TIDMBAB
RNS Number : 3252D
Babcock International Group PLC
15 May 2012
Babcock International Group PLC full year results for the year
ended 31 March 2012
15 May 2012
Excellent financial results with positive outlook supported by
continued growth in order book and bid pipeline
Financial Highlights
March March
Continuing operations - underlying 2012 2011 Change
------------------------------------------------------ ----------- ----------- ------
Revenue* GBP3,070.4m GBP2,703.2m + 14 %
Operating profit** GBP329.0m GBP275.4m + 19%
Profit before tax*** GBP274.1m GBP216.7m + 26%
Basic earnings per share**** 61.47p 52.50p + 17%
Continuing and discontinued operations basic earnings
per share **** 64.33p 55.03p + 17%
------------------------------------------------------ ----------- ----------- ------
Continuing operations - statutory
------------------------------------------------------ ----------- ----------- ------
Revenue GBP2,848.4m GBP2,564.5m + 11%
Operating profit GBP202.0m GBP153.2m + 32%
Profit before tax GBP173.0m GBP111.1m + 56%
Basic earnings per share 42.93p 30.14p + 42%
Continuing and discontinued operations basic earnings
per share 28.11p 31.28p -- 10%
------------------------------------------------------ ----------- ----------- ------
Full year dividend 22.7p 19.4p 17%
------------------------------------------------------ ----------- ----------- ------
Continuing operations - Following the announcement of the
disposal of VT Services Inc, their results are reported as
discontinued and the comparative restated
*Underlying revenue includes the Group's share of joint ventures
and associates revenues. **Underlying operating profit includes
IFRIC 12 investment income and joint ventures and associates
operating profit but is before amortisation of acquired intangibles
and exceptional items. ***Underlying profit before tax is inclusive
of pre-tax joint ventures and associates income but before
amortisation of acquired intangibles and exceptional items.
****Underlying basic earnings per share is before amortisation of
acquired intangibles and exceptional items, before the related tax
effects and before the effect of UK tax rate changes.
Operational Highlights
Business model and strategy driving underlying revenue and
profit growth
o 5.6% organic growth in underlying continuing revenue
o 15% organic growth in underlying continuing operating
profit
o continuing underlying operating margin increased to 10.7%
(2011: 10.2%)
Agreement reached on sale of VT US defence business for $98.75
million (GBP61 million)
Order book for continuing operations increased to GBP13 billion
(2011: GBP12 billion) supporting positive outlook
Positive market environment continues to create
opportunities
o bid pipeline for continuing operations increased to GBP9.5
billion (2011: GBP7.0 billion)
Cash conversion of 111%, net debt reduced to GBP641.1 million;
net debt:ebitda 1.8 x
Well positioned for further growth both in the UK and
overseas
Peter Rogers, Chief Executive commented
"Babcock delivered record results last year. From our position
as the UK's leading engineering support services group, we grew in
all three of our target areas - existing contracts, existing
customers and new customers. We increased our double-digit
operating margin while achieving good organic top-line growth and
further improving our strong financial position. As a result of
these successes and our confidence in the future, we have
maintained our record of increasing returns to our
shareholders.
"Our key markets remain strong and the current economic climate
is favourable to the further growth of our business. We have
excellent forward visibility with our long-term contracts, strong
order book and bid pipeline. Therefore, the Board expects the Group
to make further strong progress in 2012/13 and for earnings to be
ahead of its previous expectations."
Contact: Babcock International Group PLC
Terri Wright, Head of Investor Relations Tel: 020 7355 5300
FTI Consulting
Andrew Lorenz Tel: 020 7269 7291 Nick Hasell
A meeting for investors and analysts will be held today at 9:00
am at RBS, 250 Bishopsgate, London EC2M 4AA. A webcast of the
presentation will be available at www.babcock.co.uk from mid
afternoon on 15 May 2012.
Introduction
As expected, 2011/12 has been an exciting year for Babcock
during which we were able to deliver a further set of excellent
results and make considerable progress securing our long-term
future.
At the beginning of the year we could see a number of new
opportunities ahead of us, both in the UK and overseas. While our
financial results reflect the strength of our underlying business,
the growth we have reported in our order book and in our bidding
pipeline over this year reflects our progress realising the
opportunities we have been able to create for ourselves in the UK
and overseas, by delivering on our strategy.
Last year we set out that we would seek to achieve growth
by:
growing existing contracts - using current arrangements to
deliver additional services
growing existing customers - building on existing relationships
and using the depth and breadth of skills across the Group to offer
a broader range of services
growing new customers - transferring existing capabilities to
new customers.
After a hiatus in new opportunities coming to market during
2010, driven by our customers' imperative to operate within the
constraints imposed by the current economic climate. We understood
that our customers would have to look for alternative delivery
models if they were to achieve the level of savings and
efficiencies required to meet their budgets. Babcock is well
positioned to help our customers formulate cost efficient support
solutions and benefit from further outsourcing opportunities that
will come to market.
Order book and bid pipeline
During the second half of the year we were successful in winning
new contracts and contract extensions with a value of around GBP2
billion. These contracts bring us new customers as well as
reinforce relationships with existing customers, extend and
strengthen our market positions and demonstrate our ability to
drive both operational and financial efficiencies. The order book
for continuing operations currently stands at GBP13 billion (2011:
GBP12 billion) and provides us with excellent visibility of future
revenues. We currently have over 70% of anticipated revenue
contracted for 2012/13 and over 45% for 2013/14.
The bid pipeline for continuing operations has also increased to
GBP9.5 billion (2011: GBP7 billion) and consists of opportunities
in the UK and overseas as well as in both our civil and defence
markets. 69% of the pipeline comprises bids with a value in excess
of GBP100 million, only three of which are rebids where current
contracts will not run out until 2014.
In addition to formal competitions currently in the bid pipeline
we are tracking and are discussing with customers a number of
significant future outsourcing programmes, particularly in the
defence training and equipment support markets. All of these
opportunities are supported by and build on the key elements of our
strategy.
Dividend
The Board is focussed on ensuring our shareholders share in the
financial success of our business and we have a clear policy of
maintaining dividend cover between 2.5 and 3 times. As we continue
to strengthen our order book and bid pipeline, the Board remains
confident in the long-term future of our business and is therefore
recommending a final dividend of 17.0 pence per share. This will
give a total dividend for the year of 22.7 pence per share, an
increase of 17% (2011: total dividend 19.4 pence per share). The
dividend will be paid on 7 August 2012 to shareholders on the
register at close of business on 6 July 2012.
Strategic review
Following the acquisition of VT Group in 2010, the Board
undertook a detailed review of all our businesses to ensure they
met the Group's strategic requirements. As part of this process the
US defence operations acquired with VT and the Babcock US pipeline
operations were identified as non-core. During the course of last
year, Eagleton, the US pipeline business was sold, and agreement
has been reached for the sale of the US defence operations, subject
to regulatory clearance. The Group is now focused on growing its
core businesses, in line with its strategy, in both the UK and
overseas.
Outlook
The key markets in which the Group operates remain strong and we
believe that the current economic climate will continue to create
significant medium and long-term growth opportunities, both in the
UK and overseas.
In this environment we believe we are well placed to benefit
from the scale of our operations, the breadth of our experience and
our track record of delivering operational and financial
efficiencies.
The Group continues to benefit from excellent visibility of
future revenue streams through its long-term contracts, strong
order book and bid pipeline. Therefore, the Board expects the Group
to make further strong progress in 2012/13 and for earnings to be
ahead of its previous expectations.
Financial Review
In this review, unless otherwise stated, revenue, operating
profit, operating margin, net finance costs, profit before tax and
earnings per share refer to results before amortisation of acquired
intangibles and exceptional items. Revenue, operating profit,
operating margins and net finance costs also include the Group's
share of equity accounted joint ventures (jv) and associates.
Operating profit and operating margin include investment income
arising under IFRIC12 (Accounting for Service Concession
Arrangements) which is presented as financial income in the Income
Statement. Collectively these adjustments are made to derive the
underlying operating results of the business. All numbers are
stated before the effect of UK tax rate changes.
The underlying figures provide a consistent measure of business
performance year to year thereby enabling comparison and
understanding of Group financial performance.
Overview
This review encompasses the first full 12 month period following
the acquisition of VT Group plc. During the course of the year we
have reported a significant acceleration in activity and growth
opportunities in our markets as well as a number of successes in
high financial and strategic value contracts across a range of
those markets. At the same time we have established a strong
financial base from which to support an increasing number of
significant growth opportunities; operating cash flow conversion
has remained above 100%, net debt has further reduced to GBP641.1
million, representing 1.8 times EBITDA, on a covenanted basis, and
operating margins have improved further to 10.7% of revenue.
At the time of our half year results published in November 2011,
we reported organic growth in both revenue and operating profit and
this has been sustained for the full year with continuing revenue
up 5.6% and operating profit up 15%.
The former VT businesses have been fully integrated and the
promised merger benefits of GBP50 million per annum have been
identified and will be delivered slightly ahead of our planning
assumptions. We have progressed the business portfolio review and
agreement has been reached for the sale of VT Services Inc, subject
to regulatory clearance. Consequently the results of VT Services
Inc are reported as discontinued and the Group's investment in the
business as an asset/liability held for sale pending the completion
of the sale. Comparatives have been restated to reflect the
reporting of VT Services Inc as discontinued. Underlying results
are based on the results from continuing businesses.
Income statement - continuing operations
Statutory to underlying reconciliation
Joint ventures and
associates
------------------------------
Continuing Change Continuing
operations Revenue IFRIC Amortisation in operations
- and operating Finance 12 of acquired UK tax Exceptional -
statutory profit costs Tax income intangibles rate items underlying
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ----------- -------------- ------- ----- ------- ------------ ------- ----------- -----------
31 March 2012
Revenue 2,848.4 222.0 3,070.4
--------------- ----------- -------------- ------- ----- ------- ------------ ------- ----------- -----------
Operating
profit 202.0 11.0 27.8 77.3 10.9 329.0
Share of profit
from jv 4.3 (11.0) 19.4 6.7 (25.6) 6.2 -
Investment
income 2.2 (2.2) -
Net finance
costs (35.5) (19.4) (54.9)
--------------- ----------- -------------- ------- ----- ------- ------------ ------- ----------- -----------
Profit before
tax 173.0 -- - 6.7 - 83.5 - 10.9 274.1
Tax (15.8) (6.7) (21.7) (3.4) (2.8) (50.4)
--------------- ----------- -------------- ------- ----- ------- ------------ ------- ----------- -----------
Profit after
tax 157.2 - - - - 61.8 (3.4) 8.1 223.7
--------------- ----------- -------------- ------- ----- ------- ------------ ------- ----------- -----------
31 March 2011
Revenue 2,564.5 138.7 2,703.2
--------------- ----------- -------------- ------- ----- ------- ------------ ------- ----------- -----------
Operating
profit 153.2 9.3 16.0 76.6 20.3 275.4
Share of profit
from jv 6.1 (9.3) 8.3 4.1 (13.8) 4.6 -
Investment
income 2.2 (2.2) -
Net finance
costs (50.4) (8.3) (58.7)
--------------- ----------- -------------- ------- ----- ------- ------------ ------- ----------- -----------
Profit before
tax 111.1 - - 4.1 - 81.2 - 20.3 216.7
Tax (10.1) (4.1) (22.7) (2.7) (3.8) (43.4)
--------------- ----------- -------------- ------- ----- ------- ------------ ------- ----------- -----------
Profit after
tax 101.0 - - - - 58.5 (2.7) 16.5 173.3
--------------- ----------- -------------- ------- ----- ------- ------------ ------- ----------- -----------
Revenue The comparative numbers for 2010/11 include nine months
of the financial results from the former VT Group businesses
compared to a full 12 months for 2011/12 and consequently headline
growth of 14% (2011: 41%) includes the effects of the additional
three months' activity from VT. Adjusting for this and movements in
foreign exchange rates, yields organic growth in revenue of
5.6%.
By division, Marine and Technology saw growth of over 6% driven
by higher activity levels in the Submarine and Warship support
programmes and continued growth overseas in the Technology business
unit. New contract wins in Infrastructure, Nuclear and Rail helped
to deliver year-on-year growth of 15% in the Support Services
Division whilst the achievement of milestones in the FSTA (Future
Strategic Tanker Air) programme and the RSME (Royal School of
Military Engineering) construction phase contributed significantly
to year-on-year growth in Defence and Security of 31%. In
International, South Africa remained relatively buoyant with
continued growth in the equipment and plant hire businesses.
