Information  X 
Enter a valid email address

Babcock Intnl Group (BAB)

  Print          Annual reports

Friday 30 July, 2021

Babcock Intnl Group

Full year results for the year ended 31 March 2021

RNS Number : 9937G
Babcock International Group PLC
30 July 2021
 

 

Babcock International Group PLC

full year results for the year ended 31 March 2021

 

30 July 2021

 

Detailed reviews completed and turnaround underway

Statutory results

 

 

 

31 March
 2021

 

31 March
 2020

Restated

 

Revenue

£4,183m

£4,429m

 

Operating loss

£(1,643.0)m

£(75.6)m

 

Basic loss per share

(337.0)p

(23.3)p

 

Cash generated from operations

£470.8m

£445.3m

 

Underlying results

 

 

 

31 March
 2021

 

31 March
 2020

Restated

 

Contract backlog (note ii)

£8.7bn

£9.5bn

 

Revenue (note iii)

£4,183m

£4,429m

 

Operating (loss) / profit (note iv)

£(27.6)m

£377.6m

 

  of which one-off contract profitability and balance sheet ('CPBS') adjustments (note v)

£(250.0)m

 

 

  Operating profit excluding one-off CPBS adjustments

£222.4m

 

 

Basic (loss) / earnings per share (note vi)

(23.8)p

58.4p

 

Free cash flow (note vii)

£169.5m

£55.5m

 

Net debt

£1,354m

£1,705m

 

Net debt excluding operating leases (note viii)

£772m

£1,055m

 

Net debt/EBITDA (covenant basis) (note ix)

2.5x

2.3x

 

The results for FY20 have been restated for prior period errors and a change in accounting policy, see note (i). The Group has also changed its definitions of underlying results. See notes on page 3 and a reconciliation on page 9.

 

Strategy update

·

Following extensive reviews, we now have a turnaround plan to restore Babcock to strength without the need for new equity

·

Babcock will focus on being an international aerospace, defence and security company

·

Five strategic actions:

Aligning our portfolio, targeting at least £400 million of disposal proceeds over the next twelve months

Implementing our new operating model, delivering annualised savings of approx. £40 million (c.£20 million benefit in FY22)

Rolling out a new people strategy focused on sharing capability, talent, innovation and best practice across the Group

Developing a new ESG strategy, including a commitment to net zero for our estate, assets and operations by 2040

Exploring growth opportunities, including opportunities in international markets and through our range of products

·

Our strategy aims to significantly improve the Group's profitability, and most importantly its cash generation, over the medium term

 

Presentational changes to our reporting for improved transparency (see page 3)

·

Revenue and underlying operating profit no longer include a contribution from joint ventures (JVs) and associates

·

A clearer definition of underlying operating profit and Specific Adjusting Items

·

Free cash flow now includes cash flows related to exceptional items

·

Free cash flow now includes the capital element of lease payment cash flows, rather than net new lease commitments

 

Contract profitability and balance sheet review ('CPBS') completed (see page 11)

·

Total impairments and charges of £2 billion , consisting of impairment of goodwill and acquired intangibles (£1,349 million), other FY21 impacts, the vast majority of which are estimate changes (£464 million), the cumulative correction of prior period errors (£171 million) and a change in accounting policy (£60 million)

·

Vast majority of the impacts of the CPBS are one-off and do not change future cash flows

·

Recurring CPBS adjustment to underlying operating profit of around £25 million per annum

 

Financial results in line with early indications set out in our April 2021 business update

·

Revenue down 3% excluding foreign exchange and disposals, with business growth offset by the impact of COVID-19 on trading and the de-recognition of pass-through revenue from the Phoenix contract in Land - see page 15 for a revenue bridge from FY20 to FY21

·

Underlying operating profit excl. one-off CPBS adjustments was £222.4 million. This differs from the unaudited figure we indicated in April of £307 million for two reasons: our definition now excludes joint ventures and IFRIC 12 income (£62 million) and has been reduced by the recurring impacts of the CPBS (£24.7 million) - see page 16 for an underlying operating profit bridge from FY20 to FY21

·

On this basis, underlying operating profit (excluding FX and disposals) was down 40% , reflecting the impact of COVID-19 (£46 million) and significant credits that benefited FY20 (£47 million)

·

Underlying free cash flow of £170 million benefited from VAT timing benefit (£56 million) and corporation tax repayments (£67 million)

·

Underlying basic EPS of (23.8)p . Excluding the one-off CPBS adjustments, underlying basic EPS was 28.9p

·

Net debt at 31 March 2021 (excluding operating leases) of £772 million, down from £1,055 million last year (note both now include supply chain financing balances, £25 million at March 2021 and £93 million at March 2020). Average net debt during the year was around £1.3 billion

 

Balance sheet

·

New banking agreements in place to prudently protect against potential downside scenarios:

New £300 million revolving credit facility expiring May 2024, in addition to existing £775 million facility

Clarification on treatment of underlying results and exclusion of CPBS one-off adjustment from covenant ratios

Temporary amendment of net debt to EBITDA ratio covenant to 4.5x until 31 March 2022

·

Portfolio alignment aims to generate at least £400 million of proceeds in the next twelve months

·

Net debt to EBITDA (covenant basis) 2.5 x at 31 March 2021, with liquidity headroom of £1.2 billion

·

The near term priority is to reduce net debt to EBITDA below 2x

 

Recent business development

·

Contract backlog at 31 March 2021 was £8.7 billion . This is a simpler measurement of our committed contract cover and no longer includes work as part of framework agreements, nor our share of the contract backlogs in JVs and associates (see note ii for details)

·

Future Maritime Support Programme (FMSP) expected to be finalised this summer, interim agreement currently in place. Our contract backlog is expected to increase significantly once this contract is signed

·

In the first quarter of FY22:

Memorandum of Implementation with UK and Ukraine to be the prime contractor on programme of naval defence projects

Awarded new c.€500 million contract for defence aviation training activities in France

Won c.£150 million logistic support contract, part of the UK's next generation tactical communications & information systems

·

Working on various Type 31 export opportunities including Greece, Indonesia and Poland

 

Outlook

·

While FY22 will benefit from operating model savings (c.£20 million), it will be a year of transition and, as such, we remain cautious

·

The impact of COVID-19 on performance in FY22 is uncertain. While activity levels have broadly recovered, the additional costs from operating in a COVID-secure way remain. These costs, combined with the uncertainty over business interruption from increased cases and potential new variants, mean that we do not currently expect a material boost in profitability from COVID-19 restrictions easing

·

Free cash flow will be impacted by the material cash outflows previously communicated, particularly additional pension contributions (c.£130 million in excess of the income statement) and exceptional cash costs (c.£50 million restructuring and c.£20 million Italy fine). In addition, we are still investing in facility and IT upgrades and we will be unwinding over time the historical management of working capital around period ends. As such, free cash flow (before disposal proceeds) in FY22 is expected to be significantly negative (see page 19 for further details)

·

We are confident about our prospects for the markets we serve. We believe that with our improved strategic focus and operational delivery, and with efficiencies generated by the new operating model, we can significantly improve the Group's profitability, and most importantly its cash generation, over the medium term but this will take time to deliver

 

David Lockwood, Chief Executive Officer, said:

"We have now completed the series of reviews announced in January. These have reinforced our confidence in the underlying strength of the Babcock business and at the same time helped identify the necessary strategic changes to improve our performance. We have a plan in place to strengthen the Group without the need for an equity issue.

 

The full year 2021 performance reflects both the new financial baseline for the business and the impact of COVID-19 on our operations and markets. I'd like to thank all our people who have been working tirelessly throughout the pandemic to deliver the vital services on which our customers depend.

 

Looking forward, Babcock will be a simplified and more focussed group with a renewed emphasis on the exceptional engineering skills of its people. We will be well placed to take advantage of the many opportunities we see in both UK and international markets, leading to improved cash generation and profitability in the medium term."

 

Results presentation:

A virtual meeting for investors and analysts will be held on 30 July 2021 at 9:00 am (UK time). The presentation will be webcast live at www.babcockinternational.com/investors and subsequently will be available on demand at www.babcockinternational.com/investors/results-and-presentations . A transcript of the presentation and Q&A will also be made available on our website.

For further information:

Simon McGough, Director of Investor Relations

+44 (0)7850 978 741

Kate Hill, Group Director of Communications

+44 (0)20 7355 5312

Tulchan Communications

+44 (0)20 7353 4200

 

 

 

Changes to the presentation of underlying results

We have made a series of changes to our underlying measures this year to improve transparency and provide a simpler set of accounts and financial commentary. These changes are:

·

The results of joint ventures and associates are now included as one line in the income statement relating to Babcock's share of joint ventures' and associates' profit after tax. The Group no longer includes a share of joint venture and associates revenue. This aligns revenue with the statutory IFRS measure. IFRIC 12 income has now been taken out of underlying operating profit and included as investment income

·

A clearer definition of underlying operating profit and Specific Adjusting Items (see note iv below)

·

Updating our definition of free cash flow to include the capital element of lease payment cash flows (rather than net new lease commitments which are reflected as a debt movement) and to include cash flows related to exceptional items

 

See page 8 for the impacts of the above in restating the FY20 underlying results.

 

Adjustments between statutory and underlying information

The Group uses various alternative performance measures, including underlying operating profit, to enable users to better understand the performance and earnings trends of the Group. The Directors believe the alternative performance measures provide a consistent measure of business performance year to year and they are used by management to measure operating performance and as a basis for forecasting and decision-making. The Group believes they are also used by investors in analysing business performance. These alternative performance measures are not defined by IFRS and therefore there is a level of judgement involved in identifying the adjustments required to calculate the underlying results. As the alternative performance measures used are not defined under IFRS, they may not be comparable to similar measures used by other companies. They are not intended to be a substitute for, or superior to, measures defined under IFRS. For the most useful comparison to last year, and as a better measure to compare to future periods, this Report focuses on underlying operating profit excluding the one-off CPBS adjustment (see page 11) as we believe this to be the most helpful measure.

 

Notes to statutory and underlying results on page 1

Note (i): Results for FY20 have been restated to correct for prior year errors and to reflect changes in accounting policies. See page 8 for details.

 

Note (ii): We now report a contract backlog, which represents amounts of future revenue under contract, rather than an order book reported previously. This new measure does not include £6.0 billion of work expected to be done by Babcock as part of framework agreements (2020: £5.3 billion) and, to align with the change in presentation of revenue (see above), does not include orders of £2.0 billion within our joint ventures and associates (2020: £2.7 billion).

 

Note (iii): Revenue is as defined under IFRS with no adjustments between statutory and underlying. Historically, the Group reported underlying revenue which included the Group's share of joint ventures' and associates' revenue.

 

Note (iv): Underlying operating profit is defined as IFRS statutory operating profit adjusted for Specific Adjusting Items. See page 9 for a reconciliation. The Specific Adjusting Items are:

·

Amortisation of acquired intangibles

·

Business acquisition, merger and divestment related items (being acquisitions and gains or losses on disposal of assets or businesses)

·

Gains, losses and costs directly arising from the Group's withdrawal from a specific market or geography, including closure costs, severance costs, the sale of assets and termination of leases

·

The costs of large restructuring programmes which significantly exceed the minor restructuring which occurs every year as part of the normal day to day business. Where restructuring costs are incurred as a result of the ongoing execution of day to day business, they are included in operating costs and are not excluded from underlying operating profit

·

Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes

·

Exceptional items that are significant, non-recurring and outside of the normal operating practice. These items are described as exceptional in order to appropriately represent the Group's underlying business performance

 

Note (v): The Group's contract profitability and balance sheet review ('CPBS') has resulted in various adjustments, including in-year estimate changes, reversing prior year errors and a change in accounting policy - see page 11 for details. Reference is made throughout this document to the CPBS and its impact. Commentary in this document often discusses performance before the one-off CPBS adjustments to better reflect the year on year differences in performance across the Group.

 

Note (vi): Underlying basic earnings per share ('EPS') is based on the Group's underlying operating profit (see note iv). It includes the Group's post-tax share of results of joint ventures and associates. This measure now includes the amortisation of acquired intangibles within joint ventures.

 

Note (vii): Underlying free cash flow now includes cash flows from exceptional items and the capital element of lease payment cash flows (rather than net new lease commitments which are reflected as a debt movement).

 

Note (viii): This measure excludes operating leases as defined by IAS 17. This accounting standard has since been superseded by IFRS 16 but was the relevant standard at the inception of the banking facility. This net debt figure now also includes finance lease (as defined by IAS 17) receivables and payables and continues to include loans from the Group to joint ventures. Supply chain financing balances have been reclassified to debt in both periods (March 2021: £25 million, March 2020: £93 million).

 

Note (ix): Net debt / EBITDA as measured in our banking covenants, which make a series of adjustments to both Group net debt and Group EBITDA. See page 21 for a reconciliation.

 

CEO STATEMENT

 

Our new approach

We announced a series of reviews in January 2021 of our strategy, portfolio and operating model, alongside a deep dive into the profitability of our contracts and balance sheet position to establish a financial baseline. These reviews have now been concluded, and the results make a compelling argument for the significant change needed in order to unlock the Group's potential.

 

The reviews showed that Babcock was being run as a federation rather than a unified Group, an approach which may have served us in the past but does not meet the needs of today's market. The last few years have seen a move to in-source civil nuclear work in the UK, increased customer demands on each new programme, the need for a more agile supply chain and the requirement for more innovative solutions to the evolving threats in international defence. We did not adapt to the changing world around us quickly enough.

 

We also have to accept that the expectations we had for the Avincis acquisition in 2014 have not played out. Growth in the markets Avincis served has not been as expected, most notably in oil and gas, and the profitability of those businesses has been under pressure for some years. Many of these pressures are highlighted in our contract profitability and balance sheet review ('CPBS') with just over half of adjustments by value relating to businesses that came from this acquisition. Most importantly, we have already started to implement a plan to fix this: removing costs and taking a different approach to contract bids. We are disposing of our oil and gas business and are further reviewing the aerial emergency services businesses.

 

As a Group, it seems that we sometimes have been optimistic in setting objectives. This led to a pattern of underperformance which we are determined to address. We are doing just that, and have instituted a number of changes to enable us to be fit to take advantage of the significant opportunities we can see ahead.

 

We now have a more appropriate baseline for the financial performance of the Group. We have set a new strategy as outlined below, with a greater focus on maximising our fundamental strengths in the UK and internationally, both in our target countries and through exports like the new Type 31 frigate and High Frequency communications. I'm pleased to say that the international defence market is responding positively. And we are undergoing a wide-ranging refresh of our culture - not just in terms of the new ways of working captured in the changes to the operating model, but in the rolling-out of a new people strategy and a new emphasis on ESG throughout the Group.

 

Strengths of the Group

Our business is based on some key fundamental strengths across the Group, including:

·

Deep technical expertise and highly skilled people across critical and complex engineering

·

Ownership of key sites and infrastructure including the Devonport and Rosyth dockyards

·

Strong relationships with our customers, including a deep understanding of their challenges

·

Strong niche positions in Canada, Australasia and South Africa, with a developing position in France

·

A range of platforms, systems and products that are highly competitive in international markets

 

Our strategy

We are an international aerospace, defence and security company with a leading naval business, and we provide value-add services across the UK, France, Canada, Australasia and South Africa. We are focused on five strategic actions:

1.

Aligning our portfolio

2.

Implementing our new operating model

3.

Rolling out our new people strategy

4.

Developing our new ESG strategy

5.

Exploring growth opportunities

 

Together this should lead to returns for our shareholders, improved delivery for customers and a better place to work for our employees.

 

1) Aligning our portfolio

Our strategy review defined the markets we wish to serve and therefore the best portfolio to hold. With this in mind, we considered which businesses we are the best owner of and on which we could earn a sufficient return on capital and this has led to us identifying businesses that may be divested. This portfolio alignment will reduce complexity, increase focus and increase the effective use of the Group's capital by disposing of the businesses that are outside the perimeter of our strategy.

 

We are targeting proceeds of at least £400 million over the next 12 months from these divestments. Some of these processes are underway and we will update the market when material progress is made.

 

As announced in March 2021, we have agreed the conditional sale of our oil and gas aviation business. This deal is expected to complete over the summer subject to the satisfaction of the relevant third-party conditions.

 

2) Implementing our new operating model

We are creating a business that is more efficient and effective. We are reducing layers of management within the business to form a flatter structure that will simplify how we operate, improve line of sight, shorten communication lines and therefore increase business flexibility and our responsiveness to market conditions. Sadly, these changes will result in approximately 1,000 employees leaving the Group over the 2022 financial year with an estimated restructuring cost of £40 million.

 

These changes will also reduce our operating cost base. Some of the savings will be recognised across long-term projects, for example where they form part of existing contract efficiency assumptions, and some savings will benefit our customers via the contract structure. As such, the expected realisable annualised savings are approximately £40 million. The benefit in FY22 will be roughly half this due to timing.

 

These changes will also create a leaner organisation and should help our decision-making - giving more power to the teams closer to the customer. The changes also aim to improve our internal and financial controls, see further details in our Financial Review on page 25.

 

3) Rolling out our new people strategy

We are developing an organisation that shares capability, talent, innovation and best practice across the Group and removes complexity. The new operating model is a key pillar of our new people strategy. On top of this, we will create an agile and inclusive workplace, improve our diversity, create a new approach to talent management and we will harmonise our people policies and processes. All of these will combine to make Babcock a better place to work for our employees.

 

Delivering our new operating model and new people strategy requires us to embrace a new culture to unlock the potential that exists within the business - one which continues our tradition of focus on the customer, but which enables more innovation and collaboration. We have begun that process with the articulation of our new purpose: creating a safe and secure world, together. It's a recognition of the positive role we can and should take in creating a safe and secure world, as a responsible member of society, and of the fact that almost everything we do is collaborative - whether it is working together across the different parts of the Group, working with our customers, or working with our partners and suppliers. We have started to transform our culture and that work will continue throughout the coming financial year.

 

4) Developing our new ESG strategy

We have continued to make great progress on developing our ESG strategy in a year of many challenges. We have a plan to reduce harmful emissions and integrate sustainability into programme design and have set a new target for the Group: to achieve net zero carbon emissions for our estate, assets and operations by 2040.

 

We want to make a positive difference to our communities, including providing high-quality jobs that support local economies, and we are focused on being a collaborative, trusted partner across the supply chain. We have reaffirmed our commitment to championing inclusion and diversity across the Group, including setting a new target to ensure that 30% of our senior leadership roles are filled by women by 2025. Additionally we are actively working on meeting the recommendations of the Parker Review as we support increasing the representation of ethnicity on UK boards.

 

5) Exploring growth opportunities

While our immediate focus has been on completing our reviews and getting a more appropriate baseline in place, we are also exploring the growth opportunities ahead of us. The markets we address offer favourable medium-term growth and we will focus on opportunities for defence and value-add services in the UK, France, Canada, Australasia and South Africa.

 

Work on key programmes critical to the national security of the UK is the core of what Babcock does. Given our strong market position today, growth in the UK will mainly be dependent on market growth. There are areas where we will also look to increase our share, for example secure defence communications.

 

Growth in international markets can come from market growth and an increase in market share. We aim to develop our international presence in our target markets of France, Canada, Australasia and South Africa. We are bidding for contracts that, if won, would offer significant growth, for example pilot training in Canada.

 

Our range of products have further opportunities for growth including in our equipment and systems exports and international demand for the Type 31 platform. We aim to export a lot more in the future from the UK, embracing the aims of the UK Government and its strategy.

 

Recent business development

The Group continued to win work across all markets and sectors in the year and, as of 31 March 2021, our contract backlog was £8.7 billion. We now report a contract backlog rather than an order book as in previous years. Our new measure does not include around £6.0 billion of work expected to be done by Babcock as part of framework agreements and, to align with the change in presentation of revenue, does not include a contribution of joint ventures and associates of around £2.0 billion.

 

In June 2021, we signed a tripartite Memorandum of Implementation with the UK's MOD and Ukraine's MOD to be the prime contractor on a major programme of naval defence projects. The programme includes the enhancement of capabilities on existing naval platforms, the delivery of new platforms, including fast attack missile craft, a modern frigate capability, shipborne armaments and the training of naval personnel. It also involves working together to regenerate Ukrainian shipyards by developing, implementing and completing a Shipyard Regeneration Plan.

 

Also in June 2021, we were awarded a contract with the French MOD for an expansion of our existing defence aviation training activities. This 5-year contract is worth around €500 million and started in June 2021. We also won a logistic support contract worth £150 million as part of the UK MOD's £3.2 billion Battlefield and Tactical Communication Information Systems (BATCIS) programme of opportunities to deliver the next generation tactical communications and information systems.

