REG - Rolls-Royce Holdings - 2021 Half Year Results
05/08/2021 07:00
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RNS Number : 6258H Rolls-Royce Holdings plc 05 August 2021
5 August 2021
ROLLS-ROYCE HOLDINGS PLC - 2021 Half Year Results
Delivering on financial priorities and looking forwards to a lower carbon
future
· Good start to the year with improving cash flow and profits
from continuing operations
- Underlying operating profit £307m, up from a £(1,630)m loss in 2020 H1
- Free cash flow £(1,174)m, significantly better than prior year (2020 H1:
£(2,862)m)
- Strong liquidity position with no maturities before 2024
· Focused on delivering to plan and driving results
- Restructuring delivering results and expected to achieve >£1bn savings
in 2021
- Disposal programme progressing well towards targeted proceeds of at least
£2bn
- Target to turn free cash flow positive during the second half 2021
- On track to improve FY2021 free cash flow to approximately £(2.0)bn
(2020: £(4.2)bn)
· Net zero pathway launched confirming our targets and
commitment to play a leading role in the transition of the markets we serve to
net zero carbon emissions by 2050
Warren East, Chief Executive said: "Our continued focus on the elements within
our control, together with a good performance from Defence and order intake
recovery in Power Systems have enabled us to deliver solid progress in the
first half. The benefits of our fundamental restructuring programme in Civil
Aerospace are evident in our reduced cash outflow and improved operational
efficiency. This leaner cost base together with a strong liquidity position
gives us confidence in our ability to withstand uncertainties around the pace
of recovery in international travel and benefit from the eventual rebound. We
are making disciplined investments in the new opportunities to drive future
growth, particularly in net zero power where we are leading the way with
innovation and engineering excellence. Our net zero pathway and targets,
announced in June, set out our plan to enable the sectors in which we operate
achieve net zero by 2050 by driving step-change improvements in engine
efficiency, helping accelerate the take-up of sustainable fuels and developing
new technologies."
First half 2021 Group financial performance
Statutory 2021 H1 Statutory 2020 H1 Underlying 2021 H1 Underlying 2020 H1
£ million
Revenue 5,159 5,673 5,227 5,410
Gross profit/(loss) 814 (590) 1,097 (965)
Operating profit/(loss) 38 (1,617) 307 (1,630)
Profit/(loss) before taxation 114 (5,213) 133 (3,203)
Profit/(loss) from continuing operations 394 (5,261) 104 (3,293)
(Loss)/profit from discontinued operations (1) (1) (117) 43 (33)
Profit/(loss) for the period 393 (5,378) 147 (3,326)
Earnings/(loss) per share (pence) (2) 4.72p (96.12)p 1.76p (59.44)p
( )
2021 H1 2020 H1 Change
Group free cash flow (FCF) (1,151) (2,801) 1,650
Group free cash flow from continuing operations (1,174) (2,862) 1,688
Reported movements in net debt from cash flows (1,503) (3,152) 1,649
(ex. lease liabilities)
30 June 2021 31 December 2020 Change
Net debt (ex. lease liabilities) (3,083) (1,533) (1,550)
For footnotes referenced in tables on pages 1-14, see page 15.
Business unit underlying performance summary
Underlying performance excludes the impact of period-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
reported income statement are set out in note 2 in the condensed consolidated
interim financial statements on page 28.
£ million Underlying revenue Organic Change (3) Underlying operating Organic Change (3)
profit/(loss)
Civil Aerospace (4) 2,168 (336) 39 1,860
Defence 1,721 266 269 72
Power Systems (5) 1,181 (49) 41 9
Other businesses (6) 152 21 5 22
Corporate / eliminations (7) 5 12 (47) (7)
Continuing operations 5,227 (86) 307 1,956
ITP Aero (4) 317 (79) 7 7
Inter-segment eliminations (171) 76 (23) 16
Total Group 5,373 (89) 291 1,979
Group underlying revenue from continuing operations of £5.2bn, down 2%,
reflected a more balanced contribution from the business units compared with
the prior period. It included a positive £160m Civil Aerospace LTSA revenue
catch-up compared with a £(866)m negative revenue catch-up in first half
2020.
Group underlying operating profit from continuing operations of £307m
included significant cost savings from the restructuring programme, primarily
in Civil Aerospace, and favourable timing and mix of activity in Defence and
Power Systems. The prior period comparative underlying loss of £(1.6)bn
included £(1.2)bn of one-off charges mostly related to the impact of COVID-19
on Civil Aerospace.
In Civil Aerospace, our first half operational performance saw an overall
improvement with a recovery in business aviation and domestic large engine
flying activity together with substantial cost benefits from our fundamental
restructuring programme, which is reducing the size of our cost base by around
a third. Large engine LTSA flying hours were 43% of the 2019 level, up from
the 34% in H2 2020; 92 large engine major shop visits were completed and 100
large engines were delivered. We have already seen a return to 2019 levels of
flying activity for our business aviation engines and for large engines
operated on domestic flying routes. However, international travel is
recovering more gradually, hindered by global variation in vaccination rates
and ongoing travel restrictions. We are continuing to mitigate this through
the actions within our control.
Our Defence business continues to perform well with resilient demand that has
not been impacted by COVID-19. First half performance benefitted from
improving operational performance which enabled the earlier delivery of spare
engines and higher spare parts sales, which historically have been more second
half weighted. This favourable timing and mix in the first half is expected to
result in a stronger first half versus second half performance, hence our full
year expectations for Defence are unchanged. Our strong order book in Defence
gives us confidence in our outlook with £1.2bn order intake in period and
more than 70% of 2022 expected revenues covered by the order book.
In Power Systems, revenues were broadly stable in the first half with an
increase in services offset by a reduction in original equipment (OE)
deliveries. Operating profit benefitted from a rise in higher-margin
aftermarket spare parts, partly offset by low factory utilisation on OE
manufacturing. Order intake was up 19% to £1.4bn (2020 H1: £1.2bn), with a
1.2x book-to-bill ratio, showing recovery in our end markets led by demand in
marine, governmental and power generation markets. Interest in lower carbon
solutions is growing and we are increasing our relative R&D investment in
these products. The recovery in OE order intake is expected to be realised as
revenue over the next 6-12 months.
Delivering on our commitments
Our ongoing focus on areas within our control - cost reduction, liquidity and
operational improvement -enabled us to deliver a significant improvement in
first half profit and cash flow while continuing to invest in new products,
including new low carbon technology and solutions to decarbonise our end
markets.
- Restructuring: We delivered further good progress on our fundamental
restructuring programme with around 8,000 roles now having been removed and we
expect to deliver more than £1bn of savings in FY2021 as compared with
FY2019. This keeps us on track to achieve our aim of a reduction of at least
9,000 roles and run rate savings of more than £1.3bn by the end of 2022.
- Disposal Programme: Our disposal programme, which aims to achieve at least
£2bn in proceeds is progressing well. The planned sale of ITP Aero is moving
forwards and we continue to work closely with all key stakeholders. Although
the disposal of Bergen Engines was interrupted in the first half, we remain
committed to its sale and this week announced a new disposal agreement with
enterprise value of €63m and €40m cash on its balance sheet will remain
with the Group. We expect to complete the disposal of the Civil Nuclear
Instrumentation & Control business later this year.
Strong liquidity position and improvement in free cash flow
Our liquidity position is strong with £7.5bn of liquidity including £3.0bn
in cash at the end of the half year after repaying the 2021 €750m loan notes
and the £300m Covid Corporate Financing Facility (CCFF) loan in the first
half. Net debt (before leases) was £(3.1)bn at the period end. This week the
Group signed an extension to the 2022 £1bn unused loan facility to 2024,
consequently the Group has no debt maturities before 2024 (excluding ITP
Aero).
Free cash outflow of £(1.2)bn represented a significant improvement on the
prior year period of £(2.9)bn, which included a £(1.1)bn negative impact
from the cessation of invoice factoring. The £0.6bn underlying improvement
reflected good progress on cost reduction, stronger operating performance and
reduced capital expenditure.
Our £2.0bn UKEF-backed 2025 loan facility, which we drew down in the first
half, restricts us from declaring or making shareholder payments until 2023.
In 2023, payments can resume provided certain conditions are satisfied.
Therefore, no interim shareholder payment will be made for 2021.
Our priorities for capital allocation are to rebuild the balance sheet and to
invest in the business to grow returns ahead of returning surplus cash to
shareholders. We are focused on generating appropriate value on our disposals
and improving free cash flow. This will reduce net debt and take us towards
our ambition to return to an investment grade credit profile in the medium
term.
Outlook and financial guidance
We continue to expect to turn free cash flow positive sometime during the
second half of this year and to achieve an improvement in full year free cash
outflow to around £(2.0)bn (FY2020: £(4.2)bn). This is driven by our actions
to reduce costs, continued strength in Defence, growth in Power Systems and a
gradual recovery in Civil Aerospace. Our guidance remains sensitive to the
timing of OE concession outflows on already delivered widebody engines, as we
previously highlighted in our full year results in March.
Looking further ahead, we are confident that when border restrictions are
lifted the recovery of international travel will accelerate. Free cash flow of
at least £750m (before disposals) is still achievable in a 12-month period
when EFH exceed 80% of 2019 levels, supported by our lower cost base in Civil
Aerospace which is now a third smaller. However, based on current industry
forecasts for the pace of recovery in international travel, this is likely to
occur beyond the initial expected timeframe of 2022. We are positive on the
near-term opportunities in Defence and Power Systems and in our new business
areas in electricals and small modular reactors (SMR). We will remain agile in
our response to external factors, continuing to deliver on our restructuring,
rebuilding our balance sheet while investing in our future.
Our net zero commitment and new low-carbon growth opportunities
In June, we announced our net zero pathway setting our short and medium-term
targets and showing how we will focus our technological capabilities to play a
leading role in enabling significant elements of the global economy to reach
net zero carbon by 2050. To achieve this, we are developing new technologies,
enabling an accelerated take-up of sustainable fuels and driving step-change
improvements in fuel efficiency, within aviation, shipping and power
generation. By 2030, we plan to make all our new products compatible with net
zero and by 2050 all our products in operation will be compatible.
In addition to meeting the net zero challenge for our existing activities, we
are also investing in new opportunities and markets, laying the foundations
for future growth beyond our current portfolio.
We are at the forefront of the development of electrical aerospace propulsion
systems which are opening up exciting incremental growth opportunities with
significant commercial potential. Earlier this year we announced an agreement
with Wideroe and Tecnam to power an electric regional aircraft by 2026. We are
testing our 2.5MW power generation system for potential use in hybrid-electric
aerospace propulsion. Our urban air mobility partner, Vertical Aerospace, took
a step forwards in June with the announcement of its planned US listing and up
to $4bn in pre-orders for up to 1,000 eVTOL aircraft.
Rolls-Royce SMR power stations have been designed to deliver low cost, net
zero carbon nuclear power and are on a pathway to be connected to the UK grid
in the early 2030s with the further opportunity of substantial export
potential. In addition to stable base load power, they will be able to provide
energy for the net-zero manufacture of green hydrogen and synthetic fuels. We
are now approaching the second phase of the programme, which will include
entering the UK licensing process later this year, supported by new third
party investment that unlocks multi-year UK Government matched funding of
£210m.
To enable our net zero ambitions and to drive new business growth in
low-carbon technologies we are increasing the proportion of gross R&D
spend on lower carbon and net zero technologies to 75% by 2025.
This announcement has been determined to contain inside information.
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This half year results announcement contains forward-looking statements. Any
statements that express forecasts, expectations and projections are not
guarantees of future performance and will not be updated. By their nature,
these statements involve risk and uncertainty, and a number of factors could
cause material differences to the actual results or developments. This report
is intended to provide information to shareholders, is not designed to be
relied upon by any other party, or for any other purpose and Rolls-Royce
Holdings plc and its directors accept no liability to any other person other
than under English law.
Results webcast and conference call
A webcast will be held at 08:30 (BST) 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
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Please use this same link to access the webcast replay which will be made
available shortly after the event concludes.
Conference call details
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International dial-in for all participants: +44 (0) 203 009 5709
Participant passcode: 5215 215
Downloadable materials
Please visit the Investor Relations section of the Rolls-Royce website to
download our Half Year Results materials:
https://www.rolls-royce.com/investors/results-and-events.aspx
(https://www.rolls-royce.com/investors/results-and-events.aspx)
Group Statutory Results
Statutory Income Statement
Statutory Statutory Change
2021 H1 2020 H1
£ million
Revenue 5,159 5,673 (514)
Gross profit/(loss) 814 (590) 1,404
Operating profit/(loss) 38 (1,617) 1,655
(Loss)/gain on acquisition/disposal (7) 2 (9)
Financing income/(costs) 83 (3,598) 3,681
Profit/(loss) before taxation 114 (5,213) 5,327
Taxation 280 (48) 328
Profit/(loss) for the period from continuing operations 394 (5,261) 5,655
Loss for the period from discontinued operations (1) (1) (117) 116
Profit/(loss) for the period 393 (5,378) 5,771
Earnings/(loss) per share (p) (2) 4.72 (96.12) 100.84
Statutory revenue of £5.2bn, down 9%, reflected a more balanced contribution
from the business units compared with the prior period. Civil Aerospace
revenue declined, as lower large engine OE deliveries and shop visit volumes
offset the non-repeat of large negative LTSA catch-ups. Defence revenue grew
strongly helped by favourable timing of high margin spare parts and spare
engine sales and Power Systems revenue was broadly stable with an increase in
aftermarket services offset by lower OE deliveries. Revenue included a
positive £160m Civil Aerospace LTSA catch-up compared with a £(866)m
negative revenue catch-up in the prior period. The large negative LTSA
catch-up in 2020 H1 reflected the impact of COVID-19 on our expected flying
hours and aircraft retirement risk.
Gross profit returned to profit of £814m compared with a prior period loss of
£(590)m as the restructuring programme achieved substantial cost savings,
particularly in Civil Aerospace, and Defence delivered strong growth in higher
margin products. It also included a £166m Civil Aerospace LTSA catch-up to
profit compared with an £(814)m negative charge in 2020 H1.
Operating profit improved significantly to £38m from a prior period £(1.6)bn
loss. The prior period included one-off charges comprising negative catch-ups,
impairments and write-offs. R&D charges decreased from £(678)m to
£(390)m primarily as a consequence of one-off impairments in the prior
period. Self-funded R&D expenditure was £(396)m, down 10%. C&A costs
of £(424)m were broadly flat.
Profit before tax of £114m included higher charges from interest bearing debt
and committed undrawn facilities compared with the prior year period. It also
benefitted from a £25m non-cash profit from revaluation of the hedge book
compared with a prior period revaluation loss of £(2.6)bn.
Profit from continuing operations of £394m included a tax credit of £280m.
The tax credit mainly relates to the remeasurement of the opening UK deferred
tax balances from 19% to 25%, following the enactment of the change in UK
corporation tax rate, together with the tax on profits and losses in overseas
jurisdictions.
Discontinued operations: ITP Aero has been classified as discontinued in the
2021 H1 results.
EPS of 4.72p (2020 H1: (96.12)p) reflected the improvement in profit and an
increase in weighted average number of shares compared with the prior period,
which was restated and adjusted for the bonus factor of 2.91 to reflect the
bonus element of the rights issue in 2020.
Statutory Balance Sheet
£ million 30 June 2021 ITP Aero classified ITP Aero As Reported Change excluding ITP Aero
as HfS 31 December 2020
31 December 2020
Intangible assets 4,063 4,191 954 5,145 (128)
Property, plant and equipment 3,992 4,184 331 4,515 (192)
Right-of-use assets 1,266 1,391 14 1,405 (125)
Joint ventures and associates 413 393 1 394 20
Contact assets and liabilities (8,836) (8,945) 23 (8,922) 109
Working capital (9) 1,229 473 97 570 756
Provisions (1,720) (1,907) (38) (1,945) 187
Net debt (10) (4,941) (3,558) (69) (3,627) (1,383)
Net financial assets and liabilities (10) (2,605) (3,077) (34) (3,111) 472
Net post-retirement scheme surpluses/(deficits) (530) (673) − (673) 143
Tax 1,653 1,224 71 1,295 429
Held for sale (11) 1,402 1,410 (1,350) 60 (8)
Other net assets and liabilities 24 19 − 19 5
Net liabilities (4,590) (4,875) − (4,875) 285
Other items
US$ hedge book (US$bn) 24 25
Civil LTSA asset 847 726
Civil LTSA liability (6,895) (6,841)
Civil net LTSA liability (6,048) (6,115)
Key drivers of balance sheet movements (adjusted for assets held for sale
(HfS)) were:
Intangible assets: Net decrease of £(128)m included additions of £89m
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 £(124)m and
amortisation for the period was £(154)m.
