Building
momentum
Annual Report and Financial Statements 2023
Strategic Report
1
2
4
6
8
10
12
18
20
22
24
40
40
44
48
52
Financial highlights
At a glance
Our ways of working
Our strategy
Innovation and technology
Chair's statement
CEO review
Market review
Business model
Key performance indicators
Financial review
Operational review
Marine
Nuclear
Land
Aviation
Stakeholder engagement and
s172(1) statement
ESG strategy
Environmental
Social
Governance
Non-financial information statement
Principal risks and management controls
56
58
63
74
83
86
87
104 Going concern and viability statement
Governance
106 Chair’s introduction
108 Board of Directors
110 Board leadership and company purpose
116 Division of responsibilities
118 Composition, succession and evaluation
122
124 Audit committee report
131 Remuneration
131
153 Other statutory information
158 Directors’ responsibility statement
Remuneration Committee report
Nominations Committee report
Financial Statements
Independent auditor’s report to the members
of Babcock International Group PLC
159
175 Group financial statements:
Group income statement
175
Group statement of comprehensive income
175
Group statement of changes in equity
176
Group statement of financial position
177
Group cash flow statement
178
179
Notes to the Group financial statements
243 Company financial statements:
243
244
245
252 Shareholder information
Company statement of financial position
Company statement of changes in equity
Notes to the Company financial statements
Babcock
Creating a safe and secure world,
together
From submarines beneath the waves
to secure communications in space,
Babcock plays a critical role in
international defence.
In a world of significant geopolitical
instability, national security has never
been more important. Governments
are having to balance rising costs with
a pressing need for greater and more
robust defence and international
collaboration. Ensuring those critical
services are readily available, affordable
and long-lasting is a vital task. Now more
than ever, what we do matters.
No-one is closer to our customers, or
as dedicated to their cause. We make
their mission, our mission; delivering the
capability they need, available to them
wherever and whenever and however
they need it. Whether it’s applying
engineering excellence or the latest
technology, we combine our expertise
with a practical mindset.
Our transformation is delivering results;
we are stronger, more resilient and
more disciplined, with the right platform
to deliver sustainable, profitable growth.
Our customers, and the mission we
share, inspire us each and every day to
strive for excellence as we create a safe
and secure world, together.
Scan here to watch
our Purpose film
Strategic report
Governance
Financial Statements
2023 financial highlights
Revenue
£4,439m
Statutory operating
profit
£46m
Underlying operating
profit*
£178m
2022: £4,102m
2022: £227m
2022: £238m
Statutory cash
generated from
operations
£349m
2022: £42m
Underlying
free cash flow*
Net debt/EBITDA
(covenant basis)*
£75m
2022: £(191)m
1.5x
2022: 1.8x
* Underlying operating profit, underlying free cash flow and net debt/EBITDA (covenant basis) are defined as Alternative Performance Measures, please see below.
2023 strategic highlights
Completed portfolio
realignment programme,
Group revenues now over
two thirds defence
Further investment in
improving the control
environment and project
risk management
Progressed delivery of
our ESG strategy and
commitments
Integrated ESG into our
long-term planning
process and performance
framework
Published capital
allocation policy with a
commitment to reinstate
a dividend in FY24
Confidence in
achievements to date
and our future has
enabled us to set medium
term guidance
Adjustments between statutory and underlying
Forward-looking statements
The Group provides alternative performance measures, including underlying
operating profit, underlying free cash flow and net debt to EBITDA, to enable
users to better understand the performance and earnings trends of the Group.
These measures are considered to provide a consistent measure of business
performance from year to year. They are used by management to assess
operating performance and as a basis for forecasting and decision-making,
as well as the planning and allocation of capital resources. They are also
understood to be used by investors in analysing business performance. The
Group has defined and outlined the purpose of its alternative performance
measures (APMs) in the Financial Glossary on page 38.
The Group’s APMs are not defined by IFRS and are therefore considered to be
non-GAAP measures. The measures may not be comparable to similar measures
used by other companies and they are not intended to be a substitute for, or
superior to, measures defined under IFRS. The Group’s APMs are consistent with
the year ended 31 March 2022, with the addition of excluding the Type 31 loss.
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.
Babcock International Group PLC / Annual Report and Financial Statements 2023
1
At a glance
Our business today
Creating a safe and secure world, together
Babcock is an international defence company operating in our focus countries of the UK, Australasia, Canada, France and South
Africa, with exports to additional markets with potential to become focus countries. We meet our customers’ key requirements of
affordability, availability, and capability.
What we do
We provide frontline and equipment support, training, product design, manufacture
and integration, and technology and systems to defence, security and civil markets.
Support
We provide through-life technical and engineering support for our customers’ assets,
delivering improvements in performance, availability and programme cost. We deliver
complex programme support to defence and civil customers, including frontline support,
equipment support and technical training for naval, land, air and nuclear sectors.
Product
We design and manufacture a range of specialist defence and civil equipment, from ships
and submarine components to liquid gas systems and weapons handling systems. We also
provide integrated, technology-enabled solutions to our defence customers in areas such
as secure communications, electronic warfare and air defence.
We deliver effective and adaptable solutions that optimise capability, availability
and affordability through our four sectors, Marine, Nuclear, Land and Aviation.
Where we operate
Availability
Affordability
Capability
Key
Focus country
Additional markets
FY23 global revenue profile*
UK
67%
ANZ
8%
SA
7%
FRA
4%
CAN
3%
ROW
11%
£4.0bn
FY23 revenue*
68%
Defence*
>26,000
Employees
£9.5bn
Contract backlog
* We present FY23 revenue and splits excluding divested businesses (c.£420 million) to better reflect the Group today.
2
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Delivered across our four sectors
Marine
36% of FY23 revenue*
• UK and international warship through-life support: design,
build, assemble, maintain, upgrade
• International submarine through-life support
• Global naval exports: ship design, military equipment
and engineering support
• Energy and marine equipment and support
• Digital defence, communication and mission systems
Nuclear
29% of FY23 revenue*
• Support all UK nuclear submarines and infrastructure
• Own or manage key infrastructure and naval bases
• Nuclear submarine dismantling
• UK civil nuclear new build, generation support
and decommissioning projects
• UK and international nuclear services
Land
25% of FY23 revenue*
• Asset management and engineering support for British
Army vehicles
• Technical training and support for the British Army
• Emergency services technical training and fleet
management
FY23 revenue profile
£1.4bn
77% Defence
53% UK
23% Civil
47% International
FY23 revenue profile
£1.2bn
86% Defence
100% UK
14% Civil
0% International
FY23 revenue profile*
£1.0bn
• South Africa engineering and equipment businesses
35% Defence
60% UK
• Digital defence communications
65% Civil
40% International
Aviation
10% of FY23 revenue*
• UK and French pilot training and support
• Military aircraft engineering and airbase support
• Military and emergency services aircraft maintenance,
repair and overhaul
• Air ambulance, search and rescue and firefighting services
in our focus countries
FY23 revenue profile*
£0.4bn
63% Defence
36% UK
37% Civil
64% International
Strategy and
business model
Market review
Our ways
of working
ESG strategy
See pages 6 and 20
See page 18
See page 4
See page 58
* We present FY23 revenue and splits excluding divested businesses (c.£420 million) to better reflect the Group today.
Babcock International Group PLC / Annual Report and Financial Statements 2023
3
Our ways of working
Driving operational excellence
Introduction of ‘Blueprint of Control
Improvements’ covering over 500
improvement actions.
Appointment of new Group Director of Internal
Audit, Risk Assurance & Insurance.
Establishment of new Risk Committee to provide
executive leadership and oversight of risk
management.
Completion of a global banking services transition,
including reduction in number of bank accounts.
Upgrade in Treasury and Tax capability and
strengthening of the Finance function.
See pages 87, 88, 89 and 125
Focused business
Launched a global Business
Management System to standardise
processes across the Group
Global project management framework launched,
defining and standardising categorisation.
New Babcock role framework, providing
standardisation and clear job progression pathways.
Agile working framework and new Delegation of
Authority matrix embedded across Group.
See pages 13, 78 and 107
Enhanced internal controls
Completed portfolio realignment to
simplify and focus on core defence
business and adjacent markets
Strengthened balance sheet with a reduction in net
debt of c.£400 million.
Embedded Group-wide operating model, including
global functions.
Implemented global procurement risk management
process, including robust category management
and tool to assess risk on delivery and cost.
See page 12
Standardised processes
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
In FY23 we invested in controls and process improvements to realise efficiencies,
increase resilience, and improve delivery and risk management
Clear ‘tone from the top’ driven
by our Purpose and Principles
Conducted first global people survey for
over a decade.
Consistent people plans in place at Group,
Sector, Country and business unit level.
Launched programme to define leadership
expectations, piloted frontline leader module.
Strengthened corporate culture
Developed reward benchmarking toolkit.
See pages 75, 78 and 82
Enhanced reporting on progress
against targets to Board.
Drive to achieving Net Zero by 2040 across
our estates and operations underway.
Introduced new Employee Assistance
Programme provider.
Launched new Sponsorship and Employee
Volunteering policies.
Climate-related risk assessment integrated
into five-year plan
See page 58, 60, 68, 80 and 107
300
200
100
0
Focus on ESG
New commercial function with a
focus on optimising commercial risk
management.
Standardisation of commercial and operational
reviews, including financial and accounting impacts
and 12-monthly rolling forecast.
Deep dive/assurance reviews on significant contracts.
Regular engagement with customers and supply
chain, including via Strategic Partnering Programme.
See pages 13, 56, 88 and 93
Babcock International Group PLC / Annual Report and Financial Statements 2023
5
More responsive
contract management
Our strategy
Our strategy
Strategic framework
Purpose
To create a safe and secure world, together.
Strategy
Our growth strategy is focused on three key areas:
Leverage our technical capability in
growth areas of defence and security
Build strategic partnerships with
our key customers
• Grow internationally, both in
• Work with our customers to deliver
our focus markets and through
export opportunities
• Grow our UK business through
increased scope and market share
critical solutions
• Develop innovative solutions to
solve complex challenges faced
by our customers
Deliver our ESG objectives
• Progress our five ESG priorities and
apply our framework for integrating
sustainability into growth
• Promote vital the role of defence and
national security aligned with ESG
How we deliver
We deliver our strategy through the provision of a range of support and product solutions
Support
Product
Deliver technical support and critical services
to our defence and civil customers
Design, manufacture and integrate
specialist systems
Frontline support
Equipment support
Training
Design, develop
and manufacture
Technology and
systems integration
Through our four sectors
Our capabilities span four key markets, with around 70% of our business in defence
Marine
Nuclear
Land
Aviation
See page 40
See page 44
See page 48
See page 52
Our strategy aims to deliver
Over the medium and long-term, we are focused on delivering value for all our stakeholders
Improved outcomes
for our customers
A better place
to work
Returns for
our shareholders
6
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Strategic progress
Two years into our turnaround – building momentum
FY26+
Stabilise
Portfolio alignment
complete
FY23 Net debt
to EBITDA
1.5x
110%
Execute
Driving operational
improvement
FY23 cash conversion*
Grow
Pursuing growth
opportunities
FY23 organic revenue growth
*Excluding the Type 31 loss
10%
Strategic near-term priorities
Pursue growth
opportunities
Drive operational
improvements
Focus on
cash flow
• International land & aviation support
• Improve programme execution
• Optimise cash flow in bids
• Global naval strategies incl. AUKUS
• Enhance processes and controls
• Improve cash efficiency in portfolio
• Defence digital & systems integration
• Improve profitability
• Deliver consistent cash conversion
Organic revenue
growth
Linked to our medium term guidance and KPIs
Underlying
operating margin
Underlying
free cash flow
Our strategy in action in FY23
• Ukraine MRO & France aviation support
• DSG improved contract performance
• Australian defence comms cash profile
• Poland MIECZNIK & AUKUS positioning
• Project management framework launch
• Normalised working capital
• UK Skynet & Australia defence comms
• Culture focus through employee survey
• 110% cash conversion (excl. Type 31 loss)
Babcock International Group PLC / Annual Report and Financial Statements 2023
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Innovation and technology
Technology-led solutions
The environment in which we work is
increasingly digital, which brings both
challenges and opportunities. It’s a landscape
Babcock understands, allowing us to plan,
compete and work in partnership with our
customers for our joint success.
As a Group we will continue to focus on growing and developing
our data and digital solutions, building on the progress made in areas
including Advanced and Additive Manufacturing, synthetics and
simulation technology and our Autonomous Systems programmes.
It isn’t just about the technology. Over the past year we have worked
hard to create a better culture around our digitally engaged
workforce. After all, it is our people using the technology who will
make the difference.
Data & Digital
We will continue to invest in digital and data solutions to maximise
the information advantage these technologies can bring. They will
help us meet the complex engineering challenges our customers
face, whether it is digitising or even retrofitting digital twins onto
legacy assets or managing satellites in space.
Alongside our deep engineering experience, digital and data
technologies will allow us to better understand, predict and
enhance the performance of the assets we manage, make better
engineering decisions, reduce risk and improve service delivery.
We are already delivering this for our customers across contracts
such as the Future Maritime Support Programme and DSG.
Digital Facility
This year we completed the first phase of our digital advanced
manufacturing facility at Rosyth, a major project milestone.
This will give Babcock a world-class digital shipbuilding facility,
but our vision is for this to grow and become a blueprint for how
we adapt our other sites around the world.
Improvements we have made include shop floor digitisation and
digitally integrating a complete IT infrastructure network. This will
significantly improve operational efficiencies, again driving costs
down for our customer, and reducing our carbon footprint.
We have introduced mobile devices linked to enterprise resource
planning (ERP) and Product Data Model data so we can provide
real-time quality assurance and completions management, putting
our people at the centre of our technology journey. Getting the
right data into the right hands is critical for businesses like ours.
The digital facility allows our operators to have information at the
point of use, driving a much more efficient solution for our customers.
We have introduced a state-of-the-art digitally enabled panel line,
including robotic welding and vision scanning systems. The panel line
is fully connected to the design 3D model and single planning tool to
optimise the operation of the individual production units in the panel
line, driving increased throughput and lower waste volumes whilst
delivering engineering excellence.
We have also invested in a T-Beam machine at Rosyth that can
robotically weld a 3.7 tonne beam in 20 minutes, resulting in a 300%
productivity increase. Investing in digital technology this way also
provides a safer working environment for our people who can now
operate the technology remotely.
Over the next year we will look to invest in specialist co-bot
technology to further develop our automation welding processes,
whilst retaining the deep engineering skillset of our people.
Advanced analytics to adaptive learning
We believe a major area of future growth is in our training business
where data management, analysis and collaboration are becoming
an increasingly critical factor.
Not only is the battlespace landscape evolving, the roles of people
manning submarines, on the frontline or piloting fighter jets are also
evolving. This is an exciting area which brings together the latest R&D
and cutting-edge technologies, such as sensors on soldiers and AI to
adapt learning to the individual. Combining the advanced analytics
from the sensors with the technology skills of our people means we
can begin to analyse and understand human performance. Having the
ability to understand and translate this type of data allows the
possibility of responding in real-time to critical human conditions
such as fatigue and stress.
The opportunities are significant; not just in our delivery of existing
contracts such as our support of the London Fire Brigade, but in
positioning us for future ones such as becoming the UK Ministry of
Defence’s Collective Training Transformation Partner.
Future
Given the scale and complexity of the contracts and assets we
manage, data exploitation, integration and intelligence will be a key
part of our journey along with human performance. We have recently
invested in a data integration platform which will allow us to deliver
a vast array of digital services and solutions to drive increased
efficiencies in time and money.
In line with our customer’s strategic goals we are transitioning to a
cloud-based system where our businesses can self-deliver data-driven
solutions. This is expected to reduce the time and cost spent managing
and integrating data from previous systems. The foundations we are
laying today will position Babcock as a technology-led data-driven business
backed by a strong digital culture and a digitally engaged workforce.
Benefits
• Delivery of data insights more cost effectively and at pace, as we
realise the benefits more quickly for ourselves and our customers
• Increased opportunities for our employees, as we create highly
skilled jobs and a digitally enabled workforce
• Increased data intelligence, enabling us to increase platform
and system availability
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Advanced Manufacturing
Autonomous Systems & automation
In addition to the digital facility at our site in Rosyth, we continue
to build on the successes of the past year. In January we became
the Ministry of Defence’s first supplier of 3D metal printed parts
used to sustain vehicles in the British Army’s active armoured fleet.
This was a major milestone for Babcock and the customer in tackling
the growing challenges of technical and commercial obsolescence.
As a result, we have established a new Materiel Availability Services
team in our Land sector, striving to ensure more materiel is in the
right place at the right time.
Digital solutions such as advanced and additive manufacturing are
becoming increasingly significant for Babcock in the management
of complex, critical, legacy, and low-volume assets. Printing parts in
this way supports our sustainability journey as we realise the benefits
of reduced inventory holding and energy consumption.
We are excited about the future of Autonomous Systems as we
explore the development of new types of uncrewed vehicles.
Over the coming year we will work closely with industry and
academic partners to develop intellectual property (IP) alongside
new and disruptive technology applications, where we are seeing
significant demand both in the UK and overseas.
We were the first major defence company to be invited to host
an event at the UK MOD’s new flagship technology and innovation
hub, The Defence ‘BattleLab’, bringing together SMEs for a live
autonomous vehicle demonstration and demonstrating our
commitment to innovate in this area. This marked a milestone in
autonomy, heralding the first live demonstration of an autonomous
multi-vehicle convoy across an array of SME-designed technology
and showcasing our commitment to innovate with others.
In February, we enhanced our relationship with Additure to further
develop our digital manufacturing capability. This venture allows
us to focus on increasing platform availability, collaborate on new
digital solutions and better manage the challenges around
complex, critical, low-volume parts.
Future
Our work in this area is part of a longer-term global advanced
manufacturing investment programme. Our vision is to develop a
capability that will enable the printing of components anywhere as
the need arises, whether onboard vessels at sea or at military sites
abroad, giving those on the frontline the ability to print on demand.
In May 2023, we responded to a customer requirement to develop,
build and flight-test a novel jet powered Unmanned Aircraft System
solution. Collaborating with SMEs and academia, we delivered a
rapid prototype to first successful flight in just 19 days.
Future
We have already shown that unmanned vehicles can carry out a
multitude of tasks simultaneously, while being safely controlled at
a distance. We will continue to advance our SME relationships and
develop IP for autonomous technology, whilst seeking opportunities
to work with our customers to accelerate growth across all
technology focus areas.
Benefits
• Increased materiel availability in legacy & low-volume supply chains
• Reduced need to hold physical inventory for low-volume use items
• Safeguard against the challenges of technical and commercial
obsolescence
Benefits
• Enhanced capability: increased range and endurance means
more coverage of battlespace surveillance, intelligence,
reconnaissance and weapons systems
• Ability to perform complex tasks and operate equipment at
a safe distance from dangerous environments
• Increased cost effectiveness: cheaper and quicker to
manufacture than traditional solutions
Babcock International Group PLC / Annual Report and Financial Statements 2023
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Chair’s statement
A stronger, more resilient, more
disciplined Babcock
Ruth Cairnie
Chair
Read Ruth’s biography on page 108
I am delighted to confirm that our
work to stabilise the business is
complete; we are now a stronger,
more resilient, and more disciplined
company. Our focus now increasingly
turns to execution and growth as we
look to the future with confidence.”
Ruth Cairnie
Chair
Last year I told you of the steps we were taking
to address the historic underperformance of
the Group. This year I am delighted to confirm
that having successfully completed our portfolio
alignment programme, our work to stabilise
the Group’s balance sheet is complete.
We made strong progress against our goals in the year, particularly
through the introduction of enhanced systems and processes to
reduce risk across the business and capture the opportunities
emerging from a positive market for defence.
Babcock is now starting to run as it should; the work we have
undertaken over the last two years has made us a stronger, more
resilient, and more disciplined company, able to look to the future
with confidence. As a result, the Board expects to reinstate a
dividend in FY24.
Our second full year of turnaround has seen us deliver double-digit
organic growth and a strong cash performance against a backdrop
of global change (see page 12). Our focus is now increasingly
turning to execution and growth, centred on our core market of
defence, and adjacent markets which need our specialist skills and
unparalleled experience of supporting the armed forces.
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Now more than ever, what we do matters
Given the geopolitical changes experienced over the last year,
national security has never been more important. As global tensions
escalate, and as the conflict in Ukraine continues, military spending
is rising. Even allowing for inflation, last year saw the steepest
year-on-year increase in Europe in at least 30 years, according to
the Stockholm International Peace Research Institute.
This discipline will enable us to improve delivery on existing
projects, as we have in our DSG contract for the maintenance,
repair and overhaul of military land vehicles and equipment in
the UK, and capture efficiencies. With more structure around the
management of financial and commercial risk, we are enhancing
our ability to deliver sustainable, profitable growth. Wherever I
look, I see signs of progress.
We are also actively managing our exposure to historically onerous
contracts, which we expect to replace over time with higher quality
work. Our strong operating cash performance, together with the
proceeds of divestments, has enabled us to accelerate pension
payments and reduce our net debt, so that we could remain within
our target gearing range of 1x – 2x net debt to EBITDA despite the
impact of the Type 31 loss on our FY23 reported profit. Excluding
the loss, our gearing ratio (on a covenant basis) would have been
1.1x (see page 31). We are now a business which can withstand
such unforeseen events.
We also continue to build our positive relationship with our
UK defence customers, working closely with them to deliver
their goals in both the UK and on the international stage. As a
strategic supplier to the UK Government, we play a critical role
in maintaining national security – as indeed we do with our
customers outside the UK. We are currently in discussions with the
UK’s Submarine Delivery Agency and the Royal Navy regarding a
long-term strategic partnership to ensure the stable, effective and
efficient delivery of deep and base maintenance of submarines.
We continue to focus on driving continuous improvement as we
build upon our established corporate safety standards, supported
by the introduction of a Group-wide ‘Safety starts with me’
programme. I am also encouraged by how our increased focus on
ESG has been welcomed across the Group and by our customers
and is being embedded into ‘business as usual’ at all stages, from
bid design to programme delivery. Our approach to sustainability is,
and will continue to be, integral to our strategy.
None of this progress would be possible without our dedicated
people. Whenever I visit our operations, I am inspired by how
much our people care about what they do – they are collaborative,
committed and able to work flexibly and at pace to get the job
done. Whether it’s applying engineering excellence or the latest
technology, they have embraced the challenge of striving for
excellence in service of a safe and secure world.
Ruth Cairnie
Chair
Our defence customers have increasingly complex requirements,
driven by a world of evolving threats, the requirement to deliver
value for money and the need to develop new and enhanced
capability at ever greater pace. Guided by our Purpose, to create
a safe and secure world, together, Babcock is well placed to
provide the affordability, capability and availability our customers
demand in today’s uncertain times. Now more than ever, what
we do matters.
Our strategy looks to leverage our capability to deliver technical
support and critical services to our defence and civil customers
and to design, manufacture and integrate specialist equipment.
This is underpinned by the progress we have made in our
turnaround journey.
From submarines below the waves, to armoured vehicles on the
ground, to satellites in space, we are well-positioned to take
advantage of the opportunities afforded by our customers’
evolving defence requirements.
In March 2023, the US, UK and Australia unveiled plans for a new
‘AUKUS’ pact, including the supply of nuclear-powered submarine
technology to Australia. Babcock plays a critical role in all three
countries’ submarine programmes today. Our long experience
of nuclear infrastructure, workforce upskilling and regulatory
and safety stewardship means we are ideally placed to help
deliver a nuclear-powered submarine capability for the Royal
Australian Navy under the AUKUS agreement.
In the land domain, as we announced in July 2023, we are
honoured to stand with the Ukrainian and UK Governments by
providing critical operational support to the military vehicles
provided by the UK to Ukraine. This sustainment agreement
strengthens our existing relationship with Ukraine and builds
on the tripartite Memorandum of Implementation signed by
Babcock and the two governments in June 2021.
And we are safeguarding secure communications in space, an
increasingly critical domain in the defence of nations. In February
2023, we, with our partners, were awarded the contract to
manage and operate Skynet, the UK Ministry of Defence’s military
satellite communication system. Babcock is a world leader in secure
communications for the military, having been awarded a major
multi-year programme to upgrade the Australian Defence Force’s
Defence High Frequency Communication System in October 2022.
Control environment
Over the last year we have enhanced the Group’s control
environment, fostering a consistent risk approach. We aim for
predictability and optimisation of performance through
continued investment in systems, in internal controls, and,
through our far-reaching culture change programme, in our
people (see page 4 for our Ways of Working).
Babcock International Group PLC / Annual Report and Financial Statements 2023
11
CEO review
CEO statement
Introduction
Our transformation is delivering results. In FY23, we successfully
delivered double-digit organic revenue growth, underlying
margin(1)(2) expansion and a significantly better than expected
cash performance against a backdrop of economic turbulence.
Following completion of the portfolio alignment programme,
over two-thirds of the Group’s revenue is now concentrated on
defence, with this percentage expected to increase over time.
We have significantly strengthened the balance sheet and
enhanced risk management systems, underpinned by our work to
embed a new corporate culture focused on execution and growth,
aligned with our ESG strategy. While we have further to go,
Babcock is now more stable, more resilient, and better able to
capture the many growth opportunities before us.
As a result, the Board expects to reinstate a dividend in FY24
after a three-and-a-half-year hiatus. Over the medium term we
are targeting average annual organic revenue growth(3) in the
mid-single digits, an underlying operating margin(1)(2)(3) of at least
8% and underlying operating cash conversion(1)(3) of at least 80%.
David Lockwood
Chief Executive Officer
Read David’s biography on page 108
When we started our
transformation, my first goal was to
stabilise and strengthen the balance
sheet and I’m delighted to say that
work is complete. Babcock is now a
higher-quality, lower-risk and more
predictable business, with a clear
focus on execution.
David Lockwood
Chief Executive Officer
12
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
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Financial Statements
Strong underlying FY23 results
Our second full year of turnaround delivered strong underlying
performance excluding the £100 million loss on the UK Ministry of
Defence (MOD) Type 31 programme, where we have entered a
Dispute Resolution Process (DRP). We have delivered organic
revenue growth of 10%(1)(2), a 50 basis point increase in
underlying operating margin(1)(2), underlying operating cash
conversion(1)(2) of 110%, and underlying free cash flow(1) of
£75 million, significantly ahead of expectations, despite ongoing
macroeconomic headwinds.
Due to our strong cash performance, we accelerated pension
deficit payments by an additional £35 million and reduced our net
debt excluding operating leases by £211 million. At 1.5x, our net
debt to EBITDA(1) gearing ratio remains within our target range of
1.0x to 2.0x (on a covenant basis) (FY22: 1.8x). Excluding the
Type 31 loss our gearing ratio would have been 1.1x.
Our contract backlog of £9.5 billion, grew organically by 7%,
reflecting the demand for our specialist capabilities in our core
defence and security markets and underpinning our confidence
in the future.
A better Babcock
In the last two years since we began our turnaround programme,
we have made excellent progress across our three pillars of
Stabilise, Execute and Grow.
Stabilise: balance sheet strengthened
The sale of the European Aerial Emergency Services business (AES)
to Ancala Partners in February 2023 completed a two-year portfolio
alignment programme to strengthen the balance sheet and focus
on the Group’s chosen markets.
The programme realised total cash proceeds of c.£640 million,
well exceeding our initial target of above £400 million, and
reduced lease liabilities by c.£340 million. As a result of this and
a better-than-expected operating cash performance, net debt at
31 March 2023 was £564 million, representing an aggregate
reduction of £789 million over two years. Over the same period,
our net debt to EBITDA(1)(2) gearing ratio (on a covenant basis)
reduced from 2.5x at March 2021 to 1.5x at March 2023.
During the period we have also fully paid off c.£400 million of
deferred creditors and supply chain financing arrangements.
A focused and differentiated portfolio
Our portfolio is now aligned with our strategy to leverage our
capabilities in growth areas of defence and security. On a proforma
basis(3), 68% of FY23 revenue is derived from the defence market,
which we expect to steadily increase over time.
We are predominately focused on services, with most of our
business providing complex programme support to UK and
international customers in support of their requirements of
capability, affordability and availability. The balance of our
operations comprises the design, manufacturing and integration
of specialist equipment and technologies for our defence and
civil customers.
With Stabilisation complete, our strategy is now firmly focused
on delivering value through continual operational improvement
and sustainable growth.
Execute: ongoing operational improvement
We have made further progress in operational delivery across the
Group, underpinned by a strengthened corporate culture which
drives better outcomes for all our stakeholders. Our work to drive
cultural change centres on our people. In October 2022, we
concluded the first Group-wide survey of employees for more than
10 years. This achieved a response rate of 79%, demonstrating a
high level of engagement. The survey results have driven the
development and implementation of action plans as part of our
overarching People Strategy. Examples include the launch of a
Babcock Role Framework to transform the employee experience,
defining and standardising role categorisation and opening
professional development pathways and career opportunities.
We are fostering a consistent Group-wide risk-based control approach,
aiming for predictability and optimisation of performance through
investment in systems, controls and the expertise of our people.
While there is still much to do, operational improvement will
continue to be a key driver of margin expansion, cash generation
and higher returns over the coming years.
Enhanced control environment
During the year we launched a number of Group-wide process and
control initiatives and functional changes developed to improve
efficiency, enhance our control environment, and fundamentally
reduce risk in the business. We designed and implemented a Global
Project Management Framework to standardise and professionalise
project management across the Group. This framework includes
our Integrated Project Controls processes which enhance our ability
to make data-driven decisions, which is key to improved delivery
and mitigation of risk in our major projects.
We have also introduced a new centre-led commercial function
tasked with optimising commercial risk management and have
implemented 15 key ‘Blueprint’ fundamental management review
controls which mitigate significant contract management,
commercial and financial reporting risks. We also launched a
Group-wide Global Business Management System which will drive
commonality and best practice across the business.
Babcock International Group PLC / Annual Report and Financial Statements 2023
13
CEO review (continued)
Enhanced delivery
We are proactively managing exposure to historically onerous
long-term contracts and focusing on replacing them with higher
quality orders with improved terms and/or a lower execution risk
profile. At the beginning of the turnaround, we identified a small
group of higher risk legacy contracts that generated zero margin.
Associated revenue from these contracts continues to reduce from
over £400 million in FY22 to less than £300 million expected in
FY24, through a combination of contract completion and delivery,
such as the Vanguard life extension (LIFEX), and efficiency
improvements, such as DSG, both described below.
We recently concluded the Devonport elements of the highly
complex – and first of its kind – LIFEX of a Vanguard Class
submarine, with the first vessel returned to the UK Royal Navy
in May 2023 after seven years. This was one of the largest and
most complex submarine engineering projects undertaken in the
UK, with HMS Vanguard being the first of her class to receive an
extensive life-extension and upgrade package – essentially a
rebuild rather than a traditional refit. We have learned many lessons
in how to scope contracts, mobilise and deliver such a complex
project. The novel and significant risk associated with this unique
project is now behind us. Mobilisation for the next submarine in
the programme, HMS Victorious, is now underway, on contract
terms that allow us to manage programme risk more effectively
and improve delivery.
A successful example of the turnaround improving programme
delivery is the 10-year DSG contract awarded in 2015 for the
maintenance, repair and overhaul (MRO) of British Army land
vehicles and equipment. Following a radical overhaul of the
operation to raise productivity, we have markedly improved
operating performance and delivery for our UK MOD customer,
who has formally notified us of their intention to exercise up to
five option years with modifications that will contribute to better
outcomes for the customer and for Babcock. We continue to
evolve complex vehicle support and maintenance solutions that
could lead to future opportunities in the UK and internationally.
Earlier this month we were awarded an initial one-year, c.£50
million contract, with options to extend, by the UK MOD to support
urgent operational requirements for Ukraine’s military land assets
as part of the UK’s support for the country.
Further advancing our ESG strategy
Over the year, we have made progress in the delivery of our ESG
strategy and corporate commitments, while increasing disclosure
on key sustainability interests. In April 2023, we submitted our
interim and Net Zero carbon reduction targets to the Science Based
Targets initiative (SBTi) and we conducted a strategic climate-
related risk assessment as input to our five-year planning process.
We are also continuing to integrate our five ESG priorities, which
provide a comprehensive framework for integrating sustainability
into the business:
1. Reduce emissions and set Net Zero 2040 targets
2. Integrate environmental sustainability into programmes
3. Ensure the safety and well-being of our people
4. Improve communities, and provide high-quality jobs
5. Be a collaborative, trusted partner across the supply chain
In addition, we have further embedded ESG into our performance
framework with remuneration linked to our Net Zero emissions
target and diversity and inclusion targets, measured through
our KPIs.
More broadly, we have a critical role in global defence and national
security in the countries in which we operate. As global instability
and political turmoil increases, we support the view that democracies
need to be able to defend themselves from aggressors. Without the
stability provided by strong defence, it is challenging for governments
to progress environmental or social improvement measures.
Nuclear power, and in some instances nuclear deterrent, form a
crucial part of the resiliency framework developed by many
democratically elected Governments. Babcock has been supporting
the UK’s commitment to its Continuous-At-Sea Deterrent for over
50 years, while also delivering critical civil nuclear engineering.
We will continue to support our customers, both with their defence
agenda and their commitment to generate low emission power
from nuclear energy.
Financial risks being better managed
Inflation: The macro-economic environment remains volatile,
although there are signs that the extreme inflationary pressures
experienced over the last year are beginning to recede, albeit
slowly. Approximately two-thirds of our revenue base has some
measure of protection for inflation. The remainder are, “firm”,
fixed-price contracts which retain some inflation risk. Many are
relatively short term (one to two years), giving us the opportunity
to replace them with improved terms.
The Group’s largest exposure to inflation is rising labour costs
(approximately 50% of the cost base of the fixed-price contracts),
particularly within the UK. The Group addressed labour cost in the
UK for FY23 with a pay deal that targeted all but the higher paid
employees to assist in the cost-of-living increases. This pay deal
resulted in a c.£25 million FY23 cost increase over and above costs
that could be recovered through extant contracts, which we have
offset through other efficiencies. The FY24 pay cycle has commenced
and we continue to expect to offset unrecoverable increases through
targeted efficiencies.
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
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Financial Statements
Grow – building momentum
Our portfolio is now aligned with our growth strategy. This will
leverage our technical capability to grow our defence and services
business, both internationally and in the UK. The defence market
backdrop remains supportive, driven by geopolitical instability and
a heightened threat environment, although global financial
pressures do also remain acute.
Whether it be through engineering support such as maintaining
or extending the life of complex assets, through the design and
manufacture of specialist equipment, or through the integration of
new technologies into innovative and cost-effective solutions, we
see significant opportunities in our defence and adjacent markets.
Growth drivers
It is becoming clear that the events in Eastern Europe and growing
tension in the Asia-Pacific region are driving planned increases in
global defence expenditure. Whilst some additional funding will
go to new equipment, there is a realisation that increasing the
availability and capability of current military assets is crucial. As we
are largely platform-agnostic, we partner with delivery agencies – in
some cases as a Design or Technical Authority – to support them as
they make critical decisions to modernise and life-extend ageing
assets and platforms.
As defence operations modernise, so too will the support required
to deliver campaigns. The outsourcing of frontline support and
services that require skilled, engineering-based capabilities will
continue to grow, as will the need for specialist training.
The rapid pace of technology and ever-changing threat
environment is driving the need to deliver military capability
with agility and at pace. Our technology and systems integration
expertise, including capability insertion and equipment
modernisation, continue to drive growth.
Evidenced through our sectors
Marine – increasing naval support and technology opportunities
in the UK and internationally
As a leading provider of naval ship and submarine support and
maintenance to UK, Canadian, Australian, US and New Zealand
navies, we see opportunities emerging in the short term as a result
of the increased operational tempo and, over the longer term,
through life-extension and naval fleet modernisation strategies.
In the UK, our ability to deliver complex, cost-effective support has
allowed us to secure several new naval support contracts in the
year, including a critical 10-year docking contract for the Queen
Elizabeth Class aircraft carriers and a contract to support the UK
Government’s research vessel fleet.
In Australia, following our appointment as the Regional
Maintenance Provider with responsibility for managing the
support of Royal Australian Navy (RAN) vessels in Western Australia,
further opportunities are emerging as the RAN re-organises its ship
support model. Elsewhere we are seeing opportunities to support
our international customers, for example, following our recent
programme to regenerate ex-UK Royal Navy Sandown Class mine
countermeasures vessels for Ukraine.
We are continuing to experience international interest for the
proven Arrowhead 140 naval ship design used on the UK Type 31
frigate programme, both in our focus countries and other export
markets, driven by demand for affordable naval power.
The investments we have made in our advanced manufacturing
facility in Rosyth are not only allowing us to deliver new performance
standards in UK warship build but are drawing interest from other
domestic and international customers who value our flexible,
scalable advanced and modular manufacturing capabilities. A key
part of that capability is the delivery of missile tube assemblies for
the UK Dreadnought and US Columbia Class submarine programmes
where Rosyth is the programme centre of excellence for tube
manufacture as a result of investments in advanced robotic solutions.
Demand for our Liquid Gas Engineering (LGE) products and
innovative technologies for the processing, handling and storage
of liquefied gas remains strong as our customers look to satisfy the
growing global demand for cleaner energy solutions to replace
traditional fossil fuels such as coal. We continue to innovate in this
area, seeking commercially scalable technologies for the transport
and management of gas and liquid fuels that can help to reduce
the industry’s carbon emission burden.
We command a strong position in the defence digital market.
In the year, we were awarded a six-year c.£400 million contract
to manage and operate Skynet, the UK’s military satellite
communications system, part of the MOD’s c.£6 billion Skynet 6
programme, marking a significant opportunity in the space domain.
Nuclear – growth across defence and civil nuclear markets
Babcock sustains the entirety of the UK Royal Navy’s nuclear-
powered submarine fleet. The major programme to modernise
submarine infrastructure across Devonport continues to grow as
the UK progresses a multi-year phase of class transition, which
will lead to concurrent support of four classes of nuclear-powered
submarine – Trafalgar, Vanguard, Astute and, ultimately,
Dreadnought. Our upgraded facilities will support and maintain
the UK’s critical subsea and nuclear deterrent capability for
decades to come.
During the year, we launched the Submarine Availability Partnership
with the UK MOD and Submarine Delivery Agency (SDA) to improve
submarine availability over the long term. We are currently in
discussions with the SDA and the Royal Navy with the intention
of finalising a long-term strategic partnership to ensure the stable,
safe, effective and efficient delivery of deep and base maintenance
of submarines.
We welcome the announcement from the Australian, UK, and US
Governments (AUKUS) regarding the decision for acquisition of
nuclear-powered submarines. We play a critical role in all three
countries’ submarine programmes today. Our experience of nuclear
infrastructure, workforce upskilling, and regulatory and safety
stewardship, combined with our unique expertise in nuclear
submarine design and through-life support, positions us ideally to
help to deliver a nuclear-powered submarine capability for the RAN.
Babcock International Group PLC / Annual Report and Financial Statements 2023
15
CEO review (continued)
In civil nuclear, we recently secured a contract with the Japan
Atomic Energy Agency (JAEA) to provide specialist capability in
support of the decommissioning of the Monju Prototype Fast
Reactor (PFR) in Fukui Prefecture. In the UK, through our specialist
nuclear capabilities and our advanced manufacturing experience,
we are well positioned for opportunities to support the build of the
new fleet of advanced or small modular reactors to be developed.
Land – MRO and training contract wins underpin growth
Demand for our specialist land equipment MRO and fleet
management capabilities is strong. Our work to deliver urgent
operational requirements to revalidate and modernise land assets
and gifted equipment in support of operations in eastern Ukraine
has recently led to the award of an initial one-year contract to
support Ukraine’s military land equipment, including maintenance
of critical military vehicles, training of Ukrainian personnel, and
management of supply chains and spares.
Our global reputation for asset support is allowing us to expand our
operational role in France. We are pursuing a number of emerging
opportunities following the award of our first land support contract
in France, a 10-year contract to support air transit and aircraft
operations equipment across 26 military bases.
Training personnel is a critical component to support new defence
equipment and asset modernisation programmes. We see significant
opportunities for partnership and growth. In the UK, we are
collaborating with training partners for the British Army’s
£1.3 billion Collective Training Transformation programme.
Through our relationship with the UK’s Supacat, we are delivering
70 High Mobility Transporters for the British Army, with a potential
total requirement of up to 240 of these light armoured vehicles,
through a new dedicated production line, providing an operationally
capable and cost-effective protected mobility vehicle. There is
international interest in this platform with the opportunity to
develop an export sales pipeline. We are also supporting the UK
MOD and British Army’s shift to electric vehicles (EV) from 2030
through a new contract for EV conversion and trials of Land Rover
vehicles, to help the Army to understand the applications and
constraints of electric propulsion.
Aviation – opportunities in all our disciplines (training, MRO,
aerial emergency services and aviation technologies)
We see potential to materially grow our Canadian aviation business.
Initially, through the recent award of a c.£200 million, 10-year
helicopter emergency medical services contract commencing in
2025. Also, through our bid with joint venture partner Leonardo in
response to Canada’s Future Aircrew Training (FAcT) programme for
military pilot training over 25 years.
If successful, this would further strengthen our international
aviation training capabilities and result in the Group delivering both
new platforms and new capabilities to the Royal Canadian Air
Force. The outcome is expected to be declared later in 2023.
In the UK, we are partnering with the UK Royal Air Force’s Rapid
Capability Office to progress a range of sustainable aviation
technologies that could minimise the environmental impact of
light aircraft flying training, for example sustainable aviation fuel.
Trading in the first quarter of FY24
Trading in the first quarter ended 30 June 2023 was in line with
expectations.
Outlook(4)
FY24 outlook: Our expectations for FY24 profitability and
cash flow are unchanged, although operating cash flow may be
weighted to the second half given the FY23 over-performance.
With c.£2.8 billion of revenue under contract at 1 April 2023
and around £700 million of framework orders expected to be
delivered in FY24, we are confident of another year of organic
revenue growth and further underlying margin expansion.
We also expect to reinstate a dividend in FY24, as indicated
in the April trading update.
Medium term guidance
Looking ahead, having successfully stabilised the Group and
through the ongoing execution of operational improvements to
enhance the risk profile of the business, over the next three-to-five
years, we believe we can:
• Deliver underlying operating cash conversion of at least 80%
• Achieve underlying operating margins of at least 8%
• Deliver average annual revenue growth in the mid-single digits
Year to year, there are a number of factors that could influence the
pace of achieving these targets, for example mobilisation of large
new programmes and phasing of lower capital intensity work, such
as Nuclear infrastructure, that could accelerate revenue but slow
margin expansion. We will continue to enter into new contracts
giving due consideration in each case to all relevant factors to
maximise shareholder value, and in particular to growth, risk and
capital intensity criteria.
David Lockwood OBE
Chief Executive
1. A defined Alternative Performance Measure (APM) as set out in the Financial Glossary on page 38
2. Excludes Type 31 loss of £100.1 million as described in Note 1 of the financial statements
3. Pro forma – excluding the revenue from disposed businesses of £421.6 million: UK civil training of £35.1 million and European AES of £386.5 million, both sold in
February 2023
4. Our FY24 outlook and medium-term guidance is based on FY23 results excluding the impact of disposals, the Type 31 loss and a £11.6 million one-off credit in Land.
Excluding these items, FY23 revenue was c.£4 billion, underlying operating profit was c.£265 million, and underlying operating margin was 6.6%
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Babcock International Group PLC / Annual Report and Financial Statements 2023
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Governance
Financial Statements
Capital allocation
Our refreshed capital allocation framework is underpinned by a commitment to maintain strong balance sheet and investment-grade credit
rating, with a target leverage of 1.0x to 2.0x net debt to EBITDA.
The framework is aligned with our strategy to maximise value for our shareholders while balancing near-term performance and long-term
growth objectives.
Any further capital could be applied to the following three areas, prioritised according to the prevailing circumstances at the time that is
assessed by the Board to maximise shareholder value:
• Bolt on M&A – Opportunities that have a strong fit with the Group
• Pensions – Acceleration of our pension scheme obligations
• Returns – Further returns to shareholders of surplus capital
Capital allocation framework
Priorities
FY23 progress
Further capital options
1
Organic investment
Organic investment to strengthen
and grow the business
2
Financial strength
Maintain strong balance sheet and
investment grade credit rating
3
Ordinary dividend
Pay an ordinary dividend
Ongoing investment in
business improvement
M&A
Bolt on opportunities with
a strong fit
Leverage reduced to 1.5x,
S&P credit rating upgraded
to BBB (Stable)
Pensions
Acceleration of our pension
scheme obligations
Commitment to reinstate a
dividend in FY24
Shareholder returns
Further returns to our shareholders
of surplus capital
Supports growth and shareholder returns
Other information
Dividend
No ordinary dividends have been paid or declared for the year ended 31 March 2023. We expect to reinstate a dividend in FY24.
Board changes
Two Non-Executive Directors retired in the period. In July 2022, Russ Houlden retired after two years of service and Kjersti Wiklund
retired in September 2022, after four years of service. Kjersti was succeeded as Remuneration Committee Chair by Carl-Peter Forster.
In December 2022, we welcomed Jane Moriarty as Non-Executive Director. In May 2023, the Board announced the appointment
of Sir Kevin Smith as Non-Executive Director with effect from 1 June 2023.
Babcock International Group PLC / Annual Report and Financial Statements 2023
17
Market review
Our defence and nuclear markets
Defence remains our largest market.
We have a critical role in global defence and security with operations
in UK, Australia, New Zealand, Canada and France. We also design
and manufacture equipment and systems for several other nations
including the US and South Korea. Our defence customers all have
increasingly complex requirements within a focus on value for
money, high utilisation of their assets, modernisation and flexibility.
These requirements are driven by:
• An unstable geopolitical environment, evolving threats and
unpredictable crises
• Budget constraints during high inflation
• The need to develop and apply enhanced technology to counter
new threats
• Disruption to supply chains
• Customer ESG requirements
Babcock’s strategy (on page 6) aims to deliver an attractive offering
for our customers: availability, affordability and capability.
Availability – Our customers require high utilisation of complex
assets, from ships and submarines to military and emergency
services aircraft and vehicles. Our fleet support and sustainment
models are increasingly geared to higher-value-add availability-
based solutions designed to optimise asset utilisation and reduce
lifetime costs.
Affordability – Our customers are also demanding value for money
on support programmes and new platforms. Our deep understanding
of our customers’ needs, and our ability to bring suppliers and
technologies together to deliver an integrated solution, enable us
to provide the affordability and flexibility they require.
UK defence
54% of FY23 revenue*
Market position – Our primary defence market is the UK, where we
provide critical support to all the UK’s armed forces. We remain the UK’s
second largest defence supplier with around 8% of total MOD
procurement spend and, as part of the Strategic Partnering Programme,
we are working with the UK Government and MOD across multiple
critical programmes to ensure the increasingly complex needs of our
armed forces are met.
UK defence spending rose to £46 billion in 2022, £3.6 billion higher
than 2021, an increase of around 9%, adjusted for inflation, with an
estimated c.£26 billion spent on MOD equipment, support and
infrastructure.
In March 2023, alongside the launch of the Integrated Review Refresh,
the Prime Minister announced an additional £5 billion for the MOD
over the next two years, to help replenish and bolster vital ammunition
stocks, modernise the UK’s nuclear enterprise and fund the next phase
of the AUKUS submarine programme. This included an ambition to
increase defence spending to 2.5% of GDP in the longer term.
Capability – Our customers operate in complex and ever-changing
environments, which drives a continual need to adapt and enhance
capability. We apply our understanding of technology integration,
infrastructure management and specialist training to improve their
capability, whether it be through support or product solutions.
The continuation of the Russian invasion of Ukraine has led to a strong
response from defence markets. Defence budgets have, and are
planned to continue to increase, boosting capability and availability
of equipment, land assets, personnel and training, and to replace
donations to Ukraine. European countries continue to adapt their
defence budgets and alter their defence posture to increase force
readiness. NATO has agreed to enhance the size of the battle
groups in Eastern Europe while Finland and Sweden intend to join.
The crisis has also led to increased defence spending across the
Indo-Pacific, as assessments of Chinese intentions are updated,
and the Middle East.
During the year, the collaboration between Australian, UK and US
governments (AUKUS) announced the selection of a design variant
alongside a phased approach to deliver conventionally armed,
nuclear-powered submarines to Australia at the earliest possible
date. The collaboration also covers electronic warfare, information
sharing, defence innovation, autonomous systems, artificial
intelligence, and undersea capabilities.
UK and targeted international defence markets continue to offer
significant resilience and growth, alongside increased short, medium
and long-term potential, both through increased spend in our
existing markets and expansion into new markets.
Investor ESG concerns around defence companies have also been
challenged as commitment to defence is shown to be necessary to
preserving the liberal democratic order which is a prerequisite for
addressing the ESG agenda.
Opportunities – In the Government’s Defence Equipment Plan, £242
billion is intended to be spent on equipment procurement and support
over the next 10 years, which presents opportunities through: the
Defence Nuclear Enterprise (£68 billion including Submarines and
AWE), Defence Digital (£28 billion including defence IT systems and
services), Ships (£22 billion including T31 and T32) and Land
Equipment (£17 billion including Morpheus).
The War in Ukraine and growing global volatility is driving a need for the
MOD to: increase availability and resilience of in-service military platforms
and systems; develop new technology to sustain competitive advantage;
and integrate efforts with industry partners as well as strengthen and
increase the resilience of the industrial supply base, with a particular
focus on export success. All of these present opportunities for Babcock.
Risks – In FY23, £2.3 billion of our revenue came from direct MOD
spend, an increase of 7%. Increased spending from the MOD is spread
across major critical programmes such as Type 31, investment in naval
nuclear infrastructure and the Future Maritime Support Programme (FMSP).
As the UK’s second largest defence supplier, we recognise that this
represents a significant reliance on the UK MOD. We routinely review
reputational and execution risk on the volume of critical programmes in
which we are involved (see our Group principle risks, page 87).
The continually evolving international geopolitical and threat
environment may see reprioritisation of budgets away from traditional
large, complex platforms to smaller, uncrewed platforms and cyber.
* Pro forma FY23 revenue excludes c.£422m revenue from divested businesses
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Strategic report
Governance
Financial Statements
Australia and New Zealand defence
7% of FY23 revenue*
Market position – Babcock supports the armed forces of both
Australia and New Zealand. We are a strategic maritime sustainment
partner to both the Royal Australian Navy and the Royal New Zealand
Navy. In Australia we provide support to both Collins Class submarines
and surface ships including ANZAC class frigates, Canberra Class Landing
Helicopter Docks (LHD) and LHD landing craft. We strengthened this
position with the contract awards and extensions. In New Zealand we
provide asset management services, including engineering, project
management, production and operational support to the entire Royal
New Zealand Navy fleet, from frigates through to small boats.
The Government also announced immediate reforms to enable better
defence partnership with industry. The May 2023 budget reinforced
commitment to the DSR and AUKUS with $19 billion to implement
immediate priorities, including AUKUS and innovation.
Risks – Competition is strong, but we are developing our in-country
capability and credibility. We are now the regional leader in warship
sustainment and high frequency communications. Naval capability
upgrades however may be reduced while the fleet review is conducted.
AUKUS – the future submarine will be based on the UK’s Astute
replacement programme, incorporating technology from all three
nations. Australia and the UK will both operate AUKUS Class submarines
and will begin to build in domestic shipyards within the late 2020s.
We have also been awarded a contract to upgrade and sustain the
Australian Defence High Frequency Communication system (DHFC). This
builds on our proven DHFC experience in the UK and New Zealand and
reinforces our core capabilities in delivering technology-led, cutting-
edge solutions to support complex electronic defence programmes.
From 2023, Australian military and civilian personnel will embed with
the UK and US Navies and submarine industrial bases. The US will also
increase port visits to Australia to accelerate training and development.
From the early 2030s, Australia intends to purchase three Virginia Class
submarines from the US with an option to buy two more.
Opportunities – We are well positioned to take advantage of growing
opportunities in Australia. In April 2023, the Government announced
and accepted all recommendations from its Defence Strategic Review
(DSR), which concluded that the Australian Defence Force is not fit for
purpose, due to significant changes in strategic circumstances, and
identified six new priority areas. The DSR strongly supports acquisition of
nuclear-powered submarines including immediate infrastructure
development. It also recommends a continuous naval shipbuilding
programme, to ensure an optimal mix of tier 1 and 2 surface combatants,
consistent with a strategy of a larger number of smaller ships.
The UK intends to deliver its first AUKUS Class submarine to the Royal
Navy in the late 2030s while Australia will deliver their first domestically
built submarine to the Royal Australian Navy in the early 2040s.
Babcock’s expertise and technical capabilities mean we are well placed
for opportunities in designing, building, and supporting the AUKUS Class
as well as development of nuclear submarine infrastructure, skills and
regulatory frameworks.
Canada defence
3% of FY23 revenue*
Market position – Babcock delivers Victoria In Service Support
Contract (VISSC) to sustain the Royal Canadian Navy’s (RCN) Victoria
Class submarines. Working with the RCN, Babcock has transferred the
skills and expertise required to provide through-life support and
maintenance to submarines from the UK to Canada.
Opportunities – We continue to target large military aviation training
opportunities in Canada. The evolving geopolitical landscape is driving
Canada to re-assess its Defence Policy – with greater focus expected on
Continental Defence and Indo-Pacific Operations. This may offer
opportunities for Babcock, particularly in ship and submarine build and
sustainment, military training and mission systems.
Risks – A preference for well-established native competition could limit
Babcock’s exposure to further opportunities given our relatively modest
footprint in the country. Our current work is based around naval
engineering. This is highlighted as one of the Group’s principal risks,
see page 87.
France defence
4% of FY23 revenue*
Market position – We have an established position in military aviation
training for fast jet pilot training and strengthened our position in the
military rotary wing maintenance, repair and overhaul (MRO) market,
including the provision of search and rescue aircraft and services for the
French Navy. We have now moved into land support in France.
Opportunities – Defence spending in France continues to grow with
clear opportunities in military aviation training and MRO, and armoured
vehicle MRO.
UK civil nuclear
4% of FY23 revenue*
Market position – Babcock is the only major UK-owned nuclear
services partner for Government and is unique in covering both the
defence and civil sectors. We provide complex services across civil
nuclear new build, operations and decommissioning in the UK, and
provide more limited services internationally.
Opportunities – Nuclear power is a key part of both the UK’s Net Zero
strategy and its energy security post-Ukraine. The Government’s Energy
Security Strategy published on 6 April 2022 announced a new body
called Great British Nuclear (GBN).
By 2050 this body aims to bolster the UK’s nuclear capacity to up to 24
GW of electricity, or 25% of projected demand, through up to eight
new reactors, with one being approved each year until 2030.
* Pro forma FY23 revenue excludes c.£422m revenue from divested businesses
There may also be some opportunity for the in-service support of
non-complex naval vessels and equipment, and for our mission systems
business in maritime autonomy. French and UK bilateral relations, are
reinforcing the relationship, announcing deeper cooperation on Ukraine
and renewed commitments to ensure that their military equipment is
interoperable.
Risks – Similarly to Canada, France has well established domestic
defence suppliers, often with some element of state ownership. As a
British company with limited infrastructure, we may struggle to
compete for some opportunities.
GBN also launched the new £120 million Future Nuclear Enabling Fund
(as part of a total £2.3 billion commitment) to provide targeted support
towards further nuclear projects. In November 2022, the Government
confirmed a £700 million investment in the new Sizewell C nuclear
power station. Subject to technology readiness, Small and Advanced
Modular Reactors (SMR/AMR) will form a key part of the nuclear project
pipeline. We are well positioned to take advantage of opportunities in
these areas.
Babcock has signed a Memorandum of Understanding (MoU) with US
nuclear reactor and fuel design engineering company X-energy to act
as its deployment partner for AMRs in the UK.
Risks – The UK decommissioning market continues to be challenging
suffering from programme procurement delays. In addition, historically
it has been hard to secure the necessary commitments to make new
nuclear power a reality.
Babcock International Group PLC / Annual Report and Financial Statements 2023
19
Business model
Our business model
We provide a range of products and service solutions to enhance our customers’ defence
capabilities and critical assets. Our business model is underpinned by a deep understanding
of technology integration and engineering, infrastructure management and specialist training.
We help our customers around the world to cost effectively improve the capability, reliability
and availability of their most critical assets.
Our key strengths
and resources
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 of over 26,000.
Customer relationships
We are a trusted partner, critical to
our customers’ ability to solve complex
problems. Through long-term
programmes and contracts, we work
collaboratively with our customers to
understand their needs and identify
solutions that add value.
Our assets
We own critical national infrastructure
across the UK, including the Rosyth and
Devonport Royal dockyards. We also
operate a range of customer-owned
critical assets such as naval and air force
bases, complex engineering facilities
and aircraft for the delivery of emergency
services and military training.
Our technology
and know-how
We use our technology and our highly
specialised engineering know-how to
solve customer challenges. We have a
deep understanding of our customers’
assets and are able to integrate
technologies and capabilities to support
their needs and provide services that
add value.
Safety and regulatory
compliance
This underpins 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.
What we do
How we do it
1 Foundations
We work collaboratively with government
departments, public bodies, highly
regulated industries and blue chip
companies, and are embedded on
crucial long-term programmes. We
focus on markets and customers with
outsourcing models that require
value-add engineering-based support
and product development. Our five
main markets are the UK, Australasia,
France, Canada and South Africa,
with operations in and exports to
other countries.
2 Bidding and
business development
We continually monitor opportunities
across our markets, using strong
reference cases and deep sector
expertise to identify ways to solve new
and existing customers’ challenges and
support their programmes. We have a
multi-gate review process for contract
bids to help ensure we only bid on
value-creating work.
3 Contracting
A significant proportion of our business
is carried out on a long-term contract or
multi-year framework basis. Our
contract backlog of £9.5 billion of
contracted work provides a base level
of revenue for the years ahead,
supplemented by new business wins,
framework orders, contract extensions
and variations, and short-cycle work.
Revenue is recognised as we deliver on
our contracts and performance
obligations are satisfied. We have an
established review process to manage
contract risk. See page 87 for our
principal risks.
Deliver support on
complex programmes
We provide through-life technical and
engineering support for our customers’
assets, delivering improvements in
performance, availability and
programme cost.
We deliver these critical services to
defence and civil customers, including
engineering support to naval, land, air
and nuclear operations, frontline
support, specialist training and asset
management.
Product design,
manufacture
and integration
We design and manufacture a range of
defence and specialist equipment from
naval ships and weapons handling
systems to liquid gas handling systems.
We also provide integrated, technology-
enabled solutions to our defence
customers in areas such as secure
communications, electronic warfare
and air defence.
20
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
7 Investment
and capability
The cash we generate funds selective
reinvestment into the business,
principally through capital expenditure
to develop our unique infrastructure,
equipment, IT systems and engineering
talent. See page 17 for our capital
allocation framework.
6 Partnerships
and collaboration
Partnering and collaboration are key
to our success of bringing market-
leading capabilities to our customers.
We bring together organisations to
deliver engineering and technology-
based products and support solutions
that add value to our customers and
increase access to markets.
5 Technology-based
solutions
We apply technology-based solutions
to solve complex customer problems.
We invest in technologies that
optimise asset utilisation, advance
manufacturing, enhance support
capabilities and add value to
customers. Our data analytics, digital
design and integration capabilities
reduce costs and increase the
customer’s ability to adapt to
technology developments.
Creating stakeholder value
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.
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.
Communities
Providing jobs and investment across the
UK and ensuring we act responsibly at all
times in the interests of local communities
around our sites.
See page 56 for details on how we
engage with stakeholders.
1
2
3
7
6
Supported by our
strong corporate
governance
and culture
5
4
4 Sustainability
Our ESG strategy is a key component
of how we deliver and increase the
sustainability and growth of our business.
Our business has a significant impact on
society and the environment and
sustainability is an integral part of our
corporate strategy and how we do
business. See page 58 for our ESG review.
Babcock International Group PLC / Annual Report and Financial Statements 2023
21
Key performance indicators
How we measure our progress
We have six financial and three non-financial key performance indicators (KPIs). The six financial
metrics are alternative performance measures, which we use to monitor the underlying
performance, are not defined by International Financial Reporting Standards (IFRS) and are
therefore considered to be non-GAAP (Generally Accepted Accounting Principles) measures.
The Group has defined and outlined the purpose of its alternative performance measures in the
Financial Glossary starting on page 38.
2023 Results
Organic
revenue
growth (%)
9.9%
9
9
.
7
4
.
N/A
Underlying
operating
margin (%)
4.0%
8
5
.
5
5
.
0
4
.
Underlying
EPS (p)
Underlying
operating
cash conversion (%)
Net debt/EBITDA
(covenant basis)
17.7p
173%
.
7
0
3
.
8
8
2
.
7
7
1
.
6
2
7
1
.
1
5
3
1
1.9
1.5x
4
2
.
8
1
.
5
1
.
FY21
FY22
FY23
FY21
FY22
FY23
FY21
FY22
FY23
FY21
FY22
FY23
FY21
FY22
FY23
Definition
Underlying earnings,
after tax divided by the
weighted average number
of ordinary shares.
Commentary
Underlying earnings per
share decreased to 17.7
pence in the year due to
the Type 31 loss.
Excluding this, EPS was up
10% to 33.8 pence, see a
reconciliation on page 27.
Link to glossary
Underlying basic earnings
per share
Definition
The movement in revenue
compared to that of the
previous year excluding
the impact of FX,
contribution from
acquisitions and disposals
over the prior and current
year. See note 1 of the
accounts for details of our
revenue recognition policy.
Commentary
Organic revenue growth
was 10%, driven by an
increase across all sectors,
see our Operational
reviews on page 40.
Link to glossary
Organic revenue growth
Link to medium term
guidance
Organic revenue growth
Definition
Underlying operating profit,
expressed as a percentage
of revenue. See page 26
for a reconciliation of
statutory to underlying
operating profit.
Commentary
Group margin was lower
year on year driven by the
Type 31 loss impacting
profit. Excluding this,
underlying margin
increased 50 basis points
to 6.3%, see our
commentary on page 26.
Link to glossary
Underlying operating
margin
Underlying operating profit
Link to medium term
guidance
Underlying operating
margin
Definition
Underlying operating
cash conversion is defined
as underlying operating
cash flow after capital
expenditure as a
percentage of underlying
operating profit.
Commentary
Underlying operating cash
conversion of 173% reflects
reduced working capital
and lower than expected
capital expenditure and
underlying operating profit
was lower due to the Type
31 loss. Excluding the
Type 31 loss, cash
conversion was 110%.
Link to glossary
Underlying operating cash
conversion
Underlying operating profit
Underlying operating cash
flow
Link to medium term
guidance
Underlying operating cash
conversion
Definition
Net debt to EBITDA 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.
This definition makes a
series of adjustments to
both Group net debt and
Group EBITDA, see page
31 for a reconciliation.
Commentary
Our net debt to EBITDA
(covenant basis) decreased
to 1.5 times. The decrease
was driven by lower net
debt (as a result of
disposals), which was
predominantly greater
than the reduction in
EBITDA, which was
impacted the Type 31
loss. Excluding the Type
31 loss, net debt to
EBITDA was 1.1 times.
Link to glossary
EBITDA
Net debt/EBITDA
(covenant basis)
22
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Our approach
We went through the process of the contract profitability and balance sheet review (CPBS) in FY21 to set our approach to running the
Group, including creating the right baseline for future performance. We show our financial-based KPI performance for three years, and
excluding the one-off CPBS adjustments in FY21. This is to provide a meaningful measurement and ongoing baseline, and reflect how
we assess operational performance.
Non-Financial
Total
injuries rate
Underlying return
on invested
capital, pre-tax
(ROIC) (%)
18.8%
0.73
CO2e
emissions
(tCO2e/£m)
40.4
.
8
8
1
.
4
7
1
.
9
2
1
.
6
8
40
7
0
.
3
7
0
.
.
3
9
4
.
7
0
5
.
4
0
4
Senior
management
gender
diversity (%)
23%
3
2
3
2
1
2
FY21
FY22
FY23
FY21
FY22
FY23
FY21
FY22
FY23
FY21
FY22
FY23
Definition
Underlying return on
invested capital is defined
as underlying operating
profit plus share of JV
profit after tax, divided by
the sum of net debt,
shareholders’ funds and
retirement deficit or
surpluses.
Commentary
The increase in underlying
ROIC reflects the reduction
in invested capital, namely
net debt and operating
leases (due to disposals)
and shareholder funds,
which was proportionally
greater than the reduction
in underlying operating
profit due to the Type 31
loss, see page 32.
Link to glossary
Underlying return on
invested capital
Definition
The Total Recordable
Injury Rate (TRIR) is a12
month rolling average that
relates to the number,
per 200,000 working
hours (200,000 represents
100 employees working
40 hours for 50 weeks
per year) of recordable
work-related injuries and
illnesses that require
medical treatment beyond
first aid. In any one year,
further assessment of an
injury/illness or information
from an extended
investigations may result
in a restatement of prior
year figures.
Commentary
In April 2021, we moved
to OSHA, an internationally
recognised accident
categorisation method in
order to be able to
conduct bench-marking.
Whilst there had been
reductions in TRIR during
FY22 it has remained
broadly static in FY23. See
page 74 for more details.
Definition
Estimated tonnes of CO2e
emitted as a direct result
of revenue generating
operations. The reporting
period for our energy
consumption and carbon
emissions is the calendar
year (01 January to 31
December). Reporting
calendar year data enables
more time to collate,
analyse and report our
environmental data, which
has improved the accuracy
and completeness of our
data sets.
Commentary
During the reporting period
estate rationalisation,
strategic divestments,
‘low-hanging fruit’ energy
conservation measures
and improvements to our
energy management
practices have resulted in
a reduction of both our
carbon baseline and FY23
operational emissions. (See
page 63 for more details).
Definition
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 (Business
Unit leadership). We also
report the gender diversity
of the Executive
Committee and their
direct reports in line with
the UK Corporate
Governance Code‘s
requirement to report on
‘senior management’
(see page 76).
Commentary
Gender representation at
the senior management
level is 23% which is in line
with last year. See page
76 for more details on
gender diversity statistics.
Link to
management
remuneration
Our remuneration
policy, as detailed on
pages 136 to 141,
includes reference to
underlying profit
before tax, underlying
operating cash flow
and non-financial
measures.
Operational
performance
measures
In the operational
reviews on pages 40
to 55, we use our first
two KPIs (organic
revenue growth,
underlying operating
profit and underlying
operating margin) to
measure sector
performance. Please
see our Financial
Glossary on page 38.
Babcock International Group PLC / Annual Report and Financial Statements 2023
23
Financial review
Financial review
David Mellors
Chief Financial Officer
Read David's biography on page 108
We’ve made excellent
progress this year, with
better-than-expected
cash generation, margin
expansion and double-digit
revenue growth.”
David Mellors
Chief Financial Officer
Statutory to underlying
As described in the Financial Glossary on page 38, the Group provides alternative performance measures (APMs), including underlying
operating profit, underlying margin, underlying earnings per share, underlying operating cash flow, underlying free cash flow, and net debt
to EBITDA, to enable users to better understand the performance and earnings trends of the Group. These measures are considered to
provide a consistent measure of business performance from year to year. The reconciliation from the IFRS statutory income statement to
underlying income statement is shown on the next page.
24
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Income statement
Revenue
Operating profit/(loss)
Other income
Share of results of joint ventures and associates
Net finance costs
Profit/(loss) before tax
Income tax (expense)/benefit
Profit/(loss) after tax for the year
Basic EPS
Diluted EPS
Type 31 loss
Underlying operating profit excl. Type 31 loss
Underlying basic EPS excl. Type 31 loss
Underlying
£m
4,438.6
177.9
–
9.3
(58.3)
128.9
(37.7)
91.2
17.7p
17.4p
100.1
278.0
33.8p
A full statutory income statement can be found on page 175.
31 March 2023
Specific
adjusting items
£m
–
(132.4)
–
–
9.7
(122.7)
(1.8)
(124.5)
Statutory
£m
4,438.6
45.5
–
9.3
(48.6)
6.2
(39.5)
(33.3)
(6.9)p
(6.9)p
31 March 2022
Underlying
£m
Specific adjusting
items £m
–
(10.9)
–
–
(9.6)
(20.5)
29.5
9.0
4,101.8
237.7
6.2
20.1
(61.2)
202.8
(43.9)
158.9
30.7p
30.4p
Statutory
£m
4,101.8
226.8
6.2
20.1
(70.8)
182.3
(14.4)
167.9
32.5p
32.1p
Type 31 loss: As described in the CEO review and in Note 1 in the financial statements, the Marine sector incurred a £100.1 million loss
in FY23, which is due to additional forecast costs that were not foreseen at contract inception. Following the commencement of a dispute
resolution process (DRP) in April 2023 over responsibility for these incremental costs, we have reassessed the contract outturn on the basis
that these are not recovered. This has resulted in the recording of a £100.1 million loss in the year, representing a £42.6 million reversal of
revenue, £1.6 million asset impairment and the recognition of a £55.9 million onerous contract loss. The DRP is ongoing.
Revenue bridge
£m
+10%
Organic growth
405
4,439
4,102
24
(92)
4,005
FY22
FX
Acquisitions and
disposals
Other trading
FY23
FY23
ongoing business*
* Ongoing business excludes c.£422m revenue from divested businesses (AES & Civil training) and the c.£12m one-off credit in Land (revenue and profit)
Revenue increased by 8% to £4,438.6 million comprising 10% organic growth and a 2% reduction due to the net impact of acquisitions
and disposals. The organic increase was delivered across all four sectors (see sector performance tables on page 37).
Babcock International Group PLC / Annual Report and Financial Statements 2023
25
4500
4000
3500
3000
2500
2000
Financial review (continued)
Statutory operating profit decreased to £45.5 million (FY22: £226.8 million). The key drivers in FY23 were the £100.1 million loss on
the Type 31 programme and £117.7 million loss on disposals and related items, mainly European AES, which more than offset a strong
operating performance, led by Land.
FY22 statutory operating profit included £163.1 million profit on disposal, £118.8 million exceptional charges, of which £123.6 million
related to impairment of tangible and intangible assets, and £33.8 million restructuring costs. There were no exceptional items recorded
in FY23. See Note 2 in the financial statements for more detail.
Statutory operating profit includes specific adjusting items (SAIs) that are not included in underlying operating profit, which is a key APM
for the Group. A reconciliation of statutory operating profit to underlying operating profit is shown in the table below and in Note 2 in the
financial statements.
Reconciliation of statutory to underlying operating profit
Operating profit
Amortisation of acquired intangibles
Business acquisition, merger and divestment related items
Restructuring costs
Exceptional items
Fair value movement on derivatives
Specific adjusting items impacting operating profit
Underlying operating profit
Type 31 loss
Underlying operating profit excluding Type 31 loss
Underlying operating profit bridge
£m
5.8%
margin
238
2
(10)
6.3%
margin*
36
12
278
31 March 2023
£m
45.5
15.8
117.7
–
–
(1.1)
132.4
177.9
100.1
278.0
31 March 2022
£m
226.8
21.4
(163.1)
33.8
118.8
–
10.9
237.7
–
237.7
6.6%
margin+
265
178
(100)
FY22
FX
Acquisitions
and
disposals
Other
trading
One-off
accounting
credit
FY23
excl. Type 31
loss
Type 31
loss
FY23
FY23
ongoing
business+
* Excluding Type 31 loss
+ Ongoing business excludes the Type 31 loss, £1m from divested businesses (AES & Civil training) and the £12m one-off credit in Land
Underlying operating profit: Underlying operating profit decreased by 25% to £177.9 million, due to the Type 31 loss, a 4% reduction
from the net impact of acquisitions and disposals, and further costs of implementing a stronger control environment, which more than
offset the strong operational performance.
Excluding the Type 31 loss, underlying operating profit increased to £278.0 million, driven by improved performance in Land, enhanced
by a £12 million one-off accounting credit, and good growth in Marine and Aviation. Underlying operating profit in Nuclear was in line with
the prior year (see sector performance tables on page 37).
26
Babcock International Group PLC / Annual Report and Financial Statements 2023
300
250
200
150
100
50
0
Strategic report
Governance
Financial Statements
Underlying operating margin decreased to 4.0% (FY22: 5.8%) due to the Type 31 loss. Excluding this, underlying operating margin
increased by 50 basis points to 6.3%.
Further analysis of our revenue and underlying operating profit performance is included in our sector operational reviews on page 40 to 55.
Other income of £6.2 million in FY22 related to pre-completion guarantee fees received in relation to the disposal of the Aviation Oil and
Gas business (in October 2021).
Joint ventures and associates: The Group’s share of results of joint ventures and associates reduced from the prior year to a profit after
tax of £9.3 million (FY22: £20.1 million) due to the disposal of our 15.4% stake in AirTanker Holdings in February 2022 and reclassification
of Naval Support Group (NSM), which was fully consolidated from March 2022.
Net finance costs decreased to £58.3 million on an underlying basis (FY22: £61.2 million), driven by lower net interest costs on reduced
debt and higher cash balances, and a £7.5 million pension interest credit, partly offset by a £12 million charge associated with financing
of defence contract receivables (described below). Reported net finance costs of £48.6 million included a £9.7 million non-cash credit due
to fair value movements in derivatives and related items.
Our Mentor military aviation contract in France is for the provision of Pilatus PC-21 aircraft to the Direction générale de l’armement (DGA),
followed by maintenance support until 2027. The aircraft have been delivered to and accepted by DGA in the year, with no remaining
performance risk for Babcock. As payment for the aircraft is not due from DGA until 2027 under the contract terms, we have sold the
receivables for these aircraft in the year for €122 million on a non-recourse basis, incurring a one-off finance cost of €14 million
(£12 million). The net overall impact on FY23 operating cash flow is broadly neutral after cash paid to purchase the aircraft in the year.
Taxation: The Group tax charge was £39.5 million. Tax on underlying profits was £37.7 million representing an effective underlying tax
rate of 32%. Excluding the impact of the Type 31 loss the effective tax rate was 26% (FY22: 24%), slightly higher than expected due to the
geographical mix of profits and unrelieved losses in the European AES business. The underlying effective tax rate is calculated on underlying
profit before tax excluding the share of income from joint ventures and associates (which is a post-tax number). The Group’s effective
underlying rate of tax for this financial year will be dependent on country profit mix. The current assumption is around 26%.
Earnings per share: Basic earnings per share, on a statutory basis, declined to a 6.9 pence loss (FY22: 32.5 pence) reflecting lower profit
before tax and a higher UK tax rate. Underlying earnings per share declined to 17.7 pence (FY22: 30.7 pence) primarily due to the Type 31
loss. Excluding this, underlying earnings per share increased by 10% to 33.8 pence.
Reconciliation of statutory profit/(loss) and basic EPS to underlying profit and basic EPS
(Loss)/profit after tax for the year
Specific adjusting items, net of tax
Underlying profit after tax for the year
Type 31 loss, net of tax
Underlying profit after tax for the year excl. Type 31 loss
31 March 2023
31 March 2022
£m
Basic EPS
(33.3)
124.5
91.2
81.1
172.3
(6.9)p
24.6p
17.7p
16.1p
33.8p
£m
167.9
(9.0)
158.9
–
158.9
Basic EPS
32.5p
(1.8)p
30.7p
–
30.7p
Exchange rates
The translation impact of foreign currency movements resulted in an increase in revenue of £23.5 million and an increase in underlying
operating profit of £1.6 million. The main currencies that have impacted our results are the Canadian Dollar, South African Rand, Euro and
Australian Dollar. Following disposal of the European AES businesses, the currencies with the greatest potential to impact results are the
South African Rand and the Australian and Canadian Dollar:
• A 10% movement in the South African Rand against Sterling would affect revenue by around £30 million and underlying operating profit
by around £4 million per annum
• A 10% movement in the Australian Dollar against Sterling would affect revenue by around £25 million and underlying operating profit
by around £2 million per annum
• A 10% movement in the Canadian Dollar against Sterling would affect revenue by around £15 million and underlying operating profit
by around £1 million per annum
Babcock International Group PLC / Annual Report and Financial Statements 2023
27
Financial review (continued)
Cash flow and net debt
Underlying cash flow and net debt
Underlying cash flows are used by the Group to measure operating performance as they provide a more consistent measure of business
performance from year to year.
31 March 2023
31 March 2022
£m
45.5
132.4
177.9
91.3
84.9
6.9
103.5
37.2
(86.2)
(108.5)
307.0
173%
(141.9)
(62.2)
(25.4)
8.7
(10.9)
75.3
158.6
–
(2.2)
108.5
(115.1)
218.1
(1.8)
(36.1)
56.0
(57.0)
404.3
(968.7)
(564.4)
218.2
(346.2)
£m
226.8
10.9
237.7
123.1
74.4
0.6
(173.9)
(9.3)
(135.2)
(113.0)
4.4
2%
(151.7)
(45.0)
10.0
41.6
(50.6)
(191.3)
417.2
(18.1)
(1.1)
113.0
(71.2)
136.6
(2.4)
–
(11.8)
12.8
383.7
(1,352.4)
(968.7)
412.0
(556.7)
Operating profit
Add back: specific adjusting items
Underlying operating profit
Right of use asset depreciation
Other depreciation & amortisation
Non-cash items
Working capital movements
Provisions
Net capital expenditure
Lease principal payments
Underlying operating cash flow
Cash conversion %
Pension contributions in excess of income statement
Interest paid (net)
Tax paid
Dividends from joint ventures and associates
Cash flows related to exceptional items
Underlying free cash flow
Net acquisitions and disposals of subsidiaries
Acquisitions/investments in joint ventures and associates
Dividends paid (including non-controlling interests)
Lease principal payments
Net new lease arrangements
Leases disposed of/(acquired) with subsidiaries
Other non-cash debt movements
Clarification of net debt definition
Fair value movement in debt and related derivatives
Exchange movements
Movement in net debt
Opening net debt
Closing net debt
Add back: operating leases
Closing net debt excluding operating leases
A full statutory cash flow statement can be found on page 178 and a reconciliation to net debt on page 30.
28
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Reconciliation of underlying operating cash flow to statutory net cash flow from operations
Underlying operating cash flow
Add: net capex
Add: capital element of lease payments
Less: pension contributions in excess of income statement
Non-operating cash items (excluded from underlying cash flow)
Cash generated from operations (statutory)
Tax (paid)/received
Less: net interest paid
Net cash flow from operating activities (statutory)
Underlying operating profit to operating cashflow bridge
£m
91
31 March 2023
£m
307.0
86.2
108.5
(141.9)
(10.9)
348.9
(25.4)
(62.2)
261.3
31 March 2022
£m
4.4
135.2
113.0
(151.7)
(59.1)
41.8
10.0
(45.0)
6.8
110% cash
conversion*
85
104
178
(86)
44
307
(109)
UOP
Working
capital
Depreciation and
amortisation
ROU asset
depreciation and
amortisation
Net capex
Capital lease
payments
Other
(including
provisions)
OCF
* Excluding the Type 31 loss
Underlying operating cash flow
Underlying operating cash flow after capital expenditure increased to £307.0 million (FY22: £4.4 million), a conversion ratio to underlying
operating profit of 173% (FY22: 2%). Excluding the Type 31 loss, underlying operating cash conversion was 110%. The higher conversion
ratio reflects reduced working capital and lower than expected capital expenditure.
• Working capital: An inflow of £103.5 million compared to an outflow of £173.9 million last year. This reflects a strong focus on cash
flow as a performance measure coupled with cash flow phasing on programmes and customer receipts of c.£70 million received earlier
than expected. The outflow in FY22 included payments associated with the unwind of the past practice of period-end management of
working capital (withholding of creditors). We have sold receivables relating to the provision of aircraft on our Mentor contract in France
for €122m in the year. This is to match receipts and payments for the aircraft in the period, such that the net impact on operating cash
flow is broadly neutral. The factoring is on a non-recourse basis and there is no remaining performance risk for Babcock.
• Capital expenditure: Net capital expenditure decreased to £86.2 million (FY22: £135.2 million). This was a result of gross capex of
£125.1 million (FY22: £203.2 million) being lower than expected due to project phasing, which more than offset a c.£30 million
reduction in proceeds from asset disposals primarily relating to the timing of aircraft sales in our Aviation sector. We expect FY24 gross
capital expenditure to be approximately £120-£150 million depending on phasing, reflecting continued investment in our submarine
infrastructure in Devonport and roll-out of enterprise resource planning (ERP).
• Lease principal payments, representing the capital element of payments on lease obligations, reduced slightly to £108.5 million
(FY22: £113.0 million), following divestments in our Aviation business. This is reversed out below underlying free cash flow as the
payment reduces our lease liability (i.e. no net effect on net debt).
Babcock International Group PLC / Annual Report and Financial Statements 2023
29
Financial review (continued)
Underlying free cash flow
Underlying free cash inflow of £75.3 million compares to an outflow of £191.3 million in the prior year, primarily reflecting higher
underlying operating cash flow.
• Pension cash outflow in excess of the income statement charge of £141.9 million (FY22: £151.7 million) was higher than previous
guidance of c.£100 million due to acceleration of £35 million of future years scheduled payments at the year end. As a result, we expect
the pension cash outflow in excess of the income statement charge to reduce to around £65 million in FY24.
• Interest: Net interest paid, excluding that paid by JVs and associates, increased to £62.2 million (FY22: £45.0 million) primarily due to
the €14 million (£12 million) finance charge associated with the financing of a French defence contract receivable described above.
• Taxation: Tax paid in the year was £25.4 million. The £10.0 million cash tax receipt in FY22 was a result of the settlement of several
open years’ tax computations with the authorities. We expect a cash tax outflow in the current financial year of approximately £35
million.
• Dividends received from joint ventures and associates decreased to £8.7 million as expected (FY22: £41.6 million) reflecting the
disposal of our stake in AirTanker Holdings, the acquisition and subsequent consolidation of NSM, and the non-repeat of close out
dividends on the termination of JV’s in the prior year. We expect dividends from JVs and associates to be broadly stable in FY24.
• Exceptional cash flows: The £10.9 million (FY22: £50.6 million) exceptional cash outflow in the year was the conclusion of the large
prior year restructuring programme.
Acquisitions and disposals
The net cash inflow from disposals in the year, after costs, was £158.6 million. This included gross proceeds (net of cash disposed) of
£176.6 million from the sale of the European AES business in February 2023, which included around £60 million net completion
adjustments, and £2.9 million from the sale of Civil Training, also in February 2023, less transaction costs.
The net cash inflow from acquisitions and disposals in FY22 was £417.2 million, including gross proceeds (net of cash disposed) from the
sale of Oil & Gas (£10.0 million). Frazer Nash Consultancy (£286.8 million), UK Power (£45.8 million) and our 15.4% shareholding in
AirTanker Holdings Limited (£95.6 million), less £15.5 million net consideration paid for the acquisition of the remaining 50% of NSM and
transaction costs.
New lease arrangements
In addition to net capital expenditure, and not included in underlying free cash flow, £117.0 million (FY22: £93.8 million) of additional
leases were entered into in the period. These represent new lease obligations and so are included in our main net debt figure but do not
involve any cash outflows at inception.
Net debt
Net debt at 31 March 2023 was £564.4 million, representing a reduction of £404.3 million compared to the beginning of the year.
This reduction was driven by underlying free cash flow, proceeds from disposals and £218.1 million of operating leases that were
transferred with the European AES disposal. The reconciliation of net cash flow to net debt is shown in the table below.
Excluding operating leases, net debt was £346.2 million, representing a reduction of £210.5 million compared to the beginning of the year.
Movement in net debt – reconciliation of statutory cash flows to net debt
Net cash flow from operating activities (statutory)
Net cash flow from investing activities (statutory)
Net cash flow from financing activities (statutory)
Net increase/(decrease) in cash, cash equivalents and bank overdrafts (statutory)
Cash flow from the (increase)/decrease in debt
Change in net funds resulting from cash flows
Additional lease obligations
New leases granted
Debt held by disposed subsidiaries
Other non-cash movements and changes in fair value
Clarification of net debt definition
Foreign currency translation differences
Movement in net debt in the year
Opening net debt
Closing net debt
30
Babcock International Group PLC / Annual Report and Financial Statements 2023
31 March 2023
£m
261.3
83.5
(666.1)
(321.3)
629.6
308.3
(117.0)
28.5
219.7
57.9
(36.1)
(57.0)
404.3
(968.7)
(564.4)
31 March 2022
£m
6.8
338.6
(122.7)
222.7
55.1
277.8
(93.8)
41.9
137.1
7.9
–
12.8
383.7
(1,352.4)
(968.7)
Strategic report
Governance
Financial Statements
Funding and liquidity
As of 31 March 2023, the Group had access to a total of £1.9 billion of borrowings and facilities of mostly long-term maturities.
These comprised:
• £300 million revolving cash facility (RCF) maturing 20 May 2024
• £775 million RCF, with £45 million maturing 28 August 2025 and £730 million extended to 28 August 2026
• £300 million bond maturing 5 October 2026
• €550 million bond, hedged at £493 million, maturing 13 September 2027
• Two committed overdraft facilities totalling £100 million
At 31 March 2023, the Group’s net cash balance was £430 million. This combined with the undrawn amounts under our committed RCFs
and overdraft facilities, gave us liquidity headroom of around £1.6 billion.
Capital structure
While there are several facets to balance sheet strength, a primary measurement relevant to Babcock is the net debt/EBITDA gearing ratio
within our debt covenant of 3.5x. Due to strong underlying operating cash flow, the net debt/EBITDA gearing ratio at 31 March 2023 of
1.5x is lower than at the start of the year despite the £100 million Type 31 loss recognised within EBITDA in the year. This is still within our
medium-term target of between 1.0x and 2.0x. Excluding the Type 31 loss, the net debt/EBITDA gearing ratio at 31 March 2023 would
have been 1.1x.
Net debt to EBITDA (covenant basis)
This measure is used in the covenant in our RCF facilities and includes several adjustments from reported net debt and EBITDA. The covenant
level is 3.5 times. As set out below, our net debt to EBITDA (covenant basis) decreased to 1.5 times for FY23 despite the impact of the
Type 31 loss on underlying operating profit.
Underlying operating profit
Depreciation and amortisation
Covenant adjustments1
EBITDA
JV and associate dividends
EBITDA + JV and associate dividends (covenant basis)
Net debt
Covenant adjustments2
Net debt (covenant basis)
Net debt/EBITDA
31 March 2023
£m
Last twelve
months
177.9
84.9
(8.4)
254.4
8.7
263.1
(346.2)
(49.3)
(395.5)
1.5x
31 March 2022
£m
Last twelve
months
237.7
74.4
(12.9)
299.1
41.6
340.8
(556.7)
(60.0)
(616.7)
1.8x
1. Various adjustments made to EBITDA to reflect accounting standards at the time of inception of the original RCF agreement. The main adjustments are to the
treatment of leases within operating profit and pension costs.
2. Removing loans to JVs, finance lease receivables.
Interest cover (covenant basis)
This measure is also used in the covenant in our RCF facilities, with a covenant level of 4.0 times.
EBITDA (covenant basis) + JV and associate dividends
Net finance costs
Covenant adjustments3
Net Group finance costs
Interest cover
31 March 2023
£m
Last twelve
months
263.1
(48.6)
7.1
(41.5)
6.3x
31 March 2022
£m
Last twelve
months
340.8
(70.8)
18.7
(52.1)
6.5x
3. Various adjustments made to reflect accounting standards at the time of inception of the original RCF agreement, including lease and retirement benefit interest.
Babcock International Group PLC / Annual Report and Financial Statements 2023
31
Financial review (continued)
Return on invested capital, pre-tax (ROIC)
This measure is one of the Group’s key performance indicators.
Underlying operating profit
Share of results of joint ventures and associates
Underlying operating profit plus share of JV PAT
Net debt excluding operating leases
Operating leases
Shareholder funds
Retirement deficit/(surplus)
Invested capital
ROIC
31 March 2023
£m
Last twelve
months
177.9
9.3
187.2
346.2
218.2
370.9
61.4
996.7
18.8%
31 March 2022
£m
Last twelve
months
237.7
20.1
257.8
556.7
412.0
701.5
(191.6)
1,478.7
17.4%
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 2023,
the net position was a deficit of £61.4 million compared to a net surplus of £191.6 million at 31 March 2022. These valuations are based
on discounting using corporate bond yields.
The fair value of the assets and the present value of the liabilities of the Group pension schemes at 31 March 2023 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
FY23
FY22
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
(3.1)
301.7
–
6.0
1,227.7
1,524.7
(231.8)
2,825.2
79%
21%
450.7
686.6
1,773.6
2,910.9
10.6
0.2
–
148.0
95.5
1.4
–
255.7
100%
–
45.7
65.3
130.5
241.5
26.6
5.9
0.4
17.5
34.1
307.8
0.4
171.5
31.6
364.0
44.1
46.0
45.1
1,368.3
1,924.1
21.7
(10.1)
107.1
70%
30%
1,547.8
(241.9)
3,188.0
2,094.0
(283.5)
4,220.3
80%
20%
84%
16%
21.7
34.7
40.6
97.0
518.1
786.6
1,944.7
756.0
1,066.2
2,170.4
3,249.4
3,992.6
14.3
0.1
–
182.9
77.2
1.3
–
275.8
100%
–
65.7
93.5
167.9
327.1
30.6
5.1
0.4
31.8
76.5
369.2
44.5
260.7
77.5
2,078.8
101.8
2,197.1
(10.2)
237.0
(293.7)
4,733.1
46%
54%
82%
18%
35.8
132.7
53.3
857.5
1,292.4
2,391.6
221.8
4,541.5
(85.7)
14.2
10.1
(61.4)
227.7
(51.3)
15.2
191.6
* The matching assets aim to hedge the liabilities and consist of gilts, repos, cash and swaps. They are shown net of repurchase obligations of £1,055 million
(FY22: £1,872 million)
32
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Analysis of movement of pensions in the Group statement of financial position
The movement in net deficits for the year ending FY23 is as a result of the movement in assets and liabilities shown below.
Fair value of plan assets
(including reimbursement rights)
At 1 April
Interest on assets
Actuarial gain 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 (gain)/loss
Actuarial loss/(gain) – demographics
Actuarial (gain)/loss – financial
Benefits paid
Past service costs
Settlement
At 31 March
Net surplus/(deficit) at 31 March
FY23
FY22
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
4,220.3
275.8
237.0
4,733.1
4,123.7
265.6
234.3
4,623.6
113.4
(1,437.0)
167.4
0.1
(239.0)
–
2,825.2
7.3
(17.1)
2.5
–
(12.8)
–
255.7
5.4
(79.0)
4.6
–
(4.8)
126.1
(1,533.1)
174.5
0.1
(256.6)
82.3
77.0
182.5
0.2
(245.4)
5.2
13.1
2.6
–
(10.7)
4.7
(1.7)
5.1
–
(5.4)
92.2
88.4
190.2
0.2
(261.5)
(56.1)
107.1
(56.1)
3,188.0
–
4,220.3
–
275.8
–
237.0
–
4,733.1
3,992.6
327.1
221.8
4,541.5
4,290.0
369.6
242.9
4,902.5
21.7
6.2
105.0
0.1
135.6
(38.2)
(1,073.1)
(239.0)
–
–
2,910.9
(85.7)
1.3
0.5
8.7
–
18.0
(3.6)
(97.7)
(12.8)
–
–
241.5
14.2
2.8
0.1
4.9
–
9.3
(1.7)
(79.3)
(4.8)
–
(56.1)
97.0
10.1
25.8
6.8
118.6
0.1
162.9
(43.5)
(1,250.1)
(256.6)
–
(56.1)
25.6
6.6
83.8
0.2
70.6
(11.5)
(227.3)
(245.4)
–
–
2.0
0.5
7.3
–
(14.2)
(3.5)
(23.9)
(10.7)
–
–
3.5
0.3
4.8
–
(2.4)
–
(21.9)
(5.4)
–
–
31.1
7.4
95.9
0.2
54.0
(15.0)
(273.1)
(261.5)
–
–
3,249.4
(61.4)
3,992.6
227.7
327.1
(51.3)
221.8
15.2
4,541.5
191.6
Accounting valuations
At 31 March 2023, the IAS 19 valuation for accounting purposes was a net deficit of £61.4 million (FY22: a surplus of £191.6 million).
The move to a net accounting deficit is a result of a greater reduction in the fair value of plan assets (by £1,545.1 million to £3,188.0
million, net of £241.9 million longevity swaps), compared to the reduction in present value of pension benefit obligations (by £1,292.1
million to £3,249.4 million). The reduction in fair value of plan assets was driven by negative net asset returns coupled with the impact on
the assets held from the UK market volatility experienced by pension schemes in September 2022, partly offset by scheme contributions.
The reduction in pension liabilities was primarily a result of higher discount rates. The fair value of the assets and liabilities of the Group
pension schemes at 31 March 2023 and the key assumptions used in the IAS 19 valuation of our schemes are set out in Note 26 of the
financial statements.
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
FY23
4.8
3.3
2.8
2.8
20.5
FY22
2.7
3.7
3.2
3.2
20.9
FY23
4.8
3.3
2.8
3.2
21.3
FY22
2.7
3.7
3.2
3.5
21.8
FY23
4.8
3.3
2.8
3.3
19.4
FY22
2.7
3.7
3.2
3.7
20.0
Babcock International Group PLC / Annual Report and Financial Statements 2023
33
Financial review (continued)
Cash contributions
An estimate of the actuarial deficits of the Group’s defined benefit pension schemes, including all longevity swap funding gaps,
calculated using each Scheme’s respective technical provisions basis, as at FY23 was approximately £400 million (FY22: c.£350 million).
Such valuations use discount rates based on UK gilts – which differs from the corporate bond approach of IAS 19. This technical provision
estimate is based on the assumptions used within the latest agreed valuation prior to 31 March 2023 for each of the three main schemes.
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.
Pensions management
The Group continues to review its options to reduce the risks inherent in its schemes. 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 and the
Babcock Clyde Section of the Citrus Pension Plan, as well as employees in 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.
Investment strategy
In recent years, the Group has agreed investment 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, and with the trustees of the
Devonport Royal Dockyard Pension Scheme designed to target self-sufficiency for this scheme by 2030. 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. 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 2023 approximately 90% of the schemes’ liabilities (as measured
on a self-sufficiency 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 2021 was completed in
the last financial year, the valuation of the Babcock International Group Pension Scheme as at 31 March 2022 has been completed since
year end, and work has commenced on the valuation of the Devonport Royal Dockyard Pension Scheme at 31 March 2023.
Future service contributions
Deficit recovery
Longevity swap
Total cash contributions — employer
31 March 2024e
£m
18.0
47.8
15.2
81.0
31 March 2023
£m
20.0
123.5
15.6
159.1
31 March 2022
£m
21.1
135.2
16.8
173.1
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.
Income statement charge
The charge included within underlying operating profit in FY23 was £32.6 million (FY22: £38.5 million), of which £25.8 million (FY22:
£31.1 million) related to service costs and £6.8 million (FY22: £7.4 million) related to expenses. In addition to this, there was an interest
credit of £7.5 million (FY22: charge of £3.7 million).
34
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
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.
Liquidity and debt maturity profile
Debt maturity profile1 (£m)
300
775
300
493
FY23
300
775
300
493
FY24
300
775
300
493
FY25
730
300
493
FY26
493
FY27
RCF 20242 £300m
RCF 20263 £775m
GBP bond 20264 £300m
Euro bond 20275 €550m
1. Chart shows notional value of the debt
2. RCF 2024 £300m, matures 20 May 2024
3. £730m of £775m RCF extended to 2026, matures 28 August 2026
4. GBP bond 2026 £300m, matures 5 October 2026
5. Euro bond 2027 €550m, hedged at £493m, matures 13 September 2027
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.
