REG - Rolls-Royce Holdings - 2021 Full Year Results
24/02/2022 07:00
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RNS Number : 6381C Rolls-Royce Holdings plc 24 February 2022
24 February 2022
ROLLS-ROYCE HOLDINGS PLC - 2021 Full Year Results
A better balanced and more sustainable business
· Improved financial performance driven by growth and cost
reduction
- Underlying operating profit of £414m (statutory £513m), recovered from
prior year loss
- Free cash flow substantially improved and ahead of expectations
· Delivering on our commitments
- Restructuring run-rate savings of more than £1.3bn delivered one year
ahead of schedule
- Disposals on-track with total expected proceeds of around £2bn
· Investing to drive further growth and deliver sustainable
value
- FY 2021 £(1.2)bn gross R&D on market-leading technology for new and
existing markets
- Focused investments in net zero opportunities to deliver long-term
sustainable value
Warren East, Chief Executive said: "We have improved our financial and
operational performance, continued to deliver on our commitments and created a
better balanced business capable of sustainable growth. We have achieved the
benefits of our restructuring programme a year ahead of schedule, positioning
Civil Aerospace to capitalise on increasing international travel. In Defence,
we have seen growth driven by strong demand in all our markets and in Power
Systems we achieved record order intake in the last quarter. The positive
momentum we are generating gives us confidence both in our expectations for
2022 and our future growth. We have also made significant progress with our
new businesses in electrical power and small modular reactors, both of which
have the potential to create very significant long-term value. We are
continuing to make disciplined investments to develop new and existing
technologies, which will enable us to seize the significant commercial
opportunity presented by the global energy transition driving sustainable
returns."
Full Year 2021 Group financial performance
Statutory 2021 Restated Statutory 2020 Underlying 2021 Restated Underlying 2020
£ million, continuing operations
Revenue 11,218 11,491 10,947 11,430
Gross profit/(loss) 2,136 (187) 1,996 (613)
Operating profit/(loss) 513 (1,972) 414 (2,008)
Operating margin % 4.6% (17.2)% 3.8% (17.6)%
Profit/(loss) for the year 124 (3,101) 10 (4,039)
Earnings per share (p) 1.48 (51.81) 0.11 (67.48)
( )
£ million 2021 2020 Change
Free cash flow from continuing operations (1,485) (4,255) 2,770
Group free cash flow (1,442) (4,185) 2,743
£ million 31 Dec 2021 31 Dec 2020 Change
Net debt (including lease liabilities) (5,157) (3,576) (1,581)
Improved financial performance driven by cost reduction and market growth
Underlying revenue from continuing operations of £10.9bn, reflected a more
balanced contribution from the business units compared with the prior year. It
included a positive £214m Civil Aerospace LTSA revenue catch-up compared with
a £(1.1)bn negative revenue catch-up in 2020.
Underlying operating profit from continuing operations of £414m included
significant cost savings from the restructuring programme, primarily in Civil
Aerospace, continued resilient performance in Defence and strong growth in
Power Systems as it benefitted from recovering end markets. The prior year
comparative underlying loss of £(2.0)bn included £(1.3)bn of one-off charges
mostly related to the impact of COVID-19 on Civil Aerospace.
Free cash outflow from continuing operations of £(1.5)bn and trading cash
outflow from continuing operations of £(1.2)bn were substantially improved on
the prior year helped by robust progress on cost reduction, stronger operating
performance including higher flying hour receipts in Civil Aerospace and
reduced capital expenditure. Working capital outflows of £(0.8)bn, which were
mostly driven by concession payments and lower OE deliveries in Civil
Aerospace, improved on the prior year due to the non-repeat of £(1.1)bn
negative impact from the cessation of invoice factoring in 2020.
Business unit underlying performance summary
£ million Underlying revenue Organic Change (1) Underlying operating (loss)/profit Organic Change (1) Trading cash flow Change
Civil Aerospace (2, 3) 4,536 (491) (172) 2,371 (1,670) 2,840
Defence 3,368 155 457 13 377 79
Power Systems (3) 2,749 89 242 67 219 57
New Markets (3) 2 (2) (70) (27) (56) (1)
Other businesses (3, 4) 303 40 2 22 (43) (13)
Corporate/eliminations (11) (5) (45) 20 (38) 25
Total (continuing operations) 10,947 (214) 414 2,466 (1,211) 2,987
For footnotes referenced in tables on pages 2-13, see page 14.
Civil Aerospace Our fundamental restructuring programme has been largely
completed resulting in higher productivity and sustainably lower costs, better
suited to the current environment and positioned well for future growth. The
launch of the Airbus A350 freighter in 2021 represents a significant
opportunity for our Trent XWB engine, with 58 engine orders secured for the
A350F since its launch. In Business Aviation, we achieved two key new
selections with our Pearl 10X chosen by Dassault for the Falcon 10X and our
Pearl 700 chosen by Gulfstream for the G800. In 2021, we powered 7.4m large
engine flying hours, up 11% on 2020 with gradual recovery in international
flying activity, which continued to be impacted by COVID-19 travel
restrictions.
Defence Our longstanding commitment to strategic investments in Defence
products and facilities has resulted in a strong order book and is driving
longer-term sustainable growth. In 2021, we secured new work for the coming
decades in the US with the award of the B-52 engine replacement contract, and
we remain in a competitive process for the Future Long-Range Assault Aircraft
(FLRAA) programme. Our profitability and strong cash conversion are supporting
increased investment to meet the customer demand for products that deliver
advances in technology and sustainability.
Power Systems End market demand increased significantly for our Power Systems
business in the second half of 2021 as the impacts of COVID-19 reduced. Order
intake accelerated, with record order intake in the fourth quarter, driving
book to bill of 1.2x in 2021 and good order cover for 2022. Significant awards
included a power solution for a hyperscale data centre customer and
a first-of-a-kind net zero microgrid which will combine fuel cells and
hydrogen combustion engines for the Port of Duisburg in Germany.
New Markets We have created a new reporting segment for our early-stage
businesses with high growth potential, focused on addressing new market
opportunities being created by the transition to net zero. Rolls-Royce SMR
reached a major milestone with grant funding and new equity investors
supporting entry into the UK's Generic Design Assessment (GDA) process.
Rolls-Royce Electrical achieved key product advances with a world speed record
for our all-electric aircraft. We believe our two New Markets businesses could
generate more than £5bn combined annual revenue by the early 2030s.
Delivering on our commitments
We have met our £1.3bn run-rate savings target a year ahead of schedule and
delivered on our Group restructuring commitment with the removal of more than
9,000 roles from continuing operations. Our focus now is on ensuring the
benefits are sustained. Our restructuring programme has fundamentally changed
the way we work in our Civil Aerospace business, reducing the size of the
business by around a third and creating a more productive, more efficient
business poised for future growth.
We are committed to rebuilding our balance sheet. We have announced four
disposals which are expected to generate around £2bn in proceeds (including
retained cash). Three of the disposals have completed, two in 2021 and the
other one since the start of 2022. The final and largest of the disposals, ITP
Aero, is progressing well and we expect completion in the first half of 2022.
Disposal proceeds, together with underlying free cash flow generation from the
Group, will be used to reduce net debt, in line with our ambition to return to
an investment grade credit profile in the medium term.
Our liquidity position is strong with £7.1bn of liquidity including £2.6bn
in cash at the end of the year after repaying the 2021 €750m bond and the
£300m Covid Corporate Financing Facility (CCFF) commercial paper. Net debt
was £(5.2)bn including leases (2020:£(3.6)bn). Net debt excluding leases was
£(3.4)bn (2020:£(1.5)bn).
Some of our loan facilities place restrictions and conditions on payments to
shareholders. The restrictions mean no shareholder payment will be made for
2021. From 2023, the Board may recommend shareholder payments, subject to
satisfaction of the conditions and our consideration of progress made to
strengthen the balance sheet. We aim to be able to recommend shareholder
payments in the medium term.
Investing to drive growth and deliver sustainable value
Our technology and engineering expertise gives us a critical role in enabling
the transition to a low carbon global economy. We are focused on producing the
technology breakthroughs society needs to decarbonise the global economy and
capture the economic opportunity this transition represents. We are doing that
by making our existing products compatible with net zero and pioneering new
technologies that can meet accelerating demand for net zero power, as well as
identifying additional applications for our current portfolio of technologies.
Our investment in small modular reactors (SMRs) and electrical propulsion
create net zero solutions and opportunities in new end markets, as we aim to
maximise the future market potential for our technological and industrial
solutions and products.
In 2021, our gross R&D costs totalled £(1.2)bn (2020:£(1.2)bn), £366m
of which was paid for by contributions from third parties. Our continued
prioritisation of targeted investment, even in the most challenging years,
drove commercial success in 2021 including the Pearl engine selections, the
B-52 engine replacement contract, the first all-hydrogen microgrid, a world
speed record for electric flight and entry into the UK GDA for our SMRs.
Outlook and financial guidance
We are well positioned for the anticipated growth in our end markets as the
impact of the COVID-19 pandemic eases. This, along with continued good
contribution from Defence, gives us confidence that we will see positive
momentum in our financial performance in 2022 despite the challenges and risks
around the pace of market recovery, global supply chain disruption and rising
inflation. We expect
low-to-mid-single digit revenue growth and we expect our operating profit
margin to be broadly unchanged as underlying operational improvement is
balanced with increased engineering spend to develop sustainable growth
opportunities. We expect to generate modestly positive free cash flow in 2022,
seasonally weighted towards the second half of the year.
Results webcast and conference call
A webcast will be held at 08:30 (GMT) today and details of how to join are
provided below. Conference call details are also available for those who would
prefer to dial-in. Downloadable materials will also be available on the
Investor Relations section of the Rolls-Royce website.
Webcast details
To register for the webcast, including Q&A participation, please visit the
following link: https://edge.media-server.com/mmc/p/gi4zqu9m
(https://edge.media-server.com/mmc/p/gi4zqu9m%20)
Please use this same link to access the webcast replay which will be made
available shortly after the event concludes.
Conference call details
UK dial-in: 0207 192 8338/ US dial-in: +1 646 741 3167
International dial-in for all participants: +44 207 192 8338
Participant passcode: 784 4816#
Downloadable materials
Please visit the Investor Relations section of the Rolls-Royce website to
download our Full Year Results materials:
https://www.rolls-royce.com/investors/results-and-events.aspx
(https://www.rolls-royce.com/investors/results-and-events.aspx)
Enquiries:
Investors: Media:
Isabel Green +44 7880 160976 Richard Wray +44 7810 850055
Photographs and broadcast-standard video are available at www.rolls-royce.com
(http://www.rolls-royce.com) .
A PDF copy of this report can be downloaded from www.rolls-royce.com/investors
(http://www.rolls-royce.com/investors) .
This 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 Rolls-Royce Holdings plc and its
directors accept no liability to any other person other than under English
law.
LSE: RR.; ADR: RYCEY; LEI: 213800EC7997ZBLZJH69
Group Statutory Results
Statutory Income Statement
£ million 2021 Restated( ) Change
2020
Revenue 11,218 11,491 (273)
Gross profit/(loss) 2,136 (187) 2,323
Operating profit/(loss) 513 (1,972) 2,485
Gain/(loss) on disposal/acquisition of businesses 56 (14) 70
Net financing costs (863) (813) (50)
Loss before taxation (294) (2,799) 2,505
Taxation 418 (302) 720
Profit/(loss) for the year from continuing operations 124 (3,101) 3,225
Earnings per share from continuing operations (p) 1.48 (51.81) 53.29
Statutory revenue of £11.2bn was 2% lower compared with 2020 driven by a
decline in Civil Aerospace revenue, due to lower OE deliveries and shop visit
volumes. Revenue included a £214m positive LTSA catch-up in Civil Aerospace
compared with a £(1.1)bn negative revenue catch-up in the prior year. Defence
benefitted from increased spare parts and spare engine sales. Power Systems
revenues were driven by our more resilient end markets, with increased demand
for Services from our defence and industrial customers.
Gross profit returned to profit of £2.1bn compared with a prior year loss of
£(187)m reflecting growth and cost discipline as well as substantial cost
savings and productivity gains delivered by the restructuring programme. Gross
profit also included a £105m provision reversal in relation to the Trent 1000
engine programme (2020: £620m) and a £256m positive LTSA catch-up in 2021.
The prior year comparative included £(1.8)bn of net charges relating to
negative LTSA catch-ups, impairments and write-offs.
Operating profit improved significantly to £513m from a prior year £(2.0)bn
loss. Research & Development costs were £(778)m down 35% from 2020 as a
consequence of one-off impairments in the prior year. Commercial &
Administrative costs of £(890)m were 15% higher than the prior year
(2020:£(771)m), which benefitted from a one-off pension credit partly offset
by a restructuring provision.
Loss before taxation of £(294)m included £(538)m net fair value losses on
derivative contracts, £(245)m net interest payable and a net £56m profit
from disposals.
Profit from continuing operations of £124m included a tax credit of £418m,
(2020: tax charge £302m), which mostly related to movements in deferred tax
balances due to the impact of the UK tax rate change from 19% to 25%,
effective from April 2023. The tax charge in 2020 was mostly driven by the
derecognition of some of the deferred tax asset on UK losses previously
recognised, partly offset by a credit relating to the change in the UK tax
rate from 17% to 19%.
Earnings per share of 1.48p (2020: (51.81)p) reflected the improvement in
profit and an increase in weighted average number of shares compared with the
prior year to reflect the full year impact of the bonus element of the rights
issue completed in November 2020.
Statutory Balance Sheet
£ million Statutory 2021 Adjusted 2020 Held for sale (5) Statutory 2020 Change excluding HfS (5)
Intangible assets 4,041 4,191 954 5,145 (150)
Property, plant and equipment 3,917 4,103 412 4,515 (186)
Right of use assets 1,203 1,390 15 1,405 (187)
Joint ventures and associates 404 386 8 394 18
Contract assets and liabilities (8,836) (8,945) 23 (8,922) 109
Working capital (7) 1,458 464 106 570 994
Provisions (1,582) (1,907) (38) (1,945) 325
Net debt (8) (5,110) (3,556) (71) (3,627) (1,554)
Net financial assets and liabilities (8) (3,034) (3,077) (34) (3,111) 43
Net post-retirement scheme deficits (225) (673) − (673) 448
Taxation 1,787 1,240 55 1,295 547
Held for sale 1,305 1,490 (1,430) 60 (6) (185)
Other net assets and liabilities 36 19 − 19 17
Net liabilities (4,636) (4,875) − (4,875) 239
Other items
US$ hedge book (US$bn) 22 25
Civil LTSA asset 915 726
Civil LTSA liability (7,129) (6,841)
Civil net LTSA liability (6,214) (6,115)
Key drivers of balance sheet movements, adjusted for assets held for sale,
were:
Intangible assets: Net decrease of £(150)m included additions of £223m
primarily related to programme development in Civil Aerospace and Power
Systems, and investment in the development of software applications across the
business. There was an adverse foreign exchange impact of £(146)m and
amortisation for the year was £(281)m.
Property, plant and equipment: Net decrease of £(186)m included additions of
£299m, more than offset by £(439)m of depreciation and a foreign exchange
impact of £(63)m. Additions were £254m lower than prior year as a result of
focus on prioritisation of business critical infrastructure projects and focus
on reducing capital intensity.
Right-of-use assets: Net reduction of £(187)m was driven by £(272)m
depreciation charged in the year partly offset by additions of £82m.
Contract assets and liabilities: The £109m movement in net liability balance
was mainly driven by the utilisation of deposits, foreign exchange movements
and invoiced LTSA receipts in Civil Aerospace exceeding revenue recognised in
the year, partly offset by £214m LTSA catch-ups.
Working capital: The £1,458m net current asset position was £994m higher
than prior year, due to a £0.7bn reduction in payables driven mostly by Civil
Aerospace, including a £0.5bn reduction in concessions payable as payments
significantly exceeded new concessions accrued in the year, alongside a modest
reduction in trade payables due to the timing and volume of supplier payments.
We also made the final financial penalty payment of £156m related to
agreements reached in January 2017. Inventory increased by £0.2bn, mostly in
Power Systems and Defence, to support 2022 sales.
Provisions: The £325m decrease primarily reflected the utilisation and
reversal of restructuring provisions of £212m as the restructuring programme
nears completion, utilisation of Trent 1000 provision of £199m, partly offset
by £82m of contract loss provision net of reversals.
Net debt: Increased from £(3.6)bn to £(5.1)bn primarily driven by free cash
outflow of £(1.5)bn.
Net post-retirement scheme deficits: £448m movement driven by an increase in
the UK scheme surplus reflecting company contributions and actuarial gains and
a decrease in the overseas schemes deficit mainly attributable to actuarial
gains and foreign exchange.
Taxation: The net tax asset increased by £547m, most of which (£344m)
related to remeasurement of the opening UK deferred tax balances due to the UK
tax rate change from 19% to 25% effective from April 2023. In addition, there
was an increase in the deferred tax asset on unrealised losses on derivatives
(£96m) and certain other UK deferred tax assets (£126m) reflecting tax
relief that will be taken in the future, based on profit forecasts.
Group Underlying(9) Results
Underlying Income Statement
£ million 2021 Restated( )2020 Change Organic Change (1) M&A (10) FX
Underlying revenue 10,947 11,430 (483) (214) 19 (288)
Underlying OE revenue 4,911 5,626 (715) (598) 19 (136)
Underlying services revenue 6,036 5,804 232 384 − (152)
Underlying gross profit/(loss) 1,996 (613) 2,609 2,672 6 (69)
Gross margin % 18.2% (5.4)% 23.6%pt 23.8%pt
Commercial and administration costs (899) (866) (33) (45) (8) 20
Research and development costs (774) (708) (66) (79) (1) 14
Joint ventures and associates 91 179 (88) (82) (1) (5)
Underlying operating profit/(loss) 414 (2,008) 2,422 2,466 (4) (40)
Underlying operating margin % 3.8% (17.6)% 21.4%pt 21.8%pt
Financing costs (378) (1,985) 1,607 1,605 − 2
Underlying profit/(loss) before taxation 36 (3,993) 4,029 4,071 (4) (38)
Taxation (26) (46) 20 15 − 5
Profit/(loss) for the period 10 (4,039) 4,049 4,086 (4) (33)
Underlying earnings per share (p) 0.11 (67.48) 67.59 67.94
Underlying revenue of £10.9bn reflected a more balanced contribution from our
business units. Services revenue increased 7% while OE fell 11%. Services
revenue included a £214m Civil Aerospace LTSA revenue catch-ups compared with
£(1.1)bn in the prior year.
Underlying gross profit of £2.0bn reflected the benefit of cost reductions
and a £256m Civil Aerospace LTSA catch-up. The prior year loss of £(613)m
included £(1.3)bn of one-off COVID-19 related charges, mainly relating to
negative Civil Aerospace LTSA catch-ups.
Underlying operating profit was £414m, with a return to profit reflecting the
higher gross profit in the year partly offset by lower contribution from JVs
and associates.
Underlying profit before taxation of £36m reflected net financing costs of
£(378)m with higher charges relating to interest bearing debt compared with
the prior year. In 2020, a £(1.7)bn one-off underlying finance charge was
taken to close out over hedged positions on the USD hedge book.
Underlying profit for the year of £10m included a tax charge of £(26)m
(2020: £(46)m). The tax charge reflects the tax arising on overseas profits
and increases in other deferred tax assets. Deferred tax has not been
recognised on current year UK tax losses. The tax charge in 2020 included the
impact of derecognising some of the deferred tax asset previously recognised
on UK tax losses.
Underlying earnings per share of 0.11p reflected the improvement in profit and
an increase in weighted average number of shares compared with the prior year
to reflect the full year impact of the bonus element of the rights issue
completed in November 2020.
Group Funds Flow Statement (11)
( )
£ million 2021 2020 Change
Underlying operating profit/(loss) 414 (2,008) 2,422
Operating loss from discontinued operations (43) (109) 66
Depreciation, amortisation and impairment 971 1,048 (77)
Lease payments (capital plus interest) (403) (379) (24)
Expenditure on intangible assets (185) (316) 131
Capital expenditure (PPE) (311) (579) 268
Change in inventory (169) 588 (757)
Movement in receivables/payables/contract balances (excluding Civil LTSA) (641) (2,115) 1,474
Civil Aerospace net LTSA balance change 66 479 (413)
Movement on provisions (136) (195) 59
Cash flows on settlement of excess derivative contracts (452) (202) (250)
Net interest and fees on undrawn facilities (259) (172) (87)
Cash flow on financial instruments net of realised losses included in (85) (105) 20
operating profit
Other 68 (49) 117
Trading cash flow (1,165) (4,114) 2,949
…of which relates to continuing operations (1,211) (4,198) 2,987
Contributions to defined benefit pensions (in excess of)/less than that of (92) 160 (252)
underlying operating profit charge
Taxation paid (185) (231) 46
Group free cash flow (1,442) (4,185) 2,743
…of which relates to continuing operations (1,485) (4,255) 2,770
Shareholder payments (4) (92) 88
Rights issue − 1,972 (1,972)
Disposals and acquisitions 49 (119) 168
Exceptional Group restructuring (231) (323) 92
Payment of financial penalties (156) (135) (21)
Other underlying adjustments (23) (33) 10
Movement in net funds from cash flows (excluding lease liabilities) (1,807) (2,915) 1,108
Capital element of lease repayments 374 284 90
Movement in net funds from cash flows (1,433) (2,631) 1,198
Movement in short-term investments (8) 6 (14)
Net cash flow from changes in borrowings and lease liabilities 666 1,630 (964)
Statutory cash flow (775) (995) 220
Key changes in the funds flow items are described below:
Expenditure on intangible assets: Expenditure of £(185)m included £(104)m
capitalised Research & Development (2020: £(232)m), which was lower than
prior year reflecting the mix of spend across Civil Aerospace engine
programmes.
Capital expenditure: Investment of £(311)m was £268m lower than prior year
as a result of continued focus on prioritisation of business critical
infrastructure projects and focus on reducing capital intensity in Civil
Aerospace in line with the cost reduction programme.
Increase in inventory: The £169m increase in the year was primarily driven by
planned inventory build in Defence and Power Systems to meet expected sales
volumes, and the impact of global supply chain disruption on Power Systems.
