Annual Financial Report
8 June 2009
Babcock International Group PLC
Annual Financial Report
In compliance with paragraph 9.6.1 of the Listing Rules, Babcock International Group PLC (the Company) has today submitted to the UK Listing Authority two copies of each of the documents listed below:
Annual Report and Accounts 2009
Notice of the 2009 Annual General Meeting
Proxy form for the 2009 Annual General Meeting
Copies of the above documents will be available for inspection at the UK Listing Authority's Document Viewing Facility which is situated at:
Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
The documents are being sent to shareholders today. The Annual Report and Accounts 2009 and Notice of the 2009 Annual General Meeting may be viewed and downloaded on the Company's website at www.babcock.co.uk.
In compliance with paragraph 6.3.5 of the Disclosure and Transparency Rules (DTR), a description of the principal risks, details of related party transactions and a Directors' responsibility statement are set out below in full unedited text. A condensed set of financial statements was issued as part of the Company's 2009 unaudited preliminary results announcement issued on 12 May 2009. These financial statements have been audited subsequently and remain unchanged.
References below to notes are references to the specified notes to the financial statements contained in the Annual Report and Accounts 2009. References below to page numbers are to the specified pages in the Annual Report and Accounts 2009.
Enquiries:
Babcock International Group PLC 020 7355 5300
Bill Tame (Finance Director)
Terri Wright (Head of Investor Relations)
Financial Dynamics 020 7831 3113
Andrew Lorenz/Sophie Kernon
PRINCIPAL RISKS
In the course of our day-to-day operations we face a number of risks and uncertainties. The Board considers the matters described in this section to be those that could adversely affect the business, results of operations, revenue, profit, cash flow, assets and the delivery of our growth strategy. Given the size, complexity and spread of our businesses and the continually changing environment in which the Group operates, this cannot be an exhaustive list of such risks.
Systems and procedures are in place across the Group to identify, assess and mitigate major business risks. The management of risk is an integral part of our operational review process and is supplemented at Group level by independent challenge and review by the Group Risk Manager and the Audit and Risk Committee. Further details on our internal control processes are set out on pages 44 and 45.
Risk
Health, safety and environmental issues
The working environments in which the Group operates are complex and, in some instances, can be inherently dangerous. Some of our activities, if not appropriately managed, could have an adverse effect on the environment which could reasonably be avoided.
Our commitment to our employees and the nature of our business and our customers mean that our ability to manage these issues is a key element of our business reputation and success.
Impact
Damage to our reputation would affect our ability to win and retain contracts and attract and retain our staff and therefore adversely affect the financial performance of the Group.
Action
The Executive Committee and the Board review health, safety and environmental performance regularly and satisfactory performance on these matters is one of the performance criteria included in executive bonus schemes.
A Safety Leadership Team comprising the Executive Directors and all divisional Managing Directors meets regularly to set policy and procedures and to monitor performance and agree corrective actions where necessary. For further details of our approach to Health, Safety and Environment see pages 22 and 23 and 25.
Risk
The Group is dependent on a number of key people
The Group operates in highly technical and complex businesses and is dependent on recruiting, retaining and developing highly skilled, qualified and experienced engineers and project management staff. The marketplace for such staff remains highly competitive.
Impact
The Group's operations could be constrained by a lack of suitably qualified and experienced employees in key areas.
Action
We seek to make our businesses attractive places to work by offering competitive remuneration packages aimed at long-term employee retention as well as appropriate training and development opportunities. In the past few years we have extended both our graduate and apprentice recruitment and development programmes and we continue to improve our management development programmes.
Risk
The Group's ethical reputation could be damaged
We pride ourselves on our 'trusted to deliver' ™ reputation. This is a key factor in our ability to win, complete and retain contracts and is an important element in our ability to build and maintain long-term relationships with our customers.
Impact
Any damage to our reputation could have an adverse effect on the Group's future results and financial position.
