REG - Rolls-Royce Holdings - 2022 Half Year Results
04/08/2022 07:15
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RNS Number : 8527U Rolls-Royce Holdings plc 04 August 2022
4 August 2022
ROLLS-ROYCE HOLDINGS PLC - 2022 Half Year Results
Focused on operational and commercial drivers to address risks and deliver
better performance
· Good progress with growth in order intake, revenue and
cash flow
- Another record quarter in Q2 for order intake in Power Systems
- £1.1bn free cash flow improvement due to commercial discipline and
increased flying hours
- Underlying profit margins were lower in the first half, but are expected
to improve in the second half
· Managing external challenges with operational and
commercial discipline
- Concentrating spend with leading suppliers; increased inventory to
address supply constraints
- Controlling costs and applying contractual and pricing discipline to
limit inflation risk
· Delivering on our commitments
- 2022 Group guidance unchanged with focus on managing risks
- ITP Aero disposal received regulatory clearance and is progressing
towards completion
- Medium-term Civil Aerospace targets reflect commitment to become leaner
and more agile
Warren East, Chief Executive said: "We have progressed well in the first half
of the year, with more than a £1bn improvement in free cash flow, strong
order intake in Power Systems, increased engine flying hours and commercial
discipline in Civil Aerospace, and targeted investment to support longer-term
growth in Defence and New Markets. We are actively managing the impacts of a
number of challenges, including rising inflation and ongoing supply chain
disruption, with a sharper focus on pricing, productivity and costs. As a
result of the actions we have taken over the last few years, our Civil
Aerospace business is becoming leaner and more agile, and we are executing on
the levers of value creation we shared at our investor event in May. This is
setting us up to deliver on our commitments this year and in the future. We
are making choices to manage the current challenges, deliver better returns,
reduce debt, and generate long-term sustainable value."
Half Year 2022 Group financial performance
Statutory 2022 H1 Statutory Underlying 2022 H1 Underlying 2021 H1
2021 H1
£ million, continuing operations
Revenue 5,600 5,159 5,308 5,227
Gross profit 1,062 814 942 1,097
Operating profit 223 38 125 307
Operating margin % 4.0% 0.7% 2.4% 5.9%
(Loss)/profit for the period (1,611) 394 (188) 104
(Loss)/earnings per share (pence) (19.29) 4.73 (2.24) 1.25
( )
£ million 2022 H1 2021 H1
Free cash flow from continuing operations (68) (1,174)
Group free cash flow (77) (1,151)
( )
£ million 2022 H1 2021 H1
Net cash inflow/(outflow) from operating activities 597 (679)
£ million 30 Jun 2022 31 Dec 2021
Net debt (5,142) (5,157)
Good progress with growth in order intake, revenue and cashflow
Demand for our products and services is growing with another period of record
order intake in Power Systems, continued recovery in Civil Aerospace engine
flying hours and high visibility of future revenues in Defence with a strong
order book. We are focusing on operational and commercial drivers to drive
better performance. For example, we are strategically partnering with key
suppliers, robustly applying contractual pricing protection in long-term
contracts and utilising commodity hedges and fixed price purchasing
agreements. We are also focused on maximising efficiency and productivity in
manufacturing, such as increasing the repair and reuse of spare parts in
services and de-risking original equipment (OE) deliveries with a temporary
increase in inventory.
Our underlying profit margins fell in the period. Adjusting for foreign
exchange movements, contract catch-ups and provision movements our underlying
profit margins slightly increased in the period. The prior period included
legacy spare parts sales in Defence, which had a £45m positive profit impact,
and a foreign exchange movement in Civil Aerospace of approximately £270m
reflecting a one-off transactional revaluation credit.
Free cash outflow from continuing operations of £68m improved by £1.1bn on
the prior period, led mostly by increased flying hour receipts in Civil
Aerospace. Working capital (excluding long term service agreement (LTSA)
balance movements) was a £269m outflow in 2022 H1 with higher inventory
resulting from the impact of supply chain disruption partly offset by improved
payables performance.
Managing external challenges with operational and commercial discipline
The external environment remains challenging, with the war in Ukraine,
inflationary pressures, and supply chain constraints all impacting our
business. We expect these issues will persist into 2023 and have been managing
our business to address and minimise the impact.
We are tightly controlling costs and have consolidated our supply chain,
focusing on the best performing suppliers, and we have long-term agreements
and hedges in place that offer reasonable protection against
near-term price increases. Inventory has increased across the Group, due to
supply chain constraints, and we aim to reduce inventories in the second half
of the year. In many of our long-term contracts we are able to pass on a
proportion of higher input costs to our customers through commercial
discipline on pricing and robust contract management.
We have faced some challenges in hiring, particularly for experienced
engineers with certain skills and technical expertise. We are addressing this
with actions to attract, train and retain talent. Our early years recruitment
has been strong and our retention rates are good.
Delivering on our commitments
We are working across the Group to increase the productivity and efficiency of
our operations and improve commercial discipline to drive a better and more
balanced financial performance.
In May, we hosted an investor day at our Civil Aerospace operations in Derby
and committed to medium-term financial targets for the business founded on
five value drivers (see page 6). We have focused on these in the first half of
2022, with rigorous supply chain management, leaner manufacturing, and strong
commercial discipline helping to address supply chain and inflation
challenges. Our new engine programmes are driving fleet growth and will, as
they mature, need less engineering time, enabling us to spend less and shift
our focus towards extending time on wing and lowering shop visit costs.
We have committed to rebuilding our balance sheet in the medium-term. Our
liquidity position remains strong with £7.3bn of liquidity including £2.8bn
in cash at the period end. Net debt of £(5.1)bn included £1.9bn leases and
we have no significant debt maturities before 2024. No interim shareholder
payment will be made for 2022.
We have received all the required regulatory approvals for the sale of ITP
Aero and expect the transaction to complete in the coming weeks. The proceeds
will be used to reduce debt by repaying early the £2bn loan, which is
supported by an 80% guarantee from UK Export Finance. This loan expires in
2025 and is our only drawn debt exposed to interest rate movements.
Outlook and financial guidance
Our Group guidance for 2022, as first set out on 24 February, is unchanged. We
continue to expect:
· low-to-mid-single digit underlying revenue growth
· full year underlying operating profit margin to be broadly
unchanged on the prior year (2021 FY: 3.8%)
· modestly positive free cash flow in 2022
Our full year guidance is based on expected improvement in Civil Aerospace in
the second half driven by planned higher spare large engine sales and large
engine shop visits.
We are well positioned to deliver on our near and medium-term commitments
despite the increasing challenges and risks around the pace of global economic
growth, supply chain disruption and rising inflation that are expected to
persist into next year.
Results webcast and conference call
A webcast will be held at 09:00 (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 be available on the Investor
Relations section of the Rolls-Royce website.
Webcast details
To register for the webcast, including Q&A participation, visit the
following link:
https://edge.media-server.com/mmc/p/crfwe8bs
(https://edge.media-server.com/mmc/p/crfwe8bs)
The same link will provide access to a replay of the webcast shortly after the
event concludes.
Conference call details
To register for the conference call, visit the following link:
https://register.vevent.com/register/BIb3ce38aad37f417d92343128228fb6bc
(https://register.vevent.com/register/BIb3ce38aad37f417d92343128228fb6bc)
After registering you will receive a list of dial-in details and a personal
PIN code.
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)
Trading update
Our next scheduled trading update will be on 3 November 2022.
Enquiries:
Investors: Isabel Green +44 7880 160976 / Jeremy Bragg +44 7795 840875
Media: Richard Wray +44 7810 850055
Photographs and broadcast-standard video are available at www.rolls-royce.com
(http://www.rolls-royce.com) .
A PDF copy of this report can be downloaded from www.rolls-royce.com/investors
(http://www.rolls-royce.com/investors) .
This results announcement contains forward-looking statements. Any statements
that express forecasts, expectations and projections are not guarantees of
future performance and will not be updated. By their nature, these statements
involve risk and uncertainty, and a number of factors could cause material
differences to the actual results or developments. This report is intended to
provide information to shareholders, is not designed to be relied upon by any
other party, or for any other purpose and Rolls-Royce Holdings plc and its
directors accept no liability to any other person other than under English
law.
LSE: RR.; ADR: RYCEY; LEI: 213800EC7997ZBLZJH69
Underlying income statement (1)
£ million 2022 H1 2021 H1 Change Organic Change (2) M&A (3) FX
Underlying revenue 5,308 5,227 81 223 (148) 6
Underlying OE revenue 2,194 2,239 (45) 42 (76) (11)
Underlying services revenue 3,114 2,988 126 181 (72) 17
Underlying gross profit 942 1,097 (155) (135) (19) (1)
Gross margin % 17.7% 21.0% (3.3)%pt (3.4)%pt
Commercial and administrative costs (499) (444) (55) (71) 10 6
Research and development costs (371) (386) 15 8 4 3
Joint ventures and associates 53 40 13 11 − 2
Underlying operating profit 125 307 (182) (187) (5) 10
Underlying operating margin % 2.4% 5.9% (3.5)%pt (3.8)%pt
Financing costs (236) (174) (62) (62) 1 (1)
Underlying (loss)/profit before taxation (111) 133 (244) (249) (4) 9
Taxation (77) (29) (48) (50) 1 1
(Loss)/profit for the period (188) 104 (292) (299) (3) 10
Underlying (loss)/earnings per share (pence) (2.24) 1.25 (3.49) (3.61)
Note: H1 2021 transactions were translated at an achieved rate of £$1.39,
close to the average prevailing exchange rate, whereas H1 2022 transactions
were translated at £$1.50, close to the average rate of our hedge book.
