
pandemic. Therefore, it will determine
the appropriate structure for the bonus in
the first half of the financial year. Any
final decisions around the annual bonus
for Executive Directors will be consistent
with the Policy and considered in the
context of the bonus for the broader
participant population.
2020 PSP awards
PSP awards will be granted in 2020
consistent with the new Policy. However,
the granting of awards will be delayed
until at least the half year, to allow the
Committee sufficient time to consider
the appropriate weighting of measures
and performance ranges in the context
of the ongoing impact of the COVID-19
pandemic. The targets – which would
normally be disclosed prospectively in
this report – will be disclosed in the RNS
statement announcing the granting of
these awards.
In February, after 16 years of service with
the Group, Archie Bethel announced his
intention to retire as Director and Group
Chief Executive. The Nomination Committee
has started the search for his replacement.
Archie’s remuneration arrangements
will remain in line with our Policy.
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Babcock International Group PLC Annual Report and Accounts 2020
Compliance statement
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 2018, 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 4 August
2020. A binding resolution to approve the remuneration policy will also be
proposed at the Meeting.
This report contains both auditable and non-auditable information.
The information subject to audit is so marked.
Please see page 126 for a summary of his
outcomes for the last financial year and
page 131 for his arrangements for the
current financial year. In addition, in order
to simplify the workings of the Board,
John Davies stepped off the Board on
31 March 2020 and is no longer an
Executive Director, although, as the CEO
of the Land Sector, he remains a key
member of the senior leadership team.
However, we disclose below on page
126 his pay outcomes for the last
financial year.
Finally, the composition of the Committee
has been reviewed for 2020 onwards.
To streamline its membership in order
to make its operation more efficient and
following Sir David Omand’s decision to
step down as a member of the Committee
after 11 years’ service, from 1 April 2020,
the membership of the Committee was
Kjersti Wiklund (Chair), Jeff Randall,
Victoire de Margerie and Russ Houlden,
with Carl-Peter Forster joining the
Committee on his appointment to the
Board on 1 June 2020.
Kjersti Wiklund
Committee Chair
Remuneration Committee
membership and attendance
during the year
Jeff Randall (Chair)
Sir David Omand
Ian Duncan
Myles Lee
Victoire de Margerie*
Lucy Dimes
Kjersti Wiklund
7 of 7
6 of 7
7 of 7
7 of 7
6 of 7
7 of 7
7 of 7
* Victoire de Margerie was unable to
attend one meeting due a pre-existing
business commitment.
Babcock International Group PLC Annual Report and Accounts 2020
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Strategic reportGovernanceFinancial statements Remuneration continued
Remuneration at a Glance
This section provides an overview of the Company’s performance
over the 2019/20 financial year and the remuneration received
by our Executive Directors. Full details can be found in the
Annual Report on Remuneration on pages 125 to 136.
2019/20 remuneration outcomes
Annual bonus
The annual bonus for the 2019/20 financial year was based on a mix of financial and non-financial measures, the performance
targets for which (and actual performance against these) are set out below:
Measures
Warranted payout (% of max. bonus)
Performance targets
Group
Earnings per
Share (EPS)
Group Profit
Before Tax
(PBT)
Group
Operating
Cash Flow
(OCF)
Sector Profit
Before
Interest &
Tax (PBIT)1
Sector
Operating
Cash Flow
(OCF)1
Non-financial2
Total
A Bethel
F Martinelli
J Davies
30%
Max
0%
Actual
30%
Max
0%
Actual
30%
Max
0%
Actual
Threshold
70.5p
Target
74.2p
Stretch
81.6p
Actual 69.7p
Threshold
£437.7m
Actual
£432.0m
Threshold
£351.6m
Actual
£306.7m
Threshold
95%*
*Of budget
Threshold
93%*
*Of budget
Target
£460.7m
Stretch
£506.8m
Target
£378.1m
Stretch
£404.6m
Target
100%*
Stretch
110%*
Target
100%*
Stretch
107%*
20%
Max
0%
Actual
20%
Max
0%
Actual
10%
Max
0%
Actual
30%
Max
0%
Actual
30%
Max
0%
Actual
15%
Max
0%
Actual
10%
Max
10%
Actual
15%
Max
15%
Actual
20%
Max
14%3
Actual
20%
Max
16%
Actual
20%
Max
13.3%3
Actual
100%
Max
14%
Actual
100%
Max
16%
Actual
100%
Max
38.3%
Actual
1. Given the commercially sensitive nature of sector measures, targets and outcomes are not disclosed.
2. Several measures have been merged into an overall assessment in this table for disclosure purposes.
3. The Committee reduced the non-financial outcome for Archie Bethel and John Davies to take account of the fatality in the year.
Based on actual outturn as set out above, the Executive Directors would have received payouts under the 2019/20 annual bonus of
between 14.0% and 38.3% of maximum bonus. However, the Committee has delayed the decision on payment of the annual bonus
until after the Board’s decision on the final dividend for the 2019/20 financial year. 40% of any bonus earned will be deferred in
shares for three years under the Deferred Bonus Plan.
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Babcock International Group PLC Annual Report and Accounts 2020
2017 PSP
The 2017 PSP vests subject to three performance measures, the targets for which (and actual performance against these) are
summarised below:
Measure & weighting
Threshold (25% vesting)
Stretch (100% vesting)
Outcome
Performance range
Warranted vesting
(% of total award)
EPS growth (3-year CAGR)
33%
Return on Capital Employed
(ROCE) (3-year average)
33%
Relative Total Shareholder
Return (TSR) (vs FTSE350)
33%
TOTAL
4% p.a.
11% p.a.
(4.4%) p.a.
12.0%
14.5%
11.7%
Median
Median
+9% p.a.
Below
median
0%
0%
0%
0%
Based on the performance outcomes set out above, 2017 PSP awards shall lapse in full.
Implementation of the Remuneration Policy in 2020/21
For the 2020/21 financial year, the Committee’s intention at the time of writing this report is for the Remuneration Policy to be
implemented as set out in the table below. As set out earlier in this Report, the Executive Directors have volunteered a temporary
20% reduction to their base salaries, and the Chair and Non-Executive Directors have also volunteered a temporary reduction to their
fees of 20%. The measures, their weightings and targets for the annual bonus and PSP are expected to be finalised following
publication of this report and will be confirmed in next year’s DRR or earlier if applicable through RNS.
Element of remuneration Implementation for 2020/21
Base salary
Unchanged from 2019/20, with any inflationary increase currently suspended until later in the year:
Archie Bethel: £796,000
Franco Martinelli: £446,000
Pension
Benefits
Reduced from 25.0% to 21.5% of salary
Unchanged from 2019/20
Annual bonus and DBP
Awards of up to 150% of salary, based on the achievement of financial targets (80% weighting) and
non-financial measures (20% weighting). 40% of any bonus earned deferred in shares for 3 years.
PSP
Awards of 200% of salary based on: EPS, ROCE, free cashflow, relative TSR
Alignment of the Remuneration Policy
The Committee believes that the proposed Policy complies with the six pillars set out in paragraph 40 of the 2018 Corporate
Governance Code.
Clarity: The Committee believes that the disclosure of the remuneration arrangements is transparent with clear rationale provided
on its maintenance and any changes to policy. The Committee remains committed to consulting with shareholders on the Policy and
its implementation.
Simplicity: The policy and the Committee’s approach to implementation is simple and well understood. The performance measures
used in the long-term incentive plans, along with those in the bonus, are well aligned to Babcock’s strategy.
Risk: The Committee has ensured that remuneration arrangements do not encourage and reward excessive risk-taking by setting
targets to be stretching and achievable, with discretion to adjust formulaic bonus and PSP outcomes.
Predictability and proportionality: The link of the performance measures to strategy and the setting of targets balances
predictability and proportionality by ensuring outcomes do not reward poor performance.
Culture: The policy is consistent with Babcock’s culture as well as strategy, therefore driving behaviours which promote the
long-term success of the Company for the benefit of all stakeholders.
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Remuneration continued
Remuneration Policy Report
The Remuneration policy set out in this section is to be submitted to a binding Shareholder vote at the 2020 AGM and it is intended
that this policy will apply for three years from that date. The key changes from the previous remuneration policy and the rationale
for the changes are explained in the Committee Chair’s introduction on pages 113 to 115.
Key principles of the Remuneration policy
Our policy for Executive Directors 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, to incentivise and reward
success. The focus of our executive remuneration is, therefore, weighted towards performance-related pay with a particular emphasis
on long-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.
Remuneration policy for Executive Directors
Base salary
Purpose and link to
strategy
To recruit and retain the best executive talent to execute our strategic objectives at appropriate cost.
Operation
Opportunity
Base salaries are 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.
In respect of existing Executive Directors, it is 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.
Performance metrics
Business and individual performance are considerations in setting base salary.
Pension
Purpose and link to
strategy
Operation
Opportunity
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.
Policy for new appointments
Executive Directors appointed after 1 April 2020 will receive pension benefits up to the value
equivalent to the maximum level of pension benefits provided under the Company’s regular defined
contribution pension plans as offered to the wider workforce in the relevant market as may be in
effect or amended from time to time.
Transition arrangements for existing Executive Directors
The existing directors will transition from the arrangements immediately prior to the new
policy (25% of salary) to alignment with the workforce, as per the new appointment policy,
by 1 April 2023.
Performance metrics
Not performance-related.
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Babcock International Group PLC Annual Report and Accounts 2020
Benefits
Purpose and link to
strategy
Operation
Designed to be competitive in the market in which the individual is employed or to meet costs
effectively incurred at the Company’s request.
A range of benefits is provided which may include (but is not limited to): life insurance; medical
insurance; car and fuel benefits and allowances; home to work travel and related costs;
accommodation benefits and related costs.
Other benefits (e.g. relocation) may be offered if considered appropriate and reasonable by
the Committee.
Opportunity
Benefit values vary by role and are periodically reviewed and set at a level that 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.
Performance metrics
Not performance-related.
Annual Bonus
Purpose and link to
strategy
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.
Operation
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 is deferred into Company shares for
three years. Dividend equivalents accrued during the deferral period are payable in respect of
deferred shares when (and to the extent) these vest.
Malus and clawback provisions 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.
Opportunity
Maximum bonus 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.
Performance metrics
Performance is determined by the Committee on an annual basis by reference to Group and/or
sector financial measures, e.g. PBT, OCF, as well as the achievement of non-financial objectives.
The weighting on non-financial objectives is limited to 20%, unless the Committee believes
exceptional circumstances merit a higher weighting.
The Committee retains discretion to vary the financial measures and their weightings annually, to
ensure alignment with the business priorities for the year.
Babcock International Group PLC Annual Report and Accounts 2020
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Remuneration continued
Performance Share Plan (PSP)
Purpose and link to
strategy
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.
Operation
The Committee has the ability to grant nil-cost 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 PSP awards before
they are released.
Malus and clawback provisions 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.
Opportunity
Maximum annual PSP award opportunity is 200% of base pay.
16.7% of the maximum award opportunity will vest for threshold performance.
Performance metrics
Vesting of PSP awards is subject to continued employment and Company performance over a
three-year performance period.
It is intended that PSP awards made during the life of this Policy will be based on the achievement
of stretching EPS, cashflow (added for the 2020 Policy), TSR and ROCE targets, equally weighted.
The Committee will review the performance measures, their weightings, and performance targets
annually to ensure continued alignment with Company strategy.
All-employee plans – Babcock Employee Share Plan
Purpose and link to
strategy
To encourage employee ownership of Company shares.
Operation
Open to all UK tax-resident employees, including Executive Directors, of participating Group companies.
The plan is an HMRC approved share incentive plan that allows an employee to purchase shares 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.
Opportunity
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 ten shares purchased. The matching rate is reviewed periodically, and any
future offer will be bound by the prevailing HMRC limit.
Performance metrics
Not performance-related.
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Approach to recruitment remuneration
In the case of hiring or appointing a new Executive Director, the Committee may make use of any of the components of
remuneration (and subject to the same limits) set out in the Policy above.
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 external
appointment to ‘replace’ incentive arrangements forfeited on leaving a previous employer over and above the limits set out in the
Policy in the table above. 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 the relevant Listing Rule, if required.
When appointing a new Executive Director by way of promotion from an internal role, the pay structure 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.
When recruiting a new Non-Executive Director, the Committee or Board will 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.
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, cashflow and ROCE are effective measures of long-term performance for the Company,
providing a good balance between shareholder value creation and line of sight for Executives.
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.
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 four different performance scenarios: ‘Minimum’, ‘On-target’, ‘Maximum’ and
‘Maximum+50%’.
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Strategic reportGovernanceFinancial statements Remuneration continued
Potential reward opportunities are based on the Company’s Remuneration Policy and implementation in 2020/21, as outlined in
the Committee Chair’s statement and later in the Annual Report on Remuneration, applied to base salaries as at 1 April 2020.
Note that the projected values exclude the impact of any share price movements except in the ‘Maximum+50%’ scenario.
Chief Executive
Archie Bethel (£’000)
Maximum
+50%
Maximum
25%
30%
25%
30%
Group Finance Director
Franco Martinelli (£’000)
50%
£4,772
Maximum
+50%
21%
26%
53% £2,550
40% £3,976
Maximum
26%
32%
42% £2,104
On-target
56%
31%
13%
£2,113
On-target
51%
35%
14%
£1,060
Minimum
100% £1,190
Minimum
100% £543
0
1,000
2,000
3,000
4,000
5,000
0
500
1,000
1,500
2,000
2,500
3,000
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 that are not at risk.
The ‘On-target’ scenario reflects fixed remuneration as above, plus a payout of 55% 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 payout of all incentives (150% of salary under the annual bonus, 200%
of salary under the PSP).
The ‘Maximum+50%’ scenario reflects fixed remuneration, plus full payout of all incentives with the value of the PSP also reflecting
an increase of 50% in the share price from grant.
Shareholding guidelines for Executive Directors
The Committee sets shareholding guidelines for the 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). Executive Directors are 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.
For the 2020 Policy onwards, the shareholding requirements will be extended post-cessation such that departing Executive Directors
will be required to hold vested Company shares, received through incentive plans granted from the 2020/21 financial year
onwards, for two years at a level equal to the lower of their actual shareholding on cessation and the in-post shareholding
requirement. Any shares purchased by an Executive Director will not be part of this holding requirement.
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 Executive Directors’ service contracts:
Executive Directors
Name
Archie Bethel (Chief Executive)
Date of service contract
1 April 2016
Franco Martinelli (Group Finance Director)
1 August 2014
Notice period
12 months from Company,
12 months from Director
12 months from Company,
12 months from Director
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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.
Name
Annual bonus
Deferred bonus
awards
PSP
Treatment on
a change of control
Will be paid a time pro-rated
proportion, subject to performance
during the year, generally paid
immediately, with Committee
discretion to treat otherwise.
Treatment for
a good leaver*
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.
Treatment for
other leavers
No annual bonus entitlement,
unless the Committee exercises
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.
Entitled to retain any award which
will generally vest at the normal
vesting date, with Committee
discretion to treat otherwise.
Entitled to retain a time pro-rated
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.
Outstanding awards are forfeited
unless the Committee exercises its
discretion to treat otherwise.
Outstanding awards are 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.
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.
Chair and Non-Executive Directors
Name
Ruth Cairnie (Chair)
Date of appointment
as a Director
3 April 2019
Date of current
appointment letters
2 April 2019
Sir David Omand
1 April 2009
17 May 2018
10 November 2010
1 April 2019
Ian Duncan
Jeff Randall
Myles Lee
1 April 2014
1 April 2015
Victoire de Margerie
1 February 2016
Lucy Dimes
Kjersti Wiklund
Russ Houlden
Carl-Peter Forster
1 April 2018
1 April 2018
1 April 2020
1 June 2020
22 February 2017
17 May 2018
1 April 2019
5 March 2018
5 March 2018
4 February 2020
6 April 2020
Anticipated expiry of present
term of appointment (subject
to annual re-election)
AGM 2022
AGM 2021
AGM 2020
AGM 2020
AGM 2021
AGM 2022
AGM 2021
AGM 2021
AGM 2023
AGM 2023
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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.
Details of the policy on fees paid to our Non-Executive Directors are set out in the table below:
Performance
measures
None
Function
To attract and
retain high-
calibre Non-
Executive
Directors with
commercial and
other experience
relevant to the
Company
Operation
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
additional responsibilities such as acting as Senior
Independent Director, Chair of the Audit and Risk
Committee, and Chair of the Remuneration Committee.
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.
Opportunity
Non-Executive Director fee increases
are applied in line with the outcome
of the periodic fee review.
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 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 Committee engages with employees through the Babcock
Employee Forum, which is attended by representatives from across the Group’s business operations. The Committee’s policy on
remuneration for Executive Directors is presented to the Forum together with an explanation as to how it aligns with the wider
company pay policy. The representatives not only give feedback on the policy, but also explain it to their business operations.
The Committee takes the feedback it receives into account in its decision-making on executive remuneration.
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 the Remuneration policy and
arrangements and commits to undergoing consultation with leading shareholders in advance of any significant changes to the
Remuneration policy. In developing the proposed Policy set out in this Report, we consulted with shareholders representing a total
of c.60% of our issued share capital, as well as shareholder representative bodies. We had a high level of engagement and are
pleased to report that virtually all investors who provided feedback indicated support for the approach initially proposed.
The Committee will continue to monitor trends and developments in corporate governance and market practice to ensure the
structure of executive remuneration remains appropriate.
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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 independent Non-Executive Directors.
The membership of the Committee during the year to 31 March 2020 (with each member serving throughout the year) as well
as attendance at Committee meetings in the year is shown below. The Group Chair 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.
The 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 and its terms of reference comply with the provisions
of the UK Corporate Governance Code.
In total there were seven meetings in the year to 31 March 2020.
Committee membership and attendance during the year
Jeff Randall (Chair)
Sir David Omand
Ian Duncan
Myles Lee
Victoire de Margerie*
Lucy Dimes
Kjersti Wiklund
7 of 7
6 of 7
7 of 7
7 of 7
6 of 7
7 of 7
7 of 7
* Victoire de Margerie was unable to attend one meeting due to a pre-existing business arrangement.
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 Chair. 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 £92,234 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.
Matters considered
The Committee considered a number of matters during the year to 31 March 2020, including:
• reviewing the Remuneration policy against market trends and corporate governance best practice
• agreeing how to align incumbent Executive Directors’ pension arrangements to those of the general UK workforce
• agreeing Executive Director salaries for the financial year 2020/21
• 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 2019/20 annual bonus plan
• agreeing the level of vesting of PSP and DBMP awards granted in 2016
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Strategic reportGovernanceFinancial statements Remuneration continued
• considering performance against the measures applied to, and level of payout of, the 2018/19 annual bonus
• agreeing the level of 2019 PSP awards
• reviewing share ownership guidelines for senior executives
• 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 2019 Annual Report on Remuneration at the 2019 AGM:
Votes cast
For (including discretionary)
Against
Total votes cast (excluding withheld votes)
Votes withheld
Total votes cast (including withheld votes)
2017 Remuneration policy
2019 Annual Report on Remuneration
Total number of votes % of votes cast for & against
368,814,605
13,528,165
382,342,770
4,341,748
386,684,518
96.5%
3.5%
100.0%
Total number of votes % of votes cast for & against
98.1%
1.9%
100%
355,040,155
6,915,419
361,955,574
19,437
361,975,011
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
Fixed remuneration
Salary1
Benefits in kind and cash2
Pension3
Annual variable remuneration
Annual bonus (cash)4
DBP (deferred annual bonus)5
Long-term incentives
PSP6
Dividends7
Total (of which)
Fixed remuneration1,2,3
Annual variable remuneration4,5
Long-term incentives6,7
Archie Bethel
£’000
Franco Martinelli
£’000
John Davies
£’000
19/20
796
223
199
100
67
–
–
1,385
1,218
167
–
18/19
780
221
195
409
273
77
14
1,969
1,196
682
91
19/20
446
1
112
64
43
–
–
666
559
107
–
18/19
437
1
109
240
160
59
11
1,017
547
400
70
19/20
430
20
107
148
99
–
–
804
557
247
–
18/19
421
24
106
207
138
57
10
963
551
345
67
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 19/20 received £221,210 (18/19: £218,181) in connection with his accommodation costs in London, at the Company’s request, to enable
him to lead the business effectively.
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): this is the part of total annual bonus earned for performance during the year (see page 128) that is not required to be mandatorily
deferred into shares under the DBP (see page 119) and that is paid in cash. The decision on the payment of 19/20 bonuses set out above (including the
granting of associated DBP awards) will be delayed until the Board makes a decision on a final dividend in respect of the 19/20 financial year.
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. PSP: for 19/20, represents the lapsing in full of the 2017 awards that were subject to performance to 31 March 2020 (see page 130). Note: the difference
between the PSP figures shown for 2018/19 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 464.60p on 14 June 2019.
7. Dividends: the total value of dividends accruing on long-term incentive awards (other than on mandatory deferral of bonus awards under the DBP) vesting on
performance to 31 March 2020 (for 19/20) and 31 March 2019 (for 18/19), payable in cash on exercise of the award.
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Babcock International Group PLC Annual Report and Accounts 2020
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 2020. 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 2017/18
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 2018/19 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 2020 are set out in the following table:
Director1
Franco Martinelli
Accrued pension at 31 March 2020
£’000 pa
66
Normal retirement age2
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
Franco Martinelli
John Davies
2019/20
£’000 pa
5
3
3
2018/19
£’000
5
3
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Annual bonus
2019/20 Annual bonus (audited)
The 2019/20 annual bonus was based on a mix of financial and non-financial measures. The financial element, weighted 80%,
was based on the Group’s underlying PBT and EPS performance (based on budgeted FX rates), and 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.
The table below summarises performance against each financial measure, and the bonus outcome.
Bonus element
EPS1 performance
stretching targets, with a
sliding scale between
threshold and maximum
Threshold
70.5p
Target
74.2p
Maximum
81.6p
Achieving budgeted
Group cash flow
93% of
budget
Budget
(£378.1m)
107% of
budget
Achieving budgeted
Group PBT2
95% of
budget
Budget
(£460.7m)
110% of
budget
Achieving budgeted
sector cash flow
93% of
budget
Budget3 107% of
budget
Achieving budgeted
sector PBIT2
95% of
budget
Budget3 110% of
budget
Non-financial objectives4
Total
Actual outturn
69.3p Maximum potential
(% of salary)
Outturn (% of salary)
£300.3m Maximum potential
(% of salary)
Outturn (% of salary)
£429.1m Maximum potential
(% of salary)
Outturn (% of salary)
3 Maximum potential
(% of salary)
Outturn (% of salary)
3 Maximum potential
(% of salary)
Outturn (% of salary)
Maximum potential
(% of salary)
Outturn (% of salary)
Maximum potential
(% of salary)
Outturn (% of salary)
Archie Bethel
45.0%
Franco Martinelli
45.0%
John Davies
45.0%
0%
0%
0%
45.0%
45.0%
22.5%
0%
30.0%
0%
30.0%
0%
0%
30.0%
30.0%
0%
15.0%
0%
22.5%
22.5%
15.0%
15.0%
30.0%
21.0%
150.0%
24.0%
150.0%
20.0%
150.0%
21.0%
24.0%
57.5%
1. Threshold vesting is: 10% of maximum for the Group PBT and sector PBIT elements; 27.5% of maximum for the EPS element; and 15.9% of maximum for the
Group and sector cash flow elements. 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 19/20 are set out on the following page.