In the prior year the Group signed a new three-year Revolving Credit Facility (RCF) of £300 million, which expires in May 2024, 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’) did not impact the
calculation and agreed with lenders a temporary amendment to the net debt to EBITDA ratio covenant permitted level to 4.5 times for the
measurement periods ending 30 September 2021 and 31 March 2022 after which the permitted level returned to the original 3.5 times.
The Group also extended the maturity of £730 million of its existing £775 million RCF to 2026.
The Group's main corporate debt comprises a £300 million Sterling bond, maturing October 2026 and a €550 million bond, maturing
September 2027. Taken together, these provide the Group with a total of around £1.8 billion of available committed facilities and bonds.
In October 2022 the Group repaid a €550m bond which matured using cash generated from operations and disposals.
Babcock International Group PLC / Annual Report and Financial Statements 2023
35
Financial review (continued)
Interest rates
Objective
To manage exposure to interest rate fluctuations on borrowings by varying the proportion of fixed rate debt relative to floating rate debt to
reflect the underlying nature of the Group’s commitments and obligations. As a result, the Group does not maintain a specific set proportion of
fixed versus floating debt, but monitors the mix to ensure that it is compatible with its business requirements and capital structure.
Policy
Interest 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 and updated from time to time.
Performance
As at 31 March 2023, the Group had 83% fixed rate debt (31 March 2022: 66%) and 17% floating rate debt (31 March 2022: 34%) based
on gross debt, including lease liabilities of £1,061.1 million (31 March 2022: £2,290.1 million).
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 sectors aims to regularly forecast cash 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 in the prior year, the Group signed a new £300 million RCF and extended the maturity of
£730 million of its existing RCF to 2026. The Group continues to monitor the liquidity position and will seek to extend or replace
committed debt as the need arises. Surplus cash during the year was used to either repay outstanding RCF drawings or 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, Australian Dollar and Canadian Dollar.
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.
Policy — Translation risk
The Group is exposed to movements in foreign currency exchange rates in respect of the translation of net assets and income statements
of foreign subsidiaries and equity accounted investments. It is not the Group’s policy to hedge through the use of derivatives the translation
effect of exchange rate movements on the income statement or balance sheet of overseas subsidiaries and equity accounted investments
it regards as long-term investments. However, where the Group has material assets denominated in a foreign currency, it will consider some
matching of those aforementioned assets with foreign currency denominated debt.
Performance
There was a net foreign exchange loss of £12.7 million in the income statement for the year ending 31 March 2023
(31 March 20221: £10.5 million loss).
36
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Segmental analysis
The Group reports its performance through four reporting sectors.
31 March 2023
Revenue
Operating profit
Operating profit margin
Underlying operating profit
Underlying operating margin
Marine
£m
1,439.6
Nuclear
£m
1,179.2
Land
£m
1,017.1
5.8
0.4%
12.7
0.9%
63.6
5.4%
63.5
5.4%
80.9
8.0%
85.9
8.4%
Aviation
£m
802.7
(104.8)
(13.1)%
15.8
2.0%
Total
£m
4,438.6
45.5
1.0%
177.9
4.0%
Contract backlog
2,580.7
2,453.8
2,809.8
1,633.0
9,477.3
Type 31 loss
Underlying operating profit
Underlying operating margin
31 March 2022
Revenue
Operating profit
Operating profit margin
Underlying operating profit
Underlying operating margin
100.1
112.8
7.8%
100.1
278.0
6.3%
Marine
£m
1,259.3
Nuclear
£m
1,009.7
Land
£m
1,015.5
Aviation
£m
817.3
Total
£m
4,101.8
309.7
24.6%
98.0
7.8%
56.9
5.6%
62.4
6.2%
36.2
3.6%
58.8
5.8%
(176.0)
(21.5)%
18.5
2.3%
226.8
5.5%
237.7
5.8%
Contract backlog
2,491.8
2,788.8
2,309.0
2,293.6
9,883.2
Babcock International Group PLC / Annual Report and Financial Statements 2023
37
Financial review (continued)
Financial Glossary – Alternative Performance Measures
The Group provides Alternative Performance Measures (APMs), including underlying operating profit, underlying margin, underlying earnings per
share, underlying operating cash flow, underlying free cash flow, and net debt to EBITDA to enable users to have a more consistent view of
the performance and earnings trends of the Group. These measures are considered to provide a consistent measure of business performance
from year to year. They are used by management to assess operating performance and as a basis for forecasting and decision-making,
as well as the planning and allocation of capital resources. They are also understood to be used by investors in analysing business performance.
The Group’s APMs are not defined by IFRS and are therefore considered to be non-GAAP measures. The measures may not be comparable
to similar measures used by other companies and they are not intended to be a substitute for, or superior to, measures defined under IFRS.
The Group’s APMs are consistent with the year ended 31 March 2022 with the addition of measures excluding the Type 31 loss.
Further information on the Group’s specific adjusting items, which is a critical accounting judgement, can be found in Note 2.
Adjustments to reconcile to
IFRS measure (and reference to
reconciliation)
FX, contribution of
acquisitions and
disposals in the current
and prior period
Contract backlog is
based on the full
contract term whereas
the IFRS measure may be
based on shorter periods
where the customer has
the ability to exit
contracts early
Specific adjusting items1
See table on page 10
See Note 2
Ratio – N/A
Specific adjusting items1
See table on page 10
Specific adjusting items1
See table on page 10
Specific adjusting items1
See table on page 10
Measure
Closest equivalent
IFRS measure
Definition and purpose
Revenue measures
Organic revenue
growth
Revenue growth
year-on-year
Contract
backlog
Framework
agreements
Profit measures
Transaction price
under IFRS 15 on
customer contracts
allocated to
unsatisfied /
partially satisfied
performance
obligations
No direct
equivalent
Growth excluding the impact of foreign exchange (FX), and contribution from
acquisitions and disposals over the prior and current year
• Used to measure the year-on-year movement in Group revenue
• It is a good indicator of business growth
• Group KPI
Contracted revenue excluding variable revenue, expected contract renewals,
expected revenue from framework agreements and impact of termination for
convenience clauses
• Used to measure revenue under contract as a good indicator of revenue
visibility
Funded and unfunded unexecuted customer contracts. Unfunded orders include the
elements of contracts for which funding has not been authorised by the customer
Underlying
operating profit
Operating
profit
Operating profit before the impact of specific adjusting items1
• Underlying operating profit is the headline measure of the Group’s performance
Underlying
operating
margin
No direct
equivalent
Underlying net
finance costs
Net finance
costs
Underlying
profit before tax
Profit before
tax
Underlying
effective tax
rate
Effective tax
rate
Underlying basic
earnings per share
Basic earnings
per share
Underlying
operating profit
excluding the
Type 31 loss
Underlying
operating margin
excluding the
Type 31 loss
Operating
profit
No direct
equivalent
Underlying operating profit as a percentage of revenue
• To provide a measure of operating profitability, excluding one-off items
• Operating margin is an important indicator of operating efficiency across the Group
• Group KPI
Net finance costs excluding specific adjusting items1
• To provide an alternative measure of finance costs excluding items such as fair
value measurements which can fluctuate significantly on inputs outside of
management’s control
Profit before tax adjusted for
• The summation of the impact of all specific adjusting items on profit before tax
Tax expense excluding the tax impact of specific adjusting items1, as a percentage of
underlying profit before tax (being the summation of the impact of all adjusting
items on profit before tax) excluding the share of post-tax income from joint
ventures and associates
• To provide an indication of the ongoing tax rate across the Group, excluding
one-off items
Based on the Group’s underlying profit before tax and underlying effective tax rate Specific adjusting items1
Operating profit, excluding the Type 31 loss, before the impact of specific
adjusting items1
• Eliminates the Type 31 loss for a better measure of the Group’s underlying
operating profit performance, given the one-off nature of the loss
Underlying operating profit, excluding the Type 31 loss, divided by revenue
• Eliminates the Type 31 loss for a better measure of the Group’s underling
operating margin performance, given the one-off nature of the loss
See table on page 10
Specific adjusting items1
See table on page 10
See Note 2
Ratio – N/A
38
Babcock International Group PLC / Annual Report and Financial Statements 2023
Specific adjusting items1
Depreciation and
amortisation
Covenant adjustments
See table on page 16
See table on page 15
See table on page 16
See table on page 16
Ratio – N/A
See table on page 16
Strategic report
Governance
Financial Statements
Measure
Closest
equivalent IFRS
measure
Definition and purpose
Profit measures continued
Adjustments to reconcile to
IFRS measure (and reference to
reconciliation)
Basic
earnings per
share
Based on the Group’s underlying profit before tax, excluding the Type 31 loss,
and underlying effective tax rate.
• Eliminates the Type 31 loss for a better measure of the Group’s basic earnings
Specific adjusting items1
See table on page 12
Underlying basic
earnings per share
excluding the Type
31 loss
EBITDA
Operating
profit
per share performance, given the one-off nature of the loss
Underlying operating profit, plus depreciation and amortisation, and various
covenant adjustments linked to the Revolving Credit Facility including the
treatment of leases within operating profit and pension costs
• Used as the basis to derive the gearing ratio net debt/EBITDA, which is a key
measure of balance sheet strength and the basis of our debt covenant calculations
Balance sheet
Net debt
No direct
equivalent
Net debt
(excluding
operating leases)
No direct
equivalent
Net debt
(covenant basis)
No direct
equivalent
Net debt/EBITDA
(covenant basis)
No direct
equivalent
Loans, including the interest rate and foreign exchange derivatives which hedge
the loans, bank overdrafts, cash and cash equivalents, loans to joint ventures and
associates, lease receivables and lease obligations
• Used as a general measure of the progress in generating cash and
strengthening of the Group’s balance sheet position
Net debt (defined above) excluding operating lease liabilities as previously
defined by IAS 17.
• Used by management to monitor the strength of the Group’s balance sheet
position and to ensure the Group’s capital structure is appropriate
• Used by credit agencies
Net debt (excluding operating leases), excluding loans to joint ventures
and associates and finance lease receivables
• Used for covenants over Revolving Credit Facility
• Used by credit agencies
Net debt (covenant basis) divided by EBITDA
• A measure of the Group’s ability to meet its payment obligations
• Used by analysts and credit agencies
• Group KPI
Net debt/EBITDA
excluding Type 31
No direct
equivalent
Net debt (covenant basis) divided by EBITDA, excluding the Type 31 loss
• Eliminates the Type 31 EBITDA loss for a better measure of the Group’s
Ratio - N / A
Return on invested
capital (pre-tax)
(ROIC)
No direct
equivalent
Cash flow measures
Net capital
expenditure
No direct
equivalent
Underlying
operating cash
conversion
No direct
equivalent
Underlying free
cash flow
No direct
equivalent
balance sheet, given the one-off nature of the loss
Underlying operating profit plus share of JV PAT, divided by the sum of net
debt (excluding operating leases), shareholders’ funds and retirement benefit
deficit (surplus)
• Used as a measure of profit earned by the Group generated by the debt and
equity capital invested, to indicate the efficiency at which capital is allocated
• Group KPI
Ratio – N/A
See table on page 16
Property, plant and equipment and intangible assets, less proceeds on disposal
of property, plant and equipment
• Included in underlying operating cash flow to calculate underlying operating
cash conversion
Underlying operating cash flow after capital expenditure as a percentage of
underlying operating profit
• Used as a measure of the Group’s efficiency in converting profits into cash
Underlying free cash flow includes cash flows from exceptional items and the
capital element of lease payment cash flows (rather than net new lease
commitments, which are reflected as a debt movement)
• Provides a measure of cash generated by the Group's operations after servicing
debt and tax obligations, available for use in line with the Group's capital
allocation policy
Ratio – N/A
See page 13
1. Refer to Note 2 in the financial statements
Babcock International Group PLC / Annual Report and Financial Statements 2023
39
Operational review
Marine
40
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Marine – at a glance
Revenue
£1.4bn
Percentage of Group revenue*
36%
Contract backlog
£2.6bn
Number of employees
5,200
Revenue profile
Contract backlog profile
77% Defence
53% UK
87% Defence
79% UK
23% Civil
47% International
13% Civil
21% International
* Excluding divested businesses in FY23, Group revenue was c.£4.0 billion
What we do
Operational highlights
UK and international warship
through-life support: design, build,
assemble, maintain, upgrade
International submarine
through-life support
Global naval exports:
ship design, military equipment
and engineering support
Digital defence communications
Energy and marine equipment
and support
• Secured two further contracts on the Polish Miecznik (Swordfish)
frigate programme
• Awarded a six-year c.£400 million contract to manage and
operate Skynet, the UK’s military satellite communications system
• Awarded 10-year contract for the UK Royal Navy’s Queen
Elizabeth Class, aircraft carrier docking periods
• Awarded a contract to maintain the UK’s fleet of scientific Royal
Research Ships
• Awarded the Regional Maintenance Provider (RMP) West contract
to deliver ship support to the Royal Australian Navy
• Awarded a six-year contract to deliver, install and provide
in-service support for the maritime Communications Electronic
Support Measures (CESM) capability on UK Type 23 frigates
• Won 55 Liquid Gas Engineering (LGE) system orders worth over
£250 million for LPG, Ethane, and LNG technologies
• The Naval Ship Management (NSM) business, fully acquired last
year, has now been integrated into our Australian business
Babcock International Group PLC / Annual Report and Financial Statements 2023
41
Operational review (continued)
Marine continued
Financial review
Contract backlog*
Revenue
Underlying operating profit*
Underlying margin*
31 March 2022
£m
2,491.8
1,259.3
98.0
7.8%
FX impact
£m
Acquisitions &
disposals £m
Other trading
£m
12.3
1.0
72.4
(0.2)
95.6
(86.1)
Type 31 loss
Underlying operating profit excl. Type 31 loss*
Underlying margin excl. Type 31 loss*
* Alternative Performance Measures are defined in the Financial Glossary on page 38
31 March 2023
£m
2,580.7
1,439.6
12.7
0.9%
100.1
112.8
7.8%
In an otherwise promising year, Marine results were significantly
impacted by a £100.1 million loss on the Type 31 contract,
representing a £42.6 million reversal of revenue, £1.6 million asset
impairment and the recognition of a £55.9 million onerous contract
loss. The programme has been impacted by additional forecast costs
that were not foreseen at contract inception. In April 2023, following
discussions with the customer, we entered a Dispute Resolution
Process regarding the responsibility for these costs.
dockings where routine maintenance and repairs cannot be carried
out afloat. In Devonport, the Type 23 frigate life-extension (LIFEX)
programme continues at pace while the LIFEX and fleet time support
to the amphibious assault ships is making good progress. In readiness
for the first Type 26 Frigate base-ported at Devonport later this decade,
we have established the Type 26 Class Output Management system
to prepare for the through-life sustainment of the platforms as they
enter service.
Revenue increased by 14% to £1,439.6 million, comprising organic
growth of 8% and the net impact from the acquisition of NSM in
March 2022 and disposal of Frazer Nash Consultancy in October
2021. Organic growth was broad based, driven by continued strong
demand for our LGE products, higher activity in warship support and
on the South Korean (SK) submarine programme, as well as ramp up
of several new contracts through the second half, such as the Queen
Elizabeth Class aircraft carrier support and the early enabling contracts
for the Poland frigate programme.
Underlying operating profit decreased to £12.7 million as a result of
the Type 31 loss, representing an underlying operating margin of
0.9% (FY22: 7.8%). Excluding this, underlying operating profit
increased to £112.8 million, representing an underlying operating
margin of 7.8%. The increase was driven by revenue growth in ship
support and South Korea submarine work and a c.£9 million benefit
from a contract settlement. The prior year margin was supported by
international license fees on AH140.
Contract backlog was up 4% in the year to £2,581 million (FY22:
£2,492 million). Positive order momentum through the second half,
including the c.£400 million Skynet award, more than offset trading
revenue on long-term contracts. At 1 April 2023, Marine had around
£900 million of FY24 expected revenue under contract and an
additional c.£350 million under framework agreements, a similar
position to FY22.
Operational review
UK defence
Despite the ongoing Dispute Resolution Process, we continued to
deliver on the Type 31 Inspiration Class frigate programme. Keel
laying took place for the first ship – HMS Venturer – in April 2022, and
whole ship assembly and outfitting progressed as planned. Ship two
– HMS Active – steel cutting took place in January 2023.
Warship support advanced in the year as we secured a 10-year
contract to provide dry-dock maintenance for the Royal Navy’s
Queen Elizabeth Class aircraft carriers, including contingency
Through our global sustainment and support arrangements, we marked
four years of delivering support to Type 23 Class ship HMS Montrose
during her forward deployment in the Middle East, enabling the vessel
to achieve more operational days at sea than any other frigate since
2019. In the period, the mine countermeasure vessel team in Rosyth
has delivered four simultaneous ship regenerations for onward sale
from the Royal Navy to new international customers. All four vessels are
former Sandown Class mine hunters which are all undergoing work
packages to provide modern warships, tailored to the new clients’
requirements while providing future support opportunities.
In Mission Systems, we were awarded a contract to manage and
operate Skynet, the UK’s military satellite communications system.
The six-year contract, which commenced in March 2023, forms
part of the MOD’s c.£6 billion Skynet 6 programme and is
sustaining more than 400 jobs in the south-west of the UK.
Additionally, a six-year contract was awarded to deliver, install
and provide in-service support for Ardent Wolf, the maritime
Communications Electronic Support Measures (CESM) capability
for the Royal Navy’s Type 23 frigates.
We signed a Memorandum of Understanding (MoU) with Rafael
Advanced Defence Systems to deliver capability into the UK MOD's
wider Land Ground Based Air Defence (GBAD) programme and signed a
further MoU with Israel Aerospace Industries’ (IAI) Group and Subsidiary
ELTA Systems to offer a deep-find radar solution for the UK MODs
SERPENS programme for a next generation weapons locating system.
At our Bristol Mission Systems site, the opening of a new build hall has
boosted efficiency, enabling us to deliver major system modules for
Boat 2 of the Dreadnought Class submarine, a significant milestone on
the programme, ahead of schedule.
Deployment of advanced manufacturing technology continues to
underpin our market leading role in submarine missile tube assembly,
with installation of robotics and additional machining capability at
our Rosyth facility. The missile tube programme continues successfully,
supporting both the UK Dreadnought and US Columbia submarine
programmes.
42
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
RSS Sir David Attenborough.
We were awarded a contract
to maintain the UK’s fleet of
scientific Royal Research Ships.
International defence
We support international defence markets from our UK operations and
from our businesses in Canada, Australia, New Zealand, Oman and
South Korea.
In Poland, building on our selection as Design & Technology Partner
to PGZ (the Polish prime contractor), we secured two further contracts
on the MIECZNIK (Swordfish) frigate programme, which is based on
the proven Arrowhead 140 naval ship design used on the UK Type
31. The Class Design Contract and the Transfer of Knowledge &
Technology framework agreement further support the development
of the programme and shipbuilding capability in Poland. Working in
collaboration with the PGZ-MIECZNIK Consortium, we have also
agreed an extension to oversee the programme.
In Ukraine, having signed the tripartite agreement with the UK and
Ukrainian Governments as lead industry partner on the Ukrainian Naval
Capabilities Enhancement Programme, we continue to support our
Ukrainian customer with their requirements, such as the mine counter
measure vessels, which were formally handed over to the Ukrainian
Navy in the year.
In Oman, we delivered several maintenance, repair and overhaul
activities for the US Navy. The Duqm Naval Dockyard JV continues to
bid for work with the US and Royal Navy of Oman, while we continue to
deliver deployed support for the UK Royal Navy.
In Brazil, we established an in-country project team to deliver
through-life support to the Marinha do Brasil’s (Brazilian Navy) flagship
vessel, NAM Atlantico, formerly the UK Royal Navy aircraft carrier
platform HMS Ocean, and continue to explore future opportunities with
the Marinha do Brasil and other international navies as part of our global
support and export programmes.
In Canada, Babcock continues to deliver the Victoria Class In-Service
Support (VISSC) contract which was extended to 2027.
In South Korea, our weapon handling and launch team successfully
completed the final milestone on the Korean Navy’s Jang-Bogo III Class
submarine – with all 122 Category A milestones delivered on time or
ahead of schedule over the 10-year period. We continue to deliver the
equipment systems for boats four and five. In September 2022,
we received a first maintenance contract from Daewoo Shipbuilding
and Marine Engineering (DSME) to support the Jang Bogo III Class – Boat
1 systems, with a second phase of this work secured in October.
In Australia, we completed the integration of the Naval Ship
Management (NSM) business following acquisition of the remainder
of the business in March 2022. NSM strengthens Babcock’s support
to the Royal Australian Navy’s (RAN) future maritime support model,
Plan Galileo. Babcock is now the premier warship sustainment
organisation in Australasia.
In October 2022, Babcock was announced as the preferred tenderer
for the Regional Maintenance Provider (RMP) West, to manage the
sustainment of RAN ships in Western Australia over the next five years.
In February 2023, Babcock signed a contract with BAE Systems to
provide the air weapons handling system for the first batch of
Hunter Class frigates for the RAN. The scope includes the design,
build, testing and installation support of air weapons handling
based on a modified Type 26 design.
In New Zealand, the new Maritime Fleet Sustainment Services
(MFSS) contract with New Zealand Defence Force formally began.
Energy and Marine
Our Liquid Gas Engineering business (LGE) continues to support its
customers on transition to Net Zero carbon with LPG and Ethane fuel
gas supply systems for ships’ main engine supply, replacing fuel oil.
Our ecoFGSS-FLEX® ammonia/LPG fuel gas system will enable the
use of zero carbon fuels, whilst our ecoCO2 – liquefied CO2 cargo
handling – system will enable the transportation and storage of
CO2 from current emitters.
In the period, LGE furthered the development of aftermarket services
to provide enhanced through-life support for ship-owners.
During the year, our Rosyth dockyard was awarded c.£45 million to
maintain the UK’s fleet of scientific research vessels – RRS Sir David
Attenborough, RRS Discovery and RRS James Cook. The three vessels
are involved in some of the most pressing research across the globe,
visiting polar regions and depths of tropical oceans. This year RRS
Discovery and the RRS Sir David Attenborough will have planned
maintenance periods.
Babcock International Group PLC / Annual Report and Financial Statements 2023
43
Operational review (continued)
Nuclear
44
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Nuclear – at a glance
Revenue
£1.2bn
Percentage of Group revenue*
29%
Contract backlog
£2.5bn
Number of employees
8,000
Revenue profile
Contract backlog profile
86% Defence
100% UK
95% Defence
100% UK
14% Civil
0% International
5% Civil
0% International
* Excluding divested businesses in FY23, Group revenue was c.£4.0 billion
What we do
Operational highlights
Support all UK nuclear submarines and
infrastructure
Own or manage key infrastructure and
naval bases
Nuclear submarine dismantling
UK civil nuclear new build, generation
support and decommissioning projects
UK and international nuclear services
• Significant ramp up on the Major Infrastructure Programme
continuing across Devonport Dockyard
• Concluded first Vanguard Class life-extension with the first vessel
returned to the UK Royal Navy post year end, and an initial
contract and mobilisation phase for the next submarine, HMS
Victorious, is now underway
• Launched the Submarine Availability Partnership with the UK
MOD and Submarine Delivery Agency to progress availability
• First Astute Class submarine arrived at Devonport Dockyard ready
for a Base Maintenance Period (BMP)
• Awarded a framework agreement with the Japan Atomic Energy
Agency to deliver the Monju sodium treatment project
Babcock International Group PLC / Annual Report and Financial Statements 2023
45
Operational review (continued)
Nuclear
continued
Financial review
Contract backlog*
Revenue
Underlying operating profit*
Underlying margin*
31 March 2022
£m
2,788.8
1,009.7
62.4
6.2%
FX impact
£m
Acquisitions &
disposals £m
Other trading
£m
–
–
–
–
169.5
1.1
31 March 2023
£m
2,453.8
1,179.2
63.5
5.4%
* Alternative Performance Measures are defined in the Financial Glossary on page 38
Revenue grew by 17%, driven principally by the further strong
ramp up of the Major Infrastructure Programme (MIP) at Devonport
dockyard, as well as increased Future Maritime Support Programme
(FMSP) submarine support activity at Faslane naval base and new
defence contracts in our civil nuclear business. MIP revenue
doubled in the year to £267 million (FY22: £134 million).
Underlying operating profit increased by 2% to £63.5 million.
Profit from MIP growth and a lower programme write-off compared
to FY22, more than offset the impact of future inflation assumptions
on programmes and further investment in strengthening the
control environment. The programme write-off in FY23, resulting
from a final assessment of completion costs, was £16 million
(FY22: £22 million). This contract is expected to complete soon.
Operating margin declined to 5.4%, reflecting the impact of
future inflation and higher MIP revenue, which is lower margin.
Contract backlog decreased 12% in the year to £2,454 million
(FY22: £2,789 million) due to the trading of long-term contracts,
specifically FMSP, although it was flat in the second half due to
strong order intake. At 1 April 2023, Nuclear had around
£1 billion of FY24 expected revenue under contract, and an
additional c.£150 million under framework agreements, both
above the position in the previous year.
Operational review
Defence
The UK is going through a phase of class transition for nuclear
submarines. Astute Class submarines are currently replacing the
Trafalgar Class and the future Dreadnought Class will replace
the Vanguard Class. Good progress has been made in the year
in meeting the current and future requirements of the MOD.
We are working closely with the MOD to jointly develop long-term
strategies for people, infrastructure and transformation, to meet
the evolving requirements for the future of the Royal Navy.
At Devonport, the MIP has ramped up significantly over the year.
The programme is designed to deliver substantial upgrades to
existing infrastructure over the next ten years, to ensure the future
capability requirements of the Royal Navy and the submarine
enterprise are met for decades to come from state-of-the-art
facilities. The programme will enable the dockyard to deliver base
maintenance periods (BMP) and deep maintenance periods (DMP)
for new classes of submarine, including nuclear defuel and refuel
of current and future classes, and life-extension programmes
(LIFEX), crucial to the UK submarine programme. During the year,
key MIP delivery dates have been agreed with the customer to
meet continued and future submarine docking, through-life
support and fleet availability.
The concept design phase for 10 Dock is now complete and
construction is underway to transform a large dry dock,
traditionally used for large ship refit, into a seismically qualified
dock in alignment with strict nuclear regulation, capable of
enabling delivery of the first DMP of an Astute Class submarine.
Currently, planning permission has been granted with customer
approval for the development of the facility which is starting with
demolition of ageing assets to create space for new facilities.
Work on the MIP at 9 Dock continues where we are upgrading,
improving and life-extending the facility which will enable us to
continue delivering the Vanguard Class submarines LIFEX
programme, including defuel and refuel while planning for future
class support.
46
Babcock International Group PLC / Annual Report and Financial Statements 2023
Two of our graduates working on
the Major Infrastructure
Programme at Devonport.
Strategic report
Governance
Financial Statements
An Astute Class submarine
arriving at Devonport for its
Base Maintenance Period.
Since the start of the FMSP contract, productivity during
maintenance projects has continually increased and this has been
further supported by the introduction of round the clock working
patterns for engineering support staff and greater collaboration
with the Royal Navy and Submarine Delivery Agency. The Devonport
elements of the first Vanguard Class LIFEX DMP concluded during
the year, and HMS Vanguard was handed back to the Royal Navy in
May 2023. The mobilisation phase for the next DMP (HMS Victorious)
is now underway following initial contract award on a full cost
recovery basis.
Additionally, we have welcomed the first Astute Class submarine
ready for the start of a BMP and we successfully completed a
Revalidation Assisted Maintenance Period (RAMP) programme for
a Trafalgar Class submarine.
At Clyde, we have delivered strong performance on several support
programmes for our customer. This has included several Vanguard
Class BMPs, which were completed ahead of schedule. Engineering
support to Astute Class submarines has also been delivered at the
naval base and abroad, supporting the global operational needs of
the Royal Navy. At Rosyth, delivery of the submarine dismantling
and disposal programme has continued in line with schedule.
Civil Nuclear
In decommissioning, we have been selected as the preferred bidder
for the Magnox Hinkley Point A Vault Retrievals Phase 2 project.
This project builds upon our strong relationship with Magnox
and our history of delivering retrievals projects on Magnox sites.
The five-year contract is to provide the design and delivery of
an automated solution to safely retrieve, process and package
waste from vaults within Magnox’s Hinkley Point A site, ready
for safe storage.
In Japan, we are continuing our growth plans for nuclear
decommissioning services and in April 2023, we signed a
framework agreement with the Japan Atomic Energy Agency
(JAEA) to deliver the Monju sodium treatment project over
five years, starting in 2024.
In nuclear support, we worked in collaboration with our EDF
customer, to successfully complete the Dungeness B Power Station
pre-defueling outage. We have also secured an extension to the
Lifetime Enterprise Agreement.
During the year, the new Process, Plant and Equipment (PP&E)
contract commenced in the UK. Our role is to lead the design,
installation and commissioning of complex plant and equipment
engineering, enabling the customer to safely process and deliver
their production line. We expect to see the framework contract
continue to ramp up in FY24 while the programme remains a
key enabler for further opportunities across the wider facility
as they develop.
Our Cavendish Nuclear business continues to focus on several
growth opportunities in the UK and internationally. In the clean
energy space, we are continuing to support X-energy as their
UK deployment partner. The partnership complements our civil
nuclear business’ support to all three nuclear streams of the UK
Government’s Energy Security Strategy: Large Gigawatt Reactors,
Small Modular Reactors, and Advanced Modular Reactors, such as
High Temperature Gas-Cooled Reactors with the capability to focus
on industrial heat and hydrogen.
In the US, Cavendish Nuclear partnered with Amentum and Fluor,
has successfully secured the Portsmouth Gaseous Diffusion Plant
Decontamination and Decommissioning Contract in Ohio, USA.
Fusion energy is at a transition point moving from science to
engineering deployment, and through Cavendish Nuclear we are
seeking to become an early member of this developing industry,
including positioning for a role on the whole plant partner
procurement with the UKAEA on their Spherical Tokamak for
Energy Production programme.
Babcock International Group PLC / Annual Report and Financial Statements 2023
47
Operational review (continued)
Land
48
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Land – at a glance
Revenue*
£1.0bn
Percentage of Group revenue*
25%
Contract backlog
£2.8bn
Number of employees
6,600
Revenue profile*
Contract backlog profile
35% Defence
60% UK
69% Defence
79% UK
65% Civil
40% International
31% Civil
21% International
* Excluding divested businesses in FY23, Group revenue was c.£4.0 billion
What we do
Operational highlights
Asset management and engineering
support for British Army vehicles
Technical training and support for the
British Army
Emergency services technical training
and fleet management
South Africa engineering and
equipment businesses
• Awarded Australian Defence High Frequency Comms contract for
c.£500 million over 10 years
• In discussions with UK MOD for five option years on the DSG
contract to 2030
• Awarded initial UK MOD contract to build ‘Jackal’ vehicles with
Supacat in Devonport
• Awarded initial c.£50 million one-year contract by the UK MOD
to support UK Gifted platforms to Ukraine
• Awarded contract to help the British Army improve operational
performance and extend the life of its Land Rover fleet
• Secured first Land win in France to deliver ground support
equipment support to the French Navy, Army and Air Force
• Completed the sale of our non-core Civil Training business
Babcock International Group PLC / Annual Report and Financial Statements 2023
49
Operational review (continued)
Land
continued
Financial review
Contract backlog *
Revenue
Underlying operating profit*
Underlying margin*
31 March 2022
£m
2,309.0
1,015.5
58.8
5.8%
FX impact
£m
Acquisitions &
disposals £m
One-off credit
£m
Other trading
£m
1.8
0.0
(67.1)
(2.5)
11.6
11.6
55.3
18.0
31 March 2023
£m
2,809.8
1,017.1
85.9
8.4%
* Alternative Performance Measures are defined in the Financial Glossary on page 38
Revenue was in line with the prior year with organic growth of 5%
offset by the impact of disposals (UK Power in December 2021
and Civil Training in February 2023). Growth was driven by ramp
up of the Australian Defence High Frequency Communication
(DHFC) system, continued strong demand for mining equipment
and aftermarket sales in South Africa and higher volumes in Rail
and Emergency Services training, which more than offset the end
of the Eskom contract in South Africa in March 2022.
Underlying operating profit grew to £85.9 million, representing
an underlying operating margin of 8.4%. The increase was driven
by the ramp up of the Australian DHFC system contract, higher
volumes in our South Africa business and Emergency Services
training, and a £12 million one-off credit. Excluding the one-off
credit, margin would have been 7.4%.
Contract backlog increased 24% organically to £2,810 million
(FY22: £2,309 million) driven by the Australian DHFC system
and good order momentum in the second half of the year.
At 1 April 2023, Land had around £640 million of FY24
expected revenue under contract, and an additional
c.£180 million under framework agreements, both above
the position in the previous year.
Operational review
Defence
Performance in defence equipment activity improved in the period,
including our DSG contract where we maintain, repair, overhaul
and upgrade the British Army’s armoured vehicles and tanks.
Following a successful transformation programme, we continue
to support our British Army customer as they plan for the future of
their equipment and support. We are now in detailed discussions
regarding execution of the five option years with modifications
that will contribute to better outcomes for the customer and for
the Group. In addition, we successfully extended our Phoenix II
contract which delivers the UK MOD’s ‘white fleet’ service for a
further two years with strong performance.
In February, we announced that we will be working in collaboration
with Devon-based Supacat, to deliver an order of 70 High Mobility
Transporters (HMT 400 series) from the MOD. With this initial
order, the contract award could lead to the production of as
many as 240 of the light armoured vehicles, should operational
requirements demand. The contract is to be delivered from our
Devonport site in Plymouth, where we will create 90 new jobs.
We have been awarded a one-year contract by the MOD to help
the British Army improve operational performance and extend
the life of its Land Rover fleet. Partnering with Electric Vehicles
experts, Electrogenic, we will convert four in-service military Land
Rovers, two protected vehicles and two general service vehicles,
from diesel-fueled to electric using a drop-in kit and modified
battery system.
This year we established our Advanced Manufacturing business in
response to growing obsolescence and commercial strains in the
supply chain. We fitted our first additively manufactured metal
parts onto a military vehicle having established an approval and
safety case process in collaboration with the MOD and the British
Army. We have signed a partnership agreement with a specialist
advanced manufacturing business, Additure, and are now scaling
this capability working with our British Army customer and across
the Group.
Through our existing contracts, we contributed to the British Army’s
support to Ukraine’s Armed Forces, refurbishing and regenerating
equipment that has been gifted in kind by the UK Government
and supporting the training of Ukrainian nationals in a range of
domains. We were recently awarded an initial 12-month contract
to support the equipment, including the supply of spares and
technical support.
A new collaboration between
Babcock and Supacat will see
the production of a new ‘Jackal’
vehicle for the British Army.
50
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
We were proud to support HM
Queen Elizabeth II’s funeral with
over 500 hours of vehicle
maintenance for the Met Police
and London Fire Brigade.
Our defence training business performed well across all contracts
and continued to offer operational benefits for our customers.
We have been working closely with the British Army throughout the
year to support their Mobilise campaign and successfully delivered
training to partnering nations. We continue to invest and develop
innovative training and have recently submitted our proposal
around threat identification.
We have successfully delivered Exercise Cerberus 22, the British Army’s
largest and most ambitious field army exercise in Europe for a decade.
Following a successful campaign in 2022, we participated in the
British Army’s 2023 Army Warfighting Experiment where we
showcased our Human Insight Performance System.
In France, we secured our first major Land contract in this focus
country for the Group. We will support around 5,000 ground
support equipment assets across the French Army, Navy and Air
Force through a 10-year contract. The contract represents the first
outsourcing for the provision of maintenance, repair and overhaul;
supply chain and logistics; technical and obsolescence management;
as well as asset renewal. The contract will see the Group investing
in key systems, infrastructure, and people across France, supported
by capability transfer from our UK businesses, which will reinforce
our in-country growth strategy.
In Australia, in October 2022, we signed a contract with the
Government to upgrade and sustain the Defence High Frequency
Communication System to support the Australian armed forces over
the next 10 years. The c.£500 million contract starting in October
2023, will see Babcock lead the operation and support of the
customer’s existing capability, while delivering a comprehensive
technology upgrade programme. The new system will provide
Australian and allied armed forces with the ability to securely
communicate using voice and other data from almost any location
across the globe.
We continue to deliver and pursue Land defence opportunities in
Australia. The Group is one of four short-listed tenderers for the
LAND-125 Phase 4 – Integrated Soldier System programme, to
integrate a wide range of connected technologies including
uncrewed ground and aerial systems and self-learning machines for
Australian soldiers.
Emergency Services
We have seen good performance in our London Fire Brigade (LFB)
contract, with recognition for our support during the summer 2022
heatwave, which saw the busiest operational period for the LFB since
World War Two. Delivery of our Metropolitan Police (MPS) contract
has been stable through a challenging period that included a significant
surge in demand during the funeral of HM Queen Elizabeth II.
The MPS fleet management contract will end in October 2023.
Our LFB and MPS training contracts also performed well in the
period, with significant demand in volumes as both customers seek
to meet recruitment targets. Our new MPS training programme is
now well established and performing well.
South Africa
Performance for the South African business was better than expected
driven by high demand in the equipment business as a result of a
strong market in the mining sector. This more than offset the ending
of the Eskom engineering contract. Work continues on ongoing
improvements through operational excellence initiatives
throughout the business.
Other civil markets
Our Rail business had strong performance during the year with
further work in our Translink framework. We continue to focus on
delivery in our two key regions of Scotland and Northern Ireland.
In February 2023, we completed the sale of our civil training
business to Inspirit Capital.
Babcock International Group PLC / Annual Report and Financial Statements 2023
51
Operational review (continued)
Aviation
52
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Aviation – at a glance
Revenue*
£0.4bn
Percentage of Group revenue*
10%
Contract backlog
£1.6bn
Number of employees
5,000
Revenue profile*
Backlog profile
63% Defence
36% UK
54% Defence
42% UK
37% Civil
64% International
46% Civil
58% International
* Excluding divested businesses in FY23, Group revenue was c.£4.0 billion
What we do
Operational highlights
UK and French pilot training
and support
Military aircraft engineering
and airbase support
Military and emergency services
aircraft maintenance, repair
and overhaul
Air ambulance, search and
rescue and firefighting services
in our focus countries
• First two of six H160 helicopters modified and delivered to the
French Navy as part of a 10-year contract
• Completed delivery of nine PC21 aircraft and commenced
operational flights on the French Mentor contract
• Secured an 11-year extension to support the UK Hawk TMk1 and
TMk2 aircraft and the Red Arrows
• Secured extensions from the UK MOD to operate the Light
Aircraft Flying Task (LAFT2) and RAF base support contract, Hades
• Awarded R&D funding from the UK MOD to explore technologies
that minimise the environmental impact of light, fixed wing
training aircraft
• Awarded Queensland Health contract in Australia for helicopter
emergency medical services (HEMS) for 12 years
• Awarded a HEMS contract in Canada for c.£200 million, starting
in FY25
Babcock International Group PLC / Annual Report and Financial Statements 2023
53
Operational review (continued)
Aviation
continued
Financial review
Contract backlog*
Revenue
Underlying operating profit*
Underlying margin*
31 March 2022
£m
2,293.6
817.3
18.5
2.3%
FX impact
£m
Acquisitions &
disposals £m
Other trading
£m
9.4
0.6
(97.6)
(6.6)
73.6
3.3
31 March 2023
£m
1,633.0
802.7
15.8
2.0%
* Alternative Performance Measures are defined in the Financial Glossary on page 38
Revenue decreased 2% in the year. Organic growth of 9% was
driven by phasing in our French defence contracts, in particular
Mentor, which included aircraft sales to the customer. This was
offset by the impact of disposals (Oil and Gas in September 2021
and European Aerial Emergency Services (AES) on 28 February
2023). The divested European AES contributed revenue of
£386 million during the 11 months of ownership in FY23 (FY22:
£405 million).
Underlying operating profit decreased to £15.8 million, driven by
the impact of disposals, primarily European AES, which contributed
a loss of £1.1 million in the 11 months of ownership compared to
a profit of £3.3 million in FY22, due to higher fuel costs. Underlying
operating margin declined by 30 basis points to 2.0%, primarily due
to weaker performance of the disposed European AES businesses.
The retained business within Aviation generated revenue of
£416 million (FY22: £337 million), up by 24%, and underlying
operating profit of £17 million (FY22: £14 million), representing
an operating margin of 4.1% (FY22: 4.1%). Growth was driven by
our French defence contracts, as described above, with
associated profit offset by continued high bid costs on a large
contract tender that has recently been submitted.
Contract backlog decreased to £1,633 million (FY22:
£2,294 million), mainly due to the impact of the AES disposal
(c.£975 million). The retained business contract backlog grew by
24%, driven by new contracts (Australia and Canada HEMS) and
renewal/extension of long-term contracts (UK Hawk and LAFT2 –
Light Aircraft flying Task). At 1 April 2023, Aviation had around
c.£240 million of FY24 expected revenue under contract, lower
than the prior year position on a like-for-like basis, due to high
FY23 military aircraft deliveries in France.
Operational review
Defence
Across UK defence, activity has continued at a steady pace. Our
military business secured an 11-year contract extension with BAE
Systems to support the Hawk TMk1 and TMk2 aircraft at Royal Air
Force (RAF) Valley and won a new contract to support the RAF
Aerobatics Team (Red Arrows) with line and depth maintenance
at RAF Waddington. Extensions were also secured on our RAF Hades
support and Light Aircraft Flying Task contracts with performance
remaining strong. Progress continues to be made on the Tutor
programme with 80 aircraft available to the customer. Our UK
Military Flying Training System contract saw good progress in the year.
The PC-21 aircraft used to
deliver fast jet training to
the French Air Force.
54
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
During the year we delivered
the first two Airbus H160
helicopters to the French Navy
as part of our contract with the
French MOD.
We are continuing to develop our partnership with the Airbus
H175M Task Force – a UK-based industry team created to supply
and support the British-produced H175M helicopter for the UK’s
new medium helicopter requirement.
During the year, we were awarded two years of research and
development funding from the RAF’s Rapid Capability Office.
Project Monet is designed to explore and progress the application
of a range of sustainable aviation technologies, including the
potential for synthetic fuelled internal combustion engines,
hydrogen cell, and hybrid.
In France, activity continues to ramp up on the Mentor contract,
with the delivery of nine PC21 aircraft and the start of operational
flights. Availability continues to remain good, further enhancing the
training delivery. On the FOMEDEC contract, we delivered circa
35,000 flight hours and 23,000 simulator hours to the customer.
During the year the first two Airbus H160 helicopters were delivered
to and accepted by the French Navy as part of our contract with
the French MOD. In partnership with Airbus and Safran, we’ll provide
a total of six modified H160 aircraft and through-life support for 10
years. The aircraft will be used by the French Navy on demanding
search and rescue missions. The customer pays for the aircraft over
10 years after acceptance. We will discount the customer receivables
for all 6 aircraft in FY24 on a non-recourse basis once the aircraft
are delivered and accepted.
Through Babcock’s joint venture with Leonardo Canada, Babcock
Leonardo Canadian Aircrew Training has submitted a bid to deliver
Canada’s Future Aircrew Training (FAcT) opportunity, with an award
decision expected in late 2023.
Aerial emergency services
On 28 February 2023, we completed the sale of certain of our
European (Spanish, Italian, Portuguese and Scandinavian) Aerial
Emergency Services (AES) businesses to Ancala Partners for a gross
consideration of €136.2 million (c.£120 million), with an additional
c.£60 million of completion adjustments.
Babcock has retained its AES businesses in its focus countries of the
UK, France, Canada and Australia, where the Group also operates
defence businesses.
Our operations in the UK secured several successful extensions,
with Hampshire and Isle of Wight Air Ambulance, Great Western Air
Ambulance, and Northwest Air Ambulance.
In Australia, Babcock was awarded a contract with Queensland
Health for the Torres Strait and Northern Cape York Peninsula
Emergency Helicopter Service in December 2022. Operating from
Horn Island, Babcock will provide 24/7 services across the region
including aeromedical retrieval and search and rescue. The aircraft
will also be available to support taskings from other government
departments including Queensland Fire and Emergency Services
and Queensland Police. The 12-year contract continues a 15-year
relationship between Queensland Health and Babcock in the Torres
Strait and will represent a significant uplift in capability to the region.
In France, we’ve continued to develop our service offering extending
operations to 24 hours coverage. We also delivered four EC135
helicopters to our French Customs customer, including initial
maintenance and inspection of the assets delivered as part of the
contract to support the French Customs and Gendarmerie
Nationale’s helicopter fleet.
In Canada, Babcock is continuing to deliver air ambulance and
wildfire suppression services in the Province of Manitoba, helping to
protect citizens, communities, and natural resources. In 2022 alone,
Babcock dropped over 18 million litres of water on the wildfires in
Manitoba and completed over 268 aerial firefighting missions.
During the year, we were selected as the in-service support provider
for British Columbia’s new fleet of AW169 aircraft. The 10-year
contract is worth around £200 million and will start in FY25.
Babcock International Group PLC / Annual Report and Financial Statements 2023
55
Stakeholder engagement and s172(1) statement
Creating a safe and secure world,
together
Building strong and lasting relationships with our global stakeholder groups is not only vital
to our success, it’s central to our Purpose: to create a safe and secure world, together.
Customers
Investors
Why they matter to us
Understanding the needs and
challenges of our customers allows
us to help them to succeed. We
make their mission, our mission;
working in partnership with our
customers to deliver critical
programmes and services.
We seek to solve their challenges
through the introduction of
innovative solutions and technology
to support their needs.
We build and maintain long-term
relationships with our customers to
promote our mutual success.
What matters to them
• Safety
• Operational excellence
• Affordability (value for money)
• Availability
• Capability
• Innovation and expertise
• Reliability
• Collaboration
• Deep understanding of their
needs, both now and in
the future
• Sustainability performance
and agenda
How Babcock engages
• Regular ongoing relationship
engagement at all levels
• Contract negotiation and
execution
• Strategic Partnering Programme
• Collaborating on joint initiatives
• Attendance at key industry
events
• 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
• Shareholder value
• Financial and operational
performance
• Strategy and business
development
• Capital structure
• Dividend policy
• Transparency of
communications
• Access to management
• Governance
• Sustainability strategy
How Babcock engages
• Annual Report and Financial
Statements and AGM
• Results materials and
presentations
• Proactive Investor Relations
team
• Treasury team engagement
with banks, noteholders and
credit rating agencies
• Dedicated investor section on
Babcock website
• Investor roadshows with
management and IR team
• Chair & NED engagement with
top shareholders
• Consultation with large
shareholders on remuneration
policy
• Investor site visits
• Stock exchange
announcements and press
releases
Suppliers
Regulators
Why they matter to us
To support our global 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
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
• Safety and compliance of
operations
• 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
• Coordinated safety
improvement programmes
56
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
We recognise the impact we have on our stakeholders and our responsibility to them,
which is why increased stakeholder engagement is a key part of our turnaround strategy.
We are committed to open and productive engagement with all our stakeholders.
Employees
Communities
How Babcock engages
• Sponsorship and donations,
with new policy created in FY23
• Commissioned an independent
report to analyse our
contribution to the UK economy
• Created a new employee
volunteering framework
• University partnerships
• STEM Ambassadors
• Significant employer of service
leavers, veterans and reserves
• Engagement with local
community programmes
Why they matter to us
Our success is led by our
employees. We are committed to
creating an inclusive and diverse
organisation where employees
can develop their full potential.
We focus on developing and
supporting a truly engaged
workforce, living our Principles
and working on shared goals,
united by our common Purpose.
What matters to them
• Remuneration, reward and
recognition
• Professional development
and career progression
• The Group’s aims, goals,
priorities and reputation
• Regular engagement with
leaders
• Health, safety and wellbeing
• An empowering culture
• Inclusion and diversity
• Our ESG agenda
• Employee networks
How Babcock engages
• Employee forums and meetings
• Global engagement platforms,
including an employee app
• Weekly CEO and senior
management vlogs
• Access to the CEO via a
dedicated email
• A global people survey
• Regular internal updates
• Cascade briefings
• A dedicated onboarding app
• Regular safety stand downs
and annual safety summit
• Apprentice and Graduate
programmes
• Regular training
• Access to independent
whistleblowing process
• Senior management and
Board visits
• Non-Executive Director
responsible for employee
engagement at Board level
• Free confidential employee
support helpline
Why they matter to us
We are committed to the
communities in which we operate
and the broader interests of the
customers we serve. We have a
responsibility to 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.
We want to be a force for good in
our communities, particularly
where we have major sites of
operation, and are one of the
largest employers in the local area.
What matters to them
• Employment and economic
contribution
• Health, safety and wellbeing
• Engagement in local education
and STEM activities
• Sustainability and the local
environment
• Support for indigenous people
• Support for armed forces
community
• Community engagement
s172(1) Statement
The Directors confirm that they, 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.
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.
More information on how stakeholders are factored into our decision-making and the Board’s engagement with stakeholders can be
found in the Governance section in the Chair’s introduction on page 106 and on pages 112 to 115, which form part of this Statement.
Further information on how the Board addressed the different matters set out in s172(1) in performing their duties during the year can
be found as follows:
S172 factor
a. the likely consequences of any decision in the long term
b. the interests of the Company’s employees
c. the need to foster the Company’s business relationships
with suppliers, customers and others
d. the impact of the Company’s operations on the community
and environment
e. the desirability of the Company maintaining a reputation
for high standards of business conduct
Relevant disclosures
Our strategy (page 6)
Business model (page 20)
ESG strategy (page 58)
Ensuring the safety and wellbeing of our people (pages 74 to 78)
Being a collaborative, trusted partner across the supply chain
(pages 83 to 85)
Innovation and technology (pages 8 and 9)
Making a positive impact on the communities in which we operate
(pages 78 to 82)
Environmental (pages 63 to 73)
ESG Strategy: Governance (page 83 to 85)
f. the need to act fairly between members of the Company
Investors (page 56)
Babcock International Group PLC / Annual Report and Financial Statements 2023
57
ESG strategy
ESG strategy
Sustainability is an integral part of our
corporate strategy and it underpins our
corporate Purpose: to create a safe and
secure world, together.
Over the last year we have progressed our
corporate Environment, Social and
Governance (ESG) strategy and ensured
progress towards our commitments and
our five ESG priorities; these provide a
framework for integrating sustainability into
the business and ensure that we play our
part in minimising risk, reducing our
environmental footprint, contributing to
our communities and transitioning to a
more sustainable future for all.
Recognising our key stakeholders’ focus on ESG, we extended our
materiality assessment to capture the views of some of our key
customers and suppliers. We also captured feedback on ESG issues
in our annual employee survey and ensured that our internal
communications included examples from across the business of
where and how we are taking action on material topics.
The Executive Committee, with the support from the Corporate
ESG Committee continue to guide and govern Group-wide
sustainability initiatives, ensure alignment behind the Group ESG
strategy and progress towards sustainability targets.
Further to the decision in FY22 to build specific ESG objectives and
measures in the FY23 annual bonus, the Remuneration Committee
has set ESG related targets relating to reduction in carbon emission
and senior management diversity for the 2023 PSP grant. See page
133 Remuneration Committee Report.
We continue to develop our approach to ESG reporting: we completed
the Dow Jones Sustainability Index (DJSI) submission in December
2022, we are now compliant with 9 of the 11 TCFD disclosure
requirements as per Listing Rule LR9.8.6R and we have disclosed
in line with the new 2021 Global Reporting Index (GRI) framework.
We work proactively with ratings agencies to enhance, where possible,
the level of transparency and provide further insight into a range
of economic, social and governance topics. We are appropriately
represented on trade bodies and collaborate to raise ESG standards
and demonstrate the positive impact of the Defence sector to
our stakeholders.
Our ESG priorities
We will reduce emissions and set science-based targets
to get to Net Zero across our estate, assets and operations
by 2040
See page 63
We will integrate environmental sustainability into
programme design to minimise waste and
optimise resources
See page 66
We will ensure the safety and wellbeing of all our people
See page 74
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
See page 78
We will be a collaborative, trusted partner across the
supply chain, helping to tackle common challenges
See page 83
Progress against our ESG priorities
Reducing emissions and setting science-based
targets to get to Net Zero
• We are working collaboratively with our customers and suppliers
to take action to combat climate change and its catastrophic
impacts by decarbonising our business and its value chain
• Following industry best practice, we committed to an interim Science
Based Target in line with a 1.5-degree pathway in April 2023 which
requires a 4.2% annual carbon reduction against our 2019 baseline and
sets us on a course for decarbonising our estate, assets and operations
to reach our overarching goal of Net Zero emissions by 2040
• We conducted a quantitative strategic climate-related risk
assessment with the support of a third-party (KPMG) to assess
the financial impact of material risk themes and this has been
considered by the business as an input to the five-year strategic
planning process and FY24 budgeting process
Integrating environmental sustainability
into programme design
• We are working to embed low carbon principles into the
design, planning and operational delivery of our products and
services with the use of Life Cycle Assessment tools and Circular
Economy principle
• Over the past year we invested significant efforts to further our
understanding of our nature-related impacts, risks and opportunities.
We are exploring new legislative requirements to disclose
nature-related risks and impacts, in line with the Taskforce on
Nature-related Financial Disclosures (TNFD). A key area of focus for
Babcock is engagement with our stakeholders and experts in the
nature arena to understand opportunities to collaborate, knowledge
share and partner. Babcock has become a member of the UK
Business and Biodiversity Forum
• We have developed a new Group e-training package ‘Curious about
Climate’ to help us learn more about what climate change is and the
actions we can take individually and collectively to reduce our impact
58
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Ensuring the safety and wellbeing
of our people
Being a collaborative, trusted partner across
the supply chain
• We continue to focus on making Babcock a more efficient,
• As an organisation we aim to be a collaborative and trusted
agile, inclusive and people-focused business
• Ensuring the safety, health and wellbeing of all our people
and those affected by our activities is our priority
• We continue to collaborate and learn, across the enterprise, to
ensure our products and services achieve the quality and safety
standards required of our customers and regulators. Our Engaged
Safety Culture framework forms the foundations of the safety
behaviours being developed across Babcock
• Our updated approach to Inclusion and Diversity (I&D) has enabled
us to create the right foundations to deliver gender balance and
greater diversity more broadly through our organisation
• Our female population has reduced in this reporting year due
both to divestments and natural attrition but we are actively
focused on attracting talent to grow our pipeline for the future
and deliver equal representation
• Our work to reduce inequalities between male and female
employees has resulted in year-on-year progress since we started
reporting in 2017. This year we are pleased to report that the
median pay gap has continued to reduce narrowing from
11.8% to 9.6%
Making a positive impact on the communities
in which we operate
• We are making a positive difference to the communities in which
we operate by promoting sustained, inclusive and quality jobs.
This is evidenced by the independent report carried out by
Oxford Economics highlighting amongst other things, how we
support levelling up across the UK, our focus on wellbeing and
environmental initiatives we are progressing
• With a global presence, Babcock recognises the importance of
engaging and supporting indigenous people in the countries in
which we operate
• Our charitable sponsorship and community investment approach
allows sectors and regions to manage their respective donations
and sponsorship, which means that our support goes where it
can serve the greatest need. This includes Veterans with dogs
in the UK, Yalari in Australia and Laus Deo Primary School in
South Africa
partner and we believe that a culture of respect for, and promotion
of, human rights is embedded throughout our business and can
be demonstrated by our commitment to ethical conduct in
everything we do
• One of our governance initiatives was for Babcock to launch its
first global and Company-wide Shadow Executive Committee
inviting applications from non-executive employees from across
the business, in order to provide a varied perspective to key
decision-making, by offering fresh ideas and viewpoints on
strategic initiatives as well as being an opportunity to expand
the diversity of thought in our business
• We have launched a new Group Sustainability policy which
outlines the corporate strategy and governance for sustainability
across Babcock Group and applies to all employees. The policy
was shared with the Corporate ESG Committee, launched on the
Group Sustainability pages and uploaded to the Global Business
Management system
• We ensure that our value chain is effective and engage its support
to deliver our ESG strategy. This year Procurement have adopted
a spend-based calculation methodology for mapping our upstream
value chain emissions to provide a baseline for further developing
Babcock's carbon strategy
Our focus for FY24 is to…
• Scale the development of Carbon Reduction Plans and
implement renewable energy initiatives
• Work to develop Babcock’s Climate Transition Plan in line with
requirements of the Transition Plan Taskforce
• Work with our partners to investigate, assess and deliver low
carbon opportunities
• Broaden our inclusion strategy and improve employee
engagement
• Evaluate and improve our procurement practices in alignment
with ISO20400
Babcock International Group PLC / Annual Report and Financial Statements 2023
59
ESG strategy (continued)
Progress vs ESG commitments and targets
Commitment and targets
Commentary
Progress Plan Zero 40 and minimise the impact on the environment
Progress Plan Zero 40
Preparing waste management plans across all
significant sites by 2024
We have continued to develop and enhance our decarbonisation strategy to ensure delivery of
our carbon reduction targets. During 2022 we reduced our emissions by 8.6%, and we have
reduced our absolute footprint by 12.9% against our adjusted baseline. To date we have
delivered a range of initiatives such as estate rationalisation, energy efficiency improvements,
awareness raising and training, EV vehicle roll-out and energy management improvements
We have identified ‘significant’ sites based on multiple selection criteria associated with waste
types and quantity generated. We are working to develop waste management plans across the
significant sites by 2024
Zero controlled waste to landfill by 2025
We are investigating a range of initiatives and working with our partners to identify
opportunities to reduce our waste to landfill by 2025
Eliminate the use of avoidable single-use plastic
by 2027
Within our developing waste management plans, we are working to identify initiatives and
map the transition away from single-use plastics by 2027
Prepare water management plans across all
significant sites by 2024
We have identified ‘significant’ sites across our operations based on multiple selection criteria
associated with location, water consumption and water extraction/discharges. We are working
to develop water management plans across the significant sites by 2024
Maintaining and enhancing biodiverse ecosystems
Conduct biodiversity assessments across all
significant sites by 2024
Deliver a 10% biodiversity increase across the
estate by 2030
We have identified 15 sites across the organisation where our interaction with and impact on
local ecosystems has been considered to potentially be significant and are working to conduct
biodiversity assessments across all these sites and are on track to complete this by 2024
The biodiversity assessments will allow Babcock to understand our baseline, against which we
can develop the initiatives and roadmaps to achieve our medium-term objective of 10%
biodiversity increase across our estate
TCFD metrics and targets
Develop a baseline for Scope 1 and 2 emissions by
the end 2023
During FY23, we developed ten ‘Pathfinder’ carbon reduction plans which capture 75% of
Babcock's estate related Scope 1and 2 emissions. We are now working to scale the carbon
reduction plans across our remaining estate and assets by the end of 2023
Submit science-based targets for Scope 3 by
Apr-23
In April we submitted our interim and Net Zero carbon reduction plans to the Science Based
Targets initiative (SBTi) and are currently awaiting verification of our plans
Complete an assessment of climate-related risk of
all critical Babcock infrastructure by Dec-24
During 2022 we conducted high-level risk assessments across our operations. We are now working to
conduct detailed climate-related risk assessments across our critical infrastructure by the end of 2024
Complete a review of climate-related changes to
working conditions covering all employees who are
exposed at geographical locations by April 2023
Completed
Climate-related impacts to be considered in all
business bid/no bid decisions and associated
contract negotiations/KPIs
Completed
100% of electricity for Babcock facilities to be
sourced from renewable supplies by 2030
In 2022 approximately 32% of Babcock’s electricity was from renewable energy sources,
this is an increase from 26% in 2021
Complete an assessment of all our critical
suppliers’ climate-related risks and associated
impact by Sept 2022
Completed
Creating a people-centred business where everyone is included
30% women within senior leadership teams
by 2025
30% female representation at all levels by 2030
Set clear metrics for disability and ethnicity (in
addition to gender) to focus our effort, measure
our performance and progress and create
accountability across the Group
Reduce inequalities through a thorough review of
our recruitment practices and how we support
progression once in employment
We have seen an improvement of female representation within our senior leadership team
from 21% to 23%.
Our female population has reduced by 1pt to 18% this year due to divestments and natural
attrition but we remain committed to reaching our gender balance target
We are designing an Inclusion Roadmap which will help us to further develop our approach
on ethnicity and disability
We are taking a range of actions including new policies and ways of working; refreshed
recruitment processes and supporting leadership development programmes amongst others
Underpinned by conducting business with honesty, transparency and integrity
60
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Materiality assessment
Our Purpose: to create a safe and secure world, together
Environment
Social
Governance
Biodiversity and ecological impact
Community engagement
Business ethics and integrity
Climate change
Health, safety and wellbeing
Data and cyber security
Waste
Talent and development
Water consumption
Local economic contribution
Employee inclusion and diversity
Governance, accountability and
culture
Sustainable supply chains
Innovation and technology
Collaboration
s
e
u
s
s
i
l
a
i
r
e
t
a
M
In FY22 we based our materiality assessment on feedback from
employees and investors. For FY23 we have updated our assessment
in relation to these stakeholders and also expanded our assessment
to include the views of some of our key customers and suppliers.
This process ensures we are addressing and managing the material
issues that matter most to our stakeholders via our Group
sustainability strategy.
Following this year’s strategic climate risk assessment, the
Executive Committee has categorised Climate as a principal risk
see page 101.
For customers we captured topics that were most commonly raised
in key customer meetings and views from customer engagement
surveys. The top three material topics cited by customers were:
• Climate change: We are facing a global climate crisis and we
need to work collaboratively with our customers to play our part
in averting this
• Employee inclusion and increased diversity: We need to play our
part in supporting levelling up by investing and supporting
employment in the most deprived areas. We also need to help
tackle economic inequality and improve equality of opportunity.
We need jointly recognised definitions, measures and metrics in
place and data to drive action and decision
• Governance, accountability and culture: To achieve our
sustainability ambitions we need to be true to our purpose,
culture and strategy demonstrating the benefits from the new
operating model and fully integrate ESG in the business
To capture views of the topics of most concern to our suppliers,
we captured views from our key suppliers. The top three material
topics they cited were:
• Health safety and wellbeing: 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
• Climate change: 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
• Collaboration: Collaboration is required to achieve a shared goal,
foster innovation and create lasting relationships for sustainable
long-term business success
From investor engagement, the following three topics were
highlighted as being of most interest in relation to ESG:
• Governance, accountability and culture: These are key to
optimise operational performance and fully integrate ESG in
the business to achieve our sustainability ambitions
• Employee inclusion and increased diversity: By accessing the broad
range of talent and experiences within our workforce, we will
achieve greater employee satisfaction and improved delivery for
our customers
• Talent and development: Babcock requires skilled employees.
Our workforce is ageing and there is concern that we could
struggle to deliver planned growth or take advantage of
emerging opportunities. We are creating an employment
structure that supports development and progression
opportunities across the Group
This year’s Group-wide employee survey indicated that views of
employees have not changed markedly from last year.
• Climate action: We are facing a global climate crisis and our
people recognise we need to play our part in averting this
• Health and safety: Our employees recognise we must protect
the wellbeing of all who interact with Babcock
• Waste: Our employees believe we need to reduce the amount
of waste generated, be more efficient and adopt circular
economy principles
We have ensured that action plans are in place to address the
sustainability-related issues highlighted and we plan to include
more detailed questions on sustainability in forthcoming surveys.
Babcock International Group PLC / Annual Report and Financial Statements 2023
61
ESG strategy (continued)
ESG and our shareholders
Over the year we have progressed our ESG strategy and ensured
progress on our corporate commitments while furthering our
disclosure on key sustainability interests in line with best practice
and regulation. This year we have continued to develop our
approach to ESG reporting and enhanced the level of transparency
providing further insight into a range of economic, social and
environmental impacts.
Nuclear deterrents and nuclear power are both crucial to our
customers and a democratically elected mandate. Babcock has
been supporting the UK’s commitment to the Continuous At Sea
Deterrent for over 50 years, while also delivering complex and
critical civil nuclear through-life engineering. We will continue to
support our customers, both with their defence agenda and their
commitment to generate low-emission power from nuclear energy.
In April 2023, we submitted our interim Net Zero carbon reduction
plans to SBTi and we conducted a strategic climate-related risk
assessment for our five-year planning process. We’re also continuing
to integrate environmental sustainability into programme design to
optimise resources. Our emissions target is also linked to our KPIs
and remuneration. Read more on page 133.
The health, safety and wellbeing of our employees, customers and
the community comes first. The independent report carried out by
Oxford Economics shows how we have made a positive difference
to the communities in which we operate by promoting sustained,
inclusive and quality jobs. Senior management diversity has also
now been added to remuneration targets. See pages 131 to 133.
Governance starts at the top. We have continued to support the
Company’s turnaround by making improvements to the governance
of the Group at Board level, which is covered in our Chair’s report
(page 106) and our Audit Committee Chair’s report (page 124).
Our approach to risk management is discussed on page 87.
Defence and nuclear
Following the completion of the portfolio alignment programme,
the Group today is over two thirds defence focused. We recognise
that our business is therefore of increasing relevance to investors
investigating through an ESG lens: most notably that we operate in
defence and civil nuclear markets. We have a critical role in global
defence and national security with operations in UK, Australia,
New Zealand, Canada, and France. We also design and manufacture
equipment and systems for several other nations including the US
and South Korea. As global instability and political turmoil increases,
we support the view that democracies need to be able to defend
themselves from aggressors to ensure democracy.
Certain ESG agencies and investment funds have identified internal
screening policies to minimise their portfolio’s exposure to
controversial weapons activities. To enable compliance with their
requirements, we disclose key ESG metrics to measure our exposure
to these activities as percentage of revenue.
Below we describe our involvement in these areas. As we have
concluded our portfolio alignment programme, we compare our
exposure against FY23 revenue excluding divested businesses (pro
forma) to provide a fairer, ongoing baseline.
• We do not design, manufacture, or sell nuclear weapons or
controversial weapons or their components.
• We deliver support, decommissioning and infrastructure projects
for our Atomic Weapons Establishment customer in support of
their programmes, representing 0.4% of FY23 pro forma revenue.
• We provide in-service and through-life support for the UK Royal
Navy’s ballistic nuclear submarines (SSBNs), the Continuous At
Sea Deterrent. Submarine support is part of our wider FMSP
contract to deliver all dockside and fleet time support, base
maintenance and deep maintenance periods for both classes of
non-nuclear armed (SSN) and SSBN submarines, including naval
base management. We estimate the split of SSBN related support
work to be around 2% of FY23 pro forma revenue.
• We design and manufacture the non-nuclear weapons handling
systems for the future Dreadnought Class SSBNs and manufacture
the missile tube assemblies for the joint US/UK common missile
compartment for integration into the future US and UK SSBNs.
This work represents less than c.2% of FY23 pro forma revenue.
• Nuclear power provides a reliable source of low-carbon electricity
and is a critical component of countries’ national 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. This work represents around
4% of FY23 pro forma revenue.
We continue to develop our approach to ESG reporting and work proactively with ratings agencies to enhance, where possible, the level
of transparency and provide further insight into a range of economic, social and governance topics.
ESG disclosure and external ratings
GRI/SASB coverage
TCFD disclosure vs
Listing Rule LR9.8.6R
DJSI Score FY22
FTSE Russell
MSCI Rating
ISS Rating
Reporting with reference to GRI Standards 2021 and SASB Standards for the period April 2022 to March
2023. See external website for further details
We are now compliant with 9 of the 11 TCFD disclosure requirements with limited disclosures on Metrics
and Targets A and B. For further details see TCFD section, page 67-73
Completed DJSI submission in December 2022 and achieved score of 47, which was 1 point lower than last year
Submitted in February 2023 and achieved ESG rating of 3.0 in line with prior year
ESG rating is A in line with prior year
ESG rating is C- in line with prior year
62
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Environment
Reducing emissions and setting science-based targets to get to Net Zero
At Babcock we understand our responsibilities to the environment. We have set ambitious targets and are taking action to reduce our
impacts. Since the launch of Plan Zero 40 in 2021, we have committed significant resources to address our environmental risks and unlock
opportunities, and we are working to influence our wider value chain. Over the past year we have made significant progress on our journey.
The following are a few of our highlights:
• Submission of Interim and Net Zero carbon reduction targets to the Science Based Targets initiative (SBTi)
• Gained accreditation to the Carbon Trust’s new Route to Net Zero Standard - Taking Action
• Prepared detailed Carbon Reduction Plans across ten pathfinder sites and commenced the roll out across remaining global operations
• Development of low-carbon product and service capabilities
• Supported our customers on their journeys to Net Zero
• Launched Group-wide environmental minimum standards
Babcock Group energy consumption and emissions
UK
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)
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 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 (adjusted in line with emissions baseline)*
Intensity ratio**
Dec-19
Dec-20
Dec-21
Dec-22
tCO2e
tCO2e
37,847
58,445
29,316
46,458
38,804
43,818
27,611
42,448
tCO2e
tCO2e
kWh
11,231
107,522
422,144,618
5,484
81,258
351,936,201
5,806
88,428
396,229,990
5,754
75,813
343,074,206
tCO2e
tCO2e
91,357
6,364
103,416
4,724
102,748
4,747
99,556
3,666
tCO2e
tCO2e
kWh
351
98,072
383,872,012
168
108,307
433,823,941
126
107,622
429,298,199
126
103,348
408,269,655
tCO2e
tCO2e
129,203
64,809
132,732
51,182
141,552
48,565
127,167
46,114
tCO2e
tCO2e
kWh
GJ
£m
tCO2e/£1m
Revenue
11,582
205,594
806,016,629
2,901,660
4,042.5
5,652
189,566
785,760,142
2,828,737
3,842.7
5,932
196,050
825,528,188
2,971,901
3,867.8
5,880
179,161
751,343,861
2,704,838
4,438.6
50.9
49.3
50.7
40.4
Our emissions data is reported in line with the Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard under the ‘Operational Control’ approach.
Our reporting is in line with the requirements of the Streamlined Energy and Carbon Reporting (SECR) requirements. The reporting period for our energy consumption
and carbon emissions is the calendar year (01 January to 31 December). 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). Recent organisational changes have cumulatively
exceeded our materiality threshold (5% emission variance) and accordingly we have assessed and revised our carbon baseline. Emissions data for prior years have been
adjusted in line with the organisational changes and to include data unavailable last year. Emission figures for this year include an element of estimated data and 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 and USA).
Metering and monitoring improvements are being implemented to capture these data streams. During the reporting period a range of initiatives and activities resulted in
a year-on-year reduction in carbon emissions, including estate rationalisation, strategic divestments, ‘low-hanging fruit’ energy conservation measures, reduced use of
diesel, reduced aviation operations and improvements to our energy management practices. We do not have the data maturity to report quantitative reductions
generated through energy efficiency measures for the current or previous years. We are progressing well on our journey to Net Zero and aim to accelerate our carbon
reduction over the coming years. * The revenue figures detailed are for the corresponding fiscal year and have been adjusted so as to align with the adjusted emissions
baseline. ** The Intensity Ratio is based on the adjusted emissions baseline and the adjusted revenue.
Babcock International Group PLC / Annual Report and Financial Statements 2023
63
ESG strategy (continued)
Plan Zero 40 pathway and
implementation plan
Plan Zero 40
In 2021 we launched our decarbonisation strategy, Plan Zero 40,
where we committed to delivering Net Zero across our own
operations (Scope 1 and 2) by 2040 and the delivery of a 2030
Science Based Target in line with a 1.5-degree pathway.
During FY23, we have continued to build upon the progress made
in FY22 and progressed on our journey to Net Zero. In April 2023
we submitted our Interim and Net Zero carbon reduction targets
to the Science Based Targets initiative (SBTi) and are currently
awaiting verification of our plans.
Under Plan Zero 40 we have segmented our investigations and
delivery of decarbonisation initiatives into four strands: Estate and
Assets, Transport, Products and Services, and Value Chain.
Estate and assets
Babcock’s estate is vast and complex, and we operate in a variety of
regions across the globe, which means we do not have a one-size-
fits-all approach to decarbonisation. To address the complexity and
variance, we have opted for a comprehensive approach and are
working to prepare specific Carbon Reduction Plans across all our
global operations. Within the Carbon Reduction Plans we are firstly
ensuring there is an accurate and complete GHG inventory, secondly
conducting hotspot analysis, desktop assessments and site energy
audits, before finally preparing a techno-economic analysis which
models and analyses the economic and carbon performance of a
range of low carbon technologies (solar PV panels, wind turbines,
ground source heat pump, district heating etc) so as to assess the
most effective pathway to deliver Net Zero.
The plans are supported by robust business cases and are developed
in line with our estate strategies and business plans to ensure full
alignment and integration into our business as usual. During FY23,
we developed ten ‘Pathfinder’ Carbon Reduction Plans, which
captures c.75% of Babcock’s estate related Scope 1 and 2 emissions.
Whilst resource intensive, this comprehensive approach is giving
us great insight and allowing us to understand true cost and impact
of Net Zero on our estate and assets, which enables us to effectively
plan our journey to Net Zero. We are on track to meet our
commitment to have developed Carbon Reduction Plans across
our operations by 2024.
Over the past year we have continued investigations to unlock
renewable energy generation opportunities across the estate.
We currently have several renewable energy projects with cumulative
installed capacity in excess of 25MW which are progressing through
the stages of development. At a local level, we are assessing our
energy performance as part of our planned maintenance and
specifying low carbon products into asset life cycle replacements.
We remain committed to delivering high-quality development within
our construction and refurbishment programmes. Our development
at Bristol Technology Centre recently reached practical completion
and achieved a BREEAM excellent rating.
Transport
Decarbonisation of our transport, as detailed within our developing
Sustainable Transport Strategy, is being addressed under four pillars:
fleet, business travel, employee commuting and transportation and
distribution (upstream and downstream). Under Plan Zero 40 we
have committed to transition to 100% Ultra Low Emission Vehicles by
2030, and we are progressing well towards this target, roughly 15%
of our fleet are ULEV and the majority of our new vehicle orders are
ULEV. In June 2022, we announced the launch of Babcock’s EV
Salary Sacrifice scheme, which has been positively received with
large interest and uptake from across our workforce. Over the coming
year we are working to develop Workplace Travel Plans across key
sites and reviewing business travel to unlock and promote sustainable
travel options for our employees and visitors. We are also working
with our partners to reduce our logistics emissions.
Products and services
We have been working to unlock the low carbon opportunities
presented by the low carbon economy and aim to become a leader
in low carbon enablement. In creating a safe and secure world,
we strive to support our customers on their journeys to Net Zero
and have been working with a variety of customers across our
operations to identify decarbonisation opportunities. Recently
we supported several customers to seek funding from the UK
Government’s Low Carbon Skills Fund. Our Training and Technology
and Innovation teams are investigating a range of innovative low
carbon opportunities, and we are working to ensure we have the
right capabilities to deliver. Over the last 12 months, we have also
been working to develop our own climate e-training package,
Curious about Climate, which will support to raise awareness of
climate-related risks and opportunities.
Utilising a hybrid spend and revenue-based approach, we have
commenced work to calculate our Scope 3 downstream footprint.
Based on the work to date, we understand that emissions from Use
of Sold Products, Category 11 is one of the largest contributors to
our footprint. Due to the early stages of our investigations and the
limitations to the methodology utilised, we have not reported our
full Scope 3 footprint within our annual figures whilst we refine
the calculation methodology. We recognise the importance of
the Scope 3 footprint on our own footprint, but also that of
our customers.
To reduce the impacts of our Products and Services, across our
operations we are working to embed low carbon principles into
the design, planning and operational delivery of our products and
services with the use of Life Cycle Assessment tools and Circular
Economy principles. Over the coming 18 months we have
committed to conducting detailed carbon assessments of our
products and services and developing Net Zero roadmaps.
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Our Net Zero journey
2020
Baseline
Group ‘Top Down’
carbon strategy
2023
Strategy delivery
2025
Full Scope 3
mapping to
be complete
2032
All Babcock estate
to be Net Zero
in operation
2040
Net Zero Target
(Scope 1 and 2)
2021
‘Bottom-Up’
carbon strategies
• strategy planning
• baseline assessment
2024
All new buildings to be
Net Zero operational emissions
2030
Science-based targets,
ultra low-emissions vehicles
2035
All buildings to be Net
Zero
embodied carbon
Value chain
We understand our responsibility to lead by example, to encourage
and influence the supply chain to transition to the low carbon
economy. Babcock has a strong sustainable procurement policy to
underpin and ensure we deliver our operations in a sustainable
manner. Utilising the Environmentally Extended Input Output (EEIO)
approach, we are working to calculate our Scope 3 upstream
emissions. We recognise the limitations of the EEIO approach, and
we are working collaboratively with our partners and participating
in a range of industry working groups to mature the approach to
emission calculations. Our teams continue to work with our partners
to investigate, assess and deliver low carbon opportunities, such as
our recent transition to Hydrotreated Vegetable Oil (HVO) fuel.
Further information
Find out more about our Net Zero
journey by scanning this QR code
Climate management instruments
We acknowledge that the delivery of our Net Zero targets will be
challenging and requires immediate action. To support, influence
and encourage the delivery of our ambitious targets, we are working
to investigate and implement a range of climate management
instruments. Executive Remuneration linked to the carbon
performance of the organisation, and Internal Carbon Pricing are
two instruments being reviewed for implementation in FY24.
Alongside this, the performance of our Sectors and Direct Reporting
Countries (DRCs) are being assessed against a range of non-financial
metrics and targets.
Priorities for the year ahead
For the year ahead we will be building on the existing processes,
procedures and programmes established to deliver Plan Zero 40.
We have also commenced work to develop Babcock’s Climate
Transition Plan in line with requirements of the Transition Plan
Taskforce, which we aim to prepare over the coming18 months.
We will also continue to scale the development of Carbon
Reduction Plans and implement renewable energy initiatives.
Tree planting at Wembury
Barton Farm
A team from Devonport’s safety engineering group used
their volunteering day to plant trees at Wembury Barton
Farm. The new woodland will be part of the Plymouth and
South Devon Community Forest where there will be a mix
of native species planted, including sessile oak, fruit trees,
and hazel.
Babcock International Group PLC / Annual Report and Financial Statements 2023
65
ESG strategy (continued)
Integrating environmental sustainability into programme design
Following a detailed review of Babcock’s position and performance
relating to environmental protection, during 2022 we developed
and launched an enhanced suite of Group-wide Environmental
Minimum Standards. The new minimum standards will further
ensure the impacts of our operations are minimised and the highest
standards of environmental protection are upheld.
Data management
Data is a key enabler to our environmental strategy and is used
across the organisation to inform our decisions. Whilst access to
accurate and complete data is still considered one of our key
challenges, over the past 12 months we have continued to improve
our data sets. We have conducted a review of our operating
procedures and governance structures and are working to implement
a range of improvements. We have enhanced our capacity and
capability with our dedicated team of data specialists, who have
implemented rigorous internal audit processes, and we have
matured our investigations into the development of our Group-
wide Environmental Data Management System, which we aim to
implement throughout 2023. We have developed a clear data
improvement roadmap which will ensure compliance with the
increasing regulatory reporting requirements.
Awareness raising and engagement
We understand the importance of awareness raising and engagement
in embedding sustainability into our culture and ‘business as usual’.
As part of our engagement and communications strategy, every
year we deliver a number of environmental campaigns to raise
awareness and engage with our workforce and wider value chain.
During June 2022, we held ‘Environmental Action Month’, where
local environmental working groups from across the organisation
coordinated environmental engagement and volunteering activities
within their regions, such as beach litter picks, river cleans by kayaks,
tree planting and environmental coffee mornings. Continuing from
our COP26 campaign, in October 2022, supported by public figure
climate change advocates and industry experts, we delivered a
successful COP27 engagement campaign. Over the coming year
we are planning to continue the great work with further campaigns.
Natural environment
Throughout our global operations we interact with a range of complex
natural ecosystems. Maintaining and enhancing the biodiversity of
these ecosystems is a priority as we strive to protect and enhance
the environment and adapt to the impacts of Climate Change.
Over the past year we invested significant efforts to further our
understanding of our nature-related impacts, risks and opportunities.
We have identified fifteen sites across the organisation where our
interaction with and impact on local ecosystems has been considered
to be potentially significant. We are now working to conduct
biodiversity assessments across all these sites and are on track to
complete this work by the end of 2023. The bio-diversity assessments
will allow Babcock to understand our baseline, against which we
can develop the initiatives and roadmaps to achieve our medium-
term objective of 10% biodiversity increase across our estate.
Our approach is establishing a solid foundation for our broader
natural environment programme which will be launched over 2024.
Babcock has also become a member of the UK Business and
Biodiversity Forum and we are working to explore new legislative
requirements emerging from COP15 to disclose nature-related risks
and impacts, in line with the Taskforce on Nature-related Financial
Disclosures (TNFD). Over the coming year we are working to
conduct a pilot TNFD assessment, setting the pathway for
integration of nature considerations in our business as usual.
Taking action on our commitments
Consumption of materials and resources is a significant contributor
to Babcock’s environmental footprint and we understand our
responsibility to minimise the impacts of our operations. Last year
we announced a range of additional commitments (over and above
those stated within Plan Zero 40 and our TCFD disclosures):
• Prepare Carbon Reduction Plans across all operations by 2024
• Prepare Water Management Plans across all significant sites
by 2024
• Prepare Waste Management Plans across all significant sites
by 2024
• Conduct biodiversity assessments across all significant sites
by 2024
• All operations to be captured within an Environmental
Management System by 2024
• Zero controlled waste to landfill by 2025
• Eliminate the use of avoidable single-use plastics by 2027
• Deliver 10% biodiversity increase across the estate by 2030
In line with our ‘Top-down, Bottom-up’ approach, our Sectors and
DRCs have identified significant sites and are working hard to
develop ‘Bottom-up’ plans and programmes to deliver on our
commitments. Significant sites have been identified based on area,
consumption and emissions. Whilst there is a significant amount of
work still to do, we are on track to meet our commitments.
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Management’s role in assessing and managing
climate-related risks and opportunities
The executive with responsibility for TCFD reporting is the Chief
Corporate Affairs Officer. TCFD workstreams are championed by
the Group Director of Sustainability and activities are overseen by
the Corporate ESG Committee, which meets quarterly and includes
representatives from the Executive Committee.
Progress on TCFD activities was reported to this Committee
quarterly, and any actions/activities required to further climate-
related risk management activities were agreed by the Committee.
Executive Committee members who are members of the Corporate
ESG Committee are indicated on page 110.
Climate-related risks and opportunities have been reported to the
Executive Committee on a six-monthly basis. Our newly formed
Risk Committee, which sits as a direct management committee
into our Group Executive, will provide executive leadership and
oversight of the Group’s risk management framework, which
includes climate-related risks under the categorisation of Principal
Risk and Uncertainty.
In September 2022, the Chief Financial Officer agreed to appoint
KPMG to undertake quantified scenario analysis to model exposure
to physical and transition risks and help inform our strategic direction
and financial impacts, inform strategy and planning decisions.
The core project team was led by the Group Director of Sustainability,
supported by the Group Head of Environment, Group Head of
Reporting & Financial Control and included sector and regional
contacts who had the seniority and authority and best understood
the risks within their respective sectors and regions.
Interviews with sector and regional contacts were a key input to
the scenario analysis and provided the wider business context
behind identified risks and opportunities.
A Steering Group was set up, which included the Chief Financial
Officer and Director of Group Finance, to ensure governance and
oversight of the engagement.
The Group Director of Sustainability and KPMG reported the insights
from the climate-related risk assessment with sector and regional
Financial Directors and presented to both the December 2022
Executive Committee and the February 2023 Board.
Plan Zero 40 is led by the Group Head of Environment, with sectors
and regions accountable for developing their bottom-up carbon
reduction plans.
For further details on decarbonisation, see page 63.
Task Force on Climate-related Financial
Disclosures
Building on last year’s qualitative assessment, we have been working
towards full disclosure to the Task Force on Climate-related Financial
Disclosures (TCFD) requirements, as per Listing Rule LR9.8.6R.
We are now consistent with 9 of the 11 TCFD requirements, with
limited disclosures on Metrics and Targets A and B having not yet
set an internal carbon price, nor fully embedded cross-industry
climate-related metric categories into our targets, nor reported our
full scope 3 emissions across the full value chain due to the early
stages of our investigations and the limitations to the methodology
utilised. Over the coming 18 months we have committed to
conducting detailed carbon assessments of our products and
services and developing Net Zero roadmaps.
Last year, we set governance with respect to climate change,
integrated risk management and scenario planning in our strategic
planning cycles and had set some initial targets. This year, we
conducted a strategic climate-related risk assessment to assess
the financial impact of the key risk themes on the organisation’s
business strategy and financial planning. In line with TCFD
recommendations, we have made the following disclosures:
• Governance (all recommended disclosures)
• Strategy (all recommended disclosures)
• Risk management (all recommended disclosures)
• Metrics and targets (limited disclosures for A and B)
We are committed to achieving Net Zero and our Plan Zero 40 and
climate strategy workstreams are aligned. We intend to develop
one holistic transition plan, which includes Plan Zero 40
workstreams and climate-related risks in line with final
recommendations of the Transition Plan Taskforce.
For further details see FY24 priority table, pages 72-73. Additional
climate-related disclosures can be found in the Risk Management
101 and Governance sections 133.
Governance
Board oversight of climate-related risks and
opportunities
Our Board ensures oversight on climate-related issues and discusses
Group-wide ESG matters as an integral part of Board strategic
discussions. In FY23, the Board requested two progress reviews on
Group-led sustainability workstreams including implementation of
Plan Zero 40 and TCFD through updates from the Group Director
of Sustainability and the Group Head of Environment.
At the September 2022 and February 2023 Board meetings,
the Board noted the progress vs objectives, including baselining,
development of Pathfinder carbon reduction plans, indicative
capital profile to deliver Net Zero target, and noted that carbon
reduction plans need to be strategically integrated into business
plans. They also noted the intention to submit carbon reduction
targets to the Science Based Targets Initiative (SBTi), insights from
the climate-related risk assessment and the plan to develop a climate
transition plan in line with the TPT recommendations. The Board
also discussed plans to set ESG targets relating to emissions reduction
through the remuneration committee as part of the FY24 long-term
incentive plan.
See page 110 for further details on our governance framework.
Babcock International Group PLC / Annual Report and Financial Statements 2023
67
ESG strategy (continued)
Strategy
Building on our climate-related risk management process from
last year, which considered the following time horizons: short
(present to 2030), medium (2030 to 2040), and long-term
horizons (2040 to 2100), sectors and regions considered the
insight and recommendations from the KPMG climate-related risk
assessment report and identified the immediate actions required
in their five-year strategic plans to support corporate commitments
including Net Zero, wider environmental targets, and to address
key climate-related risks and opportunities.
Approach to scenario analysis
Advancing our climate maturity, we have undertaken quantified
scenario analysis of our shortlisted climate-related risks and
opportunities to assess our organisational resilience. Two potential
future climate scenarios were selected which use economic constraints
associated with the International Panel on Climate Change’s (IPCC)
Shared Socioeconomic Pathway 2 (SSP2) middle of the road
scenario: a Paris-aligned 1.5°C for the best-case scenario and a
business-as-usual 4°C scenario for the baseline scenario. These align
with TCFD recommendations.
The baseline scenario considers how the global economy could
look in the absence of new climate policies beyond those in place
today. The 1.5°C counterfactual simulates a potential future
pathway of the world economy assuming a successful introduction
of climate policies. The 4°C baseline, utilised and agreed by climate
modelling experts within the UN IPCC Change, assumes the
scenario in which no further intervention on climate change is
taken, leading to a global-mean temperature rise of 4°C above
pre-industrial levels by 2100.
A desktop analysis of physical risk exposure considering asset
location, insured value, machinery and contents, and stock was
undertaken for 15 key sites.
These sites represent centres of operations, significant revenues,
large asset values, and wide coverage of geographies in which we
operate, therefore capturing physical risk across the Group.
Physical risk was assessed against eight climate hazards. Acute
physical risks were considered, which are event-driven, including
increased frequency and severity of extreme weather events:
• Riverine flooding
• Forest fire
• Extreme wind
• Soil subsidence
• Surface water flooding
• Freeze thaw
Two chronic physical risks were also considered which refer to
longer-term shifts in climate patterns: extreme heat and coastal
inundation.
Babcock operates assets with long life; therefore, we consider
long-term risks up to 2100.
We have undertaken quantified scenario analysis of our shortlisted
climate-related risks and opportunities to assess our organisational
resilience. Based on the results of this initial analysis, the impact of
climate change on the Group’s financial performance and position
is not expected to be material, after considering the potential risk
management and mitigation strategies available to the Group.
An economic analysis was used to assess transition risks.
The global economic model analysed the potential carbon
emissions of economic activities and the consequential impact
on macroeconomics of constraining these emissions, in order
to achieve the target global-mean temperature at 2100.
The economic model disaggregated these economic
considerations to a market level, producing price and volume
impacts on commodities and sectors across the global economy,
against which our supply chain cost structure was assessed.
The model achieves the scenario’s emissions constraints through
carbon pricing. Trajectories for GDP of countries, output of industry
sectors and global carbon intensity of industry sectors are used as
inputs to the model among others.
For further details see the scenario table on page 71.
Risks
Third-party analysis has calculated the potential revenue and business
interruption impact of shortlisted risks up to 2050 and critically
identified the short-term (<5 years) and long-term (5 years+)
actions that should be taken now and in the future by our business.
These have been considered in our five-year strategic planning.
In last year’s report, we had identified dockyard disruption due to
coastal flooding as the most significant risk. This year’s quantification
analysis suggested that coastal inundation could still pose a risk
after 2050 due to sea level rise being a lagging impact of climate
change, however with respect to lost revenue and asset value,
the risk of dockyard disruption has been assessed as less likely than
expected. Site-specific physical risk assessments are now taking
place to consider local characteristics and to verify this finding.
The impact of future possible risk scenarios related to climate for
2030 and 2040 is also being factoring into periodic reviews at
Devonport and is informing the design work of major infrastructure
projects at our sites.
This year, we have identified a risk to Bristol Ashton Vale site
in the 4°C scenario due to its location on a flood plain.
Our Environmental, Health and Safety leads at Ashton have
arranged for this risk to be considered within future business
continuity planning. For three additional sites based outside the
UK, we have identified extreme heat and forest fire as the key risks.
For all of these sites, Group Occupational Health has completed
preliminary assessments of the mitigations which are in place to
manage these potential scenarios.
For transition risk, the most significant is labour cost, which is
expected to rise under both scenarios, but significantly in the 1.5°C
scenario. However, this is likely to materialise in the medium and
long term and affect UK operations the most. We also recognise the
need to keep pace with decarbonisation related technological
change as a measure to mitigate risk. Details of all climate-related
physical and transition risks, proximity, impact, and control
measures introduced can be seen in the table on page 72-73.
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Climate mitigation strategies
Plan Zero 40 is our chief mitigation mechanism to combat transition
risk, which is highest in countries with a strong Net Zero policy,
such as the UK. For further details of carbon emissions reporting
and mitigations, see the Environment section on page 63.
Opportunities
We also recognise there will be opportunities in the transition
towards a greener economy. Through our Liquid Gas Equipment
(LGE) business, we aim to continue to develop our ecoFGSS-FLEX®
ammonia fuel gas supply system with an aim of bringing this to
market in FY23/24. LGE also see an increasing demand for the bulk
marine transportation of hydrogen, in the form of ammonia (rather
than pure liquid hydrogen) and are supporting several opportunities
for dedicated ammonia-carrying ships based on existing technologies.
LGE continues to see a growing demand for the capture, transportation,
and storage of CO2 from current emitters and are working closely
with several project developers, shipyards and shipowners to
develop the end-to-end solution for liquefied CO2 carriers.
The quantitative results suggest that Liquid Natural Gas (LNG)
demand could rise in a 4°C scenario, presenting an opportunity if
the world does not rapidly transition. But in the 1.5°C scenario with
an increasing impact of carbon prices, LNG demand could fall.
Through expanding our LGE business to handle other liquefied gasses,
we are increasing our resilience against potential falling LNG demand.
Conversely, demand for civil nuclear services could fall in the 4°C
scenario in favour of cheaper fossil fuels, whereas demand could
increase in the 1.5°C scenario as nuclear becomes attractive over
competing energy sources that are carbon taxed. We expect revenue
for our civil nuclear services to initially fall in the 1.5°C, due to the
decommissioning of existing UK fleet, before increasing again with
renewed nuclear power demand and the opportunity for growth.
Within Marine, we have commenced planning consultations for
installation of renewable energy at Rosyth. The initial phase is
expected to be operational in FY25.
We are continuing to develop Marine R&D programmes to capitalise
on potential new markets, especially green propulsion. Focused on
Fuel Cell – Battery Hybrid-Ship, we are prioritising challenges in
hydrogen production and supply volumes and safe integration and
storage on-board. We have undertaken virtual fuel cell testing to
identify the most effective power-energy management profile for
storage solution and have also undertaken physical fuel cell testing,
evaluating the technology under a range of conditions. Other R&D
projects include electrical systems, catalytic reduction systems,
waste heat recovery, energy management systems, alternative or dual
fuels, and others. We are an active member of MarRI-UK and benefit
from Innovate UK and other funding sources.
In Land’s PHOENIX II contract, we manage in excess of 15,000
White Fleet vehicles and worked with the customer to deliver the
UK Government’s 2022 ‘Road to Zero’ target that requires 25% of
the M1 Classified Fleet (predominantly cars) to be ULEV. In parallel
with the procurement of c. 400 ULEVs, we developed a model
which utilises telematics data to assist the MoD in identifying
suitable locations and required quantities for the ULEVs.
The team are now working to achieve the 2027 milestone which
requires the entire car and van fleet to be zero emission. Whilst the
majority of these vehicles are likely to be Battery Electric Vehicles
(BEVs), Babcock in collaboration with the customer and original
equipment manufacturers, is also exploring other technologies
such as hydrogen fuel cells and synthetic fuels.
We’ve produced the first battery-powered pumping appliance in
partnership with London Fire Brigade (LFB), which is known as the
Zero Emission Pumping Appliance (ZEPA) and it can be used with
any UK-based Fire and Rescue Service (FRS). This was put on the
frontline during FY23 at one of LFB’s busiest stations. They are
designed to meet all demanding operational requirements but
are capable of zero emissions. In future, we plan to introduce 10
appliances by 2025/26 with the ZEPA2 project phase and then
repower all LFB’s heavy fleet by 2030 with ZEPA3.
For Aviation, Babcock has been selected by the RAF’s Rapid Capability
Office to lead a consortium of UK-based SMEs to explore emerging
technologies which could minimise the environmental impact of
light aircraft flying training. R&D funding from the customer will
facilitate the delivery of a net carbon zero solution through
development of new, synthetic fuel, as well as reducing overall
emissions from an improved efficiency engine with the possibility
of an electric hybrid drive. The project will also assess recycling
techniques for carbon fibre structures. This year our UK Onshore
entity has proposed customer options for initial Sustainable Aviation
Fuel (SAF) trials and continues to explore more permanent
sustainable fuel options with key suppliers including transition
targets anticipated for 2027 and 2030.
At Babcock sites leased through our customers, such as Bovington,
the Land sector this year went through upskilling programmes to
assist with Net-Zero baselining activity and have also generated
infrastructure improvement plans that would allow the sites to
meet the Group decarbonisation plan (2040). Customer engagement
on this site has recently supported improvements including LED
lighting upgrades and has provided the future opportunity to install
available photovoltaic (PV) roof panelling if required. Our team has
also engaged with the Ministry of Defence on the Babcock-led
application for SALIX funding to further decarbonise public and
private operations at Bovington.
