Half-year Report

BBA Aviation plc

2019 Interim Financial Report

Unaudited results for the half year ended

30 June 2019

For further information please contact:

David Crook, Group Finance Director (020) 7514 3999

Kate Moy, Investor Relations

BBA AVIATION PLC

David Allchurch / Lisa Jarrett-Kerr (020) 7353 4200

TULCHAN COMMUNICATIONS

A video with Mark Johnstone, Group Chief Executive, and David Crook, Group Finance Director, is now available on www.bbaaviation.com 

A live audio webcast of the analyst presentation will be available from 08:30 today on www.bbaaviation.com 

INTERIM FINANCIAL REPORT FOR PERIOD ENDED 30 JUNE 2019

Highlights1

·; Total Group underlying operating profit, on a pre IFRS 16 basis, grew 5.3% to $190.0 million (H1 2018: $180.5 million); Signature FBO network outperformed the US B&GA market

·; Proposed sale of Ontic to CVC for $1,365 million announced on 30 July 2019

·; Continuing operations:

o Signature

§ Organic revenue up 0.4% (Signature FBO up 1.0%) with new commercial initiatives contributing to outperformance against a strong prior year comparative

§ US B&GA market growth of 0.3% in the six months to June 2019

§ Underlying Signature FBO operating profit on a pre-IFRS 16 basis reduced 2.6% to $156.4 million (H1 2018: $160.5 million) in a flat H1 US B&GA market with reduced heavy jet traffic in our network

§ EPIC acquisition delivered $2.9 million operating profit for six months as expected, with card and network fuel benefits to come from H2 19 onwards

o Ontic

§ Underlying operating profit growth on a pre IFRS 16 basis increased to $31.7 million (H1 2018: $24.5 million), driven by good organic growth and the Firstmark acquisition

§ Further licence signed with Meggitt in the period

§ Firstmark acquisition integrating well and proceeding to plan

·; Discontinued operations:

o Engine Repair and Overhaul (ERO) delivered underlying operating profit performance of $18.8 million on a pre IFRS 16 basis (H1 2018: $13.4 million) through robust trading with the benefit of depreciation and amortisation suspension

·; Group statutory operating profit is up 21.7% at $156.0 million (H1 2018: $128.2 million) due to the adoption of IFRS 16 on 1 January 2019

·; Total Group free cashflow up 12.8% to $129.2 m (H1 2018: $114.5 million) highlighting inherently strong free cash flow generation

·; Leverage stable at 2.8x net debt/underlying EBITDA on a covenant basis, well within our target range of 2.5-3.0x, reflecting continued strong free cash flow generation funding Ontic licence investment in the period and our progressive dividend

·; Total Group ROIC on a pre IFRS 16 basis is flat at 11.4% (Dec 2018: 11.4%)

·; Underlying Total Group adjusted basic EPS (pre IFRS 16) decreased by 3% to 11.3¢ (2018: 11.7¢). Total Group basic EPS (pre IFRS 16) decreased by 43.1% to 3.7¢ (2018: 6.5¢) reflecting higher exceptional and other item charges

·; Interim dividend increased by 5% to 4.2¢ reflecting continued confidence in the Group's future growth prospects and free cash generation.

Mark Johnstone, BBA Aviation Group Chief Executive, commented:

"The first half of 2019 has been broadly in line with our expectations for BBA Aviation, with a solid Signature performance, in a flat B&GA market. Our Ontic legacy business has delivered a strong performance.

We are pleased to have advanced our new commercial initiatives in Signature including a successful fuel RFP and increasing the EPIC fuel card penetration within the Signature owned network.

Ontic's first half performance was ahead of expectations, with strong organic growth driven primarily by our GE licence portfolios. Ontic continues to see a strong pipeline of licence opportunities and we invested $23.6 million during the period.

On 30 July we were delighted to announce the proposed sale of Ontic to CVC for a consideration of $1,365 million which represents a compelling transaction multiple which we believe fully recognises the strategic value and strong growth track record for the business.

Looking forward, Signature is focused on maintaining its level of performance against the US B&GA market in the second half. Post the proposed disposals, BBA Aviation will be focused on the cash generative Signature business which will enable us to maintain our progressive dividend policy, coupled with the prospect of returns to shareholders as we maintain our target leverage range. The Board is confident of delivering market outperformance through our Signature strategic growth initiatives."

1 Underlying results represent alternative performance measures (APM), see APM section in note 19 outlining all such measures. Where applicable and for comparability these are presented on a pre IFRS 16 basis

2 % change based on total (including discontinued operations)

3 Statutory measure is basic earnings per share (EPS)

4 ROIC is calculated on a pre IFRS 16 basis as there is no full 12 months of operating profit on an IFRS 16 basis

5 Ontic's performance is presented as a continuing operation, consistent with its position at the balance sheet date

6 2018 return on invested capital and net debt is shown for the full year ended 31 December 2018

NOTE ON IFRS 16:

As previously noted we have adopted the modified retrospective approach available within the new accounting standard and therefore we have not restated our comparative disclosures for the impact of IFRS 16, which came into effect from 1 January 2019. The statutory results have been split out to show the IFRS 16 impact to aid comparison period on period.

