Annual Report 2012
Directors’ Report 01 Industry Acronyms Overview 01 Airbus Corporate Jet ACJ Business and General Aviation B&GA BBA Aviation at a Glance 02 Boeing Business Jet BBJ Financial Highlights 04 Bureau of Economic Analysis BEA Group Structure 05 Corporate Social Responsibility CSR Chairman’s Statement 06 Engine Repair & Overhaul ERO Federal Aviation Administration FAA Board of Directors and Executive Management 08 Fixed Base Operation FBO General Aviation Manufacturers Association GAMA Business Review 10 Green House Gas GHG Business Model 10 Original Equipment Manufacturer OEM Recordable Incident Rate RIR Our Markets 11 Regional Turbine Centre RTC Our Strategy 14 Request for Proposal RFP Our Strengths 16 Transportation Security Administration TSA Principal Risks and Uncertainties 17 Zero Incident Philosophy and Process ZIPP Key Performance Indicators 18 Group Financial Summary 20
Flight Support 22 — Signature Flight Support 26 — ASIG 30
Aftermarket Services 32 — Engine Repair & Overhaul 36 — Legacy Support 40 — APPH 44
Corporate Social Responsibility 46 Financial Matters 51 Additional Disclosures 53 Directors’ Corporate Governance Statement 55 Directors’ Remuneration Report 63 Going Concern 75 Statement of Directors’ Responsibilities 76
Consolidated Financial Statements 77 Independent Auditor’s Report 77 Consolidated Income Statement 78 Consolidated Statement of Comprehensive Income 79 Consolidated Balance Sheet 80 Consolidated Cash Flow Statement 81 Consolidated Statement of Changes in Equity 82 Accounting Policies 83 Notes to the Consolidated Financial Statements 88
Company Financial Statements 121 Independent Auditor’s Report 121 Company Balance Sheet 122 Front cover Accounting Policies 123 An ASIG tow team safely guides an A380 to its gate after Notes to the Company Financial Statements 124 landing at JFK. The A380’s wingspan of nearly 80m requires the JFK ramp route to be cleared before a tow can begin. Principal Subsidiary and Associated Undertakings 129 Inside front cover Five Year Summary 130 A Signature fuel truck waiting to refuel a customer aircraft. Shareholder Information 131 Signature sells 150m gallons of jet fuel every year. Directors’ Report BBA Aviation Overview 01
BBA Aviation Overview
BBA Aviation is a leading global aviation services and aftermarket support provider.
Our businesses are well-positioned market leaders with attractive long-term growth prospects. We strive to continuously improve our service and product offerings and exceed our customers’ expectations. With shared customers, process skills and a common service focus, our businesses consistently look for ways of working more closely together to innovate, drive operational improvement and deliver exceptional performance.
Our people are the foundation of our success. We aim to be an employer of choice for empowered individuals working in a safe and sustainable environment and behaving with integrity and respect.
This consistent, Group-wide focus is fundamental to achieving our overarching objective of delivering exceptional, long-term, sustainable value for all our stakeholders. Directors’ Report 02 BBA Aviation at a Glance
BBA Aviation at a Glance
BBA Aviation vision To be a dynamic, world class supplier to the global aerospace industry, continuously delivering YWG added exceptional performance. in 2012 KGRB added Our mission in 2012 YHM To grow exceptional, long-term sustainable in 2012 value through: YOW added — Exceeding customer expectations and in 2012 YQM added competitor offerings; in 2012 CYEG/YEG — Continuously improving market-leading added in 2012 YYG added in 2012 and innovative businesses; YVR added in 2012 YDF added in 2012 — Working together for greater gain; YYC added in 2012 YYT added — Being an employer of choice for empowered in 2012 YXE added individuals in a safe and sustainable environment; in 2012 YQY added in 2012 — Always behaving with integrity and respect. YQR added in 2012 YHZ added in 2012 KOMA added BBA Aviation divisions in 2012 YSJ added in 2012 Flight Support KFTW added in 2012 YFC added Our Flight Support businesses, Signature Flight in 2012 Support and ASIG, provide specialist on-airport KDAB added in 2012 support services including refuelling and ground North America handling to the owners and operators of private, business and commercial aircraft. 69% Flight Support has nearly 200 locations worldwide, of world’s business jets covering geographies with large numbers of 33% of commercial aviation business jets and aircraft movements. movements
Aftermarket Services Our Aftermarket Services businesses, Dallas South America Airmotive, Premier Turbines, H+S Aviation, International Turbine Service, W. H. Barrett Turbine Engine Company, International Governor Services, 9% Ontic and APPH, are focused on the repair and of world’s business jets overhaul of gas turbine engines and the manufacture 10% of commercial aviation and service of aerospace components, sub-systems movements and systems.
Aftermarket Services has 23 locations worldwide, distributed to support customer requirements. Directors’ Report BBA Aviation at a Glance 03
Locations Key Markets Over 220 locations worldwide Revenue Split 2012 Nearly 12,000 employees worldwide 67%
Business & General Aviation Europe
11% 27% of world’s business jets 23% of commercial aviation movements Commercial Aviation
SXF added in 2012 6%
Asia Military Aviation 5% of world’s business jets Key Financial 26% Highlights 2012 of commercial aviation movements
$2,178.9m
Africa Singapore RTC added in 2012 Revenue declined by 4% 1% on an organic basis of world’s business jets 3% of commercial aviation movements $195.4m
Oceania Underlying operating profit down 2% 2% of world’s business jets 29.0¢ 5% of commercial aviation movements Adjusted earnings per share unchanged Location Key Flight Support Aftermarket Services Signature Flight Support Engine Repair & Overhaul Source: B&GA distribution JetNet Jan 2013 (North America includes Mexico, Caribbean and Central America) ASIG Legacy Support Commercial aviation movements OAG Jan 2013 Signature Flight Support + ASIG APPH (South America includes Mexico, Caribbean and Central America) Directors’ Report 04 Financial Highlights
Financial Highlights
$m 2012 2011 Change 1 Underlying operating profit before depreciation and Revenue 2,178.9 2,136.7 2% amortisation 2 Operating profit before Underlying EBITDA1 255.9 260.5 (2)% exceptional items 3 Operating margin on 2 Underlying operating profit 195.4 198.9 (2)% underlying operating profit 4 Net interest excluding Operating profit 162.7 180.6 (10)% exceptional items Underlying operating margin3 9.0% 9.3% 5 Profit before tax excluding exceptional items Underlying net interest4 (32.4) (28.7) 6 Exceptional items exclude exceptional items included Underlying profit before tax5 163.0 170.2 (4)% within tax (2012: $9.5 million, 2011: $23.0 million) Exceptional items6 (32.7) (6.6) 7 Underlying operating profit return on average invested Profit before tax 130.3 163.6 (20)% capital including goodwill and intangibles amortised Profit for the period 115.5 152.1 (24)% or written off to reserves 8 Cash generated by operations plus dividends from associates, less tax, Earnings per ordinary share – basic interest, preference Adjusted† 29.0¢ 29.0¢ – dividends and net capital expenditure (excluding Unadjusted 24.2¢ 32.5¢ (26)% expenditure on Ontic licences) 9 Book value of borrowings and finance leases less cash Earnings per ordinary share – diluted and cash equivalents
Adjusted† 28.5¢ 28.3¢ 1% † Earnings per share before exceptional items Unadjusted 23.8¢ 31.7¢ (25)% The definitions as outlined above are consistently applied throughout the Dividends per ordinary share 14.65¢ 13.94¢ 5% Directors’ Report and Return on invested capital7 10.0% 10.6% Consolidated Financial Statements unless Cash generated by operations 212.1 227.1 (7)% otherwise stated. Free cash flow8 121.2 185.8 (35)% Net debt9 416.4 403.6 Net debt to underlying EBITDA 1.6x 1.5x Directors’ Report Group Structure 05
Group Structure
Revenue by business BBA Aviation $2,178.9m
Signature $952.9m
Flight Aftermarket Support Services ERO $1,321.8m $641.2m $857.1m
ASIG $368.9m Legacy APPH $147.3m $68.6m
Revenue by key markets
B&GA Commercial Military
Signature $952.9m ASIG $368.9m ERO $58.5m ERO $460.2m ERO $122.5m Legacy $55.9m Legacy $32.3m Legacy $59.1m APPH $21.3m APPH $14.3m APPH $33.0m Total $1,459.7m Total $583.5m Total $135.7m Directors’ Report 06 Chairman’s Statement
Chairman’s Statement
Against a backdrop of softer than Results In 2012 our businesses continued to demonstrate their anticipated markets throughout the year underlying strengths. Group revenue increased by 2% and a weak de-icing season, BBA Aviation and underlying operating profit declined by 2% to $195.4m delivered a resilient performance in 2012. (2011: $198.9m) due principally to a weak de-icing season We made good strategic progress and with strong operational improvement broadly offsetting market decline. continued to deliver operational improvement, structural cost reduction Despite the reduction in underlying profit and higher net and good cash conversion. We continue interest reflecting the cost of BBA Aviation’s new long-term bank and private placement debt facilities, adjusted earnings to invest in our employees and their per share remained unchanged at 29.0¢ due to a reduction development and made some changes in our tax rate. to our organisational management structure at the beginning of 2013 to We made good strategic progress on a number of fronts in 2012. In Flight Support we extended our FBO network, accelerate our growth and operational adding six locations and a line maintenance business, in improvement programme. addition to securing substantial lease extensions. We also have a number of major capital investment projects now underway at key Signature locations. ASIG entered Canada Michael Harper Chairman with the C$27m acquisition of PLH Aviation Services and Dryden Air Services and delivered good contract wins as well as adding innovative technical services. In Aftermarket Services we continued to add engine authorisations and new licences and have added significant capacity at our Chatsworth facility to support rapidly growing demand for legacy electronics products. A new RTC with extensive Honeywell engine support capabilities was opened in Singapore during the year.
The Group’s major structural cost reduction and operational initiatives for 2012 were delivered to plan with good operational improvement achieved in 2012 and incremental benefit expected in 2013.
The cash generative nature of the business was once again apparent in 2012. Free cash flow in the year was good at $121.2m (2011: $185.8m) given much increased net capital expenditure relating to growth projects and lease extensions. Net debt increased marginally to $416.4m (2011: $403.6m) but our balance sheet remains strong with net debt to EBITDA at 1.6x, giving us ample scope to take advantage of further investment and acquisition opportunities as they arise. Directors’ Report Chairman’s Statement 07
Organisational change Employees We continue to see significant potential for further The Board values the commitment, hard work and improvement in our businesses through additional enthusiasm of our employees and would like to thank them operational synergies, increased cross-business co- for their continued contribution. They have enabled the operation, and the sharing of best in class process and Group to deliver the operating and financial results we practice across the Group. With effect from 1 January 2013, achieved in 2012. While it is disappointing that the rate of we consolidated the operational management of our Flight progress to our goal of zero health and safety incidents has Support businesses under one management team headed slowed, we recognise the achievement of 160 of our by Michael Scheeringa, previously President of Signature, reporting locations remaining accident-free throughout the and our Aftermarket Services businesses under a team year. You can read more about our progress on CSR matters headed by Peg Billson, previously President of Legacy on pages 46 to 49. Support. This organisational change is expected to enhance our market and customer focus, to develop and deploy Outlook our human resources more effectively and to accelerate Our major markets are broadly stable despite the subdued the delivery of these cross-business and operational global macro-economic backdrop. Although we have yet to improvement opportunities. see any material effect on B&GA flying, economic indicators in the USA are slowly beginning to improve. We are also Dividend carrying good underlying momentum into 2013 which, The Board is recommending a final dividend of 10.45¢ (2011: together with the incremental contribution from 9.95¢), taking the full year dividend to 14.65¢ (2011: 13.94¢). acquisitions, means we therefore continue to anticipate This is a 5% increase and reflects the Board’s progressive making good progress in 2013. dividend policy and continuing confidence in the Group’s medium-term growth prospects. Over the longer term, the underlying strengths of BBA Aviation’s market-leading businesses, the potential for further Corporate governance and the Board operational improvement, a strong balance sheet and the The Board firmly believes that good corporate governance is Group’s unique position in markets where leading indicators a major contributor to maintaining and sustaining the support medium-term recovery and structural growth delivery of strong Group operating and financial potential, give us continued confidence in our ability to performance. In our Corporate Governance Statement on generate superior through-cycle returns. pages 55 to 62 you can read in greater detail about the ways in which we have applied the principles of the UK Corporate Michael Harper Governance Code. Chairman
In April 2012 we welcomed Susan Kilsby to the Board and more details about the process of that appointment and the Board’s approach to its progressive refreshment are also set out in the Corporate Governance Statement. Directors’ Report 08 Board of Directors and Executive Management
Board of Directors
Michael Harper (68) Simon Pryce (51) Mark Hoad (42) Nick Land (65) Chairman Group Chief Executive Group Finance Director Non-Executive Director Appointed to the Board as a Appointed to the Board as Group Appointed to the Board as Group Appointed to the Board in August non-executive director in Chief Executive in June 2007. Finance Director in April 2010. 2006 and Senior Independent February 2005 and became Simon also chairs the BBA Aviation Mark is a Chartered Accountant. Director and Chairman of Audit Non-Executive Chairman in June Executive Management He joined BBA Aviation as Group and Risk Committee, Nick was 2007. Michael is an engineer by Committee. In addition to his BBA Financial Controller in May 2005 formerly Chairman of Ernst & training and has a wealth of Aviation plc position, Simon is on from RMC Group plc where he Young LLP and a member of the experience gained as a director the Board of the General Aviation had worked since 1996 in a Global Executive Board of Ernst & of Williams plc where, on the Manufacturers Association number of finance roles, including Young, positions which he held demerger in 2000, he became (GAMA), the US general aviation expanding his international from 1995 to 2006. In addition to Chief Executive of Kidde plc. He is trade body and is Chairman business experience with periods his experience as a Chartered currently Chairman of Ricardo plc, of their International Affairs based in Germany, Croatia and Accountant, Nick brings to the a non-executive director of Committee. Simon is a Fellow Australia, where he was Chief Board his extensive skills as QinetiQ Group plc and a Fellow of of the Royal Aeronautical Society, Financial Officer of ASX-listed an advisor to international the Royal Aeronautical Society. a Chartered Accountant and company Adelaide Brighton. businesses. His current a member of the Chartered appointments include being Institute for Securities and a non-executive director of Investment. He was previously Vodafone Group Plc, Ashmore with JP Morgan and Lazards in Group plc and Alliance Boots London and New York, and GKN GmbH. He sits on the Finance and plc in a range of international Audit Committees of the National finance and management roles. Gallery. He is also an adviser to Alsbridge plc and sits on the Financial Reporting Council.
Executive Management
Simon Pryce Mark Hoad Peg Billson Sheena Mackay Group Chief Executive Group Finance Director President and CEO, Group HR Director Aftermarket Services Directors’ Report Board of Directors and Executive Management 09
Mark Harper (56) Susan Kilsby (54) Peter Ratcliffe (64) Hansel Tookes (65) Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Appointed to the Board in Appointed to the Board in April Appointed to the Board in January Appointed to the Board in December 2006. Mark is Chairman 2012. Susan brings to the Board 2009. Peter brings to the Board his February 2007. Hansel brings of Remuneration Committee and her global investment banking experience of working in an to the Board his operational BBA Aviation’s CSR Responsible experience, having begun her industry focused on customer perspective and experience of Director. Following a career career at The First Boston service as he was the Chief the aviation industry drawn from involving various sales and Corporation and later worked at Executive Officer of Carnival plc nearly 20 years working in various marketing positions with Ford Bankers Trust and BZW, before the until April 2003 and Chief positions at United Technologies Motor Company, Lucas Industries latter was acquired by Credit Executive Officer of the P&O Group including as President at and Unipart, Mark joined Bunzl in Suisse. She was Chairman of the Princess Cruises division of Pratt & Whitney’s Large Military 1986 where he held a number of EMEA Mergers and Acquisitions Carnival Corporation and Carnival Engines Group, prior to which he general management positions, team at Credit Suisse until 2009 plc from 2003 to 2007. He also was a Lieutenant Commander including a period as President and continues a part-time role brings his significant experience and military pilot in the US Navy of a US-based plastics business. as a Senior Advisor. Her current both as an executive and a and a commercial pilot with He became Chief Executive of appointments include being non-executive director of UK and United Airlines. He retired in 2002 Filtrona plc when it demerged a non-executive director of US public listed companies. from Raytheon Inc., where he had from Bunzl in June 2005 and Shire plc. Her experience advising He was previously an executive formerly been Chairman and CEO retired from Filtrona in April 2011. clients across a range of industries director of The Peninsular and of Raytheon Aircraft. His current He is currently Chairman of includes significant deals in the Oriental Steam Navigation appointments include being a Renold plc. aviation and aerospace sectors. Company. He is a Chartered non-executive director of Accountant and a dual US/UK Corning, Inc., Nextera Energy, Inc., citizen. He is a non-executive Harris Corporation and Ryder director of Mead Johnson System, Inc. Nutrition Company.
Key to committee members Audit Board and Risk Committee Nomination Committee Remuneration Committee
Hugh McElroy Michael Scheeringa Iain Simm President, Group President and CEO, Group General Counsel Business Development Flight Support and Company Secretary Directors’ Report 10 Business model
Business Review
BBA Aviation is the only quoted, focused Business Model BBA Aviation’s vision is to be a dynamic, world-class supplier provider of global aviation services and to the global aerospace industry, continuously delivering aftermarket support to operators of exceptional performance. business and general aviation, military and commercial aircraft. We deliver BBA Aviation seeks to maintain a balanced portfolio of market-leading flight support and aftermarket services these services through nearly 12,000 businesses which have good barriers to entry and generate employees at over 220 locations on strong cash flow and that are well placed to benefit from five continents. cyclical and secular growth. These businesses produce above average through-cycle growth rates and attractive financial returns with an overriding objective of growing Simon Pryce exceptional long-term sustainable value for all our Group Chief Executive stakeholders.
We deliver this objective through active management, effective strategy execution, efficient resource allocation and by maximising the Group’s intrinsic cross-business opportunities.
Our Flight Support division (Signature Flight Support and ASIG) provides specialist on-airport support services to the owners and operators of private, business and commercial aircraft. We differentiate ourselves from our competitors through our customer relationships, long-leasehold and customer-relevant network, technical capability and market- leading customer service.
Our Aftermarket Services division (our Engine Repair & Overhaul and Legacy Support businesses and APPH) are focused on the repair and overhaul of engines and the manufacture and support of aerospace components, sub- systems and systems. We operate with high levels of intellectual property rights, established through OEM (Original Equipment Manufacturer) authorisations and licences as well as in-house development from locations that support customer needs. Directors’ Report Our Markets 11
Our Markets FAA Flight Hours and GDP Business and General Aviation US 000s GDP hours Business and General Aviation (B&GA) covers thousands of $bn own aircraft large and small serving a wide variety of roles. 14,000 4,500 Worldwide there are more than 17,000 jets, 13,000 13,500 4,000 turboprops and 18,000 turbine civil helicopters in operation. Our Flight Support division focuses primarily on private and 13,000 3,500 business aircraft in this segment while our Aftermarket 12,500 3,000 Services division supports a broad range of jets, turboprops 12,000 2,500 and helicopters fulfilling a range of private, business, utility 11,500 2,000 and public service roles. Our services to this segment 11,000 1,500 account for approximately two-thirds of BBA Aviation’s 10,500 1,000 revenue. 10,000 500 Activity in both of our divisions is driven by the number of 9,500 0 00 01 02 03 04 05 06 07 08 09 10 11 12 aircraft movements. These, in turn, show a high dependence US GDP Source: BEA and Consensus on the strength of both local and global economies, as Economics; FAA 2012 Forecast well as broader corporate confidence. Ongoing economic FAA Turbojet hours own 2012 hours are forecast; 2011 hours are estimated uncertainty continues to constrain the recovery of the B&GA market and activity in our key US market is still some 23% below its peak. In 2012 there were modest declines in B&GA Aircraft movement trends – USA and Europe B&GA flight activity in both the USA and Europe compared % change with 2011. The more discretionary segments of flying, namely 20 charter and fractional operations, saw the most pronounced declines whereas the “owner” segment of flying proved to be 15 more robust. 10
5 Measures which give a broader indication of the longer-term 0 health of the market and future flying hours include new business aircraft (jet and turboprop) deliveries, the -5 proportion of the fleet held for resale and the price of -10 second-hand inventory. Predicting when a more sustained -15 recovery will take hold remains difficult, but we see no -20 evidence of a structural change in this market. Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Dec 10 10 10 10 11 11 11 11 12 12 12 12 12
The number of new business aircraft delivered in 2012 was Europe ight activity monthly Y on Y change very similar to 2011 and the number of transactions in the US ight activity monthly Y on Y change pre-owned jet market has been rising for the last three years, following a low point in 2009. Pre-owned inventory of Source: FAA ETMSC and EUROCONTROL both turboprops and jets as a proportion of total aircraft in operation also fell during 2012 with prices in both segments relatively stable. Directors’ Report 12 Our Markets
Business Jet and Turboprop deliveries – Deliveries are expected to grow year on year in 2013 with historic and forecast forecasters projecting delivery of some 10,000 new business No. of deliveries jets over the next decade as the global economy gradually 2,000 recovers, businesses seek to replace older jets and emerging markets seek greater access to business aviation, supporting our view of the longer-term prospects for this market.
1,500 The majority of B&GA aircraft are currently concentrated in North America and Europe, and, whilst there is growth
1,000 elsewhere, we expect that this will remain the case for the foreseeable future.
There has been growth in the size of the jet fleet in Asia, 500 however, to achieve sufficient fleet size and flight activity to justify large-scale investment in the region will require such growth to continue for an extended period, as well as the 0 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 development of airport and air traffic control infrastructure along with the freeing up of flight restrictions. Nonetheless, Turboprops Source: 2005-2012 historic deliveries: GAMA (excludes Airbus ACJ, Boeing BBJ, head of this is likely to be a viable market over time and we have Jets state/shuttles, ag turboprops) made initial investments in Asia Pacific, including the Source: 2013-2020 forecast deliveries: Teal Group, December 2012 opening of a regional office and Regional Turbine Centre in (excludes Airbus ACJ, Boeing BBJ and head of state/shuttles, includes caravan turboprops) Singapore during 2012.
North American Commercial That B&GA has weathered the storm of a particularly severe Aviation movements 2007-2012 global economy is testimony to the value that governments, 000s movements corporations and high net worth individuals place on the
13,000 service these aircraft deliver. The security, privacy, flexibility and convenience of B&GA travel continues to make it an 12,000 attractive alternative to an increasingly difficult commercial airline environment with its less efficient use of time, security 11,000 protocols, crowded terminals and limited routing options.
10,000 Commercial Aviation
9,000 In our Flight Support division, our commercial aviation service business provides fuelling, full ground handling and 8,000 technical services to commercial operators around the world. Our Aftermarket Services division also provides some engine, 7,000 accessory and component repair and overhaul services plus spares support to regional jet operators who fly the 6,000 07 08 09 10 11 12 same small thrust capacity engines used in B&GA. BBA Aviation is also a provider of component and accessory Within North America To/From North America
Source: OAG facts December 2012 Directors’ Report Our Markets 13
repair services to the legacy commercial fleet. The primary Military Aviation growth driver for this market is the frequency of commercial Our military service business focuses on the support of aircraft movements. legacy military platforms. Much like the B&GA and commercial markets, this market is driven by flight activity World airline passenger traffic and movements grew at 3% and mission profile. and 1% respectively during 2012, however, airlines continued to manage load factors and, as a result, aircraft movements in For some time we have anticipated defence spending North America and Europe, where the majority of BBA reductions, especially in the West as economies struggle Aviation’s commercial flight support operations are based, with large deficits. We see this as a long-term trend. Whilst were both slightly down during the year. Central and Latin it may result in some modest pressure on maintenance America and Asia continue to exhibit strength. spend in the short-term it has positive implications for life extension of existing platforms as funding is directed away Outsourcing remains an attractive option for commercial from costly new development projects. Our service airlines as a means to control costs by shedding non-core businesses are efficient, flexible and well positioned to services such as ground handling and into-plane fuelling. support the maintenance, overhaul and product needs of the many older, out of warranty aircraft currently in service.
Worldwide distribution of Business Jets and Turboprops
Europe
11% North America 2012 9% 2005 69% Asia 2012 77% 2005 5% 2012 4% 2005
Africa
South America 4% Oceania 2012 9% 3% 2012 2005 2% 2012 6% 2005 1% 2005
Source: 2012 distribution – JetNet 1 January 2013, 2005 distribution – JetNet 1 January 2006 Directors’ Report 14 Our Strategy
Our Strategy
Vision Goals BBA Aviation’s vision and overriding objective of growing Each year BBA Aviation’s Executive Management Committee exceptional long-term sustainable value for all stakeholders sets a series of short and medium-term specific and is shared by all Group businesses which are individually and measurable goals which are then cascaded throughout the collectively focused on: Group. Each business has actions aligned to the achievement ——exceeding customer expectations and competitor of each of the short and medium-term goals and the offerings; execution of those actions is actively monitored by Group ——continuously improving market-leading and innovative management. businesses; ——working together for greater gain through improved Key Performance Indicators co-ordination and co-operation; The successful execution of BBA Aviation’s strategy is ——being an employer of choice for empowered individuals expected to be value creative for shareholders. Progress is in a safe and sustainable environment; monitored using the Key Performance Indicators (KPIs) set ——always behaving with integrity and respect. out on pages 18 and 19. BBA Aviation’s principal longer-term KPIs: earnings per share growth and return on invested Values capital (ROIC) are also directly linked to management BBA Aviation’s employees are also unified around a common incentivisation as set out in more detail in the Directors’ set of values that are a vital and integral part of the way we Remuneration Report on pages 63 to 74. do business.
Our Values
Integrity Responsibility We earn the trust and respect We are committed to managing of our stakeholders with honesty, our impact on, and contributing Integrity fairness, openness and by Responsibility positively to, society and the honouring our commitments. environment.
Performance Safety We focus on delivery of long-term We are dedicated to safety Performance and sustainable value, continuous and security, the elimination of improvement and reliability. Safety hazards and protecting people, property and our environment. People We are committed to investing Service in and empowering our We strive continually to anticipate People people through training and Service customer needs, exceeding their education and to providing expectations. them with opportunities for rewarding careers. Directors’ Report Our Strategy 15
Strategies Each of the divisions has clear business unit strategies to compete effectively in its markets and to deliver growth:
Division Business Growth Strategy and Growth Drivers
Flight Support Signature Flight Support —— Cyclical recovery – upturn of B&GA market, leading to increase in flying hours —— Continued share gain —— Structural growth of B&GA market, leading to increase in flying hours —— Consolidation – FBO acquisitions/licensing to extend network —— Enhanced service offering to customers —— Operational improvement —— Cross-business co-operation to drive customer base/offering and/or operational improvement
ASIG —— Cyclical recovery leading to increase in commercial flight activity —— Contract wins/increased presence at selected hub and international airports —— Enhanced service offering in core locations —— Operational improvement —— Cross-business co-operation to drive customer offering and/or operational improvement
Aftermarket Services ERO —— Cyclical recovery – upturn of B&GA market, leading to increase in flying hours —— New OEM authorisations —— Military and rotorcraft expansion —— Coverage extension – location footprint and/or field service —— Operational improvement —— Cross-business co-operation to drive customer base/offering and/or operational improvement
Legacy Support —— New licences —— Active selling —— Acquisitions of mature technology companies —— Cross-business co-operation to drive customer base/offering and/or operational improvement
APPH —— Operational improvement —— Niche organic expansion —— Cross-business co-operation to drive customer base/offering and/or operational improvement Directors’ Report 16 Our Strengths
Our Strengths
As a tightly focused business, BBA Aviation Market leadership ——We are market leaders in the markets in which we operate is ideally placed to exploit opportunities with strong, recognised brands. in the cyclical but attractive markets in ——Signature Flight Support is the world’s leading fixed base which we operate. Five critical factors operation (FBO) network with 88 wholly owned worldwide will contribute to the continued success locations and 22 additional locations in which we have minority interests. Five further locations operate under licence. of BBA Aviation in the future. ——ASIG is the largest independent refueller in the world. ——Our Engine Repair & Overhaul businesses have market‑ leading positions in the majority of programmes in which they participate.
Barriers to entry ——The requirement for a lease from an airport authority to operate an FBO. The average unexpired lease term of our FBO network in the USA is 17 years. ——The need for an authorisation to provide commercial aviation services at individual airports and the required technical capability around into-plane refuelling. ——The need for a licence from an OEM to service its engines. We are authorised by the OEMs for engine overhauls on 80% of the B&GA engines now in service. ——Intellectual property on aviation component sub-systems and systems which we develop ourselves or which we license from OEMs.
Service orientation/flexible cost base ——Our businesses have a service focus and operate with low asset intensity and a naturally flexible cost base, making them highly cash generative and therefore inherently well suited to deal with market cyclicality as demonstrated through this cycle.
Growth ——There are significant growth opportunities across all of our businesses resulting from cyclical recovery when it comes, structural growth and the scope for continued consolidation in what are generally fragmented markets.
Common focus ——The business is actively managed by an empowered, experienced and motivated management team with a defined Group-wide focus as expressed in BBA Aviation’s vision, mission and values. Directors’ Report Principal Risks and Uncertainties 17
Principal Risks and Uncertainties
Risk Potential Impact Mitigation
General economic —— Reduction in revenues and profits as —— Strong financial controls to monitor financial downturn a result of reduced B&GA and commercial performance and provide a basis for corrective flying and military expenditure action when required —— Low fixed costs allow cost base to be flexed to meet demand —— Mixture of early and later cycle businesses
Catastrophic global —— Reduction in revenues and profits —— Strong financial controls to monitor financial event (terrorism, weather) as a result of reduced B&GA and performance and provide a basis for corrective with a material impact commercial flying action when required on global air travel —— Low fixed costs allow cost base to be flexed to meet demand
Legislative changes —— Reduction in revenues and profits as a —— Active participation in all relevant industry bodies causing material increase result of reduction in B&GA flying hours —— Low fixed costs allow cost base to be flexed to to cost of B&GA flight meet demand relative to alternatives
Ability to attract and —— Loss of key personnel —— Remuneration structure designed to reward superior retain high-quality and —— Lack of internal successors performance and promote retention capable people to key management roles —— Succession planning process embedded with review at —— Short to medium-term disruption Executive Management Committee and Board level annually to the business —— Proactive employee development
Potential liabilities from —— Reputational impact with associated —— Standard operating procedures with routine root cause defects in services and deterioration in customer relationships analysis of all incidents products —— Loss of earnings from liability claims —— Liability insurance
Intentional or inadvertent —— Reputational impact —— Clear corporate policies and education in all major risk areas non-compliance with —— Exposure to potential litigation —— Semi-annual compliance certification by all senior legislation or criminal proceedings management —— Robust internal control environment and regular review by internal and external audit
Potential collapse of Euro —— Economic downturn in Euro zone —— Limited contribution to Group profitability from or exit of a Euro zone affecting revenues and profits Euro zone trading member from the Euro —— Threat to solvency of Euro zone banks, —— Exposure managed according to counterparty credit rating impacting access to cash deposits or —— Strong and broad core banking group and diversified ability to draw committed facilities sources of debt financing
Environmental exposures —— Loss of earnings from cost to remediate —— Strong procedural controls and physical containment or potential litigation when working with fuel or other hazardous chemicals —— Potential for loss of licence to operate —— Active management of known environmental matters —— Greater than expected liabilities to minimise costs to resolve associated with historical operations Directors’ Report 18 Key Performance Indicators
Key Performance Indicators
BBA Aviation uses a range of key Financial KPIs Organic Revenue Growth performance indicators (KPIs), allied Monitoring organic revenue growth provides a measure of to the BBA Aviation vision and mission, the underlying growth of the business. It excludes the to monitor the Group’s progress against impact of foreign currency and fuel price fluctuations and the goals set to support the delivery any contribution from acquisitions and disposals. of our overarching objective to grow 2012 Performance: There was a modest organic revenue exceptional, long-term, sustainable reduction as a result of ongoing softness in our key markets, value for all stakeholders. together with weak de-icing activity.
2012 -1% 2011 5% 2010 4% 2009 -10% 2008 1% -15 -10 -5 0 5 10
Adjusted Earnings per Share Adjusted earnings per share measures the profit attributable to shareholders after the impact of interest and tax. It excludes the impact of exceptional items and is divided by the weighted average number of shares in issue.
2012 Performance: Adjusted earnings per share was unchanged with the reduction in underlying operating profit and increased net interest expense offset by a reduction in the effective tax rate.
2012 29.0¢ 2011 29.0¢ 2010 27.3¢ 2009 22.8¢ 2008 29.7¢ 0 5 10 15 20 25 30 Directors’ Report Key Performance Indicators 19
Non-Financial KPIs Cash conversion Recordable Incident Rate (RIR) BBA Aviation’s cash conversion rate measures how effectively Each of our facilities uses Recordable Incident Rate (RIR) as its we convert operating profit into cash. Focusing on this primary health and safety performance metric. RIR measures measure encourages strong discipline in the management of the number of full-time employees out of every 100 that working capital and decisions on capital expenditure. Good sustain a recordable injury or illness. cash generation enables ongoing investment in growth opportunities. 2012 Performance: We continue to drive improvement in BBA Aviation’s safety performance, albeit the rate of advance of 2012 Performance: Cash conversion declined slightly, as the RIR metric has slowed as we get closer to our goal of zero expected, with increased capital expenditure related to lease incidents. extensions and projects in support of future growth.
2012 91% 2012 3.04 2011 102% 2011 3.08 2010 124% 2010 3.25 2009 179% 2009 4.18 2008 101% 2008 4.90 0 20 40 60 80 100 120 140 160 180 0 1 2 3 4 5
Return on Invested Capital (ROIC) Number of locations achieving zero RIR Measuring ROIC ensures BBA Aviation is focused on the BBA Aviation’s health and safety strategy seeks to deliver a efficient use of assets, with the target of operating returns zero incident environment in which every individual is generated across the cycle exceeding the cost of holding the responsible. This approach is supported by our ZIPP (Zero assets. ROIC is defined for the Group as underlying operating Incident Philosophy & Process) global safety campaign. profit expressed as a percentage of average invested capital at constant currency, including goodwill and intangible 2012 Performance: 2012 was another year of progress with assets amortised or written off to reserves. both the absolute number of sites and proportion of total sites achieving zero RIR again improving compared with 2011. 2012 Performance: Return on invested capital reduced by 60 basis points as a result of the reduction in underlying operating profit. Discipline around invested capital remains an absolute priority focus for BBA Aviation.
2012 10.0% 2012 160 2011 10.6% 2011 134 2010 9.5% 2010 124 2009 8.4% 2009 115 2008 11.1% 2008 101 0 2 4 6 8 10 12 0 20 40 60 80 100 120 140 160 180 Directors’ Report 20 Group Financial Summary
Group Financial Summary
Financial Summary 2012 2011 Inc/(dec) $m $m %
Revenue 2,178.9 2,136.7 2%
Underlying EBITDA 255.9 260.5 (2)%
Underlying operating profit 195.4 198.9 (2)%
Operating profit margin 9.0% 9.3%
Total operating profit 162.7 180.6 (10)%
Underlying profit before tax 163.0 170.2 (4)%
Adjusted earnings per share 29.0¢ 29.0¢ –
Profit for the period 115.5 152.1 (24)%
Free cash flow 121.2 185.8 (35)%
Net debt 416.4 403.6
Net debt to EBITDA 1.6x 1.5x
Return on invested capital 10.0% 10.6% Directors’ Report Group Financial Summary 21
In 2012 Group revenue increased by 2% to $2,178.9 million for further consolidation in the markets in which we operate, (2011: $2,136.7 million). Of this, $15.3 million was the result but will only execute acquisitions at prices where we see of increased fuel prices and $56.5 million came from good opportunities for value creation. Non-cash acquisitions, net of disposals. On an organic basis (excluding amortisation of acquired intangibles totalled $7.6 million the impact of fuel prices, acquisitions and disposals) (2011: $7.9 million). Included within the prior year was an therefore, Group revenue reduced by 1%. exceptional tax credit of $23.7 million relating to the settlement of an old outstanding tax claim in Germany Underlying operating profit (excluding the impact of together with $11.7 million of associated interest. Unadjusted exceptional items) declined $3.5 million or 2% to $195.4 earnings per share were 24.2¢ (2011: 32.5¢). million, and Group operating margin declined to 9.0% (2011: 9.3%). Adjusting for higher fuel prices, underlying margins Free cash flow was again good at $121.2 million (2011: $185.8 were 9.0% (2011: 9.2%). The decline in operating profits and million) with the reduction from 2011 largely attributable to margins was principally due to weaker de-icing when the inclusion in the prior year of a $35.4 million refund of compared to both a normal de-icing season and to 2011. tax and associated interest outlined above, together with increased capital investment related to growth projects The net interest expense increased to $32.4 million (2011: and lease extensions in 2012. As anticipated, the increase in $28.7 million) reflecting the cost of the new long-term bank net capital expenditure to $55.4 million (2011: $29.3 million) and private placement debt facilities put in place in 2011. reflected a number of large projects including the As expected the interest expense was lower in the second establishment of the Legacy fuel measurement facility in than first half when $2 million of cost was accelerated, Cheltenham and the relocation of Signature’s FBO at Chicago principally due to closing out interest rate swaps as part of O’Hare International Airport, as well as asset disposals in the ongoing treasury management. Interest cover reduced to prior year including in relation to the Miami FBO. Tax 7.9x as a result (2011: 9.1x), and underlying profit before tax payments increased to $4.9 million (2011: inflow $8.5 million) decreased by 4% to $163.0 million (2011: $170.2 million). with the prior year benefiting from the German tax refund referred to above. The underlying tax rate of 14.9% (2011: 20.3%) was lower than originally anticipated due to favourable developments in the Total spend on acquisitions and licences completed in the effectiveness and sustainability of our tax structure. Despite year amounted to $35.5 million, including the $27 million the reduction in underlying operating profit and increased acquisition of the trade and assets of PLH Aviation Services net interest expense, adjusted earnings per share were and Dryden Air Services, $3.4 million acquisition of the FBO in therefore unchanged at 29.0¢ (2011: 29.0¢). Omaha, Nebraska, $2.8 million acquisition of the Sun Aircraft Services maintenance business at Washington Dulles and Profit before tax declined by $33.3 million to $130.3 million ERO’s $1.9 million acquisition of Consolidated Turbine (2011: $163.6 million), with exceptional items increasing to Support, Inc. $32.7 million (2011: $6.6 million) of which $12.0 million was non-cash. As anticipated, exceptional items included $13.4 There was a net cash outflow of $13.6 million after paying million of structural cost initiatives including the closure of dividends of $67.9 million. Net debt increased marginally to APPH’s Basingstoke facility and consolidation of transactional $416.4 million (2011: $403.6 million). Our balance sheet processing in finance. We also incurred $6.6 million of remains strong with net debt to EBITDA at 1.6x (2011: 1.5x). acquisition costs relating in part to those acquisitions which we successfully executed during the year, but mainly in Return on invested capital reduced to 10.0% (2011: 10.6%) relation to a number of larger opportunities which we did compared with our through-cycle target of 12.0% pre-tax. not execute as they failed to meet our rigorous capital investment criteria. We continue to see good opportunities Directors’ Report 22 Flight Support
Flight Support
Our Flight Support division provides specialist on-airport support services including refuelling and ground handling to the owners and operators of private, business and commercial aircraft.
