TIDMRR.
RNS Number : 5603W
Rolls-Royce Holdings plc
02 August 2018
2 August 2018
ROLLS-ROYCE HOLDINGS PLC
2018 Half Year Results
Good half year progress: growing confidence for the year
Commenting on the results, Warren East, Chief Executive, said:
"We continued to make good progress in the first half. Financial
results were ahead of our expectations with strong growth from
Civil Aerospace and Power Systems and we achieved a number of
operational and technological milestones. Reflecting our progress
to date and growing confidence for the full year, we now expect
both underlying profit and cash flow for 2018 to be in the upper
half of our guidance range. We continue to be impacted by the
challenge of managing significant Trent 1000 in-service issues and
have recognised an exceptional charge of GBP554m, representing the
profit impact of that part of the total current and estimated costs
out to 2022 that is considered to be abnormal in nature."
Underlying(1) Reported
Year to 30 H1 H1 Organic H1 2018 H1 Change
June 2018 2017(2) change(3) 2017(2)
---------------------- ---------------- ------------------ -------------------- ------------------ ------------------ ------------------
Group
----------------------------------------------------------------------------------------------------------------------------------------------
Revenue
(GBPm) 7,040 6,041 +14% 7,487 6,656 +12%
---------------------- ---------------- ------------------ -------------------- ------------------ ------------------ ------------------
Operating
profit
(GBPm) 141 (84) 205 (775) (103) (672)
---------------------- ---------------- ------------------ -------------------- ------------------ ------------------ ------------------
Earnings
per share 2.5p (8.1)p n/a (52.0)p 63.9p n/a
---------------------- ---------------- ------------------ -------------------- ------------------ ------------------ ------------------
Core(4)
----------------------------------------------------------------------------------------------------------------------------------------------
Revenue
(GBPm) 6,680 5,611 +16%
---------------------- ---------------- ------------------ --------------------
Operating
profit
(GBPm) 146 (70) 183
---------------------- ---------------- ------------------ --------------------
Earnings
per share 3.1p (6.5)p n/a
---------------------- ---------------- ------------------ --------------------
(Net debt)
/ Cash
(GBPm)(5) 165 (305) n/a
---------------------- ---------------- ------------------ --------------------
Group free
cash flow
(GBPm)(6) (72) (339) 211
---------------------- ---------------- ------------------ --------------------
Core free
cash flow
(GBPm) 10 (264) 214
---------------------- ---------------- ------------------ --------------------
Payment per
share 4.6p 4.6p
---------------------- ---------------- ------------------ --------------------
For notes to table see page 6
Group financial highlights
-- Underlying revenue of GBP7,040m up 14%; reported revenue of
GBP7,487m up 12%. Civil Aerospace revenues up 26%, Power Systems up
13% and Defence remains flat
-- Underlying operating profit up GBP205m to GBP141m; strong
growth in Civil Aerospace and Power Systems; reported operating
loss of GBP775m
-- Group free cash flow improvement of GBP211m on prior year
outflow of GBP339m driven by good cash flows in Defence and reduced
outflow in Civil Aerospace
-- Exceptional charge in the income statement for Trent 1000
in-service issues of GBP554m representing that part of the total
estimated cost for the period to 2022 that is considered to be
abnormal in nature
-- Estimate of FY 2018 cash costs for Trent 1000 and Trent 900
in-service issues approximately GBP450m, in line with 15 June 2018
guidance, FY 2019 combined cash cost now expected to be at a
similar level to 2018, before declining by at least GBP100m in
2020; despite this we expect to deliver improved 2019 underlying
free cash flow compared to our guidance for 2018
-- Since the year end net funds have improved by GBP470m
primarily driven by proceeds from the disposal of L'Orange
(EUR673m) completed on 1 June 2018; Commercial Marine sale
(expected net proceeds GBP350m-GBP400m) announced on 6 July
2018
-- FY 2018 underlying profit and free cash flows; now expected
to be in the upper half of our guidance range
Group operational highlights
-- Positive early progress on the restructuring plan. Target
run-rate savings of GBP400m p.a. by end of 2020
-- Civil Aerospace widebody service revenues up 22% on an
underlying basis; large engine production ramp-up continues;
widebody deliveries up 24%; 259 engines sold in H1 2018; Trent 7000
certification; launch of Pearl engine for business jets, successful
testing of Advance3
-- Continued strong growth at Power Systems; OE and Service
growth across almost all end markets
2018 Half Year Results: Business units
Underlying
Underlying Organic op. profit Organic
revenue (GBPm) change (GBPm) change
Civil Aerospace 3,600 +26% (112) +59%
-------------------------- ---------------- -------- ------------ --------
Defence 1,415 0% 162 -3%
-------------------------- ---------------- -------- ------------ --------
Power Systems 1,471 +13% 80 +193%
-------------------------- ---------------- -------- ------------ --------
ITP Aero 375 - 40 -
-------------------------- ---------------- -------- ------------ --------
Corporate / eliminations (181) - (24) -
-------------------------- ---------------- -------- ------------ --------
Core operating business 6,680 +16% 146 183
-------------------------- ---------------- -------- ------------ --------
Commercial Marine 333 -13% (31) +32%
-------------------------- ---------------- -------- ------------ --------
L'Orange 89 - 21 -
-------------------------- ---------------- -------- ------------ --------
Other / eliminations (62) - 5 -
-------------------------- ---------------- -------- ------------ --------
Non-core business 360 - (5) -
-------------------------- ---------------- -------- ------------ --------
Total Group 7,040 +14% 141 205
-------------------------- ---------------- -------- ------------ --------
For notes to table see page 6
2018 Outlook: Increasing confidence
At our 2017 Full Year Results in March, we provided a 2018 full
year outlook for the Group excluding ITP Aero and under our prior
reporting structure. Our guidance has been updated to reflect our
revised reporting structure. We are now providing guidance on the
basis of our core business (which includes ITP Aero and excludes
non-core operations either already sold or held for sale). For our
core business, we expect 2018 underlying operating profit of around
GBP450m +/- GBP100m and underlying free cash flow of around GBP400m
+/- GBP100m.
GBPm 2018 Outlook Prior guidance
--------------------------------- ------------------------ ----------------------
Guidance on a consistent basis as provided at FY 2017 results
-----------------------------------------------------------------------------------
Group op profit (incl. non-core, GBP400m +/- GBP100m* GBP400m +/- GBP100m
excl. ITP Aero)
--------------------------------- ------------------------ ----------------------
Group FCF (incl. non-core, GBP450m +/- GBP100m* GBP450m +/- GBP100m
excl. ITP Aero)
--------------------------------- ------------------------ ----------------------
Guidance for core business only
Underlying revenue
--------------------------------- ------------------------ ----------------------
Civil Aerospace High single-digit High single-digit
growth growth
--------------------------------- ------------------------ ----------------------
Defence Stable Stable
--------------------------------- ------------------------ ----------------------
Power Systems Low double-digit growth High single-digit
growth
--------------------------------- ------------------------ ----------------------
ITP Aero Double-digit growth Double-digit growth
--------------------------------- ------------------------ ----------------------
Core business
--------------------------------- ------------------------ ----------------------
Underlying operating profit
--------------------------------- ------------------------ ----------------------
Civil Aerospace Losses up to a third Losses up to a third
lower lower
--------------------------------- ------------------------ ----------------------
Defence Margins around 150bps Margins around 250bps
lower lower
--------------------------------- ------------------------ ----------------------
Power Systems Margins stable Margins stable
--------------------------------- ------------------------ ----------------------
ITP Aero Modest decline in Modest decline in
profit profit
--------------------------------- ------------------------ ----------------------
Core business op. profit (incl. GBP450m +/- GBP100m*
ITP Aero)
--------------------------------- ------------------------ ----------------------
Core business FCF(7) GBP400m +/- GBP100m*
--------------------------------- ------------------------ ----------------------
For notes to table see page 6
* Expected to be in the upper half of the guidance range
-- Guidance for foreign exchange, net R&D, tax charge,
capital expenditure and finance charges remain unchanged for
2018
-- Percentage or absolute change figures in this document are on
an organic basis (see page 6) unless otherwise stated
Commenting on the Group's outlook, Warren East, added:
"Rolls-Royce is at a pivotal moment in its history. After a long
period of significant investment and innovation, we are poised to
become the world-leader in large aircraft engines. Now we need to
deliver the fundamental changes that will enable us to realise the
potential of our position, delivering improved returns while
continuing to invest in the innovation needed to realise our
long-term aspiration to be the world's leading industrial
technology company. Our new business structure and drive for
greater pace and simplicity, combined with our growing installed
base, means we are well placed to exceed free cash flow of GBP1bn
by 2020 and push towards our mid-term ambition for free cash flow
per share to exceed GBP1.
This is the time for execution. In Civil Aerospace our installed
widebody fleet will continue to grow and we will strive to further
reduce cash deficits on engine sales, whilst working hard to
minimise the disruption caused to our customers by in-service
issues. The benefits of creating a single Defence operation with
greater scale and the ability to offer customers a broader range of
products and services, should present us with new opportunities. In
Power Systems the continued expansion of our end markets is driving
strong volume and this, combined with the further product portfolio
rationalisation and the development of new service offerings, gives
us confidence for the full year."
Restructuring update
Since our initial announcement on 17 January 2018, we have made
progress with our plans to simplify the Group into three
customer-focused business units. Our new Defence business has been
formed by combining both our Naval and Submarine businesses with
Defence Aerospace; Civil Nuclear has been moved into Power Systems;
we successfully completed the sale of L'Orange and we announced an
agreement to sell Commercial Marine.
While we are determined to establish a strong foundation for the
future of Rolls-Royce, we are also acutely aware that this
restructuring will impact 4,600 colleagues. Restructuring efforts
are now focused on removing duplication and fixing the inefficient
processes and interfaces across our business. All parts of the
business will be managed under a radically simplified structure,
alongside an operating framework that clearly outlines roles and
responsibilities.
Communication with our people is key and since the restructuring
announcement on 14 June 2018, the Executive Leadership Team has
held many face-to-face discussions with thousands of employees
across the Group, collecting feedback, helping us to set priorities
and identifying challenges ahead. This is a tremendous opportunity
to create the world's leading industrial technology company.
Trent 1000 in-service issues and costs
The Trent 1000 in-service engine issues have caused significant
disruption for a number of our customers, which we sincerely
regret. We continue to work hard to remedy this situation and have
made further good progress on the implementation of long-term
solutions in the first half of the year. We have significantly
increased our Trent 1000 maintenance and overhaul capacity, sought
ways to reduce engine shop visit turnaround times and have added
approximately 50% more turbine blade capacity since the start of
the year. We recently confirmed that we have now started
certification testing of a redesigned intermediate compressor rotor
blade for Trent 1000 Package C engines, with a redesign for Trent
1000 Package B engines to follow. In addition, as a precautionary
measure, we have launched and, are in the process of testing, a
redesign of the blade common to the Trent 1000 TEN and Trent 7000
engines. We continue to make good progress in addressing the other
known issues affecting Trent 1000 engines.
Having provided updated guidance on the cost of these actions in
2018 at our Capital Markets Event in June we are now clarifying the
incremental cost of this dynamic situation on 2019 and beyond. Our
current assessment is that the combined cash cost of both the Trent
1000 and Trent 900 in-service issues will be at a similar level in
2019 to the approximately GBP450m we expect in 2018, before
declining by at least GBP100m in 2020. We still expect to deliver
an improvement in 2019 underlying core free cash flow compared to
our guidance for 2018, marking a further step towards our 2020 free
cash flow ambition. The cash costs of the Trent 1000 and Trent 900
issues are expected to step down materially after 2020, with all
technical changes expected to be fully embodied into the Trent 1000
and Trent 900 fleets by 2022.
In H1 2018, following the Airworthiness Directives mandating
additional inspections, an exceptional charge of GBP554m has been
taken to the income statement. It reflects the impact of the
abnormal costs we are incurring to resolve the Trent 1000
in-service issues, which fall outside the scope of our normal
TotalCare costs. The charge represents around 40% of the total cash
costs expected to be incurred in resolving the Trent 1000 issues
for the period to 2022 and is not incremental to them. The
remainder of these costs will be recognised over time through our
normal contract accounting margins. Cash costs on the Trent 1000
in-service issues will continue to be fully reflected in free cash
flow.
Free cash flow improvement of GBP211m versus prior year
Overall Group free cash flow improved materially in H1, with an
outflow of GBP72m (2017: GBP(339m)). Our core business generated a
free cash inflow of GBP10m (2017 H1: GBP(264)m). The good
year-on-year cash flow improvement was driven by increased cash
flows in the Civil Aerospace aftermarket from strong growth in
engine flying hours and T&M aftermarket activity, better
deposit inflows at Defence and a more balanced profile of Civil
spare engine deliveries in H1 vs H2 than in the prior year. These
more than offset the increased level of R&D cash spend and
higher cash costs incurred on Trent 1000 and Trent 900 in-service
issues.
L'Orange disposal and announcement of sale of Commercial
Marine
The disposal of L'Orange to Woodward Inc. for EUR673m proceeds
completed on 1 June 2018. We also announced the sale of Commercial
Marine to KONGSBERG on 6 July 2018 for a total value of GBP500m,
with expected net proceeds of around GBP350m to GBP400m dependent
upon the final outturn working capital at completion. The proceeds
from these disposals will be used to strengthen our balance sheet
and provide additional capital to judiciously pursue opportunities
that will drive greater returns for the Group. Both L'Orange and
Commercial Marine have been reported as non-core businesses in our
2018 Half Year Results.
Balance sheet, capital allocation and payments to
shareholders
As we outlined at our Capital Markets Event, a disciplined
approach to capital allocation and to sustaining a healthy balance
sheet will play a major part in driving our long-term growth.
Focusing on improving our return on capital is key and implementing
a new KPI, Cash Return on Invested Capital (CROIC), will help us
drive this across the Group. Through improved free cash flow
generation, we aim to maintain a strong investment grade rating and
ultimately return to A-grade status. In the first half net funds
have improved by GBP470m to a net cash position of GBP165m. The
interim payment to shareholders is held at 4.6 pence (H1 2017: 4.6
pence). Restoring our shareholder payments to an appropriate level
over time as free cash flow grows will be a key capital allocation
priority.
Financial highlights - core business data table (unless
otherwise stated)
Financial Civil Aerospace metrics available
at Half Year
GBPm H1 2018 H1 2017(2) H1 2018 H1 2017(2)
Large engine in-service
Underlying op. profit 146 (70) fleet 4,567 4,409(8)
------------------------ -------- ----------- ------------------------- -------- -----------
Underlying profit
before tax 81 (126)
------------------------ -------- ----------- ------------------------- -------- -----------
Underlying effective
tax rate 27.2% 4.8% Large engines deliveries 259 209
------------------------ -------- ----------- ------------------------- -------- -----------
Gross R&D spend 663 620
------------------------ -------- ----------- ------------------------- -------- -----------
Large engine invoiced
Net R&D spend 518 442 flying hours 6.9m 5.8m
------------------------ -------- ----------- ------------------------- -------- -----------
R&D capitalisation 239 84
------------------------ -------- ----------- ------------------------- -------- -----------
Total service revenue
Capex 384 427 growth +22% n/a
------------------------ -------- ----------- ------------------------- -------- -----------
Free Cash Flow 10 (264)
------------------------ -------- ----------- ------------------------- -------- -----------
Large engine LTSA(8)
Group net debt/cash(5) 165 (305) major refurbs 137 91
------------------------ -------- ----------- ------------------------- -------- -----------
Hedge book $/GBP
average(5) 1.55 1.55
------------------------ -------- ----------- ------------------------- -------- -----------
Large engine check &
Hedge book (US$bn)(5) $37.3 $38.5 repair 242 158
------------------------ -------- ----------- ------------------------- -------- -----------
For notes to table see page 6
Key drivers of increased returns:
-- Civil Aerospace OE cash deficit per engine reduced by 15% from 2017 full year average
-- Reduction in C&A cost in Civil Aerospace and Defence;
Power Systems C&A costs increased as pay escalation not yet
offset by headcount changes, together with phasing differences
compared to 2017
-- Cash R&D costs increased as planned due to launch of new
engines. Mid-term R&D still expected to fall in-line with our
mid-term ambition
-- Progress on restructuring with consultations underway. Retain
confidence in target run-rate savings of GBP400m p.a. by end of
2020
2018 Business Unit highlights
The commentary in this section relates to the core business and
is provided on an underlying basis with year-on-year changes at
constant currency(3) .
Civil Aerospace - underlying revenue GBP3,600m, growing 26%,
underlying operating loss GBP(112m)
-- Underlying revenue growth of 26% driven by a 24% increase in
sales volumes of installed engines and spare engines, including to
joint ventures, and increased services activity
-- Underlying operating loss reduced by GBP149m to GBP(112)m
reflecting strong aftermarket trading including increased spare
parts sales, higher OE spare engine volumes and increased net
R&D capitalisation of GBP174m, offsetting GBP(154)m of contract
accounting adjustments
-- Continued expansion of the in-service fleet; widebody
underlying engine flying hours +20%; increase in major LTSA shop
visits as expected as a number of Trent 700 engine have had first
overhauls
-- Continuing progress on installed OE unit deficit reduction -
fell by 15% in the first half; cost reduction and pricing
improvements on Trent XWB-84, where we continue to work towards
break even by 2020
-- Milestone achievements in new engine programmes; launched
first of a new family of engines for business aviation with the
Pearl 15; Trent XWB-97 entered into service on the Airbus
A350-1000; Trent 7000 achieved EASA certification
Defence - underlying revenue GBP1,415m, remaining flat,
underlying operating profit GBP162m
-- Underlying revenue flat with modest increase in OE offset by
largely stable services revenues
-- Underlying operating profit down GBP6m due to higher R&D
spend reflecting ongoing future programme development partly offset
by reduced C&A
-- Progress combining our enlarged Defence business; providing integrated customer solutions
-- The MT30 has maintained its position as a core naval engine
of choice with Japan the fifth nation to select the engine for a
major naval programme
-- Partner in Team Tempest, a collaboration to develop the UK's future Combat Air Strategy
-- Orders weighted to second half with a strong pipeline in Combat, Naval and Submarines
Power Systems - underlying revenue GBP1,471m, growing +13%,
underlying operating profit GBP80m
-- Core underlying revenue increased by 13% driven by growth in
both OE 14% and services 12%; following good growth in almost all
applications from both market strength and management actions on
sales
-- Core underlying operating profit saw a material improvement
on the prior year driven primarily by higher volumes; 180bps rise
in underlying gross margin to 24.1%
-- Growth in digitalisation increasing fleet connectivity;
recent launch of pilot Factory of the Future and Service of the
Future to better align internal processes and customer demands
-- Recent launch of pioneering Series 4000 marine gas engine
demonstrates capability in meeting stringent emissions
regulation
-- Full year order coverage currently over 80% versus circa 70% in prior year
-- Meaningful progress made on MTU Yuchai Power joint venture as
part of wider growth strategy in China
ITP Aero - underlying revenue GBP375m, growth of 19%, underlying
operating profit GBP40m
-- Strong revenue progress in H1 to GBP375m driven by higher
Civil Aerospace OE and aftermarket revenues primarily on
Rolls-Royce related programmes
-- Significantly improved underlying operating profit in H1,
increasing GBP32m to GBP40m reflecting the higher Civil Aerospace
revenues and better product mix in the period
-- Confidence in the full year outlook
Reported Group results
The reported loss before tax was GBP(1,262)m, a significant
decrease compared to the 2017 half year profit before tax of
GBP1,444m. The principal differences are: (i) the improvements in
operational performances as described earlier; (ii) a positive
impact from measuring revenues at spot rates rather than rates
achieved on hedging of GBP447m (H1 2017: GBP615m); (iii) a loss
included in profit before tax of GBP683m (H1 2017 gain of
GBP1,682m) including negative FX mark-to-market adjustment on the
Group's hedge books of GBP854m (H1 2017: gain of GBP1,407m) and
gains on derivatives settled during the period of GBP240m (H1 2017:
GBP342m); (iv) the exceptional charge of GBP554m relating to the
Trent 1000 engine, described on page 8; (v) the amortisation of
assets recognised under acquisition accounts of GBP124m (H1 2017
GBP62m); (vi) exceptional restructuring charges of GBP179m (H1 2017
GBP31m), described on page 8; and (vii) a gain of GBP358m on the
disposal of L'Orange in June 2018 and the write down of Commercial
Marine goodwill by GBP160m to the expected disposal value as these
assets have been reclassified as 'held for sale'. Further details
are shown on page 19.