Financial impact
Given the level of maturity of our analysis, we have not included full
climate-related financial disclosures within this TCFD statement.
We have included the potential climate impact and resilience
within our goodwill impairment assessment as a sensitivity to the
Group’s Five-Year plan, noting that any impairment is recorded first
against tangible assets before goodwill. No impairment has been
recorded to any of the Group’s assets as a result of this assessment
Babcock International Group PLC / Annual Report and Financial Statements 2023
69
ESG strategy (continued)
Risk management
Aligning with our quantitative scenario analysis, we updated our risk
management framework during FY23 to consider the two scenarios
(1.5°C and 4°C) for climate-related risks.
Along with the top 10 items for Group review and action from each
Sector and DRC, climate risks are reviewed quarterly by the Risk
Committee and Executive Committee, as well as being reported
into the Audit Committee quarterly and the Board annually.
As last year, in our risk register, the horizons against which the
climate-related risks are assessed are as follows:
• Short term (present to 2030)
• Medium term (2030 to 2040)
• Long term (2040 to 2100)
Individual owners from each Sector and DRC have been
delegated a climate-related risk register by our TCFD sponsors.
Quarterly reviews are completed by reviewing the risks with
these individual owners to consider current control measures,
proposed control measures, date for completion, and monitoring
systems of check. Sectors and DCR also identify and document
all risks and opportunities on their risk register.
On an annual basis, owners are required to reassess the initial
risk rating of each item, and therefore the effectiveness of their
control measures. Target ratings are then set where further control
improvements are required, so there is consistency in process.
Climate has been defined as a principal risk at the February
Executive Committee. See Principal Risk section page 101.
Our risk management hierarchy ensures management at the most
appropriate level in the organisation. Climate risks are integrated
into the Babcock Enterprise Risk Management Framework for
reporting, escalation and corporate oversight.
Curious about Climate
We’ve developed a new tool to help us better understand
how we can reduce our impact on the environment and
play our part in tackling climate crisis, together.
It includes animations, games, and quizzes and can be
shared with family and friends – the more people we get
involved, the bigger difference we can make.
Metrics and targets
Last year, Babcock developed metrics, with associated targets and
timescales, to measure our progress towards reducing our exposure
to climate-related risk. This year, we have been focused on
completing the initial targets we set in AR22:
• We established baseline and submitted carbon reduction targets
to the Science Based Targets initiative in April 2023
• Given the maturity of our Scope 3 calculations across our value
chain, we are not reporting the figures within our emissions
table, however we are working to investigate and calculate our
Scope 3 footprint using a range of methodologies such as EEIO.
Based on our hotspot analysis investigations to date, we understand
that categories 1 and 11 are the two largest contributors to our
footprint. For further details, see Environment Section, page 63
• We completed a desktop analysis of our top 15 sites. An assessment
of climate-related risk of all critical Babcock infrastructure will be
completed by December 2024
• Group Occupational Health has led a review of climate-related
risk to physical working conditions for four sites to identify
mitigation and control measures
• Climate-related impacts are considered in new business bid/no
bid decisions and associated contract negotiations/KPIs
• In 2022, approximately 32% of Babcock’s electricity was from
renewable energy sources, this is an increase from 26% in 2021.
We are working to identify opportunities to transition the
organisation to 100% renewable electricity, where feasible, by 2030
• Employing a climate change, scenario-based methodology,
in 2022 we completed an analysis across over 300 of Babcock’s
critical suppliers which mapped the possible trajectories of six
key physical hazards and socioeconomic risks. With no immediate
significant impact identified in this analysis, in 2023 and further
on, this Representative Concentration Pathway (RCP) analysis will
be extended to the wider supply base, identifying new risks which
have emerged since the 2022 report, embedding further sustainable
procurement practices across our Group-wide supply chains, and
validating our future adaption techniques and buying decisions
• We have also commenced work to develop Babcock’s Climate
Transition Plan in line with requirements of the Transition Plan
Taskforce, which we aim to prepare over the coming 18 months
• We have not yet embedded cross-industry climate related metric
categories into our targets. Nor have we set an internal carbon
price; however this is under consideration, and we are aiming to
do so by 2025
In addition to our published metrics and targets, we are reviewing
a range of climate management instruments including internal carbon
prices and Executive Remuneration linked to ESG performance.
Over the coming year, our Sectors and DRCs will also be working to
develop Climate Transition Plans in line with the requirements of
the Transition Plan Taskforce.
Please see our emissions table on page 63 for additional information.
70
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
TCFD progress vs priorities
FY23 progress
FY24 priorities
Governance
• ESG updates to the Board included climate action
• Board to continue the discussion on the topic
• The Remuneration Committee set ESG related targets
relating to reduction in carbon emissions for the 2023
PSP grant. See page 133 Remuneration Committee Report
of sustainability
• Board to ensure progress on Plan Zero 40
Strategy
• Completed quantitative scenario analysis to assess
organisational resilience
• Aligned ESG workstreams and financial planning process
to understand FY24 Sector priorities and actions in
support of climate-related risks and opportunities
• Defined financial implications of climate-related risks
and opportunities and included mitigation steps in
strategic planning
• Included climate-related impacts in all material
new business decisions and associated contract
negotiations/KPIs
• Align Plan Zero 40 and Climate strategy workstreams to
create a Babcock climate transition plan aligned with
TPT requirements
Risk
management
• Risk management policy and climate-related risk registers
updated to accommodate updated climate scenarios
• Assess progression of climate-related risk registers
and ongoing management
• Completed a review of climate-related changes to
• Complete physical inspection across all sites by
working conditions for four sites with the most significant
occupational risks
end of 2024
• Climate risk to be scheduled annually for Risk
• Assessment and report delivery for all of our critical
Committee review
suppliers’ climate-related risks and associated impact
on Babcock in Autumn 2022
Metrics
and targets
• We established baseline and submitted carbon
reduction targets to the Science Based Targets
initiative in April 2023
• Embed sustainable procurement checkpoints, inclusive
of climate-related onboarding requirements for new
suppliers and sub-contractors
• Progress against SBTi emissions reduction target of 4.2%
year on year
• Progress on Plan Zero 40 by scaling across the rest of
the organisation by December 2023
• Delivery of energy efficiency and renewable energy projects
Scenario details
Economic Constraints
1.5ºC warning
Moderate global population growth which levels off in the second half of the century. GDP growth in line
with historical growth
4ºC warning
Policy Expectations
Global climate policies align with emissions
to 1.5ºC pathway
No further climate policy intervention
Physical Impacts
Reduced likelihood of severe climate-related
weather events
Likely increased severity of climate-related
weather events
Babcock International Group PLC / Annual Report and Financial Statements 2023
71
ESG strategy (continued)
Climate-related risks and opportunities
Climate Risk
People welfare
(Physical Risk)
Disruption to
operations due to
working conditions
Description
Disruption to staff and operations due to
weather conditions with difficult/unsafe
working conditions
Affected
Sectors &
Regions
All
(Global)
Scenario with Greatest
Financial Impact
1.5°C 4°C
Horizon2
<5 years
5 years+
Cost of business
(Transition Risk)
Supply chain
disruption
Increased climate-related regulation, such as
taxes on fossil fuels, may affect Babcock’s supply
chain cost base or viability of supply chain
companies
All
(Global)
<5 years
5 years+
Business
delivery
& continuity
(Physical Risk)
Dockyard disruptions
due to sea level rises
Future services
(Transition Risk)
Demand for LGE and
Civil Nuclear services
Dockyards owned/operated by Babcock may be
flooded due to an increase in sea level and
higher frequency of extreme weather, resulting
in storm surges
Marine
Nuclear
(UK &
Australasia)
<5 years
5 years+
Demand impact to LGE and Civil Nuclear
services due to carbon prices
Marine
Nuclear
(UK)
<5 years
5 years+
Demand for low
carbon solutions for
aircraft
Regulatory pressures and low carbon
requirements could cause changes to customer
contracts and business models, leading to
demand reduction for Babcock services and
existing technology unable to meet
requirements
Aviation
(UK,
France,
Canada &
Australasia)
<5 years
5 years+
Shifting energy
generation markets
(Africa)
Shifting energy generation markets result in
disruption to customer base and demand for
Babcock SA services
Customers change business models because of
regulatory/physical impacts on operations and
demand reduces for Babcock services/product
Africa
<5 years
Technology
adaptation
Babcock may need to increase its spend on R&D
and new technology activities to adapt to
climate change
Marine
(Global)
5 years+
<5 years
5 years+
Failure to decarbonise
Devonport
Shift from Scope 1 combustion to Scope 2
electrical activities will require abatement
technology to deliver Net Zero targets
Opportunity to assist neighbouring Energy from
Waste plant (our source of electricity until at
least 2040) in their transition to new
technologies when the plant reaches end of life
Marine
Nuclear
(UK)
<5 years
<5 years
1. Business interruption does not consider penalty costs from customers or clients that may be incurred because of down time following a physical hazard event
2. Time horizon of < 5 years and > 5 years considers the potential future impact of climate-related risks and opportunities in line with our five-year strategic planning process
72
Babcock International Group PLC / Annual Report and Financial Statements 2023
Impact Type &
Quantification
Methodology
Business Interruption
Difference between the
current and future
potential financial loss
(1.5°C used due to
greater impact)
Costs
Difference between
4°C and 1.5°C
Business Interruption
and Damage1
Difference between
the current and future
potential financial loss
(4°C used due to
greater impact)
Revenue
Difference between
4°C and 1.5°C
Lost Market Share
Difference between
4°C and 1.5°C
Revenue
Difference between
4°C and 1.5°C
Lost Market Share
Difference between
4°C and 1.5°C
Costs
Difference between
4°C and 1.5°C
Analysis Findings
Control Measures
Site disruptions due to physical risks are dominated by flooding at Bristol
At our three sites exposed to extreme heat risk, occupational
Ashton Vale and forest fires in Manitoba. The likelihood of extreme heat
health assessments have identified those working in higher risk
increases at other sites, but the disruption is not financially material.
scenarios such as field service mechanics and confined space
Although physical hazards represent a greater percentage of revenue in the
maintenance operatives. Training, hazard notices, and health
4°C scenario, we could experience greater overall growth in the 1.5°C
guidance are installed at these sites to recognise early signs of
scenario. Therefore, physical hazards could still result in high levels of lost
temperature-related health conditions, such as heat stroke.
revenue in both scenarios.
These sites comply with and adhere to climate-related, public
instruction and guidance, with Bristol currently reviewing local
instruction for flooding through business continuity planning process.
Labour cost changes drive the risk within Babcock’s supply chain. Direct
To manage climate change risks, our future supplier selection
carbon costs also increase significantly as a result of government pressure
criteria will assess carbon footprint and the profundity of
on decarbonisation. Variations in other costs are seen to be less significant
transparent carbon reduction plans, conduct annual supply chain
up to 2050.
mapping to identify vulnerabilities, collaborate with suppliers and
Cost increases could be greater in the 1.5°C scenario because of larger labour
perform regular risk assessments through due diligence, performance
and carbon cost increases as well as greater growth overall. Supply chain
management and audits. These measures will enable us to
disruption because of the transition to a Net Zero economy is therefore
proactively manage climate change risks and contribute to our
considered a significant risk.
sustainability goals.
Dockyard disruption due to coastal flooding has not been identified as a significant
Natural external hazards assessments at our sites consider the
physical risk in terms of business interruption or value at risk. However, the scope
impact of low probability risks, such as extreme weather events.
of this desktop assessment does not consider all aspects of dockyard
Devonport mandates these assessments onsite as part of our
construction and further on-site analysis for key sites is recommended.
requirement to ensure full through life management of our nuclear
Similar to the dynamics of People Welfare, sea level rise is greater in the 4°C
facilities and to meet established nuclear safety standards, subject
scenario. However, potential greater demand for services in the 1.5°C
to both Defence and Civil Nuclear regulation. To then appraise the
scenario could result in higher levels of lost revenue from a coastal inundation
best environmental options for infrastructure designs, Devonport
event. Therefore, in both scenarios coastal inundation could cause similar
works with industry leads, our customers, and local authority to
levels of financial impact.
conduct DREAM assessments and BAT reviews where applicable.
Demand for LGE’s services in the 4°C scenario could see strong growth but
We aim to continue to develop our ammonia fuel gas supply system,
significant reduction in the demand for gas in the 1.5°C scenario could result
in reduced revenue. Demand for civil nuclear could fall in the 4°C scenario and
as well as solutions for the transportation and storage of CO2 in line
with customer and legislative requirements. This will ensure that we
grow in 1.5°C because of changes to the competitiveness of nuclear power.
are optimising efficiency while developing zero-carbon solutions and
The transition to low carbon fuels in the 1.5°C scenario may limit the global
increasing business resilience against carbon pricing and its potential
demand for gas, potentially reducing demand for LGE’s services. Higher carbon
result of falling LNG demand.
taxes may also impact the competitiveness of nuclear power, increasing
demand for civil nuclear services. In 2050, the combined impact of these
changes in demand results in a significant difference between scenarios.
Under both scenarios the air transport sector may grow, albeit at different
Investment and regulatory compliance within new sustainable fuel
rates. Falling carbon intensity of the air transport sector occurs under both
and platform contracts, such as Project MONET, currently
scenarios with the greatest decarbonisation in the 1.5°C.
mobilised to investigate synthetic fuel application within Defence,
Failure to decarbonise in line with the increased rate and extent of
specifically light aircraft for elementary flight training. Babcock
decarbonisation within the aviation sector in the 1.5°C scenario could
Aviation is also continuing to work with industry leaders such as
result in greater lost market share when compared with the 4°C scenario.
Vertical Aerospace, to look at the applications of eVTOL aircraft
within our current and future capabilities.
In Africa, electricity generating technologies may vary between the 1.5°C
We currently undertake emissions abatement projects such as an
and 4°C scenarios. Babcock’s established support services with steam-based
enhancement strategy to maximise all opportunities within NOx,
energy generators is seen to be constrained in the 1.5°C scenario.
SOx and PM, and are working with technological partners to
The potential shift from thermal electrical generation to renewables in the
identify further abatement projects where we can support.
1.5°C scenario may result in reduced revenues for Babcock’s South Africa
Possible further opportunities are now being assessed eg
engineering services when compared with the 4°C scenario.
conversion of Fossil Fuel boilers to ‘Clean Coal Technologies’ over
the next 10–20 years, re-purposing of current coal fired stations,
and the next steps to evaluate the nuclear energy market
regarding our entry levels and required qualifications.
Under both scenarios the water transport sector may grow. However, growth
Through projects such as CMDC Neptune, Babcock Marine is
will be greater under a 4°C scenario. Nonetheless, decarbonisation occurs
building our market awareness of new marine-based technologies
under both scenarios with greater decarbonisation in the 1.5°C.
Failure to decarbonise in line with the increased rate and extent of
available. Our newly formed Clean Maritime SME group is the
knowledge focal point in marine engineering for new green
decarbonisation across the economy in the 1.5°C scenario could result in
technologies and low-emission fuels. The combination of our
greater lost market share when compared with the 4°C scenario.
high-level engineering skill, with LGE and the Nuclear expertise
provides Babcock the opportunity of being at the forefront on the
green technology race with potential capitalisation in IP and skills.
The Devonport site experiences significant cost increases under a 1.5°C due to
Commitments across Nuclear to Plan Zero 40 this year has
the impact of direct carbon prices. Energy and gas costs would increase, most
allowed this sector to reduce our risk probability ranking from
notably following the expiry of the Energy from Waste contract in 2040 and a
very likely to possible.
switch to the market mix.
The introduction and increase in carbon taxes in the 1.5°C scenario could
result in higher costs to Babcock when compared with the 4°C scenario.
Climate-related risks and opportunities
Climate Risk
Description
People welfare
(Physical Risk)
Disruption to
operations due to
working conditions
Disruption to staff and operations due to
weather conditions with difficult/unsafe
working conditions
Scenario with Greatest
Financial Impact
Horizon2
1.5°C 4°C
Impact Type &
Quantification
Methodology
Affected
Sectors &
Regions
All
(Global)
Cost of business
(Transition Risk)
Increased climate-related regulation, such as
taxes on fossil fuels, may affect Babcock’s supply
All
(Global)
chain cost base or viability of supply chain
Supply chain
disruption
companies
Business
delivery
& continuity
(Physical Risk)
Dockyard disruptions
due to sea level rises
Future services
(Transition Risk)
Demand for LGE and
Civil Nuclear services
Dockyards owned/operated by Babcock may be
flooded due to an increase in sea level and
higher frequency of extreme weather, resulting
in storm surges
<5 years
5 years+
Marine
Nuclear
(UK &
Australasia)
Demand impact to LGE and Civil Nuclear
services due to carbon prices
Marine
Nuclear
(UK)
<5 years
5 years+
Demand for low
carbon solutions for
aircraft
Regulatory pressures and low carbon
Aviation
<5 years
requirements could cause changes to customer
contracts and business models, leading to
demand reduction for Babcock services and
existing technology unable to meet
(UK,
France,
Canada &
Australasia)
requirements
5 years+
Shifting energy
generation markets
(Africa)
Shifting energy generation markets result in
Africa
<5 years
disruption to customer base and demand for
Babcock SA services
Customers change business models because of
regulatory/physical impacts on operations and
demand reduces for Babcock services/product
<5 years
5 years+
<5 years
5 years+
5 years+
5 years+
Business Interruption
Difference between the
current and future
potential financial loss
(1.5°C used due to
greater impact)
Costs
Difference between
4°C and 1.5°C
Business Interruption
and Damage1
Difference between
the current and future
potential financial loss
(4°C used due to
greater impact)
Revenue
Difference between
4°C and 1.5°C
Lost Market Share
Difference between
4°C and 1.5°C
Revenue
Difference between
4°C and 1.5°C
Technology
adaptation
Babcock may need to increase its spend on R&D
and new technology activities to adapt to
Marine
(Global)
<5 years
climate change
Lost Market Share
Difference between
4°C and 1.5°C
Failure to decarbonise
Shift from Scope 1 combustion to Scope 2
Devonport
electrical activities will require abatement
technology to deliver Net Zero targets
Opportunity to assist neighbouring Energy from
Waste plant (our source of electricity until at
least 2040) in their transition to new
technologies when the plant reaches end of life
Marine
Nuclear
(UK)
<5 years
<5 years
Costs
Difference between
4°C and 1.5°C
Strategic report
Governance
Financial Statements
Impact
Insignificant
Moderate
Major
Severe
Analysis Findings
Control Measures
Site disruptions due to physical risks are dominated by flooding at Bristol
Ashton Vale and forest fires in Manitoba. The likelihood of extreme heat
increases at other sites, but the disruption is not financially material.
Although physical hazards represent a greater percentage of revenue in the
4°C scenario, we could experience greater overall growth in the 1.5°C
scenario. Therefore, physical hazards could still result in high levels of lost
revenue in both scenarios.
Labour cost changes drive the risk within Babcock’s supply chain. Direct
carbon costs also increase significantly as a result of government pressure
on decarbonisation. Variations in other costs are seen to be less significant
up to 2050.
Cost increases could be greater in the 1.5°C scenario because of larger labour
and carbon cost increases as well as greater growth overall. Supply chain
disruption because of the transition to a Net Zero economy is therefore
considered a significant risk.
Dockyard disruption due to coastal flooding has not been identified as a significant
physical risk in terms of business interruption or value at risk. However, the scope
of this desktop assessment does not consider all aspects of dockyard
construction and further on-site analysis for key sites is recommended.
Similar to the dynamics of People Welfare, sea level rise is greater in the 4°C
scenario. However, potential greater demand for services in the 1.5°C
scenario could result in higher levels of lost revenue from a coastal inundation
event. Therefore, in both scenarios coastal inundation could cause similar
levels of financial impact.
Demand for LGE’s services in the 4°C scenario could see strong growth but
significant reduction in the demand for gas in the 1.5°C scenario could result
in reduced revenue. Demand for civil nuclear could fall in the 4°C scenario and
grow in 1.5°C because of changes to the competitiveness of nuclear power.
The transition to low carbon fuels in the 1.5°C scenario may limit the global
demand for gas, potentially reducing demand for LGE’s services. Higher carbon
taxes may also impact the competitiveness of nuclear power, increasing
demand for civil nuclear services. In 2050, the combined impact of these
changes in demand results in a significant difference between scenarios.
Under both scenarios the air transport sector may grow, albeit at different
rates. Falling carbon intensity of the air transport sector occurs under both
scenarios with the greatest decarbonisation in the 1.5°C.
Failure to decarbonise in line with the increased rate and extent of
decarbonisation within the aviation sector in the 1.5°C scenario could
result in greater lost market share when compared with the 4°C scenario.
In Africa, electricity generating technologies may vary between the 1.5°C
and 4°C scenarios. Babcock’s established support services with steam-based
energy generators is seen to be constrained in the 1.5°C scenario.
The potential shift from thermal electrical generation to renewables in the
1.5°C scenario may result in reduced revenues for Babcock’s South Africa
engineering services when compared with the 4°C scenario.
Under both scenarios the water transport sector may grow. However, growth
will be greater under a 4°C scenario. Nonetheless, decarbonisation occurs
under both scenarios with greater decarbonisation in the 1.5°C.
Failure to decarbonise in line with the increased rate and extent of
decarbonisation across the economy in the 1.5°C scenario could result in
greater lost market share when compared with the 4°C scenario.
The Devonport site experiences significant cost increases under a 1.5°C due to
the impact of direct carbon prices. Energy and gas costs would increase, most
notably following the expiry of the Energy from Waste contract in 2040 and a
switch to the market mix.
The introduction and increase in carbon taxes in the 1.5°C scenario could
result in higher costs to Babcock when compared with the 4°C scenario.
At our three sites exposed to extreme heat risk, occupational
health assessments have identified those working in higher risk
scenarios such as field service mechanics and confined space
maintenance operatives. Training, hazard notices, and health
guidance are installed at these sites to recognise early signs of
temperature-related health conditions, such as heat stroke.
These sites comply with and adhere to climate-related, public
instruction and guidance, with Bristol currently reviewing local
instruction for flooding through business continuity planning process.
To manage climate change risks, our future supplier selection
criteria will assess carbon footprint and the profundity of
transparent carbon reduction plans, conduct annual supply chain
mapping to identify vulnerabilities, collaborate with suppliers and
perform regular risk assessments through due diligence, performance
management and audits. These measures will enable us to
proactively manage climate change risks and contribute to our
sustainability goals.
Natural external hazards assessments at our sites consider the
impact of low probability risks, such as extreme weather events.
Devonport mandates these assessments onsite as part of our
requirement to ensure full through life management of our nuclear
facilities and to meet established nuclear safety standards, subject
to both Defence and Civil Nuclear regulation. To then appraise the
best environmental options for infrastructure designs, Devonport
works with industry leads, our customers, and local authority to
conduct DREAM assessments and BAT reviews where applicable.
We aim to continue to develop our ammonia fuel gas supply system,
as well as solutions for the transportation and storage of CO2 in line
with customer and legislative requirements. This will ensure that we
are optimising efficiency while developing zero-carbon solutions and
increasing business resilience against carbon pricing and its potential
result of falling LNG demand.
Investment and regulatory compliance within new sustainable fuel
and platform contracts, such as Project MONET, currently
mobilised to investigate synthetic fuel application within Defence,
specifically light aircraft for elementary flight training. Babcock
Aviation is also continuing to work with industry leaders such as
Vertical Aerospace, to look at the applications of eVTOL aircraft
within our current and future capabilities.
We currently undertake emissions abatement projects such as an
enhancement strategy to maximise all opportunities within NOx,
SOx and PM, and are working with technological partners to
identify further abatement projects where we can support.
Possible further opportunities are now being assessed eg
conversion of Fossil Fuel boilers to ‘Clean Coal Technologies’ over
the next 10–20 years, re-purposing of current coal fired stations,
and the next steps to evaluate the nuclear energy market
regarding our entry levels and required qualifications.
Through projects such as CMDC Neptune, Babcock Marine is
building our market awareness of new marine-based technologies
available. Our newly formed Clean Maritime SME group is the
knowledge focal point in marine engineering for new green
technologies and low-emission fuels. The combination of our
high-level engineering skill, with LGE and the Nuclear expertise
provides Babcock the opportunity of being at the forefront on the
green technology race with potential capitalisation in IP and skills.
Commitments across Nuclear to Plan Zero 40 this year has
allowed this sector to reduce our risk probability ranking from
very likely to possible.
Babcock International Group PLC / Annual Report and Financial Statements 2023
73
ESG strategy (continued)
Social
Ensuring the safety and wellbeing of our people
Safety, Health and Environmental Protection is core to everything
that we do at Babcock and we are committed to ensure our workers,
customers and stakeholders go home safe every day. We are committed
to creating an inclusive and supportive workplace where individuals
can flourish and contribute to the shared success of the business.
This year we have strengthened the foundations of our health and safety
management as well as integrated through collaboration with functions
across Babcock to build an engaged safety culture across the globe.
Governance and engagement
As we build upon our established corporate safety standards and move
to a Global Business Management System, collaboration across the
Sectors and Direct Reporting Countries, as well as across the Functions,
has been key. We have formed specialist groups of operators and safety
professionals to develop procedures across Babcock enabling them to
share lessons and consider the use of technology to mitigate our risks,
including addressing working at height and lifting operations.
In addition, we continue to collaborate and learn, across the business,
to ensure our products and services achieve the quality and safety
standards required by our customers and regulators.
Procedures and documents have their place in managing safety,
but it is people that make the biggest difference, so we have
focused on making safety personal through our ‘Safety starts with
me’ programme. We have delivered safety leadership training to
our senior and frontline leaders to enable them to plan and control
work more safely. We have also grown the competency across the
health and safety function through structured continuous
professional development.
just & fair
flexible
engaged
safety culture
lead
learn
engage
questioning
reporting
learning
We established an Engaged Safety Culture framework with building
blocks of reporting, learning, questioning, just & fair and flexible that
align to our principles. These formed the foundations of the safety
behaviours being developed across Babcock. The annual Safety
Conference was replaced by the Safety Summit, an interactive workshop
conducted at 14 sites in six countries and additional virtual sessions.
The annual Safety Stand-down followed shortly afterwards and facilitated
discussions in the workplace about the hazards in that area. More than
500 team pledges were made to improve their local risk controls
addressing topics from office safety and welding in confined spaces to
tackling mental health. In addition to these two wide-spread events,
we have also introduced a global CEO Safety Forum and a Trade Union
Safety Committee to provide channels for engagement on health and
safety within the organisation.
Performance and Improvements
We have implemented consistent investigation training across Babcock
using TOPSET methodology to improve our ability to identify the
root causes of issues and build as a learning organisation.
Identifying and addressing a number of the underlying and root
causes has led to a reduction in serious accidents that lead to days
away from work and a reduction in the number of High Potential
Occurrences where a serious accident may have occurred.
However, conducting challenging activities in difficult conditions
do present safety risks and unfortunately there was a fatal aircraft
accident during a fire-fighting mission in Italy in October 2022 and
sadly both crew members lost their lives.
We have continued to expand the use of Synergi Life as the Safety,
Health and Environmental Protection information management
system across Babcock and introduced additional capability to
enable reporting of events and safety observations by our whole
workforce. We have made it easier to raise reports on the system
and our ongoing communications campaign reiterated the benefits
of learning from very minor events or near miss reports. This has
improved our reporting culture with an increase in the number of
proactive reports that provide opportunities to learn and correct
the situation before someone is seriously harmed.
The Total Recordable Injury Rate (TRIR) relates to injuries that required
medical treatment beyond first aid and whilst we saw a significant
reduction from 2021, the rate overall has remained broadly static
across the year; whereas we have seen a decrease in our Days Away
Case Rate (DACR1) and High Potential Occurrence Rate (HIPO2)
indicating that fewer serious events have occurred during the year.
The post-COVID return to the workplace combined with the increase
in proportion of heavy industrial activities across our dockyards globally
have resulted in reported workplace injuries with the vast majority of
these minor. We continue to work hard to tackle the causes of accidents
and are determined to ensure that our personnel go home safe every
day, notwithstanding the challenging aspects of heavy industry.
1. DACR – A Days Away from Work Case (DAWC) is a situation in which an employee
suffers an accident at the workplace and, as a result of the injuries sustained, must
stay at home for one day or more. The count of days away from work begins on
the day after the day that the injury was sustained. Rate is per 200,000 worked hours.
2. HIPO – A High Potential Occurrence is an occurrence that has the potential to
cause harm to people; damage to assets; or damage to the environment where
the loss potential is assessed to be high regardless of the level of actual impact
that occurred. Rate is per 200,000 worked hours.
TRIR, DACR and HIPO Rates
1.0
0.8
0.6
0.4
0.2
Mar-22
May-22
Jul-22
Sep-22
Nov-22
Jan-23
Mar-23
TRIR
DACR
HIPO
74
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Severity of reported injuries
456
398
348
280
0
2
Severe
6
5
66
78
Major
Moderate
Minor
Insignificant
2021/22
2022/23
The Babcock Safety Improvement Plan has focused on consolidating
the foundations for continuous improvement of safety performance
with global and local initiatives across the organisation. We have
developed our safety leadership training for our frontline leaders
and increased the awareness of the hazards within our workplaces
to improve the controls in place that mitigate the health and safety
risks. We have responded to identification of areas for improvement
by sharing good practices across our dockyards, our workshops and
between our aviation and nuclear businesses. Building upon these
foundations we will continue our global and local improvement
initiatives through development of people, processes and tools to
ensure that our people work in a safe environment, with the right
tools and standardised processes to enable us to create a safe and
secure world, together.
Deepening inclusion, increasing diversity
At Babcock we are guided by our Purpose: creating a safe and
secure world together — and a clear set of Principles that are
central to everything we do. We are committed to creating and
maintaining a working environment that is inclusive, diverse and
supportive, which provides opportunities for all our colleagues.
As a defence company, we operate in a sector that continues to
be male dominated and our challenge remains primarily an issue of
representation. For us, having more women across the Group, and
particularly in senior leadership roles, is key to our long-term strategy.
Our work to improve our gender representation has seen us reduce
our gender pay gap each year since we started reporting in 2017.
This year we are pleased to report that the median pay gap has
come down once again, from 11.8% to 9.6%.
This means that we are trending at 5.3 percentage points less than
the UK average pay gap of 14.9%. Whilst this is positive, we recognise
there is still more to do.
FY23 Gender split
Our workforce in Babcock is representative of the Defence Sector
with females making up 18% of the workforce in FY23, with a higher
proportion in entry level roles. We recognise the reduction in our
female population in this reporting year, this is due to both divestments
during the last year but also to natural attrition. In response we
have put several interventions in place to understand more about
why this has happened. This includes targeted data and modelling
as part of our gender balance action plan and undertaking 1-1
interviews with women leaving the business with less than 3 years’
service to understand where we could target actions to retain.
Our ambitions are bold as we drive to have a minimum 30%
women in the business by 2030. To accelerate progress we have
looked again at our strategic approach to inclusion and diversity
and are taking a number of actions including: rolling out new
policies and ways of working, refreshed recruitment processes,
improved leadership development, enhanced mentoring
programmes and career returners schemes along with training.
Agile, effective and inclusive
We remain committed to reaching our gender balance targets
with our renewed focus on understanding and enhancing our
people data. Through enhanced data collection, we will be in a
strong position to monitor our progress in both gender balance
and diversity more broadly.
Building on historic activity across Babcock International Group,
we adopted a new strategic and evidence led approach to
inclusion and diversity in 2022. Captured within this we have
deepened relationships with internal and external stakeholders,
including our Gender Balance network, to help drive our programme
of culture change and embed positive actions that inspire and
support women.
An important aspect of this approach is feedback from our people.
During our 2022 Global People Survey, over 73% of our people
indicated that they ‘felt part of a team’ and inclusion was very
important to them. Following the survey, leaders from across the
business have reviewed their survey results and set themselves
(and their teams) positive actions to deepen inclusion within teams
and identify actions that can support this.
Our Global Inclusion and Diversity strategy aligns with our Global
People Strategy and embeds local people plans to deliver a
collaborative, pragmatic approach.
Developing and evolving in 2023 and beyond
As an award-winning signatory to the Women in Defence Charter
we have met all our commitments, including:
Gender pay gap (2017–2022)
• Setting and publishing targets
20
16
12
8
4
0
• Appointing an Executive Committee member to be accountable
for gender balance and I&D
• Linking executive objectives to the achievement of gender
diversity targets from FY24
2017
2018
2019
2020
2021
2022
ONS UK
Babcock Mean
Babcock Median
Babcock International Group PLC / Annual Report and Financial Statements 2023
75
ESG strategy (continued)
Gender balance Action Plan
Central to our focus on creating greater gender balance, and in
embedding a culture where women can progress their careers and
develop into senior roles, we launched our Gender balance Action
Plan (GAP). This acts as the blueprint for Inclusion and Diversity,
informed by data and insight, and is supported by our Senior I&D
ExCo Sponsor.
Driving business-led change, creating success
We are continuing to develop our Employee Networks and Peer
Support Group model, as they play a key role in achieving a more
inclusive business. In 2023, we will establish three new networks
focused on carers, disability and veterans which will sit alongside
our current networks for ethnicity, faith, gender balance, LGBTQ+
and Neurodiversity.
Our GAP focuses on the employee life cycle working across the
Group to create a coherent and consistent approach to attraction,
recruitment, progression, and retention. The key elements of the
GAP include:
• redefining our ways of working to support Babcock women
• designing interventions and policies to enable women to thrive
at Babcock and
Developing our global network groups will support the drive for
greater diversity across the Group at a working level and support a
robust, dynamic, and inclusive workplace. Our Board and Executive
team are championing this move to a more inclusive business and
are committed to creating a great place to work, which is agile,
effective and inclusive.
• a coordinated education and communications programme to
engage our people
Please see Governance section page 118 to see our Board
and Executive Committee diversity table
Gender diversity
2022
Total workforce
5,853
21%
Board
3
33%
Executive Committee
2
22%
2023
22,488
79%
4,813
18%
6
67%
3
37.5%
7
78%
2
17%
Executive Committee and Direct Reports in management roles
18
21%
66
79%
25
23%
Graduate intake
37
28%
Senior management
44
23%
93
72%
50
26%
145
77%
50
23%
21,302
82%
5
62.5%
10
83%
83
77%
144
74%
163
77%
Female
Male
Female
Male
1. Our total workforce is 26,480 which includes 21,302 men, 4,813 women,10 individuals identifying as non-binary, 290 who ‘did not specify’ and 65 who chose
‘prefer not to say’.
2. Executive Committee total is 12. This figure excludes Executive Committee members on the Board.
3. Executive Committee and direct reports in management roles totals at 108. This excludes Executive Committee members on the Board.
4. Senior managers are defined as employees (excluding Executive Directors) who have responsibility for planning, directing and 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).
5. Senior management role total is 213.
6. Graduate intake is 194 (154 UK, 40 Australasia).
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Broadening our inclusion strategy
To become a more inclusive and diverse organisation, we need to
set clear and measurable objectives that:
About Me campaign
In March, we launched a pilot ‘About Me’ campaign in the UK to
collect information on the profiles of our workforce so we can:
1. Act as the catalyst for driving our longer-term disability,
• give a clearer picture of our workforce as a key government
ethnicity and gender balance goals
2. Help to prioritise activity that attracts, develops, and retains
supplier and UK publicly listed company, meeting our legal and
good governance obligations
diverse talent
3. Increase our social impact through social inclusion activity
It is critical this is both business-led and fit for purpose across
Group. To do so we need to be courageous, agreeing a clear
evidence-based and action-oriented roadmap to achieve relevant
and realistic targets.
Bringing it back to the business
Adopting global stated commitments to inclusion, we are designing
our Inclusion Roadmap across three distinct areas:
• retain and win new business by demonstrating our social value
and economic impact in bid submissions and contract reviews
• improve our people experience by better understanding who our
people are, their diversity and local needs, so we can design,
plan and invest in the right level of support
The campaign had a total disclosure rate of 21% and our disability
figure increased to10%. The data also indicted that we have 456
disabled people working in the business and 1,456 with caring
responsibilities.
1. Insight and awareness – embedding an enhanced evidence-led
inclusion approach
2. Customised action planning – collaborating across Group we
will design and implement bespoke inclusion action plans
3. Changing the face of Babcock – transforming our inclusion
narrative internally and externally to attract and retain more
diverse talent
To support delivery of our Inclusion Roadmap we will work with
our Global Inclusion Steering Committee and Action Groups to:
• Undertake research into barriers to inclusion across Group
• Develop our internal learning across all DRCs to identify and
adopt ways of working that drive change
• Maximise our membership of ‘The Valuable 500’ and in-country
opportunities on disability including the ‘UK Disability Confident’
scheme
• Develop our approach on ethnicity including being a ‘Race at
Work Charter’ signatory
Babcock International Group PLC / Annual Report and Financial Statements 2023
77
ESG strategy (continued)
Building a Babcock for the future
We want to be an agile, people-centred business, where everyone
is included, supported, and empowered to develop their talents to
the full. We have simplified our structure so we can share capability,
talent and best practice coupled with embedding diversity,
collaboration, and innovation globally.
Our plans, driven initially by our Gender Action Plan, aim to create
greater inclusivity and to support our long-term strategy to deliver
equal representation. They are based around three key themes:
1. Enabling employees to fulfil their potential within
Babcock
• Flexible working: We have embedded our Agile Working Framework
to encourage work-life balance, support family commitments,
and improve health and wellbeing. This has been well received
by our workforce and our Global People Survey confirmed that
having an agile approach does enable our people to balance
their work and home lives that promotes inclusion
• Culture change: As part of an ongoing cultural change programme,
we have reinforced our zero-tolerance position to any form of
discrimination, and we are working to ensure all policies and
processes reflect our approach to inclusion and diversity
2. Growing new talent pipeline for the long term
• STEM Hubs have been formed in Bristol and Scotland with the
objective of raising awareness, engagement, and aspiration in
STEM related subjects
• By 2024 we aim to have introduced more ‘Teacher Insight
Sessions’ along with more STEM work experience programmes
to raise awareness of STEM careers in Babcock
• Returners: By FY24 we will increase the pool of female talent by
establishing a UK pilot to hire women back into a career in STEM
and Defence
3. Attracting the best female talent
• Lifecycle analytics: We continue to collect and monitor
recruitment data to identify if bias is occurring. Additionally,
we have introduced exit interviews with women leaving the
business to understand their experiences and identify any
emerging themes
• Charters and memberships: We are proud stakeholders in the
Women in Defence Charter, Women in Aviation Charter, and
Women in Nuclear UK. We are also members of the
Armed Forces Covenant
• Our Global Networks, supported by Peer Support Groups specific
to their membership, play a key role in supporting inclusion across
Babcock to drive changes that will create a better place to work
We are proud of our work on gender diversity, which is a key
business priority, and we recognise there is still much to do to
deliver gender balance through attraction and retention of
female talent.
We are committed to closing the gender pay gap, growing our talent
pipeline for the long term, developing our processes to attract
female talent, and enabling employees to flourish and shape their
own future within Babcock.
Our Global People Survey
During 2022, we established a global engagement platform and
in October 2022 we concluded the first Group-wide survey of
employees for more than 10 years across the business to get an
informed view of how our employees feel about working here.
The survey created a consistent approach to understanding and
measuring engagement allowing us take action to drive meaningful
change so we could measure improvement over time.
Over 79% (18,548) of employees participated globally in the
survey, leaving 105,895 comments which has given us rich insight
into what is important to our people about working in Babcock and
how engaged they are feeling in their roles. The survey told us our
people have a clear understanding of their role and responsibilities
and what it takes to be successful. Our people believe we are truly
committed to health and safety and they know our Purpose and
Principles and believe their managers care about their wellbeing.
The survey also helped us identify areas where we could improve and
confirmed that whilst employees know and believe in our Principles,
they do not think we demonstrate them all on a day-to-day basis.
As a business our people thought we need to ‘be courageous’ and
do not feel that the right people are fairly rewarded, recognised and
compensated at Babcock. The survey also highlighted that we have
work to do to improve confidence in our ‘Senior Leadership’ and
make sure that we continue to demonstrate action following the
survey that puts people at the centre of everything we do.
These are critical areas we are already targeting in the coming year
through the roll out of the Babcock Role Framework and training
for our leaders.
Outside of the survey, we continue to engage in two-way
communications with employees across the business. On a global
level, employees are encouraged to use ‘Ask David’ as a direct
channel to the CEO to share ideas, suggestions and comments,
alongside the weekly vlogs that continue to be a popular way to
connect with the CEO. More locally, we conduct focus groups,
in-depth interviews and face to face engagement sessions on a
range of topics which provide dynamic and targeted employee
feedback, helping us to better understand and take action on the
things which matter most to our people.
Making a positive impact on the communities
in which we operate
We support our local communities through STEM outreach
programmes, providing early careers routes into work, specific bursary
opportunities and indigenous programmes in South Africa, Canada
and Australasia. Our open recruitment practices and Armed Forces
Covenant help us to reach a broader social mix and support ex services
personnel. Our charitable outreach activities are demonstrated through
our Group-wide policies for donations, sponsorship and volunteering.
Oxford Economics assessment
Oxford Economics independent assessment highlights how we are
supporting levelling up across the UK by investing and supporting
employment in the most deprived areas, actions we are taking to
tackle economic inequality and improve equality of opportunity,
our focus on wellbeing and environmental initiatives we are
progressing to reduce emissions and support the fight against
climate change.
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Strategic report
Governance
Financial Statements
Oxford Economics Impact Assessment
Published in November 2022
THE CONTRIBUTION OF
BABCOCK TO THE
UK ECONOMY
Scan here to find out
more about the Oxford
Economics report
ECONOMIC IMPACT
Direct
Indirect
Induced
£3.3bn
Total UK GDP contribution
56,800
Total UK jobs supported
£770m
Total UK tax revenues
£1.1bn
£1.0bn
£1.2bn
22,000 18,100 16,700
£210m £220m £340m
BUSINESS AREA
ECONOMIC IMPACT
Naval engineering, support
and systems
£2bn contribution to GDP
35,200 jobs supported
Critical services: defence
and civil
£1.3bn contribution to GDP
21,600 jobs supported
SOCIO-ECONOMIC IMPACT
IMPACT IN SOUTH WEST
ENGLAND AND SCOTLAND
Scotland
£370m total
contribution to GDP
6,300 jobs supported
South West England
£1.1bn total
contribution to GDP
19,400 jobs supported
264 graduates and
985 apprentices in
training schemes.
30,000 students
engaged through STEM
outreach activities.
£337m spent with
2,220 SME suppliers.
£290m spent with suppliers in
areas classified as a “high priority”
for the government’s
Levelling Up Fund.
1,660 people directly employed
and £230m spent with 1,070
suppliers in the 20% most deprived
local authority areas in the UK.
Results relate to the 2022 financial year which ran from 1 April 2021 to 31 March 2022.
Babcock International Group PLC / Annual Report and Financial Statements 2023
79
ESG strategy (continued)
Indigenous peoples
With a global presence, Babcock recognises the importance of engaging
and supporting indigenous people in the countries in which we operate.
In Canada, Babcock transitioned from Phase II to Phase III of the Canadian
Council for Aboriginal Business’ (CCAB) Progressive Aboriginal Relations
(PAR) programme. Phase III centres around ensuring that indigenous
employment and business partnership targets are in place, and
strategies for meeting those targets have buy-in across the organisation.
As well, we continue to engage indigenous communities and
businesses on an ongoing basis to provide information about Babcock’s
operations across Canada. From the Songhees Nation and the Métis
Nation of Greater Victoria in British Columbia, the Métis Nation –
Saskatchewan and the First Nations of the Fort Qu’Appelle Tribal
Council in Saskatchewan, to the Manitoba Métis Federation and the
Southern Chief’s Organization in Manitoba, Babcock’s investment in
relationship building leads to discussions centred around meaningful,
value-added business partnerships. Babcock Canada also added several
indigenous businesses to its supply chain this year, including Mobile
Resources Group, Abitibi River Logistics, Dreamcatcher Promotions,
and Northern Lights Petroleum.
Finally, Babcock Canada laid the groundwork for significant, multi-year
investments in indigenous skills development and training-to-
employment, which will see employment ‘pipelines’ established
beginning with engaging Indigenous youth on STEM and Babcock career
awareness, to investing in bursaries and summer co-op terms for high
achieving students, to internships and apprenticeships on graduation.
In Australia, we partner with Supply Nation to expand our supply
chain to include Aboriginal and Torres Strait Islander owned
businesses across the region. In New Zealand, we work within the
Amotai Initiative, to expand our supply chain and commitment to
Māori and Pasifika owned businesses in New Zealand.
Babcock continues to actively support First Nation students to
increase their career opportunities. A partnership is in place with a
Māori organisation for identification of interns and graduates.
Through sponsorship to Engineering Aid and Yalari in Australia,
encouraging curiosity about STEM subjects in younger children in New
Zealand and through employee volunteering at local schools Babcock
continues to actively support indigenous students to increase their
career opportunities. Babcock Sponsors the Excellence in Māori &
Pasifika Advancement Award and Women in Technology Award at
the Auckland University of Technology.
Volunteering
Volunteering is a rewarding and meaningful experience that supports
communities and brings personal reward for our employees, enabling
them to develop new skills and personal wellbeing. We want to make
a genuine difference to our communities and help them to thrive.
In December 2022, we launched our first global volunteering
policy called ‘Be Kind Day’. Be Kind Day gives Babcock employees
one day (or equivalent hours) each year to play an active part in
helping others to thrive.
Many of our employees already volunteer for various charities and
community groups globally in their own time. These include:
• Carrying out renovations at Bokantsho Primary School in
Viljoensdrift, Free State, South Africa
• Volunteering at Goatacre Animal Sanctuary, UK
• Supporting native tree planning in New Zealand
• Helping Bude Surf Veterans charity deliver surf experiences to
Blesma, The Limbless Veterans in the UK
• Volunteering at Foodbank South Australia & Central Australia in
Pooraka to help sort through donated fruit and vegetables
Charities
We are committed to supporting the communities in which we
operate and the broader interests of the customers we serve.
Through charity and sponsorship we want to make a genuine difference
in these areas. To that end, and aligning with our corporate
Purpose ‘to create and safe and secure world, together’, our criteria
are based on supporting military charities and events whilst also
protecting communities around the world by focusing on local
charities where we have our sites or attract our employees from.
A selection of the charities we have donated to or sponsored over
the last year includes:
• Veterans with dogs – a UK charity that supports veterans with
PTSD with provision of a mental health support dog
• Yalari – an organisation that provides support to young
Indigenous Australians engaged in secondary school education
• Laus Deo Primary School – a school in South Africa where we
sponsored the installation of a water bore hole reticulation
system
STEM
The STEM Teams continued to develop our offering and build presence
within communities across the UK. The impact of their delivery has
seen an increase in engagement to 885 schools: 534 primary schools,
231 secondary schools, 39 further education and 81 other events.
Guided by our commitment to reach diverse communities, our
engagement demographics demonstrate that 25% of our engagement
was with females, 80% were under 35 and 7% with ethnic minority.
Throughout 2022 our delivery shifted from a virtual offering to more
face to face as we increased our presence by hosting and supporting
more in-person events. This approach worked exceptionally well and
helped us to meet one of our strategic objectives of raising awareness
and increasing engagement of STEM to young people.
The team delivered several events and activities including working
with secondary schools to deliver ‘Babcock’s STEM In a Box of Fun’
which provides schools with a STEM resource that they could teach
pupils without the need of a STEM ambassador being present. The
Team also supported students with mock assessment centres and
interviews as well as developing and promoting STEM competitions.
Internally, development continued with building our Bristol STEM
Hub which is made up of volunteer STEM Ambassadors who are
based across Bristol and who work within different Babcock sectors.
The STEM Teams supported the virtual Neuro Diverse Work Experience
Programme at Devonport for a second year. Focus has remained on
raising awareness of STEM subjects and our early careers development
programmes. Alongside this, the STEM Teams supported the wider
Early Careers Team with the delivery of the accredited Industrial
Cadets virtual work experience weeks which took place across the UK.
The Devonport STEM Coordination team were also proud winners
of both the 2022 Regional STEM Hub Inspirational STEM Employer
award and the 2022 National STEM Employer Award.
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In May, we welcomed more than 300 local school children to the Festival of Engineering at our Rosyth facility. Over two days, alongside
our partners, customers and colleagues, we inspired the next generation with various exciting STEM-based activities as we explored the
hi-tech world of engineering, eco-friendly green shipbuilding, robotics, virtual reality, chocolate welding and mini boat building using
recycled materials. As one of the largest employers in the area we want to make a difference. That is why it is important to us that we
support our local communities. This Festival was a great way for us to engage the next generation in STEM-based activities and encourage
more young people to consider a career in engineering.
Support for Armed Forces, veterans and reserves
in the UK
Babcock is committed to honouring and supporting the Armed
Forces Covenant and the Armed Forces community. We recognise
the value of serving personnel, both regular and reservists, veterans
and military families who contribute to our business and country.
Members of the Armed Forces community and their families can rely
on our support. We offer a degree of flexibility in granting leave for
service personnel spouses and partners before, during and after a
partner’s deployment, and will offer special paid leave for employees
who have been bereaved or whose spouse or partner has been injured.
We signed the Armed Forces Covenant in 2013 and have reached
a 10-year milestone of our commitment to the Total Support Force
concept, helping our Armed Forces to deliver flexible solutions
around the world.
As part of our continued commitment to the Armed Forces
Covenant, Babcock supports membership of the Reserve Forces and
references our support in recruitment activity. We also support the
employment of service leavers, veterans, and members of the
Volunteer Forces by providing a guaranteed job interview where
applicants meet the minimum requirements of a role.
We are a major employer of service leavers and reservists through
our active recruitment approach and because of this we have held
the Gold Award in the MOD’s Armed Forces Covenant Employer
Recognition Scheme since 2015. The scheme recognises employers
who actively support Defence while encouraging other organisations
to adopt the same behaviours in their workplace.
We work closely with the Career Transition Partnership, to ensure
our employment opportunities are made available to service leavers
and veterans, and we 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.
We are proud to currently employ high volumes of service leavers,
veterans, reservists and uniformed cadet instructors. We support
the UK’s Armed Forces and reservists and continue to actively back
our reservist employees. We provide a minimum of 10 days’ special
paid leave per year.
The reserve service is actively promoted to everyone in the Group,
including our new graduates and apprentices.
As we widen our inclusion focus in support of all Babcock people,
we are establishing three new network groups in 2023.
These include carers, disability and a Forces Community Network
(FCN) which will provide support to all our people who have served
in any capacity (past or present) as well as their families and allies.
Babcock International Group PLC / Annual Report and Financial Statements 2023
81
ESG strategy (continued)
Talent and development
Attracting top talent remains a critical objective for our organisation,
as we strive to maintain our position as a leader in our market.
We recognise that attracting and retaining the best minds is essential
for driving innovation, meeting customer expectations, and
ensuring long-term growth.
In an increasingly competitive landscape, we are developing a
comprehensive talent attraction and retention strategy focused
on our culture and the opportunities we offer to make it as
straightforward as possible for candidates to join Babcock.
We have cultivated a company culture that promotes inclusivity,
collaboration, and continuous learning. By fostering an environment
where diverse perspectives are valued, we have created an
atmosphere conducive to innovation and excellence. By bringing to
life our commitment to cutting-edge technology, ethical practices,
and employee development, we look to promote our attractiveness
as an employer in the communities where we live and work.
Through targeted recruitment campaigns, participation in industry
events, and strategic partnerships with academic institutions, we have
amplified our presence and attracted top talent from as broad a
talent pool as possible. Additionally, we have implemented robust
talent acquisition processes that focus on identifying individuals who
possess not only the necessary technical skills but also the passion,
drive, and adaptability required to thrive in our dynamic industry.
Our talent acquisition team continuously explores innovative
approaches, leveraging technology and data-driven insights to
identify and engage with potential candidates efficiently.
Leadership
To address the depth and breadth of challenges our leaders face
globally we have built on the work undertaken in 2022 to develop
a global leadership framework.
The framework enables leaders of all levels to address their personal
needs by developing learning pathways to suit their level of
experience, business needs and our organisational drivers.
During 2022–23 we have successfully piloted a number of learning
interventions and workshops aimed at offline and online leaders.
Each intervention addresses our unique challenges, is under-pinned
by our Principles, and monitored for business impact.
Babcock’s leaders continue to inspire, motivate and empower their
teams. Delivering on our contractual and operational commitments
through our investment in identifying, developing and supporting
our leaders will ensure that together we build a stronger and more
sustainable Babcock. Through 2023–24 we will continue to focus
on developing the capability of our leaders, with targeted
programmes aimed at our most Senior Leaders that will be cascaded
through the organisation based on responding to the comments
raised in the Global People survey.
Early careers
Our early careers programme continued to grow through 2022 with
1,509 apprentices and graduates currently on programmes across
the Group. We also expanded our apprenticeship offer and introduced
our first L2 Industrial Coatings Apprenticeship in Devonport along with
piloting our first ever T-Levels in Digital, Design and Production in Bristol
and introducing Graduate Apprenticeships in Scotland.
We launched our UK-wide Apprentice Behavioural Development
programme which helped our apprentices focus on their health and
wellbeing. This is the first time we have delivered a UK Group-wide
behavioural programme and it’s been very well received.
A Production Support Operative (PSO) Programme was established
at Rosyth to address the challenges of availability within skilled
tradespersons (e.g., welders). It supports capability development as
well as acting as an alternative recruitment pipeline, mitigating the
types of roles we require by thinking differently in the ‘way we do’.
The PSO role is purposefully skilled in nature (trained in the specific
skills we need them to have), allowing flexibility for both the
employee and the business. In April 2022, the first of three cohorts
of PSOs began at Rosyth (41), with multiple stakeholders ensuring its
success. As a result, additional cohorts began in October 2022,
with regular intakes planned throughout 2023, with the need to
recruit approximately 250 PSO positions by December 2023.
Our early careers programme has continued to see external accolades
and recognition over the year which included: 2022 Apprenticeship
Development of the Year and ‘Best Integrated Marketing Campaign’
for our Graduate programme at ‘The Firm Awards 2022’.
Our Principles
Our Principles were launched in 2022 and express what is most important
to us and how we expect our people to show up across the business.
They act as a guide for how we do things; how we make decisions, how
we treat each other and how we behave. Our Principles are for everyone
in Babcock, whatever their role, wherever they are in their career.
To be successful at Babcock, we all need to demonstrate them.
Taking on board the feedback from our people, we need to consistently
demonstrate our Principles and embed them by using them to guide how
we operate every day. We therefore reviewed and simplified the language
of each Principle, evolved them into 'leadership expectations' to help
employees at all levels understand what is expected. Over the coming
year we will continue to identify ways in which we can embed these
principles into all our people processes, policies and use them as a guide
to support capability development programmes, communications, and
every aspect of the employment lifecycle from recruitment, onboarding
and performance management through to talent and succession.
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Governance
Being a collaborative, trusted partner across the supply chain
Commercial integrity
We are committed to conducting business honestly, transparently
and with integrity. It is the right and proper way to behave, ensuring
we uphold high ethical standards across the Group. It also supports
our long-term success.
We understand our reputation and good name are amongst our
greatest assets and could easily be lost by actual or suspected
unprincipled behaviour. To support good governance and ethical
behaviour across our Group, our actions and those of our
employees, suppliers and partners are guided by a series of Group
policies. These are reviewed periodically to ensure that they
continue to 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.
Code of Business Conduct and Ethics policy
To protect the Company and reduce risks, we have established a
policy on how we should conduct business which is summarised 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 policy is kept under review
by the Group Company Secretary and General Counsel and the
Board undertakes an annual ethics review, seeking assurance that
the Group’s Ethics policy is complied with.
Our Ethics policy comprises a detailed manual, available to employees
on the Group’s intranet and also available on our website, which
contains guidelines, authorisation mechanisms and other procedures
aimed at identifying and reducing ethical risks. It supports extensive
policies around anti-bribery and competition law that clearly show our
zero tolerance for any form of bribery or anti-competitive behaviour.
These controls form an integral part of our risk management
arrangements, which also include training our employees and
undertaking regular risk assessments throughout the business.
We implement 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 (see also page 85) mean for them in practice. This training
includes mandatory completion of courses on an annual basis in all
our geographies, translated where applicable, such as anti-bribery
and corruption, security and data protection. Completion of these
courses is monitored.
Cyber Security Awareness Training
Acceptable Use Policy
Data Protection Training
Anti-Bribery Training
Trade Controls Awareness
93%
93%
95%
95%
97%
We treat breaches of our Codes or associated guidance seriously.
Employees can raise any concerns that our Code or its associated
guidance is not being followed without fear of unfavourable
consequences for themselves.
To ensure that anyone with a concern is able to access advice and
support, our independent whistleblowing hotline, EthicsPoint,
(operated by NAVEX Global) allows for confidential and anonymous
reporting and is available 24 hours a day, seven days a week, in all
territories where we are based.
Diverse and robust supply chain
The Babcock Procurement and Supply Chain organisation are
committed to creating a world-class supply chain that prioritises
responsible sourcing, sustainability, and supply chain governance.
We achieve this by acknowledging the importance of minimising
supply chain disruptions, lowering costs, and improving our social
and environmental impact.
To accomplish our goals, we work collaboratively with our suppliers,
customers, and internal stakeholders to establish a culture of
transparency, trust, and continuous improvement. We believe that
this approach helps us to build a resilient, sustainable, and
world-class supply chain that delivers value to all parties involved.
We hold ourselves to the highest standards of honesty, transparency,
and integrity in all our business dealings. We believe that a diverse
and robust supply chain is essential to provide quality and timely
delivery of products and services to our customers.
To achieve this, we work with a portfolio of 12,000 suppliers, ranging
from large multinational OEMs to small and mid-size enterprises
(SMEs). Of these suppliers, approximately 1,100 are key in our ability
to deliver continuous improvement and innovative quality outputs.
Building strong relationships with our suppliers is essential to achieving
our sustainability goals. By working collaboratively, we can identify
opportunities for innovation, create value for all parties involved, and
promote responsible business practices throughout our supply chain.
We understand the critical role that supply chain risk management
plays in creating a resilient and sustainable business. As such, we
conduct annual due diligence on our business-critical suppliers to
ensure compliance, identify any risks in their supply chain, and ensure
that our key suppliers are reputable, responsible, and competitive.
Our AI risk resilience solution maps our supply chain ecosystem
(over 300,000 suppliers through our sub-tier ecosystem), monitors
activities, and receives alerts when hidden risks are exposed in our
sub-tier supply chain. We have reviewed and assessed a significant
number of incidents, allowing us to mitigate risk to Babcock’s supply
chain while enabling us to continuously improve our risk management
processes and ensure the sustainability of our operations.
The success of our business relies heavily on the strength of our
relationships with our suppliers. To this end, we have implemented
a more collaborative approach to procurement by improving upfront
supply chain involvement in bid processes. By engaging with
potential suppliers earlier in the process, we create an environment
where our suppliers can actively support both the design and
implementation stages of our work with innovative solutions.
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83
ESG strategy (continued)
This approach has resulted in enhanced productivity and increased
quality in the goods and services that we deliver to our customers.
We recognise that sustainability is critical, and we have taken steps
to prioritise it. We have expanded our Category Management
teams and processes throughout the organisation to provide
strategic focus on sustainability topics. This investment is aimed
at delivering a higher performing supply chain in this area, which
aligns with our commitment to responsible and sustainable
business practices.
Our risk solution also allows us to proactively assess the risk of all
potential new suppliers immediately. We consider reputational
and operational risks, supply chain transparency, financial position,
and ESG risk to build a more resilient and sustainable supply chain
that benefits everyone involved.
We recognise the critical importance of having a strong and
effective procurement and supply chain strategy. As we advance
execution of our Group Procurement & Supply Chain strategy, we
remain committed to our sustainability goals and our cost saving
objectives. However, we also recognise the importance of cost
avoidance and reallocating resources to high-priority supplier
and category management activities, which will aid in mitigating
the impact of inflation while still advancing towards our
sustainability objectives.
We have made significant progress in this area, particularly with the
implementation of our Group Procurement and Supply Chain operating
model and the standardisation of our key business processes.
Our overarching goal is to create a unified and integrated procurement
and supply chain team that is fully aligned with our business strategy
and objectives. By doing so, we aim to achieve consistent, long-term
value creation for all our stakeholders by continually enhancing our
supply chain to deliver best-in-class and sustainable products,
goods and services.
Sustainable sourcing
In today's global economy, responsible sourcing and sustainability
are key considerations for creating an ethical, transparent, and resilient
supply chain. At Babcock, we are committed to maintaining strong
and sustainable supply chains, which requires collaboration with
our suppliers and sub-tier suppliers to adopt sustainable practices.
Our goal is to reduce the environmental footprint of our supply
chain while meeting our business objectives and benefiting society.
To demonstrate our commitment to sustainability and responsible
business practices, we have published our Sustainable Procurement
Policy and Supplier Guide. These documents encourage our suppliers
to adopt sustainable practices in their operations, reducing the
environmental impact of the supply chain, promoting social
responsibility, and supporting the development of more sustainable
products and services. By promoting good labour practices, reducing
carbon emissions, and conserving natural resources, we strive to
create long-term value for our stakeholders. We are committed to
aligning our Procurement and Supply Chain processes and standards
with ISO20400 by the end of 2023. We have developed a strategic
roadmap that provides the framework required to integrate
sustainability into our procurement and supply chain activities,
enabling us to deliver sustainable outcomes through our supply chain.
Scope 3 carbon emissions mapping
To better understand and reduce our carbon footprint, we have
adopted a spend-based calculation methodology for mapping our
upstream value chain emissions. These findings will serve as a
baseline for further developing Babcock's carbon strategy, allowing
us to continually identify opportunities for emissions reduction
enabling targeted action plans to achieve our sustainability goals.
By taking a proactive approach to measuring and reducing our carbon
emissions, we are demonstrating our commitment to sustainability
and taking responsibility for our impact on the environment.
Working with SMEs
Babcock Procurement and Supply Chain recognise that small and
medium enterprises (SMEs) are essential in building a sustainable
and resilient supply chain in the UK, playing a vital role in the country's
economy as a key source of innovation, employment, and economic
growth. As part of our commitment to supporting SMEs, we ensure
that a significant portion of our procurement spend is allocated to
SMEs, with 24% of our total spend in FY23 being with SMEs.
As part of our sustainable procurement strategy and business processes,
we are committed to enabling the growth of our SME supplier
population. We monitor our percentage of spend with SMEs and
take necessary actions to support the growth of our SME supplier
population. Furthermore, we actively engage with smaller and local
suppliers, especially those that help inclusion of under-represented
groups, to contribute to economic prosperity and societal integration.
Our SME supplier base is continuously monitored using our risk
resilience tool for any key risk factors, including cyber security
threats, human rights, and financial health alerts. By prioritising our
SME suppliers and supporting their growth, we aim to build a more
sustainable and inclusive supply chain, benefitting both our
business and the broader economy.
Payment to suppliers
At Babcock, we prioritise prompt payment to our suppliers and
believe it is crucial to building strong and sustainable relationships
with them. We adhere to the payment practices and performance
regulations and are committed to the prompt payment code.
Furthermore, we encourage our suppliers to adopt this code and
promote its adoption throughout their own supply chains.
In FY23, we achieved an average payment term of 21.4 days to our
suppliers versus 24.6 days in the six months preceding March
2022. We recognise that predictable and timely payments are
essential for maintaining strong supplier relationships and helping
our suppliers to manage their cash flow. As such, we are committed
to continuously improving our payment processes to ensure that we
pay our suppliers on time and in accordance with agreed-upon terms.
Human rights
Babcock respects all international treaties including the United
Nations Declaration on Human Rights. In the UK, we expect our
suppliers and extended supply base to adhere to the Modern Slavery
Act 2015, as we do ourselves. We expect all our overseas suppliers
to understand and comply with the intent of the Act. We believe
that by working together with our suppliers, we can create a more
ethical and sustainable supply chain that benefits everyone.
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Strategic report
Governance
Financial Statements
To this end, we have developed a supplier code of conduct that
sets out the human rights standards and expectations that our
suppliers must meet to do business with us. This includes:
• Treating workers equally and without discrimination
• Ensuring work is performed on a voluntary basis
• Providing reasonable working hours
• Ensuring workers are of an appropriate age
• Paying workers fair wages
• Protecting workers' health and safety in the workplace
• Providing access to fair procedures and remedies
• Respecting freedom of association and collective bargaining
Our suppliers and their extended supply chain are required to share
our commitment to respecting, protecting, and promoting human
rights and support our efforts to achieve transparency for higher
risk supply chains and take responsibility for the issues we uncover.
The human rights risk assessment process is embedded into our
core processes including supplier onboarding, audits, assessments,
and performance management. We conduct regular audits and
assessments to monitor compliance and identify any areas for
improvement. Where issues are identified, we work collaboratively with
our suppliers to address them and provide support for remediation.
The supplier audit programme is currently under review and will be
updated to ensure the inclusion of human rights issues in the standard
audit content. These changes are set to be implemented by the end
of 2023 in conjunction with extending the supplier quality and
development audit program to encompass a wider section of our
supply chain. To ensure consistency, audit checklists will be
standardised across all business units, enabling us to verify the
presence of sufficient human rights controls demonstrated by the
supplier during the audit process. Additionally, our audit process also
includes formal actions to address any identified risks proactively.
The introduction and rollout of our strategic Risk Resilience tool
allows us to track human rights risks through live monitoring within
our extended supply chain. Visible indicators include compensation
and employee satisfaction; diversity and workforce rights; training,
safety, and morale; prohibiting child or compulsory labour; fair
treatment of people throughout the supply chain and ensuring fair
and equitable treatment of local communities affected by operations.
This approach uncovers hidden risk and serves as an early warning
system should events or changes occur in our supply chain with live
alerts being communicated to the Procurement & Supply Chain team.
Modern slavery
At Babcock, we are dedicated to upholding human rights and
preventing modern slavery in all of our operations and supply chains.
We firmly believe in the importance of conducting all business with
integrity and support the elimination of modern slavery in all its
forms. Our publicly available Group modern slavery transparency
statement outlines our commitment to responsible sourcing and
supply chain transparency, including our due diligence processes,
supplier engagement approach, training and initiatives to promote
responsible sourcing. Our due diligence processes, including supplier
onboarding, supplier audits, and technology solutions, monitor any
potential modern slavery risks in our supply chain.
We recognise that preventing modern slavery requires collaboration
from all stakeholders, and we expect our suppliers and extended
supply base to share our commitment to responsible sourcing and
supply chain transparency.
More details are available in our Modern Slavery Transparency
Statement which is available on our website.
Fair operating practices
As part of our supplier selection process, we conduct thorough
assessments to ensure our suppliers are capable of meeting our
financial, commercial, safety, governance, technical, health,
and security requirements. We periodically review and revalidate
these standards to ensure continued compliance throughout the
supplier engagement lifecycle. In the UK, we use the Joint Supply
Chain Accreditation Register due diligence tool, which is a shared
industry-wide management system for defence contractors that
collects pre-qualification and compliance information about
individual suppliers across the UK supply chain.
To enhance the security and protection of our customers' information
and physical assets, we have developed exacting security compliance
standards for certain types of supply. We also place a strong emphasis
on maintaining high standards of commercial confidentiality.
Our commitment to ethical and responsible business practices is
underpinned by our supplier's code of conduct. It serves as a
fundamental component that provides a clear framework for our
suppliers to align with Babcock's values, policies, and legal
requirements. By ensuring that our supply chain operates with
integrity and transparency, we are able to maintain a high standard
of accountability and sustainability throughout our operations.
Cyber security
Babcock recognises the threat of cyber attack and the potential
consequences including operational disruption, unlawful access or theft
of information and resultant reputational damage. Babcock works hard
to mitigate such risks and holds an Information Security Committee
which meets quarterly to provide governance, direction and assurance
that the Babcock security posture is appropriate and effective.
Babcock applies all required international and government security
standards for secure installation and operation of information
systems. Security operations are deployed to establish threats and
to protectively monitor for risks to information, systems and networks.
Core IT services are certified to ISO27001 (Information Security)
and ISO22301 (Business Continuity) standards as well as Cyber
Essential Plus, a requirement for UK government working.
Babcock is a member of the joint UK Ministry of Defence and industry
Defence Cyber Protection Partnership (DCPP) which seek to ensure
the defence supply chain understand the cyber threat and is
appropriately protected against attack. Babcock is represented
on all the working groups and the DCPP Executive committee.
Babcock continues to invest in cyber resilience and provides cyber
security education and training to raise cyber awareness across
the workforce.
Babcock International Group PLC / Annual Report and Financial Statements 2023
85
ESG strategy (continued)
Non-financial and sustainability information statement
Reporting on material yet non-financial measures is important in understanding the performance, opportunities and long-term sustainability
of the Company and our ability to generate value for all our stakeholders. We disclose non-financial information in the ESG strategy report
and throughout the Strategic report. We are committed to providing greater transparency about our policies, standards and governance
approach through the global reporting frameworks and insight in the ESG strategy report.
Reporting requirement
Sustainability
Environmental matters
Employees
Human rights
Social matters
Anti-bribery and corruption
Description of principal risks and impact
on business activity
Business model
Non-financial KPIs
Policies and standards
Group Sustainability policy
Safety, Health and Environmental Protection
policy*
Energy policy*
Sustainable P&SC policy**
Code of Conduct**
Safety, Health and Environmental Protection
policy*
Additional information
ESG strategy
Environmental section
Environmental section
Sustainable sourcing
Commercial integrity
Social Section
Page
59
63
63
84
83
74
Agile Working framework*
Charity and Sponsorship High-Level guidelines*
Be Kind Day - Global Volunteering Policy
Code of Conduct**
Supplier Code of Conduct**
Modern Slavery Transparency Statement**
Anti-bribery and Corruption/Ethics policy**
Code of Conduct**
Canada Indigenous Peoples policy*
Anti-Bribery and Corruption/Ethics policy**
Whistleblowing policy**
Supplier Code of Conduct**
Group Risk Management policy*
67
TCFD disclosure
75
Employee inclusion and diversity
80
Group-wide sponsorship
Building relationships
80
Code of Business Conduct and Ethics 83
85
Fair operating practices
83
Commercial integrity
Code of Business Conduct and Ethics 83
Code of Business Conduct and Ethics 83
Indigenous peoples
80
Code of Business Conduct and Ethics 83
87
Principal risks and management
controls
Fair operating practices
Principal risks and management
control
Our business today
Our strategy
85
87
2
6
* Available to employees through the Babcock intranet but not published externally.
** Available on the Babcock website and available to employees through the Babcock intranet.
Further information: Read our Modern
Slavery Transparency Statements by
scanning this QR code
86
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Our principal risks and management
controls
Our continued investment in monitoring,
managing and mitigating our principal
risks will foster a consistent risk control
approach, aiming for predictability and
optimisation of our performance.”
David Lockwood
Chief Executive Officer
Risk enhancement highlights
in the year
• Continued investigations into climate-related risks
• Implementation of Risk Committee
• Recruiting of specialist Enterprise Risk Management Team
• Group Executive Committee externally facilitated Risk
Management Training
• Risk Conversations embedded, and themes published
• Building our framework to support the assessment of
ESG risks
• Key control enhancements as part of the ‘Blueprint for
Control Improvement’
Forging resilience and strengthening risk control
We have a risk management and internal control framework to
manage the risks that come with our strategy. Risk management is
at the core of Babcock management practice and is an integral part
of all our activities, helping us to deliver our commitments to
customers, colleagues, and communities. We have continued to
build on improvements made throughout FY22/23 and will pursue
our path of continuous improvement in FY23/24.
FY22/23 saw material investment in Enterprise Risk Management
(ERM) capability within the Group through the recruitment of
specialist ERM professionals, both at Director and Head of
Department levels. There has also been robust resilience building
around operational risk management for resource capability,
particularly in the areas of project management, procurement,
supply chain and commercial. Effective risk management starts with
the right conversations to enable us to deliver better risk-based
decision-making. Our risk management framework considers
management of risk in the round, top-down and bottom-up
correlated through a series of risk conversations with the members
of the Group Executive Committee and critical risk influencers.
This year we have seen a continued focus around our internal
controls and the maintenance and management of principal risks,
which are now individually considered by the newly formed Risk
Committee, a sub-committee of the Group Executive Committee.
Risk is considered regularly at Board level. The Board reviews risk,
both current and emerging, as part of its business planning and
annual strategy review process.
Preparation for UK Government’s stated
aim to reform corporate governance
We expect that the nature and scope of disclosure requirements
will continue to expand. Enhancing of internal controls through the
Babcock Blueprint deliverable has continued to ensure that we are
well placed to deal with future corporate governance reforms and
new reporting requirements.
A cross functional working party has been established to consider
likely implementation timelines, regulatory developments and how
these are best aligned to our finance governance. We will continue
to monitor the preparatory activities during FY24.
Our Risk Management framework
Our Risk Management framework, (below) is used consistently
across the Group, clarifying ownership and the differing levels of
assurance. Our risk framework now includes a Risk Committee
where all Principal Risks & Uncertainties (PRUs) will be
comprehensively challenged throughout the year. We have
continued to refine the Risk Management Policy in conjunction with
our risk leads network.
The Board sets the Group’s strategy (Page 6). To help deliver this
strategy, the Board has in place procedures for identifying,
evaluating, and managing the risks inherent in our strategy,
alongside the emerging risk landscape. As part of those procedures,
the Board reviews and approves the Group’s Corporate Risk Register
on a bi-annual basis to ensure alignment with the Group’s strategy.
It makes this determination using a risk-rating matrix, which
assesses the probability and the impact of each risk occurring. The
Board makes this assessment after taking into consideration the
controls and mitigations that the Group has in place.
Drawn together by our network of risk leads, we build our risk-
rating matrix by bringing together the risk registers of our sectors
and overseas operations. These risk registers include both principal
and emerging strategic and operational risks. The sectors compile
their risk registers by using a common Group risk management
framework. The framework requires the sectors to describe their
risks along with the measures in place to control or manage each
risk and to rate their effectiveness. The Group risk function
consolidates the sector risk registers and then produces the
risk-rating matrix. The risk-rating matrix is split into two separate
five-by-five matrices: one showing the current rating of each risk;
and the other showing the target rating. Each matrix measures
each risk for likelihood and impact, with each box on the five-by-
five matrix representing a combination of a particular level of
likelihood and impact. Please see graphic below for definitions.
Babcock International Group PLC / Annual Report and Financial Statements 2023
87
Severe
Major
The Group has developed a roadmap for the future enhancement
of internal controls, with the objective of achieving best-in-class
standards in controls including upgrades envisioned by the UK
Government on Corporate Governance Reform.
Principal risks and management controls (continued)
Likelihood
Very likely
(more than 90% chance)
Likely
(60–90% chance)
Possible
(30–60% chance)
Unlikely
(10–30% chance)
Very unlikely
(less than 10% chance)
Impact
Moderate
Minor
Insignificant
Group Risk engages with Sectors quarterly, providing guidance to
the sectors and ensuring a common approach as to how to
measure probability and impact. We have included the current
rating for each principal risk alongside its description (page 92).
On a bi-annual basis, the Risk Committee reviews the matrix.
Following the Risk Committee evaluation, the Board, on an annual
basis, considers the matrix and reviews the Group’s principal and
emerging risks. The review includes a consideration of risk
description, as well as our controls and mitigations and our risk
appetite against each PRU. In addition to the review of the
risk-rating matrix, the Board also undertakes ‘deep dives’ on specific
risks at regular intervals in the year.
Our Internal Control Environment
In FY23, the Group has continued to make progress in its internal
control environment which aims to protect the Group’s assets and
to check the reliability and integrity of the Group’s information,
thereby providing assurance that the Group appropriately manages
the risks in our business model and the delivery of our strategy.
Internally published policies set the framework for the Group’s
internal controls. These policies cover a range of matters intended
to mitigate risk, such as health and safety, project management,
information security, trade controls, contracting requirements and
accounting policies.
During the year, key control enhancements as part of the ‘Blueprint
for Control Improvements’ have been made to risk areas including
project management, bids together with pension, tax, treasury and
consolidation financial reporting controls. These include:
• Strengthening our third line of internal control defence by
appointing a Group Director of Internal Audit, Risk Assurance &
Insurance with a mandate to insource the Internal Audit function.
We have also established a new Risk Committee, a sub-
committee of the Group Executive Committee, to provide
oversight of the Group’s management of risk.
Our Risk Assurance
We use the three lines of defence model to assure ourselves about
the management of the risks that we face. The first line of defence
is management control, policies and procedures, together with
management oversight. The second line is internal assurance
activities including group risk management and compliance teams
who deliver functional oversight. The third line is independent
assurance activities, such as internal audits.
Risk Management and Internal Control
Annual Review
To provide assurance, the Audit Committee performs an annual
review of our Risk Management process to assess its effectiveness.
After last year’s review, the committee acknowledged that there
remained ongoing scope for further control improvements in FY23
including lessons learnt from FY22 closing. The Committee
concluded the company has implemented several control
improvements and had a structured plan to implement further
ongoing control enhancements covering lessons learnt from FY23
closing. The Board concluded the risk management process within
the Group provides effective management of the principal,
emerging and underlying risks, allowing the Board to monitor and
review the effectiveness of these processes in adherence to the UK
Corporate Governance Code.
Risk Committee
The Committee provides executive management leadership and
oversight of the Group’s risk management framework acting as an
interface between the Audit Committee (the ‘AC’) and the business.
The committee has as its principal deliverable the review and
challenge of the mitigation and control of the ‘Principal Risks and
Uncertainties’ (PRUs), as summarised on page 92. All PRUs have an
allocated owner. Each PRU is presented to the Risk Committee by
the owner on a rolling annual programme through evaluation of
the status of the PRU and the effectiveness of its mitigation.
The committee also commissions ‘deep dives’ in relation to the
businesses’ risk registers submitted within the Group’s Quarterly
Reviews and commissions externally focused emerging risk reports
(produced by Group Risk) and reviews the Group’s approach to high
impact, low probability, black swan and grey rhino events.
• Standardising commercial and operational reviews including the
implementation of quarterly Group Watchlist reviews for the
Group’s key contracts.
A ‘black swan’ event refers to an unforseen and unlikely occurrence
that typically has extreme consequences. A ‘grey rhino’ is a slowly
emerging highly probable and high impact threat that is ignored.
• Providing challenge against revenue recognition judgement, by
implementing Group level review of accounting judgement
papers for Group Watchlist contracts; this also ensures that our
conclusions are robust and supportable.
• Completing a global banking services transition to BNP, including
virtual cross currency cash pool, zero based daily cash sweeps,
and a significant reduction in numbers of bank accounts.
• Establishing a new pension scheme engagement process
following the liability driven investment crisis in October 2022.
• Launching a Finance Business Services Team to deliver standard
processes and controls, delivering an overhaul in our Accounting
and Finance Manual to include all the best practices seen across
the business. We have also made key appointments to build on
our in-house accounting technical knowledge in response to
lessons learned from FY22 closure.
• Engaging independent review of the completeness of our
Document of Control, implemented in FY22 to set of minimum
expectation of controls, with updates and controls added to
mitigate highlighted gaps.
Risk Appetite
Low – Avoidance of risk and uncertainty with low appetite for risk
that is likely to have adverse consequences and aim to eliminate or
substantially reduce such risks.
Medium – A degree of risk is tolerated with some appetite for risk
and a balance of mitigation effects with a view of the potential
rewards and opportunities.
High – Open to opportunities that may result in a higher residual
risk where we have the capability and capacity to manage that risk.
Forward Looking Risk Priorities – FY24
• Further analysis of Risk Recording Tools.
• Enhancement of our Fraud Risk Assessment processes.
• Enhancements to the Babcock Corporate Risk Register including
the addition of key risk indicators.
• Heightened understanding of corporate governance reforms and
preparedness requirements.
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Strategic report
Governance
Financial Statements
Our risk management framework and our internal control environment
External audit
Provides external assurance:
its aim is to detect material
errors and material
irregularities in our
financial statements.
Please see page 159 for
the independent
auditor’s report
Internal audit
Provides independent and
objective assurance on
governance, risk management
and internal control to
the Board and the Group.
For more information,
please see page 129
First line of defence
– management
We have written policies covering a range
of matters to mitigate risk, such as health
and safety, information security, contracting
requirements and accounting policies. We
underpin these policies with a
comprehensive scheme of delegated
authorities, which the Board
annually reviews and approves. Twice
a year, the sectors complete a letter
of representation to provide confirmation
of compliance with the Group’s policies.
Management reports up from our business
units through the sectors to the Board
on operational and financial performance.
Board
Overall responsibility for the Group’s strategy and risk management
Reviews the Group’s risk-rating matrix and determines the Group’s principal risks
Reviews and approves the Group’s risk register
Reviews the Group’s financial reports, including annual budget and five-year plan,
to monitor financial performance and identify potential issues/emerging risks
Audit Committee
Reviews aspects of the Group’s risk management and internal control environment
Reviews and monitors the adequacy and effectiveness of the Group’s risk management
framework and internal control environment
Approves the annual audit plan for the external and internal audits
Group Executive Committee
Reviews quarterly a consolidated report prepared by the Group risk function,
which summarises the Group’s principal and emerging risks
Committee members sponsor and own the principal risks
Group Risk Committee
The Committee provides executive management leadership and oversight of the Group’s
risk management framework acting as an interface between the Audit Committee (the
‘AC’) and the business, keeping the management of each PRU alive throughout the year
Sectors
Identify the risks, including emerging risks, along with the controls
and assurance to mitigate those risks
Functions
Provide oversight and management of certain specialised risk areas that benefit
from central coordination (for example, tax, treasury, IT, procurement etc)
Our risk assurance
Second line of defence
– internal assurance
The Board and the Group Executive
Committee review the Group’s financial and
operational performance on a regular basis
through the monthly reporting packs, which
include monthly management accounts,
and can compare that performance against
the Group’s budget, which the Board
approves on an annual basis.
Group reviews the sector letters of
representation to identify any control
weaknesses.
Group functions and specific committees
monitor certain risks, such as health
and safety, finance, tax and treasury.
The Group maintains an insurance
programme. The Group Risk and Insurance
Manager reports to the Board annually on
the strategic approach to that programme.
Third line of defence
– independent assurance
The internal audit, which reports to the
Audit Committee, provides assurance
of the effectiveness of the Group’s control
environment.
The Audit Committee agrees both the external
and internal audit plans on an annual basis.
A number of external regulators and other
bodies, such as national civil aviation
authorities, the UK Office of Nuclear Regulation
and the International Office for Standardisation,
regularly inspect parts of the Group.
All employees have access to a whistleblowing
line to allow them to report any concerns
that they may have. The Board receives all
the reports to the line along with an
explanation of how the Group is investigating
them and the outcome of the investigation.
Babcock International Group PLC / Annual Report and Financial Statements 2023
89
Principal risks and management controls (continued)
Babcock (ERM) Enterprise Risk Management
The primary role of the Babcock ERM framework is to ensure we have a framework to manage risk and uncertainty consistently and
effectively. ERM supports the integration of risk management into the Group’s significant activities and aligns risk management with
our objectives, strategy, and culture.
Risk & Control
Assessment
Strengthening our third line
of internal control defence.
Ongoing development
of the roadmap
for the future enhancement
of internal controls, with
the objective of achieving
best-in-class standards
in controls.
Risk
Appetite
The Group’s risk appetite defines
the level and type of risk that we are
prepared to accept in pursuit of our
strategic objectives and business
strategy. Our robust enterprise risk
management governance framework
enables the Group to effectively
prioritise and manage risk within our
risk appetite levels.
Continuous
Improvement Cycle
Structured annual review of risk
management policy and
framework to allow agility and
relevance across the group.
Oversight of principal risk
mitigation by Group Risk
Committee.
Risk
Deep Dives
Programme of risk deep dives driven
by analysis of impact, likelihood and
risk velocity of material risks raised
by the Sectors.
Babcock
ERM
Top-Down & Bottom-Up
Risk Assessment
The Group’s top-down and bottom-up
risk assessment approach identifies
strategic and operational risks. The
individual residual ratings applied to
each risk create a consolidated view
of the Group’s risk profile.
Lessons Learnt
Risk Review
The Group have implemented
control improvements and a
structured plan to implement
further control enhancements
covering lessons learnt
facilitated through our risk
leads network.
Project Risk
Analysis
A Risk and Opportunity
Management Strategy with
regular contract status
reporting to key stakeholders
ensures risk is assessed and
managed for Group oversight
throughout the lifecycle of all
projects.
Emerging Risk
Analysis
Emerging risks are considered as part
of the risk assessment process and
identified through horizon scanning,
continual dialogue with the Group
and keeping abreast of geopolitical,
market and industry changes.
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Governance
Financial Statements
Our principal and emerging risks
The risk management framework is described above. Using this framework, the Board has identified on pages 93 to 103 the risks that it
currently believes to be of greatest significance to the Group as they have the potential to undermine our ability to achieve our strategic
goals and have a detrimental effect on our financial performance.
As part of the Group’s ongoing risk analysis, four emerging risks have been identified.
Emerging risk
Description and management
Geopolitical
tensions
Information
security
Resourcing – attraction and
retention of suitable talent
As a leading defence company operating with international Government customers, we are acutely sensitive to
geopolitical issues. We generally operate in ‘safe’ countries – stable peaceful democracies, militarily allied to
the UK through NATO or the 5 Eyes agreement. Nevertheless, we conduct ongoing geopolitical due diligence.
For new territories, this includes country risk reports and a formal approval process – requiring Board-level
authorisation in certain cases. In the short to medium term, the ongoing conflict in Ukraine will continue to
create volatility within domestic and global markets, which could increase global commodity prices and could
result in increased cyber threats from state actors.
The risk of data exfiltration from foreign state actors is heightened due to the industry and markets in which we
operate. There are several layers of protection in place including network monitoring, robust technical controls
and data segregation. We remain alert and active in regularly validating the efficacy of our business continuity
and cyber resilience protocols as described in the principal IT and Cyber Security risk.
Our ability to attract and retain talent to undertake our activities is a key requirement of our business. The
talent marketplace has been evolving rapidly in recent years with changes in working patterns, working
locations and the skills we need in our workforce.
Post pandemic this has become more pronounced candidate scarcity, global mobility and demographic shifts
all contributing to an acceleration in the need to be able to not only attract, but also to retain skills.
We closely monitor the capability that exists in our current workforce ensuring that we have the appropriate
skills at the right time to be able to deliver on existing and future contracts.
ESG Risk Emerging risk:
Sustainability and business
continuity
As noted above, some of the Group’s infrastructure could be exposed to physical risks arising from climate
change (such as floods, storms etc) and this risk could have an impact on contract delivery in the medium and
longer term. Onsite physical inspection is required at critical sites, both Babcock owned and jointly owned by
customers, to understand the level of potential exposure under future climatic scenarios and mitigating actions
required to ensure long-term resilience.
Inflation – Continuing risk
Inflation impacts across, and is considered within, a number of our Principal Risks, for example supply chain, people, existing markets, rather
than being a separate standalone risk.
As the global economy recovers from the pandemic and the effects of the conflict in Ukraine, it is experiencing increasing inflationary
pressure, both in terms of supplier costs, such as products, commodities, energy and freight, and labour rates. Due to the nature of the
Group’s activities we have a number of long-term contracts, which may include fixed-price elements or saving commitments, and are
particularly exposed to inflation via rising employment costs; particularly where we have existing contracts which were agreed in a
low-inflation environment and include inflation risk. If we have increased costs which we are not able to pass on, this will affect the
profitability of the contracts concerned and could mean that they become loss-making or that we are unable to meet our contractual
commitments, leading to an adverse financial impact and a longer-term reputational impact.
We have established a programme watchlist covering our most significant programmes as part of our monthly reviews and are in discussion
with customers where inflation is diverging from contract terms. In respect of new contracts, we have put in place controls to ensure that
the terms of the new contracts adequately cover the inflation risk.
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Principal risks and management controls (continued)
Changes to the Principal Risks and Uncertainties
Last year’s principal risks and uncertainties remain relevant and
three new principal risks have been added. Two of the existing
principal risks have been merged as follows:
8
13
11, 12
6,7
1,2
3,4
New Principal Risk
Reason for change
Climate & Sustainability
Climate and sustainability risks could
cause a material impact on the Group’s
business, and to the delivery of its
strategy or financial results.
t
c
a
p
m
I
Supply Chain
Management
Technology Disruption to
include digital agenda,
data management and
new technologies
Heightened macroeconomic influences
and increasing potential for disruption
in supply chains.
Persistent pace of change and the
broadening of the Technology agenda
internationally.
9,10
5
Merged Risk
Reason for Change
Likelihood
Existing and New Markets
are merged into one
Overlap of risk considerations within
new and existing markets led to a
belief that these should be considered
as a combined risk.
Business Interruption is
merged into the
Operational Resilience
risk
Operational resilience encompasses
how we holistically manage
disruptions to our business and
business interruption in its widest
form.
Babcock operates in a complex global environment and is exposed
to a wide range of risks that may undermine our ability to execute
our strategy.
Our risk management is an evolving and dynamic process;
therefore, the Group might identify new risks or better understand
the significance of existing risks or identify a change in a risk. This
means that the risks identified on pages 93 to 103 are not and
cannot be an exhaustive list of all principal risks that could affect
the Group. The principal risks are not listed in any order of priority.
The principal risks appear in order of their cumulative likelihood and
impact scores. Risks are plotted on a net basis including current
mitigations.
Principal risk
Risk direction
1
2
3
4
5
6
7
8
9
Contract & Project Performance
Existing & New Markets
IT & Cyber Security
Pensions
Supply Chain Management
Operational Resilience/Business Continuity
Financial Resilience
Health Safety & Compliance including
product safety
Climate & Sustainability
10
Technology Disruption to include digital
agenda, data management and new
technologies
11
Talent Management Retention & Upskilling
12
Regulatory & Compliance
13
Acquisitions & Disposals
Key
N
N
N
Escalated
De-escalated
No movement N New
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Financial Statements
Principal risks, their impact
and mitigation
Contract and project performance
We execute large contracts, which often require us to price for the long term and for risk transfer. Our contracts can
include fixed prices.
Likelihood
Impact
4
4
Risk Appetite: Medium
This reflects the complex nature of the work within the defence and emergency services sectors. Whilst we aim to ensure our contracts only
accept risk that can be managed, risk remains in the contract/project delivery.
Mitigation
This year we have strengthened our formal review and gating
processes, both through the opportunity pursuit and bid process,
and through project delivery to contract closure. The revised
governance has amended the content of the review
requirements. Specific focus has been on ensuring we are
targeting the right opportunities, matching our capabilities, risk
appetite and where we have the best prospect of winning or
retaining business. Within these opportunities, more extensive,
and where appropriate, independent reviews are conducted to
reduce the risk of underestimating risks and costs, to ensure that
the risks and opportunities are continually managed and refreshed
throughout the contract life. Group policies and procedures have
also been refreshed and continue to set a commercial, financial
and legal framework for all bids.
Contractual performance is continuously reviewed at contract,
business unit, sector and (where appropriate) at Group functional
executive level. High risk/high impact contracts have been
identified and form part of a ‘watchlist’. For these contracts
additional reviews, deep dives and, where required, additional
functional support is provided in order to best mitigate risks and
deliver opportunities. Risks are identified through each Gate to
allow early identification of risks to delivery and profitability.
Where we identify poor performance, the business will implement
a remediation plan, including but not limited to, the use of
independent advisors to ensure continued best practice approach
is adopted.
Potential impact
Our business model drives us to seek to win and execute long-term
high-value contracts for the provision of complex and integrated
services to our customers. Through delivery of our contractual
commitments, often through outcome-based contracts, and
accepting a medium appetite for risk we are rewarded by the
appropriate margins.
There are usually only a relatively limited number of customers in
each of our market sectors. In addition, our market sectors can be
highly competitive. This means that our customers have significant
market power and can require bidders to accept a substantial
transfer of risk from the customer to the supplier. For example, it is
common in our markets that the contracts that we tender for may
impose strict conditions and clauses.
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 or
additional costs are incurred, for example, due to extended
programme duration, or supply chain shortages driven by the
conflict in Ukraine, or exceptional rates of inflation and trade union
demands for cost-of-living increase, this could increase our cost to
deliver the contract. For example, we operate fixed-price contracts.
Actual costs may exceed projected costs, including assumptions on
future rates of inflation on which the fixed prices are agreed. Price
escalation might be linked to representative indices which allows
revenue to track costs, however if this were not the case given that
these contracts can extend over many years, it can be difficult to
predict the ultimate outturn of costs.
Our contracts tend to involve significant supply chains. Failure by our
supply chain partners, including shortages in supply of raw materials
and electronic components, or to deliver on their contractual
obligations may cause us increased costs or missed schedules, or put
us in breach of our contractual obligations.
Long-term contracts often have changes, or updates, to their scope.
If we do not properly manage contract changes, we may incur
additional costs or fail to deliver contractual requirements.
If any of these key risks materialise, they may increase our costs to
deliver on our contractual obligations or may result in the imposition
of penalties or the early termination of the contract with the
imposition of damages, or reputational damage, which may cause
strain on our customer relationship. This may undermine not only
our current contract, but also our ability to win future contracts.
The post-Brexit economy has created disruptions to the European
labour market, of which we were considerably reliant for certain
skills, leading to a supply deficiency for key skills and expertise.
Consequently, we have seen an inflation in the cost of labour within
many of our key projects and contracts.
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Principal risks and management controls (continued)
Existing and new markets
We rely on winning and retaining large contracts in both existing and new markets both of which are often
characterised by a relatively small number of major customers many of whom are owned, controlled or funded by
local or national government.
Likelihood
Impact
4
4
Risk Appetite: Medium
This reflects that, whilst the maintenance of a secure and assured pipeline is essential for continued growth, we may choose to embrace
the risks that we can confidently and securely manage.
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 monitor expenditure changes in our markets in order
to allow us to make the appropriate adjustments. In the UK we
maintain a public listing, as we believe it is an important factor in
winning contracts 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 bid 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. As appropriate,
we aim to invest in innovation and people to prepare for new
ways of working or delivering our services.
We maintain a dialogue with our customers to understand their
intentions regarding their pipeline and any regulatory changes
that may affect that or the viability of contract delivery.
Potential impact
Major customers, particularly those with government backing, have
significant bargaining power and can exert pressure to change,
amend or even cancel programmes and contracts. As governments
own or fund many of our major customers, political and public
spending decisions may have a significant impact on our contracts
and pipeline. For example, the UK Government’s national security
and international policy objectives control the budget of the MOD.
Whilst changes in customer policy or budgets can potentially offer
more opportunities, they can also present risks in terms of spending
which may 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 of, or return to, in-house service provision,
either generally or in the sectors in which we operate.
• Favouring small or medium-sized suppliers or adopting a more
transactional rather than a cooperative, partnering approach to
customer/supplier relationships.
• Favouring overseas suppliers potentially subject to lower
production costs and state subsidies.
• 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 affecting the profitability of doing business with them.
All defence contracts of this nature have regulations covering
contract terms and pricing, in the UK a number of our contracts with
the MOD are subject to the Single Source Contract Regulations
(SSCR), which the Single Source Regulations Office (SSRO)
administers. 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.
We may face challenges in securing contracts in new markets for a
number of reasons. These reasons may include a failure to anticipate
future market requirements, failure to align approaches with
customer expectations and a preference for, or state funding of,
domestic suppliers. The delivery of contracts may be further
challenged by commercial, legal and licensing issues which have the
potential to impact operations, recruiting, etc.
Factors which may affect existing and new markets equally, some of
which have been evident in recent years, include:
• Unforeseen regional or global economic developments.
• International conflict and subsequent impacts on global
economy, trade and military requirements.
• Changes in government.
