TIDMBAB
RNS Number : 7536U
Babcock International Group PLC
07 December 2021
Babcock International Group PLC
half year results for the six months ended 30 September 2021
7 December 2021
Delivering on our strategy, turnaround on track, results in
line
Statutory results
30 September
30 September 2020
2021 Restated
----------------------------------------------------------------- ------------ ------------
Revenue GBP2,223m GBP2,054m
================================================================= ============ ============
Operating profit/(loss) GBP75.4m GBP(785.3)m
================================================================= ============ ============
Basic earnings/(loss) per share 10.3p (164.8)p
================================================================= ============ ============
Cash generated from operations GBP(10.5)m GBP163.5m
================================================================= ============ ============
Underlying results
30 September
30 September 2020
2021 Restated
----------------------------------------------------------------- ------------ ------------
Contract backlog (note ii) GBP10.9bn GBP9.4bn
================================================================= ============ ============
Revenue GBP2,223m GBP2,054m
================================================================= ============ ============
Underlying operating profit (note iii) GBP115.3m GBP84.5m
================================================================= ============ ============
of which 'one-off' contract profitability and balance
sheet ('CPBS') adjustments (note iv) - GBP(21.4)m
================================================================= ============ ============
Underlying operating profit excluding one-off CPBS adjustments - GBP105.9m
================================================================= ============ ============
Underlying basic earnings per share (note v) 15.3p 5.8p
================================================================= ============ ============
Underlying free cash flow (note vi) GBP(160.6)m GBP(4.4)m
================================================================= ============ ============
Net debt GBP1,347m GBP1,609m
================================================================= ============ ============
Net debt excluding operating leases (note vii) GBP938m GBP990m
================================================================= ============ ============
Net debt/EBITDA (covenant basis) (note viii) 2.8x 2.5x
----------------------------------------------------------------- ------------ ------------
The results for HY21 have been restated, see note (i). See notes
on page 3 and a reconciliation between statutory and underlying
results on page 12.
Financial results in line with expectations
-- Contract backlog up to GBP10.9 billion following signing of Future
Maritime Support Maritime Programme (FMSP)
-- Revenue up 8% (up 10% excluding foreign exchange and disposals)
- see page 13 for a revenue bridge
o c.6 percentage points of revenue growth driven by growth in
Marine (Type 31 ramp up) and Nuclear (infrastructure ramp
up)
o c.4 percentage points of revenue growth from less COVID-19
interruption than the prior period
-- Statutory operating profit of GBP75.4 million compared to a GBP785.3
million loss in the prior year, which includes charges from the
CPBS (see below) and a restatement of HY21 goodwill of GBP760.5
million
-- Underlying operating profit of GBP115.3 million helped by lower
COVID-19 business interruption than the prior period (estimated
GBP25 million YoY benefit) - see page 14 for an underlying operating
profit bridge
-- Underlying EPS of 15.3p includes benefit of GBP6.2 million of
other income related to the sale of our oil and gas aviation business
-- Cash generated from operations was GBP(10.5) million and includes
a GBP110.7 million decrease in payables
-- Underlying free cash flow of GBP(160.6) million includes material
cash outflows previously communicated, including pension deficit
contributions (GBP89 million) and a large working capital outflow
(GBP140m), partly as the period end deferral of creditors is reduced
-- Net debt to EBITDA (covenant basis) 2.8 x at 30 September 2021,
with liquidity headroom of GBP1.4 billion
-- Net proceeds from sale of Frazer-Nash of GBP290 million received
after 30 September 2021
-- Pro forma net debt to EBITDA 2.1 x after disposal of Frazer-Nash
As outlined on 30 July 2021, our full year results for the 2021
financial year included a series of presentational changes to our
reporting and the results of our Contract Profitability and Balance
Sheet review ('CPBS'). Results for the half year ended 30 September
2020 (HY21) have been restated for these presentational changes and
to include the results of the CPBS. See pages 6 - 11 for further
details.
Progress on our strategy
-- Three disposals announced in the first half with c.GBP400 million
of proceeds expected to pay down debt:
o Oil and Gas aviation business completed in August 2021 for
GBP10 million (GBP8 million net proceeds)
o Frazer-Nash Consultancy completed in October 2021 for GBP290
million cash consideration
o Sale of stake in AirTanker Holdings for GBP95 million (net
of shareholder loans) expected to complete in the second half
-- Portfolio alignment programme to continue
o Proceeds generated will either be used to strengthen the balance
sheet further or will be invested in future growth
-- New operating model being implemented across the Group
o Continue to expect c.GBP40 million annualised cost savings
(c.GBP20 million benefit this financial year)
o Changes include streamlined processes, strengthened controls,
centre-led functions and more standardisation
-- People strategy being rolled out
o New Group Principles launched and agile working being rolled
out across the Group
-- Developing our ESG strategy
o Continue to progress our plans to be net zero (scope 1 and
2) by 2040
o Integrating climate-related risk and opportunity into our
risk management and strategic processes
-- Developing international opportunities including winning our first
export order for Arrowhead 140 (licence agreement with Indonesia)
and signing a Memorandum of Implementation with Ukraine to be
the prime contractor on a programme of naval defence projects
Recent business development
-- Contract backlog at 30 September 2021 was GBP10.9 billion. This
includes the Future Maritime Support Programme (FMSP), a
c.GBP3.5 billion contract signed in September that runs to March
2026. It replaces the previous MSDF contract and continues our
support work for the UK Royal Navy across ships, submarines and
naval bases
-- Other significant new contract wins in the period included:
o c.EUR500 million contract for defence aviation training activities
in France
o c.GBP150 million logistic support contract, part of the UK's
next generation tactical communications & information systems
o c.GBP110 million contract to deliver the new Defence Strategic
Radio Service for critical UK military operations
-- In October, we won a c.GBP100 million contract for the design,
manufacture, delivery, commissioning and in-service support to
the Maritime Electronic Warfare Systems Integrated Capability
(MEWSIC)
-- In December, we were selected by the Australian Government as
the preferred tenderer to upgrade and sustain the Defence High
Frequency Communication System (DHFCS) to support the Australian
armed forces over the next 10 years, with a further four extension
options, each of two years
Outlook
-- Full year outlook unchanged:
o Our new operating model is on track to deliver savings of
approximately GBP20 million in this financial year
o While we have seen a recovery of activity from the heavily
COVID-19 impacted prior period, and we have largely been able
to recover extra costs, we are cautious about our ability
to maintain activity levels and recover all costs in the remainder
of this financial year given the uncertainty from new COVID-19
variants and varied government responses
o We are investing in our business, including business development
and strengthening our control environment
o Some external uncertainty remains for the second half of the
year as we manage inflation and supply chain pressures
-- The disposals of Frazer-Nash and oil and gas aviation will impact
the reported results for this year
-- As stated before, FY22 free cash flow is expected to be significantly
negative. This reflects material cash outflows including additional
pension contributions, restructuring costs, investments in facilities
and IT upgrades and the unwinding over time of the historical
management of working capital around period ends
-- We remain confident in our future prospects. We believe that our
new strategic focus and operating model will significantly improve
the Group's profitability, and most importantly its cash generation,
over the medium term
David Lockwood, Chief Executive Officer, said:
"We are on-track with our turnaround strategy with around GBP400
million of disposals to bolster our balance sheet announced to
date.
"We will continue to align our portfolio to best support the
Group's capital allocation priorities and future growth. The
ongoing implementation of our new operating model means Babcock
will be a simplified, more focused Group.
"We are pursuing a number of important growth opportunities,
with significant contract wins in military communications, our
first order for an export licence for our Arrowhead 140 frigate as
part of the Type 31 programme, and an agreement for potentially
significant work in Ukraine, supported by both the UK and the
Ukrainian governments.
"While our half year results show some recovery from the
financial impact of COVID-19, we remain cautious as we are early on
in our transformation and as we manage inflationary and supply
chain pressures across the business and potential interruptions
from COVID-19. However, the Board believes the actions we are
taking will enable the Group to take advantage of the many
opportunities ahead of us, leading to improved cash generation and
profitability in the medium term."
Results presentation:
A meeting for investors and analysts will be held at the London
Stock Exchange (10 Paternoster Square, London) at 9:00 am (UK
time). The presentation will be webcast live at
www.babcockinternational.com/investors and subsequently will be
made available on demand at
www.babcockinternational.com/investors/results-and-presentations. A
transcript will also be made available on our website.
For further information:
Simon McGough, Director of Investor
Relations +44 (0)7850 978 741
Kate Hill, Group Director of
Communications +44 (0)20 7355 5312
Tulchan Communications:
Olivia Peters/Harry Cameron +44 (0)20 7353 4200
Adjustments between statutory and underlying information
The Group uses various alternative performance measures,
including underlying operating profit, to enable users to better
understand the performance and earnings trends of the Group. The
Directors believe the alternative performance measures provide a
consistent measure of business performance year to year and they
are used by management to measure operating performance and as a
basis for forecasting and decision-making. The Group believes they
are also used by investors in analysing business performance. These
alternative performance measures are not defined by IFRS and
therefore there is a level of judgement involved in identifying the
adjustments required to calculate the underlying results. As the
alternative performance measures used are not defined under IFRS,
they may not be comparable to similar measures used by other
companies. They are not intended to be a substitute for, or
superior to, measures defined under IFRS.
Notes to statutory and underlying results on page 1
Note (i): Results for HY21 have been restated to correct for
prior year errors and to reflect changes in accounting policies.
See page 6 for details.
Note (ii): The contract backlog represents amounts of future
revenue under contract. This measure does not include GBP3.0
billion of work expected to be done by Babcock as part of framework
agreements (September 2020: GBP5.8 billion). The decrease in
amounts in framework agreements mainly reflects the movement of
FMSP from framework into backlog after the signing of the contract
in September 2021.
Note (iii): Underlying operating profit is defined as IFRS
statutory operating profit adjusted for Specific Adjusting Items.
See page 12 for a reconciliation. The Specific Adjusting Items
are:
-- Amortisation of acquired intangibles
-- Business acquisition, merger and divestment related items (being
acquisitions and gains or losses on disposal of assets or businesses)
-- Gains, losses and costs directly arising from the Group's withdrawal
from a specific market or geography, including closure costs,
severance costs, the sale of assets and termination of leases
-- The costs of large restructuring programmes which significantly
exceed the minor restructuring which occurs every year as part
of the normal day to day business. Where restructuring costs are
incurred as a result of the ongoing execution of day to day business,
they are included in operating costs and are not excluded from
underlying operating profit
-- Profit or loss from amendment, curtailment, settlement or equalisation
of Group pension schemes
-- Exceptional items that are significant, non-recurring and outside
of the normal operating practice. These items are described as
exceptional in order to appropriately represent the Group's underlying
business performance
Note (iv): The Group's contract profitability and balance sheet
review ('CPBS') resulted in various adjustments, including in-year
estimate changes, reversing prior year errors and a change in
accounting policy - see page 9 for details. Reference is made
throughout this document to the CPBS and its impact. Commentary in
this document often discusses performance before the 'one-off' CPBS
adjustments to better reflect the year-on-year differences in
performance across the Group.
Note (v): Underlying basic earnings per share ('EPS') is based
on the Group's underlying operating profit (see note iii). It
includes the Group's post-tax share of results of joint ventures
and associates. This measure also includes the amortisation of
acquired intangibles within joint ventures.
Note (vi): 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). Underlying cash flows are reconciled to statutory
cash flows on page 15.
Note (vii): This measure excludes operating leases as defined by
IAS 17. This accounting standard has since been superseded by IFRS
16 but was the relevant standard at the inception of the banking
facility. This net debt figure also includes finance leases (as
defined by IAS 17) receivables and payables and continues to
include loans from the Group to joint ventures. Supply chain
financing balances are included in debt in both periods (September
2021: GBP11 million, September 2020: GBP77 million). See page 187
of our 2021 Annual Report and Financial Statements for full details
of our definition of net debt.
Note (viii): Net debt / EBITDA as measured in our banking
covenants, which make a series of adjustments to both Group net
debt and Group EBITDA. See page 18 for a reconciliation.
CEO STATEMENT
Progress on our strategy
We are an international aerospace, defence and security company
with a leading naval business, and we provide value-add services
across the UK, France, Canada, Australasia and South Africa.
We are focused on five strategic actions:
1. Aligning our portfolio
2. Implementing our new operating model
3. Rolling out our new people strategy
4. Developing our new ESG strategy
5. Exploring growth opportunities
We have made good progress across all of these areas in the
first half of this year and we are now six months into a turnaround
of the Group that we expect to take two to three years.
1) Aligning our portfolio
Our strategy review defined the markets we wish to serve and
therefore the best portfolio to hold. We are aligning the Group's
portfolio by divesting certain businesses. We are on track to
deliver our targeted proceeds from disposals with the agreed sales
of three businesses which, once completed, will generate around
GBP400 million:
-- In August 2021, we completed the sale of the Oil and Gas aviation
business for a cash consideration of GBP10 million
-- In October 2021, we completed the sale of Frazer-Nash Consultancy
for a cash consideration of GBP290 million
-- We have also announced the sale of our shareholding in AirTanker
Holdings Limited for a cash consideration of GBP126 million (GBP95
million net of the repayment of shareholder loans). This transaction
is expected to complete in the second half of this financial year
and is subject to regulatory approvals
Our strategic work on portfolio alignment continues and we
expect a small number of further disposals in the second half of
the year. Proceeds generated will either be used to strengthen the
balance sheet further or will be invested in the business for
future growth.
2) Implementing our new operating model
Our new operating model is creating a more efficient and
effective business through a flatter structure. This will shorten
communication lines and improve transparency and lead to an
increase in the pace and clarity of business decisions. The numbers
of management layers are being reduced across the Group and certain
functions are being established in a centre-led model, increasing
standardisation and removing duplication.
As previously reported, approximately 1,000 employees will leave
the Group this year as a result. The estimated restructuring cost
of up to
GBP40 million will be incurred in this financial year. The
expected realisable annualised savings continue to be approximately
GBP40 million, with roughly half this benefit in FY22.
The exercise has commenced and GBP11 million of restructuring
costs were incurred in the period. The Finance, Human Resources,
Procurement and Supply Chain and IT functions have been reorganised
to be centre-led. We are also looking at our property footprint,
primarily in the UK, and planning to move to a regional hub model
to reduce property costs.
Alongside this operating model, we are making a series of
changes to how we do business. We now have a new Group-wide
approach to project management and project reviews and have changed
how we manage the commercial bidding process. We have improved
group-wide coordination on business growth, improved oversight on
new bids and strengthened our focus on the large-scale, complex bid
opportunities.
3) Rolling out our new people strategy
Alongside the new operating model, we are developing an
organisation that shares capability, talent, innovation and best
practice across the Group and removes complexity. In the first
half, we continued work on transforming our culture and launched
our Purpose, "to create a safe and secure world, together", across
the Group.
We have also launched the Group's new Principles:
-- Be curious: we question everything, listen well and test the best
ideas with pragmatic optimism
-- Be kind: we consider the intent and impact of our actions at every
turn
-- Be courageous: we show up, speak out and dare to win. We are tenacious,
but never reckless
-- Think: outcomes: we focus our efforts on what our customers, communities,
and colleagues really value. We never compromise on safety or
ethics
-- Collaborate: we pull together in service of our purpose, as one
global team, in partnership with our customers
-- Own and deliver: We know our role and take personal accountability
for delivering it
These Principles seek to unify the way we do things and guide
how we work and will be embedded across the organisation as the
year progresses.
We have also introduced Agile working across the business, to
provide an improved working environment and culture by offering our
staff more autonomy and choice. In addition to providing detailed
guidance to managers and resourcing leads, we have introduced
systems for each member of Babcock to record their agile working
status, whether they are location fixed or location flexible
workers.
4) Developing our new ESG strategy
Our 2021 Annual Report set out the details of our ESG strategy,
including our roadmap to achieve net zero carbon emissions for our
estate, assets and operations (scope 1 and 2) by 2040.
During the first half we took important steps in our ESG
journey, including
-- Executive Committee completed the Chapter Zero Board Readiness
assessment
-- Incorporating the Task Force for Climate-related Financial Disclosures
(TCFD) risk management and scenario planning into our strategic
planning cycle this year as we progress towards full TCFD disclosure
requirements
-- Set out high level scenario planning for three climate scenarios
(1.5degC, 2.0degC and 3.0degC+)
-- Progressed inclusion and diversity initiatives, including our
target of 30% of senior managers to be female by 2025 (currently
21%)
5) Exploring growth opportunities
The markets we address offer favourable medium-term growth.
Business development highlights included:
-- Memorandum of Implementation with the UK and Ukraine to be the
prime contractor on a programme of naval defence projects
-- Memorandum of Understanding with Hyundai Heavy Industries in Korea
for the CVX Aircraft Carrier Programme opportunity
-- c.EUR500 million contract for defence aviation training activities
in France
-- c.GBP150 million logistic support contract, part of the UK's next
generation tactical communications & information systems
-- c.GBP110 million contract to deliver the new Defence Strategic
Radio Service (DSRS) to critical UK military operations
-- c.GBP100 million contract for the design, manufacture, delivery,
commissioning and in-service support to the Maritime Electronic
Warfare Systems Integrated Capability (MEWSIC) Increment 1
-- Secured the first export contract for our Arrowhead 140 frigate
through a design licence agreement with PT PAL Indonesia
In September, we signed the Future Maritime Support Programme
(FMSP) with the UK MOD to continue our support spanning UK naval
base operations at HMNB Clyde and HMNB Devonport, alongside UK
submarine and surface ship fleet support. This contract runs over
five years to March 2026 and is worth around GBP3.5 billion.
The Group's contract backlog at 30 September 2021 was GBP10.9
billion (31 March 2021: GBP8.7 billion), with the increase mainly
relating to the signing of FMSP.
Looking ahead
We are making good progress on our turnaround and strategic
development. While this year is a year of transition, we remain
confident in our future prospects. We believe that our new
strategic focus and operating model will significantly improve the
Group's profitability, and most importantly its cash generation,
over the medium term.
David Lockwood OBE
Chief Executive Officer
FINANCIAL REVIEW
Introduction
At the end of the last financial year, the Group performed a
Contract Profitability and Balance Sheet review ('CPBS') and also
changed the presentation of its financial reporting to improve
transparency. These changes have been applied to HY21 in these
results.
This Financial review covers:
-- How the changes made to the presentation of underlying reporting
in our FY21 results have been applied to restating HY21 results
-- Summary of how the Contract Profitability and Balance Sheet review,
which was completed with our FY21 results, has been applied to
HY21
-- Our financial performance in HY22, both statutory and underlying,
including a reconciliation between the two
Changes to the presentation of underlying reporting
The Group provides alternative performance measures, including
underlying measures, to enable users to better understand the
performance and earnings trends of the Group. These measures are
considered to provide a consistent measure of business performance
from year to year. They are used by management to assess operating
performance and as a basis for forecasting and decision making and
the Group believes are helpful for investors to analyse business
performance. For the results of the financial year ended 31 March
2021 we made a series of changes to our underlying measures to
improve transparency and provide a simpler set of accounts and
financial commentary for the future. Results for the previous
financial year (FY20) were restated. For these set of results, we
use the same approach and restate the results for the half year
ended 30 September 2020.
There are four main changes to the presentation of our
underlying results as outlined below.
1) Joint ventures and associates
Previously the Group incorporated its share of the results of
joint ventures and associates into each of the main captions of the
income statement. Babcock's share of joint ventures and associates
profit after tax is now included as one line in the income
statement. The Group used to include a share of joint ventures and
associates revenue within its revenue line - which was then defined
as underlying revenue. This definition is therefore no longer
needed. This aligns revenue with the statutory IFRS measure and
reduces the number of reconciling items between statutory and
underlying income statement captions.
2) IFRIC12 Investment Income
The group previously included IFRIC 12 investment income within
underlying operating profit. This is now included within investment
income to align with IFRS.
The restated underlying income statement compared to that
presented in the prior year Interim Statement is shown below. Note
that the correction of prior year errors (within the 'Prior year
restatement' column below) is covered on page 11.
Restatement of HY21 underlying income statement
30 September Change to Change Prior 30 September
2020 JV and Associates to IFRIC year restatements 2020
previously presentation 12 presentation restated
reported
GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------------ ------------------ ---------------- ------------------ ------------
Underlying revenue 2,243.7 (134.1) - (56.1) 2,053.5
-------------------------------- ------------ ------------------ ---------------- ------------------ ------------
Underlying operating profit 143.1 (31.2) (0.5) (26.9) 84.5
Share of results from joint
ventures
and associates - 11.6 - (5.3) 6.3
Net finance costs (44.2) 11.2 0.5 (0.1) (32.6)
Underlying profit before tax 98.9 (8.4) - (32.3) 58.2
Tax (19.8) 3.9 - (12.9) (28.8)
-------------------------------- ------------ ------------------ ---------------- ------------------ ------------
Underlying profit after tax 79.1 (4.5) - (45.2) 29.4
-------------------------------- ------------ ------------------ ---------------- ------------------ ------------
Underlying basic EPS 15.7p 5.8p
-------------------------------- ------------ ------------------ ---------------- ------------------ ------------
3) A clearer definition of underlying operating profit and Specific Adjusting Items
Underlying operating profit is now defined as IFRS statutory
operating profit adjusted for Specific Adjusting Items. Items such
as these may occur regularly, may be lumpy and may be profits or
losses. As such they distort the reporting of underlying business
performance measures if not adjusted for. The Specific Adjusting
Items are:
-- Amortisation of acquired intangibles
-- Business acquisition, merger and divestment related items (being
acquisitions and gains or losses on disposal of assets or businesses)
-- Gains, losses and costs directly arising from the Group's withdrawal
from a specific market or geography, including closure costs,
severance costs, the sale of assets and termination of leases
-- The costs of large restructuring programmes which significantly
exceed the minor restructuring which occurs every year as part
of the normal day to day business. Where restructuring costs are
incurred as a result of the on-going execution of day to day business,
they are included in operating costs and are not excluded from
underlying operating profit
-- Profit or loss from amendment, curtailment, settlement or equalisation
of Group pension schemes
-- Exceptional items that are significant, non-recurring and outside
of the normal operating practice. These items are described as
exceptional in order to appropriately represent the Group's underlying
business performance
The income statement can now be shown in a 'three column' format
with Underlying results, Specific Adjusting Items and Statutory
results in separate columns as shown below:
30 September 2021 30 September 2020 (restated)
===================================
Specific Specific
Adjusting Adjusting
Underlying Items Statutory Underlying items Statutory
GBPm GBPm GBPm GBPm GBPm GBPm
=================================== ========== ========== ========= ========== ========== =========
Revenue 2,223.0 - 2,223.0 2,053.5 - 2,053.5
------------------------------------ ---------- ---------- --------- ---------- ---------- ---------
Operating profit / (loss) 115.3 (39.9) 75.4 84.5 (869.8) (785.3)
Other income 6.2 - 6.2 - - -
Share of results of joint ventures
and associates 9.6 - 9.6 6.3 - 6.3
Finance costs (32.4) - (32.4) (32.6) - (32.6)
==================================== ========== ========== ========= ========== ========== =========
Profit / (loss) before tax 98.7 (39.9) 58.8 58.2 (869.8) (811.6)
Income tax benefit/(expense) (19.6) 15.0 (4.6) (28.8) 8.1 (20.7)
==================================== ========== ========== ========= ========== ========== =========
Profit / (loss) after tax for
the year 79.1 (24.9) 54.2 29.4 (861.7) (832.3)
------------------------------------ ---------- ---------- --------- ---------- ---------- ---------
Basic EPS 15.3p (5.0)p 10.3p 5.8p (170.6)p (164.8)p
Diluted EPS 15.1p (4.9)p 10.2p 5.8p (170.6)p (164.8)p
------------------------------------ ---------- ---------- --------- ---------- ---------- ---------
Note: the performance review on page 13 considers these results
in more detail, they are shown here for presentational
purposes.
