Final Results
Babcock International Group PLC
26 May 2005
Thursday 26 May 2005
BABCOCK INTERNATIONAL GROUP PLC
2004/5 PRELIMINARY RESULTS
Babcock International Group PLC, the Support Services company, announces its
preliminary results for the year ended 31 March 2005:
2004/5 2003/4 % Change
Sales £760.0m £452.0m 68
Operating profit (1) £41.0m £25.5m 61
Profit before tax £28.4m £19.8m 43
Profit before tax-adjusted (2) £35.1m £23.1m 52
Earnings per share (3) 14.20p 13.60p 4.4
Dividend 4.00p 3.35p 19.4
(1) Before goodwill amortisation (2005: £6.6 million, 2004: £3.3 million),
discontinued operations losses (2005: £nil, 2004: £0.3 million) and operating
exceptionals (2005: £1.5 million credit, 2004: £nil), (2) Before goodwill
amortisation, exceptional items (2005: pre-tax £(0.1) million, 2004; £nil) (3)
Before exceptional items (2005: £0.3 million credit, 2004: £nil) and goodwill
amortisation.
Business Highlights:
• Successful acquisition and integration of Peterhouse - earnings
enhancing in year one
• Babcock-led consortium appointed preferred bidder on Royal School of
Military Engineering PFI
• 5 year extension to contract for management of HM Naval Base Clyde
expected imminently - worth £400 million
• Continued growth in sales and profits in existing businesses
• Sales up by 68%, profit before tax up 43%
• Earnings per share up by 4.4% despite increased tax charge
• Full year dividend raised by 19.4% - final payment up 26% to 2.65p
• Order book as at 25 May £1.2 billion up from £1.1 billion last year
Commenting, Peter Rogers, Chief Executive, said:
'This has been another excellent year for Babcock, with sales increasing by 68%
and adjusted profit before tax growing by 52%. Notable achievements during the
year included our appointment as preferred bidder on the Royal School of
Military Engineering PFI contract and the award of a five year extension to the
contract for the management of HM Naval Base Clyde, which is expected
imminently, a year earlier than anticipated.
'We have now established a solid foundation to take the company forward, with a
broadened customer base. This follows on from the successful acquisition of
Peterhouse, which has exceeded our expectations at the time of transaction. We
are well positioned in a number of growing markets and our skills in project
planning design and engineering are now well-recognised in the sectors in which
we operate.
'This is the third successive year of double digit sales and profit growth and
Babcock is well positioned to achieve continued growth going forward.'
Contact: Peter Rogers, Chief Executive
Bill Tame, Finance Director
Babcock International plc
Telephone: 020 7291 5000
Andrew Lorenz
Rob Gurner
Financial Dynamics
Telephone: 020 7269 7291
CHAIRMAN'S STATEMENT
Four years ago we embarked on a process to convert Babcock from an engineering
conglomerate to a support services business. I said last year, that the year
ending March 2004 completed the first phase of this transformation, which was
predicated upon being a major service supplier to the defence sector. The
second phase was to broaden our customer base so that we were not overly reliant
on any one market sector. The acquisition of Peterhouse, concluded in June
2004, marked the start of this second phase. The acquisition has been extremely
successful and the businesses are now largely integrated into Babcock. The
synergies anticipated were achieved as quickly as we could possibly have hoped,
and hence the acquisition was earnings enhancing in the year ended March 2005,
somewhat earlier than had been predicted in the Offer documents. Equally our
cash management skills have reduced the debt taken on to acquire the Peterhouse
business very rapidly, such that our debt at March 2005 was only £63 million.
The results to March 2005 continue to support our strategy. Profit before tax
before goodwill and exceptional items increased by 52% following on from an
increase the previous year of 28%. Operating profit, before goodwill and
exceptional items, increased by 63% year on year, but this was by no means all
due to the Peterhouse acquisition. The existing Babcock businesses also
increased their operating profit by a reassuring 18%.
The success of the strategy is also marked by the better balance of our sales.
Sales to the Ministry of Defence fell from 70% of turnover in the year to March
2004 to approximately 50% in 2004/5. The defence sector remains an important
part of our business but the presence in higher growth sectors such as
telecommunications and power transmission gives the results more robustness.
Our South African business also continues its dynamic growth, and we have
positioned Rosyth to withstand the sharp decline in the refit business without
undermining its ability to resource adequately the assembly and integration of
the new aircraft carriers.
Earnings per share before goodwill and exceptional items in the year to March
2005 increased by 4.4% to 14.2p per share. With a comparable year on year tax
charge the increase would have been 15%. The Directors have been conscious
throughout this major transformation of Babcock of the need for tight controls
on cash, but with a much larger and better balanced business we feel that
shareholders should be rewarded by a substantial increase in dividends whilst
maintaining a conservative cover. Over the medium term we intend to target
dividend cover, based on full year earnings excluding goodwill amortisation and
exceptional items, in the range 2.5 - 3.0 times based on current accounting
principles. As a consequence, the Board is recommending a 26% increase in the
final dividend to 2.65p per share, which will take the total dividend for the
year up to 4p per share, an increase over last year of 19.4%.
The introduction of IFRS as the method of accounting for UK companies does not
have a significant effect on the 2004/05 earnings of Babcock, although there is
some redistribution between operating profit and interest. IFRS accounting will
be introduced in the year ending March 2006.
The Report and Accounts will show our compliance with the Combined Code and a
number of minor changes as a result of the Higgs recommendations. In the few
cases where we do not comply fully with the Combined Code we shall explain our
reasoning in the Report and Accounts. However, a number of our Non-Executive
Directors have held their positions for long periods by the standards of Higgs
recommendations. Notwithstanding, therefore, their outstanding contribution to
the company over this period of time, we shall be implementing a programme of
change amongst the Non-Executive Directors. However, we feel it important that
this be carried out in a controlled manner such that we do not lose the
substantial benefit of their experience. This change will therefore be carried
out progressively over the next couple of years.
