TIDMRR.
RNS Number : 7784W
Rolls-Royce Holdings plc
14 February 2017
14 February 2017
ROLLS-ROYCE HOLDINGS PLC
2016 FULL YEAR RESULTS
Commenting on the results, Warren East, Chief Executive, said:
"2016 has been an important year as we accelerated the
transformation of Rolls-Royce. Despite the significant market and
aerospace product transition challenges identified in 2015, we have
made operational progress and performed ahead of our expectations
for the year as a whole. At the same time we have delivered major
changes to our management and processes and, while we have made
good progress in our cost cutting and efficiency programmes, more
needs to be done to ensure we drive sustainable margin improvements
within the business."
Reported Underlying
Year to 31 December 2016 2015 Change 2016 2015 Change*
--------------------- --------- ------- ------- ------- ------- --------
Revenue (GBPm) 14,955 13,725 +9% 13,783 13,354 -2%
--------------------- --------- ------- ------- ------- ------- --------
Profit before tax
(GBPm) (4,636) 160 N/A 813 1,432 -49%
--------------------- --------- ------- ------- ------- ------- --------
Earnings per share (220.1)p 4.5p N/A 30.1p 58.7p -54%
--------------------- --------- ------- ------- ------- ------- --------
2016 2015 Change**
------ ------ ---------
Net debt (GBPm) (225) (111) (114)
----------------------------- ------ ------ ---------
Free cash flow (GBPm)*** 100 179 (79)
----------------------------- ------ ------ ---------
Underlying: for definition see note 2 on page 35; * 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
27.
Highlights
-- Reported revenue up 9%
-- Reported loss reflects a non-cash impact of GBP4.4bn
period-end mark-to-market revaluation of our derivatives and a
GBP0.7bn charge for financial penalties from agreements with
investigating bodies
-- Underlying revenue down 2% at constant exchange rates, reflecting weakness in Marine
-- Underlying profit before tax down 49% at constant exchange rates
-- Good free cash flow performance; led by working capital improvements
-- Final payment to shareholders maintained at 7.1 pence per
share in line with changes announced in February 2015 giving a full
year dividend of 11.7 pence (2015 full year: 16.4 pence)
Transformation programme
-- Well underway; over GBP60m incremental in-year savings in
2016; GBP80-110m further in-year benefit expected in 2017
-- On track for GBP200m annualised run rate by end 2017
Looking forward
-- Outlook for 2017: modest performance improvements, targeting
free cash flow to be similar to 2016
-- Completion of ITP acquisition expected mid-2017
Warren East added: "As I set out in November last year, it is
now time to look further ahead. With my new team in place, our
focus is turning towards the Group's long-term goals. Over the next
few months we will conclude our review of our strengths and
investment opportunities and set out an appropriate vision for the
business and the best way we can deliver sustainable shareholder
value."
"In the meantime, we will continue to focus on our key
milestones. In Civil Aerospace, we need to introduce our new Trent
engines and successfully deliver the ramp up in engine production.
At the same time we must ensure our wide ranging business
transformation programme delivers the full benefits expected, not
only in terms of cost savings but also the cultural and behavioural
changes necessary to ensure the transformation is sustained and
high standards of business conduct are maintained. These are
essential if we are to become a more trusted, 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 Full 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 09:00 (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 14 February
presentation
To register for the live webcast (including Q&A
participation) please visit this link:
http://edge.media-server.com/m/p/bn5bprbe
Please use this same link to access the webcast replay after the
event.
2016 Business Highlights
Percentage or absolute change figures in this document are on a
constant translational currency ('constant currency') basis unless
otherwise stated
2016 results % of Group Closing Underlying revenue Underlying profit
revenues* order book before financing
GBPbn
----------- ------------
GBPm % change GBPm % change
---------------------- ----------- ------------ --------- ---------- ------- -----------
Civil Aerospace 51% 71.4 7,067 0% 367 -60%
Defence Aerospace 16% 3.9 2,209 1% 384 -8%
Power Systems 19% 1.8 2,655 -1% 191 -14%
Marine 8% 0.9 1,114 -24% (27) -280%
Nuclear 6% 1.8 777 11% 45 -37%
Other - 37 -64% (1)
Eliminations/central (76) -36% (44)
Total Group 79.8 13,783 -2% 915 -45%
---------------------- ----------- ------------ --------- ---------- ------- -----------
* Based on gross revenues prior to intra-group eliminations
Civil Aerospace
-- Underlying revenue unchanged; gross margins lower:
o Original equipment (OE): increased deliveries of newer Trent
engines but lower link-accounted Trent 700 and business aviation
sales reduced achieved margins
o Services: growth from in-production large engine fleet, but
declining regional and older large engine fleet aftermarket
revenues; increase in technical costs for large engines, including
the Trent 700 and Trent 900, largely mitigated by foreign exchange
benefits
-- GBP4.4bn order book growth; includes GBP2.1bn benefit from
long-term US dollar planning rate change
-- New programmes: Trent 1000 TEN received EASA certification in
July; first test run of new Ultrafan(TM) gearbox; first flight of
the Airbus A350-1000 powered by the Trent XWB-97
-- Supply chain modernisation reducing costs and increasing capacity for Trent XWB ramp up
-- 2017 outlook: modest growth in revenue and profit; cost
improvements offsetting OE and aftermarket mix effects
Defence Aerospace
-- Underlying revenue up slightly; modest growth in OE
-- Underlying profit before financing down 8%; reflecting
adverse product mix and costs related to the TP400 programme,
partially offset by through-life cost-savings on a major EJ200
contract
-- Investing to enhance manufacturing, aftermarket service and
closer proximity to core customers
-- 2017 outlook: revenue steady; margin and profit expected to soften from recent levels
Power Systems
-- Underlying revenue 1% lower; growth in power generation and
industrial markets offset by reduction in commodity and oil price
driven sales
-- Underlying profit before financing 14% lower; volume reduction and adverse product mix
-- Good start to transformation with new leadership in place to
drive further performance improvement
-- 2017 outlook: steady; healthy order book in key segments offsetting some challenging markets
Marine
-- Underlying revenue down 24%; weak offshore markets impacting both OE and service revenues
-- Underlying profit before financing negative; lower volumes and reduced overhead absorption
-- Net restructuring benefits from current and legacy programmes
starting to improve performance
-- GBP200m impairment of goodwill reflecting a more cautious
outlook; further weakness in offshore oil and gas markets offset by
ongoing cost improvements as we refocus the business
Nuclear
-- Underlying revenue 11% higher; strong revenues led by increased submarine work
-- Underlying profit before financing 37% lower; adverse margin
mix in submarine projects, lower R&D credit than 2015 and
R&D spend on small modular reactor concept development
-- 2017 outlook: focus on further delivery improvements and
investing to address future opportunities
Chief Executive's Review
Introduction
2016 has been an important year as we accelerated the
transformation of Rolls-Royce. Overall, we have performed ahead of
our expectations for the year as a whole while delivering
significant changes to our management and processes. We increased
our large engine output by over 15%, supported the needs of our
customers, and made good technical progress in the final stages of
the development of the three new large engines, due to enter
service over the next twelve months. At the same time we have
improved manufacturing lead times for our key civil aerospace
programmes, an important goal as we ramp up production over the
next few years. Progress with our transformation programme was also
better than expected, delivering over GBP60m of in-year benefits
compared to our initial target of between GBP30-50m. Overall, the
performance improvements have helped offset a number of changing
trading conditions and higher R&D spend.
Performance in 2016
In 2015 we identified a number of significant headwinds that
would hold back performance in 2016, including mixed market
conditions and the revenue and cost impacts of some key product
transitions.
Looking first at our markets, demand for our large civil
aerospace products and services remained robust, despite some
specific weaknesses for service demand in respect of older engines.
At the same time, demand for new corporate jets softened, as did
the aftermarket for the regional jets powered by our AE3007
engines. Defence Aerospace markets held up well with a steady
demand for our aftermarket services in particular. Offshore oil and
gas markets for our Marine business continued to suffer from the
consequences of low oil prices. Alongside weaker industrial demand
this also impacted Power Systems.
Other known headwinds transpired broadly as expected, led by
lower Trent 700 volumes and prices, legacy civil large engine
aftermarket reductions and weakness in Marine markets. 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 the end of the year at around GBP80bn.
Against this backdrop, group underlying revenue reduced 2% on a
constant currency basis with reductions in both original equipment
and aftermarket revenues, led by the Marine businesses where
revenues were down 24%. More details are included in the group
trading summary and the individual business reviews.
Compared to 2015, underlying profit before finance charges and
tax was 45% lower at GBP915m. On this basis, Civil Aerospace
delivered GBP367m (2015: GBP812m); Defence Aerospace delivered
GBP384m (2015: GBP393m); Power Systems delivered GBP191m (2015:
GBP194m); Marine generated a loss of GBP27m (2015: GBP15m profit)
and Nuclear delivered GBP45m (2015: GBP51m excluding the GBP19m
R&D credit benefits highlighted in 2015). More detail on each
business is included in the Operational Review.
After underlying financing costs of GBP102m (2015: GBP60m
including a GBP34m gain from hedging overseas dividends),
underlying profit before tax was GBP813m (2015: GBP1,432m).
Since the EU referendum vote at the end of June, the value of
sterling relative to the US dollar has fallen significantly. As a
result, we have recognised a GBP4.4bn in-year non-cash
mark-to-market valuation adjustment for our currency hedge book as
part of our reported financing costs of GBP(4,677)m (2015:
GBP(1,341)m). While reported revenue of GBP14,955m (2015:
GBP13,725m) was unaffected by this adjustment, it impacted reported
profit. In addition, our reported results also included a GBP671m
charge for financial penalties from agreements with investigating
authorities in connection with historic bribery and corruption
involving intermediaries in a number of overseas markets. Our
reported loss before tax was GBP(4,636)m (2015: GBP160m
profit).
After an underlying tax charge of GBP261m (2015: GBP351m),
underlying profit after tax for the year was GBP552m (2015:
GBP1,081m). With an average 1,832m shares in issue, underlying
earnings per share were 30.1p (2015: 58.7p).
After a reported tax credit of GBP604m (2015: GBP76m charge),
the reported loss for the year was GBP(4,032)m (2015: GBP84m
profit). Reported earnings per share were (220.1)p (2015:
+4.5p).
A full reconciliation of underlying to reported profit can be
found in note 2 on page 35.
Free cash inflow in the year was GBP100m (2015: inflow of
GBP179m), better than expected, reflecting strong cash collections
from a number of key customers at the very end of the period and an
improvement in underlying working capital performance. While some
of this positive variance is a timing impact and likely to reverse
early in 2017, improved efficiencies should drive a level of
sustainable benefit. For more details see the section on technical
guidance.
A more detailed review of financial performance is included in
the Group Trading Summary and the Financial Review.
Agreement reached with various investigating authorities
In mid-January 2017 we announced that we had entered into
Deferred Prosecution Agreements (DPAs) with the UK's Serious Fraud
Office (SFO) and the US Department of Justice (DoJ) and completed a
Leniency Agreement with Brazil's Ministério Público Federal (MPF).
These agreements relate to bribery and corruption involving
intermediaries in a number of overseas markets, concerns about
which we passed to the SFO from 2012 onwards following a request
from the SFO.
The agreements are voluntary and result in the suspension of
prosecution provided that the company fulfils certain requirements,
including the payment of a financial penalty. The agreements will
result in the total payment of around GBP671m. This is recognised
within our 2016 accounts.
Under the terms of the DPA with the SFO, we agreed to pay
GBP497m plus interest under a schedule lasting up to five years,
plus a GBP13m payment in respect of the SFO's costs. We also agreed
to make payments to the DoJ totalling around US$170m and to the MPF
totalling around US$26m. As a result, the total payment in 2017 is
expected to be GBP293m (at prevailing exchange rates) with some
elements having already been paid.
Payment schedule SFO DoJ MPF Total
----------------- ----------------- -------- ------- ---------
2017 GBP119m* +GBP13m US$170m US$26m GBP293m*
2019 GBP100m* GBP100m*
2020 GBP130m* GBP130m*
2021 GBP148m* GBP148m*
* plus interest
It is our intention that these financial penalties will be paid
from existing facilities and an improved underlying cash flow
performance in the longer-term.
Our focus on clear priorities for 2016 has helped deliver
positive outcomes
Our 2016 priorities were threefold: to strengthen our focus on
engineering, operational and aftermarket excellence to drive
long-term profitable growth; to deliver a strong start to our
transformation programme; and to start rebuilding trust and
confidence in our long-term growth prospects.
Increased our focus on engineering, operational and aftermarket
excellence
Over the last few years we have invested significantly in new
product development and manufacturing capabilities. In engineering,
in 2016 we invested over GBP1.3bn in gross R&D. The net
investment of GBP937m was higher than 2015 and our expectations for
2016. A large proportion of this was focused on Civil Aerospace to
support delivery of three new engine programmes which will enter
service over the next twelve months; the Trent 1000 TEN, the Trent
XWB-97 and the Trent 7000. Supporting these investments was a
group-wide engineering efficiency programme, known internally as
E(3) , which has formed part of our overarching transformation
programme. Within the engineering team, this change programme has
focused on delivering a lean, resilient, lower cost engineering
function through reducing complexity, improving work prioritisation
and simplifying management structures.
In operations, over GBP1.4bn has been invested in new capital
equipment since 2011 (GBP225m in 2016) in transforming our
manufacturing footprint across the business. In Civil Aerospace,
these investments in state-of-the-art manufacturing facilities will
enable us to meet the significant growth in engine deliveries
required to match customer demand for our new Trent engines,
particularly the Trent 1000, Trent XWB and Trent 7000. At the same
time, the investments lower unit costs and reduce the net cash
outflows related to engine production. In Defence, the investments
have focused on modernisation of facilities such as in Indianapolis
to reduce costs and improve delivery performance of both original
equipment and spares to support higher standards of customer
service. In Marine, new facilities will contribute to a more
efficient and scalable manufacturing capability that will address
the demands of our customers today, while markets are weak, and
tomorrow, when they have recovered.
The benefits of these investments is starting to be seen in
improved delivery performance, lower assembly lead times, lower
unit costs and increased capacity. For example, in Civil Aerospace,
large engine deliveries increased by over 15% to over 355 and
capacity is now in place to deliver around 500 engines in 2017; an
increase of over a third.
The focus on improving aftermarket excellence has been driven
business by business by customer needs as well as through the
broader transformation activities. In Civil Aerospace for example,
this has resulted in a progressive change to the structure of our
engine overhaul services, our commercial TotalCare(R) and time and
materials product offerings and management structures. These have
enabled us to respond to a changing market and maturing installed
engine portfolio by adapting our resources to focus on areas of
greatest value to the company and our customers - such as
supporting airframe transitions and rolling out SelectCare(TM) and
TotalCare(R) Flex offerings and preparing for the launch of
LessorCare(TM). In Defence Aerospace, the focus has been driven by
the customer need for more embedded support. This has included
increasing our service presence at key customer facilities in the
UK and overseas, improving response time and resolving a greater
proportion of issues on-wing.
Transformation programme ahead of expectations
In November 2015, we announced a major transformation programme
focused on simplifying the organisation, streamlining senior
management, reducing fixed costs and adding greater pace and
accountability to decision making. The initial target was to
deliver incremental gross cost savings of between GBP150m and
GBP200m per annum, with the full benefits accruing from the end of
2017 onwards.
Against these initial objectives, which included a target of
delivering in-year savings of GBP30-50m in 2016, we have made a
better than expected start. 2016 in-year savings were above target,
at over GBP60m. During the year we also identified significant
opportunities to drive good sustainable cost savings from the
business. As a result, we expect the in-year savings that can be
delivered in 2017 to be between GBP80-GBP110m and we are on track
to achieve the top end of the target for the programme as a whole,
targeting a run rate of over GBP200m by end 2017.
At the same time other restructuring initiatives have delivered
their expected benefits. These included programmes to improve
operational efficiency in Civil and Defence Aerospace (announced in
2014) and Marine (announced in May 2015), as well as a back office
cost saving programme in Marine (announced in October 2015). In
December 2016, an additional reorganisation of the Marine business
was announced to further rationalise manufacturing activities in
Scandinavia, targeting incremental annualised savings of GBP50m
from mid-2017. Reflecting our cautious near-term outlook for the
Marine business, we have also taken an exceptional charge of around
GBP200m for impairment of goodwill, principally associated with the
acquisition of Vickers in 1999.
In summary, expected ongoing benefits of all current
restructuring programmes initiated since 2014 will reduce costs by
around GBP400m by the end of 2018, compared to a 2014 baseline
In aggregate, ongoing divisional restructuring programmes
together with the new programme announced in November 2015 are
expected to reduce costs by around GBP400m by the end of 2018,
including the full benefit of the Marine restructuring announced in
December 2016. The cost reduction breaks down into incremental
legacy Civil and Defence Aerospace restructuring savings of GBP80m,
Marine savings of now around GBP110m and the transformation
programme savings of around GBP200m.
Rebuilding trust and confidence; steady year with few major
surprises
2016 out-turned ahead of expectations with only a few unexpected
developments from an operational perspective, despite the
challenges presented by a changing macro-environment and some known
weaknesses in the business. The expected headwinds in Civil
Aerospace and Marine transpired largely as forecast. In addition,
the benefits of outperformance on transformation savings and
foreign exchange hedging more than offset some additional programme
costs in Civil Aerospace and a range of other smaller one-off
items. As a result, external expectations remained largely
unchanged throughout the year.
The introduction of the new revenue reporting standard, IFRS15
Revenue from Contracts with Customers, will have a significant
impact on how we present our revenues and profits, particularly for
Civil Aerospace. As a result, a combination of significant in-house
analysis and appropriate progressive communication was undertaken,
culminating in a Capital Markets Day in November. This set out in
some detail how we now expect the new standard to change the
presentation of our financial results, illustrated through a
re-presentation of 2015 performance. All the materials from this
investor event were shared at the time and are available on the
company's website at www.rolls-royce.com.
Priorities for 2017 broadly unchanged; additional focus on
developing our long-term vision and strategy
Overall, the priorities for 2017 are largely unchanged from
those set out in 2016. We will continue to invest in strengthening
our focus on engineering, operational and aftermarket excellence to
drive long-term profitable growth. At the same time, 2017 will be
an important year to drive incremental savings from our
transformation programme.
At our Capital Markets Day in November 2016 we set out how our
focus is turning towards the Group's long-term goals. Over the next
few months the senior leadership team will be concluding the review
of our strengths and investment opportunities, to define an
appropriate vision for the business and the best way we can deliver
sustainable shareholder value. Conclusions of this work will be
shared during 2017.
Rebuilding trust and confidence in the Group and its long-term
prospects remains a key priority for the management team at
Rolls-Royce. The focus remains on progressive, effective
communication combined with strong operational delivery. While we
have made a steady start, more remains to be done. The addition of
new management and a renewed focus within the business leadership
teams, with clear goals and stronger accountabilities, should
provide a strong platform for further progress in 2017.
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
arrangements (RRSAs) into the business, 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 shareholder agreement, the consideration of EUR720m
will be settled over a two year period following completion in
eight equal, evenly spaced instalments. The agreement allows
flexibility to settle up to 100% of the consideration in the form
of Rolls-Royce shares. Final consideration as to whether the
payments will be settled in cash, shares or cash and shares will be
determined by Rolls-Royce during the payment period. Completion
remains subject to regulatory clearances and is expected in
mid-2017.