Notes to financial tables on pages 1-4:
(1) Underlying: for definition see Note 2 on page 30
(2) All prior year comparatives have been restated for IFRS15
see Note 16 on page 45
(3) Organic change at constant translational currency ('constant
currency') by applying 2017 rates to 2018 numbers and excluding
M&A, specifically ITP Aero and L'Orange
(4) Core Group includes Civil Aerospace, Defence, Power Systems
and ITP Aero and excludes L'Orange and Commercial Marine
(5) Comparators at FY 2017 position
(6) Free cash flow is defined as operating cash after capital
expenditure, pensions and taxes, before payments to shareholders
and acquisitions & disposals. The derivation of free cash flow
from the cash flow statement is shown on page 43
(7) Free cash flow outlook includes in-service engine costs as
outlined on page 3
(8) LTSA is long-term service agreement
This announcement has been determined to contain inside
information.
Enquiries:
Investors: Media:
Jennifer Ramsey +44 20 7227 9087 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 (BST) today. Details of how
to join the event online are provided below. Downloadable materials
will be available on the Investor Relations section of the
Rolls-Royce website from the start of the event.
Online webcast registration details for 2 August
presentation
To register for the live webcast, including Q&A
participation, please visit the following link:
https://edge.media-server.com/m6/p/8wxstddj
Please use this same link to access the webcast replay which
will be made available shortly after the event concludes.
Core Trading Summary
The P&L table below and all commentary relate to the
underlying performance of the core business, and percentage or
absolute change figures in this document are on an organic basis,
unless otherwise stated.
Summary income statement: Core business
GBPm H1 2018 H1 2017 Change Organic change*
------------------------------- -------- -------- -------- ----------------
Underlying revenue 6,680 5,611 +19% +16%
------------------------------- -------- -------- -------- ----------------
Underlying OE revenue 3,247 2,594 +25% +19%
------------------------------- -------- -------- -------- ----------------
Underlying services revenue 3,433 3,017 +14% +14%
------------------------------- -------- -------- -------- ----------------
Underlying gross profit 870 712 +22% +12%
------------------------------- -------- -------- -------- ----------------
Gross margin % 13.0% 12.7% +30bps -50bps
------------------------------- -------- -------- -------- ----------------
Commercial and administration
costs (479) (436) +10% +4%
------------------------------- -------- -------- -------- ----------------
Research and development
costs (296) (396) -25% -28%
------------------------------- -------- -------- -------- ----------------
Joint ventures and associates 51 50 +2% +8%
------------------------------- -------- -------- -------- ----------------
Underlying operating profit 146 (70) 216 183
------------------------------- -------- -------- -------- ----------------
Underlying operating margin 2.2% -1.2% +340bps +300bps
------------------------------- -------- -------- -------- ----------------
Financing costs (65) (56) +16% +2%
------------------------------- -------- -------- -------- ----------------
Underlying profit before
tax 81 (126) 207 182
------------------------------- -------- -------- -------- ----------------
Tax (22) 6 - -
------------------------------- -------- -------- -------- ----------------
Underlying profit for H1 59 (120) - n/a
------------------------------- -------- -------- -------- ----------------
Underlying earnings per
share 3.1p (6.5)p n/a n/a
------------------------------- -------- -------- -------- ----------------
Free cash flow 10 (264) 274 -
------------------------------- -------- -------- -------- ----------------
*Organic change - 2018 excludes ITP Aero in order to be
comparable to 2017
Underlying revenue up 16%
Underlying revenue rose 16% led by good growth in both Civil
Aerospace and Power Systems. Civil Aerospace revenue increased 26%
driven by higher invoiced volumes of both installed and spare
engines together with increased services activity. Strong growth in
engine flying hours continued. Power Systems delivered good
progress, up 13%, with growth across almost all of its end markets
driving double-digit growth in both OE and services revenues.
Defence revenue remained stable in H1, with modest growth in OE
offsetting a small decline in aftermarket due to Submarines. Civil
Aerospace production ramp up continues. Widebody invoiced volumes
rose by 50 engines to 259, reflecting good growth in both installed
and spare engines, including higher sales to joint ventures - with
a much more balanced delivery profile of spare engines H1:H2 this
year relative to 2017.
Underlying gross profit up 12%
Underlying gross profit rose 12% to GBP870m, with gross margins
of 13% driven by Power Systems, reflecting volume growth and
improved factory utilisation. Civil Aerospace gross profit was
broadly flat, with strong aftermarket trading including increased
sales of spare parts for mature engines and higher OE spare engine
volumes offsetting a large negative contract accounting adjustment
of GBP(154)m (vs GBP(90)m in H1 2017).
Self-funded R&D cash spend up 14%; P&L charge down
28%
Gross research & development expenditure grew GBP44m to
GBP663m. After funding from customers and other third parties,
self-funded cash R&D spend rose 14% to GBP518m, reflecting
increased investment on new engine demonstrators and technology for
future products including the new business aviation Pearl family of
engines and UltraFan / Advance3 in Civil Aerospace. Capitalisation
of R&D rose from GBP84m to GBP239m consistent with the revised
R&D policy application as outlined at our FY17 results (see
Note 1). This led to a reduction in R&D charge to the income
statement of GBP113m to GBP296m.
C&A costs up 4%
Commercial & administration costs were GBP479m, up GBP18m on
the prior year driven by Power Systems where pay escalation was not
yet offset by headcount changes, together with phasing differences
compared to 2017. Within our other businesses, C&A costs were
modestly lower in Defence and Civil Aerospace reflecting good
discretionary spend control. Over the mid-term, as restructuring
benefits start to accelerate, we continue to target a reduction in
C&A costs.
Underlying operating profit up GBP183m
Group underlying operating profit saw a material GBP183m
improvement on the prior year to GBP146m, reflecting good profit
growth at Power Systems of GBP52m to GBP80m led by higher volumes
and an improvement at Civil Aerospace, where the operating loss
reduced by GBP149m to a GBP112m loss in H1, reflecting a number of
factors:
-- Good aftermarket growth led by higher spare parts sales for mature widebody engines
-- Increased spare engine deliveries (reflecting a better H1:H2
balance to these than in prior year) which more than offset
increased volumes of loss making installed OE engines
-- The increased level of net capitalised R&D contributed
GBP173m more than the prior year driven primarily by the policy
application change which was absent from H1 2017
-- These more than offset the impact of higher negative contract
accounting adjustments, with a GBP(154)m impact in H1 vs GBP(90)m
in the prior year
Interest
Interest and other financial costs marginally increased
year-on-year by GBP1m to GBP65m. Net interest payable increased by
GBP4m whilst other underlying financing costs reduced by GBP3m.
Taxation
Core underlying income statement tax charge was GBP22m vs a
GBP6m credit in H1 2017, a core underlying rate of 27.2% compared
with 4.8% in H1 2017.
Exceptional charge on Trent 1000
In H1 2018, an exceptional charge of GBP554m has been taken to
the income statement. It reflects the income statement impact of
the abnormal costs we are incurring to resolve the Trent 1000
in-service issues, which fall outside the scope of our normal
TotalCare costs. The charge represents around 40% of the total cash
costs expected to be incurred in resolving the Trent 1000 issues
for the period to 2022 and is not incremental to them. The
remainder of these costs will be recognised over time through our
normal contract accounting margins. Cash costs on the Trent 1000
in-service issues will continue to be fully reflected in underlying
free cash flow.
Exceptional restructuring charge
An exceptional restructuring charge of GBP179m was recognised in
the first half (H1 2017: GBP31m), of which GBP47m relates to
restructuring programmes that are already in place at Power Systems
and Defence, reflecting actions to remove cost and improve
operational efficiency. GBP132m relates to the cost of
restructuring already disclosed at the Capital Markets Event and
reflects the maturity of the restructuring plans. As we disclosed,
the total cash cost to implement this restructuring is expected to
be around GBP500m with approximately 25% of that in 2018 and the
remainder in 2019 and 2020.
Summary funds flow: Group
GBPm H1 2018 H1 2017 Change
--------------------------------- -------- -------- -------
Underlying profit before tax
- Group 73 (143) 216
--------------------------------- -------- -------- -------
Depreciation & amortisation 313 331 (18)
--------------------------------- -------- -------- -------
Movement in net working capital 129 324 (195)
--------------------------------- -------- -------- -------
Expenditure on PPE & intangible
assets (669) (599) (70)
--------------------------------- -------- -------- -------
Other 128 (169) 297
--------------------------------- -------- -------- -------
Trading cash flow - Group (26) (256) 230
--------------------------------- -------- -------- -------
Taxation paid & pensions* (46) (83) 37
--------------------------------- -------- -------- -------
Free cash flow - Group (72) (339) 267
--------------------------------- -------- -------- -------
Of which: Free cash flow - Core
business 10 (264) 274
--------------------------------- -------- -------- -------
Shareholder payments (85) (85) -
--------------------------------- -------- -------- -------
Payment of financial penalties
& other** 13 (262) 275
--------------------------------- -------- -------- -------
Foreign exchange 30 (20) 50
--------------------------------- -------- -------- -------
L'Orange disposal proceeds 584 - 584
--------------------------------- -------- -------- -------
Change in net funds 470 (706)
--------------------------------- -------- -------- -------
*Includes contributions to defined benefits pensions in excess
of underlying PBT charge
**Includes net funds acquired/acquisitions and Other Items
Group free cash flow improvement of GBP211m versus prior
year
Overall Group free cash flow improved materially in H1, with an
outflow of GBP72m (H1 2017: GBP(339m)). Our core business generated
free cash flow of GBP10m (H1 2017: GBP(264)m). The good
year-on-year cash flow improvement was driven by increased cash
flows in the Civil Aerospace aftermarket from strong growth in
engine flying hours and T&M aftermarket activity, better
deposit inflows at Defence and a more balanced profile of Civil
spare engine deliveries in H1 versus H2 than in the prior year.
These more than offset the increased level of R&D cash spend
and higher cash costs incurred on Trent 1000 and Trent 900
in-service issues.
Working capital contribution
The working capital contribution was GBP129m positive to cash
flow in H1, well below the prior year of GBP324m. Key drivers were
the strong growth in engine flying hour receipts in advance of
revenues being recognised, more than offsetting the growth in
inventories in the period. A full description of working capital
movement is provided on page 21.
Payment to shareholders held flat at 4.6p per share
For H1 2018 the final payment to shareholders is held at 4.6
pence (H1 2017: 4.6 pence), a cash cost of GBP86m. Restoring our
shareholder payments to an appropriate level over time as free cash
flow grows will be a key capital allocation priority.
Group net debt
At H1 2018 the Group moved to a net cash position of GBP165m
(2017 Full Year: GBP(305)m) largely reflecting the EUR673m proceeds
from the sale of L'Orange which was completed on 1 June 2018, group
free cash outflow of GBP72m and shareholder payments of GBP85m.
Credit rating
The Group is committed to maintaining a robust balance sheet
with an investment-grade credit rating. We aim to maintain stable
ratings in the single A rating. We believe that this is important
for our customers given that we deliver high-performance products
and support for equipment which will be in operation for
decades.
IFRS 15
Following transition to IFRS 15 on 1 January 2018 on a 'full
retrospective' basis the financial results for both the current and
comparative period are disclosed on an IFRS 15 basis. The impact of
IFRS 15 on our accounting policies and our financial results in
2017 are shown on pages 28 and 45, respectively.
Foreign exchange
The Group hedges transactional foreign exchange exposures to
reduce volatility of revenues and costs. The most significant
exposure is net US dollar income which is converted into GBP
(currently approximately $5-6bn per year and forecast to increase
over time). The Group has a hedge book of $37.3bn (at an average
rate of USD:GBP 1.55) covering this exposure. We expect the
achieved GBP/$ hedge rate to remain unchanged at around USD:GBP
1.54 through to 2020.
Board update
During the first six months of the year we have appointed one
new Non-Executive Director to the Board. Nick Luff was appointed
with effect from the close of the Annual General Meeting on 3 May
2018 and joined the Nominations & Governance and Audit
Committees.
Civil Aerospace overview
Financial overview
GBPm H1 2018 H1 2017 Change Organic change
------------------------------- --------- --------- -------- ---------------
Engine deliveries (volume) 365 308 +19% +19%
------------------------------- --------- --------- -------- ---------------
Underlying revenue 3,600 2,858 +26% +26%
------------------------------- --------- --------- -------- ---------------
Underlying OE revenue 1,530 1,151 +33% +32%
------------------------------- --------- --------- -------- ---------------
Underlying services revenue 2,070 1,707 +21% +22%
------------------------------- --------- --------- -------- ---------------
Underlying gross profit 148 137 +8% +12%
------------------------------- --------- --------- -------- ---------------
Gross margin % 4.1% 4.8% -70bps -50bps
------------------------------- --------- --------- -------- ---------------
Commercial and administrative (157) (155) +1% +1%
------------------------------- --------- --------- -------- ---------------
Research and development
cost (152) (280) -46% -46%
------------------------------- --------- --------- -------- ---------------
Joint ventures and associates 49 48 +2% +6%
------------------------------- --------- --------- -------- ---------------
Underlying operating profit (112) (250) 138 149
------------------------------- --------- --------- -------- ---------------
Underlying operating margin
% -3.1% -8.7% +560bps +590bps
------------------------------- --------- --------- -------- ---------------
Underlying revenue
GBPm H1 2018 H1 2017 Change Organic
change
-------------------- --------------- -------------- -------- --------
Original Equipment 1,530 1,151 33% 32%
-------------------- --------------- -------------- -------- --------
Large engine 1,157 763 52% 51%
-------------------- --------------- -------------- -------- --------
Business aviation 305 284 7% 5%
-------------------- --------------- -------------- -------- --------
V2500 68 104 -35% -35%
-------------------- --------------- -------------- -------- --------
Services 2,070 1,707 21% 22%
-------------------- --------------- -------------- -------- --------
Large engine 1,328 1,061 25% 25%
-------------------- --------------- -------------- -------- --------
Business aviation 201 175 15% 18%
-------------------- --------------- -------------- -------- --------
Regional 151 138 9% 14%
-------------------- --------------- -------------- -------- --------
V2500 390 333 17% 17%
-------------------- --------------- -------------- -------- --------
Underlying revenue increased 26% to 3,600m, reflecting growth in
OE, up 32% to GBP1,530m, and in services, up 22% to GBP2,070m. This
was driven by the continued ramp up of large engine production with
deliveries growing to 259 from 209 in the prior year and strong
year-on-year growth in spare engine OE sales to support the growing
in-service fleet. Revenue growth from increased sales of spare
engines to joint ventures contributed GBP141m to revenue growth in
H1. The rise in OE deliveries includes higher sales of Trent 1000
engines for the Boeing 787 and Trent XWB, including the new Trent
XWB-97 for the Airbus A350-1000, which entered into service earlier
in the year.
Large engine service revenue increased 25% to GBP1,328m (H1
2017: GBP1,061m) driven by higher shop visit volumes, with 137
major LTSA shop visits (H1 2017: 91) as expected as a number of
Trent 700 engine have had first overhauls combined with growth in
spare parts sales and increased repair activity on engines not
covered by LTSAs, notably RB211-535s.
Within business aviation, OE sales were 5% higher largely driven
by increased engine sales to Bombardier and Gulfstream for large
cabin aircraft. The 18% increase in service revenue reflects the
impact of lower servicing costs for long-term support contracts
which generated a positive contract accounting impact on revenue.
The level of service activity on business aviation engines has
remained broadly stable.
The 14% increase in regional revenue was driven by higher sales
of spare parts to third party MRO bases. On the V2500, OE revenue
was 35% lower, reflecting production slowdown on the Airbus
A320ceo. The 17% increase in V2500 service revenue to GBP390m was
driven by increased servicing and higher spare part sales. The
payment from IAE for flying hours remained broadly stable.
Underlying operating profit
The underlying operating loss of GBP(112)m improved by GBP149m.
Gross profit increased 12% to GBP148m with gross margins falling
50bps to 4.1%. Strong servicing activity driving increased spare
part sales and higher profit from increased spare OE sales was
partly offset by a materially higher negative impact from long-term
contract assumption changes. Under long-term accounting, a
variation in revenue or cost assumptions, up or down, can lead to
contract accounting adjustments, positive or negative, for profits
that have already been recognised over the life of a programme to
date. In the period there was a negative contract accounting impact
of GBP(154)m (2017: GBP(90)m) which comprised three components:
-- Life-cycle cost benefits of GBP19m primarily reflecting lower
servicing costs for business aviation
-- Higher technical costs of GBP(71)m to reflect the reassessed
costs of technical issues across various engine programmes
including the additional inspection requirements on the Trent
1000
-- Higher costs of GBP(102)m reflecting the latest information
around future aircraft utilisation patterns and the resultant
effects on shop visit cost and efficiency
GBPm H1 2018 H1 2017
--------------------------------------- -------- --------
Life-cycle costs 19 (14)
--------------------------------------- -------- --------
Technical costs (71) (9)
--------------------------------------- -------- --------
Operational changes (102) (67)
--------------------------------------- -------- --------
Total contract accounting adjustments (154) (90)
--------------------------------------- -------- --------
Investment in self-funded R&D rose by GBP44m, reflecting
increased investment in the new family of engines for business
aviation engines and next generation technology, including for the
UltraFan demonstrator. This was more than offset by an increase in
R&D capitalisation and amortisation of GBP174m largely
reflecting the stage of capitalisation of a number of development
programmes which were applied from H2 2017. Overall the expensed
R&D charge in the first half reduced from GBP(280)m in 2017 to
GBP(152)m in H1 2018. While C&A charges of GBP(157)m were 1%
higher, this reflected higher restructuring costs. Excluding such
restructuring, C&A costs were GBP1m lower year-on-year. Profit
from joint ventures and associates of GBP49m was 6% higher due to
higher shop visit volumes and a change in the mix of work in joint
venture overhaul bases. 2017 profit from joint ventures included
GBP8m from ITP Aero when it was a still a joint venture and
reported within Civil Aerospace.
Trent 1000 in-service update
Since 2016, we have been undertaking a proactive maintenance
programme on the Trent 1000 to address lower than expected
durability of a small number of parts. This has caused disruption
to customers which we sincerely regret. On 7 March 2018, with our
FY 2017 results, we provided further detail as we progressed our
understanding of the technical issues impacting compressor rotor
blades, and intermediate and high pressure turbine blades within
the Trent 1000. We reported that GBP119m of cash costs were
incurred in 2017 in relation to accelerated maintenance activities
on the Trent 1000.
At the time of our FY 2017 results, we provided details of the
anticipated future annual cash impact of the in-service issues with
the Trent 1000 and issues with the durability of high pressure
turbine blades for Trent 900. The impact was expected to broadly
double in 2018 from the GBP170m incurred in 2017 across both the
Trent 1000 and Trent 900, before falling by around GBP100m in 2019.
The majority of the work is expected to have been undertaken in
2018 and 2019 and be fully complete by 2022.
On 13 April 2018, we announced the decision to undertake more
frequent inspections of the compressors of our fleet of 386 Trent
1000 Package C engines. This was followed by EASA and the FAA
issuing airworthiness directives related to repeat inspection
requirements for Package C compressors. We said that we would
mitigate the incremental cash cost of this accelerated inspection
regime by reprioritising various items of discretionary spend. On
11 June 2018 we reported that a similar durability issue had been
identified on a small number of high life Package B engines and we
had agreed with the regulatory authorities to carry out a one-off
inspection of the whole fleet of 166 Package B engines. We have
since agreed with the authorities to carry out a regular inspection
regime which we will manage as part of our ongoing maintenance
programme.
On 15 June 2018, at our Capital Markets Event, we reported that
our current assessment was that the further issues encountered
since our FY 2017 results could lead to combined additional 2018
cash costs for both the Trent 1000 and Trent 900 in-service issues
of around GBP100m on top of the doubling we had already guided,
thus taking the total to approximately GBP450m. We added that we
had successfully enacted a number of short-term discretionary cost
mitigation actions and free cash flow guidance for 2018 was
maintained unchanged at around GBP450m +/- GBP100m.