4) Presentational changes to the underlying cash flow statement
The Group has historically presented an underlying cash flow
statement with free cash flow as an important measure. Previously
cash flows relating to exceptional items were excluded from free
cash flow. This has now been changed to more clearly present the
cash generated from the Group's operations.
Also, following the introduction of IFRS16 (Leases), the Group
previously deducted new lease commitments in entirety from
operating cash flow. We have now amended this to show the capital
element of leases as an operating cash flow (akin to capital
expenditure) and the interest element of leases within the interest
line. The lease commitment is now shown as a change in net debt
when signed, not an operating cash flow. The restated HY21
underlying cash flow is shown below.
Restatement of HY21 underlying cash flow
Underlying Prior Changes Underlying
HY21 year restatements to cash HY21
previously flow presentation restated
reported
GBPm GBPm GBPm GBPm
--------------------------------------- ----------- ------------------ ------------------ ----------
Underlying operating profit 111.4 (26.9) - 84.5
One-off CPBS adjustments - 21.4 - 21.4
Underlying operating profit excl.
one-off CPBS adjustments 111.4 (5.5) - 105.9
Depreciation & amortisation 55.5 3.2 - 58.7
ROU asset depreciation 69.0 (3.6) - 65.4
Non-cash items 2.9 4.5 (0.5) 6.9
Working capital (14.7) 6.0 - (8.7)
Provisions 1.5 - - 1.5
Net capital expenditure (47.6) - - (47.6)
New lease commitments (34.4) 8.1 26.3 -
Capital element of lease payments - - (70.7) (70.7)
--------------------------------------- ----------- ------------------ ------------------ ----------
Underlying operating cash flow 143.6 12.7 (44.9) 111.4
Cash conversion % 129% 105%
Pension contributions in excess
of income statement (42.2) - - (42.2)
Interest paid (28.0) (0.2) 0.5 (27.7)
Tax paid (30.0) - - (30.0)
Dividends from joint ventures 15.0 - - 15.0
Cash flows from exceptional items - - (30.9) (30.9)
Underlying free cash flow 58.4 12.5 (75.3) (4.4)
--------------------------------------- ----------- ------------------ ------------------ ----------
Acquisitions and disposals net
of cash acquired 84.6 - - 84.6
Exceptional cash flow (30.9) - 30.9 -
Capital element of lease payments - - 70.7 70.7
New lease commitments - (8.1) (26.3) (34.4)
Investments in joint ventures - - - -
Own shares (2.2) - - (2.2)
Dividends paid (0.3) - - (0.3)
--------------------------------------- ----------- ------------------ ------------------ ----------
Net cash inflow 109.6 4.4 - 114.0
--------------------------------------- ----------- ------------------ ------------------ ----------
Opening net debt (previously reported) (1,594.9) - - (1,594.9)
Supply chain financing - opening
adjustment - (93.3) - (93.3)
Lease liability - opening adjustment - (16.6) - (16.6)
Opening net debt (restated) (1,594.9) (109.9) - (1,704.8)
Exchange movements (33.7) 15.7 - (18.0)
Movement in net debt 109.6 4.4 - 114.0
--------------------------------------- ----------- ------------------ ------------------ ----------
Closing net debt (1,519.0) (89.8) - (1,608.8)
--------------------------------------- ----------- ------------------ ------------------ ----------
Note: the two main items in the correction of prior year errors
impacting net debt are the movement of supply chain finance
balances from trade creditors to debt (GBP93.3 million at 1 April
2020, GBP77.0 million at 30 September 2020 ) and the inclusion of
certain lease liabilities (1 April 2020: GBP16.6 million).
Contract profitability and balance sheet review ('CPBS')
As outlined in the annual report and financial statements for
the year ended 31 March 2021, the Group performed a review of the
profitability of its contract portfolio and the carrying values of
assets and liabilities on the balance sheet.
This review resulted in around 140 adjustments totalling around
GBP2 billion and related to a mixture of changes in estimates, the
correction of prior year errors and a change in accounting policy.
The results of this review have now been applied to the results for
the six months ended
30 September 2020, with prior year errors corrected for and the
change in accounting policy retrospectively applied. The changes in
estimates, which were the largest adjusting items in FY21, were
made at March 2021 (i.e. at the year-end) so have not been
retrospectively applied to the half year financials, unless the
fact pattern proved a 'trigger point' existing within HY21 and
therefore requiring correction by restatement.
In summary, the restatements for the results for the six months
period ended 30 September 2020 are:
-- Cumulative restatement at 1 April 2019 of GBP308.1 million, being
GBP45.3 million relating to a change in accounting policy and
correction of prior year errors of GBP262.8 million. This is the
same as the restatement in our FY21 results.
-- Cumulative restatement at 31 March 2020 of GBP230.7 million (being
GBP59.8 million relating to a change in accounting policy and
correction of prior year errors of GBP170.9 million). This is
the same as the restatement in our FY21 results.
-- Changes recorded within the six months ended 30 September 2020
of GBP885.2 million, being GBP6.3 million relating to a change
in accounting policy and GBP878.9 million relating to correction
of errors. The correction of errors includes a restatement of
HY21 goodwill of GBP760.5 million.
Summarised cumulative adjustments to retained earnings are as
set out below:
GBPm
=========
Restatement as at 1 April 2019 (308.1)
============================================================== =========
Adjustments recognised in the year ended 31 March 2020 77.4
============================================================== =========
Total restatement at 31 March 2020 (230.7)
============================================================== =========
Adjustments recognised in the six months ended 30 September
2020 (885.2)
============================================================== =========
Total restatement at 30 September 2020 (1,115.9)
============================================================== =========
Adjustments recognised in the six months ended 31 March 2021 (928.5)
============================================================== =========
Total adjustments recognised at 31 March 2021 (2,044.4)
============================================================== =========
The impact of items identified through the contract
profitability and balance sheet on the income statement for the six
months ended
30 September 2020 are summarised as follows:
Six months ended 30
September 2020
GBPm
Specific
Adjusting
Underlying Items Statutory
GBPm GBPm GBPm
========== ========== =========
Revenue impacts (56.1) - (56.1)
====================================== ========== ========== =========
Operating profit/(loss) impacts
================================= ========== ========== =========
Impairment/disposal of goodwill
and acquired intangible assets 0.4 (821.1) (820.7)
====================================== ========== ========== =========
Impairment of non-current assets (4.4) (4.9) (9.3)
====================================== ========== ========== =========
Impairment of property, plant
and equipment and right of use
assets (1.5) (1.4) (2.9)
====================================== ========== ========== =========
Impairment/write down of current
assets (3.7) - (3.7)
====================================== ========== ========== =========
Introduction of/increase to
liabilities (17.6) (7.5) (25.1)
====================================== ========== ========== =========
Operating loss (26.8) (834.9) (861.7)
====================================== ========== ========== =========
Share of income from JVs and
associates (5.3) - (5.3)
====================================== ========== ========== =========
Loss before tax impacts (32.1) (834.9) (867.0)
====================================== ========== ========== =========
Tax adjustments (28.8) 8.1 (20.7)
====================================== ========== ========== =========
Tax effect 2.5 - 2.5
====================================== ========== ========== =========
Loss after tax for the period
impacts (58.4) (826.8) (885.2)
====================================== ========== ========== =========
Revenue:
These adjustments have two components within them. Firstly is a
correction of an error where revenue had been recognised on a
contract the terms of which had been varied in February 2020. The
effect of the contract change is that the Group is deemed an agent
of the customer, not a principal and therefore the revenue should
not be recognised. As a result of identifying this error, GBP36.5
million of revenue initially recognised in the six months ended 30
September 2020 was reversed. The second component of revenue
adjustments reflect reassessment of constraint of variable revenue
and reassessment of the recoverability of contract assets.
Impairment of goodwill and acquired intangible assets:
Management have reviewed the goodwill balance at 30 September
2020 for indicators of impairment and identified that the approved
Q2 forecast presented to the Board in October 2020 and the strategy
plan showed a decline in profitability from the forecast used to
carry out the goodwill impairment test at 31 March 2020. This
presents impairment indicators in the Aviation and Land operating
segments at 30 September 2020. Management performed an impairment
test at 30 September 2020 for Aviation and Land and determined that
a goodwill impairment of GBP592.3 million in Aviation and GBP168.2
million in Land should have been recorded.
An adjustment at 30 September 2020 of GBP68.4 million was also
recorded to allocate the goodwill that should have been allocated
to the Holdfast disposal (June 2020). Partially offsetting this is
the reversal of amortisation of GBP15.0 million in relation to the
oil and gas business acquired intangible reflecting management's
judgement to dispose of this intangible at 1 April 2019 as a result
of a reassessment of its useful economic life.
Impairment of other non-current assets:
The adjustment of GBP4.4 million within underlying operating
profit in the six months ended 30 September 2020 relates to the
write off of a loan to one of our joint ventures which is no longer
deemed recoverable. The GBP4.9 million in the six months ended 30
September 2020 Specific Adjusting Items is due to the impairment of
internally generated intangibles, mainly computer software.
Impairment of property, plant and equipment and right of use
assets:
The GBP1.4 million in the six months ended 30 September 2020
Specific Adjusting Items is largely due to a fair value adjustment
to land in the Land operating segment. Impairments of GBP1.5
million included in underlying operating profit largely relate to a
lease incentive which was incorrectly accounted for at 30 September
2020, which is offset by lease additions which were missed at 30
September 2020.
Impairment/write down of current assets:
The impairment to current assets of GBP3.7 million relates to
the reassessment of recoverability of trade and other receivables,
including contract assets.
Introduction of/increase to liabilities:
The adjustments within underlying operating profit relate to
reassessment of constraint of variable revenue, aircraft
maintenance accruals, and other provisions. The GBP7.5 million in
the six months ended 30 September 2020 Specific Adjusting Items
relates primarily to an increase in the provision for the loss on
disposal of Conbras, which was disposed of in October 2020.
Share of income from joint ventures and associates:
Historically the Group adjusted the results of the joint
ventures and associates before equity accounting the relevant share
in the income statement. Contract settlements remain outstanding in
relation to works carried out some years ago by the Land sector's
ABC joint venture and an adjustment of GBP3.1 million for the six
months ended 30 September 2020 has been recorded. The Group has
also identified an instance where profit was incorrectly recorded
in the ALC (Superholdco) Limited joint venture for the six months
ended 30 September 2020. Correction of this error reduces Babcock's
share of results for this joint venture by GBP2.2 million.
Tax adjustments:
The underlying impact of GBP28.8 million in the six months ended
30 September 2020 primarily relates to the write off of deferred
tax assets in Spain of GBP18.2 million now considered not
recoverable within the Group's forecasting horizon, as well as an
adjustment to current tax receivable.
Change in accounting policy:
During the year, management amended the Group's accounting
policy regarding Power By the Hour agreements. For the six months
ended
30 September 2020 this change in policy increases cost of
revenue by GBP5.8 million and administration and distribution costs
by GBP0.5 million. Further information is detailed at note 4.
Impact on underlying results
Revenue for HY21 has been restated by GBP56.1 million and
underlying operating profit by GBP26.8 million. The split across
sectors is shown below.
Underlying
operating
Revenue profit
GBPm GBPm
--------- ------- ----------
Marine (14.2) (14.2)
Nuclear (3.0) (1.8)
Land (38.0) (5.8)
Aviation (0.9) (5.0)
Total (56.1) (26.8)
---------- ------- ----------
In order to assist the users of the financial statements to
better understand the effect of the transactions resulting from the
CPBS on HY21 underlying operating profit performance, we have
analysed them into ' one-off CPBS adjustments ' and ' recurring
CPBS adjustments '. It is accepted that these terms are not defined
in IFRS and are simplistic. For this purpose, we consider 'one-off
CPBS adjustments' to be those that adjust the level of profit
recognised either as a result of a one-off event or in previous
periods, while 'recurring CPBS adjustments' are those that impact
the amount of current period (and potentially future) profit before
completion of the CPBS review. A single adjustment arising from the
CPBS review might have both 'one-off' and 'recurring' elements.
By way of illustration, the write-off of a long overdue debtor
can be thought of as a 'one off CPBS adjustment' as - with today's
facts and circumstances - it would be a single transaction that
would not otherwise impact the current or future year's
profitability. However, a long term contract that has had its
profit margin reduced creates an adjustment that has the effect of
reducing the cumulative profit recognised over the life of the
contract from the old profit margin estimate to the new. An element
of this adjustment can be seen to in effect reverse the profit on
these contracts that had been recognised in HY21 (before completion
of CPBS review). This element is included within 'recurring CPBS
adjustments' whereas the remainder of the adjustment,
simplistically relating to the profit previously recognised before
HY21, is included within 'one-off CPBS adjustments'.
The restatement of revenue for HY21 (as shown in the table
above) can be split into:
1. One-off CPBS adjustments of GBP14.3 million
2. Recurring CPBS adjustments of GBP41.8 million
The restatement of underlying operating profit for HY21 (as
shown in the table above) can be split into:
1. One-off CPBS adjustments of GBP21.4 million
2. Recurring CPBS adjustments of GBP5.4 million
In addition to this, and as stated above, FY21 year-end changes
in estimates do not cause retrospective restatement of the HY21
financials (e.g. reassessments of project profit margins). However
these are a material variance in comparing the restated HY21
financials to the current year performance. The revenue and
underlying operating profit impact of such changes in estimate
total GBP51.5 million and GBP7.4 million respectively for the half
year. We refer to these in our financial review where we bridge
performance from HY21 to HY22.
HY22 performance
In order to simplify the presentation of underlying and
statutory financial performance, the Group uses a three-column
approach to the income statement. The first column below shows the
underlying results with the second column showing the Specific
Adjusting Items. The third column shows the statutory results.
Details of the Specific Adjusting Items are included in note 2
of the financial statements.
30 September 2021 30 September 2020
===================================
Specific Specific
Adjusting Adjusting
Underlying Items Statutory Underlying items Statutory
GBPm GBPm GBPm GBPm GBPm GBPm
=================================== ========== ========== ========= ========== ========== =========
Revenue 2,223.0 - 2,223.0 2,053.5 - 2,053.5
------------------------------------ ---------- ---------- --------- ---------- ---------- ---------
Operating profit / (loss) 115.3 (39.9) 75.4 84.5 (869.8) (785.3)
Other income 6.2 - 6.2 - - -
Share of results of joint ventures
and associates 9.6 - 9.6 6.3 - 6.3
Investment income 0.4 - 0.4 0.5 - 0.5
Net finance costs (32.8) - (32.8) (33.1) - (33.1)
==================================== ========== ========== ========= ========== ========== =========
Profit / (loss) before tax 98.7 (39.9) 58.8 58.2 (869.8) (811.6)
Income tax (expense) / benefit (19.6) 15.0 (4.6) (28.8) 8.1 (20.7)
==================================== ========== ========== ========= ========== ========== =========
Profit / (loss) after tax for
the year 79.1 (24.9) 54.2 29.4 (861.7) (832.3)
------------------------------------ ---------- ---------- --------- ---------- ---------- ---------
Basic EPS 15.3p (5.0)p 10.3p 5.8p (170.6)p (164.8)p
Diluted EPS 15.1p (4.9)p 10.2p 5.8p (170.6)p (164.8)p
------------------------------------ ---------- ---------- --------- ---------- ---------- ---------
Statutory performance
Revenue of GBP2,223 million was 8% higher than last year with
business growth largely in Marine and Nuclear, and less COVID-19
business interruption than the prior period, more than offset the
impact of disposals and foreign exchange.
The statutory operating profit was GBP75.4 million compared to
GBP785.3 million loss in the prior period, which includes charges
from the CPBS and a restatement of HY21 goodwill of GBP760.5
million. The share of results from joint ventures and associates
was higher than last year, which included a loss on one joint
venture no longer in the Group.
Other income of GBP6.2 million in the period (HY21: GBPnil)
related to additional fees received in relation to the sale of our
oil and gas aviation business.
Our statutory profit after tax was GBP54.2 million compared to a
large loss last year, again mainly reflecting CPBS charges. Basic
earnings per share, as defined by IAS 33, was 10.3 pence per share
(HY21: (164.8) pence).
Underlying results
30 September 30 September
2021 2020
restated
================================================ ============ ============
Revenue GBP2,223m GBP2,054m
------------------------------------------------ ------------ ------------
Underlying operating profit GBP115.3m GBP84.5m
of which one-off CPBS adjustments GBP(21.4)m
Underlying operating profit excluding one-off
CPBS adjustments GBP105.9m
Other income GBP6.2m -
Share of results of joint ventures and GBP9.6m
associates GBP6.3m
Investment income GBP0.4m GBP0.5m
Net finance costs GBP(32.8)m GBP(33.1)m
------------------------------------------------ ------------ ------------
Underlying profit before tax GBP98.7m GBP58.2m
Tax GBP(19.6)m GBP(28.8)m
------------------------------------------------ ------------ ------------
Underlying profit after tax GBP79.1m GBP29.4m
Non-controlling interests GBP(2.0)m -
------------------------------------------------ ------------ ------------
Underlying profit attributable to shareholders GBP77.1m GBP29.4m
------------------------------------------------ ------------ ------------
Underlying basic EPS 15.3p 5.8p
Revenue bridge
30
September
30 Add back 2020
September one-off excl. Disposals CPBS 30
2020 CPBS one-off FX of estimates COVID-19 Other September
Restated adjustments CPBS impact businesses changes Recovery trading 2021
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- ---------- ----------- ----------- ------- ---------- ---------- ---------- -------- -----------
Marine 592.6 10.2 602.8 (0.3) - (4.3) (20.7) 49.9 627.4
Nuclear 455.8 1.7 457.5 - (1.3) (7.9) 10.6 57.4 516.3
Land 564.0 1.4 565.4 7.9 (17.9) (30.4) 72.1 9.9 607.0
Aviation 441.1 1.0 442.1 (9.4) (12.3) (8.9) 23.0 37.8 472.3
---------- ---------- ----------- ----------- ------- ---------- ---------- ---------- -------- -----------
Total 2,053.5 14.3 2,067.8 (1.8) (31.5) (51.5) 85.0 155.0 2,223.0
---------- ---------- ----------- ----------- ------- ---------- ---------- ---------- -------- -----------
Revenue was GBP2,223 million, up 8% compared to last year. The
table above shows the main comparison variances of revenue
performance against last year. The 'one-off CPBS adjustments' that
impacted HY21 totalling GBP14.3 million are covered on page 9. The
other main variances year-on-year are:
-- FX impact - this relates to FX translation on the results, most
notably South Africa in Land and Southern Europe in Aviation.
-- Disposals of businesses - this reflects the absence of Conbras
in our Land sector (sold in October 2020) and the civil nuclear
manufacturing business (sold in September 2020) in the period,
as well as the sale of our oil and gas aviation business in August
2021.
-- CPBS estimate changes - this is the impact of CPBS estimate changes
made at March 2021 (i.e. at the year-end) that have not been retrospectively
applied to the HY21 results. As such they are a variance in the
reported financials HY21 to HY22. The most significant item here
is less revenue recognised on our DSG contract in the Land sector.
-- COVID-19 recovery - this reflects the relatively smaller impact
from COVID-19 on operations this year compared to last year. The
pandemic had a very significant impact on revenue in the first
few months of last year, including stopping or heavily disrupting
activity especially in our South Africa, airports and civil training
businesses in the Land sector. Lower flying hours in the early
stages of the pandemic also impacted the Aviation sector. Conversely,
COVID-19 led to slightly more revenue in Marine as activity levels
were increased, for example for the design and manufacture of
ventilators. The COVID-19 impact in both periods has been estimated
across our sectors and based on an analysis of direct and indirect
impacts, which include a significant degree of judgement.
-- Other trading - this relates to revenue movements excluding all
the items above. On this basis, revenue grew across all four sectors.
Marine saw growth from a further ramp up of work on the Type 31
frigate programme while Nuclear saw growth from a ramp up in infrastructure
work and increased submarine support activity. The small growth
in Aviation reflects new contract wins, particularly in France.
Land's revenue was slightly higher despite the loss of the Heathrow
baggage handling contract last year.
Included within the current period financial results is GBP81.8
million (six months to 30 September 2020: GBP88.1 million) of
revenue and cost of sales relating to the procurement of materials
for the customer under the DSG contract within the land sector.
No profit margin is attached this revenue.
Underlying operating profit bridge
30
September
30 Add back 2020
September one-off excl. Disposals CPBS 30
2020 CPBS one-off FX of estimates COVID-19 Pension Other September
Restated adjustments CPBS impact businesses changes recovery movements trading 2021
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- --------- ----------- --------- ------- ---------- --------- -------- --------- -------- ---------
Marine 32.1 10.2 42.3 0.3 - (0.6) 4.0 1.0 (8.1) 38.9
Nuclear 34.2 1.8 36.0 - (0.1) (0.1) 2.1 (3.9) 2.2 36.2
Land 16.5 5.8 22.3 0.6 (0.6) (4.9) 13.0 (0.4) (0.2) 29.8
Aviation 1.7 3.6 5.3 (0.2) 0.2 (1.8) 5.5 - 1.4 10.4
Total 84.5 21.4 105.9 0.7 (0.5) (7.4) 24.6 (3.3) (4.7) 115.3
--------- --------- ----------- --------- ------- ---------- --------- -------- --------- -------- ---------
The 'one-off CPBS adjustments' that impacted HY21 totalling
GBP21.4 million are covered on page 9. The main other variances
year-on-year are:
-- FX impact - this relates to FX translation on the results.
-- Disposals of businesses - this is the lower profit contribution
from Conbras (sold in October 2020) and the civil nuclear manufacturing
business (sold in September 2020) partly offset by the sale of
the oil and gas aviation business in August 2021, which made a
loss last year.
-- CPBS estimate changes - this is the impact of CPBS estimate changes
made at March 2021 (i.e. at the year-end) that have not been retrospectively
applied to the HY21 results. As such they are a variance in the
reported financials HY21 to HY22. The most significant item here
is a lower margin recognised on our DSG contract in the Land sector.
-- COVID-19 recovery - as covered in the revenue section above, the
first few months of the prior period were significantly impacted
by the early stages of the pandemic, stopping or heavily disrupting
activity especially in our South Africa, airports and civil training
businesses in the Land sector, and lower flying hours in the Aviation
sector. The partial recovery of these operations, albeit with
higher operating costs or inefficiencies, caused the estimated
GBP25 million profit variance. In certain cases, the additional
costs of maintaining operations (e.g. antigen testing) continued
to be recoverable from some customers in the first few months
of the current period. The COVID-19 impact in both periods has
been estimated across our sectors and based on an analysis of
direct and indirect impacts, which include a significant degree
of judgement. The estimate of differences in other 'consequential'
expenses, e.g. business travel, have also been estimated in this
analysis.
