Babcock International Group PLC
full year results for the year ended 31 March 2022

 

28 July 2022

 

Strong progress in first year of turnaround

Statutory results
	31 March 2022	31 March 2021 (restated)*
Revenue	£4,101.8m	£3,971.6m
Operating profit/(loss)	£226.8m	£(1,736.7)m
Basic earnings/(loss) per share	32.5p	(357.0)p
Cash generated from operations	£41.8m	£475.4m
Underlying results (note ii)
	31 March 2022	31 March 2021 (restated)*
Contract backlog (note iii)	£9.9bn	£8.2bn
Underlying operating profit/(loss) (note iv)	£237.7m	£(27.9)m
of which one-off contract profitability and balance sheet (CPBS) adjustments (note v)	-	£(250.0)m
Operating profit excluding one-off CPBS adjustments	£237.7m	£222.1m
Operating margin excluding one-off CPBS adjustments	5.8%	5.5%
Underlying basic earnings/(loss) per share	30.7p	(24.6)p
Free cash flow	£(191.3)m	£169.6m
Net debt	£968.7m	£1,352.4m
Net debt excluding operating leases	£556.7m	£770.3m
Net debt/EBITDA (covenant basis)	1.8x	2.4x

* Prior-year restatement is outlined in note i on page 3. Refer to Note 3 of the preliminary financial statements for more details

 

David Lockwood, Chief Executive Officer, said:

"The first year of our turnaround has seen us deliver as we said we would, despite geopolitical volatility and a challenging economic environment. We have successfully stabilised the business; strengthening our balance sheet and driving cultural change across the Group.

 

"The demand for our solutions remains strong, with significant contract wins in the year, and we see more opportunities ahead. When we perform as we should, we offer our customers availability, affordability and capability; enabling them to deliver for their stakeholders in this uncertain world. I am encouraged by our progress this year, but I am determined to continue to drive increasingly profitable growth and improved cash flow in FY23 and beyond."

 

Financial highlights (note ii)

·     Contract backlog up 21% to £9.9 billion, including £3.1 billion of the c.£3.5 billion Future Maritime Support Programme (FMSP) contract

·     Revenue up 5% organically to £4,102 million, excluding one-off CPBS adjustments of £88 million in FY21. Increase driven by recovery from COVID-19 impacts in the prior year across the Group and growth in Marine and Nuclear

·     Underlying operating profit of £237.7 million was up 13% organically, excluding one-off CPBS adjustments of £250m in FY21. This reflects revenue growth, COVID-19 recovery, and improved performance from our new operating model, including achieving our target savings of £20 million
(£40 million annualised). Improved profitability in Marine, Land and Aviation offset a decline in Nuclear, due to £22 million contract write-off

·     Group underlying operating margin increased 30bp to 5.8%

·     Statutory operating profit of £226.8 million compares to a £1,736.7 million loss in FY21, which included £1,815.5 million of charges from the CPBS review

·     Underlying basic earnings per share of 30.7p (FY21: (24.6)p) up significantly, reflecting higher profitability and one-off CPBS adjustments in the prior year

·     Underlying free cash flow of £(191.3) million better than expected due to lower net capex and a cash tax inflow from the settlement of open years with the authorities. Also, the favourable timing of customer receipts and prepayments, allowed us to accelerate the unwind of the past practice of period end working capital management

·     Balance sheet strengthened: Net debt to EBITDA (covenant basis) down to 1.8x (FY21: 2.4x) in line with FY22 target of below 2.0x

 

Strategy - strong progress on FY22 priorities

·     Portfolio - focused the group: Generated gross proceeds of £447 million from four completed disposals, above our targeted minimum of
£400 million. Disposal of part of our Aerial Emergency Services (AES) business signed in July 2022 after year end for a cash consideration of c.£115 million. Footprint expanded in Australia with acquisition of the remaining 50% interest in our Australian Naval Ship Management (NSM) joint venture

·     Operating model - implemented: Streamlining processes and structures and improving controls drove a c.£20 million benefit in FY22
(c.£40 million annualised), as expected. Internal business reporting lines flattened. We continue to focus on improved execution to deliver efficiencies

·     People strategy - culture transforming: New people strategy developed, including roll-out of Group Principles and agile working

·     ESG strategy - developing: Expanded our corporate commitments to incorporate broader environmental targets and created new policies and guidance to support the governance of our sustainability programmes

·     Growth - developing opportunities: Good order momentum including the signing of export agreements with Indonesia and Poland for the Arrowhead 140 (AH140) naval ship design (the base for the UK's Type 31 programme) and new defence contracts in Australia, France and the UK (see below).

 

Business development

·     Contract backlog at 31 March 2022 was up 21% at £9.9 billion (FY21 restated: £8.2 billion). FY21 was restated for the removal of pass-through revenue of around £0.6 billion. Excluding disposals of around £0.7 billion, backlog up 32% 

·     Significant wins:

o  FMSP, a c.£3.5 billion five-year contract award (of which c.£3.1 billion has been booked), continues our through-life, naval engineering support for the UK Royal Navy across ships, submarines and naval bases

o  Contract for defence aviation training activities in France worth up to €500 million over 11 years (including options). c.€170 million booked

o  c.£100 million, nine-year contract to deliver the new Defence Strategic Radio Service (DSRS) for critical UK MOD operations

o  c.£100 million, 13-year, contract for the design, manufacture, delivery, commissioning and in-service support to the Maritime Electronic Warfare Systems Integrated Capability (MEWSIC)

o  10-year contract to provide dry-dock maintenance for the Royal Navy's Queen Elizabeth class (QEC) aircraft carriers

o  Naval exports - secured two design contracts for our AH140 frigate: a two-ship licence order for Indonesia and selection by Poland for its MIECZNIK (Swordfish) three-ship frigate programme

o  Selected by the Australian Government as the preferred tenderer to upgrade and sustain the Defence High Frequency Communication System (DHFC) to support the Australian armed forces over at least the next decade

 

Outlook

·     Market: The market backdrop is very dynamic. Rising geopolitical uncertainty has led to increased national defence requirements and potentially more opportunities, while macro factors such as inflation and supply chain stress increase delivery challenges

·     Inflation: The Group's main exposure to inflation is via rising employment costs. We have sought to manage the short-term impact of inflation through an innovative and progressive pay deal with our UK workforce (details on page 5), which gives us visibility around the near-term cost base. We plan to offset this and other input cost inflation through operating improvements and efficiencies as we further embed our new operating model

·     Free cash flow: We have taken material steps to address the balance sheet and quality of our cash flows. We expect cash outflows associated with items such as pension deficit catch-up payments and the unwind of historical management of working capital at period end to reduce significantly in FY23

·     Balance sheet: Having achieved our previous target of leverage under 2.0x, we are now implementing a medium-term gearing ratio target of 1.0x to 2.0x, although we expect the ratio could increase above 2.0x in the short term. This reflects the pension deficit catch-up payments (c.£100 million) and unwind of the remaining historical creditor deferrals (c.£45 million), the bulk of which are expected within the first half of FY23

·     FY23 and beyond: The second year of our turnaround will build on the strategic actions taken in FY22, with a focus on execution and growth, including an expected c.£20 million further restructuring benefit. As we continue to make further operational progress through the disciplined execution of our strategy, the Board is confident of delivering on its expectations of increasingly profitable growth and improved cash flow for FY23 and into the medium term

 

Results presentation:

A presentation for investors and analysts will be webcast live on 28 July 2022 at 8:30 am (UK time). The presentation will be webcast live at www.babcockinternational.com/investors and subsequently will be available on demand at www.babcockinternational.com/investors/results-and-presentations. A transcript of the presentation and Q&A will also be made available on our website.

For further information:

Andrew Gollan, Director of Investor Relations	+44 (0)7850 978 741
Kate Hill, Group Director of Communications	+44 (0)20 7355 5312
Tulchan Communications	+44 (0)20 7353 4200

 

 

Notes to statutory and underlying results on page 1

Note i - Prior year adjustments: The Group has re-examined the presentation of revenue and cost of revenue in relation to pass-through revenue on three of the Group's contracts. The Group had previously taken the judgement that it acted as a principal in these arrangements, informed by the contractual terms and practical delivery of the contract to the customer. This approach was disclosed as a judgemental area in the FY21 annual report. Following the transition to the Group's new auditors, this has been further considered and the Group has reassessed this judgement, which had always been a finely balanced one. This change of judgement, and the resultant accounting policy, means that revenue and cost of revenue are now presented net for these contracts. Restatement of the financial information in accordance with the new accounting policy results in a decrease in revenue and a decrease in cost of revenue of £211.1 million in the year ended 31 March 2021 (no impact on profit).

 

In April 2021 the IFRS Interpretations Committee (IFRIC) published an agenda decision which clarified how a customer should account for the costs of configuring or customising the supplier's application software in a Software-as-a-service arrangement. This resulted in a small increase to administration and distribution costs of £0.3 million for year ended 31 March 2021. This is expected to result in higher up-front expenses in future years as certain IT implementation costs that would have previously been capitalised and amortised, will now be immediately expensed.

 

Further detail on prior year restatements is given in Note 3 to the preliminary financial statements.

 

Note ii - Alternative performance measures: The Group provides alternative performance measures, which we use to monitor the underlying performance of the Group. These measures are not defined by International Financial Reporting Standards (IFRS) and are therefore considered to be non-GAAP (Generally Accepted Accounting Principles) measures. The Group has defined and outlined the purpose of its alternative performance measures in the Financial Glossary starting on page 24. The Group's alternative performance measures are consistent with the year ended 31 March 2021 except for Contract Backlog which is redefined to be consistent with the revenue accounting policy change (note (i) above). Contract backlog now excludes future revenues where we are assessed as agent rather than principal (i.e. pass-through revenue).

 

Note iii - Contract backlog: Contract backlog represents amounts of future revenue under contract. This measure does not include £3.2 billion of work expected to be done by Babcock as part of framework agreements (FY21: £5.3 billion).

 

Note iv - Underlying operating profit: Underlying operating profit is a key alternative performance measure (described in note ii) for the Group. It is defined as IFRS statutory operating profit adjusted for specific adjusting items. See page 9 for a reconciliation of underlying operating profit to statutory operating profit and Note 2 of the preliminary financial statement for an analysis of specific adjusting items.

 

Note v - Contract profitability and balance sheet review ('CPBS'): The Group's CPBS in FY21 resulted in various adjustments, including in-year estimate changes, reversing FY20 errors and changes in accounting policies. Reference is made throughout this document to the CPBS last year and its impact. Commentary in this document often discusses performance before the one-off CPBS adjustments in FY21 to better reflect the year-on-year differences in performance across the Group. Going forward we will not report on this basis as there will be no CPBS year-on-year impact.

 

 

CEO STATEMENT

 

One year ago we defined the actions we needed to take in FY22 to stabilise the business and lay the foundations for the future.

In this, our first year of turnaround, I am pleased to report that we have made strong progress on all our strategic priorities. Overall, our financial performance in FY22 was in line with our expectations, with cash flow slightly better than anticipated. Additionally, we took significant actions to improve balance sheet quality, including the reduction of certain working capital items such as supply chain financing, debt factoring and the practice of deferring period-end creditors.

Led by our Purpose, to create a safe and secure world, together, we have taken action to secure our business; stabilising the balance sheet and focusing the Group through portfolio alignment. We have reorganised around a new operating model and people strategy, which has been further supported by our developing ESG strategy. We are now well-positioned to take advantage of the opportunities created by the strengthening global market for defence.

 

Stabilise - strategic actions update

At the start of FY22 we identified five strategic actions for the first year of our turnaround, designed to stabilise the Group both financially and operationally, and to position us for improved execution and growth:

 

1.     Align our portfolio

2.     Implement our new operating model

3.     Roll out our new people strategy

4.     Develop our new ESG strategy

5.     Explore growth opportunities

 

We made strong progress against our priorities, making the changes that will drive improved delivery for our customers, a better experience for our employees and improved returns for shareholders.

 

Portfolio: We reviewed the businesses in our portfolio to determine strategic fit and the value to shareholders of their presence in our portfolio. The divestment of four businesses (our Oil and Gas aviation business, Frazer-Nash Consultancy Ltd, UK Power and our 15.4% stake in the AirTanker Holdings Limited joint venture) generated gross proceeds of £447.3 million, exceeding our target of at least £400 million. In addition, in July 2022 we signed a conditional agreement the sale of some of our aerial emergency services (AES) businesses for a cash consideration of c.£115m. This achieved our key portfolio objectives: to reduce complexity, focus the Group on our chosen markets and strengthen the balance sheet. In March 2022, we expanded our footprint in Australia with the acquisition of the remaining 50% interest in our Australian Naval Ship Management (NSM) joint venture for £33.1 million. Our portfolio actions have enabled us to reduce our gearing to 1.8x net debt to EBITDA, in line with our year-end target of below 2.0x.