 

We are currently in active discussions regarding Type 31 export opportunities with a number of countries, including Greece, Indonesia and Poland.

 

Summary of financial performance in FY21

Our financial performance in the year was in line with the early indications we gave in April 2021, though this now includes presentational changes as covered in the Financial review. Organic revenue decline was 3% with demand for most of our work holding up well despite the pressures of the COVID-19 pandemic.

 

We made a statutory operating loss of £1,643 million in the year, mainly as a result of charges taken in our CPBS including the impairment of goodwill (see page 11). On an underlying basis, our operating loss was £27.6 million, again mainly due to CPBS charges. For the most useful comparison to last year, and as a better measure for future periods, we focus in this report on the Group's underlying operating profit excluding the one-off CPBS adjustment. On this basis, we had an underlying operating profit of £222.4 million in the year compared to £377.6 million last year (restated), both of which now exclude our share results of joint ventures and associates.

 

This decline in profit reflects disposals and lost business as well as a significant impact from COVID-19. The year-on-year decline is exacerbated by significant credits that benefited the results of the previous financial year. These are covered in more detail in our Financial review.

 

The COVID-19 pandemic had a material impact in the year and continues to cause uncertainty across our markets. The impacts in the year were most severe for our non-defence businesses (e.g. civil aviation and civil training) where activity in some cases stopped. The defence businesses saw some interruption and increased costs initially. Subsequently, most defence programmes and sites were reopened, albeit with social distancing restrictions and higher levels of employees working from home. This led to less efficient delivery, hence profitability was affected proportionately more than revenue.

 

Health and safety performance in the year

While our total injuries rate was lower this year, at 1.01 reported injuries for every 100,000 hours worked (2020: 1.24), we saw an increase of 36% in the more serious 'Babcock RIDDOR' injury rate. Tragically, in August 2020, during a firefighting mission an aircraft crash-landed in Spain near the Portuguese border causing the immediate fatality of the co-pilot. The pilot, who had suffered major injuries, subsequently passed away. The incident is currently under investigation by the appropriate authorities. This incident and the increase in serious injuries underlines how crucial it is we continue to focus on improving our health and safety performance.

 

Trading in the first quarter for FY22

Trading in the quarter ended 30 June 2021 was in line with our expectations across all four sectors. Net debt (excluding operating leases) was £1,140 million, higher than at 31 March 2021 but lower than the average net debt for FY21.

 

Outlook

We are confident that we have established a clear strategic path to return Babcock to strength, but the extent of the transformation we are undergoing means that FY22 will be a year of transition. The impact of COVID-19 on performance in FY22 is uncertain. While activity levels have broadly recovered, the additional costs from operating in a COVID-secure way remain. These costs, combined with the uncertainty over business interruption from increased cases and potential new variants, mean that we do not currently expect a material boost in profitability from COVID-19 restrictions easing. As such, we remain cautious about the progress we will be able to make on profitability.

 

Free cash flow will be impacted by the material cash outflows previously communicated, particularly additional pension contributions and exceptional cash costs, both restructuring costs and the Italy fine. In addition, we are still investing in facilities and IT upgrades and we will be unwinding the historical management of working capital around period ends. As such, free cash flow (before disposal proceeds) in the 2022 financial year is expected to be significantly negative.

 

We are confident about our prospects for the markets we serve. We believe that with our improved strategic focus and operational delivery, and with efficiencies generated by the new operating model, we can significantly improve the Group's profitability, and most importantly its cash generation, over the medium term but this will take time to deliver.

 

Delivering for all our stakeholders

Over the medium and long term we are focused on delivering value for all of our stakeholders, including:

·

Returns for our shareholders: a return to growth with improving margins and better cash conversion

·

Improved delivery for our customers: consistent delivery and partnering with customers to solve their challenges

·

A better place to work for our employees: an open, collaborative and diverse workplace that engages our employees

 

Our direction is set, and we are ensuring that we have all the elements in place to take advantage of the many opportunities which lie before us. We look forward to sharing updates on our progress as we move forward.

 

 

David Lockwood OBE

Chief Executive Officer

 

 

OTHER INFORMATION

 

Dividend

No ordinary dividends have been paid or declared for the financial year ended 31 March 2021.

 

AGM

We will be holding our Annual General Meeting on 22 September 2021.

 

Board changes

During the year, we welcomed new members to our Board:

· Russ Houlden joined as Non-Executive Director in April 2020 and became the Chair of the Audit Committee in August 2020

· Carl-Peter Forster joined as Non-Executive Director in June 2020 and became the Senior Independent Director in August 2020

· David Lockwood joined as CEO in September 2020

· David Mellors joined as CFO in November 2020

· Lord Parker joined the Board as Non-Executive Director in November 2020

 

During the year, some members of the Board retired:

· Ian Duncan and Jeff Randall retired from the Board in August 2020

· Sir David Omand retired in March 2021

· Archie Bethel retired as CEO in September 2020

· Franco Martinelli retired as CFO in November 2020

 

Our 2021 AGM will see the retirement from the Board of Myles Lee and Victoire de Margerie as Non-Executive Directors after six years and five years of service respectively.

 

 

FINANCIAL REVIEW

 

Introduction

This Financial review covers:

· The changes we have made to the presentation of underlying reporting this year, with restatements to FY20

· A summary of the contract profitability and balance sheet review ('CPBS') 

· Our financial performance in FY21, both statutory and underlying, including a reconciliation between the two

· Improvements we intend to make to risk management and internal controls

 

Changes to the presentation of underlying reporting

The Group provides alternative performance measures, including underlying measures, to enable users to better understand the performance and earnings trends of the Group. These measures are considered to provide a consistent measure of business performance from year to year. They are used by management to assess operating performance and as a basis for forecasting and decision making and the Group believes are helpful for investors to analyse business performance. We have made a series of changes to our underlying measures this year to improve transparency and provide a simpler set of accounts and financial commentary for the future.

 

There are four main changes to the presentation of our underlying results as outlined below.

 

1)  Joint ventures and associates

Previously the Group incorporated its share of the results of joint ventures and associates into each of the main captions of the income statement. Babcock's share of joint ventures and associates profit after tax is now included as one line in the income statement. The Group used to include a share of joint ventures and associates revenue within its revenue line - which was then defined as underlying revenue. This definition is therefore no longer needed. This aligns revenue with the statutory IFRS measure and reduces the number of reconciling items between statutory and underlying income statement captions.

 

2)  IFRIC12 Investment Income

The group previously included IFRIC 12 investment income within underlying operating profit. This is now included within investment income to align with IFRS.

 

The restated underlying income statement compared to that presented in the prior year financial statements is shown below. Note that the correction of prior year errors is covered on page 11.

 

Restatement of FY20 underlying income statement

 

 

Underlying FY20

previously

reported

Change to JV and Associates presentation

 

Change to IFRIC 12 presentation and tax*

 

Prior year restatements

 

Underlying FY20

restated

 

£m

£m

£m

£m

£m

Underlying revenue

4,871.7

(422.2)

-

(21.0)

4,428.5

Underlying operating profit

524.2

(105.7)

(1.1)

(39.8)

377.6

Share of results from joint ventures and associates

-

58.6

-

-

58.6

Investment income

-

-

1.1

-

1.1

Finance costs

(95.8)

22.8

-

-

(73.0)

Underlying profit before tax

428.4

(24.3)

-

(39.8)

364.3

Tax

(77.1)

17.9

1.2

(9.4)

(67.4)

Underlying profit after tax

351.3

(6.4)

1.2

(49.2)

296.9

Underlying basic EPS

69.1p

 

 

 

58.4p

 

*includes £1.2 million deferred tax movement as a result of changes in statutory tax rates

 

3)  A clearer definition of underlying operating profit and Specific Adjusting Items

Underlying operating profit is now defined as IFRS statutory operating profit adjusted for Specific Adjusting Items. Items such as these may occur regularly, may be lumpy and may be profits or losses. As such they distort the reporting of underlying business performance measures if not adjusted for. The Specific Adjusting Items are:

·

Amortisation of acquired intangibles

·

Business acquisition, merger and divestment related items (being acquisitions and gains or losses on disposal of assets or businesses)

·

Gains, losses and costs directly arising from the Group's withdrawal from a specific market or geography, including closure costs, severance costs, the sale of assets and termination of leases

·

The costs of large restructuring programmes which significantly exceed the minor restructuring which occurs every year as part of the normal day to day business. Where restructuring costs are incurred as a result of the on-going execution of day to day business, they are included in operating costs and are not excluded from underlying operating profit

·

Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes

·

Exceptional items that are significant, non-recurring and outside of the normal operating practice. These items are described as exceptional in order to appropriately represent the Group's underlying business performance

 

The income statement can now be shown in a 'three column' format with Underlying results, Specific Adjusting Items and Statutory results in separate columns as shown below:

 

 

 

2021

 

2020 (restated)

 

Underlying
£m

Specific
Adjusting
Items
£m

Statutory
£m

 

Underlying
£m

Specific
Adjusting
items
£m

Statutory
 m

Revenue

 

4,182.7

-

4,182.7

 

4,428.5

-

4,428.5

Operating (loss)/profit

 

(27.6)

(1,615.4)

(1,643.0)

 

377.6

(453.2)

(75.6)

Share of results of joint ventures and associates

 

(13.1)

-

(13.1)

 

58.6

-

58.6

Investment income

 

0.9

-

0.9

 

1.1

-

1.1

Finance costs

 

(62.1)

-

(62.1)

 

(73.0)

-

(73.0)

(Loss)/profit before tax

 

(101.9)

(1,615.4)

(1,717.3)

 

364.3

(453.2)

(88.9)

Income tax benefit/(expense)

 

(18.4)

33.7

15.3

 

(67.4)

40.5

(26.9)

(Loss)/profit after tax for the year

 

(120.3)

(1,581.7)

(1,702.0)

 

296.9

(412.7)

(115.8)

Basic EPS

 

(23.8)p

 

(337.0)p

 

58.4p

 

(23.3)p

Diluted EPS

 

(23.8)p

 

(337.0)p

 

58.3p

 

(23.3)p

 

Note: the performance review on page 14 considers these results in more detail, they are shown here for presentational purposes.

 

4)  Presentational changes to the underlying cash flow statement

The Group has historically presented an underlying cash flow statement with free cash flow as an important measure. Previously cash flows relating to exceptional items were excluded from free cash flow. This has now been changed to more clearly present the cash generated from the Group's operations.

 

Also, following the introduction of IFRS16 (Leases), the Group previously deducted new lease commitments in entirety from operating cash flow. We have now amended this to show the capital element of leases as an operating cash flow (akin to capital expenditure) and the interest element of leases within the interest line. The lease commitment is now shown as a change in net debt when signed, not an operating cash flow. The restated FY20 underlying cash flow is shown below.

 

 

Restatement of FY20 underlying cash flow

 

 

Underlying FY20

previously

reported

Prior year restatements

 

Changes to cash flow presentation

 

Underlying

FY20

restated

 

£m

£m

£m

£m

Operating profit

417.4

(39.8)

-

377.6

Depreciation & amortisation

95.7

(4.7)

-

91.0

ROU asset depreciation

129.4

(6.1)

-

123.3

Non-cash items

5.4

(2.9)

(1.1)

1.4

Working capital

(26.8)

16.0

-

(10.8)

Provisions

(19.4)

9.4

-

(10.0)

Net capital expenditure

(147.5)

39.0

-

(108.5)

IFRS 16 new lease commitments

(109.8)

-

109.8

-

Capital element of lease payments

-

-

(175.0)

(175.0)

Operating cash flow

344.4

10.9

(66.3)

289.0

Cash conversion %

83%

-

-

77%

Pension contributions in excess of income statement

(70.2)

-

-

(70.2)

Interest paid

(71.4)

-

1.1

(70.3)

Tax paid

(62.6)

-

-

(62.6)

Dividends from joint ventures

52.0

-

-

52.0

Exceptional items

-

-

(82.4)

(82.4)

Free cash flow

192.2

10.9

(147.6)

55.5

Acquisitions and disposals net of cash acquired

(0.8)

-

105.5

104.7

Exceptional cash flow

23.1

-

(23.1)

-

Capital element of lease payments

-

-

175.0

175.0

IFRS 16 additions

-

(7.3)

(109.8)

(117.1)

Investments in joint ventures

(0.3)

-

-

(0.3)

Own shares

(2.9)

-

-

(2.9)

Dividends paid

(153.9)

-

-

(153.9)

Net cash outflow

57.4

3.6

-

61.0

 

 

 

 

 

Opening net debt (previously reported)

(957.7)

-

-

(957.7)

Supply chain financing - opening adjustment

-

(113.5)

-

(113.5)

Opening net debt (restated)

(957.7)

(113.5)

-

(1,071.2)

IFRS 16 transition

(640.8)

-

-

(640.8)

Exchange movements

(53.8)

-

-

(53.8)

Movement in net debt

57.4

3.6

-

61.0

Closing net debt

(1,594.9)

(109.9)

-

(1,704.8)

 

Note: the two main items in the correction of prior year errors impacting net debt are the movement of supply chain finance balances from trade creditors to debt (£113.5 million at 1 April 2019, £93.2 million at 31 March 2020) and the inclusion of certain lease liabilities (31 March 2020: £16.7 million).

 

 

Contract profitability and balance sheet review

As announced in January 2021, the Group performed a review of the profitability of its contract portfolio, and the carrying values of assets and liabilities on the balance sheet. The review was carried out by management using the expertise and resource of an independent accounting firm. The initial year end financial close occurred in early April before completion of the CPBS. On 13 April 2021, the Group announced the initial headline unaudited results for FY21 before the impact of CPBS, along with an early estimate of the CPBS findings. The annual goodwill impairment test, required by IAS 36, was included within the scope of the CPBS review.

 

The CPBS scope covered over 100 contracts, representing c.£2.7 billion of annual revenues. The selected contracts received differing levels of review depending upon their perceived risk. Those contracts deemed high risk had a full review of their status, underpinning assumptions and risks and dependencies. Those deemed medium risk had a specific scope review with work targeted at any specific areas of concern, and those deemed low risk had a review with the project manager to gain an understanding of the contract and assess whether any specific scope work should be performed.  The balance sheet reviews covered all main balance sheet captions for all sectors, again prioritising balances on a risk basis. As the reviews progressed, more work was performed on contracts where findings raised issues that had not been considered in the initial scoping reviews.

 

More than 140 accounting adjustments totalling £2.0 billion (post-tax effect on retained earnings) resulted from the CPBS consisting of:

·

Cumulative restatement at 1 April 2019 of £308.1 million - being £45.3 million relating to a change in accounting policy and correction of prior year errors of £262.8 million)

·

Cumulative restatement at 1 April 2020 of £230.7 million - being £59.8 million relating to a change in accounting policy and correction of prior year errors of £170.9 million)

·

Changes recorded within the current financial year of £1,813.7 million - the vast majority of which are change in estimates, including the impairment of goodwill

 

Of the adjustments recorded in the current year income statement (see table below), £274.7 million were charged within underlying operating profit and the vast majority of these amounts related to changes in estimates. Their inclusion within underlying operating profit reflects the fact that the occurrence of such transactions, when taken individually, are part of the ordinary course of business. However, the number and magnitude of the adjustments as a result of the CPBS far exceed what would normally be expected in the Group in any one period, hence the additional disclosure.

 

In order to assist the users of the financial statements to better understand the effect of the transactions resulting from the CPBS on FY21 underlying operating profit performance, we have analysed them into ' one-off CPBS adjustments ' and ' recurring CPBS adjustments '. It is accepted that these terms are not defined in IFRS and are simplistic. For this purpose, we consider 'one-off CPBS adjustments' to be those that adjust the level of profit recognised either as a result of a one-off event or in previous periods, while 'recurring CPBS adjustments' are those that impact the amount of current period (and potentially future) profit before completion of the CPBS review. A single adjustment arising from the CPBS review might have both 'one-off' and 'recurring' elements.

 

By way of illustration, the write-off of a long overdue debtor can be thought of as a 'one off CPBS adjustment' as - with today's facts and circumstances - it would be a single transaction that would not otherwise impact the current or future year's profitability. However, a long term contract that has had its profit margin reduced creates an adjustment that has the effect of reducing the cumulative profit recognised over the life of the contract from the old profit margin estimate to the new.  An element of this adjustment can be seen to in effect reverse the profit on these contracts that had been recognised in FY21 (before completion of CPBS review). This element is included within 'recurring CPBS adjustments' whereas the remainder of the adjustment, simplistically relating to the profit previously recognised before FY21, is included within 'one-off CPBS adjustments'. The total of the 'recurring CPBS adjustments' within FY21 underlying operating profit is £24.7 million, and £250.0 million 'one-off CPBS adjustments' make up the total of £274.7 million included within underlying operating profit.

 

Prior year restatements

There are a number of prior year errors that have been recognised which are detailed in note 4 in the financial statements. Adjustments are denoted as errors, rather than changes in estimates, when it has been identified that assumptions or methodologies were used which the Group should have known at the time were incorrect. One accounting policy has also been changed to better represent certain maintenance arrangements in the Aviation sector, and the errors and the policy change result in prior year restatements - see note 4 in the financial statements for details. Prior year restatements were recorded in the 1 April 2019 opening balance sheet in these financial statements, unless they resulted from an error during FY20 in which case they were recorded in the FY20 income statement. The accounting policy change and some of the prior year errors have a consequential impact on financial results for future periods (e.g. the decision to expense certain aircraft maintenance charges rather than capitalise them will have a recurring impact). Where this is the case, those recurring impacts are included in the relevant years in the table below for completeness - and are also included in the 'recurring CPBS adjustments' figure above. 

 

The impacts of the CPBS adjustments on the income statement, including the results of the annual goodwill impairment test, are summarised as follows:

 

 

 

2021

 

2020

 

Underlying
£m

Specific
Adjusting
Items
£m

Statutory
£m

 

Underlying
£m

Specific
Adjusting
Items
£m

Statutory
 m

Revenue impacts

 

(207.4)

-

(207.4)

 

(21.0)

-

(21.0)

 

 

 

 

 

 

 

 

 

Operating profit/(loss) impacts

 

 

 

 

 

 

 

 

Impairment/disposal of goodwill and acquired intangible assets

 

(1,349.4)

(1,349.4)

 

130.5

130.5 

Impairment of non-current assets

 

(5.8)

(32.7)

(38.5)

 

0.7 

0.7 

Impairment/reversal of property, plant and equipment and right of use assets

 

(156.9)

(156.9)

 

(21.6)

(1.4)

(23.0)

Impairment/write down of current assets

 

(142.6)

(0.8)

(143.4)

 

(19.5)

(19.5)

Introduction of/increase to liabilities

 

(126.3)

(1.0)

(127.3)

 

0.6 

0.6 

Operating profit/(loss)

 

(274.7)

(1,540.8)

(1,815.5)

 

(39.8)

129.1 

89.3 

Share of income from JVs and associates

 

(37.1)

(37.1)

 

Profit/(loss) before tax impacts

 

(311.8)

(1,540.8)

(1,852.6)

 

(39.8)

129.1 

89.3 

Tax adjustments

 

(7.5)

(7.5)

 

(12.4)

(12.4)

Tax effect

 

29 .3 

17.1 

46.4 

 

3.0 

(2.5)

0.5 

Loss after tax impacts

 

(290.0)

(1,523.7)

(1,813.7)

 

(49.2)

126.6 

77.4 

                   

 

Summarised cumulative adjustments to retained earnings, including the results of the annual goodwill impairment test, are as set out below:

 

£m

Restatement as at 1 April 2019

(308.1)

Adjustments recognised in the year ended 31 March 2020

77.4

Total restatement at 31 March 2020

(230.7)

Adjustments recognised in the year ended 31 March 2021

(1,813.7)

Total adjustments recognised at 31 March 2021

(2,044.4)

 

 

The summary of the adjustments in the table above is set out below:

 

Revenue:

These adjustments have two components within them. Firstly is a correction of an error where revenue had been recognised on the Phoenix contract after the terms had been varied in February 2020. The effect of the contract change is that Babcock is deemed an agent of the customer, not a principal, and therefore the revenue should not be recognised. As a result of identifying this error, £71.8 million of revenue initially recognised in FY21 was reversed together with £11.6 million of revenue in relation to FY20. The second component of revenue adjustments reflects reassessments of the progress and profitability of a number of contracts across the Group.

