Annual Financial Report

RNS Number : 5403A

Balfour Beatty PLC

30 March 2012

 



Balfour Beatty plc Annual report and accounts 2011

Pursuant to Listing Rule 9.6.1, a copy of the Company's Annual report and accounts for year ended 31 December 2011 ("Annual Report 2011") has been submitted to the UK Listing Authority ("the UKLA") following publication on the Company's website, www.balfourbeatty.com, and will shortly be available for inspection at the UKLA's Document Viewing Facility, via the National Storage Mechanism, which is located at http://www.hemscott.com/nsm.do.

The printed Annual Report 2011, together with the Shareholders' update and Notice of 2012 Annual General Meeting ("AGM") and Class Meeting of Preference Shareholders ("Class Meeting") will be sent to those shareholders who have elected to continue to receive paper copies of the Company's Annual report and accounts on 5 April 2012.  Shareholders who have not elected to continue to receive copies of the Company's Annual report and accounts in paper form will be sent the Shareholders' update and Notice of 2012 AGM and Class Meeting together with the relevant Forms of Proxy.

The Shareholders' update and Notice of 2012 AGM and Class Meeting and Forms of Proxy will be submitted to the UKLA when posted to shareholders.

The Independent Auditor's Report on the financial statements of the Company for the year ended 31 December 2011, which comprise the Group and Company income statements, the Group and Company statements of comprehensive income, the Group and Company statements of financial position, the Group and Company statements of changes in equity, the Group and Company statements of cash flows, and the related Notes 1 to 38, is set out in full on page 94 of the Annual Report 2011.

The Annual Report 2011 submitted to the UKLA today also contains information regarding the Company's principal risks.

This material should be read in conjunction with, and is not a substitute for, the full Annual Report 2011.  Page and note references in the text below refer to page numbers in the Annual Report 2011.

Principal risks and risk management

The Group operates in many business environments and across a number of territories in which risks and uncertainties exist, not all of which are necessarily within its control.  Whilst acknowledging that it is not possible to eliminate such risks and uncertainties completely, established risk management and internal control systems and procedures exist within the Group to mitigate their impact.

The Board recognises that there may be other risks and uncertainties which are currently unknown to it or which could become material in the future.  However, it believes that the Group's established risk management and internal control systems have helped and will continue to help it in identifying and responding to such risks and to the changing business environment and challenges it faces.

The Group faces a number of risks and uncertainties which are common to many companies, for example, financial and treasury risks, information technology and information security risks and the management of pension liabilities, which are significant.  The Group has established controls and systems in place to manage such risks.

Set out on pages 60 to 62 is a description of those principal risks facing the Group which could adversely impact its profitability and its ability to achieve its strategic objectives.  The Group operates predominantly in the UK and North America with significant operations in Australasia and the Middle East and is seeking to expand into new territories.
 

Economic environment The continued effect of the global economic downturn may cause the Group's customers to cancel, postpone or reduce spending on existing or future infrastructure projects. This is particularly relevant in certain key markets where many of our clients are in the public or regulated sectors. The current economic conditions also increase the Group's exposure to counterparty credit risk of its customers, subcontractors, joint venture partners, financial institutions and other suppliers.
Impact Any significant changes in the level or timing of customer spending or investment plans could adversely impact the Group's order book. Such changes could arise from a change in government policy or from a failure of customers to secure financing for future projects.	Mitigation The Group has a broad exposure to various infrastructure markets across the globe. This and the continued need for infrastructure spending mitigates the effect of changes in spending in any one market. The Group maintains a high level of engagement with its customers to understand and respond effectively to their evolving requirements at all phases of the infrastructure lifecycle. The Group has identified and continues to identify new infrastructure markets as they develop (eg power, mining, Brazil and India).
Failure of a customer, including any government or public sector body, could result in non-collection of amounts owed.	The financial solvency and strength of counterparties is always considered prior to the signing of contracts and is a specific focus in the current economic climate. During the life of a contract such assessments are updated and reviewed whenever possible. The Group seeks to ensure that it is not over-reliant on any one counterparty.
Failure of a subcontractor or supplier would result in the Group having to find a replacement or undertaking the task itself which could result in time delays and additional costs.	The Group seeks to develop long-term relationships with a number of key subcontractors by understanding their operations and working with them. Contingency plans are developed to address the eventuality of the failure of a subcontractor. In addition, project retentions, bonds and/or letters of credit will be obtained, where appropriate, from subcontractors to mitigate the impact of any insolvency.
Reporting and monitoring •  Monthly/quarterly finance and performance review	•  Strategic roadmap process •  Budgetary process

