TIDMRR.
RNS Number : 6669M
Rolls-Royce Holdings plc
01 August 2017
1 August 2017
ROLLS-ROYCE HOLDINGS PLC
2017 HALF YEAR RESULTS
Commenting on the results, Warren East, Chief Executive, said:
"Rolls-Royce delivered encouraging year-on-year operational
progress in the first six months of the year. Civil Aerospace large
engine deliveries increased 27% and we made good further progress
improving Trent XWB OE economics. Restructuring savings were ahead
of plan. Together with a higher than expected benefit from
long-term contract accounting adjustments, this resulted in a good
set of results, with financial performance ahead of our
expectations for the first half. Looking to the balance of the
year, execution and delivery of a number of important milestones
across our businesses will be key to achieving our full year
expectations. Our outlook for full year profit and cash remains
unchanged."
Reported Underlying
Half year to 30 2017 2016 Change* 2017 2016 Change*
June
-------------------- ------- --------- -------- ------- ------ --------
Revenue (GBPm) 7,566 6,462 +12% 6,865 6,143 +6%
-------------------- ------- --------- -------- ------- ------ --------
Profit before tax
(GBPm) 1,941 (2,150) n/a 287 104 +148%
-------------------- ------- --------- -------- ------- ------ --------
Earnings per share
(p) 86.21p (96.72)p n/a 11.23p 4.20p +167%
-------------------- ------- --------- -------- ------- ------ --------
2017 2016 Change**
------ ------ ---------
Net funds (GBPm) (931) (712) -31%
----------------------------- ------ ------ ---------
Free cash flow (GBPm)*** (339) (414) +18%
----------------------------- ------ ------ ---------
Underlying: for definition see note 2 on page 32 * translated at
constant exchange rates; ** translated at actual exchange
rates;
*** free cash flow defined as operating cash after capital
expenditure, pensions and taxes, before payments to shareholders
and investigating authorities, foreign exchange and acquisitions
& disposals. The derivation of free cash flow is shown on page
24.
H1 highlights
-- Reported revenue up 12% at constant exchange rates; 17% at actual exchange rates
-- Reported profit before tax of GBP1,941m (2016 loss: GBP2,150m)
-- Underlying revenue up 6% at constant exchange rates, led by
Civil Aerospace and Power Systems
-- Underlying profit before tax of GBP287m, up GBP183m (2016: GBP104m)
-- Good profit growth in Civil Aerospace and Power Systems with
Defence remaining steady; Marine continues to face challenging
offshore oil and gas markets
-- First half commercial and administration costs down GBP38m or 7%
-- First half R&D spend increased to GBP411m (2016:
GBP378m), underpinning key growth opportunities
-- Free cash flow performance solid with a steady operating
performance, helped by effective working capital management
-- Interim payment to shareholders unchanged at 4.60 pence per share
Looking forward
-- Outlook for full year 2017 unchanged
Warren East added: "Two years ago we set out a programme of
change at Rolls-Royce to drive efficiency and sharpen our focus on
execution. Our strengthened management team is making good progress
in simplifying the organisation and driving the pace of necessary
change to develop a more resilient and sustainable business.
However, this is no time for complacency. Strong execution and a
focus on delivering our customer commitments remains essential as
we continue to manage in-service issues in Civil Aerospace
alongside key new product introductions and increased production
volumes. Our long-held commitment of investing in R&D and
future technologies remains unchanged, as we look to secure the
long-term success of the business, built on a solid platform of
outstanding customer service and strong cash flows."
This announcement has been determined to contain inside
information.
Enquiries
Investors:
John Dawson +44 20 7227 9087
Helen Harman +44 20 7227 9339
Ross Hawley +44 20 7227 9282
Media:
Richard Wray +44 20 7227 9163
Photographs and broadcast-standard video are available at
www.rolls-royce.com.
A PDF copy of this report can be downloaded from
www.rolls-royce.com/investors.
This Half Year Results Announcement contains forward-looking
statements. Any statements that express forecasts, expectations and
projections are not guarantees of future performance and will not
be updated. By their nature, these statements involve risk and
uncertainty, and a number of factors could cause material
differences to the actual results or developments. This report is
intended to provide information to shareholders, is not designed to
be relied upon by any other party, or for any other purpose and the
Company and its directors accept no liability to any other person
other than under English law.
Results Presentation
A presentation will be held at 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 1 August
presentation
To register for the live webcast (including Q&A
participation) please visit this link:
http://edge.media-server.com/m/p/ebfsbz7c
Please use this same link to access the webcast replay after the
event.
2017 Half Year Business Highlights
Percentage or absolute change figures in this document are on a
constant translational currency ('constant currency') basis unless
otherwise stated.
% of Group Closing Underlying revenue Underlying profit
revenues* order book GBPm before financing
GBPbn GBPm
----------- ------------
H1 2017 % change H1 2017 GBPm change
---------------------------- ----------- ------------ --------- ---------- -------- ------------
Civil Aerospace 53% 73.3 3,676 14% 173 125
Defence Aerospace 15% 4.3 1,048 -4% 148 7
Power Systems 18% 2.2 1,233 3% 66 48
Marine 8% 0.9 524 -15% (31) (17)
Nuclear 6% 2.0 391 8% 14 (4)
Eliminations/central/other (7) (25) (4)
Total Group 82.7 6,865 6% 345 155
---------------------------- ----------- ------------ --------- ---------- -------- ------------
* Based on gross revenues prior to intra-group eliminations
Civil Aerospace
-- Underlying revenue up 14%, principally due to:
o Original equipment (OE): 27% increase in deliveries of Trent
engines
o Services (AM): strong growth, led by in-production fleet and
time & materials activities on older engines; good progress on
Rolls-Royce powered aircraft transitions
-- Underlying profit before financing of GBP173m, up from GBP31m
in 2016; helped by aftermarket growth and a higher than expected
benefit from long-term contract accounting adjustments (a net gain
of GBP56m v 2016, including a GBP77m benefit arising from a change
to a customer credit rating risk assessment)
-- Progress on new engine programmes: ongoing flight testing of
Trent 1000 TEN and Trent XWB-97; shipped first set of Trent 7000
test engines to Airbus in June
-- Large engine production ramp up continuing; further work to
deliver 2017 targets after solid start including good further
progress improving Trent XWB OE economics
-- Expect increased activity in second half related to Trent
1000 maintenance programme to address a number of technical issues;
working with our customers to minimise disruption
-- Full year outlook unchanged: increasing deliveries driving OE
growth; aftermarket growth led by increased engine flying hours;
and further cost reduction initiatives on large engine installed
base
Defence Aerospace
-- Underlying revenue down 4%; modest reduction in both OE sales and service revenues
-- Underlying profit before financing GBP148m (2016: GBP128m); led by lower overhead costs
-- Two new Service Delivery Centres announced to enhance aftermarket service offering
-- Full year outlook unchanged: margins and profits expected to soften from 2016 levels
Power Systems
-- Underlying revenue up 3%; led by higher OE volumes
-- Underlying profit before financing GBP66m (2016: GBP13m); led
by better volumes and higher gross margin
-- New management revitalising the business; pursuing growth
opportunities, manufacturing and product simplification; clearer
performance goals
-- Full year outlook: improving environment, although visibility
in some markets remains limited; improved closing OE order book;
improved outlook overall
Marine
-- Underlying revenue down 15%; due to weak offshore markets
-- Underlying profit before financing down GBP17m to GBP(31)m;
lower offshore volumes more than offset first half cost savings
from restructuring programmes announced over last two years
-- Full year outlook: market conditions mixed; focus on operational restructuring
Nuclear
-- Underlying revenue up 8%; led by increased submarine work
-- Underlying profit before financing down GBP4m at GBP14m;
reflecting changes in product mix and higher R&D
-- Full year outlook unchanged: sustaining improved delivery
performance and investing in new R&D programmes to fuel
long-term growth
Chief Executive's Review
Steady performance in the first six months of 2017
Rolls-Royce delivered encouraging year-on-year operational
progress in the first six months of 2017; large engine volumes
increased 27% and restructuring savings were ahead of plan.
Together with a higher than expected benefit from long-term
contract accounting adjustments, this resulted in a good set of
results, with financial performance ahead of our expectations for
the first half. At the same time we have maintained our strong
investment in products and services to support our customers and
reinforce opportunities for further growth in the long-term.
With further growth in the overall value of our order book,
order cover remains strong. This includes orders for over 2,700
large engines in Civil Aerospace, which reflects an average five
years of production including six years of cover for the Trent XWB
family that power the Airbus A350. In Defence, we have maintained a
healthy order book, for both original equipment (OE) and services.
Power Systems has roughly 80% annualised order cover for its OE
activities, a more positive situation than at the same time last
year. However, Marine's order book remains weak, mainly reflecting
continued softness in its offshore oil and gas markets. Nuclear
continues to enjoy healthy order cover for all its submarine
activities and is making progress developing its position in key
international markets for its civil nuclear products and
services.
Group underlying revenue increased 6% on a constant currency
basis led by growth in both original equipment (up 5%) and
aftermarket services revenues (up 8%). Civil Aerospace made a
strong contribution (up 14%) on the back of a 27% increase in large
engine deliveries together with good engine flying hour and
associated revenue growth from the larger installed base. While
Defence revenue was down slightly, Power Systems and Nuclear
reported positive revenue growth of 3% and 8% respectively. This
was partly offset by further weakness in the trading conditions in
Marine's offshore oil and gas markets, resulting in its revenue
being 15% lower.
Compared to 2016, underlying profit before finance charges and
tax was higher at GBP345m (2016: GBP158m), largely reflecting the
revenue improvement, our focus on cost management and long-term
contract accounting adjustments. Within this, Civil Aerospace
improved to GBP173m (2016: GBP31m), including the benefit of a
favourable change to a customer credit risk assessment; Defence
Aerospace delivered GBP148m (2016: GBP128m); Power Systems improved
to GBP66m (2016: GBP13m); Marine generated a loss of GBP(31)m
(2016: GBP(13)m loss) and Nuclear delivered GBP14m (2016: GBP18m).
More detail on each business is included in the Operational
Review.
After underlying financing costs of GBP58m (2016: GBP54m),
underlying profit before tax was GBP287m (2016: GBP104m). After an
underlying tax charge of GBP81m (2016: GBP27m), underlying profit
for the period was GBP206m (2016: GBP77m). With an average 1,834m
shares in issue, underlying earnings per share were 11.23p (2016:
4.20p).
Since the end of 2016, the value of sterling relative to the US
dollar strengthened by around 5% to the end of the first half,
compared to the prior period in which sterling depreciated by
around 10%. As a result, we have recognised a net GBP1.4bn non-cash
mark-to-market favourable valuation adjustment for all our
derivative contracts (2016: GBP2.2bn charge). The valuation
adjustment was the principal reason for the reported financing gain
of GBP1,470m (2016: GBP(2,386)m charge) and reported profit before
tax being GBP1,941m (2016: GBP(2,150)m loss).
On a reported basis, the tax charge of GBP360m (2016: GBP378m
credit) resulted in a reported profit for the year of GBP1,581m
(2016: GBP(1,772)m loss). Reported earnings per share were 86.21p
(2016: (96.72)p).
A full reconciliation of underlying to reported profit can be
found in note 2 from page 32 onwards.
The free cash outflow for the first half was GBP339m (2016:
outflow of GBP414m(1) ), better than expected reflecting a steady
operating performance, supported by a higher level of working
capital management, by around GBP180m, which was the significant
contributor to the year-on-year improvement.
A more detailed review of financial performance is included in
the Group Trading Summary and the Financial Review.
Our good progress has been underpinned by our clear focus on
four simple priorities for 2017
Our 2017 priorities are four-fold: to strengthen our focus on
engineering, operational and aftermarket excellence to drive
long-term profitable growth; to sustain our transformation
progress; to further rebuild trust and confidence in Rolls-Royce
across key stakeholders; and to define an appropriate vision for
the business and the best way we can deliver sustainable
shareholder value.
We have made steady progress towards all four objectives in the
first six months of 2017.
One: Focus on engineering, operational and aftermarket
excellence starting to deliver tangible benefits
We have maintained our focus on delivering against the
engineering excellence commitments that will secure our future
growth and performance improvements. In Civil Aerospace this
included delivering key milestones towards entry into service for
the new Trent 1000 TEN, Trent XWB-97 and Trent 7000. In addition,
testing of our new power gearbox design for civil large engines has
proceeded well, and we continued to develop next generation engine
technologies for different Advance architectures. In the first six
months of the year, Power Systems has started a major product
rationalisation programme to simplify the customer offering and
deliver significant benefits to manufacturing operations. In
Marine, we successfully trialled our first unmanned operation
system, using a remote operated harbour vessel.
In operations, we have invested a further GBP89m (GBP67m in
2016, cumulative GBP1.5bn since 2011) in transforming our
manufacturing footprint across the business. This has enabled the
Civil Aerospace business to continue to make solid progress on its
major production increase - with first half deliveries of large
engines up by 27% over the same period in 2016 (2017: 209, 2016:
164). At the same time, the investment paves the way for overall
reductions in the impact of OE installed engines sold at prices
below manufacturing cost - a key target over the next few years. In
Defence, we made good progress with the modernisation of our
Indianapolis facility which will help reduce costs and improve
delivery performance of both original equipment and spares to
support higher standards of customer service. In Marine,
implementation of the restructuring announced in December 2016 has
proceeded well. As a result, by the end of 2017 we expect the
overall Marine headcount to be down by around 30% compared to end
2014. During the first six months of 2017, our Nuclear business has
sustained the improvements made to deliver performance on its key
submarine programmes with delivery against commitments recording a
significant improvement over the same period in 2016.
The focus on improving aftermarket excellence continues to be
driven across our businesses by customer needs as well as through
the broader transformation activities. In Civil Aerospace, this has
resulted in a progressive extension to the framework of our engine
overhaul services offering, including the introduction of our
CareStore, the roll out of LessorCare(TM) and further demand for
SelectCare(TM) and TotalCare(R) Flex(R). Rolls-Royce powered
aircraft transitions also improved further following the
introduction of a dedicated team in 2015. As a result, since the
end of 2016, 17 Trent 700 powered Airbus A330s and 6 Trent 800
powered Boeing 777s have found new homes.
Since 2016, we have been undertaking a proactive maintenance
programme on the Trent 1000 to address a number of technical
issues. We will be working closely with our customers to ensure any
disruption is minimised as far as possible. In order to reduce the
impact on our customers, we have redesigned key elements of the
service programme, through various 'lean' improvement initiatives
to reduce lead-times, thereby getting the engines back into
operation quicker.
In Defence, we opened two new dedicated Service Delivery Centres
in Lossiemouth and Bangalore, to support the RAF and Indian Air
Force respectively with improved response times and a greater
proportion of issues being resolved on-wing. In June, we entered
into a new partnership with Aviall to leverage its route to market
for a range of defence aftermarket spares and services. Our Marine
business also entered into its first 'power by the hour' contract
with Norlines. Power Systems has sought to leverage the
long-standing experience in Civil Aerospace to take better
advantage of its significant installed base of engines. Work is
underway to develop a service offering for customers around
lifecycle monitoring and support. With an increasing focus on
life-cycle costs and a broader use of digital solutions for engine
monitoring, this initiative should steadily develop a new growth
market through better proactive service management and as more
'digitally' enabled engines and systems are delivered.
Two: On track to deliver 2017 and 2018 transformation
benefits
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 stated 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 commitments we have made a better than expected
start. Savings achieved in 2016 were above target at over GBP60m,
with fixed costs reduced further by over GBP50m in the first half
of this year. This momentum will contribute to achieving total
incremental benefits for the year at between GBP80-110m, with
further benefits of GBP30m-60m to be delivered in 2018. Overall, we
remain on track to achieve the committed fixed cost reduction of
over GBP200m by the end of 2017.
Three: Rebuilding trust and confidence; further clarity on cash
drivers and IFRS 15 transition
The first half of 2017 finished ahead of our expectations,
helped by better than expected long-term contract accounting
adjustments, and external expectations have remained largely
unchanged for the year as a whole. While we have made some
improvements to our forecasting and understanding of business
drivers, more work needs to be done to increase resilience, and we
are bringing more resource and expertise into this area.
Simon Kirby and Stephen Daintith, our new COO and CFO
respectively, are further developing the work done on Key
Performance Indicators, particularly around cost, working capital
and cash drivers. As set out in our presentation today, these new
KPIs will be progressively embedded into our external reporting to
sharpen our focus and help demonstrate the value of wider financial
and non-financial performance improvements.
As highlighted in 2016, the introduction of the new revenue
reporting standard, IFRS 15 Revenue from Contracts with Customers,
will have a significant impact on how we present our revenues and
profits, particularly for Civil Aerospace. In November 2016, we
provided a detailed representation of our 2015 financial results
for Civil Aerospace and today are presenting a similar analysis for
2016. Building a good understanding of the year-on-year drivers of
change in our financial results should help analysts and investors
to make the transition when we formally change to the new standard
from 1 January 2018. Full details of today's update are included as
an appendix to this half year results statement and repeated in a
separate disclosure on our investor relations website.
Four: Vision and shareholder value work on track for update by
end 2017
Looking to the long term, we have committed to providing an
update to our long-standing company vision. With key senior
leadership changes completed, including new appointments such as
our new Chief Technology Officer announced in April, and the
consequential reorganisation of our engineering and technology
functions, we can now accelerate the work we started to refresh our
long-term goals as a business. Our objective remains to provide an
update by the end of 2017.
Acquisition of outstanding 53.1% stake in Industria de Turbo
Propulsores SA (ITP)
In the first half of 2017, we announced that we had received
approvals from the US and EU regulatory bodies for the acquisition
of ITP. As a result, the only remaining approval needed is from the
Spanish authorities. All other aspects of the transaction,
including payment options, are unchanged from those set out in
November 2016.