Having provided updated guidance on the cost of these actions in
2018 at our Capital Markets Event in June we are now clarifying the
incremental cost of this dynamic situation on 2019 and beyond. Our
current assessment is that the combined cash cost of both the Trent
1000 and Trent 900 in-service issues will be at a similar level in
2019 to the approximately GBP450m we expect in 2018, before
declining by at least GBP100m in 2020. We still expect to deliver
an improvement in 2019 underlying core free cash flow compared to
our guidance for 2018, marking a further step towards our 2020 free
cash flow ambition. The cash costs of the Trent 1000 and Trent 900
issues are expected to step down materially after 2020, with all
technical changes expected to be fully embodied into the Trent 1000
and Trent 900 fleets by 2022.
The Trent 1000 in-service engine issues have caused significant
disruption for a number of our customers, which we sincerely
regret. We continue to work hard to remedy this situation and have
made further good progress on the implementation of long-term
solutions in the first half of the year. We have significantly
increased our Trent 1000 maintenance and overhaul capacity, sought
ways to reduce engine shop visit turnaround times and have added
approximately 50% more turbine blade capacity since the start of
the year. We recently confirmed that we have now started
certification testing of a redesigned intermediate compressor rotor
blade for Trent 1000 Package C engines, with a redesign for Trent
1000 Package B engines to follow. In addition, as a precautionary
measure, we have launched and, are in the process of testing, a
redesign of the blade common to the Trent 1000 TEN and Trent 7000
engines. We continue to make good progress in addressing the other
known issues affecting Trent 1000 engines.
Trent 1000 exceptional charge
In H1 2018, an exceptional charge of GBP554m has been taken to
the income statement. It reflects the impact of the abnormal costs
we are incurring to resolve the Trent 1000 in-service issues, which
fall outside the scope of our normal TotalCare costs. The charge
represents around 40% of the total cash costs expected to be
incurred in resolving the Trent 1000 issues for the period to 2022
and is not incremental to them. The remainder of these costs will
be recognised over time through our normal contract accounting
margins. The treatment of such a charge as exceptional reflects a
number of factors, primarily:
-- The unprecedented nature of the issues with the Trent 1000 -
being a fleet-wide issue of an unusual and abnormal scale,
impacting multiple airline customers and resulting in a significant
level of aircraft on the ground
-- The fact that this technical issue has resulted in a number
of separate airworthiness directives and non-modification service
bulletins - a highly abnormal situation for Rolls-Royce
The costs which have been included in the exceptional charge
cover those which we would not typically incur, such as responding
to customer claims in connection with the significant disruption
caused and wastage costs related to remediation shop visits, i.e.
wasted material and labour to fulfil the contract that are not
reflected in the price of the contract.
All other normal course of business costs associated with
TotalCare service provision on Trent 1000 engines will continue to
be expensed through the income statement within underlying profit
in each financial period, in line with our normal contract
accounting approach. Cash costs on the Trent 1000 in-service issues
will continue to be fully reflected in underlying free cash
flow.
Operational and strategic review
The long term trends driving demand for growth in passenger
aircraft remain strong, in particular, a growing aspirational and
mobile middle-class. We continue to expect strong widebody airframe
demand, with an increased focus on newer, more fuel-efficient
aircraft, which will support our continued growth in market share
and installed base, delivering strong service revenues for decades.
The total widebody engines on order is 2,416. In H1 2018, there
were 259 widebody engines delivered and 185 orders were placed,
including 106 Trent XWB engines and 46 Trent 7000 engines.
Our in-service large engine fleet grew by 4% in the first half
to 4,567 and wide-body engine flying hours increased 20%, driven by
growth in our Trent 700, Trent 1000 and Trent XWB fleets. The Trent
700 fleet, which now represents 35% of our in-service fleet with
over 1,600 engines in service, achieved its 50 millionth flying
hour in June. The Trent 700 engine which is known for its
dependability and has become the engine of choice for Airbus
A330ceo customers, helping us increase our in-service widebody
passenger aircraft market share from 14% in 1995, when it was
introduced, to 34% today. Our Trent XWB-84, which now represents 8%
of our in-service widebody fleet, and has achieved over 2 million
flying hours with excellent levels of reliability. With over 1,300
engines on order, our Trent XWB engines will be a key driver of the
continued growth in our market share to over 50% in the early
2020's.
Our strong position in new widebody aircraft was underpinned by
progress with three new engines in the period. We powered the first
test flight and entry into service of the Boeing 787-10 Dreamliner
with delivery of the first Trent 1000 TEN powered Boeing 787-10 to
Singapore Airlines. The Trent XWB-97 is now powering three Airbus
A350-1000 aircraft with full ETOPs capability and we achieved full
certification of the Trent 7000 which will power the Airbus
A330neo, with entry into service expected later this summer.
We have seen positive signs of recovery in the business aviation
market and are well placed to respond with our new family of
engines, launched earlier this year with the announcement of the
Pearl 15, which will power the new Bombardier Global 5500 and
Global 6500 aircraft. This supports our strategy of regaining
market share and reaffirms our position as the top engine supplier
in the long range, large cabin sector of the market.
We have made good progress on our future technology programmes,
including successfully starting icing tests on our new lean burn
and low emission combustion system (ALECSys), which will be used in
our UltraFan engine, as well as running our Advance3 engine
demonstrator at full power for the first time.
We have taken steps to increase our capacity for engine testing
in the first half. We signed a lease with American Airlines for a
testbed in Texas which will be used for endurance testing on large
engines. We also entered into an agreement with Thai Airways
International to support maturity testing on our Trent XWB engines.
In addition, we have started work to support the construction of a
new testbed in Derby which will provide testing capability for the
next generation of engines.
We continue to design and deliver new digital services for our
customers, under the banner of our IntelligentEngine vision. With
the support of our newly-established R(2) DataLabs team we are able
to combine our pioneering technology with advancements in the
digital realm to deliver greater reliability, efficiency and value
for our customers.
Defence overview
Financial overview
GBPm H1 2018 H1 2017 Change Organic change
------------------------------- --------- -------- -------- ---------------
Aero engine deliveries
(volumes) 258 273 -5% -5%
------------------------------- --------- -------- -------- ---------------
Underlying revenue 1,415 1,478 -4% -
------------------------------- --------- -------- -------- ---------------
Underlying OE revenue 608 629 -3% +1%
------------------------------- --------- -------- -------- ---------------
Underlying services revenue 807 849 -5% -1%
------------------------------- --------- -------- -------- ---------------
Underlying gross profit 281 292 -4% +1%
------------------------------- --------- -------- -------- ---------------
Gross margin % 19.9% 19.8% +10bps +30bps
------------------------------- --------- -------- -------- ---------------
Commercial and administrative (77) (83) -7% -5%
------------------------------- --------- -------- -------- ---------------
Research and development
cost (44) (32) +38% +41%
------------------------------- --------- -------- -------- ---------------
Joint ventures and associates 2 3 -33% -33%
------------------------------- --------- -------- -------- ---------------
Underlying operating profit 162 180 -10% -3%
------------------------------- --------- -------- -------- ---------------
Underlying operating margin
% 11.4% 12.2% -80bps -40bps
------------------------------- --------- -------- -------- ---------------
Underlying revenue
Underlying revenue of GBP1,415m was broadly flat compared to the
prior year on a constant currency basis. OE revenue remained
broadly unchanged as combat volumes reduced after the completion of
the Oman EJ200 production contract in 2017. This was offset by
increased demand for transport engines such as the Multi-Role
Tanker Transport (MRTT) aircraft and AE2100 variants and an OE
contract for the UK's Dreadnought submarine programme. Service
revenue was largely flat as increased Long Term Service Agreement
(LTSA) revenues driven by EJ200 and Adour were offset by lower
service revenue related to the phasing of work on UK
submarines.
Underlying operating profit
Underlying operating profit of GBP162m was GBP6m lower than the
prior year. Gross profit of GBP281m grew 1% driven by increased
sales of MRTT engines and higher LTSA margin improvements of GBP28m
(2017: GBP21m). This is reflective of cost improvements and
increased flying hours on combat and patrol contracts, partially
offset by lower OE combat volumes and lower margin on a bridging
contract following completion of a submarine service agreement in
the prior year.
An increase in R&D spend of GBP13m largely reflects ongoing
future programmes across our Defence portfolio. C&A costs were
GBP4m lower as a result of actions taken across the business to
manage discretionary spend.
Operational and strategic review
Following the Group's restructuring announcement in January of
this year, Tom Bell, previously Global Sales & Marketing for
Defense, Space & Security at The Boeing Company, was appointed
to lead the enlarged Defence business comprising Defence Aerospace,
Submarine and Naval operations. During the first six months,
meaningful progress has been made on integration in order to
identify and pursue cost efficiency, leveraging our technology and
operational experience across this enlarged business to provide
integrated solutions to better serve our customers.
As part of this restructuring, Defence has streamlined to a
five-layer organisation from top to bottom, focused upon Defence
Programmes, Services and Submarine activities with aligned
functional support. Opportunities have been actively pursued to
incorporate elements of work previously done by central functions.
An example of this is a move to combine the former head office
function of the US Government Relations and the US Customer
Business team within Defence in order to better serve one of the
business' key customers.
Outlook for full year orders is positive, with a strong pipeline
of expected opportunity in Combat, Naval and Submarines. Orders
secured in the first half of 2018 reflect activity across markets
to secure aftermarket contract renewals such as with the US
Department of Defense to support in-service fleets, ongoing work
related to the UK's submarine programmes and other smaller
contracts. Notable orders include GBP300m of contracts in
Submarines representing orders for decommissioning, development and
sustainment activity in the near-term, and a sustainment agreement
worth up to $420m over six years to support both US Air Force and
Navy AE3007H engines. This is part of our innovative public-private
partnership first formed in 2016 at Tinker Air Force Base in
Oklahoma, US, which enables closer collaboration with our customer
to maximise engine availability.
Naval continues to see good demand for its MT30 marine gas
turbine with an initial MT30 powered Daegu-class frigate delivered
to the Republic of Korea Navy, marking the first deployment of this
engine outside the UK and US markets. In June, Japan was the fifth
nation to select the MT30 engine for a major naval ship programme,
while the Australian government's selection of the Type 26 Global
Combat Ship as the preferred design for the SEA 5000 Future Frigate
program presents further opportunity to provide a naval propulsion
system with the MT30 engine at its core.
Operationally, there was solid progress across Defence.
LiftSystem(TM) continued its good in-service fleet performance with
the Royal Air Force deploying the first four F-35B Lightning II
aircraft to the UK. EJ200 production volumes remain at a lower
level; although the expectation remains for further orders
following agreement of a contract to purchase 24 aircraft in
December 2017 from the State of Qatar, and the signing of a
memorandum of understanding to purchase a second batch of 48
aircraft for the Kingdom of Saudi Arabia.
We continue positioning the business to maximise the strengths
of our teams to develop strong long-term relationships with current
and future customers. This includes the modernisation of the
Indianapolis facility, which continues on track to achieve its 2018
milestones, including substantial completion of construction and
refurbishment and a quarter of manufacturing relocation. In
addition, the business made good progress towards securing a
substantive role to deliver a new combat power and propulsion
system through its position as one of four partner companies in
Team Tempest, a collaboration set up to explore a range of concepts
as part of UK's Future Combat Air strategy. The signature of a
contract during the Farnborough Airshow allows us to further
advance our combat R&D activities and mature key next
generation power and propulsion capabilities.
Power Systems overview
Financial overview
GBPm H1 2018 H1 2017 Change Organic
change
------------------------------- --------- -------- -------- --------
Underlying revenue 1,471 1,275 +15% +13%
------------------------------- --------- -------- -------- --------
Underlying OE revenue 945 814 +16% +14%
------------------------------- --------- -------- -------- --------
Underlying services revenue 526 461 +14% +12%
------------------------------- --------- -------- -------- --------
Underlying gross profit 354 283 +25% +23%
------------------------------- --------- -------- -------- --------
Gross margin % 24.1% 22.2% +190bps +180bps
------------------------------- --------- -------- -------- --------
Commercial and administrative (188) (172) +9% +8%
------------------------------- --------- -------- -------- --------
Research and development
cost (86) (84) +2% 0%
------------------------------- --------- -------- -------- --------
Joint ventures and associates - (1) n/a n/a
------------------------------- --------- -------- -------- --------
Underlying operating profit 80 26 +208% +193%
------------------------------- --------- -------- -------- --------
Underlying operating margin
% 5.4% 2.0% +340bps +330bps
------------------------------- --------- -------- -------- --------
Underlying revenue
Underlying revenue was GBP1,471m, an increase of 13%. This
excludes L'Orange which is now treated as non-core following its
disposal in June. OE rose 14% with good growth in almost all
segments, notably led by improved commodity end markets, Medium
Speed Land, Rail and Marine / Government project wins. Power
Generation was the only end market not to experience growth in H1,
solely due to the tough comparison base after the high level of
demand seen in 2017 from Chinese Telecoms related sales. Services
revenue increased 12% with improved commodity markets driving
higher engine running hours and hence improved spare parts and
engine remanufacturing demand, particularly in the US.
Underlying operating profit
Overall, excluding L'Orange, underlying operating profit rose by
GBP52m to GBP80m, 193% growth, reflecting the benefits of higher
volumes. This also drove an increase in gross margin, up 180bps to
24%.
C&A costs were 8% higher with pay escalation not yet offset
by headcount changes, together with phasing differences compared to
2017. Ongoing discipline around R&D investment saw costs held
broadly flat despite continued investment in future engine
platforms and in support of our electrification strategy and
engineering capabilities.
Operational and strategic review
In the first half of 2018, market conditions remained robust
across Power Systems' diverse end-markets. There was continued
demand in Power Generation, particularly for diesel powered
solutions to support infrastructure projects in emerging markets
and for gas-engine power solutions driven by increasing
availability of gas and requirements for fast response capability
to support time-critical operations. Industrial end markets remain
supported by higher commodity prices and rising demand for
solutions tailored to offshore wind markets, however challenges
remain in offshore markets, and Civil Nuclear faced some headwinds
from project delays.
Order intake was up year-on-year primarily driven by the
recovery of key markets, such as Oil & Gas, Mining and
Agriculture, and also as some customers brought forward their
orders into 2018 ahead of new emissions standards coming into
effect in 2019. Bergen land engines are notable as all sales
year-to-date have been accompanied by long term service contracts,
contributing to further growth in services. Demand for Power
Generation also continued to grow driven by an agreement signed in
July to deliver 475MW of backup capacity for Chile's national
electricity grid as part of a consortium led by TSK. Continued
strong interest from naval customers has generated a pipeline of
opportunity. Our confidence in full year delivery is underpinned by
over 80% order coverage for the full year compared to circa 70% at
the same time in the prior year.
Following the Group's restructuring announcement in January of
this year, Power Systems has achieved milestones such as the
integration of the Civil Nuclear operations and also completed the
sale of L'Orange, a fuel injector business, to Woodward Inc. for
total proceeds of EUR673m. L'Orange will remain an important
partner and supplier for Power Systems in the future through a
long-term supply agreement. Other key activities include projects
to enable greater digitalisation, increasing fleet connectivity to
support growth in the level of long-term Value Care Agreements
(VCA) covering our in-service engines. This demonstrates the strong
drive from the leadership team to transform the business into a
solutions-provider and achieve a greater share of the engine
service opportunity.
The business is implementing MTU customer service 4.0, a service
and digital strategy to transform the Power Systems service and
distribution networks is focused on improving customer interfaces
such as the opening of a new Customer Care Centre's based in
Friedrichshafen, Novi in the US, and Singapore. The recent launch
of pilot programmes will explore concepts for both the Factory of
the Future and Service of the Future, informing how the business
will align its internal processes more closely to meet customer
needs. This highlights the commitment by the business to achieving
strengthened service offerings and is complemented by further
optimisation of inventory levels to increase availability of spare
parts at the point of sale beyond 80%.
Good progress has been made to establish production capability
in lower cost locations closer to key end markets. In early 2018,
the joint venture MTU Yuchai Power began localised production of
the MTU Series 4000 diesel engines under license as the business
took receipt of the first engine from the production line in the
city of Yulin, China, and production continues to ramp up. In
April, an agreement was signed with Goa Shipyard Limited to
assemble Series 8000 engines, further reinforcing a commitment to
'Make in India' after an earlier agreement to assemble Series 4000
naval engines in the country.
R&D activity focused on delivering efficient and disciplined
investment in the current and future product portfolio. The
business continued to reprioritise its product roadmap, with a
reduction in product variants of around 30% achieved since 2015,
and positioning of future products towards growth markets to
reflect the structural shift away from traditional engine
solutions. Investments focused on hybrid and gas technology with
the first prototype of a 1MWh battery storage container for
micro-grid solutions or off-grid power supply, while the launch of
the pioneering Series 4000 marine gas engine demonstrates our
capability to enable operators to meet stringent emissions
regulation.
ITP Aero overview
Financial overview
GBPm H1 2018 H1 2017* Change Organic change
------------------------------- --------- --------- -------- ---------------
Underlying revenue 375 309 +21% +19%
------------------------------- --------- --------- -------- ---------------
Underlying OE revenue 336 - - -
------------------------------- --------- --------- -------- ---------------
Underlying services revenue 39 - - -
------------------------------- --------- --------- -------- ---------------
Underlying gross profit 85 50 +70% +67%
------------------------------- --------- --------- -------- ---------------
Gross margin % 22.7% 16.2% +650bps +650bps
------------------------------- --------- --------- -------- ---------------
Commercial and administrative (31) - - -
------------------------------- --------- --------- -------- ---------------
Research and development
charge (14) - - -
------------------------------- --------- --------- -------- ---------------
Joint ventures and associates - - - -
------------------------------- --------- --------- -------- ---------------
Underlying operating profit 40 8 +400% +400%
------------------------------- --------- --------- -------- ---------------
Underlying operating margin
% 10.7% 2.6% +810bp +820bps
------------------------------- --------- --------- -------- ---------------
* ITP Aero was acquired on 19 December 2017. Prior year
comparatives are unaudited and are presented for comparison
purposes only
Underlying revenues
Underlying revenue was GBP375m, an increase of 19% versus H1
2017. Growth was led by higher engine volumes, with significant
ramp-up across various Civil Aerospace programmes in ITP Aero's
portfolio. Civil Aerospace aftermarket growth was strong, with
Defence sales modestly lower and flat revenues in MRO and
services.
Underlying operating profit
Operating profit of GBP40m was a GBP32m improvement versus H1
2017 driven by significantly improved gross margins. Civil
Aerospace was the key driver of progress driven mostly by
Rolls-Royce programmes, with a combination of higher volumes,
improved mix of engine types and a better aftermarket
performance.
Operational and strategic review
The long-term trends driving demand for growth in passenger
aircraft remain strong. The business continues to expect strong
airframe demand for both narrow and wide body aircraft, with an
increased focus on newer more fuel efficient aircraft. This,
coupled with ITP Aero's presence on newly launched platforms which
are currently ramping up, provides a solid base for ongoing growth,
particularly in Civil Aerospace.
The business continued to deliver good operational progress
underpinning production ramp-up. Production volumes have now
reached a record level, driven by the considerable increases across
Rolls-Royce and Pratt & Whitney civil engine programs, with a
solid volume base from GE and Honeywell and also at Defence. In
order to support this growth, we have continued to successfully
execute on its capital investment plans, with expansion of
production facilities in Spain and Mexico and across various
products including turbo-machinery, externals and castings.
Execution continued on our Research & Technology plan, which
includes among others, new technologies for future low pressure
turbines (both conventional and high speed designs suitable for use
in future geared drive systems). We also continue to invest in
advanced manufacturing processes, including additive manufacturing
and digitalisation.
Financial review
Reported results
The changes resulting from underlying trading are described on
pages 7 to 18.
Consistent with past practice and IFRS, we provide both reported
and underlying figures. As the Group does not generally hedge
account for forecast transactions in accordance with IFRS 9
Financial Instruments, we believe underlying figures are more
representative of the trading performance by excluding the impact
of year-end mark-to-market adjustments. In particular, the USD:GBP
hedge book has a significant impact on the reported results. In
2018, the USD:GBP rate fell from 1.35 to 1.32 while the EUR:GBP
remained stable at 1.13. The adjustments between the underlying
income statement and the reported income statement are set out in
Note 2 to the condensed consolidated financial statements. This
basis of presentation has been applied consistently.