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Babcock International Group PLC Annual Report and Accounts 2020
Non-financial measures
The Committee sets non-financial objectives at the start of each year around strategic and risk management ‘Themes’. For 19/20,
the Themes were Growth, Technology/Processes, Resources and Reputation. 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 payout 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
Technology/Processes
Resources
Reputation
Archie Bethel
In a challenging year, further
clarified the Group’s strategy
and drove progress in the Group
with good revenue growth in
the defence business and the
award of significant tenders,
including the UK’s next
generation of warships, a
long-term position on the major
submarine projects in the US and
Australia and the expansion of
the Group’s aviation defence
operations in France.
Franco Martinelli
Secured the refinancing of the
Group’s revolving credit facility
until August 2024 and the issue
of a €550 million Eurobond,
giving the Group reassurance on
its liquidity in the current
circumstances. Continued the
emphasis on the Group’s
strategy to concentrate on three
focus markets, delivered across
our four sectors, by leading on
the rationalisation of the Group’s
portfolio (for example the sale
of Context).
John Davies
Made good progress in our
Defence Support Group
business, helped by working
collaboratively with the Cabinet
Office’s Strategic Partnering
Programme. Won strategic bids,
such as the bid for the
Metropolitan Police Service’s
learning partner and the bid to
be one of Network Rail’s key
track work suppliers.
Continued to lead the rollout of
the Group’s enterprise resource
programme. A particular highlight
was the implementation of the
system in our Defence Support
Group business.
Working with Franco Martinelli,
John Davies oversaw the
implementation of the Group’s
enterprise resource programme
in our Defence Support
Group business.
Oversaw the restructuring
programmes to right size the
cost base of our Aviation and
Nuclear sectors.
Continued to champion the
Group’s effort to improve its
diversity and talent development
with over 30% of key talent
pool being female and 30%
of the 2020 graduates also
being female.
Worked extensively to deepen
further our Defence Support
Group’s relationship with the
MOD through the Strategic
Partnering Programme.
Championed the continued
development of our Strategic
Partnering Programme with
the Cabinet Office and leading
the initiative to share the
learning across all the Group’s
business lines.
Developed the Group’s
environmental, social and
governance function with
the introduction of a new
Group policy and a new
Group Head of Sustainability.
Continued the improvement
in investor relations.
Continued to drive the initiative
to embed technology across
the Group and established the
technology group to work
across all sectors. An example
of progress made is iSupport360
and its role in winning the
contract to build the UK’s next
generation of warships.
Reinvigorated the Group’s
safety programme, which
resulted in a reduction in the
Group’s total injury rate as well
as its RIDDOR rate.
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Remuneration continued
The annual bonus outcome is primarily determined by the extent to which the financial targets and non-financial objectives are met.
The Committee was satisfied that the outcomes against the financial measures were reflective of the underlying performance of the
Group and so no discretion was applied. However, the Committee is clear that the key underpin to the annual bonus scheme is the
Group’s health and safety performance. In the year, the Committee reduced the outcomes for Archie Bethel and John Davies due to
the fatal accident involving an employee in the Land sector.
The 2019/20 bonus outcomes for each Executive Director are as follows:
Archie Bethel
Franco Martinelli
John Davies
Payment for financial targets
(% salary)
0%
0%
37.5%
Payment for non-financial targets
(% salary)
21.0%
24.0%
20.0%
Total bonus
(% salary)
21.0%
24.0%
57.5%
Total bonus
£167,160
£107,040
£247,250
The decision on the payment of the bonus warranted by performance against the targets set at the start of the 19/20 year shall be
delayed until such time as the Board makes its decision on the final dividend in respect of the 2019/20 financial year.
40% of the earned annual bonus will be deferred into Company shares under the DBP. Deferred shares normally vest after three
years, subject to continued employment.
Long-term incentive schemes (PSP)
2017 PSP awards vesting for the period ending March 2020 (audited)
The Executive Directors were granted PSP awards in 2017, which were subject to three-year TSR, EPS and ROCE targets for the
period ending 31 March 2020. Performance against these measures is as follows:
3-year TSR vs FTSE 350 (excluding
investment trusts and financial services)
Adjusted basic underlying EPS growth to
31 March 2020
3-year average ROCE
Total vesting
% weighting
33%
Threshold performance
(16.7% vesting)
Median TSR
33%
33%
4%
12%
Actual
performance
Below median
% of each element
vesting
0%
Stretch performance
(100% vesting)
Median TSR
+ 9% p.a.
11%
(4.4%)
14.5%
11.7%
0%
0%
0%
The Committee was satisfied that the outcomes against the measures were reflective of the underlying performance of the
Company and so no discretion was applied. As a result, the Executive Directors’ 2017 PSP awards will lapse in full.
PSP awards granted during 2019/20 (audited)
The Executive Directors were granted PSP awards in 2019, which were subject to three-year TSR, EPS and ROCE targets for the
period ending 31 March 2022. Due to the fall in the share price since the previous PSP grant, the Committee decided that 2019/20
PSP awards should be scaled back by 20% in value, to 160% of salary.
PSP awards made in 2019/20* (audited)
Director
Archie Bethel
Franco Martinelli
John Davies
Number of shares
263,685
147,743
142,443
Face value
(£)1
£1,273,599
£713,599
£688,000
Face value
(% of salary)2
160%
160%
160%
% of award receivable
for threshold performance
16.7%
16.7%
16.7%
End of
performance period
31 March 2022
31 March 2022
31 March 2022
1. Based for Directors on three-day average share price (of 483p) at time of grant.
2. Expressed as a percentage of salary at the date of the award (13 June 2019).
* In the form of nil-cost options.
The performance targets that were attached to these awards are summarised in the table below:
3-year TSR vs FTSE 350 (excluding investment trusts and financial services)
3-year cumulative adjusted basic underlying EPS
3-year average ROCE
% weighting
33%
Threshold performance
(16.7% vesting)
Median TSR
33%
33%
231.5p
11%
Stretch performance
(100% vesting)
Median TSR
+ 9% p.a.
248.0p
14%
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Babcock International Group PLC Annual Report and Accounts 2020
Deferred Bonus Plan awards made during 2019/20* (audited)
The Executive Directors were granted DBP awards in 2019. The awards (details of which are set out below) will normally vest after
three years subject to continued employment only.
Director
Archie Bethel
Franco Martinelli
John Davies
Number of shares
56,453
33,087
28,570
Face value
(£)1
£272,668
£159,810
£137,993
Face value
(% of salary)2
34%
36%
32%
% of award receivable
for threshold performance
n/a
n/a
n/a
End of
performance period
n/a
n/a
n/a
1. Based for Directors on three-day average share price (of 483p) at time of grant.
2. Expressed as a percentage of salary at the date of the award (13 June 2019).
* In the form of nil-cost options.
Single total figure of remuneration for Non-Executive Directors (audited)
The table below sets out the total remuneration received by each Non-Executive Director:
Fixed remuneration
Mike Turner
Ruth Cairnie2
Sir David Omand
Ian Duncan
Jeff Randall
Myles Lee
Victoire de Margerie
Lucy Dimes
Kjersti Wiklund
Base fee
£’000
Additional fee1
£’000
Total
£’000
19/20
112
253
72
61
61
65
65
61
61
18/19
330
n/a
71
60
60
64
64
60
60
19/20
0
0
0
15
15
0
0
0
0
18/19
0
n/a
0
15
15
0
0
0
0
19/20
112
253
72
76
76
65
65
61
61
18/19
330
n/a
71
75
75
64
64
60
60
1. Relating to Chairmanship of the Audit and Risk Committee (Ian Duncan), and Remuneration Committee (Jeff Randall).
2. Reflects Ruth Cairnie’s fee as a Non-Executive director (from 3 April 2019 until 18 July 2019) and as Chair of Babcock from 19 July 2019 to 31 March 2020.
Sourcing of shares
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 2020/21
The Committee has set the remuneration for Executive Directors for 2020/21 in line with the proposed 2020 Policy.
Base salary
Executive Directors’ base salaries are reviewed each year with any changes usually taking effect from 1 April. In early 2020 the
Committee approved increases to the Executive Directors’ salaries of 2% for 2020/21, in line with increases for the wider UK
workforce. However, in light of the ongoing impact on our employees and other stakeholders of the COVID-19 pandemic, the
Committee has accepted a proposal by the Chief Executive to suspend the implementation of annual salary increases and keep
this under review during the 2020/21 financial year. In addition, the Executive Directors have volunteered a 20% reduction to their
base salaries.
Archie Bethel
Franco Martinelli
* Subject to review during the 2020/21 financial year.
2020/21*
£796,000
£446,000
2019/20
£796,000
£446,000
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Remuneration continued
Pension
The pension for the Executive Directors will reduce to 21.5% of salary as the first step in the transition from the prior arrangements
(25% of salary) to alignment with the workforce over the new policy period.
2020/21 Annual bonus
The structure of Executive Director annual bonus for 2020/21 is expected to be unchanged from that in 2019/20, other than for
the removal of EPS and the reweighting of OCF and PBT (OCF from 30% to 40%, PBT from 20% to 40%). Non-financial objectives
continue to be weighted 20%. However, at the time of drafting this Report, the Committee was considering the impact on the
structure of the bonus of the ongoing COVID-19 pandemic, and will take this into account in the final decision around the bonus for
2020/21, which will be consistent with the shareholder-approved Policy. The Group financial performance targets and non-financial
objectives will be disclosed 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 under the categories of:
• Operational excellence: continue to enhance reputation as a trusted partner for our customers
• Growth: focus on our three markets with leadership positions and grow our international business
• Technology: strengthen our offering through the increased adoption of technology
• Resources: develop and retain our people to meet the future growth plans of the business
• Value creation: act to deliver our medium term Capital Markets Day financial targets
40% of any earned bonus will be deferred into shares for three years.
2020 PSP awards
Due to the impact of the current COVID-19 pandemic, the Committee has decided to delay the PSP awards for 2020 until such time
as the Committee believes that it can agree appropriate performance ranges. Any award will be consistent with the new Policy, with
vesting currently intended to be based on four measures: EPS, cashflow, ROCE (all measured on an underlying basis) and Relative
TSR. The weighting of these measures and the targets – which would normally be disclosed prospectively in this report – will be
disclosed in the RNS statement announcing the granting of these awards.
Exit payments made in year (audited)
No exit payments were made to Executive Directors during the year under review.
Payments to past Directors (audited)
Peter Rogers retired from the Company on 31 August 2016. During the year under review, 15.1% and 12.5% of his retained interests
in the 2016 PSP award and the 2016 legacy deferred bonus matching plan award, totalling 5,377 shares, vested at the normal time
and in line with other participants, on 15 June 2019. In addition to the vesting of these shares, Mr Rogers was paid a cash sum of
£4,544, representing the total value of dividends accruing on his 2016 PSP award and his legacy deferred bonus matching plan award.
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, 15.1% of his retained interests in the 2016 PSP, totalling 8,654 shares, vested at the normal time and
in line with other participants, on 15 June 2019. Mr Tame was also paid a cash sum of £7,313, representing the total value of
dividends accruing on his 2016 PSP award. Mr Tame’s 2016 DBP award (the value of which was disclosed in the 2016 Directors’
Remuneration Report) also vested on 15 June 2019.
Non-Executive Directors’ fees (including the Chair)
There are no changes to the fees for the Chair and the Non-Executive Directors for the 2020/21 financial year. In line with the
Executive team, the Chair and Non-Executive Directors volunteered a temporary 20% reduction in their fees.
Annual rate fee
Chair
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 2021
£
336,000
72,000
61,000
15,000
15,000
Year to
31 March 2020
£
336,000
72,000
61,000
15,000
15,000
% change
since last review
(% p.a.)
0%
0%
0%
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 2021.
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.
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Babcock International Group PLC Annual Report and Accounts 2020
Percentage change in Chief Executive’s remuneration
The table below shows the percentage change in remuneration from the prior year for the CEO compared to the average employee.
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
Relative importance of spend on pay
Distribution to shareholders
Employee remuneration
% change 2018/19 to 2019/20
Chief Executive
2%
1%
(75)%
2018/19
£151m
£1,612m
Other employees
2.4%
(2.6)%
6.4%
% change
1.1%
(0.4)%
2019/20
£152m
£1,606m
CEO pay ratio
The table below provides disclosure of the ratio between the CEO’s salary and total remuneration and that of the lower quartile,
median and upper quartile UK-based employee for the 2019/20 financial year.
Financial year
Calculation
methodology
FY19/20
C
Total remuneration ratio
Total remuneration (£’000)
Salary ratio
Salary (£’000)
P25
(lower quartile)
47:1
£29.2
32:1
£25.1
P50
(median)
37:1
£37.6
22:1
£36.3
P75
(upper quartile)
27:1
£50.6
18:1
£43.6
CEO
£1,385
£796
Figures for the CEO are calculated using the data from the Executive Directors’ single figure table on page 126. Total remuneration
figures for the lower quartile (P25), median (P50) and upper quartile (P75) employees were determined using the ‘single figure’
methodology, providing a like-for-like comparison with CEO remuneration. The employees representing P25, P50 and P75 were
determined using a projected forecast based on the first nine months of the financial year (i.e. to 31 December 2019). This
selection methodology excludes any annual bonus component, as the results for employee annual bonuses for the 19/20 financial
year are not known at the time of publication. Through analysing previous years’ data, it is understood that the employees identified
as representing the 25th, 50th and 75th percentile would not be bonus eligible, therefore the exclusion of this remuneration
component is deemed as unlikely to have a significant impact on the ratios reported. This Option C was chosen for practical reasons,
primarily relating to the number of employing entities and employees covered by this analysis.
The Committee has considered the pay data for the three employees identified and believes that it fairly reflects pay at the relevant
quartiles amongst our UK workforce. The three individuals identified were full-time employees during the year. None received an
exceptional incentive award which would otherwise inflate their pay figures. No adjustments or assumptions were made by the
Committee with the total remuneration of these employees calculated in accordance with the methodology used to calculate the
single figure of the CEO.
As this is the first year of reporting the CEO pay ratio using the above methodology, there is no comparative data against which to
compare the pay ratios above. The Committee will consider the median pay ratio of 37:1 in the context of the ratio reported in
future years as well as the figures produced by sector comparators and across the FTSE more generally.
The CEO pay ratio is based on comparing the CEO’s pay to that of Babcock’s UK-based workforce. The Committee expects that the
ratios will be largely driven by the CEO’s incentive pay outcomes, which will likely lead to greater variability in his pay than that
observed at other levels who, consistent with market practices, have a greater proportion of their pay linked to fixed components.
The Committee takes into account these ratios when making decisions around the Executive Director pay packages, and Babcock
takes seriously the need to ensure competitive pay packages across the organisation.
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Remuneration continued
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 31 March 2010. 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.
Babcock vs. FTSE 250 Index vs. FTSE 350 Aerospace & Defence Index
0
1
0
2
h
c
r
a
M
1
3
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
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Babcock
FTSE 250 Index
FTSE 350 Aerospace & Defence Index
The table below details the historical CEO pay over a ten-year period.
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
2018/19
2019/20
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)
1,792
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%
1,969
58%
n/a
15.1%
1,385
14%
n/a
0%
1. Until retirement on 31 August 2016.
2. Includes remuneration received whilst undertaking the role of Chief Operating Officer until August 2016.
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Babcock International Group PLC Annual Report and Accounts 2020
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 2020 and Directors’
interests in shares and options under the Company’s long-term incentives are set out in the sections below:
Vested but
subject to
holding
period
0
0
0
Vested
but not
exercised
0
0
0
At 31 March 2020
Option held
Unvested and
subject to
performance
conditions
616,878
345,578
333,121
Unvested and
subject to
continued
employment
118,387
69,957
57,859
S/holding
req.
(% salary)
300%
200%
200%
Current
shareholding
(% of salary)2
331%
422%
283%
Req.
met?2
Yes
Yes
Yes
At 31 March 2019
Shares held
Shares held
Owned outright
by Director or
spouse1
424,063
322,509
197,202
n/a
5,758
0
0
20,000
4,800
5,000
2,100
Owned outright
by Director or
spouse1
460,416
336,014
210,852
50,000
6,097
0
0
30,000
7,061
5,000
2,100
107,384
107,384
Director
Archie Bethel
Franco Martinelli
John Davies
Ruth Cairnie
Jeff Randall
Sir David Omand
Ian Duncan
Myles Lee
Victoire de Margerie
Lucy Dimes
Kjersti Wiklund
Former directors3
Mike Turner
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 2020
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 2020 and a three-month average
share price to 31 March 2020 of 504.08p, and calculated post-tax.
3. Shares held at date of retirement from the Board.
There have been no changes to the continuing Directors’ (or their spouses’) shareholdings between 31 March 2020 and
10 June 2020.
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 31 March 2020 was 383.2p. The highest and lowest mid-market share prices in the
year ended 31 March 2020 were 646.6p and 323.5p, respectively.
Director
Archie Bethel
Plan1 and year
of award
PSP 2016
DBP 2016
PSP 2017
DBP 2017
PSP 2018
DBP 2018
PSP 2019
DBP 2019
Granted
during
the year
Exercised
during
the year(a)
Lapsed
during
the year
16,657 93,655
13,162
Number of
shares subject
to award at
1 April 2019
110,312
13,162
171,588
29,185
181,605
32,749
263,685
56,453
Exercise
price
(pence)2
Number of
shares subject
to award at
31 March 2020
0
0
171,588
29,185
181,605
32,749
263,685
56,453
Market value of
each share at
date of award
(pence)
Exercisable
from3
Expiry
date4
997.17 Jun 2019 Jun 2020
997.17 Jun 2019 Jun 2020
891.67 Jun 2022 Jun 2023
891.67 Jun 2020 Jun 2021
859.33 Jun 2023 Jun 2024
859.33 Jun 2021 Jun 2022
483.00 Jun 2024 Jun 2025
483.00 Jun 2022 Jun 2023
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Remuneration continued
Plan1 and year
of award
Director
Franco Martinelli PSP 2016
DBP 2016
PSP 2017
DBP 2017
PSP 2018
DBP 2018
PSP 2019
DBP 2019
Director
John Davies
Plan1 and year
of award
PSP 2016
DBP 2016
PSP 2017
DBP 2017
PSP 2018
DBP 2018
PSP 2019
DBP 2019
Granted
during
the year
Exercised
during
the year(a)
Lapsed
during
the year
12,719 71,519
12,843
Number of
shares subject
to award at
1 April 2019
84,238
12,843
96,112
18,387
101,723
18,483
147,743
33,087
Granted
during
the year
Exercised
during
the year(a)
Lapsed
during
the year
12,265 68,965
13,571
Number of
shares subject
to award at
1 April 2019
81,230
13,571
92,635
12,890
98,043
16,399
142,443
28,570
Exercise
price
(pence)2
Exercise
price
(pence)2
Number of
shares subject
to award at
31 March 2020
0
0
96,112
18,387
101,723
18,483
147,743
33,087
Number of
shares subject
to award at
31 March 2020
0
0
92,635
12,890
98,043
16,399
142,443
28,570
Market value of
each share at
date of award
(pence)
Exercisable
from3
Expiry
date4
997.17 Jun 2019 Jun 2020
997.17 Jun 2019 Jun 2020
891.67 Jun 2022 Jun 2023
891.67 Jun 2020 Jun 2021
859.33 Jun 2023 Jun 2024
859.33 Jun 2021 Jun 2022
483.00 Jun 2024 Jun 2025
483.00 Jun 2022 Jun 2023
Market value of
each share at
date of award
(pence)
Exercisable
from3
Expiry
date4
997.17 Jun 2019 Jun 2020
997.17 Jun 2019 Jun 2020
891.67 Jun 2022 Jun 2023
891.67 Jun 2020 Jun 2021
859.33 Jun 2023 Jun 2024
859.33 Jun 2021 Jun 2022
483.00 Jun 2024 Jun 2025
483.00 Jun 2022 Jun 2023
(a) Market value of each share at date of exercise (19 Jun 2019) = 480.0p.
1. PSP = 2009 Performance Share 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 119 to 120.
2. The PSP awards are structured as nil priced options. Subject to the rules of the plan concerned, including as to meeting performance targets for PSP awards.
3. Where this date is less than ten years from the date of award, the Committee may extend the expiry date on one or more occasions, but not beyond the tenth
anniversary of the award.
General notes:
1. ‘Dividend equivalent cash’ (an amount representing dividends earned) of 84.5p per vested share had accrued on the PSP 2016
awards and on the DBP 2016 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 464.6p (14 June 2019) for PSP 2016 and DBP 2016 awards.
Summary of share-based awards and options vested during the year
During the year to 31 March 2020 the following awards vested:
Director
Archie Bethel
Franco Martinelli
John Davies
Award
PSP 2016
DBP 2016
PSP 2016
DBP 2016
PSP 2016
DBP 2016
Number vesting
16,657
13,162
12,719
12,843
12,265
13,571
Vesting date
15 Jun 2019
15 Jun 2019
15 Jun 2019
15 Jun 2019
15 Jun 2019
15 Jun 2019
Market value of vested
shares on award
£
£166,099
£131,248
£126,830
£128,067
£122,303
£135,326
Market value of vested
shares on vesting date
£
£77,388
£61,151
£59,092
£59,669
£56,983
£63,051
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 2019/20
None of the Executive Directors received a fee for any external appointment during the year.
This Remuneration report was approved by the Board on 11 June 2020 and signed on its behalf by:
Kjersti Wiklund
Chair of the Remuneration Committee
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Babcock International Group PLC Annual Report and Accounts 2020
Additional statutory information
Directors’ report and other disclosures
The Directors’ report comprises this section, the principal risks and management
controls section in the Strategic report, 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
9.8.4 (1)
9.8.4 (12-13)
Topic
Interest capitalised by the
Group during the year
Shareholder waivers of
dividends and future dividends
Location
Financial statements, note 13
on page 184
Financial statements, note 24
on page 198
Other disclosure requirements set out in LR 9.8.4 R are not applicable to the Company.