Agreement reached with investigating authorities in January
2017
In January 2017, we announced that we had reached agreement with
investigating authorities in the UK, US and Brazil related to
charges of bribery and corruption involving intermediaries in a
number of overseas markets, concerns about which the company passed
to the UK's Serious Fraud Office from 2012 onwards. This has
involved entering into Deferred Prosecution Agreements (DPAs) in
the UK and the US and a Leniency Agreement in Brazil. We have
agreed to pay fines and costs totalling GBP671m, of which GBP267m
was paid in the first half of 2017 with the Brazilian payment of
around $25m due in the second half of the year. Full details of the
agreements can be found on our website, including copies of the
statements made in January 2017.
Shareholder payments
Our dividend policy, as stated in February 2016, sets out how we
intend to rebuild the payment to shareholders to an appropriate
level, subject to the short-term cash needs of the business. We are
continuing to invest in future growth, as we ramp up engine
production and complete our important new product introductions
over the next few years. At the same time, we need to sustain a
healthy balance sheet to ensure we have the financial flexibility
to maintain a strong investment grade credit rating. As a result,
the proposed interim payment for 2017 is unchanged at 4.60 pence
per share. As in past payments, the distribution will be in the
form of C Shares. Further details are included on page 43 at the
end of this statement.
Outlook for the balance of 2017
Our overall outlook for 2017 is unchanged from that set out in
February 2017. While we have had an encouraging start, we have a
great deal of work to do to deliver our overall expectations for
the year. Key deliverables in the second half of the year include
our Civil Aerospace delivery ramp up, new product introductions and
managing installed fleet performance. While the outlook for Power
Systems appears more positive, our Marine business remains
challenged. As a result, we remain cautiously optimistic for the
year as a whole.
Individual outlooks are provided for each business in the
Operating Review.
Long-term outlook remains strong
We continue to see value in the underlying strengths of our
business: the underlying growth of our long--term markets, the
quality of our mission-critical technology and services, and
strength of customer demand for these which are reflected in our
substantial order book. While we have near-term challenges and some
key execution priorities, these constants provide us with
confidence in a strong, profitable and cash-generative future.
The progressive roll-out of new engines, led in particular by
the Trent XWB, 1000 TEN and 7000, together with a growing
aftermarket, is expected to drive significant revenue growth over
the next ten years as we build toward a 50%-plus share of the
in-service widebody passenger aircraft market. As a result, we
remain confident that the important investments we are making to
transition our production will create a resilient platform from
which to drive customer service and strong cash flows, together
with the current investments in new products and the streamlining
of our existing product portfolios across the group to ensure we
are providing high value, cost-competitive products into our target
end markets.
Board update
During the first six months of the year there have been a number
of changes to the Board. In April, Stephen Daintith joined the
Board as our new Chief Financial Officer. In May, following our
AGM, Colin Smith and John McAdam stepped down from the Board. In
June, we announced the appointment of Beverly Goulet, an executive
with 24 years of experience at American Airlines. She joined the
Board with effect from 3 July 2017 and will be a member of the
Nominations and Governance Committee and the Audit Committee.
Group Trading Summary
The commentary in this section relates to the Group's operating
segments and so, in line with the requirements of accounting
standards, is provided on an underlying basis, consistent with the
measurement basis used by the Group in its segmental reporting.
H1 Underlying Acquisitions Foreign H1
GBPm 2016 Change & disposals Exchange* 2017
--------------------------------- ------- ----------- ------------- ---------- -------
Order book** 81,351 1,350 - - 82,701
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying revenue 6,143 385 - 337 6,865
--------------------------------- ------- ----------- ------------- ---------- -------
Change +6% +5% +12%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying OE revenue 3,018 149 - 181 3,348
--------------------------------- ------- ----------- ------------- ---------- -------
Change +5% +6% +11%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying services revenue 3,125 236 - 156 3,517
--------------------------------- ------- ----------- ------------- ---------- -------
Change +8% +5% +13%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying gross margin 1,033 133 - 86 1,252
--------------------------------- ------- ----------- ------------- ---------- -------
Gross margin % 16.8% +100bps 18.2%
--------------------------------- ------- ----------- ------------- ---------- -------
Commercial and administrative
costs (538) 38 - (31) (531)
--------------------------------- ------- ----------- ------------- ---------- -------
Restructuring (6) (1) - (1) (8)
--------------------------------- ------- ----------- ------------- ---------- -------
Research and development
costs (378) (6) - (27) (411)
--------------------------------- ------- ----------- ------------- ---------- -------
Joint ventures and associates 47 (9) - 5 43
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying profit before
financing 158 155 - 32 345
--------------------------------- ------- ----------- ------------- ---------- -------
Change +98% +20% +118%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying operating margin 2.6% +220bps 5.0%
--------------------------------- ------- ----------- ------------- ---------- -------
*Translational foreign exchange impact **2016 year end comparative,
restated for a methodology change - see below
Order book and order intake
Overall, new orders marginally exceeded deliveries. As
previously highlighted, we are now transitioning from a period of
unprecedented above-trend order book growth in Civil Aerospace
(roughly 90% of our order book backlog by value) to one of
operational delivery. As a result, overall growth in our order book
is expected to moderate from here as we deliver against this
significant backlog. To an extent this is reflected in our first
half order book which increased by GBP1.4bn to GBP82.7bn.
The opening order book has been restated by GBP1.5bn reflecting
a methodology change in the rates used to translate order books -
moving from long term planning rates to period spot rates - for
overseas subsidiaries. The change in methodology will better
reflect the economics of the order books for the subsidiaries
affected.
Key Civil Aerospace orders included major wins with Singapore
Airlines and Ethiopian Airlines. The Defence Aerospace order book
benefited from a change in the foreign exchange rate used to
translate the closing order book. Otherwise the defence order book
would have been 3% lower, reflecting the steady delivery of new
engines against prior year order commitments. Power Systems order
book grew by 7%, led by good demand for various industrial and
defence applications. Order intake in our Marine business was again
soft, as a result of the continuing weak offshore market, but
higher than the same period in 2016. Order intake in our Nuclear
business was higher as a result of submarine programme
activity.
Underlying trading
Underlying group revenue rose 6% in H1 2017 compared to 2016,
reflecting growth in both original equipment revenue (up 5%) and
services (up 8%), led by Civil Aerospace and Power Systems in
particular. By business, Civil Aerospace revenue increased 14%,
Defence Aerospace revenue was down 4%, Power Systems revenue
increased 3%, Marine revenue decreased 15% and Nuclear revenue
increased 8%.
Underlying profit before financing of GBP345m (2016: GBP158m)
was 98% higher, led by significant improvements in Civil Aerospace
and Power Systems which offset a weaker performance in Marine. The
improved Civil Aerospace profit of GBP173m (2016: GBP31m) largely
reflected good growth in aftermarket revenues and margins and a
higher than expected benefit from long-term contract accounting
adjustments, including a one-off GBP77m benefit from a change to a
customer credit risk assessment. The improved Defence Aerospace
profit of GBP148m (2016: GBP128m) largely reflected lower overhead
costs. Power Systems profit of GBP66m (2016: GBP13m) reflected
improved volumes, mix and the benefits of transformation savings
from their RRPS 2018 programme. Lower volumes contributed to the
Marine loss of GBP(31)m (2016: GBP(13)m). Nuclear profit was GBP14m
(2016: GBP18m) due to the previously announced increase in
investment required to develop new products to help drive future
growth.
Commercial and administrative costs of GBP531m were GBP38m lower
reflecting the benefits of transformation initiatives and lower
legal costs, following resolution of the long-standing review by
investigating authorities in January 2017, although partially
offset by rising costs, mainly due to inflation.
Underlying restructuring was GBP(8)m (2016: GBP(6)m). Charges
relating to the transformation activity launched in November 2015
are treated as exceptional in light of the scale of the programme.
An exceptional charge of GBP18m for this programme was taken in H1
2017 (2016: GBP53m). The in-period benefits of cost savings arising
from this programme in H1 2017 were around GBP50m.
The R&D charge increased by GBP6m on a constant currency
basis, reflecting an increase in spend offset by an increase in the
level of capitalisation as several engine programmes approach entry
into service.
Free cash flow
Cash capital expenditure in the first half of 2017 was GBP378m
(2016: GBP307m), GBP71m higher than the prior year, largely
reflecting phasing of payments for aerospace footprint and capacity
investments. Cash taxes were GBP71m (2016: GBP62m). The cash cost
of defined benefit pension schemes in excess of the operating
profit charge was GBP12m (2016: GBP10m).
Overall, the free cash outflow for the first half year was
GBP(339)m (2016: GBP(414(1) )m outflow). This was better than
expected, reflecting a steady operating performance supported by a
higher level of working capital management, by around GBP180m,
principally in receivables, which was the significant contributor
to the year-on-year outperformance. Other than this, our cash flow
performance was largely as expected and reflected the higher cash
outflows related to increased engine production and higher capital
investment, partially offset by the increased cash revenues driven
by aftermarket growth.
The TotalCare net asset movement from 2016 year end was GBP119m.
The TotalCare net asset is now GBP2.6bn, in line with the expected
peak of around GBP2.5-2.7bn.
Net debt and foreign currency
The Group is committed to maintaining a robust balance sheet
with a strong, investment-grade credit rating. We believe this is
important when selling high-performance products and support
packages which will be in operation for decades. Standard &
Poor's updated its rating in January 2017 to BBB+/stable outlook
and Moody's reconfirmed its A3 rating but moved to a negative
outlook in February 2017.
During H1 2017, the Group's net debt position increased from
GBP712m to GBP931m, reflecting the GBP339m free cash outflow,
GBP85m of shareholder payments and GBP267m paid to investigating
authorities, as set out earlier in this statement.
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. Flexibility is built
into some of 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 growing net US dollar
income (currently around $5bn per year) which is converted into
GBP. Since the end of the year a modest amount of net additional
hedging has been added to cover our future revenues. As a result
the nominal value of the US dollar hedge book as at 30 June 2017
was $39bn (end 2016: $38bn). Consequently, the average rate in the
hedge book reduced to GBP/$1.54 (December 2016: GBP/$1.55).
Improvements in our achieved rate, as a result of the current
weakness of GBP, are likely to benefit revenue and profit in the
longer term. However, with a high level of cover for the next few
years built into our hedging arrangements, we do not expect there
to be any meaningful benefit to our financial results for the next
few years from improvements in our achieved hedge rate.
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 seen recently, the movements from 2016 rates would
improve full year underlying revenues by around GBP400m and improve
underlying profit before tax by around GBP40m.
There is no change in our guidance on finance charges. Overall
underlying finance charges in 2017 are expected to be in the region
of GBP100-110m, partly reflecting the higher level of gross and net
debt.
There is no change in our guidance on our underlying effective
tax rate. Given the sensitivity of the underlying tax rate to a
number of factors, including the impact of weak marine offshore
markets, the underlying effective tax rate for 2017 is expected to
be between 25-30%, reflecting the high proportion of taxable profit
expected to be generated in higher tax rate regions.
We now expect our capital expenditure for the full year to be
modestly higher and in the region of GBP700m, (2016: GBP626m) as we
invest in additional aftermarket customer support and
infrastructure.
Our expectation for Net R&D spend is unchanged and remains
in the region of GBP950m in 2017, largely reflecting investment
related to the completion of important new product launches in
Civil Aerospace.
There is no change to our full year free cash flow guidance; to
be similar to that achieved in 2016.
Footnotes from pages 1 to 10
#1 from page 4 and page 9: Re-stated to include a GBP(15)m
exceptional restructuring cash outflow excluded at H1 2016 from
free cash flow
Operational Review: Civil Aerospace
References to year-on-year change in the Operational Review are
underlying and at constant translational currencies, unless
otherwise stated.
H1 Underlying Acquisitions Foreign H1
GBPm 2016 Change & disposals Exchange* 2017
--------------------------------- ------- ----------- ------------- ---------- -------
Order book** 72,008 1,271 - 45 73,324
--------------------------------- ------- ----------- ------------- ---------- -------
Engine deliveries 312 (4) - - 308
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying revenue 3,171 432 - 73 3,676
--------------------------------- ------- ----------- ------------- ---------- -------
Change +14% +2% +16%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying OE revenue 1,461 171 - 34 1,666
--------------------------------- ------- ----------- ------------- ---------- -------
Change +12% +2% +14%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying services revenue 1,710 261 - 39 2,010
--------------------------------- ------- ----------- ------------- ---------- -------
Change +15% +2% +18%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying gross margin 399 120 - 24 543
--------------------------------- ------- ----------- ------------- ---------- -------
Gross margin % 12.6% +180bps 14.8%
--------------------------------- ------- ----------- ------------- ---------- -------
Commercial and administrative
costs (154) 5 - (1) (150)
--------------------------------- ------- ----------- ------------- ---------- -------
Restructuring (2) (4) - - (6)
--------------------------------- ------- ----------- ------------- ---------- -------
Research and development
costs (250) (3) - (10) (263)
--------------------------------- ------- ----------- ------------- ---------- -------
Joint ventures and associates 38 7 - 4 49
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying profit before
financing 31 125 - 17 173
--------------------------------- ------- ----------- ------------- ---------- -------
Change +403% +55% +458%
--------------------------------- ------- ----------- ------------- ---------- -------
Underlying operating margin 1.0% +340bps 4.7%
--------------------------------- ------- ----------- ------------- ---------- -------
*Translational foreign exchange impact **2016 year end comparative,
restated for a methodology change - see page 8
Financial overview
Overall, underlying revenue for Civil Aerospace increased 14%.
The 12% increase in original equipment (OE) revenue was underpinned
by the ramp up in large engine deliveries which more than offset
the continuing decline in business jet engines and V2500 module
sales. Service revenues increased 15%, led by flying hour revenues
from the growing in-production Trent engine fleet.
H1 % of Underlying Underlying Foreign % of H1
Change
GBPm 2016* whole change % exchange whole 2017
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Original Equipment 1,461 46% 171 12% 34 45% 1,666
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Large Engine: linked
and other 657 21% 99 15% 1 20% 757
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Large Engine: unlinked
installed 312 10% 197 63% 1 14% 510
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Business aviation 359 11% (98) -27% 32 8% 293
------------------------ ------ ------ ----------- ----------- --------- ------ ------
V2500 133 4% (27) -20% - 3% 106
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Service 1,710 54% 261 15% 39 55% 2,010
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Large Engine 1,050 33% 179 17% 2 33% 1,231
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Business aviation 212 7% 44 21% 21 8% 277
------------------------ ------ ------ ----------- ----------- --------- ------ ------
Regional 153 5% 1 1% 16 5% 170
------------------------ ------ ------ ----------- ----------- --------- ------ ------
V2500 295 9% 37 13% - 9% 332
------------------------ ------ ------ ----------- ----------- --------- ------ ------
*2016 H1 figures have been restated to reflect refinements in
allocations
Large engines: linked and other OE revenue was 15% higher
reflecting increased sales of Trent 900s for Airbus A380s and Trent
700s for Airbus A330s partly offset by a lower level of Trent 1000
deliveries for the Boeing 787. Sales of spare engines to joint
ventures in large engine: linked and other generated revenue of
GBP20m (2016 H1: GBP36m).
The most significant revenue increase was within large engine:
unlinked installed which was 63% higher, led by Trent XWB volume
growth to support the Airbus A350 production ramp.
Large engine service revenue growth of 17% reflects 15% growth
in flying hours from our in-production Trent engines together with
a higher level of time and material business from mature engines,
and a year-on-year improvement in contract accounting effects of
GBP46m. Together, these more than offset the reduction in flying
hour revenues from retirements and lower utilisation of older
engines.
The expected decline in revenue for business aviation OE,
largely from reduced BR710 engine sales, reflects the transition to
non-Rolls-Royce powered platforms. Volumes of the newer BR725
engine, which powers the Gulfstream G650 and G650ER, remained
stable. Overall OE revenues for business aviation reduced 27%
whereas business aviation service revenues grew 21% through a
combination of fleet growth, price escalation and new
CorporateCare(R) business from engines already in service.
Service revenue from our regional jet engines remained stable.
Whilst utilisation of Rolls-Royce powered regional aircraft held up
better than our initial expectations, we continue to expect
declining revenues from our regional fleet over the next few years
as older aircraft retire.
Revenues from OE modules and engine assemblies for the V2500
programme declined by 20%, reflecting the production slow-down as
Airbus continues to transition from the A320 classic to the
A320neo. V2500 service revenues were 13% higher driven by an
increase in spare part sales and higher repair and overhaul
activity. Revenue from flying hour payments was broadly flat with
price escalation offsetting the reduction in flying hours as older
aircraft retire.
Overall gross margins for Civil Aerospace were 14.8% (2016:
12.6%). The main drivers of the year-on-year increase in margin
were the growth in service revenues from in-production large
engines, a higher level of 'time and material' service activity on
mature engines and the year-on-year improvement in long-term
contract accounting adjustments of GBP56m. These were partly offset
by a reduction in business jet engine sales, reduced utilisation of
Trent 500 and RB211 engines and GBP12m of provisions related to a
specific customer contract. Gross margin from spare engine sales to
joint ventures contributed GBP19m (2016: GBP22m), including
realisation of profit deferred from sales in earlier periods.
In respect of long-term contract accounting adjustments, in the
first half of 2017 these totalled a net gain of GBP33m. The net
charge in 2016 of GBP(23)m included a GBP35m benefit from a 5 cent
change to the estimated long-term US dollar to sterling exchange
rate, which brought our own planning rate within updated external
benchmark long-term forecast data.