Movement in receivables/payables/contract balances (excluding Civil LTSA):
The movement of £(641)m was primarily driven by Civil Aerospace and included
a significant volume of concession payments during the year as well as a
reduction in trade payables driven by timing and volume of supplier payments.
In addition, deposits were utilised in Civil and Defence as we continued to
execute on customer contracts.
Movement in underlying Civil Aerospace net LTSA creditor: In 2021, there was a
£66m increase in the net LTSA balance as invoiced flying hour receipts
exceeded revenues recognised. This reflected an improvement in invoiced flying
hour receipts as air traffic recovered during the year offset by higher
revenues due to materially improved LTSA catch-ups compared to the prior year.
Movement on provisions: The £(136)m movement primarily reflected a decrease
in the Trent 1000 provision driven by provision utilisation, including
customer disruption costs settled and remediation shop visit costs.
Cash flows on settlement of excess derivative contracts: Relates to the cash
settlement costs in the year for the offsetting foreign exchange contracts
that were entered into to reduce the size of the US Dollar hedge book in 2020.
The cash settlement costs of £1.7bn occur across 2020-2026, of which £1.0bn
remains to be paid in future years.
Fees and interest: The net payment of £(259)m in the year was higher than the
prior year, reflecting £(197)m of net interest paid (2020: £(75)m).
Contributions to defined benefit pensions: In 2021, cash contributions were
£92m higher than the pensions charge in the income statement (2020: £160m
lower) reflecting payment deferrals from 2020 into the first quarter of 2021.
Taxation: Net cash tax payments in 2021 were £(185)m (2020: £(231)m). The
decrease is mainly due to timing, with additional payments arising in 2020.
Disposals and acquisitions: The £49m inflow related to proceeds associated
with disposal activity partly offset by the costs incurred on acquisition and
disposal activity.
Exceptional restructuring: Payments of £(231)m related to the restructuring
programme and associated initiatives.
Payment of financial penalties:( )The final payment of £(156)m relating to
the deferred prosecution agreement (DPA) in the UK was made in January 2021.
Other underlying adjustments: Outflow of £(23)m includes timing of cash flows
on a prior period disposal where we retain the responsibility for collecting
cash before passing it on to the acquirer, along with other smaller items.
Net cash flow from changes in borrowings and lease liabilities: During the
year, we drew down on a £2.0bn loan which is supported by an 80% guarantee
from UK Export Finance. £300m of commercial paper under the Covid Corporate
Financing Facility and €750m (£639m) loan notes were repaid in line with
repayment terms.
Civil Aerospace
£ million 2021 Organic Change (1) FX 2020 (2, 3) Change Organic Change (1)
Underlying revenue 4,536 (491) (41) 5,068 (10)% (10)%
Underlying OE revenue 1,612 (654) (12) 2,278 (29)% (29)%
Underlying services revenue 2,924 163 (29) 2,790 5% 6%
Underlying gross profit/(loss) 474 2,477 (16) (1,987) − −
Gross margin % 10.4% (39.2)% 49.7%pt 49.9%pt
Commercial and administrative costs (297) 11 2 (310) (4)% (4)%
Research and development costs (434) (35) 8 (407) 7% 9%
Joint ventures and associates 85 (82) (2) 169 (50)% (49)%
Underlying operating loss (172) 2,371 (8) (2,535) (93)% (94)%
Underlying operating margin % (3.8)% (50.0)% 46.2%pt 46.4%pt
2021 2020 (2, 3) Change
Trading cash flow (1,670) (4,510) 2,840
Key operational metrics: 2021 2020 Change
Large engine deliveries 195 264 (69)
Business jet engine deliveries 114 184 (70)
Total engine deliveries 309 448 (139)
Large engine LTSA flying hours (million) 7.4 6.6 0.8
Large engine LTSA major refurbs 208 272 (64)
Large engine LTSA check & repairs 402 559 (157)
Total large engine LTSA shop visits 610 831 (221)
Civil Aerospace financial performance significantly improved due to the
successful restructuring programme, gradual market recovery and non-repeat of
largely COVID-19 related one-time charges in 2020. Large engine LTSA flying
hours were up 11% compared with 2020 with the second half EFH up 57% year on
year as COVID-19 vaccination programmes enabled most key routes to reopen on
reduced volumes. Fewer large engines were required to fulfil customer build
schedules, but sales of spare engines increased. Business aviation OE
deliveries were down as we are transitioning to newer engines programmes,
which are growing well from a low base.
- Underlying revenue of £4.5bn, down 10% on the prior year. OE revenue of
£1.6bn was down 29% reflecting the reduction in engine deliveries. Services
revenue of £2.9bn was up 6% on the prior year and included £214m positive
LTSA catch-ups (2020: £(1.1)bn), partly offset by lower shop visit volumes
and reduced contribution from the V2500 engine programme.
- Underlying gross profit of £474m improved from a £(2.0)bn loss in 2020,
driven by strong operating cost performance resulting from restructuring
savings as well as positive LTSA catch-ups of £256m. The prior year loss
included £(1.3)bn of one-off charges and £(0.6)bn relating to USD purchases
and under recovery of fixed costs.
- Underlying operating loss of £(172)m was significantly better than the
prior year. This improvement reflected the increase in gross profit partly
offset by the higher R&D charge and lower contribution from JVs and
associates.
- Trading cash outflow was £(1.7)bn, a substantial improvement on 2020
reflecting higher EFH receipts, lower operating costs, capex and working
capital as well as the non-repeat of £(1.0)bn from invoice factoring
cessation in 2020. Working capital cash flow included large engine OE
concession payments that reduced the concession liability by £474m (2020:
£219m increase).
Outlook
Industry forecasters expect a continuation of the gradual improvement in
international travel in 2022 with an acceleration in flying hours as COVID-19
related border restrictions are lifted. We will remain focused on actions
within our control, keeping costs low and maintaining the recent productivity
gains as shop visits increase. This, along with an expected increase in spare
engine sales, would support modest revenue growth and improved profitability
in 2022, as well as a substantial improvement in trading cash flow.
Defence
£ million 2021 Organic Change (1) FX 2020 (3) Change Organic Change (1)
Underlying revenue 3,368 155 (142) 3,355 − 5%
Underlying OE revenue 1,411 42 (59) 1,428 (1)% 3%
Underlying services revenue 1,957 113 (83) 1,927 2% 6%
Underlying gross profit 721 63 (26) 684 5% 9%
Gross margin % 21.4% 20.4% 1.0%pt 0.9%pt
Commercial and administrative costs (161) (19) 4 (146) 10% 13%
Research and development costs (105) (24) 5 (86) 22% 28%
Joint ventures and associates 2 (7) − 9 − −
Underlying operating profit 457 13 (17) 461 (1)% 3%
Underlying operating margin % 13.6% 13.7% (0.1)%pt (0.2)%pt
( )
2021 2020 (3) Change
Trading cash flow 377 298 79
Our Defence business continued to perform well with strong demand for OE and
services driving growth in all our end markets: combat, transport, submarines
and naval. Disciplined investment is pivotal to the long-term sustainable
growth opportunities that will shape our Defence business for decades into the
future. Our targeted investment in our facilities in North America as well as
product development has supported recent growth in order intake and revenues.
Our largest customers, the US DoD and the UK MoD, remain committed to the
modernisation of their fleets with a particular focus on technology and an
accelerating interest in reducing their carbon footprint.
- Order intake was £2.3bn with a book-to-bill of 0.7x. Our order book is
strong following several years' of high intake with a five year average
book-to-bill of 1.1x and 85% order cover for 2022. In 2021 we secured a key
award with the US DoD for the replacement engine programme for the B-52
aircraft, with an initial value of $0.5bn and total OE programme value of
$2.6bn.
- Underlying revenue increased by 5% to £3.4bn, with services revenue up 6%
and OE revenue up 3%. Sales benefitted from strong sales of parts in our
export markets in Asia and Middle East.
- Underlying gross profit of £721m was 9% higher than the prior year and the
gross margin expanded 0.9%pt to 21.4%. This was driven by a positive mix
towards higher margin spare parts and spare engine sales.
- Underlying operating profit was £457m, an increase of 3% compared with
2020. This profit growth occurred despite a 28% increase in R&D spend to
support the UK Future Combat programme and targeted investment in growth
opportunities in North America to support continued long-term product
development.
- Trading cash flow was £377m, representing a cash conversion of over 80%.
The prior year trading cash flow included adverse impact from the timing of
cash deposit receipts.
Outlook
We expect continued modest revenue growth in 2022 with a strong order book
cover securing near term activity in all our end markets. Our increased
investment will support growth in programmes related to future projects and
recent awards, as well as product development to help the transition to net
zero. We do expect a return to more usual levels of spare engines and spare
parts sales in 2022.
Power Systems
£ million 2021 Organic Change (1) M&A (10) FX 2020 (3) Change Organic Change (1)
Underlying revenue 2,749 89 19 (94) 2,735 1% 3%
Underlying OE revenue 1,744 (2) 19 (60) 1,787 (2)% -
Underlying services revenue 1,005 91 - (34) 948 6% 10%
Underlying gross profit 778 120 6 (26) 678 15% 18%
Gross margin % 28.3% 24.8% 3.5%pt 3.6%pt
Commercial and administrative costs (383) (57) (8) 13 (331) 16% 18%
Research and development costs (157) (1) (1) 5 (160) (2)% 1%
Joint ventures and associates 4 5 (1) (1) 1 - -
Underlying operating profit 242 67 (4) (9) 188 29% 37%
Underlying operating margin % 8.8% 6.9% 1.9%pt 2.2%pt
2021 2020 (3) Change
Trading cash flow 219 162 57
The effects of COVID-19 on our end markets lessened over the course of 2021
and we recorded a strong increase in order intake in the second half of 2021,
especially in power generation with orders for data centres and infrastructure
projects. The transition to net zero power is a significant opportunity with
the mission critical power for data centres, power for construction and
infrastructure, and marine solutions leading the demand for net zero carbon
solutions. Along with many manufacturing businesses, global supply chain
disruption impacted the availability of some parts and components in the
second half of 2021. Challenges are likely to persist into 2022 until
additional capacity has been created.
- Order intake of £3.3bn was 24% higher than the prior year, with record
order intake in the fourth quarter and a book-to-bill ratio of 1.2x in the
year. Order growth was strongest in marine, defence and power generation end
markets. The customer interest in net zero carbon solutions is accelerating
and our investment in decarbonising our solutions is critical to our future
growth.
- Underlying revenue of £2.7bn was up 3%. Aftermarket services grew 10% as
product utilisation increased in our end markets, and OE was broadly flat.
Sales were strongest in industrial and power generation end markets, partly
offset by lower activity in China.
- Underlying gross profit grew by 18% to £778m and gross margin increased
by 3.6%pt. This included an increase in higher-margin aftermarket spare parts
as well as improved utilisation in our manufacturing facilities and lower
warranty costs.
- Underlying operating profit was £242m, up 37%. Operating margin of 8.8% was
2.2%pts higher than the prior year, reflecting the positive mix of activity
and increased volumes. The increase in commercial and administrative costs
reflected an increase in employee costs, partly due to the non-repeat of
government support received in the prior year.
- Trading cash flow was £219m (2020:£162m), representing a cash conversion
of about 90%.
Outlook
Looking ahead to 2022, we see continued strong demand growth from our
customers supported by global economic growth and the transition to lower
carbon solutions. We expect good revenue growth in 2022 helped by the strong
order intake, partly offset by the current global supply chain
constraints. Higher activity levels will drive improved profitability partly
offset by increased Research & Development investment as we pursue net
zero growth opportunities. Cash conversion is expected to be lower in 2022 as
we focus on inventory and supply chain management to mitigate the impact of
industry-wide disruption.
New Markets
£ million 2021 Organic Change (1) FX 2020 (3) Change Organic Change (1)
Underlying revenue 2 (2) (1) 5 (60)% (40)%
Underlying OE revenue − (2) (1) 3 (100)% (67)%
Underlying services revenue 2 − − 2 − −
Underlying gross profit 1 (1) − 2 (50)% (50)%
Gross margin % 50.0% 40.0% 10.0%pt (6.7)%pt
Commercial and administrative costs (3) (2) − (1) 200% 200%
Research and development costs (68) (24) 2 (46) 48% 52%
Underlying operating loss (70) (27) 2 (45) 56% 60%
2021 2020 (3) Change
Trading cash flow (56) (55) (1)
New Markets is our new reporting segment for our early-stage businesses, with
high growth potential, focused on addressing the opportunities being created
by the transition to net zero and solving the climate change challenge. There
are two businesses currently in this segment: Rolls-Royce SMR and Rolls-Royce
Electrical. These businesses leverage our existing, in-depth engineering
expertise and capabilities to develop new sustainable products for future
markets.
Rolls-Royce SMR secured £490m of funding in 2021 (including approximately
£50m from Rolls-Royce), with receipts phased over the next few years to align
with the future cash spend profile. This investment will help support our SMR
design through the multi-year UK Generic Design Assessment (GDA) process.
First orders for SMRs are not dependent on the completion of the GDA and are
anticipated within the next few years.
In Rolls-Royce Electrical, we broke two world speed records for all-electric
flight in our Spirit of Innovation aircraft and our eVTOL partners received
multi-billion dollar pre-orders for their eVTOL programmes.
Over the next five years, we expect cumulative R&D investment in
Rolls-Royce SMR and Rolls-Royce Electrical of over £1.0bn to be funded by
third-party grants and investments as well as self-funded cash investment of
over £0.5bn. New markets are more challenging to forecast due to the pace of
customer demand growth and regulation, however the potential opportunities for
these businesses are significant and we believe they could generate more than
£5bn combined annual revenue by the early 2030s.
- Underlying revenue of £2m came from Rolls-Royce Electrical sales relating
to marine engineering services and propulsion systems. Both Rolls-Royce
Electrical and Rolls-Royce SMR are early-stage businesses in their investment
phase, with significant future revenue generating potential in the 2030s.
- Underlying operating loss of £(70)m increased from the prior year
comparative as we increased the pace of investment in both Rolls-Royce SMR and
Rolls-Royce Electrical. The increased investment is critical to the
development of the products that will drive our net zero growth in the future
and is in line with our plans. R&D costs of £(68)m included £(16)m on
the design development to ready our SMRs to enter the UK GDA process and
£(52)m on electrical propulsion technology.
- Trading cash flow of £(56)m was lower than operating losses mainly due to
the receipt of funding for the SMR programme.
Outlook
Our financial performance in 2022 will show a significant increase in Research
& Development costs as we invest to develop our products and grow our
businesses in these exciting new markets. Cash outflow is expected to be
approximately £100m better than the underlying operating loss in 2022, mainly
due to the phased receipt of secured third party equity investment in
Rolls-Royce SMR.
Notes to financial tables and commentary on pages 1-13:
(1 )Organic change at constant translational currency (constant currency)
applying full year 2020 average rates to 2021, excluding M&A. All
commentary is provided on an organic basis unless otherwise stated.
(2 )The underlying results for Civil Aerospace for 31 December 2020 have
been restated to reflect the changes to activity during 2021 due to the
transfer of the Hucknall site and associated fabrications activities to ITP
Aero.
(3 )The underlying results of Civil Aerospace, Defence and Power Systems
for 31 December 2020 have been restated to reclassify the results of the
Group's small modular reactor (SMR) and new electrical power solutions as New
Markets and UK Civil Nuclear as Other businesses.
(4 )Other businesses include the results of the Bergen Engines AS business,
the results of the Civil Nuclear Instrumentation & Control business, the
results of the North America Civil Nuclear business (until the date of
disposal on 31 January 2020) and the results of the Knowledge Management
System business (until the date of disposal on 3 February 2020). The trading
results of the UK Civil Nuclear business have also been included in other
businesses.
(5 )2020 figures have been adjusted to reflect ITP Aero being classified as
a disposal group held for sale since 30 June 2021; the Group's investment in
Airtanker Holdings Limited being classified as a non-current asset held for
sale since 13 September 2021; and certain tangible assets related to the
Group's site rationalisation activities being classified as held for sale at
31 December 2021.
(6 )Relates to Bergen Engines AS and the Civil Nuclear Instrumentation
& Control business which were classified as disposal groups held for sale
at 31 December 2020. Both disposals were completed in 2021.( )
(7 )Net working capital includes inventory, trade receivables and payables
and similar assets and liabilities
(8 )Net debt includes £37m (2020: £251m) of the fair value of derivatives
included in fair value hedges and the element of fair value relating to
exchange differences on the underlying principal of derivatives in cash flow
hedges. Net debt has been adjusted to exclude net debt held for
sale.
(9 )Underlying performance excludes the impact of year-end mark-to-market
adjustments, the effect of acquisition accounting and business disposals,
impairment of goodwill and other non-current and current assets, and
exceptional items. Adjustments between the underlying income statement and the
statutory income statement are set out in note 2 in the Condensed Consolidated
Financial Statements on page 33.
(10 )M&A includes 2020 Power Systems acquisitions comprising of
Kinolt Group S.A and Servowatch Systems Limited (SSL).( )
(11 )The derivation of the summary funds flow statement from the
statutory cash flow statement is included on page 53.
A reconciliation of alternative performance measures to their statutory
equivalent is provided on pages 55 to 56.
Statutory results were referred to as "reported" results in the 2020 full year
results statement.
Condensed consolidated financial statements
Condensed consolidated income statement
For the year ended 31 December 2021
Restated
2021 2020 (1)
Notes £m £m
Continuing operations
Revenue 2 11,218 11,491
Cost of sales (2) (9,082) (11,678)
Gross profit/(loss) 2 2,136 (187)
Commercial and administrative costs 2 (890) (771)
Research and development costs 2, 3 (778) (1,204)
Share of results of joint ventures and associates 10 45 190
Operating profit/(loss) 513 (1,972)
Gain/(loss) arising on acquisition and disposal of businesses 22 56 (14)
Profit/(loss) before financing and taxation 569 (1,986)
Financing income 4 229 61
Financing costs (3) 4 (1,092) (874)
Net financing costs (863) (813)
Loss before taxation (294) (2,799)
Taxation 5 418 (302)
Profit/(loss) for the year from continuing operations 124 (3,101)
Discontinued operations
Profit/(loss) for the year from ordinary activities 36 (68)
Costs of disposal of discontinued operations (39) -
Loss for the year from discontinued operations 22 (3) (68)
Profit/(loss) for the year 121 (3,169)
Attributable to:
Ordinary shareholders 120 (3,170)
Non-controlling interests (NCI) 1 1
Profit/(loss) for the year 121 (3,169)
Other comprehensive income/(expense) 41 (265)
Total comprehensive income/(expense) for the year 162 (3,434)
Earnings/(loss) per ordinary share attributable to ordinary shareholders: 6
From continuing operations:
Basic 1.48p (51.81)p
Diluted 1.47p (51.81)p
From continuing and discontinued operations:
Basic( ) 1.44p (52.95)p
Diluted 1.43p (52.95)p
(1) The comparative figures have been restated to reflect ITP Aero being
classified as a discontinued operation. The respective notes to the financial
statements have also been restated on this basis. Further detail can be found
in note 22.
(2 )Cost of sales includes a charge for expected credit losses of £124m
(2020: £119m). Further details can be found in note 12.
(3) Included within financing are fair value changes on derivative
contracts. Further details can be found in notes 2, 4 and 16.
