Creating a safe
and secure world, together
Annual Report and Financial Statements 2021
B
a
b
c
o
c
k
I
n
t
e
r
n
a
t
i
o
n
a
l
G
r
o
u
p
P
L
C
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
2
0
2
1
Babcock is an international aerospace, defence and security
company. We have a leading naval business, and provide
value-add services across the UK, France, Canada, Australasia
and South Africa. We also operate in, and export to,
additional markets.
Our strategy is to focus on our core activities in the UK,
using our capabilities to work on exports from the UK and to
develop our international presence in our target countries.
We operate in attractive markets and are positioning ourselves
for future growth.
Last year saw us begin a programme of significant change for
the Group and this work will continue throughout the coming
year. We now have a refreshed strategy, a more collaborative
way of working and an emphasis on embedding a new culture
and focus on ESG. This transformation is encapsulated in our
purpose: to create a safe and secure world, together.
Ruth Cairnie
Chair
David Lockwood
Chief Executive Officer
David Mellors
Chief Financial Officer
Contents
Strategic report
Governance
Financial statements
Chair’s introduction
Board of Directors
Executive Committee
Statement of compliance
Our governance framework
Key areas of Board focus
Stakeholder engagement
Nominations Committee Report
Audit Committee Report
Remuneration Committee Report
Additional statutory information:
Directors’ responsibility statement
100
104
106
107
108
112
114
117
119
132
154
159
Financial highlights
Babcock at a glance
Chair’s statement
Creating a new approach
Chief Executive Q&A
CEO review
Strategy
Market review
Business model
People plan
Innovation & Technology
Key performance indicators
Financial Review
Operational review
Marine
Nuclear
Land
Aviation
Stakeholder engagement
ESG strategy
Environmental
Social
Governance
Non-financial information statement
and s172(1) statement
Compliance with GRI
Response to SASB
Principal risks and management controls
Going concern and viability statement
2
4
6
8
9
12
16
18
20
22
24
28
30
50
50
52
54
56
58
62
67
71
77
79
80
81
84
96
162
Independent auditors’
report to the members of
Babcock International Group PLC
Group financial statements:
Group income statement
Group statement of
174
comprehensive income
Group statement of changes in equity 175
Group statement of financial position 176
Group cash flow statement
177
Notes to the Group
financial statements
178
174
Company financial statements:
Company statement of
financial position
Company statement of
changes in equity
Notes to the Company
financial statements
Other information
Shareholder information
269
270
271
278
Babcock International Group PLC Annual Report and Financial Statements 2021
1
Financial highlights
FY21 key financials
Revenue
Statutory
operating loss
Underlying
operating (loss) / profit
£4,183m
2020: £4,429m
(Restated, see page 31)
£(1,643)m
2020: £(76)m
(Restated, see page 31)
£(28)m
2020: £378m
(Restated, see page 31)
Statutory cash generated
from operations
Underlying free
cash flow
£471m
2020: £445m
(Restated, see page 177)
£170m
2020: £56m
(Restated, see page 32)
Net debt / EBITDA
(covenant basis)
(see page 28)
2.5x
2020: 2.3x
(Restated, see page 43)
Statutory to underlying adjustments
The Group uses various alternative performance measures,
including underlying operating profit, to enable users to
better understand the performance and earnings trends of
the Group. The Directors believe the alternative performance
measures provide a consistent measure of business
performance year to year and they are used by management
to measure operating performance and as a basis for
forecasting and decision-making. The Group believes they are
also used by investors in analysing business performance.
This presentation allows for separate disclosure and specific
narrative to be included concerning the adjusting items. This
helps to ensure performance in any one year can be clearly
understood by users of the financial statements. These
alternative performance measures are not defined by IFRS and
therefore there is a level of judgement involved in identifying
the adjustments required to calculate the underlying results.
As the alternative performance measures used are not defined
under IFRS, they may not be comparable to similar measures
used by other companies. They are not intended to be a
substitute for, or superior to, measures defined under IFRS.
For further details see the Financial review on pages 30 to 49.
Forward-looking statements
Statements in this Annual Report, including those regarding
the possible or assumed future or performance of Babcock or
its industry, as well as any trend projections or statements
about Babcock’s or management’s beliefs or expectations,
may constitute forward-looking statements. By their nature,
forward-looking statements involve known and unknown risks
and uncertainties as well as other factors, many of which are
beyond Babcock’s control. These risks, uncertainties and
factors may cause actual results, performance or
developments to differ materially from those expressed or
implied by such forward-looking statements. No assurance is
given that any forward-looking statements will prove to be
correct. The information and opinions contained in this
Annual Report do not purport to be comprehensive, are
provided as at the date of the Annual Report and are
subject to change without notice. Babcock is not under any
obligation to update or keep current any information in the
Annual Report, including any forward-looking statements.
2
Babcock International Group PLC Annual Report and Financial Statements 2021
Strategic report
Governance
Financial statements
Key messages
1. Following extensive reviews, we now have a turnaround plan to restore
Babcock to strength without the need for new equity.
2. We did not adapt our approach quickly enough to match the changing
world around us and this led to underperformance. We are now aiming to
put this right.
See page 8 for details.
3. The contract profitability and balance sheet review has had a significant
impact on our financials but the vast majority of the impacts are one-off.
See page 33 for details.
4. We have established a more appropriate baseline for financials
going forward.
5. Our strategy review has now been completed and we are focusing on
being an international aerospace, defence and security company.
6. We are well placed in our markets for future opportunities.
See page 18 for details.
7. We are aligning our portfolio and aim to generate at least £400 million of
disposal proceeds over the next 12 months.
8. Our new operating model will help improve performance and control.
See page 13 for details.
9. Babcock will be a better place to work.
See page 22 for details.
10. ESG is becoming central to all that we do and we continue to make good
progress, including a commitment to net zero for our estate, assets and
operations, by 2040.
See page 62 for our ESG report.
Babcock International Group PLC Annual Report and Financial Statements 2021
3
Babcock at a glance
What we do
The markets in which we operate
Key
Main markets
Additional markets
Babcock is an international
aerospace, defence and
security company with a
leading naval business,
and provides value-add
services across our main
markets of the UK, France,
Canada, Australasia and
South Africa. We also
operate in, and export to,
additional markets.
Revenue profile
44%
33%
67%
Defence
Non-defence
56%
UK
International
15%
37%
12%
16%
20%
International revenue
Europe, excl. UK
South Africa
Australasia
North America
Rest of world
Canada
3% of Group revenue
Defence
• Submarine through-life support
Non-defence
• Aerial emergency services
4
Babcock International Group PLC Annual Report and Financial Statements 2021
United Kingdom
67% of Group revenue
Defence
• Ship and nuclear submarine lifecycle:
design, build, maintain, life extend,
upgrade and decommission
• Defence infrastructure
• Products: equipment and systems
• Engineering support for British Army
and Royal Air Force
• Training for the British Army
• Training for the Royal Air Force
Non-defence
• Energy and marine products
• Civil nuclear services
• Engineering support for police and
firefighting services
• Training for police and firefighting
services
France
2% of Group revenue
Defence
• Air force training support
• Navy search and rescue support
Non-defence
• Aerial emergency services
South Africa
6% of Group revenue
Non-defence
• Power generation and support
• Commercial vehicle services
Australasia
6% of Group revenue
Defence
• Ship and submarine support
• Ship and submarine products
• Defence infrastructure
Non-defence
• Aerial emergency services
Delivered across our four sectors:
Marine, Nuclear, Land and Aviation
See pages 50-57
Babcock International Group PLC Annual Report and Financial Statements 2021
5
Strategic reportGovernanceFinancial statements Chair’s statement
Returning Babcock
to strength
This has been a very challenging year for
Babcock. We needed to mitigate the
ongoing operational restrictions due to the
COVID-19 pandemic that prevailed
throughout the year. As a result of our
efforts, we have been able to maintain
progress delivering our customers’ critical
programmes and services.
I am very proud of the extraordinary
dedication demonstrated by our staff, and
also of our sustained focus on the care and
wellbeing of all our teams. I know that our
customers and partners have appreciated
both our flexibility and our commitment.
Looking to the longer term, we have faced
the very significant challenge of reviewing
our strategic direction, operating model
and financial baseline and taking the steps
needed to set the Company on a sound
footing for the future.
In January 2021 we announced that we
had commenced a detailed review of our
contract profitability and balance sheet
(CPBS), which was likely to lead to negative
impacts on the Group’s balance sheet and
income statement. Subsequently in April we
disclosed the early results of the review which
indicated a significant, unexpected and
deeply disappointing level of adjustments.
FY21 results
The Group’s reported financial performance
for FY21 is in line with the expectations set
out in April. Organic revenue declined by
3%, with demand for our services largely
continuing despite the challenges
presented by the pandemic.
The impact of the pandemic on demand
was felt most strongly in our non-defence
businesses such as civil aviation and civil
training. Our defence businesses did
initially suffer some interruption, but most
defence programmes and sites were
subsequently reopened.
We are reporting a statutory operating loss
of £1,643.0 million and, on an underlying
basis, an operating loss of £27.6 million.
Both the statutory and the underlying
operating losses are primarily due to
charges taken as a result of the
CPBS review.
To allow a useful comparison to last year’s
results, and as a better measure for the
future, our financial report this year
focuses on the Group’s underlying
operating profit excluding the one-off
impacts of that review.
On that basis, our underlying operating
profit was £222.4 million in FY21,
compared to £377.6 million the previous
year (restated), mainly reflecting disposals
and lost businesses as well as a significant
impact from COVID-19.
The social distancing restrictions required in
our operations led to less effective delivery,
such that the impact of COVID-19 on
profitability has been materially greater
than on revenue. These restrictions, as well
as higher levels of employees working from
home, continue to date.
The year-on-year decline in profitability of
£155.2 was exacerbated by significant
credits which benefited the results of the
previous financial year. These are covered
in more detail in our Financial review on
pages 30 to 49.
Addressing underperformance
When I became Chair in 2019, it was clear
that we needed to address a pattern of
underperformance compared to the
expectations set by the Board, and this was
reinforced by the frustrations expressed to
me by several of our stakeholders.
The path to understanding and resolving
these issues started with the early steps I
outlined in last year’s Report, which have
continued and accelerated this year.
Governance has been strengthened through
changes in the Board’s processes and there
has been significant development in the
membership of the Board including a new
Senior Independent Director and new Chairs
of the Audit and Remuneration Committees.
A new CEO
We also moved quickly to secure a new
CEO with a search started in February 2020
upon the announcement of Archie Bethel’s
retirement. It was essential that the
transition avoided any uncertainty or
instability in the business, particularly
given the critical nature of our work.
6
Babcock International Group PLC Annual Report and Financial Statements 2021
“Whilst it has been a year of profound
challenge, I am confident that we have the
right team, the right strategy and the right
governance to ensure we are able to take
advantage of the opportunities before us.
“We are on a clear path to return
Babcock to strength.”
The Board believes that with execution
of our plans, the future of the Company
can be secured without the need for
new equity. Our new Executive team
has a proven track record of delivering
business turnaround and transformation
at listed companies.
And we are confident that the strategic
clarity, simpler and more accountable
operating model, new people strategy and
revised governance will result in improved
financial transparency and control, a
stronger balance sheet and the capability
to create and capture future opportunities.
I was therefore delighted that, despite
COVID-19, we were able to conduct a
thoughtful and robust process at some
pace, appointing David Lockwood to take
up the position of CEO in September 2020.
The Board subsequently appointed David
Mellors as CFO in November.
Driving progress
The new management team has since been
driving rapid progress across a full range of
priorities within an overall agenda
supported by the Board.
This has included reviewing the strategic
and operational way forward for the business
and, most notably, the CPBS review.
Unlike the review I referred to last year,
which looked at a sample of contracts and
focused on technical accounting, this was
an executive-led review of the business
fundamentals and underlying assumptions
for a much broader range of contracts. It
also incorporated an extensive assessment
of the carrying values on the balance sheet.
The review, including our annual goodwill
impairment test, highlighted a large number
of issues and the need for a significant write
down of our balance sheet. As well as
changes in estimates and accounting
policies, the total charge of £2.0 billion
includes prior year errors. More detail of
the findings can be seen on page 33.
The review has demonstrated that, in an
evolving and increasingly competitive
environment, our governance framework,
business management and internal and
financial controls were not fully effective in
some parts of the business.
Despite compliance with most provisions of
the Corporate Governance Code, there
have been weaknesses in some aspects of
our governance framework, notably in
Aviation. There have also been weaknesses
in its practical implementation, including
instances across the businesses, affecting
this year as well as prior periods.
We have also developed a new Group
purpose: to create a safe and secure
world, together. We believe this
reflects our continued commitment to
our customers’ critical operations, our
focus on empowerment and collaboration
throughout the organisation and
with partners.
It also reflects our refreshed commitment
to ESG, including our new goal to reduce
carbon emissions and achieve net zero in
our estate, assets and operations by 2040.
The new purpose will support our intention
to drive cultural change throughout
the business.
Whilst it has been a year of profound
challenge, I am confident that we have the
right team in place, the right strategy and
the right governance to ensure we are able
to take advantage of the opportunities
before us.
We are on a clear path to return Babcock
to strength.
Ruth Cairnie
Chair
We have paid careful attention to ensuring
that, as we introduce a completely new
operating model and changes in
governance and controls, we can be
confident that our processes are fit for
the strategic path we are now setting out.
These changes are being supported by a
strong focus on tone from the top.
Response to review findings
The various elements of our response are
set out in this Annual Report as follows:
• The findings of the CPBS review are
presented in detail in the Financial review
(see page 33);
• The work of the Audit Committee in
reviewing every finding and its correct
accounting treatment is covered in the
Audit Committee report, alongside the
Committee’s assessment of controls;
• The enhancements in governance are
set out in my introduction to the
Governance section;
• The changes in internal controls linked
to the new operating model are set
out on page 47.
The Board fully acknowledges the extent
and seriousness of the accounting issues
and weaknesses identified. We are satisfied
however that we have taken the necessary
steps, and at sufficient pace, to be able to
look forward to a positive future.
Babcock International Group PLC Annual Report and Financial Statements 2021
7
Strategic reportGovernanceFinancial statements Creating a
new approach
We did not adapt our approach to
match the changing world around
us quickly enough. This led
to underperformance for our
customers, our employees and
our investors. We are now aiming
to put this right.
What the
world looks
like now
How we are
responding
to it
This new
approach
aims to create
• The world is more unstable with
new and evolving threats to
national security
See page 18 for a detailed
look at the defence market
• Many exciting opportunities
exist across our markets but
our customers demand more
sophisticated relationships
and outputs
• Our aspirations around the
Avincis acquisition in 2014 have
not played out, most notably
the growth opportunity in oil
and gas and the sustainability of
high margins
• The UK’s Nuclear
Decommissioning Authority has
moved large civil nuclear
projects in-house which has
changed the shape of our civil
nuclear business
• Developed a refreshed strategy
• A better place to work for
our employees
• Improved and more consistent
delivery for our customers
• Increased ability to meet
our budgets
• Improved quality and
predictability of earnings, with
profits backed by cash
• An appropriate balance sheet
• A return to growth
See page 16
• Aligning our portfolio
• Creating a new operating model
that will increase collaboration
and reduce complexity and
duplication, and improve our
internal and financial controls
• Established a more appropriate
baseline for future financial
performance
• Increasing focus throughout our
business on cash and returns
• Building a stronger balance
sheet with lower leverage
• Implementing a new
people strategy
See page 22
8
Babcock International Group PLC Annual Report and Financial Statements 2021
Chief Executive Q&A
Meet the CEO
David Lockwood became Babcock’s
CEO on 14 September 2020.
Having spent his first few months
listening to colleagues, customers
and investors, he’s been making
significant changes. In this short
Q&A he talks about returning the
Company to strength.
Q
Q
Q
Q
What attracted you to Babcock?
The Company does really exciting
things but has the potential to do so
much more. When I first spoke to the
Chair it was clear that Babcock was on
a journey of strategic, operational and
cultural change, and the interaction
between those three elements is
what’s really excited me throughout
my career.
What was it like joining the
Company in the middle of a
global pandemic?
I like to get out and about to meet
people and customers to understand
how an organisation works. Obviously
that wasn’t possible, so I had to learn
a lot of new ways of working, so I
could reach and understand the
organisation in ways I hadn’t thought
about before.
And what did you learn about
the business?
That we had consciously been run as a
federation rather than a unified
Group. It was a model that had served
in the past but which now needed to
change to address today’s challenges
and opportunities. And I learned that
the good bits were better than I
thought and the bad bits were worse.
You say the bad bits were worse –
what do you think went wrong?
I think we probably set ourselves
unattainable objectives for the
business we were. When you
overreach you can do a lot of
self-harm in trying to achieve the
unattainable. And like any athlete,
if you aren’t fit for the challenge you
set yourself, if you strain for something
out of reach, you open yourself up
to injury. To stick with the analogy,
when I arrived, Babcock had pulled
a hamstring.
and get fitter. The strategic piece is
making sure we’re competing in the
right events and the new operating
model is how we get fit. And like any
athlete who has gone through a period
of being out of condition, we need to
regain our confidence, and that’s the
work we’re doing on culture.
We are aiming to become an athlete
capable of performing with confidence.
We will be fit for what we’re taking on
today, and then as we get fitter still,
we can take on more.
How would you describe
your strategy?
We will focus on our core activities in
the UK, and then use them to develop
internationally in two ways. Firstly to
work on exporting from the UK, much
more heavily embracing the aims of
the UK Government and its strategy.
And secondly to develop international
presence in our target countries,
focusing on our capabilities,
particularly in Marine and value-add
services. It’s pretty simple. And
there’s loads to go for.
We’re already focusing on the
things that matter at a Group level.
Overreaching can often mean a
weak balance sheet, so focusing on
where we want to compete – and
divestments are part of that – will
allow us to drive things differently.
What’s your personal focus for
the coming year?
Once the direction is set, the
main role of a CEO is to coach,
and I’ll be concentrating on two
distinct areas. First the cultural
development – our new purpose,
a greater emphasis on ESG and
so on. The second is international,
both the international countries in
which we operate, and exports.
What difference are shareholders
going to see?
All of this aims to deliver sustainable
cash-backed margin and growth,
which drives the investment
proposition, which generates
sustainable, predictable returns to
shareholders. Babcock will be
competitive on the world stage.
Q
Q
Q
Q
So how will you get Babcock back
to full strength?
In the near term we have to rein in
the challenges, focus on our recovery,
David Lockwood
Chief Executive Officer
Babcock International Group PLC Annual Report and Financial Statements 2021
9
Strategic reportGovernanceFinancial statements Adam Collins
Motor Cycle Technician
UK
10
Babcock International Group PLC Annual Report and Financial Statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
11
Strategic reportGovernanceFinancial statements CEO review
Detailed reviews completed
and turnaround underway
Our new approach
We announced a series of reviews in
January 2021 of our strategy, portfolio and
operating model, alongside a deep dive
into the profitability of our contracts and
balance sheet position to establish a
financial baseline. These reviews have now
been concluded, and the results make a
compelling argument for the significant
change needed in order to unlock the
Group’s potential.
The reviews showed that Babcock was
being run as a federation rather than a
unified Group, an approach which may
have served us in the past but does not
meet the needs of today’s market. The last
few years have seen a move to in-source
civil nuclear work in the UK, increased
customer demands on each new programme,
the need for a more agile supply chain and
the requirement for more innovative solutions
to the evolving threats in international
defence. We did not adapt to the changing
world around us quickly enough.
We also have to accept that the
expectations we had for the Avincis
acquisition in 2014 have not played out.
Growth in the markets Avincis served has
not been as expected, most notably in oil
and gas, and the profitability of those
businesses has been under pressure for
some years. Many of these pressures are
highlighted in our contract profitability and
balance sheet review (‘CPBS’) with just over
half of adjustments by value relating to
businesses that came from this acquisition.
Most importantly, we have already started
to implement a plan to fix this: removing
costs and taking a different approach to
contract bids. We are disposing of our oil
and gas business and are further reviewing
the aerial emergency services businesses.
As a Group, it seems that we sometimes
have been optimistic in setting objectives.
This led to a pattern of underperformance
which we are determined to address.
We are doing just that, and have instituted
a number of changes to enable us to be fit
to take advantage of the significant
opportunities we can see ahead.
David Lockwood
Chief Executive Officer
“Our direction is set, and we are ensuring that we
have all the elements in place to take advantage
of the many opportunities which lie before us.”
12
Babcock International Group PLC Annual Report and Financial Statements 2021
We now have a more appropriate baseline
for the financial performance of the Group.
We have set a new strategy as outlined
below, with a greater focus on maximising
our fundamental strengths in the UK and
internationally, both in our target countries
and through exports like the new Type 31
frigate and High Frequency communications.
I’m pleased to say that the international
defence market is responding positively.
And we are undergoing a wide-ranging
refresh of our culture – not just in terms of
the new ways of working captured in the
changes to the operating model, but in the
rolling-out of a new people strategy and a
new emphasis on ESG throughout the Group.
Strengths of the Group
Our business is based on some key fundamental
strengths across the Group, including:
• Deep technical expertise and highly
skilled people across critical and
complex engineering
• Ownership of key sites and infrastructure
including the Devonport and Rosyth
dockyards
• Strong relationships with our customers,
including a deep understanding of
their challenges
• Strong niche positions in Canada,
Australasia and South Africa, with a
developing position in France
• A range of platforms, systems and
products that are highly competitive in
international markets
Our strategy
We are an international aerospace, defence
and security company with a leading naval
business, and we provide value-add services
across the UK, France, Canada, Australasia
and South Africa. We are focused on five
strategic actions:
1. Aligning our portfolio
2. Implementing our new operating model
3. Rolling out our new people strategy
4. Developing our new ESG strategy
5. Exploring growth opportunities
Together this should lead to returns for
our shareholders, improved delivery for
customers and a better place to work
for our employees.
1) Aligning our portfolio
Our strategy review defined the markets
we wish to serve and therefore the best
portfolio to hold. With this in mind, we
considered which businesses we are the
best owner of and on which we could earn
a sufficient return on capital and this has
led to us identifying businesses that may
be divested. This portfolio alignment will
reduce complexity, increase focus and
increase the effective use of the Group’s
capital by disposing of the businesses that
are outside the perimeter of our strategy.
We are targeting proceeds of at least
£400 million over the next 12 months from
these divestments. Some of these processes
are underway and we will update the
market when material progress is made.
As announced in March 2021, we have
agreed the conditional sale of our oil
and gas aviation business. This deal is
expected to complete over the summer
subject to the satisfaction of the relevant
third-party conditions.
2) Implementing our new
operating model
We are creating a business that is more
efficient and effective. We are reducing
layers of management within the business
to form a flatter structure that will simplify
how we operate, improve line of sight,
shorten communication lines and therefore
increase business flexibility and our
responsiveness to market conditions. Sadly,
these changes will result in approximately
1,000 employees leaving the Group over
the 2022 financial year with an estimated
restructuring cost of £40 million.
These changes will also reduce our
operating cost base. Some of the savings
will be recognised across long-term
projects, for example where they form part
of existing contract efficiency assumptions,
and some savings will benefit our customers
via the contract structure. As such, the
expected realisable annualised savings are
approximately £40 million. The benefit in
FY22 will be roughly half this due to timing.
These changes will also create a leaner
organisation and should help our decision-
making – giving more power to the teams
closer to the customer. The changes also
aim to improve our internal and financial
controls, see further details in our Financial
review on page 30.
3) Rolling out our new people strategy
We are developing an organisation that
shares capability, talent, innovation and
best practice across the Group and removes
complexity. The new operating model
is a key pillar of our new people strategy.
On top of this, we will create an agile and
inclusive workplace, improve our diversity,
create a new approach to talent management
and we will harmonise our people policies
and processes. All of these will combine to
make Babcock a better place to work for
our employees.
Delivering our new operating model and
new people strategy requires us to embrace
a new culture to unlock the potential that
exists within the business – one which
continues our tradition of focus on the
customer, but which enables more
innovation and collaboration. We have
begun that process with the articulation
of our new purpose: creating a safe and
secure world, together. It’s a recognition
of the positive role we can and should take
in creating a safe and secure world, as a
responsible member of society, and of the
fact that almost everything we do is
collaborative – whether it is working
together across the different parts of the
Group, working with our customers, or
working with our partners and suppliers.
We have started to transform our culture
and that work will continue throughout
the coming financial year.
4) Developing our new ESG strategy
We have continued to make great progress
on developing our ESG strategy in a year
of many challenges. We have a plan to
reduce harmful emissions and integrate
sustainability into programme design
and have set a new target for the Group:
to achieve net zero carbon emissions for
our estate, assets and operations by 2040.
Babcock International Group PLC Annual Report and Financial Statements 2021
13
Strategic reportGovernanceFinancial statements CEO review continued
We want to make a positive difference to
our communities, including providing
high-quality jobs that support local
economies, and we are focused on being a
collaborative, trusted partner across the
supply chain. We have reaffirmed our
commitment to championing inclusion and
diversity across the Group, including setting
a new target to ensure that 30% of our
senior leadership roles are filled by women
by 2025. Additionally we are actively
working on meeting the recommendations
of the Parker Review as we support
increasing the representation of ethnicity
on UK boards.
5) Exploring growth opportunities
While our immediate focus has been on
completing our reviews and getting a more
appropriate baseline in place, we are also
exploring the growth opportunities ahead
of us. The markets we address offer
favourable medium-term growth and we
will focus on opportunities for defence and
value-add services in the UK, France,
Canada, Australasia and South Africa.
Work on key programmes critical to the
national security of the UK is the core of
what Babcock does. Given our strong
market position today, growth in the UK will
mainly be dependent on market growth.
There are areas where we will also look to
increase our share, for example secure
defence communications.
Growth in international markets can come
from market growth and an increase in
market share. We aim to develop our
international presence in our target markets
of France, Canada, Australasia and South
Africa. We are bidding for contracts that,
if won, would offer significant growth, for
example pilot training in Canada.
Our range of products have further
opportunities for growth including in our
equipment and systems exports and
international demand for the Type 31
platform. We aim to export a lot more in
the future from the UK, embracing the aims
of the UK Government and its strategy.
Recent business development
The Group continued to win work across all
markets and sectors in the year and, as of
31 March 2021, our contract backlog was
£8.7 billion. We now report a contract
backlog rather than an order book as in
previous years. Our new measure does not
include around £6.0 billion of work
expected to be done by Babcock as part of
framework agreements and, to align with
the change in presentation of revenue,
does not include a contribution of joint
ventures and associates of around
£2.0 billion.
In June 2021, we signed a tripartite
Memorandum of Implementation with the
UK’s MOD and Ukraine’s MOD to be the
prime contractor on a major programme of
naval defence projects. The programme
includes the enhancement of capabilities
on existing naval platforms, the delivery of
new platforms, including fast attack missile
craft, a modern frigate capability, shipborne
armaments and the training of naval
personnel. It also involves working together
to regenerate Ukrainian shipyards by
developing, implementing and completing
a Shipyard Regeneration Plan.
Also in June 2021, we were awarded a
contract with the French MOD for an
expansion of our existing defence aviation
training activities. This five-year contract is
worth around €500 million and started in
June 2021. We also won a logistic support
contract worth £150 million as part of the
UK MOD’s £3.2 billion Battlefield and
Tactical Communication Information
Systems (BATCIS) programme of
opportunities to deliver the next
generation tactical communications
and information systems.
We are currently in active discussions
regarding Type 31 export opportunities
with a number of countries, including
Greece, Indonesia and Poland.
Summary of financial performance
in FY21
Our financial performance in the year was
in line with the early indications we gave in
April 2021, though this now includes
presentational changes as covered in the
Financial review. Organic revenue decline
was 3% with demand for most of our work
holding up well despite the pressures of the
COVID-19 pandemic.
We made a statutory operating loss of
£1,643 million in the year, mainly as a
result of charges taken in our CPBS
including the impairment of goodwill
(see page 33). On an underlying basis, our
operating loss was £27.6 million, again
mainly due to CPBS charges. For the most
useful comparison to last year, and as a
better measure for future periods, we focus
in this report on the Group’s underlying
operating profit excluding the one-off CPBS
adjustment. On this basis, we had an
underlying operating profit of £222.4 million
in the year compared to £377.6 million
last year (restated), both of which now
exclude our share results of joint ventures
and associates.
This decline in profit reflects disposals and
lost business as well as a significant impact
from COVID-19. The year-on-year decline is
exacerbated by significant credits that
benefited the results of the previous
financial year. These are covered in more
detail in our Financial review.
The COVID-19 pandemic had a material
impact in the year and continues to cause
uncertainty across our markets. The impacts
in the year were most severe for our
non-defence businesses (e.g. civil aviation
and civil training) where activity in some
cases stopped. The defence businesses saw
some interruption and increased costs
initially. Subsequently, most defence
programmes and sites were reopened,
albeit with social distancing restrictions and
higher levels of employees working from
home. This led to less efficient delivery,
hence profitability was affected
proportionately more than revenue.
14
Babcock International Group PLC Annual Report and Financial Statements 2021
Health and safety performance
in the year
While our total injuries rate was lower this
year, at 1.01 reported injuries for every
100,000 hours worked (2020: 1.24), we
saw an increase of 36% in the more serious
‘Babcock RIDDOR’ injury rate. Tragically, in
August 2020, during a firefighting mission
an aircraft crash-landed in Spain near the
Portuguese border causing the immediate
fatality of the co-pilot. The pilot, who had
suffered major injuries, subsequently passed
away. The incident is currently under
investigation by the appropriate authorities.
This incident and the increase in serious
injuries underlines how crucial it is we
continue to focus on improving our health
and safety performance.
Trading in the first quarter for FY22
Trading in the quarter ended 30 June 2021
was in line with our expectations across all
four sectors. Net debt (excluding operating
leases) was £1,140 million, higher than at
31 March 2021 but lower than the average
net debt for FY21.
Outlook
We are confident that we have established
a clear strategic path to return Babcock to
strength, but the extent of the transformation
we are undergoing means that FY22 will
be a year of transition. The impact of
COVID-19 on performance in FY22 is
uncertain. While activity levels have broadly
recovered, the additional costs from
operating in a COVID-secure way remain.
These costs, combined with the uncertainty
over business interruption from increased
cases and potential new variants, mean
that we do not currently expect a material
boost in profitability from COVID-19
restrictions easing. As such, we remain
cautious about the progress we will be able
to make on profitability.
Free cash flow will be impacted by the
material cash outflows previously
communicated, particularly additional
pension contributions and exceptional cash
costs, both restructuring costs and the Italy
fine. In addition, we are still investing in
facilities and IT upgrades and we will be
unwinding the historical management of
working capital around period ends.
As such, free cash flow (before disposal
proceeds) in the 2022 financial year is
expected to be significantly negative.
We are confident about our prospects
for the markets we serve. We believe that
with our improved strategic focus and
operational delivery, and with efficiencies
generated by the new operating model,
we can significantly improve the Group’s
profitability, and most importantly its cash
generation, over the medium term but this
will take time to deliver.
Delivering for all our stakeholders
Over the medium and long term we are
focused on delivering value for all of our
stakeholders, including:
• Returns for our shareholders: a return
to growth with improving margins and
better cash conversion
• Improved delivery for our customers:
consistent delivery and partnering with
customers to solve their challenges
• A better place to work for our
employees: an open, collaborative
and diverse workplace that engages
our employees
Our direction is set, and we are ensuring
that we have all the elements in place to
take advantage of the many opportunities
which lie before us. We look forward to
sharing updates on our progress as we
move forward
David Lockwood OBE
Chief Executive Officer
Babcock International Group PLC Annual Report and Financial Statements 2021
15
Strategic reportGovernanceFinancial statements Strategy
Our strategy
We are focused on being an international aerospace, defence and security
company with a leading naval business, providing value-add services across
the UK, France, Canada, Australasia and South Africa.
UK
naval business
UK value-add
services
International
Strengths
• Owns key sites and infrastructure including
Strengths
• Deep technical expertise across critical
Strengths
• Strong niche positions in Canada and
the Devonport and Rosyth dockyards
• Deep technical expertise across critical
and complex engineering
• Customer relationships
Growth drivers
• Increase in UK defence budget
• Increase in shipbuilding
• Defence and nuclear infrastructure
• Increased submarine support with more
classes in service
and complex engineering
• Deep technical expertise in civil nuclear
• Customer relationships
Australasia and South Africa
• Developing position in France
• Range of platforms, systems and products
Growth drivers
• Long-term opportunities in civil nuclear
that are highly competitive in
international markets
• Customer relationships
Growth drivers
• First generation outsourcing
• Equipment and systems
• Potential for Type 31 exports
Supported by
Our five strategic actions
Delivering
Returns for
our shareholders
Improved delivery
for customers
A better place to work
for our employees
A return to growth with improving
margins and better cash conversion
Consistent delivery and partnering with
customers to solve their challenges
An open, collaborative and diverse
workplace that engages our employees
16
Babcock International Group PLC Annual Report and Financial Statements 2021
1. Align the
portfolio
Strategic actions
• We will align the Group’s portfolio by divesting certain businesses
to reduce complexity, increase focus and improve the effective
use of the Group’s capital by disposing of the businesses that are
nearer the perimeter of our strategy
• This is expected to generate disposal proceeds of at least
£400 million over the next 12 months
2. Implement
our operating
model
3. Roll out a
new people
strategy
See page 22
for more details
4. Develop our
ESG strategy
See page 62
for more details
5. Explore
growth
opportunities
See page 18 for
opportunities across
our defence markets
• We are creating a business that is more efficient and effective
• A flatter structure will simplify how we operate, improve
communication and increase business flexibility and our
responsiveness to market conditions
• The new structure will reinforce a one company culture and
remove duplication
• This new model will generate annualised cost savings of
approximately £40 million, helping to create a stronger Babcock
• The new model will also help our internal and financial controls
• We will develop an organisation that shares capability,
talent, innovation and best practice across the Group and
removes complexity
• We will communicate our purpose and create a culture that
better supports and empowers our people
• We will create an agile and inclusive workplace, which supports
work-life balance
• We will improve diversity across the Group
• We will take a new approach to talent, learning and performance
• We will harmonise people policies and processes
• We will reduce emissions and set science-based targets to get to
net zero across our estate, assets and operations by 2040
• We will integrate environmental sustainability into programme
design to minimise waste and optimise resources
• We will make a positive difference to the communities we’re
proud to be part of and provide high-quality jobs that support
local economies
• We will be a collaborative, trusted partner across the supply
chain, helping to tackle common challenges
• We will ensure the safety and wellbeing of all our people
• The markets we address offer favourable medium-term growth.
We will focus on opportunities for defence and value-add
services in the UK, France, Canada, Australasia and South Africa
• Growth in the UK will mainly come from market growth, given
our strong market position today. There are areas where we will
also look to increase our share, for example defence secure
communications and shipbuilding
• Growth in international markets can come from market growth
and an increase in market share. We are bidding for contracts
that, if won, would offer significant in-market growth, for
example pilot training in Canada
• Our products have further opportunities for growth including
growth in our equipment and systems exports and international
demand for the Type 31 platform
Babcock International Group PLC Annual Report and Financial Statements 2021
17
Strategic reportGovernanceFinancial statements Market review
Babcock across defence
Defence is our largest market and
at the heart of what we do. We
have a crucial role in delivering
critical defence services in the UK,
France, Canada, Australasia and
we make products for several
other nations including the USA
and Korea.
Our customers are all facing similar demands:
• A more unstable world with new and
evolving threats to national security
• Budgets under pressure to deliver value
for money
• A greater need for applied technology
Defence markets offer significant resilience
and long-term potential, both in terms of
increased spend in our current markets and
expansion into new markets, and our bid
pipeline includes many opportunities. We
are focused on the UK, France, Australasia
and Canada markets, as well as export
opportunities across the world.
UK
Market position
Our primary market today is the UK, where
we provide critical support to all of the UK’s
armed forces. 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 requirements
evolve and complexity increases.
UK defence spend 2020 £39.8bn
16%
10%
12%
17%
27%
18%
Personnel
Equipment
support
Specialist
equipment
Infrastructure
Property,
equipment and
inventory
Other
Source: UK MOD departmental resources 2020
– GOV.UK (www.gov.uk).
Over the last year, the UK has seen a
significant uplift in budget commitments.
Defence spending rose to £39.8 billion in
2020, an increase of £1.8 billion or around
2%, adjusted for inflation compared with
2019, with an estimated £19.5 billion
spent on MOD equipment and equipment
support, an increase of around 13%.
Around 18% of the total defence spend
(of around £7 billion) was designated to
supporting MOD equipment, slightly lower
than last year.
Growth year on year is dependent on the
phasing of MOD spend, whereas long-term
UK market growth is driven by the MOD’s
longer-term spending commitments, which
will soon see the biggest uplift in over
30 years. In November 2020, the UK
announced a defence spending uplift of
£24 billion which will raise defence
spending as a proportion of GDP to an
estimated 2.2%, exceeding the NATO
pledge of 2%. In total, £190 billion was
pledged to be spent over the next four
years. The budget uplift framework was
populated with detailed plans and
commitments in the Integrated Review
released in March.
Opportunities
The budget uplift produces a variety of
potential outcomes for UK defence. The
deployment of a carrier strike group will
require available ships and submarines with
trained personnel and support ships to be
ready. The confirmation of volumes of
operational F35s and the new Tempest
programme may present further
opportunities for support to operational
training. The continued commitment to the
Continuous At Sea Deterrent may require
two streams of nuclear ballistic submarine
maintenance in future, combined with two
streams of attack class submarine support
while both classes transition, while the
UK Integrated Review
In March 2021, the UK published the
Integrated Review which sets out the
Government’s strategic framework for
national security and international
objectives out to 2025, including future
threats, capability investment and
innovation in R&D. We outline below
the highlights from the report most
relevant to us.
Naval
• A commitment to develop the next
generation of warships, including
multi-role research vessels and support
ships to supply carriers, with investment
set to double to £1.7 billion a year. This
sets out a strategic approach to the
UK’s core industrial base, including
shipbuilding in Scotland.
• Confirming the carrier strike group
deployment schedule highlights the
requirement for support ships,
submarines and trained crew and
presents opportunities for the wider UK
supply chain.
• Continued commitment to the nuclear
deterrent and an increase in the cap on
the number of UK nuclear warheads
from 180 to 260 requires UK industry
to enable the continued support of
current classes while gearing up
infrastructure, support technology and
supply chain for the future classes.
Carrier Strike Group © Crown Copyright 2021
Image: UK MOD.
Air Force
• The confirmation of the Tempest
programme to provide the Royal Air
Force with a modern aircraft to counter
future threats. Babcock currently has no
involvement with this programme.
Land
• The investment of an additional
£3 billion in new army equipment,
(including upgrading Challenger 2 to
148 Challenger 3 vehicles) will not
directly benefit Babcock, but may
present opportunities in the future.
• The Warrior capability sustainment
programme, where we had previously
targeted supporting the prime
contractor, has been cancelled .
18
Babcock International Group PLC Annual Report and Financial Statements 2021
Products
Market position
Babcock offers a number of defence
products in naval market categories. A
major offering in our product category
is the UK’s Type 31 frigate programme,
building on our capability with the
design, build and assembly of the
Queen Elizabeth Class aircraft carriers.
We have unique solutions for weapons
handling and launch systems, primarily
for submarines but also for surface ships,
with supply and support to the UK,
Australia, Spain, and Korea. We are also
involved in the production of vertical
missile tubes for the US-UK common
missile compartment programme. In
addition to weapons handling and
launch systems we have expertise in
designing innovative equipment
launch and discharge systems.
Opportunities
Type 31 presents the largest product
opportunity for Babcock, with potential
for international export plus the Type 32
variant recently included in the
UK Integrated Review. In addition to
current build programmes, the Fleet
Solid Support ships (FSS) will be
required to support the carrier strike
group on deployment and Babcock
is well placed for some of this work.
Outside of shipbuilding there is a
potential to combine our equipment
discharge system knowledge with
autonomous technology for deployment
in a variety of applications.
Risks
UK shipbuilding decisions receive a
great deal of political attention and
bidding processes are competitive.
Canberra Class landing helicopter platform
docks and ANZAC Class frigates. Babcock
also provides unique defence exports for
weapons handling and launch systems
for their future frigate and submarine
programmes. In New Zealand, we
provide maintenance programmes for
their fleet of frigates through the
managed dockyard in Auckland.
Opportunities
Australia has set out a significant increase in
defence spending over the next 10 years.
A key beneficiary of the increase are the
ship and submarine building programmes
to address the evolving threats in the
Indo-Pacific region. The new frigate and
submarine programmes present a good
opportunity for naval defence contractors.
Risks
Competition remains strong in Australia and
we may need to develop a larger in-country
presence for some major programmes in
the pipeline.
France
Market position
In partnership with the French Air Force,
Babcock developed a first-generation
outsourcing programme of support for
fixed wing air training. Babcock built from
that position with rotary wing support for
French Navy search and rescue operations,
with clear overlap with our aerial
emergency services maintenance and
support business.
Opportunities
The French defence budget will benefit
from the third year in a row of increased
spend. There is opportunity to use our
status as a maritime and aviation support
and training provider to deliver integrated
support and training requirements as
additional programmes may mature into
an outsourced contracting framework.
Risks
With limited infrastructure, there is a risk
that French companies will be prioritised
for national recovery plans designed to
support the defence sector’s supply chain.
Type 31 programme may present
further opportunities to progress into
the Type 32 class.
Risks
We recognise that our position as the UK’s
second largest defence supplier represents
a significant reliance on the UK MOD, which
is identified as a key principal risk outlined
by the Group, see page 87. Reputational
and execution risk on the volume of critical
programmes is also routinely reviewed.
A shift of threat level towards innovative
airborne and cyber threats may trigger a
response to further move budget allocation
away from traditional land-based
requirements to new areas.
Canada
Market position
Working with the Royal Canadian Navy,
Babcock has transferred the skills and
expertise required for UK submarine
services to provide through-life support and
maintenance to Canada’s fleet of Victoria
Class submarines.
Opportunities
The Canadian Government has committed
to the long-term funding of defence to
grow its force size and enhance
capabilities. It has also pledged to keep
defence spending steady to more closely
meet NATO commitments. The Canadian
Government’s shipbuilding strategy may
provide additional surface ship
opportunities in the future as new variants
are commissioned. In addition, we continue
to target future military aviation training
opportunities in Canada.
Risks
A preference for native companies could
limit Babcock’s exposure to further
opportunities given our relatively modest
footprint in the country. This is highlighted
as one of the Group’s principal risks,
see page 89. Our current work is based
around one programme and we do not
own any infrastructure.
Australasia
Market position
Babcock provides naval support
programmes to the Royal Australian Navy
and Royal New Zealand Navy. In Australia,
we provide both submarine and surface
ship programmes entailing through-life
support for the Collins Class submarines,
Babcock International Group PLC Annual Report and Financial Statements 2021
19
Strategic reportGovernanceFinancial statements Business model
Business model
Our business
model
Maintaining national security
We help our customers maintain
national security and save lives.
Our customers have complex and
valuable assets that need to be
available for as long as possible and
many defence assets need constant
sustainment to ensure there are no
gaps in defence capability.
Customer challenges
Cost efficiency is key
All of our customers face budget
pressures and look to us to help
maximise availability and outputs
while minimising costs.
Safety and regulatory
Safety and regulatory compliance
underpin all work. We and our
customers operate in heavily
regulated environments where
the health, safety and wellbeing of
all stakeholders is the number
one priority.
Our people
We rely on our people, and their
experiences and skills, to deliver for
our customers and solve challenges
every day. We aim to better support
and empower our workforce. See our
people strategy on page 22.
Our inputs
Our assets
We operate a range of assets in our
business, ranging from complex
engineering facilities through to
aircraft for the delivery of emergency
services. We own critical national
infrastructure in the UK including the
Devonport and Rosyth dockyards.
Our technology and know-how
Across our business we use our
technology and our engineering
know-how to solve customer
challenges. We have a deep
understanding of our customers’
assets and are able to integrate
multiple technologies to support
their needs. Read more about
our innovation and technology
on pages 24 to 27.
What we do
Deliver critical programmes
We provide through-life support for
our customers’ assets to deliver
material improvements in the
performance, availability and cost of
supporting these assets.
Design and manufacture
We design and manufacture a range
of equipment, from warships to
weapons handling and launch systems
for submarines.
Deliver critical services
We deliver critical services for all our
customers, from supporting naval and
air base operations to emergency
services and complex nuclear services.
20
Babcock International Group PLC Annual Report and Financial Statements 2021
How we do it
Delivering across
long-term contracts
g
Biddin
W
o
r
k
Work
Our contract backlog of £8.7 billion
represents contracted work and
provides a base level of revenue for
the years ahead. This is supplemented
by new business wins, in contract
growth and short-cycle work. Contract
extensions and variations also add to
the our work over time. Revenue is
recognised as we deliver
on our contracts and performance
obligations are satisfied.
I
n
v
e
s
ting
C ash
Cash
Performance across contracts drives
revenue, profits and cash. We aim
to improve our cash generation
throughout the year as covered in our
Financial review, see page 40.
Creating stakeholder value
Employees
Creating a better
place to work
where employees
are valued and
motivated at
all times.
Regulatory and
industry bodies
Never
compromising
on safety and
complying with
regulations at
all times.
Supply chain
Creating jobs
and nurturing
investment
through
collaboration
with our supply
chain and paying
our suppliers
on time.
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.
Bidding
We continually monitor opportunities
across our markets, for new and
existing customers. We have a multi-
gate review process for contract bids
to help ensure we only bid on value-
creating work. Any contract worth
more than £25 million, or lasting five
years or more, requires approval from
the CEO and CFO.
Investing
The cash we generate funds
reinvestment into the business,
principally through capital expenditure
to develop sites, equipment and IT
infrastructure. It pays our suppliers,
employees and lenders and covers our
tax liabilities and the funding of our
pensions schemes.
Customers
Delivering for
our customers
and partnering
with them on
the challenges
they face.
Investors
Creating
shareholder value
through growth,
cash generation
and the efficient
allocation of
capital. Delivering
shareholder
returns through
dividends and
increased
share value.
See pages 58 to 59 and 114 to 116 for details on how we engage with stakeholders
Babcock International Group PLC Annual Report and Financial Statements 2021
21
Strategic reportGovernanceFinancial statements People plan
Unlocking potential
To become the organisation we
aspire to be so we can deliver on
our new purpose – to create a safe
and secure world, together – we
recognise that we need a new
relationship with our people. In
January 2021 I was appointed
Babcock’s first Chief HR Officer and
it is my role to unlock the potential
of our people to drive business
performance that will deliver for
our shareholders, customers and
each other.
Over the last few months we have been
undertaking reviews of our business
performance, our financial baseline and our
strategic priorities, along with our
operating model. What is overwhelmingly
clear is that we have not been leveraging
our full potential, strength and capability as
a single integrated Group.
We have listened to feedback from our
workforce on how it feels to be part of our
organisation, and taken a hard look at what
we need to do to have a more efficient,
agile, sustainable and people-focused
business. Our federated structure has
resulted in an organisation that is not as
efficient as it needs to be and is far too
complex. The new operating model we
announced in April will support changes to
the way in which we deliver our work,
including the following:
• operating as one Babcock, sharing
capability, talent, innovation and best
practice Group-wide
• reducing layers and complexity to
enable more accountability, efficiency
and agility
• enabling functional activity to be
centrally coordinated, providing
consistency across the business in the
way we do things
• implementing a new people strategy,
to better support and empower our
people
• building a better, more sustainable
business, which delivers for all our
stakeholders
In addition to our new operating model,
we have made some progress over recent
months to achieving a people-focused
business with the introduction of ‘agile
working’, which seeks to offer our
employees flexibility in the way in which
they can deliver their work.
Nikki Fox
Chief Human Resources Officer
22
Babcock International Group PLC Annual Report and Financial Statements 2021
I recognise there is much more to be done
and we need a step change in areas such
as inclusion and diversity, employee
experience and career development to
create an organisation where all of our
people feel a sense of belonging and that
their contributions are valued.
I am currently working with a range of
stakeholders to develop a people strategy
that will more closely align with the
organisation we want to become and put
our people at the core of what we do.
While our people strategy is not yet
finalised, it will seek to address a number
of challenges by:
• Communicating our purpose and
principles – defining who we are, the
culture we want, and our shared goals.
By developing a consistent purpose and
set of principles, we will clarify our
expectations of people who work for
Babcock. This will create the basis for an
integrated, collaborative organisation,
which is greater than the sum of its parts
and invested in our future. It will also
provide clarity on what it means to
deliver for our shareholders, customers
and each other.
• Creating a safe and welcoming
workplace – effectively connecting and
engaging all our people to be a company
that values diversity, where everyone can
be themselves. We have a way to go on
this and will be honest and transparent
about what matters and our journey to
get there. We will take action, tackle
issues and overcome barriers to create
the inclusive and engaging workplace
that our people deserve.
A business where employees are trusted
to make decisions about how they work,
balancing personal preferences with
company and customer needs.
A culture that enables work-life balance,
supports family commitments and
promotes inclusivity, where employees
are empowered to use personal
judgement and make individual choices.
A business that focuses on output and
deliverables, not presence or location…
This is our new reality.
Agile Working Enablers
Technology
Equipment
and Kit
Health, Safety
and Wellbeing
Enablers
Environment
Policies and
Guidance
Culture
and Values
• Developing impact-focused, collaborative
leaders – there will be a fundamental
shift in leadership expectations, creating
leaders who ‘think, connect and do’. We
will set a new standard for leadership and
expect leaders to act as role models for
our purpose, principles and behaviours in
how they support their teams.
• Driving performance and unleashing
potential – enabling our people to
perform at their best. We will actively
recruit new people, and will develop our
existing employees, through robust
talent, learning and performance
processes.
• Harmonising people policies and
processes – building solid and aligned
foundations that underpin being part of
a single Babcock. We will develop a
consistent proposition and experience for
all Babcock employees that is delivered
through an appropriately structured and
highly capable people function, with
simplified and clear people processes.
This is a very exciting time to be part of
Babcock, and I am delighted to be leading
the work we are doing around our people
strategy and I look forward to working with
our trades unions as we return Babcock to
strength and offer a better experience for
all our people, a better place to work and a
better partner to our customers.
Nikki Fox
Chief Human Resources Officer
Sustainability matters
As we reshape the business, it’s evident
that sustainability needs to take centre
stage in our thinking at all levels, from the
Board to the front line.
It’s a fundamental part of the responsible
management of any business. It’s what all
our stakeholders, from customers to
investors to our own people, demand.
And rightly so.
This isn’t about paying lip-service to the
notion of responsible business; it’s about
being a business that we are proud to be a
part of, one which enables us to live our
purpose: to create a safe and secure
world, together.
Last year we developed an ESG strategy,
and this year we are building on it. We are
still at the start of our journey but we’re
developing the targets that we want to be
measured by as we make progress along
the route.
Our commitment to addressing the global
climate crisis by delivering net zero
emissions by 2040 is just one example.
One thing is clear, there is no chance that
we will turn back.
For details of what we are doing on ESG
see pages 62 to 81.
Babcock International Group PLC Annual Report and Financial Statements 2021
23
Babcock employees gardening at Rosyth as part of
an initiative to support mental health charities.
Strategic reportGovernanceFinancial statements Innovation & Technology
Innovating for the future
Technology is changing the way
we work and what we deliver.
That means our customers are
increasingly turning to us for
tomorrow’s technology solutions.
The impact of the COVID-19
pandemic alone has shown us that.
Over the last year we have taken a hard
look at how we can foster innovation and
technology across the Group. It was clear
that whilst there were areas in which we
excelled, we needed to be more flexible
and proactive in driving and sharing
innovation across the Group.
The responsibility for business
performance and customer delivery
rests on all our people, so innovation in
Babcock goes beyond the technical
engineering and digital domains.
Innovation is vital to our service delivery
and business performance, so it matters in
all our operational and functional areas.
It can range from continuous ‘lean’ thinking
to larger ‘landmark’ capability
development programmes.
That’s why, as well as acting on key
themes in our technology road maps,
we are growing our innovation platforms
and knowledge transfer networks –
encouraging our people to be curious
and to collaborate, to put good ideas
into practice.
We believe this is an important factor in
increasing our operational efficiency and
our access to new markets – whether
that is in deploying our full capability
internationally, or exploiting the growth
of new asset types and operating
environments facing our customers.
As our customer requirements have
changed and evolved, we’ve also been
looking at new ways of innovating and how
we can harness the wealth of expertise we
have in Babcock and share that knowledge
in ways that will make a real difference to
how we run our business.
We know we can do things differently and
we know we need to do things differently.
My appointment to the new role of
Babcock’s Chief Innovation & Technology
Officer is a sign of the Group’s commitment
to driving change.
Jon Hall, PhD
Chief Innovation & Technology Officer
24
Babcock International Group PLC Annual Report and Financial Statements 2021
Fostering innovation
Over the current financial year, working
together with our leadership team we will
nurture and foster innovation within
Babcock, supported by our new people
Strategy (see page 22). We will build on our
inherent engineering ingenuity, harness the
expertise of our people through knowledge-
sharing platforms and continue to invest in
our technology capabilities both in the UK
and internationally. This focus on
innovation will be promoted by increased
collaboration and reach across the Group,
aided by our ‘lean’ or operational
excellence programmes.
We will drive growth through our extensive
technology programmes, but we also need
people who understand the increasingly
complex world of digital systems and data;
people who can translate and transform
that data to bring about real, tangible
benefits to how we design, build and look
after our customers’ assets.
So investing in next generation skills will be
a key enabler of how we work with our
customers and manage their assets, and
our businesses. We will create a Babcock
Digital Academy to build wider digital
awareness across Babcock. This will be a
network to integrate and embed the latest
thinking around data exploitation and
digital technology, and an opportunity to
share ideas and best practice. Using
technology such as machine learning to
assess corrosion, for example, will drive
significant efficiencies, reduce costs,
increase availability and tap into new
markets – whatever the industry.
We have also started an internal campaign
to encourage our own people to innovate,
and to ‘think BIG’ and contribute through
our new knowledge-sharing hub, BIG Ideas.
I’m delighted that so many of our people
have jumped on board since we launched
the hub to have their say. It isn’t just about
platforms of course; it’s how we share
information, and our people are critical to
achieving that.
Randika Vithanage, Senior R&D Engineer, using a high temperature ultrasonic roller probe at the University of
Strathclyde’s Technology Innovation Centre laboratory in Glasgow.
Strathclyde
Case study
Innovation through collaboration: Our
strategic partnership with Strathclyde.
At Babcock, successful collaboration
underpins much of what we do.
That’s why working in partnership with
academic partners such as the University
of Strathclyde means we can deliver real
innovation to address some of the most
important engineering challenges facing
us today.
With our recently launched strategic
partnership, our longstanding relationship
will allow us to focus on activities which
will drive innovation and enable technology
integration in the critical work we do.
Knowledge transfer is also fundamental
so we’ll have the right platforms in place
to ensure we’re learning from this at
every step.
We’ll focus on technology areas such
as autonomy and trusted systems, data
analytics, and advanced manufacturing
and inspection. Our people will also
benefit through our planned Babcock
Digital Academy, in which Strathclyde will
have a role, to support all these projects.
We’ll build on existing successes such as
our Prosperity Partnership; a five-year
collaborative research project, co-funded
by the UK EPSRC, involving Babcock,
Strathclyde and other academic partners,
focused on delivering new technology
solutions to prolong the life of the nuclear
assets we manage.
Again, our focus will be on driving down
costs and improving availability. Over the
next two years we will deploy this research
into industrial application and generate real
world impact. There will be a particular
focus on deploying informatics solutions,
in-process and autonomous inspection
capabilities and field trials of infrastructure
remediation techniques. All of this helps us
to provide deeper engineering support
and increased efficiencies for new and
existing customers.
A more structured collaboration means we
can bring all of that innovation together
and plan greater continuity of engagement
and insight.
Professor Sir Jim McDonald, Principal
Vice-Chancellor of the University of
Strathclyde said: “Our innovative
collaborations, such as the Prosperity
Partnership, are already generating impact
across industry and academia. Our partnership
means we can now look forward to
exploring new areas of research and
translating the outcomes to both support
innovation and develop solutions for
industry challenges.
“It also means we can offer students and
staff valuable industry experience through
internships, placements and secondments,
as well as providing Babcock with a critical
source of future talent.”
Babcock International Group PLC Annual Report and Financial Statements 2021
25
Strategic reportGovernanceFinancial statements Partnerships
As well as our people, it’s the strength of
the organisations we partner with that
really makes a difference to the work
Babcock does, whether in defence,
emergency services, or our civil
nuclear business.
That’s why we’re collaborating with some
of the most respected academic institutions
and industrial partners in the UK and
internationally. Our partnerships enable us
to stay abreast of developments, and to
share the innovation that research brings
with our customers, our people, and
our business.
Our assets are complex and critical with
long lifespans, so these programmes
allow us to better understand their
lifecycle, prolong their use and deliver
increased operational efficiencies and
enhanced output.
Innovation is good ideas put into practice,
and our partnerships are a critical part of
how we do that.
Over the coming year we will expand the
number of research projects with our
academic partners. These include
Strathclyde, Cranfield, Edinburgh and
Exeter universities where we are working
on areas such as the application of
digital twins, condition monitoring and
predictive modelling to prolong the life
of nuclear assets.
Innovation & Technology continued
Airbus H145 helicopter operated by Babcock in Italy.
Cranfield/Odin
Case study
Innovation unlocking AI potential
At Babcock we manage complex and
critical assets, and to get the best out of
these assets and deliver increased efficiency
for our customers we need to understand
the data we’re working with.
In our Aviation business the Innovation and
Technology team have been working to
develop a cutting-edge data and analytics
capability to allow us to make better-
informed decisions to prolong asset life,
increase availability and reduce cost.
The first phase of Project Odin has just been
delivered, with our UK Onshore Team
supported by research with our partners at
Cranfield University.
Odin uses advanced data analytics and
artificial intelligence garnered from the
aircraft we manage. Using the most
advanced data analytic techniques we can
bring data from different sources together
which provides valuable insight into system
availability, usage, spares management and
maintenance scheduling.
Hayley Belmore, Director UK Onshore,
explains: “The Onshore business benefits
from a number of great systems collecting
a plethora of useful data. Extracting,
validating, improving the quality of the
data and bringing the information together
in an intelligent way to help us better
understand the business had previously
been a challenge. We now have a fantastic
platform giving us accessible, quality data
to facilitate decision-making.”
Odin is one of the most exciting
programmes Babcock will be offering.
As well as developing its reach across
existing aviation fleets, we’ll also look to
incorporate it into new areas such as smart
buildings and hangars. This in turn will
support our customers’ need for
sustainability and give us both
opportunities for growth. We’ll work
alongside them so they will be able to
make data-driven decisions and
incorporate new technologies such as
unmanned air systems.
26
Babcock International Group PLC Annual Report and Financial Statements 2021
These partnerships also support the work
we do with the Advanced Nuclear Research
Centre and the Advanced Manufacturing
Research Centre and this investment is
being realised in the Arrol-Gibb Innovation
Campus at our Rosyth site. We will trial
advanced technology applications that will
support our major manufacturing
programmes, including the Type 31,
ensuring we meet the programme’s
challenging targets.
Our integration of advanced manufacturing
and MRO technology will directly support
cost advantage across our current
programmes. Equally, our access to
international markets for Type 31 ‘export’
and other future programmes will be
enhanced by the ability to transfer these
new solutions, for in-country build.
We have a busy and exciting year ahead of
us. I am inspired by our people every day,
knowing what we can achieve and deliver,
as a team and as a company.
That is why for us, innovation isn’t just in
that cutting-edge piece of technology, it’s
in our people, it’s in our partnerships – it’s
in what we deliver and it defines not just
who we are but what we can be.
Royal Navy’s 4.5” Mk8 Medium Calibre Gun © Crown Copyright 2021 Image: UK MOD.
Digital & data technology
Case study
Continued investment in digital and
data technology
We continue to invest and innovate across
our technology programmes, including our
iSupport360 approach where we have a
strong focus on using data to enable better
asset availability management, in projects
such as Odin. This includes a recent
application with the Royal Navy’s 4.5” Mk8
Medium Calibre Gun. Here we’ve created a
digital twin to better predict performance
and define maintenance requirements –
demonstrating innovation and value in the
real world use of digital twin technology in
legacy assets. Expanding our data
exploitation in contracts like these not only
increases availability to benefit our
customer, it benefits Babcock through KPI
incentives and by driving down our costs
and inventory.
Working in partnership with our customers
and original equipment manufacturers we
are implementing similar programmes
across a number of existing assets that
Babcock supports or operates, including the
UK Royal Navy’s Type 23 frigates, UK Army
platforms such as Bulldog, military aviation
platforms and infrastructure, civil aircraft
and civil nuclear power plants.
We are also putting this digital approach
at the core of new platform development
such as the Type 31 class frigates and the
Dreadnought nuclear submarine
programme, where we are working with
our supply chain and wider enterprise to
establish a digital thread at the design
stage which can live with the platform
throughout its lifecycle – data that can be
shared across all stakeholders operating
and managing the asset and will reduce
costs both now and throughout the life of
the assets.
Babcock International Group PLC Annual Report and Financial Statements 2021
27
Strategic reportGovernanceFinancial statements Key performance indicators
How we will measure our progress
We have nine key performance indicators (KPI) that we monitor to measure the progress
against our strategy. These include six financial metrics and three non-financial measures,
including a new KPI this year for gender diversity across our senior management.
FY21 results
Organic revenue
growth (%)
Underlying operating
margin (%)
Underlying EPS (p)
Underlying operating
cash conversion (%)
Net debt / EBITDA
(covenant basis)
-3.3%
-0.7%
5
8
.
3
3
.
-
-23.8p
134%
2.5x
.
4
8
5
4
3
1
5
2
.
3
2
.
.
8
3
2
-
FY21
FY20
Restated
Definition
Underlying earnings
after tax divided
by the weighted
average number of
ordinary shares.
Commentary
Underlying earnings per
share was a loss of 23.8p
per share this year,
reflecting the underlying
operating loss following
the negative impacts of
our CPBS. Excluding the
one-off impacts of the
CPBS, underlying EPS
would have been 28.9p.
Our target is to grow EPS
over the long-term.
Link to strategy
2. Implement our
operating model
5. Explore growth
opportunities
N/A
FY20
FY21
Definition
The movement in
revenue compared to
that of the previous year
excluding the impact
of FX, acquisitions and
disposals. See note 1
of the accounts for
details of our revenue
recognition policy.
Previously we reported
underlying revenue,
which included our share
of revenue from joint
ventures. We now report
only one revenue
number, which excludes
joint ventures, in line
with IFRS 15.
Commentary
Organic revenue was
down 3.3% in the year,
reflecting the impacts of
COVID-19 on trading as
well as the de-recognition
of revenue from our
Phoenix contract
in Land.
Link to strategy
5. Explore growth
opportunities
7
0
.
-
FY21
FY20
Restated
Definition
Underlying operating
profit expressed as a
percentage of revenue.
We have updated our
definition of underlying
operating profit this year
to exclude our share of
joint ventures, see page
31 for more details.
See page 31 for a
reconciliation of
statutory to underlying
operating profit.
Commentary
Our underlying operating
margin was negative this
year as a result of the
impacts of the CPBS.
Excluding the one-off
impacts of the CPBS, our
underlying operating
margin would have been
5.3%. This significant
decline on last year
mainly reflects the
impact of COVID-19 and
significant credits that
benefited FY20, especially
tax credit phasing in
Nuclear and FY20 credits
in civil aviation. Our
target is to gradually
expand our underlying
margin over time.
Link to strategy
2. Implent our
operating model
5. Explore growth
opportunities
7
7
FY20
Restated
FY21
FY20
Restated
FY21
Definition
Underlying operating
cash conversion is
defined as underlying
operating cash flow
after capital expenditure
as a percentage of
underlying operating
profit. For this year, we
have excluded the
one-off impacts of the
CPBS on underlying
operating profit as this
gives the most useful
comparator.
Commentary
Underlying operating
cash conversion was
134% and mainly reflects
the significant working
capital inflow of
£128 million in the year,
of which £56 million
related to the delay in
payments of VAT. In a
normal year, we would
expect underlying cash
conversion to be around
80-90%.
Link to strategy
2. Implement our
operating model
Definition
Net debt / EBTIDA as
measured in our banking
covenants. This uses net
debt (excluding
operating leases) divided
by underlying earnings
before interest, tax,
depreciation and
amortisation plus JV
dividends received.
The calculation this year
excluded the one-off
impacts of the CPBS.
This definition makes a
series of adjustments to
both Group net debt and
Group EBITDA, see page
43 for a reconciliation.
Commentary
Our net debt to EBITDA
increased to 2.5 times
this year as the reduction
in net debt, reflecting
free cash flow
generation and disposal
proceeds, was more
than offset by the
decline in EBITDA. We
are targeting to move
the Group to a level
below 2 times.
Link to strategy
1. Align the portfolio
2. Implement our
operating model
5. Explore growth
opportunities
28
Babcock International Group PLC Annual Report and Financial Statements 2021
A new approach
As discussed on page 8 we are creating a new approach to running the Group, including creating the right baseline for future
performance. With this process, we have changed how we calculate various metrics. Given this, we show our KPI performances for
this year compared to last year but do not look further back as we feel this would not be helpful for understanding our
performance or direction. Going forward, we will report on these metrics each year.
Non-Financial
Total injuries rate
CO2e emissions
(tCO2e/£m)
Senior management
gender diversity (%)
1.01
52.7
21%
.
8
5
51
3
1
.
.
8
5
5
.
7
2
5
1
2
7
4
1
.
4
2
1
.
1
0
1
.
Underlying return
on invested capital,
pre-tax (ROIC) (%)
-2.2%
.
3
1
1
%
2
2
.
-
FY20
Restated
FY21
FY17 FY18 FY19
FY20
FY21
FY20
Restated
FY21
Definition
Estimated tonnes of
CO2e emitted as a direct
result of revenue-
generating operations.
Commentary
We have continued to
reduce our emissions
year on year, both the
intensity ratio and in
absolute terms. We aim
to continue to reduce
the emissions of our
operations and we are
committed to achieving
net zero emissions by
2040. See page 69 for
more details.
Link to strategy
4. Develop our
ESG strategy
Definition
Underlying return on
invested capital is
defined as underlying
operating profit, before
tax, divided by net debt
(including leases) and
shareholder funds
(balance sheet), excluding
retirement benefit
deficits or surpluses.
Commentary
Our underlying ROIC was
negative this year
reflecting the impacts of
the CPBS. Excluding the
one-off profit impacts of
the CPBS, underlying
ROIC increased to
12.7%, as the impact of
lower profit was more
than offset by the
impact of a smaller
balance sheet post CPBS.
We aim to improve ROIC
over the long term.
Link to strategy
1. Align the portfolio
2. Implement our
operating model
5. Explore growth
opportunities
Definition
Reported injuries across
the entire Group for
every 100,000 hours
worked by Babcock
employees.
Commentary
While our total injuries
rate was lower this year,
we saw an increase of
36% in the more serious
‘Babcock RIDDOR’ injury
rate (see page 74 in our
ESG report for more
details). Tragically, in
August, during a
firefighting mission, an
aircraft crash-landed in
Spain near the
Portuguese border
causing two fatalities.
This incident and the
increase in serious
injuries underlines how
crucial it is we continue
to focus on improving
our health and safety
performance, and we
target a reduction in the
injury rate each year.
Link to strategy
3. Roll out a new
people strategy
4. Develop our
ESG strategy
N/A
FY20
FY21
Definition
Senior managers are
defined as employees
(excluding Executive
Directors) who have
responsibility for
planning, directing or
controlling the activities
of the Group (Exco) or a
strategically significant
part of the Group
(sector/functional
leadership teams) and/
or who are directors of
subsidiary business units
(Business Unit leadership).
Commentary
This is a new KPI for this
year, reflecting our
increased focus on
diversity as part of our
new people strategy. As
such we do not have a
comparator figure
however do have a
target to increase the
percentage to 30% by
2025. Further gender
diversity statistics for the
Group and targets can
be found in the ESG
review on page 72.
Link to strategy
3. Roll out a new
people strategy
4. Develop our
ESG strategy
Link to
management
remuneration
Our Remuneration
policy, as detailed on
pages 136 to 138,
includes reference to
underlying EPS,
underlying operating
cash flow and
underlying ROCE,
a measure similar
to ROIC.
Operational
performance
measures
In the operational
reviews on pages 50
to 57, we use our first
two KPIs (revenue
growth and underlying
operating margin) to
measure sector
performance.
Babcock International Group PLC Annual Report and Financial Statements 2021
29
Strategic reportGovernanceFinancial statements
Financial review
Financial review
Introduction
This Financial review covers:
• The changes we have made to the
presentation of underlying reporting this
year, with restatements to FY20
• A summary of the contract profitability
and balance sheet review (‘CPBS’)
• Our financial performance in FY21, both
statutory and underlying, including a
reconciliation between the two
• Improvements we intend to make to risk
management and internal controls
David Mellors
Chief Financial Officer
30
Babcock International Group PLC Annual Report and Financial Statements 2021
Changes to the presentation of
underlying reporting
The Group provides alternative
performance measures, including
underlying measures, to enable users
to better understand the performance
and earnings trends of the Group.
These measures are considered to
provide a consistent measure of
business performance from year to year.
They are used by management to assess
operating performance and as a basis for
forecasting and decision making and the
Group believes are helpful for investors to
analyse business performance. We have
made a series of changes to our underlying
measures this year to improve transparency
and provide a simpler set of accounts and
financial commentary for the future.
There are four main changes to the
presentation of our underlying results as
outlined below.
1. Joint ventures and associates
Previously the Group incorporated its
share of the results of joint ventures and
associates into each of the main captions of
the income statement. Babcock’s share of
joint ventures and associates profit after tax
is now included as one line in the income
statement. The Group used to include a
share of joint ventures and associates
revenue within its revenue line – which was
then defined as underlying revenue. This
definition is therefore no longer needed.
This aligns revenue with the statutory IFRS
measure and reduces the number of
reconciling items between statutory and
underlying income statement captions.
2. IFRIC12 Investment Income
The group previously included IFRIC 12
investment income within underlying
operating profit. This is now included
within investment income to align
with IFRS.
The restated underlying income statement
compared to that presented in the prior
year financial statements is shown below.
Note that the correction of prior year
errors is covered on page 33.
Restatement of FY20 underlying income statement
Underlying revenue
Underlying operating profit
Share of results from joint ventures and associates
Investment income
Finance costs
Underlying profit before tax
Tax
Underlying profit after tax
Underlying basic EPS
* includes £1.2 million
Underlying FY20
previously
reported
£m
4,871.7
524.2
–
–
(95.8)
428.4
(77.1)
351.3
69.1p
Change to JV and
Associates
presentation
£m
(422.2)
(105.7)
58.6
–
22.8
(24.3)
17.9
(6.4)
Change to IFRIC
12 presentation
and tax*
£m
–
(1.1)
–
1.1
–
–
1.2
1.2
Prior year
restatements
£m
(21.0)
(39.8)
–
–
–
(39.8)
(9.4)
(49.2)
Underlying
FY20
restated
£m
4,428.5
377.6
58.6
1.1
(73.0)
364.3
(67.4)
296.9
58.4p
3. A clearer definition of underlying operating profit and Specific Adjusting Items
Underlying operating profit is now defined as IFRS statutory operating profit adjusted for Specific Adjusting Items. Items such as these may
occur regularly, may be lumpy and may be profits or losses. As such they distort the reporting of underlying business performance
measures if not adjusted for. The Specific Adjusting Items are:
• Amortisation of acquired intangibles
• Business acquisition, merger and divestment related items (being acquisitions and gains or losses on disposal of assets or businesses)
• Gains, losses and costs directly arising from the Group’s withdrawal from a specific market or geography, including closure costs,
severance costs, the sale of assets and termination of leases
• The costs of large restructuring programmes which significantly exceed the minor restructuring which occurs every year as part of the
normal day to day business. Where restructuring costs are incurred as a result of the on-going execution of day to day business, they are
included in operating costs and are not excluded from underlying operating profit
• Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes
• Exceptional items that are significant, non-recurring and outside of the normal operating practice. These items are described as
exceptional in order to appropriately represent the Group’s underlying business performance
The income statement can now be shown in a ‘three column’ format with Underlying results, Specific Adjusting Items and Statutory
results in separate columns as shown below:
Revenue
Operating (loss)/profit
Share of results of joint ventures and associates
Investment income
Finance costs
(Loss)/profit before tax
Income tax benefit/(expense)
(Loss)/profit after tax for the year
Basic EPS
Diluted EPS
2021
Specific
Adjusting
Items
£m
–
(1,615.4)
–
–
–
(1,615.4)
33.7
(1,581.7)
Statutory
£m
4,182.7
(1,643.0)
(13.1)
0.9
(62.1)
(1,717.3)
15.3
(1,702.0)
(337.0)p
(337.0)p
Underlying
£m
4,182.7
(27.6)
(13.1)
0.9
(62.1)
(101.9)
(18.4)
(120.3)
(23.8)p
(23.8)p
2020 (restated)
Specific
Adjusting
Items
£m
–
(453.2)
–
–
–
(453.2)
40.5
(412.7)
Underlying
£m
4,428.5
377.6
58.6
1.1
(73.0)
364.3
(67.4)
296.9
58.4p
58.3p
Statutory
£m
4,428.5
(75.6)
58.6
1.1
(73.0)
(88.9)
(26.9)
(115.8)
(23.3)p
(23.3)p
Note: the performance review on page 36 considers these results in more detail, they are shown here for presentational purposes.
4. Presentational changes to the underlying cash flow statement
The Group has historically presented an underlying cash flow statement with free cash flow as an important measure. Previously cash
flows relating to exceptional items were excluded from free cash flow. This has now been changed to more clearly present the cash
generated from the Group’s operations.
Also, following the introduction of IFRS16 (Leases), the Group previously deducted new lease commitments in entirety from operating
cash flow. We have now amended this to show the capital element of leases as an operating cash flow (akin to capital expenditure) and
the interest element of leases within the interest line. The lease commitment is now shown as a change in net debt when signed, not an
operating cash flow. The restated FY20 underlying cash flow is shown below.
Babcock International Group PLC Annual Report and Financial Statements 2021
31
Strategic reportGovernanceFinancial statements Financial review continued
Restatement of FY20 underlying cash flow
Operating profit
Depreciation & amortisation
ROU asset depreciation
Non-cash items
Working capital
Provisions
Net capital expenditure
IFRS 16 new lease commitments
Capital element of lease payments
Operating cash flow
Cash conversion %
Pension contributions in excess of income statement
Interest paid
Tax paid
Dividends from joint ventures
Exceptional items
Free cash flow
Acquisitions and disposals net of cash acquired
Exceptional cash flow
Capital element of lease payments
IFRS 16 additions
Investments in joint ventures
Own shares
Dividends paid
Net cash outflow
Opening net debt (previously reported)
Supply chain financing – opening adjustment
Opening net debt (restated)
IFRS 16 transition
Exchange movements
Movement in net debt
Closing net debt
Underlying FY20
previously
reported
£m
417.4
95.7
129.4
5.4
(26.8)
(19.4)
(147.5)
(109.8)
–
344.4
83%
(70.2)
(71.4)
(62.6)
52.0
–
192.2
(0.8)
23.1
–
–
(0.3)
(2.9)
(153.9)
57.4
(957.7)
–
(957.7)
(640.8)
(53.8)
57.4
(1,594.9)
Prior year
restatements
£m
(39.8)
(4.7)
(6.1)
(2.9)
16.0
9.4
39.0
–
–
10.9
–
–
–
–
–
–
10.9
–
–
–
(7.3)
–
–
–
3.6
Changes to cash
flow presentation
£m
–
–
–
(1.1)
–
–
–
109.8
(175.0)
(66.3)
–
–
1.1
–
–
(82.4)
(147.6)
105.5
(23.1)
175.0
(109.8)
–
–
–
–
Underlying
FY20
restated
£m
377.6
91.0
123.3
1.4
(10.8)
(10.0)
(108.5)
–
(175.0)
289.0
77%
(70.2)
(70.3)
(62.6)
52.0
(82.4)
55.5
104.7
–
175.0
(117.1)
(0.3)
(2.9)
(153.9)
61.0
–
(113.5)
(113.5)
–
–
3.6
(109.9)
–
–
–
–
–
–
–
(957.7)
(113.5)
(1,071.2)
(640.8)
(53.8)
61.0
(1,704.8)
Note: the two main items in the correction of prior year errors impacting net debt are the movement of supply chain finance balances from trade creditors to debt
(£113.5 million 1 April 2019, £93.2 million at 31 March 2020) and the inclusion of certain lease liabilities (31 march 2020: £16.7 million).
32
Babcock International Group PLC Annual Report and Financial Statements 2021
The total of the ‘recurring CPBS adjustments’
within FY21 underlying operating profit is
£24.7 million, and £250.0 million ‘one-off
CPBS adjustments’ make up the total of
£274.7 million included within underlying
operating profit.
Prior year restatements
There are a number of prior year errors that
have been recognised which are detailed in
note 5 in the financial statements.
Adjustments are denoted as errors, rather
than changes in estimates, when it has
been identified that assumptions or
methodologies were used which the
Group should have known at the time were
incorrect. One accounting policy has also
been changed to better represent certain
maintenance arrangements in the Aviation
sector, and the errors and the policy change
result in prior year restatements – see note 5
in the financial statements for details. Prior
year restatements were recorded in the
1 April 2019 opening balance sheet in these
financial statements, unless they resulted
from an error during FY20 in which case
they were recorded in the FY20 income
statement. The accounting policy change
and some of the prior year errors have a
consequential impact on financial results for
future periods (e.g. the decision to expense
certain aircraft maintenance charges rather
than capitalise them will have a recurring
impact). Where this is the case, those
recurring impacts are included in the
relevant years in the table on the following
page for completeness –and are also
included in the ‘recurring CPBS adjustments’
figure above.
Of the adjustments recorded in the current
year income statement (see table below),
£274.7 million were charged within
underlying operating profit and the vast
majority of these amounts related to changes
in estimates. Their inclusion within underlying
operating profit reflects the fact that the
occurrence of such transactions, when
taken individually, are part of the ordinary
course of business. However, the number
and magnitude of the adjustments as a
result of the CPBS far exceed what would
normally be expected in the Group in any
one period, hence the additional disclosure.
In order to assist the users of the financial
statements to better understand the effect
of the transactions resulting from the CPBS
on FY21 underlying operating profit
performance, we have analysed them into
‘one-off CPBS adjustments’ and
‘recurring CPBS adjustments’. It is
accepted that these terms are not defined
in IFRS and are simplistic. For this purpose,
we consider ‘one-off CPBS adjustments’ to
be those that adjust the level of profit
recognised either as a result of a one-off
event or in previous periods, while
‘recurring CPBS adjustments’ are those that
impact the amount of current period (and
potentially future) profit before completion
of the CPBS review. A single adjustment
arising from the CPBS review might have
both ‘one-off’ and ‘recurring’ elements.
By way of illustration, the write-off of a long
overdue debtor can be thought of as a ‘one
off CPBS adjustment’ as – with today’s facts
and circumstances – it would be a single
transaction that would not otherwise
impact the current or future year’s
profitability. However, a long term contract
that has had its profit margin reduced
creates an adjustment that has the effect of
reducing the cumulative profit recognised
over the life of the contract from the old
profit margin estimate to the new. An
element of this adjustment can be seen
to in effect reverse the profit on these
contracts that had been recognised in FY21
(before completion of CPBS review). This
element is included within ‘recurring CPBS
adjustments’ whereas the remainder of the
adjustment, simplistically relating to the
profit previously recognised before FY21, is
included within ‘one-off CPBS adjustments’.
Contract profitability and balance
sheet review
As announced in January 2021, the Group
performed a review of the profitability of its
contract portfolio, and the carrying values
of assets and liabilities on the balance
sheet. The review was carried out by
management using the expertise and
resource of an independent accounting
firm. The initial year end financial close
occurred in early April before completion of
the CPBS. On 13 April 2021, the Group
announced the initial headline unaudited
results for FY21 before the impact of CPBS,
along with an early estimate of the CPBS
findings. The annual goodwill impairment
test, required by IAS 36, was included
within the scope of the CPBS review.
The CPBS scope covered over 100
contracts, representing c.£2.7 billion of
annual revenues. The selected contracts
received differing levels of review
depending upon their perceived risk. Those
contracts deemed high risk had a full
review of their status, underpinning
assumptions and risks and dependencies.
Those deemed medium risk had a specific
scope review with work targeted at any
specific areas of concern, and those
deemed low risk had a review with the
project manager to gain an understanding
of the contract and assess whether any
specific scope work should be performed.
The balance sheet reviews covered all main
balance sheet captions for all sectors, again
prioritising balances on a risk basis. As the
reviews progressed, more work was
performed on contracts where findings
raised issues that had not been considered
in the initial scoping reviews.
More than 140 accounting adjustments
totalling £2.0 billion (post-tax effect on
retained earnings) resulted from the CPBS
consisting of:
• Cumulative restatement at 1 April
2019 of £308.1 million – being
£45.3 million relating to a change in
accounting policy and correction of prior
year errors of £262.8 million)
• Cumulative restatement at 1 April
2020 of £230.7 million – being
£59.8 million relating to a change in
accounting policy and correction of prior
year errors of £170.9 million)
• Changes recorded within the current
financial year of £1,813.7 million – the
vast majority of which are change in
estimates, including the impairment
of goodwill
Babcock International Group PLC Annual Report and Financial Statements 2021
33
Strategic reportGovernanceFinancial statements Financial review continued
The impacts of the CPBS adjustments on the income statement, including the results of the annual goodwill impairment test, are
summarised as follows:
Revenue impacts
Operating profit/(loss) impacts
Impairment/disposal of goodwill and acquired
intangible assets
Impairment of non-current assets
Impairment/reversal of property, plant and
equipment and right of use assets
Impairment/write down of current assets
Introduction of/increase to liabilities
Operating profit/(loss)
Share of income from JVs and associates
Profit/(loss) before tax impacts
Tax adjustments
Tax effect
Loss after tax impacts
2021
Specific
Adjusting
Items
£m
–
Underlying
£m
(207.4)
Statutory
£m
(207.4)
Underlying
£m
(21.0)
–
(5.8)
(1,349.4)
(32.7)
(1,349.4)
(38.5)
–
(142.6)
(126.3)
(274.7)
(37.1)
(311.8)
(7.5)
29.3
(290.0)
(156.9)
(0.8)
(1.0)
(1,540.8)
–
(1,540.8)
–
17.1
(1,523.7)
(156.9)
(143.4)
(127.3)
(1,815.5)
(37.1)
(1,852.6)
(7.5)
46.4
(1,813.7)
–
0.7
(21.6)
(19.5)
0.6
(39.8)
–
(39.8)
(12.4)
3.0
(49.2)
2020
Specific
Adjusting
Items
£m
–
130.5
–
(1.4)
–
–
129.1
–
129.1
–
(2.5)
126.6
Statutory
£m
(21.0)
130.5
0.7
(23.0)
(19.5)
0.6
89.3
–
89.3
(12.4)
0.5
77.4
Summarised cumulative adjustments to retained earnings, including the results of the annual goodwill impairment test, are as set
out below:
Restatement as at 1 April 2019
Adjustments recognised in the year ended 31 March 2020
Total restatement at 31 March 2020
Adjustments recognised in the year ended 31 March 2021
Total adjustments recognised at 31 March 2021
£m
(308.1)
77.4
(230.7)
(1,813.7)
(2,044.4)
The summary of the adjustments in the
table above is set out below:
Revenue:
These adjustments have two components
within them. Firstly is a correction of an
error where revenue had been recognised
on the Phoenix contract after the terms had
been varied in February 2020. The effect of
the contract change is that Babcock is
deemed an agent of the customer, not a
principal, and therefore the revenue should
not be recognised. As a result of identifying
this error, £71.8 million of revenue initially
recognised in FY21 was reversed together
with £11.6 million of revenue in relation to
FY20. The second component of revenue
adjustments reflects reassessments of the
progress and profitability of a number of
contracts across the Group.
Impairment of goodwill and acquired
intangible assets:
In the current year, goodwill was impaired
by £1,243.2 million and acquired intangible
assets were impaired by £56.4 million.
As detailed in note 13 of the financial
statements, the impairments of the Land and
Aviation sectors’ goodwill of £425.8 million
and £817.4 million respectively were largely
as a result of reduced forecasts of future
cash flows and an increase in the discount
rate used to discount them. CPBS adjustments
of £64.8 million were also recorded to
allocate the goodwill that should have been
allocated to the Holdfast disposal (June 2020)
and to correct the allocation of goodwill to
the Conbras disposal (October 2020 and
provided in the first half of the financial
year). As detailed in note 13 of the financial
statements, £56.4 million was impaired in
relation to the DSG contract acquired
intangible as its carrying value could
no longer be justified following the
reassessment of the contract profitability.
Partially offsetting this is the reversal of
amortisation of £15.0 million in relation to
the Oil and Gas business acquired intangible
reflecting management’s judgement to
derecognise this intangible at 1 April 2019
as a prior period error, as a result of a
reassessment of its useful economic life.
Previously a goodwill impairment of
£395.0 million was recorded in FY20
against the Aviation sector goodwill.
The credit of £130.5 million within FY20
shown above is a reduction to that
impairment and is the result of three prior
year errors. Firstly, credits of £239.2 million
and £5.1 million reflect the cumulative
amount of prior year errors to the capital
employed in the Aviation and Land operating
segments respectively – and therefore
reduce the amount that should have been
impaired in FY20. Secondly, a calculation
error in the FY20 impairment test of Land
goodwill creates a charge of £127.7 million
and, thirdly, the reduced intangible
amortisation in relation to the Oil and Gas
business was a credit of £13.9 million.
34
Babcock International Group PLC Annual Report and Financial Statements 2021
The FY21 adjustment within underlying
operating profit largely relates to the write
off of a loan to one of our joint ventures
which is no longer deemed recoverable.
The £32.7 million within FY21 Specific
Adjusting Items is largely due to the
impairment of internally generated
intangibles, mainly computer software.
Impairment of property, plant and
equipment and right of use assets:
As detailed in notes 15 and 16 of our
financial statements, impairments of
£156.9 million largely relate to fleet values
in the Aviation sector where aircraft
carrying values are no longer expected to
be recovered through use or sale. Also
included are impairments of leasehold
property (£12 million) and plant and
equipment of £11 million. The prior year
error of £21.6 million within underlying
profit is all from the Aviation sector and
relates to the expensing of previously
capitalised maintenance and the reversal
of aircraft vendor credit notes previously
recognised within profit. See note 5 of our
financial statements for details on prior
year errors.
Impairment / write down of
current assets:
This covers the reassessment of several
contract profitability margins and the
recoverability of many trade and other
receivables (including contract assets and
accrued income) as well as an increase in
obsolescence provisions for inventory.