Signature Flight Support is the world’s largest and market leading fixed base operation (FBO) network for business aviation with more than 110 locations in the USA, Europe, South America, Africa and Asia. It provides high-quality, full service support for B&GA travel, focused on passenger handling and customer amenities such as refuelling, hangar and office rentals, and other technical services.
ASIG is a global provider of ground, fuel and airport facility services to airlines, airports, oil companies and industry partners in the commercial aviation sector. It safely delivers flexible and comprehensive service solutions including refuelling, ground handling, aircraft technical support services, facilities equipment maintenance and de-icing with considerable technical expertise at more than 80 airports in North America, Central America, Europe and Asia. Directors’ Report Flight Support 23
Financial Summary 2012 2011 Inc/(dec) Performance Summary $m $m %
Revenue 1,321.8 1,330.1 (1)% (4)% Organic growth (4)% 2%
Underlying operating profit 112.5 124.6 (10)% Organic growth Operating profit margin 8.5% 9.4%
Operating cash flow 116.6 189.1 (38)% 104% Cash conversion ratio 104% 152%
Return on invested capital 9.4% 10.6% Cash conversion
Flight Support revenues declined by 1% to $1,321.8 million (2011: $1,330.1 million). Higher fuel prices increased revenue by 9.4% $15.3 million and the net impact of acquisitions and disposals contributed an additional $32.5 million of revenue. On an organic basis Flight Support revenues decreased by 4%. Of Return on this, 1% related to the general reduction in market activity in invested capital both business and general aviation (B&GA) and commercial aircraft movements together with the modest impact on both B&GA and commercial movements from Hurricane Sandy. A further 1% related to weaker de-icing and 2% was due to our exit early in the second half of 2011 from the Miami and Tampa FBOs.
This adversely impacted underlying operating profit for the division, which declined to $112.5 million (2011: $124.6 million) and operating margins which reduced by 80 basis points to 8.5% (2011: 9.3%) after adjusting fuel prices, with the benefit of continued operational improvement more than offset by the shortfall in high margin de-icing activity.
Despite a challenging year, Flight Support again demonstrated strong cash generation with an operating cash flow for the division of $116.6 million (2011: $189.1 million) and cash conversion of 104% (2011: 152%). Return on invested capital reduced by 120 basis points to 9.4% (2011: 10.6%) reflecting the reduction in underlying operating profit.
Directors’ Report 26 Flight Support
Signature Flight Support The world’s largest and market-leading FBO network
Revenue 2012 2011 Inc/(dec) Key Facts $m $m %
USA 788.9 773.0 2% 115 Europe & ROW 164.0 173.4 (5)%
Total 952.9 946.4 1% A truly international FBO network – 115 locations Performance worldwide Signature’s headline revenue increased by 1% to $952.9 million (2011: $946.4 million). US B&GA activity decreased by 1% in the year and European B&GA movements declined by 50 4%. Revenue reduced by 3% organically, which was mainly driven by the exits from Miami and Tampa in 2011. Continued share gains broadly offset market softness and weakness in Unique network – 50 FBOs in fractional flying, which is a greater proportion of top US metro locations Signature’s business than it is of the broader market, due to the location of Signature’s FBOs. >150m Signature continued to expand its network both by way of acquisition and through the increasingly successful Signature Select™ initiative, adding four locations during the year in Over 150 million gallons of Daytona, Florida, Green Bay, Wisconsin, Edmonton, Canada aviation fuel sold per annum and Fort Worth, Texas. All of these locations have been integrated into the existing network successfully and are performing as expected. Additionally the network was extended in Germany with a greenfield operation at Berlin- Schönefeld and we successfully completed and integrated the previously announced FBO acquisition in Omaha, Nebraska. We recently acquired Sun Aircraft Services, a line On previous spread Signature safely tows a maintenance business in support of our FBO at Washington customer aircraft from its Dulles airport. hangar at Signature Las Vegas. At busy times, the Signature Significant progress was made in securing lease extensions Las Vegas team supports around 100 flights per day. at 10 important locations including three sole source FBOs. We commenced two major construction projects with the dedicated NetJets private terminal at Palm Beach International Airport and a new FBO construction at Newark Liberty International Airport associated with a lease extension. A new FBO terminal facility at Chicago O’Hare International Airport opened in August 2012 and since the year‑end we have agreed a new 45-year lease at Luton, Directors’ Report Flight Support 27
A Gulfstream 550 in one of Signature’s dedicated customer hangars.
England and have broken ground on a $32 million terminal There was good operational progress in the year, improving redevelopment. We have also recently been identified as the the safety and quality of the services provided whilst reducing preferred bidder in the RFP at Mineta San Jose International the costs of delivering them. The ongoing focus on customer Airport. San Jose airport staff will recommend to the airport service resulted in another increase in our customer loyalty authority the award of the RFP which will see Signature score from 80% to 84%. Signature also introduced its TailWins™ spend circa $28 million over three years with the FBO customer loyalty programme aimed at rewarding pilots, operational in 2015. There are now a total of 115 FBOs in the schedulers, dispatchers and flight departments for fuel and network globally, with 70 of these in North America. handling purchases and in the first eight months of operation the programme has gained 11,900 members.
Directors’ Report 30 Flight Support
ASIG The world’s leading independent refueller
Revenue 2012 2011 Inc/(dec) Key Facts $m $m %
USA 276.2 289.4 (5)% 83 Europe & ROW 92.7 94.3 (2)%
Total 368.9 383.7 (4)% 83 locations worldwide
Performance ASIG’s revenue declined by 4% to $368.9 million (2011: $383.7 million). Commercial movements in the year reduced 40 by 2% in North America and by 3% in Europe. On an organic basis revenue declined by 6%, reflecting reduced commercial aviation movements and the limited de-icing 40 locations at hub and large international airports activity particularly in the first half of the year when compared to both a normal de-icing season and to 2011. Despite industry-wide TSA employee badging issues in the US, management flexed labour well to deal with decline >10bn in movements and saw good contract gains.
Refuelling contracts were renewed by Federal Express at 27 Over 10 billion gallons US airports including two of their busiest hubs, Indianapolis of aviation fuel pumped per annum and Alliance Fort Worth. We successfully renewed aircraft de- icing agreements with US Airways at eight US airports for a fourth consecutive year. Additionally, after a competitive bid process, Los Angeles World Airports re-awarded the facilities technical maintenance contract for their loading bridges, baggage handling system and a variety of other airport terminal equipment at Terminal 3. On previous spread A380 awaiting tow clearance We also secured several new refuelling contracts in 2012 as at JFK. ASIG’s technical well as new agreements with low cost carrier Spirit Airlines to knowledge of the A380 provide a variety of ground handling and aircraft refuelling has enabled it to enhance its service offering to carriers services at four US airports, including their home base at Fort flying the world’s largest Lauderdale, Florida. We now provide a variety of support passenger aircraft. services to this growing carrier at 11 airports within the USA. There was the disappointing loss of a significant cabin cleaning contract at London Heathrow early in the year, but United Airlines awarded new cleaning contracts at three UK airports including London Heathrow. Directors’ Report Flight Support 31
ASIG fuels a 777 at Atlanta International Airport. Across its global network, ASIG fuels approximately 11,000 flights per day and pumps over 10 billion gallons of jet fuel per annum.
During the period, we signed an exclusive agreement with As previously announced, we acquired for C$27 million GE Aviation to become its third-party service provider for (US$27 million) the trade and assets of PLH Aviation Services ClearCore™ engine wash systems for commercial and military and Dryden Air Services, market-leading airport services engines in the USA. The agreement represents an innovative providers delivering fuel farm management, into-plane and exciting extension of our technical services capability, refuelling, ground handling and de-icing services. This marks supporting customers seeking savings on fuel consumption ASIG’s entry into the attractive Canadian market resulting in and engine maintenance costs. 16 new airport locations in Canada, as well as an enhanced operational capability at Los Angeles International Airport. The acquisition is expected to achieve the Group’s ROIC target in the first full year of ownership. Directors’ Report 32 Aftermarket Services
Aftermarket Services
Our Aftermarket Services division is focused on the repair and overhaul of engines and the manufacture and service of aerospace components, sub-systems and systems.
Our Engine Repair & Overhaul (ERO) businesses are leading independent engine repair service providers to the B&GA market. Together, our ERO businesses have strong and established relationships with all major engine OEMs and are authorised to work on 80% of engines in the B&GA fleet.
Legacy Support is the leading provider of high-quality, cost effective solutions in the continuing support of maturing aerospace platforms to the major aerospace OEMs and airframe operators.
APPH is a niche landing gear and hydraulic sub-systems manufacturer, designing, engineering, manufacturing and supporting systems and sub-systems for original equipment and aftermarket applications. Directors’ Report Aftermarket Services 33
Financial Summary 2012 2011 Inc/(dec) Performance Summary $m $m %
Revenue 857.1 806.6 6% 3% Organic growth 3% 12%
Underlying operating profit 100.5 91.5 10% Organic growth Operating profit margin 11.7% 11.3%
Operating cash flow 93.1 89.7 4% 93% Cash conversion ratio 93% 98%
Return on invested capital 11.2% 10.7% Cash conversion
Revenue in Aftermarket Services increased by 6% to $857.1 million (2011: $806.6 million). Of the increase half was organic 11. 2% and there was a $24.0 million revenue contribution from acquisitions. Return on Underlying operating profit increased by 10% to $100.5 invested capital million (2011: $91.5 million) and operating margins improved by 40 basis points to 11.7% (2011: 11.3%).
Operating cash flow for the division was also strong at $93.1 million (2011: $89.7 million) with 93% of operating profit converted into operating cash flow (2011: 98%). This was net of the $5.9 million cash cost of establishing the Legacy fuel measurement facility in Cheltenham. Return on invested capital improved by a further 50 basis points to 11.2% (2011: 10.7%).
Directors’ Report 36 Aftermarket Services
Engine Repair & Overhaul Leading independent OEM authorised engine repair companies
Revenue 2012 2011 Inc/(dec) Key Facts $m $m %
USA 541.2 511.1 6% 80% Europe & ROW 100.0 101.9 (2)%
Total 641.2 613.0 5% Authorisations supporting 80% of the engines Performance powering the B&GA fleet Revenue in Engine Repair & Overhaul (ERO) improved by 5% to $641.2 million (2011: $613.0 million), of which 3% was organic. Overhaul activity was particularly strong in the >7,000 first half, supported by a healthy engine backlog going into the year, and by ERO’s continued focus on customer support. Overhaul activity slowed somewhat in the second Strong customer relationships half, reflecting the reduced B&GA activity in the second half – global network of more of 2011 and into 2012. than 7,000 customers
We added a number of new engine authorisations and service capabilities during the year. This included the >100 Honeywell HTF7000 engine series through the acquisition of Consolidated Turbine Services which enabled us to be an immediate provider of field service for engines on the More than 100 field service Bombardier Challenger 300 fleet and the new Gulfstream personnel globally G280 certificated in 2012. We also received authorisation from Rolls-Royce to perform field service on the BR710 engine which powers Gulfstream G550 and Bombardier Global Express long-range aircraft, and authorisation from Pratt & Whitney Canada for three additional PW500 series engines, giving the division approval to overhaul all seven On previous spread H+S Aviation’s new Test PW500 models in operation. Cell 5 facility utilises the latest design features for aircraft ERO is the only independent repair and overhaul business to engine performance testing, including testing of the offer this breadth of overhaul service for the entire PW500 GE CT7-8 engine which powers family of engines that currently power Cessna and Embraer the multi-engine Sikorsky S92 aircraft types. We also added General Electric approval for and AgustaWestland AW101 the CT7-8 engine which powers new multi-engine Sikorsky helicopters. S92 and AgustaWestland AW101 helicopters. Directors’ Report Aftermarket Services 37
State-of-the-art data acquisition and software integration enables the test cell console to be reconfigured in minutes for a variety of engine models thereby reducing turn time.
A new Regional Turbine Centre (RTC) was opened in The business continues to focus on internal efficiency Singapore during the year with extensive Honeywell engine opportunities and developed 25 new repair schemes for a support capabilities. Bombardier Aerospace and ERO number of engine models during the year. These repairs reached an agreement for us to provide engine support for provide cost savings, improved turn times and better control all Bombardier North American service centres along with on part quality. global field service. We now hold approvals on all engines used in current production business aircraft by Bombardier as well as many of its legacy products.
Directors’ Report 40 Aftermarket Services
Legacy Support Leading supplier of OEM licensed legacy products
Revenue 2012 2011 Inc/(dec) Key Facts $m $m %
USA 93.9 90.8 3% >4,000 Europe & ROW 53.4 39.3 36%
Total 147.3 130.1 13% Licensed for over 4,000 parts
Performance Legacy Support’s revenue increased by 13% to $147.3 million (2011: $130.1 million) of which 2% was organic with the 18 remaining growth coming from the incremental revenue contribution of the GE fuel measurement business. Legacy Support has more than trebled in size since its acquisition in Relationships with 18 OEM licensors 2006.
During 2012, we completed the build-out of our Cheltenham facility to support the newly acquired fuel measurement >3,000 business and successfully transitioned all fuels production lines. The fuels transition serves as further evidence of our proven and unique product adoption process, with over 130 Diverse, global customer product lines successfully adopted and integrated. base with more than 3,000 customers worldwide
We made further progress on our strategy to grow our electronics capability to address the rapidly growing demand for legacy electronic products with the recent completion of a 4,000 square foot electronics manufacturing and repair facility at our Chatsworth location and the creation of similar capabilities at the Cheltenham facility. Electronics product lines now account for more than a third On previous spread Ontic’s new Cheltenham, of Legacy Support revenues. UK facility supports over 130 legacy fuel gauging and During the year Legacy Support signed a number of new measurement product lines used on leading defence licence agreements, importantly, with new licensors for and commercial aircraft several electronic and electro-mechanical aircraft product lines. platforms including the A319/320, B777, Eurofighter Typhoon and Hawk2. Directors’ Report Aftermarket Services 41
Ontic’s flexible facilities enable the company’s skilled technicians to work on a range of product lines from a single workspace.
Directors’ Report 44 Aftermarket Services
APPH Niche landing gear and associated hydraulic equipment provider
Revenue 2012 2011 Inc/(dec) Key Facts $m $m %
USA 12.7 12.2 4% 40+ Europe & ROW 55.9 51.3 9%
Total 68.6 63.5 8% Supporting products with lifespans of 40+ years Performance In APPH, revenue increased to $68.6 million (2011: $63.5 million), with 9% organic growth which was principally >65% driven by increased spares sales.
We continued to win new business and secured Hawk orders Over 65% of revenues from to fulfil BAE Systems’ sales to both India and Saudi Arabia, programmes where APPH secured contracts to design and build upgraded landing owns the intellectual gear for the Saab Gripen E, and were awarded the landing property rights gear package orders on the new Super Lynx 300. New programme ramp‑ups have proceeded well, with first deliveries on the Augusta Westland AW159 programme. 60%
Management continues to drive operational improvement and in the year announced and completed the closure of Integrated logistics support its Basingstoke facility and successfully transferred to its 60% aftermarket support Runcorn facility the component repair and overhaul capability to support its in-house needs.
On previous spread Landing gear in the drop test area at APPH Runcorn. Drop tests assess the integrity of the landing gear design and are a fundamental part of the development process. Directors’ Report Aftermarket Services 45
An APPH technician assembles a Saab Gripen main landing gear at APPH’s Runcorn facility. Directors’ Report 46 Corporate Social Responsibility
Corporate Social Responsibility
Every day our people put our values In recent years, BBA Aviation’s CSR activities have become more aligned and more focused across the Group. Our CSR into action with pride, performing goals are actively promoted and supported by management services for customers safely, systems at all levels. Through this we are able to make a responsibly and with integrity. bigger difference in the areas we choose to focus on.
Stretching health and safety and environmental targets are Corporate Social Responsibility (CSR) applied at each of our businesses down to site level and we is embedded in BBA Aviation’s vision, have formal frameworks and policies in place that guide mission and values and is fundamental behaviour and assist us in areas such as Business Ethics, to our objective of creating sustainable Community Involvement and Charitable Giving. long-term value for all our stakeholders. CSR is important to our stakeholders and our aim is to achieve continuous improvement in all aspects of CSR every
Mark Harper year. We involve our employees personally in these efforts Non-Executive Director and and invest in new technologies, equipment and training and CSR Responsible Director development programmes where we believe we can make a difference. Our businesses have much in common and plenty to learn from each other and we encourage working together, sharing ideas and good practices.
On the BBA Aviation website (www.bbaaviation.com) you can read more about BBA Aviation’s approach to CSR including downloadable copies of our current and past years’ CSR Reports together with copies of our relevant policies and case studies showing some of the varied projects BBA Aviation’s businesses have been undertaking. Directors’ Report Corporate Social Responsibility 47
BBA Aviation’s Approach to CSR External reporting, recognition and rewards The following is an extract from BBA Aviation’s “Approach to BBA Aviation’s commitment to the environment CSR” policy document which is reviewed each year by the and to health and safety continues to be recognised Board. The full document, which deals with additional areas by our customers, our business partners and by such as Business Ethics, Transparency and Human Rights can accreditation organisations. be found in the CSR section of the BBA Aviation website.
Health and Safety Awards Shell Goal Zero award —— We are committed to achieving a working environment The Green Organisation, scheme, Health, Safety, National Green Hero Award Security & Environmental which is safe, secure and which supports healthy lifestyles APPH Nottingham Two Double Platinum Awards —— We will aim to pursue, achieve and promote best practices ASIG London Gatwick on Health and Safety specific to the aviation industry Dallas Water Utilities, Blue Thumb Award for Shell Goal Zero award environmental protection, scheme, Health, Safety, Employees pollution prevention, Security & Environmental —— We value the diversity of our employees and promote an water conservation Double Platinum Award inclusive environment recognising the importance of Dallas Airmotive ASIG London Luton equality of opportunity The Green Organisation, Shell Goal Zero award —— We support employees through training and Green Apple Environment scheme, Health, Safety, development, encouraging them to expand their Award – Silver winner Security & Environmental capabilities and realise their potential H+S Aviation Gold Award ASIG London Stansted Chicago Department Environment of Aviation, Four Green Shell Goal Zero award —— We will manage, and strive to reduce, our environmental Airplane Certification scheme, Health, Safety, impact through the more efficient use of the resources Signature Chicago Security & Environmental our businesses consume Gold Award Conoco-Phillips, ASIG Birmingham —— We will support innovative developments in Safety Award technologies that support our business objectives and ASIG Doncaster Shell Goal Zero award can offer environmental, community and social benefits scheme, Health, Safety, LAN Chile, Safety Ground Security & Environmental Handling Award Gold Award Community ASIG Los Angeles ASIG Bournemouth —— We will identify opportunities to benefit local communities where we operate through community Shell Goal Zero award scheme, Health, Safety, involvement and charitable giving Security & Environmental Gold Award CSR KPIs ASIG London City Details on the positive trend in BBA Aviation’s CSR KPIs can be found on the next page of this report for both health and safety and environment measures.
We have been a member of the FTSE4Good index as BBA Aviation plc since 2006. We have also participated in the Carbon Disclosure Project since 2006. Directors’ Report 48 Corporate Social Responsibility
Corporate Social Responsibility
Health and Safety Safe tow pins BBA Aviation’s health and safety strategy seeks to deliver a zero incident environment in which all employees take responsibility. The Group-wide Recordable Incident Rate (RIR) at the end of 2012 was 3.04, an improvement 13 of 1% on 2011. 160 out of 252 BBA Aviation reporting locations achieved an RIR of zero during the year, demonstrating the growing maturity of our safety improvement programmes. Some highlights are shown in the table below: Tow it like you own it Platinum pins awarded In 2012 Signature Flight Support introduced a new employee Notable achievements recognition programme to Signature 27 sites have had no Recordable Incidents* and enhance its already successful 51 Flight Support 3 sites have achieved over 5 years since their last safe tow compliance policy. Recordable Incident The programme gives formal recognition to those who carry ASIG 29 sites have had no Recordable Incidents* and out safe tows of aircraft using Gold pins awarded 2 sites have achieved over 5 years since their last coloured aircraft shaped pins: Recordable Incident silver for 100 safe tows, gold ERO 7 sites have had no Recordable Incidents* for 500, platinum for 1,000. Signature had awarded 320 256 Legacy Support 2 sites have had no Recordable Incidents* pins by the end of 2012. APPH All APPH sites achieved a Zero RIR result in 2012
* since start of 2007 or since opening (where later) Silver pins awarded
Environment Electricity use BBA Aviation’s environmental reporting system requires each site to record its use of resources, enabling each to track progress and to focus on measures that will drive continuous improvement in performance. -36% The table below shows the trends over the past five years in the Group’s environmental KPIs which are normalised for comparison purposes to dollars Hangar lighting upgrades of revenue. We use the services of an external consultant to review BBA White Plains, New York In Signature’s Northeast region Jan – May 11 vs Jan – May 12 Aviation’s process for collecting and consolidating this data and are prepared projects were undertaken to for the future implementation of greenhouse gas emissions reporting. replace older, less efficient hangar lighting systems with the intention of lowering electricity -23% Units 2011 2010 2009 2008 2007 consumption. Traditional Metal Halide type fixtures were replaced Electricity KiloWattHr/ 55,188 66,621 71,926 58,689 70,352 with T-5 fluorescent installations Consumption $m revenue and ambient light and Morristown, New Jersey GHG Emission Tonnes/ 61.45 75.31 81.42 57.71 55.80 occupancy sensors were added. Jan – May 11 vs Jan – May 12 $m revenue A comparison of total electricity use (kWh) at each site for the same Water Thousand litres/ 196 213 244 192 234 period pre and post installation Consumption $m revenue indicates that the projects have Revenue $m 2,136.7 1,833.7 1,686.1 2,138.8 1,958.8 made a significant contribution to an overall reduction in use. 2012 figures available in Q2 2013 Directors’ Report Corporate Social Responsibility 49
Employees BBA Aviation women Our businesses provide each of our employees with specific and relevant job-related training and personal support while, at Group level, we develop programmes – for example leadership and general skills training – that can 17% be implemented across all sites.
Developing our talented employees is important for the future leadership of Working together on training of senior executive positions BBA Aviation. A number of internal appointments and promotions were In line with BBA Aviation’s focus made this year as part of developing our talent pool. Further leadership on sharing knowledge and development initiatives will follow in 2013. best practice between teams, maintenance employees at two 22% Dallas Airmotive regional turbine BBA Aviation is also continuing to implement the local action plans that were centres – Charlotte and Millville – developed following the 2011 employee engagement and safety culture received hands-on aircraft tow perception survey and focus groups. This work has led to a number of training from Signature experts in of total employees successful new projects and will continue in 2013. February 2012. Signature performs over 270,000 aircraft movements every year, making it the ideal partner for ERO locations keen to improve tow training and procedures. ERO and Signature have also collaborated on ergonomics training at Signature bases.
Community Joplin relief effort BBA Aviation’s Group-wide Community Involvement and Charitable Giving Framework sets out the approach our sites should take to projects, volunteering and fundraising in their local communities. 1,000
Each of our sites and businesses recognises the importance of being a good neighbour and contributing to the community in which it operates. Having this Making a bigger difference Volunteering hours framework has led to a more structured way of working and has encouraged In May 2011 Joplin, Missouri was hit our businesses and employees to focus on fewer, more ambitious activities, by the deadliest tornado seen in enabling our teams to make a bigger contribution to the causes that they the USA since 1947. Joplin is less care about and fostering longer-term relationships with those organisations. than 30 miles away from ERO's $13,255 Premier Turbines facility in Neosho. Local ERO employees provided an Charitable giving programme immediate response to the disaster, BBA Aviation’s parent company charitable giving programme is designed to donating food, clothing and Donated by ERO employees complement and enhance the many fundraising and community activities ongoing support for the clean-up of the affected area. ERO has undertaken by BBA Aviation employees around the world. Since 2010, the continued its support through programme has donated more than $650,000 to organisations with strong fundraising events and over 1,000 1,000 local connections to BBA Aviation sites and to organisations in the aviation, volunteering hours. ERO's efforts led them to win the Community and engineering or education sectors. environment award in the BBA Aviation Leadership Awards 2011/12. School backpacks filled
Directors’ Report Financial Matters 51
Financial Matters acquisitions contributed approximately $28.1 million of revenue, the fair market value of the assets acquired was $12.6 million, and the goodwill arising on the acquisitions was $22.5 million. Further Mark Hoad details of the acquisitions are given in note 24 of the Consolidated Group Finance Director Financial Statements. In 2011 the Group acquired GE Aviation Systems’ fuel measurement business and seven FBOs for a total cash consideration of $128.7 million. The Group disposed of the FBO at St Louis, Missouri for a cash consideration of $3.3 million.
Interest The underlying net interest charge amounted to $32.4 million Exchange Rate (2011: $28.7 million) with the increase due to the higher costs BBA Aviation’s revenues, cash flows and balance sheet are associated with the new bank facility and the US private placement principally denominated, and as a result reported, in US dollars. being in place for the full year compared with a only a part year in The exchange rates used to translate the key non-US dollar flows 2011. Interest cover reduced slightly to 7.9x (2011: 9.1x). Cash interest and balances were: payments increased to $31.4 million (2011: $21.5 million), due to the 2012 2011 2010 inclusion in the prior year of the interest element of the German Sterling – average 1.59 1.60 1.55 tax refund, partially offset by payment in 2011 of fees associated Sterling – spot 1.62 1.55 1.57 with the new bank facility and US private placement notes. Euro – average 1.29 1.39 1.34 Tax and Dividends Euro – spot 1.33 1.29 1.34 The normalised tax rate reduced to 14.9% (2011: 20.3%) as a result of favourable developments in our tax positions. Central Costs At the time of the interim results, the Board declared an Unallocated central costs were broadly unchanged at $17.6 million increased interim dividend of 4.20¢ per share (2011: 3.99¢ per (2011: $17.2 million). share). The Board is now proposing a final dividend of 10.45¢ per share (2011: 9.95¢ per share), taking the dividend for the full year to Exceptional Items 14.65¢ per share (2011: 13.94¢ per share), an increase of 5%. Total exceptional items in the year amounted to a charge of $32.7 million (2011: $6.6 million). The exceptional items include Pensions $17.0 million in restructuring expenses (2011: $1.3 million) relating The combined accounting deficit for the UK and US pension principally to the closure of APPH’s Basingstoke facility and to the schemes increased to $66.3 million (2011: $53.5 million) principally finance function transformation project, and $8.1 million of other as a result of a further reduction in corporate bond yields which operating expenses relating largely to acquisition costs (2011: increased gross liabilities. $3.8 million). Amortisation of acquired intangibles amounted to As agreed on completion of the 2009 triennial valuation, $7.6 million (2011: $7.9 million). the Company made deficit contribution payments to the UK Included in the prior year was a $5.3 million loss on disposal scheme of $6.1 million (£3.75 million) during the year. The of businesses relating principally to a goodwill write down Company has agreed to pay a further $7.7 million (£4.75 million) following our exit from the Tampa FBO and an exceptional interest per annum during 2013 and 2014. The next triennial valuation is credit of $11.7 million associated with the settlement of an old currently underway. outstanding tax claim in Germany. The German tax refund of A revised pensions accounting standard, IAS 19, is effective $23.7 million was shown below profit before tax. from 1 January 2013. The impact of this revised standard is to In total, exceptional items gave rise to a $20.7 million cash move scheme administration costs from net interest expense to outflow (2011: $30.9 million inflow). operating expenses, and to calculate interest income on scheme assets based on the scheme discount rate rather than on expected Acquisitions and Disposals returns on scheme assets. Had IAS 19 been effective in 2012, During 2012 the Group acquired four businesses for a total initial underlying profit before tax would have been $5.2 million lower consideration of $35.1 million. In our Flight Support division we and adjusted basic EPS 1.1 cents per share lower. acquired the trade and assets of PLH Aviation Services and Dryden Air Services, expanding ASIG’s presence into Canada for the Cash Flow and Debt first time. Signature Flight Support acquired an FBO in Omaha, Free cash flow of $121.2 million reduced by 35% compared with Nebraska and a line maintenance business in Washington D.C. In the prior year (2011: $185.8 million), but was in line with our the Aftermarket Services division ERO expanded its field service expectations with a higher level of planned capital expenditure. capabilities for the Honeywell HTF7000 engine via its acquisition The prior year included a $35.4 million refund of tax and associated of Consolidated Turbine Support Inc in Phoenix, Arizona. These interest in relation to an old outstanding tax claim in Germany. Directors’ Report 52 Financial Matters
Gross capital expenditure increased slightly to $56.5 million At the end of 2012, the Group had a committed bank facility of (2011: $43.9 million), with the Group continuing to invest in support $750 million of which $250 million was drawn. In addition, the of future growth and in relation to lease extensions at Signature. Group had $300 million of US private placement loan notes which This represents a capital expenditure to depreciation ratio of were fully drawn. These facilities are subject to cross-default. 0.9 times (2011: 0.7 times). In addition, the Group maintains uncommitted facilities for The cash dividend payment in the year amounted to daily working capital fluctuation purposes. At the end of 2012, $67.9 million (2011: $63.7 million) reflecting the increased dividend the undrawn amount of these uncommitted facilities totalled per share declared. $21.1 million. During the year €50 million and $75 million of cross The rationale for preparing the financial statements on a currency swaps were closed out at a cash cost of $10.9 million. going concern basis is set out on page 75. As at 31 December 2012, $125 million of cross currency swaps with a mark-to-market loss of $21.8 million remained outstanding, all of Interest Rate Risk Management which are due to mature in the first half of 2013. Net debt increased The interest rate exposure arising from the Group’s borrowing by $12.8 million to $416.4 million (2011: $403.6 million) and net and deposit activity is managed by using a combination of fixed debt to EBITDA was broadly unchanged at 1.6x (2011: 1.5x). and variable rate debt instruments and interest rate swaps. The A significant proportion of our debt is held in US dollars as a Group’s policy with respect to interest rate risk management is to hedge against our US dollar assets. A profile by currency is shown fix portions of debt for varying periods based upon our debt in the table below: maturity profile and an assessment of interest rate trends. At the end of 2012, approximately 44% of the Group’s total borrowings (Debt)/Cash Profile by Currency were fixed at weighted average interest rates of 4.47% for a 2012 2011 weighted average period of one year. $m $m US dollars (439) (425) Currency Risk Management Sterling 11 9 The Group’s policy is to hedge all significant transactional currency Euros 7 11 exposures through the use of forward currency contracts. The Others 5 1 Group’s policy is to draw its borrowings principally in US dollars in order to match the currency of its cash flows, earnings and assets, Total (416) (404) which are principally denominated in US dollars.
Having refinanced its debt facilities in the first half of 2011 the Group enjoys long-dated committed facilities with a $750 million bank facility with $250 million maturing in 2014 and $500 million in 2016, as well as $300 million of US private placement notes which mature between 2018 and 2023. The Group policy with respect to cash deposits is only to have deposits with pre-approved banks with limits on the amounts deposited with each institution dependent on their long-term credit rating. Deposits are generally for short-term maturity (less than three months).
Financial Risk Management and Treasury Policies The main financial risks of the Group relate to funding and liquidity, interest rate fluctuations and currency exposures. A central treasury department that reports directly to the Group Finance Director and operates according to objectives, policies and authorities approved by the Board, manages these risks. The overall policy objective is to use financial instruments to manage financial risks arising from the underlying business activities and therefore the Group does not undertake speculative transactions for which there is no underlying financial exposure. More details are set out in note 17 to the Consolidated Financial Statements.
Funding and Liquidity The Group’s operations are financed by a combination of retained profits, equity and borrowings. Borrowings are generally raised at Group level from banks and then lent to operating subsidiaries. The Group maintains sufficient available committed borrowing facilities to meet any forecasted funding requirements. Directors’ Report Additional Disclosures 53
Additional Disclosures indemnity provisions as defined by s309B of the Companies Act 1985 or s234 of the Companies Act 2006, as applicable. At the date of this report, these indemnities are therefore in force for the Group Results and Dividends benefit of all the current directors of the Company and other The results for the year ended 31 December 2012 are shown in the members of senior management. Consolidated Income Statement on page 78. On 1 November 2007 a subsidiary of the Company, BBA The directors recommend the payment of a final ordinary Aviation Finance, entered into qualifying third party indemnity share dividend for 2012 of 10.45¢ net per share on 24 May 2013 to provisions as defined by s234 of the Companies Act 2006 in favour shareholders on the register at the close of business on 12 April of its directors under which each director is indemnified against 2013, which together with the interim dividend paid on liabilities incurred by that director in respect of acts or omissions 2 November 2012 makes a total of 14.65¢ net per ordinary share for arising in the course of their office or otherwise by virtue of their the year (2011: 13.94¢). Shareholders will receive their dividends in office and such provisions remain in force as at the date of this sterling unless they have previously elected to receive their report. dividends in US dollars. Shareholders who wish to receive dividends in US dollars must make the appropriate election to Employee Information Capita Registrars no later than 5.30pm Monday 29 April 2013. The Company provides employees with various opportunities to A new election is not required if shareholders have previously obtain information on matters of concern to them and to improve made a valid election to receive dividends in US dollars. Further their awareness of the financial and economic factors that affect information concerning the dividend currency election can be the performance of the Company. These include “all hands found on the Company’s website at www bbaaviation.com. briefings”, staff forums and meetings with trade unions that take place throughout the year. In 2012 a number of communication Acquisitions and Disposals initiatives have been launched to foster effective two-way Acquisitions and disposals in the year are described on page 51. communication around the organisation. All companies within the Group strive to operate fairly at all Events After the Balance Sheet Date times and this includes not permitting discrimination against any There are no disclosable events after the balance sheet date. employee or applicant for employment on the basis of race, religion or belief, colour, gender, disability, national origin, age, Research and Development military service, veteran status, sexual orientation or marital status. The Group continues to devote effort and resources to research This includes giving full and fair consideration to suitable and development of new processes and products. Costs of applications from disabled persons for employment and making $3.9 million have been charged to the income statement during appropriate accommodations so that if existing employees the year. become disabled they can continue to be employed, wherever practicable, in the same job or, if this is not practicable, making Market Value of Land and Buildings every effort to find suitable alternative employment and to The directors are of the opinion that the market values of the provide relevant training. Group’s properties are not substantially different from the values included in the Group’s Consolidated Financial Statements. Agreements Under s992 of the Companies Act 2006 the Company discloses Board of Directors that in the event of a change of control in the Company: (i) the The current directors of the Company at the date of this report Company’s $750 million revolving credit facility dated 21 April appear on pages 8 and 9. Susan Kilsby joined the Board on 10 April 2011 and its $300 million private note placement dated May 2011 2012. All the other directors held office throughout the financial could become repayable; and the Engine Lease Agreement dated year under review. 29 June 2009 (as amended) under which $67 million of aircraft engines have been leased to the ERO business could be Directors’ Interests in Shares terminated; (ii) certain authorisations issued to the ERO business Directors’ interests in shares and share options are contained in to carry out certain works on the authorising OEM’s engines the Directors’ Remuneration Report. could become terminable by the relevant OEM (OEMs include Rolls-Royce, Pratt & Whitney Canada and Honeywell); and (iii) the Directors’ Indemnities operating licence with London Luton Airport Operations may be The Company has entered into deeds of indemnity in favour of terminable. Under s992 of the Companies Act 2006 the Company each of its directors under which the Company agrees to also discloses an employment agreement between a subsidiary indemnify each director against liabilities incurred by that director company and Keith Ryan entered into in July 2002 which has in respect of acts or omissions arising in the course of their office provisions such that in certain circumstances relating to a change or otherwise by virtue of their office. In addition, the Company has of control of the Company he could receive compensation upon entered into indemnity deed polls in substantially similar terms in termination of employment of up to a year’s remuneration, based favour of members of the Executive Management Committee on base salary, bonus, benefits in kind and pension rights during and other members of senior management. Where such deeds the notice period. are for the benefit of directors they are qualifying third party Directors’ Report 54 Additional Disclosures
Under s417 of the Companies Act 2006 the Company discloses Resolutions at the Annual General Meeting that certain IT systems that support the ERO, Legacy Support and The Company’s AGM will be held on 10 May 2013. Accompanying APPH businesses and the banking and private note placement this Report is the Notice of AGM which sets out the resolutions to facilities referred to in the paragraph above are essential to the be considered and approved at the meeting together with some business of the Company. explanatory notes. The resolutions cover such routine matters as the renewal of authority to allot shares (referred to earlier), to Management Report disapply pre-emption rights and to purchase own shares. The management report required by the provisions of the Disclosure and Transparency Rules is included within this Directors’ Substantial Shareholdings Report and has been prepared in consultation with management. The Company has been notified, as at 28 February 2013, of the following material interests in the voting rights of the Company Suppliers Payment Policy under the provisions of the Disclosure and Transparency Rules: The Company and Group’s policy is to settle terms of payment % with suppliers when agreeing the terms of each transaction, to ensure that suppliers are made aware of the terms of payment Aviva plc and its subsidiaries 8.63 and to abide by the terms of the payment. William H. Gates III 6.09 Harris Associates L.P. 4.96 Share Capital Standard Life Investments Ltd 4.84 Details of the Company’s share capital and changes to the share Newton Investment Management Limited 4.98 capital are shown in note 21 to the Consolidated Financial Black Rock, Inc. 4.97 Statements. That note also contains a summary of the rights Jupiter Asset Management Limited 4.39 attaching to each class of shares and details of the number of ordinary shares held in employee benefit trusts. Awards granted Barclays Global Investors 3.86 under the Company’s share plans are satisfied either by shares held in the employee benefit trusts or by the issue of new shares Charitable and political donations when awards vest. The Remuneration Committee monitors the Group donations to charities worldwide were $575,000 (2011: number of awards made under the various share plans and their $565,000) with UK charities receiving $67,000 (2011: $113,000). potential impact on the relevant dilution limits recommended by No donations were made to any political party in either year. the Association of British Insurers. Based on the Company’s issued share capital as at 31 December 2012 these were (in respect of the Auditor limit of 10% in any rolling 10-year period for all share plans) 4.2% As required by s418 of the Companies Act 2006, each of the and (in respect of the limit of 5% in any rolling 10-year period for directors, at the date of the approval of this report, confirms that: discretionary share plans) 2.8%. a) so far as the director is aware, there is no relevant The Company was given authority to purchase up to 14.99% audit information of which the Company’s auditor is of its existing ordinary share capital at the 2012 Annual General unaware; and Meeting (AGM). That authority will expire at the conclusion of the b) the director has taken all the steps that he ought to have AGM in 2013 unless renewed. Accordingly, a special resolution to taken as a director to make himself aware of any relevant renew the authority will be proposed at the forthcoming AGM. audit information and to establish that the Company’s The existing authority for directors to allot ordinary shares auditors are aware of that information. will expire at the conclusion of the 2013 AGM. Accordingly, an Words and phrases used in this confirmation should be ordinary resolution to renew this authority will be proposed at the interpreted in accordance with s418 of the Companies Act 2006. forthcoming AGM. In addition, it will be proposed to give the directors further authority to allot ordinary shares in connection A resolution to reappoint Deloitte LLP as auditor of the Company with a rights issue in favour of ordinary shareholders. This is in line will be proposed at the AGM. with guidance issued by the Association of British Insurers. If the directors were to use such further authority in the year following Directors’ Report approved by the Board on 28 February 2013 and the 2013 AGM, all directors wishing to remain in office would signed on its behalf by: stand for re-election at the 2014 AGM. Details of these resolutions are included with the Notice of Iain Simm AGM enclosed with this Report. Group General Counsel and Company Secretary Directors’ Report Directors’ Corporate Governance Statement 55
Directors’ Corporate Governance Statement
Michael Harper I am pleased to introduce the Directors’ Corporate Governance Chairman Statement. The Board is responsible for ensuring the continuing long-term success of BBA Aviation and the delivery of long-term, sustainable value creation for all of BBA Aviation’s stakeholders. The Board firmly believes that a major contributor to that success is good and appropriate corporate governance that is relevant to BBA Aviation, the markets in which it operates and delivery of its long-term, strategic objectives. The Board is therefore committed to ensuring that appropriate standards of governance are maintained throughout the Group. The Board also considers that its own continuing effectiveness is vital to the Group delivering its strategic objectives. As Chairman I am responsible for leading the Board and ensuring ongoing improvement in the Board’s effectiveness, supported by all members of the Board, but in particular by Nick Land, the Senior Independent Director, who also independently meets with the other directors and is available if required to meet with shareholders. As a Board, and as individual directors, we strive to continuously improve the effectiveness of the Board and its Committees in support of the Group’s objective of delivering exceptional long‑term sustainable value for all our stakeholders. In 2011 our Board performance evaluation was externally facilitated and we used the action points from that when setting Board objectives in 2012 and in developing and undertaking our internal evaluation in 2012. We keep our policies and procedures under regular review, bearing in mind the ever evolving business and governance environment that we operate in, as well as drawing on the range of experience offered by Board members. While we value the longevity of service of the longer- serving members of the Board and the depth of understanding of our businesses that they bring, the Board and the Nomination Committee is aware of the importance of progressive refreshment of the Board. As a first step to implement that progressive refreshment we welcomed Susan Kilsby to the Board in April 2012. The Corporate Governance Statement that follows gives more details about our governance policies and procedures, about the structure of our Board Committees and about the areas our meetings focus on. Board members appreciate their interactions with shareholders and listen carefully to any comments. I welcome your comments on this Corporate Governance Statement and on the 2012 Annual Report more generally.