 

Impairment of goodwill and acquired intangible assets:

In the current year, goodwill was impaired by £1,243.2 million and acquired intangible assets were impaired by £56.4 million. As detailed in note 10 of the financial statements, the impairments of the Land and Aviation sectors' goodwill of £425.8 million and £817.4 million respectively were largely as a result of reduced forecasts of future cash flows and an increase in the discount rate used to discount them.  CPBS adjustments of £64.8 million were also recorded to allocate the goodwill that should have been allocated to the Holdfast disposal (June 2020) and to correct the allocation of goodwill to the Conbras disposal (October 2020 and provided in the first half of the financial year). As detailed in note 10 of the financial statements, £56.4 million was impaired in relation to the DSG contract acquired intangible as its carrying value could no longer be justified following the reassessment of the contract profitability. Partially offsetting this is the reversal of amortisation of £15.0 million in relation to the Oil and Gas business acquired intangible reflecting management's judgement to derecognise this intangible at 1 April 2019 as a prior period error, as a result of a reassessment of its useful economic life.

 

Previously a goodwill impairment of £395.0 million was recorded in FY20 against the Aviation sector goodwill. The credit of £130.5 million within FY20 shown above is a reduction to that impairment and is the result of three prior year errors. Firstly, credits of £239.2 million and £5.1 million reflect the cumulative amount of prior year errors to the capital employed in the Aviation and Land operating segments respectively - and therefore reduce the amount that should have been impaired in FY20. Secondly, a calculation error in the FY20 impairment test of Land goodwill creates a charge of £127.7 million and, thirdly, the reduced intangible amortisation in relation to the Oil and Gas business was a credit of £13.9 million. 

 

Impairment of other non-current assets:

The FY21 adjustment within underlying operating profit largely relates to the write off of a loan to one of our joint ventures which is no longer deemed recoverable. The £32.7 million within FY21 Specific Adjusting Items is largely due to the impairment of internally generated intangibles, mainly computer software.

 

Impairment of property, plant and equipment and right of use assets:

As detailed in notes 12 and 13 of our financial statements, impairments of £156.9 million largely relate to fleet values in the Aviation sector where aircraft carrying values are no longer expected to be recovered through use or sale. Also included are impairments of leasehold property (£12 million) and plant and equipment of £11 million. The prior year error of £21.6 million within underlying profit is all from the Aviation sector and relates to the expensing of previously capitalised maintenance and the reversal of aircraft vendor credit notes previously recognised. See note 4 of our financial statements for details on prior year errors.

 

Impairment / write down of current assets:

This covers the reassessment of several contract profitability margins and the recoverability of many trade and other receivables (including contract assets and accrued income) as well as an increase in obsolescence provisions for inventory. This is the summation of many contract reassessments across the Group with £62.0 million in Aviation, £36.6 million in Land, £21.8 million in Marine and £20.6 million in Nuclear. The prior year error of £19.5 million relates to Aviation and corrects the capitalisation of mobilisation and other costs as well as revenue milestones incorrectly recognised for aircraft deliveries.

 

Introduction of / increase to liabilities:

These increases reflect reassessment of several contract profitability margins, onerous contract provisions, aircraft maintenance accruals, and other provisions. £72.6 million are in the Aviation sector, £35.5 million in Land and £11.4 million in Marine. Around £60 million of the liabilities are expected to outflow beyond one year.

 

Share of income from joint ventures and associates

Historically the Group adjusted the results of the joint ventures and associates before equity accounting the relevant share in the income statement. The Group has now decided such results should be incorporated without adjustment by the Group - unless required to align with IFRS. In the prior periods the Group's share of joint venture and associates results have been adjusted by £23.1 million cumulatively, and a charge of this amount is booked as a change in estimate in FY21 to reverse these amounts. In addition, following the termination of the Group's Dounreay decommissioning contract on 31 March 2021, as a consequence of the NDA's decision to take contract delivery in-house, the Group booked an adjustment of £10.9 million to reflect the estimated contract settlement with the NDA. Contract settlements remain outstanding in relation to works carried out some years ago by the Land sector's ABC joint venture and, following developments during the year, a further adjustment of £3.1million was recorded and represents an updated assessment of the contract outcomes. 

 

Tax adjustments:

The underlying FY21 impact of £7.5 million consists of the write off of deferred tax assets in Spain now considered not recoverable within the Group's forecasting horizon, together with a £21.6 million credit, being the recognition of tax deductibility on the DSG contract intangible amortisation now confirmed with HMRC. The prior year error of £12.4 million is the write off of a deferred tax asset incorrectly calculated in the prior year. 

 

Change in accounting policy:

During the year management amended the Group's accounting policy regarding Power By the Hour agreements. At 31 March 2021 this change in policy reduces property, plant and equipment by £65.6 million and trade and other receivables by £3.1 million and increases trade and other payables by £8.1 million.

 

Material balance sheet reclassifications

 

All balance sheet reclassifications are shown in note 4 of the financial statements. The materials ones are covered below.

 

Supply chain financing:

The Group entered into certain Supply Chain Financing Facilities ('SCF arrangements') in the Aviation operating segment. Outstanding balances financed through those arrangements were previously classified within trade payables. The Group has reassessed this classification and has determined that these liabilities should be reclassified as bank and other borrowings. This has also resulted in an increase to property, plant and equipment, trade and other receivables, and other borrowings, as part of the Supply Chain Financing Facilities has been used for deposits on aircraft.

 

At 1 April 2019, correction of this error results in an increase in property, plant and equipment of £54.7 million, an increase in trade and other receivables of £21.6 million, an increase in bank and other borrowings of £113.5 million and a reduction in trade and other payables of £37.2 million. At 31 March 2020, correction of this error results in an increase in bank and other borrowings of £93.3 million, an increase in property plant and equipment of £32.9 million and a reduction in trade and other payables of £60.4 million. This adjustment also impacts on the cash flow statement, resulting in an increase in cash flows from financing activities and reduction in cash flows from operating activities.

 

Cash pool arrangement:

An error has been identified in relation to the accounting for the Group's notional cash pool arrangement. Cash and cash equivalents and bank and other borrowings should have been presented on a gross rather than net basis, in line with the requirements of IAS 32 Financial Instruments: Presentation ('IAS 32'). The correction of this error results in increases in cash and cash equivalents and bank other borrowings of £569.5 million at 1 April 2019 and £494.5 million at 31 March 2020. There is no impact on the income statement.

 

 

FY21 performance

In order to simplify the presentation of underlying and statutory financial performance, the Group has adopted a three-column approach to the income statement. The first column below shows the underlying results with the second column showing the Specific Adjusting Items. The third column shows the statutory results.

 

Details of the Specific Adjusting Items are included in note 2 of the financial statements.

 

 

 

2021

 

2020 (restated)

 

Underlying
£m

Specific Adjusting Items
£m

Statutory
£m

 

Underlying
£m

Specific Adjusting items
£m

Statutory
 m

Revenue

 

4,182.7

-

4,182.7

 

4,428.5

-

4,428.5

Operating (loss)/profit

 

(27.6)

(1,615.4)

(1,643.0)

 

377.6

(453.2)

(75.6)

Share of results of joint ventures and associates

 

(13.1)

-

(13.1)

 

58.6

-

58.6

Investment income

 

0.9

-

0.9

 

1.1

-

1.1

Net finance costs

 

(62.1)

-

(62.1)

 

(73.0)

-

(73.0)

(Loss)/profit before tax

 

(101.9)

(1,615.4)

(1,717.3)

 

364.3

(453.2)

(88.9)

Income tax benefit/(expense)

 

(18.4)

33.7

15.3

 

(67.4)

40.5

(26.9)

(Loss)/profit after tax for the year

 

(120.3)

(1,581.7)

(1,702.0)

 

296.9

(412.7)

(115.8)

Basic EPS

 

(23.8)p

 

(337.0)p

 

58.4p

 

(23.3)p

Diluted EPS

 

(23.8)p

 

(337.0)p

 

58.3p

 

(23.3)p

 

Statutory performance

Revenue is now the same on a statutory and underlying basis as set out on page 8. Revenue of £4,182.7 million was 6% lower than last year including foreign exchange movements and disposals. Excluding these, revenue was down 3% organically with reductions due to COVID-19 and the CPBS adjustments only partly offset by other trading growth.

 

The statutory operating loss was £1,643.0 million in the year (2020: £75.6 million loss), mainly as a result of charges taken in our CPBS and our annual review of goodwill impairment as discussed in detail on page 11. Compared to the prior year, this was exacerbated by the impact of COVID-19 and significant credits that benefited the results in FY20. These items are discussed in more detail on page 16.

 

The share of results of joint ventures and associates was much lower than the prior year due to the termination and disposal of certain investments and the CPBS impact outlined on page 11.

 

Net finance costs reduced from the prior year due to the lower level of debt. Our statutory loss before tax was £1,717.3 million (2020:
£88.9 million loss), again reflecting the CPBS charges. Basic earnings per share, as defined by IAS 33, was (337.0) pence (2020: (23.3) pence) per share.

 

Exceptional items

Details of exceptional items recognised in FY21 within the Specific Adjusting Items column in the year are shown in note 2 of the financial statements. For the 2022 financial year we expect exceptional charges of around £50 million relating to the operating model restructuring charge (c.£40 million) and previously announced restructuring programmes (c.£10 million).

 

We intend to restrict the use of exceptional items in future periods following a tightening of definition this year.

 

 

Underlying results

For the most useful comparison to last year, and as a better measure for future periods, we focus on the Group's underlying operating profit excluding the one-off CPBS adjustments. This is believed to the most helpful measure for stakeholders to judge our performance this year.

 

 

31 March
2021

£m

31 March
2020

Restated

£m

Revenue

 

4,182.7

 

4,428.5

Underlying operating (loss) / profit

 

(27.6)

 

377.6

  of which one-off CPBS adjustments

(250.0)

 

-

 

  Underlying operating profit excluding one-off CPBS adjustments

222.4

 

377.6

 

  Underlying margin excluding one-off CPBS adjustments

5.3%

 

8.5%

 

Share of results of joint ventures and associates

 

(13.1)

 

58.6

  of which CPBS one-off impacts

(31.5)

 

-

 

  Share of results of JVs and associates excluding one-off CPBS adjustments

18.4

 

58.6

 

Net finance costs

 

(61.2)

 

(71.9)

Underlying (loss) / profit before tax

 

(101.9)

 

364.3

Tax

 

(18.4)

 

(67.4)

Underlying (loss) / profit after tax

 

(120.3)

 

296.9

Non-controlling interests

 

-

 

(2.0)

Underlying profit attributable to shareholders

 

(120.3)

 

294.9

Underlying basic EPS

 

(23.8)p

 

58.4p

  Underlying basis EPS excluding one-off CPBS adjustments*

28.9p

 

 

 

* estimated based on an underlying effective tax rate of 21%

 

Revenue bridge

 

 

 

31 March 2020

Restated

£m

FX

impact

£m

Disposals of businesses

£m

Impact of

COVID-19

£m

FY21 CPBS

impacts

£m

Other trading

£m

31 March

2021

£m

Marine

 

1,163.6

(2.9)

(25.4)

8.5

(25.7)

124.2

1,242.3

Nuclear

 

896.9

-

(3.5)

9.3

(21.8)

95.0

975.9

Land

 

1,522.5

(50.8)

(30.5)

(118.5)

(140.9)

(71.7)

1.110.1

Aviation 

 

845.5

11.8

-

(44.6)

(19.0)

60.7

854.4

Total

 

4,428.5

(41.9)

(59.4)

(145.3)

(207.4)

208.2

4,182.7

 

Revenue for the year was £4,182.7 million, down 6% compared to last year but down 3% organically (i.e. excluding FX and disposals). The table above shows the main comparison variances of revenue performance against last year.

Specifically on each main variance:

·

FX impact - this primarily relates to FX translation on the results of the South African business.

·

Disposals of businesses - this is the lower revenue from Context (sold in March 2020), Conbras (sold in October 2020) and the civil nuclear manufacturing business (sold in September 2020).

·

Impact of COVID-19 - this reflects the impact of the COVID-19 pandemic across the Group, with the most significant impact being in many of our Land businesses including South Africa, airports and civil training. Lower flying hours in the early stages of the pandemic also impacted the Aviation sector. Conversely, COVID-19 led to slightly more revenue in Marine and Nuclear as activity levels were increased, for example for the design and manufacture of ventilators. This COVID-19 impact has been estimated across our sectors and based on an analysis of direct and indirect impacts, which include a significant degree of judgement.

·

FY21 CPBS impacts - the most significant item is the de-recognition of revenue from the Phoenix contract in Land following a contract change in February 2020 which resulted in our contract relationship changing from principal to agent. The remaining revenue decreases are a result of the reassessment of progress and profitability on many of the Group's contracts.

·

Other trading - this relates to revenue movements excluding all the items above. Revenue grew across three of the sectors, with the strongest growth coming in Marine which was driven by increased activity on our Type 31 frigate programme. Growth in Nuclear was due to higher activity, especially in infrastructure projects, while growth in Aviation came from new contracts. The decline in revenue in Land includes the impact of the loss of our Heathrow airport baggage handling contract, which ended half way through the year.

 

Revenue of £4,183 million differs from the unaudited draft figure of £4,690 million given in our April 2021 business update as this figure included £290 million share of revenue from joint ventures and associates and excluded the £207 million adjustment to revenue from our CPBS as shown in the table above. Further analysis of our revenue performance is included in each sector's operating review on pages 26 to 30.

 

Underlying operating profit performance

The underlying operating loss in the year was £27.6 million. This differs from the unaudited draft figure of £307 million given in our April 2021 update as this figure included £62 million from joint ventures and associates and IFRIC 12 income and did not include the impacts of the CPBS.

 

This performance compares to £377.6 million underlying operating profit last year, as restated on page 8 for the change in presentation of joint ventures and associates and the correction of prior year errors and a change in accounting policy.

 

Excluding the one-off CPBS adjustments, FY21 underlying operating profit was £222.4 million. This measure is deemed to be the most useful measure to compare to last year, and a better measure to compare with future periods.

 

Underlying operating profit bridge from FY20 to FY21 (before one-off CPBS adjustments):

 

 

31 March 2020

Restated

£m

FX

impact

£m

Disposals of businesses

£m

Significant credits

in FY20

£m

Impact of

COVID-19

£m

FY21 recurring CPBS adjustment

£m

Other trading

£m

31 March

2021
£m

Marine

134.4

(0.3)

(2.5)

(5.7)

(17.3)

(8.4)

(15.0)

85.2

Nuclear

113.3

-

0.5

(20.9)

(2.1)

(0.2)

(3.3)

87.3

Land

98.1

(4.8)

(1.7)

(3.1)

(15.1)

(9.8)

(11.7)

51.9

Aviation 

31.8

(0.3)

-

(17.0)

(11.1)

(6.3)

0.9

(2.0)

Corporate

-

-

-

-

-

-

-

-

Total

377.6

(5.4)

(3.7)

(46.7)

(45.6)

(24.7)

(29.1)

222.4

 

The main variances year-on-year are:

·

FX impact - this primarily relates to FX translation on the results of our South African business.

·

Disposals of businesses - this is the lower profit contribution from Context (sold in March 2020) and Conbras (sold in October 2020) partly offset by the lack of an operating loss in the civil nuclear manufacturing business disposed of in the year.

·

Significant credits in FY20 - these relate to significant credits that benefited underlying operating profit in FY20. These credits included a higher level of R&D tax credits due to a catch up on previous years' claims. The majority of other FY20 credits were in the civil aviation business, and include multi-year indexation claims on contracts and accrual and provision releases. The FY20 credits in Marine and Land were mostly accrual releases.

·

Impact of COVID-19 - this reflects a range of direct and indirect costs from working through the COVID-19 pandemic. Direct costs included the purchase of personal protective equipment (PPE) and testing equipment. Indirect costs include site closures, lower activity and reduced efficiency due to social distancing. This COVID-19 impact has been estimated across our sectors and at Group based on an analysis of direct and indirect impacts, which include a significant degree of judgement. The estimated lower expenses, e.g. travel, have also been considered in this analysis.

·

FY21 recurring CPBS adjustment - these relate to the recurring impacts of the CPBS on underlying operating profit. The largest two items included within this are a more cautious view on the recognition of profit on the Type 31 frigate programme in Marine and a lower margin recognised on the DSG contract in Land.

·

Other trading - this relates to the movement in underlying operating profit after all of the above. Included within this movement was an increase in overheads and corporate costs in the year of around £10 million, with a less favourable allocation to Marine than in the previous year, partly explaining the sector's decline in trading. Marine's weaker trading also reflects lower profitability than last year on certain contracts and a charge from the loss of a legal case. The lower profit in Nuclear partly reflects the lower margin in the transition year of MSDF while the lower profit in Land reflects the loss of the Heathrow contract and operating gearing impact of the lower revenue. Aviation saw a small increase in underlying operating profit, after adjusting for the items above, as the benefits of the cost saving programme initiated last year were mostly offset by weaker trading.

 

Further analysis of our underlying operating profit performance is included in each sector's operating review on pages 26 to 30.

 

Share of results of joint ventures and associates

The Group's share of results in joint ventures (JVs) and associates was a loss of £13.1 million in the year, or a profit of £18.4 million excluding one-off CPBS adjustments. The reduction on last year of £40.2 million reflects the absence of Magnox (£2.2 million impact), a JV that ended in the 2020 financial year, a loss on the Dounreay JV (£9.5 million impact), the disposal of the Holdfast JV (£14.8 million impact) and lower recognised profit in our Aviation JVs and associates.

 

The Group's main joint ventures and associates at 31 March 2021 were:

·

Naval Ship Management (NSM) in our Marine sector, which maintains part of Australia's naval fleet

·

ALC in our Land sector, which manages the UK Army's construction vehicle fleet. This contract ended in May 2021

·

Ascent in our Aviation sector, which trains RAF pilots in the UK under the UK Military Flying Training System (UKMFTS) air training contract

·

AirTanker in our Aviation sector, which is responsible for the UK's air-to-air refuelling capability and air transport operations. We increased our stake in this associate to around 15% in November 2020

 

Work in the Dounreay JV in our Nuclear sector ended on 31 March 2021 after the Nuclear Decommissioning Authority (NDA) announced the contract's early termination in line with their "One NDA" strategy to move work in-house. The Group recognised a loss on the Dounreay contract in the year of £15.9 million (£5 million loss excluding one-off CPBS adjustments) reflecting the updated assumptions around contract milestone profit achievability in the reduced timeframe.

 

Finance costs

Total net finance costs decreased to £61.2 million (2020: £71.9 million).

 

Tax charge

The tax charge on underlying profits / losses was £18.4 million (2020: £67.4 million), representing a notional rate of -20.7% (2020: 22.0%). The Group's underlying effective rate of tax is calculated on underlying profit before tax excluding the share of income from joint ventures and associates (which is a post-tax number). Before the one off CPBS adjustments, the underlying effective rate of tax for the year was 21%.

 

The Group's effective rate of tax for FY22, as calculated on this basis, will be dependent on country profit mix and is currently expected to be around 23%. In the medium term, we expect our effective tax rate to increase in conjunction with UK corporation tax rate increases.

 

Exchange rates

The translation impact of foreign currency movements resulted in a decrease in underlying revenue of £42 million and a £5.4 million decrease in underlying operating profit excluding one-off CPBS adjustments. The main currencies that have impacted our results are the South African Rand and the Euro. The currencies with the greatest potential to impact our results are the Euro, the South African Rand and the Canadian Dollar:

·

A 10% movement in the Euro against Sterling would affect underlying revenue by around £40 million and underlying operating profit by around £2 million per annum

·

A 10% movement in the South African Rand against Sterling would affect underlying revenue by around £25 million and underlying operating profit by around £2.5 million per annum

·

A 10% movement in the Canadian Dollar against Sterling would affect underlying revenue by around £15 million and underlying operating profit by around £1 million per annum

 

Earnings per share

Underlying earnings per share for the year was (23.8) pence (2020: 58.4 pence), reflecting the underlying operating loss.

 

Disposal programme

Our plan for disposals has been assessed and does not meet the criteria for any assets to be classed as held for sale under IFRS 5.

 

Cash flow and net debt

Our underlying cash flows are used by management to measure operating performance as they provide a more consistent measure of business performance year to year.

