Annual Report • Mar 31, 2014
Annual Report
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Babcock International Group PLC Annual Report and Accounts 2014
Babcock is the UK's leading engineering support services organisation.
Operating in the UK and overseas, we are trusted to deliver complex and critical support to the defence, energy, emergency services, transport, education and telecommunications sectors. We pride ourselves on our long-term customer focused relationships and ultra-reliable engineering excellence.
Certain statements in this Annual Report and Accounts 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 64 to 71 which set out some of these risks and uncertainties. These risks, uncertainties or assumptions could adversely affect the outcome and fi nancial effects of the plans and events described herein. Forward-looking statements contained in this Annual Report and Accounts 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 fi nancial 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 forwardlooking statements because such statements relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements refl ect Babcock's judgement at the time of preparation of this Annual Report and Accounts 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 herein or to correct any inaccuracies which may become apparent in such forward-looking statements.
| Business model and strategy | |
|---|---|
| Our business model and strategy | 6 |
| Our business model in action | 8 |
| Chief Executive's review | 16 |
At a glance – our divisions 2 Chairman's statement 4
| (Operating review) | |
|---|---|
| Marine and Technology | 20 |
| Defence and Security | 26 |
| Support Services | 32 |
| International | 38 |
| Key Performance Indicators | 42 |
| Financial review | 44 |
| Sustainability | 52 |
| Principal risks and | |
| management controls | 64 |
| Board of Directors | 72 |
|---|---|
| Governance statement | 74 |
| Report of the | |
| Nominations Committee | 83 |
| Report of the Audit and | |
| Risk Committee | 84 |
| Remuneration report | 88 |
| Directors' report | 117 |
| Directors' responsibility statement | 122 |
Financials
| Independent auditors' report to the members of Babcock |
|
|---|---|
| International Group PLC | 123 |
| Group income statement | 127 |
| Group statement of | |
| comprehensive income | 128 |
| Group statement of changes | |
| in equity | 128 |
| Group balance sheet | 129 |
| Group cash fl ow statement | 130 |
| Notes to the Group | |
| fi nancial statements | 131 |
| Independent auditors' report | |
|---|---|
| to the members of Babcock | |
| International Group PLC | 175 |
| Company balance sheet | 177 |
| Notes to the Company | |
| fi nancial statements | 178 |
| Shareholder information | 183 |
|---|---|
| Five-year fi nancial record | 184 |
| Divisional CEO | Archie Bethel | ||||
|---|---|---|---|---|---|
| Employees | 10,262 | ||||
| Description | Marine and Technology is the UK's leading maritime support business and the largest provider of through-life engineering support services to the Royal Navy. With an unmatched range of engineering and technical skills, the division delivers a wide array of cradle-to-grave engineering services to defence, commercial marine and energy markets in the UK and internationally. |
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| Principal activities |
Naval Marine Submarine through-life support, refi t and refuelling, warship maintenance and refi t, Queen Elizabeth class aircraft carrier assembly and naval base management. |
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| Energy and Marine Services Engineering support to the oil and gas, offshore renewables and commercial marine markets. |
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| Technology Specialised systems and technical services that improve our customers' capability in international defence and commercial sectors. |
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| International Through-life support of Victoria Class submarines in Canada and ANZAC Class frigates in Australia. Surface ship maintenance, repair and overhaul in New Zealand. |
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| Key customers | Royal Navy, Australian Government, New Zealand Government, Canadian Government, Defence Equipment and Support, BAE Systems, Rolls-Royce, Navantia, Daewoo Shipbuilding and Marine Engineering, Hyundai Heavy Industries, BP and Shell. |
See p20 for the Operating review
Support Services has leading positions across several civil markets. The division has three core capabilities; it teaches vital skills, manages critical assets and delivers complex programmes for civil government and blue chip commercial organisations. The division is the UK's largest nuclear support company and the leading provider of apprentice training.
Management and delivery of apprentice training for Network Rail and training delivery for Volkswagen Group and the London Fire Brigade (LFB).
Support to assets, including baggage handling systems, broadcast support, vehicle fl eets for the emergency services and the mining and construction industries, and estate management.
Nuclear decommissioning, major rail track renewal and the upgrade of high-voltage overhead power lines and communications infrastructure.
Central government, commercial organisations, including BMW and EDF, emergency services including the Metropolitan Police and LFB, bodies operating in regulated sectors including the Nuclear Decommissioning Authority
Babcock is a leading supplier of engineering support services to the energy, mining and construction industries in southern Africa. With a presence in both Oman and the United Arab Emirates the division is also building local partnerships to expand Babcock's presence in the region.
Sole distributor of heavy Volvo equipment for the mining industry and DAF equipment for the infrastructure and transport industries.
Construction, erection and maintenance of high voltage power lines.
Engineering support to Eskom power stations.
Crane hire to the infrastructure and construction sectors.
Support to Royal Air Force of Oman. Monitoring and developing opportunities for other Babcock services in the region.
Volvo, DAF, Eskom, mining and construction companies and The Royal Air Force of Oman.
See p26 for the Operating review See p32 for the Operating review See p38 for the Operating review
British Army, Royal Air Force, Royal Navy, Defence Infrastructure Organisation, BAE Systems, international
John Davies 6,352
Air
Land
Sea
Infrastructure
the UK and Germany.
ministries of defence.
and Tucano.
Defence and Security is a major support provider to all three Armed Forces delivering leading-edge training, infrastructure and asset support. The division trains c 50,000 servicemen pa and provides management and support to c 17,000 military vehicles, including the MoD's white and construction vehicle fl eets.
Elementary, basic and fast jet training and support to aircraft including the Sea King, Apache, Hawk, Lynx, Grob
Vehicle fl eet management for the MoD's white fl eet and construction fl eets. Army technical and mechanical trade training and maintaining the operational training vehicle fl eet.
A range of training for the Royal Navy and other international navies including sea safety and fi refi ghting training.
Integrated estate management and infrastructure support to the MoD in
and Network Rail.
Strategic report
| Group revenue £3,321.0m 2013: £3,029.4m |
+ 10% |
|---|---|
| Operating profi t £233.1m 2013: £203.5m |
+ 15% |
| Profi t before tax £218.8m 2013: £181.8m |
+ 20% |
| Basic earnings per share from continuing operations 50.1p 2013: 43.9p |
+ 14% |
Throughout the Overview and Strategic report, unless otherwise stated, revenue, operating profi t, operating return on revenue, net fi nance costs, profi t before tax and earnings per share refer to results before amortisation of acquired intangibles and exceptional items and include the Group's share of joint ventures (jv) and include investment income arising from IFRIC 12 (Accounting for Service Concession Arrangements).
Collectively these adjustments are made to derive the underlying operating results of the business. A reconciliation of statutory to underlying results is set out on page 44.
The underlying fi gures provide a consistent measure of business performance year-to-year thereby enabling comparison and understanding of Group fi nancial performance.
I am pleased to report, once again, that Babcock has announced record results for the 2014 fi nancial year. Our performance continues to demonstrate that we have the right business model, that we are operating in the right markets and have been following the right strategy to deliver growth. This in turn means we have been able to achieve our core objective of delivering consistent and sustainable value for our shareholders for well over 10 years.
Central to our successful and long-term track record of growth is our strategy. During this year the Board has reviewed and discussed the strategy, ensuring all options for growth, including acquisitions, are carefully considered. On 27 March 2013, we were therefore delighted to be able to recommend to shareholders the acquisition of the Avincis Group, a leading provider of specialist aviation mission critical services. The acquisition, which shareholders voted whole heartedly in favour of on 16 April 2014 and which completed on 16 May 2014, is fully
in-line with our strategy and marks another exciting development in our Company's history. Peter discusses the strategic rationale and the new growth opportunities Avincis brings to the Group on pages 16 –17.
This year underlying basic earnings per share increased by 13% to 70.3 pence (2013: 62.2 pence) and the Group continued to deliver strong cash fl ows, achieving a cash conversion rate of 103% (2013: 119%). Looking forward, the order book and bid pipeline remain strong giving us excellent visibility of future revenue and further growth opportunities.
The Board's confi dence in the long-term future of our business remains strong and we are therefore delighted to recommend a 14% increase in the fi nal dividend per share for 2014 of 16.4 pence per share (2013: 14.4 pence per share. This will give a total dividend for the year of 21.4 pence per share (2013: 19.0 pence per share), an
increase of 13%. The fi nal dividend will be paid on 12 August 2014 to shareholders on the register at 4 July 2014.
As a result of the new ordinary shares created by the Rights Issue in respect of the acquisition of Avincis, which started trading on 7 May 2014, the dividend numbers and the comparatives referred to above have been adjusted accordingly.
Babcock has had a consistent dividend policy for a number of years that, over the medium-term, the dividend should be covered on average between 2.5 and 3 times by underlying basic earnings per share. Following completion of the Avincis acquisition and taking into account the availability of distributable reserves and cash as well as the enlarged Group's working capital and investment requirements, the Board intends to maintain this policy.
In the current economic environment, our focus on using the depth and breadth of our engineering and technical knowledge and expertise to do what is right for our customers, meeting or exceeding their expectations, sets us apart from many in our sector. Our 'trusted to deliver' reputation is key to the ongoing success of our business. As Chairman, I believe it is my, and the Board's, responsibility to maintain this reputation by ensuring we adhere to the highest standards of corporate governance and risk management across our operations. In the Chairman's corporate governance statement on page xx, I discuss in more detail how we seek to achieve these standards. To safeguard our future we need to govern our business with
openness, honesty and transparency, values that I believe are embedded within the culture of our Company.
During this year we have made no changes to the Board. However, I am delighted to welcome Jeff Randall to Babcock as a Non-Executive Director with effect from 1 April 2014. As a business journalist and broadcaster, Jeff will bring a wealth of experience and a distinct and fresh perspective to our proceedings.
In accordance with corporate governance best practice, Justin Crookenden intends to retire from the Board on 30 November 2014 after serving nine years as an independent Non-Executive Director. Justin will step down as Chairman of the Remuneration Committee with effect from the AGM and Jeff Randall will assume this role. Justin has helped guide the Group through a period of substantial growth and transformation and has made a signifi cant contribution to the effectiveness of the Board.
In May this year, the Board was saddened to learn of the death of Gordon Campbell. Gordon joined Babcock in 2000 as Chief Executive and was Chairman from 2001 to 2008. During that time he was the driving force in the transformation of the Group and the driving force behind the strategy that is still delivering success today.
Each year, on behalf of the Board, I am proud to thank all those who work for Babcock for their continued hard work and dedication. Over the years, our people have been central to our success. I am delighted that we continue to take on young people, as apprentices, trainees or graduates, and train them in vital engineering and business skills to support the long-term future of our organisation. In support of this, and UK industry more widely, we have joined the 5% Club and have committed to having 5% of our workforce on structured training schemes over the next fi ve years.
For the fi rst time this year, as required by the new narrative reporting regulations, pages 1 to 71 of the annual report form our Strategic report, which is intended to provide readers with a fair, balanced and understandable explanation of the company's strategy, business model, key risks and performance. We believe we have met these requirements and have continued to describe the Group's activities with clarity and transparency.
The Board remains confi dent that the Group has excellent long-term growth prospects. We have further strengthened the growth opportunities available to us through a series of acquisitions, most notably that of Avincis, as well as a number of signifi cant contract wins. We therefore believe the outlook remains positive and we look forward to making further strong progress in the 2014/15 fi nancial year.
Mike Turner CBE Chairman
Babcock is the UK's leading engineering support services company.
We believe our business model and strategy, founded on our trusted to deliver reputation, set us apart from others in our sector and have been the corner-stone of our success in recent years. They are vital to ensuring we continue to deliver value in the future.
To see our business model in action see p8–15
We are trusted to deliver complex and critical support to infrastructure, equipment and training programmes. We thrive in complex environments and operate through output-based contracts. We design and implement innovative engineering and support solutions to ensure that our customers achieve the effi ciency and value they require.
Underpinning our capabilities are the breadth and depth of knowledge and experience of our workforce, as well as the unique infrastructure we own. These strengths, coupled with our track record of operational excellence, have enabled us to establish market leading positions and develop long-term embedded relationships with our customers. We are an organisation with clear customer empathy and a strong service culture.
Our strategic objective is to grow from our position both in the UK and overseas, thus delivering sustainable value for our shareholders.
To achieve our strategic objective, we have created and will grow a balanced portfolio of businesses based on our strategy.
| Leading market positions |
We expect our businesses to be one of the top three in their market sectors. This will ensure we achieve economies of scale and have strong competitive positions. |
|---|---|
| Preferred customer characteristics |
We manage infrastructure, equipment and provide training for customers who own large strategically important assets, who prefer long-term partnerships rather than short-term transactional relationships. These customers tend to be governments, public bodies or private blue chip companies operating in highly regulated environments. |
| Customer focused long-term relationships |
We focus on doing the right thing for our customers; we listen and seek to be fl exible and responsive to their needs. We work collaboratively, often through partnerships or alliances, which ensure objectives are aligned. |
| Integrated engineering and technical expertise |
We are able to integrate a broad range of engineering and technical expertise to provide services and training that are complex, critical and bespoke. |
| Balancing risk and reward |
We operate through long-term, integrated output-based contracts which fairly balance risk and reward with our customers. Our target cost incentive fee contracts incentivise us to remove cost through pain-share/ gain-share mechanisms. |
| Excellent health and safety record |
We expect all our divisions to deliver a sector leading safety performance. We believe all our employees and others working on or visiting our operations should be able to return home safe and well at the end of the working day. |
We create value for our employees by
Our skilled workforce enables us to meet the operational requirements of our customers.
We create value for our customers by
Long-term successful relationships with our customers help create strong cash fl ows that are used to generate growth and shareholder value.
We create value for our shareholders by
Babcock specialises in long-term, integrated output contracts that are complex, critical and bespoke in nature. We seamlessly combine a range of engineering and technical capabilities to provide a single integrated solution that supports our customers' vital operations or training requirements.
Our customers tend to operate in highly regulated environments and are responsible for delivering critical services. They require us to deliver programmes or projects with complex multiple objectives and constraints. We differentiate ourselves from others in our sector by designing, operating and delivering a complete, bespoke support solution for each contract. We are able to do this by bringing together a wide range of engineering and technical disciplines along with systems, project or programme management skills within our workforce.
Delivering complex and critical solutions is not achieved through short-term contracts. We take responsibility for achieving an agreed output over many years or we work with our customers over longer periods to ensure maximum availability or effi ciency for their equipment, infrastructures or training programmes.
By providing a complete solution, we create value for our customers by taking away from them the risk of managing multiple suppliers, allowing them to focus on the delivery of their core operations. Our ability to deliver complex and critical, integrated output-based contracts ensures we are operating in the higher value sectors of our markets, helping us deliver value for our shareholders.
Alongside our colleagues in the Aircraft Carrier Alliance we are designing and integrating two 65,000 tonne aircraft carriers, the largest and most powerful ships ever constructed for the UK Royal Navy. Babcock is responsible for over 50% of the detailed design, modular manufacture of the bow section and a number of upper blocks and the fi nal whole ship assembly and system integration in Rosyth.
4 acres Size of the operating base provided by each ship
Reaching for the Sky 25% Managing 25% of all UK MoD aircraft
Babcock provides critical support right across the RAF's pilot training scheme. We deliver aircraft maintenance, spares provision, fl ying instruction and airfi eld support, proving a complete solution for our customer.
Size of contract for the Cavendish Dounreay Partnership
Making Dounreay safe for future generations
£1.6bn
8,700
Number of separate projects as part of the Dounreay clean-up programme
Cavendish Nuclear is leading the clean-up and closure of the former nuclear research facility at Dounreay, one of the UK's most complex and contaminated industrial sites. The programme will require more than 8,700 separate projects handling and safely storing high, medium and low level nuclear waste until 2022–25 to make the site safe for future generations.
ma c hin e s
HMS Vengeance is undergoing a Long Overhaul Period (Refuel) at our facilities in Devonport, the only UK site capable of refuelling Royal Navy submarines. In this complex programme HMS Vengeance will become the fi rst of its class to have a new state-of-the-art reactor control and instrumentation system, comprising 800 different parts, installed and commissioned by Babcock. A nuclear submarine like HMS Vengeance has over 87,000 items of equipment, making it one of the most complex machines ever constructed.
Items of equipment on board a nuclear submarine 87,000
Supporting the world's most complex
We are set apart from others in our sector not only by the complexity and criticality of the contracts we deliver but also by the way in which we operate. Our trusted to deliver reputation is key to the success of our business.
Throughout our business we are committed to meeting or exceeding our customers' requirements. We can only achieve this goal if the people within our organisation take ownership of their own performance. We encourage this by maintaining a 'light-touch' corporate centre which involves delegating authority to customer facing representatives and devolving power to contract managers within the business units. This allows us to be responsive to our customers' requirements and changing operational environments. However, this is balanced by stringent central reporting structure and fi nancial controls. These ensure we meet the fi nancial KPIs and targets for each contract and achieve the required level of savings and effi ciencies which will be shared with our customers.
We would not have achieved the success we have if we had not focused on developing a strong health and safety culture. Health and safety is always our fi rst priority and we are committed to ensuring our employees, contractors or anyone visiting our sites goes 'Home Safe Every Day.'
Consistent management of contract performance helps drive excellent fi nancial performance and the delivery of strong cashfl ows. Over the years, we have used these cashfl ows to reinvest into our business, making a series of value enhancing acquisitions as well as investing in our facilities and our workforce. We have also maintained a consistent track record of sharing our success with our shareholders through our progressive dividend policy.
Availability of military vehicles maintained by Babcock 92%
Keeping the military moving
at Heathrow by Babcock
In September 2013 HMS Triumph successfully completed a Long Assisted Maintenance Period at Devonport on schedule, with changing demands that resulted in a 25% increase in the workload. As the docking period was nearing
completion further work emerged. Babcock prides itself on being able to respond to changing operational environments and our team reacted quickly and assembled a wide range of skilled personnel to carry out these additional tasks, allowing us to return the submarine to operations ahead of schedule.
r e m Strategic report
Responding to changing requi
ents Increase in workload as a result of changing demands 25%
Through the Allenby Connaught PFI, Babcock provides wide-ranging transport services to the British Army across nine locations in Hampshire and Wiltshire. We are responsive to the needs of our customer and we have delivered 92% availability of military vehicles maintained by Babcock. We also provide vital deployed driver support to training exercises, passenger services to injured personnel and management of bulk fuel facilities.
3 Number of countries travelled to by Babcock to support HMS Daring
Providing vital support far from home
Our commitment to responding quickly to our customers' needs, wherever that happens to be, was demonstrated when three engineers from Devonport worked on HMS Daring across three countries over a four week period. Focusing on a complex task within HMS Daring's weapons system, the team travelled to Singapore and Japan, and then sailed with her to South Korea while they completed and tested the system.
At Heathrow, where we operate and maintain the complex baggage system across all fi ve terminals, Babcock is helping to ensure more bags travel with passengers than ever before. By focusing on the end-to-end journey of the bag through the airport, not just individual component performance, Babcock is ensuring it meets the requirements of Heathrow and its 70 million annual passengers.
We are the UK's leading engineering support services company and we have achieved this by ensuring our customers' requirements come fi rst. The performance of our contracts, our fi nancial performance and the value of the Company all rest on our understanding of our customers' real needs and our ability to offer them effective and affordable solutions.
Our people take ownership of performance and are responsible for doing the right thing by our customers. These customers tend to be government departments, public bodies or large private companies who own or operate strategically important assets in highly regulated environments. They are all looking to tackle fi nancial constraints whilst maintaining or improving service delivery.
Our mindset and behaviours focus on our customers, on understanding their key business drivers and on leveraging our considerable expertise to design and deliver bespoke support programmes. By listening to our customers we help them achieve better availability and value for money.
Babcock is differentiated from others operating in our markets because of the long-term embedded relationships we have with our customers. We are open and transparent and believe that it is only by working collaboratively with our customers, over a number of years, that we can meet or exceed all their expectations.
We create value for our customers by delivering improved fi nancial and operational performance. By building a trusted to deliver reputation we are able to grow with new and existing customers, helping to deliver long-term shareholder value.
Babcock is committed to delivering critical solutions to our customers, as demonstrated by the extensive remodelling and re-signalling works at Nottingham Station on behalf of Network Rail. Working 24 hours a day across four different sites during the hottest period of the 2013 heat wave, Babcock delivered the 37 day blockade on time as a result of round-the-clock operations and collaboration between Network Rail, Babcock Projects, SSL and Telent.
Eskom, South Africa's major utilities provider with whom we have a support service contract to provide outage maintenance as well as breakdown services, requested that Babcock consider ways of reducing outage costs. In response Babcock applied new project management strategies to a 686 MW coal fi red boiler outage. Working in collaboration with our customer, we were able to improve weld repair rates, reduce the work crew by 57% and bring down the overall project cost by an impressive 21%.
37 days Blockade on time as a result of roundthe-clock operations
Round-the-clock programme support
To provide operational communications to UK armed forces across the globe the MoD requires a secure, reliable communications network. In delivering this service Babcock is responsive to the needs for higher data rates and increased availability whilst also improving fi nancial effi ciency. Throughout our time delivering the high frequency network we have increased system availability from 70% to 99% and delivered cost savings of over 30%.
n s ac or
D
elivering secure communicatio
Cost saving 30%
ss ht g e ebol
Savings achieved over the last 12 years
£100m 1,500t CO2 savings over the last 12 years
Helping the MoD meet its goal
Across the South West Regional Prime we have worked collaboratively with the Defence Infrastructure Organisation over the past 12 years to deliver over £100 million of savings as well as help them meet Government CO2 targets. By implementing innovative energy reduction measures we have achieved a reduction of 1,500 tonnes of CO2 and provided annual savings in energy costs of £250,000.
Through a series of major contract wins and a focused acquisition strategy we have established leadership positions in our market sectors. We own unique strategic infrastructures and, in an environment where engineering knowledge and skills are scarce, we have an unrivalled workforce with signifi cant scale and depth of expertise.
The unique infrastructures we own or operate for our customers are critical to the delivery of their operations. Alongside ship refi t complexes, vital for the support of the Royal Navy's warship fl eet, we own strategic nuclear facilities at Devonport, positioning Babcock as the only company able to deliver through-life engineering support to all classes of the UK's nuclear submarine fl eet. Similarly, our ownership of the Rosyth dockyard makes us a key partner in the Aircraft Carrier Alliance and makes us well placed to deliver critical engineering support to commercial customers in the oil and gas markets.
Babcock is differentiated from others in our sector by the breadth and depth of knowledge of its workforce. We are uniquely placed in many sectors to meet the technical requirements of delivering large, complex, integrated contracts. Many of our customers rely on our highly specialised knowledge and experience to maintain or operate their critical equipment or infrastructures, as this depth of knowledge is no longer always available within their own organisations.
As the UK's leading engineering support services company, we have the expertise to design and shape support solutions for new and existing customers, helping to create value for them and to drive long-term value for our shareholders.
Our recently acquired Brazilian operation has been established since the 1960s and is the country's leading facilities management and engineering services organisation, providing national coverage in all 27 states for blue chip Brazilian companies. Our focus on management, quality and technical expertise allows us to maximise the value of our customers' assets through-life, across many critical industries in Brazil, including fi nance, telecommunications, data centres, mining and petrochemicals.
Babcock is increasing the availability of the Metropolitan Police's 4,000-strong vehicle fl eet. We work with a fl eet that operates in challenging conditions and covers over 63 million miles annually. By using our market leading asset management capability, we add value and deliver effi ciencies including reducing the number and whole-life cost of these assets.
Babcock also manages the London Fire Brigade's vehicle fl eet, making us a key partner in helping to create a safer London.
As sole provider of both deep and in-service maintenance in the UK, we are the recognised industry lead and the Royal Navy's strategic partner for submarine support. Our role is to maximise submarine availability and performance, and our highly skilled workforce and unique infrastructure have enabled the UK to maintain a Continuous-At-Sea-Deterrent for over 16,000 days, the longest period of '2-Boat Availability' ever.
Enabled the UK to maintain a Continuous-At-Sea-Deterrent for over
Market leading asset management
We work with a fl eet that operates in challenging conditions and covers over
63 million
miles annually
ca p a bility
No.1 apprentice trainer for the MoD
850 Apprentices trained annually on REME contract
We are the largest single provider of engineering apprenticeships to the British Army. Having worked with the Royal Electrical and Mechanical Engineers for 16 years, we are currently engaged in a fi ve year contract to supply vocational, educational and training services through an engineering apprenticeship scheme to all trade groups within the organisation. This work is supported by a team of vocational coaches, trainers and assessors who are experts in their fi elds.
Strategic report
We are delighted to report another successful year of broadbased growth across the Group. During this year, not only have we delivered strong fi nancial results, we have also made considerable progress strengthening and growing our underlying businesses through major new contract wins, through acquisitions and by extending the breadth and depth of operational support we currently provide for our customers. All of this creates an even stronger platform for the future success of our business and supports our commitment to provide superior and sustainable returns for our shareholders.
Our business model is ideally suited to the current market environment. Throughout this year, many of our customers have continued to experience signifi cant fi nancial constraints or budget cuts. Despite concerns expressed in the media that outsourcing to private companies creates risks for the delivery of critical services, we have seen our customers continue to consider outsourcing as a safe and effective way of achieving both fi nancial effi ciency and increased operational effi ciency. We are well positioned, with stringent fi nancial controls, a wealth of experience and demonstrable track record, to help our customers formulate the best support solutions for their operations. Throughout the operating review we describe activities and initiatives that, over the course of this year, have further strengthened our ability to support our customers.
The continued success of the Group demonstrates the strength that our strategy and business model have brought to our operations. They defi ne the way we do business and explain our focus on creating value: they set us apart from many others operating in our sector.
The future success of our business in both the UK and overseas will come from the signifi cant opportunities we are currently bidding or tracking, as well as further new outsourcing opportunities we are helping to formulate and new market prospects we have been considering. The clear framework provided by our strategy guides not only the way we operate but, more importantly, ensures we pursue the right opportunities for growth, both organically and through acquisitions.
Over the previous pages we have set out our strategy and business model and have demonstrated, through examples of activities across our operations this year, of how we seek to create value. We have not changed our focus – we will continue to seek opportunities to develop from our position as the UK's leading engineering support services company and grow in both the UK and overseas. The contracts we have won during the year, the opportunities we are bidding and the recent acquisitions we have undertaken all support this objective.
The examples on the previous pages also show our strategy in action. They set out how across our businesses we have continued to strengthen our market leading positions, demonstrating the unparalleled depth of knowledge and expertise our customers have come to rely on. They show how we focus on ensuring we meet or exceed our customers' requirements, over the long-term, by understanding and recognising the criticality of their activities, and by using our technical expertise to ensure they get the right solution. Vitally, in today's economic environment, we focus on ensuring our customers benefi t from working with us. We seek to deliver cost saving solutions aligned to service improvement and our contracts are designed to ensure we both share in the success or failure.
Across the Group, health and safety is our fi rst priority. We would not be able to maintain our market leading positions or have the scale of opportunities ahead of us if we did not also have an excellent track record and strive for continual improvement in all our health and safety activities.
Our strategy is key to our future success and only by remaining focused on it will we continue to build the underlying strength of our business. Over the course of the year all the contracts we have won, the opportunities we are bidding or tracking and the acquisitions we have under taken support and build on key elements of our strategy.
During the second half of the 2013/14 fi nancial year, we were successful in winning new contracts and contract extensions with a value of around £3 billion and include:
Details of these and other contracts are set out within divisional reviews. The majority of the contracts we have won are with existing customers. This refl ects the confi dence they have in our ability to deliver complex and critical support as well as the deep understanding we have of their technical and operational requirements. Where we have won contracts with new customers, we have been able to do so by successfully transferring existing skills and capabilities.
Since we fi rst began the transformation of Babcock into a Support Services company in the early 2000s, acquisitions have played a key role in our development.
We are very clear about our objectives when considering acquisitions of all sizes. Therefore, any business we acquire must align with our strategic objectives and have a similar business model to ours. We will use acquisitions as a way of:
We expect the businesses we acquire to have their own growth plans, which we can accelerate, as well as being capable of delivering value for our shareholders and acceptable returns on investment within a reasonable time period.
The acquisition of the Avincis Group (Avincis) is a clear demonstration of how we believe we can create value through acquisition. Although the acquisition takes the Group into a new sector – specialist helicopter and fi xed wing services – the business is fully aligned with Babcock's existing strategy, meeting all our strategic objectives and with a business model we recognise. Avincis delivers mission-critical support and complex services in highly regulated environments. It is a leading provider of helicopter and fi xed wing emergency services in Europe and Australia and a leading provider of critical offshore crew-change helicopter services to the oil and gas industry in the UK sector of the North Sea.
The business is well positioned for growth and we can use our scale, capabilities and balance sheet to support and accelerate these plans. Through Avincis' strong presence in Europe we will also seek to develop some of our existing operations and capabilities into these new geographies. The enlarged Group will also benefi t from a wider customer base and enhanced geographic presence.
In addition to Avincis, during the last fi nancial year we also acquired four other new businesses.
Both are established businesses with well-regarded local management teams and strong reputations. We have identifi ed Brazil and the Middle East as key growth markets and we will use these businesses as a base from which to develop a broader Babcock presence.
Over the past year we have retained the excellent visibility we have of our future revenues which is a key feature of our business. This is based on the long-term contracts and partnering agreements which form the basis of our order book. Strategic report
The order book at the end of 2013/14 stood at £11.5 billion (2013: £12 billion), slightly down on the end of the previous fi nancial year but stable on the 2013/14 half year position. With a number of signifi cant contract announcements coming in the fi nal quarter of the 2013/14 fi nancial year and in the fi rst part of the 2014/15 fi nancial year that are still at preferred bidder stage, we expect the order book to increase signifi cantly during the fi rst half of this fi nancial year, as fi nal signature on these contracts is achieved. In addition, we continue discussions with the Ministry of Defence (MoD) about the introduction of the Maritime Support Delivery Framework within the Marine and Technology division, expected to complete in mid-2014 which is expected to add a further c £2 billion to the order book. As we start the 2014/15 fi nancial year we have over 60% of Babcock's (excluding Avincis) anticipated revenue for this year already contracted and over 30% for the 2015/16 fi nancial year.
Going forward, the order book of Avincis, whose acquisition was completed on 16 May 2014, will also be added to the Group's total order book. At the end of December 2013, Avincis had an order book of £1.9 billion, which provided visibility of 85% of its anticipated revenue for its next fi nancial year and 56% visibility for the year after.
Order book by division (%)
| 1. Marine and Technology | 38% |
|---|---|
| 2. Defence and Security | 36% |
| 3. Support Services | 25% |
| 4. International | 1% |
The bid pipeline currently stands at £17.5 billion (2013: £15.5 billion). This is slightly below the declared bid pipeline of £18.5 billion announced at the time of the Interim Management Statement on 11 February 2014, adjusting for a number of recent contract announcements where our bids were unsuccessful, including Network Rail's switches and crossing frameworks and Tranche 1 of the Next Generation Estates Contracts.
With the signifi cant value of bids recently announced that have not yet reached fi nal contract signature, bids at preferred bidder stage, that will transfer to the order book during the fi rst half, stand at c £3 billion.
| 1. Marine and Technology | 11% |
|---|---|
| 2. Defence and Security | 47% |
| 3. Support Services | 42% |
The majority of the bids in the pipeline continue to be new business, with rebids representing only 11%, and refl ecting the complexity of the contracts we are competing for, 75% (2013: 74%) of the pipeline comprises bids with a total contract value of over £100 million. The bid pipeline is supported by tracking opportunities of c £14 billion.
The Avincis business also brings with it a pipeline of opportunities at both bidding and tracking stages which stood at c £5.9 billion at 31 December 2013. Of this we would expect around £600 million to be added to the bid pipeline. However, as bidding timetables for Avincis' contracts are signifi cantly shorter than for traditional Babcock contracts, we expect a more rapid movement of bids from tracking into the pipeline and, if successful, into the order book.
Our business model, the scale of our operations, the depth and breadth of our experience and our track record of delivering operational and fi nancial effi ciencies provide an excellent platform to benefi t from the positive markets which continue to offer us medium and long-term opportunities in both the UK and overseas. The strength of the order book and bid pipeline continue to provide excellent visibility. During the year, the Group has won a number of important contracts and has made a signifi cant investment in acquisitions, strengthening the existing capabilities of the Group as well as creating opportunities in new markets and geographies.
The acquisition of Avincis meets Babcock's strategic objectives as it brings into the Group a market-leading business with a strong growth platform and its combination with Babcock will generate even greater growth opportunities and value creation for our shareholders.
Building on the strong growth in revenue and earnings delivered in the 2013/14 fi nancial year, the Board is confi dent the Group will continue to make further strong progress in the 2014/15 fi nancial year.
Peter Rogers CBE Chief Executive
KPI: p42
The UK market remains positive with long-term contracts in place to support critical Ministry of Defence (MoD) assets, and major programmes such as those for the Successor future deterrent submarine and Type 26 warship are creating signifi cant opportunities that are well-suited to our capabilities.
The UK Royal Navy (RN) warship support market remains stable with the MoD's 2012–2022 Equipment Plan forecasting an expenditure of around £17.4 billion on surface ships over the next ten years. With the Surface Ship Support Alliance (SSSA) operating effectively, the RN's future plans present opportunities for vessel life-extension and capability enhancement. We anticipate the MoD will ultimately utilise the SSSA to support all complex warship platforms, safeguarding Babcock's market position. Increased activity and opportunity is evident in international naval markets, such as the United Arab Emirates (UAE) which are striving to implement a fl eet-wide class management through-life support solution (similar to the SSSA).
The UK submarine market also presents Babcock with signifi cant opportunities as the recognised lead support partner, with a planned MoD investment of around £35.8 billion over ten years. The MoD's plan for Her Majesty's Naval Base (HMNB) Clyde to become the main operating base for all classes of submarine along with the establishment of a Submarine Centre of Specialisation presents opportunities to develop our support offering at Clyde in our role as the lead industrial partner at the naval base. In addition, there is growing demand for submarine training in the UK and internationally. Along with growing our UK presence in this market, we are currently tracking and bidding a number of potential international training opportunities.
There are opportunities in the commercial marine, offshore renewables and oil and gas markets. This is refl ected in a change to our divisional structure and the formation of a new Energy and Marine Services (EMS) business dedicated to growing our presence in these markets. The commercial marine market presents signifi cant opportunities to build close relationships with customers and gain fl eet contracts for vessel refi ts. The oil and gas market is a growth area for EMS. Ageing offshore production infrastructure and a predicted increase in demand for gas transportation is generating signifi cant opportunities for the division. These are all aligned to our engineering, design and manufacturing capabilities.
Internationally, in Canada, we anticipate opportunities in the medium-term from the Government's National Shipbuilding Procurement Strategy which outlines planned expenditure of Can\$36.6 billion. We have opportunities in the supply of complex equipment, design services and through-life support. We are pursuing a number of nearer-term opportunities for vessel support and life extension with the Canadian Coast Guard.
In Australia, the future submarine project continues to gain momentum. The implementation of the Rizzo and Coles Reviews continues to create opportunities for support solutions in both surface ship and submarine fl eets, and our Group Maintenance Contract for the ANZAC Class is into its second year and performing well.
In New Zealand, a revised Dockyard Management Contract presents a signifi cant opportunity for us to extend our current contract.
MoD 10 year surface ship spend £17.4bn
MoD 10 year submarine spend £35.8bn
Canada 20 year ship building programme Can\$36.6bn
Australia (annual maritime budget)
Percentage of revenues from overseas sources 21%
In the UK, as a result of our Terms of Business Agreement (ToBA) and our position on key MoD programmes, we have full visibility of the UK's submarine and surface ship plans. The ToBA is a long-term partnering agreement that provides the Marine and Technology division with a predictable, stable programme of work in surface ship and submarine deep maintenance and support, as well as maintaining our position as the MoD's strategic partner at the naval bases in Devonport and Clyde.
While continuing to support the current fl eet, we are also involved in key development programmes such as that for the Successor submarines. In addition, we are in the process of negotiating the Maritime Support Delivery Framework (MSDF) contract that will underpin our operations at HMNBs Clyde and Devonport. We continue to seek opportunities and improvements in key programmes such as the Submarine Enterprise Performance Programme (SEPP) and the SSSA. A signifi cant focus remains our role in the Aircraft Carrier Alliance which is working to deliver the RN's two Queen Elizabeth Class aircraft carriers, with the fi rst ship due to be fl oated in 2014.
We are working closely with the MoD to ensure that all warships are effectively supported by the SSSA, and anticipate opportunities from the ability to offer enhanced value for money in the provision of additional services. We are progressively expanding our current combination of class management, maintenance and design services to include equipment supply and support and are drawing on this experience to pursue contracts with selected foreign navies.
Alongside building our market leadership in the UK naval market, we are increasingly applying our engineering expertise to commercial marine and energy markets and continue to identify and pursue new growth opportunities using our through-life model to support high integrity, complex marine assets and infrastructure. By establishing long-term relationships with commercial marine customers we can provide signifi cant added value to their refi t and operations and maintenance programmes, and continue to deliver an engineering, design and manufacturing offering to the offshore renewables and oil and gas markets.
Internationally, our strategy is to leverage our UK track record, while supporting the growth strategies of our international operations by delivering innovative solutions that give us a competitive advantage.
In Canada, while advancing our submarine support capabilities, we continue to investigate opportunities that draw on our strong UK track record for service delivery performance, including the provision of support to the Canadian Coast Guard, training solutions to the Royal Canadian Navy, and engineering and design services to the commercial marine sector.
In Australia, we are utilising key experts from our existing submarine programmes to grow a signifi cant position in the Future Submarine Enterprise. Our contract for the ANZAC Class enables us to leverage our reputation for defence sustainment in new areas, as well as in offshore oil and gas support vessels. In New Zealand, we continue to concentrate on the national defence market and are investigating opportunities in other service-orientated markets.
Beyond these core international operations we selectively target major naval programmes, such as the South Korean submarine project, where Babcock has distinctive technology and know-how.
The division reported a total increase in revenue of 15% to £1,377.3 million (2013: £1,201.6 million). Organic growth, before acquisitions and at constant exchange rates, was 13%. Organic growth was driven by increased volumes in the UK on the Queen Elizabeth aircraft carrier programme and the refi t of HMS Ocean as well as increased work programmes in Canada on the submarine programme. The division also saw an increase in commercial activities for oil and gas customers. The acquisition of LGE, completed in the fi nal quarter of the 2012/13 fi nancial year delivered strong growth this year, increasing from £9.7 million to £42.5 million, contributing to the division's total growth.
Total operating profi t for the division increased by 13% to £153.9 million (2013: £136.6 million), of this 11% was organic growth. This results in an operating margin for the division of 11.2%, broadly in line with the previous year (2013: 11.4%). Margins achieved for technology, commercial and international activities remain strong, balancing UK naval marine margins of around 10%.
We retain a strong market position in the through-life support of the UK submarine fl eet as sole provider of both deep and in-service maintenance. We are a crucial member of SEPP and together with the MoD, BAE Systems and Rolls-Royce we continue to deliver on-going reductions in operating costs while maximising UK submarine fl eet availability.
In the past year we have successfully supported both the Trafalgar and Vanguard Class submarines through our Devonport and Clyde operations. HMS Vengeance's three and a half year, £350 million Long Overhaul Period (Refuel), is well underway at Devonport, with the new fuel installation complete and the refi t progressing on schedule. We are also supporting the Astute Class into service, delivering a range of products and services from weapons handling and launch systems to crew training. We continue to support the design phase of the Successor future deterrent submarine programme and are actively involved in the long-term technical engineering support as well as providing the key tactical weapons launch system for the programme.
Following the announcement in 2013 that the MoD had identifi ed both Devonport and Rosyth as its preferred locations for submarine dismantling, our Nuclear Operations team continues to develop the infrastructure design and safety case for the programme. Once regulatory approval is received, the next stage will be the demonstration of the dismantling process on one of the defueled submarines at Rosyth. Babcock has received indication that approval may take 18 to 24 months. Following a successful demonstrator project, the dismantling of the submarines is planned to take place at both our Rosyth and Devonport facilities.
Our UK surface ship activities continue to include the delivery of the Queen Elizabeth (QE) Class aircraft carriers as a partner in the ACA. With the structural assembly phase of the fi rst QE Class, HMS Queen Elizabeth, now complete, focus has shifted to fi tting out the assembled ship with vital electrical and mechanical systems. The next planned signifi cant milestone is the fl ooding of the dock in mid-2014 when the ship will fl oat for the fi rst time. Meanwhile, work on the second of the QE Class, HMS Prince of Wales, is well underway at all the Alliance build facilities including our facilities in Rosyth and Appledore. During the year the ACA agreed a revised target cost contract with the MoD to complete both the QE Class aircraft carriers. This includes a 50:50 risk share arrangement to provide greater cost performance incentives. The maximum risk for Babcock is unchanged and will be limited to the loss of our profi t opportunity. The revised contract refl ects the increased maturity of the build programme and the greater certainty this provides for the fi nal cost.
In addition to its work on the QE Class project, our Appledore facility is involved in the design, construction and commissioning of two Offshore Patrol Vessels for the Irish Department of Defence, with the fi rst ship now delivered.
We are working with the MoD and our partners to bring all support for complex surface ships, including the QE Class and replacement frigates, into the SSSA; sustaining and growing our future position. This year we have successfully delivered four vessel refi ts for the RN and work is underway on a further four, including deep maintenance of the principal RN helicopter carrier, HMS Ocean.
We have been successfully managing the delivery of services at HMNBs Devonport and Clyde under the Warship Support Modernisation Initiative (WSMI) for the past 12 years. Under the framework of our 15-year ToBA, this contract is to be superseded by the MSDF which is currently being discussed with the MoD. This new fi ve-year contract is expected to be secured by mid-2014 and will create a platform for us to deliver further cost savings and operational improvements while providing a mechanism for us to develop our role in both naval bases.
We continue to pursue and secure work in key commercial markets utilising our unique mix of engineering skills and facilities. This is something we will progress further over the coming year, while continually developing and enhancing both our skills base and facilities to meet growing demands.
In the past year, work began on 74 subsea modules for BP's Quad 204 project and we aim to build on this success by securing further contracts with other major players in the North Sea. In the commercial marine market we achieved a challenging vessel refi t programme for Bibby Offshore on its Polaris Dive Support Vessel and have expanded our position in the UK oil and gas offshore support market through the provision of 'walk to work' contracts for various oil majors, most notably TOTAL. We have also seen continued growth in our concept design partnership with Shell. The continued integration of LGE Process, acquired in 2013, has been a particular success, with a year one order book exceeding £130 million and an increase in staffi ng levels in the order of 30%. Our services to South Korea through this sector and, in parallel, in developing key systems for South Korea's new class of submarines, have grown signifi cantly during the year and are progressing well.
South Korea is in the process of establishing an indigenous submarine programme and has looked internationally for specialist knowledge to deliver some of the complex systems that are required. Working with the lead Korean shipbuilder, we are designing and manufacturing the weapons handling and launch system for the South Korean submarine programme. By providing technology transfer through training courses and manufacturing information, we will enable the majority of equipment manufacture to be done locally. We also provide liquid gas handling and storage systems (following the integration of LGE Process) to an important and increasing customer base in South Korea.
See p14 for more information on our market leading positions
Submarine weapons handling system
Our independent Technology Consultancy group has achieved continued organic growth, particularly in the areas of systems engineering and safety assurance. In December 2013 we acquired ContextIS, a specialist consultancy in cyber-security, working in defence and commercial sectors in the UK, Australia and Europe. The business now sits alongside our other consultancy businesses and will help to support growth in the UK and overseas.
In Canada, we were awarded a fi ve-year extension to our Victoria In-Service Support Contract (VISSC) to refi t and maintain the Victoria Class submarine fl eet. Under this contract we successfully undocked our fi rst submarine, HMCS Chicoutimi, after three years of an extended docking work period, signifi cantly increasing our in-country capacity and capability for future support of Canadian submarine and surface ship programmes. VISSC includes a number of extension options that could bring the contract duration to 15 years and we expect Government investment in the Canadian Coast Guard fl eet and Naval Surface Ships to create a range of growth opportunities for us. In early 2014 we successfully secured a contract for the refi t of the fi rst of two Canadian Coast Guard heavy icebreakers, Louis S. St-Laurent, with our partner shipyard, Chantier Davie, strengthening our position in the market.
The Australian Government is committed to the progressive reform of its naval support activities and a number of opportunities aligned to our support capabilities continue to arise. We are engaged in further phases of the Submarine Propulsion, Energy, Support and Integration Facility (SPESIFy) for the Australian Defence Materiel Organisation; we have delivered Mark 32 Launchers for all three Australian Air Warfare Destroyers and our contract to support the ANZAC Class frigates is going from strength to strength. We were unsuccessful in our bid to support of the Canberra Class amphibious ships. We continue to be a Tier 1 supplier and strategic partner to the New Zealand Defence Force and negotiations are underway to extend our dockyard management contract for a further fi ve years.
Drawing on an unrivalled depth of engineering knowledge, our teams safely and effi ciently support critical assets, design and deliver complex programmes and provide specialist systems and technical expertise, often in potentially hazardous environments. Our top priority continues to be ensuring the highest standards in the management of health, safety, security and environment across our sites and beyond. These standards seek to protect not only our own employees but also contractors, customers, agents and visitors to our sites. Refl ecting this, we have received a number of awards throughout the year, including the Silver Award from the Royal Society for the Prevention of Accidents for Clyde's approach to occupational safety and health and the much coveted Sword of Honour which was awarded to Rosyth for the eighth time, while Devonport received the Engineering Employers Federation Future Manufacturing Award for People Management for its employee safety engagement programme.
We recognise the impact our operations and large industrial facilities may have on the environment and are committed to managing and reducing this impact across all our operations by employing environmental regulations and best practice procedures such as ISO 14001, carbon management and recycling programmes. For example, our Devonport facility is currently constructing an 'Energy from Waste' plant which will provide the dockyard and naval base with its total requirement of electricity and steam, utilising a very high proportion of the site's waste.
The division employs over 10,000 highly skilled people with a wealth of knowledge and experience. Our commitment to attracting, retaining and developing a diverse and inclusive workforce is led by a Divisional Diversity Working Group consisting of members from across all our main operations. We recognise the importance of employee development in ensuring we continue to meet and exceed customers' needs and expectations; therefore employees at all levels are offered and supported through relevant training.
Apprentice fabricator Fay Jackson was voted Apprentice of the Year by Radio Plymouth listeners. Fay, who is currently working at our Devonport dockyard, was one of 42 local apprentices nominated for the award as a 'true inspiration to other young women who may be considering an apprenticeship within the dockyard.' Her nomination also said Fay had demonstrated commitment, drive, a determination to succeed and helped others to the best of her ability. The performance of employees like Fay is what gives Babcock its trusted to deliver reputation.
As our business expands, the development of our people, present and future, is a critical part of our business development activity. To underpin and sustain our long-term strategic growth Marine and Technology, and the Group as whole, must ensure that it has the right people to be able and trusted to deliver to customers on technically complex, long-term contracts, both today and in the future.
See p61 for more information
Fay Jackson, Apprentice of the Year
We recruit and train over 300 apprentices across the division, as well as providing a comprehensive graduate training programme for around 150 graduates each year. Through this programme we assist many of our graduates in achieving chartership with accredited institutions such as the Institution of Mechanical Engineers and the Royal Institution of Naval Architects. Our apprentices and graduates are actively involved in encouraging future engineers through a number of school, college and university initiatives, such as Primary Engineering, STEM and Go4Set, which aim to engage young people and promote engineering as a career.
In addition, annual engagement programmes enable us to support the people, environment and infrastructure that make up the communities in which we operate.
In the UK, as a result of ToBA and our current market positions, we continue to have excellent visibility of our future revenue streams. Our unrivalled expertise allows us to work alongside the MoD and Royal Navy as they seek to maximise availability of their assets and achieve best value for money. We continue to develop our position in the commercial marine and energy markets, and our organisational restructure allows us better to deliver further growth in these markets.
Internationally, our presence is growing. We continue to strengthen our relationship with governments who are seeking to achieve increased fi nancial ef fi ciency for naval equipment and infrastructure support and maximised availability of their submarine and surface ship fl eets.
We believe the outlook for the Marine and Technology division is positive with signi fi cant opportunities in the bidding and tracking pipeline driving long-term growth in the UK and internationally.
The Government's Defence Reform agenda has gathered pace over the past year with a continued drive for outsourcing of support to defence operations, stimulated by the ongoing requirement for effi ciencies and savings in defence and the wider public sector. We anticipate continued demand from across the Armed Forces and their supporting organisations for our core capabilities: training, equipment support and infrastructure management, as the MoD progresses toward Future Force 2020.
Our focus remains on retaining our UK market leading position through successfully competing for rebids and extensions of our existing services and in developing solutions for the current programme of major UK MoD outsourcing competitions.
UK aircraft support £500m Annual addressable revenue
£500m currently outsourced
UK MoD logistics
£700m Annual addressable revenue
UK military training £1.2bn Annual addressable revenue
£300m currently outsourced
UK vehicle support
£600m
Annual addressable revenue
£450m including DSG currently outsourced
The Government's commitment to further effi ciencies and savings indicates that budgetary pressure on defence will continue to prevail and further outsourcing is a likely means of delivery. As we have greater visibility of training, logistics and infrastructure programmes we now estimate addressable markets across defence to be in excess of £4 billion per annum out to 2020.
During 2013, several major MoD outsourcing opportunities have come to market and we are well placed to benefi t, evidenced by our position as one of two consortia bidding for the Logistics, Commodities and Services Transformation (LCST) contract where we are teamed with DHL and our qualifi cation as a potential acquirer of the Defence Support Group (DSG).
We continue to upgrade our market offering to match the emergent needs of the defence customer. This includes the development of e-learning techniques, smart task and resource scheduling and the further integration of our Defence Infrastructure business to provide a deeper and broader offering across the defence and adjacent sectors. This has reinforced our business model, which is built on strong customer relationships with the armed forces and MoD and has enhanced value for both the customer and ourselves, while proving highly adaptable to meet changing requirements – for example, optimising the re-basing and training of military personnel following the withdrawal from Germany and Afghanistan and military training and equipment support for both regular and reserve forces.
Along with our domestic markets where we have a very healthy domestic pipeline, we are pursuing opportunities internationally, with a particular focus on Canada, Australia, the Middle East and Europe. We continue to review these markets for fi rst generation outsourcing opportunities where customers have similar value perceptions to our UK customers and demand high quality, output or availability based contracts for complex fi xed and mobile assets. We expect to increase our investment in these markets during the next twelve months.
The Defence and Security growth plan is driven by three key strategic actions; win, develop and expand. Our plan is to win the major UK defence bids, develop an international business and expand into adjacent markets.
The division is bidding a number of UK defence contracts including the Next Generation Estates Contracts (NGEC), DSG and LCST that are all due to be awarded within the next two years. These would bring more than ten percent compound annual growth for the division based on a historic win rate. These bids are our priority.
Beyond 2015, we anticipate a relative slowing down of defence outsourcing in the United Kingdom. We are therefore implementing a programme to develop an international business in identifi ed target markets where the customer has outsourced or is moving towards outsourcing defence engineering and training support services. We are injecting pace and resource now in order to position for international growth in the longer-term.
Our third strategic action is to expand into adjacent highgrowth markets that represent a natural fi t with our division. We continue to resource our exploration of a number of adjacent sectors beyond defence and security and we will continue to identify and evaluate potential acquisition targets.
Operational effi ciency and functional effectiveness will underpin our ability to sustain margins in an increasingly competitive environment. The division structure is being reviewed to enable these effi ciencies and facilitate the major thrusts into international territories and adjacent markets.
Revenue for the Defence and Security division, including the Group's share of joint venture revenue, increased by 4% to £852.6 million (2013: £820.2 million). This refl ects a good performance from the Future Strategic Tanker Aircraft (FSTA) joint venture as well as increased infrastructure activities in both the UK and Germany which offset a reduction in revenue following completion of construction activities at the Royal School of Military Engineering and soft FM activities on the Fleet Outsourced Activities Project (FOAP) training contract.
Total operating profi t for the division increased by 8% to £118.6 million (2013: £110.2 million) mainly driven by increased revenue from infrastructure activities described above as well as income arising from the FSTA joint venture partly offsetting reductions in other joint venture activities. Operating margins for the division increased to 13.9% (2013: 13.4%).
Our Air business has continued to manage its output to meet customer requirements. In our support to UK MoD military fl ying training we have delivered at the elementary, basic and advanced stages of fl ying training. We have had to be both fl exible and responsive to meet the changing output demand for operational aircrew through the fl ying training system and we are now seeing student numbers beginning to increase. This is expected to continue with the addition of international defence training requirements which has resulted in the continuation in-service of the older Hawk T1 aircraft. We have expressed an interest in competing for a further fi ve year support contract for the T1 and this will complement the competition for the newer Hawk T2 support in which we are already engaged.
During the year the business successfully managed an engineering issue with the Grob Tutor aircraft used to deliver the Light Aircraft Flying Task contract. Following the grounding of the fl eet in 2013, full fl eet availability was restored before the end of the calendar year and with careful stewardship of available aircraft, the impact on MoD aircrew training was minimised.
The UK Military Flying Training System (UKMFTS) joint venture, Ascent, and the Future Strategic Tanker Aircraft (FTSA) joint venture have both had successful years. Ascent has continued to manage Royal Navy (RN) observer training and Advanced Fast Jet training through its facilities at RAF Barkston Heath, RAF Valley and RNAS Culdrose. The competition to deliver future fi xed wing training capability at elementary and basic level is now well-advanced. Air Tanker has also continued to mature its operational delivery and full Air-to-Air capability is planned to be delivered during 2014. In the air transport role, the Voyager tanker aircraft has taken on the responsibility for maintaining the Afghanistan and Falkland Islands air bridges and the MoD was able to withdraw the VC-10 aircraft from service as planned. The Air Business has continued to develop opportunities internationally and in new market areas. We have extended our rotary wing capability by winning an MoD contract to support the Apache helicopter. Whilst relatively small, our success in securing this contract in a competitive environment underpins our customer's trust in our delivery. Internationally, we are pursuing opportunities in the Middle East including an opportunity to deliver support to the Royal Air Force of Oman fl eet of Super Lynx helicopters.
In our Defence Infrastructure business strong operational delivery on the UK Regional Prime Contracts (RPC) has continued and we have delivered signifi cant additional contract services, including several large capital projects such as the resurfacing of the RAF Scampton runway ahead of the Dambusters' 70th anniversary commemoration. Ahead of the award of NGEC our two RPC contracts have been extended, securing an additional £100 million of core contract revenue, until the commencement of the new contracts.
During the year we submitted six bids for the four regional and two national NGEC contracts which are currently being evaluated by the Defence Infrastructure Organisation (DIO). At the time of this announcement we await decisions on the second tranche of contracts which includes the South West, Central and South East RPC. We are currently incumbent on the South West RPC and East RPC which is being incorporated into the Central NGEC. We were unsuccessful in our bids for the two national contracts (Training and Housing) and the fourth regional contract covering Scotland and Northern Ireland.
In Germany, the integrated estates management contract for the British Forces continues to deliver strongly, with the team supporting the Army's drawdown programme with the managed closure of the Rheindalen and Münster bases in late 2013. We have also worked closely with the Army and DIO to help consolidate service delivery as the estate shrinks, with additional scope being added to the contract, including energy management, waste management and snow and ice clearance. Further work continues to provide additional support to other UK forces establishments across Europe.
Babcock's trusted to deliver reputation is based on excellent contract delivery. Our Infrastructure business is no exception and it won or has been nominated for numerous awards over the last year. For example, we won the BEST (Building Engineering Services Training) Employer Recognition Award and the 'Value Award' at the South West Built Environment Award ceremony.
Babcock has a strong reputation in estates and facilities management. As well as estates management for the MoD in the UK we also provide facilities management at British Forces bases across Germany.
Babcock members of staff working on the MoD estate
Future opportunities with the DIO in the UK include the provision of support to the United States Visiting Forces and Project Hestia, an integrated base support opportunity programme. Overseas, the business is developing a growing relationship with the Canadian Department of National Defence as they move towards an outsourced estate management delivery model. In Australia we are pursuing a number of opportunities to establish an integrated asset management offering alongside the Marine and Technology division.
The Land business continues successful delivery of the Phoenix contract to the MoD, providing 14,500 white fl eet leased vehicles and 250,000 vehicle rental hires in the year. We have made improvements to this service following the MoD wide deployment of our online booking and scheduling system and the introduction of 12,000 telematics units providing assured vehicle usage and driver behaviour data. Our management of vehicle procurement services has seen us manage the competition for 6,555 replacement vehicles since the start of the contract and has delivered signifi cant savings to the customer. Our continuous hire team has also seen success during the year, winning contracts for the provision of coaches, trailers and other vehicles with a total value of £30 million.
Our primary business development focus is on two signifi cant outsourcing programmes. In December 2013 the MoD launched the sale of the DSG, the MoD's capability for delivering maintenance and spares support to the Army's tracked and wheeled vehicles. The customer's sale programme indicates that completion is anticipated to be during late calendar 2014, with a service commencement date in the fi rst quarter of calendar 2015. The disposal includes a service provision contract, for up to 15 years, as the exclusive provider of through-life maintenance, repair and overhaul and support for the current armoured and key support vehicles. Our extensive fl eet management experience and equipment support capabilities ensure we are well placed to compete for this opportunity.