Condensed consolidated statement of comprehensive income
For the year ended 31 December 2021
2021 2020
Notes £m £m
Profit/(loss) for the year 121 (3,169)
Other comprehensive income/(expense) (OCI)
Actuarial movements in post-retirement schemes 20 254 (590)
Revaluation to fair value of other investments 10 (2) −
Share of OCI of joint ventures and associates 10 1 (1)
Related tax movements (79) 195
Items that will not be reclassified to profit or loss 174 (396)
Foreign exchange translation differences on foreign operations (178) 121
Foreign exchange translation differences reclassified to income statement 22 (1) 6
on disposal of businesses
Movement on fair values debited to cash flow hedge reserve (32) (16)
Reclassified to income statement from cash flow hedge reserve 39 26
Share of OCI of joint ventures and associates 10 44 (4)
Related tax movements (5) (2)
Items that will be reclassified to profit or loss (133) 131
Total other comprehensive income/(expense) 41 (265)
Total comprehensive income/(expense) for the year 162 (3,434)
( )
Attributable to:
Ordinary shareholders 161 (3,435)
Non-controlling interests (NCI) 1 1
Total comprehensive income/(expense) for the year 162 (3,434)
( ) ( ) ( ) ( )
Total comprehensive income/(expense) for the year attributable to ordinary ( ) ( ) ( )
shareholders arises from:
Continuing operations ( ) 278 (3,457)
Discontinued operations ( ) (117) 22
Total comprehensive income/(expense) for the year attributable to ordinary ( ) 161 (3,435)
shareholders
Condensed consolidated balance sheet
At 31 December 2021
2021 2020
Notes £m £m
ASSETS
Intangible assets 7 4,041 5,145
Property, plant and equipment 8 3,917 4,515
Right-of-use assets 9 1,203 1,405
Investments - joint ventures and associates 10 404 394
Investments - other 10 36 19
Other financial assets 16 361 687
Deferred tax assets 5 2,249 1,826
Post-retirement scheme surpluses 20 1,148 907
Non-current assets 13,359 14,898
Inventories 11 3,666 3,690
Trade receivables and other assets 12 5,383 5,455
Contract assets 15 1,473 1,510
Taxation recoverable 90 117
Other financial assets 16 46 107
Short-term investments 8 -
Cash and cash equivalents 13 2,621 3,452
Current assets 13,287 14,331
Assets held for sale 22 2,028 288
TOTAL ASSETS 28,674 29,517
LIABILITIES
Borrowings and lease liabilities 17 (279) (1,272)
Other financial liabilities 16 (689) (608)
Trade payables and other liabilities 14 (6,016) (6,653)
Contract liabilities 15 (3,599) (4,187)
Current tax liabilities (101) (154)
Provisions for liabilities and charges 19 (475) (826)
Current liabilities (11,159) (13,700)
Borrowings and lease liabilities 17 (7,497) (6,058)
Other financial liabilities 16 (2,715) (3,046)
Trade payables and other liabilities 14 (1,575) (1,922)
Contract liabilities 15 (6,710) (6,245)
Deferred tax liabilities 5 (451) (494)
Provisions for liabilities and charges 19 (1,107) (1,119)
Post-retirement scheme deficits 20 (1,373) (1,580)
Non-current liabilities (21,428) (20,464)
Liabilities associated with assets held for sale 22 (723) (228)
TOTAL LIABILITIES (33,310) (34,392)
NET LIABILITIES (4,636) (4,875)
EQUITY
Called-up share capital 1,674 1,674
Share premium 1,012 1,012
Capital redemption reserve 165 162
Cash flow hedging reserve (45) (94)
Merger reserve 650 650
Translation reserve 342 524
Accumulated losses (8,460) (8,825)
Equity attributable to ordinary shareholders (4,662) (4,897)
Non-controlling interests 26 22
TOTAL EQUITY (4,636) (4,875)
Condensed consolidated cash flow statement
For the year ended 31 December 2021
Notes 2021 2020
£m £m
Operating profit/(loss) from continuing operations 513 (1,972)
Operating loss from discontinued operations 22 (43) (109)
Operating profit/(loss) (1) 470 (2,081)
Loss on disposal of property, plant and equipment 9 37
Share of results of joint ventures and associates 10 (45) (191)
Dividends received from joint ventures and associates 10 27 60
Amortisation and impairment of intangible assets 7 290 902
Depreciation and impairment of property, plant and equipment 8 462 821
Depreciation and impairment of right-of-use assets 9 257 732
Adjustment of amounts payable under residual value guarantees within lease (4) (102)
liabilities (2)
Impairment of and other movements on investments 10 7 24
Decrease in provisions (394) (801)
(Increase)/decrease in inventories (169) 588
Movement in trade receivables/payables and other assets/liabilities (507) (2,655)
Movement in contract assets/liabilities (134) 259
Financial penalties paid (3) (156) (135)
Cash flows on other financial assets and liabilities held for operating (85) (126)
purposes
Interest received 9 13
Net defined benefit post-retirement cost/(credit) recognised in profit/(loss) 20 23 (68)
before financing
Cash funding of defined benefit post-retirement schemes 20 (162) (80)
Share-based payments 28 25
Net cash outflow from operating activities before taxation (74) (2,778)
Taxation paid (185) (231)
Net cash outflow from operating activities (259) (3,009)
Cash flows from investing activities
Movement in other investments 10 (26) (5)
Additions of intangible assets 7 (231) (365)
Disposals of intangible assets 7 5 18
Purchases of property, plant and equipment (328) (585)
Disposals of property, plant and equipment 61 23
Acquisition of businesses - (106)
Disposal of businesses 22 99 23
Movement in investments in joint ventures and associates and other movements 10 - (19)
on investments
Movement in short-term investments (8) 6
Net cash outflow from investing activities (428) (1,010)
Cash flows from financing activities
Repayment of loans (4) (965) (2,884)
Proceeds from increase in loans (4) 2,005 4,774
Capital element of lease payments (374) (284)
Net cash flow from increase in borrowings and leases 666 1,606
Interest paid (206) (88)
Interest element of lease payments (63) (74)
Fees paid on undrawn facilities (62) (97)
Cash flows on settlement of excess derivative contracts (5) 4 (452) (202)
Issue of ordinary shares - rights issue (net of expenses and rights taken by - 1,972
share trust)
Purchase of ordinary shares - (1)
Transactions with NCI (6) 30 −
NCI on formation of subsidiary 3 −
Dividends to NCI (1) (1)
Redemption of C Shares (3) (91)
Net cash (outflow)/inflow from financing activities (88) 3,024
Change in cash and cash equivalents (775) (995)
Cash and cash equivalents at 1 January 3,496 4,435
Exchange (losses)/gains on cash and cash equivalents (82) 56
Cash and cash equivalents at 31 December (7) 2,639 3,496
( )
( )
Condensed consolidated cash flow statement continued
For the year ended 31 December 2021
( )
(1)( )During the year, the Group received £11m (2020: £47m) from
the British Government as part of the UK furlough scheme. This was recognised
within operating profit/(loss).
(2) Where the cost of meeting residual value guarantees is less than that
previously estimated, as costs have been mitigated or liabilities waived by
the lessor, the lease liability has been remeasured. To the extent that the
value of this remeasurement exceeds the value of the right-of-use asset, the
reduction in the lease liability is credited to cost of sales.
(3) Relates to penalties paid on agreements with investigating bodies.
(4 )Repayment of loans includes repayment of £300m commercial paper under
the Covid Corporate Financing Facility (CCFF) and €750m (£639m) loan notes
in line with repayment terms. Proceeds from increase in loans includes the
drawdown of a £2,000m loan (supported by an 80% guarantee from UK Export
Finance). Further details are provided in note 17.
(5 )During the year, the Group incurred a cash outflow of £452m as a
result of settling foreign exchange contracts that were originally in place to
sell $3,184m receipts. Further detail is provided in note 4.
(6) Relates to NCI investment received in the year, in respect of
Rolls-Royce SMR Limited. Following the formation of Rolls-Royce SMR Limited
during the year, and in line with the shareholder agreements, £30m investment
was received by Rolls-Royce SMR Limited.
(7) The Group considers overdrafts (repayable on demand) and cash held for
sale 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 condensed 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.
2021 2020
£m £m
Reconciliation of movements in cash and cash equivalents to movements in net
debt
Change in cash and cash equivalents (775) (995)
Cash flow from increase in borrowings and leases (666) (1,606)
Less: settlement of related derivatives included in fair value of swaps below 6 50
Cash flow from increase/(decrease) in short-term investments 8 (6)
Change in net debt resulting from cash flows (1,427) (2,557)
New leases and other non-cash adjustments to lease liabilities and borrowings (86) (38)
Exchange (losses)/gains on net debt (51) 143
Fair value adjustments 170 (126)
Debt disposed of on disposal of business/(debt assumed on acquisition of 8 (24)
business)
Reclassifications 19 11
Movement in net debt excluding the fair value of swaps (1,367) (2,591)
Net debt at 1 January excluding the fair value of swaps (3,827) (1,236)
Net debt at 31 December excluding the fair value of swaps (5,194) (3,827)
Fair value of swaps hedging fixed rate borrowings 37 251
Net debt at 31 December (5,157) (3,576)
Condensed consolidated cash flow statement continued
For the year ended 31 December 2021
The movement in net debt (defined by the Group as including the items shown
below) is as follows:
At 1 January Funds flow Net funds on acquisition/ Exchange differences Fair value adjustments Reclassifi-cations (1) ( ) Other movements At 31 December
disposal
£m £m £m £m £m £m £m £m
2021
Cash at bank and in hand 940 (87) - (20) - (38) - 795
Money market funds 669 (620) - - - - - 49
Short-term deposits 1,843 - - (66) - - - 1,777
Cash and cash equivalents (per balance sheet) 3,452 (707) - (86) - (38) - 2,621
Cash and cash equivalents included within assets held for sale 51 (68) - 4 - 38 - 25
Overdrafts (7) - - - - - - (7)
Cash and cash equivalents 3,496 (775) - (82) - - - 2,639
(per cash flow statement)
Short-term investments − 8 - - - - - 8
Other current borrowings (1,006) 950 - 1 35 18 - (2)
Non-current borrowings (4,274) (2,002) - 38 136 88 (9) (6,023)
Borrowings included within liabilities held for sale − 18 - 1 (1) (77) - (59)
Lease liabilities (2,043) 370 - (9) - 15 (77) (1,744)
Lease liabilities included within liabilities held for sale − 4 8 - - (25) - (13)
Financial liabilities (7,323) (660) 8 31 170 19 (86) (7,841)
Net debt excluding fair value of swaps (3,827) (1,427) 8 (51) 170 19 (86) (5,194)
Fair value of swaps hedging fixed rate borrowings (2) 251 (6) - (35) (173) - - 37
Net debt (3) (3,576) (1,433) 8 (86) (3) 19 (86) (5,157)
2020
Cash at bank and in hand 825 163 − 3 − (51) − 940
Money market funds 1,095 (426) − − − − − 669
Short-term deposits 2,523 (733) − 53 − − − 1,843
Cash and cash equivalents (per balance sheet) 4,443 (996) − 56 − (51) − 3,452
Cash and cash equivalents included within assets held for sale − − − − − 51 − 51
Overdrafts (8) 1 − − − − − (7)
Cash and cash equivalents 4,435 (995) − 56 − − − 3,496
(per cash flow statement)
Short-term investments 6 (6) − − − − − −
Other current borrowings (427) 134 (24) (1) − (686) (2) (1,006)
Non-current borrowings (2,896) (1,974) − 38 (126) 686 (2) (4,274)
Lease liabilities (2,354) 284 − 50 − 11 (34) (2,043)
Financial liabilities (5,677) (1,556) (24) 87 (126) 11 (38) (7,323)
Net debt excluding fair value of swaps (1,236) (2,557) (24) 143 (126) 11 (38) (3,827)
Fair value of swaps hedging fixed rate borrowings (2) 243 (50) − (42) 114 (14) − 251
Net debt (3) (993) (2,607) (24) 101 (12) (3) (38) (3,576)
(1) Reclassifications include the transfer of ITP Aero to held for sale and
fees of £29m paid in previous periods for the £2,000m loan (supported by an
80% guarantee from UK Export Finance) that have been reclassified to
borrowings on the drawdown of the facility during the current
period.
(2 )Fair value of swaps hedging fixed rate borrowings reflects the impact
of derivatives on repayments of the principal amount of debt. Net debt
therefore includes the fair value of derivatives included in fair value hedges
(2021: £114m, 2020: £293m) and the element of fair value relating to
exchange differences on the underlying principal of derivatives in cash flow
hedges (2021: £(77)m, 2020: £(42)m).
(3 )As at 31 December 2021, net debt excluding lease liabilities was
£(3,400)m (2020: £(1,533)m).
Condensed consolidated statement of changes in equity
For the year ended 31 December 2021
Attributable to ordinary shareholders
Notes 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 1 January 2021 1,674 1,012 162 (94) 650 524 (8,825) (4,897) 22 (4,875)
Profit for the year - - - - - - 120 120 1 121
Foreign exchange translation differences on foreign operations - - - - - (178) - (178) - (178)
Reclassified to income statement on disposal of businesses 22 - - - - - (1) - (1) - (1)
Movement on post retirement schemes 20 - - - - - - 254 254 - 254
Fair value movement on cash flow hedges - - - (32) - - - (32) - (32)
Reclassified to income statement from cash flow hedge reserve - - - 39 - - - 39 - 39
Revaluation to fair value of other investments - - - - - - (2) (2) - (2)
OCI of joint ventures and associates 10 - - - 44 - - 1 45 - 45
Related tax movements 5 - - - (2) - (3) (79) (84) - (84)
Total comprehensive income for the year - - - 49 - (182) 294 161 1 162
Redemption of C Shares - - 3 - - - (3) - - -
Share-based payments - direct to equity (2) - - - - - - 28 28 - 28
Dividends to NCI - - - - - - - - (1) (1)
Transactions with NCI (3) - - - - - - 29 29 1 30
NCI on formation of subsidiary - - - - - - - - 3 3
Related tax movements 5 - - - - - - 17 17 - 17
Other changes in equity in the year - - 3 - - - 71 74 3 77
At 31 December 2021 1,674 1,012 165 (45) 650 342 (8,460) (4,662) 26 (4,636)
At 1 January 2020 386 319 159 (96) 650 397 (5,191) (3,376) 22 (3,354)
Loss for the year - - - - - - (3,170) (3,170) 1 (3,169)
Foreign exchange translation differences on foreign operations - - - - - 121 - 121 - 121
Reclassified to the income statement on disposal of businesses - - - - - 6 - 6 - 6
Movement on post-retirement schemes 20 - - - - - - (590) (590) - (590)
Fair value movement on cash flow hedges - - - (16) - - - (16) - (16)
Reclassified to income statement from cash flow hedge reserve - - - 26 - - - 26 - 26
OCI of joint ventures and associates 10 - - - (4) - - (1) (5) - (5)
Related tax movements 5 - - - (4) - - 197 193 - 193
Total comprehensive expense for the year - - - 2 - 127 (3,564) (3,435) 1 (3,434)
Issues of ordinary shares - Rights issue (4) 1,288 693 - - - - (10) 1,971 - 1,971
Issue of C Shares - - (89) - - - 1 (88) - (88)
Redemption of C Shares - - 92 - - - (92) - - -
Ordinary shares purchased - - - - - - (1) (1) - (1)
Share-based payments - direct to equity (2) - - - - - - 27 27 - 27
Transactions with NCI - - - - - - - - (1) (1)
Related tax movements 5 - - - - - - 5 5 - 5
Other changes in equity in the year 1,288 693 3 - - - (70) 1,914 (1) 1,913
At 31 December 2020 1,674 1,012 162 (94) 650 524 (8,825) (4,897) 22 (4,875)
(1 )At 31 December 2021, 29,405,191 ordinary shares with a net book value
of £65m (2020: 39,866,717 ordinary shares with a net book value of £89m)
were held for the purpose of share-based payment plans and included in
accumulated losses. During the year:
- 10,667,095 ordinary shares with a net book value of £24m (2020: 3,458,865
ordinary shares with a net book value of £29m) vested in share-based payment
plans; and
- the Company acquired none (2020: 85,724) of its ordinary shares via
reinvestment of dividends received on its own shares and purchased none (2020:
30,763,282) of its ordinary shares through purchases on the London Stock
Exchange.
(2 )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.
(3) Relates to NCI investment received in the year in respect of Rolls-Royce
SMR Limited. Further detail can be found on page 19.
(4 )In 2020, the Company issued 6,436,601,676 new ordinary shares with a
net book value of £1,288m and the Employee Share Trust subscribed for new
shares at a value of £10m relating to the November 2020 rights issue. The
amount credited to share premium is net of £79m in relation to transaction
costs associated with the rights issue.
Notes to the year-end financial statements
1 Basis of preparation and accounting policies
Reporting entity
Rolls-Royce Holdings plc (the 'Company') is a public company limited by shares
incorporated under the Companies Act 2006 and domiciled in the UK. These
condensed consolidated financial statements of the Company as at and for the
year ended 31 December 2021 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 2021 (Annual Report 2021) 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 UK adopted International Accounting Standards (IAS) and
interpretations issued by the IFRS Interpretations Committee applicable to
companies reporting under UK adopted IFRS. They do not include all the
information required for full annual statements and should be read in
conjunction with the 2021 Annual Report.
The Board of directors approved the condensed consolidated financial
statements on 24 February 2022. They are not statutory accounts within the
meaning of section 435 of the Companies Act 2006.
The Group's financial statements for the year ended 31 December 2021 were
approved by the Board on 24 February 2022. They have been reported on by the
Group's auditors and will be delivered to the registrar of companies in due
course. 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 comparative figures for the financial year 31 December 2020 have been
extracted from the Group's statutory accounts for that financial year. The
2020 financial statements, which were prepared in accordance with
international accounting standards in conformity with the requirements of the
Companies Act 2006 and IFRS adopted pursuant to Regulation (EC) No 1606/2002
as it applies in the European Union, have been reported on by the Group's
auditors and delivered to the registrar of companies. There are no differences
for the Group in applying each of these accounting frameworks. 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.
Changes to accounting policies
In April 2021, the IFRS Interpretations Committee published its final agenda
decision on Configuration and Customisation costs in a Cloud Computing
Arrangement. The agenda decision considers how a customer accounts for
configuration or customisation costs where an intangible asset is not
recognised in a cloud computing arrangement. The agenda decision does not have
a material impact on the Group in respect of the current period or prior
periods.
During 2021, an IBOR reform transition project to assess and implement changes
to systems, processes, risk and valuation models, as well as managing related
tax and accounting implications was carried out within the Group. The Group's
risk exposure that is directly affected by the interest rate benchmark reform
is its portfolio of long-term borrowings of £6.1bn and a number of its
foreign exchange contracts. The borrowings are hedged, using interest rate
swaps and cross-currency interest rate swaps, for changes in fair value and
cash flows attributable to the relevant benchmark interest rate. The Group has
made amendments to the contractual terms of IBOR-referenced floating-rate
debt, swaps and foreign exchange contracts, and updated the relevant hedge
designations.
A number of the Group's lease liabilities are based on a LIBOR index. These
are predominantly referencing USD LIBOR which is not expected to cease until
2023, hence the change in relation to these contracts has not impacted the
2021 financial statements. These contracts will be amended in due course.
Discontinued operations
A discontinued operation is defined in IFRS 5 Non-current assets held for sale
and discontinued operations as a component of an entity that has been disposed
of or is classified as held for sale, represents a separate major line of
business or geographical area of operations, is part of a single co-ordinated
plan to dispose of such a line of business or is a subsidiary acquired
exclusively with a view to resale. The results of discontinued operations are
required to be presented separately in the statement of profit or loss with
the comparative period restated to show results attributable to continuing
operations.
Assets and businesses are classified as held for sale when their carrying
amounts are recovered through sale rather than through continuing use.
At 31 December 2021, the ITP Aero business has been classified as held for
sale following activities undertaken in the period to 30 June 2021 to transfer
assets (including the Civil Aerospace Hucknall site with associated
fabrications activities) within the Group from Civil Aerospace to ITP Aero in
preparation for sale. The comparative balance sheet has not been restated.
Consequently ITP Aero has been classified as a discontinued operation at 31
December 2021. See notes 2 and 22 for more detail.
Post balance sheet events
The Group has taken the latest legal position in relation to any ongoing legal
proceedings and reflected these in the 2021 results as appropriate. In
addition, the Group completed the sale of its 23.1% shareholding in AirTanker
Holdings Limited to Equitix Investment Management Limited on 9 February 2022.
Further details are included in note 22.
1 Basis of preparation and accounting policies continued
Going concern
The Group operates an annual planning process. The Group's plans, and risks to
their achievement are reviewed by the Board and, once approved are used as the
basis for monitoring the Group's performance, incentivising employees, and
providing external guidance to shareholders
The processes for identifying and managing risk are described on pages 52 to
57 of the 2021 Annual Report. As described on these pages, the risk management
process, and the going concern and viability statements, are designed to
provide reasonable but not absolute assurance.
In accordance with the requirements of the UK Corporate Governance Code 2018,
the Directors have undertaken a comprehensive going concern review over an
18-month period to August 2023, considering the forecast cash flows and the
available liquidity of the Group over that 18-month period, taking into
account the Group's principal risks and uncertainties.
Impact of COVID-19
The COVID-19 pandemic continues to have an impact on the Group, primarily
within Civil Aerospace, due to continued travel restrictions and varied
quarantine requirements imposed by governments across the globe. The speed of
vaccination programmes, efficacy of vaccines and differing governmental
testing and quarantine requirements means that uncertainty remains in the
short term over the timing of recovery of demand, in particular in relation to
the civil aviation industry. This has been considered by the Directors in
assessing the adoption of the going concern basis in the consolidated
financial statements. Recognising the challenges of reliably estimating and
forecasting the timing of recovery of demand, the Group has modelled two
forecasts in its assessment of going concern which have been considered by the
Directors, along with a likelihood assessment
of these forecasts, being:
- base case, which reflects the Directors current expectations of future
trading; and
- severe but plausible downside forecast, which envisages a 'stress' or
'downside' situation.
Since the start of the pandemic, the Group has taken action to reduce cash
expenditure and maintain liquidity. The Group raised £7.3bn of additional
funding during 2020 through a combination of equity and debt. In March 2021,
the Group secured a further £1bn term-loan facility, 80% of which is
guaranteed by UK Export Finance (UKEF), repayable in March 2026, and in August
2021 extended its £1bn undrawn bank loan facility from a maturity date of 15
October 2022 to a maturity date of 15 January 2024.
A major restructuring programme was launched in 2020 to reshape and resize the
Group to deliver forecast annualised savings of at least £1.3bn by the end of
2022, with a plan to remove at least 9,000 roles across the Group. At 31
December 2021, over 9,000 roles had been removed from continuing operations
and annualised savings exceeded the £1.3bn target 12 months ahead of
schedule.
Impact of climate change
The Directors believe there are significant business growth opportunities to
come from the Group playing a leading role in the transition to net zero,
whilst at the same time climate change poses potentially significant risks to
the Group. Whilst it is unlikely that physical and transition risks will arise
during the 18-month period being assessed for going concern, both physical and
transition risks have been considered as part of the Group's risk assessment.
The investment required to achieve net zero scope 1 + 2 GHG emissions,
together with that required to ensure our new products will be compatible with
net zero operation by 2030, has been included in the Group's forecasts,
including those periods used in the assessment of going concern. Over the next
18 months, 64% of the Group's R&D investment will be directed to the
delivery of our decarbonisation strategy.
Liquidity and borrowings
At 31 December 2021, the Group had liquidity of £7.1bn including cash and
cash equivalents of £2.6bn and undrawn facilities of £4.5bn.
The Group's committed borrowing facilities at 31 December 2021 and 31 August
2023 are set out below. None of the facilities are subject to any financial
covenants or rating triggers which could accelerate repayment.
(£m) 31 December 2021 31 August 2023
Issued Bond Notes (1) 3,995 3,995
Other loans 63 −
UKEF £2bn loan (drawn) (2) and UKEF £1bn loan (undrawn) (3) 3,000 3,000
Revolving Credit Facility (undrawn) (4) 2,500 2,500
Bank Loan Facility (undrawn) (5) 1,000 1,000
Total committed borrowing facilities 10,558 10,495
(1) The value of Issued Bond Notes reflects the impact of derivatives on
repayments of the principal amount of debt. The bonds mature by May 2028.
(2) The £2,000m UKEF loan matures in August 2025.
(3) The £1,000m UKEF loan matures in March 2026 (currently undrawn).
(4) The £2,500m Revolving Credit Facility matures in April 2025 (currently
undrawn).
(5) The £1,000m Bank Loan Facility matures in January 2024 (currently
undrawn).