 

Operating model: Our new operating model is now established and is driving efficiencies throughout the business. We are already realising benefits from our ongoing work to streamline processes, increase standardisation and improve controls. In FY22 we achieved our target in-year operating model savings of c.£20 million and an annualised savings rate of c.£40 million, while restructuring costs of £36 million were slightly below our original expectations. This progress contributed to the increase in underlying operating margin to 5.8%. The new model increases visibility and shortens communication lines - both essential for an agile business, and important enablers for collaboration. We will continue to embed these new ways of working, with a particular focus on operational excellence and execution in FY23.

 

People strategy: With c.28,000 skilled employees in the Babcock Group, our people strategy is critical to our future success. Aligned with our Purpose, to create a safe and secure world, together, we rolled out six Principles that underpin the ongoing cultural transformation that is key to driving sustainable improvement: Be curious; Be Kind; Be Courageous, Think: Outcomes; Collaborate; and Own and Deliver. Across the Group we are harmonising our people policies and fostering a culture that shares capability, talent, innovation and best practice. We will continue to seek to optimise our legal entities and structures as we continue to roll out our people strategy.

 

ESG strategy: We have made good progress on our ESG strategy. We have matured our plans to reduce harmful emissions from our operations, and to integrate sustainability into programme design and contract terms. Each of our sectors are developing their own sustainability plans in support of Group-led programmes and to meet stakeholders' needs. We have evolved our strategy to meet our commitment to achieve net zero carbon emissions for our estate, assets and operations by 2040. In April 2021, we signed the Business Ambition Pledge and committed to a 2030 science-based target in line with a 1.5^oC pathway. We are on track to meet our goal and over the next 12 months we aim to submit our targets for approval by the science-based targets initiative (SBTi).

 

Growth: FY22 was a pivotal year for new business development. Our strategy, which combines asset support and sustainment with a range of value-add products and technical services, drove good business momentum. We signed two export agreements for our AH140 naval ship design, which is the base for the UK's Type 31 programme: a licence order for two ships for Indonesia and selection by Poland for its new MIECZNIK (Swordfish) three-ship frigate programme. We secured several major defence communications contracts including a c.£150 million logistics support contract for the UK's next-generation tactical communications and information systems and a c.£100 million contract for the UK MOD's new Defence Strategic Radio Service (DSRS). In addition, we were selected as capability partner to upgrade and sustain the Defence High Frequency Communication System (DHFC) to support the Australian armed forces over the next 10 years. This award is a great example of collaboration across the Group and with international partners to develop high-value-add solutions for our customers.

 

The strong progress made on the five strategic actions for FY22 has achieved what we set out to do in the first year of our turnaround. We have met the immediate need to stabilise the business, strengthen the balance sheet and set our performance baseline. We have successfully laid the foundations for the future. In the second year of our turnaround we will increase our focus on execution and growth, and continue to drive cultural change across the Group.

 

Execution

With improvement underway across many areas of the Group, our focus for FY23 is on driving further operational excellence. We will continue to invest in controls and process improvement, our facilities, our people, and our IT systems. This will enable us to drive efficiencies, increase business resilience and improve operational delivery and risk management, ultimately increasing the Group's profitability and cash conversion.

 

Growth

We have laid the foundations for sustainable profitable growth. The markets we address offer favourable medium-term growth, with opportunities in our core defence market increasing as a result of the current heightened geopolitical uncertainty. We continue to target opportunities for defence and critical services in our focus countries - the UK, France, Canada, Australia and South Africa - and exports to additional markets, for example, selection of the AH140 design by Poland for its MIECZNIK frigate programme.

 

The tragic conflict unfolding in Ukraine has created significant additional geopolitical volatility and governments have reprioritised defence and national security. In the short term, opportunities are emerging for our defence support capabilities, driven by the need for force readiness. Over the longer term, our government customers must balance requirements for large-scale equipment modernisation and force expansion with the reality of constrained budgets. Our business model supports and enhances customers' defence and security capabilities and critical assets through a range of products and service solutions. We are ideally placed to address their core requirements of availability, affordability and capability:

 

·      Availability - Our customers require high utilisation of complex assets, from ships and submarines in our Marine and Nuclear sectors to military and emergency services aircraft and vehicles in Aviation and Land. Our fleet support and sustainment models are increasingly geared to higher-value-add availability-based solutions designed to optimise asset utilisation and reduce lifetime costs.

 

·      Affordability - Our customers are also demanding value for money on support programmes and new platforms. Our deep understanding of our customers' needs, and our ability to bring suppliers and technologies together to deliver an integrated solution, enable us to provide the affordability and flexibility they require.

 

·      Capability - Our customers operate in complex and ever-changing environments, which drives a continual need to adapt and enhance capability. We apply our understanding of technology integration, infrastructure management and specialist training to improve their capability, whether it be through product, support or training solutions.

 

We are growing our defence digital capabilities to develop a range of technology-based products and solutions that reduce acquisition and operational costs and increase flexibility. For example, our iSupport360 solution enables the optimisation of support to maritime and other complex equipment. Building on our success in winning the MEWSIC, LeTacCIS and DHFC contracts in FY22, we will continue to develop our ability as a technology integrator, bringing together industry partners to design innovative and cost-effective capabilities in areas such as secure communications and electronic warfare.

 

We are experiencing significant international interest in AH140, the export variant of our Type 31 frigate, driven by the demand for affordable and flexible naval power. Its modular construction offers a wide range of programme options, including capability (systems), construction and supply chain, and acquisition model - from a basic licence agreement to high levels of build programme participation for Babcock. Following our successes in Indonesia and Poland, we are in active discussions regarding further AH140 export opportunities. The digital design and build model for Type 31 is also an important enabler for the UK Government's recently refreshed 30-year National Ship Building Strategy and positions us well for future opportunities in the UK.

 

Also in defence, increased operational tempo and a growing incumbent fleet are driving demand for surface ship support and maintenance. After the year-end we signed a four-year contract to deliver through-life support to the Marinha do Brasil's flagship vessel, NAM Atlântico, formerly the UK Royal Navy platform HMS Ocean, as part of its global support programme.

 

Inflation

The Group's main exposure to inflation is via rising employment costs - particularly where we have existing contracts which were agreed in a low-inflation environment and include inflation risk. At the same time, our employees are suffering the rapidly rising cost of living, with the issue most acute in the UK of all our markets. The Group is seeking to manage the short-term impact of inflation through increased efficiencies, and to limit the taking of commercial risk of future inflation in new contracts where it cannot be mitigated.

 

We are therefore delighted that over the last few months we have engaged collaboratively with our employees and trade unions in the UK to agree a fixed-sum pay increase for FY23 that will benefit all but the most highly paid employees. This innovative and progressive pay deal has been designed to disproportionately benefit our lower-paid employees, who are most exposed to rising costs. It has now been agreed and implemented for 85% of the UK workforce (around 65% of the total workforce) giving us better visibility of employment costs for the year ahead. This will increase our labour costs by some £25 million per annum above our original expectations. The Group expects to offset this cost increase through a variety of measures, including the acceleration of improvements in contracting and procurement practices, and the removal of inefficient processes as we further embed our new operating model.

 

Outside of wage inflation, in many of our markets the recent increase in input-cost inflation coupled with shortages of supply, has increased the cost, and in some areas the availability, of materials and components. In such an environment, supplier resilience is also an emerging risk. Our newly formed Procurement and Supply Chain organisation is monitoring our supply chain to identify and mitigate any such issues as early as possible.

 

Health and safety performance in the year

The appointment of a Global Safety, Health and Environmental Protection Director, and formation of a central team, has brought additional focus to the safety improvement programme. We have strengthened our governance and introduced an electronic global safety information management system. The Group's Total Recordable Injury Rate (TRIR) in FY22, which includes work-related injuries requiring medical treatment, has reduced from 0.89 injuries for every 200,000 hours worked to 0.75 over the year, with a reduction in the number of these types of accidents of 18% against 2021. However, we have also seen a 5% increase in work-related injuries that resulted in personnel needing at least one day away from work. We continue to work hard to reduce the number of injuries and illnesses as a result of our activities.

 

Summary of financial performance in FY22

Revenue of £4,101.8 million grew by 5% organically, driven largely by recovery across the Group from prior-year COVID-19 impacts and growth in Marine and Nuclear.

 

Underlying operating profit of £237.7 million was a 13% organic increase on last year (excluding one-off CPBS adjustments in FY21), supported by improved performance from our new operating model and lower COVID-19 business interruption, particularly in Marine, Land and Aviation. This was partly offset by a £22 million programme write-off in the Nuclear sector. Underlying operating margin improved to 5.8% (FY21: 5.5%), driving a 10% increase in underlying basic EPS to 30.7 pence (FY21: 28.0 pence, excluding one-off CPBS adjustments).

 

Statutory operating profit of £226.8 million compared to a £1,736.7 million loss in the prior year, which included £1,815.5 million charges from the CPBS review.

 

Cash performance was heavily impacted by the settlement of past factors as previously communicated, including pension deficit catch-up payments and efforts to normalise period-end working capital. Underlying free cash flow of £(191.3) million was slightly ahead of our expectations, driven by lower net capex and a tax cash inflow from the settlement of open years with the authorities. Also, the favourable timing of customer receipts and prepayments enabled the Group to pay-off around £70 million more previous deferred creditors than originally planned, as well as £23.3 million of scheduled FY23 pension payments and settling the c.£15 million Italian fine.

 

Trading in first quarter of FY23

Trading in the quarter ended 30 June 2022 was in line with expectations. Net debt excluding operating leases was £625 million, higher than at 31 March 2022, reflecting timing of pension deficit payments.

 

Outlook

We are pleased with the strong progress made in FY22 to stabilise the Group and begin the process of driving improvements in the areas we identified at the beginning of the year. In particular, the material steps we have taken to address the balance sheet and the quality of our cash flow mean that we ended the year in a far stronger position than we began.

 

With the business stabilised, we are in a stronger position, both financially and operationally, with the prospects for the business similarly improved. Although we are not immune to the various macro challenges, such as inflation, that continue to impact and shape the markets in which we operate, we will be as agile as we can be in response.

 

The second year of our turnaround will be as important as the first as we build further on the foundations laid for a better Babcock in FY23. We will continue the drive to achieve efficiencies from better execution, including the expected c.£20 million further restructuring benefit, and to capture the increasing opportunities for growth in our core markets.

 

As we look ahead, and as we continue to make operational progress through the disciplined execution of our strategy, the Board is confident of delivering on its expectations of increasingly profitable growth and improved cash flow for FY23. Looking further ahead, we believe our strategy and focus on operational execution will significantly improve the Group's growth, profitability and cash generation over the medium term.

 

Delivering for all our stakeholders

Over the medium and long-term, we are focused on delivering value for all our stakeholders, including:

 

·      Improved outcomes for our customers: consistent delivery and partnering with customers to solve their challenges

·      A better place to work for our employees: an open, collaborative and diverse workplace that engages our employees

·      Returns for our shareholders: a return to growth with improving margins and better cash conversion

 

We have made strong progress to position the Company for future success. There is still much to do, but we have all the elements in place to take advantage of the many opportunities which lie before us.

 

 

 

David Lockwood OBE

Chief Executive Officer

 

 

OTHER INFORMATION

 

Dividend

No ordinary dividends have been paid or declared for the financial year ended 31 March 2022.

 

AGM

We will be holding our Annual General Meeting on 19 September 2022.

 

Board changes

In January 2022 we welcomed John Ramsay to the Board as a Non-Executive Director. John became Chair of the Audit Committee in February 2022.

Russ Houlden will retire as a Non-Executive Director in July 2022 after two years of service, and our 2022 AGM will see Non-Executive Director and Remuneration Committee Chair Kjersti Wiklund retire from the Board after four years of service.

Myles Lee and Victoire de Margerie retired as Non-Executive Directors at the AGM in September 2021 after six and five years of service respectively.