-- Pension movements - this reflects the higher pension costs this
year split across our sectors.
-- Other trading - other trading in Marine reflects the loss of the
UK Royal Navy training contract last year, as well as increased
business development costs and a share of higher corporate costs.
The Group is also investing significant resource in improving
the control environment. The Nuclear sector's results also reflects
lower margin recognised in the first year of the FMSP contract.
Other income
Other income of GBP6.2 million in the period (HY21: GBPnil)
related to additional fees received in relation to the sale of our
oil and gas aviation business.
Share of results of joint ventures and associates
The share of joint ventures and associates of GBP9.6 million was
higher than last year (HY21: GBP6.3 million) as last year included
a loss on the Dounreay joint venture which has since ended.
Finance costs
Finance costs of GBP32.8 million were flat on last year. This
represented lower year-on-year interest (due to lower average net
debt and the impact of the USPP, which had a higher interest rate,
being paid down in March 2021) offset by a non-cash charge to the
income statement on hedging our EUR550 million Eurobond.
Tax charge
The underlying tax charge of GBP19.6 million represents an
underlying effective tax rate of 23%, being the underlying tax
charge divided by underlying profit before tax, excluding the share
of results from JVs and associates (already a post-tax number) and
excluding other income. We continue to expect the Group's full year
underlying effective tax rate to be around 23% for this financial
year.
Exchange rates
The translation impact of foreign currency movements resulted in
a decrease in revenue of GBP1.8 million and a GBP0.7 million
increase 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 underlying
revenue by around GBP23.0 million and underlying operating profit
by around GBP1.3 million per annum
-- A 10% movement in the South African Rand against Sterling would
affect underlying revenue by around GBP14.0 million and underlying
operating profit by around GBP1.5 million per annum
-- A 10% movement in the Canadian Dollar against Sterling would affect
underlying revenue by around GBP7.7 million and underlying operating
profit by around GBP0.8 million per annum
Earnings per share
Underlying earnings per share for the half year was 15.3 pence
(HY21: 5.8 pence), reflecting the higher underlying operating
profit, other income and lower tax costs.
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.
30 September 30 September
2021 2020
Underlying Underlying
GBPm restated*
GBPm
----------------------------------------------------------- ------------ ------------
Underlying operating profit 115.3 84.5
One-off CPBS 21.4
Underlying operating profit excl. one-off CPBS adjustments 115.3 105.9
Other income 6.2 -
Depreciation & amortisation 39.9 58.7
Right of use asset depreciation 59.7 65.4
Non-cash items 3.0 6.9
Working capital (140.1) (8.7)
Provisions (1.2) 1.5
Net capital expenditure (72.1) (47.6)
Capital element of lease payments (69.6) (70.7)
----------------------------------------------------------- ------------ ------------
Underlying operating cash flow (58.9) 111.4
Cash conversion % (51)% 105%
Pension contributions in excess of income statement (88.5) (42.2)
Interest paid (18.4) (27.7)
Tax paid (10.3) (30.0)
Dividends from joint ventures and associates 24.7 15.0
Cash flows related to exceptional items (9.2) (30.9)
----------------------------------------------------------- ------------ ------------
Underlying free cash flow (160.6) (4.4)
Net acquisitions and disposals 8.0 84.6
Cash outflow from settlement of derivative (5.4) -
Dividends paid (including non-controlling interests) - (0.3)
Purchase of own shares - (2.2)
Capital element of lease payments 69.6 70.7
Net new lease arrangements (19.6) (34.4)
Leases terminated on disposal of business 129.7 -
Exchange movements (15.0) (18.0)
Movement in net debt 6.7 96.0
Opening net debt (1,353.6) (1,704.8)
----------------------------------------------------------- ------------ ------------
Closing net debt (1,346.9) (1,608.8)
Operating leases 408.6 618.5
----------------------------------------------------------- ------------ ------------
Closing net debt excluding operating leases (938.3) (990.3)
----------------------------------------------------------- ------------ ------------
The table below provides the reconciliation between the
statutory cash flow and underlying cash flow table above.
30 September 2021 30 September 2020
--------------------------------- ---------------------------------
Specific Specific
adjusting adjusting
Underlying items Statutory Underlying items Statutory
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ---------- ---------- --------- ---------- ---------- ---------
Cash generated from operations (1.3) (9.2) (10.5) 187.0 (23.5) 163.5
Proceeds on disposal of property,
plant and equipment 10.3 - 10.3 2.3 6.2 8.6
Purchases of property, plant and
equipment (77.7) - (77.7) (38.2) (13.6) (51.8)
Purchases of intangible assets (4.7) - (4.7) (11.8) - (11.8)
Vehicle leasing repayments (4.4) - (4.4) 0.6 - 0.5
Capital element of lease payments (69.6) - (69.6) (70.7) - (70.7)
Impairment of JV loans - - - - (4.4) (4.4)
Retirement benefit contributions
in excess of income statement 88.5 - 88.5 42.2 (7.5) 34.7
================================== ========== ========== ========= ========== ========== =========
Operating cash flow (58.9) (9.2) (68.1) 111.4 (42.8) 68.6
---------------------------------- ---------- ---------- --------- ---------- ---------- ---------
Cash performance
Underlying operating cash flow
Underlying operating cash in the period after capital
expenditure was an outflow of GBP58.9 million compared to an inflow
of GBP111.4 million last year. This outflow was mostly driven by a
large working capital outflow in the period.
Movements in working capital
The movement in working capital for the period was a GBP140.1
million outflow compared to a GBP8.7 million outflow last year. As
previously disclosed, we intend to move away from the period end
management of working capital, particularly creditors. The outflow
in the period includes part of the unwind in VAT deferrals last
year (c.GBP25 million of the total GBP56 million deferral) and some
reversal of deferred creditors (c.GBP50 million impact), as well as
an increase in amounts recoverable under contract in Aviation.
Capital expenditure
Net capital expenditure of GBP72.1 million in the period was
higher than last year (HY21: GBP47.6 million) largely due to
investment in the Rosyth Type 31 infrastructure in Marine, and
investment in facilities in Nuclear. It is expected that net
capital expenditure will continue to be high in FY22 as we continue
the Type 31 investment and increase investment in other areas of
the business, including upgrading facilities and IT equipment.
Capital element of lease payments
Capital element of lease payments of GBP69.6 million in the
period represents the cash paid on lease obligations. This is
reversed out below underlying free cash flow as the payment reduces
our lease liability obligations.
The oil & gas business represented GBP10 million of capital
element of lease payments in the period.
Cash interest paid
Net Group cash interest paid, excluding that paid by joint
ventures and associates, was GBP18.4 million (HY21: GBP27.7
million), lower year-on-year due to lower average net debt and the
impact of the USPP (which had a higher interest rate) being paid
down in March 2021.
Taxation
Underlying cash tax payments of GBP10.3 million (HY21: GBP30.0
million) represent payments on account for the expected full year
tax payable.
Pensions
Pension cash outflow in excess of the income statement charge
(excluding exceptional charges for curtailment losses) was GBP88.5
million (HY21: GBP42.2 million). This includes the previously
disclosed GBP50 million additional payment into the Rosyth scheme
made in April 2021.
For FY22, the cash outflow in excess of the income statement
charge is expected to be around GBP130 million. An additional GBP50
million payment into the Rosyth scheme, and a further GBP10 million
contribution to the BIG scheme have been agreed to be made in April
2022.
Dividends from joint ventures and associates
During the period the Group received GBP24.7 million in
dividends from its joint ventures and associates (HY21: GBP15.0
million) which includes ALC exit dividends. We currently expect
dividends from joint ventures to be around GBP30 million this
financial year.
Exceptional cash flows
Cash outflows in the period classified as exceptional items were
GBP9.2 million, all of which are restructuring costs.
For the full year, we anticipate exceptional cash outflows of up
to GBP40 million, being the restructuring costs relating to the new
operating model implementation. This restructuring cost may be
lower if an element of the reductions can be achieved through
natural attrition. If the Italy fine is resolved and paid, this
would be a further exceptional cash item.
Underlying free cash flow
Underlying free cash flow of GBP(160.6) million was
significantly larger than last year's outflow of GBP(4.4) million
which reflects the large working capital outflow and higher pension
payments.
Acquisitions and disposals
The net cash inflow from acquisitions and disposals of GBP8.0
million was the net proceeds from the sale of the Oil and Gas
aviation business.
New lease arrangements
In addition to net capital expenditure, and not included in free
cash flow, GBP19.6 million (HY21: GBP34.4 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.
Lease obligations terminated on disposal of business
During the period there was GBP129.7 million of leases
transferred on disposal of the Oil and Gas aviation business.
Net debt
The Group's net debt at 30 September 2021 was GBP1,346.9
million, or GBP938.3 million excluding operating leases.
Our average net debt in period was around GBP200 million higher
than at the period end of 30 September 2021, partly reflecting the
phasing of creditor payments around period end. This gap is smaller
than in the prior year as we reduce the level of period end working
capital management.
Our net debt includes balances related to the use of supply
chain financing in the Group with extended credit terms. At 30
September 2021 the amount included was GBP11 million (30 September
2020: GBP77 million).
Funding and liquidity
At 30 September 2021, the Group's net cash balance (gross cash
less overdrafts) was GBP367 million. This combined with the undrawn
element of our RCFs gave us liquidity headroom of over GBP1.4
billion.
As of 30 September 2021, the Group had access to a total of
GBP2.4 billion of borrowings and facilities of mostly long-term
maturities. These comprised:
-- EUR550 million bond maturing 6 October 2022 (in April 2021 this
was hedged at GBP482 million)
-- New GBP300 million 3-year RCF maturing 20 May 2024 (signed on
20th May 2021)
-- GBP775 million revolving credit facility (RCF) maturing 28 August
2025
-- GBP300 million bond maturing 5 October 2026
-- EUR550 million bond, hedged at GBP493 million, maturing 13 September
2027
-- Committed overdraft facility of GBP50 million
Capital structure
An important part of the transformation of Babcock is the
strengthening of the balance sheet. Whilst there are several facets
to balance sheet strength, the primary measurement relevant to
Babcock is net debt / EBITDA (covenant basis) within our debt
covenants, which was 2.8x at
30 September 2021. As mentioned earlier, the disposal of
Frazer-Nash completed after the period end, for a net consideration
of GBP290 million. If this had been received before 30 September
2021, the gearing ratio for the period would have reduced to 2.1x.
The covenant level is 3.5 times, temporarily increased to 4.5 times
until March 2022.
Our near-term priority is to reduce the gearing ratio to below
2x and progress on our disposal programme is helping us reach this
goal. There are, however, some short-term headwinds that remain.
Free cash flow is expected to be negative in FY22 and HY23 as
certain material cash outflows - particularly additional pension
contributions and restructuring - have already been committed.
Additionally, we intend to gradually unwind the gap between period
end and average net debt.
Despite the clear priority to delever the balance sheet, the
Group will continue to invest organically in the business as this
will be key to driving value in the medium term. As we announced in
April 2021, we aim to return to strength without the need for an
equity issue.
In the coming months, once the disposal programme is complete,
we will reassess the appropriate capital structure for the future
of the Group.
Pensions management
An estimate of the technical provisions actuarial deficits as at
30 September 2021 for the principal schemes was around GBP400
million, predominantly reflecting discount rates based on UK gilts
- which differs from the corporate bond approach of IAS 19. This
technical provisions estimate is based on the assumptions used
within the latest agreed valuation prior to 30 September 2021 for
each of the three main schemes and includes the additional funding
gap from longevity swaps.
Note: restatement of pensions accounting position
The longevity swaps related to the three main group pension
schemes were previously valued in line with the collateral posted
by each scheme with their intermediary. This was deemed a proxy for
fair value in line with IAS 19. Having considered valuations of a
notional replacement swap, or exit, we now believe the previous
approach did not accurately reflect fair value and so we have
changed our valuation approach accordingly. The prior year has been
restated for the change in approach, reducing the net retirement
benefit balances by GBP39.8 million as at 31 March 2021, with no
impact on the Group Income Statement. This change does not affect
the technical provisions assessed for those schemes during
triennial valuations, their funding requirements, or the deficit
recovery cash contributions agreed with each scheme.
Net debt to EBITDA (covenant basis)
This is the measure used in the covenant in our revolving credit
facilities (RCF) and makes a number of adjustments from reported
net debt and EBITDA. The covenant level is 3.5 times - amended to
4.5 times until 31 March 2022.
30 September 30 September
2021 2020
GBPm GBPm
Last twelve Last twelve
months months
------------------------------------------ ------------ ------------
Underlying operating profit excl. one-off
CPBS adjustments* 231.6 317.3
Depreciation and amortisation 99.0 107.6
Covenant adjustments** (15.2) (19.5)
------------------------------------------- ------------ ------------
EBITDA 315.4 405.4
JV and associate dividends 46.5 29.7
------------------------------------------- ------------ ------------
EBITDA + JV and associate dividends
(covenant basis) 361.9 435.1
Net debt (938.3) (990.3)
Covenant adjustments*** (77.9) (80.1)
------------------------------------------- ------------ ------------
Net debt (covenant basis) (1,016.2) (1,070.4)
Net debt / EBITDA (covenant basis) 2.8x 2.5x
------------------------------------------- ------------ ------------
* excludes one-off CPBS adjustments as described on pages
9-11
** various adjustments made to EBITDA to reflect accounting
standards at the time of inception of the original RCF agreement.
The main adjustments
are to the treatment of leases within operating profit and
pension costs
*** removing loans to JVs, finance lease receivables and
adjusting for an average FX rate for the previous 12 months
Interest cover (covenant basis)
This measure is also used in the covenant in our revolving
credit facility (RCF), with a covenant level of 4.0 times.
30 September 30 September
2021 2020
GBPm GBPm
Last twelve Last twelve
months months
------------------------------------ ------------ ------------
EBITDA + JV and associate dividends
(covenant basis) 361.9 435.1
------------------------------------- ------------ ------------
Finance costs (52.4) (60.4)
Finance income 11.4 12.4
Covenant adjustments - 0.2
------------------------------------- ------------ ------------
Net Group finance costs (41.0) (47.8)
------------------------------------- ------------ ------------
Interest cover 8.8x 9.1x
------------------------------------- ------------ ------------
Return on invested capital, pre-tax (ROIC)
This measure is one of the Group's key performance indicators
(KPIs).
30 September 30 September
2021 2020
GBPm GBPm
Last twelve Last twelve
months months
--------------------------------------- ------------ ------------
Underlying operating profit excluding
one-off CPBS adjustments 231.6 317.3
Share of JV PAT excluding one-off CPBS
adjustments 21.7 45.3
----------------------------------------- ------------ ------------
Underlying operating profit plus share
of JV PAT 253.3 362.6
Net debt excluding operating leases 938.3 990.3
Operating leases 408.6 618.5
Shareholder funds 388.6 1,251.2
Retirement deficit / (surplus) 79.0 134.3
----------------------------------------- ------------ ------------
Invested capital 1,814.5 2,994.3
----------------------------------------- ------------ ------------
ROIC (pre-tax) 14.0% 12.1%
----------------------------------------- ------------ ------------
OPERATIONAL REVIEWS
Marine
30 September 31 September
2021 2020
Restated
---------------------------- ------------ ------------
Contract backlog GBP2.6bn GBP2.6bn
----------------------------- ------------ ------------
Revenue GBP627.4m GBP592.6m
----------------------------- ------------ ------------
Underlying operating profit GBP38.9m GBP32.1m
----------------------------- ------------ ------------
Underlying margin 6.2% 5.4%
----------------------------- ------------ ------------
Revenue and underlying operating profit bridge:
30
September
2020
30 Add back Restated
September one-off excl. Disposals CPBS 30
2020 CPBS one off FX of estimate COVID-19 Pensions Other September
Restated adjustments CPBS impact businesses changes recovery movements trading 2021
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- --------- ----------- --------- ------- ---------- -------- -------- --------- ------- ---------
Revenue 592.6 10.2 602.8 (0.3) - (4.3) (20.7) - 49.9 627.4
----------- --------- ----------- --------- ------- ---------- -------- -------- --------- ------- ---------
Underlying
operating
profit 32.1 10.2 42.3 0.3 - (0.6) 4.0 1.0 (8.1) 38.9
Financial review
Revenue excluding FX and disposals grew by 6% led by a ramp up
of work on the Type 31 frigate and warship support programmes, and
growth in the LGE business. This growth more than offset the impact
of the loss of our UK Royal Navy training contract last year and
the year-on-year impact of COVID-19, with orders for the
ventilators project in the UK contributing last year.
Underlying operating profit of GBP38.9 million includes a GBP4.0
million year-on-year recovery in COVID-19 related costs compared to
HY21, which was particularly impacted by site closures and lower
activity levels. The recovery in activity was primarily in
Frazer-Nash (higher margin consultancy) and Oman, where the site
had been largely closed throughout the prior period. Other trading
was worse and reflects the loss of the UK Royal Navy training
contract last year, increased bidding and campaign costs across the
sector and a share of higher corporate costs.
The sector's contract backlog of GBP2.6 billion is broadly in
line with last year and the position at March 2021 (31 March 2021:
GBP2.5 billion) as new contract wins replaced contracted work
completed.
Operational review
UK defence
The Type 31 frigate programme is on schedule following the first
cut of steel for HMS Venturer at our advanced manufacturing
facility in Rosyth. The new infrastructure allows for parallel
build and assembly activity free from weather disruption and is
nearing completion ahead of first block assembly. The investment
across our Rosyth site aims to ensure shipbuilding capability and
capacity to support additional future opportunities.
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. Our fleet time support
programme continues with a large package for HMS Albion in the UK
and HMS Richmond in Japan, to support the Carrier Strike Group.
We've also continued to support the Type 23 and Sandown classes in
the Gulf and UK before its exit from the UK fleet.
We continue to support the development of the next generation of
UK submarines. We have extended our contracts for Dreadnought
launch weapons and signal ejector systems to include further scope
on boats two to four, and converted all remaining scope on boat one
to a firm basis.
In September, we secured a c. GBP110 million contract to deliver
the new Defence Strategic Radio Service to critical military
operations and in November, we were awarded a c.GBP100 million
13-year contract by the UK MOD for the design, manufacture,
delivery and in-service support to the Maritime Electronic Warfare
Systems Integrated Capability (MEWSIC). Babcock will deliver the
programme together as prime contractor with its collaboration
partners, Elbit Systems UK and QinetiQ.
During the period, we achieved full operational capacity in our
new Morpheus Logistic Support Contract (LSC) with UK MOD which
forms part of the Land Environment Tactical Communications and
Information Systems (LE TacCIS) programme of opportunities to
deliver the next generation tactical communications and information
systems.
International defence
We support international defence markets from our UK operations
and from our businesses in Canada, Australia, New Zealand, Oman and
Korea.
In Australia, 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 will also end. The AUKUS agreement
may open further opportunities for Babcock.
In December, we were selected by the Australian Government as
the preferred tenderer to upgrade and sustain the Defence High
Frequency Communication System (DHFCS) to support the Australian
armed forces over the next 10 years, with a further four extension
options, each of two years.
In Canada, the extended Victoria Class In-Service Support
Contract (VISSC) is continuing with work on two submarines
underway.
In Korea, we signed a Memorandum of Understanding with Hyundai
Heavy Industries for the CVX Aircraft Carrier Programme
opportunity. Babcock has established in-country business
benefitting from investment in an assembly, maintenance, repair and
overhaul facility in Busan, where Babcock currently assembles
equipment for the Janbogo-III submarine programme.
In Ukraine, we signed a tripartite Memorandum of Implementation
with the Ministry of Defence of Ukraine and the UK Government. The
two nations intend to push forward a major programme of Ukrainian
naval projects, with Babcock as their designated prime industrial
partner. The programme includes the enhancement of capabilities on
existing naval platforms, the delivery of new platforms and
training. The programme also serves to regenerate Ukrainian
shipyards.
In September, we won our first export contract for Arrowhead 140
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. Also in the period, it was
confirmed that Babcock's AH140 design is one of the shortlisted
designs for Poland's frigate programme.
Energy and Marine
Our Energy and Marine business continues to see strong demand
for liquefied gas handling and re-liquefaction system across the
LPG and LNG markets. Babcock LGE was awarded 47 projects,
comprising 30 LPG Cargo Handling Systems and 17 ecoSMRT LNG
Reliquefaction systems from major Korean shipyards in the Hyundai
Group, all under the recently signed Frame Agreements for LGE
market-leading Innovative Technology. In addition, LGE has also
successfully completed trial for 19 LPG and LNG systems in the same
period in Korea and China.
In the period we signed a one-year framework agreement with
Hyundai Heavy Industries, confirming Babcock LGE for the design and
supply of ecoSMRT (R) LNG reliquefaction systems for LNG gas
carriers.
Nuclear
30 September 31 September
2021 2020
Restated
---------------------------- ------------ ------------
Contract backlog GBP3.0bn GBP0.4bn
============ ============
Revenue GBP516.3m GBP455.8m
============ ============
Underlying operating profit GBP36.2m GBP34.2m
----------------------------- ------------ ------------
Underlying margin 7.0% 7.5%
----------------------------- ------------ ------------
Revenue and underlying operating profit bridge:
30
September
2020
30 Add back Restated
September one-off excl. Disposals CPBS 30
2020 CPBS one off FX of estimate COVID-19 Pensions Other September
Restated adjustments CPBS impact businesses changes recovery charge trading 2021
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- --------- ----------- --------- ------- ---------- -------- -------- -------- -------- ---------
Revenue 455.8 1.7 457.5 - (1.3) (7.9) 10.6 - 57.4 516.3
----------- --------- ----------- --------- ------- ---------- -------- -------- -------- -------- ---------
Underlying
operating
profit 34.2 1.8 36.0 - (0.1) (0.1) 2.1 (3.9) 2.2 36.2
Financial review
Revenue excluding FX and disposals was 14% higher with increased
submarine work and a further ramp up in our submarine
infrastructure work. There was a small positive revenue impact from
COVID-19 as ongoing operating costs, such as PPE and onsite antigen
testing, were covered by the customer and thus booked as revenue,
though at zero margin.
Underlying operating profit of GBP36.2 million is broadly flat
year-on-year with a small trading improvement and COVID-19 cost
recovery improvement offset by the higher pension charge. The flat
profit performance despite strong revenue growth partly reflects
the lower margin in the initial period of the FMSP contract and a
low margin recognised on infrastructure work.
The sector's contract backlog of GBP3.0 billion is up
significantly since March (31 March 2021: GBP0.4 billion) due to
the signing of the FMSP contract.
Operational review
Defence
In Devonport, work has commenced on the long term infrastructure
programme to support future submarine classes and the submarine
decommissioning and disposal programme. Work on 10 Dock is being
accelerated to be ready in line with planning for the first deep
maintenance period of the Astute Class 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.