This is the summation of many contract
reassessments across the Group with
£62.0 million in Aviation, £36.6 million
in Land, £21.8 million in Marine and
£20.6 million in Nuclear. The prior year
error of £19.5 million relates to Aviation
and corrects the capitalisation of
mobilisation and other costs as well
as revenue milestones incorrectly
recognised for aircraft deliveries.
Introduction of / increase to liabilities:
These increases reflect reassessment of
several contract profitability margins,
onerous contract provisions, aircraft
maintenance accruals, and other provisions.
£72.6 million are in the Aviation sector,
£35.5 million in Land and £11.4 million in
Marine. Around £60 million of the liabilities
are expected to outflow beyond one year.
Share of income from joint ventures
and associates:
Historically the Group adjusted the results
of the joint ventures and associates before
equity accounting the relevant share in
the income statement. The Group has
now decided such results should be
incorporated without adjustment by the
Group – unless required to align with IFRS.
In the prior periods the Group’s share of
joint venture and associates results
have been adjusted by £23.1 million
cumulatively, and a charge of this amount
is booked as a change in estimate in FY21
to reverse these amounts. In addition,
following the termination of the Group’s
Dounreay decommissioning contract on
31 March 2021, as a consequence of the
NDA’s decision to take contract delivery
in-house, the Group booked an adjustment
of £10.9 million to reflect the estimated
contract settlement with the NDA. Contract
settlements remain outstanding in relation
to works carried out some years ago by
the Land sector’s ABC joint venture and,
following developments during the year,
a further adjustment of £3.1million was
recorded and represents an updated
assessment of the contract outcomes.
Tax adjustments:
The underlying FY21 impact of £7.5 million
consists of the write off of deferred tax
assets in Spain now considered not
recoverable within the Group’s forecasting
horizon, together with a £21.6 million
credit, being the recognition of tax
deductibility on the DSG contract
intangible amortisation now confirmed
with HMRC. The prior year error of
£12.4 million is the write off of a deferred
tax asset incorrectly calculated in the
prior year.
Change in accounting policy
During the year management amended the
Group’s accounting policy regarding Power
By the Hour agreements. At 31 March
2021 this change in policy reduces
property, plant and equipment by £65.6
million and trade and other receivables by
£3.1 million and increases trade and other
payables by £8.1 million.
Material balance sheet reclassifications
All balance sheet reclassifications are shown
in note 5 of the financial statements.
The materials ones are covered below.
Supply chain financing:
The Group entered into certain Supply
Chain Financing Facilities (‘SCF arrangements’)
in the Aviation operating segment.
Outstanding balances financed through
those arrangements were previously
classified within trade payables. The Group
has reassessed this classification and has
determined that these liabilities should be
reclassified as bank and other borrowings.
This has also resulted in an increase to
property, plant and equipment, trade and
other receivables and other borrowings as
part of the Supply Chain Financing Facilities
has been used for deposits on aircraft.
At 1 April 2019, correction of this error
results in an increase in property, plant and
equipment of £54.7 million, an increase in
trade and other receivables of £21.6 million,
an increase in bank and other borrowings
of £113.5 million and a reduction in
trade and other payables of £37.2 million.
At 31 March 2020, correction of this
error results in an increase in bank and
other borrowings of £93.3 million, an
increase in property plant and equipment
of £32.9 million and a reduction in trade
and other payables of £60.4 million.
This adjustment also impacts on the
cash flow statement, resulting in an
increase in cash flows from financing
activities and reduction in cash flows from
operating activities.
Cash pool arrangement:
An error has been identified in relation to
the accounting for the Group’s notional
cash pool arrangement. Cash and cash
equivalents and bank and other borrowings
should have been presented on a gross
rather than net basis, in line with the
requirements of IAS 32 Financial
Instruments: Presentation (‘IAS 32’).
The correction of this error results in
increases in cash and cash equivalents and
bank other borrowings of £569.5 million
at 1 April 2019 and £494.5 million at
31 March 2020. There is no impact on the
income statement.
Babcock International Group PLC Annual Report and Financial Statements 2021
35
Strategic reportGovernanceFinancial statements Financial review continued
FY21 performance
In order to simplify the presentation of underlying and statutory financial performance, the Group has adopted a three-column approach
to the income statement. The first column below shows the underlying results, with the second column showing the Specific Adjusting
Items. The third column shows the statutory results.
Details of the Specific Adjusting Items are included in note 3 of the financial statements.
Revenue
Operating (loss)/profit
Share of results of joint ventures and associates
Investment income
Net finance costs
(Loss)/profit before tax
Income tax benefit/(expense)
(Loss)/profit after tax for the year
Basic EPS
Diluted EPS
2021
Specific
Adjusting
Items
£m
–
(1,615.4)
–
–
–
(1,615.4)
33.7
(1,581.7)
Statutory
£m
4,182.7
(1,643.0)
(13.1)
0.9
(62.1)
(1,717.3)
15.3
(1,702.0)
(337.0)p
(337.0)p
Underlying
£m
4,182.7
(27.6)
(13.1)
0.9
(62.1)
(101.9)
(18.4)
(120.3)
(23.8)p
(23.8)p
2020 (restated)
Specific
Adjusting
Items
£m
–
(453.2)
–
–
–
(453.2)
40.5
(412.7)
Underlying
£m
4,428.5
377.6
58.6
1.1
(73.0)
364.3
(67.4)
296.9
58.4p
58.3p
Statutory
£m
4,428.5
(75.6)
58.6
1.1
(73.0)
(88.9)
(26.9)
(115.8)
(23.3)p
(23.3)p
Statutory performance
Revenue is now the same on a statutory
and underlying basis as set out on page 31.
Revenue of £4,182.7 million was 6% lower
than last year including foreign exchange
movements and disposals. Excluding these,
revenue was down 3% organically with
reductions due to COVID-19 and the CPBS
adjustments only partly offset by other
trading growth.
The statutory operating loss was
£1,643.0 million in the year (2020:
£75.6 million loss), mainly as a result of
charges taken in our CPBS and our annual
review of goodwill impairment as discussed
in detail on page 33. Compared to the prior
year, this was exacerbated by the impact of
COVID-19 and significant credits that
benefited the results in FY20. These items
are discussed in more detail on page 37
to 38.
The share of results of joint ventures and
associates was much lower than the prior
year due to the termination and disposal of
certain investments and the CPBS impact
outlined on page 34.
Net finance costs reduced from the prior year
due to the lower level of debt. Our statutory
loss before tax was £1,717.3 million
(2020: £88.9 million loss), again reflecting
the CPBS charges. Basic earnings per share,
as defined by IAS 33, was (337.0) pence
(2020: (23.3) pence) per share.
Exceptional items
Details of exceptional items recognised in
FY21 within the Specific Adjusting Items
column in the year are show in note 3 of
the financial statements. For the 2022
financial year we expect exceptional
charges of around £50 million relating to
the operating model restructuring charge
(c.£40 million) and previously announced
restructuring programmes (c.£10 million).
We intend to restrict the use of exceptional
items in future periods following a
tightening of definition this year.
36
Babcock International Group PLC Annual Report and Financial Statements 2021
Underlying results
For the most useful comparison to last year, and as a better measure for future periods, we focus on the Group’s underlying operating profit
excluding the one-off CPBS adjustments. This is believed to the most helpful measure for stakeholders to judge our performance this year.
Revenue
Underlying operating (loss) / profit
of which one-off CPBS adjustments
Underlying operating profit excluding one-off CPBS adjustments
Underlying margin excluding one-off CPBS adjustments
Share of results of joint ventures and associates
of which CPBS one-off impacts
Share of results of JVs and associates excluding one-off CPBS adjustments
(250.0)
222.4
5.3%
(31.5)
18.4
Net finance costs
Underlying (loss) / profit before tax
Tax
Underlying (loss) / profit after tax
Non-controlling interests
Underlying profit attributable to shareholders
Underlying basic EPS
31 March
2021
£m
4,182.7
(27.6)
(13.1)
(61.2)
(101.9)
(18.4)
(120.3)
–
(120.3)
(23.8)p
–
377.6
8.5%
–
58.6
31 March
2020
Restated
£m
4,428.5
377.6
58.6
(71.9)
364.3
(67.4)
296.9
(2.0)
294.9
58.4p
Underlying basis EPS excluding one-off CPBS adjustments*
28.9p
* estimated based on an underlying effective tax rate of 21%.
Revenue bridge
Marine
Nuclear
Land
Aviation
Total
31 March
2020
Restated
£m
1,163.6
896.9
1,522.5
845.5
4,428.5
FX Impact
£m
(2.9)
–
(50.8)
11.8
(41.9)
Disposals of
businesses
£m
(25.4)
(3.5)
(30.5)
–
(59.4)
Impact of
COVID-19
£m
8.5
9.3
(118.5)
(44.6)
(145.3)
FY21 CPBS
impacts
£m
(25.7)
(21.8)
(140.9)
(19.0)
(207.4)
Other
trading
£m
124.2
95.0
(71.7)
60.7
208.2
31 March
2021
£m
1,242.3
975.9
1.110.1
854.4
4,182.7
Babcock International Group PLC Annual Report and Financial Statements 2021
37
Strategic reportGovernanceFinancial statements Financial review continued
Underlying operating profit
performance
The underlying operating loss in the year
was £27.6 million. This differs from the
unaudited draft figure of £307 million
given in our April 2021 update as this
figure included £62 million from joint
ventures and associates and IFRIC 12
income and did not include the impacts
of the CPBS.
This performance compares to
£377.6 million underlying operating profit
last year, as restated on page 31 for the
change in presentation of joint ventures
and associates and the correction of prior
year errors and a change in accounting policy.
Excluding the one-off CPBS adjustments,
FY21 underlying operating profit was
£222.4 million. This measure is deemed to
be the most useful measure to compare to
last year, and a better measure to compare
with future periods.
Revenue for the year was £4,182.7 million,
down 6% compared to last year but down
3% organically (i.e. excluding FX and
disposals). The table above shows the main
comparison variances of revenue
performance against last year.
Specifically on each main variance:
• FX impact – this primarily relates to FX
translation on the results of the South
African business.
• Disposals of businesses – this is the
lower revenue from Context (sold in
March 2020), Conbras (sold in
October 2020) and the civil nuclear
manufacturing business (sold in
September 2020).
• Impact of COVID-19 – this reflects the
impact of the COVID-19 pandemic across
the Group, with the most significant
impact being in many of our Land
businesses including South Africa, airports
and civil training. Lower flying hours in
the early stages of the pandemic also
impacted the Aviation sector. Conversely,
COVID-19 led to slightly more revenue in
Marine and Nuclear as activity levels were
increased, for example for the design and
manufacture of ventilators. This COVID-19
impact has been estimated across our
sectors and based on an analysis of direct
and indirect impacts, which include a
significant degree of judgement.
• FY21 CPBS impacts – the most
significant item is the de-recognition of
revenue from the Phoenix contract in
Land following a contract change in
February 2020 which resulted in our
contract relationship changing from
principal to agent. The remaining
revenue decreases are a result of the
reassessment of progress and profitability
on many of the Group’s contracts.
• Other trading – this relates to revenue
movements excluding all the items
above. Revenue grew across three of the
sectors, with the strongest growth
coming in Marine which was driven by
increased activity on our Type 31 frigate
programme. Growth in Nuclear was due
to higher activity, especially in
infrastructure projects, while growth in
Aviation came from new contracts. The
decline in revenue in Land includes the
impact of the loss of our Heathrow
airport baggage handling contract,
which ended half way through the year.
Revenue of £4,183 million differs from the
unaudited draft figure of £4,690 million
given in our April 2021 business update as
this figure included £290 million share of
revenue from joint ventures and associates
and excluded the £207 million adjustment
to revenue from our CPBS as shown in the
table above. Further analysis of our revenue
performance is included in each sector’s
operating review on pages 50 to 57.
Underlying operating profit bridge from FY20 to FY21 (before one-off CPBS adjustments):
Marine
Nuclear
Land
Aviation
Corporate
Total
31 March
2020
Restated
£m
134.4
113.3
98.1
31.8
–
377.6
FX Impact
Disposals of
businesses
Significant
credits in FY20
Impact of
COVID-19
FY21 recurring
CPBS adjustment
Other trading
£m
(0.3)
–
(4.8)
(0.3)
–
(5.4)
£m
(2.5)
0.5
(1.7)
–
–
(3.7)
£m
(5.7)
(20.9)
(3.1)
(17.0)
–
(46.7)
£m
(17.3)
(2.1)
(15.1)
(11.1)
–
(45.6)
£m
(8.4)
(0.2)
(9.8)
(6.3)
–
(24.7)
£m
(15.0)
(3.3)
(11.7)
0.9
–
(29.1)
31 March
2021
£m
85.2
87.3
51.9
(2.0)
–
222.4
38
Babcock International Group PLC Annual Report and Financial Statements 2021
The main variances year-on-year are:
• FX impact – this primarily relates to FX
translation on the results of our South
African business.
• Disposals of businesses – this is the
lower profit contribution from Context
(sold in March 2020) and Conbras (sold in
October 2020) partly offset by the lack of
an operating loss in the civil nuclear
manufacturing business disposed of
in the year.
• Significant credits in FY20 – these relate
to significant credits that benefited
underlying operating profit in FY20. These
credits included a higher level of R&D tax
credits due to a catch up on previous
years’ claims. The majority of other FY20
credits were in the civil aviation business,
and include multi-year indexation claims
on contracts and accrual and provision
releases. The FY20 credits in Marine and
Land were mostly accrual releases.
• Impact of COVID-19 – this reflects a
range of direct and indirect costs from
working through the COVID-19 pandemic.
Direct costs included the purchase of
personal protective equipment (PPE) and
testing equipment. Indirect costs include
site closures, lower activity and reduced
efficiency due to social distancing. This
COVID-19 impact has been estimated
across our sectors and at Group based on
an analysis of direct and indirect impacts,
which include a significant degree of
judgement. The estimated lower
expenses, e.g. travel, have also been
considered in this analysis.
• FY21 recurring CPBS adjustment
– these relate to the recurring impacts of
the CPBS on underlying operating profit.
The largest two items included within
this are a more cautious view on the
recognition of profit on the Type 31
frigate programme in Marine and a lower
margin recognised on the DSG contract
in Land.
• Other trading – this relates to the
movement in underlying operating profit
after all of the above. Included within this
movement was an increase in overheads
and corporate costs in the year of around
£10 million, with a less favourable
allocation to Marine than in the previous
year, partly explaining the sector’s decline
in trading. Marine’s weaker trading also
reflects lower profitability than last year
on certain contracts and a charge from
the loss of a legal case. The lower profit in
Nuclear partly reflects the lower margin in
the transition year of MSDF while the
lower profit in Land reflects the loss of the
Heathrow contract and operating gearing
impact of the lower revenue. Aviation saw
a small increase in underlying operating
profit, after adjusting for the items above,
as the benefits of the cost saving
programme initiated last year were mostly
offset by weaker trading.
Further analysis of our underlying operating
profit performance is included in each
sector’s operating review on pages 50 to 57.
Share of results of joint ventures
and associates
The Group’s share of results in joint ventures
(JVs) and associates was a loss of
£13.1 million in the year, or a profit of
£18.4 million excluding one-off CPBS
adjustments. The reduction on last year of
£40.2 million reflects the absence of
Magnox (£2.2 million impact), a JV that
ended in the 2020 financial year, a loss on
the Dounreay JV (£9.5 million impact), the
disposal of the Holdfast JV (£14.8 million
impact) and lower recognised profit in our
Aviation JVs and associates.
The Group’s main joint ventures and
associates at 31 March 2021 were:
• Naval Ship Management (NSM) in our
Marine sector, which maintains part of
Australia’s naval fleet
• ALC in our Land sector, which manages
the UK Army’s construction vehicle fleet.
This contract ended in May 2021
• Ascent in our Aviation sector, which trains
RAF pilots in the UK under the UK Military
Flying Training System (UKMFTS) air
training contract
• AirTanker in our Aviation sector, which is
responsible for the UK’s air-to-air refuelling
capability and air transport operations. We
increased our stake in this associate to
around 15% in November 2020
Work in the Dounreay JV in our Nuclear sector
ended on 31 March 2021 after the Nuclear
Decommissioning Authority (NDA) announced
the contract’s early termination in line with
their “One NDA” strategy to move work
in-house. The Group recognised a loss on the
Dounreay contract in the year of
£15.9 million (£5 million loss excluding
one-off CPBS adjustments) reflecting the
updated assumptions around contract
milestone profit achievability in the
reduced timeframe.
Finance costs
Total net finance costs decreased to
£61.2 million (2020: £71.9 million).
Tax charge
The tax charge on underlying profits / losses
was £18.4 million (2020: £67.4 million),
representing a notional rate of -20.7%
(2020: 22.0%). The Group’s underlying
effective rate of tax is calculated on
underlying profit before tax excluding the
share of income from joint ventures and
associates (which is a post-tax number).
Before the one off CPBS adjustments, the
underlying effective rate of tax for the year
was 21%.
The Group’s effective rate of tax for FY22,
as calculated on this basis, will be
dependent on country profit mix and is
currently expected to be around 23%. In
the medium term, we expect our effective
tax rate to increase in conjunction with UK
corporation tax rate increases.
Exchange rates
The translation impact of foreign currency
movements resulted in a decrease in
underlying revenue of £42 million and
a £5.4 million decrease in underlying
operating profit excluding one-off CPBS
adjustments. 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 £40 million and underlying
operating profit by around £2 million
per annum
• A 10% movement in the South African Rand
against Sterling would affect underlying
revenue by around £25 million and
underlying operating profit by around
£2.5 million per annum
• A 10% movement in the Canadian Dollar
against Sterling would affect underlying
revenue by around £15 million and
underlying operating profit by around
£1 million per annum
Babcock International Group PLC Annual Report and Financial Statements 2021
39
Strategic reportGovernanceFinancial statements Financial review continued
Earnings per share
Underlying earnings per share for the year was (23.8) pence (2020: 58.4 pence), reflecting the underlying operating loss.
Disposal programme
Our plan for disposals has been assessed and does not meet the criteria for any assets to be classed as held for sale under IFRS 5.
Cash flow and net debt
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.
Underlying operating profit
One-off CPBS adjustments
Underlying operating profit excl. one-off CPBS adjustments
Depreciation & amortisation
ROU asset depreciation
Non-cash items
Working capital
Provisions
Net capital expenditure
Capital element of lease payments
Underlying operating cash flow
Cash conversion % excl. one-off CPBS adjustment
Pension contributions in excess of income statement
Interest paid
Tax received/paid
Dividends from joint ventures and associates
Cash flows related to exceptional items
Underlying free cash flow
Net acquisitions and disposals
Acquisitions/investments in joint ventures and associates
Dividends paid (including non-controlling interests)
Purchase of own shares
Capital element of lease payments
Net new lease arrangements
Exchange movements
IFRS 16 transition
Movement in net debt
Opening net debt
Closing net debt
Operating leases
Closing net debt excluding operating leases
* see restatements summary on page 31.
2021
Underlying
£m
(27.6)
250.0
222.4
107.7
140.2
9.1
128.0
3.4
(171.1)
(140.6)
299.1
134%
(73.5)
(66.6)
18.4
36.8
(44.7)
169.5
90.6
(8.8)
(0.8)
(2.2)
140.6
(82.3)
44.6
–
351.2
(1,704.8)
(1,353.6)
(582.1)
(771.5)
2020
Underlying
restated•
£m
377.6
–
377.6
91.0
123.3
1.4
(10.8)
(10.0)
(108.5)
(175.0)
289.0
77%
(70.2)
(70.3)
(62.6)
52.0
(82.4)
55.5
104.7
(0.3)
(153.9)
(2.9)
175.0
(117.1)
(53.8)
(640.8)
(633.6)
(1,071.2)
(1,704.8)
(649.4)
(1,055.4)
40
Babcock International Group PLC Annual Report and Financial Statements 2021
Cash performance
Changes in reporting
As set out on page 31, we have updated
our cash flow reporting to better reflect
cash movements, with the cash payments
relating to the capital element of leases
included in underlying operating cash flow
rather than net new lease commitments,
which is reflected as a debt movement. We
have also changed our definition of
underlying free cash flow to include cash
flows related to exceptional items.
Underlying operating cash flow
Underlying operating cash flow in the
period after capital expenditure was
£299.1 million compared to £289.0 million
last year. This represented operating cash
conversion of 134% on the underlying
operating profit excluding one-off CPBS
adjustments. The increase in cash
generation year-on-year despite the
significant fall in operating profit came
from a large working capital inflow.
Movements in working capital
The movement in working capital for the
period was a £128.0 million inflow
compared to a £10.8 million outflow last
year. FY21 benefited from the deferral of
£56 million of VAT payments that will
unwind in the next financial year. Cash flow
in FY21 improved through advanced
customer receipts across some of the
Group’s businesses.
As in previous years, working capital
benefited from creditor payment phasing
around period end, which we will now
move away from over time.
Working capital also continued to benefit
from period end receivables factoring in
Southern Europe, which was £102 million
at 31 March 2021 (31 March 2020:
£98 million).
Capital expenditure
Net capital expenditure of £171.1 million
in the year was significantly higher than last
year (2020: £108.5 million), reflecting the
start of our investment in a new facility
to build Type 31 frigates in Rosyth and
increased net capital expenditure in
Aviation, partly reflecting lower disposal
proceeds given fewer aircraft disposals.
It is expected that net capital expenditure
will continue to be high in FY22 as we
continue the Type 31 investment and
increase investment in other areas of the
business, including upgrading facilities and
IT equipment.
Cash interest paid
Net Group cash interest paid, excluding
that paid by joint ventures and associates,
was £66.6 million (2020: £70.3 million).
Taxation
Cash tax in the year was an inflow of
£18.4 million, helped by a receipt of
£67 million of corporation tax repayments
in the final quarter. We currently expect a
cash tax outflow of around £30 million
in FY22.
Pensions
Pension cash outflow in excess of the
income statement charge (excluding
exceptional charges for curtailment losses)
was £73.5 million (2020: £70.2 million).
For FY22, the cash outflow in excess of the
income statement charge is expected to be
around £130 million. This includes a
£50 million additional payment into the
Rosyth scheme made in April 2021 and an
additional £10 million payment into the
BIG scheme.
An additional £50 million additional
payment into the Rosyth scheme, and a an
additional £10 million contribution to the
BIG scheme have been agreed to be made
in April 2022.
Dividends from joint ventures
and associates
During the period the Group received
£36.8 million in dividends from its
joint ventures and associates (2020:
£52.0 million).
We expect dividends from joint ventures
and associates to be around £30 million
in the next financial year.
Exceptional cash flows
Cash outflows related to exceptional items
were £44.7 million compared to
£82.4 million last year. These costs
included exits and restructuring costs. In
FY22, we anticipate exceptional cash
outflows of around £70 million, including
around £50 million of reorganisation costs
related to implementing our new operating
model (c.£40 million) and completing the
existing restructuring programme in
Aviation (c.£10 million). In addition to this,
there may be cash settlements for the Italy
antitrust fine, see page 47.
Underlying free cash flow
Underlying free cash flow of £169.5 million
was significantly higher than last year’s
£55.5 million and partly reflects the
working capital timing benefits and
corporation tax repayments.
Acquisitions and disposals
The net cash inflow from acquisitions and
disposals was £90.6 million, including net
disposal proceeds from the sale of Holdfast
(£85.0 million) and Conbras (£6.6 million).
In addition, the Group increased its stake in
the AirTanker associate. We aim to
generate at least £400 million of disposal
proceeds in the next 12 months.
New lease arrangements
In addition to net capital expenditure,
and not included in free cash flow,
£82.3 million (FY20: £117.1 million)
of additional leases were entered into in
the period. These represent new lease
obligations and so are included in our main
net debt figure but do not involve any cash
outflows at inception.
Net debt
The Group’s net debt at 31 March 2021
was £1,353.6 million, or £771.5 million
excluding operating leases (broadly in line
with the early indication of £750 million
reported in our April 2021 business
update). Net debt excluding lease
obligations was £283.9 million lower than
last year and reflects the free cash flow
and net divestments discussed above.
As in previous periods, average net debt
during FY21 was higher than the closing
balance at 31 March 2021, partly
reflecting the phasing of creditor payments
around period end. Average net debt over
the 2021 financial year was around
£1.3 billion, compared to around
£1.6 billion last year, with this calculation
being based on each month end balance.
Our net debt now includes balances
related to the use of supply chain financing
in the Group with extended credit terms.
At 31 March 2021 the amount included was
£25 million (31 March 2020: £93 million).
We are phasing out the use of supply chain
financing across the Group.
Babcock International Group PLC Annual Report and Financial Statements 2021
41
Strategic reportGovernanceFinancial statements Financial review continued
Funding and liquidity
As announced on 13 April 2021, the Group
has been in discussions with its lending
banks to prudently secure protection
to the potential downside risks in our
scenario planning. This includes ensuring
sufficient headroom under severe but
plausible scenarios.
In May 2021, the Group:
• Signed a new three-year revolving credit
facility (‘RCF’) of £300 million that
expires in May 2024. This is in addition
to the £775 million RCF that expires in
August 2025
• Clarified the definition of underlying
results used in covenant calculations to
ensure that any one-off impacts from the
Group’s contract profitability and balance
sheet review (‘CPBS’) do not impact
the calculation
• Agreed a temporary amendment to the
net debt to EBITDA ratio covenant from
3.5 times to 4.5 times for the measurement
periods ending 30 September 2021 and
31 March 2022
At 31 March 2021, the Group’s net cash
balance was £531 million. This combined
with the undrawn element of our RCF gave
us liquidity headroom of around £1.2 billion.
We repaid the US Private Placement of
$500 million, which was hedged at
£307 million, in March 2021. This was
funded from existing Group cash resources.
As of July 2021, the Group had access to a
total of £2.4 billion of borrowings and
facilities of mostly long-term maturities.
These comprised:
• €550 million bond maturing 6 October
2022 (in April 2021 this was hedged at
£482 million)
• New £300 million 3-year RCF maturing
20 May 2024 (signed on 20th May 2021)
• £775 million revolving credit facility
(RCF) maturing 28 August 2025
• £300 million bond maturing
5 October 2026
• €550 million bond, hedged at £493 million,
maturing 13 September 2027
• Committed overdraft facility of
£50 million
Capital structure
An important part of the transformation of
Babcock is the strengthening of the balance
sheet. Whilst there are several facets to
balance sheet strength, the primary
measurement relevant to Babcock is the
net debt / EBITDA gearing ratio within
our debt covenants, which was 2.5x at
31 March 2021. The covenant level is
3.5 times, increased to 4.5 times until
March 2022.
Our near-term priority is to reduce the
gearing ratio to below 2x. There are some
short-term headwinds to reducing the
gearing. Free cash flow is expected to be
negative in FY22 and HY23 as certain
material cash outflows – particularly
additional pension contributions and
restructuring - have already been
committed. Additionally, we intend to
gradually unwind the gap between period
end and average net debt.
The planned disposal proceeds of at
least £400 million over the next twelve
months will provide the funds to support
strengthening the balance sheet. Despite
the clear priority to delever the balance
sheet, the Group will continue to invest
organically in the business as this will be
key to driving value in the medium term.
As we announced in April 2021, we aim to
return to strength without the need for an
equity issue.
In the next 12-18 months, once the
disposal programme is complete, we will
reassess the appropriate capital structure
for the future of the Group.
42
Babcock International Group PLC Annual Report and Financial Statements 2021
Net debt to EBITDA (covenant basis)
This is the measure used in the covenant in our revolving credit facilities (RCF) and makes a number of adjustments from reported net
debt and EBITDA. The covenant level is 3.5 times - amended to 4.5 times until 31 March 2022. Our net debt to EBITDA increased to 2.5
times at 31 March 2021 as the reduction in net debt, reflecting free cash flow generation and disposal proceeds, was more than offset by
the decrease in EBITDA.
Underlying operating profit excl. one-off CPBS adjustments
Depreciation and amortisation
Covenant adjustments*
EBITDA
JV and associate dividends
EBITDA + JV and associates dividends (covenant basis)
Net debt
Covenant adjustments**
Net debt (covenant basis)
Net debt/EBITDA
31 March
2021
£m
222.4
107.7
(11.5)
318.6
36.8
355.4
(771.5)
(103.6)
(875.1)
2.5x
31 March
2020 Restated
£m
377.6
91.0
(17.0)
451.6
52.0
503.6
(1,055.4)
(94.9)
(1,150.3)
2.3x
* various adjustments made to EBITDA to reflect accounting standards at the time of inception of the original RCF agreement. The main adjustments are to the
treatment of leases within operating profit and pension costs.
** removing loans to JVs, finance lease receivables and adjusting for an average FX rate for the previous 12 months.
Interest cover (covenant basis)
This measure is also used in the covenant in our revolving credit facility (RCF), with a covenant level of 4.0 times.
EBITDA (covenant basis) + JV and associate dividends
Finance costs
Finance income
Covenant adjustments
Net Group finance costs
Interest cover
Return on invested capital, pre-tax (ROIC)
This measure is one of the Group's key performance indicators (KPIs).
Underlying operating profit
Share of JV PAT
Underlying operating profit plus share of JV PAT
Underlying operating profit excl. one off CPBS impacts
Share of JV PAT excl. one-off CPBS impacts
Underlying OP plus share of JV PAT excl. one off CPBS adjustments
Net debt excluding operating leases
Operating leases
Shareholder funds
Retirement deficit / (surplus)
Invested capital
ROIC underlying OP (pre-tax))
ROIC excl. one off CPBS adjustments (pre-tax)
31 March
2021
£m
355.4
(55.6)
11.7
(0.2)
(43.7)
8.1x
31 March
2020 Restated
£m
503.6
(61.2)
13.0
0.2
(48.0)
10.5x
31 March
2021
£m
(27.6)
(13.1)
(40.7)
222.4
18.4
240.8
771.5
582.1
243.4
293.1
1,890.1
(2.2)%
12.7%
31 March
2020 Restated
£m
377.6
58.6
436.2
377.6
58.6
436.2
1,055.4
649.4
2,314.8
(145.2)
3,874.4
11.3%
11.3%
Babcock International Group PLC Annual Report and Financial Statements 2021
43
Strategic reportGovernanceFinancial statements Financial review continued
Pensions
The Group has a number of defined benefit pension schemes. The principal defined benefit pension schemes in the UK are the Devonport
Royal Dockyard Pension Scheme, the Babcock International Group Pension Scheme and the Rosyth Royal Dockyard Pension Scheme.
The 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 of each scheme who are advised by independent, qualified actuaries.
The Group’s balance sheet includes the assets and liabilities of the pension schemes calculated on an IAS 19 basis. At 31 March 2021,
the net position was a deficit of £293.1 million compared to a net surplus of £145.2 million at 31 March 2020. These valuations are
based on discounting using corporate bond yields. Bond credit spreads were unusually high in March 2020 given the onset of the
COVID-19 pandemic. They have now reverted to a more normal level causing a significant increase in benefit obligations.
The fair value of the assets and the present value of the liabilities of the Group pension schemes at 31 March were as follows:
2021
2020
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
High yield bonds/emerging market debt
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) recognised in the
statement of financial position
55.1
437.1
348.4
428.5
1,422.9
1,682.7
(211.2)
4,163.5
100%
–
857.6
1,227.3
2,259.1
4,344.0
12.5
2.1
–
194.5
54.8
1.7
–
265.6
100%
–
126.1
107.4
136.1
369.6
23.0
4.7
–
25.4
90.6
443.9
348.4
648.4
33.7
426.0
75.3
345.0
–
83.2 1,560.9
219.5 1,903.9
(211.2)
355.8 4,784.9
100%
100%
–
–
1,397.4
1,918.7
(206.9)
3,989.2
100%
–
39.5 1,023.2
273.9 1,608.6
51.0 2,446.2
364.4 5,078.0
892.0
863.4
2,035.4
3,790.8
14.0
4.6
–
191.1
30.3
1.4
–
241.4
100%
–
93.1
82.0
122.4
297.5
19.8
4.4
–
22.3
67.5
435.0
75.3
558.4
–
75.0 1,502.7
59.2 1,979.3
(206.9)
180.7 4,411.3
100%
100%
–
–
91.8 1,076.9
45.0
990.4
41.0 2,198.8
177.8 4,266.1
(180.5)
(104.0)
(8.6)
(293.1)
198.4
(56.1)
2.9
145.2
* The matching assets aim to hedge the liabilities and consist of gilts, repos, cash and swaps. They are shown net of repurchase obligations of £2,177 million
(2020: £2,033 million).
44
Babcock International Group PLC Annual Report and Financial Statements 2021
Analysis of movement of pensions in the Group statement of financial position
The movement in net deficits for the year ending 31 March 2021 is as a result of the movement in assets and liabilities are shown below.
2021
2020
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
Curtailment
Settlements
At 31 March
Net surplus/(deficit) at 31 March
3,989.2
91.7
224.3
102.5
0.2
(244.4)
–
4,163.5
3,790.8
24.1
6.4
86.4
0.2
33.5
8.4
629.7
(244.4)
1.4
7.5
–
4,344.0
(180.5)
241.4
5.7
26.3
2.8
–
(10.6)
–
265.6
297.5
2.0
0.7
7.0
–
0.6
(0.6)
73.0
(10.6)
–
–
–
369.6
(104.0)
180.7 4,411.3
100.4
424.6
108.8
0.2
(260.4)
–
355.8 4,784.9
3.0
174.0
3.5
–
(5.4)
–
2.0
0.2
3.0
–
(1.4)
(0.2)
188.4
(5.4)
–
–
–
177.8 4,266.1
28.1
7.3
96.4
0.2
32.7
7.6
891.1
(260.4)
1.4
7.5
–
364.4 5,078.0
(293.1)
(8.6)
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 4,582.2
104.8
3.0
(36.1)
30.3
110.9
2.8
0.3
0.1
(270.5)
(6.1)
(80.3)
(80.3)
180.7 4,411.3
238.8 4,610.2
33.7
3.7
104.9
0.3
29.2
14.8
(180.0)
(270.5)
–
1.7
0.1
3.1
0.1
1.4
(1.2)
20.1
(6.1)
–
(80.2)
(80.2)
177.8 4,266.1
145.2
2.9
* Settlement effect in Other schemes is 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 it is neutral in terms of both the income statement and other comprehensive income,
An estimate of the technical provisions actuarial deficits as at 31 March 2021 for the principal schemes was around £270 million,
predominantly reflecting discount rates based on UK gilts – which differs from the corporate bond approach of IAS 19. This technical
provisions estimate is based on the assumptions used within the latest agreed valuation prior to 31 March 2021 for each of the three main
schemes, and therefore does not fully allow for the impact of RPI reform which will be fully reflected in future technical provisions valuations.
Discount rate:
Inflation rate (RPI):
2.0% (31 March 2020: 2.4%)
3.2% (31 March 2020: 2.6%)
Pensions management
The Group continues to review its options to reduce the risks inherent in its schemes. In the last financial year, it closed the Rosyth Royal
Dockyard Pension Scheme and the Babcock Naval Services Pension Scheme to future accruals.
It has employees earning benefits in the Babcock International Group Pension Scheme, the Devonport Royal Dockyard Pension Scheme,
the Babcock Rail Ltd Shared Cost Section of the Railways Pension Scheme, the Cavendish Nuclear section of the Magnox Group section 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 also provides an occupational defined contribution pension scheme used to comply with the automatic enrolment legislation
across the Group for all new employees and for those not in a defined benefit pension scheme. Over 75% of its UK employees are
members of the defined contribution pension scheme. The Group pays contributions to this scheme 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.
Babcock International Group PLC Annual Report and Financial Statements 2021
45
Strategic reportGovernanceFinancial statements Financial review continued
Investment strategy
The Group previously agreed long-term
funding strategies with trustees across the
three largest schemes designed that each
scheme would be fully self-sufficient by
April 2037, although the expectation is
that this target will be met significantly
earlier (albeit on a slightly weakened
self-sufficiency target from that used
previously). In recent years, the Group has
agreed revised strategies with the trustees
of the Babcock International Group Pension
Scheme and the Rosyth Royal Dockyard
Pension Scheme designed to target these
schemes being self-sufficient by 2026.
The schemes also operate within agreed
risk budgets to ensure the level of risk
taken is appropriate. 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 and
funding strategies. As at 31 March 2021
growth assets were 29% 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, such that
as at 31 March 2021 approximately 80% of
the schemes’ liabilities (as measured on a
guilts flat basis) across the three largest
schemes are protected 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
Rosyth Royal Dockyard Pension Scheme as
at 31 March 2018 was completed in the
last financial year, the valuation of the
Devonport Royal Dockyard Pension Scheme
as at 31 March 2020 has been completed
since the end of the 2021 financial year,
and work has commenced on the valuation
of the Rosyth Royal Dockyard Pension
Scheme as at 31 March 2021. The next
valuation of the Babcock International
Group Pension Scheme will have an
effective date of 31 March 2022.
Cash contributions
Future service contributions
Deficit recovery
Longevity swap
Total cash contributions — employer
FY22e
£m
23.2
111.9
16.8
151.9
2021
£m
24.2
51.6
16.3
92.1
2020
£m
26.0
47.3
15.3
88.6
Cash contributions made by the Group into the defined benefit pension schemes,
excluding expenses and salary sacrifice contributions, during the last financial year are set
out in the table above. In FY22, the total cash contributions expected to be paid by the
Group into the defined benefit pension schemes are £160.7 million including £8.8 million
for salary sacrifice contributions, £23.2 million is in respect of the cost of future service
accrual, £111.9 million is to recover deficits over periods of time agreed with the Trustee
and an additional £16.8 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.
Accounting valuations
The IAS 19 valuation for accounting purposes showed a market value of assets of
£4,784.9 million, net of longevity swaps, in comparison to a valuation of the liabilities
based on AA corporate bond yields of £5,078.0 million. The total net accounting deficit,
before allowing for deferred tax, at 31 March 2021, was £293.1 million (2020: surplus of
£145.2 million), representing a 94.2% 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.
Income statement charge
The charge included within underlying operating profit in FY21 was £35 million, of which
£28 million related to service costs and £7 million related to expenses. We expect charges
of around £40 million in FY22, split between £33 million of service costs and £7 million of
expenses. In addition to this, there was an interest credit of £4 million in FY21 and, for
FY22, we expect an interest charge of £5 million on the deficit.
Governance
The Group believes that the complexity of defined benefit schemes requires effective
governance and supports an increasingly professional approach. Each of the largest schemes
have independent trustees and 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
2021
2.0
3.2
2.7
2020
2.4
2.6
1.8
2021
2.0
3.2
2.7
2020
2.4
2.6
1.8
2021
2.0
3.2
2.7
2020
2.4
2.6
1.8
2.7
2.0
3.1
2.6
3.2
2.8
20.7
20.7
22.1
22.1
19.8
19.8
46
Babcock International Group PLC Annual Report and Financial Statements 2021
Subsequent events
In April 2021, the Group announced a new operating model. The related restructuring will result in an exceptional charge of around
£40 million being recognised in the 2022 financial year.
In FY20, the Lazio Regional Administrative Court confirmed a €51 million fine issued by the Italian Competition Authority to our
subsidiary, Babcock Mission Critical Services Italia SpA (BMCS Italia), for certain anti-trust violations. As a result, we recognised a provision
for £46 million. During the year, BMCS Italia appealed the decision of the Court to the Italian Council of State. In July 2021, the Council,
whilst upholding the decision of the Court on the facts, annulled the fine, though allowing the Authority leave to re-calculate it. We
expect the Authority to decide on the recalculation of the fine over the next few months. Taking into account the guidance given by the
Council to the Authority on the recalculation, we further expect the Authority to reduce the fine. As a result, we have reduced our best
estimate of the provision from £46 million to £20 million, although we have not received any indication from the Authority as to how it
will choose to interpret the Council’s guidance.
Improvements in risk management and internal control
During the second half of the year, the new Executive Directors made several changes to the risk management and internal control
environment. These were initially designed to simplify and improve the oversight and governance of the Group. As the CPBS review
progressed it became apparent that business processes and internal controls needed a more thorough revision. A programme of change
has commenced which targets certain priority areas – a summary is set out below. The findings of the CPBS have been mapped against
these areas to ensure that risks and issues that resulted in financial adjustments in the CPBS are in future either prevented, or at least
detected at an early stage.
The priority areas of improvement and key actions are as follows:
Area
Governance
Financial control
Bids
Project
management
Safety
Improvements and actions
• Clear ‘tone from the top’ on Babcock values
• Board and Exco documentation streamlined and focused
• Formation of Disclosure Committee/Disclosure Panel to consider market communications
• New Risk Management process with Exco ownership
• Enhanced Delegations of Authority document across the Group
• Formal Letter of Representation covering policy compliance sign off from management each six months
• Simplification of income statement and cash flow management reporting
• Standardised management reporting across the Group
• Development of detailed minimum standards of financial control
• Updated and standardised Group accounting policies
• Updated Treasury controls and policies
• Monthly business reviews with sectors
• Regular balance sheet reviews with sector sign off
• Improved, standardised bid review process and documentation
• New Group-wide approach to project management and project reviews
• Enhanced change control process
• Revamped scrutiny of safety performance
• Nominated Exco Safety sponsor
Some of the above changes have been implemented already. Some require a more detailed approach and will take more time to embed.
They will be implemented in the current fiscal year. In the meantime where this is the case, management reviews of projects and financial
results will help mitigate against the risk of reoccurrence.
Additionally, the new operating model has organised the functions of finance, HR, IT, and procurement and supply chain as ‘centre-led’.
This will ensure higher common standards across the Group and increase transparency and oversight of the business, as well as promote
more collaboration.
Babcock International Group PLC Annual Report and Financial Statements 2021
47
Strategic reportGovernanceFinancial statements Financial review continued
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 treasury team is only permitted to
enter into financial instruments where it has
a high level of confidence in the hedged
item occurring. Both the treasury
department and the sectors 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,
particularly given the ongoing 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
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 repaid
the US$500 million private placement
notes maturing March 2021 using cash and
drawings under its Revolving Credit Facility
Debt maturity profile (£)1
(RCF). The Group also extended the
maturity of its £775 million RCF by one
year to mature in August 2025.
In May 2021, the Group signed a new
three-year RCF of £300 million that expires
in May 2024. This is in addition to the
Group’s existing £775 million RCF. At the
same time, the Group clarified the
definition of underlying results used in the
RCF covenant calculations to ensure that
any one-off impacts from the Group’s
contract profitability and balance sheet
review (‘CPBS’) do not impact the
calculation and agreed with lenders a
temporary amendment to the net debt to
EBITDA ratio covenant permitted level from
3.5 times to 4.5 times for the measurement
periods ending 30 September 2021 and
31 March 2022.
The Group’s other main corporate facilities
comprise of the following: a £300 million
Sterling bond, maturing October 2026, a
€550 million bond, maturing October 2022,
and a €550 million bond, maturing
September 2027. Taken together, these
debt facilities provide the Group with a
total of around £2.4 billion of available
committed facilities and bonds as of
July 2021.
2,500
2,000
1,500
1,000
500
0
482
300
775
300
493
482
775
300
493
300
775
300
493
300
775
300
493
775
300
493
300
493
493
2021
2022
2023
2024
2025
2026
2027
Euro bond 20272
GBP bond 2026
RCF 2025
RCF 2024
Euro bond 20223
1. Chart shows notional value of the debt
2. Euro bond 2027 €550m hedged at £493m
3. Euro bond 2022 €550m hedged at £482m
48
Babcock International Group PLC Annual Report and Financial Statements 2021
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 rate 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 2021, the Group had
70% fixed rate debt (31 March 2020
restated: 53%) and 30% floating rate
debt (31 March 2020 restated: 47%)
based on gross debt of £2,340.0 million
(31 March 2020: £3,621.3 million).
The figures at 31 March 2020 included
the drawn down RCF in response to the
uncertainties of COVID-19 at the time.
Liquidity
Objective
i. To maintain adequate undrawn
committed borrowing facilities
ii. To monitor and manage bank credit
risk, and credit capacity utilisation
iii. To diversify the sources of financing
with a range of maturities and
interest rates, to reflect the long-
term nature of Group contracts,
commitments and risk profile.
Policy
All the Group’s material borrowings are
arranged by the treasury department and
funds raised are lent onward to operating
subsidiaries as required.
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.
As noted above, the Group repaid the
US$500 million private placement notes
maturing March 2021 using cash and
drawings under its Revolving Credit Facility
(RCF) during the year. The Group also
extended the maturity of its £775 million
RCF by one year to mature in August 2025.
Any surplus cash during the year was
invested in short term deposits diversified
across several well rated financial
institutions in accordance with policy.
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
£7.8 million in the income statement for
the year ending 31 March 2021 (2020:
£12.7 million loss).
Babcock International Group PLC Annual Report and Financial Statements 2021
49
Strategic reportGovernanceFinancial statements Operational review
Marine
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
Revenue as % of Group
30%
HMNZS Manawanui in dry dock at Devonport, New Zealand.
50
Babcock International Group PLC Annual Report and Financial Statements 2021
Contract backlog
Revenue
Underlying operating profit
31 March
2021
£2.5bn
31 March
2020
Restated
£2.6bn
£1,242.3m £1,163.6m
£56.3m £134.4m
of which CPBS one-off impacts
Underlying operating profit excluding CPBS one-off impacts
Underlying margin excluding CPBS one-off impacts
£(28.9)m
£85.2m
6.9%
11.6%
Revenue and underlying operating profit (excl. one-off CPBS impacts) bridge:
31 March
2020
Restated
£m
1,163.6
FX
Impact
£m
(2.9)
Disposals
of
businesses
£m
(25.4)
Non-
recurring
items in
FY20
£m
–
Impact of
COVID-19
£m
8.5
FY21
CPBS
recurring
impacts
£m
Other
31 March
trading
2021
£m
£m
(25.7) 124.2 1,242.3
134.4
(0.3)
(2.5)
(5.7)
(17.3)
(8.4)
(15.0)
85.2
Revenue
Underlying
operating profit
Financial review
Organic revenue grew by 9% in the year led
by the ramp up of work on the Type 31
frigate programme and continued strength
in our LGE business. Growth in these areas
more than offset the impact of the disposal
of Context and the £44 million year-on-year
revenue impact from the end of the QEC
programme last year. Increased work
related to COVID-19 had a small positive
impact on revenue with lower activity in
warship support and in Oman offset by
COVID-related orders for the ventilators
in the UK.
Underlying operating profit of £56.3 million
includes a £28.9 million one-off adjustment
from our CPBS (see page 33). Excluding this,
underlying operating profit was £85.2 million.
The table above shows the main variances
year-on-year:
• The estimated impacts of COVID-19
which included lower activity in high
margin consultancy work and the
shutdown of our Oman training site for
most of the period with limited
opportunities to mitigate costs
• A recurring impact from the CPBS
primarily related to a more cautious
view on the recognition of profit on the
Type 31 frigate programme, amongst
other projects
• Weaker trading which reflects lower
profitability on certain programmes,
a charge from the loss of a legal case
relating to a previously exited business,
and a less favourable allocation of
corporate costs to Marine than in the
previous year
The sector’s contract backlog was broadly
flat year-on-year.
Operational review
UK defence
Performance across UK defence was mixed
throughout the year with lower volumes
across some key programmes, partly
reflecting the pressures of COVID-19, being
offset by increased activity on the Type 31
frigate programme. The Type 31 frigate
programme has now completed both its
preliminary and whole ship design reviews.
This is a key indicator of the compliance,
maturity and engineering risk in proceeding
into production as we mature the design
models of specific individual systems and
equipment. The development and
construction of a new state-of-the-art
assembly hall at our Rosyth dockyard to
support the build is due for completion
towards the end of this summer with the
steel on the first ship, HMS Venturer, to be
cut in September 2021.
The Type 23 frigate life-extension
programme at our Devonport dockyard saw
a temporary halt to work in the early stages
of the COVID-19 pandemic but was soon
back to a full work schedule, with four ships
undergoing life extension in parallel. HMS
Portland was returned to the Royal Navy in
the year after receiving its life extension
including a first-in-class engine removal
and repair. HMS St Albans is currently
undergoing the largest Type 23 support
period yet. We also provided a large
support package for HMS Richmond ahead
of her joining the UK’s Carrier Strike Group.
We continue to support the development
of the next generation of UK submarines.
We secured both weapons handling and
launch system (WHLS) and defensive aids
suite (DAS) contracts in the period in
support of the UK Dreadnought
programme. The US/UK Common Missile
Compartment programme output
increased significantly during the period
and will continue to do so throughout the
next year as the programme ramps up.
In March 2021 we secured a five-year,
£150 million logistic support contract with
the MOD as part of the £3.2 billion Land
Environment Tactical Communications and
Information Systems (LE TacCIS) programme
of opportunities to deliver the next-generation
tactical communications and information
systems. We have been down-selected for
the next phase of the Skynet 6 Service Delivery
Wrap contract supporting the next generation
of UK military satellite communications,
with a final submission expected in October
2021. We also await the outcome of the
Maritime Electronic Warfare Systems
Integrated Capability (MEWSIC) bid, which
is expected in the coming months.
We were disappointed to be unsuccessful in
our Project Selborne bid during the period.
The delivery of FOAP training, which was
included within the larger Project Selborne
scope, finished on 31 March 2021. We
continue to deliver training under the
Astute Class Training contract at
HMNB Clyde.
International defence
We support international defence markets
from our UK operations and from our
businesses in Canada, Australia, New
Zealand, Oman and Korea.
In Canada, our customer exercised two
one-year contract extension options to the
Victoria In-Service Support Contract (VISSC)
to take the contract out to June 2023.
VISSC is one of the largest naval in-service
support contracts in Canada and includes
refits and deep maintenance periods for
Canada’s fleet of four submarines.
In Australia, we secured a contract with
Naval Group to commence the second
stage design and build of the Weapon
Discharge System (WDS) for the Australian
Future Submarine Programme (AFSP). AFSP
is Australia’s largest defence acquisition
programme and will see 12 Attack Class
submarines designed and built for the Royal
Australian Navy, expected to enter service
in the early 2030s.
In Korea, we secured a WHLS order for the
fourth boat of the Jangbogo-III Submarine
programme. We continue to develop our
Busan facility to expand our presence in Korea
to provide the programme with through-life
support, as well as future Republic of Korea
Navy development programmes.
Looking ahead we see several opportunities
for export orders for our Arrowhead 140
frigate design chosen for the UK Type 31
programme and we are expanding our high
frequency communications capability and
capacity in Australasia, building on our work
in the UK and New Zealand.
Energy and Marine
Our Energy and Marine business saw good
revenue growth during the year, driven by
increased commercial vessel work and
continued strong demand for multiple
liquefied gas handling and re-liquefaction
system orders across the LPG, LNG and
ethane markets.
In the period we signed frame agreements
with Hyundai Heavy Industries, Hyundai
Samho Heavy Industries and Hyundai Mipo
Dockyard confirming Babcock LGE as
preferred supplier for the design and supply
of LPG cargo handling systems for very
large gas carriers and midsize gas carriers.
Babcock International Group PLC Annual Report and Financial Statements 2021
51
Strategic reportGovernanceFinancial statements
Operational review continued
Nuclear
We have supported the Continuous At Sea
Deterrent for over 50 years
We sustain the entirety of the UK’s
submarine fleet
We have role across all civil nuclear: from
new build, to operational support, to
decommissioning
Revenue as % of Group
23%
HMS Vanguard approaches home port at Her Majesty’s Naval Base Clyde © Crown Copyright 2021 Image: UK MOD
52
Babcock International Group PLC Annual Report and Financial Statements 2021
Contract backlog
Revenue
Underlying operating profit
of which CPBS one-off impacts
Underlying operating profit excluding CPBS one-off impacts
Underlying margin excluding CPBS one-off impacts
31 March
2021
£0.4bn
£975.9m
£63.9m
£(23.4)m
£87.3m
8.9%
Revenue and underlying operating profit (excl. one-off CPBS impacts) bridge:
Revenue
Underlying operating profit
31 March
2020
Restated
£m
896.9
113.3
FX
Impact
£m
–
–
Disposals of
businesses
£m
(3.5)
0.5
Non-recurring
items in FY20
£m
–
(20.9)
Impact of
COVID-19
£m
9.3
(2.1)
FY21 CPBS
recurring
impacts
£m
(21.8)
(0.2)
Other trading
£m
95.0
(3.1)
31 March
2020
Restated
£0.6bn
£896.9m
£113.3m
12.6%
31 March
2021
£m
975.9
87.3
Financial review
Organic revenue was 9% higher this
year led by strong growth in defence.
This growth came from increased work on
submarine support and a further ramp up of
infrastructure work. This revenue growth
however was at a lower margin. The increase
in revenue associated with COVID-19
relates to COVID related costs recovered
from the customer.
The underlying operating profit of
£63.9 million includes a £23.4 million
one-off adjustment from our CPBS
(see page 33). Excluding this, underlying
operating profit was £87.3 million.
The table above shows the main variances
year-on-year, the largest of which is the
impact of a higher R&D tax credits in the
last financial year due to a catch up on
previous years’ claims. The small decline
in profit reflected in the other trading
movements reflect the lower margin
earned this year across programmes.
The sector’s contract backlog reduced
slightly year on year, reflecting the lower
time period of committed revenue from
MSDF, and is expected to increase
significantly once the FMSP contract is
agreed, as discussed below.
We are working with our customer to
finalise the four replacement contracts.
All are identified as being ‘Qualifying
Defence Contracts (QDC)’ and fall under
Single Source Contract Regulations (SSCR).
Negotiations have not yet concluded, but
we expect to finalise all elements of the
four FMSP contracts over this summer.
Civil
Revenue across civil was lower in the year
reflecting major long-term projects with the
NDA and AWE coming to a close and lower
volumes on work with EDF partly as a result
of challenges with the Advance Gas Reactor
station fleet.
New build construction continues to be
delayed at Hinkley Point C (HPC) resulting
in a knock-on impact to the MEH Alliance.
The alliance, launched in August 2019 with
three other operators, aims to deliver all of
the main Mechanical, Electrical and Heating
(venting and air conditioning) (MEH) activity
at HPC.
The civil nuclear decommissioning and new
build market remains challenging in the
short term and we made good progress in
the year in reducing our overheads and
simplifying our structure to adapt to these
challenges. There are, however, significant
opportunities in the medium term across
the UK and potential opportunities in
Canada and Japan, two markets where
we already have a small presence.
Operational review
Defence
The defence business saw increased activity
in the year despite COVID-19 working
pressures as critical work continued. We
continued to support the Continuous At Sea
Deterrent and the high availability of Attack
Submarines from our operations at HMNB
Clyde despite the challenges of the
pandemic. Work on large submarine
infrastructure programmes ramped up in
the year, including planning for the first
deep maintenance period of the Astute
Class at Devonport in the next few years.
In Devonport, we continue to work on the
Revalidation Assisted Maintenance Period
(RAMP) programme for the Trafalgar Class
and work has continued on the first life
extension of the Vanguard Class.
Our largest individual contract across the
Group, the Maritime Support Delivery
Framework (MSDF), operates across our
Maritime and Nuclear sectors. The previous
five year MSDF contract was due to expire
on the 31 March 2020, however, MOD
and Babcock agreed to exercise an option
in the MSDF contract to extend the
commercial arrangement by a year to
31 March 2021. This additional year
included some scope increases but at a
lower margin compared to the previous
MSDF contract. This has been replaced by
an Intention To Proceed (ITP) agreement
which includes an output based requirement,
covering the period 1 April 2021 to
31 July 2021. This transition period will
allow MOD and Babcock to conclude
negotiations on the four Future Maritime
Support Programme (FMSP) single source
contracts at HMNB Devonport and Clyde,
replacing the current MSDF arrangements.
Babcock International Group PLC Annual Report and Financial Statements 2021
53
Strategic reportGovernanceFinancial statements
Operational review continued
Land
We ensure the British Army can focus on
their missions safely by supporting 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
Revenue as % of Group
27%
British Army Challenger 2 tank at Bovington © Crown Copyright 2021 Image: UK MOD
54
Babcock International Group PLC Annual Report and Financial Statements 2021
Contract backlog
Revenue
Underlying operating profit
of which CPBS one-off impacts
Underlying operating profit excluding CPBS one-off impacts
Underlying margin excluding CPBS one-off impacts
31 March
2021
£3.0bn
31 March
2020
Restated
£3.5bn
£1,110.1m £1,522.5m
£98.1m
£(17.4)m
£(69.3)m
£51.9m
4.7%
6.4%
Revenue and underlying operating profit (excl. one-off CPBS impacts) bridge:
Revenue
Underlying operating profit
31 March
2020
Restated
£m
1,522.5
98.1
FX
Impact
£m
(50.8)
(4.8)
Disposals of
businesses
£m
(30.5)
(1.7)
Non-recurring
items in FY20
£m
–
(3.1)
Impact of
COVID-19
£m
(118.5)
(15.1)
FY21 CPBS
recurring
impacts
£m
(140.9)
(9.8)
Other trading
£m
(71.7)
(11.7)
31 March
2021
£m
1,110.1
51.9
Operational review
Defence
Trading across our most of our defence
businesses held up well during the year
despite COVID-19. Activity slowed in some
areas however, including training and
short-cycle inventory work at DSG while our
work supporting the British Army in
Germany reduced in scope.
We continue to engage with the customer
as they develop their Collective Training
Transformation Programme and won the
opportunity to participate in the British
Army’s 2021 Army Warfighting Experiment
where we will be demonstrating a range of
capabilities. During the year we secured an
extension to our Training Maintenance and
Support Services (TMASS) contract out to
2023 and we are in negotiations to extend
the Defence College of Technical Training
for the provision of training design and
delivery (EMTC II) for a further three years,
plus one option year.
Activity levels remained high across our
Defence Support Group (DSG) business
though reduced efficiency reduced the
pace of progress. Following a review of
the DSG contract as part of the CPBS,
and taking into account the changes
announced by the MOD in the Integrated
Review in the year, we now recognise a
significantly lower margin on the
DSG contract.
Financial review
On an organic basis, revenue was 22%
lower in the year. This includes a significant
impact from the CPBS, with an in-year
reduction relating to lower revenue on our
DSG contract and the de-recognition of
revenue on our Phoenix contract as, from
February 2020, the contractual terms
changed from Babcock acting as principal
to acting as agent. Revenue was also
impacted by a significant COVID-19 impact
of around £120 million across many parts
of the sector as well as the lost contract for
Heathrow in our Airports business and lower
defence volumes.
The underlying operating loss of
£17.4 million includes a £69.3 million
one-off adjustment from our CPBS
(see page 33). Excluding this, underlying
operating profit was £51.9 million.
The table above shows the main variances
year-on-year:
• Estimated impacts from COVID-19 as a
result of lower activity and site closures in
civil training, education, airports and in
South Africa
• Recurring impacts from the CPBS
primarily relating to a significantly lower
margin recognised on our DSG contract
• Other trading reflects the loss of the
Heathrow contract, increased operating
costs and lower profitability on
some contracts
The sector’s contract backlog decreased by
£0.5 billion in the year, reflecting the
utilisation of multi-year backlog on
long-term contracts, predominantly DSG,
and also the reduction of backlog in Airports.
Emergency services
Trading across our emergency services
businesses was relatively flat in the year
with lower volumes in firefighting training
offset by the start of our new police training
contract. Our fleet support contract for the
Met Police performed well and we were
awarded a two year contract extension
worth around £60 million in the year.
In January 2021, we launched the
£300 million contract for the Met Police
Education and Qualification Framework
(PEQF). Our fleet support and training
contracts for the London Fire Brigade
continue to perform well.
Other civil markets
The impact of COVID-19 was most severe
across many of our other markets in the
Land sector, both in terms of revenue and
operating profit. In our civil training
business, the start of the COVID-19
pandemic saw customer facilities closed
and no face-to-face training. The majority
of our civil training workforce were initially
placed on the UK Government’s furlough
scheme. Our airports businesses saw a
dramatic reduction in volumes given the
global decline in passenger numbers and
our Heathrow airport baggage contract
came to an end in October 2020. Work
across our rail and power businesses held
up well throughout the year.
Our South Africa business had a very tough
first half of the year, hit by national
lockdowns, but saw a stronger second half
as activity increased.
In October 2020, we completed the sale of
the Conbras business in Brazil for a net
consideration of £7 million.
Babcock International Group PLC Annual Report and Financial Statements 2021
55
Strategic 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
Revenue as % of Group
20%
Airbus H160 helicopter
56
Babcock International Group PLC Annual Report and Financial Statements 2021
Contract backlog
Revenue
Underlying operating profit
of which CPBS one-off impacts
Underlying operating profit excluding CPBS one-off impacts
Underlying margin excluding CPBS one-off impacts
31 March
2021
£2.9bn
£854.4m
£(130.4)m
£(128.4)m
£(2.0)m
(0.2)%
Revenue and underlying operating profit (excl. one-off CPBS impacts) bridge:
Revenue
Underlying operating profit
31 March
2020
Restated
£m
845.5
31.8
FX
Impact
£m
11.8
(0.3)
Disposals of
businesses
£m
–
–
Non-recurring
items in FY20
£m
–
(17.0)
Impact of
COVID-19
£m
(44.6)
(11.1)
FY21 CPBS
recurring
impacts
£m
(19.0)
(6.3)
Other trading
£m
60.7
0.9
31 March
2020
Restated
£2.8bn
£845.5m
£31.8m
3.8%
31 March
2021
£m
854.4
(2.0)
Financial review
Organic revenue was flat this year as
business growth and new contracts offset
a COVID-19 impact of around £45 million
from lower flying hours in the earlier stages
of the pandemic.
The positive impact of these in FY20 was
around £17 million compared to nil in
FY21. The small improvement in other
trading reflects the benefits from the cost
restructuring programme mostly offset by
weaker trading.
Performance in aerial emergency medical
services was the most severely hit by
COVID-19 in the earlier parts of the
financial year. We were successful in
securing contract renewals in Italy,
Spain and France in the year.
Our firefighting operations across Europe
and Canada saw higher activity levels
compared to last year, particularly in Spain
and Italy. We have increased our footprint
in firefighting in Europe with new contract
wins in Spain and we deployed aircraft in
Chile with a small counter-season contract.
Oil and gas
Market conditions for our oil and gas
business remained tough throughout the
year. Flying hours were heavily reduced in
the early part of the year in response to the
COVID-19 pandemic but recovered as the
year continued.
The underlying operating loss of
£130.4 million includes a £128.4 million
one-off adjustment from our CPBS
(see page 33). Excluding this, underlying
operating loss was £2.0 million. The table
above shows the main variances year-on-year,
being the estimated costs of COVID-19 and
significant credits that benefited FY20.
The estimated COVID-19 impact includes
the direct impact from lower flying hours
in the early stages of the pandemic and
the additional costs across the business.
These costs included PPE, the refitting and
segregation modification of aircraft and the
inefficiencies of flying in a COVID-secure
way, for example flying at lower capacity.
In many cases these additional costs were
not recovered in our contract pricing.
The recurring impacts to underlying operating
profit from the CPBS of £6.3 million relate
to the ongoing impact of various
adjustments made.
As set out before, our civil aviation business
has a cost structure too high for the
revenue we generate under existing
contracts. Our cost reduction programme
started in the last financial year has begun
to address this. In the prior year, reported
performance benefited from various
transactions that are not expected to
repeat. These include multi-year indexation
claims on contracts and accrual and
provisions releases.
The sector’s contract backlog was broadly
stable year-on-year with new work
replacing contracts that ended.
Operational review
Defence
Activity across defence was broadly flat in
the year with work continuing despite
COVID-19. In the UK, support continued
across both RAF station support and flying
training. Additionally both our Hawk and
Adour contracts, which underpin the
delivery of critical UK fast-jet training to the
RAF, were extended in year. Discussions
continue on a longer-term Hawk support
contract for the next decade.
In France, we continued to deliver on our
Fomedec pilot training contract and we
started our H160 contract to provide
search and rescue aircraft and services for
the French Navy. In June 2021, we were
awarded a contract by the French MOD for
an expansion of our existing defence
aviation training activities. This five-year
contract is worth around €500 million and
started in June 2021.
In Canada, we have signed a letter of intent
with Leonardo to bid together for the
Future Aircrew Training programme (FACT).
Aerial emergency services
Revenue across our aerial emergency
services businesses was slightly higher this
year, helped by the start of new contracts
and higher firefighting hours. Profitability
was severely impacted by COVID-19 with
the pressures of lower flying hours in much
of the business and higher costs of delivery.
Babcock International Group PLC Annual Report and Financial Statements 2021
57
Strategic reportGovernanceFinancial statements
Stakeholder engagement
Building relationships
Customers
Investors
Employees
Why they matter to us
Enabling our customers to succeed is
fundamental to our success. We work
in partnership with public and private
customers to enable them to deliver
critical programmes and services
where failure is not an option. We
seek to solve their challenges through
excellent operational performance
and the introduction of innovations
to support their longer-term needs.
We build and maintain long-term
relationships with our customers in
order to promote the long-term
success of the Group.
What matters to them
• Safety
• Operational excellence
• Reliability
• Value for money
• Deep understanding of their needs,
both now and in the future
• Sustainability performance
How Babcock engages
• Regular ongoing relationship
engagement at all levels
• Contract negotiation, execution
• Strategic Partnership Programme
• Work on joint initiatives
• Provision of information on
sustainability goals
Why they matter to us
The support of our equity and debt
investors and continued access to
capital is vital to the long-term
success of the Company. We work to
ensure that we provide clear and
transparent information to the
market which allows investors and
potential investors to make informed
decisions, via market updates,
information published on our
website, appropriate access to
management and an active IR and
Treasury team.
What matters to them
• Creation of shareholder value
• Financial and operational
performance of the Company
• Strategy and business development
• Capital structure
• Dividend policy
• Transparency and simplification of
communication
• Governance and management
• Sustainability strategy and progress
How Babcock engages
• Annual Report and financial
statements and annual general
meeting
• Results materials and presentations
• Investor relations team
• Treasury team with banks and
noteholders and credit rating agencies
• Babcock website, including
dedicated Investor section
• Investor roadshows with
management and the IR team
• Chair engagement with top
shareholders
• Consultation with large shareholders
on Remuneration policy
• Investor site visits
• Stock exchange announcements
and press releases
Why they matter to us
We recognise that our employees are
key to our success, and strive to
engage with them through a variety
of channels, so that they are aware of
the Group’s aims and priorities. We
work to create a diverse and inclusive
workplace where employees can
reach their full potential and we
engage with them to understand
their expectations and meet their
needs to ensure we retain and
develop the best talent.
What matters to them
• Remuneration and reward
• Professional development
• The Group’s aims, goals, priorities
and reputation
• Employee engagement
• Health and Safety
• An empowering employment
culture
• Diversity and Inclusion
• Sustainability
How Babcock engages
• Employee forums and meetings
with representative groups
• Regular employee surveys
• CEO and senior management vlogs
• Access to the CEO via a dedicated
email
• Regular updates on the intranet
and App
• Cascade briefings
• Inductions, including using a
dedicated App
• Apprentice and Graduate
programmes
• Regular training, including on Code
of Conduct
• Access to independent
whistleblowing process
• Senior management and
Board visits
• Director designated for employees
meetings
58
Babcock International Group PLC Annual Report and Financial Statements 2021
Regulators
Suppliers
Communities
Why they matter to us
We manage complex assets in highly
regulated sectors: nuclear, defence
and aviation. We are committed to
providing safe and effective
operations. We have to maintain
positive and constructive
relationships with regulators in order
to be able to operate, to help shape
policy in our markets and to position
for future opportunities.
What matters to them
• Regulations, policies and standards
• Governance and transparency
• Trust and ethics
• Compliance
• Sustainability
• Site-specific issues
How Babcock engages
• Regular engagement (national,
local and official level)
• Briefing on key issues
• Dedicated compliance teams
• Response to direct queries
Why they matter to us
To support our business operations
and strategy we require an efficient
and highly effective supply chain. This
means we need to foster trusted and
collaborative relationships with
suppliers who share our appetite to
drive improvement through
innovation and best practice. Our
external supply chains are an
important part of our performance
and by working collaboratively with
suppliers we can ensure continuity of
supply, minimise risk and bring
innovative solutions to our customers.
What matters to them
• Good working relationships
• Access to opportunities
• Prompt payment and predictable
supplier cash flows
How Babcock engages
• Regular open and honest two-way
communications
• Supplier Code of Conduct
• Supplier conferences, workshops
and ‘lunch and learns’
• Supplier due diligence
• Involvement in Security supply chain
development programme SC21
Why they matter to us
Our partnership with the
communities in which we operate is
at the core of our business. We have
a responsibility to ensure that we
support the communities in which
we operate both economically and
socially; community engagement and
social value creation is a key aspect
of our ESG strategy. Where we have
major sites of operation, such as at
Plymouth in the UK, we are often one
of the largest employers in the local
area. We are aware of the impact
that we have on those communities.
What matters to them
• Employment
• Health and Safety
• Engagement in local education and
STEM activities
• Sustainability and the local
environment
• Support for indigenous people
• Armed Forces Reservists Support
• Improved community infrastructure
and resilience
How Babcock engages
• Sponsorship
• Employee volunteering
• University partnerships
• STEM Ambassadors
• Engagement with local community
programmes
For further information on how the Board engaged with the Company’s stakeholders and took their interests into account in key
decisions during the year under review, please see pages 114 to 116 which forms part of the s172(1) Statement on page 79.
Babcock International Group PLC Annual Report and Financial Statements 2021
59
Strategic reportGovernanceFinancial statements Jasvinder Bancroft
Civil Engineer
UK
60
Babcock International Group PLC Annual Report and Financial Statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
61
Strategic reportGovernanceFinancial statements ESG strategy
Creating a safe and
secure world, together
In FY21 we made progress in the
development of our environmental,
social and governance (ESG)
strategy despite managing financial
issues. We recognise it is
increasingly important to all our
stakeholders, not least our people
and our customers. Our activities
have a significant impact on society
and the environment, and
sustainability is now an integral part
of our corporate strategy and how
we do business, but we need to
focus more in this area. You can see
more about how our new approach
to sustainability, driven by our
corporate purpose, is central to our
business model and wider strategy
on page 16.
Key focus areas for FY22
• Materiality assessment see page 64
• Progress the pathway to net zero,
set science-based targets and
reduce emissions
• Conduct Chapter Zero Board readiness
assessment
• Focus on climate action: TCFD risk
management and scenario planning
• Establish a baseline and investigate
reduction invitiatives for water and waste
• Progress sustainable transport solutions
for Babcock and our customers
• Progress inclusion and diversity initiatives
• Upweight corporate citizenship
• Increase Group-wide engagement with
stakeholders
• Increase ESG transparency and disclosure
We recognise we are at the start of our
sustainability journey but are committed to
acting now to reduce emissions, achieve
our net zero goals and meet the
expectations of all our stakeholders and
society as a whole. In particular, we aspire
to make a positive difference for the
communities in which we operate and
actively contribute towards the UN
Sustainable Development Goals (SDGs).
We are focused on minimising the impact
of our operations on the environment,
on ensuring the safety of our people and
ensuring that we have a positive impact on
the communities in which we operate.
We are working collaboratively with our
customers and our supply chain to address
the common challenges we all share, such
as climate change.
Our sustainability strategy underpins our
corporate purpose: to create a safe and
secure world, together. We do this by
supporting the defence of nations,
protecting communities and saving lives.
• By reducing our carbon emissions and
focusing on cleaner energy, minimising
waste and increasing recycling we will
protect the environment
• Through an active corporate citizenship
programme and sustainable procurement
initiatives we will protect our
communities and suppliers
• By providing a safe and inclusive
workplace where each person feels
valued we will protect our employees
• By delivering robust free cash flows and
creating sustainable value we will protect
the future of the organisation
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 fulfil 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 solutions
and ensure timely
delivery of quality
products and services.
E
n
v
i
r
o
n
m
e
n
t
c
o
R
n
s
u
m
p
t
i
o
n
e
s
p
o
n
s
i
b
l
e
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.
p l e a n d
t i a
n
l
P e o
p o t e
Cle
a
inp
n
uts
y
t
i
n
u
m
m
o
t
n
e
m
e
g
a
g
C
n
e
r
o
b
u
Div
st su
erse and
pply chains
C o m m e rcial
g rity
e
i n t
Governa n c e
62
Babcock International Group PLC Annual Report and Financial Statements 2021
Our ESG strategy focuses on the operations
and strategy of the Group and is owned
at Executive Committee level by John
Howie, Chief Corporate Affairs Officer.
Our approach to Board governance is
owned by our Chair, Ruth Cairnie, and is
discussed on page 100.
ESG and our shareholders
We recognise that there are parts of our
business model of particular relevance to
investors when looking at ESG matters,
most notably that we operate in the
defence and nuclear markets.
This year our ESG report features additional
disclosure and transparency on key
sustainability interests that may help
investors looking at Babcock with an ESG
lens. To address this, we met with some of
our top shareholders in the year to identify
and discuss what the most material areas of
focus should be and what disclosures would
be useful.
Below we highlight the key points relating
to issues commonly identified among our
shareholders:
Environmental: We have set a net zero
emissions target for 2040. Not only do we
explain our target, we set out a roadmap
with milestones to achieve our new goals,
linked to our KPI on CO2e emissions for
measuring our progress, see page 68.
Social: The health, safety and wellbeing of
our employees, customers and the
community comes first at all times. We
have evolved the way we conduct
community outreach activities in the year
to foster take-up in STEM subjects for
younger audiences and to help address
diversity disparity, including encouraging
women in engineering. Improved employee
diversity is a key pillar of our new people
strategy and this year we have set an
ambitious new target – to increase the
proportion of women in our senior
leadership team from 21% to 30%
by March 2025.
Governance: Governance starts at the top.
We have made significant changes to the
governance of the Group at Board level,
which is covered in detail in our Chair’s
Governance Statement (page 100) and our
Audit Committee Chair’s Report (page 119).
We have reworked our approach to risk
management in the year, see page 84,
and changed our governance of contract
bids, as covered in our business model
on page 21.
Investor FAQ:
Are you involved in nuclear weapons?
• We do not make, deal in or maintain nuclear weapons
• We do, however, own and operate critical infrastructure and have technical
knowledge of the defence nuclear market. We provide maintenance and through-
life support for the UK’s fleet of nuclear powered submarines
• Our product offering includes the build and assembly of the missile launch tubes
for the common missile compartment on the US and UK nuclear deterrent
submarine replacement programme
• Work related to these areas represented approximately 20% of FY21
Group revenue
Are you involved in other weapons?
• We do not make or deal in other weapons
• We do, however, design and manufacture weapons handling and launch systems
for international naval platforms used by the UK, Spain, Korea and Australia
• We also have a contract to maintain the UK Royal Navy’s naval weaponry
• Work related to these areas represented approximately 2% of FY21 Group revenue
Are you involved in nuclear power?
• Yes, nuclear power provides a reliable source of low-carbon electricity and is a
critical component of countries’ energy strategies as they move towards net
zero carbon
• Our civil nuclear business is involved in new build, power generation support,
fuel route management and decommissioning in the UK nuclear market
• We also use technical knowledge and reference cases to undertake consultancy
work in Canada and Japan, albeit at a small volume currently
• Work related to these areas represented approximately 4% of FY21 Group revenue
Do you have a dedicated ESG team with ESG targets?
• Yes. Following our review of the Company’s strategy and operating model, we
have confirmed that ESG remains a vital part of our business model. Not only do
we report on TCFD, but our new Net Zero 2040 target is published alongside a
route map to achieving our goals
What ESG indices are you actively involved in?
• While we can be rated by many ESG indices, we actively cooperate and submit
information and disclosures for rating by MSI, with a year-on-year improvement
under the DJSI scoring system.
This year we have continued to develop
our approach to ESG reporting. Building on
last year, we have enhanced the level of
transparency and provided further insight
into a range of economic, social and
environmental impacts in association
with global standards and industry-
specific disclosures.
• We achieved a demonstrable
improvement in the Dow Jones
Sustainability Index score across all
three reporting areas (overall increase
of 17 points versus last year)
• We have shared examples of how we
are contributing towards the global
UN SDGs (see over)
• We have assessed against global
standards and increased our level of
disclosure ( see GRI/SASB tables)
• Our 2020 Modern Slavery statement was
recognised in the TISC compliance report
as amongst the top 6% of companies in
scope for Section 54 for meeting the
minimum criteria this year and published
in a list of links to exemplar statements
• We are now reporting in line with TCFD
limited disclosure recommendations
Babcock International Group PLC Annual Report and Financial Statements 2021
63
Strategic reportGovernanceFinancial statements ESG strategy continued
Materiality assessment
We are focusing on issues that we believe matter most to our stakeholders and to Babcock and this will help influence our sustainability
agenda and our priorities.
This year we have set out our material issues and explained why they matter. We did this by reviewing the list of topics from our 2019
stakeholder engagement, assessing our impact across the value chain and versus global standards.
We have categorised these topics and they will be further explored in the relevant pages of the Environment, Social and Governance
sections of the ESG report.
ESG
E
Material issue
Why this matters to us
Biodiversity and Ecological
Impact
Biodiverse ecosystems are fundamental to healthy and quality lives. Maintaining and
enhancing the environment in which we operate is at the core of Babcock’s principles.
E
Climate Change
E
Waste
E
Water Consumption
S
Community Engagement
S
Health, Safety and Wellbeing
S
Talent and Development
We are facing a global climate crisis which has the potential to cause catastrophic impacts.
We understand the risks posed by climate change and are committed to play our part in
addressing the global crisis.
Global production and consumption patterns generate unconscionable amounts of waste,
depleting finite resources and causing irreparable damage to the global biosphere. We are
committed to driving material and resource efficiency, adopting circular economy
principles and reducing our impacts.
The global hydrosphere supports all life on earth and current consumption and
production patterns place significant pressure on our finite water resources. We
understand the importance of this precious resource and commit to managing our
consumption responsibly.
Our community engagement approach aims to ensure we are good neighbours by
supporting the communities who live alongside and work with us whilst positively
contributing to society’s progress overall.
High health and safety standards are a fundamental condition and responsibility we must
meet to protect the wellbeing of all who interact with Babcock and ensure everyone gets
home safely every day.
Recruiting, maintaining and developing the best talent through a robust talent pipeline is
key to ensuring that we maintain a competent workforce with the capacity to meet
current and future needs.
S
S
Local Economic Contribution
We recognise the jobs we provide have a large socio-economic impact, especially at major
sites where we are often a leading employer in that area.
Employee Diversity and Inclusion
Diversity and inclusion in recruitment and in all our people processes is critical to ensuring
we create a workplace culture where individuals can flourish and contribute to the shared
success of the business.
G
Business Ethics and Integrity
Reputation is a key business asset – in order to thrive, we as an organisation have to be
trusted by all our stakeholders.
G
Data and Cyber Security
We recognise the very real risk of malicious cyber breach and work hard to ensure both our
customers’ and our information assets remain protected. (See risk section on page 84.)
G
Governance, Accountability and
Culture
Babcock’s culture is the glue that binds strategy and operating model. Governance is the
way in which we make sure that Babcock is true to its purpose, culture and strategy.
G
Sustainable Supply Chains
G
Innovation and Technology
G
Collaboration
We manage our local and global impact through considerate purchasing, taking into
account products’ entire lifecycles, whilst safeguarding our supply chains from the taint of
unacceptable labour practice issues.
Innovation, including the application of novel or transferable technologies, is important
in creating efficient and sustainable outcomes. (See Innovation and technology section
on page 24.)
Collaboration unifies and empowers others to achieve a shared goal, fosters innovation and
creates lasting relationships for sustainable long-term business success. (See people
strategy on page 22.)
We recognise the importance of the materiality assessment and there is further progress to be made. It will be reviewed on an annual
basis to capture the dynamic and ever-changing sustainability landscape and ensure that our strategy evolves with the interests and needs
of our stakeholders, as well as those of Babcock.
64
Babcock International Group PLC Annual Report and Financial Statements 2021
Progress against UN Sustainable Development Goals
The UN SDGs provide a common language for our employees, our customers, our investors and regulators. By aligning the Company
strategy and material issues to the SDGs, we can transparently disclose our contribution, assess annual progress that has been made
towards the 2030 targets and unlock opportunities that benefit people, the planet and the economy.
Our aim is to make a positive impact on the communities in which we operate and make a better and more sustainable future for all.
Our sustainability agenda has a number of programmes which support and make a valuable contribution to the following SDGs and we
have listed a few examples of the activities taking place across the business. SDG 13 Climate Action has been added this year as it is a
key focus.
Sustainability
at Babcock
SDGs
Affordable and
Green Energy
Clean Water
and Sanitation
Responsible
Consumption
and Production
Climate Action
Our intention is to ensure access to
and use of affordable, reliable,
sustainable and modern energy for
Babcock.
Our intention is to sustainably
manage our water consumption to
ensure it remains available and
safe to all at our sites.
Our intention is to sustainably
manage our consumption of our
planet’s finite resources and ensure
sustainable production patterns.
Our intention is to work
collaboratively with our customers
and suppliers to take immediate
action to combat climate change
and its catastrophic impacts by
decarbonising our business and our
value chain.
l
a
t
n
e
m
n
o
r
i
v
n
E
Life Below
Water
Life on Land
Our intention is to protect the
ocean, seas and marine resources
for sustainable development.
Our intention is to protect and
conserve the biosphere around the
communities in which we operate.
Some examples which demonstrate our progress and
impact during FY21
• Rosyth naval base is developing plans to install a solar farm
and energy storage system at the site with a view to
incorporating other energy solutions.
• Cavendish Nuclear focuses on water-saving devices and
technologies, such as sensor taps and eco flush toilets, on
all sites when performing refurbishments.
• In August 2020, Devonport joined forces with WH Knight
& Sons, to ensure that 3,000 pairs of decommissioned
overalls could be reused instead of being sent to landfill.
• Twenty-three ISO 14001 accredited environmental
management systems.
• Carbon strategy and TCFD reporting, see pages 67 and 70
respectively.
• Since our datacentre move in June 2020 we have saved
1,500 MWh of electricity, which is equivalent to the
average annual electricity consumption of 400 UK homes
and has resulted in a reduction of 350 tonnes of CO2e.
• Babcock, alongside three partners, has secured funding to
undertake an R&D project seeking to understand the
performance of hydrogen fuel cells and batteries as a
possible zero emission power and propulsion technology.
• Delivery of aerial firefighting services reduces damage
from fires and run-off into water bodies.
• Use of UAVs to detect fires and assist direction of
firefighting actions.
• Land Defence partnered with the Marine Conservation
Society to undertake volunteer beach cleans. Plans were
arranged for another volunteer clean project in March
2020, but this was cancelled due to COVID-19.
• Piloted food waste collections at Dalton Avenue site,
Rivergate and Babcock Technology Centre, which will be
rolled out across further sites. One wormery and one
beehive in place at Chatham base in October 2020.
Babcock International Group PLC Annual Report and Financial Statements 2021
65
Strategic reportGovernanceFinancial statements
ESG strategy continued
Sustainability
at Babcock
SDGs
Some examples which demonstrate our progress and
impact during FY21
Good Health
and Wellbeing
Our intention is to promote good
health and wellbeing through
policy and our corporate culture.
• We have a Group-wide approach to corporate health and
wellbeing and increased communications to staff during
COVID-19, see social section on page 71.
Quality
Education
Our intention is to ensure inclusive
and equitable quality work-related
education and promote lifelong
learning opportunities for our
employees and support education
in the wider community in which
we operate.
Gender Equality Our intention is achieve gender
equality and empower all females
through our partnerships
and networks.
l
i
a
c
o
S
Decent Work
and Economic
Growth
Our intention is to promote
sustained, inclusive and sustainable
economic growth, full and
productive employment and
decent work.
Reduced
Inequalities
Our intention is to reduce
inequalities throughout our
business and value chain.
Responsible
Consumption
and Production
Our intention is to ensure
sustainable consumption and
production patterns by aligning
our processes to international
standards and through
corporate policy.
Peace, Justice
and Strong
Institutions
Our intention is to ensure
we and our value chain are
effective, accountable and
inclusive institutions.
e
c
n
a
n
r
e
v
o
G
• Through the COVID-19 Recovery Commission we are
working to reverse the impact that the pandemic has had
on the UK’s levelling-up agenda.
• Across the Group, we have employed over 250 graduates
and over 300 apprentices.
• We continue to support STEM activities, see page 75
• Through our partnership with Women in Science and
Engineering and our active involvement in Women in
Defence and Women in Nuclear, we are working to
address the gender imbalance across the sectors in which
we operate. Examples include Aviation’s Fly High women’s
network, Women in Defence 2020 Awards, supporting the
‘1 of the Million’ campaign by Women in Science and
Engineering (WISE) and supporting International Women in
Engineering Day 2020.
• During the year, the Executive Committee has reviewed
the Group’s gender pay report. In the 2020/21 Gender
Pay report (reflecting data relating to April 2020), our
mean gender pay gap was 12.5% and our median gender
pay gap was 12.3%, representing a further year-on-year
narrowing of the gap, as has consistently been the case
since reporting commenced in 2017.
• We have exceeded our 5% Club commitment to employ
5% of the workforce on an Early Careers programme – in
2021 we employed 7.26%.
• We publicise our apprenticeship opportunities through the
Government’s Redundancy Support Service for
Apprentices.
• We pay all staff (excluding apprentices) in line with the
Living Wage Foundation’s living wage.
• In 2017, Babcock established a five-year partnership with
Vine Trust for employees to volunteer on 14-day home-
building expeditions. To date, 65 Babcock employees from
across the UK and Canada have volunteered on home-
building projects in Tanzania.
• In 2021 we signed the UK social mobility pledge which
means we are committed to reducing inequalities and will
review our recruitment practices and how we support
progression once in employment.
• We are aligning our processes and standards to ISO 20400
(Sustainable Procurement).
• We are currently looking to develop a Group-wide
approach to our support for communities and sponsorship
initiatives, to be implemented in FY22.
• Group Procurement developed four additional modules to
raise awareness of elements specific to the function. As of
mid-December 2020, 438 users had registered, with 307
actually marked as having completed and passed them all.
• Prompt payment, see Governance section.
• We recognise the value of SMEs and encourage them to
engage with us.
66
Babcock International Group PLC Annual Report and Financial Statements 2021
We are working to engage with our supply
chain to understand, manage and reduce
our wider environmental impacts. Our
Group-wide Procurement Environmental
policy ensures that environmental aspects
are taken into account as part of supplier
procurement and purchasing activities.
We do recognise that the change in
working brought about by COVID-19 has
resulted in increased energy consumption
within our employees’ homes. We are
working to assess this increase and to
identify opportunities to reduce the impact.
Environmental – Clean inputs
Developments across our estate continue
to be designed and delivered to high
environmental standards and aim to
achieve BREEAM Excellent ratings as
a minimum.
We are committed to improving the
environmental performance of our estate
and are actively investigating SMART
Building Solutions in line with our Agile
Working policy.