The GBP33m net gain included a GBP40m benefit (2016: benefit of
GBP35m) from life-cycle cost improvements, partially offset by
technical costs of GBP(59)m (2016: GBP(55)m), the largest component
of which was for additional maintenance activity on the Trent 1000,
and a net GBP52m benefit (2016: a charge of GBP(38)m) from other
operational changes which included a GBP77m benefit arising from a
change to a customer credit rating risk assessment.
Since 2016, we have been undertaking a proactive maintenance
programme on the Trent 1000 to address a number of technical
issues. We will be working closely with our customers to ensure any
disruption is minimised in so far as possible. A provision has been
taken in respect of related costs and is included in the increased
technical costs set out above and specific customer contract
provision set out above.
Costs below gross margin were GBP5m lower than the previous
year. Within this, R&D charges of GBP263m were GBP3m higher.
This reflected an increase in the level of spend on several new
programmes ahead of entry into service together with reduced
development cost contributions from risk and revenue sharing
partners. These were partially offset by increased R&D
capitalisation on the Trent XWB-97.
Underlying commercial and administrative and other costs were
GBP5m lower than 2016, with cost reduction benefits offsetting
inflationary effects. Restructuring costs of GBP6m were GBP4m
higher, and profits from joint ventures and associates were GBP7m
higher, GBP11m higher at actual exchange rates.
Overall, profit before financing and tax was GBP125m higher, led
by the growth in gross margins. Taking account of foreign exchange
effects, underlying profit before financing and tax was GBP173m
(2016: GBP31m).
TotalCare net assets and Contractual Aftermarket Rights
TotalCare net assets increased in H1 2017 by GBP119m at actual
exchange rates (2016: GBP149m) to GBP2.6bn reflecting accounting
for new "linked" engines of GBP265m (2016: GBP202m) and contract
accounting adjustments taken in the year of GBP33m (2016:
GBP(23)m), offset by net other items of GBP(179)m (2016:
GBP(30)m).
The CARs balance increased by GBP113m (2016: increase of GBP71m)
to GBP687m, largely reflecting higher sales of unlinked Trent XWB
engines partly offset by further progress improving Trent XWB OE
economics.
Investment and business development
Order intake in the first half of 2017 was GBP7.0bn (2016:
GBP7.9bn including a GBP2.1bn uplift from the change in the
long-term planning rate). As a result the closing order book was
GBP73.3bn, up GBP1.3bn (up 2% from 2016 year-end), including
inflation effects on historic orders where appropriate price
escalation applies.
Significant orders during the first half included an order
valued at $1.5bn at list prices from Ethiopian Airlines, which
included Trent XWB engines for 10 new Airbus A350 XWB aircraft as
well as extending TotalCare coverage for 14 of the same aircraft
already on order. Singapore Airlines selected Trent 1000 engines
covered by TotalCare to power 19 Boeing 787 Dreamliner aircraft in
a deal valued at $1.7bn at list prices.
Investment in Civil Aerospace continues to target improvements
in the three core areas of focus; engineering excellence,
operational excellence and capturing aftermarket value:
Engineering excellence remains the cornerstone of our value to
Civil Aerospace customers
In the first half of 2017, we delivered some important
milestones in respect of our new product introductions. In March,
we powered the first test flight of the Boeing 787-10 aircraft with
its Trent 1000 TEN (Thrust, Efficiency and New Technology) engine.
The new engine will power all variants of the Boeing 787 Dreamliner
family and draws on technologies from the Trent XWB engine and the
Advance engine programme.
In June, we despatched the Trent 7000 engines which will power
the first test flight of the Airbus A330neo, to Toulouse. The
engine brings together experience from the Trent 700, the engine of
choice for the current A330, architecture from the Trent 1000 TEN,
and technology from the Trent XWB, the world's most efficient large
engine flying today. The Trent XWB has now accumulated more than
500,000 engine flying hours in service and the 300(th) production
engine has been delivered. The newest variant of the engine, the
Trent XWB-97, continues to power Airbus A350-1000 flight tests and
early testing is progressing well.
Looking further ahead, the Advance3 large engine demonstrator
has completed assembly and is being prepared for its first run at
our Derby facility. The demonstrator will test the new core
architecture for future engine families and other key technologies
such as Lean Burn combustion, Ceramic Matrix Composites,
CastBond(TM) (specialist turbine manufacturing) and additive layer
manufacturing or 3D printing.
At the same time, we continued to make progress with our
UltraFan(R) engine design, with the power gearbox element of the
programme starting its first power runs at its purpose-built
facility in Dahlewitz, Germany in May.
Investing in new aerospace supply chain capabilities to help
drive operational excellence
In June, we announced that, as part of the ongoing planned
expenditure, we will invest around GBP150m in new and existing
aerospace facilities in the UK to support the doubling of engine
production and deliver on a record Civil Aerospace order book. The
majority of the investment will provide a new facility for the
testing of large Civil Aerospace engines in Derby.
In the same month we officially opened a new assembly line at
our Dahlewitz site in Germany for Trent XWB engines, complementing
the main production line in Derby. The facility, which will be
delivering up to two engines a week by the end of the year, will
help Rolls-Royce meet the high demand for this engine.
Aftermarket development benefiting from enhanced service
capabilities and new products
Delivering outstanding service remains at the heart of
Rolls-Royce's customer proposition. At the core of this are the
range of long-term service packages which started with TotalCare in
the late 1990s. Over the last few years we have strengthened the
range of services to match the maturing of our growing fleet of
engines. As part of this process, in March we introduced the
CareStore, a gateway to help customers better understand our range
of digitally-enabled services and make informed decisions about
which services best fit their needs.
In June, we opened a new Airline Aircraft Availability Centre
which will use industry-leading data analytics to plan engine
operations and maintenance. The centre complements the Rolls-Royce
global network of Customer Service Centres, created to work locally
with customers by providing in-depth expertise in the local market.
We also announced that we were further expanding our global network
of Authorised Service Centres (ASC) for business aviation aircraft
under our CorporateCare service provision for customers.
Rolls-Royce now has 72 ASCs in place with key maintenance providers
worldwide, enabling CorporateCare customers to benefit from
streamlined administration and reduced maintenance time.
In May, we celebrated the BR710 business jet engine achieving 10
million hours of service in flight.
Civil Aerospace outlook
On a constant currency basis, we continue to expect our Civil
Aerospace business to 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. Higher costs related to increased maintenance
activity in respect of the Trent 1000 are included in our estimates
for the second half, but should temper any upgrades to full year
profit following the good start to the year. Business jet demand is
expected to weaken further, as will the demand for aftermarket
services to support Rolls-Royce powered regional aircraft. We
continue to expect trading cash flow to be broadly unchanged
year-on-year, reflecting higher volumes of OE sales at prices below
manufacturing cost offsetting the positive effects of higher
aftermarket cash inflows.
Operational Review: Defence Aerospace
H1 Underlying Acquisitions Foreign H1
GBPm 2016 change & disposals Exchange* 2017
--------------------------------- ------ ----------- ------------- ---------- ------
Order book** 4,545 (120) - (100) 4,325
--------------------------------- ------ ----------- ------------- ---------- ------
Engine deliveries 291 (18) - - 273
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying revenue 1,002 (38) - 84 1,048
--------------------------------- ------ ----------- ------------- ---------- ------
Change -4% +8% +5%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying OE revenue 412 (17) - 36 431
--------------------------------- ------ ----------- ------------- ---------- ------
Change -4% +9% +5%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying services revenue 590 (21) - 48 617
--------------------------------- ------ ----------- ------------- ---------- ------
Change -4% +8% +5%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying gross margin 211 - - 19 230
--------------------------------- ------ ----------- ------------- ---------- ------
Gross margin % 21.1% +80bps 21.9%
--------------------------------- ------ ----------- ------------- ---------- ------
Commercial and administrative
costs (60) 9 - (3) (54)
--------------------------------- ------ ----------- ------------- ---------- ------
Restructuring (3) 2 - - (1)
--------------------------------- ------ ----------- ------------- ---------- ------
Research and development
costs (29) 2 - (3) (30)
--------------------------------- ------ ----------- ------------- ---------- ------
Joint ventures and associates 9 (6) - - 3
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying profit before
financing 128 7 - 13 148
--------------------------------- ------ ----------- ------------- ---------- ------
Change +5% +10% +16%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying operating margin 12.8% +120bps 14.1%
--------------------------------- ------ ----------- ------------- ---------- ------
*Translational foreign exchange impact **2016 year end
comparative, restated for a methodology change - see page 8
Financial Overview
Underlying revenue of GBP1,048m was down 4% on a constant
exchange rate basis (5% higher than the prior year at actual
exchange rates). Original equipment sales were down 4%, principally
due to lower EJ200 export sales following the completion of the
Saudi Typhoon contract in 2016. Service revenues were also 4% lower
than the prior year, mainly due to lower one-off revenue from some
of our long-term service contracts, particularly as a consequence
of the retirement of the UK MoD's Gnome-powered Sea King fleet in
2016. Lower revenue from spare part sales on some legacy programmes
was offset by increased overhaul activity for LiftSystem(TM) and
for EJ200 engines in service with the Royal Saudi Air Force.
Gross margin was unchanged on a constant exchange rate basis (up
GBP19m at actual exchange rates) reflecting lower volumes partially
offset by the non-repeat of GBP31m of one-off costs for the TP400
programme in 2016. Catch-up adjustments on existing long-term
contracts reflected cost improvements totalling GBP16m, down GBP29m
on the prior year due to the completion of contracts in 2016 and
lower benefits from US contracts.
Overall R&D costs of GBP30m were similar to the prior year
as the business continued to invest in future programme
development, while restructuring costs were lower due to reduced
level of severance costs. Underlying commercial and administrative
costs and other costs were lower than prior year.
As a result, profit before financing and tax of GBP148m was 5%
higher than the prior period.
Investment and business development
Order intake for H1 2017 was GBP928m (2016: GBP743m), with new
orders principally for aftermarket contracts. During the first six
months we won aftermarket contracts in the US worth around $600m,
including some major renewals with the US Department of Defence,
supporting engine fleets powering C-130, V-22 and T-45 aircraft.
Other contract wins included a legacy spares order from the Indian
Air Force and smaller orders relating to other programmes. The
Defence Aerospace order book closed at GBP4.3bn.
In respect of engineering excellence, led in Defence by product
innovation, we saw very positive early operational performance of
our T56 Series 3.5 technology insertion in the US NOAA P-3 fleet,
and the kits continue to generate significant international
interest for legacy P-3 and C-130 aircraft with orders expected in
the second half of 2017. A new special operations version of the
C-130J was launched in June at the Paris Air Show, alongside the
debut of the new LM-100J civil variant of the aircraft.
In May, we announced a new joint venture agreement with Kale,
the Turkish industrial conglomerate, to develop an engine solution
for Turkey's TF-X combat programme, should they wish to pursue a
new local option for engine provision.
Development work continued on the Anglo French Future Combat Air
System programme and we announced a partnership with Purdue
University in Indiana, which will help design and test components
for our next generation engine component programmes.
The major upgrading of the Indianapolis facility, the core
driver of operational excellence in Defence, passed another
milestone with the first production cell, focused on turbines,
coming on line. The overall programme remains on track and will
deliver significant operational efficiencies and greater
flexibility in our largest defence facility.
Aftermarket excellence initiatives have focused on deepening
existing customer relationships with enhanced services. In the
first half of the year, we opened a further two Service Delivery
Centres (SDCs) at RAF Lossiemouth in Scotland and in Bangalore in
India. We are preparing for further SDC facilities to be opened
over the coming year as we expand our programme following a
positive customer response to this approach. The LiftSystem
continues to perform well on the F-35B Lightning II, with the
aircraft making its first international operational deployment with
the US Marine Corps to Japan.
In June, a significant service supply agreement was signed with
Aviall, a Boeing Company, in relation to the distribution of engine
spares for all defence variants of the global AE engine fleet. This
multi-year agreement extends their offering to cover thousands of
engines and is expected to significantly improve availability and
logistics for our customers, enabling us to secure efficiencies and
additional aftermarket demand.
Defence Aerospace outlook
The longer-term outlook remains stable, with margins and profits
expected to soften modestly from the recent high levels, reflecting
infrastructure and R&D investments to support long-term
growth.
The outlook for 2017 is unchanged. While revenues are expected
to be broadly unchanged overall, we expect full year profit to be
lower than in 2016, reflecting the non-repeat of the significant
level of long-term contract accounting benefits which occurred in
the prior year.
Operational Review: Power Systems
H1 Underlying Acquisitions Foreign H1
GBPm 2016 change & disposals Exchange* 2017
--------------------------------- ------ ----------- ------------- ---------- ------
Order book** 2,035 135 - 59 2,229
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying revenue 1,084 35 - 114 1,233
--------------------------------- ------ ----------- ------------- ---------- ------
Change +3% +11% +14%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying OE revenue 711 33 - 76 820
--------------------------------- ------ ----------- ------------- ---------- ------
Change +5% +11% +15%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying services revenue 373 2 - 38 413
--------------------------------- ------ ----------- ------------- ---------- ------
Change +1% +10% +11%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying gross margin 254 36 - 29 319
--------------------------------- ------ ----------- ------------- ---------- ------
Gross margin % 23.4% +250bps 25.9%
--------------------------------- ------ ----------- ------------- ---------- ------
Commercial and administrative
costs (158) 6 - (16) (168)
--------------------------------- ------ ----------- ------------- ---------- ------
Restructuring - - - - -
--------------------------------- ------ ----------- ------------- ---------- ------
Research and development
costs (83) 7 - (8) (84)
--------------------------------- ------ ----------- ------------- ---------- ------
Joint ventures and associates - (1) - - (1)
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying profit before
financing 13 48 - 5 66
--------------------------------- ------ ----------- ------------- ---------- ------
Change +369% +38% +408%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying operating margin 1.2% +430bps 5.4%
--------------------------------- ------ ----------- ------------- ---------- ------
*Translational foreign exchange impact **2016 year end comparative,
restated for a methodology change - see page 8
Financial overview
Underlying revenue of GBP1,233m increased 3% (14% at actual
exchange rates). Original equipment growth of 5% reflected Chinese
demand for PowerGen equipment and recovery in several industrial
markets, including construction, agricultural and rail. Continued
development of our REMAN (remanufacture) activities supported the
1% increase in service revenues. While some industrial and power
generation markets improved, other markets were less buoyant, with
government related activity lower year on year and marine offshore
markets continuing to be impacted by low oil prices.
Overall, gross margins increased to 25.9% (2016: 23.4%)
reflecting higher production volumes and better factory utilisation
together with some improvements in customer and product mix.
Commercial & administrative costs were GBP6m lower, led by
headcount reductions and other efficiency savings arising from the
RRPS 2018 transformation programme which more than offset
inflationary headwinds. R&D costs were GBP7m lower, reflecting
the more efficient deployment of resources on future product
development activity.
As a result, the improved trading performance was the most
significant contributor to the increase in underlying profit before
financing and tax to GBP66m (2016: GBP13m).
Investment and business development
Order intake of GBP1.4bn (2016: GBP1.2bn) was 6% higher than
2016 at constant foreign exchange, with the year-on-year increase
reflecting several notable orders from governments for land and
naval based equipment, higher demand from PowerGen customers in
Asia and rising European orders for construction and agricultural
products.
Product launches in the first half include a diesel genset (a
self-contained combination of an engine and a generator) with
increased output for emergency and prime power applications which
is able to operate in hot climates. Demand for our recently
launched propulsion systems which meet the latest emissions
standards has also been strong.
Notable orders include ones from market leaders KATO and JCB as
we entered the industrial excavator market with our MTU series 1000
engines. In addition a project agreement, also for MTU series 1000
- 1500 engines, was signed with agricultural machinery manufacturer
Claas for the supply of 4,000 to 5,000 engines per annum, together
with a follow up order for a US defence project and a large order
for MTU series 4000 engines for a US data centre.
Turning to broader business developments, our Asian activities
saw good progress with the official registration of the joint
venture with Yuchai Machinery in advance of production of MTU
series 4000 diesel engines under licence, planned for 2018 and
targeting off-highway opportunities. An agreement was also signed
with Garden Reach Shipbuilders & Engineers Ltd for final
assembly in India of MTU series 4000 engines plus options for the
local production of parts.
Within the services business, long term contracts were won for
mining vehicles in Zambia and with Mediterranean ferry operator
Virtu Ferries. In addition, leveraging the longstanding experience
in Civil Aerospace, we have established a digital solutions unit
which will focus on creating digital value adding services.
Our transformation programme is on track and is delivering
results across all work streams, generating reductions in
headcount, material costs and to our footprint. The changes we have
made to our organisational structure together with lean processes
implementation are facilitating better customer focus which is in
turn helping to grow our revenues and achieve a more balanced
profile across the year. We are also making good progress on our
product portfolio simplification activity.
Power Systems outlook
The long-term outlook for Power Systems remains positive. Demand
for its products looks set to grow steadily led by strong growth in
key sectors where standalone power generation remains
mission-critical. Together with new initiatives around product
simplification and new market development, the businesses
transformation programme will deliver progressive improvements
The outlook for 2017 remains cautiously positive, following a
good first half which in part reflects efforts to rebalance
profitability across the year. As a result, supported by a solid
order book with good order coverage in several key longer cycle
markets, albeit with limited visibility for our important service
activity, we expect to achieve a second-half performance broadly
consistent with the strong finish to 2016.