 

 

FINANCIAL REVIEW

 

Overview

We are encouraged by our financial performance in the first year of our turnaround. We delivered year-on-year profit improvement and a cash outturn that was ahead of our expectations. The actions we have taken have significantly strengthened the balance sheet and improved the quality of cash flows. We have met, and in some cases exceeded, the financial targets we set ourselves a year ago, including delivering £20 million savings from the implementation of our new operating model, generating more than £400 million of proceeds from our disposals, and reducing gearing to our FY22 target of below 2.0x.

 

Group statutory results

		31 March 2022 £m	31 March 2021 (restated)* £m
Revenue		4,101.8	3,971.6
Operating profit/(loss)		226.8	(1,736.7)
Other income		6.2	-
Share of results of joint ventures and associates		20.1	(13.1)
Investment income		0.8	0.9
Other net finance costs		(71.6)	(62.1)
Profit/(loss) before tax		182.3	(1,811.0)
Income tax benefit/(expense)		(14.4)	8.0
Profit/(loss) after tax for the year		167.9	(1,803.0)
Basic EPS		32.5p	(357.0)p
Diluted EPS		32.1p	(357.0)p

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement 

 

 

Statutory performance

Revenue of £4,101.8 million was 3% higher than last year, driven by recovery across the Group's businesses that were impacted by COVID-19 and the one-off CPBS reduction in revenue of £88.3 million in FY21 which did not repeat in FY22. Offsetting this was the net year-on-year reduction from disposals and a slight adverse impact from foreign exchange.

 

Statutory operating profit of £226.8 million compared to a £1,736.7 million loss in the prior year, which included charges from the CPBS of
£274.7 million (of which £250.0 million was one-off and £24.7 million was recurring), and asset impairments of £1,566.3 million. Statutory operating profit in FY22 includes profit as a result of acquisitions and disposals of £172.8 million (FY21: £49.7 million loss), £123.6 million impairment of goodwill and intangible assets relating to the AES businesses that were subject to a signed disposal agreement in July 2022, amortisation of acquired intangibles of
£21.4 million (FY21: £40.2 million) and £33.8 million restructuring (FY21: £8.4 million). See Note 2 of the preliminary financial statements.

 

Other income of £6.2 million (FY21: £nil) related to pre-completion guarantee fees received in relation to one of the divested businesses during the year.

 

The share of results of joint ventures (JVs) and associates was higher than the prior year, mainly due to the CPBS loss in FY21 of £37.1 million.

 

Other net finance costs increased to £71.6 million (FY21: £62.1 million), with lower net interest costs due to lower average debt and reduced IFRS 16 lease interest, more than offset by a £7.1 million higher pension finance charge and a one-off, non-cash finance charge on derivative instruments of
£9.6 million.

 

Profit before tax was £182.3 million (FY21: £1,811.0 million loss). Basic earnings per share, as defined by IAS 33, was 32.5 pence (FY21: (357.0) pence) per share.

 

A full income statement can be found on page 31.

 

 

Underlying results

 

Statutory to underlying

As described in the 'Financial Glossary - alternative performance measures' on page 24, the Group provides underlying measures to better understand the performance and earnings trends of the Group. Underlying operating profit and underlying earnings per share exclude certain specific adjusting items that can distort the reporting of underlying business performance, as set out in Note 3 of the preliminary financial statements on page 40. The reconciliation from the IFRS statutory income statement to underlying income statement is shown below:

 

		31 March 2022			31 March 2021 (restated)*
		Underlying £m	Specific adjusting items £m	Statutory £m	Underlying £m	Specific adjusting items £m	Statutory  £m
Revenue		4,101.8	-	4,101.8	3,971.6	-	3,971.6
Operating profit/(loss)		237.7	(10.9)	226.8	(27.9)	(1,708.8)	(1,736.7)
Other income		6.2	-	6.2	-	-	-
Share of results of joint ventures and associates		20.1	-	20.1	(13.1)	-	(13.1)
Investment income		0.8	-	0.8	0.9	-	0.9
Other net finance costs		(62.0)	(9.6)	(71.6)	(62.1)	-	(62.1)
Profit/(loss) before tax		202.8	(20.5)	182.3	(102.2)	(1,708.8)	(1,811.0)
Income tax (expense)/benefit		(43.9)	29.5	(14.4)	(21.8)	29.8	8.0
Profit/(loss) after tax for the year		158.9	9.0	167.9	(124.0)	(1,679.0)	(1,803.0)
Basic EPS		30.7p		32.5p	(24.6)p		(357.0)p
Diluted EPS		30.4p		32.1p	(24.6)p		(357.0)p

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement 

 

Specific adjusting items

Specific adjusting items within operating profit of £(10.9) million (FY21: £(1,708.8) million) includes profit resulting from acquisitions and disposals of £172.8 million (FY21: £49.7 million loss), a further £9.7 million of costs incurred in relation to the Group's divestment programme for disposals that have not completed, operating model and restructuring costs of £33.8 million (FY21: £8.4 million), and exceptional charges of  £118.1 million (FY21: £1,590.5 million). Exceptional items in FY22 include £123.6 million impairment of goodwill and intangible assets relating to the AES businesses that were subject to a signed disposal agreement in July 2022, offset by a £3.6 million release of provisions relating to the Italy fine and £1.8 million release of onerous contract provisions. Exceptional items in FY21 were dominated by asset impairments as a result of the CPBS. As previously stated, we intend to restrict the use of exceptional items in future periods.

 

Underlying results excluding one-off CPBS adjustments in FY21

For the most useful comparison to FY21, we focus on the last years' underlying operating profit excluding one-off CPBS adjustments. We believe this to be the most helpful measure for stakeholders to judge our performance this year. Going forward we will not report on this basis as there will be no CPBS year-on-year impact.

 

	31 March 2022 £m		31 March 2021 (restated)* £m
Revenue		4,101.8		3,971.6
of which one-off CPBS adjustments		-		88.3
Revenue excluding one-off CPBS adjustments in FY21		4,101.8		4,059.9
Underlying operating profit/(loss)		237.7		(27.9)
of which one-off CPBS adjustments	-		(250.0)
Underlying operating profit excluding one-off CPBS adjustments	237.7		222.1
Underlying margin excluding one-off CPBS adjustments	5.8%		5.5%
Other income		6.2
Share of results of joint ventures and associates		20.1		(13.1)
of which CPBS one-off impacts	-		(31.5)
Share of results of JVs and associates excluding one-off CPBS adjustments	20.1		18.4
Investment income		0.8		0.9
Other net finance costs		(62.0)		(62.1)
Underlying profit/(loss) before tax		202.8		(102.2)
Income tax		(43.9)		(21.8)
Underlying profit/ (loss) after tax		158.9		(124.0)
Non-controlling interests		3.7		-
Underlying profit attributable to shareholders		155.2		(124.0)
Underlying basic EPS		30.7p		(24.6)p
Underlying basic EPS excluding one-off CPBS adjustments**	30.7p		28.0p

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement

** Estimated in FY21 based on an underlying effective tax rate of 21%      

 

Revenue performance

 

	31 March 2021 (restated)* £m	One-off CPBS in FY21   £m	FY21  (excl. one-off CPBS adj.) £m	FX impact   £m	Acquisitions & disposals   £m	COVID-19 recovery (estimated) £m	Other trading     £m	31 March 2022 £m
Marine	1,230.6	8.6	1,239.2	(0.6)	(24.3)	(10.2)	55.2	1,259.3
Nuclear	975.9	2.2	978.1	-	-	0.4	31.2	1,009.7
Land	910.7	60.7	971.4	-	(27.1)	103.2	(32.0)	1,015.5
Aviation	854.4	16.8	871.2	(22.0)	(75.4)	38.5	5.0	817.3
Total	3,971.6	88.3	4,059.9	(22.6)	(126.8)	131.9	59.4	4,101.8

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement

 

Revenue for the year was £4,101.8 million, 5% higher than last year on an organic basis excluding one-off FY21 CPBS adjustments, foreign exchange and the impact of acquisitions and disposals. All sectors grew organically driven by recovery from COVID-19 impacts in the prior year, with further underlying growth in Marine from the ramp-up of new and early-stage contracts, including Type 31, and in Nuclear, from additional submarine infrastructure activity. See sector operational reviews on pages 18 to 23.

 

The main variances year-on-year (compared to revenue before one-off CPBS adjustments in FY21) are:

·      FX impact (1)% - this primarily relates to foreign exchange translation on the results of our European Aviation businesses

·      Acquisitions and disposals (3)% - this reflects lower net revenue from the sale of Cobras (sold in October 2020 - Land), Oil and Gas aviation (sold in August 2021 - Aviation), Frazer-Nash Consultancy Ltd (sold in October 2021 - Marine), UK Power (sold in December 2021 - Land), and a modest contribution from the NSM acquisition in March 2022 (Marine)

·      COVID-19 recovery 3% - this reflects our estimate of revenue recovered in our businesses that were impacted by COVID-19 in FY21, most notably across our South African contracts and civil training business in the Land sector, and aerial emergency services (AES) activities in the Aviation sector. The COVID-19 revenue impact in Marine is negative, reflecting the ventilators project in FY21 that did not repeat in FY22

·      Other trading 2% - excluding COVID-19 recovery factors, there was growth in Marine from further ramp-up of work on the Type 31 frigate programme, new contracts in Mission Systems and demand for LGE products, and in Nuclear, driven by the continued ramp-up in submarine infrastructure programmes. On the same basis, Land decreased, with higher activity in Rail more than offset by the impact of the loss of the Heathrow baggage contract in the prior year and the Eskom support contract in South Africa in FY22

 

Underlying operating profit performance

 

	31 March 2021 (restated)*   £m	One-off CPBS in FY21   £m	FY21  (excl. one-off CPBS adj.) £m	FX impact   £m	Acquisitions & disposals   £m	COVID-19 recovery (estimated) £m	Pension movements   £m	Other trading     £m	31 March 2022   £m
Marine	56.2	28.9	85.1	(1.1)	(4.6)	15.9	(2.9)	5.6	98.0
Nuclear	63.8	23.4	87.2	-	-	2.1	(0.3)	(26.6)	62.4
Land	(17.5)	69.3	51.8	0.1	(3.2)	12.8	0.1	(2.8)	58.8
Aviation	(130.4)	128.4	(2.0)	(3.6)	(1.7)	8.1	-	17.7	18.5
Total	(27.9)	250.0	222.1	(4.6)	(9.5)	38.9	(3.1)	(6.1)	237.7

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement

 

Underlying operating profit of £237.7 million was 7% higher than last year excluding the one-off FY21 CPBS adjustment of £(250) million. Organic growth of 13% was driven mainly by COVID-19 recovery across the Group and operating model cost savings of c.£20 million, achieving our target annualised savings of c.£40 million. By sector, profit improvement in Marine, Land and Aviation more than offset a decline in Nuclear, as a consequence of a programme write-off of £22 million.

 

The underlying operating margin was 5.8%, up from 5.5% on the same basis (excluding one-off CPBS adjustments in FY21). Three sectors improved their operating margin: Marine by 90bp to 7.8%, Land by 50bp to 5.8% and Aviation by 250bp to 2.3%. Nuclear margin decreased 270bp to 6.2% due to the programme write-off.

 

The main variances year-on-year (compared to underlying operating profit before one-off CPBS adjustments in FY21) are:

·      FX impact (2)% - this primarily relates to foreign exchange translation on the results, most notably South Africa and Southern Europe

·      Acquisitions and disposals (4)% - this is the lower net contribution following completed transactions in the period

·      COVID-19 recovery 18% - this is the estimate of profit linked to the recovery of activity in business impacted by the pandemic based on an analysis of direct and indirect impacts. The Group saw material profit improvements from recovery of operations and reduced operating costs associated with COVID-19, particularly in Land, Marine and Aviation. Subject to any material unforeseen pandemic-related developments, we do not expect to report separately on its impact in future periods

·      Pension movements (1)% - this reflects slightly higher IAS 19 pension costs this year split across our sectors

·      Other trading (3)% - Excluding COVID-19 recovery factors, sector performance was boosted by c.£20 million operating model benefits which more than offset increased business development costs relating to certain large bids and costs of implementing a stronger control environment. In Marine, initial licence fees from the Indonesian AH140 design order and a favourable contract settlement resulted in a strong performance in the second half, while the increase in Aviation profit was driven primarily by the significant milestone achievements in two defence contracts in France and restructuring benefits. Nuclear profit decreased due to the £22 million contract write-off, which more than offset the higher contribution from infrastructure work

 

Further analysis of our revenue and underlying operating profit performance is included in each sector's operating review on pages 18 to 23.