 

2021

2020

 

Underlying
£m

Underlying

restated*

£m

Underlying operating profit

(27.6)

377.6

One-off CPBS adjustments

250.0

-

Underlying operating profit excl. one-off CPBS adjustments

222.4

377.6

Depreciation & amortisation

107.7

91.0

ROU asset depreciation

140.2

123.3

Non-cash items

9.1

1.4

Working capital

128.0

(10.8)

Provisions

3.4

(10.0)

Net capital expenditure

(171.1)

(108.5)

Capital element of lease payments

(140.6)

(175.0)

Underlying operating cash flow

299.1

289.0

Cash conversion %  excl. one-off CPBS adjustment

134%

77%

Pension contributions in excess of income statement

(73.5)

(70.2)

Interest paid

(66.6)

(70.3)

Tax received / paid

18.4

(62.6)

Dividends from joint ventures and associates

36.8

52.0

Cash flows related to exceptional items

(44.7)

(82.4)

Underlying free cash flow

169.5

55.5

Net acquisitions and disposals

90.6

104.7

Acquisitions/investments in joint ventures and associates

(8.8)

(0.3)

Dividends paid (including non-controlling interests)

(0.8)

(153.9)

Purchase of own shares

(2.2)

(2.9)

Capital element of lease payments

140.6

175.0

Net new lease arrangements

(82.3)

(117.1)

Exchange movements

44.6

(53.8)

IFRS 16 transition

-

(640.8)

Movement in net debt

351.2

(633.6)

Opening net debt

(1,704.8)

(1,071.2)

Closing net debt

(1,353.6)

(1,704.8)

Operating leases

(582.1)

(649.4)

Closing net debt excluding operating leases

(771.5)

(1,055.4)

 

* see restatements summary on page 10.

 

Cash performance

 

Changes in reporting

As set out on page 9, we have updated our cash flow reporting to better reflect cash movements, with the cash payments relating to the capital element of leases included in underlying operating cash flow rather than net new lease commitments, which is reflected as a debt movement. We have also changed our definition of underlying free cash flow to include cash flows related to exceptional items.

 

Underlying operating cash flow

Underlying operating cash flow in the period after capital expenditure was £299.1 million compared to £289.0 million last year. This represented operating cash conversion of 134% on the underlying operating profit excluding one-off CPBS adjustments. The increase in cash generation year-on-year despite the significant fall in operating profit came from a large working capital inflow.

 

Movements in working capital

The movement in working capital for the period was a £128.0 million inflow compared to a £10.8 million outflow last year. FY21 benefited from the deferral of £56 million of VAT payments that will unwind in the next financial year. Cash flow in FY21 improved through advanced customer receipts across some of the Group's businesses.

 

As in previous years, working capital benefited from creditor payment phasing around period end, which we will now move away from over time.

 

Working capital also continued to benefit from period end receivables factoring in Southern Europe, which was £102 million at 31 March 2021 (31 March 2020: £98 million).

 

Capital expenditure

Net capital expenditure of £171.1 million in the year was significantly higher than last year (2020: £108.5 million), reflecting the start of our investment in a new facility to build Type 31 frigates in Rosyth and increased net capital expenditure in Aviation, partly reflecting lower disposal proceeds given fewer aircraft disposals.

 

It is expected that net capital expenditure will continue to be high in FY22 as we continue the Type 31 investment and increase investment in other areas of the business, including upgrading facilities and IT equipment.

 

Cash interest paid

Net Group cash interest paid, excluding that paid by joint ventures and associates, was £66.6 million (2020: £70.3 million).

 

Taxation

Cash tax in the year was an inflow of £18.4 million, helped by a receipt of £67 million of corporation tax repayments in the final quarter. We currently expect a cash tax outflow of around £30 million in FY22.

 

Pensions

Pension cash outflow in excess of the income statement charge (excluding exceptional charges for curtailment losses) was £73.5 million (2020: £70.2 million).

 

For FY22, the cash outflow in excess of the income statement charge is expected to be around £130 million. This includes a £50 million additional payment into the Rosyth scheme made in April 2021 and an additional £10 million payment into the BIG scheme.

 

An additional £50 million payment into the Rosyth scheme, and a further £10 million contribution to the BIG scheme have been agreed to be made in April 2022.

 

Dividends from joint ventures and associates

During the period the Group received £36.8 million in dividends from its joint ventures and associates (2020: £52.0 million).

 

We expect dividends from joint ventures and associates to be around £30 million in the next financial year.

 

Exceptional cash flows

Cash outflows related to exceptional items were £44.7 million compared to £82.4 million last year. These costs included exits and restructuring costs. In FY22, we anticipate exceptional cash outflows of around £70 million, including a round £50 million of reorganisation costs related to implementing our new operating model (c.£40 million) and completing the existing restructuring programme in Aviation (c.£10 million). In addition to this, there may be cash settlements for the Italy antitrust fine, see page 24.

 

Underlying free cash flow

Underlying free cash flow of £169.5 million was significantly higher than last year's £55.5 million and partly reflects the working capital timing benefits and corporation tax repayments.

 

Acquisitions and disposals

The net cash inflow from acquisitions and disposals was £90.6 million, including net disposal proceeds from the sale of Holdfast (£85.0 million) and Conbras (£6.6 million). In addition, the Group increased its stake in the AirTanker associate.  We aim to generate at least £400 million of disposal proceeds in the next 12 months.

 

New lease arrangements

In addition to net capital expenditure, and not included in free cash flow, £82.3 million (FY20: £117.1 million) of additional leases were entered into in the period. These represent new lease obligations and so are included in our main net debt figure but do not involve any cash outflows at inception.

 

Net debt

The Group's net debt at 31 March 2021 was £1,353.6 million, or £771.5 million excluding operating leases (broadly in line with the early indication of £750 million reported in our April 2021 business update). Net debt excluding lease obligations was £283.9 million lower than last year and reflects the free cash flow and net divestments discussed above.

 

As in previous periods, average net debt during FY21 was higher than the closing balance at 31 March 2021, partly reflecting the phasing of creditor payments around period end. Average net debt over the 2021 financial year was around £1.3 billion, compared to around £1.6 billion last year, with this calculation being based on each month end balance.

 

Our net debt now includes balances related to the use of supply chain financing in the Group with extended credit terms. At 31 March 2021 the amount included was £25 million (31 March 2020: £93 million). We are phasing out the use of supply chain financing across the Group.

 

Funding and liquidity

As announced on 13 April 2021, the Group has been in discussions with its lending banks to prudently secure protection to the potential downside risks in our scenario planning. This includes ensuring sufficient headroom under severe but plausible scenarios.

In May 2021, the Group:

·

Signed a new three-year revolving credit facility ('RCF') of £300 million that expires in May 2024. This is in addition to the £775 million RCF that expires in August 2025

·

Clarified the definition of underlying results used in covenant calculations to ensure that any one-off impacts from the Group's contract profitability and balance sheet review ('CPBS') do not impact the calculation

·

Agreed a temporary amendment to the net debt to EBITDA ratio covenant from 3.5 times to 4.5 times for the measurement periods ending 30 September 2021 and 31 March 2022

 

At 31 March 2021, the Group's net cash balance was £531 million. This combined with the undrawn element of our RCF gave us liquidity headroom of around £1.2 billion. We repaid the US Private Placement of $500 million, which was hedged at £307 million, in March 2021. This was funded from existing Group cash resources.

 

As of July 2021, the Group had access to a total of £2.4 billion of borrowings and facilities of mostly long-term maturities. These comprised:

·

€550 million bond maturing 6 October 2022 (in April 2021 this was hedged at £482 million)

·

New £300 million 3-year RCF maturing 20 May 2024 (signed on 20th May 2021)

·

£775 million revolving credit facility (RCF) maturing 28 August 2025

·

£300 million bond maturing 5 October 2026

·

€550 million bond, hedged at £493 million, maturing 13 September 2027

·

Committed overdraft facility of £50 million

 

Capital structure

An important part of the transformation of Babcock is the strengthening of the balance sheet. Whilst there are several facets to balance sheet strength, the primary measurement relevant to Babcock is the net debt / EBITDA gearing ratio within our debt covenants, which was 2.5x at 31 March 2021. The covenant level is 3.5 times, increased to 4.5 times until March 2022.

 

Our near-term priority is to reduce the gearing ratio to below 2x. There are some short-term headwinds to reducing the gearing. Free cash flow is expected to be negative in FY22 and HY23 as certain material cash outflows - particularly additional pension contributions and restructuring - have already been committed. Additionally, we intend to gradually unwind the gap between period end and average net debt.

 

The planned disposal proceeds of at least £400 million over the next twelve months will provide the funds to support strengthening the balance sheet. Despite the clear priority to delever the balance sheet, the Group will continue to invest organically in the business as this will be key to driving value in the medium term. As we announced in April 2021, we aim to return to strength without the need for an equity issue.

 

In the next 12-18 months, once the disposal programme is complete, we will reassess the appropriate capital structure for the future of the Group.

 

Net debt to EBITDA (covenant basis)

This is the measure used in the covenant in our revolving credit facilities (RCF) and makes a number of adjustments from reported net debt and EBITDA. The covenant level is 3.5 times - amended to 4.5 times until 31 March 2022. Our net debt to EBITDA increased to 2.5 times at 31 March 2021 as the reduction in net debt, reflecting free cash flow generation and disposal proceeds, was more than offset by the decrease in EBITDA.

 

 

 

31 March 2021

£m

 

31 March 2020

Restated

£m

Underlying operating profit excl. one-off CPBS adjustments

 

222.4

377.6

Depreciation and amortisation

 

107.7

91.0

Covenant adjustments*

 

(11.5)

(17.0)

EBITDA

 

318.6

451.6

JV and associate dividends

 

36.8

52.0

EBITDA + JV and associates dividends (covenant basis)

 

355.4

503.6

Net debt

 

(771.5)

(1,055.4)

Covenant adjustments**

 

(103.6)

(94.9)

Net debt (covenant basis)

 

(875.1)

(1,150.3)

Net debt / EBITDA

 

2.5x

2.3x

* various adjustments made to EBITDA to reflect accounting standards at the time of inception of the original RCF agreement. The main adjustments are to the treatment of leases within operating profit and pension costs

** removing loans to JVs, finance lease receivables and adjusting for an average FX rate for the previous 12 months

 

Interest cover (covenant basis)

This measure is also used in the covenant in our revolving credit facility (RCF), with a covenant level of 4.0 times.

 

 

31 March 2021
£m

 

31 March 2020

Restated
 m

EBITDA (covenant basis) + JV and associate dividends

355.4

503.6

Finance costs

(55.6)

(61.2)

Finance income

11.7

13.0

Covenant adjustments

(0.2)

0.2

Net Group finance costs

(43.7)

(48.0)

Interest cover

8.1x

10.5x

 

Return on invested capital, pre-tax (ROIC)

This measure is one of the Group's key performance indicators (KPIs).

 

 

31 March 2021
£m

 

31 March 2020

Restated
 m

Underlying operating profit

(27.6)

377.6

Share of JV PAT

(13.1)

58.6

Underlying operating profit plus share of JV PAT

(40.7)

436.2

Underlying operating profit excl. one off CPBS impacts

222.4

377.6

Share of JV PAT excl. one-off CPBS impacts

18.4

58.6

Underlying OP plus share of JV PAT excl. one off CPBS adjustments

240.8

436.2

Net debt excluding operating leases

771.5

1,055.4

Operating leases

582.1

649.4

Shareholder funds

243.4

2,314.8

Retirement deficit / (surplus)

293.1

(145.2)

Invested capital

1,890.1

3,874.4

ROIC (pre-tax)

(2.2)%

11.3%

ROIC excl. one off CPBS adjustments (pre-tax)

12.7%

11.3%

 

 

Pensions

The Group has a number of defined benefit pension schemes. The principal defined benefit pension schemes in the UK are the Devonport Royal Dockyard Pension Scheme, the Babcock International Group Pension Scheme and the Rosyth Royal Dockyard Pension Scheme. The nature of these schemes is that the employees contribute to the schemes with the employer paying the balance of the cost required. The contributions required and the assessment of the assets and the liabilities that have accrued to members and any deficit recovery payments required are agreed by the Group with the trustees of each scheme who are advised by independent, qualified actuaries.

 

The Group's balance sheet includes the assets and liabilities of the pension schemes calculated on an IAS 19 basis. At 31 March 2021, the net position was a deficit of £293.1 million compared to a net surplus of £145.2 million at 31 March 2020. These valuations are based on discounting using corporate bond yields. Bond credit spreads were unusually high in March 2020 given the onset of the COVID-19 pandemic. They have now reverted to a more normal level causing a significant increase in benefit obligations.

 

The fair value of the assets and the present value of the liabilities of the Group pension schemes at 31 March were as follows:

 

 

2021

 

2020

Principal
schemes
£m

Railways
scheme
£m

Other
schemes
£m

Total
£m

Principal
schemes
£m

Railways
scheme
£m

Other
schemes
£m

Total
£m

Fair value of plan assets

 

 

 

 

 

 

 

 

 

Growth assets

 

 

 

 

 

 

 

 

 

Equities

55.1

12.5

23.0

90.6

 

33.7

14.0

19.8

67.5

Property

437.1

2.1

4.7

443.9

 

426.0

4.6

4.4

435.0

High yield bonds/emerging market debt

348.4

-

-

348.4

 

75.3

-

-

75.3

Absolute return and multi-strategy funds

428.5

194.5

25.4

648.4

 

345.0

191.1

22.3

558.4

Low-risk assets

 

 

 

 

 

 

 

 

 

Bonds

1,422.9

54.8

83.2

1,560.9

 

1,397.4

30.3

75.0

1,502.7

Matching assets*

1,682.7

1.7

219.5

1,903.9

 

1,918.7

1.4

59.2

1,979.3

Active position on longevity swaps

(211.2)

-

-

(211.2)

 

(206.9)

-

-

(206.9)

Fair value of assets

4,163.5

265.6

355.8

4,784.9

 

3,989.2

241.4

180.7

4,411.3

Percentage of assets quoted

100%

100%

100%

100%

 

100%

100%

100%

100%

Percentage of assets unquoted

-

-

-

-

 

-

-

-

-

Present value of defined
benefit obligations

 

 

 

 

 

 

 

 

 

Active members

857.6

126.1

39.5

1,023.2

 

892.0

93.1

91.8

1,076.9

Deferred pensioners

1,227.3

107.4

273.9

1,608.6

 

863.4

82.0

45.0

990.4

Pensioners

2,259.1

136.1

51.0

2,446.2

 

2,035.4

122.4

41.0

2,198.8

Total liabilities

4,344.0

369.6

364.4

5,078.0

 

3,790.8

297.5

177.8

4,266.1

Net assets / (liabilities) recognised in the statement of financial position

(180.5)

(104.0)

(8.6)

(293.1)

 

198.4

(56.1)

2.9

145.2

*  The matching assets aim to hedge the liabilities and consist of gilts, repos, cash and swaps. They are shown net of repurchase obligations of £2,177 million (2020: £2,033 million).

 

Analysis of movement of pensions in the Group statement of financial position

T he movement in net deficits for the year ending 31 March 2021 is as a result of the movement in assets and liabilities shown below.

 

 

2021

 

2020

Principal
schemes
£m

Railways
scheme
£m

Other
schemes
£m

Total
£m

Principal
schemes
£m

Railways
scheme
£m

Other
schemes
£m

Total
£m

Fair value of plan assets (including reimbursement rights)

 

 

 

 

 

 

 

 

 

At 1 April

3,989.2

241.4

180.7

4,411.3

 

4,104.7

246.6

230.9

4,582.2

Interest on assets

91.7

5.7

3.0

100.4

 

96.0

5.8

3.0

104.8

Actuarial gain/(loss) on assets

224.3

26.3

174.0

424.6

 

(64.0)

(2.4)

30.3

(36.1)

Employer contributions

102.5

2.8

3.5

108.8

 

105.1

3.0

2.8

110.9

Employee contributions

0.2

-

-

0.2

 

0.2

-

0.1

0.3

Benefits paid

(244.4)

(10.6)

(5.4)

(260.4)

 

(252.8)

(11.6)

(6.1)

(270.5)

Settlements

-

-

-

-

 

-

-

(80.3)

(80.3)

At 31 March

4,163.5

265.6

355.8

4,784.9

 

3,989.2

241.4

180.7

4,411.3

Present value of benefit obligations

 

 

 

 

 

 

 

 

 

At 1 April

3,790.8

297.5

177.8

4,266.1

 

4,060.3

311.1

238.8

4,610.2

Service cost

24.1

2.0

2.0

28.1

 

29.5

2.5

1.7

33.7

Incurred expenses

6.4

0.7

0.2

7.3

 

3.4

0.2

0.1

3.7

Interest cost

86.4

7.0

3.0

96.4

 

94.4

7.4

3.1

104.9

Employee contributions

0.2

-

-

0.2

 

0.2

-

0.1

0.3

Experience loss/(gain)

33.5

0.6

(1.4)

32.7

 

27.8

-

1.4

29.2

Actuarial (gain)/loss - demographics

8.4

(0.6)

(0.2)

7.6

 

14.8

1.2

(1.2)

14.8

Actuarial loss /(gain)- financial

629.7

73.0

188.4

891.1

 

(186.8)

(13.3)

20.1

(180.0)

Benefits paid

(244.4)

(10.6)

(5.4)

(260.4)

 

(252.8)

(11.6)

(6.1)

(270.5)

Past service costs

1.4

-

-

1.4

 

-

-

-

-

Curtailment

7.5

-

-

7.5

 

 

 

 

 

Settlements

-

-

-

-

 

-

-

(80.2)

(80.2)

At 31 March

4,344.0

369.6

364.4

5,078.0

 

3,790.8

297.5

177.8

4,266.1

Net surplus/(deficit) at 31 March

(180.5)

(104.0)

(8.6)

(293.1)

 

198.4

(56.1)

2.9

145.2

*  Settlement effect in Other schemes is a result of a transfer of assets and liabilities from the Babcock Naval Services Pension Scheme back into the Principal Civil Service Pension Scheme. As the Group is reimbursed by MOD for any contributions payable to this scheme, the settlement has an equal impact on both the value of the benefit obligations and the plan assets, hence it is neutral in terms of both the income statement and other comprehensive income,

 

An estimate of the technical provisions actuarial deficits as at 31 March 2021 for the principal schemes was around £270 million, predominantly reflecting discount rates based on UK gilts - which differs from the corporate bond approach of IAS 19. This technical provisions estimate is based on the assumptions used within the latest agreed valuation prior to 31 March 2021 for each of the three main schemes, and therefore does not fully allow for the impact of RPI reform which will be fully reflected in future technical provisions valuations.

 

Discount rate:

2.0% (31 March 2020: 2.4%)

Inflation rate (RPI):

3.2% (31 March 2020: 2.6%)

 

 

Cash contributions


FY22e
£m

FY21

£m

FY20
£m

Future service contributions

23.2

24.2

26.0

Deficit recovery

111.9

51.6

47.3

Longevity swap

16.8

16.3

15.3

Total cash contributions - employer

151.9

92.1

88.6

 

Cash contributions made by the Group into the defined benefit pension schemes, excluding expenses and salary sacrifice contributions, during the last financial year are set out in the table above. In FY22, the total cash contributions expected to be paid by the Group into the defined benefit pension schemes are £160.7 million including £8.8 million for salary sacrifice contributions. £23.2 million is in respect of the cost of future service accrual, £111.9 million is to recover deficits over periods of time agreed with the Trustee and an additional £16.8 million is in respect of the three longevity swaps transacted for each of the largest schemes during 2009/10 to mitigate the financial impact of increasing longevity.

 

Income statement charge

The charge included within underlying operating profit in FY21 was £35 million, of which £28 million related to service costs and £7 million related to expenses. We expect charges of around £40 million in FY22, split between £33 million of service costs and £7 million of expenses. In addition to this, there was an interest credit of £4 million in FY21 and, for FY22, we expect an interest charge of £5 million on the deficit.

 

 

Subsequent events

In April 2021, the Group announced a new operating model. The related restructuring will result in an exceptional charge of around £40 million being recognised in the 2022 financial year.

 

In FY20, the Lazio Regional Administrative Court confirmed a €51 million fine issued by the Italian Competition Authority to our subsidiary, Babcock Mission Critical Services Italia SpA (BMCS Italia), for certain anti-trust violations. As a result, we recognised a provision for £46 million.  During the year, BMCS Italia appealed the decision of the Court to the Italian Council of State.  In July 2021, the Council, whilst upholding the decision of the Court on the facts, annulled the fine, though allowing the Authority leave to re-calculate it.  We expect the Authority to decide on the recalculation of the fine over the next few months.  Taking into account the guidance given by the Council to the Authority on the recalculation, we further expect the Authority to reduce the fine.  As a result, we have reduced our best estimate of the provision from £46 million to £20 million, although we have not received any indication from the Authority as to how it will choose to interpret the Council's guidance.

