TIDMRR.
RNS Number : 4263E
Rolls-Royce Holdings plc
28 February 2020
28 February 2020
ROLLS-ROYCE HOLDINGS PLC - 2019 Full Year Results
Strong 2019 underlying operating profit driving FCF; reinforcing
our confidence for 2020
Warren East, Chief Executive commented: "After a challenging
first half, we had a good end to 2019, delivering 25% growth in
full year underlying operating profit and an encouraging level of
free cash flow. Our restructuring efforts gained momentum, with
run-rate cost savings of GBP269m. Civil Aerospace improved its
underlying profit significantly, with record engine deliveries,
good aftermarket performance and improved OE unit losses. We made
further progress on the Trent 1000; cash costs are in line with
guidance. We remain on target to reduce aircraft on ground to
single digits by the end of Q2 2020.
We continued to invest significantly in R&D and took
important steps towards becoming a leader in low carbon
technologies. We grew our electrical capabilities with the
acquisitions of Siemens' eAircraft business and a majority stake in
Qinous, as well as developing new in-house hybrid-electric
solutions."
-- Good end to 2019: strong Civil Aerospace aftermarket; better Power Systems trading in Q4
-- Underlying core operating profit up 25% to GBP810m; reported
group operating loss GBP(852)m
-- Core FCF GBP911m led by higher profit and reflecting GBP173m
Trent 1000 insurance receipts
-- GBP0.5bn improvement in net cash* position to GBP1.4bn; gross debt reduced by GBP1.1bn
-- Trent 1000 in-service cash costs GBP578m; GBP1.4bn exceptional charge in 2019 results
-- Trent 1000 guidance unchanged from November trading update
-- Record widebody engine deliveries; 14% lower OE unit loss; 64% share of new orders
-- Defence: record GBP5.3bn order intake driving 26% order book growth and healthy cash flow
-- Power Systems: revenue up 4% & operating margin +90bps despite market challenges
-- 2020: underlying operating profit up 15%; at least GBP1bn
FCF; excl. any material COVID-19 impact
-- Remain confident in mid-term target of at least GBP1 per share of FCF (>GBP1.9bn FCF)
Underlying Group(1) Underlying Core(1,2)
Year to 31 2019 2018 Organic 2019 2018 Organic
December Change(4) (3) Change(4)
--------------------- ------------------ ------------------- -------------------- ----------------- ----------------- ---------------------
Revenue
(GBPm) 15,450 15,067 +7% 15,261 14,286 +6%
--------------------- ------------------ ------------------- -------------------- ----------------- ----------------- ---------------------
Operating
profit
(GBPm) 808 616 +25% 810 631 +25%
--------------------- ------------------ ------------------- -------------------- ----------------- ----------------- ---------------------
Earnings
per share 15.9p** 16.0p -2.2p 15.9p 17.3p -2.4p
--------------------- ------------------ ------------------- -------------------- ----------------- ----------------- ---------------------
Free cash
flow
(GBPm)
(5) 873 568 305 911 648 263
--------------------- ------------------ ------------------- -------------------- ----------------- ----------------- ---------------------
Reported Group
2019 2018 Change
--------------------- ------------------ ------------------- --------------------
Revenue
(GBPm) 16,587 15,729 +5%
--------------------- ------------------ ------------------- --------------------
Operating
(loss)
(GBPm) (852) (1,161) 27%
--------------------- ------------------ ------------------- --------------------
Earnings
per share (69.1)p (129.1)p 60.0p
--------------------- ------------------ ------------------- --------------------
Net Cash
(GBPm) 1,361 840 +521
--------------------- ------------------ ------------------- --------------------
Payment
per share 11.7p 11.7p n/a
--------------------- ------------------ ------------------- --------------------
*Net cash is presented excluding lease liabilities **2019
underlying EPS 18p before the impact of IFRS 16
Footnotes to the tables can be found with the Financial
Highlights
2019 Full Year Group Highlights
Financial:
-- Both Group and core underlying operating profit increased 25%
to GBP808m and GBP810m respectively; led by a GBP195m organic
improvement in Civil Aerospace underlying operating profit to
GBP44m and underlying profit growth in Power Systems of 15%
following better Q4 trading
-- Strong Group free cash flow (FCF) of GBP873m (2018: GBP568m)
and core FCF GBP911m (2018: GBP648m), driven by improved underlying
operating profit and Civil aftermarket cash margin; GBP578m Trent
1000 in-service cash costs partly offset by GBP173m insurance
receipt
-- FCF before working capital movement (inventory, receivables
& payables), insurance receipts and Trent 1000 costs was
GBP747m, 79% higher than the prior year (2018: GBP418m)
-- Trent 1000 exceptional programme charge of GBP1,361m
consistent with our November trading statement, driving reported
operating loss of GBP(852)m (2018: GBP(1,161)m)
-- Core R&D cash spend increased modestly to GBP1,108m; good
progress on electrical strategy including acquisition of Siemens'
eAircraft business and strengthening of hybrid capabilities in
Power Systems; small modular reactor (SMR) development progressing
following UK Government matched funding; investment in future
opportunities in Defence (Tempest, Future Vertical Lift, B-52)
-- Net cash excluding lease liabilities improved to GBP1,361m
(2018: GBP840m); gross debt GBP1.1bn lower
Operational:
-- Civil Aerospace: record 510 widebody engines delivered;
further progress in reducing average widebody OE loss, down 14% to
GBP1.2m; 6% growth in large engine installed fleet to 5,029 with
engine flying hour growth of 7%. Widebody market share of 64%
achieved on new orders in 2019
-- Power Systems: revenues up 4%; strong power generation growth
and market share gains in Asia; increased services penetration;
underlying operating profit margin up 90bps to 10.1%
-- Defence: excellent performance in 2019 on both orders and
cash flow; record order intake of GBP5.3bn and book-to-bill ratio
of 1.6x driving healthy cash flow; 499 aero engines delivered
-- ITP Aero: good underlying revenue growth of 21% and strong profit growth to GBP111m
-- Restructuring plan on track; 2,900 cumulative headcount
reduction with run rate cost savings of GBP269m achieved since the
programme commenced in June 2018
Civil Aerospace in-service performance:
-- Trent XWB now our second largest installed fleet; leading
engines now in their fifth year in service. Fleet leader has flown
over 22,000 hours without a shop visit; Trent XWB-84 OE deficit
reduced by over 20% in 2019 and remains on track to reach breakeven
by the end of 2020
-- Trent 1000: roll-out of technical fixes progressing well,
further actions underway to reduce customer disruption; in-service
cash costs unchanged at GBP2.4bn across 2017-23. AOG reduction to
single-digit by end of Q2 2020, unchanged since November update
-- Design progressing on track for the improved Trent 1000 TEN
high pressure turbine (HPT) blade, the last major issue to resolve;
certification of this component still expected in the first half of
2021
Market environment: mid-term ambition of GBP1 FCF per share
remains supported
-- Updated widebody engine delivery expectations of 450 in 2020
and 400-450 per year over the mid-term, following previously
announced airframer build rate reductions
-- Despite challenges in certain Power Systems end markets,
growth expected to continue led by mission-critical power
generation, rising services penetration and further geographical
expansion
-- Defence targeting a number of attractive mid-term growth
opportunities, particularly in the US where we are well
positioned
-- The outbreak of COVID-19 represents a macro risk and is
likely to have an impact on air traffic growth in the near term;
however long term growth trends remain intact
2019 Full Year Results: Financial Highlights
Percentage or absolute change figures in this document are on an
organic basis(4) unless otherwise stated.
Underlying
Underlying Organic op. profit Organic
revenue (GBPm)(1) Change(3,4) (GBPm)(1) Change (3,4)
Civil Aerospace 8,107 +10% 44 +195
-------------------------- ------------------- ------------- ------------ --------------
Power Systems 3,545 +4% 357 +15%
-------------------------- ------------------- ------------- ------------ --------------
Defence 3,250 +1% 415 -7%
-------------------------- ------------------- ------------- ------------ --------------
ITP Aero 936 +21% 111 +67%
-------------------------- ------------------- ------------- ------------ --------------
Corporate / eliminations (577) - (117) -
-------------------------- ------------------- ------------- ------------ --------------
Core(2) operating
business 15,261 +6% 810 +25%
-------------------------- ------------------- ------------- ------------ --------------
Non-core(2) business 189 - (2) -
-------------------------- ------------------- ------------- ------------ --------------
Total Group 15,450 +7% 808 +25%
-------------------------- ------------------- ------------- ------------ --------------
Core underlying:
Civil Aerospace metrics: 2019 2018 GBPm 2019 2018
----------------------------- ------- ------- ------------------- ------ ------
Widebody engine deliveries 510 469 Net R&D cash spend 1,108 1,105
----------------------------- ------- ------- ------------------- ------ ------
Average loss per widebody
OE (GBPm) 1.2 1.4 R&D capitalised 468 498
----------------------------- ------- ------- ------------------- ------ ------
Large engine in-service
fleet 5,029 4,757 R&D P&L charge 688 650
----------------------------- ------- ------- ------------------- ------ ------
Large engine invoiced
flying hours 15.3m 14.3m C&A 938 977
----------------------------- ------- ------- ------------------- ------ ------
Large engine LTSA major Hedge book $/GBP
refurbs 306 286 average 1.53 1.54
----------------------------- ------- ------- ------------------- ------ ------
Large engine LTSA check
& repair 660 569 Hedge book (US$bn) $37 $37
----------------------------- ------- ------- ------------------- ------ ------
(1) Underlying: for definition see Note 2
(2) Core includes Civil Aerospace, Power Systems, Defence and
ITP Aero. Non-core includes Commercial Marine sold on 1 April 2019,
Rolls-Royce Power Development sold on 15 April 2019, Civil Nuclear
North America Service business and other smaller non-core
businesses.
(3) The prior period has been restated to reflect the treatment
of our Civil Nuclear North America Services business as non-core
(disposal announced in September 2019). See Note 1 for details
(4) Organic change at constant translational currency ('constant
currency') by applying FY 2018 average rates to 2019 and 2018
numbers excluding M&A. All commentary is provided on an organic
basis unless otherwise stated
(5) Free cash flow is defined as operating cash after capital
expenditure, pensions and taxes, before payments to shareholders,
payments to investigating authorities and M&A. Excludes cash
costs of 2018 restructuring plan. The derivation of free cash flow
is shown in Note 24
2020 Outlook
Commenting on the outlook for 2020, Warren East added: " The
changes we have been implementing over the past two years are
creating a tangible and sustainable cultural and performance shift.
The momentum we gained in 2019 underpins our confidence for the
year ahead. W e will continue to make progress against our key
drivers of improving OE losses, growing aftermarket cash flow, and
controlling our indirect costs, while investing significantly in
R&D to enable our future growth.
There are macro risks to navigate in 2020, notably the outbreak
of COVID-19. The situation is still evolving, and as such our
guidance for 2020 excludes any material impact. We are monitoring
developments, taking mitigating actions, and will update the market
as appropriate. Core operating profit growth is expected to be
around 15%, with at least GBP1bn of FCF in 2020, as we drive
towards our ambition to exceed GBP1 per share of FCF - or at least
GBP1.9bn - in the mid-term.
We see a significant opportunity in the years ahead to lead the
transition to providing low carbon power and we made significant
progress on this strategy in 2019. We will continue to invest in
developing increasingly efficient engines, exploiting new
technologies, and innovating to become a disruptor in new areas. We
are increasingly well placed to realise our long-term aspiration to
be the world's leading industrial technology company."
Detailed 2020 guidance
GBPm 2019^ 2020 Outlook
-------------------------------- ------- ------------------------------
Underlying revenue(1)
-------------------------------- ------- ------------------------------
Civil Aerospace 8,107 Stable to low single-digit
growth
-------------------------------- ------- ------------------------------
Power Systems(^) 3,306 Low single-digit growth
-------------------------------- ------- ------------------------------
Defence 3,250 Stable to low single-digit
growth
-------------------------------- ------- ------------------------------
ITP Aero 936 Stable
-------------------------------- ------- ------------------------------
Corporate / eliminations (577) Stable
-------------------------------- ------- ------------------------------
Core(2) revenues 15,022 Stable to low single-digit
growth
-------------------------------- ------- ------------------------------
Non-core (including Bergen)^ 428
-------------------------------- -------
Group revenues 15,450
-------------------------------- -------
Underlying operating profit(1)
-------------------------------- ------- ------------------------------
Civil Aerospace 44 50-100bps margin improvement*
-------------------------------- ------- ------------------------------
Power Systems(^) 375 0-100bps margin improvement
-------------------------------- ------- ------------------------------
Defence 415 Stable
-------------------------------- ------- ------------------------------
ITP Aero 111 50-100bps margin improvement
-------------------------------- ------- ------------------------------
Corporate / eliminations (117) GBP(60)-(80)m
-------------------------------- ------- ------------------------------
Core(2) underlying operating 828 Around 15% growth
profit
-------------------------------- ------- ------------------------------
Non-core (including Bergen)^ (20)
-------------------------------- -------
Group underlying operating
profit 808
-------------------------------- -------
*Civil Aerospace profit improvement despite headwind from
GBP100-150m lower capitalisation of R&D in 2020
^For 2020 guidance purposes Power Systems 2019 is shown
excluding Bergen, which is included in non-core to reflect
treatment from 2020
(1) Underlying: for definition see Note 2
(2) Core includes Civil Aerospace, Power Systems, Defence and
ITP Aero. Non-core includes Commercial Marine sold on 1 April 2019,
Rolls-Royce Power Development sold on 15 April 2019, Bergen (for
2020 guidance purposes only), Civil Nuclear North America Service
business and other smaller non-core businesses.
(3) The prior year has been restated to reflect the treatment of
our Civil Nuclear North America Services business as non-core
(disposal announced in September 2019). See Note 1 for details
(4) Organic change at constant translational currency ('constant
currency') by applying FY 2018 average rates to 2019 and 2018
numbers excluding M&A. All commentary is provided on an organic
basis unless otherwise stated
-- Net R&D cash spend is expected to be broadly stable at GBP1.1bn
-- Capitalised R&D should reduce by GBP100m-GBP150m
reflecting lower capitalisation in Civil Aerospace
-- Capex (PPE) is expected to be GBP100m-GBP150m higher
reflecting higher investment in Trent 1000 spare engines as we take
further pro-active steps to reduce customer disruption in 2020
-- Trent 1000 in service cash costs expected to be GBP450m-GBP550m
-- P&L finance costs are expected to be broadly stable
(2019: GBP223m); cash flow finance costs modestly lower reflecting
gross debt reduction in 2019 (2019: GBP73m)
-- P&L underlying tax rate is expected to be in the
low-to-mid 30s in 2020 (2019: 47.9%); Cash tax paid expected to
increase to GBP260m-GBP290m (2019: GBP175m), mainly due to the
timing of payments in the US and Germany
-- As part of our ongoing portfolio evaluation to create a
simpler, more focused group, we are announcing today that we are
carrying out a strategic review of our Bergen medium speed gas and
diesel engine business. Bergen will be reported within non-core
businesses in 2020 results. For guidance purposes 2019 results are
shown on this basis with our 2020 divisional guidance above
-- All guidance presented for 2020 excludes any material impact from COVID-19
This announcement has been determined to contain inside
information.
Enquiries :
Investors: Media:
+44 (0) 7717 811
Peter Lapthorn 069 Richard Wray +44 (0) 7974 918416
Photographs and broadcast-standard video are available at
www.rolls-royce.com .
A PDF copy of this report can be downloaded from
www.rolls-royce.com/investors .
This Full Year Results announcement contains forward-looking
statements. Any statements that express forecasts, expectations and
projections are not guarantees of future performance and will not
be updated. By their nature, these statements involve risk and
uncertainty, and a number of factors could cause material
differences to the actual results or developments. This report is
intended to provide information to shareholders, is not designed to
be relied upon by any other party, or for any other purpose and the
Company and its directors accept no liability to any other person
other than under English law.
Results presentation
A presentation will be held at 09:00 (GMT) today. Details of how
to join the event online are provided below. Downloadable materials
will be available on the Investor Relations section of the
Rolls-Royce website from the start of the event.
Online webcast registration details:
To register for the live webcast, including Q&A
participation, please visit the following link:
https://edge.media-server.com/mmc/p/724ns9b4
Please use this same link to access the webcast replay which
will be made available shortly after the event concludes.
Chief Executive Review
In 2019, how we got to our destination - strong progress across
the Group - gives me increased confidence that the changes we have
been implementing over the past two years are creating a tangible
and sustainable cultural and performance shift within our
business.
We had a good end to the year including strong Civil Aerospace
aftermarket performance, record widebody engine deliveries, and
better trading in Power Systems despite tough market conditions.
Defence performed well throughout the year with a record order
intake and healthy cash performance. As a result, we delivered
improved financial results including a 25% increase in underlying
operating profit and further strong improvement in Civil Aerospace.
This contributed to strong Group free cash flow of GBP873m, another
significant step towards achieving at least GBP1bn in 2020. We also
continued to invest in the new technologies which are so vital to
remaining competitive. This was all achieved despite the in-service
challenges with the Trent 1000, which could have derailed our
progress. The fact that they did not, is thanks to the focus of our
people on their roles in delivering for the business.
I spoke last year of needing to build beyond the breakthrough we
could see occurring as we launched our restructuring and adopted
our new operating structure. We have generated real momentum during
2019, not least in respect to costs, as we scrutinised our spending
with intense rigour and really challenged ourselves to act
differently. There is, however, no denying the fact that the
durability issues with the Trent 1000 weighed heavily on 2019, in
terms of the financial cost of returning the fleet to the levels of
service our customers expect and dealing with the unacceptable
disruption we have caused them. As a result of the Trent 1000 and
as announced in November, we are recognising a net exceptional
charge of GBP1,361m within our financials, contributing to a
reported loss of GBP(852)m.
We have fixes designed for all but one of the issues identified
and are well advanced on certification and rolling them out into
the fleet. As the year drew to a close, we carried out a detailed
technical re-evaluation of our progress on the final fix, a new
high pressure turbine blade for the Trent 1000 TEN. Based upon that
work and test activity, we reset our financial and operational
expectations for the engine in November, based on a revised
estimate of final blade durability, in order to provide certainty
for customers and greater clarity for investors. Since then, we
have made good progress on the design of this blade, and continue
to expect certification of this component in the first half of
2021.
We believe in the positive transforming potential of technology
and have a passion for solving difficult problems. Today, one of
our society's greatest technological challenges is the need for
lower carbon power and we have a crucial role to play in
decarbonising the sectors in which we operate. Firstly, we are
committed to further reducing the environmental impacts of our
products and services. We are following up our success as the
developer of the world's most efficient civil large engine in
service today, the Trent XWB, with our next generation UltraFan. We
are also heavily involved in the drive for alternative sustainable
fuels. Secondly, we are committed to developing new low emission
technologies. During 2019, we made significant progress, including
the acquisition of Siemens' eAircraft business and ground tests of
our megawatt generator for the E-Fan X demonstrator with Airbus.
Thirdly, we are working to reduce the greenhouse gas emissions from
our own operations and facilities to zero by 2030.
Our ability to pioneer the decarbonisation of aviation builds
upon the experience of our Power Systems business in hybrid and
electrical power across a range of sectors. During the year, we
signed customer contracts and framework agreements for hybrid
solutions for the rail and yacht markets. In early 2020, we further
enhanced our capabilities with the acquisition of a majority
holding in power storage specialist Qinous, which will enhance our
microgrid development activities.
I believe the coming year will mark another important step
towards generating significant returns from the market positions
Rolls-Royce has spent many years securing. The value embedded
within our business, most obviously within our installed base of
widebody engines and order book, must be fully unlocked. Our sights
are firmly set upon a mid-term ambition to exceed GBP1 of free cash
flow per share, which translates to at least GBP1.9bn of free cash
flow. To secure this in a sustainable way means reinforcing
behavioural change across our business, driving pace and
simplicity, developing a thirst for continuous improvement and
ensuring disciplined investment in the new technologies we require
to exploit the opportunities that we can see across all our
markets. We will push harder and further in 2020, towards becoming
the world's leading industrial technology company.
Trading Summary
Core(2) Trading Summary
The income statement table below and all commentary relate to
the underlying performance of our core business and percentage or
absolute change figures in this document are on an organic basis,
unless otherwise stated.
Summary income statement
Organic(4)
GBPm 2019(1) 2018(1,3) Change change
------------------------------- -------- ---------- ------- -----------
Underlying revenue 15,261 14,286 +7% +6%
------------------------------- -------- ---------- ------- -----------
Underlying OE revenue 7,373 7,172 +3% +3%
------------------------------- -------- ---------- ------- -----------
Underlying services revenue 7,888 7,114 +11% +10%
------------------------------- -------- ---------- ------- -----------
Underlying gross profit 2,342 2,240 +5% +4%
------------------------------- -------- ---------- ------- -----------
Gross margin % 15.3% 15.7% -40bps -40bps
------------------------------- -------- ---------- ------- -----------
Commercial and administration
costs (938) (977) -4% -4%
------------------------------- -------- ---------- ------- -----------
Restructuring (15) (14) +7% +7%
------------------------------- -------- ---------- ------- -----------
Research and development
charge (688) (650) +6% +5%
------------------------------- -------- ---------- ------- -----------
Joint ventures and associates 109 32 +241% +222%
------------------------------- -------- ---------- ------- -----------
Underlying operating profit 810 631 +28% +25%
------------------------------- -------- ---------- ------- -----------
Underlying operating margin 5.3% 4.4% +90bps +80bps
------------------------------- -------- ---------- ------- -----------
Financing costs (223) (148) +51% +49%
------------------------------- -------- ---------- ------- -----------
Underlying profit before
tax 587 483 +22% +17%
------------------------------- -------- ---------- ------- -----------
Tax (281) (153) +84% -
------------------------------- -------- ---------- ------- -----------
Underlying effective tax
rate 47.9% 31.7% - -
------------------------------- -------- ---------- ------- -----------
Underlying (loss)/profit 306 330 -7% -12%
------------------------------- -------- ---------- ------- -----------
Underlying earnings per
share 15.9 17.3 -1.4p -2.4p
------------------------------- -------- ---------- ------- -----------
(1) Underlying: for definition see Note 2
(2) Core includes Civil Aerospace, Power Systems, Defence and ITP Aero.
(3) The financial information for the prior period has been
restated to reflect the treatment of our Civil Nuclear North
America Services business as non-core. See note 1 for more
details
(4) Organic change at constant translational currency ('constant
currency') by applying FY 2018 average rates to 2019 and 2018
numbers excluding M&A. All commentary is provided on an organic
basis unless otherwise stated
Revenue up 6%
Revenue increased by 6% to GBP15,261m reflecting growth in both
OE and services, led by Civil Aerospace and Power Systems. Civil
Aerospace delivered OE revenue growth of 4% reflecting higher
widebody engine volumes. Services revenue in Civil Aerospace rose
14% with increased shop visit volumes and higher sales of spare
parts. Power Systems achieved 4% OE revenue growth due to strength
in power generation markets, notably for data centres, and 4%
services growth including increased long-term service agreement
(LTSA) penetration. Defence revenue was 1% higher led by 4% growth
in services driven by increased activity in transport and combat.
ITP Aero revenue increased 21% reflecting volume growth largely
across its civil programmes.
Gross profit up 4%
Gross profit was GBP2,342m, up 4%. Civil Aerospace gross profit
improved by 25% reflecting several key factors:
-- increased sales of spare parts and higher LTSA servicing activity
-- a material improvement in the net impact of contract
catch-ups to LTSA profits at GBP33m in 2019 (2018: GBP(276)m),
driven primarily by lower servicing costs in business aviation;
and
-- modestly lower LTSA underlying gross margins, reflecting shop
visit mix, and around GBP70m of FX related headwind principally
reflecting the revaluation of USD creditors and deposits
Power Systems generated a 6% gross profit improvement with a
gross margin of 26% driven by volume growth and improvements in
product mix. As expected, Defence gross profit reduced by 6% with
margins 160bps lower, reflecting product mix. ITP Aero gross profit
increased by 33% with margin improvement of 200bps, driven by
higher OE volumes, improved pricing and a GBP25m benefit from the
impact of a change made to simplify ITP Aero's trading relationship
and contractual terms with Civil Aerospace. This was net neutral at
the Group level, with a corresponding increase in eliminations.
C&A costs down 4%
C&A costs reduced by 4% to GBP938m. This reduction was
driven by restructuring programme headcount savings and management
actions to reduce discretionary spend, partly offset by cost
escalation and higher sales-related activities in Power
Systems.
Self-funded R&D cash spend up modestly; charge to profit 5%
higher
Gross R&D spend was up GBP70m. After funding from customers
and other third parties, core self-funded cash spend was GBP3m
higher at GBP1,108m. Investment in Civil Aerospace widebody and new
business aviation programmes was lower following the recent entry
into service of several new engine programmes. New technology
investment increased by 9%, to develop technologies that underpin
UltraFan in Civil Aerospace, a range of new programmes in Defence
and electrification in Power Systems. R&D capitalisation of
GBP468m was GBP28m lower. Capitalisation remains at a significant
level due to the current development stage of several Civil
Aerospace programmes but is expected to reduce in 2020 and over the
coming years. The net charge to profit increased by GBP35m
reflecting higher spend and the reduction in capitalisation.
Profit from joint ventures and associates
Our share of results from joint ventures was GBP109m, GBP71m
higher than the prior year. This was driven by increased servicing
activity in overhaul bases and higher profit on disposal of engines
in Rolls-Royce & Partners Finance (our engine financing joint
venture).
Operating profit up 25%
Operating profit improved by GBP157m on the prior year to
GBP810m, led by the GBP85m increase in gross profit, higher JV
profit and a GBP37m reduction in C&A costs, partially offset by
the higher R&D charge outlined above.
Financing costs
Financing costs increased from GBP(148)m in 2018 to GBP(223)m in
2019. Within financing costs, net interest payable of GBP(132)m
increased by GBP60m largely due to the adoption of IFRS16. Other
financing costs were GBP(91)m in 2019, modestly higher than the
previous year (2018: GBP(76)m). Other financing costs include
charges relating to the factoring of receivables and the
discounting of prior year provisions.
Taxation
The core underlying tax charge was GBP281m (2018: GBP153m), an
underlying tax rate of 47.9% compared with 31.7% in 2018. This
increase in rate was primarily driven by the non-recognition of a
deferred tax asset on UK losses arising in 2019.
Trent 1000
The Trent 1000 is 13% of our widebody engine fleet. We made good
progress on resolving the technical issues in 2019; we have now
designed eight of the nine component fixes required, seven of which
have been certified. The intermediate pressure turbine fix is now
fitted to almost 100% of the in-service fleet across all engine
variants. The revised intermediate compressor has now been fitted
to over 50% of package C engine variants and has now been certified
for the Trent 1000 TEN variant with the package B planned for the
second half of 2020. Roll-out of the revised high pressure turbine
blade has been embodied into almost 50% of package B and C engine
variants and design work for the Trent 1000 TEN high pressure
turbine blade continues to progress well with certification
expected in the first half of 2021.
