Babcock International Group PLC

The trusted partner

Annual Report and Accounts 2019

The trusted partner.

Babcock is a leading provider of critical, complex engineering services which support national defence, save lives and protect communities.

We focus on three highly regulated markets ? defence, aerial emergency services and civil nuclear ? delivering vital services and managing complex assets in the UK and internationally.

We are a trusted partner who understands the key roles that our technology, our expertise, our infrastructure and our assets play in ensuring our customers can deliver. We share risk with them in delivering innovation, and we share the benefits.

Strategic report Financial and operational highlights Chairman's review Strategic framework Babcock at a glance Business model Strategy Market review

Defence Aerial emergency services Civil nuclear Chief Executive's review Strategic Partnering Programme Key Performance Indicators Financial review Operational review: Marine Land Aviation Cavendish Nuclear Sustainability Principal risks and management controls Viability statement Governance statement Chairman's introduction Leadership: Governance framework Board of Directors Executive Committee Effectiveness: Report of the Nominations Committee Accountability: Report of the Audit and Risk Committee Remuneration: Report of the Remuneration Committee Relations with Shareholders Additional statutory information: Directors' responsibility statement Independent auditors' report to the members of Babcock International Group PLC

1 2 5 6 8 10 12 12 16 18 22 24 26 28 40 40 43 46 49 54

70 81 84

86 88 90

94

96

101 132 133 138

142

Group financial statements

Group income statement

152

Group statement of

comprehensive income

153

Group statement of changes in equity 153

Group balance sheet

154

Group cash flow statement

155

Notes to the Group financial

statements

156

Company financial statements

Company balance sheet

208

Company statement of

changes in equity

209

Notes to the Company

financial statements

210

Other information

Shareholder information

215

Fiveyear financial record

216



Strategic report

Financial and operational highlights

A partner for progress

Statutory results

Group revenue

?4,474.8m -4%

Operating profit

?196.5m -47%

Cash from operations

?507.9m +13%

Basic earnings per share

39.5p -41%

Governance

39.5 66.6

61.8 57.0 52.9

507.9 447.9

504.0 490.3

426.8

196.5 370.6 359.6 352.5 352.3

4,474.8 4,659.6 4,547.1

4,158.4 3,996.6

Financial statements

15 16 17 18 19

15 16 17 18 19

Underlying results*

Group revenue

?5,160.6m -4%

Operating profit

?588.4m +1%

15 16 17 18 19

Free cash flow

?323.7m +29%

15 16 17 18 19

Basic earnings per share

84.0p +1%

84.0 83.0 80.1

74.2 68.5

323.7 250.2

282.7 275.7

224.1

588.4 584.6 574.8

539.7 518.7

5,160.6 5,362.8 5,216.6

4,842.1 4,503.3

15 16 17 18 19

15 16 17 18 19

15 16 17 18 19

15 16 17 18 19

30.0 29.5 28.15

25.8 23.6

Strengthening the Group

We have continued to deliver across new and existing contracts, demonstrating the quality of our operations and the resilience of our business. Our combined order book and pipeline of ?31 billion supports the future of our business. This year, we also took action to strengthen the Group, including reshaping our Oil and Gas business, and restructuring across the Group.

Full year dividend

30.0p +1.7%

*Underlying

The adjustments described below, collectively, are made to derive the underlying operating results of the Group. The underlying figures provide a consistent measure of business performance year to year. They are used by management to measure operating performance and as a basis for forecasting and the Group believes they are used by investors in analysing business performance.

Throughout the Strategic report, unless otherwise stated, revenue, operating profit, operating margin, net finance costs, profit before tax and earnings per share refer to results before amortisation of acquired intangibles and exceptional items. Underlying revenue, operating profit, operating margins and net finance costs also include the Group's share of equity accounted joint ventures and associates. Underlying operating profit and operating margin include investment income arising under IFRIC12 which is presented as financial income in the Income Statement. A reconciliation of statutory to underlying results is set out on page 29.

15 16 17 18 19

Babcock International Group PLC Annual Report and Accounts 2019 1

Chairman's review

Building an engineering champion

Mike Turner CBE, Chairman

"A great business which can and will go on to achieve so much more."

I write this, my final Chairman's review, with a mixture of pride and regret. Pride because of the extraordinary growth of the Company over the 10 years since I became Chairman; regret because I am leaving a great business which can and will go on to achieve so much more for our shareholders and other stakeholders as we build on our growth platform in the years ahead.

I have been involved with Babcock for most of the last 23 years. When I first joined the Board in the late 1990s, the Company was one of the many fallen British industrial giants struggling to secure its future. We were just taking our first step into engineering services through the acquisition of the Rosyth yard from the UK Government.

When I returned in 2008 from BAE Systems to succeed Babcock's inspirational chairman, the late Gordon Campbell, the Company had just acquired Devonport and was immersed in implementing Gordon's vision to become a leader in the growing market for engineering services.

We had a long way to go. Babcock was a mid-sized company with annual revenues of ?1.56 billion, underlying pre-tax profits of ?95.5 million, basic earnings per share of 33.4 pence and was paying a full-year dividend of 11.5 pence per share. The share price when I became Chairman was 340 pence, struggling in the aftermath of the financial crisis.

This year, our revenue was ?5.2 billion, underlying operating profit was ?588 million, basic earnings were 84 pence and we are recommending a final dividend of 22.9 pence, making a total full year dividend of 30.0 pence ? the 17th successive year that we have increased the dividend.

Our international revenues last year exceeded the entire Group revenues in 2008, due to the combination of the carefully-targeted export of our defence know-how and the very significant contribution of the aerial emergency services business we acquired with Avincis five years ago.