The two most important decisions a Board can make in large companies is to
choose the strategy and to identify and select the best people to implement that
strategy. I think the history over the last five years suggests that we have
made both decisions with some skill, and the increase in shareholder value over
those five years is a testimony to that. Over the five years ending March 31
2005, £100 invested in Babcock would have yielded a return of 124% more than a
similar investment in the FTSE All-Share index.
I am sure that shareholders would wish me to thank all employees who have
contributed to such an outstanding performance and I believe that, with the
acquisition of Peterhouse, we shall continue to improve value for our
shareholders.
CHIEF EXECUTIVE'S OPERATING STATEMENT
The 2004/05 Financial Year has been both successful and highly active for
Babcock. The acquisition and integration of Peterhouse, and subsequently Turner
& Partners, the start of the South West Regional Prime Contract, the first year
of the contract at RAF Valley, significant reorganisation in our marine-based
business and movement to preferred bidder on RSME all took place during the
Financial Year. The result of all this activity is that sales from continuing
operations have risen by £322 million or 74% and operating profit from
continuing operations before goodwill and exceptional items has risen by £15.5
million or 61%.
The integration of the former Peterhouse businesses continued to occupy
significant amounts of management time but synergy benefits totalling £9 million
compared to the £5.3 million contained in the Offer documents had been
identified by 31 March 2005.
Most significantly the development of a better balanced portfolio of businesses,
most of which are in growing markets, has laid solid foundations which should
allow the company to continue double digit sales and profit growth in the coming
years.
Defence Services
Sales £245.1m (2004 : £171.5m) Operating profit £17.8m (2004 : £11.6m)
(32% of Group Sales)
Growth in sales was largely driven by the April 1, 2004 start of the South West
Regional Prime (SWRP) Contract. We expect further growth in sales during the
current year as the contract will be fully operational throughout the period.
Naval Services also showed some growth in turnover and margin as the scope of
the contract increased and our confidence in delivering the contracted cost
reduction targets improved. The announcement by the Ministry of Defence that
the contract will be extended by an additional 5 years, which is expected
imminently, will further enhance the order book.
We continue to deliver excellent service to the customer across the range of
businesses. At HM Naval Base Clyde customer satisfaction surveys show that,
despite the significant cost savings we are achieving, our customers rate our
service as significantly better than that which was being delivered previously.
Similarly, we have been complimented on our activities in relation to contracts
at RAF Valley, RAF Lyneham and on SWRP on each of which we are also delivering
substantial savings to the customer.
A notable step forward in the second half of the year was the award of Preferred
Bidder Status on the Royal School of Military Engineering (RSME) PFI to the
Holdfast consortium led by Babcock. We had been sole bidder for almost three
years and internal difficulties in the Ministry of Defence (MoD) had prevented
the project moving forward. We are now aiming, with the MoD, to achieve
financial close during the 2006/07 Financial Year.
We are involved in the MoD's Marine Services PFI as part of the Starfish Marine
consortium, one of two bidders for this large project. Other significant bids
on which we are working include the Eastern Regional Prime Contract and Projects
for managing the ministry estates in Cyprus and Gibraltar. We are also working
towards submitting bids on a number of opportunities in the 'Building Schools
for the Future' programme.
The major project on which we are currently bidding (again as leader of the
Holdfast Consortium) is the Defence Training Review which is a PFI for the
management and delivery of approximately half of the three services non-military
training. The award of this contract should take place during the 2006/07
financial year.
Technical Services
Sales £160.2m (2004 : £180.0m) Operating profit £13.1m* (2004 : £14.8m)
(21% of Group sales)
* before exceptional charge of £5.5m (2004 : £nil)
This is the business based at Rosyth. We carried out significant reorganisation
during the year in recognition of the fact that the allocated programmed for
warship refit is coming to an end in March 2006 and in further recognition of
the fact that the market for warship refit will be somewhat smaller over the
next few years. The reorganisation so far has enabled us, we believe, to become
the lowest cost warship refit yard in the UK and we are therefore confident of
our ability to compete in the reduced market. We won 8 of the last 13
competitive bids during the year and we are confident of our ability to continue
to bid both successfully and profitably.
We have moved the businesses based at Rosyth from a position two years ago where
they were almost wholly dependent for profits on the warship refitting programme
to a position in which they would be a profitable group of businesses even in
the unlikely event of the refit market dropping to zero. A regrettable
consequence of this reorganisation is the reduction in the Rosyth workforce from
some 1800 people to under 1200 by March 2006.
We are continuing to participate in the programme for construction of the new
aircraft carriers. While no contracts have yet been awarded, other than for
design, we remain confident that Rosyth will be the location selected for the
assembly and integration of the two ships, on the grounds of the excellent
facilities and the skills of the workforce. These have also played a large part
in the success of the modular construction work we are carrying out for Heathrow
Terminal 5.
We are participating in discussions with the MoD on the ISOLUS programme - which
is a programme for the dismantling and storage of defuelled nuclear submarines.
Any contract awarded under the ISOLUS programme will be for over 20 years.
The Supply Chain Services, Design and Technology and nuclear businesses are all
profitable in their own right. We are continuing to bid for naval refit work
and are seeking opportunities to expand the scope of the Engineered Products
business.
Engineering and Plant Services
Sales £113.0 (2004 : £86.5m) Operating profit £5.5m (2004 : £3.5m)
(15% of Group sales)
The African business has continued its outstanding progress during the year with
sales at over £100 million for the first time and profits exceeding £5 million.