Also during 2013 the MoD started the competition for the LCST programme to outsource the procurement, warehousing and distribution services for commodities such as food, clothing, medical and general supplies as well as the wider operation of distribution and storage facilities across the military supply chain. We are partnered with DHL in a 50/50 joint venture to address this opportunity which we currently expect to have a total contract value of around £5 billion over a 13 year period.
We continue to deliver training for regular and reserves personnel within the Army. The mix of our courses continues to change as we respond to the shifting operational needs of the Army. We are currently the sole source bidder for the Defence College of Technical Training Electro-Mechanical Training Contract which includes the integration of Bordon and Arborfi eld Schools and we expect to achieve contract award for an initial fi ve year period by July 2014.
Through our Holdfast contract, the regeneration of infrastructure at the Royal School of Military Engineering is well advanced. Refurbishment of accommodation blocks and construction of new training and support buildings has been completed and the remainder of the programme, including Single Living Accommodation, will be complete by January 2015.
Our delivery of training for the RN during the year included successful completion of the second year of the FOAP training contract. This was achieved below the target cost through the implementation of continuous effi ciency improvement measures. International ship crew training programmes continue with the completion of courses for the Brazilian Navy and the Royal Navy of Oman and we maintain our focus on developing international markets.
In the Security sector we continue to drive signifi cant business improvements which place the business in a strong position for the rebidding exercise during 2014, when the current contract will be sub-divided into three separate service streams. The scope of these procurements may offer the opportunity for the business to expand its services across the wider Government security community.
Building on our position as the number one training support provider to the MoD, Babcock continues to grow its relationships with select overseas military organisations. For example, in the course of the year we won a c £6 million contract to deliver UK based mechanical, electrical and electronics training for 24 BAE Systems Saudi national technicians.
Training activities will be carried out in the world-class facilities and dedicated classrooms at HMS Collingwood and HMS Sultan over two years. This contract followed an extension to a separate Babcock contract to provide English language training for Saudi naval personnel ahead of the crews' specialist training. These awards refl ect our strong reputation in international defence markets.
See p14 for more information on our market leading positions
Babcock is growing from its position as the number one training support provider to the MoD
Provision of skilled, quali fi ed manpower remains a corner-stone of the offering in the Defence and Security division. To further secure this core capability for the future, we have embarked on an apprenticeship partnership with Hartlepool College. An element of this apprenticeship will be delivered on our air engineering sites at RAF Leeming and RAF Linton-on-Ouse and will create an opportunity for well-quali fi ed young men and women to join our organisation.
The Infrastructure business has been engaged in a number of sustainability projects, with over 170 man days of support to a range of local communities and charities. We aim to deliver services using, where possible, sustainable technologies and energy saving projects to reduce our customers' carbon footprint and overall running costs.
As part of our drive for the highest performance in key operational disciplines we have seen a reduction in our accident rates and an increase in near miss reporting. The prime focus of the health and safety improvement programme was the review of the high risk work activities of our people, the equipment we use and the sites we operate on to drive improved performance. Further developments in the quality of accident and near miss investigations have enabled improvements in the identi fi cation of the direct and indirect causes of incidents. Combined with further engagement and involvement of staff through the Babcock 'Safety Lens' (see page 58) we are well placed to continue to drive improved health and safety performance within the business.
The security posture of the business has continued to strengthen, following independent assessments of the business against the Government's Information Assurance Maturity Model during 2013. Building on this assessment we have taken a systemic approach to further security improvements including a strong focus on local site orders, incident reporting training and communication, and this will be a continued drive during 2014.
We have positioned our business to address the changing needs of our principal customer – the UK MoD. In addition, we are increasing our focus on international opportunities where we believe we can leverage our UK expertise and capabilities. Our track record of delivering operational and fi nancial ef fi ciencies leaves the Defence and Security division well placed to bene fi t from its bid pipeline of signi fi cant opportunities in the UK defence sector.
The markets served by the Support Services division continue to remain attractive. The underlying pick-up in GDP growth across the UK, combined with a continuing desire by existing and potential customers to reduce their costs and maximise service levels, is driving strong demand for outsourced solutions.
The impact of imminent or recently changed regulatory control periods, for example in the power and rail sectors, is driving change and the division is responding by continually updating its knowledge of our core markets and customers to ensure we position our services optimally.
Customers continue to market test the services that they have outsourced. We are addressing this challenge by developing innovative solutions and growing the scope of services that we offer our customers to maximise value and maintain returns.
Canada and Japan nuclear markets £1.2bn
Combined annual addressable revenue
Global mining and construction fl eet management
£3.0bn Annual addressable revenue
UK training and education £5.6bn
Annual addressable revenue
UK rail network £2.2bn
Annual addressable revenue
Brazil facilities management £350m Annual addressable revenue
The division continues to deliver against a consistent strategy focused on generating profi table growth and continuous development and extension of our core capabilities. The strategy is fully aligned with the wider Group strategic objectives and we are targeting growth in a number of select markets, both in the UK and overseas, by leveraging wider Group activities or through customer-led opportunities.
We remain focused on our growth markets: nuclear decommissioning and new build, complex fl eet management and training. In addition, we are exploring a focused set of opportunities in Brazil following the acquisition of Conbras. In these select focus sectors we have identifi ed around £14 billion of addressable annual revenue.
Building on its position as the UK's leading supplier to the nuclear industry, Babcock's wholly owned subsidiary, Cavendish Nuclear, continues to bid for complex programme management opportunities in the UK as well as in select international markets such as Canada and Japan, providing a source of long-term growth. Our fl eet management business continues to develop its unique proposition, offering customers clear value through effective capital utilisation and effi cient operations and maintenance. It will continue to develop the opportunities in the mining and quarrying sector and is building propositions for other fl eet operators in new sectors. Our training and skills assurance proposition has been developed over the year. We are targeting customers that have demanding training requirements to address technical challenges and rigorous safety requirements. We are making strong progress in the automotive, emergency, rail and utilities sectors.
Underpinning our growth objectives is a requirement to ensure we have market leading capabilities to deliver value to our customers and provide a clear point of differentiation from our competition. We have continued to invest in our key capabilities: teaching vital skills, managing critical assets and delivering complex programmes, Our employees are supported by a range of development programmes ensuring they have the right opportunities and support throughout their careers. We also continue to pro-actively manage the recruitment of new talent into the business to support its growth.
The Support Services division reported total revenue of £1,040.1 million (2013: £943.7 million), an increase of 10%, of which 7% was organic growth. Cavendish Nuclear experienced strong growth in decommissioning activities and the Critical Services business unit benefi ted from enhanced contracts with Heathrow Airport Ltd secured at the beginning of the fi nancial year. The Rail business has also seen strong demand for overhead line and special project works. The acquisition of Conbras Ltda, completed in the fi rst half of the year, has added £26 million to total growth for the division.
Operating profi t for the division was £85.1 million (2013: £82.9 million). an increase of 3%. As anticipated, as a result mainly of the early phases of a number of new long-term contracts combined with signifi cant bidding and business development costs, operating margins for the division reduced to 8.2% (2013: 8.8%).
Cavendish Nuclear, Babcock's wholly owned subsidiary, continues to strengthen its position as the UK's leading supplier to the nuclear industry in the UK and overseas and has made signifi cant progress during the year. Its focus remains on targeted sectors including site operations and maintenance, decommissioning and new build.
The key success of the year was the Nuclear Decommissioning Authority (NDA) naming the Cavendish Fluor Partnership, a joint venture with Fluor, as the preferred bidder for the contract to decommission and clean up the Magnox and Research sites. Allowing for changes to the bid scope, the total contract value is expected to be around £4.2 billion for 13.5 years. Over the full term of the contract, this contract value represents savings of more than £1.5 billion to the UK tax payer. This is a complex long-term contract based over 12 sites and its award is a clear demonstration of Cavendish Nuclear's trusted reputation within the nuclear decommissioning sector. A Transition Agreement was signed on 15 April 2014 and the formal award of the contract for the new Parent Body Organisation (PBO) and Site Licence Company Agreements is planned for 1 September 2014.
Cavendish Nuclear has continued to perform well in its role as the PBO at Dounreay where key milestones have been achieved in the decommissioning of the Fuel Recycling areas and the construction of low level waste vaults. Good progress has been made on complex programme areas such as reactor decommissioning and shaft clean up. Silo fuel shipments continue to be successfully made to Sellafi eld.
Cavendish Nuclear continues to strengthen its position at Sellafi eld and it has experienced increased demand for its services. The Silo Maintenance Facility Phase 2 design was completed signifi cantly ahead of schedule and Phase 3 funding has been approved by the NDA and Department for Environment and Climate Change, with a contract award anticipated early in the new fi nancial year. Cavendish Nuclear is now into the second year of the Design Services Alliance framework and it is currently involved in over 100 projects, a number of which are critical to the high hazard reduction programme. Progress has been excellent with signifi cant growth in design and engineering services with revenues more than double those of the fi rst year. Ongoing tender activity includes the re-launched BEPPS/DIF contract and the tender for an anticipated 10 year renewal of the Sellafi eld Analytical Services contract (where Cavendish Nuclear has been the incumbent for the previous four years).
At the Atomic Weapons Establishment, decommissioning on behalf of the MoD continues to progress well with strong delivery achieved on all projects.
Cavendish Nuclear continues to develop opportunities and relationships in the nuclear new build sector. Its relationship with EDF remains strong and the submission of the fi nal phase of the bid document for the Balance of Nuclear Island contract for the new Hinkley Point C power station was made in March 2014.
The business is also assisting Hitachi-GE Nuclear Energy with the development of its strategy for the construction of the Advanced Boiling Water Reactors at the Horizon Nuclear Power sites at Wylfa and Oldbury and has recently been awarded an engineering framework contract to support Horizon in scoping activities for the project. Within the power generation support sector, Cavendish Nuclear has supported EDF's achievement of the highest generation output for many years. Discussions with EDF for the lifetime support contract for its fl eet of eight UK nuclear stations are continuing and these are expected to conclude during 2014.
Internationally, Cavendish Nuclear is expanding activities in Japan, to include nuclear decommissioning at nuclear sites including Fukushima, alongside the existing work in support of the decommissioning of the Tokai Magnox reactor. Cavendish Nuclear continues to pursue the opportunity for the management and operations of the Chalk River facilities in Canada.
Our Critical Services business (formerly known as Mobile Assets) delivered another strong performance with 19% organic revenue growth.
Following the contract award from Heathrow Airports Limited (HAL) in 2013, Babcock is now responsible for the operation and maintenance of the baggage handling systems across the entire Heathrow campus, delivering an integrated cost-reducing solution. We are also bidding for a range of baggage system upgrades and replacement projects across all terminals. The British Airways ground support equipment contract is performing well, with signifi cant reductions to the cost base of maintenance of equipment whilst maintaining high availability of equipment.
Within Critical Assets, the Mining and Construction business has continued to build its position in the UK and overseas. Following the June 2013 contract with Aggregate Industries, a subsidiary of Holcim Group, to manage its 400-strong fl eet of heavy mobile equipment in the UK, we have also won a £2 million contract to support a further Holcim subsidiary, Rail Freight Services Ltd. From May 2014 Babcock will be responsible for Lafarge's Readymix fl eet in Western Canada. This is a ten year contract across a fl eet of c 700 assets.
Babcock has been announced as the preferred bidder on a 21-year £300 million contract to provide fl eet management to the London Fire Brigade's (LFB) fl eet of 500 vehicles and 50,000 pieces of specialist equipment. This followed the initial award of an 18 month interim contract in 2012.
Delivering effi cient vehicle fl eet support
Across our fl eet management contracts, including those recently won with Aggregate Industries and the London Fire Brigade, we use ALCAMiE™, our unique approach to asset management. Comprising a customised set of systems and processes, this allows us to optimise the performance of our customers' complex fl eets of emergency service vehicles, heavy mobile equipment, or Readymix vehicles. We deliver a full range of services, improving availability and managing costs over the whole life of each and every asset – from procurement, maintenance and overhaul through to disposal. In North America we have reduced Lafarge's vehicle fl eet by 15%, providing a total saving of US\$38 million in terms of replacement costs and a further annual operating cost saving of c US\$4 million.
See p8 for more information on delivering complex and critical solutions
Babcock delivers better availability and cost savings for vehicle fl eets
Elsewhere in the division, our Skills and Learning business has made signifi cant investment in its training capability over the past 12 months to strengthen and build on its position as a leader in this market.
Our contracts continue to perform well and there have been a number of signifi cant achievements this year, including: the award of a major extension and scope expansion to our work with Volkswagen Group UK worth £32 million (including apprenticeship funding) over four years, winning a new contract with Asda for delivery of the 'Logistics Services Apprenticeship Programme', extension of our EDF Energy contract providing an Advanced Apprenticeship Programme for nuclear technicians, and securing a two-year extension to our contract with BMW to provide technical apprentices, commercial and leadership training.
Babcock's in-house training consultancy team is advising customers on their skills requirements, analysing their training needs and translating business priorities into operational learning programmes. Our new contract with Urenco to deliver a managed learning service will utilise our online learning management system, giving the customer more control and ownership of its training and development needs.
Strategic report
Our acquisition of an award-winning digital learning company, Skills2Learn, complements our practical and classroom-based training provision and enables us to deliver more innovative, effi cient and cost effective training for all our customers. We also acquired the Oman-based National Training Institute, which provides high-quality bespoke HSE and vocational technical training to the energy, oil and gas and construction sectors. This additional capability will enable us to pursue signifi cant opportunities with both current and new customers.
We continue to invest in training infrastructure to support our customers. We expanded our Automotive Training Academy in Milton Keynes with the introduction of state-of-the-art specialist paint and body facilities and we expect to open two new dedicated training facilities for the LFB in 2014. These new LFB facilities will enable us to deliver extended carbonaceous, search and rescue and incident command training.
The quality of our training delivery was recognised this year with a number of industry awards and accreditations, including: 'Best Vocational Education Provider of the Year' at the Education Investor awards; 'Training Partnership of the Year' in SEMTA's 'Best of British Engineering' awards; and 'Outstanding Achiever of the Year' for one of our BMW apprentices.
Outside our core growth areas: nuclear, complex fl eet management and training – the division has continued to grow, winning new contracts and further developing our capabilities.
Babcock's Rail, Power and Communications businesses were brought together as Network Engineering to leverage common skills and capabilities and provide value in a range of very competitive markets.
Through our joint venture with Alstom and Costain, ABC Electrifi cation, the Rail business has secured two of Network Rail's National Electrifi cation Programme framework contracts covering the Central (London North Western, South) and Wales and Western regions. These contracts have an estimated value of £900 million to the joint venture, which is shared equally amongst the partners. Babcock has had further success on the Edinburgh Glasgow Improvement Programme, winning a number of work packages both independently and with the ABC joint venture. On 12 May Network Rail announced that Babcock had been selected to deliver conventional plain line track works across three of its regions. The new frameworks cover Western, Wales and Wessex, Scotland and LNW South and are expected to be worth a total of around £200 million over a fi ve year period from 2014-19. The Rail business was unsuccessful in its bid for the Northern Region switches and crossings framework for Network Rail.
Recently, the Power team has recorded several important wins. These include a National Grid Onshore Underground Cabling Decommissioning contract, and a place on the National Grid EPC Overhead Line Framework. We are also very pleased to have secured a framework contract from Scottish and Southern Energy for major overhead transmission line works in the North of Scotland and three signifi cant schemes from Scottish Power.
Our Integrated Services business, which delivers integrated facilities management, broadcast support and educational improvement services, continues to perform well.
Babcock prides itself on being responsive to the requirements of our customer, no matter how technically demanding these requirements are. Our Network Engineering business recently completed a major refurbishment of 132kV overhead line located in areas of signifi cant ecological and archaeological importance on behalf of Western Power Distribution. The location of the work necessitated innovative approaches including the use of a helicopter to remove old towers and new foundation construction methods to minimise traffi c into each site, reduce the amount of spoil to be removed and the volume of concrete required.
See p12 for more information on working with our customers
The Babcock team with the helicopter used to remove the old towers
The acquisition of Brazilian facilities management company Conbras in July 2013 gave Babcock its fi rst entry point into the Brazilian market. Conbras provides a broad range of facilities services, mainly to large private sector companies with substantial, and relatively complex, facilities including data centres and offi ce buildings. This business is now fully integrated into the division with the local management team all remaining with the business. With additional business development support from the UK, the focus is now on extending Conbras' current capabilities into new sectors and developing new business opportunities in training and programme management.
In the UK, the BBC World Service contract is performing well above contract expectations by broadcasting 50% more hours than originally forecast. In the Education sector, Local Authorities continue to seek innovative partnerships to drive more targeted and effi cient delivery of education services. Babcock is well placed in this environment and the high quality of our joint venture partnership models with Surrey and Devon County Councils was recognised at the Education Investor awards, where we were awarded 'Best Education Partnership of the Year'.
Devon schools continue to achieve excellent outcomes and are improving faster than elsewhere in England, with over 86% of schools in Devon now 'Good' or 'Outstanding' according to the latest Ofsted inspection. Our joint venture with Surrey County Council continues to deliver solid results with improved performance of schools in Surrey across all key stages. We also continue to invest in the development of new education products and capabilities to meet the emerging needs of our customers.
Sustaining and developing our core capabilities is critical to the success of our growth strategy. Signifi cant progress has been made during the year through the establishment of professional practice communities for our division's major capabilities. These practices draw together domain experts to share knowledge, codify best practice and develop our capability to deliver operational excellence. In particular, the practices have been encouraged to support our customers by performing diagnostic type activities which help customers to understand how and where their operations can be made more effi cient or effective.
We have developed an active account management programme for our major customers. Our Account Teams are targeted on developing a deep understanding of our customers' markets and their challenges to further improve our service delivery and build valuable propositions. We continue to develop effective feedback mechanisms to ensure that our service teams focus on the issues and drivers that are key to each customer.
Our employees' engagement with our customers and our business is also critical to our continued success. Signifi cant effort has been made over the year to defi ne and articulate a set of guiding principles that have contributed to the success of Babcock to date and to encourage our employees to consistently adopt these behaviours at all our locations. Employee satisfaction surveys are used consistently and inform our action plans. Our employees are supported by a range of development programmes ensuring they have the right opportunities and support throughout their careers. To meet our growth aspirations the business pro-actively sources new talent with graduate recruitment up by 12% in the year, consisting largely of engineering disciplines.
Our Skills and Learning business achieved the Gold Standard from Investors in People for exceptional working practices, in areas such as people management, leadership, staff development and continuous improvement, and gained Investors in Diversity accreditation for commitment to equality, diversity and inclusion.
Where appropriate, the division supports local community initiatives; a good example being association with education joint ventures. The Surrey Educational Trust and Devon Education Fund reinvest a percentage of profi ts back into the community to fund innovative ideas that benefi t children, young people and learners in their respective regions. Since 2004, £1 million has been reinvested through the Surrey fund, with 30 projects awarded grants of up to £25,000.
Health and safety performance remains the paramount priority across the business. The business continues to drive health and safety at all levels. Accident levels have reduced across all our businesses with reportable lost time injuries falling from 51 in FY2013 to 36 in FY2014 and our all injuries frequency rate has dropped by 10%.
During the year, a major cross-divisional training programme was delivered covering behavioural-based safety, so employees could appreciate the impact their personal behaviour, and the behaviour of others, has on our overall safety performance. Our 'Safety Lens', a tool to facilitate safety discussions in the workplace, continues to be rolled out across the division to promote our 'Home Safe Every Day' campaign and focus on the leading factors that contribute to a safe working environment. For more information see page 58.
We remain confi dent that the division is well placed to deliver on its growth aspirations.
In the UK, the recovering economy and our customers' ongoing need to manage their cost reduction challenges, whilst protecting and enhancing service levels, has seen a strong demand for our technical expertise.
Outside the UK, we are continuing to respond to international opportunities to meet specifi c customers' requirements and also continuing to build our international capabilities as part of the wider Group's development.
Operating review continued
8.4
The South African economy during the 2013/14 fi nancial year has been dominated by the weakness of the local currency when compared to its major trading partners. Forecast GDP for South Africa dropped from an anticipated 2.8% to 2.2% and Rand weakness has further contributed to a rise in imported infl ation that has directly impacted consumer spending. Despite these challenging headwinds, the markets served by Babcock in South Africa have seen growth. Energy demand in particular has remained at prior year levels and has been characterised by breakdowns and extended outage periods as Eskom, South Africa's power utility, works hard to meet demand before new build power stations come on stream. This has created demand for our power generation support business in breakdown and preventative maintenance opportunities as well as life-extension programmes on the ageing fl eet of existing generators. The early start of spend on the infrastructure programme and growth in Mozambique have led to increased demand for the Plant hire business. Mining is still affected by labour unrest but coal mining, where the business is strong, continues to increase production.
| £350m | |
|---|---|
| Total addressable revenue | |
| Equipment | |
| £1.5bn | |
| Total addressable revenue | |
| Rentals | |
| £150m Total addressable revenue |
|
After two years of limited transmission line projects in the region, we have started to see increased activity. Babcock has won a number of new projects and we remain confi dent in the Powerlines business as power generation and transmission is an increasing priority for the region. For the Equipment business, our strategic focus has been on continued market share growth. This has resulted in a further 2.6% growth in our Volvo construction equipment market share to 12.2%. During 2013, we successfully launched a range of Volvo equipment produced in China which has been well received by customers looking for a more cost effi cient product. New branches in Mozambique, Zambia and Botswana have been opened and are showing early potential in these high growth areas. Within Power Generation, we continue with our strategy to increase outage effi ciencies, leading to extra maintenance opportunities and selling our engineering expertise on life-extension programmes within utility and industrial power markets. In the fi rst quarter of 2013 we increased our crane rental fl eet by 21 cranes and our strategy continues to be one of long-term hire within blue chip clients for both cranes and mechanical gear hire. We continue to seek an opportunity to develop a new business stream within the technical training market and have formed Babcock Education and Training to control all internal training, including our apprentice school. We intend to expand this product into the wider technical training market in South Africa.
Revenue for the division in local currency grew by 18% with strong demand for all the South African operations. The effect of movement in the South African Rand has resulted in reported revenue in line with the previous year at £277.6 million (2013: £278.0 million). In Sterling terms, operating profi t in the International division reduced by 6% to £23.2 million (2013: £24.7 million) but increased 13% in local currency terms. This resulted in an operating margin of 8.4% (2013: 8.9%).
In spite of challenges in the mining industry, the construction and mining sector has seen growth of approximately 5%. During the year we have been able to take advantage of this growth and increase our market share by almost 3% in South Africa. This, combined with the successful opening of new branches in Mozambique and Zambia and the launch of the value brand Volvo Chinese product, has resulted in a good year for equipment sales and service.
During 2013/14 we built on our relationship with the Volvo Corporation and were awarded the aftermarket support contract for Volvo Penta in South Africa. The new business unit has performed well in the year and should continue to grow steadily. The DAF automotive division managed to improve revenue by over 50% and has opened a new dealership in the centre of the main coal production region to take advantage of the coal supply routes.
The demand for electricity in South Africa continues to grow signifi cantly. As a result, Eskom has continued to delay preventative maintenance outages on aging power stations, which has led to increased breakdown and engineering activities for our power generation support services unit. Project effi ciency gains in this unit created extra resource and generated extra revenue. The increased activity on these power stations has also provided increased opportunities for the Rentals business unit through increased mechanical gear hire. The Target Cranes acquisition has been fully integrated and has achieved improved safety standards as well as market share growth in the Southern Cape region. Transmission line contract wins in the latter half of the year for the Powerlines business has resulted in the business ending the year with a strong order book for construction projects in 2014.
Teamwork between Babcock, Volvo CE and our customer Multipit allowed us to help revolutionise commercial forestry planting in South Africa. Combining an excavator with protected software, we have created a machine that digs and GPS registers planting pits. This technology is used to generate 3D maps, helping to create an energy effi cient, highly productive and cost effective planting and harvesting programme.
integrated output contracts
Infrastructure / Programmes Equipment/Assets
Focused on our operate
Leadership position across selected markets
Training
See p10 for more information about the way we operate
Digging planting pits
For the South African business, looking forward our primary focus for the coming year will be on continued market share growth in the automotive and construction sectors in both our local and export markets. In the power generation market we hope to continue to extend our support service operations. After two years of limited activity in the powerline market, we are encouraged by recent wins and believe the shortage of lines to and from new power stations will give us further opportunities to grow. In addition, we continue to identify new opportunities where we can build on Group expertise in new markets for the division.
Working in close collaboration with the primary contractor, KEC, Babcock helped Eskom meet its 2013/2014 commitments for kilometres of transmission lines built as well as million volt-amperes of substations. Working to tight deadlines in December 2013 and January 2014, we were responsible for the construction of 100 giant 765 kV towers and stringing 15 km of line. Despite the signifi cant challenges posed by working during the industry shutdown period in diffi cult terrain and a remote site, an innovative resourcing approach coupled with a target incentive scheme delivered outstanding results. Utilising our South African cranes business, Babcock completed the work on time, exceeding the client's and Eskom's expectations.
See p8 for more information about complex and critical support
Working on transmission lines for Eskom
Strategic report
We have identifi ed a number of Group and divisional level fi nancial and non-fi nancial key performance indicators (KPI) that refl ect the internal benchmarks we use to measure the success of our business and strategy. These will enable investors and other stakeholders to measure our progress.
Key performance indicator KPI
Revenue growth (%) + 9%
Revenue growth is defi ned as the increase in the Group's revenue (including jvs) when compared to that of the previous year.
200
Operating Cash Flow (OCF) conversion rate is defi ned as cash generated by operations after adding back retirement benefi t cash fl ows in excess of service cost as a percentage of operating profi t (pre-exceptionals and amortisation of acquired intangibles).
Interest cover is profi t before interest, tax, depreciation, amortisation, jvs and exceptionals divided by net Group interest payable.
Gearing ratio measures the extent to which a company is funded by debt. Calculated as net debt divided by shareholder funds excluding retirement benefi t defi cits or surpluses.
Net debt/EBITDA is calculated as net debt divided by earnings before interest, tax, depreciation and amortisation.
Operating Return on Revenue (ORR) is defi ned as underlying operating profi t expressed as a percentage of revenue.
In the Operating review we used the following KPIs to measure each division's performance.
Operating profi t before amortisation of acquired intangibles and exceptional items expressed as a percentage of revenue.
The percentage increase in the division's continuing revenue when compared to that of previous years.
Return on Invested Capital (ROIC) is defi ned as underlying profi t before fi nancing and tax divided by total capital (equity, excluding retirement benefi t defi cits or surpluses, plus net debt).
Health and safety is a core value for Babcock. The data includes all injuries reported each year across the entire Group.
In addition to our KPIs we also have a number of non-fi nancial statistics and measures. These can be found in the Sustainability report on page 52.
| Joint ventures and associates | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Continuing operations – statutory £m |
Revenue and operating profi t £m |
Finance costs £m |
Tax £m |
IFRIC 12 income £m |
Amortisation of acquired intangibles £m |
Change in UK tax rate £m |
Exceptional items £m |
Continuing operations – underlying £m |
|
| 31 March 2014 | |||||||||
| Revenue | 3,321.0 | 226.6 | 3,547.6 | ||||||
| Operating profi t | 233.1 | 21.9 | 38.8 | 59.2 | 24.9 | 377.9 | |||
| Share of profi t from jv | 20.9 | (21.9) | 25.1 | 7.0 | (37.3) | 6.2 | – | ||
| Investment income | 1.5 | (1.5) | – | ||||||
| Net fi nance costs | (36.7) | (25.1) | (61.8) | ||||||
| Profi t before tax | 218.8 | – | – | 7.0 | – | 65.4 | – | 24.9 | 316.1 |
| Tax | (30.8) | (7.0) | (15.2) | (2.4) | (55.4) | ||||
| Profi t after tax | 188.0 | – | – | – | – | 50.2 | (2.4) | 24.9 | 260.7 |
| 31 March 2013 | |||||||||
| Revenue | 3,029.4 | 214.1 | 3,243.5 | ||||||
| Operating profi t | 203.5 | 21.2 | 40.2 | 66.4 | 14.3 | 345.6 | |||
| Share of profi t from jv | 18.0 | (21.2) | 29.2 | 6.3 | (38.5) | 6.2 | – | ||
| Investment income | 1.7 | (1.7) | – | ||||||
| Net fi nance costs | (41.4) | (29.2) | (70.6) | ||||||
| Profi t before tax | 181.8 | – | – | 6.3 | – | 72.6 | – | 14.3 | 275.0 |
| Tax | (18.0) | (6.3) | (17.4) | (1.2) | (2.7) | (45.6) | |||
| Profi t after tax | 163.8 | – | – | – | – | 55.2 | (1.2) | 11.6 | 229.4 |
Continuing our successful track record of growth for well over 10 years, the 2013/14 results have increased by 9% in underlying revenue and 9% in underlying operating profi t, demonstrating the strength of our underlying operations and our ability to deliver successful support solutions for our customers. Continuing to focus on delivering effi ciencies for our customers as well as maintaining stringent controls over our own overheads, the Group operating margin has remained stable at 10.7%.
The Group continues to have a secure fi nancial base which is key to supporting the Group's future growth ambitions. During the 2013/2014 fi nancial year we have also invested in bidding activities to deliver future organic growth as well as £62.5 million on acquisitions, strengthening and enhancing the Group's capabilities and providing entry positions in new geographies.
Total revenue for the year was £3,547.6 million (2013: £3,243.5 million) which represents growth of 9% (2013: 6%) KPI: p42 . Adjusting for movements in foreign exchange growth was 11% (2013: 7%).
The Marine and Technology division saw headline revenue growth of 15% and organic growth of 13% before acquisitions and at constant exchange rates. Organic growth was driven by increased volumes in the UK on the Queen Elizabeth aircraft carrier programme and the refi t of HMS Ocean, as well as increased work programmes in Canada on the submarine programme. The division also saw an increase in commercial activities for oil and gas customers. LGE, acquired in the third quarter of the 2012/13 fi nancial year, delivered strong growth this year, increasing from £9.7 million to £42.5 million, contributing to the division's total growth. Revenue for the Defence and Security division increased by 4%, refl ecting a good performance from the Future Strategic Tanker Aircraft (FSTA) joint venture as well as increased infrastructure activities in both the UK and Germany which offset a reduction in revenue following completion of construction activities at the Royal School of Military Engineering and soft FM activities on the FOAP training contract. The Support Services division delivered total revenue growth of 10% and 7% organic growth. Cavendish Nuclear experienced strong growth in decommissioning activities and the Critical Assets business unit benefi ted from enhanced contracts with Heathrow Airport Ltd secured at the beginning of the fi nancial year. The Rail business has also seen strong demand for overhead line and special project works. The acquisition of Conbras in the fi rst half of the year has added £26 million to total growth for the division. For the International division, in South Africa, strong demand for all the business's activities has delivered organic growth in local currency of 18%, although the effect of exchange rate movements in the South African Rand has resulted in revenue in Sterling terms in line with the previous fi nancial year.
Bridging analysis revenue growth (£m)
Underlying operating profi t increased by 9% to £377.9 million (2013: £345.6 million) which gave a Group operating return on revenue of 10.7% (2013: 10.7%) KPI: p43 . Excluding the effect of foreign exchange movements growth in operating profi t was 11% (2013: 15%). The Marine and Technology division experienced 13% growth in operating profi ts of which 11% was organic: this resulted in an operating margin of 11.2% broadly in line with last year (2013: 11.4%). Margins for technology, commercial and international activities remain strong balancing, UK naval marine margins of around 10%. For the Defence and Security division income arising from increased revenue from infrastructure activities, as well as FSTA joint venture activities, which partly offset reductions in other joint venture activities, increased margins to 13.9% (2013: 13.4%). Operating profi t in the Support Services division increased by 3% with operating margins reducing to 8.2% (2013: 8.8%) as previously highlighted, resulting from the early phases of a number of long-term contracts combined with signifi cant bidding and business development costs. Operating profi t in the International division increased by 13% in local currency terms but was 6% lower in Sterling terms, refl ecting the adverse impact of a weak South African Rand. This resulted in an operating margin of 8.4% (2013: 8.9%).
Charges to exceptional items were £24.9 million (2013: £14.3 million) and comprised the following items
| 2013/14 £m |
2012/13 £m |
|
|---|---|---|
| Acquisition costs | 24.9 | – |
| Reorganisation costs | – | 14.5 |
| Profi t on disposal of subsidiaries | – | (0.2) |
| Total | 24.9 | 14.3 |
Acquisition costs relate to the acquisition of the Avincis Group announced on 27 March 2014. 2013 reorganisation costs represent the costs of combining IT networks, rationalisation of property and redundancy costs following the acquisition of VT in 2010/11.
Amortisation of acquired intangibles of £65.4 million (2013: £72.6 million) represents the amortisation of the value attributed on business acquisitions, customer relationships (both contractual and non-contractual) and acquired brands. The value is amortised over its estimated useful life, which in the case of relationships currently 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. In relation to brands, the asset life is dependent on the market characteristics of the business acquired. Details of the basis of amortisation of acquired intangible assets is set out in note 14 to the Group fi nancial statements.
Net fi nance costs were £61.8 million (2013: £70.6 million) and include the Group's share of joint venture net interest expense of £25.1 million (2013: £29.2 million) and the IAS 19 pension fi nance charge of £10.9 (2013: £11.8 million). Joint venture fi nance costs are primarily related to fi nancing structures on the FSTA and UK Military Flying Training System (MFTS) Private Finance Initiative (PFI) contracts which decreased year-on-year following favourable movements on debt hedging instruments. Joint venture fi nance costs, excluding the effect of movement in hedging instruments, will increase as the PFI continues to deliver assets into service for the customer. 2013/14 saw three tanker aircraft delivered, with the related non-recourse debt drawn down under the PFI facilities. We expect further aircraft to be constructed and delivered over the coming year and this element of net fi nance costs to increase. Finance costs on the Group's own facilities were £25.8 million (2013: £29.6 million) in line with the decrease in the average amount drawn on the Group's revolving credit facility and improved fi nance terms.
Profi t before tax, amortisation of acquired intangibles and exceptional charges increased by 15% to £316.1 million (2013: £275.0 million). The associated tax charge, including the Group's share of joint venture tax of £7.0 million (2013: £6.3 million), totalled £55.4 million (2013: £45.6 million) representing an effective rate of tax of 18% (2013: 17%). The effective tax rate is calculated by using the Group's underlying profi t before tax and therefore excludes the tax effect of amortisation and exceptional charges.
Continuing underlying earnings per share for the year was 70.3 pence (2013: 62.2 pence), an increase of 13%. Basic earnings per share as defi ned by IAS 33 was 50.1 pence (2013: 43.9 pence) per share, an increase of 14%.
In order to fi nance the acquisition of the Avincis Group and to ensure the Group maintains suffi cient fi nancial headroom for growth opportunities, the Group undertook a Rights Issue of 139,259,204 new ordinary shares which was completed on 6 May 2014. To provide a comparison for future years, underlying earnings per share for 2013/14 has been adjusted to 62.1 pence to take into account the increase in the number of shares and the bonus issue of shares.
This year underlying basic earnings per share increased by 13% to 70.3 pence (2013: 62.2 pence) and the Group continued to deliver strong cash fl ows, achieving a cash conversion rate of 103% (2013: 119%). Looking forward, the order book and bid pipeline remain strong giving us excellent visibility of future revenue and further growth opportunities.
The Board's confi dence in the long-term future of our business remains strong and we are therefore delighted to recommend a 14% increase in the fi nal dividend per share for 2014 of 16.4 pence per share (2013: 14.4 pence per share). This will give a total dividend for the year of 21.4 pence per share (2013: 19.0 pence per share), an increase of 13%. The fi nal dividend will be paid on 12 August 2014 to shareholders on the register at 4 July 2014.
As a result of the new ordinary shares created by the Rights Issue in respect of the acquisition of Avincis, which started trading on 7 May 2014, the dividend numbers and the comparatives referred to above have been adjusted accordingly.
Babcock has had a consistent dividend policy for a number of years that, over the medium-term, the dividend should be covered on average between 2.5 and 3 times by underlying basic earnings per share. Following completion of the Avincis acquisition and taking into account the availability of distributable reserves and cash as well as the enlarged Group's working capital and investment requirements, the Board intends to maintain this policy.
During the 2013/14 fi nancial year, in support of our strategic growth objectives, the Group has made a number of acquisitions which have added to our capabilities and will enable us to expand our international presence. For the year, net acquisition spend, after disposals, totalled £61.8 million (2013 income: £45.8 million).
In July 2013, the Support Services division acquired Conbras in Brazil for a cash consideration of £18.2 million plus deferred consideration of £4.4 million. In December 2013, the division also acquired Skills2Learn, a specialist in the delivery of virtual reality and e-learning based training, for £5.8 million plus deferred consideration of £1.5 million and in January 2014 the National Training Institute (NTI) in Oman for £12.3 million. In December 2013, the Marine and Technology division acquired Context Information Security (ContextIS) for £29 million plus deferred consideration of £4 million payable in 2016.
During the period the Group received a deferred consideration of £4.2 million on the disposal of the UKAEA Pension Administration Offi ce which was sold in December 2012.
The Group completed acquisition of the Avincis Group on 16 May 2014 following the receipt of the Rights Issue Funds of £1.1 billion. Shareholder approval was received on 16 April 2014 and all relevant clearances have been obtained and there are no other restrictions on the expected completion date.
| 2013/14 | 2012/13 | |
|---|---|---|
| £m | £m | |
| Cash generated from operations | 279.5 | 293.4 |
| Capital expenditure (net) | (68.3) | (53.7) |
| Interest paid (net) | (31.8) | (30.5) |
| Taxation | (55.8) | (45.8) |
| Free cash fl ow | 123.6 | 163.4 |
| Acquisitions and disposals net of | ||
| cash/debt acquired | (63.1) | 40.8 |
| Investments in joint ventures | 5.2 | (30.2) |
| Movement in own shares | 0.7 | (2.2) |
| Dividends received from joint | ||
| ventures and associates | 4.8 | 7.1 |
| Joint ventures and associate loans | (0.5) | 26.2 |
| Dividends paid | (101.0) | (86.7) |
| Other | (3.9) | (1.7) |
| Net cash (outfl ow)/infl ow | (34.2) | 116.7 |
| Opening net debt* | (499.5) | (616.2) |
| Closing net debt* | (533.7) | (499.5) |
* Net debt includes interest bearing loans to joint ventures of £50.6 million (2013: £51.1 million) and comparatives have been restated accordingly.
Cash generated from operations was £279.5 million (2013: £293.4 million) and represents a conversion rate KPI: p42 of 103% (2013: 119%). Capital expenditure of £68.3 million (2013: £53.7 million) was primarily focused on the upgrade of dockyard facilities in the Marine and Technology division, as well as investment in new cyber-security systems and IT infrastructure across the Group. We have also purchased additional equipment for the South African crane hire business and have invested in vehicles and infrastructure to support contract wins during the period.
In addition to the normal investment in dockyard facilities, following the acquisition of Avincis in May 2014, the Group will invest further in IT infrastructure, cyber-security systems and enterprise software as well as assets necessary to support business growth. As a result, capital expenditure for 2014/15 is expected to be around 1.5 times annual depreciation of £80 million.
Working capital cash outfl ows (excluding retirement benefi ts and exceptional items) were £51.3 million in the year (2013: £3.6 million infl ow) with higher activity levels increasing debtors and stock, partly offset by creditors. We expect a similar working capital profi le in the 2014/15 fi nancial year.
Net Group cash interest paid was £31.8 million (2013: £30.5 million), the increase resulting from lower receipts on joint venture loans. We expect the cash interest charge in this fi nancial year to be around £60 million, refl ecting the increase in the Group's debt levels over the year following the acquisition of Avincis, which completed in May 2014.
After taxation payments of £55.8 million (2013: £45.8 million), free cash fl ow was £123.6 million (2013: £163.4 million) representing a free cash fl ow yield on 31 March 2014 of 3% (2013: 4%), the reduction being partly driven by the increase in share price over the year. We expect the cash tax charge for this fi nancial year to increase in line with the income statement charge.
Acquisitions and disposals totalling £63.1 million comprise the purchase during the year of Conbras, Skills2Learn, National Training Institute and Context IS and the deferred receipt for the UKAEA Pension Administration offi ce which was sold in December 2012. Dividends received from joint ventures during the period totalled £4.8 million (2013: £7.1 million). Cash dividends (including to minorities of £4.3 million) paid out in the year totalled £101.0 million (2013: £86.7 million).
Group net cash outfl ow was £34.2 million (2013 infl ow: £116.7 million) increasing total net debt to £533.7 million (31 March 2013: £499.5 million, 30 September 2013: £521.2 million).
We defi ne ROIC as earnings before fi nancing costs and tax excluding exceptional charges, divided by equity plus net debt, excluding retirement benefi t defi cits. For the year 2013/14, ROIC was 20.7% (2013: 20.0%). Measured against the current weighted average pre-tax cost of capital of c 10%, the track record of performance demonstrates the Group's ability to generate value-enhancing rates of return today and in the long-term.
The Company defi nes available fi nancial capital (AFC) as shareholder equity, net debt plus undrawn committed borrowing facilities.
To ensure an appropriate level of AFC to:
The Board aims to maintain a balance between equity and debt capital which optimises the Group's cost of carry whilst allowing access to both equity and debt capital markets at optimum pricing when appropriate.
The Group, in considering its capital structure and fi nancial capital, views net debt to EBITDA at circa two times as being steady state and sustainable in the current market and against the current economic backdrop. This is not to rule out acquisition spikes above two times, as illustrated by the recently announced Avincis acquisition and those in the past, but only if the Group can see a clear path to reducing net debt to EBITDA KPI: p43 back to circa two times within a reasonable time frame.
The Group's gearing and debt cover ratios KPI: p43 , used by the Group to evaluate AFC, have continued to improve year-on-year, both in the pay down of debt and through increased profi ts attributable to shareholders.
| Covenant 2013/14 2012/13 | ||||
|---|---|---|---|---|
| Debt service | ||||
| cover | EBITDA/net interest | >4 | 15.0x | 11.9x |
| Debt cover | Net debt/EBITDA | <3.5 | 1.3x | 1.3x |
| Net debt/ | ||||
| Gearing | shareholders' funds | n/a | 41% | 41% |
Debt ratios are well below covenanted levels and gearing is at a level that readily allows further acquisitions and funding of organic growth. As such we believe capital markets remain readily accessible when required.
Treasury activities within the Group are managed in accordance with the parameters set out in the treasury policies and guidelines approved by the Board. A key principle within the treasury policy is that trading in fi nancial instruments for the purpose of profi t generation is prohibited, with all fi nancial instruments being used solely for risk management purposes.
The Group only enters into fi nancial instruments where it has a high level of confi dence in the hedged item occurring. Both the treasury department and the divisions have responsibility for monitoring compliance within the Group to ensure adherence to the principal treasury policies and guidelines.
The Group's treasury policies in respect of the management of debt, interest rates, liquidity, and currency are outlined below. The Group's treasury policies are kept under close review given the continuing volatility and uncertainty in the fi nancial markets.
With debt as a key component of available fi nancial capital, the Group seeks to ensure that there is an appropriate balance between continuity, fl exibility and cost of debt funding through the use of borrowings, whilst also diversifying the sources of these borrowings with a range of maturities and rates of interest, to refl ect the long-term nature of the Group's contracts and commitments and its risk profi le.
All the Group's material borrowings are arranged by the treasury department, and funds raised are lent onward to operating subsidiaries as required.
It remains the Group's policy to ensure the business is prudently funded and that suffi cient headroom is maintained on its facilities to fund its future growth.
The Group continues to keep under review its capital structure to ensure that the sources, tenor and availability of fi nance is suffi cient to meet its stated objective. Current committed facilities and headroom are thought to be suffi cient to meet the Group's ongoing commitments. The following are a summary of the Group's main debt facilities: £100 million of loan notes issued in January 2010, US\$650 million US private placement notes issued in March 2011, £500 million Revolving Credit Facility (RCF) signed in June 2011, with a term of fi ve years, three months, a circa £900 million Bridge Facility comprising of a Sterling tranche and a Euro tranche signed in March 2014 with a term of one year, plus two six month extensions at the Company's option. The aforementioned debt provides the Group with total committed banking facilities and loan notes of £1.9 billion.
For further information see note 2 to the Group fi nancial statements.
To manage exposure to interest rate fl uctuations on borrowings by varying the proportion of fi xed rate debt relative to fl oating rate debt to refl ect the underlying nature of its commitments and obligations. As a result, the Group does not maintain a specifi c set proportion of fi xed versus fl oating debt, but monitors the mix to ensure that it is compatible with its business requirements and capital structure.
Interest hedging and the monitoring of the mix between fi xed and fl oating rates is the responsibility of the treasury department, and is subject to the policy and guidelines set by the Board.
As at 31 March 2014, the Group had 49% fi xed rate debt (31 March 2013: 55%) and 51% fl oating rate debt (March 2013: 45%) based on gross debt of £670.6 million (March 2013: £647.7 million).
For further information see note 2 to the Group fi nancial statements.
i all the Group's material borrowings are arranged by the treasury department and funds raised are lent onwards to operating subsidiaries as required.
For further information see note 2 to the Group fi nancial statements.
To reduce exposure to volatility in earnings and cash fl ows from movements in foreign currency exchange rates. The Group is exposed to a number of foreign currencies, the most signifi cant being US Dollar and South African Rand.
The Group is exposed to movements in foreign currency exchange rates in respect of foreign currency denominated transactions. To mitigate this risk, the Group's policy is to hedge all material transactional exposures, using fi nancial instruments where appropriate. Where possible, the Group seeks to apply IAS 39 hedge accounting treatment to all derivatives that hedge material foreign currency transaction exposures.
The Group is exposed to movements in foreign currency exchange rates in respect of the translation of net assets and income statements of foreign subsidiaries and equity accounted investments. It is not the Group's policy to hedge the translation effect of exchange rate movements on the income statement or balance sheet of overseas subsidiaries and equity accounted investments it regards as long-term investments.
There was a net foreign exchange loss of £1.5 million in the income statement for the year ending 31 March 2014 (2013: £0.8 million gain).
For further information see note 2 to the Group fi nancial statements.
Strategic report
The Group provides a number of occupational defi ned benefi t and defi ned contribution schemes for its employees. The largest schemes are the Babcock International Group Pension Scheme, the Devonport Royal Dockyard Pension Scheme and the Rosyth Royal Dockyard Pension scheme whose combined assets of £2.8 billion represent 85.7% of the total assets of all the Group's defi ned benefi t schemes.
It also has employees in two industry wide occupational schemes, the Railways Pension Scheme and the Magnox Group of the Electricity Supply Pension Scheme, as well as employees in other smaller occupational defi ned benefi t schemes and local and central government schemes. All the occupational defi ned benefi t schemes are closed to new members.
The Group operates an occupational defi ned contribution scheme open to all new employees across the Group and was used to comply with the automatic enrolment legislation from 1 April 2013. The Group pays contributions to an independently administered fund, such contributions being based on a percentage of employees' pay. It has no legal or constructive obligations to pay further contributions once the agreed contributions have been paid. Any investment risk is borne by the employees.
The acquisition of Avincis will have no impact on the Group's pension liabilities.
The Group works constructively with an investment subcommittee, which operates across the three largest schemes, and implemented a single consistent investment strategy designed to systematically derisk the schemes as funding levels improve and to operate within a risk budget. It has been agreed the schemes will target having suffi cient assets by 2037 for the schemes to be fully self-suffi cient.
To implement the strategy to achieve self-suffi ciency , the schemes' assets are divided into growth assets, low risk assets and matching assets refl ecting the duration of the liabilities. The growth funds are systematically derisked as funding levels increase (on the basis used for self-suffi ciency). In addition, the matching assets are used to hedge adverse movements in interest rates and expected infl ation based on the expected cash fl ows from the scheme. The level of hedging is increased in line with funding levels to reduce the risk of volatility in the schemes' funding positions and IAS defi cit, thereby creating a more stable fi nancial position.
Actuarial valuations are carried out every three years in order to determine the Group's cash contribution commitments to the schemes. The valuation dates for the three largest schemes are set such that only one scheme is undertaking an actuarial valuation in any one year in order to spread the fi nancial impact of market movements in both assets and liabilities. The valuation for the Devonport scheme is due as at 31 March 2014 with any consequent cash requirements expected to be implemented from 1 April 2015.
An actuarial valuation of the Babcock scheme as at 31 March 2013 is due to be completed by June 2014 based on the market value of assets and assumptions for the valuation of liabilities as agreed with the sponsoring company. A valuation of the Railways Pension scheme is due 31 December 2013 with any consequent cash requirements expected to be implemented from 1 July 2015 .
| 13/14 | 12/13 | |
|---|---|---|
| £m | £m | |
| Future service contributions | 49.0 | 53.3 |
| Defi cit recovery | 43.6 | 39.3 |
| Longevity swap | 4.2 | 5.0 |
| Pension pre-payments (net) | – | (20.0) |
| Total cash contributions – | ||
| employer | 96.8 | 77.6 |
The total cash contributions expected to be paid by the Group into the defi ned benefi t pension schemes in 2014/15 are £94.6 million. £51.2 million is in respect of the cost of future service accrual of which £32.7 million in Marine and Technology is recovered via contractual terms. Of the balance, £4.2 million of the contributions are in respect of the three longevity swaps transacted for each of the largest schemes during 2009/10 to mitigate the fi nancial impact of increasing longevity, leaving £39.2 million to be funded from other Group contracts.
The IAS 19 valuation for accounting purposes showed a market value of assets of £3,220.1 million, net of longevity swaps, in comparison to a valuation of the liabilities based on AA corporate bond yields of £3,487.7 million representing a 92% funding level.
A summary of the key assumptions used to value the largest schemes is shown below. The most signi fi cant assumptions that impact on the results are the discount rate, the rate of future pensionable salary increases and the expected rate of in fl ation. The impact of the longevity swaps transacted during 2009/10 has helped to mitigate the impact of increasing allowance for longevity.
| Devonport | Babcock | Rosyth | ||||
|---|---|---|---|---|---|---|
| 13/14 | 12/13 | 13/14 | 12/13 | 13/14 | 12/13 | |
| Discount rate % | 4.5 | 4.4 | 4.5 | 4.4 | 4.5 | 4.4 |
| Rate of increase in pensionable salaries % |
2.4 | 2.6 | 2.4 | 2.6 | 2.4 | 2.6 |
| Rate of increase in pensions in payment % |
2.2 | 2.4 | 3.0 | 3.0 | 3.4 | 3.4 |
| Life expectancy of male currently aged 65 years |
21.7 | 21.6 | 22.8 | 22.8 | 19.3 | 17.7 |
The total accounting de fi cit, pre deferred tax, at 31 March 2014, was £267.7 million (2013: £261.1 million) and the expected IAS 19 net periodic bene fi t cost in 2014/15 is £57.9 million (2013/14: £60.2 million).
Actions taken during the year to mitigate further volatility of assets and liabilities include the continued hedging of in fl ation and interest rate changes.
Further details on the Group's pension schemes can be found in note 27 to the Group fi nancial statements.
Professional and effective pension scheme management is paramount to enable members and sponsors to be con fi dent in the trustees' stewardship of the schemes. The Group and the cross scheme Governance Committee have continued to work constructively to improve the effectiveness of the trustee boards of the three largest schemes and their sub-committees as well as enhancing trustees' knowledge through training and decisionmaking. All trustees are required to sign a trustee charter regarding their duties.
" Our priority is to ensure that Babcock continues to be a strong, successful and sustainable business that will create longterm value for our shareholders and in so doing we recognise there are other stakeholders to consider – our employees, our customers, our suppliers and the communities in which we operate. We believe that we will only be able to do this if we have regard to the long-term sustainability of what we do and by behaving in a safe and responsible way and upholding the highest standards of business ethics in all we do."
As a leading engineering support services company with an increasingly international footprint we recognise that our business operates within the context of wider society and the environment. We work hard to sustain the long-term future of our business whilst at the same time having a positive effect for individuals and local economies, for example, by way of employment, apprenticeships, training and career development opportunities, and make great efforts to try to avoid or minimise, so far as we can, any potentially negative impact of our operations on the environment or the health and safety of employees or others. How we do this is discussed further within this Sustainability report as well as in the sustainability section of each of our divisional unit operating reviews.
51% (2013: 58%)
Percentage, by revenue, of the Group's operations with environmental management systems ISO 14001 certifi ed.
See page 63 for more information.
We are especially conscious of the fact that our people are key to our success. Initiatives in areas such as our graduate recruitment scheme and apprentice programmes as well as talent development and management training are critically important for the long-term future success of the Company. We have demonstrated our support and commitment in this area by joining the '5% Club' during the year, which involves our committing to having 5% of our workforce on structured training schemes within the next fi ve years. These initiatives, along with our continuing commitment to promote a highly skilled, diverse workforce, should help ensure that we are well placed to meet our immediate and long-term commitments.
Our commitment to ethical and responsible business practices being observed throughout the Group is fundamental. Our Group-wide Code of Business Conduct, set out in section 1 of this report, is supplemented by detailed guidance and training, and underpins everything we do as a business. It is my belief that not only is this the right approach in and of itself for a responsible business it also makes good business sense, and helps foster our long-term fi nancial growth by sustaining our reputation and encouraging longer-term thinking looking beyond short-term fi nancial returns.
In this Sustainability report we highlight certain areas that we consider key to our being a responsible and ethical business as well as to assist us in reducing risks, and thus sustaining our operations.
Peter Rogers CBE Chief Executive
442 (2013: 251)
Number of graduates currently on a graduate programme across the Group.
See page 60 for more information.
95% (2013: 96%)
Percentage of senior managers at the beginning of the fi nancial year still employed by the Group at the end of the year.
See page 59 for more information.
Number of employees currently on apprenticeships across the Group.
See page 60 for more information.
Babcock aims at all times to act responsibly and ethically when pursuing and awarding business. We understand that our reputation and good name are amongst our greatest assets, which could easily be lost by actual or suspected corrupt or unethical behaviour. To protect the Company and reduce these risks we have set out a policy on how we should all conduct business in the form of the Babcock Code of Business Conduct. Compliance with this policy is compulsory for employees, business advisers and business partners (or, in the case of business advisers and partners they must have equivalent standards and procedures in their own businesses).
The Babcock Code of Business Conduct is a Group-wide policy that sets out the following principles to ensure that those who work with or within the Company do so to the highest of ethical standards:
Babcock Code of Business Conduct
The Babcock Code of Business Conduct is supplemented by a detailed manual available on the Group's intranet that contains guidelines, authorisation and other procedures aimed at identifying and reducing corruption and ethical risks. For example: an explanation of the law and how it can apply; 'Red Flags' to look out for; guidelines and authorisation procedures for giving or accepting gifts and hospitality or making charitable or political donations; due diligence and approval requirements before engaging new business partners; and how to whistleblow concerns. This manual can also be accessed online on the Company's website at www.babcockinternational.com/ about-us/responsibilities/ethical-compliance/.
Employees take online training courses in anti-bribery and corruption risks. Each Division and Group function is required to have a designated member of its senior management team with specifi c responsibility for ensuring the distribution, communication and implementation of the anti-bribery and corruption guidance, and for overseeing training. Divisions and Group functions are also required to consider carefully whether they need also to designate business unit level or site specifi c managers with the same responsibility. Anti-bribery and corruption risks have expressly to be considered each year in business unit risk reviews as an integral part of our risk management arrangements. Internal audit carries out a review of the implementation of the Guidance as part of the annual internal audit plan. Divisional monthly reports contain information on anti-bribery and corruption compliance, copies of which go to each Board meeting.
As an international business we recognise our responsibility for upholding and protecting the human rights of our employees and other individuals with whom we deal in our operations across the world. We welcome the opportunity we have to contribute positively to global efforts to ensure that human rights are understood and observed.
We believe that a culture of respect for, and promotion of, human rights is embedded throughout our business and can be demonstrated by our commitment to ethical conduct (pages 54-55), our customer and supplier relationships (pages 56-57), the importance we place on health and safety (pages 58-59), the commitment we have towards the people who work for and with Babcock both now and in the future (pages 59-61), and our respect towards the wider society and environment in which we work (pages 62-63), as we set out throughout this Sustainability report.
Babcock insists on responsible, transparent and accountable business practices in accordance with our Code of Business Conduct. Confi dential employee whistleblower hotlines are available Group-wide to relay any employee concerns that these standards are not being adhered to for investigation. The service is provided by an independent third party who promptly reports
messages received to central Group senior management. Callers can remain anonymous if they wish. The hotlines are intended for use by employees to report concerns that they feel unable to raise with line management (or if they have raised matters, but are not satisfi ed with the response) regarding fi nancial irregularities, non-compliance with laws, or breaches of our Code of Business Conduct, threats to health and safety, confl icts of interest or improper practices. New employees are made aware of the existence of the hotlines as part of their induction; details of the hotlines are advertised at operating sites.
All whistleblowing incidents are reviewed and a method of investigation confi rmed, which can be by a senior manager not directly related to the incident, an external agency or by internal audit. In all cases this review is followed up by a report to Group senior management. Where possible, the caller reporting the incident will be notifi ed of the outcome of the investigation. A report on all whistleblowing calls throughout the Group, the investigations undertaken as a result of these calls, the conclusions drawn and the recommendations and actions resulting is given to each meeting of the Audit and Risk Committee.