At our new Bristol Technology Centre
campus, we are assessing the feasibility of
sustainable and low-carbon technologies,
along with incorporating biophilic design
aspects. We are working to complete
Investment Grade Energy Audits to identify
energy saving and carbon reduction
opportunities. We have also completed
renewable energy feasibility studies across
a number of our key sites.
At Rosyth Dockyard, in line with
investigations into the digital dockyard, we
are working to complete Investment Grade
Energy Audits for an Integrated Energy
System which includes the integration of
solar, wind, battery storage and water
source heat pump technologies.
Data is the cornerstone to understanding
and managing our environmental impacts.
We are working to develop our
environmental data management systems
and to improve the accuracy and
completeness of our data sets.
In line with our net zero carbon strategy,
Plan Zero 40, we are investigating the
transition to an ultra-low emission fleet in
addition to reviewing a range of additional
sustainable transport opportunities. Across
the organisation we are also supporting our
customers with their transition to ultra-low
emission vehicles.
At Babcock, our Group-wide
Energy and Environmental policies
and strategies set out the direction
and ambition of the organisation
for environmental matters.
Our sectors and business units
have policies, strategies and
implementation plans which are
specific to their operations and
impacts. Our approach ensures
that sustainable considerations
and practices are embedded
throughout the organisation.
Across our operations we are providing
products and services to support the
renewable energy and low-carbon
economy, from our services within
Cavendish Nuclear on critical nuclear
power plants, to Liquid Gas Equipment’s
low-carbon shipping solutions and
Fastblade turbine R&D.
Low carbon energy
We purchase electricity for our UK
operations from renewable energy sources
aligned with our flexible purchasing
strategy; this ensures cost effectiveness,
reduces our carbon emissions and supports
the shift to a low carbon economy. We are
also investigating renewable energy
opportunities across our global operations
and plan a transition to renewable energy
sources where feasible.
Across our estate and operations we are
working to investigate opportunities for
alternative energy sources, low-carbon
technology and renewable energy
installations. Babcock Power has trialled
solar pods to power its temporary
accommodation at remote sites.
This sustainable solution leverages solar
hybrid technology with an automatic
backup generator to power sites and
is a low-carbon alternative to diesel
generators. The solution has resulted in a
43% reduction in fossil fuel consumption
and a reduction in carbon emissions.
Babcock International Group PLC Annual Report and Financial Statements 2021
67
Strategic reportGovernanceFinancial statements ESG strategy continued
Environmental – Responsible consumption
In FY21 we reset and reassessed
our environmental performance.
We have worked hard to develop
and enhance our previous
environmental, energy and
carbon strategies and we are
working to establish more
ambitious targets, with detailed
roadmaps, implementation plans
and initiatives.
Our sectors and business units are
supported by specialist teams of
environmental experts who work to
ensure the impacts of our operations are
minimised. We continue to manage our
environmental impacts through ISO14001
accredited Environmental Management
Systems (EMS) which cover over 75% of
our global operations.
Waste
Waste is a significant global issue and we
understand we have a responsibility to
minimise the impacts of our operations.
We also have the opportunity to influence
a large value chain and accordingly we
regularly engage with our suppliers and
customers to ensure sustainable practices
are adopted. Material and resource
efficiency is a core principle which we
seek to embed across our operations.
Babcock Group Energy Consumption and Emissions
Mar-18
Mar-19
Mar-20
Mar-21
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
Underlying energy consumption
Revenue
Intensity Ratio
tCO2e
tCO2e
tCO2e
tCO2e
76,688.9
74,167.5
66,349.4
60,848.3
96,233.6
73,416.0
61,595.3
51,058.1
20,747.1
193,669.6
17,701.8
165,285.3
13,722.7
141,667.4
6,920.9
118,827.3
kWh
645,286,882.4
610,390,853.8 553,861,833.7 513,073,873.2
tCO2e
tCO2e
tCO2e
tCO2e
105,010.5
93,619.5
100,424.7
97,205.5
8,144.8
7,314.3
4,571.0
4,268.6
851.4
114,006.8
323.1
101,256.9
364.4
105,360.1
86.8
101,560.8
kWh
446,044,504.7
397,521,762.0 417,636,004.0 403,486,309.6
tCO2e
tCO2e
tCO2e
tCO2e
181,699.4
167,786.9
166,774.1
158,053.7
104,378.4
80,730.3
66,166.3
55,326.7
21,598.6
307,676.4
18,025.0
266,542.3
14,087.0
247,027.5
7,007.6
220,388.0
kWh 1,091,331,387.1 1,007,912,615.8 971,497,837.7 916,560,182.8
3,299,616.7
4,182.7
3,497,392.2
4,428.5
3,628,485.4
4,474.8
3,928,793.0
4,659.6
66.0
59.6
55.8
52.7
GJ
£M
tCO2e/£1M
Revenue
Our emissions data is reported in line with the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard under the ‘Operational Control’ approach.
Figures for UK operations follow conversion factors published by BEIS. Non-UK operations utilise 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 (including operations in
Oman, South Korea, Canada and Australia). Metering and monitoring improvements are being implemented to capture these data streams. During the reporting period
our approach to energy and carbon management included a holistic review and the re-establishment of our baseline. We have developed our new net zero carbon
strategy, Plan Zero 40, which details our journey to net zero.
68
Babcock International Group PLC Annual Report and Financial Statements 2021
Where feasible we adopt circular economy
principles throughout planning, design and
delivery phases to maximise opportunities
for end of life reuse.
Across our operations we are investigating
a range of waste management initiatives
with key aims of minimising waste to
landfill and limiting the use of ‘single use
plastics’. We do, however, acknowledge
that more needs to be done and we are
committed to continually improving our
approach to waste management and
reducing our impacts.
Water consumption
We have commenced investigations to
re-establish our baseline and are working to
ensure we have an accurate and complete
understanding of our water consumption
across our global operations. Our local
environmental teams are working to
identify opportunities to reduce our water
consumption and we are assessing
opportunities to incorporate water
reduction technologies within our new
developments, such as rainwater harvesting,
leak detection and flow restriction.
Biodiversity and ecological impact
Throughout our global operations we
interact with a range of complex
ecosystems. Maintaining and enhancing the
natural capital and ecosystems within
which we operate is a priority and we strive
to adopt a net gain approach where
possible. Our commitment to the
environment is delivered by our network of
experienced environmental professionals
and dedicated local sustainability groups in
collaboration with our customers, value
chain and wider stakeholders.
Devonport Dockyard’s Environmental
Working Group takes part in a range of
local initiatives throughout the year,
collaborating with the local communities
and environment groups to address local
issues such as litter on beaches. At Rosyth
Dockyard our local environmental
improvement team are investigating tree
planting within the dockyard, with the aim
of reintroducing indigenous flora and fauna,
reducing carbon emissions and improving
local air quality.
Climate change
Babcock is committed to addressing the
global climate crisis. Plan Zero 40 is our
strategy to lead the low-carbon transition
with extensive decarbonisation
programmes planned across our estate,
assets and operations. We have committed
to setting ambitious science-based targets
in line with a 1.5°C limit to global warming
and commit to delivering net zero carbon
emissions by 2040. We are aware of the
challenges and risks on our journey to net
zero, but also the opportunities the low-
carbon transition presents. We will require
strategic investment in our people,
technology and innovation. However,
achieving net zero is not something we can
achieve on our own and we will be taking a
leading role in collaborations and
partnerships. We commit to driving
innovation throughout our value chain and
aim to be a leader in low-carbon
enablement. Planning our approach for full
scope 3 mapping is a priority for FY22 and
we have committed to developing our
scope 3 footprint with associated
decarbonisation strategy by 2025.
We have gained reaccreditation to the
Carbon Trust Standard for Babcock’s UK-
based operations which supports our
journey to net zero.
Babcock International Group PLC Annual Report and Financial Statements 2021
69
Strategic reportGovernanceFinancial statements ESG strategy continued
Environmental – Task Force for Climate-related Financial Disclosure
This year we have started to report in line with the TCFD requirements and have agreed our journey towards full disclosure.
In FY22 we will be incorporating TCFD risk management and scenario planning into our strategic planning cycle and working towards full
TCFD disclosure requirements.
FY21 Progress
FY22 Priorities
Governance
• Defined Executive Committee’s role in
• Executive Committee completed Chapter Zero Board
climate-related disclosure
Readiness assessment
• The CEO is the Executive accountable for
climate change, and he determined that the
Chief Corporate Affairs Officer is the Executive
sponsor for climate change
• Training to ensure the competence of the Board and
Executive Committee to respond to climate-related
risks and opportunities effectively
• Climate-related risks and opportunities are integrated
• Established new management ESG Committee
into standard Board agendas
which is responsible for management of
climate-related issues and driving the
performance of wider sustainability agenda
• Full and clear consideration of the physical, transition
and liability risks over the short, medium and longterm
• Agree financial incentives for Executives on progress
towards ESG goals
Strategy
• We recognise the impact that greenhouse gas
emissions have on our environment and we are
committed to reducing our impact
• Ensure climate-related risks and opportunities are
integrated into sector and geographic strategies
• Develop approach to scenario analysis and assess
organisational resilience
Risk Management
• Reviewed current approach to identify and capture
• Identify and disclose physical and transitional risks and
climate-related risks
opportunities in the short, medium and long term
• Integrate climate-related risk into Babcock’s overall risk
management process
Metrics and
Targets
• Disclose Scope 1, Scope 2 and limited
• Baseline Scope 1 and 2 emissions and plan approach
Scope 3 emissions
for Scope 3 mapping
• Agreed Babcock’s commitment to our
net zero carbon target, Plan Zero 40,
and to developing science-based targets
• Set emissions reduction targets in line with strategy
and risk management process
70
Babcock International Group PLC Annual Report and Financial Statements 2021
Social – People and potential
People are critical to our ability to
deliver our strategic goals. In order
to serve our customers effectively,
we need to attract, recruit and
retain the best people and provide
a workplace which is inclusive
where each individual feels
supported and respected.
New People strategy
If we are to deliver our business strategy
and priorities we need to develop a people
strategy that underpins this. Our people
strategy is evolving under the new
leadership of Nikki Fox, Chief Human
Resources Officer (see People section on
page 22 and Business model on page 20).
As we move forward, we will create an
organisation that is more integrated and
collaborative, putting our people at the
centre of what we do. We will bring our HR
teams into a more integrated function that
supports the business in its mission,
supporting and navigating the cultural
challenges we will inevitably face.
We will design simple and consistent
people processes, and scale up the
approaches that are working well already,
to deliver a new HR function. These new
ways of working and the overarching
people strategy will seek to develop and
motivate a workforce that is built on trust
and empowerment. Our new people
strategy will offer a consistent and common
solution for Babcock, providing the
foundation to evolve the Babcock we want
for the future.
The agile framework and culture
We are committed to creating an inclusive
working environment with a trust-based
culture, focused on providing our
customers with the delivery they expect, to
the quality they desire, in the timeframe
that is agreed.
The COVID-19 pandemic and our
operational response has highlighted
opportunities to work effectively but
differently – one of these new ways is
agile working. We have launched an agile
framework which builds on the positive and
alternative working arrangements, setting
out a consistent, single framework to
maintain these across Babcock.
Agile is an all encompassing term to
describe not just where our people work
but how they work; providing our people
with the flexibility to make local decisions
on when, where and how they deliver
their commitments, and the
infrastructure, policies and procedures
that support them, within an agreed and
acceptable framework.
Agile working will support our new business
model and culture, providing an
environment where employees are trusted
to make decisions about how they work,
balancing personal preferences with
Company and customer needs:
• A way of working that enables work-life
balance, supports family commitments
and promotes inclusivity;
• Where employees are empowered to use
personal judgement and make individual
choices; and
• A business that focuses on output and
deliverables, not presence or location.
Each business within the Group will
implement the principles of the agile
framework, working closely with local trade
unions and HR teams, so that we have
synergy and a common improved working
environment for all. There are already
activities underway in different areas of
the business to review revised working
methods and it is the intention that the
Group framework will complement the
local progress.
Employee engagement
During the COVID-19 pandemic we
significantly increased and improved
employee communications to enhance and
improve employee engagement. These
include a weekly CEO vlog and the ‘Ask
David’ initiative, where employees can
email the CEO and get a direct response
from him, as well as the launch of a
Babcock app allowing more employees to
access communication content.
The CEO has been open in his
communication with employees; for
example explaining that as the COVID-19
situation worsened in most of our markets
the Executive Committee made the
decision to defer the Annual Pay Review,
which usually takes place in April, until
September. The deferral will allow the
Group to make a decision as to whether the
pay review can then proceed or whether it
will need to consider alternative options.
Based on the outcomes of our employee
engagement focus groups, employee
surveys and listening forums, we have been
focusing on the topics that employees
have highlighted as a priority, those being:
communication, pay and reward, leadership
and career development. Examples of our
work to improve across these areas are
the introduction of our BIG Benefits
platform and the development of the
Babcock Academy.
During FY22 we will be moving to a
consistent approach to measuring
employee engagement across the Group.
Babcock International Group PLC Annual Report and Financial Statements 2021
71
Strategic reportGovernanceFinancial statements ESG strategy continued
Capability and skills
Maintaining and developing the capability
and skills of our workforce is important to
Babcock to ensure we deliver on our
contractual and operational commitments.
To ensure we have a sound baseline of
current and future requirements we have
implemented a robust Strategic Workforce
Planning Process (SWFP). To satisfy the
requirements identified through our SWFP
we source and develop talent through a
number of routes. We bring experienced
talent into the business through our
experienced hire and contingent labour
programmes, we bring new talent in
through our early careers programmes and
we develop our existing workforce through
our learning and development offerings.
To develop our leadership capability we
re-launched the Babcock Academy this
year. The academy provides development
from team leader to senior leader within
the business. To date we have had around
50 employees start the team and
operational leadership programmes and
around 60 employees start the senior
leader programmes leading to an MSc or
MBA qualification.
Early careers
For our early careers we run extensive
apprenticeship and graduate development
programmes across the business.
We recruited over 300 apprentices onto
our apprenticeship programmes during the
year. The majority of these were new
starters on level two and three
programmes, which create entry level
opportunities to join the workforce.
We recruited over 250 graduates onto our
graduate development programme this
year, our largest intake to date. We have
implemented a new behavioural
programme for all graduates across the
Group which has been developed following
extensive research involving our current
graduates, their managers and mentors and
a range of senior leaders.
Inclusion and diversity
We have seen improvements over the year
in our efforts to build an inclusive and
diverse organisation that more accurately
represents the communities and countries
in which we operate. This has included the
addition of new networks including BAME
and Multifaith, along with the growth of
existing networks that have collaborated
and worked together to lead a number of
initiatives across the business. Our vision for
Babcock is that we are a company where
people can bring their whole selves to work
and feel proud to be part of an organisation
where everyone feels respected, included
and supported.
At Babcock we recognise the value for our
people of working in an inclusive
environment where differences are valued,
where everyone can thrive, give their best
and fulfil their potential. We are committed
to being a workforce that reflects the rich
diversity of wider society and to be a
business that inspires and shapes the
communities in which we operate. We also
recognise the importance of diverse
thinking in the development of solutions for
customers and our ambition is to become
an employer of choice for diverse
candidates, attracting and nurturing the
best talent, that will enable us to deliver
exceptional business outcomes.
Our Diversity and Inclusion focus areas for
the year ahead are: harnessing our data to
drive insight and measure results;
strengthening and broadening our
employee networks; transforming our key
people processes; creating a culture of
wellbeing; and celebrating inclusion and
diversity as our key differentiating strength.
To monitor progress in these areas we will
focus on enhanced data collection and
measure ourselves against three targets:
1. 80% disclosure of diversity data within
18 months.
2. 30% women within senior leadership
teams by 2025. Senior managers are
defined as employees (excluding
Executive Directors) who have
responsibility for planning, directing or
controlling the activities of the Group
(Executive Committee) or a strategically
significant part of the Group (sector/
functional leadership teams) and/or who
are directors of subsidiary business units
(BU leadership.)
3. 30% gender representation at all levels
by 2030.
Executive Committee and Direct Reports
in management roles %
16%
84%
Male: 62
Female: 12
Gender Diversity
Total workforce
%
19%
2
81%
Male: 23,624
Female: 5,513
Graduate intake
%
31%
69%
Male: 179
Female: 79
Board
%
40%
60%
Male: 6
Female: 4
Senior Management*
%
21%
2
79%
Male: 161
Female: 42
* See KPI on page 29.
72
Babcock International Group PLC Annual Report and Financial Statements 2021
The CSLT is responsible for driving the
generation of the safety strategy and
standards for the Group and adherence of
businesses to these. Additionally, there are
sector-specific industry standards and
regulations that must also be adhered to,
for example Nuclear, Aviation and Product
Safety. The expectation is that subject
matter experts are retained within the
sectors and consequently the CSLT’s remit/
scope does not seek to replicate specialist
sector-specific roles.
Achievements and improvements
Our annual Group Safety Conference
promotes the Group safety vision and the
sharing of health and safety initiatives and
activities. It also recognises the hard work
and tireless efforts made every day by
Babcock personnel, our customers and
our suppliers. Our 14th annual event was
held virtually in February 2021 with
250 attendees and a theme of ‘Share,
Learn and Improve’. 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.
Along with these commitments, we are
also actively working on meeting the
recommendations of the Parker Review as
we support increasing the representation of
ethnicity on UK boards.
Health and safety
Governance
The Group’s Board and Executive
Committees review safety commentary and
performance reports on a monthly basis.
The mission of the Group is that everyone
goes “Home Safe Every Day”. Our vision is
that Health and Safety is at the heart of all
that we do.
We have a high-performing, open and just
safety culture, with strong leadership at all
levels, where our people are empowered to
speak up, intervene, and are heard,
invested in and trusted.
The Corporate Safety Leadership Team
(CSLT) leads the development and
implementation of all policies, standards
and expectations for Health, Safety and
Environmental (HSE) issues within Babcock.
The role of the CSLT is to:
• Recommend and set the Group policy
and standards for health, safety and
environment relating to 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 the
Group’s undertakings.
• Assure the Group Executive Committee
of the delivery of these policies and
standards.
• Facilitate and enable corporate learning
around the Group, raising awareness of
health, safety and environmental topics
throughout the business.
• Own and deliver Group-wide health,
safety and environmental culture
initiatives and projects.
Gender diversity and gender pay gap
In relation to female representation across
our Company, we have made in-roads over
the past year with 19% of our total
workforce female (2020: 18.8%). At the
end of the financial year, our Senior
Management population (over 200 people
in senior leadership positions throughout
the business against which we will measure
our progress (see opposite and page 29))
was 21% women and 9% of our Executive
Committee were women. This alongside
our 31% female graduate intake supports
that we are making progress and gender
diversity will be a key focus over the
coming year as we deliver on the
commitments we have set ourselves
for the future.
Our gender pay gap results support that
we have made progress in rebalancing the
representation of our female staff across
our business. In spite of this, the
engineering sector, as well as other
STEM disciplines in which we operate,
continues to be male dominated and we
therefore remain committed to driving
down this gap.
We are pleased to see our gender pay gap
has reduced year on year since first
reporting in 2017. The mean gender pay
gap has narrowed year on year from 16.2%
in 2017 to 12.5% in 2020. Similarly, the
median gender pay gap has narrowed year
on year from 16.5% in 2017 to 12.3% in
2020. We recognise that closing this gap
will take time and whilst these results do
reflect the positive outcome of our efforts,
we remain focused on cutting the time it
will take us to get there.
For further information please see our
Gender Pay Gap Report.
Focus for FY22
We will seek to address the challenges
identified in the Chief HR Officer’s opening
statement through the implementation of a
new people strategy in support of the new
Babcock operating model. We are
reviewing our Diversity and Inclusion
strategy and metrics and by the next
Annual Report will have a more
comprehensive set of Diversity and
Inclusion metrics.
Babcock International Group PLC Annual Report and Financial Statements 2021
73
Strategic reportGovernanceFinancial statements ESG strategy continued
Our leadership
safety commitments
to you:
We will CARE by
• Never walking
by anything
unsafe.
• Challenging
constructively.
• Providing you
with the right
tools, training
and working
conditions.
• Visible safety leadership
and starting all meetings
with a safety moment.
CARE
Incident numbers
Total number of injuries
Fatalities
Major injuries
Over three day injuries
Babcock riddor1 totals
Incident rates
Total injury rates per 100,000 hrs worked
Babcock riddor1 rates per 100,000 hrs worked
LEARN
We will LEARN by
• Reviewing all significant
events.
Listening to you and
•
seeking your views.
• Creating an open
environment, with
a just culture, that
recognises that people
make mistakes that we
can learn from.
Throughout the period we have reviewed
and refreshed our Group safety strategy, our
Safety policy and the Terms of Reference of
the Corporate Safety Leadership Team. Of
particular note, we launched our new safety
commitments (see left).
Additionally, during January 2021 all of our
sectors, direct reporting countries and
business units undertook safety stand
downs. Dedicated sessions were held to
hear about the new safety commitments,
based around the themes of Care and Learn
and to discuss how we can improve safety.
A short survey was launched to all
employees and the feedback will prove
important and extremely valuable in
informing our future direction towards
achieving our safety vision and mission.
A replacement incident reporting system
was launched in May 2020 predominantly
for our UK operations. All other areas are
due to be included early in the next
financial year; this will then provide a truly
global reporting and analysis system.
Performance
Tragically, in August, during a firefighting
mission an aircraft crash-landed in Spain
near the Portuguese border causing the
immediate fatality of the co-pilot. The pilot,
who had suffered major injuries,
subsequently passed away. The incident is
currently under investigation by the
appropriate authorities.
The number of injuries In the period has
reduced by 32%; however, the more
serious ‘Babcock riddor’ injuries Increased
by 11% compared to the previous year.
Similarly, our total injury rate (injuries per
100,000 hours worked) has reduced by
19% and the Babcock riddor injury rate
increased by 36%.
2016/17
2017/18
2018/19
2019/20
2020/21
1,720
7
27
107
141
1,389
2
12
101
115
1,452
4
24
144
173
1,141
1
20
111
132
780
2
12
133
147
2016/17
1.58
0.13
2017/18
1.35
0.11
2018/19
1.47
0.18
2019/20
1.24
0.14
2020/21
1.01
0.19
1. In 2012, the UK Health and Safety Executive changed formal 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 these as a ‘Babcock riddor’.
Focus for FY22
Our focus for FY22 will be on building on the strategy and creating a second wave of Group-wide Health, Safety and Environment
standards, engagement with our people and the second part of the safety commitments survey, together with a Group-wide
communications campaign on our new safety commitments. We will also be moving to Occupational Safety and Health Administration
reporting requirements in order to be able to benchmark our HSE performance against our peers.
74
Babcock International Group PLC Annual Report and Financial Statements 2021
Social – Community engagement
We are the major employer in
many of our communities so our
engagement approach aims to
ensure we support the communities
in which we work, we are a good
neighbour and we contribute
positively to society’s progress.
We focus on the wider impact we have on
society, including environmental, social and
cultural factors.
We are committed to being proactive in
ensuring we build a positive relationship
and engagement with the local
communities in which we operate; in
some places we are one of the most
significant employers in the area. In
some communities inequality and high
unemployment are a specific concern,
so we try to recruit locally and train
where the required skills are available.
Historically we have focused our
sponsorship and volunteering activities on
locally-led causes that are important to us
and close to our business but we plan to
introduce a Group-wide approach in FY22.
Volunteering
Volunteering is a rewarding and meaningful
experience that supports employee
development and their wellbeing. Whilst
we do some volunteering activities around
the Group, our ambition is to develop a
centrally-led framework which can be
applied locally across our business.
We are proud that two of our employees
have been awarded the prestigious
British Empire Medal (BEM) for the
important role that they played during
the COVID-19 pandemic.
In Australia many of our employees acted as
volunteers in the bush fire rescue services.
In Canada employees volunteered to
support local homeless shelters and in
South Africa we supported “adopt a
school“, donated computers and
provided maintenance.
We actively support our reservist employees
and we now have circa 160 volunteer
reserves and 50 sponsored reserves. We
also have around ten uniformed cadet
instructors. We provide 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.
Community Impact
During the year we supported a broad
range of activities for local communities
and the armed forces community.
This includes Science, Technology,
Engineering and Maths (STEM)
programmes, strengthening our
relationship with indigenous peoples,
support for armed forces and reserves,
partnering with a broad range of academic
establishments to support funded research
and local sponsorship.
In FY21, COVID-19 had a significant impact
on our operations, our employees and our
supply chain. As the main employer in many
of the communities we supported a range
of different initiatives such as the Mayflower
400 celebrations in Plymouth, military open
days (eg HMS Raleigh and HMS Collingwood)
and The Trussell Trust (a foodbank charity).
Our Chair was a founder member of the
Covid Recovery Commission and we
recognise the critical role that businesses
have to play in supporting the needs of
individual communities.
STEM
Babcock encourages its employees to
become STEM Ambassadors so they can
support our schools engagement
programme. In the UK this year we have
trained over 200 STEM Ambassadors,
bringing our total across the business to
over 700 active Ambassadors. The focus
this year has been to move our extensive
programme of events in schools to virtual
offerings. This has included: two activity
books targeted at primary age children that
could be used at home, and virtual careers
events for students, parents and teachers/
careers leaders. In Australia we are focused
on female STEM programmes and
Submarine in school programme. This year
we sponsored the “xhibition” team of
20/21 from Brighton Secondary School in
Adelaide and supported with engineering
technical capability.
Indigenous peoples
In Canada we are in year two of the
Progressive Aboriginal Relations
Certification through the Canadian Council
for Aboriginal Business. We are focused on
expanding the supply chain and have
recently invested C$1 million in an
indigenous owned business based in
Victoria, British Columbia. We have a
further range of activities in place to help
drive social inclusivity, eg an initiative over
the next two years with the Camosun
College Coastal Training Centre which is
an indigenous post-secondary institution in
British Columbia. In Australia, we are
engaging with organisations targeted
towards indigenous peoples and we are
focusing on expanding our indigenous
supply chain.
Support for Armed Forces, veterans
and reserves
We are proud to be a major employer of
service leavers, veterans and reserves and
have in excess of 5,000 veterans in the UK
workforce. 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. In 2020 we enhanced our focus
on Service Leaver and Veteran hires and
recruited 164 declared service leavers and
380 veterans (total 544) representing circa
20% of our total UK hire for 2020.
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.
Babcock International Group PLC Annual Report and Financial Statements 2021
75
Strategic reportGovernanceFinancial statements ESG strategy continued
Partnerships with academia
We are collaborating with and have built
outstanding relationships with a broad
range of academic establishments both
local to our facilities and where subject
matter expertise exists that complements
our business. We support learning
development opportunities by mentoring
and helping to refine the teaching of
courses as well as providing industrially
related projects for students. In addition
we fund and collaborate on a number of
excellent research programmes developing
impactful, sustainable solutions for
implementation across all our sectors.
Sponsorship
During FY21, we supported communities
by sponsoring local events or providing
donations to local causes. Babcock policy is
not to make political donations either in
cash or kind; this includes not only financial
donations but indirect support.
Sponsorship activity has been locally led
and not coordinated centrally. In FY22
we will be developing a Group-wide
sponsorship and donations policy which will
be aligned to our corporate purpose and
this will be supported by locally led
programmes. There will be a clear
guidelines for managing community and
sponsorship activities to ensure that our
sites follow the overall Group approach.
Bokantsho Primary School in Viljoensdrift, South Africa.
Supporting local
communities
It is important that Babcock supports the
communities around the world in which
it operates.
In South Africa, we championed
the renovations for the Bokantsho
Primary School in Viljoensdrift. Located
approximately 5km from the Lethabo
Power Station, the school provides an
essential service to the community and
caters for Grade R to 7 learners from
different townships. The majority of the
school’s198 pupils come from nearby farms
and impoverished families who cannot
afford to pay school fees. The school also
participates in the National School Nutrition
Programme (NSNP) which provides food
for pupils on a daily basis.
Our team of Babcock volunteers
engaged several contractors to upgrade
the school buildings including the
classrooms, kitchen, hall, administration
building and toilets. The scope of work
was extensive, including painting of walls;
repairing and replacing ceilings, doors,
windows and roofing; installing new
flooring; repairing and upgrading of the
electrics and plumbing; and removing the
old fence and installing a new one.
T A Lengana, the school’s principal, said:
“Babcock’s contribution and assistance is
highly appreciated and valued, and ensures
that learners are taught in an environment
that is conducive to teaching and learning.
The support also contributes to learners’
holistic development by providing
adequate resources for all learners, and
will contribute to improving the learners’
confidence and their self-worth.”
Babcock is proud to support all of
our communities.
76
Babcock International Group PLC Annual Report and Financial Statements 2021
Governance – Commercial integrity
We are committed to conducting
business honestly, transparently and
with integrity. As well as being the
right and proper way to behave,
this will ensure we uphold high
ethical standards across the Group
and support our long-term success.
We understand our reputation and good
name are amongst our greatest assets,
which could easily be lost by actual or
suspected unprincipled 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. These
are reviewed periodically to ensure that
they meet current best practice principles
and legislative needs. By establishing
transparent policies and procedures we
can reduce risk to our business and to
our customers. An outline of our risk
management and assurance processes
can be found on pages 85 to 86.
Ethics policy and Code of Business
Conduct
To protect the Company and reduce 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 Ethics policy comprises a detailed
manual, available on the Group’s intranet,
containing guidelines, authorisation and
other procedures aimed at identifying and
reducing ethical risks. These include
extensive policies around anti-bribery and
competition law prohibitions that clearly
show our zero tolerance for any form of
bribery or anti-competitive behaviour.
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 as referenced
in our Diverse and robust supply chains
section mean for them in practice.
We treat breaches of our Codes or
associated guidance seriously. Employees
can raise any concerns they have that our
Code or its associated guidance is not
being followed without fear of
unfavourable consequences for themselves.
We provide a range of channels for
employees to do so, including a new
initiative “Ask David” which allows
employees to raise questions directly to our
new CEO, David Lockwood. We also have
independent whistleblowing hotlines in
each country where we operate so that
employees can raise issues confidentially if
they wish, with assurance that we will not
take action against anyone who makes a
report. All reports to the whistleblowing
line are sent directly to the Company
Secretary who decides the appropriate
course of investigation.
More details of our risk management
procedures can be found on pages 85-86
whilst our Ethics policy, Code of Business
Conduct and Suppliers’ Code of Conduct
can be found on our website.
Human rights
As an international business, we recognise
our responsibility for upholding and
protecting the human rights of our
employees, our suppliers and business
partners 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 to contribute positively to
global efforts to ensure that human rights
are understood and observed.
We believe that a culture of respect
for, and protection of, human rights is
embedded throughout our business and
can be demonstrated by our commitment
to principled conduct in everything we do.
Our Modern Slavery Transparency
Statement, which is referenced again in our
Diverse and robust supply chain section,
78, is reviewed and approved annually by
the Board. Our statement during the year
was assessed by the TISC report AI system
and Babcock was placed in the top 6% of
companies meeting the minimum criteria.
Additionally Babcock was included in its
published list of links to exemplar
statements. Our statement remains
available on our website.
Cyber security
We recognise the very real risk of malicious
cyber breach and work hard to ensure both
our customers’ and our own information
assets remain protected. 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 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). In
addition, following a recent external
assessment, we retained our Cyber
Essentials Plus certification which is
mandatory for all suppliers of Government
contracts that involve handling personal
information and providing certain IT
products and services.
Babcock International Group PLC Annual Report and Financial Statements 2021
77
Strategic reportGovernanceFinancial statements ESG strategy 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 for our customers
and shareholders.
External expenditure via third-party
suppliers, including Original Equipment
Manufacturers (OEMs), accounts for a
significant part 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 supply chain solutions
which enable us to return value to our
customers, shareholders and communities.
We buy a wide range of goods and services
from over 14,000 suppliers. These range
from large multinational OEMs to Small and
Mid-size Enterprises (SMEs). Of these
suppliers, 300 are key partners in our ability
to deliver continuous improvement and
innovative quality outputs.
Sustainable sourcing
The development and execution of our
supply strategy is aligned with the overall
business strategy.
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. We review our business-
critical suppliers on an annual basis to
address any risks or concerns.
We are aligning our processes and
standards to ISO 20400 (Sustainable
Procurement) and this includes ensuring
that we consider circular economy principles
including recycling and disposal options.
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 combine technology, market
intelligence and business process to engage
with our supply base to form long-term
sustainable relationships.
Working with 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 with SMEs ensures that we have
access to innovative new solutions and
provides enhanced flexibility and agility.
Fair operating practices
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 supports Babcock’s high standards
and contributes to the reputation of
Babcock and our customers.
The Code reflects the same standards to
which 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.
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.
78
Babcock International Group PLC Annual Report and Financial Statements 2021
Our businesses use appropriate processes
to qualify, on-board and periodically
revalidate sub-contractors 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.
Payment to suppliers
Historically we have not been good
customers around period ends; however
we will be improving our practices. We
understand the importance of predictable
payments when running a business and will
ensure good practice across the Group.
Twenty-one legal entities submit returns
to Companies House according to the
Payment Practices and Performance
Regulations. Fourteen of our legal entities
are signed up to the Prompt Payment Code
and are compliant as of 31 March 2021.
Average payment across the Group over
the past six months to March is 29.6 days,
an improvement versus 34.5 as reported
last year.
We actively 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. We have put in place
measures to ensure that we continue to
comply with the UK Government’s January
reforms of the code.
Focus for FY22
• Work towards aligning procurement
processes and standards with ISO 20400
• Actively encourage supplier diversity and
social inclusivity by engaging with SMEs
and minority owned businesses
• Support Scope 3 carbon emissions mapping
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 ESG strategy
report and throughout the Strategic report.
We are committed to providing greater transparency into our policies, standards and governance approach through the global reporting
frameworks and insight in the ESG strategy report.
Reporting requirement
Environmental matters
Employees
Policies and standards
Health, Safety and Environmental policy*
Energy policy*
Procurement Environmental policy*
Code of Conduct **
Health, Safety and Environment policy*
Joint Ways of Working Charter
Agile working framework*
Human rights
Social matters
Anti-bribery and corruption
Description of principal risks and impact
on business activity
Business model
Non-financial KPIs
Code of Conduct**
Supplier Code of Conduct**
Modern Slavery Statement**
Anti-bribery and Corruption/Ethical
policy**
Code of Conduct**
Diversity and Inclusion Charter*
Canada Indigenous Peoples policy*
Anti-Bribery and Corruption/Ethical
policy**
Whistleblowing structure
Supplier Code of Conduct**
Additional information
Clean inputs
Responsible consumption
Health, safety and environmental risk
People and potential
Gender diversity and gender pay gap
Commercial Integrity
People risk
Building relationships
Stakeholder engagement
Remuneration
Note 28 – share-based payments
Corporate Integrity
Diverse and robust supply chains
Page
67
68
91
71
72
77
93
58
114
134
254
77
78
People and potential
Commercial integrity
Community engagement
Building relationships
Stakeholder engagement
Remuneration
Note 28 – share-based payments
Diverse and robust supply chains
Commercial integrity
Principal risks and management controls
Governance statement
Principal risks and management controls 84
71
77
75
58
114
134
254
78
77
84
100
Our business model
Delivering on our strategy
20
29
* available to employees through the Babcock intranet but not published externally.
** available on the Babcock website and available to employees through the Babcock intranet.
s172(1) Statement
This statement explains how the Directors, both individually and collectively, 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. Section 172(1) requires a director to have regard, among other matters to the
• likely consequences of any decision in the long term;
• interests of the Company’s employees;
• need to foster the Company’s business relationships with suppliers, customers and others;
• impact of the Company’s operations on the community and environment;
• desirability of the Company maintaining a reputation for high standards of business conduct; and
• need to act fairly as between members of the Company.
Depending on the matter under consideration the relevance of the different factors set out in s172(1) will vary. The Board does seek
to balance the interests of its different stakeholders, but, where there are competing interests, not every decision the Board has made
will result in a positive outcome for all our stakeholders. However, by considering key stakeholder groups and aligning our activities
with our strategic plan, as well as the Company’s culture and values, we aim to act fairly, transparently and in the best interests of the
Company over the long term. Further information on how the Board addresses these different factors can be found throughout the
Strategic report. For further information on how the Board keeps s172(1) on its agenda, its key activities and how the Board engaged
with the Company’s stakeholders and took their interests into account, please see pages 114 to 116 which form part of this
Statement. Additional information on the Company’s engagement with key stakeholders can be found on pages 58 and 59.
Babcock International Group PLC Annual Report and Financial Statements 2021
79
Strategic reportGovernanceFinancial statements ESG strategy continued
Compliance with Global Reporting Initiative (GRI)
We intend to report in accordance with GRI Standards Core option. We have indicated the disclosure topics that are relevant to Babcock
and the level of disclosure.
Standards
Universal
Standards
Economic
Topics
Disclosures
GRI 101: Foundation 2016
GRI 102: General Disclosures 2016
GRI 103: Management Approach 2016
GRI 201: Economic Performance 2016
GRI 202: Market Presence 2016
GRI 203: Indirect Economic Impacts 2016
GRI 204: Procurement Practices 2016
GRI 205: Anti-corruption 2016
GRI 206: Anti-competitive Behaviour 2016
GRI 207: Tax 2019
Environmental
Topics
GRI 301: Materials 2016
GRI 302: Energy 2016
GRI 303: Water and Effluents 2018
GRI 304: Biodiversity 2016
GRI 305: Emissions 2016
GRI 306: Waste 2020
GRI 307: Environmental Compliance 2016
GRI 308: Supplier Environmental Assessment 2016
Social Topics
GRI 401: Employment 2016
GRI 402: Labour/Management Relations 2016
GRI 403: Occupational Health and Safety 2018
GRI 404: Training and Education 2016
GRI 405: Diversity and Equal Opportunity 2016
GRI 406: Non-discrimination 2016
GRI 407: Freedom of Association and Collective Bargaining 2016
GRI 408: Child Labour 2016
GRI 409: Forced or Compulsory Labour 2016
GRI 410: Security Practices 2016
GRI 411: Rights of Indigenous Peoples 2016
GRI 412: Human Rights Assessment 2016
GRI 413: Local Communities 2016
GRI 414: Supplier Social Assessment 2016
GRI 415: Public policy 2016
GRI 416: Customer Health and Safety 2016
GRI 417: Marketing and Labelling 2016
GRI 418: Customer Privacy 2016
GRI 419: Socioeconomic Compliance 2016
Status
GRI 101-01 to 101-10
GRI 102-01 to 102-56
GRI 103-01 to 103-03
GRI 201-01 to 201-04
GRI 202-01 to 202-02
GRI 203-01 to 203-02
GRI 204-01
GRI 205-01 to 205-03
GRI 206-01
GRI 207-01 to 207-04
GRI 301-01 to 301-03
GRI 302-01 to 302-05
GRI 303-01 to 303-05
GRI 304-01 to 304-04
GRI 305-01 to 305-07
GRI 306-01 to 306-05
GRI 307-01
GRI 308-01 to 308-02
GRI 401-01 to 401-03
GRI 402-01
GRI 403-01 to 403-10
GRI 404-01 to 404-03
GRI 405-01 to 405-02
GRI 406-01
GRI 407-01
GRI 408-01
GRI 409-01
GRI 410-01
GRI 411-01
GRI 412-01 to 412-03
GRI 413-01 to 413-02
GRI 414-01 to 414-02
GRI 415-01
GRI 416-01 to 416-02
GRI 417-01 to 417-03
GRI 418-01
GRI 419-01
80
Babcock International Group PLC Annual Report and Financial Statements 2021
Response to Sustainable Accounting Standards Board (SASB)
Dimension
Environment
General Issue
Category
Disclosure
Topic
Energy
Management
Energy
Management
Hazardous
Waste
Management
Waste &
Hazardous
Materials
Management
Accounting Metric(s)
Status
• RT-AE-130a.1: (1) Total energy consumed, (2) percentage grid
electricity, (3) percentage renewable
• RTA-AE-150a.1: Amount of hazardous waste generated, percentage
recycled
• RTA-AE-150a.2: Number and aggregate quantity of reportable spills,
quantity recovered
Social Capital Data Security
Data Security
• RT-AE-230a.1: (1) Number of data breaches, (2) percentage involving
confidential information
• RT-AE-230a.2: Description of approach to identifying and addressing
data security risks in (1) company operations and (2) products
Product
Quality &
Safety
Product Safety
• RT-AE-250a.1: Number of recalls issues, total units recalled
• RT-AE-250a.2: Number of counterfeit parts detected, percentage
avoided
• RT-AE-250a.3: Number of Airworthiness Directives received, total units
affected
• RT-AE-250a.4: Total amount of monetary losses as a result of legal
proceedings associated with product safety
Business
Model &
Innovation
Product Design
& Lifecycle
Management
Fuel Economy
& Emission in
Use phase
• RT-AE-410a.1: Revenue from alternative energy-related products
• RT-AE-410a.2: Description of approach and discussion of strategy to
address fuel economy and greenhouse gas (GHG) emissions of products
Materials
Sourcing &
Efficiency
Materials
Sourcing
Leadership &
Governance
Business
Ethics
Business
Ethics
• RT-AE-440a.1: Description of the management of risks associated with
the use of critical materials
• RT-AE-p510a.1: Total amount of monetary losses as a result of legal
proceedings associated with incidents of corruption, bribery, and/or
illicit international trade
• RT-AE-p510a.2: Revenue from countries ranked in the “E” or “F” Band of
Transparency International’s Government Defence Anti-Corruption Index
• RT-AE-p510a.3: Discussion of processes to manage business ethics risks
throughout the value chain
Status Key
Full Disclosure
Partial Disclosure
Partial Disclosure
Indicative disclosure
100%
75%
50%
Partial Disclosure
No Disclosure
Not Relevant
Indicative disclosure
25%
0%
N/A
Babcock International Group PLC Annual Report and Financial Statements 2021
81
Strategic reportGovernanceFinancial statements Andrew Taylor
Multi-Engine Pilot
Australia
82
Babcock International Group PLC Annual Report and Financial Statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
83
Strategic reportGovernanceFinancial statements Principal risks and management controls
Our principal risks and
how we manage them
David Mellors
Chief Financial Officer
The Board is accountable for effective risk
management across the Group. The Board,
along with the Audit 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’s
risk management approach includes:
• The review and approval of the Group’s
overall strategy
• The review and control of the Group’s risk
appetite through its delegated authorities
• The review of business performance
• The review of the Group’s risk register
• The review of management’s approach to
identifying and managing risk
• The evaluation of the effectiveness of
internal controls
• The evaluation of the effectiveness of
internal and external audit.
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. 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. This
means that the risks identified on pages 87
to 95 are not and cannot be an exhaustive
list of all the principal risks that could affect
the Group.
84
Babcock International Group PLC Annual Report and Financial Statements 2021
Principal and emerging risks,
risk mitigation and controls
The Board confirms that it has carried out
a robust assessment of the principal and
emerging risks facing the Group and has
identified the risks and uncertainties that
it currently considers to be of greatest
significance to Babcock which are
described overleaf from pages 87 to 95.
These risks have the potential to materially
and adversely affect Babcock’s business, the
delivery of its strategy and/or its financial
results, condition or prospects.
The risk process was enhanced during the
period with
• a new Group Risk Management
Framework, which provides guidance to
the sectors to assist them with identifying
key external and internal drivers and risk
influencers;
• the assigning of a Group Executive
Committee member as a sponsor for
each principal risk;
• the introduction of a new expanded risk
register for each business unit, sector and
Group function to improve the
granularity and detail on each risk; and
• the introduction of a dedicated quarterly
review of the principal and emerging
risks by the Group Executive Committee.
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 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
emerging risks, which are “new” risks that
may challenge the Group in the future.
They may begin to evolve rapidly or simply
not materialise.
Group Risk Management
Board
The Board is ultimately responsible for the Company’s risk management and internal control system. The Board reviews the Group’s
principal and emerging risks at least on an annual basis. The Board delegates oversight of certain risk management activities to the
Audit Committee.
The Board ensures that it controls the risk appetite of the Group through its delegated authorities, which impose strict controls on
the Group — for example, 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 CEO and the CFO) and all financing arrangements
(unless delegated to the Board’s Finance Committee). The Board performs ’deep dives’ on principal risks on an ongoing basis.
Audit Committee
The Audit Committee reviews aspects of the risk management and control system at its meetings. At least once a year, the
Committee formally reviews the system’s effectiveness as a whole on behalf of the Board.
Group Executive Committee
The Group Executive Committee reviews quarterly a consolidated report prepared by the Group Risk and Insurance Manager.
The report summarises the principal risks facing the Group. Executive Committee members now sponsor and own each principal
risk and associated actions. Emerging risks and their causes, and potential mitigations will also be identified and where appropriate
incorporated into the principal risks.
Sectors
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.
Employees
Employees undertake a selection of risk management training programmes (for example, IT security and anti-bribery and corruption
training) appropriate to their roles in order to increase awareness of potential risks.
Babcock International Group PLC Annual Report and Financial Statements 2021
85
Strategic reportGovernanceFinancial statements Principal risks and management controls continued
Risk Assurance
Lines of Defence
The primary risk management mechanism is the
Group’s risk management process which is designed to
identify, control, mitigate and report risks as part of the
Group’s internal control model.
Through the risk register this process provides a clear
line of sight to the Company’s principal risks.
The Company uses the “three lines of defence”
model to assure itself about the management of the
risks that it faces.
This model defines the first line of defence as
management controls, policies and procedures
together with management oversight. The second and
third lines of defence are considered as assurance
related – with the second line of defence being internal
assurance activities, such as the review of Sector risk
assessments by Group senior management; and the
third being assurance obtained from external sources,
such as internal audit.
First line of defence
Risk owners: Managers identify, mitigate, control and monitor
the risks.
The Company has written policies, covering a range of matters
intended to mitigate risk, such as health and safety, information
security, contracting requirements and accounting policies. The
Board annually approves a schedule of delegated authorities
setting out specific levels of decision-making authority delegated
by it to the business.
Managers report on a monthly basis up through their business
units and sectors to the Group Executive Committee. The CEO
and CFO report to each Board meeting on operating
performance and other matters of significance to the Group.
Managers prepare annual budgets and medium-term financial
plans for review by sector and then by Group. The Board reviews
and approves the Group annual budget and medium-term
financial plans. Managers prepare updated forecasts for the
year on a quarterly basis. The Board receives details of monthly
actual financial performance compared to budget, forecasts
and the prior year.
Second line of defence
Internal assurance: Internal functions (such as HR, legal, tax
and treasury) provide internal review and control of risks within
their areas.
Certain risks are monitored by specific committees. The
Corporate Safety Leadership Team leads the development and
implementation of policies, standards and expectations for
health, safety and environmental issues. The Group Security
Committee oversees the Group’s security and information
assurance management infrastructure.
A whistleblowing hotline is available to all employees to allow
them to report any concerns that they may have without fear
of any action being taken against them.
The Group maintains an insurance programme, preferring to
transfer risk to the insurance market, where available on
acceptable terms. The Group Risk and Insurance Manager reports
annually to the Board on the strategic approach to insurance and
on the placing of the programme.
Third line of defence
External assurance: Internal audit provides assurance of the
effectiveness of the Group’s control environment. Internal audit
reports directly to the Audit Committee.
The Group is audited or inspected by a number of external
regulators and other bodies, including national civil aviation
authorities, the Office of Nuclear Regulation, the Office for Rail
and Road and the International Office for Standardisation.
86
Babcock International Group PLC Annual Report and Financial Statements 2021
Principal risks, risk mitigation
and controls
Existing markets
Probability: High
Impact: High
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 whom are (directly or indirectly) owned or controlled by government (national or local) and/or are (wholly or partly)
publicly funded.
Mitigation
Our focus on the aerospace, defence and security markets,
together with our geographical spread, provides a degree of
portfolio diversification. We are in ongoing dialogue with our key
customers in order to understand their requirements, objectives
and constraints, so that we can remain as aligned with them as
possible. We continue to monitor expenditure changes in our
markets in order to allow us to make the appropriate adjustments.
We maintain a public listing as we believe it is an important factor
in winning and retaining our business position, particularly with
government customers.
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 an alignment with the Group strategy and
where we believe we stand a realistic chance of success due to,
for example, customer understanding, domain knowledge or
technical expertise, both in the UK and overseas. We maintain
a dialogue with our customers to understand their intentions
regarding their pipeline.
Following the COVID-19 outbreak, we have continued to work
closely with our customers in order to understand their priorities in
response to the pandemic. All our businesses have implemented
the necessary plans in consultation with our key customers to
continue to deliver on our contracts where possible. 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.
The Group remains in dialogue with the SSRO and MOD regarding
future planned changes to the SSCR.
Potential impact
Major customers, such as our single biggest customer, the UK
Ministry of Defence (MOD), have significant bargaining power and
can exert pressure to change, amend or even cancel programmes
and contracts. As many of our major customers are government
owned or publicly funded, they are affected by political and public
spending decisions. For example, the MOD has published its
Integrated Strategic Review, which sets the UK Government’s
national security and international policy objectives to 2025.
Another example may be the UK’s exit from the EU, the
consequences of which remain difficult to predict, as UK companies
may not be able to bid on EU programmes or have to trade on
different terms as a non-EU member or experience difficulties
holding operating licences.
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.
A significant number of our contracts with the MOD are subject to
the Single Source Contract Regulations (SSCR), which are
administered by the Single Source Regulations Office (SSRO).
The SSRO sets the baseline profit rate for single source contracts
let by the MOD on an annual basis. These regulations and their
implementation are subject to review by the UK Government,
which could lead to lower returns for industry.
Babcock International Group PLC Annual Report and Financial Statements 2021
87
Strategic reportGovernanceFinancial statements Principal risks, risk mitigation and controls continued
Contract and project performance
Probability: High
Impact: High
We operate large contracts, which often require us to price for the long term and for risk transfer. Our contracts can include fixed prices.
Mitigation
We have 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. Where we identify poor performance,
the business will implement a remediation plan. These reviews
also consider the performance of our supply chain. In the current
circumstances, the reviews consider the impact of COVID-19. We
also regularly review project costs to complete to ensure accuracy
of the financial profile of the contract.
Potential impact
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.
There are usually only a relatively limited number of customers in
each of our market sectors and our market sectors can be highly
competitive. Because of their strong market power, our customers
can require bidders to accept a substantial transfer of risk from the
customer to the supplier. For example, it is not unusual in defence
and aerospace markets that the contracts that we tender for may
impose strict conditions and clauses, including unlimited liabilities,
termination without cause and strict performance conditions,
which, if not complied with, may trigger compensation for
the customer.
If we (or our supply chain) underestimate or under-price actual risk
exposure or the cost of performance, or if, during the contract, cost
inflation diverges from revenue inflation, or if unforeseen additional
costs are incurred, for example, due to the UK’s exit from the EU or
COVID-19, this could adversely affect our future profitability, cash
generation and growth. For example, mobilisation of the contract
may be difficult, or the transitioning from mobilisation to business
as usual may not be effective. We may not deliver the contractual
requirements due to ineffective contract management, cost or
quality control or the failure to manage our supply chain. These may
lead to contract overruns or unfulfilled contractual obligations,
especially if the contract is fixed price. COVID-19 may increase the
likelihood of each of these key risks arising as it makes our
operations less efficient or effective. Failure to deliver contractual
requirements may result in the imposition of penalties, the need to
devote additional resource to deliver the contract, the early
termination of the contract with the imposition of damages, or
reputational damage, which may cause strain on the customer
relationship, undermining not only the current contract, but also
future contracts.
Long-term contracts often have changes, or updates, to scope.
If we do not properly manage contract changes, we may incur
additional costs or failure to deliver our contractual requirements,
which may reduce overall profitability or lead to penalties or
contract termination.
88
Babcock International Group PLC Annual Report and Financial Statements 2021
New markets
Probability: Medium
Impact: High
We seek new markets and contracts for our services both with existing and new customers, whether in territories where we are already
established or in territories where we are not.
Mitigation
We aim to target our resources in those new markets where we
believe our services are relevant and we believe we have a good
chance of being awarded the opportunity. As appropriate, we aim
to invest in innovation and people to prepare for new ways of
working or delivering our services. We maintain ongoing dialogue
with our customers in order to understand their requirements and
their budgets.
Potential impact
We may not be successful in securing those new opportunities for a
number of reasons, including: customer funding constraints; our
services not being relevant due to the non-acceptance of our
business model by customers; our failure to anticipate future market
requirements or future changes in technology; our failure to find
the appropriate quantity and quality of resource; our bid strategy
failing to align with the customer’s strategy; or increased
competition in our markets. In addition, COVID-19 or the UK’s
departure from the EU or other geopolitical development may give
rise to economic nationalism and a reluctance from international
customers to award contracts to a non-domestic company. A lack of
success in exporting the Group’s business model outside the UK and
our current core markets could adversely affect the growth
prospects and strategic development of the Group. Failure to
convert our bidding pipeline into contracts may put pricing pressure
on the remaining pipeline.
Financial resilience
Probability: High
Impact: High
The Group is exposed to a number of financial risks, some of which are of a macroeconomic nature (for example, foreign currency,
interest rates) and some of which are more specific to the Group (for example, liquidity and credit risks).
Potential impact
A lack of financial resilience may hinder us in being able to raise
debt funding to invest in the securing of existing or future business.
The weakness also may cause our existing banks to increase the cost
of our funding. If our debt is denominated in a currency other than
Sterling, movements in exchange rates may make that debt more
costly when we repay it. Customers and/or suppliers may question
our long-term sustainability if we have a weak balance sheet. This
may tighten the terms of business that they are prepared to
contract with us on. Credit rating agencies may downgrade our
rating, which would increase our cost of borrowing. Certain pension
scheme financial thresholds may be triggered, requiring further
resource to be allocated to the schemes. We could face capital
allocation constraints and be left with reduced capital to invest in
the business to meet all our obligations or to pay a dividend.
Mitigation
The alignment of the Group portfolio has triggered a programme
of potential disposals. We expect to raise £400 million in the next
12 months which will contribute towards the strengthening of the
balance sheet. We have already secured an additional debt facility
of £300 million to provide additional liquidity and a temporary
relaxing of financial covenants. We are proactive in our dealings
with credit rating agencies and lenders. The Board reviews the
financial position of the Group on a monthly basis against the
Board approved three- year plan.
Babcock International Group PLC Annual Report and Financial Statements 2021
89
Strategic reportGovernanceFinancial statements Principal risks, risk mitigation and controls continued
Business interruption
Probability: Medium
Impact: High
Failure to withstand the impact of an event or a combination of events may signicantly disrupt all or a substantial part of the
Group’s business.
Potential impact
A range of events, for example, extreme weather, natural hazards
(such as floods or earthquakes), political events, financial insolvency
of a critical supplier, scarcity of materials, loss of data, fire or
infectious disease could cause business interruption. The
consequences of these events could have an adverse impact on our
people, our facilities, our supply chains, or our ability to meet our
contractual obligations. The COVID-19 pandemic is an example of
such an event. The pandemic has had a significant impact on our
business and the markets that we serve over the financial year
2021. For our customers, the pandemic may reduce their current or
future budgets or cause them to deploy their budgets in different
ways, changing our markets. For our employees, the pandemic has
changed the ways that we work. These measures may create
inefficiencies in some of our businesses. The pandemic may also
affect our suppliers and lead to failures in the supply chain, which
may adversely affect our ability to deliver our programmes. An
outbreak of another contagious disease or a new variant of the
COVID-19 may still have an adverse effect on the Company’s
business, financial condition and prospects.
Mitigation
Throughout the pandemic, we have looked to prioritise the key
programmes of our customers to demonstrate the mission critical
nature of our services. For employees, our priority has been their
wellbeing and safety. We have adapted working practices and
facilities, including social distancing, PPE requirements, improved
cleaning regimes and increased remote working, to seek to keep
our people safe and well throughout this crisis. We continue to
manage the situation closely and follow Government and health
authority advice to help prevent the spread of the virus. For
general business continuity, we have in place IT disaster recovery
and business continuity processes. We also maintain relevant and
appropriate insurance.
Operational resilience
Probability: High
Impact: High
We are undertaking multiple change programmes with the introduction of a new strategy, a new operating model to restructure
the shape of the Group, and a new people strategy, as well as undertaking the alignment of both the business portfolio and our
property portfolio.
Potential impact
All these programmes are underway concurrently, in addition to the
delivery of the Group’s services to its customers. This may put
pressure on management bandwidth to oversee all the change
programmes, as well as the regular running of the business. This
could lead to an elevated risk of mistakes or missed opportunities.
If we fail to deliver the change programmes, we will not be able to
achieve our strategic goals as set out on page 16. Failure to deliver
the change programmes would undermine the confidence of key
stakeholders in our future growth and plans.
Mitigation
Management is experienced in delivering programmes of this
nature. There is regular monitoring of progress across all the
programmes to ensure that they remain on track, along with
regular dialogue with customers at senior level to ensure that
delivery of our contracts is in no way compromised. The Board
receives a monthly report with a status update of the key
change programmes.
90
Babcock International Group PLC Annual Report and Financial Statements 2021
Health, safety and environmental
Probability: Medium
Impact: High
Our operations entail the potential risk of significant harm to people, property or the environment, wherever we operate across the
world.
Potential impact
Parts of our business (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. Others, 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) or the environments
in which they operate (low-altitude flying in adverse weather,
terrain or operational conditions).
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 as well as education and training programmes
for staff. Sector safety leadership teams and the Corporate Safety
Leadership Team (CSTL) oversee the implementation of policy,
strategy and initiatives across all our businesses.
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. These accidents
may arise from inadequate hazard control or training or
management supervision; the failure to implement changes or
learning from previous accidents; poor safety leadership and
culture; equipment failure; or human or organisation factors.
The Board receives reviews of health and safety performance.
Nuclear risks: We hold indemnities given to us by the UK Nuclear
Decommissioning Authority and the UK MOD, to protect 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.
If we cause or contribute to an incident because of failings on our
part, or because as a matter of law we are strictly liable without
fault, we may be liable for substantial damages claims, not all of
which may be insured, as well as potentially to criminal
proceedings, which could result in substantial penalties. We could
also suffer contract penalties due to an inability to deliver the
contract or a loss of productivity.
Such incidents (which may have a high public profile given the
nature of our operations) may also seriously damage our reputation
or our brand (whether justified or not), which could lead to a
significant loss of business or future business opportunities.
An incident may also disrupt our business if it prevents our
employees from working.
In respect of the current COVID-19 pandemic, 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.
We believe we have appropriate insurance cover against civil
liability exposures.
Babcock International Group PLC Annual Report and Financial Statements 2021
91
Strategic reportGovernanceFinancial statements Principal risks, risk mitigation and controls continued
Regulatory and compliance burden
Probability: Low
Impact: High
Our businesses are subject to the laws, regulations and restrictions of the many jurisdictions in which they operate.
Potential impact
The laws and regulations that we are subject to include anti-bribery
laws, import and export controls, tax, procurement rules, human
rights and data protection regulations.
Failure to maintain compliance with applicable requirements
could result in: fines and criminal prosecution; the removal of a
licence to operate; reputational damage; cost of rectification;
debarment from bidding; loss of access to markets; and, the loss of
substantial business streams (and possible damages claims) and
opportunities for future business.
If an applicable law or regulation changes, it may cause us
substantial expenditure in order to comply, which may not be
recoverable (either fully or at all) under customer contracts.
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, as well as regulations
relating to ownership and control requirements. Regulation (EC)
No.1008/2008 (the Regulation) requires all air operators in the EU
to be majority-owned and controlled by European Economic Area
nationals.
Given the nature of our customers and the markets in which we
operate, as well as the services that we provide, we believe that our
reputation, not only in terms of delivery but also in terms of
behaviour, is a fundamental business asset. 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.
Mitigation
We maintain internal policies and procedures in order to ensure
that the Group complies with all applicable laws and regulations.
We also 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.
In order to address the requirements of the Regulation, we have
restructured the operations of the relevant operations so that a
new sub-group, which is majority owned and controlled by an
EU-based holding company holds those parts of the business that
fall under the Regulation . 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 EU aviation authorities, there can be no guarantee
that this continues to be the case.
Senior management at Group and sector level are keenly aware of
reputational risks, which can come from many sources. Our Code
of Conduct, together with our Ethics policy, sets out the clear
expectations that we have of our employees. We seek to reinforce
these values with all employees through a number of different
processes, for example, our training. 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.
92
Babcock International Group PLC Annual Report and Financial Statements 2021
People
Probability: Medium
Impact: Medium
We operate in many specialised engineering and technical domains, which require appropriate skills and experience.
Potential impact
Our business delivery and future growth depend on our ability to
recruit, develop and retain experienced highly skilled employees
(such as suitably qualified and experienced engineers, technicians,
pilots and other specialist skills groups).
Mitigation
We undertake workforce and succession planning to identify skill
gaps and to form plans to address them. We have programmes
to develop our employees so that they have the right skills
and experience.
Competition for the personnel we need is intense and is likely to
remain so for the future. This may be exacerbated by nationality
restrictions, which may prevent us from accessing talent from the
EU or worldwide. This poses risks in both recruiting and retaining
such staff.
We are developing a new people strategy, led by the Group’s first
Chief Human Resources Officer. This strategy will establish a
common approach across the Group. The new approach includes
a new ‘agile’ way of working, a review of the rewards and
remuneration structure and improved people management.
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 affect our
contract profitability.
Babcock International Group PLC Annual Report and Financial Statements 2021
93
Strategic reportGovernanceFinancial statements Principal risks, risk mitigation and controls continued
Pensions
Probability: High
Impact: High
The Group has significant defined benefit pension schemes in the UK, which provide for a specified level of pension benefits to
scheme members.
Mitigation
Group senior management undertakes continuous strategic
monitoring and evaluation of the assets and liabilities of the
pension scheme. Management aims to increase its engagement
with the scheme trustee chairs and with the pension regulator.
Pension liability increases are mitigated by the pension scheme
having investment strategies that hedge against interest rate and
inflation risk and using longevity swaps to limit exposure to
increasing life expectancy. Trustees use professional advisors to
assist in the hedging of risks.
Potential impact
Member and employer contributions paid into pension scheme funds
and the investment returns made in those funds over time have to
meet the cost of the defined benefit obligations.
The level of our contributions is based on various assumptions, which
are subject to change, such as life expectancy of members, gilt yields,
investment returns, inflation, and regulatory changes. 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. For example, pension liabilities can increase due
to rising life expectancy, higher than expected inflation rates in the
future and lower interest rates.
If the assets in the pension schemes are judged insufficient to meet
pension liabilities or if our balance sheet strength does not meet the
pension trustee expectations, we may be required to make increased
contributions and/or lump sum cash payments into the schemes or
provide additional security from the Group. Trustee’s perspectives
may be influenced by toughening stances taken by the UK Pension
Regulator. 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.
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.
Accounting standard rules governing the measurement of pension
liabilities can lead to significant accounting volatility from year to
year due to the need to take account of macroeconomic
circumstances beyond the control of the Company. Actuarial
valuations used for funding are not calculated on the same basis as
IFRS accounting standards. This means the future cash contributions
are difficult to derive from the Group’s IFRS balance sheet.
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.
94
Babcock International Group PLC Annual Report and Financial Statements 2021
IT and security
Probability: Medium
Impact: High
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.
Potential impact
We hold data that is confidential and needs to be secure against a
background of increasing cyber threat. Despite controls designed to
protect such information, there can be no guarantee that security
measures will be sufficient to prevent security breaches or cyber
attacks being successful in their attempts to penetrate our network
security and misappropriate confidential information or otherwise
cause harm to the Group, for example through denial of service.
In addition, failure to invest in our IT infrastructure, for example,
in legacy systems, may also create a weakness that may lead to a
breach. The risk of loss of information or data by other means is
also a risk that cannot be eliminated.
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, significant data breaches or losses could also
lead to litigation and fines for breach of applicable regulations such
as data protection laws. This could have an adverse effect on the
Group’s operations and its ability to win future contracts, which may
affect our overall financial condition.
Mitigation
We have made and will continue to make significant investment
in enhancing IT security and security awareness generally.
We seek to assure our data security through a multi-layered
approach that provides a hardened environment, including
robust physical security arrangements and data resilience
strategies. We have formal security and information-assurance
governance structures in place to oversee and manage cyber-
security and similar risks. We conduct comprehensive internal
and external testing of potential vulnerabilities.
The Group maintains business continuity plans that cover a range
of scenarios (including loss of access to IT). We regularly test the
plans that relate to IT.
Acquisitions and disposals
Probability: Medium
Impact: High
We have built our core strengths organically and through acquisition. Decisions to acquire companies, as well as the process of their
acquisition and integration, are complex, time consuming and expensive. If we believe that a business is not ‘core’, we may decide to sell
that business.
Potential impact
As we are not currently seeking acquisition opportunities, we may not
identify potentially value- or skill-enhancing transactions and miss an
opportunity to grow shareholder value.
Mitigation
Our focus is currently on operational execution, rather
than acquisitions, with the possible exceptions of ‘bolt-on’
acquisitions.
Where we have acquired companies, we may not realise the financial
benefits of the acquisition as expected, due to poor integration or
to acquisition business cases relying on market conditions or other
business assumptions that subsequently do not materialise,
challenging the logic of the acquisition decision. Before
making any future acquisition, we will learn the lessons from
the Avincis acquisition.
We will work to enhance our acquisition and integration
capability so that we are ready at the appropriate time in
the future.
We will clearly communicate our disposal strategy and put
in place the appropriate transaction resource to prioritise
the disposals.
Those companies that we consider as non-core and therefore disposal
candidates, may become distracted or demotivated or lose key
employees, which may lead to poor performance whilst also
undermining their value to their customers and a potential buyer.
A key assumption in the strengthening of our balance sheet is the
planned disposals which should raise a minimum of £400 million.
Disposal timing and price are not within the full control of the Group.
There could be a lack of market interest or a delay in the planned
processes, which may make disposals harder to complete. Some
countries are increasing government oversight of disposals in sectors
deemed of national importance (for example, the UK National
Security and Investment Bill). Such oversight could add delay or even
block a planned disposal.
Babcock International Group PLC Annual Report and Financial Statements 2021
95
Strategic reportGovernanceFinancial statements Going concern and viability statement
Going concern and viability statement
Overview
The Directors have undertaken reviews of
the business financial forecasts, in order to
assess whether the Group has adequate
resources to continue in operational
existence for the foreseeable future and as
such can continue to adopt the going
concern basis of accounting. The Directors
have also looked further out to consider
the viability of the business to test whether
they have a reasonable expectation that
the Group will continue in operation and
meet its liabilities as they fall due.
For assessing going concern, the Board
considered the 12 month period from the
date of signing the Group’s financial statements
for the year ended 31 March 2021.
For viability, the Board looked at a three
year view as this is the period over which
the Group prepares its strategic
plan forecasts.
The annual budgets are compiled using a
bottom-up process, aggregating the
budgets for the individual business units
into Sector budgets. The Sector budgets
and the consolidated Group budget is then
reviewed by the Board and used to monitor
business performance.
The impacts of the recent contract
profitability and balance sheet review
(‘CPBS’) and the planned restructuring as a
result of the change in operating model
have been incorporated into the budgets.
The Board considered the budgets
alongside the Group’s available finances,
strategy, business model, market outlook
and principal risks. The process for
identifying and managing the principal
risks of the Group is set out in our Annual
report. The Board also considered the
mitigation measures being put in place and
potential for further mitigation.
Available financing
As at 31 March 2021, net debt excluding
operating leases was £771.5 million and
the Group therefore had liquidity
headroom of £1.2 billion, including net
cash and cash equivalents of £0.5 billion
and undrawn facilities of £0.8 billion.
As of July 2021, the Group’s committed
facilities and bonds totalling £2.4 billion
were as follows:
• €550 million bond, hedged at
£482 million, maturing 6 October 2022
• New £300 million 3-year RCF maturing
20 May 2024 (signed on 20th May 2021)
• £775 million revolving credit facility
(RCF) maturing 28 August 2025
• £300 million bond maturing
5 October 2026
• €550 million bond, hedged at
£493 million, maturing
13 September 2027
• A committed overdraft facility of
£50 million
The RCFs are the only facilities with
covenants attached. The key covenant
ratios are (i) net debt to EBITDA (gearing
ratio) (ii) and EBITDA to net interest
(interest cover).
These are measured twice per year – on
30 September and 31 March. The lending
banks have agreed to raise the covenant
limit for the gearing ratio from 3.5x to 4.5x
for the measurement periods ending
30 September 2021 and 31 March 2022
in order to provide sufficient downside
protection for the Group as the turnaround
in performance takes place – and
particularly as a key assumption in
strengthening the Group’s balance sheet is
the planned divestment programme which
aims to generate a minimum of
£400 million of proceeds within the next
twelve months. For all subsequent periods,
the gearing ratio covenant returns to 3.5x.
The definition was clarified to specifically
exclude the one-off impacts of the CPBS
review from the covenant calculations.
The RCF lenders are fully committed to
advance funds under the RCF to the Group,
provided that the Group has satisfied the
usual ongoing undertakings, and the credit
worthiness of the Group’s relationship
banks is closely monitored. Based on their
credit ratings we have no credit concerns
with our relationship banks.
Given the importance of the RCFs to the
Group’s liquidity position, our assessments
of going concern and viability have tested
the Group’s gearing ratio, interest cover
and liquidity headroom throughout the
period under review.
COVID-19 impact
The COVID-19 pandemic created increased
uncertainty across our business during the
financial year, particularly in the UK and
European operations. The impacts were
most severe for our non-defence businesses
(e.g. civil aviation and civil training) where
operations in some cases were stopped.
The defence businesses incurred some
interruption and increased cost initially
with the heightened uncertainty.
Subsequently most defence programmes
and sites were re-opened, albeit with social
distancing restrictions and higher levels of
employees working from home where
possible. In response to this, the Group
took steps to mitigate the financial impact
and improve the Group’s liquidity
including:
• Deferring non-essential operating
and capital expenditure
• Furloughing staff in a number of areas
such as our airports and civil training
businesses
• Senior executive management taking a
temporary 20% reduction in basic salary
with their annual bonus and pay rise
deferred
• Non-Executive Board members taking a
temporary 20% reduction in fees with
no annual increase
• Taking the decision not to pay an interim
dividend for the 2020 financial year
Subsequently the Group has been in
discussion with certain customers
regarding cost recovery and contract
performance relief where appropriate.
As the year progressed, it became clear
that there was a significant impact from
COVID-19 and that the Group’s financial
performance was tracking behind original
expectations. Overall, the net financial
impact of COVID-19 on the Group in the
year was a reduction of operating profit of
approximately £45 million as explained on
page 38.
As there are now vaccination programmes
in most of the geographies in which the
Group operates, it has been assumed
that there will be a gradual removal of
pandemic measures such as social
distancing and that all our operations will
eventually be able to work on sites as
before. However, there remains the risks of
new variants, potential future lockdowns
and business interruptions, so the Board
has taken a cautious view as to how
quickly the return to pre-pandemic ways
of working will happen over the
forecast period.
Base case scenario
In addition to the trading assumptions
outlined above, key assumptions in our
base case budget include:
• £400 million of cash proceeds from
disposals during FY22
• c.£50 million of restructuring costs in
FY22 being c.£40 million relating to
the operating model change and
c.£10 million of previously announced
restructuring (e.g. in Aviation)
• £56 million of VAT deferred from FY21
to be paid in FY22
96
Babcock International Group PLC Annual Report and Financial Statements 2021
• Additional pension deficit contributions
previously agreed with trustees (over
and above the normal levels) of £60
million in FY22 and £52 million in FY23
• A gradual unwind of the historical year
end working capital ‘push’ over the
period, to close the gap between
average monthly net debt and the much
lower period end net debt
• A continuation of debt factoring for
certain Southern European contracts
within Aviation at similar levels to FY21
• Dividends not paid for FY21 or FY22
The base case budget shows significant
levels of headroom against both financial
covenants and liquidity headroom based
on the current committed facilities
outlined above (without assuming any
refinancing of the €550 million bond in
October 2022).
Reverse stress testing of the base case
To assess the level of headroom within the
available facilities, a reverse stress test was
performed to see what level of
performance deterioration against the
base case budget (in both EBITDA and net
debt) was required to challenge covenant
levels. Of the remaining measurement
points within the three year period, the
lowest required reduction in forecast
EBITDA to hit the covenant level was 36%
and the lowest net debt increase was 56%.
Given the mitigating actions that are
available and within management’s
control, such movements are not
considered plausible.
Severe but plausible downside
scenarios
The Directors also considered a series of
severe but plausible downside scenarios
which are sensitivities run against the base
case budget for the duration of the
assessment period. These sensitivities
include – separately - a reduction in bid
pipeline closure (business winning), a
reduction in the assumed restructuring
savings, a deterioration in large
programme performance across the
Group, a deterioration in the Group’s
working capital position and a regulator
imposed cessation in flying two of the
largest aircraft fleets in the Group.
Furthermore a sensitivity was run which
modelled the removal of all uncommitted
working capital facilities available to the
Group. As stated above, a key contributor
to the strengthening of the balance sheet
is the divestment programme which is
expected to generate a minimum of
£400 million of proceeds in FY22. For this
reason a further sensitivity was run
removing all planned divestments entirely
and keeping the Group portfolio as it
currently is throughout the forecast period.
Unsurprisingly, removing the divestments
entirely – however unlikely it may be to
happen – left the gearing ratio with too
little headroom against the financial
covenants. Whilst all of these separate
scenarios showed compliance with the
financial covenants throughout the period,
the measurement periods ending
30 September 2021 and 31 March 2022
had the highest covenant gearing ratios.
This is a reflection of the significant cash
out flows in this period (e.g. programme
capital expenditure, restructuring costs
and the extra pension deficit contributions)
occurring before the proceeds from the
planned divestments are received. It is for
this reason that the Board approached and
has agreed with our lending banks to
increase the covenant level gearing ratio
from the usual 3.5x to 4.5x for those two
measurement periods.
As with any company or group, it would be
possible, however unlikely, to model
individual risks or combinations of risks that
would threaten the financial viability of the
Group. The Board has not sought to model
events where it considers the likelihood of
such events not to be plausible. In preparing
a combined severe but plausible (SBP)
downside case, the Board considered the
feed of individual risks from the sectors
covering the above sensitivities. Overall
there were c.80 profit and cash flow risks
identified. A simple aggregation of all of
these risks is not considered plausible as
the Group operates businesses and
contracts which run largely independently
of each other, albeit with a relatively small
number of customers within each
geography. The majority of these identified
risks were seen as ‘sector independent’
(i.e. there is no direct read across from one
sector to another). A small number are
deemed ‘non independent’ e.g. COVID-19,
inflation, FX etc. The Board decided to
include in its combined SBP downside all
the ‘non independent’ risks without
reduction, but reduced the aggregation of
the ‘sector independent’ risks by 25% to
reflect the implausibility of all such risks
fully crystallising within the same period.
The SBP scenario also deferred all disposal
proceeds by 12 months, significantly
reduced the financial benefits of the
operating model restructuring and
assumed a much reduced level of
receivable factoring in the
Aviation business.
If such a severe downturn were to occur in
the Group’s performance, the Board would
take mitigation measures to protect the
group in the short term. Such profit and
cash mitigation measures that are deemed
entirely within the control of the Group
and identified as part of the sector
budgeting exercise have been included in
the SBP scenario (e.g. cancelling pay rises
and bonus awards, curtailing uncommitted
capital expenditure and operational spend
including R&D and other investment).
Despite the severity of the above
combined SBP scenario, the Group
maintained a sufficient amount of
headroom against the financial covenants
within its borrowing facilities, albeit that
this is less after the gearing covenant level
reverts to 3.5x in September 2022, and
sufficient liquidity when compared against
existing facilities.
Additional mitigation options
While the new bank liquidity facility and
the temporary relaxation of the covenant
levels are deemed appropriate to cover
the potential impacts of plausible risks, the
Group has considered additional mitigation
measures that could be undertaken should
the need arise. These may include
measures under the control of the Board
as outlined above. Further measures which
are not wholly under the control of the
Board might include additional divestment
plans; and in extremis seeking a further
covenant amendment from our RCF
lenders and/or utilising alternative
financing sources, such as a hybrid
bond or equity.
Going concern assessment and
viability conclusion
Based on our review, the Directors have a
reasonable expectation that the Group has
adequate resources to continue as a going
concern for at least 12 months from the
date of these financial statements. As such,
these financial statements have been
prepared on the going concern basis.
The Directors do not believe there are
any material uncertainties to disclose in
relation to the Group’s ability to continue
as a going concern.
In concluding on the financial viability of
the group, having considered the scenarios
outlined above, the Directors have a
reasonable expectation that the Company
and the Group will be able to continue in
operation and meet all its liabilities as they
fall due up to March 2024.
Babcock International Group PLC Annual Report and Financial Statements 2021
97
Strategic reportGovernanceFinancial statements Kerrie Greenall
Procurement & Supply Chain Graduate
UK
98
Babcock International Group PLC Annual Report and Financial Statements 2021
Strategic report
Governance
Financial statements
Babcock International Group PLC Annual Report and Financial Statements 2021
99
Governance statement
Chair’s introduction
Dear Shareholder
On my appointment as Chair of Babcock
in 2019, I was aware that stakeholders
had become frustrated by the pattern of
underperformance compared with the
expectations set by the Board. As I set
about to understand the causes, I
anticipated that these might reflect,
at least in part, deficiencies in Board
governance. I therefore took early steps
to refresh the Board’s working, mindful of
the fact that strong governance requires
an effective combination of a number of
key ingredients:
• strong structure and processes;
• a diverse and capable membership
working in a climate of open and
frank debate;
• a team of senior executives who
recognise both the Board’s importance
and their critical role in providing the
information and insight the Board needs.
Following their appointments, David
Lockwood and David Mellors instigated a
number of reviews, including the contract
profitability and balance sheet review.
The findings from this review are deeply
disappointing, with many adjustments
being made including the correction of
prior year errors. Clearly our governance
had not been performing as required and
this is referenced in the Statement of
Compliance on page 107. In this
introduction, I give an overview of the
multi-faceted changes and improvements
we have made to Board governance,
operating model and financial control.
Together, the reforms make us confident
that the weaknesses have been addressed.
Board changes
Board structure
In my report last year I covered the initial
steps I had taken on Board structure and
processes. Change has accelerated further
this year. The changes are set out opposite
but they include: adjusting the Board
agenda to give a greater focus on strategy;
the appointment of a Non-Executive
director as designated for employee
engagement; refreshing the role of the
Board’s Disclosure Committee; reducing
membership of the Committees to
enhance accountability; and streamlining
attendance at Board meetings to support
effective debate and constructive
challenge. In addition, a UK Security
Ruth Cairnie
Chair
100
Babcock International Group PLC Annual Report and Financial Statements 2021
Committee has been formed to enable
closer scrutiny of those programmes where
information can only be shared with
security-cleared UK citizens.
Board membership
The work to ensure a strong and diverse
Board membership has also continued with
the appointment of new Non-Executive
directors to replace those due to leave the
Board. Lord Parker brings an outstanding
track record of leadership and public
service while Carl-Peter Forster, who took
over the role of Senior Independent
Director following last year’s AGM, brings a
wealth of senior board experience. Russ
Houlden, in the Audit Committee Chair role
since last year’s AGM, has made significant
improvements to the operation of the Audit
Committee as set out in the Audit
Committee report. I am most grateful to
Russ for the rigour he has brought to the
Committee’s discussions. I am also grateful
to Sir David Omand, Myles Lee and Victoire
de Margerie for their service on the Board.
Sir David retired at the end of the financial
year 2021, while Myles and Victoire will
both retire after this year’s AGM.
New leadership team
We have been very focused this year
on finding successors to Archie Bethel
as CEO and Franco Martinelli as CFO.
David Lockwood took over the CEO role
in September last year and was joined
by David Mellors as CFO in November.
I was pleased that the thorough and
thoughtful process to select our new CEO
and CFO progressed at pace despite the
COVID-19 challenges, and that the whole
transition was achieved without uncertainty
or disruption within the organisation: an
important consideration given the critical
nature of our operations.
Board process and climate
These appointments have enabled us to drive
progress on the third critical ingredient of
effective Board governance – the interaction
between the Executive directors and the
Board. David, David and I have strongly
aligned views on the importance of open,
regular and comprehensive communication.
There has been a significant shift in the
design and content of Board papers and we
have paid careful attention to improving the
dynamic of Board discussions. I was pleased
to see that the creation of an inclusive
climate, with constructive yet robust debate
incorporating the views of both Non-
Executive Directors and Executive Directors,
was recognised in our recent independent
Board review.
New operating model
On joining the Group, David Lockwood and
David Mellors undertook an in-depth review
of our business model and operational
design. As a result of the review, the Board
recognised that Babcock’s previous strongly
federated and fragmented organisational
design did not support Babcock’s scale,
breadth and complexity. As a consequence,
David Lockwood has created a new operating
model better able to underpin Babcock’s
more focused and purpose-driven future.
The Board believes that the simplified
structure will improve leadership line of
sight, while the new operating model
will create a more efficient and effective
business, built on empowerment and
collaboration, as well as enhancing internal
and financial controls. This model allows
Babcock to take a consistent approach
across the Group; this can be seen already
from the changes made to the Group’s
purpose, people strategy, health and safety
programmes and ESG. A Group-wide
approach to strengthening the culture of the
organisation is planned. David Lockwood
describes his approach in more detail in his
CEO Review on pages 12 to 15.
David Mellors has led the contract
profitability and balance sheet review.
The Board believes that the outcome of
this Review will be improved financial
transparency and control, a baseline for a
return to growth, and ultimately a stronger
balance sheet. David has also reviewed the
Group’s policies, processes and controls
with a focus on consistency and simplicity,
which will support better flows of
information and strengthened management
of operational, business and financial
performance. These changes are described
in David’s Financial review on page 47.
Key changes since 2019 to address issues identified by the contract profitability and balance sheet review
As described in my opening paragraph, the Board has made or is making a number of enhancements to its corporate governance
structure to address the issues identified by the contract profitability and balance sheet review, as summarised below:
Board governance
Financial control
Operating model
• Refreshed Board to drive tone from the top
• New Executive Directors
• New Senior Independent Director
• New Audit Committee Chair
• New Remuneration Committee Chair
• Enhanced focus and accountability of Board
Committees by reducing membership
• Refreshed the role of the Disclosure Committee and
established the UK Security Committee
• Streamlined Board agendas and focused Board papers
• Approved the new risk management process
• Approved enhanced delegation of authority
• Reviewed letter of representation covering policy
compliance from management every six months
Please see above and the following pages.
• Simplification of income
statement and cash flow
management reporting
• Standardised management
reporting across the Group
• Developed standards of
financial control
• Revised Group accounting
policies
• Revised Treasury controls
and policies
• Revised sector business and
balance sheet reviews
Please see page 47.
• Launched new operating model
• Standardised bid review process
• Group-wide common approach
to project management, project
reviews and change control
• Refreshed Corporate Safety
Leadership Team
Please see pages 13 and 47.
Babcock International Group PLC Annual Report and Financial Statements 2021
101
Strategic reportGovernanceFinancial statements Governance statement continued
COVID-19 response
Inevitably, the pandemic has continued to
affect the way we have gone about our
business throughout the year. The Board
has regularly reviewed the measures taken
by the business in response to the
pandemic: those to protect our staff, to
ensure we have remained aligned with the
priorities of our customers, and to ensure
continuity of operations. The restrictions on
travel and social interaction have affected
all aspects of the working of the Board,
including notably the recruitment process
for new executives and the induction
process for all our new joiners (as detailed
on page 110).
Throughout the year we have needed to
conduct all our regular Board and
Committee meetings by video conference;
we quickly adjusted to this new way of
working and have successfully covered all
the required aspects of Board oversight,
leadership and governance. Whilst pleased
with the effective way the Board has
adjusted, a return to some face-to-face
meetings and visits to different parts of the
business will be given high priority as soon
as this is possible.
Strategy
The Board has spent significant time
reviewing and refreshing the strategy for the
Group, having given David Lockwood licence
to consider all aspects of the strategy on his
appointment as CEO. This work has been
conducted in parallel with the contract
profitability and balance sheet review, and
has informed the operating model review, so
that the strategy, financial underpinning and
operating model to deliver it are all coherent.
We held multiple Board sessions to work
through different aspects of the strategy
and choices, with plenty of opportunities
to capture the diverse perspectives and
insights of Board members. The refreshed
Group strategy is set out on page 16.
One conclusion of the strategy is that
steps will be taken to align the portfolio,
a difficult decision as it will mean exiting
some good-quality businesses. The Board
carefully considered the implications of
these decisions both for the overall strategy
and for affected stakeholder groups.
Purpose and culture
The Board believes Babcock needs a clear
purpose that sets out how it will contribute
to society, and that the purpose should set
the context for the strategy and drive key
decisions and actions. We recognise the
importance of a clear purpose in attracting
talented people to work for us and in
enabling them to feel attuned to the
objectives and values of the Company and
were pleased to approve the new Group
purpose, creating a safe and secure
world, together.
To deliver the purpose through the new
Group strategy, further development of the
culture across the organisation will be
essential. A key enabling step is the
development of Babcock’s first Group-wide
people strategy, a critical element of our
new operating model. The people strategy
has been discussed and supported by the
Board and its development is described on
pages 22 and 23. Whilst not yet finalised,
our people strategy will set out for all our
employees what the Company stands for,
what is valued and rewarded and the
output and behaviour the Company
expects. Future work to strengthen and
embed the culture will include a renewed
focus on employee engagement and on
developing the skills of leaders at all levels.
The Board will keep itself informed through
a variety of mechanisms and we have
enhanced our oversight of employees’
interests and views with the appointment
of Lord Parker as Director designated for
employee engagement. This is a significant
step up from our previous approach.
ESG
The Board’s oversight of the Group’s ESG
approach and performance has been
strengthened in a number of areas across
the three ESG pillars. On the environmental
pillar, the Board has agreed a net zero
target for emissions by 2040, which is
supported by a roadmap with milestones.
On the social pillar, the Board has overseen
the reinvigoration of the Group’s safety
leadership with the establishment of the
Corporate Safety Leadership Team,
supplemented by the appointment of a
Group Health, Safety & Environment
Director and the development of a new
balanced safety scorecard. In addition, the
Board has reviewed the Group’s Inclusion
and Diversity policy and welcomed the
clear positioning of Inclusion and Diversity
as a strategic imperative by the new
management with the adoption of targets
to drive and measure progress. On the
governance pillar, I have described the
actions taken during the year above.
Independent board evaluation
As a Board we are committed to effective
corporate governance and believe that
fresh perspectives from independent
reviewers add significant value by
identifying opportunities for improvement.
Having deferred the FY20 external review
of the Board as I was newly appointed
into the Chair role and had a number of
changes underway, this year as planned
we commissioned an external review of
the Board, its Committees and the Group
Executive Committee. This was conducted
by an independent reviewer (Belinda
Hudson Limited) and was completed
recently so it reflects the full suite of
changes that have been described.
The findings have reinforced the sense of
substantial change and improvement.
