TIDMRR.
RNS Number : 4559F
Rolls-Royce Holdings plc
28 July 2016
28 July 2016
ROLLS-ROYCE HOLDINGS PLC
2016 HALF YEAR RESULTS
Commenting on the results, Warren East, Chief Executive, said:
"In the first half of 2016 Rolls-Royce performed broadly in line
with expectations, delivering a result a little better than
breakeven; and the outlook for the rest of the year remains
unchanged. Order intake has been good and, although known headwinds
constrained revenue and profit in the first half, the business
remains well positioned to deliver a solid second half performance
supported by growth in engine deliveries, stronger aftermarket
revenues and incremental benefits from our ongoing restructuring
programmes."
Reported Underlying
Half year to 30 2016 2015 Change* 2016 2015 Change*
June
-------------------- --------- ------- -------- ------ ------- --------
Revenue (GBPm) 6,462 6,370 -1% 6,143 6,256 - 5%
-------------------- --------- ------- -------- ------ ------- --------
Profit before tax
(GBPm) (2,150) 310 - 104 439 - 80%
-------------------- --------- ------- -------- ------ ------- --------
Earnings per share
(p) (96.72)p 19.51p - 4.20p 18.30p -81%
-------------------- --------- ------- -------- ------ ------- --------
2016 2015 Change**
------ ------ ---------
Net funds (GBPm) (712) (643) -69
----------------------------- ------ ------ ---------
Free cash flow (GBPm)*** (399) (576) +177
----------------------------- ------ ------ ---------
Underlying: for definition see note 2 on page 32; * translated
at constant exchange rates; ** translated at actual exchange
rates;
*** free cash flow defined as operating cash after capital
expenditure, pensions and taxes, before payments to shareholders,
foreign exchange and acquisitions & disposals. The derivation
of free cash flow from the cash flow statement is shown on page
44.
H1 highlights
-- Reported revenue down 1% at constant exchange rates; reported
loss reflects a non-cash impact of GBP2.2bn period-end
mark-to-market revaluation of our derivatives
-- Underlying revenue down 5% at constant exchange rates, led by Civil Aerospace and Marine
-- Underlying profit before tax at GBP104m, down 80% at constant exchange rates
-- As set out in February 2016, interim payment to shareholders
reduced to 4.60 pence per share (2015 interim: 9.27 pence)
Transformation programme
-- 2016 programme well underway, good progress on actions to date
-- GBP50m benefit expected in 2016
-- Over GBP100m of annualised savings already identified; on track for GBP150-200m by end 2017
Looking forward
-- Trading outlook for 2016 unchanged
-- EUR720m acquisition of outstanding ITP stake announced 11
July; expected completion early 2017
-- Greater clarity on principles of IFRS 15; further work
required in order to assess likely impacts
Warren East added: "We have taken some positive first steps on
the journey that will lead Rolls-Royce to profitable and highly
cash generative growth. Our strategic advantages lie in our focus
on engineering excellence, operational excellence and capturing
value in the aftermarket. In the first six months, we have made
progress with our business transformation; introducing the greater
pace and simplicity required to make Rolls-Royce a more resilient
company."
This announcement has been determined to contain inside
information.
Enquiries
Investors:
John Dawson +44 20 7227 9087
Helen Harman +44 20 7227 9339
Ross Hawley +44 20 7227 9282
Media:
Richard Wray +44 20 7227 9163
Photographs and broadcast-standard video are available at
www.rolls-royce.com.
A PDF copy of this report can be downloaded from
www.rolls-royce.com/investors.
This Half Year Results Announcement contains forward-looking
statements. Any statements that express forecasts, expectations and
projections are not guarantees of future performance and will not
be updated. By their nature, these statements involve risk and
uncertainty, and a number of factors could cause material
differences to the actual results or developments. This report is
intended to provide information to shareholders, is not designed to
be relied upon by any other party, or for any other purpose and the
Company and its directors accept no liability to any other person
other than under English law.
Results Presentation
A presentation will be held at 08:45 (GMT) today. Details of how
to join the event online are provided below. Downloadable materials
will be available on the Rolls-Royce website from the start of the
event.
Online webcast registration details for 28 July presentation
To register for the live webcast (including Q&A
participation) please visit this link:
http://edge.media-server.com/m/p/u2yh2kw3
Please use this same link to access the webcast replay after the
event.
2016 Half Year Business Highlights
Percentage or absolute change figures in this document are on a
constant translational currency ('constant currency') basis unless
otherwise stated
% of Group Closing Underlying revenue Underlying profit
revenues* order book GBPm before financing
GBPbn GBPm
----------- ------------
H1 2016 % change H1 2016 % change
---------------------------- ----------- ------------ --------- ---------- --------- ---------
Civil Aerospace 51% 70.5 3,171 -5% 31 -91%
Defence Aerospace 16% 4.2 1,002 -1% 128 -33%
Power Systems 18% 2.0 1,084 -3% 13 -35%
Marine 9% 1.0 548 -25% (13) n/a
Nuclear 6% 2.0 356 +14% 18 -15%
Eliminations/other/central (0.2) (18) (19)
Total Group 79.5 6,143 -5% 158 -70%
---------------------------- ----------- ------------ --------- ---------- --------- ---------
* Based on gross revenues prior to intra-group eliminations
Civil Aerospace
-- Underlying revenue down 5% and lower gross margins, principally due to:
o Original equipment (OE): increased deliveries of newer Trent
engines but lower link-accounted Trent 700 and business aviation
sales
o Services: growth from in-production fleet, but declining
regional and other large engine fleet aftermarket revenues;
increase in technical costs for large engines, including the Trent
1000 but some offsetting foreign exchange benefits
-- GBP3.4bn order book growth; includes over GBP2bn foreign
exchange benefit from long-term US dollar planning rate change
-- Good progress on new engine programmes: launch of the Trent
XWB-84 EP with Singapore Airlines in February and Trent 1000 TEN
receiving EASA certification in early July
-- Supply chain modernisation reducing costs and increasing capacity for Trent XWB ramp up
-- H2 outlook: increasing deliveries driving OE growth and
further targeted lifecycle cost savings on large engine installed
base
Defence Aerospace
-- Underlying revenue 1% lower; growth in OE revenues offset by reduction in service revenues
-- Underlying profit before financing down 33%; reflecting
adverse product mix and GBP31m costs supporting TP400 programme
-- Roll-out of further Service Delivery Centres set to enhance aftermarket service offering
-- H2 outlook: supported by higher engine deliveries,
particularly in transport & patrol; actions underway to
mitigate TP400 costs
Power Systems
-- Underlying revenue 3% lower; led by weaker OE sales
-- Underlying profit before financing 35% lower; reflecting lower volume and changes in mix
-- R&D investment focus on higher volume engine applications
-- H2 outlook: challenging market environment; healthy closing
order book for OE in a number of key market segments; cautious but
positive outlook
Marine
-- Underlying revenue down 25%; weak offshore markets impacting OE and service revenues
-- Underlying profit before financing negative; lower volumes
and reduced overhead absorption from weak offshore performance with
some offset from non-repeat of contract provision in 2015
-- Net restructuring benefits from legacy programmes starting to benefit performance
-- H2 outlook: continuing challenging offshore market for OE and
services; naval and merchant focus on operational execution and
ongoing cost reduction
Nuclear
-- Underlying revenue 14% higher; strong revenues led by increased submarine work
-- Underlying profit before financing 15% lower, adverse margin mix in submarine projects
-- H2 outlook: steady - focus on improving delivery performance
Chief Executive's Review
Introduction
In the first half of 2016, Rolls-Royce performed broadly in line
with expectations and the outlook for the rest of the year remains
unchanged. Order intake has been good, and although known headwinds
constrained revenue and profit in the first half, the business
remains well positioned to deliver a solid second half performance
supported by growing engine deliveries, underlying growth in
aftermarket revenues and incremental benefits from our ongoing
restructuring programmes.
Performance in the first six months of 2016
Our performance in H1 2016 was broadly in line with our early
expectations, with Trent 700 volume and price reductions, legacy
aftermarket reductions and Marine markets causing most of the
weakness. At the same time we have continued to invest in products
and services to support our customers and reinforce the long-term
strength of our order book, valued at GBP79.5bn including GBP2.2bn
of foreign exchange benefit, up 4% from 2015 year end.
Group underlying revenue reduced 5% on a constant currency basis
with reductions in both original equipment and aftermarket services
revenues led by the Civil Aerospace and Marine businesses.
Previously communicated Trent 700 volume and price reductions,
reductions in business jet volumes resulting from softening
markets, reduced utilisation and fewer overhauls of some of our
more mature widebody large engines and increased technical costs
for large engines, including the Trent 1000, were the most
significant contributors in Civil Aerospace. This was partly offset
by the impact of a change to our long-term US dollar planning rate.
Difficult trading conditions in offshore oil and gas markets
continue to hamper performance in Marine. Compared to H1 2015,
underlying profit before finance charges and tax was 70% lower at
GBP158m.
On an underlying profit before finance charges and tax basis,
Civil Aerospace delivered GBP31m (2015: GBP248m); Defence Aerospace
delivered GBP128m (2015: GBP184m); Power Systems delivered GBP13m
(2015: GBP17m); Marine generated a loss of GBP(13)m (2015: GBP4m
profit) and Nuclear delivered GBP18m (2015: GBP20m excluding the
residual Energy business assets now reported in "Other"). More
detail on each business is included in the Operational Review.
After underlying financing costs of GBP54m (2015: GBP17m
including a GBP24m gain from hedging overseas dividends),
underlying profit before tax was GBP104m (2015: GBP439m).
Since the EU referendum vote at the end of June, the value of
sterling relative to the US dollar fell significantly. As a result,
we have recognised a GBP2.2bn non-cash mark-to-market valuation
adjustment for our US dollar hedge book. Reported revenue of
GBP6,462m (2015: GBP6,370m) was unaffected by this; however the
valuation adjustment was the principle reason for reported
financing costs being GBP(2,386)m (2015: GBP(69)m) and reported
loss before tax being GBP(2,150)m (2015: GBP310m profit).
After an underlying tax charge of GBP27m (2015: GBP102m),
underlying profit for the year was GBP77m (2015: GBP337m). With an
average 1,832m shares in issue, underlying earnings per share were
4.20p (2015: 18.27p).
After a reported tax credit of GBP378m (2015: GBP50m), reported
loss for the year was GBP(1,772)m (2015: GBP360m profit). Reported
earnings per share were (96.72)p (2015: 19.51p).
A full reconciliation of underlying to reported profit can be
found in note 2 on page 32.
At the same time, the weakness in sterling does present
near-term opportunities by providing scope to reduce the average
hedge book rate and to benefit from a better conversion of our
overseas revenues and costs to marginally enhance our underlying
performance. As a result, the weaker pound will enhance underlying
full year earnings in future years to the extent our effective
hedge rate declines over time.
The free cash outflow for the first half of GBP399m (2015:
outflow of GBP576m) was lower than expected, reflecting strong cash
collections from a number of key customers at the very end of the
period and a better than expected overall working capital
performance. Most of this positive variance is a timing impact and
likely to reverse early in H2 2016.
A more detailed review of financial performance is included in
the Group Trading Summary and the Financial Review.
Positive market developments continue to drive long-term growth
in Civil Aerospace
The long-term positive market trends for our leading power and
propulsion systems remain unchanged despite some near-term
uncertainties in Civil Aerospace that are expected to impact
business jet engine production volumes and service activity on
older large engines over the next couple of years. The long-term
trends driving demand for growth in large passenger aircraft,
business jets, power systems and maritime activity remain strong;
in particular a growing aspirational and mobile middle-class,
particularly in Asia, and globalisation in business, trade and
tourism.
While recent political and economic developments have added some
uncertainty to near-term utilisation, we continue to expect that
strong widebody airframe demand - driven by the need for newer,
more fuel efficient aircraft - should provide resilience to
manufacturing schedules over the next few years as the industry
undergoes a strong replacement cycle.
Transitioning airframes impacting short-term performance
The effects of the transition of the Airbus A330ceo to A330neo
models have impacted profitability in line with our early
estimates. Once completed, we will benefit from an exclusive
position with the new Trent 7000 on the A330neo. In the near-term
the profit impact of this transition is negative; the impact of
lower pricing and gross margin is exacerbated by the accounting
effects of changes within our large engine aerospace product mix as
we transition to a portfolio increasingly comprising
"unlinked-accounted" engine sales. However, the roll-out of new
engines, including the Trent XWB for the highly successful Airbus
A350 family, will significantly grow our market share and the
installed base of new engines that will deliver strong aftermarket
revenues for decades to come.
Good progress in the first six-months of our new transformation
programme
The objective of our new transformation programme announced in
November 2015 is to simplify the organisation, streamline senior
management, reduce fixed costs and add greater pace and
accountability to decision making. Our target is to deliver
incremental gross cost savings of between GBP150m and GBP200m per
annum, with the full benefits accruing from the end of 2017
onwards.
A transformation team was set up at the end of 2015 to drive
change to simplify processes and activities across the company to
deliver sustainable performance improvements, and ensure the other
restructuring programmes maintain progress.
In the first half of 2016, these transformation actions resulted
in the removal of the divisional structure and a reduction of over
400 in headcount across the management levels of the business. As a
result, the initial savings achieved are primarily in indirect
costs, particularly at corporate and divisional level.
The management simplification has also enabled early
improvements to a number of business processes through clearer
delegated authorities and reporting lines together with more
efficient management reporting and oversight. As a result, the
changes enable management to better direct their efforts onto our
core areas of focus and continuous improvement. These encompass
engineering excellence, operational excellence and capturing more
aftermarket value through leveraging our installed base and
improving customer facing activities. Examples include: improving
cost-awareness and lead times within product development; reducing
production cycle times; and encouragement of local initiatives
enhancing customer responsiveness and inventory management across
our aftermarket activities.
Good early progress on this programme has meant that the
business is well on track towards delivering at the top end of our
targeted GBP30-50m of savings in 2016, which will be second half
weighted, with over GBP100m of annualised savings now identified.
As a result we are well on our way to achieving the GBP150--200m of
annualised cost savings by the end of 2017. Exceptional
restructuring charges for this programme were GBP53m in H1 2016 and
we expect to remain within our full year 2016 target range of
GBP75--100m.
Work is also well advanced to deliver the necessary suite of key
performance indicators (KPIs) needed to create a high performance
culture. Management information and forecasting tools are being
rolled out across the business to simplify the tracking of
performance. These include both physical drivers, for example,
various measures of delivery performance and working capital
management, together with a greater emphasis on forward-looking
KPIs. When combined with increased accountability and improved
speed and accuracy of data, we believe the tools being put in place
will help drive the needed behavioural change and embed greater
pace and simplicity within the business culture.
Acquisition of outstanding 53.1% stake in Industria de Turbo
Propulsores SA (ITP)
We were notified in early July that SENER Grupo de Ingeniería SA
("SENER") had decided to exercise the put option in respect of its
53.1% stake in Industria de Turbo Propulsores SA ("ITP"). This
decision provides us with the opportunity to effectively
consolidate several key large engine risk and revenue sharing
partner (RRSP) arrangements into the business and strengthens our
position on a number of important defence engine platforms and will
enable us to enjoy greater benefits from future aftermarket
growth.
Under the existing shareholder agreement, the consideration will
be settled over a two year period following completion in eight
equal, evenly spaced instalments. The agreement allows flexibility
to settle up to 50% of the consideration in the form of Rolls-Royce
shares. Final consideration as to whether the payments will be
settled in cash or cash and shares will be determined by
Rolls-Royce during the payment period. Completion, which is subject
to regulatory clearances and due diligence, is expected in early
2017.
The acquisition strengthens Rolls-Royce's position on its Civil
Aerospace large engine growth programmes by capturing significant
additional value from its long-term aftermarket revenues, including
the high volume Trent 1000 and XWB engines, where ITP has played a
key role as an RRSP. It also enhances the group's own manufacturing
and services capabilities and adds value to the Defence Aerospace
business, particularly on the TP400 and EJ200 programmes.
Update on regulatory investigations
We previously reported that the Serious Fraud Office had begun a
formal investigation. The Group is continuing to cooperate with the
authorities in the UK, US and elsewhere. As the investigations are
still ongoing we are unable to give any further details or a
timescale for when they will conclude.
Shareholder payments
In February 2016 we recommended that the payment to shareholders
should be halved at both the full year for 2015 and at the 2016
half year. As we discussed at the time, the pace of investment
required to transform the business creates near-term pressure on
free cash flow. At the same time, we need to sustain a healthy
balance sheet to ensure we have the financial flexibility to
maintain a strong investment grade credit rating. We recognise the
importance of a healthy 'dividend' to our shareholders and so over
time, and subject to short-term cash needs, we intend to review the
payment so that it will be progressively rebuilt to an appropriate
level. This reflects the Board's long-standing confidence in the
strong future cash generation of the business.
As a result, the proposed interim payment for 2016 is 4.60 pence
per share, a halving of the interim payment made for full year
2015. As in past payments, the distribution will be in the form of
C Shares. Further details are included on page 41 at the end of
this statement.
Outlook for the balance of 2016
Our outlook for 2016 is unchanged from that set out in February
2016. On a constant currency basis Group revenue for 2016 is
expected to be marginally lower than that achieved in 2015,
partially reflecting pricing and volume effects in Civil Aerospace
and the continued weakness in offshore marine markets. Overall, the
net profit trading headwinds discussed in previous announcements
are unchanged.
Individual outlooks are provided for each business in the
operating review.
Looking further ahead - long-term outlook remains strong
We continue to see value in the underlying strengths of our
business: the underlying growth of our long--term markets, the
quality of our mission-critical technology and services, and
strength of customer demand for these which are reflected in our
exceptional order book. While we have near-term challenges and some
core execution priorities, these constants provide us with
confidence in a strong, profitable and cash-generative future.
The successful roll-out of new engines, led in particular by the
Trent XWB, 1000 and 7000, together with a growing aftermarket, is
expected to drive significant revenue growth over the next ten
years as we build toward a 50%-plus share of the installed widebody
passenger market. As a result, we remain confident that the
important investments we are making to transition our production
will create a strong platform to drive customer service and strong
cash flows, together with the current investments in new products
and the streamlining of our existing product portfolios to ensure
we are providing high value, cost-competitive products into our
target end markets.