The acquisition of ITP 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 a participant in RRSAs. 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.
Further details of its impact on the Group will be made
available on completion of the acquisition.
Board update
During the year there have been a number of important changes to
the Board. In March we appointed Brad Singer, a partner of ValueAct
Capital, to the Board, at which time he also joined the Science
& Technology Committee. In May, following the AGM, Dame Helen
Alexander stepped down from the Board and was succeeded as Chairman
of the Remuneration Committee by Ruth Cairnie. At the same time,
alongside chairing the Science & Technology Committee, Sir
Kevin Smith took over the role of Senior Independent Director from
Lewis Booth, who continues as Chairman of the Audit Committee.
Finally, Alan Davies stepped down from the Board in November
2016.
In respect of Executive Directors, we announced in September
that Stephen Daintith will join the Board in 2017 as Chief
Financial Officer. He succeeds David Smith who leaves Rolls-Royce
to join QinetiQ Group plc on 1 March 2017.
Commenting on David Smith's contribution to Rolls-Royce, Warren
East said: "I would like to thank David for his valuable support
over the past three years. He has made an important contribution to
restoring confidence in the business, improving financial reporting
and delivering the early stages of our transformation. I and the
rest of the Rolls-Royce team wish him every success in the
future."
In addition, Colin Smith will be leaving the company after 43
years with Rolls-Royce, including 12 years as a main Board
Director. He will be stepping down from the Board after this year's
AGM. During his time with Rolls-Royce Colin has held a variety of
key positions within Engineering, including Director - Research and
Technology and, from 2005 to 2015, Director, Engineering and
Technology and most recently as Group President.
Commenting on Colin Smith, Warren East added: "Colin has devoted
his entire career to Roll-Royce having joined the company as an
undergraduate apprentice in 1974. He has made a tremendous
contribution to the company and the industry having been
instrumental in developing much of today's portfolio of power
systems and helping shape our technology plans for the future. His
advice and insights will be greatly missed but he leaves behind a
strong legacy. On behalf of all of everyone at Rolls-Royce I would
like to thank Colin for his exceptional service and wish him well
in his next endeavours."
Shareholder payments
Our stated objective in the long term is to progressively
rebuild our payment to shareholders to an appropriate level,
subject to the short-term cash needs of the business. This reflects
the Board's long-standing confidence in the strong future cash
generation of Rolls-Royce.
At this stage the investment needs of the business remain high,
reflected in the low level of free cash flow in 2016 and this is
expected again in 2017. In addition, the Board sees the need to
retain a degree of balance sheet flexibility.
As a result, it is proposed that the final payment for 2016 is
unchanged from 2015 at 7.1 pence per share. Taken together with the
interim payment, this brings the full year payment to 11.7 pence
per share. As in past payments, the distribution will be in the
form of C Shares.
Further details are included at the end of this statement on
page 48.
Outlook for 2017
After a better than expected 2016, year-on-year incremental
progress will be modest. Our medium-term trajectory for revenue,
profit and free cash flow remains unchanged. On a constant currency
basis, Group revenue for 2017 should be marginally higher than that
achieved in 2016, despite expected further weakening in offshore
oil and gas markets in Marine. Underlying improvements in
performance should be driven largely by transformation savings and
free cash flow should benefit from increased aftermarket cash
revenues in Civil Aerospace, further improvements in working
capital efficiency and cost savings. As a result, we expect a
modest performance improvement overall and we are targeting free
cash flow to be similar to that achieved in 2016.
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 the
strength of customer demand for these which is reflected in our
strong 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 coming 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 modernise 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.
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 segmental reporting.
Underlying Foreign
GBPm 2015* Change** Exchange*** 2016
-------------------------------- -------- ----------- ------------ --------
Order book 76,399 3,329 82 79,810
-------------------------------- -------- ----------- ------------ --------
Underlying revenue 13,354 (296) 725 13,783
-------------------------------- -------- ----------- ------------ --------
Change -2% +5% +3%
-------------------------------- -------- ----------- ------------ --------
Underlying OE revenue 6,724 (112) 415 7,027
-------------------------------- -------- ----------- ------------ --------
Change -2% +6% +5%
-------------------------------- -------- ----------- ------------ --------
Underlying services revenue 6,630 (184) 310 6,756
-------------------------------- -------- ----------- ------------ --------
Change -3% +5% +2%
-------------------------------- -------- ----------- ------------ --------
Underlying gross margin 3,203 (577) 197 2,823
-------------------------------- -------- ----------- ------------ --------
Gross Margin % 24.0% -390 bps 20.5%
-------------------------------- -------- ----------- ------------ --------
Commercial and administrative
costs (1,025) (71) (67) (1,163)
-------------------------------- -------- ----------- ------------ --------
Restructuring costs (39) 41 (2) -
-------------------------------- -------- ----------- ------------ --------
Research and development
costs (765) (47) (50) (862)
-------------------------------- -------- ----------- ------------ --------
Joint ventures and associates 118 (11) 10 117
-------------------------------- -------- ----------- ------------ --------
Underlying profit before
financing 1,492 (665) 88 915
-------------------------------- -------- ----------- ------------ --------
Change -45% +6% -39%
-------------------------------- -------- ----------- ------------ --------
Underlying operating margin 11.2% -480 bps 6.6%
-------------------------------- -------- ----------- ------------ --------
Underlying: for definition see note 2 on page 35; *2015 figures
have been restated as a result of GBP21m of costs previously
reported in 'cost of sales', being reclassified as 'other
commercial and administrative costs' to ensure consistent treatment
with 2016; ** Order book underlying change includes GBP2.1bn
increase from a change to our long term US dollar planning rate;
*** Translational foreign exchange impact
Order book and order intake
During the year our order book increased by GBP3.3bn to
GBP79.8bn, led by Civil Aerospace, which, alongside strong order
intake, also benefitted from a GBP2.1bn uplift from a 5 cent
decrease to our long term US dollar planning rate. Order intake in
our Marine business was poor, largely as a result of the continuing
weak offshore market. Overall orders were also lower in Defence
Aerospace, Power Systems and Nuclear, although we view the
prospects for these businesses as unchanged, reflecting long-term
orders won in previous years.
Underlying trading
Underlying group revenue declined 2% in 2016 compared to 2015 on
a constant currency basis, reflecting declines in both original
equipment revenue (down 2%) and services (down 3%) and driven
almost entirely by Marine. By business on a constant currency
basis, Civil Aerospace revenue was unchanged, Defence Aerospace
revenue increased 1%, Power Systems revenue decreased 1%, Marine
revenue decreased 24% and Nuclear revenue increased 11%.
Underlying profit before financing of GBP915m (2015: GBP1,492m)
was 45% lower on a constant currency basis, led by a significant
reduction in Civil Aerospace profit. This reflected the previously
communicated volume and margin reductions on link accounted Trent
700 engines, reduced business jet original equipment volumes,
reduced large engine utilisation and increased technical costs for
large engines. In addition, reported 2015 numbers included one-off
benefits from a methodology change in respect of risk assessment
and reversal of impairments and provisions in respect of a Trent
1000 launch customer, totalling GBP189m and GBP65m respectively.
These were partially offset by strong life-cycle cost improvements
on installed engines and some provision releases. Profit in Defence
Aerospace at GBP384m was 8% lower on a constant currency basis
largely reflecting additional costs related to the TP400 programme.
Power Systems was down 14% year-on-year principally due to volume
reduction and adverse changes to product mix. Marine profit was
sharply lower led by continuing weakness in the off--shore markets.
Nuclear profit was 37% lower than 2015 due to a lower margin mix in
submarine projects.
Underlying gross margin was GBP2,823m, down 390 bps to 20.5%
largely reflecting the lower margins in Civil Aerospace, Defence
and Marine. Commercial and administrative costs include accruals
for employee incentive schemes in line with our current policies.
Given the good performance relative to original plan, these are
higher than in the prior year. This contributed to commercial and
administrative costs being GBP71m higher on a constant currency
basis year-on-year.
The R&D charge increased by 6% over 2015 on a constant
currency basis, reflecting increased charges in Civil Aerospace and
the adverse year-on-year effect of the favourable R&D credit
adjustment taken in 2015 in Nuclear.
Underlying restructuring charges reduced by GBP41m reflecting
the lower level of underlying restructuring as most costs in 2016
were taken as exceptional due to the nature of the restructuring
activities within the group. The exceptional charge in relation to
these programmes was GBP129m in 2016. This included GBP92m for the
transformation programme launched in November 2015, which delivered
in year benefits of over GBP60m in 2016. The underlying tax rate
for 2016 increased to 32.1% (2015: 24.5%). The primary reasons for
the increase are the non-recognition of deferred tax assets on
losses in Norway, which reflects the current uncertainty in the oil
and gas markets, and a different profit mix with more profits
arising in countries with higher tax rates.
Reported results
Reported results are impacted by the mark-to-market adjustments
driven by movements in USD:GBP and EUR:GBP exchange rates over the
year. In addition, we recognised the GBP671m charge related to the
agreements reached in respect of regulatory investigations, a
goodwill impairment charge of GBP219m largely reflecting a more
cautious outlook for our marine business and GBP129m of exceptional
restructuring cost. As a result, the reported loss before tax was
GBP(4,636)m (2015: a profit of GBP160m).
Free cash flow
Free cash inflow in the year was GBP100m (2015: inflow of
GBP179m), better than expected, reflecting strong cash collections
from a number of key customers at the very end of the period and an
improvement in underlying working capital performance. This helped
offset the lower profit before tax and higher expenditure on PPE
and intangibles. The latter reflects the increased capital
investment in new manufacturing capacity, higher capitalised
R&D, mainly related to the Trent 1000 TEN and higher
certification costs on the Trent XWB-97. More details on the
movement in trading and free cash are included in the Funds Flow
section of the Financial Review.
While some of this positive variance is a timing impact and
likely to reverse early in 2017, improved efficiencies should drive
a level of sustainable benefit. For more details see the section on
technical guidance.
Net debt and foreign currency
The Group is committed to maintaining a robust balance sheet
with a healthy, investment-grade credit rating. We believe this is
important when selling high-performance products and support
packages which will be in operation for decades. Standard &
Poor's updated its rating in January 2017 to BBB+ from A-/negative
outlook and Moody's maintained a rating of A3/stable.
During 2016, the Group's net debt position increased from
GBP111m to GBP225m, reflecting the GBP100m free cash inflow,
shareholder payments of GBP301m 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 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 which
is converted into GBP (currently approximately $5bn per year and
forecast to increase significantly by 2021). Following the fall in
the value of sterling which resulted from the outcome of the UK
referendum on membership of the European Union, 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 $38bn at the end of 2016 (end 2015: $29bn) together
with a reduction in the average rate in the hedge book to GBP/$1.55
(end 2015: GBP/$1.59). The movement in the average achieved rate
year-on-year was around two and a half cents, providing a net
underlying group benefit, after balance sheet effects (the movement
in achieved rate also affects creditor and debtor balances of
hedged cash flows), of around GBP20m.
Group technical factors for 2017
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 2016, the movements from average 2016
rates would improve full year underlying revenues by around GBP400m
and improve underlying profit before tax by around GBP50m.
In the second half of 2016 we took advantage of weak sterling to
increase our US dollar hedge book and averaged down the overall
rate to around GBP/$1.55. With this higher level of cover, we do
not expect to make any material net additions to the hedge book in
2017. As a result, we expect the average achieved rate in 2017 to
be broadly unchanged from that achieved in 2016.
Net R&D spend is expected to be in the region of GBP950m in
2017 (2016: GBP937m), principally reflecting expenses related to
the completion of important new product launches in Civil
Aerospace. Largely reflecting an increase in R&D
capitalisations associated with new engine programmes, the net
R&D charge is expected to be between GBP60-100m lower than that
in 2016 (2016: GBP862m).
Incremental restructuring cost savings in 2017, from the
transformation programme announced in November 2015, are expected
to be between GBP80-110m (2016: over GBP60m).
Overall underlying finance charges in 2017 are expected to be in
the region of GBP100-110m, partly reflecting the higher average
level of gross and net debt.
Given the sensitivity of the underlying tax rate to a number of
factors, including the impact of weak marine offshore markets, we
expect our effective tax rate for 2017 to be between 25-30%,
reflecting the continued high proportion of taxable profit expected
to be generated in higher tax rate regions.
Capital expenditure for 2017 is expected to be around GBP600m
(2016: GBP626m).
We are targeting free cash flow to be similar to that achieved
in 2016. Free cash flow excludes the payments in respect of
agreements reached with investigating authorities.
Operational Review: Civil Aerospace
Underlying Foreign
GBPm 2015 Change* Exchange** 2016
-------------------------------- ------- ----------- ----------- -------
Order book 67,029 4,395 2 71,426
-------------------------------- ------- ----------- ----------- -------
Engine deliveries 712 (63) 649
-------------------------------- ------- ----------- ----------- -------
Underlying revenue 6,933 (27) 161 7,067
-------------------------------- ------- ----------- ----------- -------
Change - +2% +2%
-------------------------------- ------- ----------- ----------- -------
Underlying OE revenue 3,258 14 85 3,357
-------------------------------- ------- ----------- ----------- -------
Change - +3% +3%
-------------------------------- ------- ----------- ----------- -------
Underlying services revenue 3,675 (41) 76 3,710
-------------------------------- ------- ----------- ----------- -------
Change -1% +2% +1%
-------------------------------- ------- ----------- ----------- -------
Underlying gross margin 1,526 (397) 56 1,185
-------------------------------- ------- ----------- ----------- -------
Gross Margin % 22.0% -570 bps 16.8%
-------------------------------- ------- ----------- ----------- -------
Commercial and administrative
costs (296) (43) (3) (342)
-------------------------------- ------- ----------- ----------- -------
Restructuring costs (7) (4) - (11)
-------------------------------- ------- ----------- ----------- -------
Research and development
costs (515) (34) (19) (568)
-------------------------------- ------- ----------- ----------- -------
Joint ventures and associates 104 (8) 7 103
-------------------------------- ------- ----------- ----------- -------
Underlying profit before
financing 812 (486) 41 367
-------------------------------- ------- ----------- ----------- -------
Change -60% +5% -55%
-------------------------------- ------- ----------- ----------- -------
Underlying operating margin 11.7% -700 bps 5.2%
-------------------------------- ------- ----------- ----------- -------
Underlying: for definition see note 2 on page 35; * Order book
underlying change includes GBP2.1bn increase from a change to our
long term US dollar planning rate; ** Translational foreign
exchange impact
Financial overview
Overall, underlying revenue for Civil Aerospace was unchanged
(up 2% at actual exchange rates). Original equipment revenue (OE)
was unchanged, with increases from higher volumes of large engines
being offset by the decline in business jet engines and V2500
modules. Aftermarket revenue was down 1% despite strong growth from
our in-production engines.
% of Underlying Underlying Foreign % of
Change
GBPm 2015 whole Change % Exchange Whole 2016
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Original Equipment 3,258 48% 14 - 85 48% 3,357
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Large engine: linked
and other 1,570 23% 32 +2% 2 23% 1,604
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Large engine: unlinked
installed 504 7% 237 +47% 1 10% 742
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Business aviation 903 14% (228) -25% 82 11% 757
------------------------ ------ ------ ----------- ----------- --------- ------ ------
V2500 281 4% (27) -10% - 4% 254
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Service 3,675 52% (41) -1% 76 52% 3,710
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Large engine 2,371 34% (84) -4% 2 32% 2,289
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Business aviation 425 6% (13) -3% 40 6% 452
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Regional 360 5% (52) -14% 34 5% 342
------------------------ ------ ------ ----------- ----------- --------- ------ ------
V2500 519 7% 108 +21% - 9% 627
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Original equipment revenue from Large engine: linked and other
was up 2% reflecting increased volumes of Trent 900s and a higher
number of spare Trent XWB engines, partly offset by Trent 700
volume and price reductions, ahead of the introduction of the Trent
7000 for the Airbus A330neo. Sales of spare engines to joint
ventures, included in Large engine: linked and other, generated
revenue of GBP288m (2015: GBP189m).
Original equipment revenue from Large engine: unlinked installed
increased 47%, led by higher volumes of Trent XWBs.
Large engine service revenue reflected double digit growth from
our in-production engines which more than offset the reduction from
older engines, including the expected lower year-on-year
utilisation of Trent 500 and Trent 800 engines. Time and material
revenue reduced, as a result of fewer overhauls of engines across
the out-of-production fleet. Contract accounting effects within
service revenue in 2016 were significantly lower than prior year.
As a result, while there was a small foreign exchange improvement
in 2016, underlying service revenue from large engines were down
4%. Adjusting for contract accounting effects, service revenue from
large engines would have been up 2%.
Revenue from business aviation OE engine sales was, 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, were stable. Overall, business aviation
OE revenues declined 25% while aftermarket revenue was slightly
down.
Service revenue from our regional jet engines declined 14%,
reflecting retirements and reduced utilisation of relevant fleets
by North American operators in particular.
On the V2500 programme, which powers aircraft including the
Airbus A320, revenue from OE modules declined 10% reflecting the
production slow-down as Airbus transitions to the A320neo, powered
by another engine provider. However, V2500 service revenues were
21% higher, reflecting price escalation on flying hour payments
together with increased overhaul activity.
Overall gross margins for Civil Aerospace were 16.8% (2015:
22.0%), declining GBP397m from 2015 on a constant currency basis.
The main headwinds were as forecast at the start of the year; OE
reductions to the Trent 700 programme, business aviation engines
and V2500 modules, reduced utilisation and fewer overhauls of our
out--of--production Trent 500 and 800 and RB211 engines and the
declining regional aftermarket. In addition, we also incurred
programme charges of around GBP30m for engines still in
development. These were partially offset by the release, after
accounting and legal review, of accruals related to the termination
in prior years of intermediary services, totalling GBP53m (2015:
GBPnil). Gross margin from spare engine sales to joint ventures
contributed GBP97m (2015: GBP67m).
The in-year net benefit from long-term contract accounting
adjustments totalled GBP90m (2015: total benefit of GBP222m, which
included a GBP189m one-off benefit associated with the refinement
of our methodology for risk assessment of future revenue). The
GBP90m included a GBP217m benefit from life-cycle cost improvements
(2015: benefit of GBP140m). We also 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 offset by technical costs of GBP98m
(2015: GBP24m) for large engines, including the Trent 900, relating
to the need for increased shop visits in the short-term, and the
Trent 700, where we are upgrading the engine management system,
together with a charge of GBP64m (2015: GBP83m), reflecting other
operational changes.
The year-on-year change was also impacted by a one-off GBP65m
write-back in 2015 of a previously recognised impairment of
Contractual Aftermarket Rights (CARs) for sales to a launch
customer and the release of a related provision; in 2016 these
sales were capitalised as CARs.
Costs below gross margin were GBP89m higher than the previous
year at GBP818m on an underlying basis. Within this, R&D
charges of GBP568m were GBP34m higher, reflecting higher spend on
key programmes, particularly in respect of the Trent 7000 which are
being expensed ahead of capitalisation and lower development cost
contributions from risk and revenue sharing partners, partly offset
by increased R&D capitalisation on the Trent 1000 TEN.
Underlying commercial and administrative costs were GBP43m
higher than 2015 reflecting increased employee incentive charges.
Underlying restructuring costs of GBP11m were GBP4m higher than
2015 and profits from joint ventures and associates were down
GBP8m.
