26th May 2005 07:01
Babcock International Group PLC26 May 2005 Thursday 26 May 2005 BABCOCK INTERNATIONAL GROUP PLC 2004/5 PRELIMINARY RESULTS Babcock International Group PLC, the Support Services company, announces itspreliminary results for the year ended 31 March 2005: 2004/5 2003/4 % Change Sales £760.0m £452.0m 68Operating profit (1) £41.0m £25.5m 61Profit before tax £28.4m £19.8m 43Profit before tax-adjusted (2) £35.1m £23.1m 52Earnings per share (3) 14.20p 13.60p 4.4Dividend 4.00p 3.35p 19.4 (1) Before goodwill amortisation (2005: £6.6 million, 2004: £3.3 million),discontinued operations losses (2005: £nil, 2004: £0.3 million) and operatingexceptionals (2005: £1.5 million credit, 2004: £nil), (2) Before goodwillamortisation, exceptional items (2005: pre-tax £(0.1) million, 2004; £nil) (3)Before exceptional items (2005: £0.3 million credit, 2004: £nil) and goodwillamortisation. Business Highlights: • Successful acquisition and integration of Peterhouse - earnings enhancing in year one• Babcock-led consortium appointed preferred bidder on Royal School of Military Engineering PFI• 5 year extension to contract for management of HM Naval Base Clyde expected imminently - worth £400 million• Continued growth in sales and profits in existing businesses• Sales up by 68%, profit before tax up 43%• Earnings per share up by 4.4% despite increased tax charge• Full year dividend raised by 19.4% - final payment up 26% to 2.65p• Order book as at 25 May £1.2 billion up from £1.1 billion last year Commenting, Peter Rogers, Chief Executive, said: "This has been another excellent year for Babcock, with sales increasing by 68%and adjusted profit before tax growing by 52%. Notable achievements during theyear included our appointment as preferred bidder on the Royal School ofMilitary Engineering PFI contract and the award of a five year extension to thecontract for the management of HM Naval Base Clyde, which is expectedimminently, a year earlier than anticipated. "We have now established a solid foundation to take the company forward, with abroadened customer base. This follows on from the successful acquisition ofPeterhouse, which has exceeded our expectations at the time of transaction. Weare well positioned in a number of growing markets and our skills in projectplanning design and engineering are now well-recognised in the sectors in whichwe operate. "This is the third successive year of double digit sales and profit growth andBabcock is well positioned to achieve continued growth going forward." Contact: Peter Rogers, Chief Executive Bill Tame, Finance Director Babcock International plc Telephone: 020 7291 5000 Andrew Lorenz Rob Gurner Financial Dynamics Telephone: 020 7269 7291 CHAIRMAN'S STATEMENT Four years ago we embarked on a process to convert Babcock from an engineeringconglomerate to a support services business. I said last year, that the yearending March 2004 completed the first phase of this transformation, which waspredicated upon being a major service supplier to the defence sector. Thesecond phase was to broaden our customer base so that we were not overly relianton any one market sector. The acquisition of Peterhouse, concluded in June2004, marked the start of this second phase. The acquisition has been extremelysuccessful and the businesses are now largely integrated into Babcock. Thesynergies anticipated were achieved as quickly as we could possibly have hoped,and hence the acquisition was earnings enhancing in the year ended March 2005,somewhat earlier than had been predicted in the Offer documents. Equally ourcash management skills have reduced the debt taken on to acquire the Peterhousebusiness very rapidly, such that our debt at March 2005 was only £63 million. The results to March 2005 continue to support our strategy. Profit before taxbefore goodwill and exceptional items increased by 52% following on from anincrease the previous year of 28%. Operating profit, before goodwill andexceptional items, increased by 63% year on year, but this was by no means alldue to the Peterhouse acquisition. The existing Babcock businesses alsoincreased their operating profit by a reassuring 18%. The success of the strategy is also marked by the better balance of our sales.Sales to the Ministry of Defence fell from 70% of turnover in the year to March2004 to approximately 50% in 2004/5. The defence sector remains an importantpart of our business but the presence in higher growth sectors such astelecommunications and power transmission gives the results more robustness.Our South African business also continues its dynamic growth, and we havepositioned Rosyth to withstand the sharp decline in the refit business withoutundermining its ability to resource adequately the assembly and integration ofthe new aircraft carriers. Earnings per share before goodwill and exceptional items in the year to March2005 increased by 4.4% to 14.2p per share. With a comparable year on year taxcharge the increase would have been 15%. The Directors have been consciousthroughout this major transformation of Babcock of the need for tight controlson cash, but with a much larger and better balanced business we feel thatshareholders should be rewarded by a substantial increase in dividends whilstmaintaining a conservative cover. Over the medium term we intend to targetdividend cover, based on full year earnings excluding goodwill amortisation andexceptional items, in the range 2.5 - 3.0 times based on current