Disclosures required pursuant to Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 as updated by Companies (Miscellaneous
Reporting) Regulations 2018 can be located as follows:
Topic
Financial risk management regarding financial
instruments
Greenhouse gas emissions
Employee engagement
Business relationships
Post balance sheet events
Likely future developments in the business of
the Group
Details of important events affecting the Group
Location
Note 2, pages 170 to 173
Page 41
Pages 30 to 31 and pages 44
to 46
Pages 30 to 31, 50 to 51 and
throughout the Strategic report
Note 35 on page 209
Page 26 and pages 68 to 77
Pages 24 to 27 and 68 to 77
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.
Dividends
An interim dividend of 7.2 pence per 60 pence ordinary share was declared in the year
(2019: 7.10 pence). Given the current level of uncertainty due to COVID-19, the
Board has decided to defer the decision on our final dividend for the year ended
31 March 2020. The Board will keep this under review during the financial year as the
impact of COVID-19 becomes clearer.
Major shareholdings
As at 31 March 2020, 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.
Name
Invesco Ltd
Standard Life Aberdeen PLC
Jupiter Asset Management Limited
Polaris Capital Management, LLC
Number of 60 pence ordinary
shares on date of notification
50,381,712
30,759,102
27,175,867
24,507,560
% of issued share capital
on date of notification
9.96%
6.08%
5.38%
4.85%
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.
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
2019, 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 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 18 July
2019 (the date the current authority was
granted) to the date of this Report. The
Company currently does not hold any
treasury shares.
Details of purchases of the Company’s
shares made in the year to 31 March
2020 by the Babcock Employee Share
Trust in connection with the Company’s
executive share plans are to be found in
note 24 on page 197.
Babcock International Group PLC Annual Report and Accounts 2020
137
Strategic reportGovernanceFinancial statements 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.
Borrowing facilities
In August 2019, the Group renewed its
five-year multi-currency revolving credit
facility of up to £775 million. 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.
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.
£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 issued
three tranches: €550,000,000 1.75%
Notes due in 2022; £300,000,000
1.875% Notes due in 2026; and
€550,000,000 1.375 % Notes due
in 2027.
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 122 and 123.
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.
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Babcock International Group PLC Annual Report and Accounts 2020
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.
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.
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, 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.
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.
Babcock International Group PLC Annual Report and Accounts 2020
139
Strategic reportGovernanceFinancial statements Additional statutory information continued
Nationality-related restrictions on
share ownership
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.
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 Chair of the relevant meeting (who
may exercise, or refrain from exercising,
such rights at his/her sole discretion).
The Affected Shares Notice may, if the
Directors determine, also require that the
Affected Shares must be disposed of within
ten 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.
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Babcock International Group PLC Annual Report and Accounts 2020
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 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, following the
restructuring of the Aviation sector, those
companies, in which the Company has an
interest and are required to comply with
the Regulation, (being those companies
operating aviation services in the EU) do
meet the requirement of the Regulation,
including those relating to nationality.
This belief is based on the Company’s
understanding of the application of the
Regulation. 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.
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.
The Board reviews notified actual or
potential conflicts as soon as possible.
The Board will consider whether a
conflict or potential conflict does 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).
Internal controls and
risk management
There has been a process for identifying,
evaluating and managing principal risks
throughout the year to 31 March 2020
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.
Management review data for consolidation
into the Group’s financial statements to
ensure that it reflects a true and fair view
of the Group’s results in compliance with
applicable accounting policies.
Babcock International Group PLC Annual Report and Accounts 2020
141
Strategic reportGovernanceFinancial statements Additional statutory information continued
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 Committee asks the Group Financial
Controller to report on the effectiveness
of the Group’s internal controls, and
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 80 to 82.
Going concern statement
The financial statements have been
prepared on the going concern basis
because the Directors have a reasonable
expectation that the Group has adequate
resources for a period of at least 12
months from the date of the approval of
the financial statements and that there
are no material uncertainties to disclose.
In assessing the appropriateness of
the going concern basis of accounting,
the Directors reviewed the resources
available to the Group in the form of cash
and committed facilities, which are the
£775 million five year multi-currency
revolving credit facility, the US$500
million loan notes, and the three tranches
of notes (€550 million 1.75% notes,
£300 million 1.875% notes and €550
million 1.375% notes) issued under the
Group’s Eurobond programme, along
with a baseline plan.
The baseline plan was adjusted to reflect
a range of estimated impacts of
COVID-19 on the Group over varying
periods (three months and six months).
This adjusted baseline plan has then
been subject to a further downside
stress scenario to twelve months.
The Directors also considered mitigating
actions, including deferral of non-essential
capital and revenue expenditure as well
as the deferral of dividends.
Having considered these matters, the
Directors do not believe there are any
material uncertainties to disclose in
relation to the Group’s ability to continue
as a going concern.
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. The Company’s financial
statements are prepared 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.
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
maintenance and integrity of the
corporate and financial information
included on the Company’s website.
Legislation in the United Kingdom governing
the preparation and dissemination of
financial statements may differ from
legislation in other jurisdictions.
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Babcock International Group PLC Annual Report and Accounts 2020
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 157 to
214) 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 2 to 143 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.
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.
Chair
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Chief Executive
Group Finance Director
Ruth Cairnie
Sir David Omand
Carl-Peter Forster
Prof. Victoire de Margerie
Ian Duncan
Lucy Dimes
Russ Houlden
Myles Lee
Kjersti Wiklund
Jeff Randall
Archie Bethel
Franco Martinelli
Approval of the Strategic report
and the Directors’ report
The Strategic report and the Directors’
report (pages 2 to 143) for the year
ending 31 March 2020 have been
approved by the Board and signed on its
behalf by:
Ruth Cairnie Archie Bethel
Chair Chief Executive
11 June 2020
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Strategic reportGovernanceFinancial statements Critical support:
adjacent markets
Shergar, an 84,000cbm LPG carrier owned by Petredec, fitted with a Babcock LPG cargo handling solution
144
Babcock International Group PLC Annual Report and Accounts 2020
Alan Duckett
Director, Sales & Design, LGE
LGE delivers world-leading,
environmentally-focused
and engineering-led cargo
handling and fuel gas
solutions to our customers,
through the application of
innovation in all that we
do; we cultivate our
people and our culture to
promote high integrity,
high performance and a
first class attitude to safety
in all business endeavours,
within the Commercial
Marine Industry.”
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Strategic reportGovernanceFinancial statements 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 2020 and of the Group’s loss 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 statements of financial position as at 31 March 2020; 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 note 4 to the financial statements, we have provided no non-audit services to the Group or the
Company in the period from 1 April 2019 to 31 March 2020.
Our audit approach
Overview
Materiality
• Overall Group materiality: £21.4 million (2019: £26 million), based on 5% of profit before tax, adjusted for amortisation of
acquired intangible assets and exceptional items.
• Overall Company materiality: £16.5 million (2019: £25 million), based on 1% of total assets restricted for the amount allocated as
part of group materiality.
Audit scope
• We conducted our audit work over the complete financial information for 28 of the largest and higher risk reporting components
located in the UK, Europe, South Africa and Australia.
• In addition, we performed an audit of specific balances and transactions at one further reporting component and of 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 of tax, treasury and pensions where we performed our audit
work, accounted for 84% of Group revenue and 70% of Group profit before tax, adjusted for amortisation of acquired intangibles
and exceptional items.
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Key audit matters
• Contract accounting and revenue/profit recognition (Group);
• Valuation of defined benefit pension liabilities and pensions assets (Group);
• Goodwill impairment (Group);
• Presentation and classification of exceptional items (Group);
• Completeness and accuracy of lease liability and right of use asset (Group); and
• Impact of Covid-19 (Group).
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 judgments, 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 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
judgmental 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.
Audit procedures performed by the Group engagement team and/or component auditors included:
• 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;
• Review of internal audit reports; and
• We also agreed financial statement disclosures to underlying supporting documentation and performed a review of component
auditors’ 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 judgment, to understand thematically any issues within the Group and evaluated 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 judgment, 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.
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Key audit matter
Contract accounting and revenue/profit
recognition (Group)
Refer to note 3 in the Group financial
statements and to section 2 of the
Report of the Audit and Risk Committee.
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 judgment 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
and site conditions based on management’s
expert where applicable;
• Forecast contract variations and the
outcome of claims to the extent that it is
highly probable that a significant reversal
of revenue will not occur, and dependent
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 judgments
that could lead to different revenue and profit
being reported in the financial statements.
How our audit addressed the key audit matter
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 judgment
and estimation uncertainty. Where applicable, we:
• Attended management’s contract review meetings and, through interviews
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), discussion with external
legal advisors, in certain cases discussions with customers, 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 obtained supporting evidence of 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 material 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 and to comply with the relevant accounting standards.
We assessed the related disclosures, including those required under IFRS 15,
contained in the Group financial statements, and consider them to
be appropriate.
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Key audit matter
Valuation of defined benefit pension liabilities and
pension assets (Group)
Refer to note 26 of the Group financial statements and to
section 6 of the Report of the Audit and Risk Committee.
The Group operates a number of defined benefit pension
plans, giving rise to net pension asset of £145m (2019: £28m
liability), gross pension assets of £4,411m (2019: £4,582m)
and gross pension liabilities of £4,266m (2019: £4,610m),
which are significant in the context of the overall balance
sheet of the Group.
The valuation of pension liabilities requires judgment and
technical expertise in choosing appropriate assumptions such
as salary increases, mortality rates, discount rates and inflation
levels. Management engaged external actuarial experts to assist
them in selecting appropriate assumptions and to calculate
the liabilities.
The liabilities for Devonport, Babcock International Group and
the Rosyth pension schemes were calculated by performing
a full member-by-member valuation at 31 March 2020.
The Group’s pension assets, given the Covid-19 uncertainty,
require additional judgment regarding the valuation of
certain assets.
Inappropriate selection of assumptions or methodologies for
calculating the pension liabilities could result in a material
difference in the value of the liabilities.
Inappropriate valuation of pension assets due to economic
uncertainty could lead to a material difference on the
balance sheet.
How our audit addressed the area of focus
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 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;
• Reviewing the calculations prepared by external actuaries
to assess the consistency of the assumptions used; and
• Reviewing legal and accounting conclusions received by
the Group from third parties for the recognition of surpluses.
Based on our procedures, we found no exceptions and overall
considered management’s key assumptions to be within
acceptable ranges.
For pension assets we have confirmed the valuation with third
parties and assessed the reasonableness of the asset valuations.
We assessed the related disclosures included in the Group
financial statements and consider them to be appropriate.
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Key audit matter
Goodwill impairment (Group)
Refer to note 11 of the Group financial statements and to
section 5 of the Report of the Audit and Risk Committee.
The Group has goodwill of £2,171m (2019: £2,584m)
allocated between the Aviation, Nuclear, Marine and Land
sectors which is subject to an annual impairment review.
An impairment charge of £395m has been recorded against the
Aviation goodwill balance for the year ended 31 March 2020.
The impairment assessments used to support the carrying value
of the Group’s four goodwill cash generating units (‘CGUs’)
involve the application of subjective judgment about future
business performance.
Management considered certain assumptions in the value in use
calculations supporting the impairment assessments, including
the forecast cash flows, the short and long term growth rates
and the discount rates applied.
How our audit addressed the area of focus
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 including Covid-19
considerations 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
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, creating additional impairments.
• The reliability of cash flow forecasts through a review
of actual past performance and comparison with
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.
For the Aviation CGU we performed alternative sensitivity
scenarios to ascertain the extent of changes in assumptions
that would impact the amount of goodwill impairment
recognised. Our findings were discussed with the Audit
and Risk Committee and we concluded the impairment
charge recognised was within an acceptable range.
We assessed the related disclosures included in the Group
financial statements, including the sensitivities provided in
respect of the Aviation Sector CGU for the long term growth
rates and discount rates and consider them to be appropriate.
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Key audit matter
Presentation of exceptional items (Group)
Refer to note 5 in the Group financial statements and to
section 3 of the Report of the Audit and Risk Committee.
The Group has recognised net exceptional items related
to business reorganisation, restructuring, impairment and
legal provisions of £503m before tax for the year ended
31 March 2020.
These items comprise a goodwill impairment of £395m,
as described above, restructuring costs of £51m, asset
impairments of £36m, a legal provision for £46m and other
costs of £34m offset by a net profit on exits and disposals
of £59m.
Restructuring programmes announced within Aviation, Nuclear
and Land have led to exceptional costs for redundancies
and other costs directly attributable to the programmes.
Determining the restructuring costs required management to
make judgments over the key inputs and assumptions, including
the amount and timing of expected costs that will be incurred.
As required by accounting standards, management performed
impairment assessments for certain Aviation assets, having
identified impairment indicators arising from industry and
market conditions. The determination of the recoverable
amount of tangible assets requires judgment, 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.
Items may be inappropriately classified as exceptional in the
year. Additionally, changes to the key assumptions used by
management could result in the calculated exceptional charges
being different to those reported in the financial statements.
How our audit addressed the area of focus
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. Additionally, we have challenged the robustness of
management’s policy and how this was applied.
We considered management’s programmes for the business
reorganisation, restructuring, exits and disposals.
We assessed the key inputs and assumptions used by
management in calculating business exit and 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 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 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 material
items were identified.
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Key audit matter
Completeness and valuation of lease liability and right
of use asset (Group)
Refer to note 14 and 31 in the Group financial
statements and to section 4 of the Report of the
Audit and Risk Committee.
With the adoption of IFRS 16, the Group has recognised right-
of use assets and lease liabilities at 31 March 2020 of £639m
and £673m respectively and incurred depreciation charges of
£129m on the right-of-use assets and interest of £28m on the
lease liabilities for the year ended 31 March 2020.
The valuation of the lease liabilities and right of use assets
requires judgment when determining the discount rates to
obtain the present value of the leases.
All leases across the Group and the relevant data points from
each lease need to be captured to ensure all leases are
recorded accurately.
The impact of not capturing all leases across the Group,
not capturing all relevant data points from each lease and/or
inaccurately calculating the right-of-use asset or lease liability
could be material.
Impact of Covid-19 (Group)
Refer to section 5 of the Report of the Audit and
Risk Committee.
The Covid-19 outbreak has been declared a pandemic by the
World Health Organisation. It has caused significant disruption
and economic uncertainty globally.
The outbreak has had an impact to the Group’s future
expected cash flows due to the heightened uncertainty, which
has a direct impact on the going concern assessment and asset
impairment assessments. Additionally, there is a heightened risk
of the Group’s controls being bypassed with some employees
working remotely more often in line with government advice.
Management has included Covid-19 considerations when
modelling future cash flows and assessing assets for impairment.
Changes to the Group’s future cash flows and the general
economic environment as a result of Covid-19 could result
in impairments to the Group’s assets and reduce liquidity.
How our audit addressed the area of focus
We assessed management’s process for identifying the
completeness of the Group’s leases.
We agreed the lease input data back to the lease contract for
a sample of leases. We recalculated the right-of-use asset and
lease liability balances for the sample selected and compared
these to the outputs from management’s IFRS 16 model.
We recalculated the depreciation charge on the right of use
assets and interest charge on the lease liabilities.
We tested the assumptions used in the incremental borrowing
rates used to discount the future cash flows associated with the
right-of-use assets and lease liabilities, including consideration of
management’s methodology compared to common practice.
We considered potential impairment indicators to the
carrying value of the right of use assets and tested any
relevant impairment charges where previous onerous
lease provisions were in place at the adoption date.
We assessed the reconciliation of the lease liabilities as
determined under IFRS 16 to that under the previous leasing
standard, IAS 17.
We assessed the appropriateness and completeness of the
disclosures included in the Group financial statements.
No material issues were identified from our work.
We reviewed and evaluated management’s cash flow
forecasts and the process by which they were determined
and approved, agreeing the forecasts with the latest Board
approved budgets and confirming the mathematical
accuracy of underlying calculations.
We assessed management’s forecast assumptions and
various scenarios in respect of the impact of Covid-19 on the
Group’s ability to continue as a going concern. We concluded
management’s adjusted forecasts in relation to Covid-19
were reasonable. We have assessed the Group’s liquidity
and confirmed the revolving credit facility terms to
support management’s going concern assessment.
We considered any potential impairment indicators to
the carrying value of assets including pension assets and the
broader impact to the Group’s financial statements as detailed
in the ‘Goodwill Impairment’ and ‘Valuation of defined benefit
pension liabilities and pensions assets’ Key Audit Matters above.
We have tested journal entries posted at both a component and
Group level to underlying support with consideration to the risk
of management override of controls. We assessed the related
Covid-19 disclosures included in the Group financial statements
and consider them to be appropriate.
We determined that there were no key audit matters applicable to the Company to communicate in our report.
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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 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 28 components that, in our view, required an audit of
their complete financial information due to their size and/or risk. 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 Australia.
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.
Due to the current restrictions on travel and social distancing measures, the Group engagement leader and senior members of
the Group team used video conferencing to oversee the component auditor work and had remote discussions with management
in the UK, France, Italy, Spain, South Africa and Australia during the audit. Senior team members also attended the clearances for
our significant risk components telephonically. During 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 84% of Group revenue and 70% of Group profit
before tax adjusted for amortisation of acquired intangible assets and exceptional items.
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 judgment, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Company financial statements
Overall materiality
£21.4 million (2019: £26 million).
£16.5 million (2019: £25 million).
How we determined it
5% of profit before tax, adjusted for
amortisation of acquired intangibles assets
and exceptional items.
1% of total assets restricted for the amount
allocated as part of group materiality.
Rationale for benchmark applied Given the contractual nature of the
business, and consistent with the prior
year, we adjusted for amortisation of
acquired intangible assets and exceptional
items as this better reflects the underlying
performance and nature of operations.
When a business is acquired, the value of
contractual relationships is fair valued and
included on the balance sheet as intangible
assets, representing the future profitability
of the contracts.
Considering the nature of the business and
activities in the Company (holding activities)
we use the Company total assets value as
a basis for the calculation of the overall
materiality level.
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 £16.5 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 million (Group audit) (2019: £1 million) and £1 million (Company audit) (2019: £1 million) as well as misstatements below
those amounts that, in our view, warranted reporting for qualitative reasons.
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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.
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.
Reporting on other information
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.
We have nothing to report.
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 2020 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 80 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 93 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)
154
154 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
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 142, 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 108 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.
Babcock International Group PLC Annual Report and Accounts 2020
155
Babcock International Group PLC Annual Report and Accounts 2020 155
Strategic reportGovernanceFinancial statements
Independent auditors’ report to the members of Babcock International Group PLC continued
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 appointed by the members during 2002 to audit the
financial statements for the year ended 31 March 2003 and subsequent financial periods. The period of total uninterrupted
engagement is 18 years, covering the years ended 31 March 2003 to 31 March 2020.
John Waters (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
11 June 2020
156
156 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
Group income statement
For the year ended 31 March 2020
Revenue1
Cost of revenue
Gross profit
Distribution expenses
Administration expenses
Goodwill impairment
Profit on disposal of subsidiaries
Operating (loss)/profit before share of results of joint ventures
and associates
Share of results of joint ventures and associates
Group and joint ventures and associates
Operating profit before amortisation of acquired intangibles and
exceptional items
Investment income
Underlying operating profit2
Amortisation of acquired intangibles
Exceptional items – Group
Exceptional items – joint ventures and associates
Investment income – Group
Joint ventures and associates finance costs
Joint ventures and associates income tax expense
Operating (loss)/profit
Finance costs
Investment income
Retirement benefit interest
Finance costs
Finance income
(Loss)/profit before tax
Income tax expense
(Loss)/profit for the year
Attributable to:
Owners of the parent
Non-controlling interest
Earnings per share
Basic
Diluted
Note
3
3, 4
3, 15
3
5
5
3
26
6
6
3
8
10
2020
£m
Total
£m
4,449.5
(3,940.5)
509.0
(9.3)
(344.3)
(395.0)
74.7
(164.9)
58.6
2019
£m
Total
£m
4,474.8
(3,928.3)
546.5
(11.9)
(352.9)
–
14.8
196.5
83.8
497.2
27.0
524.2
(87.3)
(500.8)
(2.1)
(1.1)
(22.8)
(16.4)
1.1
(0.1)
(85.9)
13.0
559.3
29.1
588.4
(101.0)
(160.8)
–
(1.3)
(24.1)
(20.9)
(106.3)
280.3
1.3
0.3
(62.7)
16.0
(71.9)
(178.2)
(15.0)
(193.2)
(195.2)
2.0
(193.2)
(38.6)p
(38.6)p
(45.1)
235.2
(35.4)
199.8
199.4
0.4
199.8
39.5p
39.4p
1. Revenue does not include the Group’s share of revenue from joint ventures and associates of £422.2 million (2019: £685.8 million).
2. Including IFRIC 12 investment income but before exceptional items and amortisation of acquired intangibles.
Babcock International Group PLC Annual Report and Accounts 2020
157
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Strategic reportGovernanceFinancial statements
Group statement of comprehensive income
For the year ended 31 March 2020
(Loss)/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/(loss), net of tax
Total comprehensive (loss)/income
Total comprehensive (loss)/income attributable to:
Owners of the parent
Non-controlling interest
Total comprehensive (loss)/income
Group statement of changes in equity
Note
2020
£m
(193.2)
2019
£m
199.8
15
15
26
(26.3)
(12.0)
2.5
–
(14.4)
(31.0)
(0.5)
0.4
(1.3)
1.8
2.3
(0.3)
99.9
(20.2)
0.9
32.7
(160.5)
(160.4)
(0.1)
(160.5)
(58.4)
10.4
(0.4)
(79.3)
120.5
122.3
(1.8)
120.5
For the year ended 31 March 2020
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
Transition to IFRS 16
At 1 April 2019
Total comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Own shares
Transactions with non-
controlling interests (note 30)
Net movement in equity
At 31 March 2020
Share
capital
£m
303.4
–
–
–
–
–
–
303.4
–
303.4
–
–
–
–
–
–
–
303.4
Share
premium
£m
Other
reserve
£m
873.0 768.8
–
–
–
–
–
–
–
–
–
–
–
–
–
873.0 768.8
–
873.0 768.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
873.0 768.8
Capital
redemption
£m
30.6
–
–
–
–
–
–
30.6
–
30.6
–
–
–
–
–
–
–
30.6
Retained
earnings
£m
994.9
151.0
(150.5)
2.4
2.4
(2.0)
3.3
998.2
(22.4)
975.8
(114.6)
(152.1)
2.9
1.9
(2.9)
(0.2)
(265.0)
710.8
Hedging
reserve
£m
(74.5)
0.1
–
–
–
–
0.1
(74.4)
–
(74.4)
(21.6)
–
–
–
–
–
(21.6)
(96.0)
Translation
reserve
£m
Owners
of the
parent
£m
(3.3) 2,892.9
122.3
(150.5)
2.4
2.4
(28.8)
–
–
–
Non-
controlling
interest
£m
Total
equity
£m
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
(22.4)
(32.1) 2,845.1
(160.4)
(24.2)
(152.1)
–
2.9
–
1.9
–
(2.9)
–
–
1.9
3.9
(0.7)
(26.1)
17.4 2,884.9
(22.4)
17.4 2,862.5
(160.5)
(0.1)
(153.9)
(1.8)
2.9
–
1.9
–
(2.9)
–
(0.2)
–
(24.2)
(310.8)
(56.3) 2,534.3
–
0.2
(1.7)
(312.5)
15.7 2,550.0
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.