The UK's future submarine programme work has also continued and
our Dreadnought design phase contract was extended in the period
for a further two years. The programme continues to plan and growth
opportunities are being monitored and assessed.
In September, the Future Maritime Support Programme (FMSP) was
signed. This five-year c.GBP3.5 billion contract replaces the
previous Maritime Support Delivery Framework (MSDF) and continues
our support spanning UK naval base operations at HMNB Clyde and
HMNB Devonport, alongside UK submarine and surface ship fleet
support. The new contract is identified as being a 'Qualifying
Defence Contracts (QDC)' and falls under Single Source Contract
Regulations (SSCR).
Civil
In the period we secured a five-year extension to the multi-year
Design Services Alliance (DSA) engineering framework, worth around
GBP200 million, and a two-year extension to the Pile Fuel Cladding
Silo (PFCS) project, both at Sellafield. We continue to support EDF
and the project volumes are in line with expectations. In new
build, Hinkley Point C continues to run behind schedule with delays
in civil construction delaying the ramp up of MEH Alliance scope
further.
During the period we signed a memorandum of understanding with
Rolls-Royce for collaboration 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.
Land
30 September 31 September
2021 2020
Restated
---------------------------- ------------ ------------
Contract backlog GBP2.9bn GBP3.4bn
============ ============
Revenue GBP607.0m GBP564.0m
============ ============
Underlying operating profit GBP29.8m GBP16.5m
----------------------------- ------------ ------------
Underlying margin 4.9% 2.9%
----------------------------- ------------ ------------
Revenue and underlying operating profit bridge:
30
September
2020
30 Add back Restated
September one-off excl. Disposals CPBS 30
2020 CPBS one off FX of estimate COVID-19 Pensions Other September
Restated adjustments CPBS impact businesses changes recovery charge trading 2021
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- --------- ----------- --------- ------- ---------- -------- -------- -------- -------- ---------
Revenue 564.0 1.4 565.4 7.9 (17.9) (30.4) 72.1 - 9.9 607.0
----------- --------- ----------- --------- ------- ---------- -------- -------- -------- -------- ---------
Underlying
operating
profit 16.5 5.8 22.3 0.6 (0.6) (4.9) 13.0 (0.4) (0.2) 29.8
Financial review
The disposal of Conbras in October 2020 caused the revenue
variance of GBP17.9 million and profit variance of GBP0.6 million
versus the prior period. Revenue excluding FX and disposals was 9%
higher with an increase in activity levels across the sector
compared to last year which was severely impacted by COVID-19
restrictions. As previously disclosed, the pandemic had a very
significant impact on revenue in the first few months of last year,
including stopping or heavily disrupting activity especially in our
South Africa, airports and civil training businesses. There was a
small increase in other trading as business growth more than offset
the impact of the loss of the Heathrow baggage handling contract
last year. Included within the current period financial results is
GBP81.8 million (six months to 30 September 2020: GBP88.1 million)
of revenue and cost of sales relating to the procurement of
materials for the customer under the DSG contract. No profit margin
is attached this revenue.
Underlying operating profit benefited from the partial recovery
of activity levels from the COVID-19 impact in the prior period.
The other trading movement reflects better performances in our Rail
and training businesses offset by the loss of the Heathrow baggage
handling contract last year. The CPBS estimate changes mainly
relate to a lower margin in our DSG business, consistent with the
reassessment at the March 2021 year end.
The sector's contract backlog of GBP2.9 billion is slightly
lower than at March 2021 (31 March 2021: GBP3.0 billion),
reflecting the utilisation of multi-year backlog on long term
contracts, mostly DSG.
Operational review
Defence
The DSG transformation programme has been implemented in
response to the customer's evolving requirements following the UK's
Integrated Review. This review stated that the Warrior platform
will now be taken out of service, and a number of other changes
will take place to the Army fleet. We have been working closely
with the customer to support their requirements with the reduction
phasing over the upcoming years.
Defence training saw a recovery in activity levels compared to
last year. After a competitive process, we were selected to
participate in the British Army's 2021 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 higher in the period with a ramp up of the Met
Police training contract. The Police Education and Qualification
Framework (PEQF) programme originally launched through a
COVID-secure delivery model in January 2021 and in September 2021
we were able to return the programme to anticipated operational
delivery. Our work with the London Fire Brigade performed well in
the period.
South Africa
Our business in South Africa had a good half year as Eskom
resumed outages to enable routine maintenance schedules. The
equipment business saw a modest recovery and experienced some
disruption from global shipping constraints.
Other civil markets
The Rail business saw a modest increase in volumes on track
renewals and signalling framework while our civil training and
power businesses saw higher activity compared to last year.
Aviation
30 September 31 September
2021 2020
Restated
---------------------------- ------------ ------------
Contract backlog GBP2.4bn GBP3.0bn
============ ============
Revenue GBP472.3m GBP441.1m
============ ============
Underlying operating profit GBP10.4m GBP1.7m
----------------------------- ------------ ------------
Underlying margin 2.2% 0.4%
----------------------------- ------------ ------------
Revenue and underlying operating profit bridge:
30
September
2020
30 Add back Restated
September one-off excl. Disposals CPBS 30
2020 CPBS one off FX of estimate COVID-19 Pensions Other September
Restated adjustments CPBS impact businesses changes recovery movements trading 2021
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- --------- ----------- --------- ------- ---------- -------- -------- --------- ------- ---------
Revenue 441.1 1.0 442.1 (9.4) (12.3) (8.9) 23.0 - 37.8 472.3
----------- --------- ----------- --------- ------- ---------- -------- -------- --------- ------- ---------
Underlying
operating
profit 1.7 3.6 5.3 (0.2) 0.2 (1.8) 5.5 - 1.4 10.4
Financial review
Revenue excluding FX and disposals was up 12% with business
growth and higher activity compared to last year, which was
particularly hit by lower flying hours amid COVID-19 restrictions
in the early months of the pandemic. Reported revenue was impacted
by the sale of our Oil and Gas aviation business in August 2021.
Growth, particularly in the French defence business, also improved
revenue in the period.
Underlying operating profit of GBP10.4 million was significantly
improved on last year. This improvement mainly reflects the return
to more normal conditions compared to the COVID-19 pressures last
year, which included lower activity, personal protective equipment
and refit costs. The CPBS estimate changes reflect estimate changes
made at 31 March 2021 and not restated for. These estimate changes
were mostly the adjustment of some project margins and asset
impairments.
The sector's contract backlog of GBP2.4 billion is lower than
last year and the position at March 2021 (31 March 2021: GBP2.9
billion) as the backlog for the Oil and Gas aviation business, sold
in August 2021, was removed.
Operational review
Defence
Defence revenues increased as the H160 contract, which delivers
search and rescue aircraft for the French Navy, ramped up. In June
2021, we were awarded a contract by the French MOD for an expansion
of our existing defence aviation training activities. This
five-year contract is worth around EUR500 million and started in
June 2021.
Activity across UK defence including RAF station support, Hawk
and LAFT contracts was broadly flat. In Canada, we have signed a
teaming agreement with Leonardo to bid together for the Future
Aircrew Training programme (FACT).
Aerial emergency services
Revenue across the majority of our aerial emergency services
businesses was slightly higher due to new contracts and compared to
last year where COVID-19 had a large impact on activity levels.
Performance in aerial emergency medical services was the most
severely hit by COVID-19 last year and has seen some good recovery
this year. Scandinavia saw higher flying hours over the summer with
new services in Sweden and Norway. Southern European bases have all
remained open and experienced varying increases in activity.
Our firefighting operations across Europe and Canada saw higher
activity levels compared to last year, particularly in Italy.
During the period we have utilised five Super Puma helicopters in
Spain that have been 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.
Oil and gas
Revenue was higher year-on-year reflecting previous business
wins. The sale of the Oil and Gas business completed in August
2021.
Risks and uncertainties
The Group's risks and uncertainties are reviewed throughout the
year. The principal risk and uncertainties are shown below. These,
together with their potential impacts and mitigating actions we
take in respect of them, are explained in more detail in the 2021
Annual Report, a copy of which is available at
www.babcockinternational.com . There are no new principal risk and
uncertainties.
Since the publication of our 2021 Annual Report, the macro risk
of cost inflation and supply chain disruptions has increased and
the Group has taken mitigating actions where possible. The risk
around financial resilience (see below) has reduced given the
progress we have made on our disposal programme.
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.
Contract performance: we operate large contracts, which often
requires us to price for the long term and for risk transfer. Our
contracts can include fixed price and may in some cases assume
inflation risk. We also contract with suppliers for the delivery of
components of our large contracts.
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 and credit risks). The Group's debt facilities include financial covenant tests every six months.
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.
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: Our ability to deliver secure IT and other
information assurance systems to maintain the confidentiality of
sensitive information is a key factor for our customers.
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.
Forward-looking statements
Certain statements in this announcement are forward-looking
statements. Such statements may relate to Babcock's business,
strategy and plans. Statements that are not historical facts,
including statements about Babcock's or its management's beliefs
and expectations, are forward-looking statements. Words such as
'believe', 'anticipate', 'estimates', 'expects', 'intends', 'aims',
'potential', 'will', 'would', 'could', 'considered', 'likely', and
variations of these words and similar future or conditional
expressions are intended to identify forward-looking statements but
are not the exclusive means of doing so. By their nature,
forward-looking statements involve a number of risks, uncertainties
or assumptions, some known and some unknown, many of which are
beyond Babcock's control that could cause actual results or events
to differ materially from those expressed or implied by the
forward-looking statements. These risks, uncertainties or
assumptions could adversely affect the outcome and financial
effects of the plans and events described herein. Forward-looking
statements contained in this announcement regarding past trends or
activities should not be taken as a representation that such trends
or activities will continue in the future. Nor are they indicative
of future performance and Babcock's actual results of operations
and financial condition and the development of the industry and
markets in which Babcock operates may differ materially from those
made in or suggested by the forward-looking statements. You should
not place undue reliance on forward-looking statements because such
statements relate to events and depend on circumstances that may or
may not occur in the future. Except as required by law, Babcock is
under no obligation to update (and will not) or keep current the
forward-looking statements contained herein or to correct any
inaccuracies which may become apparent in such forward-looking
statements.
Forward-looking statements reflect Babcock's judgement at the
time of preparation of this announcement and are not intended to
give any assurance as to future result.
Condensed consolidated income statement (unaudited)
Six months
Six months ended
ended 30 September
30 September 2020 (restated
2021 *)
--------------- -----------------
Total Total
Note GBPm GBPm
------ ------- ---------------
Revenue 2,5 2,223.0 2,053.5
=================================== ================== =============== =================
Cost of revenue (1,986.1) (1,842.7)
=================================== ================== =============== =================
Gross profit 236.9 210.8
=================================== ================== =============== =================
Administration and distribution
expenses (145.2) (185.9)
=================================== ================== =============== =================
Goodwill impairment 2, 3 - (760.5)
=================================== ================== =============== =================
Loss on divestments 18 (16.3) (49.7)
=================================== ================== =============== =================
Operating profit/(loss) 2,5 75.4 (785.3)
=================================== ================== =============== =================
Other income 6 6.2 -
=================================== ================== =============== =================
Share of results of joint ventures
and associates 2, 5 9.6 6.3
=================================== ================== =============== =================
Finance income 7 5.6 8.1
=================================== ================== =============== =================
Finance costs 7 (38.0) (40.7)
=================================== ================== =============== =================
Profit/(loss) before tax 58.8 (811.6)
=================================== ================== =============== =================
Income tax (expense) 8 (4.6) (20.7)
=================================== ================== =============== =================
Profit/(loss) for the period 54.2 (832.3)
=================================== ================== =============== =================
Attributable to:
=================================== ================== =============== =================
Owners of the parent 52.2 (832.3)
=================================== ================== =============== =================
Non-controlling interest 2.0 -
=================================== ================== =============== =================
54.2 (832.3)
=================================== ================== =============== =================
Earnings/(loss) per share 2
=================================== ================== =============== =================
Basic 10.3p (164.8)p
=================================== ================== =============== =================
Diluted 10.2p (164.8)p
=================================== ================== =============== =================
*In the year ended 31 March 2021, the Group performed a contract
profitability and balance sheet review which identified accounting
errors and a change to one accounting policy. These also impact the
six months ended 30 September 2020. Details of the restatements are
contained in note 4.
Condensed consolidated statement of comprehensive income
(unaudited)
Six months
Six months ended
ended 30 September
30 September 2020 (restated
2021 *)
Note GBPm GBPm
---------------------------------------------------- ----- ------------- ---------------
Profit/(loss) for the year 54.2 (832.3)
=========================================================== ============= ===============
Other comprehensive income/(loss)
==================================================== ===== ============= ===============
Items that may be subsequently reclassified to
income statement
==================================================== ===== ============= ===============
Currency translation differences (6.9) 17.0
=========================================================== ============= ===============
Reclassification of cumulative currency translation
reserve on disposal (7.3) -
=========================================================== ============= ===============
Fair value adjustment of interest rate and foreign
exchange hedges (7.8) 13.6
=========================================================== ============= ===============
Tax, including rate change impact, on fair value
adjustment of interest rate and foreign exchange
hedges 3.8 (0.9)
=========================================================== ============= ===============
Hedging (losses)/gains reclassified to profit and
loss (3.1) 1.4
=========================================================== ============= ===============
Share of other comprehensive income/(losses) of
joint ventures and associates 2.7 (5.2)
=========================================================== ============= ===============
Tax, including rate change impact, on share of
other comprehensive income of joint ventures and
associates - 0.1
=========================================================== ============= ===============
Items that will not be subsequently reclassified
to income statement
==================================================== ===== ============= ===============
Remeasurement of retirement benefit obligations 168.0 (269.3)
=========================================================== ============= ===============
Tax, including rate change impact, on remeasurement
of retirement benefit obligations (27.1) 51.1
=========================================================== ============= ===============
Other comprehensive income/(loss), net of tax 122.3 (192.2)
----------------------------------------------------------- ------------- ---------------
Total comprehensive income/(loss) 176.5 (1,024.5)
----------------------------------------------------------- ------------- ---------------
Total comprehensive income/(loss) attributable
to:
==================================================== ===== ============= ===============
Owners of the parent 174.5 (1,024.8)
=========================================================== ============= ===============
Non-controlling interest 2.0 0.3
----------------------------------------------------------- ------------- ---------------
Total comprehensive income/(loss) 176.5 (1,024.5)
----------------------------------------------------------- ------------- ---------------
Condensed consolidated statement of changes in equity
(unaudited)
Owners
Share Share Other Capital Retained Hedging Translation of the Non-controlling Total
capital premium reserve redemption earnings reserve reserve parent interest equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ------- ------- ------- ---------- --------- ------- ----------- --------- --------------- ---------
At 1 April
2020
as previously
stated
* 303.4 873.0 768.8 30.6 480.1 (97.3) (59.5) 2,299.1 15.7 2,314.8
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Prior year
adjustment
(note 4) - - - - (39.9) - - (39.9) - (39.9)
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
At 1 April
2020
restated 303.4 873.0 768.8 30.6 440.2 (97.3) (59.5) 2,259.2 15.7 2,274.9
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Loss for the
period - - - - (832.3) - - (832.3) - (832.3)
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Other
comprehensive
income/(loss) - - - - (218.2) 9.0 16.7 (192.5) 0.3 (192.2)
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Total
comprehensive
loss - - - - (1,050.5) 9.0 16.7 (1,024.8) 0.3 (1,024.5)
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Dividends - - - - - - - - (0.3) (0.3)
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Share-based
payments - - - - 1.8 - - 1.8 - 1.8
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Tax on
shared-based
payments - - - - 1.5 - - 1.5 - 1.5
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Own shares - - - - (2.2) - - (2.2) - (2.2)
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Net movement
in
equity - - - - (1,049.4) 9.0 16.7 (1,023.7) - (1,023.7)
-------------- ------- ------- ------- ---------- --------- ------- ----------- --------- --------------- ---------
At 30
September
2020 restated 303.4 873.0 768.8 30.6 (609.2) (88.3) (42.8) 1,235.5 15.7 1,251.2
-------------- ------- ------- ------- ---------- --------- ------- ----------- --------- --------------- ---------
At 1 April
2021
as previously
stated 303.4 873.0 768.8 30.6 (1,629.1) (71.1) (48.2) 227.4 16.0 243.4
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Prior year
adjustment
(note 4) - - - - (34.2) - - (34.2) - (34.2)
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
At 1 April
2021
restated 303.4 873.0 768.8 30.6 (1,663.3) (71.1) (48.2) 193.2 16.0 209.2
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Profit for the
period - - - - 52.2 - - 52.2 2.0 54.2
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Other
comprehensive
income/(loss) - - - - 140.9 (4.4) (14.2) 122.3 - 122.3
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Total
comprehensive
income - - - - 193.1 (4.4) (14.2) 174.5 2.0 176.5
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Share-based
payments - - - - 2.0 - - 2.0 - 2.0
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Tax on
shared-based
payments - - - - 0.9 - - 0.9 - 0.9
============== ======= ======= ======= ========== ========= ======= =========== ========= =============== =========
Net movement
in
equity - - - - 196.0 (4.4) (14.2) 177.4 2.0 179.4
-------------- ------- ------- ------- ---------- --------- ------- ----------- --------- --------------- ---------
At 30
September
2021 303.4 873.0 768.8 30.6 (1,467.3) (75.5) (62.4) 370.6 18.0 388.6
-------------- ------- ------- ------- ---------- --------- ------- ----------- --------- --------------- ---------
*Amount included in this line relates to amounts previously
stated in the annual report for the year ended 31 March 2021.
The other reserve relates to the rights issue of new ordinary
shares on 7 May 2014 and the capital redemption reserve relates to
the issue and redemption of redeemable "B" preference shares in
2001.
Condensed consolidated statement of financial position
(unaudited)
As at
As at 31 March
30 September 2021 (restated
2021 *)
Note GBPm GBPm
-------------------------------------------------- ---- ------------- ---------------
Assets
================================================== ==== ============= ===============
Non-current assets
================================================== ==== ============= ===============
Goodwill 9 955.6 956.3
================================================== ==== ============= ===============
Other intangible assets 186.1 200.0
================================================== ==== ============= ===============
Property, plant and equipment 749.5 731.5
================================================== ==== ============= ===============
Right of use assets 353.6 521.2
================================================== ==== ============= ===============
Investment in joint ventures and associates 60.8 73.5
================================================== ==== ============= ===============
Loans to joint ventures and associates 42.6 42.1
================================================== ==== ============= ===============
Retirement benefit surpluses 17 115.5 14.6
================================================== ==== ============= ===============
Financial assets 10.8 11.2
================================================== ==== ============= ===============
Lease receivables 16.5 12.9
================================================== ==== ============= ===============
Derivatives 3.2 4.3
================================================== ==== ============= ===============
Deferred tax asset 120.1 148.9
-------------------------------------------------- ---- ------------- ---------------
2,614.3 2,716.5
-------------------------------------------------- ---- ------------- ---------------
Current assets
================================================== ==== ============= ===============
Inventories 168.7 162.4
================================================== ==== ============= ===============
Trade and other receivables 11 367.9 430.1
================================================== ==== ============= ===============
Contract assets 11 344.6 310.9
================================================== ==== ============= ===============
Income tax recoverable 47.9 48.4
================================================== ==== ============= ===============
Lease receivables 18.8 26.7
================================================== ==== ============= ===============
Derivatives 3.4 8.2
================================================== ==== ============= ===============
Cash and cash equivalents 16 784.1 904.8
-------------------------------------------------- ---- ------------- ---------------
1,735.4 1,891.5
-------------------------------------------------- ---- ------------- ---------------
Total assets 4,349.7 4,608.0
-------------------------------------------------- ---- ------------- ---------------
Equity and liabilities
================================================== ==== ============= ===============
Equity attributable to owners of the parent
================================================== ==== ============= ===============
Share capital 303.4 303.4
================================================== ==== ============= ===============
Share premium 873.0 873.0
================================================== ==== ============= ===============
Capital redemption and other reserves 661.5 680.1
================================================== ==== ============= ===============
Retained losses (1,467.3) (1,663.3)
-------------------------------------------------- ---- ------------- ---------------
Total equity attributable to owners of the parent 370.6 193.2
================================================== ==== ============= ===============
Non-controlling interest 18.0 16.0
-------------------------------------------------- ---- ------------- ---------------
Total equity 388.6 209.2
-------------------------------------------------- ---- ------------- ---------------
Non-current liabilities
================================================== ==== ============= ===============
Bank and other borrowings 1,319.2 1,318.8
================================================== ==== ============= ===============
Lease liabilities 328.4 486.2
================================================== ==== ============= ===============
Trade and other payables 12 1.8 1.9
================================================== ==== ============= ===============
Deferred tax liabilities 8.2 7.7
================================================== ==== ============= ===============
Other financial liabilities 59.0 51.1
================================================== ==== ============= ===============
Retirement benefit deficits 17 194.5 347.5
================================================== ==== ============= ===============
Provisions for other liabilities 14 63.8 73.7
-------------------------------------------------- ---- ------------- ---------------
1,974.9 2,286.9
-------------------------------------------------- ---- ------------- ---------------
Current liabilities
================================================== ==== ============= ===============
Bank and other borrowings 425.2 383.7
================================================== ==== ============= ===============
Lease liabilities 106.2 126.1
================================================== ==== ============= ===============
Trade and other payables 12 977.8 1,110.2
================================================== ==== ============= ===============
Contract liabilities 12 382.4 396.5
================================================== ==== ============= ===============
Income tax payable 8.3 9.7
================================================== ==== ============= ===============
Other financial liabilities 8.8 13.9
================================================== ==== ============= ===============
Provisions for other liabilities 14 77.5 71.8
-------------------------------------------------- ---- ------------- ---------------
1,986.2 2,111.9
-------------------------------------------------- ---- ------------- ---------------
Total liabilities 3,961.1 4,398.8
-------------------------------------------------- ---- ------------- ---------------
Total equity and liabilities 4,349.7 4,608.0
-------------------------------------------------- ---- ------------- ---------------
*The Group has restated the statement of financial position at
31 March 2021. Details of the restatements are contained in note
4.