Expansion into new territories and by acquisition The Group, in pursuit of its strategic objectives, will seek to enter into new territories and continue to make acquisitions. Failure to identify and manage the risks associated with either of these could impact the ability of the Group to meet its strategic objectives and result in loss and reputational damage.
Impact Failure to identify, understand and evaluate the risks of conducting business in a new territory could lead to significant financial loss and reputational damage.	Mitigation As part of the decision making process to enter into a new territory, a detailed country risk assessment will be undertaken. These will consider and assess the prevailing economic, political, regulatory, ethical, health, safety and sustainability conditions to ensure that the Group is able to operate in that territory consistent with its own values and standards.
Failure to realise the expected benefits from acquisitions and to integrate successfully the businesses acquired into the Group's processes could result in an adverse impact on the Group's strategic objectives, future prospects, financial conditions and profitability.	Detailed due diligence is undertaken on all potential acquisitions to ensure that the acquired businesses' values and their approach to health, safety and sustainability aligns with those of the Group. In addition, valuation models are prepared on all potential acquisitions drawing upon both internal and external resources. Due diligence also includes an assessment of the ability to integrate the acquired businesses successfully into the Group. When a business is acquired, detailed integration plans are developed and monitored to ensure the successful integration of the business into the Group and its internal control framework.
Reporting and monitoring •  Board/divisional review and approval	•  Monthly/quarterly finance and performance reviews •  Board review and approval of initiatives involving entering a new country

Legal and regulatory The Group operates in a number of diverse territories and its businesses are subject to a number of complex, demanding and evolving legal, tax and regulatory requirements. Such requirements will only increase in complexity as the Group enters new countries.
Impact A breach of these local laws and regulations could lead to legal proceedings, investigations or disputes resulting in a disruption of business, ranging from additional costs incurred on a project, to potential debarment and reputational damage.	Mitigation The Group monitors and responds to legal and regulatory developments in the territories in which it operates. A country's legal and regulatory framework is considered as part of any Group decision to conduct business in a new country.
Reporting and monitoring •  Monthly/quarterly performance reviews	•  Strategic roadmap process

Business conduct The Group operates in various international markets with partners and supply chains which may have inherent risks relating to business conduct including but not limited to fraud, bribery and corruption.
Impact Failure by the Group and its employees to observe the highest standards of integrity and conduct in dealing with customers, suppliers and other stakeholders could result in civil and/or criminal penalties, debarment and reputational damage.	Mitigation Throughout the Group there is a vigorous approach to assessing corruption risks. The Group has a number of programmes dealing with compliance with the Group's Code of Conduct, competition law, data protection etc. E-learning courses have been developed and are used throughout the Group to raise awareness of and to embed many of those compliance programmes. Each operating company has appointed a compliance officer who is responsible for ensuring the application and monitoring of these programmes.
Reporting and monitoring •  Business Practices Committee	•  Monthly/quarterly performance and operations reviews

People The success of the Group depends on its ability to recruit and retain the best management and employees who have the appropriate competencies and also share the Group's values and behaviours.
Impact Failure to recruit and retain appropriately skilled people could have an adverse impact on the Group's ability to deliver specific contracts and its future growth.	Mitigation All key roles in the organisation have a competency and leadership framework against which potential recruits are measured. Organisation and people reviews are undertaken by each division and its operating companies to review the role, competencies, performance and potential of personnel. A well-developed succession planning process exists within the Group to identify and develop high-potential/calibre personnel to fill key roles that arise. These plans are reviewed and discussed at all levels within the organisation and by the Board on a regular basis. Appropriate remuneration and incentive packages are in place to assist in the attraction and retention of key employees.
Reporting and monitoring •  Monthly operations and performance reviews •  Annual succession planning review	•  Board review •  Remuneration Committee •  Committee

