Babcock International Group PLC PLC Group International Babcock Aligned Annual Report and Accounts 2017 Report Accounts and Annual for growth Babcock International Group PLC Annual Report and Accounts 2017 Engineering is in our DNA. Babcock provides skilled, bespoke engineering services which allow our customers to improve their own performance whilst reducing costs. We work in highly regulated environments managing complex assets for both defence and civil customers. We maintain, upgrade, operate and manage expensive infrastructure and essential equipment for a range of government bodies and private sector customers in the UK and internationally. We provide them with better capability, reliability and availability of their critical assets, and in doing so provide significant cost savings. We are a trusted partner who understands the critical role that our customers’ assets and infrastructure play in delivering their business; we share risk with them in delivering innovation and efficiency, and we share the benefits. In this report Strategic report Directors’ report Group financial statements Key Highlights 1 Board Directors, Executive Independent auditors’ report to the Babcock at a glance 4 and Company Secretary 82 members of Babcock International Sector reconciliation 6 Governance statement 84 Group PLC 144 Marine 8 Report of the Group income statement 150 Land 10 Nominations Committee 92 Group statement of Aviation 12 Report of the Audit comprehensive income 151 Cavendish Nuclear 14 and Risk Committee 94 Group statement of changes in equity 151 Business model and strategy 16 Report of the Remuneration Committee 98 Group balance sheet 152 Chairman’s review 18 Other disclosures 134 Group cash flow statement 153 Chief Executive’s review 20 Directors’ responsibility statement 140 Notes to the Group Market overview and outlook 24 financial statements 154 Key performance indicators 28 Financial review 30 Company financial statements Marine and Technology 38 Independent auditors’ report to the Defence and Security 44 members of Babcock International Support Services 48 Group PLC 203 International 54 Company balance sheet 205 Sustainability 58 Company statement of Principal risks changes in equity 206 and management controls 68 Notes to the Company Viability statement 79 financial statements 207 Other information Shareholder information 212 Five‑year financial record 213 Visit us at www.babcockinternational.com Realignment and reporting structure From 1 April 2017 we formally report the Group in four sectors to reflect how we manage the business. In this year’s Strategic report we present the Group as it is today, using the sector alignment, pages 1‑25, and report on financial and operational progress over the past year using the previous divisional format, pages 26‑79. Financial and operational highlights Strategic report 1 Directors’ report 80 A year of progress Financials 142 Statutory results Group revenue Operating profit Good progress across contracts and markets £4,547.1m £359.6m We have continued to deliver across new and existing contracts demonstrating 4,547.1 359.6 352.5 352.3 4,158.4 the quality of our operations and the 3,996.6 resilience of our business. A healthy order 3,321.0 3,029.4 233.1 book, at £19.0 billion, was replenished 203.5 with £4.7 billion of contracts and the bid pipeline, maintained at £10.5 billion, had £6.6 billion of opportunities added, providing clear visibility of revenues. 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Profit before tax Basic earnings per share Full year dividend* +9.1% £362.1m 61.8p 28.15p 28.15 362.1 25.8 330.1 23.6 313.1 61.8 21.4 57.0 52.9 19.0 44.3 218.8 181.8 35.0 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 *Underlying Underlying results The adjustments described below, collectively, are made to derive the Total revenue* Operating profit* underlying operating results of the +8% +7% Group. The underlying figures provide £5,216.6m £574.8m a consistent measure of business 574.8 performance year to year, thereby 539.7 5,216.6 518.7 4,842.1 enabling comparison and understanding 4,503.3 of Group financial performance. 377.9 3,547.6 345.6 3,243.5 Throughout the Strategic report, unless otherwise stated, revenue, operating profit, operating margin, net finance costs, profit before tax and earnings per share refer to results before amortisation 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 of acquired intangibles and exceptional Profit before tax* Basic earnings per share* items. Revenue, operating profit, +8% +8% operating margins and net finance costs £494.8m 80.1p also include the Group’s share of equity accounted joint ventures and associates. 494.8 459.7 Operating profit and operating margin 417.7 80.1 include investment income arising under 74.2 68.5 IFRIC12 which is presented as financial 316.1 62.1 275.0 54.9 income in the Income Statement. All numbers are stated before the effect of corporate tax rate changes. A reconciliation of statutory to underlying results is set out on page 31. 