accountingprinciples. As a consequence, the Board is recommending a 26% increase in thefinal dividend to 2.65p per share, which will take the total dividend for theyear up to 4p per share, an increase over last year of 19.4%. The introduction of IFRS as the method of accounting for UK companies does nothave a significant effect on the 2004/05 earnings of Babcock, although there issome redistribution between operating profit and interest. IFRS accounting willbe introduced in the year ending March 2006. The Report and Accounts will show our compliance with the Combined Code and anumber of minor changes as a result of the Higgs recommendations. In the fewcases where we do not comply fully with the Combined Code we shall explain ourreasoning in the Report and Accounts. However, a number of our Non-ExecutiveDirectors have held their positions for long periods by the standards of Higgsrecommendations. Notwithstanding, therefore, their outstanding contribution tothe company over this period of time, we shall be implementing a programme ofchange amongst the Non-Executive Directors. However, we feel it important thatthis be carried out in a controlled manner such that we do not lose thesubstantial benefit of their experience. This change will therefore be carriedout progressively over the next couple of years. The two most important decisions a Board can make in large companies is tochoose the strategy and to identify and select the best people to implement thatstrategy. I think the history over the last five years suggests that we havemade both decisions with some skill, and the increase in shareholder value overthose five years is a testimony to that. Over the five years ending March 312005, £100 invested in Babcock would have yielded a return of 124% more than asimilar investment in the FTSE All-Share index. I am sure that shareholders would wish me to thank all employees who havecontributed to such an outstanding performance and I believe that, with theacquisition of Peterhouse, we shall continue to improve value for ourshareholders. CHIEF EXECUTIVE'S OPERATING STATEMENT The 2004/05 Financial Year has been both successful and highly active forBabcock. The acquisition and integration of Peterhouse, and subsequently Turner& Partners, the start of the South West Regional Prime Contract, the first yearof the contract at RAF Valley, significant reorganisation in our marine-basedbusiness and movement to preferred bidder on RSME all took place during theFinancial Year. The result of all this activity is that sales from continuingoperations have risen by £322 million or 74% and operating profit fromcontinuing operations before goodwill and exceptional items has risen by £15.5million or 61%. The integration of the former Peterhouse businesses continued to occupysignificant amounts of management time but synergy benefits totalling £9 millioncompared to the £5.3 million contained in the Offer documents had beenidentified by 31 March 2005. Most significantly the development of a better balanced portfolio of businesses,most of which are in growing markets, has laid solid foundations which shouldallow the company to continue double digit sales and profit growth in the comingyears. Defence Services Sales £245.1m (2004 : £171.5m) Operating profit £17.8m (2004 : £11.6m)(32% of Group Sales) Growth in sales was largely driven by the April 1, 2004 start of the South WestRegional Prime (SWRP) Contract. We expect further growth in sales during thecurrent year as the contract will be fully operational throughout the period.Naval Services also showed some growth in turnover and margin as the scope ofthe contract increased and our confidence in delivering the contracted costreduction targets improved. The announcement by the Ministry of Defence thatthe contract will be extended by an additional 5 years, which is expectedimminently, will further enhance the order book. We continue to deliver excellent service to the customer across the range ofbusinesses. At HM Naval Base Clyde customer satisfaction surveys show that,despite the significant cost savings we are achieving, our customers rate ourservice as significantly better than that which was being delivered previously.Similarly, we have been complimented on our activities in relation to contractsat RAF Valley, RAF Lyneham and on SWRP on each of which we are also deliveringsubstantial savings to the customer. A notable step forward in the second half of the year was the award of PreferredBidder Status on the Royal School of Military Engineering (RSME) PFI to theHoldfast consortium led by Babcock. We had been sole bidder for almost threeyears and internal difficulties in the Ministry of Defence (MoD) had preventedthe project moving forward. We are now aiming, with the MoD, to achievefinancial close during the 2006/07 Financial Year. We are involved in the MoD's Marine Services PFI as part of the Starfish Marineconsortium, one of two bidders for this large project. Other significant bidson which we are working include the Eastern Regional Prime Contract and Projectsfor managing the ministry estates in Cyprus and Gibraltar. We are also workingtowards submitting bids on a number of opportunities in the 'Building Schoolsfor the Future' programme. The major project on which we are currently bidding (again as leader of theHoldfast Consortium) is the Defence Training Review which is a PFI for themanagement and delivery of approximately half of the three services non-militarytraining. The