102
Babcock International Group PLC Annual Report and Financial Statements 2021
Whilst her report confirmed our compliance
with the Code, the review identified some
helpful points for further improvement and
these will be my focus for the year ahead.
These include spending time together as a
Board, especially considering that due to
COVID-19 we have not yet had the
opportunity for a face-to-face meeting all
together; completing the induction process
with site visits for new members as
COVID-19 restrictions are lifted; increasing
Board engagement with all stakeholders
especially key talent; embedding the Board
role in overseeing the implementation of
the new people strategy, culture and
succession planning; and driving even more
focus on ESG issues across the business.
2022
An extensive set of changes and
improvements have been described in this
report that will ensure full compliance with
governance and control expectations in the
future. We plan to engage with our larger
shareholders at a governance event later in
the year, to provide more insights into our
new approach. The Board has reviewed
carefully the totality of the measures taken
and will oversee the planning and delivery
of implementation, the intended assurance
and the effectiveness of operation.
This provides the firm foundation on
which we will deliver benefits for all our
stakeholders – for our shareholders, a
sustainable return; for our customers,
excellent and innovative services; and
for our employees, interesting and
rewarding careers.
Ruth Cairnie
Chair
Babcock Festival of Engineering for local Rosyth school children.
Babcock International Group PLC Annual Report and Financial Statements 2021
103
Strategic reportGovernanceFinancial statements Governance statement continued
Board of Directors
N
D
E
D
E
D
Ruth Cairnie
Chair
David Lockwood OBE
Chief Executive Officer
David Mellors
Chief Financial Officer
Appointed: April 2019
Appointed: September 2020
Appointed: November 2020
Skills and experience: David brings wide-ranging
knowledge of the defence and aviation markets, as
well as a wealth of experience in both technology
and innovation. David was CEO of Cobham plc (from
2016 to March 2020) and prior to that he was CEO
of Laird PLC (from 2012 to September 2016). His
career includes senior management roles at BT
Global Services, BAE Systems and Thales Corporation.
David has a Degree in Mathematics from the
University of York and is a chartered accountant. He
is a Fellow of the Royal Aeronautical Society and the
Royal Society of Arts and Commerce. He received an
OBE for services to industry in Scotland in 2011.
Current external appointments: None
Skills and experience: David brings extensive CFO
experience in defence, aerospace and commercial
markets. David was previously CFO of Cobham plc
and prior to that he was CFO of QinetiQ Group plc
from 2008 to 2016 and also served as interim Chief
Executive for a period. His career includes several
roles at Logica PLC, CMG plc and Rio Tinto PLC. David
has a Degree in Physics from Oxford University and is
a member of the Institute of Chartered Accountants
in England and Wales.
Current external appointments: None
Skills and 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. 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.
Ruth 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. She is a fellow of the
Energy Institute.
Current 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, a trustee of
Windsor Leadership and a trustee of the White
Ensign Association.
N
R
A
R
N
A
R
N
D
Carl-Peter Forster
Senior Independent Director
Kjersti Wiklund
Independent Non-Executive Director
Russ Houlden
Independent Non-Executive Director
Appointed: June 2020
Appointed: April 2018
Appointed: April 2020
Skills and experience: Carl-Peter, a German
national, brings extensive manufacturing and
international experience. 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. Carl-Peter
holds a Diploma in Economics from Bonn University
and a Diploma in Aeronautical Engineering from the
Technical University in Munich.
Current external appointments: Carl-Peter is
currently the Chairman of Chemring Group PLC and
Senior Independent Director of IMI plc.
Skills and experience: Kjersti, a Norwegian national,
brings broad technology and business experience
gained across Europe, Eastern Europe/Russia and
Asia. She has held senior roles, including Director,
Group Technology Operations of Vodafone, and
Chief Operating Officer of VimpelCom Russia, Deputy
Chief Executive Officer and Chief Technology Officer
of Kyivstar in Ukraine, Executive Vice President and
Chief Technology Officer of Digi Telecommunications
in Malaysia, and Executive Vice President and Chief
Information Officer at Telenor in Norway. Kjersti was
also a Non-Executive Director of Cxense ASA and Fast
Search & Transfer ASA in Norway, Telescience Inc in
the US and Laird PLC in the UK. Kjersti holds a Master
of Business Management from BI Norwegian Business
School and an MSc in Electronical Engineering from
Chalmers University of Technology, Sweden.
Current external appointments: Kjersti is a
Non-Executive Director of Trainline plc, Spectris PLC
and was appointed as a Non-Executive Director of
Zegona Communications PLC in February 2020.
Skills and experience: Russ brings accounting and
treasury management experience along with his
extensive knowledge of driving performance
improvement. He was Chairman of the Financial
Reporting Committee of the 100 Group (from 2013
to March 2020), Chief Financial Officer of United
Utilities Group PLC (from 2010 to July 2020), Chief
Financial Officer of Telecom New Zealand (from
2008 to 2010) and Finance Director of Lovells (from
2002 to 2008). Until 2002 he held a variety of
divisional Finance Director positions in ICI and BT.
Russ holds a 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.
Current external appointments: Russ is currently
the Audit Committee Chairman of Orange Polska SA,
which is listed on the Warsaw Stock Exchange.
104
Babcock International Group PLC Annual Report and Financial Statements 2021
N
R
A
N
D
A
N
Prof. Victoire de Margerie*
Independent Non-Executive Director
Myles Lee*
Independent Non-Executive Director
Lucy Dimes
Independent Non-Executive Director
Appointed: February 2016
Appointed: April 2015
Appointed: April 2018
Skills and experience: Myles, an Irish national,
brings extensive global experience in management,
M&A and finance. He was Chief Executive Officer
(from 2009 to 2013) and Finance Director (from
2003 to 2008) of CRH PLC. Myles holds a degree in
Civil Engineering and is a Fellow of the Institute of
Chartered Accountants in Ireland.
Current 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.
Skills and experience: Victoire, a French national,
brings strong international strategic and commercial
experience. 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.
Victoire holds a PhD in Strategic Management from
Université Panthéon-Assas and a Master in Business
Administration from HEC Paris.
Current 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) and, since
December 2020, Chair of the Supervisory Board of
Ixellion AS.
Skills and experience: Lucy brings experience in
industries at the forefront of growth and technology-
based innovation and an understanding of complex
outsourcing and global strategic partnerships. She
was a Non-Executive Director of Berendsen PLC and a
member of its Audit, Remuneration and Nominations
Committees. In her executive career, Lucy was Chief
Executive Officer of UBM EMEA until September
2018 and was previously Chief Executive Officer, UK
& Ireland, of Fujitsu, the Chief Operating Officer and
Executive Director of Equiniti Group, Chief Executive
Officer UK & Ireland of Alcatel Lucent (now Nokia)
and had a 19-year career at BT, where she held
various senior roles, including Managing Director of
Group and Openreach Service Operations. Lucy holds
an MBA from London Business School and a degree in
Business Studies from Manchester Metropolitan
University.
Current external appointments: Lucy is currently
the Chief Strategy and Transformation Officer of
Virgin Money UK Plc.
N
Appointment key
Board Diversity*
E
A
R
N
D
Executive Committee
Audit Committee
Remuneration Committee
Nominations Committee
Disclosure Committee
Board Committee Chair
Membership of the UK Security Committee
is variable depending on the security level
required for the business under discussion.
2
BY TENURE
2
6
0-3 Years
3-5 Years
5-9 Years
4
BY GENDER
Female
Male
BY NATIONALITY
UK
6
International
6
4
* July 2021.
The Right Honourable, The Lord Parker
of Minsmere, GCVO, KCB
Independent Non-Executive Director
Appointed: November 2020
Skills and experience: Lord Parker brings extensive
experience of working at the highest level of public
service including a focus on new technology-centred
change and championing inclusion. Lord Parker has
had a long career in a wide range of national security
and intelligence roles in the UK, which culminated in
him becoming the Director General of MI5, the UK
Government’s national security agency, in 2013. He
retired from this role in 2020. Lord Parker is a
graduate of Natural Sciences from Cambridge
University.
Current external appointments: Lord Chamberlain
(head of the Royal Household), member of the House
of Lords, Board Adviser to Telicent Ltd, Distinguished
Fellow at the Royal United Services Institute and
Visiting Professor at Northumbria University.
* Victoire de Margerie and Myles Lee will retire from the Board after the 2021 AGM.
Babcock International Group PLC Annual Report and Financial Statements 2021
105
Strategic reportGovernanceFinancial statements Governance statement continued
Executive Committee
Biographies for CEO David Lockwood and
CFO David Mellors are on page 104.
Will Erith
Chief Executive, Marine
Simon Bowen
Chief Executive, Nuclear
Tom Newman
Chief Executive, Land
Appointed: December 2020
Appointed: April 2017
Appointed: December 2020
Skills and experience: Will joined Babcock in 2017
and in 2018 became MD Surface Ships, responsible
for the entirety of our Warship support business
(including the successful Type 23 LIFEX programme).
In addition he was responsible for the critical phases
of our overall bid activity for FMSP (Future Maritime
Support Programme), representing the next five years
of our Surface Ship and Submarine support for the
Royal Navy. Prior to this he had a successful 20-year
career with Rolls-Royce, where he held senior
leadership positions in Engineering, Programme
Management, Business Development and General
Management. This included three years based in
Tokyo, significantly growing the Asia Pacific Naval
business. Will has a First Class Honours Degree in
Mechanical Engineering from the University of
London. He is a Chartered Engineer and a Fellow of
the Institute of Mechanical Engineers.
Skills and 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.
Skills and experience: Tom was appointed as Chief
Executive, Land in June 2021, following the
retirement of John Davies. Tom joined Babcock
through the VT acquisition in 2010 and brings a
broad range of experience from senior management
positions held in industrial sectors including
shipbuilding, broadcast and communications,
aviation, defence and emergency services. Most
recently Tom has been responsible for our
relationship with the UK Cabinet Office through the
Strategic Partnering Programme and as Chief of Staff
the design and implementation of our new
Operating Model. He has a degree in Naval
Architecture from UCL and an MBA from Warwick
Business School.
Neal Misell
Chief Executive, Aviation
Nikki Fox
Chief Human Resources Officer
John Howie MBE
Chief Corporate Affairs Officer
Appointed: April 2020
Appointed: January 2021
Appointed: April 2016
Skills and 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.
Skills and experience: Nikki was previously
Organisation & Development Director, Nuclear,
responsible for delivery of HR across the sector and a
member of the Group’s O&D Leadership team. Nikki
led the development of the Cavendish Nuclear
people strategy and the subsequent review of the
Cavendish Nuclear operating model. She joined
Babcock in 2017 following a successful 20-year
career within the oil and gas industry, which included
BG Group/Shell where she held various senior
leadership positions in HR and General Management,
based in the UK and overseas including Houston and
Moscow.
Skills and experience: John was appointed as Chief
Corporate Affairs Officer in October 2020 with a
remit to further develop Babcock’s relationships with
its key governmental customers in the UK and
internationally, as well as leading Group Strategy,
Corporate Communications, Sustainability and
International Development. Prior to that, John was
CEO Marine with 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. John
joined Babcock in April 2001.
Jon Hall
Chief Innovation & Technology Officer
Jack Borrett
Group Company Secretary and
General Counsel
Collette McMullen
Chief of Staff
Appointed: April 2017
Appointed: July 2016
Appointed: June 2021
Skills and experience: Jon joined Babcock in 2008
as Managing Director, Technology and in November
2020 was appointed Chief Innovation & Technology
Officer. Prior to that, Jon held senior roles within
the Weir Group, covering defence, nuclear and
commercial sectors and, before that, worked in the
power and process sectors with Balfour Beatty
International and Monenco Inc. Jon is a Chartered
Engineer and Fellow of the Institution of Mechanical
Engineers, and holds a PhD from Bath University for
research work in technology.
Skills and 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,
Nominations and Disclosure Committees. Prior to
joining Babcock, Jack was a solicitor at law firm,
Clifford Chance.
Skills and experience: Collette was appointed as
Chief of Staff in June 2021 to support the CEO on a
day-to-day basis. Collette has a broad understanding
of the business and deep experience of the Chief of
Staff role, having previously held this position for a
number of years in the Nuclear and Aviation sectors.
She joined Babcock in 2009 following a commercial
career in the nuclear industry with the UKAEA.
106
Babcock International Group PLC Annual Report and Financial Statements 2021
Statement of compliance
The principal governance framework applying to the Company is the UK Corporate Governance Code published in 2018 (the Code).
The Board acknowledges that the contract profitability and balance sheet review has demonstrated that, in an evolving and increasingly
competitive environment, our governance framework, business management, and internal and financial controls were not fully effective
in all parts of the business in prior years as well as in 2021, notably in Aviation. Corrective actions have been set in place during the year
(see page 101). In respect of the Code, the Nominations Committee did not use an external search consultant for the appointment of
Lord Parker (provision 20, see page 118), this year’s external Board evaluation was delayed into the fourth year after the previous one
(provision 21, see page 111) and the transition arrangements for alignment of pension contribution rates for our former Executive
Directors were not in line with provision 38 (see page 144). With these exceptions, the Company throughout the year to 31 March 2021
complied with all the provisions of the Code. Information on how the Company has applied the principles and complied with the
supporting provisions during the year can be found throughout the Annual Report. Details of where key information can be found is
provided below.
1. Board leadership
and company
purpose
2. Division of
responsibilities
3. Composition,
succession and
evaluation
4. Audit, risk and
internal control
5. Remuneration
The Directors of the Company are set out on pages 104 and 105.
Long-term value
Our business model is set out on pages 20 and 21 and our strategy can be found on pages 16 and 17. Principal risks
are on pages 87 to 95.
Purpose and culture
Our purpose is set out in the Strategic report on page 7. The Board’s consideration of our purpose and culture is
described on pages 102 and 111.
Stakeholders
Our key stakeholders are set out in the Strategic report on pages 58 and 59, with the section 172(1) statement on
page 79 with details of how the Board has engaged directly with stakeholders and how the Directors have had
regard to stakeholders when undertaking their duties can be found on pages 114 to 116.
Workforce policies and practices
Our people strategy, described on pages 22 and 23, has been designed to support our values and long-term
sustainable success.
Role and independence of Directors
We are satisfied as a Board that all our Non-Executive Directors are independent and we have the right balance of
executive and non-executives on the Board see page 109. We are also satisfied that the Non-Executive Directors
have sufficient time to meet their Board responsibilities.
Board and Committee meetings
Information on the operations of the Board and its Committees can be found throughout this section, with a table
detailing the number of meetings and Director attendance for the Board and the key Board Committees on page 109.
Directors’ external commitments
Details of the Board’s current external commitments are provided in their biographies on pages 104 and 105.
The Nominations Committee Report can be found on pages 117 and 118.
Director appointment and succession planning
The Nominations Committee has responsibility for ensuring that the Board has the correct balance of skills,
experience and knowledge, and oversees succession planning. See page 118.
Diversity and inclusion
The Board’s oversight of diversity is described on page 118 and details of the Group’s diversity policy and objectives,
together with the gender balance of senior management and other groups, is provided on pages 72 and 73.
Board evaluation
An evaluation of the Board, Board Committees and individual Directors is undertaken annually. A description of the
externally led process undertaken this year is provided on page 111.
The Audit Committee Report can be found on pages 119 to 131.
Internal controls
The result of the Board’s review of the effectiveness of the Company’s internal control systems is on page 158.
The Board concluded that the control environment was not operating effectively in certain parts of the Group,
particularly in Aviation, Land and Group Head Office. For more information, see page 131.
Audit and integrity of financial reporting
For information on our external audit tender and for review of our financial information reporting processes see
page 119 and pages 129 to 130.
Risk reporting
Our approach to risk management along with the Group’s principal risks is set out on pages 84 to 95.
Other reporting requirements
The Board’s approach to ensure a fair, balanced and understandable report is provided on page 124. The Going
concern and viability statement can be found on pages 96 and 97. The Directors’ responsibility statement is on page
158.
The Remuneration Committee Report can be found on pages 132 to 153.
Remuneration policies and practices
For an explanation of how our remuneration policies and practices support our strategy for long-term sustainable
success, see pages 136 to 142.
Remuneration policy and its implementation
Our approach to developing Remuneration policy is described on pages 132 and 133 and a report of how it was
implemented during the year on pages 143 to 153.
Babcock International Group PLC Annual Report and Financial Statements 2021
107
Strategic reportGovernanceFinancial statements Governance statement continued
Our governance framework
The Board
The Board’s role is to lead the Group with a view to the creation of strong, sustainable financial performance and long-term shareholder
value, to review and approve the Group’s strategic plan and to supervise the conduct of the Group’s activities within a framework of
prudent and effective internal controls.
The Board has adopted a schedule of matters reserved for its, or its Committees’, specific approval (see page 110. For other matters,
authority is delegated to management by way of a delegation matrix.
Principal Board Committees
Audit Committee
Responsible for
overseeing the
Company’s systems for
internal financial control,
risk management and
financial reporting.
See pages 119 to 131.
Remuneration
Committee
Determines the
Remuneration policy for
the Executive Directors
and is responsible for
oversight of the
remuneration policies
and practices of the
wider workforce.
Nominations
Committee
Reviews the composition
of the Board, considers
succession planning at
both Board and senior
management level and
leads the process of
appointments to the
Board.
See pages 132 to 153.
See pages 117 and 118.
Disclosure Committee
Ensures that policies,
systems and controls
exist so that potential
price-sensitive
information is escalated,
considered, verified and
promptly released to the
market, where required.
UK Security Committee
Receives reports on those
UK programmes on which
the Group is engaged and
access to which either
requires a certain security
clearance or UK
nationality.
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 106.
Principal Management Committees
Corporate Safety Leadership Team
Leads the development and
implementation of policies, standards and
expectations for health, safety and
environmental issues with a mission that
everyone goes “Home Safe Every Day”.
Disclosure Panel
Oversees potential price-sensitive
information and evaluation to ensure
prompt disclosure, reporting up to the
Disclosure Committee as appropriate.
See page 113.
See page 73.
Corporate ESG Committee
Responsible for Group-wide ESG
initiatives, the management of climate-
related issues and driving the
performance of the wider sustainability
agenda. The Committee is chaired by
the Chief Corporate Affairs Officer.
Reporting to the Committee are the
Inclusion and Diversity Steering Group
and the Carbon, TCFD and Communities
and sponsorship working groups.
See page 70.
108
Babcock International Group PLC Annual Report and Financial Statements 2021
The membership and attendance at scheduled Board and Committee meetings are shown below. In addition a number of unscheduled
meetings were held.
Number of scheduled meetings held
Current Directors
Ruth Cairnie
Carl-Peter Forster1
Kjersti Wiklund
Russ Houlden2
Victoire de Margerie3
Myles Lee
Lucy Dimes
Lord Parker4
David Lockwood5
David Mellors6
Former Directors
Archie Bethel7
Franco Martinelli8
Ian Duncan9
Jeff Randall10
Sir David Omand11
Board
10
Nominations
Committee
4
Audit
Committee
4
Remuneration
Committee
6
10 of 10
8 of 9
10 of 10
10 of 10
9 of 10
10 of 10
10 of 10
5 of 5
7 of 7
4 of 4
3 of 3
6 of 6
3 of 3
3 of 3
10 of 10
4 of 4
4 of 4
4 of 4
4 of 4
3 of 4
4 of 4
4 of 4
1 of 1
–
–
–
–
2 of 2
2 of 2
4 of 4
–
–
4 of 4
4 of 4
–
4 of 4
4 of 4
–
–
–
–
–
3 of 3
–
–
–
6 of 6
6 of 6
6 of 6
6 of 6
–
–
–
–
–
–
–
–
3 of 3
–
1. Carl-Peter Forster was appointed to the Board in June 2020 and was absent from one meeting due to a prior engagement.
2. Russ Houlden was appointed to the Board in April 2020.
3. Victoire de Margerie was absent from certain meetings due to prior engagements.
4. Lord Parker was appointed to the Board in November 2020.
5. David Lockwood was appointed to the Board in September 2020.
6. David Mellors was appointed to the Board in November 2020.
7. Archie Bethel retired from the Board in September 2020.
8. Franco Martinelli retired from the Board in November 2020.
9. Ian Duncan retired from the Board after the AGM in August 2020.
10. Jeff Randall retired from the Board after the AGM in August 2020.
11. Sir David Omand retired from the Board on 31 March 2021.
Roles and responsibilities
The roles of the Chair and Chief Executive
are clearly defined, with the Chair
responsible for the leadership and
effectiveness of the Board and the Chief
Executive for the running of the Group’s
business. Non-Executive Directors support
the Chair and provide objective and
constructive challenge to management.
The Senior Independent Director (SID)
provides a sounding board for the Chair
and serves as an intermediary for the Chief
Executive, other Directors and shareholders
when required. The Company Secretary
makes sure that appropriate and timely
information is provided to the Board and its
Committees and is responsible for advising
and supporting the Chair and Board on all
governance matters. All Directors have
access to the Company Secretary and may
take independent professional advice at the
Company’s expense in conducting their
duties. A more detailed description of
these roles is available online at
www.babcockinternational.com.
Review of independence
of Non-Executive Directors
The Board is satisfied that throughout the
year all Non-Executive Directors remained
independent and accordingly the Company
is compliant with Provision 10 of the
Governance Code. Although Ian Duncan
and Sir David Omand had served for over
nine years at the time of their resignations,
the Board did not consider that this
impaired their independence and they both
played a role in the managed succession.
Ian stepped down as Audit Committee
Chair and Director after the AGM in 2020.
Sir David passed on his responsibilities as
SID to Carl-Peter Forster after the 2020
AGM and retired from the Board at the
end of the financial year.
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.
This was evidenced by the Directors
attendance at additional meetings as
required during the year.
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.
The Board has established a formal
schedule of matters specifically reserved for
its approval. It has delegated other specific
responsibilities to its Committees and these
are clearly defined in their terms of
reference (available online at
www.babcockinternational.com) and
other responsibilities are delegated to
management under a delegated
authorities matrix.
Babcock International Group PLC Annual Report and Financial Statements 2021
109
Strategic reportGovernanceFinancial statements Governance statement continued
Conflict of interests
Babcock has adopted a formal procedure
for the disclosure, review, authorisation and
management of Directors’ actual and
potential conflicts of interest in accordance
with 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 new actual or potential conflict of
interest or when there is a material change
in any of the conflicts of interest they have
already disclosed.
A register is maintained of all the
disclosures made and the terms of any
authorisations granted. Authorisations
can be revoked, or the terms on which
they were given varied, at any time if
judged appropriate.
Possible conflicts of interest authorised by
the Board are reviewed annually. In the
event of any actual conflict arising in
respect of a particular matter, mitigating
action would be taken (for example,
non-attendance of the Director
concerned at all or part of Board
meetings and non-circulation to him/her
of relevant papers).
Summary of key matters reserved
for the Board
• Group strategy and resourcing
• Interim and final results announcements
and the Annual Report
• Dividend policy
• Acquisitions, disposals and other
transactions outside delegation limits
• Significant contracts not in the ordinary
course of business
• Major changes to the Group’s
management or control structure
• Changes relating to the Company’s
capital structure or status as a listed PLC
• Annual budgets
• Major capital expenditure
• Major changes in governance,
accounting, tax or treasury policies
• Internal controls and risk management
(advised by the Audit Committee)
• Major press releases and
shareholder circulars.
Meetings and attendance
The Board has 10 scheduled full Board
meetings each financial year, with typically
two other meetings devoted solely to
strategy. As the strategy was being
refreshed this year there were also a
number of additional updates at Board
meetings. The Chair also meets
separately with Non-Executive Directors
without Executive Directors or other
managers present.
Board induction and development
Board induction continued to be a
challenge during the year with face-to-face
meetings and first-hand experience of our
operations not possible due to restrictions
on access to our sites. However, new ways
of working have been adopted in our
induction process using virtual sessions,
with adjustments to our programmes
made accordingly.
Our new Directors receive comprehensive
and tailored induction programmes. The
programmes for Non-Executive Directors
typically 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
normally 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. Normally,
Non-Executive Directors are encouraged to
make visits at any time to any Group
business although this continued not to be
possible during the year.
David Lockwood joined the Company in
August after the end of the first COVID-19
lockdown. As such he was able to visit the
Group’s principal UK sites. He was also able
to visit certain key sites in Europe. During
these visits, he had the opportunity to meet
and talk with a broad range of employees
from sector management, local
management and front-line employees.
During his induction, he also met with the
Group’s auditors and external advisors.
These meetings covered the full range of
topics relating to the Company’s business.
As well as hearing from different levels of
the Company, David Lockwood was keen to
understand the views and priorities of the
Company’s external stakeholders. To this
end, he met with the Company’s principal
shareholders as well as with the Company’s
key contacts in the UK Government, the
Group’s most significant customer, again to
get a better understanding of their views.
As David Mellors joined the Group as the
COVID-19 restrictions were starting to be
re-imposed before the end of 2020, he was
not able to travel around the Group as
many of our sites were closed to visits.
However he did manage to visit Devonport
Royal Dockyard. Although David was not
able to visit sites physically, he was able
to continue his induction virtually. This
included in-depth briefings from all parts of
senior management, the external auditors
and other advisors. These briefings covered
all the topics relevant to his responsibilities
as CFO, including the Group’s financial
reporting structure, key accounting issues,
the external and internal audit plans, the
Group’s business portfolio and strategy.
Lord Parker joined the Board in
November 2020. His induction included
a series of virtual meetings with senior
management on the Group’s businesses,
its strategy, its corporate governance and
Directors’ duties. As with David Mellors, and
with Russ Houlden and Carl-Peter Forster
before him, Lord Parker has had limited
opportunity to visit the Group’s principal
sites due to the restrictions caused by
COVID-19. However, once the restrictions
have eased, a series of visits will be scheduled.
110
Babcock International Group PLC Annual Report and Financial Statements 2021
Meetings – return to face-to-face meetings
as soon as COVID-19 restrictions allow to
enhance Board integration.
Inductions – complete the induction
process with site visits for those Board
members who have been prevented from
doing so by the COVID-19 restrictions.
Board engagement – enhance the Board’s
engagement with stakeholders.
Board oversight – continue the Board’s
oversight of the development of the
Company’s people strategy, culture and
succession planning as well as the
focus on ESG.
How the Board monitors
culture
Leading by example
Our Directors and senior managers
act with integrity and lead by
example, promoting our culture to
our employees through living our
values.
Listening to our people
Questions and feedback from
employees to the CEO’s dedicated
email ’Ask David’ along with
employee forums and surverys.
This will be enhanced by the
appointment of Lord Parker as
designated Non-Executive director
for employee engagement.
Cultural indicators
The Board regularly receives
health and safety metrics and
receives thematic reviews such as,
this year, on inclusion and
diversity. The Board looks forward
to the development of the people
strategy which will enhance the
ability to monitor cultural themes.
Ethics and whistleblowing
Whistleblowing lines are available
throughout our business for
reporting of any departure from
our values. The Board reviews all
whistleblowing reports, together
with their outcomes, on a
quarterly basis.
Board performance review
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. In the second half of this year,
an external evaluation was undertaken for
the first time in four years. The Board
considers that this departure from the
recommendation of provision 21 of the
Code to hold an external valuation every
three years was the right choice since
holding the external review this year rather
than last has added more value having
given the membership changes and a
number of procedural changes, introduced
by the then new Chair, time to bed down.
Progress against last year
The key outcome of the Board evaluation
reported last year was the need to further
align the Board’s agenda to the strategic
priorities of the Group, shifting the balance
of the Board’s time further towards
strategic rather than operational matters.
During the year the papers moved to be
more thematic and strategic and the Board
approved the new strategy for ESG,
including the carbon strategy, and
approved the development of the
people strategy.
External Board evaluation 2021
This year Belinda Hudson carried out the
formal independent effectiveness review of
the Board and its Committees. Ms Hudson
has no other connection with the Company
or individual Directors and had not
previously been engaged by the Company.
Ms Hudson was selected after a tender
process. Ms Hudson reviewed relevant
Board and Committee papers and then
interviewed all the members of the Board
and the Group Executive Committee, as
well as certain key external advisors to the
Board. The Board discussed the resulting
report at its March meeting and agreed
that over the current financial year the
Board would:
Babcock International Group PLC Annual Report and Financial Statements 2021
111
Strategic reportGovernanceFinancial statements Governance statement continued
Key areas of Board focus
Matters considered
Discussion and outcome
Find out more
Purpose
Corporate narrative
Strategy
Re-assessment of
strategy
ESG
Stakeholders
Disposals
Culture
People strategy
The Board considered and approved the new purpose: to create a safe and secure
world, together.
See pages 7 and 115
A full day’s meeting debated the Group’s strategic direction from the ground up based
on our common purpose and there were regular reports at monthly Board meetings on
progress of the development of the strategy.
See pages 13, 16
and 115
The Group Head of Sustainability reported on progress with the introduction of the new
Group-wide ESG strategy at the beginning of the year and environmental, social and
governance matters are now an integral part of Board strategic discussions.
See pages 62 to 78
and 115
The Board reviewed its key stakeholders and its methods of engagement, and
appointed a Non-Executive Director designated for employee engagement.
See page 114
The Board kept strategic disposals under review, approving the sale of Conbras, the
facilities management business in Brazil, and the oil and gas business.
See pages 55 and 57
The Chief Human Resources Officer presented, and the Board approved the
development of the new people strategy around the new purpose.
See pages 22, 71
and 116
Health and safety
The Board received a presentation on the reinvention of safety leadership and endorsed
the reinvigoration of the Group safety strategy.
See pages 73 and
116
Inclusion and diversity
The Board heard from the Group champion for inclusion and diversity, endorsing the
ongoing work in this area of people strategy.
See pages 72 and 73
and 116
Ethics review
Whistleblowing
Risk
Risk review
The Board undertook the annual ethics review, seeking assurance that the Group’s
anti-bribery and corruption policy is understood and complied with across
the Group.
See pages 77 and
116
Contact details of the Group’s whistleblowing line are readily available and are in local
languages. All reports to the whistleblowing line are sent directly to the Company
Secretary who decides the appropriate course of investigation. The Board reviewed all
reports to the Group’s whistleblowing line, together with their outcomes, quarterly.
See pages 77 and 86
The Board reviewed the major risks that the Group faces in its business model and its
appetite for those risks.
See pages 84 to 95
112
Babcock International Group PLC Annual Report and Financial Statements 2021
Matters considered
Discussion and outcome
Operational performance
Operational reports
The Board considered at its monthly meetings operational reports from the Executive
Directors which included updates on the Group’s COVID-19 response.
Project reviews
The Board considered the Design Review on the T31 project.
Bids
The Board reviewed reports on key bids such as FMSP.
Financial performance
Financial reports
At its monthly meetings, the Board considered finance reports from the Executive
Directors. Throughout the year the financial impact of COVID-19 was considered and
the Board decided to withdraw guidance and not pay a final dividend in FY20 or an
interim dividend in FY21.
The Board considered the Group’s treasury, tax and pensions strategies.
Find out more
See page 102
See page 51
See page 53
See page 115
Contract profitability
and balance sheet
review
In January 2021 the Board approved the release of the Company’s Q3 trading update
which announced the contract profitability and balance sheet review. At its monthly
meetings the Board received updates as to progress. For more information on the
conclusions see page 119.
See pages 33 and
126 and 127
Governance and compliance
Auditor
The Board approved the appointment of Deloitte as Group auditor.
Disclosure Committee
The Board revised processes for the overseeing of potential price-sensitive information
and evaluation to ensure prompt disclosure with the creation of a Disclosure
Committee reported to by an executive Disclosure Panel.
Delegated authorities
The Board reviewed its Delegated authorities. These were revised in December 2020.
See pages 119 and
130
See page 108
See pages 85, 86,
109 and 131
Committee terms of
reference
The Board reviewed and approved any changes to the terms of reference for the Audit
and Remuneration Committees.
See page 109
Succession and leadership
Executive
appointments
The Board approved the appointments of a new CEO and CFO, David Lockwood and
David Mellors.
See pages 6 and 117
Non-Executive
appointments
The Board approved the appointments of two new independent Non-Executive
Directors, Carl-Peter Forster and Lord Parker.
See page 117
Babcock International Group PLC Annual Report and Financial Statements 2021
113
Strategic reportGovernanceFinancial statements Governance statement continued
Stakeholder engagement
During the year the Board undertook a review of the Group’s key stakeholders and levels of engagement with them to make sure that this
remained appropriate. Details of how the Directors receive information on our key stakeholders and how they engage with them directly
are set out below, together with some insight into how the Board took stakeholders’ interests into account in certain key decisions.
This section, through to page 116, forms part of the section 172(1) statement which can be found in the Strategic report on page 79.
Further information on how the Company engages with its stakeholders can be found on pages 58 and 59.
Information flow to the Board
Direct Board engagement
Customers
• Monthly written reports from Executive
Investors
Directors include material customer matters
• Sector CEOs and the Executive Directors
give briefings at Board meetings
• Strategic Supplier Partnership briefings
• Reports from Investor Relations
• Treasury reports
• Investor meetings/roadshow
• In normal circumstances, availability
at AGM
Employees
• Report on the new people strategy by Chief
Human Resources Officer underpinned by
feedback from focus groups, employee
forum and surveys
• Chair of the Diversity and Inclusion Steering
Committee attended and reported to a
Board meeting
• Whistleblowing reports
Regulators
• Monthly reports as applicable
Suppliers
Communities
• Briefings from Group Head of Procurement
• Audit Committee supplier risk review
• Supply chain risk considered in reports on
major tenders
• Approval of the Modern Slavery Statement
• Health, safety and environment updates
• Monthly sector reports where applicable
• Annual Report review
During the year the Chair and the Executive Directors had
regular meetings with the Group’s key customers.
The Board engaged directly with its investors. David Lockwood
and David Mellors have met institutional shareholders extensively
since joining the Company during the year. In addition, the Chair
regularly meets with shareholders. The Chair of the Audit
Committee also met with shareholders during the year (see page
121) and, in the early part of the year, the Chair of the
Remuneration Committee engaged with the Company’s top
shareholders in connection with the Company’s new
Remuneration policy. Directors usually meet shareholders at the
AGM, which provides an opportunity for private investors to ask
questions direct to the Board. It was not possible this year due to
COVID-19 restrictions, although shareholders were encouraged
to submit questions via email. Subject to prevailing Government
restrictions, the Board intends to return to a physical AGM in
September 2021, when shareholders will again have the
opportunity to meet and ask questions of Directors.
The CEO engages with employees Group-wide via vlogs and
employees can contact him directly via a dedicated email. The
Chair introduced the ESG programme to all employees via a vlog.
Members of the Board meet employees during site visits,
although during the year these were severely restricted. The
intention is to resume such visits as soon as circumstances allow
and additionally this will be enhanced following the recent
appointment of Lord Parker as director responsible for workforce
engagement. Members of the senior leadership team regularly
present to the Board.
The Board relies on dedicated functions, at a Group, sector or
business unit level and does not have direct contact with
Regulators unless appropriate.
Principal engagement is undertaken by operational management
and the Group procurement function.
In the main, the sectors hold these relationships at a local level
where the most relevant knowledge is, with no direct
engagement by the Board of Directors. The Board’s engagement
levels were considered as part of the stakeholder mapping
exercise undertaken and found to be appropriate.
114
Babcock International Group PLC Annual Report and Financial Statements 2021
How the Board took stakeholders’ interests into account in key decisions
Matters considered
Stakeholders
most affected
Discussion and outcome
Find out more
COVID-19
Pandemic response
Customers
Shareholders
Employees
Purpose
Corporate narrative
Customers
Employees
Strategy
Re-assessment
of strategy
Shareholders
COVID-19 had a material impact on the principal decisions of the Board
and influenced its engagement with stakeholders. In its discussions over
the last financial year, the Board sought to have in mind the impact of
the pandemic on its decisions. In particular, the Board considered the
impact on shareholders in deciding whether to pay a final dividend in
respect of the financial year ending 31 March 2020 and an interim
dividend in respect of the financial year ending 31 March 2021. The
Board decided that, especially taking into account the impact of
COVID-19 on the economy in general as well as the Company, its
shareholders, its customers and its employees, it was in the best
interests of the Company not to pay either dividend in order to
conserve the Group’s financial position.
With the background of the Board’s engagement with customers and
employees, the Board considered and approved the new purpose. The
Board believes that the new purpose will clarify the Group’s long-term
business strategy for customers and employees and create a
differentiation for the Group to inspire innovation, trust and loyalty from
both customers and employees.
See page 102
From its engagement with shareholders, the Board understood that
they wanted to understand the direction of the Company in light of the
appointment of the new management team. A full meeting debated
the Group’s strategic direction from the ground up based on a common
purpose and there were regular reports at monthly Board meetings on
progress of the development of the strategy. In approving the refreshed
strategy, the Board took into account the views of shareholders that it
had received during its direct engagement.
See pages 13 and 16
Portfolio
ESG
Shareholders
Employees
Customers
Shareholders
Employees
Communities
Suppliers
In response to shareholders, the Board has continued to streamline its
portfolio, for example approving the sale of Conbras, the facilities
management business in Brazil. In its discussions of the disposal, the
Board took into account the impact of the sale on employees.
See page 55
Our stakeholders have told us that they expect us to increase the
integration of environmental, social and governance matters in
everything we do. During the year, the Group Head of Sustainability
reported on progress with the new Group-wide ESG programme. The
Board, in order to progress the ESG programme and to meet the
expectations of our stakeholders, approved Babcock’s carbon initiative
which sets new targets and established a new governance structure to
deliver them.
See pages 62 to 78
Babcock International Group PLC Annual Report and Financial Statements 2021
115
Strategic reportGovernanceFinancial statements Governance statement continued
Matters considered
Stakeholders
most affected
Discussion and outcome
Find out more
Culture
People strategy
Employees
Customers
Shareholders
Inclusion
Customers
and diversity
Shareholders
Employees
Health and safety
Employees
Ethics
Regulators
Customers
Customers
Shareholders
Employees
Succession and leadership
Executive
appointments
Customers
Shareholders
Employees
The Board’s approval of the development of a new people strategy to
drive business performance and deliver for our stakeholders followed
feedback from the workforce delivered by the new Chief Human
Resources Officer. The Board listened to how it feels to be part of the
organisation and suggestions for what we need to create a more
efficient, agile, sustainable and people-focused business.
The Board heard that customers and employees want diverse and
inclusive environments. The Board agreed to build on the work already
being done in the sectors and to support a revised vision for Babcock.
In order to make sure that it hears better the voice of the employees
around issues such as inclusion and diversity, the Board designated
Lord Parker as Non-Executive Director responsible for its
workforce engagement.
The Board wants all our employees to go “Home Safe Every Day”,
a key message from and for employees and the Company. The Board
wanted to further improve the Group’s health and safety performance
and during the year it approved the refreshment of the safety
programme and endorsed the reinvigoration of the strategy and
governance to better improve safety leadership within the Group.
The Board is committed to conducting business transparently and
with integrity. When reviewing the Group’s opportunities for the
Group’s services and products, for example, the opportunities to
export the Type 31 platform, the Board considers the business ethical
risks to the Group’s reputation and the consequences of any decision
in the long term.
See page 22
See pages 71 to
73 and 118
See page 73
See page 77
The Board approved the appointments of a new CEO and CFO. The
appointment of a new leadership is one of the core roles of any board.
In both cases, the Nominations Committee led the process. A key step
was to decide the necessary skills and experience required by any
candidate for the relevant role. In developing the required skills and
experience criteria, the Committee considered the requirements of the
Company’s stakeholders, including customer, business sector and
leadership experience.
See pages 117
and 118
How the Board keeps s172 on its agenda
The Board meets the requirements of s172 of the Companies Act 2006 as follows:
• The Board sets the Company’s purpose and strategy. It carries out an annual strategy review, which assesses the long-term
sustainable future of the Group and its impact on key stakeholders.
• The Board’s risk management procedures identify the principal risks facing the Group and the mitigations in place to
manage the impact of these risks. Many of these risks relate to our stakeholder groups.
• Standing agenda items and papers are presented at each Board meeting: for example, operational reports, financial reports,
health and safety reports and litigation reports.
• There are regular reports from the Audit Committee chair and the Remuneration Committee chair on items within their remit.
• When making judgement decisions which require balance across different stakeholder interests, the Board is careful to
consider the interests of each different stakeholder in the context of the long-term consequences: for example, employee
and executive pay; dividends; portfolio alignment.
116
Babcock International Group PLC Annual Report and Financial Statements 2021
Nominations Committee Report
Before making a final decision, the
Committee reviewed extensive references
from previous employers and peers as an
important supplement to the selection
process, given the limited in-person
meetings that had taken place. The
Committee also reviewed the quality of
its selection process to confirm that it
was thorough and structured, as well as
broad and diverse.
In conclusion, the Committee was pleased
unanimously to recommend to the Board
the appointment of David Lockwood as
CEO. David has extensive prior experience
as a CEO in both the defence and
technology sectors and is held in high
regard by investors for his strategic insight
and record of delivering value.
Following Franco Martinelli’s decision to
retire, the Committee followed a similar
approach to finding his successor as CFO,
working in conjunction with David
Lockwood in identifying the key
requirements and in assessing various
candidates. Once again, the Committee
made a unanimous recommendation to the
Board to appoint David Mellors, who brings
extensive experience in the defence sector,
having previously been CFO of both
QinetiQ and Cobham. I am particularly
pleased with the way in which these
recruitment processes were conducted
and concluded at pace, despite the
impacts of COVID-19.
Non-Executive director changes
As I discussed in last year’s Nominations
Committee Report, following search
processes already completed, Russ Houlden
and Carl-Peter Forster both joined the
Board during this financial year, in April
2020 and June 2020 respectively. Russ
took over as Chair of the Audit Committee
after last year’s AGM. At the same time,
Carl-Peter became our Senior Independent
Director, succeeding Sir David Omand, who
Ruth Cairnie
Chair of the Nominations Committee
Dear Shareholder
There have been significant changes to the
Board during the last financial year for
which the Nominations Committee has
taken a central role, on behalf of the Board,
in the appointment processes.
Executive director changes
Arguably, the most important role of the
Committee is to support the appointment
of Executive Directors when required to do
so. Following Archie Bethel’s decision to
retire from the Company, the Committee
led the process to appoint his successor.
Our approach placed a clear focus on the
future needs of the Company, considering
its strategic direction, as well as the key
skills, qualities and experience that the post
would require. The Committee appointed
Savannah as lead search consultant due to
its expertise and knowledge of the Group’s
sector; Savannah has no other connections
with the Company or any Director.
The Committee asked Savannah to
prepare a long list that contained as
diverse a range of individuals as possible,
including international candidates. The
Committee also reviewed the existing
succession pipeline to identify potential
internal candidates.
The Committee established a sub-group,
led by the Chair, to manage the detailed
review and selection process. The members
of the sub-group met the shortlisted
candidates in what had to be a mostly
virtual process due to the COVID-19
restrictions. The sub-group used a
structured assessment approach to frame
its discussions of the candidates, which
identified two preferred candidates for
further consideration. The sub-group
kept the full Committee updated on
progress and consulted its members
throughout the process.
Quick facts
The Committee
• Ruth Cairnie chairs the Committee.
• The other members throughout the year
were all the prevailing Non-Executive
Directors. Please see pages 104 and 105
for biographies and page 109 for
attendance.
Highlights
• Appointment of new CEO
• Appointment of new CFO
• Appointment of new SID
• Appointment of new Audit Committee Chair
• Appointment of new Non-Executive Director
• Managing the transition to new CEO and CFO
Key responsibilities
• Board and Committee
composition
• Succession planning
• Talent and diversity pipeline
• Board appointment process
Babcock International Group PLC Annual Report and Financial Statements 2021
117
Strategic reportGovernanceFinancial statements Nominations Committee Report continued
Activities undertaken by the Committee during the year
In the last financial year, the Committee considered the following key areas:
Matters considered
Board succession
Discussion and outcome
The Committee conducted a search for a new CEO, a new CFO and a new
Non-Executive Director.
Senior management
succession
Terms of reference
The Committee considered senior management succession and received a
briefing from the Group’s Organisation and Development Officer on talent and
succession planning.
The Committee reviewed its terms of reference.
Committee effectiveness
The Committee underwent an external review of its effectiveness.
More information
See pages 104-105
for Board
composition
See below for more
information
Terms available on
the Babcock website
See page 111 for
more information
In the year, the Committee met with the
Group’s Organisation and Development
Director to review the Company’s
succession plans and its talent strategy.
This review considered both the current
succession pipeline to the Group’s
Executive Committee, as well as a review
of more junior talent, in order to get a
full picture of the depth of the pipeline.
Subsequent to this review however,
the Company’s approach to talent
management is being refreshed as part
of the new people strategy. The Committee
welcomes the fresh energy and focus
being brought to talent management and
to succession planning and looks forward
to receiving presentations on the
new approach.
Ruth Cairnie
Committee Chair
stepped down from the role. Sir David
retired from the Board at the end of the
financial year and I would like to thank him,
not only for his long service to the
Company, but also for his support and
advice since my appointment as Chair.
With Sir David’s planned retirement from
the Board, the Committee considered how
best to replace his extensive knowledge of
the Group’s principal customer, the UK
Government. As this was a very specific
requirement, the Committee decided not
to use an external search consultant, but to
rely on its own knowledge and networks.
The Committee considered a range of
potential candidates. In November 2020,
the Committee was pleased to recommend
the appointment of Sir Andrew Parker, now
Lord Parker, the former Director General
of MI5. Lord Parker brings outstanding
experience of leading organisations
through complex challenges, alongside his
extensive experience of working at the
highest level of public service.
Future Board composition
Myles Lee and Victoire de Margerie have
announced their intention to retire from
the Board at the end of this year’s AGM. I
would like to thank both Myles and Victoire
for their contributions to the Company and
the Board. The Committee has developed a
Board skills matrix, which it will use to set
the criteria for identifying their successors,
including a strong focus on diversity.
Diversity and inclusion
The Committee shares the Board’s belief in
the importance of increasing diversity
across the organisation. In its own selection
and appointment work, the Committee asks
its search consultants to prepare diverse
long lists. The Committee also focuses on
diversity when it reviews the Group’s talent
pipeline and supports and encourages
the plans and initiatives being adopted to
drive progress across the organisation.
These include the work that the Company
undertakes to support improvement in the
under-representation of women in the
engineering sector (please see pages 72
and 73). The Committee recognises that
there is still much work to do but is
encouraged that the new people strategy,
currently under development as described
on page 22, and the new integrated HR
function and Group-wide approach will
help to accelerate progress. In particular,
the Committee welcomed the adoption
of Group-wide diversity targets as set out
on page 72, together with our gender
balance statistics.
In the past, the focus on diversity has been
mostly directed towards gender diversity.
However, the Committee shares the view of
the Board and management that diversity
should encompass a wide range of factors,
including gender, ethnicity, experience,
background, perspective, skills and thinking
styles, which, when combined, can
contribute to a high-performing and
effective organisation. The Committee has
set itself the target of meeting the Parker
Review recommendation to have one
Director from an ethnic minority
background by 2024.
For more information on the vision for
diversity and inclusion see page 72.
Succession planning
As referred to above, the Committee
oversees the Company’s talent pipeline,
as well as the Company’s processes for
developing talent.
118
Babcock International Group PLC Annual Report and Financial Statements 2021
Audit Committee Report
adjusting items including exceptionals, free
cash flow and joint ventures in March and
April 2021. The Committee approved these
changes which we believe will make it
easier for investors, analysts and other
stakeholders to understand our business.
We announced in January 2021 that our
new management team, with the support
of an independent accounting firm, was
conducting a contract profitability and
balance sheet review. This wide-ranging
review resulted in around 130 matters for
consideration by PwC through the audit
and by the Audit Committee. These were
reviewed as they emerged during March,
April, May, June and July, supplemented and
challenged by PwC, reviewed by the Audit
Committee, and amended as required.
By the end of the audit in July, management,
PwC and the Audit Committee had agreed
147 accounting adjustments relating to
128 matters. The total post tax profit
impact of these accounting adjustments
was around £2.0 billion, comprising
changes in 2020/21 (£1,814 million post
tax), the vast majority of which are changes
in estimates, and prior year restatements
resulting from the correction of 42 prior
period errors (£171 million post tax) and
one change in accounting policy
(£60 million post tax).
As a result of the contract profitability and
balance sheet review, the Group has been
in correspondence with the FRC and FCA,
details of which are set out on page 127.
In addition, partly through PwC’s normal
year end audit work and partly through the
contract profitability and balance sheet
review, we identified errors in the first
half unaudited results. This reinforces
the importance of the decision taken in
August 2020 as part of the audit tender
process to require our new auditor to give
a review report on the half year results
starting in 2021/22.
The substantial extra workload for
management, PwC and the Audit
Committee as a result of the contract
profitability and balance sheet review,
together with the impact of COVID-19
on the audit, caused us to defer the
publication of our preliminary full year
results from 26 May to 30 July 2021.
We took a conscious decision to prioritise
quality over speed.
Russ Houlden
Chair of the Audit Committee
Dear Shareholder
This is my first report as Chair of the Audit
Committee. My main objective has been to
review and improve the quality of financial
reporting, audit and the oversight provided
by the Audit Committee. We have made
substantial progress but there is still
more to do.
Audit committees have an important role in
protecting the interests of shareholders and
other stakeholders in relation to financial
reporting and internal control
arrangements, in ensuring effective internal
and statutory audits and in constructively
challenging the proposals of the
management team relating to the content
and disclosures within the financial reports.
Prior to my appointment as Audit Committee
Chair in August 2020, I requested a review
of difficulties encountered in the financial
reporting and audit process for the year
ended 31 March 2020. The outcome of
this review was reported to the Audit
Committee in July 2020 and progress on
the recommendations was reported at the
Audit Committee’s meetings in September
2020 and March 2021. The actions taken
have led to substantial improvements in
the scope, quality and timeliness of
management papers presented to the
Audit Committee for review.
In September 2020, the Audit Committee
concluded the process, referred to in last
year’s Annual Report, for the appointment
of a new statutory auditor for the year
ending 31 March 2022. As part of this
process, we decided to require the new
auditor to provide a review report on the
half year results, which had not been part
of the engagement with PwC . This should
give greater confidence in the quality of
half year reporting starting in the 2021/22
financial year. After a rigorous selection
process outlined on pages 129 and 130
the Audit Committee recommended to the
Board that, subject to shareholder approval,
Deloitte should succeed PwC as the
Company’s statutory auditor. From the
proposals received, the Committee is
confident that it has selected the highest-
quality audit proposal.
In November 2020, I agreed with PwC that
we would be an early adopter of emerging
best practice engagement level Audit
Quality Indicators to monitor the quality of
the 2020/21 audit. These were approved
at the March 2021 Audit Committee
meeting and used from March to July to
improve the real-time monitoring of the
quality and effectiveness of the audit.
Also in November 2020, the Audit
Committee agreed that the new
management team would consider best
practice approaches in relation to the
presentation of our financial results.
Management presented its proposals for
changes to the presentation of specific
Babcock International Group PLC Annual Report and Financial Statements 2021
119
Strategic reportGovernanceFinancial statements Audit Committee Report continued
Auditor independence is a key principle,
and the Audit Committee was satisfied that
PwC was independent for the purposes of
their audit of the 2020/21 financial
statements (see page 128) and that
Deloitte will be independent for the
purposes of their audit of the 2021/22
financial statements (see page 130).
The Committee also ensured that the
relationship between the Committee, the
auditor and management is appropriate
with no undue influence by any of the
parties on any other, thereby ensuring the
integrity of the audit process.
Whilst we have made substantial
improvements in 2020/21, we are
committed to continuous improvement and
aim to take further steps to improve our
financial reporting and the quality of the
Audit Committee’s oversight for the benefit
of shareholders and other stakeholders:
Quick facts
The Committee
• Russ Houlden has chaired the Committee
since August 2020. He is a qualified
accountant and a qualified corporate
treasurer. He has served as CFO of a FTSE
100 company and an NZX50 company
and as Audit Committee Chair of a
WIG20 company. The Nominations
Committee considers that Russ Houlden
has recent and relevant financial
experience and that the Committee as a
whole has competence relevant to the
sectors in which the Company operates.
• The other Committee members are
Myles Lee (who is also a qualified
accountant with experience as Finance
Director of a FTSE 100 company and as
Audit Committee Chair of a FTSE 350
company), Kjersti Wiklund and Lucy
Dimes, all of whom are independent
Non-Executive Directors. Ian Duncan
chaired the Committee until he
retired from the Board at the AGM
in August 2020.
• Attendance at Committee meetings is
set out on page 109, and the relevant
Directors’ biographies are on pages 104
and 105.
• The Committee regularly invites the CEO,
the CFO, the Company Secretary and the
Group Financial Controller, as well as
representatives from the statutory
• We will continue to focus on improving
the quality of management papers
reviewed by the Audit Committee.
• We will continue our emphasis on
improving the quality of the
statutory audit.
regarding the Audit Committee’s work
in 2020/21 and plans for 2021/22.
• We will oversee the quality of
implementation of digital financial
reporting using the European Single
Electronic Format.
• We will monitor the implementation of the
programme of improvement of internal
and financial controls with a particular
focus on Group Head Office, Aviation
and Land.
• We will consider preparatory steps for the
main, longer lead-time changes likely to
result from the UK Government’s
proposals on “Restoring trust in audit and
corporate governance”.
• We will review the scope of internal audit
and we will assess whether there is a
better alternative to our current
outsourced model.
• We will, as part of the wider Corporate
Governance event highlighted in the
Chair’s introduction to the Governance
section (see page 103), engage
proactively with our larger shareholders
I would like to thank my colleagues on the
Committee for their support during this
year of substantial change. We will
continue our improvement journey in the
year ahead.
Russ Houlden
Committee Chair
auditor, PwC, and the internal auditor,
BDO, to attend its meetings. None of
these attendees are members of the
Committee.
• PwC and BDO each have time with the
Key responsibilities
• Leading tenders for internal and statutory
auditors, agreeing their fees and making
recommendations to the Board for the
appointments.
Committee to share any concerns they or
the Audit Committee may have without
management being present.
• Establishing policies for the provision of
any non-audit services by the statutory
auditor.
Highlights
• Substantial improvements in papers
presented to the Audit Committee.
• On-boarding of new internal auditor
in 2020/21 and improvement in the
process for setting the internal audit
plan for 2021/22.
• Review of statutory auditor performance
in 2019/20 and early adoption of best
practice engagement-level Audit Quality
Indicators for 2020/21.
• Selection of statutory auditor for
2021/22 and extension of scope to
include a half year review report.
• Contract profitability and balance
sheet review resulting in 147 accounting
adjustments, some of which would
probably have been discovered through
normal year end processes.
• Improvements in presentation of
adjusting items, joint ventures and
free cash flow.
• Reviewing the scope and the results of
the statutory audit and reporting to the
Board on the effectiveness of the audit
process and how the independence and
objectivity of the auditor has been
safeguarded.
• Reviewing the half year and annual
financial statements and any
announcements relating to financial
performance, including reporting to
the Board on the significant issues
considered by the Committee.
• Reviewing the scope, remit and
effectiveness of the internal audit
function.
• Reviewing the effectiveness of the
Group’s internal control and risk
management systems.
• Reviewing the Group’s procedures for
reporting fraud, bribery and corruption.
120
Babcock International Group PLC Annual Report and Financial Statements 2021
Shareholder engagement
Our Audit Committee Chair, Russ Houlden, is available to engage one-on-one with large shareholders on request through Babcock’s
Investor Relations team. Two large shareholders requested meetings with him in July and September 2020, prior to the first Audit
Committee meeting that he chaired in September 2020. Topics discussed included: shareholders’ observations about the Avincis
acquisition in 2014, the management team in 2019/20 and financial reporting (including the goodwill impairment) in 2019/20; and
Russ’s observations on the Audit Committee and the plan to tender for a new statutory auditor for 2021/22, one year ahead of the legal
requirement to change.
In 2021/22, Russ will engage proactively with large shareholders as part of the wider Corporate Governance event (see page 103)
and will continue to be available on request for one-on-one discussions.
Reporting timetable
The timetable published at the beginning of the year envisaged the publication of the preliminary full year results on 26 May 2021.
As a result of the additional workload for management, auditors and the Audit Committee involved in addressing the unprecedented number
of accounting adjustments (147) from the contract profitability and balance sheet review, compounded by the COVID-19 restrictions on
face-to-face meetings on sites around the world, it was necessary to take more time to ensure that the results we published would be of the
quality needed to restore trust and confidence in our corporate reporting. The need for careful consideration of the (128) matters by
management, our auditor and the Audit Committee resulted in six extra meetings of the Audit Committee in April-July and the publication of
our preliminary full year results on 30 July 2021.
Activities of the Committee for the 2020/21 financial year
The Committee has an extensive agenda of items of business focusing on the financial reporting, audit, assurance and risk management
processes within the business, which it deals with in conjunction with senior management, the external auditor, the internal audit
function and the financial reporting team. In doing so, it aims to deliver high standards of financial governance, in line with the regulatory
framework as well as market practice for audit committees. Items of business considered by the Committee during the year are set out in
the table below.
Matters considered
Discussion and outcome
Find out more
Financial reporting
Year end financial
reporting review
Fair, balanced and
understandable
Key accounting matters
The Committee reviewed a paper on difficulties experienced in the financial
reporting process for the year ended 31 March 2020 and approved the
recommendations, all except one of which were implemented by
31 March 2021.
See the Audit
Committee Chair’s
letter on pages 119
and 120
The Committee reviewed the 2021 Annual Report and the Group’s interim and
annual financial statements and received reports from the Company Secretary
and the Group Financial Controller. After due challenge and careful
consideration, the Committee recommended the approval of the fair,
balanced and understandable statement by the Board.
See page 124
The Committee reviewed management papers on the key accounting
matters in the Group’s financial statements, challenging management’s
assumptions, interpretations and judgements where appropriate. After the
reviews, the Committee supported the approval of the half year and full
year financial statements.
See pages 125
and126
Free cash flow
The Committee reviewed a management paper on the definition and
presentation of free cash flow in Group’s Annual Report and Financial Statements
for the year ending 31 March 2021 and approved the changes proposed.
See pages 31
and 126
Specific adjusting items
including exceptional items
The Committee reviewed a management paper on the definition and
presentation of specific adjusting items including exceptional items in the
Group’s Annual Report and Financial Statements for the year ending
31 March 2021 and approved the changes proposed.
See pages 31, 125
and 127
Joint ventures
The Committee reviewed a management paper on the presentation of joint
ventures in the Group’s Annual Report and Financial Statements for the year
ending 31 March 2021 and approved the changes proposed.
See pages 30
and126
Babcock International Group PLC Annual Report and Financial Statements 2021
121
Strategic reportGovernanceFinancial statements Audit Committee Report continued
Activities of the Committee in the 2020/21 financial year continued
Matters considered
Discussion and outcome
Find out more
Financial reporting continued
COVID-19
The Committee considered the updated forecasts reviewed by the Board and
ensured that they were appropriately reflected in accounting estimates used, for
example, in the assessment of goodwill impairment, fixed asset impairment and
deferred tax recoverability. The Committee also reviewed the estimate of the
operating profit impact in 2020/21 of COVID-19 and approved the disclosure
which aims to help shareholders and other stakeholders to gain a better
understanding of business performance.
Contract profitability
and balance sheet
review
Going concern and
viability
External audit
Audit Quality Review
Inspection
Independence
2020/21 financial
statements
Representation letter
The Committee reviewed the findings and recommendations from management’s
contract profitability and balance sheet review. This included the correction of
prior year errors, one change in accounting policy and revisions to estimates
resulting in impairment of goodwill and acquired intangibles, impairment of
property, plant and equipment and right of use assets, and adjustments to current
and non-current assets and current liabilities. After appropriate challenge by PwC
and the Audit Committee, the amended recommendations were approved. The
Committee also reviewed the judgements taken in analysing contract profitability
and balance sheet adjustments in 2020/21 between “one off” and “recurring”.
Whilst recognising the subjectivity of these judgements, the Committee was
satisfied that, overall, this disclosure should help shareholders and other
stakeholders to gain a better understanding of business performance comparisons
with prior and subsequent years.
The Committee reviewed at its meetings in March, May, June and July 2021,
the analysis supporting the Company’s going concern statement and viability
statement in the 2021 Annual Report for recommendation to the Board. The
Committee raised questions and requested changes until it was satisfied with the
analysis and conclusion, with areas of particular focus including the treatment of
uncommitted facilities, the identification of severe but plausible scenarios and the
linkage between the risk assessment presented to the Board and the analysis
supporting the going concern and viability assessments.
See pages 33, 126
and 127
See pages 96 and 97
and127 and 128
The Committee considered the AQR scores of PwC published in July 2020.
See page 128
The Committee considered PwC’s independence and how it continued to meet
the appropriate professional standards of independence as the Company’s
statutory auditor.
See page 128
The Committee received a series of reports from PwC on the results of the audit of
the financial statements for the year ended 31 March 2021. The Committee
considered each of the key judgements and risks in turn and questioned PwC in
detail as to the level of challenge and investigation PwC had employed in respect
of those judgements.
The Committee requested a paper from management to enable proper
consideration of the basis supporting the representations to PwC required for the
statutory audit for 2020/21. After careful consideration of the evidence
presented, the Committee supported management’s recommendation that the
representation letter be signed on behalf of the Board.
Statutory audit
evaluation
The Committee reviewed the results of an internal survey of opinions on the
performance of PwC in the audit for the year ended 31 March 2020. Any
significant issues raised were discussed with PwC to inform their approach to the
audit for the year ended 31 March 2021.
See page 128
122
Babcock International Group PLC Annual Report and Financial Statements 2021
Matters considered
Discussion and outcome
Find out more
External audit continued
Audit plan
The Committee considered PwC’s audit plan for the year ended 31 March 2021,
including the key areas of focus, materiality levels, scope and coverage. The
Committee monitored PwC’s progress against its plan and supported changes in
the plan as a result of the contract profitability and balance sheet review, including
the addition of appropriate PwC resources to enable them to deliver a high quality
audit in the new environment in which additional work was required, particularly in
Aviation and in relation to the going concern statement.
See page 128
Non-audit fees
Audit Quality
Indicators
The Committee approved the policy on non-audit services provided by the auditor
for 2020/21and approved the non-audit services and related fees provided by PwC
for 2020/21.
See page 129
In line with best practice in Canada and emerging best practice in the UK, the
Committee agreed engagement-level Audit Quality Indicators with PwC and
management in order to monitor the quality of the audit as it progressed.
Statutory auditor
selection for
2021/22
The Committee led a tender process at the end of which it recommended the
appointment of Deloitte as the Group’s statutory auditor with effect from the 2021 AGM.
The Committee monitored the transition process for Deloitte to ensure that it would be
ready to take on the role if shareholders approve Deloitte’s appointment.
Internal controls and risk management
Internal and financial
controls
The Committee reviewed the effectiveness of the Group’s internal and financial
controls by reference to a management paper on the subject, the reports of our
new internal auditor (BDO) and our statutory auditor (PwC) and the findings of the
contract profitability and balance sheet review. The Committee concluded that
internal and financial controls had not been fully effective in certain parts of the
Group, in particular, in Aviation, Land and Group Head Office. It therefore agreed
with Group and sector management a programme of improvements in internal and
financial controls. Group Head Office will implement a new operating model which
will bring control benefits across the Group whilst in Aviation and Land the plans
will address the specific issues in those sectors.
See “Audit Committee
Guide to AQIs” (2018)
published by CPA
Canada, CPAB and ICD
See pages 129
and 130
See page 131
Group risk
management process
The Committee reviewed the Group risk management process and approved the
proposed improvements in the process to raise the quality of risk management
information presented to the Board. After implementation of the new approach the
Committee was satisfied with the effectiveness of the Group’s risk management
process and made recommendations for further improvement in 2021/22. The
Committee Chair reported its findings to the Board.
Specific risk review
During each year, the Committee receives a “deep dive” on a specific risk. This year,
the Committee reviewed the bid and contract review processes of Marine and Land.
See pages 85 and 131
Internal audit reports
The Committee received reports from BDO, the Company’s internal auditor, in
accordance with the agreed internal audit plan for 2020/21, as well as updates on the
status of the resolution of any issues raised. It also reviewed the effectiveness of internal
audit and reviewed a report by the Institute of Internal Auditors on the effectiveness of
BDO’s internal audit work for a range of clients.
See pages 130
and 131
Internal audit policy,
scope and plan
The Committee approved the internal audit policy, the scope of internal audit and
the plan for 2021/22, noting that refinements may be required in year for
disposals and any new issues which may be identified. The Committee also
requested a more fundamental review during 2021/22 to inform the scope and
method of delivery for 2022/23 and beyond.
See pages 130
and 131
Babcock International Group PLC Annual Report and Financial Statements 2021
123
Strategic reportGovernanceFinancial statements Audit Committee Report continued
Matters considered
Discussion & outcome
Governance and compliance
Terms of reference
The Committee undertook its annual review of its terms of reference and
recommended them to the Board for approval.
Find out more
See page 113
Code of conduct
The Committee reviewed and approved the Company’s procedures for compliance
with the Company’s Code of Conduct, fraud, bribery and anti-corruption policies.
See page 77
Performance review
The Committee reviewed the conclusions of the externally facilitated Board’s
annual evaluation as they related to the workings of the Committee.
Climate change
The Committee considered a management paper assessing the impact of climate
change on the Company’s financial statements in preparation for the drafting of
the Company’s Annual Report and Financial Statements for the year ending
31 March 2021. The Committee considered a management proposal for a
journey of improvement in TCFD disclosures. The Committee supported the
plan and encouraged management to consider assurance for the TCFD
disclosures for 2021/22.
See pages 102
and 111
See page 62
Fair, balanced and understandable
Provision 27 of the UK Corporate
Governance Code (2018) requires the
Board to satisfy itself that the Annual Report
provides the information necessary for
shareholders to assess the Company’s
position and performance, business model
and strategy and is fair, balanced and
understandable. The Board delegates to the
Committee the review of the Annual Report
and Financial Statements so that the
Committee may advise whether they
comply with the provision.
To make this assessment the Committee
received copies of the Annual Report and
Financial Statements for review during the
drafting process to ensure that the key
messages in the Annual Report aligned with
the Company’s position, performance and
strategy and that the narrative sections of
the Annual Report were consistent with the
Financial Statements. The Committee
considered the significant issues and
judgements applied in the 2021 Annual
Report and Financial Statements. In
addition, the Committee considered
reports from the Company Secretary and
from the Group Financial Controller on the
procedures they used to ensure compliance
with provision 27. The Committee
discussed whether all the key events and
issues reported to the Board in
management’s monthly Board reports
during the year, both good and bad, were
adequately referenced or reflected within
the 2021 Annual Report and Financial
Statements. Whilst recognising the inherent
complexities resulting from the contract
profitability and balance sheet review, the
Committee was satisfied that the 2021
Annual Report and Financial Statements did
provide a fair, balanced and understandable
assessment of the Company’s position and
performance and reported this conclusion
to the Board. The Board’s statement on
provision 27 for 2020/21 (which also
covers business model and strategy) is on
pages 158 and 159.
124
Babcock International Group PLC Annual Report and Financial Statements 2021
Significant issues considered by the Audit Committee in relation to the financial statements
Significant issue
Action taken
Accounting policies, definitions,
interpretations and presentation
Contract accounting
Goodwill impairment
Reviewed changes in accounting policies, definitions, interpretations and presentation for
specific adjusting items including exceptional items, free cash flow, joint ventures,
maintenance and capitalised contract costs. After appropriate challenge and refinement of
management’s recommendations, the Committee approved the changes.
Reviewed as part of the contract profitability and balance sheet review. After appropriate
challenge and refinement of management’s recommendations, approved the changes in
judgements and estimates, the correction of prior year errors and associated disclosures.
Reviewed as part of the contract profitability and balance sheet review. After appropriate
challenge and refinement of management’s recommendations, approved the changes in
judgements and estimates, the correction of prior year errors and associated disclosures.
Property, plant and equipment
impairment
Reviewed as part of the contract profitability and balance sheet review. After appropriate
challenge and refinement of management’s recommendations, approved the changes in
judgements and estimates, the correction of errors and associated disclosures.
Leases
Specific adjusting items including
exceptional items
Pensions accounting
Taxation
Impact of COVID-19
Going concern and viability
Reviewed management’s progress in addressing systems issues which had hindered the
2019/20 reporting process and obtained confirmation that the material issues had been
satisfactorily resolved.
Reviewed as part of the contract profitability and balance sheet review. After appropriate
challenge and refinement, approved the items to be classified as specific adjusting items
including exceptional Items and the associated disclosures. In addition, for 2020/21 only,
it was agreed that the Strategic report should also present certain figures excluding the
one-off impacts from the contract profitability and balance sheet review to enable a clearer
understanding of business performance compared with prior and subsequent years.
Reviewed as part of the normal accounting issues and judgements papers. Assessed the
inflation rate, discount rate and mortality assumptions used by management in the context
of assumptions used in respect of the same factors by other companies. The Committee was
satisfied that the assumptions fell within acceptable ranges.
Reviewed as part of the contract profitability and balance sheet review. After appropriate
challenge and refinement of management’s proposals, approved the changes in estimates
and the correction of a prior year error in the calculation of deferred tax.
Ensured appropriate disclosure of the operating profit impact of COVID-19 in 2020/21 and
that the updated forecasts reviewed periodically by the Board were appropriately reflected in
accounting estimates.
Reviewed papers from management ensuring that they had considered appropriately the
impacts of the contract profitability and balance sheet review, the budget and plan reviewed
by the Board in March and May 2021, the risk assessments and mitigations reviewed by the
Board in March 2021, clarification of the appropriate interpretation of certain covenants as
at 31 March 2021, increases in covenant limits for 30 September 2021 and 31 March 2022
and the additional Revolving Credit Facility signed in May 2021.
Babcock International Group PLC Annual Report and Financial Statements 2021
125
Strategic reportGovernanceFinancial statements Audit Committee Report continued
Accounting policies, definitions,
interpretations and presentation
The new management team reviewed its
accounting policies and definitions for
specfic adjusting items including
exceptional items in order to help
shareholders and other stakeholders to gain
a clearer understanding of the underlying
performance of the business; this addressed
issues which the Committee had identified
for improvement earlier in the year.
Following discussion and refinement,
management’s proposal was supported (see
page 31). In summary, it was agreed that
exceptional items would need to meet a
“size and nature” test (whereas previously
“size or nature” had been sufficient) and
adjusting items would be clearly specified
and adjusted consistently from year to year,
whether positive or negative.
The Committee also supported
management’s proposal to change the
presentation of the underlying cash flow
statement, including the definition of
underlying free cash flow, as set out on
pages 31-32. We believe this better aligns
with normal market practice.
Finally, the Committee supported
management’s proposals to base the
presentation of the results of joint ventures
and associates and the presentation of
IFRIC12 investment income on IFRS, as set
out on page 30. We believe that
shareholders and other stakeholders should
welcome these simplifications.
In response to the discovery of
inconsistencies in accounting between
various sectors and legal entities in
maintenance costs and capitalised
contract costs, the Committee supported
management’s proposal to introduce a
consistent set of policies, definitions and
interpretations across the Group in
these areas including one change in
accounting policy to better represent
Power By the Hour (PBH) maintenance
arrangements in the Aviation sector.
Contract profitability and balance
sheet review
The Company announced in January 2021
that the new management team was
conducting a contract profitability and
balance sheet review. This was a major
undertaking, reviewing around 100
contracts representing around £2.6 billion
of revenue each year (with differing levels
of review applied to contracts based on
their perceived risk). It involved substantial
management time and effort supported by
over 13,000 hours of work by an
accounting firm independent from our
statutory auditor. PwC also strengthened
their team with experienced senior staff.
The Audit Committee held six extra
unscheduled meetings (more than doubling
its standard workload) to review all of the
resulting materials. After review by PwC and
the Audit Committee and refinement of
proposals by management, this resulted in
147 accounting adjustments which
required over 1,000 accounting entries to
be made across various legal entities,
covering all business sectors and Group.
Some of these accounting entries may have
been identified through normal year end
processes but others would not.
In view of the unprecedented volume of
issues to consider in parallel with a normal
year end process, and the importance of
many of those issues, the Committee
adopted a systematic and rigorous
approach to reviewing, refining and
approving the recommendations for
inclusion in the statutory financial
statements and notes. The Committee
reviewed several hundreds of pages of
management papers and PwC papers and
therefore we do not consider it helpful to
discuss each item in detail but the outline
below should give a good overview of the
approach we took, the extent of challenge,
the changes made and the implications
from the perspective of internal and
financial controls.
For all items, management first documented
its analysis and recommendation clearly;
then PwC reviewed the analysis and
recommendations based on the audit
evidence they had obtained and their
interpretation of the relevant parts of IFRS.
As a result of the scale and timing of the
review and the technical complexity of
some of the adjustments, a healthy number
of the classifications and/or quantifications
were changed folllowing the PwC review
performed as part of the audit. For
example, changes in the method of
calculating income from two joint ventures
which management had originally judged
to be prior year errors were, following
PwC challenge, agreed to be changes in
estimates on the basis that PwC remained
satisfied with the justification of the
estimates given as part of the audit process
in 2019/20. On the other hand, a
significant adjustment in the capitalisation
of contract costs in Aviation, which
management initially judged to be a
change in accounting policy was later
agreed to be a prior year error when PwC
presented evidence that the previous
treatment had not been consistent with
IFRS 15.
For each of the 58 matters with a potential
impact over £5 million (total impact on
profit after tax of c£1.8 billion), the Audit
Committee reviewed papers from
management in a consistent format which
included a balanced description of the
facts, the proposed accounting
classification based on IAS 8, the trigger
event or control failure giving rise to the
recommendation, the proposed accounting
and consideration of accounting
alternatives (if any). This enabled the Audit
Committee to provide effective oversight of
the larger items and to challenge both
management and PwC where appropriate.
The Audit Committee challenge was after
PwC’s initial opinions had been taken into
account and so there were only a few items
where the Audit Committee’s challenges
resulted in further changes, for example
the treatment of the deferred tax
adjustment in Spain.
For the 70 matters with a potential impact
less than £5 million (total impact on profit
after tax of c£0.2 billion), the Audit
Committee required a paper only on those
which were prior period errors, on the basis
that items below that level would be dealt
with in the normal course of the year
end audit and only raised at the Audit
Committee if there were irresolvable
differences of opinion between
management and PwC, of which
there were none.
On contract accounting, there were prior
year errors and adjustments in profit
estimates on many contracts. Whilst the
Committee supported the accounting
changes, the findings raised concerns about
126
Babcock International Group PLC Annual Report and Financial Statements 2021
the robustness of the management of
contracts. The Committee noted that the
Board would be considering management’s
plans to improve the contract management
process across all segments for the future;
whilst the accounting for contracts was
now receiving more effective review at the
Audit Committee supported by significantly
better management papers, there would
always be a significant reliance on
management’s judgement in estimating the
cost to complete a long-term contract.
underlying operating profit and supported
the disclosure in the Strategic Report of
“one-off CPBS adjustments” of £250 million
and “recurring CPBS adjustments” of
£25 million in the way described on page 33,
notwithstanding the definitional difficulties,
because we felt that this would help users
of our financial statements to gain a better
understanding of business performance
in 2020/21 compared with prior and
subsequent years than they would have
had without these additional disclosures.
On the impairment of goodwill and
acquired asset intangibles, the 2020/21
impairment of £1.3 billion related mostly
to goodwill impairments in Aviation
(£0.8 billion) and Land (£0.4 billion) and
reflected reductions in forecasts of business
performance in the light of experience in
2020/21 and an increase in the discount
rate. In addition, there were prior year
errors, the net effect of which was to
reduce the 2019/20 impairment charge
by £0.1 billion (see page 34).
On the impairment of property, plant and
equipment and right of use assets, the
2020/21 impairment of £0.2 billion was
mainly in Aviation, for example due to reduced
estimates of the residual values of aircraft.
There were also smaller impairments of
other non-current assets and current assets,
the introduction of (and increases in)
liabilities, changes in estimates relating to
income from joint ventures and associates
and two material balance sheet
reclassifications, as set out in the Financial
Review on page 35.
On taxation, the main change related to
deferred tax in Spain where, after Audit
Committee challenge, it was agreed that
this should be shown partly as a prior year
error (as a result of the failure to correctly
apply the relevant Spanish tax rules) and
partly as a change in estimate (reflecting
the changes in business forecasts, largely
relating to long term contracts).
On specific adjusting items including
exceptional items, the Committee reviewed
the work of management (and PwC’s audit
conclusions) to ensure that the disclosures
were appropriate. The Committee also
considered the analysis of the impact of the
CPBS adjustments on the 2020/21
Of the 147 adjustments, 67 related to
Aviation, 17 related to Land and 16 related
to Group. In response to these findings,
together with the results of the internal and
external audits, the Audit Committee
agreed with management internal and
financial control improvement plans for
Group and for Aviation and will agree a
plan for Land shortly following the input of
the new sector CEO and FD. In addition, as
normal, management will be expected to
respond to all of the control recommendations
made by our internal auditor (BDO) and
external auditor (PwC). Progress in all five
areas will be monitored by the Committee
at its meetings every six months starting in
September 2021 until all material control
issues have been satisfactorily addressed.
FRC review of financial statements for
the year ended 31 March 2020
The FRC wrote to the Company in
January 2021 following its review of our
financial statements for the year ended
31 March 2020. The main areas of
enquiry related to contract modifications,
estimation uncertainty and recoverability of
investment in subsidiary and intercompany
receivables. The Company responded in
February 2021 and the FRC was broadly
satisfied by the Company’s responses,
subject to consideration of the results of
the contract profitability and balance sheet
review and a request for further disclosures
on the estimation uncertainty relating to
revenue and profit recognition on
contracts. Since the audit of the Group
financial statements (incorporating the
appropriate accounting changes resulting
from the contract profitability and balance
sheet review) had not been completed until
30 July 2021 the FRC’s final conclusions
from its review of the Group’s 2019/20
financial statements were not available on
the date the 2020/21 financial statements
were approved by the Board.
FCA enquiries regarding the contract
profitability and balance sheet review
The FCA wrote to the Company in January
2021 requesting information on the
contract profitability and balance sheet
review and has since written asking for
updates on its progress, The Company has
kept the FCA updated and will supply
further information on request.
Going concern and viability statements
The Code requires the Board to state
whether it considers it appropriate to adopt
the going concern basis of accounting in
preparing its financial statements and to
identify any material uncertainties to the
Company’s ability to continue to do so over
a period of at least 12 months from the
date of approval of the financial statements.
In making its assessment, the Committee
considers the Group’s ability to continue as
a going concern, taking into account the
budget and forecasts, borrowing facilities,
cash flows and risks before making a
recommendation to the Board. For the
2020/21 Annual Report and Financial
Statements, this involved careful
consideration of the impacts of the
contract profitability and balance sheet
review, discussions with banks regarding
covenant definitions and a new Revolving
Credit Facility (which was entered into in
May) and changes in the Group’s risk
assessment. After ensuring that these
matters had been properly reflected in the
going concern analysis, the Committee
recommended that it adopt the going
concern basis of preparation for the
2020/21 Annual Report and Financial
Statements. The going concern statement
for 2020/21 is on pages 96 and 97.
The Code also requires the Board to make a
viability statement to indicate whether it
has a reasonable expectation that the
Company will be able to continue in
operation and meet its liabilities as they fall
due over the period of their assessment,
drawing attention to any qualifications or
assumptions as necessary. The Company’s
period for the viability assessment is three
years, being the period over which relevant
financial forecasts are available.
Babcock International Group PLC Annual Report and Financial Statements 2021
127
Strategic reportGovernanceFinancial statements Audit Committee Report continued
The Committee advises the Board in
respect of this statement. In order to do so,
it considers the longer-term viability of the
Company, reviewing and challenging
management analysis to support the
viability statements in the Company’s
Annual Report and Financial Statements.
This analysis includes stress tests based on
the Company’s most recent risk assessment.
It also involves reverse stress testing to
understand whether this revealed
sufficiently plausible scenarios which would
require qualifications to the viability
statement. After careful consideration, the
Committee made its recommendation to
the Board which resulted in the viability
statement on pages 96 and 97.
Effectiveness of the statutory audit
process
The Code requires the Committee, on
behalf of the Board, to review and monitor
the effectiveness of the audit process. The
Committee regards audit quality as the principal
requirement of the annual audit process.
On completion of the 2019/20 annual
audit process, all members of the
Committee, as well as key members of the
senior management team and those who
have regular contact with the auditor,
completed a feedback questionnaire
seeking their views on PwC’s performance.
The questionnaire covered the audit team’s
qualification, expertise, resources,
effectiveness, independence and
leadership. The Committee considered and
discussed the feedback from the
questionnaire, noting that the disruption
caused by COVID-19 had impacted the
timescale of the completion of the audit.
Overall, the feedback did not raise any
major concerns about PwC’s performance.
The Committee noted the individual
comments and would use them to improve
the Group’s and the auditor’s processes.
In addition, the Committee considers the
assessment by the Financial Reporting
Council (“FRC”) through its Audit Quality
Review (“AQR”) process of a selection of
the audits performed by the leading firms
of auditors in the UK. Whilst the sample
sizes are small and not necessarily
representative, this provides valuable
information to the Committee in assessing
the firms over time and compared with
their competitors. The Committee noted
that PwC had launched a Programme to
Enhance Audit Quality in June 2019 and
that PwC had committed to investing more
into audit quality, including an additional
£30m per year for training, people and
technology initiatives.
In September 2020 PwC presented to the
Committee its audit plan and scope for the
financial year 2020/21, highlighting any
areas which would be given special
consideration. PwC reported against this
audit scope at subsequent Committee
meetings, providing an opportunity for the
Committee to monitor progress and raise
any questions. Private meetings are also
held at each Committee meeting between
the Committee and representatives of the
auditor without management being present
in order to encourage open and transparent
feedback by both parties. In addition,
during the annual audit process PwC meets
with management at regular intervals. In
March/April 2021, in the light of reduced
forecasts and the emerging findings from
the contract profitability and balance sheet
review, the Committee agreed an increase
in the scope (to include two more legal
entities) and a reduction in the audit
materiality (from £21.4 million in 2019/20
to £15.9 million in 2020/21) to enable an
effective audit for 2020/21.
In line with emerging best practice being
promoted in the UK by the FRC, the
Committee agreed engagement-level
Audit Quality Indicators (“AQIs”) with PwC
for the first time ever. These were used in
real-time during the year end audit process
from March to July 2021 to give a greater
insight into the expected level of audit
quality on the 2020/21 audit. This was
considered a valuable addition to the
quality control process. The AQIs will be
further refined with our proposed new
statutory auditor, Deloitte, for use in the
2021/22 audit process.
Independence of the statutory auditor
As required by the Code the Committee
reviews the independence of the external
auditor. The Committee considers the
information and assurances provided by the
auditor which confirm that all its partners
and staff involved with the audit are
independent of any links to the Company.
In the year PwC confirmed that this was
the case. PwC also reconfirmed its
independence at the planning stage of
the audit and at regular intervals as the
audit progressed.
The Committee also maintains a policy on
the non-audit services and associated fees
that its auditor may provide. In accordance
with the FRC’s Revised Ethical Standard
(2019), an auditor is only permitted to
provide certain non-audit services to public
interest entities (such as the Company) that
are closely linked to the audit itself or that
are required by law or regulation. The
Committee Chair must approve any
non-audit work subject to the CFO being
able to approve any single engagement of
£10,000 or less, provided that in aggregate
during any one financial year he does not
approve more than £50,000.
Our auditor is never offered work 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.
Taking into account its findings in relation
to the independence of PwC and the strict
limitation of non-audit services (see below),
the Committee concluded that it was
satisfied that PwC was independent and
free from any conflict of interest with
the Company.
128
Babcock International Group PLC Annual Report and Financial Statements 2021
Audit fees and non-audit fees
The audit fees payable to PwC for 2020/21
were £6.0 million, a significant increase
compared with £3.1 million in 2019/20,
largely because of the extra work required
to assess the issues highlighted by the
contract profitability and balance sheet
review and the extra work required
to assess the going concern and viability
statements.
The non-audit services fees payable to PwC
for 2020/21 were £41,000, similar to
£0.1 million in 2019/20, in line with the
Group’s policy of limiting such services to
those where there is no actual or perceived
conflict of interest.
An analysis of the 2020/21 fees is shown
in the notes to the financial statements on
page 223 and the history for the last three
years is shown in the chart below.
Audit fees and Non-audit service fees
£m
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
£3.7m
£2.3m
£2.2m
£1.9m
£0.9m
£0.6m
19
20
21
19
20
21
£0.0m £0.1m £0.0m
20
21
19
Group and Company audit
Subsidiaries audit
Other non-audit services
Statutory audit tender process and
transition management
PwC has audited the Group for
19 consecutive years from 2002/03 to
2020/21. The current lead Engagement
Partner, John Waters, joined at short notice
in February 2019 and led the audit for
2018/19 , 2019/20 and 2020/21.
The audit was retendered in 2020, as had
been planned for some time.
The Committee led the tender process
during the year. PwC did not participate in
the process. The Committee’s primary
objective throughout the tender process,
was to select the firm expected to deliver
the highest quality audit (for an acceptable
level of fees).
In conducting the tender, the Committee
was mindful that the new auditor should
have sufficient time to cease to provide
non-audit services, as set out in the FRC’s
Revised Ethical Standard (2019), prior to
commencing their tenure and to observe
the performance of management and PwC
during the 2020/21 audit.
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.
Babcock International Group PLC Annual Report and Financial Statements 2021
129
Strategic reportGovernanceFinancial statements
Audit Committee Report continued
The Chair of the Committee established a selection panel to ensure that a wide range of
views was taken into account and that appropriate financial expertise supported the
Committee in the decision-making process. The Committee Chair led the process and kept
the Committee as a whole appraised of the progress of the tender. The criteria for
evaluation of the proposals were set out in advance as follows:
Lead partner and key delivery teams
Capabilities, skills and experience, industries and geographies
Global account management
Ability to deliver consistent and efficient experience globally
Ability of lead partner to influence overseas partners to achieve this
Audit approach
Overall level of resources, including proportion of senior staff
Audit methodology including planned use of technology
Overall audit quality and audit quality record of lead partner, team and firm
Review of accounting policies and key accounting judgements
Audit coverage
Consistent with current coverage, treatment of JVs
Transition
Structured approach, prior experience, references
RFP response / presentation
Standard of proposal document
Standard of presentation
Independence
Fees
Total
Maximum
marks available
12
12
24
8
10
12
12
5
5
100
The participating firms provided a written tender document and face-to-face
presentations. The quality of the proposals submitted by the participating firms impressed
the panel. After the presentations, the Committee met privately to discuss the bidders’
proposals and to make its assessment against the criteria above. The Committee agreed
unanimously that Deloitte provided the most convincing evidence that it would provide
the best audit quality. The Committee put its recommendation to the Board which
accepted the Committee’s recommendation. The Board will recommend that shareholders
approve the appointment of Deloitte at the 2021 AGM.