Action
We insist on the highest standards of honesty, integrity and performance in all aspects of business. We have an ethical policy in place that defines the level of behaviour we expect. The policy is formally re-emphasised to senior management every year and they formally confirm compliance. We have established a 'whistle blower' hot line so all employees can anonymously express any concerns they have about the way the business is being operated. We maintain regular dialogue with customers and carry out customer surveys to ensure we identify any potential threats to our customer relationships and act on them.
Risk
Information technology
The Group relies on the use of complex software for the management of engineering, commercial and financial data. The Group and its customers are dependent on the resilience of the applications' software, the data processing facilities and the network infrastructure linking the sites where we operate.
Impact
A serious failure in any of these areas would have a significant adverse effect on our businesses.
Action
The Group's businesses have detailed disaster recovery plans in place. We have also established a Group data centre which has in-built high resilience levels with a physically separate disaster recovery facility. This will increasingly form the hub of all shared IT services.
Risk
The Group is reliant on large contracts from a limited number of major customers
A significant proportion of the Group's revenue comes from large contracts placed by a limited number of major customers such as the Ministry of Defence, Network Rail, and National Grid. These customers are affected by budgetary, regulatory or political constraints which could have a significant impact on the size, scope, timing and duration of contracts and orders under them. In addition, because of their size, these customers have considerable bargaining power and the ability to cancel contracts at short notice.
Impact
The loss, expiration, delay, suspension, cancellation or termination of a number of these large contracts, or any damage to the relationship with any of our major customers, could have a material adverse effect on the Group's future results and financial position.
Action
We make it a priority to have a close understanding of our customers and their needs and objectives. Our aim is to develop and maintain long-term co-operative working relationships with them, and to ensure the financial success or failure of contracts is fairly shared. We aim to position our businesses in markets where the risk of adverse changes to the size, scope, timing and duration of contracts is low.
Management regularly reviews contract performance and Executive Committee members are closely involved in ensuring the strength of customer relationships.
Risk
Maintaining growth through continuing bid success
Our ability to achieve growth and deliver value for our shareholders relies on our ability to win new contracts and retain existing contracts on expiry. Our ability to manage the bid process successfully is vital. Bid processes can be long and are often subject to delays, changes or abandonment by the customer, all of which are outside our control. The significant financial and manpower costs of these bids are generally not recoverable if bids are unsuccessful or the tenders are withdrawn or aborted by the customer.
Impact
Failure to win significant new contracts will materially affect the Group's future results and its ability to achieve its strategic growth objectives.
Action
All bids are subject to continuous monitoring and review by senior Group and divisional executives to ensure resources are appropriately focused so the chances of success and the financial returns are acceptable. The final submission of any significant bid or re-bid requires formal approval from one or more Executive Directors.
Risk
Poor contract performance
The continuing financial success of the Group depends on our ability to meet or exceed the contractual requirements of our customers. On many contracts we employ sub-contractors or work with other commercial partners and so are reliant on their performance as well as that of our own employees to meet the key performance indicators and financial standards expected.
Impact
Failure to meet contractual performance criteria either directly or through sub-contractors and the resultant damage to our reputation could have an adverse effect on the Group's future results and financial position.
Action
Each division has procedures in place to monitor the ongoing performance of each contract and these are discussed at operational reviews with Group Executive management. The financial performance of all contracts is reviewed quarterly by Group Finance.
Risk
The Group derives a large proportion of its revenues from national and local government activities
Our largest customer is the Ministry of Defence. We also have significant contracts with private sector companies who are strongly influenced by political and regulatory considerations. As such our businesses are susceptible to changes in government policy, budget allocations and the political environment.
Impact
The termination or significant amendment of any of our large contracts arising from changes in the factors noted could have an adverse effect on the Group's future results and financial position.
Action
We seek to maintain a regular dialogue with our customers and others within government departments to ensure we fully understand at both Group and divisional levels the considerations that are affecting budgetary and policy decisions and the changing political environment.
Risk
The Group has experienced growth through acquisitions, the financial and strategic benefits of these acquisitions may not be realised
Since 2001 the Group has grown through a series of acquisitions. This is expected to continue as the Group seeks to meet its strategic objectives. The integration of operations and employees is a complex process and post-acquisition performance may not be at the levels anticipated. The Group may not be able to integrate the operations of acquired businesses with existing operations as rapidly as expected or without encountering other difficulties.
