Babcock : Annual Report and AGM Documents

Babcock International Group PLC ('the Company') - Annual Report and AGM Documents

Copies of each of the following documents have today been posted or otherwise made available to shareholders and copies have been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.morningstar.co.uk/uk/NSM.:-

1. Annual Report and Accounts for the year ended 31 March 2016

2. Notice of Annual General Meeting to be held on 21 July 2016

3. Form of Proxy

Copies of the above documents (excluding the Form of Proxy) are also available on Babcock International Group PLC's website, www.babcockinternational.com.

Jack Borrett

Company Secretary

Babcock International Group PLC

16 June 2016

Compliance with Disclosure and Transparency Rule 6.3.5 ('DTR 6.3.5') - Extract from the 2016 Annual Report and Accounts

The information set out below is extracted from the Company's Annual Report and Accounts 2016 (page references are to pages in the Annual Report) and should be read in conjunction with the Company's Full Year Results 2016 announcement issued on 25 May 2016. Both documents can be found at www.babcockinternational.com and together constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the Company's Annual Report 2016 in full.

Principal risks and management controls

The following report is extracted from pages 64 to 74 of the Annual Report and Accounts.

How Babcock manages risk

Babcock has an established formal process that aims to identify and evaluate risks and how they are to be managed. A range of internal control processes is in place as part of the risk management regime. The Board, principally through the Audit and Risk Committee, keeps under review the risks facing the Group, including the appropriateness of the level of risk the Group may accept in order to achieve its strategic objectives. The Board ensures that it controls the risk appetite of the Group through its delegated authorities that impose strict controls on the Group - for example, all acquisitions and disposals, all material capital expenditure, all material non-ordinary course tenders (material ordinary course tenders are approved by the Chief Executive and the Group Finance Director), all financing arrangements (unless delegated to the Board's Finance Committee) must be approved by the Board. The Board considers and reviews the controls and mitigation plans in place, that are intended to manage and reduce the potential impact of the risks the Company takes, to ensure, so far as possible, that the assets and reputation of the Group are protected.

The Group's risk management and internal control systems can, however, only seek to manage, not eliminate, the risk of failure to achieve business objectives, as any system can only provide reasonable, not absolute, assurance against material misstatement or loss.

Principal risks, risk mitigation and controls

The risks and uncertainties described below through to page 74 are those that the Board currently considers to be of greatest significance to Babcock in that they have the potential to affect materially and adversely Babcock's business, the delivery of its strategy and/or its financial results, condition or prospects. For each risk there is a short description of the Company's view of the possible impact of the risk on the Group should it occur, and the mitigation and control processes in place to manage the risk (which should be read in conjunction with the information above about our risk management approach and general controls).

Babcock is, however, a large and developing group of businesses, and factual circumstances, business and operating environments will change with new risks being identified or the evaluation of the significance of existing risks changing or being better appreciated and understood. This means that the risks identified below are not and cannot be an exhaustive list of all principal risks that could affect the Group.

Risks and uncertainties which might affect businesses in general and that are not specific to the Group are not included, but Babcock, of course, faces such risks as well.

Our customer profile

We rely heavily on winning and retaining large contracts with a relatively limited number of major customers, whether in the UK
or overseas. Many of our major customers are (directly or indirectly) owned or controlled by government (national or local) and/or
are (wholly or partly) publicly funded. Our single biggest customer is currently the UK Ministry of Defence (the MOD).

These customers are affected by political and public spending decisions. Commercial customers are also affected by conditions
in their market sector which affect their levels of, and priorities for, spending.

Risk Description

Policy changes (following a change of political administration or otherwise) and spending constraints on customers are material factors for the Group's business and outlook.

Whilst the Board believes that policy changes, spending reviews and restraints can offer significant opportunities to the Group to assist in the delivery of services to customers more efficiently and at lower cost, these factors inevitably also carry risk.

Large customers, whether public or private sector, have significant bargaining power and the ability (contractual or otherwise) to cancel contracts without, or on, short notice, often without cause, or they can exert pressure to renegotiate them in their favour.

If the UK votes to leave the European Union in the referendum to be held on 23 June 2016, the consequences for the Group's business will be difficult to predict, as there is likely to be a period of uncertainty over the consequential effects on the nature, timing and scope
of the policies and procurement plans of both our current and potential customers in the UK and overseas.

Potential Impact

Periods of uncertainty as to the course of customer policy and spending can result in the delay, suspension or withdrawal of tendering processes and the award of contracts.