Operating profit Whilst total revenue growth was a major driver
of the increase in underlying operating profit to GBP329.0 million
(2011: GBP275.4 million), an increase in operating return on
revenue to 10.7% (2011: 10.2%) was also a significant contributor.
Organic operating profit growth was 15% (2011: 5%). This was
derived in part from cost synergy benefits delivered in the year in
excess of those achieved last year, leaving an annualised run rate
of GBP40 million at the end of this year - and in part from
improved contract margins. Successful completion of the Long
Overhaul Period (Refuel) (LOP(R)) contract for HMS Vigilant boosted
margins in Marine and Technology whilst stronger performance in
Nuclear and Rail took Support Service to 9.8% (2011: 8.4%). As
flagged last year, return on revenue in Defence and Security
reduced to 13.0% (2011: 15.6%) following completion of the Main
Operating Base (MOB) facilities for FSTA and MFTS (Military Flying
Training System) in 2010/11. Despite some weakness in its Power
business the South African business overall improved as the
equipment franchise continued to make progress and consequently,
the International division return on revenue improved to 6.9%
(2011: 6.8%).
Charges to continuing exceptional items were GBP10.9 million
(2011: GBP20.3 million) and comprised the following items
2011/12 2010/11
-------------------- -------- --------
VT reorganisation
costs 12.8 10.8
Profit on disposal
of subsidiaries (1.9) (2.9)
Acquisition costs - 12.4
-------------------- -------- --------
Total 10.9 20.3
-------------------- -------- --------
Reorganisation costs represent the costs of delivering the
merger synergies and for which the cumulative expenditure at 31
March 2012 was c GBP24million out of a projected total of GBP45
million, as previously reported.
The profit on disposal arose from the sale of Babcock
Eagleton.
Amortisation of acquired intangibles of GBP83.5 million (2011:
GBP81.2 million) represents the amortisation of the value
attributed on business acquisitions to customer relationships, both
contractual and non-contractual. The value is amortised over the
estimated useful life, which does not exceed ten years, by
reference to the duration of contracts in hand at the time of
acquisition and for non-contractual customer relationships, the
risk adjusted value of potential future orders from existing
customers with an average estimated duration.
Net finance costs of GBP54.9 million (2011: GBP58.7 million)
including the Group's share of joint venture net interest expense
of GBP19.4 million (2011: GBP8.3 million) represents a full twelve
month period of interest charges on the post-acquisition of VT net
debt compared to nine months last year. Joint venture finance costs
are primarily related to financing structures on the FSTA and MFTS
Private Finance Initiative (PFI) contracts and will increase as the
PFI delivers assets into service for the customer. 2011/12 saw the
delivery of both the FSTA and MFTS MOBs as well as the first tanker
aircraft, with the related non-recourse debt drawn down under the
PFI facilities. As further assets are constructed and delivered,
this element of net finance costs will increase. During the period
following the end of the construction phase and as the PFI debt is
repaid over the long-term, finance costs will decline. Finance
costs on the Group's own facilities decreased from GBP50.4 million
to GBP35.5 million in line with the decrease in the amount drawn on
the Group's revolving credit facility and improved financing
terms.
Profit before tax before amortisation of acquired intangibles
and exceptional charges increased to GBP274.1 million (2011:
GBP216.7 million). The associated tax charge including the Group's
share of joint venture tax of GBP8.3 million (2011: GBP5.4 million)
totalled GBP50.4 million (2011: GBP43.4 million) representing an
effective rate of tax of 19% (2011: 20.5%). The effective tax rate
is calculated by reference to the Group's underlying profit before
tax and therefore excludes the tax effect of prior year tax
adjustments and of amortisation and exceptional charges.
Earnings per share
Underlying earnings per share on continuing operations for the
year was 61.47 pence (2011: 52.50 pence) an increase of 17% on
2010/11. Continuing basic earnings per share as defined by IAS 33
was 42.93 pence (2011: 30.14 pence) per share.
Discontinued operations
Following a review of our business portfolio post the
acquisition of VT Group in 2010, the Board decided that the VT US
business did not meet the strategic requirements of the Group. A
review was undertaken to establish the most appropriate course of
action including the possible divestment of the business. This
review was completed during the year and following discussions with
a number of parties the Board opted to divest the business.
Agreement has now been reached for the sale of VT Services Inc,
subject to regulatory clearance, as such, the business has been
treated as discontinued.
Within discontinued operations an exceptional impairment of
goodwill of GBP58.5 million is included in respect of VT Services
Inc. This has been calculated by reference to the estimated final
sale value of the business.
Cash flow and net debt
2011/12 2010/11
GBPm GBPm
---------------------- -------- --------
Cash generated from
operations 260.7 308.5
Capital expenditure
(net) (46.0) (33.2)
Interest paid (net) (37.1) (50.0)
Taxation (28.0) (19.3)
---------------------- -------- --------
Free cash flow 149.6 206.0
---------------------- -------- --------
Acquisitions and
disposals net of
cash/debt acquired 4.2 (574.3)
Investments in joint
ventures (2.7) 0.2
Dividend received 6.6 -
from joint ventures
and associates
Own shares 0.6 (2.2)
Dividends paid (73.5) (51.5)
Exchange difference 3.1 (4.9)
---------------------- -------- --------
Net cash inflow 87.9 (426.7)
---------------------- -------- --------
Opening net debt (729.0) (302.3)
---------------------- -------- --------
Closing net debt (641.1) (729.0)
---------------------- -------- --------
2011/12 has been another successful year for cash generation and
the pay down of debt and at 31 March 2012 net debt had reduced to
GBP641.1 million from GBP729.0 million at the previous year end.
The management of cash is at the core of our financial disciplines
and we aim to convert 100% of operating profit to operating cash
over the medium term.
Cash generated from operations was GBP260.7 million (2011:
GBP308.5 million) and represents a conversion rate of 111% (2011:
146%). The increase in working capital in the year was GBP76.6
million which was primarily as a result of the unwind of
prepayments from customers, the acceleration of pension
contributions and the increase in contract activity levels.
Following the acquisition of VT in 2010, the Group began a major
IT transformation project with a total value of approximately GBP25
million and a programme of upgrades to dockyard facilities at
Devonport and Rosyth. These, together with other minor expenditure
principally focussed on the South African business, formed part of
the total Group capital expenditure in 2011/12 of GBP46.0 million
(2011: GBP33.2 million). Expenditure on the IT project totalled
GBP14.4 million and cumulatively stood at GBP18.6 million.
Following slight slippage in the programme the balance is now
expected to be spent in 2012/13. Dockyard facilities upgrades will
also continue into 2012/13.
Net cash interest paid was GBP37.1 million (2011: GBP50.0
million) excluding that paid by joint ventures. The positive effect
on interest arising from the reduction in drawn debt on the Group
banking facility was to some extent offset by the additional three
months of post VT debt funding including the new US Private
Placement loan notes issued in early 2011.
After taxation payments of GBP28.0 million (2011: GBP19.3
million) free cash flow was GBP149.6 million (2011: GBP206.0
million) representing a free cash flow yield on 31 March 2012 of
5%. The disposal of Babcock Eagleton raised GBP5.7 million after
costs. Cash dividends paid out in the year to shareholders totalled
GBP71.4 million (2011: GBP48.0 million).
Group net cash inflow was GBP87.9 million (2011: outflow
GBP426.7 million) reducing total net debt to GBP641.1 million
(2011: GBP729.0 million). Leverage ratios have improved
significantly from last year, both in the rapid pay down of debt
and through increased profits attributable to shareholders.
Covenant 2011/12 2010/11
---------- ---------------- ---------- -------- --------
Debt EBITDA/ > 4 6.4 5.3
service net interest x x x
cover
---------- ---------------- ---------- -------- --------
Debt Net debt/ < 3.5 1.8 2.4
cover EBITDA x x x
---------- ---------------- ---------- -------- --------
Net debt/
shareholders'
Gearing funds n/a 54% 59%
---------- ---------------- ---------- -------- --------
Whilst these ratios will inevitably 'peak' at the time of
significant acquisitions they demonstrate a clear downward trend as
we continue to focus on reducing net debt.
Return on invested capital (ROIC) is defined as underlying
profit before interest and tax divided by shareholders funds
(excluding pensions deficits or surpluses) plus debt. For the year
2011/12, ROIC was 18.0%, up from the relatively low level of 13.9%
in 2010/11 - a low point following the take-on of significant
additional capital for the acquisition of VT Group plc part way
through the financial year. Measured against the current weighted
average pre-tax cost of capital of 9.7% and the track record of
performance, this year's return of 18.0% demonstrates the Group's
ability to generate value enhancing rates of return today and in
the long term.
Pensions
Cash contributions
The total cash contributions expected to be paid by the group
into the defined benefit pension schemes in 2012/13 are GBP93
million. GBP20 million of this was paid prior to 31 March 2012.
GBP56 million is in respect of the cost of future service accrual
of which GBP27 million, for future service accrual in Marine and
Technology, is recovered via contractual terms. Of the balance,
GBP8 million of the contributions are in respect of the three
longevity swaps transacted during 2009/10 to mitigate the financial
impact of increasing longevity, leaving GBP36 million to be funded
from other Group contracts.
Accounting valuations
The IAS19 valuation for accounting purposes showed a market
value of assets of GBP2.8 billion in comparison to a valuation of
the liabilities based on AA corporate bond yields of GBP3.0 billion
representing 93% funding level.
A summary of the key assumptions used to value the largest
schemes is shown in the attached financial statements. The most
significant assumptions that impact on the results are the discount
rate, the rate of future pensionable salary increases and the
expected rate of inflation. The impact of the longevity swaps
transacted during 2009/10 has helped to mitigate the impact of
increasing allowance for longevity.
The total accounting deficit, pre deferred tax, at 31 March
2012, was GBP265.9 million (2011: GBP225.1 million) and the
expected IAS19 service cost in 2012/13 is GBP46.1 million (2011/12:
GBP44.5 million). The net IAS19 charge to the income statement
after allowing for interest on liabilities and expected return on
assets for 2012/13 is GBP15.2 million or GBP11.5 million after tax
(2011/12: GBP18.1 million and GBP13.8 million). The application of
the proposed revisions to IAS 19, which will apply to the year
2013/14, on a pro forma basis to 2012/13 would give a net charge to
the income statement of GBP45 million.
Operational review
Marine and Technology
Change
31 March 31 March + /
2012 2011 -
========== ====== =========== =========== ======
Revenue total GBP1,084.7m GBP1,019.5m + 6%
Operating
profit total GBP135.1m GBP119.3m + 13%
Operating
margin total 12.5% 11.7%
---------- ------ ----------- ----------- ------
Marine and Technology market
Our UK market has remained stable over the past 12 months with
no significant change expected in the year to come. During the
year, progress towards general MoD outsourcing of equipment support
was slow, although we believe the changes proposed to the MoD's
procurement organisation, Defence Equipment and Support (DES) are
likely to create outsourcing opportunities for larger, more complex
programmes well suited to the depth and breadth of our
capabilities.
In Canada, through the Canada First Defence Strategy and the
National Shipbuilding Procurement Strategy, progress is being made
towards major naval surface fleet modernisation. With two
submarines soon to return to service, recent budget allocations
suggest a positive outlook for submarine support and
enhancement.
In Australia, the government has an ambitious programme of
investment in future naval programmes, the Rizzo Review and the
Coles Review have been set up to review and identify improved
support solutions for both surface ship and submarine fleets. Both
these reviews create opportunities for our proven, value for money
support capabilities.
Marine and Technology strategy
In the UK our strategy is to retain and develop our position as
the leading support partner to the Royal Navy. In support of this
we have focused on delivering our commitments under the Terms of
Business Agreement (ToBA) as well as seeking to identify
opportunities to enhance and expand the services we provide our
customer while driving further efficiencies. We have a significant
involvement in major UK alliance programmes, the Surface Ship
Support Alliance (SSSA) and the Submarine Enterprise Performance
Programme (SEPP), where we are building on our significant
engineering and integration expertise and know-how to broaden and
deepen our involvement. Our strategy to provide technology-led
services across the full programme life-cycle has been supported by
our growing role in the design development of the future nuclear
deterrent submarine as well as the provision of specialist design
support and system proposals for the UK naval ship programme.