Condensed consolidated cash flow statement (unaudited)
Six months
Six months ended
ended 30 September
30 September 2020 (restated
2021 *)
Note GBPm GBPm
------------------------------------------------------ ---- ------------- ---------------
Cash flows from operating activities
====================================================== ==== ============= ===============
Profit/(loss) for the period 54.2 (832.3)
====================================================== ==== ============= ===============
Share of results of joint ventures and associates (9.6) (6.3)
====================================================== ==== ============= ===============
Income tax expense 8 4.6 20.7
====================================================== ==== ============= ===============
Finance income 7 (5.6) (8.1)
====================================================== ==== ============= ===============
Finance costs 7 38.0 40.7
====================================================== ==== ============= ===============
Depreciation and impairment of property, plant
and equipment 31.4 51.4
====================================================== ==== ============= ===============
Depreciation and impairment of right of use assets 62.4 65.9
====================================================== ==== ============= ===============
Amortisation and impairment of intangible assets 18.3 32.8
====================================================== ==== ============= ===============
Goodwill impairment - 760.5
====================================================== ==== ============= ===============
Equity share based payments 2.0 1.8
====================================================== ==== ============= ===============
Impairment of joint venture loans - 4.4
====================================================== ==== ============= ===============
Net derivative fair value movement through profit
or loss 0.1 1.8
====================================================== ==== ============= ===============
Loss on disposal of subsidiaries, businesses and
joint ventures and associates 18 16.3 49.7
====================================================== ==== ============= ===============
Loss on disposal of property, plant and equipment 0.4 5.9
====================================================== ==== ============= ===============
Loss on disposal of intangible assets 0.5 -
------------------------------------------------------ ---- ------------- ---------------
Cash generated from operations before movement
in working capital and retirement benefit payments 213.0 188.9
------------------------------------------------------ ---- ------------- ---------------
(Increase)/decrease in inventories (8.9) 3.6
====================================================== ==== ============= ===============
Increase in receivables (11.7) (25.4)
====================================================== ==== ============= ===============
(Decrease)/increase in payables (110.7) 42.7
====================================================== ==== ============= ===============
Decrease in provisions (3.7) (11.6)
====================================================== ==== ============= ===============
Retirement benefit payments in excess of income
statement (88.5) (34.7)
====================================================== ==== ============= ===============
Cash generated from operations (10.5) 163.5
====================================================== ==== ============= ===============
Income tax paid (10.3) (30.0)
====================================================== ==== ============= ===============
Interest paid (23.9) (34.3)
====================================================== ==== ============= ===============
Interest received 4.4 5.5
====================================================== ==== ============= ===============
Net cash flows from operating activities (40.3) 104.7
------------------------------------------------------ ---- ------------- ---------------
Cash flows from investing activities
====================================================== ==== ============= ===============
Disposal of subsidiaries and joint ventures and
associates, net of cash disposed 18 8.0 84.6
====================================================== ==== ============= ===============
Dividends received from joint ventures and associates 24.7 15.0
====================================================== ==== ============= ===============
Proceeds on disposal of property, plant and equipment 10.3 8.6
====================================================== ==== ============= ===============
Purchases of property, plant and equipment (77.7) (51.8)
====================================================== ==== ============= ===============
Purchases of intangible assets (4.7) (11.8)
====================================================== ==== ============= ===============
Loans repaid by joint ventures and associates 0.6 4.6
====================================================== ==== ============= ===============
Net cash flows from investing activities (38.8) 49.2
------------------------------------------------------ ---- ------------- ---------------
Cash flows from financing activities
====================================================== ==== ============= ===============
Lease principal payments (69.6) (70.7)
====================================================== ==== ============= ===============
Cash outflow from non-hedging derivatives (5.4) -
====================================================== ==== ============= ===============
Bank loans repaid (15.3) (732.0)
====================================================== ==== ============= ===============
Loans raised and facilities drawn down 3.8 -
====================================================== ==== ============= ===============
Dividends paid to non-controlling interest - (0.3)
====================================================== ==== ============= ===============
Purchase of own shares - (2.2)
------------------------------------------------------ ---- ------------- ---------------
Net cash flows from financing activities (86.5) (805.2)
------------------------------------------------------ ---- ------------- ---------------
Net decrease in cash, cash equivalents and bank
overdrafts 16 (165.6) (651.3)
====================================================== ==== ============= ===============
Cash, cash equivalents and bank overdrafts at
beginning of period 530.9 1,348.7
====================================================== ==== ============= ===============
Effects of exchange rate fluctuations 1.2 1.9
------------------------------------------------------ ---- ------------- ---------------
Cash, cash equivalents and bank overdrafts at
end of period 16 366.5 699.3
------------------------------------------------------ ---- ------------- ---------------
* In the year ended 31 March 2021, the Group performed a
contract profitability and balance sheet review which identified
accounting errors and a change to one accounting policy. These also
impact the six months ended 30 September 2020. Details of the
restatements are contained in note 4.
Notes to the consolidated financial statements
1. Basis of preparation and significant accounting policies
These condensed consolidated half year financial statements have
been prepared in accordance with IAS 34, Interim Financial
Reporting and the Disclosures and Transparency Rules of the
Financial Services Authority, the Listing Rules and UK-endorsed
International Financial Reporting Standards (IFRS). They should be
read in conjunction with the Annual Report and financial statements
for the year ended 31 March 2021, which were prepared in accordance
with EU endorsed IFRS and the applicable legal requirements of the
Companies Act 2006. These condensed consolidated half-yearly
financial statements do not comprise statutory accounts within the
meaning of Section 435 of the Companies Act 2006. The annual report
and financial statements for the year ended 31 March 2021 were
reported upon by the Group's auditor and delivered to the registrar
of companies. The report of the auditor on the annual report and
financial statements for the year ended 31 March 2021 was
unqualified, did not include a reference to any matters to which
the auditor drew attention by way of emphasis without qualifying
their report and did not contain statements under Section 498 (2)
or (3) of the Companies Act 2006. The accounting policies used and
presentation of these condensed consolidated half year financial
statements are consistent with the accounting policies applied by
the Group in its consolidated annual report and financial
statements as at, and for the year ended, 31 March 2021, except as
noted below, and comply with amendments to IFRS.
The half year report for the six months ended 30 September 2021
was approved by the Directors on 7 December 2021.
Significant accounting policies
New and amended standards adopted by the Group
There are no new standards, amendments or interpretations that
are not yet effective that are expected to have a material impact
on the Group's operations.
The Group has amended one accounting policy in response to an
IFRIC agenda decision released in April 2021 regarding
software-as-a-service arrangements. Further detail is included in
note 4.
Basis of preparation
The Directors consider it appropriate to adopt the going concern
basis of accounting in preparing the interim financial
information.
In assessing the appropriateness of the going concern basis of
accounting, the Directors have considered whether the Group has
adequate resources to continue in operational existence for at
least 12 months from the date of signing. The Directors reviewed
the resources available to the Group in the form of cash and
committed facilities. As of 30 September 2021, the Group's
committed facilities and bonds totalling GBP2.4 billion were the
GBP300 million revolving credit facility (RCF), the GBP775 million
five year multi-currency RCF, and the three tranches of notes
(EUR550 million 1.75% notes, GBP300m million 1.875% notes and
EUR550 million 1.375% notes) issued under the Group's Eurobond
programme.
The RCFs are the only facilities with covenants attached. The
key covenant ratios are (i) net debt to EBITDA (gearing ratio) (ii)
and EBITDA to net interest (interest cover). These are measured
twice per year, on 30 September and 31 March. The lending banks
have agreed to raise the covenant limit for the gearing ratio from
3.5x to 4.5x for the measurement periods ending 30 September 2021
and 31 March 2022. For all subsequent periods, the gearing ratio
covenant returns to 3.5x. To assess the level of headroom within
the available facilities, a reverse stress test was performed to
see what level of performance deterioration against the base case
budget (in both EBITDA and net debt) was required to challenge
covenant levels. Of the remaining measurement points within the
three year period approved by the Board, the lowest required
reduction in forecast EBITDA to hit the covenant level was 58% and
the lowest net debt increase was 68%. Given the mitigating actions
that are available and within management's control, such movements
are not considered plausible. There have been no breaches of debt
covenants during the reporting period.
The Directors have also considered the Group's forecasts when
assessing going concern, having considered the 18 month period from
the date of signing the Group's condensed consolidated financial
statements for the six months ended 30 September 2021. These are
prepared using a bottom up approach, aggregating the budgets for
the individual business units into Sector budgets. The Sector
budgets and the consolidated Group budget is then reviewed by the
Board and used to monitor business performance. The impacts of the
prior year contract profitability and balance sheet review ('CPBS')
and the restructuring now underway as a result of the change in
operating model have been incorporated into the forecasts, as has
the future expected impact of COVID-19 on the Group.
The Directors have performed sensitivity analyses on the latest
Group forecast for the duration of the assessment period. These
sensitivities include a reduction in bid pipeline closure (business
winning), a reduction in the assumed restructuring savings, a
deterioration in large programme performance across the Group, a
deterioration in profitability arising from cost base inflation, 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. These sensitivities did not present any
material uncertainties in relation to the Group's ability to
continue as a going concern.
As outlined in the annual report and financial statements for
the year ended 31 March 2021, we are aligning the Group's portfolio
by divesting certain businesses and this is expected to generate at
least GBP400 million. In the first half of this year we exchanged
contracts on three divestments, two of which are still subject to
completion at the reporting date, which, once completed, will
generate around GBP400 million. Our strategic work on portfolio
alignment continues and we expect a small number of further
disposals in the second half of the year. Proceeds generated will
either be used to strengthen the balance sheet further or will be
invested in the business for future growth. This divestment
programme has been included in the going concern assessment.
Having considered these matters, 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.
Key sources of estimation uncertainty
The application of the Group's accounting policies requires the
use of estimates. The key sources of estimation uncertainty at the
end of the reporting period that may have a significant risk of
causing a material adjustment to the carrying amount of assets and
liabilities within the next financial year are set out below:
-- Revenue and profit recognition: The Group's revenue recognition
policies are set out in note 1 of the annual report for the year
ended 31 March 2021. Revenue is recognised over time based on
costs incurred for the majority of the Group's contracts with
customers. These policies require management to make an estimate
of the cost to complete for long term contracts. Estimates of
cost to complete include assessment of contract contingencies
arising out of technical, commercial, operational and other risks.
The assessments of all significant contract outturns are subject
to review and challenge, and judgements and estimates are reviewed
regularly throughout the contract life based on latest available
information and adjustments are made where necessary. As contracts
near completion, often less judgement is required to determine
the expected outturn. As at 30 September 2021, the Group's contract
assets and contract liabilities amounted to GBP344.6 million and
GBP382.4 million, respectively. The Group has considered the nature
of the estimates involved in deriving these balances and concluded
that it is possible that outcomes within the next financial year
may be different from the Group's assumptions applied as at 30
September 2021 and could require a material adjustment to the
carrying amounts of these assets and liabilities in the next financial
year. In the annual report and financial statements for the year
ended 31 March 2021, note 1 provided a sensitivity indicator regarding
the impact of the costs to complete estimate on revenue and profit
recognition.
-- Defined benefit pension schemes obligation: The Group's defined
benefit pension schemes are assessed annually in accordance with
IAS 19 and the valuation of the defined benefit pension obligations
is sensitive to the inflation and discount rate actuarial assumptions
used. There is a range of possible values for the assumptions
and small changes to the assumptions may have a significant impact
on the valuation of the defined benefit pension obligation. In
addition to the inflation and discount rate estimates, a key estimation
relates to the expected availability of future accounting surpluses
under IFRIC 14. In the annual report and financial statements
for the year ended 31 March 2021, note 29 provided a sensitivity
analysis of the Group's defined benefit pension schemes.
-- Deferred tax assets: The Group has carried forward tax losses
in a number of jurisdictions, and therefore has to assess the
extent to which a deferred tax asset should be recognised in respect
of these. The recognition of deferred tax assets can be subjective,
and the Group is required to assesses the future availability
of carried forward losses and other tax attributes by reference
to the jurisdiction-specific rules around the carry forward and
utilisation, and whether it is probable that future taxable profits
will be available against which the attribute can be utilised.
In the annual report and financial statements for the year ended
31 March 2021, note 1 provided a sensitivity indicator regarding
the deferred tax asset balance. There have been no changes to
the Group's key assumptions in the six months ended 30 September
2021.
-- The carrying value of goodwill: Goodwill is tested annually for
impairment based on assumptions in relation to the cash flows
expected to be generated by cash generating units, together with
appropriate discounting of the cash flows. The assessment of the
carrying value of goodwill is included as a critical accounting
estimate given the significance of the remaining carrying value
of goodwill and the inherent level of estimation uncertainty required
to undertake impairment testing. In the annual report and financial
statements for the year ended 31 March 2021, note 13 provided
a sensitivity indicator regarding the impairment of goodwill.
-- Italy fine: As outlined in the annual report for the year ended
31 March 2021, in the year ended 31 March 2020 the Group was issued
a fine of EUR51 million by the Italian Competition Authority for
certain anti-trust violations. In In July 2021, the Court to the
Italian Council of State annulled the fine, though allowing the
Authority leave to re-calculate it, which is expected in the next
few months. Taking into account the guidance given by the Council
to the Authority on the recalculation, we further expect the Authority
to reduce the fine. At 30 September 2021 the Group has recorded
a provision of GBP20 million, being management's best estimate
of the Group's obligation based on an interpretation of the Council's
guidance. We have not received any indication from the Authority
as to how it will choose to interpret the Council's guidance.
Critical accounting judgements
Critical accounting judgements, apart from those involving
estimations, that are applied in the preparation of the
consolidated financial
statements are discussed below:
-- Revenue and profit recognition: The Group's contracts are often
amended for changes in customers' requirements. The Group's preferred
approach is to approve contract variations following scope and
pricing agreement by contract amendment. However the approval
of contract modifications is often required to be at pace and
other mechanisms can be used to achieve effective approval of
contract modifications, informed by established customer relationships
and local working arrangements. The Group is required to make
a judgement regarding the point in time at which a contract modification
is approved and should be accounted for, which impacts on the
point at which revenue and profit can be recognised.
-- Impact of COVID-19: During the six months ended 30 September 2021
the Group benefitted from some COVID-19 recovery. Management considered
the potential impact of COVID-19 on the Group's future performance
as part of the budgeting and business planning process and concluded
that COVID-19 is not expected to materially impact the Group in
the medium or long term. The Group's budget for FY22 includes
contingency to address remaining uncertainty.
-- Determining the Group's operating segments: Management exercises
judgement in determining the Group's operating segments. This
determination is generally straightforward and factual, however
in some cases judgement is required. There have been no changes
to the operating segments in the current period.
Identification of prior period errors
As outlined in the annual report and financial statements for
the year ended 31 March 2021, the Group performed a contract
profitability and balance sheet review which resulted in the
identification of a number of prior period errors. The results of
the Group have been restated, where practicable, by retrospectively
restating the Group's prior period results for the affected
periods. Where an item identified through the contract
profitability and balance sheet review has been found to impact the
results for the six months ended 30 September 2020 we have restated
the comparative financial information. An additional restatement
has been made relating to the valuation of the Group's longevity
swaps. See note 4 for further details.
Changes in accounting policies
Management have implemented one change in accounting policy
during the six months ended 30 September 2021 in response to an
IFRS Interpretation Committee agenda decision in April 2021. See
note 4 for further details.
2. Adjustments between statutory and underlying information
Definition of underlying measures and exceptional items
The Group provides alternative performance measures, including
underlying operating profit, to enable users to better understand
the performance and earnings trends of the Group. These measures
are considered to provide a consistent measure of business
performance from year to year. They are used by management to
assess operating performance and as a basis for forecasting and
decision-making, as well as the planning and allocation of capital
resources. They are also understood to be used by investors in
analysing business performance.
The Group's alternative performance measures are not defined by
IFRS and are therefore considered to be non-GAAP measures. The
measures may not be comparable to similar measures used by other
companies and they are not intended to be a substitute for, or
superior to, measures defined under IFRS. The Group's alternative
performance measures are consistent with the year ended 31 March
2021.
Underlying operating profit
Underlying operating profit excludes certain Specific Adjusting
Items that distort the reporting of underlying business performance
measures if they are not adjusted for. Underlying operating profit
eliminates potential differences in performance caused by purchase
price allocations on business combinations in prior periods
(amortisation of acquired intangibles), business acquisition,
merger and divestment related items and large, infrequent
restructuring programmes. Transactions such as these may happen
regularly and could be lumpy and may be profits or losses. Specific
Adjusting Items include:
-- Amortisation of acquired intangibles;
-- Business acquisition, merger and divestment related items (being
acquisitions and gains or losses on disposal of assets or businesses);
-- Gains, losses and costs directly arising from the Group's withdrawal
from a specific market or geography, including closure costs,
severance costs, the disposal of assets and termination of leases;
-- The costs of large restructuring programmes that significantly
exceed the minor restructuring which occurs in most years as part
of normal operations. Restructuring costs incurred as a result
of normal operations are included in operating costs and are not
excluded from underlying operating profit;
-- Profit or loss from amendment, curtailment, settlement or equalisation
of Group pension schemes; and
-- Exceptional items that are significant, non-recurring and outside
of the normal operating practice. These items are described as
exceptional in order to appropriately represent the Group's underlying
business performance. Exceptional items are set out in the Exceptional
items section below.
Income statement including underlying results
Six months ended 30 Six months ended 30
September 2021 September 2020 (restated)
Specific Specific
Adjusting Adjusting
Underlying Items Statutory Underlying Items Statutory
GBPm GBPm GBPm GBPm GBPm GBPm
========== ========== ========= ========== ========== =========
Revenue 2,223.0 - 2,223.0 2,053.5 - 2,053.5
=============================== ========== ========== ========= ========== ========== =========
Operating profit/(loss) 115.3 (39.9) 75.4 84.5 (869.8) (785.3)
=============================== ========== ========== ========= ========== ========== =========
Other income 6.2 - 6.2 - - -
=============================== ========== ========== ========= ========== ========== =========
Share of results of joint
ventures and associates 9.6 - 9.6 6.3 - 6.3
=============================== ========== ========== ========= ========== ========== =========
Investment income 0.4 - 0.4 0.5 - 0.5
=============================== ========== ========== ========= ========== ========== =========
Net finance costs (32.8) - (32.8) (33.1) - (33.1)
=============================== ========== ========== ========= ========== ========== =========
Profit/(loss) before tax 98.7 (39.9) 58.8 58.2 (869.8) (811.6)
=============================== ========== ========== ========= ========== ========== =========
Income tax (expense)/benefit (19.6) 15.0 (4.6) (28.8) 8.1 (20.7)
=============================== ========== ========== ========= ========== ========== =========
Profit/(loss) after tax
for the year 79.1 (24.9) 54.2 29.4 (861.7) (832.3)
=============================== ========== ========== ========= ========== ========== =========
Earnings per share including underlying measures
Six months ended 30 Six months ended 30
September 2021 September 2020 (restated)
Adjusting Adjusting
Underlying items Statutory Underlying items Statutory
GBPm GBPm GBPm GBPm GBPm GBPm
========== ========= ========= ========== ========= =========
Profit/(loss) after tax for
the year 79.1 (24.9) 54.2 29.4 (861.7) (832.3)
========================================= ========== ========= ========= ========== ========= =========
Amount attributable to owners
of the parent 77.1 (24.9) 52.2 29.4 (861.7) (832.3)
========================================= ========== ========= ========= ========== ========= =========
Amount attributable to non-controlling
interests 2.0 - 2.0 - - -
========================================= ========== ========= ========= ========== ========= =========
Weighted average number of
shares (m) 505.0 505.0 505.1 505.1
========================================= ========== ========= ========= ========== ========= =========
Effect of dilutive securities
(m) 6.3 6.3 1.1 1.1
========================================= ========== ========= ========= ========== ========= =========
Diluted weighted average number
of shares (m) 511.3 511.3 506.2 506.2
========================================= ========== ========= ========= ========== ========= =========
Basic EPS 15.3p (5.0)p 10.3p 5.8p (170.6)p (164.8)p
========================================= ========== ========= ========= ========== ========= =========
Diluted EPS 15.1p (4.9)p 10.2p 5.8p (170.6)p (164.8)p
========================================= ========== ========= ========= ========== ========= =========
Details of Specific Adjusting Items
The impact of Specific Adjusting Items is set out below:
Six months Six months
ended ended
30 September 30 September
2021 2020 (restated)
GBPm GBPm
============================================================== ============= ================
Amortisation of acquired intangibles (10.6) (20.3)
=============================================================== ============= ================
Business acquisition, merger and divestment related items (21.1) (49.7)
=============================================================== ============= ================
Gains, losses and costs directly arising from withdrawal from
a specific market or geography - (7.1)
=============================================================== ============= ================
Profit or loss from amendment, curtailment, settlement or
equalisation of Group pension schemes - (7.5)
=============================================================== ============= ================
Restructuring (9.4) (11.0)
=============================================================== ============= ================
Exceptional items 1.2 (774.2)
=============================================================== ============= ================
(39.9) (869.8)
============================================================== ============= ================
Income tax benefit
============================================================== ============= ================
Amortisation of acquired intangibles 2.6 4.1
=============================================================== ============= ================
Gains, losses and costs directly arising from withdrawal from
a specific market or geography - 1.0
=============================================================== ============= ================
Profit or loss from amendment, curtailment, settlement or
equalisation of group pension schemes - 1.4
=============================================================== ============= ================
Restructuring 1.7 0.5
=============================================================== ============= ================
Tax on exceptional items (0.5) 1.1
=============================================================== ============= ================
Exceptional tax items - change in UK tax rate 11.2 -
=============================================================== ============= ================
15.0 8.1
============================================================== ============= ================
Explanation of Specific Adjusting Items
Amortisation of acquired intangibles
Underlying operating profit excludes the amortisation of
acquired intangibles. This item is excluded from underlying results
as it arises as a result of purchase price allocations on business
combinations, and is a non-cash item which does not change each
year dependent on the performance of the business. It is therefore
not considered to represent the underlying activity of the Group.
Intangible assets arising as a result of the purchase price
allocation on business combinations include customer lists,
technology-based assets, order book and trade names. Amortisation
of internally generated intangible assets is included within
underlying operating profit.
Amortisation of acquired intangibles for the six months ended 30
September 2020 has been restated following identification of prior
period errors through the CPBS, resulting in a reduction to
amortisation charged through cost of revenue of GBP7.7 million.
Further detail is included in note 4.
Business acquisition, merger and divestment related items
The total net loss relating to business acquisition, merger and
divestment related items was GBP21.1 million. Of this, GBP16.3
million relates to the disposal of the Group's Oil and Gas
business. Further detail is included in note 18. The remaining
GBP4.8 million relates to professional fees and other related costs
incurred in relation to the Group's divestment programme for
transactions which were not completed at 30 September 2021. Further
details on the Group's divestment programme are included in note
1.
Business acquisition, merger and divestment related items
(continued)
The prior period included a net loss of GBP49.7 million,
consisting of a GBP38.2 million loss on disposal of the Group's
share in the Holdfast joint venture and losses arising on disposal
of subsidiary undertakings of GBP0.6 million for Cavendish Nuclear
Manufacturing Limited. In addition a provision of GBP10.9 million
was made in relation of the disposal of Conbras Serrvicos Tecnicos
Supporte Ltda which completed in October 2020. Included in the
prior period is a restatement of GBP68.4 million in relation to
allocation of goodwill to the disposal of Holdfast and GBP6.9
million in relation to an increased provision for the loss on
disposal of Conbras Serrvicos Tecnicos Supporte Ltda. Further
detail is included in note 4.
Gains, losses and costs directly arising from the Group's
withdrawal from a specific market or geography
In the prior period the Group exited its Airport baggage
handling business, incurring costs of GBP3.1 million. Further costs
were incurred in relation to exits in the previous financial year
from the oil and gas business in Congo (GBP2.0 million), the
overseas Powerlines business (GBP0.7 million) and certain Rail
related contracts (GBP1.3 million).
Restructuring
The Group incurred GBP10.8 million of charges in relation to the
new operating model programme. Further detail is included in the
CEO Statement on page 4. This was offset by the release of
restructuring provision totalling GBP1.4 million.