Whilst customer policy changes or spending constraints can potentially offer more outsourcing opportunities for us to pursue, they can also be a risk in that they could lead to changes in customer outsourcing strategy and spend which could include:

· reductions in the number, frequency, size, scope, profitability and/or duration of future contract opportunities;

· in the case of existing contracts, early termination, non-extension or non-renewal or lower contract spend than anticipated and pressure to renegotiate contract terms in the customer's favour;

· favouring the retention or return of in-house service provision, either generally or in the sectors in which
we operate;

· favouring small or medium-sized suppliers or adopting a more transactional rather than co-operative, partnering approach to customer/supplier relationships; and

· imposing new or extra eligibility requirements as a condition of doing business with the customer that we may not be able readily to comply with or that might involve significant extra costs impacting the profitability of doing business with them.

Mitigation

We have extensive and regular dialogue with key customers, involving, as appropriate, our Chief Executive, Divisional Chief Executives and/or other members of the senior management team.

We actively monitor actual and potential political and other developments and spending constraints that might affect our customers' demand for our services.

We aim to be innovative and responsive in helping customers meet their needs and challenges.

The nature of our contracts, bid processes and our major markets

We seek to win relatively long-term contracts for the provision of complex and integrated services to our customers. Bidding for these contracts typically involves a protracted and detailed tendering process, often under public procurement rules. There are typically only a relatively limited number of customers in each of the market sectors we serve. The contracts we bid for often entail a substantial transfer of risk from the customer to the supplier.

Failure to realise the pipeline of opportunities and to secure rebids can mean missed opportunities for growth and loss of revenue.

Risk Description

Bidding requires a substantial investment in terms of manpower resource and is very expensive. Bids can be subject to cancellation, delays or changes in scope.

Contract award decisions made under public procurement rules can be subject to legal challenge by losing bidders.

Given the size and often long-term nature of the contracts we bid for and the relatively limited numbers of customers in the markets we serve, significant contracting opportunities tend not to arise on a regular or frequent basis.

When we are bidding for such contracts we have to price for the long term and for risk transfer, and the scope for later price adjustment may be limited or not exist.

Our contracts typically impose strict performance conditions and use key performance indicators (KPIs) that if not complied with trigger compensation for the customer and/or may result in loss of the contract.

Bid and rebid success rates determine how much of the pipeline of opportunities is realised and turned into profitable business and how much existing business is retained.

Potential Impact

If we lose a bid or a bid process is aborted by the customer or we withdraw due to scope changes as it progresses, this is a significant waste of limited resource and substantial expenditure that has to be written off.

If we win a public procurement bid and this is challenged, this could lead to delay in contract award, expensive legal proceedings or the competition having to be re-run.

Not winning a new bid can be a significant missed opportunity for growth which may not soon be replaced by another.

Not winning rebids could mean the loss of significant existing revenue and profit streams.

Loss of bids or rebids can adversely impact the strategic development of the Group.

If we underestimate or under-price actual risk exposure or the cost of performance this could significantly and adversely affect our future profitability, cash generation and growth.

Compensation to the customer for poor KPI performance could significantly impair profitability under the contract and damages following termination could be substantial.

Unsuccessful major bids or rebids may adversely impact the strategic development and growth plans of the Group.

A lack of success in exporting the Group's business model outside the UK and its current core markets could adversely impact the growth prospects and strategic development of the Group.

Mitigation

We have a clear business strategy to target a large-bid pipeline, both in the UK and internationally, and will only tender bids for contracts we consider have a clear alignment with the Group strategy and in which we believe we stand a realistic chance of success, both in the UK and overseas.

There are formal and rigorous reviews and gating processes that are held at key stages of each material bid that are intended to reduce the risk of underestimating risks and costs and ensure that limited bid resources are appropriately targeted at opportunities that we consider have the best prospects for winning or retaining business.

Group policies and procedures set a commercial, financial and legal framework for all bids.

Contractual performance is continually under review (at a business unit, divisional and/or senior Group executive level as appropriate) with a view to highlighting at an early stage risks to delivery and profitability.

Reputation

Given the nature of our customers and the markets in which we operate our reputation is a fundamental business asset. Our businesses include activities that have a high public profile and/or if they were to involve adverse incidents or accidents they could attract a high level of publicity.

Risk Description

We have a relatively limited number of customers and potential customers in our market sectors and they typically have raised public profiles.

We are involved in the direct delivery to the public on behalf of our customers of high-profile and sensitive services or our services are critical to our customers' ability to discharge their own public responsibilities or delivery of critical services to their customers.

Failings or misconduct (perceived or real) in dealing with a customer or in providing services to them or on their behalf can substantially damage our reputation with that customer or more generally. The same would be true of high-profile incidents or accidents.