Property, plant and equipment: Net decrease of £(192)m included additions of
£95m, more than offset by £(239)m depreciation and a foreign exchange impact
of £(65)m. Additions were £83m lower as a result of continued focus on
prioritisation of business critical infrastructure projects and efforts to
reduce capital intensity in Civil Aerospace with the ongoing cost reduction
programme.
Right-of-use assets: Net reduction of £(125)m was driven by £(137)m
depreciation charged in the period partly offset by additions of £10m.
Contract assets and liabilities: The net liability balance decreased by
£(109)m, of which £67m related to the Civil Aerospace net LTSA balance
change, and included positive LTSA catch-ups of £160m, offset by LTSA revenue
billed being ahead of revenue recognised in the period of £(52)m and foreign
exchange movements of £(41)m.
Working capital: The £1,229m net current asset position reflected a £756m
movement driven by a £239m increase in inventory for planned second half
sales, and a £758m decrease in payables driven by lower concessions and Risk
and Revenue Sharing Partner (RRSPs) payables in Civil Aerospace and the final
financial penalty payment of £156m related to agreements reached in January
2017. Partly offset by a £(241)m decrease in receivables reflecting the
phasing of trading and customer receipts.
Provisions: The £187m decrease primarily reflected the utilisation of
restructuring provisions of £59m and Trent 1000 provisions of £148m during
the period.
Net debt: Reduced by £(1.4)bn to £(4.9)bn primarily driven by free cash
outflow of £(1.2)bn.
Net financial assets and liabilities: There was an increase of £472m,
primarily related to settled contracts in the period of £333m and the fair
value movement in foreign exchange and other derivatives.
Net post-retirement scheme surpluses/deficits: £143m movement driven by an
increase in the UK scheme surplus reflecting company contributions offset by
actuarial changes and a decrease in the overseas schemes deficit mainly
attributable to actuarial changes and foreign exchange. See note 16.
Group Underlying Results
The commentary and income statement below describe underlying performance,
with percentage and absolute change figures presented on an organic basis,
unless otherwise stated. Adjustments between the underlying income statement
and the reported income statement are set out in note 2 to the condensed
consolidated interim financial statements on page 28.
Underlying Income Statement
£ million 2021 H1 2020 H1 Change Organic Change (3) M&A (8) FX
Underlying revenue 5,227 5,410 (183) (86) 24 (121)
Underlying OE revenue 2,239 2,728 (489) (466) 24 (47)
Underlying services revenue 2,988 2,682 306 380 − (74)
Underlying gross profit/(loss) 1,097 (965) 2,062 2,082 8 (28)
Gross margin % 21.0% (17.8%) 38.8%pt 38.7%pt
Commercial and administration costs (444) (435) (9) (7) (8) 6
Research and development costs (386) (321) (65) (71) − 6
Joint ventures and associates 40 91 (51) (48) − (3)
Underlying operating profit/(loss) 307 (1,630) 1,937 1,956 − (19)
Underlying operating margin 5.9% (30.1%) 36.0%pt 36.1%pt
Financing costs (174) (1,573) 1,399 1,397 − 2
Underlying profit/(loss) before tax 133 (3,203) 3,336 3,353 − (17)
Taxation (29) (90) 61 61 − −
Profit/(loss) for the period from continuing operations 104 (3,293) 3,397 3,414 − (17)
Profit/(loss) for the period from discontinued operations 43 (33) 76 75 − 1
Underlying profit/(loss) for the period 147 (3,326) 3,473 3,489 − (16)
Underlying earnings/(loss) per share (p) (2) 1.76 (59.44) 61.20 61.42
Underlying revenue of £5.2bn reflected a more balanced contribution from our
business units. Services revenue increased 14% while OE fell 17%. Services
revenue included a £160m Civil Aerospace LTSA revenue catch-up compared with
£(866)m in the prior period.
Underlying gross profit of £1.1bn reflected the benefit of cost reductions
and a £166m Civil Aerospace LTSA catch-up. The prior period loss of £(965)m
included £(1.2)bn of one-off charges, mainly relating to negative Civil
Aerospace LTSA catch-ups.
Underlying operating profit was £307m, with a return to profit reflecting the
higher gross profit in the period. The R&D charge increase demonstrates
the continued focus on early stage technology and innovation. The lower JV and
associates contribution reflected the impact of lower services activity on our
MRO joint venture businesses.
Underlying profit before tax included financing costs of £(174)m with higher
charges relating to interest bearing debt and committed undrawn facilities
compared with the prior period. In 2020 H1, a £(1.5)bn one-off underlying
finance charge was taken to close out over hedged positions on the USD hedge
book.
Underlying profit included a tax charge of £(29)m (2020 H1: £(90)m), an
underlying rate of 21.8% compared with (2.8)% in the prior period.
Underlying EPS reflected the improvement in profit and an increase in weighted
average number of shares compared with the prior period, which was restated
and adjusted for the bonus factor of 2.91 to reflect the bonus element of the
rights issue in 2020.
Group Funds Flow Statement
( )
£ million 2021 H1 2020 H1 Change
Underlying operating profit/(loss) - total Group 291 (1,669) 1,960
Depreciation, amortisation and impairment 480 499 (19)
Lease payments (capital plus interest) (171) (190) 19
Expenditure on intangible assets (71) (176) 105
Expenditure on property, plant and equipment (124) (221) 97
Change in inventory (219) (301) 82
Movement in receivables/payables/contract balances (excluding Civil LTSA) (420) (1,541) 1,121
Civil Aerospace net LTSA balance change (108) 788 (896)
Movement on provisions (136) 132 (268)
Cash flows on settlement of excess foreign exchange contracts (303) (88) (215)
Fees on undrawn facilities and net interest (116) (26) (90)
Cash flow on financial instruments net of realised losses included in (52) (33) (19)
operating profit
Other (6) (35) 29
Trading cash flow (955) (2,861) 1,906
Contributions to defined benefit pensions in excess of underlying PBT charge (94) 94 (188)
Taxation paid (102) (34) (68)
Group free cash flow (1,151) (2,801) 1,650
Free cash flow from continuing operations (1,174) (2,862) 1,688
Free cash flow from discontinuing operations 23 61 (38)
Shareholder payments (2) (90) 88
Disposals and acquisitions (30) 2 (32)
Exceptional group restructuring (134) (87) (47)
Payment of financial penalties (156) (135) (21)
Other (30) (41) 11
Movement in net funds from cash flows (excluding lease liabilities) (1,503) (3,152) 1,649
Capital element of lease payments 147 149 (2)
Movement in net funds from cash flows (1,356) (3,003) 1,647
Change in short-term investments (1) 6 (7)
Net cash flow from changes in borrowings and lease liabilities 914 2,637 (1,723)
Statutory cash flow (443) (360) (83)
Key changes in the funds flow items are described below:
Expenditure on intangible assets: Expenditure of £(71)m included £(42)m
capitalised R&D (30 June 2020: £(152)m), lower than prior period
reflecting the maturity of Civil Aerospace engine programmes.
Capital expenditure: Investment of £(124)m was £97m lower than prior period
as a result of continued focus on prioritisation of business critical
infrastructure projects and efforts to reduce capital intensity in Civil
Aerospace in line with the ongoing cost reduction programme.
Increase in inventory: The £219m increase in the period was primarily driven
by planned inventory build in Power Systems to meet expected sales volumes in
the second half of the year alongside a modest increase in Civil Aerospace
expected to mostly unwind in the second half.
Movement in receivables/payables/contract balances (excluding Civil LTSA):
The movement of £(420)m was primarily driven by Civil Aerospace. This
included reduced deposits as well as lower amounts owed to suppliers, JVs and
RRSPs, driven in part by the reduced level of OE volumes. In addition, there
was a decrease in the Civil Aerospace OE engine concessions payable, due to
the timing of concession payments and aircraft deliveries, albeit the decrease
was lower than expected as some aircraft deliveries were delayed. It also
includes increased receivables in Defence reflecting the timing of customer
receipts.
Movement in underlying Civil Aerospace net LTSA creditor: In H1 2021, there
was a £108m reduction in the net LTSA balance as revenues recognised exceeded
invoiced flying hour receipts. This included £160m positive contract
catch-ups, which increased revenue recognised during the period. These
catch-ups were principally driven by improved shop visit cost expectations in
Business Aviation and the impact of specific customer negotiations with
airlines.
Movement on provisions: The £(136)m movement reflected a decrease in the
provision balance primarily driven by Trent 1000 provision utilisation and
progress on the restructuring programme.
Cash flows on settlement of excess derivative contracts: Relates to the cash
settlement costs in the period to 30 June 2021 for the offsetting foreign
exchange contracts that were entered into to reduce the size of the US Dollar
hedge book. The cash settlement costs of £1.7bn occur across 2020-2026, of
which £1.2bn remains to be paid in future periods.
Interest and fees: The net payment of £(116)m in the period was higher than
the prior period, reflecting £(81)m of net interest paid (2020 H1: £(26)m)
and commitment fees on undrawn facilities.
Contributions to defined benefit pensions: In H1 2021, cash contributions were
£94m higher than the pensions charge in the income statement (H1 2020: £94m
lower) reflecting payment deferrals from 2020 into H1 2021.
Taxation: Net cash tax payments in 2021 H1 were £(102)m (2020 H1: £(34)m).
The increase in 2021 H1 is mainly due to the timing of certain payments. Net
tax payments in 2021 H2 are expected to be significantly lower.
Disposals and acquisitions: The £(30)m outflow related to costs associated
with disposal activity.
Exceptional restructuring: Payments of £(134)m related to the restructuring
programme and associated initiatives, of which £20m related to restructuring
capital expenditure.
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 £(30)m includes timing of cash flows
on a prior period disposal where the Group retains 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
period, the Group drew down on its £2.0bn loan which is supported by an 80%
guarantee from UK Export Finance and repaid £300m of commercial paper under
the Covid Corporate Financing Facility and €750m (£639m) loan notes in line
with repayment terms.
Civil Aerospace
£ million 2021 H1 Organic Change (3) FX 2020 H1 (4) Change Organic Change (3)
Underlying revenue 2,168 (336) (12) 2,516 (14%) (13%)
Underlying OE revenue 722 (466) 1 1,187 (39%) (39%)
Underlying services revenue 1,446 130 (13) 1,329 9% 10%
Underlying gross profit/(loss) 380 1,940 (8) (1,552) (124%) (125%)
Gross margin % 17.5% 79.4%pt (61.7%) 79.2%pt
Commercial and administrative costs (145) 25 2 (172) (16%) (15%)
Research and development costs (237) (60) 3 (180) 32% 33%
Joint ventures and associates 41 (45) (2) 88 (53%) (52%)
Underlying operating profit/(loss) 39 1,860 (5) (1,816) (102%) 1,860
Underlying operating margin % 1.8% 74.1%pt (72.2%) 74.0%pt
Key operational metrics: 2021 H1 2020 H1 Change
Large engine deliveries 100 137 (27%)
Business jet engine deliveries 48 103 (53%)
Total engine deliveries 148 240 (38%)
Large engine LTSA flying hours (million) 3.2 3.9 (18%)
Large engine LTSA major refurbs 92 161 (43%)
Large engine LTSA check & repairs 192 310 (38%)
Total large engine LTSA shop visits 284 471 (40%)
Civil Aerospace operational performance in the first half was in line with
expectations. Large engine LTSA flying hours were 43% of the 2019 level, a 9
percentage point improvement from second half 2020. Domestic large engine
flying hours exceeded 2019 levels in May and made up approximately 20% of the
large engine activity in the period. Business aviation flying recovered to
2019 levels by the end of the first half. Engine deliveries were down from the
prior period, reflecting the build schedules of widebody airframer customers
and the transition between engine programmes for business aviation.
· Underlying revenue of £2.2bn, down 13% on the prior period. OE revenue
of £722m was down 39% reflecting the reduction in engine delivery volumes
required to fulfil airframer customer build schedules. Services revenue of
£1.4bn was up 10% on the prior year period and included £160m positive LTSA
catch-ups (2020 H1: £(866)m negative contract catch-ups), offset by lower
shop visit volumes.
· Underlying gross profit of £380m benefitted from strong operating cost
performance resulting from our restructuring programme and £166m positive
LTSA catch-ups. The £(1.6)bn gross loss in 2020 H1 included £(1.2)bn of
largely COVID-related one-time charges including £(814)m negative LTSA
catch-ups.
· Underlying operating profit of £39m reflected the good progress on
restructuring cost savings, which were mostly related to direct costs, offset
by the higher R&D charge and lower contribution from JVs and associates.
· Trading cash outflow was £(1,064)m in the first half, a significant
improvement on 2020 H1 reflecting the return to underlying profitability,
including restructuring savings, as well as a reduction in working capital
related outflows driven partly by the non-repeat of the H1 2020 unwind of
invoice factoring. OE concession outflows were higher than the prior period,
driving a £239m reduction in the concession liability on the balance sheet.
Outlook
The timing of civil aviation recovery, particularly for international travel,
remains uncertain and sensitive to the developments of the COVID-19 virus. For
2021, we expect the recovery in business aviation and domestic flying to be
sustained and a continuation of the gradual improvement in international
flying, which is constrained by the border restrictions in place worldwide. We
are encouraged by forward indicators, including vaccination programmes and
expect the recovery to accelerate once restrictions are lifted.
Defence
£ million 2021 H1 Organic Change (3) FX 2020 H1 Change Organic Change (3)
Underlying revenue 1,721 266 (98) 1,553 11% 17%
Underlying OE revenue 719 83 (42) 678 6% 12%
Underlying services revenue 1,002 183 (56) 875 15% 21%
Underlying gross profit 395 80 (17) 332 19% 24%
Gross margin % 23.0% 1.3%pt 21.4% 1.6%pt
Commercial and administrative costs (79) (5) 2 (76) 4% 7%
Research and development costs (47) − 2 (49) (4%) −
Joint ventures and associates − (3) − 3 − −
Underlying operating profit 269 72 (13) 210 28% 35%
Underlying operating margin % 15.6% 2.0%pt 13.5% 2.1%pt
( )
Our Defence business continues to perform well with resilient demand for OE
and services. First half growth was helped by the earlier timing of spare
engine and spare parts sales, which typically have been in the second half in
prior years. This favourable timing and mix in the first half is expected to
result in a stronger first half versus second half performance, and our full
year expectations for Defence are unchanged. The timing of order deposits
resulted in a lower cash conversion in the first half compared with the prior
year period but our full year expectation is unchanged.
Order intake was £1.2bn, representing a book-to-bill ratio of 0.7x. The order
book is strong following several years' of high intake. Order cover for 2022
is in excess of 70%.
· Underlying revenue increased by 17% to £1.7bn. This was driven by
improved operational performance that enabled earlier delivery of high margin
spare parts and spare engine sales, historically weighted towards the second
half. Actions taken to support the supply chain in 2020 have supported an
improvement in on-time delivery to customers, with services revenue up 21% and
OE revenue up 12%.
· Underlying gross profit of £395m was 24% higher year-over-year and the
gross margin expanded 1.3%pt to 23.0%. This reflected a positive mix towards
higher margin spare parts and spare engine sales.
· Underlying operating profit increased by 35% to £269m, with margin
2.0%pt higher at 15.6%. This reflected the beneficial phasing of revenue and
profit, together with strong cost control.