We continue to regret the disruption caused to our customers
from these issues. We are taking further positive steps in 2020 to
increase availability of spare engines and further expand
maintenance capacity to reduce the number of aircraft on the ground
(AOG) to below ten by the end of Q2 2020. We have seen positive
results from our actions in the first two months of 2020 with
aircraft on the ground reduced to the mid-30s from the elevated
level of 42 in the second half of 2019, which had resulted from the
proactive actions taken in autumn to retrofit the small number of
remaining Package B intermediate pressure turbine modules.
In November we announced the outcome of recent testing and a
thorough technical and financial review of the Trent 1000 TEN
programme following the issues identified during 2019. This
resulted in a revised timeline and durability estimate for the
improved Trent 1000 TEN HP turbine blade. As a result we expect
total in-service cash costs across all Trent 1000 variants of
around GBP2.4bn across 2017-2023, consistent with the trading
update in November. In 2019, GBP578m of cash costs were incurred,
partly offset by a GBP173m insurance receipt. We continue to expect
cash costs of GBP450-GBP550m in 2020 and a similar level in 2021,
before declining significantly thereafter. These primarily comprise
the cost of replacing affected parts as well as customer disruption
related compensation.
Outside of these in-service costs, we are also investing in our
engineering function, further expansion of our MRO capacity and our
pool of Trent 1000 spare engines. Additionally, the increased costs
associated with our revised estimate for HP turbine blade
durability on the Trent 1000 TEN has impacted the future margins on
our Trent 1000 contracts, including a small number of contracts now
becoming loss making (see below).
As guided in November, an exceptional charge of GBP1,361m at
underlying FX rates was recorded in 2019 on the Trent 1000 (net of
GBP173m insurance receipts). Within this charge, GBP703m is due to
the additional cash costs associated with customer disruption and
remediation shop visits. The remaining GBP658m relates to the
margin impact of our updated HP turbine durability expectations on
the Trent 1000 TEN, primarily the up-front recognition of future
losses on the small number of contracts which are now loss making,
as well as related contract accounting adjustments.
Exceptional restructuring programme
Progress was made in 2019 on our restructuring plan. To date we
have achieved a net headcount reduction of around 2,900 with
run-rate savings of GBP269m. Cash costs of GBP216m were incurred
during the year to deliver this plan, which are reported outside of
free cash flow. We continue to expect run-rate savings of GBP400m
by the end of 2020 and a net headcount reduction of 4,600.
Strategic review of Bergen
As part of our ongoing efforts to evaluate our portfolio and
create a simpler, more efficient Group, today we announce the
decision to carry out a strategic review of Bergen, our medium
speed gas and diesel engine business. Bergen formed part of Power
Systems during 2019, but from 2020 (as a result of this review) it
will be reclassified as non-core. Additionally, following a
reassessment of the order book, an impairment review has been
completed in the second half of the year and a charge of GBP58m has
been recorded outside underlying results in 2019. In 2019 Bergen
generated sales of GBP239m and an underlying operating loss of
GBP(18)m.
A380 cessation costs
In our full year 2018 results we took a preliminary view of
costs relating to Airbus' decision to close the A380 production
line. During the first half of 2019 we had the opportunity to
update our impact assessment and as a result recorded an additional
exceptional charge of GBP59m. This charge has been reduced to
GBP48m at the year-end following the release of GBP11m relating to
supplier amounts recorded in 2018.
IFRS 16
IFRS 16 is effective for the year beginning 1 January 2019.
Commitments for operating as well as finance leases are now
recognised on the balance sheet. The impact of the standard is as
follows:
-- on January 1(st) 2019 an additional lease liability of
GBP2,248m and lease assets of GBP2,213m were recorded on the
balance sheet
-- in the income statement rental payments (previously included
within operating costs) are now replaced with a depreciation charge
on the leased assets. Underlying financing costs on lease
liabilities increased from GBP5m in 2018 to GBP77m in 2019 due to
the new liability
-- there is no impact on free cash flow resulting from the implementation of IFRS 16; and
-- we estimate the overall impact of the adoption of IFRS 16 in
2019 was approximately a 2p reduction in underlying EPS
Group Trading Summary
Group results include core and non-core businesses. Group
underlying revenues rose 7% to GBP15,450m, primarily driven by
growth in Civil Aerospace, offsetting a (76)% decline in non-core
revenue. Group underlying operating profit improved by 25% to
GBP808m as a result of improved gross profit, lower C&A costs
and higher profit from joint ventures offsetting an increased
R&D charge.
Group Funds Flow
Free cash flow
Group free cash flow of GBP873m improved materially from GBP568m
in 2018. This was driven by strong profit growth across most of our
core businesses, increased engine flying hour receipts and spare
parts sales in Civil Aerospace, as well as reduced capital
expenditure on several capacity and facility modernisation projects
which had neared completion in 2018. Trent 1000 in-service cash
costs were GBP578m (2018: GBP431m), partially offset by receipt of
GBP173m of related insurance proceeds. R&D investments
increased modestly.
In 2019 there was an inflow of GBP574m (2018: GBP1,197m) from
the movement in receivables and payables, reflecting higher trade
payables due to increased trading activity, actions taken to
improve overdue debt collection, together with a number of customer
deposits notably in Defence. This was partly offset by a GBP(43)m
increase in inventory (2018: GBP(616)m).
We continue to strive to increase transparency around our
financial performance and reported results. As part of this effort,
additional information is now provided in note 14 on the sale of
trade receivables. For many years, the Group has undertaken the
sale of trade receivables, without recourse, to help normalise
Group cash flows in line with physical delivery volumes. This
practice is commonplace in the aerospace industry. Over the last
three years this has averaged around GBP1,037m at the year-end. At
31 December 2019 GBP1,117m had been drawn under factoring
facilities, GBP95m higher than December 2018, which is reflected
within working capital.
Given the one-off nature of the restructuring announced in 2018,
the GBP(216)m cash costs relating to this restructuring programme
(2018: GBP(70)m) are reported outside of Group free cash flow.
Summary funds flow statement (1)
GBPm 2019 2018 Change
------------------------------------------------------------------------------ ------ ------ -------
Underlying operating profit 808 616 192
------------------------------------------------------------------------------ ------ ------ -------
Depreciation and amortisation 1,068 756 312
------------------------------------------------------------------------------ ------ ------ -------
Lease payments (capital plus interest) (319) - (319)
------------------------------------------------------------------------------ ------ ------ -------
Expenditure on intangible assets (591) (680) 89
------------------------------------------------------------------------------ ------ ------ -------
Capital expenditure (Property, Plant and Equipment) (747) (905) 158
------------------------------------------------------------------------------ ------ ------ -------
Change in inventory (43) (616) 573
------------------------------------------------------------------------------ ------ ------ -------
Change in receivables/payables 574 1,197 (623)
------------------------------------------------------------------------------ ------ ------ -------
Civil Aerospace net LTSA balance change 754 679 75
------------------------------------------------------------------------------ ------ ------ -------
Of which: underlying change 654 376 278
------------------------------------------------------------------------------ ------ ------ -------
Of which: impact of contract catch-ups 100 303 (203)
------------------------------------------------------------------------------ ------ ------ -------
Movement on provisions (506) (242) (264)
------------------------------------------------------------------------------ ------ ------ -------
Net interest received and paid (73) (70) (3)
------------------------------------------------------------------------------ ------ ------ -------
Trent 1000 insurance receipt 173 - 173
------------------------------------------------------------------------------ ------ ------ -------
Other (41) 22 (63)
------------------------------------------------------------------------------ ------ ------ -------
Trading cash flow 1,057 757 300
------------------------------------------------------------------------------ ------ ------ -------
Contributions to defined benefit pensions in excess of underlying PBT charge (9) 59 (68)
------------------------------------------------------------------------------ ------ ------ -------
Taxation paid (175) (248) 73
------------------------------------------------------------------------------ ------ ------ -------
Group free cash flow 873 568 305
------------------------------------------------------------------------------ ------ ------ -------
Of which: Disposed entities(2) (41) (78) 37
------------------------------------------------------------------------------ ------ ------ -------
Group free cash flow (pre disposed entities) 914 646 268
------------------------------------------------------------------------------ ------ ------ -------
Of which: Non-core businesses(3) 3 (2) 5
------------------------------------------------------------------------------ ------ ------ -------
Core free cash flow 911 648 263
------------------------------------------------------------------------------ ------ ------ -------
Shareholder payments (224) (219) (5)
------------------------------------------------------------------------------ ------ ------ -------
Disposals and acquisitions 410 573 (163)
------------------------------------------------------------------------------ ------ ------ -------
Exceptional group restructuring (216) (70) (146)
------------------------------------------------------------------------------ ------ ------ -------
Payment of financial penalties (102) - (102)
------------------------------------------------------------------------------ ------ ------ -------
Foreign exchange (98) 54 (152)
------------------------------------------------------------------------------ ------ ------ -------
Pension fund contribution (35) - (35)
------------------------------------------------------------------------------ ------ ------ -------
Other (87) 10 (97)
------------------------------------------------------------------------------ ------ ------ -------
Change in net funds/(debt) excluding lease liabilities 521 916 (395)
------------------------------------------------------------------------------ ------ ------ -------
(1) The derivation of the summary funds flow statement above
from the reported cash flow statement is included on note 24
(2) Disposed entities include Commercial Marine and Power
Development in 2019 and both of these plus L'Orange in 2018
(3) Non-core businesses include the former Energy businesses not
sold to Siemens and Civil Nuclear North America Services
business
Depreciation and amortisation
The GBP312m increase in depreciation and amortisation to
GBP1,068m was largely due to an additional GBP340m charge relating
to right of use assets following the adoption of IFRS 16 from 1
January 2019.
Lease payments
Lease payments of GBP(319)m reflect the cash cost of leases in
2019. In 2018, prior to the adoption of IFRS 16, the equivalent
lease payments were reflected within underlying operating profit.
Under IFRS16 the depreciation charge is recorded in underlying
operating profit.
Expenditure on intangible assets
Intangible asset expenditure of GBP(591)m was incurred in 2019.
This included GBP(481)m of R&D capitalisation (2018: GBP498m)
largely reflecting ongoing investment in Civil Aerospace programmes
including the Trent 7000, Trent XWB and Pearl engine
programmes.
Capital expenditure on property, plant and equipment
Investment of GBP(747)m in 2019 reduced by GBP158m (2018
(GBP905m)) due to several capacity and modernisation programmes
nearing completion in 2018. Spend in 2019 reflects our ongoing
investment in manufacturing capability, projects to modernise our
facilities, and spare engines to support our growing in-service
fleet in Civil Aerospace.
Change in inventory
Inventory increased by GBP(43)m (2018: GBP(616)m) in 2019 due to
volume growth in Civil Aerospace and Power Systems, with a
significant improvement in the second half following a GBP(433)m
increase in H1. This H1 inventory position was driven by a high
level of assembled engines and aftermarket parts held in Civil
Aerospace, as well as growth in Power Systems due to programme
delays, production relocation projects, and product mix. Higher
delivery volumes and greater focus on supply chain management in
the second half of the year drove a significant reduction in
inventory, with a strong improvement in Civil Aerospace in
particular.
Change in receivables/payables
The change in receivables/payables of GBP574m in 2019 was
significantly reduced year-on-year, and reflected:
-- higher trade and other payables due to increased trading activity led by Civil Aerospace
-- a number of customer deposits, notably in Defence driven by strong order intake; and
-- an increase in trade and other receivables, which reflected
volume-related growth partially offset by actions taken to reduce
overdue customer receivables
Movement in underlying Civil Aerospace net LTSA balance
The net LTSA balance represents deferred revenue and is a core
part of our business model where we receive payments from our
customers in respect of our long-term service and overhaul
agreements. In 2019 the LTSA net balance increased by GBP754m. This
movement included a GBP100m increase driven by negative contract
catch-ups to revenues (2018: GBP303m). The underlying change net of
these catch-ups was GBP654m. This reflected invoiced engine flying
hour receipts in excess of revenue traded together with customer
deposits received in the year.
Movement in provisions
The movement in provisions of GBP(506)m in 2019 largely included
utilisation of the Trent 1000 exceptional provision. The remainder
primarily covered cash costs from onerous contracts and
restructuring activity.
Pensions
Cash contributions were in line with the profit and loss charge
in 2019. There was a GBP(68)m year-on-year movement, reflecting the
non-recurrence of a 2018 benefit from changing to quarterly
payments.
Taxation
The decrease in cash tax in 2019 from GBP248m to GBP(175)m
reflected lower payments in Germany compared to 2018, largely due
to timing.
Shareholder payments
Payments to shareholders of GBP224m in 2019 remained in line
with the prior year.
Acquisitions and disposals
In 2019 we completed the disposals of Commercial Marine and
Rolls-Royce Power Development with combined net proceeds of
GBP453m. The GBP573m cash inflow in 2018 related to the disposal of
the L'Orange business, previously within Power Systems. Costs of
GBP43m were incurred in 2019 relating to the acquisition of
Siemens' eAircraft business.
Payment of financial penalties
Following the agreements reached with investigating authorities
in January 2017, a payment schedule was established. N o payments
were due in 2018 and a GBP102m payment was made in 2019. In 2020
and 2021, GBP130m and GBP148m (plus interest) are due respectively
. Consistent with prior years this payment is reported outside of
free cash flow.
Balance Sheet
31 Dec 2018
Summary balance sheet 31 Dec Excluding Civil Civil Nuclear Change excluding Civil Nuclear
GBPm 2019 Nuclear Total
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Intangible assets 5,442 5,278 17 5,295 164
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Property, plant and
equipment 4,803 4,919 10 4,929 (116)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Right of use assets 2,009 - - - 2,009
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Joint ventures and
associates 402 412 - 412 (10)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Contract assets and
liabilities (8,745) (7,074) 1 (7,073) (1,671)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Working capital (1) (1,136) (1,263) 8 (1,255) 127
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Provisions (2,804) (1,916) (1) (1,917) (888)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Net funds (2) (993) 631 (20) 611 (1,624)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Net financial assets and
liabilities (2) (3,277) (4,117) - (4,117) 840
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Net post-retirement scheme
(deficit)/ surplus (208) 641 - 641 (849)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Tax 1,136 1,024 2 1,026 112
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Held for sale 3 391 (17) 374 (388)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Other net assets and
liabilities 14 22 - 22 (8)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Net liabilities (3,354) (1,052) - (1,052) (2,302)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Other items
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
US$ hedge book (US$bn) 37 37 37 -
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Civil Aerospace LTSA asset 1,086 1,097 1,097 (11)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Civil Aerospace LTSA
liability (6,784) (5,584) (5,584) (1,200)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
Civil Aerospace net LTSA
liability (5,698) (4,487) (4,487) (1,211)
--------------------------- -------- ----------------- ---------------- -------- --------------------------------
(1) Net working capital includes inventory, trade receivables
and payables and similar assets and liabilities.
(2) Net funds includes GBP243m (2018: GBP293m) of the fair value
of financial instruments which are held to hedge the fair value of
borrowings.
Key drivers of balance sheet movements were:
Intangible assets
The net increase of GBP164m includes R&D additions of
GBP481m, primarily related to engine programmes in Civil Aerospace
GBP(426)m, together with further investment in software
applications of GBP101m. These were offset by impairment charges of
GBP54m following the announcement of the strategic review of the
Bergen business and the sale of the Civil Nuclear North America
Services business in Power Systems. Amortisation for the period was
GBP(318)m.
Property, plant and equipment
Following the adoption of IFRS 16, finance leased assets
previously held in PPE have been transferred to right of use
assets. C apital additions of GBP767m related to investments in
maintenance, repair and overhaul (MRO) capacity in Civil Aerospace
and the modernisation of facilities including our Defence facility
in Indianapolis. We also expanded our spare engine lease pool to
support our growing in-service widebody engine fleet. These were
offset by depreciation of GBP(491)m.
Right of use assets
IFRS 16 was adopted effective 1 January 2019 resulting in the
recognition of leased assets with a value of GBP2.2bn. See notes 1
and 25 in the consolidated financial statements for more
information.
Investments in joint ventures and associates
There was no material change in our investment in joint ventures
and associates year-on-year.
Contract assets and liabilities
This represents deferred revenue and is a core part of our
business model where we receive payments from our customers in
respect of our long-term service and overhaul agreements. In 2019
this increased by GBP(1,671)m, of which GBP(1,211)m related to the
Civil Aerospace LTSA balance. The remainder largely covered advance
payments in several businesses. The movement in the Civil Aerospace
LTSA balance of GBP(1,211)m included non-cash items of GBP557m,
primarily related to foreign exchange and the cumulative negative
impact of contract catch-ups to LTSA revenue. The change, net of
these items, of GBP(654m) reflected invoiced engine flying hour
receipts and customer deposits in excess of underlying revenue
traded in the income statement.
Working capital
Working capital increased by GBP127m. This reflected a financial
penalty payment of GBP102m related to agreements reached with
investigating authorities in January 2017, and a GBP245m reduction
in working capital from the settlement of deferred consideration
for the acquisition of ITP Aero. These factors offset the reduction
in working capital seen in the funds flow.
Provisions
Provisions increased by GBP888m largely driven by the
incremental exceptional charge related to Trent 1000 disruption and
related onerous contract losses, partly offset by utilisation.
Net funds
Net funds have moved from a net cash position of GBP611m in FY
2018 to a net debt position of GBP(993)m. This was driven by the
adoption of IFRS 16 Leases, which increased lease liabilities by
GBP(2,248)m. Excluding lease liabilities, net cash stood at
GBP1,361m at FY 2019. For other movements see funds flow commentary
in note 24.
Net financial assets and liabilities
These items principally relate to the fair value of foreign
exchange, commodity and interest rate contracts. The reduction in
the net liability of GBP840m largely reflected settlement of
derivative contracts in 2019.
Net post -retirement scheme deficits
The GBP(849)m movement was primarily driven by the buy-in
agreement with Legal & General Assurance Society Limited, which
resulted in a decrease in the surplus of the UK pension plan of
around GBP(600)m. There were also changes in financial and
demographic assumptions.
US$ hedge book
The US hedge book at 31 December 2019 was $37bn. It extends to
2028 on a declining basis and remains sufficient to cover our
medium-term requirements.
Group Reported Results
The changes resulting from underlying trading are described in
the trading summary below.
Consistent with past practice, 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 period-end
mark-to-market adjustments. In particular, the USD:GBP hedge book
has a significant impact on the reported results. In 2019, the
GBP:USD rate rose from 1.28 to 1.32 while the GBP:EUR rose from
1.12 to 1.18. 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.
GBPm Revenue Profit before financing Financing Profit/(loss) before tax
2019 2018 2019 2018 2019 2018 2019 2018
--------------------- ------- ------- -------------- ---------- ------ -------- ------------- ------------
Underlying 15,450 15,067 808 616 (225) (150) 583 466
--------------------- ------- ------- -------------- ---------- ------ -------- ------------- ------------
Foreign exchange and
1 derivatives 1,137 781 144 (24) 75 (1,984) 219 (2,008)
--------------------- ------- ------- -------------- ---------- ------ -------- ------------- ------------
Exceptional
2 programme charges - (119) (1,409) (976) - (15) (1,409) (991)
--------------------- ------- ------- -------------- ---------- ------ -------- ------------- ------------
Impact of discount
3 rate charges - - - - (40) - (40) -
--------------------- ------- ------- -------------- ---------- ------ -------- ------------- ------------
Exceptional
restructuring
4 charges - - (136) (317) - - (136) (317)
--------------------- ------- ------- -------------- ---------- ------ -------- ------------- ------------
5 M&A gains & effects - - (24) 28 (8) (8) (32) 20
of acquisition
accounting
--------------------- ------- ------- -------------- ---------- ------ -------- ------------- ------------
Impairments and
6 asset write-offs - - (84) - - - (84) -
--------------------- ------- ------- -------------- ---------- ------ -------- ------------- ------------
7 Net post-retirement - - (12) (130) 20 13 8 (117)
scheme financing,
pension equalisation
& other
--------------------- ------- ------- -------------- ---------- ------ -------- ------------- ------------
Reported 16,587 15,729 (713) (803) (178) (2,144) (891) (2,947)
--------------------- ------- ------- -------------- ---------- ------ -------- ------------- ------------
See Note 2 to the Condensed Consolidated Financial Statements
for further details
The most significant items included in the reported income
statement, but not in underlying are summarised below.
1 Foreign exchange and derivatives included the impact of the following:
-- the impact of measuring revenue and profit before financing
at spot rates rather than achieved hedge rates
-- mark-to-market adjustments on the Group's net hedge book of
GBP(7)m (2018: GBP(2,145)m). 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; and
-- losses on derivatives settled during the period 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
2 Exceptional programme charges relating to the Trent 1000 of
GBP1,361m and Trent 900 GBP48m are excluded from the underlying
results. These have been explained in note 2.
3 Included in discount rate changes is GBP30m relating to Trent
900 and GBP10m relating to Trent 1000
4 Exceptional restructuring costs of GBP136m (2018: GBP317m).
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
for multiple years. Of the 2019 costs, GBP88m (2018: GBP223m)
relate to the Group restructuring programme announced in June
2018.
5 The loss before tax of GBP(32)m (2018: GBP20m profit) relates
to the effects of acquisition accounting GBP171m (2018: GBP183m)
that principally relate to the amortisation of intangible assets
arising on the acquisition of Power Systems in 2013 and ITP Aero in
2017. The Group completed the sale of the Commercial Marine
business to KONGSBERG on 1 April 2019 and recognised a profit of
GBP106m in 2019. Rolls Royce Power Development Limited was sold on
15 April 2019 with a gain arising on disposal of GBP33m. In our
2018 financial statements, we reported an impairment charge of
GBP155m in relation to the Commercial Marine business being
disclosed as held for sale and recognised a gain on the sale of
L'Orange of GBP358m. Together with the GBP183m acquisition
accounting effect relating to ITP Aero this resulted in the GBP20m
profit before tax in 2018. Further details can be found in note
23.
6 On 26 September 2019 the Group announced the sale of the Civil
Nuclear North America Services business and recognised an
impairment charge and asset write offs of GBP26m. Following a
reassessment of the Bergen order book and subsequent impairment
review we have recorded a charge of GBP58m in 2019. Further details
can be found in note 2.
7 Following a High Court judgement in October 2018, the
estimated costs of equalising UK pension benefits for men and women
was recognised as a past-service charge. There is no equivalent
charge in 2019.
Tax affecting these adjustments resulted in a tax charge of
GBP143m (2018: tax credit of GBP715m). The charge in 2019 is due to
the non-recognition of deferred tax in respect of UK losses in the
year. The 2019 charge also includes GBP86m relating to the
derecognition of UK deferred tax assets on foreign exchange and
commodity financial assets and liabilities. In 2018 deferred tax
was recognised on UK losses resulting in an overall credit in that
year.
Civil Aerospace
Overview
Civil Aerospace delivered a record 510 widebody engines in 2019.
We have continued to make progress reducing widebody average OE
losses, down by 14% year-on-year to GBP1.2m. Our large engine
installed fleet increased to over 5,000 engines in service, driving
a 7% growth in widebody engine flying hours and a GBP0.3bn increase
in aftermarket cash margin. 2019 saw strong revenue growth of 10%
and further significant improvement in underlying operating profit
for the business.
Financial overview
Organic
GBPm 2019 2018 Change change
------------------------------- ------- ------ --------- --------
Engine deliveries 729 686 +6% +6%
------------------------------- ------- ------ --------- --------
Underlying revenue 8,107 7,378 +10% +10%
------------------------------- ------- ------ --------- --------
Underlying OE revenue 3,246 3,119 +4% +4%
------------------------------- ------- ------ --------- --------
Underlying services
revenue 4,861 4,259 +14% +14%
------------------------------- ------- ------ --------- --------
Underlying gross profit 622 493 +26% +25%
------------------------------- ------- ------ --------- --------
Gross margin % 7.7% 6.7% +100bps +90bps
------------------------------- ------- ------ --------- --------
Commercial and administrative (299) (336) -11% -11%
------------------------------- ------- ------ --------- --------
Restructuring (7) (8) -13% -13%
------------------------------- ------- ------ --------- --------
Research and development
cost (374) (332) +13% +13%
------------------------------- ------- ------ --------- --------
Joint ventures and associates 102 21 +81 +78
------------------------------- ------- ------ --------- --------
Underlying operating
result 44 (162) +206 +195
------------------------------- ------- ------ --------- --------
Underlying operating
margin % 0.5% -2.2% +270bps +260bps
------------------------------- ------- ------ --------- --------
Underlying revenue
Organic
GBPm 2019 2018 Change change
-------------------- --------------- ---------------- --------- --------
Original Equipment 3,246 3,119 +4% +4%
-------------------- --------------- ---------------- --------- --------
Large engine 2,568 2,373 +8% +8%
-------------------- --------------- ---------------- --------- --------
Business aviation 643 620 +4% +5%
-------------------- --------------- ---------------- --------- --------
V2500 35 126 -72% -72%
-------------------- --------------- ---------------- --------- --------
Services 4,861 4,259 +14% +14%
-------------------- --------------- ---------------- --------- --------
Large engine 3,205 2,666 +20% +20%
-------------------- --------------- ---------------- --------- --------
Business aviation 477 464 +3% +2%
-------------------- --------------- ---------------- --------- --------
Regional 355 292 +22% +19%
-------------------- --------------- ---------------- --------- --------
V2500 824 837 -2% -2%
-------------------- --------------- ---------------- --------- --------
Underlying revenue
Underlying revenue increased 10%, reflecting good growth in OE,
up 4% to GBP3,246m and strong growth in services, up 14% to
GBP4,861m. Large engine OE growth of 8% was driven by an increase
of 41 in widebody engine delivery volumes to 510. This reflected
strong growth in Trent 7000 engines for the A330neo production
ramp-up.
Large engine service revenue increased 20% to GBP3,205m (2018:
GBP2,666m) driven by higher servicing volumes. Major long-term
service agreement (LTSA) shop visits rose 7% to 306 and check and
repair visits, led by Trent 1000 activity, increased 16% to 660.
Sales of spare parts not covered by LTSAs increased year-on-year.
There was also a material reduction in negative contract catch-ups
to revenues.
In business aviation, OE sales were 5% higher with deliveries
broadly stable at 219 engines (2018: 217 engines) reflecting
improved mix, while service revenue increased 2%. Regional aviation
service revenue increased 19% driven by the AE3007 and Tay-powered
fleets. V2500 OE revenue was down 72% due to end-of-life production
on the Airbus A320ceo. The 2% reduction in V2500 service revenue
reflected a modest reduction in spare parts sales, with the payment
from Pratt & Whitney Aero Engines International (PWAEI)
relating to engine flying hours remaining stable.