Timeframe
Tender activity
January – July 2020 Pre-audit qualification and independence enquiries to six firms
August 2020
Request for proposals from firms which met the independence
requirement and which indicated that they were willing and able to bid
August – September
2020
Initial meetings with lead partners of tendering firms
Data room open
Fact finding process for tendering firms
September 2020
Tender process presentations by tendering firms
Assessment and recommendation of Deloitte to the Board
October 2020
Board endorsed the recommendation of the Audit Committee
January – June
2021
September 2021
Audit transition activities
Appointment of Deloitte as the new auditor, subject to shareholder
approval
The main steps taken to ensure an effective
transition from PwC to Deloitte were:
• Review of non-audit services provided to
the Group by Deloitte and steps to
achieve audit independence from
31 March 2021
• Agreed interaction between Deloitte and
PwC during the 2020/21 audit cycle,
including attendance at key audit meetings
and observing the year end audit
• Deloitte held meetings and interaction
with the Audit Committee Chair, Group
CEO, Group CFO, Group and sector
management to facilitate knowledge
building, audit scoping and planning
• Deloitte worked with BDO as internal
auditor to understand their work
programmes to inform the 2021/22
statutory audit plan
• Deloitte attended Audit Committee
meetings in November 2020, March 2021,
April 2021, May 2021, June 2021 and
July 2021 and reported on independence
and audit transition plan status.
Internal audit function
The Group’s internal audit is entirely
outsourced to BDO. Each year BDO, after
discussions with management, propose a
strategy and plan for the internal audit to
the Committee for approval. The plan
covers business units and countries,
financial risk and other risk themes. Once
approved the internal auditor implements
the plan and reports back to the
Committee at each of its meetings. The
internal audit function is a key element of
the Group’s corporate governance
framework. It provides independent and
objective assurance, advice and insight on
governance, risk management and internal
control to senior management, the
Committee and the Board. It supports the
organisation’s vision and objectives by
evaluating and assessing the effectiveness
of business policies and processes, systems
and key internal controls. In addition to
reviewing the effectiveness of these areas
and reporting on aspects of the Group’s
compliance with them, internal audit
makes recommendations to address any
key issues and improve processes and, as
such, provides an indication of the
behaviours being exhibited by employees
and reports to the Committee on progress
made at every meeting.
130
Babcock International Group PLC Annual Report and Financial Statements 2021
The Committee keeps the relationship
with BDO under review to ensure the
independence and effectiveness of the
internal audit function is maintained and
meets the internal auditor without
management being present. The Committee
reviewed an assessment by the Institute of
Internal Auditors of the effectiveness of the
quality of the internal audit services
provided more broadly by BDO as a firm,
which was satisfactory.
In reviewing the effectiveness of BDO in its
first year as our internal auditor, the
Committee noted that 7 out of 17 internal
audits had a “limited assurance” rating in
either design or operational effectiveness or
both and that, within these figures 4 out of
5 internal audits in Aviation had a “limited
assurance” rating and 3 out of 6 audits in
Land had a ‘limited assurance’ rating.
This reinforced messages also apparent
from the contract profitability and balance
sheet review. Having reviewed BDO’s
effectiveness, the Audit Committee was
satisfied with the work performed by BDO
in 2020/21 and encouraged BDO to
review the plan for 2021/22 in the light of
the risk assessment presented to the Board
in March, the contract profitability and
balance sheet review and the new
operating model.
The audit plan for 2021/22 was approved
in May 2021 after consideration of the
impacts of the revised risk assessment and
the lessons learned from the contract
profitability and balance sheet review.
It was also agreed that during 2021/22
management should perform a more
fundamental review and make proposals for
the internal audit scope and method of
delivery for 2022/23 and beyond for
review by the Audit Committee in the
second half of 2021.
Risk management and internal control
The Board has delegated to the Committee
responsibility for reviewing the
effectiveness of the Company’s risk
management and internal control systems.
The Company’s management of risk is
described on pages 84 to 86 and its
principal risks on pages 87 to 95.
In reviewing the effectiveness of the risk
management system, the Committee noted
that management had improved the
approach to risk management in 2020/21
and that the first output using the new
approach was presented to the Board in
March 2021. The Committee was satisfied
that the improved process was working
effectively, whilst recommending some
further enhancements. The Committee also
asked management to ensure that the risk
map presented to the Board was appropriately
reflected in the going concern and viability
assessments and in the description of
principal risks on pages 87 to 95.
In reviewing the effectiveness of the
Group’s internal control system, the
Committee reviewed a management paper
on the subject and considered the Group’s
risk management system and reports, its
delegated authorities, its management and
financial reporting and forecasting, its
internal and statutory audit programmes
and reports, its business continuity plans, its
whistleblowing processes and reports, its
ethical compliance programme and the
management papers relating to the
contract profitability and balance sheet
review. In view of the findings of the new
internal auditor (BDO), the contract
profitability and balance sheet review and
the reports of the new management team,
the Committee concluded that the control
environment was not operating effectively
in certain parts of the Group, particularly in
Aviation, Land and Group Head Office.
Since January 2021, the Company has
implemented a number of improvements
including a review of the Group’s delegated
authorities, a requirement for the sectors to
provide a formal letter of representation
covering policy compliance, standardisation
of management reporting across the Group
and the simplification of the income
statement and cash flow management
reporting. In addition, the Committee has
agreed with management improvement
plans for Aviation, Land and Group Head
Office. Provided that these plans are
effectively implemented, the Committee
believes that internal and financial controls
should become fully effective. The Committee
will monitor the implementation of these
plans in 2021/22.The resulting statement
regarding the effectiveness of the Group’s
internal controls is on page 158.
Review of the effectiveness of the
Audit Committee
We conclude each Audit Committee with a
private session without management,
external audit or internal audit to review
our effectiveness. The feedback from these
sessions has been very encouraging about
the progress made and supportive of
further developments.
We also benefitted this year from the
independent, external review of the
effectiveness of the Board and its Committees
(see page 111). This concluded that the
effectiveness of the Committee had
been improved through well-structured
and comprehensive agendas, better
documentation, more time for discussion
on all key items and clarity on the division
of responsibility for different aspects of
risk governance.
Next steps
Whilst we have made substantial
improvements in 2020/21, we are
committed to continuous improvement
and aim to take further steps to improve
our financial reporting and the quality
of the Audit Committee’s oversight
for the benefit of shareholders and
other stakeholders:
• We will continue to focus on improving
the quality of management papers
reviewed by the Audit Committee.
• We will continue our emphasis
on improving the quality of the
statutory audit.
• We will monitor the implementation
of the programme of improvement of
internal and financial controls with a
particular focus on Group Head Office,
Aviation and Land.
• We will review the scope of internal audit
and we will assess whether there is a
better alternative to our current
outsourced model.
• We will, as part of the wider Corporate
Governance event highlighted in the
Chair’s introduction to the Governance
section (see page 103), engage
proactively with our larger shareholders
regarding the Audit Committee’s work in
2020/21 and plans for 2021/22.
• We will oversee the quality of
implementation of digital financial
reporting using the European Single
Electronic Format.
• We will consider preparatory steps for the
main, longer lead-time changes likely to
result from the UK Government’s
proposals on “Restoring trust in audit
and corporate governance”.
Babcock International Group PLC Annual Report and Financial Statements 2021
131
Strategic reportGovernanceFinancial statements Remuneration Committee Report
(reflecting data relating to April 2020),
our mean gender pay gap was 12.5% and
our median gender pay gap was 12.3%,
representing a further year-on-year
narrowing of the gap, as has consistently
been the case since reporting commenced
in 2017.
Leadership changes
We were pleased to welcome David
Lockwood, who joined the Company in
August 2020, before becoming CEO in
September, and David Mellors who
joined the Group as its new CFO in
November 2020. These appointments
followed the retirements of Archie Bethel
and Franco Martinelli. The remuneration of
both appointments is consistent with our
Remuneration policy, with salaries set at
£800,000 and £560,000 for the CEO and
CFO respectively, and annual bonus and PSP
award opportunities of 150% and 200% of
salary respectively. The pension opportunity
for both executives is set at 10% of salary,
consistent with that of our workforce more
broadly. For more detail, please see the
single total figure table on page 144.
When setting the salary levels for the new
Executive Directors we took into account
the salaries of the previous incumbents in
the roles as well as market levels based on
companies of similar size, complexity and
sector to the Company. We also needed to
consider the significant prior executive
director experience of both appointees, the
substantial level of challenge anticipated in
driving the reset of the business, and also
the competitive recruitment environment
with a number of comparable searches
underway at the time of appointment.
Remuneration in 2020/21
The results of the contract profitability
and balance sheet review were a key
consideration in the Committee’s discussion
of remuneration in 2020/21. The
Committee believes that the remuneration
outcomes, which are summarised below
Key responsibilities
• Oversight of reward matters across
the Group
• Maintenance of a strong link between
stakeholder experience and Executive
Director reward
• Approval of reward outcomes for the
Executive Directors
Kjersti Wiklund
Chair of the Remuneration Committee
Dear Shareholder
On behalf of the Board, I present the
Directors’ Remuneration Report (“DRR”)
for the year ended 31 March 2021.
This was my first full year as Chair of the
Remuneration Committee, with the year
being dominated by the COVID-19
pandemic and the contract profitablity
and balance sheet review. As a Committee
we share the disappointment expressed
by Ruth in her Chair’s introduction with
the results of the contract profitability
and balance sheet review. We have paid
careful attention to how these outcomes
should be factored into our decisions for
remuneration in 2020/21. These decisions
are set out in this report.
Remuneration across Babcock
At last year’s AGM, we proposed our new
Remuneration policy for shareholders’
approval. I was pleased that the policy was
Quick facts
The Committee
• Kjersti Wiklund has chaired the Committee
since April 2020. She is also chair of the
Remuneration Committee of Trainline plc.
• The other Committee members are
Carl-Peter Forster, Russ Houlden and
Victoire de Margerie. Jeff Randall also sat
on the Committee until his retirement
from the Board in August 2020. Please
see pages 104-105 for biographies and
page 109 for attendance.
supported by a 99.5% vote, which the
Committee has since worked hard to apply.
When applying our Remuneration policy,
the Committee receives input and advice
from internal and external sources so that
the Committee can take into account the
priorities of the Company’s stakeholders.
For example, the Committee always
considers wider employee remuneration
when determining pay arrangements for
the Executive Directors. Previously, the
Committee received periodic reports from
senior management who attended the
Babcock Employee Forum, to help the
Committee in understanding the views of
employees. We will look to enhance our
engagement by asking Lord Parker to report
to the Committee in his role as Non-
Executive Director designated for
employee engagement.
The Committee supports the Board’s
ambition of improving the representation
of diverse candidates at senior levels. In the
2020/21 Gender Pay Gap Report
Highlights
• Approval of the Company’s new
Remuneration policy
• Appointment of new CEO and CFO
• Introduction of a post-cessation
shareholding policy
132
Babcock International Group PLC Annual Report and Financial Statements 2021
and in this report, reflect the Company’s
performance and the broader context,
including shareholders’ experience and
interests. After due consideration,
the Committee approved the
following outcomes:
Salary: Although the Group made only
limited use of the UK furlough scheme, the
Committee accepted the proposal by the then
Executive Directors to reduce their salaries by
20% for as long as the Group participated in
the scheme. In line with the Executive
Directors, the Non-Executive Directors also
agreed to reduce their fees by 20% on the
same basis. In addition, the Non-Executive
Directors did not receive an increase in their
fees in the year. From September 2020, the
time that the Group ceased to participate in
the scheme, the salaries and the fees of the
Directors were restored.
2020/21 annual bonus: The 2020/21
annual bonus for Executive Directors was
based 80% on underlying financial
performance measures. As the Committee
wanted to incentivise the focus on cash
generation, the weighting on OCF was
increased to 40%, with the remaining 40%
based on PBT. In line with past practice, the
percentage allocated to non-financial
measures was maintained at 20%. With
guidance withdrawn, the Committee met
the challenge of setting targets by
widening the range for the performance
measures and retaining discretion to ensure
that the outcome aligned to the Group’s
stakeholder experience. As the Company’s
performance did not meet the threshold
levels set for the financial performance
measures, there was no payout under those
measures. The Committee did assess the
performance of the Executive Directors
against their non-financial measures. In
respect of David Lockwood and David
Mellors, the Committee concluded that
they had made very positive steps towards
the Group’s recovery, which would have
warranted a payout in respect of the
non-financial measures. However, both of
them had confirmed that they wished to
waive any award. In respect of the other
plan participants, including the former
Executive Directors, the Committee
believed that the financial performance of
the Company did not merit a payout under
the non-financial measures. Please see page
145 for more detail.
2018 PSP awards: The vesting of PSP
awards granted in 2018 was based on
performance measured over 1 April 2018
to 31 March 2021, 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
the 2018 PSP awards lapsing in full. In
assessing the outcome of the PSP awards,
no discretion was applied by the Committee.
Please see page 146 for more detail.
2020 PSP awards: The Committee delayed
the 2020 PSP award due to the impact of
COVID-19 pandemic on the business and
uncertainty about how it might develop.
The grant was made in December 2020,
despite continued uncertainty and ongoing
withdrawal of guidance, due to the need
to establish some incentives for the new
Executive Directors. In light of the prevailing
circumstances, the Committee believed that
the most appropriate measures for the grant
were relative TSR and cumulative free cash
flow, both equally weighted. As the
Committee considers the range for
cumulative free cash flow to be commercially
sensitive, the range has not been disclosed,
but the Committee intends to disclose it as
soon as the range is no longer commercially
sensitive which is expected to be on the
return to giving guidance. The performance
period for free cash flow is the three financial
years starting with 2020/21. As David
Lockwood and David Mellors, both external
hires, had only recently joined the Group, the
Committee determined the start date of the
TSR performance period would run for the
three years commencing on the PSP grant
date. Our analysis indicated that there was
no material advantage or disadvantage to
participants by using this start date, and this
neutrality was important to ensure the
awards are motivational for our new leaders.
However, the Committee felt that it was
appropriate due to the performance of the
share price since the last grant to reduce
the size of award by 10% to 180% of salary.
The Committee further noted that it may
need to use its discretion to review the
outcome of the awards in 2023 to take
into account the level of uncertainty at the
time of award. As always, final decisions
would include a check to ensure alignment
with the shareholder experience. For further
detail, please see pages 146 and 147.
Implementation of remuneration for
2021/22
When considering the implementation of
our Remuneration policy for 2021/22, the
Committee has taken into account the
impact of the contract profitability and
balance sheet review to reach decisions
that incentivise the new Executive Directors
and align with shareholder interests.
Salary: The Committee has delayed its
review of the Executive Director salaries
until September 2021, consistent with
the approach for other employees.
2021/22 annual bonus: The structure of
the Executive Director annual bonus for
2021/22 is consistent with that for
2020/21, with measures based on OCF,
PBT and non-financial objectives. However,
in the event of a payout under the bonus
for 2021/22, the 60% of the annual bonus
usually paid in cash will be deferred into
awards over Company shares for one year.
This is to reflect the fact that in this reset
year no dividend will be paid. The
remaining 40% will be deferred into awards
over Company shares for three years as
usual. The measures and targets have been
set and will be disclosed in full in next year’s
Annual Report on Remuneration. Please see
page 148 for more detail.
2021 PSP awards: The Committee has
granted awards under the PSP to the
Executive Directors in 2021 covering the
three-year period FY22-FY24. The
Committee decided to use the same
measures as used for the 2020 PSP award,
being relative TSR and free cash flow, as
they align with our focus on cash
generation during the reset of the business,
as well as shareholder interests. The
Committee reviewed targets for both
measures to ensure that they would be
appropriately stretching. In respect of the
free cash flow target, the Committee set a
three-year cumulative range. The
Committee considers this range
commercially sensitive, but intends to
disclose it as soon as it no longer is so
which is expected to be on the return to
giving guidance. In respect of relative TSR
the Committee decided to retain the same
performance range as for 2020 PSP awards.
I hope that you have found this letter clear
and useful in summarising the workings of
the Committee.
Ruth has mentioned in her introduction to
the governance section that we plan to
hold a governance event for our largest
shareholders, and I look forward to that
opportunity to share more about our
approach to remuneration.
Kjersti Wiklund
Committee Chair
Babcock International Group PLC Annual Report and Financial Statements 2021
133
Strategic reportGovernanceFinancial statements Remuneration Committee Report continued
Remuneration at a glance
This section provides an overview of the Company’s performance over the 2020/21 financial year and the remuneration received by our
Executive Directors. Full details can be found in the Annual Report on Remuneration on pages 143 to 153.
2020/21 remuneration outcomes
Annual bonus
The annual bonus for the 2020/21 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
D Lockwood
D Mellors
Group Profit
Before Tax (PBT)
40%
Max
0%
Actual
40%
Max
0%
Actual
Group Operating
Cash Flow (OCF)
40%
Max
0%
Actual
40%
Max
0%
Actual
Non-financial1
20%
Max
0%
Actual
20%
Max
0%
Actual
Threshold
£249.7m
Target
£277.4m
Stretch
£322.9m
Actual £209.9m2
Threshold
£236.3m
Target
£262.5m
Stretch
£315.0m
Actual £230.1m2
The Committee would have awarded David
Lockwood and David Mellors an award in respect
of the non-financial measures, but both confirmed
to the Committee that they waived any award.
Total
100%
Max
0%
Actual
100%
Max
0%
Actual
1. Several measures have been merged into an overall assessment in this table for disclosure purposes.
2. Please see the Annual bonus table on page 145 for more detail.
2018 PSP
The 2018 PSP vests subject to three performance measures, the targets for which (and actual performance
against these) are summarised below:
Measure and weighting
Threshold (16.7% vesting)
Stretch (100% vesting)
Outcome
Performance range
Warranted vesting
(% of total award)
33%
33%
EPS growth (3-year CAGR)
4% pa
11% pa
-25.9% pa
Return on Capital Employed
(ROCE) (3-year average)
12%
14%
4.8%
33%
Relative Total Shareholder
Return (TSR) (vs FTSE 350)
Median
Median
+9% pa
Below
median
Based on the performance outcomes set out above, 2018 PSP awards shall lapse in full.
TOTAL
0%
0%
0%
0%
134
Babcock International Group PLC Annual Report and Financial Statements 2021
Implementation of the Remuneration policy in 2021/22
For the current 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.
Element of remuneration Implementation for 2021/22
Base salary
David Lockwood: £800,000
David Mellors: £560,000
The Committee has delayed its review of the Executive Director salaries until September 2021, consistent
with the approach for other employees.
Pension
Benefits
10% of salary.
Unchanged from 2020/21.
Annual bonus and DBP
The bonus structure is consistent with that used for 2020/21 with awards of up to 150% of salary, based
on the achievement of financial targets, PBT and OCF, (each a 40% weighting) and non-financial measures
(20% weighting).
Normally, 40% of any bonus earned would be deferred in shares for three years. This year, in addition to
the 40% of any bonus earned being deferred in shares for three years, the remaining 60% usually paid in
cash will be deferred into shares for one year.
PSP
PSP awards of 200% of salary with vesting based on the financial measures the Committee believes most
appropriate: free cash flow and relative TSR, equally weighted. As the free cash flow targets are
commercially sensitive, the Committee intends to disclose them as soon as they are no longer so, which is
expected to be on the return to giving guidance.
Alignment of the Remuneration policy
The Committee believes that the policy complies with the 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.
Compliance statement
This report has been prepared in
compliance with all relevant
remuneration reporting regulations in
force at the time and in respect of the
financial year under review.
This report contains both auditable and
non-auditable information. The
information subject to audit is so marked.
Babcock International Group PLC Annual Report and Financial Statements 2021
135
Strategic reportGovernanceFinancial statements Remuneration Committee Report continued
Remuneration Policy Report
The Remuneration policy set out in this section was approved by a binding shareholder vote at the 4 August
2020 AGM, and can also be found at www.babcockinternational.com/who-we-are/leadership-and-governance. It
is intended that this policy will apply for three years from that date.
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
To provide market competitive retirement benefits.
Operation
Opportunity
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.
Executive Directors 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.
Performance metrics
Not performance-related.
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 (eg 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 (eg
relocation) or in circumstances where factors outside the Company’s control have changed materially.
Performance metrics
Not performance-related.
136
Babcock International Group PLC Annual Report and Financial Statements 2021
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 financial
measures, eg 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 Financial Statements 2021
137
Strategic reportGovernanceFinancial statements Remuneration Committee Report 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 financial targets such as EPS, cash flow, TSR and ROCE targets.
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 10 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.
138
Babcock International Group PLC Annual Report and Financial Statements 2021
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 Chairship of the
Audit 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 a combination of TSR, EPS, cash flow 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%’.
Babcock International Group PLC Annual Report and Financial Statements 2021
139
Strategic reportGovernanceFinancial statements Remuneration Committee Report continued
Potential reward opportunities are based on the Company’s Remuneration policy and implementation in 2021/22, as outlined in the
Committee Chair’s statement and later in the Annual Report on Remuneration, applied to base salaries as at 1 April 2021. Note that the
projected values exclude the impact of any share price movements except in the ‘Maximum+50%’ scenario.
Chief Executive
David Lockwood (£’000)
Chief Financial Officer
David Mellors (£’000)
Maximum
+50%
22%
Maximum
26%
26%
32%
52%
£4,600
Maximum
+50%
20%
42% £3,800
Maximum
24%
27%
33%
53% £3,148
43%
£2,588
On-target
52%
34%
14%
£1,927
On-target
49%
36%
15%
£1,277
Minimum
100% £1,000
Minimum
100% £628
0
1000
2000
3000
4000
5000
0
500
1000
1500
2000
2500
3000
3500
Fixed Remuneration
Annual Variable Remuneration
Long-term incentives
The ‘Minimum’ scenario shows base salary, pension (and/or pay in lieu of pension) and benefits (ie 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.
The shareholding requirements include a post-cessation extension such that departing Executive Directors will be required to hold
vested Company shares, received through the Company’s PSP, 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
David Lockwood (Chief Executive)
Date of service contract
29 July 2020
David Mellors (Chief Financial Officer)
29 September 2020
Notice period
12 months from Company,
12 months from Director
12 months from Company,
12 months from Director
140
Babcock International Group PLC Annual Report and Financial Statements 2021
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.
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.
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.
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.
Treatment for
other leavers
No annual bonus entitlement, unless
the Committee exercises discretion
to treat otherwise.
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 Directors
The 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)
Myles Lee
Victoire de Margerie
Lucy Dimes
Kjersti Wiklund
Russ Houlden
Carl-Peter Forster
Lord Parker
Date of appointment
as a Director
3 April 2019
1 April 2015
1 February 2016
1 April 2018
1 April 2018
1 April 2020
1 June 2020
10 November 2020
Date of current
appointment letters
2 April 2019
17 May 2018
1 April 2019
28 May 2021
28 May 2021
4 February 2020
6 April 2020
9 November 2020
Anticipated expiry of present term of
appointment (subject to annual
re-election)
AGM 2022
AGM 2021
AGM 2021
AGM 2024
AGM 2024
AGM 2023
AGM 2023
AGM 2024
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.
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.
Babcock International Group PLC Annual Report and Financial Statements 2021
141
Strategic reportGovernanceFinancial statements Remuneration Committee Report continued
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:
Function
To attract and retain
high-calibre Non-Executive
Directors with commercial
and other experience
relevant to the Company
Performance
measures
None
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.
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
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.
Consideration of employee views
When reviewing Executive Directors’ remuneration, the Committee is aware of the proposals for remuneration of all employees.
When considering executive pay, the Committee takes into account the experience of employees and their pay. 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. 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 undertaking consultation with leading shareholders in advance of any significant changes to the Remuneration policy. In
developing the 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.
142
Babcock International Group PLC Annual Report and Financial Statements 2021
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 2021 (with each member serving throughout the year) as well
as attendance at Committee meetings in the year is shown on page 109. In total there were eight meetings in the year to
31 March 2021. The Chair and the CEO normally attend meetings by invitation, as does the CFO on occasion, but they are not
present when their own remuneration is being decided. The Chief HR Officer 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.
Advisors
Mercer Kepler (which is part of the MMC group of companies) advised the Committee during the year until 31 December 2020, when the
Committee transferred the advisory role to Ellason following the departure of the lead advisors from Mercer Kepler, to Ellason. Ellason
reports directly to the Committee Chair and provides 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. A representative from
Ellason typically attends Committee meetings. Ellason also provides participant communications, performance reporting, and Non-
Executive Directors’ fee benchmarking services to the Company. Ellason and Mercer Kepler are members of the Remuneration Consultants
Group and signatories to the Code of Conduct for consultants to remuneration committees of UK listed companies, details of which can
be found at www.remunerationconsultantsgroup.com. Ellason and Mercer Kepler adhere to this Code of Conduct. The fees paid to Ellason
and Mercer Kepler in respect of work for the Committee carried out in the year under review totalled £31,330 and £63,260 respectively
on the basis of time and materials, excluding expenses and VAT.
The Committee will review Ellason’s involvement each year and will consider any other relationships that it has with the Company that
may limit its independence. The Committee is satisfied that the advice provided by Ellason is objective and independent.
Matters considered
The Committee considered a number of matters during the year to 31 March 2021, including:
• reviewing the Remuneration policy against market trends and corporate governance best practice
• reviewing the Committee’s terms of reference
• considering trends in executive remuneration, remuneration governance and investor views
• reviewing share ownership guidelines for senior executives
• reviewing the Directors’ Remuneration Report
• reviewing the continued appointment of the Committee’s independent advisors
• making share awards under the Company’s share plans
• reviewing the performance measures and targets to be applied under the Company’s share plans
• agreeing Executive Director salaries for the next financial year
• finalising performance targets and non-financial objectives for the 2020/21 annual bonus plan
• agreeing the level of vesting of PSP awards granted in 2017
• considering performance against the measures applied to, and level of payout of, the 2019/20 annual bonus
• agreeing the level of, and targets for, 2020 PSP awards.
Summary of shareholder voting
The following table shows the results of the last binding shareholder vote on the Remuneration policy, and the advisory vote on the
Annual Report on Remuneration, at the 2020 AGM:
Votes cast
For (including discretionary)
Against
Total votes cast (excluding withheld votes)
Votes withheld
Total votes cast (including withheld votes)
2020 Remuneration policy
2020 Annual Report on Remuneration
Total number
of votes
358,523,814
1,866,823
360,390,637
16,471,678
376,862,315
% of votes cast
for and against
99.48%
0.52%
100%
Total number
of votes
374,839,939
1,995,057
376,834,996
27,320
376,862,316
% of votes cast
for and against
99.47%
0.53%
100%
Babcock International Group PLC Annual Report and Financial Statements 2021
143
Strategic reportGovernanceFinancial statements
Remuneration Committee Report continued
Single total figure of remuneration for Executive Directors (audited)
The table below sets out a single figure for the total remuneration received by each Executive Director
Fixed remuneration
Salary1
Benefits in kind and cash2
Pension3
Annual variable remuneration
Annual bonus (cash)4
DBP (deferred annual bonus)5
Withholding of bonus6
Long-term incentives
PSP7
Dividends8
Total (of which)
Fixed remuneration1,2,3
Total variable remuneration4,5,6,7,8
The figures have been calculated as follows:
David Lockwood9
£’000
19/20
20/21
438
65
44
–
–
n/a
n/a
547
547
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
David Mellors9
£’000
19/20
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
20/21
188
6
19
–
–
n/a
n/a
213
213
–
Archie Bethel10
Franco Martinelli10
20/21
321
102
78
–
–
(167)
–
–
334
501
(167)
£’000
19/20
796
223
199
100
67
–
–
1,385
1,218
167
20/21
276
1
64
–
–
(107)
–
–
234
341
(107)
£’000
19/20
446
1
112
64
43
–
–
666
559
107
1. Salary: base salary amount paid in the year, after the waivers offered by the Executives due to the pandemic. Archie Bethel waived £39.8k and Franco Martinelli
£22.3k. As both David Lockwood and David Mellors joined the Board after the Company ceased accessing the UK Furlough Scheme triggering the restoration of
executive pay, the table above shows no waiver for them.
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. David
Lockwood as an Executive Director in 20/21 received £64,632 in connection with his accommodation costs in London; Archie Bethel, whilst an Executive
Director, received £100,616 (19/20: £221,210) in connection with his accommodation costs in London for the period he served as a Director. Both were, at the
Company’s request, to enable them to lead the business effectively.
3. Pension: the numbers above represent for each year the value of the cash supplement, which for Archie Bethel and Franco Martinelli was 21.5% of base salary
(without deduction of the waivers offered by the Executives due to the pandemic) and for David Lockwood and David Mellors was 10% of base salary.
4. Annual bonus (cash): this is the part of total annual bonus earned for performance during the year (see page 145) that is not required to be mandatorily deferred
into shares under the DBP (see page 135) and is paid in cash.
5. DBP deferred annual bonus: this is the mandatorily deferred element of the annual bonus earned for performance during the year, which will vest after three years.
6. The payment of the bonus declared for FY20 was delayed until the Board had made a decision around the FY20 dividend. In February 2021 the Committee
determined the FY20 bonus previously determined for Archie Bethel and Franco Martinelli would be cancelled as no FY20 dividend had been declared.
7. PSP: for 20/21, represents the lapsing in full of the 2018 awards that were subject to performance to 31 March 2021 (see page 146).
8. 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 2021 (for 20/21) and 31 March 2020 (for 19/20), payable in cash on exercise of the award.
9. David Lockwood and David Mellors were not Directors of the Company in FY19/20. David Lockwood joined the Company on 17 August 2020 as CEO designate
and joined the Board as CEO on 14 September 2020. David Mellors joined the Company as CFO designate on 1 November 2020 and joined the Board as CFO on
30 November 2020. Amounts for FY20/21 are based on their service as Directors.
10. Archie Bethel and Franco Martinelli stepped down from the Board on 14 September 2020 and 30 November 2020 respectively. Amounts for FY20/21 are based
on their service as Directors. In FY21, Archie Bethel received a base salary of £765,487, benefits of £300,290 and a pension supplement of £173,137 and Franco
Martinelli a base salary of £428,903 and a pension supplement of £97,008. Please see page 148 for more details.
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 2021. They instead received a cash supplement equal to 10% of salary for David Lockwood and David
Mellors and 21.5% of salary for Archie Bethel and Franco Martinelli of their base salary in lieu of pension benefits. There are no additional
early retirement benefits.
At the time of their respective retirements from the Board in September and November 2020 Archie Bethel’s and Franco Martinelli’s cash
supplements in lieu of pension benefits were transitioning from the arrangements immediately prior to the new policy (25% of salary)
to alignment with the workforce, as per the new policy, by 1 April 2023. Consequently until November 2020 the Company was not
compliant with provision 38 of the Code, requiring the pension rates for Executive directors, or payments in lieu, to be aligned to those
available to the workforce. However, our new policy, under which David Lockwood and David Mellors were appointed during the year,
ensured that we were compliant for the remainder of the year and will be in the future.
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.
144
Babcock International Group PLC Annual Report and Financial Statements 2021
Pension entitlements under the Scheme (defined benefit) for the year to 31 March 2021 are set out in the following table:
Director1
Franco Martinelli
1. No Executive Director was an active member of the scheme during the year.
2. Age from which payment can be drawn with no actuarial reduction.
3. There are no additional benefits in the event of early retirement under this scheme.
Accrued pension
at 31 March 2021
£’000 pa
68
Normal
retirement age2
65
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
David Lockwood
David Mellors
Archie Bethel
Franco Martinelli
2020/21
£’000 pa
4
3
4
2
2019/20
£’000
n/a
n/a
5
3
Annual bonus
2020/21 Annual bonus (audited)
The 2020/21 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 OCF and PBT performance (based on budgeted FX rates). 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.
Due to the impact of the COVID-19 pandemic and the withdrawal of guidance, the Committee was obliged to set the 2020/21 annual
bonus on the basis of the Company’s Q1 forecast. Accordingly, for Archie Bethel and Franco Martinelli, the Committee reduced their
maximum opportunity from 150% to 112.5% of salary to reflect the delay in setting targets. In respect of David Lockwood and David
Mellors, their bonus opportunity for 2020/21 was based on their pro-rated salary, as they joined the Company part way through the
financial year. Notwithstanding the strong performance delivered by the incumbent Executive Directors against their non-financial
measures, in the context of the lapsing of the financial elements of the bonus and the wider stakeholder experience during FY21,
Messrs Lockwood and Mellors requested the waiver of any bonus assessed payable for the non-financial measures. The table below
summarises performance against each financial measure, and the bonus outcome. In respect of Archie Bethel and Franco Martinelli,
along with other plan participants, the Committee believed the financial performance of the Company did not merit a payout under the
non-financial measures.
Bonus element
Achieving budgeted
Group cash flow2
Threshold1
90% of
Q1 forecast
Target
Q1 forecast
(£262.5m)
Actual outturn
Maximum
120% of
Q1 forecast £218.8m3
Achieving budgeted
Group PBT4
90% of
Q1 forecast
Q1 forecast
(£277.4m)
120% of Q1
forecast
£209.9m5
Non-financial
objectives6
Total
Maximum potential
(% of salary)
Outturn (% of salary)
Maximum potential
(% of salary)
Outturn (% of salary)
Maximum potential
(% of salary)
Outturn (% of salary)
Maximum potential
(% of salary)
Outturn (% of salary)
David
Lockwood
David
Mellors
Archie
Bethel
Franco
Martinelli
37.2%
0%
25.2%
0%
37.2%
0%
25.2%
0%
45%
0%
45%
0%
45%
0%
45%
0%
18.6%
0%7
12.6%
0%7
22.5%
0%
22.5%
0%
93%
0%
63% 112.5% 112.5%
0%
0%
0%
1. Threshold vesting is: 18.8% of maximum for the Group PBT and 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. Operating cash flow after capital expenditure before pension payments in excess of the income statement charge.
3. To calculate outturn, the Group’s FY21 operating cash after capital expenditure has been adjusted (i) to exclude the deferral of VAT, which the Q1F had assumed
would be paid in FY21, (ii) to take into account the reclassification of the Group’s Supply Chain Financing Facilities as bank and other borrowings rather than trade
payables, and (iii) to take into account the change in treatment of the capital elements of lease payment cash flows.
4. Before amortisation of acquired intangibles with the treatment of exceptional items at the discretion of the Committee.
5. To calculate outturn, the Group’s FY21 profit before tax has been adjusted to add back specific adjusting items as well as the impacts of the contract profitability
and balance sheet review.
6. Further details on the non-financial objectives set for 20/21 are set out below.
7. David Lockwood and David Mellors each waived any entitlement to bonus for performance against the non-financial measures set at the time they respectively
joined Babcock and relating to their key priorities for 2020/21. Notwithstanding this waiver, the Remuneration Committee reviewed their performance against the
objectives set, and determined that these had been met in full.
Babcock International Group PLC Annual Report and Financial Statements 2021
145
Strategic reportGovernanceFinancial statements
Remuneration Committee Report continued
Non-financial measures
The Committee set non-financial objectives for Archie Bethel and Franco Martinelli at the start of the year around strategic and risk
management ‘Themes’ of Growth, Technology/Processes, Resources and Reputation. At the end of the bonus year, the Committee
reviewed their performance against those objectives. In respect of David Lockwood and David Mellors, who joined the Company during
the course of 2020/21, the Committee set them targets that were aligned to the Company’s turnaround. Achievement of the objectives
are summarised below.
David Lockwood
Strategy
Developed a new strategy
Business Model
Introduced a new Operating Model
People
Launched a new Company purpose and
developing a new People Strategy
Customers
Established positive relations with the
Company’s principal customer
David Mellors
Financial
Created a more appropriate
financial baseline for future
financial performance
Improved clarity of reporting
People
Reset finance function as part of
the new Operating Model
Customers
Established positive relations
with key external stakeholders
The 2020/21 bonus outcomes for each Executive Director are as follows:
David Lockwood
David Mellors
Archie Bethel
Franco Martinelli
Archie Bethel/Franco Martinelli
Growth
Initial progress on divestments
International growth limited
Technology/Processes
Progress on technology capabilities in some areas
Resources
Plans to meet growth targets not achieved, in part due to
COVID-19
Reputation
Progress on MOD’s strategic partner programme, but
impacted by COVID-19 and FMSP renegotiation focus
Payment for
financial targets
(% salary)
0%
0%
0%
0%
Payment for
non-financial
targets
(% salary)
0%
0%
0%
0%
Total bonus
(% salary)
0%
0%
0%
0%
Total bonus
£0
£0
£0
£0
Long-term incentive schemes (PSP)
2018 PSP awards vesting for the period ending March 2021 (audited)
Archie Bethel and Franco Martinelli were granted PSP awards in 2018, which were subject to three-year TSR, EPS and ROCE targets for the
period ending 31 March 2021. Performance against these measures is as follows:
3-year TSR vs FTSE 350 (excluding
investment trusts and financial services)
3-year adjusted basic underlying EPS growth to
31 March 2021
3-year average ROCE
Total vesting
% weighting
Threshold performance
(16.7% vesting)
33%
Median TSR
Stretch performance
(100% vesting)
Median TSR
+ 9% p.a.
Actual
performance
Below median
% of each element
vesting
33%
33%
4% p.a.
12%
11% p.a.
14%
(165.9)% p.a.
5.4%
0%
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’ 2018 PSP awards will lapse in full.
PSP awards granted during 2020/21 (audited)*
The Executive Directors were granted PSP awards in 2020. Due to the fall in the share price since the previous PSP grant, the Committee
decided that 2020/21 PSP awards should be scaled back by 10% in value to 180% of salary.
Director
David Lockwood
David Mellors
1. Based on three-day average share price (of 352p) at time of grant.
2. Expressed as a percentage of salary at the date of the award (1 December 2020).
* In the form of nil-cost options.
Number of shares
408,545
285,981
Face value1
£1,440,000
£1,008,000
Face value
(% of salary)2
180%
180%
% of award receivable
for threshold
performance
16.7%
16.7%
146
Babcock International Group PLC Annual Report and Financial Statements 2021
In the Company’s Annual Report and Accounts for the year ending 31 March 2020, the Company stated in its Remuneration Committee
Report that it was delaying the grant of the PSP awards due to the impact of the COVID-19 pandemic. At that time, the intention was to
base any award to Executive Directors on four measures. However, after further consideration and taking into account the recent
appointments of David Lockwood and David Mellors, the Remuneration Committee decided that the best alignment with shareholders
and the Company’s strategy would be to base those awards on free cash flow and relative TSR, with each measure having equal
weighting. The performance period for these awards is based on the three financial years through to 31 March 2023 for cumulative FCF,
and the three years starting on the date of grant (1 December 2020) for relative TSR. The Committee defines FCF as all cash flows of the
Company, including exceptional items (unless the Committee decides otherwise), but excluding disposals, on an IFRS 16 basis as stated in
the Company’s Annual Report and Financial Statements.
Given the reset of the Company and the absence of guidance, the Committee considers the performance range for the cumulative
three-year FCF measure to be commercially sensitive, but intends to disclose it once it ceases to be so, which is expected to be on the
return to giving guidance. The Committee may need to use its discretion to review the outcome of the awards in 2023 to take into
account the level of uncertainty at the time of award. As always, final decisions would include a check to ensure alignment with the
shareholder experience. The relative TSR performance range is described below:
3-year TSR vs FTSE 350 (excluding investment trusts and financial services)
50%
Median TSR
% weighting
Threshold performance
(16.7% vesting)
Stretch performance
(100% vesting)
Median TSR
+ 9% p.a.
Deferred Bonus Plan awards made during 2020/21 (audited)
Neither Archie Bethel nor Franco Martinelli was granted DBP awards in 2020, as the Company did not pay their 2019/20 bonus due to
the Company not paying a dividend in the year.
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
Ruth Cairnie
Sir David Omand2
Myles Lee
Victoire de Margerie
Lucy Dimes
Kjersti Wiklund
Russ Houlden
Carl-Peter Forster3
Lord Parker4
Ian Duncan5
Jeff Randall5
Base fee
£’000
Additional fee1
£’000
Total
£’000
Total fixed
remuneration
Total variable
remuneration
20/21
319
61
62
62
58
58
58
55
24
18
18
19/20
253
72
65
65
61
61
n/a
n/a
n/a
61
61
20/21
–
–
–
–
–
15
10
–
–
5
–
19/20
n/a
–
–
–
–
–
n/a
n/a
n/a
15
15
20/21
319
61
62
62
58
73
68
55
24
23
18
19/20
253
72
65
65
61
61
n/a
n/a
n/a
76
76
20/21
319
61
62
62
58
73
68
55
24
23
18
19/20
253
72
65
65
61
61
n/a
n/a
n/a
76
76
20/21
–
–
–
–
–
–
–
–
–
–
–
19/20
–
–
–
–
–
–
–
–
–
–
–
1. Relating to role as Chair of the Audit Committee (Russ Houlden) with effect from August 2020 and Remuneration Committee (Kjersti Wiklund) with effect from April
2020.
2. Sir David Omand was Senior Independent Director until the 2020 AGM, when Carl-Peter Forster stepped up to the role.
3. Carl-Peter Forster joined the Board in June 2020 and stepped up to be Senior Independent Director at the 2020 AGM.
4. Lord Parker joined the Board in November 2020.
5. Ian Duncan and Jeff Randall retired from the Board after the AGM on 4 August 2020.
Babcock International Group PLC Annual Report and Financial Statements 2021
147
Strategic reportGovernanceFinancial statements
Remuneration Committee Report continued
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 2021/22
The Committee has set the remuneration for Executive Directors for 2021/22 in line with the Company’s approved Remuneration policy.
Fixed pay
Executive Directors’ base salaries are normally reviewed each year with any changes usually taking effect from 1 April. However, given the
continued uncertainty of the impact of the COVID-19 pandemic, the Committee has decided to delay its review of Executive Director
salaries until September 2021, in line with the approach for other employees. The Executive Directors will participate in the same pension
arrangements as in FY21 (ie at 10% of salary) and the same benefits as in FY21.
David Lockwood
David Mellors
* Subject to review in September 2021
2021/22*
£800,000
£560,000
2020/21
£800,000
£560,000
2021/22 Annual bonus
The structure of the Executive Director annual bonus for 2021/22 is consistent with that for 2020/21, with measures based on OCF, PBT
and non-financial objectives. The Committee have agreed the measures and targets but, due to their commercial sensitivity, will only
disclose them in next year’s Annual Report on Remuneration.
40% of any earned bonus will be deferred into shares for three years, with the remaining 60% deferred into shares for one year.
2021 PSP awards
The Committee has granted awards under the PSP to the Executive Directors in 2021 covering the three-year period FY22-FY24, with
measures consistent with those used for the 2020 PSP award, being relative TSR and free cash flow, equally weighted. As in the 2021 PSP
award, the relative TSR performance range is set on the basis of the Company’s three-year TSR outperformance of the constituents of the
FTSE 350 index (excluding investment trusts and financial services). Threshold vesting (of 16.7% of maximum) requires the Company’s TSR
to be median for the benchmark, with maximum vesting requiring an outperformance of median TSR by 9% pa. Given the reset of the
Company and the absence of guidance, the Committee considers the FCF performance range to be commercially sensitive, but intends to
disclose it once it ceases to be so which is expected to be on the return to giving guidance.
Payments for loss of office (audited)
Archie Bethel retired from the Company on 31 March 2021, having previously stepped down as an Executive Director on
14 September 2020. Archie received his base salary (£444,301), pension (£95,525) and benefits (£199,674 including
accommodation and accrued holiday pay) through to his retirement, and was eligible to receive a bonus for FY20/21, but none
was paid. He received no further payments for loss of office and no discretion was required in determining this outcome.
Franco Martinelli stepped down as an Executive Director on 30 November 2020 and is due to retire from the Company on
30 September 2021. Franco will continue to receive his base salary (£152,903 in FY20/21), pension (£32,875 in FY20/21) and
benefits through to his retirement and was eligible to receive a bonus for FY20/21 but none was paid. He will receive no further
payments for loss of office and no discretion was required in determining this outcome.
The Committee considered the consequences of the contract profitability and balance sheet review and, as a result, decided to reduce to
zero the PSP awards granted to Archie Bethel and Franco Martinelli in June 2019 and December 2020.
Both Archie Bethel and Franco Martinelli have outstanding DBP awards. In accordance with DBP rules, the awards will vest on their normal
vesting dates. They will receive a cash sum equivalent to the dividends that accrue on the shares that vest.
Payments to past Directors (audited)
John Davies stepped down as an Executive Director on 31 March 2020 and retired as CEO Land on 28 June 2021. His 2017 PSP
award lapsed in full. His 2017 DBP award (the value of which was disclosed in the 2017 Directors’ Remuneration Report) vested on
14 June 2020.
Bill Tame retired from the Company on 30 June 2018, having previously stepped down as an Executive Director on 31 March 2018. Bill’s
2017 PSP award lapsed in full. His 2017 DBP award (the value of which was disclosed in the 2017 Directors’ Remuneration Report) vested
on 14 June 2020.
Peter Rogers retired from the Company on 31 August 2016. His 2017 DBP award (the value of which was disclosed in the 2017
Directors’ Remuneration Report) vested on 14 June 2020.
148
Babcock International Group PLC Annual Report and Financial Statements 2021
Non-Executive Directors’ fees (including the Chair)
There are no changes to the fees for the Chair and the Non-Executive Directors for the 2021/22 financial year.
Annual rate fee
Chair
Senior Independent Director (inclusive of basic fee)
Basic Non-Executive Director’s fee (UK-based Directors)1
Chair of Audit Committee2
Chair of Remuneration Committee2
Year to
31 March 2022
£
336,000
72,000
61,000
15,000
15,000
Year to
31 March 2021
£
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 2022.
2. Fees for chairing Board Committees are paid in addition to the basic applicable Non-Executive Director’s fee. No additional fees are paid for membership of
Committees.
Percentage change in the remuneration of all Directors compared to the workforce
The table below shows the percentage change in remuneration from the prior year for each Director compared to the average UK
employee, as required under The Companies (Directors’ Remuneration policy and Directors’ Remuneration Report) Regulations 2019. This
analysis will be built up in subsequent years until it displays a five-year history.
The Regulations require this disclosure to provide a comparison of year-on-year changes in Director remuneration compared to all other
employees of the parent company in the Group. However, Babcock International Group PLC does not have any employees, on which basis
there would be no data to disclose for the broader employee population. The Committee has therefore elected to compare the change in
Director remuneration against the change in remuneration for the average of the UK employee population, as a suitable comparator
group for this purpose.
The Committee monitors carefully this information to ensure that the trend over time in fixed pay is appropriately aligned between
Executive Directors, Non-Executive Directors and UK employees.
Base salary / fees
Taxable benefits
Single-year variable
% change 2019/20 to 2020/21
Executive Directors
David Lockwood1
David Mellors1
Non-Executive Directors2
Ruth Cairnie3
Sir David Omand
Myles Lee
Victoire de Margerie
Lucy Dimes
Kjersti Wiklund
Russ Houlden1
Carl-Peter Forster1
Lord Parker1
Former Executive Directors4
Archie Bethel5
Franco Martinelli5
Former Non-Executive Directors
Ian Duncan
Jeff Randall
Average for all UK employees
n/a
n/a
26%
-15%
-5%
-5%
-5%
18%
n/a
n/a
n/a
-4%
-4%
-5%
-24%
2%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
35%
0%
n/a
n/a
0%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
-100%
1. Joined during 2020/21, and hence no year-on-year comparison is available.
2. Non-Executive Directors receive fees only. They do not receive taxable benefits and do not participate in incentive schemes.
3. Year-on-year change reflects appointment during 2019/20 as Chair of Babcock.
4. The percentage change in salary, benefits and single-year variable for former Directors reflects annualised values for 2020/21 remuneration, to facilitate a
comparison with 2019/20 on a like-for-like basis.
5. Archie Bethel and Franco Martinelli did not receive an annual bonus in either 2019/20 or in 2020/21.
Babcock International Group PLC Annual Report and Financial Statements 2021
149
Strategic reportGovernanceFinancial statements Remuneration Committee Report continued
Relative importance of spend on pay
Distribution to shareholders1
Employee remuneration
2020/21
£0m
£1,611m
2019/20
£152m
£1,606m
% change
-100%
-1.1%
1. Distributions to shareholders includes all amounts distributed to shareholders, being only dividends.
CEO pay ratio
The table below provides disclosure of the ratio between the CEO’s total remuneration and that of the lower quartile, median and upper
quartile UK-based employee.
Figures for the CEO are based on the data from the Executive Directors’ single figure table on page 144 and is a combination of Archie
Bethel’s and David Lockwood’s remuneration for the periods that each was CEO during the financial year. Total remuneration figures for
the lower quartile (P25), median (P50) and upper quartile (P75) employees were determined on 31 March 2021 using the ‘single figure’
methodology as at 31 March 2021, providing a like-for-like comparison with CEO remuneration.
The reporting regulations offer three calculation approaches for determining the pay ratio – Options A, B and C. The most statistically
accurate approach is Option A, which we were able to adopt this year, due to the centralisation of our payroll and HR systems, allowing
sufficient time to collate the necessary information. Total full-time equivalent remuneration was calculated for all UK employees
throughout the 20/21 financial year, which was then ranked, and 3 employees representing P25, P50 and P75 were identified.
As with last year, bonus payments were excluded from the calculations because it was not feasible to identify which payments were
explicitly for services delivered within the financial year, and because not all bonus pay relating to financial year 20/21 are known at the
time of publication. Analysis of past data indicates that the three employees would not typically be eligible for a bonus and the exclusion
of this element is unlikely to have a significant impact on the ratios reported.
To validate that the figures presented are representative of the pay and benefits of the UK workforce, the pay and benefits of a number of
employees centred on each of the three employees was also considered. Whilst there can be variation in the pay mix for individuals
throughout the organisation, the Committee believes that the information presented fairly reflects pay at the relevant quartiles amongst
our UK workforce. The three individuals identified were full-time employees during the year and 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.
The median CEO pay ratio in the last financial year was 22:1 compared to 37:1 in FY19/20. The decline in the ratio reflects a significant
reduction in the CEO total remuneration, primarily due to the annual bonus not paying out in 20/21, but also a result of the 20% salary
reduction for the CEO from June to September. At the same time, employee pay saw an increase from FY19/20.
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 and the Company’s reward policies across the organisation, 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.
Financial year
FY20/21
FY19/20
Financial year
FY20/21
FY19/20
Calculation methodology
Option A
Option C
Total remuneration (£’000)
Salary (£’000)
Total remuneration (£’000)
Salary (£’000)
P25
(lower quartile)
30:1
47:1
P25
(lower quartile)
£29.7
£28.0
£29.2
£25.1
P50
(median)
22:1
37:1
P50
(median)
£39.2
£35.8
£37.6
£36.3
P75
(upper quartile)
17:1
27:1
P75
(upper quartile)
£52.0
£49.0
£50.6
£43.6
150
Babcock International Group PLC Annual Report and Financial Statements 2021
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 2011. 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
1
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
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Babcock
FTSE 250 Index
FTSE 350 Aerospace & Defence Index
The table below details the historical CEO pay over a 10-year period.
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
2018/19
2019/20
2020/21
Peter Rogers1
Single figure (£’000)
Bonus vesting (% max)
DBMP matching shares vesting (% max)
PSP/CSOP vesting (% max)
Archie Bethel2,3
Single figure (£’000)
Bonus vesting (% max)
DBMP matching shares vesting (% max)
PSP vesting (% max)
David Lockwood4
Single figure (£’000)
Bonus vesting (% max)
PSP vesting (% max)
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%
1,012
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%
334
0%
n/a
0%
547
0%
N/A
1. Until retirement on 31 August 2016.
2. Excludes remuneration received whilst undertaking the role of Chief Operating Officer until August 2016.
3. Until he stepped down as CEO on 14 September 2020.
4. Excludes his salary from when he joined the Company in August before joining the Board as CEO on 14 September 2021.
Babcock International Group PLC Annual Report and Financial Statements 2021
151
Strategic reportGovernanceFinancial statements
Remuneration Committee Report continued
Directors’ share ownership
Directors’ interests in shares (audited)
The interests of the Directors (and/or their spouses) in the ordinary shares of the Company as at 31 March 2021 and Directors’ interests in
shares and options under the Company’s long-term incentives are set out in the sections below:
At 31 March 2020
At 31 March 20211
Shares held
Shares held
Options held
Director
David Lockwood
David Mellors
Ruth Cairnie
Sir David Omand
Myles Lee
Victoire de
Margerie
Lucy Dimes
Kjersti Wiklund
Russ Houlden
Carl-Peter Forster
Lord Parker
Former Director
Archie Bethel
Franco Martinelli
Ian Duncan
Jeff Randall
Owned outright
by Director or
Spouse2
n/a
n/a
50,000
–
30,000
7,061
5,000
2,100
n/a
n/a
n/a
460,416
336,014
–
6,097
Owned outright
by Director or
Spouse2
186,924
71,268
120,000
–
40,000
7,061
5,000
2,100
–
10,000
–
476,421
336,014
–
6,097
Vested but
subject to
holding
period
–
–
Vested
but not
exercised
–
–
Unvested and
subject to
performance
conditions
408,545
285,981
Unvested and
subject to
continued
employment
–
–
S/holding
req.
(% salary)
300%
200%
Current
shareholding
(% of salary)3
57%
31%
Req.
met?3
Building
Building
–
–
–
–
445,290
249,466
89,202
51,570
300%
200%
157%
195%
No
No
1. At the date of stepping down from the Board, in the case of former directors.
2. Beneficially held shares (of Director and/or spouse).
3. Current shareholdings for comparison with the shareholding requirements for Executive Directors are calculated based on salary as at 31 March 2021 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 2021 and a three-month average share price to 31 March
2021 of 243.58p, and calculated post-tax.
There have been no changes to the continuing Directors’ (or their spouses’) shareholdings between 31 March 2021 and 30 July 2021.
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 2021 was 228.6p. The highest and lowest mid-market share prices in the year ended
31 March 2021 were 448.7p and 199.0p, respectively.
Director
David Lockwood
Plan and
year of award1
PSP 2020
Number of
shares subject
to award at
1 April 2020
Granted
during
the year
– 408,545
Exercised
during
the year
–
Director
David Mellors
Plan and
year of award1
PSP 2020
Number of
shares subject
to award at
1 April 2020
Granted
during
the year
285,981
Exercised
during
the year
–
Number of
shares
subject to
award at
31 March
2021
– 408,545
Lapsed
during
the year
Number of
shares
subject to
award at
31 March
2021
– 285,981
Lapsed
during
the year
Exercise price
(pence)2
–
Exercise price
(pence)2
–
152
Babcock International Group PLC Annual Report and Financial Statements 2021
Market value
of each share
at date of
award (pence)
Expiry
date3
352.47 Dec 2025 Dec 2026
Exercisable
from
Market value
of each share
at date of
award (pence)
Expiry
date3
352.47 Dec 2025 Dec 2026
Exercisable
from
Director
Archie Bethel
Plan and year
of award1
PSP 2017
DBP 2017
PSP 2018
DBP 2018
PSP 2019
DBP 2019
PSP 2020
Plan and year
of award1
Director
Franco Martinelli PSP 2017
DBP 2017
PSP 2018
DBP 2018
PSP 2019
DBP 2019
PSP 2020
Number of
shares subject to
award at
1 April 2020
171,588
29,185
181,605
32,749
263,685
56,453
Number of
shares subject to
award at
1 April 2020
96,112
18,387
101,723
18,483
147,743
33,087
Granted
during
the year
–
Exercised
during
the year(a)
–
29,185
Lapsed
during
the year
171,588
Exercised
during
the year(b)
–
18,387
Lapsed
during
the year
96,112
414,632
Granted
during
the year
–
232,319
Exercise price
(pence)2
Exercise price
(pence)2
Number of
shares subject
to award at
31 March 2021
–
–
181,605
32,749
263,6854
56,453
414,6324
Number of
shares subject
to award at
31 March 2021
–
–
101,723
18,483
147,7434
33,087
232,3194
Market value
of each share
at date of
award (pence)
Exercisable
from
Expiry
date3
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
352.47 Dec 2025 Dec 2026
Market value
of each share
at date of
award (pence)
Exercisable
from
Expiry
date3
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
352.47 Dec 2025 Dec 2026
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 137 to 138.
2. The PSP awards are structured as nil-priced options and are subject to the rules of the PSP, including as to meeting performance targets for PSP awards.
3. Where this date is less than 10 years from the date of award, the Committee may extend the expiry date on one or more occasions, but not beyond the tenth
anniversary of the award.
4. These grants have since 31 March 2021 been reduced to zero.
(a) Market value on date of exercise (14 August 2020) was 276.20p.
(b) Market value on date of exercise (19 March 2021) was 254.05p.
General notes:
1. ‘Dividend equivalent cash’ (an amount representing dividends earned) of 88.35p per vested share had accrued on the DBP 2017 awards 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 368.90p (14 June 2020) for DBP 2017 awards.
Summary of share-based awards and options vested during the year
During the year to 31 March 2021 the following awards vested:
Director
Award
Number vesting
Vesting date
Market value of
vested shares on
award
£
Market value of
vested shares on
vesting date
£
Exercise price
payable
for vested shares
(if any) £
Archie Bethel
DBP 2017
29,185 14 Jun 2020
£260,234
£107,663
Franco Martinelli
DBP 2017
18,387 14 Jun 2020
£163,951
£67,830
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 2020/21
None of the Executive Directors received a fee for any external appointment during the year.
This Remuneration Report was approved by the Board on 30 July 2021 and signed on its behalf by:
Kjersti Wiklund
Committee Chair
Babcock International Group PLC Annual Report and Financial Statements 2021
153
Strategic reportGovernanceFinancial statements
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 (2)
9.8.4 (5)
9.8.4 (12-13)
Location
Financial statements, note 15
on pages 232 and 233
Topic
Interest capitalised by the
Group during the year
Publication of unaudited
financial information
Director waivers of emoluments Remuneration report on page 144
Shareholder waivers of
dividends and future dividends
Financial statements, note 27
on page 253
Financial review on page 38
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
Subsequent events
Likely future developments in the business of
the Group
Details of important events affecting the Group
Location
Note 2, page 192
Page 68
Pages 58, 71, 102, 114 and 142
Pages 58 to 59, page 78 and
throughout the Strategic report
Note 37 on page 263
Pages 12 to 15
Strategic and directors’ reports in
particular pages 12 to 15 and 30
to 49
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 financial statements incorporated by reference.
The Company
Babcock International Group PLC, registered and domiciled in England and Wales, with the registered number 02342138, is the holding
company for the Babcock International Group of companies.
Dividends
The Company did not pay an interim dividend this year (2020: 7.2 pence per 60 pence ordinary share) and, as part of our focus on
building a strong balance sheet, has not recommended a final dividend (2020: nil).
Major shareholdings
As at 31 March 2021, 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
Polaris Capital Management, LLC
Abrams Bison Investments, L.L.C.
Cobas Asset Management, SGIIC, S.A.
Tameside MBC re. Greater Manchester Pension Fund managed by UBS Asset Management
Number of 60 pence ordinary
shares on date of notification
50,381,712
30,374,782
29,311,332
15,547,899
15,738,663
% of issued share capital
on date of notification
9.96%
6.01%
5.80%
3.08%
3.11%
Since 31 March 2021 the Company has been notified by Polaris Capital Management, LLC. that it reduced its interest to 29,089,500
shares representing 5.75% in the share capital of the Company. There have been no further notifications between then and the date of
this report.
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.
154
Babcock International Group PLC Annual Report and Financial Statements 2021
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 August
2020, members authorised the Company
to make market purchases of up to
50,559,660 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 4 August 2020 (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 2021
by the Babcock Employee Share Trust in
connection with the Company’s executive
share plans are to be found in note 27 on
page 253.
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 very material. In addition the UK
government is considering provding itself
with new powers to scrutinise transactions
on national security grounds with the
introduction of the National Security and
Investment Bill.
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 May 2021, the Group agreed a new
revolving credit facility of up to £300 million.
As with the Group’s existing main £775 million
revolving credit facility maturing in
August 2025, the new facility provides
funds for general corporate and working
capital purposes. The new facility expires
in May 2024. In the event of a change of
control, both facilities provide that the
lenders may, within a certain period,
call for the payment of any outstanding
loans and cancel the facilities.
£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 140
and 141.
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.
Babcock International Group PLC Annual Report and Financial Statements 2021
155
Strategic reportGovernanceFinancial statements Additional statutory information continued
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.
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 a relevant Marine sector
operating company or any holding
company including the Company in
circumstances where, acting on the
grounds of national security, the MOD
considers that it is inappropriate for the
new owners to become involved, or
interested, in the Marine sector. ‘Change in
control’ occurs where a person or group of
persons that controls the relevant company
ceases to do so or if another person or
group of persons acquires control.
Future Maritime Support Programme
Interim Agreement dated 31 March
2021 between (1) The Secretary of State
for Defence (2) Devonport Royal
Dockyard Limited (3) Babcock Marine
(Clyde) Limited and (4) Rosyth Royal
Dockyard Limited and (5) the Company
Babcock has been delivering services at
HMNB Clyde and HMNB Devonport under
the Maritime Support Delivery Framework
(MSDF) contract for the MOD since
1 October 2014. MSDF had replaced
Babcock’s Warship Support Modernisation
Initiative (WSMI) contracts. These contracts
sit under and work alongside Babcock’s
ToBA, which runs through to 2025.
The MOD is now contracting the replacement
programme for Babcock’s MSDF under
the Future Maritime Support Programme
(FMSP). Babcock is delivering its services
under an Interim FMSP Agreement.
Surface Ship Support Alliance Agreement
(SSSA) dated 28 April 2017 between (1)
The Secretary of State for Defence, (2)
Devonport Royal Dockyard Limited and
(3) BAE Surface Ships Limited
Any change of control of Devonport Royal
Dockyard Limited must be approved in
advance by the Secretary of State for
Defence. Consent may be withheld to
prevent an unsuitable third party taking
control. Breach may result in exclusion
from the alliance.
Competitive Design Phase Contract for
the Type 31 Programme dated 7
December 2018 (as amended and
restated on 15 November 2019)
between (1) The Secretary of State for
Defence and (2) Devonport Royal
Dockyard Limited
The Secretary of State for Defence may
terminate if, in its reasonable opinion, a
change of control of Devonport Royal
Dockyard or any holding company will be
contrary to the defence, national security
or national interest of the UK. In 2020 this
contract was novated to Rosyth Royal
Dockyard Limited.
Since the Marine sector is core to the
strategy, profitability and cashflow of the
Group, the exercise of the change of
control clauses outlined above could be
very damaging not only to the Marine
sector but to the Group as a whole.
Share capital and rights attaching to
the Company’s shares
General
Under the Company’s Articles of
Association, any share in the Company may
be issued with such rights or restrictions,
whether in regard to dividend, voting,
return of capital or otherwise, as the
Company may from time to time by
ordinary resolution determine (or, in the
absence of any such determination, as the
Directors may determine). The Directors’
practice is to seek authority from
shareholders at each year’s Annual General
Meeting to allot shares (including authority
to allot free of statutory pre-emption rights)
up to specified amounts and also to buy
back the Company’s shares, again up to a
specified amount.
At a general meeting of the Company,
every member has one vote on a show
of hands and, on a poll, one vote for each
share held. The notice of general meeting
specifies deadlines for exercising voting
rights, either by proxy or by being present
in person, in relation to resolutions to be
proposed at a general meeting.
No member is, unless the Board decides
otherwise, entitled to attend or vote, either
personally or by proxy, at a general meeting
or to exercise any other right conferred by
being a shareholder if they or any person
with an interest in their shares has been
sent a notice under Section 793 of the
Companies Act 2006 (which confers upon
public companies the power to require the
provision of information with respect to
interests in their voting shares) and they or
any interested person have failed to supply
the Company with the information
requested within 14 days after delivery of
that notice. The Board may also decide that
no dividend is payable in respect of those
defaulting shares and that no transfer of
any defaulting shares shall be registered.
These restrictions end seven days after
receipt by the Company of a notice of
an approved transfer of the shares or
all the information required by the
relevant Section 793 notice, whichever
is the earlier.
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 on the
following 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.
156
Babcock International Group PLC Annual Report and Financial Statements 2021
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
10 days of receiving such notice (or such
longer period as the Directors may specify)
such that the Affected Shares become
owned by an EEA national, failing which the
Directors may arrange for the sale of the
relevant shares at the best price reasonably
obtainable at the time. The net proceeds of
any sale of Affected Shares would be held
on trust and paid (together with such rate
of interest as the Directors deem
appropriate) to the former registered
holder upon surrender of the relevant share
certificate in respect of the shares.
Circumstances in which the Directors
may determine that shares are
Affected Shares
The Articles provide that where the
Directors determine that it is necessary to
take steps in order to protect an operating
licence of the Group they may: (i) seek to
identify those shares which have given rise
to the determination and to deal with such
shares as Affected Shares; and/or (ii) specify
a maximum number of shares (which will
be less than 50% of the Company’s issued
share capital) that may be owned by
non-EEA nationals and then 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.
Babcock International Group PLC Annual Report and Financial Statements 2021
157
Strategic reportGovernanceFinancial statements Additional statutory information continued
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.
Internal controls and risk management
There has been a process for identifying,
evaluating and managing principal risks
throughout the year to 31 March 2021
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 reviews
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.
The Board, through the Audit Committee,
reviews the effectiveness of the Company’s
internal control processes formally at least
once a year. More information can be
found in the Audit Committee report on
page 131.
In line with the Audit Committee (please
see page 131), the Board considers that
the system of internal and financial controls
was not operating effectively in certain
parts of the Group, in particular, in Aviation,
Land and Head Office. The Audit
Committee is reviewing plans to address
the key issues. Since January 2021, the
Company has implemented a number of
improvements. Provided that these plans
are effectively implemented, the Audit
Committee believes that the Company’s
internal and financial controls should
become fully effective.
Further information on the principal
internal controls and risk assurances in
use in the Company can be found on
pages 84 to 86.
Auditor
As described on page 119 the Board has,
subject to shareholder approval, appointed
a new statutory auditor for the year ending
31 March 2022. A resolution to appoint
Deloitte as independent auditor of the
Company 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 accounting standards in
conformity with the requirements of the
Companies Act 2006 and the company
financial statements in accordance with
United Kingdom Generally Accepted
Accounting Practice (United Kingdom
Accounting Standards, comprising FRS 101
“Reduced Disclosure Framework”, and
applicable law). Additionally, the Financial
Conduct Authority’s Disclosure Guidance
and Transparency Rules require the
Directors to prepare the Group financial
statements in accordance with international
financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002
as it applies to the European Union.
Under company law, 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 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 international
accounting standards in conformity with
the requirements of the Companies Act
2006 and international financial
reporting standards adopted pursuant to
Regulation (EC) No 1606/2002 as it
applies in 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; and
• prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
Group and the Company will continue
in business.
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 keeping
adequate accounting records that are
sufficient to show and explain the Group’s
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 financial statements and the Directors’
Remuneration Report comply with the
Companies Act 2006.
The Directors are responsible for the
maintenance and integrity of the
Company’s website. Legislation in the
United Kingdom governing the
preparation and dissemination of financial
statements may differ from legislation in
other jurisdictions.
158
Babcock International Group PLC Annual Report and Financial Statements 2021
In addition, each of the Directors listed below considers that the Annual Report and
financial statements, taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group’s and Company’s position,
performance, business model and strategy.
Ruth Cairnie
Carl-Peter Forster
Kjersti Wiklund
Russ Houlden
Prof. Victoire de Margerie
Myles Lee
Lucy Dimes
Lord Parker
David Lockwood
David Mellors
Chair
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Chief Executive Officer
Chief Financial Officer
Approval of the Strategic report and the Directors’ report
The Strategic report and the Directors’ report (pages 2 to 159) for the year ending
31 March 2021 have been approved by the Board and signed on its behalf by:
Ruth Cairnie
Chair
David Lockwood OBE
Chief Executive Officer
30 July 2021
Directors’ confirmations
Each of the Directors, being each Director
who is in office at the date of the Directors’
report is approved and whose names and
functions are listed below, confirm that, to
the best of their knowledge:
• the Group financial statements, which
have been prepared in accordance with
international accounting standards in
conformity with the requirements of the
Companies Act 2006, and international
financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002
as it applies in the European Union give a
true and fair view of the assets, liabilities,
financial position and loss of the Group;
• the Company financial statements, which
have been prepared in accordance with
United Kingdom Accounting Standards,
comprising FRS 101, give a true and fair
view of the assets, liabilities, financial
position and profit of the Company; and
• the Strategic Report and 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.
• so far as the Director is aware, there is no
relevant audit information of which the
Group’s and the Company’s auditors are
unaware; and
• 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’s and the
Company’s auditors are aware of
that information.
Babcock International Group PLC Annual Report and Financial Statements 2021
159
Strategic reportGovernanceFinancial statements Jamie Gibbons
Maintenance Supervisor
Australia
160
Babcock International Group PLC Annual Report and Financial Statements 2021
Strategic report
Governance
Financial statements
Babcock International Group PLC Annual Report and Financial Statements 2021
161
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 2021 and of the Group’s loss and the Group’s
cash flows for the year then ended;
• the Group financial statements have been properly prepared in accordance with international accounting standards in conformity with
the requirements of the Companies Act 2006;
• 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.
We have audited the financial statements, included within the Annual Report and Financial Statements (the “Annual Report”), which
comprise: the Group and Company statements of financial position as at 31 March 2021; 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 Committee.
Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union
As explained in note 1 to the Group financial statements, the Group, in addition to applying international accounting standards in
conformity with the requirements of the Companies Act 2006, has also applied international financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
In our opinion, the Group financial statements have been properly prepared in accordance with international financial reporting standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
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.
Other than those disclosed in note 7 to the financial statements, we have provided no non-audit services to the Group in the period under audit.
Our audit approach
Overview
Audit scope
• We conducted our audit work over the complete financial information for 31 of the largest and higher risk reporting components
located in the UK, Europe, South Africa and Australia, including one financially significant component, Devonport. We increased the
number of components in scope to include the Aviation businesses in Norway and Sweden after PwC Oslo reported issues to us in
completing the 31 March 2020 local statutory audit in December 2020.
• In addition, we performed specified audit procedures at 17 further reporting components and for the Group’s share of the results of six joint
ventures, selected based on their relative contribution to the Group results. The number of components on which specified audit procedures
were performed was expanded to cover a number of issues identified by the contract profitability and balance sheet (CPBS) review. A large
proportion of these were Aviation entities in Europe where issues were identified but had not historically been in scope for Group reporting.
• 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 central and component locations at which work was performed by the group engagement team and component
auditors accounted for 84% of Group revenue and 78% of Group loss before tax.
Key audit matters
• Contract accounting and revenue/profit recognition (Group)
• Contract profitability and balance sheet review (Group)
• Goodwill and other acquired intangibles impairment (Group)
• Valuation of defined benefit pension liabilities (Group)
• Presentation and classification of specific adjusting items, including exceptional items (Group)
• Completeness and accuracy of lease liabilities and right-of-use assets (Group)
• Impact of COVID-19 (Company and Group)
• Going concern (Company and Group)
162
Babcock International Group PLC Annual Report and Financial Statements 2021
Materiality
• Overall Group materiality: £15,900,000 (2020: £21,400,000) based on 75% of the 2020 materiality, given the impact to the 2021
income statement of the CPBS review, which distorts the ongoing performance of the Group. We have applied a 25% reduction to reflect
an expected normalised performance of the Group, which considers and factors in an appropriate level of reduction in the Group’s
ongoing operations and performance arising from the impact of COVID-19 and the prospective impact of the CPBS review. The 2020
materiality was based on 5% of profit before tax, adjusted for amortisation of acquired intangible assets and exceptional items.
• Company financial statements: £61,391,000 (2020: £72,750,000), based on 1% of total assets. For the purposes of the Group audit,
we applied a lower materiality of £12,375,000 (2020: £16,500,000) to Company balances and transactions, other than those which
were eliminated on consolidation in the Group financial statements.
• Performance materiality: £11,925,000 (Group) and £9,280,000 (Company).
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.
Capability of the audit in detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined in the Auditors’ responsibilities for the audit of the financial statements section, to detect material misstatements
in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is
detailed below.
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, tax regulations, anti-bribery and corruption
legislation, health and safety regulation and equivalent local laws and regulations applicable to reporting components, 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 the posting of inappropriate journal entries and management
bias in accounting estimates and judgments. This included the risk of manipulation of results to achieve performance targets through
improper revenue/profit recognition, given the judgmental nature of contract accounting (see key audit matter); inappropriate
capitalisation of costs or expenses; and assessing the adjustments arising from management’s CPBS review. 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:
• Gaining an understanding of the legal and regulatory framework applicable to the Group and the industries in which its businesses
operate, and considering the risk of any acts by the Group which may be contrary to applicable laws and regulations, including fraud.
• Discussions with management and internal audit, including consideration of known or suspected instances of non-compliance with laws
and regulation and fraud;
• Evaluating the results of whistleblowing procedures and related investigations;
• Review of reporting component auditors’ work, including any matters reported by component auditors relating to non-compliance with
laws and regulations or fraud;
• Challenging assumptions and judgments made by management in their significant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain. In particular in relation to contract accounting and revenue/
profit recognition, management’s CPBS review, and goodwill impairment (see related key audit matters below). This included meetings
with, and reviewing working papers prepared by, component auditors to understand and assess the areas of estimation and judgement
relevant to the component, and how component auditors challenged management to support their conclusions;
• As in all of our audits we also addressed the risk of management override of internal controls, including testing journals, and evaluated whether
there was evidence of bias by management or the directors that represented a risk of material misstatement due to fraud. In particular, we
considered the results of management’s CPBS review and our procedures thereon (as detailed in the related key audit matter below), and we
did not identify any specific material matters relating to fraud. As part of our work on the CPBS review we considered the risk that new
management may take an overly prudent position, both at a group and a component level, on long term profitability.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-
compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. 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.
There are two new key audit matters this year. One in respect of the CPBS review which reflects the additional work involved in addressing
the adjustments proposed by management and one in respect of Going Concern. Otherwise, the key audit matters below are consistent
with last year.
Babcock International Group PLC Annual Report and Financial Statements 2021
163
Strategic reportGovernanceFinancial statements Independent auditors’ report to the members of Babcock International Group plc continued
Key audit matter
Contract accounting and revenue/profit recognition (Group)
Refer to notes 6, 20 and 22 in the Group financial statements and the
Audit Committee Report.
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, where applicable;
• Recognise revenue arising from 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
• Provide appropriately against 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 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), acceptance
certificates, milestone agreements, and/or discussions
with external legal advisors;
• Performed procedures over management’s contract
forecast models, testing the mathematical accuracy and
agreeing amounts to underlying contracts;
• Discussed and obtained supporting evidence of
management’s estimates for total contract costs and
forecast costs to complete, including considering the
historical accuracy of such estimates and understanding
the reasons for material changes where these have
arisen as part of the CPBS review;
• 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 management’s calculations of provisions for
onerous commitments, where these relate to a contract;
• 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; and
• Assessed the results of management’s CPBS review and
considered the impact on contract profitability and our
audit more broadly (see separate key audit matter below).
Our testing did not identify any material factors that
management had not considered in its estimates of the
total contract costs, stage of completion and expected
profit margin of each contract (including the expected
losses on loss making contracts). A number of adjustments
were identified by our work which were adjusted for by
Group management.
164
Babcock International Group PLC Annual Report and Financial Statements 2021
Key audit matter
Contract accounting and revenue/profit recognition (Group)
(continued)
Contract profitability and balance sheet review (Group)
Refer to notes 3, 4 and 5 in the Group financial statements and the
Audit Committee Report.
During the current year, management, with the assistance of an
independent accounting firm, performed a review of the contract portfolio
and other balance sheet items as part of its contract profitability and
balance sheet (CPBS) review including consideration of the impact on the
annual goodwill impairment assessment. This review identified a number of
findings, including:
• impairment of goodwill and other assets;
• changes in the estimation of contract profitability;
• correction of errors in the accounting for property, plant and equipment,
right of use assets and deferred contract fulfilment costs; and
• changes in the estimation of provisions.
As a result of these findings, management recorded adjustments in the
financial statements in respect of the current year and restatements to
prior years.
The adjustments arising from the CPBS review, including the impact of the
annual goodwill impairment review, increased the loss before tax for the
year ended 31 March 2021 by £1,853m. This includes impairment of
goodwill and acquired intangible assets (£1,349m), impairments of
property plant and equipment and right of use assets (£157m), impairment
of other assets and increased liabilities (£310m), adjustments relating to
investments in joint ventures and associates (£37m) and other adjustments
included within underlying operating profit of £275m.
Through the CPBS review process, management also reassessed a number
of key accounting policies applied and accounting judgments made in prior
years. Corrections of errors in previously reported figures were also
identified as being required. Where these resulted in a material impact to
the financial statements, adjustments have been made to the comparative
information for the year ended 31 March 2020 and opening balances. The
correction of the prior year errors reduced Group net assets at 1 April 2019
by £308m and decreased the loss before tax for the year ended 31 March
2020 by £77m.
The CPBS review also identified an accounting policy that management
elected to change relating to the treatment of “power by the hour”
agreements for aircraft. The comparative information for the year ended 31
March 2020 and opening balances have been restated, resulting in a
reduction in Group net assets at 1 April 2019 of £45m and an increase to
the loss before tax for the year ended 31 March 2020 of £15m.
How our audit addressed the key audit matter
Overall, we consider the contract positions taken by
management at 31 March 2021 to be reasonable and to
comply with the relevant accounting standards. In
reaching this view, we considered the risk of management
bias. Whilst new management were more prudent in
positions taken, overall, we did not identify any instances
of inappropriate management bias.
We considered the nature and extent of the CPBS findings
in determining our assessment of the risk of material
misstatement to the financial statements including as a
result of fraudulent manipulation of the financial
statements (including the risk of override of controls), as
described elsewhere in this report.
We assessed and tested the key areas of judgments and
accounting estimates involved in preparing the financial
statements, and considered whether the results of our audit
testing in the current year, including in respect of areas
involving judgement and accounting estimates, were
indicative of prior year errors not identified by management.
The CPBS adjustments included changes in accounting
estimates impacting the current year which related to the
underlying profitability of long-term contracts and
impairment of goodwill and other acquired intangible
assets, which are covered by separate key audit matters.
In respect of other CPBS adjustments, in conjunction with
our component audit teams, we performed procedures to:
• evaluate the classification of current year changes of
estimates, corrections of prior year errors, or changes in
accounting policy, for each individual adjustment with
an impact greater than £800,000 (being the level
agreed with the Audit Committee above which we
would report any misstatements identified during our
audit). We assessed the evidence of the events that
occurred in the current year which resulted in the
adjustments, and evaluated whether adjustments should
have been recorded in prior years and their classification
as policy changes or errors;
• test the monetary value of adjustments greater than
£800,000, through agreement and verification to
supporting documentation; and
• challenge management’s assumptions related to
accounting estimates. We considered management’s
view on the appropriate recoverable amount of the
relevant assets 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. We also checked the
accuracy of the calculations prepared by management.
Babcock International Group PLC Annual Report and Financial Statements 2021
165
Strategic reportGovernanceFinancial statements Independent auditors’ report to the members of Babcock International Group plc continued
Key audit matter
Contract profitability and balance sheet review (Group) (continued)
In respect of asset impairments, management performed impairment
assessments where impairment indicators were identified or where these
were otherwise required by accounting standards. The determination of the
recoverable amount of 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 growth rates and
discount rates applied, where value in use calculations were used to
determine the recoverable amount of the relevant assets.
The classification and treatment of adjustments arising from the CPBS review
required judgment, specifically when assessing whether an adjustment
represented a change of estimate to be recognised in the current year or
related to the correction of a prior year error or change in accounting policy.
Judgment was also required to determine the monetary value of changes in
estimates and prior year errors:
• changes to the key assumptions used by management in the valuation of
internally generated intangible assets, tangible assets and right-of-use
assets subject to an impairment could result in the calculated
recoverable value being lower than the carrying value, resulting in
additional impairment;
• there is a broad range of acceptable outcomes resulting from estimates
and judgments in the determination of forecast contract profitability that
could lead to different revenue and profit being reported in the financial
statements; and
• judgment is required in the assessment of contract fulfilment costs and
expenditure on the repair and maintenance of aircraft in order to
determine whether the capitalisation/deferral of costs is appropriate.
There is a risk that new management may take an overly prudent position
on long term profitability.
Judgment was also required in respect of the classification and disclosure
of these items in the financial statements.
Goodwill and other acquired intangibles impairment (Group)
Refer to notes 3, 4, 5, 13 and 14 in the Group financial statements and
the Audit Committee Report.
The Group has goodwill of £956m (2020: £2,288m), allocated between
the Aviation, Nuclear, Marine, Land and Africa cash generating units (CGUs),
which is subject to an annual impairment review. In addition, the group has
acquired intangibles of £104m (2020: £202m). Management assessed a
CGU to be an operating segment for the purposes of goodwill and other
intangible impairment testing.
An impairment charge of £1,243m has been recorded against the goodwill
balances allocated to the Aviation (£817m) and Land (£426m) CGUs for
the year ended 31 March 2021. In addition, the correction of a prior year
error of £117m has been recorded for the year ended 31 March 2020.
As disclosed in note 5 to the Group financial statements, following a review
of the methodology, management has corrected an error in the
determination of CGUs, which resulted in the Land and Africa operating
segments being assessed as separate CGUs for the years ending 31 March 2021
and 31 March 2020. This, together with a computational error identified in
the Land CGU model in the prior year, resulted in a prior year restatement
to record an impairment of £123m in respect of the Land CGU in the year
ended 31 March 2020.
How our audit addressed the key audit matter
Where appropriate, management considered the results of
our procedures in determining the final classifications and
monetary amounts of CPBS adjustments that impacted the
current and prior years, and adjusted these accordingly in
the financial statements.
We evaluated the Group’s revised accounting policy to
determine whether these comply with the requirements of
international financial reporting standards (IFRS) and IFRS
interpretations committee interpretations as adopted by
the European Union and in accordance with international
accounting standards in conformity with the Companies
Act 2006.
We considered the risk of management bias and whilst
new management were more prudent in positions taken,
overall, we did not identify any instances of inappropriate
management bias.
We assessed the related disclosures included in the Group
financial statements and consider them to be sufficient
and appropriate to explain the nature of the CPBS items.
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.
We evaluated the inputs included in the value in use
calculations and challenged the key assumptions by
obtaining evidence, including in respect of:
• The operating profit, margin and growth rates used in the
cash flow forecasts by comparing them with historical
results, forecasts and our understanding of the related
CGU’s historical pipeline, order book and future pipeline;
• The inclusion of expected sale proceeds for planned
business disposals were included within the cash flow
forecasts for each CGU. These were supported by, and
compared to, evidence including; recent offers, external
valuations, discounted cash flows or recent market
transaction activity;
• Working capital, capital expenditure and capital
employed assumptions by comparing these against
historically achieved cash flows, capital expenditure plans
and agreeing these to the respective CGU balance sheets;
• The key market-related assumptions, including discount
rates and short-term and long-term growth rates, by
benchmarking these against external data and using our
valuation expertise;
166
Babcock International Group PLC Annual Report and Financial Statements 2021
Key audit matter
Goodwill and other acquired intangibles impairment (Group)
(continued)
A prior year error was separately identified in respect of an impairment of
Aviation oil and gas customer relationship intangible assets, which has
resulted in a restatement to record an impairment of £58m at 1 April 2019
and £44m at 31 March 2020.
As a result of other Aviation CGU prior year errors identified in the year
ended 31 March 2020, and the associated impact on the carrying values, a
corresponding adjustment was recorded to the goodwill impairment
charge, to reflect the impact of the prior year adjustments, as disclosed in
note 5 to the Group financial statements.
The impairment assessments used to support the carrying value of, or to
determine the level of impairment required against, the goodwill allocated
to the Group’s five 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-term and long-term growth rates and the discount
rates applied.
Changes to the key assumptions used by management could result in the
calculated value in use being lower than the carrying value of the CGU,
resulting in additional impairments. In the current year, we identified a
heightened risk of impairment in respect of the Aviation and Land CGUs.
How our audit addressed the key audit matter
• The reliability of cash flow forecasts through a review of
actual past performance and comparison with previous
forecasts. On a sample basis, projects were agreed to
their estimate at completion forecast, contractual terms
and previous track record performance;
• The allocation of corporate assets was assessed by
understanding and testing the basis for management’s
allocation; and
• Where restructuring cost savings were assumed within
the forecast, we obtained details of management’s
restructuring plan and how these costs savings were
expected to be realised and were committed at the
balance sheet date.
In respect of the prior year errors arising in relation to the
Aviation and Land CGU impairments, and the oil and gas
relationship intangible asset impairment, we:
• Determined the appropriateness of Land and Africa
being treated as separate CGUs by reviewing
management’s internal reporting and understanding
what information is provided to the chief operating
decision maker (CODM);
• Recalculated the 31 March 2020 Land CGU goodwill
impairment, after the computational error was
corrected, and performed procedures to confirm the
error did not impact prior periods;
• Reassessed the carrying value of the Aviation oil and gas
customer intangible asset prior year error by
determining which customer intangible contracts
existed to confirm the point at which the associated
impairment should be recognised; and
• Recalculated the 31 March 2020 Aviation CGU goodwill
impairment after the Aviation CGU carrying values were
updated to reflect the impact of other Aviation CGU
prior period errors.
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 and Land CGUs, 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 Committee and we concluded the impairment
charges recognised were within an acceptable range.
For the impairments recognised we also considered
whether there was contradictory evidence that would
indicate that the fair value less cost to sell was higher than
the value in use calculations used by management to
determine the impairment.
We assessed the related disclosures included in the Group
financial statements, including the sensitivities provided in
respect of the Aviation and Land Sector CGUs for the
long-term growth rates and discount rates, and consider
them to be acceptable.
Babcock International Group PLC Annual Report and Financial Statements 2021
167
Strategic reportGovernanceFinancial statements Independent auditors’ report to the members of Babcock International Group plc continued
Key audit matter
Valuation of defined benefit pension liabilities (Group)
Refer to note 29 in the Group financial statements and the
Audit Committee Report.
The Group operates a number of defined benefit pension plans,
giving rise to net pension deficit of £293m (2020: £145m net
pension asset), gross pension assets of £4,785m (2020: £4,411m)
and gross pension liabilities of £5,078m (2020: £4,266m), 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.
Inappropriate selection of assumptions or methodologies for
calculating the pension liabilities could result in a material
difference in the value of the liabilities.
Presentation and classification of specific adjusting items,
including exceptional items (Group)
Refer to note 3 and 4 in the Group financial statements and the
Audit Committee Report.
The Group has recognised specific adjusting items of £1,615m, and
a related income tax benefit of £34m, for the year ended 31 March
2021,
as disclosed in note 3 to the Group financial statements.