158
158 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
Group statement of financial position
As at 31 March 2020
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Right of use assets
Investment in joint ventures and associates
Loan to joint ventures and associates
Retirement benefits surpluses
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
Lease liabilities
Trade and other payables
Deferred tax liabilities
Other financial liabilities
Retirement benefit deficits
Provisions for other liabilities
Current liabilities
Bank and other borrowings
Lease liabilities
Trade and other payables
Income tax payable
Other financial liabilities
Provisions for other liabilities
Total liabilities
Total equity and liabilities
Note
2020
£m
2019
£m
11
12
13
14
15
15
26
22
16
17
18
22
19, 28
24
21
20
16
22
26
23
21
20
22
23
2,171.3
379.5
951.1
638.8
148.0
48.6
325.3
12.8
21.5
190.6
4,887.5
193.5
930.8
13.6
153.9
1,351.4
2,643.2
7,530.7
303.4
873.0
647.1
710.8
2,534.3
15.7
2,550.0
2,050.0
534.8
2.1
115.2
35.6
180.1
30.4
2,948.2
400.1
138.0
1,366.3
5.9
9.0
113.2
2,032.5
4,980.7
7,530.7
2,584.2
448.9
1,014.3
–
153.2
42.5
226.9
15.5
93.8
150.9
4,730.2
196.5
917.1
11.1
48.0
275.2
1,447.9
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
The notes on pages 161 to 214 are an integral part of the consolidated financial statements. The Group financial statements on
pages 158 to 214 were approved by the Board of Directors on 11 June 2020 and are signed on its behalf by:
A Bethel
Director
F Martinelli
Director
Babcock International Group PLC Annual Report and Accounts 2020
159
Babcock International Group PLC Annual Report and Accounts 2020 159
Strategic reportGovernanceFinancial statements
Group cash flow statement
For the year ended 31 March 2020
Cash flows from operating activities
Operating profit before amortisation of acquired intangibles and exceptional items
Amortisation of acquired intangibles and exceptional items
Operating (loss)/profit before share of results of joint ventures and associates
Depreciation and impairment of property, plant and equipment
Depreciation and impairment of right of use assets
Amortisation of intangible assets
Goodwill impairment
Investment income
Equity share-based payments
Profit on disposal of subsidiaries, businesses and joint ventures and associates
Loss/(profit) on disposal of property, plant and equipment
Loss on disposal of intangible assets
Cash generated from operations before movement in working capital and
retirement benefit payments
Increase in inventories
(Increase)/decrease in receivables
Increase in payables
Increase 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
Lease principal payments
Lease assets issued and repaid
Bank loans repaid
Loans raised and facilities drawn down
Dividends paid to non-controlling interest
Transactions with non-controlling interest
Movement on own shares
Net cash flows from financing activities
Net increase/(decrease) 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
2020
£m
2019
£m
417.4
(582.3)
(164.9)
94.2
143.6
96.5
395.0
1.1
2.9
(74.7)
3.3
0.2
497.2
(10.9)
(8.4)
7.4
62.4
(73.5)
474.2
(72.4)
(84.9)
13.5
330.4
101.6
52.0
30.1
(145.5)
(29.1)
(6.4)
2.7
(152.1)
(175.0)
19.9
(140.0)
1,202.4
(1.8)
–
(2.9)
750.5
1,083.6
275.2
(10.1)
1,348.7
5
3
3
29
29
15
15
9
28
28
28
28
30
28
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
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160 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
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 142,
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 2019:
• IFRS 16, ‘Leases’, effective from 1 January 2019 and endorsed by the EU. Operating leases have now been recognised on the
statement of financial position; the impact of this standard has been to recognise a lease liability and right of use asset on the
Group’s statement of financial position in relation to almost all leases formerly classified as operating leases. The change has
resulted in an improvement in operating profit, with the depreciation of the right of use asset being less than the operating lease
charge under IAS 17. This has however been offset by an increase in interest charge with an immaterial net impact on profit
before tax resulting from the Group’s maturity of leases on adoption. Please refer to Note 31 and below for further details.
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 2019 and did not have
a material impact on the consolidated financial statements:
• IAS 19, ‘Employee Benefits’, amended effective from 1 January 2019. The amendment related to treatment of plan amendments,
curtailments and settlements.
• IFRIC 23, ‘Uncertainty over Income Tax Treatments’, effective from 1 January 2019.
• IFRS 9, ‘Financial Instruments’, amended effective from 1 January 2019.
• Annual improvement 2015-2017 Cycle, effective from 1 January 2019. Including clarifications on IFRS 3, IFRS 11, IAS 12
and IAS 23.
The following standards and amendments to IFRSs become effective for the period beginning on 1 April 2020 or later, but have
been early adopted by the Group for the period beginning on 1 April 2019:
• IFRS 9 and IFRS 7, ‘Financial Instruments’ and ‘Financial Instruments: Disclosures’, amended effective from 1 January 2020.
Amendments to IFRS 7 and IFRS 9 have been issued which modify specific hedge accounting requirements and allow it to be
assumed that the interest rate benchmark is not altered as a result of the uncertainties of LIBOR reform when performing hedge
effectiveness testing. These amendments are effective from 1 January 2020 with early adoption allowed. The Group has elected
to early adopt for the year ending 31 March 2020. There is no impact on the Group’s fair value hedge accounting as a result of
adopting the amendments.
(a) 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, the Group has now recognised almost all leases, where the Group is a lessee, on the statement of financial
position as the distinction between finance leases and operating leases has been removed. Both short-term leases and low-value
leases are exempt from IFRS 16, and instead their lease payments continue to be recognised as expenses on a straight-line basis.
The approach for lessors has remained largely unchanged.
Transition
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 was 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 have not been
restated for the year ended 31 March 2019.
Babcock International Group PLC Annual Report and Accounts 2020
161
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Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
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.
Subsequent measurement
Right-of-use assets are held at cost less accumulated depreciation and impairment. Any impairments are determined in line with
IAS 36, ‘Impairment of Assets’. Depreciation is charged on a straight-line basis over the full length of the lease.
Lease liabilities decrease over time by the net of lease payments made and the interest accrued. Interest is charged to the income
statement as the effect of discounting the future lease payments is unwound.
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 judgements and estimates have been made in applying the Group’s
accounting policies that have had a material effect on the amounts recognised in the financial statements. The application of
the Group’s accounting policies requires the use of estimates and the inherent uncertainty in certain forward-looking estimates
may result in a material adjustment to the carrying amounts of assets and liabilities in the next financial year. Critical accounting
estimates are subject to continuing evaluation and are based on historical experience and other factors, including expectations of
future events that are believed to be reasonable in light of known circumstances. Critical accounting estimates in relation to these
financial statements are considered below:
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1. Basis of preparation and significant accounting policies (continued)
Critical accounting estimates and judgements (continued)
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 around 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 historical 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.
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. In addition to the inflation and discount rate estimates, a key judgement relates to the availability of future accounting
surpluses under IFRIC 14. Further information on the key assumptions and sensitivities is included in note 26.
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 16.
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. This year the Group impaired the goodwill within the Aviation operating segment and, accordingly, reasonably possible
changes exist which would give rise to a further impairment. The carrying value of goodwill is included as a critical accounting
estimate given this impairment and also as a result of the significance of the remaining 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.
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Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Revenue (continued)
(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.
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.
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 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 on a systematic basis consistent with the transfer to the customer of the goods
and services to which the asset relates, provided that the contract is expected to result in future net cash inflows. These costs are
classified as current assets on the basis that the contracts represent the normal trading cycle.
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1. Basis of preparation and significant accounting policies (continued)
Revenue (continued)
(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 on a systematic basis consistent with the transfer to the customer of the goods and services
to which the asset relates. 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.
These costs are classified as current assets on the basis that the contracts represent the normal trading cycle.
(f) Principal versus agent considerations
A number of the Group’s contracts include promises in relation to procurement activity undertaken on behalf of customers at low or
nil margin, together with other promises. 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 performance obligation
by performance obligation 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, the exit of
business lines or markets and 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.
Provisions
A provision is recognised in the statement of financial position 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 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.
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Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Goodwill and intangible assets (continued)
(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.
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
statement of financial position 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 includes lease obligations and consists of the total of loans, bank overdrafts, cash and cash equivalents, joint venture and
associate loans and 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.
The Group’s key performance indicators exclude lease obligations from net debt in order to more closely align with the Group’s debt
covenants which are prepared on a pre-IFRS 16 basis and the financial review presents net debt and related performance measures
including and excluding lease obligations for this purpose.
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1. Basis of preparation and significant accounting policies (continued)
Leases
For all leases in which the Group is a lessee (other than those meeting the criteria detailed below), the present value of future lease
payments are capitalised to the statement of financial position in accordance with IFRS 16 ‘Leases’, with a corresponding right of
use asset recognised. Depreciation of right of use assets is recognised as an expense in the income statement on a straight-line
basis over the shorter of the asset’s useful life or expected term of the lease.
Interest on the lease liability is recognised as a finance expense in the income statement over time, with the rate being determined
at lease inception based on a number of factors including asset type, lease currency and lease term.
Right of use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable, with the impairment expense being recognised in the income statement. Where a lease is terminated early,
any termination fees or gain or loss relating to the release of right of use asset and lease obligation are recognised as a gain or loss
through the income statement.
Payments in respect of short-term leases not exceeding 12 months in duration or low-value leases are expensed straight-line to the
income statement as permitted by IFRS 16 ‘Leases’.
As a lessor, the Group recognises assets held under a lease in the statement of financial position 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.
In previous years, under IAS 17, 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.
Inventory
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 statement of financial position 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 statement of financial position 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.
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 statement of financial position 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.
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Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Foreign currencies (continued)
Exchange differences arising from the translation of the statement of financial positions 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
statement of financial position reflects the IAS 19 measurement of the schemes’ surpluses or deficits at the statement of financial
position 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.
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.
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1. Basis of preparation and significant accounting policies (continued)
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 (e.g. 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.
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 2020 or later periods but which the Group has not early adopted.
Standards, amendments and interpretations that are not yet effective and the impact on the Group’s operations is
not expected to be material:
• IFRS 3, ‘Business Combinations’, amended effective from 1 January 2020. The amendment related to the definition of a business
on a combination.
• IAS 1, ‘Presentation of Financial Statements’, and IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’,
amendments effective from1 January 2020 related to the definition of material.
• IFRS 17, ‘Insurance Contracts’, effective 1 January 2021.
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Notes to the Group financial statements continued
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 available financial capital as shareholder equity, net debt plus undrawn committed borrowing facilities.
Available financial capital includes surplus cash held on deposit as a result of fully drawing the revolving credit facility in March 2020.
Objective
on available
financial
capital
Policy
To ensure an appropriate level of capital and available financial capital to maintain liquidity and the 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 which is particularly
relevant as a result of the COVID-19 crisis.
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 between one and one and
a half times, 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 as we are currently
experiencing during the COVID-19 crisis. This is not to rule out acquisition spikes above one and a half 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 one and a half times or below within a reasonable time frame.
Performance The interest and net debt to EBITDA ratios, used by the Group to evaluate capital, are set out below. The net
debt to EBITDA ratio aligns with the Group’s key performance indicator as set out and defined on page 21 noting
that the measure is calculated on a pre-IFRS 16 basis to more closely align with the Group’s debt covenants. Net
debt to EBITDA is broadly unchanged at 1.7 times in 2020 (2019: 1.6 times). Interest cover is as presented in
the financial review on page 56, on a pre-IFRS 16 basis, in order to more closely align with the Group’s
debt covenants.
Interest cover – covenant basis
Net debt to EBITDA – covenant basis
2020
11.5
1.7x
2019
13.0
1.6x
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 well below covenanted levels.
Current debt covenanted ratios reflect the strength of the Group in the current crisis and will leave sufficient
headroom for funding of organic growth and for bolt on acquisitions when circumstances allow. 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.
170
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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 excluding lease obligations divided by underlying earnings before interest, tax, depreciation and
amortisation but excluding IFRS 16 depreciation), ROIC (defined as underlying operating profit divided by net debt excluding lease
obligations 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 excluding IFRS 16 interest). Net debt
to EBITDA and ROIC align with the Group’s key performance indicators as set out and defined on page 21 noting that the measures
are calculated on a pre-IFRS 16 basis, to more closely align with the Group’s debt covenants. Interest cover is as presented in the
financial review on page 63 on a pre-IFRS 16 basis, in order to more closely align with the Group’s debt covenants.
Through the monitoring of these metrics it remains the Group’s intention to ensure the business is prudently funded and to maintain
statement of financial position strength at this time, balancing risk and price on the capital markets and retaining sufficient flexibility
to fund future organic and acquisitive growth as described further within its capital allocation policy on page 64.
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 and SEK. The USD exposure arises firstly through the USD500
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. Similarly, the EUR exposure arises firstly through
EUR 550 million of Eurobonds which are retained as hedges against our Euro businesses and also through a further EUR 550 million
raised in the year, which are swapped into Sterling and secondly, 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 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 statement of financial positions 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 GBP to Euro, being £7.2 million (2019: Euro to US Dollars £15.2 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 £0.7 million (2019: £0.5 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 25% for
Canadian and Australian Dollars and South African Rand.
Babcock International Group PLC Annual Report and Accounts 2020
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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 (2019: ±50bp), with pre-tax effect annualised and an additional shift in variable rates for the floating rate element
of the gross debt, offset by short-term money market deposits of surplus cash. 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
2020
£m +50bp
(1.1)
9.8
£m –50bp
1.1
(9.8)
2019
£m +50bp
(2.0)
1.9
£m –50bp
2.0
(1.9)
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 2020, the Group had 60% fixed rate debt (2019: 74%) and 40% floating rate debt
(2019: 26%) based on gross debt including derivatives of £3,020.4 million (2019: £1,336.4 million).
The percentages for this year include the fully drawn down revolving credit facility which if excluded
would result in 80% fixed rate debt and 20% floating rate debt. For further information see note 22.
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 cash and/or availability under committed credit lines (see note 21).
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 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.
Policy
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 corporate debt facilities include: a £775 million
Revolving Credit Facility maturing in August 2024, US$500 million US private placement notes maturing in March
2021, a EUR 550 million Eurobond maturing in October 2022, a £300 million ten year Sterling bond maturing in
October 2026 and a EUR 550 million Eurobond maturing in September 2027. These borrowing and debt facilities
provide the Group with total available committed banking facilities and loan notes of £2.4 billion and sufficient
sources of liquidity and headroom to meet the Group’s ongoing commitments. For further information see note 21.
172
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Babcock International Group PLC Annual Report and Accounts 2020
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 statement of financial position 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 2020
Bank and other borrowings*
Derivative financial instruments
Trade and other payables**
At 31 March 2019
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
429.4
113.1
1,119.1
62.9
(1.2)
1,142.6
21.3
8.7
1.0
424.1
74.1
0.5
1,303.7
(6.2)
0.7
632.6
(4.7)
0.4
Over
5 years
£m
823.6
(23.4)
0.3
316.3
(1.5)
0.8
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 statement of financial position 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 are not
hedge accounted.
At 31 March 2020
Forward derivative contracts – hedges:
• Outflow
• Inflow
At 31 March 2019
Forward derivative contracts – hedges:
• Outflow
• Inflow
Less than
1 year
£m
Between
1 and 2 years
£m
Between
2 and 5 years
£m
Over
5 years
£m
790.7
894.8
147.3
156.2
91.9
85.9
494.9
488.9
392.6
391.4
418.0
493.3
117.9
113.6
16.2
15.1
Babcock International Group PLC Annual Report and Accounts 2020
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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 naval ships and infrastructure in the UK and internationally.
Nuclear – through-life support of submarines and complex engineering services in support of major decommissioning programmes
and projects, training and operation support, new build programme management and design and installation in the UK and,
increasingly, 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.
The Group Chief Executive, the chief operating decision maker as defined by IFRS 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 IFRS 8. However the business represents less than 10% of the Group’s revenues, profits and assets and, as
permitted by IFRS 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 of the Land sector.
On 1 April 2019 a single Nuclear operating segment was established by combining our naval nuclear business, included within the
Marine operating segment, with our civil nuclear business within the Nuclear operating segment. The 2019 comparatives have been
restated to reflect this.
2020
Revenue including joint ventures and associates
Less: joint ventures and associates revenue
Revenue
Operating (loss)/profit before share of results of joint
ventures and associates
Exceptional items
Acquired intangible amortisation – Group
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 – Group
Exceptional items – joint ventures and associates
(Loss)/profit before tax
* Before amortisation of acquired intangibles and exceptional items.
Marine
£m
1,206.9
43.1
1,163.8
Nuclear
£m
1,110.9
212.5
898.4
Land
£m
1,553.6
18.9
1,534.7
Aviation
£m
1,000.3
147.7
852.6
Unallocated
£m
–
–
–
Total
£m
4,871.7
422.2
4,449.5
207.7
(72.5)
5.3
140.5
0.2
3.3
–
144.0
(0.5)
(1.1)
(5.3)
–
–
72.5
–
209.6
94.2
19.5
0.4
114.1
–
12.2
–
126.3
–
(2.5)
(0.4)
–
–
(19.5)
(2.1)
101.8
49.6
14.2
35.8
99.6
0.9
32.0
1.4
133.9
0.3
(7.0)
(35.8)
(2.0)
–
(14.2)
–
75.2
(513.9)
538.1
40.0
64.2
–
32.3
24.5
121.0
(22.6)
(5.8)
(40.0)
(3.8)
–
(538.1)
–
(489.3)
(2.5)
1.5
–
(1.0)
–
–
–
(1.0)
–
–
–
–
(73.0)
(1.5)
–
(75.5)
(164.9)
500.8
81.5
417.4
1.1
79.8
25.9
524.2
(22.8)
(16.4)
(81.5)
(5.8)
(73.0)
(500.8)
(2.1)
(178.2)
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174 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
3. Segmental information (continued)
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 – Group
Acquired intangible amortisation – Group
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 – Group
Profit before tax
* Before amortisation of acquired intangibles and exceptional items.
Inter divisional revenue is immaterial.
Marine
(restated)
£m
1,086.0
20.3
1,065.7
Nuclear
(restated)
£m
1,318.9
465.7
853.2
Land
£m
1,620.2
60.2
1,560.0
Aviation
£m
1,135.5
139.6
995.9
Unallocated
£m
–
–
–
Total
£m
5,160.6
685.8
4,474.8
110.4
22.5
4.7
137.6
0.3
3.3
–
141.2
(0.4)
(1.3)
(4.7)
–
–
(22.5)
112.3
89.8
16.0
0.7
106.5
–
37.0
–
143.5
–
(7.2)
(0.7)
–
–
(16.0)
119.6
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)
(21.0)
18.2
–
(2.8)
–
–
–
(2.8)
–
–
–
–
(46.4)
(18.2)
(67.4)
196.5
160.8
95.2
452.5
1.3
106.8
27.8
588.4
(24.1)
(20.9)
(95.2)
(5.8)
(46.4)
(160.8)
235.2
Revenues of £2.3 billion (2019: £2.2 billion) are derived from a single external customer. These revenues are attributable across
all sectors.
The segment assets and liabilities at 31 March 2020 and 31 March 2019 and capital expenditure and lease payments for the years
then ended are as follows:
Marine
Nuclear
Land
Aviation
Unallocated
Group total
Assets
Liabilities
Capital expenditure
Lease payments
2020
£m
719.8
545.9
1,630.6
2,567.6
2,066.8
7,530.7
2019
(restated)
£m
687.4
517.0
1,673.2
2,466.9
833.6
6,178.1
2020
£m
402.9
163.0
427.4
433.1
3,554.3
4,980.7
2019
(restated)
£m
427.3
145.4
515.5
408.3
1,796.7
3,293.2
2020
£m
32.4
23.5
21.7
90.5
6.4
174.5
2019
(restated)
£m
30.0
28.7
16.2
141.4
10.7
227.0
2020
£m
9.1
3.7
17.7
143.0
1.5
175.0
2019
£m
–
–
4.6
21.8
–
26.4
Capital expenditure represents additions to property, plant and equipment and intangible assets. Proceeds from the sale of assets
totalled £30.1 million (2019: £78.5 million). Proceeds are in the main within the Aviation sector. See note 20 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 including lease
obligations, 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 15.
Babcock International Group PLC Annual Report and Accounts 2020
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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 2020 and
31 March 2019 is as follows:
Marine
Nuclear
Land
Aviation
Unallocated
Group total
Depreciation
Amortisation of
intangible assets
2020
£m
8.1
25.8
10.1
30.6
6.1
80.7
2019
(restated)
£m
8.1
21.0
17.9
39.9
6.9
93.8
2020
£m
10.0
0.7
37.6
41.2
7.0
96.5
2019
(restated)
£m
9.7
0.9
46.2
46.6
6.6
110.0
The geographic analysis for non-current assets by location of those assets for the years ended 31 March 2020 and 31 March 2019 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
2020
£m
2,745.3
1,335.2
34.9
16.1
167.9
37.9
4,337.3
325.3
12.8
21.5
190.6
4,887.5
The geographic analysis by origin of customer for the years ended 31 March 2020 and 31 March 2019 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 2020 and 31 March 2019 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
2020
£m
2,998.9
509.0
358.0
198.5
196.1
189.0
4,449.5
2020
£m
607.5
101.6
709.1
3,734.3
6.1
4,449.5
2019
£m
2,825.3
1,165.7
34.2
7.0
175.0
37.2
4,244.4
226.9
15.5
92.5
150.9
4,730.2
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
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 4.