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Financial Statements
Likelihood
Impact
Change from last year
1 Very unlikely
1 Insignificant
Up from last year
2 Unlikely
3 Possible
4 Likely
2 Minor
Same as last year
3 Moderate
Down from last year
4 Major
5 Very likely
5 Severe
IT and security
A key factor for our customers is our ability to deliver secure IT and other information assurance systems to maintain the
confidentiality of sensitive information.
Likelihood
Impact
4
4
Risk Appetite: Low
IT and Cyber Security are fundamental components to Babcock’s operations, we continually review the emergence of cyber threats, in an effort
to eradicate and mitigate the risk as far as possible.
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. To maintain organisational awareness
around cyber security, we provide cyber security education to our
staff. 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.
Potential impact
We hold data that is confidential and needs protection, in an
environment 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. The
Group may be seen as a target for attack by ’state actors’ from
overseas countries because of the nature of the Group’s activities for
its government customers. In addition, failure to invest in our IT
infrastructure, for example in legacy systems, may create a weakness
that may lead to a breach. The risk of loss of information or data by
other means (such as physical loss) is also a risk that we cannot
entirely eliminate. 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 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.
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Principal risks and management controls (continued)
Pensions
The Group has significant defined benefit pension schemes in the UK, which provide for a specified level of pension
benefits to scheme members.
Likelihood
Impact
4
4
Risk Appetite: Low
Babcock utilise engagement with the Pensions schemes trustees and a balanced pension management approach that looks to mitigate and
reduce the risks associated with pensions over the journey to settling the pension obligations.
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 UK Pensions Regulator.
The pension scheme mitigates the risk of liability increases by
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.
Various assumptions underpin the level of our contributions.
These assumptions 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 pension trustees believe that the assets in the pension schemes
are insufficient to meet pension liabilities or if our balance sheet
strength does not meet the pension trustees’ expectations, they
may require us to make increased contributions and/or lump sum
cash payments into the schemes or provide additional security from
the Group. The toughening stance of the UK Pensions Regulator
may influence our pension trustees’ perspectives. Increased
contributions or lump sum cash payments may reduce the cash
available to meet our other obligations or business needs and
may restrict our future growth.
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. Companies,
including Babcock, do not calculate actuarial valuations used for
funding 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.
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.
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.
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Financial Statements
Supply chain management
The Group is exposed to several risks within its supply chain, these can typically be:
Likelihood
5
Impact
3
• Macroeconomic condition – high inflation, Brexit.
• Disruption Events – disruptions to established supply chains such as natural disasters, wars, strikes.
• Supplier Specific Challenges – we have seen increasing disruption from cyber-attacks on suppliers (i.e., financial failure of suppliers).
• Part Availability for Aged Customer Assets – maintenance of customer assets that are so old that it is not possible to source key parts or
components, or the cost of minimum quantities becomes cost or lead-time prohibitive.
Risk Appetite: Low
Babcock recognises the adverse effects of the financial resilience risk on our balance sheet and investments, our aim being to eliminate the
risk where possible.
Potential impact
Inflationary pressure on the cost of goods and services: Where
additional unplanned costs are absorbed within the contract
delivery costs and cannot be mitigated. This may lead to the cost
of third-party goods or services in our fixed-price or long-term
contracts being much higher than forecasted, potentially
impacting our profit.
Supply chain disruption: If an event causes restriction to supply, it
will either cause inflation as detailed above, or could mean that
we cannot secure supply within agreed lead-times, leading to
contracts incurring liquidated damages where we have agreed to
fixed timescales and carry the risk of supply.
Part availability for aged customer assets: If there are sole supply
components for which no alternative can be sourced, this would
mean we could not meet our contractual commitments to
maintenance of customer assets, leading to either of the points
above or incurring reputational damage as a safe and secure
partner to the maintenance of critical national assets.
Mitigation
Mitigation can come downstream from within the supply chain,
these include, but are not limited to:
• Where possible we have supply contract clauses which dictate
or limit inflationary uplift, these are either linked to national
published indices or have specific increases lower than the
head contract inflationary index. We also often enter into
long-term supply contracts that match the head contract
duration, so the prices are fixed for the contract duration.
• Pro-actively reviewing supply markets to understand best times
to renegotiate, to find the most advantageous times to
contract.
• Flowing down specific contract terms to our supply chain to
provide protection from inflation and impose some liquidated
damages to offset impacts, where possible. Although, this
would never likely cover our full exposure.
• Actively engaging with customers on known sole source
components and implementing sensible plans to mitigate this,
ranging from end of life buys to jointly finding alternative
supply.
• Looking to have dual sources of supply or where we have single
sources or points of failure, they would be dealt with within
local contract disaster recovery planning.
• We monitor our supply chain for risk and continuously invest in
risk tools and processes which take data from multiple sources
to ensure, where possible, that we foresee and mitigate any
potential risk impacts.
• We undertake detailed due diligence on new suppliers, the
level of due diligence is linked to the criticality of the goods or
services being provided. Where risks are identified mitigation
plans would be put in place.
Upstream, our commercial teams also ensure that our customer
contracts have adequate contract protections for us in relation to
these supply chain risks, these could include:
• Ability to recover costs where inflation exceed limits, especially
in 5 years plus contracts.
• Relief from our contractual commitments where parts are
customer dictated and we cannot provide alternative sources
of supply.
• Ensure our customer contracts have relief for force majeure events
and that includes supply chain disruptions caused from those
events.
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Principal risks and management controls (continued)
Operational resilience
We are undertaking multiple change programmes with the introduction of a new strategy, a new operating model
to restructure the shape of the Group, and a new People strategy, as well as undertaking the alignment of both the
business portfolio and our property portfolio. Additionally, there are several new material opportunities that the
Group may pursue – some in new geographies – that may further stretch management bandwidth.
Likelihood
Impact
3
4
Risk Appetite: Low
Given the materially adverse nature of the risk to operational resilience, Babcock looks to recognise and eradicate the emergence of risks to
operations where possible, hence risk appetite being set as low.
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. Failure to deliver the change
programmes may also undermine the confidence of key
stakeholders in our future growth and plans.
Mitigation
Management is experienced in delivering programmes of this
nature. The role of a change portfolio manager has been created
to ensure both completion and synergy across these programmes.
There is regular monitoring of progress across all the programmes
to ensure that they remain on track, along with regular dialogue
with customers at a senior level to ensure that delivery of our
contracts is in no way compromised. The Board receives a
monthly report with a status update on the key change
programmes and major new opportunities.
In order to ensure general operational resilience, we continue
to monitor the emergence of business interruption events that
could materially and adversely affect the business operations
through our Risk Committee. For general business continuity,
we have in place IT disaster recovery and business continuity
processes that seek to reduce the impact of a such an event for
ourselves and our key suppliers. We also maintain relevant and
appropriate insurance.
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Financial Statements
Financial resilience
The Group is exposed to a number of financial risks, some of which are of a macroeconomic nature (for example, foreign
currency, interest rates) and some of which are more specific to the Group (for example, liquidity and credit risks).
Likelihood
Impact
3
4
Risk Appetite: Low
Babcock recognises the adverse effects of the financial resilience risk on our balance sheet and actively manages this risk via its capital allocation
policy, substantial committed debt facilities and maintaining an investment grade credit rating allowing access to debt capital markets.
However, this risk cannot be entirely eliminated and will always require management.
Mitigation
The recent rationalisation of the Group portfolio raising proceeds
from disposals has strengthened our balance sheet during FY23
resulting in the only material debt of the Group being long-term
EuroBonds.
In respect of immediate liquidity, the Group has committed bank
RCFs of £775m and £300m, neither of which were drawn as of
31 March 2023.
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.
The Group has a very proactive ESG agenda and regularly
communicates Group activities to assist in more informed
investment decisions by providers of capital.
Potential impact
A lack of financial resilience may hinder us in raising debt funding
to invest in 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 on which they are prepared to contract with
us or, in the extreme, cause them to not award work to Babcock
due to their perception of risk.
Credit rating agencies may downgrade our rating, which could
increase our cost of borrowing.
The lack of financial resilience may trigger certain pension scheme
financial thresholds, requiring us to allocate further resource to
the schemes.
We could face capital allocation constraints and consequently
have reduced capital to invest in the business to meet all our
obligations or to pay a dividend.
In addition, if companies working in the defence or nuclear sectors
were deemed to be not suitable for investment by certain investment
funds (eg due to extremely strict ESG policies) the cost and/or
availability of capital to the Group could be adversely affected.
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Principal risks and management controls (continued)
Health and safety
Our operations entail the potential risk of significant harm to people and property, wherever we operate across the
world.
Likelihood
Impact
2
5
Risk Appetite: Low
For both moral, financial and reputational reasons we would wish to keep the risk as low as possible. Through the eyes of the HSE and high
hazard regulators we are legally mandated to keep the risk as low as reasonably practicable.
Mitigation
Harm to individuals may arise from failure of processes, tools or
people and many situations have elements of all of these, so our
mitigations strive to work across these areas to reduce the
probability of occurrence and the severity of the impact. Health
and safety is our priority with a low tolerance for risk of harm. It
has oversight by the Babcock Board and Executive Committee
through monthly monitoring of leading and lagging performance
indicators. The function is centrally led, with teams in each sector
and country working under the direction of the Group Director
and the Corporate Safety Leadership Team to support operations
to implement improvements in safety performance. Induction and
task specific training builds competency of personnel, whilst our
communications and safety behaviours programmes are
developing an engaged safety culture of openness and fairness.
Our global management system enables reporting and
investigation of all events and near misses to identify and address
causes and share lessons, whilst the development of standardised
processes and ways of working provide consistency and quality
across the Group. These mitigations are integral to our
management systems, which are delivered and certified to
international standards, and assured through a programme of
internal and external assurance activities. These mitigations
enable everyone to go Home Safe Every Day.
Potential impact
Many parts of our business involve employees and contractors
working in potentially hazardous environments, including work with
hazardous materials, high energy systems and in challenging
locations. Furthermore, many of the activities that we undertake are
in high hazard industries with inherent risk of harm, such as aerial
emergency services and heavy industrial production including
shipbuilding. The risks associated with our activities and working
environments can cause harm to our people and those affected by
our operations; we work to minimise the risk exposure to as low as
reasonably practicable. Similarly, the end user of our products and
services could be harmed when using our products so we introduce
mitigations in design, manufacture, and maintenance to ensure our
products are both fit for purpose and safe.
We have moral, regulatory and legal obligations to prevent harm,
and there could be significant impacts if we fail to reach the
standards and mandated requirements to adequately mitigate
against health and safety risks. Accidents and debilitating health
conditions can have major, long-term impacts on the lives of
those directly affected and on their families, friends, colleagues
and community. We may face criminal and civil prosecution,
which could result in substantial penalties and fines (some of
which are uninsurable); and there may also be serious damage to
our reputation with both the public and with our customers
(whether justifiable or not). We could be prevented from operating
due to employees being unavailable for work, investigations being
conducted, or if regulatory approval and certification is
withdrawn; potentially leading to contractual penalties due to loss
of productivity or inability to deliver the contract, which could
lead to a loss of business or future opportunities.
These impacts could occur if we cause or contribute to an
incident due to a failing on our part, or it is found that we have
failed to meet the required standards in place to mitigate these
risks. These could be caused by failing to prevent critical
equipment failure; inadequate information, poor training and
supervision; or the inadequate management of change and
learning from previous accidents.
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Financial Statements
Climate and sustainability
Sustainability is an integral part of our corporate strategy, and our global business employs short- medium- and
long- term control measures to manage climate risks.
Likelihood
Impact
3
3
Risk Appetite: Low
Our probability and impact scorings for the risks related to Climate and Sustainability are based on a scenario-based methodology. We
determined that the most significant transition risk is labour, which is expected to rise, however our risk appetite allocation remains low as
this situation is likely to materialise in the medium and long term and gives us time to implement activities to mitigate.
Potential impact
The Group may be impacted by environmental factors, including
physical risks arising from climate change (such as floods, storms
etc as many of our sites are based at coastal locations) and
transition risks resulting from the process of adjusting to a low
carbon economy.
Additionally, if we were to cause contamination or pollution due
to failings in respect of air emissions, wastewater discharges, or
the use, handling and storage of hazardous materials and waste,
this could result in environmental damage and have contractual
consequences. Within each of our international entities, Babcock
is regulated by, and adheres to, increasing levels of national and
international climate-related legislation, as well as strict disclosure
requirements pertaining to key sustainability themes such as
environmental protection, employee safety, community
engagement, commercial integrity, and responsible procurement.
Our Executive Risk Committee and Management teams recognise
the possibility of supply chain disruption and facilities disturbance
due to climate-change under certain scenarios. As global demand
of energy and fuel services changes into 2030 and 2040, it is
clear that there may be costs associated with mitigating transition
risks, in order to remain competitive within current markets. If
global GHG emissions, temperature, and consumption of natural
resources are not stabilised, this could impact delivery of our
strategy in the longer term.
Mitigation
Independent, quantified scenario analysis was carried out in FY23,
from which our Group has identified locations at which climate-
related risk poses the greatest threat. Here we have completed
occupational health assessments of our physical mitigations and
reviewed standard risk management procedures.
Safety, Health, and Environmental Protection is core to everything
that we do at Babcock. From our commitment last year to
investigate the feasibility of extending our Environmental
Management Systems (EMS) across our global operations, we have
now developed Group-wide minimum environmental standards.
We are also investigating a Group-wide Environmental Data
Management System, which will help to protect our people and
the environment in both the short term and long term.
Compliance with climate regulation and the development of
transition plans are our key priorities. In addition, sectors and
regions will continue to deliver and update their climate-related
risk registers quarterly and ensure appropriate mitigating actions
are in place.
Plan Zero 40 is our chief mitigation mechanism to combat
transition risk and will be scaled across the organisation, along
with physical inspections across all critical Babcock sites by the
end of 2024. We recognise the technological improvements
required to transition towards a Net Zero economy for our
products and services. Our workforce is protected by the required
insurance and standards, and it will continue to be fundamental
for us to provide a safe environment for all Babcock employees
and future generations.
Babcock International Group PLC / Annual Report and Financial Statements 2023
101
Principal risks and management controls (continued)
Technological disruption
We have identified three main attributes to potential technological disruption that potentially affects Babcock. The
digital change agenda both within our customers and internal to Babcock, our approach to data management and
finally the disruption of new technology offerings.
Likelihood
Impact
3
3
Risk Appetite: Low
Given the materially adverse nature of digital and data risks, Babcock look to recognise and eradicate the emergence of risks to operations
where possible, hence risk appetite being set at low. Exploiting new technology in an appropriate manner can open new markets.
However, Babcock does survey the market for new technology to develop into new opportunities. These are assessed for benefit
individually and if deemed of interest, integrated into our research and development programme and managed with project management.
Mitigation
Our management is experienced in delivering programmes of this
nature. We continue to make significant investment in enhancing IT, to
enable management and security of the data. Additional investment
is being made in further data analytics solutions, such as Palantir.
We have appointed an experienced team in the Chief Technology
Officer (CTO) organisation and set up appropriately linked teams
across group who have a track record in successfully identifying
new technologies and bringing them through to either enhance
existing or introducing new products or services.
Potential impact
There are three impacts of technological disruption that are
mitigated by controls that are regularly reviewed:
Digital change – advancement of modern IT and software solutions
enabling improved insight into developing products, delivering
services and common change across business sectors and countries.
Data management – the change in digital approaches, as larger
volumes of internal and external data are being created and
processed. This must be appropriately shared, stored, and managed
due to sensitivity and security. New technology – disruptive impacts
on existing products and services but also opens new opportunities
for the company if recognised and leveraged appropriately.
As a result, this may pressurise management bandwidth to oversee
the change programmes that rely upon the new technology or digital
solutions, and the regular running of the business. This could lead
to an elevated risk of mistakes or missed opportunities. Failure to
deliver the change programmes, will mean an inability to achieve
our strategic goals. Failing to manage these risks may undermine
the confidence of key stakeholders in our future growth plans.
Talent management, retention
and upskilling
We operate in many specialised engineering and technical domains, which require appropriate skills and experience.
Likelihood
Impact
4
2
Risk Appetite: Medium
Avoidance of the risk would increase costs and necessitate over-resourcing resulting in potential negative workforce engagement and
retention. Some risk is accepted given by sharing capability across our business and compensating for skills shortages in particular areas.
Mitigation
We have a People Strategy, which will be delivered through our
People Programme, led by the Group’s Chief Human Resources
Officer. This Programme is informed by workforce planning and
includes the upskilling of our workforce to meet future requirements;
enhancing our ability to attract talent; engagement and reward
strategies to improve retention; and building better career
development opportunities for our employees.
Potential impact
Our business delivery and future growth depend on our ability to
recruit, develop and retain experienced, highly skilled employees
(including suitably qualified and experienced engineers, technicians,
and staff from other specialist skill groups). This is compounded by
ongoing change in the skills and experience required, as technologies
and capabilities develop. Competition for the people we need is
high and is likely to remain so for the future. This may be exacerbated
by nationality and regulatory restrictions, which may prevent us
from accessing talent from the EU or worldwide. This poses risks in
both recruiting and retaining such staff. 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
including inflation. This could affect our contract profitability.
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Governance
Financial Statements
Regulatory and compliance
Our businesses are subject to the laws, regulations and restrictions of the many jurisdictions in which they operate.
Likelihood
Impact
2
4
Risk Appetite: Low
Babcock always endeavours to act in line with best practices and regulatory requirements. Babcock has zero tolerance for regulatory risk
around risks such as anti-bribery and corruption and modern slavery, the risk appetite allocation is therefore set at low.
Potential impact
The laws and regulations that we are subject to include anti-bribery
laws, import and export controls, tax, procurement rules, human
rights laws 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. 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
the Group complies with all applicable laws and regulations. We
also have suitably qualified and experienced employees and
expert external advisors to assist on regulatory compliance. Our
management systems comprise of competent personnel with
clear accountabilities for operational regulatory compliance.
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 if they see
evidence of behaviour which is not in keeping with our values.
The Board monitors and reviews all reports and their investigations.
Acquisitions and disposals
We have built our core strengths organically and through acquisition. Decisions to acquire companies, as well as the
process of their acquisition and integration, are complex, time-consuming and expensive. If we believe that a
business is not ‘core’, we may decide to sell that business.
Likelihood
Impact
1
4
Risk Appetite: Medium
Babcock will continue to review potential opportunities within the market in a considered and measured way, M&A activity continues to be
inherently high risk, future M&A activity will be undertaken only where it is possible to reduce inherent risk to its lowest level balanced
against potential rewards and opportunity.
Potential impact
If we acquire 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. Those companies
that we consider to be 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.
Mitigation
Our focus is currently on operational execution, rather than
acquisitions, with the possible exception of ‘bolt-on’ acquisitions.
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.
Babcock International Group PLC / Annual Report and Financial Statements 2023
103
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 2023. For viability, the Board looked at a
five-year view as this is the period over which the Group prepares its
strategic plan forecasts.
The use of a five-year period provides a planning tool against which
long-term decisions can be made concerning strategic priorities,
addressing the Group’s stated net zero target and climate-related
risks and opportunities, funding requirements (including
commitments to Group pension schemes), returns made to
shareholders, capital expenditure and resource planning.
The annually prepared budgets and forecasts are compiled using a
bottom-up process, aggregating those from the individual business
units into sector level budgets and forecasts. Those sector submissions
and the consolidated Group budget and forecasts are then
reviewed by the Board and used to monitor business performance.
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 the Principal risks and management controls
section on page 87. The Board also considered the mitigation
measures being put in place and potential for further mitigation.
The Board considers that the long-term prospects of the Group
underpin its conclusions on viability. As outlined in our strategy,
business model and markets summaries on pages 6, 18 and 20 of
this report, our prospects are supported by:
• a diverse portfolio of businesses based on well-established market
positions, focussed on naval engineering, support and systems,
and on critical services in our core defence and civil markets. In
FY23 62% of Group sales were defence related and 38% civil;
• a geographically diverse business with a high proportion of sales
to governments and other major prime defence contractors. In
FY23, 61% of sales were to defence and civil customers in the UK,
and 39% were international;
• long-term visibility of sales and future sale prospects through an
order backlog of £9.5 billion as at 31 March 2023, including
incumbent positions on major defence programmes; and
• market positions underpinned by a highly skilled workforce,
intellectual property assets and proprietary know-how, which are
safeguarded and developed for the future by customer and
Group-funded investment.
Available financing
As at 31 March 2023, net debt excluding operating leases was
£346.2 million and the Group therefore had liquidity headroom
of £1.6 billion, including net cash of £0.5 billion and undrawn
facilities of £1.2 billion. These facilities are considered more than
adequate to meet current and other liabilities as they fall due, and
supports the Group’s negative working capital position largely arising
from securing customer advances ahead of contract work starting.
All of the Group’s facilities mature during the viability period, and
therefore in assessing liquidity in future periods we have assumed
that it will be possible to re-finance the Group’s facilities at current
market rates.
As of July 2023, the Group’s committed facilities and bonds
totalling £1.9 billion were as follows:
• £300 million three-year RCF maturing 20 May 2024
• Existing £775 million revolving credit facility (RCF), of which £45
million matures on 28 August 2025 and £730 million matures
28 August 2026
• £300 million bond maturing 5 October 2026
• €550 million bond, hedged at £493 million, maturing 13
September 2027
• Two committed overdraft facilities totalling £100 million
The RCFs are the only facilities with covenants attached. The key
covenant ratios are (i) net debt to EBITDA (gearing ratio) of 3.5x (ii)
and EBITDA to net interest (interest cover) of 4.0x. These are
measured twice per year – on 30 September and 31 March.
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 creditworthiness 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 up to their current maturity dates.
Base case scenario
The base case budget shows significant levels of headroom against
both financial covenants and liquidity headroom based on the
current committed facilities outlined above. That base case largely
assumes we maintain our incumbent programme positions if re-let
during the five year period, with margin recovery if they are
currently below the Group average. Many opportunities available to
the Group, where we do not yet have high conviction of securing
the work, have been excluded from the Base Case to seek to
maintain a degree of caution.
It also assumes that the impact of current inflationary pressures can
be managed within contract estimates assumed in our planning.
The base case assumes no further reshaping of the business
portfolio, so it is not dependent upon any future cash proceeds
from divestments. It also maintains pension deficit contributions in
excess of income statement charges of around £63 million relating
to FY24 and around £63 million relating to FY25.
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Governance
Financial Statements
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 budgets and forecasts (in both
EBITDA and net debt) was required to challenge covenant levels.
Of the remaining measurement points within the available facility
period, the lowest required reduction in forecast EBITDA to hit the
gearing covenant level was £115 million and the lowest net debt
increase was 67%. The lowest required reduction in forecast EBITDA
to hit the interest cover covenant was £174 million. 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 and forecasts for the duration of the assessment period.
These sensitivities include – separately – a reduction in bid pipeline
closure (business winning), a deterioration in large programme
performance across the Group (including further inflation cost
increases, or related failures in supplier resilience, as per our principal
risks), a deterioration in the Group’s working capital position and a
regulator imposed cessation in flying two of the largest aircraft
fleets in the Group. All of these separate scenarios showed
compliance with the financial covenants throughout the period.
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.90 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’ (ie there is no direct read across from one sector to
another). A small number are deemed ‘non independent’ eg
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.
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 (eg 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, and sufficient
liquidity when compared against existing facilities.
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 2028.
Babcock International Group PLC / Annual Report and Financial Statements 2023
105
Governance statement
Chair’s introduction
Dear fellow Shareholder
This year has been our second year of transformation. The Board’s
governance focus has again been to oversee the implementation of
the suite of changes and improvements initiated in response to the
weaknesses identified in FY21 and to assure ourselves that the
resulting control and oversight framework is robust. Key aspects
covered in the year have been:
Strengthened Group-wide capabilities
and processes
We have continued with the roll-out of our new Operating Model
introduced in FY21, strengthening a number of key Group-wide
functions and establishing common Group-wide processes. These
underpin the management of some of the Group’s key risks, for
example, project and contract performance, and talent. During the
year the Board has had presentations from the heads of
procurement, project management, people, risk, treasury, and
insurance and has reviewed the progress and status in enhancing
our capability and performance in these areas.
Controls enhancement programme
The Board has received regular updates from the Audit Committee on
the ongoing programme of controls enhancement. This follows on
from the work last year to strengthen financial controls, in particular in
Head Office, Aviation and Land sectors. This year, we have defined a
new ambition for our control approach which is designed to meet the
anticipated requirements of the revision of the UK’s corporate
reporting and audit regime. We have had the programme
benchmarked for adequacy and effectiveness. Full implementation
will be a multi-year programme but in FY23 we set out a workplan
based on clear prioritisation and this has been delivered. Full details
are available in the Audit Committee report on pages 125 and 127.
The Board considered the conclusion of the Financial Reporting
Council’s review of PwC’s audit of Babcock’s financial statements
for FY17 and FY18, which it published on 8 March 2023.
The Audit Committee reviewed the Council’s decision together
with a detailed assessment of the findings to assure the Board that
all the findings were addressed through a combination of the
Contract Profitability and Balance Sheet review, our control
enhancement programme, or in some instances the disposal of
businesses as part of our portfolio rationalisation programme.
Board membership and effectiveness
Further progress has been made to strengthen the Board. This year
we have welcomed Jane Moriarty who brings financial and accounting
skills, an area identified as requiring enhancement, as well as extensive
experience of diverse businesses from her restructuring work at KPMG.
Since her executive career, she has held a number of Non-Executive
roles including at NG Bailey Group Limited, an engineering and
services business, and at Mitchells & Butler plc where she is the
Senior Independent Director. Jane has joined both the Audit and
Remuneration Committees, as well as the Nominations Committee.
Following the year end, we have concluded a search for a Board
member with extensive Defence sector experience which was
an area raised with us in some conversations with shareholders.
We were pleased to welcome Sir Kevin Smith as a Non-Executive
Director on 1 June. Sir Kevin spent over 20 years at BAe and was
then the CEO of GKN for eight years. Since his executive career,
Sir Kevin spent several years working with Unitas Capital, a
private equity firm based in Hong Kong, and has been a
Non-Executive Director at Rolls Royce prior to stepping down
in May 2023. Sir Kevin joins the Audit Committee as well as
the Nominations Committee.
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Governance
Financial Statements
Having conducted an external Board review process in both FY21
and FY22, this year we elected for an internal review which
Carl-Peter Forster led in his role as Senior Independent Director.
The review confirmed that all directors find the Board climate to
be open and inclusive. Areas for ongoing attention were for
the Board to continue our work on overseeing the control
improvement programme, to continue to build out our strategy
framework as we look beyond the focus on transformation, and
to continue to develop our forward-looking agenda. For more
information, please see page 120.
To ensure we understand the views of you, our shareholders, we
interact in a number of ways. Our Executive Directors have regular
meetings with shareholders around the announcement of our full
year and our half results. As your Chair, I always welcome
opportunities to hear the views of shareholders directly and this year
I held a series of meetings with some of our largest holders during the
year. On behalf of the Remuneration Committee, Carl-Peter engaged
with shareholders owning over 60% of the Company to hear their
views in respect of our new remuneration policy. For more
information, please see pages 131 to 132.
People and Culture
A key aspect of the overall transformation of Babcock is the shift to
becoming a more people-focused organisation. During the year the
Board has had a number of sessions with the Chief HR Officer and
members of her team to review progress on the implementation of
the first-ever Group-wide People Strategy, which was built around
our Purpose and Principles, as well as Inclusion and Diversity. One of
the aims of our Purpose and Principles is to reinforce a one company
culture. During the year, a key step towards this was the launch of
the Babcock Role Framework which maps each role within Babcock
in one of five career pathways. We now have a common language
across the organisation that will help all our employees to navigate
opportunities at Babcock. This framework will not only improve our
people processes, but it will also promote equality of opportunity.
Engagement
With the easing of COVID-19 restrictions, over the last year the Board
has been able to re-start its visits to Babcock sites. In July, the Board
visited the Land site at Bovington to see the improvements in our DSG
programme (our contract to support the British Army’s armoured
fleet). As well as reviews of the DSG programme and developments at
the Bovington site, the Board spent several hours out in the workplace
in small groups, hearing about people’s work, their views on progress
at the site and at Babcock, and their thoughts on obstacles and areas
for improvement.
Lord Parker continues to visit sites and engage with staff in his role
as Director for employee engagement. In the year, he has visited
Devonport, Bovington and RAF Valley. His reports following these
visits give the Board insights into the impact of the decisions being
made and how our colleagues receive and interpret them.
Additional visits have been made by Board members during the year
and this is being encouraged to enable first-hand experience of the
progress being made against the Group’s key transformation priorities.
We also had the benefit of our Global People Survey. The very rich
insights from the Survey gave the Board a clear picture of those areas
we are doing well in (like health & safety) and those areas that we
could improve (such as scepticism that Babcock would act as a result
of the survey, and reward & recognition). The Board discussion about
the Survey findings emphasised the criticality of visible action being
taken, both at Group and local level. The Company’s action plan,
which was based on the 1800 improvement actions logged under
the Survey, was reviewed. Some of the actions were small and local
such as various improvements in employee facilities while others were
more Group-wide such as implementing our global volunteering
policy, which gives employees the opportunity to take one working
day paid leave a year to do volunteering work with their chosen
charity. We are pleased that we have already completed 300 actions.
The Board will receive updates on progress on a regular basis.
ESG
Through our engagements with stakeholders, we understand the
importance they attach to ESG, diversity and the cost-of-living crisis
and have responded in a number of ways.
Considering the cost-of-living crisis, the Board welcomed the Company’s
UK-wide pay settlement for FY23 that sought to prioritise those most
impacted by the crisis, awarding a standard annual salary increase to
all UK employees except for the highest earners. We complemented
the pay settlement by launching the new Babcock Employee Assistance
Programme that provides free confidential practical advice for all our
UK employees to help them manage life’s complexities. We are proud
of the contribution Babcock makes through employment opportunities,
training, or supply chain expenditure to the communities in which we
work. To highlight that contribution, in the year, we commissioned a
report by an independent advisory firm to analyse our impact on the
UK economy. For more information, please see pages 78 and 79.
The Board has long held the view that to attract and retain the best
talent we must be able to nurture staff with much broader diversity of
backgrounds than our historic workforce. As I mentioned above, we
believe that the new Babcock Role Framework will support our progress.
Furthermore, the Group has now established a Global Head of Inclusion
and Diversity, reporting directly to the Chief HR Officer, to champion
Babcock’s approach. She attended the Board to present plans for
creating an inclusive work environment and driving results. Babcock’s
response is based on three pillars – insight & data, policy & programmes,
and education & awareness. These pillars will enable us to develop
our strategy, measure our progress, and embed our approach in our
one company culture. For more information, please see page 75.
Finally in respect of the Environment, following the adoption last year
of Plan Zero 40, our commitment to get to Net Zero carbon emission
across our estate, assets and operations by 2040, we have been maturing
our plans to achieve this. The Board has had two updates on the progress
made and was pleased that we are on track for submission of science-
based targets during FY24. For more information, please see page 64.
Priorities for FY24
For FY24, the Board and its Committees will continue to support
the turnaround through its execution phase. We will do this by:
• Providing assurance on the control enhancement programme
• Overseeing the development of our ESG initiatives to make our
business more sustainable and more diverse
I hope my summary above has given you a sense of the Board’s
activities during FY23 and our ambitions for the future. I look
forward to meeting you at our AGM on 28 September 2023.
Ruth Cairnie
Chair
Babcock International Group PLC / Annual Report and Financial Statements 2023
107
Governance statement (continued)
Board of Directors
1
4
2
5
3
6
1. Ruth Cairnie
Chair
Appointed: April 2019
N
3. David Mellors
Chief Financial Officer
E
5. John Ramsay
Independent Non-Executive Director
Appointed: November 2020
Appointed: January 2022
A
N
R
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.
She is a fellow of the Energy Institute and previously
Chair of POWERful Women. 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.
Current external appointments: Ruth is
currently a Non-Executive Director of BT Group plc
and Associated British Foods plc. She is Patron
of the Women in Defence Charter, a trustee of
Windsor Leadership and a trustee of the White
Ensign Association.
2. David Lockwood OBE
Chief Executive Officer
E
Appointed: September 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.
He received an OBE for services to industry in
Scotland in 2011. 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.
Current external appointments: None
Skills and experience: David brings extensive
CFO experience in the 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 senior 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
4. Carl-Peter Forster
Senior Independent Director
Appointed: June 2020
N
R
Skills and experience: Carl-Peter, a dual German
and British national, brings extensive manufacturing
and international experience. Carl-Peter has 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 Chair of Chemring Group PLC and the
Chair of Vesuvius plc.
Skills and experience: John, a Chartered
Accountant, brings with him over 30 years of
international business and finance experience.
He served as Chief Financial Officer of Syngenta AG
from 2007 to 2016, and interim Chief Executive
Officer of Syngenta from October 2015 to June
2016. Prior to joining Syngenta, he held senior
international finance roles with Zeneca
Agrochemicals and ICI.
Current external appointments: John is a
member of the Supervisory Board at Koninklijke
DSM N.V. and is a Non-Executive Director of Croda
International PLC and RHI Magnesita N.V. He is Audit
Committee Chair at each of these companies.
6. Lucy Dimes
Independent Non-Executive Director
Appointed: April 2018
A
N
R
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, having been the Chief Strategy and
Transformation Officer of Virgin Money UK Plc, the
CEO of UBM EMEA and Chief Executive Officer, UK &
Ireland, of Fujitsu. She has also held senior roles at
Equiniti Group, Alcatel Lucent (now Nokia) and BT.
Lucy was a Non-Executive Director of Berendsen
PLC and a member of its Audit, Remuneration and
Nominations Committees. Lucy holds an MBA from
London Business School and a degree in Business
Studies from Manchester Metropolitan University.
Current external appointments: Lucy is the Chair
of iomart plc.
108
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Governance
Financial Statements
7
9
8
Appointment key
E
A
R
Executive Committee
Audit Committee
Remuneration Committee
N Nominations Committee
Board Committee Chair
7. 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 Advisor to Telicent Ltd, Distinguished
Fellow at the Royal United Services Institute and
Visiting Professor at Northumbria University.
N
8. Jane Moriarty
Independent Non-Executive Director
Appointed: December 2022
A
N
R
Skills and experience: Jane, an Irish national
and a Chartered Accountant, brings with her over
30 years of international business and finance
experience. After a long executive career with
KPMG, where she was a senior advisory partner,
Jane has held a number of Non-Executive roles.
Current external appointments: Jane is a
Non-Executive Director of Mitchells & Butlers plc,
where she chairs the audit committee and is also
Senior Independent Director, and The Quarto Group
Inc, where she chairs the audit and remuneration
committees as well as being the Vice-Chair. She is
also a Non-Executive Director at NG Bailey.
9. Sir Kevin Smith
Independent Non-Executive Director
A
N
Appointed: June 2023
Skills and experience: Sir Kevin spent almost 20
years at BAE Systems plc predominantly in its
Military Aircraft Division and BAe Defence before
becoming Group Managing Director with
responsibilities for new business and international
strategy. Following this Sir Kevin joined the Board
of GKN PLC, the FTSE listed global engineering and
manufacturing company, initially leading the
Aerospace and Defence businesses, and then
serving 9 years as Group Chief Executive. He went
on to spend 4 years in Hong Kong as a Partner at
Unitas Capital and his non-executive career includes
8 years at Rolls Royce where he served as Senior
Independent Director.
Current external appointments: None
Statement of compliance
The Board confirms that for the year ended 31 March 2023, the principles of good corporate governance contained in the 2018 UK Corporate
Governance Code (the Code) have been consistently applied and all provisions complied with, except provision 24, as, following the retirement
of Russ Houlden in July 2022, the Audit Committee only had two members until the appointment of Jane Moriarty in December 2022. As the
Audit Committee had completed the work connected to the FY22 audit and knew that a search was well advanced to appoint Jane Moriarty,
it was satisfied that it could continue its oversight role and provide appropriate challenge to management with just two members for an interim
period of four months, during which time there was only two meetings of the Committee. With the appointment of Jane Moriarty, the
non-compliance with provision 24 was resolved, and the membership was increased to four in June 2023 with the appointment of Sir Kevin Smith.
Further information on the Code can be found on the Financial Reporting Council’s website at: www.frc.org.uk.
We have structured this Governance report to describe how the Company has applied the Code principles in line with its five categories:
110–115
116 –117
118–123
124 –130
131–152
Board leadership and Company Purpose
Division of responsibilities
Composition, succession and evaluation
Audit, risk and internal control
Remuneration
Babcock International Group PLC / Annual Report and Financial Statements 2023
109
Governance statement (continued)
Board leadership
and company purpose
Board leadership
Maintaining the highest standards of governance is integral to the successful delivery of our
strategy. Our governance framework ensures that the Board provides effective leadership in
both making decisions and maintaining oversight, mapping where accountability resides and
playing a key role in our internal controls.
The Board
The Board’s role is to lead the Group for the long-term sustainable success of Babcock by setting our strategy and supervising
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 117).
For other matters, authority is delegated to management according to 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 124 to 130.
Remuneration Committee
Determines the Remuneration policy for the
Executive Directors and is responsible for
oversight of the remuneration policies and
practices relating to 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 131 to 152.
See pages 122 to 123.
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. The Committee consists of the CEO, the CFO, the Chief Corporate Affairs Officer, the Chief Executive Nuclear,
the Chief Executive Marine, the Chief Executive Land, the Chief Executive Aviation, the Chief Executive Africa, the Chief Executive
Australasia, the Chief Executive Canada, the Chief HR Officer, the Chief Technology Officer, the Chief of Staff and the Group Company
Secretary and General Counsel.
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’.
See page 100.
Group Information
Security Committee
Provides governance,
direction and assurance that
the Babcock security posture
is appropriate and that
Babcock’s employees,
customers, other stakeholders
and reputation are protected.
Members include the Group
SIRO, CTO, CIO and CISO.
See page 85.
Corporate ESG Committee
Responsible for Group-wide ESG
initiatives, the management of
climate-related issues and driving
the wider sustainability agenda.
The Committee is chaired by the
Chief Corporate Affairs Officer
and members include the Chief
Human Resources Officer and the
Group Company Secretary and
General Counsel. Reporting to the
Committee are the Inclusion and
Diversity Steering Group and the
Carbon, TCFD and Communities
and Sponsorship working groups.
See page 67.
Group Risk Committee
Provides leadership and oversight
of the Group’s risk management
framework acting as an interface
between the Audit Committee and
the business, keeping the Principal
Risks and Uncertainties and their
mitigations and control under
continual challenge and review.
The Committee is chaired by the
Chief Corporate Affairs Officer
and the membership comprises the
Group Director of Internal Audit,
Risk Assurance and Insurance and
members of the Group Executive
Committee.
See page 89.
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Company purpose
The Board sets the Company’s Purpose and its alignment to strategy,
assessing the long-term sustainable future of the Group and its impact
on key stakeholders while keeping a watchful eye on the culture of
the Group to ensure that everybody understands their role in
promoting the success of the Company as they deliver against the
business model. Our Principles of be curious, think: outcomes, be
kind, collaborate, be courageous, and own & deliver underpin our
Purpose and drive the transformation of our culture.
Effective decision-making and oversight
The Board has an annual plan of business around which the Chair,
CEO and Company Secretary structure agendas and consider the
current status of projects, strategic work streams and the overarching
operating context. Standing agenda items and papers are presented
at each Board meeting; other matters are considered on a less
frequent but regular basis. Appropriate amounts of time are
allocated to items of business to allow for open and frank debate
and encourage informed decision-making.
All scheduled meetings consider
• Health and safety reports
• Operational update
• Financial update
• Investor relations update
• Legal/governance reports
• Conflicts of interest review
• Reports from Chairs of Remuneration, Audit and
Nominations Committees
Regularly the Board considers
• Strategy update, including ESG
• Review of major risks and emerging risks
• Review of financial and non-financial controls
• Delegated authorities
• Committee terms of reference
• Whistleblowing reports (with an additional annual review in
the context of the ethics review)
• Annual ethics review
• Modern Slavery Transparency Statement
• Deep-dive presentations from sectors, direct reporting countries,
and Group functions, for example IT and security, procurement
and pensions
• Results announcements, Annual Report and Notice of Annual
General Meeting
How the Board monitors culture
The Board believes that the right culture is essential to
support the delivery of strategy and seeks to monitor the
culture throughout the Group.
Leading by example
Our Directors and senior managers act with integrity and
lead by example, promoting our culture to our employees
through living our Principles which are: be curious; be
kind; be courageous; think outcomes; collaborate and
own & deliver.
Listening to our people
Our designated Non-Executive Director for employee
engagement visits sites, talks to employees and reports
back to the Board. Questions and feedback are received
from employees to the CEO’s dedicated email ’Ask David’
as well as from employee forums and surveys. This year
saw our first Group-wide employee engagement survey in
over a decade. The Board reviewed the results of the
survey and an action plan for responding to those results.
See page 78
Ethics and whistleblowing
Whistleblowing lines are available throughout our business
for reporting any departure from our values. The Board
reviews all whistleblowing reports, together with their
outcomes, on a regular basis as well as via an annual review.
Other cultural indicators
The Board regularly receives health and safety metrics and
thematic reviews through its regular ‘People’ reviews.
Further information on the Purpose and Principles
and cultural change overseen by the Board during
the year can be found on page 5 and throughout
the Strategic report.
Setting and overseeing strategy
During FY23 the Board held its dedicated strategy review meeting
in July 2022. The Board held the meeting off-site and combined it
with a visit to our Land operations at Bovington. At the meeting,
the Board assessed the Company’s current position against the strategic
plan announced in July 2021 and began to define its ten-year
strategic direction. In addition to its dedicated review, the Board
has regular updates throughout the year, as the Board believes that
strategy is a dynamic process which benefits from regular Board
engagement supported by dedicated deep-dive review sessions.
More information on the implementation of the
strategy overseen by the Board can be seen on
pages 6 and 7 and throughout the Strategic report.
Babcock International Group PLC / Annual Report and Financial Statements 2023
111
Governance statement (continued)
Board leadership and company purpose
continued
Factoring our stakeholders into our decision-making
In order to deliver the best outcome for the Company we have to understand our stakeholders’ priorities and then factor these into our
decision-making. Accordingly, the Board works to establish and maintain strong stakeholder relationships. An understanding of stakeholder
views at Board level is gathered via a combination of direct and indirect engagement.
Details of how the Directors receive information on our key stakeholders and how they engage with them directly to support effective
decision-making and oversight are set out below.
This section, through to page 115, forms part of the s172(1) statement which can be found in the Strategic report on page 57.
Further information on how the Company engages with its stakeholders can be found on pages 56 and 57.
How the Board engages
Information flow to the Board
Direct Board engagement
Measures reviewed by the Board
to assess effectiveness of engagement1
Customers
• Monthly written reports from
Executive Directors include
material customer matters
During the year the Executive Directors
had regular meetings with the Group’s
key customers.
• Order intake by sector
• Safety balanced scorecard
including leadership scores
• Sector CEOs and the Executive
Directors give briefings at
Board meetings
Investors
• Reports from Investor Relations
• Treasury reports
• Investor meetings/roadshow
• AGM
Employees
• Bottom-up reports from Lord
Parker, the Director designated
for workforce engagement
• Global People Survey, our first
uniform survey in over a
decade
• Top-down reports from
the CHRO
• Principal trade union meeting
with the CEO and the CHRO
• Whistleblowing reports
• Major operational programmes
RAG status
• Underlying operating profit
• Operating cash flow
• Analysis of share register
movements
• Investor feedback from results
presentations and investor meetings
• AGM feedback and voting from
shareholders and proxy agencies
• Participation rate and engagement
score in Global People Survey
• Safety balanced score together
with monthly overview of
significant safety events and total
recordable injury rate
• Ethics training compliance rate
• Gender pay-gap
• Subject matter of whistle-blowing
reports
The Board engaged directly with its
investors, principally through the
Executive Directors, David Lockwood and
David Mellors. The Committee Chairs are
available to meet shareholders when
required. During FY23, the Chair of the
Remuneration Committee consulted with
shareholders regarding the refreshing of
our Remuneration policy. Our AGM gives
the Board an annual opportunity to meet
with private investors and for them to ask
questions direct to the Board.
Lord Parker, the Director responsible for
workforce engagement, visited our
operations at Bovington, where we
support the British Army’s armoured fleet,
RAF Valley, where we support the RAF’s
flight training, and Devonport, where we
support the Royal Navy’s submarine and
surface fleet during the year, with over
100 employees attending 6 engagement
sessions. After his visits, Lord Parker gave
an overview of his findings to the Board.
Other members of the Board meet with
employees during their visits to our sites.
Additionally, the CEO engages with
employees Group-wide via vlogs and
employees can contact him directly via a
dedicated email address. Members of the
senior leadership team regularly present
to the Board.
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Information flow to the Board
Direct Board engagement
Regulators
• Information on the
relationships with regulators
is included in reports to the
Board where appropriate
Suppliers
• Briefings from Group Head
of Procurement on an
annual basis
• Supply chain risk considered
in reports
on major tenders
• Approval of the Modern Slavery
Transparency Statement
Communities
• Health, safety, and
environment updates
• Material issues are included in
the monthly reports from
Executive Directors or in sector
CEO briefings
• Annual Report review
The Board relies on dedicated functions
at a Group, sector or business unit level
and does not have direct contact with
regulators unless appropriate. Any material
issues are brought to the Board’s attention
through the monthly operational reports,
as appropriate.
Principal engagement is undertaken by
operational management and the Group
procurement function. The Chief
Procurement Officer reports annually to
the Board to give it oversight of the
function and its operation.
In the main, the sectors hold these
relationships at a local level where the
most relevant knowledge is concentrated,
with no direct engagement by the Board
of Directors. The Board continues to
believe that this level of engagement is
appropriate as any material issues are
brought to the Board’s attention through
the monthly operational reports or the
functional reports to the Board.
1. Measures in bold are reviewed at every Board meeting, others at least once a year.
Measures reviewed by the Board
to assess effectiveness of engagement
• Specific reports in Executive
Directors’ report (if any)
• Subject matter of whistleblowing
reports
• Modern slavery review
• Safety balanced scorecard including
total recordable injury rate
• Diversity performance against target
• Performance against carbon
emissions target
Babcock International Group PLC / Annual Report and Financial Statements 2023
113
Governance statement (continued)
Board leadership and company purpose
continued
How the Board took stakeholders’ interests into account when it considered its
key areas of focus
When making decisions to balance different stakeholder interests, the Board reviews what the Board believes most matters to each
stakeholder in the context of the long-term interests of the Company. In all its decisions, the Board also keeps in mind the Company’s
Purpose and Principles to ensure that all decisions are aligned with them. Principal decisions where the Board considered different
stakeholder interests include: decisions to divest certain businesses as part of the Group’s portfolio rationalisation programme; the FY23 UK
pay review; the development of our ESG strategy; and the exploration of growth opportunities. A fuller description of the Board discussions
around those decisions is set out below.
Stakeholders
most affected
More
information
Shareholders
Page 13
Employees
Page 107
Employees
Customers
Shareholders
Pages 87 to 90
Employees
Shareholders
Matters
considered
1
Stabilise
2
Enhancing
resilience
3
Driving
operational
excellence
Discussion and outcome
The Board believes that shareholders and employees support the turnaround plan
first set out in our FY21 Annual Report. A key part of that plan was the portfolio
rationalisation programme the purpose of which was to reduce the Group’s
complexity, increase its focus and increase the effective use of the Group’s capital
for the long-term benefit of shareholders and other stakeholders. The Board
received regular updates on the programme and has approved each of the
disposals along the way. In its discussions, the Board considered that for employees
staying with the Group and for shareholders it was important that the programme
strengthened the Group’s balance sheet and gave the Group a stable platform for
future growth. However, the Board recognised that for those working in the
businesses to be divested the process can be unsettling. The Board considered each
divestment separately and concluded that in the long run it would be better for
those employees to work in a business which fits better with its owner’s strategy.
On 1 March 2023, we were pleased to announce the conclusion of the portfolio
alignment programme with the completion of the sale of certain of our aerial
emergency businesses. Through the portfolio alignment programme, the Board has
significantly strengthened the Group’s balance sheet and focused the Group on its
core markets. The refocused Babcock is better able to align behind its Purpose
and Principles with the aim of unlocking its full potential for the benefit of
shareholders and employees.
This year has seen increasing geopolitical tensions, the return of high inflation and a
‘cost-of-living’ crisis. Through its engagement with stakeholders, the Board
understood that enhancing the Group’s resilience in uncertain times was important to
our stakeholders, although they were impacted in different ways. In its UK pay
review, the Board considered the impact of the ‘cost-of-living’ crisis. The Board
noted that the crisis impacted different levels of employees in different ways.
The Board also considered the competition for talent, which is a principal risk for
the Group. Having considered the Group’s employees, the Board then considered
the impact on shareholders, who had not received a dividend in FY21 or in FY22.
Taking the interests of its stakeholders into account, the Board balanced them and
decided to offer all UK employees a standard pay increase except for its higher paid
employees. The Board did this as it wanted to prioritise the lower paid employees
who were most impacted by the crisis. As regards shareholders, the Board believed
that not to offer a pay increase would risk seeing talent leave the Group, which it
could not replace with a consequent loss of knowledge and effectiveness, which
would not be in the Group’s or shareholders’ interests.
Our employees, customers and shareholders are clear that they want to work in,
deal with or own a business that works and delivers effectively and efficiently. In
response, over the year, the Board has put in place a number of initiatives to drive
operational excellence to improve Babcock effectiveness and efficiency. For
example, the Board considered the introduction of a new risk management
framework. The new framework has required material investment through the
recruitment of specialist Enterprise Risk Management professionals at a Director and
Head of Department level. In a turnaround, the Board has to carefully consider the
prioritisation of its investment opportunities. If it chose to invest in the new risk
management framework, the Company may not be able to invest in another
opportunity. In approving the new framework, the Board balanced the cost of
investment to the Group, shareholders, and employees against the improvements
that the Board expected to see arising from the new framework. The Board believed
that the Group and employees would benefit from the new framework as it would
give them better information to deliver better risk-based decision-making. For
shareholders, the new framework would improve the Group’s operational
effectiveness and better protect the Group’s value. Having considered the interests
of its stakeholders, the Board approved the new risk management framework.
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Governance
Financial Statements
Stakeholders
most affected
More
information
Page 6. page 14
and pages 58
to 86
Customers
Shareholders
Employees
Communities
Suppliers
Customers
Page 16
Shareholders
Employees
Matters
considered
4
Developing our
ESG strategy
5
Exploring growth
opportunities
Discussion and outcome
Through its engagement the Board understands the rising importance of ESG
matters to its stakeholders. For example, customers are making ESG
considerations part of their tenders; ESG has an increasing role in the
allocation of capital by investors; and employees and communities want to
understand their employer’s policy on ESG. The Board considered all these
issues in its review of the Company’s ESG strategy. When the Board was
considering the ESG targets, it weighed up the different priorities that each
set of stakeholders might have to design targets that met the aspirations of
customers, employees, shareholders, communities and suppliers, while at the
same time being achievable and practical. Throughout the year the Board
has overseen the implementation of this strategy with the aim of making the
Company more attractive for new shareholders and new employees and for
the benefit of all stakeholders.
Being successful in securing growth opportunities is important for our
investors, employees and customers because they want to see a strong
company. Customers want affordability, availability and capability.
Shareholders want a sustainable profitable business. Employees want a strong
company with opportunities to develop their careers. The Company’s bid for
Future Aircrew Training programme of the Royal Canadian Air Force was one
such growth opportunity that the Board considered in FY23. In its review, the
Board considered the priorities of each stakeholder in turn. For shareholders,
the bid was a significant growth opportunity that would enhance the
Company’s reputation in bidding for similar opportunities. For employees in
Canada, the bid would consolidate the Company’s position as a defence
company with significant capability. For customers, the Board considered the
Group’s capabilities, in particular the Group’s existing programmes for
delivering flight training programmes to the RAF and the French Air Force.
However, as well as balancing these priorities, the Board had to satisfy itself
that the Company was bidding at an appropriate price in light of the risk
transfer inherent in the bid for the protection of all its stakeholders. After the
Board’s review, the Company submitted its bid to the Canadian Department
of Defence and is awaiting its decision.
How the Board keeps s172 on its agenda
The Board makes sure that in its decisions it considers the long-term success of the Company and considers the interests
of its stakeholders 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. As part of those discussions, it takes into account the matters
the Directors must consider as part of their Section 172 duties.
• 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, to ensure that the Board receives relevant updates on matters of interest to our
stakeholders. The Board also receives detailed presentations from the sector CEOs delivering updates on key activities which feeds
into the decision-making process.
• 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; and portfolio alignment.
Members of the Board regularly engage with our investors and employees and the Board uses the stakeholder engagement
summarised on pages 56 and 57 and on page 112 and 113 to inform its decision-making process.
Babcock International Group PLC / Annual Report and Financial Statements 2023
115
Governance statement (continued)
Division of responsibilities
Defining Board responsibilities
The role specifications below set out the clear division of responsibility between the Executive and Non-Executive members of the Board,
which supports the integrity of the Board’s operations.
A more detailed description of these roles is available online at www.babcockinternational.com.
Executive
Chief Executive Officer
• Oversees the day-to-day operation and
management of the Group’s businesses
and affairs;
• Responsible for the implementation
of Group strategy as approved by the
Board, including driving performance
and optimising the Group’s resources;
• Accountable to the Board for the
Group’s operational performance; and
• Takes primary responsibility for
managing the Group’s risk profile,
identifying and executing new business
opportunities, and management
development and remuneration.
Chief Financial Officer
• Accountable to the Board for the
Group’s financial performance;
• Responsible for raising the finance
required to fund the Group’s strategy,
servicing the Group’s financing whilst
maintaining compliance with its
covenants; and
• Maintains a financial control
environment capable of delivering
robust financial reporting information
to indicate the Group’s financial
position.
Chair
Non-Executive
• Leads the Board and sets the tone and agenda, promoting a culture of openness
and debate;
• Ensures the effectiveness of the Board and that Directors receive accurate,
timely and clear information;
• Ensures effective communication with shareholders;
• Acts on the results of the Board performance evaluation and leads on the
implementation of any required changes; and
• Holds periodic meetings with Non-Executive Directors without the Executive
Directors present.
Senior Independent Director
• Acts as a sounding board for the Chair and, if and when appropriate, serves as
an intermediary for the other Directors;
• Available to shareholders if they have any concerns which require resolution;
• Supports the Chair with the annual Board evaluation and leads the annual
evaluation of the Chair’s performance; and
• Serves as an intermediary to other Directors when necessary.
Independent Non-Executive Directors
• Support and constructively challenge the executive team;
• Contribute to the development of the Company’s strategy;
• Provide an external perspective and bring a diverse range of skills and experience
to the Board’s decision-making;
• Contribute to Board discussions on the nature and extent of the risks the Company
is willing to take to achieve its strategic objectives;
• Satisfy themselves as to the integrity of financial information;
• Ensure financial controls and systems of risk management are robust and
defensible; and
• Play a primary role in appointing and, where necessary, removing Executive
Directors, setting their remuneration and succession planning.
Designated Non-Executive Director for employee engagement
• Gauges the views and feedback of the workforce and identifies any areas of concern;
• Communicates the views of the workforce to the Board;
• Ensures the views of the workforce are considered in Board decision-making; and
• Ensures the Board takes appropriate steps to evaluate the impact of any proposals
that influence the experiences of the workforce and considers what steps should be
taken to mitigate any adverse impact.
116
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Articles of Association
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. These are clearly
defined in their terms of reference (available online at
www.babcockinternational.com). Other responsibilities are
delegated to management under a delegated authorities matrix.
Summary of key matters reserved for the Board
• Group strategy
• 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 eight scheduled full Board meetings held in person
and two meeting held by video conference each financial year,
which includes a meeting dedicated to strategy. The Chair also
meets separately with Non-Executive Directors without Executive
Directors or other managers present. See table opposite for further
information about the meetings held during the year.
Conflicts of interest and independence
Babcock has a procedure for the disclosure, review, authorisation
and management of Directors’ actual and potential conflicts of
interest or related party transactions 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.
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).
Possible conflicts of interest authorised by the Board are reviewed
annually on behalf of the Board by the Nominations Committee.
The Committee also considers the circumstances set out in the
Code which could compromise an individual’s position of
independence. 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 Code.
Time commitment
The expected time commitment of the Chair and Non-Executive
Directors is agreed and set out in writing in their respective letters
of appointment, at which point the existing external demands on
an individual’s time are assessed to confirm their capacity to take
on the role. Further appointments can only be accepted with
approval of the Board following consideration of whether there
would be an impact on the independence and objectivity required
to discharge the agreed responsibilities of each role and whether
the resultant position is believed to be consistent with recognised
proxy advisor guidelines.
The Board is satisfied that each Director has the necessary time to
effectively discharge 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.
Board and Committee membership,
meetings and attendance
Board
Nominations
Committee
Audit
Committee
Remuneration
Committee
Number of
meetings held
Current Directors1
Ruth Cairnie
Carl-Peter Forster
John Ramsay2
Lucy Dimes2,3
Lord Parker2
Jane Moriarty3,4
David Lockwood
David Mellors
Former Directors
Kjersti Wiklund5
Russ Houlden6
8
8/8
8/8
7/8
8/8
7/8
4/4
8/8
8/8
3/3
2/3
3
3/3
3/3
3/3
3/3
3/3
3/3
–
–
–
–
7
–
–
7/7
6/7
–
2/2
–
–
3/3
3/3
8
–
8/8
–
5/5
–
3/3
–
–
3/3
2/2
1. Sir Kevin Smith Is not Included In the table since he was appointed since the
year end.
2. John Ramsay, Lucy Dimes, Lord Parker and Russ Houlden were each absent from
one board or committee meeting due to prior engagements.
3. Lucy Dimes was appointed to the Remuneration Committee In September 2022.
4. Jane Moriarty was appointed to the Board in December 2022.
5. Kjersti Wiklund retired from the Board after the AGM in September 2022.
6. Russ Houlden retired from the Board in July 2022.
Babcock International Group PLC / Annual Report and Financial Statements 2023
117
Governance statement (continued)
Composition, succession
and evaluation
Composition
The composition of the Board is kept under constant review by the Nominations Committee to ensure a balance of the skills, experience
and knowledge to lead the Group. At the date of this Report the Board comprises the Chair, who was independent on appointment, six
Independent Non-Executive Directors and two Executive Directors. All continuing Directors are required to offer themselves for re-election
by shareholders each year at the Annual General Meeting. Biographical details can be found on pages 108 and 109 and there is more
information on appointments to the Board in the Nominations Committee report on pages 122 and 123.
Board diversity policy
It is the Board’s policy that it is in the best interest of the Group and all its stakeholders for the Group to be led and peopled by individuals
from a range of skills, experiences, backgrounds and perspectives. This links directly to our strategy as the Group wants the best talents to
deliver its Purpose and its Principles. For the Board, this means that it is our policy to have women make up at least 40% of the Board by
2025 in line with the FTSE Women Leaders Review. In addition, we aim to have at least one Director from a minority ethnic background by
2024 in line with the Parker Review. In respect of the new Listing Rule 14.3, as at 31 March 2023, we met the target of having a woman in
a senior board position with Ruth as our Chair. However, we have not met the targets of one board member from a minority ethnic
background or 40% of the Board being women. As at 31 March 2023, with the appointment of Jane Moriarty, 37.5% of the Board were
women, although this percentage reduced on the appointment of Sir Kevin Smith to 33.3%. The reason for not meeting all the targets is
that the Board is still developing and strengthening, while it works towards meeting its policy, which means that progress is not even. The
Nomination Committee is aware of the challenge that it has to meet its policy and is actively undertaking searches to ensure that the Board
meets its policy in full. For more information on the Group’s diversity policy and its objectives, please see pages 75 to 77.
Board and executive management ethnicity
White British or other White (including
minority-white groups)
Mixed/Multiple Ethnic Groups
Asian/Asian British
Black/African/Caribbean/Black British
Other ethnic group, including Arab
Not specified/prefer not to say
Number of Board
members
8
Percentage
of the Board
100%
Number of senior
positions on the Board
(CEO, CFO, SID and Chair)
4
Number in Executive
Committee
14
Percentage of Executive
Committee
100%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Board and executive management gender
Men
Women
Not specified/prefer not to say
Number of board
members
5
3
–
Percentage of
the board
62.5%
37.5%
–
Number of senior positions
on the board (CEO, CFO,
SID and Chair)
3
1
–
Number in Executive
Committee
12
2
–
Percentage of Executive
Committee
86%
14%
–
The tables and charts on this page show the position at 31 March 2023, before the appointment of Sir Kevin Smith on 1 June 2023. Last
year this data was presented at the date of publication of the Annual Report but, for consistency of presentation going forward, the
reference date will be 31 March. The Company has collected the data on which the tables above are based by the individuals concerned
self-reporting their data on being asked about their ethnicity and gender.
Board information
Independence
Gender
Ethnicity
Nationality
1 Chair
2 Executive Directors
62.5% Men
37.5% Women
5 Independent Non-Executive Directors
100% White British
or other White (including
minority-white groups)
6 UK
2 Non-UK
118
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Succession
The Chair, Senior Independent Director and independent Non-Executive Directors are appointed for a three-year term, subject to annual
re-election by the shareholders. At the end of every three-year term, each Non-Executive Director’s tenure is reviewed before the term is
renewed. The term can be renewed by mutual agreement up to a maximum total tenure of nine years.
The ongoing replenishment of the Board is a key focus for the Nominations Committee and more information about succession planning
can be found in its report.
Director training
With the ever-changing environment in which Babcock operates, it is important for our Executive and Non-Executive Directors to remain
aware of recent, and upcoming, developments and keep their knowledge and skills up to date.
The Company arranges for new Non-Executive Directors to receive detailed business briefings on the Group’s operations and to make
induction visits to the Group’s principal sites. Training for new Directors, when appropriate, is arranged with external providers.
Non-Executive Directors may at any time make visits to Group businesses or operational sites and are encouraged to do so at least once per
year. Visits are coordinated by the Group Company Secretary’s office. Presentations on the Group’s businesses and specialist functions are
made regularly to the Board.
Our Company Secretary also provides updates to the Board and its Committees on regulatory and corporate governance matters.
Our new Directors receive comprehensive and tailored induction programmes. The programmes for Non-Executive Directors
typically involve:
• Meetings with the Executive Directors, the sector CEOs and functional leads
• 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
• Briefings on key contracts and customers
Board tenure1
Number of years
Sir Kevin Smith
0.08
0.6
1.5
2.7
2.7
2.8
3.1
Jane Moriarty
John Ramsay
David Mellors
The Lord Parker of
Minsmere GCVO, KCB
David Lockwood
Carl-Peter Forster
Ruth Cairnie
Lucy Dimes
1. At 30 June 2023.
4.3
5.3
Babcock International Group PLC / Annual Report and Financial Statements 2023
119
Governance statement (continued)
Composition, succession and evaluation continued
Evaluation
2022/23 Board performance review
Each year we conduct an evaluation to assess the skills, experience, independence and knowledge of the Board to confirm it is able to
discharge its duties and responsibilities effectively. The composition and diversity of the Board and its Committees and how well the
Directors are working together is considered, as well as the individual performance of the Directors and the Chair. Following an external
evaluation last year, this year the review was conducted by Carl-Peter Forster, the Senior Independent Director
Progress made on actions identified in the FY22 review
Recommendations for FY23
Recruit new Non-Executive Directors to strengthen the
Board further.
With the lifting of the COVID-19 restrictions, continue
to enhance the opportunities for Board members to
spend more time with each other and the business, in
order to strengthen Group dynamics and cohesion.
Develop further the Board’s oversight of Babcock’s
culture.
Further information
See pages 106 and 122 to
123
See page 107
See page 78
Update
In December 2022, the Nominations Committee was
delighted to announce the appointment of Jane Moriarty to
the Board. Jane strengthens the finance capability of the
Board by bringing over 30 years of finance experience to
the Board after an executive career with KPMG. Jane’s
appointment was followed with the appointment of Sir
Kevin Smith. The Nomination Committee had identified the
benefit of appointing a Non-Executive Director with a deep
knowledge of the Aerospace & Defence Sector. Sir Kevin
brings that knowledge after an executive career with BAe
Systems and GKN as well as being the Senior Independent
Director of Rolls Royce.
All the Non-Executive Directors attended the Board’s site
visit to Bovington, where they could see the improvements
in the delivery of our contract to support the British Army’s
armoured fleet. In addition, the Chair visited operations in
France, Rosyth and Devonport. Carl-Peter visited Devonport,
while Lord Parker visited Devonport and RAF Valley. Lucy
visited Devonport and the Group’s IT hub in Portsmouth.
John visited Rosyth, Faslane, Staverton and Devonport. Jane
has started her induction with a visit to Devonport.
As reported, the Board oversees Babcock’s culture through
a number of channels, including reports from the Chief HR
Officer, reports from Lord Parker in his role as Director
designated for employee engagement, and reports from
the Babcock whistleblowing line. In FY23, the Board’s
ability to oversee Babcock’s culture was further enhanced
by Babcock’s first global employee survey in over ten years.
The Chief HR Officer presented the results of the survey to
the Board, including a description of the Group’s strengths
and its weaknesses. The Board reviewed the Group’s
response plan to the survey.
Areas of assessment and findings for the FY23 Board evaluation
Recommendations for FY24
Strategy development
Control environment
Forward-looking agenda
Commentary and actions
Continue to develop the Company’s approach to strategy and to build out its strategy
framework.
Although the Group has improved its control environment, there remains still more to
do. The Board, through the Audit Committee, has to continue its oversight role of the
control enhancement programme to ensure progress and to ensure that progress is
embedded in the Group’s processes.
The Group should continue to develop its agenda to ensure the right division of time
between governance, operations, risk, culture and strategy.
120
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Babcock International Group PLC / Annual Report and Financial Statements 2023
121
Governance statement (continued)
Composition, succession and evaluation continued
Nominations Committee report
Ruth Cairnie
Chair of the Nominations
Committee
Key facts
The Committee
Ruth Cairnie chairs the Committee.
The other members throughout the year were all
the Non-Executive Directors.
For biographies of the members, please see pages 108
and 109.
For attendance, please see page 117.
Highlights
• Appointment of new Non-Executive Directors
Key responsibilities
• Board and Committee composition
• Succession planning
• Talent pipeline and diversity policy
• Board appointment process
Dear fellow Shareholder
This report sets out the work of the Nominations Committee over
the year. The Committee is responsible, on behalf of the Board, for
ensuring the Board’s and Committees’ structures and membership
provide the skills, experience, diversity and knowledge required to
support delivery of the strategy, aligned to our Purpose and our
Principles. It also considers the future development of the Board,
reviews succession planning for the Group Executive Committee
and reviews progress across the Group on Inclusion and Diversity
and on Culture.
Composition
The Committee has developed a skills matrix which maps the skills
needed to fulfil the Board’s role both currently and looking ahead
to implementation of the strategy. The skills matrix is kept under
review and is used to identify any gaps that need to be addressed.
Where this involves the potential appointment of a new Director,
the Committee will appoint an external search firm with a clear
specification of objective criteria based on the skills matrix, and
with instruction to seek both female and male candidates, from as
wide a range as possible of diverse ethnic and social backgrounds.
This reflects the Board’s firm belief in the value of diverse inputs.
In FY23, with the retirement of Russ Houlden in July 2022, the
Committee recognised the need to enhance the Board’s financial
expertise, in particular to support John Ramsay and the Audit
Committee with the oversight of the Company’s control enhancement
programme. The Committee appointed the external search firm,
MWM, to identify candidates who would meet this criterion while
also contributing more broadly to the Board’s work. MWM’s services
have been used previously by the Committee, but it has no other
connections with the Company or any of its directors. After a
thorough process, in December 2022, we were delighted to
welcome Jane Moriarty to the Board, who brings financial expertise
from her long executive career at KPMG, extensive experience of
business issues from her restructuring work and diverse non-
executive experience in recent years.
122
Babcock International Group PLC / Annual Report and Financial Statements 2023
Governance statement (continued)
Strategic report
Governance
Financial Statements
As we move beyond the second year of Babcock’s turnaround,
looking ahead we have identified operational and strategic
experience in the Defence sector as an area to strengthen in the
Board, as we increase our focus on the sector and anticipate the
navigation of future strategic opportunities and challenges.
Again using MWM, we were pleased to announce on 24 May 2023
that Sir Kevin Smith would be joining the Board at the beginning of
June. Sir Kevin has an in-depth knowledge of Defence having spent
most of his career working in the sector, first at BAE Systems for
over 20 years and then at GKN, where he was the CEO for eight
years. He is also an experienced Non-Executive Director having
served on the Board of Rolls Royce.
In terms of overall diversity, the Committee recognises the benefit
of experience from outside the UK as we consider international
opportunities for growth. The Board currently has UK nationals who
have spent a significant proportion of their careers working outside
the UK, as well as two European nationals. The Committee is
considering also appointing a candidate who would bring a
non-European lens to its discussions.
Every year the Committee reviews the independence of each
Director to ensure that any conflicts of interests are identified and
dealt with in an appropriate manner. The Committee also considers
other commitments of each Director to assure the Board that they
have the appropriate time to commit to the Company. This is in
addition to the assessment that the Committee carries out when
the Board first appoints a Director, and the assessment it makes
whenever there are changes to a Director’s portfolio. This year, the
Committee noted that John Ramsay has shown exceptional
commitment in his role as Chair of the Audit Committee, organising
additional Committee meetings and regular meetings outside the
Committee with the external and internal audit teams, as well as
with management, to lead the oversight of the Company’s audit
process. It also noted that Carl-Peter Forster had been appointed as
the chair of Vesuvius plc but had stepped down from his roles at IMI
plc; Carl-Peter has this year led the policy review for Remuneration
in his role as chair of the Remuneration Committee and has spent
time consulting with shareholders on it.
Talent, Leadership and Succession
The Committee keeps Babcock’s leadership needs under review,
providing assurance to the Board that Babcock has the skills and
capabilities to progress its strategy and strategic actions now and
in the future.
This year, the Committee reviewed the Company’s plans to refresh
its approach to senior leadership succession and talent management
by establishing a common framework. The framework shows our
employees, including our leadership teams, where they are and the
possible pathways in front of them. This provides clarity on the
differences in expectations as individuals move up through the levels.
Diversity, Inclusion and Culture
At Board level, as the Committee works on composition and
develops the Board’s membership over time, it is planning for the
Board to meet the FTSE Women Leaders Review target for 40%
women by 2025, and the Parker Review target of at least one
minority ethnic director by 2024 and has searches ongoing to do
so. However, as a relatively small board, the Board’s diversity
statistics can be susceptible to material movement on the basis
of an individual appointment or retirement.
For example, on Jane’s appointment, the Board was 37.5% female,
but that percentage reduced on Sir Kevin’s appointment. So, the
journey to achieving the targets will not be even.
Looking at diversity across the organisation, the Committee
recognises that the transparency and clarity introduced with the
Babcock Role Framework will be very supportive, allowing
employees a clear sight of the criteria for each role within the
Group. It will also allow role models to become more visible.
To support the Remuneration Committee in setting performance
targets, the Committee has probed Management’s targets on gender
(30% of the senior leadership to be female by 2025 and 30% of
employees to be female by 2030) and concluded that these
represent sufficient ambition, taking into account the locations of the
Group’s principaI sites and the sectors in which the Group operates.
The Committee also regularly reviews the broader approach to
inclusion as an important element in creating a people-centred
business which supports and empowers everyone to unlock their
potentiaI. Babcock’s approach is based on three pillars: insight & data,
to enable an evidence-led approach; policy & programmes, for the
creation of a consistent approach and the enablement of social
mobility and community engagement; and, education & awareness.
The Committee receives regular updates from the Group Head of
Diversity and Inclusion. This year the Committee considered the
Group’s plans for attracting female talent, including the transformation
of its hiring processes. For more detail, please see page 76.
The focus on inclusion is an important factor in resetting Babcock’s
culture which is underpinned by our Purpose – creating a safe and
secure world, together – and our Principles – be curious, think:
outcomes, be kind, collaborate, be courageous, own & deliver.
These are at the heart of everything that we do. The Committee uses
a variety of information sources to assess for itself Babcock’s culture
and progress. There are regular reviews in the Board from the Chief
HR Officer on the progress of the Group’s many people initiatives.
In addition, we have discussions with executives during Board/
Committee presentations, discussions with employees during site
visits, reports from Babcock’s whistleblowing channels, and updates
from Lord Parker in his capacity as Director designated for employee
engagement. Significantly, this year for the first time, we had the
results of Babcock’s first global employee survey in over a decade.
Evaluation
The Board reviews its effectiveness on an annual basis. For a full
report on the Board annual evaluation, please see page 120. Based
on the Committee’s work over the past four years, the Board has
been re-shaped and developed with new Executive Directors and
new Non-Executive Directors. We have a breadth and depth of
complementary skills and experiences around the table with diversity
in terms of gender and background. As supported by this year’s Board
Evaluation, the Board functions well with good dynamics, setting
the tone from the top by demonstrating trust, respect, and openness
between all the Directors and alignment behind our Purpose.
I hope this report gives you an understanding of the work of the
Committee over FY23. If you do have any questions, I would
welcome hearing them at this year’s AGM.
Ruth Cairnie
Chair
Babcock International Group PLC / Annual Report and Financial Statements 2023
123
Governance statement (continued)
Audit, risk and internal control
Audit Committee report
John Ramsay
Chair of the Audit
Committee
Key facts
The Committee
John Ramsay chairs the Committee.
John is a Chartered Accountant, and formerly the Chief Financial
Officer of Syngenta AG, as well as being an experienced Audit
Committee chair (see page 108 for John’s full biography). The
Board has designated him as the financial expert on the Committee
for the purposes of the UK Corporate Governance Code.
In FY23, the other members of the Committee were Lucy Dimes,
Russ Houlden until his retirement in July 2022, and Kjersti Wiklund
until her retirement in September 2022. In December 2022, Jane
Moriarty joined the Board and the Committee. Jane is a qualified
Finance professional with an in-depth experience of audit committees,
both as an advisor and a member. In June 2023, Sir Kevin Smith
joined the Board and the Committee. Sir Kevin brings his
experience as a seasoned FTSE100 executive, having led GKN as
CEO for eight years. All members of the Committee are
independent Non-Executive Directors. Please see pages 108 and
109 for their biographies and page 117 for attendance.
During the year the Committee invited the Chair of the Board,
other Non-Executive Directors, the CEO, the CFO, the Director of
Group Finance, the Deloitte external audit team, the BDO internal
audit team and key senior management to attend their meetings,
as appropriate.
Typically, after Committee meetings, the Committee meets
separately with the external audit lead partner from Deloitte and
also frequently meets with the internal audit lead partner from BDO
to give them the opportunity to discuss matters without
management being present.
In addition, the Committee Chair maintains regular contact with
the external audit lead partner and the internal audit lead partner
between meetings, often without the presence of management.
Highlights
• Oversight of the implementation of improvements to the control
environment throughout the year
• Review of the key management judgements and estimates for
the FY23 financial statements including the T31 provision
• For the first months of FY23, oversight of Deloitte’s first audit of
Babcock
• Supporting the establishment of an internal audit function and
the on-going transition of internal audit from BDO
Key responsibilities
• Reviewing the scope and the results of the statutory audit and
other financial statements
• Reporting to the Board on the effectiveness of the audit process
and how the Company safeguards the independence and
objectivity of the auditor
• 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
124
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Dear fellow Shareholder
This is now my second year as Chair of the Audit Committee. As I
reported last year Russ Houlden and Kjersti Wiklund stood down
from the Board and the Committee in July and September 2022
respectively. I thank them both for their support in seeing through
the FY22 cycle. I welcome Jane Moriarty and Sir Kevin Smith as
members of the Committee and look forward to getting the benefit
of their valuable experience. This is also the second year of Babcock’s
turnaround strategy. As can be seen throughout the governance
section of this Annual Report, the Board and its Committees have
played their full part in supporting this turnaround. For the Audit
Committee, the focus has been on the oversight of Babcock’s
improvement in financial reporting and controls.
FY22 Audit
The FY22 audit was the first year with Deloitte as the external
auditor. They completed their first audit in July 2022. The
Committee was pleased with the effectiveness of the audit and the
rigour and challenge applied by management and Deloitte during
the process. The FY22 audit did reveal weaknesses in Babcock’s
financial reporting that it is addressing in its control improvement
plans. The Committee’s decision to consider the FY22 as effective
was supported by the fact that so far, no new Group issues have
arisen out of the audits of the Group’s subsidiary statutory accounts,
which are conducted to a much lower level of materiality, to
change any of the material judgements taken in the FY22 audit.
Blueprint of Control Improvements
Since the Contract Profitability and Balance Sheet Review in FY21,
Babcock has embarked on a major programme to improve its
operational and financial controls with the objective of being in line
with best-in-class FTSE companies in controls including upgrades
envisioned by the UK Government on Corporate Governance
Reform. This is a multi-year endeavour which will continue into FY24
with the Company targeting to reach the highest standards in FY25.
During the year the Company produced a detailed and
comprehensive plan called the ‘Blueprint of Control Improvements’
covering over 500 control improvement actions. The Committee
oversaw this compilation by receiving regular updates and reports
from management on its progress. The basis of the ‘Blueprint of
Control Improvements’ was the combined learnings from the FY21
Contract Profitability and Balance Sheet Review and, the FY22
control insights report from Deloitte following the completion of
their FY22 audit as well as recommendations arising from internal
audits, all combining to form a comprehensive improvement plan
for the whole Babcock Group. This includes for financial reporting a
mapping of key reporting risks to 15 key controls which the Company
has had independently reviewed and benchmarked for adequacy
and effectiveness. The Company had implemented these controls
by the close of FY23.
The scope of the programme covers not only financial controls but
also commercial and operational controls and its objective is for
Babcock to be managing risks and its control environment in line
with best-in-class FTSE companies. Some notable achievements in
improved controls include:
• Appointment of a new Group Director of Internal Audit, Risk
Assurance & Insurance as Babcock starts to insource the
Internal Audit function
• The establishment of a new Risk Committee, as a sub-committee
of the Group Executive Committee to provide executive
management leadership and oversight of the Group’s
management of risk
• Standardisation of commercial and operational reviews including
financial and accounting impacts and a 12-monthly rolling forecast
with profit and cash phasing for all major projects/contracts
• Completion of a global banking services transition to BNP,
including virtual cross currency cash pool, zero based daily cash
sweeps, a significant reduction in numbers of bank accounts and
use of a new banking platform
The Committee tests and challenges the implementation and
effectiveness of these controls by receiving regular reports from the
management team on progress on key issues, including
management judgements and the Blueprint of Controls
Improvements. The Committee has further assurance through the
internal and external audits.
During the year there has been several actions to improve overall
finance capability in support of core finance areas and
improvements in financial and operational controls. These actions
include extended training sessions across the Group; establishment
of a centralised Finance Business Services Team of 150
professionals to deliver standard processes and accounting controls
for UK operations; upgrade in Treasury and Tax capability; and the
strengthening of the general Finance function through recruitment
of additional experienced finance professionals.
The progress and further plans in financial and operation control
improvements set out above support Babcock’s commitment to
deliver the business turnaround.
I would like to thank all those involved for their dedication and hard
work in achieving the improvements that they have delivered over
FY23. We understand that there is a lot more to do before the
improvement plans are fully implemented but the Committee
believes that the improvements made in FY23 are substantial and
provide a solid base from which further improvements can be made.
Babcock International Group PLC / Annual Report and Financial Statements 2023
125
Governance statement (continued)
Audit, risk and internal control continued
The improvement programme should provide confidence to
stakeholders that Babcock will deliver a cost-effective service to
customers and employees will be motivated to meet those standards.
Priorities for FY24
Looking to FY24, the Committee will continue to play its part in
Babcock’s turnaround by:
Financial Reporting Council
As previously reported, the Financial Reporting Council has been
reviewing the audits by PwC of Babcock’s financial statements for
FY17, FY18, FY19 and FY20. On 8 March 2023, the Council issued
its Final Settlement Decision Notice in respect of PwC’s FY17 and
FY18 audits and imposed sanctions on PwC and two former audit
partners. Babcock has reviewed the Council’s Decision Notice and
is confident that it has addressed the issues in the PwC audits found
by the Council through a combination of the Contract Profitability
and Balance Sheet review, the disposal of businesses through the
portfolio rationalisation plan, and the Blueprint of Control
Improvements. The Council continues to review PwC’s audits of the
Company’s FY19 and FY20 financial statements. During the course
of its review, the Council has asked the Company certain
clarification questions, which it has answered. Other than that
Babcock has had no other role in the review. For more detail
see page 130.
• Continuing its oversight of the implementation of Babcock’s
control improvements plan and capability upgrade though
regular management reports to allow the Committee to oversee
progress;
• Monitoring the planning and successful transition to the new
insourced internal audit; which the Group Director of Internal
Audit will report on both to the Committee as a regular attendee
of its meetings and to the Chair of the Committee in their
one-to-one meetings;
• Challenging management to achieve and maintain high
standards of internal control, including the robust challenge of
key judgements;
• Ensuring high quality external and internal audits to provide the
necessary independent assurance of the Company’s progress;
and
• Overseeing an upgrade in process and detail in the Company’s
assessment of fraud risk.
Finally, I would like to thank my fellow Committee members for
their support and work over the year. This year, like the last year,
has been busy for the Committee with additional meetings and
deeper dives on issues necessitating additional time commitment
from Committee members. I have greatly appreciated the extra
commitment that my fellow members have given, as it has allowed
the Committee to provide the appropriate level of oversight and
challenge on behalf of the Company’s stakeholders.
As ever I am available to all shareholders to discuss any significant
matter related to the Audit Committee’s work. All the Committee
will all be at the FY23 AGM and hope to meet as many of you as
possible. We will be available to answer any questions you may
have on this report or the Committee’s activities.
John Ramsay
Committee Chair
126
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Risk management and internal control systems
The Board has ultimate responsibility for risk management and
internal control systems and has delegated to the Committee the
review of the effectiveness of these systems to assist it in
discharging this responsibility.
The Committee reviews internal financial controls: that is, the
systems established to identify, assess, manage, and monitor
financial risks. In FY23, the Committee reviewed the internal
financial controls at each of meetings, bar one. The Group
Executive Committee, chaired by the CEO, retains accountability
for the management of operational risks, including related controls
and mitigating actions. Sector CEOs and function directors are
required to ensure that appropriate processes, including the
maintenance of risk registers for both the sector itself and individual
constituent lines of business, exist to identify and manage risks; and
to regularly carry out formal risk assessments. Please see pages 87
to 103 for further information on the Group’s principal risks, risk
management process and internal control environment.
The centrepiece of the Group’s system of controls is the Babcock
Document of Control, which was introduced in FY21 and
subsequently supplemented by the “Blueprint of Control
Improvements” described above. The Document of Control is a
comprehensive description of Babcock’s key financial and non-
financial controls, matched against risks, that the Group expects to
be in operation across the Group. The Document splits the controls
between mandatory (those the Group must have in operation or
introduce without delay if not already in operation) and expected
(those the Group must have a plan to implement). In FY23 there
was no significant non-adherence.
The Document acts as a risk and control matrix. Each business
currently reports adherence to the Document on a six-monthly
basis. Internal audit has a role in independently reviewing these
reports. It is expected that the Document will form the basis of
Babcock’s response to any regulatory initiative flowing from the UK
Government’s stated aim to reform corporate governance.
Legacy control systems still exist from the Group’s previous
acquisition activity, and other key control processes, including IT,
are not fully standardised and implemented across the Group.
The implementation and operation of certain key controls is
decentralised to business units. However, they operate under the
framework of the Group’s Document of Control and oversight of
Sector and functional control.
As described in the Committee Chair’s report above, the Group has
embarked on a major programme to improve its control environment.
The basis of this programme has been learnings and experiences,
principally from the Contract Profitability and Balance Sheet review,
as well as the insights from Deloitte’s FY22 audit and recommendations
from internal audits. This has been combined into one programme,
the Babcock Blueprint of Control Improvement covering commercial
and operational as well as financial controls. The Blueprint provides
a mechanism for planning, prioritising, and tracking the implementation
of all improvements, as well as a mechanism for engaging with all
those involved in the programme. The Group reviews progress
against the programme and tests to ensure the effectiveness of
implementation. This includes for Financial Reporting a mapping of
key reporting risks to 15 key controls which have been independently
reviewed and benchmarked for adequacy and effectiveness.
The Company has implemented these controls and reports on its
progress to the Audit Committee.
The Committee, on behalf of the Board, reviews the effectiveness
of the Company’s risk management and internal control systems on
an annual basis. The Committee conducts this review through the
receipt of a report from the Company’s finance team, including the
Group Director of Internal Audit. The report describes the Group’s
risk management and internal control and demonstrates that the
Company is providing the Board with the relevant information in a
timely manner to fulfil its monitoring role. This year, after its review,
the Committee was satisfied with the progress made by the
Company to improve its risk management and internal control
systems through the Blueprint. In particular, the Committee was
satisfied that the Company has now effectively implemented the
15 key controls for Financial Reporting as required by the Blueprint.
External audit
FY22 was the first year of the external audit being conducted by
Deloitte. Following the close of the FY22 audit, the Committee
wanted to achieve a more timely audit in FY23. Consequently, it
conducted, with management and Deloitte, a full review of the
effectiveness of the audit process. This review, culminated in a
‘lessons learnt’ combined action plan. The essence of the action
plan was a FY23 audit milestone execution plan, which set out 13
key steps to deliver the FY23 audit. A principal component of the
milestone plan was to have for the first time a P10 (31 January)
Hard Close of the Group accounts with the aim of undertaking the
maximum amount of work possible prior to the year end on 31
March 2023. The action plan also included other elements aimed
at delivering a more timely audit for FY23 such as ‘lunch & learn’
sessions between the Babcock finance team and Deloitte to
discuss key topics such as audit evidence. The Committee
believes that the Company would have been able to report its
FY23 results by 30 June 2023 had it not been for the extended
audit work on the T31 provision.
Deloitte and management reported on progress of the FY23 audit
against the plan to the Committee. So as not to distract
management and Deloitte from planning an advanced full year
audit, the Committee did not commission Deloitte to provide a
review opinion on the interim financial information. However, the
Committee remains committed that Deloitte should conduct such
a review in the future when further progress has been made on a
sustainable advanced full year audit timetable.
Deloitte presented their audit plan to the Committee which set
out the scope and objectives of the audit, together with an
overview of their planned approach, an assessment of the Group’s
risks and controls, and proposed areas of audit focus together with
proposed Audit Quality Indicators (AQI’s). This was reviewed and
approved by the Committee and included agreeing the scope
(98% of revenue and 98% of profit before tax) and the level of
materiality (£15.6 million).
The total fees paid to Deloitte in the year ended 31 March 2023
equalled £10.45 million. All of these fees were in respect of audit
work, with no non-audit services performed by the external auditor
during the year. An analysis of the fees paid to the external auditor
during the year can be found in note 4 to the Group Financial
Statements on page 200.
Babcock International Group PLC / Annual Report and Financial Statements 2023
127
Governance statement (continued)
Audit, risk and internal control continued
The Committee recognises that there may be some element of
non-audit services for which the Group might wish to use the
external auditors. The provision of non-audit services is controlled
by a policy which states that the external auditors will not be
engaged to provide any element of non-audit services without
approval in advance – from the CFO for fees up to £10,000, from
the Committee Chair for fees between £10,000 and £100,000,
and by the Committee for fees over £100,000.
The Independent auditor’s report to the members of the Company can
be found on pages 159 to 174.
The Company complies with the Statutory Audit Services for Large
Companies Market Investigation (Mandatory Use of Competitive Tender
Processes and Audit Committee Responsibilities) Order 2014.
Independence
The Committee is responsible for the development, implementation,
and monitoring of the Group’s policies on services from external
auditors, which are designed to ensure a high quality and effective
audit and to maintain the objectivity and independence of the
external auditors. In addition to an independence review conducted
by management, Deloitte has provided specific assurance of its
independence, while the Committee has considered the arrangements
and safeguards that Deloitte has in place to maintain its independence
and objectivity. The external auditors follow regulatory requirements
to maintain the objectivity of the audit process; these stipulate a
five-year rotation policy in relation to the senior engagement
auditor. Makhan Chahal is Deloitte’s lead audit partner and is in his
second year, having started in FY22. The Committee is satisfied that
Deloitte remain independent and objective.
Audit Quality
The FRC’s Audit Quality Review (AQR) team monitors the quality of
audit work of certain UK audit firms through inspections of a sample
of audits and related procedures at individual audit firms. Deloitte
has provided the Committee with the findings from its latest
firm-wide AQR report, the initiatives being taken in respect of the
evolution of its firm-wide audit approach and methodology, and how
those are transferred to the Babcock audit. In FY22, the Committee
agreed a series of audit quality indicators (AQIs) with the external
audit team, focused on phasing of audit hours, timeliness of deliverables
and subsidiary audit progress. In FY23, the Committee reviewed the
FY22 AQIs and agreed that they continued to be relevant for the
FY23 audit with the addition of one indicator to measure adherence
to milestones by both the Company and Deloitte. The Committee
uses the AQIs to measure and monitor audit quality as they are key
metrics relating to the audit. With the assistance of the AQIs the
Committee can assess and challenge the execution and quality
of the audit.
In addition to the AQIs, the Committee Chair and the CFO met
with Deloitte during the year, to ensure priorities were adequately
resourced by management and Deloitte and to execute the
year-end audit timetable. During the year the Company Chair, the
Committee Chair and the CFO met with senior representatives of
Deloitte including the Lead Audit Partner to discuss the Company’s
plans and the progress of its business turnaround including commercial,
operational, and financial control upgrades, appreciating that this
will take a few years to complete.
The Committee reviewed the FRC’s proposed ‘Minimum Standard
for Audit Committees’ issued for consultation. The Committee
considered that it was largely complying with the proposed standard
but made some minor amendments to its Terms of Reference.
Internal audit and assurance
In FY23, the Group continued its policy of outsourcing its internal
audit activity to BDO. As in previous years, BDO, after discussions
with management, agreed an internal audit plan with the Committee.
The plan covered lines of business and countries, with proposed
effort directed towards financial and other risk themes. Over FY23,
BDO has implemented the agreed plan and has reported back to the
Committee. BDO summarises the findings of its internal audit reviews
so that the Committee can focus its discussions on unsatisfactory
findings and on the action plans in place to address them.
Particular areas of focus for internal audit during FY23 included
continuation of financial control audits in line with the increased
focus on control improvements, audits of key programmes such as
T31 and Future Maritime Support Programme, and a number of
risk-based reviews such as health & safety. In addition, internal audit
has continued to maintain a programme of follow-up audits to
assess the timely implementation of internal audit recommendations
by the businesses and key matters from the internal audit reviews.
By the end of FY23, internal audit had made 39 recommendations
across the ten internal audits completed in FY23. Of those
recommendations, the Company had implemented 12, a further
22 were not due for completion, and five were overdue. In respect
of the overdue recommendations, one relating to delegated authority
limits in New Zealand has been implemented, but internal audit is
waiting for the support before closing the recommendation. The
other four relate to the design and effectiveness of the governance
environment in respect of the Company’s Future Maritime Support
Programme. Internal audit has received a progress update and
agreed revised dates for their completion. The Committee was
satisfied with the pace of implementation of the recommendations.
Through its review of the internal audit plan, its review of the
reports of BDO, and its review of an external quality assessment of
BDO’s internal audit service delivery, the Committee was satisfied
with the effectiveness of the internal audit. However, as reported
last year, in FY22, the Committee decided to move from outsourcing
the Group’s internal audit activity to insourcing the internal audit
activity. Early in FY23, the Company appointed a Group Director for
Internal Audit, Risk Assurance, and Insurance, who has started to
build her team with the appointment of a Head of Risk Assurance
and Insurance and a Head of Internal Audit with an intention to
appoint a further three senior Internal Auditors. The internal audit
activities have now started to transition from BDO to the internal
team, but it is expected that there will continue to be some
co-sourcing where specialised expertise is required to conduct a
particular audit. The Committee is monitoring this transition and
receives regular updates from the Group Director on progress.
For FY24, the Committee will continue to monitor the transition of
internal audit. It has approved an internal audit plan for FY24 prepared
by the Group Director for Internal Audit, Risk Assurance, and Insurance.
The plan includes the proposed audit approach, coverage, and
allocation of resources. In approving the FY24 plan, the Committee
considered a range of factors, including the principal risks of the Group
and the resources available to the Group. The key points in the
FY24 plan include:
• The establishment of the Internal Audit team
• Continued focus on internal financial controls assurance;
• A deep dive into the Group’s French operations
• A review of the newly established Financial Business Services team
• A review of certain of the Group’s key contracts.
128
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Financial statements
One of the main roles of the Committee is to review the financial
statements of the Company on behalf of the Board so that the
Board can give its responsibility confirmation (please see page 158)
that the Company’s financial statements give a true and fair view of
the assets, liabilities, financial position, and profit or loss of the
Company, as well as confirming that the annual report and financial
statements, taken as a whole, are fair, balanced, and understandable.
The Committee reviews all significant judgements and estimates
made by management in preparing the financial statements, which
include the estimates of future performance inherent in the Going
Concern and Viability statements (see the Going concern and
Viability statement on pages 104 and 105). In FY22, the
Committee reviewed the period covered by the Going concern and
Viability statement and agreed to extend it to five years, being the
period covered by the Group’s business plan. As part of its review in
FY23, the Committee considered again the period to be covered
by the statement and agreed that the five-year period remained the
most appropriate timespan for this Group given the business
planning cycle, the long-term nature of many of the programmes
and insight gained from the turnaround. In assessing going concern
and viability, the Committee has considered cash flow projections
and timings, which include assumptions, as far as they can be
made, in respect of climate change, with related sensitivity analysis
and stress-testing scenarios, borrowing facilities available to the
Company and covenants.
Given that Goodwill impairments were required in FY22 the
Committee paid particular attention in FY23 to management’s
impairment reviews and the Auditor’s opinion thereon. The
Committee reviewed the Company’s goodwill assessment and
considered the key assumptions, which were the number of cash
generating units, the cash flow assumptions embedded in the
Company’s five-year plan, the cash flows in perpetuity, which use
external estimates of GDP growth rates, the discount rates used and
the approach to central contingencies and Corporate surpluses/
deficits. The assessment also included sensitivity analyses on
inflation and climate change. Following its review, the Committee
was satisfied that no impairment of goodwill was required in FY23.
In FY22, the Company made its first Task Force on Climate-related
Financial Disclosures following the introduction of the Listing Rule
9.8.6. During FY23, the Group has built on the work done in FY22
to be in a position to provide enhanced disclosure on environmental,
social and governance (ESG) issues. Further detail on climate risk
and opportunity scenario planning is set out on page 72.
The essence of Babcock’s business involves commercial contracts
frequently involving significant upfront investment and with many
extending over multiple years. Consequently, management in
preparing the financial statements has to make a number of key
judgements and estimates that are specific to each contract. An
important focus for the Audit Committee has been to review and
challenge management on these key judgements and estimates,
with reference to revenue recognition under IFRS15, which include:
• The Company’s Type 31 Programme, where the Committee
reviewed the process for the release of the announcement dated
20 April 2023, which disclosed that the Company had been unable
to reach agreement with the MoD about the contractual position
regarding additional costs resulting from certain macroeconomic
changes that were not foreseen at contract inception.