 

 

Improvements in risk management and internal control

 

During the second half of the year, the new Executive Directors made several changes to the risk management and internal control environment. These were initially designed to simplify and improve the oversight and governance of the Group. As the CPBS review progressed it became apparent that business processes and internal controls needed a more thorough revision. A programme of change has commenced which targets certain priority areas - a summary is set out below. The findings of the CPBS have been mapped against these areas to ensure that risks and issues that resulted in financial adjustments in the CPBS are in future either prevented, or at least detected at an early stage.

 

The priority areas of improvement and key actions are as follows:

 

Area

Improvements and actions

Governance

Clear 'tone from the top' on Babcock values

Board and Exco documentation streamlined and focused

Formation of Disclosure Committee/Disclosure Panel to consider market communications

New Risk Management process with Exco ownership

Enhanced Delegations of Authority document across the Group

Formal Letter of Representation covering policy compliance sign off from management each six months

Financial control

Simplification of income statement and cash flow management reporting

Standardised management reporting across the Group

Development of detailed minimum standards of financial control

Updated and standardised Group accounting policies

Updated Treasury controls and policies

Monthly business reviews with sectors

Regular balance sheet reviews with sector sign off

Bids

Improved, standardised bid review process and documentation

Project management

New Group-wide approach to project management and project reviews

Enhanced change control process

Safety

Revamped scrutiny of safety performance

Nominated Exco Safety sponsor

 

Some of the above changes have been implemented already. Some require a more detailed approach and will take more time to embed. They will be implemented in the current fiscal year. In the meantime where this is the case, management reviews of projects and financial results will help mitigate against the risk of reoccurrence.

 

Additionally, the new operating model has organised the functions of finance, HR, IT, procurement and supply chain as 'centre-led'. This will ensure higher common standards across the Group and increase transparency and oversight of the business, as well as promote more collaboration.

 

 

OPERATIONAL REVIEWS

Marine

 

 

31 March
2021

31 March
2020

Restated

Contract backlog

£2.5bn

£2.6bn

Revenue

£1,242.3m

£1,163.6m

Underlying operating profit

£56.3m

£134.4m

  of which CPBS one-off adjustment

£(28.9)m

 

  Underlying operating profit excluding CPBS one-off adjustment

£85.2m

 

  Underlying margin excluding CPBS one-off adjustment

6.9%

11.6%

 

Revenue and underlying operating profit (excl. one-off CPBS adjustment) bridge:

 

 

31 March 2020

Restated

£m

FX

impact

£m

Disposals of businesses

£m

Significant credits

in FY20

£m

Impact of

COVID-19

£m

CPBS impacts

£m

Other trading

£m

31 March

2021
£m

Revenue

1,163.6

(2.9)

(25.4)

-

8.5

(25.7)

124.2

1,242.3

Underlying operating profit

134.4

(0.3)

(2.5)

(5.7)

(17.3)

(8.4)

(15.0)

85.2

 

Financial review

Organic revenue grew by 9% in the year led by the ramp up of work on the Type 31 frigate programme and continued strength in our LGE business. Growth in these areas more than offset the impact of the disposal of Context and the £44 million year-on-year revenue impact from the end of the QEC programme last year. Increased work related to COVID-19 had a small positive impact on revenue with lower activity in warship support and in Oman offset by COVID-related orders for the ventilators in the UK.

 

Underlying operating profit of £56.3 million includes a £28.9 million one-off adjustment from our CPBS (see page 11). Excluding this, underlying operating profit was £85.2 million. The table above shows the main variances year-on-year:

·

The estimated impacts of COVID-19 which included lower activity in high margin consultancy work and the shutdown of our Oman training site for most of the period with limited opportunities to mitigate costs

·

A recurring impact from the CPBS primarily related to a more cautious view on the recognition of profit on the Type 31 frigate programme, amongst other projects

·

Weaker trading which reflects lower profitability on certain programmes, a charge from the loss of a legal case relating to a previously exited business, and a less favourable allocation of corporate costs to Marine than in the previous year

 

The sector's contract backlog was broadly flat year-on-year.

 

Operational review

 

UK defence

Performance across UK defence was mixed throughout the year with lower volumes across some key programmes, partly reflecting the pressures of COVID-19, being offset by increased activity on the Type 31 frigate programme.

 

The Type 31 frigate programme has now completed both its preliminary and whole ship design reviews. This is a key indicator of the compliance, maturity and engineering risk in proceeding into production as we mature the design models of specific individual systems and equipment. The development and construction of a new state-of-the-art assembly hall at our Rosyth dockyard to support the build is due for completion towards the end of this summer with the steel on the first ship, HMS Venturer, to be cut in September 2021.

 

The Type 23 frigate life-extension programme at our Devonport dockyard saw a temporary halt to work in the early stages of the COVID-19 pandemic but was soon back to a full work schedule, with four ships undergoing life extension in parallel. HMS Portland was returned to the Royal Navy in the year after receiving its life extension including a first-in-class engine removal and repair. HMS St Albans is currently undergoing the largest Type 23 support period yet. We also provided a large support package for HMS Richmond ahead of her joining the UK's Carrier Strike Group.

 

We continue to support the development of the next generation of UK submarines. We secured both weapons handling and launch system (WHLS) and defensive aids suite (DAS) contracts in the period in support of the UK Dreadnought programme. The US/UK Common Missile Compartment programme output increased significantly during the period and will continue to do so throughout the next year as the programme ramps up.

 

In March 2021 we secured a five-year, £150 million logistic support contract with the MOD as part of the £3.2 billion Land Environment Tactical Communications and Information Systems (LE TacCIS) programme of opportunities to deliver the next-generation tactical communications and information systems. We have been down-selected for the next phase of the Skynet 6 Service Delivery Wrap contract supporting the next generation of UK military satellite communications, with a final submission expected in October 2021. We also await the outcome of the Maritime Electronic Warfare Systems Integrated Capability (MEWSIC) bid, which is expected in the coming months.

 

We were disappointed to be unsuccessful in our Project Selborne bid during the period. The delivery of FOAP training, which was included within the larger Project Selborne scope, finished on 31 March 2021. We continue to deliver training under the Astute Class Training contract at HMNB Clyde.

 

International defence

We support international defence markets from our UK operations and from our businesses in Canada, Australia, New Zealand, Oman and Korea.

In Canada, our customer exercised two one-year contract extension options to the Victoria In-Service Support Contract (VISSC) to take the contract out to June 2023. VISSC is one of the largest naval in-service support contracts in Canada and includes refits and deep maintenance periods for Canada's fleet of four submarines.

 

In Australia, we secured a contract with Naval Group to commence the second stage design and build of the Weapon Discharge System (WDS) for the Australian Future Submarine Programme (AFSP). AFSP is Australia's largest defence acquisition programme and will see 12 Attack Class submarines designed and built for the Royal Australian Navy, expected to enter service in the early 2030s.

 

In Korea, we secured a WHLS order for the fourth boat of the Jangbogo-III Submarine programme. We continue to develop our Busan facility to expand our presence in Korea to provide the programme with through-life support, as well as future Republic of Korea Navy development programmes.

 

Looking ahead we see several opportunities for export orders for our Arrowhead 140 frigate design chosen for the UK Type 31 programme and we are expanding our high frequency communications capability and capacity in Australasia, building on our work in the UK and New Zealand.

 

Energy and Marine

Our Energy and Marine business saw good revenue growth during the year, driven by increased commercial vessel work and continued strong demand for multiple liquefied gas handling and re-liquefaction system orders across the LPG, LNG and ethane markets.

 

In the period we signed frame agreements with Hyundai Heavy Industries, Hyundai Samho Heavy Industries and Hyundai Mipo Dockyard confirming Babcock LGE as preferred supplier for the design and supply of LPG cargo handling systems for very large gas carriers and midsize gas carriers.

 

Nuclear

 

 

31 March
2021

31 March
2020

Restated

Contract backlog

£0.4bn

£0.6bn

Revenue

£975.9m

£896.9m

Underlying operating profit

£63.9m

£113.3m

  of which CPBS one-off adjustment

£(23.4)m

 

  Underlying operating profit excluding CPBS one-off adjustment

£87.3m

 

  Underlying margin excluding CPBS one-off adjustment

8.9%

12.6%

 

Revenue and underlying operating profit (excl. one-off CPBS adjustment) bridge:

 

 

31 March 2020

Restated

£m

FX

impact

£m

Disposals of businesses

£m

Significant credits

in FY20

£m

Impact of

COVID-19

£m

CPBS impacts

£m

Other trading

£m

31 March

2021
£m

Revenue

896.9

-

(3.5)

-

9.3

(21.8)

95.0

975.9

Underlying operating profit

113.3

-

0.5

(20.9)

(2.1)

(0.2)

(3.1)

87.3

 

Financial review

Organic revenue was 9% higher this year led by strong growth in defence. This growth came from increased work on submarine support and a further ramp up of infrastructure work. This revenue growth however was at a lower margin. The increase in revenue associated with COVID-19 relates to COVID-related costs recovered from the customer.

 

The underlying operating profit of £63.9 million includes a £23.4 million one-off adjustment from our CPBS (see page 11). Excluding this, underlying operating profit was £87.3 million. The table above shows the main variances year-on-year, the largest of which is the impact of higher R&D tax credits in the last financial year due to a catch up on previous years' claims. The small decline in profit reflected in the other trading movements reflect the lower margin earned this year across programmes.

 

The sector's contract backlog reduced slightly year on year, reflecting the lower time period of committed revenue from MSDF, and is expected to increase significantly once the FMSP contract is agreed, as discussed below.

 

Operational review

 

Defence

The defence business saw increased activity in the year despite COVID-19 working pressures as critical work continued. We continued to support the Continuous At Sea Deterrent and the high availability of Attack Submarines from our operations at HMNB Clyde despite the challenges of the pandemic. Work on large submarine infrastructure programmes ramped up in the year, including planning for the first deep maintenance period of the Astute Class at Devonport in the next few years. In Devonport, we continue to work on the Revalidation Assisted Maintenance Period (RAMP) programme for the Trafalgar Class and work has continued on the first life extension of the Vanguard Class.

 

Our largest individual contract across the Group, the Maritime Support Delivery Framework (MSDF), operates across our Maritime and Nuclear sectors.  The previous five year MSDF contract was due to expire on the 31 March 2020, however, MOD and Babcock agreed to exercise an option in the MSDF contract to extend the commercial arrangement by a year to 31 March 2021. This additional year included some scope increases but at a lower margin compared to the previous MSDF contract. This has been replaced by an Intention To Proceed (ITP) agreement which includes an output based requirement, covering the period 1 April 2021 to 31 July 2021. This transition period will allow MOD and Babcock to conclude negotiations on the four Future Maritime Support Programme (FMSP) single source contracts at HMNB Devonport and Clyde, replacing the current MSDF arrangements. We are working with our customer to finalise the four replacement contracts. All are identified as being 'Qualifying Defence Contracts (QDC)' and fall under Single Source Contract Regulations (SSCR). Negotiations have not yet concluded, but we expect to finalise all elements of the four FMSP contracts over this summer.

 

Civil

Revenue across civil was lower in the year reflecting major long-term projects with the NDA and AWE coming to a close and lower volumes on work with EDF partly as a result of challenges with the Advance Gas Reactor station fleet.

 

New build construction continues to be delayed at Hinkley Point C (HPC) resulting in a knock-on impact to the MEH Alliance. The alliance, launched in August 2019 with three other operators, aims to deliver all of the main Mechanical, Electrical and Heating (venting and air conditioning) (MEH) activity at HPC.

 

The civil nuclear decommissioning and new build market remains challenging in the short term and we made good progress in the year in reducing our overheads and simplifying our structure to adapt to these challenges. There are, however, significant opportunities in the medium term across the UK and potential opportunities in Canada and Japan, two markets where we already have a small presence.

 

Land

 

 

31 March
2021

31 March
2020

Restated

Contract backlog

£3.0bn

£3.5bn

Revenue

£1,110.1m

£1,522.5m

Underlying operating (loss) / profit

£(17.4)m

£98.1m

  of which CPBS one-off adjustment

£(69.3)m

 

  Underlying operating profit excluding CPBS one-off adjustment

£51.9m

 

  Underlying margin excluding CPBS one-off adjustment

4.7%

6.4%

 

Revenue and underlying operating profit (excl. one-off CPBS adjustment) bridge:

 

 

31 March 2020

Restated

£m

FX

impact

£m

Disposals of businesses

£m

Significant credits

in FY20

£m

Impact of

COVID-19

£m

CPBS impacts

£m

Other trading

£m

31 March

2021
£m

Revenue

1,522.5

(50.8)

(30.5)

-

(118.5)

(140.9)

(71.7)

1,110.1

Underlying operating profit

98.1

(4.8)

(1.7)

(3.1)

(15.1)

(9.8)

(11.7)

51.9

 

Financial review

On an organic basis, revenue was 22% lower in the year. This includes a significant impact from the CPBS, with an in-year reduction relating to lower revenue on our DSG contract and the de-recognition of revenue on our Phoenix contract as, from February 2020, the contractual terms changed from Babcock acting as principal to acting as agent. Revenue was also impacted by a significant COVID-19 impact of around £120 million across many parts of the sector as well as the lost contract for Heathrow in our Airports business and lower defence volumes.

 

The underlying operating loss of £17.4 million includes a £69.3 million one-off adjustment from our CPBS (see page 11). Excluding this, underlying operating profit was £51.9 million. The table above shows the main variances year-on-year:

· Estimated impacts from COVID-19 as a result of lower activity and site closures in civil training, education, airports and in South Africa

· Recurring impacts from the CPBS primarily relating to a significantly lower margin recognised on our DSG contract

· Other trading reflects the loss of the Heathrow contract, increased operating costs and lower profitability on some contracts

 

The sector's contract backlog decreased by £0.5 billion in the year, reflecting the utilisation of multi-year backlog on long-term contracts, predominantly DSG, and also the reduction of backlog in Airports.

 

Operational review

 

Defence

Trading across our most of our defence businesses held up well during the year despite COVID-19. Activity slowed in some areas however, including training and short-cycle inventory work at DSG while our work supporting the British Army in Germany reduced in scope.

 

We continue to engage with the customer as they develop their Collective Training Transformation Programme and won the opportunity to participate in the British Army's 2021 Army Warfighting Experiment where we will be demonstrating a range of capabilities. During the year we secured an extension to our Training Maintenance and Support Services (TMASS) contract out to 2023 and we are in negotiations to extend the Defence College of Technical Training for the provision of training design and delivery (EMTC II) for a further three years, plus one option year.

 

Activity levels remained high across our Defence Support Group (DSG) business though reduced efficiency reduced the pace of progress. Following a review of the DSG contract as part of the CPBS, and taking into account the changes announced by the MOD in the Integrated Review in the year, we now recognise a significantly lower margin on the DSG contract.

 

Emergency services

Trading across our emergency services businesses was relatively flat in the year with lower volumes in firefighting training offset by the start of our new police training contract. Our fleet support contract for the Met Police performed well and we were awarded a two year contract extension worth around £60 million in the year. In January 2021, we launched the £300 million contract for the Met Police Education and Qualification Framework (PEQF). Our fleet support and training contracts for the London Fire Brigade continue to perform well.

 

Other civil markets

The impact of COVID-19 was most severe across many of our other markets in the Land sector, both in terms of revenue and operating profit. In our civil training business, the start of the COVID-19 pandemic saw customer facilities closed and no face-to-face training. The majority of our civil training workforce were initially placed on the UK Government's furlough scheme. Our airports businesses saw a dramatic reduction in volumes given the global decline in passenger numbers and our Heathrow airport baggage contract came to an end in October 2020. Work across our rail and power businesses held up well throughout the year.

 

Our South Africa business had a very tough first half of the year, hit by national lockdowns, but saw a stronger second half as activity increased.

 

In October 2020, we completed the sale of the Conbras business in Brazil for a net consideration of £7 million.

 

Aviation

 

 

31 March
2021

31 March
2020

Restated

Contract backlog

£2.9bn

£2.8bn

Revenue

£854.4m

£845.5m

Underlying operating (loss) / profit

£(130.4)m

£31.8m

  of which CPBS one-off adjustment

£(128.4)m

 

  Underlying operating profit excluding CPBS one-off adjustment

£(2.0)m

 

  Underlying margin excluding CPBS one-off adjustment

(0.2)%

3.8%

 

Revenue and underlying operating profit (excl. one-off CPBS adjustment) bridge:

 

 

31 March 2020

Restated

£m

FX

impact

£m

Disposals of businesses

£m

Significant credits in FY20

£m

Impact of COVID-19

£m

CPBS impacts

£m

Other trading

£m

31 March

2021
£m

Revenue

845.5

11.8

-

-

(44.6)

(19.0)

60.7

854.4

Underlying operating profit

31.8

(0.3)

-

(17.0)

(11.1)

(6.3)

0.9

(2.0)

 

Financial review

Organic revenue was flat this year as business growth and new contracts offset a COVID-19 impact of around £45 million from lower flying hours in the earlier stages of the pandemic.

 

The underlying operating loss of £130.4 million includes a £128.4 million one-off adjustment from our CPBS (see page 11). Excluding this, underlying operating loss was £2.0 million. The table above shows the main variances year-on-year, being the estimated costs of COVID-19 and significant credits that benefited FY20. The estimated COVID-19 impact includes the direct impact from lower flying hours in the early stages of the pandemic and the additional costs across the business. These costs included PPE, the refitting and segregation modification of aircraft and the inefficiencies of flying in a COVID-secure way, for example flying at lower capacity. In many cases these additional costs were not recovered in our contract pricing.

 

The recurring impacts to underlying operating profit from the CPBS of £6.4 million relate to the adjustment of some project margins coupled with the ongoing impacts of the prior year errors and change in accounting policy.

 

As set out before, our civil aviation business has a cost structure too high for the revenue we generate under existing contracts. Our cost reduction programme started in the last financial year has begun to address this. In the prior year, reported performance benefited from various transactions that are not expected to repeat. These include multi-year indexation claims on contracts and accrual and provision releases. The positive impact of these in FY20 was around £17 million compared to nil in FY21. The small improvement in other trading reflects the benefits from the cost restructuring programme mostly offset by weaker trading.

 

The sector's contract backlog was broadly stable year-on-year with new work replacing contracts that ended.

 

Operational review

 

Defence

Activity across defence was broadly flat in the year with work continuing despite COVID-19. In the UK, support continued across both RAF station support and flying training. Additionally both our Hawk and Adour contracts, which underpin the delivery of critical UK fast-jet training to the RAF, were extended in year. Discussions continue on a longer-term Hawk support contract for the next decade.

 

In France, we continued to deliver on our Fomedec pilot training contract and we started our H160 contract to provide search and rescue aircraft and services for the French Navy. In June 2021, we were awarded a contract by the French MOD for an expansion of our existing defence aviation training activities. This five-year contract is worth around €500 million and started in June 2021.

 

In Canada, we have signed a letter of intent with Leonardo to bid together for the Future Aircrew Training programme (FACT).

 

Aerial emergency services

Revenue across our aerial emergency services businesses was slightly higher this year, helped by the start of new contracts and higher firefighting hours. Profitability was severely impacted by COVID-19 with the pressures of lower flying hours in much of the business and higher costs of delivery.

Performance in aerial emergency medical services was the most severely hit by COVID-19 in the earlier parts of the financial year. We were successful in securing contract renewals in Italy, Spain and France in the year.

 

Our firefighting operations across Europe and Canada saw higher activity levels compared to last year, particularly in Spain and Italy. We have increased our firefighting footprint with new contract wins in Spain and we deployed aircraft in Chile with a small counter-season contract.

 

Oil and gas

Market conditions for our oil and gas business remained tough throughout the year. Flying hours were heavily reduced in the early part of the year in response to the COVID-19 pandemic but recovered as the year continued.

 

 

Going concern and viability statement

 

Overview

The Directors have undertaken reviews of the business financial forecasts, in order to assess whether the Group has adequate resources to continue in operational existence for the foreseeable future and as such can continue to adopt the going concern basis of accounting. The Directors have also looked further out to consider the viability of the business to test whether they have a reasonable expectation that the Group will continue in operation and meet its liabilities as they fall due.

 

For assessing going concern, the Board considered the 12 month period from the date of signing the Group's financial statements for the year end 31 March 2021. For viability, the Board looked at a three year view as this is the period over which the Group prepares its strategic plan forecasts.

 

The annual budgets are compiled using a bottom-up process, aggregating the budgets for the individual business units into Sector budgets. The Sector budgets and the consolidated Group budget is then reviewed by the Board and used to monitor business performance.

