REG - Rolls-Royce Holdings - 2019 Full Year Results
28/02/2020 07:00
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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 £269m. 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 £810m; reported
group operating loss £(852)m
· Core FCF £911m led by higher profit and reflecting £173m
Trent 1000 insurance receipts
· £0.5bn improvement in net cash* position to £1.4bn; gross
debt reduced by £1.1bn
· Trent 1000 in-service cash costs £578m; £1.4bn 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 £5.3bn 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 £1bn FCF;
excl. any material COVID-19 impact
· Remain confident in mid-term target of at least £1 per share
of FCF (>£1.9bn FCF)
Underlying Group(1) Underlying Core(1,2)
Year to 31 December 2019 2018 Organic 2019 2018(3) Organic
Change(4) Change(4)
Revenue (£m) 15,450 15,067 +7% 15,261 14,286 +6%
Operating profit (£m) 808 616 +25% 810 631 +25%
Earnings per share 15.9p** 16.0p -2.2p 15.9p 17.3p -2.4p
Free cash flow (£m)(5) 873 568 305 911 648 263
Reported Group
2019 2018 Change
Revenue (£m) 16,587 15,729 +5%
Operating (loss) (£m) (852) (1,161) 27%
Earnings per share (69.1)p (129.1)p 60.0p
Net Cash (£m) 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 £808m and £810m respectively; led by a £195m organic improvement in
Civil Aerospace underlying operating profit to £44m and underlying profit
growth in Power Systems of 15% following better Q4 trading
· Strong Group free cash flow (FCF) of £873m (2018: £568m)
and core FCF £911m (2018: £648m), driven by improved underlying operating
profit and Civil aftermarket cash margin; £578m Trent 1000 in-service cash
costs partly offset by £173m insurance receipt
· FCF before working capital movement (inventory, receivables
& payables), insurance receipts and Trent 1000 costs was £747m, 79%
higher than the prior year (2018: £418m)
· Trent 1000 exceptional programme charge of £1,361m
consistent with our November trading statement, driving reported operating
loss of £(852)m (2018: £(1,161)m)
· Core R&D cash spend increased modestly to £1,108m; 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 £1,361m
(2018: £840m); gross debt £1.1bn lower
Operational:
· Civil Aerospace: record 510 widebody engines delivered;
further progress in reducing average widebody OE loss, down 14% to £1.2m; 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 £5.3bn 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 £111m
· Restructuring plan on track; 2,900 cumulative headcount
reduction with run rate cost savings of £269m 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 £2.4bn 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 £1 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 revenue (£m)(1) Organic Underlying op. profit (£m)(1) Organic
Change(3,4) 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%
Civil Aerospace metrics: Core underlying:
2019 2018 £m 2019 2018
Widebody engine deliveries 510 469 Net R&D cash spend 1,108 1,105
Average loss per widebody OE (£m) 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 refurbs 306 286 Hedge book $/£ average 1.53 1.54
Large engine LTSA check & repair 660 569 Hedge book (US$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. We 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 £1bn of FCF in 2020, as we
drive towards our ambition to exceed £1 per share of FCF - or at least
£1.9bn - 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
£m 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) £(60)-(80)m
Core(2) underlying operating profit 828 Around 15% growth
Non-core (including Bergen)^ (20)
Group underlying operating profit 808
*Civil Aerospace profit improvement despite headwind from £100-150m 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
~£1.1bn
· Capitalised R&D should reduce by £100m-£150m reflecting
lower capitalisation in Civil Aerospace
· Capex (PPE) is expected to be £100m-£150m 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 £450m-£550m
· P&L finance costs are expected to be broadly stable
(2019: £223m); cash flow finance costs modestly lower reflecting gross debt
reduction in 2019 (2019: £73m)
· 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
£260m-£290m (2019: £175m), 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:
Peter Lapthorn +44 (0) 7717 811 069 Richard Wray +44 (0) 7974 918416
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A PDF copy of this report can be downloaded from www.rolls-royce.com/investors
(http://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:
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visit the following link:
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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 £873m, another significant step
towards achieving at least £1bn 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 £1,361m within our financials,
contributing to a reported loss of £(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 £1 of free cash flow
per share, which translates to at least £1.9bn 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
£m 2019(1) 2018(1,3) Change Organic(4) 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 £15,261m 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 £2,342m, 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 £33m in 2019 (2018: £(276)m), driven primarily by lower
servicing costs in business aviation; and
· modestly lower LTSA underlying gross margins, reflecting shop visit
mix, and around ~£70m 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 ~£25m 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 £938m. 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 £70m. After funding from customers and other third
parties, core self-funded cash spend was £3m higher at £1,108m. 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 £468m was £28m
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 £35m reflecting higher spend and the reduction in capitalisation.