The total number of whistleblowing reports in the year to 31 March 2014 was 39. During the same period to 31 March 2013 the number was 40. Details of the number of cases by division and by category are set out below.
| 4 | 1 | 1. Defence and Security | 6 |
|---|---|---|---|
| 2. Support Services | 13 | ||
| 3. Marine and Technology | 15 | ||
| 4. International | 5 | ||
| Total | 39 | ||
| 5 | 1. Harrassment/Bullying/Discrimination | 7 | |
|---|---|---|---|
| 1 | 2. Fraud/Theft/Dishonesty | 9 | |
| 3. Employment Issues | 16 | ||
| 4. Operational | 5 | ||
| 5. Health & Safety | 2 | ||
| 2 | Total | 39 | |
As we have described throughout the Strategic report, we serve a wide range of customers in many business areas offering complex solutions under contracts which typically run over a number of years. Given the long-term nature of these contracts, and the profi les of our major customers, Babcock favours a partnering or collaborative approach and looks to build strong, long-term customer relationships; this is at the heart of our business philosophy. By this collaborative approach we aim to develop an in-depth understanding of our customers, what they value, what matters most to them, their present and future needs and objectives, and how and why they make their procurement decisions, so that we can offer and best deliver what they are truly looking for and can anticipate and plan for their future requirements.
So how do we seek to establish these strong customer relationships?
Babcock believes that the most enduring relationships are built around eight key elements:
We understand that one of the critical elements in building a strong business relationship is that both parties understand and are aware of how the other defi nes 'success' in a way that is both identifi able and measurable. Since this cannot be left to chance, we commission regular reviews of the workings of our business partnering arrangements to assess if they are working well and also to look for the tell-tale signs of where they might encounter problems.
Our customers rely upon Babcock to deliver critical support to their operations. We need trusted and effective suppliers to support us in delivering reliable service to our customers and in seeking to reduce the cost of doing so. We buy a wide range of goods and services and need reliable, high-performing suppliers across all aspects of our supply chain. Babcock seeks to ensure that our customers' money is spent effi ciently and responsibly, and that our supply contracts are managed effectively. We work to ensure that the supply chain adheres to our standards of ethical behaviour, environmental, health and safety and other working practices.
Babcock helps sustain its supply chain through an annual expenditure in excess of £1.3 billion with a supplier base of more than 10,000 companies. We have substantive trading relationships with over 350 companies. Our businesses have dedicated, local procurement and supply management functions. These teams are integrated into local operations but adopt common high standards, sharing best practices and supplier insights across the Group. Common expenditure across the Company is increasingly being managed and governed using a Group-led category management approach.
Our approach to procurement and supply is to:
Babcock is committed to creating a safe working environment which enables all those working on, or visiting, Babcock operations to be able to return 'Home Safe Every Day'. We seek to work only with suppliers who we believe are able to both meet and promote our standards – those that share our commitment to safe behaviours and performance in delivering services and solutions for our customers. Our teams aim to work with suppliers on safety and share continuous improvement practices to reduce or prevent accidents and injuries.
Protecting the information and physical assets of our customers is an increasingly important part of what we do. We always expect high standards of commercial confi dentiality. For certain types of supply we have and are developing exacting standards of security compliance. For these companies we need to know that information is well managed and protected throughout the supply chain.
Supplier credibility, responsibility, quality and service performance are what matter most. Many of our suppliers are small and medium sized enterprises. We select and manage suppliers to support our own experienced workforce in delivering complex, critical and often bespoke engineering services. Diversifi cation of supply where possible should make our supply chain more robust in helping us to deliver for our customers. The varied nature of what we do means that we depend on a wide range of talents and abilities from a wide range of suppliers.
We expect high standards of conduct from our suppliers in what they do for us or our customers and will not accept any behaviour contrary to our codes, including bribery, corruption and fraud, threats to health and safety, confl icts of interest and other improper practices. We pre-qualify suppliers for certain types of supply before admitting them to the supply chain, and this involves satisfying ourselves that they can meet our standards. Certain suppliers will be selected for audit and close monitoring based on risk assessment or supplier performance. Planned reviews of supply chain risk are undertaken by our businesses.
We want to spend time talking to our suppliers about new ideas, operational performance and total cost opportunities – not about payment. We understand the importance of predictable customer payments when running a business. That is why Babcock is a signatory in the UK to the Prompt Payment Code and we would encourage others in our supply chain to be also. Our suppliers have critical responsibilities for getting paid on time by delivering on time and in full, following the required billing processes and adhering to our standards for invoicing.
We work in close collaboration with selected suppliers – big and small. Supplier development activities target improvements that will benefi t our operations and the capability of the supplier – ultimately driving performance standards that benefi t our customers. Joint teams from Babcock and the selected suppliers engage together on a wide range of issues such as input costs, delivery performance, safety, product reliability and joint growth opportunities. Targeted supply relationships use data dashboards to monitor performance and progress. Babcock is actively involved with our suppliers in the Aerospace, Defence and Security Supply Chain development programme – SC21.
Following the successful implementation of our 'Home Safe Every Day' health and safety initiative last year, incorporating the 'Safety Lens' programme, we have further clarifi ed our expectations by way of a Behaviours and Expectations policy. This outlines the commitment of Babcock to ensuring the health, safety and welfare of our employees whilst at work. It sets the standard for the behaviours and expectations required of all of our employees, management and contractors undertaking business on our behalf.
The following excerpts from the policy provide detail on the 'To give you time to be safe' and 'Look after each other and let others look after you' segments of the Safety Lens.
Good safety takes good planning. It is essential that any job we do has been planned; where appropriate a suitable health and safety plan is in place, and for all tasks a risk assessment is in place to ensure hazards are understood and appropriately controlled.
We will:
We will not:
It is our goal to ensure that we cause no harm to persons whilst at work and we can achieve this through maintaining high safety and welfare standards.
We will:
We will not:
We have seen a 5% reduction in total injuries per 100,000 hours worked over the last year whilst our RIDDOR (Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 1995) rate has maintained at 0.17 per 100,000 hours worked.
Our focus in the coming year is to continue to embed the behaviours noted in our Safety Lens ensuring our employees make it home safe every day.
| 2013/14 | 2.51 |
|---|---|
| 2012/13 | 2.64 |
| 2011/12 | 2.65 |
| 2010/11 | 2.86 |
| 2009/10 | 3.67 |
| 2008/09 | 4.15 |
| 2013/14 | 0.17 |
|---|---|
| 2012/13 | 0.17 |
| 2011/12 | 0.21 |
| 2010/11 | 0.22 |
| 2009/10 | 0.28 |
| 2009/10 2010/11 2011/12 2012/13 2013/14 | |||||
|---|---|---|---|---|---|
| Total number | |||||
| of injuries | 2,530 | 1,962 | 1,974 | 2,010 | 1,979 |
| Fatalities | 2 | 0 | 0 | 0 | 0 |
| Major Injuries | 28 | 22 | 30 | 30 | 36 |
| Over-three-day | |||||
| injuries | 164 | 131 | 123 | 102 | 98 |
| RIDDOR totals | 194 | 153 | 153 | 132 | 134 |
Our business arrangements with our customers require us to deliver services across an array of projects and assets. Our people need to have a range of experience, skills and competencies: engineering, management, technical, commercial, administrative and developmental, to name but a few. We recognise that it is the skills and commitment of our employees that defi ne our uniqueness and our ability to deliver services to our customers.
| 5 4 |
1. Defence and Security | 22% | |
|---|---|---|---|
| 1 | 2. Marine and Technology | 36% | |
| 3. Support Services | 35% | ||
| 4. International | 6% | ||
| 5. Group | 1% | ||
| Total | c. 28,300 employees | ||
As our business expands, the development of our people, present and future, is a critical part of our business development activity. To underpin and sustain our long-term strategic growth Babcock must ensure that it has the right people to be able and trusted to deliver to customers on technically complex, long-term contracts, both today and in the future. We aim to achieve this by continually improving our talent management arrangements. Our Group Director of Organisation and Development coordinates this activity across the Group.
Succession planning is a key focus at Board level and throughout the businesses. We have plans in place that identify immediate and/or future potential successors to key senior management posts. We also have individual training and development plans for those so identifi ed. Over 80% of executive positions have identifi ed replacements. For the year ending 31 March 2014 Babcock had a 95% senior management retention rate.
In addition to the training and development provided at divisional and business unit level we have Group-wide management development resources:
– We continue to enhance our Emerging Leaders Development Programme. In addition to holding Emerging Leaders workshops, we have developed an Emerging Leaders framework which ensures that key divisional managers are able to identify high potential candidates and provide them with the development they need and so retain their skills within the Group. Each Division has identifi ed talent pools and reviews their development on a quarterly basis.
The Babcock MBA is the latest development from the longstanding partnership with triple accredited Strathclyde Business School. The programme launched in 2013 with a fi rst cohort of 25 delegates selected from Babcock's senior managers. The key objectives of this customised programme are to enable participants to broaden and deepen their toolset of business skills, and enhance their knowledge of leading management theory and practice while further improving collaboration across the Group.
The Babcock MBA is directed by a Steering Group comprising Strathclyde's Executive Education specialists and members of Babcock's senior team. The Steering Group is responsible for design, delivery and ongoing developments ensuring alignment with the Babcock strategy in the context of the latest developments in management thinking.
Our graduate and apprenticeship schemes are intended to support business requirements with the aim of securing the skills and expertise we need now and in the future, and we seek to provide as many opportunities as those requirements justify.
With regard to graduates, we reported last year that we were expecting to recruit 126 graduates for the 2013/14 intake. In the event, business requirements were such that we needed to recruit an additional 43 graduates, bringing the total for 2013/14 to 169 (2012/13: 142).
There are currently 442 graduates on the graduate programme, 79% of whom are in engineering disciplines and 21% in business support roles. At the date of this report, we expect to recruit 170 graduates for the 2014/15 intake. In addition to our graduate scheme, we recruit many graduates directly to management positions.
At 31 March 2014, there were 594 apprentices across the Group (2013: 551) of whom 226 were recruited during the year (2013: 174). The increase in numbers since last year demonstrates the commitment we have to apprenticeship training. Of those completing their training over 86.5% were appointed into substantive roles within the Group.
We have demonstrated our support and commitment in this area by joining the '5% Club' during the year, which involves our committing to having 5% of our workforce on structured training schemes within the next fi ve years.
As one of 25 Babcock managers from across the Group embarking on its inaugural MBA programme, Ted Shaw felt a little trepidation as he arrived at Strathclyde University last September for the fi rst day of class. "Having been away from academia for over 20 years," he recalls, "I was concerned about whether I could hack it." He needn't have worried. As he soon discovered: "The level of commitment from the Company is clear, and the programme – developed jointly by Strathclyde and Babcock – is well designed to suit a busy professional's lifestyle, with most of the emphasis on home study. It's a challenge – but a life-changing one."
Managers from the Marine and Technology division
Recently awarded 'Technical Apprentice of the Year', Jessica Duffy is described by her team members as having an "avid desire to learn".
It's a journey that started in September 2012 when she embarked on a four-year Technical Engineering Apprentice Scheme at Babcock Integrated Technology in Bristol at the age of 18.
Learning on the job was a key consideration for Jessica. She combines shop fl oor experience, to complete her Performing Engineering Operations (PEO), studying at college for her Mechanical Engineering HNC and gaining experience in various departments within the business. She hopes to move on to either an HND or a foundation degree.
Babcock apprentices hard at work
| 4 | 1. Marine and Technology | 310 |
|---|---|---|
| 2. Defence and Security | 37 | |
| 3. Support Services | 92 | |
| 4. Group | 3 |
| 1. Marine and Technology | 360 |
|---|---|
| 2. Defence and Security | 45 |
| 3. Support Services | 87 |
| 4. International | 102 |
Babcock is committed to equal opportunities and will not discriminate on the basis of age, race, colour, ethnic origin, gender, marital status, religious or political beliefs, sexual orientation or disability; but diversity is about more than this. It is about embracing the advantages and richness different experiences, skills and outlooks can bring and learning from that diversity to deliver our best for our customers and to safeguard the future of Babcock. Equal opportunities and awareness of diversity are integral to our talent management system. As a business it is imperative that we ensure access to the widest pool of talent available, selecting the best candidates based on their ability to do the job.
Babcock operates principally in sectors that have until recently traditionally been regarded as 'male', such as engineering and working with the armed forces. Inevitably, companies with this background will tend to be starting from a level of relatively low female participation, especially in management positions. However we are working hard to change this: as set out on page 81, 20.5% (5,768) of our total workforce is female (male – 22,370), with 19.8% (113) female senior executives, as defi ned on page 81 (male – 459), and 18% (2) female Director's on our Board (male – 9) as at 31 March 2014. Our diversity initiative,
'All together different', is championed by a Diversity Steering Group, which coordinates the implementation of our equality and diversity policy. This group has started a series of 'dialogue' conferences to debate diversity issues with relevant groups of employees.
This year's conference focused on the challenges of being a woman within our organisation. A series of actions and development programmes are being implemented across the organisation following this. We focus our graduate recruitment programme, particularly for engineering graduates, on those universities that have a richer gender mix. In 2014, 20% of those employed on our graduate scheme were female.
We were assisted at the fi rst 'dialogue' conference by WISE (Women in Science and Engineering). WISE works to promote female talent in science, engineering and technology from classroom to boardroom. Babcock has invited attendees of the conference to join WISE at the Company's expense. The Group has also become a corporate member of WISE and will be sponsoring one of their national awards to encourage women in science and engineering.
Further information on the work we are doing around our diversity can be found on page 80 of this Report.
Climbing 25 metre towers to carry out rescues. Taking life-changing leadership courses. Even meeting royalty. All in the course of a Babcock Graduate Scheme, as new engineer Nadine Young is discovering to her delight. The University of Liverpool graduate gets to experience a different business unit of Babcock every six months. First up was a stint in Power, researching, testing and implementing new technologies, followed by hands-on tower training in Communications. Right now she's in Mining and Construction, focusing on telemetry – a new fi eld for Nadine. "Gaining this amount of variety at the beginning of my career allows me to take the time to think about what I want to do," she says. "I can honestly say I'm loving every minute of my Graduate Scheme."
Babcock Graduate Nadine Young
Babcock seeks to engage with the communities around our sites and operations and to provide opportunities for employees to assist with local initiatives and support local charities that are important to them. We have Group-wide guidelines setting out our approach to charitable donations, our commitment to the communities in which we operate and the broader interests of our customers. As well as ensuring fi nancial donations are appropriately targeted, the guidelines also encourage active engagement in local community support programmes.
At a Group level, we have continued to provide corporate sponsorship for the Soldiers, Sailors, Airmen and Families Association (SSAFA), the forces charity providing support to service families in times of need.
The Babcock International Group's Africa division supports a programme that provides high school education for underprivileged children. In order to be accepted to these bursaries, the child must come from a family that has a total family income of no more than £3,500 per year. Currently, Babcock is sponsoring 20 children through various levels of high school with fi nancial support while at the same time providing mentoring assistance and further bursaries for the children who go on to universities to study in the fi elds of science, technology, engineering and mathematics.
Graduation ceremony for the Student Sponsorship Programme class of 2013
Babcock is proud to support the Armed Forces and our Reservists. We are committed to the Total Support Force and have signed the Corporate Covenant. We actively recruit service leavers and reservists. We support our employees, including providing paid time off for training, through our SaBRE recognised Reserve Forces Policy.
The Corporate Covenant is a written and published voluntary pledge from businesses and charitable organisations who wish to demonstrate their support for the armed forces community
Babcock works to achieve the highest standards in its management of environmental matters. We recognise the impact our operations can have on the environment and will seek to eliminate adverse effects wherever possible, and keep to a minimum and mitigate any negative effects where this is not possible.
Many of the sites we operate on are customer owned or operated sites and may be subject to contractual or budgetary constraints; however, this will not deter us from maintaining our own exacting standards of environmental management. We will strive through our pursuit of excellence to educate and infl uence all our customers to raise their standards and adopt our best practices in environmental management and commitment to continual improvement.
At Babcock we recognise that our business operations are dependent on the use of energy from many sources and that these contribute to global carbon emissions. We are committed to reducing our carbon emissions year-on-year with the long-term aim of achieving a low carbon business solution. We collect and report on our carbon emissions data across the business and the reductions in our carbon footprint are audited and certifi ed to the Carbon Trust Standard. Whilst our business continues to grow we also continue to strive to identify and implement measures to reduce our overall carbon footprint in relation to our business turnover. Technical solutions have their part to play but we believe that behavioural changes in the way in which we as people conduct our day-to-day business have an equally important role to play.
More than half of the Group's revenue comes from operations that have sought certifi cation to ISO14001. This is an internationally recognised environmental management system (EMS) which includes a commitment to a programme of continual improvement in environmental performance. Where we have decided not to seek or are, due to customer constraints, unable to seek formal accreditation for a business unit we apply industry standards and best practices and strive to ensure that customers' and all applicable legal and regulatory requirements are fully met. The number of our businesses units with formal accreditation is unchanged from 2013 though as a result of proportionately more revenue coming in 2014 from business units that have not sought formal accreditation the percentage of our revenues coming from accredited units has declined from 58% to 51%.
| Division | ISO14001 Certifi ed |
Industry Best Practice* |
|---|---|---|
| Marine and Technology | 20% | 80% |
| Defence and Security | 55% | 45% |
| Support Services | 100% | 0% |
| International | 0% | 100% |
* Industry Best Practice refers to our environmental management controls in compliance with industry best practice standards at sites not ISO14001 certifi ed.
Babcock's certifi cation to the Carbon Trust Standard is due for renewal in 2014 and, as part of the process of continuous improvement in our environmental management and the reduction in our CO2 emissions, we will seek to include more of our 'Scope 3' emissions into the assessment. We recognise that reporting on environmental performance for such a large and diverse company is a complex undertaking; we will also be looking to streamline and standardise our processes for collecting and collating data both to ensure greater accuracy and transparency in the future and to allow our policies and targets to concentrate on areas where the maximum benefi ts can be achieved.
We are continuing to rationalise and improve the effi ciency of the Group's built estate which should reduce our own carbon emissions. We will once again be reporting on emissions arising from our energy use in the fi nal year of 'Phase 1' of the Carbon Reduction Commitment – Energy Effi ciency Scheme (CRC) and for the new CRC Phase 2 which comes into effect in 2014.
The Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013, which came into force in October 2013, requires the Group to report on the green house gas (GHG) emissions arising from all its business activities, including overseas operations. Collecting and collating this data provides new challenges but again highlights the good sense in developing the knowledge and systems the Company needs to report with accuracy and confi dence. In a world where challenges to a company's reporting on its environmental performance are increasingly likely that confi dence is of paramount importance.
| UK Emissions | Overseas Emissions |
Total Group Emissions |
||||||
|---|---|---|---|---|---|---|---|---|
| Year Ending | March 2010 | March 2011 | March 2012 | March 2013 | March 2014 | |||
| Scope 1 Emissions | tCO2e | 30,800.68 | 50,522.19 | 50,249.66 | 46,641.70 | 35,230.78 | 2,145.73 | 37,376.51 |
| Scope 2 Emissions | tCO2e | 107,395.74 | 150,288.16 | 122,618.21 | 113,835.50 | 105,744.00 | 4,384.85 | 110,128.85 |
| Scope 3 Emissions – | ||||||||
| (Business travel) | tCO2e | 584.54 | 8,745.22 | 189.29 | 8,934.51 | |||
| Absolute Footprint | tCO2e | 138,196.42 | 200,810.35 | 172,867.87 | 161,061.74 | 149,720.00 | 6,719.86 | 156,439.86 |
| Turnover | £m | 1,668.60 | 2,210.40 | 2,432.20 | 2,542.00 | 2,798.00 | 523.00 | 3,321.00 |
| Turnover Benchmark | ||||||||
| (Adjusted for infl ation) | tCO2e/£m | 82.822 | 90.85 | 71.07 | 63.36 | 53.51 | 12.85 | 47.11 |
Babcock International Group – Carbon Footprint Tonnes CO2e against £m turnover using Carbon Trust assessment methodology. Due to the highly diverse nature of the Company's business the metric of 'tonnes of CO2e per £m turnover' has been used to provide a more meaningful measure of energy use throughout the business.
The total emissions from Scope 1,2 and 3 sources have been divided by the annual turnover to provide a fi nal benchmark fi gure.
The key risks and uncertainties shown on pages 67 to 71 are those the Board considers to be of greatest signifi cance to Babcock as it stands today. They have the potential materially and adversely to affect Babcock's business and the delivery of its strategy. For each risk there is a description of the possible impact of the risk on the Group should it occur, and the mitigation and control processes in place to manage the risk.
This list is likely to change over time as different risks take on larger or smaller signifi cance. The size, complexity and spread of Babcock's businesses and the continually changing environment in which the Group operates also mean that the list cannot be an exhaustive list of all signifi cant risks that could affect the Group. Risks and uncertainties which affect or are likely to affect businesses in general, and are not specifi c to the Group, are not set out as key risks, but Babcock, in common with other businesses, faces those risks too.
Babcock has an established system of risk management and internal control processes which operate through all levels of the Group's business. Throughout the year the Board, through the Audit and Risk Committee, critically evaluates and reviews major risks faced by the Group and the controls and mitigation plans in place intended to manage and reduce their potential impact and ensure that the assets and reputation of the Group are protected.
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.
" As we continue to grow, having a coherent, well-established and embedded risk management culture within the business is fundamental to allowing us to work towards our strategic objectives. Having a clearly defi ned risk appetite, and working within an effective framework which manages our risk in line with this approved framework, has, and will, allow us to pursue new opportunities whilst protecting the Group's assets, and minimising the potential for fi nancial or reputational risk."
Bill Tame Group Finance Director
| Budget process Management and fi nancial reporting |
Annual budgets and medium-term Code of fi nancial plans are reviewed by Group Conduct and management before submission to the anti-bribery and Board for approval. Updated forecasts for corruption the year are prepared at least quarterly. policies and The Board receives details of monthly procedures actual fi nancial performance compared against budget, forecast and the prior year, with a written commentary on signifi cant variances from approved plans. |
The Group has a Code of Conduct making clear its commitment to the highest ethical standards and the ethical standards it demands from its employees and those who work for it and with whom it does business. There is an explicit anti-bribery and corruption governance structure in place and detailed policy and procedures (available on the Babcock website), with supporting training programmes, |
||
|---|---|---|---|---|
| Security and information governance |
The Chief Executive and Divisional Chief Executives report to each Board meeting on operating performance and matters of potential strategic signifi cance. Group senior management receives a monthly narrative operating report from all business units. There is a formal security and information assurance governance structure in place to oversee and manage security and |
which the Company believes meet the requirements of 'adequate procedures' under the Bribery Act 2010. Appropriate due diligence is carried out on actual or potential business partners. Those working on our behalf or in consortium with us are required to abide by our Code of Conduct (or an equivalent) and to undertake not to behave corruptly. See more on our Code of Conduct on pages 54 – 55. |
||
| structure Clear delegation and limits of authority |
similar risks. The Board regularly reviews and approves a schedule of delegated authorities setting out levels of specifi c fi nancial decision-making authority delegated by it. |
Group policies and procedures |
The Group has written policies and procedures, which are kept under review, covering a range of matters intended to reduce or mitigate risk, such as: health, safety and environmental policies, security and information |
|
| Insurance The Group has a large and comprehensive insurance programme, preferring to place risk in the insurance market, where available on acceptable terms, rather than to self-insure or make signifi cant use of captive insurance. The Group has a full-time Insurance |
assurance, export controls, contracting requirements and guidelines, legal, fi nancial and accounting matters. These policies and procedures are available to employees on the Group intranet and are supplemented at divisional level by further business unit specifi c policies and procedures. |
|||
| Manager who reports annually to the Board on the strategic approach being taken to insurance and on the placing of the programme. |
Whistleblowing hotline |
All employees have access to a confi dential whistleblowing hotline with the opportunity to call, email or |
||
| Claims and litigation reporting |
The Board and Group Executive Committee receive monthly summaries of material disputes and actual or potential threats of claims, their progress and potential outcomes. The Group has an internal legal service. |
write letters detailing any area of concern to be brought to the attention of senior management. A report on all whistleblowing cases and the resultant investigations and conclusions is submitted to each Audit and Risk Committee meeting – see page 55. |
||
| Credit controls | All signifi cant credit risks are reviewed by Group Finance and an Executive Director, and, where appropriate and available, risk limitation actions are taken. |
Critical supplier reviews |
Divisions regularly review the vulnerability of key supply chain partners whose continued ability to supply the Group is considered critical to its business performance, and also consider fall-back plans when fi rst deciding to appoint such suppliers. |
|
| Business continuity and disaster recovery plans |
All divisions, business units and Group functions are required to consider the need for and put in place appropriate plans to minimise the risk of interruption to business and contract performance in the event of a major disruption to normal functioning arrangements. |
In this section 'Group' means the enlarged Babcock Group including the Avincis Group, which will be integrated within the governance and controls systems of the Babcock Group.
Risk: Reliance on large contracts with a relatively limited number of major clients, including clients affected by political and public spending decisions, means we are exposed to political risks, damage to our reputation or the reputation of other outsourcing businesses (and thus outsourcing itself), or our ceasing to meet customer or regulatory requirements for doing business with them, can have serious adverse consequences.
Babcock's customers are mainly large, complex organisations, typically central or local government departments (notably the UK Ministry of Defence), other public sector bodies or commercially owned entities in sectors subject to specifi c regulation. Many of them rely, to a greater or lesser extent, on public funding. These customers may be affected by fi nancial, budgetary, regulatory or political constraints which could have a signifi cant impact on the size, scope, timing and duration of contracts and orders with/placed by them and therefore on the level of business which the Group will derive from such customers. In addition, because of their size, these customers have considerable bargaining power and have the ability to cancel contracts without, or on, short notice, often without cause or exert pressure to secure their renegotiation. Inevitably, reliance on a relatively limited number of customers and contracts carries risks.
National and local government policy changes and public spending constraints are potentially material risks for the Group 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 signifi cant. Damage to Babcock's reputation, whether justifi ed or not, or to the reputation of outsourcing itself as a business model by reason of reputational or performance issues with other suppliers, has the potential, given a relatively narrow customer base and the size of contracts at stake, to impact severely our ability to win or retain signifi cant business streams.
Given its particular importance as a customer of the Group, reductions in the UK Ministry of Defence's budget or changes in its defence policy or spending priorities (such as changes to policy on continuous at sea deterrence or successors to existing nuclear deterrence capabilities or submarine or surface ship strength or capabilities) may adversely affect the Group's business if those reductions or changes result in the delay, cancellation, abandonment or signifi cant reduction in scope of activities that may otherwise have been available for the Group to participate in. The UK Government is due to undertake a Strategic Defence and Security Review in 2015 after the general election due in 2015 and such a review may have material short or longer-term consequences for the Babcock Group's business with the Ministry of Defence.
If the Scottish independence referendum to be held in September 2014 results in a majority vote in favour of independence, the consequences for the Group's businesses cannot be predicted with certainty. Regardless of the ultimate impact, there is likely to be a lengthy period of uncertainty which may itself have adverse consequences for the Group's business, fi nancial condition, operating results or prospects. There may also be a medium-term knock-on effect on the nature, timing and scope of the policies and procurement plans of the United Kingdom, especially in defence terms, the impact of which cannot be predicted with certainty.
Potential adverse consequences on the Group's Scottish business include:
The Group will monitor developments closely.
Contracts entered into by the Group are generally complex and lengthy, and are subject to various performance conditions which must be adhered to throughout the life of the contract. Failure to meet the performance criteria of a contract can lead to compensation arrangements being triggered, or the contract might not be capable of completion within the tendered price or at a lower margin than anticipated (or even at a loss).
Failure to realise the pipeline of opportunities and secure rebids for existing contracts can involve signifi cant wasted costs, missed opportunities and loss of revenue. Bidding for large and complex contracts can be time-consuming and is expensive, as can be mobilising on new contract wins. Also, by their nature, large, longer-term contracts are irregular and relatively infrequent in coming to market. The Group may also face competition in the bidding process from either existing competitors or new market entrants.
The loss of a bid or rebid can impact on the Group's strategic objectives.
Contracting on unacceptable commercial terms in order to secure new business or resecure existing business could undermine future profi tability and sustainability of business growth.
Many of Babcock's operations, if not properly managed and conducted, entail the risk of signifi cant harm to employees, third parties, members of the public or the environment. The operations of helicopters involve an inherent degree of risk which is compounded by the nature of Avincis's helicopter services that often involve low altitude fl ying in adverse climatic or operational conditions or terrains.
Incidents involving other operators in the sector concerned, such as other helicopter operators, may also adversely impact customer confi dence generally and lead to reductions in demand.
Such incidents could lead to groundings of particular types of aircraft temporarily or for longer periods and this may have an adverse impact on the ability of the business to perform its contracts for which the aircraft were required or involve greater cost in doing so.
Risk: The Group's businesses depend on their ability to attract, develop, train and retain experienced senior management, business development teams and highly skilled employees.
The Group's continuing success will depend on the Group's ability to plan for management succession and to attract, develop, train and retain qualifi ed and experienced management and business development executives. The Group's success also depends on its ability to recruit, develop, train and retain highly skilled and suitably qualifi ed employees, who represent a substantial amount of the Group's intellectual capital, to serve customers effectively. Competition for skilled personnel in the industries in which the Group operates is intense. Employees who are highly trained are likely to remain a limited resource for the foreseeable future. Identifying, recruiting and training personnel requires substantial resources.
The ability of the Group to be able to deliver secure IT and other information assurance systems designed to protect personal data or customer or Company confi dential information is a key factor for customers. Despite controls to ensure the confi dentiality of such information, the Group may breach restrictions or may be subject to attack from computer programs or malicious or hostile third parties that attempt to penetrate the network security and misappropriate confi dential information and there is no guarantee that the Group's security measures will be suffi cient to prevent breaches or cyber attacks. In addition, the risk of loss of information or data by other means due to a failure to keep it safe at all times and within custody or control is a risk that cannot be entirely eliminated.
– Any breach or compromise of security or a breach of security at a physical site could lead to loss of reputation, disruptions in business operations and inability to meet contractual obligations and have an adverse effect on the Group's ability to win future contracts and, as a result, on results of operations and overall fi nancial condition.
Defi ned benefi t schemes provide for a specifi ed level of pension benefi t 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, infl ation etc. If, based on the assumptions being used at any time, assets in the pension scheme are judged to be insuffi cient to meet the calculated cost of the pension obligations there can be a signifi cant 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. The most signifi cant 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 defi ned benefi t 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 infl ationary 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 signifi cant accounting volatility. Future accounting, regulatory and legislative changes may also adversely impact on valuations and costs.
Risk: Integration of new acquisitions including Avincis – the Group has experienced growth through acquisitions; the fi nancial benefi ts of these acquisitions may not be realised as quickly and as effi ciently as expected if there is diffi culty in integrating them.
The Avincis Group will need to be integrated into the internal management and other reporting requirements of the Babcock Group. Babcock may encounter diffi culties when seeking to integrate the Avincis Group, as a result of differences in organisational structure, IT systems, language, management and local cultures and management and operational issues. The Avincis Group itself has grown by acquisition of a number of companies, which carries its own integration risks.
Company Secretary
The business of Babcock International is managed by our Board of Directors. Biographical details of the Directors and the Company Secretary as at 19 May 2014 are as follows:
Mike Turner was appointed to the Board as a Non-Executive Director on 1 June 2008 and as Chairman of the Board on 1 November 2008. Since 3 May 2012 he has also been Chairman of GKN plc, where he was previously Senior Independent Director. He is a former Chief Executive of BAE Systems plc and a former Chairman of the UK Defence Industries Council (DIC). He is a member of the UK Government's Apprenticeship Ambassadors Network and is a Non-Executive Director of Lazard Limited.
Time served on Board: 5 years 11 months
Chairman of the Board and the Nominations Committee
N
Peter Rogers joined the Board as Chief Operating Offi cer in June 2002 and became Chief Executive in August 2003. He is a Non-Executive Director of Galliford Try PLC and a former Director of Courtaulds PLC and Acordis BV. He has also served as a President of ADS (Aerospace Defence Security).
Time served on Board: 11 years 11 months
Bill Tame joined the Board as Group Finance Director in January 2002. He is a former Finance Director of Scapa Group PLC. He is a Non-Executive Director of Carclo PLC.
Time served on Board: 12 years 3 months
Kevin Thomas became a Director on 1 May 2010. He joined the Group in June 2002. Before joining Babcock, he spent 12 years in facilities management, including seven years with Serco Group PLC and 15 years in local government with Merton, Surrey and Southwark Councils. Kevin is an independent Non-Executive Director of Harvey Nash Group PLC. He is a fellow of the Royal Institute of Chartered Surveyors and a Freeman of the City of London.
Time served on Board: 4 years
Archie Bethel became a Director on 1 May 2010. He joined the Group in January 2004. He is a Chartered Engineer and a Fellow of the Royal Academy of Engineering. He is also President of the Society of Maritime Industries and is a Lay Member of the Court of the University of Strathclyde. He is a former Vice President of the Institution of Mechanical Engineers.
John Davies joined Babcock in 2010, following the acquisition of VT Group. He was appointed Divisional Chief Executive, Defence and Security in 2010 and joined the Group Board on 1 January 2013. John is a lawyer by background and a graduate of the University of Manchester and Chester Law College. He has worked extensively across the support services and defence sectors within Bombardier, BAE Systems and VT Group.
Time served on Board: 1 year 4 months
Sir David joined the Board as a Non-Executive Director on 1 April 2009, and became Senior Independent Director on 1 January 2012. He is a Non-Executive Director of Finmecannica UK Limited and is a visiting professor in the Department of War Studies, King's College London. He left UK Government service in 2005 having served in various senior roles, including as UK Government Security and Intelligence Coordinator, Permanent Secretary of the Home Offi ce, Director of GCHQ (the UK Signals Intelligence and Information Assurance Agency) and Deputy Under-Secretary of State for Policy in the Ministry of Defence.
Time served on Board: 5 years 1 month A R N
Justin Crookenden joined the Board as a Non-Executive Director in December 2005. He qualifi ed as a Chartered Accountant and is a former investment banker, having worked at UBS, Barclays de Zoete Wedd and Credit Suisse First Boston – where he was Managing Director, UK Investment Banking.
Time served on Board: 8 years 5 months
Chairman of the Remuneration Committee (until 21 July 2014)
Ian Duncan joined the Board as a Non-Executive Director on 10 November 2010. He is a chartered accountant and is a former Group Finance Director of Royal Mail Holdings PLC. Ian is currently a Non-Executive Director and Chairman of the Audit Committees of WANdisco plc and Mouchel Group. He has also formerly been Corporate Finance Director at British Nuclear Fuels plc, Chief Financial Offi cer and Senior Vice President at Westinghouse Electric Company LLC in Pennsylvania, USA, and a Non-Executive Director and Chairman of the Audit Committee of Fiberweb plc.
Time served on Board: 3 years 6 months
Chairman of the Audit and Risk Committee
Kate Swann joined the Board as a Non-Executive Director on 1 June 2011. She is currently Group Chief Executive of SSP Group Limited. She is a former Chief Executive Offi cer of WH Smith PLC, former Managing Director of Argos and a former Managing Director of Homebase Ltd. She is also a member of the Advisory Board at Selfridges Group.
Time served on Board: 2 years 11 months
Time served on Board: 1 year 6 months A R N
Jeff Randall joined the Board as a Non-Executive Director on 1 April 2014. He had a long career as a journalist and broadcaster until he stepped down as a presenter for Sky News on 31 March 2014 and as editor-at-large of The Daily Telegraph on 31 December 2013. He was business editor of the BBC between 2001 and 2005, the launch editor of Sunday Business and, for six years, was City Editor of the Sunday Times. He is a former director of Times Newspapers. He is also a Visiting Fellow of Oxford University's Said Business School where he specialises in corporate reputation, and is an honorary professor at Nottingham University's Business School.
Time served on Board: 1 month
COMPANY SECRETARY
Albert Dungate is a solicitor. He has been Group Company Secretary and General Counsel since February 2002. He is Secretary to the Board and to the Audit and Risk, Remuneration and Nominations Committees.
Governance
Dear Shareholder
As Chairman I am committed to ensuring that your Board operates in an effective, transparent and ethical manner, and that we make our decisions based only on what we believe is likely to be for the benefi t of shareholders by promoting and maintaining the long–term success of the Company and its reputation, having regard, amongst other things, to the interests of our employees, our business relationships and the wider impact of our operations. In our deliberations as a Board I seek to encourage and foster open, honest and challenging discussion. The Board understands how good governance and the promotion of ethical business practices can sustain and drive forward the business, and thus our results, whilst managing or mitigating risks.
Good governance means more than merely complying with a set of rules and regulations, and one of our main aims is to seek to embed within our business a culture that ensures colleagues continue to behave in an ethical and principled manner and in compliance with our governance and risk management processes. To encourage this approach we have a number of processes and procedures designed to facilitate appropriate, sound working practices and good governance in a practicable and achievable way.
We understand the need continually to develop and evolve the Board to make it relevant and appropriately experienced in the light of both near-term and longer-term business strategy and operations, especially as we become more international in our outlook and activities. Our 2014 Board, Committee and Director evaluation exercise was led externally by Independent Board Evaluation, a business with wide experience and expertise in carrying out senior level evaluations. There were no signifi cant concerns highlighted as a result of this process. The principal recommendations emerging from this evaluation review are described on page 80. We are addressing and will continue to address the matters identifi ed as areas for focus and improvement.
At Babcock we are committed to working towards building a more diverse workforce and are now actively considering diversity in our succession planning, talent management, recruitment and training and development programmes, as well as looking generally at how working arrangements might be helping or hindering our objectives. Further information on our approach to the diversity challenge can be found on pages 80 – 81.
As I mentioned on page 5, Jeff Randall joined the Babcock Board as a Non-Executive Director with effect from 1 April 2014. Jeff brings with him a wealth of experience from his many years as a business journalist and broadcaster. I look forward to Jeff bringing a fresh and new perspective to the Board and our Committees.
Finally, as touched upon in my statement on page 5, I must also mention that after nine years of exemplary service as a Non-Executive Director and fi ve years as our conscientious and hardworking Chairman of the Remuneration Committee, Justin Crookenden will be leaving the Board on 30 November 2014, and will step down from the Chairmanship of the Remuneration Committee at the AGM in July. Justin has been a Non-Executive Director for all of my time as Chairman at Babcock, and the Board and Company have benefi ted greatly from his intelligence, insight, dedication and independence of thought and his active and challenging participation in our proceedings for which I, together with the rest of the Board, wish to thank him.
Mike Turner CBE Chairman
Babcock International Group PLC is required to report on how it has applied in the year under review the UK Corporate Governance Code (the Code), a revised version of which was published in September 2012. The Code sets out the main principles and specifi c provisions on how companies should be directed and controlled in order to follow good governance practice.
The Board considers that Babcock International Group PLC complied with all the provisions of the Code throughout the year to 31 March 2014, and has appropriately explained on page 83 as required by the Code why the process used in connection with a Non-Executive Director appointment did not involve the use of external search consultancies or open advertising.
The Board of Directors of Babcock International Group PLC (the Board) is collectively responsible to the Company's shareholders for the long-term success of the Company. This responsibility includes matters of strategy, performance, resources, standards of conduct and accountability. The Board also has ultimate responsibility for corporate governance which it discharges either directly or through its Committees and the structures described in the following pages of this Governance report.
The current Directors' biographies are set out on page 73. The Board is satisfi ed that each Director has the necessary time to devote to the effective discharge of their responsibilities and that between them the Directors have a blend of skills, experience, knowledge and independence suited to the Company's needs and its continuing development.
The powers of Directors are set out in the Company's Articles, which may be amended by way of a special resolution of the members of the Company. The Board may exercise all powers conferred on it by the Articles and in accordance with the Companies Act 2006, and other applicable legislation. The Articles are available for inspection online at www.babcockinternational.com and can also be seen at the Company's registered offi ce.
Babcock governance structure
The Board has established a formal schedule of matters specifi cally reserved for its approval. It has delegated other specifi c responsibilities to its Committees and these are clearly defi ned within the respective Committee's terms of reference.
Board Committee terms of reference and other delegated authorities are formalised and reviewed from time to time. Key Committee terms of reference are available to view on our website: www.babcockinternational.com.
In addition to the principal Committees of the Board – the Remuneration Committee, the Audit and Risk Committee and the Nominations Committee – each of which has its own report in the pages that follow – the Board from time to time establishes committees to deal with specifi c matters on its behalf. The Board also allows for routine matters or the implementation of formal steps for matters approved in principle by the Board to be dealt with by a Board meeting of any two Directors, but these are later ratifi ed by the full Board.
There is also a Group Finance Committee consisting of any two Directors, one of whom must be the Group Finance Director, to approve borrowing, guarantees, treasury and related matters within its terms of reference.
During the year some of the key areas the Board focused on included:
Throughout the year to 31 March 2014, the Board comprised the Chairman, fi ve Executive Directors and fi ve independent Non-Executive Directors. From 1 April 2014 there has also been an additional independent Non-Executive Director (making six in total). This structure is in accordance with Code provision B1.2. The Board believes that its make-up allows for the promotion of high quality discussion and consideration of key issues affecting the Group, including development of the business in both existing and new market sectors and with new and new types of customers, both in the UK and internationally. The composition of the Board is kept under review to ensure that the skill, knowledge and experience of its members is or will be suitable to meet the longer-term needs of the business and its strategic development plans; this is the primary focus of the Nominations Committee.
As at 19 May 2014
| 1. Under 3 years | 4 |
|---|---|
| 2. 3-6 years | 5 |
| 3. 6-9 years | 1 |
| 4. 9 years + | 2 |
During the year there were no changes made to the Board. The following changes were made, or will be made to the Board after 31 March 2014:
| Date of | |
|---|---|
| New Directors | Appointment |
| Jeff Randall | 1 April 2014 |
Justin Crookenden has indicated his intention to retire from the Board on 30 November 2014
The process for the selection and subsequent appointment of new Directors to the Board is described in the Nominations Committee section on page 83 of this Report. Following the feedback from the independent Board evaluation process described on page 80 the Board has accepted that the formality around this process, better to meet the requirements of rigour and transparency, could be improved and steps are in hand to act on this.
The rules relating to the appointment and replacement of Directors are contained within the Company's Articles of Association. The Articles of Association provide that Directors may be appointed by an ordinary resolution of the members or by a resolution of the Directors, provided that, in the latter instance, a Director appointed in that way retires and is submitted for election at the fi rst Annual General Meeting (AGM) following their appointment. Jeff Randall, who joined the Board as a Non-Executive Director on 1 April 2014 will be complying with this requirement, and, in compliance with provision B.7.1 of the Code, all other existing Directors will be seeking reelection at the 2014 AGM. The names and biographical details of each of the Directors are set out on pages 72 and 73.
Executive Directors are entitled to 12 months' notice of termination of their service agreements from the Company. Non-Executive Directors, including the Chairman, have letters of appointment which can be terminated at will.
The Chairman is responsible for leadership and overall effectiveness of the Board. In particular, his role is to:
The roles and responsibilities of the Chairman and the Chief Executive are separate, clearly established, set out in writing, and have been approved by the Board. The Chairman is responsible for the leadership and governance of the Board as a whole, and the Chief Executive for the management of the Group and the successful planning and implementation of Board strategy. The descriptions above summarise their current respective roles and responsibilities. A copy of the formal written statement is also maintained on the Company's website at www.babcockinternational.com
The Chief Executive is responsible for the day-to-day leadership of the business and managing it within the authorities delegated by the Board. In particular, his role is to:
Sir David Omand is currently and has throughout the year been the Senior Independent Director. Shareholders can bring matters to his attention if they have concerns which have not been resolved through the normal channels of Chairman, Chief Executive or Group Finance Director, or if these channels are not deemed appropriate. The Chairman looks to the Senior Independent Director as a sounding board and he is available as an intermediary between the other Directors and the Chairman. The Senior Independent Director is also responsible for leading the Non-Executive Directors in the annual performance evaluation of the Chairman. The specifi c role of the Senior Independent Director has been set out in writing and approved by the Board.
The independent Non-Executive Directors bring external perspectives and insight to the Board and its Committees' deliberations, providing a range of knowledge and business or other experience from other sectors and undertakings (see their biographies on page 73). They play an important role in the formulation and progression of the Board's agreed strategy, and review and monitor the performance of the executive management in the implementation of this strategy. For the year ending 31 March 2014 the Board considered the balance of independent Non-Executive Directors and Executive Directors was in accordance with the requirements of the Code.
Non-Executive Directors are appointed for an expected initial three-year term (though the appointments are terminable at will by either party at any time), subject to their annual re-election by shareholders at the AGM, commencing with their election by shareholders at the fi rst AGM following their appointment by the Board. Re-appointment after the expiry of their three-year terms is subject to review by the Nominations Committee. The Board considers the independence of each Non-Executive Director against criteria specifi ed in the Code. The Board is conscious that before extending the appointment of any Non-Executive Director in offi ce over six years they should be subject to a 'particularly rigorous review' of their performance and commitment. The only Non-Executive Director to whom this applied during the year was Justin Crookenden whose current period of appointment was due to expire at the AGM in July 2014 and whose appointment has been extended, subject to his re-election at the AGM, for four months until 30 November 2014 as noted on page 74 in this report. The performance of all Directors is evaluated as part of the Board annual evaluation process described on page 80. The Board also determines whether it considers each Non-Executive Director to be independent in character and judgement (which the Board currently does in respect of all existing Non-Executive Directors). The terms and conditions of appointment of the Non-Executive Directors, together with the service contracts for Executive Directors, are available for inspection at the Company's registered offi ce during normal business hours, and at the AGM. During the year, the Non-Executive Directors, including the Chairman, met independently of management on several occasions.
The Company Secretary is responsible, under direction from the Chairman, for ensuring the appropriate information fl ows to the Board and its Committees to facilitate their discussions and allow fully informed decisions to be made. The Company Secretary also ensures the Non-Executive Directors have access to senior management where required, as well as ensuring an appropriate induction process and ongoing training is in place for Executive and Non-Executive Directors. The Company Secretary advises the Board and its Committees on governance matters.
The Group Executive Committee is not a formal Board Committee and has no delegated powers as such. It is made up of the Chief Executive, the Group Finance Director, Divisional Chief Executives, the Company Secretary and General Counsel and the Group Director of Organisation and Development. It is also attended by the heads of the principal overseas operations. It is scheduled to meet ten times a year and reviews and discusses all matters of material signifi cance to the Group's management, operational and fi nancial performance as well as strategic development. Minutes of its meetings are circulated to Board members.
The Board has at least ten scheduled full Board meetings each fi nancial year and two other meetings devoted solely to strategy. The Chairman also meets separately with Non-Executive Directors without Executive Directors or other managers present from time to time. Debate and discussion at Board and Committee meetings is encouraged to be open, challenging and constructive. Directors regularly receive presentations by functional and operational senior managers. In the Board and Committee evaluation reviews, no Directors expressed dissatisfaction with the timing or quality of information provided to them.
| Attendance at | |
|---|---|
| Name | Board meetings |
| Chairman | |
| Mike Turner | 12 of 12 |
| Executive Directors | |
| Peter Rogers | 12 of 12 |
| Bill Tame | 12 of 12 |
| Kevin Thomas | 12 of 12 |
| Archie Bethel | 12 of 12 |
| John Davies | 12 of 12 |
| Non-Executive Directors | |
| Sir David Omand | 12 of 12 |
| Justin Crookenden 1 | 11 of 12 |
| Ian Duncan | 12 of 12 |
| Kate Swann 2 | 11 of 12 |
| Anna Stewart | 12 of 12 |
| Jeff Randall 3 | N/A |
Justin Crookenden was absent for one meeting due to unavoidable personal commitments.
The Board commissions an external independent review of its effectiveness and that of its Committees and members at least every other year, with an internally-led review in the alternate years.
The evaluation for the fi nancial year ending 31 March 2014 was carried out externally by Independent Board Evaluation (this fi rm and its representatives had no other connections with the Company) and involved confi dential one-on-one meetings with each Director, the Company Secretary, other senior managers and also representatives from certain external advisers who work closely with the Board or its Committees. The review considered the balance of skills, experience, independence and knowledge of the Board, its diversity (including gender), how the Board, its Committees, the Chairman and individual Directors performed and how they worked together and other factors relevant to effectiveness. As part of the evaluation process, representatives from Independent Board Evaluation attended, as observers, a Board meeting, an Audit and Risk Committee meeting and a Remuneration Committee meeting. Independent Board Evaluations confi rmed that no signifi cant concerns had been expressed by Board or Committee members as to the way in which the Board or Board Committees functioned, the support given to them, the matters covered at their meetings or how they were dealt with, or as to the contribution of any individual Director.
Recommendations for primary areas of focus or consideration going forward were:
The Board is addressing and will continue to address the above matters and will report back to shareholders on progress in the 2015 Annual Report.
As reported last year, the Board evaluation for the year ending 31 March 2013 was conducted internally, facilitated by the Company Secretary, and involved one-on-one interviews between the Chairman and each Director. Key areas of focus to come out of that review and how they were addressed in the year to 31 March 2014 included:
broadly based external perspective, especially in the context of reputation management and the how the Company and its Board operate and may be perceived
Babcock recognises that in making decisions regarding succession planning, recruitment, promotion and training there needs to be an active consideration of the benefi ts of diversity, including gender diversity, and the Board is clear that its aspiration and intent is to see an increasing number of women in senior executive management roles and throughout the workforce as a whole to be achieved consistently with Babcock's 'best for the job' philosophy.
As discussed previously on page 61, we believe that diversity should not be about fi rm quotas, or solely a gender debate. Instead, we should look at engaging a wide-ranging approach to ensure our workforce refl ects the richness of our society and that everyone has the opportunity to contribute towards the success of the Company.
In considering the issues around gender diversity we can report that Babcock has:
managers of the future – this is already bearing fruit and female graduates now make up 20% of the annual intake arranged a 'Talented Futures' conference which discussed issues around diversity
– Babcock is also actively considering how to make management roles more attractive and amenable to female candidates so as to increase the numbers of women in management. A breakdown of gender diversity throughout the Company is given in the illustration below:
* As at 31 March 2014. For the period 1 April 2014 to 30 November 2014 (when Justin Crookenden will leave the Board) there will be 16.7% (2) female Directors and 83.3% (10) male Directors on the Board.
* Senior executives refers to all divisional business unit managing directors and their direct reports.
New Non-Executive Directors receive detailed business briefi ngs on the Group's operations and make induction visits to operational sites. Those who have not previously served as a director of a listed company receive a briefi ng from the Company's external lawyers on their duties and responsibilities.
As required by the Chairman, training for new Directors and ongoing general Director training is arranged as necessary or as they may request, and the Company Secretary briefs Board members about signifi cant changes in the law or governance codes affecting their duties as Directors.
Non-Executive Directors may at any time make visits to Group businesses or operational sites and Board visits are also made to sites. Presentations on the Group's businesses and specialist functions are made to the Group Board from time to time.
Non-Executive Directors receive copies of all minutes of meetings of the Group Executive Committee and of the principal Divisional Boards, together with copies of monthly divisional operating reports which also cover health, safety and environmental matters and compliance with the Group's ethical and security standards. They are also invited to attend the Group's senior management conferences.
Details concerning the Company's share capital and rights attaching to the Company's shares are set out in the Directors' report on page 121.
The Board believes it is important to maintain open and constructive relationships with all of its shareholders – large and small, institutional and private. The Chief Executive, Group Finance Director and Head of Investor Relations undertake a programme of meetings, conference calls and presentations to discuss the Group's strategy and fi nancial performance with investors, brokers' sales teams and analysts. During the year the Company met 129 separate institutions in 132 meetings (including a number of group meetings) in the UK, USA and Europe. The Company offers meetings with the Chief Executive and Group Finance Director to its top 20 shareholders at least twice a year, and in the year to 31 March 2014 a total of 40 meetings were held with our top 20 shareholders. In addition, the Chairman wrote to our largest 16 shareholders inviting them to meet with him to discuss strategy, performance and corporate governance matters. Both the Chairman and Sir David Omand, the Senior Independent Director, are available to shareholders should they have any concerns where contact through the normal channels is deemed inappropriate or where they believe their matter has not been adequately resolved.
| Results and trading updates available as audio casts at www.babcockinternational.com/investors |
When |
|---|---|
| Full-year and half-year results: | May and |
| announcement and presentation | November 2013 |
| Interim management statements | July 2013 and |
| and conference call with Group Finance Director |
February 2014 |
| Other presentations | When |
| By Group Finance Director, Divisional Chief Executives and Head of Investor Relations at company and/or broker organised conferences |
May, June, September, November, 2013 and March 2014 |
| Dealings with shareholders, investors and analysts Resolutions of AGM available at www.babcockinternational.com/investors |
When |
| 132 meetings with shareholders and potential investors |
Throughout |
| 22 meetings with sell side analysts and brokers' sales teams |
Throughout |
| Letter from the Group Chairman to leading shareholders |
July 2013 |
| Marine and Technology Analyst and Investor Seminar |
September 2013 |
| Roadshow in London and Edinburgh | May and November 2013 |
| Annual General Meeting | July 2013 |
| Roadshow in Frankfurt | June 2013 |
| Roadshow in Milan | September 2013 |
Prior to the announcement of the proposed acquisition of Avincis, the Chief Executive and the Group Finance Director met with a number of the Group's top shareholders, representing approximately 38% of the share register, to explain the strategic rationale of the transaction. Following the announcement and prior to the General Meeting on 16 April 2014 a number of shareholders who wanted to discuss the transaction with management were offered individual or group meetings or conference calls.
Over 75% of all Babcock shares are held by institutional shareholders. Whilst it is normal practice for institutional funds to have a greater degree of contact with the Company, all shareholders are welcome to raise questions with the Board at the Annual General Meeting. In addition, on a day-to-day basis our investor relations team engages with shareholders on a wide range of issues. To assist our private and international shareholders, the investor relations team makes sure that all price-sensitive information is released in accordance with the applicable legal and regulatory requirements. All announcements and major presentations given to institutional shareholders, along with annual reports, shareholder circulars, shareholder services information, other stock exchange releases and share price information, are made available to all shareholders through the Babcock website (www.babcockinternational.com/investors).
The Company ensures that the Board has an up to date perspective on the views and opinions of shareholders and the investment market. An investor relations report summarising share price performance compared to market, changes to the shareholder register and feedback from shareholders is produced for each Board meeting. For the third consecutive year, the Company also commissioned Clare Williams Associates to undertake a Market Perception Review to provide an independent evaluation of investor attitudes towards the Group. This year 11 investors, including some of the Company's major shareholders, accounting for around 20% of the shareholder register, as well as some non-holding institutions. The results were formally presented to the Board in October 2013.
As at 31 March 2014, the Company had been notifi ed in accordance with Chapter 5 of the Disclosure and Transparency Rules of the following major interests in voting rights attached to its ordinary shares (which represent interests in 3% or more of its issued ordinary share capital).
| Name | Number of 60p ordinary shares on date of notifi cation |
% of issued share capital at 31 March 2014 |
|---|---|---|
| The Capital Group Companies Inc. | 21,910,915 | 6.05 |
| Blackrock, Inc. | 18,147,899 | 5.01 |
| Cantillon Capital LLC | 17,938,977 | 4.95 |
| Standard Life Investments Limited | 17,928,896 | 4.95 |
| FMR LLC | 17,700,915 | 4.89 |
| Legal & General Group Plc | 14,325,920 | 3.96 |
| JP Morgan Chase & Co. | 11,376,214 | 3.14 |
| Ameriprise Financial Inc. | 11,330,063 | 3.13 |
On 28 April the Company was notifi ed that the Capital Group of Companies Inc. had increased their holdings in the Company to 9.4%. This disclosure was made on the basis that did not yet refl ect the share capital as increased by the rights issue which completed on 7 May 2014. Subsequently on 9 May 2014 Capital Group of Companies Inc. notifi ed the Company that their holdings had decreased to 6.8% on completion of the rights issue. There had been no further notifi cations between 31 March 2014 and the date of this report.
The 2014 AGM will be held at 12:00 pm on 21 July 2014 at the Grosvenor House Hotel, Park Lane, London, W1K 7TN. The Company will send notice of the AGM and any related papers at least 20 working days prior to the date of the meeting in accordance with best practice standards.
All shareholders are welcome. The event provides a platform for the Chairman and Chief Executive to explain how the Company has progressed during the year. It also provides all shareholders with the opportunity to put questions to the Chairman of the Board, the Chairmen of the Audit and Risk, Nomination and Remuneration Committees, and the Senior Independent Director. At these meetings a poll is conducted on each resolution; shareholders also have the opportunity to cast their votes by proxy, either electronically or by post. Directors also make themselves available before and after the AGM to talk informally to shareholders. Following each AGM the results of the poll are published on the Company's website and released to the London Stock Exchange.