Impact
The diversion of management attention to integration issues and other difficulties encountered could adversely affect the Group's business. Post-acquisition performance may not meet the financial performance expected and could therefore not justify the price paid and could adversely affect the Group's future results and financial position.
Action
We seek to carry out appropriate due diligence as far as we are able and carry out a detailed valuation process based on information available and our knowledge of the marketplace. All acquisition processes are overseen by the Board and no acquisition may be completed without the formal approval of the Board.
Risk
The Group operates large defined benefit pension schemes
The Group's defined benefit pension schemes are currently in overall surplus. However this could be adversely affected by a number of factors including lower than assumed investment returns, changes in mortality or other valuation assumptions and the funds could go into deficit.
Impact
A pension scheme deficit could require the Group to make greater cash contributions to the schemes and reduce the cash available to meet the Group's other obligations or business needs.
Action
We seek to maintain constructive and open relationships with the scheme trustees and to encourage them to follow appropriate investment policies for the profile of their members as well as seek other means of eliminating or mitigating risk. For an example of how we are addressing this see the financial review page 32, where we discuss proposed longevity swaps. We also maintain a suitable ongoing funding rate. We have a Group Pensions Manager reporting to the Group Finance Director whose task is to keep such strategic matters under close review. He regularly reports to the Board. An annual review of the pension schemes is also conducted by the Board and the schemes form part of Board discussions at other times of the year. Further details of the Group's pension schemes are detailed in note 28 to the Group financial statements.
Risk
The material misstatement of financial results
The Group could materially misstate financial results through fraud or error if financial and operational controls are inadequate.
Impact
Misstatement of financial results could adversely damage the Group's reputation, affect its ability to operate and its future results and financial position.
Action
The Group has robust structures to mitigate or manage these risks, including a comprehensive financial policy and accounting standards manual with authority and approval mandates. All material commercial and contractual activities are overseen by Group executives and governed by the Group Policy and Procedures manual which sets out the Group's approach to doing business. These policies and procedures are backed up by a system of regular contract reviews conducted by Group Finance and a regime of internal audit, conducted by Ernst and Young which reports to the Audit and Risk Committee. Further detail of internal controls is given on pages 44-45.
Risk
Default of a significant debtor or counterparty
Impact
The failure of a significant debtor or counterparty could adversely affect the cash flow of the Group.
Action
All significant credit risks are reviewed by Group Finance and an Executive Director and, where appropriate and available, risk limitation actions are taken.
Risk
Liquidity risk
The Group relies on the ongoing provision of lines of credit from its relationship banks. Banking lines of credit could be withdrawn if legally binding covenants are not met.
Impact
The Group's ability to fund current and future obligations and future expansion could be adversely affected.
Action
The Group has committed lines of credit of £600 million through to 2012. Borrowing ratios are comfortably within the banking covenants set out in financing agreements and are monitored on a regular basis. The conversion of profit to cash is a key performance indicator.
Risk
Interest and foreign exchange risk
Historically the Group has financed its operations through equity and bank debt. Some of the Group's debt is denominated in foreign currency. The interest rate charged on bank debt could increase significantly or foreign currency exchange rates could move materially against Sterling, the Group's base currency.
Impact
Adverse movements in interest and foreign exchange rates could impact Group profit and net assets causing a reduction in returns to shareholders.
Action
Interest rate risk is managed by the use of interest rate collars and swaps to ensure an appropriate mix of fixed and floating rate debt is maintained. Foreign exchange translation exposure is managed by restricting foreign borrowing to the value of assets denominated in the same currency or in the case of transactions in foreign currency, by the mandatory use of foreign currency contracts.