Profit from joint ventures and associates
Our share of results from joint ventures was £109m, £71m 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 £157m on the prior year to £810m, led by the
£85m increase in gross profit, higher JV profit and a £37m reduction in
C&A costs, partially offset by the higher R&D charge outlined above.
Financing costs
Financing costs increased from £(148)m in 2018 to £(223)m in 2019. Within
financing costs, net interest payable of £(132)m increased by £60m largely
due to the adoption of IFRS16. Other financing costs were £(91)m in 2019,
modestly higher than the previous year (2018: £(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 £281m (2018: £153m), 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 £2.4bn across 2017-2023, consistent with the trading update in
November. In 2019, £578m of cash costs were incurred, partly offset by a
£173m insurance receipt. We continue to expect cash costs of £450-£550m 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 £1,361m at underlying FX
rates was recorded in 2019 on the Trent 1000 (net of £173m insurance
receipts). Within this charge, £703m is due to the additional cash costs
associated with customer disruption and remediation shop visits. The remaining
£658m 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 £269m.
Cash costs of £216m 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 ~£400m 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 £58m has been recorded outside
underlying results in 2019. In 2019 Bergen generated sales of £239m and an
underlying operating loss of £(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 £59m. This charge has been
reduced to £48m at the year-end following the release of £11m 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 £2,248m and
lease assets of £2,213m 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 £5m in
2018 to £77m 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 £15,450m, primarily driven by growth in Civil Aerospace,
offsetting a (76)% decline in non-core revenue. Group underlying operating
profit improved by 25% to £808m 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 £873m improved materially from £568m 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 £578m (2018: £431m), partially offset by
receipt of £173m of related insurance proceeds. R&D investments increased
modestly.
In 2019 there was an inflow of £574m (2018: £1,197m) 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 £(43)m increase in inventory (2018: £(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 £1,037m at the year-end. At 31 December
2019 £1,117m had been drawn under factoring facilities, £95m higher than
December 2018, which is reflected within working capital.
Given the one-off nature of the restructuring announced in 2018, the £(216)m
cash costs relating to this restructuring programme (2018: £(70)m) are
reported outside of Group free cash flow.
Summary funds flow statement (1)
£m 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 £312m increase in depreciation and amortisation to £1,068m was largely
due to an additional ~£340m charge relating to right of use assets following
the adoption of IFRS 16 from 1 January 2019.
Lease payments
Lease payments of £(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 £(591)m was incurred in 2019. This included
£(481)m of R&D capitalisation (2018: £498m) 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 £(747)m in 2019 reduced by £158m (2018 (£905m)) 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 £(43)m (2018: £(616)m) in 2019 due to volume growth
in Civil Aerospace and Power Systems, with a significant improvement in the
second half following a £(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 £574m 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 £754m. This movement included a £100m increase driven by
negative contract catch-ups to revenues (2018: £303m). The underlying change
net of these catch-ups was £654m. 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 £(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 £(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 £248m to £(175)m reflected lower
payments in Germany compared to 2018, largely due to timing.
Shareholder payments
Payments to shareholders of £224m 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 £453m. The £573m cash inflow in
2018 related to the disposal of the L'Orange business, previously within Power
Systems. Costs of £43m 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. No payments were due in 2018 and a
£102m payment was made in 2019. In 2020 and 2021, £130m and £148m (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 Change excluding Civil Nuclear
2019
Nuclear
£m Civil 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 £243m (2018: £293m) 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 £164m includes R&D additions of £481m, primarily
related to engine programmes in Civil Aerospace £(426)m, together with
further investment in software applications of £101m. These were offset by
impairment charges of £54m 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
£(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. Capital additions of £767m
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 £(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 £2.2bn. 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 £(1,671)m, of
which £(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 £(1,211)m included non-cash items of £557m,
primarily related to foreign exchange and the cumulative negative impact of
contract catch-ups to LTSA revenue. The change, net of these items, of
£(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 £127m. This reflected a financial penalty
payment of £102m related to agreements reached with investigating authorities
in January 2017, and a £245m 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 £888m 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 £611m in FY 2018 to a net
debt position of £(993)m. This was driven by the adoption of IFRS 16 Leases,
which increased lease liabilities by £(2,248)m. Excluding lease liabilities,
net cash stood at £1,361m 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
£840m largely reflected settlement of derivative contracts in 2019.