" We continue to seek Board candidates who can contribute towards the Board having a range and balance of skills, experience, perception, approach and outlook to help support and develop the long-term success of the Company"
Mike Turner Chairman
The Nominations Committee is appointed by the Board and, in accordance with Code provision B.2.1, is made up of Non-Executive Directors (with a requirement for there to be a majority of independent Directors). It is chaired by the Chairman of the Board. Other Directors are invited to attend meetings of the Committee, if appropriate. The current membership of the Committee, and its membership during the year to 31 March 2014 as well as attendance at Committee meetings, is shown below. The Company Secretary is Secretary to the Committee.
| Member | Number of meetings attended/ Number of meetings possible in the year |
|---|---|
| Mike Turner (Chairman) | 2 of 2 |
| Ian Duncan | 2 of 2 |
| Sir David Omand | 2 of 2 |
| Justin Crookenden1 | 1 of 2 |
| Kate Swann | 2 of 2 |
| Anna Stewart | 2 of 2 |
The members listed above served throughout the year to 31 March 2014 and continue to be members. Jeff Randall joined the Committee on 1 April 2014.
The Committee is responsible for making recommendations to the Board, within its agreed terms of reference, on appointments to the Board. The terms of reference of the Committee are available on the Company's website.
The Committee is also to assist the Board in discharging its responsibilities in respect of:
– Regularly reviewing and evaluating the size, structure and composition (including the balance of skills, diversity, knowledge and experience) of the Board and making recommendations to the Board with regards to any changes
When considering recommendations on the appointment to the Board the Committee has in mind the strategic plans and the development of the business in both existing and new market sectors and with new, and new types of, customers, both in the UK and internationally, and the need to maintain the Board's credibility in its chosen business areas. The Committee also takes into account as part of its deliberations the Board's aspiration and intent to foster and encourage greater diversity, including gender diversity, of outlook, background, perception and experience at Board level. As discussed on page 80, in making recommendations on future appointments to the Board the Committee will ensure that due consideration is given to issues of diversity when compiling its shortlist of suitable candidates.
In appointing Jeff Randall as a new independent Non-Executive Director the Committee did not, on this occasion, use an external search consultancy or open advertising. The Chairman was made aware that Mr Randall would be available to take up a non-executive appointment when he retired from his active career in journalism. With his very different business and professional background and the resulting fresh perspective and approach he could bring to the Board, especially as regards external perceptions, the Committee believed he was a unique and exceptional candidate for consideration. Each member of the Board met or was offered the opportunity of meeting Jeff to interview him and assess, in their personal opinion, his suitability for the role. The full Board then discussed the matter before resolving to make the appointment.
Many of the matters within the Committee's remit are addressed with all Board members present or taken as specifi c items at full Board meetings. Recommendations as to improving the Committee's proceedings and arising out of the independent Board evaluation this year are mentioned on page 80.
During the year ended 31 March 2014, the Committee:
Mike Turner CBE Committee Chairman
19 May 2014
" With the continued growth of the Group during the year, the Committee was, and continues to be, focused on satisfying itself that the internal and external systems of controls and safeguards are working effectively within the business to ensure that risks are mitigated and managed appropriately. The Committee also spent time during the year considering the signifi cant issues affecting the fi nancial statements as detailed on page 86, and satisfying itself that the Annual Report is a fair, balanced and understandable document, that allows shareholders to assess the Company's performance, business model and strategy."
Ian Duncan Chairman
The Audit and Risk Committee is appointed by the Board on the recommendation of the Nominations Committee and is, and was during the year, made up entirely of the independent Non-Executive Directors listed below – for further details of the backgrounds and qualifi cations of the members of the Committee please see page 73.
| Number of | |
|---|---|
| meetings attended/ | |
| Number of meetings | |
| Member | possible in the year |
| Ian Duncan (Chairman) | 4 of 4 |
| Sir David Omand | 4 of 4 |
| Justin Crookenden1 | 3 of 4 |
| Kate Swann2 | 3 of 4 |
| Anna Stewart | 4 of 4 |
Justin Crookenden was unavailable for one meeting due to an unavoidable personal commitment.
Kate Swann was unavailable for one meeting due to a previously arranged engagement.
The members listed above served throughout the year to 31 March 2014 and continue to be members. Jeff Randall joined the Committee on 1 April 2014.
The Board is satisfi ed that Ian Duncan, who became Chairman of the Committee in July 2011, has recent and relevant fi nancial experience and that the Committee complies with Code provision C3.1. Ian is a Chartered Accountant. He is currently Chairman of the Audit Committees of, WANdisco plc and Mouchel Group and until 15 November 2013 was Chairman of the Audit Committee of Fiberweb PLC. Until June 2010 he was Finance Director of Royal Mail Holdings PLC and other former roles have included the position of Corporate Finance Director at British Nuclear Fuels and Chief Financial Offi cer and Senior Vice President at Westinghouse Electric Company LLC in Pennsylvania, USA.
The purpose of the Audit and Risk Committee is to assist the Board in discharging its responsibilities in respect of:
Only the members of the Committee have the right to attend Committee meetings; however, the Committee invites the Group Chairman, Chief Executive, Group Finance Director and Group Financial Controller to attend its meetings. Divisional Chief Executives (who are each themselves main Board Directors) are also invited to attend meetings and do so on a regular basis. The Committee considers that the presence of these attendees does not infl uence or restrict the Committee's open deliberation of matters or the Committee's independence, and fi nds that their presence has the advantage of enabling the Committee to raise questions directly of them and, where necessary, to challenge them about matters under review. Should a situation arise where the presence of any such attendee would be inappropriate or might compromise discussion the Committee would either not invite the attendee concerned or request that they not attend part of the meeting. The Group Risk Manager attends Committee meetings for discussion of Group risk reports and related items. Ernst & Young LLP provides internal audit services to the Company. PricewaterhouseCoopers LLP is the Group's external auditor. Both auditors usually attend the Committee's meetings. The Committee Chairman also meets PricewaterhouseCoopers LLP and Ernst & Young LLP in the absence of executive management, and other Committee members have the opportunity to do so. The auditors are also invited to address the Committee without executives present at least once a year.
The Committee undertakes its duties in accordance with its terms of reference which were reviewed during the year to ensure that they remained fi t for purpose and in line with best practice guidelines. The terms of reference are available on the Company's website.
During the year to 31 March 2014 the Committee met four times; attendance at these meetings is set out on page 84. The agenda for each meeting is approved by the Committee Chairman in conjunction with the Committee Secretary and other members of the Committee as appropriate. During the year ended 31 March 2014, the Committee's deliberations included consideration of the following:
– An annual review of the Company's system of internal controls and their effectiveness.
– An assessment of information assurance and cyber-security maturity in the Group's operations.
– Internal and external audit plans for the year or particular audits.
– At each meeting, internal audit reports on fi ndings from audit visits to business units, including follow-up reports on any matters identifi ed in earlier reports as requiring attention or improvement. The reports contain tracking information to enable the Committee easily to see the control performance of business units over time and how quickly any matters are addressed.
– Reports to each meeting on fraud risk, covering any suspected incidents of fraud, their investigation and remedial or preventive action.
– The Committee is responsible for monitoring the Group whistleblowing policy and receives regular reports of calls and emails to the Group's external independent whistleblowing services and how these have been investigated and concluded. For further explanation of the whistleblowing procedure please see page 55.
– Audit and non-audit fees for the external and internal auditors were reviewed by the Committee and considered as to their effect on auditor independence.
We are required to provide an explanation of the signifi cant issues that the Committee considered in relation to the fi nancial statements for the year to 31 March 2014 and how these issues were addressed, having regard to matters communicated to it by the auditors.
In planning the year-end audit, the Committee considered with management and the Company's auditors the key areas of focus for the audit having in mind their signifi cance to the Group's reporting of results and the degree of judgement involved in their evaluation. The signifi cant issues considered in relation to the fi nancial statements for the year ended 31 March 2014 and how the Committee addressed them are set out in the following table:
| Signifi cant Issue | How the Committee addressed it |
|---|---|
| Contract judgements – revenue and profi t recognition |
The Committee considered the material contracts that require a signifi cant degree of management judgement that could materially affect the appropriate accounting treatment for them; these were the subject of discussion and challenge with management to ensure that the Committee is satisfi ed as to the reasonableness of those judgements |
| Pensions accounting – the choice of assumptions in the valuation for accounting purposes of the liabilities of the Group's defi ned benefi t schemes |
The Committee assessed the particular assumptions proposed to be used by management and their impact on scheme assets and liabilities in the context of assumptions being used in respect of the same factors by other companies and the pensions industry more widely |
| Business acquisitions – goodwill impairment |
The Committee reviewed and challenged management's assessment of value in the context of, inter alia, cash fl ow forecasts, budget, growth rates, and having assessed sensitivities |
The risk management framework, risk mitigation and control processes and other internal controls are detailed on pages 64 – 71.
A statement regarding the effectiveness of the internal controls and control processes, including those over fi nancial reporting, can be found on pages 121 – 122.
Ernst & Young LLP has provided an internal audit service to the Group since 2003. The Committee considers that it is still appropriate to have an internal audit service provided by an external adviser, but keeps this under review. The Committee continues to be satisfi ed with the service provided by and the independence of Ernst & Young LLP acting as internal auditor.
The Committee manages the relationship with the external auditor on behalf of the Board and monitors the auditor's independence and objectivity along with the effectiveness of the external audit on an annual basis. Audit fees are re-evaluated periodically.
The Committee is aware of and is following the debate led by the Competition Commission in the UK and the European Union about the market for the provision of audit services, including as to the question of the length of time for which audit fi rms should provide audit services and requirements for companies periodically to re-tender the provision of those services.
PricewaterhouseCoopers LLP (PwC) has been the external auditor of the Group since 2002 without a re-tender in that time. The Committee's current intention is to embark on a re-tendering process no later than 2017 when the current audit engagement partner at PwC is due to rotate out of that role having served in it for fi ve years. There are no contractual obligations that would restrict the selection of a different auditor or the re-tendering process taking place earlier than 2017 should the Committee consider, having regard amongst other things to PwC's continued effectiveness, that it would be in the Company's interest to do so. PwC's effectiveness in the provision of audit services is regularly assessed by the Committee and its Chairman in their meetings with PwC, and after each annual audit there is a review of the effectiveness of PwC's audit services in that audit, which review includes the provision to PwC and discussion with it of detailed feedback from those exposed to the audit process within the Group. The question of PwC's continuing independence in the provision of audit services is considered and discussed with PwC including the basis upon which that assessment can reasonably be made and supported.
Being satisfi ed with PwC's continuing independence and with the effectiveness of its provision of audit services, and PwC having expressed its willingness to be re-appointed as auditors of the Company, the Committee has recommended to the Board that PwC be re-appointed as the Company's auditors for a further year. The Board has accepted this recommendation and will be proposing a resolution to shareholders at the 2014 AGM for the re-appointment of PwC as auditors.
The Committee regularly considers the engagement of, and level of fees payable to, the auditors for non-audit work, considering potential con fl icts and the possibility of actual or perceived threats to their independence. The Company's policy is to consider whether to place material non-audit services work with external auditors on a case-by-case basis based on an assessment of who is best placed to do the work having regard to the availability, resources, capability, experience and any con fl icts of interest of potential candidate fi rms for the work, and to make the choice based on what is considered to be in the Company's best interest overall having regard to potential independence issues if the work is placed with the Company's auditors. Non-audit services offered to the auditor would not include the design or operation of fi nancial information systems, internal audit services, maintenance or preparation of accounting records or fi nancial statements that would be subject to external audit or work that might reasonably be considered as capable of compromising their independence as auditors. If use of the auditors for non-audit work would lead to non-audit fees payable to them in the year exceeding 20% of their audit fee, the Committee Chairman's approval is required. Having considered the non-audit services provided by the auditor during the year ended 31 March 2014, the Committee is satis fi ed that these services were provided effectively and did not prejudice the objectivity or independence of the auditor.
For the year ended 31 March 2014, the Committee has approved the payment to PwC of fees of £1.7 million for audit services, and of fees of £2.7 million for non-audit related work, including work in connection with the proposal to acquire the Avincis Group and the Prospectus and Circular and related accounting work and accounting due diligence in connection with that transaction, (part of which is required under auditing standards to be performed by the Company's auditors) and other ancillary work where PwC were well placed to carry it out most effectively. Non-audit related work accounted for 61.4% of the total audit and non-audit related fees paid to the external auditor during the year. A breakdown of fees paid to the auditor is set out in note 5 on page 142.
19 May 2014
Annual Remuneration Committee Chairman Statement
I am pleased to present the Directors' Remuneration report for 2013/14 for which we will be seeking your approval at the Annual General Meeting on Monday, 21 July 2014.
The Committee has had a full agenda during the year, and continues to ensure the Directors' remuneration policy is in line with evolving corporate governance requirements, is aligned with Company strategy, and rewards the right behaviours, helping to ensure we do what is right for our customers, and drive sustainable value for our shareholders. The changes made to our remuneration structure over the past few years mean that we are in a position to propose a policy for the next three years that is in line with that operated in 2013/14. Our remuneration structure remains weighted toward rewarding success over a multi-year period and signifi cant equity related components, which the Committee strongly believes is appropriate for our business and our future success, as well as aligning the interests of shareholders and management.
Over recent years the shareholdings and equity-related interests of our senior management (as a group) have increased signifi cantly as has the number of employees with equity interests in the Company. During the year the Committee considered the shareholding guidelines applicable to senior management as it considers this an important element of the remuneration arrangements but given the level of shareholdings and interests generally, felt it unnecessary to modify these at this time other than for the Chief Executive.
Following consultation with shareholders on a number of matters, as disclosed in last year's report, and as part of the annual granting process, the PSP and DBMP targets for the 2013 awards were reviewed and the Committee reduced the top-end EPS target for the 2013 PSP and DBMP awards and increased the three-year average ROCE targets for the 2013 DBMP to ensure they remained appropriate and challenging at the time of grant. Awards were made at the same level as 2012 awards, and the performance period ends on 31 March 2016.
The Company continues to perform at a high level, delivering once again record results for the fi nancial year. These results reinforce the Board's belief in the Company's strategy, and give the Committee the reassurance that the executive incentives are driving the right behaviours, and are rewarding the executive team appropriately. This performance over the year resulted in annual bonus payments of between 92% and 94% of maximum, and sustained performance over the last 3 years has resulted in 93.0% vesting of the PSP (94.7% for the CEO's awards), with relative TSR performance ahead of the stretching targets and EPS performance in the performance range set by the Committee in 2011.
| CSOP | means the 2009 Babcock Company Share Option Plan | |
|---|---|---|
| DBP | means the 2009 Babcock Deferred Bonus Plan | |
| DBMP | means the 2012 Babcock Deferred Bonus Matching Plan | |
| LTIP | means the 2003 Babcock Long Term Incentive Plan (a plan replaced by the PSP in 2009) | |
| PSP | means the 2009 Babcock Performance Share Plan | |
| PBT | means underlying Profi t Before Tax | |
| PBIT | means underlying Profi t Before Interest and Tax | |
| OCF | means Operating Cash Flow as determined for management purposes | |
| ROCE | means Return on Capital Employed | |
| EPS | means basic underlying Earnings per Share | |
The remuneration policy for 2014/15 remains unchanged from 2013/14. Following a number of necessary changes to remuneration arrangements in recent years, the Remuneration Committee has not proposed any changes to the remuneration structures, and incentive opportunities remain at the same levels as in 2013/14. Whilst the Committee intends to measure performance for the annual bonus, PSP and DBMP against similar measures to prior years, in light of the acquisition of Avincis Group, the annual bonus targets and DBMP ROCE targets may require review in the coming year to ensure they remain appropriate, motivating and suffi ciently stretching. The incentive targets for the PSP for both EPS and TSR performance remain appropriate and are unchanged from 2013/14.
The Committee reviewed Executive Director base salaries during the year, and following the required adjustment to salaries in 2013, determined that salaries for Executive Directors should be increased in line with those for the wider Group for 2014/15. The Remuneration Committee was informed by the Executive Directors that exceptionally they would not be drawing the increase granted for 2014/15 in order to demonstrate their understanding of the fi nancial austerity still affecting the government as their principal customer. Whilst that one-year restraint was welcomed, the Committee is aware of the need to ensure that remuneration continues to be appropriately competitive going forward to ensure that we can meet our stated remuneration policy, and therefore agreed that the increase made for 2014/15 (2.5%) would be included in the baseline for their next review in 2015.
In line with the new reporting regulations that came into effect on 1 October 2013, this Directors' Remuneration Report is split into three parts: this Annual Statement, a Policy Report and an Annual Report on Remuneration. These sections work together to give you full and transparent disclosure of the Company's intention and operation of Directors' remuneration, and build upon some of the disclosures adopted early in last year's Remuneration Report. At the AGM, a binding shareholder vote will be sought for the future Policy section and an advisory shareholder vote for the Annual Report on Remuneration section.
Justin Crookenden
Committee Chairman
19 May 2014
Terms of reference for the Remuneration Committee (Committee) have been approved by the Board. Duties of the Committee include the determination of the policy for the remuneration of the Executive Directors and the Chairman, as well as their specifi c remuneration packages, including pension rights and, where applicable, any compensation payments. In determining the remuneration policy, the Committee takes into account all factors which it deems necessary to ensure that members of the senior executive management of the Group are provided with appropriate incentives to encourage strong performance and that they are rewarded for their individual contributions to the success of the Company, in a fair and responsible manner.
The composition of the Committee and its terms of reference comply with the provisions of the Corporate Governance Code. The terms of reference are available for inspection on the Company's website.
This report covers the reporting period from 1 April 2013 to 31 March 2014 and provides details of the Committee membership, details of their deliberation on executive remuneration during the year under review and remuneration policy for the Company. This report has been prepared by the Committee according to the requirements of the Companies Act 2006 (the Act), Regulation 11 and Schedule 8 of the Large and Medium–Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Regulations) and other relevant requirements of the FCA Listing Rules. In addition, the Committee has applied the principles of good corporate governance set out in the UK Corporate Governance Code,
and has considered guidelines issued by its leading shareholders and bodies such as the Association of British Insurers and the National Association of Pension Funds. In accordance with Section 439 and 439A of the Act, a binding resolution to approve the Policy Report and an advisory resolution to approve the Annual Report on Remuneration will be proposed at the Annual General Meeting on 21 July 2014, from which date the Policy will, if approved, take effect. This report contains both auditable and non-auditable information. The information subject to audit is so marked. The Regulations require the Company's auditors to report that the 'Audited information' in this report has been properly prepared in accordance with the Regulations.
To provide fair remuneration arrangements that allow for enhanced rewards for delivery of superior performance by allowing for the possibility of upper quartile rewards for upper quartile performance, that align Directors' and shareholders' interests and take account of risk.
Our policy for executives refl ects a preference that we believe is shared by the majority of our shareholders – to rely more heavily on the value of variable performance-related rewards, rather than on the fi xed elements of pay. The rationale is to incentivise and reward success.
The focus of our executive remuneration is, therefore, weighted towards performance-related pay (with a signifi cant element weighted towards long-term rather than short-term performance). We believe that, properly structured and with suitable safeguards, variable, performance-related rewards are the best way of linking pay to strategy, risk management and shareholders' interests.
| Purpose and link to strategy | Operation |
|---|---|
| Fixed pay | |
| Base salary Should be at a level that is (i) fair and (ii) capable, when taken with the gearing effect of performance-related pay, of delivering upper quartile actual remuneration for upper quartile performance. |
Base salaries are reviewed annually, with reference to the individual's role, experience and performance; salary levels at relevant comparators are considered but do not in themselves drive decision-making. |
| Pension To provide market competitive retirement benefi ts. |
Cash supplement in lieu wholly or partly of pension benefi ts for ongoing service and/or membership of the group's Defi ned Benefi t or Defi ned Contribution pension scheme. |
| Benefi ts | A range of benefi ts are provided which may include life insurance; medical insurance; car and fuel benefi ts and allowances; |
| Designed to be competitive in the market in which the individual is employed or to meet costs effectively incurred at the Company's request. |
home to work travel and related costs if agreed on an individual basis or if incurred at the request of the Company; accommodation benefi ts and related costs if based away from home at the request of the Company; Board function related costs; and, in certain circumstances, cash allowances in respect of the tax charge on accommodation or travel to work benefi t if incurred at the request of the Company or with its prior approval. Other benefi ts (e.g. relocation) may be offered if considered appropriate and reasonable by the Committee. |
| Variable pay | |
| Annual bonus To underpin delivery of year-on-year fi nancial performance and progress towards strategic non-fi nancial objectives, being structured to motivate delivery against targets and achievement of stretching outperformance, whilst mindful of achievement of long-term strategy and longer term risks to the Company. The requirement to defer a substantial part of bonus into Babcock shares strengthens the link to long-term sustainable growth. |
Performance targets are set at the start of the year and refl ect the responsibilities of the executive in relation to the delivery of our strategy. At the end of the year, the Committee determines the extent to which these targets have been achieved. The Committee has the discretion to adjust the outcome (up or down) within the limits of the plan for corporate transactions, unforeseen events, factors outside reasonable management control, changes to business priorities or operational arrangements, to ensure targets represent and remain a fair measure of performance. In addition, the Committee considers health and safety performance and it may reduce or cancel any annual bonus otherwise payable if it considers it appropriate to do so in light of that performance. At least 40% of annual bonus payments for Executive Directors must be deferred into awards over Company shares for three years under the DBMP. Mandatory deferred bonus awards (Deferred annual bonus) are subject to potential forfeiture if the holder leaves before the awards vest. Clawback applies to unvested deferred annual bonuses if the accounts used to determine the bonus level have to be materially corrected or the Committee subsequently comes to a view that bonus year performance was materially worse than originally believed or will have material adverse impacts in future years. |
| Deferred bonus matching plan (DBMP) To ensure that a substantial part of the Directors' short-term incentive rewards is exposed to the longer-term impact of decision-making and to further align their interests with shareholders. |
The Committee may grant performance-related matching awards to Executive Directors who are granted deferred bonus awards. Participants can make an investment (including by voluntary extra deferral of bonus) regardless of any annual bonus earned of up to 100% of salary (including mandatory and voluntary investment). Participants may make an additional voluntary investment of up to 40% of salary. An additional benefi t is provided in cash or shares equal to dividends that would have been paid over the vesting period on shares that vest. The Committee has the ability to exercise discretion to override the DBMP matching outcome in circumstances where application of the formula would produce a result inconsistent with the Company's remuneration principles. |
| Performance Share Plan (PSP) and Company Share Option Plan (CSOP) To incentivise delivery of top quartile shareholder returns and earnings growth over the longer term. Long-term measures guard against short-term steps being taken to maximise annual rewards at the expense of future performance. |
The Remuneration Committee has the ability to grant nil-cost options or conditional share awards under the PSP, and may grant a portion of an award in CSOP options. To date, the Remuneration Committee has only awarded nil-cost options and CSOP options to executives. The award levels and performance conditions on which vesting depends are reviewed from time to time to ensure they remain appropriate. An additional benefi t is provided in cash or shares equal to dividends that would have been paid over the vesting period on shares that vest. Options may also be granted under the CSOP, an HMRC approved option scheme, which have an exercise price based on market price at the award date and can be linked to PSP awards as explained further on page 115, but are otherwise the same as for PSP awards. The Committee has the ability to exercise discretion to override the PSP outcome in circumstances where strict application of the performance conditions would produce a result inconsistent with the Company's remuneration principles. |
| All-employee plans – Babcock Employee Share Plan To encourage employee ownership of Babcock shares. |
Open to all UK tax resident employees of participating Group companies. Executive Directors are eligible to participate. The plan is an HMRC approved share incentive plan that allows an employee to purchase shares (through the plan trustees) out of pre tax salary which, if held for periods of time approved by HMRC (currently 3 to 5 years), are taxed on a favourable basis. The Company can match purchased shares with an award of free shares. Matching shares are forfeited if employees leave within three years of their award (other than for 'good leaver' reasons). |
Governance
| Opportunity | Performance metrics |
|---|---|
| In respect of existing Executive Directors, it is anticipated that decisions on any salary increases will be guided by the increases for the wider employee population over the term of this policy. In certain circumstances (including, but not limited to, a material increase in job size or complexity, market forces, promotion or recruitment) the Committee has discretion to make appropriate adjustments to salary levels to ensure they remain fair and competitive. Latest salaries are set out in the Annual Report on Remuneration on page 100. |
Business and individual performance are considerations in setting base salary. |
| Executive Directors, other than John Davies, currently receive a cash supplement of 25% of base pay in lieu of pension benefi ts. John Davies is a member of the Babcock International Group Pension Scheme (which offers 1/60th accrual) and receives a cash supplement, currently 20% of base pay above the scheme earnings cap. The cash supplement payable, whether in lieu of all pension benefi ts or on pay in excess of any applicable scheme earnings cap, and the level of any employer contribution into a defi ned contribution pension scheme for Executive Directors is set having regard to market practice, and in the context of the other elements of the remuneration package, notably base salary. Other than in exceptional cases (such as to replace existing arrangements for new recruits) the Committee does not anticipate employer contributions into a defi ned contribution pension scheme or cash in lieu of benefi t as being at a cost to the Company that would exceed 30% of base salary or, in the case of internal promotions to the Board or for Executive Directors subsequently leaving existing Group pension schemes, in excess of the cost to the Company as a percentage of base salary of their current pension provision. |
Not performance related. |
| Benefi t values vary by role and are periodically reviewed and set at a level which the Committee considers appropriate in light of relevant market practice for the role and individual circumstances. The cost of the benefi ts provided changes in accordance with market conditions and will, therefore, determine the maximum amount that would be paid in the form of benefi ts during the period of this policy. The Committee retains the discretion to approve a higher cost in certain circumstances (e.g. relocation) or in circumstances where factors outside the Company's control have changed materially. |
Not performance related. |
| Maximum bonus opportunity is 150% of salary. For achievement of threshold, up to 15% of maximum bonus is earned; for achievement of target up to 55% of maximum bonus is earned. |
Performance is determined by the Committee on an annual basis by reference to Group and/or Divisional fi nancial measures, e.g. EPS growth, PBIT, PBT, OCF, as well as the achievement of non-fi nancial objectives. The fi nancial and personal/strategic objectives are typically weighted 80% and 20% of maximum, respectively. The Committee retains discretion to vary the weightings +/- 20% for individual measures within the fi nancial element at the start of each year, to ensure alignment with the business priorities for the year. Measures used for the 2013/14 annual bonus and proposed for 2014/15 are included in the Annual Report on Remuneration. |
| The maximum match would be 2 for 1 on any shares held under the DBMP (up to a maximum of 200% of salary based on maximum voluntary investment). For each performance condition applying to matching awards, 12.5% of the maximum award will vest for threshold performance. |
Vesting of DBMP awards is subject to continued employment and Company performance over a 3 year performance period. Awards in recent cycles have been based on the achievement of stretching EPS, TSR and/or ROCE targets. The Committee will review the performance measures, their weightings, and performance targets annually to ensure continued alignment with Company strategy. Should the Committee make changes to the measures, the weighting on EPS, TSR and ROCE combined will be not less than 66% of the total award. Details of measures and targets used for specifi c DBMP grants are included in the Annual Report on Remuneration. |
| Maximum annual PSP awards of up to 200% of base pay (though currently only the Chief Executive receives awards at this level). For each performance condition applying to an award, 16.7% of the maximum award will vest for threshold performance. |
Vesting of PSP awards is subject to continued employment and Company performance over a 3 year performance period. Awards in recent cycles have been based on the achievement of stretching EPS and TSR targets. The Committee will review the performance measures, their weightings, and performance targets annually to ensure continued alignment with Company strategy. Should the Committee make changes to the measures, the weighting on EPS and/or TSR combined will be not less than 66% of the total award. Details of measures and targets used for specifi c PSP and CSOP grants are included in the Annual Report on Remuneration. |
Participants can purchase shares up to the prevailing HMRC limit at the time employees are invited to participate. Not performance related.
The Company currently offers to match purchases made through the plan at the rate of 1 free matching share for every 10 shares purchased. The matching rate is reviewed periodically, and any future offer will be bound by the prevailing HMRC limit.
Executive Directors are eligible to receive payment from any award or other commitment made prior to the approval and implementation of the remuneration policy detailed in this report.
The measures used under annual bonus schemes are selected annually to refl ect the Group's main strategic objectives for the year and refl ect both fi nancial and non-fi nancial priorities. Performance targets are set to be stretching but achievable, taking into account the Company's strategic priorities and the economic environment in which the Company operates. Financial targets are set taking into account a range of reference points including the Group's strategic and operating plan. The Committee considers at length the appropriate fi nancial conditions and non-fi nancial objectives to attach to annual bonus awards and the fi nancial targets to attach to share awards to ensure they continue to be: (i) relevant to our strategic objectives and aligned with shareholders' interests mindful of risk management; and (ii) fair by being suitably stretching whilst realistic.
The Committee believes that Total Shareholder Return (TSR), Underlying Earnings per Share (EPS) and Return on Capital Employed (ROCE) continue to be effective measures of long-term performance for the Company, providing a good balance between shareholder value creation and line of sight for executives.
The TSR performance measure is tested by reference to the Company's relative long-term share price performance against suitable peers. The Committee believes that the use of relative TSR provides strong alignment with shareholders' interests by incentivising management for the delivery of above market returns. The TSR calculation would normally use a 12-month average for opening and closing share prices adjusted for dividends paid during the period. The Company feels that this is the most appropriate period because a 12-month average ensures both that short-term market volatility is excluded and that for each company a 12-month period will capture the impact of the announcement of results and payment of dividends. A shorter period would not capture all these events and would not necessarily put all companies on an equal footing.
The use of an EPS growth performance measure, in the opinion of the Committee, focuses management on continued strong fi nancial performance and is heavily dependent on the Company's success in achieving its strategic goals.
The Committee believes that ROCE reinforces the focus on returns for shareholders and encourages capital discipline. It also provides good line of sight for management.
The Remuneration Committee has the discretion to make adjustments to the calculation of short and long-term performance outcomes in circumstances where application of the formula would produce a result inconsistent with the Company's remuneration principles. Such circumstances may include: changes in accounting standards, certain major corporate events such as rights issues, share buybacks, special dividends, corporate restructurings, acquisitions and disposals.
The Committee reviews the performance conditions for share awards prior to the start of each cycle to ensure they remain appropriate. No material reduction in long-term incentive targets for future awards would be made without prior consultation with our major shareholders.
The policy and practice with regard to the remuneration of senior executives below the Board is consistent with that for the Executive Directors. Senior executives generally participate in the same long-term incentives as the Executive Directors with similar performance measures applied. The remuneration policy for our Executive Directors is considered with the remuneration philosophy and principles that underpin remuneration for the wider Group in mind. The remuneration arrangements for other employees refl ect local market practice and seniority of each role. As a result, the levels and structure of remuneration for different groups of employees will differ from the policy for executives as set out above but with the common intention that remuneration arrangements for all groups might reasonably be considered to be fair having regard to such factors.
In the cases of hiring or appointing a new Executive Director, the Committee may make use of any of the existing components of remuneration, as follows:
| Pay element | Policy on recruitment | Maximum |
|---|---|---|
| Salary Based on size and nature of responsibilities of the proposed role; the candidate's experience; implications for total remuneration positioning vs. market pay levels for comparable roles; internal relativities; and the candidate's current salary |
n/a | |
| Pension | Membership of pension scheme or salary supplement on a similar basis to other executives, as described in the policy table |
n/a |
| Benefi ts | Provision of benefi ts on a similar basis to other executives, as described in the policy table |
n/a |
| Annual bonus | As described in the policy table, and may be pro-rated for proportion of year served | 150% of salary |
| Deferred Bonus Matching Plan |
New appointees may participate in the DBMP on similar terms to other executives | 200% of salary |
| Performance Share Plan and Company Share Option Plan (CSOP) |
New appointees may be granted awards under the PSP on similar terms to other executives |
200% of salary |
| Other | In determining appropriate remuneration for new Executive Directors, the Committee will take into consideration all relevant factors (including quantum, the nature of remuneration and where the candidate was recruited from) to ensure that arrangements are in the best interests of the Company and its shareholders. The Committee may also make an award in respect of a new appointment to 'replace' incentive arrangements forfeited on leaving a previous employer. In doing so, the Committee will consider relevant factors including any performance conditions attached to these awards, time to vesting and the likelihood of those conditions being met. The fair value of the compensatory award would not be greater than the awards being replaced. In order to facilitate like-for-like compensatory awards on recruitment, the Committee may avail itself of Listing Rule 9.4.2R if required |
|
| Other recruitment events | ||
| Internal promotion When appointing a new Executive Director by way of promotion from an internal role, the Committee will be consistent with the policy for external hires detailed above. Where an individual has contractual commitments, outstanding incentive awards and/or pension arrangements prior to their promotion to Executive Director, the Company may honour those arrangements; however, where appropriate, these would be expected to transition over time to the arrangements as stated above |
n/a | |
| Non-Executive Director |
When recruiting a new Non-Executive Director, the Committee or Board will structure pay in line with the existing policy, namely a base fee in line with the current fee schedule, with additional fees for fulfi lling the role of Senior Independent Director and Chairmanship of the Audit and Risk and Remuneration Committees |
n/a |
The charts below provide an estimate of the potential future reward opportunities for the Executive Directors, and the potential split between the different elements of remuneration under three different performance scenarios: 'Minimum', 'On-target' and 'Maximum'.
Potential reward opportunities are based on Babcock's remuneration policy, applied to base salaries as at 1 April 2014. Note that the projected values exclude the impact of any share price movements. For this reason, were the DBMP or PSP shares to vest in full, actual total remuneration may exceed the value shown in the chart below.
Annual Variable Remuneration
Long-term incentives
Fixed Remuneration
Annual Variable Remuneration
Long-term incentives
Annual Variable Remuneration
Long-term incentives
Chief Executive, Support Services –
The 'Minimum' scenario shows base salary, pension (and/or pay in lieu of pension) and benefi ts (i.e. fi xed remuneration). These are the only elements of the Executive Directors' remuneration packages which are not at risk.
The 'On-Target' scenario refl ects fi xed remuneration as above, plus a payout of 50% of the annual bonus for the CEO and CFO (52.7% for the other Executive Directors) and threshold vesting of 12.5% and 16.7% of the maximum award under the DBMP and PSP, respectively. All scenarios assume full voluntary investment under the DBMP.
The 'Maximum' scenario refl ects fi xed remuneration, plus full payout of all incentives.
The Committee sets shareholding guidelines for Executive Directors. The current guideline is to build and maintain, over time, a personal (and/or spousal) holding of shares in the Company equivalent in value to at least twice the Executive Director's annual base salary (three times for the CEO). The guidelines also state that an Executive Director is expected to retain at least half of any shares acquired on the exercise of a share award that remain after the sale of suffi cient shares to cover tax and national insurance triggered by the exercise (and associated dealing costs) until the guideline level is achieved and thereafter maintained. The Executive Directors' compliance with these guidelines is shown in the table on page 110.
The following summarises the key terms (excluding remuneration) of the Directors' service contracts or terms of appointment:
| Name | Date of service contract | Notice period |
|---|---|---|
| Peter Rogers (Chief Executive) | 31 July 2003 (amended by letters dated 5 May 2004 and 3 April 2006) |
12 months from Company, 6 months from Director |
| Bill Tame (Group Finance Director) | 1 October 2001 (amended by letters dated 5 May 2004 and 3 April 2006) |
12 months from Company, 6 months from Director |
| Archie Bethel (Chief Executive, Marine and Technology) |
21 April 2010 | 12 months from Company, 6 months from Director |
| Kevin Thomas (Chief Executive, Support Services) |
20 April 2010 | 12 months from Company, 6 months from Director |
| John Davies (Chief Executive, Defence and Security) |
20 December 2012 | 12 months from Company, 12 months from Director |
The latest service contracts are available for inspection at the Company's registered offi ce and will also be available at the Company's Annual General Meeting.
The Company's policy is that Executive Directors' service contracts should be capable of being terminated by the Company on not more than 12 months' notice. The Executive Directors' service contracts entitle the Company to terminate their employment without notice by making a payment of salary and benefi ts in lieu of notice. In these circumstances, for new contracts (including for John Davies) the Company can choose to make the payment in lieu by monthly instalments and mitigation applies such that the Committee may decide to reduce or discontinue further instalments. For existing contracts (for Executive Directors other than for John Davies) such a payment would be by way of a lump sum payment on termination. If the Company terminates an Executive Director's service contract it will have regard to all the circumstances (including the scope for mitigation) and the Company's interests in determining the amount of compensation, if any, payable to him in connection with that termination.
The contracts for Peter Rogers and Bill Tame (but not for Archie Bethel, Kevin Thomas and John Davies) contain provisions which provide that within 90 days of the occurrence of a change of control of the Company, each may terminate his employment forthwith. If he exercises this right, he is entitled, for a 12-month period, to be paid (on a monthly basis) his base salary plus 40% (compared to a maximum entitlement under the annual bonus scheme of 150%) in lieu of bonus and all other contractual entitlements. From this payment there is to be deducted any amount that the Executive Director receives by way of income, if it exceeds 10% of his Babcock salary, from other sources that he would not have been able to earn had he continued in employment with the Company.
The contracts for Peter Rogers and Bill Tame (but not for Kevin Thomas, Archie Bethel and John Davies) also provide that if the Company terminates their appointment within 12 months of a change of control, they would be entitled to a termination payment equal to 100% of annual salary (plus 40% in lieu of bonus and all other benefi ts), subject to any additional entitlement as outlined below.
In addition to the contractual provisions regarding payment on termination set out above, the Company's incentive plans contain provisions for termination of employment, where the Committee has the discretion to determine the level of award vesting.
| Component | Treatment on a change of control | Treatment for a good leaver1 | Treatment for other leavers |
|---|---|---|---|
| Annual Bonus | Will be paid a time pro-rated proportion, subject to performance during the year, generally paid immediately, with Committee discretion to treat otherwise2 |
Will be paid a time pro-rated proportion, subject to performance during the year, generally paid immediately, with Committee discretion to treat otherwise |
No annual bonus entitlement, unless the Committee exercises discretion to treat otherwise |
| PSP, CSOP, DBP and DBMP (mandatorily deferred bonus awards and matching awards) |
Awards generally vest immediately, and, for performance-related awards, will be pro-rated for time and remain subject to performance conditions, with Committee discretion to treat otherwise |
Entitled to retain a time pro rated proportion, which remains subject to performance conditions. Committee has discretion to allow immediate vesting and/or more than time pro-rated vesting |
Outstanding awards are forfeited, unless the Committee exercises discretion to treat otherwise |
An individual would generally be considered a 'good leaver' if they leave the Group's employment by reason of injury, ill-health, disability, redundancy or retirement (in each case evidenced to the Committee's satisfaction). The treatment of share awards held by Directors who leave on other grounds is entirely at the discretion of the Committee and in deciding whether (and the extent to which) it would be appropriate to exercise that discretion the Committee will have regard to all the circumstances.
Treatment of bonus on a change of control for Peter Rogers and Bill Tame is also the subject of the provisions outlined on page 95 and above.
The Committee has discretion to allow awards held by leavers to vest immediately and/or in full or for a 'good leaver' or on a change of control at a higher proportion than strict timeapportionment if it considers this to be appropriate. In deciding how to exercise its discretion the Committee will take account of all the circumstances arising including, in the case of a leaver, the reasons for and circumstances of the termination of employment, the leaver's length of service, level of responsibility and business impact, individual performance during their tenure, exceptional contribution to the business and the extent to which that contribution is expected to still have an impact during the remainder of the applicable performance period. The Committee may also make any favourable exercise of its discretion subject to conditions.
The Executive Directors may accept external appointments with the prior approval of the Chairman, provided that such appointments do not prejudice the individual's ability to fulfi l their duties at the Group. Any fees for outside appointments are retained by the Director.
| Name | Date of appointment as a Director |
Date of current appointment letters |
Anticipated expiry of present term of appointment (subject to annual re-election) |
|---|---|---|---|
| Mike Turner (Chairman) | 1 June 2008 | 20 March 2014 | AGM for 2017 |
| Justin Crookenden | 1 December 2005 | 20 March 2014 | 30 November 2014 |
| David Omand | 1 April 2009 | 31 May 2012 | AGM for 2015 |
| Ian Duncan | 10 November 2010 | 5 March 2013 | AGM for 2016 |
| Kate Swann | 1 June 2011 | 20 March 2014 | AGM for 2017 |
| Anna Stewart | 1 November 2012 | 19 June 2012 | AGM for 2015 |
| Jeff Randall | 1 April 2014 | 6 December 2013 | AGM for 2017 |
Chairman and Non-Executive Directors
The latest written terms of appointment are available for inspection at the Company's registered offi ce and at the Company's Annual General Meeting. The expected time commitment of Non-Executive Directors is set out in their current written terms of appointment.
The Group's Non-Executive Directors serve under letters of appointment as detailed in the table above, normally for no more than three year terms at a time; however, in all cases appointments are terminable at will at any time by the Company or the Director. All Non-Executive Directors are subject to annual re-election by the Company in general meeting in line with the UK Corporate Governance Code.
Details of the Non-Executive Directors' terms of appointment are shown in the table. The appointment and re-appointment and the remuneration of Non-Executive Directors are matters reserved for the Nominations Committee and Executive Directors, respectively.
The Non-Executive Directors' fees have been set at a level to refl ect the amount of time and level of involvement required in order to carry out their duties as members of the Board and its Committees. The Non-Executive Directors are not eligible to participate in the Company's performance-related incentive plans and do not receive any pension contributions.
Details of the policy on fees paid to our Non-Executive Directors are set out in the table below:
| Function | Operation | Opportunity | Performance measures |
|---|---|---|---|
| To attract and retain high calibre Non-Executive Directors with commercial and other experience relevant to the Company |
Fee levels are reviewed against market practice from time to time (by the Chairman and the Executive Directors in the case of Non-Executive Director fees and by the Remuneration Committee in respect of fees payable to the Chairman), with any adjustments normally being made on 1 April in the review year |
Non-Executive Director fee increases are applied in line with the outcome of the periodic fee review Any increases to the Non Executive Director fee will typically be in line with general movements in market levels of Non-Executive Director fees |
None |
| Additional fees are payable for acting as Chairman of the Audit and Risk, and Remuneration Committees Fee levels are reviewed by reference to FTSE listed companies of similar size and complexity. Time commitment, level of involvement required and responsibility are taken into account when reviewing fee levels |
In the event that there is a material misalignment with the market or a change in the complexity, responsibility or time commitment required to fulfi l a Non-Executive Director role, the Board has discretion to make an appropriate adjustment to the fee level |
||
| Fees for the year ending 31 March 2014 and those for the year ending 31 March 2015 are set out in the Annual Report on Remuneration on page 109. |
When reviewing Executive Director pay the Committee is aware of the proposals for review of remuneration of all employees. The Committee receives regular updates on salary increases, bonus and share awards made to employees throughout the Group. These matters are considered when conducting the annual review of executive remuneration. The Company seeks to promote and maintain good relationships with employee representative bodies as part of its employee engagement strategy and consults on matters affecting employees and business performance as required in each case by law and regulation in the jurisdictions in which the Company operates. The Company now formally presents a summary of its policy for remuneration arrangements for Executive Directors to the Babcock Employee Forum, which is attended by representatives from across the UK business operations, and will consider any feedback from that Forum.
Consideration of shareholder views When determining remuneration, the Committee takes into account views of leading shareholders and best practice guidelines issued by institutional shareholder bodies. The Committee is always open to feedback from shareholders on remuneration policy and arrangements, and commits to undergoing consultation with leading shareholders in advance of any signifi cant changes to remuneration policy. The Committee will continue to monitor trends and developments in corporate governance and market practice to ensure the structure of the executive remuneration remains appropriate.
Further detail on the votes received on the 2013 Directors' Remuneration Report and the Committee's response are provided in the Annual Report on Remuneration on page 98.
The members of the Committee are appointed by the Board on the recommendation of the Nominations Committee and, in accordance with provision D 2.1 of the UK Corporate Governance Code, the Committee is made up of the Independent Non-Executive Directors listed below. The membership of the Committee during the year to 31 March 2014 (with each member serving throughout the year) as well as attendance at Committee meetings, is shown below. The Company Secretary is Secretary to the Committee.
| Member | Number of Meetings attended/Number of meetings possible |
|---|---|
| Justin Crookenden (Chairman)1 | 6 of 7 |
| Sir David Omand | 7 of 7 |
| Ian Duncan | 7 of 7 |
| Kate Swann | 7 of 7 |
| Anna Stewart | 7 of 7 |
On 1 April 2014 Jeff Randall joined the Committee as an independent Non-Executive Director and will assume the role of Chairman of the Committee when Mr Crookenden steps down from that position at the AGM in July 2014.
The Group Chairman and the Chief Executive normally attend meetings by invitation, but are not present when their own remuneration is being decided. The Company Secretary attends meetings as Secretary to the Committee. The Group Director of Organisation and Development also attends meetings.
Kepler Associates (Kepler) was appointed by the Committee in late 2008, following a selection process including interviewing a number of candidate fi rms, to provide it with independent analysis, information and advice on all aspects of executive remuneration and market practice, within the context of the objectives and policy set by the Committee. Kepler reports directly to the Committee Chairman. A representative from Kepler typically attends Committee meetings. Kepler provides no other services to the Company. Kepler is a member of the Remuneration Consultants Group and is a signatory to the Code of Conduct for consultants to Remuneration Committees of UK listed companies, details of which can be found at www.remunerationconsultantsgroup.com. Kepler adheres to this Code of Conduct. The fees paid to Kepler in respect of work carried out in the year under review totalled £125,988 on the basis of time and materials, excluding expenses and VAT.
The Committee periodically considers whether Kepler remains independent of the Company and that the advice provided is impartial and objective. The Committee is satisfi ed that the advice provided by Kepler is independent.
In total there were 7 meetings in the year to 31 March 2014. The Committee plans to meet at least 6 times in the current fi nancial year.
The Committee considered a number of matters during the year, including:
The following table shows the results of the advisory shareholder vote on the 2013 Remuneration Report at the 2013 AGM:
| Votes cast | Total number of votes | % of votes cast |
|---|---|---|
| For (including discretionary) |
208,159,126 | 84.3% |
| Against | 38,893,012 | 15.7% |
| Total votes cast (excluding withheld votes) |
247,052,138 | 100% |
| Votes withheld | 1,822,169 | |
| Total votes cast (including withheld votes) |
248,874,307 |
The Committee engaged with leading shareholders before the AGM in 2013 on a number of matters and proposed changes to the remuneration arrangements. Feedback from a minority of shareholders consulted stated a preference for 'simplicity' with regard to incentive structures. Internally, we work to ensure that incentive plans are well communicated to, and well understood by, participants. We believe the plans are structured to align the interests of shareholders and management, and that the addition of matching awards under the DBMP has been crucial in rewarding and motivating our management team.
The Committee will continue to engage with its major shareholders to facilitate a better understanding of the Company, the environment in which it operates and how this translates into the Group's executive remuneration policy.
The table below sets out a single fi gure for the total remuneration received by each Executive Director for the years ending 31 March 2014 and 31 March 2013.
| Peter Rogers £000 | Bill Tame £000 | Archie Bethel £000 | Kevin Thomas £000 | John Davies £000 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 13/14 | 12/13 | 13/14 | 12/13 | 13/14 | 12/13 | 13/14 | 12/13 | 13/14 | 12/13a | |
| 1 Salary | 612 | 561 | 387 | 355 | 337 | 309 | 337 | 309 | 322 | 76 |
| 2 Benefi ts in kind | ||||||||||
| and cash | 35 | 20 | 19 | 36 | 24 | 9 | 1 | 1 | 19 | 5 |
| 3 Pension | 153 | 140 | 97 | 89 | 84 | 77 | 84 | 77 | 74 | 19 |
| 4 Annual bonus (cash or voluntarily deferred |
||||||||||
| bonus) | 512 | 500 | 324 | 317 | 233 | 229 | 238 | 229 | 223 | 58 |
| 5 DBMP (deferred annual bonus) |
341 | 334 | 216 | 211 | 156 | 153 | 159 | 153 | 148 | 39 |
| 6 DBMP (matching awards) |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| 7 PSP | 1,845 | 1,113 | 823 | 712 | 748 | 612 | 748 | 612 | 561 | 467 |
| 8 Dividends | 105 | 63 | 46 | 41 | 43 | 36 | 43 | 36 | 32 | 27 |
| Total (of which) | 3,603 | 2,731 | 1,912 | 1,761 | 1,625 | 1,425 | 1,610 | 1,417 | 1,379 | 691 |
| Fixed Remuneration (1,2,3) |
800 | 721 | 503 | 480 | 445 | 395 | 422 | 387 | 415 | 100 |
| Annual Variable Remuneration (4,5) |
853 | 834 | 540 | 528 | 389 | 382 | 397 | 382 | 371 | 97 |
| Long-term Incentives (6,7,8) |
1,950 | 1,176 | 869 | 753 | 791 | 648 | 791 | 648 | 593 | 494 |
The fi gures have been calculated as follows:
Salary: basic salary amount earned for the year.
Benefi ts in kind and cash: the value of benefi ts and salary supplements (other than those in lieu of pensions) including medical insurance, home to work travel expenses incurred at the request of the Company, accommodation benefi ts, car and fuel benefi ts and costs in connection with accommodation.
Pension: for Peter Rogers, Bill Tame, Archie Bethel and Kevin Thomas, value of the cash supplement; for John Davies (i) 20 times the increase in his accrued benefi t over the year, less Directors' contributions plus (ii) the value of the cash supplement.
Annual bonus (cash or voluntarily deferred bonus): this is the part of total annual bonus earned for performance during the year (see page 102) that is not required to be mandatorily deferred into a basic award of shares under the DBMP) (see page 103) and that is to be satisfi ed in cash and/or, if the Director has so elected, by the making of a voluntary deferral award of shares under the DBMP.
DBMP deferred annual bonus: this is the mandatorily deferred element of the annual bonus earned for performance during the year, which will vest after three years.
DBMP (matching awards): no DBMP awards vested on performance to (i) 31 March 2014 or (ii) 31 March 2013.
PSP: the market value of awards that vest on performance to (i) 31 March 2014: based on vesting as to 94.7% of the total award to Peter Rogers and 93.0% of the awards to other Executive Directors and an average share price in the 3 months to 31 March 2014 of 1,233p and (ii) 31 March 2013: based on vesting as to 58.8% of the total award to Peter Rogers and 78.4% of the awards to other Executive Directors and a vest date share price on 13 July 2013 of 1,173p. Note: the difference for 2012/13 PSP fi gures versus that disclosed in last year's Annual Report on Remuneration refl ects truing up for the actual share price on vesting.
Dividends: the total value of dividends accruing on long-term incentive awards (other than on mandatory deferral of bonus awards under the DBP) vesting on performance to (i) 31 March 2014 and (ii) 31 March 2013, payable in cash on exercise of the award.
a. Refl ects period from appointment as a Director on 1 January 2013 to 31 March 2013.
The table below sets out a single fi gure for the total remuneration received by each Non-Executive Director for the year ended 31 March 2014 and the prior year:
| Base fee £000 | Additional fees £000 | Total £000 | ||||
|---|---|---|---|---|---|---|
| 13/14 | 12/13 | 13/14 | 12/13 | 13/14 | 12/13 | |
| Mike Turner | 295 | 255 | 0 | 0 | 295 | 255 |
| Justin Crookenden | 55 | 50 | 13 | 8 | 68 | 58 |
| David Omand | 65 | 60 | 0 | 0 | 65 | 60 |
| Ian Duncan | 55 | 50 | 13 | 13 | 68 | 63 |
| Kate Swann | 55 | 50 | 0 | 0 | 55 | 50 |
| Anna Stewart | 55 | 211 | 0 | 0 | 55 | 21 |
Based on the Committee's policy, the principal elements of the remuneration arrangements (other than pension benefi ts or supplements in lieu of pension benefi ts) for Executive Directors in the year to 31 March 2014 and for the year to 31 March 2015 are summarised in the table below. Further details on the annual bonus schemes, share awards, and pension schemes (and pension benefi ts) are to be found in the following pages of this Remuneration report.
| 2014/15 | 2013/14 | |||||||
|---|---|---|---|---|---|---|---|---|
| Maximum | Maximum | |||||||
| Matching | Matching | |||||||
| Share | Share | |||||||
| Annual | opportunity | Annual | opportunity | |||||
| bonus | Performance | under | bonus | Performance | under | |||
| Base pay | potential | share awards | DBMP1 | Base pay | potential | share awards | DBMP1 | |
| Director | £ | (% of salary) | (% of salary) | (% of salary) | £ | (% of salary) | (% of salary) | (% of salary) |
| Peter Rogers | 611,871 | 150% | 200% | 200% | 611,871 | 150% | 200% | 200% |
| Bill Tame | 387,331 | 150% | 150% | 200% | 387,331 | 150% | 150% | 200% |
| Archie Bethel | 336,810 | 125% | 150% | 180% | 336,810 | 125% | 150% | 180% |
| Kevin Thomas | 336,810 | 125% | 150% | 180% | 336,810 | 125% | 150% | 180% |
| John Davies2 | 321,810 | 125% | 150% | 180% | 321,810 | 125% | 150% | 180% |
Assumes maximum bonus and maximum self-investment and 2 for 1 share match.
Salary refl ects that he receives car and fuel benefi ts.
Executive Directors' base salaries and benefi ts are reviewed each year with any changes usually taking effect from 1 April. The Committee determined that base salaries and benefi ts for 2014/15 for Executive Directors should be increased in line with those for the wider Group. The Committee was informed by the Executive Directors that exceptionally they would not be drawing the increase granted for 2014/15 in order to demonstrate their understanding of the fi nancial austerity still affecting the UK Government as the Company's principal customer. The Committee welcomed that one-year restraint, and agreed that the increase it had made for 2014/15 (2.5%) would be included in the baseline for their next review in 2015.
| Director | Salary 2013/14 £ |
Salary 2014/15 £ |
% increase |
|---|---|---|---|
| Peter Rogers | 611,871 | 611,871 | 0% |
| Bill Tame | 387,331 | 387,331 | 0% |
| Archie Bethel | 336,810 | 336,810 | 0% |
| Kevin Thomas | 336,810 | 336,810 | 0% |
| John Davies | 321,810 | 321,810 | 0% |
As noted above, when reviewing Executive Directors' remuneration, the Committee takes note of proposals for pay in the wider Group. Each business within the Group determines its own pay structures and remuneration in light of its own position and the employment market in which it operates. The overall average salary increases for employees generally for the year to 31 March 2015 is expected to be in the order of 2.5% (with individual increases signifi cantly above this amount in some cases) dependent on business and personal performance and local market conditions.
The Executive Directors, other than John Davies, did not participate in a Group pension scheme or otherwise receive pension benefi ts from the Group for service during the year to 31 March 2014. These Executive Directors received a cash supplement equal to 25% of their base salary in lieu of pension benefi ts. There are no additional early retirement benefi ts.
John Davies is a member of the Babcock International Group Pension Scheme. During the year to 31 March 2014, he received a cash supplement equal to £36k in lieu of pension benefi ts on that part of his base salary as exceeded the applicable scheme earnings cap.
Supplements paid in lieu of pension do not count for pension, share award or bonus purposes.
Bill Tame was a member of the senior executive tier of the Scheme until 30 September 2011. Archie Bethel and Kevin Thomas were members of the executive tier of the Scheme until 31 March 2012. All three Directors are no longer active members of the Scheme. Whilst still members of the Scheme, Bill Tame accrued benefi ts at the rate of one-thirtieth, and for Archie Bethel and Kevin Thomas at the rate of one-forty-fi fth, of pensionable salary for each year of service.
John Davies is a member of the VT Upper Section Ex-Short Brothers section of the Scheme. He accrues benefi ts on earnings up to the scheme earnings cap (currently £141,000) at the rate of one-sixtieth of pensionable salary for each year of service.
Pension entitlements under the Scheme (defi ned benefi t) for the year to 31 March 2014 are set out in the following table:
| Director | Accrued pension at 31 March 2014 £ p.a. |
Normal retirement date1 |
|---|---|---|
| Bill Tame2 | 45,532 | 60 |
| Archie Bethel2 | 37,657 | 65 |
| Kevin Thomas2 | 60,484 | 65 |
| John Davies | 50,254 | 65 |
Date from which payment can be drawn with no actuarial reduction.
Bill Tame, Archie Bethel and Kevin Thomas were not active members of the scheme during the year.
Note: The fi gures in the above table make no allowance for the cost of death in service benefi ts under the Scheme, or for any benefi ts in respect of earnings in excess of the earnings cap. In calculating the above fi gures no account has been taken of any retained benefi ts that the Director may have from previous employments.
Directors also benefi t from life assurance cover of four times base salary. The cost of providing that life assurance cover was:
| Director | 2014 £000 |
2013 £000 |
|---|---|---|
| Bill Tame | 3 | 3 |
| Archie Bethel | 3 | 2 |
| Kevin Thomas | 3 | 2 |
| John Davies (appointed 1 January 2013) | 2 | 0.5 |
Governance
For our Executive Directors' annual bonus schemes in 2013/14, as in previous years, a mix of fi nancial and non-fi nancial measures was used. The non-fi nancial measures were principally based on the key themes that are of central importance to the continued success of the Company, including: reputation protection; growth; security; employee engagement and talent development; and IT systems improvement. Maintaining a satisfactory health and safety and environmental performance is always an overriding bonus objective. The fi nancial measures were focused on delivery of budget profi tability, cash management and growth in earnings. Objectives for the 2013/14 bonus were set by the Committee at the beginning of the year.