As a result, profit before financing and tax was 55% down,
reflecting a combination of lower overall gross margins, higher
commercial and administrative, R&D and restructuring costs and
reduced joint venture and associate profits. Taking account of
foreign exchange effects, underlying profit before financing and
tax was GBP367m (2015: GBP812m).
Trading cash flow
Trading cash flow before working capital movements of GBP22m
declined year-on-year by GBP462m, driven by a reduction in
underlying profit before financing of GBP445m and increased
property, plant and equipment additions. There were also increased
certification costs driven by the Trent XWB-97 and higher R&D
capitalisation of the Trent 1000 TEN development costs, offset in
part by other timing differences including provision movements.
GBPm 2016 2015 Var
-------------------------------------------------- ------ ------ ------
Underlying profit before financing 367 812 (445)
-------------------------------------------------- ------ ------ ------
Depreciation and amortisation 491 410 81
-------------------------------------------------- ------ ------ ------
Sub-total 858 1,222 (364)
-------------------------------------------------- ------ ------ ------
CARs additions (208) (161) (47)
-------------------------------------------------- ------ ------ ------
Property, plant, equipment and other intangibles (739) (502) (237)
-------------------------------------------------- ------ ------ ------
Other timing differences* 111 (75) 186
-------------------------------------------------- ------ ------ ------
Trading cash flow pre-working capital
movements 22 484 (462)
-------------------------------------------------- ------ ------ ------
Net long-term contract debtor movements (246) (406) 160
-------------------------------------------------- ------ ------ ------
Other working capital movements 267 (78) 345
-------------------------------------------------- ------ ------ ------
Trading cash flow** 43 - 43
-------------------------------------------------- ------ ------ ------
* Includes timing differences between underlying profit before
financing and cash associated with: joint venture profits less
dividends received; provision charges higher /(lower) than cash
payments; non-underlying cash and profit timing differences
(including restructuring); and, financial assets and liabilities
movements including the effect of foreign exchange movements on
non-cash balances. ** Trading cash flow is cash flow before:
deficit contributions to the pension fund; taxes; payments to
shareholders; foreign exchange on cash balances; and, acquisitions
and disposals.
The overall trading cash flow improvement of GBP43m resulted
largely from a significant year-on-year improvement in working
capital, due mainly to differences in the timing of payments to
suppliers and increased deposits, offset in part by an increase in
inventory. In addition, reflecting the lower profits recorded on
our linked engines such as the Trent 700, net long term contract
debtor additions were also lower.
TotalCare net assets and Contractual Aftermarket Rights
TotalCare net assets increased in 2016 by GBP230m (2015:
GBP406m) to GBP2.44bn reflecting accounting for new "linked"
engines of GBP432m (2015: GBP521m), contract accounting adjustments
taken in the year of GBP90m (2015: GBP222m) offset by the cash
inflows and net other items of GBP(292)m (2015: GBP(337)m). It
should be noted that the GBP230m net asset increase is different
from the GBP246m used in the trading cash flow above because of
foreign exchange effects on evaluating TotalCare net debtor balance
movements.
The CARs balance increased by GBP169m (2015: increase of
GBP156m) to GBP574m reflecting higher sales of unlinked Trent XWB
engines partly offset by engine cost improvements.
Investment and business development
Order intake of GBP14.1bn in 2016 for Civil Aerospace was
GBP1.3bn higher than the previous year. The order book closed at
GBP71.4bn, up GBP4.4bn or 7% from 2015, which included a GBP2.1bn
benefit from the change in the long term planning foreign exchange
rate discussed previously. Excluding this the order book was up
3%.
Significant orders in 2016 included a $2.7bn order from
Norwegian for Trent 1000 engines, an order from Garuda Indonesia
worth $1.2bn for Trent 7000 engines and a $900m order from Virgin
Atlantic for Trent XWB. All of these include the provision of long
term TotalCare(R) engine services.
Foundations for future growth are built from our investment in
engineering excellence
During the year we committed resources in order to ensure we
made significant progress across all key engineering programmes in
2016. The Trent 1000 TEN (Thrust, Efficiency and New Technology)
engine undertook its first test flight in March and received its
European Aviation Safety Agency (EASA) certification on 11 July.
The Trent 1000 TEN will power all variants of the Boeing 787
Dreamliner family and will power the first flight of the 787-10 in
2017.
In November the latest version of the Trent XWB, the higher
thrust -97 engine, successfully powered the first flight of the
Airbus A350-1000 in Toulouse. The Trent 7000 engine, which will
exclusively power the Airbus A330neo, undertook ground testing for
the first time and we started assembly of the first flight test
engines.
In respect of future technologies, the Advance3 large engine
demonstrator is proceeding well. The engine 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) plus additive layer
manufacturing or 3D printing. It is currently in development at our
Bristol facility with all core modules advancing well.
In September, we successfully ran the world's most powerful
aerospace gearbox for the first time under the joint venture
Aerospace Transmission Technologies (ATT). The gearbox is designed
to reach up to 100,000 horsepower and is a significant step in the
development of the new UltraFan(TM) engine technology.
Supporting our commitment to research and development, we also
announced a $30m expansion into a new facility in Cypress,
California, that will be dedicated to research and development of
ceramic matrix composite (CMC) materials and processes for use in
next generation aircraft engine components.
Investing in new aerospace supply chain capabilities to help
drive operational excellence
In January, we announced plans to invest more than GBP30m at our
site in Washington, Tyne & Wear, UK, creating a new facility to
manufacture a range of aerospace discs for in-service engines. The
new facility is expected to be fully operational in 2018 and 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.
The construction of a GBP50m extension to our Wide Chord Fan
Blade facility in Barnoldswick, UK, started in December. The
expanded facility will be able to manufacture 6,000 large Trent fan
blades a year, almost twice its current capacity. We also announced
the creation of a Centre of Excellence (CoE) in Structures &
Transmissions at the same site. The new centre, supported by GBP20m
of investment, will manufacture many of the complex structures that
feature in all Rolls-Royce aero engines.
Good progress strengthening our aerospace aftermarket service
offering
We have continued to invest in our service capabilities to
support our customers with state-of-the-art facilities and relevant
products and services, particularly within our portfolio of
TotalCare offerings.
During the year we completed changes to three Approved
Maintenance Centre (AMC) joint ventures. This included investing
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%. These AMCs support our strategy to offer 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.
Additionally, we announced further details of a new AMC in Abu
Dhabi with Mubadala Development Company, the emirate-based
investment and development organisation. This purpose built
facility will carry out work on the Trent XWB.
We also announced that we are further expanding our global
network of Authorised Service Centres (ASC) for business aviation
aircraft under our CorporateCare(R) service provision for
customers. Rolls-Royce now has 62 ASCs in place with key
maintenance providers worldwide.
Following the launch of SelectCare(TM) in 2016 we secured our
first agreement for Trent 800 engines as part of a wide-ranging
deal with Delta Airlines.
Civil Aerospace outlook
On a constant currency basis our Civil Aerospace business should
deliver modest growth in revenue and profit in 2017, supported by
large engine aftermarket growth, further life-cycle cost reductions
and a higher level of R&D capitalisation. Business jet demand
is expected to weaken further, as will the demand for aftermarket
services to support Rolls-Royce powered regional aircraft. After a
better year for trading cash flow in 2016, we now expect this to be
broadly unchanged year-on-year reflecting higher volumes of
cash-loss making engines offsetting the positive effects of higher
aftermarket cash revenues.
We expect the TotalCare net asset to peak in the next twelve
months at between GBP2.5bn and GBP2.7bn, reflecting further
targeted life cycle cost improvements and other timing differences
between cost and cash.
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 continue to impact business
jet engine production volumes and service activity on older large
engines. 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.
New airframe growth and transitions are in line with
expectations
Preparations for the transition of the Airbus A330ceo to A330neo
models are also progressing well and once the transition is
completed, we will benefit from an exclusive position with the new
Trent 7000 on the A330neo.
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.
Operational Review: Defence Aerospace
Underlying Foreign
GBPm 2015 Change Exchange* 2016
--------------------------------- ------ ----------- ---------- ------
Order book 4,316 (391) 1 3,926
--------------------------------- ------ ----------- ---------- ------
Engine deliveries 649 12 - 661
--------------------------------- ------ ----------- ---------- ------
Underlying revenue 2,035 17 157 2,209
--------------------------------- ------ ----------- ---------- ------
Change +1% +8% +9%
--------------------------------- ------ ----------- ---------- ------
Underlying OE revenue 801 22 67 890
--------------------------------- ------ ----------- ---------- ------
Change +3% +8% +11%
--------------------------------- ------ ----------- ---------- ------
Underlying services revenue 1,234 (5) 90 1,319
--------------------------------- ------ ----------- ---------- ------
Change - +7% +7%
--------------------------------- ------ ----------- ---------- ------
Underlying gross margin 579 (49) 34 564
--------------------------------- ------ ----------- ---------- ------
Gross margin % 28.5% -260 bps 25.5%
--------------------------------- ------ ----------- ---------- ------
Commercial and administrative
costs (124) (3) (7) (134)
--------------------------------- ------ ----------- ---------- ------
Restructuring (8) 18 - 10
--------------------------------- ------ ----------- ---------- ------
Research and development
costs (73) 5 (3) (71)
--------------------------------- ------ ----------- ---------- ------
Joint ventures and associates 19 (4) - 15
--------------------------------- ------ ----------- ---------- ------
Underlying profit before
financing 393 (33) 24 384
--------------------------------- ------ ----------- ---------- ------
Change -8% +6% -2%
--------------------------------- ------ ----------- ---------- ------
Underlying operating margin 19.3% -180 bps 17.4%
--------------------------------- ------ ----------- ---------- ------
Underlying: for definition see note 2 on page 35; *
Translational foreign exchange impact
Financial Overview
Underlying revenue of GBP2,209m was up slightly on the prior
year. Higher volumes for TP400 production, together with increased
Adour engine deliveries, helped original equipment (OE) revenues
increase 3%. Service revenues were stable, with lower demand for
spare parts offset by increased revenues from long-term Eurofighter
Typhoon and C-130J service contracts.
Gross margin declined by GBP49m, reflecting lower sales of spare
parts, an adverse change in OE product mix, additional expenditure
of GBP31m on the TP400 programme and higher payroll costs.
Retrospective contract margin improvements totalled GBP82m, GBP5m
lower than prior year, but ahead of early expectations. Of this,
around half relates to delivering significant cost savings benefits
on the largest Eurofighter Typhoon contract, which triggered a
cost-saving incentive award.
While overall R&D costs were slightly lower than the prior
year; the business continued to invest in future programme
development and the Indianapolis transformation.
Restructuring costs were lower due to reduced level of severance
costs and reversal of a provision for the closure of the defence
facility at Ansty through better cost recovery than expected.
Underlying commercial and administrative costs and other costs were
similar to prior year.
Profit before financing of GBP384m was 8% lower than the prior
period, driven by the lower gross margin.
Investment and business development
Order intake for 2016 was GBP1.5bn (2015: GBP1.7bn), reflecting
significant follow-on export orders being delayed to 2017.
Significant activities in 2016 included winning orders for the
F-35B LiftSystem, increased MRTT engines for A330 aircraft and
contract renewals for services. Deliveries of engines were slightly
higher in 2016, driven by increased units for TP400 and Adour
export. Services revenues were steady, reflecting higher flying
hours from newer EJ200, F405 Adour and AE2100 powered aircraft in
the UK, North America and the Middle-East.
The first T56 3.5 technology insertion kits delivered to the
USAF for its legacy Hercules C-130 fleet have validated the
expected fuel saving and performance benefits, prompting growing
interest in the upgrade.
The UK and French Governments also committed to the EUR2bn FCAS
unmanned combat air system programme in December, enabling progress
through to the demonstrator phase of the programme in 2017. Our
LibertyWorks(TM) development unit was selected to provide the
vertical lift propulsion for the new DARPA VTOL X-Plane. The unit
also launched an infrared footprint suppression module, reflecting
our diverse and cutting edge technology capability.
Within the Services portfolio, the support contract for the US's
C-130J transport fleet was renewed and we signed a memorandum of
understanding with Pratt & Whitney to extend support for the
UK's new F--35B Lightning fleet beyond the Rolls-Royce
LiftSystem(R).
This strategy of strengthening our service offerings closer to
our major customers saw the opening of new on-base Service Delivery
Centres in the UK (at RAF Brize Norton) and in the US (at
Kingsville Texas), as well as a new joint engine support facility
for the USAF's Global Hawk fleet.
As part of the TP400 consortium, the focus was on delivering
solutions to improve the on-wing reliability of the GE-Avio
gearbox. This included an on-wing exchange procedure which has
greatly helped to reduce the service time and backlog.
Transformation milestones were achieved as planned, including
completion of the first production cell as part of the investment
activity in Indianapolis. Further manufacturing changes are due to
come on stream in the first half of 2017.
Defence Aerospace outlook
While revenues should remain steady, margins are expected to
come under pressure from the essential investments in efficiency
and long-term growth. These reflect important product development
and manufacturing transformation initiatives as the business looks
capitalise on its strong positions, particularly in Combat and
Transport & Patrol, and the absence of significant incentive
arrangements under remaining long-term service agreements. As a
result, margins and profits are expected to soften from the recent
levels.
Operational Review: Power Systems
Underlying Foreign
GBPm 2015* change Exchange** 2016
--------------------------------- ------ ----------- ----------- ------
Order book 1,928 (113) - 1,815
--------------------------------- ------ ----------- ----------- ------
Underlying revenue 2,385 (25) 295 2,655
--------------------------------- ------ ----------- ----------- ------
Change -1% +12% +11%
--------------------------------- ------ ----------- ----------- ------
Underlying OE revenue 1,618 (9) 201 1,810
--------------------------------- ------ ----------- ----------- ------
Change -1% +12% +12%
--------------------------------- ------ ----------- ----------- ------
Underlying services revenue 767 (16) 94 845
--------------------------------- ------ ----------- ----------- ------
Change -2% +12% +10%
--------------------------------- ------ ----------- ----------- ------
Underlying gross margin 656 (28) 79 707
--------------------------------- ------ ----------- ----------- ------
Gross margin % 27.5% -90 bps 26.6%
--------------------------------- ------ ----------- ----------- ------
Commercial and administrative
costs (296) (9) (35) (340)
--------------------------------- ------ ----------- ----------- ------
Restructuring (4) 4 - -
--------------------------------- ------ ----------- ----------- ------
Research and development
costs (162) 5 (20) (177)
--------------------------------- ------ ----------- ----------- ------
Joint ventures and associates - 1 - 1
--------------------------------- ------ ----------- ----------- ------
Underlying profit before
financing 194 (27) 24 191
--------------------------------- ------ ----------- ----------- ------
Change -14% +12% -2%
--------------------------------- ------ ----------- ----------- ------
Underlying operating margin 8.1% -110 bps 7.2%
--------------------------------- ------ ----------- ----------- ------
Underlying: for definition see note 2 on page 35; * 2015 figures
have been restated as a result of costs previously reported in
'cost of sales', being reclassified as 'other commercial and
administrative costs' to ensure consistent treatment with 2016; **
Translational foreign exchange impact
Financial overview
Underlying revenue of GBP2,655m was 1% lower at constant
currency (11% higher including the impact of translational foreign
exchange). Overall original equipment revenue declined 1%. Growth
in sales of diesel and gas products to power generation and
industrial customers offset reductions within markets where demand
is linked to low oil and commodity prices, and reduced activity in
naval markets.
Service revenues reduced 2%, largely reflecting weaker marine
medium speed markets, once again reflecting low oil prices.
Gross margin reduced by GBP28m in absolute terms and by 90 basis
points, to 26.6% (2015: 27.5%) with good progress on cost reduction
generated from transformation activity offsetting some of the
impact of volume reduction, adverse changes in product mix and a
reduction in the discount rate applied to the warranty
provision.
Overall, underlying profit declined GBP27m or 14%, led by the
reduction in gross margin. Costs below gross margin remained
broadly unchanged on an underlying basis. The GBP9m increase in
commercial and administrative costs was offset by a GBP5m reduction
in R&D reflecting a more focused approach to future product
development activity together with reduced underlying restructuring
costs. An exceptional charge of GBP45m has been taken for
restructuring activity.
Investment and business development
Power Systems' customers span a range of markets from power
generation and defence to marine, industrial and construction
markets. This end-market diversity has enabled the business to
mitigate some of the weak market environments and as a result, the
order book ended the year at GBP1.8bn (2015: GBP1.9bn).
2016 order intake of GBP2.4bn (2015: GBP2.5bn) was 2% down at
constant currency, with the year-on-year reduction being mainly in
oil and gas and commodity-related markets including marine,
together with lower government project orders. This was offset by
improvements within power generation, agricultural and industrial
markets.
Within power generation markets, we delivered 200 gensets (a
package of engine and generator) to the Asian VPower Group, one of
our strategic partners in the region. We have continued to
strengthen our position in the growing market for backup power for
larger mission critical applications. Order intake later in the
year was healthy for solutions to support data systems in both
Europe and the US and also for independent power customers. We have
also agreed to establish a 50/50 joint venture with Yuchai
Machinery Company Ltd for the production under licence of MTU
Series 4000 diesel engines in China, targeting the Chinese
off-highway market.
Demand for our marine products remained good. Naval orders
included gensets for the UK Royal Navy's Type 26 Global Combat Ship
and a supply contract for the Italian Navy relating to a new
multi-purpose ocean-going patrol vessel. Within the land defence
markets there was a follow-up order for use in a German armoured
vehicle.
In other areas we continued to attract new customers in new
regional markets including Japanese high-tech crane producer Kato.
We also made progress within the rail market in both Europe and
Asia. This included a notable order from Hitachi Rail Europe for
over 100 MTU power packs for use in the UK and an order to
remanufacture (an in-house process, known as Reman, to refurbish
and extend the life of existing systems) around 400 MTU power packs
for Transdev Group in Germany.
Innovation was again strong with some notable new products
coming to market in the year. We launched new advanced diesel and
gas propulsion systems which meet new IMO and EPA emissions
standards. At the same time, we launched advanced propulsion
systems for the construction and industrial markets which satisfy
new emission standards in those industries. Finally, we launched a
hybrid power pack and energy pack battery system for the rail
market.
Power Systems also made progress with the transformation
programme, targeting reductions in product costs as well as
strengthening sales and service resources and leveraging digital
capabilities to develop value adding services.
Power Systems outlook
The outlook for Power Systems remains steady. The business
finished the year with a strong order book for several of its key
markets. Whilst some markets, particularly those impacted by oil
and commodity prices remain difficult, we expect the business to
deliver modest growth in revenue and profit in 2017.
