Rolls-Royce Reports Loss on Bribery Charges, Weak Pound -- Update
February 14 2017 - 3:42AM
Dow Jones News
By Robert Wall
LONDON-- Rolls-Royce Holdings PLC on Tuesday said it swung to a
full-year GBP4.03 billion ($5.05 billion) net loss and suffered a
sharp decline in operating profit stung by a settlement over
corruption charges, the fall in the British pound and setbacks on
high-profile aircraft engine programs.
Rolls-Royce, best known for making aircraft engines for Boeing
Co. and Airbus SE long-range planes, reported a GBP83 million
profit the year prior. The loss in the latest year reflected a
large, noncash accounting hit from the revaluation of U.S. currency
hedges after the British pound slumped in the wake of the Brexit
vote. It included a GBP671 million a one-time charge for bribery
settlements with U.S., British and Brazilian authorities.
The company's closely watched underlying pretax profit, that
strips out one-time items and currency fluctuations, fell for a
third year to GBP813 million from GBP1.43 billion a year earlier,
ahead of expectations. Underlying sales fell 2% to GBP13.4
billion.
Earnings this year will only be modestly better, Rolls-Royce
said. Underlying free cash flow, which was GBP100 million last
year, should be similarly weak in 2017, the company said.
Rolls-Royce a year ago announced its first dividend cut since
1992 to maintain balance sheet health amid falling profits. The
company said it would pay a 7.1 pence final dividend or 11.7 pence
for the full-year compared with 16.4 pence for 2015.
Rolls-Royce, no longer affiliated with the luxury car maker,
began the year warning earnings would sag. Profit on its engines
for Airbus A330 planes would retreat amid weaker demand and with
the plane maker introducing an upgraded model with newer
Rolls-Royce engines. Costs on its Trent 1000 engines used to power
Boeing Dreamliners have also risen with turbine components
degrading too quickly. Other headwinds include weakness in its
business to provide engine for regional and business jets where
Rolls-Royce has lost ground to rivals.
Rolls-Royce has embarked on companywide restructuring and
overhauled management to boost returns. About 600 manager positions
are being eliminated along with around 2,600 job losses in the
aerospace unit that generates most Rolls-Royce sales. About 1,800
jobs are being eliminated in the ship-engine unit. Chief Executive
Warren East has promised annual savings starting at the end of this
year of up to GBP200 million.
"We have delivered major changes to our management and processes
and, while we have made good progress in our cost cutting and
efficiency programs, more needs to be done to ensure we drive
sustainable margin improvements within the business," Mr. East
said.
Rolls-Royce faces another difficult year. The company will have
to pay about GBP293 million this year under its bribery settlement.
Rolls-Royce admitted to illegal business practices over decades in
several markets including to win defense contracts and commercial
aircraft engine business.
The company also is bracing for the introduction of new
accounting standards that will depress near-term profit.
Rolls-Royce typically sells aircraft engines at a loss and makes up
the money later on servicing them. Rolls-Royce masks the early
losses by booking some of the assured services revenue early. Under
new accounting rules those losses will need to be reflected
immediately and services revenue can't be booked until the work
takes place.
Write to Robert Wall at robert.wall@wsj.com
(END) Dow Jones Newswires
February 14, 2017 03:27 ET (08:27 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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