Net post-retirement scheme deficits
The £(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 £(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.
£m 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
1 Foreign exchange and derivatives 1,137 781 144 (24) 75 (1,984) 219 (2,008)
2 Exceptional programme charges - (119) (1,409) (976) - (15) (1,409) (991)
3 Impact of discount rate charges - - - - (40) - (40) -
4 Exceptional restructuring charges - - (136) (317) - - (136) (317)
5 M&A gains & effects of acquisition accounting - - (24) 28 (8) (8) (32) 20
6 Impairments and asset write-offs - - (84) - - - (84) -
7 Net post-retirement scheme financing, pension equalisation & other - - (12) (130) 20 13 8 (117)
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 £(7)m
(2018: £(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 £1,361m and
Trent 900 £48m are excluded from the underlying results. These have been
explained in note 2.
3 Included in discount rate changes is £30m relating to Trent 900 and
£10m relating to Trent 1000
4 Exceptional restructuring costs of £136m (2018: £317m). 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, £88m (2018: £223m)
relate to the Group restructuring programme announced in June 2018.
5 The loss before tax of £(32)m (2018: £20m profit) relates to the
effects of acquisition accounting £171m (2018: £183m) 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 £106m in 2019. Rolls Royce Power Development Limited was sold on 15
April 2019 with a gain arising on disposal of £33m. In our 2018 financial
statements, we reported an impairment charge of £155m in relation to the
Commercial Marine business being disclosed as held for sale and recognised a
gain on the sale of L'Orange of £358m. Together with the £183m acquisition
accounting effect relating to ITP Aero this resulted in the £20m 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 £26m. Following a reassessment of the Bergen order
book and subsequent impairment review we have recorded a charge of £58m 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 £143m (2018: tax
credit of £715m). 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 £86m 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 £1.2m. Our large engine installed fleet increased to over
5,000 engines in service, driving a 7% growth in widebody engine flying hours
and a £0.3bn 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
£m 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
£m 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
£3,246m and strong growth in services, up 14% to £4,861m. 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 £3,205m (2018: £2,666m) 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 £44m was an improvement of £195m
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 £121m 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 £33m positive impact on profit (2018: £(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, ~£70m 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 £18m to £(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 £60m lower, driven by widebody and business
aviation development programme maturity. Overall, the R&D charge to profit
increased to £(374)m from £(332)m in 2018.
Underlying C&A costs were 11% lower year-on-year. Joint venture profit of
£102m (2018: £21m) 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 £201m to £419m, 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 £578m (2018:£431m) were partly offset by insurance
receipts of £173m.
Cash inflow from working capital was significantly lower in 2019 notably due
to the non-recurrence of a c.£400m 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 £1.2m 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 £100-150m
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 £3,415m, a
book-to-bill of 1.0x.
Financial overview^
Organic
£m 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 £3,545 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 £357m, led by revenue growth.
Gross profit was 6% higher at £909m, helped by a 50bps increase in gross
margins to 25.6%, due to better product mix. C&A costs of £(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
£11m 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. The 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 £239m with an operating loss of £(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
£m 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 £3,250m 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 £415m was £28m lower than the prior year, in
line with expectations. Gross profit of £669m 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 £4m 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 £22m
lower year-on-year at £(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 £5.3 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 £111m, 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
£m 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 £936m, 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
~£50m 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 £111m, led by higher gross
profit. This increase was driven by higher OE volumes and improved pricing.
Profit also benefitted by ~£25m 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 £(61)m, and R&D rose by
10% to £33m 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 £m £m
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 £m £m
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 £600m 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 £m £m
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
Notes 2019 2018
£m £m
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 (757) (732)
purposes
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 (8) (13)
on investments
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 (271) (23)
payments)
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 (88) (5)
payments)
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 £173m.