Underlying operating profit
The underlying operating profit of GBP44m was an improvement of
GBP195m reflecting higher gross profit, increased profit from joint
ventures and lower C&A costs more than offsetting 13% higher
R&D charge.
Gross profit improved by GBP121m and gross margin by 90bps. This
was driven by increased servicing activity, higher spare parts
sales, and a material improvement in the net impact of contract
catch-ups to LTSA profits. In 2019 catch-ups had a GBP33m positive
impact on profit (2018: GBP(276)m negative). This was driven by
improvements in servicing costs in business aviation, which was
partly offset by a reassessment of costs and utilisation across
various widebody programmes. Gross profit was negatively affected
by a modestly lower LTSA underlying margin due to the mix of shop
visits, GBP70m of FX related headwind principally relating to the
revaluation of USD creditors and deposits, and a modest impact from
higher customer charges. The profit contribution from spare engine
sales was relatively stable year-over-year.
Self-funded R&D cash spend reduced by GBP18m to GBP(767)m
reflecting lower investment in existing widebody and business
aviation programmes and an increase in next generation technology
including the UltraFan demonstrator. Net R&D capitalisation was
GBP60m lower, driven by widebody and business aviation development
programme maturity. Overall, the R&D charge to profit increased
to GBP(374)m from GBP(332)m in 2018.
Underlying C&A costs were 11% lower year-on-year. Joint
venture profit of GBP102m (2018: GBP21m) reflected increased
servicing activity in overhaul bases and higher profit on disposal
of engines in Rolls-Royce & Partners Finance (our engine
financing joint venture).
Trading cash flow
Civil Aerospace trading cash flow improved GBP201m to GBP419m,
driven by increased flying hour receipts from our growing
in-service engine fleet, increased spare parts sales and lower
capital expenditure. Cash costs on Trent 1000 in-service issues of
GBP578m (2018:GBP431m) were partly offset by insurance receipts of
GBP173m.
Cash inflow from working capital was significantly lower in 2019
notably due to the non-recurrence of a c.GBP400m benefit from
standardisation of supplier payments in 2018. Year-on-year growth
in inventory was significantly lower.
Operational and strategic review
Our top priority in 2019 remained securing the return of the
Trent 1000 fleet to full health. We made major steps forward in
rolling out fixes, expanding maintenance capacity and providing
additional clarity to our customers. Much more work remains to be
done in 2020. Importantly, we did not allow the Trent 1000
challenge to derail the much needed transformation of our business;
significant progress was also made on near-term operational
improvement, and we achieved a number of milestones in our longer
term strategy to become a leader in the lower carbon future of
aviation.
In 2019 we delivered 510 widebody engines, in line with guidance
and a record figure for Rolls-Royce. This included the successful
ramp up of the Trent 7000, with 106 engines delivered compared with
just 8 engines in 2018. We continued to make progress in reducing
our large engine average OE unit losses, which fell by 14% to
GBP1.2m during the year, helped by a 22% improvement on the Trent
XWB-84. We continue to expect to deliver our first breakeven Trent
XWB-84 by the end of 2020. Thanks to these record engine
deliveries, our large engine installed base grew by 6% in 2019 and
crossed the 5,000 mark to 5,029 engines.
Overall, the performance of our fleet continues to be very
strong, with invoiced engine flying hours increasing by 7% to 15.3
million. The Trent 700, the largest part of our installed base at
32%, has crossed 55 million flying hours and continues to deliver
excellent performance in fuel burn, reliability and durability. The
Trent XWB became our second largest Trent programme by volume in
2019, and has now flown over 5 million hours. As we highlighted in
November, fleet leading Trent XWB-84 engines have reached our
original expectations for time-on-wing. The Trent 7000 has made an
excellent entry into service, with 80 engines now flying and a
dispatch reliability of 99.9%. The Trent 1000 is 13% of our
widebody fleet and we continue to work to improve durability and
reduce customer disruption. To this end we announced actions to
boost our maintenance capacity and add additional spare engines,
with a significant investment in 2020 set to drive a 50% increase
in our Trent 1000 spare engine pool. We also gave greater certainty
to customers and clarity to investors following an extensive review
of the programme. Our focus is now on executing the clear plan we
have to reduce aircraft on ground and return the fleet to the level
of service which our customers expect.
In business aviation, 2019 was a year of milestones. The
Bombardier Global 5500 and Global 6500, both powered by our Pearl
15 engine, received EASA and FAA certification. In November, we
also announced the new Pearl 700 to power the upcoming Gulfstream
G700. The Pearl family now powers two airframer platforms,
bolstering our position as the leader in the large cabin,
long-range market.
Our transformation and cost reduction efforts accelerated during
the year, and Civil Aerospace made the largest contribution towards
the group's 1,600 net headcount reduction in 2019. The removal of
roles was enabled by increased use of digital technologies, largely
in engineering, simplification of processes and removal of
duplication.
We are determined to seize the opportunity of becoming a leader
in the provision of lower carbon air power. This means not only
improving our existing gas turbine technology to be more fuel
efficient with lower carbon emissions, but also pioneering future
technologies that will enable a low carbon future for aviation. We
reached an important milestone with design freeze on UltraFan,
which will be 25% more efficient than original Trent engines and
10% more efficient than the Trent XWB, the world's most efficient
large engine in service today. We also carried out successful tests
of the composite fan system, a key technology enabler for UltraFan
to reduce weight and increase fuel efficiency.
On future technologies, we have taken significant steps towards
increasing our capabilities in hybrid electric propulsion. During
the year we acquired the eAircraft business from Siemens and
achieved major milestones in three of our key electric demonstrator
programmes:
-- In August we began ground tests of our 2.5-megawatt generator
in Norway. This forms part of our E-Fan X project with Airbus, the
largest hybrid aircraft demonstrator in the world
-- In November we announced a flight demonstrator based on our
hybrid M250 propulsion system with APUS and the Brandenburg
University of Technology, paving the way for experimental flights
after 2021.
-- In December we unveiled the plane which will seek to break
the speed record for an all-electric aircraft in 2020 as part of
our ACCEL programme
Outlook
During the year we booked a net widebody order intake of 213
engines. As a result, our widebody backlog at the end of 2019 was
1,978 engines, providing good visibility on our deliveries in the
coming years and driving continued growth in our installed base.
The long term trends supporting air traffic growth remain intact,
though the outbreak of COVID-19 represents a near term macro risk.
In 2019, approximately 20% of our invoiced engine flying hours were
derived from the greater China region. We have a small number of
tier one suppliers in the Greater China region, all of whom have
resumed operations. We are in daily communication and are offering
support as appropriate.
Although currently subdued, we expect an improvement in widebody
orders driven by a replacement cycle in the coming years as a
growing number of aircraft reach retirement age, including Boeing
777s, Boeing 767s and older Airbus A330s. We believe we are well
positioned to continue to win a large share of these orders, having
captured 64% of gross order intake and 52% of net orders for
widebody engines in 2019. The increase in retirements in the coming
years represents a challenge for the industry, but we are
favourably positioned due to the younger age distribution of our
fleet relative to our competitors. The average age of our widebody
in-service fleet is less than 8 years, compared to the industry
average (ex. Rolls-Royce) of 13 years. As a result, we continue to
expect strong growth in our installed base in the coming years,
which supports growth in our engine flying hours and the widebody
aftermarket cash margin.
In 2020 we expect stable to low-single-digit sales growth in
Civil Aerospace and operating margins 50-100bps higher
year-over-year, despite a GBP100-150m reduction in the level of
R&D capitalisation.
Power Systems
Overview
Power Systems made good progress in 2019, with sales continuing
to outgrow global GDP and gross margins improving due to operating
leverage and a better product mix. We continued to advance our
services strategy, with strong growth in LTSA sales a particular
highlight. Order intake was good at GBP3,415m, a book-to-bill of
1.0x.
Financial overview^
Organic
GBPm 2019 2018 Change change
------------------------------- ------- ------ --------- --------
Underlying revenue 3,545 3,434 +3% +4%
------------------------------- ------- ------ --------- --------
Underlying OE revenue 2,386 2,310 +3% +4%
------------------------------- ------- ------ --------- --------
Underlying services revenue 1,159 1,124 +3% +4%
------------------------------- ------- ------ --------- --------
Underlying gross profit 909 866 +5% +6%
------------------------------- ------- ------ --------- --------
Gross margin % 25.6% 25.2% +40bps +50bps
------------------------------- ------- ------ --------- --------
Commercial and administrative (374) (363) +3% +4%
------------------------------- ------- ------ --------- --------
Restructuring - (1) - -
------------------------------- ------- ------ --------- --------
Research and development
cost (176) (188) -6% -6%
------------------------------- ------- ------ --------- --------
Joint ventures and associates (2) 1 - -
------------------------------- ------- ------ --------- --------
Underlying operating profit 357 315 +13% +15%
------------------------------- ------- ------ --------- --------
Underlying operating margin
% 10.1% 9.2% +90bps +90bps
------------------------------- ------- ------ --------- --------
^Commentary and figures exclude the Civil Nuclear North America
Services business which has been treated as non-core following its
disposal in February 2020
Underlying revenue
Underlying revenue of GBP3,545 increased by 4%, OE revenue was
up 4% driven by strong demand for mission critical power generation
products, notably to serve the data centre market. This growth more
than offset an expected reduction in demand from the construction
& agriculture sectors, following the non-recurrence of the
emissions-led pre-buy effect seen in 2018.
Services revenue rose 4% reflecting higher spare parts sales and
6% growth in LTSAs. We continue our focus on generating greater
value from our large installed base, both through a more proactive
approach to spare parts sales and a greater emphasis on LTSA sales
which now account for 12% of total service revenues.
Underlying operating profit
Underlying operating profit rose by 15% to GBP357m, led by
revenue growth. Gross profit was 6% higher at GBP909m, helped by a
50bps increase in gross margins to 25.6%, due to better product
mix. C&A costs of GBP(374)m were 4% higher year-on-year
reflecting cost escalation, additional spend on digital solutions,
and higher sales-related activities. The R&D charge reduced by
GBP11m reflecting the timing of key projects, with cash spend
modestly higher. In the coming years we expect R&D spend in
Power Systems to increase as we ramp up activity on new programme
investment and our electrification strategy.
Operational and strategic review
Conditions across our markets were challenging in 2019. Despite
this, our financial performance remained robust, supported by a
strong order book. A combination of rising energy demand in
developing countries and the expansion of renewable energy sources
drove orders for flexible power solutions and products such as
microgrids, hybrid and gas engines, electrification and energy
storage.
In 2019 we delivered 6,580 engines (excluding smaller
off-highway engines). This compares to 5,976 deliveries in 2018.
Our installed base increased to approximately 146,000 engines (from
approximately 142,000 in 2018) which will continue to support
replacement demand and drive our growing services revenue.
Power Systems has a key role to play in our drive towards low
carbon power across the Group. A number of technologies that will
have applications in civil aerospace markets, notably hybrid,
electric, and fuel cells, are already being developed and adopted
in Power Systems. Significantly, 2019 marked the last year in which
Power Systems sold only fossil fuel based power solutions as we
reached several important strategic milestones on this journey,
including the signing of customer contracts and framework
agreements to implement hybrid engine solutions for the rail
sector, where we are first to market, and the yacht market,
building on our leadership position with the MTU series engines. We
anticipate being first to market in both of these applications.
Since October, Power Systems has been operating its own microgrid
in Friedrichshafen, which provides over 30% of the energy required
for the weekly running of the plant. We successfully received the
first orders for our new battery container and microgrid solutions,
delivering cleaner and decentralised energy. Together with Lab1886,
an innovation lab within the Daimler Group, we started a pilot
project to test the use of Mercedes-Benz fuel cell technology for
backup power and the supply of energy to data centres. This
technology will provide safe, sustainable and emission free energy
to one of the world's most significant power consuming industries.
Power Systems is also researching more sustainable fuels. During
the year, we signed an agreement to construct a demonstration plant
to produce synthetic fuels in Brandenburg, Germany.
Continuing our push into life-cycle services, we are placing
increased focus on digital services and predictive maintenance. Our
digital solutions team was expanded during the year and we
established a data and analytics competence centre in Munich,
Germany. We also expanded our service network for Yachts in La
Spezia, Italy. These actions have helped to drive a steady increase
in long-term service agreements, including the signing of a 10-year
agreement with Svitzer, a global towage and marine services
operator.
Expanding our geographic footprint is a key driver of our
ability to outgrow underlying markets. In 2019 we successfully
strengthened our position in China, signing agreements for the
delivery of more than 700 MTU engines. These included the largest
ever single order of MTU gas gensets to supply over 200 MTU Series
4000s to China's VPower. In India, our Force MTU Power Systems
joint venture will begin local assembly of Series 1600 engines in
the first half of 2020. This enables us to be closer to our
customers and to reduce operating costs. In anticipation of this
move we have ceased assembly of MTU Series 1600 engines in
Überlingen, Germany.
Investing in our people is vital if we are to continue to
position ourselves for growth in new markets including hybrid
power. To meet our need for increased electrical engineering
capability, 100 mechanical engineers undertook a course in
electrical engineering as part of a new project at Karlsruhe
University.
Outlook
As we enter 2020, the early indication is that conditions in a
number of our end markets will remain challenging. However, we aim
to outperform our markets, driven by our strategy to increase
services sales and the shift towards new technologies and
integrated solutions. We are also continuing our efforts to gain
market share in Asia, where Power Systems has previously been
underexposed. As a result, we expect to deliver low single-digit
organic revenue growth in 2020 despite this challenging backdrop.
We expect margins to improve again in 2020, increasing by 0-100bps
as we take another step towards our medium term target of
mid-teens. T he outbreak of COVID-19 represents a near term macro
risk. In 2019, approximately 10% of Power Systems revenues were
derived from the greater China region.
As part of our ongoing efforts to evaluate our portfolio and
create a simpler, more efficient Group, we have taken the decision
to carry out a strategic review of Bergen, our medium speed gas and
diesel engine business. In 2019 Bergen generated revenues of
GBP239m with an operating loss of GBP(18)m. From 2020 Bergen will
be reported within non-core businesses and has been therefore been
excluded from our guidance above.
Defence
Overview
Defence had an excellent year for both order intake and cash
flows. Record order intake and a 1.6x book-to-bill ratio helped to
drive strong cash flow performance and 26% growth in the order book
in 2019. Sales were broadly stable and operating profit margins
declined by 110bps, as expected, driven largely by a less
profitable OE mix and increased investment in R&D to support a
number of major new programme opportunities in the coming
years.
Financial overview
Organic
GBPm 2019 2018 Change change
------------------------------- ------- ------ --------- --------
Underlying revenue 3,250 3,124 +4% +1%
------------------------------- ------- ------ --------- --------
Underlying OE revenue 1,461 1,452 +1% -2%
------------------------------- ------- ------ --------- --------
Underlying services
revenue 1,789 1,672 +7% +4%
------------------------------- ------- ------ --------- --------
Underlying gross profit 669 690 -3% -6%
------------------------------- ------- ------ --------- --------
Gross margin % 20.6% 22.1% -150bps -160bps
------------------------------- ------- ------ --------- --------
Commercial and administrative (151) (170) -11% -13%
------------------------------- ------- ------ --------- --------
Restructuring (7) (3) +133% +133%
------------------------------- ------- ------ --------- --------
Research and development
cost (105) (100) +5% +4%
------------------------------- ------- ------ --------- --------
Joint ventures and associates 9 10 -10% -10%
------------------------------- ------- ------ --------- --------
Underlying operating
profit 415 427 -3% -7%
------------------------------- ------- ------ --------- --------
Underlying operating
margin % 12.8% 13.7% -90bps -110bps
------------------------------- ------- ------ --------- --------
Underlying revenue
Underlying revenue of GBP3,250m was up 1% on an organic basis.
OE revenue was 2% lower year-on-year driven by fewer deliveries of
transport engines due to the phasing of orders, including lower
volumes of Trent 700s for Multi-Role Tanker Transport (MRTT)
aircraft and AE series engines for the C-130J and V-22. These were
partly offset by increased volumes for LiftSystem hardware for the
F-35B. Service revenue was up 4%, driven by higher LTSA volume for
the AE1107 and AE2100 transport engines, together with increased
time and materials (T&M) revenue from EJ200 services.
Underlying operating profit
Underlying operating profit of GBP415m was GBP28m lower than the
prior year, in line with expectations. Gross profit of GBP669m fell
6%, driven by the lower OE volumes in transport, particularly on
the Trent 700 MRTTs, and lower LTSA margins due to the non-repeat
of one-off customer settlements in the prior year.
A modest increase in R&D spend of GBP4m reflected ongoing
investment to support future programmes across our Defence
portfolio, with a number of attractive growth opportunities in the
coming years. C&A costs were GBP22m lower year-on-year at
GBP(151)m.
Operational and strategic review
2019 was a very successful year for Defence, with record order
intake, strong operational execution, and the achievement of
significant milestones in our ongoing R&D projects which will
position the business to grow in the coming years in both transport
and combat markets.
Our markets remained stable in 2019. The US continues to
represent nearly half of the addressable defence spend globally,
while the UK and Europe also remain key markets. We expect higher
growth in Asia and the Middle East, driven by regional tensions.
While the budget backdrop in our markets is relatively stable, we
see a number of exciting programme opportunities in the coming
years, notably in the Tempest combat programme in the UK and in
multiple upcoming campaigns in the US market.
Defence had a record order intake of GBP5.3 billion, driving 26%
growth in the order book. Book-to-bill in 2019 was 1.6x, taking the
cumulative book-to-bill over the last five years to 1.2x. The
strength in 2019 was led by services, highlighting the demand
driven by our installed base of over 16,000 engines. Key highlights
included a five-year contract worth over $1bn to maintain AE1107
engines for the US Marine Corps, which have now reached the service
milestone of over one million flying hours. Two UK Ministry of
Defence support contracts were signed; one for Spey naval engines,
and one for the maintenance of the EJ200. A multi-year spare parts
order was additionally confirmed for our Adour engines in India. OE
orders grew, including four Dreadnought power-plants in Submarines
and a LiftFan OE order for LRIP 12 of the F-35 programme. We
continued to leverage our existing installed base with the Series
3.5 upgrade kit for the T56 engine, which secured further orders
from the US Air Force. Fewer than 5% of the C-130 aircraft in
service with the US Air Force currently have the Series 3.5 upgrade
kit fitted, presenting a significant opportunity for future
orders.
We delivered 499 aero engines in 2019. In aerospace, three
Bombardier Global 6000s, powered by our BR710 engines, were
delivered to the German Special Air Mission Wing and German Air
Force. LiftSystem production ramped up to meet F-35B programme
demand and the Boeing MQ-25 unmanned aerial refuelling tanker,
powered by the AE 3007, completed its maiden flight. In maritime,
our 50th MT30 gas turbine came off the production line and we
delivered key early components for the first Dreadnought
submarine.
Operationally, our Submarines business implemented a management
restructure, reducing complexity and aligning to the needs of the
customer. We continued to invest in facilities; the revitalisation
of our Indianapolis site is nearing completion while a new 24,000
sqft facility in Walpole, Massachusetts is due to be commissioned
in late 2020. These actions to improve efficiency are helping us
meet customer demand for cost-effective solutions while minimising
the impact on our margins.
R&D investment stepped up in 2019 ahead of a period of
important upcoming opportunities. We made good progress as part of
Team Tempest, for which we are developing a power and propulsion
system which will provide fully integrated power and thermal
management. We were also awarded a two-year contract by the UK
Ministry of Defence to develop hypersonic propulsion systems.
LibertyWorks, our dedicated US defence development unit,
successfully demonstrated an integrated power and thermal
management system for high-power directed energy applications. We
announced an agreement with Bell Helicopter to exclusively develop
an optimised propulsion system for the V280 Valor. Over 50,000
hours of engineering analysis, including digital engineering, were
devoted to refine our offering for the B-52 re-engining competition
and early engine tests were successfully completed in
Indianapolis.
Outlook
We expect Defence to deliver stable to low-single-digit sales
growth in 2020, with stable operating margins. Longer term,
supported by the order intake in 2019 and the pipeline of upcoming
new programme opportunities, we expect Defence growth to
accelerate.
ITP Aero
Overview
ITP Aero had a strong year. Underlying revenue grew 21%
year-on-year, driven by increases in both aftermarket and OE sales
for civil aerospace, both on Trent and non-Rolls-Royce engine
programmes. Operating profit increased materially to GBP111m,
reflecting revenue growth and improved pricing. ITP's Aero's 2019
performance also benefitted from a change made to simplify its
trading relationship and contractual terms with Civil Aerospace.
This change was net neutral at Group level.
Financial overview
Organic
GBPm 2019 2018 Change change
------------------------------- ------- ------ --------- --------
Underlying revenue 936 779 +20% +21%
------------------------------- ------- ------ --------- --------
Underlying OE revenue 782 666 +17% +19%
------------------------------- ------- ------ --------- --------
Underlying services revenue 154 113 +36% +37%
------------------------------- ------- ------ --------- --------
Underlying gross profit 206 156 +32% +33%
------------------------------- ------- ------ --------- --------
Gross margin % 22.0% 20.0% +200bps +200bps
------------------------------- ------- ------ --------- --------
Commercial and administration
costs (61) (57) +7% +9%
------------------------------- ------- ------ --------- --------
Restructuring (1) (2) -50% -50%
------------------------------- ------- ------ --------- --------
Research and development
costs (33) (30) +10% +10%
------------------------------- ------- ------ --------- --------
Underlying operating profit 111 67 +66% +67%
------------------------------- ------- ------ --------- --------
Underlying operating margin 11.9% 8.6% +330bps +330bps
------------------------------- ------- ------ --------- --------
Underlying revenue
Underlying revenue was GBP936m, an increase of 21% over 2018. OE
growth of 19% was driven by higher engine volumes on civil
programmes, with ITP Aero module deliveries up 20% on Trent engine
programmes and 40% higher for non-Rolls-Royce programmes. This was
partially offset by a reduction in defence sales. Aftermarket
revenue increased by 37% due to higher spare parts sales, largely
from Rolls-Royce engine programmes. Revenues also benefitted by
GBP50m from a change made to simplify ITP Aero's trading
relationship and contractual terms with Civil Aerospace. This was
net neutral at the Group level.
Underlying operating profit
Operating profit increased materially, by 67% to GBP111m, led by
higher gross profit. This increase was driven by higher OE volumes
and improved pricing. Profit also benefitted by GBP25m from the
change in ITP Aero's trading terms with Civil Aerospace, with a
corresponding negative impact in Group eliminations. C&A costs
increased by 9% to GBP(61)m, and R&D rose by 10% to GBP33m
reflecting ongoing investment in aerospace programmes.
Operational and strategic review
In November, ITP Aero celebrated its 30th anniversary. The
business continued to grow, underpinned by strong positions across
a range of large commercial aircraft and business jet platforms. In
large commercial we delivered a 20% increase in engine module
deliveries for Rolls-Royce widebody programmes and a 40% increase
in deliveries to other customers. In business aviation, we
continued to see growth through our positions on engine programmes
including the PW800 and HTF700.
Good progress was made during the year in the expansion of
production facilities to meet rising demand for ITP Aero products.
Investment included a new Externals facility in Biscay, Spain,
focusing on high technology products, and the extension of the
Externals facility in Queretaro, Mexico. Both sites are now open
and fully operational. In addition to adding new capacity, these
facilities will further improve our manufacturing efficiency,
driving cost reduction across civil and defence engine
programmes.
We also achieved important technology milestones in 2019. In
June the first aerodynamic tests of the intermediate pressure
turbine for UltraFan were successfully carried out. UltraFan will
be 25% more efficient than the first generation of Rolls-Royce
Trent engines and 10% more efficient than the Trent XWB, the most
efficient civil large engine in service globally. Other significant
milestones in 2019 included producing the first components designed
and manufactured using additive technology. Our new additive
manufacturing cell in Zamudio, Spain, manufactured both the low
pressure turbine seal segments for the Trent XWB-84 engine and
non-structural vanes for the TP400 engine. Additionally, earlier in
the year we were certified as only the second provider of servicing
globally for the MTR390-E engine for the Tiger helicopter.
At the end of the year we strengthened our Board and Management,
including the promotion of Carlos Alzola to CEO and ITP Aero board
member.
Outlook
We expect continued demand growth on newer, more fuel-efficient
engine programmes in both narrowbody and widebody aircraft. We are
well placed with strong positions on newer Rolls-Royce Trent
engines, as well as the Pratt & Whitney 1000G engines and other
non-Rolls-Royce programmes. Longer term, we have secured
participation in technology projects that will contribute
significantly to sustainable aviation and efficient digital
transformation of production processes. These include the
Investigation and Maturation of Technologies for Hybrid Electric
Propulsion (IMOTHEP), within the EU's Horizon 2020 framework, which
is focused on assessing the potential of hybrid electric
propulsion.
Following the very strong performance in 2019, we expect to
deliver stable sales and margin improvement of 50-100bps in 2020.
Longer term the trends outlined above will drive further good
growth in profitability and cash flow.
Condensed consolidated income statement
For the year ended 31 December 2019
2019 2018
Notes GBPm GBPm
----------------------------------------------------------------------- ------ --------- ----------
Revenue (1) 2 16,587 15,729
------------------------------------------------------------------------- ------ --------- ----------
Cost of sales (1) (15,645) (14,531)
------------------------------------------------------------------------- ------ --------- ----------
Gross profit 2 942 1,198
------------------------------------------------------------------------- ------ --------- ----------
Commercial and administrative costs (1) 2 (1,128) (1,595)
------------------------------------------------------------------------- ------ --------- ----------
Research and development costs 3 (770) (768)
------------------------------------------------------------------------- ------ --------- ----------
Share of results of joint ventures and associates 104 4
------------------------------------------------------------------------- ------ --------- ----------
Operating loss (852) (1,161)
------------------------------------------------------------------------- ------ --------- ----------
Gain arising on disposal of businesses (2) 23 139 358
------------------------------------------------------------------------- ------ --------- ----------
Loss before financing and taxation (713) (803)
------------------------------------------------------------------------- ------ --------- ----------
Financing income 4 252 271
------------------------------------------------------------------------- ------ --------- ----------
Financing costs 4 (430) (2,415)
------------------------------------------------------------------------- ------ --------- ----------
Net financing costs (178) (2,144)
------------------------------------------------------------------------- ------ --------- ----------
Loss before taxation (891) (2,947)
------------------------------------------------------------------------- ------ --------- ----------
Taxation 5 (420) 554
------------------------------------------------------------------------- ------ --------- ----------
Loss for the year (1,311) (2,393)
------------------------------------------------------------------------- ------ --------- ----------
Attributable to:
------------------------------------------------------------------------- ------ --------- ----------
Ordinary shareholders (1,315) (2,401)
------------------------------------------------------------------------- ------ --------- ----------
Non-controlling interests 4 8
------------------------------------------------------------------------- ------ --------- ----------
Loss for the year (1,311) (2,393)
------------------------------------------------------------------------- ------ --------- ----------
Other comprehensive (expense)/income (1,013) 182
------------------------------------------------------------------------- ------ --------- ----------
Total comprehensive expense for the year (2,324) (2,211)
------------------------------------------------------------------------- ------ --------- ----------
Earnings per ordinary share attributable to ordinary shareholders: 6
------------------------------------------------------------------------- ------ --------- ----------
Basic (69.07)p (129.15)p
------------------------------------------------------------------------- ------ --------- ----------
Diluted (69.07)p (129.15)p
------------------------------------------------------------------------- ------ --------- ----------
Payments to ordinary shareholders in respect of the year 7
------------------------------------------------------------------------- ------ --------- ----------
Pence per share 11.7p 11.7p
------------------------------------------------------------------------- ------ --------- ----------
Total 224 220
------------------------------------------------------------------------- ------ --------- ----------
Underlying profit before taxation 2 583 466
------------------------------------------------------------------------- ------ --------- ----------
(1) Included within revenue, cost of sales and commercial and
administrative costs are exceptional charges relating to Civil
Aerospace programmes, impairment charges and restructuring costs.