Michael Harper Chairman 28 February 2013 Directors’ Report 56 Directors’ Corporate Governance Statement
1. Compliance 3. 2012 Board and Board Committee Meeting Attendance The Board is committed to ensuring appropriate standards of The following table shows the attendance of Board and Board corporate governance are maintained at BBA Aviation plc. Committee members at scheduled meetings. It does not show The Company applies the principles of corporate attendance by non-Committee members at meetings to which governance set out in the UK Corporate Governance Code they were invited. published in June 2010 (the Code) which sets out the Audit standards of good practice in relation to board leadership and and Risk Remuneration Nomination effectiveness, accountability, remuneration and relations with Board Committee Committee Committee shareholders. The Code is publicly available at the website Number of of the Financial Reporting Council: www.frc.org.uk. The Board scheduled meetings 8 5 4 1 monitors the evolution of corporate governance best practice, Michael Harper 8 1 reviews and updates its procedures as required and adopts, Simon Pryce 8 where relevant, recommendations of governance review bodies. Mark Hoad 8 The directors can confirm compliance throughout 2012 Nick Land 8 5 4 1 with all relevant provisions set out in the Code. The Independent Auditor’s Report concerning the Mark Harper 8 5 4 1 Company’s compliance with the Code appears on page 77. Susan Kilsby* 7 4 3 1 Peter Ratcliffe 6 4 4 1 2. The Board’s Role Hansel Tookes 8 5 4 1 The Board recognises its collective responsibility for the long-term success of the Company. Its role includes providing effective *Susan Kilsby was appointed to the Board, Audit and Risk, Remuneration leadership and agreeing the Group’s strategic aims. It assesses and Nomination Committees on 10 April 2012. business opportunities and seeks to ensure that appropriate controls are in place to assess and manage risk. It is responsible for Directors unable to attend a meeting discuss with the relevant reviewing management’s performance and oversees senior level chairman their views on the business of that meeting. succession planning within the Group. The Board is responsible for setting the Company’s values and standards, ensuring the 4. The Board and Independence Company’s obligations to its shareholders are met. At the date of this report, the Board comprises the Chairman, five There were eight scheduled Board meetings in 2012. Details independent non-executive directors and two executive directors of attendance at scheduled Board and Board Committee who contribute a wide range of complementary skills and meetings are shown in the table in section 3. Board meetings experience. Set out on pages 8 and 9 are short biographies of focus on strategy and financial and business performance. each director, including that of Susan Kilsby who was appointed Additional meetings are called as required to deal with specific to the Board on 10 April 2012. During 2012 Michael Harper retired matters. The Board agenda is set by the Chairman in consultation as chairman and board member of Vitec plc. with the Group Chief Executive, the Group Finance Director, other The Board has determined that Nick Land, Mark Harper, Board members and the Group Secretary. Peter Ratcliffe, Susan Kilsby and Hansel Tookes are independent in The Board has a formal schedule of matters reserved to it for character and judgement. The Company has formal procedures in decision including approval of matters such as: place to ensure that the Board’s powers to authorise conflicts are ——strategy and objectives operated effectively and such procedures have been followed ——Group policies throughout 2012. ——annual budgets The Board has decided that all Board members wishing to ——dividends continue serving on the Board will retire and stand for re-election ——acquisitions and disposals of businesses (over a certain size) at the 2013 AGM. The Board believes that each of the directors ——expenditure over a certain limit should be re-elected by shareholders because each continues to ——financial results be effective and demonstrates commitment to the role that each ——appointment and removal of directors and company secretary of them performs. During the year the Chairman met the other non-executive This schedule of matters is reviewed by the Board each year. directors without the attendance of the executive directors on a Matters outside the scope of this formal schedule are decided by number of occasions. There was a formal meeting of the Senior management in accordance with delegated authorities approved Independent Director and non-executive directors without the by the Board and by the Audit and Risk Committee. Chairman present which included a review of the performance of The Chairman and each of the non-executive directors the Chairman (taking into account the views of the executive has provided assurances to the Board that they remain fully directors). There were several other occasions during the year committed to their respective roles and can dedicate the when discussions between various directors took place on an necessary amount of time to attend to the Company’s affairs. informal basis. Executive directors must obtain the prior consent of the Board before accepting a non-executive directorship in any other company. Executive directors may retain the fees from any such directorship. No executive directors held non-executive directorships during 2012. Directors’ Report Directors’ Corporate Governance Statement 57
5. Chairman and Group Chief Executive the Group. For itself the Board does continue to have an aspiration Throughout 2012 there has continued to be a clear division of to increase female representation on the Board and, when responsibilities between the Chairman and the Group Chief engaging external search consultants to identify future candidates Executive. Michael Harper as the Chairman is primarily responsible for Board roles, such consultants would be requested to take full for leading the Board and ensuring its effectiveness. Simon Pryce account of all aspects of diversity in preparing their candidate list. as the Group Chief Executive is responsible for the development Across BBA Aviation as at 31 December 2012 three of the and (after discussion and agreement with the Board) ten member Executive Management Committee were women, implementation of Board strategy and policy and the running approximately 17% of the senior executive positions in BBA of the Group’s business. The written statement of the division of Aviation were held by women; and approximately 22% of the responsibilities between the two positions was last reviewed by Group’s total workforce were women. the Board in December 2012. There is a written framework for the induction of new directors which includes site visits, meetings with senior management and advisers and the provision of corporate Michael Harper as Chairman is primarily responsible for: documentation. The focus of any induction programme is tailored ——leading the Board and ensuring its effectiveness; to the background of the new director concerned. The induction ——setting the Board agenda and ensuring the directors of a new executive director would be mostly focused on the receive information in an accurate, clear and timely manner; obligations and requirements of being the director of a listed ——promoting effective decision-making; company. An induction for a non-executive director who already ——ensuring the performance of the Board, its committees holds other listed company directorships (as was the case for and individual directors are evaluated on an annual basis; Susan Kilsby who joined the Board in April 2012) would be more and focused on introducing the director to the businesses within BBA ——ensuring that appropriate Board training and development Aviation. New non-executive directors are also available to meet occurs. major shareholders on request. Appointments of non-executive directors are made by the Simon Pryce as Group Chief Executive is responsible for: Board for an initial term of three years. This term is subject to the ——the development and (after discussion and agreement usual regulatory provisions and continued satisfactory performance with the Board) implementation of Board strategy of duties following the Board’s annual performance evaluation. and policy; Re‑appointment for a further term is not automatic but may be ——the running of the Group’s business; made by mutual agreement. All continuing directors of the ——ensuring that the business strategy and activities are Company will retire and stand for re-election at the 2013 AGM. effectively communicated and promoted within and The fees of the non-executive directors are determined outside the business; and by the Board as a whole on the recommendation of the Group ——building positive relationships with the Company’s Chief Executive. No director is involved in deciding his or her own stakeholders. remuneration or fees. Details of the fees of non-executive directors are set out on page 72 of the Directors’ Remuneration Report. 6. Board Appointments Letters of appointment for the non-executive directors are The Board acknowledges its responsibility for planned and available for inspection by shareholders at each AGM and during progressive refreshing of the Board. There is a formal and normal business hours at the Company’s registered office. transparent procedure for the appointment of new directors to the Board, the prime responsibility for which is delegated to the 7. Information and Professional Development Nomination Committee. Further details about that committee are The Chairman takes responsibility for ensuring the directors set out in section 9b below. receive accurate, timely and clear information with Board and The Nomination Committee had one scheduled meeting in Committee papers being circulated sufficiently in advance of 2012 and one arranged at shorter notice. In its scheduled June meetings. The Board and its Committees are kept informed of meeting the Nomination Committee discussed matters relating corporate governance and relevant regulatory developments as to succession planning and talent planning for leadership they arise and receive topical business briefings. The Board also succession. Diversity is considered as one aspect of those keeps itself informed about the Company’s activities through a succession planning discussions, along with, for example, ways of structured programme of presentations from each of the developing and strengthening the pipeline of talent within the businesses within the Group and from a number of Group Group and ways of increasing the interaction between Board functional leaders. members and senior members of executive management and In 2012 senior executives also gave presentations to the talented future executives. Board on projects in development and there were presentations Within the topic of diversity there are a variety of different from some of the Company’s corporate advisers. aspects, including professional and industry experience, In addition in 2012, as in previous years, the Board invited understanding of different geographical regions, ethnic each Executive Management Committee member in turn to background and gender. The Board does not believe that gender attend the whole of one Board meeting. In 2013, as a consequence quotas (or any other quotas) promote effectively the development of the restructuring of the roles of Executive Management of appropriate and broad diversity. The Board does believe that an Committee members, Peg Billson and Michael Scheeringa will appreciation of the value that a diverse range of backgrounds both be invited to attend all Board meetings. brings is an important part of succession planning at all levels in Directors’ Report 58 Directors’ Corporate Governance Statement
——The Audit and Risk Committee is routinely briefed on included matters relating to ensuring executive continuity accounting and technical matters by senior management and through talent management, the location of Board meetings by the external auditor. In 2012 briefings included considering and the Board’s composition and tenure. the progress of the exposure draft on revenue recognition and of proposed revisions to the exposure draft on accounting In addition, the Senior Independent Director, in consultation with for leases. the other non-executive directors and taking into account the ——The Remuneration Committee receives updates on views of the executive directors, reviewed the performance of the remuneration trends and market practices as part of its Chairman and the performance evaluation and appraisal process regularly scheduled business and in 2012 Towers Watson also as a whole. held a training update session covering the current status of Overall the conclusion from the Board evaluation and the UK Government’s proposals on reporting of executive appraisal process was positive, with each individual director remuneration. contributing actively to the effective performance of the Board and the Committees of which he or she is a member. A number of In addition to formal Board meetings, the Chairman maintains areas were identified as appropriate for focus in 2013 and for regular contact during the year with the other directors to discuss further continuous improvement. specific issues. Opportunities exist throughout the year for The Board has reviewed the objectives it set itself for 2012 informal contact between Board members and with members of relating to strategy, succession planning, leadership team the senior management team. development and Board information and considers it has made Site visits are an important part of the Board’s programme, good progress against these objectives. The Board has set further enabling Board members to meet employees in individual objectives for 2013. operations. ——In 2012 the Board held two of its scheduled eight meetings 9. Board Committees outside the UK: one meeting was held in Los Angeles and one The Board operates a Remuneration Committee, a Nomination meeting was held in Dallas. The directors had the opportunity Committee and an Audit and Risk Committee. Written terms of to meet formally and informally with a number of employees reference for each Committee are reviewed each year and are based in the area, as well as to visit Ontic’s Chatsworth facility available on the Group’s website www.bbaaviation.com or on and Dallas Airmotive’s facility at Heritage Park and talk to request from the Group Secretary. employees working there. a. Remuneration Committee A register of the training that individual directors have undertaken Composition is maintained by the Company and this register is periodically The composition of the Remuneration Committee during 2012 is reviewed by the Chairman with the director concerned as part of set out in the table below. All Committee members are the Chairman’s regular review of their training and development independent non-executive directors. Susan Kilsby was appointed needs. If particular training needs are identified, then plans are to the Committee on 10 April 2012. put in place and the Company provides appropriate resources for During Year developing and updating the directors’ knowledge and skills. 01/01/12 Resigned Appointed 31/12/12 28 /02/13 The Board believes that the identification of individual training and development needs is primarily the responsibility of each Mark Harper individual director, bearing in mind the range of experiences and (Chairman) – – skills that are developed by their differing portfolios. Susan Kilsby n/a – 10/04/12 All directors have access to the advice and services of the Nick Land – – Group Secretary and the Board has established a procedure Peter Ratcliffe – – whereby directors wishing to do so in furtherance of their duties Hansel Tookes – – may take independent professional advice at the Company’s expense. The Company arranges appropriate insurance cover in During 2012 the Remuneration Committee had four scheduled respect of legal actions against its directors. The Company has meetings and one additional meeting. These meetings were also entered into indemnities with its directors as described on minuted by the Group Secretary. Executive directors, the Group page 53 of this Directors’ Report. HR Director and Michael Harper attend Remuneration Committee meetings by invitation. 8. Board Effectiveness Review In the autumn of 2012 the Chairman, in conjunction with the Role Senior Independent Director, led the performance evaluation The Remuneration Committee has two principal functions: and appraisal process for the Board, its members and its —— making recommendations to the Board on the framework and main Committees. The Chairman discussed with each director Board policy for the remuneration of the Chairman, executive individually: directors and other designated senior executives; and ——their replies to a questionnaire they had previously completed —— determining on behalf of the Board the specific remuneration concerning the Board, its Committees and their operation; package for each of the executive directors, including pension ——progress made on the action points agreed following the rights and any compensation payments. externally facilitated 2011 Board performance evaluation that Directors’ Report Directors’ Corporate Governance Statement 59
Work of the Committee with BBA Aviation plc.) The consultant draws up a list of potential Further details of the work of the Remuneration Committee candidates and a shortlist is created through consultation appear in the Directors’ Remuneration Report. amongst Nomination Committee members. The Board as a whole is also updated regularly as to the status of the appointment b. Nomination Committee process. Meetings as appropriate are arranged with Committee Composition members and the Committee aims to ensure that each Board The composition of the Nomination Committee during 2012 is member is given the opportunity to meet any short-listed set out in the table below. The Nomination Committee now candidates. comprises the Chairman and five independent non-executive The Nomination Committee would then meet to finalise a directors. Susan Kilsby was appointed to the Committee on recommendation to the Board regarding the appointment. The 10 April 2012. final decision rests with the full Board. During Year Further details about Board appointments and the work of 01/01/12 Resigned Appointed 31/12/12 28 /02/13 the Nomination Committee are set out in section 6 above. Michael Harper (Chairman) – – c. Audit and Risk Committee Mark Harper – – Nick Land Susan Kilsby n/a – 10/04/12 Chairman of the Audit Nick Land – – and Risk Committee Peter Ratcliffe – – Hansel Tookes – –
Other directors attend Nomination Committee meetings by invitation. The Nomination Committee meets as required. During 2012 the Committee had one scheduled meeting and one The Audit and Risk Committee, as can be seen from the additional meeting. This was supplemented by informal meetings, description of its role, discharges a number of key individual briefings and meetings between Committee members. responsibilities on behalf of the Board and the Company. This includes monitoring BBA Aviation’s financial reporting Role processes, overseeing the work of the internal audit team and The primary responsibilities of the Nomination Committee are to: reporting on the independence and objectivity of the ——make appropriate recommendations to the Board for the appointed external auditor. appointment of replacement or additional directors; While risk strategy and risk appetite are matters for the ——devise and consider succession planning arrangements for whole Board, the oversight of the processes that underpin risk directors and senior executives; and assessment and internal control are matters that the Board ——regularly review the structure, size and composition of the delegates to this Committee. Board and make recommendations to the Board with regard to any changes. Nick Land Chairman of the Audit and Risk Committee Work of the Committee The Nomination Committee carefully evaluates the existing Composition balance of experience, skills, knowledge, independence and The composition of the Audit and Risk Committee during 2012 is diversity of backgrounds on the Board when the Committee set out in the table below. Susan Kilsby was appointed to the considers Board succession planning. The Committee recognises Committee on 10 April 2012. All members of the Audit and Risk that promoting an inclusive environment and diverse participation Committee are independent non-executive directors. Nick Land, on the Board requires that the external search consultants used the Committee’s Chairman, has recent and relevant financial by the Board to identify future candidates for a Board role be experience and a professional accountancy qualification as requested to approach their search with these goals in mind. considered desirable by the Financial Reporting Council’s Other factors that also need to be taken into account are the Guidance on Audit Committees issued in September 2012. In current and future requirements of the Company and, in the case addition the other Committee members all have experience of of a non-executive appointment, the time commitment expected. corporate financial matters and Peter Ratcliffe has a professional The appointment process is initiated by identifying suitable accountancy qualification. external search consultants for the vacancy and preparing details During Year 01/01/12 Resigned Appointed 31/12/12 28 /02/13 of the role and capabilities required for the appointment. (Such consultants will be a signatory to the voluntary code of conduct Nick Land for executive search firms on gender diversity.) The process differs (Chairman) – – in its detail depending on whether the appointment is for an Mark Harper – – executive or non-executive position, but the essentials remain Susan Kilsby n/a – 10/04/12 the same, and it was followed prior to the appointment to the Peter Ratcliffe – – Board of Susan Kilsby. (In that instance Stonehaven LLP were the Hansel Tookes – – external consultants used. They do not have any other connection Directors’ Report 60 Directors’ Corporate Governance Statement
During 2012 the Audit and Risk Committee had five scheduled The Audit and Risk Committee discharges its responsibilities meetings, generally coinciding with key dates in the financial through the review of written reports circulated in advance of reporting and audit cycle, and one additional meeting. The meetings and by discussing these reports and any other matters external auditor and Head of Group Internal Audit regularly attend with the relevant auditors and management. these meetings which are minuted by the Group Secretary. The Topics covered by the Committee during 2012 and to date Chairman, Group Chief Executive, Group Finance Director and in 2013 included: Group Financial Controller also generally join at least part of the —— review of any significant issues from reports from both the Audit and Risk Committee meetings by invitation. The Committee internal and external audits; Chairman may call a meeting at the request of any director or the —— consideration of the audit fee and the balance between audit Company’s external auditor. and non-audit fees; —— assessment of the risk of the possible withdrawal of Deloitte Role LLP from the external auditor market; The Audit and Risk Committee may consider any matter that —— annual review of the terms of reference of the Committee, of might have a financial impact on the Group. However, its primary the schedule of the Committee’s agenda items for the roles are to: forthcoming year, of the non-audit services policy and of BBA ——monitor and review the effectiveness of the Company’s Aviation’s matrix of authority levels; internal control and risk assessment; —— discussion of steps taken to mitigate Euro zone risk and ——monitor the effectiveness of the Company’s internal audit consideration of the stability of core relationship banks; function; —— discussion of the further development of Group Internal ——review the Company’s external audit function including the Audit’s overall strategy and approach including the conclusions annual audit plan and results of the external audit and the from an enterprise risk assurance mapping project; and independence of the external auditor; —— other topics that are described in more detail in section 10. ——monitor the integrity and audit of the Company’s financial statements and any formal announcements relating to the In 2012 the Audit and Risk Committee held two confidential Company’s financial performance, including a review of the sessions without management present with the Head of Group significant financial reporting judgements contained within Internal Audit and with the external auditor. them; and ——establish and oversee the Company’s arrangements for 10. Audit and Accountability employee disclosure and fraud prevention arrangements a. Auditor Independence and Audit Effectiveness within the Company. Central to the Audit and Risk Committee’s work is the review and monitoring of the external auditor’s independence and objectivity Work of the Committee and the effectiveness of the audit process. The Committee carried The Committee reviews twice yearly reports on the Group’s key out a formal audit service assessment in respect of work business risks and the Audit and Risk Committee (whose members carried out during the year including a review of audit plans are also members of the Remuneration Committee) is aware of and the qualifications, expertise, resources, effectiveness and the importance of keeping the appropriateness of incentive independence of the external auditor. The Audit and Risk structures under review. The Committee assesses compliance Committee has also carried out a self-assessment and believes with the directors’ responsibility statement. that it has satisfied the requirements of the Code and the Guidance There is a twice yearly formal report to the Committee on on Audit Committees published by the Financial Reporting business ethics and compliance, which includes such matters Council in December 2010. The Committee has confirmed that as the review of the Group’s Disclosure of Unethical Conduct during the year it had formal and transparent arrangements for Policy under which staff may, in confidence, raise concerns considering corporate reporting and risk management and about possible improprieties in matters of financial reporting or internal control principles and for maintaining an appropriate other matters. In addition the Committee at each meeting reviews relationship with the Company’s auditor. reports on any items arising under that policy. One of the safeguards to ensure auditor objectivity and The Committee is responsible for making recommendations independence is the Group’s policy on the provision of non-audit to the Board on matters within its remit, including regarding the services by its external auditor. The policy is reviewed each year remuneration and appointment of the external auditor. While the and in December 2012 it was updated to prohibit the Group’s appointment of the external auditor is considered each year, it is external auditors from carrying out remuneration consultancy the policy of the Committee to review the appointment in greater and tax planning work for the Group. The external auditor is also detail at least every five years, taking into account a number of prohibited from carrying out a number of other services for the factors, including audit effectiveness at both operating company Group such as book-keeping, internal audit, valuations, actuarial and Group-level; quality, continuity and depth of resources; and services and financial systems design and implementation. expertise and competitiveness of fees. A detailed review was last Services which the external auditor may be permitted to carry out completed in 2008 and this will be considered again in 2013. The include assurance services such as reporting accountant work and appointment of Senior Statutory Auditor is also rotated every five tax compliance services. The Company’s policy is not to use the years. As Nigel Mercer was appointed to this role for the 2008 external auditor for acquisition and due diligence work. However, audit, the next rotation is planned following the completion of the where the Group considers it appropriate or where conflicts arise, 2012 audit. suppliers other than the preferred supplier may be asked to Directors’ Report Directors’ Corporate Governance Statement 61
tender. This would only include the external auditor in unusual —— compliance; and exceptional circumstances. —— operational; and Non-audit fees paid or due to the external auditor are —— other categories of risks including health, safety and regularly reviewed by the Committee and those paid in 2012 environmental risks. are set out in note 2 to the Consolidated Financial Statements. If fees for non-audit projects within the scope of permitted In addition the risks identified are plotted on risk maps and tax services are expected to exceed £250,000 in a particular year, both the self-assessments and the risk maps are reviewed by then the Audit and Risk Committee Chairman is required to pre- Group Internal Audit and by senior management at review approve each project. In any event, specific project approval is meetings held with each business. The outcome from these required by the Committee Chairman for any such project where reviews is then discussed twice each year at meetings of the estimated fees exceed £100,000. Pre-approval is required for Executive Management Committee, with the results being non‑tax projects where fees are estimated to exceed £25,000. presented to the Audit and Risk Committee, which in turn These limits are also reviewed annually. reviews the effectiveness of the Group’s system of internal Deloitte LLP have confirmed that all non-audit services they control on behalf of the Board. The Audit and Risk Committee performed during the year were permitted by APB Ethical receives a report at least twice a year from the Group Finance Standards and do not impair their independence or objectivity. Director detailing the key risks and the work undertaken in On the basis of their own review of the services performed, the managing the risks faced by the Group. Based on this requirement of pre-approval and the auditor’s confirmation, the information the Board reviews the risks and confirms they are Committee is satisfied that the non-audit services currently satisfied that the risks are appropriately mitigated. If this is not provided by Deloitte LLP do not impair their independence and the case they request that management take further action. objectivity. 2. An organisational structure is in place at both head office b. Systems of Internal Control and divisional level which clearly defines responsibilities for Overall responsibility for the Group’s system of internal control operational, accounting, taxation, treasury, legal, company and for reviewing its effectiveness rests with the directors. secretarial and insurance functions. Management is accountable to the directors for monitoring this system and for providing assurance to the directors that it has 3. An internal audit function undertakes a programme of risk- done so. The system of internal control is essentially an ongoing based reviews of controls and business processes. The role of process embedded in the Group’s businesses for identifying, internal audit is defined in a Group Internal Audit Charter and evaluating and managing the significant risks faced by the Group, this includes its terms of reference, the standards which it including social, environmental and ethical risks. The Group adheres to, the scope and coverage of its work and its considers that it has adequate information to identify and assess reporting processes. The Audit and Risk Committee receives a significant risks and opportunities affecting its long and short- report from internal audit at each meeting which includes term value. opinions on the adequacy and effectiveness of controls by This ongoing process has been in place for the year ended site, together with a summary of key issues, work schedules 31 December 2012 and up to 28 February 2013 and the directors and details of any action required. In accordance with the UK can therefore confirm that they have reviewed the effectiveness Corporate Governance Code, the Audit and Risk Committee in accordance with the internal control requirements of the Code monitors and reviews the effectiveness of internal audit using throughout that period. outside specialists as well as self-assessment techniques. The Group’s internal system of control is reviewed annually by the directors and accords with the guidance issued by the 4. A Group Finance Manual details accounting policies and Financial Reporting Council in October 2005: “Internal Control: financial controls applicable to all reporting units. The Group Revised Guidance for Directors on the Code” (known as the accounting policies are aligned with International Financial “Turnbull guidance”). The system is designed to manage rather Reporting Standards. Compliance with these policies is than eliminate the risk of failure to achieve business objectives. reviewed as part of the internal audit process. It can provide reasonable but not absolute assurance against material misstatement or loss, to the extent that is appropriate, 5. An annual budgeting exercise is carried out to set targets for taking account of costs and benefits. each of the Group’s reporting units. The principal risks and uncertainties which the Group faces are summarised on page 17, together with a description of 6. Detailed management accounts are submitted monthly to their potential impact and mitigations in place. The main features management which measure actual performance against of the Group’s internal control and risk management systems are budget and forecasts. The monthly forecasts of sales, profits listed below. and operating cash are updated on a quarterly basis. A monthly report is provided to the Board, based on these 1. The risks identified through a detailed written self-assessment management accounts, highlighting key issues and process carried out by division and by function are recorded summarising the detailed financial information provided by on a risk register together with the mitigations in place. This the operating units. The integrity of management accounts covers a range of different types of risks, such as: with the underlying financial records is subject to review as ——business; part of the internal audit process. ——financial; Directors’ Report 62 Directors’ Corporate Governance Statement
7. Capital expenditure is controlled by means of budgets, Senior managers’ performance and related financial incentives authorisation levels requiring the approval of major projects are tied in part to their success against selected annual HSE by the Group directors and by post-investment appraisals. improvement objectives. Further details about HSE matters The lessons learned from the post-investment appraisals are are set out in the Corporate Social Responsibility Report 2011- also shared with members of senior management. 2012 on the BBA Aviation website. BBA Aviation’s Group Internal Audit team includes a number of questions on CSR 8. Defined procedures are laid down for investments, currency matters in the annual Control Risk Assessment questionnaire and commodity hedging, granting of guarantees and use of which is completed by each of the operating businesses. The treasury products. responses are reviewed and collated by Group Internal Audit and then discussed by the Group’s CSR Steering Committee 9. A detailed matrix defines the levels of authority for the Group’s and used in the development of future CSR action plans. senior executives and their direct reports in relation to acquisitions, capital expenditure, commercial and employee 11. Shareholder Relations contracts and treasury matters. This matrix is authorised by the The Board as a whole is routinely kept up to date on corporate Audit and Risk Committee on behalf of the Board and is governance developments and the views of BBA Aviation’s reviewed on an annual basis. Compliance with the authority major shareholders. The executive directors undertake an annual matrix is reviewed as part of the internal audit process. programme of meetings with banks, institutional shareholders, fund managers and analysts to maintain a continuing dialogue 10. All significant acquisitions and disposals of companies or with the Company’s providers of finance. The Board receives businesses are approved by the Board. formal written reports from its brokers (as well as reports from the executive directors) regarding the views of shareholders following 11. A Group policies manual sets out policies and procedures its preliminary and half yearly results announcements and at other concerning: business ethics, bribery and corruption, gifts and times as appropriate. entertainments, equal opportunities and anti-harassment, All non-executive directors, including the Senior competition law, legal policy, data privacy, corporate social Independent Director, are available to meet with major responsibility, market disclosure and communications and shareholders. As in previous years, the Chairman wrote to share dealing. A review of compliance with such policies by major shareholders ahead of the 2012 AGM offering them the Group companies is carried out twice a year and senior opportunity to raise any issues or questions. The Chairman of the executives are also required to confirm compliance with Remuneration Committee and the Chairman also maintain certain policies twice a year. Group policies are complemented contact as required with major shareholders about directors’ by divisional and company-led initiatives and are remuneration matters. The Board considers that its non-executive supplemented by the Group’s Disclosure of Unethical Conduct directors, including its current Senior Independent Director, Nick Policy which includes a 24-hour “hotline” available to all Land, have a good level of understanding of the issues and employees. This is supported by a formal investigation concerns of major shareholders, as required by the Code. protocol and regular reporting to the Audit and Risk The Company’s AGM is used as an opportunity to Committee as part of the twice yearly report on Business communicate with private investors. It is intended that notice of Ethics and Compliance. The Ethics Implementation Policy that the AGM and related papers are sent to shareholders at least 20 was introduced in 2011 seeks to codify the overarching working days before the meeting. Michael Harper as Chairman of principles and processes that underlie the various elements the Board and the Nomination Committee, Nick Land as Chairman set out in more detail in the Code of Business Ethics and of the Audit and Risk Committee and Senior Independent Director, the policies on bribery and corruption and gifts and and Mark Harper as Chairman of the Remuneration Committee entertainments. Compliance with all these policies and with and CSR Responsible Director will each be available to answer the Group’s procedures concerning the appointment and questions, as appropriate, at the AGM. Shareholders are given the remuneration of foreign agents is reviewed as part of opportunity of voting separately on each proposal. The Company the ongoing BBA Aviation Internal Audit Programme. The counts all proxy votes cast in respect of the AGM and makes effectiveness of these policies is assessed alongside the risk available the proxy voting figures (for, against, at discretion and review process described in item 1 above. “vote withheld”) on each resolution. The voting results of the AGM, together with the details of proxy votes cast prior to the 12. A Group Safety Management System Manual details policies, meeting, are made available on request and on the Company’s standards and procedures which are applicable throughout website. The results of the AGM are announced to the market via the Group. Annual self-assessment and/or audits are carried a Regulatory News Service. out at company level against these Group standards. An Directors’ Corporate Governance Statement approved by executive summary Health, Safety and Environmental (HSE) the Board on 28 February 2013 and signed on its behalf by: report is tabled at each meeting of the Executive Management Committee. The Board also receives a summary HSE report in Michael Harper addition to updates on HSE activities. These reports cover all Chairman Group companies and are prepared by the internal Group HSE function. Key HSE performance metrics are reviewed and verified annually by an independent third party organisation. Directors’ Report Directors’ Remuneration Report 63
Directors’ Remuneration Report
Mark Harper Shareholders’ attention is also drawn to the bonus received by Chairman of the the executive directors in 2012 compared with 2011. As a Remuneration Committee consequence of the softer market conditions experienced during 2012 and despite a good underlying operating performance the percentage of salary awarded to Simon Pryce for his 2012 bonus has fallen from 104.4% to 58.7% and for Mark Hoad from 103.4% to 58.7%. The emoluments and fees for 2012 shown in Table 1 on page 72 for Simon Pryce and Mark Hoad have fallen by 17% and 12% respectively. I am pleased to introduce our Directors’ Remuneration Report For 2013 the Committee intends to reduce the minimum for 2012, which sets out the Group’s policy on directors’ threshold vesting of the long-term incentive plan (LTIP) to 25% remuneration and how that has been applied during the year. (2012: 33%). The Committee will also introduce two performance Despite softer than expected market conditions, the conditions for the 2013 LTIP awards, one being a challenging Group’s share price has marginally outperformed the FTSE 250 ROIC condition and the other a stretching adjusted earnings per and the S&P 500 composite price index and total shareholder share (EPS) condition. return at 30.8% exceeded the 26.1% delivered across the FTSE The same performance conditions and minimum 250 index. The financial highlights for 2012, 2011 and 2010 are threshold vesting will also be mirrored in the conditions of the shown on page 64. other long-term element of the Group’s incentive schemes, The Committee focuses on and prioritises the creation of namely the matching element of the deferred bonus plan (DBP). effective executive compensation structures specific to BBA Changes to remuneration of the executive directors that Aviation that: have been agreed in 2012 are highlighted in the relevant section ——are closely aligned with and reward the delivery of, the of this Report. They include an increase in Mark Hoad’s base Group’s long-term strategy for sustainable value creation; salary, a consequence of the planned and stepped progression and of his salary over 3 years following his appointment in 2010 and ——ensure that the Group can compete effectively for executive an increase in his maximum potential LTIP award to 100% of talent in the international markets in which it operates. base salary.
In formulating and implementing remuneration policy, the Mark Harper Committee continues to engage in proactive dialogue with its Chairman of the Remuneration Committee major investors and their representative bodies and also reflect, 28 February 2013 where practical, the constantly evolving and differing views of stakeholders and the variety of approaches that are perceived as best practice for UK listed companies in the area of executive remuneration. Prior to the 2012 AGM, ISS RREV proxy advisory services issued a ‘vote against’ recommendation in respect of the resolution to approve the 2011 Remuneration Report and just over 20% of shareholders voted against this resolution. There has therefore been more detailed consultation with shareholders and representative bodies to clarify aspects of, and the rationale behind, our policy and practice and changes to our plans for 2013. As a result of feedback received during this period, the Remuneration Committee intends to look at ways to further simplify our management incentives in the future for 2014 and beyond. Directors’ Report 64 Directors’ Remuneration Report
Remuneration summary The Committee believes that driving improvements in the Group’s ROIC and adjusted EPS are the principal mechanisms for creating sustainable shareholder value. These two measures will be applied to all awards granted in 2013 under the Deferred Bonus Plan (DBP) and the LTIP. The elements of the executive directors’ remuneration planned for 2013 are summarised in the tables opposite and described in more detail in the rest of the Report.
Remuneration mix The following charts show the balance between fixed and variable elements of the remuneration package for each of the executive directors. The upper bar on each chart shows the position (labelled target) if half of the maximum potential variable remuneration was received. The lower bar on each chart shows the position (labelled stretch) if the maximum potential variable remuneration was received. As more stretching performance is achieved, so the proportion of variable to fixed remuneration increases. The actual value of performance-related incentives will depend on actual performance. The targets for variable remuneration include operating profit, free cash flow, adjusted EPS and ROIC, all of which strongly align to the Company’s strategic objective of creating longer-term sustainable value.
Simon Pryce: target Fixed remuneration: includes base salary, bene ts and contribution to pension stretch Variable remuneration: short-term incentive plan delivered in cash and deferred bonus award Variable remuneration: longer-term incentives Mark Hoad: target stretch | 0 25 | 50 | 75 | 100 |
Financial performance for 2010 – 2012 The graphs and table below show the Group’s performance over the last three years.