176
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Babcock International Group PLC Annual Report and Accounts 2020
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)
Depreciation of right-of-use assets
Depreciation of property, plant and equipment (PPE)
– under finance leases
Amortisation of intangible assets
• acquired intangibles
• other
Impairment of goodwill
(Loss)/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
2020
£m
1,605.6
2019
£m
1,611.6
428.3
(7.5)
80.7
129.4
–
81.5
15.0
96.5
395.0
(3.3)
0.2
–
–
0.2
1.2
12.7
504.5
(5.9)
81.0
–
12.8
95.2
14.8
110.0
–
5.4
0.3
32.4
124.4
0.4
1.6
(5.9)
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
Other non-audit services
Total fees paid to the Group’s auditor and network firms
2020
£m
2019
£m
0.9
2.2
0.1
3.2
0.6
1.9
–
2.5
Babcock International Group PLC Annual Report and Accounts 2020
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Notes to the Group financial statements continued
5. Exceptional items and acquired intangible amortisation
Group
Joint ventures and associates
Aviation
• Goodwill impairment
• Asset impairment*
• Right-of-use asset impairment
• Onerous contracts
• Onerous lease provisions
• Exit of Ghana and Congo
• Aviation restructuring
• Aviation other
Total Aviation
Restructuring
Exit and disposals
Pension GMP equalisation and bulk transfer
Exceptional items
Exceptional tax items and tax on exceptional items
Exceptional items – net of tax
Acquired intangible amortisation
Tax on acquired intangibles amortisation
Acquired intangible amortisation – net of tax
2020
£m
2019
£m
395.0
22.2
14.2
17.0
–
7.1
26.5
55.8
537.8
24.3
(61.3)
–
500.8
(25.7)
475.1
81.5
(17.3)
64.2
–
39.0
–
–
42.1
–
–
–
81.1
42.4
6.6
30.7
160.8
(16.7)
144.1
95.2
(20.4)
74.8
2020
£m
–
–
–
–
–
–
–
–
–
–
2.1
–
2.1
(0.4)
1.7
5.8
(1.1)
4.7
2019
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5.8
(1.1)
4.7
Total
2020
£m
2019
£m
395.0
22.2
14.2
17.0
–
7.1
26.5
55.8
537.8
24.3
(59.2)
–
502.9
(26.1)
476.8
87.3
(18.4)
68.9
–
39.0
–
–
42.1
–
–
–
81.1
42.4
6.6
30.7
160.8
(16.7)
144.1
101.0
(21.5)
79.5
*
Included within the asset impairment charge of £22.2 million is £13.5 million relating to the impairment of owned aircraft and plant and equipment.
Exceptional items are those items which are exceptional in nature or size.
Aviation market
Our Aviation sector operates in the defence, emergency services and oil and gas markets. While the defence market has remained
robust, and the emergency services market remains attractive in the medium term, the oil and gas market deteriorated significantly
the year. The three large providers of helicopter services who operate worldwide in oil and gas all emerged from Chapter 11
bankruptcy protection with reduced debt and written-down assets. This effectively reset global market pricing levels and forced
us to respond quickly to remain competitive. Furthermore, with a significant fall in the price of oil, we do not expect any recovery
in this market any time soon.
Aviation: Goodwill impairment
The further deterioration in the oil and gas market contributed significantly to our review of goodwill in the Aviation sector, which
relates to the acquisition of Avincis in 2014. As a result of this review, we have taken an impairment charge of £395.0 million to
reflect revised estimates of the future performance of the sector given the change in market conditions.
Aviation: Oil and Gas
We have written down assets in our oil and gas business by £22.2 million and recognised costs of £31.2 million in relation to the
impairment of right-of-use assets and onerous customer contracts. We also exited our oil and gas businesses in Ghana and Congo
and incurred charges of £7.1 million in relation to this.
Aviation: Restructuring
The impact of trading in our oil and gas aviation business combined with the impact of delays in our aerial emergency services
business led us to take action to reduce the cost base as a whole for the Aviation sector, creating a simplified European structure
to create an agile business competitive for the medium term. The Aviation restructuring charge was £26.5 million and includes
substantial redundancy costs.
Aviation: Other (including Italy anti-trust fine)
Other charges in our Aviation sector relate to a fine in Italy and associated legal costs, plus additional costs from our Brexit-related
restructure in addition to those recognised in the prior financial year.
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Babcock International Group PLC Annual Report and Accounts 2020
5. Exceptional items and acquired intangible amortisation (continued)
We have recognised a provision of £46 million in respect of a €51 million fine issued by the Italian Competition Authority to our
subsidiary, Babcock Mission Critical Services Italia S.p.A (“BMCS Italy”) following an unsuccessful first instance decision. This matter
was previously a contingent liability to the Group. The fine relates to a publicly available “tariff list” dating back to 2001 produced
by a trade association of which BMCS Italy was a member. BMCS Italy does not understand the basis of this decision, given that the
tariff list did not apply to any of the services provided by BMCS Italy and was not relevant to BMCS Italy’s activities. In particular,
BMCS Italy is convinced that the tariff list did not relate to the helicopter emergency medical services (“HEMS”) and, indeed, this
lack of relevance was explicitly stated on the front of the list from 2012, two years prior to the acquisition of BMCS Italy by Babcock
in 2014. BMCS Italy will appeal this decision.
Restructuring
This relates to restructuring programmes outside the Aviation sector. The end of the Magnox contract in our civil nuclear business
and the ongoing trading environment in the UK civil nuclear market has led us to take action to reduce the cost base of our civil
nuclear business as well. The Nuclear restructuring charge was £16.5 million. We have also further restructured our Rail business.
The total restructuring cost of £24.3 million includes substantial redundancy costs.
Exits and disposals
The total net credit related to exits and disposals was £59.2 million, consisting of a £74.7 million gain on the sale of Context partially
offset by additional costs from exits in the last financial year and the costs of exiting areas of our nuclear manufacturing business.
6. Net finance costs
Finance costs
Loans, overdrafts and associated interest rate hedges
Lease interest
Amortisation of issue costs of bank loan
Other
Total finance costs
Finance income
Bank deposits, loans and leases
Total finance income
Net finance costs
7. Employee costs
Wages and salaries
Social security costs
Share-based payments (note 25)
Pension costs – defined contribution plans (note 26)
Pension charges – defined benefit plans (note 26)
The average number of people employed by the Group during the year was:
Operations
Administration and management
2020
£m
45.6
28.2
2.1
10.0
85.9
13.0
13.0
72.9
2020
£m
1,323.6
156.0
2.9
85.7
37.4
1,605.6
2020
Number
30,116
4,104
34,220
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
Emoluments of the Executive Directors are included in employee costs above and reported in the Remuneration report.
Babcock International Group PLC Annual Report and Accounts 2020
179
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Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
7. Employee costs (continued)
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
Share-based payments
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
Total income tax expense
2020
£m
8.2
0.6
8.8
Total
2020
£m
56.2
–
19.4
75.6
(33.4)
(26.0)
–
(1.2)
(60.6)
15.0
2019
£m
10.3
0.2
10.5
2019
£m
51.6
11.6
22.8
86.0
(33.6)
(1.3)
(17.0)
1.3
(50.6)
35.4
The tax for the year is higher (2019: lower) than the standard rate of corporation tax in the UK. The differences are explained below:
(Loss)/profit before tax
(Loss)/profit on ordinary activities multiplied by rate of corporation tax in the UK of 19% (2019: 19%)
Effects of:
Expenses not deductible for tax purposes
Re-measurement of deferred tax re change in UK 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
2020
£m
(178.2)
(33.9)
0.9
(1.2)
(14.1)
(3.5)
–
66.8
15.0
2019
£m
235.2
44.7
0.4
1.3
(15.9)
3.4
(5.4)
6.9
35.4
In the UK 2019 Budget it was announced that the UK corporation tax rate would not reduce to 17% but would remain at 19% from
April 2020. As a result of this change, UK deferred tax balances have been re-measured at 19% as this is the tax rate that will apply
on reversal. As a result a credit of £1.2 million has been taken to the income statement in respect of the re-measurement of year
end UK deferred tax balances to 19%. A further £0.9 million has been credited to reserves in respect of the re-measurement of
year end UK deferred tax balances to 19%.
The European Commission decided during 2019 that certain aspects of the UK Finance Company Partial Exemption (“FCPE”) rules
constituted partial State Aid for the period from 2013 to 2018. The Group has been applying the FCPE rules to certain intra-group
interest income earned in that period. The Group submitted an appeal against the decision in September 2019, the UK Government
having, by then, also appealed the decision. Regardless of the outcome of these appeals, the Group believes the risk of a potential
liability to be remote, and that, in any event, such a liability would be immaterial.
The exceptional tax item and the tax effect of the other exceptional items are set out in more detail in note 5.
180
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Babcock International Group PLC Annual Report and Accounts 2020
9. Dividends
Final dividend for the year ended 31 March 2019 of 22.9p (2018: 22.65p) per 60p share
Interim dividend for the year ended 31 March 2020 of 7.20p (2019: 7.10p) per 60p share
2020
£m
115.7
36.4
152.1
2019
£m
115.5
35.0
150.5
In addition, the Directors have deferred a decision on a final dividend in respect of the financial year ended 31 March 2020 until
further notice (2019: 22.9p per 60p ordinary share).
10. (Loss)/earnings per share
Basic (loss)/earnings per share is calculated by dividing the profit/(loss) attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding during the year excluding those held in the Babcock Employee Share Trust.
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
2020
Number
2019
Number
505,284,584 505,165,728
947,702
506,157,333 506,113,430
872,749
(Loss)/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
2020
Earnings
£m
(195.2)
68.9
476.8
(1.2)
2020
Basic
per share
Pence
(38.6)
2020
Diluted
per share
Pence
(38.6)
2019
Earnings
£m
199.4
13.6
94.3
(0.2)
13.6
94.3
(0.2)
79.5
144.1
1.3
349.3
69.1
69.1
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
83.9
Babcock International Group PLC Annual Report and Accounts 2020
181
Babcock International Group PLC Annual Report and Accounts 2020 181
Strategic reportGovernanceFinancial statements
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
2020
£m
2019
£m
2,589.0
(20.6)
2.7
2,571.1
4.8
–
395.0
399.8
2,171.3
2,608.0
(9.4)
(9.6)
2,589.0
7.1
(2.3)
–
4.8
2,584.2
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 risk-adjusted cash flows from the Group’s budget and strategic
plan for four years, a further year informed by the average growth included in the budget and strategic plan period and extrapolated
cash flows thereafter based on an estimated long-term growth rate of 2.0% (2019: 3.0%). The process by which the budget and
strategic plan is prepared, reviewed and approved benefits from historical experience, visibility of long-term work programmes in
relation to work undertaken for the UK Government, available government spending information (both UK and overseas), the
Group’s £35 billion order book and bid pipeline and the Group’s significant tracking pipeline which monitors opportunities prior to
release of tenders. The Group’s FY21 budget cash flows include an assessment of the impact of COVID-19. Recognising the current
economic uncertainties the Group reduced the long-term growth rate used to value the extrapolated cash flows from 3% to 2%,
equivalent to no growth in real terms.
The Group’s weighted average cost of capital post-tax is approximately 7.8% to 8.2% (2019: 7.8% to 8.6%). This equates to a pre-tax
discount rate in the range 9.5% to 10.0% (2019: 9.5% to 10.5%) and a rate within this range, other than in relation to the Aviation
CGU as set out below, was used in the value-in-use calculations.
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. A single Nuclear operating segment was
established on 1 April 2019 by combining our naval nuclear business, included within the Marine operating segment, with our
civil nuclear business and goodwill of £163 million was reallocated from the Marine operating segment to the Nuclear operating
segment based on a relative value in use calculation at that date. The 2019 comparative has been restated for the reallocation.
Marine
Nuclear
Land
Aviation
2020
£m
341.7
233.1
887.1
709.4
2,171.3
2019
(restated)
£m
361.2
233.1
889.7
1,100.2
2,584.2
Key assumptions in relation to the risk-adjusted budget and strategy plan cash flows included in the value in use models are set out
below, noting that the budget cash flows include an assessment of the impact of COVID-19:
Marine
Nuclear
Land
Aviation
Continuing delivery of work programmes with the UK Ministry of Defence.
Continuing delivery of naval nuclear services to the UK Government under long-term contracts. 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.
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. Reflecting the low oil price and
the highly competitive oil and gas market, no improvement is expected in this area.
The value in use calculations present significant headroom in respect of all the CGUs other than Aviation. There are no reasonably
possible changes in assumptions for all CGUs other than Aviation which could give rise to the recoverable amount being lower
than the carrying amount. In this respect it would require long-term growth of nil (effectively negative growth of 2% in real terms),
together with discount rates of 58%, 46% and 14% to eliminate the headroom in the Marine, Nuclear and Land CGUs respectively.
The Directors do not consider these to be plausible assumptions.
182
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Babcock International Group PLC Annual Report and Accounts 2020
11. Goodwill (continued)
Recognising the current economic conditions and market expectations, particularly in oil and gas, the Directors revised the estimate
of risk-adjusted cash flows expected from the Aviation CGU and additionally, in consideration of CGU specific risk factors, used an
increased discount rate of 10.9% (2019: 10%) to determine the value in use. These revisions, together with the reduced long-term
growth rate applied to all CGUs, resulted in an impairment of £395 million.
The recoverable amount of Aviation goodwill continues to be subject to sensitivities. An increase in the discount rate of 25bps
would decrease value in use by £46 million and a reduction in the long-term growth rate of 25bps would decrease value in use by
£34 million. A reduction of £10 million in the operating profit of the continuing year used to extrapolate cash flows, for example
as a result of failure to maintain cost savings, would result in a reduction in value in use by £79 million. Accordingly, reasonably
possible changes exist which would give rise to a further impairment.
12. Other intangible assets
Cost
At 1 April 2019
On disposal of subsidiaries (note 29)
Additions
Disposals at cost
Exchange adjustments
At 31 March 2020
Accumulated amortisation and impairment
At 1 April 2019
On disposal of subsidiaries (note 29)
Amortisation charge
Amortisation on disposals
Exchange adjustments
At 31 March 2020
Net book value at 31 March 2020
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
Acquired
intangibles –
relationships
£m
Acquired
intangibles –
brands
£m
Acquired
intangibles –
total
£m
Software
development
costs and
licences
£m
Development
costs and
other
£m
1,169.5
(7.0)
–
–
2.3
1,164.8
843.3
(5.8)
80.4
–
0.8
918.7
246.1
1,174.4
–
–
(4.9)
1,169.5
751.5
94.6
–
(2.8)
843.3
326.2
23.7
(6.4)
–
(17.4)
0.1
–
20.2
(4.1)
1.1
(17.4)
0.2
–
–
23.9
–
–
(0.2)
23.7
19.7
0.6
–
(0.1)
20.2
3.5
1,193.2
(13.4)
–
(17.4)
2.4
1,164.8
863.5
(9.9)
81.5
(17.4)
1.0
918.7
246.1
1,198.3
–
–
(5.1)
1,193.2
771.2
95.2
–
(2.9)
863.5
329.7
172.0
(1.7)
21.6
(4.5)
(0.3)
187.1
70.1
(1.2)
14.2
(4.4)
(0.2)
78.5
108.6
153.0
21.4
(2.3)
(0.1)
172.0
57.9
14.3
(1.9)
(0.2)
70.1
101.9
18.6
–
7.8
–
0.4
26.8
1.3
–
0.8
–
(0.1)
2.0
24.8
8.0
10.8
–
(0.2)
18.6
0.9
0.5
–
(0.1)
1.3
17.3
Total
£m
1,383.8
(15.1)
29.4
(21.9)
2.5
1,378.7
934.9
(11.1)
96.5
(21.8)
0.7
999.2
379.5
1,359.3
32.2
(2.3)
(5.4)
1,383.8
830.0
110.0
(1.9)
(3.2)
934.9
448.9
Acquired intangible amortisation charges for the year have been charged through cost of revenue.
Babcock International Group PLC Annual Report and Accounts 2020
183
Babcock International Group PLC Annual Report and Accounts 2020 183
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
13. Property, plant and equipment
Freehold
property
£m
Leasehold
property
£m
Plant and
equipment
£m
Aircraft
fleet
£m
Assets in
course of
construction
£m
Cost
At 1 April 2019
Transfer of leased assets to right-of-use assets
On disposal of subsidiaries (note 29)
Additions
Disposals
Reclassification
Capitalised borrowing costs
Exchange adjustments
At 31 March 2020
Accumulated depreciation
At 1 April 2019
Transfer of leased assets to right-of-use assets
On disposal of subsidiaries (note 29)
Charge for the year
Impairment*
Disposals
Exchange adjustments
At 31 March 2020
Net book value at 31 March 2020
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
125.1
–
–
1.3
(1.3)
–
–
0.1
125.2
60.4
–
–
5.1
–
(0.7)
–
64.8
60.4
124.9
(0.7)
4.2
(2.9)
–
–
(0.4)
125.1
56.8
(0.2)
5.0
–
(1.2)
–
60.4
64.7
38.0
–
–
0.2
(6.2)
–
–
–
32.0
9.8
–
–
1.8
–
(2.1)
–
9.5
22.5
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
615.2
(45.1)
(3.8)
61.7
(14.2)
0.6
1.4
(8.7)
607.1
354.5
(18.0)
(2.2)
54.6
0.2
(13.1)
(3.4)
372.6
234.5
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
644.3
(59.8)
–
51.9
(40.6)
26.2
–
7.5
629.5
97.1
(14.1)
–
19.2
13.3
(21.4)
(2.3)
91.8
537.7
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
113.5
–
–
15.3
(8.4)
(26.8)
–
2.4
96.0
–
–
–
–
–
–
–
–
96.0
90.0
–
47.5
(16.3)
(4.8)
–
(2.9)
113.5
–
–
–
–
–
–
–
113.5
Total
£m
1,536.1
(104.9)
(3.8)
130.4
(70.7)
–
1.4
1.3
1,489.8
521.8
(32.1)
(2.2)
80.7
13.5
(37.3)
(5.7)
538.7
951.1
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
* During the year, the Group impaired eight (2019: eight) owned helicopters as a result of the reshaping of our Oil and Gas business, as set out in note 5.
Two of the assets were impaired using market values to estimate fair value less costs of disposal observing Level 2 inputs and six
of the assets were impaired as a result of a value in use assessment. The eight assets have been written down to a combined
recoverable amount of £28 million.
A capitalisation rate of 3% (2019: 3%) was used to determine the amount of borrowing costs eligible for capitalisation.
184
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Babcock International Group PLC Annual Report and Accounts 2020
13. Property, plant and equipment (continued)
Assets held under finance leases, in the prior year, have the following net book value within property, plant and equipment:
2019
Cost
Aggregate depreciation
Net book value
Plant and
equipment
£m
45.1
(18.0)
27.1
Aircraft
fleet
£m
113.3
(24.8)
88.5
Total
£m
158.4
(42.8)
115.6
Not all assets held under finance leases were transferred to Right-of-use assets as they were in effect purchased and retained in
Property, plant and equipment.
14. Right-of-use assets
Cost
On transition to IFRS 16 – 1 April 2019
Transferred from property, plant and equipment
On disposal of subsidiaries (note 29)
Additions
Exchange adjustments
At 31 March 2020
Accumulated depreciation
Transferred from property, plant and equipment
Charge for the year
Impairment (see note 5)
Exchange adjustments
At 31 March 2020
Net book value at 31 March 2020
Net book value on transition to IFRS 16 – 1 April 2019
Freehold
property
£m
Plant and
equipment
£m
111.3
–
(2.3)
32.5
(3.2)
138.3
–
27.3
–
(0.9)
26.4
111.9
111.3
15.4
45.1
–
8.4
–
68.9
18.0
13.1
–
(0.1)
31.0
37.9
42.5
Aircraft
fleet
£m
466.0
59.8
–
87.2
(8.3)
604.7
14.1
89.0
14.2
(1.6)
115.7
489.0
511.7
Total
£m
592.7
104.9
(2.3)
128.1
(11.5)
811.9
32.1
129.4
14.2
(2.6)
173.1
638.8
665.5
The Group impaired 11 right-of-use helicopters as a result of the reshaping of our Oil and Gas business, as set out in note 5.
The assets were impaired as a result of a value in use assessment. The 11 assets were written down to a combined recoverable
amount of £17.4 million.
15. Investment in and loans to joint ventures and associates
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
Investment in joint ventures
and associates
Loans to joint ventures and
associates
Total
2020
£m
153.2
–
–
0.3
58.6
–
–
(52.0)
(14.4)
2.3
–
148.0
2019
£m
119.3
(6.6)
–
–
83.8
–
–
(44.6)
1.8
(0.3)
(0.2)
153.2
2020
£m
42.5
–
(0.7)
5.5
–
3.8
(2.5)
–
–
–
–
48.6
2019
£m
27.8
–
(2.3)
10.8
–
6.5
(0.3)
–
–
–
–
42.5
2020
£m
195.7
–
(0.7)
5.8
58.6
3.8
(2.5)
(52.0)
(14.4)
2.3
–
196.6
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
Included within investment in joint ventures and associates is goodwill of £1.2 million (2019: £1.2 million).
Babcock International Group PLC Annual Report and Accounts 2020
185
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Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
15. Investment in and loans to joint ventures and associates (continued)
The total investment in joint ventures is attributable to the following segments:
Marine
Nuclear
Land
Aviation
Net book value
Included within joint ventures and associates are:
2020
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
Other
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
* Before amortisation of acquired intangibles.
Assets
Country of
£m
incorporation
61.5
United Kingdom
United Kingdom
34.4
United Kingdom 405.1
35.5
United Kingdom
94.6
United Kingdom
13.9
Australia
38.7
United Kingdom
3.3
United Kingdom
45.0
732.0
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
Liabilities
£m
(5.7)
(14.5)
(394.2)
(5.1)
(69.7)
(12.4)
(16.0)
–
(17.8)
(535.4)
(3.6)
–
(390.6)
–
(98.7)
(4.1)
(19.8)
(80.2)
–
–
(597.0)
Revenue
£m
69.3
18.9
38.2
40.2
85.9
48.0
99.8
130.1
15.7
546.1
80.6
19.3
42.5
43.7
61.5
23.7
110.5
390.8
50.7
33.9
857.2
Operating
profit/(loss)*
£m
18.4
14.6
9.8
4.4
18.0
3.7
6.9
5.2
(1.2)
79.8
28.4
11.3
13.4
5.0
5.0
4.2
7.8
28.9
(0.2)
3.0
106.8
2019
£m
6.0
42.1
77.4
70.2
195.7
% interest
held
74%
50%
13%
22%
50%
50%
50%
65%
2020
£m
5.8
25.6
90.6
74.6
196.6
Total
comprehensive
income/(loss)
£m
14.4
11.2
7.1
2.6
14.8
2.6
5.5
2.2
(1.8)
58.6
74%
50%
13%
22%
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
Joint ventures and associates revenue excluding Group sub-contract revenue is £422.2 million (2019: £685.8 million).
The joint ventures and associates have no significant contingent liabilities to which the Group is exposed.
None (2019: none) 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 decision 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
(2019: £nil). The Magnox decommissioning contract being delivered by the Cavendish Flour Partnership Limited completed
on 31 August 2019.
AirTanker Limited is included as an associate due to the level of management input and the relative share ownership.
Ascent Flight Training (Holdings) Limited and ALC (Superholdco) Limited benefitted from an improved cumulative margin position
in the year.
No joint ventures and associates are deemed individually material to the Group.
