Interim Results

Babcock International Group PLC 22 November 2001 22nd November 2001 BABCOCK INTERNATIONAL GROUP PLC Interim Results for the Six Months Ended 30 September 2001 Contacts: Gordon Campbell - Chairman Babcock International Group PLC Telephone: 020 7282 2945 Until 16.00 thereafter 020 7291 5000 Ginny Pulbrook - Director Citigate Dewe Rogerson Telephone: 020 7282 2945 Highlights * Profit improvement compared to the previous six months driven by Babcock's core support services divisions: BES and HCS - Operating profit before goodwill and exceptional items of £ 7.1m on turnover of £227m (£1.8m and £228m in second half of 2000/2001 and £7.8m and £213m in the first half of 2000/2001); - Earnings per share before goodwill and non-operating exceptional items of 2.39p as compared with a loss of 0.35p per share for the full year 2000/2001; - Interim dividend of 1.1p per share (1.1p per share on the same basis for the first half of 2000/2001) * Continued implementation of the strategy to transform Babcock into a support services group: - Integration of recently acquired Hunting Defence Services business completed and performing ahead of expectations; - Order book for continuing operations increased over last six months; - Initial progress with sale of the materials handling businesses; - Stabilised majority of underperforming BMH businesses * Strong financial base: - Ungeared balance sheet; - Secure order book with circa 60% business based on long-term government contracts Commenting on the results, Gordon Campbell, Chairman of Babcock said: 'This was an encouraging recovery from the previous six months and despite the deterioration of the BMH Division, the order book has increased. Two-thirds of our business is in defence related activities; and with an ungeared balance sheet, we are well placed to weather any economic downturn and, indeed, to continue with our expansion in support services.' BABCOCK INTERNATIONAL INTERIM STATEMENT SIX MONTHS ENDED 30 SEPTEMBER 2001 Overview The first half of the current financial year saw a recovery in operating profits compared to the previous six months. This stemmed from good performances in the BES and HCS Divisions and was assisted by the sale of the loss-making Railcare business. These performances more than offset the expected deterioration in the BMH Division. Interest costs increased due to the acquisition of HCS and the return of cash to shareholders. This was an encouraging recovery from the previous six months, and despite the deterioration of the BMH Division, the order book for continuing operations has increased. Two-thirds of the business is in defence related activities and, with an ungeared balance sheet, the company is well placed to weather any economic downturn and, indeed, to continue with the expansion in support services. The six months saw the continued implementation of the strategy to move the business more firmly into the support services sector. HCS, which was acquired in March 2001 for £60.9m, was fully integrated into the Babcock Group and delivered the performance anticipated at the time of the acquisition. In addition to establishing Babcock as a leading supplier of support services to the Armed Forces, it will also provide a base for expansion into the civil sector. HCS performed slightly ahead of expectations and is currently bidding for a number of major MoD contracts, details of which are described later in this report. BES turned in a strong performance, with additional work being demanded on both HMS Ark Royal and the two S-Class submarines. HMS Ark Royal was completed on time and has now been replaced in the dockyard by HMS Invincible. Further contracts were secured for the refitting of 5 Type 23 frigates and a number of orders were booked for new vessel builds. The sale of the BMH operation commenced with the disposal of the wood handling business, albeit at a loss to the net asset value. The deteriorating market conditions, allied to uncertainty created after the September 11 events, has inevitably made the sale of the remaining businesses in the BMH Group more difficult. The deteriorating market conditions also meant disappointing results from BMH but, with the exception of the Marine Division, results have now been stabilised. The management are, however, continuing to actively restructure the underperforming parts of this division; consequently, restructuring costs were incurred in downsizing the operation and these will continue into the second half. Review of Operations BES: Engineering and technology support services for the defence, transport and 'secure facilities' sector The division performed particularly well in the first half, with turnover and profits growing, compared to the previous six months and the first half of 2000/2001. This was primarily due to an increased workload on HMS Ark Royal and S-Class submarines. The final programme on HMS Ark Royal