Share price performance: January 2010 to December 2012 Historical TSR Performance (re-based from January 2010) Growth in the value of a hypothetical £100 holding over three years (1 January 2010 – 31 December 2012)
140% £160 £150 130% £140 120% £130 110% £120 £110 100% £100 90% £90 80% £80 Jan 10 Jan 11 Jan 12 Dec 12 Jan 10 Jan 11 Jan 12 Dec 12
BBA Aviation BBA Aviation FTSE 250 FTSE 250 S&P 500 Composite Price Index
Financial highlights for 2012, 2011 and 2010
$m (other than share amounts in cents) 2012 2011 2010 Underlying operating profit1 195.4 198.9 171.4 Adjusted earnings per share (in cents)2 29.0¢ 29.0¢ 27.3¢ Net debt 416.4 403.6 492.8 Leverage 1.6x 1.5x 2.1x
1 Operating profit before exceptional items 2 Earnings per share before exceptional items Directors’ Report Directors’ Remuneration Report 65
Fixed remuneration Element Base salary Benefits and retirement provision
Purpose and —— Reflects role, international nature of —— Includes company car allowance, private components operations and contribution medical insurance, retirement and death —— Relates to skills and experience in service benefits
Opportunity in 2013 —— Group Chief Executive: £575,000 —— 20% of salary contributed to pension —— Group Finance Director: £325,000 arrangements
Description, measures —— Takes into account market conditions, —— Reflects local market practice and timing business performance, personal contribution and the level of pay awards and conditions elsewhere in the Group —— Competitive base salaries positioned around mid-market
Variable remuneration Element Short-term incentive plan Deferred Bonus Plan (DBP) Long-Term Incentive Plan (LTIP) Purpose and —— Focuses on delivery —— Deferred bonuses, paid in shares, —— Rewards achievement of components of stretching and increases focus on long-term longer-term strategic strategically aligned alignment with shareholder objectives and provides targets value creation accountability for delivery of —— Incentive for achievement —— Three-year deferral strategy of Group financial —— For grants in 2013 half the award —— Three-year performance period objectives will be subject to a challenging —— For grants in 2013 half the —— Incentive for achievement ROIC performance condition award will be subject to a of individual personal and half subject to a stretching challenging ROIC performance objectives EPS performance condition condition and half subject —— 50% of bonus payable to a stretching adjusted EPS compulsorily deferred performance condition
Maximum —— 125% of base salary —— 50% of bonus payable —— Group Chief Executive: one opportunity compulsorily deferred and a half times base salary in 2013 —— Matching award calculated on —— Group Finance Director: one a one to one basis in relation to times base salary amount of bonus deferred
Description, —— 70% of salary for —— Deferred bonus released as measures and achievement of Group shares in three years, subject timing operating profit targets; to continued employment 35% of salary for achievement of Group The ROIC performance condition is applied to half of the DBP Matching free cash flow targets Award and the LTIP award and the adjusted EPS performance condition —— 20% of salary for is applied independently to the other half of those awards achievement of measurable personal Percentage that will vest ROIC EPS growth per annum objectives Nil Below 10.5% Below 6% pa
25% At 10.5% At 6% pa
25% to 100% straight Between 10.5% Between 6% pa line pro rata and 12.0% and 12% pa
100% At or above 12.0% At or above 12% pa Directors’ Report 66 Directors’ Remuneration Report
Introduction During the year, the Committee also consulted the Chairman, the This Report outlines the Company’s remuneration policy and Group Chief Executive, the Group Finance Director, the Group HR practice for the financial year ended 31 December 2012, as well Director and the Group Secretary in connection with the as other specific disclosures required, such as those relating to Committee’s work. It is expected that the Committee will wish to directors’ shareholdings and other interests. continue to consult with them in 2013 and that they will continue Information in this report is unaudited other than that which to be invited to attend Committee meetings when appropriate. is required to be audited and that is stated as such in the relevant table. This Report has been prepared taking into account the 2. Remuneration Policy provisions of the UK’s Corporate Governance Code published in The Committee believes that a significant element of executive June 2010 (the Code) and in accordance with the requirements of directors’ remuneration should be linked to performance-related the Large and Medium-Sized Companies and Groups (Accounts long-term incentives. and Reports) Regulations 2008 and the Listing Rules of the The Group’s remuneration policy is intended to ensure Financial Services Authority. that the remuneration of executive directors and other senior This Report will be submitted to shareholders for an executives properly reflects their duties and responsibilities advisory vote at the BBA Aviation plc AGM in May 2013. and is sufficient to attract, retain and motivate high calibre senior management capable collectively of delivering the goals 1. Remuneration Committee of the Company. Although the Board considers itself ultimately responsible for The policy of the Committee is to provide base salaries that remuneration policy, it has delegated prime responsibility for are positioned around mid-market when compared with relevant implementing that policy as it relates to senior executive local market data to ensure that it can recruit and retain suitable remuneration to the Remuneration Committee. The Remuneration talent. In determining short and longer-term incentives, reference Committee is a Committee of the Board consisting exclusively is made to the wider, regional and global markets and in particular of non-executive directors and its meetings are minuted by North America where the majority of the company’s employees the Group Secretary. No director is directly involved in the and management teams are located. determination of, or votes on, any matter relating to their own The Remuneration Committee believes that a significant remuneration. element of executive directors’ remuneration should be linked to The Committee is responsible for: performance-related long-term incentives and that alignment ——determining executive directors’ remuneration; between Group strategy and the remuneration of its senior ——setting targets for the short-term and longer-term incentive executives is critical. plans and performance-related share plans; This policy is reflected in the Deferred Bonus Plan (DBP) ——reviewing proposals in respect of other senior executives; and where the Matching Awards will only vest if demanding ROIC ——overseeing any major changes in employee incentive targets are met (see section 3c below for more detail). In the future structures throughout the Group. the DBP Matching award will be subject to a ROIC and adjusted EPS target. The compulsory requirement to defer bonus ties the Further information on the work of the Remuneration Committee long-term value of executive remuneration closely to the and details of the Committee’s membership are set out in the Company’s performance. Directors’ Corporate Governance Statement on page 58. Total executive remuneration is structured to create During the year the Committee received advice from the potential for upper quartile rewards based on the Towers Watson as the Committee’s appointed remuneration delivery of superior performance with a significant proportion advisers. In 2012 Towers Watson provided market analysis relating of variable pay subject to stretching performance targets. The to the executive directors and other senior executives. In addition, Committee believes that the remuneration packages of the Towers Watson provided general advice in relation to: executive directors contain a suitable balance of fixed and ——remuneration strategy; variable remuneration. ——background information about remuneration trends; and In connection with the ABI Responsible Investment ——calculations of total shareholder return (TSR) in connection Disclosure Guidelines the Remuneration Committee confirms with the older Deferred Bonus and Long-term Incentive Plans. that it considers corporate performance on environmental, social and governance issues when setting the remuneration Towers Watson also provides advice to the Company in respect of of executive directors. The Committee also believes that the human resource policies, healthcare and benefits provision, incentive structure for senior management does not raise pension administration and actuarial services and remuneration environmental, social or governance risks by inadvertently practice including on non-executive directors’ fees. Towers motivating irresponsible behaviour and is compatible with the Watson is a member of the Remuneration Consultants Group and Company’s risk policies and systems. is committed to that Group’s voluntary code of practice for remuneration consultants in the UK. This includes processes for ensuring integrity and objectivity of advice to the Remuneration Committee. Directors’ Report Directors’ Remuneration Report 67
To ensure that the Company offers appropriate incentives to pensionable. It is the Committee’s policy to make new executive enhance shareholder value, the Committee assesses the director appointments with a rolling service agreement which constituent elements of the remuneration of the executive can be terminated by the Company on giving 12 months’ notice. directors as follows: Set out below are the contractual notice periods for executive directors who served during the year. Fixed elements: Months’ Notice ——salary, benefits and service contract Contract By To ——pension Date Company Company
Variable elements Simon Pryce 23/04/07 12 12 ——annual bonus Mark Hoad 29/04/10 12 6 ——deferred bonus plan —— long-term incentive plan including executive share option plan In the event of early termination, the Remuneration Committee will, within legal constraints, determine the approach to be taken This mix is illustrated graphically in the charts on page 64. according to the circumstances of each individual case, taking In determining remuneration, consideration is given to account of the departing director’s obligation to mitigate his loss. reward levels throughout the organisation as well as in the In certain circumstances, and other than for termination for non- external employment market. The Committee aims to reward performance, the executive directors may receive compensation employees fairly based on their role, their experience, their upon early termination of a contract which could, depending on performance and salary levels in the wider market. the circumstances at the relevant time, amount to up to one year’s The remuneration policy described in this Report will be remuneration based on base salary, benefits in kind and pension kept under review, but the current intention is that the policy rights during the notice period. There are no guaranteed bonus should continue to apply in future financial years. provisions and there is no entitlement to any bonus payments if an employee is under notice given or received at the end of the 3. Executive Directors’ Remuneration applicable financial year. a. Salary, Benefits and Service Contract Table 1 (on page 72) sets out details of the executive Salary reflects the role and contribution to the Company of the directors’ salaries and benefits. executives in terms of skills and experience. Base salaries are reviewed annually. Individual salary b. Short-term incentive plan decisions take into account business performance, personal The short-term incentive plan provides focus on the delivery of contribution, the level of pay awards and conditions elsewhere stretching and strategically aligned annual financial targets and in the Group and market conditions. In 2011 a review was personal objectives. It seeks to provide executive directors, conducted against businesses of comparable size, geographic members of the Executive Management Committee and senior spread, business focus and opportunity. managers with the opportunity to increase overall remuneration Following a review at the end of 2012 the Remuneration levels for achieving demanding performance targets. Committee approved (with effect from 1 January 2013) a 2.99% increase in base salary to £575,000 for Simon Pryce, a percentage Short-term incentive plan arrangements increase in line with the salary increases given to those in the The structure for the 2012 and 2013 short-term incentive plan for wider employee workforce who have performed strongly during executive directors is: the year. In relation to Mark Hoad the Remuneration Committee Element Maximum opportunity agreed (with effect from 1 January 2013) an 8.33% increase in base salary to £325,000. This is to reflect his continued good Total financial and personal Providing a maximum performance and increased experience and is the final year objectives opportunity for executive of a planned and stepped progression of his salary over three directors of up to 125% years, from his appointment in April 2010, towards a market of salary competitive rate. Financial objectives (with a Up to 105% of salary In addition to base salary, executive directors receive a maximum of 70% of salary for company car allowance, private medical insurance, retirement achievement of Group operating and death in service benefits. profit targets and 35% of salary The Company’s UK Defined Benefit Plan was closed to new for achievement of Group free entrants from April 2002; new employees from that date have the cash flow targets) option to join a Company-sponsored Defined Contribution Plan. Measurable personal objectives Up to 20% of salary Simon Pryce does not participate in that Defined Contribution Compulsory deferral into 50% of bonus payable Plan and Mark Hoad does. The Company makes a cash payment Deferred Bonus Plan equal to 20% of Simon Pryce’s base salary in lieu of a contribution by the Company to a pension scheme. Mark Hoad receives a sum equal to 20% of his base salary as a pension contribution. Part of The annual bonus payments in respect of 2012 are included in this is received in cash and part is paid into his Defined Contribution table 1 on page 72. Both Simon Pryce and Mark Hoad received Plan. No other element of the executive directors’ remuneration is 40.7% of their salary in respect of the performance against the financial objectives set (20.0% in respect of partial achievement of Directors’ Report 68 Directors’ Remuneration Report
Group operating profit targets and 20.7% in respect of partial annual bonus) and the adjusted EPS condition is intended to be achievement of Group free cash flow targets). Simon Pryce and the same range as that used in 2012 in relation to the LTIP. Mark Hoad received 18% in respect of achievement of their 2012 awards under Deferred Bonus Plan respective personal objectives, which included objectives relating to strategy development, efficiency improvements and —— Three-year performance —— 100% vesting if ROIC is 12.0% professional development. period 2012 to 2014 —— 25% vesting if ROIC is 10.5% —— 50% bonus payable —— Pro-rated between c. Longer-term performance incentives – Deferred Bonus Plan compulsorily deferred 10.5-12.0% The structure of deferred bonuses, paid in shares, places increased —— 50% opportunity for —— Forfeiture restrictions apply focus on long-term alignment with shareholders’ interests, voluntary deferral (not reinforces the critical importance of maintaining performance and applicable in 2013) both enhances and supports retention. —— 1:1 matching award for The Remuneration Committee believes that it is important deferred bonus to encourage personal investment and ongoing shareholding in —— ROIC performance BBA Aviation plc. The Company has had a Deferred Bonus Plan condition for matching since 2006 and this plan enables a significant proportion of award executive directors’ short-term remuneration to be deferred and linked to performance-related long-term incentives. In 2011 ROIC was 10.6% and in 2012 it was 10.0%. The Committee A fixed percentage of the annual bonus awarded to is of the view that these targets are sufficiently stretching over the executive directors and other senior management has to be three year performance period. deferred into BBA Aviation’s shares for a period of three years. For awards made in 2011 and subsequently, if the employee The Company makes a matching award of shares (on a one leaves the Group at any time before the third anniversary of the to one basis) calculated by reference to the total amount of deferral then that part of the bonus compulsorily deferred and still gross bonus deferred. These matching awards are subject to a subject to restrictions would be forfeited, subject to the rules of performance condition that is tested at the end of the three-year the Deferred Bonus Plan. This does not apply to an employee performance period and the awards will lapse if the condition is leaving by reason of injury, disability, retirement, redundancy, not met. death or their employing company ceasing to be a part of the The overall effect is to defer the payment of 50% of the Group. The forfeiture restrictions would in general be lifted as to a annual bonus earned by executive directors as shown by the third on each anniversary of the deferral. On the third anniversary timeline below: of the deferral, the shares would be released to the employee. In 2011 and 2012 employees had the opportunity to Timeline for 2012 annual bonus voluntarily defer an additional portion of their bonus and therefore if they left before the third anniversary any voluntarily deferred 2012 Annual bonus targets set portion of the bonus would be retained by the individual, though the related matching award would usually lapse on their departure. The opportunity for voluntary deferral will not be 2013 2012 bonus targets measured offered in 2013. and performance conditions The Committee considers the award levels under the set for matching award Deferred Bonus Plan to be appropriate, when viewed in the context of the structure of the total remuneration package 2014 Year 1 of deferred 2012 bonus including the fact that there is a compulsorily required deferral of bonus which is forfeitable if the individual leaves within three years. These award levels support and reinforce the policy to 2015 Year 2 of deferred 2012 bonus reward sustained and superior performance with potential upper quartile remuneration and to retain highly capable executives. The matching awards made under the Deferred Bonus Plan 2016 Deferred 2012 bonus released in in 2009 vested during 2012 as the TSR performance condition shares and depending on performance was met in full. The TSR performance condition was replaced for condition being satis ed related grants made after 2010. matching shares released Details of awards made in 2012 to the executive directors under the Deferred Bonus Plan are set out in table 3 on page 73. The performance condition used for the matching awards since 2011 has been ROIC. The Committee’s intention in relation to the d. Longer-term performance incentives – Long-term Incentive matching awards to be made in relation to the 2012 annual Plan (LTIP) and Executive Share Option Plan (ESOP) bonus deferred under the Deferred Bonus Plan in 2013 is for the The Company’s longer-term performance incentives reward performance condition to be an adjusted EPS performance achievement of longer-term strategic objectives and provide the condition as to 50% and a ROIC performance condition as to the executive directors with accountability for the delivery of that other 50%. The ROIC performance condition is intended to be the strategy. same range as that used in 2012 (in relation to the deferral of 2011 Directors’ Report Directors’ Remuneration Report 69
LTIP TSR performance condition Under the LTIP, conditional awards of shares can be made of up to The comparator group in respect of the TSR performance one times the executive’s base salary or up to two times base condition for the 2009 LTIP awards and the 2009 and 2010 salary if the Remuneration Committee determines that the matching awards is set out below: executive will not be granted options in that year. In 2012, conditional awards made to Simon Pryce were one and a half TSR comparator group* times base salary, while those made to Mark Hoad were three- Arriva+ Meggitt quarters of base salary. For the awards planned to be made in Avis Europe+ National Express 2013 it is intended that the level of award to Simon Pryce will BAE Systems Northgate be one and a half times base salary, while those made to Mark BBA Aviation QinetiQ Group Hoad will be one times base salary. British Airways Rolls-Royce Group Part of the conditional share awards made under the LTIP in Carnival Smiths Group 2009 vested during 2012 as the TSR element of the performance Chemring Group Stagecoach Group condition was fully satisfied. The adjusted EPS element of the Cobham Thomas Cook Group performance condition was not met and that element of the LTIP EasyJet TUI Travel award lapsed. TSR was not used as a performance condition for First Group Ultra Electronics Holdings LTIP awards made after 2009. Forth Ports+ VT Group+ Details of awards made in 2012 to the executive directors Go-Ahead Group under the LTIP are set out in table 3 on page 73. * Reflects the composition of the comparator group at the date ESOP of grant Under the ESOP, the maximum value of options which an +Companies have delisted from the London Stock Exchange executive may be granted in any year is limited to three times base salary, or four times base salary if the Remuneration Committee TSR is measured by reference to the six months immediately determines that an executive will not receive an award under the following the start of the three-year performance period and LTIP in that year. There is no intention to grant unapproved options the three months after the end of the performance period and under the ESOP. therefore the TSR element of any performance condition cannot No participant can be granted approved options with a usually be tested before April of the relevant year. value of more than £30,000 (calculated at the date of grant) The TSR performance conditions in respect of the awards of and any gain that is made on the approved options by a UK conditional shares made in 2009 (50% TSR) and the matching taxpayer will be subject to the capital gains tax regime rather awards made in 2009 and 2010 (100% TSR) are measured over a than income tax. three-year performance period: No executive director received an award under the ESOP during 2012. TSR ranking in Percentage of TSR part of comparator group award vesting e. Longer-term performance incentives – performance At or above 75th percentile 100% conditions and other terms Between median and The conditional awards of shares made in 2009 under the LTIP 75th percentile Pro rata between 25% and 100% were subject to two performance conditions measured over a At median 25% three-year period. One half of the award was subject to a Below median Nil performance condition that measured the Company’s TSR against a comparator group of companies. The other half of the ROIC performance condition award was subject to an adjusted EPS performance condition. The ROIC performance condition in respect of the matching After consultation with the Company’s major shareholders awards made in 2011 and 2012 is average annual ROIC measured in 2009, it was agreed that the performance condition for share over a three-year performance period: awards under the LTIP (and any associated share options) made in 2010 and subsequently would not have a TSR element. The awards ROIC (2011 awards) Percentage award vesting made in 2010, 2011 and 2012 were solely EPS-based. The Committee’s intention in relation to the LTIP awards to be made At or above 11.5% 100% in 2013 is for the performance condition to be an adjusted EPS Between 10.0% and 11.5% Pro rata between 25% and 100% performance condition as to 50% and a ROIC performance At 10.0% 25% condition as to the other 50%. The ROIC performance condition is Below 10.0% Nil intended to be the same range as that used in 2012 (in relation to the Matching Awards) and the adjusted EPS condition is intended ROIC (2012 awards) Percentage award vesting to be the same range as that used in 2012 in relation to the LTIP, At or above 12.0% 100% although in 2013 it is intended that threshold vesting will only result Between 10.5% and 12.0% Pro rata between 25% and 100% in 25% (2012: 33%) of the applicable portion vesting. At 10.5% 25% Below 10.5% Nil Directors’ Report 70 Directors’ Remuneration Report
EPS performance condition In line with the method used to test the satisfaction of performance The adjusted EPS performance conditions in respect of awards of conditions under previous awards, the Remuneration Committee conditional shares made in 2009 (50% EPS), 2010, 2011 and 2012 has chosen to have the benefit of the expertise of an independent are measured over a three-year performance period: remuneration consulting firm, Towers Watson, to calculate TSR and the external auditor will perform certain agreed procedures EPS growth per annum Percentage of EPS part of on the adjusted EPS and ROIC calculations. Adjusted EPS growth (2009 awards) award vesting and ROIC are both calculated on a constant exchange rate basis. At or above retail price At present, awards made under either the LTIP or ESOP or index (RPI) increase plus the Deferred Bonus Plan lapse (subject to the rules of the relevant 7% per annum 100% plan) when an employee leaves the Company, except when the Between RPI increase plus Remuneration Committee exercises its discretion to permit 3% and 7% per annum Pro rata between 33% and 100% awards (in part or whole) to be retained and tested at the end of At RPI increase plus 3% the performance period. The exercise of such discretion is guided per annum 33% by the principles (including reduction by a service factor) set out Less than RPI increase plus in a leaver matrix approved by the Remuneration Committee. The 3% per annum Nil discretion is always subject to the rules of the relevant share plan, which set out the treatment of awards when an employee dies, is EPS growth per annum made redundant or leaves due to injury, disability, retirement or (2010 and 2011 awards) Percentage of award vesting their employing company ceasing to be a part of the Group. It is intended that this practice will continue to apply to awards made At or above RPI increase (under the LTIP, the ESOP and also the Deferred Bonus Plan) in 2013 plus 8% per annum 100% and beyond. Between RPI increase plus 4% and 8% per annum Pro rata between 33% and 100% BBA Group longer-term incentive plans prior to 2005 At RPI increase plus 4% The BBA Group 2004 Long-Term Incentive Plan (the 2004 Plan) per annum 33% provided for awards of options, conditional shares and matching Less than RPI increase plus shares. Some options granted under the 2004 Plan remain 4% per annum Nil exercisable as do some executive options awarded by the Company prior to 2005 which were made under the BBA Group EPS growth per annum 1994 Executive Share Option Scheme which expired in April 2004. (2012 awards) Percentage of award vesting BBA Group 2004 Savings-Related Share Option Scheme At or above 12% per annum 100% Executive directors may be eligible to participate in the BBA Group Between 6% and 12% 2004 Savings-Related Share Option Scheme, which is open to all per annum Pro rata between 33% and 100% eligible UK employees. Options are granted under three or five- At 6% per annum 33% year SAYE contracts at a 20% discount to the stock market price at Less than 6% per annum Nil the offer date. The maximum overall employee contribution is £250 per month. In setting these EPS performance conditions the Committee took into account both the growth prospects in the current market Share ownership requirements conditions and the wider economic environment. As part of its strategy to align shareholders’ and directors’ interests, As mentioned above, in 2013 it is intended that the Remuneration Committee expects all executive directors to threshold vesting will only result in vesting of 25% (2012: 33%) of build and maintain from shares vesting under the long-term the applicable portion of award subject to the adjusted EPS incentive plans a holding of shares with a value at least equal to performance condition. their base salary.
Awards and testing Clawback The details of the exact numbers of the awards to be made in 2013 All unvested share scheme awards made since 2010 to Executive are not known at the date of this Report, as they are calculated Management Committee members are subject to provisions based on the share price at the time of the award. concerning cancellation and reduction in the event of material The awards made in 2010 will be tested and, if vesting, will financial mis-statement. be released to participants in 2013, while those made in 2011 will be tested and, if vesting, will be released to participants in 2014. The awards made in 2012, if vesting, will be released to participants in 2015. There is no retesting of any performance conditions. Directors’ Report Directors’ Remuneration Report 71
Performance charts On pages 18 and 19 the adjusted EPS and ROIC figures for the past five years are set out. These are two of the key performance indicators tied to the Group’s mission statement which BBA Aviation uses to monitor progress against its goals: hence these are the measures used in the performance conditions of the share plan awards made in 2012.
However, the currently applicable regulations require that charts showing the Company’s TSR over the last five financial years compared with the equivalent information for the FTSE 350 Industrial Transportation sector be included in this Report. These are set out below. (The Remuneration Committee considers the FTSE 350 Industrial Transportation sector to be a suitable broad-based equity market index of which the Company is a constituent for the purposes of these charts.) The graph on the left shows the annual change in TSR for the Company and the index, while the graph on the right shows the cumulative change in TSR from 1 January 2008 to 1 January 2013.
Annualised total shareholder return: Cumulative total shareholder return: BBA Aviation vs Industrial Transportation sector BBA Aviation vs Industrial Transportation sector Total shareholder return % Total shareholder return %
1.8 75 1.6 1.4 50 1.2 1.0 25 0.8 0.6 0 0.4 0.2 0 -25 -0.2 -0.4 -50 -0.6 -0.8 -75 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013
BBA Aviation BBA Aviation FTSE 350 Industrial Transportation Index FTSE 350 Industrial Transportation Index Directors’ Report 72 Directors’ Remuneration Report
Table 1 – Emoluments and fees (audited)
Basic salary Car Other Annual Total Total and fees allowance emoluments Benefits1 bonus 2012 2011 £000 £000 £000 £000 £000 £000 £000 Michael Harper 191 – – – – 191 185 Simon Pryce 558 14 1122 6 3283 1,018 1,235 Mark Hoad 300 14 604 3 1763 553 631 Mark Harper 59 – – – – 59 57 Susan Kilsby 345 – – – – 345 – Nick Land 61 – – – – 61 60 Peter Ratcliffe 46 – – – – 46 45 Hansel Tookes 586 – – – – 58 54 Total 1,307 28 172 9 504 2,0207 2,2677
1 Benefits include benefits in kind such as life assurance and private medical insurance. 2 The Company’s pension contribution for Simon Pryce is 20% of basic salary. During the year he received £111,660 in lieu of a contribution by the Company to a pension scheme. 3 50% of the 2012 annual bonus is subject to compulsory deferral and also subject to forfeiture in the circumstances described earlier in this report. 4 The Company’s pension contribution for Mark Hoad is 20% of basic salary. During the year the Company paid £50,000 into Mark Hoad’s Defined Contribution Plan. The Company’s contribution in excess of the annual allowance of £50,000 was paid in cash and he received £10,000. 5 From date of appointment 10 April 2012. 6 The non-executive director fee paid to Hansel Tookes is a US dollar-based fee of $92,700 per annum (2011: US$90,000). The sterling amount paid during 2012 has increased from that paid in 2011 as a result of the change in the sterling/US dollar exchange rate. 7 If the total remuneration for 2012 of £2,020,000 and for 2011 of £2,267,000 had been converted using the 2012 average rate of 1.59 then the total remuneration for 2012 would have been $3,211,800 and for 2011 would have been $3,604,530. If the 2011 amount of total remuneration had been converted using the average rate of 2011, namely 1.60, then the US dollar equivalent for the total remuneration of 2011 would have been $3,627,200. The salaries and other emoluments of Simon Pryce and Mark Hoad and the fees for Michael Harper, Mark Harper, Susan Kilsby, Nick Land and Peter Ratcliffe were paid in sterling.
US dollar amounts for total remuneration (for 2012 and 2011) are shown in note 7 above, because with effect from the 2011 year end results, the Group’s presentation currency has been US dollars. In the narrative of this Remuneration Report all amounts are shown in sterling, the currency that the executive directors are paid in and the currency that is used in the parent company financial statements of BBA Aviation plc for the year ended 31 December 2012.
Table 2 – Directors’ interests in share capital (includes interests held by a director’s spouse)
16 16 Ordinary 29 /21p Ordinary 29 /21p shares shares 1 Jan 2012 31 Dec 2012 Beneficial Beneficial Michael Harper 165,965 170,965 Simon Pryce 939,874 973,282 Mark Hoad 89,052 153,136 Mark Harper 20,000 20,000 Susan Kilsby – – Nick Land 55,000 55,000 Peter Ratcliffe 15,000 15,000 Hansel Tookes 30,167 30,167
There were no changes in directors’ interests in share capital between 31 December 2012 and 28 February 2013. Directors’ Report Directors’ Remuneration Report 73
Table 3 – Award of Conditional, Matching and Linked Shares (audited)
Awarded Vested Lapsed Type of 1 Jan during during during Award 31 Dec Award 2012 the year the year the year date 2012 Simon Pryce Conditional LTIP 1,646,844 414,4001 540,2502 540,2502 08/03/12 980,744 Conditional DBP 112,621 133,4733 – – 15/03/12 246,094 Matching Conditional DBP 112,621 133,4733 – – 15/03/12 246,094 Matching Purchased DBP 287,971 – 133,9444 – – 154,0275 Linked 18,356 – – – – 18,356 Mark Hoad Conditional LTIP 334,744 111,4001 104,9006 104,9006 08/03/12 236,344 Conditional DBP 54,822 67,0733 – – 15/03/12 121,895 Matching Conditional DBP 54,822 67,0733 – – 15/03/12 121,895 Matching Purchased DBP 49,747 – 11,8887 – – 37,8595 Linked 18,356 – – – – 18,356
16 1 The average of the mid-market price of a BBA Aviation plc ordinary 29 /21p share on 5, 6 and 7 March 2012 was 202.10p. This was the price used to determine the number of conditional shares awarded under the Long-term Incentive Plan on 8 March 2012. On 8 March 2012 the mid-market price of a 16 BBA Aviation plc ordinary 29 /21p share was 205.00p. 2 Simon Pryce received an award of 1,080,500 conditional shares on 6 March 2009. On 2 April 2012 540,250 of these conditional shares vested and were 16 released to him at nil cost. 540,250 conditional shares lapsed. The mid-market price of a BBA Aviation plc ordinary 29 /21p share on 2 April 2012 was 216.00p. The market value of the shares received by Simon Pryce was £1,166,940. 3 A fixed percentage of the 2011 annual bonus was compulsorily deferred and paid in the form of a conditional share award. Matching awards were 16 granted on a one for one basis by reference to the amount of bonus deferred. The average of the mid-market price of a BBA Aviation plc ordinary 29 /21p share on 12, 13 and 14 March 2012 was 211.97p. This was the price used to determine the number of conditional shares and matching shares awarded 16 under the Deferred Bonus Plan on 15 March 2012. On 15 March 2012 the mid-market price of a BBA Aviation plc ordinary 29 /21p share was 216.20p. 4 Simon Pryce received an award of 133,944 matching shares on 17 March 2009. On 2 April 2012 these matching shares vested and were released to him at 16 nil cost. The mid-market price of a BBA Aviation plc ordinary 29 /21p share on 2 April 2012 was 216.00p. The market value of the shares received by Simon Pryce was £289,319. 5 A percentage of the annual bonus was invested in the form of purchased shares. The purchased shares are held in an Employee Share Trust and matching shares were awarded on a one for one basis by reference to the amount of bonus deferred. Matching shares awarded in 2010, 2011 and 2012 are subject to the performance conditions set out on page 69. 6 Mark Hoad received an award of 209,800 conditional shares on 6 March 2009. On 2 April 2012 104,900 of these conditional shares vested and were 16 released to him at nil cost. 104,900 conditional shares lapsed. The mid-market price of a BBA Aviation plc ordinary 29 /21p share on 2 April 2012 was 216.00p. The market value of the shares received by Mark Hoad was £226,584. 7 Mark Hoad received an award of 11,888 matching shares on 17 March 2009. On 2 April 2012 these matching shares vested and were released to him 16 at nil cost. The mid-market price of a BBA Aviation plc ordinary 29 /21p share on 2 April 2012 was 216.00p. The market value of the shares received by Mark Hoad was £25,678.
Additional notes i The performance conditions in respect of the conditional awards made in 2009 were partially satisfied (see pages 69 and 70 for details). ii Under normal circumstances, a linked award will only vest to the extent needed to provide sufficient funds to meet the exercise price of an Approved Share Option under the 2006 Executive Share Option Plan. The numbers stated in table 3 will be the maximum number of shares that will vest under the linked award which is linked to the number (noted in table 4 on page 74) of Approved Share Options granted under the 2006 Executive Share Option Plan. Fewer shares will vest under the linked award if the share price increases between the date of grant and vesting as fewer shares will be required to cover the exercise price of the Approved Share Option. Directors’ Report 74 Directors’ Remuneration Report
Table 4 – Options to acquire ordinary shares (audited)
Exercised/ Exercise Granted lapsed price per 1 Jan during during 31 Dec share Exercisable Expiry 2012 the year the year 2012 pence from date Simon Pryce 1 18,356 – – 18,356 163.43 2013 2013 2 27,456 – – 27,456 57.00 01/05/14 01/11/14 45,812 – – 45,812 Mark Hoad 3 40,259 – – 40,259 298.75 23/05/08 23/05/15 1 18,356 – – 18,356 163.43 2013 2013 2 8,026 – 8,026 – 57.00 01/05/12 01/11/12 2 13,728 – – 13,728 57.00 01/05/14 01/11/14 2 – 2,884 – 2,884 156.00 01/12/15 01/06/16 80,369 2,884 8,026 75,227
1 2006 Executive Share Option Plan. 2 2004 Savings-Related Share Option Scheme. 3 BBA Group 2004 Long-Term Incentive Plan (2004 Plan).
Additional notes 16 i BBA Aviation plc ordinary 29 /21p shares: mid-market price on 31 December 2012 was 223.00p. Mid-market price for 2012 was in the range 175.60p to 225.90p. ii There were no changes in the directors’ options to acquire ordinary shares between 31 December 2012 and 28 February 2013. iii Options granted under the 2004 Plan became exercisable after the third anniversary of the date of grant to the extent that the performance conditions were satisfied. iv Options granted under the 2006 Executive Share Option Plan are only exercisable on the day when the conditional share awards they are associated with vest and if the performance conditions as set out earlier in this report are satisfied. v Mark Hoad exercised options under the 2004 Savings-Related Share Option Scheme on 1 May 2012. The mid-market price of a BBA Aviation ordinary 16 29 /21p share on 1 May 2012 was 195.90p.
4. Non-Executive Directors’ Remuneration The dates of appointment or subsequent re-appointment and The non-executive directors each have a letter of appointment unexpired term of the non-executive directors as at which is available for inspection by shareholders at each AGM and 28 February 2013 are set out below: during normal business hours at the Company’s registered office. Unexpired No compensation would be payable for the early termination of Date of term as at the appointment of any non-executive director. appointment/ 28 February Non-executive directors’ fees were reviewed in December re-appointed 2013 2012 and with effect from 1 January 2013 the non-executive directors’ basic fee was increased by 3% from £46,350 to £47,750 Michael Harper 01/07/2010 4 months and Hansel Tookes’ fee was increased by 3% from $92,700 to Nick Land 01/08/2012 29 months $95,490. The fee paid to the Chairman was increased similarly by Mark Harper 01/12/2012 33 months 3% from £190,550 to £196,270. The annual supplements for the Peter Ratcliffe 09/01/2012 22 months Chairmen of the Audit and Risk and Remuneration Committees Hansel Tookes 19/02/2013 35 months were increased from £9,785 to £10,080, that for the Senior Susan Kilsby 10/04/2012 25 months Independent Director from £5,150 to £5,310 and the annual supplement for the CSR Responsible Director from £2,575 to The non-executive directors do not participate in the Company’s £2,660. These supplements reflect the increased commitments incentive plans or pension arrangements. and demands placed upon each of the non-executive directors in Directors’ Remuneration Report approved by the Board on performing their duties on the Board and its principal committees. 28 February 2013 and signed on its behalf by: Details of the non-executive directors’ fees for 2012 are set out in table 1 (page 72). Mark Harper Chairman of the Remuneration Committee Directors’ Report Going Concern 75
Going Concern The principal risks and uncertainties affecting the forecasts and The Group’s business activities together with the factors likely to projections, to which the Group is exposed, relate to the number affect its future development, performance and position are set of hours of flying activity, principally in B&GA, but also to a lesser out in the Directors’ Report on pages 2 to 75. The financial position extent in commercial and military aviation. Flying hours largely of the Group, its cash flows and liquidity position are described on dictate the drivers of revenue, namely fuel volumes in Signature, pages 51 and 52. In addition, note 17 of the Consolidated Financial aircraft movements in ASIG, engine overhaul cycles in ERO and Statements includes the Group’s objectives, policies and processes demand for components in Legacy Support and APPH. Further for managing its capital; its financial risk management objectives; details of these risks and uncertainties are provided on page 17. details of its financial instruments and hedging activities; and its The directors have carried out a critical review of the Group’s exposure to credit risk and liquidity risk. 2013 budget and medium-term plans, with due regard for the In the prior year the Group replaced its previous bank risks and uncertainties to which the Group is exposed and the facilities with a new $750 million multicurrency revolving credit impact that these could have on trading performance. The key facility, dated 21 April 2011, with a split maturity of $250 million assumptions used in constructing the budget were that: which is due to expire in April 2014, and $500 million which is due —— Signature, ASIG and Engine Repair & Overhaul will see gradual to expire in April 2016. In addition, the Group raised $300 million recovery throughout the plan period with ongoing in senior loan notes in the US private placement market, in operational improvements; May 2011, with maturities of seven, ten and twelve years. Under —— Legacy Support will experience modest revenue growth; and the $750 million multicurrency revolving credit facility, as at —— APPH will experience gradual recovery complimented by 31 December 2012, the Group had available $500 million of continued operational improvement. undrawn committed borrowing facilities. These debt obligations and facilities are subject to cross default. Further details relating to The directors have a reasonable expectation that the Company these debt arrangements are provided in note 16 to the and the Group have adequate resources to continue in operational Consolidated Financial Statements. The bank facility and the US existence for the foreseeable future. Thus they continue to adopt private placement notes are subject to two main financial the going concern basis of accounting in preparing the annual covenants: maximum net debt to underlying EBITDA of 3.5 times financial statements. and minimum net interest cover of 3.0 times EBITDA. The directors expect the Group to comply with these covenants for the foreseeable future. The Group’s forecasts and projections taking account of reasonably possible changes in trading performance show that the Group should be able to operate within the level of its current facilities in the foreseeable future. 76 Statement of Directors’ Responsibilities
Statement of Directors’ Responsibilities The directors are responsible for keeping adequate accounting The directors are responsible for preparing the Annual Report records that are sufficient to show and explain the Company’s and the Consolidated Financial Statements in accordance with transactions and disclose with reasonable accuracy at any time applicable law and regulations. the financial position of the Company and enable them to ensure Company law requires the directors to prepare financial that the financial statements comply with the Companies Act statements for each financial year. Under that law the directors are 2006. They are also responsible for safeguarding the assets of the required to prepare the group financial statements in accordance company and hence for taking reasonable steps for the prevention with International Financial Reporting Standards (IFRSs) as and detection of fraud and other irregularities. adopted by the European Union and Article 4 of the IAS Regulation The directors are responsible for the maintenance and and have elected to prepare the parent company financial integrity of the corporate and financial information included on statements in accordance with United Kingdom Generally the Company’s website. Legislation in the United Kingdom Accepted Accounting Practice (United Kingdom Accounting governing the preparation and dissemination of financial Standards and applicable law). Under company law the directors statements may differ from legislation in other jurisdictions. must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company Responsibility statement and of the profit or loss of the Company for that period. We confirm that to the best of our knowledge: In preparing the parent company financial statements, the —— the financial statements, prepared in accordance with the directors are required to: relevant financial reporting framework, give a true and fair ——select suitable accounting policies and then apply them view of the assets, liabilities, financial position and profit or consistently; loss of the Company and the undertakings included in the ——make judgements and accounting estimates that are consolidation taken as a whole; and reasonable and prudent; —— the management report, which is incorporated into the ——state whether applicable UK Accounting Standards have directors’ report, includes a fair review of the development been followed, subject to any material departures disclosed and performance of the business and the position of the and explained in the financial statements; and company and the undertakings included in the consolidation ——prepare the financial statements on the going concern basis taken as a whole, together with a description of the principal unless it is inappropriate to presume that the company will risks and uncertainties that they face. continue in business. By order of the Board In preparing the group financial statements, International Accounting Standard 1 requires that directors: Simon Pryce Mark Hoad ——properly select and apply accounting policies; Group Chief Executive Group Financial Director ——present information, including accounting policies, in a 28 February 2013 28 February 2013 manner that provides relevant, reliable, comparable and understandable information; ——provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and ——make an assessment of the company’s ability to continue as a going concern. Independent Auditor’s Report 77
Independent Auditor’s Report Separate opinion in relation to IFRSs as issued by the IASB to the members of BBA Aviation plc As explained in the Accounting Policies on page 83 to 87 of the We have audited the Consolidated Financial Statements of BBA Group financial statements, the Group in addition to complying Aviation plc for the year ended 31 December 2012 which comprise with its legal obligation to apply IFRSs as adopted by the European the Consolidated Income Statement, the Consolidated Statement Union, has also applied IFRSs as issued by the International of Comprehensive Income, the Consolidated Balance Sheet, the Accounting Standards Board (IASB). Consolidated Cash Flow Statement, the Consolidated Statement In our opinion the Group financial statements comply with of Changes in Equity, the Accounting Policies and the related IFRSs as issued by the IASB. notes 1 to 26. The financial reporting framework that has been applied in their preparation is applicable law and Opinion on other matter prescribed by the Companies Act 2006 International Financial Reporting Standards (IFRSs) as adopted by In our opinion the information given in the Directors’ Report for the European Union. the financial year for which the Group financial statements are This report is made solely to the Company’s members, as a prepared is consistent with the Group financial statements. body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might Matters on which we are required to report by exception state to the Company’s members those matters we are required We have nothing to report in respect of the following: to state to them in an Auditor’s Report and for no other purpose. Under the Companies Act 2006 we are required to report to To the fullest extent permitted by law, we do not accept or assume you if, in our opinion: responsibility to anyone other than the Company and the —— certain disclosures of directors’ remuneration specified by law Company’s members as a body, for our audit work, for this report, are not made; or or for the opinions we have formed. —— we have not received all the information and explanations we require for our audit. Respective responsibilities of directors and auditor As explained more fully in the Statement of Directors’ Responsibilities, Under the Listing Rules we are required to review: the directors are responsible for the preparation of the Group —— the directors’ statement, contained within the Directors’ financial statements and for being satisfied that they give a true Report on page 75, in relation to going concern; and and fair view. Our responsibility is to audit and express an opinion —— the part of the Corporate Governance Statement relating to on the Group financial statements in accordance with applicable the Company’s compliance with the nine provisions of the law and International Standards on Auditing (UK and Ireland). UK Corporate Governance Code specified for our review; Those standards require us to comply with the Auditing Practices —— certain elements of the report to shareholders by the Board Board’s Ethical Standards for Auditors. on directors’ remuneration.