Underlying revenue of £5.3bn was 4% higher led by market recovery in Power
Systems and improvement in Civil Aerospace including a £241m LTSA catch up
(2021 H1: £160m). Defence revenue was lower against a strong comparative
partly due to the non-repeat of legacy spare parts sales in the prior period.
Underlying gross profit of £942m included a £219m Civil Aerospace LTSA catch
up (2021 H1: £166m) partly offset by a £(29)m charge in Other businesses
related to a legacy business and a £(22)m negative contract charge in Defence
due to inflation risk. The £(135)m organic change also included the
non-recurrence of legacy spare parts sales in Defence, which had a £45m
positive profit impact in the prior period, a foreign exchange movement in
Civil Aerospace of approximately £270m reflecting a one-off transactional
revaluation credit in the prior period, and other movements which had a
positive profit impact in the current period. After taking these items into
account, gross profit was slightly ahead period on period.
Underlying operating profit was £125m, due to lower underlying gross profit
and included £(371)m in research and development costs with an increase in
spend in Defence, Power Systems and New Markets balanced by lower spend in
Civil Aerospace. Commercial and administrative costs increased by 16%
reflecting the absence of furlough assistance received in 2021, increased
activity as markets recover in Power Systems and Civil Aerospace and the
ramp-up of activity in New Markets.
Underlying loss before taxation of £(111)m included net financing costs of
£(236)m of which £(162)m related to interest bearing debt.
Underlying loss for the year of £(188)m included a tax charge of £(77)m
(2021 H1: £(29)m).
Underlying loss per share of (2.24)p was based on 8,345m weighted average
shares in issue.
Business unit underlying performance
£ million Underlying revenue Organic Change (2) Underlying operating (loss)/profit Organic Change (2) Trading cash flow Change
Civil Aerospace 2,339 174 (79) (124) 63 1,127
Defence 1,609 (164) 189 (86) 89 −
Power Systems 1,371 229 119 80 (76) (147)
New Markets (4) 1 − (48) (20) (30) 1
Other businesses (4) (7) (11) (29) (25) (1) 21
Corporate/eliminations (4) (5) (5) (27) (12) (24) (2)
Total (continuing operations) 5,308 223 125 (187) 21 1,000
For footnotes referenced in tables on pages 4-13, see page 13.
Civil Aerospace
£ million 2022 H1 Organic Change (2) FX 2021 H1 Change Organic Change (2)
Underlying revenue 2,339 174 (3) 2,168 8% 8%
Underlying OE revenue 660 (56) (6) 722 (9)% (8)%
Underlying services revenue 1,679 230 3 1,446 16% 16%
Underlying gross profit 256 (127) 3 380 (33)% (33)%
Gross margin % 10.9% 17.5% (6.6)%pt (6.7)%pt
Commercial and administrative costs (183) (38) − (145) 26% 26%
Research and development costs (202) 33 2 (237) (15)% (14)%
Joint ventures and associates 50 8 1 41 22% 20%
Underlying operating (loss)/profit (79) (124) 6 39
Underlying operating margin % (3.4)% 1.8% (5.2)%pt (5.4)%pt
2022 H1 2021 H1 Change
Trading cash flow 63 (1,064) 1,127
2022 H1 key operational metrics: Large Engine Business Aviation/ Regional Total Change
OE deliveries 78 71 149 1
LTSA engine flying hours (EFH) (000's) 4,524 1,593 6,117 1,521
Total LTSA shop visits 321 156 477 27
…of which major shop visits 113 150 263 15
Note: H1 2021 transactions were translated at an achieved rate of £$1.39,
close to the average prevailing exchange rate, whereas H1 2022 transactions
were translated at £$1.50, close to the average rate of our hedge book.
Large engine LTSA flying hours were 4.5m, up 43% year on year. We are still in
a relatively early stage of recovery at around 60% of 2019 levels. Total LTSA
engines flying hours (which includes Business Aviation and Regional flying
hours) of 6.1m were up 33% year on year. Inflation and supply chain challenges
have increased and we are addressing the impact through tight cost control and
robust long-term contracts with suppliers and customers that aim to pass
through inflation risk. Shop visit volumes and OE deliveries were lower than
planned in the period, mainly due to supply chain constraints and delays in
spare engine sales. Shop visits and OE deliveries are both expected to
accelerate in the second half as supply chain actions take effect and assembly
rates improve.
- Underlying revenue of £2.3bn, up 8% on the prior period. OE revenue of
£660m was down 8% reflecting the mix of engine deliveries with fewer large
spare engines sold and more Business Aviation engines. Services revenue of
£1,679m was up 16% on the prior period and included £241m positive LTSA
catch-ups (2021 H1: £160m).
- Underlying gross profit of £256m was £127m lower than the prior period
and included £219m of LTSA catch-ups (2021 H1: £166m) and other movements
which had a positive profit impact in the current period. These were offset by
a foreign exchange movement in Civil Aerospace of approximately £270m
reflecting a one-off transactional revaluation credit in the prior period. As
a result, gross profit was broadly flat on the prior period. Approximately
half of the revaluation unwound in 2021 H2.
- Underlying operating loss of £(79)m reflected the lower gross profit and
included £(183)m in commercial and administrative costs, £(38)m more than
the prior period due to business recovery and the absence of government
furlough assistance schemes. This was partly offset by a £33m reduction in
research and development costs.
- Trading cash flow was £63m, £1.1bn better than 2021 H1 driven mostly by
higher EFH receipts. Shop visits also increased but at a slower pace. Working
capital was modestly negative, but significantly better than the prior period,
with higher inventory partly offset by increased payables with higher RRSP
payables and warranties reflecting the recovery in flying hour and shop visit
volumes in the first half. Trading cash flow included £(265)m outflow related
to the settlement of excess foreign exchange derivative contracts and there
was limited net impact from OE concessions in the period.
Outlook
Engine flying hours are expected to maintain the current trajectory and return
to pre-pandemic levels in 2024 as global travel restrictions are lifted. In
2022, we expect 350-400 total OE deliveries and 1,100-1,200 total shop visits.
We are focused on keeping costs low and maintaining productivity gains as shop
visits increase. This supports our updated expectation for good (previously
modest) revenue growth and improved profitability as well as a substantial
improvement in trading cash flow in 2022, compared with the prior year.
Civil Aerospace medium-term outlook
On 13 May we announced new medium-term targets for our Civil Aerospace
business based on a simplified value drivers framework and supported by
expected flying hours recovery by 2024. A replay of the event is available on
our website. We have guided:
· Underlying revenue growth at a low double-digit percentage
compound annual growth rate
· Underlying operating profit margin expansion to high single digit
percentage
· Trading cash flow to comfortably exceed operating profit
Our five Civil Aerospace value drivers highlight the operational side of our
business and provide a deeper understanding of how the changes we have
implemented are making it a better quality, more resilient, and more agile
business which is set up to increase returns and deliver long-term sustainable
growth.
1. Maximise service receipts with better pricing on customer contracts on
a growing fleet as the market recovers
2. Reduce service costs by extending the time between shop visits (time on
wing) as engine programmes mature and reducing shop visit costs with more
repair and reuse of spare parts
3. Improve OE margins through increased productivity, controlled overhead
costs and a focused purchasing strategy to reduce the cost of components and
assembly
4. Grow Business Aviation with the ramp-up of the Pearl engine programme
and market share gains
5. Investment cycle has passed its peak with less intense new product
introduction, and the nature of spend reflects increased partnering to reduce
capital intensity and a rebalancing towards cost reduction and product
maturity work
Medium-term Civil Aerospace guidance summary FY 2021 Medium-term
DRIVERS
Engine deliveries (large and business engines) 309 Mid teens CAGR
Shop visit volumes (large, business and regional engines) 953 Low double-digit CAGR
LTSA engine flying hours (large, business and regional engines) 10.3m Approaching 2019 levels
FINANCIAL (underlying)
OE revenue £1,612m Low teens CAGR
Services revenue £2,924m High single-digit CAGR
Total revenue £4,536m Low double-digit CAGR
R&D charge as % of sales 10% ~5%
Operating profit margin (4)% High single-digit
Change in net LTSA balance £66m ~£500m average pa
Trading cash flow £(1,670)m Comfortably exceeding operating profit
Base year for medium-term compound average growth rate (CAGR) is 2021
Defence
£ million 2022 H1 Organic Change (2) FX 2021 H1 Change Organic Change (2)
Underlying revenue 1,609 (164) 52 1,721 (7)% (9)%
Underlying OE revenue 697 (42) 20 719 (3)% (6)%
Underlying services revenue 912 (122) 32 1,002 (9)% (12)%
Underlying gross profit 326 (77) 8 395 (17)% (19)%
Gross margin % 20.3% 23.0% (2.7)%pt (2.5)%pt
Commercial and administrative costs (86) (6) (1) (79) 9% 8%
Research and development costs (53) (5) (1) (47) 13% 11%
Joint ventures and associates 2 2 − − − −
Underlying operating profit 189 (86) 6 269 (30)% (32)%
Underlying operating margin % 11.7% 15.6% (3.9)%pt (3.9)%pt
2022 H1 2021 H1 Change
Trading cash flow 89 89 −
Our Defence business continued to perform well, with the business cycle
normalising in 2022 following two years of increased support from customers to
offset COVID-19 challenges. We achieved our first milestone on the B-52
programme with the completion of a review in support of the F130 integration
activities onto the airframe. The rapid twin pod test to validate our
integrated design for the B-52 will commence in the coming months on our
outdoor test stand at NASA's Stennis site in Mississippi.