Attitudes to the outsourcing of services generally or in a particular sector can also be adversely affected by the poor performance or behaviour of other service providers or incidents in which we are not involved.

As well as our reputation for service delivery, our ethical reputation is key.

Potential impact

Given our dependence on individual major customers and the relatively narrow customer base in the markets in which we currently operate, loss of our reputation (whether justified or not) with a major customer or more generally could put at risk substantial existing business streams and the prospects of securing future business from that or other customers in that or other sectors.

Non-compliance with anti-bribery and corruption laws can result in debarment from bidding as well as criminal penalties.

Mitigation

Senior management at Group and divisional level are keenly aware of reputational risks, which can come from many sources. Our risk control procedures relating to contract performance, anti-bribery and corruption, health and safety performance and other matters that could impact our reputation are described elsewhere on pages 56 to 63.

(See also health, safety and environmental risks below).

Regulatory and compliance burden

Our major businesses are dependent on being able to comply with applicable customer or industry-specific requirements or regulations.

If the UK votes to leave the European Union in the referendum to be held on 23 June 2016, the terms of British exit could have implications on the requirements or regulations that are applicable to the business of the Group, including licence to operate in the European Union.

Risk Description

The cost of compliance can be high.

Requirements can change.

Compliance with some regulatory requirements is a precondition to being able to carry on a business activity at all.

For example:

· Our Mission Critical Services business is subject to a high degree of regulation relating to aircraft airworthiness and certification and also to ownership and control requirements (for example, European air operators must be majority owned and controlled by European Economic Area nationals - see page 133 for more information).

· Our civil and defence-related nuclear businesses operate in a highly-regulated environment.

Potential Impact

Failure to maintain compliance with applicable requirements could render the business unable to continue providing services and result in the loss of substantial business streams (and possible damages claims) and opportunities for future business.

A change in requirements could entail substantial expenditure which may not be recoverable (either fully or at all) under customer contracts.

Mitigation

We seek to maintain a clear understanding of ongoing regulatory requirements and to maintain good working relationships with regulators.

We have suitably qualified and experienced employees and/or expert external advisers to advise and assist on regulatory compliance.

We have management systems involving competent personnel with clear accountabilities for operational
regulatory compliance.

Our Articles of Association empower us to take steps to protect European air operating licences if necessary by controlling the level and/or limiting the rights of non-European Economic Area owners of our shares (see pages 133 to 134 for more information).

However, if the UK votes to leave the European Union in the referendum to be held on 23 June 2016, there is likely to be a period of uncertainty over the exact nature, timing and scope of the regulation and requirements that will subsequently apply to the Group.

Health, safety and environmental

Some of our operations entail the potential risk of significant harm to people, property or the environment.

Risk Description

Many of our businesses involve working in potentially hazardous operations or environments which need to be properly managed and controlled to minimise the risk of injury or damage.

Some, for example, the mission critical operations of our helicopter services, involve an inherent degree of risk that is compounded by the nature of the services provided (offshore oil and gas crew change services, fire-fighting, search and rescue, air ambulance and emergency services) or the environments in which they operate (low altitude flying in adverse weather, terrains or operational conditions).

Potential Impact

Serious accidents can have a major impact on the lives of those directly involved and on their families, friends, colleagues and community, as can serious environmental incidents.

To the extent that we have caused or contributed to an incident as a result of failings on our part, or because as a matter of law we would be strictly liable without fault, the Group could be exposed to substantial damages claims, not all of which exposure may be insured against, and also to criminal proceedings which could result in substantial penalties.

Such incidents (which may have a high public profile given the nature of our operations) may also seriously and adversely affect the reputation of the Group or its brand (whether that would be justified or not), which could lead to a significant loss of business or future business opportunities.

Mitigation

Health, safety and environmental performance receive close and continuous attention and oversight from the senior management team.

We have specific health, safety and environmental governance structures in place and extensive and ongoing education and training programmes for staff.

The Board receives half-yearly reviews of health and safety and environmental performance and the management reports tabled at each of its meetings also address health, safety and environment on an ongoing basis.

We believe we have appropriate insurance cover against civil liability exposures.

Nuclear risks: we believe, having regard to the statutory regime for nuclear liability in the UK, the terms on which we do nuclear engineering business and the terms of indemnities given to us by the UK Nuclear Decommissioning Authority and the UK MOD in respect of the nuclear site licensee companies in which we are interested, that the Group would have adequate protection against risk of liability for injury or damage caused by nuclear contamination or incidents, but a reputational risk as a result of any serious incident would remain.