We have a clear strategy to grow our international presence in
naval support markets building on our UK position. In Australia, we
have continued to grow our presence through the provision of
technical support on both in-service and new programmes in line
with our strategy to become a leading support provider to the Royal
Australian Navy. Recent contract wins have demonstrated the value
of our commitment to the Australian market. In Canada we have
established an initial capability for submarine support and we are
now seeking to deliver wider services drawing on our UK track
record. In other overseas markets we continue to build on our
design/build activity on the South Korean and Spanish submarine
programmes and are also reviewing the potential for our complete
naval asset management support models in other countries where
Babcock's track record in delivering cost reduction and
improvements in service delivery is recognised.
Financial review
The division reported revenue of GBP1,084.7 million (2011:
GBP1,019.5 million), an increase of 6% benefiting from increased
revenue on submarine and warship programmes, including the QE class
carrier programme as well as continued growth from international
revenue. Operating profit increased to GBP135.1 million (2011:
GBP119.3 million) an increase of 13% which resulted in an operating
return on revenue of 12.5% driven largely by completion of the main
part of HMS Vigilant's LOP(R) and the continuing efficiencies which
we share with our customers.
Operational review
Our ToBA with the MoD creates a long-term partnering arrangement
that provides us with a predictable, long-term programme of work in
submarine and warship deep maintenance as well as continuing our
role as the MoD's partner at the naval bases in Devonport and
Clyde. During the year we met all of our requirements under the
ToBA including the delivery of significant cost reductions in
excess of the required level.
We retain a strong market position in the through-life support
of the UK submarine fleet as sole provider of both deep and
in-service maintenance. We are working with the MoD, BAE Systems
and Rolls Royce on SEPP to ensure maximum availability of the UK
submarine fleet whilst delivering on going reductions in operating
costs.
HMS Vigilant successfully completed the main element of its
LOP(R), which involved 160 capability upgrades, the removal and
overhaul of 26,500 components and the defueling and refuelling of
the nuclear reactor. As HMS Vigilant returned to HMNB Clyde for sea
trials and contract acceptance, HMS Vengeance arrived at Devonport
to begin her three and a half year, c GBP350 million LOP(R).
We continue to provide specialist systems and services for the
Astute-class submarine programme as well as specialist training for
submarine crews. HMS Astute is now included in the Babcock led
in-service engineering management organisation and is continuing
sea-trials before becoming fully operational in 2013. HMS Ambush is
expected at Faslane in the summer of 2012 and procurement
activities are already underway for the fifth submarine in the
class. On the Successor future deterrent submarine programme,
activities continue to progress. Babcock has involvement in the
long-term technical engineering support and has secured the role as
provider of the key tactical weapons launch system and we continue
to invest in capability to deliver further elements of the
programme.
The MoD is progressing its proposals for the Submarine
Dismantling Programme (SDP) and has completed the public
consultation process at Devonport and Rosyth, the sites identified
for the dismantling phase of the programme. We expect the results
of the consultation to be published in the summer of 2012 with the
MoD's currently stated preference being for dismantling activities
to take place in parallel on both sites.
During the year we have successfully delivered deep maintenance
periods for a number of warships as part of the SSSA. The recently
signed Phase 2 Agreement brings all of the remaining classes of
warship currently in-service into the class management arrangements
developed for SSSA. Work is also underway to develop Phase 3 of the
SSSA covering future classes of warships providing Babcock with a
potentially enhanced support role in future years.
As part of the Aircraft Carrier Alliance, with significant roles
in both the design and build of the new vessels, we continue to
make excellent progress and the programme remains on schedule with
costs remaining in line with forecast. The first superblock is in
place in the dock at Rosyth following delivery of lower and upper
hull blocks and their assembly using the new Goliath crane.
We have been successfully managing the delivery of services at
HMNBs Devonport and Clyde under the Warship Support Modernisation
Initiative (WSMI) for the past 10 years. Under the framework of the
ToBA, we are in active discussion with the MoD to introduce a
replacement contract under the Maritime Support Delivery Framework.
This new contract will provide a platform for further development
of our role in both naval bases and provide a mechanism for us to
deliver scope expansion.
In our broader equipment support operations, where we provide
engineering support for a range of key assets as well as
procurement and logistics support, we have consistently achieved or
exceeded our customer's operational KPIs. During this year, our
approach to demand management for a wide range of defence spares
has enabled us to win additional, competitively tendered,
procurement packages. In addition, we expect the MoD will, over
time, transition to substantial outsourcing of equipment management
services, roles where we can demonstrate industry leading
capabilities.
Our international activities continue to progress well and now
account for over 10% of the division's revenue. In Australia we
have successfully tested our torpedo launchers and weapons handling
systems for the new Hobart class Air Warfare Destroyers. We have
also been selected, with our partners UGL, to provide in-service
support for the Royal Australian Navy's fleet of eight Anzac class
frigates. The contract worth GBP200 million over the initial five
year period, establishes a new model of long-term support
arrangements delivering benefits to the customer and industry. We
have also been down-selected to tender for future packages of
warship support which are expected to come to market by mid
2013.
With the Australian government committed to progressive reform
of its naval support activities, which has included an in-depth
review of its submarine support activities, we believe we are well
place with distinctive capabilities and credentials.
On the Canadian submarine programme, the Navy successfully
trialled Babcock systems on HMCS Victoria, their first submarine to
come back into service during 2012. We have taken control of HMCS
Corner Brook ahead of refit activities and with HMCS Chicoutimi
progressing through a refit, we continue to build our capability in
Canada for an increasing future workload. The recent budget in
Canada confirmed the government's commitment to the submarine fleet
and high level agreements have been put in place for major surface
fleet renewal. We expect these programmes to progress in the
medium-term and bring a range of growth opportunities for us.
In Spain, significant deliveries of Babcock systems have been
made throughout the year in support of the Spanish S-80 submarine
programme and these are being integrated into the first of class
build programme.
Divisional outlook
In the UK, as a result of our ToBA and our position on a number
of key programmes we have excellent visibility of future revenues.
We are well positioned, with unrivalled depth and breadth of
expertise within each of our business units, to assist the MoD and
Royal Navy as they seek to achieve maximum availability and
increased financial efficiency as well as supporting them as
further programmes are outsourced.
In our international markets, we continue to build our presence
and are now well positioned as governments seek to achieve better
value for money for naval equipment and infrastructure support and
improved availability for their submarine and warship fleets.
We believe the outlook for the Marine and Technology division is
extremely secure, with a number of opportunities to deliver further
growth in both the UK and overseas.
Defence and Security
Change
31 March 31 March + /
2012 2011 -
========== ====== ========= ========= ===============
Revenue group GBP446.0m GBP381.9m + 17%
jv GBP167.3m GBP87.3m + 92%
----------------- --------- --------- ---------------
total GBP613.3m GBP469.2m + 31%
----------------- --------- --------- ---------------
Operating
profit group GBP51.7m GBP54.4m * 5%
jv GBP27.9m GBP18.8m + 48%
----------------- --------- --------- ---------------
total GBP79.6m GBP73.2m + 9%
----------------- --------- --------- ---------------
Operating
margin group 11.6% 14.2%
jv 16.7% 21.5%
----------------- --------- --------- ---------------
total 13.0% 15.6%
----------------- --------- --------- ---------------
Defence and Security markets
The key focus of the Defence and Security division is military
training and equipment support primarily for the UK MoD with over
GBP1.5 billion of MoD spend within our core capabilities. Through
our 4,500 people in over 70 locations we have extensive experience
across all three UK Armed Services, in leading the provision of
training and equipment support services to operationally critical
defence activities. Our success is built on our commitment to a
safe working environment for our people, our depth of engineering
and technical expertise and the ability to establish long-term
partnering relationships with our customers.
In the UK the GBP38 billion shortfall in the Defence Budget over
the next 10 years is being addressed through a comprehensive review
of existing and planned programmes and personnel requirements. As a
result, radical organisational change is proposed within the MoD
together with significant reductions in equipment spending and in
uniformed and civilian MoD staff. Within this context we expect the
increasing pressure on budgets and manpower will drive greater
outsourcing and the short-term potential for the extension of
existing contract services in support of MoD legacy assets.
Defence and Security strategy
During the year our key focus has been to secure the rebids and
extensions essential to maintaining our business capabilities and
to build on our leading market positions in military training and
equipment support to ensure we are well placed for future
outsourcing opportunities. In support of these activities we remain
focused on ensuring we are able to deliver the most cost efficient
solution for our customer on current, as well as potential future,
activities.
We have a demonstrable track record of delivery which has been
sustained despite the current challenging economic and operational
environment. This is recognised by the MoD through our excellent
SRT (Supplier Relations Team) scores which reflect our strong
relationship and our on-going commitment to the identification and
sharing of efficiency savings.
Overseas, in selected markets where defence operational
requirements are similar to those in the UK, we have been reviewing
opportunities to exploit our expertise in developing long-term
contracting support solutions. We believe our current Group
position in the Australian and Middle East markets will provide an
attractive growth opportunity.
Financial review
Revenue for the year including the Group's share of joint
ventures for the Defence and Security division increased to
GBP613.3 million (2011: GBP469.2 million) an increase of 31% mainly
resulting from a full year of revenue from former VT operations.
Organic growth for the division was 4%. The division's share of
revenue from its joint venture projects including FSTA and MFTS was
GBP167.3 million (2011: GBP87.3 million). With a long term
commitment and a role as shareholder in both projects, we expect
them to continue to contribute significantly to the division's
revenue. The securing of the MoD's new Phoenix framework for the
management of its white fleet of vehicles will underpin the
division's revenue into next year. Both training and equipment
support businesses performed well. Operating profit was GBP79.6
million (2011: GBP73.2 million) and, as previously indicated,
operating return on revenue reduced to 13.0% (2011: 15.6%)
following completion of the construction phase of both the joint
ventures and the change in mix between new and mature
contracts.
Operational review
Throughout the year our operational performance supporting the
RAF has been strong. Following successful completion of the Main
Operating Base and the communications and information systems for
the Future Strategic Tanker Aircraft (FSTA) project, our focus has
now moved to the through-life service delivery phase for the
remaining 23 years of the programme. Under the UK Military Flight
Training System (UKMFTS) programme we are now delivering the first
training packages in support of RAF Advanced Jet Training at RAF
Valley and Rear Crew Training at RAF Barkston Heath and RNAS
Culdrose.
Our airfield and operational support contracts have performed
well. We delivered 39,000 flying hours on the Light Aircraft Flying
Task using our fleet of 119 Grob 115e Tutor aircraft across 15 MoD
sites and 17,000 flying hours on 52 aircraft through the Tucano in
Service Support Contract at RAF Linton-on-Ouse. We continue to
provide engineering manpower support to the Sea King Integrated
Operational Support (SKIOS) Search and Rescue service which is
expected to continue until the Sea King out-of-service date in
2016.
We continue to develop our contract for engineering support to
the fleet of 67 Hawk T1 aircraft in advanced flying training and
engineering support to BAE Systems for the introduction to service
of the Hawk T2 at RAF Valley - in aggregate support to15,000 Hawk
flying hours.
In our Land business we have continued to expand our training
and equipment support capabilities. During the year we won a four
year contract as the service provider for the MoD's new Phoenix
framework. We have also signed a contract to provide continuity of
service and incremental replacement for over 14,000 vehicles
(ranging from cars to coaches and articulated trucks) previously
provided through the White Fleet contract. We expect the overall
Phoenix contract to be worth c GBP400 million to September 2016. To
help the MoD to meet its challenging budget constraints, we have
enhanced our service offering by incorporating telematic monitoring
and on-line booking systems to improve fleet optimisation.
Throughout the year, our ALC joint venture contract with Amey
has successfully provided and managed the MoD's fleet of 2,000
construction vehicle worldwide and has successfully and
consistently delivered services in support of Urgent Operational
Requirements. We are working closely with the MoD to identify
further savings opportunities through more effective use of this
contractual arrangement.
Our fleet management capability is also evidenced through our
strong performance as a service provider on the Allenby Connaught
programme where we provide maintenance and fleet management
services to the MoD Green Fleet and have delivered in excess of
66,000 transport tasks during the year.
We expect the MoD to launch its competition for the Logistics
and Commodities Service Transformation programme during 2012 and in
preparation for this we have entered into a teaming agreement with
DHL to bid, and if successful, operate this programme jointly.
At Bovington, our contract to provide training, maintenance and
support services to the Royal Armoured Corps had delivered over
45,000 man training days to 1,900 students and provides us with a
further opportunity to extend our role in both training and
equipment support solutions until 2016.