Taking into account the maturity of borrowing facilities, the Group has
committed facilities of at least £10.5bn available throughout the period to
31 August 2023.
1 Basis of preparation and accounting policies continued
Forecasts
The Group has modelled a base case, reflecting a best estimate of future
trading. The base case forecast assumes the continuation of a steady recovery
in customer confidence in the aftermath of the COVID-19 pandemic. Vaccination
programmes continue to be rolled out but the efficacy of vaccines over
different variants and differing governmental testing and quarantine
requirements means that the recovery of demand is hindered in the short term,
in particular in relation to the civil aviation industry.
In August 2020, the Group announced it would deliver proceeds of around £2bn
from planned disposals. Some of these disposals were completed by 24 February
2022. For the remaining planned disposals, as these are due to complete within
the 18-month period being considered, the proceeds have been included in the
base case forecast, together with a corresponding decrease in debt facilities.
The downside forecast assumes Civil widebody EFHs remain at average Q4 2021
levels over the 18-month period to August 2023, with recovery subdued due to
ongoing infection rates and a continuation of new variants of the virus,
resulting in ongoing caution in opening borders to international travel and no
upward trend in EFH until September 2023, resulting in a much slower recovery
in demand compared with the base case. The downside forecast also reflects
risks in relation to load reduction through our factories, and possible supply
chain challenges.
Conclusion
After reviewing the current liquidity position, the cash flow forecasts
modelled under both the base case and downside, the Directors consider that
the Group has sufficient liquidity to continue in operational existence for a
period of at least 18 months from the date of this report and are therefore
satisfied that it is appropriate to adopt the going concern basis of
accounting in preparing the financial statements.
Climate change
In preparing the Condensed Consolidated Financial Statements the Directors
have considered the potential impact of climate change. Based on the Taskforce
for Climate-related Financial Disclosures (TCFD) recommendations, the Group
assesses the potential impact of climate-related risks which cover both
transition risks and physical risks. The transition risks may include
extensive policy, legal, technological, and market changes and physical risks
could include direct damage to assets and supply chain disruption.
The Group has set decarbonisation commitments and identified longer-term
considerations in response to the climate challenge and is engaging
proactively with external stakeholders to advocate for the conditions that
society needs to achieve its net zero target. The Group's main short and
longer-term priorities include the following:
- achieving net zero greenhouse gas (GHG) emissions by 2030 from all energy
purchased and consumed in the operation of the buildings, facilities and
manufacturing processes (with the exception of product testing and
development). This will be met through continued investment in onsite
renewable energy installations; the procurement of renewable energy; and
continued investment in energy efficiency improvements to reduce the Group's
overall energy demands and operating costs. The investment required to meet
these scope 1 and 2 emission improvements is included in the forecasts that
support these Financial Statements. The Group expects the Bristol, UK,
manufacturing site to be its first site to achieve net zero carbon operations
during 2022.
- pioneering breakthrough new technologies, including investment in
hybrid-electric solutions in Power Systems, continued development of the more
efficient UltraFan aero engine, testing of sustainable aviation fuels, small
modular reactors (SMRs) and hybrid and fully electric propulsion. New products
will be compatible with net zero operation by 2030 and all products will be
compatible with net zero operation by 2050. In the year, R&D costs of
£(68)m within New Markets included design development to ready the SMRs to
enter the UK GDA process and investment in electrical propulsion technology.
Future investment required to deliver these technologies is included in the
forecasts that support the financial statements.
Climate change scenarios have been prepared to assess the viability of our
business strategy, decarbonisation plans and approach to managing
climate-related risk. There is inherent uncertainty over the assumptions used
within these and how they will impact the Group's business operations, cash
flows and profit projections. The Directors assess the assumptions on a
regular basis to ensure that they are consistent with the risk management
activities and the commitments made to investors and other stakeholders.
Assumptions used within the Financial Statements in relation to areas such as
revenue recognition for long-term contracts, impairment reviews of non-current
assets and the carrying amount of deferred tax assets consider the findings
from the climate scenarios prepared. Key variables include carbon prices based
on the IEA Net Zero scenario, which assumes an increase from $47 per tonne of
carbon in 2022 to $250 per tonne in 2050, commodity price trends derived from
the climate scenarios set out by the Intergovernmental Panel on Climate Change
(IPCC RCP1.9), temperature rises from the (IPCC SSP1-19) scenario, and GDP
information from the Oxford Economics Net Zero model.
1 Basis of preparation and accounting policies continued
As details of what specific future intervention measures will be taken by
governments are not yet available, carbon pricing has been used to quantify
the potential impact of future policy changes on the Group. To ensure revenue
recognition or the carrying value of assets is not overstated it has
cautiously been assumed that the impact of carbon pricing predominantly falls
on the cost base of the domestic facilities and external supply chain, rather
than directly on customers or consumers. The Group will be able to mitigate an
element of the financial impact as it reduces the scope 1 and 2 emissions from
its buildings, facilities and manufacturing processes and this is expected to
decline. However, no account has been made of expected mitigations from
decarbonisation in the external supply chain (who the Group is working with,
whilst acknowledging in its financial modelling that this is complex and will
therefore take some time). The financial modelling performed recognises the
extent to which the Group's current supplier contracts offer protection from
cost increases in the short to medium term where pricing is fixed or subject
to capped escalation clauses. The Group has made a cautious assessment of
whether higher costs would be passed on to customers in the short and medium
term that considers the markets operated in and the pricing mechanisms in
place. For example, in Civil Aerospace it is recognised that escalation caps
within a number of its LTSA contracts would be triggered, meaning additional
costs could remain within the business under current commercial arrangements
until the end of existing contract periods.
When determining the amount of cumulative revenue recognised on long-term
contracts, and the obligation in relation on onerous contracts, the
assumptions above have been used to reflect the climate uncertainties. This
has resulted in a revenue catch-up of £(17)m and an increase in contract loss
provisions of £(20)m in the year from increased costs over the term of the
current contracts of around 1%. A sensitivity is presented within the key
sources of estimation uncertainty to disclose the impact of a further 1% cost
increase that might arise from further unmitigated increases in carbon and/or
commodity pricing.
Impairment testing of non-current assets including goodwill, programme assets
and deferred tax assets has considered the above risks as well as assessing
how the Groups 1.5(o)C scenario may change the demand for products over the
medium and longer term. To assess the carrying value of assets where there is
more potential for impairment, the Directors have modelled downside risks
specific to those products. This included consideration of lower OE volumes or
a shorter in-service life that generates lower aftermarket volumes, together
with higher costs in Civil Aerospace. Power Systems is a shorter-cycle
business with scope to re-assess contractual terms to reflect the cost of
carbon. Whilst the Defence programmes cover a longer period, the nature of the
largest customers and the typical contractual arrangements mean that the Group
expect future contracts to reflect the cost of carbon. Further information is
provided in notes 5 and 7.
Deferred tax assets are recognised to the extent it is probable that future
taxable profits will be available, against which the unused tax losses and
deductible temporary difference can be utilised. In addition to the weighted
downside forecast (see note 7), the climate-related estimates and assumptions
above have also been considered when assessing the recoverability of the
deferred tax assets. Recognising the longer term over which these assets will
be recovered, the Group has also considered the impact on OE and aftermarket
sales if new, more efficient, civil aircraft or new engine options enter the
market earlier than assumed in its most likely estimates. Under this scenario
some older products would see a reduction in profits but additional
opportunities exist for newer products such as the Trent XWB. Whilst carbon
pricing illustrates pressure on costs, decarbonisation and new supplier and
customer contracts offer the opportunity to receive value for more efficient
and sustainable products. Further details are included in note 5 together with
sensitivity analysis in the key sources of estimation uncertainty section
below.
The climate-related estimates and assumptions that have been considered to be
key areas of judgement or sources of estimation uncertainty for the year ended
31 December 2021 are those relating to the recoverable amount of non-current
assets including goodwill, capitalised development costs, recovery of deferred
tax assets, recognition and measurement of provisions and recognition of
revenue on long-term contracts.
Further detail is set out in note 1 to the Financial Statements in the 2021
Annual Report.
1 Basis of preparation and accounting policies continued
Key areas of judgement and sources of estimation uncertainty
The determination of the Group's accounting policies requires judgement. The
subsequent application of these policies requires estimates and the actual
outcome may differ from that calculated. The key areas of judgement and
sources of estimation uncertainty as at 31 December 2021, that were assessed
as having a significant risk of causing material adjustment to the carrying
amounts of assets and liabilities are set out in note 1 to the Financial
Statements in the 2021 Annual Report and are summarised below.
Area Key judgements Key sources of estimation uncertainty Sensitivities performed
Revenue recognition and contract assets and liabilities Whether Civil Aerospace OE and aftermarket contracts should be combined. Estimates of future revenue and costs of long-term contractual arrangements Based upon the stage of completion of all widebody LTSA contracts within Civil
including the impact of climate change. Aerospace as at 31 December 2021, the following changes in estimate would
How performance on long-term aftermarket contracts should be measured.
result in catch-up adjustments being recognised in the period in which the
Uncertainty remains in the short-term over the timing of recovery of demand, estimates change (at underlying rates):
Whether any costs should be treated as wastage. in particular in relation to the civil aviation industry, in the aftermath of
the COVID-19 pandemic. Estimates of future revenue within Civil Aerospace are - A change in forecast EFHs of 1% over the remaining term of the contracts
Whether sales of spare engines to joint ventures are at fair value. based upon future EFH forecasts, influenced by assumptions over the time would impact LTSA income and to a lesser extent costs, resulting in an in-year
period and profile over which the civil aviation industry will recover. impact of around £6m to £9m. This would be expected to be seen as a catch-up
When revenue should be recognised in relation to spare engine sales to related change in revenue or, to the extent it impacts onerous contracts, within cost
entities. of sales.
- A 1% increase or decrease in our pricing to customers over the life of the
contracts would lead to a revenue catch-up adjustment in the next 12 months of
around £100m.
- A 1% increase or decrease in shop visit costs over the life of the
contracts would reduce the stage of completion and lead to a revenue catch-up
adjustment in the next 12 months of around £25m.
Risk and revenue sharing arrangements Determination of the nature of entry fees received.
Taxation Estimates are necessary to assess whether it is probable that sufficient A 5% change in margin or shop visits would result in an increase/decrease in
suitable taxable profits will arise in the UK to utilise the deferred tax the deferred tax asset by around £150m.
assets. This is largely driven by the Civil Aerospace business and the
estimates described above. If only 90% of assumed future cost increases are passed on to customers it
would result in a decrease in the deferred tax asset by around £40m, if
carbon prices were to double, this would be £110m.
Further detail is included in note 5.
Discontinued operations and assets held for sale Whether the ITP Aero business and associated consolidation adjustments meets
the criteria to be classified as held for sale and a discontinued operation.
Research and development Determination of the point in time where costs incurred on an internal
programme development meet the criteria for capitalisation or ceasing
capitalisation.
Determination of the basis for amortising capitalised development costs.
Leases Determination of the lease term. Estimates of the payments required to meet residual value guarantees at the The lease liability at 31 December 2021 included £412m relating to the cost
end of engine leases. Amounts due can vary depending on the level of of meeting these residual value guarantees in the Civil Aerospace business. Up
utilisation of the engines, overhaul activity prior to the end of the to £76m is payable in the next 12 months, £75m is due over the following
contract, and decisions taken on whether ongoing access to the assets is four years and the remaining balance after five years.
required at the end of the lease term.
Impairment of non-current assets Determination of cash-generating units for assessing impairment of goodwill. The carrying value of intangible assets (including programme-related The Group has considered whether a 10% reduction in OE quantities or a 5%
intangible assets) is dependent on the estimates of future cash flows which deterioration in EFHs (and hence future cash flows) on the business aviation
are influenced by assumptions over the recovery of the industries in which the programme assets that have previously been subject to impairment would lead to
Group operate. an additional impairment and concluded that it would not.
For programmes that have not previously been impaired, but where there is
existing headroom that could be significantly reduced over the next 12 months,
the Group has considered whether an increase in costs of up to 10% would lead
to an additional impairment and considered that it would not.
Provisions Whether any costs relating to contracts with customers should be treated as Estimates of the time to resolve the technical issues on the Trent 1000, A 12-month delay in the availability of the modified HPT blade could lead to a
wastage. including the development of the modified high pressure turbine (HPT) blade £60-100m increase in the Trent 1000 exceptional costs provision.
and estimates to Trent 1000 long-term contracts assessed as onerous.
An increase in Civil Aerospace widebody estimates of LTSA costs of 1% over the
Estimates of the future revenues and costs to fulfil onerous contracts. remaining term of the contracts could lead to a £100-120m increase in the
provision for contract losses across all programmes.
Post-retirement benefits The valuation of the Group's defined benefit pension schemes are based on A reduction in the discount rate from 1.90% to 1.65% could lead to an increase
assumptions determined with independent actuarial advice. The size of the net in the defined benefit obligations of the RR UK Pension Fund of approximately
surplus is sensitive to the actuarial assumptions, which include the discount £460m. This would be expected to be broadly offset by changes in the value of
rate used to determine the present value of the future obligation, longevity, scheme assets, as the scheme's investment policies are designed to mitigate
and the number of plan members who take the option to transfer their pension this risk.
to a lump sum on retirement or who choose to take the Bridging Pension Option.
A one-year increase in life expectancy from 21.8 years (male aged 65) and from
23.2 years (male aged 45) would increase the defined benefit obligations of
the RR UK Pension Fund by approximately £365m.
Where applicable, it is assumed that 50% and 40% (31 December 2020: 40%) of
employed deferred and deferred members respectively of the RR UK Pension Fund
will transfer out of the fund on retirement with a share of funds transfer
value. An increase of 5% in this assumption would increase the defined benefit
obligation by £30m.
2 Analysis by business segment
The analysis by 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 acts as the Chief Operating Decision
Maker as defined by IFRS 8). The Group's four divisions are set out below.
Civil Aerospace - development, manufacture, marketing and sales of commercial aero engines
and aftermarket services
Defence - development, manufacture, marketing and sales of military aero engines,
naval engines, submarine nuclear power plants and aftermarket services
Power Systems - development, manufacture, marketing and sales of integrated solutions
for onsite power and propulsion
New Markets - development, manufacture and sales of small modular reactor (SMR) and
new electrical power solutions
For the year ended 31 December 2020, Civil Aerospace, Power Systems, Defence
and ITP Aero were identified as core businesses, with other smaller businesses
identified as non-core businesses. From 1 January 2021, the identification of
core and non-core businesses has ceased with non-core businesses now included
within the category of 'Other businesses'. The figures in the segmental
analysis are shown in total to include the Group's four divisions and Other
businesses.
Other businesses include the trading results of the Bergen Engines AS business
until the date of disposal on 31 December 2021, the results of the Civil
Nuclear Instrumentation & Control business until the date of disposal on 5
November 2021, the results of the North America Civil Nuclear business until
the date of disposal on 31 January 2020 and the results of the Knowledge
Management System business until the date of disposal on 3 February 2020. The
trading results of the UK Civil Nuclear business have also been included in
Other businesses. The segmental analysis for 2020 has been restated to reflect
the 2021 definition of Other businesses.
During the year to 31 December 2021, activity previously managed as part of
the Civil Aerospace segment has been transferred to ITP Aero. The activity
transferred from Civil Aerospace to ITP Aero relates to the change in
ownership of the Hucknall site with associated fabrications activities. This
transfers the production of fabrications, combustors and fan outlet guide
vanes manufactured in Hucknall from Civil Aerospace to ITP Aero. To ensure
comparability, the segmental analysis for 2020 has been restated to reflect
this transfer. ITP has been classified as a disposal group held for sale and
discontinued operations since 30 June 2021 and as such, the operating segment
is no longer regularly reviewed by the Board as a basis for making decisions
about the allocation of resources to the business or to assess its
performance. In line with IFRS 8, ITP Aero is no longer considered to meet the
definition of an operating segment and the segmental analysis for 2020 has
been restated to reflect the 2021 assessment of operating segments.
During the year to 31 December 2021, the Group assessed whether its New
Markets activities met the criteria of an operating segment in accordance with
IFRS 8. As the Group increases its investment in these important new
technologies, the results of these activities have been combined and presented
as an additional segment, reflecting the differing characteristics and risk
profile of these businesses, in line with how performance is reviewed by the
Board. These results were previously included within Civil Aerospace, Defence,
Power Systems and Corporate and Inter-segment. The segmental analysis for 2020
has been restated to reflect the 2021 assessment of operating segments.
Underlying results
The Group presents the financial performance of the businesses in accordance
with IFRS 8 and consistently with the basis on which performance is
communicated to the Board each month.
Underlying results are presented by recording all relevant revenue and cost of
sales transactions at the average exchange rate achieved on effective settled
derivative contracts in the period that the cash flow occurs. The impact of
the revaluation of monetary assets and liabilities using the exchange rate
that is expected to be achieved by the use of the effective hedge book is
recorded within underlying cost of sales. Underlying financing excludes the
impact of revaluing monetary assets and liabilities to period end exchange
rates. Transactions between segments are presented on the same basis as
underlying results and eliminated on consolidation. Unrealised fair value
gains/(losses) on foreign exchange contracts, which are recognised as they
arise in the statutory results, are excluded from underlying results. To the
extent that the previously forecast transactions are no longer expected to
occur, an appropriate portion of the unrealised fair value gain/(loss) on
foreign exchange contracts is recorded immediately in the underlying results.
2 Analysis by business segment continued
Amounts receivable/(payable) on interest rate swaps which are not designated
as hedge relationships for accounting purposes are reclassified from fair
value movement on a statutory basis to interest receivable/(payable) on an
underlying basis, as if they were in an effective hedge relationship.
In the first half of the year, the Group was a net purchaser of USD, with the
consequence that the achieved exchange rate GBP:USD of 1.39 on settled
contracts was similar to the average spot rate in the period. In the second
half of 2021, the Group was a net seller of USD, at an achieved exchange rate
GBP:USD of 1.59 based on the USD hedge book.
Estimates of future USD cash flows have been determined using the Group's
base-case forecast. These USD cash flows have been used to establish the
extent of future USD hedge requirements. In 2020, the Group took action to
reduce the size of the USD hedge book by $11.8bn across 2020-2026, resulting
in an underlying charge of £1.7bn being recognised within underlying finance
costs and the associated cash settlement costs occurring over the period
2020-2026. In the year to 31 December 2021, the Group took the opportunity to
further reduce the size of the USD hedge book by an additional $2bn by
settling the mark-to market at £1m cost. The derivatives relating to this
underlying charge have been subsequently excluded from the hedge book and,
therefore, are also excluded from the calculation of the average exchange rate
achieved in the current and future periods. This charge was reversed in
arriving at statutory performance on the basis that the cumulative fair value
changes on these derivative contracts are recognised as they arise.
In the year to 31 December 2021, cash settlement costs of £452m were incurred
(2020: £202m).
Underlying performance excludes the following:
- the effect of acquisition accounting and business disposals;
- impairment of goodwill and other non-current and current assets where the
reasons for the impairment are outside of normal operating activities;
- exceptional items; and
- certain other items which are market driven and outside of the control of
management.
Acquisition accounting, business disposals and impairment
These are excluded from underlying results so that the current year and
comparative results are directly comparable.
Exceptional items
Items are classified as exceptional where the Directors believe that
presentation of the results in this way is useful in providing an
understanding of the Group's financial performance. Exceptional items are
identified by virtue of their size, nature or incidence.
In determining whether an event or transaction is exceptional, the Directors
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 post-retirement
schemes.
Subsequent changes in exceptional items recognised in a prior period will also
be recognised as exceptional. All other changes will be recognised within
underlying performance.
Exceptional items are not allocated to segments and may not be comparable to
similarly titled measures used by other companies.
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 statutory
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 or changes in the amount of
recoverable deferred tax or advance corporation tax recognised are also
excluded.
See page 33 for the reconciliation between underlying performance and
statutory performance.
2 Analysis by business segment continued
The following analysis sets out the results of the Group's businesses on the
basis described above and also includes a reconciliation of the underlying
results to those reported in the condensed consolidated income statement.
Civil Aerospace (1,2) Defence (2) Power Systems (2) New Markets (2) Other businesses Corporate and Inter-segment (2) Total underlying
£m £m £m £m £m £m £m
For the year ended 31 December 2021
Underlying revenue from sale of original equipment 1,612 1,411 1,744 - 155 (11) 4,911
Underlying revenue from aftermarket services 2,924 1,957 1,005 2 148 - 6,036
Total underlying revenue 4,536 3,368 2,749 2 303 (11) 10,947
Gross profit/(loss) 474 721 778 1 32 (10) 1,996
Commercial and administrative costs (297) (161) (383) (3) (20) (35) (899)
Research and development costs (434) (105) (157) (68) (10) - (774)
Share of results of joint ventures and associates 85 2 4 - - - 91
Underlying operating (loss)/profit (172) 457 242 (70) 2 (45) 414
For the year ended 31 December 2020
Underlying revenue from sale of original equipment 2,278 1,428 1,787 3 136 (6) 5,626
Underlying revenue from aftermarket services 2,790 1,927 948 2 137 - 5,804
Total underlying revenue 5,068 3,355 2,735 5 273 (6) 11,430
Gross (loss)/profit (1,987) 684 678 2 15 (5) (613)
Commercial and administrative costs (310) (146) (331) (1) (26) (52) (866)
Research and development costs (407) (86) (160) (46) (9) - (708)
Share of results of joint ventures and associates 169 9 1 - - - 179
Underlying operating (loss)/profit (2,535) 461 188 (45) (20) (57) (2,008)
(1)( )The underlying results for Civil Aerospace for 31 December 2020 have
been restated to reflect the changes to activity during 2021 due to the
transfer of the Hucknall site and associated fabrications activities to ITP
Aero.
(2) The underlying results of Civil Aerospace, Defence, Power Systems and
Corporate and Inter-segment activities for 31 December 2020 have been restated
to reclassify the results of the Group's SMR and electrical activities as New
Markets.