We reiterate that the adoption of IFRS 16 has no impact on the economic prospects, strategy, cash generative nature of our business, our progressive dividend policy or our stated capital allocation policy.

At adoption on 1 January 2019, and for this interim period, IFRS16 does significantly impact several key financial metrics with regard to reported performance, financial position, financing costs and associated financial leverage.

The approach we have taken to ensure consistency and comparability is to report APMs (non-GAAP metric) that convert and reconcile IFRS 16 reported financials back to the historical accounting treatment of leases. This historical accounting treatment of leases is the basis on which we are tested under our banking covenants, plus monitor performance, KPIs and remuneration targets.

INTERIM RESULTS 2019

Overview

Overall BBA Aviation performed broadly in line with our expectations, with Signature growing ahead of a flat US B&GA market and strong organic and inorganic growth in our Ontic business. We have made further progress with the implementation of our strategy and delivered as expected from our recent acquisitions of EPIC, Firstmark and from the Ontic licence acquisitions acquired in 2018.

Continuing Group revenue increased by 23.3% to $1,262.7 million (H1 2018: $1,024.3 million) including a $230.2 million contribution from the acquisition of EPIC and a $21.4 million contribution from Ontic licence acquisitions and Firstmark.

·; Signature revenue increased 23.3%, reflecting the six-month contribution from EPIC, partially offset by the impact of lower fuel prices ($10.7 million) and foreign exchange movements ($6.6 million). Organic growth in the Signature FBO business was 1.0%.

·; Ontic revenue increased by 28.2% with organic revenue growth of 8.0% supplemented by the contribution from the 2018 licence acquisitions and Firstmark (H1 2019: $16.4 million) contributing as expected.

Continuing Group underlying operating profit (on a pre IFRS 16 basis) was $171.2 million (H1 2018: $167.1 million).

·; Underlying operating profit performance in Signature, on a pre IFRS 16 basis, was $160.0 million (H1 2018: $163.7 million) which includes a $2.9 million contribution from EPIC.

·; Ontic delivered strong underlying operating profit, on a pre IFRS 16 basis, of $31.7 million (H1 2018: $24.5 million) which includes a $5.3 million contribution from the Firstmark acquisition and $1.4m from new licences

·; Total central costs were broadly flat at $20.5 million (H1 2018: $20.5 million).

Continuing group statutory operating profit increased 13.1% to $131.1 million (H1 2018: $115.9 million) primarily due to the adoption of IFRS 16 on 1st January 2019.

Our Engine Repair and Overhaul (ERO) business performed well, delivering strong underlying operating profit performance of $18.8 million on a pre IFRS 16 basis, a 40.3% increase on the $13.4 million in H1 2018, through robust trading with the benefit of $5.9 million depreciation and amortisation suspension. 

Net interest for the continuing operations, including the impact of IFRS 16, was $73.6 million (H1 2018: $26.9 million). The increase of $46.7 million results primarily from the adoption of IFRS 16, with the introduction of net interest on lease liabilities of $34.4 million. The increase in underlying net interest on a pre IFRS 16 basis is as expected and primarily reflects the revised debt structure implemented in April 2018.

Net debt on a reported basis increased to $2,537.3 million (FY 2018: $1,332.2 million) following the adoption of IFRS 16 which results in the recognition of additional $1,196.2 million in lease liabilities within the definition of net debt. Our banking covenants are tested on the accounting standards in force at the time the debt financing was secured, consequently they are not impacted by the adoption of IFRS 16. Net debt to underlying EBITDA on a covenant basis was flat at 2.8x on a covenant basis (FY 2018: 2.8x). Interest cover on a covenant basis decreased to 6.5x for the 12 months to June 2019 (FY 2018: 7.9x).

Continuing underlying profit before tax (on a pre IFRS 16 basis) was $132.0 million (H1 2018: $140.2 million). The decrease primarily results from the additional net interest costs following the revision to our debt structure in April 2018. Statutory profit before tax for the continuing Group was $57.5 million (H1 2018: $76.2 million). The decrease arose principally from the adoption of IFRS 16 and the increased net interest on debt partially offset by lower levels of exceptional and other items charged.

The Group's underlying tax rate for continuing operations was 21.5% (H1 2018: 21.0%). Cash taxes paid increased in line with expectations to $23.0 million (H1 2018: $10.2 million). This increase largely represents timing of payments between 2018 and 2019.

Adjusted earnings per share (on a pre IFRS 16 basis) for continuing operations was 10.0¢ (H1 2018: 10.7¢).

Statutory earnings per share for continuing operations decreased to 4.5¢ (H1 2018: 6.0¢) principally as a result of the impairment recognised on ERO and the adoption of IFRS 16.

Exceptional and other items after tax, for continuing and discontinued operations, totalled $78.5 million (H1 2018: $54.3 million) of which $32.5 million (H1 2018: $5.0 million) related to discontinued operations. Key components of this for continuing operations are the non-cash amortisation of acquired intangibles accounted for under IFRS 3 ($47.9 million), restructuring expenses ($1.4 million), and provisions in respect of previously disposed businesses of ($10.4 million). Exceptional and other items on discontinued operations of $32.5 million, net of tax, relate to the impairment of ERO net assets, to fair value less costs to sell, and transaction costs relating to the disposal process of the ERO business.