(2 )In 2019, an impairment of £58m in respect of Bergen Engines AS was
included in these lines (2018: £160m 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
£m £m
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 (1) -
subsidiary
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 £79m 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:
At 31 December 2018 Transition to IFRS 16 and reclassifications (1) At 1 January Funds flow Net funds on acquisition /disposal Exchange differences Fair value adjustments Reclassifications Other movements on leases At 31 December
£m £m £m £m £m £m £m £m £m £m
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) 4,974 - 4,974 (427) - (104) - - - 4,443
(per balance sheet)
Overdrafts (22) - (22) 14 - - - - - (8)
Cash and cash equivalents 4,952 - 4,952 (413) - (104) - - - 4,435
(per cash flow statement)
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 318 (2,327) (2,009) 972 (1) (32) 48 3 (217) (1,236)
fair value swaps
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 (532) 865 - 54 (69) - - 318
fair value swaps
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 £79m 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 £173m.
(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
Share capital Share premium Capital redemption reserve Cash flow hedging reserve( ) Merger reserve Translation reserve Accumulated losses (1) Total Non-controlling interests (NCI) Total equity
£m £m £m £m £m £m £m £m £m £m
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 £108m (2018: 13,538,921, 2017: 6,466,153 ordinary shares with net book
values of £123m and £52m 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 £82m (2018: 468,165 shares
with a net book value of £4m) 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 £66m
(2018: £74m).
(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 £401m relating to the cost of meeting these residual value
guarantees, with up to £80m in 2020 and £112m 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.
Civil Aerospace Power Systems( )(1) Defence ITP Aero Corporate and inter-segment Core businesses
£m £m £m £m £m £m
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 reported results Core businesses Non-core businesses (1,2) Total underlying Underlying adjustments and adjustments to foreign exchange Group at actual exchange rates
£m £m £m £m £m
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 interests 4 - 4
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
Civil Aerospace Power Systems (1) Defence ITP Aero (2) Corporate and inter-segment Core businesses
£m £m £m £m £m £m
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 £(93)m (2018: £(196)m) of revenue recognised in the year
relating to performance obligations satisfied in previous years - see note 14.
Core businesses Non-core businesses (1,2) Total underlying Underlying adjustments and adjustments to foreign exchange (3) Group results at actual exchange rates
£m £m £m £m £m
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 £(187)m (2018: £nil) 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 Total
five years five years Total five years five years
£bn £bn £bn £bn £bn £bn
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
Revenue Profit before financing Net financing Revenue Profit before financing Net financing
£m £m £m £m £m £m
Underlying performance 15,450 808 (225) 15,067 616 (150)
Transactions recognised at exchange rate on date of cash flow and revaluation 1,137 145 80 781 (23) 163
of trading assets / liabilities (1)
Impact of unrealised fair value changes to derivative contracts held for - (1) (6) - (1) (2,144)
trading (2)
Impact of unrealised fair value changes to derivative contracts held for - - 1 - - (3)
financing (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 £13m
(2018: losses £3m)
(4 )The table below summarises the exceptional items recorded in 2019 and
2018.
Year to 31 December
2019 2018
£m £m
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 £1,361m (2018:
£790m), £1,531m (2018: £905m) at prevailing exchange rates, in respect of
the abnormal wastage costs on the Trent 1000. This includes £0.2bn of
insurance receipts in respect of the Trent 1000 in-service issues. In
addition, there is an exceptional item of £48m (2018: £186m), £49m (2018:
£218m) 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 £30m relating to Trent 900
and £10m 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 £136m (2018:
£317m) in the year. The costs include: £88m (2018: £223m) 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 £58m relating to Bergen
Engines AS, and impairment charge and asset write offs of £26m following the
announcement to sell the North America Civil Nuclear business within the Power
Systems business segment. The impairment charge in 2018 of £155m 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
£143m (2018: credit £715m). The charge in 2019 was £57m plus an additional
charge of £86m relating to the derecognition of UK deferred tax assets on
foreign exchange and commodity financial assets and liabilities. The credit in
2018 was £672m plus an additional credit of £43m 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
£m £m
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
£m £m
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 74 79
foreign exchange
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 income statement Underlying financing (1) Per consolidated income statement Underlying financing (1)
£m £m £m £m
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 11 - 25 -
payments
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 (10) - (27) -
payments
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
£m £m £m £m £m £m
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
£m £m
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 £1,887m include £1,010m (2018: £998m) relating to
tax losses in the UK and £163m (2018: £163m) 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
£1,010m relating to losses and £163m 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 £438m 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 £1.4bn 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 £2bn 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 £170m 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 £86m 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 £108m (2018: £99m). 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
Basic Potentially dilutive share options (1 ) Diluted Basic Potentially dilutive share options (1) Diluted
Loss attributable to ordinary shareholders (£m) (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 £m Pence £m
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 £m Pence per £m
share
share
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
Goodwill Certification costs Development expenditure Customer relationships Software Other Total
£m £m £m £m £m £m £m
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 £15m 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 £155m for the
related goodwill (with an additional £5m impairment charge to Property, Plant
and Equipment) was recognised in the income statement at 31 December 2018 and
the remaining net balance of £227m 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
Land and buildings Plant and equipment Aircraft and engines In course of construction Total
£m £m £m £m £m
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 businesses - 3 - - 3
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 joint venture to joint operations 5 3 - - 8
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 joint venture to joint operations 1 3 - - 4
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
£m £m £m £m
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
£m £m £m £m
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
£m £m
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 104 4
statement)
Dividends paid by joint ventures and associates to the Group (cash flow (92) (105)
statement)
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
£m £m
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 *
£m £m £m £m £m £m
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 £217m from
prepayments to other receivables to better reflect the nature of these
balances.