Operational Review: Marine
H1 Underlying Acquisitions Foreign H1
GBPm 2016 change & disposals Exchange* 2017
--------------------------------- ------ ----------- ------------- ---------- ------
Order book** 988 (92) - (9) 887
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying revenue 548 (82) - 58 524
--------------------------------- ------ ----------- ------------- ---------- ------
Change -15% +11% -4%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying OE revenue 303 (67) - 32 268
--------------------------------- ------ ----------- ------------- ---------- ------
Change -22% +11% -12%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying services revenue 245 (15) - 26 256
--------------------------------- ------ ----------- ------------- ---------- ------
Change -6% +11% +4%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying gross margin 108 (25) - 11 94
--------------------------------- ------ ----------- ------------- ---------- ------
Gross margin % 19.7% -190bps 17.9%
--------------------------------- ------ ----------- ------------- ---------- ------
Commercial and administrative
costs (104) 12 - (9) (101)
--------------------------------- ------ ----------- ------------- ---------- ------
Restructuring (1) 2 - (2) (1)
--------------------------------- ------ ----------- ------------- ---------- ------
Research and development
costs (16) (6) - (1) (23)
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying profit before
financing (13) (17) - (1) (31)
--------------------------------- ------ ----------- ------------- ---------- ------
Change -131% -8% -138%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying operating margin -2.4% -410bps -5.9%
--------------------------------- ------ ----------- ------------- ---------- ------
*Translational foreign exchange impact **2016 year end
comparative, restated for a methodology change - see page 8
Financial overview
Underlying revenue of GBP524m was 15% lower. Within this,
original equipment revenues were down 22% and service revenues
declined 6%. This was primarily due to the ongoing weakness within
the offshore market, but also some softness in the merchant markets
through over-capacity in cargo-carrying vessels. Within the weak
overall revenues there were some highlights including delivery of
several major orders secured in 2016, including the diesel gensets
for the UK's new polar research ship, RRS Sir David
Attenborough.
Gross margins decreased 190 basis points to just under 18% and
overall gross margin was GBP94m, GBP25m lower than in 2016 on a
constant exchange rate basis. While margins declined due to
volumes, foreign exchange and product mix, the impact was partly
offset by cost reduction programmes, particularly for OE, and the
impact of the headcount reduction programme benefitting both
trading margin and overheads.
R&D spend increased, mainly due to higher design spend on
ship intelligence. Commercial and Administrative costs were over
12% lower at GBP101m.
As a result, the business reported an overall underlying loss
before financing and tax of GBP(31)m, compared to a loss of
GBP(13)m in 2016.
Investment and business development
The order book declined 9% during the first half of this year,
despite an improved order intake compared to the first half of
2016. (2017: GBP449m v 2016: GBP362m). Offshore demand remained
very weak, reflecting the impact of the continued low oil price and
reduced investment by oil majors and their key suppliers. Service
revenues were more stable, but remain at historically low
levels.
Our Marine business did have some success in merchant
opportunities outside of oil-related markets, including orders for
equipment for ferries and fishing vessels. The Naval business
secured a number of significant contract wins, including power,
propulsion and handling systems for the US Coastguard's new fleet
of offshore patrol cutters, and MT30 gas turbines for the Republic
of Korea Navy. The start of sea trials by the Royal Navy's new
aircraft carrier, HMS Queen Elizabeth was also a significant
milestone for the business.
To help develop future products and capabilities, we have
increased our investment in R&D to focus on reshaping the
Marine product portfolio, as shipping shifts from mechanical to
electrical and the adoption of digital technologies. Examples
include the launch of a new Energy Management solution to drive
down ship operating costs, and the first power-by-the-hour contract
for two cargo ships for Norlines. There was also further uptake of
our Autocrossing system, which automatically controls vessel speed
and optimises energy use.
Progress in our strategy for developing remote and autonomous
ship operation included securing third-party funding to help
develop a centre in Finland to focus on future land-based control
centres, and establishing a Fleet Management Centre in Norway for
remote optimisation of ship operation. A contract was also signed
with global towage operator Svitzer to jointly test remote
manoeuvring of commercial vessels, following a successful first
demonstration.
Marine restructuring activities remain on track, including the
programme of actions announced last December which target a further
significant headcount reduction and GBP45-50m of annualised
savings. As a result, by the end of 2017 we expect the overall
Marine headcount to be down by around 30% compared to end 2014.
Other cost actions have included further simplifying the
organisation, streamlining processes and operations across the
value chain and the closure of the Shanghai factory. The investment
in our Rauma facility is on track and will create a world-class
assembly and test capability for propulsion products.
Marine outlook
We expect the outlook for our traditional offshore markets to
remain challenging throughout 2017 and to only start to stabilise
in 2018; we expect to benefit from a strong efficiency and internal
cost focus when offshore markets eventually start to recover. The
range of factors expected to influence future growth in marine
markets include digitalisation, autonomy, electrification and
increased focus on environmental and safety aspects amongst others.
This is reflected in our strategy, ongoing transformation and
investment focus.
In the near-term, with prevailing markets remaining weak our
expectations for the second half of the year are more cautious.
Transformation and restructuring savings should partially offset
market challenges. As a result, we now expect the reported loss to
be similar to the second half of 2016.
Operational Review: Nuclear
H1 Underlying Acquisitions Foreign H1
GBPm 2016 change & disposals Exchange* 2017
--------------------------------- ------ ----------- ------------- ---------- ------
Order book** 1,825 172 - 5 2,002
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying revenue 356 27 - 8 391
--------------------------------- ------ ----------- ------------- ---------- ------
Change +8% +2% +10%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying OE revenue 141 25 - 4 170
--------------------------------- ------ ----------- ------------- ---------- ------
Change +18% +3% +21%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying services revenue 215 2 - 4 221
--------------------------------- ------ ----------- ------------- ---------- ------
Change +1% +2% +3%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying gross margin 51 3 - 2 56
--------------------------------- ------ ----------- ------------- ---------- ------
Gross margin % 14.3% -20bps 14.3%
--------------------------------- ------ ----------- ------------- ---------- ------
Commercial and administrative
costs (33) 3 - (2) (32)
--------------------------------- ------ ----------- ------------- ---------- ------
Restructuring - - - - -
--------------------------------- ------ ----------- ------------- ---------- ------
Research and development
costs - (10) - - (10)
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying profit before
financing 18 (4) - - 14
--------------------------------- ------ ----------- ------------- ---------- ------
Change -22% - -22%
--------------------------------- ------ ----------- ------------- ---------- ------
Underlying operating margin 5.1% -140bps 3.6%
--------------------------------- ------ ----------- ------------- ---------- ------
*Translational foreign exchange impact **2016 year end comparative,
restated for a methodology change - see page 8
Financial overview
Underlying revenue increased 8%, with solid performances across
both submarine and civil nuclear activities. This reflected the
phasing of activities on several long term contracts as well as
improved trading across all civil nuclear businesses.
Gross margin was unchanged at 14.3%. Below gross margin there
was no R&D credit in the first half (2016: GBP3m). In addition,
led by investment in small modular reactors, the R&D charge was
GBP10m higher than the prior year. These were partly offset by
savings in commercial and administrative costs driven by
transformation initiatives.
As a result, underlying profit before financing was GBP4m lower
than the prior year, at GBP14m.
Investment and business developments
The order book remained relatively steady at GBP2.0bn,
reflecting the nature of the nuclear business with the majority of
the order book being the long term contracts under UK government
procurement arrangements.
During the first half, submarine activities focused on
performance improvement initiatives to support long-term contracts
for the UK Royal Navy's nuclear submarine fleet, including delivery
of the nuclear propulsion system to power the Astute class
submarines. This included signing the contract for the 6(th) of 7
Astute boats.
We also made good progress in the de-fuelling programme at HMS
Vulcan Naval Reactor Test Establishment. In addition, significant
work was undertaken with our programme partners to agree a new
delivery model for the new Dreadnought class deterrent
submarines.
The civil nuclear business, which focuses on multi-year
engineering projects and specialist technical services, saw steady
growth. In the UK, we started early work on Hinkley Point C, for
which we are the preferred bidder to deliver heat exchangers, waste
treatment systems and emergency diesel generators.
Internationally, the Instrumentation and Controls business
focused on delivery of long-term safety-critical retrofit contracts
in France and Finland, as well as developing our access to new
build markets.
Progress in our global business development activities were
reflected in three notable successes. In China we strengthened our
collaboration both for the domestic and export market for
Instrumentation and Controls. This included signing of a Letter of
Intent to develop our instrumentation and controls business with
CTEC (CGN) and securing orders within the current China build
programme at Tianwan 5 and 6. In May, we made good progress
developing our digital services business in North America, with the
award of a contract to support Canada's largest nuclear utility
operator, Bruce Power, with digital analytical tools designed to
optimise the operational lifetime of nuclear plants. Finally, in
June we were selected as preferred bidder for Instrumentation and
Controls supply to a new Russian-designed reactor at Fennovoima's
Hanhikivi nuclear power plant in Finland, due for completion in
2024.
We have continued to develop our small modular reactor R&D
programme, working with potential partners on a whole-plant design.
Market interest remains positive as large scale reactor programmes
continue to suffer from ongoing investment and programme
challenges. We remain of the firm belief that these smaller, more
flexible units offer the potential for lower cost and more flexible
power generation in future decades and directly build on the
knowledge and specialist skills of our Nuclear business.
Nuclear outlook
The long-term outlook for Nuclear remains solid with a steady
outlook for submarines, supported by the recent confirmation of the
ongoing investment in the UK's Dreadnought class deterrent.
Improving revenues will largely be driven by renewed activities in
the civil market, particularly in the UK and China, which provide
encouraging growth opportunities.
In the near-term, while revenues and gross margins are expected
to be largely unchanged year-on-year, full year profit is expected
to be roughly half that delivered in 2016, largely reflecting the
increase in R&D spend.
Financial review
Underlying income statement
Six months to 30 June
GBPm 2017 2016 Change
-------------------------------------------------- ------ ----- ------
Revenue 6,865 6,143 +722
-------------------------------------------------- ------ ----- ------
Gross profit 1,252 1,033 +219
-------------------------------------------------- ------ ----- ------
Commercial and administrative costs (531) (538) +7
-------------------------------------------------- ------ ----- ------
Restructuring (8) (6) -2
-------------------------------------------------- ------ ----- ------
Research and development costs (411) (378) -33
-------------------------------------------------- ------ ----- ------
Share of results of joint ventures and associates 43 47 -4
-------------------------------------------------- ------ ----- ------
Profit before financing 345 158 +187
-------------------------------------------------- ------ ----- ------
Net financing (58) (54) -4
-------------------------------------------------- ------ ----- ------
Profit before tax 287 104 +183
-------------------------------------------------- ------ ----- ------
Tax (81) (27) -54
-------------------------------------------------- ------ ----- ------
Profit for the period 206 77 +129
-------------------------------------------------- ------ ----- ------
Earnings per share (EPS) 11.23p 4.20p +7.03p
-------------------------------------------------- ------ ----- ------
Payments to shareholders 4.60p 4.60p -
-------------------------------------------------- ------ ----- ------
Gross R&D investment 645 638 +7
-------------------------------------------------- ------ ----- ------
Net R&D charge 411 378 +33
-------------------------------------------------- ------ ----- ------
Segmental analysis
Revenue Gross profit Profit before financing
-------------------- -------------------- ---------------------------
Six months to 30 June
GBPm 2017 2016 Change 2017 2016 Change 2017 2016 Change
---------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Civil 3,676 3,171 +505 543 399 +144 173 31 +142
---------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Defence 1,048 1,002 +46 230 211 +19 148 128 +20
---------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Power Systems 1,233 1,084 +149 319 254 +65 66 13 +53
---------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Marine 524 548 -24 94 108 -14 (31) (13) -18
---------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Nuclear 391 356 +35 56 51 +5 14 18 -4
---------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Other 28 21 +7 7 12 -5 (2) 12 -14
---------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Intra-segment (35) (39) +4 3 (2) +5 3 (2) +5
---------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Central costs (26) (29) +3
---------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Group 6,865 6,143 +722 1,252 1,033 +219 345 158 +187
---------------------- ----- ----- ------ ----- ----- ------ ------- ------- ---------
Underlying revenue and underlying profit before financing are
discussed in the Business Highlights (page 3), the Group Trading
Summary (page 8) and the Operational Reviews (from page 11).
Underlying financing costs increased by GBP4m to GBP58m. Net
interest payable reduced by GBP4m to GBP31m largely due to
repayment of a bond in 2016 on which the Group was paying a higher
than average rate of interest. Other underlying financing costs
increased by GBP8m to GBP27m.
Underlying taxation was GBP81m, an underlying tax rate of 28.2%
compared with 26.0% in 2016. The primary reason for the increase is
the non-recognition of deferred tax assets on losses in Norway,
reflecting the continued uncertainty in the oil & gas
market.
Underlying EPS increased from 4.20p to 11.23p, in line with
profit for the period.
Payments to shareholders are made in the form of C Shares,
details of which are set out on page 43. An interim payment of 4.6p
per share will be made.
Reported income statement
Six months to 30 June
GBPm 2017 2016 Change
-------------------------------------------------- ------ -------- --------
Revenue 7,566 6,462 +1,104
-------------------------------------------------- ------ -------- --------
Gross profit 1,408 1,193 +215
-------------------------------------------------- ------ -------- --------
Other operating income 4 2 +2
-------------------------------------------------- ------ -------- --------
Commercial and administrative costs (556) (605) +49
-------------------------------------------------- ------ -------- --------
Research and development costs (436) (404) -32
-------------------------------------------------- ------ -------- --------
Share of results of joint ventures and associates 51 51 -
-------------------------------------------------- ------ -------- --------
Operating profit 471 237 +234
-------------------------------------------------- ------ -------- --------
Loss on disposal of businesses - (1) +1
-------------------------------------------------- ------ -------- --------
Profit before financing 471 236 +235
-------------------------------------------------- ------ -------- --------
Net financing 1,470 (2,386) +3,856
-------------------------------------------------- ------ -------- --------
Profit/(loss) before tax 1,941 (2,150) +4,091
-------------------------------------------------- ------ -------- --------
Tax (360) 378 -738
-------------------------------------------------- ------ -------- --------
Profit/(loss) for the period 1,581 (1,772) +3,353
-------------------------------------------------- ------ -------- --------
Earnings/(losses) per share (EPS) 86.21p (96.72)p +182.93p
-------------------------------------------------- ------ -------- --------
The changes in 2017 resulting from underlying trading are
described in the previous sections.
Consistent with past practice and IFRS, the Group provides both
reported and underlying figures. We believe underlying figures are
more representative of the trading performance, by excluding the
impact of period-end mark-to-market adjustments, principally the
GBP:USD hedge book. In addition, post-retirement financing and the
effects of acquisition accounting are excluded. The adjustments
between the underlying income statement and the reported income
statement are set out below and in more detail in note 2 to the
Condensed Financial Statements. This basis of presentation has been
applied consistently.
Reconciliation between underlying and reported results
Revenue Profit before financing Financing Profit before tax
Six months to 30 June
GBPm 2017 2016 2017 2016 2017 2016 2017 2016
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
Underlying 6,865 6,143 345 158 (58) (54) 287 104
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
Revenue recognised at exchange rate on
date of transaction 701 319 - - - - - -
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
Mark-to-market adjustments on
derivatives and related adjustments - - 223 207 1,526 (2,326) 1,749 (2,119)
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
Movements on other financial instruments - - - - 4 (8) 4 (8)
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
Effects of acquisition accounting - - (62) (62) - - (62) (62)
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
Exceptional restructuring - - (31) (68) - - (31) (68)
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
Acquisitions and disposals - - - (1) - - - (1)
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
Post-retirement schemes - - - - (1) 3 (1) 3
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
Other - - (4) 2 (1) (1) (5) 1
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
Reported 7,566 6,462 471 236 1,470 (2,386) 1,941 (2,150)
---------------------------------------- ----- ----- ------------ ----------- ----- ------- -------- ---------
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 GBP701m (2016: GBP319m) and increased profit before
financing by GBP223m (2016: GBP207m).
The effects of acquisition accounting GBP62m (2016: GBP62m),
principally relating to the amortisation of intangible assets
arising on the acquisition of Power Systems in 2013.
Exceptional restructuring costs of GBP31m (2016: GBP68m). These
are costs associated with the substantial closure or exit of a
site, facility or activity, largely as a result of the ongoing
transformation programme.
Financing and taxation
The mark-to-market adjustments on the Group's hedge book of
GBP1,526m (2016: GBP(2,326)m). These reflect: the large hedge book
held by the Group (e.g. GBP:US$39bn); and the strengthening of
sterling against the US dollar. At each period end, our foreign
exchange hedge book is included in the balance sheet at fair value
(mark-to-market) and the movement in the period included in
reported financing costs.
Appropriate tax rates are applied to these additional items
included in the reported results, leading to an additional tax
charge of GBP279m (2016: credit of GBP405m), largely as a result of
the mark-to-market adjustments. This leads to an effective tax rate
of 18.5% (2016: 17.6%).
Summary balance sheet
GBPm 30 June 2017 31 December 2016 Change
----------------------------------------- ------------- ----------------- -------
Intangible assets 5,269 5,080 +189
----------------------------------------- ------------- ----------------- -------
Property, plant and equipment 4,071 4,114 -43
----------------------------------------- ------------- ----------------- -------
Joint ventures and associates 850 844 +6
----------------------------------------- ------------- ----------------- -------
Net working capital (1) (1,031) (1,553) +522
----------------------------------------- ------------- ----------------- -------
Net funds (2) (931) (225) -706
----------------------------------------- ------------- ----------------- -------
Provisions (734) (759) +25
----------------------------------------- ------------- ----------------- -------
Net post-retirement scheme deficits (121) (29) -92
----------------------------------------- ------------- ----------------- -------
Net financial assets and liabilities (2) (4,014) (5,751) +1,737
----------------------------------------- ------------- ----------------- -------
Other net assets and liabilities (3) (116) 143 -259
----------------------------------------- ------------- ----------------- -------
Net assets 3,243 1,864 +1,379
----------------------------------------- ------------- ----------------- -------
Other items
----------------------------------------- ------------- ----------------- -------
US$ hedge book (US$bn) 39.2 37.8 +1.4
----------------------------------------- ------------- ----------------- -------
TotalCare assets 3,545 3,348 +197
----------------------------------------- ------------- ----------------- -------
TotalCare liabilities (985) (907) -78
----------------------------------------- ------------- ----------------- -------
Net TotalCare assets 2,560 2,441 +119
----------------------------------------- ------------- ----------------- -------
Gross customer finance commitments 211 238 -27
----------------------------------------- ------------- ----------------- -------
Net customer finance commitments 60 61 -1
----------------------------------------- ------------- ----------------- -------
1 Net working capital includes inventories, trade and other
receivables, trade and other payables and current tax assets and
liabilities.