award of this contract should take place during the 2006/07financial year. Technical Services Sales £160.2m (2004 : £180.0m) Operating profit £13.1m* (2004 : £14.8m)(21% of Group sales)* before exceptional charge of £5.5m (2004 : £nil) This is the business based at Rosyth. We carried out significant reorganisationduring the year in recognition of the fact that the allocated programmed forwarship refit is coming to an end in March 2006 and in further recognition ofthe fact that the market for warship refit will be somewhat smaller over thenext few years. The reorganisation so far has enabled us, we believe, to becomethe lowest cost warship refit yard in the UK and we are therefore confident ofour ability to compete in the reduced market. We won 8 of the last 13competitive bids during the year and we are confident of our ability to continueto bid both successfully and profitably. We have moved the businesses based at Rosyth from a position two years ago wherethey were almost wholly dependent for profits on the warship refitting programmeto a position in which they would be a profitable group of businesses even inthe unlikely event of the refit market dropping to zero. A regrettableconsequence of this reorganisation is the reduction in the Rosyth workforce fromsome 1800 people to under 1200 by March 2006. We are continuing to participate in the programme for construction of the newaircraft carriers. While no contracts have yet been awarded, other than fordesign, we remain confident that Rosyth will be the location selected for theassembly and integration of the two ships, on the grounds of the excellentfacilities and the skills of the workforce. These have also played a large partin the success of the modular construction work we are carrying out for HeathrowTerminal 5. We are participating in discussions with the MoD on the ISOLUS programme - whichis a programme for the dismantling and storage of defuelled nuclear submarines.Any contract awarded under the ISOLUS programme will be for over 20 years. The Supply Chain Services, Design and Technology and nuclear businesses are allprofitable in their own right. We are continuing to bid for naval refit workand are seeking opportunities to expand the scope of the Engineered Productsbusiness. Engineering and Plant Services Sales £113.0 (2004 : £86.5m) Operating profit £5.5m (2004 : £3.5m)(15% of Group sales) The African business has continued its outstanding progress during the year withsales at over £100 million for the first time and profits exceeding £5 million.The growth resulted mainly from the growth in the Construction Equipmentbusiness which sells Volvo equipment largely to the mining and constructionindustries. Our market share continued to increase and the parts aftermarket isgrowing as the number of Volvo vehicles on the ground continues to expand.Increasing sales in the aftermarket will give opportunities for further marginimprovement. The African engineering business continued its excellent progress withprofitability again improving. The need to continue increasing both activegeneration capacity and infrastructure support in Africa will provide a morestable environment for the engineering business than has been the case for anumber of years. Eagleton, our pipeline business in Houston Texas, had another challenging yearas the market continued at very low levels, although towards the end of the yearthere were clear signs of increased activity driven by the continuing high pricelevels for oil and gas. Networks Sales £61.5m (2004 : £n/a) Operating profit £4.1m (2004 : £n/a) (for period of9.5 months)(8% of Group sales) Since the acquisition of Peterhouse, the Networks businesses (which trade underthe 'Eve' name) have performed somewhat better than we had anticipated. In thetelecoms business, the launch of 3G technology by the network operators istaking place on a more gradual basis than many had expected, but has been inline with our expectations at the time of the acquisition. With the purchase ofTurner and Partners we continue to win contracts for the acquisition design andconstruction of new sites thereby strengthening the core business as well asadding valuable skills. The combination of the skills of Eve and Turners isproving attractive to customers. A number of contracts with the major operatorshave been secured, including Vodafone, Orange and 3. The transmission business continues to deliver an excellent performance with thevolume of work continuing to rise, at a slightly faster rate than our originalexpectations. The volume of pre-sanction engineering work also continues torise, which is usually a predictor of the volume of contracts to be let over thenext two years. Eve Trakway had a reasonable winter and spring period as its share of theindustrial market grew and is now profitable. We have invested in furthercapacity in this business to ensure we maintain our ability to provideoutstanding levels of service to our customers. Rail Sales £167.0m (2004 : £n/a) Operating profit £8.3m* (2004 : £n/a) (for period of9.5 months) (22% of Group sales)* before operating exceptional credit of £8.8m The rail business (First Engineering) has met our original expectations at thetime of acquisition. Although the market for signalling was somewhat slowerthan we had anticipated the track renewals business remained extremely busythroughout our period of ownership. There are clear signs that the rate ofplacement for signalling and communication