We continue to focus on delivering the highest standards of
training for both the Army and Royal Navy (RN). Following the
cancellation of the Defence Training Rationalisation programme in
2010 the MoD is reviewing its long-term requirements and this will
determine the scale and timing of future outsourcing opportunities.
In the interim, our successful delivery record in training has
enabled us to secure a GBP40 million, two year contract extension
to 2014, for our activities at Bordon and Arborfield for the Royal
Electrical and Mechanical Engineers.
At The Royal School of Military Engineering (RSME) we provide
technical trade and professional engineering training as well as
infrastructure and facilities management services. The construction
and refurbishment programme is now 60% complete and 40 new and
refurbished training assets have been handed over to the Royal
Engineers during the year. New accommodation and specialist
training facilities are planned at the Defence Explosives Munitions
and Search School at Bicester during 2012 and this will deliver a
step change in training capability in counter IED (Improvised
Explosive Device) activities. We continue to work with the RSME in
the transformation of engineering training and we remain on target
to optimise the delivery of all trade courses by 2015.
We have had continued success in the winning and delivery of
services to the RN. During the year we were awarded a six year c
GBP90 million contract for the training requirement of the Fleet
Outsourced Activities Project. This contract offers the RN
significant improvements in efficiency and service delivery through
innovative training and support processes and has options for the
customer to extend to 15 years. Following a successful transition
from the previous Flagship contract service delivery commenced in
January 2012.
In support of our services to the RN training establishments we
were awarded a contract extension until 2013 for the delivery of
soft facilities management services. A competition is underway for
the provision of these services from 2013 and we are actively
engaged in that process.
In August 2011 we started delivery of training at the Royal Navy
Maritime Composite Training System facility at HMS Collingwood
where our team enables state-of-the-art training on synthetic
training equipment. This GBP20 million, seven year contract is with
BAE Systems who have developed the system in support of the
Maritime Synthetic Training programme.
In the Security sector our ten year strategic partnering
relationship with a Government Agency for the provision of
engineering and procurement services continues to operate
successfully and we continue to work with our customer to identify
further savings opportunities within their operations, as they
arise.
Divisional outlook
Following our success during the year in securing new vehicle
support and training contracts for the Army and Royal Navy, our
short-term focus is on service delivery and ensuring we maintain
our track record of delivering efficiencies to the MoD. As these
new contracts become operational we continue to seek opportunities
to increase the scope of these services and participate in new MoD
outsourcing programmes.
Our fleet availability contracts and engineering support
activities leave us well placed to compete for future programmes.
We expect that the pace of outsourcing across MoD will accelerate
particularly in relation to:
the proposed disposal of the Defence Support Group (DSG) which
provides routine and depth maintenance on the Army's vehicle
fleet
MoD Logistics Commodities and Service Transformation - the
outsourcing of elements of the Joint Supply Chain
Tri-Service training packages in technical, collective and
sponsored reserve training
support of front line aircraft.
Overseas we aim to leverage our UK expertise and capabilities in
selected markets where defence operational requirements are similar
and opportunities arise to exploit our experience in developing
long-term contracting models.
Support Services
Change
31 March 31 March + /
2012 2011 -
========== ====== =========== ========= ======
Revenue group GBP1,037.7m GBP895.2m + 16%
jv GBP54.7m GBP51.4m + 6%
----------------- ----------- --------- ------
total GBP1,092.4m GBP946.6m + 15%
----------------- ----------- --------- ------
Operating
profit group GBP98.0m GBP75.3m + 30%
jv GBP8.7m GBP4.3m + 102%
----------------- ----------- --------- ------
total GBP106.7m GBP79.6m + 34%
----------------- ----------- --------- ------
Operating
margin group 9.4% 8.4%
jv 15.9% 8.4%
----------------- ----------- --------- ------
total 9.8% 8.4%
----------------- ----------- --------- ------
Support Services market
The Support Services division operates predominantly in a range
of UK public sector, MoD, regulated and commercial markets,
targeting various elements of the c GBP200 billion market for
outsourced services.
Since the 2010 Comprehensive Spending Review, aggregated
customer output and spend has reduced across our markets, however
that spend which is addressable to Babcock has, in most cases,
grown or remained flat, influenced by a range of factors. These
include a transformation in our customers' operating models towards
a commissioner of services, and hence increased reliance on private
sector partners, such as in our local authority, schools, police
and fire and rescue markets.
Equally, the mission critical nature of the engineering assets
managed on behalf of our civil nuclear, MoD, power and telecoms
customers typically encourages longer-term planning and procurement
cycles.
Finally, and in response to the challenging economic climate, as
well as the Cabinet Office's push for alternative provision of
service delivery, Babcock has been working with customers in our
government property, mining and construction and local authority
markets on innovative models of asset ownership and finance and
service provision that has unlocked spend that might otherwise not
be available.
Support Services strategy
The division has continued to develop its strategy, in line with
the Group's strategic objectives, and is focused on taking
responsibility for our customers' complex and critical assets,
providing technical expertise and improving service delivery at
reduced cost to give our customers the confidence to focus on their
core operations and strategic direction. Our business units have
developed their strategies to ensure they are in a strong position
to compete within their specific markets.
In particular, we have strengthened our approach to account
management for our key customers, developing specific propositions
that are targeted at delivering additional value and strengthening
our relationships. This approach is also providing a bridge between
business units, allowing us to develop propositions that combine
capabilities across the division.
With growth as our key priority, last year we identified a
number of core growth sectors; nuclear, government property,
education and training and mobile asset management. Good progress
has been made throughout the year with a number of key contract
wins and new competitions coming to market demonstrating
progress.
The integration of ex-VT businesses has delivered substantial
cost synergies arising from revised organisation structures and
enhanced procurement activities. Revenue synergies are also being
delivered, in particular in the Nuclear and Mobile Assets
businesses, where the combination of Babcock and VT skills and
capabilities have delivered innovative propositions and further
improved our market positioning.
Financial review
The division's revenue, including the Group's share of joint
ventures, increased by 15% to GBP1,092.4 million (2011: GBP946.6
million) of which c 5% was organic growth. Joint venture revenue
was GBP54.7 million (2011: GBP51.4 million). All businesses showed
revenue growth with Infrastructure and Nuclear benefiting from new
contract wins as well as continued organic growth. Operating profit
including jvs increased by 34% to GBP106.7 million, (2011: GBP79.6
million) which gave an operating return on revenue of 9.8% (2011:
8.4%) driven by both contract performance and additional cost
synergy realisation.
Operational review
Nuclear
Our Nuclear business continues to grow its reputation as a major
player in the UK market with capabilities in the decommissioning
and power generation sectors.
The key success during the year was at Dounreay, where the
Nuclear Decommissioning Authority awarded the contract for the
decommissioning and clean up of the Dounreay nuclear site to the
Babcock Dounreay Partnership (a joint venture between Babcock, CH2M
Hill and URS). This is a complex long-term contract to deliver the
site to its interim end state by 2025, 16 years earlier than the
previous plan. The total contract value is expected to be in the
region of GBP1.6 billion, which represents a reduction of over GBP1
billion on previous estimates.
Dounreay is the first major closure project in the UK and is
also the first target cost/incentive fee contract for this type of
programme - a clear demonstration of Babcock's ability to create
value for its customers.
We have continued to strengthen our position at Sellafield with
involvement in a number of significant decommissioning programmes
on the site. Core contracts awarded in 2010/11 have performed well
and our position has been further reinforced by other major wins
during this year; Phase 1 of the Silos Maintenance Facility, a key
part of the hazard reduction programme and the Design Services
Alliance framework agreement which will provide initial design
works for decommissioning related projects on the site. Both these
contracts have a potential total value of up to GBP150 million.
Elsewhere in the UK, Babcock has secured substantial
decommissioning work at the Trawsfynydd Magnox site and the
decommissioning of the A1 facility at AWE is progressing very
well.
We continue to provide specialist fuel route support to EdF on
the UK's current fleet of nuclear power stations. Looking forward,
although we do not expect any contract awards until at least 2015,
we have teamed with a major French contractor and are starting to
prepare bids for future activities as part of EdF's new build
programme at Hinkley Point and Sizewell.
Mobile Assets
As announced in September 2011, we are now managing and
maintaining Lafarge's fleet of heavy mobile equipment in the UK, US
and Canada worth a total of GBP150 million over a ten year period.
The team continue to develop the next phases of the process with
due diligence on going in further territories, where we expect some
negotiations to be concluded in the first half of this financial
year.
Our other fleet management contracts for the emergency services
continue to perform well and our operations at Heathrow continue to
expand as a result of a new contract with BAA to support their
airfield operations vehicles at the world's busiest international
airport.
We are now looking at a number of opportunities where our proven
through-life management model could prove attractive to customers
operating complex mixed vehicle fleets.
Infrastructure
For our Infrastructure business, the current reorganisation of
the Defence Infrastructure Organisation (DIO) has created a number
of opportunities. Our current regional prime contracts are
performing well and have been extended to 2014 as the DIO prepares
for the Next Generation Estate contracts to come to market. Babcock
is the only organisation to have pre-qualified for all contracts
being let under the first phase of this process; the Scotland and
Northern Ireland Prime, the Housing Prime and the National Training
Estate Prime contracts. The contract to support the British Forces
in Germany is also performing well and we will remain proactive and
responsive to the Military's needs as operations are wound down in
Germany and forces are returned to the UK.
In addition, we are looking at other opportunities within the
DIO, and other public and private sector customers to help them
unlock value within their complex and critical property
portfolios.
Education and Training
The training business has continued to perform strongly. We
remain the UK's largest provider of vocational training, with c
45,000 learners on a programme at any one time. We work in
partnership with over 6,000 employers drawn from a broad range of
industries, predominantly in the engineering and services
sectors.
During the year our training client base has continued to
expand, most notably with a new 25 year contract with the London
Fire Brigade (LFB) to support the training of all fire-fighters
across London. Our contract will also entail the building of two
dedicated fire training facilities in London and the refurbishment
of facilities at a number of fire stations. The new contract
started on 1 April 2012 following rapid mobilisation and is
performing well.
In addition to new contracts, we also secured rebids with the
Army and Network Rail and we hope to secure a rebid for the EdF
technical training facility. These contracts along with the LFB
success, clearly demonstrate our unparalleled position in the
technical training sector.
Within the Education business, we have built on our successful
partnership with Surrey Country Council, by winning a GBP125
million, seven year contract with Devon County Council to deliver
education effectiveness services and learning support. This new
contract will be delivered through a dedicated team of education
professionals, working to create a regional and national centre of
excellence to deliver savings and returns to the council of over
GBP10 million over the life of the partnership. Babcock is now the
leading provider of school effectiveness services to UK
schools.
Outside the growth areas highlighted above, the division has had
two major successes during the year retaining key contract and
customer relationships.
We retained our position as a trusted partner for the BBC built
up over the past 15 years with the win of the ten year, GBP200
million contract to continue providing the BBC World Service with
transmission and distribution services for radio and
television.
A major contract extension was awarded by National Grid to our
Electricity Alliance contract with a further five year framework
arrangement agreed to maintain and upgrade high voltage power lines
across the UK. This extension also offers the exciting opportunity
to proactively support our customer as it moves into the new RIIO
regulatory framework being implemented by Ofgem with its focus on
performance through incentives, innovation and output.
Divisional outlook
The pressure on the UK government and our private sector
customers to deliver services within restricted budgets continues
to create substantial growth opportunities for the Support Services
Division. In addition investment and change is being driven through
the UK's infrastructure, including the power transmission, rail and
mobile communications networks where we can offer existing and new
customers a differentiated engineering solution.
Our unique combination of market-leading positions: technical,
management and analytical expertise and track record of improving
service delivery and reducing costs for our customers, creates a
compelling proposition and a strong platform for growth.
International
Change
31 March 31 March + /
2012 2011* -
========== ====== ========= ========= ======
Revenue total GBP280.0m GBP267.9m + 5%
Operating
profit total GBP19.3m GBP18.1m + 7%
Operating
margin total 6.9% 6.8%
---------- ------ --------- --------- ------
* restated
Following agreement being reached for the sale of the US defence
business, subject to regulatory approval, which was previously
reported with the results of the International division, the
division's financial results have been restated to include only
continuing operations. These comprise the South African operations
and aircraft support contracts in Oman and Kuwait. The US business
is reported as discontinued and as held for sale.