The table below sets out the annual bonus schemes in place for the Executive Directors and the outturn under them in 2013/14.
| Bonus element | Threshold target |
Maximum target |
Actual outturn | Peter Rogers |
Bill Tame |
Archie Bethel |
Kevin Thomas |
John Davies |
|
|---|---|---|---|---|---|---|---|---|---|
| EPS1 performance Stretching targets, with a sliding scale |
Maximum potential (% of salary) |
90% | 90% | 70% | 70% | 70% | |||
| between threshold and maximum |
63.8p | 70.9p | 70.3p | Outturn (% of salary) | 81% | 81% | 63% | 63% | 63% |
| Maximum potential (% of salary) |
15% | 15% | |||||||
| Achieving budgeted Group cash fl ow |
96% of budget |
Budget (£218m) |
£268m | Outturn (% of salary) | 15% | 15% | |||
| Maximum potential (% of salary) |
15% | 15% | |||||||
| Achieving budgeted Group PBT2 |
96% of budget |
Budget (£293m) |
£316m | Outturn (% of salary) | 15% | 15% | |||
| Maximum potential (% of salary) |
15% | 15% | 15% | ||||||
| Achieving budgeted Divisional cash fl ow |
96% of budget |
Budget3 | Exceeded budget | Outturn (% of salary) | 15% | 15% | 15% | ||
| Maximum potential (% of salary) |
15% | 15% | 15% | ||||||
| Achieving budgeted Divisional PBIT2 |
96% of budget |
Budget3 | Exceeded budget | Outturn (% of salary) | 15% | 15% | 15% | ||
| Maximum potential (% of salary) |
30% | 30% | 25% | 25% | 25% | ||||
| Non-fi nancial objectives4 | Outturn (% of salary) | 28% | 28% | 22% | 25% | 22% | |||
| Maximum potential (% of salary) |
150% | 150% | 125% | 125% | 125% | ||||
| Total | Outturn (% of salary) | 139% | 139% | 115% | 118% | 115% |
Threshold vesting is 20% of maximum for each bonus element except for EPS performance, where 18% of maximum vests at threshold.
Before amortisation of acquired intangibles. The treatment of exceptional items is at the discretion of the Committee.
The Remuneration Committee considers that the divisional budgets remain commercially sensitive given the strategic nature of some of our customers or their activities and they would also be of assistance to competitors, and will not be published.
Non-fi nancial objectives were set around the following priority strategic and risk management themes: Reputation (with customers and investors, including specifi ed improved strategic and customer engagement objectives, anti-bribery and corruption training and review of policies and procedures); Growth (relating to strategy planning and development, progress against existing strategic plans particularly for territories outside the UK, specifi c bidding targets and objectives, win rates, development and leveraging of identifi ed strategic partnerships, organisational and management changes to support growth and strategic objectives); Employees (developing or progressing employee engagement, communications and cultural initiatives, for example in connection with diversity; talent identifi cation, development and succession planning initiatives and programmes, developing graduate and apprentice strategies and relationships with universities); Process improvements (for example in IT, IT strategy, management information systems, cyber-security and information assurance objectives). The actual objectives set are considered by the Board to be commercially sensitive relating as they do to customer relationships, specifi c bids, specifi c strategic steps or objectives, security measures and personnel issues or they are effectively discussed elsewhere in this Annual Report.
For our annual bonus schemes for 2014/15 we are continuing to use the structure adopted in 2013/14 as set out in the table above. Bonuses will be based on the same measures and weightings as those used in 2013/14. The Committee intends
to disclose fi nancial performance targets and personal objectives retrospectively in next year's Annual Report on Remuneration, subject to these no longer being considered by the Board to be commercially sensitive.
Governance
The weighting of the elements of bonus is kept under review and, in particular, the weighting for non-fi nancial objectives for the annual bonus scheme for 2015/16 and future years is a matter the Committee will be considering during the current fi nancial year.
To ensure that a substantial part of the Director's annual bonus is exposed to the longer term impact of decision-making and to further align their interests with shareholders, 40% of any annual bonus earned by Executive Directors (and other senior executives) must be deferred into Babcock shares (by means of an award of nil-cost options). Under the Deferred Bonus Plan (applicable to deferred bonus awards made to Directors before 2012) the deferral period was two years. From 2012 deferred awards have been made to Directors under the Deferred Bonus Matching Plan (DBMP) under which the deferral period is three years. In addition to mandatory deferral of 40% of bonus the DBMP allows for Directors to be invited to make a voluntary
additional investment (including by way of accepting deferral of extra amounts of bonus) of an amount equal to up to 40% of salary. Both mandatorily deferred and voluntary investments are eligible for matching share awards of up to a 2 for 1 match. The Committee granted performance-related matching awards under the DBMP to Directors on the amount of bonus for 2012/13 mandatorily or voluntarily deferred into share awards under that scheme and will be doing the same in respect of bonus mandatorily or voluntarily deferred into share awards for 2013/14. The performance conditions relating to matching awards made in 2013 and those proposed for matching awards to be made in 2014 are discussed on pages 104 and 105. Bonuses mandatorily deferred into shares in 2010 and 2011 did not have any associated matching share awards. Deferred annual bonus awards are subject to potential forfeiture if the holder leaves before the awards vest (other than by reason of death, disability, redundancy, retirement or the company or business in which they are employed ceasing to be part of the Group).
| Director | Basis | Face value (£)1 |
Face value (% of salary) |
% receivable for threshold performance |
End of performance period |
|---|---|---|---|---|---|
| Peter Rogers | 1,223,744 | 200% | 16.7% | 31 March 2016 | |
| Bill Tame | As per the Policy. | 580,998 | 150% | 16.7% | 31 March 2016 |
| Archie Bethel | Performance | 505,215 | 150% | 16.7% | 31 March 2016 |
| Kevin Thomas | measures and targets are set out below |
505,215 | 150% | 16.7% | 31 March 2016 |
| John Davies | 482,715 | 150% | 16.7% | 31 March 2016 |
* In the form of nil-cost options.
In 2013, PSP awards were made to each of the Executive Directors. Awards were made over shares having a total value on grant equal to 200% of basic salary for Peter Rogers and 150% of salary for the other Executive Directors. The performance targets attached to those awards – split equally between TSR performance relative to the peer group and real EPS growth – are illustrated in the charts below:
Note: real EPS growth is that in excess of the change in the UK retail prices index. TSR comparators are the companies comprised in the FTSE 350 (excluding investment trusts and fi nancial services companies).
Threshold vesting (16.7% of this element) for the EPS element was set at real growth of 4% per annum and maximum vesting at real growth of 11% per annum. We believe that real growth of 11% would represent exceptional performance. For the comparative TSR element, threshold vesting (16.7% of this
element) would be for performance in line with the median of the FTSE 350 (excluding investment trusts and fi nancial services companies) and maximum vesting would be for 9% p.a. outperformance of the median, representing upper quartile performance.
| Director | Basis | Face value (£)1 |
Face value (% of salary) |
% receivable for threshold performance |
End of performance period |
|---|---|---|---|---|---|
| Peter Rogers | 1,115,964 | 182% | 12.5% | 31 March 2016 | |
| Bill Tame | As per the Policy. | 582,156 | 150% | 12.5% | 31 March 2016 |
| Archie Bethel | Performance | 553,110 | 164% | 12.5% | 31 March 2016 |
| Kevin Thomas | measures and targets are set out below |
553,110 | 164% | 12.5% | 31 March 2016 |
| John Davies | 542,370 | 169% | 12.5% | 31 March 2016 |
* In the form of nil-cost options.
The DBMP allows the Committee to make matching share awards of up to two times the deferred bonus shares (40% of bonus) and any additional shares or extra bonus deferral self-invested under the scheme by the Director (of an amount equal to up to 40% of salary). The matching share award is performance-related and only vests to the extent that the performance criteria are met in respect of the three-year
performance period. For the 2013 cycle, the performance period runs from 1 April 2013 to 31 March 2016, the same as for PSP awards made in 2013. The performance targets attached to those awards – split equally between TSR performance relative to the peer group, real EPS growth, and average return on capital employed (ROCE) over the period – are illustrated in the charts below:
The target for maximum vesting is ROCE of 23.5% and for threshold vesting it is 21.5%. The maximum match is 2 for 1 on any shares held under the plan; 0.25 matching shares would be released for each such share at threshold vesting. Therefore for each measure, threshold vesting would be a (0.25/3) for 1 match (4.2% of maximum) and maximum vesting would be a (2/3) for 1 match (33% of maximum).
For 2013/14 Executive Directors received awards in lieu of mandatorily and voluntarily deferred bonus and matching awards (in respect of the 2012/13 bonus) as follows:
| Director | Deferred annual bonus (mandatorily deferred bonus) no of shares |
Voluntarily Deferral Awards (no of shares) |
Total shares invested in the DBMP |
Potential Maximum number of matching shares |
|---|---|---|---|---|
| Peter Rogers | 28,353 | 19,093 | 47,446 | 94,894 |
| Bill Tame | 17,948 | 6,802 | 24,750 | 49,502 |
| Archie Bethel | 13,006 | 10,510 | 23,516 | 47,032 |
| Kevin Thomas | 13,006 | 10,510 | 23,516 | 47,032 |
| John Davies | 12,753 | 10,306 | 23,059 | 46,119 |
Awards granted in 2011 under the PSP were subject to 3-year TSR and EPS targets outlined on page 106. 3-year TSR to 31 March 2014 was 15% p.a. above median TSR for the FTSE 350 (excluding investment trusts and fi nancial services). Babcock's 3-year adjusted basic underlying EPS growth to 31 March 2014 was 11.1% p.a. in excess of RPI (historical EPS numbers were restated to ensure they were on the same accounting basis). Accordingly, 2011 PSP awards are expected to vest in June 2014 as to 94.7% for Peter Rogers and 93.0% for other Executive Directors.
| Director | Award | Number expected to vest |
|---|---|---|
| Peter Rogers | PSP 2011 | 149,598 |
| PSP 2011 | 66,757 | |
| PSP 2011 Funding1 | TBC1 | |
| Bill Tame | CSOP 2011 | 3,217 |
| Archie Bethel | PSP 2011 | 60,651 |
| Kevin Thomas | PSP 2011 | 60,651 |
| John Davies | PSP 2011 | 45,489 |
The Committee intends to grant awards under the PSP and DBMP with the same maximum opportunities and performance measures as in 2013. EPS targets for the 2014 PSP and DBMP
awards will vest from RPI +4% p.a. to RPI +11% p.a. over three years; TSR targets for the 2014 PSP and DBMP awards will vest between median and median +9% relative to the peer group; ROCE targets for the DBMP, however, will be set later in the year.
As mentioned in the circular issued by the Company on 27 March 2014 relating to the acquisition of the Avincis Group, the acquisition is only expected to achieve a return on invested capital in excess of the Company's current cost of capital from the second full fi nancial year following the acquisition. However, this level of return, while value-creating for the business as a whole, is below Babcock's current ROCE. The Committee believes it is important to ensure that the performance of Babcock and the acquired business is taken into account for 2014 DBMP awards, and as such, the relevant ROCE targets will be reviewed during the year and set to ensure they are commensurate with those set in previous years. The Committee will communicate the targets in next year's report.
Shares needed to satisfy share awards for Directors are either fresh issue shares issued to the Group's employee share trusts to meet share awards or shares purchased in the market by the trusts using funds advanced by the Company. The source selection is fi nalised on or before vesting, the choice being based on what the Board considers to be in the best interests of the Company at the time, and what is permissible within available headroom and dilution limits.
The following tables summarise the performance targets (if applicable) and other information about the schemes relevant to currently outstanding share awards held by Executive Directors (i.e. those awards yet to vest) and those that vested during the year to 31 March 2014 (the awards made in 2010 under the PSP and the CSOP and the DBP awards made in 2011).
| Scheme | Performance Share Plan (nil price options) and Company Share Option Plan (market price options) – 2010–2013 awards |
|---|---|
| Performance period | For the 2010 awards: 1 April 2010 to 31 March 2013. (Vested in July 2013 as to 58.8% for Peter Rogers and 78.4% for other Executive Directors) |
| For the 2011 awards: 1 April 2011 to 31 March 2014. (Expected to vest in June 2014 as to 94.7% for Peter Rogers and 93.0% for other Executive Directors) |
|
| For the 2012 awards: 1 April 2012 to 31 March 2015. | |
| For the 2013 awards: 1 April 2013 to 31 March 2016. | |
| Proportion of total award | ||||||||
|---|---|---|---|---|---|---|---|---|
| General performance target | EPS growth test | Comparative TSR test | that can vest | |||||
| Maximum | Real compound annual growth | Outperformance of the median | 50% | |||||
| of 12.5% (2010-2012)/ | TSR performance for the peer | |||||||
| 11% (2013) or more | group taken as a whole by 9% | |||||||
| or more | ||||||||
| Threshold | Real compound annual growth | TSR performance equivalent to | 8.3% | |||||
| of 4% | the median for the peer group as | |||||||
| a whole | ||||||||
| Intermediate growth between the | Intermediate ranking between | Straight–line basis between 8.3% | ||||||
| above points | the above points | and 50% | ||||||
| Real compound annual growth of | Performance less than equivalent | 0% | ||||||
| less than 4% | to median for the whole | |||||||
| peer group | ||||||||
| Chief Executive's | If comparative TSR performance exceeded median TSR performance for the peer group taken as a whole | |||||||
| additional award in | by more than 9% per annum further shares vest, with full vesting of this additional award for more than | |||||||
| 2010 and 2011 | 12.5% per annum. This will affect the relative proportion of the award vesting in his case. For 2010, none | |||||||
| over shares equal to a | of the additional award vested. The 2011 additional award is expected to vest in full. | |||||||
| further 50% of salary | ||||||||
| TSR comparator group | For the TSR element the peer group is the FTSE 350 (excluding investment trusts and fi nancial services). | |||||||
| This group was chosen after careful review due to the fact that Babcock's closest peers straddle multiple | ||||||||
| sectors, not just support services, and the broader group makes the calibration more robust. | ||||||||
| Other information | The awards are not subject to re-testing. The TSR element will vest only to the extent the Committee is | |||||||
| satisfi ed that the recorded TSR is a genuine refl ection of the underlying performance of the Company over | ||||||||
| the performance period. | ||||||||
| EPS is adjusted to exclude acquired intangible amortisation, but, unless the Committee decides otherwise | ||||||||
| in respect of any item, is after exceptional items. Real EPS growth is that in excess of the change in the | ||||||||
| retail prices index. | ||||||||
| The awards carry the right to receive on vesting a payment equal to the value of any dividends paid in the | ||||||||
| period between grant and vesting but this right applies only to the shares that actually vest under the award. Exercise periods commence not less than three years from actual or nominal award grant date. |
||||||||
| CSOP and PSP awards are linked so that in aggregate the holder cannot receive more gross value from | ||||||||
| them than a standalone PSP award of shares equal to the relevant award multiple of the Director's | ||||||||
| base salary. |
| Scheme | Deferred Bonus Plan awards (nil price options) 2011; Deferred Bonus Matching Plan deferred annual bonus and voluntary deferral awards (nil price options) 2012 and 2013: |
|---|---|
| Performance period | Not applicable: these awards represent amounts of annual bonus mandatorily (DBP) and/or mandatorily and voluntarily (DBMP) deferred into awards. Awards under the DBP vest and become exercisable two years, those under the DBMP three years, after the date of grant. The DBP awards made in 2011 vested in July 2013. |
| Other information | Deferred annual bonus awards are subject to potential forfeiture if the holder leaves before the awards vest (other than by reason of death, disability, redundancy, retirement or the company or business in which they are employed ceasing to be part of the Group). |
| The number of shares into which bonus has been mandatorily deferred may be reduced by the Committee if the accounts by reference to which the bonus was calculated have to be materially corrected or if, in the opinion of the Committee, there is evidence that performance against performance conditions in the bonus year or the impact of that performance on the Group in respect of future fi nancial years was or will be materially worse than was believed to be the case at the time of the original assessment. |
|
| The shares carry the right to dividends in the period of deferral, but payable only when the shares are released. |
|
| Scheme | Deferred Bonus Matching Plan (nil price options) 2012 and 2013 matching awards |
| Performance period | For the 2012 awards: 1 April 2012 to 31 March 2015. |
|---|---|
| For the 2013 awards: 1 April 2013 to 31 March 2016. |
| General Performance target | EPS growth test | Comparative TSR test | ROCE test | Match that can vest under each measure |
|||
|---|---|---|---|---|---|---|---|
| Maximum | Real compound annual growth of 12.5% (2012)/11% (2013) or more |
Outperformance of the median TSR performance for the peer group taken as a whole by 9% or more |
ROCE of 20.5% (2012)/ 23.5% (2013) or more |
0.33x maximum | |||
| Threshold | Real compound annual growth of 4% |
TSR performance equivalent to the median for the peer group as a whole |
ROCE of 17.5% (2012)/ 21.5% (2013) |
0.042x maximum | |||
| Intermediate growth between the above points |
Intermediate ranking between the above points |
Intermediate ROCE between the above points |
Straight–line basis between 0.042x and 0.33x maximum |
||||
| Real compound annual growth of less than 4% |
Performance less than equivalent to median for the whole peer group |
ROCE of less than 17.5% (2012)/21.5% (2013) |
0x | ||||
| TSR comparator group | For the TSR element the peer group is the FTSE 350 (excluding investment trusts and fi nancial services). This group was chosen after careful review due to the fact that Babcock's closest peers straddle multiple sectors, not just support services, and the broader group makes the calibration more robust. |
||||||
| Other information | Matching awards are not subject to re-testing. The TSR element will vest only to the extent the Committee is satisfi ed that the recorded TSR is a genuine refl ection of the underlying performance of the Company over the performance period. |
||||||
| EPS is adjusted to exclude acquired intangible amortisation, but, unless the Committee decides otherwise in respect of any item, is after exceptional items. Real EPS growth is that in excess of the change in the retail prices index. |
|||||||
| ROCE is underlying Earnings Before Interest and Tax ('EBIT') after amortisation of acquired intangibles but before exceptional items and including IFRIC 12 investment income and the Group's share of the EBIT of JVs, as a percentage of Average Capital Employed where Capital Employed is calculated as Total Shareholders' Equity plus Net Debt (or minus Net Funds), as stated in the Company's consolidated audited accounts for the relevant Financial Year; and Average Capital Employed will be calculated as the average of the opening and closing value of Capital Employed for each year of the Performance Period. |
|||||||
| The awards carry the right to receive on vesting a payment equal to the value of any dividends paid in the period between grant and vesting but this right applies only to the shares that actually vest under the award. Exercise periods commence not less than three years from actual or nominal award grant date. |
Governance
The Committee links the remuneration of executives to the long-term interests of shareholders and key strategic and risk management objectives by the performance criteria it uses in the annual bonus and long-term incentive schemes. Examples include the following:
| Strategic Objective (SO)/Risk (R) | Annual bonus scheme metric | Long-term incentive metric |
|---|---|---|
| SO/R: Delivering superior and sustainable value for our shareholders, whilst balancing risk and reward. |
Financial measures focused on annual delivery of sustainable earnings and/or profi ts with stretch targets, whilst |
Incentivising delivery of top quartile shareholder returns and earnings growth over the longer term. |
| maintaining strict control of cash. | Long-term measures and deferral of signifi cant part of annual bonus to guard against short-term steps being taken to maximise annual rewards at the expense of future performance. |
|
| SO: Growth. | Setting challenging budgets and stretch targets, as well as non-fi nancial measures specifi cally aimed at: |
|
| – laying the foundations for sustainable growth in specifi c geographical and existing and new business markets; |
||
| – winning key bids and re-bids; | ||
| – fostering strategically important partnering arrangements. |
||
| SO: Developing and maintaining leading | Specifi c non-fi nancial objectives for: | |
| market positions in the UK and selected overseas markets. |
– progressing plans for entry into or expansion in targeted domestic and overseas markets; |
|
| – securing key business development milestones. |
||
| SO: Building and maintaining customer | Objectives linked to: | |
| focused, long-term relationships with strategically important customers. |
– customer satisfaction; | |
| R: Loss of business reputation, poor contract performance. |
– continuing improvement of management processes; |
|
| – meeting and planning for existing and future customer expectations on capability and compliance, for example, in the fi eld of security and information assurance. |
||
| SO/R: Ensuring the Group will continue to retain and attract the suitably qualifi ed and experienced people it needs to |
Non-fi nancial objectives linked to talent development and succession planning, and fostering employee engagement. |
Retentive nature of the long-term schemes. |
| deliver its growth and strategic plans, maintain and develop its technical and management expertise. |
Retentive nature of the requirement for deferral into shares of 40% of annual bonuses earned by senior executives. |
|
| SO/R: Maintenance of an excellent health, safety and environmental record. |
Overriding health, safety and environmental performance criterion in annual bonus schemes. |
No exit payments were made to Executive Directors during the year under review.
No payments were made to past Directors in the year.
The Chairman and Non-Executive Directors receive fi xed fees. These fees are reviewed against market practice from time to time (by the Chairman and the Executive Directors in the case of the Non-Executive Director fees and by the Remuneration Committee in respect of the fees payable to the Chairman). The fees were last reviewed as of 1 April 2013.
| Annual rate of fees | Year to 31 March 2015 £ |
Year to 31 March 2014 £ |
|---|---|---|
| Chairman | 295,000 | 295,000 |
| Senior Independent Director (inclusive of basic fee) |
65,000 | 65,000 |
| Basic Non-Executive Director's fee | 55,000 | 55,000 |
| Chairmanship of Audit and Risk Committee1 |
12,500 | 12,500 |
| Chairmanship of Remuneration Committee1 |
12,500 | 12,500 |
Percentage change in CEO remuneration
The table below shows the percentage change in CEO remuneration from the prior year compared to the average percentage change in remuneration for other employees. The analysis is based on UK employees as they are operating in the same geography and economic background as the CEO.
| % change 2012/13 | ||
|---|---|---|
| to 2013/14 | ||
| Other | ||
| CEO | employees | |
| Base salary | 9% | 2.4% |
| Taxable benefi ts | 75%1 | 4.5% |
| Single-year variable | 2.3% | 4.2% |
| 2012/13 | 2013-14 | % change | |
|---|---|---|---|
| Distribution to shareholders | £94m | £107m | 13% |
| Employee remuneration | £1,065m | £1,151m | 8% |
The following graph shows the TSR (Total Shareholder Return) for the Company compared to the FTSE100 Index and FTSE350 Support Services Index, assuming £100 was invested on 31 March 2009 (investment in the Company was worth £346 on 31 March 2014). The Board considers that these indices currently represent the most appropriate of the published indices for these purposes as it provides a view of performance against the broad equity market and sector index of which the Company is a constituent. The table below details the CEO's single fi gure remuneration and actual variable pay outcomes over the same period.
| 2009/10 | 2010/11 | 2011/12 | 2012/13 | 2013/14 | |
|---|---|---|---|---|---|
| Single fi gure (£k) | 1,706 | 1,792 | 2,185 | 2,731 | 3,603 |
| Bonus vesting (% max) | 97% | 98% | 99% | 99% | 93% |
| DBMP matching shares vesting (% max) | n/a | n/a | n/a | n/a | n/a |
| PSP/CSOP vesting (% max) | 100% | 82.9% | 57.8% | 58.8% | 94.7% |
The interests of the Directors (and/or their spouses) in the ordinary shares of the Company as at 31 March 2014, and Directors' interests in shares and options under Babcock's long-term incentives are set out in the sections below:
| At 31 March 2013 |
At 31 March 2014 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Shares held | Shares held | Options held | |||||||
| Owned outright by |
Owned outright by |
Vested but subject to |
Vested | Unvested and subject to |
Unvested and subject to |
S/holding | Current | ||
| Director | director or spouse1 |
director or spouse1 |
holding period |
but not exercised |
performance conditions |
continued employment |
req. (% salary) |
shareholding (% of salary)2 |
Req. met?2 |
| Peter Rogers | 710,535 | 889,639 | 45,056 | 0 | 612,145 | 65,786 | 300% | 2,093% | ü |
| Bill Tame | 362,927 | 451,645 | 6,802 | 0 | 285,269 | 41,644 | 200% | 1,660% | ü |
| Archie Bethel | 124,304 | 194,197 | 24,802 | 0 | 271,312 | 30,350 | 200% | 894% | ü |
| Kevin Thomas | 84,149 | 168,150 | 24,802 | 0 | 273,260 | 30,350 | 200% | 789% | ü |
| John Davies | 18,962 | 18,962 | 10,306 | 59,145 | 204,838 | 25,761 | 200% | 300% | ü |
| Mike Turner | 40,000 | 40,000 | |||||||
| Justin Crookenden | 11,647 | 11,647 | |||||||
| David Omand | 0 | 0 | |||||||
| Ian Duncan | 0 | 0 | |||||||
| Kate Swann | 5,000 | 5,000 | |||||||
| Anna Stewart | 0 | 0 |
Benefi cially held shares.
Current shareholdings for comparison with the shareholding requirements for Executive Directors is calculated based on shares owned outright by Director or spouse, options vested but subject to holding periods, options vested but not exercised and options unvested and subject to continued employment, valued assuming exercise of options on 31 March 2014 and calculated post-tax.
Disclosure of these shareholdings in next year's annual report will refl ect the rights issue which completed during May 2014.
There have been changes to directors' (or their spouses') shareholdings between 31 March 2014 and 19 May 2014 as a result of taking up of rights in the Rights Issue made by the Company as announced on 27 March 2014.
| Shares owned outright by director or spouse |
|||
|---|---|---|---|
| Director | At 31 March 2014 |
At 19 May 2014 |
|
| Peter Rogers | 889,639 | 1,231,807 | |
| Bill Tame | 451,645 | 526,929 | |
| Archie Bethel | 194,197 | 262,063 | |
| Kevin Thomas | 168,150 | 230,081 | |
| John Davies | 18,962 | 26,255 | |
| Mike Turner | 40,000 | 55,384 | |
| Justin Crookenden | 11,647 | 16,126 | |
| David Omand | 0 | 0 | |
| Ian Duncan | 0 | 0 | |
| Kate Swann | 5,000 | 6,923 | |
| Anna Stewart | 0 | 0 |
The table below shows the various share awards held by Directors under the Company's various share schemes. The Company's mid-market share price at close of business on 31 March 2014 was 1,347p. The highest and lowest mid-market share prices in the year ended 31 March 2014 were 1,471p and 1,027p, respectively.
| Number of shares subject to award at |
Granted | Exercised | Lapsed | Number of shares subject to award at |
Exercise | Market value of each share at date |
||||
|---|---|---|---|---|---|---|---|---|---|---|
| Director | Scheme1 and year of award |
1 April 2013 |
during the year |
during the year |
during the year |
31 March 2014 |
price (pence)2 |
of award (pence) |
Exercisable from3 |
Expiry date4 |
| Peter | L-TIP 2008 | 65,596 | 65,596a | 0 | 594.33 June 2011 | Jun 2018 | ||||
| Rogers | PSP 2009 | 76,327 | 76,327a | 0 | 544.67 | Jul 2012 | Jul 2014 | |||
| PSP (A) 20105,6 | 156,494 | 90,024a | 66,470 | 0 | 619.83 | Jul 2013 | Jul 2014 | |||
| PSP(B) 20105.5A,6 | 4,840 | 2,509a | 2,331 | 0 | 619.83 | July 2013 | Jul 2014 | |||
| CSOP 20105,6 | 4,840 | 4,840a | 0 | 619.83 | 619.83 | Jul 2013 | Jul 2020 | |||
| DBP 2010 | 45,023 | 45,023a | 0 | 619.83 | Jul 2012 | Jul 2014 | ||||
| PSP 2011 | 157,971 | 157,971 | 690.00 | Jun 2014 | Jun 2015 | |||||
| DBP 2011 | 42,609 | 42,609a | 0 | 690.00 | Jun 2013 | Jun 2014 | ||||
| PSP 2012 | 32,454 | 32,454 | 864.83 | Jul 2015 | Jul 2016 | |||||
| PSP 2012 | 95,975 | 95,975 | 877.33 | Jun 2015 | Jun 2016 | |||||
| DBMP 2012 | ||||||||||
| (basic award) | 37,433 | 37,433 | 864.83 | Jul 2015 | Jul 2016 | |||||
| DBMP 2012 | ||||||||||
| (basic matching | ||||||||||
| award) | 74,866 | 74,866 | 864.83 | Jul 2015 | Jul 2016 | |||||
| DBMP 2012 (voluntary |
||||||||||
| deferral award) | 25,963 | 25,963 | 864.83 | Jul 2015 | Jul 2016 | |||||
| DBMP 2012 | ||||||||||
| (voluntary deferral | ||||||||||
| matching award) | 51,926 | 51,926 | 864.83 | Jul 2015 | Jul 2016 | |||||
| PSP 2013 | 104,059 | 104,059 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 | ||||||||||
| (basic award) | 28,353 | 28,353 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 | ||||||||||
| (basic matching award) |
56,707 | 56,707 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 | ||||||||||
| (voluntary | ||||||||||
| deferral award) | 19,093 | 19,093 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 | ||||||||||
| (voluntary deferral | ||||||||||
| matching award) | 38,187 | 38,187 | 1,176.00 | Jun 2016 | Jun 2017 |
a. Market value of each share at date of exercise (9 August 2013) = 1,197p.
| Director | Scheme1 and year of award |
Number of shares subject to award at 1 April 2013 |
Granted during the year |
Exercised during the year |
Lapsed during the year |
Number of shares subject to award at 31 March 2014 |
Exercise price (pence)2 |
Market value of each share at date of award (pence) |
Exercisable from3 |
Expiry date4 |
|---|---|---|---|---|---|---|---|---|---|---|
| Bill | PSP 2009 | 49,664 | 49,664a | 0 | 544.67 | Jul 2012 | Jul 2014 | |||
| Tame | PSP (A) 2010 | 76,182 | 59,454a | 16,728 | 0 | 619.83 | Jul 2013 | Jul 2014 | ||
| PSP (B) 2010 | 1,258 | 652a | 606 | 0 | 619.83 | Jul 2013 | Jul 2014 | |||
| CSOP 2010 | 1,258 | 1,258a | 0 | 619.83 | 619.83 | Jul 2013 | Jul 2020 | |||
| DBP 2010 | 29,598 | 29,598a | 0 | 619.83 | Jul 2012 | Jul 2014 | ||||
| PSP (A) 2011 | 71,782 | 71,782 | 690.00 | Jun 2014 | Jun 2015 | |||||
| PSP (B) 2011 | 3,217 | 3,217 | 690.00 | Jun 2014 | Jun 2015 | |||||
| CSOP 2011 | 3,217 | 3,217 | 690.00 | 690.00 | Jun 2014 | Jun 2021 | ||||
| DBP 2011 | 27,270 | 27,270a | 0 | 690.00 | Jun 2013 | Jun 2014 | ||||
| PSP 2012 | 60,755 | 60,755 | 877.33 | Jun 2015 | Jun 2016 | |||||
| DBMP 2012 | ||||||||||
| (basic award) DBMP 2012 (basic matching |
23,696 | 23,696 | 864.83 | Jul 2015 | Jul 2016 | |||||
| award) | 47,392 | 47,392 | 864.83 | Jul 2015 | Jul 2016 | |||||
| PSP 2013 | 49,404 | 49,404 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (basic award) |
17,948 | 17,948 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (basic matching award) |
35,897 | 35,897 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (voluntary deferral award) |
6,802 | 6,802 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (voluntary deferral matching award) |
13,605 | 13,605 | 1,176.00 | Jun 2016 | Jun 2017 |
a. Market value of each share at date of exercise (9 August 2013) = 1,197p.
| Director | Scheme1 and year of award |
Number of shares subject to award at 1 April 2013 |
Granted during the year |
Exercised during the year |
Lapsed during the year |
Number of shares subject to award at 31 March 2014 |
Exercise price (pence)2 |
Market value of each share at date of award (pence) |
Exercisable from3 |
Expiry date4 |
|---|---|---|---|---|---|---|---|---|---|---|
| Archie | PSP (A) 2009 | 33,810 | 33,810a | 0 | 544.67 | Jul 2012 | Jul 2014 | |||
| Bethel | PSP (B) 200 | 5,507 | 2,550a | 2,957 | 0 | 544.67 | Jul 2012 | Jul 2014 | ||
| CSOP 20095 | 5,507 | 5,507a | 0 | 544.67 | 544.67 | Sep 2012 | Sep 2019 | |||
| PSP 2010 | 66,550 | 52,175a | 14,375 | 0 | 619.83 | Jul 2013 | Jul 2014 | |||
| DBP 2010 | 19,128 | 19,128a | 0 | 619.83 | Jul 2012 | Jul 2014 | ||||
| PSP 2011 | 65,217 | 65,217 | 690.00 | Jun 2014 | Jun 2015 | |||||
| DBP 2011 | 18,939 | 18,939a | 0 | 690.00 | Jun 2013 | Jun 2014 | ||||
| PSP 2012 | 52,831 | 52,831 | 877.33 | Jun 2015 | Jun 2016 | |||||
| DBMP 2012 (basic award) |
17,344 | 17,344 | 864.83 | Jul 2015 | Jul 2016 | |||||
| DBMP 2012 (basic matching award) |
34,688 | 34,688 | 864.83 | Jul 2015 | Jul 2016 | |||||
| DBMP 2012 (voluntary deferral award) |
14,292 | 14,292 | 864.83 | Jul 2015 | Jul 2016 | |||||
| DBMP 2012 (voluntary deferral |
||||||||||
| matching award) PSP 2013 |
28,584 | 42,960 | 28,584 42,960 |
864.83 1,176.00 |
Jul 2015 Jun 2016 |
Jul 2016 Jun 2017 |
||||
| DBMP 2013 | ||||||||||
| (basic award) | 13,006 | 13,006 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (basic matching |
||||||||||
| award) | 26,012 | 26,012 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (voluntary deferral award) |
10,510 | 10,510 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (voluntary deferral |
||||||||||
| matching award) | 21,020 | 21,020 | 1,176.00 | Jun 2016 | Jun 2017 |
a. Market value of each share at date of exercise (14 August 2013) = 1,177p.
| Director | Scheme1 and year of award |
Number of shares subject to award at 1 April 2013 |
Granted during the year |
Exercised during the year |
Lapsed during the year |
Number of shares subject to award at 31 March 2014 |
Exercise price (pence)2 |
Market value of each share at date of award (pence) |
Exercisable from3 |
Expiry date4 |
|---|---|---|---|---|---|---|---|---|---|---|
| Kevin | L-TIP 2008 | 31,786 | 31,786a | 0 | 594.33 | Jun 2011 | Jun 2018 | |||
| Thomas | PSP (A) 2009 | 34,641 | 34,641a | 0 | 544.67 | Jul 2012 | Jul 2014 | |||
| PSP (B)2009 | 2,368 | 1,096a | 1,272 | 0 | 544.67 | Jul 2012 | Jul 2014 | |||
| CSOP 2009 | 2,368 | 2,368a | 0 | 544.67 | 544.67 | Sep 2012 | Sep 2019 | |||
| PSP 2010 | 66,550 | 52,175a | 14,375 | 0 | 619.83 | Jul 2013 | Jul 2014 | |||
| DBP 2010 | 17,825 | 17,825a | 0 | 619.83 | Jul 2012 | Jul 2014 | ||||
| PSP 2011 | 65,217 | 65,217 | 690.00 | Jun 2014 | Jun 2015 | |||||
| DBP 2011 | 18,939 | 18,939a | 0 | 690.00 | Jun 2013 | Jun 2014 | ||||
| PSP (A) 2012 | 50,881 | 50,881 | 877.33 | Jun 2015 | Jun 2016 | |||||
| PSP (B) 2012 | 1,949 | 1.949 | 877.33 | Jun 2015 | Jun 2016 | |||||
| CSOP 2012 | 1,949 | 1,949 | 877.33 | 877.33 | Jun 2015 | Jun 2022 | ||||
| DBMP 2012 (basic award) |
17,344 | 17,344 | 864.83 | Jul 2015 | Jul 2016 | |||||
| DBMP 2012 (basic matching award) |
34,688 | 34,688 | 864.83 | Jul 2015 | Jul 2016 | |||||
| DBMP 2012 (voluntary deferral award) |
14,292 | 14,292 | 864.83 | Jul 2015 | Jul 2016 | |||||
| DBMP 2012 (voluntary deferral matching award) |
28,584 | 28,584 | 864.83 | Jul 2015 | Jul 2016 | |||||
| PSP 2013 | 42,960 | 42,960 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (basic award) |
13,006 | 13,006 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (basic matching award) |
26,012 | 26,012 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (voluntary deferral award) |
10,510 | 10,510 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 (voluntary deferral matching award) |
21,020 | 21,020 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
a. Market value of each share at date of exercise (14 August 2013) = 1,177p.
| Number of shares |
Number of shares |
Market value of |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| subject to | subject to | each share | ||||||||
| award at | Granted | Exercised | Lapsed | award at | Exercise | at date | ||||
| Scheme1 and year | 1 April | during | during | during | 31 March | price | of award | Exercisable | ||
| Director | of award | 2013 | the year | the year | the year | 2014 | (pence)2 | (pence) | from3 | Expiry date4 |
| John | PSP (A) 2010 | 45,980 | 10,978 | 35,002 | 619.83 | Jul 2013 | Jul 2014 | |||
| Davies | PSP (B) 20105,5A | 4,840 | 4,840 | 619.83 | Jul 2013 | Jul 2014 | ||||
| CSOP 2010 | 4,840 | 4,840 | 619.83 | 619.83 | Jul 2013 | Jul 2020 | ||||
| PSP 2011 | 48,913 | 48,913 | 690.00 | Jun 2014 | Jun 2015 | |||||
| DBP 2011 | 14,463 | 14,463 | 690.00 | Jun 2013 | Jun 2014 | |||||
| PSP 2012 | 42,743 | 42,743 | 877.33 | Jun 2015 | Jun 2016 | |||||
| DBMP 2012 | ||||||||||
| (basic award) | 13,008 | 13,008 | 864.83 | Jul 2015 | Jul 2016 | |||||
| DBMP 2012 | ||||||||||
| (basic matching | ||||||||||
| awards) | 26,016 | 26,016 | 864.83 | Jul 2015 | Jul 2016 | |||||
| PSP 2013 | 41,047 | 41,047 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 | ||||||||||
| (basic award) | 12,753 | 12,753 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 | ||||||||||
| (basic matching | ||||||||||
| award) | 25,507 | 25,507 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 | ||||||||||
| (voluntary | ||||||||||
| deferral award) | 10,306 | 10,306 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
| DBMP 2013 | ||||||||||
| (voluntary deferral | ||||||||||
| matching award) | 20,612 | 20,612 | 1,176.00 | Jun 2016 | Jun 2017 | |||||
L-TIP = 2003 Long-Term Incentive Plan; PSP = 2009 Performance Share Plan; CSOP = 2009 Company Share Option Plan; DBP = 2009 Deferred Bonus Plan. DBMP = 2012 Deferred Bonus Matching Plan. Further details about these plans and, where applicable, performance conditions attaching to the awards listed are to be found on pages 103 to 107.
The PSP, DBP, DBMP and L-TIP awards are structured as nil priced options. DBP awards and DBMP (basic awards represent the amount of the annual bonus mandatorily deferred and DBMP voluntary deferral awards represent the amount voluntarily deferred by the Director), in each case converted into shares at their value at the award date.
Subject to the rules of the scheme concerned, including as to meeting performance targets for PSP, LTIP, CSOP and DBMP Matching Awards.
Where this date is less than ten years from the date of award, the Committee may extend the expiry date on one or more occasions, but not beyond the tenth anniversary of the award.
The vesting of the CSOP award is subject to performance measures that are identical to those for the PSP award granted on the same date. When a CSOP award is granted at the same time as a PSP award, the PSP award has two parts. The CSOP and PSP awards are linked so that the maximum aggregate number of shares that can be acquired on exercise of the two awards is limited to that number of shares that had a market value on the date of the awards (and after deducting any exercise price payable on exercise of the CSOP award) equal to the relevant grant multiple of the Director's base salary at the date of the awards (the 'Limit'). This is achieved making the level of vesting of Part B of the PSP Award accord to the level of vesting of the linked CSOP award but the actual number of vested Part B award shares that can be exercised is then limited according to the exercise price on the day of exercise such that the total value of Part B PSP award shares so exercisable does not then exceed the exercise price payable on exercise of the vested CSOP award. If there is less than full vesting, it is possible for the Director to choose to exercise the CSOP to its fullest extent within the Limit and then to exercise the PSP award to the extent of any balance left within the Limit.
5A. The actual number of shares capable of being exercised under Part B of the PSP award can only be determined on the exercise date as explained in note 5 above.
Awards shown in the table for John Davies for 2010, 2011, and 2012 were made prior to his appointment as a Director, which took effect on 1 January 2013.
Outstanding awards will be adjusted to refl ect the rights issue which completed during May 2014 using a standard adjustment factor of 1.13417. Any reference price, including the exercise prices shown will also be adjusted.
| Director | Award | Number vesting | Vesting date | Market Value of vested shares on award £ |
Market Value of vested shares on vesting date £ |
Exercise Price payable for vested shares (if any) £ |
|---|---|---|---|---|---|---|
| Peter Rogers | PSP 2010 | 90,024 | 13-Jul-13 | 557,996 | 1,055,982 | |
| PSP 2010 Funding | 2,509 | 9-Aug-13 | n/a2 | 30,000 | ||
| CSOP 2010 | 4,840 | 13-Jul-13 | 30,000 | 56,773 | 6.1983 | |
| DBP 2011 | 42,609 | 14-Jun-13 | 294,002 | 474,025 | ||
| Bill Tame | PSP 2010 | 59,454 | 13-Jul-13 | 368,514 | 697,395 | |
| PSP 2010 Funding | 652 | 9-Aug-13 | n/a2 | 7,797 | ||
| CSOP 2010 | 1,258 | 13-Jul-13 | 7,797 | 14,756 | 6.1983 | |
| DBP 2011 | 27,270 | 14-Jun-13 | 188,163 | 303,379 | ||
| Archie Bethel | PSP 2010 | 52,175 | 13-Jul-13 | 323,396 | 612,013 | |
| DBP 2011 | 18,939 | 14-Jun-13 | 130,679 | 210,696 | ||
| Kevin Thomas | PSP 2010 | 52,175 | 13-Jul-13 | 323,396 | 612,013 | |
| DBP 2011 | 18,939 | 14-Jun-13 | 130,679 | 210,696 | ||
| John Davies | PSP 2010 | 35,002 | 13-Jul-13 | 216,953 | 410,573 | |
| PSP 2010 Funding | TBC1 | 13-Jul-13 | n/a2 | TBC1 | ||
| CSOP 2010 | 4,840 | 13-Jul-13 | 30,000 | 56,773 | 6.1983 | |
| DBP 2011 | 14,463 | 14-Jun-13 | 99,795 | 160,901 | ||
Notes:
The actual number of PSP 2010 Funding shares capable of being exercised can only be determined on the CSOP exercise date, but cannot exceed 4,840.
Market value on vesting cannot exceed market value on award of relating CSOP 2010 awards.
General Notes:
'Dividend equivalent cash' (an amount representing dividends earned) of 68.4p per vested share had accrued on the PSP 2010 awards and of 43.2p per vested share on the DBP 2011 awards, in each case for the period between grant and vesting. It is payable by the Company to the award holder on exercise of the award concerned.
DBP awards represented, on award, the gross amount of annual bonus compulsorily deferred into shares out of the annual bonus awards in respect of the fi nancial year 2010/11.
Closing Share Price on the last dealing date before vesting was for PSP 2010 and CSOP 2010 awards 1,173p (13 July 2013), and for the DBP 2011 awards 1,112p (14 June 2013).
None of the Directors had an interest in the shares of any subsidiary undertaking of the Company or in any signifi cant contracts of the Group.
The table below details the fees received by Peter Rogers and Bill Tame during the year, in respect of their other directorships, which are retained by the Executive Director.
| Name of director | Company | Fees received £000 |
|---|---|---|
| Peter Rogers | Galliford Try | 42 |
| Bill Tame | Carclo | 36 |
This Remuneration report was approved by the Board on 19 May 2014 and signed on its behalf by:
Justin Crookenden Chairman of the Remuneration Committee
19 May 2014
This report is required to be produced by law. The UKLA's Disclosure and Transparency Rules (DTRs) and Listing Rules (LRs) also require us to make certain disclosures.
The Corporate Governance statement along with the reports of the Nominations, Audit and Risk and Remuneration Committees, which can be found on pages 74 to 116, form part of this Directors' report. Disclosures elsewhere in the Annual Report will be cross referenced where appropriate. Taken together they fulfi ll the combined requirements of company law, the DTRs and LRs.
Babcock International Group PLC, registered and domiciled in England and Wales, with the registered number 2342138, is the holding company for the Babcock International Group of companies. The principal activities of the Group and its subsidiaries are described in the Strategic report on pages 2 and 3 and in note 39 to the accounts on page 174.
Biographies of the current Directors of the Company are to be found on page 73. The table on page 79 shows the Directors who served during the year to 31 March 2014.
Rules relating to the appointment and removal of Directors can be found on page 77.
The powers of the Directors are set out in the Company's Articles of Association, which may be amended by way of a special resolution of the members of the Company. For further information see page 75.
At the date of this report, there is no contract or arrangement with the Company or any of its subsidiaries that is signifi cant in relation to the business of the Group as a whole in which a Director of the Company is materially interested.
The profi t attributable to the owners of the parent Company for the fi nancial year was £180.5 million (2013: £142.7 million (restated)). An interim dividend of 5.0p per 60p ordinary share was declared in the year (2013: 4.6p), as adjusted for the rights issue. The Directors are recommending that shareholders approve at the forthcoming Annual General Meeting a fi nal dividend for the year of 16.4p (2013: 14.4p, as adjusted for the rights issue) on each of the ordinary shares of 60p to be paid on 12 August 2014 to those shareholders on the register at the close of business on 4 July 2014.
The Company has all-employee share ownership plans for UK employees as described below.
| Name of Plan | Who it covers | Performance related? |
Summary description | Source of shares |
|---|---|---|---|---|
| The Babcock Approved Employee Share Ownership Plan |
Open to all UK employees (including Executive Directors) |
No | Employees can buy Company shares (partnership shares) in the market out of pre-tax income. |
Purchased in the market. |
| who meet necessary service criteria. |
The Plan allows for the Company to award free and/or matching shares to participants. In November 2013 the Company introduced a one free share for every ten shares purchased element to the scheme. |
|||
| Shares are bought on behalf of the employee via a tax-approved employee trust which holds them on behalf of the individual participants. The shares must generally be kept in trust for at least three years to obtain any tax advantages, and for fi ve years to obtain maximum tax advantages. |
||||
| VT Group Share Incentive Plan |
UK employees of VT Group at the time of its acquisition by the Company in July 2010 who held shares in VT Group plc and accepted Company shares wholly or partly in exchange for such shares under the terms of the acquisition. |
No | As above for the Babcock shares acquired on the acquisition. |
The Company issued and allotted new shares to the Trustee under the terms of the acquisition by the Company of VT Group PC in 2010. |
Employees of the Group (who are not Directors of the Company) also hold outstanding share options under the discretionary schemes described in the table below. As these schemes have expired no further awards are to be made under them.
| Name of Plan | Who it covers | Performance related? |
Summary description | Source of shares |
|---|---|---|---|---|
| The Babcock 1999 Approved Executive Share Option Scheme |
UK employees who met necessary service criteria |
Yes | Expired 2009. HM Revenue and Customs approved performance-linked share awards in the form of options to acquire shares in the Company at market price at the time of the award. |
Market purchase or fresh issue |
| Babcock 1999 Unapproved Executive Share Option Scheme |
Employees selected by the Remuneration Committee |
Yes | Expired 2009. Options to acquire shares (at their market price on the date of grant) subject to achievement of performance targets measured over a three-year performance period. |
Market purchase or fresh issue |
Already vested awards are also held by Directors and senior employees under the following plan (which since 2009 is no longer being operated).
| Name of Plan | Who it covers | Performance related? |
Summary description | Source of shares |
|---|---|---|---|---|
| 2003 Long Term Incentive Plan |
Directors and employees selected by the Remuneration Committee |
Yes | Nil-cost options to acquire shares, subject to achievement of performance conditions over a three-year performance period. |
Market purchase or fresh issue |
Currently active share plans namely, The Performance Share Plan, The Company Share Option Plan, The Deferred Bonus Plan and the Deferred Bonus Matching Plan, are described in the Directors' Remuneration report on pages 88 to 116.
Share awards outstanding under all plans are as follows:
| Number of shares covered by Outstanding Awards |
|||||
|---|---|---|---|---|---|
| Scheme | Yet to Vest | Vested | |||
| Performance Share Plan | 4,202,627 | 386,084 | |||
| Company Share Option Plan | 243,625 | 69,310 | |||
| The Babcock 1999 Approved Executive Share Option Scheme |
– | 1,870 | |||
| The Babcock 1999 Unapproved Executive Share Option Scheme |
– | 10,000 | |||
| Long Term Incentive Plan | – | 27,841 | |||
| Deferred Bonus Plan | 135,469 | 78,891 | |||
| Deferred Bonus Matching Plan (DBP2012) |
8,802 | ||||
| Deferred Bonus Matching Plan | 1,381,467 | – |
Shares intended to be used towards satisfying existing share awards and options are held by the trustees of the Babcock Employee Share Trust and the Peterhouse Employee Share Trust. The trustees of these Schemes have no present intention of exercising the voting rights attached to the shares held by them. As at 19 May 2014, the total number of ordinary shares in the trusts was 1,607,730 which represented 0.32% of the Company's issued share capital. Shares are also held by the trustees of the Approved Employee Share Ownership Plan. The trustees of that plan exercise voting rights attached to those shares in accordance with directions from the employees on whose behalf they are held.
The trustees of the Babcock Employee Share Trust effectively waive dividends on shares held by them – see note 25 on page 160.
At the Annual General Meeting in July 2013, members authorised the Company to make market purchases of up to 36,207,393 of its own ordinary shares of 60p each. That authority expires at the forthcoming Annual General Meeting in July 2014 when a resolution will be put to renew it so as to allow purchases of up to a maximum of no more than 10% of the Company's issued share capital. No shares in the Company have been purchased by the Company in the period from 9 July 2013 (the date the current authority was granted) to the date of this Report. The Company currently does not hold any treasury shares.
Details of issues and purchases of the Company's shares made in the year to 31 March 2014 by the Babcock Employee Share Trust and the Peterhouse Employee Share Trust are to be found in note 25 on page 160. Since 31 March 2014 the Babcock Employee Share Trust acquired a further 429,473 shares and the Peterhouse Employee Share Trust a further 17,118 shares pursuant to the rights issue announcement by the Company on 27 March 2014.
A statement regarding compliance with the UK Corporate Governance Code is included in the Governance Statement on page 75.
The Group commits resources to research and development to the extent management considers necessary for the evolution and growth of its business.
Notifi cations received by the Company of major interests held in the Company shares, in accordance with Chapter 5 of the Disclosure and Transparency rules, are set out on page 82.
No donations were made during the year for political purposes.
Details relating to fi nancial risk management can be found in note 2 on pages 136 to 139.
Details of important events affecting the Group which have occurred since 31 March 2014 and an indication of likely future developments in the business of the Group can be found in the Strategic report on pages 2 to 71.
The disclosures concerning greenhouse gas emissions required by law are included in the Strategic report on page 63.
Details of the 2014 Annual General Meeting of the Company are set out on page 82.
The Company has entered into deeds of indemnity with each of its current Directors, including Jeff Randall who joined the Board on 1 April 2014, which are qualifying third-party indemnity provisions for the purpose of the Companies Act 2006 in respect of their Directorships (and, in the case of Jeff Randall, in respect of his position as a prospective Director in connection with the prospectus issued by the Company on 27 March 2014) of the Company and, if applicable, of its subsidiaries.
Under their respective Articles of Association, Directors of Group UK subsidiary companies may be indemnifi ed by the company concerned of which they are or were Directors against liabilities and costs incurred in connection with the execution of their duties or the exercise of their powers, to the extent permitted by the Companies Act 2006.
There are also qualifying third-party indemnity provisions entered into between the Company and Archie Bethel and Kevin Thomas in their capacity as Directors of International Nuclear Solutions PLC (a former subsidiary of the Company) which were in force at the date of approval of this report.
Qualifying pension scheme indemnity provisions are also in place for the benefi t of Directors of the Group companies that act as trustees of Group pension schemes.
The majority of the Group's revenue comes from the United Kingdom Ministry of Defence through various contracts across different businesses, which together are essential to the business of the Group as a whole, as are its borrowing facilities with banks and other lenders.
Many agreements entered into by the Company or its subsidiaries contain provisions entitling the other parties to terminate them in the event of a change of control of the Group company concerned, which can often be triggered by a takeover of the Company.
Although the Group has some contracts that on their own are not signifi cant to the Group, several may be with the same customer. If, upon a change of control, the customer decided to terminate all such agreements, the aggregate impact could be signifi cant.
The following agreements are those individual agreements which the Company considers to be signifi cant to the Group as a whole that contain provisions giving the other party a specifi c right to terminate them if the Company is subject to a change of control.
The Articles of Association of Devonport Royal Dockyard Limited (DRDL) and Rosyth Royal Dockyard Limited (RRDL), both subsidiaries of the Company, grant the MoD as the holder of a special share in each of those companies certain rights in certain circumstances. Such rights include the right to require the sale of shares in, and the right to remove Directors of, the company concerned.
The circumstances in which such rights might arise include where the MoD considers that unacceptable ownership, infl uence or control (domestic or foreign) has been acquired over the company in question and that this is contrary to the essential security interests of the UK. This might apply, for example, in circumstances where any non-UK person(s) directly or indirectly acquire control over more than 30% of the shares of the Company, though such a situation is not of itself such a circumstance unless the MoD in the given situation considers it to be so. Any level of ownership by particular foreign or domestic persons may, on the facts of the case, be so treated.
The Company believes that RRDL presently has the right under its Articles of Association to request that the special share held by the MoD in RRDL be redeemed.
The ToBA confi rms Babcock as the MoD's key support partner in the maritime sector and covers the 15-year period from 2010 to 2025. The MoD may terminate the ToBA in the event of a Change in Control of the Company in circumstances where, acting on the grounds of national security, the MoD considers that it is inappropriate for the new owners of the Company to become involved or interested in the Marine division. 'Change in Control' occurs where a person or group of persons that control the Company ceases to do so or if another person or group of persons acquires control of the Company.
Completion of the acquisition of the Avincis Group occurred on 16 May 2014. Certain of the operating subsidiaries of the Avincis Group (which are now subsidiaries of the Company) are required to hold operating licences in order to operate their principal business. Under the Regulation (EC) No. 1008/2008 (the Regulation), a holder of an air operator's certifi cate (an operating licence) is required to be majority owned and effectively controlled by EU nationals. Failure to be so could lead to the suspension or revocation of those operating licences, which could have a material adverse impact on the Company's business. Where operating licence holders form part of a listed company group, such as the Company, the nationality test is applied to the nationality of the listed company's shareholders.
Currently the Company satisfi es the relevant nationality requirements of the Regulation. However, as compliance with the Regulation is an ongoing requirement, the Company proposes to seek shareholder approval to make certain amendments to the Company's Articles of Association which will grant to the Company and its Directors certain powers to monitor and, in certain circumstances, actively manage the nationality requirements with a view to protecting the value of the group undertakings that currently hold operating licences. These amendments would bring our Articles of Association in line with other listed companies that are subject to the Regulation.
£500 million facility agreement dated 17 June 2011 between the Company and Australia and New Zealand Banking Group Limited, BoA Netherlands Cooperatiev U.A., Barclays Corporate, HSBC Bank plc, J.P. Morgan Limited, Lloyds TSB Bank plc and the Royal Bank of Scotland plc as mandated lead arrangers and the Royal Bank of Scotland plc as facility agent.
The facility provides funds for general corporate and working capital purposes. The facility agreement provides that in the event of a change of control of the Company, the lenders may, within a certain period, call for the prepayment of any outstanding loans and cancel the credit facility.
The Company entered into a bridge facility agreement on 27 March 2014 between J.P. Morgan Limited, Lloyds Bank plc, Barclays Bank plc and HSBC Bank plc as mandated lead arrangers and bookrunners and Lloyds Bank plc as facility agent and certain fi nancial institutions named therein as lenders, pursuant to which the lenders made available to the Company a £383 million multi-currency bridge loan facility and a €620 million bridge facility.
The facility may be used for the purpose of refi nancing or cash collateralising certain indebtedness of the Avincis Group (including the fi nancing of any related premiums, fees, costs and expenses of such refi nancing or cash collateralisation) as well as for the general ongoing corporate and working capital purposes of the Avincis Group (other than the funding of any portion of the consideration for the acquisition of the Avincis Group).
Loans under the facility are mandatorily repayable in certain circumstances, including on a change of control of the Company.
On 21 January 2010, the Company issued two series of loan notes to Prudential Investment Management Inc. (and certain of its affi liates): (a) £60 million 4.995% Series A Shelf Notes due 21 January 2017 (the Series A Shelf Notes); and (b) £40 million 5.405% Series B Shelf Notes due 21 January 2020 (the Series B Shelf Notes) (together, the Multi-Currency Loan Notes). Each series is unsecured and unsubordinated and ranks pari passu with all other unsecured and unsubordinated fi nancial indebtedness obligations of the Company. Unless previously redeemed or purchased and cancelled, the Company will redeem the Series A Shelf Notes on 21 January 2017 and the Series B Shelf Notes on 21 January 2020, respectively at their principal amount. In the event of a change of control of the Company before then, the Company must offer to pre-pay the Multi-Currency Loan Notes together with a make whole premium.