2 Net funds includes GBP302m (2016 GBP358m) 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 GBP189m mainly due to
additions of GBP375m (partially offset by amortisation charge of
GBP208m). The additions primarily relate to GBP139m of contractual
aftermarket rights, GBP84m of development expenditure and GBP79m of
certification and participation fees.
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) decreased by GBP43m.
Additions of GBP209m were offset by depreciation of GBP221m.
Exchange differences were GBP(22)m.
Movements in net funds are shown overleaf.
Investments in joint ventures and associates increased by
GBP6m.
Net post-retirement scheme deficits (note 11) have increased by
GBP92m largely due to movements on discount rates in the
period.
The UK plan comprises 85% of the gross liabilities and 95% of
the gross assets and has a surplus of GBP1,229m. There was a
GBP125m reduction in the surplus in H1 due to plan assets
underperforming liabilities measured on an IAS19 basis (which
discounts liabilities at a AA bond rate). 90% of pension assets are
in low risk investments to match liabilities; this has been key to
protecting our funding position in low yield environment.
The overseas plans comprise 15% of the gross liabilities and 5%
of the gross assets. The deficit of GBP1,350m (IAS19 basis) is
principally made up of unfunded US healthcare/pension plans
(GBP534m) and German unfunded pension plans (GBP728m).
Provisions largely relate to warranties and guarantees provided
to secure the sale of OE and services. The decrease of GBP25m
includes additional charges of GBP139m, principally for warranty
and guarantees and other provisions, offset by utilisation of
GBP125m and unused amounts of GBP39m.
Net financial assets and liabilities relate to the fair value of
foreign exchange, commodity and interest rate contracts and
financial RRSAs, set out in detail in note 10. All contracts
continue to be held for hedging purposes. The fair value of foreign
exchange derivatives is a financial liability of GBP3.8bn, a
decrease of GBP1.8bn in the period, mainly a result of the
strengthening of sterling.
The US$ hedge book increased by 4% to US$39.2bn. This represents
around six years of net exposure and has an average book rate of
GBP1 to US$1.54.
Net TotalCare assets relate to Long-Term Service Agreement
(LTSA) contracts in the Civil Aerospace business, including the
flagship services product TotalCare. These assets represent the
timing difference between the recognition of income and costs in
the income statement and cash receipts and payments.
Customer financing facilitates the sale of OE and services by
providing financing support to certain customers. Where such
support is provided by the Group, it is generally to customers of
the Civil Aerospace business and takes the form of various types of
credit and asset value guarantees. These exposures produce
contingent liabilities that are outlined in note 12. The contingent
liabilities represent the maximum aggregate discounted gross and
net exposure in respect of delivered aircraft, regardless of the
point in time at which such exposures may arise.
The reduction in gross exposures is a result of guarantees
expiring.
Summary funds flow statement
Six months to 30 June
GBPm 2017 2016(1) Change
---------------------------------------------------------------------------- ------ -------- -------
Underlying profit before tax 287 104 +183
---------------------------------------------------------------------------- ------ -------- -------
Depreciation and amortisation 372 335 +37
---------------------------------------------------------------------------- ------ -------- -------
Movement in net working capital (110) (255) +145
---------------------------------------------------------------------------- ------ -------- -------
Expenditure on property, plant and equipment and intangible assets (753) (539) -214
---------------------------------------------------------------------------- ------ -------- -------
Other (52) 13 -65
---------------------------------------------------------------------------- ------ -------- -------
Trading cash flow (256) (342) +86
---------------------------------------------------------------------------- ------ -------- -------
Contributions to defined benefit pensions in excess of operating cost (12) (10) -2
---------------------------------------------------------------------------- ------ -------- -------
Taxation paid (71) (62) -9
---------------------------------------------------------------------------- ------ -------- -------
Free cash flow (339) (414) +75
---------------------------------------------------------------------------- ------ -------- -------
Shareholder payments (85) (168) +83
---------------------------------------------------------------------------- ------ -------- -------
Increase in share of joint ventures - (154) +154
---------------------------------------------------------------------------- ------ -------- -------
Payments for financial penalties from agreements with investigating bodies (267) - -267
---------------------------------------------------------------------------- ------ -------- -------
Other acquisitions/disposals 5 7 -2
---------------------------------------------------------------------------- ------ -------- -------
Foreign exchange (20) 128 -148
---------------------------------------------------------------------------- ------ -------- -------
Change in net funds (706) (601) -105
---------------------------------------------------------------------------- ------ --------
Opening net funds (225) (111)
---------------------------------------------------------------------------- ------ --------
Closing net funds (931) (712)
---------------------------------------------------------------------------- ------ --------
(1) 2016 GBP(15)m exceptional restructuring expenditure has been
re-presented to be included in free cash flow
Movement in working capital - the GBP110m decrease includes
higher levels of inventory to support the progressive ramp up in
Civil Aerospace's large engine production and higher Civil
Aerospace long-term contract balances, offset by a higher level of
working capital management, by around GBP180m, principally in
receivables.
Expenditure on property, plant and equipment and intangibles -
the increase largely reflects higher capital spend (GBP71m), IT and
Marine intangibles (GBP88m) and contractual aftermarket rights
(GBP50m).
Pensions - UK contributions were GBP90m (2016: GBP88m),
including GBP15m financed by employees under salary sacrifice
arrangements. A statutory funding valuation currently being
conducted as at 31 March 2017 is expected to show material surplus.
No deficit funding is anticipated and the new contribution schedule
is expected to take effect from 2018. Overseas contributions were
GBP40m (2016: GBP40m). Some modest increases in contributions to
overseas schemes have been offset by changes in exchange rates.
Shareholder payments - the change in shareholder payments
reflects the difference between the 2015 and 2016 interim payments,
which are paid in the following January.
The derivation of the summary funds flow statement above from
the reported cash flow statement is included in note 14.
Condensed consolidated financial statements
Condensed consolidated income statement
For the half-year ended 30 June 2017
Half-year Half-year Year to
to 30 June to 30 June 31 December
2017 2016 2016
Notes GBPm GBPm GBPm
------------------------------------------------------------ ---- ---------- ----------- ----------- -----------
Revenue 2 7,566 6,462 14,955
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Cost of sales (6,158) (5,269) (11,907)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Gross profit 1,408 1,193 3,048
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Other operating income 4 2 5
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Commercial and administrative costs(2) (556) (605) (2,208)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Research and development costs 3 (436) (404) (918)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Share of results of joint ventures and associates 51 51 117
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Operating profit 471 237 44
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Loss on disposal of businesses - (1) (3)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Profit before financing and taxation 471 236 41
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Financing income 4 1,570 36 96
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Financing costs 4 (100) (2,422) (4,773)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Net financing 1,470 (2,386) (4,677)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Profit/(loss) before taxation (1) 1,941 (2,150) (4,636)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Taxation 5 (360) 378 604
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Profit/(loss) for the period 1,581 (1,772) (4,032)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Attributable to:
============================================================ ==== ========== =========== =========== ===========
Ordinary shareholders 1,581 (1,772) (4,032)
====================================================================== ========== =========== =========== ===========
Non-controlling interests - - -
------------------------------------------------------------ ---- ---------- ----------- ----------- -----------
Profit/(loss) for the period 1,581 (1,772) (4,032)
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Earnings/(losses) per ordinary share attributable to shareholders 6
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Basic 86.21p (96.72)p (220.08)p
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Diluted 86.06p (96.72)p (220.08)p
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Underlying earnings per ordinary share are shown in note 6.
Payments to ordinary shareholders in respect of the period 7
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Pence per share 4.6p 4.6p 11.7p
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
Total 85 85 215
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
(1) Underlying profit before taxation 2 287 104 813
---------------------------------------------------------------------- ---------- ----------- ----------- -----------
(2) In 2016 (full year), 'commercial and administrative costs'
include GBP671m for financial penalties from agreements with
investigating bodies.
All activities comprise continuing operations.
Condensed consolidated statement of comprehensive income
For the half-year ended 30 June 2017
Half-year Half-year Year to
to 30 June to 30 June 31 December
2017 2016 2016
Notes GBPm GBPm GBPm
---------------------------------------------------------------- ------ ----------- ----------- ------------
Profit/(loss) for the period 1,581 (1,772) (4,032)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Other comprehensive income (OCI)
---------------------------------------------------------------- ------ ----------- ----------- ------------
Items that will not be reclassified to profit or loss
---------------------------------------------------------------- ------ ----------- ----------- ------------
Movements in post-retirement schemes 11 (112) 346 495
------------------------------------------------------------------ ------ ----------- ----------- ------------
Share of OCI of joint ventures and associates (1) (2) (2)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Related tax movements 42 (123) (179)
------------------------------------------------------------------ ------ ----------- ----------- ------------
(71) 221 314
---------------------------------------------------------------- ------ ----------- ----------- ------------
Items that may be reclassified to profit or loss
---------------------------------------------------------------- ------ ----------- ----------- ------------
Foreign exchange translation differences on foreign operations (59) 557 861
------------------------------------------------------------------ ------ ----------- ----------- ------------
Share of OCI of joint ventures and associates (3) (6) (7)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Related tax movements 1 3 4
------------------------------------------------------------------ ------ ----------- ----------- ------------
(61) 554 858
---------------------------------------------------------------- ------ ----------- ----------- ------------
Total comprehensive income/(expense) for the period 1,449 (997) (2,860)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Attributable to:
---------------------------------------------------------------- ------ ----------- ----------- ------------
Ordinary shareholders 1,449 (997) (2,860)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Non-controlling interests - - -
---------------------------------------------------------------- ------ ----------- ----------- ------------
Total comprehensive income/(expense) for the period 1,449 (997) (2,860)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Condensed consolidated balance sheet
At 30 June 2017
30 June 30 June 31 December
2017 2016 2016
Notes GBPm GBPm GBPm
-------------------------------------------- ------ --------- --------- ------------
ASSETS
-------------------------------------------- ------ --------- --------- ------------
Intangible assets 8 5,269 4,990 5,080
-------------------------------------------- ------ --------- --------- ------------
Property, plant and equipment 9 4,071 3,718 4,114
-------------------------------------------- ------ --------- --------- ------------
Investments - joint ventures and associates 850 765 844
-------------------------------------------- ------ --------- --------- ------------
Investments - other 40 37 38
-------------------------------------------- ------ --------- --------- ------------
Other financial assets 10 413 351 382
-------------------------------------------- ------ --------- --------- ------------
Deferred tax assets 634 617 876
-------------------------------------------- ------ --------- --------- ------------
Post-retirement scheme surpluses 11 1,243 1,545 1,346
-------------------------------------------- ------ --------- --------- ------------
Non-current assets 12,520 12,023 12,680
-------------------------------------------- ------ --------- --------- ------------
Inventories 3,501 3,165 3,086
============================================ ====== ========= ========= ============
Trade and other receivables 7,241 7,145 6,956
============================================ ====== ========= ========= ============
Taxation recoverable 13 16 32
============================================ ====== ========= ========= ============
Other financial assets 10 15 45 5
============================================ ====== ========= ========= ============
Short-term investments 3 1 3
============================================ ====== ========= ========= ============
Cash and cash equivalents 2,336 2,287 2,771
============================================ ====== ========= ========= ============
Assets held for sale 3 5 5
-------------------------------------------- ------ --------- --------- ------------
Current assets 13,112 12,664 12,858
-------------------------------------------- ------ --------- --------- ------------
TOTAL ASSETS 25,632 24,687 25,538
-------------------------------------------- ------ --------- --------- ------------
LIABILITIES
-------------------------------------------- ------ --------- --------- ------------
Borrowings (170) (120) (172)
-------------------------------------------- ------ --------- --------- ------------
Other financial liabilities 10 (648) (521) (651)
-------------------------------------------- ------ --------- --------- ------------
Trade and other payables (8,117) (7,524) (7,957)
-------------------------------------------- ------ --------- --------- ------------
Tax liabilities (185) (119) (211)
-------------------------------------------- ------ --------- --------- ------------
Provisions for liabilities and charges (407) (408) (543)
-------------------------------------------- ------ --------- --------- ------------
Current liabilities (9,527) (8,692) (9,534)
-------------------------------------------- ------ --------- --------- ------------
Borrowings (3,402) (3,212) (3,185)
-------------------------------------------- ------ --------- --------- ------------
Other financial liabilities 10 (3,492) (3,497) (5,129)
-------------------------------------------- ------ --------- --------- ------------
Trade and other payables (3,484) (2,807) (3,459)
-------------------------------------------- ------ --------- --------- ------------
Tax liabilities - (1) -
-------------------------------------------- ------ --------- --------- ------------
Deferred tax liabilities (793) (863) (776)
-------------------------------------------- ------ --------- --------- ------------
Provisions for liabilities and charges (327) (369) (216)
-------------------------------------------- ------ --------- --------- ------------
Post-retirement scheme deficits 11 (1,364) (1,404) (1,375)
-------------------------------------------- ------ --------- --------- ------------
Non-current liabilities (12,862) (12,153) (14,140)
-------------------------------------------- ------ --------- --------- ------------
TOTAL LIABILITIES (22,389) (20,845) (23,674)
-------------------------------------------- ------ --------- --------- ------------
NET ASSETS 3,243 3,842 1,864
-------------------------------------------- ------ --------- --------- ------------
EQUITY
-------------------------------------------- ------ --------- --------- ------------
Called-up share capital 367 367 367
-------------------------------------------- ------ --------- --------- ------------
Share premium account 196 180 181
-------------------------------------------- ------ --------- --------- ------------
Capital redemption reserve 162 159 162
-------------------------------------------- ------ --------- --------- ------------
Cash flow hedging reserve (110) (105) (107)
-------------------------------------------- ------ --------- --------- ------------
Other reserves 756 508 814
-------------------------------------------- ------ --------- --------- ------------
Retained earnings 1,870 2,731 445
-------------------------------------------- ------ --------- --------- ------------
Attributable to ordinary shareholders 3,241 3,840 1,862
-------------------------------------------- ------ --------- --------- ------------
Non-controlling interests 2 2 2
-------------------------------------------- ------ --------- --------- ------------
TOTAL EQUITY 3,243 3,842 1,864
-------------------------------------------- ------ --------- --------- ------------
Condensed consolidated cash flow statement
For the half-year ended 30 June 2017
Half-year Half-year Year to
to 30 June to 30 June 31 December
2017 2016 2016
Notes GBPm GBPm GBPm
------------------------------------------------------------------- ------ ------------ ------------ -------------
Reconciliation of cash flows from operating activities
------------------------------------------------------------------- ------ ------------ ------------ -------------
Operating profit 471 237 44
------------------------------------------------------------------- ------ ------------ ------------ -------------
Loss on disposal of property, plant and equipment 6 2 5
------------------------------------------------------------------- ------ ------------ ------------ -------------
Share of results of joint ventures and associates (51) (51) (117)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Dividends received from joint ventures and associates 28 14 74
------------------------------------------------------------------- ------ ------------ ------------ -------------
Amortisation and loss on disposal of intangible assets 8 213 201 628
------------------------------------------------------------------- ------ ------------ ------------ -------------
Depreciation of property, plant and equipment 9 221 196 426
------------------------------------------------------------------- ------ ------------ ------------ -------------
(Decrease)/increase in provisions (33) 86 44
------------------------------------------------------------------- ------ ------------ ------------ -------------
Increase in inventories (421) (339) (161)
------------------------------------------------------------------- ------ ------------ ------------ -------------
(Increase)/decrease in trade and other receivables (352) (459) 54
------------------------------------------------------------------- ------ ------------ ------------ -------------
(Payments)/accruals for financial penalties from agreements with
investigating bodies (267) - 671
------------------------------------------------------------------- ------ ------------ ------------ -------------
Increase in trade and other payables 780 514 234
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash flows on other financial assets and liabilities (341) (139) (608)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net defined benefit post-retirement cost recognised in operating
profit 11 118 118 510
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash funding of defined benefit post-retirement schemes 11 (130) (128) (271)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Share-based payments 15 14 35
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net cash inflow from operating activities before taxation 257 266 1,568
------------------------------------------------------------------- ------ ------------ ------------ -------------
Taxation paid (71) (62) (157)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net cash inflow from operating activities 186 204 1,411
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash flows from investing activities
------------------------------------------------------------------- ------ ------------ ------------ -------------
Additions of intangible assets 8 (375) (232) (631)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Disposals of intangible assets - - 8
------------------------------------------------------------------- ------ ------------ ------------ -------------
Purchases of property, plant and equipment 9 (381) (307) (585)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Government grants received 3 - 15
------------------------------------------------------------------- ------ ------------ ------------ -------------
Disposals of property, plant and equipment 9 10 8
------------------------------------------------------------------- ------ ------------ ------------ -------------
Acquisitions of businesses - - (6)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Disposals of businesses - 1 7
------------------------------------------------------------------- ------ ------------ ------------ -------------
Increase in share in joint ventures - (154) (154)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Other investments in joint ventures and associates (8) (11) (30)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash and cash equivalents in joint ventures reclassified as joint
operations - 5 5
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net cash outflow from investing activities (752) (688) (1,363)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash flows from financing activities
------------------------------------------------------------------- ------ ------------ ------------ -------------
Repayment of loans 10 (5) (325) (434)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Proceeds from increase in loans 10 280 - 93
------------------------------------------------------------------- ------ ------------ ------------ -------------
Capital element of finance lease payments (1) - (4)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net cash flow from increase/(decrease) in borrowings 274 (325) (345)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Interest received 3 7 14
------------------------------------------------------------------- ------ ------------ ------------ -------------
Interest paid (36) (54) (84)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Interest element of finance lease payments - (1) (2)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Decrease/(increase) in short-term investments - 1 (1)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Issue of ordinary shares - - 1
------------------------------------------------------------------- ------ ------------ ------------ -------------
Other transactions in ordinary shares and cash received on
share-based schemes vesting 20 - -
------------------------------------------------------------------- ------ ------------ ------------ -------------
Purchase of ordinary shares for share schemes (22) (20) (21)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Redemption of C Shares (85) (168) (301)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net cash inflow/(outflow) from financing activities 154 (560) (739)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Net decrease in cash and cash equivalents (412) (1,044) (691)
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash and cash equivalents at 1 January 2,771 3,176 3,176
------------------------------------------------------------------- ------ ------------ ------------ -------------
Exchange (losses)/gains on cash and cash equivalents (25) 155 286
------------------------------------------------------------------- ------ ------------ ------------ -------------
Cash and cash equivalents at period end* 2,334 2,287 2,771
------------------------------------------------------------------- ------ ------------ ------------ -------------
* The Group considers overdrafts (repayable on demand) to be an
integral part of its cash management activities and these are
included in cash and cash equivalents for the purposes of the cash
flow statement