2 Analysis by business segment continued
Reconciliation to statutory results
Total underlying Underlying adjustments and adjustments to foreign exchange Group statutory results
£m £m £m
For the year ended 31 December 2021
Continuing operations
Revenue from sale of original equipment 4,911 152 5,063
Revenue from aftermarket services 6,036 119 6,155
Total revenue 10,947 271 11,218
Gross profit 1,996 140 2,136
Commercial and administrative costs (899) 9 (890)
Research and development costs (774) (4) (778)
Share of results of joint ventures and associates 91 (46) 45
Operating profit 414 99 513
Gain arising on the acquisition and disposal of businesses - 56 56
Profit before financing and taxation 414 155 569
Net financing (378) (485) (863)
Profit/(loss) before taxation 36 (330) (294)
Taxation (26) 444 418
Profit after taxation from continuing operations 10 114 124
Discontinued operations (1) 51 (54) (3)
Profit for the year 61 60 121
Attributable to:
Ordinary shareholders 60 60 120
Non-controlling interests 1 - 1
For the year ended 31 December 2020
Continuing operations
Revenue from sale of original equipment 5,626 (68) 5,558
Revenue from aftermarket services 5,804 129 5,933
Total revenue 11,430 61 11,491
Gross (loss)/profit (613) 426 (187)
Commercial and administrative costs (866) 95 (771)
Research and development costs (708) (496) (1,204)
Share of results of joint ventures and associates 179 11 190
Operating (loss)/profit (2,008) 36 (1,972)
Loss arising on the disposal of businesses - (14) (14)
(Loss)/profit before financing and taxation (2,008) 22 (1,986)
Net financing (1,985) 1,172 (813)
(Loss)/profit before taxation (3,993) 1,194 (2,799)
Taxation (46) (256) (302)
Loss/profit after taxation from continuing operations (4,039) 938 (3,101)
Discontinued operations (1) 42 (110) (68)
Loss for the year (3,997) 828 (3,169)
Attributable to:
Ordinary shareholders (3,998) 828 (3,170)
Non-controlling interests 1 - 1
(1 )Discontinued operations relate to the results of ITP Aero and are
presented net of intercompany trading eliminations and related consolidation
adjustments.
2 Analysis by business segment continued
Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition Civil Aerospace (1,2) Defence (2) Power Systems (2) New Markets (2) Other businesses Corporate and Inter-segment (2) Total underlying
£m £m £m £m £m £m £m
For the year ended 31 December 2021
Original equipment recognised at a point in time 1,612 604 1,720 - 142 (11) 4,067
Original equipment recognised over time - 807 24 - 13 - 844
Aftermarket services recognised at a point in time 629 825 871 2 148 - 2,475
Aftermarket services recognised over time 2,223 1,132 134 - - - 3,489
Total underlying customer contract revenue (3) 4,464 3,368 2,749 2 303 (11) 10,875
Other underlying revenue 72 - - - - - 72
Total underlying revenue 4,536 3,368 2,749 2 303 (11) 10,947
For the year ended 31 December 2020
Original equipment recognised at a point in time 2,278 522 1,769 3 120 (6) 4,686
Original equipment recognised over time - 905 17 - 16 - 938
Aftermarket services recognised at a point in time 1,168 794 824 2 136 - 2,924
Aftermarket services recognised over time 1,398 1,132 124 - 1 - 2,655
Total underlying customer contract revenue (3) 4,844 3,353 2,734 5 273 (6) 11,203
Other underlying revenue 224 2 1 - - - 227
Total underlying revenue 5,068 3,355 2,735 5 273 (6) 11,430
(1 )The underlying results for Civil Aerospace for 31 December 2020 have
been restated to reflect the changes to activity during 2021 due to the
transfer of the Hucknall site and associated fabrications activities to ITP
Aero.
(2 )The underlying results of Civil Aerospace, Defence, Power Systems and
Corporate and Inter-segment activities for 31 December 2020 have been restated
to reclassify the results of the Group's SMR and electrical activities as New
Markets.
(3 )Includes £159m (2020: £(1,048)m) of revenue recognised in the
year relating to performance obligations satisfied in previous years.
Total underlying Underlying adjustments and adjustments to foreign exchange Group statutory results
£m £m £m
For the year ended 31 December 2021
Original equipment recognised at a point in time 4,067 152 4,219
Original equipment recognised over time 844 - 844
Aftermarket services recognised at a point in time 2,475 38 2,513
Aftermarket services recognised over time 3,489 75 3,564
Total customer contract revenue 10,875 265 11,140
Other revenue 72 6 78
Total revenue 10,947 271 11,218
For the year ended 31 December 2020
Original equipment recognised at a point in time 4,686 (63) 4,623
Original equipment recognised over time 938 (6) 932
Aftermarket services recognised at a point in time 2,924 53 2,977
Aftermarket services recognised over time 2,655 110 2,765
Total customer contract revenue 11,203 94 11,297
Other revenue 227 (33) 194
Total revenue (1) 11,430 61 11,491
(1) During the year to 31 December 2021, revenue recognised within Civil
Aerospace, Defence and Power Systems of £1,634m (2020: 1,701m) was received
from a single customer.
2 Analysis by business segment continued
Underlying profit adjustments 2021 Restated
2020
Revenue Profit before financing Net financing Revenue Loss Net financing
£m £m £m £m before financing £m
Taxation (11) £m Taxation (11)
£m £m
Total underlying performance 10,947 414 (378) (26) 11,430 (2,008) (1,985) (46)
Impact of settled derivative contracts on trading transactions (1) A 271 (34) 62 33 61 995 (324) (39)
Unrealised fair value changes on derivative contracts held for trading (2) A - (6) (618) 110 - 8 (85) (182)
Unrealised net (gain)/losses on closing future A - - (8) - - - 1,503 (106)
over-hedged position (3)
Realised net (gain)/losses on closing future over-hedged position (3) A - - (6) - - - 202 (38)
Unrealised fair value change to derivative contracts held for financing (4) A - - 79 (20) - - (86) -
Exceptional programme credits/(charges) (5) B - 105 - (1) - 620 (36) -
Exceptional restructuring credit/(charge) (6) B - 45 - 1 - (470) - 32
Impairments (7) C - 9 - - - (1,244) - 258
Other write-offs C - - - - - (92) - 25
Effect of acquisition accounting (8) C - (50) - 12 - (85) - 23
Pension past-service credit (9) B - 47 - (13) - 308 - (108)
Other D - (17) 6 (37) - (4) (2) (7)
Included in operating profit 271 99 (485) 85 61 36 1,172 (142)
Gains/(losses) arising on the acquisitions C - 56 - 2 - (14) - 3
and disposals of businesses (10)
Impact of tax rate change - - - 327 - - - 159
Re-recognition/(de-recognition) of UK losses - - - 30 - - - (276)
Total underlying adjustments 271 155 (485) 444 61 22 1,172 (256)
Statutory performance per condensed consolidated income statement 11,218 569 (863) 418 11,491 (1,986) (813) (302)
A - FX, B - Exceptional, C - M&A and impairment, D - Other
(1)( )The impact of measuring revenues and costs and the impact of
valuation of assets and liabilities using the period end exchange rate rather
than the achieved rate or the exchange rate that is expected to be achieved by
the use of the hedge book increased reported revenues by £271m (2020:
increased by £61m) and reduced profit before financing and taxation by £34m
(2020 restated: reduced loss by £995m). Underlying financing excludes the
impact of revaluing monetary assets and liabilities at the period end exchange
rate.
(2) The underlying results exclude the fair value changes on derivative
contracts held for trading. These fair value changes are subsequently
recognised in the underlying results when the contracts are settled.
(3) In 2020, the Group took action to reduce the size of the USD hedge book
by $11.8bn across 2020-2026, resulting in an underlying charge of £1.7bn at
31 December 2020. In 2021, this estimate was updated to reflect the actual
cash cost and resulted in a £15m gain to underlying finance costs in the year
to 31 December 2021. In the year to 31 December 2021, the Group took the
opportunity to further reduce the size of the USD hedge book by an additional
$2bn resulting in a £1m charge to underlying finance costs. Further detail is
provided in note 4.
(4) Includes the losses on hedge ineffectiveness in the year of £1m (2020:
losses of £11m) and net fair value gains of £80m (2020: losses of £75m) on
any interest rate swaps not designated into hedging relationships for
accounting purposes.
(5) During the year to 31 December 2021, the estimated Trent 1000 abnormal
wastage costs reduced by £105m following a reassessment of the number of
engines impacted by these issues, with an associated reduction in expected
contract losses.
(6) During the year to 31 December 2021, the Group recorded an exceptional
restructuring credit of £45m (2020 restated: charge of £470m) which included
a £138m provision release offset by £93m (2020: £116m) associated with
initiatives to enable the restructuring which have been charged directly to
the income statement. Further details are provided in note 19.
(7)( )The Group has assessed the carrying value of its assets. Further
details are provided in notes 7, 8 and 9.
(8) The effect of acquisition accounting includes the amortisation of
intangible assets arising on previous acquisitions.
(9) The past service credit £47m comprises of; £7m has been recorded
following the final details on the additional transitional protections agreed
during the period; £4m as a result of transferring employment of 236
employees in anticipation of a business disposal; £4m from the updated scope
of the fundamental restructuring programmes following a higher than expected
rate of natural attrition; and £32m from remeasurement of the US defined
benefit liability to remove spousal benefits not included in the plan
benefits.
(10) Gains/(losses) arising on the acquisitions and disposals of
businesses are set out in note 22.
(11) Appropriate rates of tax have been applied to adjustments made to
profit/(loss) before tax in the table above. Adjustments which impact the UK
tax loss have an effective tax rate of zero. See note 5 for more details. The
total underlying adjustments in 2021 are a credit of £444m (2020: tax charge
of £256m). The overall tax credit in 2021 includes £327m which arises on the
re-measurement of UK deferred tax balances following the change in the UK tax
rate from 19% to 25% and £30m re-recognition of deferred tax assets
previously not recognised. The £159m tax credit in 2020 relates to the
re-measurement of the UK deferred tax balances from 17% to 19%. In 2020 there
is a tax charge of £276m relating to the derecognition of some of the
deferred tax asset on UK losses previously recognised.
2 Analysis by business segment continued
Balance sheet analysis
( ) Civil Aerospace (1, 2) Defence (2) Power Systems (2) New Markets( 2) Total reportable segments
At 31 December 2021
Segment assets 15,846 2,766 3,531 90 22,233
Interests in joint ventures and associates 378 9 16 - 403
Segment liabilities (20,745) (2,635) (1,503) (33) (24,916)
Net (liabilities)/assets (4,521) 140 2,044 57 (2,280)
At 31 December 2020
Segment assets 16,622 3,083 3,471 65 23,241
Interests in joint ventures and associates 363 19 11 - 393
Segment liabilities (22,331) (3,079) (1,352) (17) (26,779)
Net (liabilities)/assets (5,346) 23 2,130 48 (3,145)
(1) The financial position for Civil Aerospace for 31 December 2020 has been
restated to reflect the transfer of activity during 2021 as described on page
28.
(2 )The financial positions of Civil Aerospace, Defence, Power Systems and
Corporate and Inter-segment activities at 31 December 2020 have been restated
to reclassify the results of the Group's SMR and electrical activities as New
Markets.
Reconciliation to the balance sheet
2021 2020
£m £m
Total reportable segment assets excluding held for sale 22,233 23,241
Other businesses 14 21
Corporate and inter-segment (2,255) (3,112)
Interests in joint ventures and associates 403 393
ITP Aero prior to classification as held for sale - 2,091
Assets held for sale (1) 2,028 288
Cash and cash equivalents and short-term investments 2,629 3,452
Fair value of swaps hedging fixed rate borrowings 135 293
Deferred and income tax assets 2,339 1,943
Post-retirement scheme surpluses 1,148 907
Total assets 28,674 29,517
Total reportable segment liabilities excluding held for sale (24,916) (26,779)
Other businesses (11) (10)
Corporate and inter-segment 2,139 3,261
ITP Aero prior to classification as held for sale - (1,036)
Liabilities associated with assets held for sale (1) (723) (228)
Borrowings and lease liabilities (7,776) (7,330)
Fair value of swaps hedging fixed rate borrowings (98) (42)
Deferred and income tax liabilities (552) (648)
Post-retirement scheme deficits (1,373) (1,580)
Total liabilities (33,310) (34,392)
Net liabilities (4,636) (4,875)
(1) As at 31 December 2021, assets and liabilities relating to ITP Aero, the
investment in Airtanker Holdings and other non-current assets related to the
Group's site rationalisation activities are classified as held for sale. At 31
December 2020, Bergen Engines AS and Civil Nuclear Instrumentation and Control
were classified as held for sale. For further details see note 22.
3 Research and development
2021 Restated 2020
£m £m
Gross research and development costs (1,179) (1,225)
Contributions and fees (1) 366 353
Expenditure in the year (813) (872)
Capitalised as intangible assets 105 228
Amortisation and impairment of capitalised costs (2) (70) (560)
Net cost recognised in the income statement (778) (1,204)
Underlying adjustments relating to the effects of acquisition accounting, 4 496
impairment and foreign exchange (3)
Net underlying cost recognised in the income statement (774) (708)
(1)( )Includes government funding.
(2)( )See note 7 for analysis of amortisation and impairment. During the
year, amortisation of £5m has been incurred within the disposal group
recognised as a discontinued operation.
(3) During the year, no impairment of research and development was recorded.
In the comparative period to 31 December 2020 (restated), impairment charges
of £464m were recorded, relating to the financial and operational impact of
COVID-19.
4 Net financing
2021 Restated
2020
Per consolidated income statement Underlying financing (1) Per consolidated income statement Underlying financing (1)
£m £m £m £m
Interest receivable 7 7 21 21
Net fair value gains on non-hedge accounted interest rate swaps (2) 80 - - -
Financial RRSAs - foreign exchange differences and changes in forecast - - 12 -
payments
Net fair value gains on commodity contracts 63 - - -
Financing on post-retirement scheme surpluses 17 - 28 -
Net foreign exchange gains 62 - - -
Realised net gains on closing over-hedged position (3) - 6 - -
Unrealised net gains on closing over-hedged position (3) - 8 - -
Financing income 229 21 61 21
Interest payable (252) (262) (178) (175)
Net fair value losses on foreign currency contracts (681) - (23) -
Net fair value losses on non-hedge accounted interest rate swaps (2) - - (75) -
Unrealised net losses on closing future over-hedged position - - - (1,503)
Realised net losses on closing over-hedged position - - - (202)
Financial RRSAs - foreign exchange differences and changes in forecast (7) - (20) -
payments
Financial charge relating to financial RRSAs - - (3) (8)
Net fair value losses on commodity contracts - - (62) -
Financing on post-retirement scheme deficits (20) - (29) -
Net foreign exchange losses - - (324) -
Fees on undrawn facilities (62) (62) (97) (97)
Other financing charges (70) (75) (63) (21)
Financing costs (1,092) (399) (874) (2,006)
Net financing costs (863) (378) (813) (1,985)
Analysed as:
Net interest payable (245) (255) (157) (154)
Net fair value (losses)/gains on derivative contracts (538) 14 (160) (1,705)
Net post-retirement scheme financing (3) - (1) -
Net foreign exchange gains/(losses) 62 - (324) -
Net other financing (139) (137) (171) (126)
Net financing costs (863) (378) (813) (1,985)
(1 )See note 2 for definition of underlying results.
(2 )The condensed consolidated income statement shows the net fair value
gain/(loss) on any interest rate swaps not designated into hedging
relationships for accounting purposes. Underlying financing reclassifies the
fair value movements on these interest rates swaps to interest payable.
(3) In 2020, the Group took action to reduce the size of the USD hedge book by
$11.8bn across 2020-2026, resulting in an underlying charge of £1,689m at 31
December 2020. In 2021, this estimate was updated to reflect the actual cash
settlement cost of £1,674m and resulted in a £15m gain to underlying finance
costs in the year to 31 December 2021. In the year to 31 December 2021, the
Group took the opportunity to further reduce the size of the USD hedge book by
an additional $2bn resulting in a £1m charge to underlying finance costs. The
cash settlement costs of £1,674m covers the period 2020-2026, £186m was
incurred in 2020 and £452m was incurred in the year to 31 December 2021. The
Group estimates that future cash outflows of £326m will be incurred in 2022
and £710m spread over 2023 to 2026.
5 Taxation
UK Overseas Total
2021 Restated 2021 Restated 2021 Restated
£m 2020 £m 2020 £m 2020
£m £m £m
Current tax charge for the year 17 12 151 162 168 174
Adjustments in respect of prior years 2 - 12 (27) 14 (27)
Current tax 19 12 163 135 182 147
Deferred tax (credit)/charge for the year (173) 178 (59) (327) (232) (149)
Adjustments in respect of prior years (15) (12) (26) 42 (41) 30
Derecognition of deferred tax - 433 - - - 433
Deferred tax credit resulting from increase in UK tax rate (327) (159) - - (327) (159)
Deferred tax (515) 440 (85) (285) (600) 155
(Credited)/charged in the income statement (496) 452 78 (150) (418) 302
Deferred taxation assets and liabilities
2021 2020
£m £m
At 1 January 1,332 1,269
Amount credited/(charged) to income statement 636 (107)
Amount (charged)/credited to other comprehensive income (82) 197
Amount charged to cash flow hedge reserve (2) (4)
Amount credited to equity 17 5
On disposal/acquisition of businesses (1) (4) (20)
Transferred to assets held for sale (2) (85) (4)
Exchange differences (14) (4)
At 31 December 1,798 1,332
Deferred tax assets 2,249 1,826
Deferred tax liabilities (451) (494)
1,798 1,332
(1)( )( )The 2021 deferred tax relates to disposal of Bergen Engines AS and
the Civil Nuclear Instrumentation & Control business. The 2020 deferred
tax relates to the acquisitions of Qinous GmBH and Kinolt Group S.A.
(2) The 2021 deferred tax transferred to assets held for sale relates to ITP
Aero. The 2020 deferred tax transferred to assets held for sale relates to
Bergen Engines AS and the Civil Nuclear Instrumentation and Control business.
Deferred tax assets of £2,249m include £1,054m (2020: £801m) relating to UK
tax losses and £162m (2020: £163m) relating to advance corporation tax
(ACT), both arising in Rolls-Royce plc. These assets have been recognised
based on the expectation that the 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 Civil Aerospace widebody business which
makes initial losses through the investment period of a programme and then
makes a profit through its contracts for services. The programme lifecycles
are typically in excess of 30 years. 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).
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 Civil Aerospace widebody
business, to assess the level of future taxable profits.
The recoverability of deferred tax assets relating to tax losses and ACT has
been assessed in 2021 on the following basis:
- using the most recent UK profit forecasts 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 in excess of 30 years from initial
investment to retirement of the fleet, including the aftermarket revenues
earned from airline customers;
- taking into account forecast reductions in the usage of older aircraft,
and including new business in certain areas;
- taking into account a 25% probability of the severe but plausible downside
forecast materialising in relation to the civil aviation industry; and
- the long-term forecast profit and cost profile of the other parts of the
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.
In addition, management's assumptions relating to the amounts and timing of
future taxable profits take into account the impact of COVID-19 and climate
change on existing widebody engine programmes. Based on this assessment, the
Group has recognised a deferred tax asset of £1,054m relating to losses and
£162m relating to ACT. This reflects the conclusions that:
- It is probable that the 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 expected widebody engine programme
lifecycles.
- The Group has not recognised any deferred tax assets in respect of 2021 UK
tax losses.
5 Taxation continued
An explanation of the potential impact of climate change on forecast profits
and sensitivity analysis can be found in note 1.
The Group has also reassessed the recovery of other deferred tax assets in
Rolls-Royce plc, including those arising on unrealised losses on derivative
contracts, resulting in a net increase of £154m of which £58m relates to the
increase in the UK corporation tax rate (see below). Any future changes in tax
law or the structure of the Group could have a significant effect on the use
of losses, ACT and other deferred tax assets, including the period over which
they can be used. In view of this and the significant judgement involved the
Board continuously reassesses this area.
The other significant deferred tax assets in respect of tax losses and other
deductible temporary differences continue to arise in Rolls-Royce Deutschland
Ltd & Co KG, where the main business is business aviation. The total net
deferred tax asset is £254m (2020: £252m), which has been recognised in full
as it is considered probable that the business will generate taxable income in
the future against which these assets can be utilised.
The Spring Budget 2021 announced that the UK corporation tax rate will
increase from 19% to 25% from 1 April 2023. The new law was substantively
enacted on 24 May 2021. The prior year UK deferred tax assets and liabilities
were calculated at 19%, as this was the enacted rate at the 2020 balance sheet
date. As the 25% rate has been substantively enacted before 31 December 2021,
the UK deferred tax assets and liabilities have been re-measured at 25%.
The resulting credits and charges have been recognised in the income statement
except to the extent that they relate to items previously credited or charged
to equity. Accordingly, in 2021, £327m has been credited to the income
statement and £17m has been credited directly to equity.
The temporary differences associated with investments in subsidiaries, joint
ventures and associates, for which a deferred tax liability has not been
recognised, aggregate to £957m (2020: £907m). 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 share (EPS) is calculated by dividing the profit/(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.
In the current year, the potentially dilutive share options element has been
assessed as 20 million shares. Where a loss for the year is recognised, the
effect of potentially dilutive ordinary shares is anti-dilutive.