contracts will increase over thecoming months while track renewals will continue to perform well. The highoutput renewals contract is continuing to develop well and First Engineering isnow responsible for the Facilities Management (Mechanical and ElectricalMaintenance) for all Network Rail's major stations. Significant first steps have been taken to align overheads with the newstructure of First Engineering following the handing back of maintenance work toNetwork Rail in June 2004. Further savings are planned including theconsolidation of all Glasgow operations into a single building at HamiltonInternational Park at the end of the 2005/06 Financial Year. Health, Safety and Environmental Sales £13.2m (2004 : £n/a) Operating loss £1.2m (2004 : £n/a) (for period of 9.5months)(2% of Group sales) The two smallest businesses acquired with Peterhouse are in the process ofdisposal. Neither IETG nor ESS (flow monitoring and safety equipment andtraining) is regarded as core and we are aiming for completion of the processesbefore the end of September. Summary and Prospects As I said in November, credit is due to the operational management of thebusinesses for a strong performance, despite the inevitable distractions of theacquisition and integration of Peterhouse. The forecast integration savingshave been achieved and we expect that further savings will be realised. During the last year we have positioned Babcock to take advantage of the growingmarkets in which we operate. We now have a balanced portfolio of businesses andcustomers. We have continued to grow sales and profits in existing businessesby over 10% a year while successfully integrating a significant acquisition. We are well placed to continue the growth in both sales and profits in thecoming years and to become a major force in the public sector outsourcingmarkets and in other technically demanding markets. FINANCIAL REVIEW Results of operations - summary analysis To assist in understanding how events have impacted the Group, we have set outin the tables below an analysis of existing and acquired operations, as such alloperating profit numbers quoted in the table are before charging goodwillamortisation and operating and non-operating exceptional items. Turnover Operating Net margin Growth profit 2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 T/over Op. profit £m £m £m £m % % % % Defence Services 245.1 171.5 17.8 11.6 7.3% 6.8% 43% 53%Technical Services 160.2 180.0 13.1 14.8 8.2% 8.2% (11)% (12)%Engineering & Plant 113.0 86.5 5.5 3.5 4.9% 4.0% 31% 57%Unallocated (6.4) (4.4)Existing 518.3 438.0 30.0 25.5 5.8% 5.8% 18% 18% Networks 61.5 - 4.1 - 6.7% - - -Rail 167.0 - 8.3 - 5.0% - - -HS&E 13.2 - (1.2) - - - -Unallocated (0.2)Acquisitions 241.7 - 11.0 - 4.6% - - - Disposals - 14.0 - (0.3) - - - - Total pre-goodwill and exceptional 760.0 452.0 41.0 25.2 5.4% 5.6% 68% 63%items Sales and operating profits from continuing businesses were substantiallyincreased from those of last year as a result of both organic and acquisitionrelated growth and, as we reported at the interim stage, the performance of theexisting businesses and that of the newly acquired Peterhouse businesses hasbeen strong. The acquired businesses met our expectations for the nine monthsthat they formed part of the Babcock group. Turnover was 68% above that of the previous year or 18% up after excluding theeffect of acquisitions. Operating profit increased by 63% to £41 million,representing a net margin of 5.4% against 5.6% last year. On existingbusinesses, operating profit increased 18% with margins in line with last yearat 5.8%. Existing businesses Within the existing businesses, Defence Services performed strongly both inturnover and operating profit with net margins up from 6.8% to 7.3% driven by acombination of the start of South West Regional Prime and further growth in theHM Naval Base Clyde contract. Conversely and as anticipated, revenues declinedin Technical Services in the face of lower naval re-fit activity but timelyrealignment of the cost base enabled margins to be sustained at 8.2%. Continuedstrong growth in the African operations on improved margins yielded turnover inexcess of £100 million and an operating profit improvement of over 50%. Acquisitions The former Peterhouse businesses, included for nine months, added £11 million inoperating profit on £242 million of turnover, a net margin of 4.6%. TheNetworks business benefited from ongoing growth in both the high voltage powersupply market and the mobile phone transmission market and operating marginstotalled 6.7%. The latter included a contribution to operating profit of £0.5million from Turner and Partners, which was acquired in September 2004. In Railthe strong growth recorded in track renewals more than offset any softness inother rail activities to deliver turnover of £167 million and, followingadjustment of the cost base (post the transfer of rail maintenance work toNetwork Rail in June 2004) an operating margin of 5%. Conversely, theperformance of the non-core Health, Safety and Environmental businesses wasworse than anticipated, losing £1.2 million in market conditions weakened bydelays in expenditure on the regulated assets of the utility companies that arethe division's key customers. Reconciliation to statutory profit and loss The following table reconciles the results quoted above to the figures reportedin the statutory accounts. Turnover Operating profit Net margin Growth 2004/05 2003/04 