Scope of the audit of the financial statements Other matter An audit involves obtaining evidence about the amounts and We have reported separately on the parent company financial disclosures in the financial statements sufficient to give reasonable statements of BBA Aviation plc for the year ended 31 December assurance that the financial statements are free from material 2012 and on the information in the Directors’ Remuneration misstatement, whether caused by fraud or error. This includes an Report that is described as having been audited. assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently Nigel Mercer (Senior statutory auditor) applied and adequately disclosed; the reasonableness of for and on behalf of Deloitte LLP significant accounting estimates made by the directors; and Chartered Accountants and Statutory Auditor the overall presentation of the financial statements. In addition, London, United Kingdom we read all the financial and non-financial information in the 28 February 2013 annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements In our opinion the Group financial statements: ——give a true and fair view of the state of the Group’s affairs as at 31 December 2012 and of its profit for the year then ended; ——have been properly prepared in accordance with IFRSs as adopted by the European Union; and ——have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. Consolidated Financial Statements 78 Consolidated Income Statement
Financial statements Consolidated Income Statement 77 Independent Auditor’s Report to the members of BBA Aviation plc 2012 2011 78 Consolidated Income Statement Exceptional Exceptional Underlying1 Items Total Underlying1 Items Total 79 Consolidated Statement of Notes $m $m $m $m $m $m Comprehensive Income 80 Consolidated Balance Sheet Revenue 1 2,178.9 – 2,178.9 2,136.7 – 2,136.7 Cost of sales (1,766.5) – (1,766.5) (1,729.4) – (1,729.4) 81 Consolidated Cash Flow Statement Gross profit 412.4 – 412.4 407.3 – 407.3 82 Consolidated Statement of Changes in Equity Distribution costs (38.8) – (38.8) (39.4) – (39.4) 83 Accounting Policies of the Group Administrative expenses (182.3) (7.6) (189.9) (174.6) (7.9) (182.5) 88 Notes to the Consolidated Other operating income 2.8 – 2.8 4.6 – 4.6 Financial Statements Share of profit of associates 1.6 – 1.6 2.0 – 2.0 121 Independent Auditor’s Report to the members of BBA Aviation plc Other operating expenses (0.3) (8.1) (8.4) (1.0) (3.8) (4.8) 122 Company Balance Sheet Restructuring costs – (17.0) (17.0) – (1.3) (1.3) Loss on disposal of businesses – – – – (5.3) (5.3) 123 Accounting Policies of the Company Operating profit 1,2 195.4 (32.7) 162.7 198.9 (18.3) 180.6 124 Notes to the Company Financial Statements Investment income 3 6.0 – 6.0 10.7 11.7 22.4 129 Principal Subsidiary and Finance costs 3 (38.4) – (38.4) (39.4) – (39.4) Associated Undertakings 130 Five Year Summary Profit before tax 163.0 (32.7) 130.3 170.2 (6.6) 163.6 131 Shareholder Information Tax 4 (24.3) 9.5 (14.8) (34.5) 23.0 (11.5) Profit for the period 138.7 (23.2) 115.5 135.7 16.4 152.1
Attributable to: Equity holders of the parent 139.0 (23.2) 115.8 136.0 16.4 152.4 Non-controlling interest (0.3) – (0.3) (0.3) – (0.3) 138.7 (23.2) 115.5 135.7 16.4 152.1
Earnings per share Adjusted Unadjusted Adjusted Unadjusted Basic 6 29.0¢ 24.2¢ 29.0¢ 32.5¢ Diluted 6 28.5¢ 23.8¢ 28.3¢ 31.7¢
1 Before exceptional items. Exceptional items are items which are material or non-recurring in nature, costs relating to acquisitions and the amortisation of acquired intangibles, as set out in note 2 to the Consolidated Financial Statements. Consolidated Financial Statements Consolidated Statement of Comprehensive Income 79
Consolidated Statement of Comprehensive Income
2012 2011 $m $m Profit for the period 115.5 152.1
Other comprehensive income: Exchange difference on translation of foreign operations (24.6) (2.0) Gains/(losses) on net investment hedges 33.2 (1.9) Fair value movements in foreign exchange cash flow hedges 5.1 (1.4) Transfer to profit or loss from equity on foreign exchange cash flow hedges (0.8) 2.4 Fair value movements in interest rate cash flow hedges (5.4) (6.7) Transfer to profit or loss from equity on interest rate cash flow hedges 10.3 9.4 Actuarial losses on defined benefit pension schemes (23.0) (16.7) Tax relating to components of other comprehensive income 8.8 4.0 Total comprehensive income for the period 119.1 139.2
Attributable to: Shareholders of BBA Aviation plc 119.4 139.5 Non-controlling interests (0.3) (0.3) 119.1 139.2 Consolidated Financial Statements 80 Consolidated Balance Sheet
Financial statements Consolidated Balance Sheet 77 Independent Auditor’s Report to the members of BBA Aviation plc 31 December 31 December 78 Consolidated Income Statement 2012 2011 Notes $m $m 79 Consolidated Statement of Comprehensive Income Non-current assets 80 Consolidated Balance Sheet Goodwill 8 834.7 806.6 81 Consolidated Cash Flow Other intangible assets 8 174.1 176.2 Statement Property, plant and equipment 9 511.5 517.4 82 Consolidated Statement of Changes in Equity Interests in associates 10 5.0 4.2 83 Accounting Policies of the Group Trade and other receivables 12 53.7 43.2 Deferred tax asset 20 6.0 10.5 88 Notes to the Consolidated Financial Statements 1 1,585.0 1,558.1 121 Independent Auditor’s Report to the members of BBA Aviation plc Current assets 122 Company Balance Sheet Inventories 11 261.8 233.9 123 Accounting Policies of the Company Trade and other receivables 12 377.3 353.5 124 Notes to the Company Cash and cash equivalents 151.1 125.1 Financial Statements Tax recoverable 11.0 0.4 129 Principal Subsidiary and 801.2 712.9 Associated Undertakings Total assets 1 2,386.2 2,271.0 130 Five Year Summary 131 Shareholder Information Current liabilities Trade and other payables 13 (471.1) (427.1) Tax liabilities (96.1) (86.1) Obligations under finance leases 14 (1.5) (1.5) Borrowings 16 (11.2) (23.7) Provisions 18 (3.9) (1.1) (583.8) (539.5) Net current assets 217.4 173.4
Non-current liabilities Borrowings 16 (580.6) (519.7) Other payables due after one year 13 (23.5) (62.8) Retirement benefit obligations 19 (66.3) (53.5) Obligations under finance leases 14 (1.4) (2.9) Deferred tax liabilities 20 (82.0) (84.1) Provisions 18 (27.2) (28.8) (781.0) (751.8) Total liabilities 1 (1,364.8) (1,291.3) Net assets 1 1,021.4 979.7
Equity Share capital 21 251.5 250.1 Share premium account 21 732.8 732.4 Other reserves 21 6.9 6.9 Treasury reserve 21 (5.5) (9.0) Capital reserve 21 34.4 39.2 Hedging and translation reserves 21 (38.0) (55.8) Retained earnings 21 43.8 19.8 Equity attributable to shareholders of BBA Aviation plc 1,025.9 983.6 Non-controlling interest (4.5) (3.9) Total equity 1,021.4 979.7
These financial statements were approved by the Board of Directors on 28 February 2013 and signed on its behalf by
Simon Pryce Mark Hoad Group Chief Executive Group Finance Director Consolidated Financial Statements Consolidated Cash Flow Statement 81
Consolidated Cash Flow Statement
2012 2011 Notes $m $m Operating activities Net cash flow from operating activities 23 207.2 235.6
Investing activities Interest received 7.3 18.0 Dividends received from associates 0.8 1.0 Purchase of property, plant and equipment (51.1) (38.5) Purchase of intangible assets (5.4) (5.4) Proceeds from disposal of property, plant and equipment 0.7 14.6 Acquisition of subsidiaries 24 (35.1) (128.7) Proceeds from disposal of businesses – 3.3 Investment in associates – (0.2) Deferred consideration on prior year acquisitions – (0.4) Net cash outflow from investing activities (82.8) (136.3)
Financing activities Interest paid (38.3) (39.0) Interest element of finance leases paid (0.4) (0.5) Dividends paid (67.9) (63.7) Losses from realised foreign exchange contracts (20.8) (41.2) Proceeds from issue of ordinary shares 1.8 141.9 Issue of loan notes – 300.0 Purchase of own shares (12.4) – Increase/(decrease) in loans 52.5 (411.4) Decrease in finance leases (1.5) (1.4) Decrease in overdrafts (12.1) (19.6) Net cash outflow from financing activities (99.1) (134.9)
Increase/(decrease) in cash and cash equivalents 25.3 (35.6) Cash and cash equivalents at beginning of year 125.1 169.1 Exchange adjustments 0.7 (8.4) Cash and cash equivalents at end of year 17 151.1 125.1
Net debt at beginning of year (403.6) (492.8) Increase/(decrease) in cash and cash equivalents 25.3 (35.6) (Increase)/decrease in loans (52.5) 111.4 Decrease in finance leases 1.5 1.4 Decrease in overdrafts 12.1 19.6 Exchange adjustments 0.8 (7.6) Net debt at end of year 17 (416.4) (403.6) Consolidated Financial Statements 82 Consolidated Statement of Changes in Equity
Financial statements Consolidated Statement of Changes in Equity 77 Independent Auditor’s Report to the members of BBA Aviation plc Non- 78 Consolidated Income Statement Share Share Retained Other controlling Total capital premium earnings reserves Total interests equity 79 Consolidated Statement of $m $m $m $m $m $m $m Comprehensive Income 80 Consolidated Balance Sheet Balance at 1 January 2011 228.6 612.1 (58.1) (21.1) 761.5 (4.1) 757.4 81 Consolidated Cash Flow Total comprehensive income for the period – – 139.7 (0.3) 139.4 (0.2) 139.2 Statement Dividends – – (63.7) – (63.7) – (63.7) 82 Consolidated Statement of Issue of share capital 21.5 120.3 – – 141.8 – 141.8 Changes in Equity Movement on treasury reserve – – – (1.3) (1.3) – (1.3) 83 Accounting Policies of the Group Credit to equity for equity-settled share-based payments – – – 4.4 4.4 – 4.4 Deferred tax on share-based payment transactions – – 1.5 – 1.5 – 1.5 88 Notes to the Consolidated Financial Statements Changes in non-controlling interests – – – – – 0.4 0.4 121 Independent Auditor’s Report to Transfer to retained earnings – – 0.4 (0.4) – – – the members of BBA Aviation plc Balance at 1 January 2012 250.1 732.4 19.8 (18.7) 983.6 (3.9) 979.7 122 Company Balance Sheet Total comprehensive income for the period – – 101.6 17.8 119.4 (0.3) 119.1 123 Accounting Policies of the Company Dividends – – (67.9) – (67.9) – (67.9) 124 Notes to the Company Issue of share capital 1.4 0.4 – – 1.8 – 1.8 Financial Statements Movement on treasury reserve – – – (12.4) (12.4) – (12.4) 129 Principal Subsidiary and Credit to equity for equity-settled share-based payments – – – 0.9 0.9 – 0.9 Associated Undertakings Deferred tax on share-based payment transactions – – 0.5 – 0.5 – 0.5 130 Five Year Summary Changes in non-controlling interests – – – – – (0.3) (0.3) 131 Shareholder Information Transfer to retained earnings – – (10.2) 10.2 – – – Balance at 31 December 2012 251.5 732.8 43.8 (2.2) 1,025.9 (4.5) 1,021.4 Consolidated Financial Statements Accounting Policies 83
Accounting Policies depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the Basis of accounting instrument. For financial liabilities, the standard retains most of the The financial statements have been prepared using the historical IAS 39 requirements. The main change is that, in cases where the cost convention adjusted for the revaluation of certain financial fair value option is taken for financial liabilities, the part of a fair instruments. The principal accounting policies adopted are set value change due to an entity’s own credit risk is recorded in other out below which have been consistently applied with the prior comprehensive income rather than the income statement, unless year except where noted. this creates an accounting mismatch. The Group is yet to assess The financial statements have been prepared in accordance IFRS 9’s full impact. The Group will also consider the impact of the with International Financial Reporting Standards (IFRS) adopted remaining phases of IFRS 9 when they are completed. for use in the European Union and therefore comply with Article 4 IFRS 10, ‘Consolidated financial statements’, builds on of the EU IAS Regulation. They have also been prepared in existing principles by identifying the concept of control as the accordance with IFRS as issued by the International Accounting determining factor in whether an entity should be included Standards Board. within the Consolidated Financial Statements of the parent There are no IFRSs or IFRIC interpretations that are effective company. The standard provides additional guidance to assist for the first time for the financial year beginning on or after in the determination of control where this is difficult to assess. 1 January 2012 that would be expected to have a material impact The Group is yet to assess IFRS 10’s full impact. on the Group. IFRS 12, ‘Disclosures of interest in other entities’, includes the A number of new standards and amendments to standards disclosure requirements for all forms of interests in other entities, and interpretations are effective for annual periods beginning including joint arrangements, associates, special purpose vehicles after 1 January 2012, and have not been applied in preparing and other off balance sheet vehicles. The Group is yet to assess these Consolidated Financial Statements. None of these are IFRS 12’s full impact. expected to have a significant effect on the Consolidated Financial There are no other IFRSs or IFRIC interpretations that are not Statements of the Group, except for the following set out below: yet effective that would be expected to have a material impact on Amendment to IAS 1, ‘Financial statement presentation’ the Group. regarding other comprehensive income. The main change resulting from these amendments is a requirement for entities to Basis of consolidation group items presented in ‘other comprehensive income’ (OCI) on The Group financial statements incorporate the financial the basis of whether they are potentially reclassifiable to profit or statements of the parent company and all subsidiary undertakings loss subsequently (reclassification adjustments). The amendments under the acquisition method of accounting. do not address which items are presented in OCI. The results of subsidiary undertakings acquired or sold IFRS 13, ‘Fair value measurement’, aims to improve during the year are included in the Consolidated Income consistency and reduce complexity by providing a precise Statement from the effective date of acquisition or up to the definition of fair value and a single source of fair value measurement effective date of disposal as appropriate. Control is achieved and disclosure requirements for use across IFRSs. The requirements, where the Company has the power to govern the financial and which are largely aligned between IFRSs and US GAAP, do not operating policies of an investee so as to obtain benefits from extend to the use of fair value accounting but provide guidance activities. on how it should be applied where its use is already required or Goodwill on acquisitions, being the excess of the fair value permitted by other standards within IFRSs or US GAAP. of the consideration paid, the non-controlling interest, and the fair IAS 19, ‘Employee benefits’, was amended in June 2011 and value of any previously held equity interest in the acquiree over is effective for annual periods beginning on or after 1 January the fair value of the identifiable net assets and liabilities acquired, 2013. The principal impact for the Group will be that the concepts is capitalised and tested for impairment on an annual basis. of expected return on assets and interest expense on the defined Associated undertakings are those investments other than benefit obligation as separate components of defined benefit subsidiary undertakings where the Group is in a position to cost will be replaced by a concept that interest will be calculated exercise a significant influence, typically through participation in on the net of the defined benefit obligation, after allowance for the financial and operating policy decisions of the investee. The any asset ceilings and additional liability under IFRIC 14. If this Consolidated Financial Statements include the Group’s share of concept had been adopted by the Group in 2012, it is estimated the post-acquisition reserves of all such companies. that underlying profit before tax would have been $5.2 million lower and adjusted basic EPS 1.1 cents per share lower. Going concern IFRS 9, ‘Financial instruments’, addresses the classification, The directors have, at the time of approving the financial measurement and recognition of financial assets and financial statements, a reasonable expectation that the Company and the liabilities. IFRS 9 was issued in November 2009 and October 2010. Group have adequate resources to continue in operational It replaces the parts of IAS 39 that relate to the classification and existence for the foreseeable future. Thus they continue to adopt measurement of financial instruments. IFRS 9 requires financial the going concern basis of accounting in preparing the financial assets to be classified into two measurement categories: those statements. Further detail is contained in the directors’ statement measured as at fair value and those measured at amortised cost. of going concern on page 75 of the Directors’ Report. The determination is made at initial recognition. The classification Consolidated Financial Statements 84 Accounting Policies
Financial statements Accounting Policies – continued relating to the ineffective portion is recognised immediately, and 77 Independent Auditor’s Report to is included in the operating profit of the income statement. Gains the members of BBA Aviation plc Investments in associates and losses deferred in the foreign currency translation reserve are 78 Consolidated Income Statement In the Group’s financial statements, investments in associated recognised in profit or loss on disposal of the foreign operation. 79 Consolidated Statement of undertakings are stated at cost plus the Group’s share of post- Changes in the fair value of the foreign exchange contracts Comprehensive Income acquisition reserves less provision for impairment. classified as fair value through profit or loss (FVTPL) and those that 80 Consolidated Balance Sheet do not qualify for hedge accounting, are recognised in the income 81 Consolidated Cash Flow Statement Foreign currencies statement as they arise, and are included in the operating profit of 82 Consolidated Statement of Transactions in foreign currencies are translated into the entity’s the income statement. Changes in the fair value of the interest Changes in Equity functional currency at the rate of exchange at the date of the rate swaps classified as FVTPL are charged to the net interest line 83 Accounting Policies of transaction. Monetary assets and liabilities denominated in other of the income statement. the Group currencies at the balance sheet date are recorded at the rates of 88 Notes to the Consolidated exchange prevailing at that date. Any gain or loss arising from a Financial instruments Financial Statements change in exchange rates subsequent to the date of transaction is Financial assets and financial liabilities are recognised on the 121 Independent Auditor’s Report to the members of BBA Aviation plc recognised in the income statement. Group’s balance sheet when the Group becomes a party to the 122 Company Balance Sheet The income statements of operations outside of the US are contractual provisions of the instrument. Financial assets are 123 Accounting Policies of translated into US dollars at the average exchange rates for the accounted for at the trade date. the Company year and their balance sheets are translated into US dollars at the 124 Notes to the Company exchange rates ruling at the balance sheet date. All exchange Cash and cash equivalents Financial Statements differences arising on consolidation are recognised in other Cash and cash equivalents comprise cash on hand and deemed 129 Principal Subsidiary and comprehensive income. All other translation differences are taken deposits, and other short-term highly liquid investments that are Associated Undertakings to the income statement, with the exception of differences on readily convertible to a known amount of cash and are subject to 130 Five Year Summary foreign currency borrowing and derivative instruments to the an insignificant risk of changes in value. 131 Shareholder Information extent that they are used to provide a hedge against the Group’s equity investments in overseas operations, which are recognised Trade receivables in other comprehensive income together with the exchange Trade receivables do not carry any interest and are stated at their difference on the net investment in those operations. nominal value as reduced by appropriate allowances for estimated Goodwill and fair value adjustments arising from the irrecoverable amounts. acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Financial liabilities and equity Financial liabilities and equity instruments are classified according Operating profit to the substance of the contractual arrangements entered into. An Operating profit is stated after charging exceptional items and equity instrument is any contract that evidences a residual interest after the share of results of associates but before investment in the assets of the Group after deducting all of its liabilities. income and finance costs. Exceptional items are items which are material or non- Borrowings recurring in nature, costs relating to acquisitions and the Interest-bearing loans and overdrafts are initially recorded at fair amortisation of acquired intangibles. value (which equates to proceeds less direct issue costs at inception). Subsequent to initial recognition, borrowings are Derivative financial instruments and hedge accounting measured at amortised cost, using the effective interest rate Derivative financial instruments utilised by the Group comprise method, except where they are identified as a hedged item in a interest rates swaps, cross-currency swaps and foreign exchange fair value hedge. Any difference between the proceeds net of contracts. All such instruments are used for hedging purposes to transaction costs and the amount due on settlement is recognised manage the risk profile of an underlying exposure of the Group in in the income statement over the term of the borrowings. line with the Group’s risk management policies. All derivative instruments are recorded on the balance sheet at fair value. Trade payables Recognition of gains or losses on derivative instruments depends Trade payables are not interest bearing and are stated at their on whether the instrument is designated as a hedge and the type nominal value. of exposure it is designed to hedge. The effective portion of gains or losses on cash flow hedges Equity instruments is recognised in other comprehensive income until the impact Equity instruments issued by the Company are recorded at the from the hedged item is recognised in the income statement. The proceeds received, net of direct issue costs. ineffective portion of such gains and losses is recognised in the income statement immediately, and is included in the ‘other gains Revenue recognition and losses’ line of the income statement. Revenue is measured at the fair value of the consideration received Hedges of net investments in non US dollar territories are or receivable, and represents amounts receivable for goods accounted for similarly to cash flow hedges. Any gain or loss on the supplied and services provided by the Group excluding hedging instrument relating to the effective portion of the hedge intercompany transactions, sales by associated undertakings and is recognised in other comprehensive income. The gain or loss sales taxes. Consolidated Financial Statements Accounting Policies 85
Within the engine overhauls business, turnover and associated Finance costs which are directly attributable to the construction profit are recognised on a percentage of completion basis once of major items of property, plant and equipment are capitalised as the terms of the contract have been agreed with the customer part of those assets. The commencement of capitalisation begins and the ultimate profitability of the contract can be determined when both finance costs and expenditures for the asset are being with reasonable certainty. The percentage of completion is incurred and activities that are necessary to get the asset ready generally based on hours incurred compared to management’s for use are in progress. Capitalisation ceases when substantially best estimate of the total hours of production. all the activities that are necessary to get the asset ready for use are complete. Research and development expenditure Research expenditure is charged against income in the year in Impairment of assets which it is incurred. An internally generated intangible asset At each balance sheet date, the Group reviews the carrying value arising from the Group’s development expenditure is recognised of its tangible and intangible assets to determine whether there is only if the asset can be separately identified, it is probable that the any indication that those assets have suffered an impairment loss. asset will generate future economic benefits and the development If any such indication exists, the recoverable amount of the asset is costs of the asset can be measured reliably. estimated in order to determine the extent of the impairment loss. Where the asset does not generate cash flows that are Post-retirement benefits independent from other assets, the Group estimates the Payments to defined contribution retirement benefit schemes are recoverable amount of the cash-generating unit to which the charged as an expense as they fall due. asset belongs. An intangible asset with an indefinite life is tested For defined benefit retirement benefit schemes, the cost is for impairment annually and whenever there is an indication that determined using the Projected Unit Credit Method, with actuarial the asset may be impaired. valuations being carried out annually on 31 December. Actuarial Recoverable amount is the higher of fair value less costs to gains and losses are recognised in full in the period in which they sell and value in use. In assessing value in use, the estimated future occur. They are recognised outside profit or loss and presented in cash flows are discounted to their present value using a pre-tax the statement of comprehensive income. discount rate that reflects current market assessments of the time The service cost of providing retirement benefits to value of money. The risks specific to the asset are reflected as an employees during the year is charged to operating profit in the adjustment to the future estimated cash flows. year. Any past service cost is recognised immediately to the extent If the recoverable amount of an asset or cash-generating that the benefits are already vested, and otherwise is amortised unit is estimated to be less than its carrying amount, the carrying on a straight-line basis over the average period until the benefits amount of the asset or cash-generating unit is reduced to its become vested. recoverable amount. An impairment loss is recognised The retirement benefit obligation recognised in the balance immediately. sheet represents the present value of the defined benefit Where an impairment loss subsequently reverses, the obligation as adjusted for unrecognised past service costs, and carrying amount of the asset or cash-generating unit is increased reduced by the fair value of scheme assets plus any additional to the revised estimate of its recoverable amount, but so that the liability to be recognised in accordance with IFRIC 14 and the increased carrying amount does not exceed the carrying amount minimum funding requirement. Any asset resulting from this that would have been determined had no impairment loss been calculation is only recognised to the extent that it is recoverable. recognised for the asset or cash-generating unit in prior years. Defined benefit scheme contribution levels are determined Excluding goodwill, a reversal of an impairment loss is recognised by valuations undertaken by independent qualified actuaries. as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment Property, plant and equipment loss is treated as a revaluation increase. Property, plant and equipment is stated in the balance sheet at cost less accumulated depreciation and provision for impairments. Intangible assets Depreciation is provided on the cost of property, plant and Licences and contracts, other than manufacturing licences within equipment less estimated residual value and is calculated on a our Legacy Support business, are shown at amortised cost which straight-line basis over the following estimated useful lives of is provided for on a straight-line basis over their useful life. Within the assets: our Legacy Support business we acquire licences from OEMs to become the alternate OEM for that product. The underlying Land Not depreciated platform often has an indeterminable remaining lifespan on Buildings 40 years maximum acquisition. In this instance the licence is not amortised until Fixtures and equipment (including management has sufficient visibility over the remaining life of the essential commissioning costs) 3-18 years associated platform, which is typically 20 years, at which point amortisation commences over the remaining useful life of the licence on a straight-line basis. Tooling, vehicles, computer and office equipment are categorised Where computer software is not an integral part of a related within fixtures and equipment. item of computer hardware, the software is treated as an intangible asset. Computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific Consolidated Financial Statements 86 Accounting Policies
Financial statements Accounting Policies – continued simulations. For cash-settled options, the fair value of the option is 77 Independent Auditor’s Report to revisited at each balance sheet date. For both cash and equity- the members of BBA Aviation plc software. Amortisation is provided on the cost of software and is settled options, the Group revises its estimates of the number of 78 Consolidated Income Statement calculated on a straight-line basis over the useful life of the options that are expected to become exercisable at each balance 79 Consolidated Statement of software. sheet date. Comprehensive Income The Group makes an assessment of the fair value of 80 Consolidated Balance Sheet intangible assets arising on acquisitions. An intangible asset will Leases 81 Consolidated Cash Flow Statement be recognised as long as the asset is separable or arises from Where assets are financed by lease agreements that give rights 82 Consolidated Statement of contractual or other legal rights, and its fair value can be measured similar to ownership (finance leases), the assets are treated as if Changes in Equity reliably. Amortisation is provided on the fair value of the asset and they had been purchased and the leasing commitments are 83 Accounting Policies of is calculated on a straight-line basis over its useful life. shown as obligations to the lessors. The capitalisation values of the Group the assets are written off on a straight line basis over the shorter of 88 Notes to the Consolidated Provisions the periods of the leases or the useful lives of the assets concerned. Financial Statements Provisions are recognised when the Group has a present obligation The capital elements of future leases are recorded as liabilities, 121 Independent Auditor’s Report to the members of BBA Aviation plc (legal or constructive) as a result of a past event, it is probable that while the interest elements are charged to the income statement 122 Company Balance Sheet the Group will be required to settle that obligation and a reliable over the period of the leases to produce a constant rate of charge 123 Accounting Policies of estimate can be made of the amount of the obligation. on the balance of capital payments outstanding. the Company The amount recognised as a provision is the best estimate For all other leases (operating leases) the rental payments 124 Notes to the Company of the consideration required to settle the present obligation at are charged to the income statement on a straight-line basis over Financial Statements the balance sheet date, taking into account the risks and the lives of the leases. 129 Principal Subsidiary and uncertainties surrounding the obligation. Where a provision is Associated Undertakings measured using the cash flows estimated to settle the present Inventory 130 Five Year Summary obligation, its carrying amount is the present value of those cash Inventory is stated at the lower of cost and net realisable value. 131 Shareholder Information flows. Cost comprises the cost of raw materials and an appropriate When some or all of the economic benefits required to proportion of labour and overheads in the case of work in progress settle a provision are expected to be recovered from a third party, and finished goods. Cost is calculated using the first in first out a receivable is recognised as an asset if it is virtually certain that method in the Flight Support segment, and weighted average reimbursement will be received on settlement of a related method in the Aftermarket Services segment. Provision is made provision and the amount of the receivable can be measured for slow moving or obsolete inventory as appropriate. reliably. Taxation Restructurings The charge for taxation is based on the profit for the year and A restructuring provision is recognised when the Group has takes into account taxation deferred due to temporary differences developed a detailed formal plan for the restructuring and has between the treatment of certain items for taxation and raised a valid expectation in those affected that it will carry out the accounting purposes. Current tax is calculated at tax rates which restructuring by starting to implement the plan or announcing its have been enacted or substantially enacted at the balance main features to those affected by it. The measurement of a sheet date. restructuring provision includes only the direct expenditures Deferred tax is the tax expected to be payable or recoverable arising from the restructuring, which are those amounts that are on differences between the carrying amounts of assets and both necessarily entailed by the restructuring and not associated liabilities in the financial statements and the corresponding tax with the ongoing activities of the entity. bases in the computation of taxable profit, and is accounted for using the balance sheet liability method. Onerous contracts No provision is made for temporary differences on Present obligations arising under onerous contracts are unremitted earnings of foreign subsidiaries, joint ventures or recognised and measured as provisions. An onerous contract is associates where the Group has control and the reversal of the considered to exist where the Group has a contract under which temporary difference is not foreseeable. the unavoidable costs of meeting the obligations under the The carrying amount of deferred tax assets is reviewed at contract exceed the economic benefits expected to be received each balance sheet date and reduced to the extent that it is no under it. longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Share-based payments Deferred tax is calculated at tax rates which have been The Group operates a number of cash and equity-settled share- enacted or substantially enacted at the balance sheet date and based compensation plans. The fair value of the compensation is that are expected to apply in the period when the liability is recognised in the income statement as an expense. The total settled or the asset is realised. Deferred tax is charged or credited amount to be expensed over the vesting period is determined by in the income statement, except when it relates to items charged reference to the fair value of the options granted and calculated or credited to equity, in which case the deferred tax is also dealt using the valuation technique most appropriate to each type of with in equity. award. These include Black-Scholes calculations and Monte Carlo Consolidated Financial Statements Accounting Policies 87
Critical accounting judgements and key sources of estimation uncertainty Taxation The key assumptions concerning the future, and other key sources As part of the process for preparing the Group’s financial of estimation uncertainty at the balance sheet date, that have a statements, management is required to calculate income tax significant risk of causing a material adjustment to the carrying accruals. This process involves estimates of the current tax amounts of assets and liabilities within the next financial year, are exposures together with assessing temporary differences discussed below. The judgements used by management in the resulting from differing treatment of items for tax and accounting application of the Group’s accounting policies in respect of these purposes. These differences result in deferred tax assets and key areas of estimation are considered to be the most significant. liabilities, which are included in the balance sheet. As at 31 December 2012, the Group had a corporate tax Impairment of goodwill, intangible assets and property, plant liability of $96.1 million (2011: $86.1 million). While the Group aims and equipment to ensure the accruals for its tax liabilities are accurate, the process Determining whether goodwill, intangible assets or property, of agreeing tax liabilities with the tax authorities can take several plant and equipment are impaired requires an estimation of the years. Management judgement is therefore required in value in use of the cash-generating units to which the goodwill determining the provision for income tax and the recognition of has been allocated or the individual assets. The value in use deferred tax assets and liabilities; however the actual tax liabilities calculation requires the entity to estimate future cash flows could differ from the amounts accrued. expected to arise from the cash-generating unit or asset and a As at 31 December 2012, the Group had a deferred tax suitable discount rate in order to calculate present value. The liability of $82.0 million (2011: $84.1 million). carrying amounts of goodwill, intangible assets and property, plant and equipment at the balance sheet date were $834.7 Provisions million (2011: $806.6 million), $174.1 million (2011: $176.2 million) The Group exercises judgement in measuring and recognising and $511.5 million (2011: $517.4 million) respectively. Details provisions and the exposures to contingent liabilities related to regarding the goodwill and property, plant and equipment pending litigation or other outstanding claims subject to carrying values and assumptions used in carrying out the negotiated settlement, mediation, arbitration or government impairment reviews are provided in notes 8 and 9. regulation, as well as other contingent liabilities (see note 25 to the Consolidated Financial Statements). Judgement is necessary in Pensions and other post-retirement benefits assessing the likelihood that a pending claim will succeed, or a Determining the defined benefit obligation and the income liability will arise, and to quantify the possible range of the financial statement charge in respect of pension and other post-retirement settlement. Because of the inherent uncertainty in this evaluation benefit schemes requires an estimation of certain assumptions process, actual losses may be different from the originally which include the discount rate, inflation rate, mortality, length estimated provision. of service and the expected return on assets. These assumptions are determined having taken advice from qualified actuaries. The net pension liability related to defined benefit type schemes at the balance sheet date was $66.3 million (2011: $53.5 million). Details regarding the carrying value and assumptions used in arriving at the carrying values are provided in note 19. Consolidated Financial Statements 88 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements 77 Independent Auditor’s Report to the members of BBA Aviation plc 1. Segmental information 78 Consolidated Income Statement IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly 79 Consolidated Statement of reviewed by the Chief Executive to allocate resources to the segments and to assess their performance. Comprehensive Income The Group provides information to the Chief Executive on the basis of components that are substantially similar within the 80 Consolidated Balance Sheet segments in the following aspects: 81 Consolidated Cash Flow Statement ——the nature of the long-term financial performance 82 Consolidated Statement of ——the nature of the products and services Changes in Equity ——the nature of the production processes 83 Accounting Policies of the Group ——the type of class of customer for the products and services 88 Notes to the Consolidated ——the nature of the regulatory environment Financial Statements 121 Independent Auditor’s Report to Based on the above, the primary reportable segments of the Group have been deemed to be Flight Support, which comprises Signature the members of BBA Aviation plc Flight Support and ASIG, and Aftermarket Services, which comprises Engine Repair and Overhaul, Legacy Support and APPH. The 122 Company Balance Sheet components of these two segments are deemed to be the primary segments of the Group. 123 Accounting Policies of the Company The businesses within the Flight Support segment provide refuelling, ground handling and other services to the business, general and commercial aviation markets. 124 Notes to the Company Financial Statements The businesses within the Aftermarket Services segment maintain, manufacture and support engines and aerospace components, 129 Principal Subsidiary and sub-systems and systems. Associated Undertakings Sales between segments are immaterial. 130 Five Year Summary Flight Aftermarket Unallocated 131 Shareholder Information Support Services Total Corporate Total Business Segments $m $m $m $m $m 2012 External revenue 1,321.8 857.1 2,178.9 – 2,178.9
Underlying operating profit 112.5 100.5 213.0 (17.6) 195.4 Exceptional items (16.5) (14.4) (30.9) (1.8) (32.7) Segment result* 96.0 86.1 182.1 (19.4) 162.7 Underlying operating margin 8.5% 11.7% 9.8% – 9.0%
* Segment result includes $1.6 million profit of associates within Flight Support.
Other information Capital additions* 34.2 20.5 54.7 1.8 56.5 Depreciation and amortisation 47.4 20.4 67.8 0.3 68.1
* Capital additions represent cash expenditures in the year.
Balance sheet Total assets 1,303.3 853.9 2,157.2 229.0 2,386.2 Total liabilities (206.7) (200.1) (406.8) (958.0) (1,364.8) Net assets 1,096.6 653.8 1,750.4 (729.0) 1,021.4 Consolidated Financial Statements Notes to the Consolidated Financial Statements 89
1. Segmental information – continued Flight Aftermarket Unallocated Support Services Total Corporate Total Business Segments $m $m $m $m $m 2011 External revenue 1,330.1 806.6 2,136.7 – 2,136.7
Underlying operating profit 124.6 91.5 216.1 (17.2) 198.9 Exceptional items (13.3) (3.1) (16.4) (1.9) (18.3) Segment result* 111.3 88.4 199.7 (19.1) 180.6 Underlying operating margin 9.4% 11.3% 10.1% – 9.3%
* Segment result includes $2.0 million profit of associates within Flight Support.
Other information Capital additions* 24.1 19.8 43.9 – 43.9 Depreciation and amortisation 46.5 22.0 68.5 0.3 68.8
* Capital additions represent cash expenditures in the year.