amounted to £135m compared to an original programme of £80m. Despite this increase in workload, the original timetable was met and the vessel delivered on time. HMS Ark Royal has now been replaced at Rosyth by HMS Invincible, and various other refits were confirmed during the period. The division's order book increased from £ 128m to £168m over the six months. Additional commercial orders were received during the period, based largely on the design capability of FBM which had been acquired in March 2000. The first fast passenger ferry was delivered in August, and contracts for 16 military landing craft were booked, in addition to 6 vessels for the RNLI. Orders were also confirmed for 22 mega-3 rail freight wagons and delivery is expected to commence in the second half. The New Zealand dockyard operation made further progress in its commercial activities as well as exploring the potential for service support to the Australian Navy. Work continued throughout the period with the Warship Support Agency to conclude the contract to manage the naval bases at Faslane and Coulport. It is still expected that this proposal will be submitted to the Minister by the end of the year, with the contract commencing in the spring of 2002. HCS: Multi-skilled organisation offering technical support, training and facilities management for the Royal Air Force and the Army The acquisition of HCS was completed in March 2001. It has been rapidly assimilated into the Babcock Group and has met fully the expectation at the time of the acquisition. HCS has strong relationships with all its customers and the Multi-Activity contract at Cranwell and FSAST Simulator Maintenance contract have been extended during the first half. Further renewals are anticipated as a consequence of the excellent reputation which HCS enjoys with its customers in the Armed Forces. In addition, HCS are in the bidding process for some major new PPP/PFI contracts, including the Royal School of Military Engineering, Armoured Vehicle Training Service and the Airfield Support Services Project, in conjunction with partners. HCS will also provide the basis for expansion into the civil sector of support services, but this move would be accelerated by prudent acquisitions and a number are under review. The areas upon which we would concentrate would be those areas of strength within HCS, viz training, maintenance and facilities management. BMH: Leading supplier of materials processing technologies and engineered systems BMH's performance was adversely affected by very difficult trading conditions. Action was taken to significantly restructure the business in response to poor demand but further will be necessary in the second six months. However, with the exception of the marine business, the other businesses have been stabilised. The order book at 30 September 2001 was similar to that at 31 March 2001 but turnover (excluding Africa) fell by 29% compared to the previous six months. In the circumstances, to contain the losses, before exceptional items, to only £1.2m more than in the previous six months, was a respectable achievement. The market environment undoubtedly hindered our attempts to dispose of the BMH businesses, but we are currently in negotiations to sell two of the remaining businesses. The wood handling business in Finland was sold to the management, but at a book loss of £3.3m. Babcock Africa Babcock Africa continues to refocus its business on support services, but still has some dependency on contracting which causes some lumpiness in the results. Thus, whilst the turnover in the first six months matched the previous half-year, profits were somewhat lower. There is, however, potential for transferring some of the BES/HCS skills into South Africa as the government reviews its outsourcing policy, and our base there is a crucial marketing advantage over other support services groups. Prospects With two-thirds of the business based on long-term government contracts and an ungeared balance sheet, Babcock is well placed to weather the current uncertain economic circumstances, and to pursue its strategy of expansion in support services. BABCOCK INTERNATIONAL GROUP PLC GROUP PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2001 Year ended Six months ended Six months ended 31 March 30 September 2001 30 September 2000 2001 (as restated) (as restated) Before Before except- Except- except- Except- ional ional ional ional items items Total items items Total (un- (un- (un- (un- (un- (un- audited) audited) audited) audited) audited) audited) £'000 Note £'000 £'000 £'000 £'000 £'000 £'000 Group turnover 382,776 Continuing 212,930 - 212,930 184,719 - 184,719 operations 58,265 Discontinued 4 14,060 - 14,060 28,198 - 28,198 operations 441,041 3 226,990 - 226,990 212,917 - 212,917 -------- --------- -------- -------- --------- ------- --------- (6,135) Group 7,139 (1,677) 5,462 7,828 (1,190) 6,638 operating