2004/05 2003/04 2004/05 2003/04 T/over Op. profit £m £m £m £m % % % % Total pre-goodwill and exceptional 760.0 452.0 41.0 25.2 5.4% 5.6% 68% 63%items Operating exceptional items: On acquisitions 7.0 - On existing (5.5) - Total 1.5 -Amortisation of goodwill: On acquisitions (3.4) - On exisiting (3.2) (3.3) Total (6.6) (3.3) Statutory operating results 760.0 452.0 35.9 21.9 4.7% 4.8% 68% 64% Share of joint ventures 0.3 0.1 Non-operating exceptional items (1.6) (1.7) Profit on ordinary activities before 34.6 20.3interest Exceptional items The following have been treated as exceptional charges to operating profit. Cash Non-cash Total £m £m £m Reorganisation of marine designand goodwill impairment (0.8) (4.7) (5.5) Exceptional gain on termination ofrail maintenance contracts 8.8 8.8 Peterhouse rationalisation costs (1.8) (1.8) Disposals - non-operating (1.2) (0.4) (1.6) 5.0 (5.1) (0.1) Reorganisation costs and goodwill impairment charges of £5.5 million wereincurred in respect of the marine design businesses within Technical Servicesfollowing the decision to scale down and refocus this division's operations. Agreement was reached with Network Rail for compensation and other payments tobe made by them in respect of the early termination and hand back of railmaintenance contracts formerly run by First Engineering, the Peterhousesubsidiary responsible for rail operations. The net gain after costs ofredundancies and other restructuring charges totalled £8.8 million. Costs incurred in restructuring and integrating the Peterhouse businesses intothe group totalled £1.8 million. Costs totalling £1.6 million in respect of disposals have been charged as anon-operating exceptional item in the year. Goodwill Additions to goodwill arose in respect of the acquisitions of Peterhouse Groupplc (£81.0) million and Turner and Partners (£7.0 million). Amounts amortisedand written off as a result of impairment were £6.6 million and £4.7 millionrespectively. The impairment write off was made as a result of a scaling downof the activities of the marine design businesses. Interest and taxation 2004/05 2003/04 £m £m Profit on ordinary activities before interest 34.6 20.3 Interest (6.2) (2.2)Exceptional gain on financial asset - 1.7Net interest and similar income/(charges) (6.2) (0.5) Profit before tax 28.4 19.8 Taxation (7.7) (3.4) Profit after tax 20.7 16.4 The net interest charge rose to £6.2 million following an increase in net debtarising on acquisition of Peterhouse and for which a new £140 million financingfacility was arranged. The total interest charge was covered over 6 times byoperating profit before goodwill amortisation and exceptional items. Pre-tax profit increased 43% to £28.4 million and by 52% to £35.1 millionexcluding goodwill amortisation and exceptional items. The group's effective tax rate for the year was 24%. This compares to a rate of15.7% last year, which benefited from the utilisation of prior years tax losses. The expected rate for 2005/06 is approximately 26%. Earnings per share Basic earnings per share, before goodwill and exceptional items, increased 4.4%to 14.20 pence, despite a significantly higher tax charge and an enlarged issuedshare capital. After adjusting for the effect of the larger tax charge,underlying growth in earnings per share was 15%. Cash flow We continue to underpin good and improving profit performances with strong cashgeneration and one of our key performance indicators for all operations is theconversion rate of operating profit into cash from operations, after taking intoaccount capital expenditure. The conversion rate for 2004/05 was 115% comparedto 120% last year. After interest and tax payments free cash flow was £30.5 million, (2004; £24.4million). Capital expenditure, before receipts from assets sold, totalled £5.7million or less than 1% of turnover and less than 1 times depreciation. Onaverage over the medium term we target to spend no more than 1.5% of turnover or1 times depreciation, whichever is the greater, on capital assets. Net debt increased to £62.9 million from £15.4 million last year principally asa result of the acquisition of Peterhouse (cash impact £64.7 million) and Turnerand Partners (£4 million) although higher interest payments (£6.1 millionagainst £0.4 million last year) and tax payments (£4.7 million against £1.6million) both of which benefited from one off gains last year, also impacted.The group has access to a £140 million three year credit line arranged at thetime of the Peterhouse acquisition of which £78 million had been drawn down at31 March 2005. Cost of capital and return on investment The group's weighted average cost of capital, which for 2004/05 was 8.7%, isused as one measure in assessing the financial viability of its investments.The after-tax return before goodwill amortisation and exceptional items for 2004/05 was 16%, compared with 20% last year, a decline arising principally from theinclusion of less than a full years operating profit for Peterhouse and Turnerand Partners. Pensions The group maintains a number of defined benefit pension schemes some of whichwere acquired with the Peterhouse businesses. In accounting for these schemesthe group applies SSAP24 in its consolidated accounts and the transitional rulesof FRS17 for disclosure purposes. The balance sheet position under both SSAP24and FRS17 at 31 March 2005 is as set out in the following table. SSAP24 FRS17 2004/05 2003/04 2004/05 2003/04 £m £m £m £m Balance sheet