(1 )Includes £267m (2018: £146m) of trade receivables held to collect or
sell and £76m (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 £8m (2018: £13m) 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 £12m to £138m (2018: £126m). 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 £1,037m at the year-end. Trade receivables factored
are generally due within the following quarter.
At 31 December 2019 £1,117m was drawn under factoring facilities, an increase
of £95m 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 £504m 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
£m £m £m £m £m £m
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 £1,086m (2018: £1,097m) 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 £90m
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
£(166)m.
Participation fee contract assets have reduced by £(55)m due to amortisation
exceeding additions by £(35)m and FX on consolidation of overseas entities of
£(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 £9m in
relation to normal business cycle to £13m (2018: £22m).
Current Non-current Total
2019 2018 2019 2018 2019 2018
£m £m £m £m £m £m
Contract liabilities 4,228 3,794 6,612 5,336 10,840 9,130
During the year, £3,491m (2018: £2,823m) of the opening contract liability
was recognised as revenue and contract liabilities have increased by £1,710m.
The main reasons for the increase being a £1,199m growth in Civil Aerospace
LTSA liabilities to £6,783m (2018: £5,584m) 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 £(114)m.
15 Cash and cash equivalents
2019 2018
£m £m
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 £34m (2018: £31m)
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
£m £m £m £m £m £m
Unsecured
Overdraft 8 22 - - 8 22
Bank loans 27 298 16 354 43 652
6.75% Notes 2019 £500m (1) - 504 - - - 504
2.375% Notes 2020 US$500m (2) 378 - - 383 378 383
2.125% Notes 2021 €750m (2) - - 655 699 655 699
0.875% Notes 2024 €550m (3) - - 481 498 481 498
3.625% Notes 2025 US$1,000m (3) - - 781 765 781 765
3.375% Notes 2026 £375m (4) - - 410 403 410 403
1.625% Notes 2028 €550m (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 £79m as borrowings previously included in
other financial liabilities. Other loans of £8m (2018: £5m) 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 £2,500m (2018: £2,500m) 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
£m £m £m £m £m £m
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 £12m (2018: £8m) of government grants were released
to the income statement.
(2 )Other payables include £280m (2018: £378m) for financial penalties
from agreements with investigating bodies and £nil (2018: £245m) 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 £859m under the SCF scheme (31 December 2018: £817m).
18 Financial instruments
Carrying values of other financial assets and liabilities
Foreign exchange contracts Commodity contracts Interest rate contracts (1) Total derivatives Financial RRSAs Other C Shares Total
£m £m £m £m £m £m £m £m
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 financial 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
£m £m £m £m £m £m £m £m
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 financial liabilities arising from financial RRSAs. These
financial liabilities are valued at each reporting date using the amortised
cost method. This involves calculating the present value of the forecast cash
flows 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
£m £m £m £m £m £m
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 £79m as borrowings previously included in
other financial liabilities.
(2) Included in financing.
19 Provisions for liabilities and charges
At 1 January 2019 Reclassified to lease liabilities (IFRS 16) Charged to income statement Reversed Utilised Transfers Exchange differences At 31 December 2019
£m £m £m £m £m £m £m £m
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 £15m as a
result of discount unwind.