Reconciliation between underlying and reported results
Six months to 30 June Revenue Profit before financing Financing Profit/(loss) before tax
GBPm 2018 2017 2018 2017 2018 2017 2018 2017
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
Underlying 7,040 6,041 141 (84) (68) (59) 73 (143)
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
1 Revenue recognised at
exchange rate on date of
transaction 447 615 - - - - - -
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
1, 2 Mark-to-market adjustments on
derivatives and related
foreign exchange adjustments - - 103 78 (786) 1,604 (683) 1,682
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
3 Trent 1000 exceptional charge - - (554) - - - (554) -
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
Effects of acquisition
4 accounting - - (124) (62) - - (124) (62)
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
5 Exceptional restructuring - - (179) (31) - - (179) (31)
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
6 Disposal of L'Orange - - 358 - - - 358 -
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
Impairments of Commercial
7 Marine - - (160) - - - (160) -
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
Other - - (2) (4) 9 2 7 (2)
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
Reported 7,487 6,656 (417) (103) (845) 1,547 (1,262) 1,444
---- ----------------------------- ----- ----- ------------ ----------- ----- ----- -------------- ----------
The most significant items included in the reported income
statement, but not in underlying are summarised below.
(1) The impact of measuring revenues and costs at spot rates
rather than achieved hedge rates increased revenues by GBP447m
(2017: GBP615m) and profit before financing by GBP103m (2017:
GBP78m).
(2) There was a mark to market loss on the Group's hedge book of
GBP854m (2017: gain of GBP1,407m). These reflect: the large hedge
book held by the Group (eg USD $37bn); and the weakening 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 year included in
reported financing costs.
Adjustments are also included to recognise the gain on
derivatives settled during the period (2018: GBP240m, 2017:
GBP342m) and the impact of valuation of assets and liabilities
using the spot exchange rate rather than the exchange rate that is
expected to be achieved by the use of the hedge book.
(3) As described on page 8 and the accounting policy on page 28,
the exceptional charge relating to the Trent 1000 aero engine has
been excluded from the underlying results.
(4) The effects of acquisition accounting GBP124m (2017: GBP62m)
principally relate to the amortisation of intangible assets arising
on the acquisition of Power Systems in 2013 and ITP Aero at the end
of 2017.
(5) Exceptional restructuring costs of GBP179m (2017: GBP31m).
These are costs associated with the substantial closure or exit of
a site, facility or activity related to the significant
transformation project that the business is currently undertaking.
A number of the projects within the transformation programme are
spread over several years. Of the 2018 costs GBP132m relates to the
Group Restructure announced in June 2018.
(6) The disposal of L'Orange in June 2018 gave rise to a gain of
GBP358m.
(7) As described on page 4, the sale of the Commercial Marine
business was announced on 6 July. It has been reclassified as 'held
for sale', and written down to its expected disposal value,
resulting in a loss of GBP160m.
Appropriate tax rates are applied to these additional items
included in the reported results, leading to an additional tax
credit of GBP327m (2017: charge GBP267m), the most significant
components being the mark to market adjustments (tax effect GBP134m
and GBP(249)m in 2018 and 2017 respectively), the effect of
acquisition accounting (tax effect GBP52m and GBP18m in 2018 and
2017 respectively), and the abnormal Trent 1000 costs (tax effect
GBP100m in 2018). In 2018, a gain of GBP54m was also recognised in
respect of changes in the Basque tax rates, applying to ITP
Aero.
Funds flow
Summary funds flow statement (1) Half-year to 30 June
------------------------------------------------------------------------------ ----------------------- -------
GBPm 2018 2017 Change
------------------------------------------------------------------------------ ----------- ---------- -------
Opening net (debt)/funds (305) (225)
------------------------------------------------------------------------------ ----------- ---------- -------
Closing net funds/(debt) 165 (931)
------------------------------------------------------------------------------ ----------- ---------- -------
Change in net funds 470 (706)
------------------------------------------------------------------------------ ----------- ---------- -------
Underlying profit before tax 73 (143) 216
------------------------------------------------------------------------------ ----------- ---------- -------
Depreciation and amortisation 313 331 (18)
------------------------------------------------------------------------------ ----------- ---------- -------
Movement in net working capital 129 324 (195)
------------------------------------------------------------------------------ ----------- ---------- -------
Expenditure on property, plant and equipment and intangible assets (669) (599) (70)
------------------------------------------------------------------------------ ----------- ---------- -------
Other 128 (169) 297
------------------------------------------------------------------------------ ----------- ---------- -------
Trading cash flow (26) (256) 230
------------------------------------------------------------------------------ ----------- ---------- -------
Contributions to defined benefit pensions in excess of underlying PBT charge 31 (12) 43
------------------------------------------------------------------------------ ----------- ---------- -------
Taxation paid (77) (71) (6)
------------------------------------------------------------------------------ ----------- ---------- -------
Free cash flow (72) (339) 267
------------------------------------------------------------------------------ ----------- ---------- -------
Shareholder payments (85) (85) -
------------------------------------------------------------------------------ ----------- ---------- -------
Disposal of L'Orange 584 - 584
------------------------------------------------------------------------------ ----------- ---------- -------
Other acquisitions and disposals 13 5 8
------------------------------------------------------------------------------ ----------- ---------- -------
Payment of financial penalties - (267) 267
------------------------------------------------------------------------------ ----------- ---------- -------
Foreign exchange 30 (20) 50
------------------------------------------------------------------------------ ----------- ---------- -------
Change in net funds 470 (706)
------------------------------------------------------------------------------ ----------- ---------- -------
(1) The derivation of the summary funds flow statement above
from the reported cash flow statement is included on page 44.
Movement in working capital - There was a GBP129m contribution
to free cash flow from lower working capital in H1. The main
drivers of this were:
-- inventories rose by GBP427m due to volume growth in Civil and
Power Systems and the phasing of product deliveries in Defence;
-- trade and other receivables increased GBP300m primarily
driven by an increase in risk and revenue sharing partner related
debtor balances in Civil; and
-- trade and other payables rose by GBP997m due to phasing ahead
of the H2 volume ramp up at Power Systems, underlying volume growth
in Civil and a GBP715m increase in long term contract creditor
balance in Civil, reflecting growth in EFH cash receipts in advance
of revenues being recognised and the negative GBP154m prior year
contract catch up adjustment.
Expenditure on property, plant and equipment and
intangibles:
Expenditure on:
-- intangible assets of GBP327m intangible assets includes
GBP241m of development costs on the Trent 1000/XWB/7000 and Pearl
and software; and
-- property plant and equipment of GBP343m, largely investment
in industrial footprint and IT infrastructure spend.
Pensions - The 2017 UK triennial actuarial valuation has reduced
the contributions in the first half of 2018 by GBP43m; this
includes the impact of a switch to making cash contributions
quarterly in arrears, a one off cash flow saving in 2018.
Shareholder payments - There was no change between the 2016 and
2017 interim payments (paid in the following year).
Acquisitions and disposals - the L'Orange business (part of the
Power Systems segment) was sold on 1 June 2018.
Payment of financial penalties - following the agreements
reached with investigating authorities in January 2017, GBP286m of
penalties were paid in the UK, US and Brazil. Further UK payments
of GBP378m (plus interest) will be made in 2019-2021.
Balance sheet
31 December 2017
------------------------------------- -------- ----------------
Change
Excluding excluding
L'Orange L'Orange L'Orange
Summary balance sheet 30 June and Commercial and Commercial and Commercial
GBPm 2018 Marine Marine Total Marine
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Intangible assets 5,266 5,098 567 5,665 168
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Property, plant and equipment 4,494 4,482 190 4,672 12
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Joint ventures and associates 717 688 - 688 29
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Net working capital(1) (7,082) (7,132) 83 (7,049) 50
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Net funds(2) 165 (305) - (305) 470
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Provisions (1,625) (816) (52) (868) (809)
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Net post-retirement scheme
surpluses/(deficits) 1,215 793 (55) 738 422
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Net financial assets and
liabilities(2) (3,226) (2,640) - (2,640) (586)
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Held for sale (Commercial
Marine) 366 - 7 7 366
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Other net assets and liabilities(3) 480 305 (2) 303 175
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Net assets 770 473 738 1,211 297
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Other items
------------------------------------- -------- ---------------- ---------------- -------- ----------------
US$ hedge book (US$bn) 37.3 38.5
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Civil LTSA asset 1,215 1,044
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Civil LTSA liability (5,318) (4,603)
------------------------------------- -------- ---------------- ---------------- -------- ----------------
Civil net LTSA liability(4) (4,103) (3,559)
------------------------------------- -------- ---------------- ---------------- -------- ----------------
(1) Net working capital includes inventories, trade and other
receivables, trade and other payables and current tax assets and
liabilities.
(2) Net funds includes GBP220m (2017: GBP227m) 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.
(4) In December 2017 we disclosed a provisional LTSA net
creditor of GBP3.5bn. In finalising our IFRS 15 reporting we have
analysed all balance sheet items classifying RRSP prepayments and
other smaller balances out of the LTSA liability balance(.)
Excluding L'Orange and Commercial Marine:
Intangible assets: (page 37), increase of GBP168m. Additions of
GBP327m (including GBP241m of development costs) were partially
offset by amortisation of GBP165m.
Property, plant and equipment: (page 38) increase of GBP12m.
Additions of GBP241m are largely offset by depreciation of
GBP244m.
Investments in joint ventures and associates: increase of
GBP29m. This includes the Group's share of retained profit of GBP6m
and exchange benefits of GBP15m.
Movements in net funds are shown on page 26.
Net working capital: increase of GBP50m.The GBP129m contribution
to funds flow described on the previous page was offset by a
reduction of GBP240m in the liability to Sener for the ITP Aero
acquisition, which has been settled by the issue of ordinary
shares. Other differences largely relate to movements on capital
creditors.
Provisions: increased of GBP809m. This is largely due to the
Trent 1000 provision of GBP649m (technical issues) and
restructuring provision of GBP130m relating to the group
restructuring programme.
Net post-retirement scheme surpluses: (page 40) increase of
GBP422m (UK GBP411m, Overseas GBP11m). The UK increase in the
surplus is primarily the result of plan assets outperforming the
change in value of liabilities measured on an IAS 19 basis.
Net financial assets and liabilities: (page 39) reduction of
GBP586m. These principally relate to the fair value of foreign
exchange, commodity and interest rate contracts. The movement
primarily relates to an adverse mark to market movement on the
foreign exchange book of GBP854m, offset by contracts settled of
GBP237m. All contracts continue to be held for hedging
purposes.
The US$ hedge book at $37.3bn remain broadly stable as contracts
settled were replaced with new contracts.
L'Orange and Commercial Marine
L'Orange was sold on 1 June 2018 and, following the announcement
of the anticipated sale of Commercial Marine, it has been
classified as held for sale. Consequently, amounts for these
businesses are not included in the 2018 balance sheet categories.
To provide a more meaningful comparison, they have also been
excluded from the 31 December 2017 balance sheet.
Condensed consolidated half-year financial statements
Condensed consolidated income statement
For the half-year ended 30 June 2018
Half-year Restated* Half-year Restated* Year to
to 30 June to 30 June 31 December
2018 2017 2017
Notes GBPm GBPm GBPm
------------------------------------------ --- -------- ----------- -------------------- ------------------
Revenue 2 7,487 6,656 14,814
--------------------------------------------------- -------- ----------- -------------------- ------------------
Cost of sales (7,231) (5,801) (12,514)
--------------------------------------------------- -------- ----------- -------------------- ------------------
Gross profit 2 256 855 2,300
--------------------------------------------------- -------- ----------- -------------------- ------------------
Commercial and administrative costs 2 (723) (552) (1,222)
--------------------------------------------------- -------- ----------- -------------------- ------------------
Research and development costs 3 (360) (457) (843)
--------------------------------------------------- -------- ----------- -------------------- ------------------
Share of results of joint ventures and associates 52 51 131
--------------------------------------------------- -------- ----------- -------------------- ------------------
Operating (loss)/profit (775) (103) 366
--------------------------------------------------- -------- ----------- -------------------- ------------------
Gain arising on the acquisition of ITP Aero 14 -- - 1,066
--------------------------------------------------- -------- ----------- -------------------- ------------------
Gain arising on the disposal of L'Orange 14 358 - -
--------------------------------------------------- -------- ----------- -------------------- ------------------
(Loss)/profit before financing and taxation (417) (103) 1,432
--------------------------------------------------- -------- ----------- -------------------- ------------------
Financing income 4 106 1,648 2,911
--------------------------------------------------- -------- ----------- -------------------- ------------------
Financing costs 4 (951) (101) (164)
--------------------------------------------------- -------- ----------- -------------------- ------------------
Net financing (845) 1,547 2,747
--------------------------------------------------- -------- ----------- -------------------- ------------------
(Loss)/profit before taxation (1) (1,262) 1,444 4,179
--------------------------------------------------- -------- ----------- -------------------- ------------------
Taxation 5 302 (272) (515)
--------------------------------------------------- -------- ----------- -------------------- ------------------
(Loss)/profit for the period (960) 1,172 3,664
--------------------------------------------------- -------- ----------- -------------------- ------------------
Attributable to:
========================================== === ======== =========== ==================== ==================
Ordinary shareholders (962) 1,172 3,663
=================================================== ======== =========== ==================== ==================
Non-controlling interests 2 - 1
--------------------------------------------------- -------- ----------- -------------------- ------------------
(Loss)/profit for the period (960) 1,172 3,664
--------------------------------------------------- -------- ----------- -------------------- ------------------
Earnings per ordinary share attributable to
ordinary shareholders 6
--------------------------------------------------- -------- ----------- -------------------- ------------------
Basic (52.03)p 63.90p 199.73p
--------------------------------------------------- -------- ----------- -------------------- ------------------
Diluted (52.03)p 63.80p 199.08p
--------------------------------------------------- -------- ----------- -------------------- ------------------
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 86 85 216
--------------------------------------------------- -------- ----------- -------------------- ------------------
(1) Underlying profit before taxation 2 73 (143) 199
--------------------------------------------------- -------- ----------- -------------------- ------------------
(2) Included within cost of sales and commercial and
administrative costs are exceptional charges in respect of costs
relating to the Trent 1000 Civil Aerospace programme and
restructuring costs, respectively. Further details can be found in
note 2.
* The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
Condensed consolidated statement of comprehensive income
For the half-year ended 30 June 2018
Restated* Restated *
Half-year Half-year Year to
to 30 June to 30 June 31 December
2018 2017 2017
Notes GBPm GBPm GBPm
---------------------------------------------------------------- ------ ----------- ----------- ------------
(Loss)/profit for the period (960) 1,172 3,664
------------------------------------------------------------------ ------ ----------- ----------- ------------
Other comprehensive income (OCI)
---------------------------------------------------------------- ------ ----------- ----------- ------------
Movements in post-retirement schemes 11 451 (112) 735
------------------------------------------------------------------ ------ ----------- ----------- ------------
Share of OCI of joint ventures and associates - (1) (1)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Related tax movements (154) 42 (307)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Items that will not be reclassified to profit or loss 297 (71) 427
------------------------------------------------------------------ ------ ----------- ----------- ------------
Foreign exchange translation differences on foreign operations 47 (55) (136)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Reclassification to income statement on disposal of business (19) - -
---------------------------------------------------------------- ------ ----------- ----------- ------------
Share of OCI of joint ventures and associates 8 (3) (5)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Related tax movements - 1 1
------------------------------------------------------------------ ------ ----------- ----------- ------------
Items that may be reclassified to profit or loss 36 (57) (140)
------------------------------------------------------------------ ------ ----------- ----------- ------------
Total comprehensive (expense)/income for the period (627) 1,044 3,951
------------------------------------------------------------------ ------ ----------- ----------- ------------
Attributable to:
---------------------------------------------------------------- ------ ----------- ----------- ------------
Ordinary shareholders (629) 1,044 3,950
------------------------------------------------------------------ ------ ----------- ----------- ------------
Non-controlling interests 2 - 1
------------------------------------------------------------------ ------ ----------- ----------- ------------
Total comprehensive (expense)/income for the period (627) 1,044 3,951
------------------------------------------------------------------ ------ ----------- ----------- ------------
* The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
Condensed consolidated balance sheet
At 30 June 2018
Restated*
30 June 31 December
2018 2017
Notes GBPm GBPm
------------------------------------------------- ------ --------- -------------
ASSETS
------------------------------------------------- ------ --------- -------------
Intangible assets 8 5,266 5,665
------------------------------------------------- ------ --------- -------------
Property, plant and equipment 9 4,494 4,672
------------------------------------------------- ------ --------- -------------
Investments - joint ventures and associates 717 688
------------------------------------------------- ------ --------- -------------
Investments - other 27 26
------------------------------------------------- ------ --------- -------------
Other financial assets 10 409 610
------------------------------------------------- ------ --------- -------------
Deferred tax assets 938 842
------------------------------------------------- ------ --------- -------------
Post-retirement scheme surpluses 11 2,521 2,125
------------------------------------------------- ------ --------- -------------
Non-current assets 14,372 14,628
------------------------------------------------- ------ --------- -------------
Inventories 4,065 3,888
================================================= ====== ========= =============
Trade and other receivables 6,363 6,341
================================================= ====== ========= =============
Taxation recoverable 9 17
================================================= ====== ========= =============
Other financial assets 10 47 36
================================================= ====== ========= =============
Short-term investments 7 3
================================================= ====== ========= =============
Cash and cash equivalents 4,379 2,953
================================================= ====== ========= =============
Current assets 14,870 13,238
------------------------------------------------- ------ --------- -------------
Assets held for sale 14 829 7
------------------------------------------------- ------ --------- -------------
TOTAL ASSETS 30,071 27,873
------------------------------------------------- ------ --------- -------------
LIABILITIES
------------------------------------------------- ------ --------- -------------
Borrowings (797) (82)
------------------------------------------------- ------ --------- -------------
Other financial liabilities 10 (768) (601)
------------------------------------------------- ------ --------- -------------
Trade and other payables (10,183) (11,653)
------------------------------------------------- ------ --------- -------------
Current tax liabilities (141) (209)
------------------------------------------------- ------ --------- -------------
Provisions for liabilities and charges (1) (843) (495)
------------------------------------------------- ------ --------- -------------
Current liabilities (12,732) (13,040)
------------------------------------------------- ------ --------- -------------
Borrowings (3,644) (3,406)
------------------------------------------------- ------ --------- -------------
Other financial liabilities 10 (2,694) (2,458)
------------------------------------------------- ------ --------- -------------
Trade and other payables (7,195) (5,433)
------------------------------------------------- ------ --------- -------------
Deferred tax liabilities (485) (565)
------------------------------------------------- ------ --------- -------------
Provisions for liabilities and charges (1) (782) (373)
------------------------------------------------- ------ --------- -------------
Post-retirement scheme deficits 11 (1,306) (1,387)
------------------------------------------------- ------ --------- -------------
Non-current liabilities (16,106) (13,622)
------------------------------------------------- ------ --------- -------------
Liabilities associated with assets held for sale 14 (463) -
------------------------------------------------- ------ --------- -------------
TOTAL LIABILITIES (29,301) (26,662)
------------------------------------------------- ------ --------- -------------
NET ASSETS 770 1,211
------------------------------------------------- ------ --------- -------------
EQUITY
------------------------------------------------- ------ --------- -------------
Called-up share capital 374 368
------------------------------------------------- ------ --------- -------------
Share premium account 435 195
------------------------------------------------- ------ --------- -------------
Capital redemption reserve 162 162
------------------------------------------------- ------ --------- -------------
Cash flow hedging reserve (103) (112)
------------------------------------------------- ------ --------- -------------
Other reserves 687 660
------------------------------------------------- ------ --------- -------------
Retained earnings (804) (65)
------------------------------------------------- ------ --------- -------------
Equity attributable to ordinary shareholders 751 1,208
------------------------------------------------- ------ --------- -------------
Non-controlling interests 19 3
------------------------------------------------- ------ --------- -------------
TOTAL EQUITY 770 1,211
------------------------------------------------- ------ --------- -------------
* The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
(1) Explanation for the movement in provisions for liabilities
and charges can be found on page 21.