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Babcock International Group PLC Annual Report and Accounts 2017 1 Strategic report: Overview Babcock at a glance 4 Sector reconciliation 6 Marine 8 Land 10 Aviation 12 Cavendish Nuclear 14 Business model and strategy 16 Chairman’s review 18 Chief Executive’s review 20 Market overview and outlook 24 Focusing on delivering for customers 2 Babcock International Group PLC Annual Report and Accounts 2017 “I’ve always loved knowing how and why things work. With Babcock, I’m being given the chance to do exactly that. My PhD in Marine Toxicology certainly had a nuclear element to it, which comes in handy when I’m fixing a technical problem or making sure that people stay safe. A typical day involves writing reports – just as it did when I was a research scientist – but it also includes talking to colleagues inside Babcock and to clients about safety or technical queries that might have been raised. I’m also likely to get my overalls on to go and examine a submarine. As chair of Plymouth Women in STEM (Science, Technology, Engineering and Mathematics), I’m very involved with sending our STEM Ambassadors to events and schools. Teaching was an enjoyable and integral part of my role as a postdoctoral research scientist. My STEM work allows me to continue teaching people about why science is so important to society and the great careers that women can build in the sector.” Lorna Dallas Safety Engineer, Devonport Babcock International Group PLC Annual Report and Accounts 2017 3 Babcock at a glance Sector specialists with engineering embedded in our DNA Civil vs defence Technology Marine Aviation 52% Training 48% Engineering Services Infrastructure Civil Defence Land Cavendish Nuclear UK vs international Global Growth 75% Deep sector expertise Furthermore, each sector is underpinned In February 2017, we announced that by deep technical knowledge and 25% we were going to realign the business expertise and is already demonstrating around the four core sectors in which a willingness to embrace Babcock’s we operate. Grouping our business into transformational change and Marine, Land, Aviation and Cavendish performance improvement models. UK International Nuclear brings us even closer to our Through infrastructure, assets, customers and markets, allows our technology or regulation, all four teams in each sector to really focus on sectors are characterised by high the capabilities we offer and makes barriers to entry. Each of our sectors Public vs private the Group easier to understand for all is now customer‑facing and shares deep our stakeholders. Most importantly, sector technical knowledge, experience it provides us with a better platform and understanding of its industry. for future growth, both in the UK and Moving to a sector‑based reporting globally. We are still the same company, structure that is more closely aligned 82% doing the same things, but aligning to with our markets serves to provide 18% sectors will help us do it better. clarity and focus. This resonates with our employees, our customers and our The realignment will help us achieve shareholders, creating a stronger base our growth ambitions. Supported by from which to build future growth. technology and technical training, Public Private it enables easier identification How to read this report and development of international From 1 April 2017 we formally report opportunities through Global Growth. the Group in four sectors to reflect how Each sector has a strong base of both we manage the business. In this year’s defence and civil customers, with Strategic report we present the Group operations of scale in the UK and as it is today, using the sector alignment, internationally and importantly all pages 1‑25, and report on financial and four have growth opportunities across operational progress over the past year the globe. using the previous divisional format, pages 26‑79. 4 Babcock International Group PLC Annual Report and Accounts 2017 Strategic report 1 Directors’ report 80 Financials 142 Our sectors Our capabilities Historically we have consistently built up our expertise and commercial positions across Over the years we have continued to four key sectors: marine, land, aviation and nuclear. The realignment into our four new develop our capabilities and specialist sectors provides employees, customers and investors with a clearer, more aligned skills in our four sectors, each of which Babcock and an improved platform for growth. provides good opportunities for growth in both the UK and, increasingly, internationally. The realignment will enable us to effectively leverage our capabilities and share expertise across the Group through four key enablers: Marine Technology Delivers a wide array of complex through‑life We have deep sector‑specific technical marine engineering services ranging from expertise with decades of experience; we supporting UK and international naval understand risk and resilience and are able fleets, commercial marine, engineering to deliver availability with innovation.