People

Our business delivery and future growth depends on our ability adequately and successfully to plan for management succession and for our continuing and future need to recruit, develop and retain experienced senior managers, business development teams and highly-skilled employees (such as suitably qualified and experienced engineers, technicians, pilots and other specialist skills groups).

Risk Description

Competition for the skilled and experienced personnel we need is intense and they are likely to remain in limited supply for the foreseeable future. This poses risks in both recruiting and retaining such staff.

Potential Impact

Losing experienced senior managers for any reason without plans for their replacement could have a material adverse effect on the prospects for, or performance of, the Group and the delivery of our strategy.

If we have insufficient experienced business development or bidding personnel this could impair our ability to achieve strategic aims and financial targets or to pursue business in new areas.

If we have insufficient qualified and experienced employees this could impair our service delivery to customers or our ability to pursue new business, with consequent risks to our financial results, growth, strategy and reputation and the risk of contract claims.

The cost of recruiting or retaining the suitably qualified and experienced employees we need might increase significantly depending on market conditions and this could impact our contract profitability.

Mitigation

We give a high priority and devote significant resources to recruiting skilled professionals, training and development, succession planning and talent management.

The Board, the Nominations Committee and the Group Executive Committee regularly receive reports on and/or discuss these matters.

Apprentice and graduate recruitment programmes are run throughout all divisions.

Further information about this subject and how we address it is on pages 60 to 61 of this Annual Report.

Pensions

The Group has significant defined benefit pension schemes. These provide for a specified level of pension benefits to scheme members, the cost of which is met from both member and employer contributions paid into pension scheme funds and the investment returns made in those funds over time.

Risk Description

The level of our contributions is based on various assumptions, which are subject to change, such as life expectancy of members, investment returns, inflation, etc. Based on the assumptions being used at any time, there is always a risk of a significant shortfall in the schemes' assets below the calculated cost of the pension obligations.

When accounting for our defined benefit schemes we have to use corporate bond-related discount rates to value the pension liabilities. Variations in bond yields and inflationary expectations can materially affect the pensions charge in our income statement from year to year as well as the value of the net difference between the pension assets and liabilities shown on our balance sheet.

Potential Impact

Should the assets in the pension schemes be judged insufficient to meet pension liabilities we may be required to make increased contributions and/or lump sum cash payments into the schemes. This may reduce the cash available to meet the Group's other obligations or business needs, and may restrict the future growth of the business.

Accounting standards for pension liabilities can lead to significant accounting volatility from year to year due to the need to take account of macro-economic circumstances beyond the control of the Company.

There is a risk that future accounting, regulatory and legislative changes may also adversely impact on pension valuations and costs for the Group.

Mitigation

Continuous strategic monitoring and evaluation by Group senior management of the assets and liabilities of the pension scheme and, as appropriate, the execution of mitigation opportunities.

The Company and the scheme trustees have agreed a long-term investment strategy and risk framework intended to reduce the impact of the schemes' exposure to changes in inflation and interest rates.

Longevity swaps have been used to reduce the impact of the schemes' exposure to increasing life expectancy.

IT and security

Our ability to deliver secure IT and other information assurance systems to maintain the confidentiality of their sensitive information is a key factor for our customers.

During the coming year the Group expects to continue the implementation of a new Enterprise Resource Planning (ERP) application for the 'back office' within sections of two of our four divisions.

Risk Description
Despite controls designed to protect such information, there can be no guarantee that security measures will be sufficient to prevent all risk of security breaches or cyber-attacks being successful in their attempts to penetrate our network security and misappropriate confidential information. The risk of loss of information or data by other means is also a risk that cannot be entirely eliminated.

Installing major new IT systems carries the risk of key system failures and disruption.

Potential Impact
A breach or compromise of IT system security or physical security at a physical site could lead to loss of reputation, loss of business advantage, disruptions in business operations and inability to meet contractual obligations. This could have an adverse effect on the Group's ability to win future contracts and, consequently, on our results of operations and overall financial condition.

Failure adequately to plan and resource the implementation of the new ERP systems or difficulties experienced in doing so could cause both trading and financial reporting difficulties that could be material.

Mitigation
We have made and will continue to make significant investment in enhancing IT security and security awareness generally.

We have formal security and information assurance governance structures in place to oversee and manage cyber-security and similar risks.

The Board receives reports at least quarterly on security and information assurance matters.

The ERP implementation project is overseen and closely monitored by steering and working groups, is regularly reported on to the Group Executive Committee and will be implemented in a phased approach (with parallel running of old and new systems for a period), to what we believe is a realistic timetable.