Condensed consolidated cash flow statement
For the half-year ended 30 June 2018
Restated*
Half-year Restated* Half-year Year to
to 30 June to 30 June 31 December
2018 2017 2017
Notes GBPm GBPm GBPm
----------------------------------------------------------- ------ ------------ -------------------- -------------
Reconciliation of cash flows from operating activities
----------------------------------------------------------- ------ ------------ -------------------- -------------
Operating (loss)/profit (775) (103) 366
----------------------------------------------------------- ------ ------------ -------------------- -------------
Loss on disposal of property, plant and equipment (11) 6 11
----------------------------------------------------------- ------ ------------ -------------------- -------------
Share of results of joint ventures and associates (52) (51) (131)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Dividends received from joint ventures and associates 46 28 79
----------------------------------------------------------- ------ ------------ -------------------- -------------
Amortisation and impairment of intangible assets 8 325 172 345
----------------------------------------------------------- ------ ------------ -------------------- -------------
Depreciation and impairment of property, plant and
equipment 9 239 221 450
----------------------------------------------------------- ------ ------------ -------------------- -------------
Impairment of investments - - 14
----------------------------------------------------------- ------ ------------ -------------------- -------------
Increase/(decrease) in provisions 814 (30) 77
----------------------------------------------------------- ------ ------------ -------------------- -------------
Increase in inventories (427) (428) (196)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Increase in trade and other receivables (287) (482) (291)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Decrease in amounts payable for financial penalties from
agreements with investigating bodies - (267) (286)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Other increase in trade and other payables 997 1,374 1,893
----------------------------------------------------------- ------ ------------ -------------------- -------------
Cash flows on other financial assets and liabilities held
for operating purposes (261) (340) (663)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Net defined benefit post-retirement cost recognised in
profit before financing 11 118 118 240
----------------------------------------------------------- ------ ------------ -------------------- -------------
Cash funding of defined benefit post-retirement schemes 11 (87) (130) (249)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Share-based payments 22 15 33
----------------------------------------------------------- ------ ------------ -------------------- -------------
Net cash inflow from operating activities before taxation 661 103 1,692
----------------------------------------------------------- ------ ------------ -------------------- -------------
Taxation paid (77) (71) (180)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Net cash inflow from operating activities 584 32 1,512
----------------------------------------------------------- ------ ------------ -------------------- -------------
Cash flows from investing activities
----------------------------------------------------------- ------ ------------ -------------------- -------------
Additions of unlisted investments (4) - (4)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Additions of intangible assets 8 (327) (213) (647)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Disposals of intangible assets 2 - 7
----------------------------------------------------------- ------ ------------ -------------------- -------------
Purchases of property, plant and equipment 9 (343) (389) (801)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Government grants received 1 3 14
----------------------------------------------------------- ------ ------------ -------------------- -------------
Disposals of property, plant and equipment 60 9 4
----------------------------------------------------------- ------ ------------ -------------------- -------------
Acquisition of business - - 263
----------------------------------------------------------- ------ ------------ -------------------- -------------
Consolidation of previously unconsolidated subsidiary - - 1
----------------------------------------------------------- ------ ------------ -------------------- -------------
Reclassification of joint operations to subsidiaries 4 - -
----------------------------------------------------------- ------ ------------ -------------------- -------------
Disposal of business 14 584 - -
----------------------------------------------------------- ------ ------------ -------------------- -------------
Other investments in joint ventures and associates - (8) (48)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Net cash outflow from investing activities (23) (598) (1,211)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Cash flows from financing activities
----------------------------------------------------------- ------ ------------ -------------------- -------------
Repayment of loans 10 (5) (5) (166)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Proceeds from increase in loans and finance leases 969 280 366
----------------------------------------------------------- ------ ------------ -------------------- -------------
Capital element of finance lease payments (8) (1) -
----------------------------------------------------------- ------ ------------ -------------------- -------------
Net cash flow from increase in borrowings and finance
leases 956 274 200
----------------------------------------------------------- ------ ------------ -------------------- -------------
Interest received 11 3 14
----------------------------------------------------------- ------ ------------ -------------------- -------------
Interest paid (47) (36) (64)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Interest element of finance lease payments - - (3)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Increase in short-term investments (4) - -
----------------------------------------------------------- ------ ------------ -------------------- -------------
Issue of ordinary shares (net of expenses) - 20 21
----------------------------------------------------------- ------ ------------ -------------------- -------------
Purchase of ordinary shares - other - (22) (24)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Redemption of C Shares (85) (85) (214)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Net cash inflow/(outflow) from financing activities 831 154 (70)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Change in cash and cash equivalents 1,392 (412) 231
----------------------------------------------------------- ------ ------------ -------------------- -------------
Cash and cash equivalents at 1 January 2,933 2,771 2,771
----------------------------------------------------------- ------ ------------ -------------------- -------------
Exchange gains/(losses) on cash and cash equivalents 33 (25) (69)
----------------------------------------------------------- ------ ------------ -------------------- -------------
Cash and cash equivalents at period end ** 4,358 2,334 2,933
----------------------------------------------------------- ------ ------------ -------------------- -------------
* The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
** 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.
Condensed consolidated cash flow statement continued
Restated* Restated*
Half-year Half-year Year to
to 30 June to 30 June 31 December
2018 2017 2017
GBPm GBPm GBPm
--------------------------------------------------------------------------- ------------ ------------ -------------
Reconciliation of movements in cash and cash equivalents to movements in
net funds
--------------------------------------------------------------------------- ------------ ------------ -------------
Change in cash and cash equivalents 1,392 (412) 231
--------------------------------------------------------------------------- ------------ ------------ -------------
Cash flow from increase in borrowings and finance leases (956) (274) (200)
--------------------------------------------------------------------------- ------------ ------------ -------------
Cash flow from increase in short-term investments 4 - -
--------------------------------------------------------------------------- ------------ ------------ -------------
Change in net funds resulting from cash flows 440 (686) 31
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds (excluding cash and cash equivalents) on acquisition of ITP Aero - - (34)
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds (excluding cash and cash equivalents) of previously
unconsolidated subsidiary - -- (18)
--------------------------------------------------------------------------- ------------ ------------ -------------
Exchange gains/(losses) on net funds 30 (20) (59)
--------------------------------------------------------------------------- ------------ ------------ -------------
Fair value adjustments 7 56 131
--------------------------------------------------------------------------- ------------ ------------ -------------
Movement in net funds 477 (650) 51
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds at 1 January excluding the fair value of swaps (532) (583) (583)
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds at period end excluding the fair value of swaps (55) (1,233) (532)
--------------------------------------------------------------------------- ------------ ------------ -------------
Fair value of swaps hedging fixed rate borrowings 220 302 227
--------------------------------------------------------------------------- ------------ ------------ -------------
Net funds at period end 165 (931) (305)
--------------------------------------------------------------------------- ------------ ------------ -------------
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
2018 Funds flow differences adjustments ifications(*) 2018
GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Cash at bank and
in hand 838 17 4 - 4 863
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Money market funds 589 641 3 - - 1,233
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Short-term
deposits 1,526 731 26 - - 2,283
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Cash and cash
equivalents (as
per reported
balance sheet) 2,953 1,389 33 - 4 4,379
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Overdrafts (20) (1) - - - (21)
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Cash and cash
equivalents (per
cash flow
statement) 2,933 1,388 33 - 4 4,358
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Short-term
investments 3 4 - - 7
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Other current
borrowings (39) 5 - 8 (724) (750)
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Non-current
borrowings (3,292) (969) 1 (1) 724 (3,537)
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Finance leases (137) 8 (4) - - (133)
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Financial
liabilities (3,468) (956) (3) 7 - (4,420)
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Net funds
excluding the
fair value of
swaps (532) 436 30 7 4 (55)
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Fair value of
swaps hedging
fixed rate
borrowings 227 (7) 220
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
Net funds (305) 436 30 - 4 165
------------------ ----------------- ----------- ----------------- ----------------- --------------- -----------
* Reclassifications relate predominantly to the movement of
non-current borrowings to current borrowings as maturity dates
approach.
Condensed consolidated statement of changes in equity
For the half-year ended 30 June 2018
Attributable to ordinary shareholders
-----------------------------------------------------------------------
Cash
Capital flow Other Retained
Share Share redemption hedging reserves earnings Non-controlling Total
capital premium reserve reserve (2) (3) Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
At 1 January 2017 as
previously reported 367 181 162 (107) 814 445 1,862 2 1,864
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Impact of adopting IFRS 15
(1) - - - - (19) (4,445) (4,464) - (4,464)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Other (1) - - - - - 43 43 - 43
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
At 1 January 2017 restated
(1) 367 181 162 (107) 795 (3,957) (2,559) 2 (2,557)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Profit for the period - - - - - 3,663 3,663 1 3,664
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Foreign exchange translation
differences on foreign
operations - - - - (136) - (136) - (136)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Movement on post-retirement
schemes - - - - - 735 735 - 735
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Share of other comprehensive
income of joint ventures
and associates - - - (5) - (1) (6) - (6)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Related tax movements - - - - 1 (307) (306) - (306)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Total comprehensive income
for the year - - - (5) (135) 4,090 3,950 1 3,951
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Arising on issue of ordinary
shares 1 14 - - - (14) 1 - 1
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Issue of C Shares - - (215) - - 1 (214) - (214)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Redemption of C Shares - - 215 - - (215) - - -
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Ordinary shares purchased - - - - - (24) (24) - (24)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Share-based payments -
direct to equity (4) - - - - - 51 51 - 51
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Related tax movements - - - - - 3 3 - 3
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Other changes in equity in
the year 1 14 - - - (198) (183) - (183)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
At 31 December 2017 368 195 162 (112) 660 (65) 1,208 3 1,211
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Impact of adopting IFRS 9 - - - - - (15) (15) - (15)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
At 1 January 2018 including
the impact of IFRS 9 368 195 162 (112) 660 (80) 1,193 3 1,196
Profit for the period - - - - - (962) (962) 2 (960)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Foreign exchange translation
differences on foreign
operations - - - - 47 - 47 - 47
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Reclassification to income
statement on disposal of
business - - - - (19) - (19) - (19)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Movement on post-retirement
schemes - - - - - 451 451 - 451
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Share of other comprehensive
income of joint ventures
and associates - - - 9 (1) - 8 - 8
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Related tax movements - - - - - (154) (154) - (154)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Total comprehensive income
for the period - - - 9 27 (665) (629) 2 (627)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Arising on issues of
ordinary shares (5) 6 240 - - - - 246 - 246
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Issue of C Shares - - (85) - - - (85) - (85)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Redemption of C Shares - - 85 - - (85) - - -
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Share-based payments -
direct to equity (4) - - - - - 22 22 - 22
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Reclassification of joint
operations to subsidiaries - - - - - - - 15 15
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Transactions with
non-controlling interest - - - - - - - (1) (1)
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Related tax movements - - - - - 4 4 - 4
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
Other changes in equity in
the period 6 240 - - - (59) 187 14 201
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
At 30 June 2018 374 435 162 (103) 687 (804) 751 19 770
---------------------------- -------- -------- ----------- -------- --------- --------- ------- ---------------- -------
(1) The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
(2) Other reserves include a merger reserve of GBP3m and a
translation reserve of GBP684m.
(3) At 30 June 2018, 6,347,623 ordinary shares with a book value
of GBP51m were held for the purposes of share-based payment plans
and included in retained earnings. During the period, 153,281
ordinary shares with a net book value of GBP1m vested in
share-based payment plans and the Company acquired 34,801 of its
ordinary shares via reinvestment of dividends received on its own
shares.
(4) Share-based payments- direct to equity is the share-based
payment charge for the year less the actual cost of vesting and
cash received on share-based schemes vesting.
(5) Share premium on shares issued relate to the payment of the
first three instalments for the acquisition of ITP Aero.
Notes to the half-year financial statements
1 Basis of preparation and accounting policies
Reporting entity
Rolls--Royce Holdings plc is a company incorporated and
domiciled in the UK. These condensed consolidated half-year
financial statements of the Company as at and for the six months
ended 30 June 2018 comprises the Company and its subsidiaries
(together referred to as the "Group") and include the Group's
interest in jointly controlled and associated entities.
The consolidated financial statements of the Group as at and for
the year ended 31 December 2017 (Annual Report 2017) are available
upon request from the Company Secretary, Rolls-----Royce Holdings
plc, 62 Buckingham Gate, London SW1E 6AT.
The Board of directors approved the condensed consolidated
half-year financial statements on 2 August 2018.
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 2017 Annual Report.
The comparative, unaudited figures for the financial year 31
December 2017 are not the Group's statutory accounts for that
financial year. The interim figures up to 30 June 2018 and 2017 are
unaudited. The 2017 financial statements have been reported on by
the Group's previous 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.
Change of auditor
On 3 May 2018, following changes in the legislation requiring
mandatory rotation of the audit firm the Group appointed
PricewaterhouseCoopers LLP as the company's auditor.
Significant accounting policies
Except for the adoption of IFRS 15 Revenue from Contracts with
Customers and IFRS 9 Financial Instruments, the accounting policies
applied by the Group in these condensed consolidated half-year
financial statements are the same as those that were applied to the
consolidated financial statements of the Group for the year ended
31 December 2017 (International Financial Reporting Standards
issued by the International Accounting Standards Board (IASB), as
adopted for use in the EU effective at 31 December 2017).
The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
IFRS 15 Revenue from Contracts with Customers
The Group adopted IFRS 15 on 1 January 2018 using the 'full'
retrospective approach.
IFRS 15 provides a single, principles based five-step model to
be applied to all sales contracts. It is based on the transfer of
control of goods and services to customers. In summary:
- Revenues on original equipment (OE) and time and material
aftermarket contracts are generally recognised at the point of
delivery;
- Revenues on long-term aftermarket contracts and some OE
contracts (generally for products without an alternative use to the
specific contract) are recognised on an activity basis using the
costs incurred as the measure of the activity; and
- Costs are recognised as they are incurred.
Accounting policy
Revenue recognised comprises sales to the Group's customers
after discounts and amounts payable to customers. It excludes value
added taxes. The Group has elected to use the practical expedient
not to adjust revenue for the effect of financing components where
the expectation is that the period between the transfer of goods
and services to customers and the receipt of payment is less than a
year.
Sales of standard OE, spare parts and time and material overhaul
services are generally recognised on delivery to the customer,
unless the specific contractual terms indicate a different
point.
Sales of services and OE specifically designed for the contract
are recognised by reference to the progress towards completion of
the performance obligation provided the outcome of contracts can be
assessed with reasonable certainty.
- The Group generates a considerable proportion of its revenue and profit from aftermarket arrangements. These aftermarket contracts, such as TotalCare and CorporateCare agreements in Civil Aerospace, cover a range of services and generally have contractual terms covering more than one year. Under these contracts, the Group's primary obligation is to maintain customers' equipment in an operational condition and this is achieved by undertaking various activities, such as repair, overhaul and engine monitoring over the period of the contract. Revenue on these contracts is recognised over the period of the contract and the measure of progress is a matter of judgement. The stage of completion of the contract is best measured by using the actual costs incurred to date compared to the estimated costs to complete the performance obligations, as this reflects the extent of completion of the activities performed.
- The estimated revenue and costs under such agreements are
inherently imprecise and significant estimates are required to take
into account uncertainties relating to: (i) the forecast
utilisation of the engines by the operator and related pricing;
(ii) payments due to the customer that are either contractual and
based on measures of performance or that could reasonably be
expected to have been reflected in the contract price; (iii) the
frequency of engine overhauls where the principal variables are the
operating parameters of the engine and operational lives of
components; and (iv) the forecast costs to maintain the engines in
accordance with the contractual requirements where the cost of each
overhaul is dependent on the required work-scope and the cost of
parts and labour at the time.
- Future variable revenue is constrained to take account of the
risk of non-recovery of resulting contract balances from reduced
utilisation e.g. engine flying hours, based on historical
forecasting experience, the risk of aircraft being parked by the
customer and the customer's creditworthiness.
- A significant amount of revenue and cost is denominated in
currencies other than that of the relevant Group undertaking. These
are translated at estimated long-term exchange rates.
- The assessment of stage of completion is generally measured
for each contract. However, in certain cases, such as for
CorporateCare agreements where there are many contracts covering
aftermarket services, each for a small number of engines, the Group
accounts for a portfolio of contracts together as the effects on
the Condensed Financial Statements would not differ materially from
applying the standard to the individual contracts in the portfolio.
When accounting for a portfolio of long-term service arrangements
the Group uses estimates and assumptions that reflect the size and
composition of the portfolio.
- A contract asset/liability is recognised where payment is
received in arrears/advance of the costs incurred to meet
performance obligations.
- In rare circumstances we may incur costs of wasted material,
labour or other resources to fulfil a contract where the level of
cost was not reflected in the contract price, these are expensed
when the trigger to incur these costs arises. The identification of
such costs is a matter of judgement and would only be expected to
arise where there has been a series of abnormal events which give
rise to a significant level of cost which is also of a nature we
would not expect to incur and hence is not reflected in the
contract price. For example, where we have technical issues that
require resolution to meet regulatory requirements; have a
wide-ranging impact across a product type; and cause significant
operational disruption to customers. Similarly, in these rare
circumstances, significant disruption costs to support customers
resulting from the actual performance of a delivered good or
service may be treated as a warranty type cost in the period. Where
material these costs are recorded as an exceptional non-underlying
expense.
The Group has paid participation fees to airframe manufacturers,
its customers for OE on certain programmes. Amounts paid are
initially treated as contract assets within trade and other
receivables and subsequently charged as a reduction to the OE
revenue when it is transferred to the customer over the estimated
number of units to be delivered. This estimate of the number of
units may change over the course of the programme.
In assessing the accounting for the participation fee payments
we make to our OE customers, we have also assessed the accounting
for up-front payments we sometimes receive from the Group's
suppliers under RRSAs to allow them to participate in an engine
programme. These receipts are deferred and recognised against cost
of sales over the estimated number of units to be delivered.
The Group has elected to use the practical expedient to expense
as incurred any incremental costs of obtaining or fulfilling a
contract if the amortisation period of an asset created would have
been one year or less. Where costs to obtain a contract are
capitalised, they are amortised over the performance of the related
contract.
IFRS 9 Financial Instruments
The Group adopted IFRS 9 on 1 January 2018. IFRS 9 relates to
the accounting for financial instruments and covers: classification
and measurement; impairment; and hedge accounting. Except for hedge
accounting, retrospective application is required with any
adjustment being made to reserves on 1 January 2018. The Group has
not restated its 2017 comparative information.
The Group has adopted the simplified approach to provide for
losses on receivables and contract assets resulting from
transactions within the scope of IFRS 15 applying credit ratings
and business information to determine the expected credit losses on
receivables. The adoption of the expected credit loss approach has
not resulted in a significant impairment loss for trade receivables
as at 30 June 2018.
IFRS 16 Leases
IFRS 16 (effective for the year beginning 1 January 2019) will
require all leases to be recognised on the balance sheet.
Currently, IAS 17 Leases only requires leases categorised as
finance leases to be recognised on the balance sheet.
The Group is progressing well in its analysis of how IFRS 16
should be implemented and is developing the data-set, systems and
processes that will be required. The most significant leases, by
value, relate to property and aircraft engines. The Group expects
to apply the standard retrospectively with the cumulative effect of
initial application recognised on 1 January 2019. Under this
approach the Group will not restate comparative periods.
In broad terms the impact of the standard will be to:
- recognise an additional lease liability equivalent to the
present value of the lease commitments at the date of transition.
Further work is required to validate the contracts which will
represent leases under IFRS 16, including ongoing consideration of
some supply chain contracts. The Group is also considering whether
there are any re-assessments of lease term required and the
discount rate to be applied. Under the expected transition option,
payments will be discounted using incremental borrowing rates at 1
January 2019. The Group holds some leases in non-functional
currencies where the value of the lease liability will be dependent
on spot exchange rates on transition; and
- recognise a right-of-use asset measured either: as if the
standard had applied since commencement of the lease; or at an
amount equal to the lease liability on transition.
Research and development
In the Annual Report 2017 the Group announced a change in
estimate to amortise programme assets on a 15 year straight-line
basis pro rata over the estimated number of units produced. This
approach has been applied prospectively from 1 January 2018.