Our Defence portfolio of long-cycle products is not immediately exposed to
short term changes in defence demand, but the increase in military activity
and spending this year has further underpinned the longer-term outlook for the
business. We have seen continued impetus on key future programmes including
Tempest, the new fighter jet programme which is targeting entry into service
in 2035, and the next generation nuclear submarine programmes for the UK. We
await the decision on the Future Long-Range Assault Aircraft (FLRAA) programme
in the US, with the outcome expected in the coming months.
- Order intake was £1.4bn with a book-to-bill ratio of 0.9x. Our £6.5bn
order book and the long operational life of our products give high visibility
of future revenue. Order intake in the first half included a new 11-year
contract to support the Adour engine, which powers the Hawk jet trainer
aircraft.
- Underlying revenue decreased 9% to £1.6bn. Timing on the signature of the
next tranche for the
F-35B and lower spare engine sales in Naval led to a 6% reduction in OE
revenue. Services revenue was £122m (12%) lower partly due to the non-repeat
of a large legacy spare parts sales in 2021. The remainder of the decline
related to engine flying hours and delays from suppliers.
- Underlying gross profit of £326m was £77m (19%) lower than the prior
period including the
non-recurrence of legacy spare parts sales in Defence, which had a £45m
positive profit impact in the prior period. The 20.3% gross margin in 2022 H1
reflected a more normal mix of activity. Product margin remained strong
through the period despite supply chain and labour inflationary challenges,
and a £(22)m charge in respect of inflationary increases to the costs to
deliver long term services contracts.
- Underlying operating profit was £189m, a decrease of 32% compared with
2021 H1 mostly due to the lower gross profit. Commercial and administrative
costs increased by £6m. Research and development costs were up by £5m
including investment in directed energy and future programmes. We are also
playing a key role in Project Pele which will deliver the first advanced
microreactor in the US.
- Trading cash flow at £89m was flat year on year. The increase in
inventory reflected supply chain challenges and lower deliveries. This was
offset by higher payables and a one-off customer receipt.
Outlook
We expect modest revenue growth in 2022, helped by an easier comparable in the
second half of the year, with strong order book cover securing near term
activity in all our end markets. We are increasing investment to support
future growth and recent orders, develop products that will help decarbonise
the military, and modernise our facilities. This, combined with a return to
more usual levels of spare parts sales in 2022, is expected to result in a low
double digit operating margin (new guidance) and strong cash conversion.
-
Power Systems
£ million 2022 H1 Organic Change (2) M&A (3) FX 2021 H1 Change Organic Change (2)
Underlying revenue 1,371 229 2 (41) 1,181 16% 20%
Underlying OE revenue 849 153 2 (24) 718 18% 21%
Underlying services revenue 522 76 − (17) 463 13% 17%
Underlying gross profit 401 110 1 (11) 301 33% 37%
Gross margin % 29.2% 25.5% 3.7%pt 3.7%pt
Commercial and administrative costs (204) (19) − 5 (190) 7% 10%
Research and development costs (79) (12) − 2 (69) 14% 17%
Joint ventures and associates 1 1 − 1 (1)
Underlying operating profit 119 80 1 (3) 41 190% 195%
Underlying operating margin % 8.7% 3.5% 5.2%pt 5.1%pt
2022 H1 2021 H1 Change
Trading cash flow (76) 71 (147)
Demand for our products remains very strong with continued record order intake
in the first half. Demand has been strongest for power generation with orders
including mission critical backup power for data centres for very large
customers worldwide. Global supply chain challenges have continued to impact
the availability of key components. This is restricting our pace of revenue
recovery and drove a substantial increase in inventory in the first half which
we aim to reduce in the second half. We have a dedicated taskforce in place to
mitigate risk and accelerate OE deliveries with actions such as increased risk
monitoring to identify and resolve supply chain issues early, and technical
substitution of certain cast parts with 3D printed alternatives.
- Order intake of £2.1bn was 53% higher than the prior period and included
our highest quarter for order intake on record. The book-to-bill ratio was
1.5x with strongest growth in demand in power generation governmental and
industrial end markets. Our order cover for 2023 is building well and we are
already at full capacity for 2023 in some market segments.
- Underlying revenue of £1.4bn was up 20%. Aftermarket services grew 17%
with increased activity in both stationary and mobile solutions. OE revenue
was up 21% with particularly strong sales in power generation, marine and
governmental end markets.
- Underlying gross profit grew by 37% to £401m and gross margin increased
by 3.7%pt. This reflected the mix of activity with an increase in higher
margin services and lower warranty costs as well as improved utilisation in
our manufacturing facilities compared with the prior period when we were in
the earlier stages of recovery.
- Underlying operating profit was £119m, up £80m giving an operating
margin of 8.7%. The increase in commercial and administrative costs reflected
higher employee costs as activity increased as well as wage inflation
pressures. The 17% increase in research and development costs reflects
investment in new product development and transitioning products to
sustainable fuel alternatives as we help our customers towards net-zero
emissions.
- Trading cash outflow was £(76)m (2021 H1: £71m), with a negative cash
conversion as inventory increased to meet growth demand and to manage the
supply chain challenges. It also reflected our investment in a 54%
non-controlling stake in electrolysis stack specialist Hoeller Electrolyzer.
Outlook
We expect good revenue growth in 2022 supported by record order intake, partly
held back by the current global supply chain constraints. We expect our
operating margin to be broadly flat, with higher activity levels utilisation
offset by continued inflationary pressures and increased research and
development in net zero solutions. Cash conversion is expected to improve in
the second half with some of the recent inventory build unwinding, but is
still expected to be lower for the full year.
New Markets
£ million 2022 H1 Organic Change (2) FX 2021 H1 Change Organic Change (2)
Underlying revenue 1 − (1) 2 (50)% −
Underlying services revenue 1 − (1) 2 (50)% −
Underlying gross loss (2) (2) − − − −
Commercial and administrative costs (9) (9) − − − −
Research and development costs (37) (9) − (28) 32% 32%
Underlying operating loss (48) (20) − (28) 71% 71%
2022 H1 2021 H1 Change
Trading cash flow (30) (31) 1
New Markets is our reporting segment for investment phase businesses focused
on addressing the opportunities being created by the transition to net zero
and addressing the climate change challenge. This segment comprises two
businesses with no significant revenues but high future potential: Rolls-Royce
SMR and Rolls-Royce Electrical.
Our small modular reactor (SMR) design is going through the UK Generic Design
Assessment (GDA) process, which is expected to take several years to complete.
The estimated costs are mostly covered by third party investment and a UK
Government grant in addition to £50m (approximately 10% of the total)
self-funded by the Group. Factory sites where we will make the heavy vessel
modules for our SMR are being identified in preparation for the build process,
with minimal infrastructure investment prior to receipt of first order. We
welcomed the decision by the European Parliament this year to categorise
nuclear power as an environmentally sustainable energy source in the EU
taxonomy for sustainable activities.
Our Electrical business supports electrical engineering projects across the
Group enabling us to take an agile approach to specialist engineering
resource. In the first half, we announced the development of turbogenerator
technology which includes a new small engine designed for hybrid-electric
applications in Civil Aerospace and Defence. In July we signed an agreement
with Hyundai Motor Group to collaborate on bringing all-electric propulsion
and hydrogen fuel cell technology to the advanced air mobility market. Our
urban air mobility customers are targeting entry into service by 2026, using
our torque dense, compact, and highly reliable electrical propulsion units.
- Underlying operating loss of £(48)m was £(20)m greater than the prior
period comparative as we grew the workforce in both businesses with a focus on
engineering capability for research and development activities. The rate of
cost increase is slightly lower than expected as a result of a tight labour
market in experienced engineers with certain skills and technical expertise.
- Trading cash flow of £(30)m was £18m better than operating losses mainly
due to the receipt of third party funding and investment for the SMR
programme.
Outlook
Investment in research and development will continue to increase in the second
half of the year as we add to the engineering teams and take our new products
through development and regulatory processes. Trading cash outflow guidance
has been updated, and is now expected to be around two thirds of the
underlying operating loss in 2022 (previously £100m better), with the
difference mainly due to the phased receipt of secured third party equity
investment in Rolls-Royce SMR.
Statutory income statement
£ million 2022 H1 2021 H1 Change
Revenue 5,600 5,159 441
Gross profit 1,062 814 248
Operating profit 223 38 185
Gain/(loss) on disposal/acquisition of businesses 77 (7) 84
Net financing (costs)/income (2,054) 83 (2,137)
(Loss)/profit before taxation (1,754) 114 (1,868)
Taxation 143 280 (137)
(Loss)/profit from continuing operations (1,611) 394 (2,005)
(Loss)/earnings per share from continuing operations (pence) (19.29) 4.73 (24.02)
The adjustments between the underlying income statement and the statutory
income statement are set out in note 2 to the condensed consolidated interim
financial statements.