Expected ongoing benefits of all current restructuring
programmes will reduce costs by around GBP300-350m by the end of
2017
Ongoing divisional restructuring programmes together with the
new programme announced in November 2015 are expected to reduce
costs by around GBP300m to GBP350m. This breaks down to incremental
legacy Civil and Defence Aerospace restructuring savings of GBP80m,
Marine savings of GBP65m and new transformation programme savings
of between GBP150m and GBP200m.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 is a joint standard for IFRS and US GAAP issuers and
introduces new accounting principles for revenue recognition for
all types of sales of goods or services. For Rolls-Royce, it comes
into force from 1 January 2018 and as a result we will adopt IFRS
15 in both our half-year and full-year 2018 accounts. At that time
we will restate the 2017 results, with an opening balance sheet
adjustment to equity as at 1 January 2017.
It replaces existing revenue recognition standards: IAS 11
Construction Contracts and IAS 18 Revenue, and moves away from the
'risks and rewards' concept of revenue recognition used by IAS 18
to a concept of 'transfer of control'. Its core principle is that
revenue should be recognised when (or as) an entity transfers
control of goods or services.
It is important to remember that, while these changes will be
significant, there will be no changes to the treatment of cash
flows and cash will still be collected in line with the contractual
terms.
We have been working to assess the implications and quantify the
impact of the new standard. Our work has confirmed our view that
our current accounting is in compliance with existing standards and
we will continue to make commercial evaluations on a long-term net
present value basis.
We are consulting with other companies in the aerospace and
defence sector, so that we can take account of other
interpretations in our implementation of the new requirements.
Before we can fully assess the impact, we still have a considerable
amount of work to do to apply the new standard to the large range
of different contracts for our original equipment and aftermarket
sales across all our businesses. However, the most significant
impact will be in Civil Aerospace.
As we described in our 2015 Annual Report, based on our
provisional assessment, IFRS 15 will have a significant impact on
the timing and profile of revenue recognition over the life of
individual long-term contracts (without changing the total amount
of revenue recognised), although this will be somewhat mitigated
when the portfolio of contracts is combined, and in the way we
allocate revenue between original equipment and aftermarket
sales.
We have now reached tentative conclusions on several key areas
of judgement, as follows:
-- We will likely no longer recognise contractual aftermarket rights (CARs)
-- We will likely no longer link OE and TotalCare agreements,
including where we are currently doing so, and these would then be
accounted for separately
-- Revenues will likely be recognised as and when we deliver OE
and then when we carry out aftermarket services activities
The main impacts of applying these principles to civil large
engines are expected to be as follows:
Change Consequence on underlying profit before financing
-------------------------------------------------------- ------------------------------------------------------------
Unlinked accounting - creation of CARs would cease
* Any OE cash deficits would now be expensed on
delivery
* Note: the CARs balance would be subject to a
transition adjustment
* There would be no amortisation expense of OE CARs
recognised in prior periods
-------------------------------------------------------- ------------------------------------------------------------
Linked accounting - would no longer be applied, OE and
TotalCare agreements will be accounted * Any in-year OE deficits on currently linked engines
for separately and concessions agreed with operators would now be recognised on delivery
that relate to the aircraft delivery
will be set against the OE sales price to the
airframer * Any OE price concessions would no longer be deferred
to the linked aftermarket contract
* Note: the TotalCare debtor balance would be subject
to a transition adjustment
* The unwinding of previous OE deficits and deferred
price concessions would no longer reduce TotalCare
service margins
-------------------------------------------------------- ------------------------------------------------------------
TotalCare revenues - would be recognised on an event
basis, with the majority being recognised * The profile of revenue recognised on TotalCare
as shop-visits occur contracts over their lives would change, with limite
d
revenue recognition until the first shop visits
-------------------------------------------------------- ------------------------------------------------------------
Further work is required to fully evaluate the impact and to
prepare for adoption in 2018 including:
-- finalise our methodology for recognition of revenue on
TotalCare contracts including, for example, the impact on risk and
revenue sharing agreements and the impact of acquiring ITP
-- modelling the detailed impact on our historical results and
to determine the actual transition adjustments at 1 January
2017
-- finalise the procedures required to operate under the new requirements
-- complete the evaluation and implementation for all businesses
(note: our initial evaluations indicate these will be less
significant than for the Civil Aerospace large engine business)
The adoption of IFRS15 will enhance the focus on cash efficiency
measures. This will be particularly important as we invest in
building the installed thrust and manage the transition to being
the larger aftermarket business that will provide sustainable
long-term cash flows. In parallel to our review of KPIs and future
remuneration frameworks, we are working to ensure that future
measures work within IFRS15 to provide the right focus on cash
efficiency, cash conversion and overall free cash flow
performance.
We expect to be in a position to give more detail and an
indication of potential impact in Q4.
Board update
During the first six months of the year there have been a number
of important changes to the Board. In March we appointed Brad
Singer to the Board, at which time he also joined the Science and
Technology Committee. In May, following the AGM, Dame Helen
Alexander stepped down from the Board having reached the end of her
term and was succeeded as Chair of the Remuneration Committee by
Ruth Cairnie. In addition, alongside chairing the Science and
Technology Committee, Sir Kevin Smith took over the role of Senior
Independent Director from Lewis Booth, who continues as Chair of
the Audit Committee. Finally, Alan Davies will join the Safety and
Ethics Committee with effect from the start of September 2016.
Group Trading Summary
The commentary in this section relates to the Group's operating
segments and so, consistent with the requirements of accounting
standards, is provided on an underlying basis which is the
measurement basis used by the Group in its segment reporting.
H1 Underlying Acquisitions Foreign H1
GBPm 2015 Change*** & disposals Exchange* 2016
--------------------------------- ------- ----------- ------------- ---------- -------
Order book ** 76,399 3,028 - 94 79,521
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying revenue 6,256 (296) - 183 6,143
--------------------------------- ------- ----------- ------------- ---------- -------
Change -5% +3% -2%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying OE revenue 3,062 (146) - 102 3,018
--------------------------------- ------- ----------- ------------- ---------- -------
Change -5% +3% -1%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying services revenue 3,194 (150) - 81 3,125
--------------------------------- ------- ----------- ------------- ---------- -------
Change -5% +3% -2%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying gross margin 1,332 (348) - 49 1,033
--------------------------------- ------- ----------- ------------- ---------- -------
Gross margin % 21.3% -480bps 16.8%
--------------------------------- ------- ----------- ------------- ---------- -------
Commercial and administrative
costs (496) (22) - (20) (538)
--------------------------------- ------- ----------- ------------- ---------- -------
Restructuring (45) 39 - - (6)
--------------------------------- ------- ----------- ------------- ---------- -------
Research and development
costs (378) 12 - (12) (378)
--------------------------------- ------- ----------- ------------- ---------- -------
Joint ventures and associates 43 2 - 2 47
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying profit before
financing 456 (317) - 19 158
--------------------------------- ------- ----------- ------------- ---------- -------
Change -70% +4% -65%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying operating margin 7.3% -500bps 2.6%
--------------------------------- ------- ----------- ------------- ---------- -------
*Translational foreign exchange impact ** 2015 year end comparative
***Order book change includes GBP2.1bn increase from change to Long
Term US dollar planning rate
As noted in the 2015 Annual Report, the methodology basis for
the allocation of Civil Aerospace revenues on linked TotalCare
contracts between original equipment and aftermarket was reviewed
and amendments made to reflect better the commercial substance of
the combined contracts. Historically, the allocation resulted in
original equipment revenue and aftermarket revenue reflecting the
contractual terms rather than the commercial substance of the
contracts. The H1 2015 figures have been restated on the same
basis; the impact was an increase in original equipment revenue of
GBP66m and an equal decrease in aftermarket revenue
Order book and order intake
During the year our order book increased by GBP3.1bn to
GBP79.5bn, led by Civil Aerospace. Key orders included a $2.7bn
order from Norwegian for Trent 1000 engines and the selection by
China Eastern of 20 Trent XWB powered Airbus A350 aircraft. The
order book also benefitted by a GBP2.1bn uplift from a 5 cent
decrease to our long term US dollar planning rate which is used to
convert foreign currency orders. Order intake in our Marine
business has been low as a result of the continuing weak offshore
market. Overall orders were also lower in Defence Aerospace and
Power Systems, although we view the prospects for these businesses
as unchanged, reflecting long-term orders won in previous years.
Order intake in our Nuclear business was higher as a result of
submarine programme activity.
Underlying trading
Underlying group revenue declined 5% in H1 2016 compared to 2015
on a constant currency basis, reflecting declines in both original
equipment revenue (down 5%) and services (down 5%) and led by Civil
Aerospace and Marine. By business on a constant currency basis,
Civil Aerospace revenue reduced 5%, Defence Aerospace revenue
decreased 1%, Power Systems revenue decreased 3%, Marine revenue
decreased 25% and Nuclear revenue increased 14%.
Underlying profit before financing of GBP158m (2015: GBP456m)
was 70% lower on a constant currency basis, led by a significant
reduction in Civil Aerospace profit reflecting previously
communicated volume and margin reductions on link accounted Trent
700 engines, reduced business jet original equipment volumes,
reduced large engine aftermarket utilisation and increased
technical costs for large engines, including the Trent 1000. Profit
in Defence Aerospace was GBP61m lower resulting from a reduction in
sales volumes and GBP31m of costs in support of the TP400
programme. Power Systems was down GBP6m year-on-year due to lower
sales and a product mix effect. Marine profit was GBP18m lower led
by continuing weakness in the off--shore markets. Nuclear profit in
H1 2016 was GBP3m lower than 2015 due to a lower margin mix in
submarine projects
The R&D charge reduced by 3% over 2015 on a constant
currency basis, reflecting an increase in the level of
capitalisation within Civil Aerospace in H1 2016 and reduced spend
in Power Systems.
Underlying restructuring has reduced to GBP6m (2015: GBP45m).
Charges relating to the transformation activity launched in
November 2015 are treated as exceptional in light of the scale of
the programme. An exceptional charge of GBP53m for this programme
has been taken in H1 2016. The benefits of cost savings arising
from this programme in 2016 are expected to have a second half
weighting.
Commercial and administrative costs include accruals for
performance incentive schemes in line with our current policies.
Given the current state of performance relative to plan, these are
currently higher than in the prior year.
Free cash flow
Cash capital expenditure in the first half of 2016 was GBP307m
(2015: GBP257m), GBP50m higher, largely reflecting phasing of
payments for aerospace footprint and capacity investments. Cash
taxes were GBP62m (2015: GBP79m). The cash cost of defined benefit
pension schemes in excess of the operating profit charge was GBP10m
(2015: GBP25m).
Overall, the free cash outflow for the first half year was
GBP(399)m (2015: GBP(576m). The decline in profit, which included a
significant non-cash element, was offset by better than expected
favourable working capital movements. The TotalCare net asset
movement from 2015 year end of GBP149m reflects the price pressure
on the Trent 700 and associated cash deficits. The net asset is now
expected to peak between GBP2.5-2.7bn in the next twelve months
reflecting benefits of the changes to our long term US dollar
planning rate, further targeted life cycle cost improvements and
other timing differences between cost and cash.
Net debt and foreign currency
The Group is committed to maintaining a robust balance sheet
with a strong, investment-grade credit rating. We believe this is
important when selling high-performance products and support
packages which will be operation for decades. Standard & Poor's
updated its rating in May 2016 to A-/negative outlook and Moody's
maintained a rating of A3/stable.
During H1 2016, the Group's net debt position increased from
GBP111m to GBP712m, reflecting the GBP399m free cash outflow,
shareholder payments of GBP168m and GBP154m for the increased
investment in our approved maintenance centre joint ventures
following receipt of regulatory approval for the changes to the
joint venture agreements in June 2016. In April, we increased our
revolving credit facilities by GBP500m to GBP2bn to provide
additional standby liquidity.
The Group hedges the transactional foreign exchange exposures to
reduce volatility to revenues, costs and resulting margins. The
hedging policy sets maximum and minimum cover ratios of hedging for
net transactional foreign exchange exposure. It allows us to take
advantage of attractive FX rates, whilst remaining within the cover
ratios. A level of flexibility is built into the hedging
instruments to manage changes in exposure from one period to the
next and to reduce volatility by smoothing the achieved rates over
time.
The most significant exposure is the net US dollar income of
approximately $5bn per year which is converted into GBP. Following
the fall in the value of sterling which resulted from the outcome
of the UK referendum, additional cover has been taken out to
benefit from the favourable rates. This has resulted in an increase
in the nominal value of the hedge book to approximately $35bn at
the end of June (December 2015: $29bn) together with a reduction in
the average rate in the hedge book to GBP/$1.57 (December 2015:
GBP/$1.59). Whilst the majority of the benefit of the favourable
exchange rates is likely to impact revenues in the longer term, the
flexibility to reduce volatility built into our hedging
arrangements should result in a modest benefit to current year
results.
Group technical factors for 2016
All figures are at constant translational currencies unless
otherwise stated.
Should foreign exchange rates for the full year remain unchanged
from those at the end of June 2016, the movements from 2015 rates
would improve full year underlying revenues by around GBP600m and
improve underlying profit before tax by around GBP60m.
There is no change in our guidance on finance charges. Overall
underlying finance charges in 2016 are expected to be in the region
of GBP90-110m, partly reflecting the higher level of gross and net
debt. The increase also reflects the fact that the underlying
financing gain of GBP34m taken in 2015, on realised foreign
exchange contracts settled to convert significant overseas
dividends from group companies, is not expected to recur.
There is no change in our guidance on our underlying effective
tax rate. The underlying effective tax rate for 2016 is expected to
be around 26% reflecting the greater proportion of taxable profit
expected to be generated in higher tax rate regions in 2016
compared to 2015.
There is no change in our guidance on capital expenditure.
Capital expenditure for 2016 is expected to be around GBP500-550m
(2015: GBP494m).
Net R&D spend is now expected to be in the region of GBP900m
in 2016, largely reflecting expenses related to the completion of
important new product launches in Civil Aerospace.
There is no change to our full year free cash flow guidance.
Despite a better than expected first half free cash flow
performance our guidance for the full year is unchanged. As a
result, free cash flow in 2016 is likely to be in line with
previous expectations for a modest overall out flow of between
GBP100-300m.
Operational Review : Civil Aerospace
H1 Underlying Acquisitions Foreign H1
GBPm 2015 Change*** & disposals Exchange* 2016
--------------------------------- ------- ----------- ------------- ---------- -------
Order book ** 67,029 3,437 - 2 70,468
--------------------------------- ------- ----------- ------------- ---------- -------
Engine deliveries 326 (14) - - 312
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying revenue 3,285 (159) - 45 3,171
--------------------------------- ------- ----------- ------------- ---------- -------
Change -5% +1% -3%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying OE revenue 1,516 (79) - 24 1,461
--------------------------------- ------- ----------- ------------- ---------- -------
Change -5% +2% -4%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying services revenue 1,769 (80) - 21 1,710
--------------------------------- ------- ----------- ------------- ---------- -------
Change -5% +1% -3%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying gross margin 628 (243) - 14 399
--------------------------------- ------- ----------- ------------- ---------- -------
Gross margin % 19.1% -680bps 12.6%
--------------------------------- ------- ----------- ------------- ---------- -------
Commercial and administrative
costs (140) (12) - (2) (154)
--------------------------------- ------- ----------- ------------- ---------- -------
Restructuring (23) 21 - - (2)
--------------------------------- ------- ----------- ------------- ---------- -------
Research and development
costs (255) 10 - (5) (250)
--------------------------------- ------- ----------- ------------- ---------- -------
Joint ventures and associates 38 (2) - 2 38
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying profit before
financing 248 (226) - 9 31
--------------------------------- ------- ----------- ------------- ---------- -------
Change -91% +4% -88%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying operating margin 7.5% -680bps 1.0%
--------------------------------- ------- ----------- ------------- ---------- -------
*Translational foreign exchange impact ** 2015 year end comparative
***Order book change includes GBP2.1bn increase from change to Long
Term US dollar planning rate
As noted in the 2015 Annual Report, the methodology basis for
the allocation of Civil Aerospace revenues on linked TotalCare
contracts between original equipment and aftermarket was reviewed
and amendments made to reflect better the commercial substance of
the combined contracts. Historically, the allocation resulted in
original equipment revenue and aftermarket revenue reflecting the
contractual terms rather than the commercial substance of the
contracts. The H1 2015 figures have been restated on the same
basis; the impact was an increase in original equipment revenue of
GBP66m and an equal decrease in aftermarket revenue
Financial overview
Overall, underlying revenue for Civil Aerospace was 5% lower
(down 3% at actual exchange rates) with similar reductions in both
original equipment and services.
H1 % of Underlying Underlying Foreign H1 % of
Change
GBPm 2015 whole change % exchange 2016 whole
------------------------ ------ ------ ----------- ----------- --------- ------ ------
OE 1,516 46% (79) -5% 24 1,461 46%
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Large Engine: linked
and other 637 19% 19 +3% 1 657 21%
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Large Engine: unlinked
installed 298 9% 13 +4% 1 312 10%
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Business aviation 413 13% (75) -18% 22 360 11%
------------------------ ------ ------ ----------- ----------- --------- ------ ------
V2500 168 5% (36) -21% 0 132 4%
------------------------ ------ ------ ----------- ----------- --------- ------ ------
AM 1,769 54% (80) -5% 21 1,710 54%
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Large Engine 1,094 33% (66) -6% 3 1,031 33%
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Business aviation 219 7% (2) -1% 10 227 7%
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Regional 191 6% (32) -17% 8 167 5%
------------------------ ------ ------ ----------- ----------- --------- ------ ------
V2500 265 8% 20 +8% 0 285 9%
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Original equipment revenues from large engines: linked and other
increased 3% reflecting increased sales of Trent 900s which
included initial deliveries for Emirates A380s as part of our
record $9.2bn order announced last year together with more Trent
1000s for the Boeing 787 Dreamliner. These were partly offset by
the slow-down in linked Trent 700 deliveries for the Airbus A330
and associated price pressure ahead of the introduction of the
Trent 7000 for the Airbus A330neo. Sales of spare engines to joint
ventures generated revenue of GBP35m (2015 H1: GBP13m).
Original equipment revenues from large engines: unlinked
installed increased 4%, led by higher volumes of Trent XWBs with
some reductions of unlinked engine sales from other Trent engine
programmes.