On 17 March 2012, the Company issued to 21 fi nancial institutions: (i) US\$150 million aggregate principal amount of 4.94% Series A Senior Notes due 17 March 2018; and (ii) US\$500 million aggregate principal amount of its 5.64% Series B Senior Notes due 17 March 2021. Each series is unsecured and unsubordinated and ranks pari passu with all other unsecured and unsubordinated fi nancial indebtedness obligations of the Company. In the event of a change of control of the Company before then, the Company must offer to pre-pay the Notes.
The Company's share plans contain provisions as a result of which options and awards may vest and become exercisable on a change of control of the Company in accordance with the rules of the plans.
A description of those agreements with Directors that contain provisions relating to payments in the event of a termination of employment following a change of control of the Company is set out on page 95 to 96. One senior employee, who is not a Director of the Company, has an agreement providing for payment of 12 months' salary plus 40% in lieu of all benefi ts in the event of a dismissal (including constructive dismissal) by the Company within 12 months following a change of control.
Under the Company's Articles of Association, any share in the Company may be issued with such rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise, as the Company may from time to time by ordinary resolution determine (or, in the absence of any such determination, as the Directors may determine). The Directors' practice is to seek annual authority from shareholders at each year's Annual General Meeting to allot shares (including authority to allot free of statutory pre-emption rights) up to specifi ed amounts and also to buy back the Company's shares, again up to a specifi ed amount.
At a general meeting of the Company, every member has one vote on a show of hands and, on a poll, one vote for each share held. The notice of general meeting specifi es deadlines for exercising voting rights, either by proxy or by being present in person, in relation to resolutions to be proposed at a general meeting.
No member is, unless the Board decides otherwise, entitled to attend or vote, either personally or by proxy, at a general meeting or to exercise any other right conferred by being a shareholder if they or any person with an interest in their shares has been sent a notice under section 793 of the Companies Act 2006 (which confers upon public companies the power to require the provision of information with respect to interests in their voting shares) and they or any interested person have failed to supply the Company with the information requested within 14 days after delivery of that notice. The Board may also decide that no dividend is payable in respect of those default shares and that no transfer of any default shares shall be registered. These restrictions end seven days after receipt by the Company of a notice of an approved transfer of the shares or all the information required by the relevant section 793 notice, whichever is the earlier.
The Directors may refuse to register any transfer of any share which is not a fully-paid share, although such discretion may not be exercised in a way which the Financial Conduct Authority regards as preventing dealings in the shares of the relevant class or classes from taking place on an open or proper basis. The Directors may likewise refuse to register any transfer of a share in favour of more than four persons jointly.
The Company is not aware of any other restrictions on the transfer of shares in the Company other than certain restrictions that may from time to time be imposed by laws and regulations (for example, insider trading laws).
The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or voting rights in the Company.
At the date of this report 501,333,136 ordinary shares of 60p each have been issued and are fully paid up and are quoted on the London Stock Exchange.
Information regarding our employees and their involvement within the business, including the Company's policy towards discrimination and diversity, can be found within the Sustainability report on pages 59 to 61.
The Company has adopted a formal procedure for the disclosure, review, authorisation and management of Directors' confl icts of interest and potential confl icts of interest in accordance with the provisions of the Companies Act 2006.
The procedure requires Directors formally to notify the Board (via the Company Secretary) as soon as they become aware of any actual or potential confl ict of interest with their duties to the Company or of any material change in existing actual or potential confl icts that may have been authorised by the Board. Notifi ed actual or potential confl icts will be reviewed by the Board as soon as possible. The Board will consider whether a confl ict or potential confl ict does, in fact, exist and, if so, whether it is in the interest of the Company that it be authorised and, if so, on what terms. In making their judgement on this, the other Directors must have regard to their general duties to the Company. A register is maintained for the Board of all such disclosures and the terms of any such authorisation.
Authorisations may be revoked, or the terms on which they were given varied, at any time. Cleared confl icts will in any event be reviewed annually by the Board. In the event of any actual confl ict arising in respect of any matter, mitigating action would also be considered (for example, non-attendance of the Director concerned at all or part of Board meetings and non-circulation to him of relevant papers).
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the fi nancial statements.
The acquisition of Avincis Mission Critical Services took place after the year end. More details regarding the acquisition can be found in the Chief Executive Offi cer's Statement on page 17 and note 13 on page 182.
There has been a process for identifying, evaluating and managing signifi cant risks throughout the year to 31 March 2014 and up to the date of the approval of the fi nancial statements for that year. In respect of our fi nancial reporting process and the process for preparing our consolidated accounts, management monitors the processes underpinning the Group's fi nancial reporting systems through regular reporting and review, and data for consolidation into the Group's fi nancial statements are reviewed by management to ensure that they refl ect a true and fair view of the Group's results in compliance with applicable accounting policies.
The Board, through the Audit and Risk Committee, reviews the effectiveness of the Company's internal control processes formally at least once a year. The Board considers the system to be effective and in accordance with Internal Controls: Guidance for Directors on the Combined Code (the Turnbull Guidance). Further information on the principal internal controls in use in the Company is to be found on pages 64 to 71.
PricewaterhouseCoopers LLP is willing to continue in offi ce as independent auditor of the Company, and a resolution to reappoint it will be proposed at the forthcoming Annual General Meeting.
So far as the Directors who are in offi ce at the time of the approval of this report are aware, there is no relevant audit information (namely, information needed by the Company's auditors in connection with the preparation of their auditors' report) of which the auditors are unaware. Each such Director has taken all steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the auditors are aware of that information.
The Directors are responsible for preparing the Annual Report, the Directors' Remuneration report and the Group's and the Company's fi nancial statements in accordance with applicable law.
Company law requires the Directors to prepare fi nancial statements for each fi nancial year. In accordance with that law, the Directors have prepared the Group's fi nancial statements in accordance with International Financial Reporting Standards (IFRS) (as adopted in the European Union), and the Company's fi nancial statements and the Directors' Remuneration report in accordance with applicable law and UK Generally Accepted Accounting Practice (UK GAAP). The Group's and the Company's fi nancial statements are required by law to give a true and fair view of the state of affairs of the Group and the Company and of the profi t and loss of the Group for that year. In preparing those fi nancial statements the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are suffi cient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the fi nancial position of the Group and the Company, and enable them to ensure that the Group's fi nancial statements
comply with the Companies Act 2006 and Article 4 of the IAS Regulation and that the Company's fi nancial statements and the Directors' Remuneration report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and fi nancial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of fi nancial statements may differ from legislation in other jurisdictions.
Each of the Directors listed below (being the Board of Directors at the date of this Annual Report and these fi nancial statements) confi rms that to the best of his or her knowledge:
In addition, each of the directors listed below considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
| Mike Turner | Chairman |
|---|---|
| Peter Rogers | Chief Executive |
| Bill Tame | Group Finance Director |
| Archie Bethel | CEO, Marine and Technology |
| Kevin Thomas | CEO, Support Services |
| John Davies | CEO, Defence and Security |
| Justin Crookenden | Non-Executive Director |
| Sir David Omand | Non-Executive Director |
| Ian Duncan | Non-Executive Director |
| Kate Swann | Non-Executive Director |
| Anna Stewart | Non-Executive Director |
| Jeff Randall | Non-Executive Director |
The Strategic report (pages 2 to 71) and the Directors' report (pages 117 to 122) for the year ending 31 March 2014 have been approved by the Board and signed on its behalf by
Mike Turner CBE Chairman
19 May 2014
In our opinion the Group financial statements, defined below:
This opinion is to be read in the context of what we say in the remainder of this report.
The Group financial statements (the "financial statements"), which are prepared by Babcock International Group PLC, comprise:
The financial reporting framework that has been applied in their preparation comprises applicable law and IFRSs as adopted by the European Union.
Certain disclosures required by the financial reporting framework have been presented elsewhere in the Annual Report and Accounts 2014 (the "Annual Report"), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ('ISAs (UK & Ireland)'). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited Group financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
We set certain thresholds for materiality. These helped us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole
Based on our professional judgement, we determined materiality for the financial statements as a whole to be £14 million. This represents approximately 5% of profit before tax adjusted for amortisation on acquired intangibles. We believe using profit before tax adjusted for amortisation on acquired intangibles more appropriately reflects the underlying business.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £1 million as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
The Group is primarily structured and monitored across four divisions being Marine and Technology, Defence and Security, Support Services and International. The financial statements are a consolidation of the Group's reporting units, which include operating businesses and centralised functions.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the reporting units by us, as the Group engagement team, or component auditors within PwC UK and from other PwC network firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the financial statements as a whole.
Accordingly, we identified 27 reporting units, spread across the divisions, which, in our view, required an audit of their complete financial information, either due to their size or their risk characteristics. We also performed specific risk based audit procedures on specific financial statement line items at one further reporting unit and three joint venture entities to primarily address the risk of fraud in revenue recognition. This, together with additional procedures performed at the Group level relating primarily to pensions, treasury and taxation gave us the evidence we needed for our opinion on the financial statements.
In preparing the financial statements, the Directors made a number of subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We primarily focused our work in these areas by assessing the Directors' judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.
In our audit, we tested and examined information, using sampling and other auditing techniques, to the extent we considered necessary to provide a reasonable basis for us to draw conclusions. We obtained audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
We considered the following areas to be those that required particular focus in the current year. This is not a complete list of all risks or areas of focus identified by our audit. We discussed these areas of focus with the Audit Committee. Their report on those matters that they considered to be significant issues in relation to the financial statements is set out on page 86.
| Area of focus | How the scope of our audit addressed the area of focus |
|---|---|
| Contract accounting and fraud in revenue recognition ISAs (UK & Ireland) presume there is a risk of fraud in revenue recognition when management are under pressure to achieve planned results. In addition, due to the contracting nature of the business, revenue recognition involves a significant degree of judgement with respect to total contract costs, extent of completion and the recognition of one off pain/gain share amounts. We focused on this area due to the complex and judgemental nature of the timing and amount of revenue to recognise on contracts. |
We read all key contracts and discussed with management to obtain a full understanding of the terms and risks to inform our consideration of whether revenue was appropriately recognised. We evaluated the relevant IT systems and tested the operating effectiveness of internal controls over the completeness, accuracy and timing of revenue recognised in the financial statements, including controls over contract reviews and assessing the estimated costs to complete. We performed tests to agree revenue back to supporting documentation as well as testing the appropriateness of all significant one off pain/gain share arrangements and testing of revenue adjustments recognised around the year end. |
| Pension liabilities The Group operates a number of defined benefit pension plans, giving rise to pension liabilities (refer to note 27 in the notes to the Group financial statements). |
We considered and challenged the reasonableness of key actuarial assumptions (including pensionable salary increases, inflation, discount rates and mortality), using benchmark ranges based on market conditions and expectations at the balance sheet date and comparison across the wider pensions industry. We also performed |
| We focused on this area because of the magnitude of the pension liabilities in the context of the overall balance sheet and the inherent judgement and technical expertise required in determining appropriate assumptions. Changes in key assumptions can have a material impact on the liability recorded. |
testing to agree underlying membership data to supporting payroll documentation and assessed the appropriateness of the closing liability based on known movements and assumptions. |
| Goodwill impairment assessment The Directors' assess the carrying value of goodwill and conduct an annual impairment review (refer to note 13 in the notes to the financial statements). |
We evaluated the Directors' cash flow forecasts; including comparing them to the latest Board approved budgets. We challenged the Directors' key assumptions, including the long term growth rate by comparison to historic growth rates and |
| We focused on this area because of the materiality of the goodwill balance and because it involves complex and subjective judgements by the Directors about near term and long term sales growth rates, costs and the projected operating margins. |
managements' budgets and the discount rate by independently estimating a range based on market data and analysis of comparable companies. We performed sensitivity analysis around these assumptions to ascertain the extent of change that either individually or collectively would be required for the goodwill to be impaired. We then considered the likelihood of such movement in those key assumptions arising. |
| Risk of management override of internal controls ISAs (UK & Ireland) require that we consider this. |
We assessed the overall control environment of the Group, including the arrangements for staff to "whistle-blow" inappropriate actions and interviewed senior management and the Group's Internal Audit function. We considered whether there was evidence of bias by the Directors in the significant accounting estimates and judgements relevant to the financial statements. We performed unpredictable audit procedures and tested journal entries including consolidation entries. |
Under the Listing Rules we are required to review the Directors' statement, set out on page 121, in relation to going concern. We have nothing to report having performed our review.
As noted in the Directors' statement, the Directors have concluded that it is appropriate to prepare the financial statements using the going concern basis of accounting. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors' use of the going concern basis is appropriate.
However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group's ability to continue as a going concern.
In our opinion the information given in the Strategic report and the Directors' report for the financial year for which the financial statements are prepared is consistent with the Group financial statements.
Under the Companies Act 2006 we are required to report to you if, in our opinion we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility.
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors' remuneration specified by law have not been made. We have no exceptions to report arising from this responsibility.
Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company's compliance with nine provisions of the UK Corporate Governance Code ('the Code'). We have nothing to report having performed our review.
On page 122 of the Annual Report, as required by the Code Provision C.1.1, the Directors state that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group's performance, business model and strategy. On page 86, as required by C.3.8 of the Code, the Audit Committee has set out the significant issues that it considered in relation to the financial statements, and how they were addressed. Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
We have no exceptions to report arising from this responsibility.
Under ISAs (UK & Ireland), we are required to report to you if, in our opinion, information in the Annual Report is:
We have no exceptions to report arising from this responsibility.
Our responsibilities and those of the Directors
As explained more fully in the Directors' responsibilities statement set out on page 122, the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
We have reported separately on the company financial statements of Babcock International Group PLC for the year ended 31 March 2014 and on the information in the Directors' remuneration report that is described as having been audited.
John Baker (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London, United Kingdom
19 May 2014
| Total Total For the year ended 31 March 2014 Note £m £m £m £m Total revenue 3,547.6 3,243.5 Less: joint ventures and associates revenue 226.6 214.1 Group revenue 3 3,321.0 3,029.4 Group Operating profit before amortisation of acquired intangibles and exceptional items 3, 4, 5 317.2 284.2 Amortisation of acquired intangibles 3, 6 (59.2) (66.4) Exceptional items 6 (24.9) (14.3) Group operating profit 3 233.1 203.5 Joint ventures and associates Share of operating profit 3 21.9 21.2 Investment income 3 37.3 38.5 Amortisation of acquired intangibles 3, 6 (6.2) (6.2) Finance costs 3 (25.1) (29.2) Income tax expense 3 (7.0) (6.3) Share of results of joint ventures and associates 20.9 18.0 Group and joint ventures and associates Operating profit before amortisation of acquired intangibles and exceptional items 339.1 305.4 Investment income 38.8 40.2 Underlying operating profit* 377.9 345.6 Amortisation of acquired intangibles (65.4) (72.6) Exceptional items (24.9) (14.3) Group investment income (1.5) (1.7) Joint ventures and associates finance costs (25.1) (29.2) Joint ventures and associates income tax expense (7.0) (6.3) Group operating profit plus share of joint ventures and associates 254.0 221.5 Finance costs Investment income 3 1.5 1.7 Retirement benefit interest (10.9) (11.8) Finance costs 7 (35.2) (38.7) Finance income 7 9.4 9.1 (35.2) (39.7) Profit before tax 218.8 181.8 Income tax expense 9 (30.8) (18.0) Profit for the year from continuing operations 188.0 163.8 Discontinued operations Loss for the year from discontinued operations attributable to owners of the parent 10 – (15.2) Profit for the year 188.0 148.6 Attributable to: Owners of the parent 180.5 142.7 Non-controlling interest 7.5 5.9 188.0 148.6 Earnings per share from continuing operations 12 Basic 50.1p 43.9p Diluted 49.8p 43.4p Earnings per share from continuing and discontinued operations 12 Basic 50.1p 39.7p Diluted 49.8p 39.2p |
2014 | 2013 (restated) | |
|---|---|---|---|
* Including IFRIC 12 investment income but before exceptional items and amortisation of acquired intangibles.
Financials
| 2013 | ||
|---|---|---|
| For the year ended 31 March 2014 | 2014 Note £m |
(restated) £m |
| Profit for the year | 188.0 | 148.6 |
| Other comprehensive income | ||
| Items that may be subsequently reclassified to income statement | ||
| Currency translation differences | (19.5) | (0.8) |
| Fair value adjustment of interest rate and foreign exchange hedges | (2.2) | 1.2 |
| Tax on fair value adjustment of interest rate and foreign exchange hedges | 0.5 | (0.3) |
| Fair value adjustment of joint venture and associates derivatives | 16 23.1 |
(23.0) |
| Tax on fair value adjustment of joint venture and associates derivatives | 16 (5.3) |
5.5 |
| Items that will not be reclassified to income statement | ||
| Remeasurement of retirement benefit obligations | 27 (43.0) |
(16.2) |
| Tax on remeasurement of retirement benefit obligations | 9.9 | 3.9 |
| Impact of change in UK tax rates | (9.5) | (3.1) |
| Other comprehensive loss, net of tax | (46.0) | (32.8) |
| Total comprehensive income | 142.0 | 115.8 |
| Total comprehensive income attributable to: | ||
| Owners of the parent | 137.8 | 111.0 |
| Non-controlling interest | 4.2 | 4.8 |
| Total comprehensive income | 142.0 | 115.8 |
| For the year ended 31 March 2014 | Share capital £m |
Share premium £m |
Capital redemption £m |
Retained earnings £m |
Hedging reserve £m |
Translation reserve £m |
Owners of the parent £m |
Non controlling interest £m |
Total equity £m |
|---|---|---|---|---|---|---|---|---|---|
| At 1 April 2012 | 215.5 | 873.0 | 30.6 | (160.9) | (41.9) | (4.9) | 911.4 | 8.6 | 920.0 |
| Total comprehensive income/(loss) | – | – | – | 127.2 | (16.6) | 0.4 | 111.0 | 4.8 | 115.8 |
| Shares issued in the financial year | 1.7 | – | – | – | – | – | 1.7 | – | 1.7 |
| Dividends | – | – | – | (83.6) | – | – | (83.6) | (3.1) | (86.7) |
| Share-based payments | – | – | – | 8.6 | – | – | 8.6 | – | 8.6 |
| Tax on shared-based payments | – | – | – | 6.5 | – | – | 6.5 | – | 6.5 |
| Acquisition of non-controlling interest | – | – | – | – | – | – | – | 19.8 | 19.8 |
| Disposal of non-controlling interest | – | – | – | – | – | – | – | 0.4 | 0.4 |
| Transaction with non-controlling interest | – | – | – | (4.6) | – | – | (4.6) | (8.7) | (13.3) |
| Own shares and other | – | – | – | (3.9) | – | – | (3.9) | – | (3.9) |
| Net movement in equity | 1.7 | – | – | 50.2 | (16.6) | 0.4 | 35.7 | 13.2 | 48.9 |
| At 31 March 2013 | 217.2 | 873.0 | 30.6 | (110.7) | (58.5) | (4.5) | 947.1 | 21.8 | 968.9 |
| At 1 April 2013 | 217.2 | 873.0 | 30.6 | (110.7) | (58.5) | (4.5) | 947.1 | 21.8 | 968.9 |
| Total comprehensive income/(loss) | – | – | – | 137.9 | 16.1 | (16.2) | 137.8 | 4.2 | 142.0 |
| Dividends | – | – | – | (96.7) | – | – | (96.7) | (4.3) | (101.0) |
| Share-based payments | – | – | – | 12.2 | – | – | 12.2 | – | 12.2 |
| Tax on share-based payments | – | – | – | 3.3 | – | – | 3.3 | – | 3.3 |
| Own shares and other | – | – | – | 0.7 | – | – | 0.7 | – | 0.7 |
| Net movement in equity | – | – | – | 57.4 | 16.1 | (16.2) | 57.3 | (0.1) | 57.2 |
| At 31 March 2014 | 217.2 | 873.0 | 30.6 | (53.3) | (42.4) | (20.7) 1,004.4 | 21.7 1,026.1 |
| As at 31 March 2014 | Note | 2014 £m |
2013 £m |
|---|---|---|---|
| Assets | |||
| Non-current assets | |||
| Goodwill | 13 | 1,609.6 | 1,563.0 |
| Other intangible assets | 14 | 275.8 | 299.2 |
| Property, plant and equipment | 15 | 252.1 | 248.9 |
| Investment in joint ventures and associates | 16 | 52.3 | 18.6 |
| Loan to joint ventures and associates | 16 | 50.6 | 51.1 |
| Retirement benefits | 27 | 15.2 | 10.1 |
| Trade and other receivables | 19 | 1.2 | 0.5 |
| IFRIC 12 financial assets | 20.5 | 22.2 | |
| Other financial assets | 23 | – | 45.1 |
| Deferred tax asset | 17 | 46.6 | 43.4 |
| 2,323.9 | 2,302.1 | ||
| Current assets | |||
| Inventories | 18 | 105.9 | 73.9 |
| Trade and other receivables | 19 | 577.5 | 519.0 |
| Income tax recoverable | 28.0 | 8.6 | |
| Other financial assets | 23 | 9.6 | 3.5 |
| Cash and cash equivalents | 20 | 86.3 | 97.1 |
| 807.3 | 702.1 | ||
| Total assets | 3,131.2 | 3,004.2 | |
| Equity and liabilities | |||
| Equity attributable to owners of the parent | |||
| Share capital | 25 | 217.2 | 217.2 |
| Share premium | 873.0 | 873.0 | |
| Capital redemption and other reserves | (32.5) | (32.4) | |
| Retained earnings | (53.3) | (110.7) | |
| 1,004.4 | 947.1 | ||
| Non-controlling interest | 21.7 | 21.8 | |
| Total equity | 1,026.1 | 968.9 | |
| Non-current liabilities | |||
| Bank and other borrowings | 22 | 649.4 | 684.0 |
| Trade and other payables | 21 | 9.2 | 7.9 |
| Deferred tax liabilities | 17 | 2.4 | 4.0 |
| Other financial liabilities | 23 | 12.3 | 10.0 |
| Retirement liabilities | 27 | 282.9 | 271.2 |
| Provisions for other liabilities | 24 | 95.0 | 115.2 |
| 1,051.2 | 1,092.3 | ||
| Current liabilities | |||
| Bank and other borrowings | 22 | 17.7 | 8.8 |
| Trade and other payables | 21 | 974.4 | 884.4 |
| Other financial liabilities | 23 | 11.7 | 7.2 |
| Provisions for other liabilities | 24 | 50.1 | 42.6 |
| 1,053.9 | 943.0 | ||
| Total liabilities | 2,105.1 | 2,035.3 | |
| Total equity and liabilities | 3,131.2 | 3,004.2 |
The notes on pages 131 to 174 are an integral part of the consolidated financial statements. The Group financial statements on pages 127 to 174 were approved by the Board of Directors on 19 May 2014 and are signed on its behalf by:
P L Rogers W Tame Director Director
Financials
| 2014 | 2013 | |
|---|---|---|
| For the year ended 31 March 2014 Note |
£m | £m |
| Cash flows from operating activities | ||
| Cash generated from operations 28 |
279.5 | 293.4 |
| Income tax paid | (55.8) | (45.8) |
| Interest paid | (36.5) | (38.7) |
| Interest received | 4.7 | 8.2 |
| Net cash flows from operating activities | 191.9 | 217.1 |
| Cash flows from investing activities | ||
| Disposal of subsidiaries and joint ventures and associates, net of cash disposed 32 |
0.7 | 68.0 |
| Dividends received from joint ventures and associates | 4.8 | 7.1 |
| Proceeds on disposal of property, plant and equipment | 4.2 | 6.2 |
| Purchases of property, plant and equipment | (37.4) | (52.7) |
| Purchases of intangible assets | (16.1) | (6.6) |
| Investment in, loans to and interest received from joint ventures and associates | 5.2 | (30.2) |
| Transactions with non-controlling interest | – | 1.3 |
| Acquisition of subsidiaries net of cash acquired 31 |
(62.5) | (22.2) |
| Net cash flows from investing activities | (101.1) | (29.1) |
| Cash flows from financing activities | ||
| Dividends paid 11 |
(96.7) | (83.6) |
| Finance lease principal payments | (3.5) | (3.7) |
| Loans repaid | (1.0) | (101.1) |
| Dividends paid to non-controlling interest | (4.3) | (3.1) |
| Net proceeds on issue of shares | – | 1.7 |
| Movement on own shares | 0.7 | (3.9) |
| Net cash flows from financing activities | (104.8) | (193.7) |
| Net (decrease)/increase in cash, cash equivalents and bank overdrafts | (14.0) | (5.7) |
| Cash, cash equivalents and bank overdrafts at beginning of year | 90.6 | 98.4 |
| Effects of exchange rate fluctuations | (5.4) | (2.1) |
| Cash, cash equivalents and bank overdrafts at end of year 30 |
71.2 | 90.6 |
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of certain financial instruments and on a going concern basis. The Company is a public limited company, is listed on the London Stock Exchange and is incorporated and domiciled in the UK.
The principal accounting policies adopted by the Group are disclosed below. They have been applied consistently throughout the year, except that the definition of net debt has been changed as reflected in the net debt accounting policy.
The Group financial statements comprise the Company and all of its subsidiary undertakings made up to 31 March.
Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. If, however, more than 50% of the voting rights are owned but the Group does not govern the financial and operating policies then this investment is not consolidated as a subsidiary. Acquisitions are included from the date of acquisition and the results of the businesses disposed of or terminated are included in the results for the year up to the date of relinquishing control or closure and analysed as continuing or discontinued operations.
The Group's interests in jointly controlled entities are accounted for by the equity method of accounting and are initially recorded at cost. The Group's investment in jointly controlled entities includes goodwill (net of any accumulated impairment loss) identified on acquisition.
The Group's share of its jointly controlled entities' post-acquisition profits or losses after tax is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment.
Unrealised gains and losses on transactions between the Group and its jointly controlled entities are eliminated to the extent of the Group's interest in the joint controlled entities.
The Group's share of joint venture revenue is disclosed after elimination of sales to that joint venture. Loans to joint ventures are valued at amortised cost.
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:
Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be reliably measured and recovery of consideration is considered probable. As can be seen from note 3 this represents approximately 10% of the business.
Revenue from services rendered is recognised by reference to the stage of completion of the transaction. The provision of services over a long-term period are accounted for under the principles of construction contracts, and the revenue recognised as set out below. In a limited number of contracts where performance and revenue are measured annually the revenue and costs are similarly recognised over the course of the year.
Revenue from long-term service contracts is recognised by reference to the stage of completion of the contract in accordance with IAS 18 'Revenue' and IAS 11 'Construction contracts'. The stage of completion is determined according to the nature of the specific contract concerned. Methods used to assess the stage of completion include incurred costs as a proportion of total costs, labour hours incurred or earned value of work performed.
The profit element of the revenue attributable to a contract is recognised if the final outcome can be reliably assessed. In order to assess the likely outcome of a contract a full estimated cost of completion is produced which will assess risks and opportunities including cost rates, time, volume and performance for the contract and apply a probability to these being realised. As time elapses these risks and opportunities will become more predictable. Risks and opportunities will vary dependent on the terms of each contract and the commercial environment of each market. Certain contracts will have pain/gain share arrangements whereby target cost under/over spends are shared with the customer. These sharing arrangements are included in assessing the overall contract outturn and the expected profit.
Any expected loss on a contract is recognised immediately in the income statement.
Items that are exceptional in size or nature are presented as exceptional items within the consolidated income statement. The separate reporting of exceptional items helps provide a better indication of the Group's underlying business performance. Events which may give rise to the classification of items as exceptional include gains or losses on the disposal of properties and businesses, material acquisition costs along with the restructuring of businesses and asset impairments.
The Group policy is to treat transactions with non-controlling interest as transactions with owners of the parent and therefore result in movements in reserves.
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and the amount has been reliably estimated. If the effect is material, provisions are determined by discounting the expected future cash flows at an appropriate discount rate.
A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been publicly announced. Future operating costs are not provided for.
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract.
Provisions for losses on contracts are recorded when it becomes probable that total estimated contract costs will exceed total contract revenues. Such provisions are recorded as write downs of work-in-progress for that portion of the work which has already been completed, and as liability provisions for the remainder. Losses are determined on the basis of estimated results on completion of contracts and are updated regularly.
When the fair value of the consideration for an acquired undertaking exceeds the fair value of its separable net assets, the difference is treated as purchased goodwill and is capitalised. When the fair value of the consideration for an acquired undertaking is less than the fair value of its separable net assets, the difference is taken directly to the income statement.
Goodwill relating to acquisitions prior to 1 April 2004 is maintained at its net book value on the date of transition to IFRS. From that date goodwill is not amortised but is reviewed at least annually for impairment.
Annual impairment reviews are performed as outlined in note 13.
Acquired intangibles are the estimated fair value of customer relationships and brands which are in part contractual, represented by the value of the acquired order book, and in part non-contractual, represented by the risk adjusted value of future orders expected to arise from the relationships.
The carrying value of the contracted element is amortised straight-line over the remaining period of the orders that are in process or the future period in which the orders will be fulfilled, as the case may be. The amortisation periods, reflecting the lengths of the various contracts, are mainly in the range one year to five years, with a minority of contracts and hence amortisation periods, up to ten years.
The carrying value of the non-contracted element is amortised over the period in which it is estimated that the relationships are likely to bring economic benefit via future orders. The method of amortisation is tailored to the expectations of the timing of the receipt of specific future orders and therefore the charge to the income statement matches the timing of value likely to be generated in those years. Relationships are valued on a contract by contract and customer by customer basis and the pattern of amortisation reflects the expected pattern of benefit in each case. The amortisation profile is determined on a case-by-case basis and in all cases results in a front-loaded profile, reflecting the greater certainty of future orders in the near term compared with the longer term. The amortisation period is in the range one year to ten years.
Research expenditure is recognised as an expense as incurred. Costs incurred on development projects are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other development expenditure is recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs that have been capitalised are amortised from the date the product is available for use on a straight-line basis over the period of its expected benefit but not exceeding seven years.
Computer software is shown at cost less accumulated amortisation and is amortised over its expected useful lives of between three and five years.
Property, plant and equipment is shown at cost less subsequent depreciation and impairment, except for land, which is shown at cost less impairment. Cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is provided on a straight-line basis to write off the cost of PPE over the estimated useful lives to their estimated residual value (reassessed at each balance sheet date) at the following annual rates:
| Freehold property | 2% to 8% |
|---|---|
| Leasehold property | Lease term |
| Plant and equipment | 6.6% to 33.3% |
PPE is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the fixed asset may not be recoverable. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount exceeds the higher of an asset's fair value less cost to sell or value in use.
Net debt consists of the total of loans, bank overdrafts, cash and cash equivalents and finance leases plus any derivatives whose objective is to fair value hedge the underlying debt. This will include swaps of the currency of the debt into the functional currency and interest rate basis of the company carrying the debt and fair value hedges. The policy has been changed to include joint venture and associate loans which has resulted in a reduction of £50.6 million (2013: £51.1 million)
Assets under finance leases are capitalised and the outstanding capital element of instalments is included in borrowings. The interest element is charged against profits so as to produce a constant periodic rate of charge on the outstanding obligations. Depreciation is calculated to write the assets off over their expected useful lives or over the lease terms where these are shorter.
Operating lease payments are recognised as an expense in the income statement on a straight-line basis. A provision is made where the operating leases are deemed to be onerous.
Inventory is valued at the lower of cost and net realisable value. Cost is determined on a first-in first-out method. In the case of finished goods and work in progress, cost comprises direct material and labour and an appropriate proportion of overheads.
The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings.
The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses).
Pre-contract costs are recognised as expenses as incurred, except that directly attributable costs are recognised as an asset and amortised over the life of the contract when it can be reliably expected that a contract will be obtained and the contract is expected to result in future net cash inflows.
Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted, or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group, and it is probable that the temporary difference will not reverse in the foreseeable future.
Tax is recognised in the income statement except to the extent that it relates to items recognised directly in either other comprehensive income or in equity.
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Sterling, which is the Company's functional and presentation currency.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the local currency at the year end exchange rates.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at exchange rates ruling at the balance sheet date of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement except when deferred in equity as part of the net investment of a foreign operation.
Exchange differences arising from the translation of the balance sheets and income statements of foreign operations into Sterling are recognised as a separate component of equity on consolidation. Results of foreign subsidiary undertakings are translated using the average exchange rate for the month of the applicable results. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at period end exchange rates.
Finance costs are recognised as an expense in the period in which they are incurred unless they are attributable to an asset under construction, in which case finance costs are capitalised. Capitalisation of applicable interest commenced in 2009/10.
The Group operates a number of pension schemes. The schemes are generally funded through payments to trustee-administered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity.
Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred.
For defined benefit pension schemes, the cost of providing benefits is determined using the projected unit credit actuarial valuation method. The service cost and associated administration costs of the Groups' pension schemes, are charged to operating profit. In addition, a retirement benefit interest charge on the net pension deficit is charged to the Income statement as a finance cost. Actuarial gains and losses are recognised directly in equity through the Statement of comprehensive income so that the Group's balance sheet reflects the fair value of the schemes' surpluses or deficits at the balance sheet date.
The Group operates equity-settled, share-based compensation plans. The economic cost of awarding shares and share options to employees is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value is determined by reference to option pricing models. The charge is recognised in the income statement over the vesting period of the award.
The shares purchased by the Group's ESOP trusts are recognised as a deduction to equity.
Paid holidays are regarded as an employee benefit and as such are charged to the income statement as the benefits are earned.
A significant business stream sold in a prior year or during the year or being actively marketed with an expectation of being sold within a year will be treated as discontinued within the income statement. The prior year comparatives will be restated. If such a business has not been sold at year end the relevant assets and liabilities will be shown as held for sale within the balance sheet.
In addition businesses bought as part of a larger acquisition but identified for sale on purchase will be treated as discontinued.
IFRIC 12 'Service concession arrangements' addresses the accounting by private sector operators involved in the provision of public sector infrastructure assets and services. For all arrangements falling within the scope of the Interpretation (essentially those where the infrastructure assets are not controlled by the operator), the infrastructure assets are not recognised as property, plant and equipment of the operator. Rather, depending on the terms of the arrangement, the operator recognises:
As a consequence of this treatment the operator recognises investment income in respect of the financial asset on an effective interest basis and amortisation of any intangible asset arising.
Derivatives are initially recognised at fair value on the date a derivative is entered into and are subsequently remeasured at their fair value. The Group designates certain of the derivative instruments within its portfolio to be hedges of the fair value of recognised assets or liabilities or unrecognised firm commitments.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
For derivatives that qualify as cash flow hedges, gains and losses are deferred in equity until such time as the firm commitment is recognised, at which point any deferred gain or loss is included in the assets' carrying amount. These gains or losses are then realised through the income statement as the asset is sold.
Certain derivatives do not qualify or are not designated as hedging instruments and any movement in their fair values is recognised in the income statement immediately.
Dividends are recognised as a liability in the Group's financial statements in the period in which they are approved. Interim dividends are recognised when paid.
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable in light of known circumstances. The key areas of estimates and judgements for the Group are contract accounting and revenue recognition (see above), the accounting for defined benefit pension schemes (see note 27), impairment of goodwill (see note 13).
Fair value adjustments on acquisitions are by nature subject to critical judgements. The size of recent acquisitions do not make them significant in Group terms however any future acquisitions might do so.
Profit and revenue recognition on contracts is a key judgement exercised by management on a contract by contract basis. In order to make such a judgement an estimate of contract outturn is made and for all significant contracts both local management and Group review and challenge estimates made.
Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group's accounting periods beginning on or after 1 April 2013 or later periods but which the Group has not early adopted.
(a) Standards, amendments and interpretations effective in 2013 with minimal or no impact on the Group with the exception of IAS 19 (amendment):
(b) New standards and interpretations to existing standards that are not yet effective or are effective but only endorsed for periods beginning on or after 1 January 2014 and have not been early adopted by the Group. The impact on the Group's operations is currently being assessed:
(c) Interpretations to existing standards that are not yet effective, have not been endorsed by the EU and the impact on the Group's operations is currently being assessed but is not expected to be significant:
– IAS 19 (amendment), 'Employee benefits' effective 1 July 2014;
– 2012 and 2013 Annual improvements effective 1 July 2014.
IFRIC , 'Levies', effective 1 January 2014; and
Financial risk management
The Group's treasury and capital policies in respect of the management of debt, interest rates, liquidity, and currency are outlined below. The Group's treasury policies are kept under close review given the continuing volatility and uncertainty in the financial markets.
The Company defines capital as shareholder equity plus net debt but in addition considers available financial capital which adds committed undrawn facilities to capital as a measure.
| Objective on available financial capital |
To ensure an appropriate level of capital and available financial capital to maintain operational flexibility and meet financial obligations whilst funding the Group's organic and acquisitive growth. The Group seeks to maintain the necessary headroom to cover the peaks and troughs in its working capital cycle, and sufficient liquidity to see it through any periods of tightened liquidity in the market. |
||||||
|---|---|---|---|---|---|---|---|
| Policy | The Board aims to maintain a balance between equity and debt capital which optimises the Group's cost of carry whilst allowing access to both equity and debt capital markets at optimum pricing when appropriate. The Group, in considering its capital structure and financial capital, views net debt to EBITDA at circa two times as being steady state and sustainable in the current market and against the current economic backdrop. This is not to rule out acquisition spikes above two times, as illustrated by the recently announced Avincis acquisition and those in the past, but only if the Group can see a clear path to reducing net debt to EBITDA back to circa two times within a reasonable time frame. |
||||||
| Performance | The Group's gearing and debt cover ratios, used by the Group to evaluate capital, have continued to improve year-on-year both in the pay down of debt and through increased profits attributable to shareholders. |
||||||
| Covenant | 2014 | 2013 (restated) |
|||||
| Debt service cover | EBITDA/net interest | >4 | 15.0x | 11.9x | |||
| Debt cover | Net debt/EBITDA | <3.5 | 1.3x | 1.3x |
Financial instruments, in particular forward currency contracts and interest rate swaps, are used to manage the financial risks arising from the business activities of the Group and the financing of those activities.
All treasury transactions are carried out only with prime rated counterparties as are investments of cash and cash equivalents. The Group's customers are mainly from government, government backed institutions or blue chip corporations and as such credit risk is considered small.
Treasury activities within the Group are managed in accordance with the parameters set out in the treasury policies and guidelines approved by the Board. A key principal within the treasury policy is that trading in financial instruments for the purpose of profit generation is prohibited, with all financial instruments being used solely for risk management purposes.
The Group only enters into financial instruments where it has a high level of confidence of the hedged item occurring. Both the treasury department and the divisions have responsibility for monitoring compliance within the Group to ensure adherence with the principal treasury policies and guidelines.
The Group's treasury policies in respect of the management of debt, interest rates, liquidity, and currency are outlined below. The Group's treasury policies are kept under close review given the continuing volatility and uncertainty in the financial markets.
The Group's capital structure is derived from equity and net debt and is overseen by the Board through the Group Finance Committee.
All the Group's material borrowings are arranged by the treasury department, and funds raised are lent onward to operating subsidiaries as required.
A range of gearing and liquidity ratios are used to monitor and measure capital structure and performance, including: Net debt to EBITDA (defined as net debt divided by earnings before interest, tax, depreciation and amortisation), Gearing ratio (defined as net debt, excluding retirement benefit deficits or surpluses, divided by shareholders' funds), ROIC (defined as net income divided by total capital (equity, excluding retirement benefit deficits or surpluses, plus net debt)) and EBITDA interest cover (defined as profit before interest, tax, depreciation, amortisation and exceptionals divided by net interest payable). These ratios are discussed under the business review.
Through the monitoring of these metrics it remains the Group's intention to ensure the business is prudently funded, balancing risk and price on the capital markets and to retain sufficient flexibility to fund future organic and acquisitive growth.
The functional and presentational currency of Babcock International Group PLC and its UK subsidiaries is pounds Sterling. The Group has two main areas of currency exposure; firstly, the US\$650 million US Private Placements which are swapped into Sterling and secondly, through its activities in South Africa where both translational and transactional exposure exist.
| Objective | To reduce exposure to volatility in earnings and cash flows from movements in foreign currency exchange rates. The Group is exposed to a number of foreign currencies, the most significant being the US Dollar and South African Rand. |
|---|---|
| Policy – Transactional risk |
The Group is exposed to movements in foreign currency exchange rates in respect of foreign currency denominated transactions. To mitigate this risk, the Group's policy is to hedge all material transactional exposures, using financial instruments where appropriate. Where possible, the Group seeks to apply IAS 39 hedge accounting treatment to all derivatives that hedge material foreign currency transaction exposures. |
| Policy – Translational risk |
The Group is exposed to movements in foreign currency exchange rates in respect of the translation of net assets and income statements of foreign subsidiaries and equity accounted investments. It is not the Group's policy to hedge the translation effect of exchange rate movements on the income statement or balance sheet of overseas subsidiaries and equity accounted investments it regards as long-term investments. |
| Performance | There have been no material unhedged foreign exchange losses in the year. |
A key principle within the treasury policy is that trading in financial instruments for the purpose of profit generation is prohibited, with all financial instruments being used solely for risk management purposes.
The Group only enters into financial instruments where it has a high level of confidence of the hedged item occurring. Both the treasury department and the divisions have responsibility for monitoring compliance within the Group to ensure adherence with the principal treasury policies and guidelines.
The foreign exchange exposure of Group entities on the net monetary position against their respective functional currencies expressed in the Group's presentation currency is insignificant with the largest exposure being £1.4 million Sterling to Canadian Dollars (2013: Sterling to Omani Rial £1.5 million).
The pre-tax effect on profit and equity, increase or (decrease), if the rates moved up or down by an appropriate percentage volatility, assuming all other variables remained constant would in total be £0.1 million (2013: £0.1 million). The reasonable shifts in exchange rates are based on historic volatility and range from 10% for Sterling to Euro and US Dollars; 25% for Sterling to Canadian and Australian Dollars; 25% for South African Rand to Euro; and 15% Sterling to Omani Rial.
The fair values of debt, and related hedging instruments are affected by movements in interest rates. The following table illustrates the sensitivity in interest rate-sensitive instruments and associated debt to a hypothetical parallel shift of the forward interest rate curves of ±50bp (2013: ±50bp), with pre-tax effect annualised and an additional shift in variable rates for the floating rate element of the gross debt. All other variables are held constant. The Group believes ±50bp is an appropriate measure of volatility at this time.
| 2014 | 2013 | ||||
|---|---|---|---|---|---|
| £m +50bp | £m –50bp | £m +50bp | £m –50bp | ||
| Net results for the year | (1.6) | 1.6 | (1.6) | 1.6 | |
| Equity | 11.1 | (11.1) | 13.6 | (13.6) |
Interest rate risk is managed through the maintenance of a mixture of fixed and floating rate debt and interest rate swaps, each being reviewed on a regular basis to ensure the appropriate mix is maintained.
| Objective | To manage exposure to interest rate fluctuations on borrowings by varying the proportion of fixed rate debt relative to floating rate debt to reflect the underlying nature of its commitments and obligations. As a result, the Group does not maintain a specific set proportion of fixed versus floating debt, but monitors the mix to ensure that it is compatible with its business requirements and capital structure. |
|---|---|
| Policy | Interest hedging and the monitoring of the mix between fixed and floating rates is the responsibility of the treasury department, and is subject to the policy and guidelines set by the Board. |
| Performance | As at 31 March 2014, the Group had 49% fixed rate debt (March 2013: 55%) and 51% floating rate debt (March 2013: 45%) based on gross debt including derivatives of £670.6 million (March 2013: £647.7 million). For further information see note 22 to the Group accounts. |
The key objectives are to ensure that the Group has an appropriate balance between continuity, flexibility and cost of debt funding through the use of borrowings, whilst also diversifying the sources of these borrowings with a range of maturities and rates of interest, to reflect the long-term nature of the Group's contracts and commitments and its risk profile.
Liquidity risk management includes maintaining sufficient cash and the availability of funding from an adequate amount of committed credit facilities. Due to the dynamic nature of the underlying businesses, Group treasury maintains flexibility in funding by maintaining availability under committed credit lines (see note 22).
The Group's committed Revolving Credit Facility (RCF) of £500 million has an expiry date of September 2016, and is available to meet general corporate funding requirements. At 31 March 2014, £127 million was drawn on this facility.
The Group has US Private Placements with a value of US\$650 million maturing between four and seven years.
The Group has two Sterling loan notes with a value of £100 million maturing between three and six years.
Each of the business divisions in the Group provides regular cash forecasts for both management and liquidity purposes. These cash forecasts are used to monitor and identify the liquidity requirements of the Group, and ensure that there is sufficient cash to meet operational needs while maintaining sufficient headroom on the Group's committed borrowing facilities. The cash performance of the business divisions is a KPI.
The Group adopts a conservative approach to the investment of its surplus cash. It is deposited with strong financial institutions for short periods, with bank counterparty credit risk being monitored closely on a systematic and ongoing basis. A credit limit is allocated to each institution taking account of its market capitalisation and credit rating.
| Objective | With debt as a key component of Available Capital, the Group seeks to ensure that there is an appropriate balance between continuity, flexibility and cost of debt funding through the use of borrowings, whilst also diversifying the sources of these borrowings with a range of maturities and rates of interest, to reflect the long term nature of the Group's contracts and commitments and its risk profile. |
|---|---|
| Policy | All the Group's material borrowings are arranged by the treasury department, and funds raised are lent onward to operating subsidiaries as required. It remains the Group's policy to ensure the business is prudently funded and that sufficient headroom is maintained on its facilities to fund its future growth. |
| Performance | The Group continues to keep under review its capital structure to ensure that the sources, tenor and availability of finance are sufficient to meet its stated objective. Current committed facilities and headroom are thought to be sufficient to meet the Group's ongoing commitments. The following are a summary of the Group's main debt facilities; £100 million of loan notes issued in January 2010, US\$650 million US private placement notes issued in March 2011, and the refinancing of the £500 million Revolving Credit Facility (RCF) signed in June 2011, with a term of five years. In March 2014 the Group entered into a Bridge Facility comprising £383 million Sterling tranche and a €620 million Euro tranche, with a term of one year, plus two six month extensions at the company's option to support the Avincis acquisition. The aforementioned debt provides the Group with total committed banking facilities and loan notes of £1.9 billion. For further information see note 22 to the Group accounts. |
The table below analyses the Group's liabilities that will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contract maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of interest is not significant.
| Less than 1 year £m |
Between 1 and 2 years £m |
Between 2 and 5 years £m |
Over 5 years £m |
|
|---|---|---|---|---|
| At 31 March 2014 | ||||
| Bank and other borrowings | 33.3 | 29.4 | 351.8 | 403.2 |
| Derivative financial instruments | 3.4 | (1.6) | 8.4 | 3.4 |
| Trade and other payables* | 952.8 | 1.7 | 3.8 | 2.4 |
| At 31 March 2013 | ||||
| Bank and other borrowings | 37.5 | 31.6 | 370.6 | 456.7 |
| Derivative financial instruments | 1.6 | 0.4 | 0.5 | (33.8) |
| Trade and other payables* | 867.2 | 1.3 | 3.1 | 2.3 |
* Does not include other taxes and social security.
The table below analyses the Group's derivative financial instruments that will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Held for trading contracts are economic hedges and not hedge accounted.
| Less than 1 year |
Between 1 and 2 years |
Between 2 and 5 years |
Over 5 years |
|
|---|---|---|---|---|
| £m | £m | £m | £m | |
| At 31 March 2014 | ||||
| Forward derivative contracts – hedges: | ||||
| – outflow | 167.5 | 154.0 | 109.1 | 307.7 |
| – inflow | 169.6 | 155.5 | 106.3 | 307.4 |
| Forward derivative contracts – held for trading: | ||||
| – outflow | 0.3 | – | – | – |
| – inflow | 0.4 | – | – | – |
| At 31 March 2013 | ||||
| Forward derivative contracts – hedges: | ||||
| – outflow | 50.7 | 21.5 | 121.4 | 307.7 |
| – inflow | 50.2 | 21.5 | 126.5 | 348.3 |
| Forward derivative contracts – held for trading: | ||||
| – outflow | 43.1 | – | – | – |
| – inflow | 42.5 | – | – | – |
The segments reflect the accounting information reviewed by the Executive Committee which is the Chief Operating Decision Maker (CODM).
| 2014 | Marine and Technology £m |
Defence and Security £m |
Support Services £m |
International £m |
Unallocated £m |
Total continuing operations £m |
|---|---|---|---|---|---|---|
| Total revenue | 1,377.3 | 852.6 | 1,040.1 | 277.6 | – | 3,547.6 |
| Less: joint ventures and associates revenue | 12.7 | 115.8 | 98.1 | – | – | 226.6 |
| Group revenue | 1,364.6 | 736.8 | 942.0 | 277.6 | – | 3,321.0 |
| Operating profit* – Group | 152.9 | 74.6 | 69.4 | 23.2 | (2.9) | 317.2 |
| IFRIC 12 investment income – Group | – | 0.8 | 0.7 | – | – | 1.5 |
| Share of operating profit – joint ventures and associates | 1.0 | 14.4 | 6.5 | – | – | 21.9 |
| Share of IFRIC 12 investment income – joint ventures and associates |
– | 28.8 | 8.5 | – | – | 37.3 |
| Underlying operating profit | 153.9 | 118.6 | 85.1 | 23.2 | (2.9) | 377.9 |
| Share of finance costs – joint ventures and associates | – | (16.6) | (8.5) | – | – | (25.1) |
| Share of tax – joint ventures and associates | (0.3) | (5.3) | (1.4) | – | – | (7.0) |
| Acquired intangible amortisation – Group | (12.8) | (10.5) | (35.9) | – | – | (59.2) |
| Share of acquired intangible amortisation –joint ventures and associates |
– | (5.8) | (0.4) | – | – | (6.2) |
| Net finance costs – Group | – | – | – | – | (36.7) | (36.7) |
| Exceptional items – Group | – | – | – | – | (24.9) | (24.9) |
| Group profit before tax | 140.8 | 80.4 | 38.9 | 23.2 | (64.5) | 218.8 |
* Before amortisation of acquired intangibles and exceptional items.
| Continuing operations | Discontinued operations |
Total | ||||||
|---|---|---|---|---|---|---|---|---|
| 2013 | Marine and Technology (restated) £m |
Defence and Security (restated) £m |
Support Services (restated) £m |
International £m |
Unallocated (restated) £m |
Total continuing operations (restated) £m |
International £m |
Group Total (restated) £m |
| Total revenue | 1,201.6 | 820.2 | 943.7 | 278.0 | – | 3,243.5 | 38.9 | 3,282.4 |
| Less: joint ventures and associates revenue |
7.8 | 110.8 | 95.5 | – | – | 214.1 | – | 214.1 |
| Group revenue | 1,193.8 | 709.4 | 848.2 | 278.0 | – | 3,029.4 | 38.9 | 3,068.3 |
| Operating profit* – Group | 136.0 | 65.0 | 67.3 | 24.7 | (8.8) | 284.2 | 1.1 | 285.3 |
| IFRIC 12 investment income – Group | – | 1.0 | 0.7 | – | – | 1.7 | – | 1.7 |
| Share of operating profit – joint ventures and associates |
0.6 | 14.3 | 6.3 | – | – | 21.2 | – | 21.2 |
| Share of IFRIC 12 investment income – joint ventures and associates |
– | 29.9 | 8.6 | – | – | 38.5 | – | 38.5 |
| Underlying operating profit | 136.6 | 110.2 | 82.9 | 24.7 | (8.8) | 345.6 | 1.1 | 346.7 |
| Share of finance costs – joint ventures and associates |
– | (20.0) | (9.2) | – | – | (29.2) | – | (29.2) |
| Share of tax – joint ventures and associates |
(0.2) | (4.7) | (1.4) | – | – | (6.3) | – | (6.3) |
| Acquired intangible amortisation – Group |
(11.7) | (12.1) | (42.6) | – | – | (66.4) | – | (66.4) |
| Share of acquired intangible amortisation – joint ventures and associates |
– | (5.8) | (0.4) | – | – | (6.2) | – | (6.2) |
| Net finance costs – Group | – | – | – | – | (41.4) | (41.4) | – | (41.4) |
| Exceptional items – Group | – | – | – | – | (14.3) | (14.3) | (18.2) | (32.5) |
| Group profit before tax | 124.7 | 67.6 | 29.3 | 24.7 | (64.5) | 181.8 | (17.1) | 164.7 |
* Before amortisation of acquired intangibles and exceptional items.
Revenues of £2.0 billion (2013: £1.9 billion) are derived from a single external customer. These revenues are attributable to the Marine and Technology, Defence and Security, and Support Services segments.
The segment assets and liabilities at 31 March 2014 and 31 March 2013 and capital expenditure for the years then ended are as follows:
| Assets | Liabilities | Capital expenditure | |||||
|---|---|---|---|---|---|---|---|
| 2014 £m |
2013 £m |
2014 £m |
2013 £m |
2014 £m |
2013 £m |
||
| Marine and Technology | 868.0 | 784.9 | 650.9 | 639.4 | 29.8 | 29.0 | |
| Defence and Security | 927.5 | 900.5 | 273.3 | 239.3 | 15.2 | 2.7 | |
| Support Services | 967.4 | 941.4 | 274.1 | 262.9 | 10.3 | 7.7 | |
| International | 156.5 | 158.5 | 117.0 | 105.9 | 4.6 | 11.0 | |
| Unallocated | 211.8 | 218.9 | 789.8 | 787.8 | 12.6 | 9.5 | |
| Group total | 3,131.2 | 3,004.2 | 2,105.1 | 2,035.3 | 72.5 | 59.9 |
Capital expenditure represents additions to property, plant and equipment and intangible assets.
All assets and liabilities are allocated to their appropriate segments except for cash, cash equivalents, borrowings, income and deferred tax and discontinued operations which are included in the unallocated segment.