 

The impacts of the recent contract profitability and balance sheet review ('CPBS') and the planned restructuring as a result of the change in operating model have been incorporated into the budgets.

 

The Board considered the budgets alongside the Group's available finances, strategy, business model, market outlook and principal risks. The process for identifying and managing the principal risks of the Group is set out in our Annual report. The Board also considered the mitigation measures being put in place and potential for further mitigation.

 

Available financing

As at 31 March 2021, net debt excluding operating leases was £771.5 million and the Group therefore had liquidity headroom of £1.2 billion, including net cash and cash equivalents of £0.5 billion and undrawn facilities of £0.8 billion.

 

As of July 2021, the Group's committed facilities and bonds totalling £2.4 billion were as follows:

· €550 million bond, hedged at £482 million, maturing 6 October 2022

· New £300 million 3-year RCF maturing 20 May 2024 (signed on 20th May 2021)

· £775 million revolving credit facility (RCF) maturing 28 August 2025

· £300 million bond maturing 5 October 2026

· €550 million bond, hedged at £493 million, maturing 13 September 2027

· A committed overdraft facility of £50 million

 

The RCFs are the only facilities with covenants attached. The key covenant ratios are (i) net debt to EBITDA (gearing ratio) (ii) and EBITDA to net interest (interest cover).

 

These are measured twice per year - on 30 September and 31 March. The lending banks have agreed to raise the covenant limit for the gearing ratio from 3.5x to 4.5x for the measurement periods ending 30 September 2021 and 31 March 2022 in order to provide sufficient downside protection for the Group as the turnaround in performance takes place - and particularly as a key assumption in strengthening the Group's balance sheet is the planned divestment programme which aims to generate a minimum of £400 million of proceeds within the next twelve months. For all subsequent periods, the gearing ratio covenant returns to 3.5x. The definition was clarified to specifically exclude the one-off impacts of the CPBS review from the covenant calculations.

 

The RCF lenders are fully committed to advance funds under the RCF to the Group, provided that the Group has satisfied the usual ongoing undertakings, and the credit worthiness of the Group's relationship banks is closely monitored. Based on their credit ratings we have no credit concerns with our relationship banks.

 

Given the importance of the RCFs to the Group's liquidity position, our assessments of going concern and viability have tested the Group's gearing ratio, interest cover and liquidity headroom throughout the period under review.

 

COVID-19 impact

The COVID-19 pandemic created increased uncertainty across our business during the financial year, particularly in the UK and European operations. The impacts were most severe for our non-defence businesses (e.g. civil aviation and civil training) where operations in some cases were stopped. The defence businesses incurred some interruption and increased cost initially with the heightened uncertainty. Subsequently most defence programmes and sites were re-opened, albeit with social distancing restrictions and higher levels of employees working from home where possible. In response to this, the Group took steps to mitigate the financial impact and improve the Group's liquidity including:

· Deferring non-essential operating and capital expenditure

· Furloughing staff in a number of areas such as our airports and civil training businesses

· Senior executive management taking a temporary 20% reduction in basic salary with their annual bonus and pay rise deferred

· Non-Executive Board members taking a temporary 20% reduction in fees with no annual increase

· Taking the decision not to pay an interim dividend for the 2020 financial year

 

Subsequently the Group has been in discussion with certain customers regarding cost recovery and contract performance relief where appropriate.

 

As the year progressed, it became clear that there was a significant impact from COVID-19 and that the Group's financial performance was tracking behind original expectations. Overall, the net financial impact of COVID-19 on the Group in the year was a reduction of operating profit of approximately £45 million as explained on page 16.

 

As there are now vaccination programmes in most of the geographies in which the Group operates, it has been assumed that there will be a gradual removal of pandemic measures such as social distancing and that all our operations will eventually be able to work on sites as before. However, there remain the risks of new variants, potential future lockdowns and business interruptions so the Board has taken a cautious view as to how quickly the return to pre-pandemic ways of working will happen over the forecast period.

 

Base case scenario

In addition to the trading assumptions outlined above, key assumptions in our base case budget include:

·

£400 million of cash proceeds from disposals during FY22

·

c.£50 million of restructuring costs in FY22 being c.£40 million relating to the operating model change and c.£10 million of previously announced restructuring (e.g. in Aviation)

·

£56 million of VAT deferred from FY21 to be paid in FY22

·

Additional pension deficit contributions previously agreed with trustees (over and above the normal levels) of £60 million in FY22 and £52 million in FY23

·

A gradual unwind of the historical year end working capital 'push' over the period, to close the gap between average monthly net debt and the much lower period end net debt

·

A continuation of debt factoring for certain Southern European contracts within Aviation at similar levels to FY21

·

Dividends not paid for FY21 or FY22

 

The base case budget shows significant levels of headroom against both financial covenants and liquidity headroom based on the current committed facilities outlined above (without assuming any refinancing of the €550 million bond in October 2022).

 

Reverse stress testing of the base case

To assess the level of headroom within the available facilities, a reverse stress test was performed to see what level of performance deterioration against the base case budget (in both EBITDA and net debt) was required to challenge covenant levels. Of the remaining measurement points within the three year period, the lowest required reduction in forecast EBITDA to hit the covenant level was 36% and the lowest net debt increase was 56%. Given the mitigating actions that are available and within management's control, such movements are not considered plausible.

 

Severe but plausible downside scenarios

The Directors also considered a series of severe but plausible downside scenarios which are sensitivities run against the base case budget for the duration of the assessment period. These sensitivities include - separately - a reduction in bid pipeline closure (business winning), a reduction in the assumed restructuring savings, a deterioration in large programme performance across the Group, a deterioration in the Group's working capital position and a regulator imposed cessation in flying two of the largest aircraft fleets in the Group. Furthermore a sensitivity was run which modelled the removal of all uncommitted working capital facilities available to the Group. As stated above, a key contributor to the strengthening of the balance sheet is the divestment programme which is expected to generate a minimum of £400 million of proceeds in FY22. For this reason a further sensitivity was run removing all planned divestments entirely and keeping the Group portfolio as it currently is throughout the forecast period. Unsurprisingly, removing the divestments entirely - however unlikely it may be to happen - left the gearing ratio with too little headroom against the financial covenants.  Whilst all of these separate scenarios showed compliance with the financial covenants throughout the period, the measurement periods ending 30 September 2021 and 31 March 2022 had the highest covenant gearing ratios. This is a reflection of the significant cash out flows in this period (e.g. programme capital expenditure, restructuring costs and the extra pension deficit contributions) occurring before the proceeds from the planned divestments are received. It is for this reason that the Board approached and has agreed with our lending banks to increase the covenant level gearing ratio from the usual 3.5x to 4.5x for those two measurement periods.

 

As with any company or group, it would be possible, however unlikely, to model individual risks or combinations of risks that would threaten the financial viability of the Group. The Board has not sought to model events where it considers the likelihood of such events not to be plausible. In preparing a combined severe but plausible (SBP) downside case, the Board considered the feed of individual risks from the sectors covering the above sensitivities. Overall there were c.80 profit and cash flow risks identified. A simple aggregation of all of these risks is not considered plausible as the Group operates businesses and contracts which run largely independently of each other, albeit with a relatively small number of customers within each geography. The majority of these identified risks were seen as 'sector independent' (i.e. there is no direct read across from one sector to another). A small number are deemed 'non independent' e.g. COVID-19, inflation, FX etc. The Board decided to include in its combined SBP downside all the 'non independent' risks without reduction, but reduced the aggregation of the 'sector independent' risks by 25% to reflect the implausibility of all such risks fully crystallising within the same period. The SBP scenario also deferred all disposal proceeds by 12 months, significantly reduced the financial benefits of the operating model restructuring and assumed a much reduced level of receivable factoring in the Aviation business.

 

If such a severe downturn were to occur in the Group's performance, the Board would take mitigation measures to protect the group in the short term. Such profit and cash mitigation measures that are deemed entirely within the control of the Group and identified as part of the sector budgeting exercise have been included in the SBP scenario (e.g. cancelling pay rises and bonus awards, curtailing uncommitted capital expenditure and operational spend including R&D and other investment).

 

Despite the severity of the above combined SBP scenario, the Group maintained a sufficient amount of headroom against the financial covenants within its borrowing facilities, albeit that this is less after the gearing covenant level reverts to 3.5x in September 2022, and sufficient liquidity when compared against existing facilities.

 

Additional mitigation options

While the new bank liquidity facility and the temporary relaxation of the covenant levels are deemed appropriate to cover the potential impacts of plausible risks, the Group has considered additional mitigation measures that could be undertaken should the need arise. These may include measures under the control of the Board as outlined above. Further measures which are not wholly under the control of the Board might include additional divestment plans; and in extremis seeking a further covenant amendment from our RCF lenders and/or utilising alternative financing sources, such as a hybrid bond or equity.

 

Going concern assessment and viability conclusion

Based on our review, the Directors have a reasonable expectation that the Group has adequate resources to continue as a going concern for at least 12 months from the date of these financial statements. As such, these financial statements have been prepared on the going concern basis. The Directors do not believe there are any material uncertainties to disclose in relation to the Group's ability to continue as a going concern.

 

In concluding on the financial viability of the group, having considered the scenarios outlined above, the Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet all its liabilities as they fall due up to March 2024.

 

 

Risks and uncertainties

The principal risks and uncertainties affecting the Group are set out in the Company's Annual Report and Financial Statements 2021.  They should be read in conjunction with this announcement when published. The full list will also be published in the Company's Notice of Availability.  However, below is a list of those risks and uncertainties. This list is not a substitute for reading the Company's Annual Report and Financial Statements 2021 in full. The Group's principal risks and uncertainties are:

 

Existing markets:   we rely heavily on winning and retaining large contracts with a relatively limited number of major clients, whether in the UK, particularly the Ministry of Defence, or overseas, many of whom are (directly or indirectly) owned or controlled by government (national or local) and/or are (wholly or partly) publicly funded.

 

Contract performance:   we operate large contracts, which often requires us to price for the long term and for risk transfer.  Our contracts can include fixed price.

 

New markets:   We seek new markets and contracts for our services both with existing and new customers, whether in territories where we are already established or in territories where we are not.

 

Financial resilience:   The Group is exposed to a number of financial risks, some of which are of a macroeconomic nature (for example, foreign currency, interest rates) and some of which are more specific to the Group (for example, liquidity and credit risks)

 

Business interruption:   Failure to withstand the impact of an event or a combination of events may significantly disrupt all or a substantial part of the Group's business

 

Operational resilience:   We are undertaking multiple change programmes with the introduction of a new strategy, a new operating model to restructure the shape of the Group, and a new people strategy, as well as undertaking the rationalisation of both the business portfolio and our property portfolio

 

Health, safety and environmental:   Our operations entail the potential risk of significant harm to people, property or the environment, wherever we operate across the world

 

Regulatory and compliance burden:   Our businesses are subject to the laws, regulations and restrictions of the many jurisdictions in which they operate

 

People:   We operate in many specialised engineering and technical domains, which require appropriate skills and experience

 

Pensions:   The Group has significant defined benefit pension schemes in the UK, which provide for a specified level of pension funds to scheme members

 

IT and security:   Our ability to deliver secure IT and other information assurance systems to maintain the confidentiality of sensitive information is a key factor for our customers

 

Acquisitions and disposals:   We have built our core strengths organically and through acquisition.  Decisions to acquire companies, as well as the process of their acquisition and integration, are complex, time-consuming and expensive.  If we believe that a business is not "core" we may decide to sell that business

 

The risks listed above, together with their potential impacts and mitigating actions we have taken in respect of them, are explained and described in more detail in the 2021 Annual Report, a copy of which will be available at www.babcockinternational.com .

 

Forward-looking statements

Certain statements in this announcement are forward-looking statements. Such statements may relate to Babcock's business, strategy and plans. Statements that are not historical facts, including statements about Babcock's or its management's beliefs and expectations, are forward-looking statements. Words such as 'believe', 'anticipate', 'estimates', 'expects', 'intends', 'aims', 'potential', 'will', 'would', 'could', 'considered', 'likely', and variations of these words and similar future or conditional expressions are intended to identify forward-looking statements but are not the exclusive means of doing so. By their nature, forward-looking statements involve a number of risks, uncertainties or assumptions, some known and some unknown, many of which are beyond Babcock's control that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. These risks, uncertainties or assumptions could adversely affect the outcome and financial effects of the plans and events described herein. Forward-looking statements contained in this announcement regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Nor are they indicative of future performance and Babcock's actual results of operations and financial condition and the development of the industry and markets in which Babcock operates may differ materially from those made in or suggested by the forward-looking statements. You should not place undue reliance on forward-looking statements because such statements relate to events and depend on circumstances that may or may not occur in the future. Except as required by law, Babcock is under no obligation to update (and will not) or keep current the forward-looking statements contained herein or to correct any inaccuracies which may become apparent in such forward-looking statements.

Forward-looking statements reflect Babcock's judgement at the time of preparation of this announcement and are not intended to give any assurance as to future results.

 

 

Group income statement

For the year ended 31 March

Note

2020
(restated)
Total
£m

Revenue

2,5

4,428.5

Cost of revenue

 

(3,941.2)

Gross profit

 

487.3

Administration and distribution expenses

 

(359.2)

Goodwill impairment

10

(278.4)

(Loss)/profit on divestments

24

74.7

Operating loss

2,5

(75.6)

Share of results of joint ventures and associates

2,5,14

58.6

Finance income

6

14.1

Finance costs

6

(86.0)

Loss before tax

2,5

(88.9)

Income tax benefit/(expense)

7

(26.9)

Loss for the year

 

(115.8)

Attributable to:

 

 

Owners of the parent

 

(117.8)

Non-controlling interest

 

2.0

 

 

(115.8)

Loss per share

9

 

Basic

 

(23.3)p

Diluted

 

(23.3)p

 

Group statement of comprehensive income

For the year ended 31 March

Note

2021
£m

2020
(restated)
£m

Loss for the year

 

(1,702.0)

(115.8)

Other comprehensive income

 

 

 

Items that may be subsequently reclassified to income statement

 

 

 

Currency translation differences

 

1.9

(29.5)

Reclassification of cumulative currency translation reserve on disposal

 

10.5

-

Fair value adjustment of interest rate and foreign exchange hedges

 

18.2

(25.4)

Tax on fair value adjustment of interest rate and foreign exchange hedges

 

(4.5)

5.5

Hedging gains/(losses) reclassified to profit or loss

 

6.9

(3.1)

Fair value adjustment of joint ventures and associates derivatives

14

7.0

(9.4)

Tax, including rate change impact, on fair value adjustment of joint ventures and associates derivatives

14

(1.4)

2.3

Items that will not be reclassified to income statement

 

 

 

Remeasurement of retirement benefit obligations

21

(506.8)

99.9

Tax on remeasurement of retirement benefit obligations

 

96.3

(20.2)

Impact of change in UK tax rates

 

-

0.9

Other comprehensive (loss)/income, net of tax

 

(371.9)

21.0

Total comprehensive loss

 

(2,073.9)

(94.8)

Total comprehensive loss attributable to:

 

 

 

Owners of the parent

 

(2,075.0)

(94.7)

Non-controlling interest

 

1.1

(0.1)

Total comprehensive loss

 

(2,073.9)

(94.8)

In the year ended March 2021, the contract profitability and balance sheet review identified material errors which impact the prior period. The review also resulted in changes to an accounting policy. The errors were corrected and new policy applied by restating each of the affected financial statement line items for the prior period. See note 4.

Additionally, for the year ended 31 March 2021 the income statement has been simplified to exclude the reconciliation to underlying operating profit, as this is now shown in note 2.

 

Group statement of changes in equity

 

Share
capital
£m

Share
premium
£m

Other
reserve
£m

Capital
redemption
£m

Retained
earnings
£m

Hedging
reserve
£m

Translation
reserve
£m

Total equity attributable to owners
of the
Company
£m

Non-
controlling
interest
£m

Total
equity
£m

At 1 April 2019 as previously stated

303.4

873.0

768.8

30.6

975.8

(74.4)

(32.1)

2,845.1

17.4

2,862.5

Prior year adjustment (note 4)

-

-

-

-

(308.1)

7.2

-

(300.9)

-

(300.9)

At 1 April 2019 restated

303.4

873.0

768.8

30.6

667.7

(67.2)

(32.1)

2,544.2

17.4

2,561.6

(Loss)/profit for the year

-

-

-

-

(117.8)

-

-

(117.8)

2.0

(115.8)

Other comprehensive income/(loss)

-

-

-

-

80.6

(30.1)

(27.4)

23.1

(2.1)

21.0

Total comprehensive loss

-

-

-

-

(37.2)

(30.1)

(27.4)

(94.7)

(0.1)

(94.8)

Dividends

-

-

-

-

(152.1)

-

-

(152.1)

(1.8)

(153.9)

Share-based payments

-

-

-

-

2.9

-

-

2.9

-

2.9

Tax on share-based payments

-

-

-

-

1.9

-

-

1.9

-

1.9

Own shares

-

-

-

-

(2.9)

-

-

(2.9)

-

(2.9)

Transactions with non-controlling interests

-

-

-

-

(0.2)

-

-

(0.2)

0.2

-

Net movement in equity

-

-

-

-

(187.6)

(30.1)

(27.4)

(245.1)

(1.7)

(246.8)

At 31 March 2020 restated

303.4

873.0

768.8

30.6

480.1

(97.3)

(59.5)

2,299.1

15.7

2,314.8

 

 

 

 

 

 

 

 

 

 

 

At 1 April 2020 as restated

303.4

873.0

768.8

30.6

480.1

(97.3)

(59.5)

2,299.1

15.7

2,314.8

Loss for the year

-

-

-

-

(1,702.0)

-

-

(1,702.0)

-

(1,702.0)

Other comprehensive (loss)/income

-

-

-

-

(410.5)

26.2

11.3

(373.0)

1.1

(371.9)

Total comprehensive loss

-

-

-

-

(2,112.5)

26.2

11.3

(2,075.0)

1.1

(2,073.9)

Dividends

-

-

-

-

-

-

-

-

(0.8)

(0.8)

Share-based payments

-

-

-

-

3.2

-

-

3.2

-

3.2

Tax on share-based payments

-

-

-

-

2.3

-

-

2.3

-

2.3

Own shares

-

-

-

-

(2.2)

-

-

(2.2)

-

(2.2)

Net movement in equity

-

-

-

-

(2,109.2)

26.2

11.3

(2,071.7)

0.3

(2,071.4)

At 31 March 2021

303.4

873.0

768.8

30.6

(1,629.1)

(71.1)

(48.2)

227.4

16.0

243.4

The other reserve relates to the rights issue of new ordinary shares on 7 May 2014 and the capital redemption reserve relates to the issue and redemption of redeemable 'B' preference shares in 2001.

 

Group statement of financial position

As at

Note

31 March

2021
£m

31 March

2020
(restated)
£m

1 April

2019
(restated)
£m

Assets

 

 

 

 

Non-current assets

 

 

 

 

Goodwill

10

956.3

2,287.9

2,584.2

Other intangible assets

11

202.0

334.7

389.0

Property, plant and equipment

12

731.5

840.9

873.7

Right of use assets

13

521.2

609.0

623.5

Investment in joint ventures and associates

14

73.5

161.9

162.1

Loan to joint ventures and associates

14

42.1

48.6

42.5

Retirement benefits surpluses

21

40.8

325.3

226.9

IFRIC 12 financial assets

 

11.2

12.8

15.5

Other financial assets

 

17.2

21.5

93.8

Deferred tax asset

15

141.3

60.5

54.7

 

 

2,737.1

4,703.1

5,065.9

Current assets

 

 

 

 

Inventories

 

162.4

191.6

194.7

Trade and other receivables

16

741.0

837.4

868.8

Income tax recoverable

 

48.4

57.2

40.5

Other financial assets

 

34.9

153.9

48.0

Cash and cash equivalents

23

904.8

1,845.9

844.7

 

 

1,891.5

3,086.0

1,996.7

Total assets

 

4,628.6

7,789.1

7,062.6

Equity and liabilities

 

 

 

 

Equity attributable to owners of the parent

 

 

 

 

Share capital

 

303.4

303.4

303.4

Share premium

 

873.0

873.0

873.0

Capital redemption and other reserves

 

680.1

642.6

700.1

Retained earnings

 

(1,629.1)

480.1

667.7

 

 

227.4

2,299.1

2,544.2

Non-controlling interest

 

16.0

15.7

17.4

Total equity

 

243.4

2,314.8

2,561.6

Non-current liabilities

 

 

 

 

Bank and other borrowings

18

1,318.8

2,050.0

1,437.2

Lease liabilities

13, 18

486.2

548.5

533.7

Trade and other payables

17

1.9

2.1

2.0

Deferred tax liabilities

15

7.7

33.7

25.5

Other financial liabilities

 

51.1

35.6

9.3

Retirement benefit deficits

21

333.9

180.1

254.9

Provisions for other liabilities

20

73.7

32.7

33.8

 

 

2,273.3

2,882.7

2,296.4

Current liabilities

 

 

 

 

Bank and other borrowings

18

383.7

987.9

657.3

Lease liabilities

13, 18

126.1

140.9

107.1

Trade and other payables

17

1,506.7

1,301.2

1,348.8

Income tax payable

 

9.7

3.8

22.1

Other financial liabilities

 

13.9

27.7

10.9

Provisions for other liabilities

20

71.8

130.1

58.4

 

 

2,111.9

2,591.6

2,204.6

Total liabilities

 

4,385.2

5,474.3

4,501.0

Total equity and liabilities

 

4,628.6

7,789.1

7,062.6

In March 2021, the contract profitability and balance sheet review identified material errors which impact prior periods. The review also resulted in changes to an accounting policy. The correction of the errors and application of the new policy resulted in a reduction of net assets amounting to £235.2 million at 31 March 2020 and £300.9 million at 1 April 2019. Each of the affected financial statement line items was restated for the prior periods. See note 4. This also impacts the Group cash flow statement.