In the prior period, the Group incurred a restructuring charge
of GBP11.0 million.
Profit or loss from amendment, curtailment, settlement or
equalisation of Group pension schemes.
In the prior period, the Group incurred a curtailment charge of
GBP7.5 million in relation to the closure of the Rosyth defined
benefit pension scheme to future accrual.
Exceptional items
In the prior period, business acquisition and divestment related
items and restructuring charges were included as exceptional items
(previously referred to as 'Exits and disposals'). These remain as
Specific Adjusting Items but are no longer included as exceptional
items in order to provide greater clarity and consistency to the
users of the financial statements.
Exceptional items are those items which are significant,
non-recurring and outside the normal operating practice of the
Group.
Six months Six months
ended ended
30 September 30 September
2021 2020 (restated)
GBPm GBPm
===================================================== ============= ================
Operating costs
===================================================== ============= ================
Impairment of goodwill - (760.5)
====================================================== ============= ================
Impairment of internally generated intangible assets - (4.9)
====================================================== ============= ================
Impairment of property, plant and equipment and
aircraft fleet rationalisation - (8.8)
====================================================== ============= ================
Onerous contracts 0.6 -
====================================================== ============= ================
Other 0.6 -
====================================================== ============= ================
Exceptional items - Group 1.2 (774.2)
====================================================== ============= ================
Tax on exceptional items (0.5) 1.1
====================================================== ============= ================
Exceptional items - net of tax 0.7 (773.1)
====================================================== ============= ================
Explanation of exceptional items
Impairment of goodwill
The Group reviewed the goodwill balance at 30 September 2020 for
indicators of impairment and identified that the Q2 forecast and
strategy plan presented to the Board showed a decline in
profitability from the forecast used to carry out the goodwill
impairment test at 31 March 2020. This did not present an
impairment indicator in the Marine and Nuclear operating segments
due to the headroom at 31 March 2020.
However, there was no headroom in the Aviation or Land operating
segment at 31 March 2020, and therefore the decline in
profitability for both operating segments present impairment
indicators. Management performed an impairment test as at 30
September 2020 for Aviation and Land and determined that a goodwill
impairment should have been recorded. Correction of this error
results in an impairment in Aviation and Land of GBP592.3 million
and GBP168.2 million, respectively. Further detail is included in
note 4.
Impairment of internally generated intangible assets
The prior period has been restated as a result of the impairment
of the Clarity software intangible asset. This was developed for
use on the Phoenix contract and another contract that was in the
bidding phase. The Group was advised that this bid was unsuccessful
and therefore the asset should have been impaired, resulting in a
charge of GBP4.9 million for the six months ended 30 September
2020. Further detail is included in note 4.
Impairment of property, plant and equipment and aircraft fleet
rationalisation
In the prior period, the fleet rationalisation programme in
Aviation resulted in an income statement charge of GBP7.4 million
within cost of revenue. Included in the prior period is a
restatement of GBP1.4 million relating to further impairments of
property, plant and equipment. Further detail is included in note
4.
3. Contract and balance sheet review
As outlined in the annual report and financial statements for
the year ended 31 March 2021, the Group performed a review of the
profitability of its contract portfolio and the carrying values of
assets and liabilities on the balance sheet.
The contract profitability and balance sheet review has impacted
on the results for the six months ended 30 September 2020,
consisting of:
-- Cumulative restatement at 1 April 2019 of GBP308.1 million (being
GBP45.3 million relating to a change in accounting policy and
correction of prior year errors of GBP262.8 million).
-- Cumulative restatement at 31 March 2020 of GBP230.7 million (being
GBP59.8 million relating to a change in accounting policy and
correction of prior year errors of GBP170.9 million).
-- Changes recorded within the six months ended 30 September 2020
of GBP885.2 million, being GBP6.3 million relating to a change
in accounting policy and GBP878.9 million relating to correction
of errors.
Of the adjustments recorded in the income statement for the six
months ended 30 September 2020 (see table below), GBP26.8 million
were charged within underlying operating profit.
Prior year restatements
The Group restated the results for the six months ended 30
September 2020 for changes in accounting policy and errors.
Accounting errors included both the rollforward of those identified
as at 31 March 2020 and also those which were identified in the
previously published results for the six months ended 30 September
2020. Further details are set out in note 4.
Summarised cumulative adjustments to retained earnings are as
set out below:
GBPm
=========
Restatement as at 1 April 2019 (308.1)
============================================================== =========
Adjustments recognised in the year ended 31 March 2020 77.4
============================================================== =========
Total restatement at 31 March 2020 (230.7)
============================================================== =========
Adjustments recognised in the six months ended 30 September
2020 (885.2)
============================================================== =========
Total restatement at 30 September 2020 (1,115.9)
============================================================== =========
Adjustments recognised in the six months ended 31 March 2021 (928.5)
============================================================== =========
Total adjustments recognised at 31 March 2021 (2,044.4)
============================================================== =========
Impact of the contract profitability and balance sheet review on
the six months ended 30 September 2020
The impact of items identified through the contract
profitability and balance sheet on the income statement for the six
months ended 30 September 2020 are summarised as follows:
Six months ended 30
September 2020
GBPm
Specific
Adjusting
Underlying Items Statutory
GBPm GBPm GBPm
========== ========== =========
Revenue impacts (56.1) - (56.1)
====================================== ========== ========== =========
Operating profit/(loss) impacts
================================= ========== ========== =========
Impairment/disposal of goodwill
and acquired intangible assets 0.4 (821.1) (820.7)
====================================== ========== ========== =========
Impairment of non-current assets (4.4) (4.9) (9.3)
====================================== ========== ========== =========
Impairment of property, plant
and equipment and right of use
assets (1.5) (1.4) (2.9)
====================================== ========== ========== =========
Impairment/write down of current
assets (3.7) - (3.7)
====================================== ========== ========== =========
Introduction of/increase to
liabilities (17.6) (7.5) (25.1)
====================================== ========== ========== =========
Operating loss (26.8) (834.9) (861.7)
====================================== ========== ========== =========
Share of income from JVs and
associates (5.3) - (5.3)
====================================== ========== ========== =========
Loss before tax impacts (32.1) (834.9) (867.0)
====================================== ========== ========== =========
Tax adjustments (28.8) 8.1 (20.7)
====================================== ========== ========== =========
Tax effect 2.5 - 2.5
====================================== ========== ========== =========
Loss after tax for the period
impacts (58.4) (826.8) (885.2)
====================================== ========== ========== =========
The summary of the adjustments in the table above is set out in
note 4.
4. Prior year restatements
In addition to the items identified through the contract
profitability and balance sheet review (note 3) management has
identified an error in the methodology used to value the Group's
longevity swaps. Further detail is included in the 'vii. Longevity
swaps' section below.
The Group also restated the results for the six months ended 30
September 2020 due to a change in accounting policy for Software as
a Service arrangements. This is required due to an IFRS
Interpretations Committee (IFRIC) agenda decision in April 2021.
Further detail is included in the 'viii. Other errors -
Administration and distribution costs' section below.
The tables and narrative below are set out in the same format as
in the annual report and financial statements for the year ended 31
March 2021.
Impact on the income statement for the six months ended 30
September 2020
Change
in
accounting
policy Correction of errors
================= =========== =========== =======================================================================
Six months
ended
30 (i) Power Six months
September By the (ii) ended
2020 Hour (PBH) Aircraft (iii) (iv) (v) 30 September
(previously maintenance related Mobilisation Credit Deferred (vi) (viii) 2020
published) agreements errors costs notes tax Goodwill Other (restated)
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Group income
statement
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Revenue 2,109.6 - - - 1.2 - - (57.3) 2,053.5
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Cost of revenue (1,877.8) (5.8) (1.0) 1.3 1.7 - - 38.9 (1,842.7)
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Administration
and
distribution
expenses (181.2) (0.5) - - - - - (4.2) (185.9)
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Goodwill
impairment - - - - - - (760.5) - (760.5)
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Profit/(loss)
from
divestments 25.6 - - - - - (68.4) (6.9) (49.7)
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Share of results
of joint
ventures
and associates 11.6 - - - - - - (5.3) 6.3
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Finance income 8.1 - - - - - - - 8.1
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Finance costs (40.6) - - - (0.1) - - - (40.7)
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Profit/(loss)
before
tax 55.3 (6.3) (1.0) 1.3 2.8 - (828.9) (34.8) (811.6)
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Income tax
expense (2.5) - - - - (18.2) - - (20.7)
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Loss for the
period 52.8 (6.3) (1.0) 1.3 2.8 (18.2) (828.9) (34.8) (832.3)
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Impact on basic
earnings per
share
(pence) 10.5 (1.2)p (0.2)p 0.3p 0.6p (3.6)p (164.0)p (7.2)p (164.8)p
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
Impact on diluted
earnings per
share
(pence) 10.4 (1.2)p (0.2)p 0.3p 0.6p (3.6)p (164.0)p (7.1)p (164.8)p
================= =========== =========== ======== ============ ======= ======== ======== ====== ============
The total impact of prior year errors and change in accounting
policy on the income statement for the six months ended 30
September 2020 is GBP885.2 million.
1 April 2020 - Group statement of financial position
(extract)
1 April
2020 (previously (vii) Longevity 1 April 2020
published) swaps (viii) Other (restated)
============================== ================= =============== ============ ============
Assets
Non-current assets
Other intangible assets 334.7 - (1.8) 332.9
============================== ================= =============== ============ ============
Retirement benefit surpluses 325.3 (26.9) - 298.4
============================== ================= =============== ============ ============
Deferred tax asset 60.5 8.9 - 69.4
============================== ================= =============== ============ ============
Total non-current assets
* 4,703.1 (18.0) (1.8) 4,683.3
============================== ================= =============== ============ ============
Liabilities
Non-current liabilities
Retirement benefit deficits (180.1) (20.1) - (200.2)
============================== ================= =============== ============ ============
Total non-current liabilities
* (2,882.7) (20.1) - (2,902.8)
============================== ================= =============== ============ ============
Equity
Retained earnings 480.1 (38.1) (1.8) 440.2
============================== ================= =============== ============ ============
Total equity * 2,314.8 (38.1) (1.8) 2,274.9
============================== ================= =============== ============ ============
* The table above includes only those financial statement line
items which have been restated. The total non-current assets,
non-current liabilities, and equity do not therefore represent the
sum of the line items presented above.
31 March 2021 - Group statement of financial position
(extract)
31 March
2021 (previously (vii) Longevity 1 April 2020
published) swaps (viii) Other (restated)
============================== ================= =============== ============ ============
Assets
Non-current assets
Other intangible assets 202.0 - (2.0) 200.0
============================== ================= =============== ============ ============
Retirement benefit surpluses 40.8 (26.2) - 14.6
============================== ================= =============== ============ ============
Deferred tax asset 141.3 7.6 - 148.9
============================== ================= =============== ============ ============
Total non-current assets
* 2,737.1 (18.6) (2.0) 2,716.5
============================== ================= =============== ============ ============
Liabilities
Non-current liabilities
Retirement benefit deficits (333.9) (13.6) - (347.5)
============================== ================= =============== ============ ============
Total non-current liabilities
* (2,273.3) (13.6) - (2,286.9)
============================== ================= =============== ============ ============
Equity
Retained earnings (1,629.1) (32.2) (2.0) (1,663.3)
============================== ================= =============== ============ ============
Total equity * 243.4 (32.2) (2.0) 209.2
============================== ================= =============== ============ ============
* The table above includes only those financial statement line
items which have been restated. The total non-current assets,
non-current liabilities, and equity do not therefore represent the
sum of the line items presented above.
Six months ended 30 September 2020 - Group statement of other
comprehensive income (extract)
The table below shows the impact of the adjustment to the
Group's longevity swaps on the statement of other comprehensive
income. Further detail is included in the 'vii. Longevity swaps'
section below.
Six months Six months
ended 30 ended 30
September (vii) Longevity September
2020 swaps (viii) Other 2020 (restated)
=================================== ========== =============== ============ ================
Other comprehensive income/(loss)
Remeasurement of retirement
benefit obligations (286.3) 17.0 - (269.3)
=================================== ========== =============== ============ ================
Tax, including rate change
impact, on remeasurement
of retirement benefit obligations 54.3 (3.2) - 51.1
=================================== ========== =============== ============ ================
Change in presentation
In the year ended 31 March 2021 the Group changed the
presentation of the Group income statement to present its share of
results of joint ventures and associates below operating profit.
This change was made to better reflect the way in which management
reviews the core underlying performance of the business. The total
share of results of joint ventures and associates is GBP9.6 million
profit for the six months ended 30 September 2021 (30 September
2020 (restated): GBP6.3 million).
Definitions
Aircraft are considered in two key components for accounting
purposes. 'Rotables' are major life-limited parts, such as engines,
gearboxes and rotor blades, where value is consumed on a flying
hour basis. The 'airframe' represents the remainder of the
aircraft, and includes the body and other structural, mechanical
and electrical installations necessary for flight. These
definitions exclude 'equipment' which is separable from the
aircraft and mission specific, such as medical and firefighting
installations.
Change in accounting policy
i. Power By the Hour (PBH) agreements
The Group is party to a number of 'Power By the Hour' ('PBH')
maintenance arrangements, under which the provider supplies rotable
and airframe parts as required in exchange for a fixed price per
flying hour. The provider therefore assumes the risk associated
with the failure rate of parts.
Certain of these payments have previously been capitalised
within property, plant and equipment, while the rotable parts which
are subject to the arrangement have been depreciated as a separate
component of the aircraft. Depreciation of the PBH payments has
commenced as rotable and airframe parts are provided under the
arrangement.
Following a review of the terms of these arrangements, a
comparison to policies of peer companies (where publicly available)
and considering the requirements and application of IAS 16
'Property, Plant and Equipment' ('IAS 16'), it was determined that
a more reliable and relevant accounting policy would be to
recognise PBH payments in the income statement as incurred, but not
to separately depreciate the rotable parts covered by the
arrangement. This is more relevant as it reflects the substance of
the arrangements, which is to maintain the parts covered at their
full potential. It is more reliable in recording an expense in the
income statement as there is no depreciation charge, which requires
the use of an accounting estimate. The policy is also more prudent
as (a) the cost of rotable parts does not change over time with
inflation and (b) the elements of the PBH cost which reimburse the
risk assumed by the PBH provider and which cover ancillary benefits
such as access to the supply chain of the provider are directly
expensed rather than initially capitalised.
This change in policy is consistent with those disclosed in the
annual report and financial statements for the year ended 31 March
2021 and increases cost of revenue by GBP5.8 million and
administration and distribution costs by GBP0.5 million for the six
months ended 30 September 2020.
ii. Aircraft related errors
Maintenance of leased aircraft
Leased aircraft typically require to be returned to lessors with
rotables in a similar condition to that which existed at the
commencement of the lease. Betterment and detriment clauses set out
the balancing payments required if these conditions are not
met.
The cost of repair and replacement parts which extends the life
of rotables has typically been capitalised as a leasehold
improvement and depreciated over the term of the lease, resulting
in an increasing cost of depreciation towards the end of the
lease.
Following a review of lease return conditions and considering
the requirements and application of IAS 16, it was determined that
the Group should record a leasehold improvement asset or
dilapidation provision which represents the difference between the
condition of the rotables at any given point in time and the return
condition. This reflects the amount of leasehold improvement which
will generate future benefits and the value of the liability to
restore parts to the return condition, and results in a more
consistent profile of cost recognition over the duration of the
lease.
The correction of this error increases cost of revenue by GBP0.1
million for the six months ended 30 September 2020.
Rotables - maintenance of owned aircraft
Rotables are depreciated as a separate component of the aircraft
on the basis of flying hours, as this most appropriately reflects
the consumption of economic benefits.
Following a review of balances capitalised as rotables, it was
identified that in certain cases the carrying value of parts
replaced prior to completion of the expected number of flying hours
had not been written off, depreciation rates had not been regularly
updated to reflect the latest actual cost of replacement parts and
the remaining number of flying hours used for accounting purposes
had not been regularly checked for accuracy against contemporaneous
technical records. It was also identified that certain parts
capitalised related to the airframe rather than rotables and should
have been expensed as these represented a replacement rather than
enhancement to the aircraft. Detailed exercises were undertaken to
assess the remaining life of rotables against technical records,
determine the actual cost of parts capitalised and review balances
for airframe parts which should not have been capitalised under IAS
16.
The correction of these errors increases cost of revenue by
GBP0.8 million for the six months ended 30 September 2020.
Rotables - maintenance of customer aircraft
The Group operates a number of aircraft which are provided by
customers. The cost of repair and replacement parts which extends
the life of rotables was capitalised within property, plant and
equipment and depreciated over the contract term in a manner
similar to that applied for leased aircraft.
Following a review of the terms of these customer contracts, it
has been determined that these costs should not have been
capitalised as they represent the enhancement of a customer asset
rather than an asset of the Group and therefore do not meet the
recognition requirements of IAS 16.
The correction of this error increases cost of revenue by GBP0.1
million for the six months ended 30 September 2020.
iii. Mobilisation costs
The Group incurs various costs in mobilising contracts and
certain of these costs have been capitalised as contract fulfilment
assets. Following a review of all such assets, it was identified
that certain costs did not meet the requirements of IFRS 15 to be
capitalised as contract fulfilment assets as there was insufficient
evidence that the costs generated or enhanced resources which the
Group would use in performing the contract. The key areas related
to lease costs, maintenance costs and personnel costs incurred
prior to contract commencement or the achievement of full operating
capability. A significant proportion of these costs was incurred in
mobilising the Group's Air Ambulance contract in Norway, which
commenced in July 2019.
The correction of these errors decreases cost of revenue by
GBP1.3 million for the six months ended 30 September 2020.
iv. Credit notes
The Group receives certain credit notes from aircraft
manufacturers at the point of placing orders for aircraft,
exercisable against the purchase of future parts and services.
These credit notes have previously been recognised in the income
statement on receipt of the credit notes and recorded within trade
and other receivables until used to purchase parts or services,
which is typically within a short period.
Following a review of the substance of these credit notes, it
was determined that these represent a discount on the purchase
price of the aircraft. In the case of aircraft which are owned by
the Group, credit notes should therefore be recognised as a
reduction in the cost of aircraft acquired. The majority of
aircraft ordered by the Group in recent years have been sold and
leased back prior to delivery, typically at the gross purchase
price excluding the credit note, resulting in a gain on disposal of
the aircraft being recognised in the income statement. The
accounting for these sale and leasebacks has been corrected,
reversing the gain recognised on disposal and recalculating reduced
right of use assets arising from the leasebacks. The reduced right
of use assets represent the discounted purchase price of the
aircraft due to utilisation of the credit notes.
In the case of aircraft acquired for customers under an aircraft
supply contract, the credit notes should be recognised as a
reduction in operating costs.
The correction of these errors increases revenue by GBP1.2
million, decreases cost of revenue costs by GBP1.7 million and
increases finance costs by GBP0.1 million for the six months ended
30 September 2020.
v. Deferred tax
At 31 March 2020 a net deferred tax asset of GBP71.7 million was
recognised in the Aviation operating segment in relation to the
Group's Spanish entities. The recognition of this asset was
supported by forecasts which showed the Spanish tax group becoming
profitable in FY23 with significant further growth beyond this
date. However, this analysis did not appropriately take into
account restrictions on the utilisation of various tax attributes
within Spanish tax law which, when corrected, extend the duration
over which the deferred tax asset is expected to be fully utilised
to over 20 years. Although the relevant tax attributes can be
carried forward indefinitely, it was determined that appropriately
risk-weighted profit forecasts (see note 1 "Critical accounting
estimates") supported only a portion of the deferred tax asset,
reducing the deferred tax asset by GBP25.5 million at 1 April 2019,
GBP37.9 million at 31 March 2020 and GBP56.1 million at 30
September 2020. This is partially offset by the tax benefit of
other CPBS adjustments which are recognised to the extent it is
appropriate to do so in the relevant jurisdiction.
The correction of this error (after the partial offset by the
tax benefit of other adjustments) results in a reduction in
deferred tax assets of GBP8.8 million at 1 April 2019, GBP16.3
million at 31 March 2020 and GBP34.5 million at 30 September 2020.
This increased the tax charge for the six months ended 30 September
2020 by GBP18.2 million.
vi. Goodwill allocation
Goodwill impairment
Following the goodwill impairment identified through the
contract profitability and balance sheet review, the Group reviewed
the goodwill balance at 30 September 2020 for indicators of
impairment and identified that the approved Q2 forecast and
strategy plan presented to the Board showed a decline in
profitability from the forecast used to carry out the goodwill
impairment test at 31 March 2020.
In the Marine and Nuclear operating segments this did not
present an impairment indicator, given the significant headroom in
each sector at 31 March 2020. However, following the restatement
identified through the contract and balance sheet review, there was
no headroom in Aviation and Land operating segments at 31 March
2020, and therefore the decline in profitability for both operating
segments presented impairment indicators.
Management therefore performed an impairment test for the
Aviation and Land operating segments at 30 September 2020 and
determined that a goodwill impairment of GBP592.3 million and
GBP168.2 million, respectively, should be charged to the income
statement for the six months ended 30 September 2020.
Goodwill allocation
In June 2020 the Group completed the sale of its 74%
shareholding in Holdfast Training Services Limited for a cash
consideration of GBP85.0 million, which resulted in a loss on
disposal of GBP38.2 million. This loss arose following goodwill
allocation of GBP68.4 million to Holdfast Training Services Limited
upon disposal, which was allocated using the relative value method.
As the sale occurred in June 2020, the allocated goodwill should
have been included in the loss on disposal in the six months ended
30 September 2020. Correction of this error increases the loss on
disposal by GBP68.4 million.
vii. Longevity swaps
The longevity swaps related to the three main group pension
schemes were previously valued in line with the collateral posted
by each scheme with their intermediary. This was deemed a proxy for
fair value in line with IAS 19. Having considered valuations of a
notional replacement swap, or exit, we now believe the previous
approach did not accurately reflect fair value and so we have
changed our valuation approach accordingly. The prior year has been
restated for the change in approach, reducing retirement benefit
surpluses by GBP26.9 million, increasing deferred tax asset by
GBP8.9 million and increasing retirement benefit deficits by
GBP20.1 million as at 1 April 2020. In the year ended 31 March 2021
there was a GBP5.9 million gain through the statement of other
comprehensive income resulting in a cumulative reduction to
retirement benefit surpluses of GBP26.2 million, an increase to
deferred tax asset of GBP7.6 million and an increase to retirement
benefit deficits by GBP13.6 million as at 31 March 2021. There is
no impact on the Group Income Statement. This change does not
affect the technical provisions assessed for those schemes during
triennial valuations, their funding requirements, or the deficit
recovery cash contributions agreed with each scheme.
viii. Other errors
A number of other errors have been identified, as set out
below.
Revenue
The contract profitability and balance sheet review identified
that variable revenue recognised in relation to a contract
modification did not meet the 'highly probable not to significantly
reverse' test set out in IFRS 15 and should therefore be reversed.
This resulted in a reduction to revenue of GBP9.4 million for the
six months ended 30 September 2020.