The release included the announcement of a one-off provision of
between £50 million and £100 million. The Committee carefully
reviewed the Company’s disclosure processes leading up to the
announcement, including the support for the preliminary assessment
of the provision. After its review, the Committee was satisfied with
the robustness of the Company’s approach. After the release, the
Committee convened a dedicated meeting to consider the 14
key judgements that underpinned the revised estimate outturn at
completion. The meeting was attended by the project team so
that the Committee could challenge the process by which the
project team had produced their revised estimate as well as the
prudence of the judgements themselves. After its review, the
Committee approved the Company’s judgement, which also
formed part of the audit by Deloitte.
• The Company’s Future Maritime Support Programme, where the
Committee considered the way in which the Company demonstrated
the transformation savings achieved on the Programme and those
planned to accrue. Under the programme, the Company has to
deliver certain savings over the five-year lifetime of the programme.
The realisation of these savings is a key estimate for the Company.
The Committee considered the maturity of each category of saving
– whether the customer had signed off on the saving, whether it
was embedded in the Company’s cost base, or whether the
Company had taken the saving through its gated review process.
After challenging the robustness of the Company’s evidence, the
Committee approved the Company’s judgement,
• A fixed-price programme within the Nuclear sector, which is close
to completion, where the Committee tested the management
judgements on outstanding work and therefore costs to complete.
In particular, the Committee challenged the Company’s position
on whether it had a right to apply for a final price adjustment
under the Single Source Contract Regulations. After its review,
the Committee accepted the Company’s position.
• The Company’s Defence Support Group contract, where the
Committee reviewed the accounting for the work that the
Company expected to contract in year ten of the programme as
well as the accounting for exit costs. Having considered IFRS15
carefully, the Committee was satisfied that the Company was
adopting the appropriate accounting,
• Inflation and its impact on the Group’s revenue and cost for each
of its contracts was a key accounting judgement for the
Company, as the Company accounts for these contracts over
time under an Estimate at Completion model with the Company
recognising profits based on the final expected contract outturn
margin. Changes in future inflation assumptions therefore impact
profits in FY23. The key inflation assumption for the Company’s
contracts relates to the wages of its employees. The Committee
considered the Company’s assumption for its FY24 wage
negotiations and tested the support for that assumption. The
Committee also considered inflation in other costs such as
materials and sub-contractors. The Committee tested the
guidance given by the Company to its businesses, noting that
there was little commonality across the Group’s contracts. After
its reviews, the Committee was satisfied with the Company’s
accounting approach to inflation.
Babcock International Group PLC / Annual Report and Financial Statements 2023
129
Governance statement (continued)
Audit, risk and internal control continued
• Sale of certain of the Company’s Aerial Emergency Services
• Contract A: Contract A is a ten-year contract with a foreign
business. On 28 February 2023, the Company completed the
sale of certain of its Aerial Emergency Services business. There
were four key accounting considerations for the Committee to
consider as result of the completion of the sale – the classification
of the discontinued operation, the point at which the Company
had passed control over the business to the buyer, the need to
impair any assets or to recognise any liabilities arising from the
sale, and the classification of costs relating to the disposal.
The Committee tested the accounting approach taken by the
Company in respect of each of these considerations and was
satisfied that they were appropriate.
Following its review, the Committee was of the opinion that the
FY23 Annual Report and Accounts was representative of the year
and presented a fair, balanced and understandable overview,
providing the necessary information for shareholders to assess the
Group’s position and performance, business model and strategy
and recommended that the Board make its responsibility
statements as set out on page 158.
As previously reported, the Financial Reporting Council was
reviewing the audits by PwC of Babcock’s financial statements for
FY2017, FY2018, FY2019 and FY2020. On 8 March 2023, the
Council issued its Final Settlement Decision Notice in respect of
PwC’s FY17 and FY18 audits and imposed sanctions on PwC and
two former audit partners. The Company has reviewed the
Council’s Decision Notice and is confident that it has addressed
the failings in the PwC audits found by the Council through a
combination of the Contract Profitability and Balance Sheet review
(the CPBS review), the disposal of businesses through the portfolio
rationalisation plan, and the Blueprint of Control Improvements.
The breaches in the PwC audits identified by the Council included:
• Issues relating to the Company’s EC225 helicopters: The
Company did own eight EC225s and held operating leases for a
further five. The Company now has only two EC225s which are
undergoing maintenance prior to sale or return to their lessor.
• MSDF contract: The MSDF contract was a long-term contract with
the MoD for the repair, maintenance and support of vessels and
enabling services at naval bases. The contract has been replaced
with a new contract with the MoD, the Future Maritime Support
Programme (FMSP). FMSP does also include agreed savings
targets, which Deloitte review as part of their audit.
• Compliance with accounting standards in relation to the
assessment of goodwill impairment: The Company had included
its Africa business within the Land sector for the purpose of its
goodwill impairment testing. Following the CPBS review, the
Company has corrected this aggregation.
• Vanguard contract: The Vanguard contract was a long-term
contract for the refuelling and re-fit of HMS Vanguard. The
Council identified that management made two key accounting
judgements in respect of the contract. As part of the CPBS
review, the Company has reassessed its revenue recognition
assumptions.
government agency for the supply of specialist training facilities
as well as the supply of personnel, support services and
infrastructure work. The Council identified breaches in respect of
revenue recognition and supply chain financing. As part of the
CPBS review, the Company has reassessed its revenue recognition
assumptions and reclassified outstanding balances under the
supply chain financing as bank and other borrowings.
• Holdfast contract: Holdfast was a joint venture in which the
Company had a 74% interest. The Council identified a number of
breaches in the audit work of FY18. The Company has since
disposed of its interest in the joint venture.
• Phoenix II contract: The Company manages a fleet of leased
vehicles for the MoD under this contract. The Company recorded
the revenue and costs of the contract as a principal rather than
as an agent, including for the ‘pass-through’ arrangement (the
selecting and paying of certain suppliers and recharging the
revenue to the MoD at nil margin). The Company has reassessed
this judgement as part of the CPBS review so that the Company
recognises the ‘pass-through’ revenue as an agent.
• DSG contract: Under the DSG contract, the Company provides
military vehicle fleet management services to the British Army.
Under the contract, the Company received revenue for the
provision of spares and repairs, which it billed to the MoD at nil
margin. The Company judged that it was receiving this revenue
as a principal and not an agent. As part of the CPBS review, the
Company reassessed this judgement and judged that it was
receiving the revenue as agent.
• RD57: The MoD and the Company agreed to settle a number of
issues in respect of Rosyth Royal Dockyard in the RD57 settlement
agreement. The agreement was a unique occurrence relating to
the issues that were being settled and will not repeat.
The Council continues to review PwC’s audits of the Company’s
FY19 and FY20 financial statements. During the course of its
review, the Council has asked the Company certain clarification
questions, which it has answered. Other than that Babcock has had
no other role in the review.
Code of Business Conduct violations and fraud
The Babcock Code of Business Conduct, which incorporates the
Group’s whistleblowing policy, contains arrangements for an
independent external service provider to receive, in confidence,
reports on suspected violations of the Code for reporting to the
Board and the Committee as appropriate. Please see page 83 for
further details. The Board regularly received reports on matters
relating to the Code.
130
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Remuneration
Remuneration Committee report
Carl-Peter Forster
Chair of the Remuneration
Committee
Key facts
Dear fellow Shareholder
The Committee
Carl-Peter Forster has chaired the Committee since
September 2022 and has been a member of the
Committee since joining the Board in June 2020. The
other Committee members are currently John Ramsay,
Lucy Dimes, and Jane Moriarty. Please see pages 108 and
109 for biographies and page 117 for attendance.
Highlights
• Review of the Company’s Remuneration policy for
proposing to shareholders for their approval at the
2023 AGM
• Engagement with shareholders in respect of the
Company’s proposed Remuneration policy
• Review of FY23 remuneration outcomes
• Deciding on the FY24 implementation of the
Remuneration policy
Key responsibilities
• Oversight of reward matters across the Group
• Maintenance of a strong link between strategy,
stakeholder experience and Executive Director reward
• Approval of reward outcomes for the
Executive Directors
This is my first report to you as Chair of the Committee. Before starting
my report, I would like to thank my fellow Committee members for
their time and assistance over the year in review, which involved
additional Committee meetings and papers as we reviewed the
Company’s proposed new Remuneration policy, including the
outcome of our engagement with shareholders. I would also like
to thank Kjersti Wiklund for all her work as Committee Chair before
her retirement from the Board in September 2022.
Finally, I thought it would be useful to set the context in which
the Committee made its decisions. This is the second full year of
our turnaround. During the year, we, as a company, have taken a
number of steps to address our historic underperformance. We have
significantly strengthened our balance sheet through our portfolio
realignment programme and are now a stronger, more resilient,
and more disciplined company. This year we have delivered
double-digit organic revenue growth, underlying margin expansion
and a significantly better than expected cash performance in an
uncertain environment (please see pages 12 to 17 for more detail).
The Committee has taken this context into account in deciding the
FY23 remuneration outcomes.
New Remuneration policy
A key focus for the Committee over the last year was the review of
the Company’s Remuneration policy, as our current policy expires
this year. We will put the new policy to shareholders for approval at
the 2023 AGM. In conducting its review, the Committee kept in
mind its key responsibility to maintain a strong link between
strategy, stakeholder experience and Executive Director reward.
The Committee considered different structures, but concluded that
broadly the current policy, which 99.5% of shareholders approved
at the 2020 AGM, remains credible and effective, with only modest
changes proposed, as discussed below.
Babcock International Group PLC / Annual Report and Financial Statements 2023
131
Governance statement: Remuneration (continued)
Before finalising its proposals, the Committee was keen to engage
with shareholders to understand their views. The Committee consulted
our largest shareholders, capturing over 60% of the issued share capital,
including meeting with a number of them. In general, shareholders
supported the proposed policy and offered suggestions around the
weighting of incentive measures which the Committee accepted
and has adopted. Having received and incorporated the feedback
from this exercise, we trust that we are now proposing a policy that
broadly all our shareholders will support, as they did in 2020.
Changes in the new Remuneration policy
The Committee looked in detail at the design of the Company’s
Performance Share Plan (PSP). In particular, it evaluated whether
the existing PSP struck the right balance between motivational
effectiveness and market competitiveness (by being based on
three-year performance) and reinforced success over the longer-
term horizons of the Company’s business cycle and contracts, as
well as the ongoing business turnaround. The Committee
considered a number of alternative approaches to the current
three-year PSP to help address these specific challenges, including:
• extending the PSP performance horizon, eg, to four or five years.
However, the Committee concluded that, given the ongoing
business reset, it was preferable to continue with the current
three-year long-term incentive period to ensure executives are
focused on performance over this next critical stage of our
turnaround; and
• replacing the PSP with a Restricted Stock Plan, where shares awarded
to the executives vest over time subject to continued employment
only (ie without performance conditions). While this structure is
considered potentially helpful in alleviating the challenges of target
setting and would align existing arrangements in Babcock for
employees below Board level, which reflects incentive practices
seen elsewhere in the market, the Committee concluded that it
was important to retain a strong focus on performance-related
long-term remuneration at executive levels, and that the PSP
remained the best vehicle to achieve this.
The Committee therefore decided to retain the existing PSP but revise
the measure scorecard; the Committee discussed with the management
team a range of possible PSP measures which would align more
closely with the drivers of the Company’s long-term success and
strategy, and concluded that TSR (used previously in the PSP) should
be replaced by two new key financial metrics. This new set of metrics,
the Committee believes, will ensure the PSP is more effective in
reflecting the quality of decision-making over the PSP performance
horizon. The new proposed metrics for the 2023 PSP grant are:
• Free cash flow (weighted 30%); retaining this KPI in the PSP
scorecard aligns with our current focus on improving the quality
of our cash flow and balance sheet strength;
• Underlying operating margin (weighted 30%); this is a key
strategic driver for the Company and a KPI that underpins
shareholder value creation over the longer-term;
• Organic revenue growth (weighted 25%); to incentivise delivery
of a primary KPI for the Group and a key pillar of our strategy.
This element will also be subject to a discretionary underpin if
operating margin performance is below threshold; and
• ESG (weighted 15%); the Committee is mindful of the increasingly
strong investor sentiment in this area and, in particular, the
desire to see quantitative environmental targets included in the
long-term incentive.
The Committee has selected two key metrics, reduction in carbon
emissions and senior management diversity, in line with the
Company’s ESG strategy. The Committee believes that these four
measures together capture the key drivers of the Company’s
long-term strategy and enable the Committee to set challenging,
but meaningful, three-year targets against which to measure
success. In proposing this scorecard, the Committee also considered
whether to retain a weighting on relative TSR for the 2023 PSP
awards. However, it concluded that, when measured over a
three-year period, TSR is likely currently to be less directly related to
Babcock’s underlying performance and therefore risks outcomes
being driven primarily by external factors beyond management’s
control. In addition, the Committee believed it was a challenge to
define a benchmark for the Company that was both robust and
sufficiently relevant to ensure the relative TSR measure would be
credible. Therefore, the Committee proposes dropping relative TSR
for the FY24 cycle, and keeping under review its use in the scorecard
attaching to future cycles during the life of the proposed Policy.
As discussed above, the Committee considered carefully how
the Company’s remuneration arrangements could incentivise the
delivery of its strategy over its long-term business cycle generally,
and through the business reset specifically. The Committee believes
that the balance of pay elements should reflect this focus, with a
significant portion of the Executive Directors’ pay being delivered
in shares vesting subject to multi-year performance to create
alignment with the Company’s performance over this period
and, by extension, the experience of our stakeholders.
As part of this review, the Committee therefore also considered
whether the existing incentive opportunities remain appropriate in
the specific business context for Babcock, and whether they deliver a
competitive, performance-orientated package reflective of the calibre,
experience and sustained strong performance of our Executive
Directors. The Committee concluded that the annual bonus
opportunity was set at an appropriate level, but that the PSP limit
in the Policy should be increased from 200% to 250% of salary.
The Committee is proposing to increase the CEO’s PSP opportunity
in line with this change. In determining to do so, the Committee
considered the complexity and critical nature of the business reset
required to establish a platform for future success and shareholder
value creation, and the value attributed to the specific skillset,
expertise, sector knowledge and deep customer relationships of
our high-performing CEO. The Committee resolved to upweight
the emphasis in the CEO’s package on long-term performance to
reflect these considerations and further strengthen the alignment
of incentive outcomes with shareholders’ longer-term interests
through the delivery of the business reset. The Committee is
mindful of the external optics of quantum increases, but is satisfied
that this: is proportionate to the calibre of our CEO (the total
remuneration opportunity would be positioned between median
and upper quartile for companies of comparable scale and sector
peers); does not risk rewarding poor performance (targets are set to
be stretching, and the vesting level at threshold – of 16.7% – is below
market norms); and will appropriately reinforce a scorecard of
measures that are consistent with the Company’s strategy and
values. We calculate that the impact of making this change on the
CEO’s overall remuneration level, considering the achievability of
the performance conditions, is c.8%. The CFO’s PSP award opportunity
will remain at 200% of salary for the time being. Full vesting of the
PSP award opportunity will continue to be subject to the achievement
of stretching targets, ensuring that the additional opportunity vests
only for delivering exceptional performance for stakeholders.
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Strategic report
Governance
Financial Statements
Having set out the changes, I hope to receive your support on our
new policy at the 2023 AGM. If you would like to talk to me about
the new policy, I will be at the AGM and would be more than happy
to take any questions.
Remuneration in FY23
This annual report together with the FY23 financial statements sets
out the business context in which the Committee took its decisions
over FY23. The Committee believes that the remuneration outcomes,
which I summarise below, reflect the Company’s performance and
the broader context, including shareholders’ experience and interests.
In summary, the Committee approved the following outcomes:
• Salary: As we disclosed in our FY22 report, the Company decided
to focus its FY23 pay settlement on those employees most
impacted by the ‘cost-of-living’ crisis by awarding a standardised
annual salary increase to all UK employees except the highest
earners. In line with this decision, the Committee decided not to
increase the Executive Directors’ salaries for FY23.
• FY23 annual bonus: We followed the same structure for the
FY23 annual bonus for Executive Directors as we did for FY22.
It was based 80% on underlying financial performance measures,
split equally between underlying operating cash flow (OCF) and
underlying profit before tax (PBT). In line with past practice, we
maintained the percentage allocated to non-financial measures
at 20%. As in FY22, we adopted a wide range for the performance
targets and retained discretion to ensure that the outcome
aligned to the experience of the Group’s stakeholders. Even
though the Company’s cash flow performance was strong in
FY23, with the OCF component of the bonus being earned in full,
the PBT performance threshold was missed and no bonus was
earned for this component. The Committee also considered the
excellent progress against the FY23 strategic priorities, as
detailed on pages 13 and 14, and was pleased to award an
overall annual bonus for FY23 of 59% of maximum for David
Lockwood and 58% of maximum for David Mellors. Please see
pages 144 and 145 for more detail.
• 2020 PSP awards: The Committee made its 2020 PSP grant in
December 2020, delayed due to the impact of COVID-19.
Vesting of the awards (the opportunities under which were scaled
back by 10% – to 180% of salary – to reflect the Company’s share
price performance prior to grant) is linked 50% to cumulative
underlying free cash flow (FCF) over three years ending FY23
and 50% on relative Total Shareholder Return (TSR) over three
years ending 30 November 2023. As set out on page 146
(and in line with best practice guidance from investors and their
representatives), the Committee subsequently further scaled
back the award opportunities by a further 10% of salary at the
time of finalising the FCF targets, to recognise the decision to
delay doing so pending the conclusion by the Company of the
Contract Profitability and Balance Sheet review in 2021.
The Committee recognises that 2020 was an uncertain period
for the business, and considers the reductions to the 2020 PSP
award quantum to be appropriate in the circumstances. The FCF
component has vested at 100%, following exceptionally strong
underlying cash generation; the relative TSR component was
tracking at zero vesting at the end of FY23 – we will report on its
final vesting in the FY24 report and confirm overall vesting of the
2020 PSP award next year.
• 2022 PSP awards: We granted the 2022 PSP award in August
2022. Vesting is based on relative TSR and cumulative FCF, both
equally weighted, consistent with the 2021 PSP awards.
The performance period for the award is the three financial years
starting with FY23; as we consider the targets for cumulative free
cash flow to be commercially sensitive, we have delayed disclosing
the range, but we will disclose this no later than the FY25 annual
report, being the relevant annual report for disclosing the vesting
outcome for the 2022 PSP award. For further detail, please see
pages 143 and 151 to 152.
Remuneration for FY24
When considering the implementation of our Remuneration policy
for FY24, we have borne in mind the need to continue to support
the turnaround of the Group by ensuring that we incentivise the
Executive Directors to deliver the Board’s strategic actions, whilst
continuing to align the implementation of the policy with
shareholder interests. We have done this as follows:
• Salary: Our normal practice is to align our review of the
Executive Director salaries with the Company’s review of the
wider workforce. This year, the Committee will wait to see the
outcome of the Company’s review before deciding whether any
increase is appropriate for the Executive Directors. The Committee
is well aware of shareholders’ views during this time of inflation
and will bear those views in mind in its discussions.
• FY24 annual bonus: The structure of the Executive Director
annual bonus for FY24 is consistent with that for FY23, with
measures based on underlying OCF, underlying PBT and
non-financial objectives. The maximum award opportunity is
150% of salary and the Executive Directors will defer 40% of any
earned bonus into the Company’s shares for three years. We have
set the measures and targets, which we will disclose in full in our
report next year. Please see page 147 for more detail.
• 2023 PSP awards: We will grant awards under the PSP to the
Executive Directors in 2023 covering the three-year period
FY24–FY26. As described above, we have decided to refine the
measures so that they align more closely with the drivers of the
Company’s long-term performance and strategy. The measures
are free cash flow (as used for the 2022 PSP award), underlying
operating margin (an important indicator of operating efficiency),
organic revenue growth (an indicator of business growth) and
ESG (reflecting shareholder sentiment that companies need to
play their part in improving the UK’s performance in this area).
We have set the targets for each measure to ensure that they are
appropriately stretching. For more detail please see page 146.
Focus for FY24
We will continue to support the strategic aims of the Group
through our work on the Committee and the implementation of
our Remuneration policy. To do that, we will continue to engage
with our key stakeholders, our shareholders and employees, to
understand their views. We will use this engagement to design
remuneration structures under our new Remuneration policy which
reflect best practice and support the Group’s strategic direction
and incentivise employees to deliver value to shareholders.
I hope that I can count on your support for our new Remuneration
policy. If you have any questions, I will be at the 2023 AGM and
would be happy to discuss them with you.
Carl-Peter Forster
Committee Chair
Babcock International Group PLC / Annual Report and Financial Statements 2023
133
Governance statement: Remuneration (continued)
Remuneration at a glance
This section provides an overview of the Company’s performance over FY23 and the remuneration received by our Executive Directors. You
can find full details in the Annual report on remuneration on pages 142 to 152.
FY23 remuneration outcomes
FY23 Annual bonus
The Committee based the FY23 bonus on a mix of financial and non-financial measures, the performance targets for which (and actual
performance against these) are set out below. For a full description of the FY23 annual bonus, please see page 144.
Measures
Underlying Profit Before Tax (PBT)
Warranted payout (% of maximum bonus)
D Mellors
D Lockwood
40% Max
40% Max
0% Outturn
0% Outturn
Underlying Operating Cash Flow (OCF)
40% Max
100% Outturn 40% Max
100% Outturn
Performance targets
Threshold
Target
Stretch
£223.3m
£235.0m
£258.5m
Outturn £128.9m
Threshold
Target
Stretch
£121.1m
£127.5m
£140.3m
Outturn £307.0m
Non-financial1
Total
20% Max
100% Max
95% Outturn
59% Outturn
20% Max
100% Max
90% Outturn
58% Outturn
1. The Committee has merged several measures into an overall assessment in this table for disclosure purposes.
2020 PSP
The Committee approved the 2020 PSP grant in December 2020, delayed due to COVID-19. Vesting is based 50% on three year
underlying free cash flow (FCF) and 50% on three year relative Total Shareholder Return (TSR). The FCF performance period ended 31 March
2023, warranting 100% vesting. The TSR performance period ends November 2023, but as of 31 March 2023 vesting was zero.
Threshold
performance (16.7%
vesting)
% weighting
Stretch performance
(100% vesting)
Outturn1
Vesting
(% of overall award)
3-year FCF post exceptional items
3-year TSR vs FTSE 350 (excluding investment
trusts and financial services)
50%
£140m
£210m
50%
Median TSR Median TSR + 9% pa
£ 253m
Below median TSR
as of end FY23
Total expected
vesting
50%
0%
50%
1. The Committee adjusted the FCF outturn to exclude the cash flow impact of certain items, and which was intended to ensure the focus
was on driving core performance. For more information, please see page 146.
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Governance
Financial Statements
Implementation of the Remuneration policy in FY24
For the current financial year, the Committee intends to implement the Remuneration policy as set out in the table below.
Element of remuneration
Implementation for FY24
Element of remuneration
Implementation for FY24
Base salary
David Lockwood: £816,000
David Mellors: £571,200
The Committee will review the base salary of
the Executive Directors later in the year. In its
review, it will carefully consider shareholder
sentiment in respect of salary increases.
Annual bonus and Deferred Bonus Plan (DBP)
The bonus structure is consistent with that
used for FY23, with awards of up to 150% of
salary based on the achievement of financial
targets, underlying profit before tax (PBT) and
underlying operating cash flow (OCF), (each a
40% weighting) and non-financial measures
(20% weighting).
The Committee has maintained its normal
practice of paying 60% of any bonus earned in
cash, with the remaining 40% deferred in
shares for three years. For more detail, please
see page 147.
Pension
10% of salary
Benefits
Unchanged from FY23
PSP
PSP awards of 250% and 200% of salary for the CEO and CFO
respectively, with vesting based on measures the Committee
believes are most appropriate: FCF (weighted 30%),
underlying operating margin (weighted 30%), organic
revenue growth (weighted 25%, and subject to a discretionary
operating margin underpin) and ESG (weighted 15%).
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
Simplicity
Risk
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.
The policy and the Committee’s approach to its implementation are simple and well understood. The
performance measures used in the PSP, along with those in the annual bonus, align to Babcock’s strategy.
The Committee has ensured that remuneration arrangements do not encourage or reward excessive
risk-taking by setting targets which are stretching, but achievable, with discretion to adjust formulaic annual
bonus and PSP outcomes, and with suitable underpins where necessary.
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 its 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 marked.
Babcock International Group PLC / Annual Report and Financial Statements 2023
135
Governance statement: Remuneration (continued)
Remuneration policy report
Shareholders approved our current Remuneration policy at our 2020 AGM. As the policy expires after three years, we
will propose a new Remuneration policy to shareholders for their approval at the 2023 AGM. We set out below the
new policy with any changes from the current policy in italics. We have explained any changes to the current policy
in detail in the Committee Chair’s opening letter on pages 131 to 133. If shareholders approve the new policy, the
Committee intends to apply it for three years from the date of its approval. You can find the current policy at
www.babcockinternational.com/who-we-are/leadership-and-governance.
Key principles of the Remuneration policy
Our Remuneration policy for Executive Directors reflects a preference that we believe the majority of our shareholders share – to rely more
heavily on the value of variable performance-related rewards than on the fixed elements of pay, to incentivise and reward success. The
Committee, therefore, weights the focus of executive remuneration towards performance-related pay with a particular emphasis on
long-term performance. The Committee believes 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
Operation
To recruit and retain the best executive talent to execute our strategic objectives at appropriate cost.
The Committee reviews base salaries 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.
The Committee anticipates that increases in salary for the wider employee population over the term of this
policy will guide it on any increases for the Executive Directors. 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.
Business and individual performance are considerations in setting base salary.
Opportunity
Performance metrics
Pension
Purpose and link to strategy
Operation
Opportunity
Performance metrics
Benefits
Purpose and link to strategy
Operation
Opportunity
Performance metrics
To provide market-competitive retirement benefits.
Cash supplement in lieu (wholly or partly) of pension benefits for ongoing service and/or membership of the
Group’s defined benefit or defined contribution pension scheme.
Executive Directors receive pension benefits up to the value (10% of salary, as of FY24) 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.
Not performance-related.
Designed to be competitive in the market in which the Group employs the individual, or to meet costs
effectively incurred at the Company’s request.
The Group provides a range of benefits, which may include (but are not limited to): life insurance; medical
insurance; car and fuel benefits and allowances; home-to-work travel and related costs; and accommodation
benefits and related costs.
The Group may offer other benefits (eg relocation) if the Committee considers it appropriate and reasonable.
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, which will determine the
maximum amount that the Company would pay in the form of benefits during the period of this policy. The
Committee retains discretion to approve a higher cost in certain circumstances (eg relocation) or in
circumstances where factors outside the Company’s control have changed materially.
Not performance-related.
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Governance
Financial Statements
Annual bonus
Purpose and link to
strategy
Operation
Opportunity
Performance metrics
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 the achievement of long-term strategy and longer-term risks to the
Company.
The requirement to defer a substantial part of the bonus into Company shares strengthens the link to
long-term sustainable growth.
Performance targets are set at the start of the year and reflect the responsibilities of the Executive in relation
to the delivery of our strategy.
At the end of the year, the Committee determines the extent to which the Group has achieved these targets.
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, and 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 may reduce or cancel
any annual bonus otherwise payable if it considers it appropriate to do so in light of that performance.
The Committee defers at least 40% of annual bonus payments for Executive Directors 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 until the third anniversary of the
payment/vesting date: 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 would have caused the Committee to exercise any
discretion differently.
Maximum bonus opportunity is 150% of salary.
For achievement of threshold, the Executive Directors earn up to 15% of maximum bonus; for achievement of
target, they earn up to 55% of maximum bonus.
The Committee determines performance on an annual basis by reference to Group financial measures, eg
underlying PBT, underlying 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.
Performance Share Plan (PSP)
Purpose and link to
strategy
Operation
Opportunity
Performance metrics
To incentivise delivery of sustainable value creation over the longer term.
Long-term measures guard against the Company taking short-term steps to maximise annual rewards at the
expense of future performance.
The Committee has the ability to grant nil-cost options or conditional share awards under the PSP.
The Committee reviews award levels and performance conditions, on which vesting depends, from time to
time to ensure they remain appropriate.
Participants will receive cash or shares equal to the value of any dividends that they would have received 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 the
Company releases them.
Malus and clawback provisions apply to PSP awards until the third anniversary of the payment/vesting date: 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.
Maximum annual PSP award opportunity is 250% of base pay1.
16.7% of the maximum award opportunity will vest for threshold performance.
Vesting of PSP awards is subject to continued employment and Company performance over a three-year
performance period.
The Committee intends to base PSP awards made during the life of this policy on the achievement of
stretching targets that align to key drivers of strategy (including, but not limited to, free cash flow,
operating margin, organic revenue growth and ESG).
The Committee will review the performance measures, their weightings, and performance targets annually to
ensure continued alignment with Company strategy.
1. Under the 2020 remuneration policy the maximum was 200%.
Babcock International Group PLC / Annual Report and Financial Statements 2023
137
Governance statement: Remuneration (continued)
All-employee plans – Babcock Employee Share Plan
Purpose and link to strategy
Operation
Opportunity
Performance metrics
To encourage employee ownership of Company shares.
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 a period 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.
Participants can purchase shares up to the prevailing HMRC limit from time to time.
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 Committee reviews the matching rate
periodically, but it will remain bound by the prevailing HMRC limit.
Not performance-related.
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.
The Committee sets performance targets to be stretching but
achievable, considering the Company’s strategic priorities and the
economic environment in which the Company operates.
The Committee sets financial targets taking into account a range of
reference points, including the Group’s strategic and operating plan.
In determining appropriate remuneration for new Executive Directors,
the Committee will take into consideration all relevant factors
(including quantum, the nature of remuneration and from where
the Company recruited the candidate) 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 the Company was replacing. 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 the Committee would expect these 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, Chair of the
Audit and Remuneration Committees, and Director designated for
employee engagement.
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 Committee selects measures used under the annual bonus
plans annually to reflect the Group’s main strategic objectives for
the year. They reflect both financial and non-financial priorities.
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 has discretion to adjust 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. The Committee would not make a material reduction
in long-term incentive targets for future awards without prior
consultation with our major shareholders.
Executive Director and general employee
remuneration
The policy with regard to the remuneration of senior executives
below the Board is broadly consistent with that for the Executive
Directors, in that it weights remuneration to variable components
which are delivered through an annual bonus and equity-based
incentives, albeit that restricted stock awards, and not the PSP, are
used for participants below Board level. The Committee considers
the Remuneration policy for our Executive Directors 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 the 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.
138
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
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%’.
Potential reward opportunities are based on the Company’s
Remuneration policy and implementation in FY24, as outlined in
the Committee Chair’s statement and later in the Annual report on
remuneration, applied to base salaries as at 1 April 2023. 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%
19%
23%
58%
£5,302
Maximum
+50%
20%
Maximum
24%
29%
47% £4,282
Maximum
24%
27%
32%
53% £3,213
44% £2,642
On-target
50%
33% 17%
£2,032
On-target
49%
36% 15%
£1,305
Minimum
100% £1,018
Minimum
100% £643
0
1000
2000
3000
4000
5000
6000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
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.
David Mellors
(Chief Financial Officer)
29 September
2020
Fixed
Bonus
PSP
The ‘Minimum’ scenario shows base salary, pension (and/or pay in
lieu of pension) and taxable 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,
250% of salary under the PSP for the CEO and 200% for the CFO).
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 incentive plans granted
from the 2020/21 financial year onwards, for two years at a level
equal to the lower of their actual shareholding on cessation and the
in-post shareholding requirement. Any shares purchased by an
Executive Director will not be part of this holding requirement.
Details of Directors’ service contracts and exit
payments and treatment of awards on a change
of control
The following summarises the key terms (excluding remuneration)
of the Executive Directors’ service contracts:
Executive Directors
Name
David Lockwood (Chief
Executive)
Date of service contract
29 July 2020
Notice period
12 months from
Company,
12 months from
Director
12 months from
Company,
12 months from
Director
The latest service contracts are available for inspection at the
Company’s registered office and will also be available at the
Company’s Annual General Meeting.
The Company’s policy is that Executive Directors’ service contracts
should be capable of being terminated by the Company on not
more than 12 months’ notice. The Executive Directors’ service
contracts entitle the Company to terminate their employment
without notice by making a payment of salary and benefits in lieu of
notice. Under the Executive Directors’ contracts, the Company may
choose to make the payment in lieu by monthly instalments and
mitigation applies such that the Committee may decide to reduce
or discontinue further instalments.
Babcock International Group PLC / Annual Report and Financial Statements 2023
139
Governance statement: Remuneration (continued)
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 as described in
the table below.
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.
Participants may exercise award 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 for the Group. Any fees for outside appointments are retained by the Director. The Chair will
approve such appointments, as the Board believes it is beneficial for Directors to gain experience of practice in other organisations.
However, before approving any appointment, she must satisfy herself that there are no conflict issues with the Company (or they can be
appropriately dealt with) and the Director will have sufficient time to devote to the Company. During the year, Carl-Peter Forster joined
Vesuvius plc and Lucy Dimes joined iomart plc. Since the year end, Ruth Cairnie has joined the BT Group plc but stepped down as Senior
Independent Director and Remuneration Committee Chair for Associated British Foods plc.
Chair and Non-Executive Directors
Name
Ruth Cairnie (Chair)
Lucy Dimes
Carl-Peter Forster
Lord Parker
John Ramsay
Jane Moriarty
Sir Kevin Smith
Date of appointment as a Director
3 April 2019
1 April 2018
1 June 2020
10 November 2020
6 January 2022
1 December 2022
1 June 2023
Date of current appointment letter
28 March 2022
28 May 2021
30 March 2023
30 March 2023
5 January 2022
1 December 2022
31 May 2023
Anticipated expiry of
present term of appointment
(subject to annual re-election)
AGM 2025
AGM 2024
AGM 2026
AGM 2026
AGM 2025
AGM 2025
AGM 2026
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.
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.
140
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
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
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). Additional fees are payable for additional
responsibilities such as acting as Senior Independent
Director, Chair of the Audit Committee, Chair of the
Remuneration Committee and Director designated
for employee engagement.
Non-Executive Directors do not participate in any
incentive schemes, nor do they receive any pension
or benefits (other than the cost of travel and
accommodation expenses).
The Company reviews fee levels by reference to FTSE
listed companies of similar size and complexity. It
takes into account time commitment, level of
involvement required and responsibility when it
reviews fee levels. This may result in higher fee levels
for overseas Directors.
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.
Consideration of shareholder views
When determining remuneration, the Committee takes into account
the views of shareholders and best practice guidelines issued by
institutional shareholder bodies. The Committee welcomes feedback
from shareholders on the Remuneration policy and arrangements. It
commits to consulting 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 c.60% of our issued share capital, as well as shareholder
representative bodies. We had a good 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.
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. The Committee considers these
matters when it conducts its 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 several routes: directly with employees
through the global people survey and through the ‘ask David’
email; and indirectly through forums such as the employee
representative forum, which is a forum where the CEO, the CFO
and the Chief HR Officer meet with the Group’s main trade union
representatives to discuss matters of material interest to the Group,
including the Group’s remuneration policy. At the FY23 meetings,
the Chief HR Officer explained the Company’s approach to
executive pay, including that of the Executive Directors, and the
intent of the Company to focus on its lower paid employees by
offering a standardised annual pay increase for all UK employees up
to a given threshold. The Chief HR Officer explained that there
would be no increase for those employees on fixed pay over the
threshold, including the Executive Directors, who would still remain
eligible for the bonus and the PSP. The trade union representatives
welcomed the Company’s early engagement and its proposed
positioning for FY23. The Chief HR Officer reported the views of the
trade union representatives to the Board and the Committee for
them to consider as part of their discussions. The Committee takes
any feedback it receives into account in its decision-making on
executive remuneration.
Babcock International Group PLC / Annual Report and Financial Statements 2023
141
Governance statement: Remuneration (continued)
Annual report on remuneration
The Committee
The Board appoints the members of the Committee on the
recommendation of the Nominations Committee. In accordance
with the UK Corporate Governance Code, only independent
Non-Executive Directors are members of the Committee.
In total there were 8 meetings in the year to 31 March 2023. The
Chair and the CEO 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. The Committee reviewed
them 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 the
Company provides members of the senior executive management
of the Group with appropriate incentives to encourage strong
performance and rewards them 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.
Advisers
Ellason advised the Committee during the year. 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 is a member of the Remuneration Consultants
Group and a signatory to the Code of Conduct for consultants to
remuneration committees of UK listed companies.
Ellason adheres to this Code of Conduct. The Company paid fees to
Ellason in respect of work for the Committee carried out in the year
under review totalling £96,420 based on time and materials,
excluding expenses and VAT.
The Committee reviews Ellason’s involvement each year and
considers any other relationships that it has with the Company that
may limit its independence. Ellason has no relationship with the
Company or its directors beyond those formed in its capacity as
appointed adviser to the Committee. 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 2023, including:
• renewing the Remuneration policy bearing in mind market trends
and corporate governance best practice
• engaging with shareholders in respect of the Company’s new
Remuneration policy
• 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 advisers
• making share awards under the Company’s share plans
• reviewing the performance measures and targets to be applied
under the Company’s PSP
• agreeing Executive Director salaries for the financial year
• considering performance targets and non-financial objectives for
the FY24 annual bonus plan
• agreeing the level of vesting of PSP awards granted in 2019
• considering performance against the measures applied to, and
Please see www.remunerationconsultantsgroup.com for details.
level of payout of, the FY22 annual bonus
• agreeing the level of, and targets for, 2022 PSP awards.
Summary of shareholder voting
The following table shows the results of the last binding shareholder vote on the Remuneration policy at the 2020 AGM, and the advisory
vote on the Annual report on remuneration, at the 2022 AGM:
Votes cast
For (including discretionary)
Against
Total votes cast (excluding withheld votes)
Votes withheld
Total votes cast (including withheld votes)
2020 Remuneration policy
2022 Annual report on remuneration
Total number of votes % of votes cast for and against
99.48%
0.52%
100%
358,523,814
1,866,823
360,390,637
16,471,678
376,862,315
Total number of votes % of votes cast for and against
94.45%
5.55%
100%
320,983,657
18,867,386
339,851,043
28,309
339,879,352
142
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Single total figure of remuneration for Executive Directors for FY23 (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 plan)5
Long-term incentives
PSP6
Dividends7
Total (of which)
Total fixed remuneration1,2,3
Total variable remuneration4,5,6,7
David Lockwood
David Mellors
FY23 £’000
FY22 £’000
FY23 £’000
FY22 £’000
816
121
82
433
289
631
0
2,372
1,019
1,353
808
119
81
580
387
n/a
n/a
1,975
1,008
967
571
15
57
298
199
442
0
1,582
643
939
566
15
57
401
268
n/a
n/a
1,307
638
669
The figures have been calculated as follows:
1. Salary: Base salary amount paid in the year. The Executive Directors did not receive a pay increase in FY23, but they did part way through FY22. The reason for the
difference between the base salary between FY22 and FY23 is that the FY23 amount shows the FY22 increase for the full year, whereas the FY22 amount only shows
the increase for part of the year.
2. Benefits in kind and cash: The value of benefits and salary supplements (other than those in lieu of pensions) including medical insurance, home to work travel expenses
incurred at the request of the Company, accommodation-related benefits, car and fuel benefits and costs in connection with accommodation. David Lockwood in
FY23 received £99,495 in connection with his accommodation costs in London, which were, at the Company’s request, to enable him to lead the business effectively.
3. Pension: The numbers above represent for each year the value of the cash supplement, which for David Lockwood and David Mellors was 10% of base salary.
4. Annual bonus (cash): This is the 60% of total annual bonus earned for performance during the year (see pages 144 and 145) that is not required to be mandatorily
deferred into shares under the DBP (see page 137) and is paid in cash.
5. DBP: This is the mandatorily deferred element of the annual bonus earned for performance during the year (40% of earned bonus), which will vest after three years.
6. PSP: The 2020 award was granted in December 2020 at a grant price of 352p, with vesting based 50% on cumulative FCF to the end of FY23 and 50% on relative TSR
over the 3 years to 30 November 2023. The value in the table reflects 100% vesting of the FCF component and an expectation of zero vesting of the TSR component,
using a share price averaged over the last quarter of FY23 (of 309.12p); the vest-date value attributable to share price appreciation was zero as the share price at
grant was higher, at 352p. The value recorded in the table will be updated in the FY24 report, to reflect any change in vesting of the TSR component and the actual
share price at vest.
7. Dividends: The total value of dividends accruing on long-term incentive awards (other than on mandatory deferral of bonus awards under the DBP) vesting on
performance to 31 March 2023 (for FY23) and 31 March 2022 (for FY22), payable in cash on exercise of the award.
Neither 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 2023. They instead received a cash supplement equal to 10% of salary. There are no additional early
retirement benefits.
Supplements paid in lieu of pension do not count for pension, share award, or bonus purposes.
Directors benefit from life assurance cover of four times base salary. The cost of providing that life assurance cover was:
Director
David Lockwood
David Mellors
FY23 £’000 pa
FY22 £’000
4
3
4
3
Babcock International Group PLC / Annual Report and Financial Statements 2023
143
Governance statement: Remuneration (continued)
FY23 annual bonus (audited)
The Committee based the FY23 annual bonus on a mix of financial and non-financial measures. The financial element, weighted 80%, was
the underlying OCF and PBT performance (based on budgeted foreign exchange rates) of the Group against budget. The non-financial
measures were principally the themes that the Committee considers to be of material importance to the continued success of the Company.
In determining the outturn in respect of the financial measures, the Committee considered whether it should adjust the actual outturns to
account for the impact of the sale of certain of the Group’s aerial emergency services businesses (the AES business), but concluded that no
adjustment was necessary as it would have had no impact on the bonus outcome. The Committee also reviewed the Company’s health &
safety performance as it is an underpin for the annual bonus. The Committee considered the totality of the Group’s health & safety
environment over the year, including the improved reporting culture, the changes made over the year and the improved profile of the
Group’s Total Recordable Injury Rate and decided not to exercise its discretion.
The table below summarises performance against each financial measure, and the bonus outcome.
Bonus element
Achieving budgeted
underlying operating cash flow2
Achieving budgeted
underlying profit before tax3
Non-financial objectives4
Total
Threshold1
Target
Maximum
Outturn
David Lockwood
David Mellors
£121.1m
£127.5m
£140.3m
£307.0m
£223.3m
£235.0m
£258.5m
£128.9m
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)
60%
60%
60%
0%
30%
28.5%
150%
88.5%
60%
60%
60%
0%
30%
27%
150%
87.0%
1. Threshold vesting is: 18.8% of maximum for the PBT and cash flow elements, and 0% for non-financial measures. In line with our policy, overall vesting at threshold is
no more than15% when all measures are considered. Vesting outcomes are determined on a straight-line sliding scale for performance outturns between threshold
and target, and between target and maximum.
2. Operating cash flow after capital expenditure and before pension payments in excess of the income statement charge.
3. Before amortisation of acquired intangibles, with the treatment of exceptional items at the discretion of the Committee.
4. Further details on the non-financial objectives set for FY23 are given below.
FY23 annual bonus non-financial measures
The Committee set non-financial objectives for David Lockwood and David Mellors at the start of the year around strategic management
‘Themes’ of strategy, people, culture and ESG, as the Committee believed these themes align to the Company’s turnaround.
Overall, the Committee assessed that strong progress has been made in FY23 on a very broad front, with clear signs of improvements in
relationships with key stakeholders, strengthened international outlook for the Group, simplified and more consistent processes, stronger
focus on people, and a marked positive shift in culture. Performance against the objectives (detailed below) was generally well above
expectations, and while in some areas there remains much to be done, this reflects the starting point, scale and the complexity.
David Lockwood
Theme
Strategy:
Strengthen
position in the
UK
Grow
international
business and
strengthen
capability
Drive
operational
transformation
Objective and assessment
Significant progress ahead of Board expectations, including:
• Babcock taking leadership positions on Defence Supplier Forum and Shipbuilding Enterprise for Growth
Assessment
Exceeded
expectations
• Full mobilisation of Future Maritime Support Programme with structured process to deliver required
savings
• Strong progress in Defence Support Group – Year 8 closed with no red KPIs
• Awarded multi-year programme to upgrade the Australian Defence Force’s high frequency
communications system, reinforcing Babcock’s leading position in that region
• Awarded first significant Land Sector contract in France
• Established office to address AUKUS opportunity
• Delivered targeted savings built into sector budgets
• Successful execution of Phase 1 implementation of new Global Business Management System, providing
a standardised approach across Babcock
Exceeded
expectations
Exceeded
expectations
144
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
People &
culture:
Strengthen
Babcock’s
capability to
secure the
workforce and
leadership it
requires
ESG:
Strengthen
Babcock’s ESG
credentials
David Mellors
Theme
Strategy:
Improve Group
financial base
stability
Portfolio
rationalisation
Drive
operational
transformation
& performance
People &
culture
• Executed in full an agreed programme of activities, developing a Group-wide approach to People and
Culture for the first time
Exceeded
expectations
• Launch of our Global People Survey (GPS), with participation rates outperforming market benchmarks
• Launch of Global Babcock Role framework
• Simplified key HR processes including; inclusion, agile working and family leave policies to embed
cultural change
• Excellent progress made on further embedding Babcock’s safety culture, with 81% of employees in the
GPS perceiving Babcock to be committed to the health & safety of its people
Exceeded
expectations
• Plan Zero 40 steps successfully implemented, with ten pathfinder projects developed
• Diverse management representation continues to grow and our gender pay gap continued to improve in
2023, now 5.5% below the UK average
Objective and assessment
• Successfully launched a new model of monthly rolling forecasts
• Increased focus on cash delivery to move towards a smoother cash profile
• Introduction of Group Programme Watchlist with standard programme status review materials
• Delivered agreed objectives, including the completion of the sale of certain of the Group’s aerial
emergency services businesses, realising total cash proceeds of c.£635 million, well exceeding our initial
guide of at least £400 million
• Delivered targeted savings built into sector budgets
• Successful execution of Phase 1 implementation of new Global Business Management System, providing
a standardised approach across Babcock
• Internal audit processes overhauled
• Transformation of finance function by leading the deployment of a new shared-services business model
with the establishment of the Finance Business Services team
• Simplified global banking services with the transition to a single provider
• Transformation of the procurement function by managing the standardisation of processes and policies
and the launch of a procurement academy with over 800 employees on the programme
Assessment
Exceeded
expectations
Exceeded
expectations
Exceeded
expectations
Exceeded
expectations
Met
expectations
Exceeded
expectations
ESG
• Embedded new governance and internal controls framework across the Group, with the implementation
of the Blueprint of Controls
• Reviewed the design of the internal audit function with the Audit Committee Chair, appointing a Group
Director of Internal Audit and transitioning to in-sourcing internal audit
The FY23 bonus outcomes for each Executive Director are as follows (40% of which will be deferred under the DBP):
David Lockwood
David Mellors
Payment for
financial targets
(% salary)
60%
60%
Payment for
non-financial targets
(% salary)
28.5%
27.0%
Total bonus
(% salary)
88.5%
87.0%
Total bonus
(£’000)
£722
£497
Babcock International Group PLC / Annual Report and Financial Statements 2023
145
Governance statement: Remuneration (continued)
Long-term incentive scheme (PSP) awards vesting during the year (audited)
The Executive Directors were granted PSP awards on 1st December 2020, delayed due to the impact of the COVID-19 pandemic. The
values of the awards were scaled back by 10% from 200% of salary to180% of salary, to reflect the share price decline in the period prior to
the grant. In line with best practice guidance from investors and their representatives, the Committee subsequently further scaled back the
award opportunities by a further 10% of salary at the time of finalising the underlying free cash flow (FCF) targets, to recognise the delay in
finalising the target pending the conclusion by the Company of the contract profitability and balance sheet review in 2021. The Committee
recognises that 2020 was an uncertain period for the business, and considers the reductions to the 2020 PSP award quantum to be
appropriate in the circumstances. Vesting of the awards is based on cumulative underlying free cash flow (FCF) and relative Total
Shareholder Return (TSR), with each measure having equal weighting. The performance period for these awards is 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.
Through to the end of FY23 the vesting of the FCF component was 100%; as a result of strong underlying cash generation; the vesting of
the relative TSR component will be confirmed in the FY24 report, but as of 31 March 2023 Babcock’s performance was below Median TSR,
suggesting a vesting of zero; therefore, the numbers in the table below are indicative. Awards will vest on 1st December 2023 and be
subject to a two year holding period. The Committee will assess the vest-date value in December 2023 and determine then whether any
additional downwards adjustment needs to be made to ensure the award does not benefit unduly from windfall gains.
3-year adjusted underlying FCF
3-year TSR vs FTSE 350 (excluding
investment trusts and financial services)
% weighting
50%
Threshold performance
(16.7% vesting)
£140m
Stretch performance
(100% vesting)
£210m
50%
Median TSR Median TSR + 9% pa
Adjusted performance
£253m
Below Median TSR
(as of end FY23)
Vesting
(% of overall award)
50%
0%
(indicative)
Awards vest on a straight-line sliding scale between threshold and stretch.
To ensure the Executive Directors were appropriately incentivised to deliver against the stated medium-term objectives of the business
reset, the Committee agreed at the time of setting the targets that it would be appropriate to measure underlying FCF on an adjusted
basis, ie before certain items. Accordingly, the Committee set the targets to exclude the cash flow impact of the following items: voluntary
excess pension deficit payments, the Italy fine, operating model restructuring costs, as well as cash flow lost as a result of executing the
disposal programme.
This approach recognised the prevailing business context at the time, shortly after the Executive Directors were appointed, and was
intended to ensure the focus was on driving core performance. In determining that this element of the 2020 PSP award should vest in full,
the Committee adjusted the FCF performance by excluding the cash flow impact for excess pension contributions, the Italian fine, and
restructuring costs, which increased FCF performance by £155 million for the excess pension contributions, £15 million for the Italian fine,
and £40 million for restructuring costs. The Committee is pleased to note that not only was the Company able to increase the payments
made over the period to address the pension deficit, but also that underlying FCF performance after taking into account these items was
ahead of internal expectations.
Long-term incentive scheme (PSP) award granted during FY23 (audited)
The Committee granted PSP awards in the form of nil-cost options in August 2022 to the Executive Directors, consistent with the
Remuneration policy.
Director
David Lockwood
David Mellors
Number
of shares1
474,418
332,093
Face
value2
£1,632,000
£1,142,400
Face value
(% of salary)3
200%
200%
% of award receivable for
threshold performance
16.7%
16.7%
1. Awards are in the form of nil-cost options.
2. Based on three-day average share price (of 344p) at time of grant.
3. Expressed as a percentage of salary at the date of the award (1 August 2022).
Vesting of the awards is based on FCF and relative TSR, equally weighted. The performance period for these awards is the three financial
years 1 April 2022 through to 31 March 2025. Awards vest on a straight-line sliding scale between the stated threshold and stretch
performance levels.
The relative TSR performance range is below:
3-year TSR vs FTSE 350
(excluding investment trusts and financial services)
% weighting
Threshold performance
(16.7% vesting)
Stretch performance
(100% vesting)
50%
Median TSR
Median TSR + 9% pa
Free cash flow (FCF) is defined as cash flows of the Company, including exceptional items (unless the Committee decides otherwise), but
excluding disposals, on an IFRS 16 basis. Given the current position of the Company in its turnaround the Committee considers the performance
range for the cumulative three-year FCF measure to be commercially sensitive but will disclose the range at the earliest opportunity when
its commercial sensitivity is removed. The Committee may need to use its discretion to review the outcome of the awards in 2025 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.
146
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Deferred Bonus Plan awards made during FY23 (audited)
In 2022, the Committee approved the payment of annual bonuses to both Executive Directors under the FY22 annual bonus plan. For
more detail, please see the single total figure table on page 143.
Single total figure of remuneration for Non-Executive Directors for FY23 (audited)
The table below sets out the total remuneration received by each Non-Executive Director:
Base fee
Additional
fee1
Total2
Total fixed
remuneration
Total variable
remuneration
FY23 £’000
FY22 £’000
FY23 £’000
FY22 £’000
FY23 £’000
FY22 £’000
FY23 £’000
FY22 £’000
FY23 £’000
FY22 £’000
Fixed remuneration
Ruth Cairnie
Lucy Dimes
Kjersti Wiklund3
Russ Houlden3
Carl-Peter Forster4
Lord Parker
John Ramsay5
Jane Moriarty6
336
61
28
20
72
61
61
20
336
61
61
61
72
61
15
n/a
–
–
4
–
11
6
15
–
–
–
15
14
–
–
1
–
336
61
32
20
83
67
76
20
336
61
76
75
72
61
16
n/a
336
61
32
20
83
67
76
20
336
61
76
75
72
61
16
n/a
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1. Relating to role as Chair of the Audit Committee (John Ramsay), Remuneration Committee (Kjersti Wiklund until her retirement in September 2022 and now Carl-Peter
Forster), and Director designated for employee engagement (Lord Parker).
2. Non-Executive Directors did not receive any taxable benefits in FY23 or FY22.
3. Kjersti Wiklund retired from the Board in September 2022 and Russ Houlden retired in July 2022.
4. Carl-Peter Forster is the Senior Independent Director and Chair of the Remuneration Committee.
5. John Ramsay joined the Board in January 2022.
6. Jane Moriarty joined the Board in December 2022.
Sourcing of shares
Shares needed to satisfy share awards for Directors are shares that the Company either newly issues to the Group’s employee share trusts or
purchases in the market by the trusts using funds advanced by the Company. The Company finalises the source selection on or before
vesting, depending on the Board’s view of the best interests of the Company at the time, within the limits of available headroom and
dilution restrictions.
Executive Directors’ remuneration for FY24
The Committee has set the remuneration for Executive Directors for FY24 in line with its new Remuneration policy.
Fixed pay
The Company has not completed its FY24 pay review for the general UK workforce. Therefore, the Committee has decided not to review
the fixed pay of the Executive Directors until later in the year when the FY24 pay review is more advanced. In its review, the Committee will
take account of shareholders’ views on increases in executive pay and their alignment with the increases for the workforce. The Executive
Directors will receive the same pension arrangements as in FY23 (ie at 10% of salary) and the same benefits as in FY23.
David Lockwood
David Mellors
1 April 2023
£816,000
£571,200
1 April 2022
£816,000
£571,200
FY24 annual bonus
The structure of the Executive Director annual bonus for FY24 is consistent with that for FY23, with measures based on underlying OCF,
underlying PBT and non-financial objectives. The Committee has agreed the targets but, due to their commercial sensitivity, it 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% payable in cash (in line with our normal
Remuneration policy).
Babcock International Group PLC / Annual Report and Financial Statements 2023
147
Governance statement: Remuneration (continued)
2023 PSP awards
The Committee intends to grant awards under the PSP to the Executive Directors in 2023 covering the three-year period FY24–FY26, with
the measures being underlying free cash flow (weighted 30%), underlying operating margin (30%), organic revenue growth (25%, subject
also to a discretionary underpin if operating margin performance is below threshold), and ESG (15%).
3-year organic revenue growth
3-year weighted average underlying operating margin1
3-year cumulative underlying free cash flow
1. FY24 and FY25 account for 25% each of the measure whereas FY26 accounts for 50%.
Awards vest on a straight-line sliding scale between threshold and stretch.
The targets for the ESG measures are:
% weighting
25%
30%
30%
Threshold performance
(16.7% vesting)
15.7%
6.8%
£216m
Stretch performance
(100% vesting)
23.6%
8.0%
£324m
• A reduction in the Company’s carbon emissions in FY26 within a range of (6.7)% and (8.5)%. This measure will have a weighting of 7.5%
(ie half of the ESG total weighting of 15%). A reduction of (6.7)% will result in a 16.7% vesting of this portion of the ESG element, with a
reduction of (8.5)% warranting full vesting.
• The achievement of senior management gender diversity range in FY26 of between a threshold of 28.5% and a maximum of 31.5%,
being a -5% and +5% range around the Company’s gender diversity target. This measure will have a 7.5% weighting, with a 16.7% vesting
at threshold and full vesting at maximum. The definition of senior management is employees, excluding Executive Directors, who have
responsibility for planning, directing or controlling activities of the Group or a strategically significant part of the Group (Sector/
Functional leadership teams) and/or are directors of subsidiary business units (Business Unit leadership).
Payments for loss of office (audited)
No payments for loss of office were made during the year ended 31 March 2023.
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 2019 DBP award
(the value of which was disclosed in the 2019 Directors’ Remuneration Report) vested on 13 June 2022.
Bill Tame retired from the Company on 30 June 2018, having previously stepped down as an Executive Director on 31 March 2018. His
2019 DBP award (the value of which was disclosed in 2019 Directors’ Remuneration Report) vested on 13 June 2022.
Non-Executive Directors’ fees (including the Chair)
In line with the approach taken with the Executive Directors, the Committee will review the Chair’s fee later in the year when the FY24 pay
review for the general UK workforce is more advanced. The same approach will be taken for the review of the Non-Executive Director fees.
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
Director designated for employee engagement2
FY24
£
336,000
72,000
61,000
15,000
15,000
7,500
FY23
£
336,000
72,000
61,000
15,000
15,000
7,500
% change since last review
(% pa)
0%
0%
0%
0%
0%
0%
2. The Company sets fees for non-UK-based Directors having regard to the extra time commitment involved in attending meetings.
3. The Company pays fees for chairing Board Committees in addition to the basic applicable Non-Executive Director’s fee and for acting as the Director designated for
employee engagement. The Company does not pay additional fees for membership of Committees.
Percentage change in the remuneration of all Directors compared to the workforce
The table below shows the annual percentage changes in remuneration over the last three years for each individual who was a Director
during the year ended 31 March 2023, compared to the average UK employee, as required under The Companies (Directors’
Remuneration policy and Directors’ remuneration report) Regulations 2019 (the ‘Regulations’). The Committee will build up this analysis 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 Directors’ remuneration compared to all other
employees of the parent company in the Group. However, the Company does not have any employees, meaning there would be no data to
disclose for the broader employee population. The Committee has therefore elected to compare the change in Directors’ remuneration
with the change in remuneration for the average of the UK employee population, as a suitable comparator group for this purpose.
The Committee monitors this information to ensure that there is appropriate alignment over time in fixed pay between Executive Directors,
Non-Executive Directors, and UK employees.
148
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Executive Directors
David Lockwood
David Mellors
Non-Executive Directors2
Ruth Cairnie
Lucy Dimes
Kjersti Wiklund3
Russ Houlden3
Carl-Peter Forster
Lord Parker
John Ramsay4
Jane Moriarty5
Average for all UK employees6
Base salary/fees
Taxable benefits
Single-year variable
FY22
to FY231
FY21
to FY22
FY20
to FY21
FY22
to FY231
FY21
to FY22
FY20
to FY21
FY22
to FY231
FY21
to FY22
FY20
to FY21
1%
1%
0%
0%
(15)%
(18)%
16%
10%
0%
n/a
5.9%
1%
1%
5%
5%
4%
10%
11%
5%
n/a
n/a
2%
n/a
n/a
26%
-5%
18%
n/a
n/a
n/a
n/a
n/a
2%
1%
0%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
0%
1%
1%
n/a
n/a
n/a
n/a
n/a
n/a
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
0%
(25)%
(26)%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
(30.57)%
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
n/a
n/a
n/a
n/a
n/a
n/a
(100)%
1. As this table is based on the single figure table, it has produced anomalous results. In respect of the Executive Directors, they did not receive a pay increase in FY23,
but they did in July 2021 (part way through FY22). The single figure table shows a base salary actually paid during the year. FY23 was the first year to show the full
increase granted in FY22. In respect of the Non-Executive Directors, there were changes to the Chairs of Committees and a fee to Lord Parker introduced for his
additional work as Non-Executive Director designated for employee engagement. Together, these account for the percentage changes as there has been no change
to their fee levels, other than the decision to pay a fee for the Director designated for employee engagement. Please see the ’Non-Executive Directors’ fees’ table on
page 147. Explanations for the observed changes in earlier years relating to former directors are provided in the relevant Annual Report on Remuneration.
2. Non-Executive Directors receive fees only. They do not receive taxable benefits and do not participate in incentive schemes.
3. The percentage change in fees for former Directors reflects annualised values for FY23 remuneration to facilitate a comparison with FY22.
4. John Ramsay joined in January 2022. To facilitate a comparison with FY23, his FY22 fee (together with his fee for being the Chair of the Audit Committee) has been
annualised. The increase shown above reflects his appointment in late FY22 to the role of Audit Committee chair.
5. Jane Moriarty joined during FY23 and hence no year-on-year comparison is available.
6. The single year variable figure for our UK employees is provided in respect of our annual bonus plan, which has been estimated based on our expected bonus outturn
for FY23 at the time of disclosure. This estimate is prior to any discretionary adjustments.
Relative importance of spend on pay
Distribution to shareholders
Employee remuneration
FY23
£0m
£1,567m
FY22
£0m
£1,516m
% change
0%
3.4%
Distribution to shareholders includes all amounts distributed to shareholders.
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 employees.
Figures for the CEO come from the Executive Directors’ single figure table on page 143. The Committee determined total remuneration
figures for the lower quartile (P25), median (P50) and upper quartile (P75) employees on 31 March 2023 using the ‘single figure’
methodology, as at 31 March 2023, to provide a like-for-like comparison with CEO remuneration.
The reporting regulations offer three calculation approaches for determining the P25, P50 and P75 employees – Options A, B and C. From
FY23, the Committee concluded to adopt Option B, in recognition of the significant workload placed on our colleagues of the previous
methodology in adopting Option A. During FY23, the Committee evaluated Option B as an alternative methodology, concluding through
back-testing the calculation for recent years that the resulting pay ratios were not unduly sensitive to the methodology adopted. The
Company used the data collected for gender pay gap reporting purposes to identify the three employees representing P25, P50 and P75,
calculating the total full-time equivalent remuneration for these three employees on a similar basis to that adopted for the CEO’s single
figure of total remuneration.
As with last year, the Company excluded bonus payments from the calculations, because it was not feasible to identify those payments for
services delivered within the financial year, and because the Company does not know all bonus pay relating to FY23 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 Company considered the pay and
benefits of a number of employees centred on each of the three employees. 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. The Company made no adjustments or assumptions to the total remuneration of
these employees and calculated the total remuneration in accordance with the methodology used to calculate the single figure of the CEO.
The median CEO pay ratio in FY23 was 60:1, compared to 48:1 in FY22.
Babcock International Group PLC / Annual Report and Financial Statements 2023
149
Governance statement: Remuneration (continued)
The Committee calculated the CEO pay ratio by comparing the CEO’s pay to that of Babcock’s UK-based workforce. The increase within the
FY23 ratios is primarily driven by the higher CEO’s single total figure of remuneration for the latest financial year, a result of the inclusion in
that of an expected 50% vesting level under the 2020 PSP (the first award made to the CEO since joining Babcock). As the remuneration of
the CEO has a significant weighting towards variable pay to align his remuneration with Company performance, it is likely that there will be
greater variability in his pay year to year, than that observed at other levels which have a greater proportion of their pay linked to fixed
components. This is consistent with market practices and the Company’s reward policies across the organisation. In respect of the general
workforce, Babcock understand the need to ensure competitive pay packages across the organisation. For the Committee, it considers the
ratios below when making its decisions around the remuneration of the Executive Directors.
Financial year
FY23
FY22
FY21
FY20
Financial year
FY23
Calculation methodology
Option B
Option A
Option A
Option C
Total remuneration
(£’000)
Salary (£’000)
P25
(lower quartile)
73:1
61:1
30:1
47:1
P25
(lower quartile)
£32.3
£30.9
P50
(median)
60:1
48:1
22:1
37:1
P50
(median)
£39.3
£37.4
P75
(upper quartile)
45:1
36:1
17:1
27:1
P75
(upper quartile)
£52.8
£48.9
Performance graphs
The following graph shows the TSR for the Company compared to the FTSE 250 and FTSE 350 Aerospace & Defence indices, assuming an
investor invested £100 on 31 March 2013. 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.
2
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
250
200
150
100
50
0
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Babcock
FTSE 250 Index
FTSE 350 Aerospace & Defence Index
The table below details the historical CEO pay over a 10-year period.
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
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)
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
1,975
80%
n/a
2,372
59%
50%5
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 between joining the Company in August and joining the Board as CEO on 14 September 2020.
5. Reflects 100% vesting of the FCF component and an expectation of zero vesting of the TSR component.
150
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Directors’ share ownership (audited)
The Committee sets out below the interests of the Directors (and/or their spouses) in the ordinary shares of the Company as at 31 March 2023:
At 31 March 20231
Vested but
subject to
holding period
–
–
Vested but not
exercised
Unvested and
subject to
performance
conditions
– 1,335,413
934,789
–
Options held
Unvested and
subject to
continued
employment
281,373
194,495
S/holding req.
(% salary)
300%
200%
Current
shareholding (%
of salary)3
127%
94%
Req. met?
Building
Building
At 31 March
2022
Shares held
Shares held
Director
David Lockwood
David Mellors
Ruth Cairnie
Lucy Dimes
Kjersti Wiklund 4
Russ Houlden 5
Carl-Peter Forster
Lord Parker
John Ramsay
Jane Moriarty
Owned outright
by Director or
spouse2
186,924
71,268
120,000
5,000
2,100
–
10,000
–
30,000
n/a
Owned
outright by
Director or
spouse2
186,924
71,268
120,000
5,000
2,100
–
10,000
–
30,000
–
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 2023 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 2023 and a three-month average share price to 31 March
2023 of 309p and are calculated post tax.
4. Kjersti Wiklund retired from the Board in September 2022.
5. Russ Houlden retired from the Board in July 2022.
There have been no changes to the continuing Directors’ (or their spouses’) shareholdings between 31 March 2023 and 20 July 2023.
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 2023 was 298.8p. The highest and lowest mid-market share prices in the year ended 31
March 2023 were 367.6p and 268.6p, respectively.
Number of
shares subject
to award at 1
April 2022
408,545
452,450
Director
Plan and year
of award1
David
Lockwood
PSP 2020
PSP 2021
PSP 2022
DBP 20224
(1 year)
DBP 20224
(3 year)
Granted during
the year
Exercised
during the year
Lapsed during
the year
Number of
shares subject
to award at 31
March 2023
Market value of
each share at
date of award
(pence)
Exercise price
(pence)2
Exercisable
from
Expiry date3
474,418
168,824
112,549
408,545
452,450
474,418
168,824
112,549
352.47 Dec 2025 Dec 2026
Aug 2027
353.63
Aug 2028
344
Aug 2026
Aug 2027
344
Aug 2023
Aug 2024
344
Aug 2025
Aug 2026
Babcock International Group PLC / Annual Report and Financial Statements 2023
151
Governance statement: Remuneration (continued)
Director
David Mellors
Number of
shares subject
to award at 1
April 2022
285,981
316,715
Plan and year
of award1
PSP 2020
PSP 2021
PSP 2022
DBP 20224
(1 year)
DBP 20224
(3 year)
Granted during
the year
Exercised
during the year
Lapsed during
the year
332,093
116,697
77,798
Exercise price
(pence)2
Number of
shares subject
to award at 31
March 2023
285,981
316,715
332,093
116,697
77,798
Market value of
each share at
date of award
(pence)
Exercisable
from
Expiry date3
352.47 Dec 2025 Dec 2026
353.63
344
Aug 2026
Aug 2027
Aug 2027
Aug 2028
344
Aug 2023
Aug 2024
344
Aug 2025
Aug 2026
1. PSP = the Company’s Performance Share Plan. Further details about these plans and, where applicable, performance conditions attaching to the awards listed are to
be found on page 146.
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 10th
anniversary of the award.
4. The Company only requires the Executive Directors to defer 40% of any annual bonus awarded into shares, which vest after three years. The remaining 60% of any
annual bonus is paid in cash. In FY22, David Lockwood and David Mellors agreed to defer the 60% usually paid in cash into shares for one year to align their interests
with shareholders.
Summary of share-based awards and options vested during the year
No awards vested for the Executive Directors during the year to 31 March 2023.
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 FY23
None of the Executive Directors received a fee for any external appointment during the year.
The Board approved this Remuneration report on 20 July 2023.
Carl-Peter Forster
Committee Chair
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Other 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, the Directors’ Responsibility Statement on page 158 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 as provided in the table below:
Listing rule
9.8.4 (12-13)
Topic
Shareholder waivers of dividends and future
dividends
Location
Financial statements, note 24 on page 228
Other disclosure requirements set out in LR 9.8.4 R are not applicable to the Company.
Disclosures required pursuant to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as updated
by the Companies (Miscellaneous Reporting) Regulations 2018 can be located as follows:
Topic
Financial risk management regarding financial instruments
Greenhouse gas emissions
Employee engagement
Fostering business relationships with suppliers, customers and others
Subsequent events
Likely future developments in the business of the Group
Details of important events affecting the Group
Location
Note 22, page 221
Page 63
Pages 57, 78, 107 and 112
Pages 56 to 57, 83 to 85 and throughout the Strategic
report
Note 33 on page 227
Pages 18 and 19
Strategic and Directors’ reports, in particular pages 12 to
17 and 24 to 39
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 (2022: nil) and, as part of our continued focus on building a strong balance sheet,
has not recommended a final dividend (2022: nil). Given the stronger than expected cash performance and further de-gearing of the
balance sheet, the Board expects to reinstate a dividend in FY24.
Major shareholdings
As at 31 March 2023, 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
Abrams Bison Investments, L.L.C.
Silchester International Investors LLP
Invesco Ltd
Cobas Asset Management, SGIIC, S.A.
Oaktree Capital Management (UK) LLP
Number of 60 pence ordinary
shares on date of notification
29,311,332
25,567,748
24,896,615
20,458,556
15,330,960
% of issued share capital on
date of notification
5.80%
5.06%
4.92%
4.05%
3.03%
There have been no further notifications between 31 March 2023 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.
Babcock International Group PLC / Annual Report and Financial Statements 2023
153
Other statutory information (continued)
Employment of disabled persons/equal
opportunities
Equal opportunities are available for all employees at Babcock
including those with disability. We recognise that disability covers a
much broader range of both visible and non-visible conditions. To
address this, during FY23, we undertook a full review of options
available for personal data including language and definitions.
We define disability within the HR system as: A person is disabled
under the Equality Act 2010 if they have a physical or mental
impairment that has a ‘substantial’ and ‘long-term’ negative effect
on their ability to do normal daily activities. This does not mean a
person must be registered as disabled. A long-term disability might
include something physical (such as a mobility issue, hearing or sight
impairment or long-term illness). It also covers people with mental
health conditions. Additionally neurodivergence (for example
dyslexia, dyspraxia, Asperger’s and autism) are caught within the
definition, including where someone is undergoing diagnosis.
Declarations have increased as a result, with more of our people
completing options around health conditions and impairments and
informing us that they have a physical and/or other disability. To
support continued employment, training, career development and
promotion of disabled employees we have:
• created and rolled out a dedicated Disability Action Plan;
informed by data and insight and following the employee
lifecycle from attraction to progression and retention, the action
plan details support and provisions for disabled colleagues
• made progress towards achieving Disability Confident Employer
Level 2 (UK Government Disability Confident scheme) as we
continue to develop our processes, ensuring we are inclusive and
providing support for our employee’s to enable them to stay in work
• launched a Group wide Disability Network Group
We are also working to review/refresh additional elements of the
employee lifecycle, ensuring that disability is a clear consideration
at different stages, including recruitment and onboarding.
For more information about the broadening of our inclusion
strategy and our About Me data collection campaign, see page 77.
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 September 2022, 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 10% of the Company’s issued share capital. No
shares in the Company have been purchased by the Company in
the period from 26 September 2022 (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 during the year
to 31 March 2023 by the Babcock Employee Share Trust in
connection with the Company’s executive share plans are to be
found in note 24 on page 229.
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 purposes 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 could 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 National Security and Investment Act 2021 that came
into force on 4 January 2022 provides the UK Government with
new powers to scrutinise and potentially make void transactions on
the grounds of national security. The legislation is part of a global
trend towards introducing foreign investment laws which has seen
a number of other countries introduce similar protections.
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
The Group has a revolving credit facility of up to £300 million
maturing in May 2024 and a £775 million revolving credit facility
where £45 million matures in August 2025 and £730 million
matures in August 2026, providing funds for general corporate and
working capital purposes. 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 a Euro Medium-Term Note Programme under
which it has issued three tranches: €550,000,000 1.75% Notes
redeemed in 2022; £300,000,000 1.875% Notes due in 2026;
and €550,000,000 1.375 % Notes due in 2027.
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Strategic report
Governance
Financial Statements
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 139 and 140.
Articles of Association of DRDL and RRDL
The Articles of Association of Devonport Royal Dockyard Limited
(DRDL) and Rosyth Royal Dockyard Limited (RRDL), both subsidiaries
of the Company, grant the MOD as the holder of a special share in
each of those companies certain rights in certain circumstances.
Such rights include the right to require the sale of shares in, and the
right to remove Directors of, the company concerned. The
circumstances in which such rights might arise include where the
MOD considers that unacceptable ownership, influence or control
(domestic or foreign) has been acquired over the company in
question and that this is contrary to the essential security interests
of the UK. This might apply, for example, in circumstances where
any non-UK person(s) directly or indirectly acquire control over
more than 30% of the shares of the relevant subsidiary, although
such a situation is not of itself such a circumstance unless the MOD
in the given situation considers it to be so.
Surface Ship Support Alliance Agreement (SSSA) dated
23 September 2009 between (1) The Secretary of
State for Defence, (2) Devonport Royal Dockyard
Limited and (3) BAE Surface Ships Limited (as amended)
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.
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) Rosyth Royal Dockyard Limited (as
amended)
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 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 work that is
the subject of the ToBA. ‘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.
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) Rosyth Royal
Dockyard Limited
The Secretary of State for Defence may terminate if, in its
reasonable opinion, a change of control of Rosyth Royal Dockyard
or any holding company will be contrary to the defence, national
security or national interest of the UK.
Future Maritime Support Programme Lot 11
(Warehousing and Distribution at HMNB Clyde) dated
30 March 2021 between (1) The Secretary of State for
Defence and (2) Babcock Marine (Clyde) Limited
The Secretary of State for Defence may terminate on certain grounds,
including national security, if there is a change of control of Babcock
Marine (Clyde) Limited or any other company in the Group that it
objects to and in respect of which its concerns have not been addressed.
Future Maritime Support Programme Lot 1 (Naval
Bases) dated 28 July 2021 between (1) The Secretary
of State for Defence and (2) Devonport Royal
Dockyard Limited
The Secretary of State for Defence may terminate on certain
grounds, including national security, if there is a change of control
of any of Devonport Royal Dockyard Limited, the Company or a
critical key sub-contractor and the Secretary of State’s concerns are
not addressed or, if relevant, Devonport Royal Dockyard Limited
does not terminate the sub-contract.
Future Maritime Support Programme Lot 2 (Ships
Engineering) dated 30 September 2021 between (1)
The Secretary of State for Defence and (2) Devonport
Royal Dockyard Limited
The Secretary of State for Defence may terminate on certain
grounds, including national security, if there is a change of control
of any of Devonport Royal Dockyard Limited, the Company or a
critical key sub-contractor and the Secretary of State’s concerns are
not addressed or, if relevant, Devonport Royal Dockyard Limited
does not terminate the sub-contract.
Future Maritime Support Programme Lot 3
(Submarine Engineering) dated 30 September 2021
between (1) The Secretary of State for Defence and
(2) Devonport Royal Dockyard Limited
The Secretary of State for Defence may terminate on certain
grounds, including national security, if there is a change of control
of any of Devonport Royal Dockyard Limited, the Company or a
critical key sub-contractor and the Secretary of State’s concerns are
not addressed or, if relevant, Devonport Royal Dockyard Limited
does not terminate the sub-contract.
Future Maritime Support Programme Lot 4 (Hard
Facilities Management and Alongside Services at
HMNB Clyde) dated 30 September 2021 between (1)
The Secretary of State for Defence and (2) Devonport
Royal Dockyard Limited
The Secretary of State for Defence may terminate on certain grounds,
including national security, if there is a change of control of any of
Devonport Royal Dockyard Limited, the Company or a critical key
sub-contractor and the Secretary of State’s concerns are not
addressed or, if relevant, Devonport Royal Dockyard Limited does
not terminate the sub-contract.
Babcock International Group PLC / Annual Report and Financial Statements 2023
155
Other statutory information (continued)
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 s793 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 below.
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 quoted on the
London Stock Exchange.
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.
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Strategic report
Governance
Financial Statements
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 is a robust process in place to enable the Board to have
assurance around the overall risk management including the
determination of the nature and extent of the Group’s principal
risks. Management monitors the financial reporting process and the
process for preparing the consolidated accounts through regular
reporting and review. Management reviews data for consolidation
into the Group’s financial statements to ensure that it gives 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. Following the Committee’s FY23 review, the Board is satisfied
that the Company has successfully delivered its improvement plans
for FY23, whilst recognising that there remains ongoing scope for
further improvement in FY24, including lessons learnt from the
FY23 closing.
For more detailed information on the improvements in internal
controls please see the Audit Committee report on page 127.
Further information on the principal internal controls and risk
assurances in use in the Company can be found in the Strategic
report on pages 87 to 92.
Auditor
Deloitte, appointed as Independent Auditor of the Company
following a competitive tender process in 2021, is willing to
continue in office. A resolution to re-appoint Deloitte as
Independent Auditor will be proposed at the forthcoming Annual
General Meeting.
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 in
trust and paid (together with such rate of interest as the Directors
deem appropriate) to the former registered holder upon surrender
of the relevant share certificate in respect of the shares.
Circumstances in which the Directors may determine that shares
are Affected Shares
The Articles provide that where the Directors determine that it is
necessary to take steps in order to protect an operating licence of
the Group they may: (i) seek to identify those shares which have
given rise to the determination and to deal with such shares as
Affected Shares; and/or (ii) specify a maximum number of shares
(which will be less than 50% of the Company’s issued share capital)
that may be owned by non-EEA nationals and then treat any shares
owned by non-EEA nationals in excess of that limit as Affected
Shares (the Directors will publish a notice of any specified maximum
within two business days of resolving to impose such limit). In
deciding which shares are to be dealt with as Affected Shares, the
Directors shall be entitled to determine which Relevant Shares in
their sole opinion have directly or indirectly caused the relevant
determination. However, so far as practicable, the Directors shall
have regard to the chronological order in which the Relevant
Shares have been entered in the separate register.
Right to refuse registration
The Articles provide the Directors with the power to refuse
registration of a share transfer if, in their reasonable opinion, such
transfer would result in shares being treated or continuing to be
treated as Affected Shares.
The Articles also provide that the Directors shall not register any
person as a holder of any share in the Company unless the Directors
receive a declaration of nationality relating to such person and such
further information as they may reasonably request with respect to
that nationality declaration.
The Directors believe that, following the restructuring of the Aviation
sector, those companies in which the Company has an interest and
which 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.
Babcock International Group PLC / Annual Report and Financial Statements 2023
157
Directors’ responsibility statement
Directors’ responsibility statement
So far as the Directors are aware there is no relevant audit
information of which the Company’s auditor is unaware. The
Directors have taken all the steps that they ought to have taken as
Directors in order to make themselves aware of any relevant audit
information and to establish that the Company’s auditor is aware of
that information.
Responsibility statement
Each of the Directors, being each Director who is in office at the
date the Directors’ report is approved and whose names and
functions are listed below, confirms that, to the best of their
knowledge:
• the financial statements, prepared in accordance with the
relevant financial reporting framework, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation
taken as a whole;
• the strategic report includes a fair review of the development
and performance of the business and the position of the
Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal
risks and uncertainties that they face; and
• the annual report and financial statements, taken as a whole, are
fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s position and
performance, business model and strategy.
Ruth Cairnie
Carl-Peter Forster
John Ramsay
Lucy Dimes
Lord Parker
Jane Moriarty
Sir Kevin Smith
David Lockwood
David Mellors
Chair
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 1 to 158) for
the year ending 31 March 2023 have been approved by the Board
and signed on its behalf by:
Ruth Cairnie
Chair
20 July 2023
David Lockwood
Chief Executive Officer
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors are required to
prepare the group financial statements in accordance with United
Kingdom adopted international accounting standards. The
Directors have chosen to prepare the parent company financial
statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and
applicable law), including FRS 101 ‘Reduced Disclosure Framework’.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of the profit or loss
of the Company for that period.
In preparing the parent company financial statements, the
Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are reasonable
and prudent;
• state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the company will
continue in business.
In preparing the Group financial statements, International
Accounting Standard 1 requires that Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
• provide additional disclosures when compliance with the specific
requirements of the financial reporting framework are insufficient
to enable users to understand the impact of particular
transactions, other events and conditions on the entity’s financial
position and financial performance; and
• make an assessment of the Company’s ability to continue as a
going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
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Strategic report
Governance
Financial Statements
Independent auditor’s report to the
members of Babcock International
Group PLC
Report on the audit of the financial statements
1. Opinion
In our opinion:
• the financial statements of Babcock International Group plc (the ‘Company’) and its subsidiaries (the ‘Group’) give a true and fair
view of the state of the Group’s and of the Company’s affairs as at 31 March 2023 and of the Group’s loss for the year then ended;
• the Group financial statements have been properly prepared in accordance with United Kingdom adopted international accounting
standards;
• the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice, including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements which comprise:
• the Group income statement;
• the Group statement of comprehensive income;
• the Group and Company statements of changes in equity;
• the Group and Company statements of financial position;
• the Group cash flow statement; and
• the related Notes 1 to 34 of the Group financial statements and Notes 1 to 13 of the Company financial statements.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and
United Kingdom adopted international accounting standards. The financial reporting framework that has been applied in the preparation
of the Company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure
Framework” (United Kingdom Generally Accepted Accounting Practice).
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the Group and the Company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest
entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services provided to
the Group and
Company for the year are disclosed in note 4 to the financial statements. We confirm that we have not provided any non-audit services
prohibited by the FRC’s Ethical Standard to the Group or the Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
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Independent auditor’s report to the members of Babcock International Group PLC (continued)
3. Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
• Impact of control deficiencies (Group and Company);
• Revenue and margin recognition on key long-term contracts with significant management judgement
(Group);
• Type 31 Programme Estimates (Group);
• Carrying value of goodwill within the Aviation Sector (Group); and
• Disposal of the European Aerial Emergency Services (AES) businesses (Group).
Within this report, key audit matters are identified as follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
We have determined materiality to be £15.6m. See section 6.1 for further details on materiality.
Scoping
Our scope covered 31 components of the Group, all were subjected to a full-scope audit.
The components contribute 98% of revenue and 98% of absolute profit before tax. See section 7 for
further details on our scoping.
Significant changes
in our approach
Our audit approach is consistent with the previous year with the exception of the following:
• Given an onerous contract provision of £55 million has been recorded in the current year in respect of the
Type 31 frigate contract, we have identified a new key audit matter in respect of this provision.
• Given the disposal during the year of part of the Group’s European Aerial Emergency Services (AES)
businesses, we have identified a new key audit matter. We have also increased the scope of the Canadian
component to full scope to ensure we obtained sufficient audit evidence to support our opinion.
• In the prior year, we identified a key audit matter over the carrying value of property, plant and equipment
(PP&E) and Right of Use (RoU) assets in the Aviation sector. Given the impairments in the prior year and the
disposal of the AES businesses during the current period, the judgement associated with these assets has
now reduced.
• In the prior year, we identified a key audit matter over the carrying value of goodwill in the Land and Aviation
sector. Given the level of headroom and sensitivity of key assumptions in the Land CGU, we do not consider
there to be a key audit matter associated with these valuations. We continue to identify the carrying value of
goodwill in the Aviation sector as a key audit matter.
• In the prior year, we identified a key audit matter over the hedge effectiveness on foreign currency forward
exchange contracts. This was due to the complexity in designating cash flow hedge relationships, prior year
restatements and control deficiencies identified. During the year, management have discontinued almost all
cash flow hedges and therefore there is now a reduced risk associated with the application of hedge
accounting. As a result, we have not identified this item as a key audit matter.
• In the prior year, we identified a key audit matter over the valuation of retirement benefits and obligations.
This key audit matter primarily focussed on three prior year errors which were identified and recorded.
No such instances have occurred during the current year and as such, this item has been removed as a
key audit matter.
• In the prior year, we identified a key audit matter associated with the carrying value of investments in
subsidiaries in the Company only financial statements. This was primarily due to the prior period error
identified and the subsequent reversal. Given the level of headroom and sensitivity of key assumptions in the
investment valuation, we do not consider this item to be a key audit matter.
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4. Conclusions relating to going concern
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.
Our evaluation of the Directors’ assessment of the Group’s and Company’s ability to continue to adopt the going concern basis of
accounting included:
• Understanding the Group’s processes and related controls over the assumptions in the going concern assessment;
• Assessing the Group’s available committed borrowing facilities;
• Testing the accuracy of the Directors’ models, including agreement to the most recent Board approved budgets and forecasts;
• Determining whether the forecasts used within assessing the going concern assumption were consistent, where relevant, with those
used within Goodwill impairment modelling;
• Challenging the key assumptions of these forecasts by:
• reading analyst reports, industry data and other external information and comparing these with the Directors’ estimates;
• comparing forecast revenue with the secured revenue under contract, contract churn rates, contract win rates and historical
performance; and
• comparing contract margin and overhead cost assumptions to historical performance and the current macroeconomic environment;
• Evaluating the historical accuracy of forecasts prepared by the Directors;
• Assessing the sensitivity of the headroom in the Directors’ forecasts;
• Comparing the risks management has identified in its risk register to the going concern scenarios modelling to assess completeness and
accuracy of the modelled scenarios;
• Evaluating the accuracy and completeness of the covenant compliance calculation within the model;
• Evaluating the downside sensitivities in the context of the FY23 financial position;
• Assessing whether the Directors have considered and reflected the impact of climate risks and opportunities in the Group’s going
concern assessment; and
• Assessing the disclosures relating to going concern in the financial statements.
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 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 relation to the reporting on how the Group 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.
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Independent auditor’s report to the members of Babcock International Group PLC (continued)
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements
of the current year and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified.
These matters included 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 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.
5.1. Impact of control deficiencies (Group and Company)
Refer to page 125 (Audit Committee report)
Key audit matter
description
In the prior year, we identified a large number of errors and significant control deficiencies in the internal control
environment. These were reported to those charged with governance and included as a key audit matter in our
FY22 audit opinion.
As outlined in the Audit Committee report on page 125, the Group has initiated a roadmap for internal control
enhancement over its operational and financial controls. During the year the Company designed and implemented
the “Blueprint Fundamental Control (BFC) improvements” in relation to significant financial reporting risk areas and
risks associated with the prior year financial close reporting process. These were pinpointed to include project bid,
project management, pensions, taxation, consolidation reporting and Treasury controls. During the year- end close
period, we obtained an understanding of controls we deemed to be relevant for our audit.
We consider the level of risk associated with this key audit matter has reduced from the prior year due to the progress
made by management during the current period through the BFC improvements but the risk remains high. Our
expectation when planning our FY23 audit approach was that deficiencies would still remain in the control
environment including in the IT environment and the BFCs would not be operating fully throughout the year. As a
result, we did not plan to rely on controls and undertook a fully substantive approach. This was a contributing factor
to the extended time and effort required to complete the audit.
How the scope of
our audit responded
to the key audit
matter
Our procedures to respond to this key audit matter included:
• interacting with management and the Audit Committee to understand and challenge the actions they were
taking as part of the internal controls enhancement programme to address the control deficiencies identified in
the prior year;
• performing walkthroughs on key accounting processes, with particular focus on long term contract accounting and
the design of the Blueprint of Fundamental Control improvements;
• obtaining an understanding of the general IT control environment; and
• identifying relevant controls and evaluating those controls.
We considered the nature and extent of the 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.
Given the large number of errors and significant control deficiencies identified in the prior year, together with the
implementation of the Blueprint of Fundamental Controls improvements occurring towards the end of the FY23
financial year, we factored this within our audit plan accordingly. Additional procedures included:
• increasing the level of component oversight;
• expanding the types of journal entries that we selected for testing due to failures within the IT environment, that
meant we were not able to rely on these controls;
• involving fraud specialists to respond to our presumed risk of fraud associated with the management override
of controls;
• using data analytics specialists to complement our substantive testing over key areas such as the consolidation
and contracts; and
• maintaining the seniority in our engagement and review teams.
Key observations
Whilst the Group has made progress in responding to the control deficiencies identified, the internal controls
enhancement programme is planned over a number of years and is not yet complete. A number of deficiencies and
misstatements which are individually and collectively immaterial still remain present at year end.
We consider that the design of BFCs are further advanced than sector level controls. We observed varied practice of
implementation of contract review controls across sectors and the formal documentation of these controls, together
with control enhancements occurring during the second half of the financial year such that we concluded the controls
were not operating effectively throughout the year.
We have identified some improvements in core ERP systems in the IT environment but continue to identify
observations associated with privileged access controls and password controls.
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5.2. Revenue and margin recognition on key long-term contracts with significant management
judgement (Group)
Refer to page 129 (Audit Committee report), Group Income Statement, Note 1 (Basis of preparation and significant accounting policies),
Note 16 (Trade and other receivables and contract assets) and Note 18 (Trade and other payables and contract liabilities).
Key audit matter
description
The estimation of lifetime contract margin and the appropriate level of revenue and profit to recognise in any single
accounting period requires the exercise of Directors’ judgement. Within the Group’s contract portfolio there are a
number of contracts which extend over a number of years, with values in excess of £1billion, where there is a
significant degree of judgement and which could lead to a material error within the financial statements. These
judgements include estimating the amount of transformation cost savings on long term facilities management
contracts; the impact of inflation on estimates of cost to complete; estimating the recovery of contractual
entitlements from customers; estimating project completion dates on complex and technically challenging refit
and maintenance projects; and schedule duration and contractual obligations on multiple ship deliveries which
extend over a number of years.
Consequently, we consider that revenue and margin recognition within key contracts, and the associated accounting
for contracts assets, liabilities and provisions, in accordance with IFRS 15: ‘Revenue from Customers with Contracts’
(“IFRS 15”) and IAS 37: ‘Provisions, contingent liabilities and contingent assets’ (“IAS 37”) represents a key audit
matter. Key aspects of IFRS 15 we considered related to the recognition of variable consideration on contracts and,
under IAS 37, the measurement of the provision for loss making contracts where there were cost increases and/or
delays to the contract schedule.
Given the level of judgement involved in estimating costs to complete on these long-term contracts, particularly in a
high inflationary environment; cost allocation between contracts; assessing the level of allowable and disallowable
costs to recharge; the level of cumulative-catch-up adjustments (CCAs) recorded and the subsequent impact on
revenue and margin recognition, we identified this as an area for potential management bias.
In order to identify the key contracts where there is a significant risk of material misstatement, we undertook a
contract risk assessment process for each sector utilising data analytics, the latest contract information, our
understanding of the business, the results of prior audits and review of external information about market and
geopolitical conditions which might impact certain contracts. We held meetings with key finance and contract
managers, attended business review meetings and other key management meetings, read and understood underlying
contract documentation and obtained support for key contract judgements.
In addition, we looked for contracts which may have higher levels of judgement associated with the risk of schedule
delivery or technical complexity, and other indicators that could increase the risk of a material impact on the financial
statements, including achieving forecast learner, efficiency and transformation savings and the impact of rising
inflation. As a result of our risk assessment, we identified four contracts where we consider there to be the highest
degree of judgement required in estimating the outturn margin position. These are: Type 31 Frigates; FMSP; Vanguard
and DSG. In particular this year the T31 contract for the Design & Build of 5 Type 31 Frigates for the UK Royal Navy
has been subject to a significant degree of change and cost increases. We have identified a separate key audit matter
associated with the Type 31 Programme Estimates, see section 5.3 for further details.
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Independent auditor’s report to the members of Babcock International Group PLC (continued)
5.2. Revenue and margin recognition on key long-term contracts with significant management
judgement (Group ) continued
How the scope of
our audit responded
to the key audit
matter
Our contract testing approach included:
Understanding relevant controls
• We obtained an understanding of relevant manual and IT controls and project accounting processes which
management have established to ensure that contracts are appropriately forecast, managed, challenged and
accounted for.
• As part of this, we attended a sample of project contract status review meetings, quarterly business review
meetings and Group level meetings to understand the various levels of challenge applied to the forecasts.
• As outlined in Key Audit Matter 5.1, we did not rely on any controls for the purposes of our substantive testing.
Challenging management’s assumptions and estimates
Our work included:
• obtaining an understanding of the contract and its key terms;
• making inquiries of contract project teams and other personnel to obtain an understanding of the performance of
the project throughout the year and at year-end;
• assessing delivery progress and challenging key areas of estimation in overall contract revenue and cost;
• performing a risk assessment to identify contracts where cost shifting could impact on the margin recorded and
performing testing on contracts with characteristics of audit interest;
• analysing historical contract performance and understanding the reason for in- year movements or changes;
• performing site visits to inspect status of construction;
• testing the underlying calculations used in the contract assessments for accuracy and completeness, including the
estimated costs to complete the contract, the associated contingencies and exit liabilities;
• considering historical forecasting accuracy of costs, comparing to similar programmes, and challenging future cost
expectations with reference to those data points;
• recomputing the CCAs recorded by management;
• obtaining evidence and assessing management’s transformational savings assumptions;
• examining external correspondence to assess the timeframe and contractual performance for delivery of the
product or service and any judgements made in respect of these;
• assessing the underlying inflation assumptions against competitors, the wider market and inflation rates;
• examining internal and external evidence to assess contract status and estimation of variable consideration
(including associated recoverability of contract balances), such as customer correspondence and, for certain
contracts, meeting with the customer directly;
• enquiring with in-house and external legal counsel regarding contract related judgements and claims and
contractual entitlement relating to applicable regulations;
• considering whether there were any indicators of management override of controls or bias in arriving at the
reporting position; and
• assessing the appropriateness of disclosures in the financial statements.
Key observations
The results of our testing were satisfactory.
Through our testing of the contracts in relation to this key audit matter we consider the judgements made by the
Group in recognising revenue and profit to be reasonable.
We identified misstatements which were individually and collectively immaterial which had a net impact of reducing
revenue and remain uncorrected.
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5.3. Type 31 Programme Estimates (Group)
Refer to page 129 (Audit Committee report) and Note 1 (Basis of preparation and significant accounting policies)
Key audit matter
description
The Type 31 contract is complex involving the construction of five ships over a multi-year build programme. The
ability of the Group to determine future build cost and schedule duration estimates is critically dependant on the
maturity of the ship design. Ship 1 is currently under construction. The Group is therefore required to make both
operational and financial assumptions to estimate future costs over a number of years. The prediction of future events
over extended periods contains inherent risk and the outcome is uncertain and involves a high degree of
management estimation.
During the year significant increases in forecast costs on the Type 31 programme were identified, which were not
foreseen at contract inception. A contract dispute resolution process has been commenced over responsibility for
some elements of these incremental costs, but management have assessed the contract outturn on the basis that
these are not recovered given the early stage of negotiations.
As a result, a £100m loss has been recorded in the year in relation to the contract, reflected through a £43m reversal
of revenue, £2m asset impairment and the recognition of a £55m onerous contract provision.
There is a risk that the provision recognised in respect of this contract does not appropriately cover the unavoidable
future losses against the contract as required under IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”
(“IAS 37”) and the revenue and margin for this contract has been recognised in accordance with IFRS 15: ‘Revenue
from Customers with Contracts’ (“IFRS 15”).