Operational Review: Marine
Underlying Foreign
GBPm 2015 change Exchange* 2016
--------------------------------- ------ ----------- ---------- ------
Order book 1,164 (337) 78 905
--------------------------------- ------ ----------- ---------- ------
Underlying revenue 1,324 (312) 102 1,114
--------------------------------- ------ ----------- ---------- ------
Change -24% +8% -16%
--------------------------------- ------ ----------- ---------- ------
Underlying OE revenue 773 (198) 56 631
--------------------------------- ------ ----------- ---------- ------
Change -26% +7% -18%
--------------------------------- ------ ----------- ---------- ------
Underlying services revenue 551 (114) 46 483
--------------------------------- ------ ----------- ---------- ------
Change -21% +8% -12%
--------------------------------- ------ ----------- ---------- ------
Underlying gross margin 260 (44) 20 236
--------------------------------- ------ ----------- ---------- ------
Gross margin % 19.6% +170 bps 21.2%
--------------------------------- ------ ----------- ---------- ------
Commercial and administrative
costs (201) (6) (17) (224)
--------------------------------- ------ ----------- ---------- ------
Restructuring (16) 19 (1) 2
--------------------------------- ------ ----------- ---------- ------
Research and development
costs (28) (11) (2) (41)
--------------------------------- ------ ----------- ---------- ------
Joint ventures and associates - - - (0)
--------------------------------- ------ ----------- ---------- ------
Underlying profit before
financing 15 (42) - (27)
--------------------------------- ------ ----------- ---------- ------
Change -280% -280%
--------------------------------- ------ ----------- ---------- ------
Underlying operating margin 1.1% -380 bps -2.4%
--------------------------------- ------ ----------- ---------- ------
Underlying: for definition see note 2 on page 35; *
Translational foreign exchange impact
Financial overview
Underlying revenue of GBP1,114m was 24% lower on a constant
currency basis. Within this, original equipment and services
revenues were 26% and 21% lower respectively. This reflected
continued weakness in offshore and merchant, as ship owners
deferred overhaul and maintenance on the back of reduced
utilisation of their vessels.
Gross margin was GBP236m, an improvement of 170 basis points
versus 2015, but GBP(44)m lower in absolute terms, as a result of
the lower volume. The improved gross margin percentage partly
resulted from cost reduction actions. Overall this resulted in a
net loss of GBP(27)m.
The announcement in December 2016 of further organisational
changes and headcount reduction in 2017 has led to an exceptional
GBP(5)m restructuring charge. In addition, GBP200m of the group
impairment of goodwill was in marine and mainly related to the
acquisition of Vickers in 1999.
Investment and business development
Overall, the Marine order book declined 29% during the year at
constant currency, reflecting adjustments for a number of postponed
or cancelled orders and very weak offshore markets. Orders for new
vessels, projects and services were all sharply lower than 2015 and
as a result order intake was only GBP715m, 29% down on the previous
year at constant currency.
The offshore market was extremely challenging, driven by a low
oil price and reduced capital expenditure within the upstream oil
exploration and related services sectors. Several merchant segments
were also subdued, reflecting generally weak conditions in the
global marine industry. The business focussed on using its
strengths as a system integrator to leverage across adjacencies
including designing and equipping the UK's new polar research ship
RSS Sir David Attenborough. It also landed a major deal to design
and equip Hurtigruten's new explorer cruise ships, along with
battery solutions to make full electric propulsion possible.
The business announced a contract to supply the world's first
automatic crossing system to ferry operator, Fjord 1, and also
launched our new Azipull Carbon thruster with yacht builder
Benetti, reflecting the increasing importance of newer
technologies. The fishing segment remained strong, with contracts
won for a range of vessels. The naval business was focused on
further development work and supporting customers across Asia,
Europe and US. These included supporting successful sea-trials for
US Navy's most advanced warship the USS Zumwalt, further MT-30
orders for new Italian helicopter landing craft and selection by
New Zealand Navy for ship design of its MSC programme.
The Marine business continues to lower its cost base and build
flexibility into the organisation particularly across back office
and operational activities. The restructuring programmes announced
in 2015 have led to a reduction of around 1,100 headcount with
GBP65m of annual savings recognised from 2017.
Reflecting the ongoing subdued and increasingly cost-conscious
market environment, in December further restructuring to take place
in early 2017 was announced, targeting annualised savings of around
GBP50m. This included a further headcount reduction of around 800
across operations and back-office functions as the business
continues to shrink footprint, reduce indirect headcount, and
consolidate manufacturing activity.
At the same time, investments were made in the strategic
enablers of the future, including upgrading 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 pace of technology change in the sector is accelerating, and
we continue to invest in pioneering research into Ship Intelligence
technologies focused on data-driven value-added services that
facilitate full ship automation in the long term.
Marine outlook
Overall the outlook for Marine remains cautious. We expect that
the market will continue to feel the impact of low oil prices, and
the general overcapacity in several segments will take time to
reach equilibrium. This will impact the demand for our products and
services. We will sustain our active cost reduction programmes,
focusing on manufacturing, supply chain and overhead costs, in
order to drive a more competitive business adapted to the current
market conditions.
Operational Review: Nuclear
Underlying Foreign
GBPm 2015 change Exchange* 2016
--------------------------------- ------- ----------- ---------- ------
Order book 2,168 (379) 1 1,790
--------------------------------- ------- ----------- ---------- ------
Underlying revenue 687 74 16 777
--------------------------------- ------- ----------- ---------- ------
Change +11% +2% +13%
--------------------------------- ------- ----------- ---------- ------
Underlying OE revenue 251 95 8 354
--------------------------------- ------- ----------- ---------- ------
Change +38% +3% +41%
--------------------------------- ------- ----------- ---------- ------
Underlying services revenue 436 (21) 8 423
--------------------------------- ------- ----------- ---------- ------
Change -5% +2% -3%
--------------------------------- ------- ----------- ---------- ------
Underlying gross margin 111 6 4 121
--------------------------------- ------- ----------- ---------- ------
Gross margin % 16.2% -80 bps 15.6%
--------------------------------- ------- ----------- ---------- ------
Commercial and administrative
costs (53) (14) (3) (70)
--------------------------------- ------- ----------- ---------- ------
Restructuring (2) 2 - -
--------------------------------- ------- ----------- ---------- ------
Research and development
costs 14 (20) - (6)
--------------------------------- ------- ----------- ---------- ------
Joint ventures and associates 0 - - -
--------------------------------- ------- ----------- ---------- ------
Underlying profit before
financing 70 (26) 1 45
--------------------------------- ------- ----------- ---------- ------
Change -37% +1% -36%
--------------------------------- ------- ----------- ---------- ------
Underlying operating margin 10.2% -440 bps 5.8%
--------------------------------- ------- ----------- ---------- ------
Underlying: for definition see note 2 on page 35; *
Translational foreign exchange impact
Financial overview
Underlying revenue increased by 11% to GBP777m, led by growth in
several key programmes in the submarines business, including
support for the next generation Dreadnought class submarines (the
successor to the Vanguard class), various refuelling projects and
decommissioning activities. Volumes on key civil instrumentation
and control programmes in both France and Finland were also
good.
Gross margin was lower at 15.6%, reflecting the revenue mix
favouring lower margin government-led submarine projects. Below
gross margin, the change in treatment of R&D credits, which
significantly impacted the full year in 2015, produced an R&D
credit of GBP7m in 2016. This was offset by additional costs to
support the higher volumes and to improve delivery performance. In
addition, there were extra payroll costs, as well as additional
R&D to support the initial design phase for small modular
reactors.
As a result, underlying profit before financing excluding the
R&D credit was GBP37m at constant currency, 27% below the prior
year (2015: GBP51m adjusted for the R&D credit). After the
R&D credit and including a GBP1m foreign exchange benefit,
underlying profit was GBP45m.
Investment and business developments
Order intake of GBP385m was 8% higher than 2015.
Notwithstanding, the closing order book of GBP1.8bn was 17% below
2015, reflecting the business working through the large multi-year
orders, particularly in submarines, received in prior years.
Submarine activities focused on continuing our support to the
Royal Navy's current operational fleet of nuclear powered
submarines, as well as delivery of propulsion systems for the
remaining Astute Class submarines and for the Dreadnought
programme. As well as implementing a range of performance
improvement initiatives during the year, we also completed delivery
of the nuclear propulsion system for the 4(th) (of 7) Astute class
submarine and have made good progress both in the preparation for
the refuelling programme of HMS Vanguard and for decommissioning
the Naval Reactor Test Establishment in Scotland. In conjunction
with the UK's Ministry of Defence and BAE Systems, we have also
advanced discussions around a long-term alliance framework for the
Dreadnought programme. Once concluded, this new framework should
ensure that the delivery structure and commercial benefits are
clarified for all key partners in this GBP31bn investment
programme.
The civil nuclear business successfully concluded the first
phase of its major instrumentation and control modernisation
programme at Fortum's Loviisa plant in Finland, using our
Spinline(TM) technology. It also continued with its upgrade
programme across the French nuclear fleet as part of a multi-year
contract.
The UK Government announced final approval for the Hinkley Point
C nuclear power station in September, where our Nuclear business
was awarded preferred bidder status for contracts covering waste
treatment systems, heat exchangers and diesel generators.
The business also announced the strengthening of the strategic
collaboration, started in 2014, with the China National Nuclear
Corporation, including engineering and training services. The
Chinese market is expected to sustain strong growth and we are well
positioned with relevant technology.
During the year we started an R&D programme, together with a
number of partners, to scope out the initial design phase for small
modular reactors (known as SMRs). These smaller, more flexible
nuclear power generation units offer the potential for a more
flexible power generation in future decades and directly build on
the knowledge and specialist skills of our Nuclear business. Any
significant further development work will be dependent on
government support for this technology.
Nuclear outlook
The long-term outlook for Nuclear remains positive, supported by
confirmation from the UK Government of the ongoing investment in
the Dreadnought class submarines. Together with renewed activities
in the civil market, particularly in the UK and China, these
provide encouraging growth opportunities.
Performance in 2017 will be impacted by the loss of R&D
credits on investments and further modest increases in the
investment in SMR technology. As a result, profit is expected to be
around half that achieved in 2016.
Financial review
Underlying income statement
Year to 31 December
GBPm 2016 2015 Change
-------------------------------------------------- ------- ------- -------
Revenue - 2015 exchange rates 13,058 13,354 -296
-------------------------------------------------- ------- ------- -------
Translation to 2016 exchange rates 725
-------------------------------------------------- ------- ------- -------
Revenue 13,783 13,354 +429
-------------------------------------------------- ------- ------- -------
Gross profit 2,626 3,203 -577
-------------------------------------------------- ------- ------- -------
Commercial and administrative costs (1,096) (1,025) -71
-------------------------------------------------- ------- ------- -------
Restructuring 2 (39) +41
-------------------------------------------------- ------- ------- -------
Research and development costs (812) (765) -47
-------------------------------------------------- ------- ------- -------
Share of results of joint ventures and associates 107 118 -11
-------------------------------------------------- ------- ------- -------
Profit before financing at 2015 exchange rates 827 1,492 -665
-------------------------------------------------- ------- ------- -------
Translation to 2016 exchange rates 88
-------------------------------------------------- ------- ------- -------
Profit before financing 915 1,492 -577
-------------------------------------------------- ------- ------- -------
Net financing (102) (60) -42
-------------------------------------------------- ------- ------- -------
Profit before tax 813 1,432 -619
-------------------------------------------------- ------- ------- -------
Tax (261) (351) +90
-------------------------------------------------- ------- ------- -------
Profit for the year 552 1,081 -529
-------------------------------------------------- ------- ------- -------
Earnings per share (EPS) 30.13p 58.73p -28.60p
-------------------------------------------------- ------- ------- -------
Payments to shareholders 11.70p 16.37p -4.67p
-------------------------------------------------- ------- ------- -------
Gross R&D expenditure (1,331) (1,240) -91
-------------------------------------------------- ------- ------- -------
Net R&D charge (862) (765) -97
-------------------------------------------------- ------- ------- -------
Segmental analysis
Year to 31 December Revenue Gross profit Profit before financing
---------------------- -------------------- ---------------------------
GBPm 2016 2015 Change 2016 2015 Change 2016 2015 Change
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Civil 6,906 6,933 -27 1,129 1,526 -397 326 812 -486
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Defence 2,052 2,035 +17 530 579 -49 360 393 -33
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Power Systems 2,360 2,385 -25 628 656 -28 167 194 -27
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Marine 1,012 1,324 -312 216 260 -44 (27) 15 -42
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Nuclear 761 687 +74 117 111 +6 44 70 -26
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Other 35 96 -61 6 64 -58 1 52 -51
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Intra-segment (68) (106) +38 - 7 -7 - 7 -7
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Central costs (44) (51) +7
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Group at 2015 exchange rates 13,058 13,354 -296 2,626 3,203 -577 827 1,492 -665
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Translation to 2016 exchange rates 725 422 88
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Group 13,783 13,354 +429 3,048 3,203 -155 915 1,492 -577
----------------------------------- ------ ------ ------ ----- ----- ------ ------- ------- ---------
Underlying revenue and underlying profit before financing are
discussed in the Review of 2016 (page 4), the Group Trading Summary
(page 9) and the Operational Reviews (from page 12).
Underlying financing costs increased by GBP42m to GBP102m. Net
interest payable increased by GBP4m to GBP63m. Other underlying
financing costs increased by GBP38m to GBP39m, principally due to
the non-recurrence of an underlying foreign exchange gain
recognised in 2015, which arose from the realised gains on foreign
exchange contracts settled to translate overseas dividends in to
sterling.
Underlying taxation was GBP261m (2015: GBP351m), an underlying
rate of 32.1% compared with 24.5% in 2015. The primary reasons for
the increase are the non-recognition of deferred tax assets on
losses in Norway, which reflects the current uncertainty in the oil
& gas market, and a different profit mix with more profits
arising in countries with higher tax rates.
Underlying EPS decreased 49% to 30.13p, reflecting the reduction
in profit for the year.
At the Annual General Meeting on 4 May 2017, the directors will
recommend an issue of 71 C Shares with a total nominal value of 7.1
pence for each ordinary share. Together with the interim issue on 4
January 2017 of 46 C Shares for each ordinary share with a total
nominal value of 4.6 pence, this is the equivalent of a total
annual payment to ordinary shareholders of 11.7 pence for each
ordinary share. Further details are included on pages 8 and 48.
Reported income statement
Year to 31 December
GBPm 2016 2015(1)
-------------------------------------------------- --------- --------
Revenue 14,955 13,725
-------------------------------------------------- --------- --------
Gross profit 3,048 3,277
-------------------------------------------------- --------- --------
Other operating income 5 10
-------------------------------------------------- --------- --------
Commercial and administrative costs(2) (2,208) (1,070)
-------------------------------------------------- --------- --------
Research and development costs (918) (818)
-------------------------------------------------- --------- --------
Share of results of joint ventures and associates 117 100
-------------------------------------------------- --------- --------
Operating profit 44 1,499
-------------------------------------------------- --------- --------
(Loss)/profit on disposal of businesses (3) 2
-------------------------------------------------- --------- --------
Profit before financing 41 1,501
-------------------------------------------------- --------- --------
Net financing (4,677) (1,341)
-------------------------------------------------- --------- --------
(Loss)/profit before tax (4,636) 160
-------------------------------------------------- --------- --------
Tax 604 (76)
-------------------------------------------------- --------- --------
(Loss)/profit for the year (4,032) 84
-------------------------------------------------- --------- --------
Earnings per share (EPS) (220.08)p 4.51p
-------------------------------------------------- --------- --------
(1) 2015 figures have been restated as a result of GBP11m costs
previously reported in 'cost of sales', being reclassified as
'commercial and administrative costs' to ensure consistent
treatment with 2016.
(2) In 2016, 'commercial and administrative costs' include
GBP671m for financial penalties from agreements with investigating
bodies and GBP306m for the restructuring of the UK pension
schemes.
The changes in 2016 resulting from underlying trading are
described in the previous sections.
Consistent with past practice and IFRS, we provide both reported
and underlying figures. As the Group does not hedge account in
accordance with IAS 39 Financial Instruments, we believe underlying
figures are more representative of the trading performance, by
excluding the impact of year-end mark-to-market adjustments,
principally the USD:GBP hedge book, which has had a significant
impact on the reported results in 2016 as the USD:GBP rate has
fallen from 1.48 to 1.23 and the EUR:GBP has fallen from 1.36 to
1.17. The adjustments between the underlying income statement and
the reported income statement are set out in note 2 to the
condensed consolidated financial statements. This basis of
presentation has been applied consistently.
The most significant items included in the reported income
statement, but not in underlying are summarised below.
Profit before financing
The impact of measuring revenues and costs at spot rates rather
than rates achieved on hedging transactions. This increased
revenues by GBP1,172m (2015: GBP371m) and increased profit before
financing by GBP570m (2015: GBP265m).
The effects of acquisition accounting GBP115m (2015: GBP124m),
principally relating to the amortisation of intangible assets
arising on the acquisition of Power Systems in 2013.
The impairment of goodwill of GBP219m (2015: GBP75m),
principally relating to the Marine business as a result of the
continued weakness in the oil & gas market (see note 8).
Exceptional restructuring costs of GBP129m (2015: GBP49m). These
are costs associated with the substantial closure or exit of a
site, facility or activity and increased as a result on the ongoing
transformation programme.
Financial penalties of GBP671m from agreements with
investigating bodies (page 5).
Costs of restructuring the UK pension schemes in 2016 of
GBP306m, principally a settlement charge on the transfer of the
Vickers Group Pension Scheme to an insurance company (see note
11).
Financing and taxation
The mark to market adjustments on the Group's hedge book of
GBP4,420m (2015: GBP1,306m). These reflect: the large hedge book
held by the Group (eg. USD $38bn); and the weakening of sterling,
particularly against the US dollar and the euro, as noted above. At
each year end, our foreign exchange hedge book is included in the
balance sheet at fair value ('mark to market') and the movement in
the year included in reported financing costs.
Appropriate tax rates are applied to these additional items
included in the reported results, leading to an additional tax
credit of GBP865m (2015: GBP275m), largely as a result of the mark
to market adjustments.
Reconciliation between underlying and reported results
Year to 31 December Revenue Profit before financing Financing Profit/(loss) before tax
GBPm 2016 2015 2016 2015 2016 2015 2016 2015
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Underlying 13,783 13,354 915 1,492 (102) (60) 813 1,432
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Revenue recognised at
exchange rate on date of
transaction 1,172 371 - - - - - -
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Mark-to-market adjustments on
derivatives - - - (9) (4,420) (1,306) (4,420) (1,315)
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Related foreign exchange
adjustments - - 570 265 (151) (15) 419 250
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Movements on other financial
instruments - - - - (8) 8 (8) 8
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Effects of acquisition
accounting - - (115) (124) - - (115) (124)
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Impairment of goodwill - - (219) (75) - - (219) (75)
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Exceptional restructuring - - (129) (49) - - (129) (49)
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Acquisitions and disposals - - (3) 2 - - (3) 2
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Financial penalties - - (671) - - - (671) -
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Post-retirement schemes - - (306) - 3 32 (303) 32
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Other - - (1) (1) 1 - - (1)
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Reported 14,955 13,725 41 1,501 (4,677) (1,341) (4,636) 160
----------------------------- ------ ------ ------------ ----------- ------- ------- ------------ ------------
Summary balance sheet
At 31 December
GBPm 2016 2015
---------------------------------------- -------- --------
Intangible assets 5,080 4,645
---------------------------------------- -------- --------
Property, plant and equipment 4,114 3,490
---------------------------------------- -------- --------
Joint ventures and associates 844 576
---------------------------------------- -------- --------
Net working capital(1) (1,553) (501)
---------------------------------------- -------- --------
Net funds(2) (225) (111)
---------------------------------------- -------- --------
Provisions (759) (640)
---------------------------------------- -------- --------
Net post-retirement scheme deficits (29) (77)
---------------------------------------- -------- --------
Net financial assets and liabilities(2) (5,751) (1,883)
---------------------------------------- -------- --------
Other net assets and liabilities(3) 143 (483)
---------------------------------------- -------- --------
Net assets 1,864 5,016
---------------------------------------- -------- --------
Other items
---------------------------------------- -------- --------
US$ hedge book (US$bn) 37.8 28.8
---------------------------------------- -------- --------
TotalCare assets 3,348 2,994
---------------------------------------- -------- --------
TotalCare liabilities (907) (783)
---------------------------------------- -------- --------
Net TotalCare assets 2,441 2,211
---------------------------------------- -------- --------
Gross customer finance commitments 238 269
---------------------------------------- -------- --------
Net customer finance commitments 61 54
---------------------------------------- -------- --------
(1) Net working capital includes inventories, trade and other
receivables, trade and other payables and current tax assets and
liabilities.