Total Group free cash flow increased 13% to $129.2 million (H1 2018: $114.5 million). This improvement resulted from a partial turnaround in working capital within our ERO business following the significant working capital outflows in H1 2018. Free cash flow for the continuing Group reduced to $107.2 million (H1 2018: $159.8 million), primarily as a result of the expected payment of additional interest ($16.9 million) and additional tax payments ($12.8 million) and a working capital inflow in the prior year.

Gross capital expenditure for the total Group amounted to $41.1 million (H1 2018: $43.1 million). Principal capital expenditure items include investment in Signature's FBO developments at Teterboro, and Palm Beach.

Cash flows on exceptional and other items were an outflow of $1.8 million (H1 2018: $12.2 million outflow) and are largely a result of restructuring expenses and costs associated with the disposal process for our ERO discontinued operations.

The Group made $2.3 million of pension scheme payments (H1 2018: $2.2 million). During H1 2019 the Group completed and signed off the 2018 actuarial review of its UK defined benefit pension scheme. Net interest payments were $38.4 million (H1 2018: $21.5 million) and dividend payments amounted to $103.9 million (H1 2018: $99.3 million).

Total spend on acquisitions and licences completed during the period was $26.5 million (H1 2018: $27.7 million), which included deferred consideration on a Meggitt licence acquired in December 2018, the acquisition of a new licence from Meggitt in June and the final working capital settlements in respect of EPIC and Firstmark.

Total Group Return on Invested Capital (ROIC) on a pre IFRS 16 basis was flat at 11.4% (FY 2018: 11.4%).

Business Review - Continuing Operations

Signature (83% of continuing operations' underlying operating profit, pre IFRS 16)

Signature ("Signature FBO", "TechnicAir" and "EPIC") provides specialist on-airport services including refuelling, ground handling and line maintenance to the business & general aviation (B&GA) market.

1 Return on invested capital for full year 2018

2 Revenue is stated pre IFRS 16, Signature revenue post IFRS 16 was $1,140.4 million (H1 2018: $926.3 million)

3 EPIC acquired 1 July 2018

Signature FBO revenue increased 1.0% on an organic basis against a strong prior year comparator. On a reported basis revenue was down 0.9% to $879.1 million (H1 2018: $887.5 million) as a result of lower fuel prices of $10.7 million and foreign exchange movements of $6.2 million. This was delivered against a backdrop of US B&GA movements (source: FAA) which were up 0.3% for the six months to June 2019, representing outperformance of 70 basis points. Heavy jet traffic (over 5k gallon uplifts) was down within our Signature network, which has limited our ability to outperform the overall US B&GA market at our usual levels.

We continue to believe the US B&GA market is a long-term structural growth market, correlated with US GDP growth. Uncertainty around the US trade tariffs, Gulf tensions and a slowdown in China continues to impact business confidence, and the reduction in discretionary flying, which has been most notable in our charter customer segment, continues. Furthermore, we have experienced challenges, in what has been a low growth market, as the long tail value behaviours become more pronounced.

European B&GA movements were down 4.7% in H1 2019 (source: WingX) and while Europe is a small part of Signature, this has clearly impacted overall performance, although encouragingly we saw a much-improved performance in June.

The underlying operating profit in our Signature FBO business for the six months ended June 2019 (on a pre IFRS 16 basis) was down 2.6% to $156.4 million (H1 2018: $160.5 million) as the positive impact from fuel and non-fuel commercial initiatives were offset by wage and other cost inflation that we were unable to fully pass on in a flat market. We remain confident in Signature's ability to deliver significant longer-term value creation across our enlarged network, supported by the commercial growth investments made during 2018 and the phased implementation of the strategic growth initiatives presented at the Capital Markets Day in November 2018.

The underlying operating margin, on a pre IFRS 16 basis, in Signature FBO was 17.8% (2018 on a constant fuel price basis: 18.3%) and reflects the wage inflation experienced in a tight US labour market.

TECHNICAir continued to face challenges in the first half of 2019 with organic revenue decline of 14.4% to $33.2 million (H1 2018: $38.8 million) as we rationalised the footprint from 15 locations down to 8. Underlying operating profit on a pre IFRS 16 basis decreased to $0.7 million (H1 2018: $3.2 million) albeit when compared to H2 2018 the performance was broadly flat. Going forward, TECHNICAir is a smaller but lower risk business given the actions being taken on the fixed cost base.

EPIC contributed revenues of $230.2 million and underlying operating profit of $2.9 million, on a pre IFRS 16 basis, for the first six months of 2019. The integration of EPIC is progressing in line with expectations and in the period, we have made good progress on the fuel card penetration within the Signature network.

Signature's overall revenue, which includes our Signature FBO business, our line maintenance business TECHNICAir and EPIC, increased by 23.3% to $1,142.5 million (H1 2018: $926.3 million) on a pre IFRS 16 basis. The EPIC acquisition contribution was $230.2 million and Signature's organic revenue increased by 0.4%.