Large engine service revenue reduced 6% despite double digit
growth in revenues from new engines. The growth was offset by a
significant reduction in revenues from our out-of-production
engines. The decline included the expected reduced flying hour
revenues from lower utilisation of Trent 500 and Trent 800 engines,
and reduced time and material sales from fewer overhauls,
particularly on older RB211 engines approaching the end of their
long-service lives.
Revenues from business jet engine sales were, as expected,
lower, particularly for the BR710 engines, reflecting general
market weakness and a transition to newer non-Rolls-Royce powered
platforms. Volumes of our newer BR725 engine, which powers the
Gulfstream G650 and G650ER, remained good. Overall, business jet
original equipment revenues declined 18%. Aftermarket revenues for
business jets were broadly unchanged.
Services revenues from our regional jet engines declined 17%,
reflecting retirements and reduced utilisation of relevant fleets
by North American operators.
On the V2500 programme, revenues from original equipment modules
declined 21%, as expected, ahead of the end of production of the
V2500 engine. Overall V2500 service revenues were 8% higher,
reflecting strong flying hour performance as well as a good level
of repair and overhaul activity.
Overall gross margins for Civil Aerospace were 12.6% (2015:
19.1%). The main driver of the year-on-year reduction in margin of
GBP243m was the change in mix of large engine sales with fewer link
accounted Trent 700 engine sales and price reductions on these
engines. Other factors contributing to the reduction were the drop
in business jet engine sales, reduced utilisation and less time and
material overhauls of our out--of--production Trent 500 and 800 and
RB211 engines and a declining regional aftermarket.
In respect of long-term contract accounting adjustments, in the
first half of 2016 these totalled a net reduction of GBP(23)m
(2015: total benefit of GBP48m, including a GBP66m one-off benefit
associated with the refinement of our methodology for risk
assessment of future revenue). The GBP(23)m net reduction included
a GBP35m benefit (2015: benefit of GBP25m) from life-cycle cost
improvements. In addition, we recognised in this period a GBP35m
benefit from a 5 cent change (2015: GBPnil) to our estimated
long-term US dollar to sterling exchange rate to bring our own
planning rate within updated external benchmark long-term forecast
data. These benefits were more than offset by technical costs of
GBP(55)m (2015: GBP9m benefit) for large engines including the
Trent 1000 and a retrospective charge of GBP(38)m (2015: GBP(52)m),
reflecting other operational changes. The gross margin in H1 2015
included a charge of GBP17m reflecting losses on Trent 1000 engines
which was subsequently capitalised in H2 2015 as contractual
aftermarket rights. In H1 2016 all "unlinked" Trent 1000 engines
were capitalised as contractual aftermarket rights.
Costs below gross margin were GBP17m lower than the previous
year. Within this, R&D charges of GBP250m were GBP10m lower,
reflecting increased R&D capitalisation on the Trent 1000 TEN
partially offset by higher spend on key programmes, particularly in
respect of the Trent 7000 and the Trent XWB-97 which are being
expensed ahead of capitalisation and reduced development cost
contributions from risk and revenue sharing partners.
Underlying commercial and administrative and other costs were
GBP12m higher than 2015 and included higher accruals for
performance incentives. Restructuring costs of GBP2m were GBP21m
lower, reflecting the significant charges taken in 2015.
As a result, profit before financing and tax was 91% down,
reflecting a combination of lower overall gross margins and higher
commercial and administrative costs with partial offset from
reduced R&D and restructuring costs. Taking account of foreign
exchange effects, underlying profit before financing and tax was
GBP31m (2015: GBP248m).
TotalCare net assets and Contractual Aftermarket Rights
TotalCare net assets increased in H1 2016 by GBP149m (H1 2015:
GBP62m) to GBP2.36bn and the CARs balance increased by GBP71m (H1
2015: GBP47m) to GBP476m.
Investment and business development
Order intake of GBP7.9bn in the first half of 2016 for Civil
Aerospace was GBP0.5bn higher than the previous year. The order
book closed at GBP70.5bn, up GBP3.4bn or 5% from 2015 year end,
which included a GBP2.1bn benefit from the change in the long term
planning foreign exchange rate discussed above. Excluding this the
order book was up 2%.
Significant orders during the first half included an order worth
$2.7bn from Norwegian for Trent 1000 engines and TotalCare service
support for 19 new Boeing 787 Dreamliner aircraft and the selection
of 20 Airbus A350 aircraft, powered by the Trent XWB engine, by
China Eastern.
In May, Rolls-Royce despatched the first 'shipset' of four Trent
900 engines as part of its largest ever order, for Emirates.
Rolls-Royce is providing Trent 900 engines and TotalCare service
for 50 Emirates A380s, the first of which will enter service later
this year.
The first half saw several notable entries into service,
including Ethiopian Airlines becoming Africa's first operator of
the Trent XWB and Cathay Pacific Airways becoming the first in the
Greater China region. Air China became China's first operator of
the Boeing 787-9 Dreamliner, powered by the Trent 1000 engine.
Investment is targeted at achieving improvements in our three
core areas of focus: engineering excellence, operational excellence
and capturing aftermarket value:
Engineering excellence remains the cornerstone of our value to
Civil Aerospace customers
The Rolls-Royce Trent 1000 TEN engine took to the skies for the
first time in March, starting a series of test flights and received
its European Aviation Safety Agency (EASA) certification on 11
July. The Trent 1000 TEN (Thrust, Efficiency and New Technology)
will power all variants of the Boeing 787 Dreamliner family and
draws on technologies from the Rolls-Royce Trent XWB engine and
Advance engine programme, delivering thrust and efficiency
improvements.
In February, Rolls-Royce launched an Enhanced Performance (EP)
version of the Trent XWB, the world's most efficient large aero
engine, powering the Airbus A350 XWB. The first customer is
Singapore Airlines. The Trent XWB-84 EP goes beyond the original
Trent XWB-84 performance target levels, offering a fuel consumption
improvement of 1%. The Trent XWB-84 EP incorporates technologies
from the higher thrust Trent XWB-97 engine, the Advance engine
programme and other future technology research.
The Advance3 large engine demonstrator started build in our
Bristol facility. The demonstrator will test the new core
architecture for future engine families and other key technologies
such as Lean Burn combustion, Ceramic Matrix Composites,
CastBond(TM) (specialist turbine manufacturing) and additive layer
manufacturing or 3D printing.
Rolls-Royce's German joint venture for power gearboxes, a key
technology for the UltraFan(TM) engine, delivered the first gearbox
hardware and commissioned its attitude rig.
Investing in new aerospace supply chain capabilities to help
drive operational excellence
Rolls-Royce announced plans to invest more than GBP30m at its
site in Washington, Tyne & Wear, UK, creating a new facility to
manufacture a range of aerospace discs for in-service engines. The
new Fleet Support plant is expected to be fully operational in 2018
and will sit alongside our world-class UK discs manufacturing
facility, which officially opened in June 2014. The new facility
will have the capacity to manufacture well over 1,500 fan and
turbine discs a year for use in a wide-range of existing engines,
in both Civil and Defence Aerospace applications.
Strengthening our aerospace aftermarket service offering
Rolls-Royce and its partners have received regulatory approval
and met all other closing conditions for its previously announced
changes to three Approved Maintenance Centre (AMC) joint ventures.
AMCs support Rolls-Royce's strategy to develop a competitive,
capable and flexible Trent service network to meet the changing
needs of customers across the lifecycle of engines and to support
the growing Trent engine fleet. In June, we invested GBP154m to
increase our stake in both Hong Kong Aero Engine Aero Services
Limited (HAESL) and Singapore Aero Engine Services Pte Ltd (SAESL)
to 50%.
Rolls-Royce also announced that it is further expanding its
global network of Authorised Service Centres (ASC) for business
aviation aircraft under its CorporateCare service provision for
customers. Rolls-Royce now has 62 ASCs in place with key
maintenance providers worldwide, meaning that CorporateCare
customers will benefit from streamlined administration and reduced
maintenance time.
Civil Aerospace outlook
We continue to expect our Civil Aerospace business to
underperform 2015 underlying profit before finance and tax by
around GBP550m, excluding foreign exchange benefits. The
significant headwind related to Trent 700 volume reductions and the
non-recurrence of a number of one-off benefits seen in 2016 remains
broadly unchanged.
In the second half we expect the business to benefit from higher
large engine deliveries for widebody aircraft, including spare
engines to support the growth in our fleets, further life-cycle
cost improvements within our TotalCare contracts and the benefits
of our restructuring activity. We remain cautious about the weak
business jet markets.
We expect the TotalCare net asset to peak in the next twelve to
eighteen months at between GBP2.5bn and GBP2.7bn, reflecting
benefits of the changes to our long-term US dollar planning rate,
further targeted life cycle cost improvements and other timing
differences between cost and cash.
Operational Review: Defence Aerospace
H1 Underlying Acquisitions Foreign H1
GBPm 2015 change & disposals Exchange* 2016
--------------------------------- ------ ----------- ------------- ---------- ------
Order book ** 4,316 (163) - 3 4,156
--------------------------------- ------ ----------- ------------- ---------- ------
Engine deliveries 272 19 - - 291
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying revenue 973 (8) - 37 1,002
--------------------------------- ------ ----------- ------------- ---------- ------
Change -1% +4% +3%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying OE revenue 368 28 - 16 412
--------------------------------- ------ ----------- ------------- ---------- ------
Change +8% +4% +12%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying services revenue 605 (36) - 21 590
--------------------------------- ------ ----------- ------------- ---------- ------
Change -6% +3% -2%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying gross margin 279 (76) - 8 211
--------------------------------- ------ ----------- ------------- ---------- ------
Gross margin % 28.7% -760bps 21.1%
--------------------------------- ------ ----------- ------------- ---------- ------
Commercial and administrative
costs (63) 5 - (2) (60)
--------------------------------- ------ ----------- ------------- ---------- ------
Restructuring (15) 12 - - (3)
--------------------------------- ------ ----------- ------------- ---------- ------
Research and development
costs (27) (1) - (1) (29)
--------------------------------- ------ ----------- ------------- ---------- ------
Joint ventures and associates 10 (1) - - 9
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying profit before
financing 184 (61) - 5 128
--------------------------------- ------ ----------- ------------- ---------- ------
Change -33% +3% -30%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying operating margin 18.9% -620bps 12.8%
--------------------------------- ------ ----------- ------------- ---------- ------
*Translational foreign exchange impact ** 2015 year end
comparative
Financial Overview
Underlying revenue of GBP1,002m was marginally below the prior
year on an underlying basis (up 3% at actual exchange rates).
Higher volumes on both LiftSystem(TM) and TP400 production,
together with increased Adour engine deliveries to Saudi Arabia,
helped original equipment revenues increase 8%, on an underlying
basis. Service revenues were 6% lower than the prior year, mainly
due to lower spares sales on a number of legacy programmes, while
long-term service contract revenues were broadly in line with the
prior year.
Gross margin declined by GBP76m, reflecting the lower sales of
spare parts and an adverse change in OE product mix plus expected
additional expenditure of GBP31m on technical improvements to the
TP400 programme. Retrospective margin improvements on existing
long-term contracts reflecting cost improvements totalled GBP44m,
similar to the prior year. These improvements are expected to be
principally first half weighted.
Overall R&D costs were similar to the prior year as the
business continued to invest in future programme development, while
restructuring costs were lower due to reduced level of severance
costs and lower spend on the closure of the defence facility at
Ansty. Underlying commercial and administrative costs and other
costs were similar to prior year despite higher accruals for
performance incentives in 2016.
Profit before financing of GBP128m was 33% lower than the prior
period.
Investment and business development
Order intake for H1 2016 was GBP743m (2015: GBP821m). Overall,
the Defence Aerospace order book declined by 4%, in part reflecting
the timing of a number of expected orders which should be received
in the next few quarters. The first half saw continued interest in
our Services portfolio from major customers including the contract
renewal from the US Department of Defence to support AE 2100
engines powering its C-130J transport fleet. We also delivered the
first T56 3.5 technology insertion kits to the USAF which offer
both fuel saving and performance benefits for its legacy C-130
fleet. International interest in this technology upgrade continues
to be strong.
We received a follow-on production contract for the LiftSystem
for the F-35B and recently signed an memorandum of understanding
with Pratt & Whitney to extend our aftermarket support for the
UK's new F--35B Lightning fleet beyond the LiftSystem. The opening
of the Kingsville Service Delivery Centre (SDC) in Texas
strengthens our local service offering for the US Navy's T-45
Goshawk trainer fleet and provides further opportunities to develop
the service relationship. A number of new SDC facilities are due to
be rolled out over the next 12 months as we pursue this strategy of
closer proximity to our major customers.
We continue to work on positioning ourselves to be competitive
for forthcoming indigenous combat programmes, and see further
combat opportunities following the UK and French Governments'
commitment to the EUR2bn FCAS unmanned combat air system programme.
In addition, we signed agreements with both MD Helicopters and
Enstrom which offer new opportunities for our small helicopter
engines. Our commitment to development of cutting-edge technology
was boosted by the selection of our LibertyWorks development unit
to provide the vertical lift propulsion for the new DARPA VTOL
X-Plane.
As well as some organisational rationalisation, the
transformation programme within the Defence Aerospace business has
focused on the upgrading of the Indianapolis operations facilities
which will deliver both operational efficiencies and greater
development capabilities. Performance against transformation
milestones ran to plan in the first half. Defence Aerospace capital
expenditure rose modestly as the investment activity in
Indianapolis increased.
Defence Aerospace outlook
The business continues to invest in important product
development and manufacturing transformation initiatives as it
looks capitalise on its strong positions, particularly in Combat
and Transport & Patrol. As a result, margins are expected to
soften from the highs seen in 2014 and 2015.
Expectations for full year performance are unchanged. Revenues
should remain steady, with margins continuing to reflect the
investments in long-term growth and additional actions to offset
the TP400 expenditure.
Operational Review: Power Systems
H1 Underlying Acquisitions Foreign H1
GBPm 2015 change & disposals Exchange* 2016
--------------------------------- ------ ----------- ------------- ---------- ------
Order book ** 1,928 65 - - 1,993
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying revenue 1,039 (30) - 75 1,084
--------------------------------- ------ ----------- ------------- ---------- ------
Change -3% +7% +4%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying OE revenue 684 (22) - 49 711
--------------------------------- ------ ----------- ------------- ---------- ------
Change -3% +7% +4%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying services revenue 355 (8) - 26 373
--------------------------------- ------ ----------- ------------- ---------- ------
Change -2% +7% +5%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying gross margin 245 (11) - 20 254
--------------------------------- ------ ----------- ------------- ---------- ------
Gross margin % 23.6% -40bps 23.4%
--------------------------------- ------ ----------- ------------- ---------- ------
Commercial and administrative
costs (143) (3) - (12) (158)
--------------------------------- ------ ----------- ------------- ---------- ------
Restructuring (2) 2 - - -
--------------------------------- ------ ----------- ------------- ---------- ------
Research and development
costs (82) 5 - (6) (83)
--------------------------------- ------ ----------- ------------- ---------- ------
Joint ventures and associates (1) 1 - - -
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying profit before
financing 17 (6) - 2 13
--------------------------------- ------ ----------- ------------- ---------- ------
Change -35% +12% -24%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying operating margin 1.6% -50bps 1.2%
--------------------------------- ------ ----------- ------------- ---------- ------
*Translational foreign exchange impact ** 2015 year end comparative
Financial overview
Underlying revenue of GBP1,084m was 3% lower (4% higher at
actual exchange rates). Original equipment revenue was 3% lower,
reflecting a lower level of naval and rail project-related sales
compared to 2015 and the impact of the low oil price on marine
offshore and fracking activities in particular, with some offset
from higher power generation, construction and agriculture sales.
Low oil and commodity prices were the most significant contributors
to the 2% reduction in underlying service revenues, where
industrial markets were most impacted.
Gross margins were marginally lower at 23.4% (2015: 23.6%)
reflecting volume reductions leading to higher overhead allocations
as well as some changes to the product mix.
Underlying profit declined GBP6m or 35%. Commercial &
administrative costs were GBP3m higher. The GBP5m reduction in
R&D reflects a more focused approach to future product
development activity. Other costs below gross margin were broadly
unchanged.
Investment and business development
Our Power Systems business serves a variety of markets ranging
from marine, industrial, construction & agriculture to defence
and power generation. This diversity has enabled the business to
mitigate some of the weak market environment, particularly those
linked to oil and commodities.
H1 2016 order intake was GBP1.2bn (2015: GBP1.3bn) with the
year-on-year reduction mainly from oil and gas and commodity
related markets together with lower rail and government project
orders. Despite this, the order book closed up from the end of 2015
at GBP2.0bn (2015: GBP1.9bn).
We have continued to develop our position in the energy segment.
In March, we signed a strategic agreement with VPower Group to
strengthen our partnership in power generation markets across China
and the rest of Asia. We also established a 50/50 joint venture
with China Yuchai International Limited's main operating
subsidiary, Yuchai Machinery Company Ltd, for the production under
licence of MTU Series 4000 diesel engines in China for the Chinese
off-highway market, for power generation and for oil and gas
applications.
We have had several good contract wins for our naval and marine
products. These include an order for twelve MTU diesel gensets for
the UK Royal Navy's Type 26 Global Combat Ship and a contract win
for six MTU engines from Istanbul based Bilgin Yachts. We have also
been selected to supply MTU-branded engines to crane producer Kato
for the first time. Winning Kato as a customer represents our first
success in the high-tech Japanese crane market and we expect Kato
to source several hundred units per year.
Power Systems outlook
The Power Systems outlook is cautiously positive. The business
finished the first half with a solid order book and good order
coverage in several key longer cycle markets including power
generation and governmental, broadly consistent with the prior
year. Markets continue to be mixed, with some industrial markets
remaining soft, as demonstrated by comments from some of our
customers and competitors. While there is much to do in the second
half, we expect our diverse end market mix to help mitigate
this.