186
186 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
16. Deferred tax
Deferred tax asset
Deferred tax liability
2020
£m
190.6
(115.2)
75.4
2019
£m
150.9
(103.2)
47.7
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 2019
On transition to IFRS 16 – 1 April 2019
Income statement credit
Tax credit to equity
Transfer to corporation tax
Disposal of subsidiary (note 30)
Effect of change in UK tax rate
• income statement
• equity
Exchange differences
At 31 March 2020
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
Accelerated
tax depreciation
£m
(2.6)
5.0
–
–
–
–
Retirement
benefit
obligations
£m
4.7
–
7.1
(20.2)
(19.9)
–
(0.5)
–
–
1.9
(8.0)
–
3.4
2.2
–
–
–
(0.2)
–
–
(2.6)
–
0.6
–
(27.7)
0.8
11.4
–
–
–
10.4
(17.4)
–
(0.5)
–
4.7
Tax losses
£m
72.2
–
18.6
–
–
–
0.1
–
–
90.9
41.4
–
–
–
17.0
–
13.8
–
–
–
72.2
Other
£m
(26.6)
–
33.7
4.5
(2.1)
0.6
1.6
0.3
(1.7)
10.3
(43.0)
11.8
5.8
0.1
–
2.8
(3.4)
(1.1)
0.1
0.3
(26.6)
Total
£m
47.7
5.0
59.4
(15.7)
(22.0)
0.6
1.2
0.9
(1.7)
75.4
(8.8)
23.2
9.2
2.3
17.0
13.2
(7.0)
(1.3)
(0.4)
0.3
47.7
The net deferred tax assets of £75.4 million includes deferred tax assets of £120.7 million and deferred tax liabilities of
£63.3 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.
Deferred tax expected to be recovered within 12 months:
Deferred tax liability
2020
£m
(11.6)
(11.6)
2019
£m
(21.5)
(21.5)
At the statement of financial position date, deferred tax assets of £90.9 million (2019: £72.0 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 £91.5 million.
Babcock International Group PLC Annual Report and Accounts 2020
187
Babcock International Group PLC Annual Report and Accounts 2020 187
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
17. Inventories
Raw materials and spares
Work-in-progress
Finished goods and goods for resale
Total
2020
£m
111.9
6.0
75.6
193.5
2019
(restated)
£m
102.8
7.7
86.0
196.5
The 2019 amounts for Raw Materials and spares have increased by £14.9 million due to a reclassification of fuel and spare parts
from Finished goods and goods for resale.
18. 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
2020
£m
283.6
(7.0)
276.6
242.3
108.6
80.8
431.7
8.1
2.9
127.9
83.6
930.8
2019
(restated)
£m
255.5
(6.0)
249.5
266.0
133.2
62.9
462.1
9.1
11.4
108.3
76.7
917.1
Other debtors in 2019 have been restated by £9.3 million as the non-current Trade and other receivables amount was repaid during
the current year and is therefore now not shown separately.
Trade and other receivables are stated at amortised cost.
188
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Babcock International Group PLC Annual Report and Accounts 2020
18. Trade and other receivables (continued)
Significant changes in contract assets during the year are as follows:
31 March 2019
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 2020
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
Amounts
due from
customers for
contract work
£m
266.0
Accrued income
£m
133.2
Capitalised
contract costs
£m
62.9
Contract assets
£m
462.1
(240.1)
222.4
–
–
(4.6)
–
(1.4)
242.3
462.8
(53.5)
409.3
(394.7)
264.5
–
–
(14.4)
–
1.3
266.0
(118.7)
104.8
–
–
(8.7)
(2.2)
0.2
108.6
118.5
–
118.5
(112.5)
128.5
–
–
–
(1.0)
(0.3)
133.2
–
–
39.3
(9.9)
(0.2)
(5.3)
(6.0)
80.8
–
53.5
53.5
–
–
26.5
(8.7)
(6.3)
–
(2.1)
62.9
(358.8)
327.2
39.3
(9.9)
(13.5)
(7.5)
(7.2)
431.7
581.3
–
581.3
(507.2)
393.0
26.5
(8.7)
(20.7)
(1.0)
(1.1)
462.1
* The asset write downs are included in exceptional charges in Note 5; amounts due from customers for contract work relate to business exits and accrued
income relates to the Aviation sector.
No material revenue was recognised in 2020 from performance obligations satisfied in previous periods, arising from changes in
stage of completion, or transaction price allocation (2019: No material revenue).
Within the Group’s order book £12.8 billion (2019: £10.6 billion) represents the transaction price allocated to unsatisfied or
partially satisfied performance obligations. Management expects that 23% (2019: 28%) of the transaction price allocated to
unsatisfied performance obligations as at 31 March 2020 will be recognised as revenue during the next reporting period. A further
49% (2019: 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 2020. In addition there are £4.0 billion (2019: £3.4 billion) of orders where pricing is still to be
finalised and £0.8 billion (2019: £3.0 billion) of orders within joint ventures and associates.
Babcock International Group PLC Annual Report and Accounts 2020
189
Babcock International Group PLC Annual Report and Accounts 2020 189
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
18. 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
2020
£m
(6.0)
(3.6)
1.1
1.0
0.5
(7.0)
2019
£m
(4.9)
(1.6)
0.2
0.2
0.1
(6.0)
* 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.
19. Cash and cash equivalents
Cash at bank and in hand
Short-term bank deposits
2020
£m
289.1
1,062.3
1,351.4
2019
£m
275.0
0.2
275.2
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 Krona
New Zealand Dollar
Brazilian Real
Other currencies
2020
Total
£m
Floating rate
£m
2019
Total
£m
Floating rate
£m
1,214.1
32.0
5.6
53.9
20.7
4.9
1.0
4.4
4.5
9.8
–
0.5
1,351.4
1,214.1
32.0
5.6
53.9
20.7
4.9
1.0
4.4
4.5
9.8
–
0.5
1,351.4
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
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.
190
190 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
20. 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
2020
£m
2019
£m
222.8
207.3
32.8
462.9
474.3
0.7
80.8
125.2
222.4
1,366.3
188.5
192.8
40.0
421.3
510.6
1.0
63.9
125.6
259.0
1,381.4
2.1
2.0
Included in creditors is £6.1 million (2019: £19.5 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 2019
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 2020
Contract cost
accrual
£m
188.5
Amounts due to
customers for
contract work
£m
192.8
–
–
219.2
(182.1)
–
(2.8)
222.8
(141.1)
158.0
–
–
–
(2.4)
207.3
Deferred
income
£m
40.0
(38.5)
33.9
–
–
(1.2)
(1.4)
32.8
Contract
liabilities
£m
421.3
(179.6)
191.9
219.2
(182.1)
(1.2)
(6.6)
462.9
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
179.9
173.4
60.0
413.3
–
–
183.7
(167.2)
(6.0)
(1.9)
188.5
(143.8)
168.5
–
–
(4.1)
(1.2)
192.8
(56.4)
37.4
–
–
–
(1.0)
40.0
(200.2)
205.9
183.7
(167.2)
(10.1)
(4.1)
421.3
Babcock International Group PLC Annual Report and Accounts 2020
191
Babcock International Group PLC Annual Report and Accounts 2020 191
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
21. Bank and other borrowings
Current liabilities
Bank loans and overdrafts due within one year or on demand
Secured
Unsecured
Lease obligations*
Non-current liabilities
Bank and other borrowings
Secured
Unsecured
Lease obligations*
* 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 22.
The carrying amount of the Group’s borrowings are denominated in the following currencies:
2020
£m
2019
£m
(0.2)
400.3
400.1
138.0
538.1
0.3
38.3
38.6
15.3
53.9
19.4
2,030.6
2,050.0
534.8
2,584.8
22.0
1,285.1
1,307.1
50.5
1,357.6
Currency
Sterling
Euro
US Dollar*
South African Rand
Canadian Dollar
Australian Dollar
Norwegian Krone
Swedish Krona
Currency
Sterling
Euro
US Dollar*
South African Rand
Total
£m
1,225.4
1,287.2
518.7
23.1
10.2
37.1
0.9
20.3
3,122.9
Total
£m
505.4
508.1
382.1
15.9
1,411.5
2020
Floating rate
£m
764.3
252.0
241.5
15.6
–
–
–
–
1,273.4
2019
Floating rate
£m
134.7
19.9
229.3
15.9
399.8
Fixed rate
£m
461.1
1,035.2
277.2
7.5
10.2
37.1
0.9
20.3
1,849.5
Fixed rate
£m
370.7
488.2
152.8
–
1,011.7
* US$500 million (2019: US$500 million) has been swapped into Sterling, with US$300 million (2019: US$300 million) equivalent into floating rates and
US$200 million (2019: US$200 million) equivalent into fixed rate. This is included in the US Dollar amount above.
EUR550 million (2019: €nil) has been swapped into Sterling, with €275 million (2019: €nil) equivalent into floating rates and
EUR275 million (2019: €nil) equivalent into fixed rates. This is included in the Euro amount above.
The weighted average interest rate of Sterling fixed rate borrowings is 1.9%. 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, including £775 million of fully drawn RCF
facility expected to be repaid once the current crisis abates:
Total borrowings
As at 31 March 2020
As at 31 March 2019
1 year
£m
1,554.6
352.6
1–5 years
£m
885.7
753.9
>5 years
£m
682.6
305.0
Total
£m
3,122.9
1,411.5
192
192 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
21. Bank and other borrowings (continued)
The effective interest rates at the statement of financial position dates were as follows:
UK bank overdraft
UK bank borrowings
US private placement – fixed
US private placement – floating
8 year Eurobond September 2027– fixed
8 year Eurobond September 2027 – floating
8 year Eurobond October 2022
£300 million bond
Other borrowings
Leases obligations
Repayment details
The total borrowings of the Group at 31 March are repayable as follows:
2020
%
1.1
0.5
6.0
2.8
2.9
2.8
1.8
1.9
4.8 – 8.9
0.4 – 12.6
2019
%
1.3
2.4
6.0
3.1
–
–
1.8
1.9
4.8 – 9.7
0.4 – 9.0
Within one year
Between one and two years
Between two and five years
Greater than five years
2020
2019
Loans and
overdrafts
£m
400.1
–
1,260.4
789.6
2,450.1
Lease
obligations
£m
138.0
115.1
287.3
132.4
672.8
Loans and
overdrafts
£m
38.6
382.2
623.2
301.7
1,345.7
Lease
obligations
£m
15.3
19.2
23.5
7.8
65.8
In addition to the lease obligations above, the Group paid £44.3 million (2019: £53.5 million) for the Phoenix contract where the
leases are directly on behalf of and benefit to the customer.
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
2020
£m
3.5
77.6
81.1
2019
£m
4.6
778.2
782.8
Babcock International Group PLC Annual Report and Accounts 2020
193
Babcock International Group PLC Annual Report and Accounts 2020 193
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
22. Other financial assets and liabilities
Financial instruments and leases granted
Non-current
US private placement – derivative
US private placement – interest rate swaps
8 year Eurobond September 2027 – derivative
8 year Eurobond September 2027 – interest rate swaps
Interest rate hedge
Other currency hedges
Financial derivatives
Leases granted
Total non-current other financial assets and liabilities
Current
US private placement – derivative
US private placement – interest rate swaps
Interest rate hedge
Other currency hedge
Financial derivatives
Leases granted
Total current other financial assets and liabilities
Assets
2020
£m
–
–
–
–
–
14.6
14.6
6.9
21.5
95.5
9.2
–
17.5
122.2
31.7
153.9
Fair value
2019
£m
75.2
–
–
–
–
2.0
77.2
16.6
93.8
–
–
–
3.7
3.7
44.3
48.0
Liabilities
2020
£m
2019
£m
–
–
6.1
17.0
0.8
11.7
35.6
–
35.6
–
–
0.1
8.9
9.0
–
9.0
–
1.0
–
–
0.8
7.5
9.3
–
9.3
–
–
0.1
4.8
4.9
–
4.9
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 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 lease debtors.
Lease debtors are derecognised at the date they are discounted by the bank. At 31 March 2020 the non-recourse balance was
£100.9 million which will be recovered over approximately three years.
Interest rate hedges
The notional principal amount of outstanding interest rate swap contracts at 31 March 2020 included £4.2 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 2020:
Hedged
Interest rate swap
Hedged – US$
Amount
£m
Fixed payable
%
Floating receivable
%
Maturity
4.2
4.745
Six month LIBOR 31/3/2029
Amount
US$m
Amount at
swapped rates
£m
Swap
%
Maturity
Cross currency and interest rate swap
200.0
122.9
fixed 5.95% GBP 17/3/2021
Fixed 5.64% US$ to
Cross currency and interest rate swap
Total cross currency and interest rate swap – US$
300.0
500.0
184.3
307.2
Fixed 5.64 US$ to
floating three-month
LIBOR + margin GBP 17/3/2021
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Babcock International Group PLC Annual Report and Accounts 2020
22. Other financial assets and liabilities (continued)
Amount
EURm
Amount at
swapped rates
£m
Swap
%
Maturity
Hedged – EURO
Cross currency and interest rate swap
275.0
246.7
Cross currency and interest rate swap
Total cross currency and interest rate swap – EURO
275.0
550.0
246.7
493.4
Fixed 1.375% EUR to
fixed 2.931% GBP
Fixed 1.375 EUR to
floating three-month
LIBOR + margin GBP
13/9/27
13/9/27
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 leases to external customers. At the year end the present value of the minimum lease receivable amounted
to £22.3 million (2019: £24.4 million), these were split as £15.4 million (2019: £7.8 million) due within one year and £6.9 million
(2019: £16.6 million) between one and five years. In addition there is £16.3 million (2019: £36.5 million) due within one year in
respect of our Fomedec contract.
Fair values of non-current borrowings and loans
The fair values of non-current borrowings and loans at the statement of financial position date were:
Fair value of non-current borrowings and loans
Long-term borrowings
Loan to joint venture
2020
2019
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
(2,584.8)
48.6
(2,536.2)
(2,682.8)
48.6
(2,634.2)
(1,357.6)
42.5
(1,315.1)
(1,404.6)
42.5
(1,362.1)
Fair values of long-term borrowings are based on cash flows discounted using the GBP Zero IR Curve as at 31 March 2020
(2019: 4% to 5%).
Babcock International Group PLC Annual Report and Accounts 2020
195
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Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
23. Provisions for other liabilities
At 1 April 2019
Transition to IFRS 16
On disposal of subsidiaries (note 29)
Net charge to income statement
Utilised in year
Foreign exchange
At 31 March 2020
Employee
benefits and
business
reorganisation
costs
(c)
£m
65.3
(17.1)
–
56.0
(42.9)
(0.4)
60.9
Contract/
warranty
(b)
£m
8.8
–
–
9.4
(0.9)
–
17.3
Insurance
provisions
(a)
£m
0.5
–
–
–
0.1
–
0.6
Property
and other
(d)
£m
29.0
(4.1)
(0.3)
45.4
(4.8)
(0.8)
64.4
Expected
credit losses
£m
0.3
–
–
0.1
–
–
0.4
Total
provisions
£m
103.9
(21.2)
(0.3)
110.9
(48.5)
(1.2)
143.6
Included within net charge to income statement is £111.7 million relating to exceptional items, with £10.3 million relating to
contract/warranty, £53.8 million relating to employee benefits and business reorganisation, and £47.6 million relating to property
and other.
Provisions have been analysed between current and non-current as follows:
Current
Non-current
2020
£m
113.2
30.4
143.6
2019
£m
63.4
40.5
103.9
(a) The insurance provisions arise in the Group’s captive insurance company, Chepstow Insurance 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 restructuring (see note 5), acquired businesses,
personnel related costs and payroll taxes.
(d) Property and other in the main relate to provisions for the fine in Italy (see note 3), dilapidation costs and contractual obligations
in respect of infrastructure. Onerous lease provisions have been utilised and offset against right-of-use assets as part of the
IFRS 16 transition (refer to note 31).
Included within provisions is £5 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.
196
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Babcock International Group PLC Annual Report and Accounts 2020
24. Share capital
Allotted, issued and fully paid
At 1 April 2019 and 31 March 2020
Allotted, issued and fully paid
At 1 April 2018 and 31 March 2019
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 2020 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 by the Trustees of the Babcock
Employee Share Trust (BEST) – a total of 9,526,628 shares (2019: 7,747,703 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
11 June 2015
11 June 2015
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
13 June 2019
13 June 2019
13 June 2019
13 June 2019
Type
PSP1
DBMP2
DBP4
PSP1
PSP1
DBMP2
DBP3
DBP4
PSP1
PSP1
DBP3
DBP4
PSP1
PSP1
DBP3
DBP4
PSP1
PSP1
2020
Number
–
–
–
–
4,733
8,866
179,263
2019
Exercise period
Number
23,897
11/06/2018 – 11/06/2019
24,279
11/06/2018 – 11/06/2019
62,845
15/06/2019 – 15/06/2020
17,279 1,786,612
15/06/2019 – 15/06/2020
27,578
12/10/2019 – 12/10/2020
444,648
15/06/2019 – 15/06/2020
91,284
14/06/2019 – 14/06/2020
14/06/2020 – 14/06/2021
179,263
14/06/2020 – 14/06/2021 1,358,599 1,507,664
839,723
14/06/2022 – 14/06/2023
84,207
13/06/2020 – 13/06/2021
13/06/2021 – 13/06/2022
187,433
13/06/2021 – 13/06/2022 1,398,259 1,628,113
860,157
860,157
13/06/2023 – 13/06/2024
–
83,466
13/06/2021 – 13/06/2022
–
13/06/2022 – 13/06/2023
313,909
–
13/06/2022 – 13/06/2023 2,825,524
–
13/06/2024 – 13/06/2025 1,370,671
9,526,628 7,747,703
839,723
78,746
187,433
Options granted to Directors are summarised in the Remuneration report on pages 113 to 136 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.
Babcock International Group PLC Annual Report and Accounts 2020
197
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Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
24. 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
Total
A reconciliation of PSP and DBMP movements is shown below:
2020
2019
Shares newly
issued by the
Company
–
–
Shares
bought in
the market
221,320
221,320
Shares newly
issued by the
Company
–
–
Shares
bought in
the market
239,862
239,862
Outstanding at 1 April
Granted
Exercised
Forfeited/lapsed
Outstanding at 31 March
Exercisable at 31 March
2020
Number
’000
7,748
4,797
(654)
(2,364)
9,527
31
2019
Number
’000
8,027
2,838
(830)
(2,287)
7,748
48
The weighted average share price for awards exercised during the year was 497.7p per share (2019: 823.3p per share).
During the year 635,326 ordinary shares (2019: nil shares) were acquired or subscribed for through the Babcock Employee Share
Trust (‘the Trust’). The Trust holds shares to be used towards satisfying awards made under the Company’s employee share schemes.
During the year ended 31 March 2020, 653,868 shares (2019: 829,859 shares) were disposed of by the Trust resulting from
options exercised. At 31 March 2020, the Trust held a total of 221,320 ordinary shares (2019: 239,862 ordinary shares) at a
total market value of £848,098 (2019: £1,183,719) representing 0.04% (2019: 0.05%) 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.
The Company meets the operating expenses of the Trust.
The Trust enables 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 scheme. The Trust is a discretionary settlement for the benefit of
employees within the Group. The Company is excluded from benefiting under it. It is controlled and managed outside the UK and
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.
198
198 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
25. 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 £2.9 million (2019: £2.4 million), all of which
related to equity-settled share-based payment transactions.
After tax, the income statement charge was £2.4 million (2019: £2.0 million).
The fair value per option granted and the assumptions used in the calculation are as follows:
DBMP, PSPs and DBP1
Options
awarded
Number
1,370,671
3,019,033
313,909
93,430
860,157
1,699,323
187,433
90,777
902,424
1,769,338
186,949
103,246
Share price
at grant or
modification
date
Pence
472.8
472.8
472.8
472.8
856.0
856.0
856.0
856.0
905.5
905.5
905.5
905.5
Expected
volatility
%
11.0%
11.0%
11.0%
11.0%
14.0%
14.0%
14.0%
14.0%
15.0%
15.0%
15.0%
15.0%
Option life
Years
6.0
4.0
4.0
3.0
6.0
4.0
4.0
3.0
6.0
4.0
4.0
3.0
Expectations
of meeting
performance
criteria –
EPS/ROCE
%
–
–
100%
100%
–
–
100%
100%
–
–
100%
100%
Fair value
per option –
TSR
Pence
70.9
70.9
–
–
370.9
370.9
–
–
131.2
131.2
–
–
Fair value
per option –
EPS/ROCE
Pence
472.8
472.8
472.8
472.8
856.0
856.0
856.0
856.0
905.5
905.5
905.5
905.5
Correlation
%
Grant or
modification
date
45% 13/06/19
45% 13/06/19
45% 13/06/19
45% 13/06/19
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
2019 PSP
2019 PSP
2019 DBP
2019 DBP
2018 PSP
2018 PSP
2018 DBP
2018 DBP
2017 PSP
2017 PSP
2017 DBP
2017 DBP
Both the vesting period and the expected life of all DBMP and PSP awards are three years, but for the DBP they are two years, other
than for Executive Directors where the vesting period is three years. The holders of all awards receive dividends.
The PSP awards are split evenly between the performance criteria of TSR, EPS and ROCE. 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 104,756 matching
shares (2019: 92,772 matching shares) at a cost of £0.5 million (2019: £0.6 million).
The Group also operates the Babcock Employee Share Plan International which reflects the structure of the UK Plan. During the
year 1,000 matching shares were purchased on the open market (2019: nil matching shares) and 713 matching shares vested
(2019: 82 matching shares) leaving a balance of 1,205 matching shares (2019: 918 matching shares).
1. DBMP = 2012 Deferred Bonus Matching Plan, PSP = 2009 Performance Share Plan and DBP = 2012 Deferred Bonus Plan.
Babcock International Group PLC Annual Report and Accounts 2020
199
Babcock International Group PLC Annual Report and Accounts 2020 199
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
26. Retirement benefits and liabilities
Defined contribution schemes
Pension costs for defined contribution schemes are as follows:
Defined contribution schemes
Defined benefit schemes
Statement of financial position assets and liabilities recognised are as follows:
Retirement benefits – funds in surplus
Retirement benefits – funds in deficit
2020
£m
85.7
2019
£m
69.5
2020
£m
325.3
(180.1)
145.2
2019
£m
226.9
(254.9)
(28.0)
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 investment strategies which have significantly hedged the interest rate and inflation risk through derivative instruments,
made benefit changes in 2014 and 2015 with respect to future service benefits, and in 2019 closed the Babcock International
Group Pension Scheme to future accrual for some employees.
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 Devonport Royal Dockyard 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
Babcock
International
Group Scheme
Devonport
Royal Dockyard
Scheme
Babcock Rail Ltd
section of the
Railways Pension
Scheme
31/03/2017 31/03/2019 31/03/2015 31/12/2016
279
Projected unit Projected unit Projected unit Projected unit
Rosyth
Royal Dockyard
Scheme
2,241
829
643
£1,860.8m £1,480.0m
97%
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.