Outlook
We expect revenue and profit to be broadly stable in 2021, with a stronger
first half versus second half performance reflecting the earlier timing of
sales in addition to an increase in R&D investment expected during the
second half, in line with customer requirements and project phasing.
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
emerging interest in reducing their carbon footprint. Our work on the
Tempest programme in the UK is progressing well and we have tendered a strong
solution for the B-52 new engine programme in the US, which is being assessed
by the DoD with a decision on selection expected in the second half of this
year.
Power Systems
£ million 2021 H1 Organic Change (3) M&A (8) FX 2020 H1 (5) Change Organic Change (3)
Underlying revenue 1,181 (49) 24 (8) 1,214 (3%) (4%)
Underlying OE revenue 718 (105) 24 (5) 804 (11%) (13%)
Underlying services revenue 463 56 − (3) 410 13% 13%
Underlying gross profit 301 34 8 (4) 263 14% 13%
Gross margin % 25.5% 3.8%pt 21.7% 3.8%pt
Commercial and administrative costs (190) (37) (8) 3 (148) 28% 25%
Research and development costs (69) 12 − 1 (82) (16%) (14%)
Joint ventures and associates (1) − − (1) 0 - -
Underlying operating profit 41 9 − (1) 33 24% 26%
Underlying operating margin % 3.5% 0.8%pt 2.7% 0.8%pt
Power Systems saw increased activity levels during the first half with
improved order intake and growth in aftermarket revenue. This encouraging
start to the recovery supports our expectations for OE recovery starting in
the second half.
· Order intake of £1.4bn was 19% higher than the prior period and
represented a book-to-bill ratio of 1.2x in the period. Year on year growth
was strongest in marine, governmental and power generation end markets. Lower
carbon solutions are gaining interest from customers as we continue to develop
our product offerings in this area aligned with market progress and customer
demand.
· Underlying revenue broadly unchanged at £1.2bn with 13% growth in
aftermarket services as economic activity recovers in our end markets, offset
by a 13% reduction in OE revenue, in line with expectations.
· Underlying gross profit of £301m was 13% higher benefitting from a
positive mix effect due to the rise in higher-margin aftermarket spare parts
and reallocation of certain direct costs to commercial and administrative
costs. This was partly offset by lower utilisation in the period.
· Underlying operating profit of £41m with a margin of 3.5%, 0.8%pts
higher than prior period, reflecting the positive mix of activity. The
increase in commercial and administrative costs was largely due to one-off
items in the period that are not expected to repeat and timing differences
which are expected to unwind as well as the reallocation of certain costs from
gross profit. The reduction in R&D in the first half reflected the timing
of projects and is expected to increase in the second half.
Outlook
Revenues are expected to return to growth in the second half of 2021 as the
encouraging recovery in order intake converts into sales. This will help
improve factory utilisation and drive margin recovery in the second half
despite the expected increase in R&D spend. Our strategy to focus on
market share growth in China resulted in increased order intake compared with
the prior year which we expect to convert into strong sales growth in China
for the full year. Our target to return to 2019 levels of revenue by 2022 is
unchanged and supported by the order intake recovery we have seen year to
date.
ITP Aero
ITP Aero is classified as a discontinued business and held for sale in the
2021 H1 results.
£ million 2021 H1 Organic Change (3) FX 2020 H1 (4) Change Organic Change (3)
Underlying revenue 317 (79) (2) 398 (20%) (20%)
Underlying OE revenue 271 (47) (1) 319 (15%) (15%)
Underlying services revenue 46 (32) (1) 79 (42%) (41%)
Underlying gross profit 48 12 (1) 37 30% 32%
Gross margin % 15.1% 5.9%pt 9.3% 5.8%pt
Commercial and administrative costs (26) (4) 1 (23) 13% 17%
Research and development costs (15) − − (15) − −
Joint ventures and associates − (1) − 1 − −
Underlying operating profit 7 7 − − − −
Underlying operating margin % 2.2% 2.2%pt 0.0% 2.2%pt
ITP Aero has performed well in challenging conditions in the first half with
resilience in demand for its defence activities (approximately 30% of revenue)
but low levels of demand for its civil aerospace activities (approximately 70%
of revenue), impacted by the continued effect of COVID-19 on original
equipment manufacturer (OEM) customers.
· Underlying revenue was £317m, down 20% in 2020 H1, reflecting the
continued impact of COVID-19 on the civil aerospace market. Defence revenue
remained resilient.
· Underlying gross profit of £48m, up 32%, benefitted from a favourable
mix of higher margin products, particularly in defence.
· Underlying operating profit was £7m, a small improvement on the
break-even result in 2020 H1 driven mostly by the increase in gross profit and
saving from headcount reductions in 2020.
· Hucknall and fabrications: As part of the footprint review and
reorganisation of the Group's Civil Aerospace activities announced in 2020,
approximately 700 people and all activities carried out at Rolls-Royce's
Hucknall site in the UK transferred to ITP Aero in May 2021 along with certain
fabrication supply chain activities.
Notes to financial tables and commentary on pages 1-14:
(1 )Discontinued operations relate to the statutory and underlying results
of ITP Aero and are presented net of internal sales and related consolidation
adjustments.
(2 )2020 H1 earnings per share has been adjusted to reflect the 2.91 bonus
element of the rights issue that was completed on 12 November 2020.
(3 )Organic change at constant translational currency (constant currency)
applying FY20 average rates to 2020 H1 and 2021 H1, excluding M&A. All
commentary is provided on an organic basis unless otherwise stated.
(4 )The underlying results for Civil Aerospace and ITP Aero for 2020 H1
have been restated to reflect the transfer of the Hucknall site with
associated fabrications activities from Civil Aerospace to ITP Aero during
2021.
(5 )The underlying results for Power Systems for 2020 have been restated to
reclassify the Civil Nuclear Instrumentation & Control business as other
businesses, consistent with FY20.
(6 )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.
(7 )The underlying results of Corporate and inter-segment activities
includes the results of the Group's SMR, electrical and UK civil nuclear
activities.
(8 )M&A includes 2020 Power Systems acquisitions comprising of Kinolt
Group S.A and Servowatch Systems Limited (SSL).
(9) Working capital includes inventory, trade receivables, payables and
similar assets and liabilities.
(10) Net debt includes £57m (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.
(11) 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 together with ITP Aero held for sale at 30 June 2021.
Condensed consolidated interim financial statements
Condensed consolidated income statement
For the half-year ended 30 June 2021
Restated
Half-year to 30 June 2021 Half-year to
30 June 2020 (1)
Notes £m £m
Continuing operations
Revenue 2 5,159 5,673
Cost of sales (2) (4,345) (6,263)
Gross profit/(loss) 2 814 (590)
Commercial and administrative costs 2 (424) (421)
Research and development costs 2, 3 (390) (678)
Share of results of joint ventures and associates 38 72
Operating profit/(loss) 38 (1,617)
(Loss)/gain arising on acquisition and disposal of businesses 19 (7) 2
Profit/(loss) before financing and taxation 31 (1,615)
Financing income (3) 4 280 23
Financing costs (3) 4 (197) (3,621)
Net financing income/(costs) 83 (3,598)
Profit/(loss) before taxation 114 (5,213)
Taxation 5 280 (48)
Profit/(loss) for the period from continuing operations 394 (5,261)
Discontinued operations
Profit/(loss) for the period 16 (117)
Costs of disposal of discontinued operations (17) −
Loss for the period from discontinued operations 19 (1) (117)
Profit/(loss) for the period 393 (5,378)
Attributable to:
Ordinary shareholders 393 (5,380)
Non-controlling interests − 2
Profit/(loss) for the period 393 (5,378)
Other comprehensive (expense)/income (145) 683
Total comprehensive income/(expense) for the period 248 (4,695)
Profit/(loss) per ordinary share attributable to ordinary shareholders: 6
From continuing operations:
Basic (4) 4.73p (94.03)p
Diluted (4) 4.72p (94.03)p
From continuing and discontinued operations:
Basic( 4) 4.72p (96.12)p
Diluted (4) 4.71p (96.12)p
Underlying earnings per ordinary share are shown in note 6.
(1) The comparative figures have been restated to reflect ITP Aero being
classified as a discontinued operation. Further detail can be found in note
19.
(2 )Cost of sales includes a net charge for expected credit losses of
£48m (2020: £104m).
(3) Included within financing are fair value changes on derivative
contracts. Further details can be found in notes 2, 4 and 13.
(4) The comparative figures for earnings per share have been adjusted to
reflect the bonus element of the rights issue that completed on 12 November
2020 - see note 6. Payments to ordinary shareholders in respect of the period
are £nil (2020: £nil).
Condensed consolidated statement of comprehensive income
For the half-year ended 30 June 2021
Half-year to 30 June 2021 Half-year to
30 June 2020
Notes £m £m
Profit/(loss) for the period 393 (5,378)
Other comprehensive income (OCI)
Actuarial movements in post-retirement schemes 16 (12) 393
Share of OCI of joint ventures and associates (4) (1)
Related tax movements 16 (130)
Items that will not be reclassified to profit or loss − 262
Foreign exchange translation differences on foreign operations (174) 444
Reclassified to income statement on disposal of businesses − 3
Movement on fair values debited to cash flow hedge reserve (41) (6)
Reclassified to income statement from cash flow hedge reserve 38 (19)
Share of OCI of joint ventures and associates 32 (9)
Related tax movements − 8
Items that may be reclassified to profit or loss (145) 421
Total other comprehensive (expense)/income (145) 683
Total comprehensive income/(expense) for the period 248 (4,695)
( )
Attributable to:
Ordinary shareholders 248 (4,697)
Non-controlling interests − 2
Total comprehensive income/(expense) for the period 248 (4,695)
( ) ( ) ( ) ( )
Total comprehensive income/(expense) for the period attributable to ordinary ( ) ( ) ( )
shareholders arises from:
Continuing operations ( ) 316 (4,646)
Discontinued operations ( ) (68) (51)
Total comprehensive income/(expense) for the period attributable to ordinary ( ) 248 (4,697)
shareholders
Condensed consolidated balance sheet
At 30 June 2021
30 June 31 December
2021 2020
Notes £m £m
ASSETS
Intangible assets 7 4,063 5,145
Property, plant and equipment 8 3,992 4,515
Right-of-use assets 9 1,266 1,405
Investments - joint ventures and associates 413 394
Investments - other 24 19
Other financial assets 13 537 687
Deferred tax assets 2,062 1,826
Post-retirement scheme surpluses 16 914 907
Non-current assets 13,271 14,898
Inventories 3,673 3,690
Trade receivables and other assets 10 5,068 5,455
Contract assets 12 1,402 1,510
Taxation recoverable 79 117
Other financial assets 13 40 107
Short-term investments 1 -
Cash and cash equivalents 2,915 3,452
Current assets 13,178 14,331
Assets held for sale 19 2,306 288
TOTAL ASSETS 28,755 29,517
LIABILITIES
Borrowings and lease liabilities 14 (221) (1,272)
Other financial liabilities 13 (663) (608)
Trade payables and other liabilities 11 (5,720) (6,653)
Contract liabilities 12 (3,811) (4,187)
Current tax liabilities (96) (154)
Provisions for liabilities and charges 15 (568) (826)
Current liabilities (11,079) (13,700)
Borrowings and lease liabilities 14 (7,693) (6,058)
Other financial liabilities 13 (2,462) (3,046)
Trade payables and other liabilities 11 (1,792) (1,922)
Contract liabilities 12 (6,427) (6,245)
Deferred tax liabilities (392) (494)
Provisions for liabilities and charges 15 (1,152) (1,119)
Post-retirement scheme deficits 16 (1,444) (1,580)
Non-current liabilities (21,362) (20,464)
Liabilities associated with assets held for sale 19 (904) (228)
TOTAL LIABILITIES (33,345) (34,392)
NET LIABILITIES (4,590) (4,875)
EQUITY
Called-up share capital 1,674 1,674
Share premium 1,012 1,012
Capital redemption reserve 164 162
Cash flow hedging reserve (63) (94)
Merger reserve 650 650
Translation reserve 348 524
Accumulated losses (8,399) (8,825)
Equity attributable to ordinary shareholders (4,614) (4,897)
Non-controlling interests 24 22
TOTAL EQUITY (4,590) (4,875)
Condensed consolidated cash flow statement
For the half-year ended 30 June 2021
Notes Half-year to 30 June 2021 Half-year to
£m 30 June 2020
£m
Reconciliation of cash flows from operating activities
Operating profit/(loss) from continuing operations 38 (1,617)
Operating loss from discontinued operations (93) (152)
Operating loss (1) (55) (1,769)
Loss on disposal of property, plant and equipment 2 19
Share of results of joint ventures and associates (38) (73)
Dividends received from joint ventures and associates 14 28
Amortisation and impairment of intangible assets 7 159 550
Depreciation and impairment of property, plant and equipment 8 243 495
Depreciation and impairment of right-of-use assets 9 128 513
Adjustment of amounts payable under residual value guarantees within lease (3) (42)
liabilities (2)
Impairment of and other movements on investments 2 19
Decrease in provisions (211) (130)
Increase in inventories (219) (301)
Movement in trade receivables/payables and other assets/liabilities (136) (1,925)
Movement in contract assets/liabilities (178) 642
Financial penalties paid (3) (156) (135)
Cash flows on other financial assets and liabilities held for operating (45) (35)
purposes
Interest received 3 12
Net defined benefit post-retirement cost/(credit) recognised in loss before 16 26 (116)
financing
Cash funding of defined benefit post-retirement schemes 16 (131) (38)
Share-based payments 18 1
Net cash outflow from operating activities before taxation (577) (2,285)
Taxation paid (102) (34)
Net cash outflow from operating activities (679) (2,319)
Cash flows from investing activities
Net movement in unlisted investments (6) (14)
Additions of intangible assets 7 (89) (204)
Disposals of intangible assets 7 2 10
Purchases of property, plant and equipment (126) (226)
Disposals of property, plant and equipment 5 1
Disposals of right-of-use assets - 7
Acquisition of businesses 19 - (8)
Disposal of businesses 19 (8) 10
Movement in investments in joint ventures and associates and other movements (2) (4)
on investments
Movement in short-term investments (1) −
Net cash outflow from investing activities (225) (428)
Cash flows from financing activities
Repayment of loans (4) (942) (21)
Proceeds from increase in loans (4) 2,003 2,807
Capital element of lease payments (147) (149)
Net cash flow from increase in borrowings and leases 914 2,637
Interest paid (84) (38)
Interest element of lease payments (31) (39)
Fees paid on undrawn facilities (35) −
Cash flows on settlement of excess derivative contracts (5) 4 (303) (88)
Movement in short-term investments − 6
Purchase of ordinary shares − (1)
NCI on formation of subsidiary 2 −
Redemption of C Shares (2) (90)
Net cash inflow from financing activities 461 2,387
Change in cash and cash equivalents (443) (360)
Cash and cash equivalents at 1 January 3,496 4,435
Exchange (losses)/gains on cash and cash equivalents (75) 156
Cash and cash equivalents at 30 June (6) 2,978 4,231
( )
( )
Condensed consolidated cash flow statement continued
For the half-year ended 30 June 2021
( )
(1)( )During the period, the Group received £10m (30 June 2020: £17m)
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. Where 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
draw down of a £2,000m loan (supported by an 80% guarantee from UK Export
Finance). Further details are provided in note 15.
(5 )During the period, the Group incurred a cash outflow of £303m as a
result of settling foreign exchange contracts that were originally in place to
sell $3,297m receipts. Further detail is provided in note 4.
(6) 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 period includes the sale of goods and services to joint ventures and
associates - see note 18.