2021 Restated
2020
Basic Potentially dilutive share options Diluted Basic Potentially dilutive share options Diluted
Profit/(loss) attributable to ordinary shareholders (£m):
Continuing operations 123 123 (3,102) (3,102)
Discontinued operations (3) (3) (68) (68)
120 120 (3,170) (3,170)
Weighted average number of ordinary shares (millions) 8,332 20 8,352 5,987 - 5,987
EPS (pence):
Continuing operations 1.48p (0.01p) 1.47p (51.81p) - (51.81p)
Discontinued operations (0.04p) - (0.04p) (1.14p) - (1.14p)
1.44p (0.01p) 1.43p (52.95p) - (52.95p)
The reconciliation between underlying EPS and basic EPS is as follows:
2021 Restated
2020
Pence £m Pence £m
Underlying EPS / Underlying profit/(loss) from continuing operations 0.11 9 (67.48) (4,040)
attributable to ordinary shareholders
Total underlying adjustments to profit/(loss) before tax (note 2) (3.96) (330) 19.94 1,194
Related tax effects 5.33 444 (4.27) (256)
EPS / profit/(loss) from continuing operations attributable to ordinary 1.48 123 (51.81) (3,102)
shareholders
Diluted underlying EPS from continuing operations attributable to ordinary 0.11 (67.48)
shareholders
7 Intangible assets
Goodwill Certification costs Development expenditure Customer relationships Software (4) Other Total
£m £m £m £m £m £m £m
Cost:
At 1 January 2021 1,112 963 3,564 1,403 968 893 8,903
Additions - 1 104 - 83 35 223
Transferred to assets held for sale (1) - (6) (179) (868) (15) (59) (1,127)
Disposals (4) (22) - - (51) (2) (79)
Reclassifications (2) - - - - (2) 8 6
Exchange differences (48) (3) (96) (60) (5) (42) (254)
At 31 December 2021 1,060 933 3,393 475 978 833 7,672
Accumulated amortisation and impairment:
At 1 January 2021 38 429 1,803 478 607 403 3,758
Charge for the period (3) - 21 75 59 97 29 281
Impairment - - - - 1 8 9
Transferred to assets held for sale (1) - (4) (51) (176) (10) - (241)
Disposals (4) (21) - - (48) (1) (74)
Reclassifications (2) - - (1) - 6 1 6
Exchange differences - - (66) (19) (3) (20) (108)
At 31 December 2021 34 425 1,760 342 650 420 3,631
Net book value:
31 December 2021 1,026 508 1,633 133 328 413 4,041
1 January 2021 1,074 534 1,761 925 361 490 5,145
(1 )ITP Aero has been classified as a disposal group held for sale since
30 June 2021. Bergen Engines AS and the Civil Nuclear Instrumentation &
Control business were classified as held for sale at 31 December 2020 - see
note 22.
(2 )Includes reclassifications within intangible assets or from property,
plant and equipment when available for use.
(3 )Charged to cost of sales and commercial and administrative costs except
development costs, which are charged to research and development costs.
(4 )Includes £115m (2020: £110m) of software under course of
construction which is not amortised.
Goodwill has been tested for impairment during 2021 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 the Directors, 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 growth rates of 2% which reflect the products,
industries and countries in which the relevant CGU or group of CGUs operate.
- The key forecast assumptions for the impairment tests are the discount
rate and the cash flow projections, in particular the programme assumptions
(such as sales volumes and product costs), the impact of foreign exchange
rates on the relationship between selling prices and costs, and growth rates.
Impairment tests are performed using prevailing exchange rates.
- The Group believes there are significant business growth opportunities to
come from Rolls-Royce playing a leading role in the transition to net zero,
whilst at the same time climate change poses potentially significant risks.
The assumptions used by the Directors are based on past experience and
external sources of information. The main areas that have been considered are
demand for engines and their in-service lives, utilisation of the products
whilst in service, and the impact of market and regulatory change. The
investment required to ensure our new products will be compatible with net
zero operation by 2030, and to achieve net zero scope 1 and 2 GHG emissions is
reflected in the forecasts used.
A 1.5(o)C Paris-aligned sensitivity, based on IEA and Oxford Economics
forecasts, has been considered which assumes that Governments adopt strict
product and behavioural standards, high carbon pricing and strategic
investments in low carbon alternatives, with markets willing to pay for low
carbon solutions. The sensitivity has considered the likelihood of demand
changes for our products based on their relative fuel efficiency in the
marketplace and the probability of alternatives being introduced earlier than
currently expected. The sensitivity also reflects a broad range of potential
costs imposed by policy or regulatory interventions (through carbon pricing).
This sensitivity does not indicate the need for an impairment charge. Further
detail can be found in note 1.
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) that are based on current and known future programmes,
estimates of market share and long-term economic forecasts;
- Plausible downside scenario in relation to COVID-19 recovery included with
a 20% weighting;
- Cash flows beyond the five-year forecasts are assumed to grow at 2.0%
(2020: 2.0%); and
- Pre-tax discount rate 10.7% (2020: 11.7%).
The Directors do not consider that any reasonably possible changes in the key
assumptions (including taking consideration of the climate risks above) would
cause the value in use of the goodwill to fall below its carrying value.
7 Intangible assets continued
Rolls-Royce Deutschland Ltd & Co KG
- Trading assumptions (e.g. volume of engine deliveries, flying hours of
installed fleet, including assumptions on the recovery of the civil aviation
industry, and cost escalation) that are based on current and known future
programmes, estimates of market share and long-term economic forecasts;
- Plausible downside scenario in relation to COVID-19 recovery included with
a 25% weighting;
- Cash flows beyond the five-year forecasts are assumed to grow at 2.0%
(2020: 2.0%).
- Pre-tax discount rate 11.9% (2020: 11.9%).
The Directors do not consider that any reasonably possible changes in the key
assumptions (including taking consideration of the climate risks above) would
cause the value in use of the goodwill to fall below its carrying value.
Other cash generating units
Goodwill balances across the Group that are not considered to be individually
significant were also tested for impairment, resulting in no impairment charge
(2020: £8m) being recognised in
2021.
The carrying amount and the residual life of the material intangible assets
(excluding goodwill) for the Group are as follows:
Residual life 2021 2020
£m £m
Trent programme intangible assets (1) 7-15 years 1,787 1,770
Business aviation programme intangible assets (2) 15 years 237 256
Customer relationship assets on acquisition of ITP Aero (3) typically 13-35 years - 651
Intangible assets from the acquisition of Power Systems (4) 491 531
2,515 3,208
(1 )Included within the Trent programmes are the Trent 1000, Trent 7000
and Trent XWB.
(2 )Included within business aviation are the Pearl 700 and Pearl 15.
(3) ITP Aero has been classified as a disposal group held for sale since 30
June 2021.
(4 )Includes £108m (2020: £115m) in respect of a brand intangible asset
which is not amortised. Remaining assets are amortised over a range of 2-10
years.
The carrying amount of goodwill or intangible assets allocated across multiple
CGUs is not significant in comparison with the Group's total carrying amount
of goodwill or intangible assets with indefinite useful lives.
Other intangible assets (including programme intangible assets) have been
reviewed for impairment in accordance with IAS 36 Impairment of Assets.
Assessments have considered potential triggers of impairment such as external
factors including climate change (as set out in the goodwill section above),
significant changes with an adverse effect on a programme and by analysing
latest management forecasts against those prepared in 2020 to identify any
deterioration in performance. Where a trigger event has been identified, an
impairment test has been carried out. Where an impairment was required, the
test was 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 the Directors, 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 based on
estimates of product performance related estimates, future market share and
pricing and cost for uncontracted business. Climate risks are considered when
making these estimates consistent with the assumptions above. The uncertainty
over the recovery from COVID-19 has been modelled by including downside
forecasts at an appropriate weighting taking into account the business segment
being considered.
There have been no individually material impairment charges or reversals
recognised during the year.
8 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 1 January 2021 1,994 5,442 1,025 451 8,912
Additions 19 120 6 154 299
Transferred to assets held for sale (1) (200) (305) (22) (8) (535)
Disposals/write-offs (59) (264) (11) (23) (357)
Reclassifications (2) 144 75 53 (271) 1
Exchange differences (33) (82) (5) (3) (123)
At 31 December 2021 1,865 4,986 1,046 300 8,197
Accumulated depreciation and impairment:
At 1 January 2021 679 3,336 374 8 4,397
Charge for the period (3) 70 312 57 - 439
Impairment (4) 1 18 - - 19
Transferred to assets held for sale (1) (74) (127) (5) - (206)
Disposals/write-offs (48) (254) (1) - (303)
Reclassifications (2) (7) 11 (10) - (6)
Exchange differences (7) (52) (1) - (60)
At 31 December 2021 614 3,244 414 8 4,280
Net book value at:
31 December 2021 1,251 1,742 632 292 3,917
1 January 2021 1,315 2,106 651 443 4,515
(1 )ITP Aero has been classified as a disposal group held for sale since
30 June 2021. In addition, certain items of property, plant and equipment
related to the Group's site rationalisation activities have been classified as
held for sale at 31 December 2021. Bergen Engines AS and the Civil Nuclear
Instrumentation & Control business were classified as held for sale at 31
December 2020 − see note 22.
(2 )Includes reclassifications of assets under construction to the
relevant classification in property, plant and equipment, right-of-use assets
or intangible assets when available for use.
(3 )Depreciation is charged to cost of sales and commercial and
administrative costs or included in the cost of inventory as appropriate.
(4 )The carrying values of property, plant and equipment have been
assessed during the period in line with IAS 36. Material items of plant and
equipment and aircraft and engines are assessed for impairment together with
other assets used in individual programmes - see assumptions in note 7. Land
and buildings are generally used across multiple programmes and are considered
based on future expectations of the use of the site, which includes any
implications from climate-related risks as explained in note 7. As a result of
this assessment, there are no individually material impairment charges or
reversals in the year.
9 Right-of-use assets
Land and buildings Plant and equipment Aircraft and engines Total
£m £m £m £m
Cost:
At 1 January 2021 447 150 1,833 2,430
Additions/modification of leases 37 15 30 82
Transferred to assets held for sale (1) (16) (2) - (18)
Disposals (8) (16) (66) (90)
Reclassifications - - (8) (8)
Exchange differences (4) (4) (4) (12)
At 31 December 2021 456 143 1,785 2,384
Accumulated depreciation and impairment:
At 1 January 2021 159 60 806 1,025
Charge for the period 43 30 199 272
Impairment (2) (2) (6) (7) (15)
Transferred to assets held for sale (1) (4) (1) - (5)
Disposals (8) (16) (66) (90)
Reclassifications - - (1) (1)
Exchange differences (2) (1) (2) (5)
At 31 December 2021 186 66 929 1,181
Net book value at:
31 December 2021 270 77 856 1,203
1 January 2021 288 90 1,027 1,405
(1)( )ITP Aero has been classified as a disposal group held for sale since
30 June 2021. Bergen Engines AS and the Civil Nuclear Instrumentation &
Control business were classified as held for sale at 31 December 2020 - see
note 22.
(2 )The carrying values of right-of-use assets have been assessed during
the period in line with IAS 36. Material items of plant and equipment and
aircraft and engines are assessed for impairment together with other assets
used in individual programmes - see assumptions in note 7. Land and buildings
are generally used across multiple programmes and are considered based on
future expectations of the use of the site (which includes any implications
from climate-related risks as explained in note 7). As a result of this
assessment, an impairment reversal of £8m has been recognised through
non-underlying profit. The reversal relates to an element of the
non-underlying impairments recorded in 2020 in Civil Aerospace for site
rationalisation where there has been a subsequent change in strategy to
continue production on that site.
10 Investments
Equity accounted and other investments
Equity accounted Other (1)
Joint ventures Associates Total £m
£m £m £m
At 1 January 2021 393 1 394 19
Additions (2) 2 1 3 27
Disposals - - - (1)
Impairment (3) (2) - (2) (5)
Share of retained profit (4) 19 (1) 18 -
Reclassification of deferred profit to deferred income (5) (24) - (24) -
Transferred to assets held for sale (6) (35) - (35) -
Repayment of loans (3) - (3) -
Revaluation of other investments accounted for at FVOCI - - - (2)
Exchange differences 8 - 8 (2)
Share of OCI (7) 45 - 45 -
At 31 December 2021 403 1 404 36
(1) Other investments includes unlisted investments of £29m and listed
investments of £7m.
(2) During the year, additions to other investments of £27m include the
following significant transactions. On 17 December 2021, the Group acquired a
1% investment in Vertical Aerospace for consideration of £9m. The Group has
elected to value this investment at fair value through other comprehensive
income. On 18 May 2020, the Group increased its shareholding in Reaction
Engines Limited from 2% to 10.1% for £20m (£4m of which was paid during
2020) which was payable (and the associated shares acquired) in instalments.
During the year, the Group paid the remaining instalments of £16m for the
Reaction Engines acquisition.
(3) During the year, the Group recognised an impairment of £7m (2020: nil)
through underlying and nil (2020: £24m) charged to the income statement
through non-underlying.
(4) See table below.
(5 )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.
(6) The Group's investment in Airtanker Holdings Limited has been classified
as a non-current asset held for sale since 13 September 2021. Further detail
can be found in note 22.
(7 )Up to 13 September 2021 when Airtanker Holdings Limited was
transferred to held for sale, the Group recognised share of OCI relating to
cash flow hedges of £43m.
Reconciliation of share of retained profit to the income statement and cash
flow statement:
2021 Restated
2020
£m £m
Share of results of joint ventures and associates 22 132
Adjustments for intercompany trading (1) 23 58
Share of results of joint venture and associates to the Group (income 45 190
statement)
Dividends paid by joint ventures and associates to the Group (cash flow (27) (60)
statement)
Share of retained profit attributable to continuing operations 18 130
Share of retained profit attributable to discontinued operations - 1
Share of retained profit above 18 131
(1) During the year, the Group sold spare engines to Rolls-Royce &
Partners Finance, a joint venture company. The Group's share of the profit on
these sales is deferred and released to match the depreciation of the engines
in the joint venture's financial statements. In 2021 and 2020, profit deferred
on the sale of engines was lower than the release of that deferred in prior
years.
11 Inventories
2021 2020
£m £m
Raw materials 376 417
Work in progress 1,135 1,139
Finished goods 2,146 2,111
Payments on account 9 23
3,666 3,690
12 Trade receivables and other assets
Current Non-current Total
2021 2020 2021 2020 2021 2020
£m £m £m £m £m £m
Trade receivables (1) 2,141 2,479 52 - 2,193 2,479
Receivables due on risk and revenue sharing arrangements (RRSAs) 702 603 67 82 769 685
Amounts owed by joint ventures and associates 598 486 1 16 599 502
Costs to obtain contracts with customers (2) 13 12 41 50 54 62
Other taxation and social security receivable 197 225 8 6 205 231
Other receivables (3) 593 639 20 20 613 659
Prepayments 572 412 378 425 950 837
4,816 4,856 567 599 5,383 5,455
(1) Non-current trade receivables relate to amounts not expected to be
received in the next 12 months from customers on payment plans.
(2 )These are amortised over the term of the related contract, resulting
in amortisation of £9m (2020: £10m) in the year. There were no impairment
losses.
(3) Other receivables include unbilled recoveries relating to overhaul
activity.
During the year to 31 December 2021, the Group reassessed which trade
receivables are held to collect or sell. The Group's intent is to no longer
utilise invoice discounting and consequently, balances are generally not
classified as held to collect or sell. A small amount of invoice discounting
has continued within Power Systems at the request and cost of the customers.
The expected credit losses for trade receivables and other assets have
increased by £7m to £259m (2020: £252m). This movement is mainly driven by
the Civil Aerospace business of £7m, of which £10m relates to specific
customers and £(3)m relates to updates to the recoverability of other
receivables.
The Group has adopted the simplified approach to provide for expected credit
losses, measuring the loss allowance at a probability weighted amount
incorporated by using credit ratings which are publicly available, or through
internal risk assessments derived using the customer's latest available
financial information.
The movements of the Group's expected credit losses provision are as follows:
2021 2020
£m £m
At 1 January (252) (138)
Increases in loss allowance recognised in the income statement during the year (124) (119)
Loss allowance utilised 46 5
Releases of loss allowance previously provided 46 13
Transferred to held for sale 2 −
Exchange differences 23 (13)
At 31 December (259) (252)
13 Cash and cash equivalents
2021 2020
£m £m
Cash at bank and in hand 795 940
Money-market funds 49 669
Short-term deposits 1,777 1,843
Cash and cash equivalents per the balance sheet 2,621 3,452
Cash and cash equivalents within assets held for sale 25 51
Overdrafts (note 17) (7) (7)
Cash and cash equivalents per cash flow statement (page 18) 2,639 3,496
Cash and cash equivalents at 31 December 2021 includes £89m (2020: £143m)
that is not available for general use by the Group. This balance includes
£40m which is held in an account that is exclusively for the general use of
Rolls-Royce Submarines Limited. This cash is not available for use by other
entities within the Group. The remaining balance 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.
14 Trade payables and other liabilities
Current Non-current Total
2021 2020 2021 2020 2021 2020
£m £m £m £m £m £m
Trade payables 1,272 1,418 - - 1,272 1,418
Payables due on RRSAs 739 697 - - 739 697
Amounts owed to joint ventures and associates 486 583 - - 486 583
Customer concession credits 1,106 1,536 399 514 1,505 2,050
Warranty credits 201 173 161 196 362 369
Accruals 1,361 1,322 192 117 1,553 1,439
Deferred receipts from RRSA workshare partners 23 17 484 507 507 524
Government grants (1) 28 16 39 66 67 82
Other taxation and social security 40 127 - 7 40 134
Other payables (2) 760 764 300 515 1,060 1,279
6,016 6,653 1,575 1,922 7,591 8,575
(1 )During the year, £13m, including £1m in discontinued operations,
(2020: £10m) of government grants were released to the income statement.
(2 )Other payables includes parts purchase obligations, payroll
liabilities, HM UK Government levies and payables associated with business
disposals.
The Group's payment terms with suppliers vary on the products and services
being sourced, the competitive global markets the Group operates in and other
commercial aspects of suppliers' relationships. Industry average payment terms
vary between 90 to 120 days. The Group offers reduced payment terms for
smaller suppliers, so that they are paid in 30 days. In line with civil
aviation industry practice, the Group offers a supply chain financing (SCF)
programme in partnership with banks to enable suppliers, including joint
ventures, who are on standard 75-day payment terms to receive their payments
sooner. The SCF programme is available to suppliers at their discretion and
does not change rights and obligations with suppliers nor the timing of
payment of suppliers. At 31 December 2021, suppliers had drawn £540m under
the SCF scheme (31 December 2020: £582m).
15 Contract assets and liabilities
Current Non-current (1) Total
2021 2020 2021 2020 2021 2020
£m £m £m £m £m £m
Contract assets
Contract assets with customers 586 416 641 660 1,227 1,076
Participation fee contract assets 27 48 219 386 246 434
613 464 860 1,046 1,473 1,510
(1) Contract assets and contract liabilities have been presented on the face
of the balance sheet in line with the operating cycle of the business.
Contract liabilities are further split according to when the related
performance obligation is expected to be satisfied and therefore when revenue
is estimated to be recognised in the income statement. Further disclosure of
contract assets is provided in the table above, which shows within current the
element of consideration that will become unconditional in the next year.
(2) Contract assets are classified as non-financial instruments.
Contract assets with customers includes £915m (2020: £726m) of Civil
Aerospace LTSA assets, with most of the remaining balance relating to Defence.
The main driver of the increase in the Group balance is revenue recognised in
Civil Aerospace in the year as performance obligations have been completed
exceeding amounts received, partly reduced by £10m relating to performance
obligations satisfied in previous years, together with foreign exchange
movements. No impairment losses in relation to these contract assets (2020:
none) have arisen during the year to 31 December 2021.
Participation fee contract assets have reduced by £188m (2020: reduced by
£165m) due to ITP Aero being reclassified as a disposal group held for sale
which had an impact of £147m, amortisation exceeding additions by £23m and
foreign exchange on consolidation of overseas entities of £18m.
The absolute value of expected credit losses for contract assets has increased
by £1m to £15m (2020: £14m).
15 Contract assets and liabilities continued
Current Non-current Total
2021 2020 2021 2020 2021 2020
£m £m £m £m £m £m
Contract liabilities 3,599 4,187 6,710 6,245 10,309 10,432
During the year £2,713m (2020: £2,792m) of the opening contract liability
was recognised as revenue.
Contract liabilities have decreased by £123m. The main driver of the change
in the Group balance is as a result of ITP Aero contract liabilities (2020:
£173m) being reclassified as held for sale. The remaining movement includes
an increase in Civil Aerospace of £165m offset by a £99m decrease in
Defence.
The Civil Aerospace movement consists of an increase in relation to LTSA
liabilities of £288m to £7,129m (2020: £6,841m). LTSA revenue billed has
been ahead of revenue recognised in the year and together with foreign
exchange movements resulted in an increase in the LTSA liabilities by £512m,
offset by £224m of revenue recognised relating to performance obligations
satisfied in previous years, which were principally driven by price escalation
in business aviation and the impact of specific customer negotiations. This is
partially offset by the utilisation of deposits reflecting utilisation of
amounts received in previous years as engines and aftermarket services were
delivered in 2021.
The movement in Defence is from utilisation of prior year deposits and
recognition of deferred income as revenue as performance obligations have been
satisfied.
16 Financial assets and liabilities
Carrying value of other financial assets and liabilities
Derivatives
Foreign exchange contracts Commodity contracts Interest rate contracts (1) Total Financial RRSAs Other C Shares Total
£m £m £m derivatives £m £m £m £m
£m
At 31 December 2021
Non-current assets 159 11 176 346 - 15 - 361
Current assets 12 21 - 33 - 13 - 46
Assets 171 32 176 379 - 28 - 407
Current liabilities (629) - - (629) (7) (28) (25) (689)
Non-current liabilities (2,581) - (82) (2,663) (5) (47) - (2,715)
Liabilities (3,210) - (82) (3,292) (12) (75) (25) (3,404)
(3,039) 32 94 (2,913) (12) (47) (25) (2,997)
At 31 December 2020
Non-current assets 396 18 258 672 - 15 - 687
Current assets 45 7 42 94 - 13 - 107
Assets 441 25 300 766 - 28 - 794
Current liabilities (522) (17) (11) (550) (5) (25) (28) (608)
Non-current liabilities (2,790) (19) (113) (2,922) (76) (48) - (3,046)
Liabilities (3,312) (36) (124) (3,472) (81) (73) (28) (3,654)
(2,871) (11) 176 (2,706) (81) (45) (28) (2,860)
(1) Includes the foreign exchange impact of cross-currency interest rate
swaps.
Derivative financial instruments
Movements in fair value of derivative financial assets and liabilities were as
follows:
Foreign exchange instruments Commodity instruments Interest rate instruments - hedge accounted (2) Interest rate instruments - non-hedge accounted Total
2021 2020 2021 2020 2021 2020 2021 2020 2021 2020
£m £m £m £m £m £m £m £m £m £m
At 1 January (2,871) (3,104) (11) 12 233 229 (57) 14 (2,706) (2,849)
Movements in fair value hedges - - - - (143) 139 - - (143) 139
Movements in cash flow hedges (13) 18 4 6 (2) (60) - - (11) (36)
Movements in other derivative contracts (1) (681) (23) 63 (62) - - 80 (75) (538) (160)
Contracts settled 538 238 (9) 33 (31) (75) 14 4 512 200
Reclassification to held for sale (12) - (15) - - - - - (27) -
At 31 December (3,039) (2,871) 32 (11) 57 233 37 (57) (2,913) (2,706)
(1) Included in net financing.