South Africa
South African market
In South Africa, the general economic environment has remained
stable during 2011 and economic growth is forecast to continue. Our
equipment markets continue to be supported by both the on going
investment in infrastructure; for which the South African
government announced a c ZAR800 billion programme of investment
over the next three years in October 2011, and the increasing
global demand for South African commodities, including coal,
diamonds and copper. For our power generation support operations,
as economies continue to grow across Southern Africa, demand for
energy is increasing and is putting pressure on current generating
capacity. We expect this to continue for the next 15-20 years.
Our strategy
Throughout the downturn, between 2008 - 2010, we took the
opportunity to review and reshape our business and ensure we were
well placed to take full advantage of the recovery which started
during 2011. Our key priorities are to drive growth through our
well-established equipment dealership networks and plant hire
operations and build on our long-term relationship with Eskom in
our power generation activities. We will also be seeking to build
on Group-wide capabilities and expertise to develop new business
streams and will be focusing on opportunities we have identified
for automotive training and defence infrastructure and equipment
support.
Financial overview
Continuing revenue for the division increased by 5% to GBP280.0
million (2011: GBP267.9 million) and operating profit increased by
7% to GBP19.3 million (2011: GBP18.1 million) which resulted in an
operating return on revenue of 6.9% (2011: 6.8%). The growth in
Volvo equipment and in the plant hire business has driven up
profits year on year.
Operational overview
The equipment market has continued to experience steady growth
throughout the year. We have seen good demand for Volvo equipment,
benefiting in particular from the introduction of new ranges of
trucks, and are planning for this to continue during 2012.
Following the launch of the DAF truck franchise in 2010, sales have
been steady throughout the first year and with the introduction of
new customer finance packages we expect to see increased growth in
the coming year.
With increased investment in infrastructure our plant hire
operations have experienced strong demand for cranes and power
generators. We expect growth in demand to increase significantly
and we have increased our capacity to respond to this accordingly
as well as creating opportunities to move into new geographies.
Eskom, South Africa's power generation company, continue to fall
behind on their planned maintenance activities. However we have
experienced good activity levels within our power generation
support operations as we support Eskom meet increased demand for
electricity. Powerlines activity has remained stable and although
one or two international competitors have withdrawn from the
market, competition remains stiff.
Divisional outlook
In South Africa, the markets in which we operate are expected to
remain strong for a number of years supported by significant
investment programmes and global commodity requirements. We have
restructured our business so we are in a strong position to benefit
from these trends.
For our current operations we have a number of opportunities
within our existing markets and we have identified opportunities to
develop these businesses into new geographies and new markets. In
addition, we have identified a number of opportunities in new
markets and for additional business streams which we can access by
building on expertise elsewhere in the Group.
Middle East
Despite the on going political unrest in parts of the Middle
East a number of factors support our belief that the area will
provide the Group with significant growth opportunities in future.
In particular, the drive for economic diversification away from oil
and the increased focus on vocational training, in both civil and
defence sectors, to support this as well as the rising investment
in education and infrastructures across the region.
We have continued to build our presence through our management
team in Abu Dhabi and have been actively engaged in dialogue with a
number of government departments and private organisations. As
anticipated, this process is taking time but we are making steady
progress. We have identified a number of areas where we can build
on our current contracts in the region and exploit the capabilities
across the Group and our successful track record of delivery.
Peter Rogers
Group Chief Executive
Bill Tame
Group Finance Director
14 May 2012
Principal risks
The risks and uncertainties shown below are those the Board
considers to be of most direct relevance and greatest significance
to Babcock as it stands today. They have the potential to
materially and adversely affect Babcock's business, results of
operations, revenue, profit, cash flow, assets and the delivery of
its strategy.
For each risk there is a description of the general strategic
response by the Company. The size, complexity and spread of
Babcock's businesses and the continually changing environment in
which the Group operates means, however, that the list below cannot
be an exhaustive list of all significant risks that could affect
the Group. For example, risks and uncertainties which affect or are
likely to affect businesses in general are not set out below but
Babcock, in common with other businesses, faces those risks
too.
The Group's risk management and internal control systems can
only seek to manage, not eliminate, the risk of failure to achieve
business objectives, as any system can only provide reasonable, not
absolute, assurance against material misstatement or loss.
Risk - reliance on large contracts with a relatively limited
number of major clients, including clients affected by political
and public spending decisions
Babcock's customers are mainly large, complex organisations,
typically central or local government departments, other public
sector bodies or commercially owned entities in sectors subject to
specific regulation. Many of them rely, to a greater or lesser
extent, on public funding.
Babcock's contracts are typically intended to last for five to
seven years, but many for much longer than that.
Inevitably, reliance on a relatively limited number of large
customers and contracts carries risks.
National and local government policy changes and public spending
constraints are potentially material risks for the Company as they
could result in delays in placing work, pressure on pricing or
margins, withdrawal of projects, early termination of contracts,
lower contract spend than anticipated or adoption of less
favourable contracting models.
These customers set demanding criteria for eligibility for
contracting with them, the cost of compliance with which can be
significant; the failure to obtain or retain the necessary eligible
status to contract with such customers could substantially impact
entire business areas.
A loss of reputation for any reason, either generally or with a
specific major customer, could lead to a significant loss of
existing or future business.
Key reputational dependencies include health and safety
performance, ethical conduct and contract performance.
Bid success rate determines how much of a pipeline of
opportunities is actually turned into growth.
Bidding for large and complex contracts is time-consuming (it
can take many months or even run into years) and is expensive - as
can be mobilising on new contract wins.
Unsuccessful bids or rebids can involve significant wasted bid
costs.
By their nature, large, longer-term contracts are irregular and
relatively infrequent in coming to market;
These factors together mean that lack of success in a new bid
can represent a significant missed opportunity for growth, and
losing rebids can mean the loss of a significant existing revenue
and profit stream.
Strategic response
The Company has extensive and regular dialogue with key
customers, involving as appropriate, the Chief Executive,
Divisional Chief Executives and other members of the senior
management team.
The Company actively monitors actual and potential political and
other developments that might affect its customers.
By these means, the Company seeks to maintain a clear
understanding of customer needs, plans and constraints and to be
able to respond to them.
The Company aims to be innovative and responsive in helping
customers meet their needs and challenges.
Risk - operations carrying significant health and safety or
environmental risks
Many of Babcock's operations, if not properly managed and
conducted, entail the risk of significant harm to employees, third
parties or the environment. Apart from the adverse impact this
could have on reputation and the willingness of customers to deal
with Babcock (see above), this could lead to significant financial
loss and claims for damages.
Strategic response
Health, safety and environmental performance are absolute
priorities for Babcock and receive close and continuous attention
and oversight from the senior management team as well as at the
operational level.
Risk - need for experienced management resource and skilled
employees, who can sometimes be in short supply
The Group needs, now and in the future, strong, experienced
senior executive and management teams familiar with the Babcock
culture, business model and customer base and who are capable of
delivering its strategic development plans. Also, some of the
Group's core engineering, technology and project management
businesses are complex and demand skilled, suitably qualified
personnel to deliver them operationally. The continuing success of
the Group relies on Babcock's ability to attract, train and retain
qualified and experienced management and business development
executives and other specialist professionals, technicians,
engineers and project management staff. The number of suitable
candidates is limited and the market for them competitive. This can
lead not only to increasing costs of recruitment and retention but
also potential problems with resourcing contracts and pursuing bids
and new business areas, which could in turn threaten the Company's
growth and reputation.
Strategic response
High priority and significant resources are given to recruiting
skilled professionals, apprentice and graduate recruitment
programmes, training and development, succession planning and
talent management generally.
Risk - IT and cyber-security
Like any business, Babcock depends on having reliable and secure
IT systems and cyber-security is an increasing threat for all
businesses. However, for Babcock this is also a critical customer
concern.
Many customer contracts require the Group to operate
contract-supporting IT either entirely within secure customer
networks or to be able to interface reliably and securely with
those systems, and the nature of Babcock's main customers is such
that they and their suppliers are a prime target for cyber-security
attacks.
The ability of Babcock to be able to deliver secure IT and other
information assurance systems is, therefore, a key factor for the
customer. If Babcock is unable to demonstrate continuing compliance
with customer requirements in this area it could have a substantial
impact on major business sectors.
Strategic response
Babcock has made a major investment - and will need to maintain
significant investment - in updated, reliable, more secure and
suitably accredited systems, under a centrally run IT management
structure.
As a part of this investment programme a major project is
underway to upgrade and further enhance security and information
assurance controls and management.
Risk - the Group has significant defined benefit pension
schemes
Defined benefit schemes provide for a specified level of pension
benefit to members, the cost of which is met from both member and
employer contributions paid into pension scheme funds and the
investment returns made in those funds over time. The level of
contributions required to meet pension obligations is actuarially
determined based on various assumptions, which are subject to
change, such as life expectancy of members, investment returns,
inflation etc. If, based on the assumptions being used at any time,
assets in the pension scheme are judged to be insufficient to meet
the calculated cost of the pension obligations there can be a
significant shortfall, which the scheme trustees may require to be
made up or secured by increased contributions from employers and/or
employees, additional cash payments from employers and/or
guarantees or other security to be provided by employers. This may
reduce the cash available to meet the Group's other obligations or
business needs. The most significant impact can occur due to
differences between the actual and assumed investment returns and
changes in the assumption for life expectancy.
Also, the Group must comply with IAS 19 when accounting for its
defined benefit schemes. IAS 19 requires corporate bond related
discount rates to be used to value the pension liabilities. This is
likely to lead to variations from year-to-year due to a mismatch
with the investments held in the pension schemes and because of
variations in the yields available on corporate bonds and
inflationary expectations. This in turn can materially affect the
pensions charge in the income statement in the Group's accounts
from year-to-year as well as the value of the difference between
the assets and the liabilities shown on the Group's balance sheet,
leading to significant accounting volatility. Future accounting,
regulatory and legislative changes may also adversely impact on
valuations and costs.
Strategic response
Continuous strategic monitoring and evaluation by Group senior
management of both the assets and liabilities of the pension scheme
and, as appropriate, the execution of mitigation opportunities. The
Company seeks to have a constructive and open relationship with the
schemes' trustees with a view to working together to mitigate and
manage these long-term risks.