Balance sheet Total assets 1,246.6 804.7 2,051.3 219.7 2,271.0 Total liabilities (199.3) (166.6) (365.9) (925.4) (1,291.3) Net assets 1,047.3 638.1 1,685.4 (705.7) 979.7
Revenue by Revenue by Capital Non current destination origin Additions* assets Geographical Segments $m $m $m $m 2012 United Kingdom 282.0 401.0 13.8 253.1 Mainland Europe 125.7 42.1 0.8 44.0 North America 1,650.9 1,720.6 41.9 1,278.8 Rest of World 120.3 15.2 – 9.1 Total 2,178.9 2,178.9 56.5 1,585.0
2011 United Kingdom 290.1 404.5 8.7 236.6 Mainland Europe 138.9 50.4 0.3 43.1 North America 1,593.6 1,676.5 34.9 1,272.7 Rest of World 114.1 5.3 – 5.7 Total 2,136.7 2,136.7 43.9 1,558.1
An analysis of the Group’s revenue for the year is as follows: Revenue from Revenue from sale of goods services 2012 2011 2012 2011 $m $m $m $m Flight Support 821.1 817.6 500.7 512.5 Aftermarket Services 247.5 229.6 609.6 577.0 1,068.6 1,047.2 1,110.3 1,089.5
* Capital additions represent cash expenditures in the year. A portion of the Group’s revenue from the sale of goods and services denominated in foreign currencies is cash flow hedged. The amounts disclosed above for revenue from the sale of goods include the recycling of the effective amount of the foreign currency derivatives that are used to hedge foreign currency revenue. The amount included in revenue is a gain of $0.8 million (2011: loss of $2.5 million). Consolidated Financial Statements 90 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 2. Profit for the year 78 Consolidated Income Statement Profit for the year has been arrived at after charging/(crediting): 79 Consolidated Statement of Comprehensive Income Exceptional items 80 Consolidated Balance Sheet Exceptional items included within profit before tax amounted to a charge of $32.7 million (2011: charge of $6.6 million). 81 Consolidated Cash Flow Statement In the year ended 31 December 2012, exceptional items amounting to a charge of $32.7 million are included within operating 82 Consolidated Statement of profit, and include restructuring expenses of $17.0 million which includes $8.6 million in respect of re-sizing manufacturing capacity, Changes in Equity $3.6 million for management reorganisation and $4.8 million investment in efficiency projects; amortisation of intangible assets 83 Accounting Policies of the Group acquired and valued in accordance with IFRS 3 of $7.6 million included within administrative expenses; and $6.6 million of acquisition 88 Notes to the Consolidated costs and $1.5 million environmental provision costs included within other operating expenses. Financial Statements In the year ended 31 December 2011, exceptional items amounting to a charge of $18.3 million are included within operating 121 Independent Auditor’s Report to profit, and include restructuring expenses of $1.3 million; amortisation of intangible assets acquired and valued in accordance with IFRS the members of BBA Aviation plc 3 of $7.9 million included within administrative expenses; $3.2 million of acquisition costs included within other operating expenses; and 122 Company Balance Sheet a $5.3 million loss on disposal of business relating principally to a goodwill write down following exit from the Tampa FBO. 123 Accounting Policies of the Company In addition, in 2011, the Group received an exceptional tax refund of $23.7 million included within the exceptional tax credit, relating to the settlement of an old outstanding tax claim in Germany, together with associated exceptional interest receivable of 124 Notes to the Company Financial Statements $11.7 million. 129 Principal Subsidiary and Underlying profit is shown before exceptional items on the face of the income statement because the directors consider that this Associated Undertakings gives a useful indication of underlying performance. 130 Five Year Summary 131 Shareholder Information Other 2012 2011 $m $m Net foreign exchange (gains)/losses (0.3) 0.3 Research and development costs 3.9 3.3 Depreciation of property, plant and equipment 52.7 53.0 Amortisation of intangible assets (included in cost of sales) 2.4 2.4 Amortisation of intangible assets (included in administration expenses) 13.0 13.4 Total depreciation and amortisation expense 68.1 68.8 Impairment of licences and other intangible assets – 0.7 Total employee costs (note 7) 525.7 519.3 Cost of inventories recognised as an expense within cost of sales 1,103.1 1,085.2
The analysis of auditor’s remuneration is as follows: 2012 2011 $m $m Fees payable to the Company’s auditor for the audit of the Group’s annual accounts 1.8 1.8 The audit of the Company’s subsidiaries pursuant to legislation 0.2 0.2 Total audit fees 2.0 2.0
Other assurance services 0.2 0.2 Tax services 0.1 0.2 0.3 0.4 Total fees payable to the Company’s auditor 2.3 2.4 Consolidated Financial Statements Notes to the Consolidated Financial Statements 91
3. Investment income, finance costs and other gains and losses 2012 2011 $m $m Interest on bank deposits 5.8 9.0 Net finance income from pension schemes 0.2 1.7 Underlying investment income 6.0 10.7 Exceptional interest receivable (note 2) – 11.7 Total investment income 6.0 22.4
Interest on bank loans and overdrafts (16.6) (20.8) Interest on loan notes (17.0) (10.4) Interest on obligations under finance leases (0.4) (0.5) Other finance costs (1.6) (2.0) Total borrowing costs (35.6) (33.7)
Less amounts included in the cost of qualifying assets 0.6 0.5 Fair value losses on interest rate swaps designated as cash flow hedges transferred from equity (10.3) (9.4) Fair value gains on interest rate swaps designated as fair value hedges 6.9 3.2 Total finance costs (38.4) (39.4)
Borrowing costs included in the cost of qualifying assets during the year arose on the general borrowing pool and are calculated by applying a capitalisation rate of 4.5% (2011: 4.8%) to expenditure on such assets, which represents the weighted average interest rate for the currency in which expenditure has been made.
4. Income tax expense 2012 2011 $m $m Current tax 8.2 24.3 Adjustments in respect of prior years – current tax (1.5) (23.3) Deferred tax (note 20) 11.5 8.4 Adjustments in respect of prior years – deferred tax (3.4) 2.1 Income tax expense for the year 14.8 11.5
Domestic income tax is calculated at 24.5% (2011: 26.5%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.
The total charge for the year can be reconciled to the accounting profit as follows: 2012 2011 $m $m Profit before tax: 130.3 163.6
Tax at the rates prevailing in the relevant tax jurisdictions 26.4% (2011: 27.0%) 34.4 44.2 Tax effect of income that is not taxable in determining taxable profit (11.9) (12.6) Items on which deferred tax has not been recognised (4.9) (2.9) Tax rate changes (1.6) 0.9 Difference in tax rates on overseas earnings 3.7 3.1 Adjustments in respect of prior years (4.9) (21.2) Tax expense for the year 14.8 11.5
The applicable tax rate of 26.4% (2011: 27.0%) represents a blend of the tax rates of the jurisdictions in which taxable profits have arisen. The change on prior year is due to a change in the proportion of profits that have arisen in each jurisdiction and the benefits associated with certain financing structures implemented. The underlying tax rate of 14.9% (2011: 20.3%) resulted from the significant progress made this year in respect of open tax issues in various jurisdictions. This progress, together with the new UK tax legislation offering a favourable regime for overseas financing, coming into effect from 1 January 2013, is anticipated to result in the Group’s underlying rate remaining below the headline rate. Consolidated Financial Statements 92 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc In addition to the income tax expense charged to profit or loss, a current tax credit of $3.8 million (2011: credit $2.3 million) and a deferred 78 Consolidated Income Statement tax credit of $5.0 million (2011: credit $1.7 million) have been recognised in other comprehensive income in the year primarily relating to 79 Consolidated Statement of pension and foreign exchange movements. A deferred tax credit of $0.5 million (2011: credit $1.5 million) has been recognised in equity Comprehensive Income in the year relating to share-based payments movements. 80 Consolidated Balance Sheet 81 Consolidated Cash Flow Statement 5. Dividends 82 Consolidated Statement of On 25 May 2012, the 2011 final dividend of 9.95¢ per share (total dividend $47.7 million) was paid to shareholders (2011: the 2010 final Changes in Equity dividend of 9.39¢ per share (total dividend $44.5 million) was paid on 8 June 2011). 83 Accounting Policies of the Group On 2 November 2012, the 2012 interim dividend of 4.20¢ per share (total dividend $20.2 million) was paid to shareholders (2011: the 88 Notes to the Consolidated 2011 interim dividend of 3.99¢ per share (total dividend $19.3 million) was paid on 4 November 2011). Financial Statements In respect of the current year, the directors propose that a final dividend of 10.45¢ per share will be paid to shareholders on 121 Independent Auditor’s Report to 24 May 2013. This dividend is subject to approval by shareholders at the Annual General Meeting and in accordance with IAS 10 “Events the members of BBA Aviation plc after the Reporting Period” has not been included as a liability in these financial statements. The proposed dividend is payable to all 122 Company Balance Sheet shareholders on the register of members on 12 April 2013. The total estimated dividend to be paid is $50.1 million. 123 Accounting Policies of the Company 124 Notes to the Company 6. Earnings per share Financial Statements The calculation of the basic and diluted earnings per share is based on the following data: 129 Principal Subsidiary and 2012 2011 Associated Undertakings $m $m 130 Five Year Summary Basic and diluted 131 Shareholder Information Earnings: Profit for the period 115.5 152.1 Non-controlling interests 0.3 0.3 Basic earnings attributable to ordinary shareholders 115.8 152.4 Exceptional items (net of tax) 23.2 (16.4) Adjusted earnings and diluted earnings 139.0 136.0
Number of shares 16 Weighted average number of 29 /21p ordinary shares: For basic earnings per share 478.8 468.6 Exercise of share options 8.4 12.8 For diluted earnings per share 487.2 481.4
Earnings per share Basic: Adjusted 29.0¢ 29.0¢ Unadjusted 24.2¢ 32.5¢ Diluted: Adjusted 28.5¢ 28.3¢ Unadjusted 23.8¢ 31.7¢
Adjusted earnings per share is shown calculated on earnings before exceptional items (note 2) because the directors consider that this gives a useful indication of underlying performance. Consolidated Financial Statements Notes to the Consolidated Financial Statements 93
7. Employees 2012 2011 Average monthly number (including Executive Directors) number number By segment Flight Support 8,386 8,142 Aftermarket Services 1,993 1,839 10,379 9,981 By region United Kingdom 2,633 2,695 Mainland Europe 132 124 North America 7,543 7,112 Rest of World 71 50 10,379 9,981
$m $m Employment costs Wages and salaries 469.9 467.2 Social security costs 44.5 41.2 Pension costs (note 19) 11.3 10.9 525.7 519.3
8. Intangible assets Licences Licences and Computer and Computer Goodwill contracts software Total Goodwill contracts software Total 2012 2012 2012 2012 2011 2011 2011 2011 $m $m $m $m $m $m $m $m Cost Beginning of year 806.6 221.9 26.6 1,055.1 761.5 183.5 24.7 969.7 Exchange adjustments 5.0 2.6 0.2 7.8 (2.9) (1.6) – (4.5) Acquisitions 22.5 5.2 – 27.7 53.9 40.9 – 94.8 Additions – 4.0 1.4 5.4 – 3.6 1.8 5.4 Disposals – (2.7) (1.5) (4.2) – (2.7) (0.5) (3.2) Disposals of businesses – – – – (5.0) (2.1) – (7.1) Transfers (to)/from other asset categories – (0.1) 1.0 0.9 – 0.3 0.6 0.9 Acquisitions in prior years 0.6 – – 0.6 (0.9) – – (0.9) End of year 834.7 230.9 27.7 1,093.3 806.6 221.9 26.6 1,055.1
Amortisation Beginning of year – (50.1) (22.2) (72.3) – (39.1) (19.9) (59.0) Exchange adjustments – (0.6) (0.2) (0.8) – 0.2 – 0.2 Amortisation charge for the year – (13.4) (2.0) (15.4) – (13.0) (2.8) (15.8) Impairment charge – – – – – (0.7) – (0.7) Disposals – 2.7 1.5 4.2 – 2.3 0.5 2.8 Disposals of businesses – – – – – 0.2 – 0.2 Transfers (to)/from other asset categories – – (0.2) (0.2) – – – – End of year – (61.4) (23.1) (84.5) – (50.1) (22.2) (72.3)
Carrying amount End of year 834.7 169.5 4.6 1,008.8 806.6 171.8 4.4 982.8 Beginning of year 806.6 171.8 4.4 982.8 761.5 144.4 4.8 910.7
Included within the amortisation charge for intangible assets of $15.4 million (2011: $15.8 million) is amortisation of $7.6 million (2011: $7.9 million) in relation to the amortisation of intangible assets acquired and valued in accordance with IFRS 3 and disclosed as an exceptional item. Consolidated Financial Statements 94 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 8. Intangible assets – continued 78 Consolidated Income Statement Licences and contracts are amortised over the period to which they relate, which is on average 16 years (2011: 16 years). In accordance 79 Consolidated Statement of with the Group’s accounting policy manufacturing licences are not amortised until management has sufficient visibility over the life of Comprehensive Income the associated platform at which point amortisation commences over the remaining useful life of the licence which is typically 20 years. 80 Consolidated Balance Sheet Computer software is amortised over its estimated useful life which is on average five years (2011: five years). 81 Consolidated Cash Flow Statement Goodwill acquired in a business combination is allocated, at acquisition, to the cash-generating units (CGUs) that are expected to 82 Consolidated Statement of benefit from the business combination. The carrying amount of goodwill had been allocated as follows: Changes in Equity 2012 2011 83 Accounting Policies of the Group $m $m 88 Notes to the Consolidated Flight Support: Financial Statements Signature Flight Support 428.4 422.1 121 Independent Auditor’s Report to the members of BBA Aviation plc ASIG 185.7 166.1 122 Company Balance Sheet Aftermarket Services: 123 Accounting Policies of the Company Engine Repair and Overhaul 141.6 140.8 124 Notes to the Company Legacy Support 70.5 69.1 Financial Statements APPH 8.5 8.5 129 Principal Subsidiary and Associated Undertakings 834.7 806.6 130 Five Year Summary The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. 131 Shareholder Information The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money. The future estimated cash flows are based on board approved forecasts and are adjusted to reflect the individual risk of the CGU. The growth rates are based on industry growth forecasts and our view of our ability to outperform them. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.
The key assumptions in constructing the 2013-2015 plans were that: ——Signature, ASIG and Engine Repair and Overhaul will see gradual recovery throughout the plan period with ongoing operational improvements; ——Legacy Support will experience modest revenue growth; and ——APPH will experience gradual recovery complimented by continued operational improvement.
The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next three years. In order to reflect the key potential downside risk to these forecasts, the model is adjusted to reflect a more pessimistic view of the rate of market recovery than used for budget and planning purposes. Cash flow projections beyond three years are based on internal management forecasts over the long-term business cycle and assume a growth rate of 2.4% (2011: 2.3%). This rate does not exceed the average long-term growth rate for the relevant markets. The rate used to discount the forecast cash flows for all CGUs is 10.8% (2011: 10.3%) and this approximates to the Group’s weighted average pre-tax cost of capital which is deemed applicable for all CGUs. The calculation of value in use for each CGU is most sensitive to the principal assumptions of discount rate and growth rate. Sensitivity analysis has been performed on the calculations and confirms that no reasonably possible changes in the assumptions would result in the value in use exceeding the recoverable amount for any of the CGUs. Consolidated Financial Statements Notes to the Consolidated Financial Statements 95
9. Property, plant and equipment Land and Fixtures and Land and Fixtures and buildings equipment Total buildings equipment Total 2012 2012 2012 2011 2011 2011 $m $m $m $m $m $m Cost or valuation Beginning of year 620.4 425.1 1,045.5 596.7 425.8 1,022.5 Exchange adjustments 2.1 5.3 7.4 (1.4) (2.2) (3.6) Transfers (to)/from other asset categories (0.4) (6.1) (6.5) 0.5 (4.1) (3.6) Acquisition of businesses 1.8 4.6 6.4 35.6 1.6 37.2 Additions 19.4 29.3 48.7 12.0 20.6 32.6 Disposals – (2.4) (2.4) (17.4) (2.3) (19.7) Asset write downs (9.3) (12.5) (21.8) (2.1) (13.5) (15.6) Disposals of businesses – – – (3.5) (0.8) (4.3) End of year 634.0 443.3 1,077.3 620.4 425.1 1,045.5
Accumulated depreciation and impairment Beginning of year (263.4) (264.7) (528.1) (248.6) (259.7) (508.3) Exchange adjustments (0.8) (3.3) (4.1) 0.6 1.4 2.0 Transfers from other asset categories – 2.4 2.4 – 5.0 5.0 Depreciation charge for the year (27.0) (25.7) (52.7) (26.3) (26.7) (53.0) Disposals – 2.0 2.0 6.4 2.0 8.4 Asset write downs 6.0 8.7 14.7 1.7 12.6 14.3 Disposals of businesses – – – 2.8 0.7 3.5 End of year (285.2) (280.6) (565.8) (263.4) (264.7) (528.1)
Carrying amount End of year 348.8 162.7 511.5 357.0 160.4 517.4 Beginning of year 357.0 160.4 517.4 348.1 166.1 514.2
2012 2011 $m $m Capital commitments Capital expenditure contracted for but not provided for 49.5 7.1
The carrying amount of the Group’s fixtures and equipment includes an amount of $0.8 million (2011: $1.4 million) in respect of assets held under finance leases. Where assets have been written down or impaired the recoverable amount has been determined by reference to its value in use, estimated using the forecast cash flows over the remaining life of the asset and discounted using a rate of 10.8% (2011: 10.3%) which approximates to the Group’s pre-tax weighted average cost of capital. The amounts disclosed above for asset write downs are attributable to $3.7 million in Flight Support, $3.1 million in Aftermarket Services and $0.3 million unallocated corporate. Consolidated Financial Statements 96 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 10. Interests in associates 78 Consolidated Income Statement 2012 2011 $m $m 79 Consolidated Statement of Comprehensive Income Cost of investment in associates 1.4 1.4 80 Consolidated Balance Sheet Share of post-acquisition profit, net of dividends received 3.6 2.8 81 Consolidated Cash Flow Statement Group share of net assets of associates 5.0 4.2 82 Consolidated Statement of Changes in Equity The investments in associates relates to a number of small investments within the Flight Support segment (note 26). 83 Accounting Policies of the Group 2012 2011 88 Notes to the Consolidated Aggregated amounts relating to associates $m $m Financial Statements 121 Independent Auditor’s Report to Total assets 58.7 42.7 the members of BBA Aviation plc Total liabilities (51.0) (36.8) 122 Company Balance Sheet Net assets 7.7 5.9 123 Accounting Policies of the Company 2012 2011 124 Notes to the Company $m $m Financial Statements Revenue 514.5 497.3 129 Principal Subsidiary and Associated Undertakings Profit for the year 5.1 4.9 130 Five Year Summary Group’s share of profit for the year 1.6 2.0 131 Shareholder Information A list of significant investments in associates, including name, country of incorporation, and proportion of ownership interest is given in the Principal Subsidiary and Associated Undertakings note on page 129.
11. Inventories 2012 2011 $m $m Raw Materials 173.3 155.8 Work-in-progress 36.7 24.6 Finished goods 51.8 53.5 261.8 233.9
The directors consider that the carrying value of inventory approximates to its fair value.
12. Other financial assets 2012 2011 Trade and other receivables Note $m $m Amounts due within one year Trade receivables 260.8 229.6 Other receivables, prepayments and accrued income 114.2 121.1 Derivative financial instruments 17 2.3 2.8 Trade and other receivables due within one year 377.3 353.5
Amounts due after one year Trade and other receivables 25.7 24.1 Derivative financial instruments 17 28.0 19.1 Trade and other receivables due after one year 53.7 43.2 431.0 396.7 Consolidated Financial Statements Notes to the Consolidated Financial Statements 97
12. Other financial assets – continued Trade receivables An allowance has been made for estimated irrecoverable amounts from the sale of goods and services of $7.8 million (2011: $6.2 million). This allowance has been determined by reference to past default experience and current expectations. Included in the Group’s trade receivables balances are debtors with a carrying amount of $50.7 million (2011: $40.3 million) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral over these balances. The average age of these overdue receivables is 78 days (2011: 62 days). 2012 2011 $m $m Ageing of past due but not impaired receivables 30 – 60 days 25.4 27.1 60 – 90 days 7.6 6.5 90 – 120 days 5.0 3.4 over 120 days 12.7 3.3 50.7 40.3
2012 2011 $m $m Movement in the allowance for doubtful debts Beginning of year (6.2) (6.6) Amounts written off as uncollectable 0.3 1.6 Charged in the year (1.9) (1.2) End of year (7.8) (6.2)
In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. The directors consider that the carrying amount of trade and other receivables approximates their fair value. 2012 2011 $m $m Ageing of impaired trade receivables 60 – 90 days 1.9 2.6 90 – 120 days 1.6 1.6 over 120 days 4.3 2.0 7.8 6.2
Cash and cash equivalents Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.
Credit risk The Group’s principal financial assets are bank balances and cash, trade and other receivables, finance lease receivables and investments.
The Group’s policy on credit risk relating to cash and derivative financial instruments is disclosed in note 17.
The Group’s credit risk is primarily attributable to its trade and finance lease receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction of the cash flows.
The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. Consolidated Financial Statements 98 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 13. Trade and other payables 78 Consolidated Income Statement 2012 2011 Note $m $m 79 Consolidated Statement of Comprehensive Income Amounts due within one year 80 Consolidated Balance Sheet Trade payables 215.9 179.5 81 Consolidated Cash Flow Other taxation and social security 13.0 10.4 Statement Other payables 69.8 78.1 82 Consolidated Statement of Changes in Equity Accruals and deferred income 146.0 147.8 83 Accounting Policies of the Group Derivative financial instruments 17 26.4 11.3 88 Notes to the Consolidated 471.1 427.1 Financial Statements 121 Independent Auditor’s Report to Amounts due after one year the members of BBA Aviation plc Trade and other payables 16.5 14.9 122 Company Balance Sheet Derivative financial instruments 17 7.0 47.9 123 Accounting Policies of the Company 23.5 62.8 124 Notes to the Company Total trade and other payables 494.6 489.9 Financial Statements 129 Principal Subsidiary and The directors consider that the carrying amount of trade and other payables approximates their fair value. Associated Undertakings 130 Five Year Summary The average age of trade creditors was 45 days (2011: 38 days). 131 Shareholder Information 14. Obligations under finance leases Present value of Minimum lease minimum lease payments payments 2012 2011 2012 2011 $m $m $m $m Amounts payable under finance leases Within one year 1.7 1.8 1.5 1.5 In the second to fifth years inclusive 1.4 3.1 1.4 2.9 3.1 4.9 2.9 4.4 Less: future finance charges (0.3) (0.5) – – Present value of lease obligations 2.8 4.4 2.9 4.4
Less: Amount due for settlement within 12 months (shown under current liabilities) (1.5) (1.5) Amount due for settlement after 12 months 1.4 2.9
It is the Group’s policy to lease certain of its fixtures and equipment under finance leases. The average lease term is five years for equipment and 20 years for FBO leasehold improvements. For the year ended 31 December 2012, the average effective borrowing rate of the Group was 11.1% (2011: 10.3%). Interest rates are fixed at the contract date or vary based on prevailing interest rates.
All of the Group’s finance lease obligations are denominated in US dollars.
The fair value of the Group’s lease obligations approximates their carrying amount.
The Group’s obligations under finance leases are secured by the lessors’ charges over the leased assets. Consolidated Financial Statements Notes to the Consolidated Financial Statements 99
15. Operating lease arrangements The Group as lessee 2012 2011 $m $m Minimum lease payments under operating leases recognised as an expense in the year 82.9 79.4
At the balance sheet date, the Group has outstanding commitments under non-cancellable operating leases, which fall due as follows: 2012 2011 $m $m Within one year 102.5 94.0 In the second to fifth years inclusive 364.5 315.1 After five years 641.6 745.1 1,108.6 1,154.2
Operating lease payments represent amounts payable by the Group for certain of its office properties, plants, FBOs, and equipment. Leases are negotiated for an average term of nine years for office properties, nine years for plant and warehouses, 28 years for FBOs, and six years for equipment. Rentals are generally fixed or adjusted based on inflation.
The total future minimum sub-lease payments expected to be received under non-cancellable sub-leases at 31 December 2012 were $64.4 million (2011: $101.7 million).
16. Borrowings 2012 2011 $m $m Bank overdrafts 11.2 23.3 Bank loans 250.0 200.1 Loan notes 326.9 319.1 Other loans 3.7 0.9 591.8 543.4
The borrowings are repayable as follows: On demand or within one year 11.2 23.7 In the second year 200.4 0.4 In the third to fifth years inclusive 50.0 200.0 After five years 330.2 319.3 591.8 543.4 Less: Amount due for settlement within 12 months (shown within current liabilities) (11.2) (23.7) Amount due for settlement after 12 months 580.6 519.7
The loan notes in the table above have been accounted for at fair value through profit and loss as the fair value interest rate risk has been hedged from fixed to floating interest rates. Under IFRS hedge accounting rules the fair value movement on the loan notes is booked to interest and is off-set by the fair value movement on the underlying interest rate swaps.
The Group includes the fair value gain on the interest rate swaps in relation to the loan notes within net debt so that the net effect is to show the $300 million US private placement at face value and to reflect the fact that the liabilities will be in place until maturity. More information is detailed in note 17. Consolidated Financial Statements 100 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 16. Borrowings – continued 78 Consolidated Income Statement The carrying amounts of the Group’s borrowings are denominated in the following currencies: 79 Consolidated Statement of Comprehensive Income Sterling US dollar Euro Other Total $m $m $m $m $m 80 Consolidated Balance Sheet 81 Consolidated Cash Flow 31 December 2012 Statement Bank overdrafts 8.0 0.9 1.4 0.9 11.2 82 Consolidated Statement of Bank loans – 250.0 – – 250.0 Changes in Equity Loan notes – 326.9 – – 326.9 83 Accounting Policies of the Group Other loans 0.3 3.0 – 0.4 3.7 88 Notes to the Consolidated Financial Statements 8.3 580.8 1.4 1.3 591.8 121 Independent Auditor’s Report to the members of BBA Aviation plc 31 December 2011 122 Company Balance Sheet Bank overdrafts 10.3 10.2 1.8 1.0 23.3 123 Accounting Policies of Bank loans – 200.1 – – 200.1 the Company Loan notes – 319.1 – – 319.1 124 Notes to the Company Other loans 0.3 0.2 – 0.4 0.9 Financial Statements 10.6 529.6 1.8 1.4 543.4 129 Principal Subsidiary and Associated Undertakings The average floating interest rates on borrowings are as follows: 130 Five Year Summary 2012 2011 131 Shareholder Information Sterling 1.5% 1.5% US dollar 1.9% 1.8% Euros 0.7% 1.5%
The Group’s borrowings are funded through a combination of fixed and floating rate debt. The floating rate debt exposes the Group to cash flow interest rate risk whilst the fixed rate US dollar private placement debt exposes the Group to changes in the fair value of fixed rate debt due to changes in interest rates. Interest rate risk is managed by the combination of fixed rate debt and interest rate swaps in accordance with pre-agreed policies and authority limits. As at 31 December 2012, 44% of the Group’s borrowings are fixed at a weighted average interest rate of 4.47% for a weighted average period of one year.
Bank overdrafts are repayable on demand. All bank loans and loan notes are unsecured.
Under the bank facilities totalling $750 million (2011: $750 million) as at 31 December 2012, the Group had available $500 million (2011: $550 million) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. The Group’s committed facilities are a $250 million revolving credit facility maturing in April 2014 and a $500 million revolving credit facility maturing in April 2016. Consolidated Financial Statements Notes to the Consolidated Financial Statements 101
17. Derivative financial instruments Categories of financial instruments The table below details the categories of financial instruments across the Group and the carrying values of each category: 2012 2011 Carrying Carrying value value $m $m Financial assets Fair value through profit and loss – foreign exchange contracts† 0.4 2.6 Fair value through profit and loss – interest rate swaps†† 27.2 19.1 Derivative instruments in designated hedge accounting relationships 2.7 0.3 Loans and receivables (including cash and cash equivalents)††† 444.3 388.0 474.6 410.0
Financial liabilities Fair value through profit and loss – foreign exchange contracts† (1.0) (0.1) Derivative instruments in designated hedge accounting relationships (32.4) (59.1) Amortised cost (843.1) (762.2) (876.5) (821.4)
† The foreign exchange contracts detailed above as fair value through profit and loss are not designated in a formal hedging relationship and are used to hedge foreign currency flows through the BBA Aviation plc company bank accounts to ensure that the Group is not exposed to foreign exchange risk through the management of its international cash management structure. †† The interest rate swaps detailed above as fair value through profit and loss are designated in formal hedging relationships and are used to hedge the change in fair value of fixed rate US dollar borrowings. ††† Recoveries from third parties in respect of environmental and other liabilities totalling $21.2 million (2011: $19.7 million) are included within loans and receivables.
Derivative Financial Instruments The fair values of all derivative financial instruments shown in the table below are based on market values of equivalent instruments at the balance sheet date. The notional amounts of the derivative financial instruments detailed in the table below are based on the contractual gross amounts as at the balance sheet date. The fair values of all derivative financial instruments are categorised within level 2 of the fair value hierarchy as confirmation that the fair values have been calculated based on quoted prices in active markets for identical assets or liabilities. The Group does not have any derivative financial instruments which would be categorised as level 1 or level 3 of the fair value hierarchy. 2012 2011 Notional Notional amount Fair value amount Fair value $m $m $m $m Cash flow hedges Foreign exchange forward contracts (97.9) 2.7 (11.6) 0.3
Fair value hedges Interest rate swaps (300.0) 27.2 (300.0) 19.1
Derivatives not in a formal hedge relationship Foreign exchange forward contracts 156.6 0.4 302.6 2.6 (241.3) 30.3 (9.0) 22.0 Consolidated Financial Statements 102 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 17. Derivative financial instruments – continued 78 Consolidated Income Statement Financial liabilities measured at fair value 79 Consolidated Statement of 2012 2011 Comprehensive Income Notional Notional 80 Consolidated Balance Sheet amount Fair value amount Fair value $m $m $m $m 81 Consolidated Cash Flow Statement Cash flow hedges 82 Consolidated Statement of Changes in Equity Interest rate swaps (580.0) (10.5) (350.0) (15.4) Foreign exchange forward contracts (8.0) (0.1) (103.6) (2.2) 83 Accounting Policies of the Group 88 Notes to the Consolidated Financial Statements Net investment hedges 121 Independent Auditor’s Report to Cross currency swaps (125.0) (21.8) (264.6) (41.5) the members of BBA Aviation plc 122 Company Balance Sheet Derivatives not in a formal hedge relationship 123 Accounting Policies of Foreign exchange forward contracts 111.7 (1.0) 42.7 (0.1) the Company (601.3) (33.4) (675.5) (59.2) 124 Notes to the Company Financial Statements 129 Principal Subsidiary and The maturity of derivative financial instruments is as follows: Associated Undertakings 2012 2011 130 Five Year Summary Asset Liability Asset Liability fair value fair value fair value fair value 131 Shareholder Information $m $m $m $m Current Less than one year 2.3 (26.4) 2.8 (11.3) Total current 2.3 (26.4) 2.8 (11.3)
Non-current One to two years 0.6 (3.6) 0.1 (41.1) Two to three years 0.2 (0.4) – (6.8) Three to four years – (0.6) – – Four to five years – (2.4) – – More than five years 27.2 – 19.1 – Total non-current 28.0 (7.0) 19.2 (47.9) 30.3 (33.4) 22.0 (59.2)
Collateral As part of the Group’s management of its insurable risks, a proportion of this risk is managed through self insurance programmes operated by its captive insurance company, BBA Aviation Insurances Limited, based in the Isle of Man. This company is a wholly owned subsidiary of the Group and premiums paid are held to meet future claims. The cash balances held by the company are reported on the balance sheet within cash and cash equivalents. As is usual practice for captive insurance companies some of this cash is used as collateral against contingent liabilities (standby letters of credit) that have been provided to certain external insurance companies.
The table below details the contractual amount of the cash balances that have been pledged as collateral for these contingent liabilities, all of which are current: 2012 2011 US dollar Sterling Total US dollar Sterling Total $m $m $m $m $m $m BBA Aviation Insurances Limited 13.9 1.6 15.5 14.2 1.5 15.7
The standby letters of credit have been issued via bank facilities that BBA Aviation Insurances Limited has in place. The amount of these facilities corresponds to the amounts pledged as detailed in the table above. The amounts pledged are usually for less than one year and are secured by a legal charge, to the bank providing the letters of credit, over the cash balances of BBA Aviation Insurances Limited corresponding to the amount of the standby letters of credit. Consolidated Financial Statements Notes to the Consolidated Financial Statements 103
17. Derivative financial instruments – continued Financial Risk Factors Our activities expose us to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. Overall our risk management policies and procedures focus on the uncertainty of financial markets and seek to manage and minimise potential financial risks through the use of derivative financial instruments. The Group does not undertake speculative transactions for which there is no underlying financial exposure. Risk management is carried out by a central treasury department under policies approved by the Board of Directors of BBA Aviation plc. This department identifies, evaluates and hedges financial risks in close co-operation with our subsidiaries. The treasury policies cover specific areas such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and the investment of excess liquidity. These policies are outlined on page 52.
Capital Risk Management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt to equity balance. The capital structure of the Group consists of debt, cash and cash equivalents and equity attributable to equity holders of the parent comprising capital, reserves and retained earnings. The Group’s policy is to borrow centrally to meet anticipated funding requirements. These borrowings, together with cash generated from the operations, are on-lent or contributed as equity to subsidiaries at market-based interest rates and on commercial terms and conditions. The Group is subject to two financial covenant requirements within its borrowing facilities: maximum net debt to underlying EBITDA of 3.5 times and minimum net interest cover of 3.0 times (based on EBITDA). The Group complied with these covenants during the year.
Market Risk Market risk is the risk of adverse financial impact due to changes in fair values or future cash flows of financial instruments from fluctuations in foreign currency exchange rates and interest rates. The Group has well defined policies for the management of these risks which includes the use of derivative financial instruments.
(i) Foreign Exchange Risk The Group has significant overseas businesses whose revenues, cash flows, assets and liabilities are mainly denominated in the currency in which the operations are located. The Group’s policy in relation to foreign exchange translation risk is not to hedge the income statement since such hedges only have a temporary effect. In relation to the balance sheet, the Group seeks to denominate the currency of its borrowings in US dollars in order to match the currency of its cash flows, earnings and assets which are principally denominated in US dollars.
As at 31 December 2012 the majority of the Group’s net borrowings were denominated in US dollars as detailed in the table below: 2012 US dollar Euros Sterling Other Total $m $m $m $m $m Cash and cash equivalents 117.0 8.5 19.7 5.9 151.1 Borrowings and finance leases (583.7) (1.4) (8.3) (1.3) (594.7) Derivative asset – fair value of interest rate swaps on fixed interest rate borrowings 27.2 – – – 27.2 Net debt (439.5) 7.1 11.4 4.6 (416.4)
2011 US dollar Euros Sterling Other Total $m $m $m $m $m Cash and cash equivalents 90.0 12.9 19.6 2.6 125.1 Borrowings and finance leases (533.8) (1.8) (10.6) (1.6) (547.8) Derivative asset – fair value of interest rate swaps on fixed interest rate borrowings 19.1 – – – 19.1 Net debt (424.7) 11.1 9.0 1.0 (403.6) Consolidated Financial Statements 104 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 17. Derivative financial instruments – continued 78 Consolidated Income Statement As detailed in note 16, the US dollar private placement loan notes included within borrowings and finance leases in the tables above, 79 Consolidated Statement of Comprehensive Income have been accounted for at fair value through profit and loss as the fair value interest rate risk has been hedged from fixed to floating interest rates. 80 Consolidated Balance Sheet The Group includes the fair value gain on the interest rate swaps in relation to the loan notes within net debt so that the net effect 81 Consolidated Cash Flow Statement is to show the $300 million US private placement at face value to reflect the fact that the liabilities will be in place until maturity. 82 Consolidated Statement of At the end of 2012 the Group had outstanding $125 million (2011: $200 million) and €nil million (2011: €50 million) of cross-currency Changes in Equity swaps. The fair value of currency derivatives that are designated and effective as net investment hedges at the 2012 year end amounting 83 Accounting Policies of the Group to a payable of $21.8 million (2011: payable $41.5 million) has been recognised within other comprehensive income. 88 Notes to the Consolidated The Group manages its transactional foreign currency risk by hedging significant currency exposures in accordance with foreign Financial Statements exchange policies that our subsidiaries have in place which have been pre-agreed between Group Treasury and the subsidiary. Each 121 Independent Auditor’s Report to foreign exchange policy is individually tailored to the foreign exchange exposures within the relevant subsidiary. Transaction currency the members of BBA Aviation plc risk is managed through the use of spot and forward foreign exchange contracts. All committed exposures are fully hedged 100% and 122 Company Balance Sheet where significant foreign currency exposures exist then we generally will also cover a percentage of the projected foreign currency 123 Accounting Policies of the Company flows depending on the certainty of these cash flows. 124 Notes to the Company The transaction foreign exchange risk is measured by each subsidiary submitting monthly reports to Group Treasury which detail Financial Statements the foreign currency exposure reported on the balance sheet as committed exposures and, for those subsidiaries with significant 129 Principal Subsidiary and foreign exchange transaction exposures, an additional report detailing the future projected foreign currency cash flows over the life of Associated Undertakings the policy. The pre-determined policy margin is shown against the projected exposures to determine whether there is a net exposure 130 Five Year Summary which needs to be hedged. If this is the case, then foreign exchange spot or forward contract(s) will be undertaken by Group Treasury 131 Shareholder Information on behalf of the relevant subsidiary with our relationship banks. 2012 US dollar Euros Total $m $m $m Net foreign exchange transaction cash flow exposure 116.7 3.3 120.0 Derivative effect – foreign exchange contracts spot/forwards (115.9) (3.8) (119.7) Net asset position excluding intercompany debt post hedging effect 0.8 (0.5) 0.3
2011 US dollar Euros Total $m $m $m Net foreign exchange transaction cash flow exposure 108.6 5.4 114.0 Derivative effect – foreign exchange contracts spot/forwards (108.3) (5.1) (113.4) Net asset position excluding intercompany debt post hedging effect 0.3 0.3 0.6
The fair value of currency derivatives that are designated and effective as cash flow hedges amounting to $2.7 million (2011: $(1.9) million) has been recognised in other comprehensive income. A gain of $0.8 million (2011: loss $2.4 million) has been transferred to the income statement. Foreign exchange contracts that are not designated as cash flow hedges are used to hedge foreign currency flows through the BBA Aviation plc company bank accounts and to ensure that the Group is not exposed to foreign exchange risk through the management of its international cash pooling structure. Changes in the fair value of foreign exchange contracts which have not been designated as cash flow hedges amounting to $10.7 million (2011: $1.1 million) have been transferred to administrative expenses in the income statement in the year. The net impact on the Group’s result for the period is immaterial, since the balances which these contracts relate to have had a similar but opposite effect on administrative expenses.