We have identified a key audit matter in respect of the judgements applied in the assessment of unavoidable future
cash flows used to determine the onerous contract provision. The key estimates relate to:
• the ability of the Group to estimate build costs over the schedule and estimate efficiencies arising from the ‘learner’
effect through work over multiple ships. The ‘learner’ effect assumes similar activities will naturally be performed
more efficiently over time due to continuous repetition, rather than through separate process improvements;
• the ability of the Group to maintain or improve current operational performance through process efficiencies and
improvements over the 5 ships;
• the assessment of inflation on the build cost; and
• the achievement of the build schedule to completion and final acceptance including compliance with contractual
delivery dates and performance metrics.
Material adjustments would arise if management assumptions differ from the time and cost it takes to complete the
contract, which extends over a number of years. With c£1bn of estimated costs to go over the life of the contract, if
actual recoveries or costs were to differ from those assumed by 5-10%, the potential impact on the contract outturn
could be £50-£100m.
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Independent auditor’s report to the members of Babcock International Group PLC (continued)
5.3. Type 31 Programme Estimates (Group) continued
How the scope
of our audit
responded to the
key audit matter
As a result of our observations regarding the financial review controls over T31 (see ‘key observations’ section below),
we have modified the nature, timing and extent of our audit procedures and performed site visits to inspect work
performed to date and held discussions with various operational team members to obtain a detailed understanding of
the build schedule and planned build activities and processes.
We completed the following audit procedures:
• Read the contract to obtain an understanding of the key contractual terms;
• Obtained an understanding of relevant controls in place to review the financial performance of the T31 contract
and forecast future revenue and costs and account for the onerous contract in the Group’s financial statements;
• Tested the maturity of the design by considering the number of completed engineering drawings versus the plan,
and validating a sample of design changes to engineering sign off in the year;
Specifically with regards to the testing of future build cost and schedule duration estimates we have:
• Evaluated the reasonableness of future cash flow forecasts with reference to current performance (both in year and
post year end to date) trend analysis, historical forecasting accuracy, and forecast operational improvements in the
contract;
• Challenged the forecast assumptions used by management with regards to future build costs by extrapolating current
performance (adjusted for those costs not forecast to recur) to date and comparing against management’s estimate.
• Tested a sample of non-recurring costs by validating the nature of the costs incurred and obtaining supporting evidence
for the individual items. In addition, a sample of forecast third party costs were agreed through to supplier contracts;
• Validated the ‘learner’ build cost efficiency saving back to independent third party industry reports;
• Challenged whether planned efficiency savings initiatives were within the Group’s contractual ability to implement,
its ability to reasonably assess their financial impact, and the forecast timing of their implementation;
• Challenged management’s forecast inflation assumptions by benchmarking against external third party forecast
data; and
• Challenged the forecast schedule assumptions with reference to current build progress versus forecast and the
availability of skilled labour. Specifically, we have challenged management’s assumptions for the average time and
cost to manufacture and install categories of units and parts required to complete the ship. We have validated
activities performed to date on a sample basis agreeing to time records and physical inspection of completed items
on the ship. We have obtained explanations and supporting evidence for significant variances between current
performance and forecast. We have also challenged the sufficiency of management’s resourcing plans compared to
the activities forecast to be performed and tested a sample of leavers/joiners post year end in order to determine
whether the resourcing plan is being met.
In addition, we have:
• Evaluated management’s forecast compliance with the contractual performance metrics by understanding the
process for assessing compliance and the interdependencies between the metrics;
• Evaluated the approach adopted in management’s model to determine compliance with the requirements of
IAS 37. This included considering a range of possibilities and that management had taken its ‘best estimate’ in
determining the provision amount;
• Tested the arithmetic accuracy of management’s model;
• Evaluated, in accordance with IAS 8, whether the current year loss provision represents a change in estimate and is
therefore recognised in the appropriate period.
• Evaluated the sensitivity analysis prepared by management and performing our own sensitivity calculations to assess
the appropriateness of the provision recorded; and
• Assessed the appropriateness of the Group’s disclosures in respect of onerous contracts and their compliance with
the requirements of IAS 37 including sensitivites.
Management’s control over the review of the financial performance on the contract was enhanced in the second half
of the financial year and therefore did not operate throughout the year. In response, we have spent additional time
with operational management, and have performed detailed substantive testing in accordance with the procedures
set out above.
Our procedures performed above identified a large number of critical judgements and estimates within
management’s estimation of the cost to complete, for example the ability of the Group to maintain or improver
current operational performance levels and the completion of the build schedule to completion and final acceptance.
As a result, we consider there is a large range of potential outcomes for the Type 31 programme, as discussed further
within the “Key Sources of Estimation Uncertainty” section of Note 1.
However, whilst highlighting the large range of potential outcomes for the programme, based on the work performed
as outlined above we are satisfied that the judgements and estimates made by the Directors in determining the
onerous contract provision recognised on Type 31 are reasonable, and in accordance with IAS 37 “Provisions,
Contingent Liabilities and Contingent Assets”.
Given the uncertainties in forecasting future unavoidable cashflows, the disclosure sensitivities in Note 1 provide
important information to assess the impact of a reasonably possible change in key assumptions.
Key observations
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5.4. Carrying value of Goodwill within the Aviation sector (Group)
Refer to page 129 (Audit Committee report), Note 1 (Basis of preparation and significant accounting policies) and Note 10 (Goodwill)
Key audit matter
description
The Group holds goodwill balances with a combined carrying value of £781.4m as at 31 March 2023
(2022: £783.4m).
The Directors perform an impairment review of the carrying value of each Cash Generating Unit (‘CGU’) on an annual
basis in line with the requirements of IAS 36.
As described in Note 10 to the financial statements, goodwill is monitored at an operating segment level. The
Directors have assessed that they do not consider there to be any reasonably possible changes in estimates that would
result in impairment in goodwill across all CGUs.
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 five-year plan. Terminal value
assessments are included based on year five and an estimated long-term, country-specific growth rate of 1.9–2.1%
(2022: 1.8-2.5%). 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 of opportunities prior to release of tenders. The process includes consideration of risks and
opportunities at contract and business level, and considered matters such as supply chain disruption, inflation and
climate change.
From our risk assessment procedures, we have identified a key audit matter in relation to the valuation of goodwill in
the Aviation operating segment given the sensitivities of key assumptions and the historical inaccuracy of
management’s forecasts. This work focused on the key assumptions within the short-term growth forecasts such as
future revenue growth and margin improvements.
We completed the following audit procedures:
• Obtained an understanding of the key controls in the impairment process, including the review controls performed
at a sector level of the five-year plan, the Group level review of the five-year plan, and the Directors’ review of the
goodwill model;
• Assessed the mechanical accuracy of the impairment models and the methodology applied for consistency with the
requirements of IAS 36;
• Challenged the appropriateness of the Directors’ assessment of CGU groups with reference to the requirements of
IAS36 and the level at which operations are managed and goodwill is monitored for internal reporting purposes;
• Assessed the completeness and accuracy of the allocation of corporate overheads to CGUs;
• Evaluated and challenged underlying assumptions, including forecast revenue, contract turnover rates, margins,
future capital expenditure and working capital adjustments with reference to recent and historical performance,
external industry benchmarks, specific forecast events, and considering the impact of any climate related matters;
• Engaged our valuations specialists to assess the discount rate;
• Performed a ‘stand-back’ assessment, including consideration of enterprise value compared to the Directors’ value
in use; and
• Assessed the appropriateness of the Group’s disclosures in the financial statements.
How the scope
of our audit
responded to the
key audit matter
Key observations
Consistent with prior year, our controls work highlighted that there was a lack of formalised documentation over
model assumptions made with limited documented evidence of review.
We are satisfied that the judgements applied and disclosures within the financial statements are appropriate.
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Independent auditor’s report to the members of Babcock International Group PLC (continued)
5.5. Disposal of the European Aerial Emergency Services (AES) businesses
Refer to page 130 (Audit Committee report), Note 28 Acquisition and disposal of subsidiaries, businesses and joint ventures and associates
Key audit matter
description
How the scope of
our audit responded
to the key audit
matter
As disclosed further in Note 28, the Group completed the disposal of part of its European AES business during the
year. The disposal group was part of the Aviation operating segment and provided Aerial Emergency Services
including medical, firefighting and search & rescue services to customers and communities, in Italy, Spain, Portugal,
Norway, Sweden and Finland. The disposal completed on 28 February 2023. The Group received consideration of
£187.1 million and has recognised a loss on disposal of £73.5m. As part of this disposal, the Group disposed of
£243.7m of net assets, incurred £18.1m of disposal costs and recycled £1.2m of cumulative currency translation loss.
The key judgements related to this key audit matter lie in the valuation of retained assets and obligations such as
warranties and determination of the amount of foreign exchange balances to recycle from reserves which are
included in the calculation of the loss on disposal.
Our procedures on the disposal included:
• Obtaining an understanding of relevant controls, including management review controls, over the valuation of
assets and obligations and determination of the amount of foreign exchange balances to recycle from reserves;
• Agreeing the terms / validity of the disposal to the sale and purchase agreement (SPA);
• Assessing that the AES business had been deconsolidated from the date control passed by evaluating the relevant SPA;
• Assessing the disposal against the criteria of IFRS 5 to evaluate whether it is appropriate to not be classified as a
discontinued operation;
• Agreeing the cash consideration to bank statements;
• Performing substantive analytical procedures over the net assets of the disposal Group at the date of disposal and
agreeing this to the net assets included in management’s calculation;
• Assessing and Recalculating the recycling of retranslation differences to the income statement that were recorded
in reserves prior to disposal;
• Testing the transaction and other disposal related costs by agreeing a sample to supporting invoices;
• Challenging the assumptions over the valuation of retained assets and obligations, which included assessing the
accuracy and completeness of these items and considering contradictory evidence such as legal and tax due
diligence reports;
• Recalculating the loss on disposal; and
• Evaluating the relevant disclosures regarding the disposal of the AES business within Note 28.
Key observations
We consider that the judgements taken by management and disclosures made within the financial statements in
determining the total loss to be recognised are reasonable.
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6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of
a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and
in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Company financial statements
Materiality
£15.6m (2022: £15.6m)
£61.7m (2022: £66.3m)
1% of total assets (2022: 1%). A lower materiality of
£12.5m was used for the purposes of the Group audit was
based on 80% of Group materiality (2022: 80%).
The materiality determined for the standalone Company
financial statements exceeds the Group materiality.
This is due to the fact that the total asset balance of the
Company financial statements exceeds the total asset
balance of the Group.
Where there were balances and transactions within the
Company accounts that were within the scope of the
auditof the Group financial statements, our procedures
were undertaken using the lower materiality level applicable
to the Group audit components. It was only for the purposes
of testing balances not relevant to the Group audit, such as
intercompany investment balances, that the higher level of
materiality applied in practice.
As the Company is non-trading and operates primarily as a
holding Company, we believe the total asset position is the
most appropriate benchmark to use.
Basis for
determining
materiality
Rationale for the
benchmark applied
The materiality has been determined by considering a
range of possible benchmarks used by investors and other
readers of the financial statements. Due to the continuing
transition of the Babcock business following the contract
profitability and balance sheet (CPBS) review and new
management, and the absence of normalised financial
performance, a method consistent with that of the
previous period has been applied.
In particular, we considered: Revenue, Net Assets, Total
assets, Profit before tax, Profit before tax excluding
amortisation of acquired intangibles, business acquisition,
merger and divestment related items, fair value
movement on derivatives and related items as defined
in Note 2 and cash generated from operations.
Our materiality represents:
Metric
Revenue
Net assets
Total assets
Profit before tax excluding
amortisation of acquired
intangibles, business
acquisition, merger and
divestment related items,
fair value movement on
derivatives and related items
as defined in Note 2
FY23
0.4%
4.2%
0.5%
FY22
0.4%
2.2%
0.3%
12.1%
9.1%
We assessed which line items are the most important to
investors and analysts by reading analyst reports and
Babcock’s communications to shareholders, as well as the
communications of peer companies.
Profit before tax is the benchmark ordinarily considered by
us when auditing listed entities. It provides comparability
against companies across all sectors but has limitations
particularly where profitability has significantly varied year
on year as is the case for Babcock.
Following this assessment, we determined using our
professional judgement that the selected materiality was
appropriate. We note this is consistent with the approach
adopted in the prior year.
Babcock International Group PLC / Annual Report and Financial Statements 2023
169
Independent auditor’s report to the members of Babcock International Group PLC (continued)
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the financial statements as a whole.
Performance
materiality
Basis and rationale
for determining
performance
materiality
Group financial statements
Company financial statements
60% (2022: 60%) of Group materiality
60% (2022: 60%) of Company materiality
In determining performance materiality, we considered the following factors:
• The deficiencies identified in the control environment;
• The de-centralised nature of the Group and lack of common controls and processes; and
• The nature, volume and size of identified corrected and uncorrected misstatements identified in the prior year
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of
£780,000 (2022: £780,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We
also report to the Audit Committee on disclosure matters that we identify when assessing the overall presentation of the financial statements.
7. An overview of the scope of our audit
7.1. Identification and scoping of components
We performed our scoping of the Group audit by obtaining an understanding of the Group and its environment, including Group-wide controls,
and assessing the audit risks. This exercise considered the relative size of each reporting unit’s contribution to revenue, profit before tax and
adjusted profit before tax, alongside further financial or contractual risks, which we considered to be present. Given the disposal of the
European AES business, we have increased the scope of the Canadian component to full scope to ensure we obtained sufficient audit
evidence to support our opinion. This resulted in 31 full scope components (2022: 29 components and 1 specified balances scope).
For all other reporting units not included in full scope , we performed centrally directed analytical review procedures to confirm our
conclusion that there was no significant risk of material misstatement in the residual population.
As each of the reporting units maintains separate financial records, we engaged component auditors from the Deloitte member firms in Australia,
Canada, France and South Africa, to perform procedures under our direction and supervision. We have also involved component auditors
from Spain, Italy, Norway and Sweden to perform work on the income statement for certain periods of Babcock ownership prior to disposal.
Excluding the Company, Component materiality ranged from £3.09m to £4.91m (2022: £3.09m to £4.91m)
Our audit approach ensured that we engaged local auditors who have appropriate knowledge of local regulations to perform the audit
work, under a common Deloitte audit approach. We issued detailed instructions to the component auditors, including specific procedures
to address Group level significant risks such as contracts testing and asset impairment procedures for some geographies and directed and
supervised their work through a number of visits to the component auditor during the planning and performance stages of our audit
alongside frequent remote communication and review of their work.
In addition to the work performed at a component level the Group audit team also performs audit procedures on the Company financial
statements including but not limited to corporate activities such as treasury and pensions as well as on the consolidated financial
statements themselves, including entity level controls, litigation provisions, the consolidation, financial statement disclosures and risk
assessment work on components not included elsewhere in the scope of our audit. The Group audit team also co-ordinates certain
procedures performed on key areas, such as PPE impairment, where audit work is performed by both the Group and component audit
teams as well as analytical reviews on out-of-scope components.
The 31 full scope components contribute the proportions of Group totals shown below.
2%
2%
Revenue
98%
Absolute
profit
before tax
98%
Full audit scope
Review at group level
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Financial Statements
7.2. Our consideration of the control environment
We have performed detailed walkthroughs of the processes associated with each of the Group’s business cycles, identifying relevant
controls and evaluating those controls. We also identified relevant IT applications, infrastructure and operating systems used in the
operation of the Group’s relevant controls, and performed testing of the general IT controls over those systems identified as key.
As a result of the deficiencies outlined in section 5.1 we did not rely on those controls in line with our planned approach.
7.3. Our consideration of climate-related risks
The Group has considered climate change risk as part of their risk assessment process when considering the principal risks and uncertainties
facing the Group. This is set out in the strategic report on pages 63 to 73, and in Note 1 to the financial statements on page 182.
The areas of the financial statements that are notably impacted by climate-related considerations are associated with future forecasts in the
medium to long term. These include considerations of the cash flows and growth rates used to determine the recoverable amount of
goodwill. The Group also considered the potential impact on useful economic lives, disruption to key operating sites and supply chain.
We have performed the following procedures:
• assessed the key financial statement line items and estimates which are more likely to be materially impacted by climate change risks
given the more notable impacts of climate change on the business are expected to arise in the medium to long term.
• challenged how the Directors considered climate change in their assessment of going concern based on our understanding of the
business environment and by benchmarking relevant assumptions with market data.
• involved our Environmental Social and Governance (ESG) specialists in challenging the Group’s climate principal risk assessments. ESG
specialists were also involved in evaluating the ESG section of the annual report and assessing Task Force on Climate-related Financial
disclosures (TCFD) on page 67 against the recommendations of the TCFD framework.
• assessed whether climate risk assumptions underpinning specific account balances were appropriately disclosed.
• read the climate risk disclosures included in the strategic report section of the annual report for consistency with the financial statements
and our knowledge of the business environment.
7.4. Working with other auditors
Our oversight of component auditors included directing the planning of their audit work and understanding their risk assessment process to
identify key areas of estimates and judgement, as well as supervising the execution of their audit work.
We issued detailed instructions to the component auditors, reviewed and challenged the related component inter-office reporting and
findings from their work, reviewed underlying audit files, attended component audit closing conference calls and held regular remote
communication to interact on any related audit and accounting matters which arose. Additionally, all teams were involved in our
global planning and fraud meeting, which was led by the Group audit team. Visits to meet with certain component teams in Australia,
South Africa and France were conducted. Where we did not visit components in person, we maintained an ongoing dialogue virtually
and reviewed files remotely.
The Company is located in the United Kingdom and the UK businesses were audited directly by the Group audit team.
We are satisfied that the level of involvement of the Group audit partner and team in the component audits has been appropriate and has
enabled us to conclude that sufficient appropriate audit evidence has been obtained in support of our opinion on the Group financial
statements as a whole.
8. Other information
The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report
thereon. The Directors are responsible for the other information contained within the Annual Report.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
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 course of the audit, or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a
material misstatement in the financial statements themselves. 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 in this regard.
Babcock International Group PLC / Annual Report and Financial Statements 2023
171
Independent auditor’s report to the members of Babcock International Group PLC (continued)
9. Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors 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.
10. Auditor’s 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 auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
11. Extent to which the audit was considered capable of 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 above, 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.
11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non- compliance with laws and
regulations, we considered the following:
• the nature of the industry and sector, control environment (in particular the ongoing deficiencies identified in the previous year, see 5.1
above) and business performance including the design of the Group’s remuneration policies, key drivers for Directors’ remuneration,
bonus levels and performance targets;
• the Group’s own assessment of the risks that irregularities may occur either as a result of fraud or
• error that was approved by the Board;
• results of our enquiries of the Directors, internal audit, internal and external legal counsel and the Audit Committee about their own
identification and assessment of the risks of irregularities;
• any matters we identified having obtained and reviewed the Group’s documentation of their policies and procedures relating to:
• identifying, evaluating and complying with laws and regulations and whether management were aware of any instances of non-
compliance;
• detecting and responding to the risks of fraud and whether management have knowledge of any actual, suspected or alleged fraud;
• the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations including obtaining an
understanding of the Group’s bribery and corruption and whistleblowing policies; and
• the matters discussed among the audit engagement team including significant component audit teams and relevant internal specialists,
including tax, fraud, valuations, pensions and IT specialists regarding how and where fraud might occur in the financial statements and
any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified
the greatest potential for fraud in the level of judgement involved in estimating costs to complete on long-term contracts. In common with
all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override of controls.
We also obtained an understanding of the legal and regulatory frameworks that the Group operates in, focusing on provisions of those laws
and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws
and regulations we considered in this context included the UK Companies Act, Listing Rules, pensions legislation and tax legislation.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but
compliance with which may be fundamental to the Group’s ability to operate or to avoid a material penalty, including in respect of export
controls, defence contracting and anti-bribery and corruption legislation.
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Strategic report
Governance
Financial Statements
11.2. Audit response to risks identified
As a result of performing the above, we identified ‘Revenue and margin recognition on key long-term contracts with significant
management judgement’ and ‘T31 programme Estimates’ as a key audit matters related to the potential risk of fraud. The key audit matters
section of our report explains the matters in more detail and also describes the specific procedures we performed in response to those key
audit matters.
In addition to the above, our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing against supporting documentation to assess compliance with provisions of
relevant laws and regulations described as having a direct effect on the financial statements;
• enquiring of the Directors, the Audit Committee, in-house legal counsel, and where needed, circularising external legal counsel,
concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement
due to fraud;
• reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with
relevant regulatory authorities; and
• in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating
the business rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including
internal specialists and significant component audit teams and remained alert to any indications of fraud or non-compliance with laws and
regulations throughout the audit.
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic Report and the Directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
• the Strategic Report and the Directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the Company and their environment obtained in the course of the
audit, we have not identified any material misstatements in the Strategic Report or the Directors’ report.
13. Corporate Governance Statement
The Listing Rules require us to review the Directors’ statement in relation to going concern, longer-term viability and that part of the
Corporate Governance Statement relating to the Group’s compliance with the provisions of the UK Corporate Governance Code specified
for our review.
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 with regards to the appropriateness of adopting the going concern basis of accounting and any material
uncertainties identified set out on page 105;
• the Directors’ explanation as to its assessment of the Group’s prospects, the period this assessment covers and why the period is
appropriate set out on page 104;
• the Directors’ statement on fair, balanced and understandable requirement set out on page 158;
• the Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 157;
• the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out
on page 127; and
• the section describing the work of the Audit Committee set out on page 124.
Babcock International Group PLC / Annual Report and Financial Statements 2023
173
Independent auditor’s report to the members of Babcock International Group PLC (continued)
14. Matters on which we are required to report by exception
14.1. Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from
branches not visited by us; or
• the Company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
14.2. Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not
been made or the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
15. Other matters which we are required to address
15.1. Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by shareholders at its Annual General Meeting on 22
September 2021 to audit the financial statements for the year ending 31 March 2022 and subsequent financial periods. The period of
total uninterrupted engagement including previous renewals and reappointments of the firm is two years, covering the years ended 31
March 2022 to 31 March 2023.
15.2. Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK).
16. Use of our report
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in
an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
As required by the Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.14R, these financial statements
will form part of the European Single Electronic Format (ESEF) prepared Annual Financial Report filed on the National Storage Mechanism of
the UK FCA in accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditor’s report provides no assurance over
whether the annual financial report has been prepared using the single electronic format specified in the ESEF RTS.
Makhan Chahal FCA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, UK
20 July 2023
174
Babcock International Group PLC / Annual Report and Financial Statements 2023
Strategic report
Governance
Financial Statements
Group income statement
For the year ended 31 March
Revenue
Operating costs
Goodwill impairment
(Loss)/profit resulting from acquisitions and disposals
Operating profit
Other income
Share of results of joint ventures and associates
Finance income
Finance costs
Profit before tax
Income tax expense
(Loss)/profit for the year
Attributable to:
Owners of the parent
Non-controlling interest
(Loss)/earnings per share
Basic
Diluted
Note
2,3
10
28
2,3,4
2,3,14
5
5
2,4
7
2023
£m
4,438.6
(4,315.7)
–
(77.4)
45.5
–
9.3
21.9
(70.5)
6.2
(39.5)
(33.3)
2022
£m1
4,101.8
(4,040.6)
(7.2)
172.8
226.8
6.2
20.1
9.6
(80.4)
182.3
(14.4)
167.9
(35.0)
1.7
164.2
3.7
9
9
(6.9)p
(6.9)p
32.5p
32.1p
1. The Group has re-presented the prior period income statement to combine Cost of revenue and Administration and distribution costs into Operating costs. Further
information is included in note 1.
Group statement of comprehensive income
For the year ended 31 March
(Loss)/profit 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, including rate change impact, on fair value adjustment of interest rate and foreign exchange
hedges
Hedging (losses)/gains reclassified to profit or loss
Reclassification of cumulative hedge reserve on disposal of joint venture
Share of other comprehensive income of joint ventures and associates
Tax, including rate change impact, on share of other comprehensive income of joint ventures and
associates
Items that will not be reclassified to income statement
Remeasurement of retirement benefit obligations
Tax on remeasurement of retirement benefit obligations
Other comprehensive (loss)/ income, net of tax
Total comprehensive (loss)/income
Total comprehensive (loss)/income attributable to:
Owners of the parent
Non-controlling interest
Total comprehensive (loss)/ income
Note
2023
£m
(33.3)
2022
£m
167.9
28
14
14
26
7
(0.5)
(1.2)
9.4
(3.1)
(10.8)
–
4.7
(1.2)
(402.4)
100.8
(304.3)
(337.6)
(337.3)
(0.3)
(337.6)
0.2
(7.3)
(14.7)
(1.0)
17.1
20.8
30.2
(5.7)
322.5
(64.2)
297.9
465.8
461.2
4.6
465.8
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
175
175
Group statement of changes in equity
At 1 April 2021
Profit for the year
Other comprehensive income
Total comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Net movement in equity
At 31 March 2022
At 1 April 2022
Loss for the year
Other comprehensive (loss)/income
Total comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Net movement in equity
At 31 March 2023
Note
25
Share
capital
£m
Share
premium
£m
Other
reserve
£m
303.4 873.0 768.8
–
–
–
–
–
–
–
303.4 873.0 768.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
303.4 873.0 768.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
25
–
–
303.4 873.0 768.8
–
Capital
redemption
£m
Retained
earnings
£m
30.6 (1,671.7)
164.2
258.3
422.5
–
5.5
2.3
430.3
30.6 (1,241.4)
–
–
–
–
–
–
–
Hedging
reserve
£m
(42.7)
–
46.7
46.7
–
–
–
46.7
4.0
Translation
reserve
£m
(48.4)
–
(8.0)
(8.0)
–
–
–
(8.0)
(56.4)
Total equity
attributable
to owners
of the
Company
£m
213.0
164.2
297.0
461.2
–
5.5
2.3
469.0
682.0
30.6 (1,241.4)
(35.0)
(301.6)
(336.6)
–
9.4
(0.2)
–
–
–
–
–
–
–
(327.4)
30.6 (1,568.8)
4.0
–
(1.0)
(1.0)
–
–
–
(1.0)
3.0
(56.4)
–
0.3
0.3
–
–
–
0.3
(56.1)
682.0
(35.0)
(302.3)
(337.3)
–
9.4
(0.2)
(328.1)
353.9
Non-
controlling
interest
£m
16.0
3.7
0.9
4.6
(1.1)
–
–
3.5
19.5
19.5
1.7
(2.0)
(0.3)
(2.2)
–
–
(2.5)
17.0
Total
equity
£m
229.0
167.9
297.9
465.8
(1.1)
5.5
2.3
472.5
701.5
701.5
(33.3)
(304.3)
(337.6)
(2.2)
9.4
(0.2)
(330.6)
370.9
The other reserve relates to the rights issue of new ordinary shares on 7 May 2014 and the capital redemption reserve relates to the
issue and redemption of redeemable ‘B’ preference shares in 2001.
176
176
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Group statement of changes in equity
Group statement of financial position
Strategic report
Governance
Financial Statements
Share
Share
Other
Capital
capital
premium
reserve
redemption
Note
£m
£m
£m
£m
Hedging
Translation
of the
controlling
reserve
£m
reserve
Company
£m
£m
303.4 873.0 768.8
30.6 (1,671.7)
(42.7)
(48.4)
213.0
Total equity
attributable
to owners
Non-
interest
£m
16.0
3.7
0.9
4.6
Total
equity
£m
229.0
167.9
297.9
465.8
–
–
–
–
5.5
2.3
(1.1)
(1.1)
–
–
5.5
2.3
–
46.7
46.7
–
(8.0)
(8.0)
164.2
297.0
461.2
–
0.3
0.3
–
–
–
(35.0)
(302.3)
(337.3)
–
9.4
(0.2)
19.5
1.7
701.5
(33.3)
(2.0)
(304.3)
(0.3)
(337.6)
(2.2)
–
–
(2.2)
9.4
(0.2)
Retained
earnings
£m
164.2
258.3
422.5
–
5.5
2.3
430.3
(35.0)
(301.6)
(336.6)
–
9.4
(0.2)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1.0)
(1.0)
303.4 873.0 768.8
30.6 (1,241.4)
46.7
4.0
(8.0)
(56.4)
469.0
682.0
3.5
19.5
472.5
701.5
303.4 873.0 768.8
30.6 (1,241.4)
4.0
(56.4)
682.0
At 1 April 2021
Profit for the year
Other comprehensive income
Total comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Net movement in equity
At 31 March 2022
At 1 April 2022
Loss for the year
Other comprehensive (loss)/income
Total comprehensive income
Dividends
Share-based payments
Tax on share-based payments
Net movement in equity
At 31 March 2023
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
25
25
303.4 873.0 768.8
30.6 (1,568.8)
3.0
(56.1)
353.9
17.0
370.9
(327.4)
(1.0)
0.3
(328.1)
(2.5)
(330.6)
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.
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
Other financial assets
Lease receivables
Derivatives
Deferred tax asset
Trade and other receivables
Current assets
Inventories
Trade and other receivables
Contract assets
Income tax recoverable
Lease receivables
Other financial assets
Derivatives
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
Derivatives
Retirement benefit deficits
Provisions for other liabilities
Current liabilities
Bank and other borrowings
Lease liabilities
Trade and other payables
Contract liabilities
Income tax payable
Derivatives
Provisions for other liabilities
Total liabilities
Total equity and liabilities
Note
10
11
12
13
14
14
26
13, 21
21
7
16
15
16
16
13, 21
21
17, 27
24
19
13, 19
18
7
21
26
20
19
13, 19
18
18
21
20
31 March
2023
£m
31 March
2022(1)
£m
781.4
140.8
478.5
159.1
57.4
9.5
94.8
7.3
22.2
2.6
112.2
6.4
1,872.2
126.8
506.9
322.5
7.7
16.4
1.4
4.3
451.7
1,437.7
3,309.9
783.4
176.7
710.6
334.3
54.3
12.1
300.9
10.0
24.1
–
47.4
9.7
2,463.5
142.7
488.8
299.3
25.4
23.3
–
11.4
1,146.3
2,137.2
4,600.7
303.4
873.0
746.3
(1,568.8)
353.9
17.0
370.9
303.4
873.0
747.0
(1,241.4)
682.0
19.5
701.5
768.4
178.9
0.9
7.0
53.3
156.2
80.8
1,245.5
19.6
49.9
911.1
616.4
15.8
12.8
67.9
1,693.5
2,939.0
3,309.9
847.7
329.3
1.0
9.6
59.3
109.3
60.3
1,416.5
863.4
104.8
888.1
518.3
17.7
34.8
55.6
2,482.7
3,899.2
4,600.7
176
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
177
177
1. The 2022 Group Statement of Financial Position has been revised under IFRS 3 for new information obtained about facts and circumstances that existed at the
acquisition date during the permitted measurement period – see Note 23 for more detail.
The notes on pages 179 to 244 are an integral part of the consolidated financial statements. The Group financial statements on pages
175 to 244 were approved by the Board of Directors on 20 July 2023 and are signed on its behalf by:
David Lockwood OBE
Director
David Mellors
Director
Group cash flow statement
For the year ended 31 March
Cash flows from operating activities
(Loss)/profit for the year
Share of results of joint ventures and associates
Income tax 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
Net derivative fair value and currency movement through profit or loss
Loss/(profit) on disposal of subsidiaries, businesses and joint ventures and associates
Profit on disposal of property, plant and equipment
Loss/(profit) on disposal of right of use assets
Loss on disposal of intangible assets
Cash generated from operations before movement in working capital and retirement
benefit payments
(Increase)/decrease in inventories
(Increase) in receivables
(Increase) in contract assets
Increase/(decrease) in payables
Increase in contract liabilities
Increase/(decrease) in provisions
Retirement benefit contributions in excess of current period expense
Cash generated from operations
Income tax (paid)/received
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
Acquisition of subsidiaries, net of cash acquired
Dividends received from joint ventures and associates
Proceeds on disposal of property, plant and equipment
Proceeds on disposal of intangible assets
Purchases of property, plant and equipment
Purchases of intangible assets
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
Lease payments
Cash inflow from settlement of derivatives
Bank loans repaid
Loans raised and facilities drawn down
Dividends paid to non-controlling interest
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
178
178
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Note
2023
£m
2022
£m
14
7
5
5
12
13
11
28
28
14
14
14
27
27
27
27
27
27
(33.3)
(9.3)
39.5
(21.9)
70.5
77.0
91.3
37.1
–
9.4
(7.5)
77.4
(2.0)
0.8
1.7
330.7
(25.7)
(71.6)
(54.2)
131.4
132.3
47.9
(141.9)
348.9
(25.4)
(77.0)
14.8
261.3
158.6
–
8.7
38.5
0.4
(104.2)
(20.9)
–
2.4
–
83.5
(108.5)
0.8
(972.8)
416.6
(2.2)
(666.1)
(321.3)
756.5
(5.7)
429.5
167.9
(20.1)
14.4
(9.6)
80.4
117.5
123.1
94.7
7.2
5.5
(0.9)
(172.8)
(1.5)
(3.2)
0.7
403.3
10.6
(85.2)
(26.5)
(202.0)
124.2
(30.9)
(151.7)
41.8
10.0
(54.9)
9.9
6.8
420.7
(15.5)
41.6
68.0
–
(190.8)
(12.4)
(2.6)
31.0
(1.4)
338.6
(113.0)
–
(31.7)
23.1
(1.1)
(122.7)
222.7
530.9
2.9
756.5
Group cash flow statement
Notes to the financial statements
Strategic report
Governance
Financial Statements
For the year ended 31 March
Cash flows from operating activities
(Loss)/profit for the year
Share of results of joint ventures and associates
Income tax 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
Net derivative fair value and currency movement through profit or loss
Loss/(profit) on disposal of subsidiaries, businesses and joint ventures and associates
Profit on disposal of property, plant and equipment
Loss/(profit) on disposal of right of use assets
Loss on disposal of intangible assets
Cash generated from operations before movement in working capital and retirement
Disposal of subsidiaries and joint ventures and associates, net of cash disposed
Retirement benefit contributions in excess of current period expense
benefit payments
(Increase)/decrease in inventories
(Increase) in receivables
(Increase) in contract assets
Increase/(decrease) in payables
Increase in contract liabilities
Increase/(decrease) in provisions
Cash generated from operations
Income tax (paid)/received
Interest paid
Interest received
Net cash flows from operating activities
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired
Dividends received from joint ventures and associates
Proceeds on disposal of property, plant and equipment
Proceeds on disposal of intangible assets
Purchases of property, plant and equipment
Purchases of intangible assets
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
Cash inflow from settlement of derivatives
Lease payments
Bank loans repaid
Loans raised and facilities drawn down
Dividends paid to non-controlling interest
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
2023
£m
2022
£m
14
7
5
5
12
13
11
28
28
14
14
14
27
27
27
27
27
27
(33.3)
(9.3)
39.5
(21.9)
70.5
77.0
91.3
37.1
–
9.4
(7.5)
77.4
(2.0)
0.8
1.7
330.7
(25.7)
(71.6)
(54.2)
131.4
132.3
47.9
(141.9)
348.9
(25.4)
(77.0)
14.8
261.3
158.6
–
8.7
38.5
0.4
(104.2)
(20.9)
2.4
–
–
83.5
0.8
(972.8)
416.6
(2.2)
(666.1)
(321.3)
756.5
(5.7)
429.5
167.9
(20.1)
14.4
(9.6)
80.4
117.5
123.1
94.7
(172.8)
7.2
5.5
(0.9)
(1.5)
(3.2)
0.7
403.3
10.6
(85.2)
(26.5)
(202.0)
124.2
(30.9)
(151.7)
41.8
10.0
(54.9)
9.9
6.8
420.7
(15.5)
41.6
68.0
–
(190.8)
(12.4)
(2.6)
31.0
(1.4)
338.6
–
(31.7)
23.1
(1.1)
(122.7)
222.7
530.9
2.9
756.5
(108.5)
(113.0)
1. Basis of preparation and significant accounting policies
Going concern
After making enquiries, the Directors, at the time of approving the financial statements, have a reasonable expectation that the
Company and the Group have adequate financial resources to continue in operational existence for the foreseeable future. As such, the
consolidated financial statements have been prepared on a going concern basis – further detail on the key factors impacting the going
concern assessment are set out in the Directors’ report on page 104. The Board considered the period from 21 July 2023 to 30
September 2024 in its assessment of going concern.
Basis of preparation
The financial statements have been prepared in accordance with United Kingdom adopted International Accounting Standards, which
has not differed from the previously EU-adopted International Financial Reporting Standards (IFRS), and the Companies Act 2006
applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost basis,
except for certain financial instruments that have been measured at fair value. 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 2022:
The following standards and amendments to IFRS became effective for the annual reporting period beginning on 1 April 2022 and did
not have a material impact on the consolidated financial statements:
The Group has adopted the amendments to IAS 37, ‘Provisions, contingent liabilities and contingent assets’. The amendments
specify that the cost of fulfilling a contract comprises the costs that relate directly to the contract.
The Group has adopted the amendments to IAS 16, ‘Property, plant and equipment’. The amendments prohibit deducting from the
cost of an item of property, plant and equipment any proceeds from selling items produced before that asset is available for use
and clarifies the meaning of ‘testing whether an asset is functioning properly’.
The Group has adopted the amendments to IFRS 3, ‘Business Combinations’. The amendment relates to the identification of
liabilities assumed and contingent assets acquired in a business combination.
•
•
•
The Group has adopted the annual improvements to IFRS 2018 – 2020 cycle.
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:
IFRS 17, ‘Insurance Contracts’. New standard effective from 1 January 2023.
IAS 1, ‘Presentation of Financial Statements’. Amendment effective from 1 January 2023.
IFRS 3, ‘Business Combinations’. Amendment effective from 1 January 2023.
IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’. Amendment effective from 1 January 2023.
IAS 12, ‘Income Taxes’. Amendment effective from 1 January 2023.
•
•
•
•
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.
(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.
178
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
179
179
Notes to the Group financial statements (continued)
1. Basis of preparation and significant accounting policies (continued)
Basis of consolidation (continued)
(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.
Materiality
Various disclosures make reference to items considered as material or immaterial to the financial statements. The Group considers
information to be material if omitting it or misstating it could influence decisions that users make on the basis of the financial
information provided. Materiality is considered from both a quantitative and qualitative factor perspective. In addition to subsequent
specific references to materiality, and in compliance with IFRS, certain disclosures have not been provided where the information
resulting from that disclosure is not material.
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:
(a) 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. Detail of the Group’s key judgements involving estimates are included in the Key sources of estimation
uncertainty section.
(i) Acting as principal or agent
A number of the Group’s contracts include promises in relation to procurement activity undertaken on behalf of customers at low or nil
margin, sub-contractor arrangements, and other pass-through costs. Management is required to exercise judgement on these revenue
streams in considering whether the Group is acting as principal or agent. This is based on an assessment as to whether the Group
controls the relevant goods or services under the performance obligations prior to transfer to customers. Factors that influence this
judgement include the level of responsibility the Group has under the contract for the provision of the goods or services, the extent to
which the Group is incentivised to fulfil orders on time and within budget, either through gain share arrangements or KPI deductions in
relation to the other performance obligations within the contract, and the extent to which the Group exercises responsibility in
determining the selling price of the goods and services. Taking all factors into consideration, the Group then comes to a judgement as
to whether it acts as principal or agent on a performance obligation-by-performance obligation basis. Note that any changes in this
judgement would not have a material impact on profit, although there may be a material impact to revenue and operating costs.
(ii) Determining the Group’s cash generating units
Management exercises judgement in determining the Group’s cash generating units for the goodwill impairment assessment. This
determination is generally straightforward and factual, however in some cases judgement is required, for example it was determined
that Africa is a separate cash generating unit, whilst operations of the Group in other territories do not represent separate cash
generating units. Over time management reviews the cash generating units 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.
If there was a change in this judgement this could result in a material adjustment to goodwill. Further detail is included in notes 3 and 10.
180
180
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
1. Basis of preparation and significant accounting policies (continued)
Basis of consolidation (continued)
(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.
Materiality
Various disclosures make reference to items considered as material or immaterial to the financial statements. The Group considers
information to be material if omitting it or misstating it could influence decisions that users make on the basis of the financial
information provided. Materiality is considered from both a quantitative and qualitative factor perspective. In addition to subsequent
specific references to materiality, and in compliance with IFRS, certain disclosures have not been provided where the information
resulting from that disclosure is not material.
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:
(a) Critical accounting judgements
uncertainty section.
(i) Acting as principal or agent
A number of the Group’s contracts include promises in relation to procurement activity undertaken on behalf of customers at low or nil
margin, sub-contractor arrangements, and other pass-through costs. Management is required to exercise judgement on these revenue
streams in considering whether the Group is acting as principal or agent. This is based on an assessment as to whether the Group
controls the relevant goods or services under the performance obligations prior to transfer to customers. Factors that influence this
judgement include the level of responsibility the Group has under the contract for the provision of the goods or services, the extent to
which the Group is incentivised to fulfil orders on time and within budget, either through gain share arrangements or KPI deductions in
relation to the other performance obligations within the contract, and the extent to which the Group exercises responsibility in
determining the selling price of the goods and services. Taking all factors into consideration, the Group then comes to a judgement as
to whether it acts as principal or agent on a performance obligation-by-performance obligation basis. Note that any changes in this
judgement would not have a material impact on profit, although there may be a material impact to revenue and operating costs.
(ii) Determining the Group’s cash generating units
Management exercises judgement in determining the Group’s cash generating units for the goodwill impairment assessment. This
determination is generally straightforward and factual, however in some cases judgement is required, for example it was determined
that Africa is a separate cash generating unit, whilst operations of the Group in other territories do not represent separate cash
generating units. Over time management reviews the cash generating units 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. If
there was a change in this judgement this could result in a material adjustment to goodwill. Further detail is included in notes 3 and
10.1. Basis of preparation and significant accounting policies (continued)
1. Basis of preparation and significant accounting policies (continued)
(b) Key sources of estimation uncertainty
The key sources of estimation uncertainty at the reporting period end that may result in significant risk of material adjustment to the
carrying amount of assets and liabilities within the next financial year are set out below:
(i) Revenue and profit recognition
The following represent the notable assumptions impacting upon revenue and profit recognition as a result of the Group’s contracts
with customers:
•
•
•
Stage of completion & costs to complete – The Group’s revenue recognition policies require management to make an estimate
of the cost to complete for long-term contracts. Management estimates outturn costs on a contract-by-contract basis and
estimates are carried out by suitably qualified and experienced personnel. Estimates of cost to complete include assessment of
contract contingencies arising out of technical, commercial, operational and other risks. The assessments of all significant contract
outturns are subject to review and challenge, and judgements and estimates are reviewed regularly throughout the contract life
based on latest available information with adjustments made where necessary. As contracts near completion, often less judgement
is required to determine the expected outturn. The most significant estimate of contract outturn relates to the Type 31 programme
as outlined below.
Variable consideration – the Group’s contracts are often subject to variable consideration including performance-based penalties
and incentives, gain/pain share arrangements and other items. Variable consideration is added to the transaction price only to the
extent that it is highly probable that there will not be a significant reversal in the amount of cumulative revenue recognised once
the underlying uncertainty is resolved.
Inflation – The level to which the Group’s revenue and cost for each contract will be impacted by inflation is a key accounting
estimate, as this could cause the revenue and cost of contract delivery to be greater than was expected at the time of contracting.
The Group’s contracts are exposed to inflation due to rising employment costs, as well as increased costs of raw materials. The
Group endeavours to include cost recovery mechanisms or index-linked pricing within its contracts with customers in order to
mitigate any inflation risk arising from increasing employment and raw material costs. In the most significant contract where there
is no mechanism to recover an increase in costs due to inflation, revenue and profit in the year would be impacted by £3-4 million
for each 1% change in personnel costs.
Type 31 Programme estimates
During the year significant increases in forecast costs on the Type 31 programme were identified, which were not foreseen at contract
inception. A dispute resolution process has commenced with the customer over responsibility for these incremental costs. We have
reassessed the contract outturn on the basis that none of these are recovered, given the uncertainty at the early stage of the process.
This has resulted in the recording of a £100m loss in the year, representing a £43m reversal of revenue, £2m asset impairment and the
recognition of a £55m onerous contract provision. Determining the contract outturn, and therefore revenue and onerous contract
provision recognised, requires assumptions and complex judgements to be made about future performance of the contract. The level of
uncertainty in the estimates made in assessing the outturn is linked to the complexity of the underlying contract.
Critical accounting judgements, apart from those involving estimations, that are applied in the preparation of the consolidated financial
statements are discussed below. Detail of the Group’s key judgements involving estimates are included in the Key sources of estimation
The key sources of estimates in assessing the outturn are:
The results of the dispute resolution process, and any reimbursements agreed with the customer;
•
•
•
•
The build costs over the production schedule and estimate of efficiencies arising from the ‘learner’ effect through performing work
over multiple ships;
The ability to maintain or improve operational performance through process efficiencies and improvements over the five ships;
The impact of inflation on the build cost; and
The achievement of the build schedule to completion and final acceptance.
These estimates are inter-related. The range of possible future outcomes in respect of assumptions made to determine the contract
•
outturn could result in a material increase or decrease in revenue and the value of the onerous contract provision, and hence on the
Group’s profitability, in the next financial year. With c£1bn of estimated costs to go over the life of the contract, if actual recoveries or
costs were to differ from those assumed by 5-10%, the potential impact on the contract outturn could be £50-£100m.
To mitigate this, comparisons of actual contract performance and previous forecasts used to assess the contract outturn are performed
regularly, with consideration given to whether any revisions to assumptions are required. In the next financial year, design activities will
be finalised and the construction of the first ship will be substantially complete. This will reduce the uncertainty over the contract
outturn but a significant element will remain due to the substantial activity which extends over a further 4 years. In a major ship build
programme of this nature, it is inherently possible that there may be changes in circumstances which cannot reasonably be foreseen at
the present time.
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181
Notes to the Group financial statements (continued)
1. Basis of preparation and significant accounting policies (continued)
(ii) 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, discount rate, actuarial and life expectancy 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, discount rate and life expectancy estimates, management is required to make
an accounting judgement relating to the expected availability of future accounting surpluses under IFRIC 14. Further information on the
key assumptions and sensitivities is included in note 26.
(iii) 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 future cash flows expected to be generated by cash generating units, together with appropriate
discounting of the cash flows. The assessment of the recoverable amount of goodwill in the Aviation CGU is included as a critical
accounting estimate given the significance of the remaining carrying value of goodwill and the inherent level of estimation uncertainty
required to undertake impairment testing. The assessment of the recoverable value of goodwill in other CGUs is not considered a critical
accounting estimate as a result of the headroom within these CGUs. The key assumptions in estimating the carrying value of goodwill
are discount rate, long-term growth rate and growth rate in the short-term cash flows.
Inflation rates are incorporated into the impairment assessment through their inclusion within the growth rates in cash inflows and
outflows and through the methodology by which discount rates are determined. Were inflation to impact upon all cash flows equally,
an impairment assessment should be neutral to the impact of inflation. The Group has a number of protections and exposures to the
impact of inflation across its portfolio of revenue arrangements and supply chain agreements resulting in an indirect impact of inflation
on the impairment outturn.
The impact of climate change, including the risks as outlined in the TCFD disclosures on pages 67 to 73, have been considered in the
determination of the cash flows and growth rates where applicable.
Further information on key assumptions and sensitivity analyses are included in note 10.
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.
(a) 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.
(i) 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 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 results in some contracts only having one
performance obligation.
(ii) Determination of contract price
The contract price represents the amount of consideration which the Group expects to be entitled 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 (v) 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. Any
required adjustment is made against the contract price in the period in which the adjustment occurs.
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Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
1. Basis of preparation and significant accounting policies (continued)
(ii) 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, discount rate, actuarial and life expectancy 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, discount rate and life expectancy estimates, management is required to make
an accounting judgement relating to the expected availability of future accounting surpluses under IFRIC 14. Further information on the
key assumptions and sensitivities is included in note 26.
(iii) 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 future cash flows expected to be generated by cash generating units, together with appropriate
discounting of the cash flows. The assessment of the recoverable amount of goodwill in the Aviation CGU is included as a critical
accounting estimate given the significance of the remaining carrying value of goodwill and the inherent level of estimation uncertainty
required to undertake impairment testing. The assessment of the recoverable value of goodwill in other CGUs is not considered a critical
accounting estimate as a result of the headroom within these CGUs. The key assumptions in estimating the carrying value of goodwill
are discount rate, long-term growth rate and growth rate in the short-term cash flows.
Inflation rates are incorporated into the impairment assessment through their inclusion within the growth rates in cash inflows and
outflows and through the methodology by which discount rates are determined. Were inflation to impact upon all cash flows equally,
an impairment assessment should be neutral to the impact of inflation. The Group has a number of protections and exposures to the
impact of inflation across its portfolio of revenue arrangements and supply chain agreements resulting in an indirect impact of inflation
on the impairment outturn.
The impact of climate change, including the risks as outlined in the TCFD disclosures on pages 67 to 73, have been considered in the
determination of the cash flows and growth rates where applicable.
Further information on key assumptions and sensitivity analyses are included in note 10.
The significant accounting policies adopted by the Group are set out below. They have been applied consistently throughout the year
Significant accounting policies
and the comparative year except as specified below.
(a) 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.
(i) 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 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 results in some contracts only having one
performance obligation.
(ii) Determination of contract price
The contract price represents the amount of consideration which the Group expects to be entitled 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 (v) 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. Any
required adjustment is made against the contract price in the period in which the adjustment occurs.
1. Basis of preparation and significant accounting policies (continued)
(a) Revenue (continued)
(ii) Determination of contract price (continued)
Variable consideration is estimated using either the expected value or the most likely amount and is added to the transaction price only
to the extent that it is highly probable that there will not be a significant reversal in the amount of cumulative revenue recognised once
the underlying uncertainty is resolved. 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 until the uncertainty is resolved. In the case of unpriced variations these will
be constrained to the extent that such variable consideration is not considered highly probable.
Variable consideration may be included in the total transaction price or, in certain circumstances, may be allocated to a specific
time period. Where variable consideration is allocated to a specific time period this will typically be in relation to performance
related deductions.
(iii) 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 observable
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.
(iv) 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 the services. 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 an input method to measure satisfaction of each
performance obligation based on costs incurred compared to total estimated contract costs. For the majority of the Group’s contracts,
this is deemed to be the most appropriate method to measure Babcock’s effort in satisfying the applicable performance obligations.
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. For contracts where costs incurred is not deemed to be
the most appropriate measure, the Group uses time elapsed to measure satisfaction of the performance obligation.
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 amount of revenue recognised (as measured by the methods described above) exceeds the amount of cash received
from the customer then the difference will be held on the statement of financial position. This will typically be comprised of a mixture of
contract assets and trade receivables. If the amount of cash collected together with amounts due under the contract but uncollected
exceeds the amount of revenue recognised then the difference is also held on the statement of financial position as a contract liability.
See section (viii) for further details on how contract assets and liabilities are recognised.
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 3, sale of goods at a point in time represents approximately 8% of Group revenues (2022: 6%). These revenues are
delivered predominantly by the Aviation and Land sectors and include sales of equipment to commercial customers and procurement of
consumables on behalf of the Ministry of Defence (MOD).
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183
Notes to the Group financial statements (continued)
1. Basis of preparation and significant accounting policies (continued)
(a) Revenue (continued)
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/or 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.
If a contract is deemed to be loss making the present obligation is recognised and measured as provision. Further detail is included in
the Provisions accounting policy.
(v) 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. 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.
These contract claims and variations are considered to be modifications as referred to in paragraph 18 of IFRS 15.
Accounting for contract modifications
The Group accounts for contract modifications in one of three ways, based on the facts and circumstances of the contract modification:
1. Prospectively, as an additional, separate contract;
2. Prospectively, as a termination of the existing contract and creation of a new contract; or
3. As part of the original contract using a cumulative catch-up.
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 may be required to be carried out 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 (ii).
Claims and variations which are not deemed to be contract modifications
Claims can also be raised by Babcock against third-party sub-contractors 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.
(vi) Costs of obtaining a contract
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 and amortised on a straight-line basis. 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.
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
1. Basis of preparation and significant accounting policies (continued)
(a) Revenue (continued)
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/or 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.
If a contract is deemed to be loss making the present obligation is recognised and measured as provision. Further detail is included in
the Provisions accounting policy.
(v) 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. 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.
Accounting for contract modifications
These contract claims and variations are considered to be modifications as referred to in paragraph 18 of IFRS 15.
The Group accounts for contract modifications in one of three ways, based on the facts and circumstances of the contract modification:
1. Prospectively, as an additional, separate contract;
2. Prospectively, as a termination of the existing contract and creation of a new contract; or
3. As part of the original contract using a cumulative catch-up.
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 may be required to be carried out 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 (ii).
Claims and variations which are not deemed to be contract modifications
Claims can also be raised by Babcock against third-party sub-contractors 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.
(vi) Costs of obtaining a contract
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 and amortised on a straight-line basis. 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.
1. Basis of preparation and significant accounting policies (continued)
(a) Revenue (continued)
(vii) Costs to fulfil a contract
Costs to fulfil a contract which do not fall within the scope of another standard are recognised under IFRS 15 as an asset and amortised
on a straight-line basis when 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.
Costs of recruiting or training staff are expensed as incurred.
(viii) Contract assets and liabilities
Contract assets represent amounts for which the Group has a conditional right to consideration in exchange for goods or services that
the Group has transferred to the customer. Contract liabilities represent the obligation to transfer goods or services to a customer for
which consideration has been received, or consideration is due, from the customer.
Payment terms are set out in the contract and reflect the timing and performance of service delivery. For substantially all contracts the
payment terms are broadly in line with satisfaction of performance obligations, and therefore recognition of revenue, such that each
contract has either a contract asset or contract liability, however these are not overly material in the context of the contract.
(b) Underlying financial information and specific adjusting items
Definitions and a description of the use of the underlying performance measures can be found in note 2.
(c) 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.
(d) 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 onerous revenue contracts are recorded when it becomes probable that total remaining contract fulfilment costs will
exceed total remaining revenue not yet recognised. Provisions for losses on contracts are recognised after impairment of any assets
directly related to fulfilling the loss-making contract. Losses are determined on the basis of estimated results on completion of contracts
and are updated regularly.
A provision for the contractual maintenance, overhaul and repair requirements of right of use aircraft and specific associated 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.
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185
185
Notes to the Group financial statements (continued)
1. Basis of preparation and significant accounting policies (continued)
(e) Goodwill and intangible assets
(i) 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 annually at 31 March 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 10 for further information on goodwill impairment reviews.
On disposal of a subsidiary, joint venture or associate, the attributable amount of goodwill is included in the determination of the profit
or loss on disposal.
(ii) 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 on a straight-line basis 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.
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 between one year to twenty 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.
(iii) 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.
(iv) Computer software
Computer software, excluding the Group’s Enterprise Resource Planning (ERP) system, includes software licences acquired. Configuration
and customisation costs relating to Software-as-a-service agreements are expensed as incurred. Computer software is measured at cost
less accumulated amortisation and is amortised on a straight-line basis over its expected useful life of between three and seven 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
business unit.
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Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
1. Basis of preparation and significant accounting policies (continued)
(e) Goodwill and intangible assets
(i) Goodwill
Marine, Land, Aviation, Nuclear and Africa.
is taken directly to the income statement.
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:
When the fair value of the consideration for an acquired undertaking is less than the fair value of its separable net assets, the difference
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 annually at 31 March 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 10 for further information on goodwill impairment reviews.
On disposal of a subsidiary, joint venture or associate, the attributable amount of goodwill is included in the determination of the profit
or loss on disposal.
(ii) Acquired intangibles
from the relationships.
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
The carrying value of the contractual element is amortised on a straight-line basis 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.
bring economic benefit via future orders.
The carrying value of the non-contractual element is amortised over the period in which it is estimated that the relationships are likely to
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 between one year to twenty 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.
(iii) 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.
(iv) Computer software
Computer software, excluding the Group’s Enterprise Resource Planning (ERP) system, includes software licences acquired. Configuration
and customisation costs relating to Software-as-a-service agreements are expensed as incurred. Computer software is measured at cost
less accumulated amortisation and is amortised on a straight-line basis over its expected useful life of between three and seven 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
business unit.
1. Basis of preparation and significant accounting policies (continued)
(f) Property, plant and equipment
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.
Items of property, plant and equipment are depreciated over their estimated useful lives to any estimated residual value, using the
following 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%
2%
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).
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.
The useful economic life of aircraft is based on management’s estimate of how long the aircraft will continue to be operated in the
same manner or a similar manner, typically not exceeding 30 years. Where the Group acquires aircraft which have already been used,
and may already exceed the typical useful economic life, an individual assessment of useful economic life is performed.
(g) Impairment of non-current assets
Goodwill and indefinite life intangibles are 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.
(h) Net debt
Net debt, including loans to joint ventures and associates and lease receivables is an alternative performance measure of the Group and
consists of the total of loans, including the interest rate and foreign exchange derivatives which hedge the loans, bank overdrafts, cash
and cash equivalents, loans to joint ventures and associates, lease receivables and lease obligations. The Group’s key performance
indicators exclude certain lease obligations 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.
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Notes to the Group financial statements (continued)
1. Basis of preparation and significant accounting policies (continued)
(i) 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 on a straight-line basis
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.
(j) 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.
Spare parts that are consumed in the sale of goods or in the rendering of services are classified as inventory.
(k) 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 30 for details of contingent liabilities.
(l) 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. Bank overdrafts that are repayable on demand and form an integral part of the Group’s
cash management are treated as cash equivalents for the purpose of the cash flow statement. In the statement of financial position such
overdrafts are presented as current bank and other borrowings.
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Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
1. Basis of preparation and significant accounting policies (continued)
(i) 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 on a straight-line basis
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.
(j) 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.
Spare parts that are consumed in the sale of goods or in the rendering of services are classified as inventory.
(k) 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 30 for details of contingent liabilities.
(l) 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. Bank overdrafts that are repayable on demand and form an integral part of the Group’s
cash management are treated as cash equivalents for the purpose of the cash flow statement. In the statement of financial position such
overdrafts are presented as current bank and other borrowings.
1. Basis of preparation and significant accounting policies (continued)
(m) Taxation
(i) 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.
(ii) 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 assets are recognised where deferred tax liabilities exist and are expected to reverse
in the same period as the deferred tax asset or in periods into which a loss arising from a deferred tax asset can be carried forward or
back. In the absence of sufficient deferred tax liabilities, deferred tax assets are recognised where it is probable that there will be future
taxable profits from other sources against which a loss arising from the deferred tax asset can be offset. In assessing the availability of
future profits, the Group uses profit forecasts consistent with those used for goodwill impairment testing. Profits forecast beyond the
Group’s five-year budget cycle are risk-weighted to reflect commercial uncertainties.
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.
(n) Foreign currencies
(i) 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.
(ii) 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.
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.
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Notes to the Group financial statements (continued)
1. Basis of preparation and significant accounting policies (continued)
(o) 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.
(p) Finance income
Finance income is recognised in the period to which it relates using the effective interest rate method.
(q) Employee benefits
(i) 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.
(ii) Share-based compensation
The Group operates equity-settled, share-based compensation plans. The economic cost of awarding shares and share options to
employees is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value
is determined by reference to option pricing models. The charge is recognised in the income statement over the vesting period of
the award.
The shares purchased by the Group’s 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.
(iii) Holiday pay
Paid holidays are regarded as an employee benefit and as such are charged to the income statement as the benefits are earned.
(r) Financial instruments
(i) 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 as they are held within a business model to collect contractual cash flows and these cash flows consist solely of
payments of principal and interest on the principal amount outstanding. Trade receivables, contract assets and lease receivables include
a provision for expected credit losses. The Group measures the provision at an amount equal to lifetime expected credit losses,
estimated by reference to past experience and relevant forward-looking factors. For all other financial assets carried at amortised cost,
including loans to joint ventures and associates and other debtors, the Group measures the provision at an amount equal to 12-month
expected credit losses. See note 22 for further information on how the Group assesses credit risk.
Trade creditors, amounts due to related parties, other creditors, accruals and bank loans and overdrafts are classified as financial
liabilities held at amortised cost.
(ii) Derivative financial instruments
Derivatives are initially recognised at fair value on the date a derivative is entered into and are subsequently remeasured at fair value.
The Group designates certain of the derivative instruments within its portfolio to be hedges of the fair value of recognised assets or
liabilities or unrecognised firm commitments.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement,
together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. For derivatives that
qualify as cash flow hedges, fair value gains or losses are deferred in equity until the underlying transaction is recognised. Changes in
the value of derivatives that are carried at fair value through profit or loss are recorded in the income statement.
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Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
1. Basis of preparation and significant accounting policies (continued)
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.
Finance income is recognised in the period to which it relates using the effective interest rate method.
(o) Finance costs
(p) Finance income
(q) Employee benefits
(i) 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.
(ii) 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 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.
the award.
(iii) Holiday pay
Paid holidays are regarded as an employee benefit and as such are charged to the income statement as the benefits are earned.
(r) Financial instruments
(i) 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 as they are held within a business model to collect contractual cash flows and these cash flows consist solely of
payments of principal and interest on the principal amount outstanding. Trade receivables, contract assets and lease receivables include
a provision for expected credit losses. The Group measures the provision at an amount equal to lifetime expected credit losses,
estimated by reference to past experience and relevant forward-looking factors. For all other financial assets carried at amortised cost,
including loans to joint ventures and associates and other debtors, the Group measures the provision at an amount equal to 12-month
expected credit losses. See note 22 for further information on how the Group assesses credit risk.
Trade creditors, amounts due to related parties, other creditors, accruals and bank loans and overdrafts are classified as financial
liabilities held at amortised cost.
(ii) Derivative financial instruments
Derivatives are initially recognised at fair value on the date a derivative is entered into and are subsequently remeasured at fair value.
The Group designates certain of the derivative instruments within its portfolio to be hedges of the fair value of recognised assets or
liabilities or unrecognised firm commitments.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement,
together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. For derivatives that
qualify as cash flow hedges, fair value gains or losses are deferred in equity until the underlying transaction is recognised. Changes in
the value of derivatives that are carried at fair value through profit or loss are recorded in the income statement.
1. Basis of preparation and significant accounting policies (continued)
(s) 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 statement of financial position 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.
(t) 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. 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 debt factoring counterparty.
(u) Supply chain financing
Suppliers can choose to access supplier financing arrangements provided by different third-party banks in different countries.
Commercial requirements, including payment terms or the price paid for goods, do not depend on whether a supplier chooses to
access such arrangements. Under the arrangements, suppliers may choose to access payment early rather than on our normal payment
terms, at a funding cost to the supplier that is set by the factoring agent. Management reviews supplier financing arrangements to
determine the appropriate presentation of balances outstanding as other payables or borrowings, dependent on the nature of each
arrangement. Factors considered in determining the appropriate presentation include the commercial rationale for the arrangement,
impact on the Group’s working capital positions, credit enhancements or other benefits provided to the bank and recourse exposures.
(v) 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.
(w) Accounting policy change – Presentation of operating profit
In the year ended 31 March 2023 the Group has re-presented the income statement to combine Cost of revenue and Administration
and distribution costs into Operating costs. The comparative period operating costs of £4,040.6 million were presented as Cost of
revenue of £3,756.5 million and Administration and distribution costs of £284.1 million in the prior period annual report and financial
statements. This change to presenting the costs of the Group by nature is deemed to be more informative for the users of the annual
report and financial statements as it allows greater comparability of year-on-year trends.
2. Adjustments between statutory and underlying financial information
Definition of underlying measures and specific adjusting items
The Group provides alternative performance measures, including underlying operating profit, to enable users to have a more consistent
view of the performance and earnings trends of the Group. These measures are considered to provide a consistent measure of business
performance from year to year. They are used by management to assess operating performance and as a basis for forecasting and
decision-making, as well as the planning and allocation of capital resources. They are also understood to be used by investors in
analysing business performance.
The Group’s alternative performance measures are not defined by IFRS and are therefore considered to be non-GAAP measures.
The measures may not be comparable to similar measures used by other companies and they are not intended to be a substitute for,
or superior to, measures defined under IFRS. The Group’s alternative performance measures are consistent with the year ended
31 March 2022.
Underlying operating profit
In any given year the statutory measure of operating profit includes a number of items which the Group considers to either be one-off in
nature or otherwise not reflective of underlying performance. Underlying operating profit therefore adjusts statutory operating profit to
provide readers with a measure of business performance which the Group considers more consistently analyses the underlying
performance of the Group by removing these one-off items that otherwise add volatility to performance.
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Notes to the Group financial statements (continued)
2. Adjustments between statutory and underlying information (continued)
Underlying operating profit (continued)
Underlying operating profit eliminates potential differences in performance caused by purchase price allocations on business
combinations in prior periods (amortisation of acquired intangibles), business acquisition, merger and divestment related items, large,
infrequent restructuring programmes and fair value movements on derivatives. Transactions such as these may happen regularly and
could significantly impact the statutory result in any given year. Adjustments to underlying operating profit may include both income
and expenditure items.
Specific adjusting items include:
Amortisation of acquired intangibles;
Business acquisition, merger and divestment related items (being amounts related to corporate transactions and gains or losses on
disposal of assets or businesses);
Gains, losses and costs directly arising from the Group’s withdrawal from a specific market or geography, including closure costs,
severance costs, the disposal of assets and termination of leases;
The costs of large restructuring programmes that significantly exceed the minor restructuring which occurs in most years as part of
normal operations. Restructuring costs incurred as a result of normal operations are included in operating costs and are not excluded
from underlying operating profit;
Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes;
Fair value gain/(loss) on forward rate contracts that are open during the period; 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 profit/(loss)
Other income
Share of results of joint ventures and associates
Net finance costs
Profit/(loss) before tax
Income tax (expense)/benefit
Profit/(loss) after tax for the year
Note
3
3,4
14
5
7
Year ended 31 March 2023
Year ended 31 March 2022
Underlying
£m
4,438.6
Specific
adjusting items
£m
–
Statutory
£m
4,438.6
Underlying
£m
4,101.8
Specific adjusting
items
£m
–
Statutory
£m
4,101.8
177.9
–
9.3
(58.3)
128.9
(37.7)
91.2
(132.4)
–
–
9.7
(122.7)
(1.8)
(124.5)
45.5
–
9.3
(48.6)
6.2
(39.5)
(33.3)
237.7
6.2
20.1
(61.2)
202.8
(43.9)
158.9
(10.9)
–
–
(9.6)
(20.5)
29.5
9.0
Earnings per share including underlying measures
(cid:3)
Profit/(loss) after tax for the year
Amount attributable to owners of the parent
Amount attributable to non-controlling interests
(cid:3)
Weighted average number of shares (m)
Effect of dilutive securities (m)
Diluted weighted average number of shares (m)
Basic EPS
Diluted EPS
Year ended 31 March 2023
Year ended 31 March 2022
Underlying
£m
91.2
(cid:3)
89.5
1.7
Specific
adjusting items
£m
(124.5)
(cid:3)
(124.5)
–
505.4
9.5
514.9
17.7p
17.4p
Statutory
£m
(33.3)
(35.0)
1.7
(cid:3)
505.4
9.5
514.9
(6.9)p
(6.9)p
Underlying
£m
158.9
155.2
3.7
Specific adjusting
items
£m
9.0
9.0
–
505.1
6.1
511.2
30.7p
30.4p
192
192
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
226.8
6.2
20.1
(70.8)
182.3
(14.4)
167.9
Statutory
£m
167.9
164.2
3.7
505.1
6.1
511.2
32.5p
32.1p
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
2. Adjustments between statutory and underlying information (continued)
Underlying operating profit (continued)
Underlying operating profit eliminates potential differences in performance caused by purchase price allocations on business
combinations in prior periods (amortisation of acquired intangibles), business acquisition, merger and divestment related items, large,
infrequent restructuring programmes and fair value movements on derivatives. Transactions such as these may happen regularly and
could significantly impact the statutory result in any given year. Adjustments to underlying operating profit may include both income
and expenditure items.
Specific adjusting items include:
Amortisation of acquired intangibles;
disposal of assets or businesses);
Business acquisition, merger and divestment related items (being amounts related to corporate transactions and gains or losses on
Gains, losses and costs directly arising from the Group’s withdrawal from a specific market or geography, including closure costs,
severance costs, the disposal of assets and termination of leases;
The costs of large restructuring programmes that significantly exceed the minor restructuring which occurs in most years as part of
normal operations. Restructuring costs incurred as a result of normal operations are included in operating costs and are not excluded
from underlying operating profit;
Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes;
Fair value gain/(loss) on forward rate contracts that are open during the period; 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
Earnings per share including underlying measures
Revenue
Operating profit/(loss)
Other income
Share of results of joint ventures and associates
Net finance costs
Profit/(loss) before tax
Income tax (expense)/benefit
Profit/(loss) after tax for the year
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
3
3,4
14
5
7
(cid:3)
(cid:3)
Year ended 31 March 2023
Underlying
adjusting items
£m
4,438.6
Specific
£m
–
Year ended 31 March 2022
Specific adjusting
Statutory
£m
4,438.6
Underlying
£m
4,101.8
items
£m
Statutory
£m
–
4,101.8
177.9
(132.4)
(10.9)
226.8
Year ended 31 March 2023
Underlying
adjusting items
Statutory
Year ended 31 March 2022
Specific adjusting
–
–
9.7
(122.7)
(1.8)
(124.5)
Specific
£m
(124.5)
(cid:3)
(124.5)
–
–
9.3
(58.3)
128.9
(37.7)
91.2
£m
91.2
(cid:3)
89.5
1.7
505.4
9.5
514.9
17.7p
17.4p
45.5
–
9.3
(48.6)
6.2
(39.5)
(33.3)
£m
(33.3)
(cid:3)
(35.0)
1.7
505.4
9.5
514.9
(6.9)p
(6.9)p
237.7
6.2
20.1
(61.2)
202.8
(43.9)
158.9
Underlying
£m
158.9
155.2
3.7
505.1
6.1
511.2
30.7p
30.4p
–
–
(9.6)
(20.5)
29.5
9.0
6.2
20.1
(70.8)
182.3
(14.4)
167.9
items
£m
9.0
9.0
–
Statutory
£m
167.9
164.2
3.7
505.1
6.1
511.2
32.5p
32.1p
2. Adjustments between statutory and underlying information (continued)
Details of specific adjusting items
The impact of specific adjusting items is set out below:
Amortisation of acquired intangibles
Business acquisition, merger and divestment related items
Fair value movement on derivatives and related items
Exceptional items
Restructuring
Adjusting items impacting operating profit/(loss)
Fair value movement on derivatives and related items
Adjusting items impacting loss before tax
Income tax benefit
Amortisation of acquired intangibles
Business acquisition, merger and divestment related items
Restructuring
Fair value movement on derivatives and related items
Exceptional tax items and tax on exceptional items, including rate change impact
Income tax (expense)/benefit
Year ended
31 March 2023
£m
(15.8)
(cid:3)
(117.7)
1.1
–
–
Year ended
31 March 2022
£m
(21.4)
163.1
–
(118.8)
(33.8)
(132.4)
9.7
(122.7)
(10.9)
(9.6)
(20.5)
4.1
(2.1)
–
(2.6)
(1.2)
(1.8)
5.5
(cid:3)
–
6.5
2.5
15.0
29.5
Explanation of specific adjusting items
Amortisation of acquired intangibles
Underlying operating profit excludes the amortisation of acquired intangibles. This item is excluded from underlying results as it arises as
a result of purchase price allocations on business combinations and is a non-cash item which does not change each year dependent on
the performance of the business. It is therefore not considered to represent the underlying activity of the Group and is removed to aid
comparability with peers who have grown organically as opposed to through acquisition. 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 for the year ended 31 March 2023 was
£117.7 million, consisting of a loss on the disposal of the Aerial Emergency Services business in Europe of £116.9 million, a loss on
disposal of the Group’s Civil Training business of £3.9 million and items relating to the disposal of the Oil & Gas business in Aviation
of £3.1 million. Further detail is included in note 28.
The prior year included a total net gain of £163.1 million, consisting of a £172.8 million profit from acquisitions and disposals
completed in the year offset by £9.7 million of costs incurred in relation to the Group’s divestment programme for disposals that
had not completed at 31 March 2022.
Restructuring
Major restructuring programmes are not anticipated to recur year-on-year and therefore are not considered to be indicative of
underlying performance and hence removed from underlying operating profit.
In the prior period the Group incurred £36.8 million of restructuring costs in relation to the implementation of the new operating
model announced and implemented during the year ended 31 March 2022. This was offset by the release of £3.0 million of
restructuring provisions created in previous years that were classified as exceptional but are no longer needed.
Fair value movement on derivatives and related items
These are open forward currency contracts, taken out in the ordinary course of business to manage foreign currency exposures, where
the transaction will occur in future periods. Hedge accounting under IFRS is not applied, however these do represent economic hedges.
On maturity the currency contract will be closed and recognised in full within underlying operating profit at the same time as the
hedged sale or purchase. The net result, at that time, will then more appropriately reflect the related sales price or supplier cost being
hedged (which is fixed to ensure ultimately profitable outcomes).
192
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
193
193
Notes to the Group financial statements (continued)
2. Adjustments between statutory and underlying information (continued)
Fair value movement on derivatives and related items (continued)
Hedge ineffectiveness on debt and debt-related derivatives that are designated in a hedge relationship are also presented as a specific
adjusting item in finance costs. This is presented as a specific adjusting item as this ineffectiveness is caused by a historic off-market
designation, the transactions are considered by the Group to represent an economic hedge.
The fair value movement on lease-related derivatives and foreign exchange movements on lease liabilities are also presented as a
specific adjusting item in finance costs, as hedge accounting under IFRS is also not applied to these transactions but are also considered
by the Group to represent an economic hedge.
Tax
Tax comprises a charge of £1.2 million arising from the impact of the increase in the rate of corporation tax to 25% with effect from
1 April 2023.
In the prior year, tax included a £12.1 million credit in relation to exceptional items, and a credit of £2.9 million arising from the impact
of the increase in the rate of corporation tax to 25%.
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 property, plant and equipment and aircraft fleet rationalisation
Release of onerous contract provisions
Release of provisions relating to the Italy fine and related costs
Other
Exceptional items – Group
Exceptional tax items and tax on exceptional items
Exceptional items – net of tax
Explanation of exceptional items
(cid:3)
Year ended
31 March 2023
£m
Year ended
31 March 2022
£m
(cid:3)
–
–
–
–
–
–
–
–
–
(7.2)
(cid:3)
(57.6)
(58.8)
1.8
3.6
(0.6)
(118.8)
15.0
(103.8)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Impairment of goodwill
The prior year impairment test resulted in a goodwill impairment of £7.2 million in the Aviation operating segment, due to changes in
the forecast future business performance informed by the Group’s disposal programme. The businesses to which this goodwill related
were fully disposed in FY23 as detailed in note 28.
Impairment of acquired intangibles
In the prior year, an impairment of £57.6 million was recognised in the Aviation operating segment, due to changes in the forecast
future business performance informed by the Group’s disposal programme. The businesses to which this goodwill related were fully
disposed in FY23 as detailed in note 28.
Impairment of property, plant and equipment
In the prior year, an impairment charge of £58.8 million was recognised on property, plant and equipment in the Aviation operating
segment, due to changes in the forecast future business performance informed by the Group’s disposal programme. The businesses to
which this goodwill related were fully disposed in FY23 as detailed in note 28.
Onerous contracts
In the prior year, the Group released an onerous contract provision that was no longer required and was previously classified as
exceptional, which totalled £1.8 million.
Italy fine
In the prior year, the Group received notice that the fine had been set at €18 million, which was subsequently paid by the Group.
This resulted in the release of unused provision of £3.6 million.
194
194
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
2. Adjustments between statutory and underlying information (continued)
Fair value movement on derivatives and related items (continued)
Hedge ineffectiveness on debt and debt-related derivatives that are designated in a hedge relationship are also presented as a specific
adjusting item in finance costs. This is presented as a specific adjusting item as this ineffectiveness is caused by a historic off-market
designation, the transactions are considered by the Group to represent an economic hedge.
The fair value movement on lease-related derivatives and foreign exchange movements on lease liabilities are also presented as a
specific adjusting item in finance costs, as hedge accounting under IFRS is also not applied to these transactions but are also considered
by the Group to represent an economic hedge.
Tax comprises a charge of £1.2 million arising from the impact of the increase in the rate of corporation tax to 25% with effect from
In the prior year, tax included a £12.1 million credit in relation to exceptional items, and a credit of £2.9 million arising from the impact
Tax
1 April 2023.
of the increase in the rate of corporation tax to 25%.
Exceptional items
Exceptional items are those items which are significant, non-recurring and outside the normal operating practice of the Group.
Year ended
Year ended
31 March 2023
31 March 2022
£m
£m
(cid:3)
–
–
–
–
–
–
–
–
–
(7.2)
(cid:3)
(57.6)
(58.8)
1.8
3.6
(0.6)
(118.8)
15.0
(103.8)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Operating costs
Impairment of goodwill
Impairment of acquired intangibles
Impairment of property, plant and equipment and aircraft fleet rationalisation
Release of onerous contract provisions
Release of provisions relating to the Italy fine and related costs
Other
Exceptional items – Group
Exceptional tax items and tax on exceptional items
Exceptional items – net of tax
Explanation of exceptional items
(cid:3)
Impairment of goodwill
were fully disposed in FY23 as detailed in note 28.
Impairment of acquired intangibles
The prior year impairment test resulted in a goodwill impairment of £7.2 million in the Aviation operating segment, due to changes in
the forecast future business performance informed by the Group’s disposal programme. The businesses to which this goodwill related
In the prior year, an impairment of £57.6 million was recognised in the Aviation operating segment, due to changes in the forecast
future business performance informed by the Group’s disposal programme. The businesses to which this goodwill related were fully
disposed in FY23 as detailed in note 28.
Impairment of property, plant and equipment
In the prior year, an impairment charge of £58.8 million was recognised on property, plant and equipment in the Aviation operating
segment, due to changes in the forecast future business performance informed by the Group’s disposal programme. The businesses to
which this goodwill related were fully disposed in FY23 as detailed in note 28.
In the prior year, the Group released an onerous contract provision that was no longer required and was previously classified as
Onerous contracts
exceptional, which totalled £1.8 million.
Italy fine
In the prior year, the Group received notice that the fine had been set at €18 million, which was subsequently paid by the Group.
This resulted in the release of unused provision of £3.6 million.
3. Segmental information
The Group has four reportable segments, determined by reference to the goods and services they provide and the markets they serve.
Marine – through-life support of naval ships, equipment and marine infrastructure in the UK and internationally.
Nuclear – through-life support of submarines and complex engineering services in support of major decommissioning programmes and
projects, training and operation support, new build programme management and design and installation in the UK.
Land – large-scale critical vehicle fleet management, equipment support and training for military and civil customers.
Aviation – critical engineering services to defence and civil customers worldwide, including pilot training, equipment support, airbase
management and operation of aviation fleets delivering emergency services.
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 Africa meets the definition of an operating segment, as defined by
IFRS 8. In accordance with IFRS 8, the Africa operating segment is included in the Land reportable segment.
The table below presents the underlying results for each reportable segment in accordance with the definition of underlying operating
profit, as set out in note 2, and reconciles the underlying operating profit/(loss) to the statutory profit/(loss) before tax.
Year ended 31 March 2023
Revenue
Underlying operating profit
Specific Adjusting Items (note 2)
Amortisation of acquired intangibles
Business acquisition, merger and divestment related items
Fair value gain/(loss) on forward rate contracts to be settled in
future periods
Operating profit/(loss)
Share of results of joint ventures and associates
IFRIC 12 investment income
Other net finance costs*
Profit/(loss) before tax
Year ended 31 March 2022
Revenue
Underlying operating profit
Specific Adjusting Items (note 2)
Amortisation of acquired intangibles
Business acquisition, merger and divestment related items
Restructuring costs
Exceptional items
Operating profit/(loss)
Other income
Share of results of joint ventures and associates
IFRIC 12 investment income
Other net finance costs*
Profit/(loss) before tax
* Other net finance costs are not allocated to a specific sector.
Marine
£m
1,439.6
12.7
Nuclear
£m
1,179.2
63.5
Land
£m
1,017.1
85.9
Aviation
£m
802.7
15.8
Unallocated
£m
–
–
Total
£m
4,438.6
177.9
(9.7)
–
2.8
5.8
(1.2)
–
–
4.6
–
–
0.1
63.6
1.1
–
–
64.7
(1.1)
(4.0)
0.1
80.9
0.4
0.7
–
82.0
(5.0)
(113.7)
(1.9)
(104.8)
9.0
–
–
(95.8)
–
–
–
(15.8)
(117.7)
1.1
–
–
–
(49.3)
(49.3)
45.5
9.3
0.7
(49.3)
6.2
Marine
£m
1,259.3
98.0
Nuclear
£m
1,009.7
62.4
Land
£m
1,015.5
58.8
Aviation
£m
817.3
18.5
Unallocated
£m
–
–
Total
£m
4,101.8
237.7
(0.6)
221.3
(8.6)
(0.4)
309.7
–
3.5
–
–
313.2
–
–
(5.5)
–
56.9
–
0.4
–
–
57.3
(1.3)
(6.1)
(16.9)
1.7
36.2
–
2.5
0.8
–
39.5
(19.5)
(52.1)
(2.8)
(120.1)
(176.0)
6.2
13.7
–
–
(156.1)
–
–
–
–
–
–
–
(71.6)
(71.6)
(21.4)
163.1
(33.8)
(118.8)
226.8
6.2
20.1
0.8
(71.6)
182.3
Revenues of £2.2 billion (2022: £2.0 billion) are derived from a single external customer. These revenues are attributable across
all reportable segments.
194
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
195
195
Notes to the Group financial statements (continued)
3. Segmental information (continued)
Segment assets and liabilities
The reportable segment assets and liabilities at 31 March 2023 and 31 March 2022 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
2023
£m
793.2
636.8
638.2
447.5
794.2
3,309.9
2022
(restated)
£m
775.8
561.1
626.5
997.8
1,639.5
4,600.7
2023
£m
762.4
284.8
379.1
200.0
1,312.7
2,939.0
2022
(restated)
£m
604.2
271.6
335.3
321.5
2,366.6
3,899.2
2023
£m
25.2
37.8
3.6
44.7
13.8
125.1
2022
(restated)
£m
41.8
56.9
5.3
90.3
8.9
203.2
2023
£m
5.6
3.1
13.9
80.9
5.0
108.5
2022
(restated)
£m
6.4
3.4
17.2
82.3
3.7
113.0
* 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.
Capital expenditure represents additions to property, plant and equipment and intangible assets. Proceeds from the sale of assets
totalled £38.9 million (2022: £68.0 million) are not included above, and are predominantly in the Aviation sector. See note 18 relating
to the treatment of amounts payable in respect of capital expenditure.
The segmental analysis of joint ventures and associates is detailed in note 14.
Segmental depreciation and amortisation
The segmental depreciation on property, plant and equipment, right of use assets and amortisation of intangible assets for the years
ended 31 March 2023 and 31 March 2022 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
2023
£m
15.9
22.8
4.4
23.6
5.4
72.1
2022
£m
8.2
22.3
4.4
18.0
5.8
58.7
2023
£m
5.2
2.6
10.8
57.7
5.4
81.7
2022
£m
7.4
3.7
12.5
78.8
2.7
105.1
2023
£m
12.7
0.2
2.3
5.5
7.4
28.1
2022
£m
4.6
0.3
2.6
20.2
9.4
37.1
Segmental asset impairments
The segmental impairment on property, plant and equipment, right of use assets and intangible assets for the years ended 31 March
2023 and 31 March 2022 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
2023
£m
–
–
–
4.9
–
4.9
2022
£m
–
–
–
58.8
–
58.8
2023
£m
–
–
0.9
8.7
–
9.6
2022
£m
–
–
–
18.0
–
18.0
2023
£m
–
–
0.9
2.3
5.8
9.0
2022
£m
–
–
–
57.6
–
57.6
196
196
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
3. Segmental information (continued)
Segment assets and liabilities
3. Segmental information (continued)
Geographic analysis of non-current assets
The reportable segment assets and liabilities at 31 March 2023 and 31 March 2022 and capital expenditure and lease principal
payments for the years then ended are as follows:
The geographic analysis for non-current assets by location of those assets for the years ended 31 March 2023 and 31 March 2022 is
as follows:
Assets
Liabilities
Capital expenditure
Lease payments
2023
£m
793.2
636.8
638.2
447.5
794.2
2022
(restated)
£m
775.8
561.1
626.5
997.8
1,639.5
2023
£m
762.4
284.8
379.1
200.0
2022
(restated)
£m
604.2
271.6
335.3
321.5
1,312.7
2,939.0
2,366.6
3,899.2
2023
£m
25.2
37.8
3.6
44.7
13.8
2022
(restated)
£m
41.8
56.9
5.3
90.3
8.9
2023
£m
5.6
3.1
13.9
80.9
5.0
2022
(restated)
£m
6.4
3.4
17.2
82.3
3.7
3,309.9
4,600.7
125.1
203.2
108.5
113.0
Marine
Nuclear
Land
Aviation
Unallocated *
Group total
Marine
Nuclear
Land
Aviation
Unallocated
Group total
Marine
Nuclear
Land
Aviation
Unallocated
Group total
* 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.
Capital expenditure represents additions to property, plant and equipment and intangible assets. Proceeds from the sale of assets
totalled £38.9 million (2022: £68.0 million) are not included above, and are predominantly in the Aviation sector. See note 18 relating
to the treatment of amounts payable in respect of capital expenditure.
The segmental analysis of joint ventures and associates is detailed in note 14.
Segmental depreciation and amortisation
The segmental depreciation on property, plant and equipment, right of use assets and amortisation of intangible assets for the years
ended 31 March 2023 and 31 March 2022 is as follows:
Depreciation of property,
plant and equipment
Depreciation of
right of use assets
Amortisation of
intangible assets
Segmental asset impairments
2023 and 31 March 2022 is as follows:
The segmental impairment on property, plant and equipment, right of use assets and intangible assets for the years ended 31 March
Impairment of property,
plant and equipment
Impairment of
right of use assets
Impairment of
intangible assets
2023
£m
15.9
22.8
4.4
23.6
5.4
72.1
2023
£m
–
–
–
–
4.9
4.9
2022
£m
8.2
22.3
4.4
18.0
5.8
58.7
2022
£m
–
–
–
–
58.8
58.8
2023
£m
5.2
2.6
10.8
57.7
5.4
81.7
2023
£m
–
–
0.9
8.7
–
9.6
2022
£m
7.4
3.7
12.5
78.8
2.7
105.1
2022
£m
–
–
–
–
18.0
18.0
2023
£m
12.7
0.2
2.3
5.5
7.4
28.1
2023
£m
–
–
0.9
2.3
5.8
9.0
2022
£m
4.6
0.3
2.6
20.2
9.4
37.1
2022
£m
–
–
–
–
57.6
57.6
United Kingdom
Rest of Europe
Africa
North America
Australasia
Rest of World
Non-current segment assets
Retirement benefits
Lease receivables
Derivatives
Deferred tax asset
Total non-current assets
2023
£m
1,415.7
48.7
32.7
13.6
126.3
3.4
1,640.4
94.8
22.2
2.6
112.2
1,872.2
2022
(restated)
£m
1,260.3
548.0
69.7
21.3
189.8
2.0
2,091.1
300.9
24.1
–
47.4
2,463.5
Geographic analysis of revenue
The geographic analysis of revenue by origin of customer for the years ended 31 March 2023 and 31 March 2022 is as follows:
Geographic analysis
United Kingdom
Rest of Europe
Africa
North America
Australasia
Rest of World
Group total
The analysis of revenue for the years ended 31 March 2023 and 31 March 2022 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
Revenue
2023
£m
2,693.3
601.0
329.3
188.1
349.5
277.4
4,438.6
2023
£m
352.5
262.3
614.8
3,822.1
1.7
4,438.6
2022
£m
2,593.5
546.8
318.9
172.9
218.6
251.1
4,101.8
2022
£m
257.5
258.1
515.6
3,580.8
5.4
4,101.8
196
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Babcock International Group PLC / Annual Report and Financial Statements 2023
197
197
Notes to the Group financial statements (continued)
4. Operating profit for the year
The following items have been included in arriving at operating profit for the year:
Raw materials, subcontracts and other bought-in items used
Change in inventories of finished goods and work-in-progress
Operating charges
Employee costs (note 6)
Depreciation of property, plant and equipment (note 12)
Depreciation of right-of-use assets (note 13)
Amortisation of intangible assets (note 11)
Acquired intangibles
Other
•
•
Impairment of intangible assets (note 11)
Impairment of property, plant and equipment (note 12)
Impairment of right of use assets (note 13)
Impairment of goodwill
(Gain) on disposal of property, plant and equipment
Loss on disposal of intangible assets
Loss/(gain) on disposal of right-of-use assets
Net foreign exchange loss
Loss/(gain) on disposal of subsidiaries and joint ventures
(Gain)/loss on derivative instruments at fair value through profit or loss
Year ended
31 March 2023
£m
1,857.1
(2.8)
682.6
Year ended
31 March 2022
£m
1,467.8
17.8
682.4
1,567.1
1,523.6
72.1
81.7
15.8
12.3
9.0
4.9
9.6
–
(2.0)
1.7
0.8
12.7
77.4
(6.9)
58.7
105.1
21.4
15.7
57.6
58.8
18.0
7.2
(1.5)
0.7
(3.2)
10.5
(172.8)
7.2
Total operating charges
4,393.1
3,875.0
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:
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
Audit related assurance fees
Fees for other services:
Other non-audit services
Total fees paid to the Group’s auditor and network firms
Year ended
31 March 2023
£m
Year ended
31 March 2022
£m
2.4
8.1
–
–
10.5
2.3
4.3
0.5
–
7.1
198
198
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
4. Operating profit for the year
The following items have been included in arriving at operating profit for the year:
Raw materials, subcontracts and other bought-in items used
Change in inventories of finished goods and work-in-progress
Operating charges
Employee costs (note 6)
Depreciation of property, plant and equipment (note 12)
Depreciation of right-of-use assets (note 13)
Amortisation of intangible assets (note 11)
Acquired intangibles
Other
•
•
Impairment of intangible assets (note 11)
Impairment of property, plant and equipment (note 12)
Impairment of right of use assets (note 13)
Impairment of goodwill
(Gain) on disposal of property, plant and equipment
Loss on disposal of intangible assets
Loss/(gain) on disposal of right-of-use assets
Net foreign exchange loss
Loss/(gain) on disposal of subsidiaries and joint ventures
(Gain)/loss on derivative instruments at fair value through profit or loss
Total operating charges
4,393.1
3,875.0
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:
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
Audit related assurance fees
Fees for other services:
Other non-audit services
Total fees paid to the Group’s auditor and network firms
Year ended
31 March 2023
Year ended
31 March 2022
£m
£m
1,857.1
1,467.8
(2.8)
682.6
17.8
682.4
1,567.1
1,523.6
72.1
81.7
15.8
12.3
9.0
4.9
9.6
–
(2.0)
1.7
0.8
12.7
77.4
(6.9)
58.7
105.1
21.4
15.7
57.6
58.8
18.0
7.2
(1.5)
0.7
(3.2)
10.5
(172.8)
7.2
Year ended
Year ended
31 March 2023
31 March 2022
£m
£m
2.4
8.1
–
–
10.5
2.3
4.3
0.5
–
7.1
5. Net finance costs
Finance costs
Loans, overdrafts and associated interest rate hedges
Lease interest and foreign exchange movements on lease liabilities
Amortisation of issue costs of bank loan
Retirement benefit interest cost
Other
Total finance costs
Finance income
Bank deposits, loans and leases
IFRIC 12 Investment income
Retirement benefit interest income
Total finance income
Net finance costs
Year ended
31 March 2023
£m
Year ended
31 March 2022
£m
29.6
21.7
3.3
–
15.9
70.5
13.7
0.7
7.5
21.9
48.6
57.3
17.4
2.0
3.7
–
80.4
8.8
0.8
–
9.6
70.8
Net finance costs decreased to £48.6 million (2022: £70.8 million). The current year includes a one-off gain of £18 million relating to
the valuation of interest rate swaps (within loans, overdrafts and associated interest rate hedges) and a £12 million cost relating to the
factoring of receivables for the Mentor contract in France (within other finance costs).
6. Employee costs
Wages and salaries
Social security costs
Share-based payments (note 25)
Pension costs – defined contribution plans (note 26)
Pension charges – defined benefit plans (note 26)
The average monthly number of people employed by the Group was:
Marine
Nuclear
Land
Aviation
Central functions
Year ended
31 March 2023
£m
1,289.2
141.3
9.4
94.6
32.6
1,567.1
Year ended
31 March 2022
£m
1,252.8
143.4
5.5
83.4
38.5
1,523.6
2023
Number
6,270
6,421
5,013
8,172
859
26,735
2022
Number
6,872
7,422
5,996
8,045
640
28,975
The reduction in average monthly number of people employed by the Group year-on-year is primarily attributable to the disposal activity
in the current and prior period as detailed in note 28.
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
Year ended
31 March 2023
£m
11.8
4.6
16.4
Year ended
31 March 2022
£m
7.3
1.9
9.2
198
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
199
199
Notes to the Group financial statements (continued)
7. Taxation
Income tax expense
Analysis of tax expense in the year
Current tax
UK current year expense
UK prior year (benefit)
Overseas current year expense
Overseas prior year expense
•
•
•
•
Deferred tax
UK current year expense
UK prior year (benefit)/expense
Overseas current year expense/(benefit)
Overseas prior year (benefit)/expense
•
•
•
•
•
Total income tax expense
Impact of changes in tax rates
Total
Year ended
31 March 2023
£m
Year ended
31 March 2022
£m
0.6
–
24.5
2.9
28.0
11.1
(3.3)
3.6
(1.1)
1.2
11.5
39.5
1.9
(10.8)
19.3
2.5
12.9
17.5
11.5
(25.3)
0.7
(2.9)
1.5
14.4
The tax for the year is higher (2022: lower) than the standard rate of corporation tax in the UK. The differences are explained below:
Profit before tax
Profit on ordinary activities multiplied by rate of corporation tax in the UK of 19% (2022: 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
Unrecognised deferred tax movements
Deferred tax not previously recognised/derecognised
Non-taxable profits on disposals and non-deductible losses on disposals
Other
Total income tax expense/(benefit)
Further information on exceptional items and tax on exceptional items is detailed in note 2.
Year ended
31 March 2023
£m
6.2
1.2
Year ended
31 March 2022
£m
182.3
34.6
8.6
–
1.2
(1.8)
(1.5)
5.8
9.0
–
22.4
(5.4)
39.5
2.4
1.4
(2.9)
(2.1)
3.9
(0.4)
25.0
(8.1)
(37.8)
(1.6)
14.4
During the prior year the Group concluded discussions with certain tax authorities regarding prior year tax positions, resulting in a tax
credit of £12.6 million.
The Group is subject to taxation in several jurisdictions. The complexity of applicable rules may result in legitimate differences of
interpretation between the Group and taxing authorities, especially where an economic judgement or valuation is involved. The
principal elements of the Group’s uncertain tax positions relate to the pricing of intra-group transactions and the allocation of profits in
overseas territories. The outcome of tax authority disputes in such areas is not predictable, and to reflect the effect of these uncertain
tax positions a provision is recorded which represents management’s assessment of the most likely outcome of each issue. At 31 March
2023 the Group held uncertain tax provisions of £20.3 million (2022: £16.5 million).
During the period the Group made disposals that are expected to be exempt from UK tax due to qualification for the UK substantial
shareholding exemption, and from overseas tax as a consequence of local reliefs.
The increase in the UK rate of corporation tax to 25% with effect from 1 April 2023 was substantively enacted during the year ended 31
March 2022. The effect has been to increase the Group’s net deferred tax asset by £23.1 million (2022: £1.4 million), comprising a
charge to Income Statement of £1.1 million (2022: £2.9 million credit) and a credit to Other Comprehensive Income of £24.2 million
(2022: £2.0 million charge). In the year ended 31 March 2022 there was also a credit to Equity of £0.5 million.