Income statement
For the year ended 31 March 2012
2011
2012 Total
Total (restated) (restated)
Note GBPm GBPm GBPm GBPm
--------------------------------------------- ---- ------ ------- ---------- -----------
Total revenue 2 3,070.4 2,703.2
Less: joint ventures and associates
revenue 222.0 138.7
--------------------------------------------- ---- ------ ------- ---------- -----------
Group revenue 2,848.4 2,564.5
--------------------------------------------- ---- ------ ------- ---------- -----------
Group
------ ----------
Operating profit before amortisation
of acquired intangibles and exceptional
items 2 290.2 250.1
Amortisation of acquired intangibles 3 (77.3) (76.6)
Exceptional items 3 (10.9) (20.3)
------ ----------
Group operating profit 202.0 153.2
Joint ventures and associates
------ ----------
Share of operating profit 11.0 9.3
Investment income 25.6 13.8
Amortisation of acquired intangibles 3 (6.2) (4.6)
Finance costs (19.4) (8.3)
Income tax expense (6.7) (4.1)
------ ----------
Share of results of joint ventures
and associates 4.3 6.1
Group and joint ventures and associates
------ ----------
Operating profit before amortisation
of acquired intangibles and exceptional
items 301.2 259.4
Investment income 27.8 16.0
------ ----------
Underlying operating profit* 2 329.0 275.4
Amortisation of acquired intangibles (83.5) (81.2)
Exceptional items (10.9) (20.3)
Group investment income (2.2) (2.2)
Joint ventures and associates finance
costs (19.4) (8.3)
Joint ventures and associates income
tax expense (6.7) (4.1)
------ ------- ---------- -----------
Group operating profit plus share of
joint ventures and associates 206.3 159.3
------- -----------
Finance costs
------ ----------
Investment income 2.2 2.2
Finance costs (46.0) (59.0)
Finance income 10.5 8.6
------ ----------
(33.3) (48.2)
--------------------------------------------- ---- ------ ------- ---------- -----------
Profit before tax 2 173.0 111.1
--------------------------------------------- ---- ------ ------- ---------- -----------
Income tax expense 4 (15.8) (10.1)
--------------------------------------------- ---- ------ ------- ---------- -----------
Profit for the year from continuing
operations 157.2 101.0
--------------------------------------------- ---- ------ ------- ---------- -----------
Discontinued operations
(Loss)/profit for the year from discontinued
operations attributable to owners of
the parent (53.1) 3.7
------- -----------
Profit for the year 104.1 104.7
------- -----------
Attributable to:
Owners of the parent 100.8 101.1
Non-controlling interest 3.3 3.6
------- -----------
104.1 104.7
------- -----------
Earnings per share from continuing
operations 5
- Basic 42.93p 30.14p
- Diluted 42.76p 30.03p
Earnings per share from continuing
and discontinued operations
- Basic 28.11p 31.28p
- Diluted 28.01p 31.17p
*Including IFRIC 12 investment income, but before exceptional items
and amortisation of acquired intangibles
Statement of comprehensive income
For the year ended 31 March 2012
2012 2011
GBPm GBPm
------------------------------------------------------------ ------- ------
Profit for the period 104.1 104.7
Other comprehensive income
Currency translation differences (6.2) (7.7)
Fair value adjustment of interest rate and foreign
exchange hedges 4.3 7.3
Tax on fair value adjustment of interest rate and foreign
exchange hedges 0.5 (1.5)
Fair value adjustment of joint venture and associate
derivatives (65.1) 8.8
Tax on fair value adjustment of joint venture and associate
derivatives 16.9 (2.4)
Net actuarial (loss)/gain in respect of pensions (106.9) 103.5
Tax on net actuarial loss/(gain) in respect of pensions 27.8 (31.3)
Impact of change in UK tax rates (5.7) (2.7)
------------------------------------------------------------ ------- ------
Other comprehensive income, net of tax (134.4) 74.0
------------------------------------------------------------ ------- ------
Total comprehensive (loss)/income (30.3) 178.7
------------------------------------------------------------ ------- ------
Attributable to:
Owners of the parent (33.3) 175.0
Non-controlling interest 3.0 3.7
------------------------------------------------------------ ------- ------
Total comprehensive (loss)/income (30.3) 178.7
------------------------------------------------------------ ------- ------
Statement of changes in equity
For the year ended 31 March 2012
Owners
Share Share Capital Retained Hedging Translation of Non-controlling Total
capital premium redemption earnings reserve reserve parent interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------- -------- ---------- --------- -------- ----------- -------- --------------- -------
At 1 April 2010 137.8 148.3 30.6 (234.2) (10.7) 8.8 80.6 5.2 85.8
Total
comprehensive
income - - - 170.6 12.2 (7.8) 175.0 3.7 178.7
Shares issued in
the period 77.5 724.5 - - - - 802.0 - 802.0
Dividends - - - (48.0) - - (48.0) (3.5) (51.5)
Share-based
payments - - - 5.8 - - 5.8 - 5.8
Tax on
share-based
payments - - - 0.5 - - 0.5 - 0.5
Own shares and
other - - - (2.2) - - (2.2) - (2.2)
Non-controlling
interest
acquired - - - - - - - 3.5 3.5
Acquisition
costs - - - (2.0) - - (2.0) - (2.0)
---------------- -------- -------- ---------- --------- -------- ----------- -------- --------------- -------
Net movement in
equity 77.5 724.5 - 124.7 12.2 (7.8) 931.1 3.7 934.8
---------------- -------- -------- ---------- --------- -------- ----------- -------- --------------- -------
At 31 March 2011 215.3 872.8 30.6 (109.5) 1.5 1.0 1,011.7 8.9 1,020.6
---------------- -------- -------- ---------- --------- -------- ----------- -------- --------------- -------
At 1 April 2011 215.3 872.8 30.6 (109.5) 1.5 1.0 1,011.7 8.9 1,020.6
Total
comprehensive
(loss)/ income - - - 16.0 (43.4) (5.9) (33.3) 3.0 (30.3)
Shares issued in
the period 0.2 0.2 - - - - 0.4 - 0.4
Dividends - - - (71.4) - - (71.4) (2.1) (73.5)
Share-based
payments - - - 5.0 - - 5.0 - 5.0
Tax on
share-based
payments - - - (0.6) - - (0.6) - (0.6)
Own shares and
other - - - 0.2 - - 0.2 - 0.2
Non-controlling
interest
acquired - - - (0.6) - - (0.6) (1.2) (1.8)
---------------- -------- -------- ---------- --------- -------- ----------- -------- --------------- -------
Net movement in
equity 0.2 0.2 - (51.4) (43.4) (5.9) (100.3) (0.3) (100.6)
---------------- -------- -------- ---------- --------- -------- ----------- -------- --------------- -------
At 31 March 2012 215.5 873.0 30.6 (160.9) (41.9) (4.9) 911.4 8.6 920.0
---------------- -------- -------- ---------- --------- -------- ----------- -------- --------------- -------
Balance sheet
As at 31 March 2012
2011
2012 (restated)
Note GBPm GBPm
--------------------------------------------- ---- ------- ------------
Assets
Non-current assets
Goodwill 1,540.9 1,622.2
Other intangible assets 347.2 473.4
Property, plant and equipment 213.7 205.8
Investments in joint ventures and associates 7 19.3 64.9
Loans to joint ventures and associates 7 24.9 22.1
Retirement benefits 11 10.2 12.2
Trade and other receivables 1.8 1.9
IFRIC 12 financial assets 23.1 38.2
Other financial assets 10 20.1 1.0
Deferred tax asset 31.3 3.3
--------------------------------------------- ---- ------- ------------
2,232.5 2,445.0
--------------------------------------------- ---- ------- ------------
Current assets
Inventories 81.6 96.6
Trade and other receivables 476.9 540.3
Income tax recoverable - 2.7
Other financial assets 3.3 0.8
Cash and cash equivalents 10 100.3 104.3
--------------------------------------------- ---- ------- ------------
662.1 744.7
--------------------------------------------- ---- ------- ------------
Assets held for sale 13 103.0 --
--------------------------------------------- ---- ------- ------------
Total assets 2,997.6 3,189.7
--------------------------------------------- ---- ------- ------------
Equity and liabilities
Equity attributable to owners of the parent
Share capital 215.5 215.3
Share premium 873.0 872.8
Capital redemption and other reserves (16.2) 33.1
Retained earnings (160.9) (109.5)
--------------------------------------------- ---- ------- ------------
911.4 1,011.7
Non-controlling interest 8.6 8.9
--------------------------------------------- ---- ------- ------------
Total equity 920.0 1,020.6
--------------------------------------------- ---- ------- ------------
Non-current liabilities
Bank and other borrowings 10 757.3 799.0
Trade and other payables 8.9 13.6
Deferred tax - 20.6
Retirement liabilities 11 276.1 237.3
Provisions for other liabilities 117.2 134.4
--------------------------------------------- ---- ------- ------------
1,159.5 1,204.9
--------------------------------------------- ---- ------- ------------
Current liabilities
Bank and other borrowings 10 4.2 35.3
Trade and other payables 819.5 877.8
Income tax payable 10.0 17.3
Other financial liabilities 8.2 4.1
Provisions for other liabilities 27.8 29.7
--------------------------------------------- ---- ------- ------------
869.7 964.2
--------------------------------------------- ---- ------- ------------
Liabilities held for sale 13 48.4 -
--------------------------------------------- ---- ------- ------------
Total liabilities 2,077.6 2,169.1
--------------------------------------------- ---- ------- ------------
Total equity and liabilities 2,997.6 3,189.7
--------------------------------------------- ---- ------- ------------
Cash flow statement
For the year ended 31 March 2012
2012 2011
Note GBPm GBPm
------------------------------------------------------ ---- ------- -------
Cash flows from operating activities
Cash generated from operations 8 260.7 308.5
Income tax paid (28.0) (19.3)
Interest paid (47.4) (58.6)
Interest received 10.3 8.6
------------------------------------------------------ ---- ------- -------
Net cash flows from operating activities 195.6 239.2
------------------------------------------------------ ---- ------- -------
Cash flows from investing activities
Disposal of subsidiaries and joint ventures and
associates 5.7 2.2
Dividends received from joint ventures and associates 6.6 -
Proceeds on disposal of property, plant and equipment 2.7 1.0
Proceeds on disposal of intangible assets - 0.2
Purchases of property, plant and equipment (42.7) (30.2)
Purchases of intangible assets (6.0) (4.2)
Investment in, loans to and interest received
from joint ventures and associates (2.7) 0.2
Acquisition of non-controlling interest (1.7) -
Acquisition of subsidiaries net of cash acquired 0.2 (486.2)
------------------------------------------------------ ---- ------- -------
Net cash flows from investing activities (37.9) (517.0)
------------------------------------------------------ ---- ------- -------
Cash flows from financing activities
Dividends paid (71.4) (48.0)
Finance lease principal payments (2.0) (12.9)
Loans repaid (305.6) (457.5)
Loans raised 251.0 845.1
Dividends paid to non-controlling interest (2.1) (3.5)
Net proceeds on issue of shares 0.4 -
Movement on own shares 0.2 (2.2)
------------------------------------------------------ ---- ------- -------
Net cash flows from financing activities (129.5) 321.0
------------------------------------------------------ ---- ------- -------
Net increase in cash, cash equivalents and bank
overdrafts 28.2 43.2
Cash, cash equivalents and bank overdrafts at
start of period 72.7 29.0
Effects of exchange rate fluctuations (2.5) 0.5
------------------------------------------------------ ---- ------- -------
Cash, cash equivalents and bank overdrafts at
end of period 10 98.4 72.7
------------------------------------------------------ ---- ------- -------
Notes to the consolidated financial statements
For the year ended 31 March 2012
1. Basis of preparation
The financial information has been extracted from the Annual
Report, including the audited financial statements for the year
ended 31 March 2012. They should be read in conjunction with the
Annual Report for the year ended 31 March 2011, which has been
prepared in accordance with IFRSs as adopted by the European Union.
The accounting policies used and presentation of these consolidated
financial statements are consistent with those in the Annual Report
for the year ended 31 March 2011.
Standards, amendments and interpretations effective in 2011 with
minimal or no impact on the Group:
IAS 24 (revised), 'Related party discloses'.
IFRS 1 (amendment), 'First time adoption' on financial
instrument disclosure.
IFRIC 14 (amendment), 'Prepayment of a minimum funding
requirement'.
IFRIC 19, Extinguishing financial liabilities with
instruments;.
2010 Annual improvements
2. Segmental analysis
The segments reflect the accounting information reviewed by the
Chief Operating Decision Maker (CODM). The Marine and Technology
segment includes the Group's UK and International marine business,
the Defence and Security segment is the remainder of the UK defence
business with the exception of certain defence infrastructure
contracts which fall within Support Services. Support Services also
includes Education and Training, Rail, Infrastructure, Critical
Assets and Mobile Assets. International includes the South African
and Middle East businesses. The US defence business formerly
included in International is now under Discontinued operations.
Discontinued
Continuing operations operations Total
------------- ------------------------------------------------------------------------------- ------------- -------
Marine Total
and Defence Support continuing Group
Technology and Security Services International Unallocated operations International total
2012 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ------------ ------------- --------- ------------- ----------- ----------- ------------- -------
Total revenue 1,084.7 613.3 1,092.4 280.0 - 3,070.4 202.1 3,272.5
Joint
ventures and
associates
revenue - 167.3 54.7 - - 222.0 - 222.0
------------- ------------ ------------- --------- ------------- ----------- ----------- ------------- -------
Group revenue 1,084.7 446.0 1,037.7 280.0 - 2,848.4 202.1 3,050.5
------------- ------------ ------------- --------- ------------- ----------- ----------- ------------- -------
Operating
profit* -
Group 135.1 50.3 97.2 19.3 (11.7) 290.2 14.7 304.9
IFRIC 12
investment
income
- Group - 1.4 0.8 - - 2.2 - 2.2
Share of
operating
profit
- joint
ventures and
associates - 9.5 1.5 - - 11.0 - 11.0
Share of
IFRIC 12
investment
income -
joint
ventures
and
associates - 18.4 7.2 - - 25.6 - 25.6
------------- ------------ ------------- --------- ------------- ----------- ----------- ------------- -------
Underlying
operating
profit 135.1 79.6 106.7 19.3 (11.7) 329.0 14.7 343.7
Share of
interest -
joint
ventures and
associates - (12.3) (7.1) - - (19.4) - (19.4)
Share of tax
- joint
ventures
and
associates - (6.5) (0.2) - - (6.7) - (6.7)
Acquired
intangible
amortisation
- Group (13.0) (12.6) (51.7) - - (77.3) (7.9) (85.2)
Share of
acquired
intangible
amortisation
- joint
ventures
and
associates - (5.8) (0.4) - - (6.2) - (6.2)
Net finance
costs -
Group - - - - (35.5) (35.5) - (35.5)
Exceptional
items - - - - (10.9) (10.9) (58.6) (69.5)
------------- ------------ ------------- --------- ------------- ----------- ----------- ------------- -------
Group profit
before tax 122.1 42.4 47.3 19.3 (58.1) 173.0 (51.8) 121.2
------------- ------------ ------------- --------- ------------- ----------- ----------- ------------- -------
*Before amortisation of acquired intangibles and exceptional
items.
