Babcock Babcock International PLC Group Babcock International Group PLC Annual and report 2001 accounts Badminton Court Realigning the business Church Street Babcock International Group PLC Amersham Buckinghamshire HP7 0DD Annual report and accounts 2001 Telephone 01494 727296 Fax 01494 721909 Website www.babcock.co.uk I was absolutely delighted to equivalent of 18p per old share. Gordon Campbell Chairman become chairman of your company. The second element was to sell our 18 June 2001 For people of my generation and materials handling business and educational background, Babcock the Railcare business and thirdly to conjures up an immediate image focus on the support services sector. of process engineering and This was a brave strategy and, like boilermaking. Over three decades, all brave moves, requires complete Babcock has changed enormously, commitment to deliver. However, the but still commands respect around successful delivery of this strategy the world, and the Babcock brand should enhance shareholder value is a great asset to us. However, considerably. It will take your company the change we are currently going into higher growth markets, reduce through is at least as large as exposure to cyclical businesses, and anything that has gone before remove our dependence on risky and many times more exciting. construction contracts. Shortly before I arrived, the Board I fully support this strategy and, announced a clear strategy along with my Board colleagues, which had three main elements. am determined to drive through First, we would return some of the the execution. cash in the Babcock balance sheet to you, the shareholders, by way So far we have succeeded in selling of a return of capital. £30.6 million the loss-making Railcare business of capital will be returned to our and are embarked upon the shareholders of which £27.9 million disposal of the BMH businesses. was returned in the year. This is the The disposal of BMH as a single Chairman’s introduction Babcock International is a multinational syste in the UK. This year’s acquisition of Hunting provided us with a strong platform from which a dedicated services company. Chairman’s statement ifc Strategic questions and answers 2 Operations review 12 Financial review 18 Directors and Company Secretary 20 Directors’ report 21 Auditors’ report to the shareholders of Babcock International Group PLC 29 Group profit and loss account 30 Group balance sheet 31 Company balance sheet 32 Group cash flow statement 33 Group statement of total recognised gains and losses 34 Reconciliation of movements in group shareholders’ funds 34 Notes to the financial statements 35 Principal subsidiary and associated undertakings 57 Notice of meeting 58 Five year financial record 59 Shareholder information 60 entity was always going to be difficult, engineering sector. We incurred However, the Board believes that poor trading conditions, and that is but in the current climate of falling heavy losses in the Railcare business, with the actions taken and the the legacy with which John should order books, has proved to be which were exacerbated by the need strategy sufficiently robust a final be associated. impossible. We shall create more for further redundancies. Railcare dividend of 1.55p per share can We are embarked upon a strategy value by selling the component cost the business £10.7 million in be recommended. clearly designed to enhance parts of BMH and this process is the year to March 2001 and its Despite the return of capital and shareholder value. If our strategy underway. Inevitably, it will take ultimate sale was a great relief. the acquisition of Hunting Defence is implemented successfully, longer than a single sale, but we are However, Railcare was not the only Services the group remains virtually we will have transformed the committed to seeing it through. The problem business, and conditions debt free at the year end. perception of Babcock from an purchase of Hunting plc's Defence in many of the BMH activities old engineering business to one Services business (Hunting Defence have also deteriorated markedly. The results show what a difficult of a high growth support services Services) is a seminal event in the Operating profits (before exceptional year some of the businesses have unit. The consequence should be transformation of Babcock. It is an items) fell by nearly 70% as demand had, and my thanks go to all our a re-rating of the shares from interesting and successful business collapsed and a £9.6 million provision employees for their dedication the depressingly low multiples in its own right, but the acquisition against a major contract was made. and contribution in such trying attributed to engineering businesses provides a vital first rung on the On a more positive note, the BES circumstances. Special thanks are to the attractive ones earned in ladder to becoming a true support profits held up well and the order book also due to the retiring chairman, support services. This will not be services business. It builds on in the immediate future is on plan. Sir John Parker. When John arrived an easy transformation, but we our excellent reputation with the at Babcock in the early '90s, it was The results in Railcare and BMH have made a successful start, with Ministry of Defence (MoD) but also close to bankruptcy and he, with the meant a fall in profit before tax from some key disposals and important provides a bridge into the civil help of all our employees, turned £26.0 million to a loss of £7.3 million acquisitions. It is now up to all of us side of the support services industry. the business round into the robust after exceptional charges of who work in Babcock to deliver the position it has today. The group now Unfortunately, during the last year, £22.0 million. Earnings per share results. I relish the challenge. had a strong enough balance sheet business conditions deteriorated before non-operating exceptional to support its strategy, even through very markedly, particularly in the charges and goodwill were 0.55p. ms and services group, headquartered plc’s Defence Services business has we can realign the business to become 01 Babcock International Group PLC Why is Babcock realigning have a heavy fixed assets base, which in the defence sector, offering such its business? are overly dependent on macro- services to the Royal Air Force and Quite unashamedly, Babcock is economics, and which have little the Army. In this respect, it fits realigning its business to enhance natural growth. Going forward, we perfectly with our operations at shareholder value. We are aiming intend to focus on the support services Rosyth, which supply services to to turn Babcock into a profitable but and facilities management businesses the Royal Navy. Whilst Hunting high-growth group. High-growth whose assets are people, market Defence Services is clearly in the companies invariably have to operate awareness, and a service culture. support services area, it also can in markets which are growing, since This inevitably leads to selling our benefit from Babcock's strong to grow in a static or declining market positions in the materials handling reputation with the MoD. We aim usually means the sacrifice of margins. sector and Railcare. It means to expand this provision of services Since we do not wish to do this, expanding into those areas where to the MoD by winning the Faslane we must reposition the group in service, rather than manufacturing, facility management contract and sectors which are inherently growing. becomes all important. other contracts which the MoD The support services and facilities wish to put out to private companies. management sector is one such How does the Hunting Our immediate target, therefore, area of activity and one where we Defence Services acquisition is to become a major supplier of can apply our managerial skills fit the strategy? support services and facilities successfully. This transition, however, The recent acquisition of Hunting management to the MoD. will not be achieved without total Defence Services is a clear example commitment and, as a consequence, of this change of emphasis. It is very What comes after Hunting we have to divest ourselves of those evidently a support services and Defence Services? business areas which do not fit with facilities management business Our ambitions do not end there. this commitment. It is our intent, as one can see from the Operations Whilst wishing to continue to expand therefore, to exit the sectors which review. However, it also operates our position in the UK, there are Strategic questions and answers Going forward, we intend to focus on the support services and facilities management businesses whose assets are people, market awareness, and a service culture. BES Engineering and support services for customers in the defence, rail, marine and ‘secure facilities’ sectors. BES will continue to adapt its current offering to become more focused on support services. Hunting Defence Services 194.2m Support services and facilities Turnover £ (2000: £185.9m) management for customers in the defence sector. Hunting Defence Services already supplies its existing customers with a comprehensive range of support services. 62.0m Turnover £ (annualised) 02 Babcock International Group PLC opportunities for transferring these What about the businesses Hunting Defence Services was, In this respect, we will be skills overseas. In the fullness of that don't fit? of course, a very large move but, introducing an AESOP scheme time, one could see an international We have clear strategic intent to be during the year, we have also for employees as soon as possible dimension adding to our UK base of a pure support services and facilities changed our financial advisers. and will be attempting to align the support services in the military field.