Shareholder Executive

ABRO

Purpose

ABRO was a defence engineering business providing repair, re-manufacture and engineering for land-based equipment in support of the UK Armed Forces. It merged with DARA on 1 April 2008 to create a new single trading fund, the Defence Support Group (DSG).

Legal Status and Ownership

Before 1 April 2008, ABRO was a trading fund of the Ministry of Defence.

Government's Objectives

ABRO's aim was to offer high quality, flexible and responsive engineering services to its customers and partners, effectively and efficiently, at the best possible value for money.

Financial Performance

£m	2008	2007	2006
Turnover1	147	142	137
Operating Profit	(2)	5	6
Profit/(Loss) for the year	(3)	4	4
Net Cash flow	(8)	0	(1)
Net Operating Assets	42	60	60
RONA	(4.5)%	8.6%	10.3%
ROCE	(4.8)%	7.1%	6.8%
Shareholders' Funds	27	50	48
Dividends	5	4	12

1 2007 results are restated including adjustment for Stafford merger.

Commentary

This year saw major change for ABRO and its employees. In May 2007, Lord Drayson, Defence Equipment and Support Minister, announced his intention to merge ABRO with the retained DARA business units to create a single new trading fund, the DSG. This would combine the land and air capabilities of both organisations and focus exclusively on supporting the UK Armed Forces. Ministers confirmed the merger in July 2007 following full trades union consultation.

The direction placed by Ministers on ABRO to concentrate activities on its MoD customer sent out a clear message that devoting resources to non-defence related business was not part of DSG's future remit. DSG began formal trading on 1 April 2008 and is focussing solely on supporting the delivery of the Defence Industrial Strategy by being a flexible, responsive, operationally excellent organisation that provides a cost competitive in-house maintenance, repair, overhaul and upgrade capability in support of the Armed Forces, while operating in partnership with industry.

Although delivering a successful merger with DARA was challenging, the emphasis for most employees was delivering critical equipment to the UK Armed Forces operating in theatre. Output performance was impressive and workload increased against plan. However, the cost in delivering increased volumes was significant and ABRO posted an operating loss this financial year, which adversely affected the ROCE key target. Underlying the cost overruns was a significant control weakness in the business reporting and management information systems. Action is underway to strengthen these reporting systems to prevent any recurrence.

ABRO also supported service colleagues by deploying many employees to operations at the front line in Afghanistan, Kuwait and Iraq, often helping save lives in extreme combat conditions by keeping critical equipment fully functioning.

The first emerging development during the year was the transfer into ABRO of staff working on engineering activities in the Defence Storage and Distribution Agency (DSDA) at Stafford. These activities are now part of a wider review of similar functions at DSG's Donnington and Sealand sites, and will help define the future shape and size of DSG.

The second involved Defence Equipment and Support (DE&S) staff at Sapphire House, Telford who are currently employed in procurement activities. They will transfer from DE&S during 2008 and form part of DSG's enhanced procurement group.

Accountability and transparency of costs are critical to the future of these DSG businesses and work is underway to shape them to best deliver the benefits and synergies of merger. This involves a major transformation and change programme, which will equip and empower employees to take the right business decisions to help secure their future.

During the year, Peter Moore, Stuart Ash, Ian Metcalf, Malcolm Westgate and Tim Johnson left the Board. New appointees were David Barrass (May 07), Archie Hughes (July 07), John Reilly, Steve Hall, Alan Lewis, Derek Owen (all October 07) and Terence Jagger (Feb 08).