 

Share of results of joint ventures and associates

The Group's share of results in JVs and associates was a profit after tax of £20.1 million in the year (FY21: £13.1 million loss). The improvement year-on-year was due largely to the impact of one-off CPBS charges in FY21 that did not repeat (£(31.5) million) and recovery from COVID-19 impacts, primarily in our Aviation and Land JVs.

 

The Group's main JVs and associates at 31 March 2022 were:

·      Ascent in our Aviation sector, which trains RAF pilots in the UK under the UK Military Flying Training System (UKMFTS) air training contract.

·      AirTanker Services in our Aviation sector, which operates A330 Voyager aircraft to support air-to-air refuelling, air transport and ancillary services for the UK Ministry of Defence.

 

During the year we sold our 15.4% stake in the AirTanker Holdings Ltd. asset JV. Babcock retains its 23.5% shareholding in AirTanker Services Limited, as described above. In March 2022, we purchased the remaining 50% share in our Naval Ship Management (NSM) JV in our Marine sector, which maintains part of Australia's naval fleet.

 

Underlying finance costs

Underlying net finance costs were flat at £62.0 million (FY21: £62.1 million) with lower net interest costs due to lower average debt and reduced IFRS 16 lease interest, offset by a £7.1 million higher pension finance charge and a £9.5 million non-cash charge due to a change in the revaluation methodology of cross currency interest rate swaps.

 

Tax charge

The tax charge on underlying profits/(losses) was £(43.9) million (FY21: £(21.8) million) representing an effective underlying rate of 24% (FY21: 21%), compared to the originally expected 23% due to the country profit mix. The underlying effective tax rate is calculated on underlying profit before tax excluding the share of income from JVs and associates (which is a post-tax number).

 

The Group's effective rate of tax for FY23 will be dependent on country profit mix and the timing of the completion of the AES disposal announced in July 2022. The current assumption is expected to be around 25%. In the medium term, we expect our effective tax rate to increase in conjunction with UK corporation tax rate increases.

 

Underlying earnings per share

Underlying earnings per share for the year was 30.7 pence (FY21: (24.6) pence). Excluding one-off CPBS adjustments in FY21, underlying earnings per share increased 10% from 28.0p, reflecting growth in underlying operating profit and other income of £6.2m (guarantee fees earned before completion on one of the FY22 disposals), partly offset by the non-cash finance charge on derivative instruments of £9.6 million and the slightly higher effective tax rate due to the country profit mix.

 

Exchange rates

The translation impact of foreign currency movements resulted in a decrease in revenue of £22.6 million and a £4.6 million decrease in underlying operating profit. The main currencies that have impacted our results are the South African Rand and the Euro. The currencies with the greatest potential to impact our results are the Euro, the South African Rand and the Canadian Dollar:

·      A 10% movement in the Euro against Sterling would affect revenue by around £40 million and underlying operating profit by around £2 million per annum.

·      A 10% movement in the South African Rand against Sterling would affect revenue by around £25 million and underlying operating profit by around £2.5 million per annum

·      A 10% movement in the Canadian Dollar against Sterling would affect revenue by around £15 million and underlying operating profit by around £1 million per annum

 

Disposal programme

Our plan for disposals has been assessed and does not meet the criteria for any assets to be classed as held for sale under IFRS 5.

 

 

Cash flow and net debt

 

Statutory cash flow summary

	31 March 2022 £m	31 March 2021 (restated)* £m
Profit/(loss) for the year	167.9	(1,803.0)
Net cash flows from operating activities	6.8	427.4
Net cash flows from investing activities	338.6	(24.4)
Net cash flows from financing activities	(122.7)	(1,223.9)
Net increase/(decrease) in cash, cash equivalents and bank overdrafts	222.7	(820.9)

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement

 

Cash flows from operating activities

Net cash flow from operating activities of £6.8 million was lower compared to last year (FY21: £427.4 million) as expected, driven by a working capital outflow of £(178.9) million (FY21: £333.2 million inflow, which included impacts from the CPBS review) and higher pension deficit payments.

Notwithstanding these outflows, the Group performed better than expected on cash generation from the timing of customer receipts and prepayments, and used this to further accelerate the unwinding of both past working capital management practices (principally deferred creditors, debt factoring) as well as pension deficit repair and payment of the Italian fine of c.£15 million).

Cash flows from operating activities

Net cash flow from investing activities of £338.6 million increased compared to last year (FY21: £(24.4 million)), primarily due to net cash inflow from disposals and acquisitions of £404.2 million (FY21: £90.6 million).

Cash flows from financing activities

Net cash flow from financing activities of £(122.7) million principally reflects lease principal payments in the year of £113.0 million (FY21: £140.6 million). The Group repaid bank loans of £31.7 million compared to £1,154 million in FY21.   

A full cash flow statement can be found on page 34.

 

Movement in net debt

	31 March 2022 £m	31 March 2021 (restated)* £m
Net increase/(decrease) in cash in the year	222.7	(820.9)
Cash flow from the decrease/(increase) in debt	55.1	1,202.1
Change in net funds resulting from cash flows	277.8	381.2
Net additional lease obligations	(93.8)	(82.3)
New leases - granted	41.9	13.9
Disposal of subsidiaries	137.1	-
Other non-cash movements and changes in fair value	(14.2)	4.2
Foreign currency translation differences	12.8	44.6
Movement in net debt in the year	383.7	361.3
Opening net debt	(1,352.4)	(1,713.7)
Closing net debt	(968.7)	(1,352.4)

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement

 

 

Underlying cash flow and net debt

Our underlying cash flows are used by management to measure operating performance as they provide a more consistent measure of business performance year to year.

	31 March 2022	31 March 2021
	Underlying £m	Underlying (restated)* £m
Operating profit	226.8	(1,736.7)
Add back: specific adjusting items	10.9	1,708.8
Underlying operating profit	237.7	(27.9)
One-off CPBS adjustments	-	250.0
Underlying operating profit excl. one-off CPBS adjustments	237.7	222.1
Depreciation & amortisation	74.4	108.0
ROU asset depreciation	123.1	140.2
Non-cash items	0.6	9.1
Working capital movements	(173.9)	128.9
Provisions	(9.3)	3.4
Net capital expenditure	(135.2)	(171.1)
Lease principal payments	(113.0)	(140.6)
Underlying operating cash flow	4.4	300.0
Cash conversion % excl. one-off CPBS adjustment	1.9%	135.1%
Pension contributions in excess of income statement	(151.7)	(73.5)
Interest paid	(45.0)	(67.4)
Tax received	10.0	18.4
Dividends from joint ventures and associates	41.6	36.8
Cash flows related to exceptional items	(50.6)	(44.7)
Underlying free cash flow	(191.3)	169.6
Net acquisitions and disposals of subsidiaries	417.2	90.6
Acquisitions/investments in joint ventures and associates	(18.1)	(8.8)
Dividends paid (including non-controlling interests)	(1.1)	(0.8)
Purchase of own shares	-	(2.2)
Lease principal payments	113.0	140.6
Leases acquired with subsidiaries	(0.5)	-
Leases disposed of with subsidiaries	137.1	-
Other non-cash debt movements	(2.4)	-
Fair value movement in debt	(11.8)	10.0
Net new lease arrangements	(71.2)	(82.3)
Exchange movements	12.8	44.6
Movement in net debt	383.7	361.3
Opening net debt	(1,352.4)	(1,713.7)
Closing net debt	(968.7)	(1,352.4)
Add back: operating leases	412.0	582.1
Closing net debt excluding operating leases	(556.7)	(770.3)

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement

 

 

Underlying cash performance

 

Underlying operating cash flow

Underlying operating cash flow for the year after capital expenditure was £4.4 million, compared to £300.0 million inflow in the prior year, primarily due to working capital outflows and lower net capex (see below). The Group used favourable timing of customer receipts and prepayments to further accelerate the unwind of the past practice of period-end working capital management (principally creditor deferrals and debt factoring), pension deficit repair and to pay the Italian fine of c.£15 million, while keeping net debt/EBITDA (covenant basis) below our target of 2.0x. This represented operating cash conversion of 1.9% (FY21: 135.1%) on the underlying operating profit (excluding one-off CPBS adjustments).

 

Movements in working capital

The movement in working capital for the year was a £(173.9) million outflow compared to an inflow of £128.9 million last year. The outflow includes the unwind of VAT payments deferred from the previous financial year (£56 million), a reduction in deferred creditors (£130 million) and debt factoring in Southern Europe (by £40 million to £62 million) as we move away from the practice of period-end management of working capital, as well as an increase in amounts recoverable under contract in our Aviation business. The outflow in the year was partly improved by favourable timing of customer receipts and prepayments against long-term contracts that will reverse in FY23.

 

Capital expenditure

Gross capital expenditure increased to £203.2 million (FY21: £176.5 million), including £12.4 million of purchases of intangible assets
(FY21: £19.6 million). The increase reflects further investment in submarine infrastructure in Devonport, including in 9 Dock, and commencement of enterprise resource planning (ERP) roll-out in Nuclear. Net capex reduced to £135.2 million (FY21: £171.1 million) due to higher proceeds from disposals (£68.0 million (FY21: £5.4 million)), primarily reflecting the disposal and sale and leaseback of aircraft in our Aviation sector. We expect that gross capital expenditure will remain at an elevated level in FY23 as we continue to upgrade our facilities and IT equipment.

 

Lease principal payments

Lease principal payments of £113.0 million in the year (FY21: £140.6 million) represents the capital element of payments on lease obligations. This is reversed out below underlying free cash flow as the payment reduces our lease liability.

 

Pensions

Pension cash outflow in excess of the income statement charge (excluding exceptional charges for curtailment losses) was £151.7 million
(FY21: £73.5 million). As stated above, the Group accelerated a payment of £23.3 million in the year, originally scheduled for FY23. We expect the cash outflow in excess of the income statement charge to be around £100 million in FY23.

 

Interest

Net cash interest paid, excluding that paid by JVs and associates, decreased to £45.0 million (FY21: £67.4 million) due to lower net debt, a reduction in interest on leases as a result of the Group's disposal programme and repayment of the US Private Placement debt facility in FY21.

 

Taxation

Cash tax in the year was an inflow of £10.0 million, compared to our previous expectation of an outflow of around £30 million, following the settlement of several open years' tax computations with the authorities. We currently expect a cash tax outflow of approximately £20 million in FY23.

 

Dividends from joint ventures and associates

During the period the Group received £41.6 million in dividends from its JVs and associates (FY21: £36.8 million). The increase year-on-year reflects close-out dividends on the termination of the ALC and Dounreay JVs, and the final dividend from NSM pre-acquisition. Following the disposal of our 15.4% share in AirTanker Holdings Ltd, we expect dividends from JVs and associates to be around £5 million in FY23.

 

Exceptional cash flows

Cash outflows related to exceptional items were £50.6 million compared to £44.7 million last year. These costs included £34 million restructuring costs, which came in slightly below our initial expectations, and the early settlement of the Italy fine of £15 million. In FY23, we anticipate exceptional cash outflows of up to £10 million, principally operating model restructuring costs for which the charge was taken in FY22 or prior.

 

Underlying free cash flow

There was an underlying free cash outflow of £(191.3) million (FY21: £169.6 million inflow) reflecting the items set out above including the working capital outflow and pension deficit payments partly offset by lower net capital expenditure.

 

Acquisitions and disposals

The net cash inflow from acquisitions and disposals after costs was £417.2 million. This included gross proceeds of £447.3 million (net of cash disposed) from the sale of Oil and Gas (£10.0 million), Frazer Nash Consultancy (£286.8 million), Power (£45.8 million) and our 15.4% shareholding in AirTanker Holdings Limited (£95.6 million), and £(15.5) million cash consideration (net of cash acquired) for the acquisition of the remaining 50% of NSM Limited. Related disposal costs were £17.5 million and there were £9.6 million of costs relating to disposals that have not completed in the year, which was partly offset by a £6.2 million inflow from pre-completion guarantee fees received in relation to a disposal.

 

New lease arrangements

In addition to net capital expenditure, and not included in free cash flow, £71.2 million (FY21: £82.3 million) of additional leases were entered into in the period. These represent new lease obligations and so are included in our main net debt figure but do not involve any cash outflows at inception.