surplus/(deficit) 98.2 67.2 (20.4) 2.0 Related tax (liability)/ asset (29.9) (20.7) 5.8 (0.9) Net surplus/(deficit) 68.3 46.5 (14.6) 1.1 Since last year end the inclusion of schemes taken on from Peterhouse hasincreased the SSAP24 balance sheet surplus substantially with the net surplusstanding at £68.3 million at the end of this year. Conversely, under FRS17 thenet position has deteriorated from a small surplus last year to a net deficit of£14.6 million at 31 March 2005. The contrast in the valuation status reflectsthe fundamental difference in assumptions between the two bases; whereas SSAP24adopts a long term view of funding, FRS17 takes a fair or market value approachto pension fund assets and liabilities, which is likely to lead to increasedvolatility in balance sheet values. All of the group's principal definedbenefit schemes were in actuarial surplus for funding purposes at the lastvaluation dates. The methodology and assumptions used to calculate the pensionassets and liabilities under FRS17 are substantially consistent with therequirements of IAS19, which will be adopted by the Group with effect from 1April 2005. Treasury The Group's policies, which have been reviewed and approved by the Board, coverall significant areas of treasury activity including foreign exchange, interestrates, liquidity and credit risk. The Treasury Committee, which comprises theGroup's Chief Executive, Finance Director and Financial Controller, withauthorities delegated by the Board, is responsible for ensuring that the Groupoperates within the policies agreed by the Board. The Group finances its operations through a combination of retained profits, newequity and bank borrowings. It is policy to ensure that the Group hassufficient financial resources to support the business and to leave acomfortable margin between those facilities and likely peak borrowings duringthe year. As such, substantial committed facilities are maintained and arecurrently a £140 million bank facility, which has a maturity date of June 2007. Interest rate risk is managed through the maintenance of a mixture of fixed andfloating rate debt and interest rate caps, each being reviewed on a regularbasis to ensure the appropriate mix is maintained. The Group's main exposures to foreign currency fluctuation arise through itsactivities in South Africa where both translational and transactional exposuresexist. It is group policy not to cover the effects of exchange rate fluctuationon translation of the results of foreign subsidiaries into the groups basecurrency, sterling. All material transactional exposures arising throughtrading in currencies other than the operation's base currency must beeliminated by the use of forward currency cover contracts as soon as they areknown of. All treasury transactions are carried out only with prime rated counter-partiesas are investments of cash and cash equivalents. The Group's revenue is derivedmainly from government or government backed institutions or blue chip corporatesand as such credit risk is considered small. International Financial reporting standards (IFRS) Under European legislation, we are required to adopt IAS and IFRS in preparingour Financial Statements from 1 April 2005 onwards. As a result, theseFinancial Statements are the last prepared under UK Generally AcceptedAccounting Principles (UK GAAP). Application of a particular standard issued by the International AccountingStandards Board (IASB) is dependent on the European Union endorsing thatstandard. To the extent that some standards may remain to be endorsed we haveassumed that they will be so endorsed when applying them in the restatement ofresults for 2004/05. The group has today issued a separate announcement to the Stock Exchangesummarising the effects of the adoption of the new standards on key elements ofthe Group's Profit and Loss Account and on Group Net Assets. This announcementis also available on our web site at www.babcock.co.uk. Although the majority of the work on the transition from UK GAAP to IAS/IFRS hasbeen completed, certain areas of the standards are still subject to change.Consequently, further and more detailed information on the impact on Profit andLoss Account and Balance Sheet line items will be given within the next twomonths. The estimates provided in the announcement have not been audited. The major areas of impact were outlined in our 2003/04 Financial Review and wereidentified as pensions accounting, goodwill and intangibles with particularreference to acquisition accounting, deferred tax, finance leases and foreignexchange hedging. Further analysis since then has shown that finance leases andforeign exchange hedging are unlikely to have a material impact but accountingfor share based payments will affect earnings although not necessarily to asignificant extent. The key points to note are that the Group's cash flow and its ability to paydividends will be unaffected but that there is likely to be more volatility inthe balance sheet as a result of the use of the fair value concept, particularlyin applying the new standard relating to pensions, which will also result in arealignment of operating profit and interest income. Although the presentational requirements of IFRS will differ from thosecurrently applied under UK GAAP, the Group will continue to provide details ofunderlying earnings, which under IFRS will be defined as earnings beforesignificant non-recurring items and before amortisation of acquired