(2) The charge to the income statement for contract losses includes a £40m
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 £1,361m (at
underlying exchange rates) has been recorded in the income statement. The
charge is £1,531m at prevailing exchange rates and net of £203m reflecting
insurance receipts and contract accounting adjustments. Of the charge £1,275m
has been recorded in relation to Trent 1000 exceptional costs, and a further
£459m in relation to contract losses (see below). See note 2 for further
details.
During 2019, we have utilised £672m 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 £592m, is £459m (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
£m $m £m $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
UK schemes £m Overseas schemes Total UK schemes £m Overseas schemes Total
£m £m £m £m
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 £121m 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 £97m. In addition, a cost of £24m
was recognised in relation to obligations to equalise certain other post-1990
benefits between men and women. The total cost of £121m 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 £9m 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 £600m 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 £3.6bn 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 £408m 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
£m £m £m £m £m £m
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 £170m to its defined benefit
schemes in 2020 (2019: £220m): UK £100m, Overseas £70m (2019: UK £140m,
Overseas £80m).
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 £48.3m 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
£2,009m (as per note 10) with a lease liability of £2,354m (as per note 16).
2019
£m
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 (23)
expense on a straight-line basis (2)
Expense relating to variable lease payments not included in lease liabilities (1)
(3,5)
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 £383m. Of this: £359m related
to leases reflected in the lease liability; £23m to short-term leases where
lease payments are expensed on a straight-line basis; and £1m 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 finance, performance bonds, countertrade
obligations and minor miscellaneous items. Various Group undertakings are
parties to legal actions and claims which arise in the ordinary course of
business, some of which are for substantial amounts. As a consequence of the
insolvency of an insurer as previously reported, the Group is no longer fully
insured against known and potential claims from employees who worked for
certain of the Group's UK based businesses for a period prior to the
acquisition of those businesses by the Group. While the outcome of some of
these matters cannot precisely be foreseen, the Directors do not expect any of
these arrangements, legal actions or claims, after allowing for provisions
already made, to result in significant loss to the Group.
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 £2.8m of property, plant and
equipment and £0.2m of other assets and liabilities. Of the £43m (€48.5m)
acquisition cost, which was settled in cash, £38m has been allocated to
identifiable intangible assets and £5m to other assets and liabilities.
Goodwill of £11m 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 €10m. 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 £547m. 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 £160m 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 £98m.
On the 15 April 2019, the Group sold its shareholding in Rolls-Royce Power
Development Limited (RRPD) to Rockland Capital Partners for £46m. The
principal activity of this company was to operate a fleet of six industrial
Trent power stations in the UK.
Commercial Marine RRPD Total
£m £m £m
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 £139m.
Commercial Marine RRPD Total
£m £m £m
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 €5.6m.
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 £25m has been recognised in the income statement, of which £15m
relates to goodwill and an additional £10m impairment charge to property,
plant and equipment and intangible assets. The impairment charge was allocated
to the non-core businesses. The remaining assets of £17m have been
transferred to assets held for sale, together with associated liabilities of
£14m 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 €673m. Under the sale agreement, the
cash consideration may be adjusted by up to +/-€44m, 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 £358m.
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 (†)
£m £m £m £m
* 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 £173m 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
£m £m £m £m 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 1,385 (1,091) A
leases)
Increase in short-term investments - 3 A
Acquisition of eAircraft 43 - A
Disposal of Commercial Marine and RRPD (453) (573) A
(2018: Disposal of L'Orange)
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:
£m
Operating lease commitments as reported at 31 December 2018 2,343
Lease commitments at end of aero engines lease contracts previously reflected 515
in provisions and other liabilities
Discounted using the incremental borrowing rate at the date of initial (749)
application
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
£m
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 IFRS 16 Transferred As at
as at impact to assets 1 January
31 December 2018 held for sale (1) 2019
£m £m £m £m
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 of: i) our customers to provide safe • Ensuring clear accountability for safety and a culture that puts
products; or ii) people who work for or with us to provide a safe and healthy safety first.
place of work which minimises the impact on the environment; would adversely
affect our reputation and long-term sustainability. • Applying our engineering design and validation process from
initial design, through production and into service to reduce the safety risks
so far as is reasonably practicable; always ensuring that we meet or better
the relevant company, legal, regulatory and industry requirements.