The segmental depreciation on tangible assets and amortisation of intangible assets for the years ended 31 March 2014 and 31 March 2013 are as follows:
| Depreciation | Amortisation of intangible assets |
||||
|---|---|---|---|---|---|
| 2014 £m |
2013 £m |
2014 £m |
2013 £m |
||
| Marine and Technology | 21.1 | 19.2 | 13.9 | 12.5 | |
| Defence and Security | 4.5 | 5.0 | 10.6 | 12.3 | |
| Support Services | 5.2 | 6.0 | 36.6 | 43.4 | |
| International | 4.7 | 4.3 | 0.2 | 0.2 | |
| Unallocated | 4.5 | 2.9 | 5.4 | 5.2 | |
| Group total | 40.0 | 37.4 | 66.7 | 73.6 |
The geographic analysis by origin for the years ended 31 March 2014 and 31 March 2013 is as follows:
| Revenue | Assets | Capital expenditure | |||||
|---|---|---|---|---|---|---|---|
| Geographic analysis | 2014 £m |
2013 £m |
2014 £m |
2013 £m |
2014 £m |
2013 £m |
|
| United Kingdom | 2,798.0 | 2,542.0 | 2,744.0 | 2,731.0 | 66.3 | 45.7 | |
| Africa | 270.2 | 272.1 | 181.4 | 169.0 | 4.6 | 11.0 | |
| North America | 136.4 | 129.9 | 67.9 | 62.0 | 0.7 | 1.8 | |
| Rest of World | 116.4 | 85.4 | 137.9 | 42.2 | 0.9 | 1.4 | |
| Group total | 3,321.0 | 3,029.4 | 3,131.2 | 3,004.2 | 72.5 | 59.9 |
The analysis of revenue for the years ended 31 March 2014 and 31 March 2013 is as follows:
| Continuing operations | Discontinued operations | Group total | |||||
|---|---|---|---|---|---|---|---|
| 2014 £m |
2013 £m |
2014 £m |
2013 £m |
2014 £m |
2013 £m |
||
| Sales of goods | 337.9 | 268.3 | – | – | 337.9 | 268.3 | |
| Sales of services | 2,981.6 | 2,758.3 | – | 38.9 | 2,981.6 | 2,797.2 | |
| Rental income | 1.5 | 2.8 | – | – | 1.5 | 2.8 | |
| 3,321.0 | 3,029.4 | – | 38.9 | 3,321.0 | 3,068.3 |
| Continuing operations | Discontinued operations | Group total | ||||
|---|---|---|---|---|---|---|
| 2014 £m |
2013 (restated) £m |
2014 £m |
2013 £m |
2014 £m |
2013 (restated) £m |
|
| Cost of sales | 2,885.0 | 2,631.9 | – | 37.8 | 2,885.0 | 2,669.7 |
| Distribution expenses | 11.4 | 11.2 | – | – | 11.4 | 11.2 |
| Administration expenses | 191.5 | 182.8 | – | 18.2 | 191.5 | 201.0 |
| 3,087.9 | 2,825.9 | – | 56.0 | 3,087.9 | 2,881.9 |
The following items have been included in arriving at operating profit for the year.
| Continuing operations | Discontinued operations | Group total | ||||
|---|---|---|---|---|---|---|
| 2014 £m |
2013 (restated) £m |
2014 £m |
2013 £m |
2014 £m |
2013 (restated) £m |
|
| Employee costs (note 8) | 1,151.4 | 1,064.9 | – | 17.7 | 1,151.4 | 1,082.6 |
| Inventories | ||||||
| – cost of inventories recognised as an expense | 293.0 | 322.3 | – | – | 293.0 | 322.3 |
| – increase in inventory provisions | 0.4 | 1.9 | – | – | 0.4 | 1.9 |
| Depreciation of Property, plant and equipment (PPE) |
||||||
| – owned assets | 38.4 | 36.5 | – | – | 38.4 | 36.5 |
| – under finance leases | 1.6 | 0.9 | – | – | 1.6 | 0.9 |
| 40.0 | 37.4 | – | – | 40.0 | 37.4 | |
| Amortisation of intangible assets | ||||||
| – acquired intangibles | 59.2 | 66.4 | – | – | 59.2 | 66.4 |
| – other | 7.5 | 7.2 | – | – | 7.5 | 7.2 |
| 66.7 | 73.6 | – | – | 66.7 | 73.6 | |
| Loss/(profit) on disposal of PPE | 0.3 | (4.1) | – | – | 0.3 | (4.1) |
| Loss on disposal of intangibles | – | 1.1 | – | – | – | 1.1 |
| Operating lease rentals payable | ||||||
| – property | 20.2 | 19.9 | – | 0.4 | 20.2 | 20.3 |
| – vehicles, plant and equipment | 47.4 | 13.9 | – | – | 47.4 | 13.9 |
| Research and development | 1.5 | 1.9 | – | – | 1.5 | 1.9 |
| Trade receivables (release)/impairment | (0.1) | (0.9) | – | – | (0.1) | (0.9) |
| Net foreign exchange losses/(gains) | 1.5 | (0.8) | – | – | 1.5 | (0.8) |
During the year the Group (including its overseas subsidiaries) obtained the following services from the Group's auditor as detailed below:
| Total | ||
|---|---|---|
| 2014 £m |
2013 £m |
|
| Audit fees: | ||
| Fees payable to the parent auditor and its associates for the audit of the parent company's individual and consolidated financial statements |
0.5 | 0.5 |
| Fees for other services: | ||
| Fees payable to the parent auditor and its associates in respect of the audit of the Company's subsidiaries | 1.2 | 1.1 |
| Taxation advisory services | 0.3 | 0.2 |
| Other assurance services | 0.1 | – |
| Services relating to corporate finance transactions | 1.8 | – |
| Other non-audit services | 0.5 | – |
| Total fees paid to the Group's auditor and network firms | 4.4 | 1.8 |
| Group | Joint ventures and associates | Total | ||||
|---|---|---|---|---|---|---|
| 2014 £m |
2013 £m |
2014 £m |
2013 £m |
2014 £m |
2013 £m |
|
| Continuing operations | ||||||
| Acquisition costs | 24.9 | – | – | – | 24.9 | – |
| Profit on disposal of subsidiaries (note 32) | – | (0.2) | – | – | – | (0.2) |
| Reorganisation cost | – | 14.5 | – | – | – | 14.5 |
| Exceptional items | 24.9 | 14.3 | – | – | 24.9 | 14.3 |
| Acquired intangible amortisation | 59.2 | 66.4 | 6.2 | 6.2 | 65.4 | 72.6 |
| Continuing total | 84.1 | 80.7 | 6.2 | 6.2 | 90.3 | 86.9 |
| Discontinued operations | ||||||
| Loss on disposal of subsidiaries (note 32) | – | 8.9 | – | – | – | 8.9 |
| Reorganisation costs | – | – | – | – | – | – |
| Impairment of US defence goodwill | – | – | – | – | – | – |
| Provision for costs on previous years disposals (note 32) |
– | 9.3 | – | – | – | 9.3 |
| Exceptional items | – | 18.2 | – | – | – | 18.2 |
| Acquired intangible amortisation | – | – | – | – | – | – |
| Discontinued total | – | 18.2 | – | – | – | 18.2 |
Exceptional items are those items which are exceptional in nature or size. These include material acquisition costs and reorganisation costs.
Acquisition costs relate to the acquisition of Avincis Mission Critical Services comprising of legal and professional fees and stamp duty.
Reorganisation costs, in the previous year, relate to the integration of Babcock International Group PLC and VT Group plc which is now complete.
In 2013 the loss on disposal of subsidiaries relates to the VT US disposal. £5 million reflects recycling of foreign exchange rate fluctuations from date of acquisition to completion of sale. The balance relates to movements in the disposal balance sheet since the year end and provisions against future claims and costs.
Previous year disposal losses arise from long-term property liabilities retained as part of past disposals.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Finance costs | ||
| Loans, overdrafts and associated interest rate hedges* | 28.2 | 36.1 |
| Finance leases | 0.8 | 0.3 |
| Amortisation of issue costs of bank loan | 1.5 | 1.2 |
| Other | 4.7 | 1.1 |
| Total finance costs | 35.2 | 38.7 |
| Finance income | ||
| Bank deposits and loans | 9.4 | 9.1 |
| Total finance income | 9.4 | 9.1 |
| Net finance costs | 25.8 | 29.6 |
* Interest rate hedges included above is £(1.1) million costs (2013: £0.1 million).
| Continuing operations | Discontinued operations | Group total | ||||
|---|---|---|---|---|---|---|
| 2014 £m |
2013 (restated) £m |
2014 £m |
2013 £m |
2014 £m |
2013 (Restated) £m |
|
| Wages and salaries | 957.2 | 893.0 | – | 16.5 | 957.2 | 909.5 |
| Social security costs | 90.2 | 86.9 | – | 1.2 | 90.2 | 88.1 |
| Share-based payments (note 26) | 12.2 | 8.6 | – | – | 12.2 | 8.6 |
| Pension costs – defined contribution plans (note 27) |
42.5 | 31.6 | – | – | 42.5 | 31.6 |
| Pension charges – defined benefit plans (note 27) |
49.3 | 44.8 | – | – | 49.3 | 44.8 |
| 1,151.4 | 1,064.9 | – | 17.7 | 1,151.4 | 1,082.6 |
The average number of people employed by the Group during the year were:
| Continuing operations | Discontinued operations | Group total | ||||
|---|---|---|---|---|---|---|
| 2014 Number |
2013 Number |
2014 Number |
2013 Number |
2014 Number |
2013 Number |
|
| Operations | 24,668 | 22,257 | – | 337 | 24,668 | 22,594 |
| Administration and management | 3,717 | 3,535 | – | 26 | 3,717 | 3,561 |
| 28,385 | 25,792 | – | 363 | 28,385 | 26,155 |
Emoluments of the Executive Directors are included in employee costs above and reported in the Remuneration report.
Key management is defined as those employees who are directly responsible for the operational management of the key cash-generating units. The employees would typically report to the Chief Executive. The key management figures given below include Directors.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Salaries | 9.7 | 7.9 |
| Post-employment benefits | 0.3 | 0.2 |
| Share-based payments | 3.7 | 3.0 |
| 13.7 | 11.1 |
| Continuing operations | Discontinued operations | Group total | ||||
|---|---|---|---|---|---|---|
| 2014 £m |
2013 (restated) £m |
2014 £m |
2013 £m |
2014 £m |
2013 (restated) £m |
|
| Analysis of tax charge in the year | ||||||
| Current tax | ||||||
| – UK current year charge | 57.9 | 26.9 | – | – | 57.9 | 26.9 |
| – Overseas current year charge | 13.6 | 13.1 | – | 0.3 | 13.6 | 13.4 |
| – UK prior year credit | (9.3) | (4.5) | – | – | (9.3) | (4.5) |
| – Overseas adjustment in respect of prior year | 0.1 | – | – | – | 0.1 | – |
| 62.3 | 35.5 | – | 0.3 | 62.3 | 35.8 | |
| Deferred tax | ||||||
| – UK current year credit | (27.6) | (17.1) | – | (2.2) | (27.6) | (19.3) |
| – Adjustment in respect of prior year | – | – | – | – | – | – |
| – Overseas current year (credit)/charge | (1.5) | 0.8 | – | – | (1.5) | 0.8 |
| – Impact of change in UK tax rate | (2.4) | (1.2) | – | – | (2.4) | (1.2) |
| (31.5) | (17.5) | – | (2.2) | (31.5) | (19.7) | |
| Total income tax expense | 30.8 | 18.0 | – | (1.9) | 30.8 | 16.1 |
The tax for the year is lower (2013: lower) than the standard rate of corporation tax in the UK. The differences are explained below:
| 2014 £m |
2013 (restated) £m |
|
|---|---|---|
| Profit before tax | 218.8 | 181.8 |
| Profit on ordinary activities multiplied by rate of corporation tax in the UK of 23% (2013: 24%) | 50.3 | 43.6 |
| Effects of: | ||
| Expenses not deductible for tax purposes | 6.2 | 1.6 |
| Re-measurement of deferred tax re change in UK tax rate | (2.4) | (1.2) |
| Difference in respect of joint venture results | (4.8) | (4.3) |
| Adjustment in respect of foreign rates and UK consortium relief rates | (2.7) | (6.1) |
| Adjustments in respect of earlier years | (9.2) | (4.6) |
| Other (including R&D tax relief) | (6.6) | (11.0) |
| Total income tax expense | 30.8 | 18.0 |
During the year, as a result of the change in the UK corporate tax rate which will be effective from 1 April 2014, deferred tax balances have been remeasured. Deferred tax relating to temporary differences expected to reverse after 1 April 2014 is measured at the tax rate of 20% as these are the tax rates that will apply on reversal. As a result, a credit of £2.4 million (2013: £1.2 million) has been taken to the income statement in respect of the re-measurement of the year end deferred tax balances to 20%, and a charge of £9.5 million (2013: £3.1 million) has been taken to reserves.
Following the sale of the US defence business in the previous year, it was treated as a discontinued operation within these financial statements.
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Financial performance of discontinued operations | ||
| Revenue | – | 38.9 |
| Operating profit before amortisation of acquired intangibles | – | 1.1 |
| Amortisation of acquired intangibles | – | – |
| Profit before tax and exceptional items | – | 1.1 |
| Taxation | – | (0.3) |
| Profit after taxation and before exceptional items | – | 0.8 |
| Exceptional items: | ||
| Loss on disposal, in year, of subsidiary (US defence business) (note 32) | – | (18.2) |
| Profit on disposal, in year, of subsidiary (Waste business) (note 32) | – | 9.3 |
| Provision for costs on previous years disposals (note 32) | – | (9.3) |
| – | (18.2) | |
| Taxation | – | 2.2 |
| Exceptional loss | – | (16.0) |
| Loss after taxation from discontinued operations | – | (15.2) |
| Cash flows from discontinued operations | ||
| Net cash flows from operating activities | – | (10.2) |
| Net cash flows from investing activities | – | 66.3 |
| Net cash flows from financing activities | – | – |
| – | 56.1 |
| 2014 £m |
2013 £m |
|
|---|---|---|
| Final dividend for the year ended 31 March 2013 of 14.4p (2012: 12.3p) per 60p share | 71.8 | 61.0 |
| Interim dividend for the year ended 31 March 2014 of 5.0p (2013: 4.6p) per 60p share | 24.9 | 22.6 |
| 96.7 | 83.6 |
In addition, the Directors are proposing a final dividend in respect of the financial year ended 31 March 2014 of 16.4p (2013: 14.4p as adjusted for rights issue) per share which will absorb an estimated £82.1 million (2013: £71.8 million) of shareholders' equity. It will be paid on 12 August 2014 to shareholders who are on the register of members on 4 July 2014. These financial statements do not reflect this dividend payable which is subject to approval at the Annual General Meeting on 21 July 2014.
Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year excluding those held in the Babcock Employee Share Trust and the Peterhouse Employee Share Trust. The calculation of the basic and diluted EPS is based on the following data:
Number of shares
| 2014 | 2013 | |
|---|---|---|
| Number | Number | |
| Weighted average number of ordinary shares for the purpose of basic EPS | 360,262,890 | 358,912,359 |
| Effect of dilutive potential ordinary shares: share options | 3,204,338 | 4,084,538 |
| Weighted average number of ordinary shares for the purpose of diluted EPS | 363,467,228 | 362,996,897 |
| 2014 Earnings £m |
2014 Basic per share Pence |
2014 Diluted per share Pence |
2013 Earnings (restated) £m |
2013 Basic per share (restated) Pence |
2013 Diluted per share (restated) Pence |
|---|---|---|---|---|---|
| 180.5 | 50.1 | 49.8 | 157.9 | 43.9 | 43.4 |
| 50.3 | 14.0 | 13.8 | 55.2 | 15.4 | 15.2 |
| 24.9 | 6.9 | 6.8 | 11.6 | 3.2 | 3.2 |
| (2.4) | (0.7) | (0.7) | (1.2) | (0.3) | (0.3) |
| 253.3 | 70.3 | 69.7 | 223.5 | 62.2 | 61.5 |
| – | – | – | (15.2) | (4.2) | (4.2) |
| – | – | – | |||
| – | – | – | – | – | – |
| – | – | – | 16.0 | 4.4 | 4.4 |
| – | – | – | 0.8 | 0.2 | 0.2 |
| 180.5 | 50.1 | 49.8 | 142.7 | 39.7 | 39.2 |
| 15.2 | |||||
| 7.6 | |||||
| (2.4) | (0.7) | (0.7) | (1.2) | (0.3) | (0.3) |
| 253.3 | 70.3 | 69.7 | 224.3 | 62.4 | 61.7 |
| 50.3 24.9 |
14.0 6.9 |
13.8 6.8 |
55.2 27.6 |
15.4 7.6 |
| 2014 £m |
2013 £m |
|
|---|---|---|
| Cost | ||
| At 1 April | 1,567.8 | 1,545.7 |
| On acquisition of subsidiaries (note 31) | 50.4 | 25.1 |
| On disposal of subsidiary (note 32) | – | (3.4) |
| Exchange adjustments | (3.8) | 0.4 |
| At 31 March | 1,614.4 | 1,567.8 |
| Accumulated impairment | ||
| At 1 April | 4.8 | 4.8 |
| Impairment charge | – | – |
| At 31 March | 4.8 | 4.8 |
| Net book value at 31 March | 1,609.6 | 1,563.0 |
During the year, the goodwill was tested for impairment in accordance with IAS 36. The recoverable amount for all the cash-generating units (CGUs) has been measured based on a value in use calculation derived from Board approved three year budgeted cash flows and extrapolated cash flows thereafter based on an estimated growth rate of 3% (effectively zero real growth allowing for inflation). A pre-tax discount rate in the range 9.5% to 11.0% was used in the pre-tax value in use calculation for the cash-generating units within each segment. The Group's weighted average cost of capital post-tax is approximately 7.0% to 8.0% (2013: 7.0% to 8.0%).
Goodwill is allocated to the Group's CGUs based on value in use, identified according to the business segment. A segment level summary of goodwill allocation is presented below:
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Marine and Technology | 429.5 | 409.3 |
| Defence and Security | 626.5 | 627.4 |
| Support Services | 551.3 | 523.4 |
| International – Africa | 2.3 | 2.9 |
| 1,609.6 | 1,563.0 |
| Acquired intangibles – relationships £m |
Acquired intangibles – brands £m |
Acquired intangibles – total £m |
IFRIC 12 intangibles £m |
Software £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Cost | ||||||
| At 1 April 2013 | 566.6 | – | 566.6 | 5.9 | 32.9 | 605.4 |
| Additions | – | – | – | – | 16.1 | 16.1 |
| On acquisition of subsidiaries (note 31) | 21.9 | 6.4 | 28.3 | – | 0.2 | 28.5 |
| Exchange adjustments | (0.9) | – | (0.9) | – | (0.5) | (1.4) |
| At 31 March 2014 | 587.6 | 6.4 | 594.0 | 5.9 | 48.7 | 648.6 |
| Accumulated amortisation and impairment | ||||||
| At 1 April 2013 | 283.5 | – | 283.5 | 2.6 | 20.1 | 306.2 |
| Amortisation charge | 59.0 | 0.2 | 59.2 | 0.2 | 7.3 | 66.7 |
| Exchange adjustments | 0.2 | – | 0.2 | – | (0.3) | (0.1) |
| At 31 March 2014 | 342.7 | 0.2 | 342.9 | 2.8 | 27.1 | 372.8 |
| Net book value at 31 March 2014 | 244.9 | 6.2 | 251.1 | 3.1 | 21.6 | 275.8 |
| Cost | ||||||
| At 1 April 2012 | 543.9 | – | 543.9 | 5.9 | 29.8 | 579.6 |
| Additions | – | – | – | – | 6.6 | 6.6 |
| Disposals | – | – | – | – | (3.0) | (3.0) |
| On acquisition of subsidiaries (note 31) | 20.1 | – | 20.1 | – | – | 20.1 |
| On disposal of subsidiaries (note 32) | – | – | – | – | (0.3) | (0.3) |
| Exchange adjustments | 2.6 | – | 2.6 | – | (0.2) | 2.4 |
| At 31 March 2013 | 566.6 | – | 566.6 | 5.9 | 32.9 | 605.4 |
| Accumulated amortisation and impairment | ||||||
| At 1 April 2012 | 214.8 | – | 214.8 | 2.4 | 15.2 | 232.4 |
| Amortisation charge | 66.4 | – | 66.4 | 0.2 | 7.0 | 73.6 |
| Disposals | – | – | – | – | (1.9) | (1.9) |
| On disposal of subsidiary (note 32) | – | – | – | – | (0.2) | (0.2) |
| Exchange adjustments | 2.3 | – | 2.3 | – | – | 2.3 |
| At 31 March 2013 | 283.5 | – | 283.5 | 2.6 | 20.1 | 306.2 |
| Net book value at 31 March 2013 | 283.1 | – | 283.1 | 3.3 | 12.8 | 299.2 |
All amortisation charges for the year have been charged through cost of sales.
Acquired intangibles are in part the estimated fair value of customer relationships which are in part contractual, represented by the value of the acquired order book, and in part non-contractual, represented by the risk adjusted value of future orders expected to arise from the relationships.
The carrying value of the contracted element is amortised straight-line over the remaining period of the orders that are in process or the future period in which the orders will be fulfilled, as the case may be. The amortisation periods, reflecting the lengths of the various contracts, are mainly in the range one year to five years, with a minority of contracts and hence amortisation periods, up to ten years.
The carrying value of the non-contracted element is amortised over the period in which it is estimated that the relationships are likely to bring economic benefit via future orders. The method of amortisation is tailored to the expectations of the timing of the receipt of specific future orders and therefore the charge to the income statement matches the timing of value likely to be generated in those years. Relationships are valued on a contract-by-contract and customer-by-customer basis and the pattern of amortisation reflects the expected pattern of benefit in each case. The amortisation profile is determined on a case-by-case basis and in all cases results in a front-loaded profile, reflecting the greater certainty of future orders in the near term compared with the longer term. The amortisation period is in the range one year to ten years.
Acquired brand names are valued dependent on the characteristics of the market in which they operate and the likely value a third party would place on them. Useful lives are likewise dependant on market characteristics of the acquired business brand. These are amortised on a straight line basis up to ten years.
| Freehold property £m |
Leasehold property £m |
Plant and equipment £m |
Total £m |
|
|---|---|---|---|---|
| Cost | ||||
| At 1 April 2013 | 68.5 | 6.3 | 349.2 | 424.0 |
| Exchange adjustments | (0.3) | – | (15.3) | (15.6) |
| On acquisition of subsidiaries (note 31) | – | – | 1.9 | 1.9 |
| Additions | 8.9 | 1.7 | 45.2 | 55.8 |
| Capitalised borrowing costs | – | – | 0.6 | 0.6 |
| Disposals | (1.0) | – | (14.5) | (15.5) |
| At 31 March 2014 | 76.1 | 8.0 | 367.1 | 451.2 |
| Accumulated depreciation | ||||
| At 1 April 2013 | 30.8 | 2.7 | 141.6 | 175.1 |
| Exchange adjustments | – | – | (5.0) | (5.0) |
| Charge for the year | 3.8 | 0.8 | 35.4 | 40.0 |
| Disposals | (0.3) | – | (10.7) | (11.0) |
| At 31 March 2014 | 34.3 | 3.5 | 161.3 | 199.1 |
| Net book value at 31 March 2014 | 41.8 | 4.5 | 205.8 | 252.1 |
| Cost | ||||
| At 1 April 2012 | 66.7 | 5.4 | 292.5 | 364.6 |
| Exchange adjustments | (0.1) | – | (5.9) | (6.0) |
| On acquisition of subsidiaries (note 31) | – | – | 25.6 | 25.6 |
| Additions | 4.4 | 1.3 | 47.2 | 52.9 |
| Capitalised borrowing costs | – | – | 0.4 | 0.4 |
| Disposals | (2.5) | (0.4) | (10.6) | (13.5) |
| At 31 March 2013 | 68.5 | 6.3 | 349.2 | 424.0 |
| Accumulated depreciation | ||||
| At 1 April 2012 | 29.2 | 2.0 | 119.7 | 150.9 |
| Exchange adjustments | – | – | (1.8) | (1.8) |
| Charge for the year | 4.1 | 0.7 | 32.6 | 37.4 |
| Disposals | (2.5) | – | (8.9) | (11.4) |
| At 31 March 2013 | 30.8 | 2.7 | 141.6 | 175.1 |
| Net book value at 31 March 2013 | 37.7 | 3.6 | 207.6 | 248.9 |
A capitalisation rate of 4% was used to determine the amount of borrowing costs eligible for capitalisation.
Assets held under finance leases have the following net book value within plant and equipment:
| 2014 £m |
2013 £m |
|
|---|---|---|
| Cost | 31.5 | 16.0 |
| Aggregate depreciation | (7.1) | (6.0) |
| Net book value | 24.4 | 10.0 |
Financials
| Investment in joint ventures and associates |
Loans to joint ventures and associates |
Total | |||||
|---|---|---|---|---|---|---|---|
| 2014 £m |
2013 £m |
2014 £m |
2013 £m |
2014 £m |
2013 £m |
||
| At 1 April | 18.6 | 19.3 | 51.1 | 24.9 | 69.7 | 44.2 | |
| Loans to/(repayments from) joint ventures and associates |
– | – | (1.5) | 28.3 | (1.5) | 28.3 | |
| Investment in joint ventures and associates | (0.1) | 5.9 | – | – | (0.1) | 5.9 | |
| Share of profits | 20.9 | 18.0 | – | – | 20.9 | 18.0 | |
| Interest accrued | – | – | 4.6 | 1.8 | 4.6 | 1.8 | |
| Interest received | – | – | (3.6) | (3.9) | (3.6) | (3.9) | |
| Dividend received | (4.8) | (7.1) | – | – | (4.8) | (7.1) | |
| Fair value adjustment of derivatives | 23.1 | (23.0) | – | – | 23.1 | (23.0) | |
| Tax on fair value adjustment of derivatives | (5.3) | 5.5 | – | – | (5.3) | 5.5 | |
| Foreign exchange | (0.1) | – | – | – | (0.1) | – | |
| At 31 March | 52.3 | 18.6 | 50.6 | 51.1 | 102.9 | 69.7 |
Included within investment in joint venture and associates is goodwill of £1.2 million (2013: £1.2 million).
Included within joint ventures and associates are:
| Country of incorporation |
Assets £m |
Liabilities £m |
Revenue £m |
Operating profit £m |
Retained profit £m |
% interest held |
|
|---|---|---|---|---|---|---|---|
| 2014 | |||||||
| Holdfast Training Services Limited | United Kingdom | 38.1 | (26.9) | 15.4 | 0.9 | – | 74% |
| ALC (Superholdco) Limited | United Kingdom | 64.3 | (47.9) | 18.8 | 6.1 | 5.2 | 50% |
| Airtanker Limited | United Kingdom | 361.5 | (321.0) | 51.1 | 2.3 | 5.5 | 13% |
| Airtanker Services Limited | United Kingdom | 44.9 | (23.4) | 22.0 | 2.5 | 1.9 | 23% |
| Ascent Flight Training (Holdings) Limited | United Kingdom | 41.9 | (32.1) | 8.5 | 2.1 | 3.5 | 50% |
| Greenwich BSF SPV Limited | United Kingdom | 55.8 | (57.2) | 1.6 | 0.2 | – | 50% |
| Lewisham Schools for the Future LEP Limited | United Kingdom | 87.9 | (75.4) | 2.4 | 0.4 | 0.2 | 40% |
| Babcock Dounreay Partnership Limited | United Kingdom | 8.1 | (5.8) | 78.3 | 4.7 | 3.7 | 50% |
| Other | 19.6 | (29.5) | 28.5 | 2.7 | 0.9 | ||
| 722.1 | (619.2) | 226.6 | 21.9 | 20.9 |
| Country of incorporation |
Assets £m |
Liabilities £m |
Revenue £m |
Operating profit £m |
Retained profit £m |
% interest held |
|
|---|---|---|---|---|---|---|---|
| 2013 | |||||||
| Holdfast Training Services Limited | United Kingdom | 38.1 | (26.1) | 29.3 | 1.0 | – | 74% |
| ALC (Superholdco) Limited | United Kingdom | 58.2 | (47.7) | 18.1 | 6.7 | 5.5 | 50% |
| Airtanker Limited | United Kingdom | 316.4 | (299.0) | 45.1 | 1.9 | 5.0 | 13% |
| Airtanker Services Limited | United Kingdom | 40.0 | (19.6) | 8.4 | 1.3 | 1.0 | 23% |
| Ascent Flight Training (Holdings) Limited | United Kingdom | 43.5 | (37.1) | 9.9 | 3.3 | 1.6 | 50% |
| Greenwich BSF SPV Limited | United Kingdom | 53.1 | (57.9) | 2.4 | 0.2 | 0.1 | 50% |
| Lewisham Schools for the Future LEP Limited | United Kingdom | 89.7 | (78.5) | 7.7 | 0.3 | (0.6) | 40% |
| Babcock Dounreay Partnership Limited | United Kingdom | 3.3 | (2.0) | 68.7 | 4.4 | 3.3 | 50% |
| Other | 24.5 | (29.2) | 24.5 | 2.1 | 2.1 | ||
| 666.8 | (597.1) | 214.1 | 21.2 | 18.0 |
The joint ventures and associates have no significant contingent liabilities to which the Group is exposed.
Holdfast Training Services Limited is shown as a joint venture as the Group does not have management control. Airtanker Limited is shown as an associate due to the level of management input and the relative share ownership.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Deferred tax asset | 46.6 | 43.4 |
| Deferred tax liability | (2.4) | (4.0) |
| 44.2 | 39.4 |
The movements in deferred tax assets and liabilities (prior to offsetting of balances within the same tax jurisdiction as permitted by IAS 12) during the period are shown below:
| Accelerated | Retirement | ||||
|---|---|---|---|---|---|
| tax depreciation |
benefit obligations |
Tax losses | Other | Total | |
| £m | £m | £m | £m | £m | |
| At 1 April 2013 | (8.8) | 60.1 | 0.8 | (12.7) | 39.4 |
| Income statement credit | – | 13.9 | – | 15.3 | 29.2 |
| Tax credit to equity | – | 9.9 | – | 3.8 | 13.7 |
| Transfer to corporation tax | – | (22.3) | – | (3.1) | (25.4) |
| Acquisition of subsidiaries (note 31) | – | – | – | (6.5) | (6.5) |
| Effect of change in UK tax rate | |||||
| – Income statement | 1.2 | – | – | 1.2 | 2.4 |
| – Equity | – | (8.0) | – | (1.5) | (9.5) |
| – Exchange differences | – | – | – | 0.9 | 0.9 |
| At 31 March 2014 | (7.6) | 53.6 | 0.8 | (2.6) | 44.2 |
| At 1 April 2012 | (9.2) | 63.8 | 0.8 | (24.1) | 31.3 |
| Income statement credit | – | 3.3 | – | 15.1 | 18.4 |
| Tax credit to equity | – | 14.2 | – | 6.0 | 20.2 |
| Transfer to corporation tax | – | (18.6) | – | (0.6) | (19.2) |
| Acquisition of subsidiaries (note 31) | – | – | – | (9.4) | (9.4) |
| Effect of change in UK tax rate | |||||
| – Income statement | 0.4 | – | – | 0.8 | 1.2 |
| – Equity | – | (2.6) | – | (0.5) | (3.1) |
| At 31 March 2013 | (8.8) | 60.1 | 0.8 | (12.7) | 39.4 |
The deferred tax in respect of 'other' includes a liability of £1.6 million (2013: £3.2 million liability) in respect of the Group's non-UK operations.
Deferred tax assets have been recognised in respect of tax losses and other temporary differences giving rise to deferred tax assets because it is probable that these assets will be recovered.
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes:
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Deferred tax asset | (53.6) | (60.1) |
| Deferred tax liability | 7.8 | 17.5 |
| (45.8) | (42.6) |
Deferred tax expected to be recovered within 12 months:
| 2014 £m |
2013 £m |
|
|---|---|---|
| Deferred tax asset | – | – |
| Deferred tax liability | (10.8) | (13.1) |
| (10.8) | (13.1) |
At the balance sheet date, the Group has unused tax losses (excluding UK capital losses and advance corporation tax) of £16.0 million (2013: £16.0 million) available for offset against future profits. A deferred tax asset has been recognised in respect of £nil million (2013: £nil million) of such losses, which may be carried forward.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Raw materials | 18.6 | 11.2 |
| Work-in-progress and long-term contracts | 6.7 | 9.6 |
| Finished goods and goods for resale | 80.6 | 53.1 |
| Total | 105.9 | 73.9 |
| 2014 £m |
2013 £m |
|
|---|---|---|
| Current assets | ||
| Trade receivables | 197.6 | 197.7 |
| Less: provision for impairment of receivables | (3.0) | (3.7) |
| Trade receivables – net | 194.6 | 194.0 |
| Amounts due from customers for contract work | 238.8 | 176.4 |
| Retentions | 5.1 | 6.1 |
| Amounts owed by related parties (note 37) | 13.5 | 20.6 |
| Other debtors | 36.5 | 65.4 |
| Prepayments and accrued income | 89.0 | 56.5 |
| 577.5 | 519.0 | |
| Non-current assets | ||
| Other debtors | 1.2 | 0.5 |
Trade and other receivables are classified as loans and receivables and are stated at amortised cost.
As of 31 March 2014, trade receivables of £3.0 million (2013: £3.8 million) were impaired. Impairment arises in the main, through contract disputes rather than credit defaults. The amount of the provision was £3.0 million (2013: £3.7 million). The individually impaired receivables mainly relate to receivables in the International division. It was assessed that a portion of these receivables is expected to be recovered.
The ageing of the net impaired receivables is as follows:
| 2014 £m |
2013 £m |
|
|---|---|---|
| Less than three months | – | – |
| Three to six months | – | 0.1 |
| Over six months | – | – |
| – | 0.1 |
As of 31 March 2014, trade receivables of £26.8 million (2013: £26.5 million) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:
| 2014 £m |
2013 £m |
|
|---|---|---|
| Less than three months | 21.5 | 20.8 |
| Three to six months | 3.6 | 4.4 |
| Over six months | 1.7 | 1.3 |
| 26.8 | 26.5 |
The carrying amounts of the Group's trade and other receivables are, in the main, denominated in Sterling.
Movements on the provision for impairment of trade receivables are as follows:
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Balance at 1 April | (3.7) | (6.4) |
| Provision for receivables impairment | (1.6) | (1.3) |
| Receivables written off during the year as uncollectable | 0.4 | 1.2 |
| Unused amounts reversed | 1.6 | 2.4 |
| Exchange differences | 0.3 | 0.4 |
| Balance at 31 March | (3.0) | (3.7) |
The creation and release of provisions for impairment of receivables have been included in cost of sales in the income statement (note 5). Amounts charged to the impairment provision are generally written off when there is no expectation of recovering additional cash.
The other classes within trade and other receivables do not contain impaired assets.
The maximum exposure to credit risk at the reporting date is the fair value of each class of receivables mentioned above. The Group does not hold any collateral as security other than retention of title clauses issued as part of the ordinary course of business (note 23).
| 2014 £m |
2013 £m |
|
|---|---|---|
| Cash at bank and in hand | 71.5 | 83.1 |
| Short-term bank deposits (overnight) | 14.8 | 14.0 |
| 86.3 | 97.1 |
The carrying amount of the Group's cash and cash equivalents are denominated in the following currencies:
| 2014 | 2013 | ||||
|---|---|---|---|---|---|
| Total £m |
Floating rate £m |
Total £m |
Floating rate £m |
||
| Currency | |||||
| Sterling | 42.5 | 42.5 | 60.6 | 60.6 | |
| Euro | 9.2 | 9.2 | 21.8 | 21.8 | |
| US Dollar | 1.7 | 1.7 | 4.8 | 4.8 | |
| South African Rand | 22.0 | 22.0 | 6.3 | 6.3 | |
| Canadian Dollar | 2.9 | 2.9 | 0.6 | 0.6 | |
| Omani Rial | 1.2 | 1.2 | – | – | |
| Australian Dollar | 0.4 | 0.4 | – | – | |
| New Zealand Dollar | 4.1 | 4.1 | 2.8 | 2.8 | |
| Brazilian Rial | 2.0 | 2.0 | – | – | |
| Other currencies | 0.3 | 0.3 | 0.2 | 0.2 | |
| 86.3 | 86.3 | 97.1 | 97.1 |
The above balances are invested at short-term, floating rates linked to LIBOR in the case of Sterling, the prime rate in the case of South African Rand and the local prime rate for other currencies.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Current liabilities | ||
| Contract cost accruals | 215.8 | 171.2 |
| Amounts due to customers for contract work | 201.8 | 198.7 |
| Trade creditors | 217.0 | 169.3 |
| Amounts owed to related parties (note 37) | 0.5 | 0.5 |
| Other creditors | 35.2 | 34.7 |
| Other taxes and social security | 60.9 | 39.4 |
| Accruals and deferred income | 243.2 | 270.6 |
| 974.4 | 884.4 | |
| Non-current liabilities | ||
| Other creditors | 9.2 | 7.9 |
| 2014 £m |
2013 £m |
|
|---|---|---|
| Current liabilities | ||
| Bank loans and overdrafts due within one year or on demand | ||
| Secured | 1.9 | 1.7 |
| Unsecured | 12.9 | 5.1 |
| 14.8 | 6.8 | |
| Finance lease obligations* | 2.9 | 2.0 |
| 17.7 | 8.8 | |
| Non-current liabilities | ||
| Bank and other loans | ||
| Secured | 11.3 | 12.8 |
| Unsecured | 622.2 | 668.6 |
| 633.5 | 681.4 | |
| Finance lease obligations* | 15.9 | 2.6 |
| 649.4 | 684.0 |
* Finance leases are secured against the assets to which they relate.
Bank and other loans and overdrafts are denominated in a number of currencies and bear interest based on LIBOR, base rates or foreign equivalents appropriate to the country in which the borrowing is incurred. The Group has entered into interest rate and currency swaps, details of which are included in note 23.
The carrying amount of the Group's borrowings are denominated in the following currencies:
| 2014 | ||||
|---|---|---|---|---|
| Currency | Total £m |
Floating rate £m |
Fixed rate £m |
|
| Sterling | 253.5 | 140.3 | 113.2 | |
| South African Rand | 6.8 | 6.8 | – | |
| US Dollar* | 393.2 | – | 393.2 | |
| Other | 13.6 | 13.6 | – | |
| 667.1 | 160.7 | 506.4 |
| 2013 | |||
|---|---|---|---|
| Currency | Total £m |
Floating rate £m |
Fixed rate £m |
| Sterling | 239.5 | 125.0 | 114.5 |
| South African Rand | 9.2 | 9.2 | – |
| US Dollar* | 442.3 | – | 442.3 |
| Other | 1.8 | 1.8 | – |
| 692.8 | 136.0 | 556.8 |
* US Dollars 650 million have been swapped into Sterling and US Dollars 300 million into floating rates.
The weighted average interest rates of Sterling fixed rate borrowings are 5.1%. The weighted average period for which these interest rates are fixed is four years.
The floating rate for borrowings is linked to LIBOR in the case of Sterling, the prime rate in the case of South African Rand and the local prime rate for other currencies.
The exposure of the Group to interest rate changes when borrowings re-price is as follows:
| Total borrowings | 1 year £m |
1–5 years £m |
>5 years £m |
Total £m |
|---|---|---|---|---|
| As at 31 March 2014 | 343.0 | 156.5 | 167.6 | 667.1 |
| As at 31 March 2013 | 341.2 | 164.8 | 186.8 | 692.8 |
The effective interest rates at the balance sheet dates were as follows:
| 2014 | 2013 | |
|---|---|---|
| % | % | |
| UK bank overdraft | 1.5 | 1.5 |
| UK bank borrowings | 3.0 | 3.0 |
| US private placement – fixed | 5.7 | 5.7 |
| US private placement – floating | 3.1 | 3.1 |
| Other borrowings | 4.8–12.0 | 4.8–5.5 |
| Finance leases | 4.6–10.0 | 8.0–14.0 |
The total borrowings of the Group at 31 March are repayable as follows:
| 2014 | 2013 | ||||
|---|---|---|---|---|---|
| Loans and overdrafts £m |
Finance lease obligations £m |
Loans and overdrafts £m |
Finance lease obligations £m |
||
| Within one year | 14.8 | 2.9 | 6.8 | 2.0 | |
| Between one and two years | 1.7 | 5.3 | 1.7 | 2.6 | |
| Between two and five years | 281.6 | 3.9 | 287.8 | – | |
| Greater than five years | 350.2 | 6.7 | 391.9 | – | |
| 648.3 | 18.8 | 688.2 | 4.6 |
Borrowing facilities
The Group had the following undrawn committed borrowing facilities available at 31 March:
| 2014 £m |
2013 £m |
|
|---|---|---|
| Expiring in less than one year | 24.7 | 32.4 |
| Expiring in more than one year but not more than five years | 373.0 | 375.0 |
| 397.7 | 407.4 |
The minimum lease payments under finance leases fall due as follows:
| 2014 £m |
2013 £m |
|
|---|---|---|
| Not later than one year | 3.9 | 2.2 |
| Later than one year but not more than five years | 10.3 | 2.9 |
| More than five years | 9.0 | – |
| 23.2 | 5.1 | |
| Future finance charges on finance leases | (4.4) | (0.5) |
| Present value of finance lease liabilities | 18.8 | 4.6 |
| Fair value | |||||
|---|---|---|---|---|---|
| Assets | Liabilities | ||||
| 2014 £m |
2013 £m |
2014 £m |
2013 £m |
||
| Non-current | |||||
| US private placement – currency and interest rate swaps | – | 45.1 | 3.5 | – | |
| Non-controlling interest put option | – | – | 8.8 | 10.0 | |
| Total non-current other financial assets and liabilities | – | 45.1 | 12.3 | 10.0 | |
| Current | |||||
| Interest rate hedges | – | – | 6.7 | 3.1 | |
| Other currency hedges | 9.6 | 3.5 | 5.0 | 4.1 | |
| Total current other financial assets and liabilities | 9.6 | 3.5 | 11.7 | 7.2 |
The Group enters into forward foreign currency contracts to hedge the currency exposures that arise on sales, purchases, deposits and borrowings denominated in foreign currencies, as the transactions occur.
The Group enters into interest rate hedges against interest rate exposure and to create a balance between fixed and floating interest rates.
The fair values of the financial instruments, excluding the non-controlling interest put option, are based on valuation techniques (level 2) using underlying market data and discounted cash flows.
The fair value of the non-controlling interest put option is based on valuation techniques (level 3) using discounted cash flows. Future cash flows are derived from approved budgets using discount rate of 14%.
The notional principal amount of outstanding interest rate swap contracts at 31 March 2014 included £12.8 million of UK interest rate swaps and interest rate swaps in relation to the US\$650 million US\$ to GBP cross-currency swap.
The Group held the following interest rate hedges at 31 March 2014:
| Amount £m |
Fixed payable % |
Floating receivable % |
Maturity | |
|---|---|---|---|---|
| Hedged | ||||
| Interest rate swap | 7.3 | 5.45 | 0.62219 31/3/2019 | |
| Interest rate swap | 5.5 | 4.745 | 0.62219 31/3/2029 | |
| Total interest rate swaps | 12.8 |
| Amount US\$m |
Amount at swapped rates £m |
Swap % |
Maturity | |
|---|---|---|---|---|
| Hedged | ||||
| Cross currency and interest rate swap | 150.0 | 92.1 | Fixed 4.94% US\$ to fixed 5.4% GBP |
19/3/2018 |
| Cross currency and interest rate swap | 200.0 | 122.9 | Fixed 5.64% US\$ to fixed 5.95% GBP |
17/3/2021 |
| Cross currency and interest rate swap | 300.0 | 184.3 | Fixed 5.64% US\$ to floating three month LIBOR +margin GBP |
17/3/2021 |
| Total cross currency and interest rate swap | 650.0 | 399.3 |
The fair values of financial assets and liabilities at the balance sheet date were:
| 2014 | 2013 | ||||
|---|---|---|---|---|---|
| Book value £m |
Fair value £m |
Book value £m |
Fair value £m |
||
| Fair value of non-current borrowings and loans | |||||
| Long-term borrowings | (649.4) | (648.8) | (684.0) | (683.4) | |
| Loan to joint venture | 50.6 | 50.6 | 51.1 | 51.1 | |
| (598.8) | (598.2) | (632.9) | (632.3) | ||
| Fair value of other financial assets and financial liabilities | |||||
| Short-term borrowings | (17.7) | (17.7) | (8.8) | (8.8) | |
| Trade and other payables* | (962.0) | (960.7) | (875.1) | (874.0) | |
| Trade and other receivables | 578.7 | 578.7 | 519.5 | 519.5 | |
| Other financial assets – IFRIC 12 | 20.5 | 20.5 | 22.2 | 22.2 | |
| Short-term deposits | 14.8 | 14.8 | 14.0 | 14.0 | |
| Cash at bank and in hand | 71.5 | 71.5 | 83.1 | 83.1 | |
| Income tax receivable | 28.0 | 28.0 | 8.6 | 8.6 | |
| Other financial (liabilities ) and assets | (14.4) | (14.4) | 31.4 | 31.4 | |
| (280.6) | (279.3) | (205.1) | (204.0) |
* Does not include other taxes and social security.
Fair values of long-term borrowings are based on cash flows discounted using a rate of 4% to 5% (2013: 4% to 5%).
| Insurance provisions (a) £m |
Contract/ warranty (b) £m |
Reorganisation costs (c) £m |
Acquisition/ deferred consideration (d) £m |
Property and other (e) £m |
Total provisions £m |
|
|---|---|---|---|---|---|---|
| At 1 April 2013 | 3.4 | 55.1 | 15.0 | – | 84.3 | 157.8 |
| On acquisition of subsidiaries (note 31) | – | – | – | 9.9 | 5.3 | 15.2 |
| (Released)/charged to income statement | – | (13.5) | (6.0) | 9.0 | (4.7) | (15.2) |
| Utilised in year | (0.1) | (0.8) | (1.8) | (7.8) | (10.5) | |
| Foreign exchange | – | (1.1) | – | (0.4) | (0.7) | (2.2) |
| At 31 March 2014 | 3.3 | 39.7 | 7.2 | 18.5 | 76.4 | 145.1 |
Provisions have been analysed between current and non-current as follows:
| 2014 £m |
2013 £m |
|
|---|---|---|
| Current | 50.1 | 42.6 |
| Non-current | 95.0 | 115.2 |
| 145.1 | 157.8 |
(a) The insurance provisions arise in the Group's captive insurance companies, Chepstow Insurance Limited, Peterhouse Insurance Limited and VT Insurance Services Limited. They relate to specific claims assessed in accordance with the advice of independent actuaries.
(b) The contract/warranty provisions relate to onerous contracts and warranty obligations on completed contracts and disposals.
(c) The reorganisation costs arise mainly in relation to acquired businesses personnel related costs.
(d) Acquisition/deferred consideration arises from acquisitions during the year and costs on the acquisition of Avincis.
(e) Property and other in the main relate to provisions for onerous leases, dilapidation costs and contractual obligations in respect of infrastructure.
Included within property and other provisions is £40 million expected to be utilised in approximately ten years. In addition within contract/warranty provisions there is £18 million expected to be materially utilised in approximately ten years. Other than these provisions the Group's non-current provisions are expected to be utilised within two to five years.
| Ordinary shares of 60p Number |
Total £m |
|
|---|---|---|
| Allotted, issued and fully paid | ||
| At 1 April 2013 | 362,071,802 | 217.2 |
| Shares issued | 2,130 | – |
| At 31 March 2014 | 362,073,932 | 217.2 |
| At 1 April 2012 | 359,146,705 | 215.5 |
| Shares issued | 2,925,097 | 1.7 |
| At 31 March 2013 | 362,071,802 | 217.2 |
The table below shows options existing over the Company's shares as at 31 March 2014 that are capable of being met on exercise by the issue of new shares. They represent outstanding options granted under the Company's executive share plans. The options were either granted directly by the Company or by the Trustees of the Babcock Employee Share Trust (BEST) – a total of 6,159,046 (2013: 5,917,922) shares – or the Trustees of the Peterhouse Employee Share Trust (PEST) – a total of 160,710 (2013: 206,973) shares. The Company decides from time to time whether to meet the exercise of such options by way of a fresh issue of shares (either to the option holder or to the employee share trust) or by way of financing the employee share trusts to purchase already-issued shares in the market. This decision is made according to available headroom within the dilution limits contained in the relevant share plan rules and what the Directors consider to be in the best interest of the Company at the time.
| Grant date | Type | Exercise price Pence |
Exercise period | 2014 Number |
2013 Number |
|---|---|---|---|---|---|
| 30 June 2003 | Option – vested | 115.60 | 30/06/2006 – 29/06/2013 | – | 9,940 |
| 06 July 2004 | Option – vested | 126.00 | 06/07/2007 – 05/07/2014 | 11,870 | 45,118 |
| 06 July 2004 | LTIP1 – vested |
– | 06/07/2007 – 05/07/2014 | – | 83,333 |
| 24 July 2006 | LTIP1 – vested |
– | 24/07/2009 – 23/07/2016 | 17,060 | 17,060 |
| 19 June 2008 | LTIP1 – vested |
– | 19/06/2011 – 18/06/2018 | 10,781 | 146,401 |
| 11 September 2009 | PSP2 – vested |
– | 11/09/2012 – 10/09/2013 | 105,672 | 503,349 |
| 11 September 2009 | CSOP3 – vested |
– | 11/09/2012 – 10/09/2013 | 38,347 | 113,719 |
| 13 July 2010 | PSP2 – vested in year |
– | 13/07/2013 – 12/07/2014 | 280,412 | 1,471,563 |
| 13 July 2010 | CSOP3 – vested in year |
– | 13/07/2013 – 12/07/2014 | 30,963 | 91,007 |
| 14 June 2011 | PSP2 | – | 14/06/2014 – 13/06/2015 | 1,499,186 | 1,526,516 |
| 14 June 2011 | CSOP3 | – | 14/06/2014 – 13/06/2015 | 77,110 | 77,110 |
| 14 June 2012 | PSP2 | – | 14/06/2015 – 13/06/2016 | 1,415,101 | 1,449,353 |
| 14 June 2012 | CSOP3 | – | 14/06/2015 – 13/06/2016 | 63,857 | 70,239 |
| 16 July 2012 | PSP2 | – | 16/07/2015 – 15/07/2016 | 32,454 | 32,454 |
| 24 January 2013 | PSP2 | – | 24/01/2016 – 24/01/2017 | 11,617 | 11,617 |
| 16 July 2012 | DBMP4 | – | 16/07/2015 – 15/07/2016 | 490,116 | 490,116 |
| 13 June 2013 | PSP2 | – | 13/06/2016 – 13/06/2017 | 1,244,269 | – |
| 13 June 2013 | CSOP3 | – | 13/06/2016 – 13/06/2017 | 102,658 | – |
| 13 June 2013 | DBMP4 | – | 13/06/2016 – 13/06/2017 | 891,351 | – |
| 13 June 2013 | DBMP5 | – | 13/06/2015 – 13/06/2016 | 8,802 | |
| 6,331,626 | 6,138,895 |
Options granted to Directors are summarised in the Remuneration report on pages 88 to 116 and are included in the outstanding options set out above.
2003 Long Term Incentive Plan,
2009 Performance Share Plan,
2009 Company Share Option Plan,
2012 Deferred Bonus Matching Plan,
Award issued without matching shares, has two year vesting period.
The table below shows shares already held by the trustees of the BEST and PEST in order to meet these options and also awards made under the 2009 Deferred Bonus Plan.
| 2014 | 2013 | |||
|---|---|---|---|---|
| Shares newly issued by the Company |
Shares bought in the market |
Shares newly issued by the Company |
Shares bought in the market |
|
| BEST | 893,062 | 223,568 | 2,394,033 | 529,179 |
| PEST | 44,509 | – | 117,880 | – |
| Total | 937,571 | 223,568 | 2,511,913 | 529,179 |
Share awards granted under the 2009 Deferred Bonus Plan are required by the rules of that plan to be satisfied with already issued shares purchased in the market.
A reconciliation of share option movements is shown below:
| 2014 | 2013 | ||||
|---|---|---|---|---|---|
| Number '000 |
Weighted average exercise price |
Number '000 |
Weighted average exercise price |
||
| Outstanding at 1 April | 55 | £1.24 | 84 | £1.21 | |
| Exercised | (43) | £1.23 | (29) | £1.15 | |
| Outstanding at 31 March | 12 | £1.26 | 55 | £1.24 | |
| Exercisable at 31 March | 12 | £1.26 | 55 | £1.24 |
The weighted average share price for options exercised during the year was 1,283.07p per share (2013: 958.35p per share).
A reconciliation of LTIP, PSP, CSOP and DBMP movements is shown below:
| 2014 | 2013 | |
|---|---|---|
| Number '000 |
Number '000 |
|
| Outstanding at 1 April | 6,084 | 5,335 |
| Granted | 2,285 | 2,067 |
| Exercised | (1,505) | (531) |
| Forfeited/lapsed | (551) | (787) |
| Outstanding at 31 March | 6,313 | 6,084 |
| Exercisable at 31 March | 483 | 864 |
The weighted average share price for awards exercised during the year was 1,192.68p per share (2013: 933.50p per share).
During the year no ordinary shares (2013: 3,257,686 shares) were acquired or subscribed for through either the Babcock Employee Share Trust or the Peterhouse Employee Share Trust (together 'the Trusts'). The Trusts hold shares to be used towards satisfying awards made under the Company's employee share schemes. During the year ended 31 March 2014 1,879,953 shares (2013: 639,761) were disposed of by the Trusts resulting from options exercised. At 31 March 2014, the Trusts held between them a total of 1,161,139 (2013: 3,041,092) ordinary shares at a total market value of £15,640,542 (2013: £33,087,081) representing 0.32% (2013: 0.84%) of the issued share capital at that date. The Company elected to pay dividends to the Babcock Employee Share Trust at the rate of 0.001p per share during the year, though full dividends were paid in respect of shares held by the Peterhouse Employee Share Trust. The Company meets the operating expenses of the Trusts.
The Trusts enable shares in the Company to be held or purchased and made available to employees through the exercise of rights or awards made under the Company's employee share schemes. The Trusts are discretionary settlements for the benefit of employees within the Group. The Company is excluded from benefiting under them. They are controlled and managed outside the UK and each has a single corporate trustee which is an independent trustee services organisation. The right to remove and appoint the trustees rests ultimately with the Company. The trustee of the Babcock Employee Share Trust is required to waive both voting rights and dividends payable on any share in the Company in excess of 0.001p, unless otherwise directed by the Company, but the trustee of the Peterhouse Employee Share Trust does not have the power to waive dividends due on Babcock ordinary shares and therefore receives the full amount of any dividends declared.
The options, LTIP, PSP, CSOP and DBMP will be adjusted for the post year end rights issue.
The charge to the income statement has been based on the assumptions below and is based on the binomial model as adjusted, allowing for a closed form numerical-integrated solution, which makes it analogous to the Monte Carlo simulations, including performance conditions. The detailed description of the plans below is included within the Remuneration report.
During the year the total charge relating to employee share-based payment plans was £12.2 million (2013: £8.6 million) all of which related to equity-settled share-based payment transactions.
After tax, the income statement charge was £9.4million (2013: £6.5 million).
The fair value per option granted and the assumptions used in the calculation are as follows:
| Options awarded Number |
Share price at grant or modification date Pence |
Expected volatility % |
Option life Years |
Expectations of meeting performance criteria – EPS/ROCE % |
Fair value per option – TSR Pence |
Fair value per option – EPS/ROCE Pence |
Correlation % |
Grant or modification date |
|
|---|---|---|---|---|---|---|---|---|---|
| 2013 DBMP Matching | 894,367 | 1,155.0 | 16.0% | 4.0 | 40% | 623.7 | 1,155.0 | 46% | 15/8/13 |
| 2013 PSP | 1,155,538 | 1,155.0 | 16.0% | 4.0 | 40% | 634.1 | 1,155.0 | 46% | 15/8/13 |
| 2013 PSP Main | 107,581 | 1,155.0 | 16.0% | 4.0 | 40% | 562.5 | 1,059.1 | 46% | 15/8/13 |
| 2013 CSOP | 107,581 | 1,155.0 | 16.0% | 4.0 | 40% | 95.9 | 71.6 | 46% | 15/8/13 |
| 2012 DBMP Matching | 326,744 | 874.5 | 18.0% | 4.0 | 40% | 623.5 | 874.5 | 46% | 16/7/12 |
| 2012 PSP | 32,454 | 874.5 | 18.0% | 4.0 | 40% | 628.8 | 874.5 | 46% | 16/7/12 |
| 2012 PSP Main | 1,389,376 | 879.5 | 18.0% | 4.0 | 40% | 653.5 | 879.5 | 46% | 14/6/12 |
| 2012 PSP Funding | 70,239 | 879.5 | 18.0% | 4.0 | 40% | 575.2 | 792.4 | 46% | 14/6/12 |
| 2012 CSOP | 70,239 | 879.5 | 18.0% | 4.0 | 40% | 78.3 | 87.1 | 46% | 14/6/12 |
| 2011 PSP Main | 1,622,534 | 701.0 | 25.9% | 4.0 | 90% | 433.0 | 701.0 | 46% | 14/6/11 |
| 2011 PSP Funding | 80,703 | 701.0 | 25.9% | 4.0 | 90% | 339.0 | 582.0 | 46% | 14/6/11 |
| 2011 CSOP | 80,703 | 701.0 | 25.9% | 4.0 | 90% | 92.0 | 116.0 | 46% | 16/6/11 |
Both the vesting period and the expected life of all DBMP, PSP and CSOP awards is three years. The holders of all awards receive dividends, except for CSOP awards.
The DBMP Matching awards are split evenly between the performance criteria of TSR, EPS and ROCE, whilst the PSP and CSOP awards are just split evenly between TSR and EPS.
The expected volatility is based on historical volatility over the last one to three years. The expected life is the average expected period to exercise. The risk free rate of return is the yield on zero-coupon government bonds of a term consistent with the assumed option life.
The DBMP, PSP and CSOP will be adjusted for the post year end rights issue.
Pension costs for defined contribution schemes are as follows:
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Defined contribution schemes | 42.5 | 31.6 |
Balance sheet assets and liabilities recognised are as follows:
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| Retirement benefits – funds in surplus | 15.2 | 10.1 |
| Retirement benefits – funds in deficit | (282.9) | (271.2) |
| (267.7) | (261.1) |
The Group has a number of pension schemes around the world covering many of its employees. The principal schemes are those in the UK where the Group operates three defined benefit pension schemes for employees in the Devonport Royal Dockyard Pension Scheme, the Babcock International Group Pension Scheme and the Rosyth Royal Dockyard Pension Scheme (the Principal schemes). The nature of these schemes is that the employees contribute to the schemes with the employer paying the balance of the cost required. The contributions required and the assessment of the assets and the liabilities that have accrued to members and any deficit recovery payments required are agreed by the Group with the trustees who are advised by an independent, qualified actuary.
The key risks in all of the defined benefit schemes relate primarily to longevity, the expected inflation rate in the future which impacts on pension increases and indirectly salary increases and the discount rate used to value the liabilities. The Principal schemes have mitigated some of these risks by taking out longevity swaps for the pensioners and their spouses and through a common investment committee have significantly hedged the interest rate and inflation risk though derivative instruments.
The Group also participates in the Babcock Rail Ltd Shared Cost Section of the Railways Pension Scheme (the Railways scheme). This scheme is a multi-employer shared cost scheme with the contributions required and the assessment of the assets and the liabilities that have accrued to members and any deficit recovery payments agreed with the trustees who are advised by an independent, qualified actuary. The costs are shared such that the employees contribute 40% of the cost of providing the benefits and the employer contributes 60%. The Group's share of the assets and liabilities is separately identified to those of other employers in the scheme and therefore the Group cannot be held liable for the obligations of other entities that participate in this scheme.
