Annual Report and Accounts 2020 Sustaining resilience Babcock International Group PLC Annual Report and Accounts 2020 Strategic report Operational review: Financial statements Financial highlights 2 Marine 68 Independent auditors’ Babcock at a glance 4 Nuclear 72 report to the members of Chair’s review 6 Land 74 Babcock International Group PLC 146 Strategy: Aviation 76 Group financial statements: Our strategic framework 10 Principal risks and management Group income statement 157 Our strategic priorities 12 controls 80 Group statement of Business model: Viability statement 93 comprehensive income 158 Our business model 14 Group statement of changes Delivering across long-term contracts 16 Governance statement in equity 158 Our capital allocation policy 17 Chair’s introduction: 96 Group statement of Technology 18 Compliance with the UK Corporate financial position 159 Key performance indicators 20 Governance Code 97 Group cash flow statement 160 Chief Executive's review 24 Board of Directors 98 Notes to the Group Strategic Partnering Programme 28 Executive Committee 100 financial statements 161 s172(1) Statement and Key areas of Board focus 101 Company financial statements: Stakeholder engagement 30 Our governance framework 102 Company statement of Market review 32 Nominations Committee 106 financial position 215 Sustainable business: Audit and Risk Committee 108 Company statement of CEO statement 36 Remuneration Committee 113 changes in equity 216 Non-financial information statement 37 Additional statutory information: 137 Notes to the Company financial statements 217 ESG strategy 38 Directors’ responsibility statement 142 Clean inputs 40 Responsible consumption 41 Other information being babcock 43 Shareholder information 222 People and potential 44 Five-year financial record 223 Community engagement 47 Corporate integrity 49 Diverse and robust supply chains 50 Women in Babcock 52 Financial review 56 Front cover: Vanguard class submarine babcockinternational.com Sustaining resilience Babcock operates in three critical markets – defence, emergency services and civil nuclear – working to meet the needs of customers for whom failure is not an option. We know that to serve our customers successfully we must understand them inside out, building close partnerships based on a deep knowledge of their operations, assets and technology. We are trusted to find solutions that address our customers’ most demanding requirements, ensuring that they can perform at their best wherever and whenever they are needed. Financial highlights Key highlights from FY20 Statutory results Group revenue Operating profit / (loss) Cash from operations Basic earnings per share £4,449.5m £(164.9)m £474.2m (38.6)p 370.6 4,659.6 359.6 352.5 4,547.1 4,474.8 66.6 4,449.5 61.8 507.9 504.0 4,158.4 490.3 57.0 474.2 447.9 196.5 39.5 (164.9) (38.6) 16 17 18 19 20 16 17 18 19 20 16 17 18 19 20 16 17 18 19 20 Group revenue as defined in Operating profit as defined in Cash from operations as Basic earnings per share the income statement on the income statement on defined in the cash flow on as defined in Note 10 on page 157. page 157. page 160. page 181. 2 Babcock International Group PLC Annual Report and Accounts 2020 Strategic report Underlying results* Group revenue Operating profit Free cash flow Basic earnings per share £4,871.7m £524.2m £192.2m 69.1p Governance 588.4 584.6 574.8 323.7 539.7 5,362.8 524.2 5,216.6 5,160.6 84.0 83.0 4,842.1 4,871.7 282.7 80.1 275.7 74.2 250.2 69.1 192.2 Financial statements 16 17 18 19 20 16 17 18 19 20 16 17 18 19 20 16 17 18 19 20 Underlying Group revenue as Underlying operating profit as Underlying free cash flow as Underlying basic earnings per defined on page 60. defined on page 60. defined on page 61. share as defined on page 20. *Underlying The adjustments described below, Throughout the Strategic report, unless and operating margin include investment collectively, are made to derive the otherwise stated, revenue, operating income arising under IFRIC 12 which is underlying operating results of the Group. profit, operating margin, net finance presented as financial income in the The underlying figures provide a consistent costs, profit before tax and earnings per Income statement. A reconciliation of measure of business performance year to share refer to results before amortisation statutory to underlying results is set out year. They are used by management to of acquired intangibles and exceptional on page 57. measure operating performance and as a items. Underlying revenue, operating Underlying free cash flow is after basis for forecasting and the Group profit, operating margins and net finance adjusting for exceptional cash flows, believes they are used by investors in costs also include the Group’s share of see page 61 for a reconciliation. analysing business performance. equity-accounted joint ventures and associates. Underlying operating profit Babcock International Group PLC Annual Report and Accounts 2020 3 Babcock at a glance What we do We solve our customers’ challenges