200
200
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
7. Taxation
Income tax expense
Analysis of tax expense in the year
Current tax
UK current year expense
UK prior year (benefit)
Overseas current year expense
Overseas prior year expense
Deferred tax
UK current year expense
UK prior year (benefit)/expense
Overseas current year expense/(benefit)
Overseas prior year (benefit)/expense
Impact of changes in tax rates
Total income tax expense
•
•
•
•
•
•
•
•
•
Total
Year ended
Year ended
31 March 2023
31 March 2022
£m
£m
0.6
–
24.5
2.9
28.0
11.1
(3.3)
3.6
(1.1)
1.2
11.5
39.5
£m
6.2
1.2
8.6
–
1.2
(1.8)
(1.5)
5.8
9.0
–
22.4
(5.4)
39.5
1.9
(10.8)
19.3
2.5
12.9
17.5
11.5
(25.3)
0.7
(2.9)
1.5
14.4
£m
182.3
34.6
2.4
1.4
(2.9)
(2.1)
3.9
(0.4)
25.0
(8.1)
(37.8)
(1.6)
14.4
Year ended
Year ended
31 March 2023
31 March 2022
The tax for the year is higher (2022: lower) than the standard rate of corporation tax in the UK. The differences are explained below:
Profit on ordinary activities multiplied by rate of corporation tax in the UK of 19% (2022: 19%)
Profit before tax
Effects of:
Expenses not deductible for tax purposes
Non-deductible write-off of goodwill
Prior year adjustments
Differences in respect of foreign rates
Unrecognised deferred tax movements
Re-measurement of deferred tax in respect of statutory rate changes
Difference in respect of share of results of joint ventures and associates’ results
Deferred tax not previously recognised/derecognised
Non-taxable profits on disposals and non-deductible losses on disposals
Other
Total income tax expense/(benefit)
Further information on exceptional items and tax on exceptional items is detailed in note 2.
During the prior year the Group concluded discussions with certain tax authorities regarding prior year tax positions, resulting in a tax
credit of £12.6 million.
The Group is subject to taxation in several jurisdictions. The complexity of applicable rules may result in legitimate differences of
interpretation between the Group and taxing authorities, especially where an economic judgement or valuation is involved. The
principal elements of the Group’s uncertain tax positions relate to the pricing of intra-group transactions and the allocation of profits in
overseas territories. The outcome of tax authority disputes in such areas is not predictable, and to reflect the effect of these uncertain
tax positions a provision is recorded which represents management’s assessment of the most likely outcome of each issue. At 31 March
2023 the Group held uncertain tax provisions of £20.3 million (2022: £16.5 million).
During the period the Group made disposals that are expected to be exempt from UK tax due to qualification for the UK substantial
shareholding exemption, and from overseas tax as a consequence of local reliefs.
The increase in the UK rate of corporation tax to 25% with effect from 1 April 2023 was substantively enacted during the year ended 31
March 2022. The effect has been to increase the Group’s net deferred tax asset by £23.1 million (2022: £1.4 million), comprising a
charge to Income Statement of £1.1 million (2022: £2.9 million credit) and a credit to Other Comprehensive Income of £24.2 million
(2022: £2.0 million charge). In the year ended 31 March 2022 there was also a credit to Equity of £0.5 million.
7. Taxation (continued)
Income tax expense (continued)
Recent developments in respect of the OECD inclusive Framework on Base Erosion and Profit Shifting (BEPS), which include the Pillar Two
initiative introducing a global minimum rate of corporation tax, are applicable to the Group. Initial analysis indicates that UK legislation,
announced on 23 March 2023, to implement this initiative will result in no material impact on the Group’s tax charge. The Group
continues to monitor this issue to quantify any impact and implement the increased tax reporting activities required to ensure
compliance.
Deferred tax
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 current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the
same Taxation Authorities:
Deferred tax asset (restated – note 23)
Deferred tax liability
The movements in deferred tax assets and liabilities during the year are shown below.
At 1 April 2022 as previously stated
Prior period restatement (note 23)
At 1 April 2022 as restated
Income statement credit/(debit)
Tax credit/(debit) to other comprehensive income/equity
Transfer to income tax receivable
Disposal of subsidiary
Effect of changes in tax rates
Income statement
Other comprehensive income/equity
•
Exchange differences
•
At 31 March 2023
At 1 April 2021
Income statement credit/(debit)
Tax credit/(debit) to other comprehensive income/equity
Transfer from income tax receivable
Acquisition of subsidiary (restated – note 23)
Disposal of subsidiary
Effect of changes in tax rates
Income statement
Other comprehensive income/equity
•
Exchange differences
•
At 31 March 2022 as previously stated
Tangible assets
£m
(32.7)
–
(32.7)
(6.1)
–
–
(1.5)
Retirement
benefit
obligations
£m
(48.0)
–
(48.0)
(28.5)
76.6
–
–
(1.5)
–
0.9
(40.9)
(17.0)
(8.4)
–
–
–
(1.2)
(6.6)
–
0.5
(32.7)
(9.0)
24.2
–
15.3
53.2
(28.3)
(61.2)
–
–
–
(8.7)
(3.0)
–
(48.0)
Tax losses
£m
101.5
0.4
101.9
23.7
–
–
(6.3)
9.5
–
(0.8)
128.0
98.9
(15.7)
–
–
–
–
17.2
–
1.1
101.5
2023
£m
112.2
(7.0)
105.2
Other
£m
16.6
–
16.6
0.5
(3.3)
(5.2)
(6.5)
(0.1)
–
0.8
2.8
(13.1)
48.0
(0.2)
4.4
(18.6)
(6.4)
1.0
1.5
–
16.6
2022
£m
47.4
(9.6)
37.8
Total
£m
37.4
0.4
37.8
(10.4)
73.3
(5.2)
(14.3)
(1.1)
24.2
0.9
105.2
122.0
(4.4)
(61.4)
4.4
(18.6)
(7.6)
2.9
(1.5)
1.6
37.4
The net deferred tax assets of £105.2 million (2022: £37.4 million) include deferred tax assets of £14.2 million (2022: £31.6 million)
and deferred tax liabilities of £7.0 million (2022: £9.6 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 note 1 to the Accounts.
200
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Babcock International Group PLC / Annual Report and Financial Statements 2023
201
201
Notes to the Group financial statements (continued)
7. Taxation (continued)
Deferred tax (continued)
Net deferred tax assets have been recognised in respect of operations in the following jurisdictions: United Kingdom (£97.9 million),
Australia (£7.4 million) and New Zealand (£0.9 million). In the prior year net deferred tax assets were recognised in the following
jurisdictions: United Kingdom (£15.4 million), Italy (£9.8 million), Australia (£8.9 million) and Spain (£3.5 million). The reductions in the
deferred tax balances in Italy and Spain jurisdictions follows the exit from these geographies following the business disposals as detailed
in note 28. The UK was in a net tax loss position for each of the years ended 31 March 2021, 31 March 2022 and 31 March 2023.
The losses for the years ended 31 March 2021 and 2022 reflected the contract and profitability review carried out in 2021 and the
restructuring of the business in 2022. The loss in the year ended 31 March 2023 was principally attributable to the provision in respect
of the Type 31 contract. The Directors do not consider that the results for these periods are representative of future trading
performance and are satisfied that these net deferred tax assets are recoverable based on future profit forecasts.
No deferred tax has been recognised in respect of temporary differences associated with investments in subsidiaries, branches,
associates and interests 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 their post acquisition retained earnings and amounted to £257 million (2022: £291 million).
At the statement of financial position date, deferred tax assets of £128.0 million (2022: £101.5 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 £96.4 million (2022: £519 million). In addition to these amounts, UK capital losses of
£92.0 million (2022: £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 losses, 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.
8. Dividends
Final dividend for the year ended 31 March 2022 of nil (2021: nil p) per 60p share
Interim dividend for the year ended 31 March 2023 of nil (2022: nil p) per 60p share
Year ended
31 March 2023
£m
–
–
–
Year ended
31 March 2022
£m
–
–
–
9. (Loss)/earnings per share
Basic (loss)/earnings 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 (loss)/earnings per share 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
2023
Number
505,391,563
9,528,985
514,920,548
2022
Number
505,091,970
6,083,765
511,175,735
Earnings per share
(Loss)/earnings for the year
Year ended 31 March 2023
Year ended 31 March 2022
Loss attributable
to shareholders
£m
(35.0)
Basic
per share
Pence
(6.9)
Diluted
per share
Pence
(6.9)
Earnings
attributable to
shareholders
£m
164.2
Basic
per share
Pence
32.5
Diluted
per share
Pence
32.1
202
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
7. Taxation (continued)
Deferred tax (continued)
Net deferred tax assets have been recognised in respect of operations in the following jurisdictions: United Kingdom (£97.9 million),
Australia (£7.4 million) and New Zealand (£0.9 million). In the prior year net deferred tax assets were recognised in the following
jurisdictions: United Kingdom (£15.4 million), Italy (£9.8 million), Australia (£8.9 million) and Spain (£3.5 million). The reductions in the
deferred tax balances in Italy and Spain jurisdictions follows the exit from these geographies following the business disposals as detailed
in note 28. The UK was in a net tax loss position for each of the years ended 31 March 2021, 31 March 2022 and 31 March 2023.
The losses for the years ended 31 March 2021 and 2022 reflected the contract and profitability review carried out in 2021 and the
restructuring of the business in 2022. The loss in the year ended 31 March 2023 was principally attributable to the provision in respect
of the Type 31 contract. The Directors do not consider that the results for these periods are representative of future trading
performance and are satisfied that these net deferred tax assets are recoverable based on future profit forecasts.
No deferred tax has been recognised in respect of temporary differences associated with investments in subsidiaries, branches,
associates and interests 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 their post acquisition retained earnings and amounted to £257 million (2022: £291 million).
At the statement of financial position date, deferred tax assets of £128.0 million (2022: £101.5 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 £96.4 million (2022: £519 million). In addition to these amounts, UK capital losses of
£92.0 million (2022: £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 losses, 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.
8. Dividends
Final dividend for the year ended 31 March 2022 of nil (2021: nil p) per 60p share
Interim dividend for the year ended 31 March 2023 of nil (2022: nil p) per 60p share
Year ended
Year ended
31 March 2023
31 March 2022
£m
–
–
–
£m
–
–
–
9. (Loss)/earnings per share
Basic (loss)/earnings 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 (loss)/earnings per share is based on the following data:
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
2023
Number
2022
Number
505,391,563
505,091,970
9,528,985
6,083,765
514,920,548
511,175,735
Year ended 31 March 2023
Year ended 31 March 2022
Loss attributable
to shareholders
£m
(35.0)
Basic
per share
Pence
(6.9)
Diluted
per share
Pence
(6.9)
Earnings
attributable to
shareholders
£m
164.2
Basic
per share
Pence
32.5
Diluted
per share
Pence
32.1
Number of shares
Earnings per share
(Loss)/earnings for the year
10. Goodwill
Cost
At 1 April
On disposal of subsidiaries (note 28)
Additions (note 28) (revised – note 23)
Exchange adjustments
At 31 March (restated – note 23)
Accumulated impairment
At 1 April
On disposal of subsidiaries (note 28)
Impairment
Exchange adjustments
At 31 March
Net book value at 31 March (revised – note 23)
31 March 2023
£m
31 March 2022
(restated)
£m
2,312.7
(488.0)
–
(1.4)
1,823.3
1,529.3
(487.4)
–
–
1,041.9
781.4
2,487.3
(197.9)
22.3
1.0
2,312.7
1,531.0
(8.9)
7.2
–
1,529.3
783.4
Goodwill is allocated to the operating segments as set out in the table below:
Marine
Nuclear
Land
Aviation
Africa
31 March 2023
£m
296.6
233.1
218.0
32.0
1.7
781.4
31 March 2022
(restated)
£m
297.7
233.1
218.6
32.0
2.0
783.4
During the year, goodwill was tested for impairment at 31 March 2023 in accordance with IAS 36. This impairment analysis is
performed on an annual basis at operating segment level, as outlined in the Group’s accounting policies. The Group monitors goodwill
at operating segment level.
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.
During the year the Group disposed of goodwill of £0.6 million through the disposal of part of the Aerial Emergency Services business in
Aviation (£nil million) and the Civil Training business in Land (£0.6 million).
Results of goodwill impairment test
The current year impairment test results have not resulted in an impairment for any of the Group’s cash generating units. 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 five-year plan. Terminal value assessments are included based on year five and
an estimated long-term, country-specific growth rate of 1.9 – 4.6% (2022: 1.8 – 2.5%). 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 inflation.
Furthermore, in preparing this assessment we have considered the potential impact of climate change. In particular, we have
considered the impact of climate change on the useful economic lives of assets, disruption to key operating sites and supply chain,
and potential asset impairments. These considerations did not have a material impact on the goodwill impairment assessment.
202
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
203
203
Notes to the Group financial statements (continued)
10. Goodwill (continued)
Key assumptions
Key assumptions are based on past experience and expectations of future changes in the market, including prevailing economic
forecasts, industry specific data, competitor activity and market dynamics.
Pre-tax discount rates derived from the Group’s post-tax weighted average cost of capital were used to discount the estimated risk-
adjusted cash flows. These pre-tax discount rates reflect the market assessment as at the period end date of the time value of money
and the risks specific to the cash-generating units.
Country-specific long-term growth rates are determined based on external analyst assessments of long-term real GDP outlooks in the
associated countries.
The country-specific real 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 real growth rate
31 March 2023
31 March 2022
Aviation
13.1
9.8
2.1
Land
13.1
9.8
2.1
Marine
13.1
9.8
2.0
Nuclear
12.4
9.3
1.9
Aviation
11.3
8.5
1.8
Land
11.7
8.8
2.2
Marine
11.3
8.5
2.5
Nuclear
11.3
8.5
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. Expected future cash flows are also subject to estimation
with regard to the impact of inflation – albeit a significant proportion of the Group’s longer term revenue contracts include variable
consideration in respect of inflation and therefore there is a natural offset on the impact of inflation on both costs and revenue.
Key assumptions in relation to future cash flows included in the value-in-use models are set out below:
Operating segment
Marine
Nuclear
Land
Aviation
Key future cash flow assumption
Continuing delivery of work programmes with the UK Ministry of Defence, including the design and build of Type 31
frigates and the production of vertical missile tubes for the US-UK common missile compartment programme. Future
international opportunities in shipbuilding.
Continuing delivery of naval nuclear services to the UK Ministry of Defence, including the FMSP contract. 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.
Continuing delivery of long-term contracts with the UK Ministry of Defence. Expansion of activities in key overseas
territories.
Sensitivity
The value-in-use for Marine and Nuclear results in these operating segments having significant headroom. Assuming no change in the
cash flows over the initial five-year period, it would require a long-term growth of nil combined with a discount rate in excess of 40% to
reduce the headroom in these sectors to £nil. The Directors do not consider these to be plausible assumptions.
In the Aviation and Land sectors the decrease in headroom that would result from a change in the discount rate and long-term growth
rate are set out in the table below:
Pre-tax discount rate
Increase of 200bps (2022: 100 bps)
Long-term growth rate
Decrease of 50bps
31 March 2023 31 March 2022
Aviation
Aviation
63.1
30.2
12.7
12.5
Management have also identified the growth rate in the short-term cash flows in the Aviation operating segment as a key assumption.
Annual growth in the underlying cash flows has been determined on a contract-by-contract basis based on our knowledge of the
existing contract base and management judgement regarding future wins and losses. If the five-year compound growth rate for the
Aviation operating segment decreased by 14% this would cause an impairment of the goodwill allocated to this sector.
204
204
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
10. Goodwill (continued)
Key assumptions
Key assumptions are based on past experience and expectations of future changes in the market, including prevailing economic
forecasts, industry specific data, competitor activity and market dynamics.
Pre-tax discount rates derived from the Group’s post-tax weighted average cost of capital were used to discount the estimated risk-
adjusted cash flows. These pre-tax discount rates reflect the market assessment as at the period end date of the time value of money
and the risks specific to the cash-generating units.
Country-specific long-term growth rates are determined based on external analyst assessments of long-term real GDP outlooks in the
associated countries.
The country-specific real 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 real growth rate
31 March 2023
31 March 2022
Aviation
13.1
9.8
2.1
Land
13.1
9.8
2.1
Marine
13.1
9.8
2.0
Nuclear
12.4
9.3
1.9
Aviation
11.3
8.5
1.8
Land
11.7
8.8
2.2
Marine
11.3
8.5
2.5
Nuclear
11.3
8.5
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. Expected future cash flows are also subject to estimation
with regard to the impact of inflation – albeit a significant proportion of the Group’s longer term revenue contracts include variable
consideration in respect of inflation and therefore there is a natural offset on the impact of inflation on both costs and revenue.
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 and the production of vertical missile tubes for the US-UK common missile compartment programme. Future
international opportunities in shipbuilding.
Nuclear
Continuing delivery of naval nuclear services to the UK Ministry of Defence, including the FMSP contract. 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.
Land
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
Aviation
Continuing delivery of long-term contracts with the UK Ministry of Defence. Expansion of activities in key overseas
assumed to renew.
territories.
Sensitivity
The value-in-use for Marine and Nuclear results in these operating segments having significant headroom. Assuming no change in the
cash flows over the initial five-year period, it would require a long-term growth of nil combined with a discount rate in excess of 40% to
reduce the headroom in these sectors to £nil. The Directors do not consider these to be plausible assumptions.
In the Aviation and Land sectors the decrease in headroom that would result from a change in the discount rate and long-term growth
rate are set out in the table below:
Pre-tax discount rate
Increase of 200bps (2022: 100 bps)
Long-term growth rate
Decrease of 50bps
31 March 2023 31 March 2022
Aviation
Aviation
63.1
30.2
12.7
12.5
11. Other intangible assets
Cost
At 1 April 2022 (restated)
Additions
Reclassification from property, plant and equipment
Disposal of subsidiary undertakings (note 28)
Disposals at cost
Exchange adjustments
At 31 March 2023
Accumulated amortisation and impairment
At 1 April 2022
Amortisation charge
Impairment
Disposal of subsidiary undertakings (note 28)
Disposals
Exchange adjustments
At 31 March 2023
Net book value at 31 March 2023
Cost
At 1 April 2021 (previously stated)
Restatement
At 1 April 2021
On acquisition of subsidiaries (note 28) (restated – note 23)
Additions
Reclassification from property, plant and equipment
Reclassification
Disposal of subsidiary undertakings (note 28)
Disposals at cost
Exchange adjustments
At 31 March 2022 (restated – note 23)
Accumulated amortisation and impairment
At 1 April 2021 (previously stated)
Restatement
At 1 April 2021
Amortisation charge
Impairment (note 2)
Reclassification
Disposal of subsidiary undertakings (note 28)
Disposals
Exchange adjustments
At 31 March 2022
Net book value at 31 March 2022 (restated)
Internally
generated software
development
costs and
licences
£m
Acquired
intangibles –
relationships
£m
Internally
generated
development
costs and
other
£m
1,095.3
–
–
(237.0)
(2.0)
4.7
861.0
1,005.8
15.8
–
(233.0)
(2.0)
7.8
794.4
66.6
1,031.5
–
1,031.5
63.0
–
–
–
–
–
0.8
1,095.3
927.5
–
927.5
21.4
57.6
–
–
–
(0.7)
1,005.8
89.5
222.6
18.1
3.0
(4.9)
(7.4)
(0.1)
231.3
156.8
10.5
9.0
(3.1)
(6.6)
(0.1)
166.5
64.8
189.3
30.4
219.7
–
7.0
0.1
0.9
(3.9)
(1.4)
0.2
222.6
115.0
30.4
145.4
13.9
–
0.1
(1.8)
(1.0)
0.2
156.8
65.8
27.6
3.4
0.3
(13.9)
(3.0)
0.6
15.0
6.2
1.8
–
(0.8)
(1.7)
0.1
5.6
9.4
26.1
–
26.1
–
4.4
(1.6)
(0.9)
–
(0.3)
(0.1)
27.6
4.5
–
4.5
1.8
–
(0.1)
–
–
–
6.2
21.4
Total
£m
1,345.5
21.5
3.3
(255.8)
(12.4)
5.2
1,107.3
1,168.8
28.1
9.0
(236.9)
(10.3)
7.8
966.5
140.8
1,246.9
30.4
1,277.3
63.0
11.4
(1.5)
–
(3.9)
(1.7)
0.9
1,345.5
1,047.0
30.4
1,077.4
37.1
57.6
–
(1.8)
(1.0)
(0.5)
1,168.8
176.7
Management have also identified the growth rate in the short-term cash flows in the Aviation operating segment as a key assumption.
Annual growth in the underlying cash flows has been determined on a contract-by-contract basis based on our knowledge of the
existing contract base and management judgement regarding future wins and losses. If the five-year compound growth rate for the
Aviation operating segment decreased by 14% this would cause an impairment of the goodwill allocated to this sector.
Acquired intangible amortisation charges for the year are recorded in operating costs.
During the year ended 31 March 2023, an error has been identified whereby fully amortised intangible assets were incorrectly
presented net. These restatements have no impact on the total intangible assets balance nor on any other financial statement area. In
addition, the carrying value of acquired intangibles – relationships as at 31 March 2022 has been revised by £1.0 million as described in
Note 23 as a result of new information coming to light during the assessment period on the acquisition of a business.
204
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
205
205
Notes to the Group financial statements (continued)
11. Other intangible assets (continued)
Included in Internally generated software development costs and licences is £38.6 million (2022: £40.7 million) relating to the Group’s
ERP system, which is amortised over a 10 year period. Included in the acquired intangible balance is £52.3 million (2022: £63.6 million)
relating to the acquisition of the NSM joint venture (refer to note 28 for further details). This will be fully amortised in 20 years.
In the prior year, the Aviation operating segment recorded an impairment to acquired intangibles of £57.6 million on an acquired
intangible that was initially recognised in relation to the acquisition of the Avincis business. The Group’s disposal programme
impacted on the ability of the Aviation operating segment to share assets, capability and management across the entire contract
and asset base, resulting in reassessment of the value-in-use for the operating segment in line with an assessment under IAS 36.
This asset was fully impaired.
12. Property, plant and equipment
Cost
At 1 April 2022
On disposal of subsidiaries (note 28)
Additions
Transfer to intangible assets
Reclassification
Transfer from Right-of use-assets
Disposals
Capitalised borrowing costs
Exchange adjustments
At 31 March 2023
Accumulated depreciation
At 1 April 2022
On disposal of subsidiaries (note 28)
Depreciation charge for the year
Impairment
Transfer from Right-of use-assets
Disposals
Exchange adjustments
At 31 March 2023
Net book value at 31 March 2023
Cost
At 1 April 2021 (previously stated)
Restatement
At 1 April 2021
On acquisition of subsidiaries (note 28)
On disposal of subsidiaries (note 28)
Additions
Disposals
Reclassification
Reclassification from intangible assets
Exchange adjustments
At 31 March 2022
Accumulated depreciation
At 1 April 2021 (previously stated)
Restatement
At 1 April 2021
On disposal of subsidiaries (note 28)
Depreciation charge for the year
Impairment
Disposals
Exchange adjustments
At 31 March 2022
Net book value at 31 March 2022
Freehold
property
£m
Leasehold
property
£m
Plant and
equipment
£m
Aircraft
fleet
£m
Assets in
course of
construction
£m
151.8
(9.4)
0.4
–
70.0
–
(0.8)
–
0.2
212.2
70.7
(2.9)
7.1
–
–
(0.7)
0.2
74.4
137.8
159.8
(1.7)
158.1
–
(7.6)
1.8
(2.5)
1.5
0.4
0.1
151.8
69.5
(0.8)
68.7
(4.7)
8.1
–
(1.5)
0.1
70.7
81.1
24.7
(9.0)
0.2
–
–
–
–
–
(0.7)
15.2
11.1
(0.5)
1.5
–
–
–
–
12.1
3.1
15.8
1.6
17.4
–
(0.6)
3.8
(0.8)
4.9
–
–
24.7
10.9
0.6
11.5
(0.2)
0.5
–
(0.7)
–
11.1
13.6
524.9
(32.1)
33.2
–
66.0
–
(13.1)
–
(7.9)
571.0
373.2
(14.3)
45.4
–
–
(11.2)
(2.5)
390.6
180.4
506.5
17.7
524.2
0.4
(21.6)
32.3
(14.2)
(1.5)
1.1
4.2
524.9
373.1
(15.3)
357.8
(13.7)
38.1
–
(10.8)
1.8
373.2
151.7
303.1
(224.1)
27.8
–
3.0
19.5
(40.2)
–
8.4
97.5
52.3
(33.9)
18.1
(0.8)
11.5
(24.0)
1.7
24.9
72.6
365.3
(17.5)
347.8
–
(17.4)
28.9
(56.0)
0.9
–
(1.1)
303.1
45.4
(17.5)
27.9
(7.7)
12.0
58.8
(38.9)
0.2
52.3
250.8
213.9
(13.9)
48.3
(3.3)
(139.0)
–
(18.8)
0.6
3.0
90.8
0.5
–
–
5.7
–
(0.5)
0.5
6.2
84.6
187.6
(32.6)
155.0
–
(0.9)
112.6
(46.5)
(5.8)
–
(0.5)
213.9
1.7
0.5
2.2
–
–
–
(1.6)
(0.1)
0.5
213.4
Total
£m
1,218.4
(288.5)
109.9
(3.3)
–
19.5
(72.9)
0.6
3.0
986.7
507.8
(51.6)
72.1
4.9
11.5
(36.4)
(0.1)
508.2
478.5
1,235.0
(32.5)
1,202.5
0.4
(48.1)
179.4
(120.0)
–
1.5
2.7
1,218.4
500.6
(32.5)
468.1
(26.3)
58.7
58.8
(53.5)
2.0
507.8
710.6
206
206
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
11. Other intangible assets (continued)
12. Property, plant and equipment (continued)
Included in Internally generated software development costs and licences is £38.6 million (2022: £40.7 million) relating to the Group’s
ERP system, which is amortised over a 10 year period. Included in the acquired intangible balance is £52.3 million (2022: £63.6 million)
relating to the acquisition of the NSM joint venture (refer to note 28 for further details). This will be fully amortised in 20 years.
In the prior year, the Aviation operating segment recorded an impairment to acquired intangibles of £57.6 million on an acquired
intangible that was initially recognised in relation to the acquisition of the Avincis business. The Group’s disposal programme
impacted on the ability of the Aviation operating segment to share assets, capability and management across the entire contract
and asset base, resulting in reassessment of the value-in-use for the operating segment in line with an assessment under IAS 36.
This asset was fully impaired.
12. Property, plant and equipment
Freehold
property
£m
Leasehold
property
£m
Plant and
equipment
£m
Aircraft
fleet
£m
Assets in
course of
construction
£m
In the year ended 31 March 2023 management identified that the prior period property, plant and equipment disclosure included a
historic error which overstated historic cost and accumulated depreciation by £17.5 million (1 April 2021: £16.8 million). Additionally,
an error has been identified in the classification of cost between asset categories in the prior period totalling £36.3 million and this has
also been restated. These restatements have no impact on the total property, plant and equipment balance nor on any other financial
statement area.
In the prior year, the Group recognised an impairment charge of £58.8 million in relation to the aircraft fleet in the Aviation operating
segment due to changes in the future business performance, as informed by the Group’s disposal programme. This change impacted on
the ability of the Aviation operating segment to share assets, capability and management across the entire contract and asset base. The
asset valuations have been calculated based on estimated discounted cash flows over the remaining useful expected lives of the assets.
The impairment charge of £58.8 million is based on a recoverable amount for the relevant assets of £220.0 million.
13. 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 2022
Additions
Transfer to Property, plant and equipment
Disposals
Disposal of subsidiaries (note 28)
Exchange adjustments
At 31 March 2023
Accumulated depreciation
At 1 April 2022
Depreciation charge for the year
Impairment
Disposals
Disposal of subsidiaries (note 28)
Transfer to Property, plant and equipment
Exchange adjustments
At 31 March 2023
Net book value at 31 March 2023
Leasehold
property
£m
Plant and
equipment
£m
127.3
37.1
–
(10.0)
(11.5)
(1.3)
141.6
42.5
20.5
0.9
(7.0)
(6.9)
–
(0.5)
49.5
92.1
64.7
9.8
–
(3.7)
(3.5)
0.4
67.7
40.9
9.1
–
(3.3)
(1.3)
–
0.3
45.7
22.0
Aircraft
fleet
£m
383.0
67.7
(19.5)
(24.5)
(269.8)
1.1
138.0
157.3
52.1
8.7
(21.7)
(94.6)
(11.5)
2.7
93.0
45.0
Total
£m
575.0
114.6
(19.5)
(38.2)
(284.8)
0.2
347.3
240.7
81.7
9.6
(32.0)
(102.8)
(11.5)
2.5
188.2
159.1
Net book value at 31 March 2022
250.8
213.4
206
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
207
207
Cost
At 1 April 2022
On disposal of subsidiaries (note 28)
Additions
Transfer to intangible assets
Reclassification
Transfer from Right-of use-assets
Disposals
Capitalised borrowing costs
Exchange adjustments
At 31 March 2023
Accumulated depreciation
At 1 April 2022
On disposal of subsidiaries (note 28)
Depreciation charge for the year
Impairment
Transfer from Right-of use-assets
Disposals
Exchange adjustments
At 31 March 2023
Net book value at 31 March 2023
At 1 April 2021 (previously stated)
Cost
Restatement
At 1 April 2021
Additions
Disposals
Reclassification
On acquisition of subsidiaries (note 28)
On disposal of subsidiaries (note 28)
Reclassification from intangible assets
Exchange adjustments
At 31 March 2022
Accumulated depreciation
At 1 April 2021 (previously stated)
Restatement
At 1 April 2021
On disposal of subsidiaries (note 28)
Depreciation charge for the year
Impairment
Disposals
Exchange adjustments
At 31 March 2022
(13.1)
(40.2)
(18.8)
151.8
(9.4)
0.4
70.0
(0.8)
–
–
–
0.2
212.2
70.7
(2.9)
7.1
–
–
(0.7)
0.2
74.4
137.8
159.8
(1.7)
158.1
–
(7.6)
1.8
(2.5)
1.5
0.4
0.1
69.5
(0.8)
68.7
(4.7)
8.1
–
(1.5)
0.1
70.7
81.1
24.7
(9.0)
0.2
–
–
–
–
–
–
–
–
–
(0.7)
15.2
11.1
(0.5)
1.5
12.1
3.1
15.8
1.6
17.4
–
(0.6)
3.8
(0.8)
4.9
–
–
10.9
0.6
11.5
(0.2)
0.5
(0.7)
–
–
11.1
13.6
524.9
(32.1)
33.2
66.0
–
–
–
–
–
(7.9)
571.0
373.2
(14.3)
45.4
(11.2)
(2.5)
390.6
180.4
506.5
17.7
524.2
0.4
(21.6)
32.3
(14.2)
(1.5)
1.1
4.2
373.1
(15.3)
357.8
(13.7)
38.1
–
(10.8)
1.8
373.2
151.7
303.1
(224.1)
27.8
–
3.0
19.5
–
8.4
97.5
52.3
(33.9)
18.1
(0.8)
11.5
(24.0)
1.7
24.9
72.6
365.3
(17.5)
347.8
–
(17.4)
28.9
(56.0)
0.9
–
(1.1)
45.4
(17.5)
27.9
(7.7)
12.0
58.8
(38.9)
0.2
52.3
Total
£m
1,218.4
(288.5)
109.9
(3.3)
–
19.5
(72.9)
0.6
3.0
986.7
507.8
(51.6)
72.1
4.9
11.5
(36.4)
(0.1)
508.2
478.5
1,235.0
(32.5)
1,202.5
0.4
(48.1)
179.4
(120.0)
–
1.5
2.7
500.6
(32.5)
468.1
(26.3)
58.7
58.8
(53.5)
2.0
507.8
710.6
213.9
(13.9)
48.3
(3.3)
(139.0)
–
0.6
3.0
90.8
0.5
–
–
5.7
–
(0.5)
0.5
6.2
84.6
187.6
(32.6)
155.0
–
(0.9)
112.6
(46.5)
(5.8)
–
(0.5)
1.7
0.5
2.2
–
–
–
(1.6)
(0.1)
0.5
151.8
24.7
524.9
303.1
213.9
1,218.4
Notes to the Group financial statements (continued)
13. Leases (continued)
Right of use assets (continued)
Cost
At 1 April 2021
Additions
Acquisition of subsidiary (note 28)
Disposals
Disposal of subsidiaries (note 28)
Exchange adjustments
At 31 March 2022
Accumulated depreciation
At 1 April 2021
Depreciation charge for the year
Impairment
Disposals
Disposal of subsidiaries (note 28)
Reclassification
Exchange adjustments
At 31 March 2022
Net book value at 31 March 2022
Leasehold
property
£m
Plant and
equipment
£m
152.9
24.0
0.5
(31.1)
(21.1)
2.1
127.3
51.1
23.5
–
(23.7)
(9.5)
–
1.1
42.5
84.8
72.1
3.4
–
(7.8)
(3.0)
–
64.7
42.2
9.5
–
(6.9)
(1.9)
(2.0)
–
40.9
23.8
Aircraft
fleet
£m
584.2
61.2
–
(33.0)
(228.4)
(1.0)
383.0
197.6
72.1
18.0
(21.8)
(109.5)
2.0
(1.1)
157.3
225.7
Lease liabilities
The following tables show the discounted Group lease liabilities and a reconciliation of opening to closing lease liabilities:
At 1 April 2022
Additions
Disposals
Disposal of subsidiaries (note 28)
Exchange adjustments
Lease interest
Lease repayments
At 31 March 2023
Non-current lease liabilities
Current lease liabilities
At 31 March 2023
At 1 April 2021
Additions
Acquisition of subsidiaries (note 28)
Disposals
Disposal of subsidiaries (note 28)
Exchange adjustments
Lease interest
Lease repayments
At 31 March 2022
Non-current lease liabilities
Current lease liabilities
At 31 March 2022
See note 22 for a maturity analysis of the contractual undiscounted lease payments.
208
208
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Total
£m
809.2
88.6
0.5
(71.9)
(252.5)
1.1
575.0
290.9
105.1
18.0
(52.4)
(120.9)
–
–
240.7
334.3
Total
£m
434.1
117.0
(5.3)
(218.1)
9.6
15.9
(124.4)
228.8
178.9
49.9
228.8
612.3
93.8
0.5
(22.6)
(137.1)
0.2
17.4
(130.4)
434.1
329.3
104.8
434.1
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
The following tables show the discounted Group lease liabilities and a reconciliation of opening to closing lease liabilities:
13. Leases (continued)
Right of use assets (continued)
Cost
At 1 April 2021
Additions
Acquisition of subsidiary (note 28)
Disposals
Disposal of subsidiaries (note 28)
Exchange adjustments
At 31 March 2022
Accumulated depreciation
At 1 April 2021
Depreciation charge for the year
Impairment
Disposals
Disposal of subsidiaries (note 28)
Reclassification
Exchange adjustments
At 31 March 2022
Net book value at 31 March 2022
Lease liabilities
At 1 April 2022
Additions
Disposals
Disposal of subsidiaries (note 28)
Exchange adjustments
Lease interest
Lease repayments
At 31 March 2023
Non-current lease liabilities
Current lease liabilities
At 31 March 2023
At 1 April 2021
Additions
Acquisition of subsidiaries (note 28)
Disposals
Disposal of subsidiaries (note 28)
Exchange adjustments
Lease interest
Lease repayments
At 31 March 2022
Non-current lease liabilities
Current lease liabilities
At 31 March 2022
Leasehold
property
£m
Plant and
equipment
£m
Aircraft
fleet
£m
584.2
61.2
–
(33.0)
(228.4)
(1.0)
383.0
197.6
72.1
18.0
(21.8)
(109.5)
2.0
(1.1)
157.3
225.7
72.1
3.4
(7.8)
(3.0)
–
–
64.7
42.2
9.5
–
(6.9)
(1.9)
(2.0)
–
40.9
23.8
152.9
24.0
0.5
(31.1)
(21.1)
2.1
127.3
51.1
23.5
(23.7)
(9.5)
–
–
1.1
42.5
84.8
Total
£m
809.2
88.6
0.5
(71.9)
(252.5)
1.1
575.0
290.9
105.1
18.0
(52.4)
(120.9)
–
–
240.7
334.3
Total
£m
434.1
117.0
(5.3)
(218.1)
9.6
15.9
(124.4)
228.8
178.9
49.9
228.8
612.3
93.8
0.5
(22.6)
(137.1)
0.2
17.4
(130.4)
434.1
329.3
104.8
434.1
13. Leases (continued)
Amounts recognised in the Group income statement
Interest on lease liabilities
Right-of-use asset depreciation
Right-of-use asset impairment
Loss/(profit) on disposal of right-of-use asset
2023
£m
15.9
81.7
9.6
0.8
2022
£m
17.4
105.1
18.0
(3.2)
The total expense for short term and low value leases was £3.0 million (2022: £8.9 million). The expense is deemed approximate to the
cash outflow for short term and low value leases.
Amounts recognised in the Group cash flow statement
Total cash outflow for principal element of leases
Total cash outflow for interest element of leases
Total cash outflow for leases
2023
£m
108.5
15.9
124.4
2022
£m
113.0
17.4
130.4
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. There have been no new material lease arrangements as a lessor in the current year (2022: none).
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)
Year ended
31 March 2023
£m
4.4
Year ended
31 March 2022
£m
3.1
Year ended
31 March 2023
£m
20.3
14.0
9.1
2.4
–
–
45.8
(7.2)
38.6
Year ended
31 March 2022
£m
23.3
12.2
8.1
4.0
–
–
47.6
(0.2)
47.4
There was no material impairment of lease receivables in the year ended 31 March 2023 (2022: £nil).
The Group has minimal residual risk for underlying assets to which it retains the residual rights as all leases for which the Group acts as
lessor are finance leases and therefore the asset has been leased for a term equivalent to the asset’s useful economic life.
See note 22 for a maturity analysis of the contractual undiscounted lease payments.
208
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Babcock International Group PLC / Annual Report and Financial Statements 2023
209
209
Notes to the Group financial statements (continued)
14. Investment in and loans to joint ventures and associates
The Group’s principal joint ventures and associates are:
AirTanker Services Limited
Nature of relationship
Associate
Year end
31 Dec
Ascent Flight Training (Holdings)
Limited
Joint venture
31 Mar
Business activity
Provision of
air-to-air refuelling
Provision of
training services
% interest
held (2023)
23.5%
% interest
held (2022)
23.5%
50.0%
50.0%
Country of
incorporation
United
Kingdom
United
Kingdom
Principal area
of operation
United
Kingdom
United
Kingdom
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 to provide useful information to users without
excessive detail. Joint ventures that are not considered material to the Group are not shown below.
Summarised income statement extract (year ended)
Revenue
Depreciation and amortisation
Interest income
Interest expense
Income tax (expense)/benefit
Profit from continuing operations
Other comprehensive income
Total comprehensive income
31 March 2023
31 March 2022
Ascent Flight
Training
(Holdings)
Limited
171.2
–
4.4
(5.0)
(3.5)
14.5
7.0
21.5
AirTanker
Services Limited
181.7
(11.5)
0.3
–
(2.3)
5.9
–
5.9
Ascent Flight
Training
(Holdings)
Limited
164.8
–
6.1
(6.2)
(3.7)
15.4
0.4
15.8
AirTanker
Services Limited
189.2
(14.5)
–
(0.3)
(2.5)
6.5
–
6.5
Summarised statement of financial position
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
29.2
75.5
69.2
(109.2)
–
(10.4)
54.3
72.3
95.2
71.9
(63.2)
–
(74.9)
101.3
29.4
101.5
60.4
(137.5)
–
(4.6)
49.2
78.2
69.0
54.4
(49.3)
–
(51.9)
100.4
Ownership
50.0%
23.5%
50.0%
23.5%
Carrying value of investment
27.2
23.8
24.6
23.6
210
210
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
14. Investment in and loans to joint ventures and associates
The Group’s principal joint ventures and associates are:
Nature of relationship
Year end
Business activity
held (2023)
held (2022)
incorporation
% interest
% interest
Country of
AirTanker Services Limited
Associate
31 Dec
Provision of
23.5%
23.5%
Ascent Flight Training (Holdings)
Joint venture
31 Mar
Provision of
50.0%
50.0%
Limited
air-to-air refuelling
training services
Principal area
of operation
United
Kingdom
United
Kingdom
United
Kingdom
United
Kingdom
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 to provide useful information to users without
excessive detail. Joint ventures that are not considered material to the Group are not shown below.
Summarised income statement extract (year ended)
Revenue
Depreciation and amortisation
Interest income
Interest expense
Income tax (expense)/benefit
Profit from continuing operations
Other comprehensive income
Total comprehensive income
Summarised statement of financial position
Non-current assets
Current assets (excluding cash and cash equivalents)
Cash and cash equivalents
Net assets
Ownership
31 March 2023
31 March 2022
Ascent Flight
Training
(Holdings)
Limited
171.2
AirTanker
Services Limited
181.7
(11.5)
Ascent Flight
Training
(Holdings)
164.8
Limited
Services Limited
–
4.4
(5.0)
(3.5)
14.5
7.0
21.5
29.2
75.5
69.2
–
(10.4)
54.3
0.3
–
(2.3)
5.9
–
5.9
72.3
95.2
71.9
–
(74.9)
101.3
–
6.1
(6.2)
(3.7)
15.4
0.4
15.8
29.4
101.5
60.4
–
(4.6)
49.2
AirTanker
189.2
(14.5)
–
(0.3)
(2.5)
6.5
–
6.5
78.2
69.0
54.4
–
(51.9)
100.4
Non-current financial liabilities (excluding trade and other payables and provisions)
(109.2)
(63.2)
(137.5)
(49.3)
Current financial liabilities (excluding trade and other payables and provisions)
Current trade and other payables and provisions
14. Investment in and loans to joint ventures and associates (continued)
Reconciliation to carrying amounts
Investment in joint ventures
and associates
Loans to joint ventures
and associates
Total
At 1 April
Acquisition and disposal of joint ventures and associates
(note 28)
Loans repaid by joint ventures and associates
Increase in loans to joint ventures and associates
Investment in joint ventures and associates
Share of profits
Interest accrued and capitalised
Interest received
Dividends received
Fair value adjustment of derivatives
Tax on fair value adjustment of derivatives
Foreign exchange
At 31 March
2023
£m
54.3
(1.0)
–
–
–
9.3
–
–
(8.7)
4.7
(1.2)
–
57.4
2022
£m
73.5
(24.5)
–
–
2.6
20.1
–
–
(41.6)
30.2
(5.7)
(0.3)
54.3
2023
£m
12.1
–
(2.4)
–
–
–
1.0
(1.2)
–
–
–
–
9.5
2022
£m
42.1
–
(31.0)
1.4
–
–
3.2
(3.6)
–
–
–
–
12.1
The total investments in joint ventures and associates is attributable to the following reportable segments:
Marine
Nuclear
Land
Aviation
Net book value
2023
£m
66.4
(1.0)
(2.4)
–
–
9.3
1.0
(1.2)
(8.7)
4.7
(1.2)
–
66.9
2023
£m
3.7
1.4
0.2
61.6
66.9
2022
£m
115.6
(24.5)
(31.0)
1.4
2.6
20.1
3.2
(3.6)
(41.6)
30.2
(5.7)
(0.3)
66.4
2022
£m
4.8
0.3
1.5
59.8
66.4
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 classified 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.
There has been no impairment to loans to joint ventures and associates during the year (2022: £nil). Total cumulative expected credit
losses in respect of loans to joint ventures and associates are also £nil (2022: £nil) as the joint ventures and associates are considered to
have low credit risk and as such impairment risk is considered minimal.
Carrying value of investment
27.2
23.8
24.6
23.6
50.0%
23.5%
50.0%
23.5%
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.
210
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
211
211
Notes to the Group financial statements (continued)
15. Inventories
Raw materials and spares
Work-in-progress
Finished goods and goods for resale
Total
31 March 2023
£m
58.6
7.2
61.0
126.8
31 March 2022
£m
77.3
4.1
61.3
142.7
Write-downs of inventories amounted to £5.4 million (2022: £15.8 million). These were recognised as an expense during the year
ended 31 March 2023 and included in operating costs in the income statement.
16. Trade and other receivables and contract assets
Non-current assets
Costs to obtain a contract
Costs to fulfil a contract
Other debtors
Non-current trade and other receivables
Current assets
Trade receivables
Less: provision for impairment of receivables
Trade receivables – net
Retentions
Amounts due from related parties (note 32)
Other debtors
Prepayments
Costs to obtain a contract
Costs to fulfil a contract
Current trade and other receivables
Contract assets
Current trade and other receivables and contract assets
31 March 2023
£m
31 March 2022
£m
2.8
1.4
2.2
6.4
307.3
(7.3)
300.0
6.0
2.1
129.4
63.7
0.6
5.1
506.9
8.9
0.8
–
9.7
311.5
(14.6)
296.9
4.4
2.0
106.2
71.1
7.6
0.6
488.8
322.5
299.3
829.4
788.1
Trade and other receivables are stated at amortised cost. Details of expected credit losses on trade receivables are provided in note 22,
there has been no impairment to other receivables during the year ended 31 March 2023 (2022: £nil). Other debtors primarily
comprise of receivables in respect of social security and other taxes.
In the year ended 31 March 2023, amortisation of costs to obtain a contract and costs to fulfil a contract totalled £5.0 million
(2022: £2.8 million). An impairment of £1.6 million was recorded in relation to costs to obtain a contract or costs to fulfil a
contract (2022: £nil).
The Group recognises that there is an inherent element of estimation uncertainty and judgement involved in assessing contract
profitability, as disclosed in note 1. Management have taken a best estimate view of contract outcomes based on the information
currently available, after allowing for contingencies, and have applied a constraint to the variable consideration within revenue resulting
in a revenue estimate that is suitably cautious under IFRS 15.
212
212
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
Write-downs of inventories amounted to £5.4 million (2022: £15.8 million). These were recognised as an expense during the year
ended 31 March 2023 and included in operating costs in the income statement.
16. Trade and other receivables and contract assets
15. Inventories
Raw materials and spares
Work-in-progress
Finished goods and goods for resale
Total
Non-current trade and other receivables
Less: provision for impairment of receivables
Amounts due from related parties (note 32)
Non-current assets
Costs to obtain a contract
Costs to fulfil a contract
Other debtors
Current assets
Trade receivables
Trade receivables – net
Retentions
Other debtors
Prepayments
Costs to obtain a contract
Costs to fulfil a contract
Contract assets
Current trade and other receivables
31 March 2023
31 March 2022
£m
58.6
7.2
61.0
£m
77.3
4.1
61.3
126.8
142.7
31 March 2023
31 March 2022
£m
2.8
1.4
2.2
6.4
307.3
(7.3)
300.0
6.0
2.1
129.4
63.7
0.6
5.1
£m
8.9
0.8
–
9.7
311.5
(14.6)
296.9
4.4
2.0
106.2
71.1
7.6
0.6
506.9
488.8
322.5
299.3
829.4
788.1
Current trade and other receivables and contract assets
Trade and other receivables are stated at amortised cost. Details of expected credit losses on trade receivables are provided in note 22,
there has been no impairment to other receivables during the year ended 31 March 2023 (2022: £nil). Other debtors primarily
comprise of receivables in respect of social security and other taxes.
In the year ended 31 March 2023, amortisation of costs to obtain a contract and costs to fulfil a contract totalled £5.0 million
(2022: £2.8 million). An impairment of £1.6 million was recorded in relation to costs to obtain a contract or costs to fulfil a
contract (2022: £nil).
The Group recognises that there is an inherent element of estimation uncertainty and judgement involved in assessing contract
profitability, as disclosed in note 1. Management have taken a best estimate view of contract outcomes based on the information
currently available, after allowing for contingencies, and have applied a constraint to the variable consideration within revenue resulting
in a revenue estimate that is suitably cautious under IFRS 15.
16. Trade and other receivables and contract assets (continued)
Significant changes in contract assets during the year are as follows:
31 March 2022
Disposal of subsidiary undertaking
Transfers from contract assets recognised at the beginning of the year to trade receivables
Increase due to work done not transferred from contract assets
Exchange adjustment
31 March 2023
31 March 2021
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
Write down of contract assets
Exchange adjustment
31 March 2022
Contract assets
£m
299.3
(34.6)
(218.9)
273.1
3.6
322.5
276.4
16.3
(20.8)
(228.7)
255.1
1.0
299.3
During the year, the Group has recognised a reversal of £48.5 million of revenue in respect of performance obligations satisfied or
partially satisfied in previous periods. This figure is significantly impacted by reductions in forecast margin on three of the Group’s
contracts – predominantly the loss on the T31 programme as described in note 1. The variance resulting from these three contracts is
a result of movements in forecast cost to complete rather than a reversal of variable consideration previously seen as highly probable.
Excluding these three contracts, the Group has recognised £4.7 million of additional revenue in the current year in respect of
performance obligations satisfied or partially satisfied in previous periods.
At 31 March 2023, there is £6.7 billion (2022: £5.8 billion) of transaction price on contracts with customers that has been allocated
to unsatisfied or partially satisfied performance obligations (note this metric has been prepared for IFRS 15 disclosure purposes and
therefore does not align to the Group’s contract backlog). Contract backlog is based on the full contractual term of the Group’s
agreements whilst the IFRS 15 disclosure may be a shorter contractual period in the event that the customer has the ability to exit
contracts prior to the full term for non-substantive penalty payments. Management expects that 37.8% (2022: 40.5%) of the transaction
price allocated to unsatisfied performance obligations as at 31 March 2023 will be recognised as revenue during the next reporting
period. A further 46.3% (2022: 59.5%) of the transaction price allocated to unsatisfied performance obligations is expected to be
recognised as revenue in years two to five after 31 March 2023.
Details on the Group’s approach to assess credit risk are included in note 22.
17. Cash and cash equivalents
Cash at bank and in hand
Short-term bank deposits
The carrying amounts of the Group’s cash and cash equivalents are denominated in the following currencies:
31 March
2023
£m
221.7
230.0
451.7
31 March
2022
£m
616.0
530.3
1,146.3
Currency
Sterling
Euro
US Dollar
South African Rand
Canadian Dollar
Omani Rial
Australian Dollar
Norwegian Krone
Swedish Krona
New Zealand Dollar
Other currencies
31 March 2023
31 March 2022
Total
£m
319.8
7.6
15.7
45.3
19.1
5.7
25.1
0.6
2.4
2.8
7.6
451.7
Floating rate
£m
319.8
7.6
15.7
45.3
19.1
5.7
25.1
0.6
2.4
2.8
7.6
451.7
Total
£m
1,023.9
15.0
25.5
27.8
12.2
4.7
22.2
1.4
6.5
1.0
6.1
1,146.3
Floating rate
£m
1,023.9
15.0
25.5
27.8
12.2
4.7
22.2
1.4
6.5
1.0
6.1
1,146.3
212
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
213
213
Notes to the Group financial statements (continued)
17. Cash and cash equivalents (continued)
Surplus cash balances are typically invested at short-term floating rates, linked to SONIA 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.
Expected credit losses of cash and cash equivalents is £nil (2022: £nil).
18. Trade and other payables and contract liabilities
Current liabilities
Contract liabilities
Trade creditors
Amounts due to related parties (note 32)
Other creditors
Other taxes and social security
Accruals
Trade and other payables
Trade and other payables and contract liabilities
Non-current liabilities
Other creditors
2023
£m
2022
£m
616.4
518.3
239.1
0.8
41.6
75.5
554.1
911.1
164.7
1.5
26.9
76.6
618.4
888.1
1,527.5
1,406.4
0.9
1.0
Included in creditors is £12.9 million (2022: £6.7 million) relating to capital expenditure which has therefore not been included in
working capital movements within the cash flow statement.
Significant changes in contract liabilities during the year are as follows:
31 March 2022
Revenue recognised that was included in the contract liability balance at the beginning
of the year
Cash advanced
Disposal of subsidiary undertaking
Exchange adjustment
31 March 2023
31 March 2021
Revenue recognised that was included in the contract liability balance at the beginning
of the year
Cash advanced
Acquisition of subsidiary undertaking
Disposal of subsidiary undertaking
Exchange adjustment
31 March 2022
Contract
liabilities
£m
518.3
(377.5)
509.8
(31.9)
(2.3)
616.4
396.5
(294.7)
419.0
8.2
(12.5)
1.8
518.3
214
214
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
17. Cash and cash equivalents (continued)
19. Bank and other borrowings
Surplus cash balances are typically invested at short-term floating rates, linked to SONIA 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.
Expected credit losses of cash and cash equivalents is £nil (2022: £nil).
18. Trade and other payables and contract liabilities
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*
31 March 2023
£m
31 March 2022
£m
0.3
19.3
19.6
49.9
69.5
21.0
747.4
768.4
178.9
947.3
0.4
863.0
863.4
104.8
968.2
24.0
823.7
847.7
329.3
1,177.0
* Leases are secured against the assets to which they relate.
The reduction in unsecured current liabilities is a result of the repayment of the €550 million Eurobond in October 2022 and a
reduction in usage of overdraft facilities.
The Group’s overdraft totalled £21.5 million at 31 March 2023 (2022: £389.8 million). Included within bank loans and overdrafts due
within one year is an offsetting £2.6 million in respect of amortisation of loan fees.
The Group has £3.1 million (2022: £3.5 million) of secured debt in the Land operating segment that is secured against a property
owned by the Group and £18.2 million (2022: £20.9 million) of debt that is secured against contracts with customers, which will cede
to the bank in the event of default.
Unsecured bank loans are subject to covenants which are tested six monthly on a rolling basis. Covenants comprise of Net Debt to
EBITDA and Interest Cover. The Net Debt to EBITDA ratio must be lower than 3.5x at each testing date whilst the Interest Cover must be
at least 4.0x at each testing date. There are no breaches in the Group’s base case forecasts as prepared for going concern purposes.
Drawn facilities at the period end date primarily comprise the €550 million Eurobond and the £300 million UK bond.
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
31 March 2023
31 March 2022
Loans and
overdrafts
£m
19.6
0.3
0.6
300.6
466.2
0.7
788.0
Lease
obligations
£m
49.9
40.6
34.5
23.4
19.9
60.5
228.8
Loans and
overdrafts
£m
863.4
22.6
0.6
0.7
356.4
467.4
1,711.1
Lease
obligations
£m
104.8
90.5
67.9
46.4
38.7
85.8
434.1
Current liabilities
Contract liabilities
Trade creditors
Amounts due to related parties (note 32)
Other creditors
Other taxes and social security
Accruals
Trade and other payables
Trade and other payables and contract liabilities
Non-current liabilities
Other creditors
31 March 2022
of the year
Cash advanced
Disposal of subsidiary undertaking
Exchange adjustment
31 March 2023
31 March 2021
of the year
Cash advanced
Acquisition of subsidiary undertaking
Disposal of subsidiary undertaking
Exchange adjustment
31 March 2022
Included in creditors is £12.9 million (2022: £6.7 million) relating to capital expenditure which has therefore not been included in
working capital movements within the cash flow statement.
Significant changes in contract liabilities during the year are as follows:
Revenue recognised that was included in the contract liability balance at the beginning
Revenue recognised that was included in the contract liability balance at the beginning
2023
£m
2022
£m
616.4
518.3
239.1
164.7
0.8
41.6
75.5
554.1
911.1
1.5
26.9
76.6
618.4
888.1
1,527.5
1,406.4
0.9
1.0
Contract
liabilities
£m
518.3
(377.5)
509.8
(31.9)
(2.3)
616.4
396.5
(294.7)
419.0
8.2
(12.5)
1.8
518.3
214
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
215
215
Notes to the Group financial statements (continued)
19. Bank and other borrowings (continued)
The Group has entered into interest rate and currency swaps, details of which are included in note 21.
The carrying amounts 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
Botswana Pula
Other
Total
£m
439.0
515.4
5.9
25.1
6.0
22.3
–
–
1.0
0.8
0.2
1.1
1,016.8
31 March 2023
Floating rate
£m
16.4
87.2
0.4
18.3
–
–
–
–
–
–
–
0.8
123.1
Fixed rate
£m
422.6
428.2
5.5
6.8
6.0
22.3
–
–
1.0
0.8
0.2
0.3
893.7
Total
£m
832.1
1,181.1
44.4
30.0
7.5
28.2
4.7
15.6
0.2
1.2
0.2
–
2,145.2
31 March 2022
Floating rate
£m
405.6
252.8
19.1
20.8
0.7
1.5
3.9
–
–
–
–
–
704.4
Fixed rate
£m
426.5
928.3
25.3
9.2
6.8
26.7
0.8
15.6
0.2
1.2
0.2
–
1,440.8
* €550 million (2022: €1,100 million) has been swapped into Sterling, with €135 million (2022: €275 million) equivalent into floating rates and
€415 million (2022: €825 million) equivalent into fixed rates. This is included in the Euro amount above. The split above includes the impact of hedging.
The weighted average interest rate of Sterling fixed rate borrowings is 1.9% (2022: 1.9%). The weighted average period for which these
interest rates are fixed is 3.5 years (2022: 4.6 years).
The floating rate for borrowings is linked to SONIA 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 effective interest rates at the statement of financial position dates, including the impact of hedging, were as follows:
UK bank overdraft
UK bank borrowings
8-year Eurobond September 2027– fixed
8-year Eurobond September 2027 – floating
8-year Eurobond October 2022
£300 million bond 2026
Other borrowings
Leases obligations
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
31 March
2023
%
5.4
–
2.9
6.3
–
1.9
5.5 – 9.8
3.7 – 17.2
31 March
2022
%
1.1
1.4
2.9
3.3
1.8
1.9
4.8 – 6.9
2.2 – 11.8
31 March 2023
£m
–
1,152.8
1,152.8
31 March 2022
£m
–
1,012.2
1,012.2
Bank loans include £nil million (2022: £12.5 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 €nil million at 31 March 2023
(2022: €128.5 million).
216
216
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
Currency
Sterling
Euro*
US Dollar
South African Rand
Canadian Dollar
Australian Dollar
Norwegian Krone
Swedish Krona
New Zealand Dollar
South Korean Won
Botswana Pula
Other
31 March 2023
Floating rate
Fixed rate
31 March 2022
Floating rate
Total
£m
439.0
515.4
5.9
25.1
6.0
22.3
–
–
1.0
0.8
0.2
1.1
£m
16.4
87.2
0.4
18.3
–
–
–
–
–
–
–
0.8
123.1
£m
422.6
428.2
5.5
6.8
6.0
22.3
–
–
1.0
0.8
0.2
0.3
Total
£m
832.1
1,181.1
44.4
30.0
7.5
28.2
4.7
15.6
0.2
1.2
0.2
–
£m
405.6
252.8
19.1
20.8
0.7
1.5
3.9
–
–
–
–
–
Fixed rate
£m
426.5
928.3
25.3
9.2
6.8
26.7
0.8
15.6
0.2
1.2
0.2
–
* €550 million (2022: €1,100 million) has been swapped into Sterling, with €135 million (2022: €275 million) equivalent into floating rates and
€415 million (2022: €825 million) equivalent into fixed rates. This is included in the Euro amount above. The split above includes the impact of hedging.
The weighted average interest rate of Sterling fixed rate borrowings is 1.9% (2022: 1.9%). The weighted average period for which these
interest rates are fixed is 3.5 years (2022: 4.6 years).
1,016.8
893.7
2,145.2
704.4
1,440.8
The floating rate for borrowings is linked to SONIA 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 effective interest rates at the statement of financial position dates, including the impact of hedging, were as follows:
UK bank overdraft
UK bank borrowings
8-year Eurobond September 2027– fixed
8-year Eurobond September 2027 – floating
8-year Eurobond October 2022
£300 million bond 2026
Other borrowings
Leases obligations
Borrowing facilities
31 March
31 March
2023
%
5.4
–
2.9
6.3
–
1.9
2022
%
1.1
1.4
2.9
3.3
1.8
1.9
5.5 – 9.8
4.8 – 6.9
3.7 – 17.2
2.2 – 11.8
31 March 2023
31 March 2022
£m
–
£m
–
1,152.8
1,152.8
1,012.2
1,012.2
19. Bank and other borrowings (continued)
The Group has entered into interest rate and currency swaps, details of which are included in note 21.
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
20. Provisions for other liabilities
At 1 April 2021
On disposal of subsidiaries (note 28)
On acquisition of subsidiaries (note 28)
(restated – note 23)
Net charge/(release) to income statement
Utilised in year
Unwinding of discount
Foreign exchange
At 31 March 2022
Prior period adjustment (note 23)
At 31 March 2022 as restated
On disposal of subsidiaries (note 28)
Reclassification
Net charge/(release) to income statement
Utilised in year
Unwinding of discount
Foreign exchange
At 31 March 2023
Employee
benefits and
business
reorganisation
costs
(b)
£m
35.8
(1.3)
–
Italian
anti-trust fine
(c)
£m
20.0
–
–
40.1
(35.4)
0.2
0.3
39.7
–
39.7
(1.2)
1.4
10.4
(19.2)
0.2
(0.8)
30.5
(3.6)
(16.1)
–
–
0.3
–
0.3
–
–
–
(0.3)
–
–
–
Contract/
warranty
(a)
£m
67.1
–
1.3
(8.6)
(8.5)
–
(0.2)
51.1
2.4
53.5
(8.5)
(1.0)
76.0
(20.2)
–
0.6
100.4
Property
(d)
£m
21.5
(1.2)
–
1.8
(0.8)
–
(0.3)
21.0
–
21.0
(5.8)
(4.3)
8.4
(4.8)
–
0.6
15.1
Other
(e)
£m
1.1
–
–
0.3
–
–
–
1.4
–
1.4
(0.1)
3.9
(0.6)
(1.8)
–
(0.1)
2.7
Total
provisions
£m
145.5
(2.5)
1.3
30.0
(60.8)
0.2
(0.2)
113.5
2.4
115.9
(15.6)
–
94.2
(46.3)
0.2
0.3
148.7
a) The contract/warranty provisions relate to onerous contracts and warranty obligations on completed contracts and disposals.
Warranty provisions are provided in the normal course of business and are recognised when the underlying products and services are
sold. The provision is based on an assessment of future claims with reference to historical warranty data and a weighting of possible
outcomes against their associated probabilities. Onerous contracts relate to expected future losses on contracts with customers –
notably T31 as outlined in note 1.
b) Employee benefits and business reorganisation costs relate to business restructuring activities including announced redundancies in
addition to employee benefits including long-term sickness. The net charge to the employee benefits and reorganisation provision
comprises a charge in the year of £12.8 million and a release of £2.4 million.
c)
Italian anti-trust fines pertain to historic court rulings in respect of the Babcock Mission Critical Services Italia SpA subsidiary.
The majority of this provision was paid in the prior year with remaining amounts paid in FY23.
d) Property and other provisions primarily relate to dilapidation costs and contractual obligations in respect of infrastructure.
e) Other provisions include provisions for insurance claims arising within the Group’s captive insurance company, Chepstow Insurance
Limited. They relate to specific claims assessed in accordance with the advice of independent actuaries.
Provisions have been analysed between current and non-current as follows:
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
Current
Non-current
31 March 2023
£m
67.9
80.8
148.7
31 March 2022
£m
55.6
60.3
115.9
Included within provisions is £6.9 million (2022: £7.4 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.
Bank loans include £nil million (2022: £12.5 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 €nil million at 31 March 2023
(2022: €128.5 million).
216
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
217
217
Notes to the Group financial statements (continued)
21. Financial instruments and fair value measurement
The following table presents the Group’s assets and liabilities:
31 March 2023 (£m)
Non-current financial assets
Loans to joint ventures and associates
Financial assets
Derivatives
Lease receivables
Current financial assets
Trade and other receivables *
Lease receivables
Derivatives
Cash and cash equivalents
Non-current financial liabilities
Bank and other borrowings
Derivatives
Current financial liabilities
Bank and other borrowings
Trade and other payables *
Derivatives
Net financial assets / (financial liabilities)
Financial
assets at
fair value
Financial assets
at amortised
cost
Financial
liabilities at fair
value
Financial
liabilities at
amortised cost
Total carrying
amount
9.5
7.3
–
22.2
345.1
16.4
–
451.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
9.5
7.3
2.6
22.2
346.6
16.4
4.3
451.7
Fair value
9.5
7.3
2.6
22.2
346.6
16.4
4.3
451.7
–
–
–
(53.3)
(768.4)
–
(768.4)
(53.3)
(670.3)
(53.3)
–
–
852.2
–
–
(12.8)
(66.1)
(19.6)
(511.1)
–
(1,299.1)
(19.6)
(511.1)
(12.8)
(504.6)
(19.6)
(511.1)
(12.8)
(406.5)
–
–
2.6
–
1.5
–
4.3
–
–
–
–
–
8.4
* Trade and other receivables and trade and other payables only include balances which meet the definition of a financial instrument.
31 March 2022 (£m)
Non-current financial assets
Investment in joint ventures and associates
Loans to joint ventures and associates
Financial assets
Lease receivables
Current financial assets
Trade and other receivables *
Lease receivables
Derivatives
Cash and cash equivalents
Non-current financial liabilities
Bank and other borrowings
Derivatives
Current financial liabilities
Bank and other borrowings
Trade and other payables *
Derivatives
Net financial assets / (financial liabilities)
Financial assets
at fair value
Financial assets
at amortised
cost
Financial
liabilities at fair
value
Financial
liabilities at
amortised cost
Total carrying
amount
Fair value
–
–
–
–
–
–
11.4
–
–
–
–
–
–
–
11.4
54.3
12.1
10.0
24.1
335.3
23.3
–
1,146.3
–
–
–
–
–
–
1,605.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
54.3
12.1
10.0
24.1
54.3
12.1
10.0
24.1
335.3
23.3
11.4
1,146.3
335.3
23.3
11.4
1,146.3
–
(59.3)
(847.7)
–
(847.7)
(59.3)
(819.6)
(59.3)
–
–
(34.8)
(94.1)
(863.4)
(460.0)
–
(2,171.1)
(863.4)
(460.0)
(34.8)
(648.4)
(833.1)
(460.0)
(34.8)
(590.0)
* Trade and other receivables and trade and other payables only include balances which meet the definition of a financial instrument.
218
218
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
21. Financial instruments and fair value measurement
The following table presents the Group’s assets and liabilities:
Financial
Financial assets
Financial
Financial
assets at
at amortised
liabilities at fair
liabilities at
Total carrying
fair value
cost
value
amortised cost
amount
Fair value
31 March 2023 (£m)
Non-current financial assets
Loans to joint ventures and associates
Financial assets
Derivatives
Lease receivables
Current financial assets
Trade and other receivables *
Lease receivables
Derivatives
Cash and cash equivalents
Non-current financial liabilities
Bank and other borrowings
Derivatives
Current financial liabilities
Bank and other borrowings
Trade and other payables *
Derivatives
31 March 2022 (£m)
Non-current financial assets
Investment in joint ventures and associates
Loans to joint ventures and associates
Financial assets
Lease receivables
Current financial assets
Trade and other receivables *
Lease receivables
Derivatives
Cash and cash equivalents
Non-current financial liabilities
Bank and other borrowings
Derivatives
Current financial liabilities
Bank and other borrowings
Trade and other payables *
Derivatives
2.6
1.5
4.3
–
–
–
–
–
–
–
–
–
11.4
–
–
–
–
–
–
–
–
–
–
–
–
–
9.5
7.3
–
22.2
345.1
16.4
451.7
54.3
12.1
10.0
24.1
335.3
23.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(768.4)
(768.4)
(670.3)
(53.3)
(53.3)
(53.3)
(19.6)
(19.6)
(19.6)
(511.1)
(511.1)
(511.1)
(12.8)
–
(12.8)
(12.8)
9.5
7.3
2.6
9.5
7.3
2.6
22.2
22.2
346.6
346.6
16.4
4.3
16.4
4.3
451.7
451.7
54.3
12.1
10.0
24.1
23.3
11.4
54.3
12.1
10.0
24.1
23.3
11.4
335.3
335.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,146.3
1,146.3
1,146.3
(847.7)
(847.7)
(819.6)
(59.3)
(59.3)
(59.3)
(863.4)
(460.0)
(863.4)
(460.0)
(34.8)
(833.1)
(460.0)
(34.8)
(34.8)
Net financial assets / (financial liabilities)
8.4
852.2
(66.1)
(1,299.1)
(504.6)
(406.5)
* Trade and other receivables and trade and other payables only include balances which meet the definition of a financial instrument.
Financial assets
Financial
Financial
Financial assets
at amortised
liabilities at fair
liabilities at
Total carrying
at fair value
cost
value
amortised cost
amount
Fair value
Net financial assets / (financial liabilities)
11.4
1,605.4
(94.1)
(2,171.1)
(648.4)
(590.0)
* Trade and other receivables and trade and other payables only include balances which meet the definition of a financial instrument.
21. Financial instruments and fair value measurement (continued)
The fair value hierarchy is as follows:
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).
All of the financial assets and liabilities measured at fair value are classified as Level 2 or Level 3 using the fair value hierarchy. There
•
were no transfers between levels during the period. Additional disclosures in respect of financial assets measured using Level 3
techniques are not provided as such assets are not material.
The fair values of financial instruments held at fair value have been determined based on available market information at the period end
date, and the valuation methodologies listed below:
The fair values of forward foreign exchange contracts are calculated by discounting the contracted forward values and translating at
the appropriate period end rates; and
•
The fair values of cross-currency interest rate swaps are calculated by discounting expected future principal and interest cash flows
and translating at the appropriate period end rates.
•
Financial assets and liabilities in the Group’s Consolidated statement of financial position are either held at fair value or their carrying
value approximates to fair value, with the exception of loans, which are held at amortised cost. Amortised cost items whose fair value or
carrying value approximate to fair value are at Level 2 in the fair value hierarchy. Due to the variability of the valuation factors, the fair
values presented at 31 March may not be indicative of the amounts the Group would expect to realise in the current market
environment.
Derivative financial instruments and hedging activities
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.
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.
Cash flow hedges
The Group uses cross-currency swap contracts to hedge the foreign currency risk on debt issued by the Group. These are formally
designated in cash flow hedge relationships and hedge ineffectiveness is recognised immediately in the income statement.
Fair value hedges
The Group maintains cross-currency interest rate 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 rate of interest. 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.
22. Financial risk management
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 and the Group’s cash and cash equivalents.
The Group’s risk management objective, policy and performance are as follows:
Objective
Policy
Risk management
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.
The Group’s interest rate management policy is to monitor the mix of fixed versus floating interest rate debt to ensure
that it is compatible with its business requirements and capital structure.
The Group manages interest rate risk 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.
As at 31 March 2023, the Group had 83% fixed rate debt (2022: 66%) and 17% floating rate debt (2022: 34%) based
on gross debt, including lease liabilities, of £1,016.8 million (2022: £2,290.1 million).
218
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
219
219
Notes to the Group financial statements (continued)
22. Financial risk management (continued)
The following balances are exposed to interest rate risk as shown below:
Cash and cash equivalents
Bank and other borrowings
31 March 2023
Between one
and two years
£m
–
40.9
Less than
one year
£m
451.7
69.5
Greater than
two years
£m
–
906.4
Less than
one year
£m
1,146.3
968.2
31 March 2022
Between one
and two years
£m
–
113.1
Greater than
two years
£m
–
1,063.9
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
Year ended 31 March 2023
Year ended 31 March 2022
Change in
interest rate
3.0%
Effect on profit
before tax
£m
3.1
Change in interest
rate
0.5%
Effect on profit
before tax
£m
3.7
The effect of fair value hedges on the Group’s financial position and performance for the year is as follows:
Hedging instruments (£m)
Cross currency interest rate swap1
Year ended 31 March 2023
Year ended 31 March 2022
Notional
principal
amount
246.7
Carrying
amount of
hedging
instrument
(38.7)
Change in
fair value of
hedging
instrument used
for calculating
hedge
ineffectiveness
(4.1)
Notional
principal
amount
246.7
Carrying
amount of
hedging
instrument
(34.6)
Change in
fair value of
hedging
instrument used
for calculating
hedge
ineffectiveness
(14.6)
1. The Group has entered into three cross-currency interest rate swaps to convert €275 million of fixed rate (1.375%) debt to GBP debt linked to SONIA. This matures
on 13 September 2027. Additionally, as part of the Group’s financial risk management response in relation to interest rate risk, the group has entered into further
interest rate swaps to fix interest rate on floating rate sterling debt – ie, the aggregated exposure that was created with €140 million fixed rate debt and the cross-
currency swaps which receive Euro fixed and pay GBP floating. These new interest rate swaps were not designated in the hedge relationship and therefore they are
accounted for at fair value through profit and loss.
Year ended 31 March 2023
Year ended 31 March 2022
Carrying
amount of
hedged item
241.7
Accumulated
fair value
adjustments
30.6
Change in
fair value used
for calculating
ineffectiveness
7.3
Amount of
ineffectiveness
recognised in the
income
statement
3.2
Carrying
amount of hedged
item
234.8
Accumulated
fair value
adjustments
22.7
Change in
fair value used for
calculating
ineffectiveness
13.7
Amount of
ineffectiveness
recognised in the
income statement
(0.9)
Hedged item (£m)
Debt
Ineffectiveness is included in the income statement in finance costs.
Liquidity risk
Liquidity risk is the risk that the Group becomes unable to meet payment obligations in a timely manner when they become due.
The Group’s risk management objective, policy and performance are as follows:
Objective
Policy
Risk management
The Group’s objective with regards to liquidity risk is 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.
The Group’s policy is to ensure the business is prudently funded and that sufficient liquidity headroom is maintained on
its facilities.
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.
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.
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. During the year ended 31 March 2023 the Group has repaid a €550
million facility. No new facilities have been entered into.
220
220
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
22. Financial risk management (continued)
The following balances are exposed to interest rate risk as shown below:
Cash and cash equivalents
Bank and other borrowings
31 March 2023
31 March 2022
Less than
Between one
Greater than
Less than
Between one
Greater than
one year
and two years
two years
one year
and two years
two years
£m
451.7
69.5
£m
–
£m
£m
–
1,146.3
£m
–
£m
–
40.9
906.4
968.2
113.1
1,063.9
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:
Year ended 31 March 2023
Year ended 31 March 2022
Change in
interest rate
3.0%
Effect on profit
before tax
Change in interest
£m
3.1
rate
0.5%
Effect on profit
before tax
£m
3.7
GBP
The effect of fair value hedges on the Group’s financial position and performance for the year is as follows:
Year ended 31 March 2023
Year ended 31 March 2022
Change in
fair value of
hedging
Change in
fair value of
hedging
Notional
principal
amount
246.7
Carrying
instrument used
amount of
for calculating
hedging
hedge
instrument
ineffectiveness
(38.7)
(4.1)
Notional
principal
amount
246.7
Carrying
instrument used
amount of
hedging
instrument
for calculating
hedge
ineffectiveness
(34.6)
(14.6)
Hedging instruments (£m)
Cross currency interest rate swap1
1. The Group has entered into three cross-currency interest rate swaps to convert €275 million of fixed rate (1.375%) debt to GBP debt linked to SONIA. This matures
on 13 September 2027. Additionally, as part of the Group’s financial risk management response in relation to interest rate risk, the group has entered into further
interest rate swaps to fix interest rate on floating rate sterling debt – ie, the aggregated exposure that was created with €140 million fixed rate debt and the cross-
currency swaps which receive Euro fixed and pay GBP floating. These new interest rate swaps were not designated in the hedge relationship and therefore they are
accounted for at fair value through profit and loss.
Year ended 31 March 2023
Year ended 31 March 2022
Change in
ineffectiveness
Amount of
Change in
Amount of
Carrying
Accumulated
fair value used
recognised in the
Carrying
Accumulated
fair value used for
ineffectiveness
amount of
hedged item
fair value
adjustments
for calculating
ineffectiveness
income
amount of hedged
fair value
calculating
recognised in the
statement
item
adjustments
ineffectiveness
income statement
241.7
30.6
7.3
3.2
234.8
22.7
13.7
(0.9)
Hedged item (£m)
Debt
Liquidity risk
Ineffectiveness is included in the income statement in finance costs.
Liquidity risk is the risk that the Group becomes unable to meet payment obligations in a timely manner when they become due.
The Group’s risk management objective, policy and performance are as follows:
Objective
The Group’s objective with regards to liquidity risk is 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
Policy
The Group’s policy is to ensure the business is prudently funded and that sufficient liquidity headroom is maintained on
Risk management
Liquidity risk management includes maintaining sufficient cash and the availability of funding from an adequate amount
commitments and its risk profile.
its facilities.
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.
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.
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. During the year ended 31 March 2023 the Group has repaid a €550
million facility. No new facilities have been entered into.
22. Financial risk management (continued)
The contracted cash outflows on bank and other borrowings, derivatives and lease liabilities at the reporting date are shown below,
based on contractual undiscounted payments.
At 31 March 2023
Bank and other borrowings
Derivatives cash outflows settled gross
Undiscounted lease payments
At 31 March 2022
Bank and other borrowings
Derivatives cash outflows settled gross
Derivatives cash outflows settled net
Undiscounted lease payments
Less than
1 year
£m
Between
1 and 2 years
£m
Between
2 and 5 years
£m
Over
5 years
£m
74.2
28.7
54.6
968.2
555.7
–
115.6
45.2
145.4
44.9
113.1
300.5
–
100.6
847.9
198.8
80.5
510.7
246.4
–
172.0
72.9
1,503.3
72.2
553.2
549.6
0.4
106.3
Total
£m
1,040.2
1,876.2
252.2
2,145.2
1,652.2
0.4
494.5
The impact of discounting for lease payments is £23.4 million (2022: £60.4 million) resulting in lease liabilities of £228.8 million
(2022: £434.1 million). Other financial liabilities not included in the table above such as trade and other payables are all expected to be
settled within one year.
Currency risk
Currency risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign
exchange rates. 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 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, ZAR, AUD and CAD.
The Group’s risk management objective, policy and performance are as follows:
Objective
Policy –
Transactional risk
Policy –
Translational risk
Risk management
Performance
The Group’s objective is 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, ZAR, AUD
and CAD.
In order to mitigate the currency risk of adverse currency movements on foreign currency denominated transactions,
the Group’s policy is to hedge all foreign currency transactions greater than £10k, using financial instruments where
appropriate. The Group applies IFRS 9 hedge accounting treatment where appropriate.
The Group is also exposed to adverse foreign currency movements on 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.
Currency risk management includes hedging the underlying foreign currency exposures in the foreign exchange market
with approved counterparties. Currency transactions are recorded and monitored in the treasury management system.
Each of the sectors in the Group provides a quarterly foreign currency exposure report to monitor the level of currency
hedge cover is appropriate.
All material firm transactional exposures are economically hedged using foreign exchange forward contracts.
220
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
221
221
Notes to the Group financial statements (continued)
22. Financial risk management (continued)
The effect of cash flow hedges on the Group’s financial position and performance in the year was as follows:
Year ended 31 March 2023
Hedging instruments (£m)
Hedge instrument: Cross currency swap
Hedged item: EUR-denominated debt
Carrying
value
Nominal
amount
€275m
€275m £241.7 13/09/27
Hedged
rate
(£8.2) 13/09/27 1.152
N/A
Maturity
Change in fair
value used for
calculating
hedge
effectiveness
(9.5)
10.0
Change in fair
value
recognised in
other
comprehensiv
e income
(9.5)
N/A
Amount
reclassified
from cash flow
hedge reserve
to finance cost
(10.0)
N/A
Ineffectiveness
recognised in
profit and loss
(finance cost)
–
N/A
As outstanding cash flow hedges matured in 2023, the amount previously recognised in the hedging reserve has been reclassified to
the income statement. Any new derivatives executed to hedge purchases and sales in foreign currencies have been treated as economic
hedges with the fair value changes recognised in the income statement rather than through other comprehensive income and therefore
disclosure has not been provided on such items.
Year ended 31 March 2022
Hedging instruments (£m)
Hedge instrument: Cross currency swap
Hedged item: EUR-denominated debt
Nominal
amount
€275m
€275m
Maturity
Carrying
value
Hedged
rate
(17.7) 13/09/27 1.152
N/A
231.7 13/09/27
Change in fair
value used for
calculating
hedge
effectiveness
2.8
(2.4)
Change in fair
value
recognised in
other
comprehensive
income
(2.4)
N/A
Amount
reclassified
from cash flow
hedge reserve
to finance cost
3.3
N/A
Ineffectiveness
recognised in
profit and loss
(finance cost)
(0.4)
N/A
Maturity date
Hedging instruments (£m)
05/03/2023
Hedging forecast purchases in EUR
Hedging forecast sales in GBP
17/04/2023
20/11/2023
Hedging forecast purchases/sales in CHF/EUR**
Hedging forecast purchases/sales in EUR/NOK**
21/09/2022
Hedging forecast purchases/sales in other currencies** 19/10/2022
Cash flow hedges
Weighted average
hedged rate
1.3617
0.8929
0.9387
10.4500
N/A
** Individually immaterial items.
Year ended 31 March 2022
Change in
value of
instruments
(3.0)
(1.1)
1.0
–
0.2
(2.9)
Change in
value of item
3.0
1.1
(1.0)
–
(0.2)
2.9
Carrying value of
derivative Notional amount
73.3
110.0
22.1
–
38.7
244.1
(2.2)
(1.1)
1.0
–
(0.4)
(2.7)
The following table demonstrates the effect on profit before tax for reasonably possible changes in EUR, ZAR, AUD and CAD
exchange rates.
EUR *
ZAR
AUD
CAD
Year ended 31 March 2023
Year ended 31 March 2022
Change in
foreign
currency rate
5%
5%
5%
5%
Effect
on profit
before tax
£m
1.5
(2.0)
(0.4)
(0.4)
Effect
on other
components
of equity
£m
1.5
(2.0)
(0.4)
(0.4)
Change in
foreign
currency
rate
5%
5%
5%
5%
Effect
on profit
before tax
£m
0.8
(1.6)
(1.6)
(0.5)
Effect
on other
components
of equity
£m
0.8
(1.6)
(1.6)
(0.5)
* This sensitivity analysis excludes the impact of the disposal of the Group’s Aerial Emergency Services business, as this is a one-off transaction which is not expected
to re-occur.
Under the Group’s economic hedging policy, the terms of the forward contracts are arranged to align with the expected timing,
currency and amounts of the hedged items. The Group typically enters into forward contracts where the hedge ratio is 1:1 on the
basis that the notional amount of the designated hedging instruments matches the principal amount of the forecast foreign
currency transaction.
222
222
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
22. Financial risk management (continued)
The effect of cash flow hedges on the Group’s financial position and performance in the year was as follows:
Year ended 31 March 2023
Change in fair
Change in fair
value
Amount
value used for
recognised in
reclassified
Ineffectiveness
calculating
other
from cash flow
recognised in
Hedging instruments (£m)
Nominal
amount
Carrying
value
Hedged
hedge
comprehensiv
hedge reserve
profit and loss
Maturity
rate
effectiveness
e income
to finance cost
(finance cost)
Hedge instrument: Cross currency swap
€275m
(£8.2) 13/09/27 1.152
Hedged item: EUR-denominated debt
€275m £241.7 13/09/27
N/A
(9.5)
10.0
(9.5)
N/A
(10.0)
N/A
–
N/A
As outstanding cash flow hedges matured in 2023, the amount previously recognised in the hedging reserve has been reclassified to
the income statement. Any new derivatives executed to hedge purchases and sales in foreign currencies have been treated as economic
hedges with the fair value changes recognised in the income statement rather than through other comprehensive income and therefore
disclosure has not been provided on such items.
Hedging instruments (£m)
Nominal
amount
Carrying
value
Hedged
hedge
comprehensive
hedge reserve
Maturity
rate
effectiveness
income
to finance cost
Hedge instrument: Cross currency swap
€275m
(17.7) 13/09/27 1.152
Hedged item: EUR-denominated debt
€275m
231.7 13/09/27
N/A
2.8
(2.4)
(2.4)
N/A
3.3
N/A
(0.4)
N/A
Year ended 31 March 2022
Change in fair
value used for
calculating
Change in fair
value
Amount
recognised in
reclassified
Ineffectiveness
other
from cash flow
recognised in
profit and loss
(finance cost)
Hedging instruments (£m)
Hedging forecast purchases in EUR
Hedging forecast sales in GBP
Hedging forecast purchases/sales in CHF/EUR**
Weighted average
Maturity date
hedged rate
05/03/2023
17/04/2023
20/11/2023
1.3617
0.8929
0.9387
Hedging forecast purchases/sales in EUR/NOK**
21/09/2022
10.4500
Hedging forecast purchases/sales in other currencies** 19/10/2022
N/A
Year ended 31 March 2022
Change in
value of
instruments
Change in
Carrying value of
value of item
derivative Notional amount
(3.0)
(1.1)
1.0
–
0.2
(2.9)
3.0
1.1
(1.0)
–
(0.2)
2.9
(2.2)
(1.1)
1.0
–
(0.4)
(2.7)
73.3
110.0
22.1
–
38.7
244.1
The following table demonstrates the effect on profit before tax for reasonably possible changes in EUR, ZAR, AUD and CAD
Year ended 31 March 2023
Year ended 31 March 2022
Effect
Effect
on other
Change in
on profit
components
foreign
before tax
of equity
currency rate
5%
5%
5%
5%
£m
1.5
(2.0)
(0.4)
(0.4)
£m
1.5
(2.0)
(0.4)
(0.4)
Change in
foreign
currency
Effect
Effect
on other
on profit
components
before tax
of equity
rate
5%
5%
5%
5%
£m
0.8
(1.6)
(1.6)
(0.5)
£m
0.8
(1.6)
(1.6)
(0.5)
* This sensitivity analysis excludes the impact of the disposal of the Group’s Aerial Emergency Services business, as this is a one-off transaction which is not expected
Under the Group’s economic hedging policy, the terms of the forward contracts are arranged to align with the expected timing,
currency and amounts of the hedged items. The Group typically enters into forward contracts where the hedge ratio is 1:1 on the
basis that the notional amount of the designated hedging instruments matches the principal amount of the forecast foreign
currency transaction.
Cash flow hedges
** Individually immaterial items.
exchange rates.
EUR *
ZAR
AUD
CAD
to re-occur.
22. 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.
The Group’s risk management objective, policy and performance are as follows:
Objective
Policy
The Group’s objective is to ensure that the Group continues to operate with an acceptable level of credit risk, based on
management’s judgement, associated with its operating activities, such as customer trade receivables, and financial
activities, including cash deposits and financial instruments.
The Group’s policy is to manage credit risk by setting and reviewing appropriate credit limits for non-government
commercial customers, being the Group’s main exposure to credit risk. With regards to financial institutions, credit limits
will be set according to the respective financial institution’s credit rating. Counterparty bank credit risk is closely
monitored on a systematic and ongoing basis.
Risk management Currency risk management includes performing credit checks on non-government commercial customers and setting and
Performance
only performing financial transactions with approved investment grade counterparties.
Expected credit loss on trade receivable portfolio/provisions of £7.4 million (2022: £14.6 million). The carrying amount
of the Group’s financial assets represents the maximum exposure to credit risk.
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 counterparty credit rating is as follows:
AA- or higher
A+ to A-
BBB+ to BB-
Trade receivables
31 March 2023
8.0%
45.0%
11.0%
31 March 2022
15.3%
78.7%
6.0%
The Group’s assessment is that credit risk in relation to customers or sub-contractors to governments is limited as their probability of
default is considered to be extremely low. The provision for expected credit losses for receivables from governments and sub-
contractors 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, 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. For all other assets the loss allowance is measured using
12-months expected credit losses unless there was a significant increase in credit risk since initial recognition. Forward-looking factors
are applied to homogenous groups of receivables which share characteristics and are based on an estimate of how corporate failure
rates may change relative to historic levels given the current economic environment.
The Group considers that default has occurred when receivables are more than 90 days overdue and recognises a provision of 100%
against all such receivables unless there is evidence of recoverability at the individual receivable level. The movement on the provision
for expected credit losses is as follows:
Balance at 1 April
Charged to the income statement
Receivables written off during the year as uncollectable
Unused amounts reversed
Disposal of businesses
Exchange differences
Balance at 31 March
2023
£m
(14.6)
(1.7)
–
2.0
7.4
(0.4)
(7.3)
2022
£m
(14.0)
(1.0)
–
0.7
–
(0.3)
(14.6)
The creation and release of provisions for impairment of receivables have been included in operating costs in the income statement.
222
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
223
223
Notes to the Group financial statements (continued)
22. Financial risk management (continued)
The Group writes off a receivable when there is evidence that the debtor is in significant financial difficulty and there is no realistic
prospect of recovery, for example, when a debtor enters bankruptcy or financial reorganisation. None of the trade receivables that
were written off during the year are still subject to enforcement activity. The ageing of trade receivables is detailed below:
Not past due
Up to 90 days overdue
Past 90 days overdue
Year ended 31 March 2023
Gross
£m
291.3
3.7
12.3
307.3
Provision
£m
–
(0.1)
(7.2)
(7.3)
Net
£m
291.3
3.6
5.1
300.0
Year ended 31 March 2022
Gross
£m
298.0
7.4
6.1
311.5
Provision
£m
(1.1)
(7.4)
(6.1)
(14.6)
Net
£m
296.9
–
–
296.9
The maximum exposure to credit risk at the reporting date is the carrying 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.
For contract assets the expected credit loss provision is immaterial as the probability of default is insignificant. No expected loss
provision has been recorded in respect of loans to joint ventures and associates.
Offsetting financial assets and liabilities
Assets
Cash and cash equivalents
Derivatives
Liabilities
Bank and other borrowings
Derivatives
Year ended 31 March 2023
Year ended 31 March 2022
Balance
sheet
£m
Amounts not
offset1
£m
Net
balances
£m
Balance
sheet
£m
Amounts not
offset1
£m
Net
balances
£m
451.0
6.9
(18.9)
(6.9)
432.1
–
1,146.3
11.4
(388.9)
(11.4)
757.4
–
(18.9)
(66.1)
18.9
6.9
–
(59.2)
(863.4)
(94.1)
388.9
11.4
(474.5)
(82.7)
1 The Group has the legal right of offset within certain of its banking arrangements, however there is no intention to net settle these balances shortly after the
period end and therefore these have been presented gross in accordance with IAS 32. The Group also has derivative assets and liabilities with the same financial
institutions which also have offset language to allow for net settlement, however the Group has no intention to net settle and therefore the IAS 32 criteria are not
satisfied and the derivative asset and derivative liabilities have been presented gross in the statement of financial position.
Capital risk
Capital risk is the risk that the entity may not be able to continue as a going concern. The capital structure of the Group consists of net
debt (borrowings disclosed in note 19 after deducting cash and cash equivalents) and equity of the Group (comprising issued capital,
reserves, retained earnings and non-controlling interests as disclosed in note 24. The Group is not subject to any externally imposed
capital requirements.
The Group’s risk management objective, policy and performance are as follows:
Objective
Policy
Risk management
Performance
The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, and to provide
returns for shareholders and other stakeholder benefits.
The Group’s policy is to protect and strengthen the Group statement of financial position through the appropriate
balance of debt and equity funding.
The Group manages its capital structure and makes adjustments in response to changes to economic conditions and the
strategic objectives of the Group. The Group raises finance in the public debt market from financial institutions, using a
variety of capital market instruments and borrowing facilities.
During the current financial year, the Group has entered into an overdraft facility of £50 million. No other new facilities
have been entered into.
224
224
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
22. Financial risk management (continued)
The Group writes off a receivable when there is evidence that the debtor is in significant financial difficulty and there is no realistic
prospect of recovery, for example, when a debtor enters bankruptcy or financial reorganisation. None of the trade receivables that
were written off during the year are still subject to enforcement activity. The ageing of trade receivables is detailed below:
Year ended 31 March 2023
Year ended 31 March 2022
Gross
£m
291.3
3.7
12.3
307.3
Provision
£m
–
(0.1)
(7.2)
(7.3)
291.3
298.0
Net
£m
3.6
5.1
Gross
£m
7.4
6.1
Provision
£m
(1.1)
(7.4)
(6.1)
Net
£m
296.9
–
–
300.0
311.5
(14.6)
296.9
Not past due
Up to 90 days overdue
Past 90 days overdue
Assets
Derivatives
Liabilities
Derivatives
Cash and cash equivalents
Bank and other borrowings
Capital risk
capital requirements.
The maximum exposure to credit risk at the reporting date is the carrying 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.
For contract assets the expected credit loss provision is immaterial as the probability of default is insignificant. No expected loss
provision has been recorded in respect of loans to joint ventures and associates.
Offsetting financial assets and liabilities
Year ended 31 March 2023
Year ended 31 March 2022
Balance
Amounts not
sheet
£m
offset1
£m
Net
balances
£m
Balance
Amounts not
sheet
£m
offset1
£m
Net
balances
£m
451.0
6.9
(18.9)
(6.9)
432.1
1,146.3
–
11.4
(388.9)
(11.4)
757.4
–
1 The Group has the legal right of offset within certain of its banking arrangements, however there is no intention to net settle these balances shortly after the
period end and therefore these have been presented gross in accordance with IAS 32. The Group also has derivative assets and liabilities with the same financial
institutions which also have offset language to allow for net settlement, however the Group has no intention to net settle and therefore the IAS 32 criteria are not
satisfied and the derivative asset and derivative liabilities have been presented gross in the statement of financial position.
Capital risk is the risk that the entity may not be able to continue as a going concern. The capital structure of the Group consists of net
debt (borrowings disclosed in note 19 after deducting cash and cash equivalents) and equity of the Group (comprising issued capital,
reserves, retained earnings and non-controlling interests as disclosed in note 24. The Group is not subject to any externally imposed
The Group’s risk management objective, policy and performance are as follows:
Objective
The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, and to provide
Policy
The Group’s policy is to protect and strengthen the Group statement of financial position through the appropriate
returns for shareholders and other stakeholder benefits.
balance of debt and equity funding.
Risk management
The Group manages its capital structure and makes adjustments in response to changes to economic conditions and the
strategic objectives of the Group. The Group raises finance in the public debt market from financial institutions, using a
variety of capital market instruments and borrowing facilities.
Performance
During the current financial year, the Group has entered into an overdraft facility of £50 million. No other new facilities
have been entered into.
23. Revisions to historic acquisitions within the IFRS 3 measurement period
Under IFRS 3, when new information obtained about facts and circumstances that existed at the acquisition date arises within the
measurement period, the Group is required to adjust amounts recognised through the acquisition accounting. Post-acquisition, we have
determined that assumptions used to calculate a pain/gain share provision in respect of the Naval Ship Management (Australia) Pty
Limited (‘NSM’) acquisition did not reflect the facts and circumstances at the acquisition date. This has resulted in an increase to
provisions of £2.4 million at 31 March 2022. The reduction in net assets acquired has increased the goodwill by £1.0 million,
increased acquired intangibles by £1.0 million, increased deferred tax assets by £0.4 million at 31 March 2022.
31 March 2022 – Group statement of financial position (extract)
Assets
Non-current assets
Goodwill
Other intangible assets
Deferred tax asset
Total non-current assets *
Liabilities
Current liabilities
Provisions
Current liabilities *
Equity
Retained earnings
Total equity *
31 March 2022
(previously
published)
(iii) Acquisition
accounting
adjustment
31 March 2022
(restated)
782.4
175.7
47.0
2,461.1
1.0
1.0
0.4
2.4
783.4
176.7
47.4
2,463.5
(53.2)
(2,480.3)
(2.4)
(2.4)
(55.6)
(2,482.7)
(1,241.4)
701.5
–
–
(1,241.4)
701.5
(18.9)
(66.1)
18.9
6.9
–
(59.2)
(863.4)
(94.1)
388.9
11.4
(474.5)
(82.7)
24. Share capital
* The table above includes only those financial statement line items which have been restated. The total non-current assets, non-current liabilities, and equity do not
therefore represent the sum of the line items presented above.