200
200 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
26. Retirement benefits and liabilities (continued)
The Group’s cash contribution rates payable to the schemes are expected to be as follows:
Future service contribution rate
Future service cash contributions
Deficit contributions
Longevity swap payments
Expected employer cash costs for 2020/21
Expected salary sacrifice contributions
Expected total employer contributions
Devonport
Royal Dockyard
Scheme
22.2%
£12.8m
£18.6m
£7.3m
£38.7m
£6.1m
£44.8m
Babcock
International
Group
Scheme
51.1%
£7.7m
£12.5m
£3.6m
£23.8m
£0.8m
£24.6m
Rosyth Royal
Dockyard
Scheme
20.0%
£3.4m
£17.5m
£4.4m
£25.3m
£1.6m
£26.9m
Babcock Rail
Ltd section of
the Railways
Pension
Scheme
12.5%
£0.5m
£1.6m
–
£2.1m
£0.6m
£2.7m
Other
–
£1.8m
£1.4m
–
£3.2m
£0.2m
£3.4m
Total
–
£26.2m
£51.6m
£15.3m
£93.1m
£9.3m
£102.4m
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 current agreement with the Rosyth trustees includes annual deficit contributions of £17.5 million until 2032. The Group
anticipates that this agreement will be superseded and expects to make additional payments into the Rosyth scheme over the
next two years of approximately £90 million, however this is subject to final agreement with the trustees.
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 2020 by
independent qualified actuaries for IAS 19 purposes, on a best estimate basis, using the following assumptions:
March 2020
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 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)
Devonport
Royal
Dockyard
Scheme
2.0%
2.0%
2.4%
2.6%
1.8%
16
85.7
86.8
Babcock
International
Group Scheme
2.0%
2.6%
2.4%
2.6%
1.8%
15
87.1
87.7
Rosyth Royal
Dockyard
Scheme
2.0%
2.8%
2.4%
2.6%
1.8%
17
84.8
85.9
Babcock Rail
Ltd section of
the Railways
Pension
Scheme
2.0%
2.0%
2.4%
2.6%
1.8%
18
85.8
86.9
2.3%
2.2%
2.4%
3.2%
2.1%
17
85.6
86.6
2.3%
3.0%
2.4%
3.2%
2.1%
16
86.7
87.7
2.3%
3.3%
2.4%
3.2%
2.1%
18
84.7
85.7
2.3%
2.2%
2.4%
3.2%
2.1%
17
85.7
86.8
Babcock International Group PLC Annual Report and Accounts 2020
201
Babcock International Group PLC Annual Report and Accounts 2020 201
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
26. 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:
2020
2019
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
Net assets (liabilities)
recognized in the statement
of financial position
33.7
426.0
14.0
4.6
19.8
4.4
67.5
435.0
1,267.4
337.2
15.0
5.6
24.9 1,307.3
344.7
1.9
420.3
191.1
22.3
633.7
127.6
192.1
18.8
338.5
1,397.4
1,918.7
(206.9)
3,989.2
100%
–
892.0
863.4
2,035.4
3,790.8
30.3
1.4
–
241.4
100%
–
93.1
82.0
122.4
297.5
75.0
59.2
–
180.7
100%
–
1,502.7
1,979.3
(206.9)
4,411.3
100%
–
822.9
1,736.7
(187.1)
4,104.7
100%
–
91.8
45.0
41.0
177.8
1,076.9
990.4
2,198.8
4,266.1
1,075.0
947.4
2,037.9
4,060.3
33.3
0.6
–
246.6
100%
–
93.7
86.2
131.2
311.1
–
98.3
954.5
87.0 1,824.3
(187.1)
230.9 4,582.2
100%
100%
–
–
113.5 1,282.2
63.8 1,097.4
61.5 2,230.6
238.8 4,610.2
198.4
(56.1)
2.9
145.2
44.4
(64.5)
(7.9)
(28.0)
* The matching assets aim to hedge the liabilities and consist of gilts, repos, cash and swaps. They are shown net of repurchase obligations of £2,033 million
(2019: £1,655 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 statement of financial position 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
2020
2019
Principal
schemes
£m
29.5
3.4
–
–
32.9
(1.6)
31.3
Railways
scheme
£m
2.5
0.2
–
–
2.7
1.6
4.3
Other
schemes
£m
1.7
0.1
–
–
1.8
0.1
1.9
Total
£m
33.7
3.7
–
–
37.4
0.1
37.5
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)
(9.5)
60.3
* Settlement gain in Other schemes is offset by movements in contract balances and is accordingly not classified as exceptional.
202
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26. Retirement benefits and liabilities (continued)
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
2020
2019
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
(64.0)
(2.4)
30.3
(36.1)
110.3
6.1
20.8
137.2
(27.8)
–
(1.4)
(29.2)
(35.7)
(5.5)
3.0
(38.2)
172.0
80.2
12.1
9.7
(18.9)
10.0
165.2
99.9
(131.6)
(57.0)
(5.1)
(4.5)
(20.7)
3.1
(157.4)
(58.4)
Analysis of movement in the Group statement of financial position
2020
2019
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
Net surplus/(deficit) at 31 March
4,104.7
96.0
(64.0)
105.1
0.2
(252.8)
–
3,989.2
4,060.3
29.5
3.4
94.4
0.2
27.8
14.8
(186.8)
(252.8)
–
–
3,790.8
198.4
246.6
5.8
(2.4)
3.0
–
(11.6)
–
241.4
311.1
2.5
0.2
7.4
–
–
1.2
(13.3)
(11.6)
–
–
297.5
(56.1)
230.9
3.0
30.3
2.8
0.1
(6.1)
(80.3)
180.7
238.8
1.7
0.1
3.1
0.1
1.4
(1.2)
20.1
(6.1)
–
(80.2)
177.8
2.9
4,582.2
104.8
(36.1)
110.9
0.3
(270.5)
(80.3)
4,411.3
4,610.2
33.7
3.7
104.9
0.3
29.2
14.8
(180.0)
(270.5)
–
(80.2)
4,266.1
145.2
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)
* Settlement effect in Other schemes in a result of a transfer of assets and liabilities from the Babcock Naval Services Pension Scheme back into the Principal
Civil Service Pension Scheme. As the Group is reimbursed by MOD for any contributions payable to this scheme, the settlement has an equal impact on both
the value of the benefit obligations and the plan assets, hence is it neutral in terms of both the income statement and other comprehensive income,
The movement in net deficits for the year ending 31 March 2020 is as a result of the movement in assets and liabilities shown above.
Babcock International Group PLC Annual Report and Accounts 2020
203
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Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
26. Retirement benefits and liabilities (continued)
The changes to the Group statement of financial position at March 2020 and the charges to the Group income statement for the year to
March 2021, 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
2020
£m
4,266.1
(326.8)
326.8
260.4
(235.8)
88.1
(88.1)
53.6
(53.6)
Income
statement
2021
£m
28.0
(13.5)
10.1
8.1
(7.5)
2.5
(2.5)
2.1
(2.1)
The figures in the table above have been calculated on an approximate basis, using information about the expected future benefit
payments out of the schemes. The analysis above may not be representative of actual changes to the position since changes in
assumptions are unlikely to happen in isolation. The change in inflation rates is assumed to affect the assumed rate of RPI inflation,
CPI inflation and future pension increases by an equal amount. The fair value of the schemes’ assets (including reimbursement rights)
are assumed not to be affected by any sensitivity changes shown and so the statement of financial position values would increase or
decrease by the same amount as the change in the defined benefit obligations.
27. 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
Debt disposed of with subsidiaries
Additional lease obligations
New leases – granted
Movement in joint venture and associate loans
Transition to IFRS 16
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
2020
£m
1,083.6
(937.3)
146.3
3.1
(128.1)
30.0
6.1
(640.8)
(53.8)
(637.2)
(957.7)
(1,594.9)
2019
£m
(5.6)
(27.4)
(33.0)
–
–
176.6
14.7
–
(1.0)
157.3
(1,115.0)
(957.7)
204
204 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
28. Changes in net debt
Cash and bank balances
Bank overdrafts
Cash, cash equivalents and bank
overdrafts
Debt
Leases – received
Leases – granted
Net debt before derivatives and joint ventures
and associates loans
Net debt derivative
Joint ventures and associates loans
Net debt
31 March
2019
£m
275.2
–
Cash flow
£m
985.0
(3.0)
Disposal of
subsidiaries
£m
101.6
–
275.2
(1,345.7)
(65.8)
60.9
(1,350.6)
(1,075.4)
75.2
42.5
(957.7)
982.0
(1,062.4)
175.0
(49.9)
(937.3)
44.7
–
6.1
50.8
101.6
–
3.1
–
3.1
104.7
–
–
104.7
Additional
leases
£m
–
–
–
–
(128.1)
30.0
(98.1)
(98.1)
–
–
(98.1)
Transition to
IFRS 16
£m
–
–
Exchange
movement
£m
(10.4)
0.3
31 March
2020
£m
1,351.4
(2.7)
–
–
(640.8)
–
(640.8)
(640.8)
–
–
(640.8)
(10.1)
(39.3)
(16.2)
(2.4)
(57.9)
(68.0)
14.2
–
(53.8)
1,348.7
(2,447.4)
(672.8)
38.6
(3,081.6)
(1,732.9)
89.4
48.6
(1,594.9)
29. Disposal of subsidiaries, businesses and joint ventures and associates
On 5 March 2020 the Group disposed of Context Information Security Limited for £107.1 million, which resulted in a profit on
disposal of £74.7 million.
During the previous year the Group disposed of its media business for £28.7 million, which resulted in a profit of £14.0 million.
A further three disposals were made for a total consideration of £11.4 million, which resulted in a profit on disposal of £0.8 million.
During both the current and previous years the Group paid certain accrued costs on previously disposed of businesses of
£0.8 million (2019: £0.8 million).
Goodwill
Investment in joint ventures and associates
Other intangible assets
Property, plant and equipment
Right of use assets
Inventory
Current assets
Cash, cash equivalents and bank overdrafts
Lease liabilities
Current liabilities
Taxation
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)
Context
Information
Security
Limited
£m
20.6
–
4.0
1.6
2.3
–
6.7
1.8
(3.1)
(3.7)
(0.4)
(0.3)
29.5
2.9
–
74.7
107.1
105.3
(2.9)
102.4
2020
Previously
disposed
of
Total
business
£m
£m
20.6
–
–
–
4.0
–
1.6
–
2.3
–
–
–
6.7
–
1.8
–
(3.1)
–
(3.7)
–
(0.4)
–
(0.3)
–
29.5
–
2.9
–
–
–
74.7
–
107.1
–
105.3
–
(0.8)
(3.7)
(0.8) 101.6
2019
Babcock
Media
Services
£m
7.1
–
Babcock
4S Limited
£m
–
–
Powerlines
£m
–
–
Helidax
S.A.S
£m
–
6.6
Previously
disposed of
business
£m
–
–
–
3.6
1.4
7.4
4.0
2.6
–
0.5
4.9
(9.6)
(2.2)
–
12.9
1.8
–
14.0
28.7
26.1
(1.8)
24.3
(0.9)
2.3
1.3
–
(1.5)
2.1
(2.8)
(0.5)
(3.3)
–
–
–
–
–
–
6.6
–
–
2.4
9.0
9.0
–
9.0
–
–
–
–
–
3.6
–
(3.2)
(0.1)
0.3
0.3
–
0.3
Total
£m
7.1
6.6
5.0
7.4
4.5
7.5
–
–
–
–
– (11.8)
(0.9)
–
25.4
–
3.1
–
(3.2)
–
14.8
–
40.1
–
32.6
–
(0.8)
(3.1)
(0.8) 29.5
Babcock International Group PLC Annual Report and Accounts 2020
205
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Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
30. Transactions with non-controlling interests
There were no transactions with non-controlling interest in the current year.
In the previous year, 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.
Also in the previous year, Cognac Formation Aero France was created with a 10% non-controlling interest and the Fomedec business
was transferred into this company.
A reconciliation to the March 2019 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
31. Adoption of IFRS 16, ‘Leases’
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
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 adopted the standard from 1 April 2019.
Under the new standard, lessees will recognise almost all leases on the statement of financial position 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 Group has completed its transition to IFRS 16 and has taken advantage of permitted expedience to exclude leases under
£5,000, leases of less than one year and service contracts in place at the date of transition.
The weighted average incremental borrowing rate applied by the Group to the lease liabilities on 1 April 2019 was 3.99%.
The impact on the Group statement of financial position at 1 April 2019 is reflected below:
Non-current assets
Right-of-use assets
Deferred tax asset
Other receivables
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
206
206 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
£m
592.7
5.0
(0.4)
597.3
(22.3)
(22.3)
533.7
(6.7)
527.0
107.1
(14.5)
92.6
597.3
31. Adoption of IFRS 16, ‘Leases’ (continued)
Following a detailed review of the new IFRS 16 transition balances an adjustment has been made to both right-of-use assets and
lease liabilities to the balances previously disclosed, primarily reflecting hindsight on lease extensions.
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 16 lease liability at 1 April 2019
1 April 2019
£m
685.5
(82.8)
38.1
640.8
The expense recognised in the income statement in the year relating to low-value and short-term leases amounted to £10.0 million.
Operating lease commitments – minimum lease payments
The minimum operating lease payments for the previous year were:
Commitments under non-cancellable operating leases payable:
Within one year
Later than one year and less than five years
After five years
2019
Property
£m
Vehicles, plant
and equipment
£m
29.5
78.8
33.1
141.4
121.5
320.6
102.0
544.1
In addition assets held under finance leases at 31 March 2019 with a net book value of £72.8 million were transferred to Right-of-use
assets (see note 14).
32. Contingent liabilities
(a) 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.
(b) 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.
(c) 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.
(d) 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.
33. Capital and other financial commitments
Contracts placed for future capital expenditure not provided in the financial statements
2020
£m
14.7
2019
£m
12.2
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207
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Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
34. Related party transactions
(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.
2020
Joint ventures and associates
Holdfast Training Services Limited
First Swietelsky Operation and Maintenance
FSP (2004) Limited
Ascent Flight Training (Management) Limited
ALC (Superholdco) 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
Cavendish Dounreay Partnership Limited
Cavendish Fluor Partnership Limited
Cavendish Boccard Nuclear Limited
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
2020
Revenue to
£m
2020
Purchases
from
£m
2020
Year end
debtor
balance
£m
2020
Year end
creditor
balance
£m
67.2
9.7
–
1.6
2.3
3.8
3.8
1.9
1.2
11.3
5.0
8.7
6.6
10.2
1.6
134.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.9
0.2
–
0.5
–
–
–
0.3
0.2
0.2
0.4
–
0.2
–
–
2.9
–
(0.7)
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.7)
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)
All transactions noted above arise in the normal course of business.
(b) Defined benefit pension schemes.
Please refer to note 26 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 25.
208
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Babcock International Group PLC Annual Report and Accounts 2020
35. Subsequent events
Holdfast Training Services Limited
In June 2020, the Group completed the sale of its 74% shareholding in Holdfast Training Services Limited (“Holdfast”) to HICL
Infrastructure PLC (“HICL”) for a cash consideration of £85 million.
Holdfast was a joint venture in the Babcock Group created in 2008 to undertake a 30-year contract for the Ministry of Defence to
provide training infrastructure and services for the Royal School of Military Engineering (“RSME”). Babcock will continue to provide
services for RSME on its existing subcontract.
Italy competition fine
During May 2020 the Group lost a first instance decision in relation to a €51 million fine imposed by the Italian Competition
Authority during February 2019 on its subsidiary Babcock Mission Critical Services Italia S.p.A (“BMCS Italy”). The Group had
reasonable grounds to believe that the court would overturn the fine or substantially reduce it and the matter was therefore
previously reported as a contingent liability. BMCS Italy will appeal the decision but given the loss of the first instance decision
the Group has recognised a provision of £46 million in respect of the fine and related legal costs. Further details of this matter are
included in note 5.
Details on dividends are given in note 9. There are no further material events subsequent to 31 March 2020 that require disclosure.
Babcock International Group PLC Annual Report and Accounts 2020
209
Babcock International Group PLC Annual Report and Accounts 2020 209
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
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 2020 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. The Group’s interest in the voting share capital is 100%
unless otherwise stated. No subsidiary undertakings have been excluded from the consolidation.
Subsidiaries, wholly owned
Airwork Limited
Appledore Shipbuilders (2004) Limited2
Devonport Royal Dockyard, Devonport, Plymouth,
PL1 4SG, United Kingdom
Armstrong Technology Associates
Limited*
Babcock (Ireland) Treasury Limited
Custom House Plaza, Block 6, IFSC, Dublin, 1,
Ireland
Babcock (NZ) Limited
C/O Babcock Central Office, HMNZ Dockyard,
Devonport Naval Base, Queens Parade, Devonport,
Auckland, 0744, New Zealand
Babcock (UK) Holdings Limited1
Babcock Aerospace Limited
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 Airports Limited
Babcock Assessments Limited
Babcock Australia Holdings Pty Ltd
Level 9, 70 Franklin Street, Adelaide SA 5000,
Australia
Babcock Aviation Services (Holdings)
Limited1, 14
Babcock Aviation Services Holdings, S.L.
Plaza Pablo Ruiz, Picasso 1, Torre Picasso, 28020,
Madrid, Spain
Babcock B.V.
Bezuidenhoutseweg 1, 2594 AB The Hague,
The Netherlands
Babcock Canada Inc.
45 O’Connor Street, Suite 1500, Ottawa, Ontario
K1P 1A4, Canada
Babcock Civil Infrastructure Limited
Babcock Communications Cyprus Limited
10 Diomidous Str, Alpha Mega Building, 3rd floor,
Office 401, CY2024 NICOSIA, Cyprus
Babcock Communications Limited
Babcock Contractors Limited2
Babcock Corporate Secretaries Limited*
Babcock Corporate Services Limited
Babcock Critical Assets Holdings LLP
Babcock Critical Services Limited
110 Queen Street, Glasgow, Scotland, G1 3HD,
United Kingdom
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 DS 2019 Limited*
Babcock DSG Ltd
Babcock Education & Training
Holdings LLP
Babcock Education and Skills Limited
Babcock Education Holdings Limited
Babcock Emergency Services Limited2
Babcock Engineering Limited*
Babcock Engineering Portugal,
Unipessoal, LDA
Heliporto de Salemas, Lousa, 2670-769, Lisboa,
Loures, Portugal
Babcock Europe Finance Limited2
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara, BKR 3000,
Malta
Babcock Fire Services (SW) Limited
Babcock Fire Services Limited
Babcock Fire Training (Avonmouth)
Limited
Babcock Group (US Investments) Limited
Babcock Holdings (USA) Incorporated7
Prentice Hall Corporation Systems Inc., S32
Loockerman Square, Ste. L-100 Dover Delaware,
United States
Babcock Holdings Limited11
Babcock Information Analytics and
Security Holdings Limited*
Babcock Information Analytics and
Security Limited5
Babcock Infrastructure Holdings LLP*
Babcock Integrated Technology (Korea)
Limited
Babcock Integrated Technology GmbH
Am Zoppenberg 23, 42366 Schwalmtal-Waldniel,
Germany
Babcock Integrated Technology Limited
Babcock Integration LLP
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 Limited2
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 Limited5
Babcock International Middle East
Limited
Babcock International Spain S.L.U.
Mutxamel, Alicante, Aeródromo de Mutxamel,
03110, Partida la Almaina 92, Spain
Babcock International Support Services
Limited
Babcock International US Inc
National Registered Agents, Inc., 1209 Orange
Street, Wilmington DE 19801, United States
Babcock Investments (Fire Services)
Limited
Babcock Investments (Number Four)
Limited
Babcock Investments (Number Nine)
Limited
Babcock Investments Limited
Babcock IP Management (Number One)
Limited
Babcock IP Management (Number Two)
Limited
Babcock Ireland Finance Limited
44 Esplanade, St Helier, JE4 9WG, Jersey
210
210 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
36. Group entities (continued)
Subsidiaries, wholly owned (continued)
Babcock Korea Limited
72-1, Shinsan-ro, Saha-gu, Busan-si (Shinpyeong-
dong), Republic of Korea
Babcock Land Limited
Babcock Leaseco Limited*
Babcock Luxembourg Finance S.a.r.l.
12F rue Guillaume Kroll, L – 1882 Luxembourg
Babcock Luxembourg Investments I
S.a.r.l.
12F rue Guillaume Kroll, L – 1882 Luxembourg
Babcock Luxembourg Investments S.a.r.l.
12F rue Guillaume Kroll, L – 1882 Luxembourg
Babcock Luxembourg S.a.r.l.
12F rue Guillaume Kroll, L – 1882 Luxembourg
Babcock M 2019 Limited*
Babcock Malta Limited
44 Esplanade, St Helier, JE4 9WG, Jersey
Babcock Malta (Number Two) Limited
44 Esplanade, St Helier, JE4 9WG, Jersey
Babcock Malta Finance (Number Two)
Limited3
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara, BKR 3000,
Malta
Babcock Malta Finance Limited3
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara, BKR 3000,
Malta
Babcock Malta Holdings (Number Two)
Limited3
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara, BKR 3000,
Malta
Babcock Malta Holdings Limited3
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara, BKR 3000,
Malta
Babcock Management 2019 Limited*
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, England
Babcock Marine (Rosyth) Limited
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
Babcock Marine Holdings (UK) Limited5
Babcock Marine Limited
Babcock Marine Products Limited*
Babcock Marine Training Limited2
Babcock MCS Congo SA
Avenue Charles de Gaulle, PB 5871, Pointe-Noire,
PB 5871, The Republic of 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 Design
and Completions Limited
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 Leasing
Limited
Babcock Mission Critical Services Ltd
Babcock Mission Critical Services
Offshore Limited
Babcock Mission Critical Services
Onshore Limited
Babcock Mission Critical Services SAU
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Mission Critical Services
Topco Ltd2
Babcock Mission Critical Services
UK Limited
Babcock MSS Limited
Babcock Mission Critical Services Fleet
Management SAU
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Networks Ireland Limited
(In liquidation)
Unit 2, Red Cow Interchange Estate, Ballymounth,
Dublin, 22, Ireland
Babcock Networks Limited
Babcock Norway AS*
Rådhusgata 3, 9008 TROMSØ, Norway
Babcock Nuclear Limited
Babcock Offshore Services Australasia
Pty Ltd
Level 9, 70 Franklin Street, Adelaide SA 5000,
Australia
Babcock Oman LLC
P.O. Box 2315, Ghala, Muscat, 130, Oman
Babcock Overseas Investments Limited
Babcock Power Maintenance Limited*
Babcock Project Investments Limited
Babcock Project Services Limited
Babcock Pty Ltd
Level 9, 70 Franklin Street, Adelaide SA 5000,
Australia
Babcock Rail Limited
Babcock Scandinavia Holding AB
Flygstationsvägen 4, 972 54, Luleå, Sweden
Babcock Services Group Limited
Babcock Services Limited
Babcock Skills Development and Training
Limited
Babcock Southern Careers Limited*3
Babcock Southern Holdings Limited6
Babcock Support Services (Investments)
Limited
Babcock Support Services GmbH
Am Zoppenberg 23, 41366 Schwalmtal, Germany
Babcock Support Services Limited10
110 Queen Street, Glasgow, Scotland, G1 3HD,
United Kingdom
Babcock Support Services s.r.l.