(2) Net funds includes GBP358m (2015 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 GBP435m mainly due to
exchange differences of GBP438m. Additions of GBP631m (including
GBP154m of certification and participation fees, GBP100m of
development costs and GBP208m of contractual aftermarket rights)
were largely offset by amortisation of GBP406m and impairment of
GBP222m (including GBP200m on Marine goodwill).
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 GBP624m,
around half of which was caused by exchange differences of GBP330m.
Additions of GBP701m (including GBP75m of TotalCare(R) Flex(R)
engines) were offset by depreciation of GBP424m and GBP41m was
added from the reclassification of joint ventures to joint
operations.
Investments in joint ventures and associates increased by
GBP268m, including an increase of GBP154m in the Group's share of
authorised maintenance centre joint ventures. The other main
movements were: exchange gains of GBP109m; and the Group's share of
retained profit of GBP43m; offset by a GBP57m reclassification of
certain joint ventures to joint operations.
Movements in net funds are shown overleaf.
Net working capital reduced by GBP1,052m, including a GBP671m
accrual for financial penalties, GBP134m increased deposits and
GBP265m of foreign exchange movements. This was partially offset by
higher inventory of GBP194m.
Provisions largely relate to warranties and guarantees provided
to secure the sale of OE and services. The increase of GBP119m
includes reclassifications from accruals of GBP92m, following a
review of accounting consistency during the period. The remaining
increase of GBP27m includes net additional charges of GBP271m
(including GBP147m for warranties and), and foreign exchange
movements of GBP75m, offset by utilisation of GBP227m.
Net post-retirement scheme deficits (note 11) have reduced by
GBP48m.
In the UK (increase in surplus of GBP293m), changes in actuarial
estimates increased the value of the obligations GBP1.8bn, largely
due to the discount rate reducing from 3.6% to 2.7%. This was more
than offset by returns (in excess of those assumed) on the scheme
assets of GBP2.3bn. This return is largely due to the liability
driven investment policy of the assets being invested to match
changes in value of the obligations (on a proxy solvency basis,
which is more onerous than the accounting valuation). The net
increase in surplus was reduced by the recognition of a settlement
charge of GBP301m on the insurance buy-out of the Vickers Group
Pension Scheme.
The principal movements in overseas schemes (increase in deficit
of GBP245m) were exchange differences of GBP208m.
Net financial assets and liabilities principally relate to the
fair value of foreign exchange, commodity and interest rate
contracts, 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 net financial liability of GBP5.6bn, an increase
of GBP3.9bn in the period, mainly a result of the weakening of
sterling against the US dollar and euro.
The US$ hedge book increased by 31% to US$37.8bn. This
represents around 5 1/2 years of net exposure and has an average
book rate of GBP1 to US$1.55.
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(1)
Year to 31 December
GBPm 2016 2015 Change
------------------------------------------------------------------------------ -------- ------ -------
Opening net (debt)/funds (111) 666
------------------------------------------------------------------------------ -------- ------ -------
Closing net debt (225) (111)
------------------------------------------------------------------------------ -------- ------ -------
Change in net funds (114) (777)
------------------------------------------------------------------------------ -------- ------ -------
Underlying profit before tax 813 1,432 -619
------------------------------------------------------------------------------ -------- ------ -------
Depreciation and amortisation 720 613 +107
------------------------------------------------------------------------------ -------- ------ -------
Movement in net working capital (55) (544) +489
------------------------------------------------------------------------------ -------- ------ -------
Expenditure on property, plant and equipment and intangible assets (1,201) (887) -314
------------------------------------------------------------------------------ -------- ------ -------
Other 47 (229) +276
------------------------------------------------------------------------------ -------- ------ -------
Trading cash flow 324 385 -61
------------------------------------------------------------------------------ -------- ------ -------
Contributions to defined benefit pensions in excess of underlying PBT charge (67) (46) -21
------------------------------------------------------------------------------ -------- ------ -------
Taxation paid (157) (160) +3
------------------------------------------------------------------------------ -------- ------ -------
Free cash flow 100 179 -79
------------------------------------------------------------------------------ -------- ------ -------
Shareholder payments (301) (421) +120
------------------------------------------------------------------------------ -------- ------ -------
Share buyback - (414) +414
------------------------------------------------------------------------------ -------- ------ -------
Acquisitions and disposals (153) (3) -150
------------------------------------------------------------------------------ -------- ------ -------
Discontinued operations - (121) +121
------------------------------------------------------------------------------ -------- ------ -------
Foreign exchange 240 3 +237
------------------------------------------------------------------------------ -------- ------ -------
Change in net funds (114) (777)
------------------------------------------------------------------------------ -------- ------ -------
(1) The derivation of the summary funds flow statement above
from the reported cash flow statement is included in note 14 of the
condensed consolidated financial statements.
Movement in working capital - the GBP55m increase in working
capital includes an increase in inventory, partially offset by a
net reduction in financial working capital. These movements are
largely driven by the increased sales volumes during 2016.
Expenditure on property, plant and equipment and intangibles -
the major increases are: GBP98m higher property plant and equipment
expenditure as we build the supply chain; GBP37m software costs
relating to systems development; GBP81m certification costs driven
by the Trent XWB-97 programme; GBP45m capitalised development costs
largely relating to the Trent 1000 TEN; and GBP46m higher
contractual aftermarket rights, mainly on Trent XWB sales.
Pensions - the increase in pension contributions in excess of
the underlying income statement largely reflects changes in net
past service costs GBP13m.
Shareholder payments - the change in shareholder payments
reflects the difference between the 2014 and 2015 payments, which
are paid in the following year.
Acquisitions and disposals include the GBP154m increase in stake
in joint ventures described above.
Condensed consolidated income statement
For the year ended 31 December 2016
2016 2015(1)
Notes GBPm GBPm
------------------------------------------------------------ --- ------ ---------- ---------
Revenue 2 14,955 13,725
------------------------------------------------------------------ ------ ---------- ---------
Cost of sales (11,907) (10,448)
------------------------------------------------------------------ ------ ---------- ---------
Gross profit 3,048 3,277
------------------------------------------------------------------ ------ ---------- ---------
Other operating income 5 10
------------------------------------------------------------------ ------ ---------- ---------
Commercial and administrative costs(2) (2,208) (1,070)
------------------------------------------------------------------ ------ ---------- ---------
Research and development costs 3 (918) (818)
------------------------------------------------------------------ ------ ---------- ---------
Share of results of joint ventures and associates 117 100
------------------------------------------------------------------ ------ ---------- ---------
Operating profit 44 1,499
------------------------------------------------------------------ ------ ---------- ---------
(Loss)/profit on disposal of businesses (3) 2
------------------------------------------------------------------ ------ ---------- ---------
Profit before financing and taxation 41 1,501
------------------------------------------------------------------ ------ ---------- ---------
Financing income 4 96 115
------------------------------------------------------------------ ------ ---------- ---------
Financing costs 4 (4,773) (1,456)
------------------------------------------------------------------ ------ ---------- ---------
Net financing (4,677) (1,341)
------------------------------------------------------------------ ------ ---------- ---------
(Loss)/profit before taxation(*) (4,636) 160
------------------------------------------------------------------ ------ ---------- ---------
Taxation 5 604 (76)
------------------------------------------------------------------ ------ ---------- ---------
(Loss)/profit for the year (4,032) 84
------------------------------------------------------------------ ------ ---------- ---------
Attributable to:
============================================================ === ====== ========== =========
Ordinary shareholders (4,032) 83
================================================================== ====== ========== =========
Non-controlling interests - 1
------------------------------------------------------------------ ------ ---------- ---------
(Loss)/profit for the year (4,032) 84
------------------------------------------------------------------ ------ ---------- ---------
Earnings per ordinary share attributable to shareholders 6
------------------------------------------------------------------ ------ ---------- ---------
Basic (220.08)p 4.51p
------------------------------------------------------------------ ------ ---------- ---------
Diluted (220.08)p 4.48p
------------------------------------------------------------------ ------ ---------- ---------
Underlying earnings per ordinary share are shown in note 6.
Payments to ordinary shareholders in respect of the year 7
------------------------------------------------------------------ ------ ---------- ---------
Pence per share 11.70p 16.37p
------------------------------------------------------------------ ------ ---------- ---------
Total 215 301
------------------------------------------------------------------ ------ ---------- ---------
(*) Underlying profit before taxation 2 813 1,432
------------------------------------------------------------------ ------ ---------- ---------
(1) 2015 figures have been restated as a result of GBP11m of
Power Systems costs previously reported in cost of sales, being
reclassified as commercial and administrative costs to ensure
consistent treatment with 2016. The applicable notes have been
restated.
(2) In 2016, commercial and administrative costs include GBP671m
for financial penalties from agreements with investigating bodies
(see note 12) and GBP306m for the restructuring of the UK pension
schemes (see note 11).
All activities comprise continuing operations.
Condensed consolidated statement of comprehensive income
For the year ended 31 December 2016
2016 2015
Notes GBPm GBPm
----------------------------------------------------------------- ------ -------- ------
(Loss)/profit for the period (4,032) 84
------------------------------------------------------------------- ------ -------- ------
Other comprehensive income (OCI)
----------------------------------------------------------------- ------ -------- ------
Items that will not be reclassified to profit or loss
----------------------------------------------------------------- ------ -------- ------
Movements in post-retirement schemes 11 495 (722)
------------------------------------------------------------------- ------ -------- ------
Share of OCI of joint ventures and associates (2) -
----------------------------------------------------------------- ------ -------- ------
Related tax movements (179) 257
------------------------------------------------------------------- ------ -------- ------
314 (465)
----------------------------------------------------------------- ------ -------- ------
Items that may be reclassified to profit or loss
----------------------------------------------------------------- ------ -------- ------
Foreign exchange translation differences on foreign operations 861 (129)
------------------------------------------------------------------- ------ -------- ------
Reclassification to income statement on disposal of businesses - 1
------------------------------------------------------------------- ------ -------- ------
Share of OCI of joint ventures and associates (7) (19)
------------------------------------------------------------------- ------ -------- ------
Related tax movements 4 (2)
------------------------------------------------------------------- ------ -------- ------
858 (149)
----------------------------------------------------------------- ------ -------- ------
Total comprehensive income for the year (2,860) (530)
------------------------------------------------------------------- ------ -------- ------
Attributable to:
----------------------------------------------------------------- ------ -------- ------
Ordinary shareholders (2,860) (530)
------------------------------------------------------------------- ------ -------- ------
Non-controlling interests - -
----------------------------------------------------------------- ------ -------- ------
Total comprehensive expense for the year (2,860) (530)
------------------------------------------------------------------- ------ -------- ------
Condensed consolidated balance sheet
At 31 December 2016
2016 2015
Notes GBPm GBPm
-------------------------------------------- ------ --------- ---------
ASSETS
-------------------------------------------- ------ --------- ---------
Non-current assets
-------------------------------------------- ------ --------- ---------
Intangible assets 8 5,080 4,645
-------------------------------------------- ------ --------- ---------
Property, plant and equipment 9 4,114 3,490
-------------------------------------------- ------ --------- ---------
Investments - joint ventures and associates 844 576
-------------------------------------------- ------ --------- ---------
Investments - other 38 33
-------------------------------------------- ------ --------- ---------
Other financial assets 10 382 83
-------------------------------------------- ------ --------- ---------
Deferred tax assets 876 318
-------------------------------------------- ------ --------- ---------
Post-retirement scheme surpluses 11 1,346 1,063
-------------------------------------------- ------ --------- ---------
12,680 10,208
-------------------------------------------- ------ --------- ---------
Current assets
============================================ ====== ========= =========
Inventories 3,086 2,637
============================================ ====== ========= =========
Trade and other receivables 6,956 6,244
============================================ ====== ========= =========
Taxation recoverable 32 23
============================================ ====== ========= =========
Other financial assets 10 5 29
============================================ ====== ========= =========
Short-term investments 3 2
============================================ ====== ========= =========
Cash and cash equivalents 2,771 3,176
============================================ ====== ========= =========
Assets held for sale 5 5
-------------------------------------------- ------ --------- ---------
12,858 12,116
-------------------------------------------- ------ --------- ---------
Total assets 25,538 22,324
-------------------------------------------- ------ --------- ---------
LIABILITIES
-------------------------------------------- ------ --------- ---------
Current liabilities
-------------------------------------------- ------ --------- ---------
Borrowings (172) (419)
-------------------------------------------- ------ --------- ---------
Other financial liabilities 10 (651) (331)
-------------------------------------------- ------ --------- ---------
Trade and other payables (7,957) (6,923)
-------------------------------------------- ------ --------- ---------
Tax liabilities (211) (164)
-------------------------------------------- ------ --------- ---------
Provisions for liabilities and charges (543) (336)
-------------------------------------------- ------ --------- ---------
(9,534) (8,173)
-------------------------------------------- ------ --------- ---------
Non-current liabilities
-------------------------------------------- ------ --------- ---------
Borrowings (3,185) (2,883)
-------------------------------------------- ------ --------- ---------
Other financial liabilities 10 (5,129) (1,651)
-------------------------------------------- ------ --------- ---------
Trade and other payables (3,459) (2,317)
-------------------------------------------- ------ --------- ---------
Tax liabilities - (1)
-------------------------------------------- ------ --------- ---------
Deferred tax liabilities (776) (839)
-------------------------------------------- ------ --------- ---------
Provisions for liabilities and charges (216) (304)
-------------------------------------------- ------ --------- ---------
Post-retirement scheme deficits 11 (1,375) (1,140)
-------------------------------------------- ------ --------- ---------
(14,140) (9,135)
-------------------------------------------- ------ --------- ---------
Total liabilities (23,674) (17,308)
-------------------------------------------- ------ --------- ---------
Net assets 1,864 5,016
-------------------------------------------- ------ --------- ---------
EQUITY
-------------------------------------------- ------ --------- ---------
Attributable to ordinary shareholders
-------------------------------------------- ------ --------- ---------
Called-up share capital 367 367
-------------------------------------------- ------ --------- ---------
Share premium account 181 180
-------------------------------------------- ------ --------- ---------
Capital redemption reserve 162 161
-------------------------------------------- ------ --------- ---------
Cash flow hedging reserve (107) (100)
-------------------------------------------- ------ --------- ---------
Other reserves 814 (51)
-------------------------------------------- ------ --------- ---------
Retained earnings 445 4,457
-------------------------------------------- ------ --------- ---------
1,862 5,014
-------------------------------------------- ------ --------- ---------
Non-controlling interests 2 2
-------------------------------------------- ------ --------- ---------
Total equity 1,864 5,016
-------------------------------------------- ------ --------- ---------
Condensed consolidated cash flow statement
For the year ended 31 December 2016
2016 2015
Notes GBPm GBPm
--------------------------------------------------------------------------------- ------ -------- ------
Reconciliation of cash flows from operating activities
--------------------------------------------------------------------------------- ------ -------- ------
Operating profit 44 1,499
--------------------------------------------------------------------------------- ------ -------- ------
Loss on disposal of property, plant and equipment 5 8
--------------------------------------------------------------------------------- ------ -------- ------
Share of results of joint ventures and associates (117) (100)
--------------------------------------------------------------------------------- ------ -------- ------
Dividends received from joint ventures and associates 74 63
--------------------------------------------------------------------------------- ------ -------- ------
Amortisation and impairment of intangible assets 8 628 432
--------------------------------------------------------------------------------- ------ -------- ------
Depreciation and impairment of property, plant and equipment 9 426 378
--------------------------------------------------------------------------------- ------ -------- ------
Impairment of investments - 2
--------------------------------------------------------------------------------- ------ -------- ------
Increase/(decrease) in provisions 44 (151)
--------------------------------------------------------------------------------- ------ -------- ------
(Increase)/decrease in inventories (161) 63
--------------------------------------------------------------------------------- ------ -------- ------
Decrease/(increase) in trade and other receivables 54 (836)
--------------------------------------------------------------------------------- ------ -------- ------
Accruals for financial penalties from agreements with investigating bodies 671 -
--------------------------------------------------------------------------------- ------ -------- ------
Other increase in trade and other payables 234 242
--------------------------------------------------------------------------------- ------ -------- ------
Cash flows on other financial assets and liabilities held for operating purposes (608) (305)
--------------------------------------------------------------------------------- ------ -------- ------
Net defined benefit post-retirement cost recognised in profit before financing 11 510 213
--------------------------------------------------------------------------------- ------ -------- ------
Cash funding of defined benefit post-retirement schemes 11 (271) (259)
--------------------------------------------------------------------------------- ------ -------- ------
Share-based payments 35 5
--------------------------------------------------------------------------------- ------ -------- ------
Net cash inflow from operating activities before taxation 1,568 1,254
--------------------------------------------------------------------------------- ------ -------- ------
Taxation paid (157) (160)
--------------------------------------------------------------------------------- ------ -------- ------
Net cash inflow from operating activities 1,411 1,094
--------------------------------------------------------------------------------- ------ -------- ------
Cash flows from investing activities
--------------------------------------------------------------------------------- ------ -------- ------
Additions of unlisted investments - (6)
--------------------------------------------------------------------------------- ------ -------- ------
Additions of intangible assets 8 (631) (408)
--------------------------------------------------------------------------------- ------ -------- ------
Disposals of intangible assets 8 4
--------------------------------------------------------------------------------- ------ -------- ------
Purchases of property, plant and equipment (585) (487)
--------------------------------------------------------------------------------- ------ -------- ------
Government grants received 15 8
--------------------------------------------------------------------------------- ------ -------- ------
Disposals of property, plant and equipment 8 33
--------------------------------------------------------------------------------- ------ -------- ------
Acquisitions of businesses (6) (5)
--------------------------------------------------------------------------------- ------ -------- ------
Disposal of discontinued operations - (121)
--------------------------------------------------------------------------------- ------ -------- ------
Disposals of other businesses 7 2
--------------------------------------------------------------------------------- ------ -------- ------
Increase in share in joint ventures (154) -
--------------------------------------------------------------------------------- ------ -------- ------
Other investments in joint ventures and associates (30) (15)
--------------------------------------------------------------------------------- ------ -------- ------
Cash and cash equivalents in joint ventures reclassified as joint operations 5 -
--------------------------------------------------------------------------------- ------ -------- ------
Net cash outflow from investing activities (1,363) (995)
--------------------------------------------------------------------------------- ------ -------- ------
Cash flows from financing activities
--------------------------------------------------------------------------------- ------ -------- ------
Repayment of loans 10 (434) (54)
--------------------------------------------------------------------------------- ------ -------- ------
Proceeds from increase in loans and finance leases 93 1,150
--------------------------------------------------------------------------------- ------ -------- ------
Capital element of finance lease payments (4) (1)
--------------------------------------------------------------------------------- ------ -------- ------
Net cash flow from (decrease)/increase in borrowings and finance leases (345) 1,095
--------------------------------------------------------------------------------- ------ -------- ------
Interest received 14 5
--------------------------------------------------------------------------------- ------ -------- ------
Interest paid (84) (58)
--------------------------------------------------------------------------------- ------ -------- ------
Interest element of finance lease payments (2) (2)
--------------------------------------------------------------------------------- ------ -------- ------
(Increase)/decrease in short-term investments (1) 5
--------------------------------------------------------------------------------- ------ -------- ------
Issue of ordinary shares (net of expenses) 1 32
--------------------------------------------------------------------------------- ------ -------- ------
Purchase of ordinary shares - share buyback - (433)
--------------------------------------------------------------------------------- ------ -------- ------
Purchase of ordinary shares - other (21) (2)
--------------------------------------------------------------------------------- ------ -------- ------
Redemption of C Shares (301) (421)
--------------------------------------------------------------------------------- ------ -------- ------
Net cash (outflow)/inflow from financing activities (739) 221
--------------------------------------------------------------------------------- ------ -------- ------
Change in cash and cash equivalents (691) 320
--------------------------------------------------------------------------------- ------ -------- ------
Cash and cash equivalents at 1 January 3,176 2,862
--------------------------------------------------------------------------------- ------ -------- ------
Exchange gains/(losses) on cash and cash equivalents 286 (6)
--------------------------------------------------------------------------------- ------ -------- ------