Further details can be found in note 2.
(2) Commercial Marine was disposed of on 1 April 2019 and
Rolls-Royce Power Development Limited was disposed of on 15 April
2019. L'Orange was disposed of on 1 June 2018.
( Loss)/profit before taxation disclosed on an underlying and
statutory basis.
Condensed consolidated statement of comprehensive income
For the year ended 31 December 2019
2019 2018
Notes GBPm GBPm
----------------------------------------------------------------- ------ -------- --------
Loss for the year (1,311) (2,393)
------------------------------------------------------------------- ------ -------- --------
Other comprehensive (expense)/income (OCI)
------------------------------------------------------------------- ------ -------- --------
Actuarial movements in post-retirement schemes (1) (934) 27
------------------------------------------------------------------- ------ -------- --------
Share of OCI of joint ventures and associates 11 (1) (1)
------------------------------------------------------------------- ------ -------- --------
Related tax movements 324 (2)
------------------------------------------------------------------- ------ -------- --------
Items that will not be reclassified to profit or loss (611) 24
------------------------------------------------------------------- ------ -------- --------
Foreign exchange translation differences on foreign operations (313) 171
------------------------------------------------------------------- ------ -------- --------
Reclassified to income statement on disposal of businesses 23 (98) (19)
------------------------------------------------------------------- ------ -------- --------
Cash flow hedge reserve movements 22 (17)
------------------------------------------------------------------- ------ -------- --------
Share of OCI of joint ventures and associates 11 (7) 18
------------------------------------------------------------------- ------ -------- --------
Related tax movements (6) 5
------------------------------------------------------------------- ------ -------- --------
Items that may be reclassified to profit or loss (402) 158
------------------------------------------------------------------- ------ -------- --------
Total other comprehensive (expense)/income (1,013) 182
------------------------------------------------------------------- ------ -------- --------
Total comprehensive expense for the year (2,324) (2,211)
------------------------------------------------------------------- ------ -------- --------
Attributable to:
------------------------------------------------------------------- ------ -------- --------
Ordinary shareholders (2,328) (2,219)
------------------------------------------------------------------- ------ -------- --------
Non-controlling interests 4 8
------------------------------------------------------------------- ------ -------- --------
Total comprehensive expense for the year (2,324) (2,211)
------------------------------------------------------------------- ------ -------- --------
(1) Includes an asset re-measurement net loss estimated at
GBP600m following the agreement to transfer the future pension
obligations of circa 33,000 pensions in the UK scheme to Legal
& General Assurance Society Limited. See note 20 for further
information.
Condensed consolidated balance sheet
At 31 December 2019
2019 2018
Notes GBPm GBPm
------------------------------------------------- ------ --------- ---------
ASSETS
------------------------------------------------- ------ --------- ---------
Intangible assets 8 5,442 5,295
------------------------------------------------- ------ --------- ---------
Property, plant and equipment 9 4,803 4,929
------------------------------------------------- ------ --------- ---------
Right-of-use assets (1) 10 2,009 -
------------------------------------------------- ------ --------- ---------
Investments - joint ventures and associates 11 402 412
------------------------------------------------- ------ --------- ---------
Investments - other 11 14 22
------------------------------------------------- ------ --------- ---------
Other financial assets 18 467 343
------------------------------------------------- ------ --------- ---------
Deferred tax assets 5 1,887 2,092
------------------------------------------------- ------ --------- ---------
Post-retirement scheme surpluses 20 1,170 1,944
------------------------------------------------- ------ --------- ---------
Non-current assets 16,194 15,037
------------------------------------------------- ------ --------- ---------
Inventories 12 4,320 4,287
------------------------------------------------- ------ --------- ---------
Trade receivables and other assets 13 5,065 4,690
------------------------------------------------- ------ --------- ---------
Contract assets 14 2,095 2,057
------------------------------------------------- ------ --------- ---------
Taxation recoverable 39 34
------------------------------------------------- ------ --------- ---------
Other financial assets 18 86 22
------------------------------------------------- ------ --------- ---------
Short-term investments 6 6
------------------------------------------------- ------ --------- ---------
Cash and cash equivalents 15 4,443 4,974
------------------------------------------------- ------ --------- ---------
Current assets 16,054 16,070
------------------------------------------------- ------ --------- ---------
Assets held for sale 23 18 750
------------------------------------------------- ------ --------- ---------
TOTAL ASSETS 32,266 31,857
------------------------------------------------- ------ --------- ---------
LIABILITIES
------------------------------------------------- ------ --------- ---------
Borrowings and lease liabilities 16 (775) (858)
------------------------------------------------- ------ --------- ---------
Other financial liabilities 18 (493) (647)
------------------------------------------------- ------ --------- ---------
Trade payables and other liabilities 17 (8,450) (8,292)
------------------------------------------------- ------ --------- ---------
Contract liabilities 14 (4,228) (3,794)
------------------------------------------------- ------ --------- ---------
Current tax liabilities (172) (138)
------------------------------------------------- ------ --------- ---------
Provisions for liabilities and charges 19 (858) (1,122)
------------------------------------------------- ------ --------- ---------
Current liabilities (14,976) (14,851)
------------------------------------------------- ------ --------- ---------
Borrowings and lease liabilities 16 (4,910) (3,804)
------------------------------------------------- ------ --------- ---------
Other financial liabilities 18 (3,094) (3,542)
------------------------------------------------- ------ --------- ---------
Trade payables and other liabilities 17 (2,071) (1,940)
------------------------------------------------- ------ --------- ---------
Contract liabilities 14 (6,612) (5,336)
------------------------------------------------- ------ --------- ---------
Deferred tax liabilities 5 (618) (962)
------------------------------------------------- ------ --------- ---------
Provisions for liabilities and charges 19 (1,946) (795)
------------------------------------------------- ------ --------- ---------
Post-retirement scheme deficits 20 (1,378) (1,303)
------------------------------------------------- ------ --------- ---------
Non-current liabilities (20,629) (17,682)
------------------------------------------------- ------ --------- ---------
Liabilities associated with assets held for sale 23 (15) (376)
------------------------------------------------- ------ --------- ---------
TOTAL LIABILITIES (35,620) (32,909)
------------------------------------------------- ------ --------- ---------
NET LIABILITIES (3,354) (1,052)
------------------------------------------------- ------ --------- ---------
EQUITY
------------------------------------------------- ------ --------- ---------
Called-up share capital 386 379
------------------------------------------------- ------ --------- ---------
Share premium account 319 268
------------------------------------------------- ------ --------- ---------
Capital redemption reserve 159 161
------------------------------------------------- ------ --------- ---------
Cash flow hedging reserve (96) (106)
------------------------------------------------- ------ --------- ---------
Merger reserve 650 406
------------------------------------------------- ------ --------- ---------
Translation reserve 397 809
------------------------------------------------- ------ --------- ---------
Accumulated losses (5,191) (2,991)
------------------------------------------------- ------ --------- ---------
Equity attributable to ordinary shareholders (3,376) (1,074)
------------------------------------------------- ------ --------- ---------
Non-controlling interests 22 22
------------------------------------------------- ------ --------- ---------
TOTAL EQUITY (3,354) (1,052)
------------------------------------------------- ------ --------- ---------
(1) IFRS 16 Leases has been adopted from 1 January 2019 and
under the transitional arrangements the Group has adopted IFRS 16
on a modified retrospective basis. There has been no restatement of
2018 comparatives. See notes 1 and note 25 for more details.
Condensed consolidated cash flow statement
For the year ended 31 December 2019
2019 2018
Notes GBPm GBPm
------------------------------------------------------------------------------------------ ------ -------- --------
Reconciliation of cash flows from operating activities
------------------------------------------------------------------------------------------ ------ -------- --------
Operating loss (852) (1,161)
------------------------------------------------------------------------------------------ ------ -------- --------
(Profit)/loss on disposal of property, plant and equipment (13) 11
------------------------------------------------------------------------------------------ ------ -------- --------
Share of results of joint ventures and associates 11 (104) (4)
------------------------------------------------------------------------------------------ ------ -------- --------
Dividends received from joint ventures and associates 11 92 105
------------------------------------------------------------------------------------------ ------ -------- --------
Amortisation and impairment of intangible assets (2) 8 372 565
------------------------------------------------------------------------------------------ ------ -------- --------
Depreciation and impairment of property, plant and equipment (2) 9 532 521
------------------------------------------------------------------------------------------ ------ -------- --------
Depreciation and impairment of right-of-use assets 10 411 -
------------------------------------------------------------------------------------------ ------ -------- --------
Impairment of and other movement on investments 11 1 6
------------------------------------------------------------------------------------------ ------ -------- --------
Increase in provisions 1,108 1,003
------------------------------------------------------------------------------------------ ------ -------- --------
Increase in inventories (43) (616)
------------------------------------------------------------------------------------------ ------ -------- --------
Increase in trade receivables and other assets (610) (469)
------------------------------------------------------------------------------------------ ------ -------- --------
Increase in contract assets (41) (112)
------------------------------------------------------------------------------------------ ------ -------- --------
Penalties paid on agreements with investigating bodies (102) -
------------------------------------------------------------------------------------------ ------ -------- --------
Increase in trade payables and other liabilities 683 1,732
------------------------------------------------------------------------------------------ ------ -------- --------
Increase in contract liabilities 1,778 1,419
------------------------------------------------------------------------------------------ ------ -------- --------
Cash flows on other financial assets and liabilities held for operating purposes (757) (732)
------------------------------------------------------------------------------------------ ------ -------- --------
Interest received 31 -
------------------------------------------------------------------------------------------ ------ -------- --------
Net defined benefit post-retirement cost recognised in loss before financing 20 222 352
------------------------------------------------------------------------------------------ ------ -------- --------
Cash funding of defined benefit post-retirement schemes 20 (266) (181)
------------------------------------------------------------------------------------------ ------ -------- --------
Share-based payments 30 35
------------------------------------------------------------------------------------------ ------ -------- --------
Net cash inflow from operating activities before taxation 2,472 2,474
------------------------------------------------------------------------------------------ ------ -------- --------
Taxation paid (175) (248)
------------------------------------------------------------------------------------------ ------ -------- --------
Net cash inflow from operating activities (1) 2,297 2,226
------------------------------------------------------------------------------------------ ------ -------- --------
Cash flows from investing activities
------------------------------------------------------------------------------------------ ------ -------- --------
Net movement in unlisted investments 3 (6)
------------------------------------------------------------------------------------------ ------ -------- --------
Additions of intangible assets 8 (640) (680)
------------------------------------------------------------------------------------------ ------ -------- --------
Disposals of intangible assets 8 13 13
------------------------------------------------------------------------------------------ ------ -------- --------
Purchases of property, plant and equipment (747) (905)
------------------------------------------------------------------------------------------ ------ -------- --------
Disposals of property, plant and equipment 50 43
------------------------------------------------------------------------------------------ ------ -------- --------
Acquisition of businesses 23 (43) -
------------------------------------------------------------------------------------------ ------ -------- --------
Disposal of other businesses 23 453 573
------------------------------------------------------------------------------------------ ------ -------- --------
Movement in investments in joint ventures and associates and other movements on
investments (8) (13)
------------------------------------------------------------------------------------------ ------ -------- --------
Disposal of joint ventures 1 -
------------------------------------------------------------------------------------------ ------ -------- --------
Net cash outflow from investing activities (918) (975)
------------------------------------------------------------------------------------------ ------ -------- --------
Cash flows from financing activities
------------------------------------------------------------------------------------------ ------ -------- --------
Repayment of loans (1,136) (37)
------------------------------------------------------------------------------------------ ------ -------- --------
Proceeds from increase in loans 22 1,054
------------------------------------------------------------------------------------------ ------ -------- --------
Capital element of lease payments (2018: Capital element of finance lease payments) (271) (23)
------------------------------------------------------------------------------------------ ------ -------- --------
Net cash flow from (decrease)/increase in borrowings and leases (1,385) 994
------------------------------------------------------------------------------------------ ------ -------- --------
Interest received - 27
------------------------------------------------------------------------------------------ ------ -------- --------
Interest paid (104) (92)
------------------------------------------------------------------------------------------ ------ -------- --------
Interest element of lease payments (2018: Interest element of finance lease payments) (88) (5)
------------------------------------------------------------------------------------------ ------ -------- --------
Increase in short-term investments - (3)
------------------------------------------------------------------------------------------ ------ -------- --------
Issue of ordinary shares (net of expenses) 24 1
------------------------------------------------------------------------------------------ ------ -------- --------
Purchase of ordinary shares (15) (1)
------------------------------------------------------------------------------------------ ------ -------- --------
Dividends to NCI (4) (3)
------------------------------------------------------------------------------------------ ------ -------- --------
Redemption of C Shares (220) (216)
------------------------------------------------------------------------------------------ ------ -------- --------
Net cash (outflow)/inflow from financing activities (1,792) 702
------------------------------------------------------------------------------------------ ------ -------- --------
Change in cash and cash equivalents (413) 1,953
------------------------------------------------------------------------------------------ ------ -------- --------
Cash and cash equivalents at 1 January 4,952 2,933
------------------------------------------------------------------------------------------ ------ -------- --------
Exchange (losses)/gains on cash and cash equivalents (104) 66
------------------------------------------------------------------------------------------ ------ -------- --------
Cash and cash equivalents at 31 December (3) 4,435 4,952
------------------------------------------------------------------------------------------ ------ -------- --------
(1) Operating cash flow includes Trent 1000 insurance receipts
of GBP173m.
(2) In 2019, an impairment of GBP58m in respect of Bergen
Engines AS was included in these lines (2018: GBP160m in respect of
Commercial Marine).
(3) 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.
In deriving the consolidated cash flow statement, movements in
balance sheet line items have been adjusted for non-cash items.
The cash flow in the year includes the sale of goods and
services to joint ventures and associates.
2019 2018
GBPm GBPm
------------------------------------------------------------------------------------------ -------- ------
Reconciliation of movements in cash and cash equivalents to movements in net funds/(debt)
------------------------------------------------------------------------------------------ -------- ------
Change in cash and cash equivalents (413) 1,953
------------------------------------------------------------------------------------------ -------- ------
Cash flow from decrease/(increase) in borrowings and leases 1,385 (994)
------------------------------------------------------------------------------------------ -------- ------
Cash flow from increase in short-term investments - 3
------------------------------------------------------------------------------------------ -------- ------
Change in net funds resulting from cash flows 972 962
------------------------------------------------------------------------------------------ -------- ------
New leases in the year (2018: new finance leases in the year) (217) (97)
------------------------------------------------------------------------------------------ -------- ------
Net debt (excluding cash and cash equivalents) of previously unconsolidated subsidiary (1) -
------------------------------------------------------------------------------------------ -------- ------
Exchange (losses)/gains on net funds (32) 54
------------------------------------------------------------------------------------------ -------- ------
Fair value adjustments 48 (69)
------------------------------------------------------------------------------------------ -------- ------
Transferred to liabilities associated with assets held for sale 3 -
------------------------------------------------------------------------------------------ -------- ------
Movement in net funds 773 850
------------------------------------------------------------------------------------------ -------- ------
Net funds/(debt) at 1 January excluding the fair value of swaps 318 (532)
------------------------------------------------------------------------------------------ -------- ------
Reclassifications (1) (79) -
------------------------------------------------------------------------------------------ -------- ------
Adoption of IFRS 16 (see note 25) (2,248) -
------------------------------------------------------------------------------------------ -------- ------
Net debt at 1 January restated (2,009) (532)
------------------------------------------------------------------------------------------ -------- ------
Net (debt)/funds at 31 December excluding the fair value of swaps (1,236) 318
------------------------------------------------------------------------------------------ -------- ------
Fair value of swaps hedging fixed rate borrowings 243 293
------------------------------------------------------------------------------------------ -------- ------
Net (debt)/funds at 31 December (993) 611
------------------------------------------------------------------------------------------ -------- ------
(1) In 2019, the Group has reclassified GBP79m as borrowings
previously included in other financial liabilities. These
borrowings mature between 2019 and 2029 - see note 16.
The movement in net funds/(debt) (defined by the Group as
including the items shown below) is as follows:
Transition to Net funds
At 31 IFRS 16 and on Other
December reclassifications At 1 Funds acquisition Exchange Fair value movements At 31
2018 (1) January flow /disposal differences adjustments Reclassifications on leases December
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
2019
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Cash at bank and in
hand 1,023 - 1,023 (179) - (19) - - - 825
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Money market funds 1,222 - 1,222 (124) - (3) - - - 1,095
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Short-term deposits 2,729 - 2,729 (124) - (82) - - - 2,523
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Cash and cash
equivalents (2)
(per balance sheet) 4,974 - 4,974 (427) - (104) - - - 4,443
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Overdrafts (22) - (22) 14 - - - - - (8)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Cash and cash
equivalents
(per cash flow
statement) 4,952 - 4,952 (413) - (104) - - - 4,435
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Short-term
investments 6 - 6 - - - - - - 6
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Other current
borrowings (802) (14) (816) 799 - 2 5 (417) - (427)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Non-current
borrowings (3,609) (65) (3,674) 315 (1) 4 43 417 - (2,896)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Finance leases (229) 229 - - - - - - - -
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Lease liabilities - (2,477) (2,477) 271 - 66 - 3 (217) (2,354)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Financial
liabilities (4,640) (2,327) (6,967) 1,385 (1) 72 48 3 (217) (5,677)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Net funds/(debt)
excluding
fair value swaps 318 (2,327) (2,009) 972 (1) (32) 48 3 (217) (1,236)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Fair value of swaps
hedging fixed rate
borrowings (3) 293 - 293 - - - (50) - - 243
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Net funds/(debt) 611 (2,327) (1,716) 972 (1) (32) (2) 3 (217) (993)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Net funds
(excluding lease
liabilities) 840 (79) 761 1,361
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
2018
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Cash at bank and in
hand 838 170 - 15 - - - 1,023
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Money market funds 589 630 - 3 - - - 1,222
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Short-term deposits 1,526 1,155 - 48 - - - 2,729
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Cash and cash
equivalents (per
balance sheet) 2,953 1,955 - 66 - - - 4,974
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Overdrafts (20) (2) - - - - - (22)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Cash and cash
equivalents (per
cash flow
statement) 2,933 1,953 - 66 - - - 4,952
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Short-term
investments 3 3 - - - - - 6
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Other current
borrowings (39) (38) - (1) 15 (739) - (802)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Non-current
borrowings (3,292) (972) - - (84) 739 - (3,609)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Finance leases (137) (81) - (11) - - - (229)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Financial
liabilities (3,468) (1,091) - (12) (69) - - (4,640)
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Net (debt)/funds
excluding
fair value swaps (532) 865 - 54 (69) - - 318
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Fair value of swaps
hedging fixed rate
borrowings 227 - - - 66 - - 293
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
Net (debt)/funds (305) 865 - 54 (3) - - 611
------------------- --------- ------------------ -------- -------- ------------ ------------ ------------ ------------------ ---------- ---------
(1) In 2019, the Group has reclassified GBP79m as borrowings
previously included in other financial liabilities. These
borrowings mature between 2019 and 2029 - see note 16.
(2) Includes Trent 1000 insurance receipts of GBP173m.
(3) All interest rate swaps are entered into for risk management
purposes, although these may not be designated into hedging
relationships for accounting purposes - see note 16.
Condensed consolidated statement of changes in equity
For the year ended 31 December 2019
Attributable to ordinary shareholders
--------------------------------------------------------------------
Cash
Capital flow
Share Share redemption hedging Merger Translation Accumulated Non-controlling Total
capital premium reserve reserve reserve reserve losses (1) Total interests (NCI) equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
At 31 December
2017 368 195 162 (112) 3 657 (343) 930 3 933
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Impact of
adopting IFRS 9 - - - - - - (15) (15) - (15)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
At 1 January 2018 368 195 162 (112) 3 657 (358) 915 3 918
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
(Loss)/profit
for the year - - - - - - (2,401) (2,401) 8 (2,393)
================== ======== ======== =========== ======== ======== ============ ============ ======= ================ =======
Foreign exchange
translation
differences on
foreign
operations - - - - - 171 - 171 - 171
================== ======== ======== =========== ======== ======== ============ ============ ======= ================ =======
Reclassified to
income
statement on
disposal of
L'Orange - - - - - (19) - (19) - (19)
================== ======== ======== =========== ======== ======== ============ ============ ======= ================ =======
Movements on
post-retirement
schemes - - - - - - 27 27 - 27
================== ======== ======== =========== ======== ======== ============ ============ ======= ================ =======
Debited to cash
flow hedge
reserve - - - (17) - - - (17) - (17)
================== ======== ======== =========== ======== ======== ============ ============ ======= ================ =======
OCI of joint
ventures and
associates - - - 18 - - (1) 17 - 17
================== ======== ======== =========== ======== ======== ============ ============ ======= ================ =======
Related tax
movements - - - 5 - - (2) 3 - 3
================== ======== ======== =========== ======== ======== ============ ============ ======= ================ =======
Total
comprehensive
income/(expense)
for the year - - - 6 - 152 (2,377) (2,219) 8 (2,211)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Shares issued in
respect of
acquisition of
ITP Aero 10 - - - 403 - - 413 - 413
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Other issues of
ordinary shares 1 73 - - - - - 74 - 74
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Issue of C
Shares (2) - - (217) - - - 1 (216) - (216)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Redemption of C
Shares - - 216 - - - (216) - - -
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Shares issued to
employee share
trust - - - - - - (75) (75) - (75)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Share-based
payments -
direct to
equity (3) - - - - - - 32 32 - 32
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Transfer of
joint
operations to
subsidiaries - - - - - - - - 15 15
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Transactions
with NCI - - - - - - - - (4) (4)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Related tax
movements - - - - - - 2 2 - 2
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Other changes in
equity in the
year 11 73 (1) - 403 - (256) 230 11 241
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
At 31 December
2018 379 268 161 (106) 406 809 (2,991) (1,074) 22 (1,052)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Impact of
adopting IFRS
16 - - - - - - (40) (40) - (40)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
At 1 January 2019 379 268 161 (106) 406 809 (3,031) (1,114) 22 (1,092)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
(Loss)/profit
for the year - - - - - - (1,315) (1,315) 4 (1,311)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Foreign exchange
translation
differences on
foreign
operations - - - - - (313) - (313) - (313)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Reclassified to
income
statement on
disposal of
Commercial
Marine - - - - - (98) - (98) - (98)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Movements on
post-retirement
schemes - - - - - - (934) (934) - (934)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Credited to cash
flow hedge
reserve - - - 22 - - - 22 - 22
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
OCI of joint
ventures and
associates - - - (7) - - (1) (8) - (8)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Related tax
movements - - - (5) - (1) 324 318 - 318
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Total
comprehensive
income/(expense)
for the year) - - - 10 - (412) (1,926) (2,328) 4 (2,324)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Arising on
issues of
ordinary shares 1 51 - - - - - 52 - 52
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Shares issued in
respect of
acquisition of
ITP Aero 6 - - - 244 - - 250 - 250
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Issue of C
Shares (2) - - (222) - - - 1 (221) - (221)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Redemption of C
Shares - - 220 - - - (220) - - -
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Ordinary shares
purchased - - - - - - (15) (15) - (15)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Shares issued to
employee share
trust - - - - - - (51) (51) - (51)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Share-based
payments -
direct to
equity (3) - - - - - - 50 50 - 50
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Transactions
with NCI - - - - - - - - (4) (4)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Related tax
movements - - - - - - 1 1 - 1
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
Other changes in
equity in the
year 7 51 (2) - 244 - (234) 66 (4) 62
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
At 31 December
2019 386 319 159 (96) 650 397 (5,191) (3,376) 22 (3,354)
------------------ -------- -------- ----------- -------- -------- ------------ ------------ ------- ---------------- -------
(1) At 31 December 2019, 12,476,576 ordinary shares with a net
book value of GBP108m (2018: 13,538,921, 2017: 6,466,153 ordinary
shares with net book values of GBP123m and GBP52m respectively)
were held for the purpose of share-based payment plans and included
in accumulated losses. During the year, 8,984,219 ordinary shares
with a net book value of GBP82m (2018: 468,165 shares with a net
book value of GBP4m) vested in share-based payment plans. During
the year, the Company acquired 118,831 (2018: 80,810) of its
ordinary shares via reinvestment of dividends received on its own
shares and purchased 1,673,143 (2018: nil) of its ordinary shares
through purchases on the London Stock Exchange. During the year,
the Company issued 28,973,262 new ordinary shares relating to the
remaining three instalments for the acquisition of ITP Aero (2018:
47,556,914 new ordinary shares relating to the first five
instalments) and 7,803,043 new ordinary shares (2018: 7,460,173) to
the Group's share trust for its employee share-based payment plans
with a net book value of GBP66m (2018: GBP74m).
(2) In Rolls-Royce Holdings plc's Company Financial Statements,
C Shares are issued from the merger reserve, this reserve was
created by a scheme of arrangement in 2011. As this reserve is
eliminated on consolidation, in the Consolidated Financial
Statements, the C Shares are shown as being issued from the capital
redemption reserve.
(3) Share-based payments - direct to equity is the share-based
payment charge for the year less the actual cost of vesting
excluding those vesting from own shares and cash received on
share-based schemes vesting.
1 Basis of preparation and accounting policies
The Company
Rolls-Royce Holdings plc (the 'Company') is a public company
incorporated under the Companies Act 2006 and domiciled in the
United Kingdom. The condensed consolidated financial statements of
the Company for the year ended 31 December 2019 consist of the
consolidation of the Financial Statements of 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 2019 (2019 Annual Report) are available
upon request from the Company Secretary, Rolls-----Royce Holdings
plc, Kings Place, 90 York Way, London, N1 9FX.