Following a review of progress on Civil Aerospace programmes,
from 1 July 2017 the point at which the criteria for capitalisation
is met, was moved one gate earlier than in the past. If this had
been in place from 1 January 2017, an additional GBP129m of
expenditure would have been capitalised in the first half of
2017.
The Group does not consider that any other standards, amendments
or interpretations issued by the IASB, but not yet applicable will
have a significant impact on the Financial Statements.
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 (who act as 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, naval engines, submarines and aftermarket
services.
Power Systems development, manufacture, marketing and sales of
reciprocating engines, power systems and nuclear systems for civil
power generation.
ITP Aero design, research and development, manufacture and
casting, assembly and test of aeronautical engines and gas
turbines.
In 2017, the Group had five operating segments; Civil Aerospace,
Defence, RRPS, Marine and Nuclear. Following the decision to
simplify the Group, announced on 17 January 2018, the Group now has
four operating segments as set out above. These are referred to
collectively as the "Core Businesses". Non-core businesses includes
the results of L'Orange until the date of its disposal on 1 June
2018 (see note 14), the trading results of Commercial Marine
through 30 June 2018 (from which date the business has been
classified as held for sale), and other smaller businesses
including Retained Energy. The 2017 segmental analysis has been
presented on a consistent basis with the new segmental
structure.
Underlying results are presented to reflect the economic impact
of the Group's foreign exchange risk management activities and
exclude significant items of a one-off nature. Trading transactions
are valued at the exchange rates achieved on the derivative
contracts settled to cover the net exposures.
In addition to the impact of exchange rates on trading above,
the reported results are adjusted for:
Operating profit
- one-off past service costs or credits on post-retirement schemes;
- exceptional restructuring costs (associated with the
substantial closure or exit of a site, facility or line of business
or other major transformation activities);
- the effect of acquisition accounting and business disposals;
- the impairment of goodwill and other assets arising on acquisition;
Financing
- 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;
- unrealised amounts arising from revaluations required by IFRS
9 Financial Instruments; 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 are also
excluded.
This analysis also includes a reconciliation of the underlying
results to those reported in the condensed consolidated income
statement.
- Civil Defence Power Systems ITP Corporate Inter- Segment Core Businesses
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
For the half-year ended 30 June 2018
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Underlying revenue from sale of
original equipment 1,530 608 945 336 ----- (172) 3,247
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Underlying revenue from aftermarket
services 2,070 807 526 39 - (9) 3,433
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Total underlying revenue 3,600 1,415 1,471 375 - (181) 6,680
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Gross profit 148 281 354 85 -- 2 870
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Commercial and administrative costs (157) (77) (188) (31) (26) - (479)
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Research and development costs (152) (44) (86) (14) - - (296)
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Share of results of joint ventures
and associates 49 2 - - - - 51
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Underlying operating profit/(loss) (112) 162 80 40 (26) 2 146
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
For the half-year ended 30 June 2017
(restated)*
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Underlying revenue from sale of
original equipment 1,151 629 814 - - - 2,594
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Underlying revenue from aftermarket
services 1,707 849 461 - - - 3,017
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Total underlying revenue 2,858 1,478 1,275 - - - 5,611
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Gross profit 137 292 283 - - - 712
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Commercial and administrative costs (155) (83) (172) - (26) - (436)
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Research and development costs (280) (32) (84) - - - (396)
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Share of results of joint ventures
and associates 48 3 (1) - - - 50
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Underlying operating profit/(loss) (250) 180 26 - (26) - (70)
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Year ended 31 December 2017
(restated)*
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Underlying revenue from sale of
original equipment 2,890 1,398 1,956 - - - 6,244
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Underlying revenue from aftermarket
services 3,708 1,782 1,052 - - - 6,542
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Total underlying revenue 6,598 3,180 3,008 - - - 12,786
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Gross profit 371 728 797 - - - 1,896
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Commercial and administrative costs (373) (192) (351) - (55) - (971)
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Research and development costs (454) (89) (181) - - - (724)
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Share of results of joint ventures
and associates 113 7 (4) - - - 116
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
Underlying operating profit/(loss) (343) 454 261 - (55) - 317
------------------------------------- ----- ------- ------------- ---- --------- -------------- ---------------
* The prior periods have been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
Reconciliation to Underlying
reported results adjustments and Group results at
Non-Core Businesses adjustments to actual exchange
Core Businesses (1) Total underlying foreign exchange rates
GBPm GBPm GBPm GBPm GBPm
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
For the half-year
ended 30 June 2018
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Revenue from sale of
original equipment 3,247 177 3,424 196 3,620
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Revenue from
aftermarket
services 3,433 183 3,616 251 3,867
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Total revenue 6,680 360 7,040 447 7,487
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Gross profit 870 109 979 (723) 256
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Commercial and
administrative
costs (479) (92) (571) (152) (723)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Research and
development costs (296) (22) (318) (42) (360)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Share of results of
joint ventures and
associates 51 -- 51 1 52
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Operating
profit/(loss) 146 (5) 141 (916) (775)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Gain arising on
disposal of
L'Orange 358 358
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit/(loss) before
financing and
taxation 146 (5) 141 (558) (417)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Net financing (68) (777) (845)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit/(loss) before
taxation 73 (1,335) (1,262)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Taxation (25) 327 302
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit/(loss) for
the period 48 (1,008) (960)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Attributable to:
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Ordinary
shareholders 46 (1,008) (962)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Non-controlling
interests 2 - 2
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Reconciliation to
reported results Underlying
continued adjustments and Group results at
For the half-year Non-Core Businesses adjustments to actual exchange
ended 30 June 2017 Core Businesses (1) Total underlying foreign exchange rates
(restated)* GBPm GBPm GBPm GBPm GBPm
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Revenue from sale of
original equipment 2,594 233 2,827 291 3,118
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Revenue from
aftermarket
services 3,017 197 3,214 324 3,538
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Total revenue 5,611 430 6,041 615 6,656
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Gross profit 712 120 832 23 855
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Commercial and
administrative
costs (436) (99) (535) (17) (552)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Research and
development costs (396) (28) (424) (33) (457)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Share of results of
joint ventures and
associates 50 (7) 43 8 51
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Operating
profit/(loss) (70) (14) (84) (19) (103)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Net financing (59) 1,606 1,547
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit/(loss) before
taxation (143) 1,587 1,444
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Taxation (5) (267) (272)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit for the
period (148) 1,320 1,172
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Attributable to:
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Ordinary
shareholders (148) 1,320 1,172
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Non-controlling
interests - - -
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Year ended 31
December 2017
(restated)*
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Revenue from sale of
original equipment 6,244 504 6,748 520 7,268
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Revenue from
aftermarket
services 6,542 381 6,923 623 7,546
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Total revenue 12,786 885 13,671 1,143 14,814
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Gross profit 1,896 248 2,144 156 2,300
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Commercial and
administrative
costs (971) (197) (1,168) (54) (1,222)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Research and
development costs (724) (52) (776) (67) (843)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Share of results of
joint ventures and
associates 116 (10) 106 25 131
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Operating
profit/(loss) 317 (11) 306 60 366
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Gains arising on the
acquisition of ITP
Aero - - - 1,066 1,066
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit before
financing and
taxation 317 (11) 306 1,126 1,432
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Net financing (107) 2,854 2,747
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit before
taxation 199 3,980 4,179
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Taxation (155) (360) (515)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit for the year 44 3,620 3,664
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Attributable to:
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Ordinary
shareholders 43 3,620 3,663
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Non-controlling
interests 1 - 1
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
* The prior periods have been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
(1) Includes Commercial Marine (held for sale from 30 June
2018), L'Orange sold on 1st June and other smaller non-core
businesses.
Disaggregation of revenue from contracts with customers
Core
Civil Defence Power Systems ITP Corporate Inter-Segment Businesses
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
For the half-year ended 30
June 2018
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Original equipment
recognised at a point in
time 1,530 281 905 336 - (172) 2,880
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Original equipment
recognised over time - 327 40 - - - 367
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Aftermarket services
recognised at a point in
time 670 336 448 39 - (28) 1,465
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Aftermarket services
recognised over time 1,384 471 78 - - 19 1,952
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Total underlying customer
contract revenue 3,584 1,415 1,471 375 - (181) 6,664
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Other underlying revenue 16 - - - - - 16
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Total underlying revenue 3,600 1,415 1,471 375 - (181) 6,680
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
For the half-year ended 30
June 2017
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Original equipment
recognised at a point in
time 1,151 296 804 - - - 2,251
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Original equipment
recognised over time - 333 10 - - - 343
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Aftermarket services
recognised at a point in
time 438 381 399 - - - 1,218
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Aftermarket services
recognised over time 1,258 468 62 - - - 1,788
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Total underlying customer
contract revenue 2,847 1,478 1,275 - - - 5,600
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Other underlying revenue 11 - - - - - 11
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Total underlying revenue 2,858 1,478 1,275 - - - 5,611
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Year ended 31 December
2017
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Original equipment
recognised at a point in
time 2,890 682 1,931 - - - 5,503
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Original equipment
recognised over time - 716 25 - - - 741
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Aftermarket services
recognised at a point in
time 1,077 829 929 - - - 2,835
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Aftermarket services
recognised over time 2,595 953 123 - - - 3,671
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Total underlying customer
contract revenue 6,562 3,180 3,008 - - - 12,750
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Other underlying revenue 36 - - - - - 36
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Total underlying revenue 6,598 3,180 3,008 - - - 12,786
-------------------------- ------ --------- ------------- ------ --------- -------------- -------------
Underlying
adjustments and Group results at
adjustments to actual exchange
Core Businesses Non-Core Businesses Total underlying foreign exchange rates
GBPm GBPm GBPm GBPm GBPm
------------------- --------------- ------------------- ---------------- ------------------ ------------------
For the half-year
ended 30 June 2018
------------------- --------------- ------------------- ---------------- ------------------ ------------------
Original equipment
recognised at a
point in time 2,880 36 2,916 195 3,111
-------------------- --------------- ------------------- ---------------- ------------------ ------------------
Original equipment
recognised over
time 367 141 508 1 509
-------------------- --------------- ------------------- ---------------- ------------------ ------------------
Aftermarket services
recognised at a
point in time 1,465 183 1,648 113 1,761
-------------------- --------------- ------------------- ---------------- ------------------ ------------------
Aftermarket services
recognised over
time 1,952 - 1,952 138 2,090
-------------------- --------------- ------------------- ---------------- ------------------ ------------------
Total customer
contract revenue 6,664 360 7,024 447 7,471
-------------------- --------------- ------------------- ---------------- ------------------ ------------------
Other revenue 16 - 16 - 16
-------------------- --------------- ------------------- ---------------- ------------------ ------------------
Total revenue 6,680 360 7,040 447 7,487
-------------------- --------------- ------------------- ---------------- ------------------ ------------------
For the half-year ended 30 June 2017
--------------------------------------------------- ----- --- ----- --- -----
Original equipment recognised at a point in time 2,251 42 2,293 291 2,584
---------------------------------------------------- ----- --- ----- --- -----
Original equipment recognised over time 343 191 534 - 534
---------------------------------------------------- ----- --- ----- --- -----
Aftermarket services recognised at a point in time 1,218 197 1,415 187 1,602
---------------------------------------------------- ----- --- ----- --- -----
Aftermarket services recognised over time 1,788 - 1,788 132 1,920
---------------------------------------------------- ----- --- ----- --- -----
Total customer contract revenue 5,600 430 6,030 610 6,640
---------------------------------------------------- ----- --- ----- --- -----
Other revenue 11 - 11 5 16
---------------------------------------------------- ----- --- ----- --- -----
Total revenue 5,611 430 6,041 615 6,656
---------------------------------------------------- ----- --- ----- --- -----
Year ended 31 December 2017
--------------------------------------------------- ------ --- ------ ----- ------
Original equipment recognised at a point in time 5,503 106 5,609 520 6,129
---------------------------------------------------- ------ --- ------ ----- ------
Original equipment recognised over time 741 398 1,139 - 1,139
---------------------------------------------------- ------ --- ------ ----- ------
Aftermarket services recognised at a point in time 2,835 373 3,208 232 3,440
---------------------------------------------------- ------ --- ------ ----- ------
Aftermarket services recognised over time 3,671 8 3,679 391 4,070
---------------------------------------------------- ------ --- ------ ----- ------
Total customer contract revenue 12,750 885 13,635 1,143 14,778
---------------------------------------------------- ------ --- ------ ----- ------
Other revenue 36 - 36 - 36
---------------------------------------------------- ------ --- ------ ----- ------
Total revenue 12,786 885 13,671 1,143 14,814
---------------------------------------------------- ------ --- ------ ----- ------
Total assets Total liabilities Net assets/(liabilities)
-------------------------------- ------------------------- ------------------------- --------------------------
30 June 31 30 June 31 30 June 31
2018 December 2017* 2018 December 2017* 2018 December 2017*
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Civil 14,352 13,668 (18,743) (16,876) (4,391) (3,208)
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Defence 2,156 2,155 (2,515) (2,549) (359) (394)
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Power Systems 3,585 3,771 (1,461) (1,388) 2,124 2,383
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
ITP 2,308 2,286 (963) (1,010) 1,345 1,276
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Corporate - - - - - -
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Inter-segment (1,373) (1,424) 1,373 1,424 - -
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Core Businesses 21,028 20,456 (22,309) (20,399) (1,281) 57
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Non-core Businesses 969 1,250 (619) (614) 350 636
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Net funds 4,606 3,183 (4,441) (3,488) 165 (305)
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Tax assets/(liabilities) 947 859 (626) (774) 321 85
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Post-retirement scheme
surpluses/(deficits) 2,521 2,125 (1,306) (1,387) 1,215 738
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
30,071 27,873 (29,301) (26,662) 770 1,211
-------------------------------- -------- --------------- -------- --------------- -------- ----------------
Underlying revenue Half-year Restated half-year to 30
adjustments to 30 June June Restated year to 31
2018 2017* December 2017*
GBPm GBPm GBPm
---------------------------- ------------ --------------------------- ---------------------------
Underlying revenue 7,040 6,041 13,671
---------------------------------- ------------ --------------------------- ---------------------------
Recognise revenue at exchange rate
on date of transaction 447 615 1,143
---------------------------------- ------------ --------------------------- ---------------------------
Revenue per consolidated income
statement 7,487 6,656 14,814
---------------------------------- ------------ --------------------------- ---------------------------
* The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
Underlying profit Half-year to Restated* half-year to Restated* year to
adjustments 30 June 2018 30 June 2017 31 December 2017
------------------------------ ------------------------------ -------------------------------
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 141 (68) (25) (84) (59) (5) 306 (107) (155)
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Realised
losses/(gains)
on settled
derivative
contracts (1) 207 33 (40) 211 131 (57) 453 195 (111)
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Net unrealised
fair value
changes to
derivative
contracts (2) 1 (815) 134 8 1,391 (249) 24 2,648 (463)
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Effect of
currency on
contract
accounting (30) - 15 (137) - 39 (153) - 31
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Revaluation of
trading assets
and liabilities
(7) (75) (4) 7 (4) 82 (11) (6) 1 (17)
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Financial RRSAs -
exchange
differences and
changes in
forecast
payments - (2) - - 4 (1) - 11 (3)
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Effect of
acquisition
accounting (124) - 52 (62) - 18 (129) - 35
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Impairment of
goodwill (5) (160) - - - - - - - -
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Net
post-retirement
scheme financing - 11 (5) - (1) - - 1 (1)
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Disposal of
business (6) 358 - (8) - - - - - -
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Exceptional
restructuring
(3, 7) (179) - 37 (31) - 9 (104) - 31
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Trent 1000
exceptional
charge (7) (554) - 100 - - - - - -
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Gain arising on
the acquisition
of ITP Aero - - - - - - 1,066 - -
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Consolidation of
previously
non-consolidated
subsidiary - - - - - - (12) - -
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Other (2) - (19) (4) (1) (15) (13) (2) 25
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Recognition of
advance
corporation tax - - - - - - - - 163
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Reduction in
corporation tax
rates (4) - - 54 - - - - - (50)
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Total underlying
adjustments (558) (777) 327 (19) 1,606 (267) 1,126 2,854 (360)
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
Reported per
consolidated
income statement (417) (845) 302 (103) 1,547 (272) 1,432 2,747 (515)
----------------- --------- --------- -------- --------- --------- -------- --------- ---------- --------
* The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
(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.
(4) The 2018 reduction in corporation tax rates relates to the
reduction in the Spanish Basque region tax rate. The 2017 full year
comparative relates to the reduction in the Federal tax rate in the
US.
(5) Relates to the impairment of Commercial Marine goodwill
following a review of the carrying value to fair value less costs
to sell (note 14).
(6) Gain on disposal of L'Orange business to Woodward Inc. on 1
June 2018 (note 14).
(7) Exceptional charges
Half-year
Half-year to 30 June
to 30 June 2018 2017 Year to 31 December 2017
GBPm GBPm GBPm
-------------------------- ----------------- ------------ -------------------------
Restructuring 179 31 104
-------------------------- ----------------- ------------ -------------------------
Trent 1000 abnormal costs 554 - -
-------------------------- ----------------- ------------ -------------------------
Foreign exchange 95 - -
-------------------------- ----------------- ------------ -------------------------
828 31 104
-------------------------- ----------------- ------------ -------------------------
The Group recorded an exceptional restructuring charge of
GBP179m (2017 half-year: GBP31m) in the period. The costs include:
GBP132m in respect of the Group wide restructuring programme
announced on 14 June 2018; costs relating to ongoing multi-year
significant restructuring programmes including restructuring at
Power Systems (RRPS2018) and in respect of Defence, reflecting
actions to remove cost and improve operational efficiency.
An exceptional charge was made in respect of the Trent 1000
costs of GBP554m at the achieved exchange rate. The balance sheet
provision has been recorded at the prevailing spot rate on 30 June
2018 resulting in foreign exchange of GBP95m, which has been
included in Cost of Sales.
3 Research and development
Half-year
Half-year to 30 June
to 30 June 2018 2017 Year to 31 December 2017
GBPm GBPm GBPm
---------------------------------------------------------- ----------------- ------------ -------------------------
Expenditure in the period (542) (465) (1,041)
---------------------------------------------------------- ----------------- ------------ -------------------------
Capitalised as intangible assets 241 84 347
---------------------------------------------------------- ----------------- ------------ -------------------------
Amortisation of capitalised costs (1) (59) (76) (149)
---------------------------------------------------------- ----------------- ------------ -------------------------
Net cost recognised in the income statement (360) (457) (843)
---------------------------------------------------------- ----------------- ------------ -------------------------
Underlying adjustments relating to the effects of
acquisition accounting and foreign exchange 42 33 67
---------------------------------------------------------- ----------------- ------------ -------------------------
Net underlying cost recognised in the income statement (318) (424) (776)
---------------------------------------------------------- ----------------- ------------ -------------------------
(1) From 1 January 2018 the company adopted the approach of
amortising programme assets on a 15 year straight-line basis pro
rata over the estimated number of units produced. See note 1 for
more details.
4 Net financing
Half-year to 30 June 2018 Half-year to 30 June 2017* Year to 31 December 2017*
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 11 11 5 5 11 11
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
gains on
foreign
currency
contracts - - 1,407 - 2,611 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financial RRSAs
- foreign
exchange
differences and
changes in
forecast
payments - - 4 - 17 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
gains on
commodity
contracts 39 - - - 37 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing on
post-retirement
scheme
surpluses 27 - 18 - 39 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net foreign
exchange gains 29 - 214 - 196 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
106 11 1,648 5 2,911 11
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing costs
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Interest payable (48) (48) (36) (36) (67) (64)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
losses on
foreign currency
contracts (854) - - - - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financial RRSAs
- foreign
exchange
differences and
changes in
forecast
payments (2) - - - (6) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financial charge
relating to
financial RRSAs (5) (5) (2) (2) (5) (5)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
losses on
commodity
contracts - - (16) - - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Financing on
post-retirement
scheme deficits (16) - (19) - (38) -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net foreign
exchange losses - - - - - -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Other financing
charges (26) (26) (28) (26) (48) (49)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
(951) (79) (101) (64) (164) (118)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net financing (845) (68) 1,547 (59) 2,747 (107)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Analysed as:
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net interest
payable (37) (37) (31) (31) (56) (53)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net fair value
(losses)/gains
on derivative
contracts (815) - 1,391 - 2,648 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net
post-retirement
scheme
financing 11 - (1) - 1 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net other
financing (4) (31) 188 (28) 154 (54)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Net financing (845) (68) 1,547 (59) 2,747 (107)
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
* The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
5 Taxation
The effective tax rate for the half year is 23.9% (2017 restated
half year 18.8%, full year 12.3%). The rates are not directly
comparable as in this half year there is a tax credit on a reported
loss and in 2017 (both half year and full year) there is a tax
charge on a reported profit. The key drivers of the effective tax
rates are the tax effect of underlying adjustments further details
of which can be found in note 2.