Statutory operating profit of $142.7 million increased by 13.3% (H1 2018: $126.0 million) primarily due to the adoption of IFRS 16.

Operating cash flow for Signature, on a pre IFRS 16 basis, decreased to $174.1 million (H1 2018: $197.8 million), principally due to working capital outflows. Return on invested capital decreased to 11.7% (FY 2018: 11.8%).

Our FBO network

There are 193 locations in Signature's global network, including 16 Signature Select® franchise locations. The acquisition of EPIC added 202 privately owned, EPIC branded independent FBOs and a further 121 unbranded locations. This creates a total network of over 400 FBO locations, which has significantly extended Signature's network relevance and the range of services it can offer.

Signature Strategic growth initiatives

In the current low growth US B&GA market we have continued to invest in our Signature FBO network and have started to capture benefits from the recent investments in new technology, designed to enhance our fuel and non-fuel revenue management capabilities through enhanced EPoS and revenue optimisation tools.

EPIC acquisition

EPIC was acquired on 1 July 2018 and provides fuel and fuel related services at 202 EPIC branded, privately owned independent FBO locations, and 121 unbranded locations. Our existing Signature Select® branded locations are complementary to EPIC's FBO locations and have now been incorporated/folded into the EPIC network to operate alongside our market-leading owned FBO network.

Pre-acquisition, EPIC was our Signature FBO fuel card partner and the acquisition has given Signature full end-to-end management of this card programme, associated transaction processing and data capture, as a platform for an enhanced service offering across our entire owned and non-owned network. As communicated at the Capital Markets Day we believe that deeper penetration of this branded fuel card, within our Signature network, represents a $4-8 million underlying operating profit opportunity over time. We are pleased to have made good initial progress on increasing own card usage in the first six months of 2019, which has now grown to over 5% in the Signature FBO network.

EPIC's proprietary QTPod technology for self-fuelling AvGas services is performing very well. We have made good progress as QTPod expands its footprint in the aviation industry, with a new generation proprietary and cloud based self-serve fuelling systems.

Fuel RFP 

We have recently concluded our biennial fuel RFP on the combined Signature and EPIC gallons, which total over 500 million gallons per annum. This new agreement took effect on 1 July 2019. We are pleased to announce that the new deal creates c.$7 million of cost savings on a full year basis. As previously noted, in the current tight US labour market the benefits of this new deal will be used to mitigate some of the impact of the higher wage costs.

Leveraging our network

In the current low growth B&GA market, we will continue to drive value through leveraging Signature's unique network of FBOs by a combination of organic growth, core revenue optimisation, non-fuel revenue growth incorporating new services and improved asset utilisation. We are focused on delivering improved yield management of both fuel and non-fuel revenues from our real estate footprint through first-class customer experience, customer segmentation and technology. On the cost side we are about to roll out labour efficiency benchmarking across the US network.

With regard to new services that will contribute over the next few years, we have made positive initial progress on a US roll-out of the ELITE ClassTM (our commercial passenger interconnect service). We believe this is further evidence of Signature redefining the market reach for B&GA infrastructure.

Over time, we will look to leverage the increased opportunity in advertising throughout our real estate, which builds on our unique customer group that controls significant wealth. Through this range of growth opportunities, over the medium term we will target enhanced market outperformance of some 250 basis points above US B&GA FAA movement growth.

We continue to evaluate a number of investment opportunities that we believe will further enhance and fortify Signature's unique real estate network as we continue to lead the development of the B&GA market.

Uber Elevate partnership

With a view to remaining at the forefront of industry developments, we have recently partnered with Uber Elevate to facilitate ground-based operations to support skyport infrastructure for UberAIR, which plans to operate a network of electric air taxis in cities worldwide. These electric vertical take-off and landing vehicles (eVTOLs) differ from helicopters as they are quieter, safer, more affordable and more environmentally-friendly. This partnership will leverage Signature's leading scale, distribution and aviation expertise with Uber's innovative services and technology leadership to forge a vision for the future of transportation. Signature will also be the ground-based operator of choice for Uber's helicopter services in Manhattan.

Ontic (17% of continuing operations' underlying operating profit, pre IFRS 16)

Ontic, the Group's legacy support business is focused on the support of maturing aerospace platforms.

1 Note: Our former Aftermarket Services business ERO (Middle East) is included under Ontic for H1 2018 in Note 2 Segmental Analysis but is excluded from the table above to provide a directly comparable analysis of the Ontic business only. In H1 2018 the ERO (Middle East) business contributed revenue of $2.7 million and an underlying operating loss of $0.6 million.

2 No IFRS 16 impact

3 Return on invested capital for full year 2018

Ontic revenue increased by 28.2% to $122.3 million (H1 2018: $95.4 million). On an organic basis, which adjusts for FX of $(2.0) million and the contribution from Ontic licence acquisitions acquired within the last twelve months and Firstmark of $21.4 million, revenue increased by 8.0% driven by a strong performance from our GE license portfolio.