Statement of compliance
These condensed Consolidated Financial Statements have been
prepared in accordance with International Financial Reporting
Standards (IFRS) adopted for use in the EU. They do not include all
of the information required for full annual statements, and should
be read in conjunction with the 2019 Annual Report.
The comparative figures for the financial year 31 December 2018
are not the Group's statutory accounts for that financial year.
Those accounts have been reported on by the Group's auditors and
delivered to the registrar of companies. The report of the auditors
was (i) unqualified, (ii) did not include a reference to any
matters to which the auditors drew attention by way of emphasis
without qualifying their report, and (iii) did not contain a
statement under section 498(2) or (3) of the Companies Act
2006.
The Board of directors approved the condensed consolidated
financial statements on 28 February 2020.
Significant accounting policies
Except for the adoption of IFRS 16 Leases and IFRIC 23
Uncertainty over Income Tax Treatment, the accounting policies
applied by the Group in these condensed Consolidated Financial
Statements are the same as those that were applied to the
Consolidated Financial Statements of the Group for the year ended
31 December 2018 (International Financial Reporting Standards
issued by the International Accounting Standards Board (IASB), as
adopted for use in the EU effective at 31 December 2018).
IFRS 16 Leases
The Group adopted IFRS 16 on 1 January 2019 using the modified
retrospective approach. Under the specific transitional provisions
in the standard, comparative information has not been restated. The
reclassifications and the adjustments arising from the new leasing
rules have been recognised in the opening balance sheet on 1
January 2019 (see note 25).
Until 31 December 2018, leases of aircraft and engines, plant
and equipment and land and buildings were classified as either
finance or operating leases. Payments made under operating leases
were charged to profit or loss on a straight-line basis over the
period of the lease. From 1 January 2019, leases are recognised as
a right-of-use asset and a corresponding liability at the date at
which the leased asset is available for use by the Group. Each
lease payment is allocated between reducing the liability and a
finance cost. The finance cost is charged to the income statement
over the lease period so as to produce a constant periodic rate of
interest on the remaining balance of the liability for each
period.
On adoption of IFRS 16, the Group recognised additional lease
liabilities in relation to leases which had previously been
classified as 'operating leases' under the previous principles of
IAS 17 Leases. These liabilities were measured at the present value
of the remaining lease payments, discounted using the Group's
incremental borrowing rate as of 1 January 2019. The weighted
average incremental borrowing rate applied by the Group to the
lease liabilities on 1 January 2019 was 3.7%.
The associated right-of-use assets for certain high value
property leases are measured on a retrospective basis as if the new
rules had always been applied. As above, the Group's incremental
borrowing rate has been used. Other right-of-use assets are
measured at the amount equal to the lease liability, adjusted by
the amount of any prepaid or accrued lease payments relating to
that lease recognised in the balance sheet as at 31 December
2018.
In applying IFRS 16 for the first time, the Group has used the
following practical expedients permitted by the standard:
- on initial application, IFRS 16 was only applied to contracts
that were previously classified as leases, the Group has elected
not to reassess whether a contract is, or contains, a lease at the
date of initial application. Instead, for contracts entered into
before the transition date the Group has relied on its assessment
made applying IAS 17 and IFRIC 4 Determining whether an Arrangement
contains a Lease;
- lease contracts with a duration of less than 12 months will
continue to be expensed to the income statement on a straight-line
basis over the lease term;
- the lease term has been determined with the use of hindsight
where the contract contains options to extend the lease; and
- reliance on previous assessments on whether or not leases are onerous.
Note 25 sets out the adjustments made on transition to IFRS 16
Leases on 1 January 2019. The most significant changes are where
the Group is a lessee as the standard has not significantly changed
the accounting where the Group is a lessor in a lease
arrangement.
Accounting policy
Key judgement - Determining the lease term
In determining the lease term, the Group considers all facts and circumstances
that create an economic incentive to exercise an extension option, or
not exercise a termination option. Extension options (or periods after
termination) are only included in the lease term if the lease is reasonably
certain to be extended (or not terminated). Certain land and building
leases have renewal options with renewal dates for the most significant
property leases evenly spread between 2022-2028 and in 2041. The Group
reviews its judgements on lease terms annually, including the operational
significance of the site, especially where utilised for manufacturing
activities.
Key estimate - Estimates of the payments required to meet residual
value guarantees at the end of engine leases
Engine leases in the Civil Aerospace segment often include clauses
that guarantee engine value when returned to the lessor. This is in
the form of additional payments to the lessor if the measured useful
life of the engine is below levels specified in the contracts. The estimated
cost of meeting these obligations are included in the lease payments.
The amount payable is calculated based upon an estimate of the utilisation
of the engines over the lease term that would determine the cash payable
to the lessor and whether engine life can be restored at a lower estimated
cost by performing an overhaul prior to the end of the lease. At 31
December 2019, the lease liability included GBP401m relating to the
cost of meeting these residual value guarantees, with up to GBP80m in
2020 and GBP112m due over the following four years. Where estimates
of payments change an adjustment is made to the lease liability and
the right-of-use asset.
1 Basis of preparation and accounting policies continued
Assets and liabilities arising from a lease are initially
measured on a present value basis. Lease liabilities include the
net present value of the following lease payments:
- fixed payments less any lease incentive receivable;
- variable lease payments that are based on an index or a rate;
- amounts expected to be payable by the Group under residual value guarantees;
- the exercise price of a purchase option if the Group is
reasonably certain to exercise that option; and
- payments of penalties for terminating the lease, if the lease
term reflects the Group exercising that option.
Where leases commence after the initial transition date, the
lease payments are discounted using the interest rate implicit in
the lease. If that rate cannot be determined, the Group's
incremental borrowing rate is used, being the rate that the Group
would have to pay to borrow the funds necessary to obtain an asset
of similar value in a similar economic environment with similar
terms and conditions. Lease liabilities are revalued at each
reporting date using the spot exchange rate.
Right-of-use assets are measured at cost comprising the
following:
- the amount of the initial measurement of lease liability or a revaluation of the liability;
- any lease payments made at or before the commencement date
less any lease incentives received;
- any initial direct costs; and
- restoration costs.
Each right-of-use asset is depreciated over the shorter of its
useful economic life and the lease term on a straight-line basis
unless the lease is expected to transfer ownership of the
underlying asset to the Group, in which case the asset is
depreciated to the end of the useful life of the asset.
Payments associated with short-term leases are recognised on a
straight-line basis as an expense in the income statement.
Short-term leases are leases with a lease term of 12 months or
less.
IFRIC 23 Uncertainty over Income Tax Treatment
The Group adopted IFRIC 23 on 1 January 2019. The interpretation
clarifies how to apply the recognition and measurement requirements
in
IAS 12 Income Taxes when there is uncertainty over income tax
treatments. Adoption of this interpretation did not have a material
impact on the Group's financial statements.
Post balance sheet events
Non-adjusting post balance sheet events in relation to pensions
and mergers and acquisitions activity is disclosed in notes 20 and
23 respectively.
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). Our four divisions are set out below and referred to
collectively as the core businesses.
Civil Aerospace - development, manufacture, marketing and sales of commercial
aero engines and aftermarket services
Power Systems - development, manufacture, marketing and sales of reciprocating
engines, power systems and nuclear systems for civil power
generation
Defence - development, manufacture, marketing and sales of military
aero engines, naval engines, submarines nuclear power plants
and aftermarket services
ITP Aero - design, research and development, manufacture and casting,
assembly and test of aeronautical engines and gas turbines,
and MRO services
Non-core businesses include the trading results of the North
America Civil Nuclear business and the Knowledge Management System
business which have been treated as a disposal group held for sale
at 31 December 2019, the Commercial Marine business until the date
of disposal on 1 April 2019, Rolls-Royce Power Development Limited
(RRPD) until the date of disposal on 15 April 2019, L'Orange until
the date of disposal on 1 June 2018 and other smaller businesses
including former Energy businesses not included in the disposal to
Siemens on 2014 (Retained Energy). Segmental analysis for 2018 has
been restated to reflect the 2019 definition of non-core.
Underlying results
We present the financial performance of our business in
accordance with IFRS 8 and consistently with the basis on which
performance is communicated to the Board each month. Underlying
results are presented to reflect the economic impact of the Group's
foreign exchange and interest rate risk management activities with
interest receivable/(payable) on interest rate swaps not designated
into hedging relationships for accounting purposes reclassified
from fair value movement on a reported basis to interest
receivable/(payable) on an underlying basis - see note 4.
Underlying performance excludes the following:
- the effect of acquisition accounting and business disposals;
- impairment of goodwill and other non-current assets where the
reasons for impairment are outside of normal operating
activities;
- exceptional items; and
- other items which are market driven and outside the control of management.
Acquisition accounting, business disposals and impairment
We exclude these so that the current year and comparative
results are directly comparable.
Exceptional items
We classify items as 'exceptional' where the Directors believe
that presentation of our results in this way is more relevant to an
understanding of our financial performance, as exceptional items
are identified by virtue of their size, nature or incidence.
In determining whether an event or transaction is exceptional,
management considers quantitative as well as qualitative factors
such as the frequency or predictability of occurrence. Examples of
exceptional items include one-time costs and charges in respect of
aerospace programmes, costs of restructuring programmes and
one-time past-service charges and credits on our post-retirement
schemes.
In 2019, the risk-free discount rate we applied to exceptional
onerous contract provisions reduced from between 4%-5% to 2%-3%.
This
was largely driven by movements in US bonds in the last quarter
of 2019. The change in the risk-free rate (US bonds) is market
driven
and the impact of the reduction in the rate has been included as
a reconciling difference between underlying performance and
headline performance.
Exceptional items are not allocated to segments and may not be
comparable to similarly titled measures used by other
companies.
2 Analysis by business segment continued
Other items
The financing component of the defined benefit pension scheme
cost is determined by market conditions and has therefore been
included as a reconciling difference between underlying performance
and headline performance.
Penalties paid on agreements with investigating bodies are
considered to be one-off in nature and are therefore excluded
from
underlying performance.
The tax effects of the adjustments above are excluded from the
underlying tax charge. In addition, changes in tax rates and
changes in the amount of recoverable advance corporation tax
recognised are also excluded.
See page 36 for the reconciliation between Underlying
performance and Reported performance.
The following analysis sets out the results of the core
businesses on the basis described above and also includes a
reconciliation of the underlying results to those reported in the
consolidated income statement.
Corporate and
Civil Aerospace Power Systems (1) Defence ITP Aero inter-segment Core businesses
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Year ended 31 December
2019
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Underlying revenue
from sale of original
equipment 3,246 2,386 1,461 782 (502) 7,373
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Underlying revenue
from aftermarket
services 4,861 1,159 1,789 154 (75) 7,888
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Total underlying
revenue 8,107 3,545 3,250 936 (577) 15,261
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Gross profit/(loss) 622 909 669 206 (64) 2,342
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Commercial and
administrative costs (299) (374) (151) (61) (53) (938)
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Restructuring (7) - (7) (1) - (15)
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Research and
development costs (374) (176) (105) (33) - (688)
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Share of results of
joint ventures and
associates 102 (2) 9 - - 109
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Underlying operating
profit/(loss) 44 357 415 111 (117) 810
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Segment assets 17,954 3,587 2,743 2,160 (2,476) 23,968
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Interests in joint
ventures and
associates 365 18 19 - - 402
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Segment liabilities (24,819) (1,450) (2,950) (1,129) 2,645 (27,703)
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Net
(liabilities)/assets (6,500) 2,155 (188) 1,031 169 (3,333)
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Year ended 31 December
2018
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Underlying revenue
from sale of original
equipment 3,119 2,310 1,452 666 (375) 7,172
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Underlying revenue
from aftermarket
services 4,259 1,124 1,672 113 (54) 7,114
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Total underlying
revenue 7,378 3,434 3,124 779 (429) 14,286
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Gross profit 493 866 690 156 35 2,240
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Commercial and
administrative costs (336) (363) (170) (57) (51) (977)
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Restructuring (8) (1) (3) (2) - (14)
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Research and
development costs (332) (188) (100) (30) - (650)
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Share of results of
joint ventures and
associates 21 1 10 - - 32
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Underlying operating
(loss)/profit (162) 315 427 67 (16) 631
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Segment assets 14,271 3,692 2,612 2,210 (1,621) 21,164
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Interests in joint
ventures and
associates 380 14 16 - - 410
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Segment liabilities (21,309) (1,651) (2,924) (1,168) 1,743 (25,309)
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
Net
(liabilities)/assets (6,658) 2,055 (296) 1,042 122 (3,735)
---------------------- --------------- ----------------- ------- -------- ---------------------- ---------------
(1) The underlying results for Power Systems for 31 December
2018 have been restated to reclassify the North America Civil
Nuclear business as non-core.
2 Analysis by business segment continued
Reconciliation to Underlying
reported results adjustments and
Non-core businesses adjustments to Group at actual
Core businesses (1,2) Total underlying foreign exchange exchange rates
GBPm GBPm GBPm GBPm GBPm
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Year ended 31
December 2019
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Revenue from sale of
original equipment 7,373 83 7,456 596 8,052
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Revenue from
aftermarket
services 7,888 106 7,994 541 8,535
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Total revenue 15,261 189 15,450 1,137 16,587
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Gross profit/(loss) 2,342 45 2,387 (1,445) 942
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Commercial and
administrative
costs (938) (41) (979) (149) (1,128)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Restructuring (15) 1 (14) 14 -
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Research and
development costs (688) (8) (696) (74) (770)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Share of results of
joint ventures and
associates 109 1 110 (6) 104
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Operating
profit/(loss) 810 (2) 808 (1,660) (852)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Gain arising on the
disposal of
businesses - - - 139 139
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit/(loss) before
financing and
taxation 810 (2) 808 (1,521) (713)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Net financing (223) (2) (225) 47 (178)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit/(loss) before
taxation 587 (4) 583 (1,474) (891)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Taxation (281) 4 (277) (143) (420)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit/(loss) for
the year 306 - 306 (1,617) (1,311)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Attributable to:
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Ordinary
shareholders 302 (1,617) (1,315)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Non-controlling 4 - 4
interests
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Year ended 31
December 2018
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Revenue from sale of
original equipment 7,172 358 7,530 285 7,815
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Revenue from
aftermarket
services 7,114 423 7,537 377 7,914
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Total revenue 14,286 781 15,067 662 15,729
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Gross profit/(loss) 2,240 210 2,450 (1,252) 1,198
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Commercial and
administrative
costs (977) (184) (1,161) (434) (1,595)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Restructuring (14) (2) (16) 16 -
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Research and
development costs (650) (39) (689) (79) (768)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Share of results of
joint ventures and
associates 32 - 32 (28) 4
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Operating
profit/(loss) 631 (15) 616 (1,777) (1,161)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Gain arising on the
disposal of
L'Orange - - - 358 358
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit/(loss) before
financing and
taxation 631 (15) 616 (1,419) (803)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Net financing (148) (2) (150) (1,994) (2,144)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit/(loss) before
taxation 483 (17) 466 (3,413) (2,947)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Taxation (153) (8) (161) 715 554
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Profit/(loss) for
the year 330 (25) 305 (2,698) (2,393)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Attributable to:
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Ordinary
shareholders 297 (2,698) (2,401)
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Non-controlling
interests 8 - 8
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
(1) Includes the North America Civil Nuclear business and the
Knowledge Management System business which have been treated as a
disposal group held for sale at 31 December 2019, the Commercial
Marine business disposed of on the 1 April 2019, RRPD disposed of
on the 15 April 2019, L'Orange until the date of disposal on 1 June
2018 and other smaller non-core businesses including former Energy
businesses not included in the disposal to Siemens in 2014
(Retained Energy). See note 23 for more details.
(2) Non-core businesses for 31 December 2018 has been restated
to include the North America Civil Nuclear business.
2 Analysis by business segment continued
Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition
Corporate and
Civil Aerospace Power Systems (1) Defence ITP Aero (2) inter-segment Core businesses
GBPm GBPm GBPm GBPm GBPm GBPm
------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Year ended 31
December 2019
------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Original equipment
recognised at a
point in time 3,246 2,285 567 702 (478) 6,322
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Original equipment
recognised over
time - 101 894 80 (24) 1,051
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Aftermarket services
recognised at a
point in time 1,599 1,026 696 48 (32) 3,337
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Aftermarket services
recognised over
time 3,138 133 1,093 106 (43) 4,427
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Total underlying
customer contract
revenue (3) 7,983 3,545 3,250 936 (577) 15,137
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Other underlying
revenue 124 - - - - 124
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Total underlying
revenue 8,107 3,545 3,250 936 (577) 15,261
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Year ended 31
December 2018
------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Original equipment
recognised at a
point in time 3,119 2,257 694 585 (355) 6,300
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Original equipment
recognised over
time - 53 758 81 (20) 872
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Aftermarket services
recognised at a
point in time 1,575 996 718 (4) 21 3,306
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Aftermarket services
recognised over
time 2,630 128 954 117 (75) 3,754
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Total underlying
customer contract
revenue (3) 7,324 3,434 3,124 779 (429) 14,232
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Other underlying
revenue 54 - - - - 54
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
Total underlying
revenue 7,378 3,434 3,124 779 (429) 14,286
-------------------- --------------- ----------------- ------- ------------ ------------------ ---------------
(1) The underlying revenue for Power Systems for 31 December
2018 has been represented to reclassify the North America Civil
Nuclear business as non-core.
(2) ITP Aero prior year disaggregation of revenue restated to be
consistent with current year presentation.
(3) Includes GBP(93)m (2018: GBP(196)m) of revenue recognised in
the year relating to performance obligations satisfied in previous
years - see note 14.
Underlying
adjustments and
adjustments to Group results at
Non-core businesses foreign exchange actual exchange
Core businesses (1,2) Total underlying (3) rates
GBPm GBPm GBPm GBPm GBPm
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Year ended 31
December 2019
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Original equipment
recognised at a
point in time 6,322 40 6,362 596 6,958
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Original equipment
recognised over
time 1,051 43 1,094 - 1,094
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Aftermarket services
recognised at a
point in time 3,337 94 3,431 313 3,744
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Aftermarket services
recognised over
time 4,427 12 4,439 228 4,667
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Total customer
contract revenue 15,137 189 15,326 1,137 16,463
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Other revenue 124 - 124 - 124
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Total revenue 15,261 189 15,450 1,137 16,587
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Year ended 31
December 2018
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Original equipment
recognised at a
point in time 6,300 64 6,364 283 6,647
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Original equipment
recognised over
time 872 294 1,166 2 1,168
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Aftermarket services
recognised at a
point in time 3,306 388 3,694 148 3,842
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Aftermarket services
recognised over
time 3,754 35 3,789 229 4,018
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Total customer
contract revenue 14,232 781 15,013 662 15,675
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Other revenue 54 - 54 - 54
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
Total revenue 14,286 781 15,067 662 15,729
-------------------- --------------- ------------------- ---------------- ------------------- -------------------
(1) Includes the North America Civil Nuclear business and the
Knowledge Management System business which have been treated as a
disposal group held for sale at 31 December 2019, the Commercial
Marine business disposed of on the 1 April 2019, RRPD disposed of
on the 15 April 2019, L'Orange until the date of disposal on 1 June
2018 and other smaller non-core businesses including former Energy
businesses not included in the disposal to Siemens in 2014
(Retained Energy). See note 23 for more details.
(2) Non-core businesses for 31 December 2018 has been restated
to include North America Civil Nuclear business.
(3) Includes GBP(187)m (2018: GBPnil) of revenue recognised
relating to performance obligations satisfied in previous years
over and above that in underlying revenue.
Order backlog
Contracted consideration that is expected to be recognised as
revenue when performance obligations are satisfied in the future
(referred to as order backlog) is as follows:
2019 2018
Within After Within After
five years five years Total five years five years Total
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
---------------- ----------- ----------- ------- ------------ ----------- -----
Civil Aerospace 22.9 25.6 48.5 22.1 30.2 52.3
---------------- ----------- ----------- ------- ------------ ----------- -----
Power Systems 2.6 0.3 2.9 2.9 0.2 3.1
---------------- ----------- ----------- ------- ------------ ----------- -----
Defence 7.7 0.9 8.6 6.3 0.5 6.8
---------------- ----------- ----------- ------- ------------ ----------- -----
ITP Aero 0.7 0.2 0.9 0.8 0.1 0.9
---------------- ----------- ----------- ------- ------------ ----------- -----
33.9 27.0 60.9 32.1 31.0 63.1
---------------- ----------- ----------- ------- ------------ ----------- -----
The parties to these contracts have approved the contract and
our customers do not have a unilateral enforceable right to
terminate the contract without compensation. We exclude Civil
Aerospace OE orders (for deliveries beyond the next 7-12 months)
that our customers have placed where they retain a right to cancel.
Our expectation based on historical experience is that these orders
will be fulfilled. Within the 0-5 years category, contracted
revenue in: Defence will largely be recognised in the next three
years; Power Systems will be recognised over the next two years as
it is a short cycle business; and ITP Aero (where internal Group
revenues have been eliminated) evenly spread over the next five
years.
2 Analysis by business segment continued
Underlying adjustments
2019 2018
--------------------------------------------- ----------------------------------------------
Profit before Profit before
Revenue financing Net financing Revenue financing Net financing
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Underlying
performance 15,450 808 (225) 15,067 616 (150)
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Transactions
recognised at
exchange rate on
date of cash flow
and revaluation of
trading
assets /
liabilities (1) 1,137 145 80 781 (23) 163
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Impact of
unrealised fair
value changes to
derivative
contracts held
for trading (2) - (1) (6) - (1) (2,144)
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Impact of
unrealised fair
value changes to
derivative
contracts held
for financing (3) - - 1 - - (3)
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Exceptional
programme charges
(4,5) - (1,409) - (119) (976) (15)
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Impact of discount
rate changes (6) - - (40) - - -
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Exceptional
restructuring
charges (4,7) - (136) - - (317) -
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
(Loss)/gains
arising on the
acquisitions and
disposals (8) - (24) (8) - 183 (8)
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Impairments and
asset write-offs
(9) - (84) - - (155) -
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Other (10) - (12) 20 - (130) 13
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Total underlying
adjustments 1,137 (1,521) 47 662 (1,419) (1,994)
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
Reported per
consolidated income
statement 16,587 (713) (178) 15,729 (803) (2,144)
--------------------- -------- -------------------- ------------- -------- --------------------- -------------
(1) The adjustments for realised gains/(losses) on settled
derivative contracts include adjustments to reflect the
gains/(losses) 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 before taxation.
(3) Includes the losses on hedge ineffectiveness in the period
of GBP13m (2018: losses GBP3m)
(4) The table below summarises the exceptional items recorded in
2019 and 2018.
Year to 31 December
----------------------
2019 2018
GBPm GBPm
----------------------------------------------------- ---------- ----------
Programme charges and associated contract losses (5) 1,409 976
----------------------------------------------------- ---------- ----------
Related foreign exchange impact (5) 171 147
----------------------------------------------------- ---------- ----------
Restructuring charges (7) 136 317
===================================================== ========== ==========
Pension charges (10) - 121
===================================================== ========== ==========
1,716 1,561
----------------------------------------------------- ---------- ----------
(5) Included within programme exceptional items is GBP1,361m
(2018: GBP790m), GBP1,531m (2018: GBP905m) at prevailing exchange
rates, in respect of the abnormal wastage costs on the Trent 1000.
This includes GBP0.2bn of insurance receipts in respect of the
Trent 1000 in-service issues. In addition, there is an exceptional
item of GBP48m (2018: GBP186m), GBP49m (2018: GBP218m) at
prevailing exchange rates that relates to the decision by Airbus to
cease A380 deliveries in 2021. For information on the associated
provisions - see note 19.
(6) Included within discount rate changes is GBP30m relating to
Trent 900 and GBP10m relating to Trent 1000 for the impact from the
change in discount rates on contract losses recorded in exceptional
items in prior years as a result of the fall in US bonds, which
drives the calculation of the risk-free rate.
(7) The Group recorded an exceptional restructuring charge of
GBP136m (2018: GBP317m) in the year. The costs include: GBP88m
(2018: GBP223m) 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 and in respect of Defence,
reflecting actions to remove cost and improve operational
efficiency.
(8) (Loss)/gains arising on the acquisitions and disposals of
businesses. See note 23 for more details.
(9) In 2019, there has been an impairment of GBP58m relating to
Bergen Engines AS, and impairment charge and asset write offs of
GBP26m following the announcement to sell the North America Civil
Nuclear business within the Power Systems business segment. The
impairment charge in 2018 of GBP155m related to Commercial
Marine.
(10) Other includes the 2018 cost of equalisation of pension benefits between men and women.
Appropriate rates of tax have been applied to adjustments made
to profit before tax in the table above. Adjustments in 2019 which
impact the UK tax loss have an effective tax rate of zero. See note
5 for more details. The total underlying adjustments to profit
before tax in 2019 are a charge of GBP143m (2018: credit GBP715m).
The charge in 2019 was GBP57m plus an additional charge of GBP86m
relating to the derecognition of UK deferred tax assets on foreign
exchange and commodity financial assets and liabilities. The credit
in 2018 was GBP672m plus an additional credit of GBP43m relating to
the reduction in the Spanish Basque region tax rate.
Group employees monthly average during the year
2019 2018
--------------------------------------------------------------- ------------------ -----------------
Civil Aerospace 26,100 25,500
--------------------------------------------------------------- ------------------ -----------------
Power Systems 10,400 10,500
--------------------------------------------------------------- ------------------ -----------------
Defence 9,900 10,500
--------------------------------------------------------------- ------------------ -----------------
ITP Aero 3,900 3,700
--------------------------------------------------------------- ------------------ -----------------
Corporate (1) 100 100
--------------------------------------------------------------- ------------------ -----------------
Core businesses 50,400 50,300
--------------------------------------------------------------- ------------------ -----------------
Non-core business (2) 1,300 4,200
--------------------------------------------------------------- ------------------ -----------------
(1) Corporate consists of employees who do not provide a shared service to the business segments.
Where corporate functions provide such a service, employees have been allocated to the business
segments on an appropriate basis.
(2) Includes the North America Civil Nuclear business (disposal group held for sale), Commercial
Marine (disposed of on 1 April 2019), RRPD (disposed of on 15 April 2019), L'Orange (disposed
of on 1 June 2018) and Retained Energy. See note 23 for more details.