 

Group cash flow statement

For the year ended 31 March

Note

2021
£m

2020 (restated)
£m

Cash flows from operating activities

 

 

 

Loss for the year

 

(1,702.0)

(115.8)

Share of results of joint ventures and associates

14

13.1

(58.6)

Income tax (benefit)/expense

7

(15.3)

26.9

Finance income

6

(16.6)

(14.1)

Finance costs

6

77.8

86.0

Depreciation and impairment of property, plant and equipment

 

199.9

91.3

Depreciation and impairment of right of use assets

 

179.8

137.5

Amortisation and impairment of intangible assets

 

148.2

81.9

Goodwill impairment

 

1,243.2

278.4

Equity share-based payments

 

3.2

2.9

Impairment of joint venture loans

14

7.0

-

Net derivative fair value movement through profit or loss

 

6.9

(3.1)

Loss/(profit) on disposal of subsidiaries, businesses and joint ventures and associates

24

49.7

(74.7)

Loss on disposal of property, plant and equipment

 

26.4

3.9

Loss on disposal of intangible assets

 

-

0.1

Cash generated from operations before movement in working capital and retirement benefit payments

 

221.3

442.6

Decrease/(increase) in inventories

 

32.9

(10.9)

Decrease in receivables

 

86.8

40.0

Increase/(decrease) in payables

 

212.5

(24.7)

(Decrease)/increase in provisions

 

(14.6)

71.8

Cash outflow from non-hedging derivatives

 

(3.6)

-

Retirement benefit contributions in excess of income statement

 

(64.5)

(73.5)

Cash generated from operations

 

470.8

445.3

Income tax received/(paid)

 

19.4

(72.4)

Interest paid

 

(79.4)

(84.9)

Interest received

 

12.0

13.3

Net cash flows from operating activities

 

422.8

301.3

Cash flows from investing activities

 

 

 

Disposal of subsidiaries and joint ventures and associates, net of cash disposed

24

90.6

101.6

Dividends received from joint ventures and associates

14

36.8

52.0

Proceeds on disposal of property, plant and equipment

 

32.2

76.5

Purchases of property, plant and equipment

 

(170.8)

(191.3)

Purchases of intangible assets

 

(19.6)

(29.0)

Lease assets repaid

24

14.9

49.9

Investment in joint ventures

14

(8.8)

(0.3)

Loans repaid by joint ventures and associates

 

4.2

0.7

Increase in loans to joint ventures and associates

 

(3.9)

(5.5)

Net cash flows from investing activities

 

(24.4)

54.6

Cash flows from financing activities

 

 

 

Dividends paid

8

-

(152.1)

Proceeds above market value on sale and leaseback of property, plant and equipment

 

1.0

8.3

Lease principal payments

23

(140.6)

(175.0)

Cash inflow from settlement of derivatives

 

52.6

-

Bank loans repaid

23

(1,154.4)

(253.5)

Loans raised and facilities drawn down

23

25.1

1,304.7

Dividends paid to non-controlling interest

 

(0.8)

(1.8)

Repurchase of own shares

 

(2.2)

(2.9)

Net cash flows from financing activities

 

(1,219.3)

727.7

Net (decrease)/increase in cash, cash equivalents and bank overdrafts

 

(820.9)

1,083.6

Cash, cash equivalents and bank overdrafts at beginning of year

23

1,348.7

275.2

Effects of exchange rate fluctuations

23

3.1

(10.1)

Cash, cash equivalents and bank overdrafts at end of year

23

530.9

1,348.7

1.  Basis of preparation and significant accounting policies

The financial information has been extracted from the Annual Report, including the audited financial statements for the year ended 31 March 2021. They should be read in conjunction with the Annual Report for the year ended 31 March 2020, which was prepared in accordance with international accounting standards in conformity with the Companies Act 2006 and applicable to companies using International Financial Reporting Standards (IFRS), adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. The accounting policies used and presentation of these consolidated financial statements are consistent with those in the Annual Report for the year ended 31 March 2020, except as noted below and to comply with amendments to IFRS.

Management has implemented one change in accounting policy during the year ended 31 March 2021. See note 4 for further details.

New and amended standards adopted by the Group

The Group applied the following standards and amendments for the first time for the year beginning on 1 April 2020:

The following standards and amendments to IFRSs became effective for the annual reporting period beginning on 1 April 2020 and did not have a material impact on the consolidated financial statements:

·

IAS 1, 'Presentation of Financial Statements' and IAS 8, 'Accounting policies, changes in accounting estimates and errors'. The amendment is effective for annual reporting periods beginning on or after 1 January 2020 and relates to the definition of material.

·

IFRS 3, 'Business Combinations', amendment is effective for annual reporting periods beginning on or after 1 January 2020 and relates to the definition of a business.

 

The following standards and amendments to IFRSs become effective for the annual reporting period beginning on 1 April 2020, but were early adopted by the Group for the annual reporting period beginning on 1 April 2019:

·

IFRS 9 and IFRS 7, 'Financial Instruments' and 'Financial Instruments: Disclosures', amended effective for periods beginning on or after 1 January 2020 with early adoption allowed. Amendments to IFRS 7 and IFRS 9 have been issued which modify specific hedge accounting requirements and allow it to be assumed that the interest rate benchmark is not altered as a result of the uncertainties of LIBOR reform when performing hedge effectiveness testing. There is no impact on the Group's fair value hedge accounting or cash flow hedge accounting as a result of adopting the amendments.

New IFRS accounting standards, amendments and interpretations not yet adopted

The Group has not early adopted any other amendment, standard or interpretation that has been issued but is not yet effective. It is expected that these standards and amendments will be adopted on the applicable effective date. The following new or amended IFRS accounting standards, amendments and interpretations not yet adopted are not expected to have a significant impact on the Group:

·

IAS 1, 'Presentation of Financial Statements' and IAS 8, 'Accounting policies, changes in accounting estimates and errors'. Amendment effective for annual reporting periods commencing on or after 1 January 2022. The amendment relates to the classification of liabilities as current or non-current.

·

IAS 37, 'Provisions, contingent liabilities and contingent assets'. Amendment effective for periods commencing on or after 1 January 2022. The amendment relates to the clarification of costs that an entity should include as the cost of fulfilling a contract when assessing whether a contract is onerous. Management's project to determine the impact of this amendment is ongoing, however this is not expected to have a material impact.

·

IFRS 3, 'Business Combinations', amendment effective for periods commencing on or after 1 January 2022. The amendment relates to the identification of liabilities assumed and contingent assets acquired in a business combination.

·

IFRS 9 and IFRS 7, 'Financial Instruments' and 'Financial Instruments: Disclosures'. These amendments are effective for periods commencing after 1 January 2022 and relate to Phase 2 of Interest Rate Benchmark Reform.

·

IFRS 16, 'Leases', amendment effective 1 June 2020. The amendment provides an optional practical expedient for lessees from assessing whether a rent concession related to COVID-19 is a lease modification.

·

IFRS 17, 'Insurance Contracts', amendment effective 1 January 2023. This has been deferred from the initial effective date of 1 January 2021.

Impact of COVID-19

During the year ended 31 March 2021 the Group's operations were significantly impacted by COVID-19. Management considered the potential impact of COVID-19 on the Group's future performance as part of the budgeting and business planning process and concluded that COVID-19 is not expected to materially impact the Group in the medium or long term. The Group's budget for FY22 includes contingency to address remaining uncertainty.

2.  Adjustments between statutory and underlying information

Definition of underlying measures and exceptional items

The Group provides alternative performance measures, including underlying operating profit, to enable users to better understand the performance and earnings trends of the Group.  These measures are considered to provide a consistent measure of business performance from year to year. They are used by management to assess operating performance and as a basis for forecasting and decision-making and are understood to be used by investors in analysing business performance.

The Group's alternative performance measures are not defined by IFRS and are therefore considered to be non-GAAP measures. The measures may not be comparable to similar measures used by other companies and they are not intended to be a substitute for, or superior to, measures defined under IFRS.

The Group revised its definition of underlying performance measures in the year, as detailed in this note.

Underlying operating profit

Underlying operating profit excludes certain Specific Adjusting Items. Transactions such as these may happen regularly and could be lumpy and may be profits or losses. As such they may distort the reporting of underlying business performance measures if they are not adjusted for. Specific Adjusting Items include:

·

Amortisation of acquired intangibles;

·

Business acquisition, merger and divestment related items (being acquisitions and gains or losses on disposal of assets or businesses);

·

Gains, losses and costs directly arising from the Group's withdrawal from a specific market or geography, including closure costs, severance costs, the disposal of assets and termination of leases;

·

The costs of large restructuring programmes that significantly exceed the minor restructuring which occurs in most years as part of normal operations. Restructuring costs incurred as a result of normal operations are included in operating costs and are not excluded from underlying operating profit;

·

Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes; and

·

Exceptional items that are significant, non-recurring and outside of the normal operating practice. These items are described as exceptional in order to appropriately represent the Group's underlying business performance. Exceptional items are set out in the Exceptional items section below.

Income statement including underlying results

 

Note

 

2021

 

2020 (restated)

 

Underlying
£m

Specific Adjusting Items
£m

Statutory
£m

 

Underlying
£m

Specific Adjusting Items
£m

Statutory
 m

Revenue

5

 

4,182.7

-

4,182.7

 

4,428.5

-

4,428.5

 

 

 

 

 

 

 

 

 

 

Operating (loss)/profit

5

 

(27.6)

(1,615.4)

(1,643.0)

 

377.6

(453.2)

(75.6)

Share of results of joint ventures and associates

 

 

(13.1)

-

(13.1)

 

58.6

-

58.6

Investment income

6

 

0.9

-

0.9

 

1.1

-

1.1

Net finance costs

6

 

(62.1)

-

(62.1)

 

(73.0)

-

(73.0)

(Loss)/profit before tax

 

 

(101.9)

(1,615.4)

(1,717.3)

 

364.3

(453.2)

(88.9)

Income tax benefit/(expense)

7

 

(18.4)

33.7

15.3

 

(67.4)

40.5

(26.9)

(Loss)/profit after tax for the year

 

 

(120.3)

(1,581.7)

(1,702.0)

 

296.9

(412.7)

(115.8)

 

Included in the Specific Adjusting Items column of the table above is £1,502.1 million relating to the contract profitability and balance sheet review. Further details are included in note 3.

Earnings per share including underlying measures

 

 

 

2021

 

2020 (restated)

 

Underlying
£m

Adjusting items
£m

Statutory
£m

 

Underlying
£m

Adjusting items
£m

Statutory
£m

(Loss)/profit after tax for the year

 

 

(120.3)

(1,581.7)

(1,702.0)

 

296.9

(412.7)

(115.8)

Amount attributable to owners of the parent

 

 

(120.3)

(1,581.7)

(1,702.0)

 

294.9

(412.7)

(117.8)

Amount attributable to non-controlling interests

 

 

-

-

-

 

2.0

 

2.0

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares (m)

 

 

505.0

 

505.0

 

505.3

 

505.3

Effect of dilutive securities (m)

 

 

4.0

 

4.0

 

0.9

 

0.9

Diluted weighted average number of shares (m)

 

 

509.0

 

509.0

 

506.2

 

506.2

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

(23.8)p

 

(337.0)p

 

58.4p

 

(23.3)p

Diluted EPS

 

 

(23.8)p

 

(337.0)p

 

58.3p

 

(23.3)p

 

Details of Specific Adjusting Items

The impact of Specific Adjusting Items is set out below:

 

 

2021
£m

2020
£m

Amortisation of acquired intangibles

 

(40.2)

(67.6)

Business acquisition, merger and divestment related items

 

(49.7)

74.7

Gains, losses and costs directly arising from withdrawal from a specific market or geography

 

(11.1)

(20.5)

Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes

 

(8.9)

-

Restructuring

 

(8.4)

(50.9)

Exceptional items

 

(1,497.1)

(388.9)

 

 

(1,615.4)

(453.2)

 

 

 

 

Income tax benefit

 

 

 

Amortisation of acquired intangibles

 

8.2

14.5

Gains, losses and costs directly arising from withdrawal from a specific market or geography

 

1.0

-

Profit or loss from amendment, curtailment, settlement or equalisation of group pension schemes

 

1.7

-

Restructuring

 

0.5

9.7

Exceptional tax items and tax on exceptional items

 

22.3

16.3

 

 

33.7

40.5

Explanation of Specific Adjusting Items

Amortisation of acquired intangibles

Underlying operating profit excludes the amortisation of acquired intangibles. This item is excluded from underlying results as it arises as a result of purchase price allocations on business combinations, and is a non-cash item which does not change each year dependent on the performance of the business. It is therefore not considered to represent the underlying activity of the Group. Intangible assets arising as a result of the purchase price allocation on business combinations include customer lists, technology-based assets, order book and trade names. Amortisation of internally generated intangible assets is included within underlying operating profit.

Business acquisition, merger and divestment related items

Transaction related costs and gains or losses on acquisitions, mergers and divestments of businesses are excluded from underlying operating profit as business combinations and divestments are not considered to result from underlying business performance.

The total net loss relating to business acquisition, merger and divestment related items was £49.7 million, consisting of a £38.2 million loss on disposal of the Group's share in the Holdfast joint venture and losses arising on disposal of subsidiary undertakings of £0.6 million for Cavendish Nuclear Manufacturing Limited and £10.9 million for Conbras Servicos Tecnicos Supporte Ltda. The prior year included a total net gain of £61.3 million, consisting of a £74.7 million gain on the disposal of Context Information Security Limited partially offset by additional costs from exits in the previous financial year and the costs of disposing of areas of the Group's nuclear manufacturing business.

Gains, losses and costs directly arising from the Group's withdrawal from a specific market or geography

The Group ceased its Airport baggage handling contract in the year, incurring costs of £4.2 million. Further costs were incurred in relation to exits in the previous financial year from the oil and gas business in Congo (£3.6 million), the overseas Powerlines business (£1.4 million) and certain Rail related contracts (£1.9 million).

In the prior year the Group incurred costs of £7.1 million in relation to the exits of its oil and gas businesses in Ghana and Congo, £3.4 million in relation to the overseas Powerlines business and £3.0 million in relation to the exit of its nuclear manufacturing business.

Restructuring

The Group continued to simplify the structure of the Aviation business and incurred a restructuring charge of £9.3 million (2020: £26.5 million). This was offset by the release of £0.9 million of unused provision from prior year restructuring costs in the Nuclear and Land sectors.

Other restructuring in the prior year of £24.4 million relates to the Group's Civil Nuclear and Rail businesses and includes substantial redundancy costs. £16.5 million was incurred in reducing the cost base in Civil Nuclear following the end of the Magnox contract and in response to the ongoing trading environment in the UK.

Profit or loss from amendment, curtailment, settlement or equalisation of Group pension schemes.

The Group incurred a curtailment charge of £7.5 million in relation to the closure of the Rosyth defined benefit pension scheme to future accrual. A charge of £1.4 million was incurred following a court ruling in November 2020 regarding equalisation of pension rights.

Exceptional items

See exceptional items section for further detail.

In the prior year, business acquisition and divestment related items and restructuring charges were included as exceptional items (previously referred to as 'Exits and disposals'). These remain as Specific Adjusting Items but are no longer included as exceptional items in order to provide greater clarity and consistency to the users of the financial statements.

Amendments to underlying definitions for the year ended 31 March 2021

For the year ended 31 March 2021 management has revised the Group's definition of underlying revenue and underlying operating profit as follows.

In prior years an underlying revenue measure was provided which included the Group's share of revenue from investments in equity accounted joint ventures and associates. This measure is no longer provided as the approach adopted by management in reviewing the operating performance of the business is more closely aligned with the statutory measure of revenue.

The Group's definition of underlying operating profit no longer includes the Group's share of results from equity accounted joint ventures and associates. This more closely aligns with the approach adopted by management in reviewing the operational performance of the business.

Reconciliation to prior year measures

Underlying income statement measures for the year ended 31 March 2021 that would have been presented under the previous underlying measures definition.

 

Revenue £m

Underlying operating loss
£m

Share of results of joint ventures and associates £m

Investment income
£m

Net finance costs
£m

Loss before tax
£m

Income tax expense
£m

Loss after tax
£m

Underlying measures

 

 

 

 

 

 

 

 

Previous definition

4,433.2

(4.9)

-

-

(84.9)

(89.8)

(19.1)

(108.9)

Reclassification of IFRIC 12 investment income

-

(0.9)

-

0.9

-

-

-

-

Share of joint venture and associates revenue

(250.5)

-

-

-

-

-

-

-

Share of joint venture and associates operating profit

-

4.0

(4.0)

-

-

-

-

-

Share of joint venture and associates investment income

-

(25.8)

25.8

-

-

-

-

-

Share of joint venture and associates amortisation of acquired intangible assets

-

-

(5.8)

-

-

(5.8)

-

(5.8)

Share of joint venture and associates finance costs

-

-

(22.8)

-

22.8

-

-

-

Share of joint venture and associates exceptional items

-

-

(5.6)

-

-

(5.6)

-

(5.6)

Share of joint venture and associates taxation

-

-

(0.7)

-

-

(0.7)

0.7

-

Revised definition

4,182.7

(27.6)

(13.1)

0.9

(62.1)

(101.9)

(18.4)

(120.3)

 

Underlying income statement measures for the year ended 31 March 2020 (restated) that would have been presented under the previous underlying measures definition

 

Revenue £m

Underlying operating profit
£m

Share of results of joint ventures and associates £m

Investment income
£m

Net finance costs
£m

Profit before tax £m

Income tax expense
£m

Profit afte r tax
£m

Underlying measures

 

 

 

 

 

 

 

 

Previous definition

4,850.7

484.3

-

-

(95.8)

388.5

(83.7)

304.8

Reclassification of IFRIC 12 investment income

-

(1.1)

-

1.1

-

-

-

-

Share of joint venture and associate revenue

(422.2)

-

-

-

-

-

-

-

Share of joint venture and associate operating profit

-

(79.7)

79.7

-

-

-

-

-

Share of joint venture and associate investment income

-

(25.9)

25.9

-

-

-

-

-

Share of joint venture and associate amortisation of acquired intangible assets

-

-

(5.8)

-

-

(5.8)

-

(5.8)

Share of joint venture and associate finance costs

-

-

(22.8)

-

22.8

-

-

-

Share of joint venture and associate exceptional items

-

-

(2.1)

-

-

(2.1)

-

(2.1)

Share of joint venture and associate taxation

-

-

(16.3)

-

-

(16.3)

16.3

-

Revised definition

4,428.5

377.6

58.6

1.1

(73.0)

364.3

(67.4)

296.9

 

The results for the year ended 31 March 2020 have been restated due to errors identified and a change in accounting policy. Further details are set out in note 4.

Exceptional items

Exceptional items are those items which are significant, non-recurring and outside the normal operating practice of the Group.