Half-year Half-year Year to
to 30 June to 30 June 31 December
2017 2016 2016
GBPm GBPm GBPm
--------------------------------------------------------------------------- ------------ ------------ -------------
Reconciliation of movements in cash and cash equivalents to movements in
net funds
--------------------------------------------------------------------------- ------------ ------------ -------------
Net decrease in cash and cash equivalents (412) (1,044) (691)
--------------------------------------------------------------------------- ------------ ------------ -------------
Net cash flow from (increase)/decrease in borrowings (274) 325 345
--------------------------------------------------------------------------- ------------ ------------ -------------
Net cash flow from (decrease)/increase in short-term investments - (1) 1
--------------------------------------------------------------------------- ------------ ------------ -------------
Change in net funds resulting from cash flows (686) (720) (345)
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds joint ventures reclassified to joint operations - (9) (9)
--------------------------------------------------------------------------- ------------ ------------ -------------
Exchange (losses)/gains on net funds (20) 128 240
--------------------------------------------------------------------------- ------------ ------------ -------------
Fair value adjustments 56 (319) (345)
--------------------------------------------------------------------------- ------------ ------------ -------------
Movement in net funds (650) (920) (459)
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds at 1 January excluding the fair value of swaps (583) (124) (124)
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds at period end excluding the fair value of swaps (1,233) (1,044) (583)
--------------------------------------------------------------------------- ------------ ------------ -------------
Fair value of swaps hedging fixed rate borrowings 302 332 358
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds at period end (931) (712) (225)
--------------------------------------------------------------------------- ------------ ------------ -------------
The movement in net funds (defined by the Group as including the
items shown below) is as follows:
At 1 January Exchange Fair value Reclass- At 30 June
2017 Funds flow differences adjustments ifications 2017
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Cash at bank and in
hand 872 (145) (13) - - 714
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Money market funds 552 (43) (2) - - 507
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Overdrafts - (2) - - - (2)
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Short-term deposits 1,347 (222) (10) - - 1,115
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Cash and cash
equivalents 2,771 (412) (25) - - 2,334
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Investments 3 - - - - 3
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Current borrowings
(excluding overdrafts) (169) 5 3 - (4) (165)
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Non-current borrowings (3,121) (280) (1) 56 4 (3,342)
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Finance leases (67) 1 3 - - (63)
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Net funds excluding the
fair value of swaps (583) (686) (20) 56 - (1,233)
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Fair value of swaps
hedging fixed rate
borrowings 358 (56) - 302
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Net funds (225) (686) (20) - - (931)
----------------------- ----------------- ----------- ---------------- ---------------- ------------ -----------
Condensed consolidated statement of changes in equity
For the half-year ended 30 June 2017
Attributable to ordinary shareholders
-------------------------------------------------------------------------
Cash
Capital flow Other Retained
Share Share redemption hedging reserves earnings Non-controlling Total
capital premium reserve reserve (1) (2) Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
At 1 January
2016 367 180 161 (100) (51) 4,457 5,014 2 5,016
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Total
comprehensive
income for
the period - - - (5) 559 (1,551) (997) - (997)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Issue of C
Shares - - (171) - - 1 (170) - (170)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Redemption of
C Shares - - 169 - - (169) - - -
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Ordinary
shares
purchased - - - - - (20) (20) - (20)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Share-based
payments -
direct to
equity (3) - - - - - 14 14 - 14
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Related tax
movements - - - - - (1) (1) - (1)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Other changes
in equity in
the period - - (2) - - (175) (177) - (177)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
At June 30,
2016 367 180 159 (105) 508 2,731 3,840 2 3,842
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Total
comprehensive
income for
the period - - - (2) 306 (2,167) (1,863) - (1,863)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Arising on
issue of
ordinary
shares - 1 - - - - 1 - 1
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Issue of C
Shares - - (130) - - - (130) - (130)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Redemption of
C Shares - - 133 - - (133) - - -
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Ordinary
shares
purchased - - - - - (1) (1) - (1)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Share-based
payments -
direct to
equity (3) - - - - - 16 16 - 16
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Related tax
movements - - - - - (1) (1) - (1)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Other changes
in equity in
the period - 1 3 - - (119) (115) - (115)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
At 31 December
2016 367 181 162 (107) 814 445 1,862 2 1,864
Total
comprehensive
income for
the period - - - (3) (58) 1,510 1,449 - 1,449
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Arising on
issues of
ordinary
shares - 15 - - - (15) - - -
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Issue of C
Shares - - (85) - - - (85) - (85)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Redemption of
C Shares - - 85 - - (85) - - -
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Ordinary
shares
purchased - - - - - (22) (22) - (22)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Share-based
payments -
direct to
equity (3) - - - - - 35 35 - 35
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Related tax
movements - - - - - 2 2 - 2
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
Other changes
in equity in
the period - 15 - - - (85) (70) - (70)
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
At 30 June
2017 367 196 162 (110) 756 1,870 3,241 2 3,243
-------------- -------- --------- ----------- -------- --------- --------- ------- ---------------- ---------
(1) Other reserves include a merger reserve of GBP3m and a
translation reserve of GBP753m.
(2) At 30 June 2017, 6,801,654 ordinary shares with a book value
of GBP55m were held for the purposes of share-based payment plans
and included in retained earnings. During the period, the Company
acquired 2,771,349 ordinary shares through purchases on the London
Stock Exchange for use in share-based payment plans. During the
period, the Company issued 1,740,355 new ordinary shares to the
Group's share trust for its employees share-based payment plans
with a net book value of GBP15m.
(3) Share-based payments- direct to equity includes 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, and cash received on share-based schemes vesting.
1 Basis of preparation and accounting policies
Reporting entity
Rolls--Royce Holdings plc is a company domiciled in the UK.
These condensed consolidated half-year financial statements of the
Company as at and for the six months ended 30 June 2017 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 2016 (Annual Report 2016) are available
upon request from the Company Secretary, Rolls-----Royce Holdings
plc, 62 Buckingham Gate, London SW1E 6AT.
Statement of compliance
These condensed consolidated half-year financial statements have
been prepared in accordance with IAS 34 Interim Financial Reporting
as adopted by the European Union. They do not include all of the
information required for full annual statements, and should be read
in conjunction with the 2016 Annual Report.
The comparative figures for the financial year 31 December 2016
are not the Group's statutory accounts for that financial year.
Those accounts have been reported on by the Group's auditors and
delivered to the registrar of companies. The report of the auditors
was (i) unqualified, (ii) did not include a reference to any
matters to which the auditors drew attention by way of emphasis
without qualifying their report, and (iii) did not contain a
statement under section 498(2) or (3) of the Companies Act
2006.
The Board of directors approved the condensed consolidated
half-year financial statements on 31 July 2017.
Significant accounting policies
The accounting policies applied by the Group in these condensed
consolidated half-year financial statements are the same as those
that applied to the consolidated financial statements of the Group
for the year ended 31 December 2016 (International Financial
Reporting Standards issued by the International Accounting
Standards Board (IASB), as adopted for use in the EU effective at
31 December 2016).
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 results of the Group's analysis of the impact of IFRS 15
were described on page 130 of the Annual Report 2016 with the
principal impacts being in the Civil Aerospace business. In
summary:
-- Revenues and costs relating to deliveries of engines will
generally be recognised when OE is delivered. The revenue
recognised in the Civil Aerospace business 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
years ended 31 December 2015 and 2016 would have been as
follows:
Reported results IAS 11 and IAS 18 IFRS 15
------------------- --------------
2016 2015* 2016 2015*
GBPbn GBPbn GBPbn GBPbn
-------------------------------------------- --------- -------- ------ ------
Revenue* 15.0 13.7 13.3 12.6
--------------------------------------------- --------- -------- ------ ------
Gross profit 3.0 3.3 1.9 2.4
--------------------------------------------- --------- -------- ------ ------
Profit/(loss) before financing and taxation 0.0 1.5 (1.1) 0.6
============================================= ========= ======== ====== ======
Net financing (4.6) (1.3) (4.5) (1.3)
============================================= ========= ======== ====== ======
Taxation 0.6 (0.1) 0.8 0.1
--------------------------------------------- --------- -------- ------ ------
Profit/(loss) for the year (4.0) 0.1 (4.8) (0.6)
--------------------------------------------- --------- -------- ------ ------
Net assets* 1.9 5.0 (2.1) 1.8
--------------------------------------------- --------- -------- ------ ------
* Estimates of 2015 reported results under IFRS 15 have been
amended to reflect latest information following our continued work
during this year to design, implement and refine procedures to
apply the new requirements of IFRS 15 and finalise accounting
policy choices. Revenue in 2015 under IFRS 15 was previously
estimated at GBP12.8bn with Net Assets of GBP2.0bn. There has been
no material change in our estimate of profit for the year 2015
under the new standard.
Underlying results IAS 11 and IAS 18 IFRS 15
------------------- --------------
2016 2015* 2016 2015*
GBPbn GBPbn GBPbn GBPbn
------------------------------------- --------- -------- ------ ------
Revenue
===================================== ========= ======== ====== ======
Civil Aerospace original equipment 3.4 3.3 2.6 2.4
====================================== ========= ======== ====== ======
Civil Aerospace aftermarket services 3.7 3.7 3.2 3.5
====================================== ========= ======== ====== ======
Other 6.7 6.4 6.7 6.4
-------------------------------------- --------- -------- ------ ------
Total revenue 13.8 13.4 12.5 12.3
-------------------------------------- --------- -------- ------ ------
Gross profit
===================================== ========= ======== ====== ======
Civil Aerospace 1.2 1.5 0.4 0.6
====================================== ========= ======== ====== ======
Other 1.6 1.7 1.6 1.7
-------------------------------------- --------- -------- ------ ------
Total gross profit 2.8 3.2 2.0 2.3
-------------------------------------- --------- -------- ------ ------
Profit before financing and taxation 0.9 1.5 0.1 0.6
====================================== ========= ======== ====== ======
Net financing (0.1) (0.1) (0.1) (0.1)
====================================== ========= ======== ====== ======
Taxation (0.2) (0.3) (0.1) (0.1)
-------------------------------------- --------- -------- ------ ------
Profit/(loss) for the year 0.6 1.1 (0.1) 0.4
-------------------------------------- --------- -------- ------ ------
* Estimates of 2015 underlying results under IFRS 15 have been
amended to reflect latest information following our continued work
during this year to design, implement and refine procedures to
apply the new requirements of IFRS 15 and finalise accounting
policy choices. Underlying revenue in 2015 under IFRS 15 was
previously estimated at GBP12.5bn. There has been no material
change in our estimate of profit for the year 2015 under the new
standard.
In preparing the information above, the Group has elected to use
the practical expedient not to adjust revenue for the effect of
financing components where the expectation was that the period
between the transfer of goods and services to customers and the
receipt of payment was less than a year.
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, including in its
subsidiaries and joint ventures. As a result of this ongoing work,
it is possible that some changes to the impact above may
result.
Key sources of estimation uncertainty
In applying the accounting policies, management has made
appropriate estimates in many areas, and the actual outcome may
differ from those calculated. The key sources of estimation
uncertainty at the balance sheet date were the same as those that
applied to the consolidated financial statements of the Group for
the year ended 31 December 2016.
2 Analysis by business segment
The analysis by Divisions (business segment) is presented in
accordance with IFRS 8 Operating segments, on the basis of those
segments whose operating results are regularly reviewed by the
Board (the Chief Operating Decision Maker as defined by IFRS
8).
Civil development, manufacture, marketing and sales of
commercial aero engines and aftermarket services.
Defence development, manufacture, marketing and sales of
military aero engines and aftermarket services.
Power Systems development, manufacture, marketing and sales of
reciprocating engines and power systems.
Marine development, manufacture, marketing and sales of
marine-power propulsion systems and aftermarket services.
Nuclear development, manufacture, marketing and sales of nuclear
systems for civil power generation and naval propulsion
systems.
The operating results are prepared on an underlying basis, which
the Board considers reflects better the economic substance of the
Group's trading during the year. The principles adopted to
determine the underlying results are:
Underlying revenues - Where revenues are denominated in a
currency other than the functional currency of the Group
undertaking, these reflect the achieved exchange rates arising on
settled derivative contracts.
Underlying profit before financing - Where transactions are
denominated in a currency other than the functional currency of the
Group undertaking, this reflects the transactions at the achieved
exchange rates on settled derivative contracts. In addition,
adjustments have been made to exclude one-off past-service costs on
post-retirement schemes, exceptional restructuring, profits or
losses on acquisitions and disposals and eliminating charges
recognised as a result of recognising assets in acquired businesses
at fair value.
Underlying profit before taxation - In addition to those
adjustments in underlying profit before financing:
- Include amounts realised from settled derivative contracts and
revaluation of relevant assets and liabilities to exchange rates
forecast to be achieved from future settlement of derivative
contracts.
- Exclude unrealised amounts arising from revaluations required
by IAS 39 Financial Instruments: Recognition and Measurement,
changes in value of financial RRSA contracts arising from changes
in forecast payments, and the net impact of financing costs related
to post-retirement scheme benefits.
Taxation - the tax effect of the adjustments above are excluded
from the underlying tax charge. In addition changes in the amount
of recoverable advance corporation tax recognised that arises from
the above adjustments are also excluded.
This analysis also includes a reconciliation of the underlying
results to those reported in the consolidated income statement.
Civil Defence Power Systems Marine Nuclear Inter-segment Total reportable segments
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
For the half-year ended 30
June 2017
----------------------------
Underlying revenue from
original equipment 1,666 431 820 268 170 (17) 3,338
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
aftermarket services 2,010 617 413 256 221 (18) 3,499
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Total underlying revenue 3,676 1,048 1,233 524 391 (35) 6,837
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Gross profit 543 230 319 94 56 3 1,245
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Commercial and
administrative costs (150) (54) (168) (101) (32) - (505)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Restructuring (6) (1) - (1) - - (8)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Research and development
costs (263) (30) (84) (23) (10) - (410)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Share of results of joint
ventures and associates 49 3 (1) - - - 51
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying profit before
financing and taxation 173 148 66 (31) 14 3 373
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
For the half-year ended 30
June 2016
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
original equipment 1,461 412 711 303 141 (19) 3,009
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
aftermarket services 1,710 590 373 245 215 (20) 3,113
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Total underlying revenue 3,171 1,002 1,084 548 356 (39) 6,122
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Gross profit 399 211 254 108 51 (2) 1,021
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Commercial and
administrative costs (154) (60) (158) (104) (33) - (509)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Restructuring (2) (3) - (1) - - (6)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Research and development
costs (250) (29) (83) (16) - - (378)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Share of results of joint
ventures and associates 38 9 - - - - 47
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying profit before
financing and taxation 31 128 13 (13) 18 (2) 175
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
For the year ended 31
December 2016
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
original equipment 3,357 890 1,810 631 354 (37) 7,005
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
aftermarket services 3,710 1,319 845 483 423 (39) 6,741
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Total underlying revenue 7,067 2,209 2,655 1,114 777 (76) 13,746
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Gross profit 1,185 565 707 236 121 - 2,814
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Commercial and
administrative costs (342) (134) (340) (224) (70) - (1,110)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Restructuring (11) 9 - 2 - - -
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Research and development
costs (568) (71) (177) (41) (6) - (863)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Share of results of joint
ventures and associates 103 15 1 - - - 119
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying profit before
financing and taxation 367 384 191 (27) 45 - 960
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Reconciliation to reported results
Total reportable Other businesses* Underlying
segments and corporate Total underlying adjustments Reported results
GBPm GBPm GBPm GBPm GBPm
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
For the half-year
ended 30 June 2017
-------------------
Revenue from
original equipment 3,338 10 3,348 252 3,600
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
aftermarket
services 3,499 18 3,517 449 3,966
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Total revenue 6,837 28 6,865 701 7,566
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Gross profit 1,245 7 1,252 156 1,408
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Other operating
income - - - 4 4
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Commercial and
administrative
costs (505) (26) (531) (25) (556)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Restructuring (8) - (8) 8 -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Research and
development costs (410) (1) (411) (25) (436)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Share of results of
joint ventures and
associates 51 (8) 43 8 51
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Loss on disposal of
businesses - - - - -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
financing and
taxation 373 (28) 345 126 471
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Net financing - (58) (58) 1,528 1,470
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
taxation - (86) 287 1,654 1,941
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Taxation - (81) (81) (279) (360)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit for the
period 373 (167) 206 1,375 1,581
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Attributable to:
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Ordinary
shareholders 206 1,375 1,581
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Non-controlling
interests - - -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
For the half-year
ended 30 June 2016
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
original equipment 3,009 9 3,018 156 3,174
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
aftermarket
services 3,113 12 3,125 163 3,288
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Total revenue 6,122 21 6,143 319 6,462
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Gross profit 1,021 12 1,033 160 1,193
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Other operating
income - - - 2 2
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Commercial and
administrative
costs (509) (29) (538) (67) (605)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Restructuring (6) - (6) 6 -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Research and
development costs (378) - (378) (26) (404)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Share of results of
joint ventures and
associates 47 - 47 4 51
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Loss on disposal of
businesses - - - (1) (1)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
financing and
taxation 175 (17) 158 78 236
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Net financing - (54) (54) (2,332) (2,386)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit before
taxation - (71) 104 (2,254) (2,150)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Taxation - (27) (27) 405 378
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit for the
period 175 (98) 77 (1,849) (1,772)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Attributable to:
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Ordinary
shareholders 77 (1,849) (1,772)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Non-controlling
interests - - -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
For the year ended
31 December 2016
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
original equipment 7,005 22 7,027 561 7,588
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
aftermarket
services 6,741 15 6,756 611 7,367
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Total revenue 13,746 37 13,783 1,172 14,955
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Gross profit 2,814 9 2,823 225 3,048
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Other operating
income - - - 5 5
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Commercial and
administrative
costs (1,110) (53) (1,163) (1,045) (2,208)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Research and
development costs (863) 1 (862) (56) (918)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Share of results of
joint ventures and
associates 119 (2) 117 - 117
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
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 before
taxation - (147) 813 (5,449) (4,636)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Taxation - (261) (261) 865 604
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Profit for the
period 960 (408) 552 (4,584) (4,032)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Attributable to:
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Ordinary
shareholders 552 (4,584) (4,032)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Non-controlling
interests - - -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
* Other businesses comprise former Energy businesses not
included in the disposal to Siemens in 2014.