2 Analysis by business segment continued
Reconciliation to the balance sheet
2019 2018
GBPm GBPm
----------------------------------------------------- ---------- ----------
Reportable segment assets 23,968 21,164
--------------------------------------------------------- ---------- ----------
Interests in joint ventures and associates 402 412
--------------------------------------------------------- ---------- ----------
Non-core businesses 84 188
--------------------------------------------------------- ---------- ----------
Assets held for sale 18 750
--------------------------------------------------------- ---------- ----------
Cash and cash equivalents and short-term investments 4,449 4,980
--------------------------------------------------------- ---------- ----------
Fair value of swaps hedging fixed rate borrowings 249 293
--------------------------------------------------------- ---------- ----------
Deferred and income tax assets 1,926 2,126
--------------------------------------------------------- ---------- ----------
Post-retirement scheme surpluses 1,170 1,944
--------------------------------------------------------- ---------- ----------
Total assets 32,266 31,857
--------------------------------------------------------- ---------- ----------
Reportable segment liabilities (27,703) (25,309)
--------------------------------------------------------- ---------- ----------
Non-core businesses (43) (159)
--------------------------------------------------------- ---------- ----------
Liabilities associated with assets held for sale (15) (376)
--------------------------------------------------------- ---------- ----------
Borrowings and lease liabilities (5,685) (4,662)
--------------------------------------------------------- ---------- ----------
Fair value of swaps hedging fixed rate borrowings (6) -
--------------------------------------------------------- ---------- ----------
Deferred and income tax liabilities (790) (1,100)
--------------------------------------------------------- ---------- ----------
Post-retirement scheme deficits (1,378) (1,303)
--------------------------------------------------------- ---------- ----------
Total liabilities (35,620) (32,909)
--------------------------------------------------------- ---------- ----------
Net liabilities (3,354) (1,052)
--------------------------------------------------------- ---------- ----------
3 Research and development
2019 2018
GBPm GBPm
---------------------------------------------------------------------------------------------- -------- --------
Expenditure in the year (1,118) (1,145)
---------------------------------------------------------------------------------------------- -------- --------
Capitalised as intangible assets 481 498
---------------------------------------------------------------------------------------------- -------- --------
Amortisation and impairment of capitalised costs (1) (133) (121)
---------------------------------------------------------------------------------------------- -------- --------
Net cost recognised in the income statement (770) (768)
---------------------------------------------------------------------------------------------- -------- --------
Underlying adjustments relating to the effects of acquisition accounting and foreign exchange 74 79
---------------------------------------------------------------------------------------------- -------- --------
Net underlying cost recognised in the income statement (696) (689)
---------------------------------------------------------------------------------------------- -------- --------
(1) See note 8 for analysis of amortisation and impairment.
4 Net financing
2019 2018
---------------------------------------------------------------------
Per consolidated Underlying financing Per consolidated Underlying financing
income statement (1) income statement (1)
GBPm GBPm GBPm GBPm
---------------------- --------------------- ---------------------- --------------------- ----------------------
Interest receivable 31 31 27 27
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net fair value gains
on non-hedge
accounted interest
rate swaps (2) 14 - - -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Financial RRSAs -
foreign exchange
differences and
changes in forecast
payments 11 - 25 -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net fair value gains
on commodity
contracts 36 - - -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Financing on
post-retirement
scheme surpluses 60 - 56 -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net foreign exchange
gains 100 - 163 -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Financing income 252 31 271 27
---------------------- --------------------- ---------------------- --------------------- ----------------------
Interest payable (182) (163) (107) (99)
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net fair value losses
on foreign currency
contracts (43) - (2,122) -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Financial RRSAs -
foreign exchange
differences and
changes in forecast
payments (10) - (27) -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Financial charge
relating to financial
RRSAs (3) (3) (8) (8)
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net fair value losses
on commodity
contracts - - (22) -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Financing on
post-retirement
scheme deficits (37) - (33) -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Other financing
charges (155) (90) (96) (70)
---------------------- --------------------- ---------------------- --------------------- ----------------------
Financing costs (430) (256) (2,415) (177)
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net financing costs (178) (225) (2,144) (150)
---------------------- --------------------- ---------------------- --------------------- ----------------------
Analysed as:
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net interest payable (151) (132) (80) (72)
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net fair value
(losses)/gains on
derivative
contracts 7 - (2,144) -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net post-retirement
scheme financing 23 - 23 -
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net other financing (57) (93) 57 (78)
---------------------- --------------------- ---------------------- --------------------- ----------------------
Net financing costs (178) (225) (2,144) (150)
---------------------- --------------------- ---------------------- --------------------- ----------------------
(1) See note 2 for definition of underlying results.
(2) The condensed consolidated income statement shows the net
fair value gain on any interest rate swaps not designated into
hedging relationships for accounting purposes. Underlying financing
reclassifies the interest receivable on these interest rates swaps
from fair value movement to interest receivable.
5 Taxation
UK Overseas Total
------------ -----
2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------------------------- ----- ----- -------- ----- ----- -----
Current tax charge for the year 15 13 228 167 243 180
----- ----- -------- ----- ----- -----
Adjustments in respect of prior years (4) (13) (3) 15 (7) 2
---------------------------------------------------------- ----- ----- -------- ----- ----- -----
Current tax 11 - 225 182 236 182
---------------------------------------------------------- ----- ----- -------- ----- ----- -----
Deferred tax charge/(credit) for the year 117 (630) (24) (43) 93 (673)
---------------------------------------------------------- ----- ----- -------- ----- ----- -----
Adjustments in respect of prior years 20 22 (15) (42) 5 (20)
---------------------------------------------------------- ----- ----- -------- ----- ----- -----
Derecognition of deferred tax 86 - - - 86 -
---------------------------------------------------------- ----- ----- -------- ----- ----- -----
Deferred tax credit resulting from reduction in tax rates - - - (43) - (43)
---------------------------------------------------------- ----- ----- -------- ----- ----- -----
Deferred tax 223 (608) (39) (128) 184 (736)
---------------------------------------------------------- ----- ----- -------- ----- ----- -----
Charged/(credited) in the income statement 234 (608) 186 54 420 (554)
---------------------------------------------------------- ----- ----- -------- ----- ----- -----
Deferred taxation assets and liabilities
2019 2018
GBPm GBPm
At 1 January 1,130 380
Impact of adopting of IFRS 16 (2018: Impact of adopting IFRS 9) 8 2
Amount (charged)/credited to income statement (184) 736
Amount credited/(charged) to other comprehensive income 323 (2)
Amount (charged)/credited to cash flow hedge reserve (5) 5
Amount credited to equity 1 2
On disposal/acquisition of businesses (1) (3) 6
Transferred to assets held for sale (2) (2) (4)
Exchange differences 1 5
At 31 December 1,269 1,130
Deferred tax assets 1,887 2,092
Deferred tax liabilities (618) (962)
1,269 1,130
(1) The 2019 deferred tax on disposal of businesses relates to
Commercial Marine. The 2018 comparative relates to the disposal of
L'Orange.
(2) The 2019 deferred tax transferred to assets held for sale
relates to the North America Civil Nuclear business. The 2018
comparative relates to Commercial Marine.
Deferred tax assets of GBP1,887m include GBP1,010m (2018:
GBP998m) relating to tax losses in the UK and GBP163m (2018:
GBP163m) relating to Advance Corporation Tax (ACT). These assets
have been recognised based on the expectation that the UK business
will generate taxable profits and tax liabilities in the future
against which the losses and ACT can be utilised.
Most of the tax losses relate to the Group's Civil Aerospace
widebody business in the UK which makes initial losses through the
investment
period of a programme and then makes a profit through its
contracts for services. The programme lifecycles typically range
between 30 and 55 years with more of the widebody engine programmes
forecast at the upper end of that range. In the past few years
there have been four new engines that have entered into service
(Trent 1000-TEN, Trent 7000, Trent XWB-84 and Trent XWB-97), all of
which are still in the investment stage.
Deferred tax assets are recognised only to the extent that it is
probable that future taxable profits will be available against
which the assets
can be utilised. A recoverability assessment has been
undertaken, taking account of deferred tax liabilities against
which the reversal can be offset and using latest UK forecasts,
which are mainly driven by the Group's Civil Aerospace widebody
business, to assess the level of future taxable profits.
The recoverability of UK deferred tax assets relating to UK tax
losses and ACT has been assessed in 2019 on the following
basis:
- using the most recent UK profit forecasts prepared by
management, which are consistent with past experience and external
sources on market conditions. These forecasts cover the next five
years;
- the long-term forecast profit profile of certain of the major
widebody engine programmes which is typically between 30 and 55
years from initial investment to retirement of the fleet, including
the aftermarket revenues earned from airline customers; and
- the long-term forecast profit and cost profile of the other parts of the Group's UK business.
The assessment takes into account UK tax laws that, in broad
terms, restrict the offset of the carried forward tax losses to 50%
of current year profits. Based on this assessment, the Group has
recognised a deferred tax asset of GBP1,010m relating to losses and
GBP163m relating to ACT. This reflects the Group's conclusions
that:
- It is probable that the UK business will generate taxable
income and tax liabilities in the future against which these losses
and the ACT
can be utilised;
- Based on current forecasts and using various scenarios these
losses and the ACT will be used in full within the next 20 to 30
years
which is within the expected widebody engine programme
lifecycles.
A deferred tax asset of GBP438m has not been recognised. This is
based management's assumptions relating to the amounts and timing
of future taxable profits and takes into account that higher losses
were incurred in 2019 than expected primarily due to the
recognition of a GBP1.4bn exceptional charge in respect of the
Trent 1000.
Changes in future profits will impact the recoverability of the
deferred tax assets, the key assumptions impact contract margins. A
5% charge in such margins would result in around a GBP2bn change in
UK profits over the remaining life of the programmes against which
the recovery of the tax losses and ACT would be assessed. Such a
variance could result in a change of up to GBP170m in the related
deferred tax balances recorded on the Group balance sheet, assuming
a 17% tax rate and the 50% loss offset restriction mentioned
above.
The Group has also reassessed the recovery of other deferred tax
assets, including those arising on unrealised losses on derivative
contracts. Whilst the deferred tax asset has reduced anyway as a
result of the reduction in the unrealised losses in 2019, the Group
has also derecognised GBP86m in line with the approach outlined
above. The impact of this is non-underlying.
5 Taxation continued
Any future changes in tax law or the structure of the Group
could have a significant effect on the use of losses and ACT,
including the period over which they can be used. In view of this
and the significant judgement involved the Board continuously
reassess this area.
The Budget 2016 announced that the UK tax rate will reduce to
17% with effect from 1 April 2020. The rate reduction to 17% has
been
substantively enacted on 6 September 2016. The deferred tax
assets and liabilities of UK companies within the Group have
therefore been
calculated at 17%.
The temporary differences associated with investments in
subsidiaries, joint ventures and associates, for which a deferred
tax liability has not been recognised, aggregate to GBP108m (2018:
GBP99m). No deferred tax liability has been recognised on the
potential withholding tax due on the remittance of undistributed
profits as the Group is able to control the timing of such
remittances and it is probable that consent will not be given in
the foreseeable future.
6 Earnings per ordinary share
Basic earnings per ordinary share (EPS) is calculated by
dividing the loss attributable to ordinary shareholders by the
weighted average number of ordinary shares in issue during the
year, excluding ordinary shares held under trust, which have been
treated as if they had been cancelled.
Diluted EPS is calculated by adjusting the weighted average
number of ordinary shares in issue during the year for the bonus
element of share options.
2019 2018
Potentially dilutive Potentially dilutive
Basic share options (1) Diluted Basic share options (1) Diluted
Loss attributable to
ordinary shareholders
(GBPm) (1,315) (1,315) (2,401) (2,401)
Weighted average number
of ordinary shares
(millions) 1,904 - 1,904 1,859 - 1,859
EPS (pence) (69.07p) - (69.07p) (129.15)p - (129.15)p
(1) As there is a loss, the effect of potentially dilutive ordinary shares is anti-dilutive.
The reconciliation between underlying EPS and basic EPS is as
follows:
2019 2018
Pence GBPm Pence GBPm
Underlying EPS / underlying profit attributable to ordinary shareholders 15.86 302 15.98 297
Total underlying adjustments to loss before tax (note 2) (77.42) (1,474) (183.59) (3,413)
Related tax effects (7.51) (143) 38.46 715
EPS/loss attributable to ordinary shareholders (69.07) (1,315) (129.15) (2,401)
Diluted underlying EPS 15.86 15.98
7 Payments to shareholders in respect of the year
Payments to shareholders in respect of the year represent the
value of C Shares to be issued in respect of the results for the
year. Issues of C Shares were declared as follows:
2019 2018
Pence per Pence per
share GBPm share GBPm
Interim (issued in January) 4.60 87 4.60 86
Final (issued in July) 7.10 137 7.10 135
11.70 224 11.70 221
8 Intangible assets
Development Customer
Goodwill Certification costs expenditure relationships Software Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 31 December 2018 1,087 948 2,883 1,384 964 811 8,077
Additions - 15 481 - 101 43 640
Acquisition of
businesses 11 - - - 4 23 38
Transferred to
assets held for
sale (1) (34) - (11) (16) (3) (11) (75)
Disposals - - (8) (1) (111) (19) (139)
Reclassifications
from PPE - - 17 - 19 (18) 18
Exchange
differences (40) (1) (68) (64) (7) (26) (206)
At 31 December 2019 1,024 962 3,294 1,303 967 803 8,353
Accumulated
amortisation and
impairment
At 31 December 2018 42 373 1,111 304 607 345 2,782
Charge for the
year (2) - 19 113 72 88 26 318
Impairment 18 - 20 9 7 - 54
Transferred to
assets held for
sale (1) (34) - (11) (16) (3) (11) (75)
Disposals - - (7) (1) (99) (19) (126)
Reclassifications
from PPE - - - - 10 (1) 9
Exchange
differences 4 - (25) (14) (5) (11) (51)
At 31 December 2019 30 392 1,201 354 605 329 2,911
Net book value
At 31 December 2019 994 570 2,093 949 362 474 5,442
At 31 December 2018 1,045 575 1,772 1,080 357 466 5,295
(1) The North America Civil Nuclear business was classified as a
disposal group held for sale on 26 September 2019, prior to this an
impairment of goodwill of GBP15m was recognised. The Commercial
Marine business was classified as a disposal group held for sale on
30 June 2018 - --see note 23.
(2) Charged to cost of sales and commercial and administrative
costs except development costs, which are charged to research and
development costs.
Goodwill
Goodwill has been tested for impairment during 2019 on the
following basis:
- The carrying values of goodwill have been assessed by
reference to value in use. These have been estimated using cash
flows from the most recent forecasts prepared by management, which
are consistent with past experience and external sources of
information on market conditions. These forecasts generally cover
the next five years. Growth rates for the period not covered by the
forecasts are based on a range of growth rates between 1.0% - 2.5%
that reflect the products, industries and countries in which the
relevant CGU or group of CGUs operate.
- The key assumptions for the impairment tests are the discount
rate and, in the cash flow projections, the programme assumptions,
the growth rates and the impact of foreign exchange rates on the
relationship between selling prices and costs. Impairment tests are
performed using prevailing exchange rates.
The principal value in use assumptions for goodwill balances
considered to be individually significant are:
Rolls-Royce Power Systems AG
- trading assumptions (e.g. volume of equipment deliveries,
pricing achieved and cost escalation) are based on current and
known future programmes, estimates of capture of market share and
long-term economic forecasts;
- cash flows beyond the five-year forecasts are assumed to grow at 1.0% (2018: 1.8%); and
- pre-tax discount rate 12% (2018: 12%).
The Directors do not consider that any reasonably possible
changes in the key assumptions would cause the value in use of the
goodwill to fall below its carrying value.
Rolls-Royce Deutschland Ltd & Co KG
- trading assumptions (e.g. volume of engine deliveries, flying
hours of installed fleet and cost escalation) are based on current
and known future programmes, estimates of customers' fleet
requirements and long-term economic forecasts;
- cash flows beyond the five-year forecasts are assumed to grow at 2.5% (2018: 2.5%); and
- pre-tax discount rate 14% (2018: 13%).
The Directors do not consider that any reasonably possible
changes in the key assumptions would cause the value in use of the
goodwill to fall below its carrying value.
Commercial Marine
On 6 July 2018, the Group announced the sale of Commercial
Marine to KONGSBERG. The disposal 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 assets and liabilities presented
separately on the balance sheet measured at the lower of carrying
value or fair value less costs to sell.
As a result of the classification of the Commercial Marine
business as a disposal group, its carrying value was assessed
against the anticipated proceeds and the disposal costs. An
impairment charge of GBP155m for the related goodwill (with an
additional GBP5m impairment charge to Property, Plant and
Equipment) was recognised in the income statement at 31 December
2018 and the remaining net balance of GBP227m transferred to assets
held for sale and associated liabilities.
The Commercial Marine business was disposed of on 1 April 2019 -
see note 23.
8 Intangible assets continued
Other intangible assets (including programme related intangible
assets)
Other intangible assets 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 7% -
15% (2018: 7% - 13%), based on the Group's weighted average cost of
capital, adjusted for the estimated programme risk, for example
taking account of whether or not the forecast cash flows arise from
contracted business.
In addition, for programme-related intangible assets, these have
been reviewed for impairment in accordance with the requirements of
IAS 36. Where there is a triggering event, an impairment test has
been performed on the following basis:
- The programme related intangible asset's carrying value as at
31 December is compared to the asset's recoverable amount. The
Group has determined that the recoverable amount of the asset
should be calculated on a value in use basis as this represents the
highest value to the Group in terms of the future cash flows that
it can generate.
- Future cash flows used in the value in use calculations are
based on our most recent forecasts prepared by management and are
discounted using a pre-tax discount rate that reflects current
market assessment of the time value of money. These forecasts
include contracted business together with management's expectation
of speculative business over the life of the programme together
with cash outflows that are necessary to maintain the current level
of economic benefit expected to arise from the asset in its current
condition.
- The key programme assumptions underlying cash flow projections
are forecast market share and pricing, engine flying hours, number
of shop visits/cost of shop visits, R&D, capital investment and
foreign exchange rates.
- The pre-tax cash flow projections have been discounted at 7% -15% (2018: 7% -13%)
No impairment was identified (2018: no impairment). For
programmes where the headroom could be significantly reduced over
the next 12
months any of the following changes in assumption, in isolation,
would cause the recoverable amount of the programme assets to equal
its
carrying value:
- an increase in discount rates by 36%
- an increase in costs of 10%.
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 31 December 2018 1,916 5,296 967 722 8,901
Impact of adopting IFRS
16 (note 25) (12) (11) (205) (29) (257)
At 1 January 2019 1,904 5,285 762 693 8,644
Additions 27 286 126 328 767
Acquisition of - 3 - - 3
businesses
Transferred to assets
held for sale (1) (5) (9) - (2) (16)
Disposals of
businesses (4) (168) - - (172)
Disposals/write-offs (54) (187) (17) (4) (262)
Reclassifications (2) 186 390 11 (605) (18)
Reclassification of 5 3 - - 8
joint venture to
joint operations
Exchange differences (39) (106) (6) (9) (160)
At 31 December 2019 2,020 5,497 876 401 8,794
Accumulated
amortisation
At 31 December 2018 579 3,142 244 7 3,972
Impact of adopting IFRS
16 (note 25) (7) (13) (40) - (60)
At 1 January 2019 572 3,129 204 7 3,912
Charge for the year
(3) 67 381 43 - 491
Impairment 1 29 - 11 41
Transferred to assets
held for sale (1) (5) (9) - (1) (15)
Disposal of
businesses - (165) - - (165)
Disposals/write-offs (45) (150) (5) (1) (201)
Reclassifications (2) 9 6 (19) (5) (9)
Reclassification of 1 3 - - 4
joint venture to
joint operations
Exchange differences (10) (57) - - (67)
At 31 December 2019 590 3,167 223 11 3,991
Net book value
At 31 December 2019 1,430 2,330 653 390 4,803
At 1 January 2019 1,332 2,156 558 686 4,732
At 31 December 2018 1,337 2,154 723 715 4,929
(1) The North America Civil Nuclear business was classified as a
disposal group held for sale on 26 September 2019. The Commercial
Marine business was classified as a disposal group held for sale on
30 June 2018 - see note 23.
(2) Includes reclassifications for assets under construction and
to intangibles.
(3) Depreciation charged during the year is presented in the
income statement or included in the cost of inventory as
appropriate.
10 Right-of-use assets
Land and buildings Plant and equipment Aircraft and engines Total
GBPm GBPm GBPm GBPm
Cost:
At 31 December 2018 - - - -
Impact of adopting IFRS 16 (see note 25) 493 107 1,654 2,254
Transferred to assets held for sale (1) (40) (1) - (41)
At 1 January 2019 453 106 1,654 2,213
Additions/modifications of leases 70 28 129 227
Transferred to assets held for sale (1) (4) - - (4)
Disposals (2) (4) (13) (19)
Exchange differences (13) (2) (3) (18)
At 31 December 2019 504 128 1,767 2,399
Accumulated depreciation and impairment:
At 1 January 2019 - - - -
Charge for the year 58 32 309 399
Impairment 1 1 10 12
Transferred to assets held for sale (1) (1) - - (1)
Disposals (2) (4) (13) (19)
Exchange differences (1) - - (1)
At 31 December 2019 55 29 306 390
Net book value at:
31 December 2019 449 99 1,461 2,009
1 January 2019 453 106 1,654 2,213
(1) The North America Civil Nuclear business was classified as a
disposal group held for sale on 26 September 2019 - see note
23.
11 Investments
Equity accounted and other investments
Equity accounted Other
Joint ventures Associates Total Unlisted
GBPm GBPm GBPm GBPm
At 1 January 2019 412 - 412 22
Additions 8 - 8 2
Disposals (4) - (4) (6)
Transfer from joint venture to joint operation (3) - (3) -
Impairment - - - (1)
Consolidation of previously non-consolidated subsidiary - - - (4)
Share of retained profit (1) 12 - 12 -
Reclassification of deferred profit to deferred income (2) 4 - 4 -
Exchange differences (19) - (19) 1
Share of OCI (8) - (8) -
At 31 December 2019 402 - 402 14
(1) See table below
(2) The group's share of unrealised profit on sales to joint
ventures is eliminated against the carrying value of the investment
in the entity. Any excess amount once the carrying value is reduced
to nil is recorded as deferred income.
Reconciliation of share of retained profit/(loss) to the income
statement and cash flow statement:
2019 2018
GBPm GBPm
Share of results of joint ventures and associates 141 114
Adjustments for intercompany trading (37) (110)
Share of results of joint venture and associates to the Group (income statement) 104 4
Dividends paid by joint ventures and associates to the Group (cash flow statement) (92) (105)
Share of retained profit/(loss) above (1) 12 (101)
(1) During the year we sold spare engines to Rolls-Royce &
Partners Finance, a joint venture company.
12 Inventories
2019 2018
GBPm GBPm
Raw materials 522 553
Work in progress 1,652 1,551
Finished goods 2,119 2,168
Payment on account 27 15
4,320 4,287
13 Trade receivables and other assets
Current Non-current Total
2019 2018 * 2019 2018 * 2019 2018 *
GBPm GBPm GBPm GBPm GBPm GBPm
Trade receivables (1) 2,538 2,680 - - 2,538 2,680
Amounts owed by joint ventures and associates (1) 197 229 12 - 209 229
Costs to obtain contracts with customers (2) 10 8 33 34 43 42
Other receivables (3) 1,490 1,218 181 145 1,671 1,363
Prepayments 356 367 248 9 604 376
4,591 4,502 474 188 5,065 4,690
* Balances at 31 December 2018 have been represented to move
GBP217m from prepayments to other receivables to better reflect the
nature of these balances.
(1) Includes GBP267m (2018: GBP146m) of trade receivables held
to collect or sell and GBP76m (2018: nil) receivables from joint
ventures and associates held to collect or sell.
(2) These are amortised over the term of the related contract,
resulting in amortisation of GBP8m (2018: GBP13m) in the year.
There were no impairment losses recognised in either year.
(3) Other receivables includes the RRSA component of the LTSA
which is held separately on the basis of differing counterparties,
together with receivables arising from overhaul activity outside of
LTSA coverage.
The expected credit losses for trade receivables and other
assets has increased by GBP12m to GBP138m (2018: GBP126m). Amounts
included are
considered as current so no ageing of expected credit losses is
disclosed.
For many years the Group has undertaken the sale of trade
receivables, without recourse, to banks. This is commonly known as
'invoice discounting' or 'factoring', and is common place in the
aerospace industry. The absolute amount carried out in any given
year depends on specific engine delivery volumes and phasing. This
activity has been used to normalise customer receipts as certain
aerospace customers have extended their payment terms. This in turn
has helped to normalise our Group cash flows in line with physical
delivery volumes. Over the last three years the sale of trade
receivables has averaged GBP1,037m at the year-end. Trade
receivables factored are generally due within the following
quarter.
At 31 December 2019 GBP1,117m was drawn under factoring
facilities, an increase of GBP95m compared to December 2018,
representing cash collected before it was contractually due from
the customer.
In exceptional circumstances, the sale of trade receivables has
taken place where amounts contractually due from aerospace
customers before the period end have been deferred into the
following period. There was GBP504m relating to this activity at
the 2018 year end. There were no equivalent amounts in 2019.
14 Contract assets and liabilities
Current Non-current Total
2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm
Contract assets
Contract assets with operators 404 295 1,092 1,108 1,496 1,403
Participation fee contract assets 57 49 542 605 599 654
461 344 1,634 1,713 2,095 2,057
Contract assets are analysed as follows:
Financial instruments (note 18):
Other non-derivative financial assets - -
Non-financial instruments 2,095 2,057
2,095 2,057
Contract assets include GBP1,086m (2018: GBP1,097m) of Civil
Aerospace LTSA assets, with most of the remainder relating to
Defence Aerospace. The main driver of the increase is driven by
Defence Aerospace which increased by GBP90m due to the timing
differences between revenue being recognised on a stage of
completion basis and when customers are billed, as well as the
timing of the flow down of amounts received in prior years from
programme partners. Revenue from performance obligations satisfied
in previous years has been adjusted by GBP(166)m.
Participation fee contract assets have reduced by GBP(55)m due
to amortisation exceeding additions by GBP(35)m and FX on
consolidation of overseas entities of GBP(20)m. No impairment
losses (2018: none) of contract assets have arisen during the
year.
The expected credit losses for contract assets has decreased by
GBP9m in relation to normal business cycle to GBP13m (2018:
GBP22m).
Current Non-current Total
2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm
Contract liabilities 4,228 3,794 6,612 5,336 10,840 9,130
During the year, GBP3,491m (2018: GBP2,823m) of the opening
contract liability was recognised as revenue and contract
liabilities have increased by GBP1,710m. The main reasons for the
increase being a GBP1,199m growth in Civil Aerospace LTSA
liabilities to GBP6,783m (2018: GBP5,584m) driven by an overall
growth in engine flying hour receipts. Our installed base increased
by 6% in 2019 compared with 2018. In addition, engine flying hours
increased by 7% year on year. Revenue from performance obligations
satisfied in previous years has been adjusted by GBP(114)m.