(ii) Interest rate risk The Group’s borrowings are funded through a combination of bank debt and capital markets borrowings. The Group’s bank debt is funded through floating rate debt which exposes the Group to cash flow interest rate risk. The Group’s capital markets borrowings are financed through US private placement fixed rate debt which exposes the Group to changes in the fair value of the fixed rate debt due to changes in interest rates. During 2011 the Board reviewed and updated the Group’s interest rate risk policy addressing the portion of its debt obligations, which should be fixed through the use of fixed rate debt and/or interest rate swaps, in order to protect the interest cover covenant. Consolidated Financial Statements Notes to the Consolidated Financial Statements 105
17. Derivative financial instruments – continued The tables below detail the fixed/floating interest rate mix within net debt, and other financial instruments. 2012 Cash and Book Fair cash value of value of equivalents borrowings borrowings $m $m $m Fixed interest rate (adjusted for interest rate hedging) Less than one year – (1.0) (1.0) Between two and five years – (251.0) (261.5) Total fixed interest rate (adjusted for interest rate hedging) – (252.0) (262.5)
Floating interest rate 151.1 (342.7) (342.7) Derivative asset – fair value of interest rate swaps on fixed interest rate borrowings – 27.2 27.2 Total interest bearing assets/(liabilities) within net debt 151.1 (567.5) (578.0)
Other interest bearing liabilities – cross currency swaps – (21.8) (21.8) Total 151.1 (589.3) (599.8)
2011 Cash and Book Fair cash value of value of equivalents borrowings borrowings $m $m $m Fixed interest rate (adjusted for interest rate hedging) Less than one year – (0.9) (0.9) Between two and five years – (352.0) (367.4) Total fixed interest rate (adjusted for interest rate hedging) – (352.9) (368.3)
Floating interest rate 125.1 (194.9) (194.9) Derivative asset – fair value of interest rate swaps on fixed interest rate borrowings – 19.1 19.1 Total interest bearing assets/(liabilities) within net debt 125.1 (528.7) (544.1)
Other interest bearing liabilities – cross currency swaps – (41.5) (41.5) Total 125.1 (570.2) (585.6)
The Group has designated $250 million interest rate swaps as cash flows hedges and the fair value loss of $10.5 million (2011: loss $15.4 million) has been recognised in other comprehensive income. A charge of $10.3 million (2011: charge $9.4 million) has been booked against hedged interest payments made in the period. The Group has designated $300 million interest rate swaps as fair value hedges and the fair value gain of $27.2 million (2011: $19.1 million) has been booked to the income statement. This amount is off-set against the change in fair value on the fixed rate debt, which has also been booked to the income statement, so that the net impact is immaterial.
Credit Risk Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. As part of the Group’s operations, cash management and risk management activities the Group is exposed to counterparty risk arising on the financial assets that we have and the credit risk on outstanding derivative financial instruments. During the year cross-currency swaps of €50 million and $75 million were closed out at a cash cost of $4.4 million and $6.5 million respectively. In addition the Group closed out two interest rate swaps totalling $100 million at a cost of $3.8 million. Consolidated Financial Statements 106 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 17. Derivative financial instruments – continued 78 Consolidated Income Statement Treasury related credit risk 79 Consolidated Statement of The Group aims to reduce counterparty risk by dealing with counterparties with investment grade ratings, as measured by financial Comprehensive Income credit rating agencies. All treasury related activity is concentrated with relationship banks that provide unsecured committed facilities 80 Consolidated Balance Sheet to the Group. Across the subsidiaries, wherever possible and where services can be provided efficiently and cost effectively, bank 81 Consolidated Cash Flow Statement accounts, surplus cash and any hedging activity are concentrated and undertaken with relationship banks. 82 Consolidated Statement of Each counterparty that the Group uses for derivatives, bank account activity and the investment of surplus cash is assigned Changes in Equity a maximum credit limit dependent upon the counterparty’s credit rating. This limit gives a maximum permitted amount of cash 83 Accounting Policies of the Group and derivatives that can be held or undertaken with each counterparty. Deposits are generally for short-term maturity of less than 88 Notes to the Consolidated three months. Financial Statements As at 31 December 2012 and 31 December 2011, the Group had a number of exposures to individual counterparties. These 121 Independent Auditor’s Report to exposures are continually monitored and reported and no individual exposure is considered significant in the ordinary course of treasury the members of BBA Aviation plc management activity. We do not expect any significant losses from non-performance by these counterparties. 122 Company Balance Sheet 123 Accounting Policies of the Company Commercial related credit risk The Group’s exposure to commercial related credit risk is primarily attributable to its trade and finance lease receivables and the amounts 124 Notes to the Company Financial Statements presented in the balance sheet are net of allowances for doubtful receivables. Sales to customers are settled by a number of different 129 Principal Subsidiary and ways including cash, credit cards, cheques and electronic payment methods. A customer or potential customer is assessed on a case- Associated Undertakings by-case basis to determine whether credit terms will be provided. The Group does not expect any significant losses of receivables that 130 Five Year Summary have not been provided for as shown in note 12. 131 Shareholder Information Liquidity risk The Group manages its liquidity requirements through the use of short-term and long-term cash flow forecasts. In addition to strong cash generation in the businesses the Group maintains unsecured committed borrowing facilities from a range of banks to mitigate this risk further. Headroom on our facilities is regularly evaluated and consistently monitored to ensure that the Group has adequate headroom and liquidity. The Group’s committed facilities are a $250 million revolving credit facility maturing in 2014 and a $500 million revolving credit facility maturing in 2016. The following table provides an analysis of the contractual undiscounted cash flows payable under the financial liabilities as at the balance sheet date: 2012 Non- US$ derivative Derivative private Bank Finance Other Trade financial financial placement loans leases loans creditors liabilities liabilities Total $m $m $m $m $m $m $m $m Due within one year 17.0 16.0 1.8 0.2 215.9 250.9 26.4 277.3 Due between one and two years 17.0 203.6 1.5 0.6 5.5 228.2 3.6 231.8 Due between two and three years 17.0 1.0 – 0.2 – 18.2 0.4 18.6 Due between three and four years 17.0 50.8 – 0.2 – 68.0 0.6 68.6 Due between four and five years 17.0 – – 0.2 – 17.2 2.4 19.6 Due in more than five years 368.0 – – 3.5 11.0 382.5 – 382.5 Total 453.0 271.4 3.3 4.9 232.4 965.0 33.4 998.4
2011 Non- US$ derivative Derivative private Bank Finance Other Trade financial financial placement loans leases loans creditors liabilities liabilities Total $m $m $m $m $m $m $m $m
Due within one year 17.0 27.8 1.8 0.4 179.6 226.6 11.3 237.9 Due between one and two years 17.0 4.2 1.7 0.3 3.8 27.0 41.1 68.1 Due between two and three years 17.0 203.0 1.5 – – 221.5 6.8 228.3 Due between three and four years 17.0 – – – – 17.0 – 17.0 Due between four and five years 17.0 – – – – 17.0 – 17.0 Due in more than five years 377.6 – – 0.2 11.0 388.8 – 388.8 Total 462.6 235.0 5.0 0.9 194.4 897.9 59.2 957.1 Consolidated Financial Statements Notes to the Consolidated Financial Statements 107
17. Derivative financial instruments – continued The maturity profile of the Group’s financial derivatives using undiscounted cash flows is as follows: 2012 2011 Payable Receivable Payable Receivable $m $m $m $m Due within one year (475.2) 451.1 (518.2) 509.7 Due between one and two years (33.0) 30.0 (223.6) 182.6 Due between two and three years (9.5) 9.3 (7.2) 0.4 Due between three and four years (0.6) – – – Due between four and five years (2.4) – – – Due in more than five years – 27.2 – 19.1 Total (520.7) 517.6 (749.0) 711.8
Sensitivity analysis as at 31 December 2012 Financial instruments affected by market risk are derivative financial instruments. The following analysis is intended to illustrate the sensitivity to changes in foreign exchange rates and interest rates. The sensitivity analysis has been prepared on the basis that the derivative portfolio and the proportion of derivatives hedging foreign exchange risk and interest rate risk are all constant and on the basis of hedge designations in place at 31 December 2012 and 2011 respectively. As a consequence, this sensitivity analysis relates to the position at these dates and is not representative of the year then ended. The following assumptions were made in calculating the sensitivity analysis: ——the balance sheet sensitivity to interest rates relates only to cash flow interest rate derivatives. Cash and floating rate debt balances are carried at amortised cost and so their carrying value does not change as interest rates move. Fixed rate debt is also carried at amortised cost unless fair value interest rate hedges are entered into and hedge accounting achieved whereby the fixed rate debt is fair valued through the income statement to offset the movement in fair value of the swaps; ——fair value interest rate swaps are assumed to be fully effective and therefore there is no impact on the income statement or balance sheet from changes in interest rates; ——changes in the carrying value of derivative financial instruments designated as cash flow hedges or net investment hedges are assumed to be recorded fully in comprehensive income; ——the sensitivity of accrued interest to movements in interest rates is calculated on net floating rate exposures on debt, cash and derivative instruments; ——changes in the carrying value of derivative financial instruments not in hedging relationships only affect the income statement; ——all other changes in the carrying value of derivative financial instruments designated as hedges are fully effective with no impact on the income statement; ——the floating rate leg of any swap or any floating rate debt is treated as not having any interest rate already set, therefore a change in the interest rates affects a full 12 month period for the accrued interest portion of the sensitivity calculations; ——the sensitivity of foreign exchange rates only looks at the outstanding foreign exchange forward book and the currency bank account balances at the Company only as at the balance sheet date and assumed this is the position for a full 12 month period; ——the sensitivity of a 10% movement in foreign exchange rates has been used due to the fact that historically rates can move by approximately 10% per annum; and ——the sensitivity of a 1% movement in interest rates has been used due to the fact that historically floating US dollar interest rates have moved by on average 1% per annum. Consolidated Financial Statements 108 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 17. Derivative financial instruments – continued 78 Consolidated Income Statement Using the above assumptions the following table shows the illustrative effect on the income statement and within other comprehensive 79 Consolidated Statement of income that would result from reasonably possible movements in foreign currency exchange rates and interest rates, before the effects Comprehensive Income of tax. 80 Consolidated Balance Sheet 2012 2011 81 Consolidated Cash Flow Statement Other Other compre- compre- 82 Consolidated Statement of Income hensive Income hensive Changes in Equity statement income statement income 83 Accounting Policies of the Group $m $m $m $m 88 Notes to the Consolidated £/$ FX rates – £ strengthens 10% – 20.8 – 28.2 Financial Statements £/$ FX rates – £ weakens 10% – (25.4) – (34.4) 121 Independent Auditor’s Report to the members of BBA Aviation plc £/Euro FX rates – £ strengthens 10% – 0.2 – 6.3 122 Company Balance Sheet £/Euro FX rates – £ weakens 10% – (0.3) – (7.7) 123 Accounting Policies of the Company Interest rates +1.00% (3.3) 8.3 (2.3) 6.4 124 Notes to the Company Interest rates –1.00% N/A* (8.7) N/A* (6.5) Financial Statements * Due to underlying interest rates being low the sensitivity of the income statement to interest rates reducing by 1% is not relevant for 2012 and 2011. 129 Principal Subsidiary and Associated Undertakings The foreign exchange analysis in the sensitivity table above illustrates the impact of movements in foreign exchange rates on foreign 130 Five Year Summary currency transactional exposures and does not include the impact on the translation of the Group’s overseas income statement and 131 Shareholder Information balance sheet. The translation impact on profit before tax in the Group’s income statement from the movement in exchange rates is approximately $0.2 million for each 1c movement in the £/$ exchange rate.
18. Provisions Exchange rate Beginning adjust- Charged Utilised End of year ments in year in year of year $m $m $m $m $m 31 December 2012 Restructuring provisions – – 4.6 (3.8) 0.8 Discontinued operations 26.7 1.2 1.9 (2.0) 27.8 Environmental provisions 3.2 – 0.6 (1.3) 2.5 29.9 1.2 7.1 (7.1) 31.1
31 December 2011 Restructuring provisions 0.3 – (0.3) – – Discontinued operations 29.5 (0.3) 1.2 (3.7) 26.7 Environmental provisions 1.9 – 1.7 (0.4) 3.2 31.7 (0.3) 2.6 (4.1) 29.9
Restructuring provisions represent costs provided in relation to commitments made at the balance sheet date for reorganisations which are expected to occur within one year of the balance sheet date. The charges to the restructuring provision relate principally to rationalisation costs within the APPH business. Discontinued operations represents a provision for environmental and other liabilities relating to businesses that have been disposed of by the Group in prior years. The provision of $27.8 million (2011 $26.7 million) is partially offset by expected recoveries from third parties of $21.2 million (2011: $19.7 million), which are included within trade and other receivables due after one year in note 12. Further potential claims which have not been provided for are disclosed as contingent liabilities within note 25. Environmental provisions relate to environmental liabilities within businesses that have been acquired by the Group. The liabilities have an expected life of up to five years. 2012 2011 Analysed as: $m $m Current liabilities 3.9 1.1 Non-current liabilities 27.2 28.8 31.1 29.9 Consolidated Financial Statements Notes to the Consolidated Financial Statements 109
19. Pensions and other post-retirement benefits The Group operates a number of plans worldwide, of both the funded defined benefit type and the defined contribution type. The normal pension cost for the Group, including early retirement costs, was $11.3 million (2011: $10.9 million) of which $6.3 million (2011: $6.2 million) was in respect of schemes outside of the United Kingdom. This includes $8.0 million (2011: $7.8 million) relating to defined contribution schemes. The pension costs are assessed in accordance with the advice of independent qualified actuaries. The Group’s main UK pension commitments are contained within a final salary defined benefit scheme, the BBA Income and Protection Plan (IPP), with assets held in a separate trustee-administered fund. Contributions to the scheme are made and the pension cost is assessed using the projected unit method. During 2008, the Trustees of the UK defined benefit plan purchased from Legal & General Group plc an annuity to match the liabilities associated with pensioner members. Since the initial ‘buy-in’, further tranches of annuities have been purchased periodically in respect of new pensioner liabilities, although there have been no new tranches purchased during 2012. The annuity is an investment of the UK plan, and all pension liabilities and responsibility for future pension payments remain with the plan. The income from the annuity matches the payments to be made to the pensioner members it covers and removes mortality risk in relation to those members which are the subject of the annuity purchase. The IPP was closed to new members in 2002. On 1 March 2010, the future service benefits provided by this plan were changed from a final salary to a career average re-valued earnings (CARE) basis. At the same time, benefits accrued in the IPP prior to 1 March 2010 were changed so that these now increase in line with inflation rather than future salary increases. The latest actuarial valuation of the plan was carried out as at 31 March 2009. Following this valuation the Company agreed to pay additional contributions of £3.75 million ($6.1 million) per annum from 2011 to 2012 and £4.75 million ($7.7 million) in each of the years 2013 and 2014 to repair the funding shortfall of £30.8 million ($49.9 million) calculated at that date. The Group’s foreign pension schemes (all in North America) mainly relate to a funded defined benefit pension arrangement. There is also a post-retirement medical plan and a deferred compensation plan. Pension costs have been calculated by independent qualified actuaries, using the projected unit method and assumptions appropriate to the arrangements in place. In accordance with IAS 19, and subject to materiality, the latest actuarial valuations of the Group’s defined benefit pension schemes and healthcare plan have been reviewed and updated as at 31 December 2012. The following weighted average financial assumptions have been adopted: United Kingdom North America 2012 2011 2010 2012 2011 2010 Per annum (%) Discount rate 4.0 4.6 5.4 3.7 4.4 5.2 Rate of increase to pensionable salaries 3.1 3.3 3.7 4.0 4.0 4.0 Price inflation 2.6 2.8 3.2 2.3 2.3 2.2 Rate of increase to pensions in payment 2.6 2.7 3.1 2.3 – –
For the UK plan, the mortality assumptions are based on the recent actual mortality experience of members within the plan and the assumptions also allow for future mortality improvements. The life expectancy assumptions applying to the UK plan as at 31 December 2012 are as follows: 2012 2011 Male Female Male Female Life expectancy for a current 65 year old (years) 21.9 22.8 21.8 22.8 Life expectancy for a 65 year old in 15 years (years) 24.2 25.5 24.0 25.4
For the US post-retirement medical plan, the immediate trend rate for medical benefits was 7.5% which is assumed to reduce by 0.5% per annum to 5.0% in 2018 onwards. Consolidated Financial Statements 110 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 19. Pensions and other post-retirement benefits – continued 78 Consolidated Income Statement The fair value of the assets and liabilities of the schemes at each balance sheet date were: 79 Consolidated Statement of Comprehensive Income United Kingdom North America Total 80 Consolidated Balance Sheet 2012 2011 2010 2012 2011 2010 2012 2011 2010 $m $m $m $m $m $m $m $m $m 81 Consolidated Cash Flow Statement Assets 82 Consolidated Statement of Equities 137.8 107.5 114.6 19.0 16.8 18.2 156.8 124.3 132.8 Changes in Equity Government bonds 24.7 21.6 18.5 – – – 24.7 21.6 18.5 83 Accounting Policies of the Group Corporate bonds 64.2 49.3 43.3 17.8 14.9 14.3 82.0 64.2 57.6 88 Notes to the Consolidated Property 38.4 42.5 32.8 – – – 38.4 42.5 32.8 Financial Statements Insurance policies 458.4 418.6 413.9 – – – 458.4 418.6 413.9 121 Independent Auditor’s Report to the members of BBA Aviation plc Cash 9.5 12.9 11.6 1.7 3.3 3.8 11.2 16.2 15.4 122 Company Balance Sheet Total fair value of scheme assets 733.0 652.4 634.7 38.5 35.0 36.3 771.5 687.4 671.0 123 Accounting Policies of the Company Present value of defined benefit obligations (763.5) (667.3) (626.5) (74.3) (69.3) (65.8) (837.8) (736.6) (692.3) 124 Notes to the Company Asset not recognised1 – – (8.2) – – – – – (8.2) Financial Statements Minimum funding liability2 – (4.3) (24.0) – – – – (4.3) (24.0) 129 Principal Subsidiary and Associated Undertakings Liability recognised on the balance sheet (30.5) (19.2) (24.0) (35.8) (34.3) (29.5) (66.3) (53.5) (53.5)
130 Five Year Summary 1 Where a surplus has arisen on a scheme, in accordance with IAS 19 and IFRIC 14, the surplus is recognised as an asset only if it represents an unconditional economic benefit available to 131 Shareholder Information the Group in the future. Any surplus in excess of this benefit is not recognised in the balance sheet. 2 In accordance with IAS 19 and IFRIC 14 a minimum funding liability arises where the statutory funding requirements are such that future contributions in respect of past service will result in an unrecognisable surplus in future. The funding policy for the United Kingdom and majority of the North American schemes is reviewed on a systematic basis in consultation with the independent scheme actuary in order to ensure that the funding contributions from sponsoring employers are appropriate to meet the liabilities of the schemes over the long term. Included within other receivables in the balance sheet are $4.2 million (2011: $4.5 million) of listed investments which are held in trust for the benefit of members of the deferred compensation plan in North America. These amounts are not included within the assets shown in the table above as they are not controlled by the plan in question. A 0.25% increase in the assumed discount rate for the UK plan would decrease the net deficit (before impact of IFRIC 14 and the minimum funding liability) by approximately $16.6 million. A 0.25% decrease in the assumed discount rate for the UK plan would increase the net deficit (before impact of IFRIC 14 and the minimum funding liability) by approximately $17.8 million. A 0.25% increase in the assumed future inflation rate for the UK plan would increase the net deficit (before impact of IFRIC 14 and the minimum funding liability) by approximately $16.2 million. A 0.25% decrease in the assumed future inflation rate for the UK plan would decrease the net deficit (before impact of IFRIC 14 and the minimum funding liability) by approximately $16.8 million. United Kingdom North America 2012 2011 2010 2012 2011 2010 Long-term expected return on assets (%) Equities 6.9 7.1 8.5 8.5 8.9 8.5 Government bonds 2.7 2.8 4.2 – – – Corporate bonds 3.8 4.4 5.2 3.5 4.2 4.7 Property 6.9 7.1 8.5 – – – Insurance policies 4.0 4.6 5.4 – – – Other 2.9 3.0 4.1 2.3 2.3 2.8
The expected rates of return reflect the Group’s best estimate of the investment returns (net of tax and expenses) that will be earned on each asset class over the long term. The long-term rates of return on bonds and other investments are set in line with market yields available at the balance sheet date. In the UK, the long-term rate of return on equities is derived from considering current “risk free” rates of return with the addition of a future “risk premium”. The overall expected return on assets in the analysis of the income statement is based on weighted average returns using the above rates for each asset class, and taking into account the asset allocation in each plan. Consolidated Financial Statements Notes to the Consolidated Financial Statements 111
19. Pensions and other post-retirement benefits – continued United Kingdom North America Total 2012 2011 2010 2012 2011 2010 2012 2011 2010 $m $m $m $m $m $m $m $m $m Analysis of income statement charge Current service cost 3.1 2.5 2.6 0.2 0.2 0.3 3.3 2.7 2.9 Interest cost 30.7 33.5 35.3 2.9 3.2 3.4 33.6 36.7 38.7 Expected return on assets (31.8) (36.4) (37.0) (2.0) (2.1) (1.9) (33.8) (38.5) (38.9) (Gain)/loss due to settlements/curtailments and terminations – – (4.8) – – 0.5 – – (4.3) (Income)/expense recognised in income statement 2.0 (0.4) (3.9) 1.1 1.3 2.3 3.1 0.9 (1.6)
Current service costs have been recognised in the income statement within administrative expenses. Net interest income has been recognised within investment income. Settlement losses have been recognised within other operating expenses. In June 2011, the IASB issued amendments to IAS 19 ‘Employee Benefits’ (‘IAS 19 revised’). The revised standard is effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. IAS 19 revised must be applied retrospectively. The principal impact for the Group will be that the concepts of expected return on assets and interest expense on the defined benefit obligation as separate components of defined benefit cost will be replaced by a concept that interest will be calculated on the net of the defined benefit obligation, after allowance for any asset ceilings and additional liability under IFRIC 14, using an interest rate reflecting market yields of high quality corporate bonds in a deep market. If this concept had been adopted by the Group in 2012, it is estimated that underlying profit before tax would have been $5.2 million lower and adjusted basic EPS 1.1 cents per share lower. As required by the standard, the Group will retrospectively adopt the standard on 1 January 2013. United Kingdom North America Total 2012 2011 2010 2012 2011 2010 2012 2011 2010 $m $m $m $m $m $m $m $m $m Changes to the present value of the defined benefit obligation during the year Defined benefit obligation at beginning of year 667.3 626.5 685.0 69.3 65.8 64.1 736.6 692.3 749.1 Current service cost 3.1 2.5 2.6 0.2 0.2 0.3 3.3 2.7 2.9 Interest cost 30.7 33.5 35.3 2.9 3.2 3.4 33.6 36.7 38.7 Contributions by plan participants 0.8 0.8 0.8 – – – 0.8 0.8 0.8 Actuarial losses/(gains) on scheme liabilities 69.1 54.0 (38.1) 5.8 6.5 2.2 74.9 60.5 (35.9) Net benefits paid out (38.9) (40.6) (36.6) (3.9) (6.4) (4.8) (42.8) (47.0) (41.4) Gains due to settlements and curtailments – – (4.8) – – 0.5 – – (4.3) Foreign currency exchange rate changes 31.4 (9.4) (17.7) – – 0.1 31.4 (9.4) (17.6) Defined benefit obligation at end of year 763.5 667.3 626.5 74.3 69.3 65.8 837.8 736.6 692.3 Consolidated Financial Statements 112 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 19. Pensions and other post-retirement benefits – continued 78 Consolidated Income Statement United Kingdom North America Total 79 Consolidated Statement of Comprehensive Income 2012 2011 2010 2012 2011 2010 2012 2011 2010 $m $m $m $m $m $m $m $m $m 80 Consolidated Balance Sheet 81 Consolidated Cash Flow Changes to the fair value of scheme assets Statement during the year 82 Consolidated Statement of Fair value of scheme assets at beginning of year 652.4 634.7 662.1 35.0 36.3 33.5 687.4 671.0 695.6 Changes in Equity Expected return on assets 31.8 36.4 37.0 2.0 2.1 1.9 33.8 38.5 38.9 83 Accounting Policies of the Group Actual employer contributions 10.1 10.9 4.3 4.2 5.8 4.5 14.3 16.7 8.8 88 Notes to the Consolidated Contributions by plan participants 0.8 0.8 0.8 – – – 0.8 0.8 0.8 Financial Statements Net benefits paid out (38.9) (40.6) (36.6) (3.9) (6.4) (4.8) (42.8) (47.0) (41.4) 1121 Independent Auditor’s Report to the members of BBA Aviation plc Actuarial (losses)/gains on assets 46.4 18.7 (15.8) 1.2 (2.8) 1.2 47.6 15.9 (14.6) 122 Company Balance Sheet Foreign currency exchange rate changes 30.4 (8.5) (17.1) – – – 30.4 (8.5) (17.1) 123 Accounting Policies of Fair value of plan assets at end of year 733.0 652.4 634.7 38.5 35.0 36.3 771.5 687.4 671.0 the Company
124 Notes to the Company United Kingdom North America Total Financial Statements 2012 2011 2010 2012 2011 2010 2012 2011 2010 129 Principal Subsidiary and $m $m $m $m $m $m $m $m $m Associated Undertakings 130 Five Year Summary Actual return on scheme assets 78.2 55.1 21.2 3.2 (0.7) 3.1 81.4 54.4 24.3 131 Shareholder Information United Kingdom North America Total 2012 2011 2010 2012 2011 2010 2012 2011 2010 $m $m $m $m $m $m $m $m $m Analysis of amounts recognised in SOCIE Total actuarial (losses)/gains recognised in year (22.7) (36.2) 21.7 (4.6) (9.3) (0.9) (27.3) (45.5) 20.8 Movement in surplus restriction – 8.2 (8.2) – – – – 8.2 (8.2) Movement in minimum funding liability 4.3 19.7 (24.0) – – – 4.3 19.7 (24.0) Foreign currency exchange rate charges (1.0) 0.9 0.6 – – (0.1) (1.0) 0.9 0.5 (19.4) (7.4) (9.9) (4.6) (9.3) (1.0) (24.0) (16.7) (10.9)
Cumulative losses recognised in SOCIE 98.3 74.6 39.3 44.4 39.8 30.5 142.7 114.4 69.8
A 1% increase in assumed medical cost trend rates would increase the aggregate charge in the income statement by $nil and increase the net liability by $0.3 million. A 1% decrease in assumed medical cost trend rates would reduce the aggregate charge in the income statement by $nil and reduce the net liability by $0.2 million.
History of asset values, defined benefits obligation, surplus/deficits in schemes and experience gains and losses United Kingdom North America 2012 2011 2010 2009 2008 2012 2011 2010 2009 2008 $m $m $m $m $m $m $m $m $m $m Fair value of assets 733.0 652.4 634.7 662.1 494.2 38.5 35.0 36.3 33.5 29.7 Defined benefits obligation (763.5) (667.3) (626.5) (685.0) (486.9) (74.3) (69.3) (65.8) (64.1) (63.2) (Deficit)/surplus (30.5) (14.9) 8.2 (22.9) 7.3 (35.8) (34.3) (29.5) (30.6) (33.5)
Experience (losses)/gains on scheme assets 46.4 18.7 (16.1) 102.6 (227.6) 1.2 (2.8) 1.2 4.8 (13.1) Experience (losses)/gains on scheme liabilities (14.9) (17.9) (18.4) 29.5 (9.3) – 0.1 (1.6) 0.5 0.9 Consolidated Financial Statements Notes to the Consolidated Financial Statements 113
19. Pensions and other post-retirement benefits – continued Total 2012 2011 2010 2009 2008 $m $m $m $m $m Fair value of assets 771.5 687.4 671.0 695.6 523.9 Defined benefits obligation (837.8) (736.6) (692.3) (749.1) (550.1) (Deficit)/surplus (66.3) (49.2) (21.3) (53.5) (26.2)
Experience gains on scheme assets 47.6 15.9 (14.9) 107.4 (240.7) Experience (losses)/gains on scheme liabilities (14.9) (17.8) (20.0) 30.0 (8.4)
United North Kingdom America Total $m $m $m Employer contributions for 2013 are estimated to be as follows: 11.9 2.3 14.2
20. Deferred tax Goodwill Tax losses Share- Fixed Other and and tax Retirement based assets assets intangibles credits benefits payments Total $m $m $m $m $m $m $m Beginning of year (18.6) 6.9 (83.5) 1.8 14.2 5.6 (73.6) Charge to profit or loss 7.6 1.5 (10.0) (1.0) (2.7) (3.6) (8.2) Charge to other comprehensive income (0.2) 0.1 0.1 – 5.0 – 5.0 Charge direct to equity – – – – – 0.5 0.5 Exchange adjustments (0.2) 0.1 – 0.1 0.1 0.2 0.3 End of year (11.4) 8.6 (93.4) 0.9 16.6 2.7 (76.0)
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes: 2012 2011 $m $m Deferred tax liabilities (82.0) (84.1) Deferred tax assets 6.0 10.5 (76.0) (73.6)
At the balance sheet date, the Group has unrecognised deferred tax assets relating to tax losses and other temporary differences of $322.9 million (2011: $342.8 million) available for offset against future profits. These assets have not been recognised as the precise incidence of future profits in the relevant countries and legal entities cannot be accurately predicted at this time. Included in the unrecognised deferred tax asset is $1.2 million (2011: $1.2 million) which relates to losses which will expire by 2017. Other losses may be carried forward indefinitely under current tax legislation. At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was $nil (2011: $nil). Temporary differences arising in connection with interests in associates and joint ventures are insignificant.
21. Share capital and reserves Allotted, called up and fully paid 2012 2011 millions millions Share capital Number of shares: 16 Ordinary 29 /21p shares 479.7 476.8 5% Cumulative preference £1 shares 0.2 0.2 Consolidated Financial Statements 114 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 21. Share capital and reserves – continued 78 Consolidated Income Statement 2012 2011 79 Consolidated Statement of $m $m Comprehensive Income 80 Consolidated Balance Sheet Nominal value of shares 81 Consolidated Cash Flow Equity shares: 16 Statement Ordinary 29 /21p shares 251.5 250.1 82 Consolidated Statement of Non-equity shares: Changes in Equity 5% Cumulative preference £1 shares 0.3 0.3 83 Accounting Policies of the Group 251.8 250.4 88 Notes to the Consolidated Financial Statements Issue of share capital 121 Independent Auditor’s Report to 16 the members of BBA Aviation plc During the year, the Group issued 2.9 million ordinary 29 /21p shares to satisfy the vesting of share awards under the BBA Aviation plc 122 Company Balance Sheet share option schemes. The consideration for shares issued in respect of share options was $1.8 million. 123 Accounting Policies of 2012 2011 the Company $m $m 124 Notes to the Company Reserves attributable to equity interests Financial Statements Share premium account 129 Principal Subsidiary and Associated Undertakings Beginning of year 732.4 612.1 130 Five Year Summary Issue of share capital 0.4 120.3 131 Shareholder Information End of year 732.8 732.4
Other reserve Beginning and end of year 6.9 6.9
Treasury reserve Beginning of year (9.0) (9.7) Purchase of own shares (15.2) (1.3) Sale/transfer of own shares 2.8 – Transfer to retained earnings 15.9 2.0 End of year (5.5) (9.0)
Capital reserve Beginning of year 39.2 37.2 Credit to equity for equity-settled share-based payments 0.9 4.4 Transfer to retained earnings on exercise of equity-settled share-based payments (5.7) (2.4) End of year 34.4 39.2
Hedging reserve Beginning of year (26.0) (29.7) Decrease in fair value of cash flow hedging derivatives (0.3) (5.0) Transfer to income statement 9.5 8.7 End of year (16.8) (26.0)
Translation reserve Beginning of year (29.8) (25.8) Exchange differences on translation of foreign operations 8.6 (4.0) End of year (21.2) (29.8) Consolidated Financial Statements Notes to the Consolidated Financial Statements 115
21. Share capital and reserves – continued 2012 2011 $m $m Retained earnings Beginning of year 19.8 (58.1) Transfer from capital reserve on exercise of equity-settled share-based payments 5.7 2.4 Transfer from treasury reserve (15.9) (2.0) Tax on items taken directly to reserves 9.3 5.5 Actuarial losses (23.0) (16.7) Dividends paid (67.9) (63.7) Profit for the year 115.8 152.4 43.8 19.8
16 At 31 December 2012 13,882 ordinary 29 /21p shares (2011: 13,882 shares) with a nominal value of £4,131 (2011: £4,131) and a market value of $50,150 (2011: $38,300) were held in the BBA Employee Benefit Trust, a trust set up in 2006. EES Trustees International Limited, the trustees of the BBA Employee Benefit Trust, has agreed to waive its dividend entitlement in certain circumstances. At 31 December 2012 16 1.5 million ordinary 29 /21p shares (2011: 3.2 million) with a nominal value of £0.4 million (2011: £1.0 million) and a market value of $5.2 million (2011: $8.9 million) were also held in the 1995 BBA Group Employee Share Trust. This included 91,956 shares being dividend reinvested on 25 May 2012 and 9,995 shares being dividend reinvested on 2 November 2012 under the Dividend Reinvestment Plan.
Rights of non-equity interests 5% cumulative preference £1 shares: i. entitle holders, in priority to holders of all other classes of shares, to a fixed cumulative preferential dividend at a rate of 5.0% per annum per share payable half yearly in equal amounts on 1 February and 1 August; ii. on a return of capital on a winding up, or otherwise, will carry the right to repayment of capital together with a premium of 12.5p per share and a sum equal to any arrears or deficiency of dividend; this right is in priority to the rights of the ordinary shareholders; and iii. carry the right to attend and vote at a general meeting of the Company only if, at the date of the notice convening the meeting, payment of the dividend to which they are entitled is six months or more in arrears, or if a resolution is to be considered at the meeting for winding-up the Company or reducing its share capital or sanctioning the sale of the undertakings of the Company or varying or abrogating any of the special rights attaching to them.
Rights of equity interests 16 29 /21p ordinary shares: i. each share has equal rights to dividends; ii. carry no right to fixed income; iii. on a return of capital on a winding-up, or otherwise, will carry the right to repayment of capital; this right is subordinate to the rights of the preference shareholders; and iv. carry the right to attend and vote at a meeting of the Company. Consolidated Financial Statements 116 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 22. Share-based payments 78 Consolidated Income Statement Equity-settled share-based payments 79 Consolidated Statement of (i) Share options Comprehensive Income The Group plan provides for a grant price equal to the average of the middle market price of a BBA Aviation share up to five dealing days 80 Consolidated Balance Sheet prior to the date of grant. The vesting period is generally three to four years. If the options remain unexercised after a period of 10 years 81 Consolidated Cash Flow Statement from the date of grant, the options expire. Furthermore, options are forfeited if the employee leaves the Group before the options vest. 82 Consolidated Statement of Details of the share options outstanding during the year are as follows: Changes in Equity 2012 2011 83 Accounting Policies of the Group Weighted Weighted 88 Notes to the Consolidated average average Financial Statements Number of exercise Number of exercise share options price share options price 121 Independent Auditor’s Report to the members of BBA Aviation plc Outstanding at the beginning of the year 10,288,274 108p 10,688,735 137p 122 Company Balance Sheet Granted during the year 2,182,641 156p 1,508,842 163p 123 Accounting Policies of Exercised during the year (3,721,570) 66p (571,383) 126p the Company Lapsed during the year (991,913) 225p (1,337,920) 224p 124 Notes to the Company Financial Statements Outstanding at the end of the year 7,757,432 184p 10,288,274 108p 129 Principal Subsidiary and Associated Undertakings Exercisable at the end of the year 1,803,393 289p 2,702,443 271p 130 Five Year Summary 131 Shareholder Information The weighted average share price at the date of exercise for share options exercised during the period was 66p. The options outstanding at 31 December 2012 had weighted average remaining contractual life of 24 months, and an exercise price range of £0.57 to £2.99. Options over 2,182,641 shares were granted under the BBA UK Share Option Plan and the Savings Related Share Option Scheme, in the year. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted and calculated using the valuation technique most appropriate to each type of award. These include Black-Scholes calculations and Monte Carlo simulations. The inputs into the models were as follows: Issued in December Issued in 2012 March 2011 Weighted average share price (pence) 212 210 Weighted average exercise price (pence) 156 163 Expected volatility – 47.2% Expected life (months) 36 36 Risk-free rate – 1.8% Expected dividends – 3.9%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the period of time equivalent to the remaining contractual life of the option. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
(ii) Share awards Details of the conditional share awards outstanding during the year are as follows: 2012 2011 Number of shares Number of shares Outstanding at the beginning of the year 17,601,235 18,005,319 Granted during the year 5,309,420 4,064,241 Exercised during the year (5,590,490) (1,935,562) Lapsed during the year (6,127,580) (2,532,763) Outstanding at the end of the year 11,192,585 17,601,235
The awards outstanding at 31 December 2012 had a weighted average remaining contractual life of 18 months. The weighted average fair value of conditional shares granted in the year was £1.85. Consolidated Financial Statements Notes to the Consolidated Financial Statements 117
22. Share-based payments – continued The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares granted and calculated using the valuation technique most appropriate to each type of award. These include Black-Scholes calculations and Monte Carlo simulations. The inputs into the model were as follows: Issued in Issued in March 2012 March 2011 Weighted average share price (pence) 213 210 Expected volatility – 47.2% Expected life (months) 36 36 Risk-free rate – 1.8% Expected dividend yield – 3.9%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the period of time equivalent to the remaining contractual life of the option. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
(iii) Expense charged to income statement The Group recognised total expenses of $0.9 million (2011: $5.6 million) related to equity-settled share-based payment transactions during the year.
(iv) Cash-settled share-based payments The Group issues to certain employees share appreciation rights (SARs) that require the Group to pay the intrinsic value of the SAR to the employee at the date of exercise. The fair value of the SARs is determined by using the valuation technique most appropriate to each type of award. These include the Black-Scholes calculations and Monte Carlo simulations and use the assumptions noted in the above table. The Group has recorded liabilities of $0.1 million (2011: $0.6 million) and a total charge of $0.7 million (2011: $0.2 million). The total intrinsic value of vested SARs at 31 December 2012 was $0.2 million (2011: $0.2 million).