The growth resulted mainly from the growth in the Construction Equipment
business which sells Volvo equipment largely to the mining and construction
industries. Our market share continued to increase and the parts aftermarket is
growing as the number of Volvo vehicles on the ground continues to expand.
Increasing sales in the aftermarket will give opportunities for further margin
improvement.
The African engineering business continued its excellent progress with
profitability again improving. The need to continue increasing both active
generation capacity and infrastructure support in Africa will provide a more
stable environment for the engineering business than has been the case for a
number of years.
Eagleton, our pipeline business in Houston Texas, had another challenging year
as the market continued at very low levels, although towards the end of the year
there were clear signs of increased activity driven by the continuing high price
levels for oil and gas.
Networks
Sales £61.5m (2004 : £n/a) Operating profit £4.1m (2004 : £n/a) (for period of
9.5 months)
(8% of Group sales)
Since the acquisition of Peterhouse, the Networks businesses (which trade under
the 'Eve' name) have performed somewhat better than we had anticipated. In the
telecoms business, the launch of 3G technology by the network operators is
taking place on a more gradual basis than many had expected, but has been in
line with our expectations at the time of the acquisition. With the purchase of
Turner and Partners we continue to win contracts for the acquisition design and
construction of new sites thereby strengthening the core business as well as
adding valuable skills. The combination of the skills of Eve and Turners is
proving attractive to customers. A number of contracts with the major operators
have been secured, including Vodafone, Orange and 3.
The transmission business continues to deliver an excellent performance with the
volume of work continuing to rise, at a slightly faster rate than our original
expectations. The volume of pre-sanction engineering work also continues to
rise, which is usually a predictor of the volume of contracts to be let over the
next two years.
Eve Trakway had a reasonable winter and spring period as its share of the
industrial market grew and is now profitable. We have invested in further
capacity in this business to ensure we maintain our ability to provide
outstanding levels of service to our customers.
Rail
Sales £167.0m (2004 : £n/a) Operating profit £8.3m* (2004 : £n/a) (for period of
9.5 months)
(22% of Group sales)
* before operating exceptional credit of £8.8m
The rail business (First Engineering) has met our original expectations at the
time of acquisition. Although the market for signalling was somewhat slower
than we had anticipated the track renewals business remained extremely busy
throughout our period of ownership. There are clear signs that the rate of
placement for signalling and communication contracts will increase over the
coming months while track renewals will continue to perform well. The high
output renewals contract is continuing to develop well and First Engineering is
now responsible for the Facilities Management (Mechanical and Electrical
Maintenance) for all Network Rail's major stations.
Significant first steps have been taken to align overheads with the new
structure of First Engineering following the handing back of maintenance work to
Network Rail in June 2004. Further savings are planned including the
consolidation of all Glasgow operations into a single building at Hamilton
International Park at the end of the 2005/06 Financial Year.
Health, Safety and Environmental
Sales £13.2m (2004 : £n/a) Operating loss £1.2m (2004 : £n/a) (for period of 9.5
months)
(2% of Group sales)
The two smallest businesses acquired with Peterhouse are in the process of
disposal. Neither IETG nor ESS (flow monitoring and safety equipment and
training) is regarded as core and we are aiming for completion of the processes
before the end of September.
Summary and Prospects
As I said in November, credit is due to the operational management of the
businesses for a strong performance, despite the inevitable distractions of the
acquisition and integration of Peterhouse. The forecast integration savings
have been achieved and we expect that further savings will be realised.
During the last year we have positioned Babcock to take advantage of the growing
markets in which we operate. We now have a balanced portfolio of businesses and
customers. We have continued to grow sales and profits in existing businesses
by over 10% a year while successfully integrating a significant acquisition.
We are well placed to continue the growth in both sales and profits in the
coming years and to become a major force in the public sector outsourcing
markets and in other technically demanding markets.
FINANCIAL REVIEW
Results of operations - summary analysis
To assist in understanding how events have impacted the Group, we have set out
in the tables below an analysis of existing and acquired operations, as such all
operating profit numbers quoted in the table are before charging goodwill
amortisation and operating and non-operating exceptional items.
Turnover Operating Net margin Growth
profit
2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 T/over Op. profit
£m £m £m £m % % % %
Defence Services 245.1 171.5 17.8 11.6 7.3% 6.8% 43% 53%
Technical Services 160.2 180.0 13.1 14.8 8.2% 8.2% (11)% (12)%
Engineering & Plant 113.0 86.5 5.5 3.5 4.9% 4.0% 31% 57%
Unallocated (6.4) (4.4)
Existing 518.3 438.0 30.0 25.5 5.8% 5.8% 18% 18%
Networks 61.5 - 4.1 - 6.7% - - -
Rail 167.0 - 8.3 - 5.0% - - -
HS&E 13.2 - (1.2) - - - -
Unallocated (0.2)
Acquisitions 241.7 - 11.0 - 4.6% - - -
Disposals - 14.0 - (0.3) - - - -
Total pre-goodwill and exceptional 760.0 452.0 41.0 25.2 5.4% 5.6% 68% 63%
items
Sales and operating profits from continuing businesses were substantially
increased from those of last year as a result of both organic and acquisition
related growth and, as we reported at the interim stage, the performance of the
existing businesses and that of the newly acquired Peterhouse businesses has
been strong. The acquired businesses met our expectations for the nine months
that they formed part of the Babcock group.
Turnover was 68% above that of the previous year or 18% up after excluding the
effect of acquisitions. Operating profit increased by 63% to £41 million,
representing a net margin of 5.4% against 5.6% last year. On existing
businesses, operating profit increased 18% with margins in line with last year
at 5.8%.