Half-year to 30 June 2021 Half-year to
£m 30 June 2020
£m
Reconciliation of movements in cash and cash equivalents to movements in net
debt
Change in cash and cash equivalents (443) (360)
Cash flow from increase in borrowings and leases (914) (2,637)
Less: settlement of related derivatives included in fair value of swaps below 6 −
Cash flow from decrease/(increase) in short-term investments 1 (6)
Change in net debt resulting from cash flows (1,350) (3,003)
New leases and other non-cash adjustments to lease liabilities and borrowings (17) 18
Exchange gains/(losses) on net debt 2 (2)
Fair value adjustments 144 (302)
Reclassifications 19 −
Movement in net debt (1,202) (3,289)
Net debt at 1 January (3,827) (1,236)
Net debt at 30 June excluding the fair value of swaps (5,029) (4,525)
Fair value of swaps hedging fixed rate borrowings 57 456
Net debt at 30 June (4,972) (4,069)
Condensed consolidated cash flow statement continued
For the half-year ended 30 June 2021
The movement in net debt (defined by the Group as including the items shown
below) is as follows:
At 1 January Funds flow Exchange differences Fair value adjustments Reclassifi-cations (2) ( ) Other movements At 30 June
£m £m £m £m £m £m £m
2021
Cash at bank and in hand 940 (122) (13) - (38) - 767
Money market funds 669 (527) - - - - 142
Short-term deposits 1,843 221 (58) - - - 2,006
Cash and cash equivalents (per balance sheet) 3,452 (428) (71) - (38) - 2,915
Cash and cash equivalents included within assets held for sale 51 (16) (4) - 38 - 69
Overdrafts (7) 1 - - - - (6)
Cash and cash equivalents 3,496 (443) (75) - - - 2,978
(per cash flow statement)
Short-term investments − 1 - - - - 1
Other current borrowings (1,006) 948 1 36 18 - (3)
Non-current borrowings (4,274) (2,003) 45 108 88 (3) (6,039)
Borrowings included within liabilities held for sale − - - - (77) - (77)
Lease liabilities (2,043) 145 31 - 15 (14) (1,866)
Lease liabilities included within liabilities held for sale − 2 - - (25) - (23)
Financial liabilities (7,323) (908) 77 144 19 (17) (8,008)
Net debt excluding fair value of swaps (3,827) (1,350) 2 144 19 (17) (5,029)
Fair value of swaps hedging fixed rate borrowings (1) 251 (6) (41) (147) - - 57
Net debt (3,576) (1,356) (39) (3) 19 (17) (4,972)
Net debt (excluding lease liabilities) (1,533) (3,083)
2020
Cash at bank and in hand 825 110 36 - - - 971
Money market funds 1,095 (44) - - - - 1,051
Short-term deposits 2,523 (426) 120 - - - 2,217
Cash and cash equivalents (per balance sheet) 4,443 (360) 156 - - - 4,239
Overdrafts (8) - - - - - (8)
Cash and cash equivalents 4,435 (360) 156 - - - 4,231
(per cash flow statement)
Short-term investments 6 (6) - - - - -
Other current borrowings (427) (283) (3) (31) (690) - (1,434)
Non-current borrowings (2,896) (2,503) (5) (271) 690 - (4,985)
Lease liabilities (2,354) 149 (150) - - 18 (2,337)
Financial liabilities (5,677) (2,637) (158) (302) - 18 (8,756)
Net debt excluding fair value of swaps (1,236) (3,003) (2) (302) - 18 (4,525)
Fair value of swaps hedging fixed rate borrowings 243 - - 213 - - 456
Net debt (993) (3,003) (2) (89) - 18 (4,069)
Net funds/(debt) (excluding lease liabilities) 1,361 (1,732)
(1) 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 (30 June
2021: £141m, 31 December 2020: £293m) and the element of fair value relating
to exchange differences on the underlying principal of derivatives in cash
flow hedges (30 June 2021: £(84)m, 31 December 2020: £(42)m).
(2 )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 draw down of the facility during the current
period.
Condensed consolidated statement of changes in equity
For the half-year ended 30 June 2021
Attributable to ordinary shareholders
Share capital Share premium Capital redemption reserve Cash flow hedging reserve Merger reserve Translation reserve Accumulated losses (1) Total Non-controlling interests (NCI) Total equity
£m £m £m £m £m £m £m £m £m £m
At 1 January 2021 1,674 1,012 162 (94) 650 524 (8,825) (4,897) 22 (4,875)
Profit for the period - - - - - - 393 393 - 393
Foreign exchange translation differences on foreign operations - - - - - (174) - (174) - (174)
Movement on post-retirement schemes - - - - - - (12) (12) - (12)
Fair value movement on cash flow hedges - - - (41) - - - (41) - (41)
Reclassified to income statement from cash flow hedge reserve - - - 38 - - - 38 - 38
OCI of joint ventures and associates - - - 32 - - (4) 28 - 28
Related tax movements - - - 2 - (2) 16 16 - 16
Total comprehensive income/(expense) for the period - - - 31 - (176) 393 248 - 248
Issues of ordinary shares - - - - - - - - - -
Redemption of C Shares (2) - - 2 - - - (2) - - -
Share-based payments - direct to equity (3) - - - - - - 18 18 - 18
NCI on formation of subsidiary - - - - - - - - 2 2
Related tax movements - - - - - - 17 17 - 17
Other changes in equity in the period - - 2 - - - 33 35 2 37
At 30 June 2021 1,674 1,012 164 (63) 650 348 (8,399) (4,614) 24 (4,590)
At 1 January 2020 386 319 159 (96) 650 397 (5,191) (3,376) 22 (3,354)
(Loss)/profit for the period - - - - - - (5,380) (5,380) 2 (5,378)
Foreign exchange translation differences on foreign operations - - - - - 444 - 444 - 444
Reclassified to the income statement on disposal of businesses - - - - - 3 - 3 - 3
Movement on post-retirement schemes - - - - - - 393 393 - 393
Fair value movement on cash flow hedges - - - (6) - - - (6) - (6)
Reclassified to income statement from cash flow hedge reserve - - - (19) - - - (19) - (19)
OCI of joint ventures and associates - - - (9) - - (1) (10) - (10)
Related tax movements - - - 6 - 2 (130) (122) - (122)
Total comprehensive income/(expense) for the period - - - (28) - 449 (5,118) (4,697) 2 (4,695)
Arising on issues of ordinary shares - - - - - - - - - -
Issue of C Shares (2) - - (89) - - - 1 (88) - (88)
Redemption of C Shares - - 91 - - - (91) - - -
Ordinary shares purchased - - - - - - (1) (1) - (1)
Shares issued to employee share trust - - - - - - - - - -
Share-based payments - direct to equity (3) - - - - - - 1 1 - 1
Related tax movements - - - - - - 13 13 - 13
Other changes in equity in the period - - 2 - - - (77) (75) - (75)
At 30 June 2020 386 319 161 (124) 650 846 (10,386) (8,148) 24 (8,124)
(1 )At 30 June 2021, 34,938,153 ordinary shares with a net book value of
£78m (30 June 2020: 9,345,059 ordinary shares with a net book value of £80m)
were held for the purpose of share-based payment plans and included in
accumulated losses. During the period, 4,928,564 ordinary shares with a net
book value of £11m (30 June 2020: 3,217,241 ordinary shares with a net book
value of £28m) vested in share-based payment plans. During the period, the
Company acquired none (30 June 2020: 85,724) of its ordinary shares via
reinvestment of dividends received on its own shares and purchased none (30
June 2020: none) of its ordinary shares through purchases on the London Stock
Exchange.
(2 )In Rolls-Royce Holdings plc's own Financial Statements, C Shares are
issued from the merger reserve. This reserve was created by a scheme of
arrangement in 2011. As this reserve is eliminated on consolidation, in the
consolidated financial statements, the C Shares are shown as being issued from
the capital redemption reserve.
(3) Share-based payments - direct to equity is the share-based payment
charge for the period less the actual cost of vesting excluding those vesting
from own shares and cash received on share-based schemes vesting.
Notes to the interim financial statements
1 Basis of preparation and accounting policies
Reporting entity
Rolls-Royce Holdings plc (the 'Company') is a public company incorporated
under the Companies Act 2006 and domiciled in the UK. These condensed
consolidated interim financial statements of the Group as at and for the six
months ended 30 June 2021 consist of the consolidation of the financial
statements of the Group 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 2020 (Annual Report 2020) are available upon request from
the Company Secretary, Rolls-Royce Holdings plc, Kings Place, 90 York Way,
London, N1 9FX. The Board of Directors approved the condensed consolidated
interim financial statements on 5 August 2021.
Statement of compliance
These condensed consolidated interim financial statements have been prepared
on the basis of the policies set out in the 2020 Annual Report and in
accordance with UK adopted IAS 34 Interim Financial Reporting and the
Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial
Conduct Authority. They do not include all of the information required for
full annual statements and should be read in conjunction with the 2020 Annual
Report.
The interim figures up to 30 June 2021 and 2020 are unaudited. 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.
The financial statements for the year ending 31 December 2021 will be prepared
in accordance with IFRS as adopted by the UK Endorsement Board. This change in
basis of preparation is required by UK company law for the purposes of
financial reporting as a result of the UK's exit from the EU on 31 January
2020 and the cessation of the transition period on 31 December 2020. This
change does not constitute a change in accounting policy, rather a change in
framework which is required to group the use of IFRS in company law. There is
no impact on the recognition, measurement or disclosure between the two
frameworks in the period reported.
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, a transition project, in relation to IBOR reform, to assess and
implement changes to systems, processes, risk and valuation models, as well as
managing related tax and accounting implications has been initiated. 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
will be making amendments to the contractual terms of IBOR-referenced
floating-rate debt, swaps and foreign exchange contracts, and updating any
relevant hedge designations in the second half of the year. 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. 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.
As at 30 June 2021, the ITP Aero business has been classified as held for sale
following activities undertaken in the period 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. ITP Aero continues to be
disclosed as an operating segment of the business in line with IFRS 8
Operating Segments and consequently has been classified as a discontinued
operation at 30 June 2021. See notes 2 and 19 for more detail. Bergen Engines
AS and Civil Nuclear Instrumentation & Control are recognised as disposal
groups held for sale but do not meet the criteria of a discontinued operation.
Post balance sheet events
The Group entered into an agreement to sell Bergen Engines on 3 August 2021.
Further detail is included in note 19. On 4 August 2021, the Group finalised
an amendment to extend a £1bn bank loan facility from a maturity date of 15
October 2022 to a maturity date of 15 January 2024.
1 Basis of preparation and accounting policies continued
Going concern
In assessing the adoption of the going concern basis in the condensed
consolidated interim financial statements, the Directors have considered the
Group's forecast cash flows and available liquidity over an eighteen-month
period to February 2023, taking into account the Group's principal risks and
uncertainties.
The COVID-19 pandemic continues to have an impact on the Group due to ongoing
global travel restrictions. The speed of vaccination programmes and efficacy
of vaccines against different variants of the virus 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
condensed consolidated interim financial statements. Recognising the
challenges of reliably estimating and forecasting the timing of recovery of
demand, the Directors have considered a base case forecast (reflecting the
Directors current expectations of future trading) and a 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. 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 30 June 2021, approximately
8,000 roles had been removed. The Group raised £7.3bn of additional funding
during 2020 through a combination of equity and debt and in March 2021,
secured a further £1bn term-loan facility, 80% of which is guaranteed by UK
Export Finance (UKEF), repayable in March 2026.
Liquidity and borrowings
At 30 June 2021, the Group had liquidity of £7.5bn including cash and cash
equivalents of £3.0bn and undrawn facilities of £4.5bn.
On 4 August 2021, the Group finalised an amendment to extend the £1bn bank
loan facility (currently undrawn) from a maturity date of 15 October 2022 to a
maturity date of 15 January 2024.
The Group's committed borrowing facilities at 30 June 2021 and 28 February
2023 are set out below. None of the facilities are subject to any financial
covenants or rating triggers which could accelerate repayment.
(£m) 30 June 2021 28 February 2023
Issued Bond Notes (1) 3,995 3,995
Other loans 81 37
UKEF £2bn loan (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 10,576 10,532
(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 maturities 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
28 February 2023.
Forecasts
The Group's base case forecast assumes the continuation of a steady recovery
in customer confidence in the aftermath of the COVID-19 pandemic. Vaccination
programmes are rolled out but the efficacy of vaccines over different variants
and differing governmental quarantine and testing requirements and travel
restrictions are expected to hinder the recovery of demand in the short term,
in particular in relation to the civil aviation industry.
The downside forecast assumes that Civil widebody engine flying hours (EFHs)
remain at current levels when compared with 2019 EFHs over the 18-month
period to February 2023, with recovery subdued due to ongoing infection rates
and an increase in new variants of the virus, resulting in caution in opening
borders to international travel and no upward trend in EFH until March 2023,
resulting in a much slower recovery in demand compared with the base case.
The proceeds of at least £2bn from planned disposals, as announced in August
2020, have not been included when assessing the going concern, although
completion of these disposals is anticipated within the eighteen-month period
being considered.
Conclusion
After reviewing the current liquidity position, the cash flow forecasts
modelled under both the base case and downside, and the stress testing of
potential risks and uncertainties, the Directors consider that the Group has
sufficient liquidity to continue in operational existence for a period of at
least eighteen 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.
1 Basis of preparation and accounting policies continued
Climate change
In preparing the condensed consolidated interim financial statements, the
Directors have considered the impact of climate change, particularly in the
context of the disclosures included in the Strategic Report in the 2020 Annual
Report and the stated net zero targets. These considerations did not have a
material impact on the financial reporting judgements and estimates,
consistent with the assessment that climate change is not expected to have a
significant impact on the Group's going concern assessment to February 2023
nor the viability of the Group over the next five years. The following
specific points were considered:
- The Group continues to invest in new technologies including 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.
- The Group continues to invest in onsite renewable energy generation
solutions for the Group's facilities and investment is included in the five
year forecasts to enable the Group to meet it's 2030 target for zero
greenhouse gas emissions (scope 1 and 2) from operations and facilities.
- Management has considered the impact of climate change on a number of key
estimates within the financial statements, including:
- the estimates of future cash flows used in impairment assessments of
the carrying value of non-current assets (such as programme intangible assets
and goodwill);
- the estimates of future profitability used in assessing the
recoverability of deferred tax assets in the UK (see note 5); and
- the long-term contract accounting assumptions, such as the level of
EFHs assumed, which consider the future expectations of consumer and airline
customer behaviour (see note 12).
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 2020, 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 2020 Annual Report and are summarised below. During the
period, the Group has reassessed these and where necessary updated the key
judgements and estimation uncertainties. Sensitivities for key sources of
estimation uncertainty are disclosed where this is appropriate and
practicable.
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
Aerospace as at 30 June 2021, the following changes in estimate would result
How performance on long-term aftermarket contracts should be measured. Uncertainty remains in the short-term over the timing of recovery of demand, in catch-up adjustments being recognised in the period in which the estimates
in particular in relation to the civil aviation industry, in the aftermath of change (at underlying rates):
Whether any costs should be treated as wastage. the COVID-19 pandemic. Estimates of future revenue within Civil Aerospace are
based upon future EFH forecasts, influenced by assumptions over the time - A reduction in forecast EFHs of 15% over the remaining term of the
Whether sales of spare engines to joint ventures are at fair value. period and profile over which the aerospace industry will recover. contracts would decrease LTSA income and to a lesser extent costs, resulting
in a catch-up adjustment of £100m - £130m. An estimated 90% of this would be
expected to be a reduction in revenue with the remainder relating to onerous
contracts which would be an increase in cost of sales.
- A 5% increase or decrease in shop visit costs over the life of the
contracts would lead to a catch-up adjustment of £140m.
- A 2% increase or decrease in revenue over the life of the contracts would
lead to a catch-up adjustment of £200m.
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 in the main Civil Aerospace widebody programmes or a 5%
suitable taxable profits will arise in the UK to utilise the deferred tax change in the number of shop visits (driven by EFHs which are influenced by a
assets. This is largely driven by the Civil Aerospace business and the number of factors including climate change) over the remaining life of the
estimates described above in 'revenue recognition'. programmes, would result in an increase/decrease in the deferred tax asset
recognised by around £150m, which equates to around a £1.2bn change in
profit.
Business combinations Identification of acquired assets and liabilities.