Underlying operating profit on a pre IFRS 16 basis of $31.7 million increased by 29.4% (H1 2018: $24.5 million) driven by the contribution from the Firstmark acquisition, which added $5.3 million, and Ontic licence acquisitions acquired within the last 12 months of $1.4 million. On an organic basis, excluding FX of $0.8 million and acquisitions of $6.7 million, Ontic's underlying operating profit increased 5.5%. Underlying operating margins improved to 25.9% (H1 2018: 25.7%).

Statutory operating profit of $21.0 million was up 18.0% (H1 2018: $17.8 million).

There was an operating cash inflow for the division of $27.7 million (H1 2018: $25.5 million) on a pre IFRS 16 basis, driven by working capital performance. Return on invested capital was 15.4 % (FY 2018: 15.6%).

Ontic Strategic growth initiatives

New licence acquisitions

In June 2019 we were pleased to sign a new licence with Meggitt Sensors, part of Meggitt plc, for signal conditioners, military chip detectors, cockpit indicators and connector harnesses. These products are used on a range of commercial, B&GA and military platforms.

This licence agreement follows on from the Meggitt licence signed in December 2018 for legacy support on engine pressure transmitters, fuel flow transmitters and fluid monitoring chip detectors fitted to a range of commercial/military rotorcraft and fixed wing platforms. Under the terms of both agreements Ontic, out of its Chatsworth facility in California, will be responsible for all ongoing new build production and repairs and spares support for the global customers for the large installed base. This further enhances our relationship with Meggitt and highlights our capability to strategically assist OEM partners with on-going support of their non-core products.

Furthermore, in late June we signed a small licence with a new relationship OEM, Thales UK Limited, to acquire manufacturing and aftermarket rights for the complete family of doppler velocity sensors. This licence will transition into our Cheltenham facility during the second half of 2019.

Our total cash spend on licence acquisitions was $23.6 million (H1 2018: $22.5 million) which includes deferred consideration of $10.0 million paid in January 2019 for the December 2018 licence acquisition from Meggitt.

Firstmark Corp acquisition

We completed the acquisition of Firstmark Corp, an aerospace focused aftermarket service provider, in November 2018. Firstmark is a leading provider of highly engineered, proprietary components and subsystems for the aerospace and defence industries. The company employs over 70 people and has locations at Creedmoor, North Carolina and Plainview, New York and expands Ontic's US footprint to the East Coast. It is highly complementary to Ontic's existing sites in Chatsworth (California), Cheltenham (UK), and Singapore.

Firstmark has enhanced Ontic's exposure to the commercial and military aerospace markets, providing access to a range of growth opportunities across various established strategic platforms, with a significant installed base, high utilisation rates and extended in-service lives.

Post Balance Sheet Event

BBA is pleased to announce that it has entered into an agreement to sell Ontic, a leading provider of high-quality, OEM-licensed parts for legacy aerospace platforms, to CVC Fund Vll, for a cash consideration of $1,365 million on a cash-free and debt-free basis.

The Transaction is a Class 1 transaction for BBA under the Listing Rules and is therefore conditional upon the approval of shareholders. A circular containing further details of the Transaction, together with a notice to convene a general meeting expected to be in late August 2019 (General Meeting), will be sent to shareholders as soon as is practicable.

The Board believes the price agreed for Ontic fully recognises the strategic value of Ontic's strong brand, attractive returns and significant growth potential. The Board intends to use some of the disposal proceeds to reduce the Group's financial indebtedness to help ensure that the net debt of the Retained Group remains near the lower end of the stated target range of net debt to underlying adjusted EBITDA of 2.5 to 3.0 times on a covenant basis at 31 December 2019, following Completion. After taking into account these deployments of the disposal proceeds, the Board expects to return between $750m and $850m to the Company's shareholders. Further details on the Board's current expectations regarding the use of proceeds and the proposed return of capital to the Company's shareholders will be set out in the Circular.

The Company will also work with the Group's Pension Trustee to obtain its consent to release applicable security.

Central costs

Total central costs, which includes support costs relating to the discontinued ERO business, on a pre IFRS 16 basis are flat at $20.5 million (H1 2018: $20.5 million). Underlying central costs were broadly flat in H1 2019 (excluding support costs of discontinued operations) at $15.1 million (H1 2018: $14.8 million).

The costs associated with supporting the ERO business will be addressed post completion of the ERO disposal or upon completion of the associated Transitional Support Agreement period, as appropriate.

Business Review - Discontinued Operations

As previously announced, at the end of May 2018 management committed to a plan to sell substantially all our ERO business, and as such at that point, the relevant assets and liabilities were classified as held for sale. At that time, as a major line of the Group's business, the ERO operations were also classified as a discontinued operation. The ERO (Middle East) business has now ceased trading and is not part of the disposal process.

In the six months to 30 June 2019 ERO's revenue increased by 9.6% to $282.4 million (H1 2018: $257.6 million) on a pre IFRS 16 basis. In stable markets, ERO's underlying operating profit on a pre IFRS 16 basis was $18.8 million (H1 2018: $13.4 million). ERO's underlying operating profit improvement includes the $5.9 million benefit from the suspension of depreciation and amortisation for the six months to 30 June 2019 compared to a benefit of $0.7 million for H1 2018, this being the required accounting treatment while the business is held for sale. In the period an impairment charge of $32.5 million, net of tax, was taken on the net assets of ERO, to reflect fair value less costs to sell and transaction costs, relating to the disposal process.