Allotted, issued and fully paid
At 1 April 2022 and 31 March 2023
Allotted, issued and fully paid
At 1 April 2021 and 31 March 2022
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 2023 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 10,346,859 shares (2022: 9,945,822 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.
224
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
225
225
Notes to the Group financial statements (continued)
24. Share capital (continued)
Potential issues of ordinary shares (continued)
Grant date
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
24 August 2021
24 September 2021
24 September 2021
24 September 2021
1 August 2022
1 August 2022
1 August 2022
1 August 2022
Type
DBP3
DBP2
DBP3
PSP1
PSP1
DBP2
DBP3
DBP2
DBP3
PSP1
PSP1
PSP1
DBP3
PSP1
PSP1
DBP4
DBP3
PSP1
PSP1
Exercise period
13/06/2021 – 13/06/2022
13/06/2021 – 13/06/2022
13/06/2022 – 13/06/2023
13/06/2022 – 13/06/2023
13/06/2024 – 13/06/2025
03/08/2022 – 03/08/2023
03/08/2023 – 03/08/2024
13/08/2022 – 13/08/2023
13/08/2023 – 13/08/2024
01/12/2025 – 01/12/2026
01/12/2023 – 01/12/2024
24/08/2026 – 24/08/2027
24/09/2024 – 24/09/2025
24/09/2024 – 24/09/2025
24/09/2026 – 24/09/2027
01/08/2022 – 01/08/2023
01/08/2022 – 01/08/2025
01/08/2022 – 01/08/2025
01/08/2022 – 01/08/2027
2023
Number
–
–
22,971
–
–
44,300
109,929
–
192,096
1,389,984
1,470,518
769,165
45,312
1,368,274
553,389
551,420
218,895
2,191,017
1,419,589
10,346,859
2022
Number
23,335
14,668
224,369
2,330,777
803,839
146,306
109,929
8,474
192,096
1,389,984
1,653,975
769,165
45,312
1,606,889
626,704
–
–
–
–
9,945,822
Options granted to Directors are summarised in the Remuneration report on pages 131 to 133 and are included in the outstanding
options set out above.
1. 2009 Performance Share Plan (‘PSP’).
2. DBP – Award issued without matching shares, has two-year vesting period.
3. DBP – Award issued without matching shares, has three-year vesting period.
4. DBP – Award issued without matching shares, has one-year vesting period.
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 DBP movements is shown below:
Outstanding at 1 April
Granted
Exercised
Forfeited/lapsed
Outstanding at 31 March
Exercisable at 31 March
31 March 2023
31 March 2022
Shares newly
issued by the
Company
–
–
Shares
bought in
the market
69,517
69,517
Shares newly
issued by the
Company
–
–
Shares
bought in
the market
398,036
398,036
31 March 2023
Number
’000
9,946
4,492
(350)
(3,741)
10,347
67
31 March 2022
Number
’000
10,438
3,222
(263)
(3,451)
9,946
38
The weighted average share price for awards exercised during the year was 339.1p per share (2022: 319.3p per share). The weighted
average fair value of awards granted in the year was 327.1p per share (2022: 312.3p per share)
During the year 21,362 ordinary shares (2022: nil shares) were acquired or subscribed for through the Babcock Employee Share Trust
(‘the Trust’). The Trust holds shares to be used towards satisfying awards made under the Company’s employee share schemes. During
the year ended 31 March 2023, 349,881 shares (2022: 263,427 shares) were disposed of by the Trust resulting from options
exercised. At 31 March 2023, the Trust held a total of 69,517 ordinary shares (2022: 398,036 ordinary shares) at a total market value
of £207,717 (2022: £1,291,682) representing 0.01% (2022: 0.08%) of the issued share capital at that date. The Company did not pay
dividends to the Trust during the year. The Company meets the operating expenses of the Trust.
226
226
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
24. Share capital (continued)
Potential issues of ordinary shares (continued)
Grant date
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
24 August 2021
24 September 2021
24 September 2021
24 September 2021
1 August 2022
1 August 2022
1 August 2022
1 August 2022
Type
DBP3
DBP2
DBP3
PSP1
PSP1
DBP2
DBP3
DBP2
DBP3
PSP1
PSP1
PSP1
DBP3
PSP1
PSP1
DBP4
DBP3
PSP1
PSP1
13/06/2022 – 13/06/2023
22,971
224,369
Exercise period
2023
Number
13/06/2021 – 13/06/2022
13/06/2021 – 13/06/2022
13/06/2022 – 13/06/2023
13/06/2024 – 13/06/2025
03/08/2022 – 03/08/2023
44,300
03/08/2023 – 03/08/2024
109,929
13/08/2022 – 13/08/2023
2022
Number
23,335
14,668
2,330,777
803,839
146,306
109,929
8,474
–
–
–
–
–
13/08/2023 – 13/08/2024
192,096
192,096
01/12/2025 – 01/12/2026
1,389,984
1,389,984
01/12/2023 – 01/12/2024
1,470,518
1,653,975
24/08/2026 – 24/08/2027
769,165
769,165
24/09/2024 – 24/09/2025
45,312
45,312
24/09/2024 – 24/09/2025
1,368,274
1,606,889
24/09/2026 – 24/09/2027
01/08/2022 – 01/08/2023
01/08/2022 – 01/08/2025
553,389
551,420
218,895
01/08/2022 – 01/08/2025
2,191,017
01/08/2022 – 01/08/2027
1,419,589
626,704
–
–
–
–
10,346,859
9,945,822
Options granted to Directors are summarised in the Remuneration report on pages 131 to 133 and are included in the outstanding
options set out above.
1. 2009 Performance Share Plan (‘PSP’).
2. DBP – Award issued without matching shares, has two-year vesting period.
3. DBP – Award issued without matching shares, has three-year vesting period.
4. DBP – Award issued without matching shares, has one-year vesting period.
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 DBP movements is shown below:
Outstanding at 1 April
Granted
Exercised
Forfeited/lapsed
Outstanding at 31 March
Exercisable at 31 March
31 March 2023
31 March 2022
Shares newly
issued by the
Company
–
–
Shares
bought in
the market
69,517
69,517
Shares newly
issued by the
Company
–
–
Shares
bought in
the market
398,036
398,036
31 March 2023
31 March 2022
Number
’000
9,946
4,492
(350)
(3,741)
10,347
67
Number
’000
10,438
3,222
(263)
(3,451)
9,946
38
The weighted average share price for awards exercised during the year was 339.1p per share (2022: 319.3p per share). The weighted
average fair value of awards granted in the year was 327.1p per share (2022: 312.3p per share)
During the year 21,362 ordinary shares (2022: nil shares) were acquired or subscribed for through the Babcock Employee Share Trust
(‘the Trust’). The Trust holds shares to be used towards satisfying awards made under the Company’s employee share schemes. During
the year ended 31 March 2023, 349,881 shares (2022: 263,427 shares) were disposed of by the Trust resulting from options
exercised. At 31 March 2023, the Trust held a total of 69,517 ordinary shares (2022: 398,036 ordinary shares) at a total market value
of £207,717 (2022: £1,291,682) representing 0.01% (2022: 0.08%) of the issued share capital at that date. The Company did not pay
dividends to the Trust during the year. The Company meets the operating expenses of the Trust.
24. Share capital (continued)
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 benefitting 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 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.
25. Share-based payments
The charge to the income statement has been based on the assumptions below and is based on the binomial model as adjusted,
allowing for a closed form numerical-integrated solution, which makes it analogous to the Monte Carlo simulations, including
performance conditions. The detailed description of the plans below is included within the Remuneration report.
During the year the total charge relating to employee share-based payment plans was £9.4 million (2022: £5.5 million), all of which
related to equity-settled share-based payment transactions.
After tax, the income statement charge was £7.6 million (2022: £4.5 million).
The fair value per option granted and the assumptions used in the calculation are as follows:
PSP and DBP1
Options
awarded
Number
2,302,009
613,078
806,511
218,895
551,420
769,165
626,704
1,780,849
45,312
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
187,433
90,777
Share price
at grant or
modification
date
Pence
351.4
351.4
351.4
351.4
351.4
371.6
380.2
380.2
380.2
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
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%
100.0%
100.0%
100.0%
–
–
100.0%
100.0%
100.0%
100.0%
Option life
Years
4.0
6.0
6.0
4.0
2.0
6.0
6.0
4.0
4.0
6.0
4.0
6.0
4.0
3.0
4.0
3.0
6.0
4.0
4.0
3.0
4.0
3.0
Fair value
per option –
TSR
Pence
–
–
168.7
–
–
148.6
–
–
–
–
–
137.9
–
–
–
–
70.9
70.9
–
–
–
–
Fair value
per option –
non-market
conditions
Pence
351.4
316.3
316.3
351.4
351.4
315.9
325.0
380.2
380.2
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
Expected
volatility
%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
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%
Correlation
%
Grant or
modification
date
55.0% 01/08/22
55.0% 01/08/22
55.0% 01/08/22
55.0% 01/08/22
55.0% 01/08/22
55.0% 24/08/21
55.0% 24/09/21
55.0% 24/09/21
55.0% 24/09/21
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
2022 PSP
2022 PSP
2022 PSP
2022 DBP
2022 DBP
2021 PSP
2021 PSP
2021 PSP
2021 DBP
2020 PSP
2020 PSP
2020 PSP
2020 DBP
2020 DBP
2020 DBP
2020 DBP
2019 PSP
2019 PSP
2019 DBP
2019 DBP
2018 DBP
2018 DBP
1. PSP = 2009 Performance Share Plan and DBP = 2012 Deferred Bonus Plan.
The vesting period and the expected life of PSP awards are three years. The vesting period and expected life of DBP awards was one year
for awards made in August 2022 and two years for previous, other than for Executives where the vesting period is three years. The
holders of all awards receive dividends.
PSP awards for 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.
226
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
227
227
Notes to the Group financial statements (continued)
25. Share-based payments (continued)
PSP awards made in August 2021 of 769,165 shares include performance criteria weighted to 50% against free cash flow targets and
50% against TSR performance.
PSP awards made in September 2021 of 2,407,553 shares were made via the use of restricted shares with a three-year vesting period.
There are no performance conditions attached.
For PSP awards made in August 2022, 3,318,343 were made via the use of restricted shares with a three-year vesting period. There are
no performance conditions attached. A further 403,255 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 140,340 matching shares
(2022: 159,494 matching shares) at a cost of £0.4 million (2022: £0.5 million).
The Group also operates the Babcock Employee Share Plan International which reflects the structure of the UK Plan. During the year no
matching shares were purchased on the open market (2022: 4,784 matching shares) and 1,055 matching shares vested (2022: 2,823
matching shares) leaving a balance of 5,918 matching shares (2022: 6,973 matching shares).
26. Retirement benefits and liabilities
Defined contribution schemes
Pension costs for defined contribution schemes are as follows:
Defined contribution schemes
Defined benefit schemes
Statement of financial position assets and liabilities recognised are as follows:
Retirement benefits – funds in surplus
Retirement benefits – funds in deficit
Year ended
31 March 2023
£m
94.6
Year ended
31 March 2022
£m
83.4
31 March 2023
£m
94.8
(156.2)
(61.4)
31 March 2022
£m
300.9
(109.3)
191.6
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). Each of these schemes is predominantly a final salary plan in which future pension levels are defined
relative to number of years’ service and final salary. Retirement age varies by scheme. The nature of these schemes is that the employees
only contribute whilst they active employees of a scheme, 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 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, and as such, it is assumed that the entire cost of the Railways Scheme is met by 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 Railways scheme.
228
228
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
25. Share-based payments (continued)
26. Retirement benefits and liabilities (continued)
PSP awards made in August 2021 of 769,165 shares include performance criteria weighted to 50% against free cash flow targets and
50% against TSR performance.
Defined benefit scheme risks
Through its defined benefit pension schemes, the Group is exposed to a number of risks, the most notable of which are as follows:
Risk
Asset volatility – discount rates (determined with reference to
AA corporate bond yields) are used to determine expected
returns on plan assets. Asset yields which vary from this
expected return will result in an increase or decrease in the
overall surplus/deficit.
Mitigation
Pension scheme assets are held in a diversified portfolio of assets in order to
minimize risk arising from asset return volatility. Investments are well
diversified, such that failure of any singular investment would not have a
material impact on the overall level of assets. The asset investment strategy is
agreed following consultation between the Group and the plan Trustees.
Following the 23 September 2022 UK ‘mini budget’, gilt yields
increased at an unprecedented rate causing significant market
turmoil – increasing the asset volatility risk during the year.
Inflation – the majority of pension scheme obligations are
index-linked and therefore exposed to inflation risk. Increasing
inflation will lead to higher liabilities. Inflation assumptions as
applied to pension obligations are a long-term assessment of
inflation over the life of the scheme.
Life expectancy – the majority of obligations are to provide
benefits for the life of the member and therefore changes in life
expectancy of the scheme participants will impact the liability
position.
Interest rate – movements in corporate bond yields will result
in a change to the plan liabilities. Similarly, movements in gilt
yields in isolation will have an impact on the schemes funding
positions.
SSaallaarryy iinnccrreeaasseess – changes in long-term salary increases will
impact the final salary position on which pension benefits are
determined.
The Group and the plan Trustees monitor the schemes closely – especially
during periods of significant turmoil and will maintain a diversified investment
strategy intended to minimize asset volatility.
The plan Trustees asset management policy includes investing in inflation
hedging assets such as inflation linked bonds to mitigate this risk
.
The Group monitors the risk of increasing life expectancy and will, from time to
time, take out longevity swaps to mitigate this risk – the most recent of which
was in 2009.
The trustee’s asset management policy includes investing in bonds and
therefore any impact on change in bond yields on the plan liabilities is partially
offset by returns on assets.
The asset portfolio invests in assets which increase in value as interest rates
decrease and thus the schemes holdings are designed to hedge against
interest rate risk for most of the funded liabilities.
In 2019, the Group closed the Babcock International Group Pension Scheme to
future accrual for some employees; and, in 2020, closed the Rosyth Royal
Dockyard Pension Scheme to future accrual for all employees.
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 Devonport Royal Dockyard Scheme as at 31 March 2023 and the
actuarial valuation of the Babcock Rail Ltd section of the Railways Pension Scheme as at 31 December 2022 have commenced):
PSP awards made in September 2021 of 2,407,553 shares were made via the use of restricted shares with a three-year vesting period.
There are no performance conditions attached.
For PSP awards made in August 2022, 3,318,343 were made via the use of restricted shares with a three-year vesting period. There are
no performance conditions attached. A further 403,255 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 140,340 matching shares
(2022: 159,494 matching shares) at a cost of £0.4 million (2022: £0.5 million).
The Group also operates the Babcock Employee Share Plan International which reflects the structure of the UK Plan. During the year no
matching shares were purchased on the open market (2022: 4,784 matching shares) and 1,055 matching shares vested (2022: 2,823
matching shares) leaving a balance of 5,918 matching shares (2022: 6,973 matching shares).
26. Retirement benefits and liabilities
Defined contribution schemes
Pension costs for defined contribution schemes are as follows:
Statement of financial position assets and liabilities recognised are as follows:
Defined contribution schemes
Defined benefit schemes
Retirement benefits – funds in surplus
Retirement benefits – funds in deficit
Year ended
Year ended
31 March 2023
31 March 2022
£m
94.6
£m
83.4
31 March 2023
31 March 2022
£m
94.8
(156.2)
(61.4)
£m
300.9
(109.3)
191.6
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). Each of these schemes is predominantly a final salary plan in which future pension levels are defined
relative to number of years’ service and final salary. Retirement age varies by scheme. The nature of these schemes is that the employees
only contribute whilst they active employees of a scheme, 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 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, and as such, it is assumed that the entire cost of the Railways Scheme is met by 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 Railways scheme.
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, which commenced winding up in 2021, and for which the MOD retains liability.
228
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
229
229
Babcock Rail Ltd
section of the
Railways Pension
Scheme
31/03/2020 31/03/2022 31/03/2021 31/12/2019
180
Attained age
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
£1,894m
90%
£1,529m
105%
£946m
86%
£271m
92%
–
Projected unit Projected unit Projected unit
Babcock
International Group
Scheme
Devonport
Royal Dockyard
Scheme
Rosyth
Royal Dockyard
Scheme
1,607
308
Notes to the Group financial statements (continued)
26. Retirement benefits and liabilities (continued)
The Group’s cash contribution rates payable to the schemes are expected to be as follows:
Future service contribution rate
Future service cash contributions
Deficit contributions
Additional longevity swap payments
Expected employer cash costs for 2023/24
Expected salary sacrifice contributions
Expected total employer contributions
Devonport
Royal Dockyard
Scheme
21.6%
£12.1m
£18.6m
£7.3m
£38.0m
£5.8m
£43.8m
Babcock
International
Group
Scheme
30.3%
£3.2m
£13.7m
£3.6m
£20.5m
£0.4m
£20.9m
Rosyth Royal
Dockyard
Scheme
N/A
–
£12.4m
£4.3m
£16.7m
–
£16.7m
Babcock Rail
Ltd section of
the Railways
Pension
Scheme
12.48%
£0.5m
£1.5m
–
£2.0m
£0.5m
£2.5m
Other
14.0% -
48.0%
£2.3m
£1.6m
–
£3.9m
£0.8m
£4.7m
Total
–
£18.1m
£47.8m
£15.2m
£81.1m
£7.5m
£88.6m
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 is completed; 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 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 2023 by
independent qualified actuaries for IAS 19 purposes, on a best estimate basis, using the following assumptions:
March 2023
Rate of increase in pensionable salaries
Rate of increase in pensions (past service)
Discount rate
Inflation rate (RPI) – year 1
Inflation rate (RPI) – thereafter
Inflation rate (CPI) – year 1
Inflation rate (CPI) – thereafter
Weighted average duration of cash flows (years)
Total life expectancy for current pensioners aged 65 (years) – male
Total life expectancy for current pensioners aged 65 (years) – female
Total life expectancy for future pensioners currently aged 45 (years) – male
Total life expectancy for future pensioners currently aged 45 (years) – female
March 2022
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 cash flows (years)
Total life expectancy for current pensioners aged 65 (years)
Total life expectancy for future pensioners currently aged 45 (years)
230
230
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Devonport
Royal
Dockyard
Scheme
3.0%
2.8%
4.8%
6.9%
3.3%
4.7%
2.8%
13
85.5
87.5
86.2
88.5
3.4%
3.2%
2.7%
3.7%
3.2%
16
85.9
86.6
Babcock
International
Group Scheme
3.0%
3.2%
4.8%
6.9%
3.3%
4.7%
2.8%
12
86.3
88.9
86.8
89.4
Rosyth Royal
Dockyard
Scheme
–
3.3%
4.8%
6.9%
3.3%
4.7%
2.8%
13
84.4
86.8
85.6
88.1
3.4%
3.5%
2.7%
3.7%
3.2%
14
86.8
87.4
–
3.7%
2.7%
3.7%
3.2%
16
85.0
85.9
Babcock Rail
Ltd section of
the Railways
Pension
Scheme
0.5%
2.9%
4.8%
6.9%
3.3%
4.7%
2.8%
13
85.0
87.3
86.0
88.5
0.5%
3.2%
2.7%
3.6%
3.2%
17
85.3
86.4
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
26. Retirement benefits and liabilities (continued)
The Group’s cash contribution rates payable to the schemes are expected to be as follows:
26. Retirement benefits and liabilities (continued)
The fair value of the assets and the present value of the liabilities of the Group pension schemes at 31 March were as follows:
Future service contribution rate
Future service cash contributions
Deficit contributions
Additional longevity swap payments
Expected employer cash costs for 2023/24
Expected salary sacrifice contributions
Expected total employer contributions
Devonport
Royal Dockyard
Scheme
21.6%
£12.1m
£18.6m
£7.3m
£38.0m
£5.8m
£43.8m
Babcock
International
Group
Scheme
30.3%
£3.2m
£13.7m
£3.6m
£20.5m
£0.4m
£20.9m
Rosyth Royal
Dockyard
Scheme
N/A
–
£12.4m
£4.3m
£16.7m
–
£16.7m
Babcock Rail
Ltd section of
the Railways
Pension
Scheme
12.48%
£0.5m
£1.5m
–
£2.0m
£0.5m
£2.5m
Other
14.0% -
48.0%
£2.3m
£1.6m
–
£3.9m
£0.8m
£4.7m
Total
–
£18.1m
£47.8m
£15.2m
£81.1m
£7.5m
£88.6m
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 is completed; 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 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 2023 by
independent qualified actuaries for IAS 19 purposes, on a best estimate basis, using the following assumptions:
March 2023
Rate of increase in pensionable salaries
Rate of increase in pensions (past service)
Discount rate
Inflation rate (RPI) – year 1
Inflation rate (RPI) – thereafter
Inflation rate (CPI) – year 1
Inflation rate (CPI) – thereafter
Weighted average duration of cash flows (years)
Total life expectancy for current pensioners aged 65 (years) – male
Total life expectancy for current pensioners aged 65 (years) – female
Total life expectancy for future pensioners currently aged 45 (years) – male
Total life expectancy for future pensioners currently aged 45 (years) – female
March 2022
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 cash flows (years)
Total life expectancy for current pensioners aged 65 (years)
Total life expectancy for future pensioners currently aged 45 (years)
Devonport
Royal
Dockyard
Scheme
Babcock
Rosyth Royal
International
Group Scheme
Dockyard
Scheme
Babcock Rail
Ltd section of
the Railways
Pension
Scheme
3.0%
2.8%
4.8%
6.9%
3.3%
4.7%
2.8%
13
85.5
87.5
86.2
88.5
3.4%
3.2%
2.7%
3.7%
3.2%
16
85.9
86.6
3.0%
3.2%
4.8%
6.9%
3.3%
4.7%
2.8%
12
86.3
88.9
86.8
89.4
3.4%
3.5%
2.7%
3.7%
3.2%
14
86.8
87.4
–
3.3%
4.8%
6.9%
3.3%
4.7%
2.8%
13
84.4
86.8
85.6
88.1
–
3.7%
2.7%
3.7%
3.2%
16
85.0
85.9
0.5%
2.9%
4.8%
6.9%
3.3%
4.7%
2.8%
13
85.0
87.3
86.0
88.5
0.5%
3.2%
2.7%
3.6%
3.2%
17
85.3
86.4
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 and annuities
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
2023
2022
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
(3.1)
301.7
–
6.0
1,227.7
1,524.7
(231.8)
2,825.2
79%
21%
450.7
686.6
1,773.6
2,910.9
10.6
0.2
–
148.0
95.5
1.4
–
255.7
100%
–
45.7
65.3
130.5
241.5
26.6
5.9
0.4
17.5
34.1
307.8
0.4
171.5
31.6
364.0
44.1
46.0
45.1 1,368.3
21.7 1,547.8
(10.1)
(241.9)
107.1 3,188.0
80%
20%
70%
30%
1,924.1
2,094.0
(283.5)
4,220.3
84%
16%
518.1
21.7
34.7
786.6
40.6 1,944.7
97.0 3,249.4
756.0
1,066.2
2,170.4
3,992.6
14.3
0.1
–
182.9
77.2
1.3
–
275.8
100%
–
65.7
93.5
167.9
327.1
30.6
5.1
0.4
31.8
76.5
369.2
44.5
260.7
77.5
101.8
(10.2)
237.0
46%
54%
2,078.8
2,197.1
(293.7)
4,733.1
82%
18%
35.8
132.7
53.3
221.8
857.5
1,292.4
2,391.6
4,541.5
(85.7)
14.2
10.1
(61.4)
227.7
(51.3)
15.2
191.6
* The matching assets for the Babcock International Group Pension Scheme, Devonport Royal Dockyard Pension Scheme and Rosyth Royal Dockyard Pension Scheme
primarily comprise a “Liability Driven Investment” portfolio for each scheme, which invest in gilts, Network Rail bonds, gilt repurchase agreements, interest rate
and inflation swaps, asset swaps and cash, on a segregated basis. For the Babcock International Group Pension Scheme and the Devonport Royal Dockyard Pension
Scheme, there are also investments in investment grade credit, via both segregated portfolios and pooled investment vehicles. The various segregated portfolios
and pooled investment vehicle each utilise derivative contracts. The Trustee has authorised the use of derivatives by the investment managers for efficient
portfolio management purposes including to reduce certain investment risks such as interest rate risk and inflation risk. The principal investment in derivatives is
gilt repurchase agreements, interest rate and inflation swaps in the matching portfolios; total return swaps in the return seeking portfolios. These derivatives are
included within the matching assets and equities classifications. The matching assets category includes gross assets of £2,580 million (2022: £3,966 million) and
associated repurchase agreement liabilities of £1,055 million (2022: £1,872 million). Repurchase agreements are entered into with counterparties to better
offset the scheme’s exposures to interest and inflation rates, whilst remaining invested in assets of a similar risk profile.
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 using Level 3 inputs.
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
Total included within operating profit
Net interest (credit)/cost
Total included within income statement
Principal
schemes
£m
21.7
6.2
27.9
(8.5)
19.4
2023
Railways
scheme
£m
1.3
0.5
1.8
1.4
3.2
Other
schemes
£m
2.8
0.1
2.9
(0.4)
2.5
Total
£m
25.8
6.8
32.6
(7.5)
25.1
Principal
schemes
£m
25.7
6.6
32.3
1.5
33.8
2022
Railways
scheme
£m
2.0
0.5
2.5
2.1
4.6
Other
schemes
£m
3.4
0.3
3.7
0.1
3.8
Total
£m
31.1
7.4
38.5
3.7
42.2
230
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
231
231
Notes to the Group financial statements (continued)
26. Retirement benefits and liabilities (continued)
Amounts recorded in the Group statement of comprehensive income
Actual return less interest on pension scheme
assets
Experience (losses)/gains arising on
scheme liabilities
Changes in assumptions on
scheme liabilities
At 31 March
Principal
schemes
£m
Year ended 31 March 2023
Other
schemes
£m
Railways
scheme
£m
Year ended 31 March 2022
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Total
£m
(1,437.0)
(17.1)
(79.0) (1,533.1)
77.0
13.1
(1.7)
88.4
(135.6)
(18.0)
(9.3)
(162.9)
(70.6)
14.2
2.4
(54.0)
1,111.2
(461.4)
101.2
66.1
81.2 1,293.6
(402.4)
(7.1)
238.8
245.2
27.4
54.7
21.9
22.6
288.1
322.5
Analysis of movement in the Group statement of financial position
Fair value of plan assets
(including reimbursement rights)
At 1 April
Interest on assets
Actuarial (loss)/gain 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 (gain)/loss – financial
Benefits paid
Settlements
At 31 March
Net (deficit)/surplus at 31 March
Principal
schemes
£m
Year ended 31 March 2023
Other
schemes
£m
Railways
scheme
£m
Year ended 31 March 2022
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Total
£m
4,220.3
113.4
(1,437.0)
167.4
0.1
(239.0)
–
2,825.2
3,992.6
21.7
6.2
105.0
0.1
135.6
(38.2)
(1,073.1)
(239.0)
–
2,910.9
(85.7)
275.8
7.3
(17.1)
2.5
–
(12.8)
–
255.7
327.1
1.3
0.5
8.7
–
18.0
(3.6)
(97.7)
(12.8)
–
241.5
14.2
5.4
237.0 4,733.1
126.1
(79.0) (1,533.1)
174.5
4.6
0.1
–
(256.6)
(4.8)
(56.1)
(56.1)
107.1 3,188.0
2.8
0.1
4.9
–
9.3
(1.7)
221.8 4,541.5
25.8
6.8
118.6
0.1
162.9
(43.5)
(79.3) (1,250.1)
(256.6)
(4.8)
(56.1)
(56.1)
97.0 3,249.4
(61.4)
10.1
4,123.7
82.3
77.0
182.5
0.2
(245.4)
–
4,220.3
4,290.0
25.6
6.6
83.8
0.2
70.6
(11.5)
(227.3)
(245.4)
–
3,992.6
227.7
265.6
5.2
13.1
2.6
–
(10.7)
–
275.8
369.6
2.0
0.5
7.3
–
(14.2)
(3.5)
(23.9)
(10.7)
–
327.1
(51.3)
234.3
4.7
(1.7)
5.1
–
(5.4)
–
237.0
4,623.6
92.2
88.4
190.2
0.2
(261.5)
–
4,733.1
242.9
3.5
0.3
4.8
–
(2.4)
–
(21.9)
(5.4)
–
221.8
15.2
4,902.5
31.1
7.4
95.9
0.2
54.0
(15.0)
(273.1)
(261.5)
–
4,541.5
191.6
The movement in net deficits for the year ended 31 March 2023 is as a result of the movement in assets and liabilities shown above.
The disclosures below relate to post-retirement benefit schemes which are accounted for as defined benefit schemes in accordance
with IAS 19. The changes to the Group statement of financial position at 31 March 2023 and the changes to the Group income
statement for the year to March 2024, 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%
232
232
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Defined
benefit
obligations
2023
£m
3,249.4
(192.1)
211.1
145.7
(137.2)
60.2
(60.2)
13.3
(12.8)
Income
statement
2024
£m
25.0
(11.5)
10.5
7.8
(7.4)
3.0
(3.0)
0.9
(0.9)
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
26. Retirement benefits and liabilities (continued)
26. Retirement benefits and liabilities (continued)
Amounts recorded in the Group statement of comprehensive income
Actual return less interest on pension scheme
assets
Experience (losses)/gains arising on
scheme liabilities
Changes in assumptions on
scheme liabilities
At 31 March
Year ended 31 March 2023
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Year ended 31 March 2022
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Total
£m
(1,437.0)
(17.1)
(79.0) (1,533.1)
77.0
13.1
(1.7)
88.4
(135.6)
(18.0)
(9.3)
(162.9)
(70.6)
14.2
2.4
(54.0)
1,111.2
(461.4)
101.2
66.1
81.2 1,293.6
(7.1)
(402.4)
238.8
245.2
27.4
54.7
21.9
22.6
288.1
322.5
Analysis of movement in the Group statement of financial position
Year ended 31 March 2023
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Year ended 31 March 2022
Principal
schemes
£m
Railways
scheme
£m
Other
schemes
£m
Total
£m
Total
£m
4,220.3
275.8
237.0 4,733.1
4,123.7
265.6
234.3
4,623.6
113.4
7.3
5.4
126.1
(1,437.0)
(17.1)
(79.0) (1,533.1)
82.3
77.0
167.4
0.1
4.6
–
174.5
182.5
0.1
0.2
(239.0)
(12.8)
(4.8)
(256.6)
(245.4)
(10.7)
(5.4)
(261.5)
–
(56.1)
(56.1)
–
2,825.2
255.7
107.1 3,188.0
4,220.3
275.8
237.0
4,733.1
3,992.6
327.1
221.8 4,541.5
4,290.0
369.6
242.9
4,902.5
21.7
6.2
105.0
0.1
135.6
(38.2)
(1,073.1)
(239.0)
2.8
0.1
4.9
–
9.3
(1.7)
25.8
6.8
118.6
0.1
162.9
(43.5)
25.6
6.6
83.8
0.2
70.6
(11.5)
(79.3) (1,250.1)
(4.8)
(256.6)
(227.3)
(245.4)
5.2
13.1
2.6
–
–
2.0
0.5
7.3
–
(14.2)
(3.5)
(23.9)
(10.7)
–
4.7
(1.7)
5.1
–
–
92.2
88.4
190.2
0.2
–
3.5
0.3
4.8
–
(2.4)
–
31.1
7.4
95.9
0.2
54.0
(15.0)
(21.9)
(273.1)
(5.4)
(261.5)
–
–
2.5
–
–
1.3
0.5
8.7
–
18.0
(3.6)
(97.7)
(12.8)
–
–
(56.1)
(56.1)
–
2,910.9
(85.7)
241.5
14.2
97.0 3,249.4
3,992.6
327.1
221.8
4,541.5
10.1
(61.4)
227.7
(51.3)
15.2
191.6
The movement in net deficits for the year ended 31 March 2023 is as a result of the movement in assets and liabilities shown above.
The disclosures below relate to post-retirement benefit schemes which are accounted for as defined benefit schemes in accordance
with IAS 19. The changes to the Group statement of financial position at 31 March 2023 and the changes to the Group income
statement for the year to March 2024, if the assumptions were sensitised by the amounts below, would be:
Fair value of plan assets
(including reimbursement rights)
At 1 April
Interest on assets
Actuarial (loss)/gain on assets
Employer contributions
Employee contributions
Present value of benefit obligations
Benefits paid
Settlements
At 31 March
At 1 April
Service cost
Incurred expenses
Interest cost
Employee contributions
Experience loss/(gain)
Actuarial (gain)/loss – demographics
Actuarial (gain)/loss – financial
Benefits paid
Settlements
At 31 March
Net (deficit)/surplus at 31 March
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
2023
£m
3,249.4
(192.1)
211.1
145.7
(137.2)
60.2
(60.2)
13.3
(12.8)
Income
statement
2024
£m
25.0
(11.5)
10.5
7.8
(7.4)
3.0
(3.0)
0.9
(0.9)
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. There have been no changes in the methodology for the
calculation of the sensitivities since the prior year.
27. Changes in net debt including loans to joint ventures and associates and lease
receivables
Cash and bank balances
Bank overdrafts
Cash, cash equivalents and bank
overdrafts
Debt
Derivatives hedging Group debt
Lease liabilities
Changes in liabilities from financing
arrangements
Lease receivables
Loans to joint ventures and associates
Derivatives hedging interest on Group debt
Net debt
31 March
2022
£m
1,146.3
(389.8)
756.5
(1,321.3)
(29.3)
(434.1)
(1,784.7)
47.4
12.1
–
(968.7)
Cash flow
£m
(687.9)
366.6
(321.3)
556.2
(0.8)
108.5
663.9
(31.9)
(2.4)
–
308.3
Additional
leases
£m
–
–
Other
non-cash
movement1
£m
–
–
Clarification
of net debt
definition2
£m
–
–
Changes in
fair value
£m
–
–
Exchange
movement
£m
(6.7)
1.0
–
–
–
(117.0)
(117.0)
28.5
–
–
(88.5)
–
(1.6)
–
223.4
221.8
–
(0.2)
–
221.6
–
–
–
–
–
–
–
(36.1)
(36.1)
–
37.2
21.8
–
59.0
–
–
(3.0)
56.0
(5.7)
(36.3)
–
(9.6)
(45.9)
(5.4)
–
–
(57.0)
31 March
2023
£m
451.7
(22.2)
429.5
(765.8)
(8.3)
(228.8)
(1,002.9)
38.6
9.5
(39.1)
(564.4)
1. Other non-cash movements predominantly relate to the disposal of lease liabilities and associated lease receivables as part of the disposal transactions described in
note 28.
2. During the year the definition of net debt has been clarified, resulting in the inclusion of the interest rate swap hedging Group debt, which was excluded in the
prior year.
Cash and bank balances
Bank overdrafts
Cash, cash equivalents and bank overdrafts
Debt
Derivatives hedging Group debt
Lease liabilities
Changes in liabilities from financing arrangements
Lease receivables
Loans to joint ventures and associates
Net debt
31 March
2021
£m
904.8
(373.9)
530.9
(1,333.6)
(19.1)
(612.3)
(1,965.0)
39.6
42.1
(1,352.4)
Cash flow
£m
238.6
(15.9)
222.7
8.6
–
113.0
121.6
(36.9)
(29.6)
277.8
Additional
leases
£m
–
–
–
–
–
(93.8)
(93.8)
41.9
–
(51.9)
Other non-cash
movement
£m
–
–
–
(2.0)
–
159.2
157.2
–
(0.4)
156.8
Changes in fair
value
£m
–
–
–
(1.6)
(10.2)
–
(11.8)
–
–
(11.8)
Exchange
movement
£m
2.9
–
2.9
7.3
–
(0.2)
7.1
2.8
–
12.8
31 March
2022
£m
1,146.3
(389.8)
756.5
(1,321.3)
(29.3)
(434.1)
(1,784.7)
47.4
12.1
(968.7)
232
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
233
233
Notes to the Group financial statements (continued)
28. Acquisition and disposal of subsidiaries, businesses and joint ventures
and associates
Acquisitions
There have been no acquisitions in the year ended 31 March 2023.
In the prior year, the Group acquired the remaining 50% of Naval Ship Management (Australia) Pty Limited on 15 March 2022. The
Group had previously held a 50% interest in this entity since May 2012 which was classified as a joint venture. NSM provides repair,
engineering and maintenance services to the Australian Navy. The Group paid cash consideration of £33.1 million (AUD60 million) for
this acquisition.
The fair value of assets and liabilities recognised as a result of the acquisition were as follows:
Fair value gain on previously held interest:
Carrying value of previously held interest
Fair value gain on previously held interest
Fair value of previously held interest at acquisition date
Purchase consideration:
Cash consideration
Fair value of previously held interest
Total consideration
Assets acquired:
Property, plant and equipment
Right of use assets
Deferred tax assets
Contract assets
Trade and other receivables
Cash and cash equivalents
Deferred tax liability
Income tax payable
Lease liabilities
Contract liabilities
Trade and other payables
Provisions
Net identifiable assets acquired
Goodwill
Intangible assets
Net assets acquired
Year ended
31 March 2022
(restated)
Naval Ship
Management
£m
0.7
32.4
33.1
33.1
33.1
66.2
0.4
0.5
0.7
16.3
11.6
17.6
(18.9)
(0.4)
(0.5)
(8.2)
(34.5)
(3.7)
(19.1)
22.3
63.0
66.2
Post-acquisition, Naval Ship Management (Australia) Pty Limited contributed £0.7 million to the profit before tax of the Group for the
year ended 31 March 2022. If this entity had been owned for the full financial year the contribution to profit before tax would have
been £10.5 million.
The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by intangible assets of
£63.0 million, relating to customer relationships, and goodwill of £22.3 million, representing potential for future synergies arising from
combining the acquired businesses with the Group’s existing business. Goodwill is not deductible for tax purposes. Post-acquisition, we
determined that assumptions used to calculate a pain/gain share provision did not reflect the facts and circumstances at the acquisition
date. This resulted in an increase to provisions of £2.4 million at 31 March 2022. The reduction in net assets acquired has increased the
goodwill by £1.0 million, increased acquired intangibles by £1.0 million, increased deferred tax assets by £0.4 million at 31 March
2022. Further detail is included in note 23.
234
234
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
28. Acquisition and disposal of subsidiaries, businesses and joint ventures
and associates
Acquisitions
There have been no acquisitions in the year ended 31 March 2023.
In the prior year, the Group acquired the remaining 50% of Naval Ship Management (Australia) Pty Limited on 15 March 2022. The
Group had previously held a 50% interest in this entity since May 2012 which was classified as a joint venture. NSM provides repair,
engineering and maintenance services to the Australian Navy. The Group paid cash consideration of £33.1 million (AUD60 million) for
this acquisition.
The fair value of assets and liabilities recognised as a result of the acquisition were as follows:
Fair value gain on previously held interest:
Carrying value of previously held interest
Fair value gain on previously held interest
Fair value of previously held interest at acquisition date
Purchase consideration:
Cash consideration
Fair value of previously held interest
Total consideration
Assets acquired:
Property, plant and equipment
Right of use assets
Deferred tax assets
Contract assets
Trade and other receivables
Cash and cash equivalents
Deferred tax liability
Income tax payable
Lease liabilities
Contract liabilities
Trade and other payables
Provisions
Net identifiable assets acquired
Goodwill
Intangible assets
Net assets acquired
been £10.5 million.
Post-acquisition, Naval Ship Management (Australia) Pty Limited contributed £0.7 million to the profit before tax of the Group for the
year ended 31 March 2022. If this entity had been owned for the full financial year the contribution to profit before tax would have
The excess of the fair value of the consideration paid over the fair value of the assets acquired is represented by intangible assets of
£63.0 million, relating to customer relationships, and goodwill of £22.3 million, representing potential for future synergies arising from
combining the acquired businesses with the Group’s existing business. Goodwill is not deductible for tax purposes. Post-acquisition, we
determined that assumptions used to calculate a pain/gain share provision did not reflect the facts and circumstances at the acquisition
date. This resulted in an increase to provisions of £2.4 million at 31 March 2022. The reduction in net assets acquired has increased the
goodwill by £1.0 million, increased acquired intangibles by £1.0 million, increased deferred tax assets by £0.4 million at 31 March
2022. Further detail is included in note 23.
Year ended
31 March 2022
(restated)
Naval Ship
Management
£m
0.7
32.4
33.1
33.1
33.1
66.2
0.4
0.5
0.7
16.3
11.6
17.6
(18.9)
(0.4)
(0.5)
(8.2)
(34.5)
(3.7)
(19.1)
22.3
63.0
66.2
28. Acquisition and disposal of subsidiaries, businesses and joint ventures and
associates (continued)
Disposals
Year ended 31 March 2023
On 19 July 2022, the Group announced it had entered into a sale and purchase agreement to dispose of part of its aerial emergency
services business in Europe. The disposal group was part of the Aviation sector and provided Aerial Emergency Services, including
medical, firefighting and search & rescue to customers and communities, in Italy, Spain, Portugal, Norway, Sweden and Finland. The
disposal completed on 28 February 2023. The Group received consideration of £187.1 million.
On 1 September 2022, the Group entered into a sale and purchase agreement to dispose of its Civil Training business. The disposal
group was part of the Land sector and the disposal completed on 1 February 2023. The Group received consideration of £5.5 million.
Year ended 31 March 2023
Goodwill
Investment in joint ventures and associates
Other intangible assets
Property, plant and equipment
Right of use assets
Deferred tax assets
Other non-current assets
Inventory
Trade and other receivables
Derivatives
Income tax receivable
Cash, cash equivalents and bank overdrafts
Other non-current liabilities
Bank and other borrowings
Lease liabilities
Deferred tax liability
Income tax payable
Trade and other payables
Other current liabilities
Provisions
Net assets disposed
Cumulative currency translation loss
Total
Consideration
Disposal costs
Net consideration after disposal costs
Loss on disposal
Disposal related items
Business acquisition, merger and divestment related items
Sale proceeds
Sale proceeds less cash disposed of
Less non-cash proceeds
Less transaction costs
Net cash inflow
Aerial Emergency
Services
£m
–
1.0
18.9
236.8
182.0
20.6
4.4
35.4
99.5
4.2
1.5
10.5
(0.2)
(1.6)
(218.1)
(6.3)
(0.6)
(128.7)
–
(15.6)
243.7
(1.2)
242.5
187.1
(18.1)
169.0
(73.5)
(43.4)
(116.9)
187.1
176.6
–
(18.1)
158.5
Civil Training
£m
0.6
–
–
0.1
–
–
–
–
9.4
–
–
2.6
–
–
–
–
–
(4.6)
–
–
8.1
–
8.1
5.5
(1.3)
4.2
(3.9)
–
(3.9)
5.5
2.9
(1.5)
(1.3)
0.1
Other
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3.1
3.1
–
–
–
–
–
Total
£m
0.6
1.0
18.9
236.9
182.0
20.6
4.4
35.4
108.9
4.2
1.5
13.1
(0.2)
(1.6)
(218.1)
(6.3)
(0.6)
(133.3)
–
(15.6)
251.8
(1.2)
250.6
192.6
(19.4)
173.2
(77.4)
(40.3)
(117.7)
192.6
179.5
(1.5)
(19.4)
158.6
Disposal related items in relation to the Aerial Emergency Services disposal include asset impairments for assets not disposed but relating
to the Aerial Emergency Services businesses whose carrying value exceeded recoverable amount following the disposal transaction
along with provisions for certain warranty related items.
234
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
235
235
Notes to the Group financial statements (continued)
28. Acquisition and disposal of subsidiaries, businesses and joint ventures and
associates (continued)
Disposals
Year ended 31 March 2022
On 11 March 2021, the Group announced that it had entered into a sale and purchase agreement to dispose of the Oil and Gas
business, which provides offshore Oil and Gas crew transportation services in the UK, Denmark and Australia. The disposal was made as
part of the Group’s targeted disposals programme. The disposal completed on 1 September 2021, on which date control of the Oil and
Gas business passed to CHC Group LLC. The Group received consideration of £10 million.
On 13 August 2021, the Group announced that it had entered into a sale and purchase agreement to dispose of Frazer-Nash
Consultancy, which provides engineering and technology solutions across a broad range of critical national infrastructure. The disposal
was made as part of the Group’s targeted disposals programme. The disposal completed on 20 October 2021, on which date control of
Frazer-Nash Consultancy passed to KBR Inc. The Group received consideration of £291.7 million.
On 24 December 2021, the Group announced the disposal of the Power business to M Group Services, which provides engineering
services in the UK overhead line electric transmission and distribution industry. The disposal was made as part of the Group’s targeted
disposals programme. The disposal completed on 24 December 2021, on which date control passed to M Group Services. The Group
received consideration of £50 million.
On 13 September 2021, the Group announced a definitive agreement with Equitix Investment Management Limited for the sale of its
15.4% shareholding in AirTanker Holdings Limited, a joint venture with Airbus, Thales and Rolls-Royce which owns 14 A330 Voyager
aircraft to support air-to-air refuelling, air transport and ancillary services for the MOD. The Group has retained its 23.5% shareholding in
AirTanker Services Limited, which operates these aircraft. The disposal was made as part of the Group’s targeted disposals programme.
The disposal completed on 9 March 2022, on which date control passed to Equitix. The Group received consideration of £95.6 million,
and shareholder loans of £31.5 million were repaid.
Year ended 31 March 2022
Goodwill
Investment in joint ventures and associates
Other intangible assets
Property, plant and equipment
Right of use assets
Deferred tax assets
Other non-current assets
Inventory
Trade and other receivables
Derivatives
Income tax receivable
Cash, cash equivalents and bank overdrafts
Other non-current liabilities
Bank and other borrowings
Lease liabilities
Deferred tax liability
Income tax payable
Trade and other payables
Other current liabilities
Provisions
Net assets disposed
Disposal costs
Cumulative currency translation loss
Recycle of hedge reserve
(Loss)/profit on disposal
Sale proceeds
Sale proceeds less cash disposed of
Less non-cash proceeds
Less transaction costs
Net cash inflow
Oil and Gas
business
£m
0.4
–
15.1
125.8
18.8
–
3.6
46.5
–
1.5
–
–
–
(129.7)
(12.0)
(1.0)
(39.6)
–
(1.3)
28.1
2.0
(7.3)
–
(12.8)
10.0
10.0
(2.0)
8.0
Frazer-Nash Consultancy
£m
64.5
–
2.1
2.2
3.9
0.5
–
–
31.0
–
2.9
4.9
–
–
(5.4)
–
–
(13.9)
–
–
92.7
10.1
–
–
188.9
291.7
286.8
(10.1)
276.7
Power
£m
44.1
–
–
4.5
1.9
0.3
–
0.1
9.3
–
–
4.2
–
–
(2.0)
–
–
(9.9)
–
(1.2)
51.3
2.7
–
–
(4.0)
50.0
45.8
(2.7)
43.1
AirTanker
£m
80.0
23.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
103.8
2.7
–
20.8
(31.7)
95.6
95.6
(2.7)
92.9
Total
£m
189.0
23.8
2.1
21.8
131.6
19.6
–
3.7
86.8
–
4.4
9.1
–
–
(137.1)
(12.0)
(1.0)
(63.4)
–
(2.5)
275.9
17.5
(7.3)
20.8
140.4
447.3
438.2
(17.5)
420.7
236
236
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
28. Acquisition and disposal of subsidiaries, businesses and joint ventures and
29. Transactions with non-controlling interests
There were no material transactions with non-controlling interests in the current or prior year.
30. Contingent liabilities
A contingent liability is a possible obligation arising from past events whose existence will be confirmed only on the occurrence or non-
occurrence of uncertain future events outside the Group’s control, or a present obligation that is not recognised because it is not
probable that an outflow of economic benefits will occur or the value of such outflow cannot be measured reliably. The Group does not
recognise contingent liabilities. There are a number of contingent liabilities that arise in the normal course of business, including:
The nature of the Group’s long-term contracts means that there are reasonably frequent contractual issues, variations and
renegotiations that arise in the ordinary course of business, including liabilities that arise on completion of contracts and on conclusion
of relationships with joint ventures and associates. The Group takes account of the advice of experts, both internal and external, in
making judgements on contractual issues and whether the outcome of negotiations will result in an obligation to the Group. The
Directors do not believe that the outcome of these matters will result in any material adverse change in the Group’s financial position.
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.
The Group is subject to corporate and other tax rules in the jurisdictions in which it operates. Changes in tax rates, tax reliefs and tax
laws, or interpretation of the law, by the relevant tax authorities may result in financial and reputational damage to the Group. This may
affect the Group’s financial condition and performance.
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.
Corporate rules in those jurisdictions may also extend to compensatory trade agreements, or economic offset rules, where we may have
to commit to use local content in delivering programmes of work. Delivery of offset is also subject to interpretations of law and
agreement with local authorities, which we monitor closely but may give rise to financial and reputational damage to the Group if not
undertaken appropriately.
31. Capital and other financial commitments
Capital commitments
Contracts placed for future capital expenditure not provided for in the financial statements
31 March 2023
£m
7.8
31 March 2022
£m
21.3
associates (continued)
Disposals
Year ended 31 March 2022
On 11 March 2021, the Group announced that it had entered into a sale and purchase agreement to dispose of the Oil and Gas
business, which provides offshore Oil and Gas crew transportation services in the UK, Denmark and Australia. The disposal was made as
part of the Group’s targeted disposals programme. The disposal completed on 1 September 2021, on which date control of the Oil and
Gas business passed to CHC Group LLC. The Group received consideration of £10 million.
On 13 August 2021, the Group announced that it had entered into a sale and purchase agreement to dispose of Frazer-Nash
Consultancy, which provides engineering and technology solutions across a broad range of critical national infrastructure. The disposal
was made as part of the Group’s targeted disposals programme. The disposal completed on 20 October 2021, on which date control of
Frazer-Nash Consultancy passed to KBR Inc. The Group received consideration of £291.7 million.
On 24 December 2021, the Group announced the disposal of the Power business to M Group Services, which provides engineering
services in the UK overhead line electric transmission and distribution industry. The disposal was made as part of the Group’s targeted
disposals programme. The disposal completed on 24 December 2021, on which date control passed to M Group Services. The Group
received consideration of £50 million.
On 13 September 2021, the Group announced a definitive agreement with Equitix Investment Management Limited for the sale of its
15.4% shareholding in AirTanker Holdings Limited, a joint venture with Airbus, Thales and Rolls-Royce which owns 14 A330 Voyager
aircraft to support air-to-air refuelling, air transport and ancillary services for the MOD. The Group has retained its 23.5% shareholding in
AirTanker Services Limited, which operates these aircraft. The disposal was made as part of the Group’s targeted disposals programme.
The disposal completed on 9 March 2022, on which date control passed to Equitix. The Group received consideration of £95.6 million,
and shareholder loans of £31.5 million were repaid.
Oil and Gas
business
Frazer-Nash Consultancy
Year ended 31 March 2022
Goodwill
Investment in joint ventures and associates
Cash, cash equivalents and bank overdrafts
Other intangible assets
Property, plant and equipment
Right of use assets
Deferred tax assets
Other non-current assets
Inventory
Trade and other receivables
Derivatives
Income tax receivable
Other non-current liabilities
Bank and other borrowings
Lease liabilities
Deferred tax liability
Income tax payable
Trade and other payables
Other current liabilities
Provisions
Net assets disposed
Disposal costs
Cumulative currency translation loss
Recycle of hedge reserve
(Loss)/profit on disposal
Sale proceeds
Less non-cash proceeds
Less transaction costs
Net cash inflow
Sale proceeds less cash disposed of
£m
0.4
–
15.1
125.8
18.8
3.6
46.5
1.5
–
–
–
–
–
(12.0)
(1.0)
(39.6)
–
(1.3)
28.1
2.0
(7.3)
–
(12.8)
10.0
10.0
(2.0)
8.0
£m
64.5
–
2.1
2.2
3.9
0.5
–
–
–
31.0
2.9
4.9
–
–
–
–
–
–
–
–
92.7
10.1
188.9
291.7
286.8
(10.1)
276.7
Power
£m
44.1
–
–
4.5
1.9
0.3
–
0.1
9.3
4.2
–
–
–
–
–
–
–
–
–
(1.2)
51.3
2.7
(4.0)
50.0
45.8
(2.7)
43.1
AirTanker
£m
80.0
23.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.7
–
20.8
(31.7)
95.6
95.6
(2.7)
92.9
Total
£m
189.0
23.8
2.1
21.8
131.6
19.6
–
3.7
86.8
–
4.4
9.1
–
–
(137.1)
(12.0)
(1.0)
(63.4)
–
(2.5)
17.5
(7.3)
20.8
140.4
447.3
438.2
(17.5)
420.7
103.8
275.9
(129.7)
(5.4)
(2.0)
(13.9)
(9.9)
236
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
237
237
Notes to the Group financial statements (continued)
31. Capital and other financial commitments (continued)
Subsidiary audit exemptions
The following UK subsidiary undertakings are exempt from the requirements of the Companies Act 2006 (the Act) relating to the audit
of individual accounts by virtue of section 479A of the Act.
Legal entity name
Appledore Shipbuilders (2004) Ltd
Babcock Airports Ltd
Babcock Assessments Limited
Babcock Contractors Limited
Babcock Critical Assets Holdings LLP
Babcock Defence & Security Holdings LLP
Babcock Defence and Security Investments Ltd
Babcock Defence Systems Limited
Babcock Education & Training Holdings LLP
Babcock Education and Skills Limited
Babcock Education Holdings Ltd
Babcock Fire Services Limited
Babcock Fire Training (Avonmouth) Ltd
Babcock Group (US Investments) Ltd
Babcock Information Analytics and Security Limited
Babcock Integrated Technology (Korea) Ltd
Babcock Integration LLP
Babcock International Support Services Limited
Babcock Investments (Fire Services) Limited
Babcock Investments (Number Four) Ltd
Babcock Investments Ltd
Company number
02052982
03954520
02881056
01398475
OC376675
OC376674
08132272
01199791
OC376676
03494815
08132276
03707192
04168329
07445425
02275471
09566389
OC356460
03335786
04380306
05269128
00165086
Legal entity name
Babcock Management Ltd
Babcock Marine (Devonport) Limited
Babcock Marine Limited
Babcock Marine Shipbuilding Limited
Babcock Mission Critical Services Leasing Ltd
Babcock Mission Critical Services Ltd
Babcock Mission Critical Services Topco Ltd
Babcock Mission Critical Services UK Ltd
Babcock MSS Limited
Babcock Nuclear Limited
Babcock Project Investments Ltd
Babcock Project Services Limited
Babcock Services Group Ltd
Babcock Southern Holdings Ltd
Babcock US Investments Ltd
Bond Aviation Topco Limited
Flagship Fire Fighting Training Ltd
LGE IP Management Company Ltd
Peterhouse Group Ltd
Vosper Thornycroft (UK) Ltd
Company number
00107414
02959785
02530351
14302509
04635275
08010453
08338012
07527245
01996548
01603273
03463927
02888133
03939840
01915771
07422616
08493398
03700728
SC695940
01517100
00070274
Babcock International Group PLC will guarantee all outstanding liabilities that these subsidiaries are subject to as at the financial year
ended 31 March 2023 in accordance with section 479C of the Act, as amended by the Companies and Limited Liability Partnerships
(Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012.
238
238
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
31. Capital and other financial commitments (continued)
Subsidiary audit exemptions
The following UK subsidiary undertakings are exempt from the requirements of the Companies Act 2006 (the Act) relating to the audit
of individual accounts by virtue of section 479A of the Act.
Company number
Legal entity name
Company number
Legal entity name
Appledore Shipbuilders (2004) Ltd
Babcock Airports Ltd
Babcock Assessments Limited
Babcock Contractors Limited
Babcock Critical Assets Holdings LLP
Babcock Defence & Security Holdings LLP
Babcock Defence and Security Investments Ltd
Babcock Defence Systems Limited
Babcock Education & Training Holdings LLP
Babcock Education and Skills Limited
Babcock Education Holdings Ltd
Babcock Fire Services Limited
Babcock Fire Training (Avonmouth) Ltd
Babcock Group (US Investments) Ltd
Babcock Integrated Technology (Korea) Ltd
Babcock Integration LLP
Babcock International Support Services Limited
Babcock Investments (Fire Services) Limited
Babcock Investments (Number Four) Ltd
Babcock Investments Ltd
02052982
03954520
02881056
01398475
OC376675
OC376674
08132272
01199791
OC376676
03494815
08132276
03707192
04168329
07445425
09566389
OC356460
03335786
04380306
05269128
00165086
Babcock Management Ltd
Babcock Marine (Devonport) Limited
Babcock Marine Limited
Babcock Marine Shipbuilding Limited
Babcock Mission Critical Services Leasing Ltd
Babcock Mission Critical Services Ltd
Babcock Mission Critical Services Topco Ltd
Babcock Mission Critical Services UK Ltd
Babcock MSS Limited
Babcock Nuclear Limited
Babcock Project Investments Ltd
Babcock Project Services Limited
Babcock Services Group Ltd
Babcock Southern Holdings Ltd
Bond Aviation Topco Limited
Flagship Fire Fighting Training Ltd
LGE IP Management Company Ltd
Peterhouse Group Ltd
Vosper Thornycroft (UK) Ltd
00107414
02959785
02530351
14302509
04635275
08010453
08338012
07527245
01996548
01603273
03463927
02888133
03939840
01915771
07422616
08493398
03700728
SC695940
01517100
00070274
Babcock Information Analytics and Security Limited
02275471
Babcock US Investments Ltd
Babcock International Group PLC will guarantee all outstanding liabilities that these subsidiaries are subject to as at the financial year
ended 31 March 2023 in accordance with section 479C of the Act, as amended by the Companies and Limited Liability Partnerships
(Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012.
32. Related party transactions
Related party transactions for the year ended 31 March 2023 are:
2023
Joint ventures and associates
First Swietelsky Operation and Maintenance
Ascent Flight Training (Management) Limited
Ascent Flight Training (Holdings) Limited
Rotary Wing Training Limited
Fixed Wing Training Limited
Advanced Jet Training Limited
Rear Crew Training Limited
AirTanker Services Limited
Alert Communications Limited
Duqm Naval Dockyard SAOC
2022
Joint ventures and associates
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
2023
Revenue to
£m
2023
Purchases
from
£m
2023
Year-end
debtor
balance
£m
2023
Year-end
creditor
balance
£m
9.0
0.9
–
4.1
3.1
1.3
0.8
13.7
7.4
–
40.3
–
–
–
–
(0.2)
–
–
–
–
–
(0.2)
0.4
0.3
0.2
–
–
0.3
–
0.1
0.5
0.3
2.1
(0.4)
–
–
–
(0.4)
–
–
–
–
–
(0.8)
2022
Revenue to
£m
2022
Purchases
from
£m
2022
Year-end
debtor
balance
£m
2022
Year-end
creditor
balance
£m
9.1
3.3
1.1
0.4
3.6
3.5
1.8
1.1
11.3
4.4
39.6
–
–
–
–
–
–
–
–
–
–
–
0.5
0.1
–
–
0.6
0.3
0.2
0.2
0.1
–
2.0
(1.5)
–
–
–
–
–
–
–
–
–
(1.5)
a) All transactions noted above arise in the normal course of business and on normal, arm’s length commercial terms.
b) Defined benefit pension schemes. Please refer to note 26 for transactions with the Group defined benefit pension schemes.
c) Key management compensation is shown in note 6.
d) Transactions in employee benefits trusts are shown in note 26.
33. Events after the reporting period
There were no events after the reporting period which would materially impact the balances reported in this Annual Report.
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Babcock International Group PLC / Annual Report and Financial Statements 2023
239
239
Notes to the Group financial statements (continued)
34. 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
2023 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 Limited1,4
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, 9
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
Spyrou Kyprianou, 47, 1st Floor, Mesa Geitona, 4004
Limassol, Cyprus
Babcock Communications Limited
Babcock Contractors Limited2
Babcock Corporate Secretaries Limited*
Babcock Corporate Services Limited
Babcock Critical Assets Holdings LLP
Babcock Critical Services Limited
103 Waterloo Street, Glasgow, Scotland, G2 7BW,
United Kingdom
Babcock Defence & Security Holdings LLP
Babcock Defence and Security Investments
Limited
Babcock Defence Systems Limited
Babcock Defense (USA) Incorporated
251 Little Falls Drive, Wilmington, Delaware 19808,
United States
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 Engineering Limited*
Babcock Europe Finance Limited2
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, Malta
Babcock Fire Services (SW) Limited
Babcock Fire Services Limited
Babcock Fire Training (Avonmouth) Limited
Babcock Group (US Investments) Limited
Babcock Holdings (USA) Incorporated8
251 Little Falls Drive, Wilmington, Delaware 19808,
United States
Babcock Holdings Limited4
Babcock Information Analytics and Security
Holdings Limited*
Babcock Information Analytics and Security
Limited6
Babcock Integrated Technology (Korea)
Limited
Babcock Integrated Technology GmbH
Am Zoppenberg 23, 41366 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
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, Malta
Babcock International Limited6
Babcock International Support Services
Limited
Babcock International US Inc
251 Little Falls Drive, Wilmington, Delaware 19808,
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
Babcock Korea Limited
72-1, Shinsan-ro, Saha-gu, Busan, 49434, South
Korea
Babcock Land Defence 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
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, Malta
Babcock Malta Finance Limited3
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, Malta
Babcock Malta Holdings (Number Two)
Limited3
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, Malta
Babcock Malta Holdings Limited3
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, 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) Limited2
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) Limited6
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
240
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
34. 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
2023 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
Babcock Europe Finance 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 Limited1,4
Babcock Aerospace Limited
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, Malta
Babcock Fire Services (SW) Limited
Babcock Fire Services Limited
Babcock Korea Limited
72-1, Shinsan-ro, Saha-gu, Busan, 49434, South
Korea
Babcock Land Defence Limited
Babcock Luxembourg Finance S.a.r.l.
Babcock Fire Training (Avonmouth) Limited
12F rue Guillaume Kroll, L – 1882 Luxembourg
Babcock Group (US Investments) Limited
Babcock Holdings (USA) Incorporated8
251 Little Falls Drive, Wilmington, Delaware 19808,
United States
Babcock Holdings Limited4
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.
Babcock Africa Investments (Pty) Ltd
Babcock Information Analytics and Security
12F rue Guillaume Kroll, L – 1882 Luxembourg
Riley Road Office Park, 15E Riley Road, Bedfordview,
Holdings Limited*
Gauteng, 2007, South Africa
Babcock Airports Limited
Babcock Assessments Limited
Babcock Australia Holdings Pty Ltd
Level 9, 70 Franklin Street, Adelaide SA 5000,
Babcock Aviation Services (Holdings)
Australia
Limited1, 9
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
Spyrou Kyprianou, 47, 1st Floor, Mesa Geitona, 4004
Limassol, Cyprus
Babcock Communications Limited
Babcock Contractors Limited2
Babcock Corporate Secretaries Limited*
Babcock Corporate Services Limited
Babcock Critical Assets Holdings LLP
Babcock Critical Services Limited
Babcock Information Analytics and Security
Babcock Integrated Technology (Korea)
Limited6
Limited
Babcock Integrated Technology GmbH
Am Zoppenberg 23, 41366 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
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, Malta
Babcock International Limited6
103 Waterloo Street, Glasgow, Scotland, G2 7BW,
Babcock International Support Services
United Kingdom
Limited
Babcock Defence & Security Holdings LLP
Babcock International US Inc
Babcock Defence and Security Investments
251 Little Falls Drive, Wilmington, Delaware 19808,
Limited
United States
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
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, Malta
Babcock Malta Finance Limited3
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, Malta
Babcock Malta Holdings (Number Two)
Limited3
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, Malta
Babcock Malta Holdings Limited3
Trident Park, Notabile Gardens, No. 2 – Level 3,
Mdina Road, Zone 2, Central Business District,
Birkirkara CBD 2010, 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) Limited2
Devonport Royal Dockyard, Devonport, Plymouth,
Babcock Defence Systems Limited
Babcock Defense (USA) Incorporated
Babcock Investments (Fire Services) Limited
Babcock Investments (Number Four) Limited
251 Little Falls Drive, Wilmington, Delaware 19808,
Babcock Investments (Number Nine) Limited
PL1 4SG, England
United States
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 Engineering Limited*
Babcock Investments Limited
Babcock Marine (Rosyth) Limited
Babcock IP Management (Number One)
Rosyth Business Park, Rosyth, Dunfermline, Fife,
KY11 2YD, Scotland
Babcock IP Management (Number Two)
Babcock Marine Holdings (UK) Limited6
Limited
Limited
Babcock Ireland Finance Limited
44 Esplanade, St Helier, JE4 9WG, Jersey
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
34. Group entities (continued)
Subsidiaries, wholly owned (continued)
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 Leasing
Limited
Babcock Mission Critical Services Ltd
Babcock Mission Critical Services Onshore
Limited
Babcock Mission Critical Services Topco Ltd2
Babcock Mission Critical Services UK Limited
Babcock MSS Limited
Babcock Nuclear Limited
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 Services Group Limited
Babcock Services Limited
Babcock Southern Careers Limited*3
Babcock Southern Holdings Limited7
Babcock Support Services (Investments)
Limited
Babcock Support Services GmbH
Am Zoppenberg 23, 41366 Schwalmtal, Germany
Babcock Support Services Limited10
103 Waterloo Street, Glasgow, Scotland, G2 7BW,
United Kingdom
Babcock Training Limited
Babcock UK Finance
Babcock USA LLC2
251 Little Falls Drive, Wilmington, Delaware
19808, United States
Babcock US Investments (Number Two) LLC2
251 Little Falls Drive, Wilmington, Delaware
19808, United States
Babcock US Investments Inc.2
251 Little Falls Drive, Wilmington, Delaware
19808, United States
Babcock US Investments Limited6
Babcock Vehicle Engineering Limited5
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 Limited6
Brooke Marine Shipbuilders Limited*
Cavendish Nuclear (Overseas) Limited*
Cavendish Nuclear (USA) Incorporated
251 Little Falls Drive, Wilmington, Delaware
19808, United States
Cavendish Nuclear Japan KK
Regus Tokyo, Arca Central - Office 104, Arca
Central Building 14F 1-2-1, Kinshi , Sumida-ku,
Tokyo, Japan
Cavendish Nuclear Limited6
Chepstow Insurance Limited
PO Box 155, Mill Court, La Charroterie, St Peter
Port, GY1 4ET, Guernsey
Devonport Royal Dockyard Limited11
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*
Flagship Fire Fighting Training Limited
Heli Aviation China Limited*
Rooms 05-15, 13 A/F South Tower, World Finance
Centre, Harbour City, 17 Canton Road, Tsim Sha
Tsui, Kowloon, Hong Kong
iMAST Limited*
INAER Helicopter Chile S.A.*
2880 Americo Vespucio Norte Avenue, Suite 1102,
Conchali, Santiago, Chile
INAER Helicopter Peru S.A.C. (In liquidation)
1118 Av. Los Conquistadores, Santa Cruz,
San Isidro, Lima, Peru
LGE IP Management Company Ltd
Rosyth Business Park, Rosyth, Dunfermline, Fife,
Scotland, KY11 2YD, United Kingdom
Liquid Gas Equipment Limited
Rosyth Business Park, Rosyth, Dunfermline, Fife,
Scotland, KY11 2YD, United Kingdom
Liquid Gas Equipment LLC2
251 Little Falls Drive, Wilmington, Delaware
19808, United States
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
Naval Ship Management (Australia) Pty Ltd
9, 70 Franklin Street, Adelaide, SA 5000, Australia
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 Limited12
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
Vosper Thornycroft (UK) Limited
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
241
241
Notes
* Dormant entity.
1. 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 four types of ordinary shares.
5. Holding of six types of ordinary shares.
6. Holding of ordinary and preference shares.
7. Holding of ordinary and deferred shares.
8. Holding of ordinary and redeemable
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 one type of ordinary share only,
where more than one type of share is authorised
or in issue.
12. Holding of two types of ordinary shares, where
more than two types of share are authorised or
in issue.
13. 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.
14. Statutory year end 31 December, however
consolidated based on the financial performance
for the period from 1 April 2022 to 31 March
2023.
15. Statutory year end 30 June however,
consolidated based on the financial performance
for the period from 1 April 2022 to 31 March
2023.
Notes to the Group financial statements (continued)
34. 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%)8
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock Africa Holdings (Pty) Ltd (90.0%)13
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%)13
52 St Christopher Street, Valletta, VLT 1462, Malta
Babcock Education and Training (Pty) Ltd
(90.0%)
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock Financial Services (Pty) Ltd (90.0%)
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock Learning and Development
Partnership LLP (80.1%)
Babcock MCS Ghana Limited (90.0%)
No. 9, Carrot Avenue, Adjacent Lizzy Sport Complex,
East Legon, Accra, Ghana
Babcock Mission Critical Services (Ireland)
Limited (49.82%)
13-18 City Quay, Dublin 2, Ireland
Babcock Mission Critical Services France SA
(49.82%)
Lieu dit le Portaret, 83340, Le Cannet-des-Maures,
France
Babcock Namibia Services Pty Ltd (90.0%)
Unit 3 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%)*
Unit G3 Victoria House, Plot 132 Independence
Avenue, Gaborone, Botswana
Babcock Plant Services (Pty) Ltd (64.82%)6
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock TCM Plant (Proprietary) Limited
(90.0%)8
Unit G3 Victoria House, Plot 132 Independence
Avenue, Gaborone, Botswana
Babcock Zambia Limited (90.0%)
16 Arusha, Town Centre, Ndola, Copper Belt,
Zambia
Cognac Formation Aero (90.0%)
Base Aérienne 709 Cognac 16100 Châteaubernard,
France
National Training Institute LLC (70.0%)
PO Box 267, MadinatQaboos, Sultanate of Oman,
115 Oman
Joint ventures and associates
(equity accounted):
ABC Electrification Ltd (33.3%)11
8th Floor, The Place, High Holborn, London, WC1V
7AA
AirTanker Services Limited (23.5%)14
AirTanker Hub RAF Brize Norton, Carterton,
Oxfordshire, England, OX18 3LX, 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%)
The Special Economic Zone at Duqm, Al-Duqm, Al-
Wusta’a, 3972 112, Oman
FSP (2004) Limited (50.0%)2
8 Stephenson Place, Hamilton International
Technology Park, Blantyre, G72 0LH, Scotland
Okeanus Vermogensverwaltungs
GmbH & Co. KG (50.0%)
Vorsetzen 54, 20459, Hamburg, Germany
Wholly owned subsidiaries with registered
office at 55 Baker Street, London,
W1U 7EU, United Kingdom, currently in
Members Voluntary Liquidation:
Babcock Civil Infrastructure Limited;
Babcock Infrastructure Holdings LLP; Bond
Aviation Leasing Limited.
Wholly owned subsidiaries with registered
office at 5 Temple Square, Temple Street,
Liverpool L2 5RH, United Kingdom,
currently in Members Voluntary
Liquidation:
Babcock Emergency Services Limited2;
Babcock Leaseco Limited; Babcock
Technical Services Limited; HCTC Limited;
KML (UK) Limited; Touchstone Learning &
Skills Ltd; Westminster Education
Consultants Limited.
Wholly owned subsidiary with registered
office at 4 Atlantic Quay, 70 York Street,
Glasgow, G2 8JX currently in Members
Voluntary Liquidation:
First Engineering Holdings Limited
Joint venture, with registered office at
18-22 Lloyd Street, Manchester, M2 5WA
United Kingdom, currently in Members
Voluntary Liquidation:
ALC (Superholdco) Limited (50.0%)15
242
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Group financial statements (continued)
Strategic report
Governance
Financial Statements
Company statement of financial position
34. Group entities (continued)
Subsidiaries, partly owned:
Joint ventures and associates
Notes
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%)8
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock Africa Holdings (Pty) Ltd (90.0%)13
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
(equity accounted):
ABC Electrification Ltd (33.3%)11
8th Floor, The Place, High Holborn, London, WC1V
7AA
AirTanker Services Limited (23.5%)14
AirTanker Hub RAF Brize Norton, Carterton,
Oxfordshire, England, OX18 3LX, United Kingdom
Alert Communications Group Holdings
Limited (20.0%)
Ascent Flight Training (Holdings) Limited
Babcock Africa Services (Pty) Ltd (90.0%)
Riley Road Office Park, 15E Riley Road, Bedfordview,
(50.0%)
* Dormant entity.
1. 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 four types of ordinary shares.
5. Holding of six types of ordinary shares.
6. Holding of ordinary and preference shares.
Gauteng, 2007, South Africa
Babcock Aviation Services Holdings
International Limited (49.82%)13
52 St Christopher Street, Valletta, VLT 1462, Malta
Babcock Education and Training (Pty) Ltd
(90.0%)
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock Financial Services (Pty) Ltd (90.0%)
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock Learning and Development
Partnership LLP (80.1%)
Babcock MCS Ghana Limited (90.0%)
No. 9, Carrot Avenue, Adjacent Lizzy Sport Complex,
East Legon, Accra, Ghana
Babcock Mission Critical Services (Ireland)
Limited (49.82%)
13-18 City Quay, Dublin 2, Ireland
Cavendish Boccard Nuclear Limited (51.0%)
7. Holding of ordinary and deferred shares.
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%)
The Special Economic Zone at Duqm, Al-Duqm, Al-
Wusta’a, 3972 112, Oman
FSP (2004) Limited (50.0%)2
8 Stephenson Place, Hamilton International
Technology Park, Blantyre, G72 0LH, Scotland
Okeanus Vermogensverwaltungs
GmbH & Co. KG (50.0%)
Vorsetzen 54, 20459, Hamburg, Germany
8. Holding of ordinary and redeemable
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 one type of ordinary share only,
where more than one type of share is authorised
or in issue.
in issue.
12. Holding of two types of ordinary shares, where
more than two types of share are authorised or
13. 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.
Wholly owned subsidiaries with registered
office at 55 Baker Street, London,
W1U 7EU, United Kingdom, currently in
14. Statutory year end 31 December, however
consolidated based on the financial performance
for the period from 1 April 2022 to 31 March
Babcock Mission Critical Services France SA
Members Voluntary Liquidation:
Babcock Civil Infrastructure Limited;
Babcock Infrastructure Holdings LLP; Bond
Aviation Leasing Limited.
15. Statutory year end 30 June however,
consolidated based on the financial performance
for the period from 1 April 2022 to 31 March
2023.
2023.
Lieu dit le Portaret, 83340, Le Cannet-des-Maures,
Babcock Namibia Services Pty Ltd (90.0%)
Unit 3 Ground Floor, Dr Agostinho Neto Road,
Ausspann Plaza, Ausspanplatz, Windhoek, Namibia
Babcock Ntuthuko Aviation (Pty) Limited
Riley Road Office Park, 15E Riley Road, Bedfordview,
Liquidation:
Gauteng, 2007, South Africa
Babcock Ntuthuko Engineering (Pty) Limited
(49.82%)
France
(66.78%)*
(46.37%)
(46.81%)*
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock Ntuthuko Powerlines (Pty) Limited
Unit G3 Victoria House, Plot 132 Independence
Avenue, Gaborone, Botswana
Babcock Plant Services (Pty) Ltd (64.82%)6
Riley Road Office Park, 15E Riley Road, Bedfordview,
Gauteng, 2007, South Africa
Babcock TCM Plant (Proprietary) Limited
(90.0%)8
Unit G3 Victoria House, Plot 132 Independence
Avenue, Gaborone, Botswana
Babcock Zambia Limited (90.0%)
16 Arusha, Town Centre, Ndola, Copper Belt,
Cognac Formation Aero (90.0%)
Base Aérienne 709 Cognac 16100 Châteaubernard,
Zambia
France
National Training Institute LLC (70.0%)
PO Box 267, MadinatQaboos, Sultanate of Oman,
115 Oman
Wholly owned subsidiaries with registered
office at 5 Temple Square, Temple Street,
Liverpool L2 5RH, United Kingdom,
currently in Members Voluntary
Babcock Emergency Services Limited2;
Babcock Leaseco Limited; Babcock
Technical Services Limited; HCTC Limited;
KML (UK) Limited; Touchstone Learning &
Skills Ltd; Westminster Education
Consultants Limited.
Wholly owned subsidiary with registered
office at 4 Atlantic Quay, 70 York Street,
Glasgow, G2 8JX currently in Members
Voluntary Liquidation:
First Engineering Holdings Limited
Joint venture, with registered office at
18-22 Lloyd Street, Manchester, M2 5WA
United Kingdom, currently in Members
Voluntary Liquidation:
ALC (Superholdco) Limited (50.0%)15
As at 31 March
Non-current assets
Investment in subsidiaries
Trade and other receivables
Current assets
Trade and other receivables
Cash and cash equivalents
Total assets
Non-current liabilities
Bank and other borrowings
Other financial liabilities
Current liabilities
Bank and other borrowings
Other financial liabilities
Trade and other payables
Total liabilities
Net assets
Equity
Called up share capital
Share premium account
Capital redemption reserve
Other reserve
Retained earnings
Total equity
Note
2023
£m
2022
£m
5
6
6
7
8
7
8
9
10
3,449.5
2,585.5
6,035.0
2,466.5
2,633.5
5,100.0
236.7
150.4
387.1
6,422.1
744.4
47.4
791.8
–
–
2,893.5
2,893.5
3,685.3
2,736.8
303.4
873.0
30.6
768.8
761.0
2,736.8
1,175.7
337.1
1,512.8
6,612.8
819.4
51.4
870.8
502.5
41.5
2,465.2
3,009.2
3,880.0
2,732.8
303.4
873.0
30.6
768.8
757.0
2,732.8
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 loss (2022: profit) for the financial year was £4.3 million
(2022: £169.4 million).
The financial statements on pages 243 to 251 were approved by the Board of Directors on 20 July 2023 and are signed on its behalf
by:
David Lockwood OBE
Director
David Mellors
Director
242
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
243
243
Company statement of changes in equity
At 31 March 2021 (restated)
Profit for the year
Other comprehensive income
Total comprehensive income
Share-based payments
Tax on share-based payments
Net movement in equity
At 31 March 2022
Loss for the year
Other comprehensive income(1)
Total comprehensive income
Share-based payments
Tax on share-based payments
Net movement in equity
At 31 March 2023
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
590.7
169.4
(8.6)
160.8
5.5
–
166.3
757.0
(4.3)
(1.5)
(5.8)
9.4
0.4
4.0
761.0
Total
equity
£m
2,566.5
169.4
(8.6)
160.8
5.5
–
166.3
2,732.8
(4.3)
(1.5)
(5.8)
9.4
0.4
4.0
2,736.8
1. Other comprehensive income comprises fair value adjustment on debt related derivatives of £9.5 million and hedging gains/(losses) reclassified to profit or loss of
£10.0 million.
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.
244
244
Babcock International Group PLC Annual Report and Financial Statements 2021
Babcock International Group PLC / Annual Report and Financial Statements 2023
Company statement of changes in equity
Notes to the Company financial statements
Strategic report
Governance
Financial Statements
Share
capital
£m
303.4
Share
premium
£m
873.0
Other
reserve
£m
768.8
Capital
redemption
£m
30.6
303.4
873.0
768.8
30.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Retained
earnings
£m
590.7
169.4
Total
equity
£m
2,566.5
169.4
(8.6)
(8.6)
160.8
160.8
5.5
–
5.5
–
166.3
757.0
166.3
2,732.8
(4.3)
(1.5)
(5.8)
9.4
0.4
4.0
(4.3)
(1.5)
(5.8)
9.4
0.4
4.0
–
–
–
–
–
–
–
–
–
–
–
–
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 Company meets the definition of a qualifying entity under Financial Reporting Standard 100 (FRS 100) issued by the Financial
Reporting Council. Accordingly, these financial statements have been prepared in accordance with Financial Reporting Standard 101
‘Reduced Disclosure Framework’ (FRS 101). In preparing these financial statements, the company applies the recognition and
measurement requirements of International Financial Reporting Standards (IFRS) as adopted by the UK, but makes amendments where
necessary in order to comply with the Companies Act 2006 and sets out below where advantage of the FRS 101 disclosure exemptions
has been taken:
303.4
873.0
768.8
30.6
761.0
2,736.8
Paragraphs 45(b) and 46 to 52 of IFRS 2, ‘Share-based payments’
At 31 March 2021 (restated)
Profit for the year
Other comprehensive income
Total comprehensive income
Share-based payments
Tax on share-based payments
Net movement in equity
At 31 March 2022
Loss for the year
Other comprehensive income(1)
Total comprehensive income
Share-based payments
Tax on share-based payments
Net movement in equity
At 31 March 2023
£10.0 million.
1. Other comprehensive income comprises fair value adjustment on debt related derivatives of £9.5 million and hedging gains/(losses) reclassified to profit or loss of
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.
•
•
•
•
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.
•
The financial statements have been prepared on a going concern basis using the historical cost convention, as modified by the
revaluation of certain financial instruments. 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.
After making enquiries, the Directors, at the time of approving the financial statements, 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.
244
Babcock International Group PLC Annual Report and Financial Statements 2021
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
245
245
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 25 to the Group financial statements.
(b) 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 26 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. 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.
246
246
Babcock International Group PLC Annual Report and Financial Statements 2021
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Company financial statements (continued)
Strategic report
Governance
Financial Statements
2. Significant accounting policies (continued)
Fixed asset investments are stated at cost less provision for impairment in value.
Investments
Taxation
Current income tax
Deferred 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 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
Finance costs are recognised as an expense in the year in which they are incurred.
income or in equity.
Finance costs
Employee benefits
(a) Share-based compensation
(b) Pension arrangements
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 25 to the Group financial statements.
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 26 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. 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.
2. Significant accounting policies (continued)
Financial risk management
All treasury transactions are carried out only with investment grade counterparties as are investments of cash and cash equivalents.
Company guarantees
The Company has guaranteed or has joint and several liability for bank facilities with nil utilisation at 31 March 2023 (2022: £nil)
provided to certain Group companies. These guarantees are measured initially at their fair values, and subsequently measured at the
higher of the expected credit loss and the amount initially recognised less cumulative amortisation.
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:
Critical accounting estimates – 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 cash flows expected to be generated by the subsidiaries, together with
appropriate discounting of the cash flows. Note 5 provides information on key assumptions and sensitivity analyses performed.
Critical accounting judgements
There are not considered to be any critical accounting judgements in respect of the Company for the current period.
3. Company profit
The Company has no employees other than the Directors.
The Company has taken advantage of the exemption granted by section 408 of the Companies Act 2006 whereby no individual profit
and loss account of the Company is disclosed. The Company’s loss (2022: profit) for the financial year was £4.3 million (2022: £169.4
million).
Fees payable to the parent auditor and its associates in respect of the audit of the Company’s financial statements were £1.9 million
(2022: £1.8 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 £3.1 million (2022: £3.9 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 gain made by Directors from the exercise of Long Term Incentive Plans in 2023 as at the
date of exercise was £nil (2022: £nil) and the net aggregate value of assets received by Directors in the year ended 31 March 2023
from Long Term Incentive Plans as calculated at the date of vesting was £nil (2022: £nil million); these amounts are calculated on a
different basis from the valuation of share plan benefits under Schedule 8 (2013) in the Remuneration report.
246
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
247
247
Notes to the Company financial statements (continued)
5. Investment in subsidiary undertakings
Cost at 1 April
Additions – preference shares converted into investments
Cost at 31 March
31 March
2023
£m
2,466.5
983.0
3,449.5
31 March
2022
£m
2,466.5
–
2,466.5
Investment additions relate wholly to the conversion of preference shares in subsidiary undertakings, which matured by mutual
agreement of both parties on 31 March 2023.
At 31 March 2023, the carrying amount of the Company’s net assets of £2,747.3 million exceeded the Group’s market capitalisation of
£1.5 billion (2022: £1.6 billion). As a result, management performed an impairment test of the Company’s major investments in line
with the requirements of IAS 36 ‘Impairment of assets’.
Results of the impairment test for the year ended 31 March 2023
This impairment test for the year ended 31 March 2023 did not result in an impairment.
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 10 of the Group financial statements sets out further details in relation to how the value-in-use calculations are determined.
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 10
of the Group financial statements.
The discount rates and long-term growth rates used to determine the recoverable amount of the Company’s investment in subsidiary
undertakings are set out below.
Pre-tax discount rate
Post-tax discount rate
Long-term growth rate
Sensitivity
31 March 2023
31 March 2022
Aviation
13.1
9.8
2.1
Land
13.1
9.8
2.1
Marine
13.1
9.8
2.0
Nuclear
12.4
9.3
1.9
Aviation
11.3
8.5
2.2
Land
11.8
8.8
2.2
Marine
11.3
8.5
2.4
Nuclear
11.3
8.5
2.0
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. Reasonably possible changes in estimates are those that 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 the Company’s investment in subsidiary undertakings.
Reasonably possible assumptions for the pre-tax discount rate and long-term growth rate for 2023 were considered to be 200 basis
points (2022: 100 bps) and 50 bps (2022: 50 bps) respectively. Significant headroom exists under these reasonably possible
sensitivities.
In the prior year it was noted that an increase to the pre-tax discount rate of 100 basis points would have caused an impairment of
£115.1 million and a decrease to the long-term growth rate of 50 basis points would have reduced headroom by £199.5 million.
248
248
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Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Company financial statements (continued)
Strategic report
Governance
Financial Statements
5. Investment in subsidiary undertakings
6. Trade and other receivables
Cost at 1 April
Cost at 31 March
Additions – preference shares converted into investments
Investment additions relate wholly to the conversion of preference shares in subsidiary undertakings, which matured by mutual
agreement of both parties on 31 March 2023.
At 31 March 2023, the carrying amount of the Company’s net assets of £2,747.3 million exceeded the Group’s market capitalisation of
£1.5 billion (2022: £1.6 billion). As a result, management performed an impairment test of the Company’s major investments in line
with the requirements of IAS 36 ‘Impairment of assets’.
Results of the impairment test for the year ended 31 March 2023
This impairment test for the year ended 31 March 2023 did not result in an impairment.
31 March
2023
£m
2,466.5
983.0
3,449.5
31 March
2022
£m
2,466.5
–
2,466.5
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
Impairment methodology
Cash-generating units
value less costs of disposal.
Calculation of recoverable amount
Key assumptions
of the Group financial statements.
undertakings are set out below.
Pre-tax discount rate
Post-tax discount rate
Long-term growth rate
Sensitivity
The recoverable amount of the Company’s investment in subsidiary undertakings was assessed by reference to value-in-use calculations.
Note 10 of the Group financial statements sets out further details in relation to how the value-in-use calculations are determined.
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 10
The discount rates and long-term growth rates used to determine the recoverable amount of the Company’s investment in subsidiary
31 March 2023
31 March 2022
Aviation
13.1
9.8
2.1
Land
13.1
9.8
2.1
Marine
13.1
9.8
2.0
Nuclear
12.4
9.3
1.9
Aviation
11.3
8.5
2.2
Land
11.8
8.8
2.2
Marine
11.3
8.5
2.4
Nuclear
11.3
8.5
2.0
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. Reasonably possible changes in estimates are those that 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 the Company’s investment in subsidiary undertakings.
Reasonably possible assumptions for the pre-tax discount rate and long-term growth rate for 2023 were considered to be 200 basis
points (2022: 100 bps) and 50 bps (2022: 50 bps) respectively. Significant headroom exists under these reasonably possible
sensitivities.
In the prior year it was noted that an increase to the pre-tax discount rate of 100 basis points would have caused an impairment of
£115.1 million and a decrease to the long-term growth rate of 50 basis points would have reduced headroom by £199.5 million.
Non-current
Amounts due from subsidiary undertakings
Deferred tax
Total non-current trade and other receivables
Current
Amounts due from subsidiary undertakings
Preference shares in a subsidiary undertaking
Prepayments
Total current trade and other receivables
31 March
2023
£m
31 March
2022
£m
2,581.7
3.8
2,585.5
2,628.4
5.1
2,633.5
236.6
–
0.1
236.7
241.9
930.4
3.4
1,175.7
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.
The Group has performed an assessment of expected credit loss for intercompany balances at 31 March 2023 and as a result of this
exercise the Company has recorded a lifetime expected credit loss provision under IFRS 9 in relation to certain amounts due from
subsidiary undertakings. This provision has been recorded due to a significant increase in assessed credit risk, as indicated by a change in
liquid assets as a result of the disposal of the Aerial Emergency Services business. This is based on the value-in-use of the counterparty
and its subsidiaries, as well as the availability of liquid assets that could be used to repay the intercompany balance at the reporting
date. In assessing whether an expected credit loss is required, historical default rates are reviewed and adjusted for forecast future
economic conditions. This assessment has been prepared for the purpose of IFRS 9 and does not reflect the Group’s commercial
assessment of recoverability of intercompany balances.
Of the preference shares in a subsidiary undertaking, the B preference shares of USD500 million matured during the year by mutual
agreement of both parties and carried interest at 5.64%. The remaining preference shares in subsidiary undertakings were Euro-
denominated preference shares, totalling €652 million, carrying a coupon rate of EURIBOR + 4.0%. All preference shares were converted
into investments on 31 March 2023 (see note 6).
Interest rates on amounts owed by subsidiary operations:
EURIBOR + 4.0%
EURIBOR + 2.0%
EURIBOR + 1.5%
EURIBOR + 0.0%
SONIA + 4.0%
USD LIBOR + 4.0%
STIBOR + 4%
BBSW + 1.5%
BBSW + 4.0%
NIBOR + 4.0%
1.5%
4.5%
5.4%
Interest-free
Non-current
Current
31 March
2023
£m
24.4
13.1
–
–
89.7
5.8
–
23.9
–
–
–
–
–
2,424.7
2,581.6
31 March
2022
£m
62.4
–
–
–
115.1
5.7
19.4
–
25.1
–
0.7
100.8
–
2,299.2
2,628.4
31 March
2023
£m
152.7
–
5.4
0.8
29.2
–
6.8
–
–
6.7
–
–
–
64.2
2,139.7
31 March
2022
£m
160.4
–
–
–
41.3
–
3.3
–
5.3
8.5
–
1.9
21.2
241.9
248
Babcock International Group PLC Annual Report and Financial Statements 2021
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
249
249
Notes to the Company financial statements (continued)
7. Bank and other borrowings
Non-current
Bank loans and other borrowings
Current
Bank loans and other borrowings
31 March
2023
£m
31 March
2022
£m
744.4
819.4
–
502.5
The reduction in current bank and other borrowings is a result of the repayment of the €550 million Eurobond in October 2022.
The Company has £1,968.0 million (2022: £2,301.8 million) of committed borrowing facilities, of which £768.4 million (2022:
£1,289.6 million) was drawn at the year end. The effective interest rates applying to bank loans and other borrowings were as follows:
UK bank overdraft
UK bank borrowings
8-year Eurobond October 2022
8-year Eurobond September 2027 – fixed
8-year Eurobond September 2027 – floating
£300 million bond 2026
8. Other financial liabilities
Non-current
Other financial liabilities – currency and interest rate swaps
Current
Other financial liabilities – currency and interest rate swaps
31 March
2023
%
5.4
–
–
2.9
6.3
1.9
31 March
2022
%
1.1
0.6
1.8
2.9
3.3
1.9
31 March
2023
£m
31 March
2022
£m
47.4
51.4
–
41.5
Disclosures in respect of the fair value of other financial assets and liabilities are provided in note 21 to the Group accounts.
9. Trade and other payables
Current
Amounts due to subsidiary undertakings
Accruals and deferred income
31 March
2023
£m
31 March
2022
£m
2,887.6
5.9
2,893.5
2,455.6
9.6
2,465.2
The amounts due to subsidiary undertakings are repayable on demand and £2,887.6 million (2022: £2,455.6 million) is interest-free.
10. Share capital
Allotted, issued and fully paid
At 1 April 2022 and 31 March 2023
Allotted, issued and fully paid
At 1 April 2021 and 31 March 2022
Ordinary shares
of 60p
Number
Total
£m
505,596,597
303.4
505,596,597
303.4
250
250
Babcock International Group PLC Annual Report and Financial Statements 2021
Babcock International Group PLC / Annual Report and Financial Statements 2023
Notes to the Company financial statements (continued)
Strategic report
Governance
Financial Statements
The reduction in current bank and other borrowings is a result of the repayment of the €550 million Eurobond in October 2022.
The Company has £1,968.0 million (2022: £2,301.8 million) of committed borrowing facilities, of which £768.4 million (2022:
£1,289.6 million) was drawn at the year end. The effective interest rates applying to bank loans and other borrowings were as follows:
11. Contingent liabilities
(a) The Company has guaranteed or has joint and several liability for bank overdraft facilities that are shared across multiple Group
companies with utilisation of £18.9 million at 31 March 2023 (2022: £383.6 million).
(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 2023 these amounted to £257.8 million (2022:
£396.5 million), of which the Company had counter-indemnified £249.2 million (2022: £378.9 million).
(c) The Company has given guarantees on behalf of Group companies in connection with the completion of contracts
within specification.
12. Group entities
See note 34 of the Group financial statements for further details.
13. Events after the reporting period
See note 33 of the Group financial statements for further details.
7. Bank and other borrowings
Non-current
Bank loans and other borrowings
Current
Bank loans and other borrowings
UK bank overdraft
UK bank borrowings
8-year Eurobond October 2022
8-year Eurobond September 2027 – fixed
8-year Eurobond September 2027 – floating
£300 million bond 2026
8. Other financial liabilities
Other financial liabilities – currency and interest rate swaps
Non-current
Current
9. Trade and other payables
Current
Amounts due to subsidiary undertakings
Accruals and deferred income
10. Share capital
Allotted, issued and fully paid
At 1 April 2022 and 31 March 2023
Allotted, issued and fully paid
At 1 April 2021 and 31 March 2022
Other financial liabilities – currency and interest rate swaps
–
41.5
Disclosures in respect of the fair value of other financial assets and liabilities are provided in note 21 to the Group accounts.
The amounts due to subsidiary undertakings are repayable on demand and £2,887.6 million (2022: £2,455.6 million) is interest-free.
31 March
2023
£m
31 March
2022
£m
744.4
819.4
–
502.5
31 March
31 March
2023
%
5.4
–
–
2.9
6.3
1.9
2022
%
1.1
0.6
1.8
2.9
3.3
1.9
31 March
31 March
2023
£m
2022
£m
47.4
51.4
31 March
31 March
2023
£m
2022
£m
2,887.6
2,455.6
5.9
9.6
2,893.5
2,465.2
Ordinary shares
of 60p
Number
Total
£m
505,596,597
303.4
505,596,597
303.4
250
Babcock International Group PLC Annual Report and Financial Statements 2021
Babcock International Group PLC / Annual Report and Financial Statements 2023
Babcock International Group PLC / Annual Report and Financial Statements 2023
251
251
Shareholder information
31 March 2023
20 July 2023
28 September 2023
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
Financial calendar
Financial year end
2022/23 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
Central Square
29 Wellington Street
Leeds, LS1 4DL
Email:
shareholderenquiries@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
252
252
Babcock International Group PLC Annual Report and Financial Statements 2021
Babcock International Group PLC / Annual Report and Financial Statements 2023
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.
Consultancy and design by Black Sun Global
www.blacksun-global.com
babcockinternational.com
Babcock International Group PLC
33 Wigmore Street
London
W1U 1QX
United Kingdom
+44(0)20 7355 5300
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