 

Net debt

The Group's net debt at FY22 was £968.7 million, or £556.7 million excluding operating leases. The reduction in net debt, excluding lease obligations, of £213.6 million reflects the free cash outflow and net divestments set out above, including £137.1 million of leases disposed of with subsidiaries. Our net debt includes balances related to the use of supply chain financing in the Group with extended credit terms. At 31 March 2022 the amount included was £12 million (FY21: £25 million). We are phasing out the regular use of supply chain financing across the Group.

 

Funding and liquidity

At 31 March 2022, the Group's net cash balance was £757 million. This combined with the undrawn amount under our committed revolving credit facilities (RCF) gave us liquidity headroom of around £1.7 billion.

 

As of 31 March 2022, the Group had access to a total of £2.4 billion of borrowings and facilities of mostly long-term maturities. These comprised:

·      €550 million bond maturing 6 October 2022 (in April 2021 this was hedged at £482 million)

·      New £300 million 3-year RCF maturing 20 May 2024 (signed on 20th May 2021)

·      Existing £775 million RCF maturing 28 August 2025; of which £730 million now matures on 28 August 2026  

·      £300 million bond maturing 5 October 2026

·      €550 million bond, hedged at £493 million, maturing 13 September 2027

 

Capital structure

An important part of the transformation of Babcock is the strengthening of the balance sheet. While there are several facets to balance sheet strength, the primary measurement relevant to Babcock is the net debt/EBITDA gearing ratio within our debt covenants, which was 1.8x for FY22. The covenant level was temporarily lifted to 4.5x in May 2021, but reverts to 3.5x from September 2022. Having achieved our previous target of leverage under 2.0x, the ratio could increase above 2.0x in the short term, reflecting final pension deficit catch-up payments of c.£100 million and the unwind of the remaining creditor deferrals (c.£35 million). The bulk of these non-recurring cash flows are expected within the first half of FY23. Thereafter, we expect leverage to reduce and are now implementing a medium-term gearing ratio target of 1.0x to 2.0x.

 

 

Net debt to EBITDA (covenant basis)

This is the measure used in the covenant in our RCF and makes a number of adjustments from reported net debt and EBITDA. The covenant level is
3.5 times - which was amended to 4.5 times until 31 March 2022. As set out above, our net debt to EBITDA (covenant basis) decreased to 1.8 times for FY22 driven by the reduction in net debt, which was proportionally greater than the decrease in EBITDA + JV and associate dividends.

 

		31 March 2022 £m	31 March 2021 (restated)*  £m
Underlying operating profit excl. one-off CPBS adjustments		237.7	222.1
Depreciation and amortisation		74.4	108.0
Covenant adjustments1		(12.9)	(11.5)
EBITDA		299.2	318.6
JV and associate dividends		41.6	36.8
EBITDA + JV and associates dividends (covenant basis)		340.8	355.4
Net debt excluding operating leases		(556.7)	(770.3)
Covenant adjustments2		(60.0)	(94.7)
Net debt (covenant basis)		(616.7)	(865.0)
Net debt/EBITDA		1.8x	2.4x

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement

¹Various adjustments made to EBITDA to reflect accounting standards at the time of inception of the original RCF agreement. The main adjustments are to the treatment of leases within operating profit and pension costs

²Removing loans to JVs, finance lease receivables and adjusting for an average FX rate for the previous 12 months

 

Interest cover (covenant basis)

This measure is also used in the covenant in our RCF, with a covenant level of 4.0x.

					31 March 2022 £m	31 March 2021 (restated)*  £m
EBITDA (covenant basis) + JV and associate dividends					340.8	355.4
Finance costs					(60.2)	(55.6)
Finance income					9.6	12.6
Covenant adjustments					(1.5)	(0.7)
Net Group finance costs					(52.1)	(43.7)
Interest cover					6.5x	8.1x

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement

 

Return on invested capital, pre-tax (ROIC)

This measure is one of the Group's key performance indicators.

 

						31 March 2022 £m	31 March 2021 (restated)*  £m
Underlying operating profit						237.7	(27.9)
Share of JV PAT						20.1	(13.1)
Underlying operating profit plus share of JV PAT						257.8	(41.0)
Underlying operating profit excl. one-off CPBS impacts						237.7	222.1
Share of JV PAT excl. one-off CPBS impacts						20.1	18.4
Underlying operating profit plus share of JV PAT excl. one-off CPBS adjustments						257.8	240.5
Net debt excluding operating leases						556.7	770.3
Operating leases						412.0	582.1
Shareholder funds						701.5	229.0
Retirement deficit/(surplus)						(191.6)	278.9
Invested capital						1,478.7	1,860.3
ROIC (pre-tax)						17.4%	(2.2)%
ROIC excl. one-off CPBS adjustments (pre-tax)						17.4%	12.9%

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement

 

 

Pensions

The Group has a number of defined benefit pension schemes. The principal defined benefit pension schemes in the UK are the Devonport Royal Dockyard Pension Scheme, the Babcock International Group Pension Scheme and the Rosyth Royal Dockyard Pension Scheme (the Principal schemes).

 

IAS 19

At 31 March 2022, the IAS 19 valuation for accounting purposes was a net surplus of £191.7 million (FY21: a deficit of £(278.9) million). Pension liabilities reduced by £361.1 million to £4,541.4 million, primarily as result of higher discount rates. Scheme contributions and positive net asset returns drove a c.£110 million increase in the fair value of plan assets to £4,733.1 million, net of £(283.5) million longevity swaps.  The fair value of the assets and liabilities of the Group pension schemes at 31 March 2022 and the key assumptions used in the IAS 19 valuation of our schemes are set out in note 18 of the preliminary statement.

 

In the year ended 31 March 2022, the Group made three prior-year adjustments to the IAS 19 valuation: a changed methodology to value the longevity swaps; use of the actual known rate of pension increase, rather than the long-term inflation assumption; and actuarial roll-forward for multiple years of the Babcock Naval Services Pension Scheme (BNSPS). Further details are included in note 18.

	31 March 2022 £m	31 March 2021 (restated)* £m
Fair value of plan assets	4,733.1	4,623.6
Present value of benefit obligations	(4,541.5)	(4,902.5)
Net surplus/(deficit) at 31 March	191.6	(278.9)

* Refer to Note 3 of the preliminary financial statements for details regarding the prior-year restatement

 

Income statement charge

The charge included within underlying operating profit in FY22 was £38.5 million, of which £31.1 million related to service costs and £7.4 million related to expenses. In addition to this, there was an interest charge of £3.7 million. For FY23, we expect charges included within underlying operating profit of around £33 million, split between £26 million of service costs and £7 million of expenses, and an interest credit of £7 million on the surplus.

 

Actuarial valuations

An estimate of the actuarial deficits of the Group's defined benefit pension schemes, including all longevity swap funding gaps, calculated using each Scheme's respective technical provisions basis, as at FY22 was approximately £350 million (FY21: c.£580million), such valuations use discount rates based on UK gilts - which differs from the corporate bond approach of IAS 19. This technical provision estimate is based on the assumptions used within the latest agreed valuation prior to 31 March 2022 for each of the three main schemes and does not fully allow for the impact of RPI reform which will be fully reflected in future technical provisions valuations.

 

The valuation dates of the three largest schemes are set so that only one scheme is undertaking its valuation in any one year, in order to spread the financial impact of market conditions. The valuation of the Devonport Royal Dockyard Pension Scheme as at 31 March 2020 was completed in the last financial year, the valuation of the Rosyth Royal Dockyard Pension Scheme as at 31 March 2021 has been completed since the year end, and work has commenced on the valuation of the Babcock International Group Pension Scheme at 31 March 2022.

 

Cash contributions

Cash contributions made by the Group into the defined benefit pension schemes, excluding expenses and salary sacrifice contributions, during the last financial year are set out in the table above.

	31 March 2023e £m	31 March 2022 £m	31 March 2021 £m
Future service contributions	19.9	21.1	24.2
Deficit recovery	88.3	135.2	51.6
Longevity swap	15.6	16.8	16.3
Total cash contributions - employer	123.8	173.1	92.1

 

 

Subsequent events

On 19 July 2022, we signed a conditional agreement with Ancala Partners for the sale of part of our aerial emergency business including net lease liabilities of £209 million, for a gross cash consideration of £115 million. These businesses provide aerial emergency medical services, firefighting and search & rescue to customers and communities in Italy, Spain, Portugal, Norway, Sweden and Finland. Completion of the agreement is subject to certain regulatory and other conditions. The deal is expected to complete by the end of the calendar year, subject to the satisfaction of the relevant conditions.

 

 

OPERATIONAL REVIEWS

Marine

		31 March 2022	31 March 2021 (restated)*
Contract backlog		£2.5bn	£2.5bn
Revenue		£1,259.3m	£1,230.6m
Underlying operating profit		£98.0m	£56.2m
of which CPBS one-off adjustment		-	£(28.9)m
Underlying operating profit excluding CPBS one-off adjustment		£98.0m	£85.1m
Underlying margin excluding CPBS one-off adjustment		7.8%	6.9%

* Refer to Note 3 of the preliminary financial statements for details regarding the prior year restatement

 

Revenue and underlying operating profit bridge:

 

	31 March 2021 (restated)* £m	One-off CPBS adj. £m	31 March 2021 restated (excl. one-off  CPBS) £m	FX Impact £m	Acquisitions and disposals £m	COVID-19 recovery (estimated) £m	Pension charge £m	Other trading £m	31 March 2022 £m
Revenue	1,230.6	8.6	1,239.2	(0.6)	(24.3)	(10.2)	-	55.2	1,259.3
Underlying operating profit	56.2	28.9	85.1	(1.1)	(4.6)	15.9	(2.9)	5.6	98.0

* Refer to Note 3 of the preliminary financial statements for details regarding the prior year restatement

 

Financial review

Revenue of £1,259.3 million increased 2% (excluding the one-off CPBS adjustment in FY21). Organic growth of 4% was driven by increased activity on the Type 31 programme, initial AH140 export revenue, new contracts in Mission Systems and strong demand for our LGE products. This more than offset the year-on-year impact of COVID-19, including the contribution from the ventilators project in the UK last year and the end of our Royal Naval training contract in FY21.

 

Underlying operating profit (excluding one-off CPBS adjustments) increased 15% to £98.0 million, or 22% on an organic basis. The main drivers were increased revenue, including COVID-19 recovery and growth in Mission Systems and LGE contracts, operating model efficiencies, a favourable contract settlement and the Indonesia AH140 licence fee, which more than offset significant bid costs on new large opportunities, including Indonesia, Poland and in the UK. As a result, underlying operating margin (excluding one-off CPBS adjustments) improved to 7.8% (FY21: 6.9%).

 

The disposal of Frazer-Nash Consultancy Ltd completed in August 2021 for a gross consideration of £291.7 million. In March 2022, we acquired the remaining 50% of the Australian Naval Ship Management (NSM) business from joint venture partners for £34 million.

 

Contract backlog was flat at £2.5 billion, with the addition of two large contracts in Mission Systems combined and growth in LGE orders, replacing revenue traded on long term contracts. At 1 April 2022, Marine had around £0.8 billion of FY23 expected revenue under contract, and an additional c.£460 million under framework agreements, both in line with the FY21 position.

 

Operational review

UK defence

The Type 31 (Inspiration Class) frigate programme remains on schedule, with three major milestones achieved during the year: the first steel cut for HMS Venturer, its subsequent keel laying, and the topping out of our advanced manufacturing facility in Rosyth. The investment across our Rosyth site aims to ensure capability and capacity to support future shipbuilding opportunities. In April 2022, we were awarded a 10-year contract to provide dry-dock maintenance work for the Royal Navy's Queen Elizabeth Class (QEC) aircraft carriers. The contract strengthens Rosyth capabilities in design, build, assembly and support of large ships.

 

Warship support activity at Devonport was higher year-on-year, with work on the Type 23 frigate programme ahead of last year, which included COVID-19 disruption. We continued to provide the UK's Royal Navy with fleet-time support, deployed support, and deep maintenance, with life extension and refit activity on a number of warships. We also supported the Royal Navy's Carrier Strike Group across multiple platforms and locations, including work on HMS Richmond in Japan, as well as the Type 23, Type 45, the QEC Class and Sandown Class.

 

We saw several positive developments in our Missions Systems business, including securing a c.£110 million contract to deliver the new Defence Strategic Radio Service to critical military operations and a c.£100 million 13-year contract for the UK MOD for the design, manufacture, delivery and in-service support to the Maritime Electronic Warfare Systems Integrated Capability (MEWSIC). Babcock will act as prime contractor, working with collaboration partners, Elbit Systems UK and QinetiQ.