Total assets Total liabilities Net assets/(liabilities)
------------------------ ------------------------------- --------------------------------
30 30 31 31
June June December 30 June 30 June December 30 June 30 June 31
2017 2016 2016 2017 2016 2016 2017 2016 December 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Civil 14,671 13,261 13,856 (11,706) (11,671) (14,510) 2,965 1,590 (654)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Defence 1,692 1,535 1,759 (2,508) (1,643) (1,996) (816) (108) (237)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Power Systems 3,766 3,680 3,837 (1,271) (1,084) (1,151) 2,495 2,596 2,686
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Marine 1,361 1,528 1,520 (1,092) (816) (903) 269 712 617
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Nuclear 290 289 352 (591) (304) (435) (301) (15) (83)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Inter-segment (662) (452) (1,223) 662 435 1,223 - (17) -
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Reportable segments 21,118 19,841 20,101 (16,506) (15,083) (17,772) 4,612 4,758 2,329
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Other businesses (17) 48 51 31 (43) (183) 14 5 (132)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Net funds 2,641 2,620 3,132 (3,572) (3,332) (3,357) (931) (712) (225)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Tax
assets/(liabilities) 647 633 908 (978) (983) (987) (331) (350) (79)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Post-retirement
scheme
surpluses/(deficits) 1,243 1,545 1,346 (1,364) (1,404) (1,375) (121) 141 (29)
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
25,632 24,687 25,538 (22,389) (20,845) (23,674) 3,243 3,842 1,864
--------------------- ------ ------ -------- -------- -------- ----------- ------- ------- --------------
Group employees at period end 30 June 30 June
2017 2016 31 December 2016
------------------------------- ------- ------- ----------------
Civil 24,300 23,500 23,800
------------------------------------- ------- ------- ----------------
Defence 6,200 6,100 6,000
------------------------------------- ------- ------- ----------------
Power Systems 10,200 10,300 10,300
------------------------------------- ------- ------- ----------------
Marine 4,600 5,300 5,300
------------------------------------- ------- ------- ----------------
Nuclear 4,200 4,300 4,300
------------------------------------- ------- ------- ----------------
Other businesses and corporate 200 200 200
------------------------------------- ------- ------- ----------------
49,700 49,700 49,900
------------------------------- ------- ------- ----------------
Underlying revenue adjustments Half-year
to 30 June Half-year to 30 June
2017 2016 Year to 31 December 2016
GBPm GBPm GBPm
------------------------------------- ------------ --------------------- ------------------------
Underlying revenue 6,865 6,143 13,783
------------------------------------------- ------------ --------------------- ------------------------
Recognise revenue at exchange rate on date
of transaction 701 319 1,172
------------------------------------------- ------------ --------------------- ------------------------
Revenue per consolidated income statement 7,566 6,462 14,955
------------------------------------------- ------------ --------------------- ------------------------
Underlying
profit
adjustments Half-year to 30 June 2017 Half-year to 30 June 2016 Year to 31 December 2016
------------------------------ ------------------------------- -------------------------------
Profit Profit Profit
before Net before Net before Net
financing financing Taxation financing financing Taxation financing financing Taxation
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Underlying
performance 345 (58) (81) 158 (54) (27) 915 (102) (261)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Realised
losses/(gains)
on settled
derivative
contracts (1) 234 108 (57) 131 5 (25) 426 162 (107)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Net unrealised
fair value
changes to
derivative
contracts (2) 8 1,391 (249) 4 (2,155) 377 - (4,420) 792
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Effect of
currency on
contract
accounting (15) - 3 32 - (6) 77 - (14)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Revaluation of
trading assets
and liabilities (4) 27 (3) 40 (176) 26 67 (313) 56
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Financial RRSAs
- exchange
differences and
changes in
forecast
payments - 4 (1) - (8) 1 - (8) (1)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Effect of
acquisition
accounting (62) - 18 (62) - 17 (115) - 35
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Impairment of
goodwill - - - - - - (219) - -
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Pension
restructuring - - - - - - (306) - 107
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Net
post-retirement
scheme
financing - (1) - - 3 (1) - 3 (2)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Disposal of
business - - - (1) - - (3) - -
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Exceptional
restructuring
(3) (31) - 9 (68) - 13 (129) - 34
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Financial
penalties from
agreements with
investigating
bodies - - - - - - (671) - -
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Other (4) (1) 1 2 (1) 3 (1) 1 (5)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Recognition of
advance
corporation tax - - - - - - - - -
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Reduction in
rate of UK
corporation tax - - - - - - - - (30)
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Total underlying
adjustments 126 1,528 (279) 78 (2,332) 405 (874) (4,575) 865
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
Reported per
consolidated
income
statement 471 1,470 (360) 236 (2,386) 378 41 (4,677) 604
---------------- --------- --------- -------- --------- ---------- -------- --------- ---------- --------
(1) The adjustments for realised losses/(gains) on settled
derivative contracts include adjustments to reflect the
losses/(gains) in the same period as the related trading cash
flows.
(2) The adjustments for unrealised fair value changes to
derivative contracts include those included in equity accounted
joint ventures and exclude those for which the related trading
contracts have been cancelled when the fair value changes are
recognised immediately in underlying profit.
(3) Restructuring is excluded from underlying performance when
it concerns the closure of a significant business or site or a
fundamental reorganisation of the business.
3 Research and development
Half-year
Half-year to 30 June
to 30 June 2017 2016 Year to 31 December 2016
GBPm GBPm GBPm
---------------------------------------------------------- ----------------- ------------ -------------------------
Expenditure in the period (465) (433) (937)
---------------------------------------------------------- ----------------- ------------ -------------------------
Capitalised as intangible assets 84 54 99
---------------------------------------------------------- ----------------- ------------ -------------------------
Amortisation and impairment of capitalised costs (76) (71) (149)
---------------------------------------------------------- ----------------- ------------ -------------------------
Net cost (457) (450) (987)
---------------------------------------------------------- ----------------- ------------ -------------------------
Entry fees received 40 59 73
---------------------------------------------------------- ----------------- ------------ -------------------------
Entry fees deferred in respect of charges in future
periods (30) (27) (40)
---------------------------------------------------------- ----------------- ------------ -------------------------
Recognition of previously deferred entry fees 11 14 36
---------------------------------------------------------- ----------------- ------------ -------------------------
Net cost recognised in the income statement (436) (404) (918)
---------------------------------------------------------- ----------------- ------------ -------------------------
Underlying adjustments relating to the effects of
acquisition accounting and foreign exchange 25 26 56
---------------------------------------------------------- ----------------- ------------ -------------------------
Net underlying cost recognised in the income statement (411) (378) (862)
---------------------------------------------------------- ----------------- ------------ -------------------------
4 Net financing
Half-year to 30 June 2017 Half-year to 30 June 2016 Year to 31 December 2016
Per Per Per
consolidated consolidated consolidated
income Underlying income Underlying income Underlying
statement financing statement financing statement financing
GBPm GBPm GBPm GBPm GBPm GBPm
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing income
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Interest
receivable 5 5 7 7 14 14
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
gains on
foreign
currency
contracts 1,407 - 1 - 1 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financial RRSAs
- foreign
exchange
differences and
changes in
forecast
payments 4 - - - 23 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
gains on
commodity
contracts - - 6 - 16 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing on
post-retirement
scheme
surpluses 18 - 22 - 42 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net foreign
exchange gains 136 - - - - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
1,570 5 36 7 96 14
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing costs
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Interest payable (36) (36) (42) (42) (77) (77)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
losses on
foreign
currency
contracts - - (2,162) - (4,437) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financial RRSAs
- foreign
exchange
differences and
changes in
forecast
payments - - (8) - (31) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financial charge
relating to
financial RRSAs (2) (2) (2) (2) (6) (6)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
losses on
commodity
contracts (16) - - - - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing on
post-retirement
scheme deficits (19) - (19) - (39) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net foreign
exchange losses - - (171) - (145) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Other financing
charges (27) (25) (18) (17) (38) (33)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
(100) (63) (2,422) (61) (4,773) (116)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net financing 1,470 (58) (2,386) (54) (4,677) (102)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Analysed as:
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net interest
payable (31) (31) (35) (35) (63) (63)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
gains /(losses)
on derivative
contracts 1,391 - (2,155) - (4,420) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net
post-retirement
scheme
financing (1) - 3 - 3 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net other
financing 111 (27) (199) (19) (197) (39)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net financing 1,470 (58) (2,386) (54) (4,677) (102)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
5 Taxation
The effective tax rate for the half year is 18.5% (2016
half-year 17.6%, full year 13.0%).
6 Earnings per ordinary share (EPS)
Basic EPS are calculated by dividing the profit attributable to
ordinary shareholders by the weighted average number of ordinary
shares in issue during the period, excluding ordinary shares held
under trust, which have been treated as if they had been cancelled.
Diluted EPS are calculated by adjusting the weighted average number
of ordinary shares in issue during the period for the bonus element
of share options.
Half-year to 30 June 2017 Half-year to 30 June 2016 Year to 31 December 2016
Potentially Potentially Potentially
dilutive dilutive dilutive
share share share
Basic options Diluted Basic options(1) Diluted Basic options(1) Diluted
-------------- ------- ------------ -------- ---------- ------------ ---------- ----------- ------------ -----------
Profit/(loss)
attributable
to ordinary
shareholders
(GBPm) 1,581 - 1,581 (1,772) - (1,772) (4,032) - (4,032)
-------------- ------- ------------ -------- ---------- ------------ ---------- ----------- ------------ -----------
Weighted
average
shares
(millions) 1,834 3 1,837 1,832 9 1,841 1,832 - 1,832
-------------- ------- ------------ -------- ---------- ------------ ---------- ----------- ------------ -----------
EPS (pence) 86.21p (0.15)p 86.06p (96.72) p - (96.72) p (220.08) p - (220.08) p
-------------- ------- ------------ -------- ---------- ------------ ---------- ----------- ------------ -----------
(1) As there is a loss on continuing operations, the effect of
potentially dilutive ordinary shares is anti-dilutive.
The reconciliation between underlying EPS and basic EPS is as
follows:
Half-year to 30 June 2017 Half-year to 30 June 2016 Year to 31 December 2016
Pence GBPm Pence GBPm Pence GBPm
----------------------------- --------------- ----------- -------------- ------------ -------------- -----------
Underlying EPS / Underlying
profit attributable to
ordinary shareholders
re-presented 11.23 206 4.20 77 30.13 552
----------------------------- --------------- ----------- -------------- ------------ -------------- -----------
Total underlying adjustments
to profit before tax (note
2) 90.19 1,654 (123.03) (2,254) (297.43) (5,449)
----------------------------- --------------- ----------- -------------- ------------ -------------- -----------
Related tax effects (15.21) (279) 22.11 405 47.22 865
----------------------------- --------------- ----------- -------------- ------------ -------------- -----------
EPS / Profit/(loss)
attributable to ordinary
shareholders 86.21 1,581 (96.72) (1,772) (220.08) (4,032)
----------------------------- --------------- ----------- -------------- ------------ -------------- -----------
Diluted underlying EPS 11.21 4.18 30.08
----------------------------- --------------- ----------- -------------- ------------ -------------- -----------
7 Payments to shareholders in respect of the period
Payments to shareholders in respect of the period represent the
value of C Shares issued during the period. Issues of C Shares were
declared as follows:
Half-year to 30 June 2017 Year to 31 December 2016
--------------------------- --------------------------
Pence per Pence per
share GBPm share GBPm
---------------------------- ------------------ ------- ----------------- -------
Interim (issued in January) 4.6 85 4.6 85
============================= ================== ======= ================= =======
Final (issued in July) 7.1 130
----------------------------- ------------------ ------- ----------------- -------
4.6 85 11.7 215
---------------------------- ------------------ ------- ----------------- -------
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
2017 1,874 1,325 1,944 1,007 540 742 663 8,095
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Exchange
differences 5 6 11 - (2) (1) 7 26
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Additions - 79 84 139 - 51 22 375
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Disposals - - - - - (10) - (10)
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 30 June 2017 1,879 1,410 2,039 1,146 538 782 692 8,486
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Accumulated
amortisation:
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 1 January
2017 337 440 888 433 209 414 294 3,015
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Exchange
differences (7) 1 6 - (1) (1) 1 (1)
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Charge for the
period - 31 76 26 25 36 14 208
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Disposals - - - - - (5) - (5)
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 30 June 2017 330 472 970 459 233 444 309 3,217
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Net book value
at:
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
30 June 2017 1,549 938 1,069 687 305 338 383 5,269
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
31 December 2016 1,537 885 1,056 574 331 328 369 5,080
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
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% (2016 full year 9-13%), based on the Group's weighted average
cost of capital.
-- No impairment is required on this basis. However, a
combination of changes in assumptions and adverse movements in
variables that are outside the Company's control (discount rate,
exchange rate and airframe delays), could result in impairment in
future periods.
9 Property, plant and equipment
In course of
Land and buildings Plant and equipment Aircraft and engines construction Total
GBPm GBPm GBPm GBPm GBPm
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Cost:
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 1 January 2017 1,667 4,599 491 765 7,522
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Exchange differences (6) (28) (3) (5) (42)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Additions 15 48 22 124 209
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Reclassifications 23 117 18 (158) -
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Transferred to assets
held for sale (3) - - - (3)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Disposals (4) (53) (2) (2) (61)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 30 June 2017 1,692 4,683 526 724 7,625
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Accumulated
depreciation:
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 1 January 2017 515 2,765 126 2 3,408
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Exchange differences (5) (14) (1) - (20)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Reclassifications (3) 8 (5) - -
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Charge for the period 29 175 17 - 221
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Transferred to assets
held for sale (2) - - - (2)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Disposals (1) (50) (2) - (53)
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
At 30 June 2017 533 2,884 135 2 3,554
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Net book value at:
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
30 June 2017 1,159 1,799 391 722 4,071
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
31 December 2016 1,152 1,834 365 763 4,114
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
10 Financial assets and liabilities
Other financial assets and liabilities comprise:
Derivatives
--------------------------------------------------------
Foreign
exchange Commodity Interest rate Financial
contracts contracts contracts (1) Total RRSAs Other C Shares Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
At 30 June 2017
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Non-current
assets 104 1 308 413 - - - 413
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Current assets 14 1 - 15 - - - 15
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Current
liabilities (567) (24) - (591) (29) - (28) (648)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
Non-current
liabilities (3,369) (39) (6) (3,414) (64) (14) - (3,492)
--------------- -------------- -------------- -------------- -------- -------------- ------ --------- --------
(3,818) (61) 302 (3,577) (93) (14) (28) (3,712)
--------------
At 30 June 2016
---------------
Non-current
assets 8 2 341 351 - - - 351
---------------
Current assets 44 1 - 45 - - - 45
---------------
Current
liabilities (443) (30) - (473) (17) - (31) (521)
---------------
Non-current
liabilities (3,324) (53) (9) (3,386) (97) (14) - (3,497)
--------------- -------------- -------------- ------ --------- --------
(3,715) (80) 332 (3,463) (114) (14) (31) (3,622)
At 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)
(1) Includes the foreign exchange impact of cross-currency interest rate swaps.