These items include pre-tax exceptional items of £1,497m, of which
£1,243m related to goodwill impairment and £278m related to
the impairment of other assets. Additional specific adjusting items
totalling £118m related to other adjustments arising from
management’s CPBS review.
Judgment was required to determine the appropriate classification
of specific adjusting items and exceptional items, and how these
items are disclosed in the financial statements.
Items may be inappropriately classified as exceptional in the year.
Completeness and accuracy of lease liabilities and right-of-
use assets (Group)
Refer to note 16 in the Group financial statements and the
Audit Committee Report.
The Group has lease liabilities of £612m (2020: £689m) and
right-of-use assets of £521m (2020: £609m) at 31 March 2021.
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 future lease payments.
All material leases across the Group and the relevant data
points from each lease need to be captured to ensure leases are
recorded accurately.
The impact of not capturing all material leases across the Group,
not capturing relevant key data points from each lease and/or
inaccurately calculating the right-of-use asset or lease liability could
be material.
How our audit addressed the key audit matter
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 independently compiled expected ranges,
based on market observable indices, relevant national and
industry benchmarks, and our market experience;
• Examining the IAS 19 reports prepared by management’s
external actuarial experts to assess the consistency of the
methodologies and assumptions used, and compliance with IAS
19 requirements; and
• Reviewing legal and accounting conclusions received
by the Group from third party experts 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.
We assessed the related disclosures included in the Group financial
statements and consider them to be appropriate.
We challenged management’s rationale for the designation of certain
items as exceptional and assessed such items against the Group’s
accounting policy, considering the nature and value of these items.
Additionally, we challenged the appropriateness of management’s
policy and how this was applied.
Our evaluation and conclusions in respect of goodwill impairment,
impairment of other assets, and other adjustments arising from
the CPBS review are set out in the related key audit matters above.
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, identifying no significant
deviations from our expectations.
We also considered whether there were items that were recorded
within underlying loss that we considered to fall within
management’s definition of exceptional items that had not been
classified as such. No material items were identified.
We assessed management’s process for identifying the
completeness of the Group’s leases.
We agreed the lease input data to the lease contract for a sample of
lease additions and disposals. 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.
We assessed the appropriateness and completeness of the
disclosures included in the Group financial statements.
No material issues were identified from our work.
168
Babcock International Group PLC Annual Report and Financial Statements 2021
How our audit addressed the key audit matter
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 and challenging
key assumptions.
We assessed the Group’s liquidity and confirmed the
revolving credit facility terms including the clarifications
and amendments to covenants agreed with the lenders to
support management’s going concern assessment (see
separate key audit matter and the conclusions relating to
going concern section below).
We considered any potential impairment indicators to the
carrying value of assets, including goodwill and other assets,
and the broader impact to the Group’s financial statements,
as set out in the related key audit matters above.
Our procedures and conclusions in respect of going
concern are set out in the conclusions relating to going
concern section below.
Key audit matter
Impact of COVID-19 (Group and Company)
Refer to the Audit Committee Report.
The COVID-19 pandemic has impacted the Group’s trading performance
and future expected cash flows. Therefore, there is inherent uncertainty in
determining the impact of the pandemic on certain aspects of the financial
statements. The key impacts of COVID-19 on the Group and Company
financial statements are:
• The budgets and models supporting the goodwill, indefinite-lived
intangibles, investments in subsidiaries (parent company only) and
tangible fixed asset impairment assessments have been updated to
reflect management’s best estimate of the impacts of COVID-19.
• Future expected cash flows and related assumptions also underpin
management’s going concern and viability assessments, including
covenant compliance. Management has modelled severe but plausible
downside scenarios to its base case trading forecast. Having considered
these models, together with a robust assessment of planned and possible
mitigating actions, and covenant clarification and amendments in place,
management has concluded that the Group remains a going concern,
and that there is no material uncertainty in respect of this conclusion.
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.
Ability of the Group and Company to continue as a going concern
(Group and Company)
Refer to the Going concern and viability statements section of the
Annual Report and the Audit Committee Report.
The Group’s forecast profitability and cash generation have been
significantly reduced as a result of the ongoing COVID-19 pandemic and
the adjustments arising from management’s CPBS review. These gave rise
to a greater uncertainty regarding the Group’s and the Company’s ability to
continue as a going concern, due to the impact on the ability of the Group
to meet financial covenant measures in its borrowing facilities.
Subsequent to the year-end, management agreed a covenant amendment
with the Group’s lenders to its revolving credit facilities at 30 September
2021 and 31 March 2022, and obtained clarification of the treatment of
certain CPBS items for the purposes of the covenant calculations at
31 March 2021 and 30 September 2021.
In accordance with the agreement reached with the Group’s lenders,
management has excluded the majority of the CPBS adjustments when
determining EBITDA for the purposes of the covenant calculation, which
has resulted in continued compliance with the debt covenants.
Management has concluded, based on the Group’s cash flow forecasts and
severe but plausible downsides, that there is no material uncertainty in respect
of the Group’s and the Company’s ability to continue as a going concern.
Babcock International Group PLC Annual Report and Financial Statements 2021
169
Strategic reportGovernanceFinancial statements Independent auditors’ report to the members of Babcock International Group plc continued
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 five Sectors: Marine, Land, Aviation, Nuclear and Africa. 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 31 components that, in our view, required an audit of their
complete financial information due to their size and/or risk, including one financially significant component, Devonport. We increased
the number of components in scope to include the Aviation businesses in Norway and Sweden after PwC Oslo reported issues to us in
completing the 31 March 2020 local statutory audit in December 2020. Specified audit procedures were performed at 17 further
reporting components and over the Group’s share of the results of six joint ventures. The number of components on which specified audit
procedures were performed was expanded to cover a number of issues identified by the contract profitability and balance sheet (CPBS)
review. A large proportion of these were Aviation entities in Europe where issues were identified but had not historically been in scope for
Group reporting. Reporting components in scope, including joint ventures, were based in ten countries: the UK, France, Spain, Portugal,
Italy, Norway, Sweden, Canada, 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. This included specific instructions in
relation to the CPBS review. Due to the 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 clearances at
each of the sectors and a number of clearance meetings across the components using video conferencing. During the clearance
meetings, the findings reported by 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 central and component
locations at which work was performed by the group engagement team and component auditors accounted for 84% of Group revenue
and 78% of Group loss before tax.
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::
Overall
materiality
Financial statements – Group
£15,900,000 (2020: £21,400,000).
Financial statements – Company
£61,391,000 (2020: £72,750,000).
How we
determined it
75% of 2020 materiality, which was based on 5% of
profit before tax, adjusted for amortisation of acquired
intangible assets and exceptional items.
Rationale for
benchmark
applied
Given the impact to the 2021 income statement as a
result of the CPBS review, which distorts the view of the
ongoing performance of the Group we have chosen to
base our materiality on that applied to the 2020
financial year. We have applied a 25% reduction to
reflect an expected normalised performance of the
Group, which considers and factors in an appropriate
level of reduction in the Group’s ongoing operations and
performance arising from the impact of COVID-19 and
the prospective impact of the CPBS review.
For the purposes of the Group audit, we applied a lower
materiality of £12,375,000 (2020 - £16,500,000)
to Company balances and transactions, other than those
which were eliminated on consolidation in the Group
financial statements.
Materiality for the Company financial statements was based
on 1% of total assets. Our lower materiality of £12,375,000
for the balances and transactions set out above was based
on our calculation and allocation of component materiality
for the Group audit.
Balances and transactions that eliminate upon consolidation
were audited to a higher materiality. We consider a
total asset measure to reflect the nature of the Company,
which primarily acts as a holding company for the
Group’s investments.
The results of procedures performed over balances and
transactions contributing to the Group’s overall results were
used to support our Group opinion.
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 £800,000 to £12,375,000. Certain components were audited to a local statutory audit
materiality that was also less than our overall Group materiality
170
Babcock International Group PLC Annual Report and Financial Statements 2021
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit
and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample
sizes. Our performance materiality was 75% of overall materiality, amounting to £11,925,000 for the Group financial statements and
£9,280,000 for the Company financial statements.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and
aggregation risk, the effectiveness of controls as well as the outcome of the CPBS review - and concluded that an amount at the upper
end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £800,000 (Group
audit) (2020: £1,000,000) and £800,000 (Company audit) (2020: £1,000,000) as well as misstatements below those amounts that, in
our view, warranted reporting for qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the Group’s and the Company’s ability to continue to adopt the going concern basis of
accounting included:
• Obtaining and examining management’s base case forecasts and downside scenarios, checking that the forecasts were subject to
board review and approval;
• Considering the historical reliability of management forecasting for cash flow and net debt by comparing budgeted results with actual
performance;
• Performing our own independent sensitivity analysis to understand the impact of changes in cash flow and net debt available to
the Group;
• Assessing the Group’s liquidity and examining the revolving credit facility terms to support management’s going concern assessment;
• Reviewing the covenants, including the amendments and clarifications obtained (referred to in the related key audit matter above),
applicable to the Group’s borrowings and assessing whether the forecasts supported ongoing compliance with the covenants; and
• Engaging our own specialists to assist us with our work on the Group’s forecasts and severe but plausible downside cases and
availability of mitigating actions when required.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually
or collectively, may cast significant doubt on the Group’s and the Company’s ability to continue as a going concern for a period of at least
twelve months from when the financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
As not all future events or conditions can be predicted, this conclusion is not a guarantee as to the Group’s and the Company’s ability to
continue as a going concern.
In relation to the Company’s reporting on how it has applied the UK Corporate Governance Code, we have nothing material to add or
draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate
to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report
thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any
form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required
to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of
the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies Act
2006 have been included.
Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters
as described below.
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 2021 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements.
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.
Babcock International Group PLC Annual Report and Financial Statements 2021
171
Strategic reportGovernanceFinancial statements Independent auditors’ report to the members of Babcock International Group plc continued
Directors’ Remuneration
In our opinion, the part of the Remuneration Committee Report to be audited has been properly prepared in accordance with the
Companies Act 2006.
Corporate governance statement
The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the
corporate governance statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Code
specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are
described in the Reporting on other information section of this report.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance
statement is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing
material to add or draw attention to in relation to:
• The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks;
• The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an
explanation of how these are being managed or mitigated;
• The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of
accounting in preparing them, and their identification of any material uncertainties to the Group’s and Company’s ability to continue to
do so over a period of at least twelve months from the date of approval of the financial statements;
• The directors’ explanation as to their assessment of the Group’s and Company’s prospects, the period this assessment covers and why
the period is appropriate; and
• The directors’ statement as to whether they have a reasonable expectation that the Company will be able to continue in operation and
meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary
qualifications or assumptions.
Our review of the directors’ statement regarding the longer-term viability of the Group was substantially less in scope than an audit and
only consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in
alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with
the financial statements and our knowledge and understanding of the Group and Company and their environment obtained in the course
of the audit.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate
governance statement is materially consistent with the financial statements and our knowledge obtained during the audit:
• The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the
information necessary for the members to assess the Group’s and Company’s position, performance, business model and strategy;
• The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and
• The section of the Annual Report describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when 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.
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’ responsibilities 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.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations.
We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling
to enable us to draw a conclusion about the population from which the sample is selected.
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.
172
Babcock International Group PLC Annual Report and Financial Statements 2021
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.
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 obtained 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 Remuneration Committee 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 Committee, we were appointed by the members on 1 April 2002 to audit the financial
statements for the year ended 31 March 2003 and subsequent financial periods. The period of total uninterrupted engagement is
19 years, covering the years ended 31 March 2003 to 31 March 2021.
John Waters (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
30 July 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
173
Strategic reportGovernanceFinancial statements Group income statement
For the year ended 31 March
Revenue
Cost of revenue
Gross profit
Administration and distribution expenses
Goodwill impairment
(Loss)/profit on divestments
Operating loss
Share of results of joint ventures and associates
Finance income
Finance costs
Loss before tax
Income tax benefit/(expense)
Loss for the year
Attributable to:
Owners of the parent
Non-controlling interest
Loss per share
Basic
Diluted
Group statement of comprehensive income
For the year ended 31 March
Loss for the year
Other comprehensive income
Items that may be subsequently reclassified to income statement
Currency translation differences
Reclassification of cumulative currency translation reserve on disposal
Fair value adjustment of interest rate and foreign exchange hedges
Tax on fair value adjustment of interest rate and foreign exchange hedges
Hedging gains/(losses) 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 (loss)/income, net of tax
Total comprehensive loss
Total comprehensive loss attributable to:
Owners of the parent
Non-controlling interest
Total comprehensive loss
Note
3,6
13
32
3,6,7
3,6,17
8
8
3,6
10
2021
Total
£m
4,182.7
(4,156.6)
26.1
(376.2)
(1,243.2)
(49.7)
(1,643.0)
(13.1)
16.6
(77.8)
(1,717.3)
15.3
(1,702.0)
(1,702.0)
–
(1,702.0)
2020
(restated)
Total
£m
4,428.5
(3,941.2)
487.3
(359.2)
(278.4)
74.7
(75.6)
58.6
14.1
(86.0)
(88.9)
(26.9)
(115.8)
(117.8)
2.0
(115.8)
12
(337.0)p
(337.0)p
(23.3)p
(23.3)p
Note
2021
£m
(1,702.0)
2020
(restated)
£m
(115.8)
17
17
29
1.9
10.5
18.2
(4.5)
6.9
7.0
(29.5)
–
(25.4)
5.5
(3.1)
(9.4)
(1.4)
2.3
(506.8)
96.3
–
(371.9)
(2,073.9)
(2,075.0)
1.1
(2,073.9)
99.9
(20.2)
0.9
21.0
(94.8)
(94.7)
(0.1)
(94.8)
In the year ended March 2021, the contract profitability and balance sheet review identified material errors which impact the prior
period. The review also resulted in changes to an accounting policy. The errors were corrected and new policy applied by restating each
of the affected financial statement line items for the prior period. See note 5.
Additionally, for the year ended 31 March 2021 the income statement has been simplified to exclude the reconciliation to underlying
operating profit, as this is now shown in note 3.
174
174 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
Group statement of changes in equity
–
–
Share
capital
£m
Share
premium
£m
Other
reserve
£m
At 1 April 2019 as previously stated 303.4 873.0 768.8
–
Prior year adjustment (note 5)
303.4 873.0 768.8
At 1 April 2019 restated
–
(Loss)/profit for the year
–
Other comprehensive income/(loss)
–
Total comprehensive loss
–
Dividends
–
Share-based payments
–
Tax on share-based payments
Own shares
–
Transactions with non-controlling
interests (note 33)
Net movement in equity
At 31 March 2020 restated
–
–
303.4 873.0 768.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At 1 April 2020 as restated
Loss for the year
Other comprehensive (loss)/income
Total comprehensive loss
Dividends
Share-based payments
Tax on share-based payments
Own shares
Net movement in equity
At 31 March 2021
303.4 873.0 768.8
–
–
–
–
–
–
–
–
303.4 873.0 768.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Capital
redemption
£m
30.6
–
30.6
–
–
–
–
–
–
–
–
–
30.6
Retained
earnings
£m
975.8
(308.1)
667.7
(117.8)
80.6
(37.2)
(152.1)
2.9
1.9
(2.9)
(0.2)
(187.6)
480.1
30.6
480.1
– (1,702.0)
–
(410.5)
– (2,112.5)
–
–
3.2
–
2.3
–
–
(2.2)
– (2,109.2)
30.6 (1,629.1)
Hedging
reserve
£m
(74.4)
7.2
(67.2)
–
(30.1)
(30.1)
–
–
–
–
–
(30.1)
(97.3)
(97.3)
–
26.2
26.2
–
–
–
–
26.2
(71.1)
Translation
reserve
£m
–
Total equity
attributable
to owners
of the
Company
£m
(32.1) 2,845.1
(300.9)
(32.1) 2,544.2
(117.8)
23.1
(94.7)
(152.1)
2.9
1.9
(2.9)
–
(27.4)
(27.4)
–
–
–
–
Non-
controlling
interest
£m
–
Total
equity
£m
17.4 2,862.5
(300.9)
17.4 2,561.6
(115.8)
21.0
(94.8)
(153.9)
2.9
1.9
(2.9)
2.0
(2.1)
(0.1)
(1.8)
–
–
–
(0.2)
–
(27.4)
(245.1)
(59.5) 2,299.1
–
0.2
(1.7)
(246.8)
15.7 2,314.8
(59.5) 2,299.1
– (1,702.0)
11.3
(373.0)
11.3 (2,075.0)
–
3.2
2.3
(2.2)
11.3 (2,071.7)
227.4
(48.2)
–
–
–
–
15.7 2,314.8
– (1,702.0)
1.1
(371.9)
1.1 (2,073.9)
(0.8)
(0.8)
3.2
–
–
2.3
(2.2)
–
0.3 (2,071.4)
243.4
16.0
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.
Babcock International Group PLC Annual Report and Financial Statements 2021
175
Babcock International Group PLC Annual Report and financial statements 2021 175
Strategic reportGovernanceFinancial statements
Group statement of financial position
As at
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
31 March
2021
£m
Note
31 March
2020
(restated)
£m
1 April
2019
(restated)
£m
13
14
15
16
17
17
29
24
18
19
20
24
21, 31
27
23
16, 23
22
18
24
29
26
23
16, 23
22
24
26
956.3
202.0
731.5
521.2
73.5
42.1
40.8
11.2
17.2
141.3
2,737.1
162.4
741.0
48.4
34.9
904.8
1,891.5
4,628.6
303.4
873.0
680.1
(1,629.1)
227.4
16.0
243.4
1,318.8
486.2
1.9
7.7
51.1
333.9
73.7
2,273.3
383.7
126.1
1,506.7
9.7
13.9
71.8
2,111.9
4,385.2
4,628.6
2,287.9
334.7
840.9
609.0
161.9
48.6
325.3
12.8
21.5
60.5
4,703.1
191.6
837.4
57.2
153.9
1,845.9
3,086.0
7,789.1
303.4
873.0
642.6
480.1
2,299.1
15.7
2,314.8
2,050.0
548.5
2.1
33.7
35.6
180.1
32.7
2,882.7
987.9
140.9
1,301.2
3.8
27.7
130.1
2,591.6
5,474.3
7,789.1
2,584.2
389.0
873.7
623.5
162.1
42.5
226.9
15.5
93.8
54.7
5,065.9
194.7
868.8
40.5
48.0
844.7
1,996.7
7,062.6
303.4
873.0
700.1
667.7
2,544.2
17.4
2,561.6
1,437.2
533.7
2.0
25.5
9.3
254.9
33.8
2,296.4
657.3
107.1
1,348.8
22.1
10.9
58.4
2,204.6
4,501.0
7,062.6
In March 2021, the contract profitability and balance sheet review identified material errors which impact prior periods. The review also
resulted in changes to an accounting policy. The correction of the errors and application of the new policy resulted in a reduction of net
assets amounting to £235.2 million at 31 March 2020 and £300.9 million at 1 April 2019. Each of the affected financial statement line
items was restated for the prior periods. See note 5. This also impacts the Group cash flow statement.
The notes on pages 178 to 268 are an integral part of the consolidated financial statements. The Group financial statements on
pages 174 to 177 were approved by the Board of Directors on 30 July 2021 and are signed on its behalf by:
David Lockwood OBE
Director
David Mellors
Director
176
176 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
Group cash flow statement
For the year ended 31 March
Cash flows from operating activities
Loss for the year
Share of results of joint ventures and associates
Income tax (benefit)/expense
Finance income
Finance costs
Depreciation and impairment of property, plant and equipment
Depreciation and impairment of right of use assets
Amortisation and impairment of intangible assets
Goodwill impairment
Equity share-based payments
Impairment of joint venture loans
Net derivative fair value movement through profit or loss
Loss/(profit) on disposal of subsidiaries, businesses and joint ventures and associates
Loss 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
Decrease/(increase) in inventories
Decrease in receivables
Increase/(decrease) in payables
(Decrease)/increase in provisions
Cash outflow from non-hedging derivatives
Retirement benefit contributions in excess of income statement
Cash generated from operations
Income tax received/(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
Vehicle leasing principal repayments
Investment in joint ventures
Loans repaid by joint ventures and associates
Increase in loans to joint ventures and associates
Net cash flows from investing activities
Cash flows from financing activities
Dividends paid
Proceeds above market value on sale and leaseback of property, plant and equipment
Lease principal payments
Cash inflow from settlement of derivatives
Bank loans repaid
Loans raised and facilities drawn down
Dividends paid to non-controlling interest
Repurchase of own shares
Net cash flows from financing activities
Net (decrease)/increase in cash, cash equivalents and bank overdrafts
Cash, cash equivalents and bank overdrafts at beginning of year
Effects of exchange rate fluctuations
Cash, cash equivalents and bank overdrafts at end of year
Note
17
10
8
8
17
32
32
17
24
17
11
31
31
31
31
31
31
2021
£m
(1,702.0)
13.1
(15.3)
(16.6)
77.8
199.9
179.8
148.2
1,243.2
3.2
7.0
6.9
49.7
26.4
–
221.3
32.9
86.8
212.5
(14.6)
(3.6)
(64.5)
470.8
19.4
(79.4)
12.0
422.8
90.6
36.8
32.2
(170.8)
(19.6)
14.9
(8.8)
4.2
(3.9)
(24.4)
–
1.0
(140.6)
52.6
(1,154.4)
25.1
(0.8)
(2.2)
(1,219.3)
(820.9)
1,348.7
3.1
530.9
2020
(restated)
£m
(115.8)
(58.6)
26.9
(14.1)
86.0
91.3
137.5
81.9
278.4
2.9
–
(3.1)
(74.7)
3.9
0.1
442.6
(10.9)
40.0
(24.7)
71.8
–
(73.5)
445.3
(72.4)
(84.9)
13.3
301.3
101.6
52.0
76.5
(191.3)
(29.0)
49.9
(0.3)
0.7
(5.5)
54.6
(152.1)
8.3
(175.0)
–
(253.5)
1,304.7
(1.8)
(2.9)
727.7
1,083.6
275.2
(10.1)
1,348.7
Babcock International Group PLC Annual Report and Financial Statements 2021
177
Babcock International Group PLC Annual Report and financial statements 2021 177
Strategic reportGovernanceFinancial statements
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 96. The
Board considered the 18 month period from 31 March 2021 to 30 September 2022 in its assessment of going concern. The financial
statements have been prepared in accordance with international accounting standards in conformity with the requirements of the
Companies Act 2006 (‘IFRS’) and the applicable legal requirements of the Companies Act 2006. In addition to complying with
international accounting standards in conformity with the requirements of the Companies Act 2006, the consolidated financial
statements also comply with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies
in the European Union. 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 England, UK.
New and amended standards adopted by the Group
The Group applied the following standards and amendments for the first time for the year beginning on 1 April 2020:
The following standards and amendments to IFRSs became effective for the annual reporting period beginning on 1 April 2020 and did
not have a material impact on the consolidated financial statements:
• IAS 1, ‘Presentation of Financial Statements’ and IAS 8, ‘Accounting policies, changes in accounting estimates and errors’. The
amendment is effective for annual reporting periods beginning on or after 1 January 2020 and relates to the definition of material.
• IFRS 3, ‘Business Combinations’, amendment is effective for annual reporting periods beginning on or after 1 January 2020 and relates
to the definition of a business.
The following standards and amendments to IFRSs become effective for the annual reporting period beginning on 1 April 2020, but were
early adopted by the Group for the annual reporting period beginning on 1 April 2019:
• IFRS 9 and IFRS 7, ‘Financial Instruments’ and ‘Financial Instruments: Disclosures’, amended effective for periods beginning on or after 1
January 2020 with early adoption allowed. 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. There is no impact on the Group’s fair value hedge accounting or cash flow hedge
accounting as a result of adopting the amendments.
New IFRS accounting standards, amendments and interpretations not yet adopted
The Group has not early adopted any other amendment, standard or interpretation that has been issued but is not yet effective. It is
expected that these standards and amendments will be adopted on the applicable effective date. The following new or amended IFRS
accounting standards, amendments and interpretations not yet adopted are not expected to have a significant impact on the Group:
• IAS 1, ‘Presentation of Financial Statements’ and IAS 8, ‘Accounting policies, changes in accounting estimates and errors’. Amendment
effective for annual reporting periods commencing on or after 1 January 2022. The amendment relates to the classification of liabilities
as current or non-current.
• IAS 37, ‘Provisions, contingent liabilities and contingent assets’. Amendment effective for periods commencing on or after 1 January
2022. The amendment relates to the clarification of costs that an entity should include as the cost of fulfilling a contract when
assessing whether a contract is onerous. Management’s project to determine the impact of this amendment is ongoing, however this is
not expected to have a material impact.
• IFRS 3, ‘Business Combinations’, amendment effective for periods commencing on or after 1 January 2022. The amendment relates to
the identification of liabilities assumed and contingent assets acquired in a business combination.
• IFRS 9 and IFRS 7, ‘Financial Instruments’ and ‘Financial Instruments: Disclosures’. These amendments are effective for periods
commencing after 1 January 2022 and relate to Phase 2 of Interest Rate Benchmark Reform.
• IFRS 16, ‘Leases’, amendment effective 1 June 2020. The amendment provides an optional practical expedient for lessees from
assessing whether a rent concession related to COVID-19 is a lease modification.
• IFRS 17, ‘Insurance Contracts’, amendment effective 1 January 2023. This has been deferred from the initial effective date of
1 January 2021.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company 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.
178
178 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
1. Basis of preparation and significant accounting policies (continued)
Basis of consolidation (continued)
(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 carrying values of associates and joint ventures are reviewed on a regular basis and if there is objective evidence that
an impairment in value has occurred as a result of one or more events during the period, the investment is impaired.
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. If the Group’s share of losses in a joint venture or associate equals or exceeds its
investment in the joint venture or associate, the Group does not recognise further losses unless it has incurred obligations to do so.
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. Loans to joint ventures are valued at amortised cost less provision for impairment.
Critical accounting estimates and judgements
In the course of preparation of the financial statements judgements and estimates have been made in applying the Group’s accounting
policies that have had a material effect on the amounts recognised in the financial statements. The application of the Group’s accounting
policies requires the use of estimates and the inherent uncertainty in certain forward-looking estimates may result in a material
adjustment to the carrying amounts of assets and liabilities in the next financial year. Critical accounting estimates are subject to
continuing evaluation and are based on historical experience and other factors, including expectations of future events that are believed
to be reasonable in light of known circumstances. Critical accounting estimates and judgements in relation to these financial statements
are considered below:
Critical accounting judgements
Critical accounting judgements, apart from those involving estimations, that are applied in the preparation of the consolidated financial
statements are discussed below:
Revenue and profit recognition
The Group accounts for revenue in accordance with IFRS 15. Revenue and profit are recognised over time based on costs incurred for the
majority of the Group’s contracts with customers. The Group’s contracts are often amended for changes in customers’ requirements and
the Group is required to make a judgement regarding the point in time at which a contract modification is approved and should be
accounted for. The Group’s preferred approach is to approve contract variations following scope and pricing agreement by contract
amendment. However the approval of contract modifications often requires to be at pace and other mechanisms, informed by
established customer relationships and local working arrangements, can be used to achieve effective approval of contract modifications.
In approving contract modifications in these circumstances, the Group considers the contract terms and the scope of the contract
modification in the context of the contract.
Impact of COVID-19
During the year ended 31 March 2021 the Group’s operations were significantly impacted by COVID-19. Management considered the
potential impact of COVID-19 on the Group’s future performance as part of the budgeting and business planning process and concluded
that COVID-19 is not expected to materially impact the Group in the medium or long term. The Group’s budget for FY22 includes
contingency to address remaining uncertainty.
Babcock International Group PLC Annual Report and Financial Statements 2021
179
Babcock International Group PLC Annual Report and financial statements 2021 179
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Critical accounting estimates and judgements (continued)
Determining the Group’s operating segments
Management exercises judgement in determining the Group’s operating segments. This determination is generally straightforward and
factual, however in some cases judgement is required, for example it was determined that South Africa is a separate operating segment
whilst operations of the Group in other territories do not represent separate operating segments. Over time management reviews the
operating segments to ensure they remain appropriate as businesses are acquired and divested and reporting structures change,
including how information is reported to the Chief Operating Decision Maker. There have been no changes to the operating segments in
the current year. Further detail is included in notes 6 and 13.
Key sources of estimation uncertainty
The key sources of estimation uncertainty at the reporting period end that may have a significant risk of causing a material adjustment to
the carrying amount of assets and liabilities within the next financial year are set out below:
Revenue and profit recognition
The Group accounts for revenue in accordance with IFRS 15. Revenue is recognised over time based on costs incurred for the majority of
the Group’s contracts with customers. There are two critical estimates impacting revenue and profit recognition: estimated costs to
complete, which impact the estimated stage of completion, and recognition of variable revenue, which impacts the transaction price.
Both of these estimates can involve significant levels of estimation uncertainty and material changes in these estimates may result in a
material adjustment to the carrying value of assets and liabilities in the following year.
Management estimates outturn costs and revenues on a contract-by-contract basis and estimates are carried out by suitably qualified and
experienced personnel.
Estimating contract revenues can involve judgements around whether the Group will meet performance targets and earn incentives. In
particular, management makes judgements to consider whether it is necessary to constrain variable revenues to meet the test set out in
paragraph 56 of IFRS 15 to include variable consideration in the transaction price only to the extent that it is highly probable a significant
reversal in the amount of cumulative revenue will not occur when the uncertainty associated with the variable consideration is
subsequently resolved. 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.
Estimates of costs include assessment of contract contingencies arising out of technical, commercial, operational and other risks. The
assessments of all significant contract outturns are subject to review and challenge. As contracts near completion, often less judgement is
required to determine the expected outturn.
The Group considers that the level of estimation uncertainty in the financial statements as a whole is mitigated by the size of the Group’s
portfolio of contracts, which are of various types and at various stages of completion at any point in time. In relation to estimates of costs
to complete at the balance sheet date, given that the Group aims to have centred forecasts for projects, the portfolio effect is expected
to cause upward and downward cost deviations to balance. However, this may not necessarily be the case and, to the extent that it is, it
may not be the case in any one reporting period, reflecting the long-term nature of many of the Group’s contracts. It is therefore possible
that revised estimates of costs to complete may result in a material adjustment to the carrying value of assets and liabilities estimates in
the following year. The Group considers that it is not practical to provide a quantitative analysis of the aggregated estimates that are
applied across the contract portfolio.
The Group considered the estimates associated with both variable consideration and costs to complete across ten contracts considered
to be significant in the context of the Group in relation to contribution to revenue, contract balance or costs to complete. Whilst at any
reporting date the Group may have significant contract modifications subject to pricing agreement with customers, at 31 March 2021
there were two significant contracts which had contract modifications where pricing was not agreed with the customer. The Group
assessed an estimation upside of £16.9 million and an estimation downside of £1.0 million on the first of these two contracts, which
would increase and decrease revenue recognised at 31 March 2021 by £14.0 million and £0.9 million respectively. The significant
upside potential reflects consideration of the highly probable not to significantly reverse test set out in IFRS 15. The estimation upside and
downside on the second contract were both assessed at £1.0 million, which would impact revenue by the same amount at 31 March
2021. In relation to costs to complete across the ten significant contracts, the Group considers that outcomes could differ from
management’s centred forecasts and, for information, a 5% increase in estimated costs to go at 31 March 2021 would, through
reassessed stages of completion, reduce revenue recognised at 31 March 2021 by £30 million.
A number of matters supported the results of the sensitivity analyses of the significant contracts including the contract completion date of
one contract, the recent completion of negotiations on a significant contract modification on another contract and change in forecasts
of contract outturn for a number of contracts following completion of the Group’s contract profitability and balance sheet review.
Defined benefit pension schemes obligations
The Group’s defined benefit pension schemes are assessed annually in accordance with IAS 19 and the valuation of the defined benefit
pension obligations is sensitive to the inflation and discount rate actuarial assumptions used. There is a range of possible values for the
assumptions and small changes to the assumptions may have a significant impact on the valuation of the defined benefit pension
obligations. In addition to the inflation and discount rate estimates, a key estimation relates to the expected availability of future
accounting surpluses under IFRIC 14. Further information on the key assumptions and sensitivities is included in note 29.
180
180 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
1. Basis of preparation and significant accounting policies (continued)
Critical accounting estimates and judgements (continued)
Deferred tax assets
The Group has carried forward tax losses and other tax attributes in a number of jurisdictions, and therefore has to assess the extent to
which a deferred tax asset should be recognised in respect of these. The recognition of deferred tax assets can be subjective, particularly
in loss-making territories where the recognition of the deferred tax asset relies on forecast future profits.
The Group carries out two tests for each company that has carried forward tax attributes: it assesses the future availability of carried
forward losses and other tax attributes by reference to the jurisdiction-specific rules around the carry forward and utilisation; and it
assesses whether it is probable that future taxable profits will be available against which the attribute can be utilised. The reversal of
deferred tax liabilities may provide a source of probable future taxable profits but, where these are insufficient, the Group considers the
forecast profits of the company or jurisdiction in question as set out in the Group’s three-year budget and extrapolates these forward on a
risk-weighted basis over what is deemed to be a commercially reasonable look-out period (generally between 10 and 15 years). Risk
weighting is considered to take into account risks associated with forecasting outside the Group’s detailed planning cycle, such as the loss
of contracts or margin, and the potential of longer-term disruption to the business. The Group recognises deferred tax assets in respect of
tax attributes to the extent that it is considered they will be utilised within the look-out period. Because of the level of judgement
involved, there is the possibility of a material adjustment within the following 12 months (for example due to the gain or loss of a
contract with a material impact on profit forecasts).
Profit forecasts used for deferred tax asset recognition are consistent with those used for goodwill impairment testing. They are therefore
subject to the same sensitivities as detailed in note 13 but as described above are risk-weighted (and not discounted – discounting is not
permitted under IAS 12). In currently loss-making territories, a key assumption is the size of the steady state business, once recovery plans
are complete. For example, for every £10 million recurring annual taxable profits forecast in either Spain or Italy, deferred tax assets
recognised at the balance sheet date would be increased by between £6 million and £10 million (limited to the extent of the
unrecognised asset available, as set out in note 18).
Significant tax losses are available as at 31 March 2021 in respect of Group companies in the UK, Spain, Australia, Italy, France and
Norway. Further information in respect of the level of tax losses recognised and unrecognised is set out in note 18.
The carrying value of goodwill
Goodwill is tested annually for impairment, in accordance with IAS 36, Impairment of Assets (‘IAS 36’). The impairment assessment is
based on assumptions in relation to the cash flows expected to be generated by cash generating units, together with appropriate
discounting of the cash flows. The assessment of the carrying value of goodwill is included as a critical accounting estimate given the
significance of the remaining carrying value of goodwill and the inherent level of estimation uncertainty required to undertake
impairment testing. Note 13 provides information on key assumptions and sensitivity analyses performed.
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 year except as specified below.
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, determination of contract price, 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.
In assessing whether the performance obligations are separately identifiable, the services are reviewed to determine the extent to which
the goods or services within a contract are interrelated and whether they modify other goods or services within a contract. The Group
also considers whether the goods and/or services are integrated and represent a combined output for which the customer has
contracted.
The integrated output nature of many of the services provided by the Group can result in contracts with one performance obligation.
Babcock International Group PLC Annual Report and Financial Statements 2021
181
Babcock International Group PLC Annual Report and financial statements 2021 181
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Significant accounting policies (continued)
Revenue (continued)
(b) Determination of contract price
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. Contracts can include both fixed and variable consideration.
Inclusion of variable consideration in the contract price requires the exercise of judgement in relation to the amount to be received
through unpriced contract variations and claims (see section (e) below for further details) and variable elements of existing contracts,
such as performance-based penalties and incentives, and gain/pain share arrangements where cost under/over spends are shared with
the customer. Elements of variable consideration are estimated at contract inception and at the end of each reporting period to ensure
that the contract price is not under or overstated. Any required adjustment is made against the contract price in the period in which the
adjustment occurs.
Variable consideration is included in the contract price using either the expected value or the most likely amount depending on whether
the variable consideration is a range of potential values or whether the amount of variable consideration to be received is one of two
outcomes, respectively. This judgement is made by suitably qualified and experienced personnel based on the contract terms, status of
negotiations with customers and historical experience with customers and with similar contracts.
As part of this judgement, variable consideration may be constrained. The Group recognises variable consideration only to the extent that
it is highly probable that there will not be a significant reversal in the amount of cumulative revenue recognised when the uncertainty
associated with the variable consideration is subsequently resolved.
(c) Allocation of contract price to performance obligations
Given the bespoke nature of many of the goods and services the Group provides, standalone selling prices are generally not available and,
in these circumstances, the Group allocates the contract price to performance obligations based on cost plus margin. This amount would
be the standalone selling price of each performance obligation if contracted with a customer separately.
(d) 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.
Revenue recognised over 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.
Typical performance obligations in the Group’s contracts that are recognised over time include the delivery of services (such as
maintenance, engineering and training), as the customer simultaneously receives and consumes the benefits of the Group’s performance
as it performs. Revenue from the design, manufacture and enhancement of bespoke assets is also recognised over time, as 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
performance completed to date, being recovery of costs incurred in satisfying the performance obligation plus a reasonable
profit margin.
Where the Group satisfies performance obligations over time, the Group primarily uses the input method to measure satisfaction of each
performance obligation based on costs incurred compared to total estimated contract costs. Costs are included in the measurement of
progress towards satisfying the performance obligation to the extent that there is a direct relationship between the input and satisfaction
of the performance obligation.
Revenue recognised over time is measured in accordance with the appropriate method. Under most of the Group’s contracts, the
customer pays in accordance with a pre-arranged payment schedule or once milestones have been met. If the value of the goods or
services rendered by the Group exceed payments, a contract asset is recognised. If payments exceed the value of the goods or services
rendered, a contract liability is recognised. See section (i) for further details on how contract assets and liabilities are recognised.
182
182 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
1. Basis of preparation and significant accounting policies (continued)
Significant accounting policies (continued)
Revenue (continued)
Revenue recognised at a point in time
If control of the goods or services is not transferred to the customer 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 receive payment by the Group. As can be
seen from note 6, sale of goods at a point in time represents approximately 12% 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 (h) below.
Assessment of contract profitability
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.
Estimating contract revenues can involve judgements around whether the Group will meet performance targets and earn incentives, as
well as consideration as to whether it is necessary to constrain variable revenues to meet the highly probable not to significantly reverse
test set out in paragraph 56 of IFRS 15. 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. Estimates of costs include assessment of contract contingencies arising out of technical, commercial, operational and other
risks. The assessments of all significant contract outturns are subject to review and challenge and estimation uncertainty is resolved on a
contract-by-contract basis as contracts near the end of the project lifecycle.
Any expected loss on a contract is recognised immediately in the income statement.
(e) Contract modifications
Claims and variations
The Group’s contracts are often amended for changes in the customers’ requirements. Contract modifications can relate to changes in
both contract scope and price arising in the ordinary course of delivering contracts, which are referred to as contract variations. Such
variations may arise as a result of customer requests or instructions or from requests from the Group in response to matters arising during
the delivery of contracts. For example, some contracts include the requirement to conduct surveys and to report on or to recommend
additional work as required. We note that some contracts may require the Group to proceed with variations and to agree pricing
subsequently. See further detail on accounting for contract modifications below.
Contract modifications can also refer to changes in price only, with no change in scope, where there is a difference of view or dispute in
relation to interpretation of contracts. For example, a claim affecting only contract price could be in relation to a change of law clause
that would respond to additional costs in relation to delivery of the existing contract scope.
These contract claims and variations are considered to be modifications as referred to in paragraph 18 of IFRS 15.
Accounting for contract modifications
If the performance obligations in a contract modification are deemed to be distinct and the price of the contract increases by an
amount that reflects the standalone selling prices for the additional goods or services, the Group accounts for the modification as a
separate contract.
If the performance obligations in a contract modification are not distinct, for example if the services provided through the contract
modification are highly interrelated with the services in the existing contract, the Group accounts for this as part of the existing contract.
A cumulative catch-up adjustment to revenue is recognised to reflect the effect of the contract modification on the transaction price and
the Group’s measure of progress towards complete satisfaction of the performance obligation.
The Group recognises contract variations, which impact both scope and price, when they are approved in accordance with IFRS 15. The
Group’s preferred approach is to approve contract modifications by formal contract amendment. However the approval of contract
modifications often requires to be at pace and other mechanisms, informed by established customer relationships and local working
arrangements, can be used to achieve approval of contract modifications. In approving contract modifications in these circumstances,
the Group considers the scope of the contract modification in the context of the contract scope and contract terms. Contract variations
where the formal contract amendment has not been received but which are, in management’s judgement approved, are accounted for
as a contract modification in accordance with IFRS 15 paragraph 18. Revenue from these contract variations is treated as variable
consideration and subject to constraint as outlined in section (b) above, until the pricing is agreed.
Contract claims are also considered to be contract modifications in accordance with IFRS 15, and revenue is subject to constraint as
outlined in section (b).
Babcock International Group PLC Annual Report and Financial Statements 2021
183
Babcock International Group PLC Annual Report and financial statements 2021 183
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Significant accounting policies (continued)
Revenue (continued)
Claims and variations which are not deemed to be contract modifications
Claims can also be raised by Babcock against third-party subcontractors or suppliers to the Group. As these do not relate to contracts with
customers, but rather relate to contracts with suppliers, they are not accounted for under IFRS 15. The Group’s accounting policy is to
account for such claims in accordance with the contingent asset guidance per IAS 37. Income in relation to these claims will only be
recognised once it is virtually certain.
(f) Costs of obtaining a contract
Costs to obtain a contract that would have been incurred regardless of whether the contract was won or lost are recognised as an
expense when incurred.
Directly attributable costs to obtain a contract with a customer that the Group would not have incurred if the contract had not been won
are recognised as an asset. These costs are capitalised as an asset after the point that it can be reliably expected that a contract will be
obtained, which is typically at preferred bidder stage. The costs are capitalised 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.
(g) Contract mobilisation costs
Post contract award but pre contract operational start-up mobilisation costs which satisfy the criteria for capitalisation under another
standard, such as property, plant and equipment (IAS 16) or intangible assets (IAS 38), are accounted for in accordance with the relevant
policies as set out below. Post contract award but pre contract operational start-up mobilisation costs which do not fall within the scope
of another standard are recognised under IFRS 15 as an asset in capitalised contract costs where they meet all of the following criteria:
(i) the costs relate directly to a contract or to an anticipated contract that can be specifically identified;
(ii) the costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance
obligations in the future; and
(iii) the costs are expected to be recovered.
Capitalised contract costs are 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.
(h) 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, sub-contractor arrangements, and other pass-through costs. For such activity, management exercises judgement in
the consideration of principal versus agent based on an assessment as to whether the Group controls the relevant goods or services under
the performance obligations prior to transfer to customers. Factors that influence this judgement include the level of responsibility the
Group has under the contract for the provision of the goods or services, the extent to which the Group is incentivised to fulfil orders on
time and within budget, either through gain share arrangements or KPI deductions in relation to the other performance obligations within
the contract, and the extent to which the Group exercises responsibility in determining the selling price of the goods and services. Taking
all factors into consideration, the Group then comes to a judgement as to whether it acts as principal or agent on a performance
obligation-by-performance obligation basis. Note that any changes in this judgement would not have a material impact on profit.
(i) Contract assets and liabilities
In circumstances where revenue recognised exceeds 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 revenue
recognised, the Group presents as a liability the gross amount due to customers as “Amounts due to customers for contract work”.
Accrued income and deferred income relate to contracts where the right to consideration is conditional on both the passage of time and
satisfaction of performance obligations. These are classified separately from “Amounts due from customers for contract work” and
“Amounts due to customers for contract work” as progress is measured using less judgemental measures than the “cost to cost”
approach, such as time-based measures. Accrued income and deferred income typically arise where the timing of the related billing cycle
differs to satisfaction of the performance obligation.
184
184 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
1. Basis of preparation and significant accounting policies (continued)
Significant accounting policies (continued)
Revenue (continued)
(j) Significant financing components
The Group accounts for a significant financing component on contracts where the timing of cash receipts differs significantly from
revenue recognition. The majority of the Group’s contracts do not include significant financing components, however on contracts which
do have a significant financing component the Group recognises an interest income or expense and the transaction price is adjusted
accordingly.
If, at contract inception, the Group expects that the period between transfer of the promised goods or services to a customer and receipt
of consideration from the customer will be one year or less, the Group applies the practical expedient under IFRS 15 and does not adjust
the amount of consideration for a significant financing component.
Underlying financial information and exceptional items
Definitions and a description of the use of the underlying performance measures can be found in note 3 on page 196.
Transactions with non-controlling interest
The Group’s policy is to treat transactions with non-controlling interest as transactions with owners of the Company. These are therefore
reflected as 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. Onerous contract provisions are recognised after impairment of any
assets directly related to the onerous 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 provisions for the remainder. Losses are determined on the basis of estimated results on completion of contracts and
contract assessments are updated regularly.
A provision for the contractual maintenance, overhaul and repair requirements of aircraft and specific aircraft components arising from
return condition obligations in aircraft lease contracts is recognised as the obligation to perform contractual maintenance arises with
each hour flown. Where lease contracts contain contractual penalties in the event that the Group returns leased aircraft in a condition
that does not meet the contractual return condition obligation, the associated provision is measured at the lower of the restoration cost
and the detriment penalty in the lease. When maintenance of a leased aircraft component is performed, if the component’s remaining
flying hours are greater than the return condition outlined in the lease contract then a leasehold improvement asset is recognised in
proportion to the excess flying hours above the contractual return condition. Maintenance provisions are not recognised in respect of
aircraft components which are maintained under Power By the Hour maintenance arrangements, instead the associated payments to the
maintenance provider are expensed as incurred. Any additional payments made to or received from maintenance providers at the
conclusion of Power By the Hour maintenance arrangements are recognised as an expense or as income at the time at which they are
incurred or received.
Babcock International Group PLC Annual Report and Financial Statements 2021
185
Babcock International Group PLC Annual Report and financial statements 2021 185
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Significant accounting policies (continued)
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 capitalised. Goodwill is monitored at operating segment level and goodwill is allocated to the
operating segment expected to benefit from the business combination’s synergies. The Group currently has five operating segments:
Marine, Land, Aviation, Nuclear and Africa.
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.
Goodwill is reviewed for impairment by assessing the recoverable amount of operating segments by reference to value-in-use calculations
or fair value less cost to dispose in relation to certain businesses which the Group plans to dispose. Goodwill impairments are not
subsequently reversed. See note 13 for further information on goodwill impairment reviews.
(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 contractual 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 15 years.
The carrying value of the non-contractual 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 over a period of 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. It is measured at cost less accumulated amortisation and is amortised on a straight-line basis
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.
186
186 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
1. Basis of preparation and significant accounting policies (continued)
Significant accounting policies (continued)
Property, plant and equipment (PPE)
Property, plant and equipment is shown at cost less subsequent depreciation and impairment, except for land, which is shown at cost less
impairment. Cost includes expenditure that is directly attributable to the acquisition of the items after the deduction of trade discounts
and rebates.
Major strategic aircraft spares are classified within property, plant and equipment. Aircraft assets, including spares, are disaggregated into
separate components where the components have differing useful lives with the value of each rotable component being measured at the
cost of replacement or overhaul of the component and the remaining value of the asset being attributed to the airframe component.
Depreciation is provided on a straight-line basis, or in the case of certain aircraft components on an hours flown basis, to write off the
cost of PPE over the estimated useful lives to their estimated residual value (reassessed at each financial year end) at the following
annual rates:
Freehold property
Leasehold property
Plant and equipment
Aircraft airframes
2.0% to 8.0%
Lower of useful economic life or lease term
6.6% to 33.3%
3.33%
Subsequent expenditure on the replacement or overhaul of aircraft components is capitalised with the carrying value of the part replaced
being written off. Subsequent expenditure on maintenance which enhances the performance of aircraft airframes is capitalised whilst
expenditure on replacing elements of aircraft airframes is expensed. Components of owned aircraft which are maintained under Power By
the Hour maintenance arrangements are not depreciated with the associated payments to the maintenance provider instead being
expensed as incurred, as the residual value of the asset is deemed to be equivalent to the cost of the asset. Any additional payments
made to or received from maintenance providers at the conclusion of Power By the Hour maintenance arrangements are recognised as
an expense or as income at the time at which they are incurred or received.
Impairment of non-current assets
Goodwill is reviewed for impairment at least annually. For all other non-financial non-current assets (including acquired intangible assets,
capitalised development costs, software assets, property, plant and equipment and right of use assets) the Group performs impairment
testing where indicators of impairment are identified. Impairment testing is performed at the individual asset level. Where an asset does
not generate cash flows that are separately identifiable from other assets, the Group estimates the recoverable amount of the CGU to
which the asset belongs.
The recoverable amount is the higher of fair value less costs of disposal, and value-in-use. When the recoverable amount is less than the
carrying amount, an impairment loss is recognised immediately in the Group income statement.
Where an impairment loss on other non-financial non-current assets subsequently reverses, the carrying amount of the asset is increased
to the revised estimate of the recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that
would have been determined if no impairment loss had been recognised in prior years. Goodwill impairments are not subsequently
reversed.
Net debt
Net debt is an alternative performance measure of the Group and consists of the total of loans, bank overdrafts, cash and cash
equivalents, loans to joint ventures and associates, leases granted or received, lease obligations and any derivatives used to fair value
hedge the underlying debt. This includes 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 certain 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 certain lease obligations for this purpose.
Babcock International Group PLC Annual Report and Financial Statements 2021
187
Babcock International Group PLC Annual Report and financial statements 2021 187
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Significant accounting policies (continued)
Leases
The Group as lessee
For all leases in which the Group is a lessee (other than those meeting the criteria detailed below), the Group recognises a right of use
asset and corresponding lease liability at commencement of the lease.
The lease liability is the present value of future lease payments discounted at the rate implicit in the lease, if available, or the applicable
incremental borrowing rate. The incremental borrowing rate is determined at lease inception based on a number of factors including
asset type, lease currency and lease term. Lease payments include fixed payments and variable lease payments dependent on an index or
rate, initially measured using the index or rate at the commencement date. The lease term reflects any extension or termination options
that the Group is reasonably certain to exercise.
The lease liability is subsequently measured at amortised cost using the effective interest rate method, with interest on the lease liability
being recognised as a finance expense in the income statement. The lease liability is remeasured, with a corresponding adjustment to the
right of use asset, if there is a change in future lease payments, for example resulting from a rent review, change in a rate/index or
change in the Group’s assessment of whether it is reasonably certain to exercise an extension, termination or purchase option.
The right of use asset is initially recorded at cost, being equal to the lease liability, adjusted for any initial direct costs, lease payments
made prior to commencement date, lease incentives received and any dilapidation costs. 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.
Right of use assets arising from sale and leaseback transactions are measured at the proportion of the previous carrying amount of the
asset that relates to the right of use retained by the Group. Gains arising on sale and leaseback transactions are recognised to the extent
that they relate to the rights transferred to the buyer-lessor whilst losses arising on sale and leaseback transactions are recognised in full.
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’.
The Group as lessor
As a lessor, the Group classifies lessor arrangements as finance or operating leases. Leases are classified as finance leases when the terms
of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. All
lessor arrangements in the Group meet the criteria for a finance lease.
Amounts due from lessees under a finance lease are held on the statement of financial position as a financial asset at an amount equal to
the Group’s net investment in the lease. The finance lease payments received are treated as finance income and a repayment of principal
including initial direct costs. Finance income is allocated over the lease term, with the gross receivable being reviewed for impairment on
a regular basis.
Inventory
Inventory is valued at the lower of cost and net realisable value, being the estimated selling price of the assets in the ordinary course of
business less estimated costs of completion and costs of sale. In the case of finished goods and work in progress, cost comprises direct
material and labour and an appropriate proportion of overheads.
Contingent liabilities
A contingent liability is a possible obligation arising from past events whose existence will be confirmed only on the occurrence or non-
occurrence of uncertain future events outside the Group’s control, or a present obligation that is not recognised because it is not
probable that an outflow of economic benefits will occur or the value of such outflow cannot be measured reliably. The Group does not
recognise contingent liabilities. See note 34 for details of contingent liabilities.
Cash and cash equivalents
Group cash and cash equivalents consist of cash at bank and cash in hand, together with short-term deposits with an original maturity of
three months or less and money market funds.
Government grants
Government grants received are recognised in the income statement so as to match them with the related expenses that they are
intended to compensate. Where grants are received in advance of the related expenses, they are initially recognised as liabilities within
trade payables and other liabilities and released to match the related expenditure.
188
188 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
1. Basis of preparation and significant accounting policies (continued)
Significant accounting policies (continued)
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 reporting date.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting
period in the countries where the company and its subsidiaries and associates operate and generate taxable income. Management
periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to
interpretation and considers whether it is probable that a taxation authority will accept an uncertain tax treatment. The group measures
its tax balances either based on the most likely amount or the expected value, depending on which method provides a better prediction
of the resolution of the uncertainty.
Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a
net basis, or to realise the asset and settle the liability simultaneously.
(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 reporting 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 tax asset recognition can involve critical accounting estimates. The Group’s approach to
deferred tax asset recognition is therefore set out in greater detail on page 181.
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.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and where
the deferred tax balances relate to the same taxation authority.
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 presentation 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 presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency of subsidiaries of the Group using the exchange rates prevailing
at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional
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 reporting date of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement except
when deferred in equity as part of a cashflow hedge or a net investment of a foreign operation when the amounts are recognised in the
hedge or translation reserve, respectively.
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 operations are translated using the average
exchange rate for the month of the applicable results, the net assets translated at year-end exchange rates and equity held at historic
exchange rates. 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.
Babcock International Group PLC Annual Report and Financial Statements 2021
189
Babcock International Group PLC Annual Report and financial statements 2021 189
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
1. Basis of preparation and significant accounting policies (continued)
Significant accounting policies (continued)
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 or interest credit on the net pension surplus is included in the income
statement as a finance cost or finance income, respectively. 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 reporting 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 charge is recognised in the income statement over the vesting period of the award.
The shares purchased by the Group’s Employee Stock Ownership Plan (ESOP) trusts are recognised as a deduction to equity. Dividends
paid on these shares are accounted for 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.
190
190 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
1. Basis of preparation and significant accounting policies (continued)
Significant accounting policies (continued)
Financial instruments (continued)
For derivatives that qualify as cash flow hedges, fair value gains or 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. The fair value gains or loss are
realised through the income statement as the asset is sold or as the hedged item is realised.
Fair value measurement
The fair value of an asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the year-end date. Fair value measurements are used on a recurring basis except where used
in the acquisition of assets and liabilities through a business combination.
The fair values of derivative financial instruments are determined by the use of valuation techniques based on assumptions that are
supported by observable market prices or rates. The fair values of non-financial assets and liabilities are based on observable market prices
or rates.
The carrying values of financial assets and liabilities which are not held at fair value in the Group balance sheet are assumed to
approximate to fair value due to their short-term nature, with the exception of fixed rate bonds.
There have been no changes to the valuation techniques used during the year.
Debt factoring
The Group engages in factoring of trade receivables in relation to certain non-UK operations of its Aviation sector as part of its working
capital management arrangements. Under these arrangements, the Group transfers the rights to receive factored receivables to the
factor in exchange for cash and is prevented from selling or pledging the receivables. The Group does not retain late payment or credit
risk, and therefore trade receivables are not recognised under the applicable contracts. Any cash received from customers under these
contracts is received as agent and transferred directly to the counterparty.
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.
Identification of prior year errors
The contract profitability and balance sheet review identified a number of prior year errors. The results of the Group have been restated
where practicable by retrospectively restating the Group’s prior period results for the affected periods. Any errors identified relating to
reporting periods before 1 April 2019 have been corrected by cumulatively restating the impacted balance sheet line item, including
retained earnings, at 1 April 2019.
Changes in accounting policies
Management implemented one change in accounting policy during the year ended 31 March 2021. See note 4 for further details.
Change in presentation
The Group changed the presentation of the Group income statement to present share of results of joint ventures and associates below
operating profit, and to exclude underlying operating profit from the Group income statement. These changes were made in order to
better reflect the way in which management reviews the core underlying performance of the business. The total share of results of joint
ventures and associates is £13.1 million loss (2020: £58.6 million profit), due to adjustments to share of results of joint ventures and
associates identified through the contract profitability and balance sheet review of £37.1 million during the year ended 31 March 2021
(see note 17 for further details).
Babcock International Group PLC Annual Report and Financial Statements 2021
191
Babcock International Group PLC Annual Report and financial statements 2021 191
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
2. Financial risk management
Management of capital
The Group’s capital structure is defined as equity plus net debt and is overseen by the Board through the Group Finance Committee. The
Group’s material borrowings are arranged by the treasury department, and funds raised are lent onward to operating subsidiaries as
required.
A number of ratios are used to monitor and measure capital structure and performance, including: Net debt to EBITDA, ROIC and interest
cover. Net debt to EBITDA and Interest cover are the debt covenant ratios associated with the Group’s £775 million revolving credit
facility. The calculation and consideration of these ratios, and the Group’s ROIC, are set out in the Financial Review on page 28. Net debt
to EBITDA and ROIC are also key performance indicators of the Group as set out on page 29.
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.
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 policies 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’s hedging strategy is to only enter into derivative 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 treasury policies and guidelines.
The Group’s treasury policies in respect of currency risk, interest rate risk, liquidity risk, and credit risk are outlined below.
Currency risk
The functional currency of Babcock International Group PLC and its UK subsidiaries is GBP. The presentation currency of the Group is GBP.
The Group has exposure primarily to EUR and ZAR and some exposure to AUD, CAD, NOK and SEK.
The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s operating activities (when revenue
or expense is denominated in a foreign currency) and the Group’s net investments in foreign subsidiaries.
The Group only enters into foreign currency swaps and forwards 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 with the treasury policies and
guidelines.
The EUR exposure arises as a result of the activities of the Babcock Mission Critical Services business in Europe, where both translational
and transactional exposures exist. EUR 550 million of Euro bonds retained as a hedge against these businesses was swapped into GBP post
31 March 2021. The ZAR exposure arises from the activities of Babcock’s subsidiaries in South Africa where both translational and
transactional exposures 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 exposures exist.
See note 25 for further detail.
The Group’s risk management objective, policy and performance are as follows:
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 EUR and ZAR.
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 assets with foreign currency denominated debt.
There have been no material unhedged foreign exchange losses in the year.
192
192 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
2. Financial risk management (continued)
Currency risk (continued)
The following table demonstrates the effect on profit before tax for reasonably possible changes in EUR and ZAR exchange rates.
EUR
ZAR
Change in
exchange rate
5%
5%
Effect on profit
before tax
£m
9.3
1.0
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debt
obligations with floating interest rates.
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. See note 23 for further detail.
The Group’s risk management objective, policy and performance are as follows:
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 rate 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 2021, the Group had 70% fixed rate debt (2020: 60%) and 30% floating rate debt (2020: 40%)
based on gross debt including derivatives of £2,340.0 million (2020: £3,126.8 million). The percentages for the
prior year included the fully drawn down revolving credit facility which if excluded would have resulted in 81%
fixed rate debt and 19% floating rate debt. For further information see note 23.
The following table demonstrates the sensitivity to a reasonably possible change in interest rates on that portion of loans and borrowings
affected, after the impact of hedge accounting. With all other variables held constant, the Group’s profit before tax is affected through
the impact on floating rate borrowings, as follows:
GBP
EUR
ZAR
Change in interest
rate
0.5%
0.5%
0.5%
Effect on profit
before tax
£m
2.0
1.2
0.1
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 23).
Each of the sectors in the Group provides regular cash forecasts for liquidity planning purposes. These cash forecasts are used to monitor
and identify the liquidity requirements of the Group, and to ensure that there is sufficient liquidity to meet operational needs while
maintaining sufficient headroom on the Group’s committed borrowing facilities. The Group utilises debt factoring in support of the non-
UK operations of its Aviation sector as part of its working capital management arrangements. In addition, supply chain financing
arrangements were used by the Aviation sector during the year. These facilities are classified as debt and their use reduced significantly
during the year. The Group plans to phase out the use of these arrangements.
Babcock International Group PLC Annual Report and Financial Statements 2021
193
Babcock International Group PLC Annual Report and financial statements 2021 193
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
2. Financial risk management (continued)
Liquidity risk (continued)
The Group’s risk management objective, policy and performance are as follows:
Objective
Policy
Performance
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 liquidity headroom is maintained on its facilities.
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 2025, a new £300 million Revolving Credit Facility entered
into in May 2021 and maturing in May 2024, a EUR 550 million Eurobond maturing in October 2022, a £300
million 10-year GBP 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 23.
The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments.
At 31 March 2021
Bank and other borrowings*
Derivative financial instruments
Lease liabilities
Trade and other payables**
At 31 March 2020 (restated)
Bank and other borrowings*
Derivative financial instruments
Lease liabilities
Trade and other payables**
Less than
1 year
£m
Between
1 and 2 years
£m
Between
2 and 5 years
£m
Over
5 years
£m
Total
£m
383.7
(5.9)
156.0
965.7
987.9
113.1
161.8
962.1
476.4
(6.2)
136.1
1.3
0.4
8.7
137.9
1.0
15.6
(1.6)
282.7
0.5
1,260.0
(6.2)
308.5
0.7
826.8
(38.8)
110.4
0.1
789.6
(23.4)
149.1
0.4
1,702.5
(52.5)
685.2
967.6
3,037.9
92.2
757.3
964.2
Includes fixed rate committed interest.
*
** Does not include amounts due to customers for contract work, deferred income, payroll taxes and social security.
The derivative financial instruments disclosed in the above table are the gross undiscounted cash flows. However, those amounts may be
settled gross or net. The following table shows the corresponding reconciliation of those amounts to their carrying amounts:
At 31 March 2021
Forward derivative contracts – hedges:
• Outflow
• Inflow
Net undiscounted cash flows outflows
At 31 March 2020
Forward derivative contracts – hedges:
• Outflow
• Inflow
Net undiscounted cash flows outflows
Less than
1 year
£m
Between
1 and 2 years
£m
Between
2 and 5 years
£m
Over
5 years
£m
Total
£m
347.5
341.7
(5.8)
203.3
197.2
(6.1)
145.9
144.6
(1.3)
501.5
476.8
(24.7)
1,198.2
1,160.3
(37.9)
809.4
894.8
85.4
147.3
156.2
8.9
91.9
85.9
(6.0)
494.9
488.9
(6.0)
1,543.5
1,625.8
82.3
194
194 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
2. Financial risk management (continued)
Credit risk
Credit risk is the risk that a counterparty will not meet its obligations to the Group, which would result in a loss for the Group.
Credit risk arises from trade and other receivables, cash and cash equivalents, investments and derivative financial instruments.
Trade and other receivables
The Group’s customers are mainly government, government-backed institutions or blue chip corporations, however due to the nature of
the business, there is a degree of concentration of risk due to the level of activity with individual customers. The Group’s assessment is
that credit risk in relation to customers or subcontractors to governments is limited as their probability of default is considered to be
extremely low. The provision for expected credit losses for receivables from government and subcontractor to government customers is
therefore considered immaterial in the context of the receivables balance. The Group manages credit risk in relation to trade and other
receivables for all non-government commercial customers through various mitigating controls including credit checks, credit limits and
ongoing monitoring. Expected credit losses are assessed for all non-government customers, however this is not considered to be material
to the financial statements.
For trade receivables, contract receivables, amounts due from equity accounted investments and finance lease receivables, the Group
measures a provision for expected credit losses at an amount equal to lifetime expected credit losses, estimated by reference to past
experience and relevant forward-looking factors.
The Group considers that receivables more than 120 days overdue are at increased risk of default based on historical experience and
recognises a provision of 100% against all such receivables unless there is evidence of recoverability at the individual receivable level.
Cash and cash equivalents and derivative financial instruments
The Group utilises approved investment-grade counterparties to carry out treasury transactions, including investments of cash and cash
equivalents; with counterparty bank 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; and as such credit risk on these counterparties is not
considered to be material to the financial statements.
The Group’s risk management objective, policy and performance are as follows:
Objective
Policy
Performance
To ensure the Group continues to operate with an acceptable level of credit risk associated with its operating
activities, such as customer trade receivables, and financial activities, including cash deposits and financial
instruments.
Credit risk associated with the Group’s predominately government, government-backed institutions or blue chip
corporations is considered to be extremely low. Credit checks are performed on non-government commercial
customers and appropriate credit limits are set and regularly reviewed. Financial transactions are carried out with
approved investment grade counterparties with credit limits set according to the respective financial institution’s
credit rating. Counterparty bank credit risk is closely monitored on a systematic and ongoing basis.
Expected credit loss on trade receivable portfolio / provisions of £14.0 million. Further details are included in
notes 20 and 26. Maximum credit risk exposure from financial assets is £1,639.6 million (note 24).
Babcock International Group PLC Annual Report and Financial Statements 2021
195
Babcock International Group PLC Annual Report and financial statements 2021 195
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
3. Adjustments between statutory and underlying information
Definition of underlying measures and exceptional items
The Group provides alternative performance measures, including underlying operating profit, to enable users to better understand the
performance and earnings trends of the Group. These measures are considered to provide a consistent measure of business performance
from year to year. They are used by management to assess operating performance and as a basis for forecasting and decision-making and
are understood to be used by investors in analysing business performance.
The Group’s alternative performance measures are not defined by IFRS and are therefore considered to be non-GAAP measures. The
measures may not be comparable to similar measures used by other companies and they are not intended to be a substitute for, or
superior to, measures defined under IFRS.
The Group revised its definition of underlying performance measures in the year, as detailed in this note.
Underlying operating profit
Underlying operating profit excludes certain Specific Adjusting Items. Transactions such as these may happen regularly and could be
lumpy and may be profits or losses. As such they may distort the reporting of underlying business performance measures if they are not
adjusted for. Specific Adjusting Items include:
• Amortisation of acquired intangibles;
• Business acquisition, merger and divestment related items (being acquisitions and gains or losses on disposal of assets or businesses);
• Gains, losses and costs directly arising from the Group’s withdrawal from a specific market or geography, including closure costs,
severance costs, the disposal of assets and termination of leases;
• The costs of large restructuring programmes that significantly exceed the minor restructuring which occurs in most years as part of
normal operations. Restructuring costs incurred as a result of normal operations are included in operating costs and are not excluded
from underlying operating profit;
• Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes; and
• Exceptional items that are significant, non-recurring and outside of the normal operating practice. These items are described as
exceptional in order to appropriately represent the Group’s underlying business performance. Exceptional items are set out in the
Exceptional items section below.
Income statement including underlying results
Revenue
Operating (loss)/profit
Share of results of joint ventures and
associates
Investment income
Net finance costs
(Loss)/profit before tax
Income tax benefit/(expense)
(Loss)/profit after tax for the year
2021
2020 (restated)
Underlying
£m
4,182.7
Specific
Adjusting Items
£m
–
Note
6
Statutory
£m
4,182.7
Underlying
£m
4,428.5
Specific
Adjusting
Items
£m
–
Statutory
£m
4,428.5
6, 7
(27.6)
(1,615.4)
(1,643.0)
377.6
(453.2)
(75.6)
17
8
8
10
(13.1)
0.9
(62.1)
(101.9)
(18.4)
(120.3)
–
–
–
(1,615.4)
33.7
(1,581.7)
(13.1)
0.9
(62.1)
(1,717.3)
15.3
(1,702.0)
58.6
1.1
(73.0)
364.3
(67.4)
296.9
–
–
–
(453.2)
40.5
(412.7)
58.6
1.1
(73.0)
(88.9)
(26.9)
(115.8)
Included in the Specific Adjusting Items column of the table above is £1,502.1 million relating to the contract profitability and balance
sheet review. Further details are included in note 4.
196
196 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
3. Adjustments between statutory and underlying information (continued)
Earnings per share including underlying measures
(Loss)/profit after tax for the year
Amount attributable to owners of the parent
Amount attributable to non-
controlling interests
Weighted average number of shares (m)
Effect of dilutive securities (m)
Diluted weighted average number
of shares (m)
Basic EPS
Diluted EPS
Details of Specific Adjusting Items
The impact of Specific Adjusting Items is set out below:
Note
Underlying
£m
(120.3)
(120.3)
2021
Adjusting items
£m
(1,581.7)
(1,581.7)
Statutory
£m
(1,702.0)
(1,702.0)
2020 (restated)
Underlying
£m
296.9
294.9
Adjusting items
£m
(412.7)
(412.7)
–
–
–
2.0
505.0
4.0
509.0
(23.8)p
(23.8)p
505.0
4.0
505.3
0.9
509.0
506.2
(337.0)p
(337.0)p
58.4p
58.3p
Note
Amortisation of acquired intangibles
Business acquisition, merger and divestment related items
Gains, losses and costs directly arising from withdrawal from a specific market or geography
Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes
Restructuring
Exceptional items
Income tax benefit
Amortisation of acquired intangibles
Gains, losses and costs directly arising from withdrawal from a specific market or geography
Profit or loss from amendment, curtailment, settlement or equalisation of group pension schemes
Restructuring
Exceptional tax items and tax on exceptional items
Statutory
£m
(115.8)
(117.8)
2.0
505.3
0.9
506.2
(23.3)p
(23.3)p
2020
£m
(67.6)
74.7
(20.5)
–
(50.9)
(388.9)
(453.2)
14.5
–
–
9.7
16.3
40.5
2021
£m
(40.2)
(49.7)
(11.1)
(8.9)
(8.4)
(1,497.1)
(1,615.4)
8.2
1.0
1.7
0.5
22.3
33.7
Babcock International Group PLC Annual Report and Financial Statements 2021
197
Babcock International Group PLC Annual Report and financial statements 2021 197
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
3. Adjustments between statutory and underlying information (continued)
Explanation of Specific Adjusting Items
Amortisation of acquired intangibles
Underlying operating profit excludes the amortisation of acquired intangibles. This item is excluded from underlying results as it arises as a
result of purchase price allocations on business combinations, and is a non-cash item which does not change each year dependent on the
performance of the business. It is therefore not considered to represent the underlying activity of the Group. Intangible assets arising as a
result of the purchase price allocation on business combinations include customer lists, technology-based assets, order book and trade
names. Amortisation of internally generated intangible assets is included within underlying operating profit.
Business acquisition, merger and divestment related items
Transaction related costs and gains or losses on acquisitions, mergers and divestments of businesses are excluded from underlying
operating profit as business combinations and divestments are not considered to result from underlying business performance.
The total net loss relating to business acquisition, merger and divestment related items was £49.7 million, consisting of a £38.2 million
loss on disposal of the Group’s share in the Holdfast joint venture and losses arising on disposal of subsidiary undertakings of £0.6 million
for Cavendish Nuclear Manufacturing Limited and £10.9 million for Conbras Serrvicos Tecnicos Supporte Ltda. The prior year included a
total net gain of £61.3 million, consisting of a £74.7 million gain on the disposal of Context Information Security Limited partially offset
by additional costs from exits in the previous financial year and the costs of disposing of areas of the Group’s nuclear manufacturing
business.
Gains, losses and costs directly arising from the Group’s withdrawal from a specific market or geography
The Group ceased its Airport baggage handling contract in the year, incurring costs of £4.2 million. Further costs were incurred in relation
to exits in the previous financial year from the oil and gas business in Congo (£3.6 million), the overseas Powerlines business (£1.4 million)
and certain Rail related contracts (£1.9 million).
In the prior year the Group incurred costs of £7.1 million in relation to the exits of its oil and gas businesses in Ghana and Congo, £3.4
million in relation to the overseas Powerlines business and £3.0 million in relation to the exist of its Nuclear manufacturing business.
Restructuring
The Group continued to simplify the structure of the Aviation business and incurred a restructuring charge of £9.3 million (2020: £26.5
million). This was offset by the release of £0.9 million of unused provision from prior year restructuring costs in the Nuclear and Land
sectors.
Other restructuring in the prior year of £24.4 million relates to the Group’s Civil Nuclear and Rail businesses and includes substantial
redundancy costs. £16.5 million was incurred in reducing the cost base in Civil Nuclear following the end of the Magnox contract and in
response to the ongoing trading environment in the UK.
Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes.
The Group incurred a curtailment charge of £7.5 million in relation to the closure of the Rosyth defined benefit pension scheme to future
accrual. A charge of £1.4 million was incurred following a court ruling in November 2020 regarding equalisation of pension rights.
Exceptional items
See exceptional items section on page 202 for further detail.
In the prior year, business acquisition and divestment related items and restructuring charges were included as exceptional items
(previously referred to as ‘Exits and disposals’). These remain as Specific Adjusting Items but are no longer included as exceptional items in
order to provide greater clarity and consistency to the users of the financial statements.
Amendments to underlying definitions for the year ended 31 March 2021
For the year ended 31 March 2021 management has revised the Group’s definition of underlying revenue and underlying operating profit
as follows.
In prior years an underlying revenue measure was provided which included the Group’s share of revenue from investments in equity
accounted joint ventures and associates. This measure is no longer provided as the approach adopted by management in reviewing the
operating performance of the business is more closely aligned with the statutory measure of revenue.
The Group’s definition of underlying operating profit no longer includes the Group’s share of results from equity accounted joint ventures
and associates. This more closely aligns with the approach adopted by management in reviewing the operational performance of the
business.
198
198 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
3. Adjustments between statutory and underlying information (continued)
Reconciliation to prior year measures
Underlying income statement measures for the year ended 31 March 2021 that would have been presented under the previous
underlying measures definition
Underlying measures
Previous definition
Reclassification of IFRIC 12 investment income
Share of joint venture and associates revenue
Share of joint venture and associates operating
profit
Share of joint venture and associates investment
income
Share of joint venture and associates
amortisation of acquired intangible assets
Share of joint venture and associates finance
costs
Share of joint venture and associates exceptional
items
Share of joint venture and associates taxation
Revised definition
Note
Revenue
£m
Underlying
operating
loss
£m
Share of
results of
joint
ventures
and
associates
£m
Investment
income
£m
Net
finance
costs
£m
Loss before
tax
£m
Income tax
expense
£m
Loss after
tax
£m
4,433.2
–
(250.5)
(4.9)
(0.9)
–
–
–
–
–
0.9
–
(84.9)
–
–
(89.8)
–
–
(19.1)
–
–
(108.9)
–
–
–
–
–
–
4.0
(4.0)
(25.8)
25.8
–
–
(5.8)
(22.8)
(5.6)
(0.7)
(13.1)
–
–
4,182.7
–
–
(27.6)
–
–
–
–
–
–
–
–
–
(5.8)
22.8
–
–
–
–
–
–
(5.8)
–
–
–
0.9
–
–
(5.6)
(0.7)
(62.1) (101.9)
–
0.7
(18.4)
(5.6)
–
(120.3)
Comparison of the Income Statement for the year ended 31 March 2021 to the results that would have been provided under the
previous definition
Revenue
Operating (loss)
Share of results of joint ventures
and associates
Investment income
Net finance costs
Loss before tax
Income tax benefit/(expense)
Loss after tax for the year
2021
Underlying
£m
4,182.7
Specific
Adjusting Items
£m
–
Statutory
£m
4,182.7
Underlying
(previous
definition)
£m
4,433.2
2021
Underlying
Adjustments
£m
(250.5)
Statutory
£m
4,182.7
(27.6)
(1,615.4)
(1,643.0)
(4.9)
(1,638.1)
(1,643.0)
(13.1)
0.9
(62.1)
(101.9)
(18.4)
(120.3)
–
–
–
(1,615.4)
33.7
(1,581.7)
(13.1)
0.9
(62.1)
(1,717.3)
15.3
(1,702.0)
–
–
(84.9)
(89.8)
(19.1)
(108.9)
(13.1)
0.9
22.8
(1,627.5)
34.4
(1,593.1)
(13.1)
0.9
(62.1)
(1,717.3)
15.3
(1,702.0)
Note
6
6,7
8
8
10
Babcock International Group PLC Annual Report and Financial Statements 2021
199
Babcock International Group PLC Annual Report and financial statements 2021 199
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
3. Adjustments between statutory and underlying information (continued)
Earnings per share
Loss after tax for the year
Amount attributable to owners of the parent
Amount attributable to non-
controlling interests
Weighted average number of shares (m)
Effect of dilutive securities (m)
Diluted weighted average number
of shares (m)
Basic EPS
Diluted EPS
Note
Underlying
£m
(120.3)
(120.3)
2021
Specific
Adjusting
Items
£m
(1,581.7)
(1,581.7)
Statutory
£m
(1,702.0)
(1,702.0)
Underlying
(previous
definition)
£m
(108.9)
(108.9)
2021
Underlying
Adjustments
£m
(1,593.1)
(1,593.1)
Statutory
£m
(1,702.0)
(1,702.0)
–
–
–
–
–
–
505.0
4.0
509.0
(23.8)p
(23.8)p
505.0
4.0
505.0
4.0
509.0
509.0
(337.0)p
(337.0)p
(21.4)p
(21.4)p
505.0
4.0
509.0
(337.0)p
(337.0)p
Underlying income statement measures for the year ended 31 March 2020 (restated) that would have been presented under the
previous underlying measures definition
Underlying measures
Previous definition
Reclassification of IFRIC 12 investment income
Share of joint venture and associate revenue
Share of joint venture and associate operating
profit
Share of joint venture and associate investment
income
Share of joint venture and associate amortisation
of acquired intangible assets
Share of joint venture and associate finance
costs
Share of joint venture and associate exceptional
items
Share of joint venture and associate taxation
Revised definition
Note
Revenue
£m
Underlying
operating
profit
£m
Share of
results of
joint
ventures
and
associates
£m
Investment
income
£m
Net finance
costs
£m
Profit before
tax £m
Income tax
expense
£m
Profit after
tax
£m
4,850.7
–
(422.2)
484.3
(1.1)
–
–
–
–
–
1.1
–
(95.8) 388.5
–
–
–
–
(83.7) 304.8
–
–
–
–
–
–
–
–
(79.7)
79.7
(25.9)
25.9
–
–
(5.8)
(22.8)
(2.1)
(16.3)
58.6
–
–
4,428.5
–
–
377.6
–
–
–
–
–
–
–
–
–
(5.8)
22.8
–
–
–
–
–
–
–
(5.8)
–
–
–
1.1
–
–
(2.1)
(16.3)
(73.0) 364.3
(2.1)
–
16.3
–
(67.4) 296.9
The results for the year ended 31 March 2020 have been restated due to errors identified and a change in accounting policy. Further
details are set out in note 5.
200
200 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
3. Adjustments between statutory and underlying information (continued)
Comparison of the Income Statement for the year ended 31 March 2020 to the results that would have been presented
under the previous definition
Revenue
Operating (loss)
Income from joint ventures and associates
Investment income
Net finance costs
Profit/(loss) before tax
Income tax expense
Profit/(loss) after tax for the year
Earnings per share
Profit/(loss after) tax for the year
Amount attributable to owners of the parent
Amount attributable to non-
controlling interests
Weighted average number of shares (m)
Effect of dilutive securities (m)
Diluted weighted average number
of shares (m)
Basic EPS
Diluted EPS
Note
6
6,7
17
8
10
Note
2020
Specific
Adjusting
Items
(restated)
£m
–
(453.2)
–
–
–
(453.2)
40.5
(412.7)
2020
Specific
Adjusting
Items
(restated)
£m
(412.7)
(412.7)
2020
Underlying
Adjustments
(restated)
£m
(422.2)
(559.9)
58.6
1.1
22.8
(477.4)
56.8
(420.6)
2020
Underlying
adjustments
(restated)
£m
(420.6)
(420.6)
Statutory
(restated)
£m
4,428.5
(75.6)
58.6
1.1
(73.0)
(88.9)
(26.9)
(115.8)
Underlying
(previous
definition)
(restated)
£m
4,850.7
484.3
–
–
(95.8)
388.5
(83.7)
304.8
Statutory
(restated)
£m
(115.8)
(117.8)
Underlying
(restated)
£m
304.8
302.8
2.0
2.0
505.3
0.9
505.3
0.9
506.2
506.2
(23.3)p
(23.3)p
59.9p
59.8p
Statutory
(restated)
£m
4,428.5
(75.6)
58.6
1.1
(73.0)
(88.9)
(26.9)
(115.8)
Statutory
(restated)
£m
(115.8)
(117.8)
2.0
505.3
0.9
506.2
(23.3)p
(23.3)p
Underlying
(restated)
£m
4,428.5
377.6
58.6
1.1
(73.0)
364.3
(67.4)
296.9
Underlying
(restated)
£m
296.9
294.9
2.0
505.3
0.9
506.2
58.4p
58.3p
Babcock International Group PLC Annual Report and Financial Statements 2021
201
Babcock International Group PLC Annual Report and financial statements 2021 201
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
3. Adjustments between statutory and underlying information (continued)
Exceptional items
Exceptional items are those items which are significant, non-recurring and outside the normal operating practice of the Group.
Operating costs
Impairment of goodwill
Impairment of acquired intangibles
Impairment of internally generated intangible assets
Impairment of property, plant and equipment and aircraft fleet rationalisation
Impairment of right of use assets
Onerous contracts
Italy fine and related costs
Other
Exceptional items – Group
Exceptional tax items and tax on exceptional items
Exceptional items – net of tax
Note
2021
£m
1,243.2
56.4
32.7
142.6
46.4
–
(24.2)
–
1,497.1
(22.3)
1,474.8
2020
(restated)
£m
278.4
–
–
23.5
14.2
17.0
48.5
7.3
388.9
(16.3)
372.6
Explanation of exceptional items
Exceptional items include the results of the annual goodwill impairment test and other adjustments arising out of the contract profitability
and balance sheet review. The contract profitability and balance sheet review includes the results of a major aircraft fleet rationalisation
programme which resulted in asset impairments and crystallisation of losses on disposal of surplus aircraft.
Impairment of goodwill
The current year impairment test results in an impairment of the Land operating segment goodwill of £425.8 million, the Aviation
operating segment goodwill of £808.5 million and the goodwill of £8.9 million allocated to the Aviation oil and gas business CGU. These
impairments reflect significant changes in estimates, informed by consideration during the second half of the year ended 31 March 2021,
of actual business performance of the Group during the current year and related assessments of future performance of the businesses.
Future business performance was informed by the strategy and contract profitability and balance sheet reviews instigated by the Group’s
new executive management and the Group’s budget addressing the years ending 31 March 2022, 31 March 2023 and 31 March 2024.
The Group combines the Africa and Land operating segments into a single Land reportable segment and, in the prior year, the goodwill
impairment test was carried out at the reportable segment level rather than at the operating segment level as required by IAS 36. This
error was compounded by an administrative error in the calculation of the value-in-use of the Land operating segment and the impact of
both errors was an overstatement of Land value-in-use by £886 million.
In addition, the correction of a number of prior period errors in the year ended 31 March 2020, in relation to other financial statement
areas, reduced the capital employed used to complete the March 2020 goodwill impairment test. A reduction in capital employed of
£239.2 million, in relation to the Aviation operating segment, resulted in the restatement of the Aviation operating segment impairment
charge for the year ended 31 March 2020 from £395.0 million, which reflected deterioration in the oil and gas market conditions, to
£155.8 million. A reduction in capital employed of £5.1 million, in relation to the Land operating segment and the impact of the
overstatement of value-in-use by £886 million noted above, resulted in a Land operating segment impairment charge of £122.6 million
in the year ended 31 March 2020.
Impairment of acquired intangibles
The Land operating segment previously recognised an acquired intangible in relation to the DSG contract acquisition in 2015. Following
publication of the Integrated Spending Review and reassessment of variable revenues under the contract, an impairment assessment
under IAS 36 resulted in the impairment of this asset.
Impairment of internally generated intangible assets
Impairment charges of £32.7 million were recorded on mainly software assets. Further details are set out in note 3 and note 14.
Impairment of property, plant and equipment and aircraft fleet rationalisation
An impairment charge of £113.3 million was recorded on property, plant and equipment. This charge included the results of a major
aircraft fleet rationalisation programme which resulted in a refreshed fleet strategy and the identification of surplus aircraft. Impairments
were recorded on surplus aircraft and as the result of value-in-use tests. Losses on disposal were incurred on aircraft disposed of during the
year. The prior year charge related to impairments of property, plant and equipment used in the Group’s Aviation oil and gas business and
reflected the prevailing market conditions. Further details are set out in note 15.
202
202 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
3. Adjustments between statutory and underlying information (continued)
Exceptional items (continued)
Impairment of right of use assets
Following a review of carrying amounts, a total impairment charge of £46.4 million was recorded in relation to the Group’s right of use
assets. This included impairments of aircraft supporting oil and gas and emergency services contracts and the impairment of assets
directly attributable to the Group’s DSG contract. The impairment in the prior year related to aircraft supporting oil and gas market
contracts. Further details are set out in note 16.
Onerous contracts
The prior year charge relates to onerous contracts supporting the Aviation oil and gas market. As disclosed in note 4, the Group identified
onerous contracts during the year ended 31 March 2021. However, the onerous contracts identified are not considered to meet the
criteria for exceptional items (being items that are significant, non-recurring and outside the normal operating practice of the Group) and
are therefore not considered further here. We have assessed that onerous contracts identified in the year ended 31 March 2020 meet the
criteria for classification as exceptional under the policy in place for the current year.
Italy fine
In the year ended 31 March 2020, the Lazio Regional Administrative Court confirmed a €51 million fine issued by the Italian Competition
Authority to our subsidiary, Babcock Mission Critical Services Italia SpA (BMCS Italia), for certain anti-trust violations. As a result, the Group
recognised a provision of £46.4 million. During the year, BMCS Italia appealed the decision of the Court to the Italian Council of State. In
July 2021, the Council, whilst upholding the decision of the Court on the facts, annulled the fine, though allowing the Authority leave to
re-calculate it. We expect the Authority to decide on the recalculation of the fine over the next few months. Taking into account the
guidance given by the Council to the Authority on the recalculation, we further expect the Authority to reduce the fine. As a result, we
have reduced the provision to £20 million, being management’s best estimate of the Group’s obligation based on an interpretation of the
Council’s guidance. We have not received any indication from the Authority as to how it will choose to interpret the Council’s guidance.
Other
Other charges in the prior year include costs arising from the Group’s Brexit-related restructure.
Babcock International Group PLC Annual Report and Financial Statements 2021
203
Babcock International Group PLC Annual Report and financial statements 2021 203
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
4. Contract and balance sheet review
As announced in January 2021, the Group performed a review of the profitability of its contract portfolio and the carrying values of assets
and liabilities on the balance sheet. The review was carried out by management using the expertise and resource of an independent
accounting firm. The initial year-end financial close occurred in early April before completion of the contract profitability and balance
sheet review. On 13 April 2021 the Group announced the initial headline unaudited results for the year ended 31 March 2021 before
the impact of contract profitability and balance sheet review, along with an early estimate of the findings. The annual goodwill
impairment test, required by IAS 36, was included within the scope of the contract profitability and balance sheet review.