(v) Other share-based payment plan The Company’s savings-related share option scheme is open to all eligible UK employees. Options are granted at a price equal to the average three-day middle market price of a BBA Aviation ordinary share prior to the date of grant, less 20%. Options are granted under three or five-year SAYE contracts. The maximum overall employee contribution is £250 per month. Pursuant to this plan, the Group issued 325,270 ordinary shares in 2012 (2011: 183,683 ordinary shares). Consolidated Financial Statements 118 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 23. Cash flow from operating activities 78 Consolidated Income Statement 2012 2011 $m $m 79 Consolidated Statement of Comprehensive Income Operating profit 162.7 180.6 80 Consolidated Balance Sheet Share of profit from associates (1.6) (2.0) 81 Consolidated Cash Flow Statement Profit from operations 161.1 178.6 82 Consolidated Statement of Depreciation of property, plant and equipment 52.7 53.0 Changes in Equity Amortisation of intangible assets 15.4 15.8 83 Accounting Policies of the Group Profit on sale of property, plant and equipment (0.3) (2.4) 88 Notes to the Consolidated Share-based payment expense 0.9 5.6 Financial Statements Decrease in provisions – (1.5) 121 Independent Auditor’s Report to Pension scheme payments (11.0) (14.1) the members of BBA Aviation plc Other non-cash items 4.8 0.9 122 Company Balance Sheet Unrealised foreign exchange movements 1.3 (1.9) 123 Accounting Policies of Non-cash impairments – 0.7 the Company Loss on disposal of businesses – 4.6 124 Notes to the Company Financial Statements Operating cash flows before movements in working capital 224.9 239.3 129 Principal Subsidiary and Increase in working capital (12.8) (12.2) Associated Undertakings Cash generated by operations 212.1 227.1 130 Five Year Summary Income taxes (paid)/received (4.9) 8.5 131 Shareholder Information Net cash flow from operating activities 207.2 235.6
Dividends received from associates 0.8 1.0 Purchase of property, plant and equipment (51.1) (38.5) Purchase of intangible assets† (5.0) (5.4) Proceeds from disposal of property, plant and equipment 0.7 14.6 Interest received 7.3 18.0 Interest paid (38.3) (39.0) Interest element of finance leases paid (0.4) (0.5) Free cash flow 121.2 185.8
† Purchase of intangible assets excludes $0.4 million (2011: $nil) paid in relation to Ontic licences since the directors believe these payments are more akin to expenditure in relation to acquisitions, and are therefore outside of the Group’s definition of free cash flow. These amounts are included within purchase of intangible assets on the face of the cash flow statement.
24. Acquisition and disposal of businesses During the year, the Group made a number of acquisitions in its Signature Flight Support, ASIG and Engine Repair and Overhaul divisions.
Signature Flight Support ——On 6 January 2012, the Group acquired substantially all the assets of Elliot Aviation of Omaha Inc operating out of Eppley Field, Omaha, an FBO operator in Omaha, Nebraska for a consideration of $3.4m; ——On 31 December 2012, the Group acquired substantially all the assets of Sun Aircraft Services Inc, a maintenance business based in Washington D.C. for a consideration of $2.8m.
ASIG ——On 1 September 2012, the Group acquired substantially all the assets of Dryden Air Services Inc, PLH Aviation Services Inc and PLH Aviation Services (YVR) Inc, airport services providers predominantly based in Canada, for a consideration of $27.0m.
Engine Repair and Overhaul On 4 May 2012, the Group acquired substantially all the assets of Consolidated Turbine Support Inc, a mobile engine support business based in Phoenix, Arizona for a consideration of $1.9m. Consolidated Financial Statements Notes to the Consolidated Financial Statements 119
24. Acquisition and disposal of businesses – continued The fair value of the net assets acquired and goodwill arising on these acquisitions are set out below: Signature Engine Flight Repair and Support ASIG Overhaul Total 2012 2012 2012 2012 $m $m $m $m Intangible assets 0.4 4.8 – 5.2 Property, plant and equipment 1.7 3.6 1.1 6.4 Inventories 0.2 0.2 0.8 1.2 Receivables – 2.1 – 2.1 Payables – (2.3) – (2.3) Net assets 2.3 8.4 1.9 12.6 Goodwill 3.9 18.6 – 22.5 Total consideration 6.2 27.0 1.9 35.1 Satisfied by: Cash consideration 6.2 27.0 1.9 35.1
The fair values in respect of the ASIG acquisition are provisional and are subject to possible amendment on finalisation of the fair value exercise due to the proximity to the year end. Acquisition-related costs, included within other operating expenses, amount to $1.5 million. The goodwill arising on all these acquisitions is attributable to the anticipated profitability arising from the growth of the Signature and ASIG networks, expansion of the Group’s Commercial and Engine Repair and Overhaul businesses, together with anticipated future operating synergies. $17.9 million of the goodwill is expected to be deductible for income tax purposes. In the period since acquisition, the operations acquired have contributed $36.0 million and $2.5 million to revenue and operating profit respectively. If all the acquisitions had occurred on the first day of the financial year, the total revenue and operating profit from these acquisitions is estimated to be $48.8 million and $3.8 million respectively. There have been no disposals during the year.
25. Contingent liabilities The Group is party to legal proceedings and claims which arise in the normal course of business, including specific product liability and environmental claims. Any liabilities are likely to be mitigated by legal defences, insurance, reserves and third party indemnities. Additionally, the Group has previously owned businesses that manufactured products containing asbestos. No BBA company has manufactured or sold any products or materials containing asbestos for many years. A small number of former BBA companies have been named as defendants to asbestos-related claims. When these companies were sold, BBA retained certain obligations to indemnify the purchasers against such claims. Notwithstanding such indemnity arrangements, the costs incurred by BBA in dealing with claims made against these former BBA companies have been immaterial to BBA. During the period 1989 to 31 December 2012, BBA’s aggregate costs of defending and disposing of all asbestos-related claims, net of insurance coverage, were approximately $16.0 million. BBA maintains a portfolio of insurance coverage in respect of the majority of such claims, including legal defence costs and liability cover. State operated compensation programmes have also provided coverage. On the basis of its past claims experience, BBA does not anticipate any material increase in the cost to it of resolving such claims. Whilst the outcome of these claims are, by their nature, uncertain, the directors do not currently anticipate that the outcome of the proceedings and claims set out above either individually, or in aggregate, will materially exceed the insurance coverage or amounts provided as shown in note 18, and are not expected to have a material adverse effect upon the Group’s financial position. Consolidated Financial Statements 120 Notes to the Consolidated Financial Statements
Financial statements Notes to the Consolidated Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 26. Related party transactions 78 Consolidated Income Statement Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not 79 Consolidated Statement of disclosed in this note. Details of transactions between the Group and other related parties are detailed below. Comprehensive Income 80 Consolidated Balance Sheet Compensation of key management personnel 81 Consolidated Cash Flow Statement Key management are the directors and members of the executive committee. 82 Consolidated Statement of The remuneration of directors and other members of key management during the year was as follows: Changes in Equity 2012 2011 83 Accounting Policies of the Group $m $m 88 Notes to the Consolidated Short-term benefits 7.6 7.6 Financial Statements Post-employment benefits 0.8 0.7 121 Independent Auditor’s Report Share-based payments 0.8 2.1 to the members of BBA Aviation plc 9.2 10.4 122 Company Balance Sheet 123 Accounting Policies of Post-employment benefits include contributions of $0.7 million (2011: $0.6 million) in relation to defined contribution schemes. the Company The remuneration of directors and key executives is determined by the Remuneration Committee having regard to the 124 Notes to the Company performance of individuals and market trends. The directors’ remuneration is disclosed in the Directors’ Remuneration Report on pages Financial Statements 63 to 74. 129 Principal Subsidiary and Associated Undertakings The amount disclosed in the table above does not include the portion of the annual bonus subject to compulsory deferral, which will be expensed over the vesting period in accordance with IFRS 2 Share-based Payment. The amount of the 2012 annual bonus subject 130 Five Year Summary to compulsory deferral is $1.0 million (2011: $1.7 million). 131 Shareholder Information Other related party transactions During the year, Group companies entered into the following transactions with related parties who are not members of the Group: Amounts owed by Amounts owed to Sales of Goods Purchases of Goods related parties related parties 2012 2011 2012 2011 2012 2011 2012 2011 $m $m $m $m $m $m $m $m Associates 18.1 15.9 449.9 424.5 5.1 3.1 27.7 8.9
Purchases of goods principally relates to the purchase of aviation fuel. Purchases were made at market price discounted to reflect the quantity of goods purchased.
The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. At the balance sheet date, Group companies had loan receivables from an associated undertaking of $2.9 million (2011: $2.5 million). The loans are unsecured and will be settled in cash, and were made on terms which reflect the relationships between the parties. In addition, the Group operates various pension and other post-retirement benefit schemes for its employees. Details are set out in note 19. Company Financial Statements Independent Auditor’s Report 121
Independent Auditor’s Report Matters on which we are required to report by exception to the members of BBA Aviation plc We have nothing to report in respect of the following matters We have audited the parent company financial statements of BBA where the Companies Act 2006 requires us to report to you if, in Aviation plc for the year ended 31 December 2012 which comprise our opinion: the Parent Company Balance Sheet, the accounting policies and —— adequate accounting records have not been kept by the the related notes 1 to 12. The financial reporting framework that parent company, or returns adequate for our audit have not has been applied in their preparation is applicable law and United been received from branches not visited by us; or Kingdom Accounting Standards (United Kingdom Generally —— the parent company financial statements and the part of the Accepted Accounting Practice). Directors’ Remuneration Report to be audited are not in This report is made solely to the Company’s members, as a agreement with the accounting records and returns; or body, in accordance with Chapter 3 of Part 16 of the Companies —— certain disclosures of directors’ remuneration specified by law Act 2006. Our audit work has been undertaken so that we might are not made; or state to the Company’s members those matters we are required —— we have not received all the information and explanations we to state to them in an auditor’s report and for no other purpose. require for our audit. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Other matter Company’s members as a body, for our audit work, for this report, We have reported separately on the Group financial statements of or for the opinions we have formed. BBA Aviation plc for the year ended 31 December 2012.
Respective responsibilities of directors and auditor Nigel Mercer (Senior statutory auditor) As explained more fully in the Statement of Directors’ for and on behalf of Deloitte LLP Responsibilities, the directors are responsible for the preparation Chartered Accountants and Statutory Auditor of the parent company financial statements and for being satisfied London, United Kingdom that they give a true and fair view. Our responsibility is to audit and 28 February 2013 express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
Opinion on financial statements In our opinion the parent company financial statements: ——give a true and fair view of the state of the Company’s affairs as at 31 December 2012; ——have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and ——have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006 In our opinion: ——the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and ——the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the parent company financial statements. Company Financial Statements 122 Company Balance Sheet
Financial statements Company Balance Sheet 77 Independent Auditor’s Report to the members of BBA Aviation plc 2012 2011 78 Consolidated Income Statement Notes £m £m 79 Consolidated Statement of Comprehensive Income Fixed assets Tangible fixed assets 3 0.8 0.1 80 Consolidated Balance Sheet Investments 4 2,314.7 2,314.7 81 Consolidated Cash Flow Statement 2,315.5 2,314.8 82 Consolidated Statement of Changes in Equity Current assets 83 Accounting Policies of the Group Debtors due after one year 5 17.3 13.1 88 Notes to the Consolidated Debtors due within one year 5 932.1 674.0 Financial Statements Cash at bank and in hand 7 18.9 5.5 121 Independent Auditor’s Report to 968.3 692.6 the members of BBA Aviation plc Current liabilities 122 Company Balance Sheet Creditors: amounts falling due within one year 123 Accounting Policies of Borrowings and finance leases 6, 7 (0.1) (4.8) the Company Others 6 (1,902.4) (1,776.0) 124 Notes to the Company Financial Statements Net current liabilities (934.2) (1,088.2) 129 Principal Subsidiary and Associated Undertakings Total assets less current liabilities 1,381.3 1,226.6 130 Five Year Summary Creditors: amounts falling due after more than one year 131 Shareholder Information Borrowings and finance leases 7, 8 (356.3) (335.1) Others 8 (4.7) (30.9) Provisions (2.3) (1.7) Total net assets 1,018.0 858.9
Capital and reserves Called up share capital 10 142.8 141.9 Share premium account 10 414.8 414.5 Other reserves 10 245.5 242.9 Profit and loss account 10 214.9 59.6 Equity shareholders’ funds 1,018.0 858.9
The financial statements of BBA Aviation plc (registered number 53688) were approved by the Board of Directors on 28 February 2013 and signed on its behalf by:
Simon Pryce Mark Hoad Group Chief Executive Group Finance Director
In accordance with the exemptions permitted by s408 of the Companies Act 2006, the profit and loss account of the Company has not been presented. The profit for the financial year in the accounts of the Company amounted to £203.9 million (2011: loss £44.9 million).
The auditor’s remuneration for audit and other services is disclosed in note 2 to the Consolidated Financial Statements.
The accompanying notes are an integral part of this balance sheet. Company Financial Statements Accounting Policies of the Company 123
Accounting Policies The costs of pension plans and other post-retirement benefits are charged to the profit and loss account so as to spread the costs Basis of Accounting over employees’ working lives within the Company. The The separate financial statements of the Company are presented as contribution levels are determined by valuations undertaken by required by the Companies Act 2006. The financial statements have independent qualified actuaries. been prepared using the historical cost convention adjusted for the revaluation of certain fixed assets and in accordance with applicable Share-based payments United Kingdom accounting standards and law. The Company operates a number of cash and equity-settled share- The financial statements have been prepared on a going based compensation plans. The fair value of the compensation is concern basis in accordance with the rationale set out in the directors’ recognised in the profit and loss account as an expense. The total statement of going concern on page 75 of the Directors’ Report. amount to be expensed over the vesting period is determined by The Company has taken advantage of the exemption from reference to the fair value of the options granted and calculated preparing a cash flow statement under the terms of FRS 1, ‘Cash flow using the valuation technique most appropriate to each type of statements’. The Company is exempt under the terms of FRS 8, award. These include Black-Scholes calculations and Monte Carlo ‘Related party disclosures’, from disclosing related party transactions simulations. For cash-settled options, the fair value of the option is with wholly owned subsidiaries of BBA Aviation plc. The Company revisited at each balance sheet date. For both cash and equity- has taken full advantage of the exemption to provide financial settled options, the Company revises its estimates of the number of instrument disclosures under the terms of FRS 29, ‘Financial options that are expected to become exercisable at each balance instruments: Disclosures’. sheet date. The principal accounting policies are set out below. They have all been applied consistently throughout the current and preceding Tangible fixed assets periods. Plant and machinery are stated in the balance sheet at cost. Land and buildings are stated at cost. Other tangible fixed assets are stated in Investments the balance sheet at cost. Depreciation is provided on the cost of In the Company’s financial statements, investments in subsidiary and tangible fixed assets less estimated residual value and is calculated associated undertakings are stated at cost less provision for on a straight-line basis over the following estimated useful lives of impairment. the assets:
Treasury Land Not depreciated Transactions in foreign currencies are translated into sterling at the Buildings 40 years maximum rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet Plant and machinery (including essential date are recorded at the rates of exchange prevailing at that date. commissioning costs) 3-18 years Any gain or loss arising from a change in exchange rates subsequent Tooling, vehicles, computer and office equipment are categorised to the date of transaction is recognised in the profit and loss account. within plant and machinery in note 3 of the accounts. Derivative financial instruments utilised by the Group The revaluation reserve consists of the surpluses on the comprise interest rates swaps, cross currency or basis swaps and revaluation of land and buildings to their market value for existing foreign exchange contracts. All such instruments are used for use and on the revaluation of plant and machinery to net current hedging purposes to manage the risk profile of an underlying replacement cost. The directors are not aware of any material change exposure of the Group in line with the Group’s risk management to the value of these assets since the last revaluation. policies. All derivative instruments are recorded on the balance sheet at fair value. Recognition of gains or losses on derivative instruments Leases depends on whether the instrument is designated as a hedge and Where assets are financed by lease agreements that give rights the type of exposure it is designed to hedge. similar to ownership (finance leases), the assets are treated as if they The effective portion of gains or losses on cash flow hedges had been purchased and the leasing commitments are shown as are deferred in equity until the impact from the hedged item is obligations to the lessors. The capitalisation values of the assets are recognised in the profit and loss account. The ineffective portion of written off on a straight-line basis over the shorter of the periods of such gains and losses is recognised in the profit and loss account the leases or the useful lives of the assets concerned. The capital immediately. elements of future lease obligations are recorded as liabilities, while Gains or losses on the qualifying part of net investment the interest elements are charged to the profit and loss account over hedges are recognised in equity together with the gains and losses the period of the leases to produce a constant rate of charge on the on the underlying net investment. The ineffective portion of such balance of capital payments outstanding. gains and losses is recognised in the profit and loss account. Changes in the fair value of the derivative financial instruments Taxation that do not qualify for hedge accounting are recognised in the profit The charge for taxation is based on the profit for the year and takes and loss account as they arise. into account taxation deferred due to timing differences between the treatment of certain items for taxation and accounting purposes. Pensions and other post-retirement benefits Deferred tax is provided in full on all liabilities. In accordance with FRS The Company provides pension arrangements to the majority of full 19, deferred tax assets are recognised to the extent it is regarded that time employees through the Company’s defined benefit scheme. It it is more likely than not that they will be recovered. Deferred tax is not possible to identify the share of underlying assets and liabilities assets and liabilities have not been discounted. in this scheme which is attributable to the Company on a consistent Deferred tax is not provided on timing differences arising from and reasonable basis. Therefore the Company has applied the provisions in FRS17 to account for the scheme as if it was a defined the sale or revaluation of fixed assets unless, at the balance sheet contribution scheme. date, a binding commitment to sell the asset has been entered into and it is unlikely that any gain will qualify for rollover relief. Company Financial Statements 124 Notes to the Company Financial Statements
Financial statements Notes to the Company Financial Statements 77 Independent Auditor’s Report to the members of BBA Aviation plc 1. Dividends 78 Consolidated Income Statement Details of the Company’s dividends paid are provided in note 5 of the consolidated financial statements. 79 Consolidated Statement of Comprehensive Income 80 Consolidated Balance Sheet 2. Directors and employees 81 Consolidated Cash Flow Statement Emoluments and interests 82 Consolidated Statement of Details of directors’ emoluments and interests are provided within the Directors’ Remuneration Report on pages 63 to 74. Changes in Equity 83 Accounting Policies of the Group Employees 88 Notes to the Consolidated 2012 2011 Financial Statements Average monthly number 36 35 121 Independent Auditor’s Report to the members of BBA Aviation plc 122 Company Balance Sheet 2012 2011 123 Accounting Policies of Salaries 5.6 7.4 the Company Social security 1.2 0.6 124 Notes to the Company Financial Statements Pension 5.3 5.6 129 Principal Subsidiary and 12.1 13.6 Associated Undertakings 130 Five Year Summary 3. Tangible fixed assets 131 Shareholder Information Land and Plant and Land and Plant and buildings machinery Total buildings machinery Total 2012 2012 2012 2011 2011 2011 £m £m £m £m £m £m Cost or valuation Beginning of year 0.6 1.0 1.6 0.6 1.0 1.6 Additions 0.7 0.3 1.0 – – – Asset write downs (0.5) (0.2) (0.7) – – – End of year 0.8 1.1 1.9 0.6 1.0 1.6
Accumulated depreciation Beginning of year 0.6 0.9 1.5 0.5 0.9 1.4 Provided during the year 0.1 0.1 0.2 0.1 – 0.1 Asset write downs (0.5) (0.1) (0.6) – – – End of year 0.2 0.9 1.1 0.6 0.9 1.5 Net book value end of year Owned assets – 0.2 0.2 – 0.1 0.1 Leased assets 0.6 – 0.6 – – – 0.6 0.2 0.8 – 0.1 0.1
2012 2011 £m £m Land and buildings Short leasehold 0.6 – 0.6 – Company Financial Statements Notes to the Company Financial Statements 125
4. Fixed asset investments 2012 2011 £m £m Subsidiary undertakings Cost of shares Beginning and end of year 2,239.7 2,239.7 Provisions for impairments Beginning and end of year (28.4) (28.4) Net book value end of year 2,211.3 2,211.3
Loans to subsidiary undertakings At beginning and end of year 103.4 103.4 Total Fixed asset investments 2,314.7 2,314.7
The principal subsidiary undertakings of BBA Aviation plc are listed on page 129.
5. Debtors 2012 2011 £m £m Amounts owed by subsidiary undertakings 906.9 641.9 Other debtors, prepayments and accrued income 25.2 32.1 Debtors due within one year 932.1 674.0 Other debtors due after one year 17.3 13.1 949.4 687.1
6. Creditors: amounts falling due within one year 2012 2011 £m £m Borrowings (note 7) Bank loans and overdrafts 0.1 4.8 0.1 4.8 Other Amounts owed to subsidiary undertakings 1,868.4 1,746.7 Other taxation and social security 0.2 0.2 Other creditors 19.3 9.3 Accruals and deferred income 14.5 19.8 1,902.4 1,776.0
Creditor days for the Company for the year end were an average of 28 days (2011: 27 days). Company Financial Statements 126 Notes to the Company Financial Statements
Financial statements Notes to the Company Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 7. Cash and borrowings 78 Consolidated Income Statement 2012 2011 £m £m 79 Consolidated Statement of Borrowings summary Comprehensive Income Medium-term loans 80 Consolidated Balance Sheet Repayable between two and five years 154.3 129.1 81 Consolidated Cash Flow Repayable in more than five years 202.0 206.0 Statement 82 Consolidated Statement of Borrowings: due after more than one year 356.3 335.1 Changes in Equity 83 Accounting Policies of the Group Short-term 88 Notes to the Consolidated Overdrafts, borrowings and finance leases repayable within one year (note 6) 0.1 4.8 Financial Statements Total borrowings and finance leases 356.4 339.9 121 Independent Auditor’s Report to the members of BBA Aviation plc Cash at bank and in hand (18.9) (5.5) 122 Company Balance Sheet Net borrowings and finance leases 337.5 334.4 123 Accounting Policies of the Company 2012 2011 124 Notes to the Company Borrowings analysis £m £m Financial Statements Unsecured 129 Principal Subsidiary and Associated Undertakings Bank loans and overdrafts 130 Five Year Summary Sterling 0.3 4.1 131 Shareholder Information US dollar 356.1 334.9 Euro – 0.9 Total borrowings and finance leases 356.4 339.9 Cash at bank and in hand (18.9) (5.5) Net borrowings and finance leases 337.5 334.4
The interest rates on unsecured loans range from 0.8% to 5.9% per annum and repayments are due at varying dates up to 2023.
Operating lease commitments Land and buildings Within one year – 0.3 One to five years 1.2 – More than five years 2.1 – 3.3 0.3
Contingent liabilities Guarantees of subsidiary undertakings’ overdrafts or loans and other guarantees 9.7 14.2
Additional details of contingent liabilities are provided within note 25 to the consolidated financial statements.
Foreign currency contracts At 31 December 2012, the Group had £319.4 million (2011: £378.3 million) of forward contracts to buy/sell foreign currency. Company Financial Statements Notes to the Company Financial Statements 127
8. Creditors: amounts falling due after more than one year 2012 2011 £m £m Borrowings (note 7) Bank loans 356.3 335.1
Others Other creditors 4.7 30.9 361.0 366.0
9. Reconciliation of movements in shareholders’ funds 2012 2011 £m £m Profit/(loss) for the period 203.9 (44.9) Equity dividends (42.1) (39.2) 161.8 (84.1) Fair value movements in interest rate cash flow hedges (3.0) (1.9) Credit to equity for equity-settled share-based payments 0.5 2.8 Movement on treasury reserve (7.8) (0.8) Transfer to profit or loss from equity on interest rate hedges 6.4 3.9 Issue of shares 1.2 87.1 Net movement in shareholders’ funds for the period 159.1 7.0 Shareholders’ funds at beginning of year 858.9 851.9 Shareholders’ funds at end of year 1,018.0 858.9 Company Financial Statements 128 Notes to the Company Financial Statements
Financial statements Notes to the Company Financial Statements – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc 10. Capital and reserves 78 Consolidated Income Statement Details of Company share capital are provided within note 21 to the consolidated financial statements. 79 Consolidated Statement of 2012 2011 Comprehensive Income £m £m 80 Consolidated Balance Sheet Reserves attributable to equity interests 81 Consolidated Cash Flow Share premium account Statement Beginning of year 414.5 340.6 82 Consolidated Statement of Changes in Equity Premium on shares issued 0.3 73.9 83 Accounting Policies of the Group End of year 414.8 414.5 88 Notes to the Consolidated Financial Statements Revaluation reserve 121 Independent Auditor’s Report to Beginning and end of year 3.5 3.5 the members of BBA Aviation plc 122 Company Balance Sheet Merger reserve 123 Accounting Policies of Beginning and end of year 99.3 99.3 the Company 124 Notes to the Company Capital reserve Financial Statements Beginning of year 155.0 153.7 129 Principal Subsidiary and Associated Undertakings Credit to equity for equity-settled share-based payments 0.5 2.8 130 Five Year Summary Transfer to retained earnings on exercise of equity-settled share-based payments (3.6) (1.5) 131 Shareholder Information End of year 151.9 155.0
Treasury reserve Beginning of year (5.4) (5.8) Purchase of own shares (7.8) (0.8) Transferred to profit and loss account 10.1 1.2 End of year (3.1) (5.4)
Hedging reserve Beginning of year (9.5) (11.5) Decrease in fair value of interest rate cash flow hedge (3.0) (1.9) Transfer to income 6.4 3.9 End of year (6.1) (9.5)
Profit and loss account Beginning of year 59.6 143.4 Transfer from capital reserve on exercise of equity-settled share-based payments 3.6 1.5 Transferred from treasury reserve (10.1) (1.2) Profit/(loss) for the period 203.9 (44.9) Equity dividends (42.1) (39.2) End of year 214.9 59.6
At 31 December 2012 13,882 ordinary 2916/21p shares (2011: 13,882 shares) with a nominal value of £4,132 (2011: £4,132) and a market value of £30,957 (2011: £24,710) were held in the BBA Employee Benefit Trust, a trust set up in 2006. EES Trustees International Limited, the trustees of the BBA Employment Benefit Trust, has agreed to waive its dividend entitlement in certain circumstances. At 31 December 2012 1,451,830 ordinary 2916/21p shares (2011: 3,210,455) with a nominal value of £432,092 (2011: £955,493) and a market value of £3,237,581 (2011: £5,714,610) were also held in the 1995 BBA Group Employee Share Trust. This included 91,956 shares being dividend reinvested on 25 May 2012 and 9,995 shares being dividend reinvested on 2 November 2012 under the Dividend Reinvestment Plan.
11. Share-based payments Details of share-based payments are provided within note 22 to the consolidated financial statements.
12. Pension and other post-retirement benefits The Company operates a defined benefit pension scheme in the United Kingdom, assets are held in a separate trustee-administered fund. Contributions to the scheme are made and pension cost is assessed using the projected unit method.
Details of the UK scheme are provided within note 19 to the consolidated financial statements. Principal Subsidiary and Associated Undertakings 129
Principal Subsidiary and Associated Undertakings The following is a list of the principal subsidiary and associated undertakings of the Group at 31 December 2012, each of which is wholly- owned unless otherwise stated. A complete list of subsidiary and associated undertakings is filed with the Company’s Annual Return.
Subsidiary undertakings Country of incorporation Principal operation Signature Flight Support Paris SA France Aircraft services APPH Limited United Kingdom Landing gear provider ASIG Limited United Kingdom Aircraft services ASIG Ground Handling Limited United Kingdom Aircraft services Balderton Aviation Holdings Limited* United Kingdom Holding company H+S Aviation Limited* United Kingdom Engine repair and overhaul Ontic Engineering and Manufacturing UK Limited United Kingdom Legacy support services Signature Flight Support London Luton Limited United Kingdom Aircraft services Signature Flight Support UK Regions Limited United Kingdom Aircraft services Aircraft Service International Group Incorporated USA Aircraft services APPH Wichita Incorporated USA Landing gear provider APPH Houston Incorporated USA Legacy support services Barrett Turbine Engine Company USA Engine repair and overhaul Dallas Airmotive Incorporated USA Engine repair and overhaul Executive Beechcraft Incorporated USA Aircraft services International Governor Services LLC USA Legacy support services Ontic Engineering and Manufacturing Incorporated USA Legacy support services Signature Flight Support Corporation USA Aircraft services
*shares held by BBA Aviation plc.
Associated undertaking % ownership Country of incorporation Principal operation Pafco LLC 50 USA Aviation fuel supplier 130 Five Year Summary
Financial statements Five Year Summary 77 Independent Auditor’s Report to the members of BBA Aviation plc 2012 2011 2010 2009 2008 78 Consolidated Income Statement $m $m $m $m $m 79 Consolidated Statement of Comprehensive Income Income statement Revenue 2,178.9 2,136.7 1,833.7 1,686.1 2,138.8 80 Consolidated Balance Sheet 81 Consolidated Cash Flow Underlying operating profit (continuing operations) 195.4 198.9 171.4 156.8 203.0 Statement Exceptional items (32.7) (6.6) (15.8) (28.4) (9.3) 82 Consolidated Statement of Interest (net) (32.4) (28.7) (23.6) (34.8) (37.9) Changes in Equity Profit before tax 130.3 163.6 132.0 93.6 155.8 83 Accounting Policies of the Group Tax (14.8) (11.5) (31.3) (22.6) (39.4) 88 Notes to the Consolidated Financial Statements Profit for the period 115.5 152.1 100.7 71.0 116.4 121 Independent Auditor’s Report to Non-controlling interests 0.3 0.3 0.2 3.7 (0.1) the members of BBA Aviation plc Profit attributable to ordinary shareholders 115.8 152.4 100.9 74.7 116.3 122 Company Balance Sheet 123 Accounting Policies of the Company Earnings per share 124 Notes to the Company Basic: Financial Statements Adjusted 29.0¢ 29.0¢ 27.3¢ 22.8¢ 29.7¢ 129 Principal Subsidiary and Unadjusted 24.2¢ 32.5¢ 23.6¢ 17.9¢ 28.3¢ Associated Undertakings Diluted: 130 Five Year Summary Adjusted 28.5¢ 28.3¢ 26.4¢ 22.3¢ 29.7¢ 131 Shareholder Information Unadjusted 23.8¢ 31.7¢ 22.8¢ 17.5¢ 28.2¢ Dividends Dividends per ordinary share 14.65¢ 13.94¢ 13.09¢ 11.70¢ 11.55¢
Balance sheet Employment of capital Non-current assets 1,585.0 1,558.1 1,453.8 1,493.8 1,536.8 Net current assets 217.4 173.4 57.8 220.0 296.0 Total assets less current liabilities 1,802.4 1,731.5 1,511.6 1,713.8 1,832.8 Non-current liabilities (671.8) (638.9) (657.6) (912.8) (1,130.1) Provisions for liabilities and charges (109.2) (112.9) (96.6) (80.9) (72.1) 1,021.4 979.7 757.4 720.1 630.6
Capital employed Called up share capital 251.5 250.1 228.6 224.6 219.5 Reserves 774.4 733.5 532.9 498.0 409.9 Shareholders’ funds 1,025.9 983.6 761.5 722.6 629.4 Non-controlling interests (4.5) (3.9) (4.1) (2.5) 1.2 1,021.4 979.7 757.4 720.1 630.6
Capital expenditure 56.5 43.9 43.1 43.4 97.7 Number of employees, end of year 11,430 10,415 10,049 9,540 10,557 Shareholder Information 131
Shareholder Information
Analysis of shareholdings Date announced % of Number of % of Number of share Announcement of Group results shareholders total shares capital Half year result August Size of holding Annual results March Ordinary shareholdings at 31 December 2012 Report and accounts Posted March 1–1,000 1,879 46.02 719,309 0.15 Interim Management Statements April and November 1,001–5,000 1,355 33.19 3,154,529 0.66 5,001–10,000 301 7.37 2,152,115 0.45 Share price information 10,001–50,000 287 7.03 6,090,245 1.27 The price of the Company’s shares is available at www.bbaaviation.com. 50,001–100,000 70 1.71 5,048,460 1.05 For the purpose of Capital Gains Tax calculations, the base 100,001–upwards 191 4.68 462,554,279 96.42 cost of the old BBA Group plc shares held immediately before the 4,083 100.00 479,718,937 100.00 demerger on 17 November 2006 has to be apportioned between BBA Aviation plc shares and Fiberweb plc shares. The ratio is BBA Dividends Aviation plc shares 84.73%: Fiberweb plc shares 15.27%. This is Shareholders will receive their dividend payment in sterling unless based on the respective market values on 17 November 2006, they have elected to receive it in US dollars. If you wish to receive determined according to CGT rules at that time, of 281.155p for your dividends in US dollars, your appropriate election must BBA Aviation plc shares and 170.5p for Fiberweb plc shares. This be received by Capita Registrars no later than 5.30pm Monday information is provided as indicative guidance. Any person 29 April 2013. Please note that if you have previously made a valid wishing to calculate their Capital Gains Tax should take their own election that election will cover all future dividend payments and financial advice from their accountant or other authorised financial a new election is not required. The dividend will be converted at a adviser and if they are in any doubt about their taxation position prevailing exchange rate on 30 April 2013 and this exchange rate they should obtain professional advice. will be announced on 1 May 2013. Company registrar Dividend Reinvestment Plan Capita Registrars A Dividend Reinvestment Plan is available, giving ordinary The Registry shareholders the option to buy shares in lieu of a cash dividend. 34 Beckenham Road Please contact the Company’s registrars for further details. Beckenham Kent BR3 4TU Share dealing service Telephone: 0871 664 0300 A share dealing service is available for UK shareholders from Capita (calls cost 10p per minute plus network charges) Share Dealing Services to either sell or buy BBA Aviation plc Lines are open 9.00 am – 5.30 pm Mon – Fri shares. For further information on this service, please contact: From outside the UK: +44 20 8639 3399 www.capitadeal.com (on-line dealing) or 0871 664 0364 (telephone e-mail: [email protected] dealing). Calls cost 10p per minute plus network charges. Lines are http://www.capitaregistrars.com open 8.00 am – 4.30 pm Mon – Fri. Please contact the registrars directly if you wish to advise a change of name, address or dividend mandate or wish to ShareGift participate in the Dividend Reinvestment Plan or wish to elect to Shareholders with a small number of shares, the value of take your dividend in US dollars rather than receive it in the default which makes it uneconomical to sell, may wish to consider currency of sterling. donating them to charity through ShareGift, a registered charity You can access general shareholder information and (charity no. 1052686). Further information is available by visiting personal shareholding details from our registrars’ website. Our www.sharegift.org or by telephoning ShareGift on 020 7930 3737. registrars provide a share portal through which you can view up to date information and manage your shareholding. You can Key dates Date payable register for this service via www.capitashareportal.com. You will Financial calendar require your unique holder code, which can be found on your Dividend and interest payments share certificate or dividend tax voucher, to register for the share Ordinary shares: portal service or to access other information from the registrar’s final 2012 May website. interim 2013 November Beneficial owners of shares who have been nominated by 5% cumulative preference shares February and August the registered holder of those shares to receive information rights under section 146 of the Companies Act 2006 are required to direct all communications to the registered holder of their shares, not to the Company’s registrar, Capita Registrars, or to the Company. 132 Shareholder Information
Financial statements Shareholder Information – continued 77 Independent Auditor’s Report to the members of BBA Aviation plc Warning to shareholders – boiler room share scams 78 Consolidated Income Statement Share fraud includes scams where investors are called out of the 79 Consolidated Statement of blue and offered shares that often turn out to be worthless or Comprehensive Income non-existent, or offered an inflated price for shares that investors 80 Consolidated Balance Sheet already own. These calls come from fraudsters operating in ‘boiler 81 Consolidated Cash Flow Statement rooms’ that are mostly based abroad. BBA Aviation plc is aware 82 Consolidated Statement of that, in common with other companies, a small number of our Changes in Equity shareholders have received unsolicited telephone calls concerning 83 Accounting Policies of the Group their investment in the Company, which may have been from 88 Notes to the Consolidated fraudsters. Financial Statements Callers can be very persistent and extremely persuasive. 121 Independent Auditor’s Report to Shareholders are advised not to give details of their email the members of BBA Aviation plc addresses or other personal details to any third party that they do 122 Company Balance Sheet not know. Further information can be found on the Company’s 123 Accounting Policies of the Company website at www.bbaaviation.com under investors and shareholder information. 124 Notes to the Company Financial Statements 129 Principal Subsidiary and Registered office Associated Undertakings 105 Wigmore Street 130 Five Year Summary London W1U 1QY 131 Shareholder Information Telephone: 020 7514 3999 Fax: 020 7408 2318 http://www.bbaaviation.com web enquiries to: [email protected] Registered in England Company number: 53688 This Annual Report is addressed solely to members of BBA Aviation plc as a body. Neither the Company nor its directors accept or assume responsibility to any person for this Annual Report beyond the responsibilities arising from the production of this Annual Report under the requirements of applicable English company law. Sections of this Annual Report, including but not limited to the Directors’ Report and Directors’ Remuneration Report may contain ‘forward- looking statements’ about certain of BBA Aviation plc’s current plans, goals and expectations relating to future financial condition, performance, results, strategy and objectives including, without limitation, statements relating to: future demand and markets of the Group’s products and services; research and development relating to new products and services; liquidity and capital; and implementation of restructuring plans and efficiencies. Statements containing the words: ‘believes’, ‘intends’, ‘targets’, ‘estimates’, ‘expects’, ‘plans’, ‘seeks’, and ‘anticipates’ and any other words of similar meaning are forward-looking. These ‘forward-looking statements’ involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future which may be beyond BBA Aviation plc’s control. Accordingly, actual results may differ materially from those set out in the forward-looking statements as a result of a variety of factors including, without limitation: changes in interest and exchange rates, commodity prices and other economic conditions; negotiations with customers relating to renewals of contracts and future volumes and prices; events affecting international security, including global health issues and terrorism; changes in regulatory environment; and the outcome of litigation. The Company undertakes no obligation to update or revise any forward-looking statement in this document or any other forward-looking statements it may make, whether as a result of new information, future events or otherwise. Pages 1 to 75 inclusive consist of a Directors’ Report and Directors’ Remuneration Report that have been drawn up and presented in accordance with and in reliance upon applicable English company law and the liabilities of the directors in connection with that report shall be subject to the limitations and restrictions provided by such law. Designed by saslondon.com Photography by © Benedict Redgrove Board Photography by Anna Batchelor Printed by CPI Colour. CPI Colour are ISO14001 certified, CarbonNeutral®, Alcohol Free and FSC® & PEFC chain of Custody certified. The inks used are vegetable oil based. BBA Aviation plc
Registered Office 105 Wigmore Street Registered in England London, W1U 1QY Company number: 53688 Telephone +44 (0)20 7514 3999 www.bbaaviation.com Fax +44 (0)20 7408 2318