 

We achieved full operational capacity in our new Morpheus Logistic Support Contract, which forms part of the UK's Land Environment Tactical Communications and Information Systems programme to deliver next generation tactical communications and information systems for the British Army. We also extended our contracts for Dreadnought launch weapons and signal ejector systems to include further scope on boats two to five.

 

International defence

We support international defence markets from our UK operations and from our businesses in Canada, Australia, New Zealand, Oman and South Korea.

 

In Australia, we completed the acquisition of the remaining 50% stake in our Naval Ship Management (NSM) business from our JV partners in March 2022. The NSM acquisition strengthens Babcock's support to the Australian Defence Force's future maritime support model, Plan Galileo. With the signing of a new sustainment contract in New Zealand (see below), Babcock is now the Australasia region's leading warship sustainment enterprise.

 

In December, we were selected by the Australian Government as the preferred tenderer to upgrade and sustain the Defence High Frequency Communication System (DHFC) to support the Australian armed forces over the next 10 years, with a further four-year extension option, each of two years.

 

In New Zealand, In February 2022, the Defence Force awarded Babcock a new seven-and-a-half year Maritime Fleet Sustainment Services contract to provide full service asset management and engineering to the Royal New Zealand Navy.

 

In Canada, Babcock is continuing to deliver on the Victoria Class In-Service Support Contract (VISSC), supporting Canada's fleet of four submarines. Babcock completed the deep maintenance period of HMCS Corner Brook and is preparing to commence work on the deep maintenance period for HMCS Victoria. Additionally, the Government of Canada has further extended VISSC to June 2025.

 

In South Korea, we signed a Memorandum of Understanding (MoU) with Hyundai Heavy Industries for the CVX Aircraft Carrier Programme opportunity. In March, we signed a further MoU with Daewoo Shipbuilding and Marine Engineering Co Ltd (DSME) to focus on international opportunities, and support system integration on future programmes. The business is benefitting from investment in an assembly, maintenance, repair and overhaul facility in Busan, where Babcock currently assembles equipment for the fifth boat in the Janbogo-III submarine programme.

 

In Oman, our joint venture operation in Duqm with the Oman Drydock Company has completed a first of its kind double engine replacement for a UK Royal Navy Type 23 Class frigate. This enables the Royal Navy to sustain operations within the region and is a clear example of Babcock's global reach. During the period, two packages of work were also completed on US Navy vessels.

 

In September, we won our first export contract for the AH140 frigate (which Type 31 is based on) through a design licence agreement with PT PAL Indonesia. The design licence will enable PAL to build two frigates in Indonesia with bespoke design modifications for the Indonesian Navy. The second export success came in March 2022, when our design was selected by Poland and Babcock was selected as the design technology partner for Poland's MIECZNIK (Swordfish) frigate programme. Babcock will co-operate with Polish state-owned defence contractor PGZ and other members of the MIECZNIK consortium to adapt the AH140 design and construct the vessels at the PGZ shipyard in Gdynia.

 

In Brazil, we were awarded a four-year contract to deliver through life support to the Marinha do Brasil's flagship vessel, NAM Atlântico, formerly the UK Royal Navy platform HMS Ocean, as part of our global programme.

 

Our Energy and Marine (LGE) business saw good growth in orders and revenue, with increased commercial vessel work and continued strong demand for liquefied gas handling and re-liquefaction systems across the LPG and LNG markets. The business won many projects in the year from shipyards in South Korea, China and other major international ship-owners.

 

 

Nuclear

		31 March 2022	31 March 2021 (restated)*
Contract backlog		£2.8bn	£0.4bn
Revenue		£1,009.7m	£975.9m
Underlying operating profit		£62.4m	£63.8m
of which CPBS one-off adjustment		-	£(23.4)m
Underlying operating profit excluding CPBS one-off adjustment		£62.4m	£87.2m
Underlying margin excluding CPBS one-off adjustment		6.2%	8.9%

* Refer to Note 3 of the preliminary financial statements for details regarding the prior year restatement

 

Revenue and underlying operating profit bridge:

 

	31 March 2021 (restated)* £m	One-off CPBS adj. £m	31 March 2021 restated (excl. one-off  CPBS) £m	FX Impact £m	Acquisitions and disposals £m	COVID-19 recovery (estimated) £m	Pension charge £m	Other trading £m	31 March 2022 £m
Revenue	975.9	2.2	978.1	-	-	0.4	-	31.2	1,009.7
Underlying operating profit	63.8	23.4	87.2	-	-	2.1	(0.3)	(26.6)	62.4

* Refer to Note 3 of the preliminary financial statements for details regarding the prior year restatement

 

Financial review

Revenue increased 3% to £1,009.7 million (excluding the one-off CPBS adjustment in FY21). This was driven by the continued strong ramp up in submarine infrastructure programmes, which more than offset lower volumes through transition to the new FMSP contract, a £22 million programme write-off and civil nuclear projects which completed in FY21.

 

Underlying operating profit (excluding one-off CPBS adjustments) fell by 28% to £62.4 million. The key impact in the year was a £22 million programme write-off, which offset higher contribution year-on-year from infrastructure work and operating model savings. As a result of this, and lower initial profit recognition at the start of the FMSP contract, underlying margin for the year fell to 6.2%.

 

The sector's contract backlog of £2.8 billion (FY21: £0.4 billion) is up significantly due to the signing of the FMSP contract. At 1 April 2022, Nuclear had around £860 million of FY23 expected revenue under contract (FY22: £260 million) and an additional c.£110m under framework agreements (FY21: £640 million).

 

Operational review

Defence

Overall, our defence activity increased driven by the continued ramp-up of the long-term Devonport infrastructure programme to support future demand. The largest current project, the design and enabling work to refurbish 10 Dock and its supporting infrastructure, is underway along with other major projects to support the first deep maintenance period of the Astute Class submarine at Devonport in the next few years. We continue to work on the Revalidation Assisted Maintenance Period (RAMP) programme for the Trafalgar Class and the life extension of the Vanguard Class. We also continue to work with our Submarine Enterprise partners in supporting the design and build programmes for the future classes of submarine, including the Dreadnaught Class.

 

In September 2021, the Future Maritime Support Programme (FMSP) was signed. This five-year contract for around £3.5 billion replaces the previous Maritime Support Delivery Framework (MSDF), and continues our support spanning UK naval base operations at HMNB Devonport and HMNB Clyde and engineering and planning at our Bristol hub, all undertaken alongside surface ship fleet support at Devonport in our Marine sector. We continue to work with our UK MOD customer to ensure the provision of future capability and resilience and to improve decision making across the Submarine Enterprise. The new contract has been identified as a 'Qualifying Defence Contracts' (QDC) and falls under Single Source Contract Regulations (SSCR).

 

Following the AUKUS announcement to acquire nuclear-powered submarine technology without nuclear armaments, Australia will no longer proceed with the Attack class conventional submarine contract with Naval Group. As a result, our participation in the Attack class programme has ended. Babcock recognises the strategic importance of the AUKUS agreement and continues to be ready to support any future requirement.

 

Civil

Momentum in the civil nuclear market is building and the business continues to position for future opportunities. During the year, we secured a five-year extension to the multi-year Design Services Alliance (DSA) engineering framework, worth around £200 million, and a two-year extension to the Pile Fuel Cladding Silo (PFCS) project, both at Sellafield. We continue to support EDF and project volumes are in line with expectations. In new build, Hinkley Point C announced a delay to the project principally because of the impact of COVID-19 on the civil works, which has further delayed the ramp up of our Mechanical, Electrical and HVAC (MEH) Alliance scope further.

 

Small work packages from the Magnox programme are now being contracted and initiated. During the period we secured two contracts at Hinkley Point A, where we will lead the installation, setting to work and inactive commissioning for the projects as the principal contractor.

 

In July 2021, we signed a memorandum of understanding with Rolls-Royce to collaborate on the Small Modular Reactor (SMR) programme to help develop roles across manufacturing, licensing, design and delivery. Babcock, in collaboration with U-Battery, has developed a full-size mock-up of the main vessels of an advanced modular reactor at our Whetstone manufacturing facility. The mock-up intends to demonstrate the potential simplicity in construction and transport of an SMR, making a valuable contribution to the UK's net zero efforts. We also signed a memorandum of understanding with X-Energy, a US reactor and fuel design engineering company, to act as its deployment partner for High Temperature Gas Reactors in the UK. The three technologies are complementary and align with the UK Governments plans to transition to net zero carbon by decarbonising electricity generation and building a hydrogen economy in the UK.

 

Increasing volatility of national power generation driven by global developments during the year has prompted nations to look at producing and securing their sources of low emission power. In the UK, the Government has backed new nuclear energy supply to deliver both UK energy security of supply and contribute to their target of net zero emissions by 2050. In addition to new policy developments, it has committed around £2.3 billion of funding to support new nuclear programmes. This is a core focus area for our civil nuclear business, and we are well positioned to take advantage of these opportunities.

 

Internationally, we are now supporting Ontario Power Generation with its decommissioning planning for the Pickering Nuclear Generating Station in Canada. In Japan, relationships continue to strengthen whilst new additional international opportunities are being identified in our focus countries.

 

 

 

Land

		31 March 2022	31 March 2021 (restated)*
Contract backlog		£2.3bn	£2.4bn
Revenue		£1,015.5m	£910.7m
Underlying operating (loss) / profit		£58.8m	£(17.5)m
of which CPBS one-off adjustment		-	£(69.3)m
Underlying operating profit excluding CPBS one-off adjustment		£58.8m	£51.8m
Underlying margin excluding CPBS one-off adjustment		5.8%	5.7%

* Refer to Note 3 of the preliminary financial statements for details regarding the prior year restatement

 

Revenue and underlying operating profit bridge:

 

	31 March 2021 (restated)* £m	One-off CPBS adj. £m	31 March 2021 restated (excl. one-off  CPBS) £m	FX Impact £m	Acquisitions and disposals £m	COVID-19 recovery (estimated) £m	Pension charge £m	Other trading £m	31 March 2022 £m
Revenue	910.7	60.7	971.4	-	(27.1)	103.2	-	(32.0)	1,015.5
Underlying operating profit	(17.5)	69.3	51.8	0.1	(3.2)	12.8	0.1	(2.8)	58.8

* Refer to Note 3 of the preliminary financial statements for details regarding the prior year restatement

 

Financial review

Revenue increased 5% to £1,015.5 million (excluding the one-off CPBS adjustment in FY21). Organic growth of 7% includes recovery from prior year COVID-19 impacts, particularly in South Africa and in our civil training businesses, and higher activity in Rail. This was offset by lower volume on the DSG contract due to project completions, the loss of the Heathrow baggage handling contract in the prior year, and the end of the Eskom power station service contract in the final quarter of FY22.

 

Underlying operating profit (excluding one-off CPBS adjustments) grew by 14% to £58.8 million or by 19% on an organic basis. The increase reflects a strong recovery from COVID-19 impacts (£12.8 million), operating model efficiencies and growth in Rail, which more than offset lower DSG volume and the loss of the Heathrow contract. As a result, underlying margin improved to 5.8%.

 

The sector's contract backlog at £2.3 billion (FY21 restated: £2.4 billion), has been adjusted for reclassification of pass-through (principal versus agent) revenue of c.£580 million. The decline reflects small business wins offset by trading and disposals. At 1 April 2022, Land had around £500 million of FY23 expected revenue under contract (FY22: £540 million) and an additional c.£150 million under framework agreements (FY21: c.£120 million).

 

Operational review

Defence

Overall, Land defence activities were broadly flat with further volume recovery from COVID-19 impacts across a number of contracts, offset by lower volumes on the DSG contract. In line with customer requirements, the DSG transformation programme has been fully implemented and we are now leading several key programmes of improvement focussed on specific outputs for the Army which see us integrating expertise from OEMs, SMEs, and the wider supply chain to improve overall programme potential.

 

Defence training saw some recovery in activity levels compared to last year. After a highly successful campaign in 2021, we will be participating in the British Army's 2022 Army Warfighting Experiment to demonstrate the integration of a range of innovative collective training capabilities. In the period we were awarded a three-year extension for the Defence College of Technical Training for EMTC 2, the provision of training design and delivery.