2. Segmental
analysis
(continued)
-------------- ----------- ------------- --------- ------------- ----------- ----------- ------------- -------
Discontinued
Continuing operations operations Total
-------------- ------------------------------------------------------------------------------ ------------- -------
Marine Total
and Defence Support International Unallocated continuing International Group
Technology and Security Services (restated) (restated) operations (restated) total
2011 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ----------- ------------- --------- ------------- ----------- ----------- ------------- -------
Total revenue 1,019.5 469.2 946.6 267.9 - 2,703.2 191.3 2,894.5
Joint ventures
and
associates
revenue - 87.3 51.4 - - 138.7 - 138.7
-------------- ----------- ------------- --------- ------------- ----------- ----------- ------------- -------
Group revenue 1,019.5 381.9 895.2 267.9 - 2,564.5 191.3 2,755.8
-------------- ----------- ------------- --------- ------------- ----------- ----------- ------------- -------
Operating
profit* -
Group 119.3 52.8 74.7 18.1 (14.8) 250.1 11.5 261.6
IFRIC 12
investment
income
- Group - 1.6 0.6 - - 2.2 - 2.2
Share of
operating
profit
- joint
ventures and
associates - 8.5 0.8 - - 9.3 - 9.3
Share of IFRIC
12 investment
income -
joint
ventures
and
associates - 10.3 3.5 - - 13.8 - 13.8
Underlying
operating
profit 119.3 73.2 79.6 18.1 (14.8) 275.4 11.5 286.9
Share of
interest -
joint
ventures and
associates - (4.7) (3.6) - - (8.3) - (8.3)
Share of tax -
joint
ventures and
associates - (4.0) (0.1) - - (4.1) - (4.1)
Acquired
intangible
amortisation
- Group (10.1) (13.9) (52.6) - - (76.6) (6.8) (83.4)
Share of
acquired
intangible
amortisation
- joint
ventures and
associates - (4.3) (0.3) - - (4.6) - (4.6)
Net finance
costs - Group - - - - (50.4) (50.4) - (50.4)
Exceptional
items - - - - (20.3) (20.3) (0.4) (20.7)
Group profit
before tax 109.2 46.3 23.0 18.1 (85.5) 111.1 4.3 115.4
-------------- ----------- ------------- --------- ------------- ----------- ----------- ------------- -------
*Before amortisation of acquired intangibles and exceptional
items.
3. Exceptional items and acquired intangible amortisation
Joint ventures
Group and associates Total
------------ ----------------- ------------
2012 2011 2012 2011 2012 2011
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ----- ----- -------- ------- ----- -----
Continuing operations
Profit on disposal of subsidiaries (1.9) (2.9) - - (1.9) (2.9)
Reorganisation costs 12.8 10.8 - - 12.8 10.8
Acquisition costs - 12.4 - - - 12.4
----------------------------------- ----- ----- -------- ------- ----- -----
Exceptional items 10.9 20.3 - - 10.9 20.3
Acquired intangible amortisation 77.3 76.6 6.2 4.6 83.5 81.2
----------------------------------- ----- ----- -------- ------- ----- -----
Continuing total 88.2 96.9 6.2 4.6 94.4 101.5
----------------------------------- ----- ----- -------- ------- ----- -----
Discontinued operations
Reorganisation costs 0.1 0.4 - - 0.1 0.4
Impairment of US defence goodwill 58.5 - - - 58.5 -
----------------------------------- ----- ----- -------- ------- ----- -----
Exceptional items 58.6 0.4 - - 58.6 0.4
Acquired intangible amortisation 7.9 6.8 - - 7.9 6.8
----------------------------------- ----- ----- -------- ------- ----- -----
Discontinued total 66.5 7.2 - - 66.5 7.2
----------------------------------- ----- ----- -------- ------- ----- -----
Exceptional items are those items which are exceptional in
nature or size. These include material acquisition costs and
reorganisation costs
Following the exchange of conditional contracts for the sale of
the US defence business acquired with VT Group plc there is an
impairment to Goodwill reflecting the current sales value
expected.
Acquisition costs in 2011 relate to the acquisition of VT Group
plc. Reorganisation costs relate to the integration of Babcock
International Group PLC and VT Group plc.
4. Income taxes
Taxation in respect of Group profit before tax, acquired
intangible amortisation and exceptional items totalled GBP54.7
million (2011: GBP46.8 million) including the Groups shares of JV
income tax of GBP8.3 million (2011: GBP5.4 million). The effective
rate of income tax, which is calculated by reference to the Group's
underlying profit before tax and the associated tax charge
(excluding prior year items) was 19% (2011: 20.5%).
5. Earnings per share
The calculation of the basic and diluted EPS is based on the
following data:
2012 2011
Number Number
---------------------------------------------- ----------- -----------
Number of shares
Weighted average number of ordinary shares
for the purpose of basic EPS 358,568,556 323,193,144
Effect of dilutive potential ordinary shares:
share options 1,312,457 1,144,410
---------------------------------------------- ----------- -----------
Weighted average number of ordinary shares
for the purpose of diluted EPS 359,881,013 324,337,554
---------------------------------------------- ----------- -----------
Earnings
2012 2011
-------------------------------- --------------------------------
Basic Diluted Basic Diluted
Earnings per share per share Earnings per share per share
GBPm pence pence GBPm pence pence
--------------------------------------- -------- ---------- ---------- -------- ---------- ----------
Continuing operations
Earnings from continuing operations 153.9 42.93 42.76 97.4 30.14 30.03
Add back:
Amortisation of acquired intangible
assets, net of tax 61.8 17.23 17.17 58.5 18.09 18.02
Exceptional items, net of tax 8.1 2.26 2.25 16.5 5.11 5.09
Impact of change in UK tax
rate (3.4) (0.95) (0.94) (2.7) (0.84) (0.83)
--------------------------------------- -------- ---------- ---------- -------- ---------- ----------
Earnings before discontinued
operations, amortisation, exceptional
items and other 220.4 61.47 61.24 169.7 52.50 52.31
--------------------------------------- -------- ---------- ---------- -------- ---------- ----------
Discontinued operations
Earnings from discontinued
operations (53.1) (14.82) (14.75) 3.7 1.14 1.14
Add back:
Amortisation of acquired intangible
assets, net of tax 4.8 1.35 1.34 4.1 1.30 1.30
Exceptional items, net of tax 58.6 16.33 16.26 0.3 0.09 0.09
Earnings from discontinued
operations before amortisation,
exceptional items and other 10.3 2.86 2.85 8.1 2.53 2.53
--------------------------------------- -------- ---------- ---------- -------- ---------- ----------
Continuing and discontinued
operations
Earnings from continuing and
discontinued operations 100.8 28.11 28.01 101.1 31.28 31.17
Add back:
Amortisation of acquired intangible
assets, net of tax 66.6 18.58 18.51 62.6 19.39 19.32
Exceptional items, net of tax 66.7 18.59 18.51 16.8 5.20 5.18
Impact of change in UK tax
rate (3.4) (0.95) (0.94) (2.7) (0.84) (0.83)
--------------------------------------- -------- ---------- ---------- -------- ---------- ----------
Earnings before amortisation,
exceptional items and other 230.7 64.33 64.09 177.8 55.03 54.84
--------------------------------------- -------- ---------- ---------- -------- ---------- ----------
6. Dividends
The Directors have proposed a final dividend of 17.0 pence per
60 pence ordinary share (2011: 14.2 pence per 60 pence ordinary
share) was declared after the balance sheet date and will be paid
on 7 August 2012 to shareholders registered on 6 July 2012.
7. Investments in and loans to joint ventures and associates
Investment in Loans to joint
joint ventures ventures and
and associates associates Total
----------------- ---------------- -------------
2012 2011 2012 2011 2012 2011
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- --------- ------ ------- ------- ------ -----
At 1 April 64.9 1.0 22.1 13.3 87.0 14.3
Acquisition of joint ventures
and associates - 51.2 - 8.1 - 59.3
Joint venture becoming a subsidiary 4.0 - - - 4.0 -
Investments in joint ventures
and associates 0.9 0.2 - - 0.9 0.2
Loans to/(repayments from)
joint ventures and associates - - 3.2 (0.4) 3.2 (0.4)
Share of profits 4.3 6.1 - - 4.3 6.1
Dividends received (6.6) - - - (6.6) -
Interest accrued - - 1.1 1.1 1.1 1.1
Interest received - - (1.5) - (1.5) -
Fair value adjustment of derivatives (65.1) 8.8 - - (65.1) 8.8
Tax on fair value adjustment
of derivatives 16.9 (2.4) - - 16.9 (2.4)
------------------------------------- --------- ------ ------- ------- ------ -----
At 31 March 19.3 64.9 24.9 22.1 44.2 87.0
------------------------------------- --------- ------ ------- ------- ------ -----
8. Reconciliation of operating profit to cash generated from
operations
2012 2011
GBPm GBPm
------------------------------------------------------------- ------ ------
Cash flows from operating activities
Operating profit before amortisation of acquired intangibles
and exceptional items. 290.2 250.1
Amortisation of acquired intangibles and exceptional
items (88.2) (96.9)
(Loss)/profit from discontinued operations (53.1) 3.7
Tax on(loss)/ profit from discontinued operations 1.3 0.6
------------------------------------------------------------- ------ ------
Operating profit 150.2 157.5
------------------------------------------------------------- ------ ------
Depreciation of property, plant and equipment 33.6 31.2
Amortisation of intangible assets 90.3 87.3
Investment income 2.2 2.2
Equity share-based payments 5.0 5.8
Profit on disposal of subsidiaries (1.9) (2.9)
Impairment of goodwill 58.5 -
(Profit)/loss on disposal of property, plant and equipment (0.8) 0.4
Loss on disposal of intangible assets 0.2 0.2
------------------------------------------------------------- ------ ------
Operating cash flows before movement in working capital 337.3 281.7
Decrease in inventories 8.6 3.5
Decrease/(increase) in receivables 23.3 (83.0)
(Decrease)/increase in payables (26.4) 176.5
Decrease in provisions (16.0) (16.8)
Retirement benefit payments in excess of income statement (66.1) (53.4)
------------------------------------------------------------- ------ ------
Cash generated from operations 260.7 308.5
------------------------------------------------------------- ------ ------
9. Movement in net debt
2012 2011
GBPm GBPm
--------------------------------------------------------- ------- -------
Increase in cash in the period 28.2 43.2
Cash flow from the (increase)/decrease in debt and lease
financing 56.6 (374.7)
--------------------------------------------------------- ------- -------
Change in net funds resulting from cash flows 84.8 (331.5)
Loans and finance leases acquired and disposed of with
subsidiaries - (90.3)
Foreign currency translation differences and other 3.1 (4.9)
--------------------------------------------------------- ------- -------
Movement in net debt in the period 87.9 (426.7)
Net debt at the beginning of the period (729.0) (302.3)
--------------------------------------------------------- ------- -------
Net debt at the end of the period (641.1) (729.0)
--------------------------------------------------------- ------- -------
10. Changes in net debt
At Exchange At
1 April Acquisition movement 31 March
2011 Cash flow and disposals /other 2012
GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------- --------- -------------- --------- ---------
Cash and bank balances 104.3 (1.8) 0.2 (2.4) 100.3
Bank overdrafts (31.6) 29.8 - (0.1) (1.9)
-------------------------------- -------- --------- -------------- --------- ---------
Cash, cash equivalents and bank
overdrafts 72.7 28.0 0.2 (2.5) 98.4
-------------------------------- -------- --------- -------------- --------- ---------
Debt (798.7) 54.6 - (13.7) (757.8)
Finance leases (4.0) 2.0 - 0.2 (1.8)
-------------------------------- -------- --------- -------------- --------- ---------
(802.7) 56.6 - (13.5) (759.6)
-------------------------------- -------- --------- -------------- --------- ---------
Net debt before derivatives (730.0) 84.6 0.2 (16.0) (661.2)
-------------------------------- -------- --------- -------------- --------- ---------
Net debt derivative 1.0 - - 19.1 20.1
-------------------------------- -------- --------- -------------- --------- ---------
Net debt including derivative (729.0) 84.6 0.2 3.1 (641.1)
-------------------------------- -------- --------- -------------- --------- ---------
11. Retirement Benefits and Liabilities
Analysis of movement in the balance sheet
2012 2011
GBPm GBPm
-------------------------------------- ------- -------
Fair value of plan assets
At 1 April 2,579.9 1,979.8
Acquisitions - 432.5
Expected return 172.1 152.6
Actuarial gain 70.1 7.8
Change in reimbursement rights (2.5) 36.1
Employer contributions 84.3 82.5
Employee contributions 7.3 7.1
Benefits paid (128.5) (118.1)
Exchange differences - (0.4)
-------------------------------------- ------- -------
At 31 March 2,782.7 2,579.9
-------------------------------------- ------- -------
Present value of benefit obligations
At 1 April 2,794.6 2,303.8
Acquisitions - 483.6
Service cost 44.5 46.0
Interest cost 145.7 135.6
Employee contributions 7.3 7.1
Actuarial (gain)/ loss 176.3 (63.3)
Benefits paid (128.5) (118.1)
Exchange differences - (0.1)
-------------------------------------- ------- -------
At 31 March 3,039.9 2,794.6
-------------------------------------- ------- -------
Present value of unfunded obligations (0.1) -
IFRIC 14 adjustment (8.6) (10.4)
-------------------------------------- ------- -------
Net deficit at 31 March (265.9) (225.1)
-------------------------------------- ------- -------
Analysis of charge to Income Statement
2012 2011
GBPm GBPm
--------------------------------------- ------- -------
Current service cost (44.5) (46.0)
Interest on obligations (145.7) (135.6)
Expected return on plan assets 172.1 152.6
--------------------------------------- ------- -------
Total included within operating profit (18.1) (29.0)
--------------------------------------- ------- -------
As at 31 March 2012 the key assumptions used in valuing pension
liabilities were:
Discount rate 4.8% (31 March 2011: 5.6%)
Inflation rate 2.7% (31 March 2011: 3.1%)
Expected return on plan assets 6.6% (31 March 2011: 7.2%)
Total life expectancy - future pensioners (years) 86.7 (31 March
2011: 86.6)
12(a). Acquisition - current year
On 6 October 2011 the Group acquired a controlling interest in
Careers Enterprises (Futures) Limited for a cost of GBPnil. Prior
to this the Group had an investment in the company and accounted
for it as a joint venture. The net assets acquired were GBPnil
after allowing for the negative value of the joint venture brought
forward and a provision of GBP3.7 million.