Operational Review: Marine
H1 Underlying Acquisitions Foreign H1
GBPm 2015 change & disposals Exchange* 2016
--------------------------------- ------ ----------- ------------- ---------- ------
Order book ** 1,164 (259) - 87 992
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying revenue 695 (171) - 24 548
--------------------------------- ------ ----------- ------------- ---------- ------
Change -25% +3% -21%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying OE revenue 415 (124) - 12 303
--------------------------------- ------ ----------- ------------- ---------- ------
Change -30% +3% -27%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying services revenue 280 (47) - 12 245
--------------------------------- ------ ----------- ------------- ---------- ------
Change -17% +4% -13%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying gross margin 121 (18) - 5 108
--------------------------------- ------ ----------- ------------- ---------- ------
Gross margin % 17.4% +220bps 19.7%
--------------------------------- ------ ----------- ------------- ---------- ------
Commercial and administrative
costs (100) - - (4) (104)
--------------------------------- ------ ----------- ------------- ---------- ------
Restructuring (4) 3 - - (1)
--------------------------------- ------ ----------- ------------- ---------- ------
Research and development
costs (13) (3) - - (16)
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying profit before
financing 4 (18) - 1 (13)
--------------------------------- ------ ----------- ------------- ---------- ------
Change -450% +25% -425%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying operating margin 0.6% -320bps -2.4%
--------------------------------- ------ ----------- ------------- ---------- ------
*Translational foreign exchange impact ** 2015 year end
comparative
Financial overview
Underlying revenue of GBP548m was 25% lower (down 21% at actual
rates). Within this, original equipment revenues were down 30% and
service revenues declined 17%, primarily due to the downturn in the
offshore market.
Gross margins increased 220 basis points to just under 20% and
overall gross margin was GBP108m, GBP18m lower than in 2015.
Despite the sharply lower revenues, gross margins were largely held
as a result of the non-repeat of last year's GBP30m contract
provision which impacted the first half of 2015. As a result, the
business reported an underlying loss of GBP(13)m, compared to a
profit of GBP4m in H1 2015
Investment and business development
The order book declined 22% during the first half of this year,
with order intake of GBP362m, 36% down on H1 2015. In particular,
the offshore market has remained very weak, with the low level of
OE revenues reflecting the impact of the continued low oil price
and reduced investment by oil majors. Service revenues have been
more resilient, although also at subdued activity levels.
We have continued to look for opportunities to extend our
differentiated technology into non-oil related adjacent markets
including for other support, fishing and research vessels. These
applications place a similar value on the high-performance
characteristics of our Marine products. One of the most interesting
contract wins will be to design and equip the UK's new polar
research ship, the RRS Sir David Attenborough. In addition, there
have been a number of opportunities within the cruise ship sector,
including a GBP25m order to design and equip up to four new
Hurtigruten polar cruise vessels to operate off the coast of
Norway, announced in July (and therefore not in the closing order
book).
The Naval business has continued to perform well, having a
strong first half compared to the prior year. This included
delivery of the first MT30 gas turbine for the UK's new Type 26
Global Combat Ship, and the successful sea trials of the USS
Zumwalt. The MT30 was also selected by a new customer, the Italian
Navy.
Product development work within the business included increasing
our R&D focus on ship intelligence to develop a range of
products that can monitor equipment performance in real time, and
help facilitate full ship automation in the long-term.
We have also recently announced plans for a significant
investment in our azimuth thruster production facility in Rauma,
Finland. The GBP44m project will create a state-of-the-art
production facility for one of our most important product
groups.
The marine restructuring programme remains on track, following
last year's proposals to reduce our workforce by 1,000. By the end
of this year, we will have reduced our Marine workforce by around
20% since 2014. We continue to assess further cost restructuring
opportunities.
Marine outlook
With the continued decline with offshore oil & gas markets
impacting revenues the Marine business is becoming more balanced
across its different end markets. As a result, business performance
is starting to more visibly reflect the benefits of restructuring
and its strong positions in Naval and Merchant, positive features
as the business looks to the next few years.
However, in the near-term, expectations for the second half 2016
remain challenging. While the stronger Naval and Merchant order
book at the end of H1 provides some comfort for achieving
expectations for the full year, when combined with the ongoing
focus on cost reduction, there are continued weaknesses in offshore
oil & gas and potential order cancellations. As a result, we
continue to expect revenues and profits to be lower than those seen
in the second half of 2015.
Operational Review: Nuclear
H1 Underlying Acquisitions Foreign H1
GBPm 2015 change & disposals Exchange* 2016
--------------------------------- ------ ----------- ------------- ---------- ------
Order book ** 2,168 (210) - 2 1,960
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying revenue 309 44 - 3 356
--------------------------------- ------ ----------- ------------- ---------- ------
Change +14% +1% +15%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying OE revenue 110 30 - 1 141
--------------------------------- ------ ----------- ------------- ---------- ------
Change +27% +1% +28%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying services revenue 199 14 - 2 215
--------------------------------- ------ ----------- ------------- ---------- ------
Change +7% +1% +8%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying gross margin 49 1 - 1 51
--------------------------------- ------ ----------- ------------- ---------- ------
Gross margin % 15.9% -170bps 14.3%
--------------------------------- ------ ----------- ------------- ---------- ------
Commercial and administrative
costs (25) (8) - - (33)
--------------------------------- ------ ----------- ------------- ---------- ------
Restructuring (1) 1 - - -
--------------------------------- ------ ----------- ------------- ---------- ------
Research and development
costs (3) 3 - - -
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying profit before
financing 20 (3) - 1 18
--------------------------------- ------ ----------- ------------- ---------- ------
Change -15% +5% -10%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying operating margin 6.5% -170bps 5.1%
--------------------------------- ------ ----------- ------------- ---------- ------
*Translational foreign exchange impact ** 2015 year end comparative
Financial overview
Underlying revenue increased 14%, led by growth particularly in
original equipment activities in the submarines business. This
reflects the phasing of programmes across next generation and
refuelling projects as well as acceleration of the Vulcan test
facility decommissioning.
Gross margin was lower at 14.3%, reflecting the product mix
favouring lower margin government-led submarine projects. Below
gross margin, the change in treatment of R&D tax credits, which
significantly impacted the full year in 2015, produced an R&D
credit of GBP3m in the first half (H1 2015: nil), offset by
increased costs to support the increased volumes and higher
performance incentives within commercial and administrative costs.
As a result, underlying profit before financing was GBP3m lower
than the prior year, at GBP18m.
Investment and business developments
While order intake of GBP144m was GBP49m higher than the prior
period, the order book was GBP210m lower at GBP2.0bn, reflecting
the phasing of MoD order releases and both delays and contract
phasing within civil nuclear programmes in the UK, North America
and Europe.
Our civil nuclear business, which focuses on multi-year
engineering projects and specialist technical services,
concentrated its first half activities on its long-term
instrumentation & controls retrofit contracts in France and
Finland, together with the integration of the US R.O.V.
Technologies business (a provider of complementary remote visual
inspection services) acquired last year. In March, Nuclear also
announced the strengthening of the strategic collaboration started
in 2014 with the China National Nuclear Corporation, CNNC. This
includes specific engineering, consultancy and training services to
be provided by Rolls-Royce in a market expected to continue to grow
strongly and where we have a strong technology presence.
Our submarine activities focused on performance improvement
initiatives to support its long-term contracts for the UK Royal
Navy's nuclear submarine fleet, including delivery of the nuclear
propulsion system to power the Astute class submarines. Development
work on the new PWR3 power plant for Successor (the next generation
of Trident submarines) continues with contract extensions agreed in
preparation ahead of the government final investment decision. Work
on the older Vanguard-class Trident submarines included
implementing a refuelling programme. In addition, progress
continues on the decommissioning of the Naval Reactor Test
Establishment, HMS Vulcan, in Scotland.
An R&D programme was initiated together with a number of
partners to scope out the initial design phase for Small Modular
Reactors. These smaller, more flexible units offer the potential
for lower cost/lower scale and more flexible power generation in
future decades and directly build on the knowledge and specialist
skills of our Rolls-Royce Nuclear business.
Transformation projects within the Nuclear business have focused
on operational improvements and on people and culture. The
organisational design and management reduction is on track to
deliver against committed cost saving targets.
Nuclear outlook
The long-term outlook for Nuclear remains positive, with both
the civil and submarine businesses focused on delivering
cost-effective and value-added products and services with on time
deliveries to their core customers under long-term secure
aftermarket contracts. Confirmation by the UK Government of the
ongoing investment in the Successor submarine programme to replace
Trident, together with renewed activities in the civil market,
particularly in China, provide encouraging growth
opportunities.
In the near term, our focus is on sustaining the recent
operational improvements at our key UK facility to improve delivery
performance. At the same time we will be making the modest
investments set out above to explore the technical and market
opportunities for Small Modular Reactors. As a result, while
revenues and gross margins are expected to be largely unchanged
year on year, full year profit is expected to be lower.
Financial review
Underlying income statement
Six months to June
GBPm 2016 2015 Change
-------------------------------------------------- ----- ------ -------
Revenue at 2015 exchange rates 5,960 6,256 -296
-------------------------------------------------- ----- ------ -------
Translation to 2016 exchange rates 183 -
-------------------------------------------------- ----- ------ -------
Revenue 6,143 6,256 -113
-------------------------------------------------- ----- ------ -------
Gross profit 984 1,332 -348
-------------------------------------------------- ----- ------ -------
Commercial and administrative costs (518) (496) -22
-------------------------------------------------- ----- ------ -------
Restructuring (6) (45) +39
-------------------------------------------------- ----- ------ -------
Research and development costs (366) (378) +12
-------------------------------------------------- ----- ------ -------
Share of results of joint ventures and associates 45 43 +2
-------------------------------------------------- ----- ------ -------
Profit before financing at 2015 exchange rates 139 456 -317
-------------------------------------------------- ----- ------ -------
Translation to 2016 exchange rates 19 -
-------------------------------------------------- ----- ------ -------
Profit before financing 158 456 -298
-------------------------------------------------- ----- ------ -------
Net financing (54) (17) -37
-------------------------------------------------- ----- ------ -------
Profit before tax 104 439 -335
-------------------------------------------------- ----- ------ -------
Tax (27) (102) +75
-------------------------------------------------- ----- ------ -------
Profit for the year 77 337 -260
-------------------------------------------------- ----- ------ -------
Earnings per share (EPS) 4.20p 18.27p -14.07p
-------------------------------------------------- ----- ------ -------
Payments to shareholders 4.60p 9.27p -4.67p
-------------------------------------------------- ----- ------ -------
Gross R&D investment 638 580 +58
-------------------------------------------------- ----- ------ -------
Net R&D charge 380 378 +2
-------------------------------------------------- ----- ------ -------
Segmental analysis
Revenue Gross profit Profit before financing
-------------------- -------------------- ---------------------------
Six months to June
GBPm 2016 2015 Change 2016 2015 Change 2016 2015 Change
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Civil 3,126 3,285 -159 385 628 -243 22 248 -226
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Defence 965 973 -8 203 279 -76 123 184 -61
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Power Systems 1,009 1,039 -30 234 245 -11 11 17 -6
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Marine 524 695 -171 103 121 -18 (14) 4 -18
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Nuclear 353 309 +44 50 49 +1 17 20 -3
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Other 20 27 -7 11 7 +4 11 5 +6
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Intra-segment (37) (72) +35 (2) 3 -5 (2) 3 -5
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Central costs (29) (25) -4
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Group at 2015 exchange rates 5,960 6,256 -296 984 1,332 -348 139 456 -317
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Translation to 2016 exchange rates 183 49 19
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Group 6,143 6,256 -113 1,033 1,332 -299 158 456 -298
----------------------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Underlying revenue and underlying profit before financing are
discussed in the Business Highlights (page 3), the Group Trading
Summary (page 9) and the Operational Reviews (page11).
Underlying financing costs increased by GBP37m to GBP54m. Net
interest payable increased by GBP7m to GBP35m due to the issue of
$1.5bn of debt in the second half of 2015 and other underlying
financing costs increased by GBP6m to GBP19m. In addition, an
underlying gain of GBP24m in 2015 on realised foreign exchange
contracts which were settled to convert overseas dividends into
sterling did not recur.
Underlying taxation was GBP27m, an underlying tax rate of 26%
compared with 23% in 2015.
Underlying EPS decreased 77% to 4.20p, in line with profit for
the period.
Payments to shareholders are made in the form of C Shares,
details of which are set out on page 41. An interim payment of 4.6p
per share will be made.
Reported income statement
Six months to June
GBPm 2016 2015
-------------------------------------------------- -------- ------
Revenue 6,462 6,370
-------------------------------------------------- -------- ------
Gross profit 1,193 1,269
-------------------------------------------------- -------- ------
Other operating income 2 5
-------------------------------------------------- -------- ------
Commercial and administrative costs (605) (522)
-------------------------------------------------- -------- ------
Research and development costs (404) (404)
-------------------------------------------------- -------- ------
Share of results of joint ventures and associates 51 31
-------------------------------------------------- -------- ------
Operating profit 237 -379
-------------------------------------------------- -------- ------
Loss on disposal of businesses (1) -
-------------------------------------------------- -------- ------
Profit before financing 236 379
-------------------------------------------------- -------- ------
Net financing (2,386) (69)
-------------------------------------------------- -------- ------
Profit before tax (2,150) 310
-------------------------------------------------- -------- ------
Tax 378 50
-------------------------------------------------- -------- ------
Profit for the year (1,772) 360
-------------------------------------------------- -------- ------
Earnings per share (EPS) (96.72p) 19.51p
-------------------------------------------------- -------- ------
The changes in 2016 resulting from underlying trading are
described in the previous sections.
Consistent with past practice and IFRS, the Group provides both
reported and underlying figures. We believe underlying figures are
more representative of the trading performance, by excluding the
impact of period-end mark-to-market adjustments, principally the
GBP:USD hedge book. In addition, post-retirement financing and the
effects of acquisition accounting are excluded. The adjustments
between the underlying income statement and the reported income
statement are set out below and in more detail in note 2 to the
Condensed Financial Statements. This basis of presentation has been
applied consistently.
Reconciliation between underlying and reported results
Six months to 30 June
GBPm 2016 2015
---------------------------------------------------------- ----- -----
Underlying revenue 6,143 6,256
---------------------------------------------------------- ----- -----
Recognise revenue at exchange rate on date of transaction 319 114
---------------------------------------------------------- ----- -----
Reported revenue 6,462 6,370
---------------------------------------------------------- ----- -----
Profit before financing Financing Profit before tax
Six months to 30 June
GBPm 2016 2015 2016 2015 2016 2015
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Underlying 158 456 (54) (17) 104 439
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Mark-to-market adjustments on derivatives 4 (12) (2,155) (89) (2,151) (101)
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Related foreign exchange adjustments 203 87 (171) 27 32 114
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Movements on other financial instruments - - (8) (3) (8) (3)
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Effects of acquisition accounting (62) (63) - - (62) (63)
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Impairment of goodwill - (69) - - - (69)
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Exceptional restructuring (68) (11) - - (68) (11)
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Acquisitions and disposals (1) (3) - - (1) (3)
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Post-retirement schemes - - 3 13 3 13
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Other 2 (6) (1) - 1 (6)
------------------------------------------ ------------ ----------- ------- ---- --------- --------
Reported 236 379 (2,386) (69) (2,150) 310
------------------------------------------ ------------ ----------- ------- ---- --------- --------
The mark to market adjustments are principally driven by
movements in the GBP:USD and EUR:USD exchange rates which moved
from 1.48 to 1.34 and from 1.09 to 1.11 respectively during the
period 1 January 2016 to 30 June 2016. At each reporting date our
foreign exchange hedge book is included in the balance sheet at
fair value ('mark-to-market'). The movement in this valuation
during the period, after taking account of contracts settled, is
included in the reported profit. As the Group has a large hedge
book ($35bn), the movements can be significant, depending on
changes in exchange rate. In H1 2016 this resulted in a charge of
GBP2,155m.
The hedge book is held to manage the impact of changes in
exchange rates on future foreign currency income. Accordingly,
non-cash changes in its value are excluded from the underlying
results as they do not relate to the trading in the period.
Movements on other financial instruments relate to exchange
differences on risk and revenue sharing arrangements.
The effects of acquisition accounting in accordance with IFRS 3
are excluded from underlying profit so that all businesses are
measured on an equivalent basis. In addition, the impairment charge
in Marine of GBP69m was excluded in 2015.
Costs associated with the substantial closure or exit of a site,
facility or activity and significant organisation transformation
are classified as exceptional restructuring and excluded. In 2016,
these increased by GBP57m primarily representing costs of the
transformation programme.
Profits and losses arising on acquisitions and disposals during
the year are excluded.
Net financing on post-retirement schemes is excluded from
underlying profit.
Appropriate tax rates are applied to these adjustments,
depending on the relevant tax jurisdiction, the net effect of which
was a reduction of GBP405m to the underlying tax charge (2015
GBP152m reduction). In 2016, the most significant tax adjustment
was GBP377m in relation to mark-to-market adjustments of GBP2,155m.
These are predominantly held in the UK.
Summary balance sheet
GBPm 30 June 2016 31 December 2015
--------------------------------------------- ------------- -----------------
Intangible assets 4,990 4,645
--------------------------------------------- ------------- -----------------
Property, plant and equipment 3,718 3,490
--------------------------------------------- ------------- -----------------
Net working capital (1) (125) (501)
--------------------------------------------- ------------- -----------------
Net funds (2) (712) (111)
--------------------------------------------- ------------- -----------------
Provisions (777) (640)
--------------------------------------------- ------------- -----------------
Net post-retirement scheme surplus/(deficit) 141 (77)
--------------------------------------------- ------------- -----------------
Net financial assets and liabilities (2) (3,954) (1,883)
--------------------------------------------- ------------- -----------------
Joint ventures and associates 765 576
--------------------------------------------- ------------- -----------------
Other net assets and liabilities (3) (204) (483)
--------------------------------------------- ------------- -----------------
Net assets 3,842 5,016
--------------------------------------------- ------------- -----------------
Other items
--------------------------------------------- ------------- -----------------
US$ hedge book (US$bn) 34.6 28.8
--------------------------------------------- ------------- -----------------
TotalCare assets 3,275 2,994
--------------------------------------------- ------------- -----------------
TotalCare liabilities (915) (783)
--------------------------------------------- ------------- -----------------
Net TotalCare assets 2,360 2,211
--------------------------------------------- ------------- -----------------
Gross customer finance commitments 253 269
--------------------------------------------- ------------- -----------------
Net customer finance commitments 62 54
--------------------------------------------- ------------- -----------------
1 Net working capital includes inventories, trade and other
receivables, trade and other payables and tax assets and
liabilities (other than deferred).
2 Net funds includes an asset of GBP332m (2015 asset GBP13m) of
the fair value of financial instruments which are held to hedge the
fair value of borrowings.