intangibles. BABCOCK INTERNATIONAL GROUP PLCGROUP PROFIT AND LOSS ACCOUNTFOR THE YEAR ENDED 31 MARCH 2005 Year ended 31 March 2005 Year ended 31 March 2004 Before Before Goodwill Goodwill Goodwill goodwill and and and and exceptional exceptional exceptional exceptional items items Total items items Total Note £m £m £m £m £m £m Existing operations 518.3 - 518.3 438.0 - 438.0Acquisitions 241.7 - 241.7 - - -Continuing 760.0 - 760.0 438.0 - 438.0operationsDiscontinued - - - 14.0 - 14.0operations Group turnover 3 760.0 - 760.0 452.0 - 452.0 Cost of sales (647.7) - (647.7) (385.0) - (385.0) Gross profit 112.3 - 112.3 67.0 - 67.0 Net operating (71.3) (5.1) (76.4) (41.8) (3.3) (45.1)expensesExisting operations 30.0 (8.7) 21.3 25.5 (3.3) 22.2Acquisitions 11.0 3.6 14.6 - - -Continuing 3 41.0 (5.1) 35.9 25.5 (3.3) 22.2operationsDiscontinued - - - (0.3) - (0.3)operations Group operating 3 41.0 (5.1) 35.9 25.2 (3.3) 21.9profit Share of operating profit 3of joint ventures 0.3 - 0.3 0.1 - 0.1Loss on sale of operations 4 - (1.6) (1.6) - (1.7) (1.7) Profit on ordinaryactivities before interest 41.3 (6.7) 34.6 25.3 (5.0) 20.3 Net interest and similar(charges)/income (6.2) - (6.2) (2.2) 1.7 (0.5) Profit on ordinaryactivities before taxation 35.1 (6.7) 28.4 23.1 (3.3) 19.8 Tax on profit on ordinary 5activities (8.1) 0.4 (7.7) (3.4) - (3.4) Profit on ordinaryactivities for thefinancial year 27.0 (6.3) 20.7 19.7 (3.3) 16.4Equity minority (0.1) -interestsProfit for the financial 20.6 16.4year Equity dividends paid and proposed 7 (9.4) (4.9) Retained profit for thefinancial year 11.2 11.5 Earnings per share - Basic 6 10.87p 11.31p- Diluted 6 10.86p 11.28pEarnings per share beforeexceptional items andgoodwill - Basic 6 14.20p 13.60p- Diluted 6 14.18p 13.57p BABCOCK INTERNATIONAL GROUP PLCGROUP BALANCE SHEETAT 31 MARCH 2005 As at As at 31 March 31 March 2005 2004 £m (as restated) £m Fixed assetsIntangible assetsDevelopment costs 0.2 0.7Goodwill- Goodwill 156.1 81.5- Negative goodwill (2.9) (4.7) 153.2 76.8 153.4 77.5Tangible assets 37.9 12.2InvestmentsInvestments in joint ventures- Share of gross assets 4.8 2.4- Share of gross liabilities (4.4) (2.7)- Loans to joint ventures 0.2 0.9 0.6 0.6Other investments 0.1 0.1 192.0 90.4Current assetsStocks 41.3 29.7Debtors - due within one year 180.4 75.2Debtors - due after more than one year 98.1 64.0 278.5 139.2Cash and bank balances 33.1 17.5 352.9 186.4Creditors - amounts due within one year (307.5) (134.7)Net current assets 45.4 51.7 Total assets less current liabilities 237.4 142.1 Creditors - amounts due after more than one year (8.4) (16.0)Provisions for liabilities and charges (55.0) (29.0) Net assets 174.0 97.1 Capital and reservesCalled up share capital 125.0 90.1Share premium account 69.3 38.6Capital redemption reserve 30.6 30.6Profit and loss account (51.0) (62.2) Shareholders' funds - equity interests 173.9 97.1Equity minority interests 0.1 - 174.0 97.1 BABCOCK INTERNATIONAL GROUP PLCSUMMARISED GROUP CASH FLOW STATEMENTFOR THE YEAR ENDED 31 MARCH 2005 Note Year ended 31 March Year ended 2004 31 March (as restated) 2005 £m £m Cash inflow from operating activities 8 43.2 28.0Returns on investments and servicing of finance (6.1) (0.4)Taxation (4.7) (1.6)Capital expenditure and financial investment 3.9 (1.8)Acquisitions and disposals (29.7) 1.4Equity dividends paid (7.0) (4.5)Cash (outflow)/inflow before financing (0.4) 21.1Management of liquid resources (5.6) 0.2Financing 20.6 (19.2)Increase in cash in the period 9 14.6 2.1 BABCOCK INTERNATIONAL GROUP PLCGROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSESFOR THE YEAR ENDED 31 MARCH 2005 Year ended Year ended 31 March 31 March 2005 2004 £m £m Group profit for the financial year 20.3 16.4Profit on joint ventures 0.3 - Profit for the financial year 20.6 16.4 Currency translation differences on foreign currency netinvestments and related loans - 0.6 Total recognised gains and losses relating to the year 20.6 17.0 BABCOCK INTERNATIONAL GROUP PLCRECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDSFOR THE YEAR ENDED 31 MARCH 2005 Year ended Note Year ended 31 March 31 March (as restated) 2005 2004 £m £m Shareholders' funds at start of year, as previously 101.1 87.3reported Prior year adjustment 11 (4.0) (3.9) Shareholders' funds at start of year, as restated 97.1 83.4 Ordinary Shares issued in the year 65.6 1.7 Total recognised gains and losses relating to the 20.6 17.0period Dividends (9.4) (4.9) Movement on Employee Share Ownership Plan - (0.1) Net movement in shareholders' funds 76.8 13.7 Shareholders' funds at the end of year 173.9 97.1 BABCOCK INTERNATIONAL GROUP PLCNOTES TO THE PRELIMINARY STATEMENTFOR THE YEAR ENDED 31 MARCH 2005 1 Basis of Preparation The financial information set out above does not comprise the company'sstatutory accounts. Statutory accounts for the previous financial year ended 31March 2004 have been delivered to the Registrar of Companies. The auditors'report on those accounts was unqualified and did not contain any statement undersection 237(2) and (3) of the Companies Act 1985. The accounting policies haveall been applied consistently throughout the year and the preceding year withthe exception of UITF38 (see note 11). 2 Board Approval The Board approved the Annual Report on the 25 May 2005. The auditors havegiven an unqualified opinion on the accounts for the year ended 31 March 2005,which will be delivered to the Registrar following the Annual General Meeting. 