Existing businesses
Within the existing businesses, Defence Services performed strongly both in
turnover and operating profit with net margins up from 6.8% to 7.3% driven by a
combination of the start of South West Regional Prime and further growth in the
HM Naval Base Clyde contract. Conversely and as anticipated, revenues declined
in Technical Services in the face of lower naval re-fit activity but timely
realignment of the cost base enabled margins to be sustained at 8.2%. Continued
strong growth in the African operations on improved margins yielded turnover in
excess of £100 million and an operating profit improvement of over 50%.
Acquisitions
The former Peterhouse businesses, included for nine months, added £11 million in
operating profit on £242 million of turnover, a net margin of 4.6%. The
Networks business benefited from ongoing growth in both the high voltage power
supply market and the mobile phone transmission market and operating margins
totalled 6.7%. The latter included a contribution to operating profit of £0.5
million from Turner and Partners, which was acquired in September 2004. In Rail
the strong growth recorded in track renewals more than offset any softness in
other rail activities to deliver turnover of £167 million and, following
adjustment of the cost base (post the transfer of rail maintenance work to
Network Rail in June 2004) an operating margin of 5%. Conversely, the
performance of the non-core Health, Safety and Environmental businesses was
worse than anticipated, losing £1.2 million in market conditions weakened by
delays in expenditure on the regulated assets of the utility companies that are
the division's key customers.
Reconciliation to statutory profit and loss
The following table reconciles the results quoted above to the figures reported
in the statutory accounts.
Turnover Operating profit Net margin Growth
2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 T/over Op. profit
£m £m £m £m % % % %
Total pre-goodwill and exceptional 760.0 452.0 41.0 25.2 5.4% 5.6% 68% 63%
items
Operating exceptional items:
On acquisitions 7.0 -
On existing (5.5) -
Total 1.5 -
Amortisation of goodwill:
On acquisitions (3.4) -
On exisiting (3.2) (3.3)
Total (6.6) (3.3)
Statutory operating results 760.0 452.0 35.9 21.9 4.7% 4.8% 68% 64%
Share of joint ventures 0.3 0.1
Non-operating exceptional items (1.6) (1.7)
Profit on ordinary activities before 34.6 20.3
interest
Exceptional items
The following have been treated as exceptional charges to operating profit.
Cash Non-cash Total
£m £m £m
Reorganisation of marine design
and goodwill impairment (0.8) (4.7) (5.5)
Exceptional gain on termination of
rail maintenance contracts 8.8 8.8
Peterhouse rationalisation costs (1.8) (1.8)
Disposals - non-operating (1.2) (0.4) (1.6)
5.0 (5.1) (0.1)
Reorganisation costs and goodwill impairment charges of £5.5 million were
incurred in respect of the marine design businesses within Technical Services
following the decision to scale down and refocus this division's operations.
Agreement was reached with Network Rail for compensation and other payments to
be made by them in respect of the early termination and hand back of rail
maintenance contracts formerly run by First Engineering, the Peterhouse
subsidiary responsible for rail operations. The net gain after costs of
redundancies and other restructuring charges totalled £8.8 million.
Costs incurred in restructuring and integrating the Peterhouse businesses into
the group totalled £1.8 million.
Costs totalling £1.6 million in respect of disposals have been charged as a
non-operating exceptional item in the year.
Goodwill
Additions to goodwill arose in respect of the acquisitions of Peterhouse Group
plc (£81.0) million and Turner and Partners (£7.0 million). Amounts amortised
and written off as a result of impairment were £6.6 million and £4.7 million
respectively. The impairment write off was made as a result of a scaling down
of the activities of the marine design businesses.
Interest and taxation
2004/05 2003/04
£m £m
Profit on ordinary activities before interest 34.6 20.3
Interest (6.2) (2.2)
Exceptional gain on financial asset - 1.7
Net interest and similar income/(charges) (6.2) (0.5)
Profit before tax 28.4 19.8
Taxation (7.7) (3.4)
Profit after tax 20.7 16.4
The net interest charge rose to £6.2 million following an increase in net debt
arising on acquisition of Peterhouse and for which a new £140 million financing
facility was arranged. The total interest charge was covered over 6 times by
operating profit before goodwill amortisation and exceptional items.
Pre-tax profit increased 43% to £28.4 million and by 52% to £35.1 million
excluding goodwill amortisation and exceptional items.
The group's effective tax rate for the year was 24%. This compares to a rate of
15.7% last year, which benefited from the utilisation of prior years tax losses.
The expected rate for 2005/06 is approximately 26%.
Earnings per share
Basic earnings per share, before goodwill and exceptional items, increased 4.4%
to 14.20 pence, despite a significantly higher tax charge and an enlarged issued
share capital. After adjusting for the effect of the larger tax charge,
underlying growth in earnings per share was 15%.
Cash flow
We continue to underpin good and improving profit performances with strong cash
generation and one of our key performance indicators for all operations is the
conversion rate of operating profit into cash from operations, after taking into
account capital expenditure. The conversion rate for 2004/05 was 115% compared
to 120% last year.
After interest and tax payments free cash flow was £30.5 million, (2004; £24.4
million). Capital expenditure, before receipts from assets sold, totalled £5.7
million or less than 1% of turnover and less than 1 times depreciation. On
average over the medium term we target to spend no more than 1.5% of turnover or
1 times depreciation, whichever is the greater, on capital assets.
Net debt increased to £62.9 million from £15.4 million last year principally as
a result of the acquisition of Peterhouse (cash impact £64.7 million) and Turner
and Partners (£4 million) although higher interest payments (£6.1 million
against £0.4 million last year) and tax payments (£4.7 million against £1.6
million) both of which benefited from one off gains last year, also impacted.
