Babcock International Group PLC PLC Group International Babcock Annual Report and Accounts 2018 Report Accounts and Annual The built in advantage Annual Report and Accounts 2018 Marine » Land » Aviation » Cavendish Nuclear Strategic report Financial and operational highlights 1 Babcock at a glance 2 Advantage: Unique infrastructure 6 Advantage: Technical skills 8 Advantage: Long-term relationships and contracts 10 Chairman’s review 12 Our culture 13 Business model and strategy 14 Our markets 16 Chief Executive’s review 18 Key performance indicators 20 Financial review 22 Operational review: Marine 30 Land 38 Aviation 46 Cavendish Nuclear 54 Sustainability 60 Principal risks and management controls 68 Viability statement 79 Governance statement Chairman’s introduction 82 Leadership: Governance framework 84 Board Directors 86 The built in advantage Executive Committee 88 Engineering is embedded in our DNA. Effectiveness: Report of the Nominations Committee 92 Babcock provides skilled, bespoke engineering Accountability: services which allow our customers to improve Report of the Audit and Risk Committee 94 their own performance whilst reducing costs. Remuneration: Report of the Remuneration Committee 98 We work in highly regulated environments Relations with Shareholders 131 managing complex assets for both Additional statutory information: 133 defence and civil customers. Directors’ responsibility statement 138 Independent auditors’ report We maintain, upgrade, operate and manage to the members of Babcock International Group PLC 142 expensive infrastructure and essential equipment Group financial statements for a range of government bodies and private Group income statement 150 sector customers in the UK and internationally. Group statement of We provide them with better capability, reliability comprehensive income 151 Group statement of changes in equity 151 and availability of their critical assets, and in Group balance sheet 152 doing so, provide significant cost savings. Group cash flow statement 153 Notes to the Group financial We are a trusted partner who understands the statements 154 critical role that our customers’ assets and Company financial statements infrastructure play in delivering their business; Company balance sheet 200 Company statement of we share risk with them in delivering innovation changes in equity 201 and efficiency, and we share the benefits. Notes to the Company financial statements 202 Realignment and reporting structure Other information Following the realignment on 1 April 2017, we formally report the Group in four sectors to reflect how we manage the business. In this year’s Shareholder information 207 Annual Report and Accounts we report for the first time the Strategic, Financial, Five‑year financial record 208 Operational reports and Accounts in full alignment with our reporting structure. Financial and operational highlights A year of progress Statutory results Sustainable profitable growth Strategic report We have continued to deliver across new Group revenue Operating profit and existing contracts, demonstrating the 2% 3% quality of our operations and the resilience 4,5m 370m of our business. A healthy combined order book and bid pipeline of £31 billion was 4,659.6 370.6 4,547.1 359.6 352.5 352.3 replenished with £4.5 billion of booked 4,158.4 3,996.6 contracts and the bid pipeline had £7 3,321.0 233.1 billion of opportunities added, providing clear visibility of revenues. At 28%, the Group is on target to reach its aspiration to grow international revenue to 30% by 2022 while also growing the UK business. Governance statement 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 ull year dividend* Profit before tax asic earnings per share 25p 5% 311m % p % 28.15 29.5 25.8 391.1 23.6 362.1 21.4 66.6 330.1 313.1 61.8 57.0 52.9 44.3 218.8 2014 2015 2016 2017 2018 Financials 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 *Underlying The adjustments described below, Underlying results collectively, are made to derive the underlying operating results of the Group. Total revenue* Operating profit* The underlying figures provide a consistent 3% 2% measure of business performance year to 5,32m 54m year. They are used by management to measure operating performance and as 584.6 574.8 5,362.8 539.7 5,216.6 a basis for forecasting and the Group 518.7 4,842.1 4,503.3 believes they are used by investors in 377.9 analysing business performance. 