The ERO disposal process is ongoing and we expect to update the market in due course. Disposal proceeds would provide an opportunity to further enhance our proposed return on capital.

Pensions

The Group's net defined benefit pension and other post-retirement benefits liabilities increased by $4.5 million in the first half from $28.2 million at 31 December 2018 to $32.7 million at 30 June 2019. The increase in the net deficit of $4.5 million since 31 December 2018 is primarily due to lower discount rate assumptions.

During H1 2019 the Group completed and signed off the 2018 actuarial valuation of its UK defined benefit pension plan. As a result of this valuation and the initial recognition of past service liabilities in line with the recent High Court ruling in the Lloyds Banking Group case on Guaranteed Minimum Pension (GMP) equalisation we have agreed to make additional payments of £8.5 million in total between July 2019 and September 2021.

Dividend

The Board is declaring an increased interim dividend of 4.20¢ (H1 2018: 4.00¢) up 5% reflecting the Board's progressive dividend policy and its continued confidence in the Group's future growth prospects.

A dividend reinvestment plan is in operation. Those shareholders who have not elected to participate in this plan, and who would like to participate, please register via the share portal www.signalshares.com. The deadline for elections is 5:30pm on 7 October 2019.

Board Changes

As previously announced, in January 2019 we welcomed two new non-executive Directors, Vicky Jarman and Stephen King, to the Board. Vicky started her career with KPMG where she qualified as a Chartered Accountant. Shortly after qualification Ms Jarman moved to Lazard & Co working in the Corporate Finance team before becoming Chief Operating Officer for the London and Middle East operations until 2009. Ms Jarman is currently a non-executive director at Knight Frank, the global commercial and residential real estate advisor, and previously held non-executive appointments at De La Rue, Equiniti Group and Hays.

Stephen qualified as a Chartered Accountant with Coopers & Lybrand and has held a number of finance roles in blue chip organisations including Lucas Industries plc, Seeboard plc, De La Rue plc and Caledonia Investments plc, where he was Group Finance Director for nine years. Mr King is currently a non-executive director of Chemring Group plc and TT Electronics where he is the Senior Independent Director and also chairs the Audit Committee.

Susan Kilsby, Chairman of the Remuneration Committee, retired from the Board at the AGM in May. Peter Ventress has taken over from Susan as Chairman of the Remuneration Committee and as our Senior Independent Director. Stephen King has replaced Peter Ventress as the Chairman of the Audit and Risk Committee.

Outlook

In 2019, we are pleased with the progress we have made on our strategic initiatives, against a largely flat US B&GA market which we had anticipated. In Signature, our ongoing investments in commercial decision making and technology, and the EPIC acquisition, will help underpin the future growth and longer-term market outperformance of our business.

We remain focused on improving both our efficiency and also our level of performance against the US B&GA market in the second half of 2019.

The Group is focused on high quality, high ROIC and strongly cash generative businesses which will enable us to grow and deliver shareholder value within our target leverage range of 2.5x to 3.0x. The strong cash generative nature of the core Signature business supports both a progressive dividend policy and the prospect of further returns to shareholders. Additionally the Group has planned capital returns from both the proposed sales of Ontic and ERO.

Going concern

The Directors have carried out a review of the Group's trading outlook and borrowing facilities, with due regard to the risks and uncertainties to which the Group is exposed, the uncertain economic climate, including Brexit (the impact of which is not expected to be significant) and the impact that this could have on trading performance. Based on this review, the Directors believe that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis.

Directors' responsibilities

The Directors confirm that to the best of their knowledge:

a) the condensed consolidated set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting";

b) the interim financial report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and,

c) the interim financial report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

Signed on behalf of the Board,

Mark Johnstone David Crook

Group Chief Executive Officer Group Finance Director

2 August 2019 2 August 2019

This interim financial report contains forward-looking statements including, without limitation, statements relating to: future demand and markets of the Group's products and services; research and development relating to new products and services; liquidity and capital; and implementation of restructuring plans and efficiencies. These forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future. Accordingly, actual results may differ materially from those set out in the forward-looking statements as a result of a variety of factors including, without limitation: changes in interest and exchange rates, in tax rates or tax legislation, commodity prices and other economic conditions; negotiations with customers relating to renewal of contracts and future volumes and prices; events affecting international security, including global health issues and terrorism; changes in regulatory environment; the introduction or variation of tariffs or duties; and the outcome of litigation. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. This interim financial report has been drawn up and presented in accordance with and in reliance on applicable English company law and the liabilities of the directors in connection with this report shall be subject to the limitations and restrictions provided by such law

This report is available in electronic format from the Company's website www.bbaaviation.com

Unaudited condensed consolidated income statement

1 Underlying results and adjusted earnings per share are stated before exceptional and other items and include the impact of IFRS 16 which was adopted on 1 January 2019. Exceptional and other items are disclosed in note 3.