profit / (loss) before goodwill amortisation 1,473 Goodwill (1,098) - (1,098) 761 - 761 amortisation Group operating profit / (loss) 5,391 Continuing 5,863 (1,677) 4,186 10,421 - 10,421 operations (10,053) Discontinued 4 178 - 178 (1,832) (1,190) (3,022) operations (4,662) 3 6,041 (1,677) 4,364 8,589 (1,190) 7,399 (163) Share of (246) - (246) (89) - (89) operating loss of joint ventures and associates (6,200) Loss on sale 6 - (3,348) (3,348) - - - of operations --------- ---------- ------- -------- -------- ------- ------ (11,025) Profit / 5,795 (5,025) 770 8,500 (1,190) 7,310 (loss) on ordinary ---------- -------- -------- -------- activities before interest 3,715 Net interest (655) 2,711 and similar --------- charges -------- ------- (7,310) Profit / 115 10,021 (loss) on ordinary activities before taxation (1,215) Tax on profit 7 (1,145) (2,647) / (loss) on --------- ordinary ---------- ------- activities (8,525) (Loss) / (1,030) 7,374 profit on --------- ordinary ---------- -------- activities after taxation 3,244 Minority 88 1,296 interest --------- --------- ------- (5,281) (Loss) / (942) 8,670 profit for the financial period (3,807) Dividends 9 (1,646) (1,560) paid and --------- proposed --------- -------- (9,088) Retained (2,588) 7,110 (loss) / --------- profit for --------- -------- the financial period (Loss) / 8 earnings per share (3.34)p - Basic (0.64)p 5.11 p (3.31)p - Diluted (0.64)p 5.04 p Earnings / 8 (loss) per share before non-operating exceptional items and goodwill (0.35)p - Basic 2.39 p 4.66 p (0.35)p - Diluted 2.38 p 4.60 p BABCOCK INTERNATIONAL GROUP PLC GROUP BALANCE SHEET AS AT 30 SEPTEMBER 2001 As at As at As at 31 March 30 September 30 September 2001 2001 2000 (as restated) (as restated) (unaudited) (unaudited) £'000 Note £'000 £'000 Fixed assets Intangible assets 1,507 Development 1,378 1,635 costs Goodwill 88,279 - Goodwill 82,819 27,795 (14,916) - Negative (10,840) (16,810) goodwill 73,363 71,979 10,985 ---------- ---------- ------------- 74,870 73,357 12,620 ---------- ----------- ----------- 37,213 Tangible 31,484 43,996 assets Investments Investments in joint ventures 2,548 - Share of 1,903 2,952 gross assets (2,069) - Share of (1,077) (2,087) gross liabilities 479 826 865 537 Investments 537 341 in associates 1,624 Other 2,720 1,119 investments --------- --------- --------- 2,640 4,083 2,325 --------- --------- --------- 114,723 108,924 58,941 --------- -------- ---------- Current assets 27,975 Stocks 22,279 31,925 98,806 Debtors - due 89,032 103,559 within one year 81,181 Debtors - due 70,330 80,079 after more than one year 179,987 159,362 183,638 25,228 Cash and bank 13 24,542 109,704 balances --------- ----------- ------- ------------ 233,190 206,183 325,267 Creditors - amounts due within one year (25,892) - Borrowings 13 (19,498) (17,909) (173,399) - Other (156,579) (170,854) (199,291) (176,077) (188,763) --------- ----------- ------------- 33,899 Net current 30,106 136,504 assets --------- ----------- ------------ 148,622 Total assets 139,030 195,445 less current liabilities Creditors - amounts due after more than one year (674) - Borrowings 13 (812) (935) (1,868) - Other (513) (758) (2,542) (1,325) (1,693) (37,221) Provisions (38,407) (40,157) for --------- liabilities ------------ ------------- and charges 108,859 Net assets 99,298 153,595 -------- ------------ ------------- Capital and reserves 90,588 Called up 10 88,712 85,028 share capital 37,542 Share premium 37,674 67,248 account 27,863 Capital 29,957 - Redemption Reserve (50,357) Profit and (57,092) (3,852) loss account --------- ------------- -------------- 102,868 Equity 98,577 148,424 interests 2,768 Non-equity 674 - interests 105,636 Shareholders' 99,251 148,424 funds 3,223 Equity 47 5,171 minority --------- interests ------------- ------------- 108,859 99,298 153,595 --------- ------------- ------------- BABCOCK INTERNATIONAL GROUP PLC SUMMARISED GROUP CASH FLOW STATEMENT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2001 Year ended Six months ended Six months ended 31 March 30 September 30 September 2001 2001 2000 (unaudited) (unaudited) £'000 Notes £'000 £'000 (10,977) Cash inflow / 11 6,739 (12,707) (outflow) from operating activities 2,495 Returns on (762) 2,570 investments and servicing of finance (743) Taxation (531) (985) (7,163) Capital (4,592) (2,859) expenditure and financial investment (59,622) Acquisitions 4,755 3,230 and disposals (4,335) Equity (2,237) (2,795) dividends paid --------- ----------------- ----------------- (80,345) Cash inflow / 3,372 (13,546) (outflow) before financing (18,549) Financing 3,390 206 ---------- ----------------- ----------------- (98,894) Increase / 13 6,762 (13,340) (decrease) in --------- cash in the ----------------- ----------------- period GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2001 Year ended Six months ended Six months ended 31 March 30 September 30 September 2001 2001 