3 Other includes other investments and deferred tax assets and
liabilities.
Intangible assets (note 8) increased by GBP345m mainly due to
exchange differences of GBP314m. Additions of GBP232m (including
GBP39m of certification and participation fees, GBP54m of
development costs and GBP90m of contractual aftermarket rights)
were largely offset by amortisation of GBP199m.
The carrying values of the intangible assets are assessed for
impairment against the present value of forecast cash flows
generated by the intangible asset. The principal risks remain:
reductions in assumed market share; programme timings; increases in
unit cost assumptions; and adverse movements in discount rates.
Property, plant and equipment (note 9) increased by GBP228m.
Additions of GBP191m were largely offset by depreciation of
GBP195m. Exchange differences were GBP206m and GBP41m was added
from the reclassification of joint ventures to joint
operations.
The net post-retirement scheme deficit surplus/(deficit) (note
11) has increased by GBP218m largely due to movements on discount
rates in the period. In the UK, the discount rate reduced from 3.6%
to 2.7%, which was the main component of an increase in pension
liabilities of GBP1.7bn. As the pension assets are managed to hedge
changes in the valuation of the liabilities, these increased by
GBP2.2bn, a net movement in the UK of GBP0.5bn. The deficit on
overseas schemes increased by GBP0.3bn (including GBP0.1bn of
foreign exchange) as many of these (most significantly in Germany
and US healthcare schemes) are unfunded and consequently the
reduction in the discount rate increases the post-retirement
liabilities with no off-setting change in assets.
Movements in net funds are shown overleaf.
Investments in joint ventures and associates increased by
GBP189m largely due to a GBP154m increase in the Group's share of
Approved Maintenance Centre joint ventures. The reclassification of
joint ventures to joint operations (GBP57m, see page31), was
broadly offset by exchange gains of GBP47m.
Provisions largely relate to warranties and guarantees provided
to secure the sale of OE and services. The increase of GBP137m
includes reclassifications from accruals of GBP92m, following a
review of accounting consistency during the period. The remaining
increase of GBP45m includes additional charges of GBP132m,
principally for warranty and guarantees and restructuring, and
foreign exchange movements of GBP50m, offset by utilisation of
GBP100m.
Net financial assets and liabilities relate to the fair value of
foreign exchange, commodity and interest rate contracts, financial
RRSAs, set out in detail in note 10. All contracts continue to be
held for hedging purposes. The fair value of foreign exchange
derivatives is a financial liability of GBP3.7bn, an increase of
GBP2.1bn in the period, mainly a result of the strengthening of the
US dollar.
The US$ hedge book increased by 20% to US$35bn. This represents
around 5 1/2 years of net exposure and has an average book rate of
GBP1 to US$1.57.
Net TotalCare assets relate to Long-Term Service Agreement
(LTSA) contracts in the Civil Aerospace business, including the
flagship services product TotalCare. These assets represent the
timing difference between the recognition of income and costs in
the income statement and cash receipts and payments.
Customer financing facilitates the sale of OE and services by
providing financing support to certain customers. Where such
support is provided by the Group, it is generally to customers of
the Civil Aerospace business and takes the form of various types of
credit and asset value guarantees. These exposures produce
contingent liabilities that are outlined in note 12. The contingent
liabilities represent the maximum aggregate discounted gross and
net exposure in respect of delivered aircraft, regardless of the
point in time at which such exposures may arise.
The reduction in gross exposures is a result of guarantees
expiring.
Summary funds flow statement
Six months to 30 June
GBPm 2016 2015 Change
-------------------------------------------------------------------- ------ -------- -------
Underlying profit before tax 104 439 -335
-------------------------------------------------------------------- ------ -------- -------
Depreciation and amortisation 335 317 +18
-------------------------------------------------------------------- ------ -------- -------
Movement in net working capital (235) (747) +512
-------------------------------------------------------------------- ------ -------- -------
Expenditure on property, plant and equipment and intangible assets (539) (391) -148
-------------------------------------------------------------------- ------ -------- -------
Other 8 (90) +98
-------------------------------------------------------------------- ------ -------- -------
Trading cash flow (327) (472) +145
-------------------------------------------------------------------- ------ -------- -------
Contributions to defined benefit pensions in excess of PBT charge (10) (25) +15
-------------------------------------------------------------------- ------ -------- -------
Taxation paid (62) (79) +17
-------------------------------------------------------------------- ------ -------- -------
Free cash flow (399) (576) +177
-------------------------------------------------------------------- ------ -------- -------
Exceptional restructuring expenditure (15) - -15
-------------------------------------------------------------------- ------ -------- -------
Shareholder payments (168) (165) -3
-------------------------------------------------------------------- ------ -------- -------
Share buyback - (433) +433
-------------------------------------------------------------------- ------ -------- -------
Increase in share of joint ventures (154) - -154
-------------------------------------------------------------------- ------ -------- -------
Other acquisitions/disposals 7 (104) +111
-------------------------------------------------------------------- ------ -------- -------
Foreign exchange 128 (31) +159
-------------------------------------------------------------------- ------ -------- -------
Change in net funds (601) (1,309)
-------------------------------------------------------------------- ------ --------
Opening net funds (111) 666
-------------------------------------------------------------------- ------ --------
Closing net funds (712) (643)
-------------------------------------------------------------------- ------ --------
Movement in working capital - the GBP235m increase includes
higher levels of inventory due to a forecast increase in deliveries
in the second half of the year, partly offset by an increase in
deposits and advance payments. The increase is lower than the
previous year, reflecting the increase in deposits and a reversal
of the payables reduction experienced in 2015 due to the timing of
sales and purchases.
Expenditure on property, plant and equipment and intangibles -
the increase largely reflects higher capital spend (GBP50m),
certification costs (GBP23m), capitalised development costs
(GBP45m) and contractual aftermarket rights (GBP16m).
Pensions - the reduction in pension contributions in excess of
the income statement charge arose principally in the UK due to a
reduction of deficit reduction payments and the non-recurrence of a
past-service credit in 2015.
Shareholder payments - the change in shareholder payments
reflects the difference between the 2014 and 2015 interim payments,
which are paid in the following January. The reduction in
shareholder payments announced in February 2016 will be reflected
in cash from the second half of 2016.
The derivation of the summary funds flow statement above from
the reported cash flow statement is included in the appendix.
Condensed consolidated income statement
For the half-year ended 30 June 2016
Half-year Half-year Year to
to 30 June to 30 June 31 December
2016 2015 2015
Notes GBPm GBPm GBPm
------------------------------------------------------------ ---- ---------- ----------- ----------- -----------
Revenue 2 6,462 6,370 13,725
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Cost of sales (5,269) (5,101) (10,459)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Gross profit 1,193 1,269 3,266
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Other operating income 2 5 10
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Commercial and administrative costs (605) (522) (1,059)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Research and development costs 3 (404) (404) (818)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Share of results of joint ventures and associates 51 31 100
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Operating profit 237 379 1,499
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
(Loss)/profit on disposal of businesses (1) - 2
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Profit before financing and taxation 236 379 1,501
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Financing income 4 36 86 115
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Financing costs 4 (2,422) (155) (1,456)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Net financing (2,386) (69) (1,341)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Profit before taxation (1) (2,150) 310 160
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Taxation 5 378 50 (76)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Profit for the period (1,772) 360 84
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Attributable to:
============================================================ ==== ========== =========== =========== ===========
Ordinary shareholders (1,772) 360 83
====================================================================== ========== =========== =========== ===========
Non-controlling interests - - 1
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Profit for the period (1,772) 360 84
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Earnings per ordinary share attributable to shareholders 6
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Basic (96.72p) 19.51p 4.51p
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Diluted (96.72p) 19.35p 4.48p
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Underlying earnings per ordinary share are shown in note 6.
Payments to ordinary shareholders in respect of the period 7
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Pence per share 4.60p 9.27p 16.37p
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Total 85 170 301
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
(1) Underlying profit before taxation 2 104 439 1,432
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
All activities comprise continuing operations.
Condensed consolidated statement of comprehensive income
For the half-year ended 30 June 2016
Half-year Half-year Year to
to 30 June to 30 June 31 December
2016 2015 2015
Notes GBPm GBPm GBPm
---------------------------------------------------------------- ------ ----------- ----------- ------------
Profit/(loss) for the period (1,772) 360 84
------------------------------------------------------------------ ------ ----------- ----------- ------------
Other comprehensive income (OCI)
---------------------------------------------------------------- ------ ----------- ----------- ------------
Items that will not be reclassified to profit or loss
---------------------------------------------------------------- ------ ----------- ----------- ------------
Movements in post-retirement schemes 11 346 (722) (722)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Share of OCI of joint ventures and associates (2) - -
---------------------------------------------------------------- ------ ----------- ----------- ------------
Related tax movements (123) 250 257
------------------------------------------------------------------ ------ ----------- ----------- ------------
221 (472) (465)
---------------------------------------------------------------- ------ ----------- ----------- ------------
Items that may be reclassified to profit or loss
---------------------------------------------------------------- ------ ----------- ----------- ------------
Foreign exchange translation differences on foreign operations 557 (280) (129)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Reclassification to income statement on disposal of businesses - - 1
------------------------------------------------------------------ ------ ----------- ----------- ------------
Share of OCI of joint ventures and associates (6) (12) (19)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Related tax movements 3 (3) (2)
------------------------------------------------------------------ ------ ----------- ----------- ------------
554 (295) (149)
---------------------------------------------------------------- ------ ----------- ----------- ------------
Total comprehensive income for the period (997) (407) (530)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Attributable to:
---------------------------------------------------------------- ------ ----------- ----------- ------------
Ordinary shareholders (997) (407) (530)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Non-controlling interests - - -
---------------------------------------------------------------- ------ ----------- ----------- ------------
Total comprehensive expense for the period (997) (407) (530)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Condensed consolidated balance sheet
At 30 June 2016
30 June 30 June 31 December
2016 2015 2015
Notes GBPm GBPm GBPm
-------------------------------------------- ------ --------- --------- ------------
ASSETS
-------------------------------------------- ------ --------- --------- ------------
Non-current assets
-------------------------------------------- ------ --------- --------- ------------
Intangible assets 8 4,990 4,476 4,645
-------------------------------------------- ------ --------- --------- ------------
Property, plant and equipment 9 3,718 3,312 3,490
-------------------------------------------- ------ --------- --------- ------------
Investments - joint ventures and associates 765 532 576
-------------------------------------------- ------ --------- --------- ------------
Investments - other 37 29 33
-------------------------------------------- ------ --------- --------- ------------
Other financial assets 10 351 185 83
-------------------------------------------- ------ --------- --------- ------------
Deferred tax assets 617 419 318
-------------------------------------------- ------ --------- --------- ------------
Post-retirement scheme surpluses 11 1,545 1,016 1,063
-------------------------------------------- ------ --------- --------- ------------
12,023 9,969 10,208
-------------------------------------------- ------ --------- --------- ------------
Current assets
============================================ ====== ========= ========= ============
Inventories 3,165 2,930 2,637
============================================ ====== ========= ========= ============
Trade and other receivables 7,145 5,624 6,244
============================================ ====== ========= ========= ============
Taxation recoverable 16 16 23
============================================ ====== ========= ========= ============
Other financial assets 10 45 47 29
============================================ ====== ========= ========= ============
Short-term investments 1 7 2
============================================ ====== ========= ========= ============
Cash and cash equivalents 2,287 1,581 3,176
============================================ ====== ========= ========= ============
Assets held for sale 5 3 5
-------------------------------------------- ------ --------- --------- ------------
12,664 10,208 12,116
-------------------------------------------- ------ --------- --------- ------------
Total assets 24,687 20,177 22,324
-------------------------------------------- ------ --------- --------- ------------
LIABILITIES
-------------------------------------------- ------ --------- --------- ------------
Current liabilities
-------------------------------------------- ------ --------- --------- ------------
Borrowings (120) (269) (419)
-------------------------------------------- ------ --------- --------- ------------
Other financial liabilities 10 (521) (218) (331)
-------------------------------------------- ------ --------- --------- ------------
Trade and other payables (7,524) (6,555) (6,923)
-------------------------------------------- ------ --------- --------- ------------
Tax liabilities (119) (159) (164)
-------------------------------------------- ------ --------- --------- ------------
Provisions for liabilities and charges (408) (418) (336)
-------------------------------------------- ------ --------- --------- ------------
(8,692) (7,619) (8,173)
-------------------------------------------- ------ --------- --------- ------------
Non-current liabilities
-------------------------------------------- ------ --------- --------- ------------
Borrowings (3,212) (1,937) (2,883)
-------------------------------------------- ------ --------- --------- ------------
Other financial liabilities 10 (3,497) (895) (1,651)
-------------------------------------------- ------ --------- --------- ------------
Trade and other payables (2,807) (2,002) (2,317)
-------------------------------------------- ------ --------- --------- ------------
Tax liabilities (1) (10) (1)
-------------------------------------------- ------ --------- --------- ------------
Deferred tax liabilities (863) (906) (839)
-------------------------------------------- ------ --------- --------- ------------
Provisions for liabilities and charges (369) (314) (304)
-------------------------------------------- ------ --------- --------- ------------
Post-retirement scheme deficits 11 (1,404) (1,084) (1,140)
-------------------------------------------- ------ --------- --------- ------------
(12,153) (7,148) (9,135)
-------------------------------------------- ------ --------- --------- ------------
Total liabilities (20,845) (14,767) (17,308)
-------------------------------------------- ------ --------- --------- ------------
Net assets 3,842 5,410 5,016
-------------------------------------------- ------ --------- --------- ------------
EQUITY
-------------------------------------------- ------ --------- --------- ------------
Attributable to ordinary shareholders
-------------------------------------------- ------ --------- --------- ------------
Called-up share capital 367 367 367
-------------------------------------------- ------ --------- --------- ------------
Share premium account 180 180 180
-------------------------------------------- ------ --------- --------- ------------
Capital redemption reserve 159 164 161
-------------------------------------------- ------ --------- --------- ------------
Cash flow hedging reserve (105) (93) (100)
-------------------------------------------- ------ --------- --------- ------------
Other reserves 508 (205) (51)
-------------------------------------------- ------ --------- --------- ------------
Retained earnings 2,731 4,992 4,457
-------------------------------------------- ------ --------- --------- ------------
3,840 5,405 5,014
-------------------------------------------- ------ --------- --------- ------------
Non-controlling interests 2 5 2
-------------------------------------------- ------ --------- --------- ------------
Total equity 3,842 5,410 5,016
-------------------------------------------- ------ --------- --------- ------------
Condensed consolidated cash flow statement
For the half-year ended 30 June 2016
Half-year Half-year Year to
to 30 June to 30 June 31 December
2016 2015 2015
Notes GBPm GBPm GBPm
------------------------------------------------------------------- ------ ------------ ------------ -------------
Reconciliation of cash flows from operating activities
------------------------------------------------------------------- ------ ------------ ------------ -------------
Operating profit 237 379 1,499
------------------------------------------------------------------- ------ ------------ ------------ -------------
Loss on disposal of property, plant and equipment 2 - 8
------------------------------------------------------------------- ------ ------------ ------------ -------------
Share of results of joint ventures and associates (51) (31) (100)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Dividends received from joint ventures and associates 14 16 63
------------------------------------------------------------------- ------ ------------ ------------ -------------
Amortisation of intangible assets 8 201 268 432
------------------------------------------------------------------- ------ ------------ ------------ -------------
Depreciation of property, plant and equipment 9 196 181 378
------------------------------------------------------------------- ------ ------------ ------------ -------------
Impairment of investments - - 2
------------------------------------------------------------------- ------ ------------ ------------ -------------
Increase/(decrease) in provisions 86 (44) (151)
------------------------------------------------------------------- ------ ------------ ------------ -------------
(Increase)/decrease in inventories (339) (260) 63
------------------------------------------------------------------- ------ ------------ ------------ -------------
Increase in trade and other receivables (459) (234) (836)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Increase/(decrease) in trade and other payables 514 (227) 242
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash flows on other financial assets and liabilities (139) (122) (305)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net defined benefit post-retirement cost recognised in operating
profit 11 118 102 213
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash funding of defined benefit post-retirement schemes 11 (128) (127) (259)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Share-based payments 14 5 5
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net cash inflow/(outflow) from operating activities before taxation 266 (94) 1,254
------------------------------------------------------------------- ------ ------------ ------------ -------------
Taxation paid (62) (79) (160)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net cash inflow /(outflow) from operating activities 204 (173) 1,094
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash flows from investing activities
------------------------------------------------------------------- ------ ------------ ------------ -------------
Additions of unlisted investments - - (6)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Additions of intangible assets 8 (232) (134) (408)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Disposals of intangible assets - - 4
------------------------------------------------------------------- ------ ------------ ------------ -------------
Purchases of property, plant and equipment (307) (258) (487)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Government grants received - 1 8
------------------------------------------------------------------- ------ ------------ ------------ -------------
Disposals of property, plant and equipment 10 6 33
------------------------------------------------------------------- ------ ------------ ------------ -------------
Acquisitions of businesses - (5) (5)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Disposal of discontinued operations - (99) (121)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Disposals of businesses 1 - 2
------------------------------------------------------------------- ------ ------------ ------------ -------------
Increase in share in joint ventures (154) - -
------------------------------------------------------------------- ------ ------------ ------------ -------------
Other investments in joint ventures and associates (11) (5) (15)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash and cash equivalents in joint ventures reclassified as joint
operations 5 - -
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net cash outflow from investing activities (688) (494) (995)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash flows from financing activities
------------------------------------------------------------------- ------ ------------ ------------ -------------
Repayment of loans 10 (325) (1) (54)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Proceeds from increase in loans - 47 1,150
------------------------------------------------------------------- ------ ------------ ------------ -------------
Capital element of finance lease payments - - (1)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net cash flow from (decrease)/increase in borrowings (325) 46 1,095
------------------------------------------------------------------- ------ ------------ ------------ -------------
Interest received 7 5 5
------------------------------------------------------------------- ------ ------------ ------------ -------------
Interest paid (54) (48) (58)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Interest element of finance lease payments (1) - (2)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Increase in short-term investments 1 - 5
------------------------------------------------------------------- ------ ------------ ------------ -------------
Issue of ordinary shares and cash received on share-based payments
vesting - 31 32
------------------------------------------------------------------- ------ ------------ ------------ -------------
Purchase of ordinary shares - share buyback -- (433) (433)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Purchase of ordinary shares for share schemes (20) (1) (2)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Redemption of C Shares (168) (165) (421)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net cash (outflow)/inflow from financing activities (560) (565) 221