An error was identified relating to a pain/gain share agreement,
in which a reduction in revenue was incorrectly recorded as an
expense. The correction of this error results in a reduction to
revenue of GBP1.3 million and a reduction in cost of revenue of
GBP1.3 million for the six months ended 30 September 2020.
Following the sale of the Group's investment in Holdfast in June
2020, the Group reassessed the performance obligations of
associated contracts. This identified a contract modification that
impacted on the allocation of the transaction price as well as the
timing of revenue recognition. The effective date of the change is
5 June 2020 and therefore revenue requires restatement. Correction
of this error reduces revenue by GBP1.2 million for the six months
ended 30 September 2020.
Due to early stage of completion of one of the Groups'
contracts, and the complex nature of the contract, management made
a decision during the contract profitability and balance sheet
review to recognise revenue in line with costs incurred in
accordance with IFRS 15 paragraph 45. Application of this approach
to the six months ended 30 September 2020 reduced revenue by GBP3.8
million.
It was identified that an incorrect margin had been applied to
the costs incurred by the Group for a particular contract. The
correction of this error decreases revenue by GBP0.2 million for
the six months ended 30 September 2020.
An overstatement of revenue and cost of revenue was identified
in relation to pass-through revenue on the Phoenix contract. The
Group had previously concluded that it acted as principal in the
arrangement. It was determined that a contract amendment in
February 2020 represented a contract modification under IFRS 15,
following which the Group has been acting as an agent. The
correction of this error results in a decrease in revenue and cost
of revenue of GBP36.5 million for the six months ended 30 September
2020. There was no impact to reported profit as a result of this
adjustment.
Management has also identified an error in the accrued income
balance. Correction of this error results in a decrease in revenue
of GBP1.1 million for the six months ended 30 September 2020.
It was identified that certain receivables were not recoverable
at 30 September 2020. The correction of this error results in a
decrease to revenue of GBP2.8 million for the six months ended 30
September 2020.
Additionally, it was identified that at 30 September 2020 the
Group was not entitled to a performance incentive on a particular
contract. Correction of this error results in a decrease to revenue
of GBP1.0 million for the six months ended 30 September 2020.
Cost of revenue
Additionally, as noted in the Revenue section, an error was
identified in relation to a painshare arrangement which resulted in
a decrease to cost of revenue of GBP1.3 million. A further error
was identified relating to a principal versus agency assessment on
the Phoenix contract which resulted in a decrease to cost of
revenue of GBP36.5 million.
Through the goodwill impairment analysis for the oil and gas
operating segment it was identified that the carrying value of the
operating segment was less than the recoverable value. Management
reviewed the acquired intangible asset included in this operating
segment and determined that the customer relationships included in
the intangible asset were no longer part of the customer base, and
were not part of the customer base at 1 April 2019. The useful
expected life of the acquired intangible asset has therefore been
revised and the intangible asset was disposed at 1 April 2019. The
amortisation of the intangible asset for the six months ended 30
September 2020 has been reversed, resulting in a reduction in cost
of revenue of GBP7.7 million.
The Group developed the Clarity software intangible asset for
use on the Phoenix contract and another proposed contract that was
currently in the bidding stage. The Group was advised that the bid
for this proposed contract was unsuccessful on 3 April 2020. The
recoverable value of the intangible asset was therefore less than
the book value, and the asset should have been impaired at 30
September 2020. Correction of this error results in an increase to
cost of revenue of GBP4.9 million for the six months ended 30
September 2020.
Capitalised maintenance costs were identified in relation to
aircraft which had been sold or returned to lessors, or where the
underlying customer contract had been completed. The correction of
this error decreases cost of revenue by GBP0.5 million for the six
months ended 30 September 2020.
A number of errors were identified where an inappropriate useful
life was assigned to aircraft and capitalised maintenance, due to
incorrect application of the Group's depreciation policy. The
correction of this error increases cost of revenue by GBP0.8
million for the six months ended 30 September 2020.
Additionally, it has been identified that certain elements
capitalised under the PBH arrangements were not suitable for
capitalisation under the previous accounting policy or the updated
accounting policy. The correction of this error reduces cost of
revenue by GBP0.6 million for the six months ended 30 September
2020.
On acquisition of Lex Transfleet Limited in 2007, a GBP2.0
million fair value adjustment was made to the land value of the
Camberwell and Park Royal sites, with the fair value adjustment
split notionally between the two sites. The Camberwell site was
subsequently sold in the year ended 31 March 2019 and therefore
GBP1.0 million of the adjustment should have been considered as
part of the disposal. A GBP1.0 million write down was recorded in
the year ended 31 March 21. Correction of this error increases cost
of revenue for the six months ended 30 September 2020 by GBP1.0
million.
Two instances were identified where reductions in lease costs in
future periods were recognised in the income statement when agreed,
with an asset recognised within trade and other receivables and
subsequently amortised, rather than in the future periods to which
the reductions related. The correction of these errors decreases
cost of revenue by GBP0.1 million and administration and
distribution costs by GBP1.4 million for the six months ended 30
September 2020.
Additionally, management identified capitalised bid costs that
do not meet the criteria for capitalisation under IFRS 15.
Correction of this error results in an increase in cost of revenue
of GBP0.1 million for the six months ended 30 September 2020.
Management have also identified historic adjustments that
incorrectly reduced creditor balances. Correction of this error
results in an increase in cost of revenue of GBP1.0 million for the
six months ended 30 September 2020.
Administration and distribution costs
Balances were identified relating to IT assets capitalised under
IAS 38 - Intangible Assets which are no longer used by the
business, and should therefore have been written off in previous
years. The correction of this error reduces administration and
distribution costs by GBP0.4 million for the six months ended 30
September 2020.
Following a review of the Group's foreign currency hedging
arrangements in relation to aircraft leases in Norway, it was
identified that insufficient contemporaneous documentation was
recorded in order to designate part of the arrangement as a hedge
for accounting purposes. The correction of this error results in an
increase in administration and distribution costs of GBP1.5 million
for the six months ended 30 September 2020, and an increase in
other comprehensive income of GBP8.4 million for the six months
ended 30 September 2020.
The Group has an equity accounted investment in ABC
Electrification Limited. It was identified that certain loan
balances with this joint venture are not recoverable. Correction of
this error increases administration and distribution costs by
GBP4.6 million.
As noted in the cost of revenue section, two instances were
identified where reductions in lease costs in future periods were
recognised in the income statement when agreed. The correction of
these errors decreases administration and distribution costs by
GBP1.4 million for the six months ended 30 September 2020.
The IFRS Interpretations Committee (IFRIC) published an agenda
decision in April 2021 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. As a
result of this decision the Group has revised its accounting policy
and will not capitalise costs associated with Software-as-a-service
arrangements where it does not control the underlying software.
Application of this new policy accounting has reduced the software
intangible asset by GBP1.8 million. As this policy is
retrospectively applied we are required to reverse amortisation
previously charged on the software intangible asset. Reversal of
this amortisation reduces administration and distribution costs by
GBP0.1 million. We note that this did not arise through the CPBS,
but through the IFRIC agenda decision in April 2021.
Loss on divestments
In October 2020 the Group completed the sale of Conbras for a
consideration of GBP9.7 million, which resulted in a loss on
disposal of GBP10.9 million. At 30 September 2020 the Group had
provided for a loss on disposal of GBP4.0 million. Correction of
this error results in an increased provision for loss on disposal
of GBP6.9 million.
Share of results of joint ventures and associates
The Group has an equity accounted investment in AirTanker
Holdings Limited. It was identified that this investment balance
became a deficit during the year ended 31 March 2019 as a result of
movements in the valuation of derivatives held by the company, and
that the Group's investment in joint ventures and associates
balance at 1 April 2019, 31 March 2020 and 30 September 2020
included this negative balance. However, as the Group has not taken
on any commitment to fund AirTanker Holdings Limited's liabilities,
in accordance with IAS 28 'Investments in Associates and Joint
Ventures' the Group should have ceased decreasing the related
investment balance once it became negative. The correction of this
error results in a decrease in other comprehensive income of GBP4.8
million for the six months ended 30 September 2020.
The Group has an equity accounted investment in ABC
Electrification Limited. It was identified that the investment in
the joint venture was not supportable at 30 September 2020 based on
future expected cash inflows. Correction of this error reduces
Babcock's share of results for this joint venture by GBP3.1
million.
The Group also identified an instance where profit was
incorrectly recorded in the ALC (Superholdco) Limited joint venture
for the six months ended 30 September 2020. Correction of this
error reduces Babcock's share of results for this joint venture by
GBP2.2 million.
Taxation
The cumulative tax benefit of these other errors decreases the
tax charge for the six months ended 30 September 2020 by GBP2.5
million. However this is offset by the movement on income tax
recoverable to result in a net impact on the tax charge of
GBPnil.
There is an increase in the tax charge for the six months ended
30 September 2020 due to movement on deferred tax assets, see vii
"deferred tax".
Impact of prior period restatements on the cash flow
statement
The prior year restatements described above have had the
following impact on the cash flow statement for the six months
ended 30 September 2020:
30 September Impact
2020 of prior 30 September
(previously year 2020
published) errors (restated)
GBPm GBPm GBPm
================================================== ============ ========= ============
Cash flows from operating activities
================================================== ============ ========= ============
Profit/(loss) for the year 52.8 (885.1) (832.3)
==================================================== ============ ========= ============
Share of results of joint ventures and associates (11.6) 5.3 (6.3)
==================================================== ============ ========= ============
Income tax (credit)/expense 2.5 18.2 20.7
==================================================== ============ ========= ============
Finance costs 40.6 0.1 40.7
==================================================== ============ ========= ============
Depreciation and impairment of right of
use assets 69.0 (3.1) 65.9
==================================================== ============ ========= ============
Amortisation and impairment of intangible
assets 35.9 (3.1) 32.8
==================================================== ============ ========= ============
Goodwill impairment - 760.5 760.5
==================================================== ============ ========= ============
Investment income 0.5 (0.5) -
==================================================== ============ ========= ============
(Profit)/loss on disposal of subsidiaries,
joint ventures and associates (25.6) 75.3 49.7
==================================================== ============ ========= ============
Impairment of joint venture loans - 4.4 4.4
==================================================== ============ ========= ============
Loss on disposal of property, plant and
equipment 6.2 (0.3) 5.9
==================================================== ============ ========= ============
Net derivative fair value movement through
profit or loss - 1.8 1.8
==================================================== ============ ========= ============
Cash generated from operations before movement
in working capital and retirement benefit
payments* 215.4 (26.5) 188.9
==================================================== ============ ========= ============
Increase in receivables (11.5) (13.9) (25.4)
==================================================== ============ ========= ============
Decrease in payables (9.2) 51.9 42.7
==================================================== ============ ========= ============
Increase in provisions (14.3) 2.7 (11.6)
==================================================== ============ ========= ============
Interest paid (33.6) (0.7) (34.3)
==================================================== ============ ========= ============
Interest received 5.6 (0.1) 5.5
==================================================== ============ ========= ============
Net cash flows from operating activities* 91.3 13.4 104.7
==================================================== ============ ========= ============
Cash flows from investing activities
================================================== ============ ========= ============
Purchases of property, plant and equipment (39.7) (12.1) (51.8)
==================================================== ============ ========= ============
Purchases of intangible assets (10.3) (1.5) (11.8)
==================================================== ============ ========= ============
Loan movements in joint ventures and associates 4.0 0.6 4.6
==================================================== ============ ========= ============
Net cash flows from investing activities* 62.2 (13.0) 49.2
==================================================== ============ ========= ============
Cash flows from financing activities
================================================== ============ ========= ============
Lease principal repayments (70.3) (0.4) (70.7)
==================================================== ============ ========= ============
Lease assets advanced and repaid (0.6) 0.6 -
==================================================== ============ ========= ============
Bank loans repaid (731.4) (0.6) (732.0)
==================================================== ============ ========= ============
Net cash flows from financing activities* (804.8) (0.4) (805.2)
==================================================== ============ ========= ============
* The table above includes only those financial statement line
items which have been restated. The total cash generated from
operations, investing activities and financing activities do not
therefore represent the sum of the line items presented above.
5. Segmental information
The Group has four reporting segments, determined by reference
to the goods and services they provide and the markets they
serve.
Marine - through life support of naval ships and infrastructure
and communications in the UK and internationally.
Nuclear - through life support of submarines and complex
engineering services in support of major decommissioning programmes
and projects, training and operation support, new build programme
management and design and installation in the UK.
Land - large scale critical vehicle fleet management, equipment
support and training for military and civil customers
worldwide.
Aviation - critical engineering services to defence and civil
customers worldwide, including pilot training, equipment support,
airbase management and operation of aviation fleets delivering
emergency and offshore services.
Marine Nuclear Land Aviation Unallocated Total
Six months ended 30 September 2021 GBPm GBPm GBPm GBPm GBPm GBPm
===================================== ====== ======= ===== ======== =========== =======
Revenue 627.4 516.3 607.0 472.3 - 2,223.0
===================================== ====== ======= ===== ======== =========== =======
Underlying operating profit 38.9 36.2 29.8 10.4 - 115.3
===================================== ====== ======= ===== ======== =========== =======
Specific Adjusting Items
===================================== ====== ======= ===== ======== =========== =======
Amortisation of acquired intangibles (0.1) - (0.6) (9.9) - (10.6)
===================================== ====== ======= ===== ======== =========== =======
Business acquisition, merger and
divestment related items - - - (16.3) (4.8) (21.1)
===================================== ====== ======= ===== ======== =========== =======
Restructuring costs (1.7) 1.5 (4.7) (1.4) (3.1) (9.4)
===================================== ====== ======= ===== ======== =========== =======
Exceptional items - 0.6 0.3 0.3 - 1.2
===================================== ====== ======= ===== ======== =========== =======
Operating profit/(loss) 37.1 38.3 24.8 (16.9) (7.9) 75.4
===================================== ====== ======= ===== ======== =========== =======
Other income - - - - 6.2 6.2
===================================== ====== ======= ===== ======== =========== =======
Share of results of joint ventures
and associates 2.0 - 2.1 5.5 - 9.6
===================================== ====== ======= ===== ======== =========== =======
Net finance costs - - 0.4 - (32.8) (32.4)
===================================== ====== ======= ===== ======== =========== =======
Profit/(loss) before tax 39.1 38.3 27.3 (11.4) (34.5) 58.8
===================================== ====== ======= ===== ======== =========== =======
Six months ended 30 September 2020 Marine Nuclear Land Aviation Unallocated Total
(restated *) GBPm GBPm GBPm GBPm GBPm GBPm
========================================= ====== ======= ======= ======== =========== =======
Revenue 592.6 455.8 564.0 441.1 - 2,053.5
========================================= ====== ======= ======= ======== =========== =======
Underlying operating profit 32.1 34.2 16.5 1.7 - 84.5
========================================= ====== ======= ======= ======== =========== =======
Specific Adjusting Items
========================================= ====== ======= ======= ======== =========== =======
Acquired intangible amortisation (0.4) - (8.2) (11.7) - (20.3)
========================================= ====== ======= ======= ======== =========== =======
Business acquisition, merger and
divestment related items - - (49.7) - - (49.7)
========================================= ====== ======= ======= ======== =========== =======
Gains, losses and costs directly
arising from the group's withdrawal
from a specific market or geography - (4.5) (2.0) (0.6) - (7.1)
========================================= ====== ======= ======= ======== =========== =======
Profit or loss from amendment,
curtailment, settlement or equalisation
of group pension schemes (7.5) - - - - (7.5)
========================================= ====== ======= ======= ======== =========== =======
Restructuring costs (1.0) - (1.1) (8.9) - (11.0)
========================================= ====== ======= ======= ======== =========== =======
Exceptional items - - (174.1) (600.1) - (774.2)
========================================= ====== ======= ======= ======== =========== =======
Operating profit/(loss) 23.2 29.7 (218.6) (619.6) - (785.3)
========================================= ====== ======= ======= ======== =========== =======
Share of results of joint ventures
and associates 1.6 (4.0) (0.9) 9.6 - 6.3
========================================= ====== ======= ======= ======== =========== =======
Investment income - - 0.5 - - 0.5
========================================= ====== ======= ======= ======== =========== =======
Net finance costs - - - - (33.1) (33.1)
========================================= ====== ======= ======= ======== =========== =======
Profit/(loss) before tax 24.8 25.7 (219.0) (610.0) (33.1) (811.6)
========================================= ====== ======= ======= ======== =========== =======
* In the year ended 31 March 2021, the Group performed a
contract profitability and balance sheet review which identified
errors and a change to accounting policy. These also impact the 6
months ended 30 September 2020. Details of the restatements are
contained in note 4.
6. Other income
In the six months ended 30 September 2021 the Group earned
GBP6.2 million (2020: GBPnil) related to additional fees received
in relation to the sale of its oil and gas aviation business, which
is presented as other income as this does not relate to the Group's
operational activity.
7. Net finance costs
Six months
Six months ended
ended 30 September
30 September 2020
2021 (restated)
GBPm GBPm
------------------------------------------------------ ------------- -------------
Finance costs
====================================================== ============= =============
Loans, overdrafts and associated interest rate hedges 23.0 25.8
====================================================== ============= =============
Lease interest 10.1 12.3
====================================================== ============= =============
Amortisation of issue costs of bank loan 0.3 0.2
====================================================== ============= =============
Retirement benefit interest 2.6 -
====================================================== ============= =============
Other 2.0 2.4
====================================================== ============= =============
Total finance costs 38.0 40.7
====================================================== ============= =============
Finance income
====================================================== ============= =============
Bank deposits, loans and leases 5.2 5.5
====================================================== ============= =============
IFRIC 12 investment income 0.4 0.5
====================================================== ============= =============
Retirement benefit interest - 2.1
====================================================== ============= =============
Total finance income 5.6 8.1
====================================================== ============= =============
Net finance costs 32.4 32.6
====================================================== ============= =============
8. Income tax expense
Six months
Six months ended
ended 30 September
30 September 2020
2021 (restated)
GBPm GBPm
---------------------------------------------------- ------------- -------------
Taxation expense (4.6) (20.7)
==================================================== ============= =============
Calculation of effective tax rate
==================================================== ============= =============
Profit before tax 58.8 (811.6)
==================================================== ============= =============
Deduct: Equity accounted investments (9.6) (6.3)
==================================================== ============= =============
(Deduct)/add back: taxable non-recurring items 12.5 51.8
==================================================== ============= =============
(Deduct)/add back: non-taxable non-recurring items 21.2 818.0
==================================================== ============= =============
Adjusted profit before tax 82.9 51.9
==================================================== ============= =============
Tax charge 4.6 20.7
==================================================== ============= =============
Exclude one-off tax benefits 11.2 -
==================================================== ============= =============
Exclude tax adjustments in respect of non-recurring
items 3.2 (10.1)
==================================================== ============= =============
Adjusted tax charge 19.0 10.6
==================================================== ============= =============
Effective tax rate 23% 20%
==================================================== ============= =============
The tax charge has been calculated by applying the effective
rate of tax which the Group expects to incur for the year to 31
March 2022. As the Group operates in multiple jurisdictions, the
effective rate is calculated by applying a weighted average of the
rates that are expected to apply across the jurisdictions as a
reasonable approximation of the effect of using more specific
rates.
The recognition of deferred tax assets can be a subjective
process and the Group's approach is therefore set out in more
detail in Note 1 - Basis of preparation and significant accounting
policies - Key sources of estimation uncertainty.
As at 30 September 2021, an increase in the UK rate of
corporation tax has been substantively enacted, from 19% to 25%,
with effect from 1 April 2023. An adjustment has been made to
reflect the fact that a portion of UK deferred tax balances are
expected to unwind at 25%. This adjustment has been recorded as a
non-recurring gain of GBP11.2 million in the group income statement
with Specific Adjusting Items together with a non-recurring gain of
GBP6.5 million in the group Statement Of Comprehensive Income.
9. Goodwill
30 September 31 March
2021 2021
GBPm GBPm
========================================== ============ ========
Cost
========================================== ============ ========
At 1 April 2,487.3 2,571.1
========================================== ============ ========
On disposal of subsidiaries (note 18) (0.7) (72.6)
========================================== ============ ========
Exchange adjustments - (11.2)
========================================== ============ ========
At 30 September/ 31 March 2,486.6 2,487.3
========================================== ============ ========
Accumulated impairment
========================================== ============ ========
At 1 April 1,531.0 283.2
========================================== ============ ========
On disposal of subsidiaries (note 18) - -
========================================== ============ ========
Impairment - 1,243.2
========================================== ============ ========
Exchange adjustments - 4.6
========================================== ============ ========
At 30 September/ 31 March 1,531.0 1,531.0
========================================== ============ ========
Net book value at 30 September / 31 March 955.6 956.3
========================================== ============ ========
Goodwill is allocated to the operating segments as set out in
the table below:
2020
2021 (restated)
GBPm GBPm
========= ====== ===========
Marine 339.2 339.2
========= ====== ===========
Nuclear 233.1 233.1
========= ====== ===========
Land 262.7 262.7
========= ====== ===========
Aviation 118.6 119.3
========= ====== ===========
Africa 2.0 2.0
========= ====== ===========
955.6 956.3
========= ====== ===========
Goodwill is stated at cost less any provision for impairment and
is compared against the recoverable amount at least annually. The
recoverable value of each cash generating unit was assessed at 31
March 2021 by reference to value-in-use calculations. The
value-in-use calculations were derived from risk-adjusted cash
flows from the Group's three-year budget and nominal growth rates
between 2.0% and 3.0% were used to establish cash flows for two
further years. Terminal value assessments were included based on
year five and an estimated long-term nominal growth rate of 2.0%
(2021: 2.0%). There have been no changes to the Group's key
assumptions in the six months ended 30 September 2021 since the
published annual report and financial statements for the year
ending 31 March 2021. The key assumptions can be found in note 13
of that report. The process by which the Group's budget is
prepared, reviewed and approved benefits from historical
experience, visibility of long-term work programmes in relation to
work undertaken for the UK Government, available government
spending information (both UK and overseas), the Group's contract
backlog, bid pipeline and the Group's tracking pipeline which
monitors opportunities prior to release of tenders. The budget
process includes consideration of risks and opportunities at
contract and business level and considered matters such as COVID-19
and climate change.
Goodwill is required to be tested for impairment at least once
every financial year, irrespective of whether there is any
indication of impairment. The Group's annual impairment review
typically occurs at year end. However, if indicators of impairment
are present, an earlier review is also required. The Group has
assessed the goodwill balance for both internal and external
impairment indicators and no impairment indicators were identified.
Management will prepare a full goodwill impairment assessment in
the final quarter of the year.
10. Property, plant and equipment
In the six months ended 30th September 2021 the Group made the
following significant additions to property, plant and
equipment:
-- GBP23.7 million investment into site improvements at Rosyth
to support the Type-31 build programme;
-- GBP6.9 million on a new fixed wing jet and hangar in Norway; and
-- GBP14.7 million investment into site improvements at Devonport Royal Dockyard.
11. Trade and other receivables and contract assets
30 September 31 March
2021 2021
GBPm GBPm
================== ============= ========
Current assets
================== ============= ========
Trade receivables 213.7 267.1
================== ============= ========
Contract assets 344.6 310.9
================== ============= ========
Other debtors 154.2 163.0
================== ============= ========
712.5 741.0
================== ============= ========
Trade and other receivables are stated at amortised cost less
expected credit loss.