(2) Includes the foreign exchange impact of cross-currency interest rate
swaps.
16 Financial assets and liabilities continued
Financial risk and revenue sharing arrangements (RRSAs) and other financial
assets and liabilities
Financial RRSAs Other liabilities Other assets
2021 2020 2021 2020 2021 2020
£m £m £m £m £m £m
At 1 January (81) (110) (73) (72) 15 16
Exchange adjustments included in OCI 4 (6) 4 (2) - -
Additions - - (9) (17) - -
Financing charge (1) - (3) (1) (13) - -
Excluded from underlying profit:
Changes in forecast payments (1) (7) (3) - - - -
Cash paid 3 39 3 18 - (1)
Other - - 1 13 - -
Reclassification to held for sale 69 2 - - - -
At 31 December (12) (81) (75) (73) 15 15
(1 )Included in net financing.
Fair values of financial instruments equate to book values with the following
exceptions:
2021 2020
Book value Fair value Book value Fair value
£m £m £m £m
Borrowings - Level 1 (4,038) (4,106) (4,886) (4,814)
Borrowings - Level 2 (1,994) (2,122) (401) (403)
Financial RRSAs - Level 3 (12) (13) (81) (89)
Fair values
The fair value of a financial instrument is the price at which an asset could
be exchanged, or a liability settled, between knowledgeable, willing parties
in an arms-length transaction. Fair values have been determined with reference
to available market information at the balance sheet date, using the
methodologies described below. There have been no transfers during the year
from or to Level 3 valuation.
- Non-current investments - primarily comprise unconsolidated companies
where fair value approximates to the book value.
- Money market funds, included within cash and cash equivalents, are valued
using Level 1 methodology. Fair values are assumed to approximately equal cost
either due to the short-term maturity of the instruments or because the
interest rate of the investments is reset after periods not exceeding six
months.
- The fair values of held to collect trade receivables and similar items,
trade payables and other similar items, other non-derivative financial assets
and liabilities, short-term investments and cash and cash equivalents are
assumed to approximate to cost either due to the short-term maturity of the
instruments or because the interest rate of the investments is reset after
periods not exceeding six months.
- Fair values of derivative financial assets and liabilities and trade
receivable held to collect or sell (2021: £17m; 2020: £938m) are estimated
by discounting expected future contractual cash flows using prevailing
interest rate curves. Amounts denominated in foreign currencies are valued at
the exchange rate prevailing at the balance sheet date. These financial
instruments are included on the balance sheet at fair value, derived from
observable market prices (Level 2 as defined by IFRS 13 Fair Value
Measurement).
- Borrowings are carried at amortised cost. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance sheet
date. The fair value of borrowings is estimated using quoted prices (Level 1
as defined by IFRS 13) or by discounting contractual future cash flows (Level
2 as defined by IFRS 13).
- The fair values of RRSAs and other liabilities are estimated by
discounting expected future cash flows. The contractual cash flows are based
on future trading activity, which is estimated based on latest forecasts
(Level 3 as defined by IFRS 13).
- Other assets are included on the balance sheet at fair value, derived from
observable market prices or latest forecast (Level 2/3 as defined by IFRS 13).
At 31 December 2021, Level 3 assets totalled £15m (2020: £15m).
- The fair value of lease liabilities are estimated by discounting future
contractual cash flows using either the interest rate implicit in the lease or
the Group's incremental cost of borrowing (Level 2 as defined by IFRS
13).
17 Borrowings and lease liabilities
Current Non-current Total
2021 2020 2021 2020 2021 2020
£m £m £m £m £m £m
Unsecured
Overdrafts 7 7 - - 7 7
Bank loans (1) 2 9 1,975 10 1,977 19
Commercial paper (2) - 300 - - - 300
2.125% Notes 2021 €750m (3) - 680 - - - 680
0.875% Notes 2024 €550m (4) - - 471 511 471 511
3.625% Notes 2025 $1,000m (4) - - 781 800 781 800
3.375% Notes 2026 £375m (5) - - 394 420 394 420
4.625% Notes 2026 €750m (6) - - 624 667 624 667
5.75% Notes 2027 $1,000m (6) - - 735 724 735 724
5.75% Notes 2027 £545m - - 540 539 540 539
1.625% Notes 2028 €550m (4) - - 493 545 493 545
Other loans (7) - 17 10 58 10 75
Total unsecured 9 1,013 6,023 4,274 6,032 5,287
Lease liabilities 270 259 1,474 1,784 1,744 2,043
Total borrowings and lease liabilities 279 1,272 7,497 6,058 7,776 7,330
All outstanding items described above as notes are listed on the London Stock
Exchange.
(1) On the 15 June 2021, the Group drew down the £2,000m loan maturing in
2025 (supported by an 80% guarantee from UK Export Finance).
(2) On 17 March 2021, the Group repaid commercial paper of £300m issued as
part of the COVID Corporate Financing Facility (CCFF), a fund operated by the
Bank of England on behalf of HM Treasury.
(3) These notes were the subject of cross-currency interest rate swap
agreements under which the Group had undertaken to pay floating rates of GBP
interest, which form a fair value hedge. On the 18 June 2021, the Group repaid
€750m (£639m) loan notes in line with repayment terms.
(4) 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.
(5) 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.
(6 )These notes are the subject of cross-currency interest rate swap
agreements under which the Group has undertaken to pay fixed rates of GBP
interest, which form a cash flow hedge.
(7 )During the year, the Group reclassified borrowings and lease
liabilities relating to ITP Aero as liabilities associated with assets held
for sale.
During the year, the Group entered into a new £1,000m facility maturing in
2026 (supported by an 80% guarantee from UK Export Finance and available to
draw until March 2025). This facility was undrawn at 31 December 2021.
Under the terms of certain recent loan facilities, the Company is restricted
from declaring, making or paying distributions to shareholders on or prior to
31 December 2022 and from declaring, making or paying distributions to
shareholders from 1 January 2023 unless certain conditions are satisfied. The
restrictions on distributions do not prevent shareholders from redeeming C
Shares issued in January 2020 or earlier.
18 Leases
Leases as lessee
The net book value of right-of-use assets at 31 December 2021 was £1,203m
(2020: £1,405m), with a lease liability of £1,744m (2020: £2,043m). Leases
that have not yet commenced to which the Group is committed have a future
liability of £55m and consist of mainly engines, plant and equipment,
properties and cars. The condensed consolidated income statement shows the
following amounts relating to leases:
2021 2020
£m £m
Land and buildings depreciation and impairment (1) (41) (122)
Plant and equipment depreciation (2) (24) (44)
Aircraft and engines depreciation and impairment (3) (192) (566)
Total depreciation and impairment charge for right-of-use assets (257) (732)
Adjustment of amounts payable under residual value guarantees within lease 4 102
liabilities (3, 4)
Expense relating to short-term leases of 12 months or less recognised as an (16) (18)
expense on a straight-line basis (2)
Expense relating to variable lease payments not included in lease liabilities (2) (1)
(3,5)
Total operating costs (271) (649)
Interest expense (6) (63) (74)
Total lease expense (334) (723)
Income from sub-leasing right-of-use assets 35 97
Total amount recognised in income statement (299) (626)
(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) Where the cost of meeting residual value guarantees is less than that
previously estimated, as costs have been mitigated or liabilities waived by
the lessor, the lease liability has been remeasured. To the extent that the
value of this remeasurement exceeds the value of the right-of use asset, the
reduction in the lease liability is credited to cost of sales.
(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.
(6) Included in financing costs.
The total cash outflow for leases in 2021 was £448m (2020: £377m). Of this
£430m related to leases reflected in the lease liability, £16m to short-term
leases where lease payments are expensed on a straight-line basis and £2m for
variable lease payments where obligations are only due when the assets are
used. The timing difference between income statement charge and cash flow
relates to costs incurred at the end of leases for residual value guarantees
and restoration costs that are recognised within depreciation over the term of
the lease, the most significant amounts relate to engine leases.
19 Provisions
At Charged to income statement (1) Reversed Utilised Transfers to held for sale Exchange differences At 31 December
1 January 2021 £m £m £m £m £m 2021
£m £m
Trent 1000 exceptional costs 321 80 (45) (199) - - 157
Contract losses 808 272 (190) (27) (13) (5) 845
Restructuring 236 5 (138) (74) (5) (3) 21
Warranty and guarantees 327 84 (5) (75) (11) (15) 305
Customer financing 17 - - - - - 17
Insurance 60 22 (20) (10) - - 52
Tax related interest and penalties 33 5 (13) (11) - - 14
Employer liability claims 50 3 (3) (2) (1) - 47
Other 93 61 (11) (17) - (2) 124
1,945 532 (425) (415) (30) (25) 1,582
Current liabilities 826 475
Non-current liabilities 1,119 1,107
(1 )The charge to the income statement includes £32m (2020: £48m) as a
result of the unwinding of the discounting of provisions previously
recognised.
Trent 1000 exceptional costs
In November 2019, the Group announced the outcome of testing and a thorough
technical and financial review of the Trent 1000 TEN programme, following
technical issues which were identified in 2019, resulting in a revised
timeline and a more conservative estimate of durability for the improved HP
turbine blade for the TEN variant. During the year, the Group has utilised
£199m of the Trent 1000 exceptional costs provision. This represents customer
disruption costs settled in cash and credit notes, and remediation shop visit
costs. The value of remaining provision reflects the single most likely
outcome and is expected to be utilised over the period 2022 to 2024.
19 Provisions continued
Contract losses
Provisions for contract losses are recorded when the direct costs to fulfil a
contract are assessed as being greater than the expected revenue. In the year,
additional contract losses for the Group of £272m have been recognised as a
result of changes in future cost estimates, primarily in relation to LTSA shop
visits; £20m was a result of revised estimates in relation to climate change.
Contract losses of £190m previously recognised have been reversed following a
reassessment of the number of engines impacted by the Trent 1000 technical
issues and the cost of meeting contractual obligations. The Group continues
to monitor the contract loss provision for changes in the market and revises
the provision as required. The value of the remaining contract loss provisions
reflect in each case the single most likely outcome. The provisions are
expected to be utilised over the term of the customer contracts, typically
within 8-16 years. From 1 January 2022, provisions for contract losses will be
measured on a fully costed basis. See note 1 for further detail.
Warranties and guarantees
Provisions for warranties and guarantees primarily relate to products sold and
are calculated based on an assessment of the remediation costs related to
future claims based on past experience. The provision generally covers a
period of up to three years.
Restructuring
In May 2020, the Group announced a fundamental restructuring programme in
response to the financial and operational impact caused by COVID-19 with a
plan to remove at least 9,000 roles across the Group. During the year, £74m
of the provision was utilised as part of these plans and £138m of the
provision released following reassessment of the anticipated cost per role and
a higher than expected rate of natural attrition. The remaining provision is
expected to be utilised by the end of 2022.
Customer financing
Customer financing provisions have been made to cover guarantees provided for
asset value and/or financing where it is probable that a payment will be made.
In addition to the provisions recognised, the Group has contingent liabilities
for customer financing arrangements where they payment is not probable as
described below. 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 $1.7bn (2020: $1.9bn) (on a discounted
basis) to provide facilities to enable customers to purchase aircraft (of
which approximately $952m could be called during 2022). 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. Significant events impacting the
international aircraft financing market, including the
COVID-19 pandemic, the failure by customers to meet their obligations under
such financing agreements, or inadequate provisions for customer financing
liabilities may adversely affect the Group's financial position.
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 better reflect 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.
2021 2020
£m $m £m $m
Gross commitments 32 43 38 52
Value of security (10) (13) (14) (19)
Guarantees (2) (3) (5) (6)
Net commitments 20 27 19 27
Net commitments with security reduced by 20% (1) 22 29 22 30
(1) Although sensitivity calculations are complex, the reduction of the
relevant security by 20% illustrates the sensitivity of the contingent
liability to changes in this assumption.
Insurance
The Group's captive insurance company retains a portion of the exposures it
insures on behalf of the remainder of the Group which include policies for
aviation claims, employer liabilities and healthcare claims. Significant
delays can 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 if
the frequency or severity of claims differs from estimated. Provisions for
outstanding claims are established to cover the outstanding expected liability
as well as claims incurred but not yet reported.
Tax related interest and penalties
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.
19 Provisions continued
Employer liability claims
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
During the year, £61m of other provisions have been charged to the income
statement. The largest item is £29m for costs related to the termination of a
contract under which the Group now has an obligation to enter an onerous
lease. On commencement of that lease, expected to be in 2022, this balance
will be recognised as a lease liability. The additional items that make up the
remaining charge in the year are individually immaterial and predominantly
relate to claims. At 31 December 2021, other provisions includes those items
as well as others (predominantly supplier claims), where the related legal
proceedings are ongoing and utilisation will depend upon their resolution. The
value of the provision reflects the single most likely outcome in each case.
20 Pensions and other post-retirement and long-term employee
benefits
Amounts recognised in the income statement
2021 2020
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 10 61 71 153 67 220
Other past service (credit)/cost (1) (15) (33) (48) (308) 20 (288)
(5) 28 23 (155) 87 (68)
Defined contribution schemes 146 81 227 80 84 164
Operating cost/(credit) 141 109 250 (75) 171 96
Net financing (credit)/charge in respect of defined benefit schemes (16) 19 3 (26) 27 1
Total income statement charge/(credit) 125 128 253 (101) 198 97
(1 )The past service credit recognised during the year comprises the
changes in the UK schemes below and £32m from the remeasurement of the US
defined benefit liability to remove spousal benefits not included in the plan
benefits. During the year to 31 December 2020, a UK past-service credit of
£308m was recognised which comprised £213m arising from the restructuring
programme and the introduction of the bridging pension option (BPO), £67m as
a result of the closure of the scheme to future accrual, £35m as a result of
changes to management benefits and a £7m past-service cost recognised as a
result of the 20 November High Court judgement that previous statutory
transfer values including guaranteed minimum pensions built up between May
1990 and April 1997 must be equalised between men and women.
Amounts recognised in the balance sheet in respect of defined benefit schemes
UK schemes Overseas schemes Total
£m £m £m
At 1 January 2021 883 (1,569) (686)
Exchange adjustments − 61 61
Current service cost and administrative expenses (10) (61) (71)
Past service credit 15 33 48
Financing recognised in the income statement 16 (19) (3)
Contributions by employer 99 63 162
Actuarial gains recognised in OCI 227 169 396
Returns on plan assets excluding financing recognised in OCI (112) (30) (142)
Transfers and disposal of businesses − 10 10
At 31 December 2021 1,118 (1,343) (225)
Post-retirement scheme surpluses - included in non-current assets (1) 1,118 30 1,148
Post-retirement scheme deficits - included in non-current liabilities − (1,373) (1,373)
1,118 (1,343) (225)
(1 )The surplus in the Rolls-Royce UK Pension Fund (RRUKPF) 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.
Changes to UK defined benefit scheme
On 20 May 2020, the Group announced its intention to reshape and resize the
Group due to the financial and operational impact of COVID-19. As part of this
restructuring programme, a voluntary severance programme was offered to
certain UK employees and pension liabilities were remeasured in 2020 to
reflect the number of members who were expected to leave the scheme. During
the year, a £4m past service credit has arisen from the updated scope of the
fundamental restructuring programmes following a higher than expected rate of
natural attrition.
On the 29 July 2020, the Group announced a consultation with the active
members of the UK scheme on a proposal to close the scheme to future accrual
on 31 December 2020. As at 31 December 2020, a non-underlying past-service
credit of £67m was recognised. Following the confirmation of the scheme
closure, the Group held discussions with the employees' representatives and
the Trustee regarding additional transitional protections that could be
granted from the scheme. At 31 December 2021, £7m had been recognised as a
non-underlying past service credit which relates to the differences between
the final protections agreed and the obligation estimated at 31 December 2020.
20 Pensions and other post-retirement and long-term employee benefits
continued
During the year to 31 December 2021, 236 employed deferred members transferred
employment in anticipation of a business disposal. As a consequence of this, a
£4m non-underlying past service credit was recognised.
Sensitivities
A reduction in the discount rate from 1.90% to 1.65% could lead to an increase
in the defined benefit obligations of the RR UK Pension Fund of approximately
£460m. This would be expected to be broadly offset by changes in the value of
scheme assets, as the scheme's investment policies are designed to mitigate
this risk.
A one-year increase in life expectancy from 21.8 years (male aged 65) and from
23.2 years (male aged 45) would increase the defined benefit obligations of
the RR UK Pension Fund by approximately £365m.
Where applicable, it is assumed that 50% and 40% (2020: 40%) of employed
deferred and deferred members respectively of the RR UK Pension Fund will
transfer out of the fund on retirement with a share of funds transfer value.
An increase of 5% in this assumption would increase the defined benefit
obligation by £30m.
Contributions
The Group expects to contribute approximately £66m to its defined benefit
schemes in 2022 (2021: £160m): UK: nil, Overseas: £66m (2020: UK: £100m,
Overseas: £60m).
In the UK, cash funding is based on a statutory triennial funding valuation
process. This process includes a negotiation between the Group and the Trustee
on the actuarial assumptions used to value the liabilities (Technical
Provisions); assumptions which may differ from those used for accounting. 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 a margin (0.5% at the
31 March 2020 valuation) 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 agreed rate of cash contributions and
any contributions from the employer to eliminate a deficit. The most recent
valuation, as at 31 March 2020, agreed by the Trustee in June 2021, showed
that the UK scheme was estimated to be 105% funded on the Technical Provisions
basis. This funding level reflected the short-term market impact of the
COVID-19 pandemic. Funding has now returned to pre-pandemic levels and was
estimated to be 112% at 31 December 2021. Following the closure of the scheme
to future accrual on 31 December 2020, no contributions will be made in
respect of future accrual and no deficit reduction contributions are required.
The 2021 contributions included above are in respect of 2020 accrual, the
payment of some of which were deferred in agreement with the Trustee as a
result of the COVID-19 pandemic. All cash due has been paid in full. The
current SoC includes an arrangement for potential contributions during 2024 to
2027 (capped at £145m in total) if the Technical Provisions funding position
is below 107% at 31 March 2023.
21 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 (DPA) with the SFO and the US Department of Justice
(DoJ) and a leniency agreement with the MPF, the Brazilian federal
prosecutors. The terms of both DPAs have now expired; the DPA with the DoJ was
dismissed by the US District Court on 19 May 2020 and the SFO filed notice of
discontinuance of proceedings with the UK Court on 18 January 2022. Certain
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, the Group 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, commitments made for
future service demand in respect of maintenance, repair and overhaul, and
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 (including with tax
authorities) 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
(2020: nil).
22 Disposals, businesses held for sale and discontinued operations
Disposals
Bergen Engines Civil Nuclear Total subsidiaries
£m £m £m
Proceeds
Cash consideration 77 85 162
Cash and cash equivalents disposed (29) (14) (43)
Net cash consideration per cash flow statement 48 71 119
Less: Net assets disposed (34) - (34)
Profit on disposal before disposal costs and continuing obligations 14 71 85
Cumulative currency translation (loss)/gain (1) 2 1
Disposal costs (20) (3) (23)
Non-underlying (loss)/profit before tax (7) 70 63
On 28 February 2020, the Group announced the decision to carry out a strategic
review of Bergen Engines AS, the Group's medium-speed gas and diesel engine
business. Bergen Engines AS formed part of the Power Systems business and from
31 December 2020 it has been classified as a disposal group held for sale.
During the year to 31 December 2021, an impairment charge of £9m was
recognised against the disposal group as a result of a change in the
anticipated proceeds. On 31 December 2021, the Group completed the sale of
Bergen Engines AS to Langley Holdings plc for a value of €91m. In accordance
with IAS 21 The Effects of Changes in Foreign Exchange Rates, the Group has
recycled the cumulative currency translation reserve through the income
statement in 2021.
On 7 December 2020, the Group signed an agreement for the sale of Civil
Nuclear Instrumentation & Control business to Framatome and consequently,
in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations, the business was classified as a disposal group held for sale at
31 December 2020. During the year to 31 December 2021, no impairment charge
was recognised. On 5 November 2021, the Group completed the sale to Framatome
for a value of £85m. In accordance with IAS 21, the Group has recycled the
cumulative currency translation reserve through the income statement in 2021.
Disposal completed in prior periods
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. A liability of
€28m is recognised for amounts that are now expected to be payable in
relation to the years 2022 and 2023 (2020: €29m liability in relation to the
years 2021 to 2023). Cash of €9m has been paid during the year with an
increase in the liability of €8m (£7m) reflected as an adjustment to sales
proceeds. The maximum adjustment to sales proceeds has now been provided for
in all future years to 2023.
Reconciliation of loss on acquisition & disposal of businesses per the Total
income statement:
£m
Profit on disposal of businesses 63
Adjustment to L'Orange sales proceeds (7)
Profit on acquisition & disposal of businesses per income statement 56
Reconciliation of cash flow on disposal of businesses to the cash flow Total
statement:
£m
Net consideration on disposal of businesses 107
Cash outflow on disposals completed in prior periods (8)
Cash flow on disposal of businesses per cash flow statement 99
Businesses held for sale
On 27 August 2020, the Group announced its intention to sell ITP Aero. During
the period to 30 June 2021, the Hucknall site with associated fabrications
activities, that were previously reported as part of the Civil Aerospace
segment, were transferred to ITP Aero (see note 2 for more detail) and other
preparatory work had been performed such that as at 30 June 2021 the business
was classified as a disposal group held for sale. On 27 September 2021, the
Group signed an agreement for the sale of ITP Aero to Bain Capital for £1.3bn
and consequently, in accordance with IFRS 5, the business continues to be
classified as a disposal group held for sale at 31 December 2021. The assets
of ITP Aero have been assessed for impairment in line with the requirements of
IFRS 5 and no impairment is required at 31 December 2021. ITP Aero had an
additional £153m of cash which was held by another Group company at 31
December 2021 and consequently is not included in the disposal group as the
resulting intra-group balances are eliminated on consolidation. On completion,
such cash is expected to be included in the disposal group. In addition, the
Group records significant adjustments to eliminate the impact of ITP Aero
margin within onerous contract provisions within Civil Aerospace. Certain
consolidation adjustments are not included in the balances held for sale but
will be derecognised upon the sale of ITP Aero and the related income
statement charge will be recognised as part of the profit on disposal.