Alternative performance measures are reconciled to IFRS measures and are explained in note 19, the Alternative Performance Measures section. For comparability and where applicable, this also includes a reconciliation to a pre IFRS 16 basis.

Unaudited condensed consolidated statement of comprehensive income

Unaudited condensed consolidated balance sheet

Details of the restatement made to the opening retained earnings as at 1 January 2019 due to the adjustment arising on the adoption of IFRS 16 can be found in note 1 and note 20. 

Unaudited condensed consolidated cash flow statement

1 Purchase of intangible assets includes $1.0 million (30 June 2018: $1.2 million; 31 December 2018: $1.2 million) paid in relation to Ontic licences not accounted for as acquisitions under IFRS 3.

2(Purchase)/sale of shares includes the share purchases for the share buy-back scheme, shares purchased for the Employee Benefit Trust and shares purchased for employees to settle their tax liabilities as part of the share schemes.

Unaudited condensed consolidated statement of changes in equity

1 Further information on the restatement of opening retained earnings as at 1 January 2019 due to the impact of adopting IFRS 16 is outlined in note 1 and note 20. 

Notes to the condensed consolidated half yearly financial statements

1. Basis of preparation

The unaudited condensed consolidated financial statements of BBA Aviation plc (the "Group"), for the six months ended 30 June 2019 have been prepared in accordance with the Disclosure and Transparency Rules of the UK's Financial Conduct Authority and International Accounting Standard IAS 34: Interim Financial Reporting (IAS 34) which permits the presentation of the financial information on a condensed basis. These condensed consolidated half yearly financial statements do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006, and therefore should be read in conjunction with the Group's Annual Report for the year ended 31 December 2018.

The Group's annual financial statements for the year ended 31 December 2018 have been reported upon by the Group's auditor and delivered to the Registrar of Companies. The report of the auditor was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and did not contain statements under section 498(2) or 498(3) of the Companies Act 2006.

These condensed consolidated half yearly financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) endorsed for use in the European Union and the Companies Act 2006 and comply with Article 4 of the EU IAS Regulation. There is a new standard effective in the period which has had a material impact on the condensed consolidated interim financial statements. The Group adopted IFRS 16 from 1 January 2019 and further details of the impact of the accounting standards is referred to below.

Going concern

The directors are satisfied that, at the time of approving the condensed consolidated financial statements, it is appropriate to continue to adopt the going concern basis of accounting. Further information is given on page 10 of the interim statement.

Alternative Performance Measures (APMs)

In the reporting of financial information, the directors have adopted various Alternative Performance Measures (APMs). The Group's results are principally discussed on an 'adjusted' and/or 'underlying' basis. Results on an adjusted basis are presented before exceptional and other items. APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measures.

Alternative Performance Measures are reconciled to IFRS measures and explained in Note 19, the Alternative Performance Measures section.

For comparability with prior periods, the financial information disclosed in Note 20 is presented excluding the impact of adoption of IFRS 16. Note 19 presents APMs on a pre and post IFRS 16 basis with a reconciliation to the equivalent statutory measure.

New financial reporting requirements

IFRS 16 Leases

The Group adopted IFRS 16 leases from 1 January 2019. IFRS 16 replaced IAS 17 'Leases' and IFRIC 4 'Determining whether an arrangement contains a lease'.

IFRS 16 requires lessees to account for most contracts under an on-balance sheet model, with the distinction between operating and finance leases removed. In addition, the standard makes changes to the definition of a lease to focus on, amongst other things, which party has the right to direct the use of the asset.

The Group has applied the modified-retrospective transition method approach and consequently the comparatives have not been restated. A one off transitional impact on reserves has been recorded as a result of recognising finance lease subcontracts under the standard. The impact on reserves is set out in the unaudited condensed consolidated statement of changes in equity.

The Group's weighted average incremental borrowing rate applied to lease liabilities as at 1 January 2019 was 6.7%.

Practical expedients adopted on transition

On initial adoption, the Group has elected to use the following practical expedients permitted under the standard:

·; The application of a single discount rate to a portfolio of leases with reasonably similar characteristics

·; IFRS 16 has been applied to contracts that were previously classified as leases under IAS 17 and IFRIC 4

·; Right of use assets have been adjusted by the carrying amount of onerous lease provisions at 31 December 2018 instead of performing impairment reviews under IAS 36

Practical expedients also exist to not recognise lease liabilities for short term or low value leases, however on transition the Group has elected not to adopt these expedients.

Significant judgements applied in the adoption of IFRS 16 included determining an incremental borrowing rate where the rate implicit in a lease could not be readily determined.

Impact on lessee accounting

Former operating leases

IFRS 16 changes how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance sheet.

Applying IFRS 16, the Group now recognises right of use assets and lease liabilities in the consolidated balance sheet, initially measured at the present value of the future lease payments.

Lease incentives are recognised as part of the measurement of the right of use asset whereas under IAS 17 they resulted in the recognition of a lease incentive liability, amortised as a reduction of rental expenses on a straight-line basis.

Under IFRS 16, right of use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets. This replaces the previous requirement to recognise a provision for onerous lease contracts.