Statutory revenue of £5.6bn was 9% higher than the prior period. Along with
the improvements in underlying revenue, statutory revenue benefited from
strengthening USD exchange rates.
Gross profit of £1.1bn was 30% higher than the prior period. Gross profit
included a £219m LTSA catch-up in Civil Aerospace (2021 H1: £166m) and other
movements which had a positive profit impact in the current period, partly
offset by a lower contribution from Defence due to the non-repeat of legacy
spare parts sales in the prior period. Gross profit also benefited from
strengthening USD exchange rates.
Operating profit improved to £223m from £38m in the prior period. Research
and development costs were 4% lower. Commercial and administrative costs
increased on the prior period with strengthening USD exchange rates,
non-repeat of furlough assistance received in 2021, increased activity as
markets recover in Power Systems and Civil Aerospace and increased headcount
in New Markets as we grow our SMR and Electrical businesses.
Loss before taxation of £(1.8)bn included £(2.1)bn of net financing costs,
of which £(1.8)bn were
mark-to-market on derivative contracts and in year foreign exchange losses,
and £(0.2)bn net interest payable. It also included a £76m gain on the
disposal of AirTanker Holdings.
Loss from continuing operations of £(1.6)bn included a tax credit of £143m.
The tax credit mainly relates to the increase in the UK deferred tax asset on
unrealised foreign exchange losses on derivative contracts together with tax
on profits and losses in overseas jurisdictions. The £280m credit in the
prior period mostly related to movements in deferred tax balances due to the
UK tax rate change from 19% to 25%, effective from April 2023.
Balance sheet
£ million 30 Jun 2022 31 Dec 2021 Change
Intangible assets 4,054 4,041 13
Property, plant and equipment 3,899 3,917 (18)
Right-of-use assets 1,116 1,203 (87)
Joint ventures and associates 466 404 62
Contract assets and liabilities (9,646) (8,836) (810)
Working capital (5) 1,870 1,458 412
Provisions (2,248) (1,582) (666)
Net debt (6) (5,126) (5,110) (16)
Net financial assets and liabilities (6) (4,003) (3,034) (969)
Net post-retirement scheme surpluses/(deficits) 48 (225) 273
Taxation 1,953 1,787 166
Held for sale 1,320 1,305 15
Other net assets and liabilities 36 36 −
Net liabilities (6,261) (4,636) (1,625)
Other items
USD hedge book (USDbn) 21 22 (1)
Civil LTSA asset 928 915 13
Civil LTSA liability (7,664) (7,129) (535)
Civil net LTSA liability (6,736) (6,214) (522)
Key drivers of balance sheet movements are detailed below:
Contract assets and liabilities: The £(810)m movement in the net liability
balance was mainly driven by Civil Aerospace LTSA revenue billed being ahead
of revenue recognised in the period, together with foreign exchange movements.
In addition, there was an increase in advance payments received in Defence.
Working capital: The £412m increase reflected a £780m increase in inventory
driven by supply chain issues, delayed outputs and a ramp up in preparation
for second half sales with the largest increases in Civil Aerospace and Power
Systems with a more modest increase in Defence. A £610m increase in
receivables reflected increased sales volumes and foreign exchange impacts. A
£(978)m increase in payables reflected higher levels of purchases to support
expected sales growth in future periods, as well as foreign exchange impacts
due to the stronger USD.
Provisions: The £666m increase primarily reflected the adoption of the
amendment to IAS 37 for Onerous Contracts - Cost of Fulfilling a Contract
which increased contract loss provisions by £723m on 1 January 2022. The
amendment clarifies that the direct cost of fulfilling a contract comprises
the incremental costs of fulfilling that contract and also an allocation of
other costs that relate directly to fulfilling contracts.
Net debt: Remained broadly flat at £5.1bn.
Net financial assets and liabilities: £(969)m movement was primarily driven
by the change in the fair value of foreign exchange contracts due to the
impact of the movement in £:US$ exchange rates from £:$1.35 at
31 December 2021 to £:$1.21 at 30 June 2022.
Net post-retirement scheme surpluses: £273m movement primarily driven by an
increase in discount rates on pension liabilities.
Taxation: The net tax asset increased by £166m, driven by £213m related to
the increase in the deferred tax asset on unrealised losses on derivative
contracts, which was partially offset by a reduction in net deferred tax
assets on movements in post-retirement schemes (£85m).
Funds flow statement (7)
( )
£ million 2022 H1 2021 H1 (8) Change
Underlying operating profit 125 307 (182)
Operating profit/(loss) from discontinued operations 68 (93) 161
Depreciation, amortisation and impairment 455 504 (49)
Lease payments (capital plus interest) (114) (171) 57
Expenditure on intangible assets (82) (71) (11)
Capital expenditure (PPE) (115) (124) 9
Movement in inventory (692) (219) (473)
Movement in receivables/payables/contract balances (excluding Civil LTSA) 423 (400) 823
Civil Aerospace net LTSA balance change 433 (108) 541
Movement in provisions (116) (136) 20
Cash flows on settlement of excess derivative contracts (265) (303) 38
Fees on undrawn facilities (23) (35) 12
Net interest received and paid (114) (81) (33)
Cash flow on financial instruments net of realised losses included in 35 (52) 87
operating profit
Other (6) 27 (33)
Trading cash flow 12 (955) 967
…. Of which relates to continuing operations 21 (979) 1,000
Contributions to defined benefit pensions in excess of underlying charge (1) (94) 93
Taxation paid (88) (102) 14
Group free cash flow (77) (1,151) 1,074
…. Of which relates to continuing operations (68) (1,174) 1,106
Disposals and acquisitions (18) (22) 4
Exceptional Group restructuring (48) (134) 86
Payment of financial penalties − (156) 156
Excluding: settlement of excess derivative contracts 265 303 (38)
Excluding: capital expenditure (including investment from non-controlling 213 223 (10)
interests and movement in investments)
Excluding: capital element of lease payments 95 147 (52)
Excluding: interest paid 172 150 22
Other (5) (39) 34
Net cash inflow/(outflow) from operating activities 597 (679) 1,276
Key changes in the funds flow items are described below:
Expenditure on intangible assets: expenditure of £(82)m in the period (2021
H1: £(71)m) included £(48)m capitalised research and development (2021 H1:
£(41)m), which was modestly higher than the prior period reflecting the mix
of spend across Civil Aerospace engine programmes.
Capital expenditure: investment of £(115)m was £9m lower than the prior
period, largely reflecting reduced spend in Civil Aerospace, primarily due to
timing impacts, partly offset by higher investment in Power Systems and in New
Markets.
Increase in inventory: global supply chain constraints and parts supply
shortages resulted in a £(692)m outflow as inventory increased in the first
half, with the largest increases in Civil Aerospace and Power Systems. In
Civil Aerospace work-in-progress inventory grew, as engine output delays more
than offset the impact of lower incoming parts from suppliers, alongside a
higher level of assembled engines held in inventory due partly to the timing
of spare engine sales. Power Systems inventory also grew, with higher
work-in-progress due to parts shortages as well as planned inventory build to
support the expected increase in sales in the second half. There was a more
modest increase in Defence.
Movement in receivables/payables/contract balances (excluding Civil LTSA):
inflow of £423m in the period (2021 H1: £(400)m) driven mainly by Civil
Aerospace including higher trade payables and joint venture payables due
largely to timing at the end of 2021, as well as higher RRSP payables and
warranties due to the recovery in flying hours in the first half and planned
increase in shop visit volumes in the second half. Defence also saw an
increase in contract liabilities in the period, reflecting advance payments
and engine deposits.
Movement in Civil Aerospace net LTSA creditor: the £433m movement (2021 H1:
£(108)m) reflected EFH invoiced receipts of £1,648m (2021 H1: £1,002m)
offset by Civil Aerospace LTSA revenue in the income statement of £1,215m
(2021 H1: £1,110m). The increase in EFH invoiced receipts reflected higher
engine flying hours, recovery in customer invoicing of minimum utilisation
clauses, and modest timing benefits, while the higher LTSA revenue was driven
by £81m higher positive LTSA catch-ups year-on-year, and £24m due to
modestly higher shop visit volumes.
Movement in provisions: the £(116)m movement (2021 H1: £(136)m) was largely
in Civil Aerospace. It included a small net increase in the Trent 1000
provision reflecting delays in certification, more than offset by a reduction
of contract loss provisions primarily due to a reversal reflecting a change in
the discount rate due to higher inflation and interest rates. £143m of
provisions were utilised in the period, mainly for warranty and guarantees,
contract losses and Trent 1000 costs.
Cash flows on settlement of excess derivative contracts: relates to the cash
settlement costs in the period for the offsetting foreign exchange contracts
that were entered into to reduce the size of the US Dollar hedge book in 2020.
The cash settlement costs of £1.7bn occur across 2020-2026, of which £0.8bn
remains to be paid in future periods including £(61)m due to be settled in
the second half.
Interest: the net payment of £(114)m in the year was higher than the prior
period (2021 H1: (£(81)m), reflecting the full impact during the period of
the drawdown of the £2bn UK Export Finance (UKEF) facility in June 2021.
Contributions to defined benefit pensions: cash contributions were broadly in
line with the income statement charge in the first half. In the prior period
cash contributions were £94m higher than the income statement charge,
reflecting payment deferrals from 2020.
Notes to financial tables and commentary on pages 4-13:
(1 ) 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 32.