Discontinued operations and assets held for sale Whether the ITP Aero business 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 30 June 2021 included £339m relating to the cost of
end of engine leases. Amounts due can vary depending on the level of meeting these residual value guarantees in the Civil Aerospace business. Up to
utilisation of the engines, overhaul activity prior to the end of the £13m is payable in the next 12 months, £139m is due over the following four
contract, and decisions taken on whether ongoing access to the assets is 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 A slower than expected recovery in the aftermath of the COVID-19 pandemic
intangible assets) is dependent on the estimates of future cash flows which could result in a deterioration in future cash flow forecasts that support
are influenced by assumptions over the recovery of the industries in which the programme intangible assets. A 5% deterioration in EFHs (and hence future cash
Group operate and the discount rates applied. flows) across the life of the Civil Aerospace programmes would result in
programme intangible assets that have previously been subject to impairment
incurring an additional impairment of £50m.
For intangible assets where there is existing headroom in the impairment test
(and thus no impairment) but where deteriorations in key assumptions over the
next 12 months could lead to an impairment, any of the following individual
changes in assumptions would cause the recoverable amount of the programme
assets to equal the carrying value:
- A reduction in engine sales that are forecast but not contracted by 64%.
- An increase in costs of 8%.
Provisions Whether any costs should be treated as wastage. 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
including the development of the modified HPT blade and estimates to Trent £60m-£100m increase in the Trent 1000 exceptional costs provision.
1000 long-term contracts assessed as onerous.
A reduction in Civil Aerospace widebody flying hours of 15% over the remaining
Estimates of the future revenues and costs to fulfil onerous contracts. term of the contracts and the associated decrease in revenues and costs could
lead to a £10m - £15m increase in the provision for contract losses.
Post-retirement benefits The valuation of the Group's defined benefit pension schemes are based on A reduction in the discount rate from 1.95% to 1.70% 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 £425m. 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 21.7 years (male aged 65) and from
23.1 years (male aged 45) would increase the defined benefit obligations of
the RR UK Pension Fund by approximately £380m.
Where applicable, it is assumed that 40% (31 December 2020: 40%) of members 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 act 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
Power Systems - development, manufacture, marketing and sales of reciprocating engines,
power systems and nuclear systems for civil power generation
Defence - development, manufacture, marketing and sales of military aero engines,
naval engines, submarine nuclear power plants and aftermarket services
ITP Aero - design, research and development, manufacture and casting, assembly and
test of aeronautical engines and gas turbines, and maintenance, repair and
overhaul (MRO) services
For the year ended 31 December 2020, the four divisions set out above 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 other businesses.
Other businesses include the trading results of the Bergen Engines AS business
(the Group signed a sales agreement on 3 August 2021), the results of the
Civil Nuclear Instrumentation & Control business (the Group signed a sales
agreement on 7 December 2020), 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 segmental analysis for 2020 has been restated to reflect the 2021
definition of other businesses.
During the period to 30 June 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. The segmental
analysis for 2020 has been restated to reflect these activities in the ITP
Aero segment in line with 2021. As a result of this transfer and the
commitment to sell ITP Aero, it has been classified as held for sale at 30
June 2021 and as a discontinued operation for both statutory and underlying
results.
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 and 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 period to 30 June 2021, the Group was a net purchaser (30 June 2020:
net purchaser) of USD, with the consequence that the achieved exchange rate
GBP:USD of 1.39 (30 June 2020: 1.24) on settled contracts was similar to the
average spot rate in the period. In the second half of 2021, the Group expects
to return to being a net seller of USD, at an expected 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 period to 30 June 2021, the Group took the opportunity to
further reduce the size of the USD hedge book by an additional $0.9bn by
settling the mark-to market at zero cost. The derivatives relating to this
underlying charge have been subsequently excluded from the effective 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 period to 30 June 2021, cash settlement costs of £303m were incurred
(30 June 2020: £88m).
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
- 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 period 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 more relevant to an understanding
of the Group's financial performance, as exceptional items are identified by
virtue of their size, nature or incidence.
In determining whether an event or transaction is exceptional, management
considers quantitative as well as qualitative factors such as the frequency or
predictability of occurrence. Examples of exceptional items include one-time
costs and charges in respect of aerospace programmes, costs of restructuring
programmes and one-time past service charges and credits on 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 advance corporation tax recognised are also excluded.
See page 31 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) Power Systems (2) Defence Other businesses Corporate and inter-segment (3) Total underlying from continuing operations
£m £m £m £m £m £m
For the half-year ended 30 June 2021
Underlying revenue from sale of original equipment 722 718 719 79 1 2,239
Underlying revenue from aftermarket services 1,446 463 1,002 73 4 2,988
Total underlying revenue 2,168 1,181 1,721 152 5 5,227
Gross profit 380 301 395 20 1 1,097
Commercial and administrative costs (145) (190) (79) (10) (20) (444)
Research and development costs (237) (69) (47) (5) (28) (386)
Share of results of joint ventures and associates 41 (1) - - - 40
Underlying operating profit/(loss) 39 41 269 5 (47) 307
For the half-year ended 30 June 2020
Underlying revenue from sale of original equipment 1,187 804 678 64 (5) 2,728
Underlying revenue from aftermarket services 1,329 410 875 70 (2) 2,682
Total underlying revenue 2,516 1,214 1,553 134 (7) 5,410
Gross (loss)/profit (1,552) 263 332 9 (17) (965)
Commercial and administrative costs (172) (148) (76) (16) (23) (435)
Research and development costs (180) (82) (49) (10) - (321)
Share of results of joint ventures and associates 88 - 3 - - 91
Underlying operating (loss)/profit (1,816) 33 210 (17) (40) (1,630)
(1)( )The underlying results for Civil Aerospace and ITP Aero (shown as
underlying results from discontinued operations below) for 30 June 2020 have
been restated to reflect the changes to activity during 2021 as described
above.
(2) The underlying results for Power Systems for 30 June 2020 have been
restated to reclassify the Civil Nuclear Instrumentation & Control
business as Other businesses.
(3) The underlying results of Corporate and inter-segment activities include
the results of the Group's SMR, electrical and UK nuclear activities. As the
Group increases its investment in these important new technologies it is
anticipated that the result of these activities will be combined and presented
as an additional segment in the full-year financial statements in line with
how performance will be reviewed by the entity's Chief Operating Decision
Maker.
2 Analysis by business segment continued
Reconciliation to statutory results
Total underlying Total underlying Underlying adjustments and adjustments Discontinued operations (1) Group statutory results
from continuing operations Discontinued operations to FX
ITP Aero Inter-segment
£m £m £m £m £m £m £m
For the half-year ended 30 June 2021
Revenue from sale of original equipment 2,239 271 (139) 2,371 (4) (132) 2,235
Revenue from aftermarket services 2,988 46 (32) 3,002 (64) (14) 2,924
Total revenue 5,227 317 (171) 5,373 (68) (146) 5,159
Gross profit/(loss) 1,097 48 (23) 1,122 (340) 32 814
Commercial and administrative costs (444) (26) - (470) 3 43 (424)
Research and development costs (386) (15) - (401) (7) 18 (390)
Share of results of joint ventures and associates 40 - - 40 (2) - 38
Operating profit/(loss) 307 7 (23) 291 (346) 93 38
Loss arising on the acquisition and disposal of businesses - - - - (7) - (7)
Profit/(loss) before financing and taxation 307 7 (23) 291 (353) 93 31
Net financing (174) 1 - (173) 257 (1) 83
Profit/(loss) before taxation 133 8 (23) 118 (96) 92 114
Taxation (29) 54 4 29 342 (91) 280
Discontinued operations - - - - - (1) (1)
Profit/(loss) for the period 104 62 (19) 147 246 - 393
Profit for the period from continuing operations 104 394
Profit/(loss) for the period from discontinued operations 43 (1)
Attributable to:
Ordinary shareholders 147 246 - 393
Non-controlling interests - - - -
For the half-year ended 30 June 2020
Revenue from sale of original equipment 2,728 319 (197) 2,850 (36) (122) 2,692
Revenue from aftermarket services 2,682 79 (50) 2,711 299 (29) 2,981
Total revenue 5,410 398 (247) 5,561 263 (151) 5,673
Gross (loss)/profit (965) 37 (39) (967) 280 97 (590)
Commercial and administrative costs (435) (23) − (458) 15 22 (421)
Research and development costs (321) (15) − (336) (376) 34 (678)
Share of results of joint ventures and associates 91 1 − 92 (19) (1) 72
Operating (loss)/profit (1,630) - (39) (1,669) (100) 152 (1,617)
Gain on the disposal of businesses - - - - 2 - 2
(Loss)/profit before financing and taxation (1,630) - (39) (1,669) (98) 152 (1,615)
Net financing (1,573) (2) - (1,575) (2,025) 2 (3,598)
(Loss)/profit before taxation (3,203) (2) (39) (3,244) (2,123) 154 (5,213)
Taxation (90) 1 7 (82) 71 (37) (48)
Discontinued operations - - - - - (117) (117)
Loss for the period (3,293) (1) (32) (3,326) (2,052) - (5,378)
Loss for the period from continuing operations (3,293) (5,261)
Loss for the period from discontinued operations (33) (117)
Attributable to:
Ordinary shareholders (3,327) (2,053) - (5,380)
Non-controlling interests 1 1 - 2
(1 )Discontinued operations relate to the statutory results of ITP Aero
and are presented net of internal sales, internal margin and related
consolidation adjustments. Included within the operating loss of £93m is
£17m of costs of disposal incurred related to the disposal group.
( )
2 Analysis by business segment continued
Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition Civil Aerospace (1) Power Systems (2) Defence Other businesses Corporate and inter-segment Total underlying from continuing operations
£m £m £m £m £m £m
For the half-year ended 30 June 2021
Original equipment recognised at a point in time 721 707 301 79 1 1,809
Original equipment recognised over time 1 11 418 - - 430
Aftermarket services recognised at a point in time 193 404 419 73 4 1,093
Aftermarket services recognised over time 1,197 59 583 - - 1,839
Total underlying customer contract revenue 2,112 1,181 1,721 152 5 5,171
Other underlying revenue 56 - - - - 56
Total underlying revenue 2,168 1,181 1,721 152 5 5,227
For the half-year ended 30 June 2020
Original equipment recognised at a point in time 1,187 786 248 64 (5) 2,280
Original equipment recognised over time - 18 430 - - 448
Aftermarket services recognised at a point in time 746 351 364 70 (2) 1,529
Aftermarket services recognised over time 477 59 511 - - 1,047
Total underlying customer contract revenue 2,410 1,214 1,553 134 (7) 5,304
Other underlying revenue 106 - - - - 106
Total underlying revenue 2,516 1,214 1,553 134 (7) 5,410
(1 )The underlying results for Civil Aerospace and ITP Aero (shown as
underlying results from discontinued operations below) for 30 June 2020 have
been restated to reflect the changes to activity during 2021 as described
above.
(2 )The underlying results for Power Systems for 30 June 2020 have been
restated to reclassify the Civil Nuclear Instrumentation & Control
business as Other businesses.
Total underlying Discontinued operations Total Underlying adjustments and adjustments to FX Discontinued operations (1) Group statutory results
from continuing operations underlying
ITP Aero Inter-segment
£m £m £m £m £m £m £m
For the half-year ended 30 June 2021
Original equipment recognised at a point in time 1,809 247 (129) 1,927 (8) (118) 1,801
Original equipment recognised over time 430 24 (10) 444 1 (14) 431
Aftermarket services recognised at a point in time 1,093 15 (3) 1,105 1 (12) 1,094
Aftermarket services recognised over time 1,839 31 (29) 1,841 (57) (2) 1,782
Total customer contract revenue 5,171 317 (171) 5,317 (63) (146) 5,108
Other revenue 56 - - 56 (5) - 51
Total revenue 5,227 317 (171) 5,373 (68) (146) 5,159
For the half-year ended 30 June 2020
Original equipment recognised at a point in time 2,280 296 (181) 2,395 (36) (115) 2,244
Original equipment recognised over time 448 23 (16) 455 - (7) 448
Aftermarket services recognised at a point in time 1,529 48 (39) 1,538 73 (9) 1,602
Aftermarket services recognised over time 1,047 31 (11) 1,067 226 (20) 1,273
Total customer contract revenue 5,304 398 (247) 5,455 263 (151) 5,567
Other revenue 106 - - 106 - - 106
Total revenue 5,410 398 (247) 5,561 263 (151) 5,673
(1 )Discontinued operations relate to the statutory results of ITP Aero
and are presented net of internal sales and related consolidation adjustments.
2 Analysis by business segment continued
Underlying profit adjustments Half-year to 30 June 2021 Half-year to 30 June 2020
Revenue Profit/(loss) before financing Net financing Revenue (Loss)/profit before financing Net financing
£m £m £m £m £m £m
Taxation Taxation £m
£m
Total underlying performance 5,373 291 (173) 29 5,561 (1,669) (1,575) (82)
Impact of settled derivative contracts on trading transactions (1) A (68) (297) 164 10 263 664 (669) (2)
Unrealised fair value changes on derivative contracts held for trading (2) A - (4) 66 (1) - (4) (2,729) 191
Unrealised net (gain)/losses on closing future A - - (8) - - - 1,369 (106)
over-hedged position (3)
Realised net (gain)/losses on closing future over-hedged position (3) A - - (7) - - - 88 -
Unrealised fair value change to derivative contracts held for financing (4) A - - 38 (10) - - (88) -
Exceptional programme credits/(charges) (5) B - - - - - 498 (21) -
Impact of discount rate changes (6) B - - - - - - 30 -
Exceptional restructuring charge (7) B - (10) - (6) - (366) - 9
Impairments (8) C - 1 - - - (966) - 125
Other write-offs C - - - - - (99) - 39
Effect of acquisition accounting (9) C - (50) - 13 - (66) - 17
Pension past-service credit (10) D - 11 - (4) - 248 - (87)
Other D - 3 4 (6) - (9) (5) 1
Included in operating (loss)/profit (68) (346) 257 (4) 263 (100) (2,025) 187
(Loss)/gains arising on the acquisitions C - (7) - - - 2 - -
and disposals of businesses (11)
Impact of tax rate change (12) - - - 346 - - - 160
De-recognition of UK losses - - - - - - - (276)
Total underlying adjustments (68) (353) 257 342 263 (98) (2,025) 71
Discontinued operations (146) 93 (1) (91) (151) 152 2 (37)
Statutory performance per condensed consolidated income statement 5,159 31 83 280 5,673 (1,615) (3,598) (48)
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 reduced statutory revenues by £68m (30 June 2020: increased
revenues by £263m) and reduced profit before financing and taxation by £297m
(30 June 2020: reduced loss by £664m). 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 (30 June 2020: £1.5bn). In 2021, this estimate was updated
to reflect the actual cash cost and resulted in a £15m gain to underlying
finance costs in the period to 30 June 2021. Further detail is provided in
note 4.
(4) Includes the losses on hedge ineffectiveness in the year of £2m (30
June 2020: losses of £15m) and net fair value gains of £40m (30 June 2020:
losses of £73m) on any interest rate swaps not designated into hedging
relationships for accounting purposes.
(5) In the comparative period at 30 June 2020, the estimated Trent 1000
abnormal wastage costs reduced by £498m as a result of COVID-19, with
improvements in the position on contract losses and lower expected costs
associated with remediation shop visits and customer disruption.
(6) During the period to 30 June 2021, the movement in discount rates on
onerous contracts has resulted in an immaterial charge which has been
recognised in underlying profit.
(7)( )During the period to 30 June 2021, the Group recorded an exceptional
restructuring charge of £10m which included a charge of £38m associated with
initiatives to enable the restructuring which have been charged directly to
the income statement. Further details are provided in note 15.
(8) The Group has assessed the carrying value of its assets. Further details
are provided in notes 7, 8 and 9.
(9) The effect of acquisition accounting includes the amortisation of
intangible assets arising on previous acquisitions.
(10) A past service credit of £7m has been recorded
following the final details on the additional transitional protections being
agreed during the period and £4m as a result of transferring employment of
236 employees in anticipation of a business disposal.