15 Cash and cash equivalents
2019 2018
GBPm GBPm
Cash at bank and in hand 825 1,023
Money-market funds 1,095 1,222
Short-term deposits 2,523 2,729
Cash and cash equivalents per the balance sheet 4,443 4,974
Overdrafts (note 16) (8) (22)
Cash and cash equivalents per cash flow statement (page 28) 4,435 4,952
Cash held as collateral against third party obligations (note 19) - 4
Cash and cash equivalents at 31 December 2019 includes GBP34m
(2018: GBP31m) that is not available for general use by the Group.
This balance predominantly relates to cash held in non-wholly owned
subsidiaries and joint arrangements.
Balances are presented on a net basis when the Group has both a
legal right of offset and the intention to either settle on a net
basis or realise the asset and settle the liability
simultaneously.
16 Borrowings and lease liabilities
Current Non-current Total
2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm
Unsecured
Overdraft 8 22 - - 8 22
Bank loans 27 298 16 354 43 652
6.75% Notes 2019 GBP500m (1) - 504 - - - 504
2.375% Notes 2020 US$500m (2) 378 - - 383 378 383
2.125% Notes 2021 EUR750m (2) - - 655 699 655 699
0.875% Notes 2024 EUR550m (3) - - 481 498 481 498
3.625% Notes 2025 US$1,000m (3) - - 781 765 781 765
3.375% Notes 2026 GBP375m (4) - - 410 403 410 403
1.625% Notes 2028 EUR550m (3) - - 501 502 501 502
Other loans (5) 22 - 52 5 74 5
Total unsecured 435 824 2,896 3,609 3,331 4,433
Secured (6)
Lease liabilities - property 50 - 473 - 523 -
Lease liability - aero engines 261 - 1,463 - 1,724 -
Lease liability - equipment 29 - 78 - 107 -
Obligations under finance leases - 34 - 195 - 229
Total secured 340 34 2,014 195 2,354 229
Total borrowings and lease liabilities 775 858 4,910 3,804 5,685 4,662
(1) These notes are the subject of interest rate swap agreements
under which the Group has undertaken to pay floating rates of
interest, which form a fair value hedge.
(2) These notes are the subject of cross-currency interest rate
swap agreements under which the Group has undertaken to pay
floating rates of GBP interest, which form a fair value hedge.
(3) These notes are the subject of cross-currency interest rate
swap agreements under which the Group has undertaken to pay
floating rates of GBP interest, which form a fair value hedge. They
are also subject to interest rate swap agreements under which the
Group has undertaken to pay fixed rates of interest, which are
classified as fair value through profit and loss.
(4) These notes are the subject of interest rate swap agreements
under which the Group has undertaken to pay floating rates of
interest, which form a fair value hedge. They are also subject to
interest rate swap agreements under which the Group has undertaken
to pay fixed rates of interest, which are classified as fair value
through profit and loss.
(5) In 2019, the Group reclassified GBP79m as borrowings
previously included in other financial liabilities. Other loans of
GBP8m (2018: GBP5m) are held by entities classified as joint
operations. The loans are disclosed after adjustments have been
made on consolidation to eliminate the extent of the Group's
interest in the entity.
(6) Obligations under leases are secured by related leased
assets.
Some of the Group's borrowings are subject to the Group meeting
certain obligations, including customary financial covenants. If
the Group fails to meet its obligations these arrangements give
rights to the lenders, upon agreement, to accelerate repayment of
the facilities. At 31 December 2019, none of these were in breach
(2018: none). There are no rating triggers contained in any of the
Group's facilities that could require the Group to accelerate or
repay any facility for a given movement in the Group's credit
rating.
In addition, the Group has GBP2,500m (2018: GBP2,500m) of
undrawn committed borrowing facilities which is available for at
least the next four years.
17 Trade payables and other liabilities
Current Non-current Total
2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm
Trade payables 2,300 2,520 - - 2,300 2,520
-----
Amounts owed to joint ventures and associates 798 635 36 18 834 653
-----
Accruals 1,751 1,673 89 109 1,840 1,782
-----
Deferred receipts from RRSA workshare partners 17 9 516 520 533 529
-----
Government grants (1) 12 14 71 85 83 99
-----
Other taxation and social security 128 125 - - 128 125
-----
Other payables (2) 3,444 3,316 1,359 1,208 4,803 4,524
-----
8,450 8,292 2,071 1,940 10,521 10,232
-----
(1) During the year GBP12m (2018: GBP8m) of government grants
were released to the income statement.
(2) Other payables include GBP280m (2018: GBP378m) for financial
penalties from agreements with investigating bodies and GBPnil
(2018: GBP245m) for deferred consideration in relation to the
acquisition of ITP Aero. In addition, other payables includes
amounts due to RRSA concessions, warranty credits and other sundry
payables.
Our payment terms with suppliers vary on the products and
services being sourced, the competitive global markets we operate
in and other
commercial aspects of suppliers' relationships. Industry average
payment terms vary between 90-120 days. We offer reduced payment
terms for smaller suppliers, so that they are paid in 30 days. In
line with aerospace industry practice, we offer a SCF programme in
partnership with
banks to enable suppliers who are on our standard 75-day payment
terms to receive their payment sooner. The SCF programme is
available to
suppliers at their discretion and does not change our rights and
obligations with suppliers nor the timing of our payment to
suppliers. At 31 December 2019 suppliers had drawn GBP859m under
the SCF scheme (31 December 2018: GBP817m).
18 Financial instruments
Carrying values of other financial assets and liabilities
Foreign
exchange Commodity Interest rate Total Financial
contracts contracts contracts (1) derivatives RRSAs Other C Shares Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2019
Non-current
assets 234 14 203 451 - 16 - 467
Current assets 16 9 49 74 - 12 - 86
Assets 250 23 252 525 - 28 - 553
Current
liabilities (394) (5) - (399) (31) (32) (31) (493)
Non-current
liabilities (2,960) (6) (9) (2,975) (79) (40) - (3,094)
Liabilities (3,354) (11) (9) (3,374) (110) (72) (31) (3,587)
(3,104) 12 243 (2,849) (110) (44) (31) (3,034)
2018
Non-current
assets 47 4 292 343 - - - 343
Current assets 16 2 4 22 - - - 22
Assets 63 6 296 365 - - - 365
Current
liabilities (523) (15) - (538) (52) (28) (29) (647)
Non-current
liabilities (3,304) (25) (4) (3,333) (175) (34) - (3,542)
Liabilities (3,827) (40) (4) (3,871) (227) (62) (29) (4,189)
(3,764) (34) 292 (3,506) (227) (62) (29) (3,824)
(1) Includes the foreign exchange impact of cross-currency interest rate swaps.
Derivative financial instruments
The Group uses various nancial instruments to manage its
exposure to movements in foreign exchange rates. Where the
effectiveness of a hedging relationship in a cash flow hedge is
demonstrated, changes in the fair value that are deemed effective
are included in the cash flow hedge reserve and released to match
actual payments on the hedged item. The Group uses commodity swaps
to manage its exposure to movements in the price of commodities
(jet fuel and base metals). To hedge the currency risk associated
with a borrowing denominated in a foreign currency, the Group has
currency derivatives designated as part of fair value hedges. The
Group uses interest rate swaps and forward rate agreements to
manage its exposure to movements in interest rates.
Movements in the fair values of derivative financial assets and
liabilities were as follows:
Foreign exchange
instruments Commodity instruments Interest rate instruments Total
2019 2018 2019 2018 2019 2018 * 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January (3,764) (2,312) (34) 1 292 227 (3,506) (2,084)
Movements
in fair
value
hedges - - - - (27) 101 (27) 101
Movements
in cash
flow
hedges (4) (14) 13 (9) - (1) 9 (24)
Movements
in other
derivative
contracts
(1) (43) (2,122) 36 (22) 14 - 7 (2,144)
Contracts
settled 707 684 (3) (4) (36) (35) 668 645
At 31
December (3,104) (3,764) 12 (34) 243 292 (2,849) (3,506)
* Prior year balances have been represented in order to give a
more accurate reflection of the cash flows associated with interest
rate instruments.
(1) Included in financing.
18 Financial instruments continued
Financial risk and revenue sharing arrangements (RRSAs) and
other financial liabilities
The Group has nancial liabilities arising from nancial RRSAs.
These nancial liabilities are valued at each reporting date using
the amortised cost method. This involves calculating the present
value of the forecast cash ows of the arrangements using the
internal rate of return at the inception of the arrangements as the
discount rate.
Movement in the carrying values were as follows:
Financial RRSAs Other liabilities Other assets
2019 2018 2019 2018 2019 2018
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January as previously reported (227) (247) (62) (57) - -
Reclassification to borrowings (1) 79 - - - - -
At 1 January restated (148) (247) (62) (57) - -
Exchange adjustments included in OCI 10 (3) 1 (1) - -
Additions (4) (3) (37) (25) - -
Financing charge (2) (3) (8) (3) (1) - -
Excluded from underlying profit:
Changes in forecast payments (2) 1 (2) - - - -
Exchange adjustments (2) 6 - - - - -
Cash paid 28 36 29 22 - -
Reclassification from trade receivables - - - - 16 -
At 31 December (110) (227) (72) (62) 16 -
(1) In 2019, the Group reclassified GBP79m as borrowings
previously included in other financial liabilities.
(2) Included in financing.
19 Provisions for liabilities and charges
Reclassified
to lease Charged to
At 1 January liabilities income Exchange At 31
2019 (IFRS 16) statement Reversed Utilised Transfers differences December 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Trent 1000
exceptional
costs (1) 779 - 1,275 - (672) - - 1,382
Contract
losses (2) 206 - 592 (4) (78) 62 (5) 773
Warranty and
guarantees 373 - 129 (19) (123) - (15) 345
Customer
financing 17 - 12 - (7) - - 22
Restructuring 204 (8) 49 (48) (128) - (1) 68
Insurance 87 - 25 (17) (25) - - 70
Tax related
interest and
penalties 62 - 14 (19) (1) - (1) 55
Employer
liability
claims 48 - 4 - (3) - - 49
Other 141 (67) 33 (34) (21) (9) (3) 40
1,917 (75) 2,133 (141) (1,058) 53 (25) 2,804
Current
liabilities 1,122 858
Non-current
liabilities 795 1,946
(1) The charge to the income statement for Trent 1000 includes
GBP15m as a result of discount unwind.
(2) The charge to the income statement for contract losses
includes a GBP40m impact from the change in discount rates on
contract losses recorded in prior years as a result of the fall in
US bonds, which drives the calculation of the risk-free discount
rate.
In November, we announced the outcome of recent testing and a
thorough technical and financial review of the Trent 1000 TEN
programme, following technical issues which were identified in
2019. This resulted in a revised timeline and a more conservative
estimate of durability for the improved HP turbine blade for the
TEN variant. An exceptional charge of GBP1,361m (at underlying
exchange rates) has been recorded in the income statement. The
charge is GBP1,531m at prevailing exchange rates and net of GBP203m
reflecting insurance receipts and contract accounting adjustments.
Of the charge GBP1,275m has been recorded in relation to Trent 1000
exceptional costs, and a further GBP459m in relation to contract
losses (see below). See note 2 for further details.
During 2019, we have utilised GBP672m of the Trent 1000
exceptional costs provision. This represents customer disruption
costs settled in cash and credit notes, and remediation shop visit
costs. We expect to use this provision over the period 2020 to
2023.
Provisions for contract losses are recorded when the direct
costs to fulfil a contract are assessed as being greater than the
expected revenue. Included within the provision charged of GBP592m,
is GBP459m (at prevailing exchange rates) relating to the upfront
recognition of future losses on a small number of contracts which
are now loss making as a result of the margin impact of our updated
HP turbine durability expectations on the Trent 1000 TEN.
Provisions for contract losses are expected to be utilised over the
term of the customer contracts, typically within 10 - 15 years.
Provisions for warranties and guarantees primarily relate to
products sold and generally cover a period of up to three
years.
Customer financing provisions cover guarantees provided for
asset value and/or financing.
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$2.8bn (2018: US$2.3bn)
(on a discounted basis) to provide facilities to enable customers
to purchase aircraft (of which approximately US$656m could be
called during 2020). 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.
19 Provisions for liabilities and charges continued
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.
2019 2018
GBPm $m GBPm $m
Gross commitments 60 79 93 119
Value of security (1) (9) (11) (24) (30)
Indemnities (8) (11) (19) (24)
Net commitments 43 57 50 65
Net commitments with security reduced by 20% (2) 43 57 60 77
(1) Security includes unrestricted cash collateral of - - 4 6
(2) Although sensitivity calculations are complex, the reduction
of relevant security by 20% illustrates the sensitivity to changes
in this assumption.
Restructuring provisions are made for Group approved, formal
restructuring programmes where the restructuring has either
commenced or has been publicly announced. Included is the
Group-wide restructuring programme announced on 14 June 2018, which
is an on-going multi-year restructuring programme across the
business and reflects the severance costs as well as the
consultancy costs that will help deliver the planned reductions.
The majority of the provision is expected to be utilised over the
next two years.
The Group's captive insurance company retains a portion of the
exposures it insures on behalf of the remainder of the Group.
Significant delays occur in the notification and settlement of
claims and judgement is involved in assessing outstanding
liabilities, the ultimate cost and timing of which cannot be known
with certainty at the balance sheet date. The insurance provisions
are based on information currently available, however it is
inherent in the nature of the business that ultimate liabilities
may vary. Provisions for outstanding claims are established to
cover the outstanding expected liability as well as claims incurred
but not yet reported.
Provisions for tax related interest and penalties relate to
uncertain tax positions in some of the jurisdictions in which the
Group operates. Utilisation of the provisions will depend on the
timing of resolution of the issues with the relevant tax
authorities.
The provision relating to employer healthcare liability claims
is as a result of an historical insolvency of the previous provider
and is expected to be utilised over the next 30 years.
Other provisions comprise a number of liabilities with varying
expected utilisation rates.
20 Post-retirement benefits
Amounts recognised in the income statement
2019 2018
Overseas schemes Total Overseas schemes Total
UK schemes GBPm GBPm GBPm UK schemes GBPm GBPm GBPm
Defined benefit schemes:
Current service cost and
administrative expenses 164 52 216 183 58 241
Past-service cost in respect
of equalisation (1) - - - 121 - 121
Other past service
cost/(credit) (2) - 6 6 (9) (1) (10)
164 58 222 295 57 352
Defined contribution schemes 66 91 157 41 100 141
Operating cost 230 149 379 336 157 493
Net financing (credit)/charge in
respect of defined benefit
schemes (59) 36 (23) (55) 32 (23)
Total income statement charge 171 185 356 281 189 470
(1) In the UK in 2018, past-service costs of GBP121m were
recognised relating to the estimated cost of equalising benefits
earned after May 1990 between men and women. The UK scheme
(Rolls-Royce UK Pension Fund) has to provide Guaranteed Minimum
Pensions (GMPs) which, as a result of statutory rules, have been
calculated differently for men and women. Although equal treatment
in pension provision for males and females has been required since
1990, there has been uncertainty on whether and how pension schemes
are required to equalise GMPs. A High Court judgement on the Lloyds
Banking Group hearing was published on 26 October 2018. The
judgement confirmed that GMPs earned from 1990 must be equalised
and highlighted an acceptable range of methods. The estimated cost
of this equalisation was GBP97m. In addition, a cost of GBP24m was
recognised in relation to obligations to equalise certain other
post-1990 benefits between men and women. The total cost of GBP121m
represents the Directors' best estimate of the cost, based on
actuarial advice. However, the final cost will differ from this
amount when the final method of equalisation is agreed with the
Trustee and subsequently implemented.
(2) In addition in 2018, a past-service credit of GBP9m arose
related to the restructuring activities. This credit was offset
against the restructuring costs. All amounts were excluded from the
underlying results.
On 5 June 2019, the Group entered into a partial buy-in with
Legal & General Assurance Society Limited covering the benefits
of circa 33,000 in-payment pensioners. As a result of the
transaction, an asset re-measurement net loss estimated at GBP600m
has been recognised within the line 'Actuarial gains/(losses)
recognised in OCI'. The buy-in was in anticipation of a buy-out. On
1 December 2019, 90% of the buy-in liabilities (covering 29,614
pensioners) were transferred, resulting in pension assets and
pension liabilities of GBP3.6bn being derecognised from the Group's
balance sheet. The remaining 10% of the buy-in liabilities
(covering 2,261 pensioners) was concluded in January 2020 with the
final balancing payment made on 1 February 2020. Pension assets and
liabilities of GBP408m will be derecognised in 2020. There is no
impact upon the income statement arising from this transaction.
20 Post-retirement benefits continued
Amounts recognised in the balance sheet in respect of defined
benefit schemes
2019 2018
UK schemes Overseas schemes Total UK schemes Overseas schemes Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 1,926 (1,312) 614 2,108 (1,370) 738
Exchange adjustments - 54 54 - (32) (32)
Current service cost and
administrative expenses (164) (52) (216) (183) (58) (241)
Other past service credit - (6) (6) (112) 1 (111)
Financing recognised in the income
statement 59 (36) 23 55 (32) 23
Contributions by employer 199 67 266 117 64 181
Actuarial gains/(losses) recognised in
OCI (1,335) (161) (1,496) 646 139 785
Returns on plan assets excluding
financing recognised in OCI 456 106 562 (705) (53) (758)
Disposal of businesses (see note 23) - 28 28 - 31 31
Transfers - (37) (37) - (2) (2)
At 31 December 1,141 (1,349) (208) 1,926 (1,312) 614
Post-retirement scheme surpluses -
included in non-current assets (1) 1,141 29 1,170 1,926 18 1,944
Post-retirement scheme deficits -
included in non-current liabilities - (1,378) (1,378) - (1,303) (1,303)
Post-retirement scheme deficits -
liabilities held for sale - - - - (27) (27)
1,141 (1,349) (208) 1,926 (1,312) 614
(1) The surplus in the UK scheme is recognised as, on ultimate
wind-up when there are no longer any remaining members, any surplus
would be returned to the Group, which has the power to prevent the
surplus being used for other purposes in advance of this event.
Future contributions
The Group expects to contribute approximately GBP170m to its
defined benefit schemes in 2020 (2019: GBP220m): UK GBP100m,
Overseas GBP70m (2019: UK GBP140m, Overseas GBP80m).
In the UK, the funding is based on a statutory triennial funding
valuation process. This includes a negotiation between the Group
and the Trustee on actuarial assumptions used to value obligations
(Technical Provisions) which may differ from those used for
accounting set out above. The assumptions used to value Technical
Provisions must be prudent rather than a best estimate of the
liability. Most notably, the Technical Provision discount rate is
currently based upon UK Government yields plus 0.5% rather than
being based on yields of AA corporate bonds. Following the
triennial valuation process, a Schedule of Contributions (SoC) must
be agreed which sets out the required contribution for current
service cost and any contributions from the employer to eliminate a
deficit. The most recent valuation, as at 31 March 2017, agreed by
the Trustee in December 2017, showed that the UK scheme was
estimated to be 112% funded on the Technical Provisions basis.
Employer contributions (inclusive of employee contributions paid by
a salary sacrifice arrangement) will subsequently be paid at a rate
of 28.5% during 2020 until a new SoC is agreed (2019: 27%). The
current SoC includes an arrangement for a potential increase in
contributions during 2021 to 2023 (capped at GBP48.3m a year) if
the Technical Provisions funding position is below 107% at 31 March
2020. As at 31 December 2019, the Technical Provisions funding
position was estimated to be 112% (2018: 111%).
Changes to UK defined benefit scheme
A consultation with active managers in the UK scheme was
concluded in January 2020. The consultation process agreed certain
changes for future accrual for the relevant manager group which
will mitigate future funding cost increases. The accounting impact
of this change will occur in 2020 rather than 2019. The change is
expected to be immaterial to these accounts. The triennial
valuation due at 31 March 2020 for the UK scheme, will take these
changes into account.
21 Leases
Leases as lessee
The net book value of lease right-of-use assets at 31 December
2019 was GBP2,009m (as per note 10) with a lease liability of
GBP2,354m (as per note 16).
2019
GBPm
Land and buildings depreciation and impairment (1) (59)
Plant and equipment depreciation (2) (33)
Aircraft and engines depreciation and impairment (3) (319)
Total depreciation and impairment charge for right-of-use assets (411)
Interest expense (4) (88)
Expense relating to short-term leases of 12 months or less recognised as an expense on a
straight-line basis (2) (23)
Expense relating to variable lease payments not included in lease liabilities (3,5) (1)
Total lease expense (523)
Income from sub-leasing right-of-use assets 79
Total amount recognised in income statement (444)
(1) Included in cost of sales and commercial and administration
costs depending on the nature and use of the right-of-use
asset.
(2) Included in cost of sales, commercial and administration
costs, or research and development depending on the nature and use
of the right-of-use asset.
(3) Included in cost of sales.
(4) Included in financing costs.
(5) Variable lease payments primarily arise on a small number of
contracts where engine lease payments are solely dependent upon
utilisation rather than a periodic charge.
The total cash outflow for leases in 2019 was GBP383m. Of this:
GBP359m related to leases reflected in the lease liability; GBP23m
to short-term leases where lease payments are expensed on a
straight-line basis; and GBP1m for variable lease payments where
obligations are only due when the right-of-use assets are used. The
timing difference between the income statement charge and cash flow
relates to costs incurred at the end of leases for residual value
guarantees that are recognised within depreciation over the term of
the lease, the most significant amounts relate to engine
leases.
The Group's leasing activities as a lessee and how they are
accounted for
The Group leases aero engines that are used to support
customers' aircraft fleets; land and buildings used for production,
administration or training purposes; and equipment used in the
manufacturing process and to support commercial and administrative
activities. Lease terms are negotiated on an individual basis and
contain a wide range of different terms and conditions. The lease
arrangements do not impose any covenants, but leased assets may not
be used as security for borrowing purposes.
Until 31 December 2018, leases were classified as either finance
or operating leases. Payments made under operating leases and
residual value guarantees were charged to the income statement on a
straight-line basis over the period of the lease. From 1 January
2019, leases are recognised as a right-of-use asset and a
corresponding lease liability at the date at which the leased asset
is available for use by the Group. Each lease payment is allocated
between reducing the liability and a finance cost. The finance cost
is charged to the income statement over the lease period so as to
produce a constant periodic rate of interest on the remaining
balance of the liability for each period.
Right-of-use assets and lease liabilities arising over the lease
term are now initially measured on a present value basis. The lease
term represented is the non-cancellable period of the lease
together with periods covered by an option to extend the lease
where the Group is reasonably certain to extend. Lease liabilities
include the net present value of the following lease payments where
such flows exist:
- fixed payments less any lease incentive;
- variable lease payments that are based on an index or a rate;
- amounts expected to be payable by the Group under residual value guarantees;
- the exercise price of a purchase option if the Group is
reasonably certain to exercise that option; and
- payments of penalties for terminating the lease, if the lease
term reflects the Group exercising that option.
Leases for engines typically contain no specific contractual
right to renew. Certain land and building leases have renewal
options with renewal dates for the most significant property leases
evenly spread over 2022-2028 and in 2041. Such judgements on lease
terms are made each period end and consider the specific terms of
the lease and the operational significance of the site, especially
where utilised for manufacturing activities. Lease obligations
beyond the renewal dates are included in the lease liability where
we are reasonably certain to extend the lease.
Engine leases in the Civil Aerospace business often include
clauses that require the engines to be returned to the lessor with
specific levels of useable life remaining. The cost of meeting
these requirements are included in the estimate of the lease
payments set out above. The amount payable is dependent upon the
utilisation of the engines over the lease term, whether the engine
is restored to the required condition by performing an overhaul at
our own cost or through the payment of amounts specified in the
contract and any new contractual arrangements arising when the
current lease contracts end. Where estimates of payments change, an
adjustment is made to the lease liability and the right-of-use
asset. Liabilities in USD and other non-functional currencies are
reported at the closing spot rates with changes arising from a
change in exchange rates reported within financing.
On transition to IFRS 16 on 1 January 2019, finance leases
continued to be recognised at their 2018 closing value and
operating leases were measured at the present value of the
remaining lease payments discounted using an incremental borrowing
rate appropriate to the lease. For new leases, the lease payments
are discounted using the interest rate implicit in the lease or if
that rate cannot be readily determined, which is generally the case
for leases in the Group, the incremental borrowing rate, being the
rate required to pay to borrow the funds necessary to obtain an
asset of similar value to the right-of-use asset in a similar
economic environment with similar terms, security and
conditions.
To determine the incremental borrowing rate, the Group uses a
build-up approach that starts with the risk-free interest rate
which is then adjusted for credit risk to reflect the nature of the
borrowing based on empirical evidence of similar external
borrowings undertaken by the Group. The rate used reflects the term
and currency of the lease.
The Group is exposed to potential future increases or reductions
in lease payments where the amount paid is based on an index (such
as LIBOR) or rate, which are not included in the lease liability
until it takes effect. When adjustments to lease payments based on
an index or rate take effect, the lease liability is remeasured and
an equivalent adjustment made to the right-of-use asset except
where the change results from a change in floating interest rates
when a revised discount rate is used that reflects changes in the
interest rate.
21 Leases continued
Right-of-use assets are measured at cost comprising the
following:
- the amount of the initial measurement of the lease liability
or a revaluation of the liability;
- any lease payments made at or before the commencement date
less any lease incentives received;
- any initial direct costs; and
- restoration costs.
Each right-of-use asset is depreciated over the shorter of its
useful life and the lease term on a straight-line basis unless the
lease is expected to transfer ownership of the underlying asset to
the Group, in which case the asset is depreciated to the end of the
useful life of the asset.
There was a single onerous lease contract where as a permitted
practical expedient the Group has adjusted the right-of-use asset
at the date of initial application by the amount of the provision
on the balance sheet at 31 December 2018.
Income from sub-leasing right-of-use assets is primarily
generated from the use of engines by our Civil Aerospace customers.
In a small number of circumstances current excess property capacity
is sub-let at market rates.
22 Contingent liabilities
Contingent liabilities in respect of customer financing
commitments are described in note 19.
In January 2017, after full cooperation, the Company concluded
deferred prosecution agreements with the SFO and the US Department
of Justice and a leniency agreement with the MPF, the Brazilian
federal prosecutors. Other authorities are investigating members of
the Group for matters relating to misconduct in relation to
historical matters. The Group is responding appropriately. Action
may be taken by further authorities against the Company or
individuals. 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
material 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.
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
nance, 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 signi cant loss to the
Group.
The Group's share of equity accounted entities' contingent
liabilities is nil (2018: nil).
23 Acquisitions and disposals
Acquisitions
eAircraft business
On the 30 September 2019, the Group completed the acquisition of
the electric and hybrid-electric aerospace propulsion activities of
Siemens. On acquisition the book value of assets acquired consisted
of GBP2.8m of property, plant and equipment and GBP0.2m of other
assets and liabilities. Of the GBP43m (EUR48.5m) acquisition cost,
which was settled in cash, GBP38m has been allocated to
identifiable intangible assets and GBP5m to other assets and
liabilities. Goodwill of GBP11m was recognised on the
transaction.