22 Disposals, businesses held for sale and discontinued operations
continued
.
On 13 September 2021, the Group signed an agreement with Equitix Investment
Management Limited to dispose its 23.1% shareholding in AirTanker Holdings
Limited for a cash consideration of £189m. The sale completed on 9 February
2022. In accordance with IFRS 5, the Group has classified £47m of the
AirTanker assets as held for sale at 31 December 2021.
At 31 December 2021, the Group recognised property, plant and equipment and
the deferred income of a related grant as held for sale in line with IFRS 5.
These assets relate to the Group's site rationalisation activities.
The table below summarises the categories of assets and liabilities classified
as held for sale at 31 December 2021 and 2020.
2021 2020
ITP Aero Other (1) Total Bergen Engines Civil Nuclear Total
£m £m £m £m £m £m
Intangible assets 872 - 872 - 16 16
Property, plant and equipment 313 26 339 3 4 7
Right-of-use assets 12 - 12 2 7 9
Investment in associates and joint ventures 1 34 35 - - -
Deferred tax assets 167 - 167 2 4 6
Inventory 222 - 222 97 14 111
Trade receivables and other assets 342 14 356 50 38 88
Cash and cash equivalents 25 - 25 25 26 51
Assets held for sale 1,954 74 2,028 179 109 288
Trade payables and other liabilities (540) (7) (547) (100) (84) (184)
Provisions for liabilities and charges (22) - (22) (11) (7) (18)
Borrowings and lease liabilities (72) - (72) (4) (7) (11)
Deferred tax liabilities (82) - (82) (2) - (2)
Post-retirement scheme deficits - - - - (13) (13)
Liabilities associated with assets held for sale (716) (7) (723) (117) (111) (228)
Net assets/(liabilities) held for sale 1,238 67 1,305 62 (2) 60
(1 )Other assets and liabilities held for sale comprise: investment in
joint venture and accrued interest with Airtanker Holdings Limited; and assets
and associated government grant, related to the Group's site rationalisation
activities.( )
Discontinued operations
ITP Aero represents a separate major line of business and is classified as a
disposal group held for sale. Therefore, in line with IFRS 5, ITP Aero has
been classified as a discontinued operation.
The financial performance and cash flow information presented reflects the
operations for the year that have been classified as discontinued operations.
2021 2020
£m £m
Revenue 365 333
Operating loss (1) (4) (109)
Profit/(loss) before taxation (1) 2 (111)
Income tax credit (1) 34 43
Profit/(loss) for the year from discontinued operations on ordinary 36 (68)
activities
Costs on disposal of discontinued operations (39) -
Loss for the year from discontinued operations (3) (68)
Net cash inflow from operating activities (2) 12 40
Net cash outflow from investing activities (32) (39)
Net cash outflow from financing activities (25) (22)
Exchange gains/(losses) 4 (4)
Net change in cash and cash equivalents (41) (25)
(1 )Profit/(loss) from discontinued operations on ordinary activities is
presented net of intercompany trading eliminations, related consolidation
adjustments and amortisation of intangible assets arising on previous
acquisition (prior to classification to held for sale).
(2 )Cash flows from operating activities include £39m costs of disposal
paid during the year to 31 December 2021 that are not a movement in the cash
balance of the disposal group as they were borne centrally.
23 Derivation of summary funds flow statement from statutory cash flow
statement
2021 2020
£m £m £m £m Source
Underlying operating profit/(loss) from continuing operations 414 (2,008) Note 2
Operating loss from discontinued operations (43) (109) Note 2
Amortisation and impairment of intangible assets 290 902 Cash flow statement (CFS)
Depreciation and impairment of PPE 462 821 CFS
Depreciation and impairment of right-of-use assets 257 732 CFS
Adjustment to residual value guarantees in lease liabilities (4) (102) CFS
Impairment of joint ventures, associates and other investments 7 24 Note 10
Reversal of non-underlying impairments of non-current assets 9 (1,244) Reversal of underlying adjustment (note 2)
Acquisition accounting (50) (85) Reversal of underlying adjustment (note 2)
Depreciation, amortisation and impairment 971 1,048
Additions of intangible assets (185) (316) CFS less exceptional restructuring (see below)
Purchases of PPE (311) (579) CFS less exceptional restructuring (see below)
Lease payments (capital plus interest) (403) (379) CFS (capital and interest payments adjusted for foreign exchange (FX))
(Increase)/decrease in inventories (169) 588 CFS
Movement in receivables/payables (469) (2,297) CFS adjusted for the impact of exceptional programme charges and exceptional
restructuring shown on the basis of the FX rate achieved on settled derivative
contracts
Movement in contract balances (excluding Civil LTSA) (289) (263) CFS adjusted for the impact of exceptional programme charges and FX and
excluding Civil LTSAs (shown separately below)
Underlying movement in Civil Aerospace LTSA contract balances 66 479 Movement in Civil LTSA balances within movement of contract balances in CFS
less impact of FX
Revaluation of trading assets (excluding exceptional items) 32 219 Adjustment to reflect the impact of the FX contracts held on
receivables/payables
Realised derivatives in financing 85 226 Realised cash flows on FX contracts not included in underlying operating
profit less cash flows on settlement of excess derivative contracts
Movement on receivables/payables/contract balances (575) (1,636)
Movement on provisions (136) (195) CFS adjusted for the impact of exceptional programme charges and anticipated
recoveries, exceptional restructuring and FX contracts held
Net interest received and paid (197) (75) CFS
Fees paid on undrawn facilities (62) (97) CFS
Cash flows on settlement of excess derivative contracts (452) (202) CFS
Cash flows on financial instruments net of realised losses included in (85) (105) Cash flows on other financial instruments (CFS) not allocated to lease
operating profit payments or exceptional programme expenditure adjusted for the impact of FX
not held for trading
Other 68 (49) Principally disposals of non-current assets, joint venture trading and the
effect of share-based payments
Trading cash flow (1,165) (4,114)
Trading cash flow from continuing operations (1,211) (4,198)
Contributions to defined benefit schemes (in excess of)/less than underlying (92) 160 CFS
operating profit charge
Tax (185) (231) CFS
Free cash flow (1,442) (4,185)
Free cash flow from continuing operations (1,485) (4,255)
Net cash flow from changes in borrowings and lease liabilities 666 1,630 CFS excluding repayment of debt acquired.
(Decrease)/increase in short-term investments (8) 6 CFS
Movement in net debt from cash flows 658 1,636
Exclude: capital element of lease repayments 374 284 CFS
Movement in net debt from cash flows (excluding lease liabilities) 1,032 1,920
Shareholder payments (4) (92) CFS (includes dividends to NCI)
Proceeds of rights issue (net of expenses and rights taken by employee share - 1,972 CFS
trust)
Acquisition of business - (130) CFS
Disposal of business 99 23 CFS
Other acquisitions and disposals (50) (12) £50m related to costs incurred on central M&A activity.
Changes in Group structure 49 (119)
Exceptional restructuring costs (231) (323) £168m related to severance costs and £63m capital expenditure (2020: £268m
and £55m respectively)
Financial penalties paid (156) (135) CFS
Other (23) (33) Cash outflow on M&A spend and timing of cash flows on a prior period
disposal.
Change in cash and cash equivalents (775) (995)
23 Derivation of summary funds flow statement from statutory cash flow
statement continued
The comparative information for the period ended 31 December 2020 has been
re-presented to be on a comparable basis with the presentation adopted at the
year ended 31 December 2021. There is no change to trading or group free cash
flow. In summary, foreign exchange transactions have been represented within
line items to be consistent with presentation throughout the financial
statements.
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 activity related to business acquisitions or disposals, financial
penalties paid, exceptional restructuring costs and foreign exchange changes
on net funds. The Board considers that free cash flow reflects cash generated
from the Group's underlying trading.
Trading cash flow is defined as free cash flow (as defined above) before the
deduction of recurring tax and post-employment benefit expenses.
The table below shows a reconciliation of free cash flow to the change in cash
and cash equivalents presented in the condensed consolidated cash flow
statement on page 18.
Reconciliation of Alternative Performance Measures (APMS) to their statutory
equivalent
Alternative Performance Measures (APMS)
Business performance is reviewed and managed on an underlying basis. These
alternative performance measures reflect the economic substance of trading in
the year, including the impact of the Group's foreign exchange activities. In
addition, a number of other APMs are utilised to measure and monitor the
Group's performance.
Definitions and reconciliations to the relevant statutory measure are included
below.
Underlying results from continuing operations
Underlying results including underlying revenue and underlying operating
profit. Underlying results are presented by recording all relevant revenue and
cost of sales transactions at the average exchange rate achieved on effective
settled derivative contracts in the period that the cash flow occurs.
Underlying results also exclude: the effect of acquisition accounting and
business disposals, impairment of goodwill and other non-current assets where
the reasons for the impairment are outside of normal operating activities,
exceptional items and certain other items which are market driven and outside
of managements control. Statutory results have been adjusted for discontinued
operations and underlying results from continuing operations have been
presented on the same basis. Further detail can be found in note 2 and note
22.
Notes 2021 2020
£m £m
Revenue from continuing operations
Statutory revenue 11,218 11,491
Derivative & FX adjustments 2 (271) (61)
Underlying revenue 10,947 11,430
Operating profit/(loss) from continuing operations
Statutory operating profit/(loss) 513 (1,972)
Derivative & FX adjustments 2 40 (1,003)
Programme exceptional charges 2 (105) (620)
Restructuring exceptional charges 2 (45) 470
Acquisition accounting & M&A 2 50 85
Impairments & asset write-offs 2 (9) 1,336
Pension past service credit 2 (47) (308)
Other underlying adjustments 2 17 4
Underlying operating profit/(loss) 414 (2,008)
Notes 2021 2020
pence pence
Basic EPS from continuing operations
Statutory basic EPS 6 1.48 (51.81)
Effect of underlying adjustments to profit/(loss) before tax 6 3.96 (19.94)
Related tax effects (5.33) 4.27
Basic underlying EPS 0.11 (67.48)
Underlying results from discontinued operations
Notes 2021 2020
£m £m
Results from discontinued operations
Profit/(loss) for the year from discontinued operations on ordinary activities 22 36 (68)
Costs of disposal on discontinued operations 22 (39) ‒
Statutory loss from discontinued operations (3) (68)
Acquisition accounting & M&A 64 48
Derivative & FX adjustments 5 (3)
Restructuring exceptional charges ‒ 82
Impairments & asset write-offs (1) 19
Related tax effects (14) (36)
Underlying profit from discontinued operations 51 42
Trading cash flow
Trading cash flow is defined as free cash flow (as defined on page 56) before
the deduction of recurring tax and post-employment benefit expenses. Trading
cash flow per segment is used as a measure of business performance for the
relevant segments. For a reconciliation of group trading cash flow to free
cash flow and reported cash flow, see note 23.
2021 2020
£m £m
Civil Aerospace (1,670) (4,510)
Defence 377 298
Power Systems 219 162
New Markets (56) (55)
Total reportable segments trading cash flow (1,130) (4,105)
Other businesses (43) (30)
Central and Inter-segment (38) (63)
Trading cash flow from continuing operations (1,211) (4,198)
Discontinued business 46 84
Trading cash flow (1,165) (4,114)
Underlying operating profit charge (exceeded by)/in excess of contributions to (92) 160
defined benefit schemes
Tax (1) (185) (231)
Free cash flow (1,442) (4,185)
(1) See page 18 for tax paid on statutory cash flow.
Reconciliation of Alternative Performance Measures (APMS) to their statutory
equivalent continued
Free cash flow
Free cash flow is a measure of financial performance of the businesses' cash
flow to see what is available for distribution among those stakeholders
funding the business (including debt holders and shareholders). Free cash flow
is the change in cash and cash equivalents excluding: amounts spent or
received on activity related to business acquisitions or disposals; financial
penalties paid; exceptional restructuring payments; proceeds from increase in
loans; and repayment of loans. Free cash flow from continuing operations has
been presented to remove free cash flow from discontinued operations as
defined in note 22. For further detail, see note 23.
2021 2020
£m £m
Statutory change in cash and cash equivalents (775) (995)
Net cash flow from changes in short-term investments, borrowings and lease (658) (1,636)
liabilities
Movement in net debt from cash flows (1,433) (2,631)
Exclude: capital element of lease payments (374) (284)
Rights issue − (1,972)
Payment to shareholders 4 92
Business acquisitions & disposals (49) 119
Penalties paid on agreements with investigating bodies 156 135
Restructuring exceptional cash flow 231 323
Other underlying adjustments 23 33
Free cash flow (1,442) (4,185)
Discontinued operations free cash flow (1) (43) (70)
Free cash flow from continuing operations (1,485) (4,255)
(1 )Discontinued operations free cash excludes: transactions with parent
company of £(15)m (2020: £103m), movements in borrowings of £22m (2020:
£7m), exceptional restructuring costs of £8m (2020: £2m), M&A costs of
£44m (2020: nil) and other of £29m (2020: £(21)m).
Free cash flow from cash flows from operating activities
In addition to the above, a reconciliation of free cash flow to the statutory
cash flow from operating activities has been provided below:
2021 2020
£m £m
Statutory cash flows from operating activities (259) (3,009)
Capital expenditure (including investment from NCI and movement in joint (489) (933)
ventures, associates and other investments)
Capital element of lease payments (374) (284)
Interest paid (331) (259)
Settlement of excess derivatives (452) (202)
Exceptional restructuring costs 231 323
M&A costs 50 12
Financial penalties paid 156 135
Other 26 32
Free cash flow (1,442) (4,185)
Discontinued operations free cash flow (43) (70)
Free cash flow from continuing operations (1,485) (4,255)
Group R&D expenditure
R&D expenditure during the year excluding the impact of contributions and
fees, including government funding, amortisation and impairment of capitalised
costs and amounts capitalised during the year.
Notes 2021 2020
£m £m
Statutory research and development costs (778) (1,204)
Amortisation and impairment of capitalised cost 3 70 560
Capitalised as intangible assets (105) (228)
Contributions and fees (366) (353)
Gross R&D expenditure (1,179) (1,225)
Key performance indicators
The following measures are key performance indicators and are calculated using
alternative performance measures or statutory results. See below for
calculation of these amounts.
Order backlog
Order backlog, also known as unrecognised revenue, is the amount of revenue on
current contracts that is expected to be recognised in future periods. Civil
Aerospace OE orders where the customer has retained the right to cancel (for
deliveries in the next 7-12 months) are excluded.
Self-funded R&D as a proportion of underlying revenue
Self-funded cash expenditure on R&D before any capitalisation or
amortisation relative to underlying revenue. Self-funded R&D and
underlying revenue are presented for continuing operations in line with
presentation in the statutory income statement. We expect to spend
approximately 5% of underlying revenue on R&D although this proportion
will fluctuate depending on the stage of development of current programmes. We
expect this proportion will reduce modestly over the medium-term.
Notes 2021 2020
£m £m
Gross R&D expenditure 3 (1,179) (1,225)
Contributions and fees 3 366 353
Self funded R&D 3 (813) (872)
Underlying revenue 10,947 11,430
% %
Self funded R&D as a % of underlying revenue 7.4 7.6
Capital expenditure as a proportion of underlying revenue
Cash purchases of PPE in the year relative to underlying revenue presented for
continuing operations. All proposed investments are subject to rigorous review
to ensure that they are consistent with forecast activity and will provide
value for money. We measure annual capital expenditure as the cash purchases
of PPE acquired during the period; over the medium-term we expect a proportion
of around 3-4%.
2021 2020
£m £m
Purchases of PPE (cash flow statement) 328 585
Exclude: capital expenditure from discontinued operations (24) (33)
Net capital expenditure 304 552
Underlying revenue 10,947 11,430
% %
Capital expenditure as a % of underlying revenue 2.8 4.8
Principal risks and uncertainties
Our risk management system is described on pages 52 to 57 of our 2021 Annual
Report as a continuous process that requires risk owners to constantly
reassess risks and include learning from incidents to drive improvements in
our control environment.
Safety Compliance
Failure to: i) meet the expectations of our customers to provide safe Non-compliance by the Group with legislation or other regulatory requirements
products; or ii) create a place to work which minimises the risk of harm to in the heavily regulated environment in which we operate (for example, export
our people, those who work with us, and the environment, would adversely controls; data privacy; use of controlled chemicals and substances;
affect our reputation and long-term sustainability. antibribery and corruption; and tax and customs legislation). This could
affect our ability to conduct business in certain jurisdictions and would
Strategic transformation potentially expose the Group to: reputational damage; financial penalties;
debarment from government contracts for a period of time; and suspension of
We see significant opportunities in leading the transition to net zero by export privileges (including export credit financing), each of which could
pioneering the power that matters. Our strategy is to focus on delivering on have a material adverse effect.
our plans for existing and nascent businesses and to focus on exploiting
opportunities to grow into new net zero areas, both organically and Cyber threat
inorganically. Failure to execute this plan will prevent us from achieving our
longer-term ambitions. An attempt to cause harm to the Group, its customers, suppliers and partners
through the unauthorised access, manipulation, corruption, or destruction of
Business continuity data, systems or products through cyberspace.
The major disruption of the Group's operations, which results in our failure Financial shock
to meet agreed customer commitments and damages our prospects of winning
future orders. Disruption could be caused by a range of events, for example: The Group is exposed to a number of financial risks, some of which are of a
extreme weather or natural hazards (for example earthquakes, floods) which macroeconomic nature (for example, foreign currency, oil price, interest
could increase in severity or frequency given the impact of climate change; rates) and some of which are more specific to the Group (for example,
political events; financial insolvency of a critical supplier; scarcity of liquidity and credit risks).
materials; loss of data; fire; or infectious disease. The consequences of
these events could have an adverse impact on our people, our internal Significant extraneous market events could also materially damage the Group's
facilities or our external supply chain. competitiveness and/or creditworthiness and our ability to access funding.
This would affect operational results or the outcomes of financial
Climate change transactions.
We recognise the urgency of the climate challenge and have committed to net Market shock
zero carbon by 2050. The principal risk to meeting these commitments is the
need to transition our products and services to a lower carbon economy. The Group is exposed to a number of market risks, some of which are of a
Failure to transition from carbon intensive products and services at pace macroeconomic nature (e.g. economic growth rates) and some of which are more
could impact our ability to win future business; achieve operating results; specific to the Group (for example, reduction in air travel or defence
attract and retain talent; secure access to funding; realise future growth spending, or disruption to other customer operations). A large proportion of
opportunities; or force government intervention to limit emissions. our business is reliant on the civil aviation industry, which is cyclical in
nature.
Competitive environment
Demand for our products and services could be adversely affected by factors
Existing competitors: the presence of competitors in the majority of our such as: recession, current and predicted air travel, fuel prices and age and
markets means that the Group is susceptible to significant price pressure for replacement rates of our in-service products.
original equipment or services. Our main competitors have access to
significant government funding programmes as well as the ability to invest Political risk
heavily in technology and industrial capability.
Geopolitical factors that lead to an unfavourable business climate and
Existing products: failure to achieve cost reduction, contracted technical significant tensions between major trading parties or blocs which could impact
specification, product (or component) life or falling significantly short of the Group's operations. Examples include: changes in key political
customer expectations, would have potentially significant adverse financial relationships; explicit trade protectionism, differing tax or regulatory
and reputational consequences, including the risk of impairment of the regimes, potential for conflict or broader political issues; and heightened
carrying value of the Group's intangible assets and the impact of potential political tensions.
litigation.
Talent and capability
New programmes: failure to deliver an NPI project on time, within budget, to
technical specification or falling significantly short of customer Inability to identify, attract, retain and apply the critical capabilities and
expectations would have potentially significant adverse financial and skills needed in appropriate numbers to effectively organise, deploy and
reputational consequences. incentivise our people would threaten the delivery of our strategies.
Disruptive technologies (or new entrants with alternative business models):
could reduce our ability to sustainably win future business, achieve operating
results and realise future growth opportunities.
Payments to shareholders
As previously reported, some of our loan facilities place restrictions and
conditions on payments to shareholders. In 2021, as a result of these
restrictions, the Board was not able to recommend shareholder payments.
However, the Board may recommend shareholder payments from 2023, subject to
satisfaction of the conditions and our consideration of progress made to
strengthen the balance sheet. We aim to be able to recommend shareholder
payments in the medium term. The restrictions on distributions do not prevent
shareholders from redeeming C Shares issued in January 2020 or prior to that.
Shareholders wishing to redeem their existing C Shares must lodge instructions
with the Registrar to arrive no later than 5.00pm on 1 June 2022 (CREST
holders must submit their election in CREST by 2.55pm). The payment of C Share
redemption monies will be made on 5 July 2022 and the CRIP purchase will begin
as soon as practicable after 5 July 2022.
Statement of Directors' responsibilities
The statements below have been prepared in connection with the Company's full
Annual Report and Accounts for the year ended 31 December 2021. Certain parts
are not included in this announcement.
The Directors consider that the Annual Report and Accounts, taken as a whole,
is fair, balanced and understandable and provides the information necessary
for shareholders to assess the Group's and Company 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 their knowledge:
- the Group Financial Statements, which have been prepared in
accordance with UK-adopted international accounting standards, give a true and
fair view of the assets, liabilities, financial position and profit of the
Group;
- the Company Financial Statements, which have been prepared in
accordance with United Kingdom Accounting Standards, comprising FRS 101, give
a true and fair view of the assets, liabilities, financial position and result
of the Company;
- the Strategic Report includes a fair review of the development and
performance of the business and the position of the Group and Company,
together with a description of the principal risks and uncertainties that it
faces; and
In the case of each Director in office at the date the Directors' Report is
approved:
- so far as the Director is aware, there is no relevant audit
information of which the Group's and Company's auditors are unaware; and
- they have taken all steps that they ought to have taken as a
Director in order to make themselves aware of any relevant audit information
and to establish that the Group's or Company's auditor are aware of that
information.
By order of the Board
Warren East
Panos Kakoullis
Chief Executive Chief
Financial Officer
24 February
2022 24
February 2022
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