The contract profitability and balance sheet scope covered over 100 contracts, representing c.£2.6 billion of annual revenues. The
selected contracts received differing levels of review depending upon their perceived risk. Those contracts deemed high risk had a full
review of their status, underpinning assumptions and risks and dependencies. Those deemed medium risk had a specific scope review
with work targeted at any specific areas of concern, and those deemed low risk had a review with the project manager to gain an
understanding of the contract and assess whether any specific scope work should be performed. The balance sheet reviews covered all
main balance sheet captions for all sectors, again prioritising balances on a risk basis. As the reviews progressed, more work was
performed on contracts where findings raised issues that had not been considered in the initial scoping reviews.
More than 100 accounting adjustments totalling £2.0 billion (post-tax effect on retained earnings) resulted from the contract profitability
and balance sheet review, consisting of:
• Cumulative restatement at 1 April 2019 of £308.1 million (being £45.3 million relating to a change in accounting policy and
correction of prior year errors of £262.8 million).
• Cumulative restatement at 31 March 2020 of £230.7 million (being £59.8 million relating to a change in accounting policy and
correction of prior year errors of £170.9 million).
• Changes recorded within the current financial year of £1,813.7 million, the vast majority of which are change in estimates.
Of the adjustments recorded in the current year income statement (see table below), £274.7m were charged within underlying
operating profit and the vast majority of these amounts related to changes in estimates. Their inclusion within underlying operating profit
reflects the fact that the occurrence of such transactions, when taken individually, is part of the ordinary course of business. However, the
number and magnitude of the adjustments as a result of the contract profitability and balance sheet review far exceeded what would
normally be expected in the Group in any one period, hence the additional disclosure.
Prior year restatements
There are a number of prior year errors that have been recognised. Adjustments were denoted as errors, rather than changes in estimates,
when it was identified that assumptions or methodologies were used which the Group should have known at the time were incorrect.
One accounting policy has also been changed to better represent certain maintenance arrangements in the Aviation sector, and the
errors and the policy change result in prior year restatements. Prior year restatements arising on or before 31 March 2019 were recorded
in the 1 April 2019 opening balance sheet in these financial statements, with the continuing impact of these errors and other errors
arising in the year ended 31 March 2020 being recorded in the income statement for the year ended 31 March 2020. Further details are
set out in note 5.
The impacts of the contract profitability and balance sheet review adjustments on the income statement, including the results of the
annual goodwill impairment test, are summarised as follows:
Revenue impacts
Operating profit/(loss) impacts
Impairment/disposal of goodwill and acquired
intangible assets
Impairment of non-current assets
Impairment of property, plant and equipment and right
of use assets
Impairment/write down of current assets
Introduction of/increase to liabilities
Operating profit/(loss)
Share of income from JVs and associates
Profit/(loss) before tax impacts
Tax adjustments
Tax effect
Loss after tax for the year impacts
2021
Specific
Adjusting
Items
£m
–
Underlying
£m
(207.4)
2020
Statutory
£m
(207.4)
Underlying
£m
(21.0)
Specific
Adjusting Items
£m
–
Statutory
£m
(21.0)
–
(5.8)
(1,349.4)
(32.7)
(1,349.4)
(38.5)
–
(142.6)
(126.3)
(274.7)
(37.1)
(311.8)
(7.5)
29.3
(290.0)
(156.9)
(0.8)
(1.0)
(1,540.8)
–
(1,540.8)
–
17.1
(1,523.7)
(156.9)
(143.4)
(127.3)
(1,815.5)
(37.1)
(1,852.6)
(7.5)
46.4
(1,813.7)
–
0.7
(21.6)
(19.5)
0.6
(39.8)
–
(39.8)
(12.4)
3.0
(49.2)
130.5
–
(1.4)
–
–
129.1
–
129.1
–
(2.5)
126.6
130.5
0.7
(23.0)
(19.5)
0.6
89.3
–
89.3
(12.4)
0.5
77.4
204
204 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
4. Contract and balance sheet review (continued)
Summarised cumulative adjustments to retained earnings, including the results of the annual goodwill impairment test, are as set
out below:
Restatement as at 1 April 2019
Adjustments recognised in the year ended 31 March 2020
Total restatement at 31 March 2020
Adjustments recognised in the year ended 31 March 2021
Total adjustments recognised at 31 March 2021
The summary of the adjustments in the table above is set out below:
£m
(308.1)
77.4
(230.7)
(1,813.7)
(2,044.4)
Revenue
These adjustments have two components within them. Firstly is a correction of an error where revenue had been recognised on a
contract the terms of which had been varied in February 2020. The effect of the contract change is that the Group is deemed an agent of
the customer, not a principal and therefore the revenue should not be recognised. As a result of identifying this error, £71.8 million of
revenue initially recognised in the year ended 31 March 2021 was reversed together with £11.6 million of revenue in relation to the year
ended 31 March 2020. The second component of revenue adjustments reflects reassessments of the progress and profitability of a
number of contracts across the Group.
Impairment of goodwill and acquired intangible assets
In the current year, goodwill was impaired by £1,243.2 million and acquired intangible assets were impaired by £56.4 million. As
detailed in note 13, the impairments of the Land and Aviation sectors’ goodwill of £425.8 million and £817.4 million respectively were
largely as a result of reduced forecasts of future cash flows and an increase in the discount rate used to discount them.
Contract profitability and balance sheet review adjustments of £64.8 million were also recorded to allocate the goodwill that should
have been allocated to the Holdfast disposal (June 2020) and to correct the allocation of goodwill to the Conbras disposal (October
2020 and provided in the first half of the financial year). Further, £56.4 million was impaired in relation to the DSG contract acquired
intangible as its carrying value could no longer be justified following the reassessment of the contract profitability. Partially offsetting this
is the reversal of amortisation of £15.0 million in relation to the oil and gas business acquired intangible reflecting management’s
judgement to dispose of this intangible at 1 April 2019 as a result of a reassessment of its useful economic life. This has been classified as
a prior year error.
Previously a goodwill impairment of £395.0 million was recorded in the year ended 31 March 2020 against the Aviation sector goodwill.
The credit of £130.5 million in the year ended 31 March 2020 is a reduction to that impairment and is the result of three prior year
errors. Firstly, credits of £239.2 million and £5.1 million reflect the cumulative amount of prior year errors in relation to the capital
employed in the Aviation and Land operating segments respectively, and therefore reduce the amount that should have been impaired in
the year ended 31 March 2020. Secondly, calculation errors in the impairment test of Land goodwill in the year ended 31 March 2020
result in a charge of £127.7 million and, thirdly, a credit of £13.9 million reflects reduced intangible amortisation in relation to the oil
and gas business following the derecognition of the intangible asset at 1 April 2019.
Impairment of other non-current assets:
The adjustments within underlying operating profit in the year ended 31 March 2021 largely relate to the write off of a loan to one of our
joint ventures which is no longer deemed recoverable. The £32.7 million within the year ended 31 March 2021 Specific Adjusting Items
is largely due to the impairment of internally generated intangibles, mainly computer software.
Impairment of property, plant and equipment and right of use assets:
Impairments of £156.9 million largely relate to fleet values in the Aviation sector where aircraft carrying values are no longer expected to
be recovered through use or sale. Also included are impairments of leasehold property of £12 million and plant and equipment of £11
million. The prior year error of £21.6 million within underlying profit is all from the Aviation sector and relates to the expensing of
previously capitalised maintenance and the reversal of aircraft vendor credit notes previously recognised within profit. Further details are
set out in note 5.
Impairment/write down of current assets:
This covers the reassessment of several contract profitability margins and the recoverability of many trade and other receivables
(including contract assets and accrued income) as well as an increase in obsolescence provisions for inventory. This is the summation of
many contract reassessments across the group with £62.0 million in Aviation, £36.6 million in Land, £21.8 million in Marine and £20.6
million in Nuclear. The prior year error of £19.5 million relates to Aviation and corrects the capitalisation of mobilisation and other costs
as well as revenue milestones recognised for an aircraft the Group did not take delivery of.
Babcock International Group PLC Annual Report and Financial Statements 2021
205
Babcock International Group PLC Annual Report and financial statements 2021 205
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
4. Contract and balance sheet review (continued)
Introduction of/increase to liabilities:
These increases reflect reassessment of several contract profitability margins, onerous contract provisions, aircraft maintenance accruals,
and other provisions. £72.6 million are in the Aviation sector, £35.5 million in Land and £11.4 million in Marine. Around £60 million of
the liabilities are expected to outflow beyond one year.
Share of income from joint ventures and associates
Historically the Group adjusted the results of the joint ventures and associates before equity accounting the relevant share in the income
statement. The Group has decided such results should be incorporated without adjustment by the Group – unless required to align with
IFRS. In the prior periods the Group’s share of joint venture and associates results were adjusted by £23.1 million cumulatively, and a
charge of this amount is booked as a change in estimate in the year ended 31 March 2021 to reverse these amounts. In addition,
following the termination of the Group’s Dounreay decommissioning contract on 31 March 2021, as a consequence of the NDA’s
decision to take contract delivery in-house, the Group booked an adjustment of £10.9 million to reflect the estimated contract
settlement with the NDA. Contract settlements remain outstanding in relation to works carried out some years ago by the Land sector’s
ABC joint venture and, following developments during the year, a further adjustment of £3.1 million was recorded and represents an
updated assessment of the contract outcomes.
Tax adjustments:
The underlying impact of £7.5 million in the year ended 31 March 2021 relates to the write off of deferred tax assets in Spain of £29.1
million now considered not recoverable within the Group’s forecasting horizon, together with a £21.6 million credit, being the
recognition of tax deductibility on the DSG contract intangible amortisation now confirmed with HMRC. The prior year error of £12.4
million is the write off of a deferred tax asset incorrectly calculated in the prior year.
Change in accounting policy
During the year, management amended the Group’s accounting policy regarding Power By the Hour agreements. At 31 March 2021 this
change in policy reduces property, plant and equipment by £65.6 million and trade and other receivables by £3.1 million and increases
trade and other payables by £8.1 million. Further information is detailed at note 5.
5. Prior year restatements
The following table summarises the impact of restatements arising from the change in accounting policy and correction of prior year
errors on Group net assets and earnings per share.
Impact on non-current assets (£m)
Impact on current assets (£m)
Impact on non-current liabilities (£m)
Impact on current liabilities (£m)
Total impact on equity
31 March 2020
1 April 2019
Change in accounting
policy
(48.7)
(2.8)
–
(8.3)
(59.8)
Prior period error
(135.7)
445.6
79.2
(564.5)
(175.4)
Change in accounting
policy
(37.2)
–
–
(8.1)
(45.3)
Prior period error
(224.8)
549.3
(1.9)
(578.2)
(255.6)
Impact on profit after tax (£m)
Impact on Group earnings per share (basic) (pence)
Impact on Group earnings per share (diluted) (pence)
(14.6)
(2.9)
(2.9)
92.0
18.6
18.6
N/A
N/A
N/A
N/A
N/A
N/A
Detail of prior period errors and change in accounting policy
Through the contract profitability and balance sheet review a number of prior year errors have been identified, in addition to one area
where there is a more appropriate alternative accounting policy. Prior year financial statements have been restated for these changes as
indicated below.
206
206 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
5. Prior year restatements (continued)
1 April 2019 – Group statement of financial position (extract)
Change in
accounting
policy
Correction of errors
1 April 2019
(previously
published)
(i) Power By
the Hour
maintenance
arrangements
(ii)
Maintenance
of leased
aircraft
(iv)
Maintenance
of customer
aircraft
(v)
Mobilisation
costs
(iii) Rotables
(vi) Credit
notes
(vii) Deferred
tax
(viii) Balance
sheet
reclassification
(x) Other
1 April 2019
(restated)
Assets
Non-current assets
Other intangible assets
448.9
–
–
–
–
Property, plant and equipment
1,014.3
(37.2)
(26.5)
(25.8)
(25.1)
Right of use assets
Investments in joint ventures
and associates
Deferred tax asset
592.7
153.2
155.9
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.8)
–
–
–
–
(2.4)
(35.3)
–
–
Total non-current assets*
5,327.9
(37.2)
(26.5)
(25.8)
(25.1)
(0.8)
(37.7)
Current assets
Inventories
Trade and other receivables
Income tax receivable
Cash and cash equivalents
196.5
916.6
11.1
275.2
Total current assets*
1,447.4
Liabilities
Non-current liabilities
Bank and other borrowings
(1,357.6)
Deferred tax liabilities
(103.2)
Total non-current liabilities*
(2,294.5)
Current liabilities
Bank and other borrowings
(53.9)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Trade and other payables
(1,381.4)
(8.1)
(2.9)
Other financial liabilities
Provisions for other liabilities
(4.9)
(48.9)
–
–
–
(9.7)
Total current liabilities*
(1,618.3)
(8.1)
(12.6)
Total impact on statement of
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(18.6)
–
–
(18.6)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(8.8)
(8.8)
–
–
–
–
–
–
11.5
11.5
–
–
–
–
–
–
0.7
66.1
–
(92.4)
(25.6)
–
9.5
26.2
569.5
605.2
(79.6)
66.2
(13.4)
(603.4)
37.2
–
–
(566.2)
(59.9)
(23.5)
–
8.9
–
389.0
873.7
623.5
162.1
54.7
(74.5)
5,065.9
(1.8)
(38.7)
3.2
–
194.7
868.8
40.5
844.7
(37.3)
1,996.7
–
–
–
–
(1,437.2)
(25.5)
(2,296.4)
(657.3)
6.4
(1,348.8)
(6.0)
0.2
0.6
(10.9)
(58.4)
(2,204.6)
financial position
–
(45.3)
(39.1)
(25.8)
(25.1)
(19.4)
(37.7)
2.7
Other reserves
Retained earnings
Total equity*
692.9
975.8
2,862.5
–
(45.3)
(45.3)
–
(39.1)
(39.1)
–
(25.8)
(25.8)
–
(25.1)
(25.1)
–
(19.4)
(19.4)
–
(37.7)
(37.7)
–
2.7
2.7
–
–
–
–
(111.2)
(300.9)
7.2
(118.4)
700.1
667.7
(111.2)
2,561.6
* The table above includes only those financial statement line items which have been restated. The total non-current assets, current assets, non-current liabilities,
current liabilities and equity do not therefore represent the sum of the line items presented above.
Babcock International Group PLC Annual Report and Financial Statements 2021
207
Babcock International Group PLC Annual Report and financial statements 2021 207
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
5. Prior year restatements (continued)
31 March 2020 – Group statement of financial position (extract)
Change in
accounting
policy
Correction of errors
31 March
2020
(previously
published)
(i) Power By
the Hour
maintenance
arrangements
(ii)
Maintenance
of leased
aircraft (iii) Rotables
(iv)
Maintenance
of customer
aircraft
(v)
Mobilisation
costs
(vi) Credit
notes
(vii)
Deferred
tax
(viii) Balance
sheet
reclassification
(ix) Goodwill
impairment
(x) Other
31 March
2020
(restated)
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Right of use assets
Investment in joint ventures
and associates
Deferred tax asset
2,171.3
379.5
951.1
638.8
148.0
190.6
–
–
–
–
–
–
–
–
–
–
–
–
(48.7)
(30.5)
(30.8)
(28.1)
(0.8)
(2.4)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(39.7)
–
–
–
–
–
–
–
–
–
52.3
(6.7)
–
(16.3)
(113.8)
116.6
– 2,287.9
–
–
–
–
–
(44.8)
334.7
(21.2)
840.9
16.6
609.0
13.9
161.9
–
60.5
Total non-current assets*
4,887.5
(48.7)
(30.5)
(30.8)
(28.1)
(0.8)
(42.1)
(16.3)
(68.2)
116.6
(35.5) 4,703.1
Current assets
Inventories
Trade and other receivables
Income tax receivable
Cash and cash equivalents
Total current assets*
Liabilities
Non-current liabilities
Lease liabilities
Deferred tax liabilities
Provision for other liabilities
193.5
930.8
13.6
1,351.4
2,643.2
(534.8)
(115.2)
(30.4)
Total non-current liabilities*
(2,948.2)
Current liabilities
Bank and other borrowings
Lease liabilities
(400.1)
(138.0)
–
(2.8)
–
–
(2.8)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Trade and other payables
(1,366.3)
(8.3)
(2.9)
Income tax payable
Other financial liabilities
(5.9)
(9.0)
Provision for other liabilities
(113.2)
–
–
–
Total current liabilities*
(2,032.5)
(8.3)
–
–
(13.7)
(16.6)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(30.1)
(0.7)
–
–
–
–
(30.1)
(0.7)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8.7
–
8.7
–
–
–
–
–
–
–
–
(12.7)
41.0
494.5
522.8
–
72.8
–
72.8
(587.8)
–
60.4
–
–
–
(527.4)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1.9)
191.6
(47.1)
837.4
2.6
57.2
– 1,845.9
(46.4) 3,086.0
(13.7)
(548.5)
–
(33.7)
(2.3)
(32.7)
(16.0) (2,882.7)
–
(987.9)
(2.9)
(140.9)
15.9 (1,301.2)
2.1
(3.8)
(18.7)
(27.7)
(3.2)
(130.1)
(6.8) (2,591.6)
Total impact on statement
of financial position
–
(59.8)
(47.1)
(30.8)
(28.1)
(30.9)
(42.8)
(7.6)
–
116.6
(104.7)
(235.2)
Other reserves
Retained earnings
Total equity*
647.1
710.8
2,550.0
–
(59.8)
(59.8)
–
(47.1)
(47.1)
–
(30.8)
(30.8)
–
(28.1)
(28.1)
–
–
(30.9)
(42.8)
(30.9)
(42.8)
–
(7.6)
(7.6)
–
–
–
–
(4.5)
642.6
116.6
(100.2)
480.1
116.6
(104.7) 2,314.8
* The table above includes only those financial statement line items which have been restated. The total non-current assets, current assets, non-current liabilities,
current liabilities and equity do not therefore represent the sum of the line items presented above.
208
208 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
5. Prior year restatements (continued)
31 March 2020 – Impact on the income statement for the year ended 31 March 2020
Change in
accounting
policy
Correction of errors
31 March
2020
(previously
published)
(i) Power By
the Hour
maintenance
agreements
(ii)
Maintenance
of leased
aircraft
(iv)
Maintenance
of customer
aircraft
(iii) Rotables
(v)
Mobilisation
costs
(vi) Credit
notes
(vii)
Deferred
tax
(viii) Balance
sheet
reclassification
(ix) Goodwill
impairment
(x) Other
31 March
2020
(restated)
Group income statement
Revenue
4,449.5
–
–
Cost of revenue
(3,940.5)
(13.1)
(6.9)
–
(4.1)
–
–
–
(2.2)
(12.7)
(3.8)
Administration and
distribution expenses
Goodwill impairment
(353.6)
(395.0)
(Loss)/profit from divestments
74.7
Share of results of joint
ventures and associates
Finance income
Finance costs
Loss before tax
58.6
14.1
(86.0)
(1.5)
(1.3)
(0.9)
(0.8)
1.2
(1.3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(5.0)
–
(5.0)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3.0)
(11.5)
(5.1)
(178.2)
(14.6)
(8.2)
Income tax expense/benefit
(15.0)
–
–
Loss for the period
(193.2)
(14.6)
(8.2)
–
–
–
(13.4)
(3.0)
(11.5)
(5.1)
(13.4)
Impact on basic earnings per
share
Impact on diluted earnings
per share
(38.6)
(2.9)
(1.6)
(1.0)
(0.6)
(2.3)
(1.0)
(2.7)
(38.6)
(2.9)
(1.6)
(1.0)
(0.6)
(2.3)
(1.0)
(2.7)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(21.0) 4,428.5
42.1 (3,941.2)
–
(1.0)
(359.2)
116.6
–
–
–
–
–
–
–
–
–
116.6
20.1
–
1.5
(278.4)
74.7
58.6
14.1
(86.0)
(88.9)
(26.9)
116.6
21.6
(115.8)
23.1
4.3
(23.3)
23.1
4.3
(23.3)
The total impact of prior year errors and change in accounting policy on the loss for the year ended 31 March 2020 period is
£77.4 million.
Babcock International Group PLC Annual Report and Financial Statements 2021
209
Babcock International Group PLC Annual Report and financial statements 2021 209
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
5. Prior year restatements (continued)
31 March 2021
The impact of the change in accounting policies on the results for the year ended 31 March 2021 is as follows:
Group statement of financial position (extract)
Assets
Non-current assets
Property, plant and equipment
Current assets
Trade and other receivables
Liabilities
Current assets
Trade and other payables
Equity
Retained earnings
Group income statement (extract)
Cost of revenue
(Loss) / Profit before tax
Income tax
(Loss) / Profit for the period
Impact on basic earnings per share
Impact on diluted earnings per share
Change in
accounting policy
(i) Power By the
Hour maintenance
arrangements
(54.5)
(3.1)
(8.1)
(65.6)
(65.6)
(6.0)
(6.0)
1.0
(5.0)
(1.0)
(1.0)
Definitions
As set out in note 1, aircraft are considered in two key components for accounting purposes. ‘Rotables’ are major life-limited parts, such
as engines, gearboxes and rotor blades, where value is consumed on a flying hour basis. The ‘airframe’ represents the remainder of the
aircraft, and includes the body and other structural, mechanical and electrical installations necessary for flight. These definitions exclude
‘equipment’ which is separable from the aircraft and mission specific, such as medical and firefighting installations.
Change in accounting policy
i. Power By the Hour (PBH) agreements
The Group is party to a number of ‘Power By the Hour’ (‘PBH’) maintenance arrangements, under which the provider supplies rotable and
airframe parts as required in exchange for a fixed price per flying hour. The provider therefore assumes the risk associated with the failure
rate of parts.
Certain of these payments have previously been capitalised within property, plant and equipment, while the rotable parts which are
subject to the arrangement have been depreciated as a separate component of the aircraft. Depreciation of the PBH payments has
commenced as rotable and airframe parts are provided under the arrangement.
Following a review of the terms of these arrangements, a comparison to policies of peer companies (where publicly available) and
considering the requirements and application of IAS 16 ‘Property, Plant and Equipment’ (‘IAS 16’), it was determined that a more reliable
and relevant accounting policy would be to recognise PBH payments in the income statement as incurred, but not to separately
depreciate the rotable parts covered by the arrangement. This is more relevant as it reflects the substance of the arrangements, which is
to maintain the parts covered at their full potential. It is more reliable in recording an expense in the income statement as there is no
depreciation charge, which requires the use of an accounting estimate. The policy is also more prudent as (a) the cost of rotable parts
does not change over time with inflation and (b) the elements of the PBH cost which reimburse the risk assumed by the PBH provider and
which cover ancillary benefits such as access to the supply chain of the provider are directly expensed rather than initially capitalised.
This change in policy reduces property, plant and equipment and trade and other receivables and increases trade and other payables,
reducing retained earnings by £45.3 million at 1 April 2019, £59.8 million at 31 March 2020 and £65.6 million at 31 March 2021.
Trade and other receivables and trade and other payables are impacted by this change in policy as amounts were recorded in trade and
other receivables and trade and other payables under the previous policy, which was deemed to be inappropriate. The tables above set
out the impact on each line item of the statement of financial position and income statement.
210
210 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
5. Prior year restatements (continued)
Correction of errors
ii. Maintenance of leased aircraft
Leased aircraft are typically required to be returned to lessors with rotables in a similar condition to that which existed at the
commencement of the lease. Betterment and detriment clauses set out the balancing payments required if these conditions are not met.
The cost of repair and replacement parts which extends the life of rotables has typically been capitalised as a leasehold improvement and
depreciated over the term of the lease, resulting in an increasing cost of depreciation towards the end of the lease.
Following a review of lease return conditions and considering the requirements and application of IAS 16, it has been determined that the
Group should record a leasehold improvement asset or dilapidation provision which represents the difference between the condition of
the rotables at any given point in time and the return condition. This reflects the amount of leasehold improvement which will generate
future benefits and the value of the liability to restore parts to the return condition, and results in a more consistent profile of cost
recognition over the duration of the lease.
The correction of this error reduces the carrying value of property, plant and equipment by £26.5 million and increases trade and other
payables and provisions by £2.9 million and £9.7 million, respectively, at 1 April 2019. There is an increase in operating costs of £8.2
million in the year ended 31 March 2020, resulting in a reduction in property, plant and equipment of £30.5 million and an increase in
trade and other payables and provisions of £2.9 million and £13.7 million, respectively, at 31 March 2020.
iii Rotables – maintenance of owned aircraft
Rotables are depreciated as a separate component of the aircraft on the basis of flying hours, as this most appropriately reflects the
consumption of economic benefits.
Following a review of balances capitalised as rotables, it was identified that in certain cases the carrying value of parts replaced prior to
completion of the expected number of flying hours had not been written off, depreciation rates had not been regularly updated to reflect
the latest actual cost of replacement parts and the remaining number of flying hours used for accounting purposes had not been regularly
checked for accuracy against contemporaneous technical records. It was also identified that certain parts capitalised related to the
airframe rather than rotables and should have been expensed as these represented a replacement rather than enhancement to the
aircraft. Detailed exercises were undertaken to assess the remaining life of rotables against technical records, determine the actual cost of
parts capitalised and review balances for airframe parts which should not have been capitalised under IAS 16.
The correction of these errors reduces property, plant and equipment by £25.8 million at 1 April 2019. There is a charge to the income
statement of £5.0 million for the year ended 31 March 2020, resulting in a reduction in property, plant and equipment of £30.8 million
at 31 March 2020.
iv. Rotables – maintenance of customer aircraft
The Group operates a number of aircraft which are provided by customers. The cost of repair and replacement parts which extends the
life of rotables has been capitalised within property, plant and equipment and depreciated over the contract term in a manner similar to
that applied for leased aircraft.
Following a review of the terms of these customer contracts, it has been determined that these costs should not have been capitalised as
they represent the enhancement of a customer asset rather than an asset of the Group and therefore do not meet the recognition
requirements of IAS 16.
The correction of this error reduces property, plant and equipment by £25.1 million at 1 April 2019. There is an increase in operating
costs of £3.0 million for the year ended 31 March 2020, resulting in a reduction in property, plant and equipment of £28.1 million at 31
March 2020.
v. Mobilisation costs
The Group incurs various costs in mobilising contracts and certain of these costs have been capitalised as contract fulfilment assets.
Following a review of all such assets, it has been identified that certain costs did not meet the requirements of IFRS 15 to be capitalised as
contract fulfilment assets as there was insufficient evidence that the costs generated or enhanced resources which the Group would use
in performing the contract. The key areas related to lease costs, maintenance costs and personnel costs incurred prior to contract
commencement or the achievement of full operating capability. A significant proportion of these costs was incurred in mobilising the
Group’s Air Ambulance contract in Norway, which commenced in July 2019.
The correction of these errors reduces trade and other receivables by £18.6 million and property, plant and equipment by £0.8 million at
1 April 2019. There is an increase in operating costs of £11.5 million for the year ended 31 March 2020, resulting in reductions in trade
and other receivables of £30.1 million and property, plant and equipment of £0.8 million at 31 March 2020.
Babcock International Group PLC Annual Report and Financial Statements 2021
211
Babcock International Group PLC Annual Report and financial statements 2021 211
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
5. Prior year restatements (continued)
Correction of errors (continued)
vi. Credit notes
The Group receives certain credit notes from aircraft manufacturers at the point of placing orders for aircraft, exercisable against the
purchase of future parts and services. These credit notes have previously been recognised in the income statement on receipt and
recorded within trade and other receivables until used to purchase parts or services, which is typically within a short period.
Following a review of the substance of these credit notes, it has been determined that these represent a discount on the purchase price
of the aircraft. In the case of aircraft which are owned by the Group, credit notes should therefore be recognised as a reduction in the
cost of aircraft acquired. The majority of aircraft ordered by the Group in recent years have been sold and leased back prior to delivery,
typically at the gross purchase price excluding the credit note, resulting in a gain on disposal of the aircraft being recognised in the
income statement. The accounting for these sale and leasebacks has been corrected, reversing the gain recognised on disposal and
recalculating reduced right of use assets arising from the leasebacks with reference to the discounted purchase price of the aircraft.
In the case of aircraft acquired for customers under an aircraft supply contract, the credit notes should be recognised as a reduction in
operating costs.
The correction of these errors results in reductions in right of use assets of £35.3 million and property, plant and equipment of £2.4
million at 1 April 2019. There is an increase in operating costs of £5.1 million for the year ended 31 March 2020, resulting in cumulative
decreases in the carrying value of right of use assets of £39.7 million, property, plant and equipment of £2.4 million and trade and other
receivables of £0.7 million at 31 March 2020.
vii. Deferred tax
At 31 March 2020 a net deferred tax asset of £71.7 million was recognised in the Aviation operating segment in relation to the Group’s
Spanish entities. The recognition of this asset was supported by forecasts which showed the Spanish tax group becoming profitable in
FY23 with significant further growth beyond this date. However, this analysis did not appropriately take into account restrictions on the
utilisation of various tax attributes within Spanish tax law which, when corrected, extend the duration over which the deferred tax asset is
expected to be fully utilised to over 20 years. Although the relevant tax attributes can be carried forward indefinitely, it was determined
that appropriately risk-weighted profit forecasts (see note 1 “Critical accounting estimates”) supported only a portion of the deferred tax
asset, reducing the deferred tax asset by £25.5m at 1 April 2019 and £37.9m in total at 31 March 2020. This is partially offset by the tax
benefit of other CPBS adjustments which are recognised to the extent it is appropriate to do so in the relevant jurisdiction.
The correction of this error (after the partial offset by the tax benefit of other adjustments) results in a reduction in deferred tax assets of
£8.8 million at 1 April 2019 and £16.3 million at 31 March 2020.
As a result of the accelerated amortisation of the acquired intangible in the oil and gas operating segment, there has been a reduction in
the deferred tax liability of £11.5 million at 1 April 2019 and £8.7 million at 31 March 2020. Further information is included at ‘x.
Other errors’.
viii. Balance sheet reclassifications
Supply chain financing
The Group entered into certain Supply Chain Financing Facilities (‘SCF arrangements’) in the Aviation operating segment. Outstanding
balances financed through those arrangements were previously accounted for within trade and other payables. The Group has reassessed
this classification and has determined that these liabilities should be reclassified as bank and other borrowings. This has also resulted in an
increase to property, plant and equipment and other borrowings, as part of the Supply Chain Financing Facilities has been used for
deposits on aircraft.
At 1 April 2019, correction of this error results in an increase in property, plant and equipment of £54.7 million, an increase in trade and
other receivables of £21.6 million, an increase in bank and other borrowings of £113.5 million and a reduction in trade and other
payables of £37.2 million. At 31 March 2020, correction of this error results in an increase in bank and other borrowings of £93.3
million, an increase in property, plant and equipment of £32.9 million and a reduction in trade and other payables of £60.4 million. This
adjustment also impacts on the cash flow statement, resulting in an increase in cash flows from financing activities and reduction in cash
flows from operating activities.
Cash pool arrangement
An error has been identified in relation to the accounting for the Group’s notional cash pool arrangement. Cash and cash equivalents and
bank and other borrowings should have been presented on a gross rather than net basis, in line with the requirements of IAS 32, ‘Financial
Instruments: Presentation’ (‘IAS 32’). The correction of this error results in increases in cash and cash equivalents and bank other
borrowings of £569.5 million at 1 April 2019 and £494.5 million at 31 March 2020. There is no impact on the income statement.
212
212 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
5. Prior year restatements (continued)
Correction of errors (continued)
viii. Balance sheet reclassifications (continued)
Norway mobilisation
The cost of acquiring an aircraft simulator and certain flight and medical equipment in mobilising the Norway Air Ambulance contract has
been capitalised as a contract fulfilment cost. IFRS 15 requires that costs that are within the scope of another Standard shall be
accounted for in accordance with those other Standards. These costs are within the scope of IAS 16 and should therefore have been
capitalised as property, plant and equipment.
The correction of this error increases property, plant and equipment and reduces trade and other receivables by the same amount, being
£12.1 million at 1 April 2019 and £12.7 million at 31 March 2020.
Reclassification of deferred tax asset to income tax receivable
The gross deferred tax asset included amounts that should have been classified as income tax receivable and a reduction in deferred tax
liabilities. In addition, deferred tax assets and liabilities have been re-stated in strict accordance with the right-of-set-off rules whereby
deferred tax assets and deferred tax liabilities in the same jurisdiction are offset where there is a legally enforceable right to offset
corporation tax assets and corporation tax liabilities, and the deferred tax assets and deferred tax liabilities relate to income taxes levied
by the same Taxation Authorities.
Correction of this error reduces the deferred tax asset by £92.4 million, increases income tax receivable by £26.2 million and decreases
the deferred tax liability by £66.2 million at 1 April 2019. At 31 March 2020 correction of this error results in a decrease in the deferred
tax asset of £113.8 million, an increase to income tax receivable of £41.0 million and a decrease in deferred tax liabilities of £72.8
million.
Reclassification of right of use assets to property, plant and equipment
On transition to IFRS 16, finance leases that were previously recorded as property, plant and equipment were transferred to right of use
assets. However, as part of the procedures for the year ended 31 March 2021 it was identified that the reclassification was processed as a
movement during the year ended 31 March 2020, as opposed to at 1 April 2019, and the amount reclassified was incorrect. Correction
of this error results in a reclassification from property, plant and equipment to right of use assets of £66.1 million at 1 April 2019 and
£6.7 million at 31 March 2020.
ix. Goodwill impairment
As a result of the prior year adjustments recorded in the Aviation and Land operating segments, the capital employed used in the goodwill
impairment assessment at 31 March 2020 reduced. This resulted in a reduction in the impairment charge of £239.2 million in the
Aviation operating segment and a reduction in the impairment charge of £5.1 million in the Land operating segment.
In addition, following a review of the methodology applied in goodwill impairment testing, the Group identified that the assessment had
been performed at the reportable segment rather than the operating segment level. The operating segment level is the highest level at
which goodwill can be monitored in accordance with IAS 36. In addition, an administrative error was identified in the calculation of the
Land operating segment value in use.
The impairment test was re-performed to correct the administrative error and with the cash flows of the Africa and Land operating
segments assessed separately. This resulted in an impairment of goodwill allocated to the Land operating segment of £127.7 million at
31 March 2020. No impairment was required at 1 April 2019 as re-performance of impairment analysis at that date identified sufficient
headroom between the recoverable amount and the carrying value of relevant assets. Further details are included in note 13.
x. Other errors
A number of other errors have been identified as set out below.
Other intangible assets
Balances were identified relating to IT assets capitalised under IAS 38 – Intangible Assets which are no longer used by the business, and
should therefore have been written off in previous years. The correction of this error reduces intangible assets by £2.0 million at 1 April
2019. There is a reduction in operating costs of £0.7 million for the year ended 31 March 2020, resulting in a reduction in intangible
assets of £1.3 million at 31 March 2020.
Through the goodwill impairment analysis for the oil and gas operating segment it was identified that the carrying value of the operating
segment was less than the recoverable value. Management reviewed the acquired intangible asset included in this operating segment
and determined that the customer relationships included in the intangible asset were no longer part of the customer base, and were not
part of the customer base at 1 April 2019. The useful expected life of the acquired intangible asset has therefore been revised and the
intangible asset has been disposed of at 1 April 2019. This has resulted in an adjustment to acquired intangible assets of £57.9 million at
1 April 2019 and £43.5 million at 31 March 2020. The amortisation of the intangible asset for the year ended 31 March 2020 has been
reversed, resulting in a reduction in operating costs of £13.9 million.
Babcock International Group PLC Annual Report and Financial Statements 2021
213
Babcock International Group PLC Annual Report and financial statements 2021 213
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
5. Prior year restatements (continued)
Correction of errors (continued)
x. Other errors (continued)
Property, plant and equipment
Capitalised maintenance costs were identified in relation to aircraft which had been sold or returned to lessors, or where the underlying
customer contract had been completed. The correction of this error reduces property, plant and equipment by £6.5 million at 1 April
2019. There is a reduction in operating costs of £0.8 million in the year ended 31 March 2020, resulting in a reduction in property, plant
and equipment of £5.7 million at 31 March 2020.
A number of errors were identified where an inappropriate useful life was assigned to aircraft and capitalised maintenance, due to
incorrect application of the Group’s depreciation policy. The correction of these errors reduces property, plant and equipment by £5.2
million at 1 April 2019. There is a £0.3 million reduction in operating costs in the year end 31 March 2020, resulting in a reduction in
property, plant and equipment of £4.9 million at 31 March 2020.
It was identified that a number of aircraft impairments recorded in local statutory financial statements had not been reflected in the
consolidated Group financial statements. The inconsistency in carrying values arising from the fair value exercise performed for the
consolidated Group financial statements following a business combination was a contributory factor in the failure to reflect the changes
in those financial statements. The correction of these errors reduces property, plant and equipment by £3.9 million at 1 April 2019. There
is a £0.2 million reduction in operating costs in the year ended 31 March 2020, resulting in a reduction in property, plant and equipment
of £3.7 million at 31 March 2020.
It was identified that the cost of constructing a customer hangar on land leased by the Group was being depreciated beyond the term of
the customer contract and the fixed end date of the lease, both of which have passed. The correction of this error reduces property, plant
and equipment by £1.3 million at 1 April 2019 and 31 March 2020.
A capitalised aircraft pre-delivery payment was found to have been utilised in the purchase of goods or services and should therefore have
been be written off. The correction of this error reduces property, plant and equipment by £1.1 million at 1 April 2019 and 31 March
2020.
Management has also identified maintenance costs which should not have been capitalised, resulting in an adjustment to property, plant
and equipment by £1.4 million at 1 April 2019 and 31 March 2020.
Additionally, it has been identified that certain elements capitalised under the PBH arrangements were not suitable for capitalisation
under the previous accounting policy or the updated accounting policy. Correction of this error has resulted in a reduction of property,
plant and equipment of £4.1 million at 1 April 2019 and 3.1 million at 31 March 2020.
Right of use assets and lease liabilities
Following a review of the lease population it was identified that right of use assets and lease liabilities were understated at 31 March
2020. This was in part due to a system generated error where previously added leases were deleted from the lease management system
and in part due to replacement leases not being identified and communicated to finance teams. Correction of this error has resulted in an
increase in right of use assets by £16.6 million, an increase in non-current lease liabilities by £13.7 million and an increase in current
lease liabilities by £2.9 million at 31 March 2020.
Inventories
Following a review of the segregation of inventories into those owned by the Group and by customers, it was identified that certain items
recognised within inventories were owned by customers of the Group and should not therefore be recorded under IAS 2, ‘Inventories’.
The correction of this error results in a reduction to inventories of £1.8 million at 1 April 2019. There is an increase in operating costs of
£0.1 million for the year ended 31 March 2020, resulting in a reduction in inventories of £1.9 million at 31 March 2020.
Trade and other receivables
Two instances were identified where reductions in lease costs in future periods were recognised in the income statement when agreed,
with an asset recognised within trade and other receivables and subsequently amortised, rather than in the future periods to which the
reductions related. The correction of these errors results in a reduction in trade and other receivables of £8.7 million at 1 April 2019.
There is a decrease in operating costs of £2.9 million for the year ended 31 March 2020, resulting in a decrease in trade and other
receivables of £5.8 million at 31 March 2020.
Following a review of the accounting for certain tax payments made by a Group entity on behalf of other Group entities, a number of
inconsistencies were identified between inter-company receivables and payables. The correction of these errors decreases trade and
other receivables and retained earnings by £11.5 million at 1 April 2019. There is a reduction in operating costs of £0.1 million for the
year ended 31 March 2020, resulting in a reduction in trade and other receivables of £11.4 million at 31 March 2020.
It was identified that amounts due from customers for contract work were not recoverable, as the rates included in this balance were
disputed by the customer. The correction of this error results in a reduction in trade and other receivables of £8.2 million at 1 April 2019.
There is a reduction in revenue of £0.3 million for the year ended 31 March 2020, resulting in a reduction in trade and other receivables
of £8.5 million at 31 March 2020.
214
214 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
5. Prior year restatements (continued)
Correction of errors (continued)
x. Other errors (continued)
Trade and other receivables (continued)
An error has been identified relating to a pain/gain share agreement, in which a reduction in revenue was incorrectly recorded as an
expense. The correction of this error results in a reduction in trade and other receivables of £1.8 million and trade and other payables of
£1.0 million at 1 April 2019. Correction of this error at 31 March 2020 results in a reduction in trade and other receivables of £3.3
million and trade and other payables of £2.6 million. There is a reduction in revenue of £1.5 million and a reduction in operating costs of
£1.6 million for the year ended 31 March 2020.
It was identified that the Group was not entitled to certain revenue recognised on the achievement of milestones relating to the provision
of aircraft. The correction of this error decreases revenue by £8.3 million and operating costs by £7.3 million in the year ended 31 March
2020, resulting in reductions in amounts due from customer for contract work of £8.3 million and trade and other payables of £7.3
million at 31 March 2020.
It was identified that certain receivables should not have been considered to be recoverable. The correction of this error decreases trade
and other receivables by £0.8 million at 1 April 2019. Further receivables which should not have been considered to be recoverable were
identified in the year ended 31 March 2020, resulting in an increase in operating costs for that year and a reduction in trade and other
receivables of £2.1 million at 31 March 2020.
A number of warranty claims from original equipment manufacturers were identified relating to 2015 which should have been provided
for in accordance with the Group’s accounting policies. The correction of this error decreases trade and other receivables by £2.6 million
at 1 April 2019 and 31 March 2020, with a corresponding decrease in income tax payable of £0.8 million.
Additionally, management has identified capitalised bid costs that do not meet the criteria for capitalisation under IFRS 15. Correction of
this error results in a decrease in capitalised bid costs of £5.1 million at 1 April 2019 and 31 March 2020.
Trade and other payables
As mentioned under trade and other receivables above, correction of the error related to milestone revenue recognition decreases
operating costs by £7.3 million for the year ended 31 March 2020 and trade and other payables by £7.3 million at 31 March 2020.
As mentioned under trade and other receivables above, correction of the error related to a pain/gain share agreement decreases trade
and other payables by £1.0 million at 1 April 2019. There is a decrease in the operating costs by £1.6 million for the year ended 31
March 2020, decreasing trade and other payables by £2.6 million at 31 March 2020.
A number of inconsistencies were identified between inter-company receivables and payables. The correction of these errors decreases
trade and other payables and increases retained earnings by £8.2 million at 1 April 2019 and 31 March 2020.
It was identified that a liability recorded during year ended 31 March 2020 was not supportable at the year end. The correction of this
error decreases operating costs for the year ended 31 March 2020 by £1.1 million and decreases trade and other payables by the same
amount at 31 March 2020.
It was identified that a customer had been mischarged by £3.3 million due to an incorrect margin being applied to the costs incurred by
the Group. The correction of this error increases trade and other payables by £2.8 million at 1 April 2019. There is an increase in
operating costs of £0.5 million for the year ended 31 March 2020, resulting in an increase in trade and other payables of £3.3 million at
31 March 2020.
Provisions for other liabilities
In March 2020, significant damage was sustained to the main ballast tank on a vessel undergoing work by the Group. Although the Group
maintains insurance against this type of damage, a proportion of the costs were not covered by this insurance. Correction of this error has
resulted in an increase to non-current provisions of £2.3 million and current provisions of £3.2 million.
Taxation
The cumulative tax benefit of these other errors increases deferred tax assets, see vii “deferred tax”, or increases income tax
receivable/decreases income tax payable by £3.2m as at 1 April 2019 and £4.7m as at 31 March 2020. A tax benefit is not available for
the full cumulative expense recorded in each year, as some items are not deductible for tax purposes or arise in territories in which
additional deferred tax assets cannot be recognised.
Babcock International Group PLC Annual Report and Financial Statements 2021
215
Babcock International Group PLC Annual Report and financial statements 2021 215
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
5. Prior year restatements (continued)
Correction of errors (continued)
x. Other errors (continued)
Other financial assets and liabilities (hedging)
Following a review of the Group’s foreign currency hedging arrangements in relation to aircraft leases in Norway, it was identified that
insufficient contemporaneous documentation was recorded in order to designate part of the arrangement as a hedge for accounting
purposes. The correction of this error results in an increase in other financial liabilities of £6.0 million and a decrease in other reserves of
£1.7 million at 1 April 2019. There is a decrease in operating costs for the year ended 31 March 2020 of £3.1 million, with a cumulative
increase in other financial liabilities of £18.7 million and a decrease in other reserves of £15.8 million. There is a decrease in other
comprehensive income of £13.5 million for the year ended 31 March 2020.
Investments in joint ventures and associates
The Group has an equity accounted investment in AirTanker Holdings Limited. It has been identified that this investment became a deficit
during the year ended 31 March 2019 as a result of movements in the valuation of derivatives held by the company, and that the Group’s
investment in joint ventures and associates balance at 1 April 2019 and 31 March 2020 included this negative balance. However, as the
Group has not taken on any commitment to fund AirTanker Holdings Limited’s liabilities, in accordance with IAS 28 ‘Investments in
Associates and Joint Ventures’ the Group should have ceased decreasing the related investment balance once it became negative.
The correction of this error results in an increase in investments in joint ventures and associates of £8.9 million and an increase in other
reserves of the same amount at 1 April 2019. There is an increase in other comprehensive income of £5.0 million for the year ending 31
March 2020, relating to movement on the derivatives held by the investment, resulting in an increase in investments in joint ventures and
associates of £13.9 million and an increase in other reserves of the same amount at 31 March 2020.
Revenue and cost of revenue items not impacting the statement of financial position
An overstatement of revenue and cost of revenue has been identified in relation to pass-through revenue on the Phoenix contract in the
year ended 31 March 2020. The Group had previously concluded that it acted as principal in the arrangement. It was determined that a
contract amendment in February 2020 represented a contract modification under IFRS 15, following which the Group has been acting as
an agent. The correction of this error results in a decrease in revenue and cost of revenue of £11.6 million in the year ended 31 March
2020. There was no impact to reported profit as a result of this adjustment.
216
216 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
5. Prior year restatements (continued)
Impact of prior period restatements on the cash flow statement
The prior year restatements described above have had the following impact on the cash flow statement for the year ended 31 March
2020, due to restatement of the statement of financial position and income statement:
Cash flows from operating activities
Loss for the year
Income tax (credit)/expense
Depreciation and impairment of property, plant and equipment
Depreciation and impairment of right of use assets
Amortisation and impairment of intangible assets
Goodwill impairment
Investment income
Net derivative fair value movement through profit or loss
Loss 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*
Decrease in receivables
Increase in payables
Increase in provisions
Cash generated from operations*
Interest received
Net cash flows from operating activities*
Cash flows from investing activities
Proceeds on disposal of property, plant and equipment
Purchases of property, plant and equipment
Purchases of intangible assets
Vehicle leasing principal repayments
Investment in joint ventures
Loan movements in joint ventures and associates
Net cash flows from investing activities*
Cash flows from financing activities
Proceeds above market value on sale and leaseback of property, plant and equipment
Lease assets issued and repaid
Bank loans repaid
Loans raised and facilities drawn down
Net cash flows from financing activities*
31 March
2020
(previously
published)
£m
Impact of
prior year
errors
£m
31 March
2020
(restated)
£m
(193.2)
15.0
94.2
143.6
96.5
395.0
1.1
–
3.3
0.2
497.2
(8.4)
7.4
62.4
474.2
13.5
330.4
30.1
(145.5)
(29.1)
–
–
(6.4)
2.7
77.4
11.9
(2.9)
(6.1)
(14.6)
(116.6)
(1.1)
(3.1)
0.6
(0.1)
(54.6)
48.4
(32.1)
9.4
(28.9)
(0.2)
(29.1)
46.4
(45.8)
0.1
49.9
(0.3)
1.6
51.9
(115.8)
26.9
91.3
137.5
81.9
278.4
–
(3.1)
3.9
0.1
442.6
40.0
(24.7)
71.8
445.3
13.3
301.3
76.5
(191.3)
(29.0)
49.9
(0.3)
(4.8)
54.6
–
19.9
(140.0)
1,202.4
750.5
8.3
8.3
–
(19.9)
(113.5)
(253.5)
102.3 1,304.7
727.7
(22.8)
* The table above includes only those financial statement line items which have been restated. The total cash generated from operations, investing activities and
financing activities do not therefore represent the sum of the line items presented above.
As part of the cash flow restatement the Group now presents Vehicle leasing principal repayments in Investing activities (previously in
Financing activities) and presents. Proceeds above market value on sale and leaseback of property, plant and equipment is presented in
Financing activities (previously in Investing activities). Furthermore, Vehicle leasing principal repayments and Purchases of property, plant
and equipment have been restated as in the prior year the Group presented certain lessor activities on a net basis. These are now
presented on a gross basis.
Babcock International Group PLC Annual Report and Financial Statements 2021
217
Babcock International Group PLC Annual Report and financial statements 2021 217
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
6. Segmental information
The Group has four reportable segments, determined by reference to the goods and services they provide and the markets they serve.
Marine – design, build and through-life support of naval ships, equipment and marine infrastructure in the UK and internationally.
Nuclear – through-life support of submarines and complex engineering services in support of major decommissioning programmes and
projects, training and operation support, new build programme management and design and installation in the UK and, increasingly,
internationally.
Land – large-scale critical vehicle fleet management, equipment support and training for military and civil customers.
Aviation – critical engineering services to defence and civil customers worldwide, including pilot training, equipment support, airbase
management and operation of aviation fleets delivering emergency and offshore services.
The Board, the chief operating decision maker as defined by IFRS 8, monitors the results of these reportable segments and makes
decisions about the allocation of resources. The Group’s business in 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 includes the South African operating segment in the Land reportable segment on the basis that they have similar economic
characteristics and that the nature of the services provided, the type of customer and the methods used to deliver services are similar.
The table below presents the underlying results for each reportable segment in accordance with the change in definition of underlying
revenue and underlying operating profit, as set out in note 3, and reconciles the underlying profit/(loss) to the statutory profit/(loss)
before tax.
Year ended 31 March 2021
Revenue
Underlying operating profit/(loss)
Specific Adjusting Items
Amortisation of acquired intangibles
Business acquisition, merger and divestment related items
Gains, losses and costs directly arising from the Group’s
withdrawal from a specific market or geography
Restructuring costs
Profit or loss from amendment, curtailment, settlement or
equalisation of group pension schemes
Exceptional items
Operating profit/(loss)
Share of results of joint ventures and associates
Investment income
Net finance costs
Profit/(loss) before tax
Marine
£m
1,242.3
56.3
Nuclear
£m
975.9
63.9
Land
£m
1,110.1
(17.4)
Aviation
£m
854.4
(130.4)
Unallocated
£m
–
–
Total
£m
4,182.7
(27.6)
(0.8)
–
–
–
(7.5)
(4.2)
43.8
3.1
–
–
46.9
–
(0.6)
–
0.7
–
(5.8)
58.2
(15.0)
–
–
43.2
(16.0)
(49.1)
(7.5)
0.2
–
(516.7)
(606.5)
5.1
0.9
–
(600.5)
(23.4)
–
(3.6)
(9.3)
–
(970.4)
(1,137.1)
(6.3)
–
–
(1,143.4)
–
–
–
–
(40.2)
(49.7)
(11.1)
(8.4)
(1.4)
–
(1.4)
–
–
(62.1)
(63.5)
(8.9)
(1,497.1)
(1,643.0)
(13.1)
0.9
(62.1)
(1,717.3)
Contract profitability and balance sheet review
The contract profitability and balance sheet review impacted the profit/(loss) before tax in Aviation by £1,190.3 million, Land by £770.2
million, Marine by £46.9 million, Nuclear by £35.5 million and unallocated by £84.6 million. Unallocated charges predominantly relate
to deferred tax movements.
Note 4 sets out details of the contract profitability and balance sheet review.
218
218 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
6. Segmental information (continued)
The table below presents the underlying results for each reportable segment in accordance with the change in definition of underlying
revenue and underlying operating profit, as set out in note 3, and reconciles the underlying profit/(loss) to the statutory profit/(loss)
before tax.
Marine
£m
1,163.6
134.4
Aviation
£m
845.5
31.8
Unallocated
£m
–
–
Nuclear
£m
896.9
113.3
Land
£m
1,522.5
98.1
Year ended 31 March 2020 (restated*)
Revenue
Underlying operating profit/(loss)
Specific Adjusting Items
Acquired intangible amortisation
Business acquisition, merger and divestment related items
Gains, losses and costs directly arising from the group’s
withdrawal from a specific market or geography
–
Restructuring costs
–
Exceptional items
–
Operating profit/(loss)
–
Share of results of joint ventures and associates
–
Investment income
–
Net finance costs
(73.0)
(73.0)
Profit/(loss) before tax
* The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
(8.9)
(26.7)
(266.3)
(296.2)
24.6
–
–
(271.6)
(6.5)
(7.7)
(122.6)
(74.5)
24.7
0.9
–
(48.9)
(3.0)
(16.5)
–
93.4
7.6
–
–
101.0
201.7
1.7
0.2
–
203.6
(26.1)
–
(35.8)
–
(5.3)
74.7
(2.1)
–
(0.4)
–
–
–
Total
£m
4,428.5
377.6
(67.6)
74.7
(20.5)
(50.9)
(388.9)
(75.6)
58.6
1.1
(73.0)
(88.9)
The table below presents the underlying results for each reportable segment under the previous basis for determining underlying
information (which included share of joint venture revenue and profits in underlying) and reconciles the underlying revenue and
underlying profit/(loss) to the statutory revenue and profit/(loss) before tax.
Year ended 31 March 2021 (previous basis)
Revenue including joint ventures and associates
Less share of joint ventures and associates revenue
Revenue
Underlying operating profit/(loss) including share of results of
joint ventures and associates
Exceptional items
Acquired intangible amortisation
IFRIC 12 investment income
Share of operating profit – joint ventures and associates
Share of IFRIC 12 investment income – joint ventures and
associates
Operating profit/(loss)
Share of results of joint ventures and associates
IFRIC 12 investment income
Net finance costs
Profit/(loss) before tax
Marine
£m
1,301.9
(59.6)
1,242.3
Nuclear
£m
1,036.7
(60.8)
975.9
Land
£m
1,131.7
(21.6)
1,110.1
61.2
(11.7)
(0.8)
–
(4.9)
–
43.8
3.1
–
–
46.9
48.0
(5.7)
–
–
15.9
–
58.2
(15.0)
–
–
43.2
(3.3)
(573.1)
(16.0)
(0.9)
(11.8)
(1.4)
(606.5)
5.1
0.9
–
(600.5)
Aviation
£m
962.9
(108.5)
854.4
(110.8)
(983.3)
(23.4)
–
4.8
(24.4)
(1,137.1)
(6.3)
–
–
(1,143.4)
Unallocated
£m
–
–
–
–
(1.4)
–
–
–
–
(1.4)
–
–
(62.1)
(63.5)
Total
£m
4,433.2
(250.5)
4,182.7
(4.9)
(1,575.2)
(40.2)
(0.9)
4.0
(25.8)
(1,643.0)
(13.1)
0.9
(62.1)
(1,717.3)
Babcock International Group PLC Annual Report and Financial Statements 2021
219
Babcock International Group PLC Annual Report and financial statements 2021 219
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
6. Segmental information (continued)
The table below presents the underlying results for each reportable segment under the previous basis for determining underlying
information (which included share of joint venture revenue and profits in underlying) and reconciles the underlying revenue and
underlying (loss)/profit to the statutory revenue and (loss)/profit before tax.
Land
£m
1,541.4
(18.9)
1,522.5
Nuclear
£m
1,109.4
(212.5)
896.9
Marine
£m
1,206.7
(43.1)
1,163.6
Aviation
£m
993.2
(147.7)
845.5
Unallocated
£m
–
–
–
Year ended 31 March 2020 (previous basis restated*)
Revenue including joint ventures and associates
Less share of joint ventures and associates revenue
Revenue
Underlying operating profit/(loss) before share of results of
joint ventures and associates
Exceptional items
Acquired intangible amortisation
Investment income
Share of operating profit – joint ventures and associates
Share of IFRIC 12 investment income – joint ventures and
–
associates
–
Operating profit/(loss)
–
Share of results of joint ventures and associates
–
IFRIC 12 investment income
(73.0)
Net finance costs
(73.0)
Profit/(loss) before tax
* The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
(24.5)
(296.2)
24.6
–
–
(271.6)
88.5
(301.9)
(26.1)
–
(32.2)
132.4
(136.8)
(35.8)
(0.9)
(32.0)
–
201.7
1.7
0.2
–
203.6
–
93.4
7.6
–
–
101.0
(1.4)
(74.5)
24.7
0.9
–
(48.9)
125.5
(19.5)
(0.4)
–
(12.2)
137.9
72.6
(5.3)
(0.2)
(3.3)
–
–
–
–
–
Total
£m
4,850.7
(422.2)
4,428.5
484.3
(385.6)
(67.6)
(1.1)
(79.7)
(25.9)
(75.6)
58.6
1.1
(73.0)
(88.9)
Intersegment reportable revenue is immaterial.
Revenues of £2.1 billion (2020: £2.1 billion) are derived from a single external customer. These revenues are attributable across
all reportable segments.
The reportable segment assets and liabilities at 31 March 2021 and 31 March 2020 and capital expenditure and lease principal
payments for the years then ended are as follows:
Marine
Nuclear
Land
Aviation
Unallocated
Group total
Assets
Liabilities
Capital expenditure
Lease payments
2021
£m
770.4
529.6
718.2
1,392.5
1,217.9
4,628.6
2020
(restated*)
£m
723.7
544.7
1,473.4
2,604.4
2,442.9
7,789.1
2021
£m
380.6
227.7
475.6
461.7
2,839.6
4,385.2
2020
(restated*)
£m
420.9
168.6
462.2
446.2
3,976.4
5,474.3
2021
£m
45.2
32.5
13.9
62.2
12.1
165.9
2020
(restated*)
£m
30.6
23.5
19.9
110.0
6.3
190.3
2021
£m
8.9
4.2
18.1
107.1
2.3
140.6
2020
£m
9.1
3.7
17.7
143.0
1.5
175.0
* The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
Capital expenditure represents additions to property, plant and equipment and intangible assets. Proceeds from the sale of assets totalled
£32.2 million (2020: £76.5 million) and are predominantly in the Aviation sector. See note 22 relating to the treatment of amounts
payable in respect of capital expenditure.
All assets and liabilities are allocated to their appropriate reportable segments except for cash, cash equivalents, borrowings including
lease liabilities, income and deferred tax balances and retirement benefit surpluses which are included in the unallocated segment.
The segmental analysis of joint ventures and associates is detailed in note 17.
220
220 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
6. Segmental information (continued)
The segmental depreciation on property, plant and equipment, right of use assets and amortisation of intangible assets for the years
ended 31 March 2021 and 31 March 2020 is as follows:
Marine
Nuclear
Land
Aviation
Unallocated
Group total
Depreciation of property,
plant and equipment
Depreciation of right of
use assets
Amortisation of
intangible assets
2021
£m
8.3
22.8
8.1
41.6
5.8
86.6
2020
(restated*)
£m
8.0
26.4
8.8
27.3
6.2
76.7
2021
£m
9.0
4.6
17.1
100.6
2.1
133.4
2020
(restated*)
£m
9.9
3.7
13.9
83.7
1.8
113.0
2021
£m
5.6
0.4
20.6
24.2
8.3
59.1
2020
(restated*)
£m
10.0
0.7
37.5
26.6
7.1
81.9
* The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
The segmental impairment on property, plant and equipment, right of use assets and intangible assets for the years ended 31 March
2021 and 31 March 2020 is as follows:
Marine
Nuclear
Land
Aviation
Unallocated
Group total
Impairment of property, plant and
equipment
Impairment of right of use
assets
Impairment of
intangible assets
2021
£m
–
2.4
7.9
103.0
–
113.3
2020
(restated*)
£m
–
0.2
–
14.4
–
14.6
2021
£m
–
0.7
9.1
36.6
–
46.4
2020
(restated*)
£m
–
–
–
14.2
–
14.2
2021
£m
0.6
–
14.1
8.0
10.0
32.7
2020
(restated*)
£m
–
–
–
–
–
–
* The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
The geographic analysis for non-current assets by location of those assets for the years ended 31 March 2021 and 31 March 2020 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
2021
£m
1,164.5
1,034.7
56.9
25.2
242.4
2.9
2,526.6
40.8
11.2
17.2
141.3
2,737.1
2020
(restated*)
£m
2,479.8
1,490.7
47.5
25.6
199.4
40.0
4,283.0
325.3
12.8
21.5
60.5
4,703.1
* The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
Babcock International Group PLC Annual Report and Financial Statements 2021
221
Babcock International Group PLC Annual Report and financial statements 2021 221
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
6. Segmental information (continued)
The geographic analysis of revenue by origin of customer for the years ended 31 March 2021 and 31 March 2020 is as follows:
Geographic analysis
United Kingdom
Rest of Europe
Africa
North America
Australasia
Rest of World
Group total
Revenue
2021
£m
2,805.8
515.5
269.6
161.6
224.0
206.2
4,182.7
* The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
The analysis of revenue for the years ended 31 March 2021 and 31 March 2020 is as follows:
Sale 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
2021
£m
484.3
175.7
660.0
3,518.2
4.5
4,182.7
2020
(restated*)
£m
2,986.8
501.2
358.0
195.0
198.5
189.0
4,428.5
2020
(restated*)
£m
585.9
105.5
691.4
3,731.0
6.1
4,428.5
* The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
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 mainly in the Marine and Aviation sectors. Provision of services over time is
across all sectors. Further disaggregation of revenue is set out in the Strategic report on page 4.
222
222 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
7. Operating (loss)/profit for the year
The following items have been included in arriving at operating (loss)/profit for the year:
Employee costs (note 9)
Inventories
• Cost of inventories recognised as an expense
Depreciation of property, plant and equipment (PPE) (note 15)
Depreciation of right of use assets (note 16)
Amortisation of intangible assets (note 14)
• Acquired intangibles
• Other
Impairment of goodwill (note 13)
Impairment of intangible assets (note 14) *
Impairment of property, plant and equipment (PPE) (note 15) *
Impairment of right of use assets (note 16) *
Loss on disposal of property, plant and equipment
Loss on disposal of intangible assets
Research and development
Net foreign exchange loss/(gain)
Loss on derivative instruments at fair value through profit or loss
Gain on derivative instruments at fair value through profit or loss
2021
£m
1,615.9
2020
(restated**)
£m
1,605.6
406.5
428.3
86.6
133.4
76.7
123.3
40.2
18.9
59.1
1,243.2
89.1
113.3
46.4
26.4
–
1.1
7.8
6.9
–
67.6
14.3
81.9
278.4
–
14.6
14.2
3.9
0.1
0.2
(12.7)
–
(3.1)
Included in cost of revenue in the income statement.
*
** The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
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 payable to the parent auditor and its associates in respect of the audit of the Company’s subsidiaries
Fees for other services:
Other non-audit services
Total fees paid to the Group’s auditor and network firms
2021
£m
2020
£m
2.3
3.7
–
6.0
0.9
2.2
0.1
3.2
Babcock International Group PLC Annual Report and Financial Statements 2021
223
Babcock International Group PLC Annual Report and financial statements 2021 223
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
8. Net finance costs
Finance costs
Loans, overdrafts and associated interest rate hedges
Lease interest
Amortisation of issue costs of bank loan
Retirement benefit interest
Other
Total finance costs
Finance income
Bank deposits, loans and leases
IFRIC 12 Investment income
Retirement benefit interest
Total finance income
Net finance costs
2021
£m
50.0
23.5
1.4
–
2.9
77.8
11.7
0.9
4.0
16.6
61.2
* The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
9. Employee costs
Wages and salaries
Social security costs
Share-based payments (note 28)
Pension costs – defined contribution plans (note 29)
Pension charges – defined benefit plans (note 29)
The average monthly number of people employed by the Group was:
Operations
Administration and management
2021
£m
1,312.4
164.1
4.2
90.9
44.3
1,615.9
2021
Number
28,569
3,840
32,409
2020
(restated*)
£m
48.6
28.2
2.1
0.1
7.0
86.0
13.0
1.1
–
14.1
71.9
2020
£m
1,323.6
156.0
2.9
85.7
37.4
1,605.6
2020
Number
30,116
4,104
34,220
Emoluments of the Executive Directors are included in employee costs above and reported in the Remuneration report.
Key management compensation
Key management is defined as those employees who are directly responsible for the operational management of the operating segments.
The employees would typically report to the Chief Executive. The key management figures given below include Directors.
Salaries
Share-based payments
2021
£m
6.7
0.2
6.9
2020
£m
8.2
0.6
8.8
224
224 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
10. Income tax expense
Analysis of tax (benefit)/charge in the year
Current tax
• UK current year (benefit)/charge
• UK prior year (benefit)
• Overseas current year charge
Deferred tax
• UK current year (benefit)
• UK prior year charge
• Overseas current year charge/(benefit)
• Impact of changes in tax rates
Total income tax (benefit)/expense
Total
2021
£m
2020
(restated*)
£m
(8.9)
(6.4)
12.8
(2.5)
(41.3)
8.5
20.2
(0.2)
(12.8)
(15.3)
19.2
–
17.9
37.1
6.0
–
(15.0)
(1.2)
(10.2)
26.9
* The results for 31 March 2020 have been restated due to correction of errors and a change in accounting policy. Further details are set out in note 5.
The tax for the year is higher (2020: higher) than the standard rate of corporation tax in the UK. The differences are explained below:
Loss before tax
Loss on ordinary activities multiplied by rate of corporation tax in the UK of 19% (2020: 19%)
Effects of:
Expenses not deductible for tax purposes
Non-deductible write-off of goodwill
Re-measurement of deferred tax in respect of statutory rate changes
Difference in respect of share of results of joint ventures and associates’ results
Prior year adjustments
Differences in respect of foreign rates and UK consortium relief rates
Unrecognised deferred tax movements
Non-taxable profits on disposals and non-deductible losses on disposals
Adjustments as a result of concluded enquiries with tax authorities
Other
Total income tax (benefit)/expense
Further information on exceptional items and tax on exceptional items is detailed in note 3.
2021
£m
(1,717.3)
(326.3)
3.2
236.2
(0.2)
2.5
2.1
2.2
83.4
9.4
(21.6)
(6.2)
(15.3)
2020
(restated)
£m
(88.9)
(16.9)
0.9
52.9
(1.2)
(14.1)
–
(5.3)
15.6
(14.2)
–
9.2
26.9
During the period, the Group has progressed discussions with the UK tax authorities (“HMRC”) regarding the deductibility of certain
acquisition costs. Having reached agreement, a tax credit of £21.6m has been recognised in the current year (period ended 31 March
2020: £nil).
In the prior year, the decrease in the UK rate of corporation tax from 19% to 17% was cancelled, resulting in a tax credit of £1.2m. On 24
May 2021, the Finance Act 2021 was substantively enacted, increasing the main rate of UK corporation tax from 19% to 25% with effect
from 1 April 2023. As the increase of the rate to 25% had not been substantively enacted at the Balance Sheet date, its effects are not
included in these Financial Statements. However, it is likely that the overall effect of the change, had it been substantively enacted by the
Balance Sheet date, would have been to increase deferred tax assets by approximately £20 million.
The European Commission decided in 2019 that certain aspects of the UK Finance Company Partial Exemption (“FCPE”) rules constituted
partial State Aid. However, HMRC have confirmed that the Group did not benefit from those provisions and therefore faces no liability in
respect of this judgement.
Disposals of subsidiaries, businesses and joint ventures are generally exempt from tax (whether the disposal is at a gain or at a loss) under
local tax legislation (for example the UK’s Substantial Shareholding Exemption).
11. Dividends
Final dividend for the year ended 31 March 2020 of nil (2019: 22.9p) per 60p share
Interim dividend for the year ended 31 March 2021 of nil (2020: 7.2p) per 60p share
2021
£m
–
–
–
2020
£m
115.7
36.4
152.1
Babcock International Group PLC Annual Report and Financial Statements 2021
225
Babcock International Group PLC Annual Report and financial statements 2021 225
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
12. (Loss) per share
Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary
shares outstanding during the year excluding those held in the Babcock Employee Share Trust. Where there is a loss arising the effect of
potentially dilutive ordinary shares is anti-dilutive.
The calculation of the basic and diluted 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
2021
Number
2020
Number
504,993,024 505,284,584
872,749
508,991,711 506,157,333
3,998,687
Loss for the year
Add back:
Specific Adjusting Items, net of tax (note 3)
Earnings before Specific Adjusting Items
13. Goodwill
Cost
At 1 April
On disposal of subsidiaries (note 32)
Exchange adjustments
At 31 March
Accumulated impairment
At 1 April
On disposal of subsidiaries (note 32)
Impairment
Exchange adjustments
At 31 March
Net book value at 31 March
2021
2020 (restated)
(Loss)/earnings
from continuing
operations
£m
(1,702.0)
Basic
per share
Pence
(337.0)
(Loss)/earnings
from
continuing
operations
£m
(117.8)
Diluted
per share
Pence
(337.0)
1,581.7
(120.3)
313.2
(23.8)
313.2
(23.8)
412.7
294.9
Basic
per share
Pence
(23.3)
81.7
58.4
Diluted
per share
Pence
(23.3)
81.6
58.3
2021
£m
2020
(restated)
£m
2,571.1
(72.6)
(11.2)
2,487.3
283.2
–
1,243.2
4.6
1,531.0
956.3
2,589.0
(20.6)
2.7
2,571.1
4.8
–
278.4
–
283.2
2,287.9
226
226 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
13. Goodwill (continued)
Goodwill is allocated to the operating segments as set out in the table below:
Marine
Nuclear
Land
Aviation
Africa
2021
£m
339.2
233.1
262.7
119.3
2.0
956.3
2020
(restated)
£m
341.7
233.1
762.5
948.6
2.0
2,287.9
During the year, goodwill was tested for impairment in accordance with IAS 36. This impairment analysis is performed on an annual basis
as outlined in the Group’s accounting policies. The Group monitors goodwill at operating segment level, other than in relation to the
establishment of a separate CGU during the year for the Group’s Aviation oil and gas business, to which goodwill was allocated, reflecting
the conditional sale and purchase agreement signed pre 31 March 2021 in relation to that business. The Group considered the potential
disposal in the context of the held for sale criteria set out in IFRS 5 and assessed that the business should not be classified as held for sale.
The goodwill allocated to the Africa operating segment is immaterial and the Directors do not consider there to be any reasonably
possible changes in estimates that would result in impairment of this goodwill. No further disclosures are provided in relation to the Africa
operating segment.
Prior year errors
The Group combines the Africa and Land operating segments into a single Land reportable segment and, in the prior year, the goodwill
impairment test was carried out at the reportable segment level rather than at the operating segment level as required by IAS 36. This
error was compounded by an administrative error in the calculation of the value-in-use of the Land operating segment and the impact of
both errors was an overstatement of Land value-in-use by £886 million.
In addition, the correction of a number of prior period errors relating to the year ended 31 March 2020, in relation to other financial
statement areas, reduced the capital employed used to complete the March 2020 goodwill impairment test. A reduction in capital
employed of £239.2 million, in relation to the Aviation operating segment, resulted in the restatement of the Aviation operating segment
impairment charge from £395.0 million to £155.8 million for the year ended 31 March 2020. A reduction in capital employed of £5.1
million, as a result of the correction of prior year errors discussed in Note 5 and the impact of the overstatement of value-in-use by £886
million noted above, resulted in a Land operating segment impairment charge of £122.6 million for the year ended 31 March 2020.
No impairment was required at 1 April 2019 as re-performance of impairment analysis at that date identified sufficient headroom
between the recoverable amount and the capital employed.
Results of goodwill impairment test
The current year impairment test results in an impairment of the Land operating segment goodwill of £425.8 million, the Aviation
operating segment goodwill of £808.5 million and the goodwill of £8.9 million allocated to the Aviation oil and gas business CGU. These
impairments reflect significant changes in estimates informed by consideration during H2 of actual business performance of the Group
during the current year and related assessments of future performance of the businesses. Future business performance was informed by
the strategy and contract profitability and balance sheet reviews instigated by the Group’s new executive management and completion
of the Group’s budget addressing the years ending 31 March 2022, 31 March 2023 and 31 March 2024.
Value-in-use calculations
The recoverable amount of the Group’s goodwill was assessed by reference to value-in-use calculations. The value-in-use calculations are
derived from risk-adjusted cash flows from the Group’s three-year budget and nominal growth rates between 2.0% and 3.0% were used to
establish cash flows for two further years. Terminal value assessments are included based on year five and an estimated long-term nominal
growth rate of 2.0% (2020: 2.0%). The process by which the Group’s budget is prepared, reviewed and approved benefits from historical
experience, visibility of long–term work programmes in relation to work undertaken for the UK Government, available government
spending information (both UK and overseas), the Group’s contract backlog, bid pipeline and the Group’s tracking pipeline which
monitors opportunities prior to release of tenders. The budget process includes consideration of risks and opportunities at contract and
business level and considered matters such as COVID-19 and climate change. The value in use calculations do not include the anticipated
benefits of the Group’s revised operating model or the implementation costs of this project reflecting that the Group was not committed
to the project at 31 March 2021.
Babcock International Group PLC Annual Report and Financial Statements 2021
227
Babcock International Group PLC Annual Report and financial statements 2021 227
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
13. Goodwill (continued)
Key assumptions
The Group updated the impairment test in the current year to incorporate changes to the model and discount rates following transition
to IFRS 16. Pre-tax discount rates, derived from the Group’s post tax weighted average cost of capital in the range 7.4% to 8.4% (2020:
7.8% to 8.2%) and adjusted for the gearing impact of lease liabilities were used to discount the estimated risk-adjusted cash flows. In
consideration of specific risk factors associated with the Aviation operating segment, the pre-tax discount rate includes a premium of
0.9% (2020: 0.9%), to determine the value-in-use of this CGU. The gearing impact of lease liabilities impacts the Aviation segment most
significantly and aligns the Aviation operating segment discount rate, inclusive of the risk premium, with the discount rates of the other
operating segments.
The long-term growth rates and discount rates for the Group’s operating segments are as follows:
Pre-tax discount rate
Post-tax discount rate
Long-term growth rate
Aviation
10.9
8.2
2.0
2021
Land
10.9
8.2
2.0
Marine
10.9
8.2
2.0
Nuclear
10.9
8.2
2.0
Aviation
10.9
8.9
2.0
2020
Land
10.0
8.2
2.0
Marine
10.0
8.2
2.0
Nuclear
10.0
8.2
2.0
Expected future cash flows used in discounted cash flow models are inherently uncertain and could materially change over time. They are
significantly affected by a number of factors, such as demand for the Group’s services, together with economic factors such as estimates
of costs of revenue and future capital expenditure requirements. Where discounted cash flow models based on management’s
assumptions are used, the resulting fair value measurements are considered to be at level 3 in the fair value hierarchy, as defined in IFRS
13, ‘Fair Value Measurement’, as they depend to a significant extent on unobservable valuation inputs.
Key assumptions in relation to future cash flows included in the value-in-use models are set out below:
Operating segment Key future cash flow assumption
Marine
Continuing delivery of work programmes with the UK Ministry of Defence, including the design and build of Type
31 frigates. Retention, through successful rebid, of the Group’s long-term submarine support role in Canada.
Continuing delivery of naval nuclear services to the UK Ministry of Defence under long-term contracts. Continuing
delivery of opportunities in the UK civil nuclear decommissioning programme together with maintenance of
ongoing spend in provision of nuclear engineering services to operational power stations.
Continuing demand for 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, not all of which
have been assumed to renew. Maintenance of existing positions in Emergency Services, including successful rebid
of one significant contract.
Continuing delivery of long-term contracts with the UK Ministry of Defence and maintenance of existing positions
in aerial emergency services and firefighting worldwide where the Group has a number of leadership positions.
Delivery of cost savings through an embedded performance improvement programme.
Nuclear
Land
Aviation
Sensitivity
The goodwill allocated to Marine and Nuclear results in both operating segments having significant headroom. It would require a long-
term growth of nil combined with discount rates of 86.7% and 22.8%, respectively, to reduce the headroom in Marine and Nuclear to
£nil. The Directors do not consider these to be plausible assumptions and, in addition, do not consider that any reasonably possible
changes to the cash flow assumptions would reduce the recoverable amount to its carrying value.
228
228 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
13. Goodwill (continued)
The impairments of £817.4 million and £425.8 million in relation to the Aviation and Land operating segments respectively eliminate the
headroom for these operating segments at 31 March 2021. Accordingly, reasonably possible changes in estimates could give rise to a
material impairment in the following year. The Group carried out sensitivity analyses on the reasonably possible changes in the discount
rate and long-term growth rate used in the value-in-use models for each of the operating segments. The increase in impairment that
would result from a change in the discount rate and long-term growth rate are set out in the table below:
£m
Pre-tax discount rate
Increase of 100bps
Long-term growth rate
Decrease of 50bps
2021
Aviation
46.8
16.8
Land
26.8
9.8
The Directors consider that a key cash flow assumption in the calculation of the value in use of the Aviation operating segment is delivery
of forecast cost savings. A reduction of £5 million in annual operating profits, as a result of failure to deliver forecast cost savings from the
year ending 31 March 2023, is considered plausible and would result in a reduction of £51 million in Aviation operating segment value in
use. Key assumptions in relation to the Land operating segment include the retention of existing business, not all of which have been
assumed to renew. A reduction in annual operating profit of £5 million is considered to be plausible from the year ending 31 March 2025
and would result in a reduction in Land operating segment value in use of £43 million.
Babcock International Group PLC Annual Report and Financial Statements 2021
229
Babcock International Group PLC Annual Report and financial statements 2021 229
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
14. Other intangible assets
Cost
At 1 April 2020
On disposal of subsidiaries and joint ventures (note 32)
Additions
Reclassification from property, plant and equipment
Disposals at cost
Exchange adjustments
At 31 March 2021
Accumulated amortisation and impairment
At 1 April 2020 as restated
On disposal of subsidiaries and joint ventures (note 32)
Amortisation charge
Impairment (note 3)
Reclassification from property, plant and equipment
Disposals
Exchange adjustments
At 31 March 2021
Net book value at 31 March 2021
Cost
At 1 April 2019 as previously stated
Prior year adjustment (note 5)
At 1 April 2019 restated
On disposal of subsidiaries (note 32)
Additions
Disposals at cost
Exchange adjustments
At 31 March 2020
Accumulated amortisation and impairment
At 1 April 2019 as previously stated
Prior year adjustment (note 5)
At 1 April 2019 restated
On disposal of subsidiaries (note 32)
Amortisation charge
Disposals
Exchange adjustments
At 31 March 2020
Net book value at 31 March 2020
Acquired
intangibles –
relationships
£m
Acquired
intangibles –
brands
£m
Acquired
intangibles –
total
£m
Internally
generated
software
development
costs and
licences
£m
Internally
generated
development
costs and
other
£m
1,042.9
(5.2)
–
–
–
(6.2)
1,031.5
840.3
(5.2)
40.2
56.4
–
–
(4.2)
927.5
104.0
1,169.5
(121.9)
1,047.6
(7.0)
–
–
2.3
1,042.9
843.3
(64.0)
779.3
(5.8)
66.5
–
0.3
840.3
202.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23.7
–
23.7
(6.4)
–
(17.4)
0.1
–
20.2
–
20.2
(4.1)
1.1
(17.4)
0.2
–
–
1,042.9
(5.2)
–
–
–
(6.2)
1,031.5
840.3
(5.2)
40.2
56.4
–
–
(4.2)
927.5
104.0
1,193.2
(121.9)
1,071.3
(13.4)
–
(17.4)
2.4
1,042.9
863.5
(64.0)
799.5
(9.9)
67.6
(17.4)
0.5
840.3
202.6
187.1
(0.1)
11.0
–
(6.0)
0.1
192.1
79.8
(0.1)
17.9
24.0
(6.0)
0.1
115.7
76.4
172.0
–
172.0
(1.7)
21.6
(4.5)
(0.3)
187.1
70.1
2.0
72.1
(1.2)
13.5
(4.4)
(0.2)
79.8
107.3
26.8
–
7.0
1.3
(8.4)
(0.6)
26.1
2.0
–
1.0
8.7
1.3
(8.4)
(0.1)
4.5
21.6
18.6
–
18.6
–
7.8
–
0.4
26.8
1.3
–
1.3
–
0.8
–
(0.1)
2.0
24.8
Total
£m
1,256.8
(5.3)
18.0
1.3
(14.4)
(6.7)
1,249.7
922.1
(5.3)
59.1
89.1
1.3
(14.4)
(4.2)
1,047.7
202.0
1,383.8
(121.9)
1,261.9
(15.1)
29.4
(21.9)
2.5
1,256.8
934.9
(62.0)
872.9
(11.1)
81.9
(21.8)
0.2
922.1
334.7
Acquired intangible amortisation charges for the year are recorded through cost of revenue.
Details of the prior year restatement are provided in note 5.
230
230 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
14. Other intangible assets (continued)
The Group holds intangible software assets in respect of its SAP enterprise resource planning system. Management reassessed the
implementation plan during the year ended 31 March 2021 and determined not to progress a number of previously planned
implementations of the software. The Group determined that the recoverable amounts, based upon value in use of the software
intangible asset relating to these business units is £nil and an impairment charge of £10.0 million was recognised in relation to these
business units.
The Land operating segment recognises a software asset relating to user interfaces for vehicle bookings that was developed for use on the
Phoenix contract. Following changes in estimates of the Phoenix contract and the wider usage of the software; the recoverable amount
has been determined to be £0.4 million based upon a value in use calculation resulting in an impairment charge of £4.9 million.
The Land operating segment also previously recognised an acquired intangible in relation to the purchase of the DSG relationship in 2015
and capitalised a software asset relating the implementation of the Group’s Global ERP system in DSG. Following reassessment of variable
revenues under the contract following publication of the Integrated Spending Review, and removal of targeted future cost savings under
the contract in line with an assessment under IAS 36, both of these assets were fully impaired with impairments of £56.4 million and £9.1
million respectively.
In the Aviation operating segment, costs were capitalised in relation to a partially funded contract to develop drone technology, which is
nearing completion. An assessment based on the latest business plan resulted in an impairment of £7.2 million. An indefinite life
technology-based intangible asset of £1.5 million has also been fully impaired following an assessment of latest business plans.
Babcock International Group PLC Annual Report and Financial Statements 2021
231
Babcock International Group PLC Annual Report and financial statements 2021 231
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
15. Property, plant and equipment
Cost
At 1 April 2020 as restated
On disposal of subsidiaries (note 32)
Additions
Disposals
Reclassification
Reclassification to intangible assets
Capitalised borrowing costs
Exchange adjustments
At 31 March 2021
Accumulated depreciation
At 1 April 2020 as restated
On disposal of subsidiaries (note 32)
Charge for the year
Impairment (note 3)
Disposals
Reclassification
Reclassification to intangible assets
Exchange adjustments
At 31 March 2021
Net book value at 31 March 2021
Cost
At 1 April 2019 as previously stated
Prior year adjustment (note 5)
Transfer of leased assets to right of use assets
At 1 April 2019 restated
On disposal of subsidiaries (note 32)
Additions
Disposals
Reclassification
Capitalised borrowing costs
Exchange adjustments
At 31 March 2020
Accumulated depreciation
At 1 April 2019 as previously stated
Prior year adjustment (note 5)
Transfer of leased assets to right of use assets
At 1 April 2019 restated
On disposal of subsidiaries (note 32)
Charge for the year
Impairment
Disposals
Exchange adjustments
At 31 March 2020
Net book value at 31 March 2020
Freehold
property
£m
Leasehold
property
£m
Plant and
equipment
£m
Aircraft
fleet
£m
Assets in
course of
construction
£m
125.2
–
20.6
(3.3)
16.9
–
0.1
(0.3)
159.2
66.6
–
5.0
0.3
(2.9)
0.7
–
(0.2)
69.5
89.7
125.1
–
–
125.1
–
1.3
(1.3)
–
–
0.1
125.2
60.4
1.8
–
62.2
–
5.0
–
(0.7)
0.1
66.6
58.6
32.0
–
1.2
(0.4)
(17.0)
–
–
–
15.8
9.5
–
1.0
2.5
(0.4)
(1.7)
–
–
10.9
4.9
38.0
–
–
38.0
–
0.2
(6.2)
–
–
–
32.0
9.8
–
–
9.8
–
1.8
–
(2.1)
–
9.5
22.5
605.7
(1.7)
73.0
(79.5)
0.1
(1.3)
1.4
3.7
601.4
390.7
(0.9)
46.7
9.2
(70.9)
0.2
(1.3)
(0.6)
373.1
228.3
615.2
4.4
(44.0)
575.6
(3.8)
55.6
(14.2)
0.6
1.4
(9.5)
605.7
354.5
20.3
(17.1)
357.7
(2.2)
50.9
0.2
(13.1)
(2.8)
390.7
215.0
533.8
–
36.3
(210.7)
11.1
–
–
(8.1)
362.4
77.5
–
33.9
99.3
(165.0)
0.8
–
(1.1)
45.4
317.0
644.3
(83.7)
(46.8)
513.8
–
47.3
(111.6)
80.9
–
3.4
533.8
97.1
(4.8)
(7.6)
84.7
–
19.0
14.4
(37.8)
(2.8)
77.5
456.3
88.5
–
24.4
(4.9)
(11.1)
–
–
(3.6)
93.3
–
–
–
2.0
–
–
–
(0.3)
1.7
91.6
113.5
22.1
–
135.6
–
41.8
(9.1)
(81.5)
–
1.7
88.5
–
–
–
–
–
–
–
–
–
–
88.5
Total
£m
1,385.2
(1.7)
155.5
(298.8)
–
(1.3)
1.5
(8.3)
1,232.1
544.3
(0.9)
86.6
113.3
(239.2)
–
(1.3)
(2.2)
500.6
731.5
1,536.1
(57.2)
(90.8)
1,388.1
(3.8)
146.2
(142.4)
–
1.4
(4.3)
1,385.2
521.8
17.3
(24.7)
514.4
(2.2)
76.7
14.6
(53.7)
(5.5)
544.3
840.9
A capitalisation rate of 4% (2020: 3%) was used to determine the amount of borrowing costs eligible for capitalisation.
232
232 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
15. Property, plant and equipment (continued)
Following changes in senior management, a comprehensive performance improvement and restructuring programme was implemented
during the year ended 31 March 2021 across the Aviation operating segment. This included a rationalisation of aircraft types and review
of fleet strategy, taking account of changes in market conditions including those resulting from COVID-19 and Brexit. A number of
impairment indicators were identified as a result, and impairment tests performed in accordance with IAS 36 have resulted in an
impairment charge of £70.2 million across the UK and continental Europe, based on fair value less costs to dispose of £70.5 million. The
fair value assessment was based on recent offers received, current market prices for assets and information received from brokers,
representing Level 2 information in the fair value hierarchy.