(11) (Losses)/gains arising on the acquisitions and
disposals of businesses are set out in note 19.
(12) The increase in the UK tax rate from 19% to 25%
has been substantively enacted at the balance sheet date. The opening UK
deferred tax balances have therefore been re-measured at 25%. This results in
a credit to the income statement in 2021 of £328m, with an additional £18m
credit arising in discontinued operations. The 2020 tax credit relates to the
increase in the UK tax rate from 17% to 19%. Included in the £160m credit in
2020 is £1m that relates to discontinued operations.
2 Analysis by business segment continued
Balance sheet analysis
Civil Aerospace (1) Power Systems Defence ITP Aero (1) Total reportable segments ITP Aero transferred to held for sale (2) Total reportable segments excluding held for sale
At 30 June 2021
Segment assets 15,673 3,461 3,274 1,931 24,339 (1,859) 22,480
Interests in joint ventures and associates 357 11 45 1 414 (1) 413
Segment liabilities (20,495) (1,459) (2,889) (958) (25,801) 538 (25,263)
Net (liabilities)/assets (4,465) 2,013 430 974 (1,048) (1,322) (2,370)
At 31 December 2020
Segment assets 16,632 3,497 3,116 2,090 25,335 - 25,335
Interests in joint ventures and associates 363 11 19 1 394 - 394
Segment liabilities (22,331) (1,358) (3,085) (1,036) (27,810) - (27,810)
Net (liabilities)/assets (5,336) 2,150 50 1,055 (2,081) - (2,081)
(1) The financial position for Civil Aerospace and ITP Aero for 31 December
2020 have been restated to reflect the transfer of activity during 2021 as
described above.
(2 )ITP Aero segmental net assets transferred to held for sale exclude
intercompany balances.
Reconciliation to the balance sheet
30 June 31 December 2020
2021
£m £m
Reportable segment assets excluding held for sale 22,480 25,335
Other businesses 5 7
Corporate and inter-segment (2,566) (3,102)
Interests in joint ventures and associates 413 394
Assets held for sale (1) 2,306 288
Cash and cash equivalents 2,915 3,452
Short-term investments 1 −
Fair value of swaps hedging fixed rate borrowings 146 293
Deferred and income tax assets 2,141 1,943
Post-retirement scheme surpluses 914 907
Total assets 28,755 29,517
Reportable segment liabilities excluding held for sale (25,263) (27,810)
Other businesses (6) (5)
Corporate and inter-segment 2,763 3,251
Liabilities associated with assets held for sale (1) (904) (228)
Borrowings and lease liabilities (7,914) (7,330)
Fair value of swaps hedging fixed rate borrowings (89) (42)
Deferred and income tax liabilities (488) (648)
Post-retirement scheme deficits (1,444) (1,580)
Total liabilities (33,345) (34,392)
Net liabilities (4,590) (4,875)
(1) As at 30 June 2021, assets and liabilities relating to ITP Aero, Bergen
Engines AS and Civil Nuclear Instrumentation & Control have been
classified as held for sale. For further details see note 19.
3 Research and development
Half-year to 30 June 2021 Restated Half-year to 30 June 2020
£m £m
Gross research and development costs (549) (580)
Contributions and fees (1) 153 138
Expenditure in the period (396) (442)
Capitalised as intangible assets 41 150
Amortisation and impairment of capitalised costs (2) (35) (386)
Net cost recognised in the income statement (390) (678)
Underlying adjustments relating to the effects of acquisition accounting, 7 376
impairment and foreign exchange (3)
Discontinued operations (18) (34)
Net underlying cost recognised in the income statement (401) (336)
(1)( )Includes government funding.
(2)( )See note 7 for analysis of amortisation and impairment. During the
period, amortisation of £5m has been incurred within the disposal group
recognised as a discontinued operation.
(3) During the period to 30 June 2021, no impairment of research and
development was recorded. In the comparative period to 30 June 2020,
impairment charges of £351m were recorded, relating to the financial and
operational impact of COVID-19.
4 Net financing
Half-year to 30 June 2021 Restated
Half-year to 30 June 2020
Per consolidated income statement Underlying financing (1) Per consolidated income statement Underlying financing (1)
£m £m £m £m
Interest receivable 3 3 10 11
Net fair value gains on foreign currency contracts 25 - - -
Net fair value gains on non-hedge accounted interest rate swaps (2) 40 - - -
Net fair value gains on commodity contracts 41 - - -
Financing on post-retirement scheme surpluses 7 - 13 -
Net foreign exchange gains 164 - - -
Realised net gains on closing over-hedged position (3) - 7 - -
Unrealised net gains on closing over-hedged position (3) - 8 - -
Financing income 280 18 23 11
Interest payable (106) (112) (79) (74)
Net fair value losses on foreign currency contracts - - (2,631) -
Net fair value losses on non-hedge accounted interest rate swaps (2) - - (73) -
Unrealised net losses on closing future over-hedged position - - - (1,369)
Realised net losses on closing over-hedged position - - - (88)
Financial charge relating to financial RRSAs - - (1) (1)
Net fair value losses on commodity contracts - - (98) -
Financing on post-retirement scheme deficits (10) - (14) -
Net foreign exchange losses - - (669) -
Fees on undrawn facilities (35) (35) (9) (9)
Other financing charges (46) (44) (47) (45)
Financing costs (197) (191) (3,621) (1,586)
Net financing income/(costs) 83 (173) (3,598) (1,575)
Analysed as:
Net interest payable (103) (109) (69) (63)
Net fair value gains/(losses) on derivative contracts 106 15 (2,802) (1,457)
Net post-retirement scheme financing (3) - (1) −
Net foreign exchange gains/(losses) 164 - (669) −
Net other financing (81) (79) (57) (55)
Net financing income/(costs) 83 (173) (3,598) (1,575)
(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
interest payable (30 June 2020: payable) on these interest rates swaps from
fair value movement to interest payable.
(3) The £15m gain recognised relates to the actual cost of the reduction in
the size of the USD hedge book in the period. For further detail, see below.
In 2020, in response to the deterioration in the medium-term outlook caused by
COVID-19 and the related reduction in anticipated net US Dollar cash inflows,
the Group took action to reduce the size of the US Dollar hedge book by
$11.8bn by transacting offsetting foreign exchange contracts across 2020-2026.
An underlying charge of £1,689m relating to the total $11.8bn reduction in
the size of the US Dollar hedge book was included within underlying financing
costs in 2020.
In 2021, this estimate was updated to reflect the actual cash cost of £1,674m
resulting in a £15m credit included within underlying financing costs.
The cash settlement costs of £1,674m will occur over the period 2020-2026,
£186m was incurred in 2020 and £303m was incurred in the period to 30 June
2021. The Group estimates that future cash outflows of £149m will occur in
the remainder of 2021, £326m in 2022, and £710m spread over 2023 to 2026.
The Group also took action to reduce the size of the US Dollar hedge book by
an additional $0.9bn by settling the mark-to market at zero cost.
5 Taxation
The income tax expense has been calculated by applying the annual effective
tax rate for each jurisdiction to the half-year profits of each jurisdiction.
The tax credit for the half-year is £280m on a statutory profit before
taxation of £114m (30 June 2020: tax charge of £48m on a statutory loss
before taxation of £5,213m), giving a statutory rate of (245.6%) (30 June
2020: (0.9%)). The key driver of the tax credit in 2021 is the impact of the
increase in the UK tax rate. The key driver of the tax charge in 2020 is the
non-recognition of deferred tax on UK losses arising in the year, partially
offset by the credit arising on the change in the UK tax rate. Additionally,
in 2020 some of the deferred tax asset relating to UK losses previously
recognised has been derecognised.
Tax reconciliation - continuing operations:
Half-year to 30 June 2021 Restated
Half-year to 30 June 2020
£m Tax rate £m Tax rate
Profit/(loss) before taxation 114 (5,213)
Nominal tax charge/(credit) at UK corporation tax rate of 19% 22 19.0% (990) 19.0%
Tax losses in year not recognised in deferred tax (1) (7) (6.1%) 707 (13.6%)
Derecognition of deferred tax − 0.0% 433 (8.3%)
Increase in deferred taxes resulting from change in UK tax rate (328) (287.6%) (159) 3.1%
Other 33 29.1% 57 (1.1%)
Statutory tax (credit)/charge and rate (280) (245.6%) 48 (0.9%)
Analysis of statutory tax (credit)/charge:
Underlying items (29) 82
Non-underlying items (see note 2) (342) (71)
Discontinued operations (see note 19) 91 37
(280) 48
(1) Includes UK losses not recognised and movement on unrecognised deferred
tax assets relating to foreign exchange and commodity financial assets and
liabilities.
Deferred tax assets are recognised to the extent it is probable that future
taxable profits will be available against which to recover the asset. Where
necessary, this is based on management's assumptions relating to the amounts
and timing of future taxable profits. The Board continually reassesses the
appropriateness of recovering deferred tax assets relating to losses and other
tax credits, which includes a consideration of the level of future profits and
the time period over which they are recovered.
Sensitivity analyses are also performed as part of the assessment. At 30 June
2021, sensitivity analyses showed that either a 5% reduction in margins across
all applicable Civil widebody programmes or a 5% reduction in shop visit
volumes, which could be driven by fewer flying hours as a result of climate
change, would result in a decrease in the deferred tax asset in respect of UK
losses by around £150m, which equates to around a £1.2bn reduction in
profit.
As a consequence of the impact of COVID-19 on existing Civil Aerospace
widebody engine programmes, taking into account the sensitivity analyses
performed, and in light of the inherent uncertainty in estimating such
long-term forecasts, the Group has not recognised any deferred tax assets in
respect of 2021 UK losses.
Deferred tax assets arising on additional unrealised losses on derivative
contracts that remain hedged have also been assessed resulting in a net
increase in the deferred tax asset of £43m, mainly driven by the change in UK
corporate tax rate.
Both of these assessments are in line with the approach set out in note 5 of
the 2020 Annual Report, and also take into account a 25% probability of there
being a severe but plausible downside scenario in relation to the commercial
aviation industry. The Spring Budget 2021 announced that the UK corporation
tax rate will increase from 19% to 25% from 1 April 2023. The tax rate
increase 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 30 June 2021, the UK deferred tax assets and liabilities have
been remeasured at 25%.
The resulting credits or 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, £328m has been credited to the income
statement and £18m has been credited directly to equity.
The unrecognised deferred tax assets on UK losses, foreign exchange financial
assets and liabilities and other deductible temporary differences have
increased by £373m, £116m, and £11m respectively due to the increase in the
UK tax rate to 25%.
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 period, excluding ordinary shares held
under trust, which have been treated as if they had been cancelled.
In the current period, the potentially dilutive share options element has been
assessed as 18 million shares. Where a continuing loss is recognised, the
effect of potentially dilutive ordinary shares is anti-dilutive.
Half-year to 30 June 2021 Half-year to 30 June 2020
Basic Potentially dilutive share options Diluted Basic Potentially dilutive share options Diluted
Profit/(loss) attributable to ordinary shareholders (£m):
Continuing operations 394 394 (5,263) (5,263)
Discontinued operations (1) (1) (117) (117)
393 393 (5,380) (5,380)
Weighted average number of ordinary shares (millions) 8,331 18 8,349 5,597 − 5,597
EPS (pence):
Continuing operations 4.73 (0.01) 4.72 (94.03) − (94.03)
Discontinued operations (0.01) - (0.01) (2.09) − (2.09)
4.72 (0.01) 4.71 (96.12) − (96.12)
The reconciliation between underlying EPS and basic EPS is as follows:
Half-year to 30 June 2021 Half-year to 30 June 2020
Pence £m Pence £m
Underlying EPS / Underlying profit/(loss) attributable to ordinary 1.76 147 (59.44) (3,327)
shareholders
Total underlying adjustments to profit/(loss) before tax (note 2) (1.15) (96) (37.93) (2,123)
Related tax effects 4.11 342 1.27 71
Related NCI effects - - (0.02) (1)
EPS / profit/(loss) attributable to ordinary shareholders 4.72 393 (96.12) (5,380)
Diluted underlying EPS 1.76 (59.44)
Basic and diluted earnings per share figures for the comparative period have
been restated and adjusted for the bonus factor of 2.91 to reflect the bonus
element of the November 2020 rights issue, in accordance with IAS 33 Earnings
per Share. Amounts as originally stated at 30 June 2020 were (280.06)p basic
and diluted earnings per share and (173.19)p basic and diluted underlying
earnings per share.
7 Intangible assets
Goodwill Certification costs Development expenditure Customer relationships Software (3) 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 42 - 28 18 89
Transferred to assets held for sale (1) - (6) (179) (868) (15) (59) (1,127)
Disposals - (22) - - (3) (1) (26)
Reclassifications - - - - 6 (6) -
Reclassifications from PPE - - - - 6 - 6
Exchange differences (41) (2) (72) (58) (5) (26) (204)
At 30 June 2021 1,071 934 3,355 477 985 819 7,641
Accumulated amortisation and impairment:
At 1 January 2021 38 429 1,803 478 607 403 3,758
Charge for the period (2) - 11 40 42 47 14 154
Impairment - - - - - 5 5
Transferred to assets held for sale (1) - (4) (51) (176) (10) - (241)
Disposals - (21) - - (2) (1) (24)
Reclassifications - - (1) - - 1 -
Reclassifications from PPE - - - - 6 - 6
Exchange differences - (1) (48) (17) (3) (11) (80)
At 30 June 2021 38 414 1,743 327 645 411 3,578
Net book value:
30 June 2021 1,033 520 1,612 150 340 408 4,063
1 January 2021 1,074 534 1,761 925 361 490 5,145
(1 )Bergen Engines AS, the Civil Nuclear Instrumentation & Control
business and ITP Aero have been classified as disposal groups held for sale at
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 19.
(2 )Charged to cost of sales and commercial and administrative costs except
development costs, which are charged to research and development costs.
(3)( )Includes £103m (31 December 2020: £110m) of software under course
of construction which is not amortised.
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, 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 management, which are consistent with past experience and external sources
of information on market conditions over the lives of the respective
programmes.
- The key assumptions underlying cash flow projections are based on
estimates of market share, trading assumptions and long-term economic
forecasts. 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 in the
period.
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 4 27 - 64 95
Transferred to assets held for sale (1) (122) (301) (22) (8) (453)
Disposals/write-offs (11) (96) (1) - (108)
Reclassifications (2) 91 102 - (193) -
Reclassifications to intangible assets (2) - (6) - - (6)
Exchange differences (32) (83) (5) (4) (124)
At 30 June 2021 1,924 5,085 997 310 8,316
Accumulated depreciation and impairment:
At 1 January 2021 679 3,336 374 8 4,397
Charge for the period (3) 36 176 27 - 239
Impairment (4) (1) (1) - 2 -
Transferred to assets held for sale (1) (22) (123) (5) - (150)
Disposals/write-offs (5) (92) - - (97)
Reclassifications (2) (13) 12 - 1 -
Reclassifications to intangible assets (2) - (6) - - (6)
Exchange differences (9) (49) (1) - (59)
At 30 June 2021 665 3,253 395 11 4,324
Net book value at:
30 June 2021 1,259 1,832 602 299 3,992
1 January 2021 1,315 2,106 651 443 4,515
(1 )Bergen Engines AS, the Civil Nuclear Instrumentation & Control
business and ITP Aero have been classified as disposal groups held for sale at
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 19.
(2 )Includes reclassifications of assets under construction to the
relevant classification in property, plant and equipment 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 tangible assets have been assessed during the
period in line with IAS 36. As a result of this assessment(,) there are no
individually material impairment charges or reversals in the period.
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 9 4 (3) 10
Transferred to assets held for sale (1) (16) (2) - (18)
Disposals (8) (4) - (12)
Exchange differences (6) (3) (3) (12)
At 30 June 2021 426 145 1,827 2,398
Accumulated depreciation and impairment:
At 1 January 2021 159 60 806 1,025
Charge for the period 22 15 100 137
Impairment (2) (3) (6) - (9)
Transferred to assets held for sale (1) (4) (1) - (5)
Disposals (8) (4) - (12)
Exchange differences (2) (1) (1) (4)
At 30 June 2021 164 63 905 1,132
Net book value at:
30 June 2021 262 82 922 1,266
1 January 2021 288 90 1,027 1,405
(1)( )Bergen Engines AS, the Civil Nuclear Instrumentation & Control
business and ITP Aero have been classified as disposal groups held for sale at
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 19.