Bidding The Group, through its operating companies, seeks to win work through a large number of bids each year. In executing certain of these bids the Group may seek to engage in joint ventures with carefully selected partners especially in those instances where the Group may not possess the necessary expertise or knowledge of the territory. The Group also invests in a number of PPP and infrastructure investments, the success of which are dependent on a number of assumptions made, at the time of investment, on future revenues and costs.
Impact Failure to estimate accurately risks, costs, the impact of inflation and the contractual terms being entered into and how best to manage them could have an adverse impact on the profitability of such contracts.	Mitigation All bids are subject to rigorous estimating and tendering processes within a defined framework. Defined delegated authority levels exist for the approval of all tenders and infrastructure investments, with all major and significant contracts in excess of those authority levels being subject to Group review and approval by the Group Tender and Investment Committee ("GTIC").
In the event of a disagreement with, or the failure, or poor performance of a joint venture partner to deliver, the Group could be exposed to financial and reputational damage.	The Group has procedures in place to review the relevant skills, experience, resources and values of joint venture partners to understand how they complement those of the Group. The performance of joint ventures and joint venture partners is monitored throughout the life of the project.
If any of the assumptions made on investment decisions prove to be incorrect it could have an adverse impact on the profitability of those investments.	Investment appraisals are performed and reviewed by experienced professionals. The risks associated with revenues and costs are analysed and, where appropriate, contractual and other risk mitigations are established.
Reporting and monitoring •  Monthly/quarterly operations, performance and financial reviews	•  Board review of GTIC activities

Project execution The Group is engaged in a number of complex design, engineering, construction, facilities management and asset management projects. The successful delivery of many of these projects is dependent on the combined availability and effective management of subcontractors and other service providers. The Group's ability to execute these projects to its customers' requirements and on a timely basis exposes it, in the event it were to fail to do so, to the risk of financial loss and reputational damage.
Impact Failure to manage or deliver against contracted customer requirements to an appropriate quality and on a timely basis could result in a number of issues (ie contract disputes, unagreed claims, design issues, cost overruns, failure to achieve customer savings) which could adversely impact the profitability and reputation of the Group.	Mitigation Each operating company has a number of defined operating procedures designed to address the risks inherent in project delivery. In addition, the Group's risk management framework facilitates the identification of specific risks on projects and the mitigating actions required. Projects are subject to management review at all levels to monitor progress and to review steps put in place to address specific risks identified on those projects.
The failure of a subcontractor to perform to an appropriate standard and quality could result in delays to a project and adversely impact the ability of the Group to meet its contractual commitments and damage its reputation.	The Group seeks to develop long-term relationships with a number of its key subcontractors whilst at the same time not becoming over-reliant on any one. As part of its selection criteria, the Group seeks to partner with subcontractors/suppliers which share its values.
Reporting and monitoring •  Monthly/quarterly operations and performance review

Health, safety and sustainability Further information on the Group's health, safety and sustainability activities are given on pages 48 to 51. The Group is involved in significant and complex projects which require the continuous monitoring and management of health and safety risks. A major catastrophic incident in relation to one of the Group's projects (eg structural collapse or accident arising from work performed) could result in harm to the public or workforce and partners and could expose the Group to significant losses and reputational damage. The Group, through its activities, is aware of the impact it can have on the world in which it operates and the communities with which it comes into contact. In addition, for a number of its customers the impact of projects on communities during their execution and operation in both the short term and the long term is a key consideration when evaluating bids. A failure to meet these requirements could result in a loss of work, reputational damage or financial loss.
Impact Failure to manage these risks could expose the public or our people to injury/harm and the Group to significant potential liabilities and reputational damage.	Mitigation Detailed health and safety policies and procedures exist to minimise such risks and are subject to review and monitoring by both operating companies and divisional management. Within each operating company there are experienced health and safety advisers who provide advice and support to line management and also undertake regular reviews.
Failure to execute projects in a sustainable manner could result in significant potential liabilities, reputational damage and not being able to win future work.	The Group has developed and implemented a sustainability strategy covering its operations until 2020 in terms of profitable markets, healthy communities and environmental limits. Sustainability issues (eg specific customer requirements, climate change adaptation) are considered in risk management activities undertaken at an operating company as well as project level.
Reporting and monitoring •  Monthly/quarterly operations reviews •  Business Practices Committee	•  Sustainability working group •  Executive Committee •  Board review

 

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