 

Emergency services

Activity was broadly flat in the period with the first year of the Met Police training contract offset by slightly lower volumes in London Fire Brigade (LFB) contracts. The Police Education and Qualification Framework (PEQF) programme originally launched through a COVID-secure delivery model was returned to operational programme delivery in September 2021.

 

South Africa

South Africa grew strongly in the year as activity recovered from COVID-19 impacts. In the final quarter of the year, Eskom made the decision to not extend the engineering services contract which we have run for many years to support state power generation. The impact of the loss of the contract is expected to be around £60 million in revenue for FY23.

 

Other civil markets

The Rail business saw growth in volumes on track renewals and signalling framework while our civil training business saw higher activity compared to last year which was affected by COVID-19 related disruption. Our Power business, which we divested in December 2021, contributed revenue of around £62 million and an operating profit of around £5 million in FY22.

 

 

 

Aviation

		31 March 2022	31 March 2021 (restated)*
Contract backlog		£2.3bn	£2.9bn
Revenue		£817.3m	£854.4m
Underlying operating (loss) / profit		£18.5m	£(130.4)m
of which CPBS one-off adjustment		-	£(128.4)m
Underlying operating profit excluding CPBS one-off adjustment		£18.5m	£(2.0)m
Underlying margin excluding CPBS one-off adjustment		2.3%	(0.2)%

* Refer to Note 3 of the preliminary financial statements for details regarding the prior year restatement

 

Revenue and underlying operating profit bridge:

 

	31 March 2021 £m	One-off CPBS adj. £m	31 March 2021 (excl. one-off  CPBS) £m	FX Impact £m	Acquisitions and disposals £m	COVID-19 recovery (estimated) £m	Pension charge £m	Other trading £m	31 March 2022 £m
Revenue	854.4	16.8	871.2	(22.0)	(75.4)	38.5	-	5.0	817.3
Underlying operating profit	(130.4)	128.4	(2.0)	(3.6)	(1.7)	8.1	-	17.7	18.5

 

Financial review

Revenue decreased by 6% to £817.3 million (excluding one-off CPBS adjustments in FY21), primarily due to the disposal of our Oil and Gas business in August 2021 and the impact of foreign exchange. Organic growth was 5% was driven by COVID-19 recovery and the ramp-up of defence contracts in France, offset partly by the completion of fixed wing aerial emergency services (AES) contracts in the Nordics and lower activity in Italy.

 

Underlying operating profit (excluding one-off CPBS adjustments) increased to £18.5 million (FY21: £(2.0) million loss). Profit performance improved due to operating model efficiencies, the achievement of certain programme milestones and recovery from COVID-19. FY22 was still slightly affected by lower flying hours and costs associated with additional COVID-19 related safety measures.

 

The sector's contract backlog declined to £2.3 billion (FY21: £2.9 billion), primarily as a result of the removal of £580 million backlog of the Oil and Gas aviation business, sold in August 2021. Excluding disposals, FY21 restated contract backlog was £2.3 billion. At 01 April 2022, Aviation had around £580 million of FY23 expected revenue under contract (FY21: £700 million (excluding disposals)).

 

Operational review

Defence

International defence grew in the year, driven by activity on new contracts and ramp up of the H160 contract which delivers search and rescue aircraft for the French Navy. In June 2021, we were awarded the Mentor contract, which involves the provision and support of an additional nine PC-21 aircraft and related equipment to the French Air Force, bringing the fleet size to 26. The contract expands the scope of our existing military training operations and is expected to be worth up to c.€500 million over 11 years, including options. c.€170 million was booked in FY22.

 

Additionally in the year, we teamed with Leonardo in Canada to work together on a new business opportunity for the Future Aircrew Training programme (FAcT).

 

Activity across UK defence including RAF station support, Hawk and LAFT contracts was flat year-on-year as expected, with further recovery from COVID-19 impacts offsetting the completion of some contracts. In the period, our military business secured a two-year extension to our Hades site support contract with the RAF, and a four-year extension for the delivery of the light aircraft flying training programme LAFT2. In addition, an expansion of requirements has been awarded from the Ascent JV to deliver further support to pilot training through the UK Military Flying Training System (UKMFTS).

 

Aerial emergency services

Revenue across the majority of our aerial emergency services businesses ended the year flat, in line with expectations, with improvements in profitability as a result of operating model efficiencies and some COVID-19 recovery.

 

Performance in aerial emergency medical services has seen some good recovery this year. Modest growth in Italy, with Scandinavia flat, was offset by lower volumes in Spain over the year. Southern European bases have all remained open and experienced varying increases in profitability. Renewal contracts have been won across the UK, Italy and Sweden. The Norway fixed wing contract has matured to a steady operational state with investment in a new maintenance facility in Tromso.

 

Our firefighting operations saw higher activity levels in Canada and key areas in Spain compared to last year, with Italy reporting expected flying hours. We have also utilised five Super Puma helicopters in Spain, converted from oil and gas operations. These aircraft deliver much greater water capacity than existing helicopters and are able to deliver a significantly larger number of firefighters to wildfires than was previously possible. Our Italy firefighting contract has been extended by two years.

 

Oil and gas

The sale of the Oil and Gas business completed in August 2021, contributed revenue of around £79 million and an operating profit of around
£2 million in FY21.

 

 

 

Financial Glossary - Alternative performance measures

The Group provides alternative performance measures, including underlying operating profit, to enable users to better understand the performance and earnings trends of the Group. These measures are considered to provide a consistent measure of business performance from year to year. They are used by management to assess operating performance and as a basis for forecasting and decision-making, as well as the planning and allocation of capital resources. They are also understood to be used by investors in analysing business performance.

Further information on the Group's Specific Adjusting Items, which is a critical accounting judgement, can be found in Notes 2.

The Group's alternative performance measures are not defined by IFRS and are therefore considered to be non-GAAP measures. The measures may not be comparable to similar measures used by other companies, and they are not intended to be a substitute for, or superior to, measures defined under IFRS.

The Group's alternative performance measures are consistent with the year ended 31 March 2021, except for Contract Backlog, which is redefined to be consistent with the revenue accounting policy change in Note 3 of the preliminary financial statements.

Measure	Closest equivalent IFRS measure	Definition and purpose	Adjustments to reconcile to IFRS measure (and reference to reconciliation)
Revenue measures
Revenue excluding the one-off CPBS adjustment	Revenue	Revenue excluding the impact of the one-off CPBS adjustment in FY21 - To eliminate the non-recurring element of the CPBS review from FY21 revenue to provide a better measure of growth	One-off CPBS revenue impact - See table on page 9 and page 10
Organic growth	Revenue growth year-on-year	Growth excluding the impact of foreign exchange (FX), and contribution from acquisitions and disposals over the prior and current year, and the one-off CPBS adjustment in FY21 - Used to measure the year-on-year movement in Group revenue - It is a good indicator of business growth - Group KPI	FX, contribution of acquisitions and disposals in the current and prior year
Contract backlog	IFRS15	Contracted revenue excluding variable revenue, expected contract renewals, expected revenue from framework agreements and impact of termination for convenience clauses. - Used to measure revenue under contract as a good indicator of revenue visibility
Profit measures
Underlying operating profit	Operating profit	Operating profit before the impact of Specific Adjusting Items1 - Underlying operating profit is the headline measure of the Group's performance	Specific Adjusting Items1 - See table on page 9 - See note 2
Underlying operating margin	No direct equivalent	Underlying operating profit as a percentage of revenue - To provide a measure of operating profitability, excluding one-off items  - Operating margin is an important indicator of operating efficiency across the Group - Group KPI	Ratio - N/A
Underlying net finance costs	Net finance costs	Net finance costs excluding Specific Adjusting Items1 - To provide an alternative measure of underlying finance costs excluding items such as fair value measurements which can fluctuate significantly on inputs outside of management's control	Specific Adjusting Items1 - See table on page 9
Underlying profit before tax	Profit before tax	Profit before tax adjusted for - The summation of the impact of all adjusting items on profit before tax	Specific Adjusting Items1 - See table on page 9
Underlying effective tax rate	Effective tax rate	Tax expense excluding the tax impact of Specific Adjusting Items1, as a percentage of underlying profit before tax (being the summation of the impact of all adjusting items on profit before tax) excluding the share of post-tax income from joint ventures and associates - To provide an indication of the ongoing tax rate across the Group, excluding one-off items	Specific Adjusting Items1 - See table on page 9
Underlying basic earnings per share	Basic earnings per share	Based on the Group's underlying profit before tax. It includes the Group's post-tax share of results of joint ventures and associates	Specific Adjusting Items1 - See table on page 9 - See Note 7 on page 48
Underlying operating profit (excluding one-off CPBS adjustment)	Operating profit	Underlying operating profit excluding one-off CPBS adjustment in FY21   - Eliminates the non-recurring element of the CPBS review to provide a better measure of underlying operating profit in FY21
Underlying operating margin (excluding one-off CPBS adjustment)	No direct equivalent	Underlying operating profit divided by revenue, both excluding one-off CPBS adjustment in FY21 - Eliminates the non-recurring element of the CPBS review to provide a better measure of underlying operating margin in FY21	Ratio - N/A
Underlying basic (earnings per share excluding one-off CPBS adjustment)	Basic earnings per share	Underlying earnings per share excluding the impact of the one-off CPBS adjustment in FY21 - Eliminates the non-recurring element of the CPBS review in FY21 to provide a better measure of underlying earnings growth in the year	Specific Adjusting Items1
EBITDA	Operating profit	Underlying operating profit excluding one-off CPBS adjustments in FY21, plus depreciation and amortisation, and various covenant adjustments linked to the Revolving Credit Facility including the treatment of leases within operating profit and pension costs - Used as the basis to derive the gearing ratio net debt/EBITDA, which is a key measure of balance sheet strength and the basis of our debt covenant calculations	Specific Adjusting Items1 Depreciation and amortisation Covenant adjustments - See table on page 16
Balance sheet
Net debt	No direct equivalent	Cash and cash equivalents and short-term investments, less bank and other borrowings, operating leases and net derivative financial instruments - Used as a general measure of the progress in generating cash and strengthening of the Group's balance sheet position	- See table on page 12 - See table on page 13
Net debt (excluding operating leases)	No direct equivalent	Net debt excluding lease liabilities as defined by IAS 17, the relevant standard at the inception of the banking facility. This net debt figure also includes finance lease (as defined by IAS 17) receivables and payables, loans from the Group to joint ventures and supply chain financing balances (of FY22: £12 million, FY21: £25 million). - Used by management to monitor the strength of the Group's balance sheet position and to ensure the Group's capital structure is appropriate - Used by credit agencies	- See table on page 12 - See table on page 13
Net debt (covenant basis)	No direct equivalent	Net debt (excluding operating leases), excluding loans to Joint Ventures, finance lease receivables and adjusting for an average FX rate for the previous 12 months - Used by debt investors - Used by credit agencies	- See table on page 16
Net debt/EBITDA (covenant basis)	No direct equivalent	Net debt (covenant basis) divided by EBITDA  - A measure of the Group's ability to meet its payment obligations - Used by analysts and credit agencies - Group KPI	Ratio - N/A - See table on page 16
Return on invested capital (pre-tax) (ROIC)	No direct equivalent	Underlying operating profit plus share of JV PAT, divided by the sum of net debt, shareholders' funds and retirement deficit (surplus) - Used as a measure of profit earned by the Group generated by the debt and equity capital invested, to indicate the efficiency at which capital is allocated -  Group KPI	Ratio - N/A - See table on page 16
Return on invested capital excluding one-off CPBS adjustments (pre-tax)	No direct equivalent	Underlying operating profit plus share of JV PAT excluding one-off CPBS adjustments, divided by the sum of net debt, shareholders' funds and retirement deficit (surplus) - Used as a measure of profit earned by the Group excluding the one-off impact of CPBS adjustments generated by the debt and equity capital invested, to indicate the efficiency at which capital is allocated	Ratio - N/A - See table on page 16
Cash flow measures
Net capital expenditure	No direct equivalent	Property, plant and equipment and intangible assets, less proceeds on disposal of property, plant and equipment - Includes underlying operating cash flow to calculate underlying operating cash conversion
Underlying operating cash conversion	No direct equivalent	Underlying operating cash flow after capital expenditure as a percentage of underlying operating profit - Used as a measure of the Group's efficiency in converting profits into cash	Ratio - N/A
Underlying free cash flow	No direct equivalent	Underlying free cash flow includes cash flows from exceptional items and the capital element of lease payment cash flows (rather than net new lease commitments, which are reflected as a debt movement)   - Provides a measure of cash generated by the Group's operations after servicing debt and tax obligations, available for use in line with the Group's capital allocation policy	- See page 13

^{1. Refer to Note 2 in the preliminary financial statements}

 

 

Going concern and viability statement

 

Overview

The Directors have undertaken reviews of the business financial forecasts, in order to assess whether the Group has adequate resources to continue in operational existence for the foreseeable future and as such can continue to adopt the going concern basis of accounting.