(2 )The carrying values of right-of-use assets have been assessed during
the period in line with IAS 36. As a result of this assessment, an impairment
reversal of £9m 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 Trade receivables and other assets
Current Non-current Total
30 June 2021 31 December 2020 30 June 2021 31 December 2020 30 June 2021 31 December 2020
£m £m £m £m £m £m
Trade receivables 2,347 2,479 - - 2,347 2,479
Receivables due on risk and revenue sharing arrangements (RRSAs) 716 603 13 82 729 685
Amounts owed by joint ventures and associates 456 486 13 16 469 502
Costs to obtain contracts with customers 16 12 44 50 60 62
Other taxation and social security receivable 178 225 22 6 200 231
Other receivables (1) 554 639 19 20 573 659
Prepayments 339 412 351 425 690 837
4,606 4,856 462 599 5,068 5,455
(1) Other receivables include unbilled recoveries relating to overhaul
activity.
The expected credit losses for trade receivables and other assets has
increased by £29m to £281m (31 December 2020: £252m). This increase is
mainly driven by the Civil Aerospace business of £27m, of which £14m relates
to specific customers and £13m relates to updates to the recoverability of
other receivables.
The Group's expected credit loss provision movements are as follows:
Half-year to 30 June 2021 Year-ended 31 December 2020
£m £m
At 1 January (252) (138)
Increases in loss allowance recognised in the income statement during the (81) (119)
period
Loss allowance utilised 15 5
Releases of loss allowance previously provided 33 13
Other net movements 2 (13)
Transferred to held for sale 2 −
At 30 June (281) (252)
11 Trade payables and other liabilities
Current Non-current Total
30 June 2021 31 December 2020 30 June 2021 31 December 2020 30 June 2021 31 December 2020
£m £m £m £m £m £m
Trade payables 1,247 1,418 - - 1,247 1,418
Payables due on RRSAs 500 697 - - 500 697
Amounts owed to joint ventures and associates 657 583 - - 657 583
Customer concession credits 1,254 1,536 557 514 1,811 2,050
Warranty credits 123 173 228 196 351 369
Accruals 1,069 1,322 110 117 1,179 1,439
Deferred receipts from RRSA workshare partners 26 17 491 507 517 524
Government grants 11 16 56 66 67 82
Other taxation and social security 117 127 6 7 123 134
Other payables (1) 716 764 344 515 1,060 1,279
5,720 6,653 1,792 1,922 7,512 8,575
(1 )Other payables includes financial penalties from agreements with
investigating bodies, parts purchase obligations, payroll liabilities, HMG
levies and deferred consideration for recent acquisitions.
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 90-120 days. The Group offers reduced payment terms for smaller
suppliers, so that they are paid in 30 days. In line with aerospace 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 30 June 2021, suppliers had drawn £449m under the SCF scheme (31 December
2020: £582m).
12 Contract assets and liabilities
Current Non-current (1) Total
30 June 2021 31 December 2020 30 June 2021 31 December 2020 30 June 2021 31 December 2020
£m £m £m £m £m £m
Contract assets
Contract assets with customers 496 416 651 660 1,147 1,076
Participation fee contract assets 24 48 231 386 255 434
520 464 882 1,046 1,402 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.
Contract assets with customers include £847m (31 December 2020: £726m) of
Civil Aerospace LTSA assets, with most of the remaining balance relating to
Defence. The main drivers of the increase in the Group balance are:
recognition of revenue relating to performance obligations satisfied in
previous years of £31m in Civil Aerospace (as the level of variable
consideration that will be received has increased as uncertainty has reduced
following commercial negotiations); and revenue recognised in Civil Aerospace
in the period exceeding amounts billed by £41m. No impairment losses in
relation to these contract assets (31 December 2020: none) have arisen during
the period to 30 June 2021.
Participation fee contract assets have reduced by £179m (31 December 2020:
reduced by £165m) due to ITP Aero being reclassified as a disposal group held
for sale which had an impact of £153m, amortisation exceeding additions by
£12m and foreign exchange on consolidation of overseas entities of £14m.
No impairment losses of participation fee contract assets (31 December 2020:
none) have arisen during the period to 30 June 2021.
Current Non-current Total
30 June 2021 31 December 2020 30 June 2021 31 December 2020 30 June 2021 31 December 2020
£m £m £m £m £m £m
Contract liabilities 3,811 4,187 6,427 6,245 10,238 10,432
Contract liabilities have decreased by £194m. The main driver of the change
in the Group balance is a result of ITP Aero contract liabilities being
reclassified as a disposal group held for sale having an impact of £173m.
Civil Aerospace contract liabilities have increased by £15m. This consists of
an increase in relation to LTSA liabilities of £54m to £6,895m (31 December
2020: £6,841m), offset by the utilisation of deposits. LTSA revenue billed
has been ahead of revenue recognised in the period and together with foreign
exchange movements have increased the LTSA liabilities by £183m, offset by
£129m of LTSA revenue recognised relating to performance obligations
satisfied in previous years, which were principally driven by improved shop
visit cost expectations in Business Aviation and the impact of specific
customer negotiations with airlines.
13 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 30 June 2021
Non-current assets 361 9 152 522 - 15 - 537
Current assets 16 11 1 28 - 12 - 40
Assets 377 20 153 550 - 27 - 577
Current liabilities (607) (1) (1) (609) (1) (27) (26) (663)
Non-current liabilities (2,293) (1) (117) (2,411) (6) (45) - (2,462)
Liabilities (2,900) (2) (118) (3,020) (7) (72) (26) (3,125)
(2,523) 18 35 (2,470) (7) (45) (26) (2,548)
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.
13 Financial assets and liabilities continued
Derivative financial instruments
Movements in fair value of derivative financial assets and liabilities were as
follows:
Half-year to 30 June 2021 Year-ended
31 December 2020
Foreign exchange instruments Commodity contracts Interest rate instruments − hedge accounted (2) Interest rate instruments - Total Total
non-hedge
accounted
£m £m £m £m £m £m
At 1 January (2,871) (11) 233 (57) (2,706) (2,849)
Movements in fair value hedges - - (129) - (129) 139
Movements in cash flow hedges (13) 4 (38) - (47) (36)
Movements in other derivative contracts (1) 25 41 - 40 106 (160)
Contracts settled 348 (1) (21) 7 333 200
Reclassification to held for sale (12) (15) - - (27) -
At period/year end (2,523) 18 45 (10) (2,470) (2,706)
(1) Included in net financing.
(2) Includes the foreign exchange impact of cross-currency interest rate
swaps.
Financial risk and revenue sharing arrangements (RRSAs) and other financial
assets and liabilities
Financial RRSAs Other liabilities Other assets
Half-year to 30 June 2021 Year-ended Half-year to 30 June 2021 Year-ended 31 December 2020 Half-year to 30 June 2021 Year-ended 31 December 2020
£m 31 December 2020 £m £m £m £m
£m
At 1 January (81) (110) (73) (72) 15 16
Exchange adjustments included in OCI 3 (6) 3 (2) - -
Additions - - (2) (17) - -
Financing charge (1) - (3) - (13) - -
Excluded from underlying profit:
Changes in forecast payments (1) - (3) - - - -
Exchange adjustments (1) - - - - - -
Cash paid 2 39 - 18 - (1)
Other - - - 13 - -
Reclassification to held for sale 69 2 - - - -
At period/year end (7) (81) (72) (73) 15 15
(1 )Included in financing.
Fair values of financial instruments equate to book values with the following
exceptions:
Half-year to 30 June 2021 Year-ended 31 December 2020
Book value Fair value Book value Fair value
£m £m £m £m
Borrowings - Level 1 (4,057) (4,070) (4,886) (4,814)
Borrowings - Level 2 (1,991) (2,071) (401) (403)
Financial RRSAs - Level 3 (7) (10) (81) (89)
13 Financial assets and liabilities continued
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.
- Non-current investments - other comprise unconsolidated companies and are
measured at fair 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 (30 June 2021: £11m; 31 December 2020:
£938m) are estimated by discounting expected future contractual cash flows
using prevailing interest rate curves or cost of borrowing, as appropriate.
Amounts denominated in foreign currencies are valued at the exchange rate
prevailing at the balance sheet date. These financial instruments are included
on the balance sheet at fair value, derived from observable market prices
(Level 2 as defined by IFRS 13 Fair Value Measurement). During the period to
30 June 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 customer.
- 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 30 June 2021, Level 3 assets totalled £15m (31 December 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).
In 2019, the Group adopted the 'Amendments to IFRS 9, IAS 39 and IFRS 7
Interest Rate Benchmark Reform' issued in September 2019. In calculating the
change in fair value attributable to the hedged risk for the fixed-rate
borrowings, the Group has made the following assumptions that reflect its
current expectations:
- The Group has assumed that pre-existing fallback provisions in the
borrowings do not apply to IBOR reform;
- Borrowings move to a risk free rate during 2022, and the spread will be
similar to the spread included in the interest rate swaps used as hedging
instruments; and
- No other changes to the terms of the hedged borrowings are
anticipated.
14 Borrowings and lease liabilities
Current Non-current Total
30 June 2021 31 December 2020 30 June 2021 31 December 2020 30 June 2021 31 December 2020
£m £m £m £m £m £m
Unsecured
Overdrafts 6 7 - − 6 7
Bank loans (1) 3 9 1,972 10 1,975 19
Commercial paper (2) - 300 - − - 300
Loan notes (3) - 680 4,057 4,206 4,057 4,886
Other loans - 17 10 58 10 75
Total unsecured 9 1,013 6,039 4,274 6,048 5,287
Lease liabilities 212 259 1,654 1,784 1,866 2,043
Total borrowings and lease liabilities 221 1,272 7,693 6,058 7,914 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 the 27 April 2020, the Group issued commercial paper of £300m to
the Covid Corporate Financing Facility (CCFF), a fund operated by the Bank of
England on behalf of HM Treasury. These borrowings were repaid on 17 March
2021.
(3) On the 18 June 2021, the Group repaid €750m (£639m) loan notes in line
with repayment terms.
During the period, the Group entered into a new £1,000m loan maturing in 2026
(supported by an 80% guarantee from UK Export Finance and available to draw
until March 2025). This facility was undrawn at 30 June 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 prior to that.
15 Provisions
At Charged to income statement (1) Reversed Utilised Transferred to held for sale Exchange differences At 30 June
1 January 2021 £m £m £m £m £m 2021
£m £m
Trent 1000 exceptional costs 321 24 - (148) - - 197
Contract losses 808 84 (30) (16) (13) (4) 829
Restructuring 236 3 (28) (59) (5) (3) 144
Warranties and guarantees 327 50 (3) (43) (11) (12) 308
Customer financing 17 - - - - - 17
Insurance 60 10 (16) (5) - - 49
Tax related interest and penalties 33 - - - - - 33
Employer liability claims 50 1 - (1) (1) - 49
Other 93 14 (1) (9) - (3) 94
1,945 186 (78) (281) (30) (22) 1,720
Current liabilities 826 568
Non-current liabilities 1,119 1,152
(1 )The charge to the income
statement includes £16m in underlying profit/(loss) 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. In the
period, the Group has utilised £148m of the Trent 1000 exceptional costs
provision. This represents customer disruption costs settled in cash and
credit notes, and remediation shop visit costs. The remaining provision is
expected to be utilised over the period 2021 to 2023.
15 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
period, additional contract losses for the Group of £84m have been recognised
as a result of a change in future cost estimates. The Group continues to
monitor the contract loss provision for changes in the market and revises the
provision as required. Provisions for contract losses are expected to be
utilised over the term of the customer contracts, typically within 10-15
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 9,000 roles across the Group. During the period, £59m of the
provision was utilised as part of these plans and £28m of the provision
released following reassessment of the anticipated cost per role. The
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 the 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 $1.8bn (31 December 2020: $1.9bn) (on
a discounted basis) to provide facilities to enable customers to purchase
aircraft (of which approximately $307m could be called during 2021). 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 USD. 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.
At 30 June 2021 At 31 December 2020
£m $m £m $m
Gross commitments 31 43 38 52
Value of security (10) (14) (14) (19)
Guarantees (2) (2) (5) (6)
Net commitments 19 27 19 27
Net commitments with security reduced by 20% (1) 21 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.
16 Pensions and other post-retirement and long-term employee benefits
The net post-retirement scheme deficit as at 30 June 2021 is calculated on a
year to date basis, using the latest valuation as at 31 December 2020, updated
to 30 June 2021 for the principal schemes.
Movements in the net post-retirement position recognised in the balance sheet
were as follows:
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 - 54 54
Current service cost and administrative expenses (4) (33) (37)
Past service credit 11 - 11
Financing recognised in the income statement 7 (10) (3)
Contributions by employer 99 32 131
Actuarial gains recognised in OCI (1) 501 142 643
Returns on plan assets excluding financing recognised in OCI (1) (609) (46) (655)
Transfers - (1) (1)
At 30 June 2021 888 (1,431) (543)
Post-retirement scheme surpluses - included in non-current assets (2) 888 26 914
Post-retirement scheme deficits - included in non-current liabilities - (1,444) (1,444)
Post-retirement scheme deficits - included in liabilities held for sale - (13) (13)
888 (1,431) (543)
(1) The UK scheme recognised a net loss of £108m in OCI in the period to 30
June 2021 which has been driven by a higher discount rate offset by returns on
plan assets.
(2 )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 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 30 June 2021, £7m has been recognised as a
non-underlying past service credit which relates to the differences between
the final details agreed and the obligation estimated at 31 December 2020.
In the period to 30 June 2021, 236 employed deferred members have transferred
employment in anticipation of a business disposal. As a consequence of this, a
£4m non-underlying past service credit has been recognised.
Sensitivities
A reduction in the discount rate from 1.95% to 1.70% could lead to an increase
in the defined benefit obligations of the RR UK Pension Fund of approximately
£425m. 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 21.7 years (male aged 65) and from
23.1 years (male aged 45) would increase the defined benefit obligations of
the RR UK Pension Fund by approximately £380m.
Where applicable, it is assumed that 40% (31 December 2020: 40%) of members 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.
17 Contingent liabilities
Contingent liabilities in respect of customer financing commitments are
described in note 15.
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. Following the expiry of its term, the DPA with the DoJ was
dismissed by the US District Court on 19 May 2020. 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.
18 Related parties
Half-year to Half-year to 30 June 2020
30 June 2021 £m
£m
Sales of goods and services to joint ventures and associates 1,434 2,171
Purchases of goods and services from joint ventures and associates (1,772) (2,514)
(1) Sales of goods and services to joint ventures and associates and
purchases of goods and services from joint ventures and associates are
included at the average exchange rate, consistent with the statutory income
statement. In prior periods these have been included at the achieved rate on
settled derivative contracts, consistent with note 2.
Included in sales of goods and services to joint ventures and associates are
sales of spare engines amounting to £6m (30 June 2020: £20m). Profit
recognised in the period on such sales amounted to £13m (30 June 2020:
£30m), including profit on current period sales and recognition of profit
deferred on similar sales in previous periods. On an underlying basis (at
actual achieved rates on settled derivative transactions), the amounts were
£13m (30 June 2020: £31m).
19 Disposals, businesses held for sale and discontinued operations
Disposals
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. This is reviewed
at each reporting date over the adjustment period. A liability of €28m (31
December 2020: €29m) is recognised for amounts that are expected to be
payable in relation to the years 2021-2023. Cash of €9m has been paid during
the period with an increase in the liability of €8m (£7m) reflected as an
adjustment to the sales proceeds. The maximum adjustment to sales proceeds has
now been provided for in all future years to 2023.