The group has access to a £140 million three year credit line arranged at the
time of the Peterhouse acquisition of which £78 million had been drawn down at
31 March 2005.
Cost of capital and return on investment
The group's weighted average cost of capital, which for 2004/05 was 8.7%, is
used as one measure in assessing the financial viability of its investments.
The after-tax return before goodwill amortisation and exceptional items for 2004
/05 was 16%, compared with 20% last year, a decline arising principally from the
inclusion of less than a full years operating profit for Peterhouse and Turner
and Partners.
Pensions
The group maintains a number of defined benefit pension schemes some of which
were acquired with the Peterhouse businesses. In accounting for these schemes
the group applies SSAP24 in its consolidated accounts and the transitional rules
of FRS17 for disclosure purposes. The balance sheet position under both SSAP24
and FRS17 at 31 March 2005 is as set out in the following table.
SSAP24 FRS17
2004/05 2003/04 2004/05 2003/04
£m £m £m £m
Balance sheet surplus/(deficit) 98.2 67.2 (20.4) 2.0
Related tax (liability)/ asset (29.9) (20.7) 5.8 (0.9)
Net surplus/(deficit) 68.3 46.5 (14.6) 1.1
Since last year end the inclusion of schemes taken on from Peterhouse has
increased the SSAP24 balance sheet surplus substantially with the net surplus
standing at £68.3 million at the end of this year. Conversely, under FRS17 the
net position has deteriorated from a small surplus last year to a net deficit of
£14.6 million at 31 March 2005. The contrast in the valuation status reflects
the fundamental difference in assumptions between the two bases; whereas SSAP24
adopts a long term view of funding, FRS17 takes a fair or market value approach
to pension fund assets and liabilities, which is likely to lead to increased
volatility in balance sheet values. All of the group's principal defined
benefit schemes were in actuarial surplus for funding purposes at the last
valuation dates. The methodology and assumptions used to calculate the pension
assets and liabilities under FRS17 are substantially consistent with the
requirements of IAS19, which will be adopted by the Group with effect from 1
April 2005.
Treasury
The Group's policies, which have been reviewed and approved by the Board, cover
all significant areas of treasury activity including foreign exchange, interest
rates, liquidity and credit risk. The Treasury Committee, which comprises the
Group's Chief Executive, Finance Director and Financial Controller, with
authorities delegated by the Board, is responsible for ensuring that the Group
operates within the policies agreed by the Board.
The Group finances its operations through a combination of retained profits, new
equity and bank borrowings. It is policy to ensure that the Group has
sufficient financial resources to support the business and to leave a
comfortable margin between those facilities and likely peak borrowings during
the year. As such, substantial committed facilities are maintained and are
currently a £140 million bank facility, which has a maturity date of June 2007.
Interest rate risk is managed through the maintenance of a mixture of fixed and
floating rate debt and interest rate caps, each being reviewed on a regular
basis to ensure the appropriate mix is maintained.
The Group's main exposures to foreign currency fluctuation arise through its
activities in South Africa where both translational and transactional exposures
exist. It is group policy not to cover the effects of exchange rate fluctuation
on translation of the results of foreign subsidiaries into the groups base
currency, sterling. All material transactional exposures arising through
trading in currencies other than the operation's base currency must be
eliminated by the use of forward currency cover contracts as soon as they are
known of.
All treasury transactions are carried out only with prime rated counter-parties
as are investments of cash and cash equivalents. The Group's revenue is derived
mainly from government or government backed institutions or blue chip corporates
and as such credit risk is considered small.
International Financial reporting standards (IFRS)
Under European legislation, we are required to adopt IAS and IFRS in preparing
our Financial Statements from 1 April 2005 onwards. As a result, these
Financial Statements are the last prepared under UK Generally Accepted
Accounting Principles (UK GAAP).
Application of a particular standard issued by the International Accounting
Standards Board (IASB) is dependent on the European Union endorsing that
standard. To the extent that some standards may remain to be endorsed we have
assumed that they will be so endorsed when applying them in the restatement of
results for 2004/05.
The group has today issued a separate announcement to the Stock Exchange
summarising the effects of the adoption of the new standards on key elements of
the Group's Profit and Loss Account and on Group Net Assets. This announcement
is also available on our web site at www.babcock.co.uk.
Although the majority of the work on the transition from UK GAAP to IAS/IFRS has
been completed, certain areas of the standards are still subject to change.
Consequently, further and more detailed information on the impact on Profit and
Loss Account and Balance Sheet line items will be given within the next two
months. The estimates provided in the announcement have not been audited.
The major areas of impact were outlined in our 2003/04 Financial Review and were
identified as pensions accounting, goodwill and intangibles with particular
reference to acquisition accounting, deferred tax, finance leases and foreign
exchange hedging. Further analysis since then has shown that finance leases and
foreign exchange hedging are unlikely to have a material impact but accounting
for share based payments will affect earnings although not necessarily to a
significant extent.
The key points to note are that the Group's cash flow and its ability to pay
dividends will be unaffected but that there is likely to be more volatility in
the balance sheet as a result of the use of the fair value concept, particularly
in applying the new standard relating to pensions, which will also result in a
realignment of operating profit and interest income.
Although the presentational requirements of IFRS will differ from those
currently applied under UK GAAP, the Group will continue to provide details of
underlying earnings, which under IFRS will be defined as earnings before
significant non-recurring items and before amortisation of acquired intangibles.