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net (decrease)/increase in cash and cash equivalents (1,044) (1,232) 320
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash and cash equivalents at 1 January 3,176 2,862 2,862
------------------------------------------------------------------- ------ ------------ ------------ -------------
Exchange gains/(losses) on cash and cash equivalents 155 (49) (6)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash and cash equivalents at period end 2,287 1,581 3,176
------------------------------------------------------------------- ------ ------------ ------------ -------------
Half-year Half-year Year to
to 30 June to 30 June 31 December
2016 2015 2015
GBPm GBPm GBPm
--------------------------------------------------------------------------- ------------ ------------ -------------
Reconciliation of movements in cash and cash equivalents to movements in
net funds
--------------------------------------------------------------------------- ------------ ------------ -------------
Net (decrease)/increase in cash and cash equivalents (1,044) (1,232) 320
--------------------------------------------------------------------------- ------------ ------------ -------------
Net cash flow from decrease/(increase) in borrowings 325 (46) (1,095)
--------------------------------------------------------------------------- ------------ ------------ -------------
Net cash flow from decrease in short-term investments (1) - (5)
--------------------------------------------------------------------------- ------------ ------------ -------------
Change in net funds resulting from cash flows (720) (1,278) (780)
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds joint ventures reclassified to joint operations (9) - -
--------------------------------------------------------------------------- ------------ ------------ -------------
Exchange gains/(losses) on net funds 128 (31) 3
--------------------------------------------------------------------------- ------------ ------------ -------------
Fair value adjustments (319) 83 45
--------------------------------------------------------------------------- ------------ ------------ -------------
Movement in net funds (920) (1,226) (732)
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds at 1 January excluding the fair value of swaps (124) 608 608
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds at period end excluding the fair value of swaps (1,044) (618) (124)
--------------------------------------------------------------------------- ------------ ------------ -------------
Fair value of swaps hedging fixed rate borrowings 332 (25) 13
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds at period end (712) (643) (111)
--------------------------------------------------------------------------- ------------ ------------ -------------
The movement in net funds (defined by the Group as including the
items shown below) is as follows:
Reclassifications
---------------------
Joint
ventures to
At 1 January Exchange Fair value joint At 30 June
2016 Funds flow differences adjustments operations Other 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Cash at bank and in
hand 662 161 65 - 5 - 893
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Money market funds 783 (258) 13 - - - 538
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Short-term deposits 1,731 (952) 77 - - - 856
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Cash and cash
equivalents 3,176 (1,049) 155 - 5 - 2,287
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Investments 2 (1) - - - - 1
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Current borrowings
(excluding overdrafts) (417) 325 (12) - (9) (4) (117)
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Non-current borrowings (2,833) - (10) (319) - 4 (3,158)
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Finance leases (52) - (5) - - - (57)
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Net funds excluding the
fair value of swaps (124) (725) 128 (319) (4) - (1,044)
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Fair value of swaps
hedging fixed rate
borrowings 13 319 332
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Net funds (111) (725) 128 - (4) - (712)
----------------------- -------------- ----------- ------------- ------------- ------------- ------ -----------
Condensed consolidated statement of changes in equity
For the half-year ended 30 June 30, 2016
Attributable to ordinary shareholders
-------------------------------------------------------------------------
Cash
Capital flow Other Retained
Share Share redemption hedging reserves earnings Non-controlling Total
capital premium reserve reserve (1) (2) Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
At 1 January
2015 376 179 159 (81) 78 5,671 6,382 5 6,387
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Total
comprehensive
income for
the period - - - (12) (283) (112) (407) - (407)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Arising on
issues of
ordinary
shares - 1 - - - -- 1 - 1
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Issue of C
Shares - - (170) - - 1 (169) - (169)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Redemption of
C Shares - - 166 - - (166) - - -
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Ordinary
shares
purchased -
buyback (4) - - - - - (433) (433) - (433)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Ordinary
shares
cancelled (4) (9) - 9 - - - - - -
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Ordinary
shares
purchased -
other - - - - - (1) (1) - (1)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Share-based
payments -
direct to
equity (3) - - - - - 35 35 - 35
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Related tax
movements - - - - - (3) (3) - (3)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Other changes
in equity in
the period (9) 1 5 - - (567) (570) - (570)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
At June 30,
2015 367 180 164 (93) (205) 4,992 5,405 5 5,410
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Total
comprehensive
income for
the period - - - (7) 154 (270) (123) - (123)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Issue of C
Shares - - (260) - - 1 (259) - (259)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Redemption of
C Shares - - 257 - - (257) - - -
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Ordinary
shares
purchased - - - - - (1) (1) - (1)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Share-based
payments -
direct to
equity (3) - - - - - (5) (5) - (5)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Disposal of
business - - - - - - - (3) (3)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Related tax
movements - - - - - (3) (3) - (3)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Other changes
in equity in
the period - - (3) - - (265) (268) (3) (271)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
At 31 December
2015 367 180 161 (100) (51) 4,457 5,014 2 5,016
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Total
comprehensive
income for
the period - - - (5) 559 (1,551) (997) - (997)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Issue of C
Shares - - (171) - - 1 (170) - (170)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Redemption of
C Shares - - 169 - - (169) - - -
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Ordinary
shares
purchased - - - - - (20) (20) - (20)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Share-based
payments -
direct to
equity (3) - - - - - 14 14 - 14
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Related tax
movements - - - - - (1) (1) - (1)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
Other changes
in equity in
the period - - (2) - - (175) (177) - (177)
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
At 30 June
2016 367 180 159 (105) 508 2,731 3,840 2 3,842
-------------- --------- --------- ----------- -------- --------- --------- ------ ---------------- ---------
(1) Other reserves include a merger reserve of GBP3m and a
translation reserve of GBP505m.
(2) At 30 June 2016, 6,821,060 ordinary shares with a book value
of GBP56m were held for the purposes of share-based payment plans
and included in retained earnings. During the period, the Company
acquired 2,847,750 ordinary shares through purchases on the London
Stock Exchange for use in share-based payment plans.
(3) Share-based payments- direct to equity is the net of the
credit to equity in respect of the share-based charge to the income
statement and the actual cost of shares vesting in the period,
excluding those vesting from shares already held.
(4) Following the completion of the sale of the Energy business
to Siemens on 1 December 2014 and further to the announcement on 19
June 2014 of a GBP1bn share buyback, the Company put in place a
programme to enable the purchase of its ordinary shares. The aim of
the buyback was to reduce the issued share capital of the Company,
helping enhance returns for shareholders. In the period to 31
December 2014, 8,215,000 shares were purchased at an average price
of 840p. These shares were cancelled. In the period to 30 June
2015, 46,016,303 shares were purchased at an average price of 937p.
44,016,303 of these shares were cancelled and 2,000,000 were
retained for use in share-based payment plans.
1 Basis of preparation and accounting policies
Reporting entity
Rolls--Royce Holdings plc is a company domiciled in the UK.
These condensed consolidated half-year financial statements of the
Company as at and for the six months ended 30 June 2016 comprise
the Company and its subsidiaries (together referred to as the
"Group") and the Group's interests in joint arrangements and
associates.
The consolidated financial statements of the Group as at and for
the year ended 31 December 2015 (2015 Annual Report) are available
upon request from the Company Secretary, Rolls-----Royce Holdings
plc, 62 Buckingham Gate, London SW1E 6AT.
Statement of compliance
These condensed consolidated half-year financial statements have
been prepared in accordance with IAS 34 Interim Financial Reporting
as adopted by the European Union. They do not include all of the
information required for full annual statements, and should be read
in conjunction with the 2015 Annual Report.
The comparative figures for the financial year 31 December 2015
are not the Group's statutory accounts for that financial year.
Those accounts have been reported on by the Group's auditors and
delivered to the registrar of companies. The report of the auditors
was (i) unqualified, (ii) did not include a reference to any
matters to which the auditors drew attention by way of emphasis
without qualifying their report, and (iii) did not contain a
statement under section 498(2) or (3) of the Companies Act
2006.
The Board of directors approved the condensed consolidated
half-year financial statements on 27 July 2016.
Significant accounting policies
The accounting policies applied by the Group in these condensed
consolidated half-year financial statements are the same as those
that applied to the consolidated financial statements of the Group
for the year ended 31 December 2015 (International Financial
Reporting Standards issued by the International Accounting
Standards Board (IASB), as adopted for use in the EU effective at
31 December 2015).
During the period, the Group has reassessed the categorisation
of joint arrangements. As a result of this review, certain
entities, previously classified as joint ventures, have been
reclassified as joint operations from 1 January 2016. This
reclassification does not affect profit before tax or net assets,
but the Group's share of the individual income statement and
balance sheet categories are included on a proportional basis,
rather than as a single figure. The adjustment to the opening
balance was to reclassify GBP57m of investments in joint ventures
to: property, plant and equipment (GBP41m), inventory (GBP19m),
receivables (GBP18m), cash (GBP5m), payables (GBP17m) and
borrowings (GBP9m). In addition, following a review of consistency,
GBP92m of accruals have been reclassified as provisions. Prior
figures have not been restated.
Key sources of estimation uncertainty
In applying the accounting policies, management has made
appropriate estimates in many areas, and the actual outcome may
differ from those calculated. The key sources of estimation
uncertainty at the balance sheet date were the same as those that
applied to the consolidated financial statements of the Group for
the year ended 31 December 2015.
2 Analysis by business segment
The analysis by Divisions (business segment) is presented in
accordance with IFRS 8 Operating segments, on the basis of those
segments whose operating results are regularly reviewed by the
Board (the Chief Operating Decision Maker as defined by IFRS
8).
Civil development, manufacture, marketing and sales of
commercial aero engines and aftermarket services.
Defence development, manufacture, marketing and sales of
military aero engines and aftermarket services.
Power Systems development, manufacture, marketing and sales of
reciprocating engines and power systems.
Marine development, manufacture, marketing and sales of
marine-power propulsion systems and aftermarket services.
Nuclear development, manufacture, marketing and sales of nuclear
systems for civil power generation and naval propulsion
systems.
The operating results are prepared on an underlying basis, which
the Board considers reflects better the economic substance of the
Group's trading during the year. The principles adopted to
determine the underlying results are:
Underlying revenues - Where revenues are denominated in a
currency other than the functional currency of the Group
undertaking, these reflect the achieved exchange rates arising on
settled derivative contracts.
Underlying profit before financing - Where transactions are
denominated in a currency other than the functional currency of the
Group undertaking, this reflects the transactions at the achieved
exchange rates on settled derivative contracts. In addition,
adjustments have been made to exclude one-off past-service credits
on post-retirement schemes, exceptional restructuring, profits or
losses on acquisitions and disposals and eliminating charges
recognised as a result of recognising assets in acquired businesses
at fair value.
Underlying profit before taxation - In addition to those
adjustments in underlying profit before financing:
- Include amounts realised from settled derivative contracts and
revaluation of relevant assets and liabilities to exchange rates
forecast to be achieved from future settlement of derivative
contracts.
- Exclude unrealised amounts arising from revaluations required
by IAS 39 Financial Instruments: Recognition and Measurement,
changes in value of financial RRSA contracts arising from changes
in forecast payments, and the net impact of financing costs related
to post-retirement scheme benefits.
Taxation - the tax effect of the adjustments above are excluded
from the underlying tax charge. In addition changes in the amount
of recoverable advance corporation tax recognised that arises from
the above adjustments are also excluded.
This analysis also includes a reconciliation of the underlying
results to those reported in the consolidated income statement.
The 2016 underlying results below are shown at 2015 exchange
rates, with the adjustment to 2016 exchange rates shown
separately.
Civil Defence Power Systems Marine Nuclear Inter-segment Total reportable segments
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
For the half-year ended 30
June 2016
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
original equipment 1,437 396 662 291 140 (18) 2,908
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
aftermarket services 1,689 569 347 233 213 (19) 3,032
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Total underlying revenue at
2015 exchange rates 3,126 965 1,009 524 353 (37) 5,940
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Translation to 2016 exchange
rates 45 37 75 24 3 (2) 182
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Total underlying revenue 3,171 1,002 1,084 548 356 (39) 6,122
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Gross profit 385 203 234 103 50 (2) 973
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Commercial and
administrative costs (152) (58) (146) (100) (33) - (489)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Restructuring (2) (3) - (1) - - (6)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Research and development
costs (245) (28) (77) (16) - - (366)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Share of results of joint
ventures and associates 36 9 - - - - 45
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying profit before
financing and taxation at
2015 exchange rates 22 123 11 (14) 17 (2) 157
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Translation to 2016 exchange
rates 9 5 2 1 1 - 18
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying profit before
financing and taxation 31 128 13 (13) 18 (2) 175
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
For the half-year ended 30
June 2015 (*)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
original equipment 1,516 368 684 415 110 (41) 3,052
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
aftermarket services 1,769 605 355 280 199 (31) 3,177
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Total underlying revenue 3,285 973 1,039 695 309 (72) 6,229
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Gross profit 628 279 245 121 49 3 1,325
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Commercial and
administrative costs (140) (63) (143) (100) (25) - (471)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Restructuring (23) (15) (2) (4) (1) - (45)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Research and development
costs (255) (27) (82) (13) (3) - (380)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Share of results of joint
ventures and associates 38 10 (1) - - - 47
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying profit before
financing and taxation 248 184 17 4 20 3 476
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
* As reported in the 2015 Annual Report, the basis for the allocation of Civil revenues on
linked TotalCare contracts between OE and aftermarket was reviewed and amendments made to
reflect better the commercial substance of the combined contracts. Historically, the allocation
has resulted in original equipment revenue and aftermarket revenue reflecting the contractual
terms rather than the commercial substance of the contracts. The 2015 half-year figures have
been restated on the same basis
----------------------------------------------------------------------------------------------------------------------
For the year ended 31
December 2015
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
original equipment 3,258 801 1,618 773 251 (53) 6,648
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
aftermarket services 3,675 1,234 767 551 436 (53) 6,610
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Total underlying revenue 6,933 2,035 2,385 1,324 687 (106) 13,258
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Gross profit 1,526 579 635 260 111 7 3,118
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Commercial and
administrative costs (296) (124) (275) (201) (53) - (949)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Restructuring (7) (8) (4) (16) (2) - (37)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Research and development
costs (515) (73) (162) (28) 14 - (764)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Share of results of joint
ventures and associates 104 19 - - - - 123
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying profit before
financing and taxation 812 393 194 15 70 7 1,491
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Reconciliation to reported results
Total reportable Other businesses* Underlying
segments and corporate Total underlying adjustments Reported results
GBPm GBPm GBPm GBPm GBPm
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
For the half-year
ended 30 June 2016
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
original equipment 2,908 8 2,916 258 3,174
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
aftermarket
services 3,032 12 3,044 244 3,288
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Total underlying
revenue at 2015
exchange rates 5,940 20 5,960 502 6,462
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Translation to 2016
exchange rates 182 1 183 (183) -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Total revenue 6,122 21 6,143 319 6,462
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Gross profit 973 11 984 209 1,193
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Other operating
income - - - 2 2
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Commercial and
administrative
costs (489) (29) (518) (87) (605)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Restructuring (6) - (6) 6 -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Research and
development costs (366) - (366) (38) (404)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Share of results of
joint ventures and
associates 45 - 45 6 51
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
financing and
taxation at 2015
exchange rates 157 (18) 139 98 237
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Translation to 2016
exchange rates 18 1 19 (19) -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Loss on disposal of
businesses - - - (1) (1)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
financing and
taxation 175 (17) 158 78 236
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Net financing (54) (54) (2,332) (2,386)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
taxation (71) 104 (2,254) (2,150)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Taxation (27) (27) 405 378
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit for the
period (98) 77 (1,849) (1,772)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Attributable to:
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Ordinary
shareholders 77 (1,849) (1,772)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Non-controlling
interests - - -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
For the half-year
ended 30 June 2015
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
original equipment 3,052 10 3,062 50 3,112
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
aftermarket
services 3,177 17 3,194 64 3,258
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Total revenue 6,229 27 6,256 114 6,370
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Gross profit 1,325 7 1,332 (63) 1,269
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Other operating
income - - - 5 5
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Commercial and
administrative
costs (471) (25) (496) (26) (522)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Restructuring (45) - (45) 45 -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Research and
development costs (380) 2 (378) (26) (404)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Share of results of
joint ventures and
associates 47 (4) 43 (12) 31
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
financing and
taxation 476 (20) 456 (77) 379
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Net financing (17) (17) (52) (69)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
taxation (37) 439 (129) 310
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Taxation (102) (102) 152 50
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit for the
period (139) 337 23 360
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Attributable to:
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Ordinary
shareholders 337 23 360
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Non-controlling
interests - - -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
For the year ended
31 December 2015
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
original equipment 6,648 76 6,724 215 6,939
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
aftermarket
services 6,610 20 6,630 156 6,786
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Total revenue 13,258 96 13,354 371 13,725
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Gross profit 3,118 64 3,182 84 3,266
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Other operating
income - - - 10 10
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Commercial and
administrative
costs (949) (55) (1,004) (55) (1,059)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Restructuring (37) (2) (39) 39 -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Research and
development costs (764) (1) (765) (53) (818)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Share of results of
joint ventures and
associates 123 (5) 118 (18) 100
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit on disposal
of businesses - - - 2 2
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
financing and
taxation 1,491 1 1,492 9 1,501
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Net financing (60) (60) (1,281) (1,341)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
taxation (59) 1,432 (1,272) 160
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Taxation (351) (351) 275 (76)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit for the
period (410) 1,081 (997) 84
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Attributable to:
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Ordinary
shareholders 1,080 (997) 83
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Non-controlling
interests 1 - 1
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
* Other businesses comprise former Energy businesses not
included in the disposal to Siemens in 2014.