In addition the Group recorded a £15.1 million impairment in Australia, reflecting its intention to dispose of 11 owned aircraft following
completion of the associated customer contracts. The fair value less costs to dispose is assessed at £14.3 million in line with the approach
set out above. There has also been an impairment of £11.7 million of the Group’s fleet of six AS332 L2 Super Puma helicopters, which
follows a previous impairment related to the grounding of the aircraft following a number of accidents. Following investigations, the
aircraft are no longer grounded but have been repurposed from passenger transportation to firefighting. The recoverable amount of £5.7
million was assessed on a value-in-use basis, reflecting rates achievable when repositioned for firefighting.
In the Land operating segment, £5.3 million of PPE was impaired following an assessment of this PPE as directly attributable to the
Group’s DSG contract, the impairment indicator being reassessed DSG contract profitability. The impairment test reassessed variable
revenues under the contract following publication of the Integrated Spending Review and removed targeted future cost savings in line
with an assessment under IAS 36.
Babcock International Group PLC Annual Report and Financial Statements 2021
233
Babcock International Group PLC Annual Report and financial statements 2021 233
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
16. Leases
Group as a lessee
Lease liabilities represent rentals payable by the Group for certain operational, distribution and office properties and other assets such as
aircraft. The leases have varying terms, purchase options, escalation clauses and renewal rights.
Right of use assets
Cost
At 1 April 2020 as restated
Additions
Disposals
Exchange adjustments
At 31 March 2021
Accumulated depreciation
At 1 April 2020 as restated
Charge for the year
Impairment (see note 3)
Disposals
Exchange adjustments
At 31 March 2021
Net book value at 31 March 2021
Cost
On transition to IFRS 16 – 1 April 2019 as previously stated
Prior year adjustment
Reclassification from property, plant and equipment
On transition to IFRS 16 restated
On disposal of subsidiaries (note 32)
Additions
Exchange adjustments
At 31 March 2020
Accumulated depreciation
Reclassification from property, plant and equipment
Charge for the year
Impairment (see note 3)
Exchange adjustments
At 31 March 2020
Net book value at 31 March 2020
Net book value on transition to IFRS 16 – 1 April 2019 as previously stated
Net book value on transition to IFRS 16 – 1 April 2019 as restated
Leasehold
property
£m
Plant and
equipment
£m
148.2
18.2
(15.3)
1.8
152.9
26.4
27.7
7.3
(10.7)
0.4
51.1
101.8
70.6
8.0
(6.5)
–
72.1
30.1
12.6
4.4
(4.8)
(0.1)
42.2
29.9
Leasehold
property
£m
Plant and
equipment
£m
111.3
–
–
111.3
(2.3)
42.4
(3.2)
148.2
–
27.3
–
(0.9)
26.4
121.8
111.3
111.3
15.4
–
44.0
59.4
–
11.2
–
70.6
17.1
13.1
–
(0.1)
30.1
40.5
42.5
42.3
Aircraft
fleet
£m
549.4
65.5
(33.5)
7.6
589.0
102.7
93.1
34.7
(30.4)
(0.6)
199.5
389.5
Aircraft
fleet
£m
466.0
(35.3)
46.8
477.5
–
81.8
(9.9)
549.4
7.6
82.9
14.2
(2.0)
102.7
446.7
511.7
469.9
Total
£m
768.2
91.7
(55.3)
9.4
814.0
159.2
133.4
46.4
(45.9)
(0.3)
292.8
521.2
Total
£m
592.7
(35.3)
90.8
648.2
(2.3)
135.4
(13.1)
768.2
24.7
123.3
14.2
(3.0)
159.2
609.0
665.5
623.5
234
234 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
16. Leases (continued)
Prior to the adoption of IFRS 16, the Group determined the Jadestone contract, delivered by the Aviation operating segment, to be
onerous in accordance with IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’ (‘IAS 37’). On adoption of IFRS 16, an
impairment test was performed on the right of use assets associated with the contract, which resulted in an impairment. Further
impairment indicators were identified in the year ended 31 March 2021 through customer interactions and feedback on tender
submissions, resulting in an additional impairment of £12.5 million in the value of the S-92 fleet.
During the year, a Helicopter Emergency Medical Services (HEMS) bid programme in France provided the Aviation operating segment with
new information on the customer’s requirements. The change in expected use of the associated leased aircraft resulted in an impairment
of £6.5 million. Cancellation of customer contracts resulted in the full impairment of right of use assets of £2.1 million in the UK and £2.0
million in Italy. In addition, a £11.9 million impairment followed re-assessment of the profitability of the Sasemar contract and a £1.9
million impairment followed re-assessment of the profitability of a UK HEMS contract.
In the Land operating segment, £9.1 million of ROU assets were impaired following an assessment of these assets as directly attributable
to the DSG contract, the impairment indicator being reassessed DSG contract profitability. The impairment test reassessed variable
revenues under the contract following publication of the Integrated Spending Review and removed targeted future cost savings in line
with an assessment under IAS 36.
Lease liabilities
The following tables show the discounted Group lease liabilities and a reconciliation of opening to closing lease liabilities:
Cost
At 1 April 2020
Additions
Disposals
Exchange adjustments
Lease interest
Lease repayments
At 31 March 2021
Non-current lease liabilities
Current lease liabilities
At 31 March 2021
At 1 April 2019
On transition to IFRS 16 – 1 April 2019
Additions
Disposal of subsidiary undertaking
Exchange adjustments
Lease interest
Lease repayments
At 31 March 2020
Non-current lease liabilities
Current lease liabilities
At 31 March 2020
See note 2 for a maturity analysis of the contractual undiscounted lease payments
Amounts recognised in the Group income statement
Interest on lease liabilities
Amounts recognised in the Group cash flow statement
Total cash outflow for principal element of leases
2021
£m
23.5
2021
£m
141.3
Total
£m
689.4
91.7
(9.4)
(18.8)
23.5
(164.1)
612.3
486.2
126.1
612.3
65.8
640.8
144.7
(3.1)
16.2
28.2
(203.2)
689.4
548.5
140.9
689.4
2020
£m
28.2
2020
£m
175.0
Group as a lessor
The Group is the lessor in an arrangement for the lease of vehicles and sub-lease of leased properties. These are solely finance lease
arrangements.
Babcock International Group PLC Annual Report and Financial Statements 2021
235
Babcock International Group PLC Annual Report and financial statements 2021 235
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
16. Leases (continued)
Amounts recognised in the Group income statement
Finance lease – interest income
Finance lease payments receivable
Within one year
Greater than one year but less than two years
Greater than two years but less than three years
Greater than three years but less than four years
Greater than four years but less than five years
Greater than five years
Total undiscounted finance lease payments receivable
Impact of discounting
Finance lease receivable (net investment in the lease)
17. Investment in and loans to joint ventures and associates
The Group’s principal joint ventures and associates are:
Holdfast Training Services Limited
Joint venture
31 Mar
Nature of relationship
Year end
ALC (Superholdco) Limited
Joint venture
30 Jun
AirTanker Holdings Limited
Associate
31 Dec
AirTanker Services Limited
Ascent Flight Training (Holdings)
Limited
Associate
31 Dec
Joint venture
31 Mar
Naval Ship Management (Australia)
Pty Limited
Joint venture
31 Mar
Cavendish Dounreay Partnership
Limited
Joint venture
31 Mar
Cavendish Fluor Partnership Limited
Joint venture
31 Mar
2021
£m
1.8
2021
£m
26.7
7.9
4.7
0.4
–
–
39.7
(0.2)
39.5
2020
£m
2.6
2020
£m
31.7
6.9
–
–
–
–
38.6
–
38.6
Business activity
Provision of training
services
Vehicle support
services for the
MoD
Provision and
management of
aircraft
Provision of air-to-
air refuelling
Provision of training
services
Provision of repair,
engineering and
maintenance
services
Provision of
decommissioning
services
Holding company
for the Group’s
investment in
Magnox Limited
% interest
held (2021)
% interest
held (2020)
–
74.0%
Country of
incorporation
United
Kingdom
Principal area
of operation
United
Kingdom
50.0%
50.0%
United
Kingdom
United
Kingdom
15.4%
13.3%
23.5%
22.3%
50.0%
50.0%
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
50.0%
50.0%
Australia
Australia
50.0%
50.0%
United
Kingdom
United
Kingdom
65.0%
65.0%
United
Kingdom
United
Kingdom
During the year the Group increased its shareholding in Airtanker Limited and Airtanker Services Limited for total consideration of
£8.8 million.
The Group disposed of its share in Holdfast Training Services Limited for total consideration of £85.0 million (note 32).
Accounting judgements in classification of joint ventures and associates
The Group has determined that it has joint control of AirTanker Services Limited and Cavendish Fluor Partnership Limited, as unanimous
decision-making is required over the key decisions which drive the relevant activities of the businesses. The Group has the right to net
assets of each of these joint arrangements, rather than separate rights and obligations to the assets and liabilities of the joint arrangement
respectively, and they are therefore classified as equity accounted joint ventures.
Airtanker Limited is included as an associate due to the level of management input and the relative share ownership.
236
236 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
17. Investment in and loans to joint ventures and associates (continued)
Summarised financial information for joint ventures and associates
The summarised financial information below reflects the amounts presented in the financial statements of the relevant joint ventures and
associates, and not the Group’s share of those amounts. These amounts have been adjusted to conform to the Group’s accounting
policies where required. The summarised financial information has been aggregated in order to provide useful information to users
without excessive detail. Joint ventures that are not considered material to the Group are not shown below.
2021 (£m)
Summarised income statement
Revenue
Depreciation and amortisation
Interest income
Interest expense
Income tax (expense) / benefit
Profit / (loss) from continuing operations
Other comprehensive income/(expense)
Total comprehensive income/(loss)
Summarised balance sheet
Non-current assets
Current assets (excluding cash and cash equivalents)
Cash and cash equivalents
Non-current financial liabilities (excluding trade and
other payables and provisions)
Current financial liabilities (excluding trade and other
payables and provisions)
Current trade and other payables and provisions
Net assets / liabilities
Ascent Flight
Training
(Holdings)
Limited
AirTanker
Limited
AirTanker
Services Limited
ALC
(Superholdco)
Limited
Cavendish
Dounreay
Partnership
Limited
Naval Ship
Management
(Australia) Pty
Limited
155.1
–
7.7
(7.2)
(2.9)
15.3
–
15.3
131.0
(34.2)
144.4
(137.2)
–
39.3
143.9
183.2
94.2
75.2
25.5
2,314.7
357.3
63.0
144.6
(3.3)
–
(0.2)
–
5.7
–
5.7
41.8
91.0
64.3
43.2
–
2.8
(0.3)
(4.6)
25.6
–
25.6
0.9
46.4
1.1
134.7
–
–
–
1.9
(29.9)
–
(29.9)
–
15.7
0.6
140.1
–
–
(0.2)
(3.1)
7.3
–
7.3
1.5
27.3
5.2
(113.3)
(2,631.8)
(9.9)
(10.0)
–
(0.5)
(3.5)
(35.4)
42.7
(58.5)
(46.9)
(2.2)
–
(93.6)
93.6
(1.0)
(6.0)
31.4
(0.8)
–
15.5
(0.5)
(27.9)
5.1
Ownership
50.0%
15.4%
23.5%
50.0%
50.0%
50.0%
Carrying value of investment at 31 March 2021
Carrying value of investment at 31 March 2020
21.4
22.3
–
–
22.0
34.2
15.7
20.7
7.7
22.6
2.5
1.4
Babcock International Group PLC Annual Report and Financial Statements 2021
237
Babcock International Group PLC Annual Report and financial statements 2021 237
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
17. Investment in and loans to joint ventures and associates (continued)
Reconciliation to carrying amounts
At 1 April
Prior year adjustment
At 1 April restated
Disposal of joint ventures and associates (note 32)
Loans repaid by joint ventures and associates
Increase in loans to joint ventures and associates
Impairment of JV loans
Investment in joint ventures and associates
Share of profits/(losses)
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
2021
£m
161.9
–
161.9
(53.2)
–
–
–
8.8
(13.1)
–
–
(36.8)
7.0
(1.4)
0.3
73.5
2020
(restated)
£m
153.2
8.9
162.1
–
–
–
–
0.3
58.6
–
–
(52.0)
(9.4)
2.3
–
161.9
2021
£m
48.6
–
48.6
–
(4.2)
3.9
(7.0)
–
–
3.1
(2.3)
–
–
–
–
42.1
2020
£m
42.5
–
42.5
–
(0.7)
5.5
–
–
–
3.8
(2.5)
–
–
–
–
48.6
2021
£m
210.5
–
210.5
(53.2)
(4.2)
3.9
(7.0)
8.8
(13.1)
3.1
(2.3)
(36.8)
7.0
(1.4)
0.3
115.6
2020
(restated)
£m
195.7
8.9
204.6
–
(0.7)
–
–
5.8
58.6
3.8
(2.5)
(52.0)
(9.4)
2.3
–
210.5
The share of results of joint ventures and associates (loss) reported of £13.1 million is due to a £37.1 million reduction to share of results
of joint ventures and associates identified through the contract profitability and balance sheet review in the year ended 31 March 2021.
The total investments in joint ventures and associates is attributable to the following reportable segments:
Marine
Nuclear
Land
Aviation
Net book value
2021
£m
6.5
9.6
13.1
86.4
115.6
2020
£m
5.8
25.6
90.6
88.5
210.5
The joint ventures and associates have no significant contingent liabilities to which the Group is exposed. The Group does not have any
commitments that have been made to the joint ventures or associates and not recognised at the reporting date.
Joint arrangements are 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 (2020: £nil).
There are no significant restrictions on the ability of joint ventures and associates to transfer funds to the owners, other than those
imposed by the Companies Act 2006 or equivalent local regulations.
Income from joint ventures and associates – AirTanker Ltd, AirTanker Services Ltd and Ascent Flight Training (Holdings) Ltd
The Group holds a 15.4% (2020: 13.3%) share in AirTanker Limited (‘ATL’) and a 23.5% (2020: 22.3%) share in AirTanker Services Limited
(‘ATSL’). The Group accounts for its interest in the joint ventures and associates based on financial information, and has previously made
certain adjustments to this information to recognise revenue over time and reflect the Group’s view of certain cost assumptions, including
the residual value of assets. The Group revised these estimates and assumptions during the year, resulting in a reduction in the share of
results of joint ventures and associates and investment in joint ventures and associates (ATL: £5.0 million, ATSL: £15.1 million).
Ascent Flight Training (Holdings) Limited (‘Ascent’) is a 50.0% owned joint venture. During the year management revised certain previous
assumptions over the contract outturn, resulting in a reduction in share of results of joint ventures and associates and investment in joint
ventures and associates of £2.9 million.
238
238 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
17. Investment in and loans to joint ventures and associates (continued)
Income from joint ventures and associates – Cavendish Dounreay Partnership Limited
Cavendish Dounreay Partnership Limited (‘CDP’), is a 50.0% owned joint venture, within the Nuclear operating segment, which owned the
site licence company Dounreay Site Restoration Limited (‘DSRL’). CDP operated under a parent body agreement (PBO) to the Nuclear
Decommissioning Authority (‘NDA’). Following notification from the NDA of the proposed termination of the PBO, the controlling ‘A’
shareholding in DSRL was transferred to the NDA on 31 March 2021. CDP maintains a ‘B’ share, which entitles it to profit earned, but yet
to be agreed and distributed, up until 31 March 2021.
The recoverability of the investment in CDP was reassessed following the change in ownership of DSRL. The amount of profit due to CDP is
judgemental as it is reliant on DSRL reaching an agreed settlement with the NDA. A reduction in the share of results of joint ventures and
associates and investment in joint ventures and associates of £10.9m was booked to reflect the Group’s latest assessment of the outcome
of the settlement with the NDA.
Income from joint ventures and associates – ABC Electrification Ltd
Babcock is a one-third shareholder, in the Land operating segment, in the ABC Electrification Ltd (‘ABC’) joint venture which performed
services under contracts with Network Rail (‘NWR’). These contracts were completed several years ago and there is no further work being
performed. Following developments during the year, the Group reassessed the range of possible outcomes on contracts subject to final
agreement, and as a result reflected a reduction in the share of results of joint ventures and associates and investment in joint ventures
and associates of £3.9 million to record the latest view of the contract outcomes. In addition, loans receivable from the JV of £7.0 million
were impaired.
18. Deferred tax
Deferred tax asset
Deferred tax liability
2021
£m
141.3
(7.7)
133.6
2020
(restated)
£m
60.5
(33.7)
26.8
Babcock International Group PLC Annual Report and Financial Statements 2021
239
Babcock International Group PLC Annual Report and financial statements 2021 239
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
18. Deferred tax (continued)
The movements in deferred tax assets and liabilities during the year are shown below. Deferred tax assets and deferred tax liabilities have
been offset if, and only if, there is a legally enforceable right in that jurisdiction to set off corporation tax assets and corporation tax
liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same Taxation Authorities:
At 1 April 2020
Income statement credit/(debit)
Tax credit/(debit) to equity
Disposal of subsidiary
Effect of changes in tax rates
• Income statement
Exchange differences
At 31 March 2021
At 1 April 2019 as previously stated
Prior year adjustment
At 1 April 2019 restated
Income statement credit/(debit) (restated)
Tax credit/(debit) to equity
Disposal of subsidiary
Effect of changes in tax rates
• Income statement
• Equity
Exchange differences
At 31 March 2020
Tangible assets
£m
1.9
(13.5)
–
–
Retirement
benefit
obligations
£m
(27.7)
(12.7)
96.3
–
–
–
(11.6)
2.4
–
2.4
–
–
–
(0.5)
–
–
1.9
–
–
55.9
4.7
–
4.7
(12.8)
(20.2)
–
–
0.6
–
(27.7)
Tax losses
£m
71.6
31.5
–
–
0.2
–
103.3
72.2
(8.8)
63.4
8.1
–
–
0.1
–
–
71.6
Other
£m
(19.0)
7.3
(2.2)
(0.1)
–
–
(14.0)
(26.6)
(14.7)
(41.3)
13.7
7.6
0.6
1.6
0.3
(1.5)
(19.0)
Total
£m
26.8
12.6
94.1
(0.1)
0.2
–
133.6
52.7
(23.5)
29.2
9.0
(12.6)
0.6
1.2
0.9
(1.5)
26.8
The deferred tax assets and liabilities at 31 March 2020 have been restated due to errors identified in prior periods. Further detail is
included in note 5.
The net deferred tax assets of £133.6 million (2020: £26.8 million) include deferred tax assets of £32.9 million (2020: £60.5 million)
and deferred tax liabilities of £7.7 million (2020: £18.0 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 recognition of deferred tax assets in respect of
losses can be subjective. The Group’s approach to the recognition of deferred tax assets in respect of losses, including how the Group
assesses future profitability for recognition purposes, is set out in detail in note 1 to the Accounts. Due to the CPBS review, substantially all
territories for which deferred tax assets in respect of losses are recognised made an accounting loss in the current year. However, these
costs are not expected to be recurring and their recovery is expected as set out in detail in note 1. The losses can be carried forward
indefinitely and have no expiry date.
The deferred tax asset in respect of tax losses includes £nil (31 March 2020: £31.7m) in respect of financial expenses carried forward.
The net deferred tax liability in respect of “Other” includes a liability in respect of acquired intangible assets of £25.5m (31 March 2020:
£46.7m), with the movement between periods having been posted to the income statement.
No deferred tax has been recognised in respect of temporary differences associated with investments in subsidiaries, branches, associates
and interest in joint ventures and joint operations where the Group is in a position to control the timing of the reversal of the temporary
differences and it is probable that such differences will not reverse in the foreseeable future. The aggregate amount of temporary
differences associated with such investments in subsidiaries, branches, associates and interests in joint ventures and joint operations is
represented by the contribution of those investments to the Group’s retained earnings and amounted to £47.0 million (2020: £40.0
million).
At the statement of financial position date, deferred tax assets of £103.3 million (2020: £71.6 million) have been recognised in respect
of unused tax losses available for carry forward. No deferred tax asset has been recognised in respect of further unutilised tax losses
carried forward (excluding capital losses) of £754.1 million (2020: £383.7 million). These amounts include trading losses of £559.3
million (2020: £325.6 million) and financial expenses carried forward of £194.8 million (2020: £58.1 million). In addition to these
amounts, UK capital losses of £92.0 million (2020: £92.0 million) are being carried forward, with no deferred tax asset having been
recognised. Where a deferred tax asset has not been recognised in respect of these losses and financial expenses, this is because
management considers that those jurisdictions are not likely to generate sufficient taxable income of the appropriate type in the
foreseeable future (see note 1). The amounts shown can be carried forward indefinitely.
240
240 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
19. Inventories
Raw materials and spares
Work-in-progress
Finished goods and goods for resale
Total
2021
£m
79.2
7.2
76.0
162.4
2020
(restated)
£m
109.9
6.1
75.6
191.6
Write-downs of inventories amounted to £28.6 million (2020: £6.9 million) inclusive of the amounts described below. These were
recognised as an expense during the year ended 31 March 2021 and included in cost of revenue in the income statement.
Through the contract profitability and balance sheet review, a comprehensive performance improvement and restructuring programme
was implemented during the year across the Aviation operating segment. This included a rationalisation of aircraft types and review of
fleet strategy, taking account of changes in market conditions including those resulting from COVID-19 and Brexit. The future strategy
affects the Group’s expected use of inventory and the calculation of net realisable value has been reassessed to reflect this, resulting in an
impairment of £20.6 million.
The Group reversed £5.0 million (2020: £1.4 million) of a previous inventory write-down, as the relevant inventory items were disposed
of. The amount reversed has been included in cost of revenue in the income statement.
In DSG the required inventory provision was reassessed and increased by £5.5 million based on the latest information including
consideration of a lower usage of inventory due to the impacts of COVID-19.
20. 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 36)
Other debtors
Prepayments
2021
£m
281.1
(14.0)
267.1
201.7
76.9
32.3
310.9
8.0
4.4
83.8
66.8
741.0
2020
(restated)
£m
281.0
(8.1)
272.9
223.0
107.8
31.8
362.6
8.1
2.9
108.5
82.4
837.4
Trade and other receivables are stated at amortised cost.
The Group reassessed the forecast profit margins of a number of contracts included within the scope of the contract profitability and
balance sheet review. The assessments were made based on the findings from detailed contract reviews, facilitated by an external
accountancy firm. The reviews considered matters such as forecast costs to complete, including the achievability of forecast cost savings,
and the recognition of contract modifications including the potential requirement to constrain variable revenue. This resulted in a
reduction in margin and a reduction in amounts due from customers for contract work totalling £97.5 million. Of this amount, £27.8
million relates to the DSG contract, which resulted from the reassessment of variable revenues following publication of the Integrated
Spending Review and reassessment of cost savings achievable under the contract reflecting delays in implementation of efficiency
programmes as a result of COVID-19. The DSG reassessment also resulted in the impairment of £6.4 million of capitalised contract costs.
The Group recognises that there is an inherent element of estimation uncertainty and judgement involved in assessing contract
profitability, as disclosed in note 1, and considers that it has taken a best estimate view of contract outcomes based on the information
currently available.
This reassessment of contract margin has also resulted in the increase in contract liabilities and recognition of certain onerous contract
provisions; see notes 22 and 26, respectively, for further detail.
Babcock International Group PLC Annual Report and Financial Statements 2021
241
Babcock International Group PLC Annual Report and financial statements 2021 241
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
20. Trade and other receivables (continued)
The Group reviewed the recoverability of its trade and other receivables, resulting in a charge to the income statement of £51.7 million.
A number of recoverability estimates have been reassessed and expected credit losses recorded following consideration of the latest facts
and circumstances, resolution of certain disputed matters and an assessment of the merits of pursuing certain others, particularly in
relation to less significant matters.
Significant changes in contract assets during the year are as follows:
31 March 2020
Disposal of subsidiary undertaking
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
Exchange adjustment
31 March 2021
31 March 2019 as previously stated
Prior year adjustment (note 5)
31 March 2019 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 2020
Amounts
due from
customers for
contract work
£m
223.0
(0.6)
Accrued income
£m
107.8
(3.4)
Capitalised
contract costs
£m
31.8
–
Contract assets
£m
362.6
(4.0)
(204.5)
191.7
–
–
(6.9)
(1.0)
201.7
266.0
(9.3)
256.7
(240.1)
222.2
–
–
(14.2)
–
(1.6)
223.0
(96.5)
70.3
–
–
–
(1.3)
76.9
133.2
(0.9)
132.3
(117.6)
105.7
–
–
(10.7)
(2.2)
0.3
107.8
–
–
25.6
(11.2)
(15.5)
1.6
32.3
62.9
(37.0)
25.9
–
–
39.4
(9.9)
(15.4)
(5.3)
(2.9)
31.8
(301.0)
262.0
25.6
(11.2)
(22.4)
(0.7)
310.9
462.1
(47.2)
414.9
(357.7)
327.9
39.4
(9.9)
(40.3)
(7.5)
(4.2)
362.6
No material revenue was recognised in 2021 from performance obligations satisfied in previous years, arising from changes in stage of
completion, or transaction price allocation (2020: No material revenue).
Within the Group’s contract backlog, £8.7 billion (2020: £9.6 billion) represents the transaction price allocated to unsatisfied or partially
satisfied performance obligations. Management expects that 26.0% (2020: 26.0%) of the transaction price allocated to unsatisfied
performance obligations as at 31 March 2021 will be recognised as revenue during the next reporting period. A further 47% (2020: 41%)
of the transaction price allocated to unsatisfied performance obligations is expected to be recognised as revenue in years two to five after
31 March 2021. In addition there are £6.0 billion (2020: £5.4 billion) of orders where pricing is still to be finalised and £2.0 billion
(2020: £2.7 billion) of orders within joint ventures and associates.
242
242 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
20. 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
2021
£m
(8.1)
(7.6)
0.2
1.0
0.5
(14.0)
2020
(restated)
£m
(6.0)
(4.7)
1.1
1.0
0.5
(8.1)
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 considered to be 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.
21. Cash and cash equivalents
Cash at bank and in hand
Short-term bank deposits
2021
£m
610.5
294.3
904.8
2020
(restated)
£m
783.4
1,062.5
1,845.9
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
Other currencies
2021
Total
£m
Floating rate
£m
2020 (restated)
Total
£m
Floating rate
£m
734.0
52.7
28.3
39.9
16.5
4.9
9.4
3.1
3.7
3.1
9.2
904.8
734.0
52.7
28.3
39.9
16.5
4.9
9.4
3.1
3.7
3.1
9.2
904.8
1,676.0
42.6
15.1
54.0
21.0
4.9
13.1
4.4
4.5
9.8
0.5
1,845.9
1,676.0
42.6
15.1
54.0
21.0
4.9
13.1
4.4
4.5
9.8
0.5
1,845.9
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.
At 31 March 2021, amounts of £294.3 million were held in money market funds. These are measured at fair value through profit and
loss.
Impairment of cash and cash equivalents has been determined to be immaterial.
Babcock International Group PLC Annual Report and Financial Statements 2021
243
Babcock International Group PLC Annual Report and financial statements 2021 243
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
22. Trade and other payables
Current liabilities
Amounts due to customers for contract work
Deferred income
Contract liabilities
Trade creditors
Amounts due to related parties (note 36)
Other creditors
Other taxes and social security
Accruals
Non-current liabilities
Other creditors
2021
£m
2020
(restated)
£m
333.1
63.4
396.5
410.6
0.4
37.4
144.5
517.3
1,506.7
210.4
32.8
243.2
435.5
0.7
37.8
102.8
481.2
1,301.2
1.9
2.1
Included in creditors is £19.1 million (2020: £22.1 million) relating to capital expenditure which has therefore not been included in
working capital movements within the cash flow statement.
As part of the contract profitability and balance sheet review, management has reassessed the liabilities of the Group, including the
measurement of accruals. This assessment has been made based on the findings from the detailed, risk based review of the Group’s
contracts and sector balance sheets and has resulted in an increase in liabilities and a charge to the income statement of £52.7 million.
Of this amount, £32.0 million relates to the DSG contract, which resulted from the reassessment of variable revenues following
publication of the Integrated Spending Review and reassessment of cost savings achievable under the contract reflecting delays in
implementation of efficiency programmes as a result of COVID-19.
Significant changes in contract liabilities during the year are as follows:
31 March 2020
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
Disposal of subsidiary undertaking
Exchange adjustment
31 March 2021
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
Disposal
Exchange adjustment
31 March 2020
Amounts due to
customers for
contract work
£m
210.4
(135.0)
259.0
(0.5)
(0.8)
333.1
Deferred
income
£m
32.8
(28.5)
59.1
–
–
63.4
Contract
liabilities
£m
243.2
(163.5)
318.1
(0.5)
(0.8)
396.5
195.3
40.0
235.3
(141.9)
159.4
–
(2.4)
210.4
(38.5)
33.9
(1.2)
(1.4)
32.8
(180.4)
193.3
(1.2)
(3.8)
243.2
244
244 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
23. 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*
2021
£m
2020
(restated)
£m
0.2
383.5
383.7
126.1
509.8
18.5
1,300.3
1,318.8
486.2
1,805.0
0.3
987.6
987.9
140.9
1,128.8
17.5
2,032.5
2,050.0
548.5
2,598.5
* Leases are secured against the assets to which they relate.
The Group has £3.9 million of secured debt in the Land operating segment that is secured against a property owned by the Group and
£14.6 million of debt that is secured against contracts with customers, which will cede to the bank in the event of default.
The Group has entered into interest rate and currency swaps, details of which are included in note 25.
The carrying amount of the Group’s borrowings are denominated in the following currencies:
Currency
Sterling
Euro
US Dollar*
South African Rand
Canadian Dollar
Australian Dollar
Norwegian Krone
Swedish Krona
New Zealand Dollar
South Korean Won
Danish Krone
Total
£m
851.8
1,248.9
123.9
23.0
8.5
36.7
0.7
18.5
0.8
1.5
0.5
2,314.8
2021
Floating rate
£m
399.4
245.7
18.8
14.8
–
–
–
–
–
–
–
678.7
Fixed rate
£m
452.4
1,003.2
105.1
8.2
8.5
36.7
0.7
18.5
0.8
1.5
0.5
1,636.1
Babcock International Group PLC Annual Report and Financial Statements 2021
245
Babcock International Group PLC Annual Report and financial statements 2021 245
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
23. Bank and other borrowings (continued)
Currency
Sterling
Euro*
US Dollar*
South African Rand
Canadian Dollar
Australian Dollar
Norwegian Krone
Swedish Krona
Brazilian Real
South Korean Won
Total
£m
1,800.4
1,298.3
528.2
23.1
10.2
37.1
1.4
20.8
5.8
2.0
3,727.3
2020 (restated)
Floating rate
£m
1,238.6
256.8
251.0
15.6
–
–
–
–
5.8
–
1,767.8
Fixed rate
£m
561.8
1,041.5
277.2
7.5
10.2
37.1
1.4
20.8
–
2.0
1,959.5
* USDnil million (2020: USD500 million) has been swapped into Sterling, with USDnil million (2020: USD300 million) equivalent into floating rates and USDnil million
(2020: USD200 million) equivalent into fixed rate. This is included in the US Dollar amount above.
EUR550 million (2020: €550 million) has been swapped into Sterling, with €275 million (2020: €275 million) equivalent into floating rates and
EUR275 million (2020: €275 million) 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 five 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 in the prior year £775 million of fully
drawn RCF facility.
Total borrowings
As at 31 March 2021
As at 31 March 2020
1 year
£m
830.9
2,057.6
1–2 years
£m
586.4
208.7
2–5 years
£m
245.0
775.0
>5 years
£m
652.5
686.0
Total
£m
2,314.8
3,727.3
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:
Within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Greater than five years
2021
%
1.1
0.6
–
–
2.9
2.4
1.8
1.9
4.8 – 6.4
2020
%
1.1
0.5
6.0
2.8
2.9
2.8
1.8
1.9
4.8 – 8.9
0.0 – 11.8 0.4 – 12.6
2021
2020
Loans and
overdrafts
£m
383.7
476.4
15.0
0.3
0.3
826.8
1,702.5
Lease
obligations
£m
126.1
120.1
91.4
96.6
61.9
116.2
612.3
Loans and
overdrafts
£m
987.9
0.4
487.4
13.1
759.5
789.6
3,037.9
Lease
obligations
£m
140.9
117.3
105.4
106.8
78.3
140.7
689.4
In addition to the lease obligations above, the Group paid £45.3 million (2020: £44.3 million) under the Phoenix contract where the
leases are directly on behalf of and benefit to the customer.
246
246 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
23. Bank and other borrowings (continued)
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
2021
£m
3.0
783.5
786.5
2020
£m
3.5
77.6
81.1
Bank loans include £25.1 million (2020: £93.2 million) that suppliers have chosen to early-fund under supplier financing arrangements,
under which the suppliers can elect to receive a discounted early payment from the partner bank rather than being paid in line with the
agreed payment terms. The total supplier financing facility available to the Group is £230 million at 31 March 2021. The typical factoring
fee is 0.9% – 1.5% and the Group has payment terms with the partner banks of 120-360 days. If the option is taken the Group’s liability is
assigned by the supplier to be due to the partner bank rather than the supplier. The value of the liability payable by the Group remains
unchanged. The Group assesses the terms and conditions of the arrangement to determine whether the arrangement should be classified
as trade payables or debt. Refer to accounting policies for further information.
Various inter-bank offer rates (IBOR) are expected to be replaced by alternative risk-free rates by the end of 2021 as part of the IBOR
reform. The Group is managing the transition to alternative risk-free rates with respect to its hedging arrangements and any future
transactions in the financial market.
24. Financial instruments
Other financial assets and liabilities within the balance sheet comprise of:
Non-current assets
Leases granted
Derivative financial instruments (note 25)
Current assets
Leases granted
Derivative financial instruments (note 25)
Non-current liabilities
Derivative financial instruments (note 25)
Current liabilities
Derivative financial instruments (note 25)
2021
£m
12.9
4.3
17.2
26.7
8.2
34.9
51.1
13.9
2020
(restated)
£m
6.9
14.6
21.5
31.7
122.2
153.9
35.6
27.7
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 £33.0 million (2020: £22.3 million), these were split as £20.2 million (2020: £15.4 million) due within one year and £12.8 million
(2020: £6.9 million) between one and five years.
Babcock International Group PLC Annual Report and Financial Statements 2021
247
Babcock International Group PLC Annual Report and financial statements 2021 247
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
24. Financial instruments (continued)
The Group’s financial assets and financial liabilities are classified as follows:
2021 (£m)
Financial assets
Trade and other receivables
Loans to joint ventures and associates
Cash and cash equivalents
Leases granted
IFRIC 12 financial assets
Financial liabilities
Bank and other borrowings
Trade payables
Accruals and other payables
Lease liabilities
Derivative contracts
Hedged contracts
Non-hedged contracts
Net assets / (liabilities)
2020 (£m)
Financial assets
Trade and other receivables
Loans to joint ventures and associates
Cash and cash equivalents
Leases granted
IFRIC 12 financial assets
Financial liabilities
Bank and other borrowings
Trade payables
Accruals and other payables
Lease liabilities
Derivative contracts
Hedged contracts
Non-hedged contracts
Net assets / (liabilities)
Note
At amortised
cost
Fair value
through profit
or loss
Fair value
hedges
Cash flow
hedges
Total carrying
amount
Fair value
20*
17
21,31
16
641.9
42.1
904.8
39.5
11.2
23
22
22**
16
(1,702.5)
(410.6)
(556.6)
(612.3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
641.9
42.1
904.8
39.5
11.2
641.9
42.1
904.8
39.5
11.2
(1,702.5)
(410.6)
(556.6)
(612.3)
(1,771.4)
(410.6)
(556.6)
(612.3)
–
–
(1,642.5)
(5.1)
(5.1)
(25.2)
–
(25.2)
(22.2)
–
(22.2)
(47.4)
(5.1)
(1,695.0)
(47.4)
(5.1)
(1,763.9)
Note
At amortised
cost
Fair value
through profit
or loss
Fair value
hedges
Cash flow
hedges
Total carrying
amount
Fair value
20*
17
21,31
16
723.2
48.6
1,845.9
38.6
12.8
23
22
22**
16
(3,710.8)
(435.5)
(521.1)
(672.8)
–
–
–
–
-
–
–
–
–
–
–
–
–
-
–
–
–
–
–
–
–
–
-
–
–
–
–
723.2
48.6
1,845.9
38.6
12.8
723.2
48.6
1,845.9
38.6
12.8
(3,710.8)
(435.5)
(521.1)
(672.8)
(3,808.8)
(435.5)
(521.1)
(672.8)
–
–
(2,671.1)
–
2.9
2.9
89.4
–
89.4
(15.9)
–
(15.9)
73.5
2.9
(2,594.7)
73.5
2.9
(2,692.7)
* Trade and other receivables excludes prepayments and capitalised contract costs as these are not classed as financial instruments.
** Accruals and other payables excludes deferred income, other taxes and social security and contract liabilities as these are not classed as financial instruments.
248
248 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
24. Financial instruments (continued)
The following table presents the Group’s financial assets and liabilities that are measured at fair value at 31 March 2021 and 31 March
2020, by level of fair value hierarchy:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);
• Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices) (Level 2); and
• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).
Derivative contracts
Level 1
–
Level 2
(52.5)
Level 3
–
Total
(52.5)
During the financial year, there were no transfers (2020: no transfers) between Level 1 and Level 2 fair value measurements, and no
transfers into and out of Level 3 fair value measurements (2020: no transfers).
25. Derivative financial instruments
The fair values of derivative financial instruments are as follows:
Non-current assets
Other currency hedges – hedged
Other currency hedges – non-hedged
Current assets
US private placement – derivative
US private placement – interest rate swaps
Other currency hedges – hedged
Other currency hedges – non-hedged
Non-current liabilities
8 year Eurobond September 2027 – derivative
8 year Eurobond September 2027 – interest rate swaps
Interest rate hedge
Other currency hedges – hedged
Other currency hedges – non-hedged
Current liabilities
Interest rate hedge
Other currency hedge
2021
£m
4.3
–
–
–
7.8
0.4
25.2
14.1
0.6
5.7
5.5
0.1
13.8
2020
£m
11.7
2.9
95.5
9.2
17.5
–
6.1
17.0
0.8
11.7
–
0.1
27.6
The Group enters into forward foreign currency contracts and cross currency interest rate swaps to hedge the currency exposures that
arise on sales, purchases, deposits, borrowings and leasing arrangements denominated in foreign currencies as the transactions occur.
There is no material ineffectiveness on any of the Group’s hedging activities. Where derivatives do not meet the hedge accounting
criteria, they are accounted for at fair value through profit or loss.
The Group’s policy regarding classification of derivatives is set out in note 1.
Held for trading contracts are economic hedges and are not hedge accounted.
The fair values of derivative financial instruments are based on valuation techniques (level 2) using underlying market data and discounted
cash flows.
Fair value hedges
The Group maintains interest rate and cross-currency swap contracts as fair value hedges of the interest rate and currency risk on fixed-
rate debt issued by the Group.
These derivative contracts receive a fixed rate of interest and pay a variable interest rate. These are formally designated in fair value
hedging relationships and are used to hedge the exposure to changes in the fair value of debt which has been issued by the Group at
fixed rates.
Babcock International Group PLC Annual Report and Financial Statements 2021
249
Babcock International Group PLC Annual Report and financial statements 2021 249
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
25. Derivative financial instruments (continued)
The Group held the following interest rate hedges at 31 March 2021:
Hedged
Interest rate swap
Hedged – EURO
Amount
£m
Fixed payable
%
Floating receivable
%
Maturity
3.9
4.745
6 month LIBOR 31/03/2029
Amount
EURm
Amount at
swapped rates
£m
Swap
%
Maturity
Cross currency and interest rate swap
275.0
246.7
fixed 2.931% GBP 13/09/2027
Fixed 1.375% EUR to
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
floating 3-month LIBOR
+ margin GBP 13/09/2027
Cash flow hedges
The Group is exposed to transactional foreign currency risk and cross currency interest rate swaps to the extent that there is a mismatch
between the currencies in which sales, purchases, receivables and borrowings are denominated and the respective functional currencies
of Group entities.
The Group uses forward contracts to hedge the foreign currency cost of future purchases of goods to be consumed in operations, future
income to be received and debt payments to be made, and designates the spot element of these contracts to hedge the foreign
currency risk.
Under the Group’s hedging policy, the terms of the forward contracts are arranged to align with the expected timing and amounts of the
hedged items. The foreign currency forwards are denominated in the same currency as the hedged item, such as future sales and
purchases, when the timing of the hedged items can be estimated with reasonable certainty. There is an economic relationship between
the hedged item and the hedging instrument as the terms of the forward contracts match the terms of the hedged item. The Group
determines that the hedging arrangements meet the criteria for a cash flow hedge if the hedging relationship is at a ratio of 0.8-1.25:1,
as this is consistent with the Group’s risk management.
See the Group’s statement of changes in equity for reconciliation of movements in the cash flow hedge reserve. Of the movement in
hedging reserve: (£6.2) million relates to interest rate swaps (2020: (£6.9) million), £3.3 million relates to foreign exchange
arrangements (2020: £1.7 million), £5.6 million relates to other comprehensive income from joint ventures and mark to market
adjustments on joint ventures hedging arrangements (2020: (£4.5) million) and £27.9 million relates to the Group’s leasing
arrangements (2020: (£23.8) million). Offset by (£4.6) million deferred tax impact (2020: £2.5 million).
Full details of the Group’s financial instrument accounting policies and risk management strategies, objectives and policies are set out in
the accounting policies in note 1 and in note 2, financial risk management.
250
250 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
26. Provisions for other liabilities
At 31 March 2020 as previously stated
Prior year adjustment
At 31 March 2020 restated
On disposal of subsidiaries (note 32)
Transfer
Net charge/ (release) to income statement
Utilised in year
Unwinding of discount
Foreign exchange
At 31 March 2021
Employee
benefits and
business
reorganisation
costs
(c)
£m
60.9
–
60.9
–
0.7
15.2
(41.9)
–
0.9
35.8
Contract/
warranty
(b)
£m
17.3
17.2
34.5
–
–
43.4
(10.1)
–
(0.7)
67.1
Insurance
provisions
(a)
£m
0.6
–
0.6
–
–
0.1
–
–
–
0.7
Italian anti-
trust fine
(d)
£m
47.3
–
47.3
–
–
(24.2)
(1.5)
–
(1.6)
20.0
Property
and other
(e)
£m
17.1
2.0
19.1
(2.5)
(0.7)
9.0
(3.5)
–
0.1
21.5
Expected credit
losses
£m
0.4
–
0.4
–
–
–
–
–
–
0.4
Total
provisions
£m
143.6
19.2
162.8
(2.5)
–
43.5
(57.0)
–
(1.3)
145.5
(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 3), acquired businesses, personnel-
related costs and payroll taxes.
(d) For further details of the provision in relation to the possible Italian anti-trust fine see note 3.
(e) Property and other provisions primarily relate to dilapidation costs and contractual obligations in respect of infrastructure.
As part of the contract profitability and balance sheet review onerous contract provisions were recognised, as well as a reduction in
amounts due from customers for contract work, see note 20. There is inherent estimation uncertainty and judgement in assessing
profitability outcomes in the future, with a potentially broad range of outcomes. Onerous contract provisions recognised include:
• £21.2 million in relation to three Helicopter Emergency Medical Services (HEMS) contracts secured during the year with minimum
terms of up to 10 years. The pricing of these contracts had regard to future strategic considerations, with profitability dependent on
future volumes. A further £8.2 million provisions were made in HEMS contracts following reassessment of future costs.
• £4.1 million in relation to a military maintenance contract following a reassessment of assumptions relating to forecast flying hours
and indexation.
Provisions have been analysed between current and non-current as follows:
Current
Non-current
2021
£m
71.8
73.7
145.5
2020
(restated)
£m
130.1
32.7
162.8
Included within provisions is £8 million (2020: £5 million) expected to be utilised over approximately 10 years. Other than these
provisions the Group’s non-current provisions are expected to be utilised within two to five years.
Babcock International Group PLC Annual Report and Financial Statements 2021
251
Babcock International Group PLC Annual Report and financial statements 2021 251
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
27. Share capital
Allotted, issued and fully paid
At 1 April 2020 and 31 March 2021
Allotted, issued and fully paid
At 1 April 2019 and 31 March 2020
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 2021 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 10,438,350 shares (2020: 9,526,628 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
15 June 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
3 August 2020
3 August 2020
13 August 2020
13 August 2020
1 December 2020
1 December 2020
Type
PSP1
DBMP2
DBP4
DBP5
PSP1
PSP1
DBP4
DBP5
PSP1
PSP1
DBP4
DBP5
PSP1
PSP1
DBP3
DBP3
DBP3
DBP3
PSP1
PSP1
2021
Number
–
–
–
12,439
2020
Number
Exercise period
17,279
15/06/2019 – 15/06/2020
4,733
15/06/2019 – 15/06/2020
8,866
14/06/2019 – 14/06/2020
179,263
14/06/2020 – 14/06/2021
– 1,358,599
14/06/2020 – 14/06/2021
839,723
–
14/06/2022 – 14/06/2023
78,746
18,092
13/06/2020 – 13/06/2021
13/06/2021 – 13/06/2022
187,433
187,433
13/06/2021 – 13/06/2022 1,311,264 1,398,259
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 2,545,970 2,825,524
13/06/2024 – 13/06/2025 1,134,950 1,370,671
–
–
–
–
–
–
10,438,350 9,526,628
146,306
118,320
8,474
192,096
1/12/2025 – 1/12/2026 1,667,742
1/12/2023 – 1/12/2024 1,939,609
3/08/2022 – 3/08/2023
3/08/2023 – 3/08/2024
13/08/2022 – 13/08/2023
13/08/2023 – 13/08/2024
758,280
83,466
313,909
Options granted to Directors are summarised in the Remuneration report on pages 132 to 153 and are included in the outstanding
options set out above.
1. 2009 Performance Share Plan (‘PSP’).
2. 2012 Deferred Bonus Matching Plan (‘DBMP’).
3. Deferred Bonus Plan (‘DBP’).
4. DBP – Award issued without matching shares, has two-year vesting period.
5. DBP – Award issued without matching shares, has three-year vesting period.
252
252 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
27. Share capital (continued)
The table below shows shares already held by the trustees of the BEST in order to meet these awards.
BEST
Total
A reconciliation of PSP and DBMP movements is shown below:
Outstanding at 1 April
Granted
Exercised
Forfeited/lapsed
Outstanding at 31 March
Exercisable at 31 March
2021
2020
Shares newly
issued by the
Company
–
–
Shares
bought in
the market
661,463
661,463
Shares newly
issued by the
Company
–
–
Shares
bought in
the market
221,320
221,320
2021
Number
’000
9,527
4,593
(258)
(3,424)
10,438
31
2020
Number
’000
7,748
4,797
(654)
(2,364)
9,527
31
The weighted average share price for awards exercised during the year was 301.8p per share (2020: 497.7p per share).
During the year 697,886 ordinary shares (2020: 635,326 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 2021, 257,743 shares (2020: 653,868 shares) were disposed of by the Trust resulting from options
exercised. At 31 March 2021, the Trust held a total of 661,463 ordinary shares (2020: 221,320 ordinary shares) at a total market value
of £1,512,104 (2020: £848,098) representing 0.13% (2020: 0.04%) of the issued share capital at that date. The Company did not pay
dividends to the Babcock Employee Share Trust 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.
Babcock International Group PLC Annual Report and Financial Statements 2021
253
Babcock International Group PLC Annual Report and financial statements 2021 253
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
28. 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 £4.2 million (2020: £2.9 million), all of which
related to equity-settled share-based payment transactions.
After tax, the income statement charge was £3.3 million (2020: £2.4 million).
The fair value per option granted and the assumptions used in the calculation are as follows:
DBMP, PSP and DBP1
Options
awarded
Number
695,458
2,091,247
1,341,477
118,320
146,306
192,096
8,474
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
350.0
350.0
350.0
289.0
289.0
284.2
284.2
472.8
472.8
472.8
472.8
856.0
856.0
856.0
856.0
905.5
905.5
905.5
905.5
Expectations
of meeting
performance
criteria –
non-market
conditions
%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
–
–
100.0%
100.0%
–
–
100.0%
100.0%
–
–
100.0%
100.0%
Option life
Years
6.0
4.0
6.0
4.0
3.0
4.0
3.0
6.0
4.0
4.0
3.0
6.0
4.0
4.0
3.0
6.0
4.0
4.0
3.0
Fair value
per option –
TSR
Pence
–
–
137.9
–
–
–
–
70.9
70.9
–
–
370.9
370.9
–
–
131.2
131.2
–
–
Fair value
per option –
non-market
conditions
Pence
305.2
350.0
305.2
289.0
289.0
284.2
284.2
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
%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
11.0%
11.0%
11.0%
11.0%
14.0%
14.0%
14.0%
14.0%
15.0%
15.0%
15.0%
15.0%
Correlation
%
Grant or
modification
date
55.0% 01/12/20
55.0% 01/12/20
55.0% 01/12/20
55.0% 03/08/20
55.0% 03/08/20
55.0% 13/08/20
55.0% 13/08/20
45.0% 13/06/19
45.0% 13/06/19
45.0% 13/06/19
45.0% 13/06/19
56.0% 13/06/18
56.0% 13/06/18
56.0% 13/06/18
56.0% 13/06/18
46.0% 14/06/17
46.0% 14/06/17
46.0% 14/06/17
46.0% 14/06/17
2020 PSP
2020 PSP
2020 PSP
2020 DBP
2020 DBP
2020 DBP
2020 DBP
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.
PSP awards for 2017 to 2019 are split evenly between the performance criteria of TSR, EPS and ROCE.
For PSP awards made in December 2020, 2,786,705 were made via the use of restricted shares with a three-year vesting period. There
are no performance conditions attached. A further 1,341,477 awards were made where the performance criteria is 50% against free cash
flow and 50% TSR.
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 180,175 matching shares (2020:
104,756 matching shares) at a cost of £0.5 million (2020: £0.5 million).
The Group also operates the Babcock Employee Share Plan International which reflects the structure of the UK Plan. During the
year 5,000 matching shares were purchased on the open market (2020: 1,000 matching shares) and 1,193 matching shares vested
(2020: 713 matching shares) leaving a balance of 5,012 matching shares (2020: 1,205 matching shares).
1. DBMP = 2012 Deferred Bonus Matching Plan, PSP = 2009 Performance Share Plan and DBP = 2012 Deferred Bonus Plan.
254
254 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
29. 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
2021
£m
90.9
2020
£m
85.7
2021
£m
40.8
(333.9)
(293.1)
2020
£m
325.3
(180.1)
145.2
The Group has a number of defined benefit pension schemes. The principal defined benefit pension schemes in the UK are the Devonport
Royal Dockyard Pension Scheme, the Babcock International Group Pension Scheme and the Rosyth Royal Dockyard Pension Scheme (the
Principal schemes). 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 of each scheme 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 (i) taking out longevity swaps in respect of pensioners and their spouses at the time; (ii) through investment
strategies which have significantly hedged the interest rate and inflation risk through derivative instruments; (iii) in 2019 closed the
Babcock International Group Pension Scheme to future accrual for some employees; and (iv) in 2020 closed the Rosyth Royal Dockyard
Pension Scheme to future accrual for all employees.
The Group also participates in the Babcock Rail Ltd 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 the railway scheme.
The defined benefit 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 details of the latest formal actuarial
valuation of the scheme are as follows (the actuarial valuation of the Rosyth Royal Dockyard Scheme as at 31 March 2021 has
commenced):
Date of last formal completed actuarial valuation
Number of active members at above date
Actuarial valuation method
Results of formal actuarial valuation:
Value of assets
Level of funding
Devonport
Royal Dockyard
Scheme
Babcock
International
Group Scheme
Babcock Rail Ltd
section of the
Railways Pension
Scheme
31/03/2020 31/03/2019 31/03/2018 31/12/2019
180
Projected unit Projected unit Projected unit Attained age
Rosyth
Royal Dockyard
Scheme
643
573
823
£1,894m
90%
£1,480m
97%
£1,189m
78%
£271m
92%
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 Section of the Electricity Supply Pension Scheme and runs the Babcock Naval
Services Pension Scheme for which the MOD fully reimburses the contributions payable.
Babcock International Group PLC Annual Report and Financial Statements 2021
255
Babcock International Group PLC Annual Report and financial statements 2021 255
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
29. 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
Additional longevity swap payments
Expected employer cash costs for 2021/22
Expected salary sacrifice contributions
Expected total employer contributions
Devonport
Royal Dockyard
Scheme
21.6%
£12.9m
£18.6m
£7.3m
£38.8m
£6.5m
£45.3m
Babcock
International
Group
Scheme
51.1%
£6.5m
£22.9m
£3.6m
£33.0m
£0.5m
£33.5m
Rosyth Royal
Dockyard
Scheme
–
–
£67.5m
£5.9m
£73.4m
–
£73.4m
Babcock Rail
Ltd section of
the Railways
Pension
Scheme
Other
12.5% 17.5%-48.0%
£2.9m
£0.9m
£1.3m
£1.6m
–
–
£4.2m
£2.5m
£0.7m
£1.1m
£4.9m
£3.6m
Total
–
£23.2m
£111.9m
£16.8m
£151.9m
£8.8m
£160.7m
Where salary sacrifice arrangements are in place, the Group effectively meets the members’ contributions. The above level of funding is
expected to continue until the next actuarial valuation of each scheme; valuations are carried out every three years.
The expected payments from the schemes are primarily pension payments and lump sums. Most of the pensions increase at a fixed rate or
in line with RPI or CPI inflation when in payment. Benefit payments commence at retirement, death or incapacity and are predominantly
calculated with reference to final salary. The levels of deficit contributions reflected above are expected to continue until technical
provisions (self-sufficiency for the Babcock International Group Pension Scheme) funding levels are met either through asset performance
or 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 2021 by independent
qualified actuaries for IAS 19 purposes, on a best estimate basis, using the following assumptions:
March 2021
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 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)
Devonport
Royal
Dockyard
Scheme
2.9%
2.7%
2.0%
3.2%
2.7%
Babcock
International
Group Scheme
2.9%
3.1%
2.0%
3.2%
2.7%
Rosyth Royal
Dockyard
Scheme
2.9%
3.2%
2.0%
3.2%
2.7%
Babcock Rail
Ltd section of
the Railways
Pension
Scheme
2.9%
2.7%
2.0%
3.2%
2.7%
85.7
86.8
2.0%
2.0%
2.4%
2.6%
1.8%
16
85.7
86.8
87.1
87.7
2.0%
2.6%
2.4%
2.6%
1.8%
15
87.1
87.7
84.8
85.9
2.0%
2.8%
2.4%
2.6%
1.8%
17
84.8
85.9
85.9
86.9
2.0%
2.0%
2.4%
2.6%
1.8%
18
85.8
86.9
256
256 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
29. 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:
Fair value of plan assets
Growth assets
Equities
Property funds
High yield bonds/emerging market debt
Absolute return and multi-strategy funds
Low-risk assets
Bonds
Matching assets*
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 defined benefit obligations
Net (liabilities)/assets recognised in the
statement of financial position
2021
2020
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
55.1
437.1
348.4
428.5
1,422.9
1,682.7
(211.2)
4,163.5
100%
–
857.6
1,227.3
2,259.1
4,344.0
12.5
2.1
–
194.5
54.8
1.7
–
265.6
100%
–
126.1
107.4
136.1
369.6
23.0
4.7
–
25.4
83.2
219.5
–
355.8
100%
–
90.6
443.9
348.4
648.4
1,560.9
1,903.9
(211.2)
4,784.9
100%
–
33.7
426.0
75.3
345.0
1,397.4
1,918.7
(206.9)
3,989.2
100%
–
39.5
273.9
51.0
364.4
1,023.2
1,608.6
2,446.2
5,078.0
892.0
863.4
2,035.4
3,790.8
14.0
4.6
–
191.1
30.3
1.4
–
241.4
100%
–
93.1
82.0
122.4
297.5
19.8
4.4
–
22.3
75.0
59.2
–
180.7
100%
–
67.5
435.0
75.3
558.4
1,502.7
1,979.3
(206.9)
4,411.3
100%
–
91.8
45.0
41.0
177.8
1,076.9
990.4
2,198.8
4,266.1
(180.5)
(104.0)
(8.6)
(293.1)
198.4
(56.1)
2.9
145.2
* The matching assets aim to hedge the liabilities and consist of gilts, repos, cash and swaps. They are shown net of repurchase obligations of £2,177 million (2020:
£2,033 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
Curtailment
Total included within operating profit
Net interest (credit)/cost
Total included within
income statement
Principal
schemes
£m
24.1
6.4
1.4
7.5
39.4
(5.2)
2021
Railways
scheme
£m
2.0
0.7
–
–
2.7
1.3
Other
schemes
£m
2.0
0.2
–
–
2.2
(0.1)
Total
£m
28.1
7.3
1.4
7.5
44.3
(4.0)
Principal
schemes
£m
29.5
3.4
–
–
32.9
(1.6)
2020
Railways
scheme
£m
2.5
0.2
–
–
2.7
1.6
Other
schemes
£m
1.7
0.1
–
–
1.8
0.1
Total
£m
33.7
3.7
–
–
37.4
0.1
34.2
4.0
2.1
40.3
31.3
4.3
1.9
37.5
Babcock International Group PLC Annual Report and Financial Statements 2021
257
Babcock International Group PLC Annual Report and financial statements 2021 257
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
29. Retirement benefits and liabilities (continued)
Amounts recorded in the Group statement of comprehensive income
Actual return less interest on pension
scheme assets
Experience gains/(losses) arising on
scheme liabilities
Changes in assumptions on
scheme liabilities
At 31 March
2021
2020
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
224.3
26.3
174.0
424.6
(64.0)
(2.4)
30.3
(36.1)
(33.5)
(0.6)
1.4
(32.7)
(27.8)
–
(1.4)
(29.2)
(638.1)
(447.3)
(72.4)
(46.7)
(188.2)
(12.8)
(898.7)
(506.8)
172.0
80.2
12.1
9.7
(18.9)
10.0
165.2
99.9
Analysis of movement in the Group statement of financial position
2021
2020
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
Curtailment
Settlements
At 31 March
Net (deficit)/surplus at 31 March
3,989.2
91.7
224.3
102.5
0.2
(244.4)
–
4,163.5
3,790.8
24.1
6.4
86.4
0.2
33.5
8.4
629.7
(244.4)
1.4
7.5
–
4,344.0
(180.5)
241.4
5.7
26.3
2.8
–
(10.6)
–
265.6
297.5
2.0
0.7
7.0
–
0.6
(0.6)
73.0
(10.6)
–
–
–
369.6
(104.0)
180.7
3.0
174.0
3.5
–
(5.4)
–
355.8
177.8
2.0
0.2
3.0
–
(1.4)
(0.2)
188.4
(5.4)
–
–
–
364.4
(8.6)
4,411.3
100.4
424.6
108.8
0.2
(260.4)
–
4,784.9
4,266.1
28.1
7.3
96.4
0.2
32.7
7.6
891.1
(260.4)
1.4
7.5
–
5,078.0
(293.1)
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)
–
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)
177.8
2.9
(80.2)
4,266.1
145.2
* Settlement effect in Other schemes is 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 it is neutral in terms of both the income statement and other comprehensive income,
The movement in net deficits for the year ending 31 March 2021 is as a result of the movement in assets and liabilities shown above.
258
258 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
29. Retirement benefits and liabilities (continued)
The changes to the Group statement of financial position at March 2021 and the charges to the Group income statement for the year to
March 2022, 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
2021
£m
5,078.0
(378.1)
378.1
306.0
(279.4)
129.6
(129.6)
57.4
(57.4)
Income
statement
2022
£m
45.5
(11.7)
7.9
8.4
(7.8)
3.0
(3.0)
2.3
(2.3)
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.
30. Movement in net debt
(Decrease)/increase in cash in the year
Cash flow from the decrease/(increase) in debt
Change in net funds resulting from cash flows
Net additional lease obligations
New leases – granted
Transition to IFRS 16
Disposal of subsidiary undertaking
Other non-cash movements
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
2021
£m
(820.9)
1,202.1
381.2
(82.3)
13.9
–
–
(6.2)
44.6
351.2
(1,704.8)
(1,353.6)
2020
restated
£m
1,083.6
(912.3)
171.3
(144.7)
29.9
(640.8)
3.1
1.3
(53.8)
(633.5)
(1,071.1)
(1,704.8)
Babcock International Group PLC Annual Report and Financial Statements 2021
259
Babcock International Group PLC Annual Report and financial statements 2021 259
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
31. Changes in net debt
Cash and bank balances
Bank overdrafts
Cash, cash equivalents and bank overdrafts
Debt
Leases – received
Net debt derivative
31 March
2020
(restated)
£m
1,845.9
(497.2)
1,348.7
(2,540.7)
(689.4)
89.4
Cash flow
£m
(944.4)
123.5
(820.9)
1,129.3
140.6
(52.6)
Additional
leases
£m
–
–
–
–
(91.7)
–
Other non-cash
movement
£m
–
–
–
–
9.4
–
Exchange
movement
£m
3.3
(0.2)
3.1
82.8
18.8
(62.0)
31 March
2021
£m
904.8
(373.9)
530.9
(1,328.6)
(612.3)
(25.2)
Changes in liabilities from financing arrangements
Leases – granted
Net debt before loans to joint ventures and
associates
Loans to joint ventures and associates
Net debt
(3,140.7)
38.6
1,217.3
(14.9)
(1,753.4)
48.6
(1,704.8)
381.5
(0.3)
381.2
(91.7)
13.9
(77.8)
–
(77.8)
9.4
–
9.4
(6.2)
3.2
39.6
1.9
(1,966.1)
39.5
44.6
–
44.6
(1,395.7)
42.1
(1,353.6)
32. Disposal of subsidiaries, businesses and joint ventures and associates
In June 2020 the Group completed the sale of its 74% shareholding in Holdfast Training Services Limited for a cash consideration of £85.0
million which resulted in a loss on disposal of £38.2 million. This loss arose following goodwill allocation of £68.4 million to Holdfast
Training Services Limited upon disposal (using the relative value method), as Holdfast Training Services Limited was integrated into the
Land operating segment.
In September 2020, the Group disposed of Cavendish Nuclear Manufacturing Limited for no consideration which resulted in a loss on
disposal of £0.6 million.
In October 2020, the Group completed the sale of Conbras Servicos Tecnicos de Suporte Ltda for a consideration of £9.7 million which
resulted in a loss on disposal of £10.9 million.
During the previous year 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 paid certain accrued costs on previously disposed of businesses of
£0.8 million.
Goodwill
Investment in joint ventures and associates
Other intangible assets
Property, plant and equipment
Right of use assets
Inventory
Other current assets
Cash, cash equivalents and bank overdrafts
Lease liabilities
Other current liabilities
Taxation
Provisions
Net assets disposed
Disposal costs
Cumulative currency translation loss
Deferred consideration
(Loss)/profit on disposal
Sale proceeds
Sale proceeds less cash disposed of
Less costs paid in the year
Net cash inflow/(outflow)
2021
Holdfast
Training
Services
Limited
£m
68.4
Cavendish
Nuclear
Manufacturing
Limited
£m
–
Conbras
Servicos
Tecnicos de
Suporte Ltda
£m
4.2
53.2
–
–
–
–
–
–
–
–
–
–
121.6
1.6
–
–
(38.2)
85.0
85.0
–
85.0
–
–
–
–
0.5
0.7
0.4
–
(1.0)
–
–
0.6
–
–
–
(0.6)
–
(0.4)
–
(0.4)
–
–
0.8
–
0.1
11.1
3.1
–
(8.2)
–
(2.5)
8.6
1.5
10.5
–
(10.9)
9.7
6.6
(0.6)
6.0
Context
Information
Security
Limited
£m
20.6
2020
Previously
disposed of
business
£m
–
–
–
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.8)
(0.8)
Total
£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
(3.7)
101.6
Total
£m
72.6
53.2
–
0.8
–
0.6
11.8
3.5
–
(9.2)
–
(2.5)
130.8
3.1
10.5
–
(49.7)
94.7
91.2
(0.6)
90.6
260
260 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
33. Transactions with non-controlling interests
There were no material transactions with non-controlling interests in the current or prior year.
34. Contingent liabilities
There are a number of contingent liabilities that arise in the normal course of business. The Group recognises provisions for liabilities when
it is more likely than not that a settlement will be required and the value of such a payment can be reliably estimated.
(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 Royal Rosyth Dockyard
Limited and the MOD dated 30 January 1997. By way of security for the MOD’s rights to such share, the Royal Rosyth Dockyard
Limited 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) As a large contracting organisation, the Group has a significant number of contracts with customers to deliver services and products,
as well as with its supply chain, where the Group cannot deliver all those services and products itself. The Group is involved in disputes
and litigation, which have arisen in the course of its normal trading in connection with these contracts. Whilst the Directors do not
believe that the outcome of these matters will result in any material adverse change in the Group’s financial position, it is possible
that, if any of these disputes come to court, the court may take a different view to the Group.
(d) 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.
35. Capital and other financial commitments
Contracts placed for future capital expenditure not provided for in the financial statements
2021
£m
57.9
2020
£m
14.7
Babcock International Group PLC Annual Report and Financial Statements 2021
261
Babcock International Group PLC Annual Report and financial statements 2021 261
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
36. 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 17.
2021
Joint ventures and associates
Holdfast Training Services Limited
First Swietelsky Operation and Maintenance
Ascent Flight Training (Management) Limited
Ascent Flight Training (Holdings) 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
ABC Electrification Limited
Duqm Naval Dockyard SAOC
2020
Joint ventures and associates
Holdfast Training Services 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
Cavendish Dounreay Partnership Limited
Cavendish Fluor Partnership Limited
Cavendish Boccard Nuclear Limited
2021
Revenue to
£m
2021
Purchases
from
£m
2021
Year-end
debtor
balance
£m
2021
Year-end
creditor
balance
£m
10.8
9.0
2.0
0.3
–
4.0
4.2
2.7
1.3
11.1
3.5
12.2
6.7
–
0.2
68.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.4)
(0.4)
0.2
0.8
0.2
0.1
0.1
–
–
0.2
–
0.1
–
–
0.2
2.5
–
4.4
–
(0.4)
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.4)
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
3.8
3.8
1.9
1.2
11.3
5.0
8.7
6.6
10.2
1.6
132.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.9
0.2
–
0.5
–
–
0.3
0.2
0.2
0.4
–
0.2
–
–
2.9
–
(0.7)
–
–
–
–
–
–
–
–
–
–
–
–
(0.7)
All transactions noted above arise in the normal course of business.
(b) Defined benefit pension schemes.
Please refer to note 29 for transactions with the Group defined benefit pension schemes.
(c) Key management compensation is shown in note 9.
(d) Transactions in employee benefits trusts are shown in note 29.
262
262 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
37. Events after the reporting period
In April 2021, the Group announced a new operating model. The related restructuring will result in an exceptional charge of around £40
million being recognised in the 2022 financial year.
In the year ended 31 March 2020, the Lazio Regional Administrative Court confirmed a €51 million fine issued by the Italian Competition
Authority to our subsidiary, Babcock Mission Critical Services Italia SpA (BMCS Italia), for certain anti-trust violations. In July 2021, the
Council annulled the fine, though allowing the Authority leave to re-calculate it. As a result we have reduced the provision to £20 million,
being management’s best estimate. Further information is detailed in note 3.
Babcock International Group PLC Annual Report and Financial Statements 2021
263
Babcock International Group PLC Annual Report and financial statements 2021 263
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
38. 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
2021 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 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 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 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 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
Orange Point Building, Second Floor, Dun Karm
Street, Birkirkara By-Pass, Birkirkara BKR 9037, 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 Integrated Technology (Korea)
Limited
Babcock Integrated Technology GmbH
Am Zoppenberg 23, 42366 Schwalmtal, 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
21 Rue Leblanc 75015, Paris, France
Babcock International France Terre SAS
21 Rue Leblanc 75015, Paris, France
Babcock International Holdings BV
Bezuidenhoutseweg 1, 2594 AB The Hague,
The Netherlands
Babcock International Holdings Limited2
Orange Point Building, Second Floor, Dun Karm
Street, Birkirkara By-Pass, Birkirkara BKR 9037, Malta
Babcock International Italy S.p.A.
Piazza Castello no.26 – 20121 Milan, Italy
Babcock International Limited5
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
264
264 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
38. 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 Defence 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
Orange Point Building, Second Floor, Dun Karm
Street, Birkirkara By-Pass, Birkirkara BKR 9037, Malta
Babcock Malta Finance Limited3
Orange Point Building, Second Floor, Dun Karm
Street, Birkirkara By-Pass, Birkirkara BKR 9037, Malta
Babcock Malta Holdings (Number Two)
Limited3
Orange Point Building, Second Floor, Dun Karm
Street, Birkirkara By-Pass, Birkirkara BKR 9037, Malta
Babcock Malta Holdings Limited3
Orange Point Building, Second Floor, Dun Karm
Street, Birkirkara By-Pass, Birkirkara BKR 9037, 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 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.
Corso Vercelli, 40, 20145, Milano, Italy
Babcock Technical Services Limited*
Babcock Training Limited
Babcock UK Finance
Babcock International Group PLC Annual Report and Financial Statements 2021
265
Babcock International Group PLC Annual Report and financial statements 2021 265
Strategic reportGovernanceFinancial statements
Notes to the Group financial statements continued
38. 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
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 Topco Limited5
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
Chepstow Insurance Limited
PO Box 155, Mill Court, La Charroterie, St Peter Port,
GY1 4ET, Guernsey
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
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 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
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
Touchstone Learning & Skills Ltd*
Vosper Thornycroft (UK) Limited
Westminster Education Consultants
Limited*
266
266 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
38. Group entities (continued)
Subsidiaries, partly owned:
Airwork Technical Services & Partners LLC
(51.0%)
PO Box 248 (Muaskar Al Murtafa’a (MAM) Garrison),
Muscat, 100, Sultanate of Oman
Babcock Africa (Pty) Limited (90.0%)7
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock Africa Holdings (Pty) Ltd (90.0%)14
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock Africa Services (Pty) Ltd (90.0%)
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock Aviation Services Holdings
International Limited (49.82%)14
52 St Christopher Street, Valletta, VLT 1462, Malta
Babcock Denmark A/S (49.82%)14
Esberg Business Park, John Tranums, Vej 23, 6705,
Esbjerg, Denmark
Babcock Dyncorp Limited (56.0%)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%)
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, Spain
Babcock Financial Services (Pty) Ltd
(90.0%)
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
(90.0%)
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%)
Partida La Almaina, nro. 92, 03110, Mutxamel,
Alicante, 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 (90.0%)
Av. Samora Machel 3380/1, Mozambique
Babcock Namibia Services Pty Ltd (90.0%)
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 (90.0%)
4th Floor, Consulting House, Broadway, Ndola,
Zambia
Cognac Formation Aero (90.0%)
Base Aérienne 709 Cognac 16100 Châteaubernard,
France
INAER Helicopter Peru S.A.C.
(In liquidation) (70.0%)
Av. De La Floresta No 497 Int., Lima, Peru
National Training Institute LLC (70.0%)
PO Box 267, MadinatQaboos, Sultanate of Oman,
115 Oman
Babcock International Group PLC Annual Report and Financial Statements 2021
267
Babcock International Group PLC Annual Report and financial statements 2021 267
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:
Babcock Careers Guidance Limited6;
Babcock Careers Management Limited3;
Babcock Environmental Services Limited;
Babcock Lifeskills Limited; Capital Careers
Limited (88.3%); Cura Classis UK (Hold Co)
Limited (48.0%); F N Consultancy Limited;
FNC Group Limited; FNCG 2019 Limited;
Surrey Careers Services Limited (94.1%)5;
UKAEA Limited.
Wholly owned subsidiaries with registered
office at 55 Baker Street, London, W1U
7EU, United Kingdom, currently in
Members Voluntary Liquidation:
2019 S&H Limited; Babcock Civil
Infrastructure Limited; Babcock
Infrastructure Holdings LLP; BIL Solutions
Limited; Bond Aviation Leasing Limited; INS
Innovation Limited; Scimco Limited.
Wholly owned subsidiaries with pending
applications for voluntary strike off under
s1003 of the Companies Act 2006:
Babcock Power Maintenance Limited; First
Projects Limited; Transfleet Distribution
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.
16. Year end 30 June.
38. Group entities (continued)
Joint ventures and associates
(equity accounted):
ABC Electrification Ltd (33.3%)12
8th Floor, The Place, High Holborn, London,
WC1V 7AA
AirTanker Holdings Limited (15.4%)
Airtanker Hub RAF Brize Norton, Carterton,
Oxfordshire, England, OX18 3LX, United Kingdom
AirTanker Services Limited (23.5%)15
Airtanker Hub RAF Brize Norton, Carterton,
Oxfordshire, England, OX18 3LX, United Kingdom
ALC (Superholdco) Limited (50.0%)16
3rd Floor, Chancery Exchange, 10 Furnival Street,
London, England, EC4A 1AB, United Kingdom
Alert Communications Group Holdings
Limited (20.0%)
Ascent Flight Training (Holdings) Limited
(50.0%)
Cavendish Boccard Nuclear Limited
(51.0%)
Cavendish Dounreay Partnership Limited
(50.0%)12
Cavendish Fluor Partnership Limited
(65.0%)
Debut Services (South West) Limited
(50.0%)
20 Triton Street, Regent’s Place, London, NW1 3BF,
United Kingdom
Duqm Naval Dockyard SAOC (49.0%)
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 (50.0%)2
Kintail House, 3 Lister Way, Hamilton International
Park, Blantyre, G72 0FT, Scotland
Naval Ship Management (Australia) Pty Ltd
(50.0%)
Level 10, 40 Miller Street, North Sydney NSW 2060,
Australia
Okeanus Vermogensverwaltungs GmbH &
Co. KG (50.0%)
Vorsetzen 54, 20459, Hamburg, Germany
268
268 Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
Company statement of financial position
As at 31 March
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
2021
£m
2020
£m
5
2,466.5
2,466.5
6
7
7
9
3,764.7
115.0
3,944.1
865.0
(2,270.6)
1,609.1
4,075.6
(2,482.7)
2,326.4
4,792.9
(1,322.4)
2,753.2
(2,054.0)
2,738.9
303.4
873.0
30.6
768.8
777.4
2,753.2
303.4
873.0
30.6
768.8
763.1
2,738.9
The accompanying notes are an integral part of this Company statement of financial position. Company number 02342138.
The Company has taken advantage of the exemption granted by Section 408 of the Companies Act 2006 whereby no
individual income statement of the Company is disclosed. The Company’s profit for the financial year was £30.5 million (2020:
£143.9 million).
The financial statements on pages 269 to 270 were approved by the Board of Directors on 30 July 2021 and are signed on its behalf
by:
Davi Lod
Director
ckwood OBE
David Mellors
Director
Babcock International Group PLC Annual Report and Financial Statements 2021
269
Babcock International Group PLC Annual Report and financial statements 2021 269
Strategic reportGovernanceFinancial statements Company statement of changes in equity
At 31 March 2019
Profit for the year
Other comprehensive income
Total comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Own shares
Net movement in equity
At 31 March 2020
Profit for the year
Other comprehensive income
Total comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Own shares
Net movement in equity
At 31 March 2021
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
767.6
143.9
1.8
145.7
(152.1)
2.9
1.9
(2.9)
(4.5)
763.1
30.5
(19.5)
11.0
–
3.2
2.3
(2.2)
14.3
777.4
Total
equity
£m
2,743.4
143.9
1.8
145.7
(152.1)
2.9
1.9
(2.9)
(4.5)
2,738.9
30.5
(19.5)
11.0
–
3.2
2.3
(2.2)
14.3
2,753.2
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.
270
270
Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
Notes to the Company financial statements
1. General information
Babcock International PLC is incorporated and domiciled in England, 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 the Companies Act 2006 as applicable to companies using 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 year).
• 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 2020:
• IAS 1, ‘Presentation of Financial Statements’ and IAS 8, ‘Accounting policies, changes in accounting estimates and errors’. Amendment
effective from 1 January 2020. The amendment related to the definition of material.
• IFRS 3, ‘Business Combinations’, amendment effective 1 January 2020. The amendment related to the definition of a business.
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.
271
Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
271
Strategic reportGovernanceFinancial statements
Notes to the Company financial statements continued
2. Significant accounting policies (continued)
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 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.
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 year 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 28 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 28 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 29 to the Group financial statements for further details.
Financial instruments
(a) Financial assets and liabilities at amortised cost
Amounts due from subsidiary undertakings and preference shares in subsidiary undertakings are classified as financial assets held at
amortised cost. Amounts due to subsidiary undertakings and bank loans and overdrafts are classified as financial liabilities held at
amortised cost. These balances are initially recognised at fair value and then held at amortised cost using the effective interest
rate method.
The Company assesses on a forward-looking basis the expected credit losses associated with financial assets held at amortised cost. The
impairment methodology applied depends on whether there has been a significant increase in credit risk.
(b) Derivative financial instruments
Derivatives are initially recognised at fair value on the date a derivative is entered into and are subsequently remeasured at their fair
value. The Company designates certain of the derivative instruments within its portfolio to be hedges of the fair value of recognised assets
or liabilities or unrecognised firm commitments.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement,
together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
For derivatives that qualify as cash flow hedges, gains and losses are deferred in equity until such time as the firm commitment is
recognised, at which point any deferred gain or loss is included in the assets’ carrying amount. These gains or losses are then
realised through the income statement as the asset is sold.
Certain derivatives do not qualify or are not designated as hedging instruments and any movement in their fair value is recognised in
profit or loss immediately.
272
272
Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
2. Significant accounting policies (continued)
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 year 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. The key assumptions about the future, and other key sources of
estimation uncertainty at the reporting year end that may have a significant risk of causing a material adjustment to the carrying amount
of assets and liabilities within the next financial year are discussed below:
Impairment of investment in subsidiaries
The carrying value of investment in subsidiaries is tested annually for impairment, in accordance with IAS 36. The impairment assessment
is based on assumptions in relation to the cashflows expected to be generated by the subsidiaries, together with appropriate discounting
of the cashflows. Note 5 provides information on key assumptions and sensitivity analyses performed.
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 £0.7 million
(2020: £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 £2.9 million (2020: £4.3 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 £0.1 million (2020: £0.4 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 £0.1 million (2020: £0.4 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
Investment in subsidiary undertaking
Preference shares in subsidiary undertaking (note 6)
Total investment in subsidiary undertaking
2021
£m
2,466.5
918.0
3,384.5
2020
£m
2,466.5
981.9
3,448.4
At 31 March 2021, the investment in subsidiary undertakings was tested for impairment in accordance with IAS 36. Management
identified that the Group’s market capitalisation of £1,155.7 million at 31 March 2021 was less than the carrying value of the Company’s
investment in subsidiary undertakings of £3,384.5 million at 31 March 2021 and that this represented an impairment indicator.
This impairment test did not result in an impairment of the total investment in subsidiary undertakings.
Impairment methodology
Cash-generating units
The CGU for the purpose of this analysis is the Group as a whole, as the Company has an investment in a single holding company through
which it indirectly owns the rest of the Group. The recoverable amount of the CGU is the higher of its value-in-use and its fair value less
costs of disposal.
Calculation of recoverable amount
The recoverable amount of the Company’s investment in subsidiary undertakings was assessed by reference to value-in-use calculations.
Note 13 of the Group financial statements sets out further details in relation to how the value in use calculations are determined.
Babcock International Group PLC Annual Report and Financial Statements 2021
273
Babcock International Group PLC Annual Report and financial statements 2021 273
Strategic reportGovernanceFinancial statements
Notes to the Company financial statements continued
5. Investment in subsidiary undertakings (continued)
Key assumptions
The key assumptions to which the recoverable amount of the Company’s investment in subsidiary undertakings is most sensitive are future
cash flows, long-term growth rates and discount rates. Further details on how these inputs are determined are set out in note 13 of the
Group financial statements. The value in use calculations do not include the anticipated benefits of the Group’s revised operating model
or the implementation costs of this project reflecting that the Group was not committed to the project at 31 March 2021.
The discount rates and long-term growth rates used to determine the recoverable amount of the Company’s investment in subsidiary
undertakings is set out below.
Pre-tax discount rate
Post-tax discount rate
Long-term growth rate
Aviation
12.0
9.0
2.0
2021
Land
11.0
8.25
2.0
Marine
11.0
8.25
2.0
Nuclear
11.0
8.25
2.0
Aviation
10.9
8.9
2.0
2020
Land
10.0
8.2
2.0
Marine
10.0
8.2
2.0
Nuclear
10.0
8.2
2.0
The Aviation operating segment discount rate includes a premium of 1% in relation to risks specific to this operating segment. The
discount rates were not adjusted for the gearing impact of IFRS 16, reflecting that the impairment test is considering the recoverability of
the Company’s investment in subsidiary undertakings, which is carried at cost less impairment.
Sensitivity
The recoverable amount, headroom and carrying value of the Company’s investment in subsidiary undertakings are set out in the
table below:
£m
Carrying value
Headroom
Recoverable amount
2021
£m
3,384.5
50.6
3,435.1
The Directors carried out sensitivity analyses on the reasonably possible changes in key assumptions used to determine the recoverable
value of the Company’s investment in subsidiary undertakings.
The Company’s calculation of recoverable value presents a headroom of £50.6 million. Accordingly, reasonably possible changes in
estimates could give rise to a material impairment in the following year. The Company carried out sensitivity analyses on the reasonably
possible changes in the discount rate and long-term growth rate used in the value-in-use models for each of the operating segments and
the results are set out in the table below:
Pre-tax discount rate
Increase of 100bps
Long-term growth rate
Decrease of 50bps
2021
£m
300.5
115.8
The Directors consider that key cash flow assumptions in the calculation of the recoverable value of the Company’s investment in
subsidiary undertakings include the retention of a key contract in the Marine operating segment which is due for renewal in two years.
Failure to retain this contract would reduce the recoverable value of the investment in subsidiary undertaking by £66 million. Additionally,
a reduction of £5 million in annual operating profits in the Aviation operating segment, as a result of failure to deliver forecast cost
savings from FY23, is considered plausible and would result in a reduction of £51 million in the recoverable value of the Company’s
investment in subsidiary undertakings. A further key assumption relates to the retention of existing business in the Land operating
segment. A reduction in annual operating profit of £5 million in relation to this is considered to be plausible from FY25, and would result
in a reduction in the recoverable value of the Company’s investment in subsidiary undertakings of £43 million.
274
274
Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
6. Trade and other receivables
Amounts due after one year
Amounts due from subsidiary undertakings
Other debtors
Amounts due within one year
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
2021
£m
351.4
–
351.4
2,472.7
918.0
–
6.2
16.4
3,413.3
3,764.7
2020
£m
351.9
0.1
352.0
2,489.7
981.9
104.7
2.8
13.0
3,592.1
3,944.1
There are no material provisions held against trade and other receivables under the expected credit loss model. Amounts due from
subsidiary undertakings that do not carry interest are repayable on demand.
Based on the investment in subsidiary undertakings impairment analysis above, the Company does not consider that there was an
increased credit risk in relation to amounts due from subsidiaries. The Group concluded that the credit risk for intercompany balances is
low as the borrower has a strong capacity to meet the contractual cash flow obligations in the near term and adverse changes in
economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its
contractual cash flow obligations.
Of the preference shares in a subsidiary undertaking, the B preference shares of USD500 million mature by mutual agreement of both
parties 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 + 4.0%, and with a maturity date of 29 July 2021.
Interest rates on amounts owed by subsidiary operations:
EURIBOR + 4.0%
EURIBOR + 2.0%
GBP LIBOR + 4.0%
GBP LIBOR + 5.0%
USD LIBOR + 4.0%
STIBOR + 4%
BBSW + 4.0%
NIBOR + 4.0%
4.5%
5.4%
Interest-free
Non-current
Current
2021
£m
78.4
12.1
84.0
140.0
5.8
1.8
12.8
14.6
–
1.9
–
351.4
2020
£m
81.9
12.4
73.5
140.0
18.0
–
11.5
12.8
–
1.8
–
351.9
2021
£m
88.1
–
51.4
–
1.5
7.2
3.3
15.0
100.8
–
2,205.4
2,472.7
2020
£m
58.3
–
51.4
–
1.7
14.0
2.9
8.1
100.8
–
2,252.5
2,489.7
Babcock International Group PLC Annual Report and Financial Statements 2021
275
Babcock International Group PLC Annual Report and financial statements 2021 275
Strategic reportGovernanceFinancial statements
Notes to the Company financial statements continued
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
2021
£m
2020
£m
198.3
2,059.3
4.8
8.2
2,270.6
547.7
1,821.9
104.7
8.4
2,482.7
1,283.1
39.3
–
1,322.4
2,030.6
23.1
0.3
2,054.0
The Company has £2,011.3 million (2020: £2,554.6 million) of committed borrowing facilities, of which £1,293.1 million
(2020: £2,443.1 million) was drawn at the year end.
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
2021
%
1.1
0.5
–
–
1.8
2.9
2.8
1.9
2020
%
1.1
0.5
6.0
2.8
1.8
2.9
2.8
1.9
The amounts due to subsidiary undertakings are repayable on demand and £2,059.3 million (2020: £1,821.9 million) is interest-free.
8. Other financial assets and liabilities
The notional principal amount of outstanding interest rate swap contracts at 31 March 2021 included interest rate swaps in relation to
€550 million (2020: €550 million) Euro to Sterling 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 174 to 268.
276
276
Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
9. Share capital
Allotted, issued and fully paid
At 1 April 2020 and 31 March 2021
Allotted, issued and fully paid
At 1 April 2019 and 31 March 2020
Ordinary shares
of 60p
Number
Total
£m
505,596,597
303.4
505,596,597
303.4
10. Contingent liabilities
(a) The Company has guaranteed or has joint and several liability for bank facilities with nil utilisation at 31 March 2021 (2020: 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 2021 these amounted to £329.7 million
(2020: £340.7 million), of which the Company had counter-indemnified £307.1 million (2020: £302.6 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 38 of the Group financial statements for further details.
12. Events after the reporting period
In July 2021, the Company and the counterparty agreed to extend the maturity date of the B preference shares by 12 months. The
amounts and terms and conditions attached to the B preference shares are unchanged.
Babcock International Group PLC Annual Report and Financial Statements 2021
277
Babcock International Group PLC Annual Report and financial statements 2021 277
Strategic reportGovernanceFinancial statements
31 March 2021
30 July 2021
22 September 2021
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
Shareholder information
Financial calendar
Financial year end
2020/21 full-year results announced
Annual General Meeting
Registered office and
company number
33 Wigmore Street
London, W1U 1QX
Registered in England
Company number 02342138
Registrars
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds, LS1 4DL
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 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
278
278
Babcock International Group PLC Annual Report and financial statements 2021
Babcock International Group PLC Annual Report and Financial Statements 2021
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
compliance with any legislation or industry standards.
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
B
a
b
c
o
c
k
I
n
t
e
r
n
a
t
i
o
n
a
l
G
r
o
u
p
P
L
C
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
2
0
2
1