Under IFRS 16 the Group recognises depreciation of right of use assets and interest on lease liabilities in the consolidated income statement, whereas under IAS 17 operating leases previously gave rise to a straight-line expense in the income statement.

Under IFRS 16 the Group separates the total amount of cash paid for leases that are on balance sheet into the principal portion (presented within financing activities) and interest in the consolidated cash flow statement. Under IAS 17 operating lease payments were presented as operating cash outflows. Under both IFRS 16 and IAS 17 there is no difference to net cashflow.

Former finance leases

The main differences between IFRS 16 and IAS 17 with respect to assets formerly held under a finance lease is the measurement of the residual value guarantees provided by the lessee to the lessor. IFRS 16 requires that the Group recognises as part of its lease liability only the amount expected to be payable under a residual value guarantee, rather than the maximum amount guaranteed as required by IAS 17. This change does not have an effect on the Groups consolidated financial statements. Former finance leases are presented together with new leases taken on balance sheet as part of the transition to IFRS 16.

The impact of adopting IFRS 16 is summarised in Note 20 which details the Group's condensed consolidation income statement, condensed consolidated balance sheet and condensed consolidated interim statement of cash flows. 

Finance leases and operating leases for the comparative periods ended 30 June 2018 and the year ended 31 December 2018 were recognised and measured in accordance with IAS 17 Leases. The accounting policies set out below are those applied to the current period, in accordance with IFRS 16.

Accounting policy for leases

When a contractual arrangement contains a lease, the Group recognises a lease liability and a corresponding right of use asset at the commencement of the lease.

At the commencement date the lease liability is measured at the present value of the future lease payments, discounted using the Group's incremental borrowing rate where the interest rate in the lease is not readily determined.

Lease payments included in the measurement of the lease liability include:

·; Fixed lease payments (including in substance fixed payments), less any lease incentives;

·; Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

·; The amount expected to be payable by the lessee under residual value guarantees;

·; The exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

·; Payment of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease

In general, where extension options exist, the Group recognises these as part of the lease liability as invariably these are exercised.

The lease liability is presented as a separate line in the consolidated statement of financial position

Subsequently, the lease liability is adjusted by increasing the carrying amount to reflect interest on the lease liability, reducing the carrying amount to reflect the lease payments made and remeasuring the carrying amount to reflect any reassessment or lease modifications.

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right of use asset) whenever:

·; The lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using the discount rate appropriate at that point in time

·; The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which case the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in the floating interest rate, in which case a revised discount rate is used)

·; A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using the revised discount rate.

The right of use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs.

In addition, on transition, the right of use asset is adjusted for:

·; The value of any lease incentives on the balance sheet at 31 December 2018

·; The value of any onerous lease provisions on the balance at 31 December 2018

The right of use asset is subsequently measured at cost less accumulated depreciation and impairment losses. Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms of the lease, a provision is recognised and measured under IAS 37 and included in the related right of use asset.

Right of use assets are depreciated over the shorter period of the lease term and the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The Group does not have any leases that include purchase or transfer options of the underlying asset.

The right of use assets are presented as a separate line item on the condensed consolidated statement of financial position, however the categories used in the Note 7 to the consolidated financial statements are the same as those used for owned tangible assets - namely Land & buildings and Fixtures and Equipment.

Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right of use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occur and are generally included within cost of sales in the consolidated income statement.

Subleasing

The Group has several contracts in place to rent space or assets to third parties, predominately across its FBO portfolio.

The Group assesses these contracts to determine firstly whether they constitute leases under IFRS 16, and secondly, where they do, to assess whether these should be accounted for as finance leases.

Where such contracts constitute leases, the assessment considers both the term of the master lease against any subcontract; and the present value of the master lease liability against the present value of the subcontract rental income stream.

Where finance subleases exist the associated right of use asset is derecognised and instead a receivable recognised from the lessee (also referred to as "net investment in the sublease"). The lease liability pertaining to the master lease remains unaffected.

Assets and associated liabilities classified as held for sale

Assets classified as held for sale are measured at the lower of carrying amount or fair value less costs to sell. Assets are classified as held for sale if their net carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year of the date of classification.

When the Group is committed to a sale plan involving loss of control of a subsidiary, all the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale. 

2. Segmental analysis

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Group Chief Executive to allocate resources to the segments and to assess their performance.

The Group provides information to the Chief Executive on the basis of components that are substantially similar within the segments in the following aspects:

• the nature of the long-term financial performance;

• the nature of the products and services;

• the nature of the production processes;

• the type of class of customer for the products and services; and

• the nature of the regulatory environment.

Based on the above, the operating segments of the Group identified in accordance with IFRS 8 are Signature (formerly known as Flight Support), which comprises Signature Flight Support and EPIC Fuels, and Ontic (formerly known as Aftermarket Services). The Ontic segment results show the effect of the ERO discontinued operations being removed.

The businesses within the Signature segment provide refuelling, ground handling, line maintenance and other services to the Business & General Aviation (B&GA) and commercial aviation markets. The Ontic segment maintains and supports aerospace components, sub-systems and systems.

Sales between segments are immaterial.

Alternative Performance Measures are reconciled to IFRS measures and explained in Note 19, the Alternative Performance Measures section.