BABCOCK INTERNATIONAL GROUP PLC
GROUP PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 MARCH 2005
Year ended 31 March 2005 Year ended 31 March 2004
Before
Before Goodwill Goodwill Goodwill
goodwill and and and and
exceptional exceptional exceptional exceptional
items items Total items items Total
Note £m £m £m £m £m £m
Existing operations 518.3 - 518.3 438.0 - 438.0
Acquisitions 241.7 - 241.7 - - -
Continuing 760.0 - 760.0 438.0 - 438.0
operations
Discontinued - - - 14.0 - 14.0
operations
Group turnover 3 760.0 - 760.0 452.0 - 452.0
Cost of sales (647.7) - (647.7) (385.0) - (385.0)
Gross profit 112.3 - 112.3 67.0 - 67.0
Net operating (71.3) (5.1) (76.4) (41.8) (3.3) (45.1)
expenses
Existing operations 30.0 (8.7) 21.3 25.5 (3.3) 22.2
Acquisitions 11.0 3.6 14.6 - - -
Continuing 3 41.0 (5.1) 35.9 25.5 (3.3) 22.2
operations
Discontinued - - - (0.3) - (0.3)
operations
Group operating 3 41.0 (5.1) 35.9 25.2 (3.3) 21.9
profit
Share of operating profit 3
of joint ventures
0.3 - 0.3 0.1 - 0.1
Loss on sale of operations 4 - (1.6) (1.6) - (1.7) (1.7)
Profit on ordinary
activities before interest 41.3 (6.7) 34.6 25.3 (5.0) 20.3
Net interest and similar
(charges)/income (6.2) - (6.2) (2.2) 1.7 (0.5)
Profit on ordinary
activities before taxation 35.1 (6.7) 28.4 23.1 (3.3) 19.8
Tax on profit on ordinary 5
activities (8.1) 0.4 (7.7) (3.4) - (3.4)
Profit on ordinary
activities for the
financial year 27.0 (6.3) 20.7 19.7 (3.3) 16.4
Equity minority (0.1) -
interests
Profit for the financial 20.6 16.4
year
Equity dividends paid and
proposed 7 (9.4) (4.9)
Retained profit for the
financial year 11.2 11.5
Earnings per share
- Basic 6 10.87p 11.31p
- Diluted 6 10.86p 11.28p
Earnings per share before
exceptional items and
goodwill
- Basic 6 14.20p 13.60p
- Diluted 6 14.18p 13.57p
BABCOCK INTERNATIONAL GROUP PLC
GROUP BALANCE SHEET
AT 31 MARCH 2005
As at
As at 31 March
31 March 2005 2004
£m (as restated)
£m
Fixed assets
Intangible assets
Development costs 0.2 0.7
Goodwill
- Goodwill 156.1 81.5
- Negative goodwill (2.9) (4.7)
153.2 76.8
153.4 77.5
Tangible assets 37.9 12.2
Investments
Investments in joint ventures
- Share of gross assets 4.8 2.4
- Share of gross liabilities (4.4) (2.7)
- Loans to joint ventures 0.2 0.9
0.6 0.6
Other investments 0.1 0.1
192.0 90.4
Current assets
Stocks 41.3 29.7
Debtors - due within one year 180.4 75.2
Debtors - due after more than one year 98.1 64.0
278.5 139.2
Cash and bank balances 33.1 17.5
352.9 186.4
Creditors - amounts due within one year (307.5) (134.7)
Net current assets 45.4 51.7
Total assets less current liabilities 237.4 142.1
Creditors - amounts due after more than one year (8.4) (16.0)
Provisions for liabilities and charges (55.0) (29.0)
Net assets 174.0 97.1
Capital and reserves
Called up share capital 125.0 90.1
Share premium account 69.3 38.6
Capital redemption reserve 30.6 30.6
Profit and loss account (51.0) (62.2)
Shareholders' funds - equity interests 173.9 97.1
Equity minority interests 0.1 -
174.0 97.1
BABCOCK INTERNATIONAL GROUP PLC
SUMMARISED GROUP CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH 2005
Note Year ended
31 March
Year ended 2004
31 March (as restated)
2005 £m
£m
Cash inflow from operating activities 8 43.2 28.0
Returns on investments and servicing of finance (6.1) (0.4)
Taxation (4.7) (1.6)
Capital expenditure and financial investment 3.9 (1.8)
Acquisitions and disposals (29.7) 1.4
Equity dividends paid (7.0) (4.5)
Cash (outflow)/inflow before financing (0.4) 21.1
Management of liquid resources (5.6) 0.2
Financing 20.6 (19.2)
Increase in cash in the period 9 14.6 2.1
BABCOCK INTERNATIONAL GROUP PLC
GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEAR ENDED 31 MARCH 2005
Year ended Year ended
31 March 31 March
2005 2004
£m £m
Group profit for the financial year 20.3 16.4
Profit on joint ventures 0.3 -
Profit for the financial year 20.6 16.4
Currency translation differences on foreign currency net
investments and related loans - 0.6
Total recognised gains and losses relating to the year 20.6 17.0
BABCOCK INTERNATIONAL GROUP PLC
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
FOR THE YEAR ENDED 31 MARCH 2005
Year ended
Note Year ended 31 March
31 March (as restated)
2005 2004
£m £m
Shareholders' funds at start of year, as previously 101.1 87.3
reported
Prior year adjustment 11 (4.0) (3.9)
Shareholders' funds at start of year, as restated 97.1 83.4
Ordinary Shares issued in the year 65.6 1.7
Total recognised gains and losses relating to the 20.6 17.0
period
Dividends (9.4) (4.9)
Movement on Employee Share Ownership Plan - (0.1)
Net movement in shareholders' funds 76.8 13.7
Shareholders' funds at the end of year 173.9 97.1
BABCOCK INTERNATIONAL GROUP PLC
NOTES TO THE PRELIMINARY STATEMENT
FOR THE YEAR ENDED 31 MARCH 2005
1 Basis of Preparation
The financial information set out above does not comprise the company's
statutory accounts. Statutory accounts for the previous financial year ended 31
March 2004 have been delivered to the Registrar of Companies. The auditors'
report on those accounts was unqualified and did not contain any statement under
section 237(2) and (3) of the Companies Act 1985. The accounting policies have
all been applied consistently throughout the year and the preceding year with
the exception of UITF38 (see note 11).