The schemes are funded by payments to legally separate trustee-administered funds. The trustees of each scheme are required by law to act in the best interests of each scheme's members. In addition to determining future contribution requirements (with the agreement of the Group), the trustees are responsible for setting the schemes' investment strategy (subject to consultation with the Group). All the schemes have an independent trustee and member nominated trustees. The schemes are subject to regulation under the funding regime set out in Part III of the Pensions Act 2004. The detail of the latest formal actuarial valuation of the scheme is as follows. Valuations of the Babcock International Group scheme and the Railways scheme are currently being undertaken:
| Devonport Royal Dockyard Scheme |
Babcock International Group Scheme |
Rosyth Royal Dockyard Scheme |
Babcock Rail Ltd section of the Railways Pension Scheme |
|
|---|---|---|---|---|
| Date of last formal completed actuarial valuation | 31/03/11 | 31/03/10 | 31/03/12 | 31/12/10 |
| Number of active members at above date | 3,328 | 2,257 | 943 | 481 |
| Actuarial valuation method | Projected unit | Projected unit | Projected unit Projected unit | |
| Results of formal actuarial valuation: | ||||
| Value of assets | £977.0m | £822.3m | £470.0m | £189.0m |
| Level of funding | 90% | 92% | 83% | 101% |
| Principal valuation assumptions: | ||||
| Excess of pre-retirement discount rate over earnings increases | 2.4% | 2.4% | 3.75% | 3.5% |
| Excess of post-retirement discount rate over earnings increases | 1.3% | 2.4% | 1.0% | 2.9% |
The Group also participates in or provides a number of other smaller pension schemes including a number of sections of the local government pension schemes in which most cases the employer contribution rates are fully reimbursed by the administering authorities. It also participates in the Magnox Electric Group of the Electricity Supply Pension Scheme and runs the Babcock Naval Services Pension Scheme for which the MoD fully reimburses the contributions payable.
The Group's cash contribution rates payable to the schemes are as follows:
| Devonport Royal Dockyard Scheme £m |
Babcock International Group Scheme £m |
Rosyth Royal Dockyard Scheme £m |
Babcock Rail Ltd section of the Railways Pension Scheme £m |
Other £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Future service contribution rate | 19.1% | 24.6% | 16.6% | 18.0% | – | – |
| Future service cash contributions | £20.1m | £14.5m | £5.0m | £2.0m | £9.6m | £51.2m |
| Deficit contributions | £13.5m | £15.7m | £8.7m | – | £1.3m | £39.2m |
| Longevity swap payments | £1.8m | £0.7m | £1.7m | – | – | £4.2m |
| Expected employer cash costs for 2014/15 | £35.4m | £30.9m | £15.4m | £2.0m | £10.9m | £94.6m |
Where salary sacrifice arrangements are in place, the Group effectively meets the members' contributions. The above level of funding is expected to continue until the next actuarial valuation of each scheme; valuations are carried out every three years.
The expected payments from the schemes are primarily pension payments, most of which increase at a fixed rate or in line with RPI or CPI inflation when in payment and lump sums. Benefit payments commence at retirement, death or incapacity and are predominantly calculated with reference to final salary.
The latest full actuarial valuation of the Group's defined benefit pension schemes have been updated to 31 March 2014 by qualified independent actuaries for IAS 19 purposes using the following assumptions:
| March 2014 | Devonport Royal Dockyard Scheme % |
Babcock International Group Scheme % |
Rosyth Royal Dockyard Scheme % |
Babcock Rail Ltd section of the Railways Pension Scheme % |
|---|---|---|---|---|
| Rate of increase in pensionable salaries | 2.4 | 2.4 | 2.4 | 2.4 |
| Rate of increase in pensions (past service) | 2.2 | 3.0 | 3.4 | 2.2 |
| Discount rate | 4.5 | 4.5 | 4.5 | 4.5 |
| Inflation rate (RPI) | 3.3 | 3.3 | 3.3 | 3.3 |
| Inflation rate (CPI) | 2.1 | 2.1 | 2.1 | 2.1 |
| Weighted average duration of cashflows (years) | 17 | 16 | 17 | 18 |
| Total life expectancy for current pensioners aged 65 (years) | 86.7 | 87.8 | 84.3 | 86.2 |
| Total life expectancy for future pensioners currently aged 45 (years) | 88.1 | 89.3 | 85.7 | 88.4 |
The fair value of the assets, the present value of the liabilities and the expected rates of return of the Group pensions schemes at 31 March were as follows:
| 2014 | 2013 (restated) | |||||||
|---|---|---|---|---|---|---|---|---|
| Principal schemes £m |
Railways scheme £m |
Other schemes £m |
Total £m |
Principal schemes £m |
Railways schemes £m |
Other schemes £m |
Total £m |
|
| Fair value of plan assets | ||||||||
| Growth assets | ||||||||
| Equities | 659.6 | 98.2 | 97.8 | 855.6 | 596.1 | 93.1 | 98.0 | 787.2 |
| Property | 134.3 | 25.4 | 6.8 | 166.5 | 121.4 | 24.6 | 6.0 | 152.0 |
| Absolute return and multi strategy funds |
47.4 | 14.1 | 5.0 | 66.5 | – | 12.9 | 4.7 | 17.6 |
| Low risk assets | ||||||||
| Bonds | 1,023.8 | 61.6 | 83.3 | 1,168.7 | 1,323.4 | 57.9 | 74.9 | 1,456.2 |
| Matching assets* | 942.9 | 0.9 | 67.8 | 1,011.6 | 787.6 | 0.9 | 51.6 | 840.1 |
| Collateral | 51.9 | – | – | 51.9 | 51.6 | – | – | 51.6 |
| Active position on longevity swaps | (100.7) | – | – | (100.7) | (99.9) | – | – | (99.9) |
| Fair value of assets | 2,759.2 | 200.2 | 260.7 | 3,220.1 | 2,780.2 | 189.4 | 235.2 | 3,204.8 |
| Percentage of assets quoted | 100% | 100% | 100% | 100% | 100% | 100% | 100% | 100% |
| Percentage of assets unquoted | – | – | – | – | – | – | – | – |
| Present value of defined benefit obligations |
||||||||
| Active members | 1,065.5 | 58.9 | 144.5 | 1,268.9 | 1,063.4 | 58.8 | 131.7 | 1,253.9 |
| Deferred pensioners | 633.8 | 57.4 | 57.6 | 748.8 | 632.5 | 59.0 | 56.2 | 747.7 |
| Pensioners | 1,330.0 | 92.6 | 47.4 | 1,470.0 | 1,327.3 | 90.0 | 46.9 | 1,464.2 |
| Total liabilities | 3,029.3 | 208.9 | 249.5 | 3,487.7 | 3,023.2 | 207.8 | 234.8 | 3,465.8 |
| Deficit/(surplus) | 270.1 | 8.7 | (11.2) | 267.6 | 243.0 | 18.4 | (0.4) | 261.0 |
| Present value of unfunded obligations | – | – | 0.1 | 0.1 | – | – | 0.1 | 0.1 |
| Net liabilities/(assets) recognised in the balance sheet |
270.1 | 8.7 | (11.1) | 267.7 | 243.0 | 18.4 | (0.3) | 261.1 |
* Included within matching assets are government bonds which are shown net of repurchase obligations of £1,913 million (2013: £1,495 million).
The schemes do not invest directly in assets or shares of the Group.
Financials
The amounts recognised in the Group income statement are as follows:
| 2014 | 2013 (restated) | |||||||
|---|---|---|---|---|---|---|---|---|
| Principal schemes £m |
Railways scheme £m |
Other schemes £m |
Total £m |
Principal schemes £m |
Railways scheme £m |
Other schemes £m |
Total £m |
|
| Current service cost | 40.5 | 1.9 | 1.6 | 44.0 | 38.7 | 1.9 | 1.2 | 41.8 |
| Incurred expenses | 5.1 | 0.1 | 0.1 | 5.3 | 2.9 | – | 0.1 | 3.0 |
| Total included within operating profit | 45.6 | 2.0 | 1.7 | 49.3 | 41.6 | 1.9 | 1.3 | 44.8 |
| Net interest cost | 10.2 | 0.8 | (0.1) | 10.9 | 11.7 | 0.5 | (0.4) | 11.8 |
| Total included within operating profit | 55.8 | 2.8 | 1.6 | 60.2 | 53.3 | 2.4 | 0.9 | 56.6 |
The change in pension costs as a result of revisions to IAS 19 Revised are shown in note 1.
| 2014 | 2013 (restated) | |||||||
|---|---|---|---|---|---|---|---|---|
| Principal schemes £m |
Railways scheme £m |
Other schemes £m |
Total £m |
Principal schemes £m |
Railways scheme £m |
Other schemes £m |
Total £m |
|
| Actual return less interest on pension scheme assets |
(112.3) | 9.6 | 23.6 | (79.1) | 281.7 | 12.7 | 24.7 | 319.1 |
| Experience gain/(losses) arising on scheme liabilities |
(28.1) | (6.0) | (1.7) | (35.8) | (61.3) | 2.3 | (0.1) | (59.1) |
| Changes in assumptions on scheme liabilities |
75.7 | 7.0 | (14.4) | 68.3 | (261.5) | (23.2) | (30.3) | (315.0) |
| Other gains/(losses) | 3.6 | – | – | 3.6 | 38.8 | – | – | 38.8 |
| At 31 March | (61.1) | 10.6 | 7.5 | (43.0) | (2.3) | (8.2) | (5.7) | (16.2) |
Analysis of movement in the Group balance sheet
| 2014 | 2013 (restated) | |||||||
|---|---|---|---|---|---|---|---|---|
| Principal schemes £m |
Railways scheme £m |
Other schemes £m |
Total £m |
Principal schemes £m |
Railways scheme £m |
Other schemes £m |
Total £m |
|
| Fair value of plan assets (including reimbursement rights) |
||||||||
| At 1 April | 2,780.2 | 189.4 | 235.2 | 3,204.8 | 2,405.9 | 175.2 | 201.6 | 2,782.7 |
| (Settlements)/transfers in | – | – | (3.3) | (3.3) | – | – | 3.9 | 3.9 |
| Interest on assets | 125.6 | 4.9 | 5.0 | 135.5 | 121.4 | 5.0 | 5.1 | 131.5 |
| Interest on reimbursement rights | (4.4) | – | – | (4.4) | (6.0) | – | – | (6.0) |
| Actuarial (loss)/gain on assets | (112.3) | 9.6 | 23.6 | (79.1) | 281.7 | 12.7 | 24.7 | 319.1 |
| Actuarial gain on reimbursement rights – demographics |
18.6 | – | – | 18.6 | 25.5 | – | – | 25.5 |
| Actuarial gain/(loss) on reimbursement rights – financial |
4.2 | – | – | 4.2 | (21.9) | – | – | (21.9) |
| Experience (loss)/gains on reimbursement rights |
(19.2) | – | – | (19.2) | 26.6 | – | – | 26.6 |
| Employer contributions | 89.9 | 2.0 | 4.9 | 96.8 | 71.3 | 2.2 | 4.1 | 77.6 |
| Employee contributions | 3.5 | 1.0 | 0.9 | 5.4 | 2.9 | 1.2 | 1.0 | 5.1 |
| Benefits paid | (126.9) | (6.7) | (5.6) | (139.2) | (127.2) | (6.9) | (5.4) | (139.5) |
| Exchange differences | – | – | – | – | – | – | 0.2 | 0.2 |
| At 31 March | 2,759.2 | 200.2 | 260.7 | 3,220.1 | 2,780.2 | 189.4 | 235.2 | 3,204.8 |
| Present value of benefit obligations | ||||||||
| At 1 April | 3,023.2 | 207.8 | 234.8 | 3,465.8 | 2,656.0 | 185.2 | 198.7 | 3,039.9 |
| (Settlements)/transfers in | – | – | (3.3) | (3.3) | – | – | 3.9 | 3.9 |
| Service cost | 40.5 | 1.9 | 1.6 | 44.0 | 38.7 | 1.9 | 1.2 | 41.8 |
| Incurred expenses | 5.1 | 0.1 | 0.1 | 5.3 | 2.9 | – | 0.1 | 3.0 |
| Interest cost | 131.5 | 5.8 | 4.9 | 142.2 | 127.1 | 5.5 | 4.7 | 137.3 |
| Employee contributions | 3.5 | 1.0 | 0.9 | 5.4 | 2.9 | 1.2 | 1.0 | 5.1 |
| Experience losses | 28.1 | 6.0 | 1.7 | 35.8 | 61.3 | (2.3) | 0.1 | 59.1 |
| Actuarial loss – demographics | 35.7 | – | – | 35.7 | 75.8 | 1.3 | 0.1 | 77.2 |
| Actuarial (gain)/loss – financial | (111.4) | (7.0) | 14.4 | (104.0) | 185.7 | 21.9 | 30.2 | 237.8 |
| Benefits paid | (126.9) | (6.7) | (5.6) | (139.2) | (127.2) | (6.9) | (5.4) | (139.5) |
| Exchange differences | – | – | – | – | – | – | 0.2 | 0.2 |
| At 31 March | 3,029.3 | 208.9 | 249.5 | 3,487.7 | 3,023.2 | 207.8 | 234.8 | 3,465.8 |
| Present value of unfunded obligations | – | – | (0.1) | (0.1) | – | – | (0.1) | (0.1) |
| Net (deficit)/surplus at 31 March | (270.1) | (8.7) | 11.1 | (267.7) | (243.0) | (18.4) | 0.3 | (261.1) |
The movement in net deficits for the year ending 31 March 2014 are as a result of the movement in assets and liabilities shown above.
The changes to the Group balance sheet at March 2014 and the charges to the Group income statement for the year to March 2015, if the assumptions were sensitised by the amounts below, would be:
| Defined benefit obligations 2014 £m |
Income statement 2015 £m |
|
|---|---|---|
| Initial assumptions | 3,352.2 | 57.9 |
| Discount rate assumptions increased by 0.5% | (251.6) | (15.6) |
| Discount rate assumptions decreased by 0.5% | 251.6 | 12.9 |
| Inflation rate assumptions increased by 0.5% | 157.0 | 9.5 |
| Inflation rate assumptions decreased by 0.5% | (146.6) | (8.5) |
| Total life expectancy increased by half a year | 48.3 | 2.8 |
| Total life expectancy decreased by half a year | (48.3) | (2.5) |
| Salary increase assumptions increased by 0.5% | 40.7 | 3.4 |
| Salary increase assumptions decreased by 0.5% | (40.4) | (3.1) |
The figures in the table above have been calculated on an approximate basis, using information about the expected future benefit payments out of the schemes. The analysis above may not be representative of actual changes to the position since changes in assumptions are unlikely to happen in isolation. The change in inflation rates is assumed to affect the assumed rate of RPI inflation, CPI inflation and future pension increases by an equal amount. The fair value of the schemes' equity and property assets are assumed not to be affected by any sensitivity changes shown. The balance sheet values would increase or decrease by the same amount as the change in the defined benefit obligations.
The sensitivity disclosed have changed compared to the prior year to meet the requirements of IAS 19 Revised.
| 2013 (restated) £m |
||
|---|---|---|
| Cash flows from operating activities | ||
| Operating profit before amortisation of acquired intangible and exceptional items | 317.2 | 284.2 |
| Amortisation of acquired intangible and exceptional items | (84.1) | (80.7) |
| Group operating profit | 233.1 | 203.5 |
| Pre-tax loss from discontinued operations | – | (17.1) |
| Depreciation of property, plant and equipment | 40.0 | 37.4 |
| Amortisation of intangible assets | 66.7 | 73.6 |
| Investment income | 1.5 | 1.7 |
| Equity share-based payments | 12.2 | 8.6 |
| Loss on disposal of subsidiaries | – | 18.0 |
| Loss/(profit) on disposal of property, plant and equipment | 0.3 | (4.1) |
| Loss on disposal of intangible assets | – | 1.1 |
| Operating cash flows before movement in working capital | 353.8 | 322.7 |
| (Increase)/decrease in inventories | (43.7) | 1.4 |
| Increase in receivables | (67.6) | (34.8) |
| Increase in payables | 91.3 | 48.5 |
| Decrease in provisions | (31.3) | (11.5) |
| Exceptional items – acquisition costs incurred not paid | 24.2 | – |
| Retirement benefit contributions in excess of income statement | (47.2) | (32.9) |
| Cash generated from operations | 279.5 | 293.4 |
| 2014 £m |
2013 (restated) £m |
|
|---|---|---|
| Decrease in cash in the year | (14.0) | (5.7) |
| Cash flow from the decrease in debt and lease financing | 4.5 | 104.8 |
| Change in net funds resulting from cash flows | (9.5) | 99.1 |
| Loans and finance leases acquired with subsidiaries | (1.3) | (6.3) |
| New finance leases | (19.0) | (0.6) |
| Movement in joint venture and associate loans | (0.5) | 26.2 |
| Foreign currency translation differences and other | (3.9) | (1.7) |
| Movement in net debt in the year | (34.2) | 116.7 |
| Net debt at the beginning of the year | (499.5) | (616.2) |
| Net debt at the end of the year | (533.7) | (499.5) |
| 31 March 2013 (restated) £m |
Cash flow £m |
Acquisitions and disposals £m |
New finance leases £m |
Exchange/ other movement £m |
31 March 2014 £m |
|
|---|---|---|---|---|---|---|
| Cash and bank balances | 97.1 | (4.9) | (0.1) | – | (5.8) | 86.3 |
| Bank overdrafts | (6.5) | (9.0) | – | – | 0.4 | (15.1) |
| Cash, cash equivalents and bank overdrafts | 90.6 | (13.9) | (0.1) | – | (5.4) | 71.2 |
| Debt | (681.7) | 1.0 | (1.3) | – | 48.8 | (633.2) |
| Finance leases | (4.6) | 3.5 | – | (19.0) | 1.3 | (18.8) |
| (686.3) | 4.5 | (1.3) | (19.0) | 50.1 | (652.0) | |
| Net debt before derivatives and joint venture and associates loans |
(595.7) | (9.4) | (1.4) | (19.0) | 44.7 | (580.8) |
| Net debt derivative | 45.1 | – | – | – | (48.6) | (3.5) |
| Joint venture and associate loans | 51.1 | (0.5) | – | – | – | 50.6 |
| Net debt | (499.5) | (9.9) | (1.4) | (19.0) | (3.9) | (533.7) |
On 23 July 2013 the Group acquired Conbras Engenharia Ltda (Conbras), a privately owned Brazilian company, for a consideration of £22.6 million (R\$75 million), including a maximum £4.4 million (R\$15 million) deferred consideration based on an earn out payable to non-employees based on financial performance. The full deferred consideration was paid subsequent to the year end. Conbras operates in the facilities management sector, serving private and public customers across Brazil.
On 16 December 2013 the Group acquired Context Information Services Limited (Context) for a consideration of £33.0 million including £4 million of deferred consideration which is payable over three years. Context provides specialist technical consultancy services in the cyber security market, with offices in London, Germany and Australia.
On 10 December 2013 the Group acquired Skills2Learn Limited for a consideration of £7.3 million including £1.5 million deferred consideration which is repayable which is payable over three years. Skills2Learn is one of the UK's premier developers of interactive digital learning and virtual reality simulation solutions. Deferred consideration relates to warranty obligations.
On 29 January the Group acquired National Training Institute LLC, (NTI) for a consideration of £12.3 million. NTI is an Oman based technical training specialist providing high quality training solutions to the energy, oil and gas, and construction sectors in Oman.
The goodwill arising on the acquisition derives from the market position of the entities involved and the value of the workforce acquired.
Details of the assets acquired and the provisional goodwill are as follows:
| Conbras £m |
Context £m |
Other £m |
Total £m |
|
|---|---|---|---|---|
| Cost of acquisition | ||||
| Cash paid | 18.2 | 29.0 | 18.7 | 65.9 |
| Deferred consideration | 4.4 | 4.0 | 1.5 | 9.9 |
| Purchase consideration | 22.6 | 33.0 | 20.2 | 75.8 |
| Fair value of assets acquired (see below) | 6.5 | 12.3 | 6.6 | 25.4 |
| Goodwill | 16.1 | 20.7 | 13.6 | 50.4 |
Net assets and liabilities arising from the acquisition are as follows:
| Conbras | Context | Other | Total | |||||
|---|---|---|---|---|---|---|---|---|
| Book value of assets acquired £m |
Provisional fair value acquired £m |
Book value of assets acquired £m |
Provisional fair value acquired £m |
Book value of assets acquired £m |
Provisional fair value acquired £m |
Book value of assets acquired £m |
Provisional fair value acquired £m |
|
| Acquired intangibles* | – | 9.3 | – | 13.5 | – | 5.5 | – | 28.3 |
| Intangible assets | 0.1 | – | 0.2 | 0.2 | – | – | 0.3 | 0.2 |
| Property, plant and equipment | 0.3 | 0.3 | 0.4 | 0.4 | 1.6 | 1.2 | 2.3 | 1.9 |
| Investments | 0.1 | – | – | – | 0.3 | – | 0.4 | – |
| Deferred tax | (0.7) | (2.7) | (0.1) | (3.1) | – | (0.7) | (0.8) | (6.5) |
| Income tax | 0.2 | 0.2 | – | (0.1) | (0.2) | (0.2) | – | (0.1) |
| Cash, cash equivalents and bank overdraft |
1.3 | 1.3 | 0.7 | 0.7 | 1.4 | 1.4 | 3.4 | 3.4 |
| Bank loan | (1.3) | (1.3) | – | – | – | – | (1.3) | (1.3) |
| Current assets | 9.1 | 8.9 | 2.9 | 2.9 | 4.2 | 3.8 | 16.2 | 15.6 |
| Current and non-current liabilities | (6.1) | (6.8) | (1.9) | (2.0) | (2.0) | (2.0) | (10.0) | (10.8) |
| Provisions | – | (2.7) | – | (0.2) | (0.7) | (2.4) | (0.7) | (5.3) |
| Net assets acquired | 3.0 | 6.5 | 2.2 | 12.3 | 4.6 | 6.6 | 9.8 | 25.4 |
* Acquired intangibles are: customer relationships, both contracted and non-contracted plus brand valuations (see note 14).
Cash outflow to acquire businesses net of cash acquired:
| Conbras £m |
Context £m |
Other £m |
Total £m |
|
|---|---|---|---|---|
| Purchase consideration paid in cash | 18.2 | 29.0 | 18.7 | 65.9 |
| Cash, cash equivalents and bank overdrafts | (1.3) | (0.7) | (1.4) | (3.4) |
| Cash outflow/(inflow) in period | 16.9 | 28.3 | 17.3 | 62.5 |
The revenue and operating profit of acquired businesses since the date of acquisition and as if they had been acquired on 1 April 2013 are:
| Conbras | Context | Other | ||||
|---|---|---|---|---|---|---|
| Since date of | Since date of | Since date of | ||||
| acquisition | For full year | acquisition | For full year | acquisition | For full year | |
| £m | £m | £m | £m | £m | £m | |
| Revenue | 26.1 | 42.0 | 3.0 | 9.9 | 2.6 | 13.1 |
| Operating profit | 1.5 | 3.8 | 0.3 | 0.5 | 0.6 | 2.4 |
During the previous financial year, on 1 June 2012 the Group acquired a controlling interest of 52% of Target Cranes (Pty) Limited (Target) a company based in South Africa involved in the rental of mobile cranes. The transaction was made via an exchange of shares and with Target also acquiring the assets and liabilities of the Plant division of Babcock Africa Services (Pty) Limited.
During the previous year, on 28 December 2012 the Group acquired the entire business of Liquid Gas Equipment Limited (LGE) a company based in Scotland that designs and builds plants for processing, storage and handling of liquid gasses and is the market leader in the supply of these solutions to the marine and onshore liquid gas sectors.
The goodwill arising on the acquisition derives from the market position of the entities involved and the value of the workforce acquired.
Details of the assets acquired and the provisional goodwill are as follows:
| LGE | Target | Other | Total | |
|---|---|---|---|---|
| £m | £m | £m | £m | |
| Cost of acquisition | ||||
| Cash paid | 25.2 | – | 2.0 | 27.2 |
| Deemed consideration | – | 19.8 | – | 19.8 |
| Purchase consideration | 25.2 | 19.8 | 2.0 | 47.0 |
| Fair value of assets acquired (see below) | 3.2 | 16.7 | 2.0 | 21.9 |
| Goodwill | 22.0 | 3.1 | – | 25.1 |
Net assets and liabilities arising from the acquisition are as follows:
| LGE | Target | Other | Total | |||||
|---|---|---|---|---|---|---|---|---|
| Book value of assets acquired £m |
Fair value acquired £m |
Book value of assets acquired £m |
Fair value acquired £m |
Book value of assets acquired £m |
Fair value acquired £m |
Book value of assets acquired £m |
Fair value acquired £m |
|
| Goodwill | 8.9 | – | – | – | – | – | 8.9 | – |
| Acquired intangibles* | – | 18.1 | – | – | – | 2.0 | – | 20.1 |
| Property, plant and equipment | – | – | 23.3 | 25.6 | – | – | 23.3 | 25.6 |
| Deferred tax | – | (3.9) | (4.6) | (5.5) | – | – | (4.6) | (9.4) |
| Income tax | – | – | 0.1 | (0.2) | – | – | 0.1 | (0.2) |
| Cash, cash equivalents and bank overdraft |
3.8 | 3.8 | 1.2 | 1.2 | – | – | 5.0 | 5.0 |
| Finance leases | – | – | (6.3) | (6.3) | – | – | (6.3) | (6.3) |
| Inventory | – | – | 0.1 | 0.1 | – | – | 0.1 | 0.1 |
| Current assets | 6.8 | 6.3 | 3.0 | 2.3 | – | – | 9.8 | 8.6 |
| Current and non-current liabilities | (16.7) | (18.2) | (0.5) | (0.5) | – | – | (17.2) | (18.7) |
| Provisions | (2.9) | (2.9) | – | – | – | – | (2.9) | (2.9) |
| Net assets acquired | (0.1) | 3.2 | 16.3 | 16.7 | – | 2.0 | 16.2 | 21.9 |
* Acquired intangibles are: customer relationships, both contracted and non-contracted (see note 14).
Cash outflow to acquire businesses net of cash acquired:
| LGE £m |
Target £m |
Other £m |
Total £m |
|
|---|---|---|---|---|
| Purchase consideration paid in cash | 25.2 | – | 2.0 | 27.2 |
| Cash, cash equivalents and bank overdrafts | (3.8) | (1.2) | – | (5.0) |
| Cash outflow/(inflow) in period | 21.4 | (1.2) | 2.0 | 22.2 |
The revenue and operating profit of acquired businesses since the date of acquisition and as if they had been acquired on 1 April 2012 are:
| LGE | Target | |||
|---|---|---|---|---|
| Since date of acquisition £m |
For full year £m |
Since date of acquisition £m |
For full year £m |
|
| Revenue | 9.7 | 41.2 | 8.0 | 10.2 |
| Operating profit | (0.7) | 1.5 | 3.2 | 3.8 |
Mark-to-market losses on forward exchange contracts of £0.7 million are included above within LGE since date of acquisition as the contracts are deemed ineffective since acquisition.
There were no disposals during the year. However, the deferred consideration on the UKAEA Pension Administration Office disposal was received and the Group paid various costs relating to previously disposed of businesses.
During the previous year, in July 2012 the Group completed the disposal of its holding in VT Services Inc. (the US defence business), the net assets of which had been disclosed as held for sale at 31 March 2012.
During the previous year on 5 December 2012 the Group sold the trade and assets of the UKAEA Pension Administration Office that had been acquired as part of the UKAEA Limited acquisition in 2009.
During the previous year in January 2013 the Group disposed of its interest in the Waste business.
| 2014 | 2013 | |||||||
|---|---|---|---|---|---|---|---|---|
| UKAEA Pensions |
Previously disposed of business |
Total | UKAEA Pensions |
Waste Business |
VT Services | Previously disposed of business |
Total | |
| £m | £m | £m | £m | £m | £m | £m | £m | |
| Goodwill | – | – | – | 3.4 | – | – | – | 3.4 |
| Other intangible assets | – | – | – | 0.1 | – | – | – | 0.1 |
| Cash, cash equivalents and bank overdrafts |
– | – | – | – | – | 2.6 | – | 2.6 |
| Non-controlling interests | – | – | – | – | – | 0.4 | – | 0.4 |
| Held for sale assets and liabilities | – | – | – | – | – | 62.2 | – | 62.2 |
| Translation adjustment recycled from translation reserve |
– | – | – | – | – | 4.9 | – | 4.9 |
| Net assets disposed/held for sale | – | – | – | 3.5 | – | 70.1 | – | 73.6 |
| (Loss)/profit on disposal of subsidiary | – | – | 0.2 | 9.3 | (18.2) | (9.3) | (18.0) | |
| Other disposal costs accrued/deferred consideration |
4.2 | – | 4.2 | (1.4) | 2.6 | 8.9 | 9.3 | 19.4 |
| Sale proceeds | 4.2 | – | 4.2 | 2.3 | 11.9 | 60.8 | – | 75.0 |
| Sale proceeds less cash disposed of | 4.2 | – | 4.2 | 2.3 | 11.9 | 58.2 | – | 72.4 |
| Less costs paid in the year | – | (3.5) | (3.5) | (0.8) | (1.7) | (1.9) | – | (4.4) |
| Net cash inflow/(outflow) | 4.2 | (3.5) | 0.7 | 1.5 | 10.2 | 56.3 | – | 68.0 |
There were no transactions with non-controlling interests in the current year. The following are the transactions for the previous year 2013:
| Increase/ (decrease) in retained earnings £m |
Increase/ (decrease) in non controlling interests £m |
Cash outflow/ (inflow) £m |
|
|---|---|---|---|
| Following the acquisition of Target Cranes, a further 12.4% of shares were purchased, in cash, from the non-controlling interest for £5.1 million. This resulted in a net gain on non-controlling interest of £4.0 million. |
4.0 | (9.1) | 5.1 |
| Following the acquisition of Target Cranes, an agreement was reached for a put option providing the non-controlling interest shareholders the right to force the Group to purchase further shares. The option exercise price is a multiple of EBITDA. The put option liability is shown as non-current Other financial liabilities on the balance sheet (see below). |
(14.6) | – | – |
| The non-controlling interest in one of the Group's subsidiaries has been acquired with the vendor paying £6.4 million. |
6.0 | 0.4 | (6.4) |
| Transactions with non-controlling interests – 2013 | (4.6) | (8.7) | (1.3) |
The £14.6 million shown above reflects the option at inception which will be revalued at period ends.
| 2014 | 2013 | ||||
|---|---|---|---|---|---|
| Property £m |
Vehicles, plant and equipment £m |
Property £m |
Vehicles, plant and equipment £m |
||
| Commitments under non-cancellable operating leases payable: | |||||
| Within one year | 19.9 | 29.0 | 21.2 | 10.2 | |
| Later than one year and less than five years | 51.9 | 26.0 | 52.4 | 14.1 | |
| After five years | 20.9 | – | 24.0 | – | |
| 92.7 | 55.0 | 97.6 | 24.3 |
The Group leases various offices and warehouses under non-cancellable operating lease agreements. The leases have various terms, escalation clauses and renewal rights. The Group also leases plant and machinery under non-cancellable operating leases.
| 36. Capital and other financial commitments | ||
|---|---|---|
| 2014 £m |
2013 £m |
|
| Contracts placed for future capital expenditure not provided in the financial statements | 18.0 | 6.2 |
(a) The following related parties either sell to or receive services from the Group. Loans to joint ventures and associates are detailed in note 16.
| 2014 Revenue to £m |
2014 Purchases from £m |
2014 Year end debtors' balance £m |
2014 Year end creditor balance £m |
|
|---|---|---|---|---|
| Joint ventures and associates | ||||
| Debut Services (South West) Limited | 139.4 | – | 0.3 | – |
| Holdfast Training Services Limited | 76.2 | 0.1 | 8.0 | – |
| First Swietelsky Operation and Maintenance | 10.1 | – | 1.9 | 0.5 |
| Ascent Flight Training (Management) Company Limited | 1.8 | – | 0.1 | – |
| Advanced Jet Training Limited | 1.6 | – | 0.2 | – |
| Rear Crew Training Limited | 0.8 | – | 0.1 | – |
| Airtanker Services Limited | 5.8 | – | 0.7 | – |
| ALC (Superholdco) Limited | 3.2 | – | 0.1 | – |
| Naval Ship Management (Australia) Pty Limited | 1.5 | – | 0.1 | – |
| Lewisham Schools for the Future SPV Limited | 1.5 | – | 0.3 | – |
| Lewisham Schools for the Future SPV2 Limited | 0.4 | – | 0.1 | – |
| Lewisham Schools for the Future SPV3 Limited | 0.8 | – | 0.1 | – |
| Lewisham Schools for the Future SPV4 Limited | 1.4 | – | 0.1 | – |
| Greenwich BSF SPV Limited | 0.2 | – | – | – |
| Cura Classis (UK) Limited | 4.1 | – | – | – |
| Cura Classis (US) LLC | 6.3 | – | 0.1 | – |
| Cura Classis Canada Hold Co Inc. | 5.9 | – | – | – |
| Dounreay Site Licence Company | 15.1 | 0.1 | – | – |
| Related by common directorships | – | |||
| Finmeccanica UK Group | 11.8 | 0.1 | 1.3 | – |
| GKN | – | 0.3 | – | – |
| Northrop Grumman Sperry Marine Limited | 0.1 | – | – | – |
| 288.0 | 0.6 | 13.5 | 0.5 |
| 2013 | 2013 | |||
|---|---|---|---|---|
| 2013 | 2013 | Year end debtors' |
Year end creditor |
|
| Revenue to | Purchases from | balance | balance | |
| £m | £m | £m | £m | |
| Joint ventures and associates | ||||
| Debut Services (South West) Limited | 128.9 | 1.2 | – | – |
| Holdfast Training Services Limited | 73.4 | 0.4 | 12.7 | – |
| First Swietelsky Operation and Maintenance | 9.5 | – | 1.2 | 0.5 |
| Ascent Management Company (Weybridge) Limited | 0.5 | – | – | – |
| Ascent Flight Training (Management) Company Limited | 1.8 | – | 0.7 | – |
| Advanced Jet Training Limited | 1.5 | – | 0.3 | – |
| Rear Crew Training Limited | 0.8 | – | 0.2 | – |
| Airtanker Services Limited | 6.9 | – | 1.0 | – |
| Whitefleet Limited | 0.4 | 17.9 | – | – |
| ALC (Superholdco) Limited | 3.1 | – | – | – |
| Naval Ship Management (Australia) Pty Limited | 2.1 | – | 0.2 | – |
| Lewisham Schools for the Future LEP Limited | 0.1 | – | – | – |
| Lewisham Schools for the Future SPV Limited | 2.2 | – | 0.9 | – |
| Lewisham Schools for the Future SPV2 Limited | 0.4 | – | – | – |
| Lewisham Schools for the Future SPV3 Limited | 0.5 | – | 0.1 | – |
| Lewisham Schools for the Future SPV4 Limited | 0.8 | – | 0.2 | – |
| Greenwich BSF SPV Limited | 0.2 | – | – | – |
| Cura Classis (UK) Limited | 5.1 | – | – | – |
| Cura Classis (US) LLC | 6.8 | – | 0.1 | – |
| Cura Classis Canada Hold Co Inc. | 7.2 | – | – | – |
| Dounreay Site Licence Company | 9.5 | – | 2.1 | – |
| Related by common directorships | ||||
| Finmeccanica UK Group | 9.3 | 0.1 | 0.9 | – |
| 271.0 | 19.6 | 20.6 | 0.5 |
All transactions noted above arise in the normal course of business.
(b) Defined benefit pension schemes Please refer to note 27 for transactions with the Group defined benefit pension schemes.
Details on dividends are given in note 11. There are no further material events subsequent to 31 March 2014 that require disclosure.
The Group completed the acquisition of Avincis Mission Critical Services on 16 May 2014. A rights issue was completed prior to the acquisition completing.
| Group interest | |||
|---|---|---|---|
| Principal related undertakings | Principal activities | in allotted capital |
Country of incorporation |
| Babcock Marine (Rosyth) Limited | Trading company | 100% | Scotland |
| Rosyth Royal Dockyard Limited | Owner of Rosyth dockyard | 99.999% | Scotland |
| Babcock Marine (Devonport) Limited | Trading company | 100% | England and Wales |
| Devonport Royal Dockyard Limited | Maintains Royal Navy ships and provides | ||
| support services to naval base | 100% | England and Wales | |
| Babcock Marine (Clyde) Limited | Trading company | 100% | Scotland |
| LSC Group Limited | Consultancy and project management | 100% | England and Wales |
| Frazer-Nash Consultancy Limited | Systems and engineering technology services | 100% | England and Wales |
| Appledore Shipbuilders (2004) Limited | Shipbuilding | 100% | England and Wales |
| Babcock (Pty) Limited | Engineering and maintenance support | 100% | Australia |
| Babcock Integrated Technology Limited | Design, supply and installation of specialist handling equipment |
100% | England and Wales |
| Babcock Canada Inc. | Trading company | 100% | Canada |
| Liquid Gas Equipment Limited | Design and build plants for processing, storage and handling of liquid gasses. |
100% | Scotland |
| Context Information services Limited | Technical cyber security consulting. | 100% | England and Wales |
| Air Power International Limited | Compressed air management and support services |
100% | Scotland |
| Babcock Support Services Limited | Support services and facilities management | 100% | England and Wales |
| Babcock Flagship Limited | Naval training services | 100% | England and Wales |
| Babcock Aerospace Limited | Airfield support services | 100% | England and Wales |
| Babcock Land Limited | Fleet management and training services | 100% | England and Wales |
| Babcock Land (Whitefleet Management) Limited | Contract management services | 100% | England and Wales |
| BNS Nuclear Services Limited | Engineering solutions and services | 100% | England and Wales |
| Babcock Airports Limited | Airport support services | 100% | England and Wales |
| Babcock Critical Services Limited | Fleet management and support services | 100% | England and Wales |
| Cavendish Nuclear Limited | Nuclear site maintenance | 100% | England and Wales |
| Babcock Rail Limited | Rail infrastructure repair and maintenance | 100% | England and Wales |
| Babcock Networks Limited | Powerline erection and maintenance | 100% | England and Wales |
| Babcock Communications Limited | Communication services | 100% | England and Wales |
| Conbras Engenharia Ltda | Facilities management | 100% | Brazil |
| Babcock Training Limited | Education and training services | 100% | England and Wales |
| Babcock 4S Limited | Education and training services | 80.1% | England and Wales |
| Babcock Learning & Development Partnership LLP | Education and training services | 80.1% | England and Wales |
| Babcock Africa Services (Pty) Limited | Equipment sales, hire and maintenance | 100% | South Africa |
| Equity accounted investments | |||
| Holdfast Training Services Limited | Military training | 74% | England and Wales |
| ALC (Superholdco) Limited | PFI operator | 50% | England and Wales |
| Airtanker Limited | In-flight refueling support | 13.3% | England and Wales |
| Ascent Flight Training (Holdings) Limited | Flight training | 50% | England and Wales |
| Cavendish Dounreay Partnership Limited | Nuclear site decommissioning | 50% | England and Wales |
The Company has taken advantage of the exemption under Section 410(2) of the Companies Act 2006 by providing information only in relation to related undertakings whose results or financial position, in the opinion of the Directors, principally affected the financial statements. A full list of subsidiary, equity accounted investments and other associated undertakings as at 31 March 2014 will be annexed to the Company's next annual return filed with the Registrar of Companies.
All subsidiary undertakings are included in the consolidation, except for Research Sites Restoration Limited which is treated as an investment due to restrictions in control.
Of the undertakings listed above, the Company holds 100% of the Group's interest in Babcock (Pty) Limited. It does not directly hold any share of the Group's interest in the other listed undertakings.
In our opinion the Company financial statements:
This opinion is to be read in the context of what we say in the remainder of this report.
The Company financial statements, which are prepared by Babcock International Group PLC, comprise:
The financial reporting framework that has been applied in their preparation comprises applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
In applying the financial reporting framework, the Directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events.
We conducted our audit in accordance with International Standards on Auditing (UK & Ireland) ("ISAs (UK & Ireland)"). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
In addition, we read all the financial and non-financial information in the Annual Report and Accounts 2014 (the "Annual Report") to identify material inconsistencies with the audited Company financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
In our opinion:
Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have no exceptions to report arising from this responsibility.
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors' remuneration specified by law have not been made. We have no exceptions to report arising from this responsibility.
Under ISAs (UK & Ireland), we are required to report to you if, in our opinion, information in the Annual Report is:
We have no exceptions to report arising from this responsibility.
As explained more fully in the Directors' responsibilities statement set out on page 122, the Directors are responsible for the preparation of the Company financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the Company financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
We have reported separately on the Group financial statements of Babcock International Group PLC for the year ended 31 March 2014.
John Baker (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London, United Kingdom
19 May 2014
| As at 31 March 2014 | Note | 2014 £m |
2013 £m |
|---|---|---|---|
| Fixed assets | |||
| Investment in subsidiary undertakings | 4 | 2,121.7 | 2,121.7 |
| Tangible fixed assets | 5 | – | – |
| 2,121.7 | 2,121.7 | ||
| Current assets | |||
| Debtors – amounts due after more than one year | 6 | 403.3 | 445.0 |
| Debtors – amounts due within one year | 6 | 368.1 | 280.7 |
| Cash at bank and in hand | – | 31.2 | |
| 771.4 | 756.9 | ||
| Creditors – amounts due within one year | 7 | 978.8 | 885.7 |
| Net current (liabilities)/assets | (207.4) | (128.8) | |
| Total assets less current liabilities | 1,914.3 | 1,992.9 | |
| Creditors – amounts due after one year | 7 | 622.0 | 667.3 |
| Provisions | 8 | 9.0 | – |
| Net assets | 1,283.3 | 1,325.6 | |
| Capital and reserves | |||
| Called up share capital | 9 | 217.2 | 217.2 |
| Share premium account | 10 | 873.0 | 873.0 |
| Capital redemption reserve | 10 | 30.6 | 30.6 |
| Profit and loss account | 10 | 162.5 | 204.8 |
| Total shareholders' funds | 1,283.3 | 1,325.6 |
The accompanying notes are an integral part of this Company balance sheet. Company number 02342138.
The financial statements on pages 177 to 182 were approved by the Board of Directors on 19 May 2014 and are signed on its behalf by:
P L Rogers W Tame Director Director
The principal accounting policies adopted by the Company are disclosed below:
The Company's financial statements have been prepared under the historical cost convention as modified by the revaluation of certain financial instruments and in accordance with applicable United Kingdom Accounting Standards and in compliance with the Companies Act 2006 and on a going concern basis. The Directors have reviewed the Company's existing accounting policies and consider that they are consistent with last year.
Fixed asset investments are stated at cost less provision for impairment in value.
Operating lease payments are recognised as an expense in the income statement on a straight-line basis.
Current UK corporation tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date.
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Company's taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.
A deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.
Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries and associates only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in future has been entered into by the subsidiary or associate.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis.
Finance costs are recognised as an expense in the period in which they are incurred.
The Company operates equity-settled, share-based compensation plans. The economic cost of awarding shares and share options to employees is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value is determined by reference to option pricing models. The charge is recognised in the income statement over the vesting period of the award and recharged to subsidiaries.
Full details of the share-based compensation plans are disclosed in note 26 of the Group financial statements.
The shares purchased by the Company's ESOP trusts are recognised as a deduction to equity. Refer to the Group financial statements note 25 for further details.
The Company operates a multi-employer defined benefit pension scheme. The scheme is accounted for on a defined contribution basis as the Company is unable to identify its share of the underlying assets and liabilities.
There is no material difference between the FRS 17 (as amended): 'Retirement Benefits' and IAS 19: 'Employee Benefits' valuation. Refer to the Group financial statements note 27 for further details.
As a result of the level of surplus the Company's compulsory contribution to the Babcock International Group Pension Scheme is currently suspended until at least the results of the next formal valuation are available although voluntary contributions have been made (see note 27 of the Group financial statements).
Derivatives are initially recognised at fair value on the date a derivative is entered into and are subsequently remeasured at their fair value. The Company designates certain of the derivative instruments within its portfolio to be hedges of the fair value of recognised assets or liabilities or unrecognised firm commitments.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
Certain derivatives do not qualify or are not designated as hedging instruments and any movement in their fair value is recognised in the profit and loss account immediately.
All treasury transactions are carried out only with prime rated counterparties as are investments of cash and cash equivalents.
Dividends are recognised in the Company's financial statements in the period in which they are approved and in the case of interims, when paid.
A cash flow statement has not been prepared by the Company under the terms of FRS 1, available to wholly owned subsidiaries of a company whose consolidated financial statements include a consolidated cash flow statement and are publicly available. The Company is also exempt under the terms of FRS 8 from disclosing related party transactions with entities that are part of the Babcock International Group PLC group.
The Company has taken advantage of the exemption granted by section 408 of the Companies Act 2006 whereby no individual profit and loss account of the Company is disclosed. The Company's profit for the financial year was £37.9 million (2013: £147.0 million).
Fees payable to the parent auditors and its associates in respect of the audit of the Company's financial statements was £0.1 million (2013: £0.1 million).
Under Schedule 5 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (Schedule 5), total Directors emoluments, excluding Company pension contributions, were £7.9 million (2012: £6.2 million); these amounts are calculated on a different basis to emoluments in the Remuneration report which are calculated under Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (Schedule 8 (2013)). These emoluments were paid for their services on behalf of Babcock International Group. No emoluments relate specifically to their work for the Company. Under Schedule 5, the aggregate gains made by directors from the exercise of Long-Term Incentive Plans in 2014 as at the date of exercise was £9.2 million (2013: £nil) and the net aggregate value of assets received by directors in 2014 from Long-Term Incentive Plans as calculated at the date of vesting was £4.9 million (2013:£ 2.7 million); these amounts are calculated on a different basis from the valuation of share plan benefits under Schedule 8 (2013) in the Remuneration report.
| 2014 | 2013 | |
|---|---|---|
| £m | £m | |
| At 1 April | 2,121.7 | 1,600.8 |
| Additions | – | 520.9 |
| Investments in shares | 2,121.7 | 2,121.7 |
On 19 November 2012 the Company acquired shares in Babcock (UK) Holdings Limited for £520.9 million.
The Directors believe that the carrying value of the investments is supported by the underlying net assets.
| Leasehold | |
|---|---|
| property | |
| £m | |
| Cost | |
| At 1 April 2013 | 0.5 |
| Additions | – |
| At 31 March 2014 | 0.5 |
| Accumulated depreciation | |
| At 1 April 2013 | 0.5 |
| Charge for the year | – |
| At 31 March 2014 | 0.5 |
| Net book value at 31 March 2014 | – |
| Net book value at 31 March 2013 | – |
| 2014 £m |
2013 £m |
|
|---|---|---|
| Non-current debtors | ||
| Amounts owed by subsidiary undertakings | 5.7 | 0.7 |
| Preference shares in a subsidiary undertaking | 395.8 | 444.3 |
| Other debtors | 1.8 | – |
| 403.3 | 445.0 | |
| Current debtors | ||
| Amounts owed by subsidiary undertakings | 352.5 | 268.2 |
| Other financial assets | 1.6 | – |
| Deferred tax | 13.1 | 9.8 |
| Prepayments and accrued income | 0.9 | 2.7 |
| 368.1 | 280.7 |
Of the preference shares in a subsidiary undertaking, the A preference shares of US\$150 million mature on 19 March 2018 and carry interest at 4.94%. The B preference shares of US\$500 million mature on 17 March 2021 and carry interest at 5.64%. The non-current amount owed by subsidiary undertakings is repayable on demand and is interest free. The current amounts owed by subsidiary undertakings are repayable on demand and are interest free apart from £22.0 million which carries interest at LIBOR +4% and another loan of £5.0 million which carries interest at LIBOR +1%.
| 2014 £m |
2013 £m |
|
|---|---|---|
| Amounts due within one year | ||
| Bank loans and overdrafts | 57.5 | – |
| Trade creditors | 1.6 | – |
| Amounts owed to subsidiary undertakings | 905.8 | 881.5 |
| Other financial liabilities | 0.7 | – |
| Accruals and deferred income | 13.2 | 4.2 |
| 978.8 | 885.7 | |
| Amounts due after one year | ||
|---|---|---|
| Bank loans | 620.2 | 667.3 |
| Other creditors | 1.8 | – |
| 622.0 | 667.3 |
The Company has £989.9 million (2013: £1,028.1 million) of committed borrowing facilities, of which £616.9 million (2013: £653.1 million) was drawn at the year end. The interest rate applying to bank loans is 1.22% (2013: 1.25%) and is linked to LIBOR whilst the interest rate applying to overdrafts is 1.5% (2013: 1.5%).
The amounts due to subsidiary undertakings are repayable on demand and £760.4 million is interest free. £136.3 million carries interest at LIBOR + 4% and £9.1 million carries interest at LIBOR + 1%.
| 2014 £m |
2013 £m |
|
|---|---|---|
| At 1 April | – | – |
| Charged to the profit and loss account | 9.0 | – |
| At 31 March | 9.0 | – |
The provisions relate to costs for the acquisition of Avincis Mission Critical Services.
| Ordinary shares of 60p Number |
Total £m |
|
|---|---|---|
| Allotted, issued and fully paid | ||
| At 1 April 2013 | 362,071,802 | 217.2 |
| Shares issued | 2,130 | – |
| At 31 March 2014 | 362,073,932 | 217.2 |
| At 1 April 2012 | 359,146,705 | 215.5 |
| Shares issued | 2,925,097 | 1.7 |
| At 31 March 2013 | 362,071,802 | 217.2 |
| Share premium account £m |
Capital redemption reserve £m |
Profit and loss account £m |
|
|---|---|---|---|
| At 1 April 2013 | 873.0 | 30.6 | 204.8 |
| Shares issue in the period | – | – | – |
| Share-based payments | – | – | 12.9 |
| Tax on share-based payments | – | – | 3.3 |
| Fair value adjustments to interest rate hedges (net of tax) | – | – | 0.3 |
| Retained profit for the year – profit for the year | – | – | 37.9 |
| – dividends | – | – | (96.7) |
| At 31 March 2014 | 873.0 | 30.6 | 162.5 |
| At 1 April 2012 | 873.0 | 30.6 | 131.5 |
| Shares issue in the period | – | – | – |
| Share-based payments | – | – | 4.5 |
| Tax on share-based payments | – | – | 6.4 |
| Fair value adjustments to interest rate hedges (net of tax) | – | – | (1.0) |
| Retained profit for the year – profit for the year | – | – | 147.0 |
| – dividends | – | – | (83.6) |
| At 31 March 2013 | 873.0 | 30.6 | 204.8 |
The Company has an operating lease commitment for land and buildings as at 31 March 2014 with an annual commitment expiring after more than five years of £2.2 million (2013: £2.2 million).
(c) The Company has given guarantees on behalf of Group companies in connection with the completion of contracts within specification.
The Directors have proposed a final dividend of 16.4p per 60p ordinary share (2013: 14.4p per 60p ordinary share as adjusted for the rights issue) and it will be paid on 12 August 2014 to shareholders registered on 4 July 2014. Subject to approval at the Annual General Meeting on 21 July 2014.
The Company completed the acquisition of Avincis Mission Critical Services on 16 May 2014. A rights issue was completed prior to the acquisition completing.
| Financial year end | 31 March 2014 |
|---|---|
| 2013/14 preliminary results announced | 19 May 2014 |
| Annual General Meeting | 21 July 2014 |
| Final dividend payment date (record date 4 July 2014)* | 12 August 2014 |
* See also 'Results and dividends' on page 117.
company number 33 Wigmore Street London W1U 1QX
Registered in England Company number 2342138
Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU
Tel: 0871 664 0330 (calls cost 10p per minute plus network extras – lines are open 8.30 am to 5.30 pm Monday to Friday) Tel (from overseas): +44 20 8639 3399 Email: [email protected]
Shareholder enquiries relating to shareholding, dividend payments, change of address, loss of share certificate etc., should be addressed to Capita Asset Services at their address given above.
www.babcock-shares.com
PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6RH
The Royal Bank of Scotland plc 135 Bishopsgate London EC2M 3UR
Lloyds Banking Group Level 7 Ũ Bishopsgate Exchange 155 Bishopsgate London EC2M 3YB
Barclays Bank PLC Level 27 1 Churchill Place London E14 5HP
JPMorgan Cazenove 25 Bank Street Canary Wharf London E14 5JP
JPMorgan Cazenove 25 Bank Street Canary Wharf London E14 5JP
Jefferies Hoare Govett Vintners Place 68 Upper Thames Street London EC4V 3BJ
Capita Asset Services provide Babcock shareholders with a quick and easy way to buy or sell Babcock International Group PLC ordinary shares. Commission starts from £21 if you deal online and £28.50 if you deal by phone.
In addition, stamp duty, currently 0.5%, is payable on purchases.
The commission amounts are correct at the time of printing and may be subject to change. Please visit www.capitadeal.com for the current costs.
The maximum deal size for online trades is £25,000. Deals over this amount can be done over the telephone and rates will be advised at the time of dealing.
There is no need to open an account in order to deal and you can trade at live market prices during stock market hours. You also have the added convenience of placing 'limit' orders which are valid for up to a maximum of 90 business days. This means that you decide the price at which you wish to sell and your shares will only be sold if the price reaches this pre-set limit during the 90-day period.
To use the service, either log on to www.capitadeal.com or call 0871 664 0364 (calls cost 10p per minute plus network extras – lines are open 8.00 am to 4.30 pm Monday to Friday). Please have your share certificate(s) to hand when you log on or call.
If you are planning to purchase shares, you will need to have your debit card at hand with cleared funds available at your bank.
These services are offered on an executiononly basis and are subject to terms and conditions which are available on request or at www.capitadeal.com
Capita Asset Services is a trading name of Capita IRG Trustees Limited, which is authorised and regulated by the Financial Conduct Authority.
This is not a recommendation to buy, sell or hold shares in Babcock International Group PLC. Shareholders who are unsure of what action to take should obtain independent financial advice. Share values may go down as well as up, which may result in a shareholder receiving less than he/she originally invested.
This is a convenient way to build up your shareholding by using your cash dividends to buy more shares in the Company. If you would prefer to receive shares for your next dividend instead of cash, please complete an application form online at www.babcock-shares.com or call Capita IRG Trustees on 0871 664 0381 (calls cost 10p per minute plus network extras, lines are open 9.00 am to 5.30 pm Monday to Friday) from UK or +44 208 639 3402 from overseas.
If you have only a small number of shares which would cost more for you to sell than they are worth, you may wish to consider donating them to the charity ShareGift (Registered Charity 1052686) which specialises in accepting such shares as donations.
The relevant stock transfer form can be obtained from Capita Asset Services. There are no implications for Capital Gains Tax purposes (no gain or loss) on gifts of shares to charity and it is also possible to obtain income tax relief. Further information about ShareGift may be obtained on 020 7930 3737 or from www.ShareGift.org
| 2013 | 2012 | 2011 | 2010 | ||
|---|---|---|---|---|---|
| 2014 £m |
(restated) £m |
(restated) £m |
(restated) £m |
(restated) £m |
|
| Continuing revenue | 3,321.0 | 3,029.4 | 2,848.4 | 2,564.5 | 1,895.5 |
| Operating profit from continuing operations | 233.1 | 203.5 | 175.6 | 136.2 | 142.2 |
| Share of profit/(loss) from joint ventures | 20.9 | 18.0 | 4.3 | 6.1 | (0.5) |
| Profit before interest from continuing operations | 254.0 | 221.5 | 179.9 | 142.3 | 141.7 |
| Net interest and similar charges | (35.2) | (39.7) | (45.9) | (66.0) | (14.8) |
| Profit before taxation from continuing operations | 218.8 | 181.8 | 134.0 | 76.3 | 126.9 |
| Income tax expense | (30.8) | (18.0) | (5.7) | (0.4) | (20.2) |
| Profit from continuing operations | 188.0 | 163.8 | 128.3 | 75.9 | 106.7 |
| Discontinued operations | – | (15.2) | (53.1) | 3.7 | – |
| Profit for the year | 188.0 | 148.6 | 75.2 | 79.6 | 106.7 |
| Non-controlling interest | (7.5) | (5.9) | (3.3) | (3.6) | (2.4) |
| Profit attributable to owners of parent | 180.5 | 142.7 | 71.9 | 76.0 | 104.3 |
| Non-current assets | 2,323.9 | 2,302.1 | 2,232.5 | 2,447.6 | 877.4 |
| Net current liabilities | (246.6) | (240.9) | (153.0) | (219.5) | (88.9) |
| Non-current liabilities | (1,051.2) | (1,092.3) | (1,159.5) | (1,207.5) | (702.7) |
| Total net assets | 1,026.1 | 968.9 | 920.0 | 1,020.6 | 85.8 |
| Equity holders of the parent | 1,004.4 | 947.1 | 911.4 | 1,011.7 | 80.6 |
| Non-controlling interest | 21.7 | 21.8 | 8.6 | 8.9 | 5.2 |
| Total equity | 1026.1 | 968.9 | 920.0 | 1,020.6 | 85.8 |
| Total earnings per share – basic | 50.1p | 39.7p | 20.1p | 23.5p | 45.6p |
| Dividend per share (proposed) | 21.4p | 19.0p | 16.4p | 14.0p | 12.7p |
Designed and produced by Black Sun Plc. www.blacksunplc.com
Printed by Pureprint Group who are a CarbonNeutral® printer certifi ed to ISO 14001 environmental management system and registered to EMAS the Eco Management Audit Scheme. Printed using vegetable oil based inks and 100% renewable energy.
The report is printed on Claro Silk an FSC® certifi ed paper made from responsible sources.
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Babcock International Group Plc 33 Wigmore Street London W1U 1QX UK +44 (0)20 7355 5300
www.babcockinternational.com
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