 

Note

2021
£m

2020
 (restated)
£m

Operating costs

 

 

 

Impairment of goodwill

10

1,243.2

278.4

Impairment of acquired intangibles

11

56.4

-

Impairment of internally generated intangible assets

11

32.7

-

Impairment of property, plant and equipment and aircraft fleet rationalisation

12

142.6

23.5

Impairment of right of use assets

13

46.4

14.2

Onerous contracts

 

-

17.0

Italy fine and related costs

 

(24.2)

48.5

Other

 

-

7.3

Exceptional items - Group

 

1,497.1

388.9

Exceptional tax items and tax on exceptional items

 

(22.3)

(16.3)

Exceptional items - net of tax

 

1,474.8

372.6

Explanation of exceptional items

Exceptional items include the results of the annual goodwill impairment test and other adjustments arising out of the contract profitability and balance sheet review.  The contract profitability and balance sheet review includes the results of a major aircraft fleet rationalisation programme which resulted in asset impairments and crystallisation of losses on disposal of surplus aircraft.

Impairment of goodwill

The current year impairment test results in an impairment of the Land operating segment goodwill of £425.8 million, the Aviation operating segment goodwill of £808.5 million and the goodwill of £8.9 million allocated to the Aviation oil and gas business CGU. These impairments reflect significant changes in estimates, informed by consideration during the second half of the year ended 31 March 2021, of actual business performance of the Group during the current year and related assessments of future performance of the businesses. Future business performance was informed by the strategy and contract profitability and balance sheet reviews instigated by the Group's new executive management and the Group's budget addressing the years ending 31 March 2022, 31 March 2023 and 31 March 2024.

The Group combines the Africa and Land operating segments into a single Land reportable segment and, in the prior year, the goodwill impairment test was carried out at the reportable segment level rather than at the operating segment level as required by IAS 36. This error was compounded by an administrative error in the calculation of the value-in-use of the Land operating segment and the impact of both errors was an overstatement of Land value-in-use by £886 million.

In addition, the correction of a number of prior period errors in the year ended 31 March 2020, in relation to other financial statement areas, reduced the capital employed used to complete the March 2020 goodwill impairment test. A reduction in capital employed of £239.2 million, in relation to the Aviation operating segment, resulted in the restatement of the Aviation operating segment impairment charge for the year ended 31 March 2020 from £395.0 million, which reflected deterioration in the oil and gas market conditions, to £155.8 million. A reduction in capital employed of £5.1 million, in relation to the Land operating segment and the impact of the overstatement of value-in-use by £886 million noted above, resulted in a Land operating segment impairment charge of £122.6 million in the year ended 31 March 2020.

Impairment of acquired intangibles

The Land operating segment previously recognised an acquired intangible in relation to the DSG contract acquisition in 2015.  Following publication of the Integrated Spending Review and reassessment of variable revenues under the contract, an impairment assessment under IAS 36, resulted in the impairment of this asset. 

Impairment of internally generated intangible assets

Impairment charges of £32.7 million were recorded on mainly software assets. Further details are set out in note 11.

Impairment of property, plant and equipment and aircraft fleet rationalisation

An impairment charge of £113.3 million was recorded on property, plant and equipment. This charge included the results of a major aircraft fleet rationalisation programme which resulted in a refreshed fleet strategy and the identification of surplus aircraft.  Impairments were recorded on surplus aircraft and as the result of value-in-use tests. Losses on disposal were incurred on aircraft disposed of during the year.  The prior year charge related to impairments of property, plant and equipment used in the Group's Aviation oil and gas business and reflected the prevailing market conditions.  Further details are set out in note 12.

Impairment of right of use assets

Following a review of carrying amounts, a total impairment charge of £46.4 million was recorded in relation to the Group's right of use assets.  This included impairments of aircraft supporting oil and gas and emergency services contracts and the impairment of assets directly attributable to the Group's DSG contract.  The impairment in the prior year related to aircraft supporting oil and gas market contracts. Further details are set out in note 13

Onerous contracts

The prior year charge relates to onerous contracts supporting the Aviation oil and gas market.  As disclosed in note 4, the Group identified onerous contracts during the year ended 31 March 2021. However, the onerous contracts identified are not considered to meet the criteria for exceptional items (being items that are significant, non-recurring and outside the normal operating practice of the Group) and are therefore not considered further here. We have assessed that onerous contracts identified in the year ended 31 March 2020 meet the criteria for classification as exceptional under the policy in place for the current year. 

Italy fine

In the year ended 31 March 2020, the Lazio Regional Administrative Court confirmed a €51 million fine issued by the Italian Competition Authority to our subsidiary, Babcock Mission Critical Services Italia SpA (BMCS Italia), for certain anti-trust violations. As a result, the Group recognised a provision of £46.4 million.  During the year, BMCS Italia appealed the decision of the Court to the Italian Council of State.  In July 2021, the Council, whilst upholding the decision of the Court on the facts, annulled the fine, though allowing the Authority leave to re-calculate it.  We expect the Authority to decide on the recalculation of the fine over the next few months.  Taking into account the guidance given by the Council to the Authority on the recalculation, we further expect the Authority to reduce the fine.  As a result, we have reduced the provision to £20 million, being management's best estimate of the Group's obligation based on an interpretation of the Council's guidance. We have not received any indication from the Authority as to how it will choose to interpret the Council's guidance.

Other

Other charges in the prior year include costs arising from the Group's Brexit-related restructure. 

3.  Contract and balance sheet review

As announced in January 2021, the Group performed a review of the profitability of its contract portfolio, and the carrying values of assets and liabilities on the balance sheet. The review was carried out by management using the expertise and resource of an independent accounting firm. The initial year-end financial close occurred in early April before completion of the contract profitability and balance sheet review. On 13 April 2021 the Group announced the initial headline unaudited results for the year ended 31 March 2021 before the impact of contract profitability and balance sheet review, along with an early estimate of the findings. The annual goodwill impairment test, required by IAS 36, was included within the scope of the contract profitability and balance sheet review.

The contract profitability and balance sheet scope covered over 100 contracts, representing c.£2.7 billion of annual revenues. The selected contracts received differing levels of review depending upon their perceived risk. Those contracts deemed high risk had a full review of their status, underpinning assumptions and risks and dependencies. Those deemed medium risk had a specific scope review with work targeted at any specific areas of concern, and those deemed low risk had a review with the project manager to gain an understanding of the contract and assess whether any specific scope work should be performed. The balance sheet reviews covered all main balance sheet captions for all sectors, again prioritising balances on a risk basis. As the reviews progressed, more work was performed on contracts where findings raised issues that had not been considered in the initial scoping reviews.

More than 140 accounting adjustments totalling £2.0 billion (post-tax effect on retained earnings) resulted from the contract profitability and balance sheet review, consisting of:

·

Cumulative restatement at 1 April 2019 of £308.1 million (being £45.3 million relating to a change in accounting policy and correction of prior year errors of £262.8 million).

·

Cumulative restatement at 31 March 2020 of £230.7 million (being £59.8 million relating to a change in accounting policy and correction of prior year errors of £170.9 million).

·

Changes recorded within the current financial year of £1,813.7 million, the vast majority of which are change in estimates.

 

Of the adjustments recorded in the current year income statement (see table below), £274.7m were charged within underlying operating profit and the vast majority of these amounts related to changes in estimates. Their inclusion within underlying operating profit reflects the fact that the occurrence of such transactions, when taken individually, is part of the ordinary course of business. However, the number and magnitude of the adjustments as a result of the contract profitability and balance sheet review far exceeded what would normally be expected in the Group in any one period, hence the additional disclosure.

Prior year restatements

There are a number of prior year errors that have been recognised. Adjustments were denoted as errors, rather than changes in estimates, when was identified that assumptions or methodologies were used which the Group should have known at the time were incorrect. One accounting policy has also been changed to better represent certain maintenance arrangements in the Aviation sector, and the errors and the policy change result in prior year restatements. Prior year restatements arising on or before 31 March 2019 were recorded in the 1 April 2019 opening balance sheet in these financial statements, with the continuing impact of these errors and other errors arising in the year ended 31 March 2020 being recorded in the income statement for the year ended 31 March 2020.

The impacts of the contract profitability and balance sheet review adjustments on the income statement, including the results of the annual goodwill impairment test, are summarised as follows:

 

 

 

2021

 

2020

 

Underlying
£m

Specific Adjusting Items
£m

Statutory
£m

 

Underlying
£m

Specific Adjusting Items £m

Statutory
 m

Revenue impacts

 

(207.4)

-

(207.4)

 

(21.0)

-

(21.0)

 

 

 

 

 

 

 

 

 

Operating profit/(loss) impacts

 

 

 

 

 

 

 

 

Impairment/disposal of goodwill and acquired intangible assets

 

-

(1,349.4)

(1,349.4)

 

-

130.5

130.5

Impairment of non-current assets

 

(5.8)

(32.7)

(38.5)

 

0.7

-

0.7

Impairment of property plant and equipment and right of use assets

 

-

(156.9)

(156.9)

 

(21.6)

(1.4)

(23.0)

Impairment/write down of current assets

 

(142.6)

(0.8)

(143.4)

 

(19.5)

-

(19.5)

Introduction of/increase to liabilities

 

(126.3)

(1.0)

(127.3)

 

0.6

-

0.6

Operating profit/(loss)

 

(274.7)

(1,540.8)

(1,815.5)

 

(39.8)

129.1

89.3

Share of income from JVs and associates

 

(37.1)

-

(37.1)

 

-

-

-

Profit/(loss) before tax impacts

 

(311.8)

(1,540.8)

(1,852.6)

 

(39.8)

129.1

89.3

Tax adjustments

 

(7.5)

-

(7.5)

 

(12.4)

-

(12.4)

Tax effect

 

29 .3

17.1

46.4

 

3.0

(2.5)

0.5

Loss after tax for the year impacts

 

(290.0)

(1,523.7)

(1,813.7)

 

(49.2)

126.6

77.4

 

Summarised cumulative adjustments to retained earnings, including the results of the annual goodwill impairment test, are as set out below:

 

 

£m

Restatement as at 1 April 2019

 

(308.1)

Adjustments recognised in the year ended 31 March 2020

 

77.4

Total restatement at 31 March 2020

 

(230.7)

Adjustments recognised in the year ended 31 March 2021

 

(1,813.7)

Total adjustments recognised at 31 March 2021

 

(2,044.4)

 

The summary of the adjustments in the table above is set out below:

Revenue:

These adjustments have two components within them. Firstly is a correction of an error where revenue had been recognised on a contract the terms of which had been varied in February 2020. The effect of the contract change is that the Group is deemed an agent of the customer, not a principal and therefore the revenue should not be recognised. As a result of identifying this error, £71.8 million of revenue initially recognised in the year ended 31 March 2021 was reversed together with £11.6 million of revenue in relation to the year ended 31 March 2020. The second component of revenue adjustments reflects reassessments of the progress and profitability of a number of contracts across the Group.

Impairment of goodwill and acquired intangible assets:

In the current year, goodwill was impaired by £1,243.2 million and acquired intangible assets were impaired by £56.4 million. As detailed in note 13, the impairments of the Land and Aviation sectors' goodwill of £425.8 million and £817.4 million respectively were largely as a result of reduced forecasts of future cash flows and an increase in the discount rate used to discount them.

Contract profitability and balance sheet review adjustments of £64.8 million were also recorded to allocate the goodwill that should have been allocated to the Holdfast disposal (June 2020) and to correct the allocation of goodwill to the Conbras disposal (October 2020 and provided in the first half of the financial year). Further, £56.4 million was impaired in relation to the DSG contract acquired intangible as its carrying value could no longer be justified following the reassessment of the contract profitability. Partially offsetting this is the reversal of amortisation of £15.0 million in relation to the oil and gas business acquired intangible reflecting management's judgement to dispose of this intangible at 1 April 2019 as a result of a reassessment of its useful economic life. This has been classified as a prior year error.

Previously a goodwill impairment of £395.0 million was recorded in the year ended 31 March 2020 against the Aviation sector goodwill. The credit of £130.5 million in the year ended 31 March 2020 is a reduction to that impairment and is the result of three prior year errors. Firstly, credits of £239.2 million and £5.1 million reflect the cumulative amount of prior year errors in relation to the capital employed in the Aviation and Land operating segments respectively, and therefore reduce the amount that should have been impaired in the year ended 31 March 2020. Secondly, calculation errors in the impairment test of Land goodwill in the year ended 31 March 2020 result in a charge of £127.7 million and, thirdly, a credit of £13.9 million reflects reduced intangible amortisation in relation to the oil and gas business following the derecognition of the intangible asset at 1 April 2019. 

Impairment of other non-current assets:

The adjustments within underlying operating profit in the year ended 31 March 2021 largely relate to the write off of a loan to one of our joint ventures which is no longer deemed recoverable. The £32.7 million within the year ended 31 March 2021 Specific Adjusting Items is largely due to the impairment of internally generated intangibles, mainly computer software.

Impairment of property, plant and equipment and right of use assets:

Impairments of £156.9 million largely relate to fleet values in the Aviation sector where aircraft carrying values are no longer expected to be recovered through use or sale. Also included are impairments of leasehold property of £12 million and plant and equipment of £11 million. The prior year error of £21.6 million within underlying profit is all from the Aviation sector and relates to the expensing of previously capitalised maintenance and the reversal of aircraft vendor credit notes previously recognised within profit. Further details are set out in note 5.

Impairment/write down of current assets:

This covers the reassessment of several contract profitability margins and the recoverability of many trade and other receivables (including contract assets and accrued income) as well as an increase in obsolescence provisions for inventory. This is the summation of many contract reassessments across the group with £62.0 million in Aviation, £36.6 million in Land, £21.8 million in Marine and £20.6 million in Nuclear. The prior year error of £19.5 million relates to Aviation and corrects the capitalisation of mobilisation and other costs as well as revenue milestones recognised for an aircraft the Group did not take delivery of.

Introduction of/increase to liabilities:

These increases reflect reassessment of several contract profitability margins, onerous contract provisions, aircraft maintenance accruals, and other provisions. £72.6 million are in the Aviation sector, £35.7 million in Land and £11.4 million in Marine. Around £70 million of the liabilities are expected to outflow beyond one year.

Share of income from joint ventures and associates:

Historically the Group adjusted the results of the joint ventures and associates before equity accounting the relevant share in the income statement. The Group has decided such results should be incorporated without adjustment by the Group - unless required to align with IFRS. In the prior periods the Group's share of joint venture and associates results were adjusted by £23.1 million cumulatively, and a charge of this amount is booked as a change in estimate in the year ended 31 March 2021 to reverse these amounts. In addition, following the termination of the Group's Dounreay decommissioning contract on 31 March 2021, as a consequence of the NDA's decision to take contract delivery in-house, the Group booked an adjustment of £10.9 million to reflect the estimated contract settlement with the NDA. Contract settlements remain outstanding in relation to works carried out some years ago by the Land sector's ABC joint venture and, following developments during the year, a further adjustment of £3.1 million was recorded and represents an updated assessment of the contract outcomes. 

Tax adjustments:

The underlying impact of £7.5 million in the year ended 31 March 2021 relates to the write off of deferred tax assets in Spain of £19.2 million now considered not recoverable within the Group's forecasting horizon, together with a £21.6 million credit, being the recognition of tax deductibility on the DSG contract intangible amortisation now confirmed with HMRC. The prior year error of £12.4 million is the write off of a deferred tax asset incorrectly calculated in the prior year. 

Change in accounting policy:

During the year, management amended the Group's accounting policy regarding Power By the Hour agreements. At 31 March 2021 this change in policy reduces property, plant and equipment by £65.6 million and trade and other receivables by £3.1 million and increases trade and other payables by £8.1 million. Further information is detailed at note 5.

4.  Prior year restatements

The following table summarises the impact of restatements arising from the change in accounting policy and correction of prior year errors on Group net assets and earnings per share.

 

31 March 2020

1 April 2019

 

Change in

accounting policy

Prior period

error

Change in

accounting policy

Prior period

error

Impact on non-current assets (£m)

(48.7)

(135.7)

(37.2)

(224.8)

Impact on current assets (£m)

(2.8)

445.6

-

549.3

Impact on non-current liabilities (£m)

-

79.2

-

(1.9)

Impact on current liabilities (£m)

(8.3)

(564.5)

(8.1)

(578.2)

Total impact on equity (£m)

(59.8)

(175.4)

(45.3)

(255.6)

 

 

 

 

 

Impact on profit after tax (£m)

(14.6)

92.0

N/A

N/A

Impact on Group earnings per share (basic) (pence)

(2.9)

18.6

N/A

N/A

Impact on Group earnings per share (diluted) (pence)

(2.9)

18.6

N/A

N/A

Detail of prior period errors and change in accounting policy

Through the contract profitability and balance sheet review a number of prior year errors have been identified, in addition to one area where there is a more appropriate alternative accounting policy. Prior year financial statements have been restated for these changes as indicated below.

1 April 2019 - Group statement of financial position (extract)

 

 

Change in accounting policy

Correction of errors

 

 

1 April 2019 (previously published)

(i) Power By the Hour maintenance arrangements

(ii) Maintenance of leased aircraft

 

(iii) Rotables

(iv) Maintenance of customer aircraft

(v) Mobilisation costs

(vi) Credit notes

(vii) Deferred tax

 (viii) Balance sheet reclassification

 

 (x) Other

1 April 2019 (restated)

Assets

 

 

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

 

 

Other intangible assets

448.9

-

-

-

-

-

-

-

-

(59.9)

389.0

Property, plant and equipment

1,014.3

(37.2)

(26.5)

(25.8)

(25.1)

(0.8)

(2.4)

-

0.7

(23.5)

873.7

Right of use assets

592.7

-

-

-

-

-

(35.3)

-

66.1

-

623.5

Investments in joint ventures and associates

153.2

-

-

-

-

-

-

-

-

8.9

162.1

Deferred tax asset

155.9

-

-

-

-

-

-

(8.8)

(92.4)

-

54.7

Total non-current assets *

5,327.9

(37.2)

(26.5)

(25.8)

(25.1)

(0.8)

(37.7)

(8.8)

(25.6)

(74.5)

5,065.9

Current assets

 

 

 

 

 

 

 

 

 

 

 

Inventories

196.5

-

-

-

-

-

-

-

-

(1.8)

194.7

Trade and other receivables

916.6

-

-

-

-

(18.6)

-

-

9.5

(38.7)

868.8

Income tax receivable

11.1

-

-

-

-

-

-

-

26.2

3.2

40.5

Cash and cash equivalents

275.2

-

-

-

-

-

-

-

569.5

-

844.7

Total current assets *

1,447.4

-

-

-

-

(18.6)

-

-

605.2

(37.3)

1,996.7

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

Bank and other borrowings

(1,357.6)

-

-

-

-

-

-

-

(79.6)

-

(1,437.2)

Deferred tax liabilities

(103.2)

-

-

-

-

-

-

11.5

66.2

-

(25.5)

Total non-current liabilities *

(2,294.5)

-

-

-

-

-

-

11.5

(13.4)

-

(2,296.4)

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Bank and other borrowings

(53.9)

-

-

-

-

-

-

-

(603.4)

-

(657.3)

Trade and other payables

(1,381.4)

(8.1)

(2.9)

-

-

-

-

-

37.2

6.4

(1,348.8)

Other financial liabilities

(4.9)

-

-

-

-

-

-

-

-

(6.0)

(10.9)

Provisions for other liabilities

(48.9)

-

(9.7)

-

-

-

-

-

-

0.2

(58.4)

Total current liabilities *

(1,618.3)

(8.1)

(12.6)

-

-

-

-

-

(566.2)

0.6

(2,204.6)

Total impact on statement of financial position

-

(45.3)

(39.1)

(25.8)

(25.1)

(19.4)

(37.7)

2.7

-

(111.2)

(300.9)

 

 

 

 

 

 

 

 

 

 

 

 

Other reserves

692.9

-

-

-

-

-

-

-

-

7.2

700.1

Retained earnings

975.8

(45.3)

(39.1)

(25.8)

(25.1)

(19.4)

(37.7)

2.7

-

(118.4)

667.7

Total equity *

2,862.5

(45.3)

(39.1)

(25.8)

(25.1)

(19.4)

(37.7)

2.7

-

(111.2)

2,561.6

 

* The table above includes only those financial statement line items which have been restated. The total non-current assets, current assets, non-current liabilities, current liabilities and equity do not therefore represent the sum of the line items presented above.

31 March 2020 - Group statement of financial position (extract)

 

 

Change in accounting policy

Correction of errors

 

 

31 March 2020 (previously published)

(i) Power By the Hour maintenance arrangements

(ii) Maintenance of leased aircraft

 

(iii) Rotables

(iv) Maintenance of customer aircraft

(v) Mobilisation costs

(vi) Credit notes

(vii) Deferred tax

(viii) Balance sheet reclassification

(ix) Goodwill impairment

 

(x) Other

31 March 2020 (restated)

Assets