Trusted to deliver

Our financial stability and the cashgenerative power of our business are reflected in our continued deleveraging since Avincis. Our excellent prospects are embodied in our immensely strong order book and pipeline of ?31 billion.

These numbers reflect the outstanding leadership of our executive team, led first by Peter Rogers and Bill Tame and now by Archie Bethel and Franco Martinelli. They would be the first to acknowledge that Babcock's sustained success has been made possible by the dedication, commitment and skill of our people. They have earned our right to be trusted to deliver.

I believe the single metric that says most about Babcock's high quality of business and earnings is our underlying Group margin, which remains in double-digits and which increased last year to 11%. This level of margin highlights the vast gulf between Babcock and the commoditised outsourcers with which we were inappropriately grouped before our recent move to the FTSE Aerospace and Defence sector.

Babcock earns its margin through our pre-eminent position as the UK leader in critical, technology-based engineering services and our track record of improving service and reducing costs for our customers, with whom we nurture long-standing, close relationships.

Decision-making responsibility, exercised from the highest level of the Company, will continue to play a crucial role in our success.

This is a long-term contractual business and the executive team has always been first-class in assessing which contracts to pursue, at what price and on what terms. This discipline is maintained after we secure a contract through our conservative accounting.

2 Babcock International Group PLC Annual Report and Accounts 2019

Strategic report

Governance

Financial statements

We maintain risk registers which ensure that we never take profit in line with revenue ? as some companies have done to their shareholders' cost ? but instead take profit in line with risk. Profit is therefore back-end loaded because risk reduces towards the end of a contract. This rigorous approach explains why, when the accounting standard IFRS 15 was introduced, Babcock was unusual in incurring no impact on previously reported profits.

It is clear that Babcock's attributes have not been reflected in our share price since investors turned bearish on UK stocks in general and outsourcing companies in particular over the past several years. I'm disappointed to be leaving at a time when the share price doesn't truly reflect the strength of the business, but the experience of my corporate career leaves me in no doubt that, over time, Babcock's outstanding business model will be recognised by the market.

We have management strength in depth and I am confident that, whatever challenges the team faces, they will deliver for you, the shareholders. Babcock International is a great company and I am honoured to have served you as its Chairman.

Mike Turner CBE Chairman

Ruth Cairnie, Chair designate

Ruth Cairnie joined the Board in April 2019. Initially a Non-Executive Director, she will succeed Mike Turner as Chair upon his retirement at the Company's Annual General Meeting in July.

Ruth has extensive experience of the engineering sector, gained from a 37-year international career spanning senior functional and line roles at Royal Dutch Shell plc, including Executive Vice President for Group Strategy & Planning.

She has substantial experience of advising government departments on strategic development and capability building.

Ruth is also a champion of diversity, and is Chair of POWERful Women, an initiative to advance gender diversity within the energy sector.

She is also a trustee of Windsor Leadership and a member of the finance committee of the University of Cambridge, where she studied for her Master of Advanced Studies in Mathematics.

Welcoming her to the Board, Mike said: "Ruth is a strategic thinker and a strong leader, and we look forward to her bringing her in-depth experience, gained from a broad range of executive and non-executive roles at leading international industrial companies."

Ruth said: "I am delighted to be joining the Babcock team and I look forward to working with the Board and the executive team to deliver shareholder value, and to help maximise future opportunities.

"I am hugely enthusiastic about the opportunity to oversee the next stage of Babcock's development as a major company delivering complex engineering to support its clients, both in the UK and internationally."

In addition to her role at Babcock, Ruth is currently the Senior Independent Director of Associated British Foods plc and a Non-Executive Director of Rolls-Royce Holdings plc and ContourGlobal plc.

Babcock International Group PLC Annual Report and Accounts 2019 3

Strategic report

Governance

Financial statements

Our strategic framework

Our purpose

We are a leading provider of critical, complex engineering services across defence, aerial emergency services and civil nuclear markets

in the UK and increasingly internationally

We apply our core strengths:

Technology and expertise

Owned infrastructure and assets

Successful operating model

See page 8 for business model

To solve customer challenges:

Maintain national security and save lives

Sustain critical and complex assets

Deliver critical services

See page 6 for At a glance

Across three focus markets:

Defence

Aerial emergency services

Civil nuclear

See page 12 for market review

Supported by our focused strategy

1

Build strategic partnerships

with our customers

2

Focus on three

key markets

3

Maintain and

grow our

UK business

4

Expand

internationally

5

Embed technology across all businesses

6

Manage adjacent markets for value

7

Relentless focus on operational excellence to sustain margins

See page 10 for strategy

Delivering for customers, employees and shareholders

Babcock International Group PLC Annual Report and Accounts 2019 5

Babcock at a glance

What we do

We apply our strengths to solve our customers' challenges, focused on three markets and delivered across four sectors.

Solve customer challenges:

Maintain national security and save lives

? We deliver major UK and international strategic defence programmes ? We support the defence of nations across maritime, air, land

and cyber ? We enable navies, air forces and armies to do their job with our training ? We contribute to front line support and sponsor reserves

Sustain critical and complex assets

? We provide through-life support for our customers' assets ? We apply technology and advance the engineering support offering ? We increase our customers' asset availability ? We deliver significant cost savings on large programmes

Deliver critical services

? We deliver world class emergency services ? We provide training to allow our customers to operate safely ? We are the number one UK civil nuclear engineer

Revenue

Civil vs defence

Public vs private

46%

Civil Defence

18%

54% 82%

Public Private

UK vs international

30% 70%

International UK

6 Babcock International Group PLC Annual Report and Accounts 2019

International

9% 12%

43% 13%

23%

Europe South Africa Australasia North America Rest of world

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