The Directors have also looked further out to consider the viability of the business to test whether they have a reasonable expectation that the Group will continue in operation and meet its liabilities as they fall due.

For assessing going concern, the Board considered the 12 month period from the date of signing the Group's financial statements for the year ended 31 March 2022. For viability, the Board looked at a five-year view as this is the period over which the Group prepares its strategic plan forecasts.

That five-year view is an update from the previous three-year plan, now that we have completed the first year of turnaround and made initial steps to reshape our portfolio of businesses.

The use of a five-year period provides a planning tool against which long-term decisions can be made concerning strategic priorities, addressing the Group's stated net zero target and climate-related risks and opportunities, funding requirements (including commitments to Group pension schemes), returns made to shareholders, capital expenditure and resource planning.

The annually prepared budgets and forecasts are compiled using a bottom-up process, aggregating those from the individual business units into sector level budgets and forecasts. Those sector submissions and the consolidated Group budget and forecasts are then reviewed by the Board and used to monitor business performance.

The Board considered the budgets alongside the Group's available finances, strategy, business model, market outlook and principal risks. The process for identifying and managing the principal risks of the Group is set out in our Annual Report. The Board also considered the mitigation measures being put in place and potential for further mitigation.

The Board considers the long-term prospects of the Group underpin its conclusions on viability. As outlined in our strategy, business model and markets summaries on pages 6 to 11 of this report, our prospects are supported by:

·      a diverse portfolio of businesses based on well-established market positions, focussed on naval engineering, support and systems, and on critical services in our core defence and civil markets. In FY22 55% of Group sales were defence related and 45% civil;

·      a geographically diverse business with a high proportion of sales to governments and other major prime defence contractors. In FY22, 63% of sales were to defence and civil customers in the UK, and 37% were international;

·      long-term visibility of sales and future sale prospects through an order backlog of £9.9bn as at 31 March 2022, including incumbent positions on major defence programmes; and

·      market positions underpinned by a highly skilled workforce, intellectual property assets and proprietary know-how, which are safeguarded and developed for the future by customer- and Group-funded investment.

Available financing

As at 31 March 2022, net debt excluding operating leases was £556.7 million and the Group therefore had liquidity headroom of £1.8 billion, including net cash and cash equivalents of £0.8 billion and undrawn facilities of £1.0 billion. These facilities are considered more than adequate to meet current and other liabilities as they fall due and supports the Group's negative working capital position largely arising from securing customer advances ahead of contract work starting.

As of June 2022, the Group's committed facilities and bonds totalling £2.4 billion were as follows:

·      €550 million bond, hedged at £482 million, maturing 6 October 2022

·      £300 million three-year RCF maturing 20 May 2024

·      Existing £775 million revolving credit facility (RCF) maturing 28 August 2025; of which £730 million now matures 28 August 2026

·      £300 million bond maturing 5 October 2026

·      €550 million bond, hedged at £493 million, maturing 13 September 2027

·      A committed overdraft facility of £50 million

The RCFs are the only facilities with covenants attached. The key covenant ratios are (i) net debt to EBITDA (gearing ratio) (ii) and EBITDA to net interest (interest cover).

These are measured twice per year - on 30 September and 31 March. In May 2021 our lending banks agreed to raise the covenant limit for the gearing ratio from 3.5x to 4.5x for the measurement periods ending 30 September 2021 and 31 March 2022 in order to provide sufficient downside protection for the Group as the turnaround in performance took place.

As we have now successfully delivered over £400 million from the divestment programme, amongst other turnaround dependencies in the prior 12 months, we have not considered it necessary to seek any extension to the period of time covered by those raised covenant limits. Hence for all periods in this going concern review, the gearing ratio covenant returns to 3.5x at September 2022 and remains so thereafter.

The RCF lenders are fully committed to advance funds under the RCF to the Group, provided that the Group has satisfied the usual ongoing undertakings, and the creditworthiness of the Group's relationship banks is closely monitored. Based on their credit ratings we have no credit concerns with our relationship banks. Given the importance of the RCFs to the Group's liquidity position, our assessments of going concern and viability have tested the Group's gearing ratio, interest cover and liquidity headroom throughout the period under review up to their current maturity dates.

 

Base case scenario

The base case budget shows significant levels of headroom against both financial covenants and liquidity headroom based on the current committed facilities outlined above (without assuming any refinancing of the €550 million bond in October 2022). That base case largely assumes we maintain our incumbent programme positions if re-let during the five-year period, with margin recovery if they are currently below the Group average. Many opportunities available to the Group, where we do not yet have high conviction of securing the work, have been excluded from the base case to seek to maintain a degree of caution.

That base case assumes no further recurrence of business disruption from the COVID-19 pandemic, which is consistent to our trading in FY22.

It also assumes that the impact of current inflationary pressures can be managed within contract estimates assumed in our planning. The base case assumes no further reshaping of the business portfolio, so it is not dependent upon any future cash proceeds from divestments. It also maintains pension deficit contributions in excess of income statement charges of around £130 million relating to FY23 and around £75 million relating to FY24.

Reverse stress testing of the base case

To assess the level of headroom within the available facilities, a reverse stress test was performed to see what level of performance deterioration against the base case budgets and forecasts (in both EBITDA and net debt) was required to challenge covenant levels.

Of the remaining measurement points within the available facility period, the lowest required reduction in forecast EBITDA to hit the covenant level was 46% and the lowest net debt increase was 50%. Given the mitigating actions that are available and within management's control, such movements are not considered plausible.

 

Severe but plausible downside scenarios

The Directors also considered a series of severe but plausible downside scenarios which are sensitivities run against the base case budget and forecasts for the duration of the assessment period. These sensitivities include - separately - a reduction in bid pipeline closure (business winning), an erosion of operating model savings, a deterioration in large programme performance across the Group (including further inflation cost increases, or related failures in supplier resilience, as per our principal risks), a deterioration in the Group's working capital position and a regulator-imposed cessation in flying two of the largest aircraft fleets in the Group.

As stated above, a key contributor to the strengthening of the balance sheet in FY22 was the divestment programme which generated in excess of the original target of £400 million of proceeds. No sensitivities were therefore considered necessary to be tested in relation to further potential divestments.

All of these separate scenarios showed compliance with the financial covenants throughout the period, and with sufficient headroom given the strengthened balance sheet, no extensions have been sought to the temporary increase in the covenant level gearing ratio previously granted by our lending; it has therefore now reverted to the usual 3.5x at September 2022 and for all future measurement periods.

As with any company or group, it would be possible, however unlikely, to model individual risks or combinations of risks that would threaten the financial viability of the Group. The Board has not sought to model events where it considers the likelihood of such events not to be plausible. In preparing a combined severe but plausible (SBP) downside case, the Board considered the feed of individual risks from the sectors covering the above sensitivities. Overall there were c.80 profit and cash flow risks identified.

A simple aggregation of all of these risks is not considered plausible as the Group operates businesses and contracts which run largely independently of each other, albeit with a relatively small number of customers within each geography.

The majority of these identified risks were seen as 'sector independent' (ie there is no direct read across from one sector to another). A small number are deemed 'non independent' eg inflation, FX etc. The Board decided to include in its combined SBP downside all the 'non independent' risks without reduction, but reduced the aggregation of the 'sector independent' risks by 25% to reflect the implausibility of all such risks fully crystallising within the same period.

If such a severe downturn were to occur in the Group's performance, the Board would take mitigation measures to protect the Group in the short term.

Such profit and cash mitigation measures that are deemed entirely within the control of the Group and identified as part of the sector budgeting exercise have been included in the SBP scenario (eg cancelling pay rises and bonus awards, curtailing uncommitted capital expenditure and operational spend including R&D and other investment).

Despite the severity of the above combined SBP scenario, the Group maintained a sufficient amount of headroom against the financial covenants within its borrowing facilities, and sufficient liquidity when compared against existing facilities.

Going concern assessment and viability conclusion

Based on our review, the Directors have a reasonable expectation that the Group has adequate resources to continue as a going concern for at least 12 months from the date of these financial statements.

As such, these financial statements have been prepared on the going concern basis. The Directors do not believe there are any material uncertainties to disclose in relation to the Group's ability to continue as a going concern.

In concluding on the financial viability of the Group, having considered the scenarios outlined above, the Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet all its liabilities as they fall due up to March 2027.

 

 

Risks and uncertainties

The principal risks and uncertainties affecting the Group are listed below and are set out in more detail in the Company's Annual Report and Financial Statements 2022, which should be read in conjunction with this announcement when published. This list is not a substitute for reading the Company's Annual Report and Financial Statements 2022 in full. The Group's principal risks and uncertainties are:

 

Existing markets: we rely heavily on winning and retaining large contracts with a relatively limited number of major clients, whether in the UK, particularly the Ministry of Defence, or overseas, many of whom are (directly or indirectly) owned or controlled by government (national or local) and/or are (wholly or partly) publicly funded

 

New markets: We seek new markets and contracts for our services both with existing and new customers, whether in territories where we are already established or in territories where we are not

 

Financial resilience: The Group is exposed to a number of financial risks, some of which are of a macroeconomic nature (for example, foreign currency, interest rates) and some of which are more specific to the Group (for example, liquidity, covenant headroom and credit risks)

 

Contract performance: We operate large contracts, which often requires us to price for the long term and for risk transfer. Our contracts may include fixed price which assumes inflation risk

 

Business interruption: Failure to withstand the impact of an event or a combination of events may significantly disrupt all or a substantial part of the Group's business

 

Operational resilience: We are undertaking multiple change programmes with the introduction of a new strategy, a new operating model to restructure the shape of the Group, and a new people strategy, as well as undertaking the rationalisation of both the business portfolio and our property portfolio. Additionally, there are several new material opportunities that the Group may pursue - some in new geographies - that may further stretch management bandwidth

 

Health, safety and environmental: Our operations entail the potential risk of significant harm to people, property or the environment, wherever we operate across the world

 

Regulatory and compliance burden: Our businesses are subject to the laws, regulations and restrictions of the many jurisdictions in which they operate

 

People: We operate in many specialised engineering and technical domains, which require appropriate skills and experience

 

Pensions: The Group has significant defined benefit pension schemes in the UK, which provide for a specified level of pension funds to scheme members

 

IT and security: A key factor for our customers is our ability to deliver secure IT and other information assurance systems to maintain the confidentiality of sensitive information

 

Acquisitions and disposals: We have built our core strengths organically and through acquisition. Decisions to acquire companies, as well as the process of their acquisition and integration, are complex, time-consuming and expensive. If we believe that a business is not "core" we may decide to sell that business

 

Emerging risks: In addition, as part of its risk work, the Group has also identified two emerging risks. Both risks are not standalone risks but affect several of the Group's principal risks. The two emerging risks are:

 

Inflation: As the global economy recovers from the Covid-19 pandemic, it is experiencing increasing inflationary pressure, both in terms of supplier costs and in terms of labour rates. The inflationary environment may be exacerbated by the conflict in Ukraine. The Group has a number of long-term contracts, which may include fixed price elements or saving commitments. We also have collective bargaining agreements with our workforce at certain sites. If we experience increased costs, which we are not able to pass on, this will affect the profitability of the contracts concerned and could mean that they become loss-making or that we are unable to meet our contractual commitments, leading to an adverse financial impact and a longer-term reputational impact.

 

Supplier resilience: Our supply chain is subject to the same global inflationary pressures. Furthermore, the global supply of raw materials and parts has not fully recovered from the Covid-19 pandemic and Brexit disruption, leading to supply interruptions. As with inflation, this could be exacerbated by the conflict in Ukraine. As a result, there is a risk that our suppliers may suffer financial distress and not be able to fulfil their contracted supply agreements with us. This could add additional cost and time to our programmes, which we may not be able to pass onto our end-customer

 

The risks listed above, together with their potential impacts and mitigating actions we have taken in respect of them, are explained and described in more detail in the 2022 Annual Report, a copy of which will be available at www.babcockinternational.com.