Cash and cash equivalents at 31 December 2,771 3,176
--------------------------------------------------------------------------------- ------ -------- ------
2016 2015
GBPm GBPm
-------------------------------------------------------------------------------------------------- ------ --------
Reconciliation of movements in cash and cash equivalents to movements in net debt
-------------------------------------------------------------------------------------------------- ------ --------
Change in cash and cash equivalents (691) 320
-------------------------------------------------------------------------------------------------- ------ --------
Cash flow from decrease/(increase) in borrowings and finance leases 345 (1,095)
-------------------------------------------------------------------------------------------------- ------ --------
Cash flow from (decrease)/increase in short-term investments 1 (5)
-------------------------------------------------------------------------------------------------- ------ --------
Change in net debt resulting from cash flows (345) (780)
-------------------------------------------------------------------------------------------------- ------ --------
Net debt (excluding cash and cash equivalents) of joint ventures reclassified to joint operations (9) -
-------------------------------------------------------------------------------------------------- ------ --------
Exchange gains on net debt 240 3
-------------------------------------------------------------------------------------------------- ------ --------
Fair value adjustments (345) 45
-------------------------------------------------------------------------------------------------- ------ --------
Movement in net debt (459) (732)
-------------------------------------------------------------------------------------------------- ------ --------
Net debt at 1 January excluding the fair value of swaps (124) 608
-------------------------------------------------------------------------------------------------- ------ --------
Net debt at 31 December excluding the fair value of swaps (583) (124)
-------------------------------------------------------------------------------------------------- ------ --------
Fair value of swaps hedging fixed rate borrowings 358 13
-------------------------------------------------------------------------------------------------- ------ --------
Net debt at 31 December (225) (111)
-------------------------------------------------------------------------------------------------- ------ --------
The movement in net funds (defined by the Group as including the
items shown below) is as follows:
Reclassification
At 1 of joint At 31
January ventures to Exchange Fair value December
2016 Funds flow joint operations differences adjustments Reclassifications 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Cash at bank
and in hand 662 96 5 109 - - 872
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Money market
funds 783 (260) -- 29 - - 552
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Short-term
deposits 1,731 (532) - 148 - - 1,347
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Cash and
cash
equivalents 3,176 (696) 5 286 - - 2,771
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Short-term
investments 2 1 - - - - 3
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Current
borrowings (417) 350 (9) (24) - (69) (169)
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Non-current
borrowings (2,833) (1) - (11) (345) 69 (3,121)
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Finance
leases (52) (4) - (11) - - (67)
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Net debt
excluding
the fair
value of
swaps (124) (350) (4) 240 (345) - (583)
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Fair value
of swaps
hedging
fixed rate
borrowings 13 345 358
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Net debt (111) (350) (4) 240 - - (225)
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Condensed consolidated statement of changes in equity
For the year ended 31 December 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 (NCI) 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
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Profit for the
year - - - - - 83 83 1 84
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Foreign exchange
translation
differences on
foreign
operations - - - - (128) - (128) (1) (129)
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Reclassified to
income
statement on
disposal of
business - - - - 1 - 1 - 1
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Movements on
post-retirement
schemes - - - - - (722) (722) - (722)
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Share of
comprehensive
income of joint
ventures and
associates - - - (19) - - (19) - (19)
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Related tax
movements - - - - (2) 257 255 - 255
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Total
comprehensive
income for the
year - - - (19) (129) (382) (530) - (530)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Arising on
issues of
ordinary shares - 1 - - - - 1 - 1
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Issue of C
Shares(4) - - (430) - - 2 (428) - (428)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Redemption of C
Shares - - 423 - - (423) - - -
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Ordinary shares
purchased -
buyback(5) - - - - - (433) (433) - (433)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Ordinary shares
cancelled(5) (9) - 9 - - - - - -
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Ordinary shares
purchased -
other - - - - - (2) (2) - (2)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Share-based
payments -
direct to
equity(3) - - - - - 30 30 - 30
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Transactions
with NCI - - - - - - - (3) (3)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Related tax
movements - - - - - (6) (6) - (6)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Other changes in
equity in the
year (9) 1 2 - - (832) (838) (3) (841)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
At 1 January
2016 367 180 161 (100) (51) 4,457 5,014 2 5,016
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Loss for the
year - - - - - (4,032) (4,032) - (4,032)
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Foreign exchange
translation
differences on
foreign
operations - - - - 861 - 861 - 861
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Movements on
post-retirement
schemes - - - - - 495 495 - 495
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Share of
comprehensive
income of joint
ventures and
associates - - - (7) - (2) (9) - (9)
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Related tax
movements - - - - 4 (179) (175) - (175)
================ ======== ======== =========== ======== ========= ========= ======= ================ ========
Total
comprehensive
income for the
year - - - (7) 865 (3,718) (2,860) - (2,860)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Arising on
issues of
ordinary shares - 1 - - - - 1 - 1
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Issue of C
Shares(4) - - (301) - - 1 (300) - (300)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Redemption of C
Shares - - 302 - - (302) - - -
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Ordinary shares
purchased - - - - - (21) (21) - (21)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Share-based
payments -
direct to
equity(3) - - - - - 30 30 - 30
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Related tax
movements - - - - - (2) (2) - (2)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
Other changes in
equity in the
year - 1 1 - - (294) (292) - (292)
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
At 31 December
2016 367 181 162 (107) 814 445 1,862 2 1,864
---------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- --------
(1) Other reserves include a merger reserve of GBP3m and a
translation reserve of GBP811m.
(2) At 31 December 2016, 6,854,216 ordinary shares with a net
book value of GBP56m (2015: 5,894,064, 2014: 14,561,097 ordinary
shares with net book values of GBP52m and GBP129m respectively)
were held for the purpose of share-based payment plans and included
in retained earnings. During the year, 1,955,390 ordinary shares
with a net book value of GBP17m (2015: 10,892,026 shares with a net
book value of GBP98m) vested in share-based payment plans. During
the year the Company acquired 165,542 (2015: 224,993) of its
ordinary shares via reinvestment of dividends received on its own
shares and purchased 2,750,000 (2015: 2,000,000) of its ordinary
shares through purchases on the London Stock Exchange.
(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) In Rolls-Royce Holdings plc's own financial statements, C
Shares are issued from the merger reserve. As this reserve is
eliminated on consolidation, in the consolidated financial
statements, the C Shares are shown as being issued from the capital
redemption reserve.
(5) 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 year to 31
December 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 year financial statements of the
Company as at and for the year ended 31 December 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 financial statements have been
prepared in accordance with International Financial Reporting
Standards (IFRS) adopted for use in the EU. They do not include all
of the information required for full annual statements, and should
be read in conjunction with the 2016 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 year
financial statements on 13 February 2017.
Significant accounting policies
No new accounting policies had a significant impact in 2016.
During the year, 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). Prior figures have not
been restated. In addition, following a review of consistency,
GBP92m of accruals have been reclassified as provisions.
Forthcoming accounting standards
IFRS 15 Revenue from Contracts with Customers (effective for the
year beginning 1 January 2018), provides a single, principles-based
five-step model to be applied to all sales contracts, based on the
transfer of control of goods and services to customers. It replaces
the separate models for goods, services and construction contracts
currently included in IAS 11 Construction Contracts and IAS 18
Revenue.
The Group has undertaken significant analysis of how IFRS 15
should be implemented and has taken tentative accounting policy
decisions. Based on this analysis, we expect that adoption of IFRS
15 will have a significant impact on the timing of recognition of
revenue on individual long-term contracts, most particularly in the
Civil Aerospace business. The most significant changes are:
-- IFRS 15 contains more specific requirements on the
combination of contracts. Contracts can only be combined if they
are with the same counterparty or related counterparties. The
existing standards require contracts with different counterparties
to be combined where that reflects the overall substance of a
transaction. As a result, it will no longer be possible to link
contracts entered into at the same time (with an airframer) for
installed original equipment (OE) with long-term contracts (with
the aircraft operator) for aftermarket services (LTSAs) relating to
that OE.
-- For similar reasons, it will no longer be possible to
recognise an intangible asset in respect of contractual aftermarket
rights (relating to future aftermarket business with an operator)
when OE is sold to an airframer.
-- For each performance obligation identified, IFRS 15 requires
revenue to be recognised based on the transfer of control of the
relevant goods or services. In contrast, under the existing
standards, revenue is recognised based on when risk and reward is
transferred. As a result it will no longer be possible to use
flying hours (or equivalent) as a basis for measuring the stage of
completion of LTSAs.
-- Compared to IAS 11, IFRS 15 includes only limited guidance on
accounting for costs incurred to fulfil a performance obligation
and in general these will be recognised as incurred. It is no
longer possible to defer or accrue costs to report a consistent
margin percentage over the term of the LTSAs.
In summary, the impact of these changes will be that upon
adoption of IFRS 15:
-- Revenues and costs relating to deliveries of engines will be
recognised when they are delivered. The revenue recognised will
comprise that included in the contract with the airframer reduced
(if applicable) by any OE concession agreed with the operator
(which IFRS 15 describes as a payment to "a customer's customer").
Consequently, the revenues and costs recognised on OE deliveries
will more closely match the related cash flows. No contractual
aftermarket revenue will be allocated to the OE delivery (where
contracts are currently combined - 'linked accounting') and no
intangible asset will be recognised (where contracts are not
currently combined - 'unlinked accounting'). This will result in a
loss being recognised on engine deliveries when the direct costs
exceed the direct revenues.
-- Revenues on LTSAs will be recognised as services are
performed rather than as the equipment is used (engine flying
hours) as is the case under the current accounting policy. The
stage of completion will be measured using the actual costs
incurred to date compared to the estimated costs to complete the
performance obligation. In practice the bulk of the revenue and
costs will relate to overhaul activity which occurs at distinct
points of time during the period of the LTSA. As the first major
overhaul typically occurs some years after delivery, this change
will generally defer the recognition of revenue on LTSAs, as
compared to the current accounting policy.
Taken together, had IFRS 15 been applicable with effect from 1
January 2015, the Group currently estimates the results for the
year ended 31 December 2015 would have been as follows:
IAS 11 and IAS 18 IFRS 15
-------------------- --------------------
Reported Underlying Reported Underlying
GBPbn GBPbn GBPbn GBPbn
------------------------------------- -------- ---------- -------- ----------
Revenue
===================================== ======== ========== ======== ==========
Civil Aerospace original equipment 3.3 2.6
====================================== ======== ========== ======== ==========
Civil Aerospace aftermarket services 3.7 3.5
====================================== ======== ========== ======== ==========
Other 6.4 6.4
-------------------------------------- -------- ---------- -------- ----------
Total revenue 13.7 13.4 12.8 12.5
-------------------------------------- -------- ---------- -------- ----------
Gross profit
===================================== ======== ========== ======== ==========
Civil Aerospace 1.5 0.6
====================================== ======== ========== ======== ==========
Other 1.7 1.7
-------------------------------------- -------- ---------- -------- ----------
Total gross profit 3.3 3.2 2.4 2.3
-------------------------------------- -------- ---------- -------- ----------
Profit before financing and taxation 1.5 1.5 0.6 0.6
====================================== ======== ========== ======== ==========
Net financing (1.3) (0.1) (1.3) (0.1)
====================================== ======== ========== ======== ==========
Taxation (0.1) (0.3) 0.1 (0.1)
-------------------------------------- -------- ---------- -------- ----------
Profit for the year 0.1 1.1 (0.6) 0.4
-------------------------------------- -------- ---------- -------- ----------
Net assets 5.0 2.0
-------------------------------------- -------- ---------- -------- ----------
The Group plans to adopt IFRS 15 in 2018 using the 'full'
retrospective approach. The comparative 2017 results included in
the 2018 financial statements will be restated, with an adjustment
to equity as at 1 January 2017.
The Group will continue to work during 2017 to design, implement
and refine procedures to apply the new requirements of IFRS 15 and
to finalise accounting policy choices. As a result of this ongoing
work, it is possible that some changes to the impact above may
result.
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 and provides financial measures
that, together with the results prepared in accordance with Adopted
IFRS, allow better analysis of the factors affecting the year's
results compared to the prior period. The principles adopted to
determine the underlying results are:
Underlying revenues and costs - Where revenues and costs are
denominated in a currency other than the functional currency of the
Group undertaking and the Group hedges the net exposure, these
reflect the achieved exchange rates arising on derivative contracts
settled to cover the net exposure. These achieved exchange rates
are applied to all relevant revenues and costs, including those for
which there is a natural offsetting position, rather than
translating the offsetting transactions at spot rates. The
underlying profits would be the same under both approaches, but the
Board considers that the approach taken provides a better
indication of trends over time.
Underlying profit before financing - In addition to impact of
exchange rates on revenues and costs above, adjustments have been
made to exclude one-off past service credits on post-retirement
schemes, exceptional restructuring costs (associated with the
substantial closure or exit of a site, facility or line of
business, or other major transformation activities), the effect of
acquisition accounting, the effect of business disposals, the
impairment of goodwill, and in 2016 financial penalties from
agreements with investigating bodies.
Underlying profit before taxation - In addition to those
adjustments in underlying profit before financing:
-- includes 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; and
-- excludes 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 and the impact of
changes in tax rates 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.
Total
reportable
Civil Defence Power Systems Marine Nuclear Inter-segment segments
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
For the year
ended 31
December 2016
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Underlying
revenue from
original
equipment 3,272 823 1,609 575 346 (33) 6,592
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Underlying
revenue from
aftermarket
services 3,634 1,229 751 437 415 (35) 6,431
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Total
underlying
revenue at
2015 exchange
rates 6,906 2,052 2,360 1,012 761 (68) 13,023
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Translation to
2016 exchange
rates 161 157 295 102 16 (8) 723
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Total
underlying
revenue 7,067 2,209 2,655 1,114 777 (76) 13,746
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Gross profit 1,129 530 628 216 117 - 2,620
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Commercial and
administrative
costs (339) (127) (305) (207) (67) - (1,045)
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Restructuring (11) 10 - 3 - - 2
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Research and
development
costs (549) (68) (157) (39) (6) - (819)
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Share of
results of
joint ventures
and associates 96 15 1 - - - 112
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Underlying
profit before
financing and
taxation at
2015 exchange
rates 326 360 167 (27) 44 - 870
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Translation to
2016 exchange
rates 41 24 24 - 1 - 90
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Underlying
profit before
financing and
taxation 367 384 191 (27) 45 - 960
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
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 1,526 579 656 260 111 7 3,139
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
Commercial and
administrative
costs (296) (124) (296) (201) (53) - (970)
--------------- ----- ------------- ------------- ------------- -------- -------------- -------------
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 Total Other
reported results reportable businesses* Total Reported
segments and corporate underlying Underlying adjustments results
GBPm GBPm GBPm GBPm GBPm
---------------------- ------------- ------------- ------------- ------------------------ -------------
For the year ended 31
December 2016
---------------------- ------------- ------------- ------------- ------------------------ -------------
Revenue from original
equipment 6,592 20 6,612 976 7,588
---------------------- ------------- ------------- ------------- ------------------------ -------------
Revenue from
aftermarket services 6,431 15 6,446 921 7,367
---------------------- ------------- ------------- ------------- ------------------------ -------------
Total underlying
revenue at 2015
exchange rates 13,023 35 13,058 1,897 14,955
---------------------- ------------- ------------- ------------- ------------------------ -------------
Translation to 2016
exchange rates 723 2 725 (725) -
---------------------- ------------- ------------- ------------- ------------------------ -------------
Total revenue 13,746 37 13,783 1,172 14,955
---------------------- ------------- ------------- ------------- ------------------------ -------------
Gross profit 2,620 6 2,626 422 3,048
---------------------- ------------- ------------- ------------- ------------------------ -------------
Other operating income - - - 5 5
---------------------- ------------- ------------- ------------- ------------------------ -------------
Commercial and
administrative costs (1,045) (51) (1,096) (1,112) (2,208)
---------------------- ------------- ------------- ------------- ------------------------ -------------
Restructuring 2 - 2 (2) -
---------------------- ------------- ------------- ------------- ------------------------ -------------
Research and
development costs (819) 7 (812) (106) (918)
---------------------- ------------- ------------- ------------- ------------------------ -------------
Share of results of
joint ventures and
associates 112 (5) 107 10 117
---------------------- ------------- ------------- ------------- ------------------------ -------------
Profit before
financing and
taxation at 2015
exchange rates 870 (43) 827 (783) 44
---------------------- ------------- ------------- ------------- ------------------------ -------------
Translation to 2016
exchange rates 90 (2) 88 (88) -
---------------------- ------------- ------------- ------------- ------------------------ -------------
Loss on disposal of
businesses - - - (3) (3)
---------------------- ------------- ------------- ------------- ------------------------ -------------
Profit before
financing and
taxation 960 (45) 915 (874) 41
---------------------- ------------- ------------- ------------- ------------------------ -------------
Net financing (102) (102) (4,575) (4,677)
---------------------- ------------- ------------- ------------- ------------------------ -------------
Profit/(loss) before
taxation (147) 813 (5,449) (4,636)
---------------------- ------------- ------------- ------------- ------------------------ -------------
Taxation (261) (261) 865 604
---------------------- ------------- ------------- ------------- ------------------------ -------------
Profit/(loss) for the
period 552 (4,584) (4,032)
---------------------- ------------- ------------- ------------- ------------------------ -------------
Attributable to:
---------------------- ------------- ------------- ------------- ------------------------ -------------
Ordinary shareholders 552 (4,584) (4,032)
---------------------- ------------- ------------- ------------- ------------------------ -------------
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 3,139 64 3,203 74 3,277
---------------------- ------------- ------------- ------------- ------------------------ -------------
Other operating income - - - 10 10
---------------------- ------------- ------------- ------------- ------------------------ -------------
Commercial and
administrative costs (970) (55) (1,025) (45) (1,070)
---------------------- ------------- ------------- ------------- ------------------------ -------------
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)
---------------------- ------------- ------------- ------------- ------------------------ -------------
(Loss)/profit before
taxation (59) 1,432 (1,272) 160
---------------------- ------------- ------------- ------------- ------------------------ -------------
Taxation (351) (351) 275 (76)
---------------------- ------------- ------------- ------------- ------------------------ -------------
(Loss)/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)
-----
2016 2015 2016 2015 2016 2015
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Civil 13,856 11,774 (14,510) (8,709) (654) 3,065
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Defence 1,759 1,449 (1,996) (1,698) (237) (249)
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Power Systems 3,837 3,384 (1,151) (1,017) 2,686 2,367
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Marine 1,520 1,488 (903) (783) 617 705
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Nuclear 352 303 (435) (324) (83) (21)
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Inter-segment (1,223) (850) 1,223 850 - -
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Reportable segments 20,101 17,548 (17,772) (11,681) 2,329 5,867
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Other businesses and
corporate 51 120 (183) (120) (132) -
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Net funds/(debt) 3,132 3,252 (3,357) (3,363) (225) (111)
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Tax assets/(liabilities) 908 341 (987) (1,004) (79) (663)
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Post-retirement scheme
surpluses/(deficits) 1,346 1,063 (1,375) (1,140) (29) (77)
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
25,538 22,324 (23,674) (17,308) 1,864 5,016
--------------------------- ------- ------ ------------------ -------- ------------------------ -----
Group employees average during the year 2016 2015
---------------------------------------- ------ ------
Civil 23,800 23,100
---------------------------------------- ------ ------
Defence 6,000 6,300
---------------------------------------- ------ ------
Power Systems 10,300 10,600
---------------------------------------- ------ ------
Marine 5,300 6,000
---------------------------------------- ------ ------
Nuclear 4,300 4,100
---------------------------------------- ------ ------
Other businesses and corporate(1,2) 200 400
---------------------------------------- ------ ------
49,900 50,500
---------------------------------------- ------ ------
(1) Other businesses and corporate includes the Energy
businesses not sold to Siemens in 2014 and corporate employees who
do not provide a shared service to the segments. Where corporate
functions provide such a service, employees have been allocated to
the segments on an appropriate basis. 2015 figures have been
restated on this basis.