3,547.6 Throughout the Strategic report, unless otherwise stated, revenue, operating profit, operating margin, net finance costs, profit before tax and earnings per share 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 refer to results before amortisation of acquired intangibles and exceptional Profit before tax* asic earnings per share* 4% 4% items. Underlying revenue, operating 5125m 30p profit, operating margins and net finance costs also include the Group’s share of equity accounted joint ventures and 512.5 83.0 494.8 80.1 associates. Underlying operating profit 459.7 74.2 417.7 68.5 and operating margin include investment 62.1 income arising under IFRIC12 which is 316.1 presented as financial income in the Income Statement. All numbers are stated before the effect of corporate tax rate changes. A reconciliation of statutory to 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 underlying results is set out on page 23. Babcock International Group PLC Annual Report and Accounts 2018 1 Babcock at a glance The built in advantage Defence 47% of 2018 revenues 2nd biggest supplier to UK MOD Largest support provider to UK MOD No1 flying trainer in UK Largest maritime support business Provide support and training worldwide to armies, navies and air forces Defence technical support operations in 10 countries Emergency World leader in aviation Nuclear Operate 17 of the UK’s emergency services 37 nuclear licensed sites services Manage and own fleet of over Working on Europe’s 500 aircraft across 320 bases 13% largest and most complex decommissioning project 12% Provide complex fleet of 2018 revenues of 2018 revenues management for large Lead partner in blue-light ground fleets decommissioning 12 Magnox sites Own unique infrastructure No1 across the sector UK civil nuclear engineer Support decommissioning, nuclear services and new build 2 Babcock International Group PLC Annual Report and Accounts 2018 Our sectors Historically, we have consistently built up our expertise and commercial positions across four key sectors: marine, land, aviation and nuclear. The realignment into our four new sectors provides employees, customers and investors with a clearer, more aligned Babcock and an improved platform for growth. Strategic report Marine Land Aviation Cavendish Nuclear UK Naval 72% Defence 34% Defence 33% Decommissioning JVs 69% International Naval 14% Emergency Services Emergency Services 51% Projects 31% Technology 14% and Training 12% Oil and Gas 16% Networks and Delivers complex nuclear Equipment Support 32% engineering on major nuclear Delivers a wide array of complex Delivers a wide array of critical Governance statement through-life marine engineering South Africa 22% engineering services to defence decommissioning programmes and projects across the UK. Our services, supporting UK and and civil customers, ranging from Projects business delivers nuclear international naval fleets, Provides large-scale critical fleet technical training of advanced decommissioning engineering commercial marine, engineering management and training for fixed and rotary wing pilots, services in training, operation consultancy, weapons handling, customer-owned defence, engineering, equipment support, new build programme equipment support, intelligence emergency services, global airport support and maintenance, management, design and and cyber security and technical and commercial vehicle fleets — airbase management and installation and critical safety training, all delivered through comprising around 80,000 logistics, to the operation of to both public and private unique owned and managed vehicles — while also providing owned and customer‑owned customers in the UK and, infrastructure to defence and engineering services and technical aviation fleets delivering increasingly, internationally. civil customers internationally. training for customers worldwide. emergency and offshore services around the globe. Civil vs defence U vs international ublic vs private Financials 53% 72% 0% 47% 2% 20% Civil Defence UK International Public Private Our capabilities Over the years we have continued to develop our capabilities and specialist skills in our four sectors, each of which provides good opportunities for growth both in the UK and, increasingly, internationally. Our four customer facing sectors enable us to effectively leverage our capabilities and share expertise across the Group through four key enablers: Technology Training Infrastructure Global Growth We have deep sector-specific Technical training is an We have experience of operating A fundamental driver of Babcock’s technical expertise with decades integral part of our engineering and managing complex and realignment is the aim to grow of experience; we understand risk offering. It is a fundamental critical infrastructure assets in our international business. This and resilience and are able to and ongoing requirement and highly regulated environments, focus will allow us to recognise deliver availability with innovation. a core part of our expertise. ranging from unique owned international opportunities and We are equipment-agnostic which