2 Board Approval
The Board approved the Annual Report on the 25 May 2005. The auditors have
given an unqualified opinion on the accounts for the year ended 31 March 2005,
which will be delivered to the Registrar following the Annual General Meeting.
3 Segmental analysis
Year ended 31 March 2005 Year ended 31 March 2004
Group Group
operating operating
profit/ profit/
(loss) (loss)
before before
goodwill Goodwill Group goodwill Goodwill Group
and and operating Group and and operating
Group exceptional exceptional profit/ turnover exceptional Exceptional profit/
turnover items items (loss) £m items items (loss)
£m £m £m £m £m £m £m
Existing operations
Defence Services 245.1 17.8 - 17.8 171.5 11.6 - 11.6
Technical Services 160.2 13.1 (5.5) 7.6 180.0 14.8 - 14.8
Engineering & Plant
Services 113.0 5.5 - 5.5 86.5 3.5 - 3.5
Unallocated costs,
other income and
goodwill - (6.4) (3.2) (9.6) - (4.4) (3.3) (7.7)
518.3 30.0 (8.7) 21.3 438.0 25.5 (3.3) 22.2
Acquisitions
Networks 61.5 4.1 - 4.1 - - - -
Rail 167.0 8.3 8.8 17.1 - - - -
HS&E 13.2 (1.2) - (1.2) - - - -
Unallocated costs,
other income and
goodwill - (0.2) (5.2) (5.4) - - - -
241.7 11.0 3.6 14.6 438.0 25.5 (3.3) 22.2
Total continuing
operations 760.0 41.0 (5.1) 35.9 438.0 25.5 (3.3) 22.2
Discontinued - - - - 14.0 (0.3) - (0.3)
Group total 760.0 41.0 (5.1) 35.9 452.0 25.2 (3.3) 21.9
The turnover, not included above, relating to joint ventures was £3.1 million
(2004: £3.5 million). The share of operating profit of £0.3 million (2004:
profit £0.1 million) from joint ventures represents a £0.2 million with the
Technical Services segment (2004: loss £0.1 million), a profit with the Defence
Services segment of £0.2 million (2004: £0.2 million) and a loss of £0.1 million
from the Networks segment (2004 £nil). The inter segment sales in 2005 and 2004
were not material.
BABCOCK INTERNATIONAL GROUP PLC
NOTES TO THE PRELIMINARY STATEMENT CONTINUED
FOR THE YEAR ENDED 31 MARCH 2005
4 Exceptional items and goodwill
Within existing businesses an operating exceptional loss of £5.5 million was
realised representing £0.8 million of restructuring costs and £4.7 million of
goodwill write-off on the downsizing of the group's marine design subsidiaries.
Within acquired businesses an operating exceptional profit of £7.0 million is
made up of £8.8 million income from the transfer of rail maintenance contracts
back to Network Rail offset by costs of the transfer and restructuring costs
within the rail business, and £1.8 million of operating exceptional costs for
the closure of the Peterhouse head office.
The regular goodwill amortisation (excluding exceptional charges) is £6.6
million (2004: £3.3 million).
In 2005 the non-operating exceptional loss of £1.6 million is made up of the
following; a loss of £1.2 million provided in the period for disposal costs of
previously disposed of businesses, and a loss of £0.4 million recognised on the
sale of CMR Consultants Limited and a write-down of the carrying value of FBMA
which was sold on 10 October 2004. Tax includes an exceptional credit of £0.4
million relating to the above.
In 2004 the non-operating exceptional charge of £1.7 million was made up of a
loss on sale of Swedish Materials Handling businesses of £2.5 million, offset by
a profit on the sale of a non-trading subsidiary containing a financial asset of
£0.8 million. Net interest and similar income/(charges) includes an exceptional
gain of £1.7 million arising on the disposal of a financial asset.
5 Taxation
The effective rate of tax in respect of continuing profits before goodwill
exceptional items and discontinued activities is approximately 24%. This is
lower than the statutory 30% rate due to the net effect of permanent differences
and the difference between the UK rate and the effective overseas rate.
6 Earnings per share
The basic earnings per share has been calculated on the profit for the period of
£20.6 million (2004: profit of £16.4 million) and the weighted average number of
ordinary shares in issue throughout the period of 189,193,887 (2004:
145,022,090).
The diluted earnings per share has been calculated after taking account of
258,810 dilutive share options where the exercise price is less than the average
market price of the company's own shares during the period.
The basic and diluted earnings per share before exceptional items and goodwill
have been calculated using the same weighted average number of ordinary shares
in issue as above and after adjusting for goodwill amortisation of £6.6 million
(2004: £3.3 million), operating exceptional items of £1.5 million profit, the
loss on the sale of operations of £1.6 million (2004: £1.7 million), and the
exceptional interest income of £nil (2004: £1.7 million) and an exceptional tax
credit of £0.4 million (2004: £nil).
7 Equity Dividends
A dividend of 2.65p per 60p ordinary share (2004: 2.1p per 60p ordinary share)
will be paid, subject to shareholders approval, on 8 August 2005 to shareholders
registered on 8 July 2005. An interim dividend of 1.35 per 60p ordinary share
(2004: 1.25p per 60p ordinary share) was paid on 21 January 2005.