12(b). Acquisition - prior year
On 8 July 2010 the acquisition of 100% of the share capital of
VT Group plc was completed for a cash and share consideration of
GBP1,471.3 million. On 27 September 2011 the acquisition of the
assets and trading of Evergreen Unmanned Systems (Evergreen) in the
USA was completed for a cash consideration of GBP8.9 million (US$14
million).
The goodwill arising on the acquisition derives from the
experience, knowledge and location of the workforce, the market
position of the entities involved and expected synergies.
Details of final assets acquired and the final goodwill are as
follows:
VT Group
plc Evergreen Total
GBPm GBPm GBPm
------------------------------------------ -------- --------- -------
Cost of acquisition
Cash paid 665.7 8.9 674.6
129,034,886 shares issued 805.6 - 805.6
------------------------------------------ -------- --------- -------
Purchase consideration 1,471.3 8.9 1,480.2
Fair value of assets acquired (see below) 397.6 2.2 399.8
------------------------------------------ -------- --------- -------
Goodwill 1,073.7 6.7 1,080.4
------------------------------------------ -------- --------- -------
Net assets and liabilities arising from the acquisition are as
follows:
VT Group plc Evergreen Total
----------------------- ----------------------- -----------------------
Book value Final Book value Final Book value Final
of assets fair value of assets fair value of assets fair value
acquired acquired acquired acquired acquired acquired
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ---------- ----------- ---------- ----------- ---------- -----------
Goodwill 302.9 - - - 302.9 -
Intangible assets 13.3 8.3 - - 13.3 8.3
Acquired intangibles* 115.9 464.9 - 4.5 115.9 469.4
Property, plant and equipment 74.6 59.6 0.9 0.9 75.5 60.5
Investment in and loans to
joint ventures and associates 16.0 59.3 - - 16.0 59.3
Retirement liabilities (84.8) (58.1) - - (84.8) (58.1)
Deferred tax (11.5) (84.3) - - (11.5) (84.3)
Income tax (1.8) (1.2) (1.8) (1.2)
Cash, cash equivalents and
bank overdrafts 193.6 193.6 0.4 0.4 194.0 194.0
Bank loans (80.9) (81.5) - - (80.9) (81.5)
Finance leases (10.6) (10.6) - - (10.6) (10.6)
Inventory 14.7 14.3 - - 14.7 14.3
Current assets 178.6 165.3 0.2 0.2 178.8 165.5
Current and non current liabilities (175.4) (201.6) - - (175.4) (201.6)
Provisions (55.7) (126.8) (3.8) (3.8) (59.5) (130.6)
Non-controlling interest (2.9) (3.6) - - (2.9) (3.6)
------------------------------------ ---------- ----------- ---------- ----------- ---------- -----------
Net assets acquired 486.0 397.6 (2.3) 2.2 483.7 399.8
------------------------------------ ---------- ----------- ---------- ----------- ---------- -----------
* Acquired intangibles are: customer relationships, both
contracted and non-contracted.
Last year's financial statements reported fair value adjustments
for VT Group plc and Evergreen as provisional. The final fair value
adjustments reflect the nature of long term contracts, the
estimation of which benefits from the effluxion of time. The
balance sheet categories affected were provisions and their related
tax benefits:
Provisional Final
fair fair
value value Movement
GBPm GBPm GBPm
-------------------- ----------- ------- --------
Deferred tax (86.9) (84.3) 2.6
Provisions (120.6) (130.6) (10.0)
-------------------- ----------- ------- --------
Net assets acquired 407.2 399.8 (7.4)
-------------------- ----------- ------- --------
13. Disposals and held for sale and Post Balance Sheet Event
During the year the Group disposed of its holding in Babcock
Eagleton Inc. At the year end the Group was actively marketing its
holding in VT Services Inc. (The US Defence business) and has
therefore transferred its assets and liabilities to held for sale.
Subsequent to the year end conditional contracts were exchanged for
the sale of the US defence business at a price consistent with the
impairment. The comparatives of the income statement have been
restated to reflect this change.
In 2011 four small subsidiaries were disposed of.
2012 2011
--------------------------- -----
Babcock
Eagleton Held for
Inc. sale Total Total
GBPm GBPm GBPm GBPm
------------------------------------------- --------- -------- ------ -----
Goodwill 1.2 23.4 24.6 -
Intangible assets - 41.7 41.7 -
Property, plant and equipment 0.6 6.0 6.6 2.0
Cash, cash equivalents and bank overdrafts - - - 0.2
Bank loans - - - (1.8)
Taxation - (20.4) (20.4) (0.5)
Current and non-current assets 3.4 31.7 35.1 0.2
Inventories - 0.2 0.2 -
Current and non-current liabilities (1.4) (21.2) (22.6) (0.5)
Provisions - (6.8) (6.8) (0.2)
Non-controlling interests - - - (0.1)
------------------------------------------- --------- -------- ------ -----
Net assets disposed/held for sale 3.8 54.6 58.4 (0.7)
Profit on disposal of subsidiary 1.9 - 1.9 2.9
Net held for sale - (54.6) (54.6)
------------------------------------------- --------- -------- ------ -----
Net cashflow 5.7 - 5.7 2.2
------------------------------------------- --------- -------- ------ -----
14. Related party transactions
Related party transactions in the year are; sales to joint
ventures and associates of GBP278.1 million (2011: GBP236.7
million) and purchases from joint ventures and associates of
GBP58.5 million (2011: GBP36.2 million). The year end receivables
balance was GBP21.0 million (2011: GBP24.0 million) and the
payables balance was GBP2.4 million (2011: GBP2.8 million). In
addition, there were sales with related parties by means of common
directors of GBP10.0 million (2011: GBP6.2 million) and purchases
from related parties by means of common directors of GBP0.3 million
(2011: GBPnil). The year end receivables balance was GBP1.8 million
(2011: GBP2.1 million).
15. Financial information
The financial information in this preliminary report does not
constitute statutory accounts within the meaning of section 434 of
the Companies Act 2006.
Statutory accounts for 2011 have been delivered to the Registrar
of Companies and those for 2012 will be delivered following the
Company's Annual General Meeting.
The Annual Report for the year ended 31 March 2012 and this
preliminary statement were approved by the Board on 14 May 2012.
The auditors have reported on the Annual Report for the year ended
31 March 2012 and 31 March 2011 and neither report was qualified
and neither contain a statement under section 498(2) or (3) of the
Companies Act 2006.
Annual General Meeting 2012
This year's Annual General Meeting will be held on 5 July 2012.
Details of the resolutions to be proposed at that meeting will be
included in the Notice of Annual General Meeting that will be sent
to shareholders at the beginning of June 2012.
At our Annual General Meeting in 2007 our shareholders
unanimously agreed to proposals to allow us to use electronic
communications with them as allowed for under the Companies Act
2006. For shareholders who agreed, or who are treated as having
agreed, to receive electronic communications, the Company website
is now the main way for them to access shareholder information.
These shareholders will be sent a 'notice of availability'
notifying them when the Annual Report is available (which will be
early in June) on the Company website www.babcock.co.uk. Hard
copies of the Annual Report will be distributed to those
shareholders who have requested or subsequently request them.
Additional copies will be available from the Company's registered
office 33 Wigmore Street, London, W1U 1QX.
Forward-looking statements
Certain statements in this announcement are forward looking
statements. Such statements may relate to Babcock's business,
strategy and plans. Statements that are not historical facts,
including statements about Babcock's or its management's beliefs
and expectations, are forward-looking statements. Words such as
'believe', 'anticipate', 'estimates', 'expects', 'intends', 'aims',
'potential', 'will', 'would', 'could', 'considered', 'likely', and
variations of these words and similar future or conditional
expressions are intended to identify forward-looking statements but
are not the exclusive means of doing so. By their nature,
forward-looking statements involve a number of risks, uncertainties
or assumptions, some known and some unknown, that could cause
actual results or events to differ materially from those expressed
or implied by the forward-looking statements, many of which are
beyond Babcock's control. Please see pages 13 which set out some of
these risks and uncertainties. These risks, uncertainties or
assumptions could adversely affect the outcome and financial
effects of the plans and events described herein. Forward-looking
statements contained in this announcement regarding past trends or
activities should not be taken as a representation that such trends
or activities will continue in the future. Nor are they indicative
of future performance and Babcock's actual results of operations
and financial condition and the development of the industry and
markets in which Babcock operates may differ materially from those
made in or suggested by the forward-looking statements. You should
not place undue reliance on forward-looking statements, which speak
only as of the date of this announcement because such statements
relate to events and depend on circumstances that may or may not
occur in the future. Forward-looking statements reflect Babcock's
judgement at the date of this announcement and are not intended to
give any assurance as to future results. Except as required by law,
Babcock is under no obligation to update (and will not) or keep
current the forward-looking statements contained in this
announcement or to correct any inaccuracies which may become
apparent in such forward-looking statements.
Directors' responsibility statement
This full year results announcement complies with the Disclosure
and Transparency Rules (DTR) of the United Kingdom's Financial
Services Authority. The full year results announcement is the
responsibility of, and has been approved by, the Directors of
Babcock International Group PLC.
The responsibility statement below has been prepared in
connection with the Company's full Annual Report for the year ended
31 March 2012. Certain parts thereof are not included in this
announcement.
The Directors of Babcock International Group PLC confirm that to
the best of their knowledge
the financial statements prepared in accordance with IFRS as
adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position and profit of the Company
and the undertakings included in the consolidation taken as a
whole, and
the Operating and Financial Review 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 they face.
On behalf of the Board
Peter Rogers
Group Chief Executive
14 May 2012
W Tame
Group Finance Director
14 May 2012
This information is provided by RNS
The company news service from the London Stock Exchange
END
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