3 Segmental analysis Year ended 31 March 2005 Year ended 31 March 2004 Group Group operating operating profit/ profit/ (loss) (loss) before before goodwill Goodwill Group goodwill Goodwill Group and and operating Group and and operating Group exceptional exceptional profit/ turnover exceptional Exceptional profit/ turnover items items (loss) £m items items (loss) £m £m £m £m £m £m £m Existing operationsDefence Services 245.1 17.8 - 17.8 171.5 11.6 - 11.6Technical Services 160.2 13.1 (5.5) 7.6 180.0 14.8 - 14.8Engineering & PlantServices 113.0 5.5 - 5.5 86.5 3.5 - 3.5Unallocated costs,other income andgoodwill - (6.4) (3.2) (9.6) - (4.4) (3.3) (7.7) 518.3 30.0 (8.7) 21.3 438.0 25.5 (3.3) 22.2AcquisitionsNetworks 61.5 4.1 - 4.1 - - - -Rail 167.0 8.3 8.8 17.1 - - - -HS&E 13.2 (1.2) - (1.2) - - - -Unallocated costs,other income andgoodwill - (0.2) (5.2) (5.4) - - - - 241.7 11.0 3.6 14.6 438.0 25.5 (3.3) 22.2 Total continuingoperations 760.0 41.0 (5.1) 35.9 438.0 25.5 (3.3) 22.2 Discontinued - - - - 14.0 (0.3) - (0.3) Group total 760.0 41.0 (5.1) 35.9 452.0 25.2 (3.3) 21.9 The turnover, not included above, relating to joint ventures was £3.1 million(2004: £3.5 million). The share of operating profit of £0.3 million (2004:profit £0.1 million) from joint ventures represents a £0.2 million with theTechnical Services segment (2004: loss £0.1 million), a profit with the DefenceServices segment of £0.2 million (2004: £0.2 million) and a loss of £0.1 millionfrom the Networks segment (2004 £nil). The inter segment sales in 2005 and 2004were not material. BABCOCK INTERNATIONAL GROUP PLCNOTES TO THE PRELIMINARY STATEMENT CONTINUEDFOR THE YEAR ENDED 31 MARCH 2005 4 Exceptional items and goodwill Within existing businesses an operating exceptional loss of £5.5 million wasrealised representing £0.8 million of restructuring costs and £4.7 million ofgoodwill write-off on the downsizing of the group's marine design subsidiaries.Within acquired businesses an operating exceptional profit of £7.0 million ismade up of £8.8 million income from the transfer of rail maintenance contractsback to Network Rail offset by costs of the transfer and restructuring costswithin the rail business, and £1.8 million of operating exceptional costs forthe closure of the Peterhouse head office. The regular goodwill amortisation (excluding exceptional charges) is £6.6million (2004: £3.3 million). In 2005 the non-operating exceptional loss of £1.6 million is made up of thefollowing; a loss of £1.2 million provided in the period for disposal costs ofpreviously disposed of businesses, and a loss of £0.4 million recognised on thesale of CMR Consultants Limited and a write-down of the carrying value of FBMAwhich was sold on 10 October 2004. Tax includes an exceptional credit of £0.4million relating to the above. In 2004 the non-operating exceptional charge of £1.7 million was made up of aloss on sale of Swedish Materials Handling businesses of £2.5 million, offset bya profit on the sale of a non-trading subsidiary containing a financial asset of£0.8 million. Net interest and similar income/(charges) includes an exceptionalgain of £1.7 million arising on the disposal of a financial asset. 5 Taxation The effective rate of tax in respect of continuing profits before goodwillexceptional items and discontinued activities is approximately 24%. This islower than the statutory 30% rate due to the net effect of permanent differencesand the difference between the UK rate and the effective overseas rate. 6 Earnings per share The basic earnings per share has been calculated on the profit for the period of£20.6 million (2004: profit of £16.4 million) and the weighted average number ofordinary shares in issue throughout the period of 189,193,887 (2004:145,022,090). The diluted earnings per share has been calculated after taking account of258,810 dilutive share options where the exercise price is less than the averagemarket price of the company's own shares during the period. The basic and diluted earnings per share before exceptional items and goodwillhave been calculated using the same weighted average number of ordinary sharesin issue as above and after adjusting for goodwill amortisation of £6.6 million(2004: £3.3 million), operating exceptional items of £1.5 million profit, theloss on the sale of operations of £1.6 million (2004: £1.7 million), and theexceptional interest income of £nil (2004: £1.7 million) and an exceptional taxcredit of £0.4 million (2004: £nil). 7 Equity Dividends A dividend of 2.65p per 60p ordinary share (2004: 2.1p per 60p ordinary share)will be paid, subject to shareholders approval, on 8 August 2005 to shareholdersregistered on 8 July 2005. An interim dividend of 1.35 per 60p ordinary share(2004: 1.25p per 60p ordinary share) was paid on 21 January 2005. BABCOCK INTERNATIONAL GROUP PLCNOTES TO THE PRELIMINARY STATEMENT CONTINUEDFOR THE YEAR ENDED 31 MARCH 2005 8 Reconciliation of group operating profit to cash flow from operatingactivities Year ended Year ended 31 March 31 March 2005 2004 £m £m Group operating profit 35.9 21.9Depreciation, amortisation and impairment 19.7 8.2chargesIncrease in stocks (5.0) (8.5)(Increase)/decrease in debtors (22.2) 13.7Increase/(decrease) in creditors 8.6 (7.1)Increase/(decrease) in provisions 5.3 (0.1)Loss/(profit) on sale of fixed assets 0.9 (0.1)Net cash inflow from operating activities 43.2 28.0 9 Movement in net debt Year ended Year ended 31 March 31 March 2005 2004Related Shares:
Babcock