of maintaining national security and saving lives, sustaining critical and complex assets, and delivering critical services. We do this by: Revenue Civil vs defence Defence Delivering critical programmes 52% • Providing through-life support for our customers’ assets • Delivering material improvements in the performance, availability and Civil cost of supporting these assets 48% • Designing and manufacturing a range of equipment Public vs private Public 82% Delivering critical services • Providing complex engineering support • Supporting naval and air bases Private • Delivering world class emergency services 18% • Delivering complex nuclear services UK vs international UK 69% Delivering critical training • Providing training across defence forces from navies to air forces International to armies • Training police officers and firefighters 31% • Providing training to allow our nuclear customers to operate safely International Europe 34% Sustainable business South Africa • Enabling our customers to increase the performance, efficiency and 24% lifespan of their assets and services Australasia • Driving a growth agenda through engagement with, and support of, local communities and small businesses 16% • Investing in engineering through our apprenticeship programmes and North America STEM activities 13% Rest of the world 13% 4 Babcock International Group PLC Annual Report and Accounts 2020 Strategic report Our work is focused on three markets that account for around three quarters of our business. Around a quarter of our work is in adjacent markets. Delivered across our sectors: Defence Governance Marine % of revenue • #2 UK supplier Defence 77% • Substantial positions in Australia, Canada, New Zealand and France Adjacent markets 23% • Export markets include USA, Spain See page 68 for more details > and South Korea See page 32 for more details on our markets > Nuclear % of revenue Defence 66% Financial statements Emergency services Civil nuclear 34% See page 72 for more details > • #1 emergency services provider in Europe • Manage and own a fleet of over 500 aircraft • Fleet management and technical training to UK police and Land % of revenue firefighting forces Defence 42% See page 33 for more details on Emergency services 5% our markets > Adjacent markets 53% See page 74 for more details > Civil nuclear • Involved in all stages of nuclear lifecycle from new build to Aviation % of revenue decommissioning Defence 26% • Managing one of Europe’s largest Emergency services 61% and most complex decommissioning projects Adjacent markets 13% See page 33 for more details See page 76 for more details > on our markets > Babcock International Group PLC Annual Report and Accounts 2020 5 Chair’s review a team, a supply chain and a technical solution that meets our customers’ requirements, building on our deep understanding of our customers’ business and the challenges they face. I have also met with our customers, including senior government representatives. I am pleased to confirm that their relationship with the Company is positive, and that the importance of our support is strongly recognised. With the UK Government, over the last couple of years we have made real progress on the ways in which we work together, further strengthening and deepening our relationship. This has been driven in particular by the shared Ruth Cairnie principles embodied in the Strategic Chair Partnering Programme (SPP) of transformation, joint problem-solving and mutual trust. This programme is described in more detail in this report. As part of my induction to the business, Committed to I have also undertaken a number of internal reviews. These included looking at senior-level talent within the business the customers and to confirm that we have the appropriate management strength and depth, underpinning our approach to succession communities we serve planning. This work was undertaken as part of a wider review of talent management across the Group. We serve customers responsible for Additionally, mindful of the complexities maintaining vital services. Our work of long-term contract accounting, I asked saves lives and protects communities. an external provider to undertake a review of significant contracts. They looked at a selection of our top contracts, representing around a third of annual Group revenue, and concluded as anticipated that our approach to long-term contract accounting is appropriately conservative. FY20 and COVID-19 As I write, we are all living through an I was proud and delighted to take up the During the year I have been building my extraordinarily challenging period in our role of Chair of Babcock last July. Over understanding of every aspect of the personal and our professional lives. You the year I have met a wide range of business: from its people and culture to will see a number of pieces in this report internal and external stakeholders and a its operations, its customers worldwide, on how the Group has been impacted by common question has been, “What was and its strategy for the future.