2000 (as restated) (as restated) Note (unaudited) (unaudited) £'000 £'000 £'000 (5,281) (Loss) / Profit for the (942) 8,670 financial period (649) Currency translation (1,940) 89 differences on foreign currency net investments and related loans (5,930) Total recognised gains and (2,882) 8,759 losses relating to the ------------ period ------------- ------------- - Prior year adjustment 14 (4,522) - ------------ ------------- ------------- (5,930) Total gains and losses (7,404) 8,759 recognised since last annual ------------ report and accounts -------------- --------------- RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2001 Year ended Six months ended Six months ended 31 March 30 September 30 September 2001 2001 2000 (as restated) (as restated) (unaudited) (unaudited) £'000 Note £'000 £'000 143,932 Shareholders' funds 110,158 143,932 at start of period, as previously reported (3,102) Prior year adjustment 14 (4,522) (3,102) -------------- --------------------- --------------------- 140,830 Shareholders' funds 105,636 140,830 at start of period, as restated -------------- ----------------- ----------------- (5,930) Total recognised gains and losses relating (2,882) 8,759 to the period 3,356 Shares issued in the period 237 395 (28,813) Redemption of 'B' (2,094) - preference shares (3,807) Dividends (1,646) (1,560) ---------- ----------------- ------------------ (35,194) Net movement in (6,385) 7,594 shareholders' fund --------- -------------------------- --------------- --------------- 105,636 Shareholders' funds 99,251 148,424 at end of period ---------- ------------------------- --------------- --------------- BABCOCK INTERNATIONAL GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2001 1. Accounting policies The interim financial statements have been prepared in accordance with the accounting policies adopted in the preparation of the financial statements for the year ended 31 March 2001, as set out in the annual report for that year. FRS19: Deferred Tax has been adopted for the first time in this interim report. The cumulative effect of this change in accounting policy has been recognised as a prior year adjustment and comparative figures have been restated. The effect on the financial statements is set out in note 14. 2. Basis of preparation The comparative figures for the year ended 31 March 2001 and the other financial information contained in this interim report do not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 March 2001 have been delivered to the Registrar of Companies. The auditors have reported on those accounts, their report was not qualified and did not contain a statement under section 273(2) or (3) of the Companies Act 1985. The interim report for the six months ended 30 September 2001 was approved by the directors on 21 November 2001. 3. Segmental Analysis Six months ended Six months ended 30 September 2001 30 September 2000 Group Group operating operating profit profit before before operating Operating Group operating Operating Group Group exceptional except- operat- Group except- except- operat- turn- ional ing turn- ional tonal ing over items items profit over items items profit £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Continuing operations BES 103,808 7,940 - 7,940 97,582 6,759 - 6,759 HCS 31,827 3,206 - 3,206 - - - - BMH 77,295 (3,151) (1,052) (4,203) 87,137 4,158 - 4,158 Un- allocated - (1,034) (625) (1,659) - (1,067) - (1,067) costs and other income --------- -------- ---------- ------ ------- ------- ------- -------- 212,930 6,961 (1,677) 5,284 184,719 9,850 - 9,850 Good- will - (1,098) - (1,098) - 571 - 571 amort- isation --------- -------- --------- ------- -------- ------ ------- ------ Total 212,930 5,863 (1,677) 4,186 184,719 10,421 - 10,421 con- tinuing operat- ions --------- --------- -------- -------- -------- ------ ------ ------- Dis- con- tinued 14,060 178 - 178 28,198 (2,022) (1,190) (3,212) operations Goodwill - - - - - 190 - 190 amort- isation ------------ -------- -------- ------- ------ ------ ------- ------ Total 14,060 178 - 178 28,198 (1,832) (1,190) (3,022) dis- continued operat- ions --------- --------- ------- ------- ------- ----- ------ ------ Group total 226,990 6,041 (1,677) 4,364 212,917 8,589 (1,190) 7,399 ---------- --------- ------- ------ ------ ----- ------ ------ 4. Discontinued operations Discontinued operations comprise the Railcare business which was disposed of on 23 May 2001 and the BMH Wood business which was disposed of on 30 August 2001. 5 Operating exceptional items Exceptional costs of £1.1 million have been incurred in restructuring businesses within the BMH division and exceptional costs of £0.6m have been incurred in relation to a proposed acquisition that did not proceed. 