(2) As described in Note 1, the Group has reclassified certain
joint ventures to joint operations from 1 January 2016. This
increased the reported Group employees by 800.
Underlying
adjustments 2016 2015
Profit
before Profit before
Revenue financing Net financing Taxation Revenue financing Net financing Taxation
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Underlying
performance 13,783 915 (102) (261) 13,354 1,492 (60) (351)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Recognise revenue
at exchange rate
on date of
transaction 1,172 - - - 371 - - -
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Realised
losses/(gains)
on settled
derivative
contracts(1) - 426 162 (107) - 287 (35) (51)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Net unrealised
fair value
changes to
derivative
contracts(2) - - (4,420) 792 - (9) (1,306) 270
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Effect of
currency on
contract
accounting - 77 - (14) - (9) - 2
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Revaluation of
trading assets
and liabilities - 67 (313) 56 - (13) 20 (6)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Financial risk
and revenue
sharing
arrangements
(RRSAs) -
exchange
differences and
changes
in forecast
payments - - (8) (1) - - 8 (1)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Effect of
acquisition
accounting(3) - (115) - 35 - (124) - 31
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Impairment of
goodwill - (219) - - - (75) - -
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Pension
restructuring(4) - (306) - 107
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Net
post-retirement
scheme financing - - 3 (2) - - 32 (12)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Disposal of
business - (3) - - - 2 - 15
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Exceptional
restructuring - (129) - 34 - (49) - 11
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Financial
penalties from
agreements with
investigating
bodies - (671) - - - - - -
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Other - (1) 1 (5) - (1) - (2)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Reduction in rate
of UK
corporation tax - - - (30) - - - 18
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Total underlying
adjustments 1,172 (874) (4,575) 865 371 9 (1,281) 275
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Reported per
consolidated
income statement 14,955 41 (4,677) 604 13,725 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 of 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) The adjustment eliminates charges recognised as a result of
recognising assets in acquired businesses at fair value.
(4) In the UK, tax is provided on pension surpluses at a rate of
35%, which is the relevant rate if the surpluses were to be return
to the Group.
3 Research and development
2016 2015
GBPm GBPm
---------------------------------------------------------------------------------------------- ------ ------
Expenditure in the year (937) (831)
---------------------------------------------------------------------------------------------- ------ ------
Capitalised as intangible assets 99 51
---------------------------------------------------------------------------------------------- ------ ------
Amortisation of capitalised costs (147) (136)
============================================================================================== ====== ======
Impairment of capitalised costs (2) -
---------------------------------------------------------------------------------------------- ------ ------
Net cost (987) (916)
---------------------------------------------------------------------------------------------- ------ ------
Entry fees received 73 83
---------------------------------------------------------------------------------------------- ------ ------
Entry fees deferred in respect of charges in future periods (40) (28)
---------------------------------------------------------------------------------------------- ------ ------
Recognition of previously deferred entry fees 36 43
---------------------------------------------------------------------------------------------- ------ ------
Net cost recognised in the income statement (918) (818)
---------------------------------------------------------------------------------------------- ------ ------
Underlying adjustments relating to the effects of acquisition accounting and foreign exchange 56 53
---------------------------------------------------------------------------------------------- ------ ------
Net underlying cost recognised in the income statement (862) (765)
============================================================================================== ====== ======
Translation to 2015 exchange rates 50 -
---------------------------------------------------------------------------------------------- ------ ------
Net underlying cost at 2015 exchange rates (812) (765)
---------------------------------------------------------------------------------------------- ------ ------
4 Net financing
2016 2015
Per consolidated Per consolidated
income statement Underlying financing income statement Underlying financing
GBPm GBPm GBPm GBPm
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financing income
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Interest receivable 14 14 12 12
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net fair value gains on
foreign currency
contracts 1 - - -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financial RRSAs -
foreign exchange
differences and
changes in forecast
payments 23 - 21 -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net fair value gains on
commodity contracts 16 - - -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financing on
post-retirement scheme
surpluses 42 - 65 -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net foreign exchange
gains - - 17 32
----------------------- ---------------------- --------------------- ----------------------- ---------------------
96 14 115 44
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financing costs
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Interest payable (77) (77) (71) (71)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net fair value losses
on foreign currency
contracts (4,437) - (1,217) -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financial RRSAs -
foreign exchange
differences and
changes in forecast
payments (31) - (13) -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financial charge
relating to financial
RRSAs (6) (6) (8) (8)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net fair value losses
on commodity contracts - - (89) -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financing on
post-retirement scheme
deficits (39) - (33) -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net foreign exchange
losses (145) - - -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Other financing charges (38) (33) (25) (25)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
(4,773) (116) (1,456) (104)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net financing (4,677) (102) (1,341) (60)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Analysed as:
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net interest payable (63) (63) (59) (59)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net fair value losses
on derivative
contracts (4,420) - (1,306) -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net post-retirement
scheme financing 3 - 32 -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net other financing (197) (39) (8) (1)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net financing (4,677) (102) (1,341) (60)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
5 Taxation
The effective reported tax rate for the year is 13.0% (2015
47.5%). The 2016 reported loss before tax largely relates to the
mark to market adjustment on the foreign currency derivatives which
arise mainly in the UK and the key driver of the reported rate is
therefore the UK tax rate. The financial penalties and goodwill
impairments on which no tax relief is available then have the
effect of reducing the rate. The 2015 reported rate was high due to
the low level of reported profit before tax and the higher
proportion of those profits arising in higher tax countries such as
the US and items that impact the tax charge having a more
distortive effect.
Following announcements in the Summer Budget 2015 and the Budget
2016, the UK corporation tax rate will reduce to 19% from 1 April
2017 and 17% from 1 April 2020. The Summer Budget 2015 had
originally announced that the rate would reduce to 18% from 1 April
2020. This reduction was substantively enacted on 26 October 2015
and so the prior year deferred tax assets and liabilities were
calculated at this rate. The subsequent announcement in the Budget
2016 that the rate will reduce to 17% from 1 April 2020 was
substantively enacted on 6 September 2016. As this reduction was
substantively enacted prior to the year end, the closing deferred
tax assets and liabilities have been calculated at this rate.
The resulting charges or credits have been recognised in the
income statement except to the extent that they relate to items
previously charged or credited to other comprehensive income or
equity. Accordingly, in 2016, GBP30m has been charged to the income
statement (2015: GBP18m credited) and GBP2m has been charged
directly to equity (2015: GBP3m).
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.
2016 2015
----------------------------------------------- -----------------------------------------
Potentially dilutive Potentially dilutive
Basic share options(1) Diluted Basic share options Diluted
------------------------ ---------- ----------------------- ---------- ------ ----------------------- --------
(Loss)/profit
attributable to
ordinary shareholders
(GBPm) (4,032) - (4,032) 83 - 83
------------------------ ---------- ----------------------- ---------- ------ ----------------------- --------
Weighted average number
of ordinary shares
(millions) 1,832 - 1,832 1,839 12 1,851
------------------------ ---------- ----------------------- ---------- ------ ----------------------- --------
EPS (pence) (220.08)p - (220.08)p 4.51p (0.03)p 4.48p
------------------------ ---------- ----------------------- ---------- ------ ----------------------- --------
(1) As there is a loss, the effect of potentially dilutive
ordinary shares is anti-dilutive.
The reconciliation between underlying EPS and basic EPS is as
follows:
2016 2015
------------------- ------------------
Pence GBPm Pence GBPm
--------------------------------------------------------------------------- --------- -------- -------- --------
Underlying EPS / Underlying profit attributable to ordinary shareholders
re-presented 30.13 552 58.73 1,080
--------------------------------------------------------------------------- --------- -------- -------- --------
Total underlying adjustments to profit before tax (note 2) (297.43) (5,449) (69.17) (1,272)
--------------------------------------------------------------------------- --------- -------- -------- --------
Related tax effects 47.22 865 14.95 275
--------------------------------------------------------------------------- --------- -------- -------- --------
EPS / (Loss)/profit attributable to ordinary shareholders (220.08) (4,032) 4.51 83
--------------------------------------------------------------------------- --------- -------- -------- --------
Diluted underlying EPS 30.08 58.35
--------------------------------------------------------------------------- --------- -------- -------- --------
7 Payments to shareholders in respect of the year
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:
2016 2015
--------------- ---------------
Pence per Pence per
share GBPm share GBPm
---------------------------- --------- ---- --------- ----
Interim (issued in January) 4.60 85 9.27 170
============================= ========= ==== ========= ====
Final (issued in July) 7.10 130 7.10 131
----------------------------- --------- ---- --------- ----
11.70 215 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 284 26 116 - 84 16 66 592
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Additions - 154 100 208 - 116 53 631
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Acquisitions of
businesses 1 - - - - - 1 2
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Disposals - - (2) - - (6) - (8)
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 31 December
2016 1,874 1,325 1,944 1,007 540 742 663 8,095
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Accumulated
amortisation:
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 1 January
2016 86 373 691 394 139 325 225 2,233
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Exchange
differences 32 3 48 - 28 8 35 154
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Charge for the
year - 64 147 39 42 81 33 406
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Impairment 219 - 2 - - - 1 222
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 31 December
2016 337 440 888 433 209 414 294 3,015
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Net book value
at:
================ ======== =============== =============== =============== =============== ======== ===== =====
31 December 2016 1,537 885 1,056 574 331 328 369 5,080
================ ======== =============== =============== =============== =============== ======== ===== =====
31 December 2015 1,503 772 1,039 405 317 291 318 4,645
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Goodwill has been tested for impairment during 2016 on the
following basis:
-- The carrying values of goodwill 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. Given the long-term and
established nature of many of the Group's products (product lives
are often measured in decades), these forecasts generally cover the
next five-ten years. Growth rates for the period not covered by the
forecasts are based on a range of growth rates (2.0-3.5%) that
reflect the products, industries and countries in which the
relevant cash generating unit (CGU) or group of CGUs operate.
-- The key assumptions for the impairment tests are the discount
rate and, in the cash flow projections, the programme assumptions,
the growth rates and the impact of foreign exchange rates on the
relationship between selling prices and costs. Impairment tests are
performed using prevailing exchange rates.
Prior to 2016, goodwill in the Marine business was considered as
separate CGUs, based on the original acquisitions (comprising ODIM
ASA, Scandinavian Electric Holdings and Vinters Limited (formerly
Vickers plc)). However, following re-organisations, including those
resulting from the current transformation programme, we now
consider that the Marine business (excluding the UK marine defence
business) is a single CGU.
The Marine business has continued to be impacted by the low
crude oil price and over supply of vessels to its offshore support
customers. The downturn has been deeper and more prolonged than
forecast a year ago and, as a consequence, the Group has recognised
an impairment loss of GBP200m to the carrying value of goodwill of
the CGU. This is included in cost of sales in the income statement,
but excluded from the underlying results. The impairment loss is
based on a value in use calculation using cash flows forecast over
a ten-year period (which are considered to take account of the
cyclicality of the market). The impairment test indicated a
recoverable amount of GBP473m (including allowance for identified
risks of GBP18m) compared with a pre-impairment carrying value of
GBP673m.
The Group has also recognised other impairments to goodwill of
GBP19m, including GBP14m in relation to its North American civil
nuclear business. This reflects the current weakness in the
services market, although the Directors expect these to recover in
the medium term.
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
9-13% (2015: 9-13%), based on the Group's weighted average cost of
capital, adjusted for the estimated programme risk, for example
taking account of whether or not the forecast cash flows arise from
contracted business.
No impairment is required on this basis. However, a combination
of adverse changes in assumptions (eg. market size and share, unit
costs and programme delays) and other variables (eg. discount rate
and foreign exchange rates), could result in impairment in future
years.
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 141 352 12 55 560
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Reclassification of
joint ventures to
joint operations 7 87 - - 94
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Additions - purchased 25 124 51 426 626
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Additions arising from
TotalCare Flex
arrangements
(non-cash) - - 75 - 75
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Disposal of businesses (1) (3) - - (4)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Reclassifications 131 230 63 (424) -
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Disposals/write-offs (11) (85) (49) - (145)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 31 December 2016 1,667 4,599 491 765 7,522
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Accumulated
amortisation:
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 1 January 2016 416 2,284 125 1 2,826
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Exchange differences 44 182 4 - 230
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Reclassification of
joint ventures to
joint operations 1 52 - - 53
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Charge for the year 63 333 28 - 424
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Impairment 1 - - 1 2
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Disposal of businesses - (2) - - (2)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Reclassifications - (9) 9 - -
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Disposals/write-offs (10) (75) (40) - (125)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 31 December 2016 515 2,765 126 2 3,408
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Net book value at:
======================= ================== =================== ==================== ======================= =====
31 December 2016 1,152 1,834 365 763 4,114
======================= ================== =================== ==================== ======================= =====
31 December 2015 959 1,610 214 707 3,490
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
10 Financial assets and liabilities
Other financial assets and liabilities comprise:
Derivatives
----------------------------------------------------
Foreign Interest
exchange Commodity rate Financial TotalCare
contracts contracts contracts(1) Total RRSAs Flex C Shares Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------- ------------ ------------- ------------- -------- ------------- ------------- --------- --------
At 31
December 2016
------------- ------------ ------------- ------------- -------- ------------- ------------- --------- --------
Non-current
assets 13 5 364 382 - - - 382
------------- ------------ ------------- ------------- -------- ------------- ------------- --------- --------
Current
assets 4 1 - 5 - - - 5
------------- ------------ ------------- ------------- -------- ------------- ------------- --------- --------
Current
liabilities (566) (24) - (590) (33) - (28) (651)
------------- ------------ ------------- ------------- -------- ------------- ------------- --------- --------
Non-current
liabilities (5,002) (38) (6) (5,046) (68) (15) - (5,129)
------------- ------------ ------------- ------------- -------- ------------- ------------- --------- --------
(5,551) (56) 358 (5,249) (101) (15) (28) (5,393)
------------- ------------ ------------- ------------- -------- ------------- ------------- --------- --------
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)
------------- ------------ ------------- ------------- -------- ------------- ------------- --------- --------
(1) Includes the foreign exchange impact of cross-currency
interest rate swaps.
Derivative financial instruments 2016 2015
Foreign exchange Commodity Interest rate Total Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ----------------- --------
At 1 January (1,640) (104) 13 (1,731) (630)
----------------------------------------
Currency options at inception(1) (33) - - (33) (20)
---------------------------------------- -----------------
Movements in fair value hedges - - 345 345 (35)
---------------------------------------- -----------------
Movements in other derivative contracts (4,436) 16 - (4,420) (1,306)
---------------------------------------- -----------------
Contracts settled 558 32 - 590 260
---------------------------------------- ----------------- --------
At 31 December (5,551) (56) 358 (5,249) (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 TotalCare Flex
2016 2015 2016
GBPm GBPm GBPm
---------
At 1 January (110) (145) --
---------
Exchange adjustments included in OCI 5 - -
---------
Additions - - (14)
---------
Financing charge(1) (6) (8) (1)
---------
Excluded from underlying profit
---------
Changes in forecast payments(1) 5 11
---------
Exchange adjustments(1) (13) (3) (3)
---------
Cash paid to partners 18 35 -
---------
Other - - 3
---------
At 31 December (101) (110) (15)
(1) Included in net financing.
Fair values of financial instruments equate to book values with
the following exceptions:
2016 2015
Book value Fair value Book value Fair value
GBPm GBPm GBPm GBPm
----------
Borrowings (3,357) (3,317) (3,302) (3,312)
Financial RRSAs (101) (109) (110) (110)
----------
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, financial RRSAs and TotalCare Flex liabilities are
carried at amortised cost. Fair values 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. For
financial RRSAs, the contractual cash flows are based on future
trading activity, which is estimated based on latest forecasts.
Borrowings
During the year, the Group has repaid GBP434m of short-term
borrowings, including the GBP200m 7(3) /(8) % Notes, which matured
in June.
11 Pensions and other post-retirement benefits
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 - (208) (208)
Current service cost and administrative expenses(1) (169) (50) (219)
Past service credit/(cost) 22 (1) 21
Settlements(1) (302) (10) (312)
Financing recognised in the income statement 41 (38) 3
Contributions by employer 185 86 271
Actuarial gains/(losses) recognised in OCI(2) (1,810) (26) (1,836)
Returns on plan assets excluding financing recognised in OCI(2) 2,326 5 2,331
Other - (3) (3)
At 31 December 2016 1,336 (1,365) (29)
Analysed as:
Post-retirement scheme surpluses - included in non-current assets 1,336 10 1,346
Post-retirement scheme deficits - included in non-current liabilities - (1,375) (1,375)
1,336 (1,365) (29)
(1) GBP306m of costs have been excluded from the underlying
results, comprising: GBP301m settlement cost on the buy-out of the
Vickers Group Pension Scheme; GBP3m of administrative expenses on
restructuring all the UK defined benefit plans; and GBP2m
settlement cost in relation to winding-up lump sums on small
pensions as a consequence of the restructuring.
(2) 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
continued its investigations and engaged with the SFO and other
authorities in the UK, the US and elsewhere in relation to the
matters of concern.
In January 2017, after full cooperation, the Company concluded
deferred prosecution agreements with the SFO and the US Department
of Justice and a leniency agreement with the MPF, the Brazilian
federal prosecutors which are described on page 5. Prosecutions of
individuals may follow and investigations may be commenced in other
jurisdictions. In addition, we could still be affected by actions
from customers and customers' financiers. The Directors are not
currently aware of any matters that are likely to lead to a
financial loss, but cannot anticipate all the possible actions that
may be taken or their potential consequences.
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$3.2bn (31 December 2015:
US$3.1bn) to provide borrowing facilities to enable customers to
purchase aircraft (of which approximately US$421m could be called
in 2017). 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.