Total assets Total liabilities Net assets/(liabilities)
------------------------ ------------------------------- --------------------------------
30 30 31 31
June June December 30 June 30 June December 30 June 30 June 31
2016 2015 2015 2016 2015 2015 2016 2015 December 2015
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Civil 13,261 11,210 11,774 (11,671) (7,073) (8,709) 1,590 4,137 3,065
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Defence 1,535 1,389 1,449 (1,643) (1,668) (1,698) (108) (279) (249)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Power Systems 3,680 3,228 3,384 (1,084) (975) (1,017) 2,596 2,253 2,367
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Marine 1,528 1,515 1,488 (816) (877) (783) 712 638 705
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Nuclear 289 351 303 (304) (337) (324) (15) 14 (21)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Inter-segment (452) (731) (850) 435 712 850 (17) (19) -
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Reportable segments 19,841 16,962 17,548 (15,083) (10,218) (11,681) 4,758 6,744 5,867
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Other businesses 48 118 120 (43) (101) (120) 5 17 -
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Net funds 2,620 1,646 3,252 (3,332) (2,289) (3,363) (712) (643) (111)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Tax
assets/(liabilities) 633 435 341 (983) (1,075) (1,004) (350) (640) (663)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Post-retirement
scheme
surpluses/(deficits) 1,545 1,016 1,063 (1,404) (1,084) (1,140) 141 (68) (77)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
24,687 20,177 22,324 (20,845) (14,767) (17,308) 3,842 5,410 5,016
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Group employees at period end 30 June 30 June
2016 * 2015 31 December 2015
------------------------------ ------- ------- ----------------
Civil 23,600 23,100 23,100
------------------------------------ ------- ------- ----------------
Defence 6,200 6,400 6,400
------------------------------------ ------- ------- ----------------
Power Systems 10,300 10,700 10,400
------------------------------------ ------- ------- ----------------
Marine 5,300 6,100 5,600
------------------------------------ ------- ------- ----------------
Nuclear 4,300 4,100 4,200
------------------------------------ ------- ------- ----------------
Other - 200 100
------------------------------------ ------- ------- ----------------
49,700 50,600 49,800
------------------------------ ------- ------- ----------------
* As described in Note 1, the Group has reclassified certain
joint ventures to joint operations from 1 January 2016. This has
had the effect of increasing the reported Group employees at 30
June 2016 by 800.
Underlying revenue adjustments Half-year
to 30 June Half-year to 30 June
2016 2015 Year to 31 December 2015
GBPm GBPm GBPm
------------------------------------- ------------ --------------------- ------------------------
Underlying revenue 6,143 6,256 13,354
------------------------------------------- ------------ --------------------- ------------------------
Recognise revenue at exchange rate on date
of transaction 319 114 371
------------------------------------------- ------------ --------------------- ------------------------
Revenue per consolidated income statement 6,462 6,370 13,725
------------------------------------------- ------------ --------------------- ------------------------
Underlying
profit
adjustments Half-year to 30 June 2016 Half-year to 30 June 2015 Year to 31 December 2015
------------------------------ ------------------------------- -------------------------------
Profit Profit Profit
before Net before Net before Net
financing financing Taxation financing financing Taxation financing financing Taxation
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Underlying
performance
re-presented 158 (54) (27) 456 (17) (102) 1,492 (60) (351)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Realised
losses/(gains)
on settled
derivative
contracts (1) 131 5 (25) 145 (28) (24) 287 (35) (51)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Net unrealised
fair value
changes to
derivative
contracts (2) 4 (2,155) 377 (12) (89) 19 (9) (1,306) 270
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Effect of
currency on
contract
accounting 32 - (6) (32) - 6 (9) - 2
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Revaluation of
trading assets
and liabilities 40 (176) 26 (26) 55 (7) (13) 20 (6)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Financial RRSAs
- exchange
differences and
changes in
forecast
payments - (8) 1 - (3) 1 - 8 (1)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Effect of
acquisition
accounting (62) - 17 (63) - 19 (124) - 31
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Impairment of
goodwill - - - (69) - -- (75) - -
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Net
post-retirement
scheme
financing - 3 (1) - 13 (5) - 32 (12)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Disposal of
business (1) - - (3) - 15 2 - 15
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Exceptional
restructuring
(3) (68) - 13 (11) - 2 (49) - 11
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Other 2 (1) 3 (6) - 4 (1) - (2)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Recognition of
advance
corporation tax - - - - - 122 - - -
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Reduction in
rate of UK
corporation tax - - - - - - - - 18
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Total underlying
adjustments 78 (2,332) 405 (77) (52) 152 9 (1,281) 275
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Reported per
consolidated
income
statement 236 (2,386) 378 379 (69) 50 1,501 (1,341) (76)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
(1) The adjustments for realised losses/(gains) on settled
derivative contracts include adjustments to reflect the
losses/(gains) in the same period as the related trading cash
flows.
(2) The adjustments for unrealised fair value changes to
derivative contracts include those included in equity accounted
joint ventures and exclude those for which the related trading
contracts have been cancelled when the fair value changes are
recognised immediately in underlying profit.
(3) Restructuring is excluded from underlying performance when
it concerns the closure of a significant business or site or a
fundamental reorganisation of the business.
3 Research and development
Half-year
Half-year to 30 June
to 30 June 2016 2015 Year to 31 December 2015
GBPm GBPm GBPm
--------------------------------------------------- ----------------- ------------------- -------------------------
Expenditure in the period (433) (405) (831)
--------------------------------------------------- ----------------- ------------------- -------------------------
Capitalised as intangible assets 54 9 51
--------------------------------------------------- ----------------- ------------------- -------------------------
Amortisation of capitalised costs (71) (66) (136)
--------------------------------------------------- ----------------- ------------------- -------------------------
Net cost (450) (462) (916)
--------------------------------------------------- ----------------- ------------------- -------------------------
Entry fees received 59 57 83
--------------------------------------------------- ----------------- ------------------- -------------------------
Entry fees deferred in respect of charges in future
periods (27) (22) (28)
--------------------------------------------------- ----------------- ------------------- -------------------------
Recognition of previously deferred entry fees 14 23 43
--------------------------------------------------- ----------------- ------------------- -------------------------
Net cost recognised in the income statement (404) (404) (818)
--------------------------------------------------- ----------------- ------------------- -------------------------
Underlying adjustments relating to the effects of
acquisition accounting and foreign exchange 24 26 53
--------------------------------------------------- ----------------- ------------------- -------------------------
Net underlying cost recognised in the income
statement (380) (378) (765)
--------------------------------------------------- ----------------- ------------------- -------------------------
4 Net financing
Half-year to 30 June 2016 Half-year to 30 June 2015 Year to 31 December 2015
Per Per Per
consolidated consolidated consolidated
income Underlying income Underlying income Underlying
statement financing statement financing statement financing
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing income
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Interest
receivable 7 7 4 4 12 12
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
gains on foreign
currency
contracts 1 - - -- - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financial RRSAs
- foreign
exchange
differences and
changes in
forecast
payments - - - - 21 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
gains on
commodity
contracts 6 - - - - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing on
post-retirement
scheme
surpluses 22 - 31 - 65 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net foreign
exchange gains - - 51 24 17 32
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
36 7 86 28 115 44
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing costs
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Interest payable (42) (42) (32) (32) (71) (71)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
losses on
foreign
currency
contracts (2,162) - (61) - (1,217) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financial RRSAs
- foreign
exchange
differences and
changes in
forecast
payments (8) - (3) - (13) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financial charge
relating to
financial RRSAs (2) (2) (2) (2) (8) (8)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
losses on
commodity
contracts - - (28) - (89) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing on
post-retirement
scheme deficits (19) - (18) - (33) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net foreign
exchange losses (171) - - - - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Other financing
charges (18) (17) (11) (11) (25) (25)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
(2,422) (61) (155) (45) (1,456) (104)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net financing (2,386) (54) (69) (17) (1,341) (60)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Analysed as:
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net interest
payable (35) (35) (28) (28) (59) (59)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
(losses)/gains
on derivative
contracts (2,155) - (89) 24 (1,306) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net
post-retirement
scheme
financing 3 - 13 - 32 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net other
financing (199) (19) 35 (13) (8) (1)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net financing (2,386) (54) (69) (17) (1,341) (60)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
5 Taxation
The effective tax rate for the half year is 17.6% (2015
half-year (16.1)%, full year 47.5%).
The Summer Budget 2015 announced that the UK corporation tax
rate will reduce to 19% from 1 April 2017 and 18% from 1 April
2020; these reductions were substantively enacted on 26 October
2015. As the reductions were substantively enacted prior to the
year end, the 2015 closing deferred tax balances were calculated at
18%.
A subsequent reduction in the rate to 17%, effective from 1
April 2020, was announced in the 2016 Budget. The proposed further
reduction in the rate to 17% will be reflected when the relevant
legislation is substantively enacted.
6 Earnings per ordinary share (EPS)
Basic EPS are calculated by dividing the profit attributable to
ordinary shareholders by the weighted average number of ordinary
shares in issue during the period, excluding ordinary shares held
under trust, which have been treated as if they had been cancelled.
Diluted EPS are calculated by adjusting the weighted average number
of ordinary shares in issue during the period for the bonus element
of share options.
Half-year to 30 June 2016 Half-year to 30 June 2015 Year to 31 December 2015
Potentially Potentially Potentially
dilutive dilutive dilutive
share share share
Basic options (1) Diluted Basic options Diluted Basic options Diluted
-------------- --------- ------------- --------- ------- ------------- -------- ------ ------------- --------
Profit
attributable
to ordinary
shareholders
(GBPm) (1,772) - (1,772) 360 - 360 83 - 83
-------------- --------- ------------- --------- ------- ------------- -------- ------ ------------- --------
Weighted
average
shares
(millions) 1,832 9 1,841 1,845 15 1,860 1,839 12 1,851
-------------- --------- ------------- --------- ------- ------------- -------- ------ ------------- --------
EPS (pence) (96.72p) - (96.72p) 19.51p (0.16p) 19.35p 4.51p (0.03p) 4.48p
-------------- --------- ------------- --------- ------- ------------- -------- ------ ------------- --------
(1) As there is a loss on continuing operations, the effect of
potentially dilutive ordinary shares is anti-dilutive and
consequently diluted EPS is the same as basic EPS.
The reconciliation between underlying EPS and basic EPS is as
follows:
Half-year to 30 June 2016 Half-year to 30 June 2015 Year to 31 December 2015
Pence GBPm Pence GBPm Pence GBPm
----------------------------- -------------- ------------ -------------- ------------ ------------- ------------
Underlying EPS / Underlying
profit attributable to
ordinary shareholders
re-presented 4.20 77 18.27 337 58.73 1,080
----------------------------- -------------- ------------ -------------- ------------ ------------- ------------
Total underlying adjustments
to profit before tax (note
2) (123.03) (2,254) (7.00) (129) (69.17) (1,272)
----------------------------- -------------- ------------ -------------- ------------ ------------- ------------
Related tax effects 22.11 405 8.24 152 14.95 275
----------------------------- -------------- ------------ -------------- ------------ ------------- ------------
EPS / Profit attributable to
ordinary shareholders (96.72) (1,772) 19.51 360 4.51 83
----------------------------- -------------- ------------ -------------- ------------ ------------- ------------
Diluted underlying EPS 4.18 18.12 58.35
----------------------------- -------------- ------------ -------------- ------------ ------------- ------------
7 Payments to shareholders in respect of the period
Payments to shareholders in respect of the period represent the
value of C Shares to be issued in respect of the results for the
period. Issues of C Shares were declared as follows:
Half-year to 30 June 2016 Year to 31 December 2015
--------------------------- --------------------------
Pence per Pence per
share GBPm share GBPm
---------------------------- ------------------ ------- ----------------- -------
Interim (issued in January) 4.6 85 9.27 170
============================= ================== ======= ================= =======
Final (issued in July) 7.10 131
----------------------------- ------------------ ------- ----------------- -------
4.6 85 16.37 301
---------------------------- ------------------ ------- ----------------- -------
8 Intangible assets
Certification
costs and Contractual
participation Development aftermarket Customer
Goodwill fees expenditure rights relationships Software Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Cost:
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 1 January
2016 1,589 1,145 1,730 799 456 616 543 6,878
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Exchange
differences 195 19 84 - 56 10 46 410
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Additions - 39 54 90 - 25 24 232
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 30 June 2016 1,784 1,203 1,868 889 512 651 613 7,520
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Accumulated
amortisation:
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 1 January
2016 86 373 691 394 139 325 225 2,233
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Exchange
differences 12 3 33 - 19 5 24 96
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Charge for the
period - 32 71 19 23 36 18 199
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Impairment - - 2 - - - - 2
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 30 June 2016 98 408 797 413 181 366 267 2,530
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Net book value
at:
================ ======== =============== =============== =============== =============== ======== ===== =====
30 June 2016 1,686 795 1,071 476 331 285 346 4,990
================ ======== =============== =============== =============== =============== ======== ===== =====
31 December 2015 1,503 772 1,039 405 317 291 318 4,645
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Certification costs and participation fees, development
expenditure and contractual aftermarket rights have been reviewed
for impairment in accordance with the requirements of IAS 36
Impairment of Assets. Where an impairment test was considered
necessary, it has been performed on the following basis:
-- The carrying values have been assessed by reference to value
in use. These have been estimated using cash flows from the most
recent forecasts prepared by management, which are consistent with
past experience and external sources of information on market
conditions over the lives of the respective programmes.
-- The key assumptions underlying cash flow projections are
assumed market share, programme timings, unit cost assumptions,
discount rates, and foreign exchange rates.
-- The pre-tax cash flow projections have been discounted at
9-11% (2015 full year 9-11%), based on the Group's weighted average
cost of capital.
-- No impairment is required on this basis. However, a
combination of changes in assumptions and adverse movements in
variables that are outside the Company's control (discount rate,
exchange rate and airframe delays), could result in impairment in
future periods.
9 Property, plant and equipment
In course of
Land and buildings Plant and equipment Aircraft and engines construction Total
GBPm GBPm GBPm GBPm GBPm
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Cost:
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 1 January 2016 1,375 3,894 339 708 6,316
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Exchange differences 91 222 5 34 352
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Reclassification of
joint ventures to
joint operations 7 87 - - 94
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Additions 6 47 21 117 191
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
On disposal of
businesses - (3) - - (3)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Reclassifications 15 75 29 (119) -
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Disposals (4) (29) (41) (1) (75)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 30 June 2016 1,490 4,293 353 739 6,875
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Accumulated
amortisation:
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 1 January 2016 416 2,284 125 1 2,826
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Exchange differences 27 117 2 - 146
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Reclassification of
joint ventures to
joint operations 1 52 - - 53
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
On disposal of
businesses - (1) - - (1)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Charge for the period 28 154 13 - 195
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Impairment - - - 1 1
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Disposals (4) (22) (37) - (63)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 30 June 2016 468 2,584 103 2 3,157
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Net book value at:
======================= ================== =================== ==================== ======================= =====
30 June 2016 1,022 1,709 250 737 3,718
======================= ================== =================== ==================== ======================= =====
31 December 2015 959 1,610 214 707 3,490
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
10 Financial assets and liabilities
Other financial assets and liabilities comprise:
Derivatives
--------------------------------------------------------
Foreign
exchange Commodity Interest rate Financial
contracts contracts contracts Total RRSAs Other C Shares Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
At 30 June 2016
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Non-current
assets 8 2 341 351 - - - 351
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Current assets 44 1 - 45 - - - 45
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Current
liabilities (443) (30) - (473) (17) - (31) (521)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Non-current
liabilities (3,324) (53) (9) (3,386) (97) (14) - (3,497)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
(3,715) (80) 332 (3,463) (114) (14) (31) (3,622)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
At 30 June 2015
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Non-current
assets 129 - 56 185 - - - 185
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Current assets 46 - 1 47 - - - 47
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Current
liabilities (157) (22) - (179) (13) - (26) (218)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Non-current
liabilities (629) (37) (88) (754) (141) - - (895)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
(611) (59) (31) (701) (154) - (26) (881)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
At 31 December
2015
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Non-current
assets 3 - 80 83 - - - 83
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Current assets 29 - - 29 - - - 29
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Current
liabilities (244) (39) - (283) (19) - (29) (331)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Non-current
liabilities (1,428) (65) (67) (1,560) (91) - - (1,651)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
(1,640) (104) 13 (1,731) (110) - (29) (1,870)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Derivative Half-year to 30
financial June Year to 31
instruments Half-year to 30 June 2016 2015 December 2015
-------------------------------------------------------
Foreign exchange Commodity Interest rate Total Total Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ----------------- ---------- -------------- -------- ------------------- -------------------
At January 1 (1,640) (104) 13 (1,731) (630) (630)
------------------- ----------------- ---------- -------------- -------- ------------------- -------------------
Currency options at
inception (1) (33) - - (33) (20) (20)
------------------- ----------------- ---------- -------------- -------- ------------------- -------------------
Movements in fair
value hedges - - 319 319 (83) (35)
------------------- ----------------- ---------- -------------- -------- ------------------- -------------------
Movements in other
derivative
contracts (2,161) 6 - (2,155) (89) (1,306)
------------------- ----------------- ---------- -------------- -------- ------------------- -------------------
Contracts settled 119 18 - 137 121 260
------------------- ----------------- ---------- -------------- -------- ------------------- -------------------
At period end (3,715) (80) 332 (3,463) (701) (1,731)
------------------- ----------------- ---------- -------------- -------- ------------------- -------------------
(1) The Group wrote currency options to sell USD and buy GBP as
part of a commercial agreement. The fair value of this option on
inception was treated as a discount to the customer.
Financial risk and revenue sharing arrangements (RRSAs) and
other financial liabilities Financial RRSAs Other
-----------------------------------------
Half-year Half-year Year to Half-year
to 30 June to 30 June 31 December to 30 June
2016 2015 2015 2016
GBPm GBPm GBPm GBPm
------------------------------------------------------------- ------------ ------------ ------------- ------------
At January 1 (110) (145) (145) --
------------------------------------------------------------- ------------ ------------ ------------- ------------
Exchange adjustments included in OCI 4 (5) - -
------------------------------------------------------------- ------------ ------------ ------------- ------------
Additions - - - (14)
------------------------------------------------------------- ------------ ------------ ------------- ------------
Financing charge (1) (2) (2) (8) -
------------------------------------------------------------- ------------ ------------ ------------- ------------
Exchange adjustments - excluded from underlying results (1) (8) (3) 8 --
------------------------------------------------------------- ------------ ------------ ------------- ------------
Cash paid to partners 2 1 35 -
------------------------------------------------------------- ------------ ------------ ------------- ------------
At period end (114) (154) (110) (14)
------------------------------------------------------------- ------------ ------------ ------------- ------------
(1) Included in net financing.