Businesses held for sale
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 formed part of the Power Systems business and from 31
December 2020 it has been classified as held for sale. After the termination
of the sale with TMH Group in March 2021, the sales process recommenced, and
on 3 August 2021 the Group signed an agreement to sell Bergen to global
engineering group Langley Holdings plc for an enterprise value of €63m. The
agreement is subject to the satisfaction of certain closing conditions and the
Norwegian government have been notified of the proposed sale. Effective
completion is scheduled for 31 December 2021. Bergen has been assessed for
impairment in line with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations with reference to its fair value less costs to sell.
An impairment of £8m has been recognised of which £5m has been charged to
non-underlying profit. As at 30 June 2021, Bergen had an additional £27m of
cash which, as part of bank pooling arrangements, was held by another Group
company and consequently is not included in the disposal group as the
resulting intra-group balances are eliminated on consolidation. On completion,
it is expected that €40m of cash will be retained by Rolls-Royce and any
remaining amount will be included in the disposal group.
19 Businesses held for sale and discontinued operations
continued
.
On 7 December 2020, the Group signed an agreement for the sale of Civil
Nuclear Instrumentation & Control business to Framatome. Consequently, in
accordance with IFRS 5, the business has been classified as held for sale at
30 June 2021 and its carrying value assessed against the anticipated proceeds
and disposal costs. The sale is expected to complete in the second half of the
year.
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, have been transferred to ITP Aero (see note 2 for more detail) and
other preparatory work has been performed such that as at 30 June 2021 ITP
Aero was available for immediate sale in its present condition and there is an
active programme to locate a buyer and complete the planned sale, as such, the
business has been classified as a disposal group held for sale. The assets of
ITP Aero have been assessed for impairment in line with the requirements of
IFRS 5 and no impairment has been recognised. ITP Aero had an additional
£315m of cash which was held by another Group company at 30 June 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.
The table below summarises the categories of assets and liabilities classified
as held for sale.
ITP Aero Bergen Civil Nuclear Total
£m £m £m £m
Intangible assets 886 - 16 902
Property, plant and equipment 303 - 6 309
Right-of-use assets 13 - 7 20
Investment in associates and joint ventures 1 - - 1
Deferred tax assets 222 2 4 228
Inventory 237 91 15 343
Trade receivables and other assets 345 52 37 434
Cash and cash equivalents 38 27 4 69
Assets held for sale 2,045 172 89 2,306
Trade payables and other liabilities (487) (93) (71) (651)
Provisions for liabilities and charges (30) (12) (4) (46)
Borrowings and lease liabilities (92) (3) (5) (100)
Deferred tax liabilities (92) (2) - (94)
Post-retirement scheme deficits - - (13) (13)
Liabilities associated with assets held for sale (701) (110) (93) (904)
Net assets/(liabilities) held for sale 1,344 62 (4) 1,402
Discontinued operations
ITP Aero represents a separate major line of business and has been managed as
a separate operating segment up to 30 June 2021 (see note 2). For the period
ended 30 June 2021, following ITP Aero being classified as a disposal group
held for sale and 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 period that have been classified as discontinued
operations.
Half-year to 30 June 2021 Half-year to 30 June 2020
£m £m
Revenue 146 151
Operating loss (1) (76) (152)
Loss before taxation (1) (75) (154)
Income tax credit (1) 91 37
Profit/(loss) for the period from discontinued operations on ordinary 16 (117)
activities
Costs on disposal of discontinued operations (17) −
Loss for the period from discontinued operations (1) (117)
Net cash inflow from operating activities (2) 4 8
Net cash outflow from investing activities (12) (13)
Net cash outflow from financing activities (1) (9)
Exchange gains/losses 3 (5)
Net change in cash and cash equivalents (6) (19)
(1 )Profit/(loss) from discontinued operations on ordinary activities is
presented net of internal margin, related consolidation adjustments and
amortisation of intangible assets arising on previous acquisition. The tax
credit in 2021 includes a credit relating to the recognition of a deferred tax
asset on losses. In the period to 30 June 2020, results included a number of
write-offs and programme impairments.
(2 )Cash flows from operating activities include £17m costs of disposal
paid during the period to 30 June 2021 that were not a movement in the cash
balance of the disposal group.
20 Derivation of summary funds flow statement from statutory cash flow
statement
Half-year to 30 June 2021 Half-year to 30 June 2020
£m £m £m £m Source
Underlying operating profit/(loss) from continuing operations 307 (1,630) Note 2
Underlying operating loss from discontinued operations (16) (39) Note 2
Underlying operating profit/(loss) (see note 2) 291 (1,669) Note 2
Amortisation and impairment of intangible assets 159 550 Cash flow statement (CFS)
Depreciation and impairment of property, plant and equipment 243 495 CFS
Depreciation and impairment of right-of-use assets 128 513 CFS
Adjustment to residual value guarantees in lease liabilities (3) (42) CFS
Impairment of joint ventures 2 15 Note 13
Reversal of non-underlying impairments of non-current assets 1 (966) Reversal of underlying adjustment (note 2)
Acquisition accounting (50) (66) Reversal of underlying adjustment (note 2)
Depreciation and amortisation 480 499
Additions of intangible assets (71) (176) CFS less exceptional restructuring (see below)
Purchases of property, plant and equipment (124) (221) CFS
Lease payments (capital plus interest) (171) (190) CFS (capital and interest payments adjusted for foreign exchange (FX))
Increase in inventories (219) (301) CFS
Movement in receivables/payables (223) (1,313) 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 (88) (150) 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 (108) 788 Movement in Civil LTSA balances within movement of contract balances in CFS
less impact of FX
Revaluation of trading assets (excluding exceptional items) (154) (152) Adjustment to reflect the impact of the FX contracts held on
receivables/payables
Realised derivatives in financing 45 74 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 (528) (753)
Movement on provisions (136) 132 CFS adjusted for the impact of exceptional programme charges and anticipated
recoveries, exceptional restructuring and FX contracts held
Net interest received and paid (81) (26) CFS
Fees paid on undrawn facilities (35) − CFS
Cash flows on settlement of excess derivative contracts (303) (88) CFS
Cash flows on financial instruments net of realised losses included in (52) (33) 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 (6) (35) Principally disposals of non-current assets, joint venture trading and the
effect of share-based payments
Trading cash flow (955) (2,861)
Underlying operating profit charge in excess of contributions to defined (94) 94 CFS
benefit schemes
Tax (102) (34) CFS
Group free cash flow (1,151) (2,801)
Free cash flow from continuing operations (1,174) (2,862)
Free cash flow from discontinued operations 23 61
Shareholder payments (2) (90) CFS (includes dividends to NCI)
Acquisition of businesses − (8) CFS
Disposal of businesses (8) 10 CFS
Exceptional restructuring costs (134) (87) £114m related to severance costs and £20m capital expenditure (30 June 2020:
£54m and £33m respectively)
DPA payments (156) (135) CFS
Difference in fair values of derivative contracts held for financing (3) (89) CFS
Payments of lease principal less new leases and other non-cash adjustments to 154 167 CFS adjusted for the impact of FX
lease liabilities
Foreign exchange (70) (2) CFS less allocation to leases above
Other (26) (41) Cash outflow on M&A spend and timing of cash flows on a prior period
disposal. See below.
Change in net debt (1,396) (3,076)
Change in net debt (1,396) (3,076)
Non-cash lease impact (154) (167)
Reclassification of other financial liabilities to borrowings − 150
Change in net debt excluding lease liabilities (1,550) (3,093)
20 Derivation of summary funds flow statement from statutory cash flow
statement continued
The information for the period ended 30 June 2020 has been re-presented to be
on a comparable basis with the presentation adopted at the period ended 30
June 2021. There is no change to trading or 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 business acquisitions, financial penalties paid and foreign
exchange changes on net funds. The Board considers that free cash flow
reflects cash generated from the Group's underlying trading.
The table below shows a reconciliation of free cash flow to the change in cash
and cash equivalents presented in the condensed consolidated cash flow
statement on page 19.
Half-year to 30 June 2021
Half-year to 30 June 2020
£m £m £m £m Source
Change in cash and cash equivalents (443) (360) CFS
Net cash flow from changes in borrowings and lease liabilities (914) (2,637) CFS
Movement in short-term investments 1 (6) CFS
Movement in net debt from cash flows (1,356) (3,003)
Exclude: Capital element of lease repayments (147) (149) CFS
Movement in net debt from cash flows (excluding lease liabilities) (1,503) (3,152)
Returns to shareholders 2 90 CFS
Acquisition of businesses − 8 CFS
Disposal of businesses 8 (10) CFS
Other acquisitions and disposals 22 − £22m related to costs incurred on central M&A activity
Changes in group structure 30 (2)
Penalties paid on agreements with investigating bodies 156 135 CFS
Exceptional restructuring costs 134 87 £114m related to severance costs and £20m capital expenditure (30 June 2020:
£54m and £33m respectively)
Other 30 41 Timing of cash flows on a prior period disposal where the Group retains the
responsibility for collecting cash before passing it on to the acquirer and
other smaller items
Group free cash flow (1,151) (2,801)
Principal risks and uncertainties
Our risk management system is described on pages 46 and 47 of our 2020 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.
We continue to review our principal risks and how we manage them to reflect
the evolving nature of the COVID-19 pandemic. The principal risks facing the
Group for the remaining six months of the financial year are reported on pages
47 to 51 of our Annual Report 2020 and are summarised below:
Safety Business continuity
Failure to: i) meet the expectations of our customers to provide safe The major disruption of the Group's operations, which results in our failure
products; or ii) create a place to work which minimises the risk of harm to to meet agreed customer commitments and damages our prospects of winning
our people, those who work with us, and the environment, would adversely future orders. Disruption could be caused by a range of events, for example:
affect our reputation and long-term sustainability. extreme weather or natural hazards (for example earthquakes, floods);
political events; financial insolvency of a critical supplier; scarcity of
Climate change materials; loss of data; fire; or infectious disease. The consequences of
these events could have an adverse impact on our people, our internal
We recognise the urgency of the climate challenge and have committed to net facilities or our external supply chain.
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. Competitive environment
Failure to transition from carbon-intensive products and services at pace
could impact our ability to win future business; achieve operating results; Existing competitors: the presence of competitors in the majority of our
attract and retain talent; secure access to funding; realise future growth markets means that the Group is susceptible to significant price pressure for
opportunities; or force government intervention to limit emissions. original equipment or services. Our main competitors have access to
significant government funding programmes as well as the ability to invest
Compliance heavily in technology and industrial capability.
Non-compliance by the Group with legislation, the terms of DPAs or other Existing products: failure to achieve cost reduction, contracted technical
regulatory requirements in the heavily regulated environment in which we specification, product (or component) life or falling significantly short of
operate (for example, export controls; data privacy; use of controlled customer expectations, would have potentially significant adverse financial
chemicals and substances; anti-bribery and corruption; and tax and customs and reputational consequences, including the risk of impairment of the
legislation). This could affect our ability to conduct business in certain carrying value of the Group's intangible assets and the impact of potential
jurisdictions and would potentially expose the Group to: reputational damage; litigation.
financial penalties; debarment from government contracts for a period of time;
and suspension of export privileges (including export credit financing), each New programmes: failure to deliver an NPI project on time, within budget, to
of which could have a material adverse effect. technical specification or falling significantly short of customer
expectations would have potentially significant adverse financial and
reputational consequences.
Cyber threat Disruptive technologies (or new entrants with alternative business models):
could reduce our ability to sustainably win future business, achieve operating
An attempt to cause harm to the Group, its customers, suppliers and partners results and realise future growth opportunities.
through the unauthorised access, manipulation, corruption, or destruction of
data, systems or products through cyberspace. Market shock
The Group is exposed to a number of market risks, some of which are of a
macroeconomic nature (e.g. economic growth rates) and some of which are more
Financial shock specific to the Group (for example, reduction in air travel or defence
spending, or disruption to other customer operations). A large proportion of
The Group is exposed to a number of financial risks, some of which are of a our business is reliant on the civil aviation industry, which is cyclical in
macroeconomic nature (for example, foreign currency, oil price, interest nature.
rates) and some of which are more specific to the Group (for example,
liquidity and credit risks). Significant extraneous market events could also
materially damage the Group's competitiveness and/or creditworthiness and our
ability to access funding. This would affect operational results or the Demand for our products and services could be adversely affected by factors
outcomes of financial transactions. such as current and predicted air traffic, fuel prices and age/replacement
rates of customer fleets.
Restructuring
Political risk
Failure to deliver our restructuring, including changing our behaviours could
result in: missed opportunities; dissatisfied customers; disengaged employees; Geopolitical factors that lead to an unfavourable business climate and
ineffective use of our significant tensions between major trading parties or blocs which could impact
the Group's operations. Examples include: changes in key political
scarce resources; and increasing the likelihood of other principal risks relationships; explicit trade protectionism, differing tax or regulatory
occurring. This could lead to a business that is overly dependent on a small regimes, potential for conflict or broader political issues; and heightened
number of products and customers; failure to achieve our vision; non-delivery political tensions.
of financial targets; and not meeting investor expectations.
Talent and capability
Inability to identify, attract, retain and apply the critical capabilities and
skills needed in appropriate numbers to effectively organise, deploy and
incentivise our people would threaten the delivery of our strategies.
Payments to shareholders
The Board decided in 2020 that, given the uncertain macro outlook, they would
not recommend a final shareholder payment for 2019 or make an interim
shareholder payment for 2020. In addition, under the terms of certain of its
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
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 December 2021 (CREST
holders must submit their election in CREST by 2.55pm). The payment of C Share
redemption monies will be made on 5 January 2022 and the CRIP purchase will
begin as soon as practicable after 6 January 2022.
Statement of Directors' responsibilities
The Directors confirm that, to the best of their knowledge:
· the condensed consolidated interim financial statements have been
prepared in accordance with IAS 34 Interim Financial Reporting as adopted by
the UK;
· the interim management report includes a fair review of the
information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first six months
of the financial year and their impact on the condensed consolidated interim
financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related
party transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial
position or performance of the entity during that period; and any changes in
the related party transactions described in the last Annual Report that could
do so.
The Directors of Rolls-Royce Holdings plc at 11 March 2021 are listed in its
Annual Report 2020 on pages 64 to 66. Subsequently, Stephen Daintith resigned
as a Director on 19 March 2021 and Frank Chapman, Lewis Booth and Jasmin
Staiblin resigned on 13 May 2021. Panos Kakoullis was appointed as a Director
on 3 May 2021 and Anita Frew was appointed on 1 July 2021.
By order of the Board
Warren East
Panos
Kakoullis
Chief Executive Chief
Financial Officer
5 August
2021
5 August 2021
Independent review report to Rolls-Royce Holdings plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed Rolls-Royce Holdings plc's condensed consolidated interim
financial statements (the "interim financial statements") in the 2021 Half
Year Results of Rolls-Royce Holdings plc for the 6 month period ended
30 June 2021 (the "period").
Based on our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
What we have reviewed
The interim financial statements comprise:
· the Condensed consolidated balance sheet as at 30 June 2021;
· the Condensed consolidated income statement and Condensed
consolidated statement of comprehensive income for the period then ended;
· the Condensed consolidated cash flow statement for the period then
ended;
· the Condensed consolidated statement of changes in equity for the
period then ended; and
· the explanatory notes to the interim financial statements.
The interim financial statements included in the 2021 Half Year Results of
Rolls-Royce Holdings plc have been prepared in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting' and the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The 2021 Half Year Results, including the interim financial statements, is the
responsibility of, and has been approved by the directors. The directors are
responsible for preparing the 2021 Half Year Results in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial
statements in the 2021 Half Year Results based on our review. This report,
including the conclusion, has been prepared for and only for the company for
the purpose of complying with the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority and for no
other purpose. We do not, in giving this conclusion, accept or assume
responsibility for any other purpose or to any other person to whom this
report is shown or into whose hands it may come save where expressly agreed by
our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information
Performed by the Independent Auditor of the Entity' issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and, consequently, does not
enable us to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do not express
an audit opinion.
We have read the other information contained in the 2021 Half Year Results and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
5 August 2021
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