Changes in tax rates
As announced in the Spanish Basque region tax reform
legislation, the corporation tax rate reduced from 28% to 26% with
effect from 1 January 2018 and will reduce to 24% with effect from
1 January 2019. The impact of the rate reduction to 24% is
reflected in the 2018 half year deferred tax balances of the
Spanish ITP companies, as the rate change was substantively enacted
prior to the period end.
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.
Restated * Half-year to Restated * Year to
Half-year to 30 June 2018 30 June 2017 31 December 2017
Potentially Potentially Potentially
dilutive dilutive dilutive
share share share
Basic options(1) Diluted Basic options Diluted Basic options(1) Diluted
-------------- --------- ------------ --------- ------- ------------- -------- -------- ------------ --------
(Loss)/profit
attributable
to ordinary
shareholders
(GBPm) (962) - (962) 1,172 - 1,172 3,663 - 3,663
-------------- --------- ------------ --------- ------- ------------- -------- -------- ------------ --------
Weighted
average
shares
(millions) 1,849 - 1,849 1,834 3 1,837 1,834 6 1,840
-------------- --------- ------------ --------- ------- ------------- -------- -------- ------------ --------
EPS (pence) (52.03)p - (52.03)p 63.90p (0.10)p 63.80p 199.73p (0.65)p 199.08p
-------------- --------- ------------ --------- ------- ------------- -------- -------- ------------ --------
* The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
(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:
Restated * Half-year to 30 June Restated * Year to 31 December
Half-year to 30 June 2018 2017 * 2017 *
Pence GBPm Pence GBPm Pence GBPm
---------------- ------------- ------------- ---------------- ---------------- ---------------- ----------------
Underlying EPS /
Underlying
profit
attributable to
ordinary
shareholders
re-presented 2.49 46 (8.07) (148) 2.34 43
---------------- ------------- ------------- ---------------- ---------------- ---------------- ----------------
Total underlying
adjustments to
profit before
tax (note 2) (72.20) (1,335) 86.53 1,587 217.01 3,980
---------------- ------------- ------------- ---------------- ---------------- ---------------- ----------------
Related tax
effects 17.68 327 (14.56) (267) (19.62) (360)
---------------- ------------- ------------- ---------------- ---------------- ---------------- ----------------
EPS / Profit
attributable to
ordinary
shareholders (52.03) (962) 63.90 1,172 199.73 3,663
---------------- ------------- ------------- ---------------- ---------------- ---------------- ----------------
Diluted
underlying EPS 2.48 (8.06) 2.34
---------------- ------------- ------------- ---------------- ---------------- ---------------- ----------------
* The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16 for more details.
7 Payments to shareholders in respect of the period
Payments to shareholders in respect of the period represent the
value of C Shares to be issued in respect of the results for the
period. Issues of C Shares were declared as follows:
Half-year to 30 June 2018 Year to 31 December 2017
--------------------------- --------------------------
Pence per Pence per
share GBPm share GBPm
---------------------------- ------------------ ------- ----------------- -------
Interim (issued in January) 4.6 86 4.60 85
============================= ================== ======= ================= =======
Final (issued in July) - - 7.10 131
----------------------------- ------------------ ------- ----------------- -------
4.6 86 11.70 216
---------------------------- ------------------ ------- ----------------- -------
8 Intangible assets
Contractual
Certification Development aftermarket Customer
Goodwill costs expenditure rights relationships Software Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- -------- -------------- ------------- ------------- -------------- -------- ----- -------
Cost:
-------------------- -------- -------------- ------------- ------------- -------------- -------- ----- -------
At 1 January 2017 as
previously reported 1,874 1,325 1,944 1,007 540 742 663 8,095
-------------------- -------- -------------- ------------- ----- -------
Impact of adoption
of IFRS 15 (1) - (475) - (1,007) - - - (1,482)
-------------------- -------- -------------- ------------- ----- -------
Foreign exchange
adjustment (1) - (21) - - - - - (21)
-------------------- -------- -------------- ------------- ------------- -------------- -------- ----- -------
At 1 January 2017
restated 1,874 829 1,944 - 540 742 663 6,592
-------------------- -------- -------------- ------------- ----- -------
Exchange
differences (5) - 15 - (3) (3) 8 12
-------------------- -------- -------------- ------------- ----- -------
Reclassifications - - (9) - - - 9 -
-------------------- -------- -------------- ------------- ----- -------
Additions - 112 347 - - 135 53 647
-------------------- -------- -------------- ------------- ----- -------
Acquisition of
business (2) - 4 158 - 989 7 44 1,202
-------------------- -------- -------------- ------------- ----- -------
Disposals - - - - - (13) - (13)
-------------------- -------- -------------- ------------- ------------- -------------- -------- ----- -------
At 1 January 2018 1,869 945 2,455 - 1,526 868 777 8,440
Exchange
differences 7 - 2 - 3 2 2 16
Additions - 27 241 - - 49 10 327
Transferred to
assets held for
sale (3) (666) - (26) - (27) (6) (12) (737)
Disposal of
business (4) (136) - (49) - (39) - (11) (235)
Disposals - - - - - (2) - (2)
At 30 June 2018 1,074 972 2,623 - 1,463 911 766 7,809
Accumulated amortisation and
impairment:
-------------- ------------- ------------- -------------- -------- ----- -------
At 1 January 2017 as
previously reported 337 440 888 433 209 414 294 3,015
-------------------- -------- -------------- ------------- ----- -------
Impact of adoption
of IFRS 15 (1) - (134) - (433) - - - (567)
-------------------- -------- -------------- ------------- ------------- -------------- -------- ----- -------
At 1 January 2017
restated 337 306 888 - 209 414 294 2,448
-------------------- -------- -------------- ------------- ----- -------
Exchange
differences (13) - 8 - (4) (1) - (10)
-------------------- -------- -------------- ------------- ----- -------
Charge for the
period - 33 149 - 51 81 29 343
-------------------- -------- -------------- ------------- ----- -------
Disposals - - - - - (6) - (6)
-------------------- -------- -------------- ------------- ------------- -------------- -------- ----- -------
At 1 January 2018 324 339 1,045 - 256 488 323 2,775
Exchange
differences 5 - 1 - 3 - 2 11
Charge for the
period - 18 59 - 38 40 10 165
Impairment (3) 160 - - - - - - 160
Transferred to
assets held for
sale (3) (444) - (23) - (21) (2) (12) (502)
Disposal of
business (4) - - (31) - (27) - (8) (66)
At 30 June 2018 45 357 1,051 - 249 526 315 2,543
Net book value at:
-------------------- -------- -------------- ------------- ------------- -------------- -------- ----- -------
30 June 2018 1,029 615 1,572 - 1,214 385 451 5,266
31 December 2017
restated 1,545 606 1,410 - 1,270 380 454 5,665
-------------------- -------- -------------- ------------- ------------- -------------- -------- ----- -------
31 December 2017 as
previously reported 1,545 1,117 1,450 873 1,247 380 451 7,063
(1) IFRS 15 adoption results in the reclassification of
Participation Fees as contract assets within Trade and Other
Receivables and the de-recognition of Contractual Aftermarket
Rights (CARs). Further, the prior period has been restated for IFRS
15 Revenue from Contracts with Customers, an interim update to the
provisional fair values of the ITP Aero acquisition and other
adjustments. See note 16 for more details.
(2) Fair values relating to the acquisition ITP have been
revised for the adoption of IFRS 15 and alignment with Group
Accounting policies (note 14).
(3) Relates to the Commercial Marine business classified as a
"held for sale" business at 30 June 2018 (note 14).
(4) Sale of L'Orange business to Woodward Inc. on 1 June 2018
(note 14).
Certification costs and development expenditure 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% (2017 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 airframer delays), could result in impairment in
future periods.
During the period, the derecognition of contractual aftermarket
rights, as a result of the implementation of IFRS 15, and the
recognition of the provision for exceptional Trent 1000 costs have
both had the effect of improving the impairment assessments.
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 2018 as
previously reported 1,842 5,035 687 773 8,337
-----
Foreign exchange
adjustment - - 48 - 48
At 1 January 2018
re-stated* 1,842 5,035 735 773 8,385
Exchange differences 7 29 2 5 43
Additions 7 95 23 116 241
-----
Additions - arising
from TotalCare Flex
contracts (non-cash) - - 3 - 3
-----
Reclassification of
joint operations to
subsidiaries 1 18 - - 19
-----
Reclassifications 19 75 8 (102) -
-----
Transferred to assets
held for sale (1) (77) (150) - (37) (264)
Disposal of business
(2) (23) (72) - (4) (99)
Disposals (20) (59) (16) - (95)
At 30 June 2018 1,756 4,971 755 751 8,233
Accumulated
depreciation and
impairment:
-----
At 1 January 2018 554 2,984 173 2 3,713
-----
Exchange differences 3 17 - - 20
Reclassification of
joint operations to
subsidiaries 1 8 - - 9
Reclassifications - 1 (1) - -
Charge for the period 31 183 30 - 244
-----
Transferred to assets
held for sale (1) (36) (97) - - (133)
Impairment (2) (3) - - (5)
Disposal of business
(2) (4) (34) - - (38)
Disposals (11) (58) (2) - (71)
At 30 June 2018 536 3,001 200 2 3,739
Net book value at:
30 June 2018 1,220 1,970 555 749 4,494
31 December 2017
restated 1,288 2,051 562 771 4,672
31 December 2017 as
previously reported 1,288 2,051 514 771 4,624
-----
* The prior period has been restated for IFRS 15 Revenue from
Contracts with Customers, an interim update to the provisional fair
values of the ITP Aero acquisition and other adjustments. See note
16.
(1) Relates to the Commercial Marine business classified as a
"held for sale" business at 30 June 2018 (note 14).
(2) Sale of L'Orange business to Woodward Inc. on 1 June 2018
(note 14).
10 Financial assets and liabilities
Other financial assets and liabilities comprise:
Derivatives
Foreign
exchange Commodity Interest rate
contracts contracts contracts (1) Total Financial RRSAs Other C Shares Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 30 June 2018
Non-current
assets 165 33 211 409 - - - 409
Current assets 16 19 12 47 - - - 47
Current
liabilities (670) (3) - (673) (39) (28) (28) (768)
Non-current
liabilities (2,447) (5) (4) (2,456) (204) (34) - (2,694)
(2,936) 44 219 (2,673) (243) (62) (28) (3,006)
At 31 December
2017
Non-current
assets 362 16 232 610 - - - 610
Current assets 27 9 - 36 - - - 36
Current
liabilities (493) (10) - (503) (50) (20) (28) (601)
Non-current
liabilities (2,208) (14) (5) (2,227) (194) (37) - (2,458)
(2,312) 1 227 (2,084) (244) (57) (28) (2,413)
(1) Includes the foreign exchange impact of cross-currency interest rate swaps.
Derivative financial instruments Half-year to 30 June 2018 Year to 31 December 2017
Foreign exchange Commodity Interest rate Total Total
GBPm GBPm GBPm GBPm GBPm
At 1 January (2,312) 1 227 (2,084) (5,249)
Movements in fair value hedges - - (7) (7) 9
Movement in cash flow hedges (7) 6 (1) (2) (131)
Movements in other derivative
contracts (854) 39 - (815) 2,648
Contracts settled 237 (2) - 235 639
At period end (2,936) 44 219 (2,673) (2,084)
Financial risk and
revenue sharing
arrangements (RRSAs)
and other financial
liabilities Financial RRSAs Other
Half-year to 30 June Year to 31 December Half-year to 30 June Year to 31 December
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
At 1 January as
previously reported (101) (15)
Impact of adoption of
IFRS 15 (1) - (42)
At 1 January restated (244) (101) (57) (57)
Exchange adjustments
included in OCI - (14) (22)
Additions - - (3)
Acquisition of ITP
Aero - (157)
Financing charge (2) (5) (5) (1)
Changes to forecast
payments (2) 1
Exchange adjustments -
excluded from
underlying results
(2) - 10 (1) 1
Cash paid to partners 8 22 18
Other - - 3
At period end (243) (244) (62) (57)
(1) IFRS 15 adoption results in a change in accounting treatment
for parts sold with an option to repurchase and also future
obligations to airframers arising from sale of our OE on their
airframes (see note 16).
(2) Included in net financing.
Fair values of financial instruments equate to book values with
the following exceptions:
Half-year to 30 June 2018 Year to 31 December 2017
Book value Fair value Book value Fair value
GBPm GBPm GBPm GBPm
Borrowings (4,441) (4,479) (3,488) (3,557)
Financial RRSAs (243) (252) (244) (247)
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
unconsolidated companies where the fair value approximates to the
book value.
-- The fair values of trade receivables (held to collect),
contractual cash flows 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
and trade receivable held for sale are estimated by discounting
expected future contractual cash flows using prevailing interest
rate curves or cost of borrowing, as appropriate. Amounts
denominated in foreign currencies are valued at the exchange rate
prevailing at the balance sheet date. These financial instruments
and money-market funds are included on the balance sheet at fair
value, derived from observable market prices (Level 2 as defined by
IFRS 13 Fair Value Measurement).
-- Borrowings are carried at amortised cost. Amounts denominated
in foreign currencies are valued at the exchange rate prevailing at
the balance sheet date. The fair value of borrowings is estimated
by discounting contractual future cash flows (Level 2 as defined by
IFRS 13).
-- The fair values of RRSAs and TotalCare Flex liabilities are
estimated by discounting expected future cash flows. The
contractual cash flows are based on future trading activity, which
is estimated based on latest forecasts (Level 3 as defined by IFRS
13).
-- At 30 June 2018 the Group does not hold any financial
instruments classified as Level 1 (as defined by IFRS 13).
Borrowings
During the period, the Group has issued EUR550m 0.875% Notes
maturing 2024 and EUR550m 1.625% Notes maturing 2028 to prefund the
2019 debt maturities. There were no other significant changes in
the Group's borrowings during the six months ended 30 June
2018.
11 Pensions and other post-retirement benefits
The net post-retirement scheme surplus as at 30 June 2018 is
calculated on a year to date basis, using the latest valuation as
at 31 December 2017, updated to 30 June 2018 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 2018 2,108 (1,370) 738
Exchange adjustments - (8) (8)
Current service cost (91) (27) (118)
Net financing 27 (16) 11
Contributions by employer 45 42 87
Actuarial gains (1) 410 41 451
Disposal of business - 31 31
Other - (1) (1)
At 30 June 2018 2,499 (1,308) 1,191
Analysed as:
Post-retirement scheme surpluses - included in non-current assets 2,499 22 2,521
Post-retirement scheme deficits - included in non-current liabilities - (1,306) (1,306)
Post-retirement scheme deficits - liabilities held for sale - (24) (24)
2,499 (1,308) 1,191
(1) The net actuarial gains in the UK arose principally due to
changes in the yield curves used to value the assets and the
liabilities.
12 Contingent liabilities
In January 2017, after full cooperation, the Company concluded
deferred prosecution agreements with the Serious Fraud Office and
the US Department of Justice and a leniency agreement with the MPF,
the Brazilian federal prosecutors. Prosecutions of individuals may
follow and enforcement action may be taken by other authorities. 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 over and above
the penalties imposed to date, 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 financing support for its customers,
generally in respect of civil aircraft. The Group's commitments
relating to these financing arrangements 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$2.4bn (2017:$3.3bn) (on
a discounted basis) to provide facilities to enable customers to
purchase aircraft (of which approximately US$27m could be called
during 2018). 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 reflect 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 2018 31 December 2017
GBPm $m GBPm $m
Gross contingent liabilities 141 186 145 196
Value of security (1) (41) (54) (41) (55)
Indemnities (40) (52) (51) (69)
Net commitments 60 80 53 72
Net commitments with security reduced by 20% (2) 70 92 64 86
(1) Security includes unrestricted cash collateral of: 22 30 22 29
(2) Although sensitivity calculations are complex, the reduction
of the relevant security by 20% illustrates the sensitivity of the
contingent liability to changes in this assumption.
Contingent liabilities exist in respect of guarantees provided
by the Group in the ordinary course of business for product
delivery, performance and reliability. The Group has, in the normal
course of business, entered into arrangements in respect of export
finance, performance bonds, countertrade obligations and minor
miscellaneous items. Various Group undertakings are parties to
legal actions and claims which arise in the ordinary course of
business, some of which are for substantial amounts. As a
consequence of the insolvency of an insurer as previously reported,
the Group is no longer fully insured against known and potential
claims from employees who worked for certain of the Group's
UK-based businesses for a period prior to the acquisition of those
businesses by the Group. While the outcome of some of these matters
cannot precisely be foreseen, the directors do not expect any of
these arrangements, legal actions or claims, after allowing for
provisions already made, to result in significant loss to the
Group.
13 Related party transactions
Transactions with related parties are shown on page 166 of the
2017 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
2018 2017 2017
GBPm GBPm GBPm
Sales of goods and services to joint ventures and associates 1,400 980 2,469
Purchases of goods and services from joint ventures and associates (1,556) (1,399) (2,224)
Included in sales of goods and services to joint ventures and
associates are sales of spare engines amounting to GBP185m (2017:
half-year GBP24m, full-year GBP418m).
Profit recognised in the year on such sales amounted to GBP54m
(2017: half-year GBP23m, full-year GBP75m), 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 GBP47m
(2017: half-year GBP19m, full-year GBP67m).
14 Acquisition and disposals
L'Orange disposal
On 1 June 2018 the Group sold its L'Orange business, part of
Rolls-Royce Power Systems, to Woodward Inc. for EUR673m.
2018
GBPm
Proceeds
Cash consideration (1) 589
Cash and cash equivalents disposed (3)
Disposal costs paid (2)
Cash inflow per cash flow statement 584
Assets and liabilities disposed
Intangible assets 169
Property, plant and equipment 61
Investments 3
Deferred tax assets 6
Inventory 40
Deposits (payments received on account) (1)
Trade and other receivables 27
Trade and other payables (21)
Current tax (1)
Provisions for liabilities and charges (6)
Deferred tax liabilities (12)
Post-retirement scheme deficits (31)
Net assets disposed 234
Profit on disposal before disposal costs and continuing obligations 352
Cumulative currency translation gain 19
Profit on disposal of business 371
Disposal costs (13)
Non-underlying profit before tax 358
(1) Under the sale agreement, the cash consideration may be
adjusted by up to +/-EUR44m, based on L'Orange aftermarket sales
over the five-year period to 31 May 2023. The table above assumes
that no adjustments arise; this will be reviewed at each reporting
date over the adjustment period, based on actual sales.
ITP Aero acquisition
On 19 December 2017 the Group completed the acquisition of ITP
Aero. The fair value of the assets and liabilities acquired has
been presented on a provisional basis in the 2017 Annual Report.
The opening balance sheet position has since been updated for the
impact of the transition to IFRS 15 Revenues from Contracts with
Customers and adjustments to the recognition of deferred tax and
long--term contracts. This has resulted in an increase in net
assets acquired of GBP1,918m and has increased the bargain purchase
value to GBP513m. As a consequence, the total gain on acquisition
has increased to GBP1,066m.
In accordance with IFRS 3 Business Combinations, the provisional
amounts recognised at the acquisition date have been adjusted
retrospectively.
Commercial Marine - held for sale
On 6 July 2018 the Group announced the sale of Commercial Marine
to KONGSBERG for a cash consideration of approximately GBP425m. The
disposal is expected to complete in the first quarter of 2019.
On 30 June 2018 the transaction met the criteria of IFRS 5
Non-current Assets Held for Sale and Discontinued Operations that
where the carrying value of a 'disposal group' is expected to be
recovered through a sale transaction, the disposal group should be
treated as 'held for sale', with net assets presented as a single
line on the balance sheet measured at the lower of carrying value
or fair value less costs to sell.