(2 ) Organic change at constant translational currency (constant currency)
applying FY21 average rates to 2021 and 2022, excluding M&A. All
commentary is provided on an organic basis unless otherwise stated.
(3 ) M&A includes 2021 Power Systems acquisitions comprising of
Shanghai, Cooltech and joint venture Kowry and Other businesses 2021 disposals
of Bergen Engines AS and Civil Nuclear Instrumentation & Controls.
(4 ) Other businesses include the trading results of the Bergen Engines AS
business until the date of disposal on 31 December 2021 and the results of the
Civil Nuclear Instrumentation & Control business until the date of
disposal on 5 November 2021. The trading results of the UK Civil Nuclear
business have been included in Other businesses. The underlying results of
Other businesses and Corporate and Inter-segment activities for 30 June 2021
have been restated to reclassify the results of the Group's SMR and electrical
activities as New Markets.
(5 ) Net working capital includes inventory, trade receivables and payables
and similar assets and liabilities.
(6 ) Net debt includes £102m (31 Dec 2021: £37m) of the fair value of
derivatives included in fair value hedges and the element of fair value
relating to exchange differences on the underlying principal of derivatives in
cash flow hedges. Net debt has been adjusted to exclude net debt held for
sale.
( )
(7 ) The derivation of the summary funds flow statement above from the
reported cash flow from operating activities is included on page 53.
(8 ) The comparative information for the period ended 30 June 2021 has been
re-presented to be on a comparable basis with the definition of underlying
results. There is no change to trading or group free cash
flow.
A reconciliation of alternative performance measures to their statutory
equivalent is provided on pages 52 and 53.
Condensed consolidated interim financial statements
Condensed consolidated income statement
For the half-year ended 30 June 2022
( )
Half-year to 30 June 2022 Half-year to
30 June 2021
Notes £m £m
Continuing operations
Revenue 2 5,600 5,159
Cost of sales (1) (4,538) (4,345)
Gross profit 2 1,062 814
Commercial and administrative costs 2 (514) (424)
Research and development costs 2, 3 (373) (390)
Share of results of joint ventures and associates 48 38
Operating profit 223 38
Gain/(loss) arising on acquisition and disposal of businesses 19 77 (7)
Profit before financing and taxation 300 31
Financing income (2) 4 215 280
Financing costs (2) 4 (2,269) (197)
Net financing (costs)/income (2,054) 83
(Loss)/profit before taxation (1,754) 114
Taxation 5 143 280
(Loss)/profit for the period from continuing operations (1,611) 394
Discontinued operations
Profit for the period 60 16
Costs of disposal of discontinued operations (4) (17)
Profit/(loss) for the period from discontinued operations 19 56 (1)
(Loss)/profit for the period (1,555) 393
Attributable to:
Ordinary shareholders (1,554) 393
Non-controlling interests (NCI) (1) −
(Loss)/profit for the period (1,555) 393
Other comprehensive income/(expense) 610 (145)
Total comprehensive (expense)/income for the period (945) 248
(Loss)/earnings per ordinary share attributable to ordinary shareholders: 6
From continuing operations:
Basic (19.29)p 4.73p
Diluted (19.29)p 4.72p
From continuing and discontinued operations:
Basic (18.62)p 4.72p
Diluted (18.62)p 4.71p
Underlying earnings per ordinary share are shown in note 6.
(1)( ) Cost of sales includes a charge for expected credit losses of £28m
(30 June 2021: £48m). Further details can be found in note 10.
(2) Included within financing are fair value changes on derivative
contracts. Further details can be found in notes 2, 4 and 12.
Condensed consolidated statement of comprehensive income
For the half-year ended 30 June 2022
Half-year to 30 June 2022 Half-year to
30 June 2021
Notes £m £m
(Loss)/profit for the period (1,555) 393
Other comprehensive income/(expense) (OCI)
Actuarial movements in post-retirement schemes 16 329 (12)
Revaluation to fair value of other investments (5) −
Share of OCI of joint ventures and associates 1 (4)
Related tax movements (85) 16
Items that will not be reclassified to profit or loss 240 −
Foreign exchange translation differences on foreign operations 375 (174)
Cash flow hedge reserve reclassified to income statement on disposal of 19 62 −
businesses
Movement on fair values debited to cash flow hedge reserve 8 (41)
Reclassified to income statement from cash flow hedge reserve (88) 38
Costs of hedging 4 −
Share of OCI of joint ventures and associates − 32
Related tax movements 9 −
Items that will be reclassified to profit or loss 370 (145)
Total other comprehensive income/(expense) 610 (145)
Total comprehensive (expense)/income for the period (945) 248
( )
Attributable to:
Ordinary shareholders (944) 248
Non-controlling interests (1) −
Total comprehensive (expense)/income for the period (945) 248
( ) ( ) ( ) ( )
Total comprehensive (expense)/income for the period attributable to ordinary ( ) ( ) ( )
shareholders arises from:
Continuing operations ( ) (1,001) 316
Discontinued operations ( ) 57 (68)
Total comprehensive (expense)/income for the period attributable to ordinary ( ) (944) 248
shareholders
Condensed consolidated balance sheet
At 30 June 2022
30 June 31 December 2021
2022
Notes £m £m
ASSETS
Intangible assets 7 4,054 4,041
Property, plant and equipment 8 3,899 3,917
Right-of-use assets 9 1,116 1,203
Investments - joint ventures and associates 466 404
Investments - other 36 36
Other financial assets 12 433 361
Deferred tax assets 2,433 2,249
Post-retirement scheme surpluses 16 1,157 1,148
Non-current assets 13,594 13,359
Inventories 4,446 3,666
Trade receivables and other assets 10 5,993 5,383
Contract assets 11 1,498 1,473
Taxation recoverable 97 90
Other financial assets 12 136 46
Short-term investments 1 8
Cash and cash equivalents 2,747 2,621
Current assets 14,918 13,287
Assets held for sale 19 2,101 2,028
TOTAL ASSETS 30,613 28,674
LIABILITIES
Borrowings and lease liabilities 13 (321) (279)
Other financial liabilities 12 (992) (689)
Trade payables and other liabilities 14 (6,681) (6,016)
Contract liabilities 11 (4,214) (3,599)
Current tax liabilities (113) (101)
Provisions for liabilities and charges 15 (567) (475)
Current liabilities (12,888) (11,159)
Borrowings and lease liabilities 13 (7,655) (7,497)
Other financial liabilities 12 (3,478) (2,715)
Trade payables and other liabilities 14 (1,888) (1,575)
Contract liabilities 11 (6,930) (6,710)
Deferred tax liabilities (464) (451)
Provisions for liabilities and charges 15 (1,681) (1,107)
Post-retirement scheme deficits 16 (1,109) (1,373)
Non-current liabilities (23,205) (21,428)
Liabilities associated with assets held for sale 19 (781) (723)
TOTAL LIABILITIES (36,874) (33,310)
NET LIABILITIES (6,261) (4,636)
EQUITY
Called-up share capital 1,674 1,674
Share premium 1,012 1,012
Capital redemption reserve 166 165
Hedging reserves (50) (45)
Merger reserve 650 650
Translation reserve 717 342
Accumulated losses (10,460) (8,460)
Equity attributable to ordinary shareholders (6,291) (4,662)
Non-controlling interests 30 26
TOTAL EQUITY (6,261) (4,636)
Condensed consolidated cash flow statement
For the half-year ended 30 June 2022
Notes Half-year to 30 June 2022 Half-year to
£m 30 June 2021
£m
Reconciliation of cash flows from operating activities
Operating profit from continuing operations 223 38
Operating profit/(loss) from discontinued operations 19 68 (93)
Operating profit/(loss) 291 (55)
Loss on disposal of property, plant and equipment 16 2
Share of results of joint ventures and associates (48) (38)
Dividends received from joint ventures and associates 19 14
Amortisation and impairment of intangible assets 7 138 159
Depreciation and impairment of property, plant and equipment 8 203 243
Depreciation and impairment of right-of-use assets 9 127 128
Adjustment of amounts payable under residual value guarantees within lease (1) (3)
liabilities (1)
Impairment of and other movements on investments − 2
Decrease in provisions (94) (211)
Increase in inventories (692) (219)
Movement in trade receivables/payables and other assets/liabilities 183 (136)
Movement in contract assets/liabilities 682 (178)
Financial penalties paid (2) − (156)
Cash flows on other financial assets and liabilities held for operating (167) (45)
purposes
Interest received 6 3
Net defined benefit post-retirement cost recognised in profit before financing 16 27 26
Cash funding of defined benefit post-retirement schemes 16 (29) (131)
Share-based payments 24 18
Net cash inflow/(outflow) from operating activities before taxation 685 (577)
Taxation paid (88) (102)
Net cash inflow/(outflow) from operating activities 597 (679)
Cash flows from investing activities
Net movement in other investments (5) (6)
Additions of intangible assets (94) (89)
Disposals of intangible assets 7 5 2
Purchases of property, plant and equipment (125) (126)
Disposals of property, plant and equipment 25 5
Disposal of businesses 19 179 (8)
Movement in investments in joint ventures and associates and other movements (14) (2)
on investments
Movement in short-term investments 7 (1)
Net cash outflow from investing activities (22) (225)
Cash flows from financing activities
Repayment of loans (23) (942)
Proceeds from increase in loans 1 2,003
Capital element of lease payments (95) (147)
Net cash flow from (decrease)/increase in borrowings and leases (117) 914
Interest paid (120) (84)
Interest element of lease payments (29) (31)
Fees paid on undrawn facilities (23) (35)
Cash flows on settlement of excess derivative contracts (3) 4 (265) (303)
Transactions with NCI (4) 25 −
NCI on formation of subsidiary − 2
Redemption of C Shares (1) (2)
Net cash (outflow)/inflow from financing activities (530) 461
Change in cash and cash equivalents 45 (443)
Cash and cash equivalents at 1 January 2,639 3,496
Exchange gains/(losses) on cash and cash equivalents 98 (75)
Cash and cash equivalents at 30 June (5) 2,782 2,978
( )
(
)
( )
Condensed consolidated cash flow statement continued
For the half-year ended 30 June 2022
( )
(1) Where the cost of meeting residual value guarantees is less than that
previously estimated, as costs have been mitigated or liabilities waived by
the lessor, the lease liability has been remeasured. To the extent that the
value of this remeasurement exceeds the value of the right-of-use asset, the
reduction in the lease liability is credited to cost of sales.