31 December 2016 31 December 2015
GBPm $m GBPm $m
Gross contingent liabilities 238 293 269 399
Value of security(1) (103) (126) (136) (201)
Indemnities (74) (91) (79) (118)
Net commitments 61 76 54 80
Net commitments with security reduced by 20%(2) 86 106 78 115
(1) Security includes unrestricted cash collateral of: 38 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.
On 11 July 2016, the Group announced that it will purchase the
outstanding 53.1% shareholding in ITP owned by SENER Grupo de
Ingeniería SA ("SENER"). This follows a decision by SENER to
exercise its put option. On 28 November 2016, and following due
diligence, the Group confirmed the valuation of EUR720m. Under the
agreement, consideration will be settled over a two-year period
following completion in eight evenly spaced instalments of equal
value. The updated agreement allows flexibility to settle the
consideration either in cash, in the form of Rolls-Royce shares or
any mixture of the two, as preferred by Rolls-Royce. A decision as
to whether each payment will be settled in cash, shares or cash and
shares will be determined by Rolls-Royce during the payment
period.
Completion remains subject to regulatory clearances and is
expected in 2017.
13 Related party transactions
Transactions with related parties are shown in note 24 of the
2016 Annual Report. Significant transactions in the current
financial period are as follows:
2016 2015
GBPm GBPm
Sales of goods and services to joint ventures and associates 2,022 1,896
Purchases of goods and services from joint ventures and associates (1,881) (2,266)
Included in sales of goods and services to joint ventures and
associates are sales of spare engines amounting to GBP356m (2015:
GBP189m).
Profit recognised in the year on such sales amounted to GBP119m
(2015: GBP71m), including profit on current year sales and
recognition of profit deferred on similar sales in previous years.
On an underlying basis (at actual achieved rates on settled
derivative transactions), the amounts were GBP97m (2015:
GBP67m).
14 Derivation of summary funds flow statement
The table below shows the derivation of the summary funds flow
statement (lines marked *) on page 27 from the consolidated cash
flow statement on page 30.
2016 2015
GBPm GBPm GBPm GBPm Source
Underlying profit before tax (PBT) -
* opposite 813 1,432
Depreciation of property, plant and
equipment 426 378 Cash flow statement
Amortisation of intangible assets 628 432 Cash flow statement
Impairment of goodwill (219) (75) Reversal of underlying adjustment (above)
Impairment of investments - 2 Cash flow statement
Acquisition accounting (115) (124) Reversal of underlying adjustment (above)
* Depreciation and amortisation 720 613
(Increase)/decrease in inventories (161) 63 Cash flow statement
Cash flow statement adjusted for
Decrease/(increase) in trade and other non-underlying exchanges differences of
receivables 312 (836) GBP258m
Cash flow statement adjusted for
(Decrease)/increase in trade and other non-underlying exchanges differences of
payables (273) 242 GBP507m
Revaluation of trading assets 67 (13) Reversal of underlying adjustment (above)
* Movement on net working capital (55) (544)
Additions of intangible assets (631) (408) Cash flow statement
Purchases of property, plant and equipment (585) (487) Cash flow statement
Government grants received 15 8 Cash flow statement
Expenditure on property, plant and
* equipment and intangible assets (1,201) (887)
Realised losses on hedging instruments 426 287 Reversal of underlying adjustment (above)
Net unrealised fair value to changes to
derivatives - (9) Reversal of underlying adjustment (above)
Foreign exchange on contract accounting 77 (9) Reversal of underlying adjustment (above)
Exceptional restructuring (129) (49) Reversal of underlying adjustment (above)
Other (1) (1) Reversal of underlying adjustment (above)
Reversal of charge in underlying PBT
Underlying financing 102 60 (above)
Non-underlying exchange differences on
receivables (258) - Reversal of adjustment above
Non-underlying exchange differences on
payables 507 - Reversal of adjustment above
Loss on disposal of property, plant and
equipment 5 8 Cash flow statement
Joint venture dividends less share of
Joint ventures (43) (37) results - cash flow statement
Increase/(decrease) in provisions 44 (151) Cash flow statement
Cash flows on other financial assets and
liabilities (608) (305) Cash flow statement
Share based payments 35 5 Cash flow statement
Additions of unlisted investments - (6) Cash flow statement
Disposal of intangible assets 8 4 Cash flow statement
Disposal of property, plant and equipment 8 33 Cash flow statement
Investments in joint ventures and associates (30) (15) Cash flow statement
Interest received and paid - cash flow
Net interest (72) (55) statement
Net funds of joint ventures reclassified Net cash and borrowings reclassified -
to joint operations (4) - cash flow statement
Issue of ordinary shares 1 32 Cash flow statement
Purchase of ordinary shares for share Cash flow statement, 2015 includes GBP19m
schemes (21) (21) from share buyback
* Other 47 (229)
* Trading cash flow 324 385
Net defined benefit plans - underlying
operating charge 204 213 Cash flow statement
Cash funding of defined benefit plans (271) (259) Cash flow statement
Contributions to defined benefit schemes
* in excess of underlying PBT charge (67) (46)
* Tax (157) (160) Cash flow statement
* Free cash flow 100 179
* Redemption of C Shares - cash flow
Shareholder payments (301) (421) statement
Cash flow statement, excluding GBP19m
* Share buyback - (414) retained for share incentive schemes
* Increase in share in joint ventures (154) - Cash flow statement
* Discontinued operations - (121) Cash flow statement
* Other acquisitions and disposals 1 (3) Cash flow statement
* Foreign exchange 240 3 Cash flow statement
* Change in net debt (114) (777)
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
excluding capital expenditures and 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.
2016 2015
GBPm GBPm GBPm GBPm Source
Reported operating profit 44 1,499
Realised losses on hedging instruments (426) (287) Reported to underlying adjustment (note 2)
Net unrealised fair value to changes to
derivatives - 9 Reported to underlying adjustment (note 2)
Foreign exchange on contract accounting (77) 9 Reported to underlying adjustment (note 2)
Revaluation of trading assets and liabilities (67) 13 Reported to underlying adjustment (note 2)
Effect of acquisition accounting 115 124 Reported to underlying adjustment (note 2)
UK pension restructuring 306 - Reported to underlying adjustment (note 2)
Impairment of goodwill 219 75 Reported to underlying adjustment (note 2)
Exceptional restructuring 129 49 Reported to underlying adjustment (note 2)
Financial penalties from agreements with
investigating bodies 671 - Reported to underlying adjustment (note 2)
Other 1 1 Reported to underlying adjustment (note 2)
Adjustments to reported operating profit 871 (7)
Underlying profit before financing 915 1,492
Underlying financing (102) (60) Underlying income statement (note 2)
Underlying profit before tax 813 1,432
The table below shows a reconciliation of free cash flow to the
change in cash and cash equivalents presented in the consolidated
cash flow statement on page 30.
2016 2015
GBPm GBPm GBPm GBPm
Change in cash and cash equivalents (691) 320
Shareholder payments 301 421
Share buy back - 433
Less amount retained for share incentive schemes - (19)
Returns to shareholders 301 835
Net cash flow from changes in borrowings and finance leases 345 (1,095)
Increase/decrease in short-term investments 1 (5)
Increase in share in joint ventures 154 -
Debt of joint ventures reclassified as joint operations (9) -
Disposal of discontinued operations - 121
Acquisition of businesses 6 5
Disposal of other businesses (7) (2)
Changes in group structure 144 124
Free cash flow 100 179
Principal risks and uncertainties
The following table describes the principal risks facing the
Group, notwithstanding that there are other risks that may occur
and may impact the achievement of the Group's objectives:
Risk or uncertainty and potential How we manage it
impact
Disruptive technologies and
business models * Horizon and emerging technology scanning, and
Disruptive technologies, new understanding our competitors, including patent
entrants with alternative searches.
business models or disruptions
to key markets or customers
could reduce our ability to * Investing in innovation and new technologies.
win sustainable future business,
achieve operating results
and realise future growth * Focusing on enhancing our skills and capabilities to
opportunities. maintain our technology leadership.
* Forming strategic partnerships and conducting joint
research programmes.
* Establishing our digital business.
Product failure
Product not meeting safety * Ensuring a culture that puts safety first.
expectations, or causing significant
impact to customers or the
environment through failure * Applying our engineering design and validation
in quality control. process from initial design, through production and
into service.
* Reviewing the scope and effectiveness of the Group's
product safety policies to ensure that they operate
to the highest industry standards.
* Operating a safety management system (SMS), governed
by the product safety review board, and subject to
continual improvement based on experience and
industry best practice.
* Product safety training is an integral part of our
SMS.
* Improving our supply chain quality.
Business continuity
Breakdown of external supply * Continuing our investment in adequate capacity and
chain or internal facilities modern equipment and facilities.
that could be caused by destruction
of key facilities, natural
disaster, regional conflict, * Identifying and assessing points of weakness in our
financial insolvency of a internal and external supply chain, our IT systems
critical supplier or scarcity and the skills of our people.
of materials which would reduce
the ability to meet customer
commitments, win future business * Selecting stronger suppliers, developing dual sources
or achieve operational results. or dual capability.
* Developing and testing site-level incident management
and business recovery plans.
* Providing improved response to supply chain
disruption through customer excellence centres.
* Understanding potential changes to supply chain
responsiveness and resilience resulting from Brexit
and change to the US administration (eg. due to
logistics delays).
IT vulnerability
Breach of IT security causing * Implementing 'defence in depth' through deployment of
controlled or critical data multiple layers of software and processes including
to be lost, made inaccessible, web gateways, filtering, firewalls, intrusion,
corrupted or accessed by unauthorised advanced persistent threat detectors and integrated
users. reporting.
* Running security and network operations centres.
* Actively sharing IT security information through
industry, government and security forums.
Competitive position
The presence of large, financially * Accessing and developing key technologies and service
strong competitors in the offerings which differentiate us competitively.
majority of our markets means
that the Group is susceptible
to significant price pressure * Focusing on being responsive to our customers and
for original equipment or improving the quality, delivery and reliability of
services even where our markets our products and services.
are mature or the competitors
few. Our main competitors
have access to significant * Partnering with others effectively.
government funding programmes
as well as the ability to
invest heavily in technology * Driving down cost and improving margins.
and industrial capability.
* Protecting credit lines.
* Investing in innovation, manufacturing and production,
and continuing governance of technology programmes.
* Maintaining a healthy balance sheet to enable access
to cost-effective sources of third-party funding.
* Understanding our competitors.
* Understanding the potential implications on our
competitiveness resulting from Brexit and change to
the US administration.
Political risk
Geopolitical factors that * Where possible, locating our facilities and supply
lead to an unfavourable business chain in countries with a low level of political risk
climate and significant tensions and/or ensuring that we maintain dual capability.
between major trading parties
or blocs which could impact
the Group's operations. For * Diversifying global operations to avoid excessive
example: explicit trade protectionism, concentration of risks in particular areas.
differing tax or regulatory
regimes, potential for conflict;
or broader political issues. * The Group's international network and its businesses
proactively monitoring local situations.
* Maintaining a balanced business portfolio with high
barriers to entry and a diverse customer base.
* Proactively influencing regulation where it affects
us.
* Steering committee, chaired by Group President, to
co-ordinate activities across the Group and minimise
the impact of Brexit.
* Monitoring the potential impact of changes following
the change to the US administration, relating to tax
policy, trade and relationships with the UK
government.
Major programme delivery
Failure to deliver a major * Major programmes are subject to Board approval.
programme on time, within
budget, to specification,
or technical performance falling * Reviewing major programmes at levels and frequencies
significantly short of customer appropriate to their criticality and performance,
expectations, or not delivering against key financial and non-financial deliverables
the planned business benefits, and potential risks throughout the programmes
would have potentially significant lifecycles.
adverse financial and reputational
consequences, including the
risk of impairment of the * Conducting technical audits at pre-defined points
carrying value of the Group's which are performed by a team that is independent
intangible assets and the from the programme.
impact of potential litigation.
* Requiring programmes to address the actions arising
from reviews, and audits and then monitoring and
controlling progress through to closure.
* Applying knowledge management principles to provide
benefit to current and future programmes.
Compliance
Non-compliance by the Group * Taking an uncompromising approach to compliance.
with legislation or other
regulatory requirements in
the heavily regulated environment * Operating an extensive compliance programme. This
in which it operates (for programme and the Global Code of Conduct are
example: export controls; disseminated throughout the Group and are updated
use of controlled chemicals from time to time to ensure their continued relevance,
and substances; and anti-bribery and to ensure that they are complied with, both in
and corruption legislation) spirit and to the letter. The Global Code of Conduct
compromising the ability to and the Group's compliance programme are supported by
conduct business in certain appropriate training.
jurisdictions and exposing
the Group to potential: reputational
damage; financial penalties; * Strengthening of the ethics, anti-bribery and
debarment from government corruption, compliance and export control teams.
contracts for a period of
time; and/or suspension of
export privileges (including * A legal team is in place to manage regulatory
export credit financing), investigations.
each of which could have a
material adverse effect
* Engaging with external regulatory authorities.
* Implementing a comprehensive Registration, Evaluation,
Authorisation and restriction of CHemicals (REACH)
compliance programme. This includes establishing
appropriate data systems and processes, working with
our suppliers, customers and trade associations and
conducting research on alternative materials.
Market and financial shock
The Group is exposed to a * Maintaining a healthy balance sheet, through managing
number of market risks, some cash balances and debt levels and maturities.
of which are of a macro-economic
nature (eg. oil price, exchange
rates) and some of which are * Providing financial flexibility by maintaining high
more specific to the Group levels of liquidity and an investment grade credit
(eg. liquidity and credit rating.
risks, credit rating, profitability
post IFRS 15, reduction in
air travel or disruption to * Sustaining a balanced portfolio through earning
other customer operations). revenue both from the sale of original equipment and
Significant extraneous market aftermarket services, providing a broad product range
events could also materially and addressing diverse markets that have differing
damage the Group's competitiveness business cycles.
and/or creditworthiness.
This would affect operational
results or the outcomes of * Deciding where and what currencies to source in, and
financial transactions. where and how much credit risk is extended or taken.
The Group has a number of treasury policies that are
designed to hedge residual risks using financial
derivatives (foreign exchange, interest rates and
commodity price risk.
* Review debt financing and hedging in light of
volatility in external financial markets caused by
external events, such as Brexit and change of US
administration.
Talent and capability
Inability to attract and retain * Attracting, rewarding and retaining the right people
the critical capabilities with the right skills globally in a planned and
and skills needed in sufficient targeted way, including regular benchmarking of
numbers and to effectively remuneration.
organise, deploy and incentivise
our people to deliver our
strategy, business plan and * Developing and enhancing organisational, leadership,
projects. technical and functional capability to deliver global
programmes and transformational change.
* Continuing a strong focus on individual development
and succession planning.
* Proactively monitoring retirement in key areas and
actively managing the development and career paths of
our people with a special focus on employees with the
highest potential.
* Embedding a lean, agile high performance culture that
tightly aligns Group strategy with individual and
team objectives.
* Retaining, incentivising and effectively deploying
the critical capabilities, skills and people needed
to deliver our strategic priorities, plans and
projects whilst implementing the Group's major
programme to transform its business, to be resilient
and to act with pace and simplicity.
* Tracking engagement through our annual employee
opinion survey and a commitment to drive year-on-year
improvement to the employee experience and
communications.
* Reviewing employee mobility as part of Brexit
steering group.
Annual General Meeting
All holders of ordinary shares may attend the Company's AGM at
which the Chairman and Chief Executive present a review of the key
business developments during the year. This year's AGM will be held
at 11.00am on Thursday 4 May 2017 at the Pride Park Stadium, Pride
Park, Derby, DE24 8XL. Shareholders can ask questions of the Board
on the matters put to the meeting, including the Annual Report and
the running of the Company generally. All Directors are invited to
attend each AGM. Unless unforeseen circumstances arise, all
committee chairmen will be present to take questions at the
AGM.
Payments to shareholders
The Company issues non-cumulative redeemable preference shares
(C Shares) as an alternative to paying a cash dividend.
Shareholders can choose to:
-- redeem all C Shares for cash;
-- redeem all C Shares for cash and reinvest the proceeds in the
C Share Reinvestment Plan (CRIP); or
-- keep the C Shares.
The CRIP is operated by Computershare Investor Services PLC (the
Registrar). The Registrar will purchase ordinary shares in the
market for shareholders electing to reinvest their C Share
proceeds. Shareholders wishing to participate in the CRIP or redeem
their C Shares in July 2017 must ensure that their instructions are
lodged with the Registrar no later than 5pm BST on 1 June 2017
(CREST holders must submit their election in CREST before 3pm BST
on 1 June 2017). Redemption will take place on 5 July 2017.
At the AGM, the Directors will recommend an issue of 71 C Shares
with a total nominal value of 7.1p for each ordinary share. The C
Shares will be issued on 3 July 2017 to shareholders on the
register on 28 April 2017 and the final day of trading with
entitlement to C Shares is 26 April 2017. Together with the interim
issue on 4 January 2017 of 46 C Shares for each ordinary share with
a total nominal value of 4.6p, this is the equivalent of a total
annual payment to ordinary shareholders of 11.7p for each ordinary
share.
Directorate change
Further to the announcement on page 8 in respect of Colin Smith,
the remuneration details required to be made available under
section 430 (2B) of the Companies Act 2006 are available on the
corporate governance section of our website www.rolls-royce.com
Annual report and financial statements
The statements below have been prepared in connection with the
Company's full Annual Report for the year ended 31 December 2016.
Certain parts thereof are not included in this announcement.
Going concern
The going concern assessment considers whether it is appropriate
to prepare the financial statements on a going concern basis.
The Group meets its funding requirements through a mixture of
shareholders' funds, bank borrowings, bonds and notes. At 31
December 2016, the Group had borrowing facilities of GBP5.3bn and
total liquidity of GBP5.1bn, including cash and cash equivalents of
GBP2.8bn and undrawn facilities of GBP2.3bn. GBP170m of the
facilities mature in 2017.
The Group's forecasts and projections, taking into account
reasonably possible changes in trading performance, show that the
Group has sufficient financial resources. The Directors have
reasonable expectations that the Company and the Group are well
placed to manage business risks and to continue in operational
existence for the foreseeable future (which accounting standards
require to be at least a year from the date of this report) and
have not identified any material uncertainties to the Company's and
the Group's ability to do so.
On the basis described above, the Directors consider it
appropriate to adopt the going concern basis in preparing the
consolidated financial statements (in accordance with the 'Guidance
on Risk Management, Internal Control and Related Financial and
Business Reporting' published by the Financial Reporting Council in
September 2014).
Responsibility statements under the Disclosure Guidance and
Transparency Rules
Each of the persons who is a Director at the date of approval of
this report confirms that to the best of his or her knowledge:
i. each of the Group and parent company financial statements,
prepared in accordance with IFRS and UK Accounting Standards
respectively, gives a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company
and the undertakings included in the consolidation taken as a
whole;
ii. the Strategic Report and Directors' Report include a fair
review of the development and performance of the business and the
position of the Company and the undertakings included in the
consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face; and
iii. the Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Group's position and performance,
business model and strategy.
By order of the Board
Warren East David Smith
Chief Executive Chief Financial Officer
13 February 2017 13 February 2017
This information is provided by RNS
The company news service from the London Stock Exchange
END
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(END) Dow Jones Newswires
February 14, 2017 02:00 ET (07:00 GMT)
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