Fair values of financial instruments equate to book values with
the following exceptions:
Half-year to 30 June 2016 Half-year to 30 June 2015 Year to 31 December 2015
---------------------------- ---------------------------- ---------------------------
Book value Fair value Book value Fair value Book value Fair value
GBPm GBPm GBPm GBPm GBPm GBPm
----------- ------------- ------------- ------------- ------------- ------------- ------------
Borrowings (3,332) (3,320) (2,206) (2,293) (3,302) (3,312)
----------- ------------- ------------- ------------- ------------- ------------- ------------
Fair values
The fair value of a financial instrument is the price at which
an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arms-length transaction. Fair
values have been determined with reference to available market
information at the balance sheet date, using the methodologies
described below.
-- Unlisted non-current investments primarily comprise bank
deposits where the fair value approximates to the book value.
-- The fair values of trade receivables and payables, short-term
investments and cash and cash equivalents are assumed to
approximate to cost either due to the short-term maturity of the
instruments or because the interest rate of the investments is
reset after periods not exceeding six months.
-- Fair values of derivative financial assets and liabilities
are estimated by discounting expected future contractual cash flows
using prevailing interest rate curves. Amounts denominated in
foreign currencies are valued at the exchange rate prevailing at
the balance sheet date. These financial instruments are included on
the balance sheet at fair value, derived from observable market
prices (Level 2 as defined by IFRS 13 Fair Value Measurement).
-- Borrowing and financial RRSAs are carried at amortised cost.
Fair values are estimated by discounting expected future
contractual cash flows using prevailing interest rate curves (Level
2 as defined by IFRS 13). Amounts denominated in foreign currencies
are valued at the exchange rate prevailing at the balance sheet
date. For financial RRSAs, the contractual cash flows are based on
future trading activity, which is estimated based on latest
forecasts.
Borrowings
During the period, the Group has repaid GBP325m of short-term
borrowings, including the GBP200m 7(3) /(8) % Notes, which matured
in June.
11 Pensions and other post-retirement benefits
The net post-retirement scheme deficit as at 30 June 2016 is
calculated on a year to date basis, using the latest valuation as
at 31 December 2015, updated to 30 June 2016 for the principal
schemes.
Movements in the net post-retirement position recognised in the
balance sheet were as follows:
UK schemes Overseas schemes Total
GBPm GBPm GBPm
---------------------------------------------------------------------- ---------- ---------------- -------
At 1 January 2016 1,043 (1,120) (77)
====================================================================== ========== ================ =======
Exchange adjustments - (139) (139)
====================================================================== ========== ================ =======
Current service cost (84) (26) (110)
====================================================================== ========== ================ =======
Past service credit/(cost) 2 (10) (8)
====================================================================== ========== ================ =======
Net financing 21 (18) 3
====================================================================== ========== ================ =======
Contributions by employer 88 40 128
====================================================================== ========== ================ =======
Actuarial gains /(losses)(1) 457 (111) 346
====================================================================== ========== ================ =======
Other - (2) (2)
====================================================================== ========== ================ =======
At 30 June 2016 1,527 (1,386) 141
---------------------------------------------------------------------- ---------- ---------------- -------
Analysed as:
====================================================================== ========== ================ =======
Post-retirement scheme surpluses - included in non-current assets 1,540 5 1,545
====================================================================== ========== ================ =======
Post-retirement scheme deficits - included in non-current liabilities (13) (1,391) (1,404)
---------------------------------------------------------------------- ---------- ---------------- -------
1,527 (1,386) 141
---------------------------------------------------------------------- ---------- ---------------- -------
(1) The net actuarial gains in the UK arose principally due to
changes in the yield curves used to value the assets and the
liabilities.
12 Contingent liabilities
On 6 December 2012, the Company announced that it had passed
information to the Serious Fraud Office (SFO), following a request
from the SFO for information about allegations of malpractice in
overseas markets. On 23 December 2013, the Company announced that
it had been informed by the SFO that it had commenced a formal
investigation. Since the initial announcement, the Company has
continued its investigations and is engaging with the SFO and other
authorities in the UK, the USA and elsewhere in relation to the
matters of concern.
The consequence of these disclosures will be decided by the
regulatory authorities. It is too early to predict the outcomes,
but these could include the prosecution of individuals and of the
Group. Accordingly, the potential for fines, penalties or other
consequences cannot currently be assessed. As the investigation is
ongoing, it is not yet possible to identify the timescale in which
these issues might be resolved.
In connection with the sale of its products the Group will, on
some occasions, provide nancing support for its customers -
generally in respect of civil aircraft. The Group's commitments
relating to these nancing arrangements, which are spread over many
years, relate to a number of customers and a broad product
portfolio and are generally secured on the asset subject to the
financing. These include commitments of US$3.6bn (31 December 2015
$3.1bn) to provide borrowing facilities to enable customers to
purchase aircraft (of which approximately US$317m could be called
in 2016). These facilities may only be used if the customer is
unable to obtain financing elsewhere and are priced at a premium to
the market rate. Consequently the directors do not consider that
there is a significant exposure arising from the provision of these
facilities.
Commitments on delivered aircraft in excess of the amounts
provided are shown in the table below. These are reported on a
discounted basis at the Group's borrowing rate to re ect better the
time span over which these exposures could arise. These amounts do
not represent values that are expected to crystallise. The
commitments are denominated in US dollars. As the Group does not
generally adopt cash flow hedge accounting for future foreign
exchange transactions, this amount is reported, together with the
sterling equivalent at the reporting date spot rate. The values of
aircraft providing security are based on advice from a specialist
aircraft appraiser.
30 June 2016 31 December 2015
-------------- ------------------
GBPm $m GBPm $m
------------------------------------------------------- ------ ------ -------- --------
Gross contingent liabilities 253 339 269 399
------------------------------------------------------- ------ ------ -------- --------
Value of security(1) (114) (153) (136) (201)
------------------------------------------------------- ------ ------ -------- --------
Indemnities (77) (103) (79) (118)
------------------------------------------------------- ------ ------ -------- --------
Net commitments 62 83 54 80
------------------------------------------------------- ------ ------ -------- --------
Net commitments with security reduced by 20% (2) 91 122 78 115
------------------------------------------------------- ------ ------ -------- --------
(1) Security includes unrestricted cash collateral of: 35 47 35 52
------------------------------------------------------- ------ ------ -------- --------
(2) Although sensitivity calculations are complex, the reduction
of the relevant security by 20% illustrates the sensitivity of the
contingent liability to changes in this assumption.
Contingent liabilities exist in respect of guarantees provided
by the Group in the ordinary course of business for product
delivery, performance and reliability. The Group has, in the normal
course of business, entered into arrangements in respect of export
finance, performance bonds, countertrade obligations and minor
miscellaneous items. Various Group undertakings are parties to
legal actions and claims which arise in the ordinary course of
business, some of which are for substantial amounts. As a
consequence of the insolvency of an insurer as previously reported,
the Group is no longer fully insured against known and potential
claims from employees who worked for certain of the Group's
UK-based businesses for a period prior to the acquisition of those
businesses by the Group. While the outcome of some of these matters
cannot precisely be foreseen, the directors do not expect any of
these arrangements, legal actions or claims, after allowing for
provisions already made, to result in significant loss to the
Group.
13 Related party transactions
Transactions with related parties are shown on page 156 of the
2015 Annual Report. Significant transactions in the current
financial period are as follows:
Half-year Half-year Year to
to 30 June to 30 June 31 December
2016 2015 2015
GBPm GBPm GBPm
------------------------------------------------------------------- ----------- ----------- ------------
Sales of goods and services to joint ventures and associates 887 859 1,896
-------------------------------------------------------------------- ----------- ----------- ------------
Purchases of goods and services from joint ventures and associates (1,072) (1,120) (2,266)
-------------------------------------------------------------------- ----------- -----------
Included in sales of goods and services to joint ventures and
associates are sales of spare engines amounting to GBP35m (2015:
half-year GBP13m, full-year GBP189m).
Profit recognised in the year on such sales amounted to GBP21m
(2015: half-year GBP13m, full-year GBP71m), including profit on
current year sales and recognition of profit deferred on similar
sales in previous years.
14 Post-balance sheet events
On 11 July 2016, the Group announced that it will purchase the
outstanding 53.1% shareholding in Industria de Turbo Propulsores SA
("ITP") owned by SENER Grupo de Ingeniería SA ("SENER").
Rolls-Royce will pay SENER a total consideration of EUR720m,
subject to due diligence, for the outstanding 53.1% of ITP. This
follows a decision by SENER to exercise its put option. Under the
existing shareholder agreement, consideration will be settled over
a two year period following completion in eight equal, evenly
spaced instalments. The agreement allows flexibility to settle up
to 50% of the consideration in the form of Rolls-Royce shares.
Final consideration as to whether the payments will be settled in
cash, or cash and shares will be determined by Rolls-Royce during
the payment period. Completion, which is subject to regulatory
clearances, is expected in early 2017.
Principal risks and uncertainties
Whilst the Group has a consistent strategy and long performance
cycles, it continues to be exposed to a number of risks and has an
established, structured approach to identifying, assessing and
managing those risks.
The principal risks facing the Group for the remaining six
months of the financial year are unchanged from those reported on
pages 55 and 56 of the Annual Report 2015, as set out below:
Product failure
Product not meeting safety expectations, or causing significant
impact to customers or the environment through failure in quality
control.
Business continuity
Breakdown of external supply chain or internal facilities that
could be caused by destruction of key facilities, natural disaster,
regional conflict, insolvency of a critical supplier or scarcity of
materials which would reduce the ability to meet customer
commitments, win future business or achieve operational
results.
Competitive position
The presence of large, financially strong competitors in the
majority of our markets means that the Group is susceptible to
significant price pressure for original equipment or services even
where our markets are mature or the competitors are few. Our main
competitors have access to significant government funding
programmes as well as the ability to invest heavily in technology
and industrial capability.
Political risk
Geopolitical factors that lead to an unfavourable business
climate and significant tensions between major trading parties or
blocs which could impact the Group's operations. For example:
explicit trade protectionism, differing tax or regulatory regimes,
potential for conflict, or broader political issues.
Major programme delivery
Failure to deliver a major programme on time, within budget, to
specification, or technical performance falling significantly short
of customer expectations, or not delivering the planned business
benefits, would have potentially significant adverse financial and
reputational consequences, including the risk of impairment of the
carrying value of the Group's intangible assets and the impact of
potential litigation.
Compliance
Non-compliance by the Group with legislation or other regulatory
requirements in the regulated environment in which it operates (eg.
export controls; offset; use of controlled chemicals and
substances; and anti-bribery and corruption legislation)
compromising our ability to conduct business in certain
jurisdictions and exposing the Group to potential reputational
damage, financial penalties, debarment from government contracts
for a period of time, and/or suspension of export privileges or
export credit financing, any of which could have a material adverse
effect.
Market and financial shock
The Group is exposed to a number of market risks, some of which
are of a macro-economic nature (eg. foreign currency, oil price,
exchange rates) and some of which are more specific to the Group
(eg. liquidity and credit risks, reduction in air travel or
disruption to other customer operations). Significant extraneous
market events could also materially damage the Group's
competitiveness and/or creditworthiness. This would affect
operational results or the outcomes of financial transactions.
IT vulnerability
Breach of IT security causing controlled or critical data to be
lost, made inaccessible, corrupted or accessed by unauthorised
users.
Talent and capability
Inability to attract and retain the critical capabilities and
skills needed in sufficient numbers and to effectively organise,
deploy and incentivise our people to deliver our strategy, business
plan and projects.
Going concern
After making enquiries, the directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. There have been
no significant changes to the basis described on page 57 of the
Annual Report 2015. For this reason they continue to adopt the
going concern basis in preparing the consolidated financial
statements.
Payments to shareholders
The Company makes payments to shareholders in the form of
redeemable C Shares which shareholders may either choose to retain
or redeem for a cash equivalent. On 4 January 2017, 46 C Shares,
with a total nominal value of 4.6p, will be allotted for each
ordinary share to those shareholders on the register on 21 October
2016. The final day of trading with entitlement to C Shares is 19
October 2016. Our Registrar, Computershare Investor Services PLC,
operates a C Share Reinvestment Plan (CRIP), and can, on behalf of
shareholders, use the cash proceeds of redemption to purchase
ordinary shares from the market. Shareholders wishing to redeem
their C Shares, or participate in the CRIP, must lodge instructions
with our Registrar to arrive no later than 5.00 pm on 1 December
2016. The payment of C Shares redemption monies will be made on 6
January 2017.
Statement of directors' responsibilities
The directors confirm that, to the best of their knowledge:
-- the condensed consolidated half-year financial statements
have been prepared in accordance with IAS 34 Interim Financial
Reporting as adopted by the EU;
-- the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being
an indication of important events that have occurred during the
first six months of the financial year and their impact on the
condensed consolidated half-year financial statements; and a
description of the principal risks and uncertainties for the
remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being
related party transactions that have taken place in the first six
months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last Annual Report that could do so.
The directors of Rolls-Royce Holdings plc at 11 February 2016
are listed in its 2015 Annual Report 2015 on pages 58 to 61. Since
that date, the following changes have taken place:
-- Bradley Singer was appointed as a Non-executive director on 2 March 2016; and
-- Helen Alexander retired as a Non-executive director at the
conclusion of the AGM on 5 May 2016.
By order of the Board
Warren East David Smith
Chief Executive Chief Financial Officer
27 July 2016 27 July 2016
Independent review report to Rolls-Royce Holdings plc
Introduction
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2016 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated balance sheet,
the condensed consolidated cash flow statement, the condensed
consolidated statement of changes in equity and the related
explanatory notes. We have read the other information contained in
the half-yearly financial report and considered whether it contains
any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the Disclosure and Transparency Rules ("the DTR")
of the UK's Financial Conduct Authority ("the UK FCA"). Our review
has been undertaken so that we might state to the company those
matters we are required to state to it in this report and for no
other purpose. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the company
for our review work, for this report, or for the conclusions we
have reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the EU.
The condensed set of financial statements included in this
half-yearly financial report has been prepared in accordance with
IAS 34 Interim Financial Reporting as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
(UK and Ireland) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2016 is not prepared, in all material respects, in accordance
with IAS 34 as adopted by the EU and the DTR of the UK FCA.
Jimmy Daboo
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London E14 5GL
27 July 2016
Appendix: Derivation of summary funds flow statement from
reported cash flow statement
GBPm GBPm Source
Reported operating profit 237
Realised gains on settled derivatives (131) Reported to underlying adjustment (note 2)
Net unrealised fair value to changes to derivatives (4) Reported to underlying adjustment (note 2)
Foreign exchange on contract accounting (32) Reported to underlying adjustment (note 2)
Revaluation of trading assets and liabilities (40) Reported to underlying adjustment (note 2)
Effect of acquisition accounting 62 Reported to underlying adjustment (note 2)
Exceptional restructuring 68 Reported to underlying adjustment (note 2)
Other (2) Reported to underlying adjustment (note 2)
Adjustments to reported operating profit (79)
Underlying profit before financing 158
Underlying financing (54) Underlying income statement (note 2)
Underlying profit before tax 104
Depreciation of property, plant and equipment 196 Cash flow statement
Amortisation of intangible assets 201 Cash flow statement
Acquisition accounting (62) Reversal of underlying adjustment (above)
Depreciation and amortisation 335
Increase in inventories (339) Cash flow statement
Increase in trade and other receivables (465) Cash flow statement, excluding GBP6m receipts on
the Energy disposal in 2014
Increase in trade and other payables 529 Cash flow statement, excluding GBP15m exceptional
restructuring
Revaluation of trading assets 40 Reversal of underlying adjustment (above)
Movement on net working capital (235)
Additions of intangible assets (232) Cash flow statement
Purchases of property, plant and equipment (307) Cash flow statement
Expenditure on property, plant and equipment and intangible
assets (539)
Realised gains 131 Reversal of underlying adjustment (above)
Net unrealised fair value to changes to derivatives 4 Reversal of underlying adjustment (above)
FX on contract accounting 32 Reversal of underlying adjustment (above)
Reported restructuring (68) Reversal of underlying adjustment (above)
Other 2 Reversal of underlying adjustment (above)
Underlying financing 54 Reversal of charge in underlying profit before tax
(above)
Loss on disposal of property, plant and equipment 2 Cash flow statement
Joint ventures (37) Joint venture dividends less share of results -
cash flow statement
Increase in provisions 86 Cash flow statement
Cash flows on other financial assets and (139) Cash flow statement
liabilities
Share based payments 14 Cash flow statement
Disposal of property, plant and equipment 10 Cash flow statement
Other investments in joint ventures and associates (11) Cash flow statement
Net interest (48) Interest received and paid - cash flow statement
Net funds of JVs reclassified to JOs (4) Net cash and borrowings reclassified - cash flow
statement
Purchase of ordinary shares for share schemes (20) Cash flow statement
Other 8
Trading cash flow (327)
Net defined benefit plans - operating charge 118 Cash flow statement
Cash funding of defined benefit plans (128) Cash flow statement
Contributions to defined benefit schemes in excess of PBT
charge (10)
Tax (62) Taxation paid - cash flow statement
Free cash flow (399)
Exceptional restructuring expenditure (15) Reversal of adjustment (above)
Shareholder payments (168) Redemption of C Shares - cash flow statement
Increase in share in joint ventures (154) Cash flow statement
Other acquisitions/disposals 7 Disposals of businesses - cash flow statement, and
receipts on Energy disposal (above)
Exchange gain on net funds 128 Cash flow statement
Change in net funds (601)
This table shows the derivation free cash flow, an alternative
performance measure, to the movement in net funds shown on page 29.
The movement in net funds table shows the change in cash and cash
equivalents which represents the most directly reconcilable line
item shown in the financial statements required by IFRS.
Free cash flow is a measure of financial performance of the
business's cash flow to see what is available for distribution
among those stakeholders funding the business (including debt
holders and shareholders). Free cash flow is calculated as trading
cash flow less recurring tax and post-employment benefit expenses,
It excludes payments made to shareholders, amounts spent (or
received) on business acquisitions, exceptional restructuring costs
and foreign exchange changes on net funds. The Board considers that
free cash flow reflects cash generated from the Group's underlying
trading.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR DMGZNLNNGVZM
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July 28, 2016 02:02 ET (06:02 GMT)
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