Currency exchange rates
As we expand outside the UK our financial results are increasingly exposed to the impact of currency exchange rates.

Risk Description
We prepare our consolidated results in Sterling and translate the value of assets, liabilities and turnover reported or accounted for in non-Sterling currencies.

Exchange rate movements can therefore affect the Sterling financial statements and results of the Group.

Expenses or commitments may be incurred in a currency that is different from the related turnover or income needed to discharge them.

Non-Sterling currencies to which we are currently most exposed are the Euro and South African Rand.

Potential Impact
If the currencies in which our non-UK business is conducted are weak or weaken against the value of Sterling this will adversely affect our reported results and the value of any dividend income received by the Company from non-UK operations.

If the cost of an operation or a contractual commitment is denominated or incurred in a currency different from the currency of the income received from that operation or that is being relied on to discharge that commitment, movements in exchange rates can reduce the profitability of the operation and increase the effective cost of discharging the commitment.

Mitigation
We seek to mitigate exposure to movements in exchange rates in respect of material foreign currency denominated transactions (for example, through use of derivative instruments).

Although we do not use these to hedge against the currency effect in translating for our financial statements the net assets and income of non-UK subsidiaries and long-term equity accounted investments, we maintain foreign currency borrowings to limit, in part, the net foreign currency exposure.

Acquisitions
The Group has grown and expects to continue to grow by making acquisitions as well as organically.

Risk Description
The financial benefits of acquisitions may not be realised as quickly and as efficiently as expected.

Potential Impact
Failure to realise the anticipated benefits of an acquisition or delay or higher than expected costs in so doing, could adversely affect the strategic development, business, financial condition, results of operations or prospects of the Group.

The diversion of management attention to unexpected difficulties encountered with acquisitions could adversely affect the Group's business.

Post-acquisition performance of the acquired business may not meet the financial performance expected at the time the acquisition terms were agreed and could fail to justify the price paid, which could adversely affect the Group's future results and financial position.

Mitigation
Full financial and other due diligence is conducted as far as may reasonably be achievable in the context of each acquisition and a detailed business case, with forward looking projections, is submitted to the Board in respect of each acquisition. Integration risk is considered at an early stage as part of the review of acquisition opportunities and detailed integration planning takes place before completion of the acquisition.

We believe we have a good track record in and experience of integrating acquisitions, both large and small.

Related party transactions

The following extract from the Annual Report and Accounts is Note 35 on pages 186 and 187.

(a)The following related parties either sell to or receive services from the Group. Loans to joint ventures and associates are detailed in note 14.

All transactions noted above arise in the normal course of business.

(b) Defined benefit pension schemes.
Please refer to note 25 for transactions with the Group defined benefit pension schemes.

(c) Key management compensation is shown in note 7 and in the Remuneration report.

(d) Transactions in employee benefits trusts are shown in note 23.

(a) The following related parties either sell to or receive services from the Group. Loans to joint ventures and associates are detailed in note 14.

All transactions noted above arise in the normal course of business.

(b) Defined benefit pension schemes.
Please refer to note 25 for transactions with the Group defined benefit pension schemes.

(c) Key management compensation is shown in note 7.

(d) Transactions in employee benefits trusts are shown in note 23.

Directors' responsibility statement

The following statement is extracted from page 135 of the Annual Report and Accounts.

The Directors are responsible for preparing the Annual Report and Accounts including the Group's and the Company's financial statements in accordance with applicable law and regulations.

UK company law requires the Directors to prepare financial statements for each financial year. In accordance with that law, the Directors have prepared the Group's financial statements in accordance with International Financial Reporting Standards (IFRS) (as adopted in the European Union), and the Company's financial statements in accordance with UK Generally Accepted Accounting Practice (UK GAAP). The Group's and the Company's financial statements are required by law to give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that year. In preparing those financial statements the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and accounting estimates that are reasonable and prudent;

· state, for the Group financial statements, whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements;

· state, for the Company's financial statements, whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Company's financial statements; and

· prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company, and enable them to ensure that the Group's financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and Article 4 of the IAS Regulation and that the Company's financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company, and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.

Under applicable law and regulation, the Directors are also responsible for preparing a Strategic report, Directors' report, Directors' remuneration report and Corporate Governance Statement that complies with the law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.

Each of the Directors listed below (being the Board of Directors at the date of this Annual Report and these financial statements) confirms that to the best of his or her knowledge:

· the Group financial statements (set out on pages 142 to 192) which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group taken as a whole; and the Strategic report and Directors' report contained on pages 2 to 135 include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

In addition, each of the directors listed below considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position, performance, business model and strategy.