(2) Relates to penalties paid on agreements with investigating bodies.
(3 ) During the period, the Group incurred a cash outflow of £265m as a
result of settling foreign exchange contracts that were originally in place to
sell $1,600m receipts. Further detail is provided in note 4.
(4) Relates to NCI investment received in the period, in respect of
Rolls-Royce SMR Limited.
(5) 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.
Half-year to 30 June 2022 Half-year to
£m 30 June 2021
£m
Reconciliation of movements in cash and cash equivalents to movements in net
debt
Change in cash and cash equivalents 45 (443)
Cash flow from decrease/(increase) in borrowings and leases 117 (914)
Less: settlement of related derivatives included in fair value of swaps below − 6
Cash flow from (decrease)/increase in short-term investments (7) 1
Change in net debt resulting from cash flows 155 (1,350)
New leases and other non-cash adjustments to lease liabilities and borrowings (67) (17)
Exchange (losses)/gains on net debt (162) 2
Fair value adjustments 24 144
Reclassifications − 19
Movement in net debt (50) (1,202)
Net debt at 1 January (5,194) (3,827)
Net debt at 30 June excluding the fair value of swaps (5,244) (5,029)
Fair value of swaps hedging fixed rate borrowings 102 57
Net debt at 30 June (5,142) (4,972)
Condensed consolidated cash flow statement continued
For the half-year ended 30 June 2022
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 (1) ( ) Other movements At 30 June
£m £m £m £m £m £m £m
2022
Cash at bank and in hand 795 182 29 − − − 1,006
Money market funds 49 174 − − − − 223
Short-term deposits 1,777 (327) 68 − − − 1,518
Cash and cash equivalents (per balance sheet) 2,621 29 97 − − − 2,747
Cash and cash equivalents included within assets held for sale 25 11 1 − − − 37
Overdrafts (7) 5 − − − − (2)
Cash and cash equivalents 2,639 45 98 − − − 2,782
(per cash flow statement)
Short-term investments 8 (7) − − − − 1
Other current borrowings (2) 1 − − − − (1)
Non-current borrowings (6,023) − (98) 25 − (23) (6,119)
Borrowings included within liabilities held for sale (59) 21 (1) (1) − − (40)
Lease liabilities (1,744) 91 (157) − − (44) (1,854)
Lease liabilities included within liabilities held for sale (13) 4 (4) − − − (13)
Financial liabilities (7,841) 117 (260) 24 − (67) (8,027)
Net debt excluding fair value of swaps (5,194) 155 (162) 24 − (67) (5,244)
Fair value of swaps hedging fixed rate borrowings (2) 37 − 98 (33) − − 102
Net debt (3) (5,157) 155 (64) (9) − (67) (5,142)
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 (2) 251 (6) (41) (147) − − 57
Net debt (3) (3,576) (1,356) (39) (3) 19 (17) (4,972)
(1) Reclassifications during the period to 30 June 2021 included 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 prior period.
(2 ) Fair value of swaps hedging fixed rate borrowings reflects the impact
of derivatives on repayments of the principal amount of debt. Net debt
therefore includes the fair value of derivatives included in fair value hedges
(30 June 2022: £81m, 31 December 2021: £114m) and the element of fair value
relating to exchange differences on the underlying principal of derivatives in
cash flow hedges (30 June 2022: £21m, 31 December 2021: £(77)m).
(3 ) As at 30 June 2022, net debt excluding lease liabilities was
£(3,275)m (31 December 2021: £(3,400)m).
Condensed consolidated statement of changes in equity
For the half-year ended 30 June 2022
Attributable to ordinary shareholders
Notes Called-up Share premium Capital redemption reserve Hedging reserves (1) Merger reserve Translation reserve Accumulated losses (2) Total Non-controlling interests (NCI) Total equity
share capital
£m £m £m £m £m £m £m £m £m £m
At 31 December 2021 as previously reported 1,674 1,012 165 (45) 650 342 (8,460) (4,662) 26 (4,636)
Adoption of amendment to IAS 37 (post-tax) 1 - - - - - - (729) (729) - (729)
At 1 January 2022 1,674 1,012 165 (45) 650 342 (9,189) (5,391) 26 (5,365)
Loss for the period − − − − − − (1,554) (1,554) (1) (1,555)
Foreign exchange translation differences on foreign operations − − − − − 375 − 375 − 375
Cash flow hedge reserve reclassified to income statement on disposal of 19 − − − 62 − − − 62 − 62
businesses
Movement on post-retirement schemes 16 − − − − − − 329 329 − 329
Fair value movement on cash flow hedges − − − 8 − − − 8 − 8
Reclassified to income statement from cash flow hedge reserve − − − (88) − − − (88) − (88)
Costs of hedging 12 − − − 4 − − − 4 − 4
Revaluation to fair value of other investments − − − − − − (5) (5) − (5)
OCI of joint ventures and associates − − − − − − 1 1 − 1
Related tax movements − − − 9 − − (85) (76) − (76)
Total comprehensive expense for the period − − − (5) − 375 (1,314) (944) (1) (945)
Redemption of C Shares (3) − − 1 − − − (1) − − −
Share-based payments - direct to equity (4) − − − − − − 24 24 − 24
Transactions with NCI (5) − − − − − − 20 20 5 25
Other changes in equity in the period − − 1 − − − 43 44 5 49
At 30 June 2022 1,674 1,012 166 (50) 650 717 (10,460) (6,291) 30 (6,261)
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 16 - - - - - - (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 for the period - - - 31 - (176) 393 248 - 248
Redemption of C Shares (3) - - 2 - - - (2) - - -
Share-based payments - direct to equity (4) - - - - - - 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)
(1 ) The hedging reserves include the cash flow hedge reserve of £(54)m and
the costs of hedging reserve of £4m. See note 12.
(2 ) At 30 June 2022, 16,297,976 ordinary shares with a net book value of
£39m (30 June 2021: 34,938,153 ordinary shares with a net book value of
£78m) were held for the purpose of share-based payment plans and included in
accumulated losses. During the period:
- 13,332,079 ordinary shares with a net book value of £27m (30 June 2021:
4,928,564 ordinary shares with a net book value of £11m) vested in
share-based payment plans; and
- the Company acquired none (30 June 2021: none) of its ordinary shares via
reinvestment of dividends received on its own shares and purchased none (30
June 2021: none) of its ordinary shares through purchases on the London Stock
Exchange.
(3) 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.
(4)( ) 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.
(5) Relates to NCI investment received in the period in respect of
Rolls-Royce SMR Limited.
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 limited by shares
incorporated under the Companies Act 2006 and domiciled in the UK. These
condensed consolidated interim financial statements of the Company as at and
for the six months to 30 June 2022 consist of the consolidation of the
financial statements of the Company and its subsidiaries (together referred to
as the 'Group') and include the Group's interest in jointly controlled and
associated entities.
The consolidated financial statements of the Group as at and for the year
ended 31 December 2021 (2021 Annual Report) 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 financial
statements on 4 August 2022.
Statement of compliance
These condensed consolidated financial statements have been prepared on the
basis of the policies set out in the 2021 Annual Report, except for changes
below, 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
Annual Report 2021.
The interim figures up to 30 June 2022 and 2021 are unaudited. The 2021
financial statements, which were prepared in accordance with UK adopted
International Accounting Standards (IAS) and interpretations issued by the
IFRS interpretations Committee applicable to companies reporting under UK
adopted IAS, have been reported on by the Group's auditors and delivered to
the registrar of companies. The report of the auditors was (i) unqualified,
(ii) did not include a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying their report, and (iii) did
not contain a statement under section 498(2) or (3) of the Companies Act 2006.
Changes to accounting policies
IAS 37 Provisions, contingent liabilities and contingent assets
The Group adopted the amendment to IAS 37 for Onerous Contracts - Cost of
Fulfilling a Contract on 1 January 2022. The amendment clarifies the meaning
of 'costs to fulfil a contract', explaining that the direct cost of fulfilling
a contract comprises the incremental costs of fulfilling that contract (for
example, direct labour and materials) and also an allocation of other costs
that relate directly to fulfilling contracts. As a result of the amendment,
the Group now includes additional allocated costs when determining whether a
contract is onerous and in the quantification of the provision recognised in
the event of a contract being onerous. These primarily relate to (a) fixed
overheads in our operational areas that are incurred irrespective of
manufacturing load, (b) fixed overheads of providing services including engine
health monitoring and IT costs, and (c) depreciation of spare engines that the
Group owns that are used to support the delivery of our contractual
commitments to customers under LTSAs.