6 Loss on sale of operations The loss on the sale of operations comprises the loss on the disposal of the BMH Wood business and includes the write-off of goodwill amounting to £2.6 million. No taxation is applicable to the loss on disposal. Provision for the loss on disposal of the Railcare business was made in the year ended 31 March 2001. 7. Taxation Provision has been made for taxation based on the estimated effective tax rate, before non-operating exceptional items and goodwill, for the year ended 31 March 2002. 8 (Loss) / earnings per share The basic (loss)/earnings per share has been calculated on the loss for the period of £942,000 (2000: restated profit of £8,670,000) and the weighted average number of ordinary shares in issue throughout the period of 146,628,978 (2000: 169,631,217). The diluted (loss)/earnings per share has been calculated after taking account of 456,187 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/(loss) per share before non-operating 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 £1,098,000 (2000: credit of £761,000) and the loss on the sale of operations of £3,348,000 (2000: £nil). 9 Dividends An interim dividend of 1.1p per 60p ordinary share (2000: 1.1p per 'new' 60p ordinary share) will be paid on 25 January 2002 to shareholders registered on 21 December 2001. 10 Share capital The Company redeemed the remainder of the redeemable 'B' preference shares on 23 October 2001. 11. Reconciliation of operating profit/(loss) to cash flow from operating activities Year ended Six months Six months ended ended 31 March 30 September 30 September 2001 2001 2000 (unaudited) (unaudited) £'000 £'000 £'000 (4,662) Group operating profit / (loss) 4,364 7,399 12,119 Depreciation 5,650 6,024 264 Amortisation of intangibles 129 136 (1,473) Amortisation of goodwill 1,098 (761) (17,415) Movement on working capital (4,516) (25,505) 190 Other items 14 - ------------ -------------- -------------- (10,977) Cash inflow / (outflow) from 6,739 (12,707) operating activities -------------- ----------- ---------------- 12 Movement in net funds Year ended Six months Six months ended ended 31 March 30 September 30 September 2001 2001 2000 (unaudited) (unaudited) £'000 £'000 £'000 (98,894) Increase / (decrease) in cash in 6,762 (13,340) the period (6,808) Cash flow from (increase) / (2,047) 217 decrease in debt and lease ------------- financing ------------- -------------- (105,702) Change in net funds resulting from 4,715 (13,123) cash flows (209) Loans and finance leases disposed 535 - of/ (acquired) of with subsidiaries (26) New finance leases (1,027) - - Loan from minority shareholder in 1,214 - subsidiary capitalised 699 Foreign currency translation 133 83 differences -------- -------------- -------------- (105,238) Movement in net funds / (debt) in 5,570 (13,040) the period ------------- ---------- -------------- 103,900 Net (debt) / funds at the start of (1,338) 103,900 the period ------------- ----------- ------------ (1,338) Net funds / (debt) at the end of 4,232 90,860 the period -------------- ----------- ------------- 13. Changes in net funds At Acquisitions Other At 1 April and non-cash Exchange 30 September 2001 Cash flow disposals changes movement 2001 £'000 £'000 £'000 £'000 £'000 £'000 Cash and 25,228 (1,062) - - 376 24,542 bank balances Bank (16,512) 7,824 - - (374) (9,062) overdrafts -------------- --------- ---------- --------- --------- ---------- 8,716 6,762 - - 2 15,480 -------------- -------- ---------- --------- -------- --------- Debt (8,928) (2,468) 167 1,214 (1) (10,016) Finance (1,126) 421 368 (1,027) 132 (1,232) leases ----------- ------- ----------- -------- -------- --------- (10,054) (2,047) 535 187 131 (11,248) ---------- -------- -------- -------- ------- -------- Total (1,338) 4,715 535 187 133 4,232 ---------- ---------- ---------- ------- -------- -------- 14. Prior year adjustment The adoption of FRS 19: Deferred Tax has resulted in provision for additional deferred tax liabilities, primarily in respect of pension prepayments, and the recognition of additional deferred tax assets, primarily in respect of surplus ACT, accelerated capital allowances and short term timing differences. The net increase required in the provision for deferred tax at 1 April 2000 was £3,102,000 with an equal reduction in the profit and loss reserve. In the year ended 31 March 2001 the tax charge increased by £1,420,000, with £798,000 of that increase relating to the six months ended 30 September 2000. This results in an increase in the provision for deferred tax of £4,522,000 at 31 March 2001 compared to that previously reported. The effect of implementing FRS 19 on the results for the six months ended 30 September 2001 is not material. 15 Distribution Copies of this interim report will be distributed to all holders of the Company's ordinary shares. Copies will also be available at the Company's registered office: 2 Cavendish Square, London, W1G 0PX. In addition, this report is available on the Company's website: www.babcock.co.uk.

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