Via Foro Buonaparte, 70 20121, Milano, Italy
Babcock Technical Services Limited*
Babcock Training Limited
Babcock UK Finance
Babcock International Group PLC Annual Report and Accounts 2020
211
Babcock International Group PLC Annual Report and Accounts 2020 211
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
36. Group entities (continued)
Subsidiaries, wholly owned (continued)
Babcock US Investments (Number Two)
LLC2
National Registered Agents, Inc, 1209 Orange
Street, Wilmington DE 19801, United States
Babcock US Investments Inc.2
National Registered Agents, Inc., 1209 Orange
Street, Wilmington DE 19801, United States
Babcock US Investments Limited5
Babcock Vehicle Engineering Limited4
BMH Technologies (Holdings) GmbH
(In liquidation)2
Berliner Platz 12, 41061, Moenchengladbach,
Germany
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 Limited5
Bond Mission Critical Services PLC
Brooke Marine Shipbuilders Limited*
Cavendish Nuclear (Overseas) Limited
Cavendish Nuclear Japan KK
GYB Akihabara Room 405, Kandasuda-cho 2-25,
Chiyoda-ku, Tokyo, Japan
Cavendish Nuclear Limited5
Cavendish Nuclear Manufacturing
Limited
Chart Distribution Services Limited*
Chart Services Limited*
110 Queen Street, Glasgow, Scotland, G1 3HD,
United Kingdom
Chart Storage & Transportation Limited*
Chepstow Insurance Limited
St Martin’s House, Le Bordage, St Peter Port,
GY1 4AU, Guernsey
Conbras Servicos Tecnicos de
Suporte Ltda
Rua Nilo Pecanha no 50, Suites 314 & 315,
Centro, Rio de Janeiro, 20020.100, Brazil
Defence SCS Limited*
Devonport Royal Dockyard, Devonport, Plymouth,
PL1 4SG, United Kingdom
Devonport Royal Dockyard Limited12
Devonport Royal Dockyard, Devonport, Plymouth,
PL1 4SG, United Kingdom
Devonport Royal Dockyard Pension
Trustees Limited*
Devonport Royal Dockyard, Devonport, Plymouth,
PL1 4SG, United Kingdom
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 Projects Limited*
Flagship Fire Fighting Training Limited
FNC Limited*
Devonport Royal Dockyard, Devonport, Plymouth,
PL1 4SG, United Kingdom
Frazer-Nash Consultancy (Australia)
Pty Ltd*
Level 8, 99 Gawler Place, Adelaide SA 5000,
Australia
Frazer-Nash Consultancy Limited8
Devonport Royal Dockyard, Devonport, Plymouth,
PL1 4SG, United Kingdom
Frazer-Nash Consultancy LLC2
Corporation Service Company, 251 Little Falls
Drive, Wilmington DE 19808, United States
Heli Aviation (Tianjin) Helicopter Sales
Co., Ltd. (In liquidation)
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, Room 1102-1103 11/F,
Kowloon Building, 555 Nathan Road, Mongkok,
Kowloon, Hong Kong
HCTC Limited*
iMAST Limited*
INAER Helicopter Chile S.A.*
2880 Americo Vespucio Norte Avenue, Suite
1102, Conchali, Santiago, Chile
KML (UK) Limited*
Liquid Gas Equipment Limited
Rosyth Business Park, Rosyth, Dunfermline, Fife,
Scotland, KY11 2YD, United Kingdom
Marine Engineering & Fabrications
(Holdings) Limited*
Marine Engineering & Fabrications
Limited*
Marine Industrial Design Limited
c/o Babcock Central Office, HMNZ Dockyard,
Devonport Naval Base, Queens Parade, Devonport,
Auckland, 0744, New Zealand
Peterhouse Group Limited
Peterhouse6 (IETG) Limited
Peterhouse GmbH
Am Zoppenberg 23, 41366 Schwalmtal, Germany
Port Babcock Rosyth Limited*
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
Rosyth Royal Dockyard Limited13
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*
Skills2Learn Ltd
Strachan & Henshaw Canada Inc*
45 O’Connor Street, Suite 1500, Ottawa, Ontario
K1P 1A4, Canada
Touchstone Learning & Skills Ltd*
Transfleet Distribution Limited*
Vosper Thornycroft (UK) Limited
Westminster Education Consultants
Limited*
212
212 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
36. Group entities (continued)
Subsidiaries, partly owned:
Airwork Technical Services & Partners
LLC (51%)
PO Box 248 (Muaskar Al Murtafa’a (MAM)
Garrison), Muscat, 100, Sultanate of Oman
Babcock Africa (Pty) Limited (90%)7
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Africa Holdings (Pty) Ltd (90%)14
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Africa Services (Pty) Ltd (90%)
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Aviation Services Holdings
International Limited (49.82%)14
Verdala Business Centre, Level 1, LM Complex,
Brewery Street, Mriehel, Birkirkara, BKR 3000,
Malta
Babcock Dyncorp Limited (56%)12
Babcock Education and Training (Pty) Ltd
(90%)
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Emergencias Aéreas España
Holding, S.L.U. (49.82%)
Avenida de Burgos, 17, 7a planta, 28036, Madrid,
Spain
Babcock Financial Services (Pty) Ltd
(90%)
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Holdings (Italy) S.p.A. (49.82%)
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%)
Sala no. 2022, 1 Andar, Terminal A, Aeroporto
Internacional do Maputo, Distrito Urbano 2,
Mozambique
Babcock Mission Critical Services
(Ireland) Limited (49.82%)
13-18 City Quay, Dublin 2, Ireland
Babcock Mission Critical Services España
SAU (49.82%)
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Mission Critical Services France
SA (49.82%)
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%)
Piazza Castello no. 26, 20121, Milan, Italy
Babcock Mission Critical Services
Portugal, Unipessoal, LDA (49.82%)
Heliporto de Salemas, Lousa, 2670-769, Lisboa,
Loures, Portugal
Babcock Mission Critical Services,
Scandinavia AB (49.82%)2
c/o Ashurst Advokatbyra AB, PO Box 7124,
10387, Stockholm, Sweden
Babcock Moçambique Limitada (90%)
Av. Samora Machel 3380/1, Mozambique
Babcock Namibia Services Pty Ltd (90%)
Unit 5 Ground Floor, Dr Agostinho Neto Road,
Ausspann Plaza, Ausspanplatz, Windhoek, Namibia
Babcock Ntuthuko Aviation (Pty) Limited
(66.78%)*
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Ntuthuko Engineering (Pty)
Limited (46.37%)
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock Ntuthuko Powerlines (Pty)
Limited (46.81%)*
Plot 17295, Molekangwetsi Cresent, Gaborone
West Phase 1, Botswana
Babcock Plant Services (Pty) Ltd
(64.82%)5
Riley Road Office Park, 15E Riley Road,
Bedfordview, Gauteng, 2007, South Africa
Babcock SAA FW AB (49.82%)*
Flygstationsvägen 4, 972 54, Luleå, Sweden
Babcock Scandinavian AirAmbulance AB
(49.82%)
Lägervägen 3, 832 56, Frösön, Sweden
Babcock Scandinavian AirAmbulance AS
(49.82%)
Rådhusgata 3, 9008 TROMSØ, Norway
Babcock Scandinavian Aviation Services
AS (49.82%)
Rådhusgata 3, 9008 TROMSØ, Norway
Babcock Scandinavian Engineering AS
(49.82%)
Rådhusgata 3, 9008 TROMSØ, Norway
Babcock Scandinavian Holding AS
(49.82%)
Rådhusgata 3, 9008 TROMSØ, Norway
Babcock TCM Plant (Proprietary) Limited
(90%)7
Plot 17295, Molekangwetsi Cresent, Gaborone
West Phase 1, Botswana
Babcock Zambia Limited (90%)
4th Floor, Consulting House, Broadway, Ndola,
Zambia
Cognac Formation Aero (90%)
Base Aérienne 709 Cognac 16100
Châteaubernard, France
INAER Helicopter Peru S.A.C.
(In liquidation) (70%)
Av. De La Floresta No 497 Int., Lima, Peru
National Training Institute LLC (70%)
PO Box 267, MadinatQaboos, Sultanate of Oman,
115 Oman
Babcock International Group PLC Annual Report and Accounts 2020
213
Babcock International Group PLC Annual Report and Accounts 2020 213
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
Wholly owned subsidiaries, unless
otherwise stated, with registered office
at 1 New Street Square, London, EC4A
3HQ, United Kingdom, currently in
Members Voluntary Liquidation:
2019 S&H Limited; Babcock Careers
Guidance Limited6; Babcock Careers
Management Limited3; Babcock
Environmental Services Limited; Babcock
Lifeskills Limited; BIL Solutions Limited;
Capital Careers Limited (88.3%); Cura
Classis UK (Hold Co) Limited (48%); F N
Consultancy Limited; FNC Group Limited;
FNCG 2019 Limited; INS Innovation
Limited; Scimco Limited; Surrey Careers
Services Limited (94.1%)5; UKAEA Limited.
Wholly owned subsidiaries with pending
applications for voluntary strike off
under s1003 of the Companies Act
2006:
Alstec Limited; Babcock Group
International Limited; First Engineering
Limited; Merlin Communications Group
Limited; Municipal Vehicle Hire Limited;
Northern Cable Installations Limited;
Transfleet Truck Rentals Limited.
Notes
*
1.
Dormant entity.
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. Holding of two types of ordinary shares.
3. Holding of three types of ordinary shares.
4. Holding of six types of ordinary shares.
5. Holding of ordinary and preference shares.
6. Holding of ordinary and deferred shares.
7. Holding of ordinary and redeemable
preference shares.
8. Holding of ordinary and two types of
preference shares.
9. Holding of ordinary and three types of
preference shares.
10. Holding of ordinary and five types of
preference shares.
11. Holding of two types of ordinary shares and
two types of preference shares.
12. Holding of one type of ordinary share only,
where more than one type of share is
authorised or in issue.
13. Holding of two types of ordinary shares,
where more than two types of share are
authorised or in issue.
14. Holding of one type of ordinary share and
one type of preference share, where more
than two types of share are authorised or
in issue.
15. Year end 31 December.
Joint ventures and associates
(equity accounted):
ABC Electrification Ltd (33.3%)12
8th Floor, The Place, High Holborn, London,
WC1V 7AA
AirTanker Holdings Limited (13.3%)
Airtanker Hub RAF Brize Norton, Carterton,
Oxfordshire, England, OX18 3LX, United Kingdom
AirTanker Services Limited (22.3%)15
Airtanker Hub RAF Brize Norton, Carterton,
Oxfordshire, England, OX18 3LX, United Kingdom
ALC (Superholdco) Limited (50%)15
3rd Floor, Chancery Exchange, 10 Furnival Street,
London, England, EC4A 1AB, United Kingdom
Alert Communications Group Holdings
Limited (20%)
Ascent Flight Training (Holdings) Limited
(50%)
Cavendish Boccard Nuclear Limited
(51%)
Cavendish Dounreay Partnership Limited
(50%)12
Cavendish Fluor Partnership Limited
(65%)
Debut Services (South West) Limited
(50%)
20 Triton Street, Regent’s Place, London, NW1
3BF, United Kingdom
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
FSP (2004) Limited (50%)2
Kintail House, 3 Lister Way, Hamilton International
Park, Blantyre, G72 0FT, Scotland
Holdfast Training Services Limited (74%)
Naval Ship Management (Australia) Pty
Ltd (50%)
Level 10, 40 Miller Street, North Sydney NSW
2060, Australia
Okeanus Vermogensverwaltungs GmbH
& Co. KG (50%)
Vorsetzen 54, 20459, Hamburg, Germany
214
214 Babcock International Group PLC Annual Report and Accounts 2020
Babcock International Group PLC Annual Report and Accounts 2020
Company statement of financial position
As at 31 March 2020
Fixed assets
Investment in subsidiaries
Current assets
Trade and other receivables
Cash and cash equivalents
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
2020
£m
2019
(restated)
£m
5
2,466.5
2,466.5
6
7
7
9
3,944.1
865.0
3,736.6
–
(2,482.7)
2,326.4
4,792.9
(2,098.0)
1,638.6
4,105.1
(2,054.0)
2,738.9
(1,361.7)
2,743.4
303.4
873.0
30.6
768.8
763.1
2,738.9
303.4
873.0
30.6
768.8
767.6
2,743.4
The accompanying notes are an integral part of this Company statement of financial position. Company number 02342138.
Please refer to note 2 for details of the restatement of the 2019 results.
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 £143.9 million
(2019: £184.3 million).
The financial statements on pages 215 to 221 were approved by the Board of Directors on 11 June 2020 and are signed on
its behalf by:
A Bethel
Director
F Martinelli
Director
Babcock International Group PLC Annual Report and Accounts 2020
215
Babcock International Group PLC Annual Report and Accounts 2019 215
Strategic reportGovernanceFinancial statements
Company statement of changes in equity
For the year ended 31 March 2020
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
Profit for the year
Other comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Own shares
Net movement in equity
At 31 March 2020
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
Total
equity
£m
739.6 2,715.4
184.3
184.3
(10.8)
(10.8)
(150.3)
(150.3)
2.4
2.4
2.4
2.4
28.0
28.0
767.6 2,743.4
143.9
143.9
1.8
1.8
(152.1)
(152.1)
2.9
2.9
1.9
1.9
(2.9)
(2.9)
(4.5)
(4.5)
763.1 2,738.9
216
216
Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2020
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, 38A-38D, 40A-40D, 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:
• IFRS16, ‘Leases.’
• IFRS 9, ‘Financial instruments’, amended.
• IAS 19, ‘Employee Benefits’, amendment. The amendment related to treatment of plan amendments, curtailments and settlements.
• IFRIC 23, ‘Uncertainty over Income Tax Treatments’.
The adoption of these standards has not had any impact on the amounts recognised in the prior period and is not expected to affect
the current or future periods.
Babcock International Group PLC Annual Report and Accounts 2020
217
Babcock International Group PLC Annual Report and Accounts 2019 217
Strategic reportGovernanceFinancial statements
Notes to the Company financial statements continued
2. Significant accounting policies (continued)
Restatement
The comparatives at 31 March 2019 have been restated to recognise £76.2 million non-current other financial assets – currency
and interest rate swaps and £76.2 million other financial liabilities – currency and interest rate swaps due after more than one year
reflecting cross currency interest rate swaps with an external party and swaps issued to a subsidiary undertaking under the same
terms, for which a legal right of offset did not exist. The value of the adjustment at the beginning of the comparative period,
1 April 2018, is £47.7 million non-current other financial assets – currency and interest rate swaps and £47.7 million other
financial liabilities – currency and interest rate swaps due after more than one year. There was no impact on profit or net assets.
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 statement of financial position date.
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 statement of financial position 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.
218
218
Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2020
2. 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 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.
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 statement of financial position 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 estimates 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 (2019: £0.6 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 £4.3 million (2019: £5.7 million); these amounts are
calculated on a different basis from 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 2020 as
at the date of exercise was £0.4 million (2019: £0.5 million) and the net aggregate value of assets received by Directors in 2020
from Long Term Incentive Plans as calculated at the date of vesting was £0.4 million (2019: £0.5 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 2019 and 31 March 2020
2020
£m
2,466.5
2019
£m
2,466.5
Babcock International Group PLC Annual Report and Accounts 2020
219
Babcock International Group PLC Annual Report and Accounts 2019 219
Strategic reportGovernanceFinancial statements
Notes to the Company financial statements continued
6. Trade and other receivables
Non-current debtors
Amounts due from subsidiary undertakings
Preference shares in a subsidiary undertaking
Other financial assets – currency and interest rate swaps
Other debtors
Current debtors
Amounts due from subsidiary undertakings
Preference shares in a subsidiary undertaking
Other financial assets – currency and interest rate swaps
Income tax recoverable
Deferred tax
Total trade and other receivables
2020
£m
2019
£m
351.9
–
–
0.1
352.0
2,489.7
981.9
104.7
2.8
13.0
3,592.1
3,944.1
313.8
943.7
76.2
0.4
1,334.1
2,386.6
–
–
6.2
9.7
2,402.5
3,736.6
There are no material provisions held against trade and other receivables under the expected credit loss model.
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.
Interest rates on amounts owed by subsidiary operations:
EURIBOR + 4%
EURIBOR + 2%
GBP LIBOR + 4%
GBP LIBOR + 5%
USD LIBOR + 4%
STIBOR + 4%
BBSW + 4%
NIBOR + 4%
4.5%
5.4%
Interest free
7. Trade and other payables
Amounts due within one year
Bank loans and overdrafts
Amounts due to subsidiary undertakings
Other financial liabilities – currency and interest rate swaps
Accruals and deferred income
Amounts due after one year
Bank loans and other borrowings
Other financial liabilities – currency and interest rate swaps
Other creditors
Non-current
Current
2020
£m
81.9
12.4
73.5
140.0
18.0
–
11.5
12.8
–
1.8
–
351.9
2019
£m
85.3
11.8
58.3
140.0
5.8
–
12.6
–
–
–
–
313.8
2020
£m
58.3
–
51.4
–
1.7
14.0
2.9
8.1
100.8
–
2,252.5
2,489.7
2019
£m
62.8
–
51.4
–
–
7.2
3.4
11.8
100.8
–
2,149.2
2,386.6
2020
£m
2019
£m
547.7
1,821.9
104.7
8.4
2,482.7
404.0
1,685.9
–
8.1
2,098.0
2,030.6
23.1
0.3
2,054.0
1,285.1
76.2
0.4
1,361.7
The Company has £2,554.6 million (2019: £2,047.1 million) of committed borrowing facilities, of which £2,443.1 million
(2018: £1,331.9 million) was drawn at the year end.
220
220
Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2020
7. Trade and other payables (continued)
The effective interest rate applying to bank loans and other borrowings were as follows:
UK bank overdraft
UK bank borrowings
US private placement – fixed
US private placement – floating
8 year Eurobond October 2022
8 year Eurobond September 2027 – fixed
8 year Eurobond September 2027 – floating
£300 million bond
2020
%
1.1
0.5
6.0
2.8
1.8
2.9
2.8
1.9
2019
%
1.6
2.4
6.0
3.1
1.8
–
–
1.9
The amounts due to subsidiary undertakings are repayable on demand and £1,821.9 million (2019: £1,685.9 million) is interest free.
8. Other financial assets and liabilities
The notional principal amount of outstanding interest rate swap contracts at 31 March 2020 included interest rate swaps in
relation to
• US$500 million (2019: US$500 million) US$ to GBP cross-currency swap
• €550 million (2019: nil million) Euro 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 158 to 214.
9. Share capital
Allotted, issued and fully paid
At 1 April 2019 and 31 March 2020
Allotted, issued and fully paid
At 1 April 2018 and 31 March 2019
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 2020 (2019: 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 2020 these amounted to £340.7 million
(2019: £255.4 million), of which the Company had counter-indemnified £302.6 million (2019: £215.8 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.
Babcock International Group PLC Annual Report and Accounts 2020
221
Babcock International Group PLC Annual Report and Accounts 2019 221
Strategic reportGovernanceFinancial statements
Shareholder information
Financial calendar
Financial year end
2019/20 full-year results announced
Annual General Meeting
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: +44 (0)37 1664 0300
(Calls are charged at standard
geographic rate and will vary by provider.
Calls outside the United Kingdom 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.
31 March 2020
11 June 2020
4 August 2020
Dividend Reinvestment Plan
Babcock operates a Dividend
Reinvestment Plan (DRIP) whereby
shareholders can choose to invest their
cash dividend to buy further shares on
the market.
For details on how to join the DRIP please
log on at www.babcock-shares.com
using your Investor Code reference
number or call Link Market Services
Trustees Limited on +44 (0)37 1664
0381. 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 9.00am to 5.30pm,
Monday to Friday, excluding public
holidays in England and Wales.
Alternatively email shares@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.
Further information about ShareGift may
be obtained on 020 7930 3737 or from
www.ShareGift.org.
Independent auditors
PricewaterhouseCoopers LLP
1 Embankment Place
London, WC2N 6RH
Share dealing services
Link Share Dealing Services provide
Babcock shareholders with a low-cost,
execution only share dealing service.
To use the service, either log on to
www.linksharedeal.com or call
+44 (0)37 1664 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. We are open 8.00am to 4.30pm,
Monday to Friday, excluding public
holidays in England and Wales.
Terms and conditions apply.
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.
222
222
Babcock International Group PLC Annual Report and Accounts 2019
Babcock International Group PLC Annual Report and Accounts 2020
Five-year financial record
Continuing revenue
Operating (loss)/profit from continuing operations
Share of profit from joint ventures
(Loss)/profit before interest from continuing operations
Net interest and similar charges
(Loss)/profit before taxation from continuing operations
Income tax expense
(Loss)/profit from continuing operations
(Loss)/profit for the year
Non-controlling interest
(Loss)/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 (loss)/earnings per share – basic
Dividend per share
2020
IFRS 16 basis
£m
4,449.5
(164.9)
58.6
(106.3)
(71.9)
(178.2)
(15.0)
(193.2)
(193.2)
(2.0)
(195.2)
4,887.5
610.7
(2,948.2)
2,550.0
2.534.3
15.7
2,550.0
(38.6)
7.2p
2019
Pre-IFRS 16 basis
£m
4,474.8
196.5
83.8
280.3
(45.1)
235.2
(35.4)
199.8
199.8
(0.4)
199.4
4,730.2
(77.8)
(1,767.5)
2,884.9
2,867.5
17.4
2,884.9
39.5
30.0p
2018
Pre-IFRS 16 basis
£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
Pre-IFRS 16 basis
£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
Pre-IFRS 16 basis
£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
Babcock International Group PLC Annual Report and Accounts 2020
223
Babcock International Group PLC Annual Report and Accounts 2019 223
This report is printed on paper certified in accordance
with the FSC® (Forest Stewardship Council®) and is
recyclable and acid-free. Pureprint Ltd is FSC certified
and ISO 14001 certified showing that it is committed
to all round excellence and improving environmental
performance is an important part of this strategy.
Pureprint Ltd aims to reduce at source the effect its
operations have on the environment and is committed
to continual improvement, prevention of pollution and
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Pureprint Ltd is a Carbon/Neutral® Printing Company.
Designed and produced by Black Sun Plc
Babcock International Group PLC
33 Wigmore Street
London
W1U 1QX
UK
+44(0)20 7355 5300
www.babcockinternational.com
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