Qinous
The Group increased its shareholding in the Berlin-based
electricity storage specialist, Qinous GmbH from 19.9% to 73.1% on
the 15 January 2020 for a consideration of EUR10m. The acquisition
will be incorporated within our Power Systems business.
23 Acquisitions and disposals continued
Disposals
Commercial Marine and Rolls-Royce Power Development Limited
On the 1 April 2019, the Group completed the sale of its
Commercial Marine business to KONGSBERG for GBP547m. The business
was disclosed as a disposal group held for sale from 30 June 2018.
In our 2018 half-year financial statements, we reported an
impairment charge of GBP160m as a result of the decision to
classify Commercial Marine as a business held for sale. Upon the
disposal of Commercial Marine on 1 April 2019, and in accordance
with IAS 21 The Effects of Changes in Foreign Exchange Rates we
have recycled the cumulative currency translation reserve through
the income statement in 2019. This has resulted in a cumulative
currency translation gain of GBP98m.
On the 15 April 2019, the Group sold its shareholding in
Rolls-Royce Power Development Limited (RRPD) to Rockland Capital
Partners for GBP46m. The principal activity of this company was to
operate a fleet of six industrial Trent power stations in the
UK.
Commercial Marine RRPD Total
GBPm GBPm GBPm
Proceeds
Cash consideration 547 46 593
Cash and cash equivalents disposed (118) - (118)
Net cash consideration 429 46 475
Disposal costs paid (21) (1) (22)
Cash inflow per cash flow statement 408 45 453
Assets and liabilities disposed
Intangible assets 236 - 236
Property, plant and equipment 139 7 146
Right-of-use assets 40 - 40
Deferred tax assets 7 - 7
Inventory 207 4 211
Trade receivables and other assets 210 4 214
Current tax assets 1 - 1
Lease liabilities (39) - (39)
Trade payables and other liabilities (274) (5) (279)
Deposits (payments received on account) (74) - (74)
Provisions for liabilities and charges (27) - (27)
Post-retirement scheme deficits (28) - (28)
Net assets disposed 398 10 408
The gain of disposal of businesses totalled GBP139m.
Commercial Marine RRPD Total
GBPm GBPm GBPm
Income statement
Net cash consideration 429 46 475
Carrying amount of net assets sold (398) (10) (408)
Profit on disposal before disposal costs 31 36 67
Disposal costs (23) (3) (26)
Profit on disposal on business before tax 8 33 41
Tax on disposal - - -
Profit on disposal of business after tax 8 33 41
Cumulative currency translation gain recycled from OCI 98 - 98
Gain recognised in the income statement 106 33 139
Trigno Energy S.r.l.
On 29 January 2020 the Group exercised its put option to sell
100% of the shares held in Trigno Energy S.r.l. The transaction is
expected to complete in the first quarter of 2020. The shares will
be transferred to Pilkington Italia S.r.l. for an estimated
consideration of EUR5.6m.
Businesses held for sale
On the 26 September 2019, the Group signed an agreement for the
sale of the North America Civil Nuclear business to Westinghouse
Electric Company LLC. for a cash consideration of approximately
$18m. The sale was completed on 31 January 2020.
As a result of the decision to classify the business as a
disposal group held for sale, in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations, its carrying
value was assessed against the anticipated proceeds and the
disposal costs. An impairment
charge of GBP25m has been recognised in the income statement, of
which GBP15m relates to goodwill and an additional GBP10m
impairment charge to property, plant and equipment and intangible
assets. The impairment charge was allocated to the non-core
businesses. The remaining assets of GBP17m have been transferred to
assets held for sale, together with associated liabilities of
GBP14m at 31 December 2019.
On the 17 December 2019, the Group signed a share purchase
agreement with Valsoft Corp. for the sale of the Knowledge
Management System business. The consideration for the disposal is
expected to be $2.6m. The sale was completed on 3 February
2020.
Disposal - 2018
L'Orange
On 1 June 2018, the Group sold its L'Orange business, part of
Rolls-Royce Power Systems, to Woodward Inc. for EUR673m. 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 and this will be reviewed at each reporting
date over the adjustment period, based on actual sales. No
significant change has been identified to the cash consideration at
31 December 2019. Profit on disposal of the business (net of
disposal costs) was GBP358m.
24 Derivation of summary funds flow statement
The table below shows the derivation of the summary funds flow
statement (lines marked *) on page 11 from the cash flow statement
on page 28.
2019 2018
GBPm GBPm GBPm GBPm
* Underlying operating profit (see note 2) 808 616
Depreciation and impairment of property, plant and equipment 532 521
Amortisation and impairment of intangible assets 372 565
Depreciation and impairment of right-of-use assets 411 ---
Impairment of goodwill (84) (155)
Acquisition accounting (163) (175)
* Depreciation and amortisation 1,068 756
* Lease payments (capital plus interest) (319) -
* Additions of intangible assets (591) (680)
* Purchases of property, plant and equipment (747) (905)
* Increase in inventories (43) (616)
Movement in receivables/payables 77 1,129
Movements in contract balances 526 363
Realised derivatives in financing (187) (465)
Revaluation of trading assets (excluding exceptional items) 158 170
* Movement on receivables/payables/contract balances (excluding Civil LTSA) 574 1,197
* Underlying Civil Aerospace LTSA contract balances 754 679
* Movement on provisions (506) (242)
* Trent 1000 insurance 173 -
* Net interest received and paid (73) (70)
* Other (41) 22
* Trading cash flow 1,057 757
* Contributions to defined benefit schemes in excess of underlying PBT charge (9) 59
* Tax (175) (248)
* Group free cash flow 873 568
Of which: Disposed entities (41) (78)
Group free cash flow (pre disposed entities) 914 646
Of which: Non-core businesses 3 (2)
Core free cash flow 911 648
* Shareholder payments (224) (219)
* Acquisition of eAircraft (43) -
* Disposal of Commercial Marine and RRPD (2018: Disposal of L'Orange) 453 573
* Exceptional restructuring costs (216) (70)
* DPA payments (102) -
* Pension fund contribution (35) -
* IFRS 16 123 -
* Other (8) 10
* Foreign exchange (98) 54
* Change in net funds 723 916
Change in net funds 723 916
IFRS 16 impact (non cash) (123) -
Reclassification of other financial liabilities to borrowings (79) -
Change in net funds excluding IFRS16 521 916
The comparative information for the year ended 31 December 2018
has been re-presented to be on a comparable basis with the
presentation adopted for the year ended 31 December 2019. There is
no change to trading or group free cash flow. In summary, items
previously included in 'other' within 'trading cash flow', which
related to 'movements in receivables/payables' or movements in
'contract balances' have been included within those items.
During the year ended 31 December 2019, the Group received
insurance receipts of GBP173m relating to the Trent 1000 in-service
issues. This amount has been recognised within the Group's
underlying results - see note 2.
24 Derivation of summary funds flow statement continued
Free cash flow is a measure of financial performance of the
business' cash flow to see what is available for distribution among
those stakeholders funding the business (including debt holders and
shareholders). Free cash flow is calculated as trading cash flow
less recurring tax and post-employment benefit expenses. It
excludes payments made to shareholders, amounts spent (or received)
on business acquisitions, SFO payments and foreign exchange changes
on net funds. The Board considers that free cash flow reflects cash
generated from the Group's underlying trading.
The table below shows a reconciliation of free cash flow to the
change in cash and cash equivalents presented in the cash flow
statement on page 28.
31 December 2019 31 December 2018
GBPm GBPm GBPm GBPm Source
Change in cash and cash equivalents (413) 1,953 A
Returns to shareholders 224 219 A
Net cash flow from changes in borrowings and lease liabilities
(2018: finance leases) 1,385 (1,091) A
Increase in short-term investments - 3 A
Acquisition of eAircraft 43 - A
Disposal of Commercial Marine and RRPD
(2018: Disposal of L'Orange) (453) (573) A
Other acquisitions and disposals 1 (10) B
Changes in group structure (409) (583)
Payments of financial penalties from agreements with investigating
bodies 102 - A
Exceptional restructuring expenditure 216 70 B
Pension fund contribution 35 - B
Other 4 (3) B
Capital element of lease repayments (1) (271) - A
Free cash flow 873 568
(1) As IFRS 16 has been adopted with effect from 1 January 2019,
no adjustments have been made to present the comparative period on
a consistent basis.
Sources:
A Cash flow statement
B Cash flow statement adjusted for non-underlying items including exchange differences
25 Impact of adopting IFRS 16 Leases
For leases previously classified as finance leases, the Group
recognised the carrying amount of the lease asset and lease
liability immediately before transition as the carrying amount of
the right-of-use asset and the lease liability at the date of
initial application. The measurement principles of IFRS 16 are only
applied after that date.
The following table reconciles the operating lease obligations
under the previous accounting standard, IAS 17 Leases, to the lease
liability recorded under IFRS16 on transition:
GBPm
Operating lease commitments as reported at 31 December 2018 2,343
Lease commitments at end of aero engines lease contracts previously reflected in provisions
and other liabilities 515
Discounted using the incremental borrowing rate at the date of initial application (749)
Additional commitments recognised during final data review (1) 180
Impact of adoption of IFRS 16 2,289
Commitments relating to disposal groups (41)
At 1 January 2019 2,248
Finance lease liabilities recognised as at 31 December 2018 229
Lease liability recognised as at 1 January 2019 2,477
Of which are:
Current lease liabilities 322
Non - current lease liabilities 2,155
(1) These have been offset by right-of-use assets with an
equivalent value.
The recognised right-of-use assets relate to the following types
of asset:
1 January
2019
GBPm
Land and buildings 453
Plant and equipment 106
Aircraft and engines 1,654
Total right-of-use assets 2,213
25 Impact of adopting IFRS 16 Leases continued
The change in accounting policy affected the following items in
the balance sheet on 1 January 2019:
Consolidated balance sheet
Previous accounting Transferred As at
as at IFRS 16 to assets 1 January
31 December 2018 impact held for sale (1) 2019
GBPm GBPm GBPm GBPm
ASSETS
Property, plant and equipment (2) 4,929 (197) - 4,732
Right-of-use assets (3) - 2,254 (41) 2,213
Deferred tax assets (4) 2,092 2 - 2,094
Other non-current assets 8,016 - - 8,016
Non-current assets 15,037 2,059 (41) 17,055
Current assets 16,070 - - 16,070
Assets held for sale 750 - 41 791
TOTAL ASSETS 31,857 2,059 - 33,916
LIABILITIES
Borrowings and lease liabilities (858) (295) 7 (1,146)
Trade payables and other liabilities (5) (8,292) 49 - (8,243)
Provisions for liabilities and charges (6) (1,122) 30 - (1,092)
Other current liabilities (4,579) - - (4,579)
Current liabilities (14,851) (216) 7 (15,060)
Borrowings and lease liabilities (3,804) (1,994) 34 (5,764)
Trade payables and other payables (5) (1,940) 60 - (1,880)
Deferred tax liabilities (4) (962) 6 - (956)
Provisions for liabilities and charges (6) (795) 45 - (750)
Other non-current liabilities (10,181) - - (10,181)
Non-current liabilities (17,682) (1,883) 34 (19,531)
Liabilities associated with assets held for sale (376) - (41) (417)
TOTAL LIABILITIES (32,909) (2,099) - (35,008)
NET LIABILITIES (1,052) (40) - (1,092)
EQUITY
Accumulated losses (7) (2,991) (40) - (3,031)
Other equity attributable to ordinary shareholders 1,917 - - 1,917
Equity attributable to ordinary shareholders (1,074) (40) - (1,114)
Non-controlling interests 22 - - 22
TOTAL EQUITY (1,052) (40) - (1,092)
(1) Relates to the Commercial Marine business which was
classified as 'held for sale' at 31 December 2018. See note 23 for
more details.
(2) Transfer of net book value of finance leased assets to
right-of-use assets.
(3) Initial recognition of right-of-use assets accounted for
under IFRS 16.
(4) Deferred tax on the difference between the right-of-use
assets measured on a retrospective basis at the Group's incremental
borrowing rate and the lease liabilities at transition date.
(5) Lease-related creditors reclassified against the IFRS 16
right-of-use asset on transition.
(6) Provisions related to engine residual value guarantees
reclassified against IFRS 16 right-of-use assets.
(7) Post-tax difference between the right-of-use assets measured
on a retrospective basis and the lease liabilities at the
transition date.
Principal risks and uncertainties
The following table describes the principal risks facing the
Group, notwithstanding that there are other risks that may occur
and may impact the achievement of the Group's objectives:
Principal risk or uncertainty How we manage it
SAFETY We manage product safety by:
Failure to meet the expectations -- Ensuring clear accountability for safety
of: i) our customers to provide and a culture that puts safety first.
safe products; or ii) people -- Applying our engineering design and validation
who work for or with us to process from initial design, through production
provide a safe and healthy and into service to reduce the safety risks
place of work which minimises so far as is reasonably practicable; always
the impact on the environment; ensuring that we meet or better the relevant
would adversely affect our company, legal, regulatory and industry requirements.
reputation and long-term -- Operating a safety management system,
sustainability. governed by the product safety assurance board,
and subject to continual improvement based
on review of existing and emerging threats,
experience, and industry
-- best practice.
-- Ensuring that our products and those of
our suppliers conform to their specification.
-- Ensuring that everyone receives appropriate
product safety awareness training.
We manage people's safety and wellbeing by:
-- Ensuring clear accountability for HSE
and a culture that puts operating safely first.
-- Refreshing our global HSE policy and introducing
our Zero Harm programme.
-- Operating an HSE management system, including
reporting, investigating and learning lessons
from incidents.
-- Driving sustainable use of resources.
BUSINESS CONTINUITY -- Sustaining investment in adequate capacity,
The major disruption of modern equipment and facilities, dual sources
the Group's operations, which of supply and researching alternative materials.
results in our failure to -- Promoting and developing resilience within
meet agreed customer commitments our external supplier partners.
and damages our prospects -- Providing a supplier finance programme
of winning future orders. in partnership with banks to enable our suppliers
Disruption could be caused to benefit from the Rolls-Royce credit rating
by a range of events, for and access funds at low interest rates.
example: extreme weather -- Building a resilient culture through flexible
or natural hazards (e.g. and collaborative working, using our single
earthquakes, floods); political Group-wide incident management framework.
events; financial insolvency -- Developing, maintaining and regularly
of a critical supplier; scarcity exercising effective business continuity and
of materials; loss of data; crisis management plans to prepare our people
and fire or infectious disease. to respond quickly and confidently to any
The consequences of these business disruption.
events could have adverse -- Sharing lessons learned identified through
impact on our people, our exercises
internal facilities or our -- or incidents.
external supply chain. -- Scanning the horizon to provide awareness
of emerging risks/potential incidents.
CLIMATE CHANGE -- Investment in our existing product range
Understanding of the impact to reduce its carbon impact and in zero carbon
of climate change and our technologies to replace our existing products.
products increases our susceptibility -- Partnering programme to introduce the
to physical and transitional skills, capability and hunger to rapidly develop
climate-related risks. We class leading solutions.
will need to transition our -- Seeking a balanced portfolio of products,
products and services to customers and revenue streams to reduce our
a lower-carbon economy. Failure dependence on any one product, customer or
to consider changes in atmospheric carbon emitting fuel source.
conditions could result in -- Clear communication and acknowledgment
changes in maintenance and of our role in the problem and the solution,
overhaul requirements, affecting and the actions we are taking to enact a credible
revenues generated by our plan of action in line with society's expectations.
in service fleet and jeopardising
the viability of a services
based business model. Failure
to transition from carbon-intensive
products and services at
pace could impact our ability
to win future business; achieve
operating results; attract
and retain talent; secure
access to funding; realise
future growth opportunities,
or force government intervention
to limit emissions.
COMPETITIVE ENVIRONMENT -- Horizon scanning for emerging technology
The presence of competitors and other competitive threats, including patent
in the majority of our markets searches.
means that the Group is susceptible -- Establishing our Innovation Hub to invest
to significant price pressure in innovation, manufacturing and production,
for original equipment or and ensure continuing governance of technology
services. Our main competitors programmes.
have access to significant -- Enhancing our capabilities to access,
government funding programmes invest in and develop key technologies and
as well as the ability to innovative service offerings which differentiate
invest heavily in technology us competitively.
and industrial capability. -- Improving the quality, delivery and durability
Disruptive technologies or of our products and services through investment
new entrants with alternative in innovation, manufacturing and production
business models could also capabilities.
reduce our ability to sustainably -- Forming strategic partnerships and conducting
win future business, achieve joint research programmes with our partners.
operating results and realise -- Driving down cost to improve margins.
future growth opportunities. -- Protecting credit lines.
-- Strengthening our balance sheet to enable
access to cost-effective sources of third
party funding.
COMPLIANCE -- Taking an uncompromising approach to compliance.
Non-compliance by the Group -- Operating an extensive compliance programme.
with legislation, the terms Global mandatory policies, processes and training
of the DPAs or other regulatory are disseminated throughout the Group and
requirements in the heavily are updated from time to time to ensure their
regulated environment in continued relevance, and to ensure that they
which it operates (for example, are complied with, both in spirit and to the
export controls; use of controlled letter.
chemicals and substances; -- Regular reviews of the strength of relevant
anti-bribery and corruption; teams including the ethics, anti-bribery and
and tax and customs legislation). corruption, compliance, tax, sustainability
This could affect our ability and export control teams.
to conduct business in certain -- A legal team is in place to manage any
jurisdictions and would expose ongoing regulatory investigations.
the Group to potential: reputational -- Engaging with all relevant external regulatory
damage; financial penalties; authorities.
debarment from government -- Implementing a comprehensive REACH compliance
contracts for a period of programme. This includes ensuring that we
time; and suspension of export and our supply chain are covered by REACH
privileges (including export authorisations for a number of chemicals needed
credit financing), each of for our products, establishing appropriate
which could have a material data systems and processes and working with
adverse effect. our suppliers, customers and trade associations.
CYBER THREAT -- Implementing defence in depth through
An attempt to cause harm deployment of multiple layers of software
to the Group, its customers, and processes including web gateways, filtering,
suppliers and partners through firewalls, intrusion, advanced persistent
the unauthorised access, threat detectors and integrated reporting.
manipulation, corruption, -- Running security and network operations
or destruction of data, systems centres.
or products through cyber -- Actively sharing cyber security information
space. through industry, government and security
forums.
-- Information and product assurance processes.
-- Training and awareness to improve cyber
security culture.
MAJOR PRODUCT PROGRAMME -- Major programmes are subject to Board
DELIVERY approval.
Failure to deliver a major -- Reviewing major programmes at levels and
programme on time, within frequencies appropriate to their criticality
budget, to technical specification and performance, against key financial and
or falling significantly non-financial deliverables and potential risks
short of customer expectations, throughout the programmes lifecycle.
or not delivering the planned -- Investing in facilities and people to
business benefits, would manage the level of disruption to our customers
have potentially significant from Trent 1000 in-service issues and developing
adverse financial and reputational longer-term solutions to these issues.
consequences, including the -- Conducting technical audits at pre-defined
risk of impairment of the points which are performed by a team that
carrying value of the Group's is independent from the programme.
intangible assets and the -- Requiring programmes to address the actions
impact of potential litigation. arising from reviews and audits and monitoring
and controlling progress through to closure.
-- Applying knowledge management principles
to provide benefit to current and future programmes.
MARKET AND FINANCIAL SHOCK -- Maintaining a strong balance sheet, through
The Group is exposed to managing cash balances and debt levels.
a number of market risks, -- Providing financial flexibility by maintaining
some of which are of a macro-economic high levels of liquidity and an investment
nature (for example, foreign grade credit rating.
currency, oil price, interest -- Sustaining a balanced portfolio through
rates) and some of which earning revenue both from the sale of original
are more specific to the equipment and aftermarket services, providing
Group (for example, liquidity a broad product range and addressing diverse
and credit risks, reduction markets that have differing business cycles.
in air travel or disruption -- Deciding where and what currencies to
to other customer operations). source in, and where and how much credit risk
Significant extraneous market is extended or taken. The Group has a number
events could also materially of treasury policies that are designed to
damage the Group's competitiveness hedge residual risks using financial derivatives
and/or creditworthiness. (foreign exchange, interest rates and commodity
This would affect operational price risk).
results or the outcomes of -- Review debt financing and hedging in light
financial transactions. of volatility in external financial markets
caused by external events, such as Brexit
or other geopolitical changes.
POLITICAL RISK -- Where possible, diversifying our global
Geopolitical factors that operations to avoid excessive concentration
lead to an unfavourable business of risks in particular areas.
climate and significant tensions -- The Group's businesses, strategic marketing
between major trading parties network and global government relations teams
or blocs which could impact proactively monitoring local situations.
the Group's operations. -- We develop and maintain relationships
Examples include: changes with governments and stakeholders and proactively
in key political relationships; influence policy, regulation and legislation
explicit trade protectionism, where it affects us.
differing tax or regulatory -- Steering committee to co-ordinate activities
regimes, potential for conflict across the Group and minimise the impact of
or broader political issues; Brexit.
and heightened political
tensions.
STRATEGIC TRANSFORMATION -- Implementing a new organisational operating
Failure to deliver our strategic model.
transformation, including -- Focusing on behaviours to drive cultural
changing our behaviours could change.
result in: missed opportunities; -- Simplifying the processes in our Rolls-Royce
dissatisfied customers; disengaged -- Management System, whilst ensuring we
employees; ineffective use comply with our legal, contractual and regulatory
of our scarce resources; requirements.
and increasing the likelihood -- Horizon scanning and scenario planning.
of other principal risks -- Investing in products with lower emissions,
occurring. This could lead reducing our impact on climate change.
to a business that is overly -- Employee innovation portal.
dependent on a small number
of products and customers;
failure to achieve our vision;
non-delivery of financial
targets and not meeting investor
expectations.
TALENT AND CAPABILITY -- Attracting, rewarding and retaining the
Inability to identify, attract, right people with the right skills globally
retain and apply the critical and locally in a planned and targeted way,
capabilities and skills needed including regular benchmarking of remuneration.
in appropriate numbers to -- Developing and enhancing organisational,
effectively organise, deploy leadership, technical and functional capability
and incentivise our people to deliver global programmes.
would threaten the delivery -- Continuing a strong focus on individual
of our strategies, business development and succession planning, recognising
plans and projects. the changing nature of careers and expectations
of work.
-- Proactively monitoring retirement in key
areas and actively managing the development
and career paths of our people with a special
focus on employees with the highest potential.
-- Embedding a lean, agile, high-performance
culture where everyone can be at their best
that tightly aligns Group strategy with individual
and team objectives.
-- Incentivising and effectively deploying
the critical capabilities, skills and people
needed to deliver our strategic priorities,
plans and projects whilst implementing the
Group's major programme to transform its business,
to be resilient and to act with pace and simplicity.
-- Tracking engagement through regular employee
opinion surveys and a commitment to drive
year-on-year improvement to employee engagement.
Annual General Meeting
All holders of ordinary shares may attend the Company's AGM at
which the Chairman and Chief Executive present a review of the key
business developments during the year. This year's AGM will be held
at 11.00am on Thursday 7 May 2020 at King's Place, 90 York Way,
London, N1 9FX. Shareholders can ask questions of the Board on the
matters put to the meeting, including the Annual Report and the
running of the Company generally. All Directors are invited to
attend each AGM. Unless unforeseen circumstances arise, all
committee chairmen will be present to take questions at the
AGM.
Payments to shareholders
The Company issues non-cumulative redeemable preference shares
of 0.1p (C Shares) as an alternative to paying a cash dividend.
Shareholders can choose to:
-- redeem all C Shares for cash;
-- redeem all C Shares for cash and reinvest the proceeds in the
C Share Reinvestment Plan (CRIP); or
-- keep the C Shares.
The CRIP is operated by Computershare Investor Services PLC (the
Registrar). The Registrar will purchase ordinary shares in the
market for shareholders electing to reinvest their C Share
proceeds. Shareholders wishing to participate in the CRIP or redeem
their C Shares in July 2020 must ensure that their instructions are
lodged with the Registrar no later than 5:00pm (BST) on 1 June 2020
(CREST holders must submit their election in CREST before 2:55pm on
1 June 2020). Redemption will take place on 3 July 2020.
At the 2020 AGM, the Directors will recommend an issue of 71 C
Shares with a total nominal value of 7.1p for each ordinary share.
The C Shares will be issued on 1 July 2020 to shareholders on the
register on 24 April 2020 and the final day of trading with
entitlement to C Shares is 23 April 2020. Together with the interim
issue on 3 January 2020 of 46 C Shares for each ordinary share with
a total nominal value of 4.6p, this is the equivalent of a total
annual payment to ordinary shareholders of 11.7p for each ordinary
share.
Annual report and financial statements
The statements below have been prepared in connection with the
Company's full Annual Report for the year ended 31 December 2019.
Certain parts thereof are not included in this announcement.
Going concern
The going concern assessment considers whether it is appropriate
to prepare the financial statements on a going concern basis. The
Board has also considered the net liability position at 31 December
2019 and the going concern status of the Group's material
subsidiaries.
The Group meets its funding requirements through a mixture of
shareholders' funds, bank borrowings, bonds and notes. At 31
December 2019, the Group had borrowing facilities of GBP5.6bn
(excluding lease liabilities of GBP2.4bn) and total liquidity of
GBP6.9bn, including cash and cash equivalents of GBP4.4bn and
undrawn facilities of GBP2.5bn. GBP435m of the facilities mature in
2020 (excluding lease liabilities of GBP340m).
The Group's forecasts and projections, taking into account
reasonably possible changes in trading performance, show that the
Group has sufficient financial resources. The Directors have
reasonable expectations that the Company and the Group are well
placed to manage business risks and to continue in operational
existence for the foreseeable future (which accounting standards
require to be at least a year from the date of this report) and
have not identified any material uncertainties to the Company's and
the Group's ability to do so.
On the basis described above, the Directors consider it
appropriate to adopt the going concern basis in preparing the
Consolidated Financial Statements (in accordance with the Guidance
on Risk Management, Internal Control and Related Financial and
Business Reporting published by the FRC in September 2014).
Directors' confirmations
The Directors consider that the Annual Report, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group and parent company's
position and performance, business model and strategy.
Each of the Directors, whose names and functions are listed in
the Directors' Report, confirm that to the best of his or her
knowledge:
-- the Group Financial Statements, which have been prepared in
accordance with IFRSs as adopted by the European Union, give a true
and fair view of the assets, liabilities, financial position and
loss of the Group;
-- the parent company Financial Statements, which have been
prepared in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards,
comprising FRS 101 Reduced Disclosure Framework, and applicable
law), give a true and fair view of the assets, liabilities,
financial position and result of the Company; and
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Group and parent company, together with a description of the
principal risks and uncertainties that it faces.
By order of the Board
Warren East Stephen Daintith
Chief Executive Chief Financial Officer
28 February 2020
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END
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