• Operating a safety management system, 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, modern equipment and
facilities, dual sources of supply and researching alternative materials.
The major disruption of the Group's operations, which results in our failure
to meet agreed customer commitments and damages our prospects of winning • Promoting and developing resilience within our external supplier
future orders. Disruption could be caused by a range of events, for example: partners.
extreme weather or natural hazards (e.g. earthquakes, floods); political
events; financial insolvency of a critical supplier; scarcity of materials; • Providing a supplier finance programme in partnership with banks
loss of data; and fire or infectious disease. The consequences of these events to enable our suppliers to benefit from the Rolls-Royce credit rating and
could have adverse impact on our people, our internal facilities or our access funds at low interest rates.
external supply chain.
• Building a resilient culture through flexible and collaborative
working, using our single Group-wide incident management framework.
• Developing, maintaining and regularly exercising effective
business continuity and crisis management plans to prepare our people to
respond quickly and confidently to any business disruption.
• Sharing lessons learned identified through exercises
• or incidents.
• Scanning the horizon to provide awareness of emerging
risks/potential incidents.
CLIMATE CHANGE • Investment in our existing product range to reduce its carbon
impact and in zero carbon technologies to replace our existing products.
Understanding of the impact of climate change and our products increases our
susceptibility to physical and transitional climate-related risks. We will • Partnering programme to introduce the skills, capability and
need to transition our products and services to a lower-carbon economy. hunger to rapidly develop class leading solutions.
Failure to consider changes in atmospheric conditions could result in changes
in maintenance and overhaul requirements, affecting revenues generated by our • Seeking a balanced portfolio of products, customers and revenue
in service fleet and jeopardising the viability of a services based business streams to reduce our dependence on any one product, customer or carbon
model. Failure to transition from carbon-intensive products and services at emitting fuel source.
pace could impact our ability to win future business; achieve operating
results; attract and retain talent; secure access to funding; realise future • Clear communication and acknowledgment of our role in the problem
growth opportunities, or force government intervention to limit emissions. and the solution, and the actions we are taking to enact a credible plan of
action in line with society's expectations.
COMPETITIVE ENVIRONMENT • Horizon scanning for emerging technology and other competitive
threats, including patent searches.
The presence of competitors in the majority of our markets means that the
Group is susceptible to significant price pressure for original equipment or • Establishing our Innovation Hub to invest in innovation,
services. Our main competitors have access to significant government funding manufacturing and production, and ensure continuing governance of technology
programmes as well as the ability to invest heavily in technology and programmes.
industrial capability. Disruptive technologies or new entrants with
alternative business models could also reduce our ability to sustainably win • Enhancing our capabilities to access, invest in and develop key
future business, achieve operating results and realise future growth technologies and innovative service offerings which differentiate us
opportunities. competitively.
• Improving the quality, delivery and durability of our products and
services through investment in innovation, manufacturing and production
capabilities.
• Forming strategic partnerships and conducting joint research
programmes with our partners.
• Driving down cost to improve margins.
• 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 with legislation, the terms of the DPAs or other • Operating an extensive compliance programme. Global mandatory
regulatory requirements in the heavily regulated environment in which it policies, processes and training are disseminated throughout the Group and are
operates (for example, export controls; use of controlled chemicals and updated from time to time to ensure their continued relevance, and to ensure
substances; anti-bribery and corruption; and tax and customs legislation). that they are complied with, both in spirit and to the letter.
This could affect our ability to conduct business in certain jurisdictions and
would expose the Group to potential: reputational damage; financial penalties; • Regular reviews of the strength of relevant teams including the
debarment from government contracts for a period of time; and suspension of ethics, anti-bribery and corruption, compliance, tax, sustainability and
export privileges (including export credit financing), each of which could export control teams.
have a material adverse effect.
• A legal team is in place to manage any ongoing regulatory
investigations.
• Engaging with all relevant external regulatory authorities.
• Implementing a comprehensive REACH compliance programme. This
includes ensuring that we and our supply chain are covered by REACH
authorisations for a number of chemicals needed for our products, establishing
appropriate data systems and processes and working with our suppliers,
customers and trade associations.