The Group has assessed the impact of this amendment on its contracts and has
included additional allocated costs that have increased the total contract
loss provision by £723m as at 1 January 2022 (see note 15). All material
elements impact Civil Aerospace contracts. Of this increase, £38m relates to
current provisions and £685m to non-current provisions. A tax credit has not
been recognised on the increase in the provision relating to the UK (see Note
5 for details).
As required by the transition arrangement in relation to the amendment,
comparative information has not been restated. The cumulative effect of
initially applying the amendment has been recognised as an adjustment to the
opening balance of retained earnings as at 1 January 2022.
Revision to IFRS not applicable in 2022
IFRS 17 Insurance Contracts
IFRS 17 is effective from 1 January 2023. The new standard established the
principles for the recognition, measurement, presentation and disclosure of
insurance contracts within the scope of the Standard. The objective of IFRS 17
is to ensure that an entity provides relevant information that faithfully
represents those contracts.
The Group has performed an assessment to establish where an impact is expected
and, at this time, the Group believes that the impact is restricted to its
captive insurance company. The process of assessing the financial impact on
the condensed consolidated financial statements will continue during the
second half of 2022.
Other
IBOR reform transition
A number of the Group's lease liabilities are based on a LIBOR index. These
are predominantly referencing USD LIBOR, which is not expected to cease until
2023, hence the change in relation to these contracts has not impacted the
2022 financial statements.
Post balance sheet events
On 3 August 2022, the Group announced that the Spanish government has approved
the sale of ITP Aero to a consortium of investors led by Bain Capital Private
Equity. As a result, the completion of the transaction is expected in the
coming weeks.
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 18-month period to
February 2024, taking into account certain risks and uncertainties, including
having regard to the Group's net liabilities of £6,261m.
Liquidity and borrowings
At 30 June 2022, the Group had liquidity of £7.3bn including cash and cash
equivalents of £2.8bn (including £37m of cash included in Assets Held for
Sale) and undrawn facilities of £4.5bn.
The Group's committed borrowing facilities at 30 June 2022 and 28 February
2024 are set out below. None of the facilities are subject to any financial
covenants or rating triggers which could accelerate repayment.
(£m) 30 June 2022 28 February 2024
Issued Bond Notes (1) 3,995 3,995
Other loans 44 −
UKEF £2bn loan (2) 2,000 2,000
UKEF £1bn loan (undrawn) (3) 1,000 1,000
Revolving Credit Facility (undrawn) (4) 2,500 2,500
Bank Loan Facility (undrawn) (5) 1,000 −
Total committed borrowing facilities 10,539 9,495
(1) The value of Issued Bond Notes reflects the impact of derivatives on
repayments of the principal amount of debt. The bonds mature by May 2028.
(2) The £2,000m UKEF loan matures in August 2025.
(3) The £1,000m UKEF loan matures in March 2026 (currently undrawn).
(4) The £2,500m Revolving Credit Facility matures in March 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 £9.5bn available throughout the period to 28
February 2024.
Forecasts
The Group has modelled two forecasts in its assessment of going concern which
have been considered by the Directors. The base case forecast reflects a best
estimation of future trading. A stressed downside forecast has also been
modelled.
The Group's base case forecast reflects the relaxation of travel restrictions
and an ongoing increase in customer confidence coming out of the COVID-19
pandemic. This drives a steady recovery of trading, especially in the civil
aviation industry. The modelling assumes Civil large engine EFHs recover to
pre-pandemic levels during 2024.
The proceeds from the planned disposal of ITP Aero have been included in the
base case forecast, together with an assumption that these proceeds would be
used to repay debt facilities, although there is no formal or contractual
commitment to do so.
The stressed downside forecast assumes no further recovery in Civil large
engines, with EFHs modelled at average Q2 2022 levels over the 18-month going
concern period. The stressed downside forecast also reflects additional
near-term cost inflationary risk, load reduction through our factories, and
possible supply chain challenges.
Conclusion
After reviewing the current liquidity position, the cash flow forecasts
modelled under both the base case and stressed downside taking into account
potential risks and uncertainties, the Directors consider that the Group has
sufficient liquidity to continue in operational existence for a period of at
least 18-months from the date of this report. The Directors 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 continued to consider the impact of climate change,
particularly in the context of the disclosures made in the Strategic Report in
the 2021 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 2024 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; and
- 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.
The Directors have considered the impact of climate change on a number of key
estimates within the financial statements, including:
- the estimates of future cash flows considered for trigger assessments
or used in impairment assessments, where applicable, 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 11).
As details of what specific future intervention measures will be taken by
governments are not yet available, carbon pricing has been used to quantify
the potential impact of future policy changes on the Group. The approach is
consistent with that disclosed in note 1 in the 2021 Annual Report.
The climate related estimates and assumptions that have been considered to be
key areas of judgement or sources of estimation uncertainty for the period
ended 30 June 2022 are those relating to the recoverable amount of non-current
assets including goodwill, capitalised development costs, recovery of deferred
tax assets, recognition and measurement of provisions and recognition of
revenue on long-term contracts. However, there have been no significant
changes to assumptions, including the potential impact of carbon prices on the
Group's cost base, since the year ended 31 December 2021.
1 Basis of preparation and accounting policies continued
Ukraine crisis
The Directors have considered the impact on the condensed consolidated
financial statements from Russia's invasion of Ukraine. The following areas
have been considered in preparing the financial statements:
- the impact to operating profit as a result of ceasing operations
and trading in Russia;
- the resultant costs associated with the cessation of operations
in Russia, including severance costs, asset impairments, and the write-down of
inventory and financial assets; and
- the impairment of non-current assets where the Russian invasion
of Ukraine, and resulting sanctions, meets the definition of a triggering
event and impairment reviews have been performed where required.
The impact on the financial statements based on the above considerations was
not material during the period.
Economic outlook
The Directors recognise the challenges in the current economic environment
including escalating inflation, energy costs and challenges in the supply
chain. The Group is actively managing the impacts associated with inflation
and supply chain disruption through a sharper focus on pricing, productivity
and costs. The Directors have considered these impacts in the estimates
included within the cash flow forecasts used for the going concern assessment,
recognition of deferred tax assets and long-term contract accounting
assumptions. There has been no material impact on the financial statements as
a result of these considerations.
1 Basis of preparation and accounting policies continued
Key areas of judgement and sources of estimation uncertainty
The determination of the Group's accounting policies requires judgement. The
subsequent application of these policies requires estimates and the actual
outcome may differ from that calculated. The key areas of judgement and
sources of estimation uncertainty as at 31 December 2021, that were assessed
as having a significant risk of causing material adjustments to the carrying
amount of assets and liabilities, are set out in note 1 to the financial
statements in the 2021 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 practical.
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, including customer pricing, and costs of Based upon the stage of completion of all large engine LTSA contracts within
long-term contractual arrangements including the impact of climate change. Civil Aerospace as at 30 June 2022, the following changes in estimate would
How performance on
result in catch-up adjustments being recognised in the period in which the
long-term aftermarket contracts should be measured. Estimates of the long-term foreign exchange rates. estimates change (at underlying rates):
Whether any costs should be treated as wastage. Uncertainty remains in the short-term over the timing of recovery of demand, - A change in forecast EFHs of 1% over the remaining term of the contracts
in particular in relation to the civil aviation industry, coming out of the would impact LTSA income and to a lesser extent costs, resulting in an impact
Whether sales of spare engines to joint ventures are at fair value. COVID-19 pandemic. Estimates of future revenue within Civil Aerospace are of around £10m. This would be expected to be seen as a catch-up change in
based upon future EFH forecasts, influenced by assumptions over the time revenue or, to the extent it impacts onerous contracts, within cost of sales.
When revenue should be recognised in relation to spare engine sales. period and profile over which the civil aviation industry will recover.
- A 1% increase or decrease in our pricing to customers over the life of the
contracts would lead to a revenue catch-up adjustment in the next 12 months of
around £100m.
- A 1% increase or decrease in shop visit costs over the life of the
contracts would change the stage of completion and lead to a revenue catch-up
adjustment in the next 12 months of around £25m.
Risk and revenue sharing arrangements (RRSAs) Determination of the nature of entry fees received.
Taxation Estimates are necessary to assess whether it is probable that sufficient A 5% change in margin or shop visits (which could be driven by fewer flying
suitable taxable profits will arise in the UK to utilise the deferred tax hours as a result of climate change) would result in an increase/decrease in
assets. This is largely driven by the Civil Aerospace business and the the deferred tax asset in respect of UK losses of around £150m, which equates
estimates described above. to around a £1.2bn increase/reduction in profit.
If only 90% of assumed future cost increases are passed on to customers, this
would result in a decrease in the deferred tax asset of around £40m, and if
the potential impact of carbon prices on the Group's cost base was to double,
this would be around £110m.
Further detail is included in note 5.
Discontinued operations and assets held for sale Whether the ITP Aero business and associated consolidation adjustments meets
the criteria to be classified as held for sale and a discontinued operation.
Research and development Determination of the point in time where costs incurred on an internal
programme development meet the criteria for capitalisation or ceasing
capitalisation.
Determination of the basis for amortising capitalised development costs.