RELATED PARTY TRANSACTIONS
(a) The following related parties either sell to or receive services from the Group. In addition British Nuclear Fuels PLC and United Kingdom Atomic Energy Authority have had a common director, with Babcock International Group PLC during the year. For details regarding loans to joint ventures see note 16.
|
|
2009 |
2009 |
2009 |
2009 |
|
Joint venture and alliances |
|
|
|
|
|
Debut Services (South West) Ltd |
121,120,000 |
- |
81,000 |
- |
|
DynCorp-Hiberna Limited |
14,761,000 |
- |
35,000 |
- |
|
Holdfast Training Services Limited |
21,470,000 |
- |
4,820,000 |
- |
|
Mouchel Babcock Education Services Limited |
1,402,000 |
- |
355,000 |
- |
|
First Swietelsky Operation and Maintenance |
6,235,000 |
- |
1,846,000 |
- |
|
First Swietelsky Joint Venture High Output |
34,573,000 |
- |
2,939,000 |
- |
|
Related by common directorships |
|
|
|
|
|
BAE Systems PLC |
21,473,000 |
2,478,000 |
2,705,000 |
625,000 |
|
BVT Surface Fleet Limited |
71,219,000 |
- |
- |
- |
|
British Nuclear Fuels PLC |
9,804,000 |
- |
- |
- |
|
|
|
|
12,781,000 |
625,000 |
|
|
2008 |
2008 |
2008 |
2008 |
|
Joint venture and alliances |
|
|
|
|
|
Debut Services (South West) Ltd |
100,622,000 |
- |
- |
- |
|
First Swietelsky Operation and Maintenance |
6,638,000 |
- |
1,521,000 |
- |
|
First Swietelsky Joint Venture High Output |
36,046,000 |
- |
3,878,000 |
2,625,000 |
|
Related by common directorships |
|
|
|
|
|
British Nuclear Fuels PLC |
7,036,000 |
- |
193,000 |
- |
|
United Kingdom Atomic Energy Authority |
15,422,000 |
526,000 |
1,598,000 |
- |
|
|
|
|
7,190,000 |
2,625,000 |
All transactions noted above arise in the normal course of business.
(b) Babcock Employee Share Trust and Peterhouse Employee Share Trust
During the year the Company sold ordinary shares through the Babcock Employee Share Trust and the Peterhouse Employee Share Trust. Further information is given in note 27 on page 92.
(c) Defined benefit pension schemes
Please refer to note 28 for transactions with the Group defined benefit pension schemes.
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors are responsible for preparing the Annual Report, the Directors' Remuneration report and the Group's and the Company's financial statements in accordance with applicable law.
Company law requires the Directors to prepare financial statements for each financial year. In accordance with that law the Directors have prepared the Group's financial statements in accordance with International Financial Reporting Standards (IFRS) (as adopted in the European Union), and the Company's financial statements and the Directors' Remuneration report in accordance with applicable law and UK Generally Accepted Accounting Practice (UK GAAP). The Group's and the Company's financial statements are required by law to give a true and fair view of the state of affairs of the Group and the Company and of the profit and loss of the Group for that year. In preparing those financial statements the Directors are required to:
-
select suitable accounting policies and then apply them consistently;
-
make judgements and estimates that are reasonable and prudent;
-
state that the Group's financial statements comply with IFRS and that with regard to the Company's financial statements that applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
-
prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Company will continue in business.
Each of the Directors (whose names and functions are set out on pages 34 and 35) confirms that to the best of his knowledge:
-
the Group financial statements (set out on pages 62 to 100), which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group taken as a whole; and
-
the Business review contained on pages 1 to 33 includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the Group's financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation and that the Company's financial statements and the Directors' Remuneration report comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Group and the Company, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
For the purposes of the above responsibility statement the Directors whose names and functions are set out on pages 34 and 35 of the Annual Report and Accounts 2009 are:
Mike Turner - Chairman
Lord Hesketh - Deputy Chairman
Peter Rogers - Chief Executive
William Tame - Finance Director
John Rennocks - Non-Executive Director
Sir Nigel Essenhigh - Non-Executive Director
Dipesh Shah - Non-Executive Director
Justin Crookenden - Non-Executive Director
Sir David Omand - Non-Executive Director
This information is provided by RNS
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