The table below summarises the categories of assets and
liabilities classified as held for sale:
2018
GBPm
Assets and liabilities held for sale
Intangible assets 235
Property, plant and equipment 133
Deferred tax assets 5
Inventory 215
Trade and other receivables 237
Current tax assets 4
Assets held for sale 829
Trade and other payables (388)
Current tax liabilities (5)
Provisions for liabilities and charges (46)
Post-retirement scheme deficits (24)
Liabilities associated with assets held for sale (463)
Net assets held for sale 366
As a result of the decision to classify the Commercial Marine
business as held for sale, its carrying value has been assessed
against the anticipated proceeds and the disposal costs. An
impairment charge of GBP160m for the related goodwill has been
recognised in the income statement.
15 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 * below) as stated on page 20 and from the
consolidated cash flow statement on page 25.
Half-year to 30 June 2018 Half-year to 30 June 2017 Year to 31 December 2017
GBPm GBPm GBPm GBPm GBPm GBPm Source
Underlying profit
before tax (PBT) -
* below 73 (143) 199
Depreciation of
property, plant and
equipment 239 221 450 A
Amortisation of
intangible assets 325 172 345 A
Impairment of goodwill (160) - (12) B
Acquisition accounting (91) (62) (129) B
Depreciation and
* amortisation 313 331 654
Increase in inventories (427) (428) (196) A
Acquisition accounting (33) - -
Increase in trade and
other receivables (300) (487) (294) C
Increase in trade and
other payables 997 1,374 1,893 C
Realised losses on
settled foreign
exchange derivatives
in financing (33) (131) (195) B
Revaluation of trading
assets (75) (4) (6) B
Movement on net
* working capital 129 324 1,202
Additions of intangible
assets (327) (213) (647) A
Purchases of property,
plant and equipment (343) (389) (801) A
Government grants
received 1 3 14 A
Expenditure on
property, plant and
equipment and
* intangible assets (669) (599) (1,434)
Realised losses on
hedging instruments 207 211 453 B
Net unrealised fair
value to changes to
derivatives 1 8 24 B
Foreign exchange on
contract accounting (30) (137) (153) B
Exceptional
restructuring (179) (31) (104) B
Trent 1000 exceptional
charge (554) - - B
Other (2) (4) (1) B
Underlying financing 68 59 107 B
Additions of unlisted
investments (4) - - A
(Loss)/profit on
disposal of property,
plant and equipment (11) 6 11 A
Joint ventures (6) (23) (52) A
(Decrease)/increase in
provisions 814 (30) 77 A
Cash flows on other
financial assets and
liabilities excluding
realised losses on
settled
foreign exchange
derivatives in
financing (228) (209) (468) A and B
Share based payments 22 15 33 A
Disposal of intangible
assets 2 - - A
Disposal of property,
plant and equipment 60 9 4 A
Investments in joint
ventures and
associates - (8) (48) A
Net interest (36) (33) (53) A
Net funds of joint
operations
reclassified to
subsidiaries 4 - - A
Issue of ordinary
shares - - 21 A
Purchase of ordinary
shares for share
schemes - (2) (24) A
* Other 128 (169) (173)
* Trading cash flow (26) (256) 448
Net defined benefit
plans - underlying
operating charge 118 118 240 A
Cash funding of defined
benefit plans (87) (130) (249) A
Contributions to
defined benefit
schemes in excess
of underlying PBT
* charge 31 (12) (9)
* Tax (77) (71) (180) A
* Free cash flow (72) (339) 259
* Shareholder payments (85) (85) (214) A
Acquisition on ITP
* Aero - - 229
Disposal of L'Orange 584 - - A
Payments of
financial penalties
from agreements
with investigating
* bodies - (267) (286) A
* Other 13 5 (9) A
* Foreign exchange 30 (20) (59) A
* Change in net debt 470 (706) (80)
Free cash flow is defined in Note 1.
Half-year to 30 June 2018 Half-year to 30 June 2017 Year to 31 December 2017
GBPm GBPm GBPm GBPm GBPm GBPm Source
Reported operating
profit (775) (103) 366
Realised losses on
hedging instruments (207) (211) (453) B
Net unrealised fair
value to changes to
derivatives (1) (8) (24) B
Foreign exchange on
contract accounting 30 137 153 B
Revaluation of trading
assets and liabilities 75 4 6 B
Effect of acquisition
accounting 124 62 129 B
Impairment of goodwill 160 - 24 B
Trent 1000 exceptional
charge 554 - - B
Exceptional
restructuring 179 31 104 B
Financial penalties from
agreements with
investigating bodies - 4 - B
Other 2 - 1 B
Adjustments to reported
operating profit 916 19 (60)
Underlying profit before
financing 141 (84) 306
Underlying financing (68) (59) (107) B
Underlying profit before
tax 73 (143) 199
The table below shows a reconciliation of free cash flow to the
change in cash and cash equivalents presented in the condensed
consolidated cash flow statement on page 25.
Half-year to 30 June 2018 Half-year to 30 June 2017 Year to 31 December 2017
GBPm GBPm GBPm GBPm GBPm GBPm Source
Change in cash and cash
equivalents 1,392 (412) 231 A
Returns to shareholders 85 85 214 A
Net cash flow from
changes in borrowings
and finance leases (956) (274) (200) A
Increase in short-term
investments 4 - - A
Acquisition of ITP Aero - - (263) A
Disposal of L'Orange (584) - - A
Other acquisitions and
disposals (13) (5) (1) C
Changes in group
structure (597) (5) (264)
Payments of financial
penalties from
agreements with
investigating bodies 267 286 A
Other - (8)
Free cash flow (72) (339) 259
Exclude cash outflow of
ITP Aero 14
Free cash flow excluding
ITP Aero 273
Sources:
A Cash flow statement
B Note 2 - underlying profit adjustments
C Cash flow statement adjusted for non-underlying items including exchange differences
16 Impact of adopting IFRS 15 and other adjustments
Condensed consolidated income statement
For 30 June and 31 December 2017
Other Other
Previous IFRS 15 adjustments IFRS 15 Previous IFRS 15 adjustments IFRS 15
accounting impact (1) basis accounting impact (1) basis
Six months to 30 June 2017 Year to 31 December 2017
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------
Revenue 7,566 (904) (6) 6,656 16,307 (1,480) (13) 14,814
---------
Cost of sales (6,158) 357 - (5,801) (13,134) 620 - (12,514)
---------
Gross profit (2) 1,408 (547) (6) 855 3,173 (860) (13) 2,300
---------
Commercial and
administrative costs (552) - - (552) (1,222) - - (1,222)
---------
Research and development
costs (3) (436) (21) - (457) (795) (48) - (843)
---------
Share of results of joint
ventures and associates 51 - - 51 131 - - 131
---------
Operating (loss)/profit 471 (568) (6) (103) 1,287 (908) (13) 366
---------
Gain arising on the
acquisition of ITP Aero - - - - 798 96 172 1,066
---------
Profit/(loss) before
financing and taxation 471 (568) (6) (103) 2,085 (812) 159 1,432
---------
Financing income 1,570 49 29 1,648 2,973 (58) (4) 2,911
---------
Financing costs (100) (3) 2 (101) (161) (8) 5 (164)
---------
Net financing (4) 1,470 46 31 1,547 2,812 (66) 1 2,747
---------
Profit/(loss) before
taxation 1,941 (522) 25 1,444 4,897 (878) 160 4,179
---------
Taxation (5) (360) 90 (2) (272) (689) 172 2 (515)
---------
Profit for the period 1,581 (432) 23 1,172 4,208 (706) 162 3,664
---------
Attributable to:
Ordinary shareholders 1,581 (432) 23 1,172 4,207 (706) 162 3,663
Non-controlling interests - - - - 1 - - 1
---------
Profit for the period 1,581 (432) 23 1,172 4,208 (706) 162 3,664
---------
Earnings per ordinary share attributable to ordinary
shareholders
Basic 86.21p (23.56)p 1.25p 63.90p 229.40p (38.50)p 8.83p 199.73p
---------
Diluted 86.06p (23.51)p 1.25p 63.80p 228.64p (38.36)p 8.80p 199.08p
---------
(1) The other adjustments arise from: the revised calculation of
the foreign exchange rate applied to non-monetary assets and
liabilities GBP29m credit in June 2017 and (GBP4m) charge in
December 2017; the revised unwind of discounting of non-current
liabilities of (GBP4m) in June 2017 and (GBP8m) in December 2017;
and a preliminary update of the provisional fair values arising on
the acquisition of ITP Aero increasing the gain arising on
acquisition in December 2017 by GBP172m.
(2) Predominantly due to de-recognition of contractual
aftermarket rights, de-linkage of OE from aftermarket contracts and
a change to recognise revenue on long-term service agreements as
costs are incurred rather than when the engines are operated.
(3) Re-classification of the recognition of contributions
received from the Group's suppliers under Risk and Revenue Sharing
Agreements (RRSAs) to cost of sales.
(4) Revised phasing of foreign exchange in line with revised
phasing of long-term service agreement revenues and unwind of
discounting of future guarantee payments due to customers.
(5) Consequential change from the restated reported profit.
Condensed consolidated statement of comprehensive income
For 30 June and 31 December 2017
Other Other
Previous IFRS 15 adjustments IFRS 15 Previous IFRS 15 adjustments IFRS 15
accounting impact (1) basis accounting impact (1) basis
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Six months to 30 June 2017 Year to 31 December 2017
Profit for the period 1,581 (432) 23 1,172 4,208 (706) 162 3,664
Other comprehensive income
(OCI)
Movements in
post-retirement schemes (112) - - (112) 735 - - 735
Share of OCI of joint
ventures and associates (1) - - (1) (1) - - (1)
Related tax movements 42 - - 42 (307) - - (307)
Items that will not be
reclassified to profit or
loss (71) - - (71) 427 - - 427
Foreign exchange
translation differences
on
foreign operations (59) 4 - (55) (142) 6 - (136)
Share of OCI of joint
ventures and associates (3) - - (3) (5) - - (5)
Related tax movements 1 - - 1 1 - - 1
Items that may be
reclassified to profit or
loss (61) 4 - (57) (146) 6 - (140)
Total comprehensive income
for the period 1,449 (428) 23 1,044 4,489 (700) 162 3,951
Attributable to:
Ordinary shareholders 1,449 (428) 23 1,044 4,488 (700) 162 3,950
Non-controlling
interests - - - - 1 - - 1
Total comprehensive income
for the period 1,449 (428) 23 1,044 4,489 (700) 162 3,951
(1) See footnote 1 above.
Condensed consolidated balance sheet
At 31 December 2017
IFRS 15 Other adjustments
Previous Accounting Impact (1) IFRS 15 basis IFRS 9 impact (11) Restated
31 Dec 2017 31 Dec 2017 1 Jan 2018
GBPm GBPm GBPm GBPm GBPm GBPm
ASSETS
Intangible assets
(2) 7,063 (1,439) 41 5,665 - 5,665
Property, plant and
equipment 4,624 - 48 4,672 - 4,672
Investments - joint
ventures and
associates 688 - - 688 - 688
Investments - other 26 - - 26 - 26
Other financial
assets 610 - - 610 - 610
Deferred tax assets
(3) 271 544 27 842 2 844
Post-retirement
scheme surpluses 2,125 - - 2,125 - 2,125
Non-current assets 15,407 (895) 116 14,628 2 14,630
Inventories (4) 3,660 64 164 3,888 - 3,888
Trade and other
receivables (5) 7,919 (1,728) 150 6,341 (17) 6,324
Taxation recoverable 17 - - 17 - 17
Other financial
assets 36 - - 36 - 36
Short-term
investments 3 - - 3 - 3
Cash and cash
equivalents 2,953 - - 2,953 - 2,953
Current assets 14,588 (1,664) 314 13,238 (17) 13,221
Assets held for sale 7 - - 7 - 7
Total assets 30,002 (2,559) 430 27,873 (15) 27,858
LIABILITIES
Borrowings (82) - - (82) - (82)
Other financial
liabilities (6) (581) (20) - (601) - (601)
Trade and other
payables (7) (9,527) (2,077) (49) (11,653) - (11,653)
Current tax
liabilities (209) - - (209) - (209)
Provisions for
liabilities and
charges (8) (526) 64 (33) (495) - (495)
Current liabilities (10,925) (2,033) (82) (13,040) - (13,040)
Borrowings (3,406) - - (3,406) - (3,406)
Other financial
liabilities (6) (2,435) (23) - (2,458) - (2,458)
Trade and other
payables (7) (4,178) (1,169) (86) (5,433) - (5,433)
Deferred tax
liabilities (3) (1,144) 586 (7) (565) - (565)
Provisions for
liabilities and
charges (8) (357) 34 (50) (373) - (373)
Post-retirement
scheme deficits (1,387) - - (1,387) - (1,387)
Non-current
liabilities (12,907) (572) (143) (13,622) - (13,622)
Total liabilities (23,832) (2,605) (225) (26,662) - (26,662)
Net assets 6,170 (5,164) 205 1,211 (15) 1,196
EQUITY
Called-up share
capital 368 - - 368 - 368
Share premium
account 195 - - 195 - 195
Capital redemption
reserve 162 - - 162 - 162
Cash flow hedging
reserve (112) - - (112) - (112)
Other reserves (9) 673 (13) - 660 - 660
Retained earnings
(10) 4,881 (5,151) 205 (65) (15) (80)
Equity attributable
to ordinary
shareholders 6,167 (5,164) 205 1,208 (15) 1,193
Non-controlling
interests 3 - - 3 - 3
Total equity 6,170 (5,164) 205 1,211 (15) 1,196
(1) The other adjustments primarily arise from: the revision of
the foreign exchange rate applied to the initial recognition of
non-monetary assets and liabilities that increases retained
earnings by GBP140m; the reduction in deferred tax assets of
(GBP18m); the use of a revised discount rate on non-current
liabilities (GBP86m); and a reclassification of contract provisions
from trade and other receivables to provisions for liabilities and
charges (GBP12m current and GBP50m non-current). In addition a
preliminary update has been made to the provisional fair values
arising on the acquisition of ITP Aero in December 2017 increasing
opening net assets by GBP172m. The tax effect of these items is to
reduce net assets by (GBP3m).
(2) The change in intangible assets primarily arises from the
de-recognition of Contractual Aftermarket Rights (CARs) and
reclassification of participation fees as contract assets within
trade and other receivables as a result of IFRS 15 providing
additional guidance on the treatment of payments to customers. The
change also includes movement on ITP Aero, see note 14.
(3) Consequential change from the restated cumulative profits.
(4) Relates to the cost of parts sold where we retain an option
to repurchase e.g. within a larger manufactured assembly. The
customer has not obtained control based on the IFRS 15 definition,
so the asset has been added to the inventory balance.
(5) There are a number of factors impacting trade and other receivables as follows:
(a) Revised revenue allocation between years (deferred income)
as a result of de-linkage of OE from aftermarket contracts and a
change to recognise revenue on long-term service agreements as
costs are incurred rather than as engines are operated.
(b) Recognition of an additional asset where we have incurred
costs to obtain a contract that will subsequently be amortised as a
reduction against the associated revenue as goods and services are
delivered.
(c) Reclassifications of: participation fees from intangible
assets; RRSA payments made ahead of parts usage as a prepayment
from trade and other payables; and amounts billed in advance have
increased the trade receivables asset (amount billed) and the
contract liability within trade and other payables to better
reflect the contractual position.
(6) Cash received for parts sold with an option to repurchase as
per 4 and future obligations to airframers arising from sale of our
OE on their airframes.
(7) Revised revenue allocation as a result of de-linkage of OE
from aftermarket contracts and a change to recognise revenue on
long-term service agreements as costs are incurred rather than when
the engine is operated. Also includes reclassification of RRSA
payments made ahead of parts usage as a prepayment within trade and
other receivables.
(8) As a result of the more refined guidance on contract
liabilities we have reclassified balance from provisions into trade
and other receivables / payables
(9) Cumulative change from consolidating overseas entities IFRS
15 local currency income statement and closing balance sheet
impacts into sterling.
(10) Cumulative impact of restating prior period's performance.
Predominantly due to de-recognition of contractual aftermarket
rights, de-linkage of OE from aftermarket contracts and a change to
recognise revenue on long-term service agreements as costs are
incurred rather than when the income is received.
(11) Re-assessment of recoverability of financial assets using
IFRS 9 principles has resulted in a reduction in net assets of
GBP(15)m.
Cash flows
The adjustments to the income statement and balance sheet
described above do not affect the cash balances, but do alter the
categorisation of some items in the cash flow statement. In
particular, the de-recognition of contractual aftermarket rights
and the transfer of participation fees to contractual assets reduce
additions to intangible assets by GBP172m and GBP346m in the half
year and full year respectively. These cash flows are now included
in the net cash flows from operating activities and there is a
consequential change to the adjustment for amortisation of
intangible assets. Other adjustments are principally within
monetary working capital movements.
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 59 to 62 of the Annual Report 2017, 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 sustainably win future business, achieve operating
results and realise future growth opportunities.
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.
Major product 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.
Product safety
The lives of people that our customers serve depend on the
safety of our products wherever and whenever they operate them. Any
failure to meet this expectation, or if our product causes
significant environmental impact, would adversely affect our
reputation and long-term sustainability.
Talent and capability
Inability to attract and retain the critical capabilities and
skills needed in sufficient numbers to effectively organise, deploy
and incentivise our people to deliver our strategies, business
plans and projects.
Business continuity
Breakdown of external supply chain or internal facilities that
could be caused by destruction of key facilities, natural disaster
(including those caused by climate change), 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 cyber security causing controlled or critical data to
be lost, made inaccessible, corrupted or accessed by unauthorised
users.
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. foreign currency, oil price,
rates) and some of which are more specific to the Group (e.g.
liquidity and credit risks, reduction in air travel or disruption
to other customer operations). Significant extraneous market events
could also materially damage the Group's competitiveness and/or
creditworthiness.
This would affect operational results or the outcomes of
financial transactions.
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. Examples include:
explicit trade protectionism, differing tax or regulatory regimes,
potential for conflict or broader political issues.
Compliance
Non-compliance by the Group with legislation, the terms of the
deferred prosecution agreements or other regulatory requirements in
the heavily regulated environment 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.
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 (which accounting
standards require to be at least a year from the date of this
report). There have been no significant changes to the basis
described on page 63 of the Annual Report 2017. 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 2019, 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 26 October 2018. The final day of trading with
entitlement to C Shares is 24 October 2018. 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
3 December 2018 (CREST holders must submit their election in CREST
by 3pm GMT). The payment of C Shares redemption monies will be made
on 7 January 2019 and the CRIP purchase will begin as soon as
practicable after 7 January 2019.
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 6 March 2018 are
listed in its Annual Report 2017 on pages 66 to 68. Since that
date, the following changes have taken place:
-- Nick Luff was elected to the Board at the AGM on 3 May 2018.
By order of the Board
Warren East Stephen Daintith
Chief Executive Chief Financial Officer
2 August 2018 2 August 2018
Independent review report to Rolls-Royce Holdings plc
Report on the Condensed consolidated half-year financial
statements
Our conclusion
We have reviewed Rolls-Royce Holdings plc's Condensed
consolidated half-year financial statements (the 'interim financial
statements') in the 2018 Half Year Results of Rolls-Royce Holdings
plc for the six month period ended 30 June 2018. Based on our
review, nothing has come to our attention that causes us to believe
that the interim financial statements are not prepared, in all
material respects, in accordance with International Accounting
Standard 34, 'Interim Financial Reporting', as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
- the Condensed consolidated balance sheet as at 30 June 2018;
- the Condensed consolidated income statement and Condensed
consolidated statement of comprehensive income for the six month
period then ended;
- the Condensed consolidated cash flow statement for the six month period then ended;
- the Condensed consolidated statement of changes in equity for
the six month period then ended; and
- the explanatory notes to the interim financial statements.
The interim financial statements included in the 2018 Half Year
Results have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The 2018 Half Year Results, including the interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the 2018
Half Year Results in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the 2018 Half Year Results based on our
review. This report, including the conclusion, has been prepared
for and only for the company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of interim financial statements involves
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 United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
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.
We have read the other information contained in the 2018 Half
Year Results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
2 August 2018
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR FKBDKKBKKDFK
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