12. Trade and other payables and contract liabilities
30 September 31 March
2021 2021
GBPm GBPm
======================================= ============ ========
Current liabilities
======================================= ============ ========
Trade creditors 326.5 410.6
======================================= ============ ========
Contract liabilities 382.4 396.5
======================================= ============ ========
Other creditors 651.3 699.6
======================================= ============ ========
Total current trade and other payables 1,360.2 1,506.7
======================================= ============ ========
Non-current liabilities
======================================= ============ ========
Other creditors 1.8 1.9
======================================= ============ ========
Included in creditors is GBP12.3 million (31 March 2021: GBP19.1
million) relating to capital expenditure which has therefore not
been included in working capital movements within the cash
flow.
13. Financial instruments
The Group's financial assets and financial liabilities are
classified as follows:
Fair value
through Total
At amortised profit Fair value Cash flow carrying
30 September 2021 (GBPm) cost or loss hedges hedges amount Fair value
============================ ============ ========== ========== ========= ========= ==========
Financial assets
============================ ============ ========== ========== ========= ========= ==========
Trade and other receivables
* 618.2 - - - 618.2 618.2
============================= ============ ========== ========== ========= ========= ==========
Loans to joint ventures and
associates 42.6 - - - 42.6 42.6
============================= ============ ========== ========== ========= ========= ==========
Cash and cash equivalents 784.1 - - - 784.1 784.1
============================= ============ ========== ========== ========= ========= ==========
IFRIC 12 financial assets 10.8 - - - 10.8 10.8
============================= ============ ========== ========== ========= ========= ==========
Financial liabilities
============================ ============ ========== ========== ========= ========= ==========
Bank and other borrowings (1,744.4) - - - (1,744.4) (1,802.7)
============================= ============ ========== ========== ========= ========= ==========
Trade payables (326.5) - - - (326.5) (326.5)
============================= ============ ========== ========== ========= ========= ==========
Accruals and other payables
** (348.4) - - - (348.4) (348.4)
============================= ============ ========== ========== ========= ========= ==========
Derivative contracts
============================ ============ ========== ========== ========= ========= ==========
Hedged contracts - - (29.9) (31.4) (61.3) (61.3)
============================= ============ ========== ========== ========= ========= ==========
Non-hedged contracts - - - - - -
============================ ============ ========== ========== ========= ========= ==========
Net assets / (liabilities) (963.6) - (29.9) (31.4) (1,024.9)
============================= ============ ========== ========== ========= ========= ==========
Fair value
through Total
At amortised profit Fair value Cash flow carrying
31 March 2021 (GBPm) cost or loss hedges hedges amount Fair value
============================ ============ ========== ========== ========= ========= ==========
Financial assets
============================ ============ ========== ========== ========= ========= ==========
Trade and other receivables
* 723.2 - - - 723.2 723.2
============================= ============ ========== ========== ========= ========= ==========
Loans to joint ventures and
associates 48.6 - - - 48.6 48.6
============================= ============ ========== ========== ========= ========= ==========
Cash and cash equivalents 1,845.9 - - - 1,845.9 1,845.9
============================= ============ ========== ========== ========= ========= ==========
IFRIC 12 financial assets 12.8 - - - 12.8 12.8
============================= ============ ========== ========== ========= ========= ==========
Financial liabilities
============================ ============ ========== ========== ========= ========= ==========
Bank and other borrowings (3,710.8) - - - (3,710.8) (3,710.8)
============================= ============ ========== ========== ========= ========= ==========
Trade payables (435.5) - - - (435.5) (435.5)
============================= ============ ========== ========== ========= ========= ==========
Accruals and other payables
** (521.1) - - - (521.1) (521.1)
============================= ============ ========== ========== ========= ========= ==========
Derivative contracts
============================ ============ ========== ========== ========= ========= ==========
Hedged contracts - - 89.4 (15.9) 73.5 73.5
============================= ============ ========== ========== ========= ========= ==========
Non-hedged contracts - 2.9 - - 2.9 2.9
============================= ============ ========== ========== ========= ========= ==========
Net assets / (liabilities) (2,036.9) 2.9 89.4 (15.9) (1,960.5)
============================= ============ ========== ========== ========= ========= ==========
* Trade and other receivables excludes prepayments (2021:
GBP74.8m; 2020: GBP107.5m) and capitalised contract costs (2021:
GBP19.5m; 2020: GBP39.4m) as these are not classed as financial
instruments.
** Accruals and other payables excludes other taxes and social
security (2021: (GBP99.8m); 2020: (GBP136.9m)) and contract cost
accruals (2021: (GBP204.9m); 2020: (GBP215.4m)) as these are not
classed as financial instruments.
The fair value measurement hierarchy is as follows:
-- Quoted prices (unadjusted) in active markets for identical assets
or liabilities (Level 1);
-- Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (that is,
as prices) or indirectly (that is, derived from prices) (Level
2); and
-- Inputs for the asset or liability that are not based on observable
market data (that is, unobservable inputs) (Level 3).
All of the financial assets and liabilities measured at fair
value are classified as level 2 using the fair value hierarchy.
There were no transfers between levels during the period.
14. Provisions for other liabilities
Employee
benefits Italian
Insurance Contract/ and business anti-trust Property
provisions warranty reorganisation fine and other Total
(a) (b) costs (d) provisions
GBPm GBPm (c) GBPm GBPm GBPm
=============================== =========== ========= =============== =========== ========== ===========
At 1 April 2021 0.7 67.1 35.8 20.0 21.9 145.5
=============================== =========== ========= =============== =========== ========== ===========
On disposal of subsidiaries - - (1.3) - - (1.3)
=============================== =========== ========= =============== =========== ========== ===========
Net charge to income statement - 0.2 6.4 - 3.4 10.0
=============================== =========== ========= =============== =========== ========== ===========
Utilised in year - (5.7) (4.9) - (3.1) (13.7)
=============================== =========== ========= =============== =========== ========== ===========
Foreign exchange - 0.4 - 0.2 0.2 0.8
=============================== =========== ========= =============== =========== ========== ===========
At 30 September 2021 0.7 62.0 36.0 20.2 22.4 141.3
=============================== =========== ========= =============== =========== ========== ===========
Included within net charge to income statement is GBP5.7 million
relating to exceptional items, all relating to employee benefits
and business reorganisation.
Provisions are analysed between current and non-current as
follows:
30 September 31 March
2021 2021
GBPm GBPm
============ ============ ========
Current 77.5 71.8
============ ============ ========
Non-current 63.8 73.7
============ ============ ========
141.3 145.5
============ ============ ========
(a) The insurance provisions arise in the Group's captive
insurance company, Chepstow Insurance Limited. They relate to
specific claims assessed in accordance with the advice of
independent actuaries.
(b) The contract/warranty provisions relate to onerous contracts
and warranty obligations on completed contracts and disposals.
(c) The employee benefits and reorganisation costs arise mainly
in relation to restructuring (see note 2), acquired businesses,
personnel related costs and payroll taxes.
(d) Property and other in the main relate to provisions for
dilapidation costs and contractual obligations in respect of
infrastructure.
Included within provisions is GBP8 million expected to be
utilised over approximately ten years. Other than these provisions
the Group's non-current provisions are expected to be utilised
within two to five years.
15. Movement in net debt
Six months
Six months ended
ended 30 September
30 September 2020
2021 (restated)
GBPm GBPm
----------------------------------------------- ------------- -------------
(Decrease)/increase in cash in the year (165.6) (651.3)
=============================================== ============= =============
Cash flow from the decrease/(increase) in debt 76.1 798.4
----------------------------------------------- ------------- -------------
Change in net funds resulting from cash flows (89.5) 147.1
=============================================== ============= =============
Net additional lease obligations (19.6) (29.3)
=============================================== ============= =============
Disposal of subsidiaries 129.7 -
=============================================== ============= =============
Other non-cash movements 1.1 (3.8)
=============================================== ============= =============
Foreign currency translation differences (15.0) (18.0)
=============================================== ============= =============
Movement in net debt in the year 6.7 96.0
----------------------------------------------- ------------- -------------
Net debt at the beginning of the year (1,353.6) (1,704.8)
=============================================== ============= =============
Net debt at the end of the period (1,346.9) (1,608.8)
----------------------------------------------- ------------- -------------
16. Changes in net debt
Other
31 March Disposal Additional non-cash Exchange 30 September
2021 Cash flow of subsidiaries leases movements movement 2021
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------- --------- ---------------- ---------- ---------- --------- ------------
Cash and bank balances 904.8 (121.9) - - - 1.2 784.1
============================ ========== ========= ================ ========== ========== ========= ============
Bank overdrafts (373.9) (43.7) - - - - (417.6)
---------------------------- ---------- --------- ---------------- ---------- ---------- --------- ------------
Cash, cash equivalents
and bank overdrafts 530.9 (165.6) - - - 1.2 366.5
---------------------------- ---------- --------- ---------------- ---------- ---------- --------- ------------
Debt (1,328.6) 11.5 - - - (9.7) (1,326.8)
============================ ========== ========= ================ ========== ========== ========= ============
Leases liabilities (612.3) 69.6 129.7 (21.7) 2.1 (2.0) (434.6)
============================ ========== ========= ================ ========== ========== ========= ============
Derivatives designated
as hedges of company debt (25.2) - - - - (4.7) (29.9)
============================ ========== ========= ================ ========== ========== ========= ============
Changes in liabilities
from financing arrangements (1,966.1) 81.1 129.7 (21.7) 2.1 (16.4) (1,791.3)
============================ ========== ========= ================ ========== ========== ========= ============
Leases - granted 39.5 (4.4) - - - 0.2 35.3
---------------------------- ---------- --------- ---------------- ---------- ---------- --------- ------------
Net debt before loans to
joint ventures and
associates (1,395.7) (88.9) 129.7 (21.7) 2.1 (15.0) (1,389.5)
---------------------------- ---------- --------- ---------------- ---------- ---------- --------- ------------
Joint ventures and
associates
loans 42.1 (0.6) - - 1.1 - 42.6
---------------------------- ---------- --------- ---------------- ---------- ---------- --------- ------------
Net debt (1,353.6) (89.5) 129.7 (21.7) 3.2 (15.0) (1,346.9)
---------------------------- ---------- --------- ---------------- ---------- ---------- --------- ------------
17. Retirement benefits and liabilities
Analysis of movement in the Group statement of financial
position.
30 September 31 March
2021 2021 (restated)
GBPm GBPm
----------------------------------------------------------- ------------ ----------------
Fair value of plan assets (including reimbursement rights)
=========================================================== ============ ================
At 1 April 4,745.1 4,364.3
=========================================================== ============ ================
Interest on assets 45.0 100.4
=========================================================== ============ ================
Actuarial gain on assets 247.1 431.8
=========================================================== ============ ================
Employer contributions 108.0 108.8
=========================================================== ============ ================
Employee contributions 0.1 0.2
=========================================================== ============ ================
Benefits paid (134.7) (260.4)
=========================================================== ============ ================
As at period end 5,010.6 4,745.1
----------------------------------------------------------- ------------ ----------------
Present value of benefit obligations
=========================================================== ============ ================
At 1 April 5,078.0 4,266.1
=========================================================== ============ ================
Service cost 15.8 28.1
=========================================================== ============ ================
Incurred expenses 3.7 7.3
=========================================================== ============ ================
Interest cost 47.6 96.4
=========================================================== ============ ================
Employee contributions 0.1 0.2
=========================================================== ============ ================
Experience (gains)/losses (34.4) 32.7
=========================================================== ============ ================
Actuarial loss - demographics - 7.6
=========================================================== ============ ================
Actuarial loss - financial 113.5 891.1
=========================================================== ============ ================
Benefits paid (including transfers) (134.7) (260.4)
=========================================================== ============ ================
Curtailments - 7.5
=========================================================== ============ ================
Past service cost - 1.4
----------------------------------------------------------- ------------ ----------------
As at period end 5,089.6 5,078.0
=========================================================== ============ ================
Net deficit at period end (79.0) (332.9)
----------------------------------------------------------- ------------ ----------------
The Group has restated the value of its longevity swaps at 31
March 2021. Further detail is included in note 4.
The amounts recognised in the Group income statement are as
follows:
30 September 30 September
2021 2020
GBPm GBPm
--------------------------------------- ------------ ------------
Current service cost 15.8 14.4
======================================= ============ ============
Incurred expenses 3.7 1.8
======================================= ============ ============
Curtailment - 7.5
======================================= ============ ============
Total included within operating profit 19.5 23.7
======================================= ============ ============
Net interest cost/(credit) 2.6 (2.1)
======================================= ============ ============
Total included within income statement 22.1 21.6
--------------------------------------- ------------ ------------
As at 30 September 2021 the key assumptions used in valuing
pension liabilities were:
Discount rate 2.0% (31 March 2021: 2.0%)
Inflation rate
(RPI) 3.4% (30 March 2021: 3.2%)
18. Disposals of subsidiaries, businesses and joint ventures and
associates
On 11 March 2021, the Group announced that it had entered into a
sale and purchase agreement to dispose of the Oil and Gas business,
which provides offshore Oil and Gas crew transportation services in
the UK, Denmark and Australia. The disposal was made as part of the
Group's targeted disposals programme. The disposal completed on 1
September 2021, on which date control of the Oil and Gas business
passed to CHC Group LLC. The Group received consideration of GBP10
million.
Six months ended 30
September 2020
Six months
ended 30
September
2021 (restated *)
--------------------------------------------- ------------- -------------------------------
Cavendish
Holdfast Nuclear
Oil & Training Manufacturing
Gas Services Limited Total
GBPm Limited GBPm GBPm
--------------------------------------------- ---- ------- --------- -------------- --------
Goodwill 0.7 68.4 - 68.4
=================================================== ======= ========= ============== ========
Property, plant and equipment 15.1 - - -
=================================================== ======= ========= ============== ========
Right-of-use assets 125.8 - - -
=================================================== ======= ========= ============== ========
Investments in joint ventures and associates - 53.2 - 53.2
=================================================== ======= ========= ============== ========
Deferred tax asset 23.2 - - -
=================================================== ======= ========= ============== ========
Inventory 3.6 - 0.5 0.5
=================================================== ======= ========= ============== ========
Current assets 48.3 - 0.7 0.7
=================================================== ======= ========= ============== ========
Cash, cash equivalents and bank overdrafts - - 0.4 0.4
=================================================== ======= ========= ============== ========
Lease liabilities (129.7) - - -
=================================================== ======= ========= ============== ========
Deferred tax liabilities (13.4) - - -
=================================================== ======= ========= ============== ========
Current liabilities (40.7) - (1.0) (1.0)
=================================================== ======= ========= ============== ========
Provisions for other liabilities and charges (1.3) - - -
=================================================== ======= ========= ============== ========
Net assets disposed 31.6 121.6 0.6 122.2
=================================================== ======= ========= ============== ========
Disposal costs 2.0 1.6 - 1.6
=================================================== ======= ========= ============== ========
Cumulative currency translation gain (7.3)
--------------------------------------------------- ------- --------- -------------- --------
Loss on disposal (16.3) (38.2) (0.6) (38.8)
--------------------------------------------------- ------- --------- -------------- --------
Sale proceeds 10.0 85.0 - 85.0
--------------------------------------------------- ------- --------- -------------- --------
Sale proceeds less cash disposed of 10.0 85.0 (0.4) 84.6
=================================================== ======= ========= ============== ========
Less costs paid in the year (2.0) - - -
--------------------------------------------------- ------- --------- -------------- --------
Net cash inflow/(outflow) 8.0 85.0 (0.4) 84.6
--------------------------------------------------- ------- --------- -------------- --------
* In October 2020 the Group disposed of Conbras Serrvicos
Tecnicos Supporte Ltda for net consideration of GBP6.6m, resulting
in a loss on disposal of GBP10.9m. Through the contract
profitability and balance sheet review it was identified that this
loss should have been provided for in full at 30 September 2020.
Further detail is included in note 4.
19. Related party transactions
Related party transactions for the six months ended 30 September
2021 are: sales to joint ventures and associates of GBP18.8 million
(six months ended 30 September 2020: GBP31.2 million) and purchases
from joint ventures and associates of GBP0.1 million (six months
ended 30 September 2020: GBPnil million).
For annualised key management compensation, please refer to note
9 and the Remuneration Report in the annual report and financial
statements for the year ended 31 March 2021.
For transactions with Group defined benefit pension schemes,
please refer to note 18 above and note 29 in the annual report and
financial statements for the year ended 31 March 2021.
Period Period
Purchases end receivables end payables
Revenue from balance balance
30 September 2021 to (GBPm) (GBPm) (GBPm) (GBPm)
============================== ========== ========= ================ =============
Alert Communications Limited 2.8 - 0.9 -
================================= ========== ========= ================ =============
Babcock Mission Critical
Services Limited - (0.1) - -
================================= ========== ========= ================ =============
AirTanker Services Limited 6.0 - - -
================================= ========== ========= ================ =============
Advanced Jet Training Limited 0.7 - 0.2 -
================================= ========== ========= ================ =============
Rear Crew Training Limited 1.2 - - -
================================= ========== ========= ================ =============
Ascent Flight Training
(Management) Limited 1.0 - - -
================================= ========== ========= ================ =============
Fixed Wing Training Limited 1.4 - - -
================================= ========== ========= ================ =============
Rotary Wing Training Limited 2.0 - - -
================================= ========== ========= ================ =============
First Swietelsky Operation
and Maintenance 3.7 - 1.5 (1.1)
================================= ========== ========= ================ =============
18.8 (0.1) 2.6 (1.1)
============================== ========== ========= ================ =============
Period Period
Purchases end receivables end payables
Revenue from balance balance
30 September 2020 to (GBPm) (GBPm) (GBPm) (GBPm)
=============================== ========== ========= ================ =============
AirTanker Services Limited 5.0 - 0.2 -
================================== ========== ========= ================ =============
Advanced Jet Training Limited 1.9 - - -
================================== ========== ========= ================ =============
Rear Crew Training Limited 1.8 - - -
================================== ========== ========= ================ =============
Ascent Flight Training
(Management) Limited 0.9 - 0.3 -
================================== ========== ========= ================ =============
Fixed Wing Training Limited 2.0 - - -
================================== ========== ========= ================ =============
Rotary Wing Training Limited 1.6 - - -
================================== ========== ========= ================ =============
Holdfast Training Services
Limited 10.8 - - -
================================== ========== ========= ================ =============
ABC Electrification Limited - - 6.8 -
================================== ========== ========= ================ =============
First Swietelsky Operation
and Maintenance 4.2 - 1.0 -
================================== ========== ========= ================ =============
Cavendish Dounreay Partnership
Limited 3.0 - 0.9 -
================================== ========== ========= ================ =============
31.2 - 9.2 -
=============================== ========== ========= ================ =============
20. Contingent liabilities
A provision is recognised when the Group has a present
obligation as a result of a past event, it is probable that an
outflow of economic benefits will occur and the amount can be
reliably estimated. A contingent liability is a possible obligation
arising from past events whose existence will be confirmed only on
the occurrence or non-occurrence of uncertain future events outside
the Group's control, a present obligation that is not recognised
because it is not probable that an outflow of economic benefits
will occur or the value of such outflow cannot be measured
reliably. The Group does not recognise contingent liabilities.
There are a number of contingent liabilities that arise in the
normal course of business, including:
a) The Group has given certain indemnities and warranties in the course of disposing
of businesses and companies and in completing contracts. The Group believes
that any liability in respect of these is unlikely to have a material effect
on the Group's financial position.
b) The nature of the Group's long term contracts means that there are reasonably
frequent contractual issues, variations and renegotiations that arise in the
ordinary course of business, including liabilities that arise on completion
of contracts and on conclusion of relationships with joint ventures and associates.
The Group takes account of the advice of experts, both internal and external,
in making judgements on contractual issues and whether the outcome of negotiations
will result in an obligation to the Group. The Directors do not believe that
the outcome of these matters will result in any material adverse change in the
Group's financial position.
c) As a large contracting organisation, the Group has a significant number of contracts
with customers to deliver services and products, as well as with its supply
chain, where the Group cannot deliver all those services and products itself.
The Group is involved in disputes and litigation, which have arisen in the course
of its normal trading in connection with these contracts. Whilst the Directors
do not believe that the outcome of these matters will result in any material
adverse change in the Group's financial position, it is possible that, if any
of these disputes come to court, the court may take a different view to the
Group.
d) The Group is subject to corporate and other tax rules in the jurisdictions in
which it operates. Changes in tax rates, tax reliefs and tax laws, or interpretation
of the law, by the relevant tax authorities may result in financial and reputational
damage to the Group. This may affect the Group's financial condition and performance.
21. Events after the reporting period
On 13 August 2021, the Group announced that it had entered into
a sale and purchase agreement to dispose of Frazer Nash
Consultancy, which provides engineering and technology solutions
across a broad range of critical national infrastructure. The
disposal was made as part of the Group's targeted disposals
programme. The disposal completed on 20 October 2021, on which date
control of Frazer Nash Consultancy passed to KBR Inc. The Group
received consideration of GBP290 million. The disposal group was
not classified as held for sale at 30 September 2021, as completion
of the disposal was contingent on approval from the Australian
Foreign Investment Review Board.
Interim financial information
As part of the tender process for a new statutory auditor it was
initially planned that Deloitte would give an Interim Review
opinion on the interim financial information in addition to
auditing the full year results. This was a new approach for Babcock
which had not previously had interim reviews performed by the
auditor.
The interim financial information review timetable was delayed
by the timing of the handover from the previous auditor and the
transition work being more extensive than would usually be the case
given the many adjustments published in the 31 March 2021 year end
and the Group's ongoing transformation of the accounting and
control environment. As a result, there was insufficient time to
enable Deloitte to complete their review procedures, pursuant to
the Financial Reporting Council guidance on Review of Interim
Financial Information.
Although no review of the interim financial information has been
completed by Deloitte, the directors have discussed and agreed with
Deloitte the material adjustments to date which the directors have
made within the unaudited results in this statement.
Statement of Directors' responsibilities
This half year report is the responsibility of the Directors who
each confirms that, to the best of their knowledge:
-- this condensed set of financial statements has been prepared in
accordance with United Kingdom adopted IAS 34 (Interim Financial
Reporting); and
-- the interim management report herein includes a fair review of
the information required by:
-- Rule 4.2.7 of the Disclosure & Transparency Rules (indication
of the important events during the first six months, and their
impact on the condensed set of financial statements, and a
description of principal risks and uncertainties for the remaining
six months of the year); and
-- Rule 4.2.8. of the Disclosure & Transparency Rules (disclosure
of related parties' transactions that have taken place in the
first six months of the current financial year and that have
materially affected the financial position or the performance
of the entity during that period; and any changes in the related
parties transactions described in the last annual report that
could have a material effect on the financial position or performance
of the enterprise in the first six months of the current financial
year).
Approved by the Board and signed on behalf of the Directors
by:
David Lockwood
Chief Executive Officer
David Mellors
Chief Financial Officer
7 December 2021
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END
IR LQLLBFLLLFBL
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December 07, 2021 02:00 ET (07:00 GMT)
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