Derivative financial Half-year to 30 June Year to 31 December
instruments Half-year to 30 June 2017 2016 2016
Foreign exchange Commodity Interest rate Total Total Total
GBPm GBPm GBPm GBPm GBPm GBPm
At January 1 (5,551) (56) 358 (5,249) (1,731) (1,731)
Currency options at
inception - - - - (33) (33)
Movements in fair
value hedges - - (56) (56) 319 345
Movements in other
derivative contracts 1,407 (16) - 1,391 (2,155) (4,420)
Contracts settled 326 11 - 337 137 590
At period end (3,818) (61) 302 (3,577) (3,463) (5,249)
Financial risk and revenue sharing
arrangements (RRSAs) and other
financial liabilities Financial RRSAs Other
Half-year Half-year Year to Half-year Half-year Year to
to 30 June to 30 June 31 December to 30 June to 30 June 31 December
2017 2016 2016 2017 2016 2016
GBPm GBPm GBPm GBPm GBPm GBPm
At January 1 (101) (110) (110) (15) -- -
Exchange adjustments included in OCI 2 4 5 - - -
Additions - - - - (14) (14)
Financing charge (1) (2) (2) (6) - - (1)
Changes to forecast payments - - 5 - - -
Exchange adjustments - excluded from
underlying results (1) 4 (8) (13) 1 -- (3)
Cash paid to partners 4 2 18 - - -
Other - - - - - 3
At period end (93) (114) (101) (14) (14) (15)
(1) Included in net financing.
Fair values of financial instruments equate to book values with
the following exceptions:
Half-year to 30 June 2017 Half-year to 30 June 2016 Year to 31 December 2016
Book value Fair value Book value Fair value Book value Fair value
GBPm GBPm GBPm GBPm GBPm GBPm
Borrowings (3,572) (3,628) (3,332) (3,320) (3,357) (3,413)
Fair values
The fair value of a financial instrument is the price at which
an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arms-length transaction. Fair
values have been determined with reference to available market
information at the balance sheet date, using the methodologies
described below.
-- Unlisted non-current investments primarily comprise bank
deposits where the fair value approximates to the book value.
-- The fair values of trade receivables and payables, short-term
investments and cash and cash equivalents are assumed to
approximate to cost either due to the short-term maturity of the
instruments or because the interest rate of the investments is
reset after periods not exceeding six months.
-- Fair values of derivative financial assets and liabilities
are estimated by discounting expected future contractual cash flows
using prevailing interest rate curves. Amounts denominated in
foreign currencies are valued at the exchange rate prevailing at
the balance sheet date. These financial instruments are included on
the balance sheet at fair value, derived from observable market
prices (Level 2 as defined by IFRS 13 Fair Value Measurement).
-- Borrowing and financial RRSAs are carried at amortised cost.
Fair values are estimated by discounting expected future
contractual cash flows using prevailing interest rate curves.
Amounts denominated in foreign currencies are valued at the
exchange rate prevailing at the balance sheet date. For financial
RRSAs, the contractual cash flows are based on future trading
activity, which is estimated based on latest forecasts.
Borrowings
During the period, the Group has drawn down GBP280m on the EIB
loan facility. There were no other significant changes in the
Group's borrowings during the six months ended 30 June 2017.
11 Pensions and other post-retirement benefits
The net post-retirement scheme deficit as at 30 June 2017 is
calculated on a year to date basis, using the latest valuation as
at 31 December 2016, updated to 30 June 2017 for the principal
schemes.
Movements in the net post-retirement position recognised in the
balance sheet were as follows:
UK schemes Overseas schemes Total
GBPm GBPm GBPm
At 1 January 2017 1,336 (1,365) (29)
Exchange adjustments - 10 10
Current service cost (93) (28) (121)
Past service credit/(cost) 3 - 3
Net financing 18 (19) (1)
Contributions by employer 90 40 130
Actuarial gains /(losses)(1) (125) 13 (112)
Other - (1) (1)
At 30 June 2017 1,229 (1,350) (121)
Analysed as:
Post-retirement scheme surpluses - included in non-current assets 1,229 14 1,243
Post-retirement scheme deficits - included in non-current liabilities - (1,364) (1,364)
1,229 (1,350) (121)
(1) The net actuarial losses 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 6. 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$3.1bn (31 December 2016
$3.2bn) to provide borrowing facilities to enable customers to
purchase aircraft (of which approximately US$239m 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.
30 June 2017 31 December 2016
GBPm $m GBPm $m
Gross contingent liabilities 211 274 238 293
Value of security(1) (79) (103) (103) (126)
Indemnities (72) (94) (74) (91)
Net commitments 60 77 61 76
Net commitments with security reduced by 20% (2) 78 101 86 106
(1) Security includes unrestricted cash collateral of: 36 47 38 47
(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
IngenierÃa 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 on page 164 of the
2016 Annual Report. Significant transactions in the current
financial period are as follows:
Half-year Half-year Year to
to 30 June to 30 June 31 December
2017 2016 2016
GBPm GBPm GBPm
Sales of goods and services to joint ventures and associates 980 887 2,022
Purchases of goods and services from joint ventures and associates (1,399) (1,072) (1,881)
Included in sales of goods and services to joint ventures and
associates are sales of spare engines amounting to GBP24m (2016:
half-year GBP39m, full-year GBP356m).
Profit recognised in the year on such sales amounted to GBP23m
(2016: half-year GBP24m, full-year GBP119m), 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 GBP19m
(2016: half-year GBP22m, full-year GBP97m).
14 Derivation of summary funds flow statement from reported cash flow statement
The table below shows the derivation of the summary funds flow
statement (lines marked *) on page 24 from the consolidated cash
flow statement on page 27.
Half-year to 30 June 2017 Half-year to 30 June 2016 Year to 31 December 2016
GBPm GBPm GBPm GBPm GBPm GBPm Source
Underlying profit
before tax (PBT) -
* below 287 104 813
Depreciation of
property, plant and
equipment 221 196 426 A
Amortisation of
intangible assets 213 201 628 A
Impairment of
goodwill - - (219) B
Acquisition accounting (62) (62) (115) B
Depreciation and
* amortisation 372 335 720
Increase in inventories (421) (339) (161) A
(Increase)/decrease in
trade and other
receivables (357) (465) 54 C
Increase in trade and
other payables 780 514 234 C
Realised (losses)/gains
on settled foreign
exchange derivatives
in financing (108) (5) (162) B
Revaluation of trading
assets (4) 40 67 B
Movement on net
* working capital (110) (255) 32
Additions of intangible
assets (375) (232) (631) A
Purchases of property,
plant and equipment (381) (307) (585) A
Government grants
received 3 - 15 A
Expenditure on
property, plant and
equipment and
* intangible assets (753) (539) (1,201)
Realised losses on
hedging instruments 234 131 426 B
Net unrealised fair
value to changes to
derivatives 8 4 - B
Foreign exchange on
contract accounting (15) 32 77 B
Exceptional
restructuring (31) (68) (129) B
Other (4) 2 (1) B
Underlying financing 58 54 102 B
Loss on disposal of
property, plant and
equipment 6 2 5 A
Joint ventures (23) (37) (43) A
(Decrease)/increase in
provisions (33) 86 44 A
Cash flows on other
financial assets and
liabilities excluding
realised
(losses)/gains on
settled foreign
exchange derivatives
in financing (233) (134) (446) A and B
Share based payments 19 14 35 A
Disposal of
intangible assets - - 8 A
Disposal of property,
plant and equipment 9 10 8 A
Investments in joint
ventures and
associates (8) (11) (30) A
Net interest (33) (48) (72) A
Net funds of joint
ventures reclassified
to joint operations - (4) (4) A
Issue of ordinary
shares - - 1 A
Purchase of ordinary
shares for share
schemes (6) (20) (21) A
* Other (52) 13 (40)
* Trading cash flow (256) (342) 324
Net defined benefit
plans - underlying
operating charge 118 118 204 A
Cash funding of defined
benefit plans (130) (128) (271) A
Contributions to
defined benefit
schemes in excess
of underlying PBT
* charge (12) (10) (67)
* Tax (71) (62) (157) A
* Free cash flow (339) (414) 100
* Shareholder payments (85) (168) (301) A
Increase in share in
* joint ventures - (154) (154) A
Payments of
financial penalties
from agreements
with investigating
* bodies (267) - - A
Other acquisitions
* and disposals 5 7 1 A
* Foreign exchange (20) 128 240 A
* Change in net debt (706) (601) (114)
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.
Half-year to 30 June 2017 Half-year to 30 June 2016 Year to 31 December 2016
GBPm GBPm GBPm GBPm GBPm GBPm Source
Reported operating
profit 471 237 44
Realised losses on
hedging instruments (234) (131) (426) B
Net unrealised fair
value to changes to
derivatives (8) (4) - B
Foreign exchange on
contract accounting 15 (32) (77) B
Revaluation of trading
assets and liabilities 4 (40) (67) B
Effect of acquisition
accounting 62 62 115 B
UK pension restructuring - - 306 B
Impairment of goodwill - - 219 B
Exceptional
restructuring 31 68 129 B
Financial penalties from
agreements with
investigating bodies - - 671 B
Other 4 (2) 1 B
Adjustments to reported
operating profit (126) (79) 871
Underlying profit before
financing 345 158 915
Underlying financing (58) (54) (102) B
Underlying profit before
tax 287 104 813
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 27.
Half-year to 30 June 2017 Half-year to 30 June 2016 Year to 31 December 2016
GBPm GBPm GBPm GBPm GBPm GBPm Source
Change in cash and cash
equivalents (412) (1,044) (691) A
Returns to shareholders 85 168 301 A
Net cash flow from
changes in borrowings
and finance leases (274) 325 345 A
Increase/decrease in
short-term investments - (1) 1 A
Increase in share in
joint ventures - 154 154 A
Debt of joint ventures
reclassified as joint
operations - (9) (9) A
Acquisition of
businesses - - 6 A
Disposal of other
businesses (5) (7) (7) C
Changes in group
structure (5) 138 144
Payments of financial
penalties from
agreements with
investigating bodies 267 - - A
Free cash flow (339) (414) 100
Sources:
A Cash flow statement
B Note 2 - underlying profit adjustments
C Cash flow statement adjusted for non-underlying items including exchange differences
Principal risks and uncertainties
Whilst the Group has a consistent strategy and long performance
cycles, it continues to be exposed to a number of risks and has an
established, structured approach to identifying, assessing and
managing those risks.
The principal risks facing the Group for the remaining six
months of the financial year are unchanged from those reported on
pages 50 and 52 of the Annual Report 2016, as set out below:
Disruptive technologies and business models
Disruptive technologies, new entrants with alternative business
models or disruptions to key markets or customers could reduce our
ability to win sustainable future business, achieve operating
results and realise future growth opportunities.
Product failure
Product not meeting safety expectations, or causing significant
impact to customers or the environment through failure in quality
control.
Business continuity
Breakdown of external supply chain or internal facilities that
could be caused by destruction of key facilities, natural disaster,
regional conflict, financial insolvency of a critical supplier or
scarcity of materials which would reduce the ability to meet
customer commitments, win future business or achieve operational
results.
IT vulnerability
Breach of IT security causing controlled or critical data to be
lost, made inaccessible, corrupted or accessed by unauthorised
users.
Competitive position
The presence of large, financially strong competitors in the
majority of our markets means that the Group is susceptible to
significant price pressure for original equipment or services even
where our markets are mature or the competitors few. Our main
competitors have access to significant government funding
programmes as well as the ability to invest heavily in technology
and industrial capability.
Political risk
Geopolitical factors that lead to an unfavourable business
climate and significant tensions between major trading parties or
blocs which could impact the Group's operations. For example:
explicit trade protectionism, differing tax or regulatory regimes,
potential for conflict; or broader political issues.
Major programme delivery
Failure to deliver a major programme on time, within budget, to
specification, or technical performance falling significantly short
of customer expectations, or not delivering the planned business
benefits, would have potentially significant adverse financial and
reputational consequences, including the risk of impairment of the
carrying value of the Group's intangible assets and the impact of
potential litigation.
Compliance
Non-compliance by the Group with legislation or other regulatory
requirements in the heavily regulated environments in which it
operates (e.g. export controls; use of controlled chemicals and
substances; and anti-bribery and corruption legislation)
compromising the ability to conduct business in certain
jurisdictions and exposing the Group to potential: reputational
damage; financial penalties; debarment from government contracts
for a period of time; and/or suspension of export privileges
(including export credit financing), each of which could have a
material adverse effect.
Market and financial shock
The Group is exposed to a number of market risks, some of which
are of a macro-economic nature (e.g. oil price, exchange rates) and
some of which are more specific to the Group (e.g. liquidity and
credit risks, credit rating, profitability post IFRS 15, reduction
in air travel or disruption to other customer operations).
Significant extraneous market events could also materially damage
the Group's competitiveness and/or creditworthiness.
This would affect operational results or the outcomes of
financial transactions.
Talent and capability
Inability to attract and retain the critical capabilities and
skills needed in sufficient numbers and to effectively organise,
deploy and incentivise our people to deliver our strategy, business
plan and projects.
Going concern
After making enquiries, the directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. There have been
no significant changes to the basis described on page 53 of the
Annual Report 2016. For this reason they continue to adopt the
going concern basis in preparing the consolidated financial
statements.
Payments to shareholders
The Company makes payments to shareholders by allotting
non-cumulative redeemable preference shares of 0.1 pence each (C
Shares). Shareholders can opt to redeem the C Shares for a cash
payment, or reinvest the cash proceeds by purchasing additional
ordinary shares via the C Share Reinvestment Plan (CRIP), which is
operated by our Registrar, Computershare Investor Services PLC. On
3 January 2018, 46 C Shares, with a total nominal value of 4.6p,
will be allotted for each ordinary share to those shareholders on
the register on 27 October 2017. The final day of trading with
entitlement to C Shares is 26 October 2017. Shareholders wishing to
redeem their C Shares, or participate in the CRIP, must lodge
instructions with our Registrar to arrive no later than 5.00 pm on
1 December 2017 (CREST holders must submit their election in CREST
by 3pm GMT). The payment of C Shares redemption monies will be made
on 5 January 2018 and the CRIP purchase will begin as soon as
practicable after 5 January 2018.
Statement of directors' responsibilities
The directors confirm that, to the best of their knowledge:
-- the condensed consolidated half-year financial statements
have been prepared in accordance with IAS 34 Interim Financial
Reporting as adopted by the EU;
-- the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being
an indication of important events that have occurred during the
first six months of the financial year and their impact on the
condensed consolidated half-year financial statements; and a
description of the principal risks and uncertainties for the
remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being
related party transactions that have taken place in the first six
months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last Annual Report that could do so.
The directors of Rolls-Royce Holdings plc at 13 February 2017
are listed in its Annual Report 2016 on pages 54 to 57. Since that
date, the following changes have taken place:
-- Colin Smith and John McAdam retired as directors at the
conclusion of the AGM on 4 May 2017; and
-- Stephen Daintith was appointed as Chief Financial Officer on
7 April 2017 and Beverly Goulet was appointed as a non-executive
director on 3 July 2017.
By order of the Board
Warren East Stephen Daintith
Chief Executive Chief Financial Officer
31 July 2017 31 July 2017
Independent review report to Rolls-Royce Holdings plc
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2017 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated balance sheet,
the condensed consolidated cash flow statement, the condensed
consolidated statement of changes in equity and the related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2017 is not prepared, in all material respects, in accordance
with IAS 34 Interim Financial Reporting as adopted by the EU and
the Disclosure Guidance and Transparency Rules ("the DTR") of the
UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with IAS
34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
Jimmy Daboo
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London E14 5GL
31 July 2017
IFRS 15 Revenue from Contracts with Customers
Restatement of 2016
During the first half of 2017 Rolls-Royce has continued to
refine policies on the detailed interpretation of the application
of IFRS 15. Alongside today's trading statement, we are publishing
an update on IFRS 15 Revenue from Contracts with Customers which
evaluates its application to our 2016 results. This follows on from
the work presented at the Capital Market Day in November 2016,
where using 2015 as an example, the company evaluated how the
standard would have changed underlying revenue and profit for Civil
Aerospace if it had been applied to that year.
The following IFRS 15 principles and consequences have
previously been highlighted:
-- Cumulative profit and cash flow recognised over the life
cycle of a product is not changed by the new standard
-- No change to in-year cash flow
-- There are significant changes to the timing of revenue and profit recognition:
o Original Equipment: changed to more closely reflect the cash
received on original equipment sales
o Aftermarket: changed to match the timing of actual work done
to provide aftermarket services, irrespective of the commercial
value of implicit activities (this new aftermarket approach is
known as the 'input' method)
For 2016 underlying results, IFRS 15 changes result in adverse
estimated adjustments to Civil Aerospace revenues of GBP0.8bn for
original equipment (OE) sales and GBP0.5bn for aftermarket services
(AM). For operating profit the impact is GBP0.6bn and GBP0.2bn for
OE and AM respectively.
-- Drivers of change in revenue and profit are largely led by:
o Elimination of linked profit on OE accounting
o Removal of the 'capitalisation' of linked and unlinked engine
losses and adjustments in both OE and AM accounting for the related
'depreciation'
o Reduction in the magnitude of beneficial long-term contract
accounting adjustments
o When applied to CorporateCare(R) service packages in business
aviation, the input method required by the new standard also has an
adverse effect on the timing of AM revenue and profit recognition
(included in the above estimated adjustments)
-- From a balance sheet perspective, if IFRS 15 had been applied
to the 2016 closing Civil Aerospace TotalCare(R) net asset and
Contractual Aftermarket Rights balances then approximately GBP3.9bn
of transition adjustments (post tax) would have been applied to
reduce shareholder reserves.
-- The analysis previously published for 2015 has been reviewed
in light of the refinements undertaken for the 2016 exercise. There
were no material changes to the 2015 revenue or profit analysis but
the 2015 post-tax balance sheet adjustment would have been GBP0.2bn
higher than the GBP3.0bn referenced in the 2016 Annual Report.
The new standard will be adopted from January 2018. When 2017
full year results are presented in March 2018, the intention is for
them to be prepared and reported under existing standards as well
as on an IFRS 15 basis.
A more detailed analysis of the 2016 figures are included as an
appendix to the H12017 slideshow and available through the investor
relations tab on the Rolls-Royce website.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR KMGFNGMLGNZZ
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