BABCOCK INTERNATIONAL GROUP PLC
NOTES TO THE PRELIMINARY STATEMENT CONTINUED
FOR THE YEAR ENDED 31 MARCH 2005
8 Reconciliation of group operating profit to cash flow from operating
activities
Year ended Year ended
31 March 31 March
2005 2004
£m £m
Group operating profit 35.9 21.9
Depreciation, amortisation and impairment 19.7 8.2
charges
Increase in stocks (5.0) (8.5)
(Increase)/decrease in debtors (22.2) 13.7
Increase/(decrease) in creditors 8.6 (7.1)
Increase/(decrease) in provisions 5.3 (0.1)
Loss/(profit) on sale of fixed assets 0.9 (0.1)
Net cash inflow from operating activities 43.2 28.0
9 Movement in net debt
Year ended Year ended
31 March 31 March
2005 2004
£m £m
Increase in cash in the year 14.6 2.1
Increase/(decrease) in liquid resources in the year 5.6 (0.2)
Cash flow from the (increase)/decrease in debt and lease (19.8) 20.5
financing
Change in net funds resulting from cash flows 0.4 22.4
Loans and finance leases acquired with subsidiaries (47.2) -
New finance leases (0.9) (0.1)
Translation differences 0.2 (0.5)
Movement in net debt in the year (47.5) 21.8
Net debt at 1 April (15.4) (37.2)
Net debt at 31 March (62.9) (15.4)
BABCOCK INTERNATIONAL GROUP PLC
NOTES TO THE PRELIMINARY STATEMENT CONTINUED
FOR THE YEAR ENDED 31 MARCH 2005
10 Changes in net debt
At Subsidiaries At
1 April New finance disposed/ Exchange 31 March
2004 Cash flow leases acquired movement 2005
£m £m £m £m £m £m
Cash in hand and at 14.6 (17.9) - 27.9 - 24.6
bank
Overdrafts (11.3) 15.2 - (10.6) - (6.7)
3.3 (2.7) - 17.3 - 17.9
Debt (20.5) (23.1) - (37.3) 0.1 (80.8)
Finance leases (1.1) 3.3 (0.9) (9.9) 0.1 (8.5)
(21.6) (19.8) (0.9) (47.2) 0.2 (89.3)
Liquid resources 2.9 5.6 - - - 8.5
Total (15.4) (16.9) (0.9) (29.9) 0.2 (62.9)
11 Prior year adjustment
The financial statements for the year ended 31 March 2004 have been restated
following the adoption of UITF Abstract 38 'Accounting for ESOP Trusts'. Shares
held by the Babcock International Group PLC ESOP Trust, previously shown in the
balance sheet as fixed asset investments, are now required to be shown as a
deduction from shareholders' funds.
The impact of the treatment above is to reduce investments by £4.0m at 31 March
2004.
The consolidated cash flow statement has been restated to reflect the
reallocation of the cash payments for the purchase of shares from 'capital
expenditure and financial investments' to 'financing'. (There is no material
impact on profit before tax in either the current or prior period.
BABCOCK INTERNATIONAL GROUP PLC
NOTES TO THE PRELIMINARY STATEMENT CONTINUED
FOR THE YEAR ENDED 31 MARCH 2005
12 Acquisitions and disposals
On 14 June 2004 Babcock acquired Peterhouse Group Plc, the following is a
summary of the provisional acquisition balance sheet:
The net assets acquired and the related costs were as follows:
Peterhouse
Provisional Peterhouse
Peterhouse book fair value Provisional
value adjustments fair value
£m £m £m
Tangible fixed assets 37.8 (7.7) 30.1
Investments 5.1 - 5.1
Total fixed assets 42.9 (7.7) 35.2
Stocks 5.2 1.6 6.8
Debtors 104.8 12.7 117.5
Cash 27.8 - 27.8
Creditors (103.0) (0.3) (103.3)
Finance lease (9.9) - (9.9)
Borrowings (37.3) - (37.3)
Net current assets (12.4) 14.0 1.6
Provisions for liabilities and charges (14.8) (3.6) (18.4)
Net assets acquired 15.7 2.7 18.4
Fair value of consideration:
Cash 31.7
Shares 64.7
Costs 3.0
99.4
Goodwill arising 81.0
On 14 June 2004 the percentage of acceptances received was 55.7% with the
remaining acceptances received over the following months. The change in
percentage ownership in this period did not materially affect the fair value of
assets acquired or the resultant goodwill reflected above.
On 10 September 2004 the group acquired Turner and Partners. Turner and
Partners has been classified in Networks.
On 13 July 2004 the group sold CMR Consultants Limited, and on 10 June 2004 the
group sold Babcock Defence Services Australia Pty Limited.
13 International financial reporting standards
Following the EU's adoption of Regulation No. 1606/2002 on the use of
International Financial Reporting Standards (IFRS) by EU-listed companies, the
group is implementing IFRS from 1 April 2005. The first financial information
to be reported by the group in accordance with IFRS will be for the first six
months ending 30 September 2005 but the requirement to present comparative
information means that a balance sheet as at 31 March 2004 and primary
statements for 2005 prepared in accordance with IFRS will also be required. The
group has continued to report its consolidated accounts in accordance with UK
GAAP for 2005.
A separate announcement will be made today to the Stock Exchange as to the
principal areas affected by the transition to IFRS.
BABCOCK INTERNATIONAL GROUP PLC
NOTES TO THE PRELIMINARY STATEMENT CONTINUED
FOR THE YEAR ENDED 31 MARCH 2005
14 AGM
The Annual General Meeting will be held at London Marriott Hotel, Marble Arch,
134 George Street, London W1H 5DN, on Tuesday 19 July 2005, at 11.30 am.
Copies of the 2005 Annual Report and Accounts will be distributed to all holders
of the company's ordinary shares on or before 16 June 2005. Copies will also be
available at the company's registered office: 2 Cavendish Square, London W1G
0PX. In addition, this report will be available on the company's website:
www.babcock.co.uk
This information is provided by RNS
The company news service from the London Stock Exchange
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