CYBER THREAT • Implementing defence in depth through deployment of multiple
layers of software and processes including web gateways, filtering, firewalls,
An attempt to cause harm to the Group, its customers, suppliers and partners intrusion, advanced persistent threat detectors and integrated reporting.
through the unauthorised access, manipulation, corruption, or destruction of
data, systems or products through cyber space. • Running security and network operations centres.
• Actively sharing cyber security information through industry,
government and security forums.
• Information and product assurance processes.
• Training and awareness to improve cyber security culture.
MAJOR PRODUCT PROGRAMME DELIVERY • Major programmes are subject to Board approval.
Failure to deliver a major programme on time, within budget, to technical • Reviewing major programmes at levels and frequencies appropriate
specification or falling significantly short of customer expectations, or not to their criticality and performance, against key financial and non-financial
delivering the planned business benefits, would have potentially significant deliverables and potential risks throughout the programmes lifecycle.
adverse financial and reputational consequences, including the risk of
impairment of the carrying value of the Group's intangible assets and the • Investing in facilities and people to manage the level of
impact of potential litigation. disruption to our customers from Trent 1000 in-service issues and developing
longer-term solutions to these issues.
• Conducting technical audits at pre-defined points which are
performed by a team that is independent from the programme.
• Requiring programmes to address the actions 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 managing cash balances
and debt levels.
The Group is exposed to a number of market risks, some of which are of a
macro-economic nature (for example, foreign currency, oil price, interest • Providing financial flexibility by maintaining high levels of
rates) and some of which are more specific to the Group (for example, liquidity and an investment grade credit rating.
liquidity and credit risks, reduction in air travel or disruption to other
customer operations). Significant extraneous market events could also • Sustaining a balanced portfolio through earning revenue both from
materially damage the Group's competitiveness and/or creditworthiness. This the sale of original equipment and aftermarket services, providing a broad
would affect operational results or the outcomes of financial transactions. product range and addressing diverse markets that have differing business
cycles.
• Deciding where and what currencies to source in, and where and how
much credit risk is extended or taken. The Group has a number of treasury
policies that are designed to hedge residual risks using financial derivatives
(foreign exchange, interest rates and commodity price risk).
• Review debt financing and hedging in light of volatility in
external financial markets caused by external events, such as Brexit or other
geopolitical changes.
POLITICAL RISK • Where possible, diversifying our global operations to avoid
excessive concentration of risks in particular areas.
Geopolitical factors that lead to an unfavourable business climate and
significant tensions between major trading parties or blocs which could impact • The Group's businesses, strategic marketing network and global
the Group's operations. government relations teams proactively monitoring local situations.
Examples include: changes in key political relationships; explicit trade • We develop and maintain relationships with governments and
protectionism, differing tax or regulatory regimes, potential for conflict or stakeholders and proactively influence policy, regulation and legislation
broader political issues; and heightened political tensions. where it affects us.
• Steering committee to co-ordinate activities across the Group and
minimise the impact of Brexit.
STRATEGIC TRANSFORMATION • Implementing a new organisational operating model.
Failure to deliver our strategic transformation, including changing our • Focusing on behaviours to drive cultural change.
behaviours could result in: missed opportunities; dissatisfied customers;
disengaged employees; ineffective use of our scarce resources; and increasing • Simplifying the processes in our Rolls-Royce
the likelihood of other principal risks occurring. This could lead to a
business that is overly dependent on a small number of products and customers; • Management System, whilst ensuring we comply with our legal,
failure to achieve our vision; non-delivery of financial targets and not contractual and regulatory requirements.
meeting investor expectations.
• Horizon scanning and scenario planning.
• Investing in products with lower emissions, reducing our impact on
climate change.
• Employee innovation portal.
TALENT AND CAPABILITY • Attracting, rewarding and retaining the right people with the
right skills globally and locally in a planned and targeted way, including
Inability to identify, attract, retain and apply the critical capabilities and regular benchmarking of remuneration.
skills needed in appropriate numbers to effectively organise, deploy and
incentivise our people would threaten the delivery of our strategies, business • Developing and enhancing organisational, leadership, technical and
plans and projects. functional capability to deliver global programmes.
• Continuing a strong focus on individual development and succession
planning, recognising 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 £5.6bn (excluding lease liabilities of £2.4bn) and
total liquidity of £6.9bn, including cash and cash equivalents of £4.4bn and
undrawn facilities of £2.5bn. £435m of the facilities mature in 2020
(excluding lease liabilities of £340m).
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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