Leases Determination of the lease term. Estimates of the payments required to meet residual value guarantees at the The lease liability at 30 June 2022 included £452m 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 £119m is payable in the next 12 months, £125m 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.
Provisions Whether any costs relating to contracts with customers should be treated as Estimates of the time to resolve the technical issues on the Trent 1000, A 12-month delay in the availability of the modified HPT blade could lead to a
wastage. including the development of the modified high-pressure turbine (HPT) blade.
£40-70m increase in the Trent 1000 wastage costs provision.
Estimates of the future revenues and costs to fulfil onerous contracts. An increase in Civil Aerospace large engines estimates of LTSA costs of 1%
over the remaining term of the contracts could lead to a £90-110m increase in
Estimates of the long-term foreign exchange rates. the provision for contract losses across all programmes.
Post-retirement benefits The valuation of the Group's defined benefit pension schemes are based on A reduction in the discount rate from 3.90% to 3.65% could lead to an increase
assumptions determined with independent actuarial advice. The size of the net in the defined benefit obligations of the RR UK Pension Fund of approximately
surplus is sensitive to the actuarial assumptions, which include the discount £260m. 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
(BPO). An increase in the assumed rate of inflation of 0.25% (RPI of 3.5% and CPI of
2.95%) could lead to an increase in the defined benefit obligations of the RR
UK Pension Fund of approximately £90m.
A one-year increase in life expectancy from 21.8 years (male aged 65) and from
23.2 years (male aged 45) would increase the defined benefit obligations of
the RR UK Pension Fund by approximately £215m.
Where applicable, it is assumed that 50% (31 December 2021: 50%) of members of
the RR UK Pension Fund will transfer out of the fund on retirement with a
share of funds transfer. An increase of 5% in this assumption would increase
the defined benefit obligation by £20m.
2 Analysis by business segment
The analysis by business segment is presented in accordance with IFRS 8
Operating Segments, on the basis of those segments whose operating results are
regularly reviewed by the Board (who acts as the Chief Operating Decision
Maker as defined by IFRS 8). The Group's four divisions are set out below.
Civil Aerospace - development, manufacture, marketing and sales of commercial aero engines
and aftermarket services
Defence - development, manufacture, marketing and sales of military aero engines,
naval engines, submarine nuclear power plants and aftermarket services
Power Systems - development, manufacture, marketing and sales of integrated solutions
for onsite power and propulsion
New Markets - development, manufacture and sales of small modular reactor (SMR) and
new electrical power solutions
Other businesses include the trading results of the Bergen Engines AS business
until the date of disposal on 31 December 2021 and the results of the Civil
Nuclear Instrumentation & Control business until the date of disposal on 5
November 2021. The trading results of the UK Civil Nuclear business have also
been included in Other businesses. The segmental analysis for the period to 30
June 2021 has been restated to reflect the 2022 definition of Other
businesses.
ITP Aero has been classified as a disposal group held for sale and
discontinued operation since 30 June 2021 and as such, the operating segment
is no longer regularly reviewed by the Board as a basis for making decisions
about the allocation of resources to the business or to assess its
performance. In line with IFRS 8, ITP Aero is no longer considered to meet the
definition of an operating segment and the segmental analysis for the period
to 30 June 2021 has been restated to reflect the assessment of operating
segments.
During the second half of the year to 31 December 2021, the Group assessed
whether its New Markets activities met the criteria of an operating segment in
accordance with IFRS 8. As the Group increases its investment in these
important new technologies, the results of these activities have been combined
and presented as an additional segment reflecting the differing
characteristics and risk profile of these businesses in line with how
performance is reviewed by the Board. These results were previously included
within Other businesses and Corporate and Inter-segment. The segmental
analysis for the period to 30 June 2021 has been restated to reflect the
assessment of operating segments.
Underlying results
The Group presents the financial performance of the businesses in accordance
with IFRS 8 and consistently with the basis on which performance is
communicated to the Board each month.
Underlying results are presented by recording all relevant revenue and cost of
sales transactions at the average exchange rate achieved on effective settled
derivative contracts in the period that the cash flow occurs. The impact of
the revaluation of monetary assets and liabilities using the exchange rate
that is expected to be achieved by the use of the effective hedge book is
recorded within underlying cost of sales. Underlying financing excludes the
impact of revaluing monetary assets and liabilities to period end exchange
rates. Transactions between segments are presented on the same basis as
underlying results and eliminated on consolidation. Unrealised fair value
gains/(losses) on foreign exchange contracts, which are recognised as they
arise in the statutory results, are excluded from underlying results. To the
extent that the previously forecast transactions are no longer expected to
occur, an appropriate portion of the unrealised fair value gain/(loss) on
foreign exchange contracts is recorded immediately in the underlying results.
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 2022, the Group was a net seller (30 June 2021: net
purchaser) of USD at an achieved exchange rate GBP:USD of 1.50 (30 June 2021:
1.39) 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. The derivatives relating to this underlying charge have been
subsequently excluded from the hedge book, and therefore are also excluded
from the calculation of the average exchange rate achieved in the current and
future periods. This charge was reversed in arriving at statutory performance
on the basis that the cumulative fair value changes on these derivative
contracts are recognised as they arise.
In the period to 30 June 2022, cash settlement costs of £265m were incurred
(30 June 2021: £303m).
2 Analysis by business segment continued
Underlying performance excludes the following:
- the effect of acquisition accounting and business disposals;
- impairment of goodwill and other non-current and current assets where the
reasons for the impairment are outside of normal operating activities;
- exceptional items; and
- certain other items which are market driven and outside of the control of
management.
Acquisition accounting, business disposals and impairment
These are excluded from underlying results so that the current 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 useful in providing an
understanding of the Group's financial performance. Exceptional items are
identified by virtue of their size, nature or incidence.
In determining whether an event or transaction is exceptional, the Directors
consider 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.
The tax effects of the adjustments above are excluded from the underlying tax
charge. In addition, changes in tax rates or changes in the amount of
recoverable deferred tax or advance corporation tax recognised are also
excluded.
See page 32 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 Defence Power Systems New Markets (1) Other businesses (1) Corporate and Inter-segment (1) Total underlying
£m £m £m £m £m £m £m
For the half-year ended 30 June 2022
Underlying revenue from sale of original equipment 660 697 849 - (7) (5) 2,194
Underlying revenue from aftermarket services 1,679 912 522 1 - - 3,114
Total underlying revenue 2,339 1,609 1,371 1 (7) (5) 5,308
Gross profit/(loss) 256 326 401 (2) (29) (10) 942
Commercial and administrative costs (183) (86) (204) (9) - (17) (499)
Research and development costs (202) (53) (79) (37) - - (371)
Share of results of joint ventures and associates 50 2 1 - - - 53
Underlying operating (loss)/profit (79) 189 119 (48) (29) (27) 125
For the half-year ended 30 June 2021
Underlying revenue from sale of original equipment 722 719 718 - 80 - 2,239
Underlying revenue from aftermarket services 1,446 1,002 463 2 75 - 2,988
Total underlying revenue 2,168 1,721 1,181 2 155 - 5,227
Gross profit 380 395 301 - 18 3 1,097
Commercial and administrative costs (145) (79) (190) - (11) (19) (444)
Research and development costs (237) (47) (69) (28) (5) - (386)
Share of results of joint ventures and associates 41 - (1) - - - 40
Underlying operating profit/(loss) 39 269 41 (28) 2 (16) 307
(1)( ) The underlying results of Other businesses and Corporate and
Inter-segment activities for 30 June 2021 have been restated to reclassify the
results of the Group's SMR and electrical activities as New Markets.
2 Analysis by business segment continued
Reconciliation to statutory results
Total underlying Underlying adjustments and adjustments to foreign exchange Group statutory results
£m £m £m
For the half-year ended 30 June 2022
Revenue from sale of original equipment 2,194 118 2,312
Revenue from aftermarket services 3,114 174 3,288
Total revenue 5,308 292 5,600
Gross profit 942 120 1,062
Commercial and administrative costs (499) (15) (514)
Research and development costs (371) (2) (373)
Share of results of joint ventures and associates 53 (5) 48
Operating profit 125 98 223
Gain arising on the disposal of businesses - 77 77
Profit before financing and taxation 125 175 300
Net financing (236) (1,818) (2,054)
Loss before taxation (111) (1,643) (1,754)
Taxation (77) 220 143
Loss for the period from continuing operations (188) (1,423) (1,611)
Discontinued operations (1) 59 (3) 56
Loss for the period (129) (1,426) (1,555)
Attributable to:
Ordinary shareholders (128) (1,426) (1,554)
Non-controlling interests (1) − (1)
For the half-year ended 30 June 2021
Revenue from sale of original equipment 2,239 (4) 2,235
Revenue from aftermarket services 2,988 (64) 2,924
Total revenue 5,227 (68) 5,159
Gross profit/(loss) 1,097 (283) 814
Commercial and administrative costs (444) 20 (424)
Research and development costs (386) (4) (390)
Share of results of joint ventures and associates 40 (2) 38
Operating profit/(loss) 307 (269) 38
Loss arising on the disposal of businesses - (7) (7)
Profit/(loss) before financing and taxation 307 (276) 31
Net financing (174) 257 83
Profit/(loss) before taxation 133 (19) 114
Taxation (29) 309 280
Profit for the period from continuing operations 104 290 394
Discontinued operations (1) 43 (44) (1)
Profit for the period 147 246 393
Attributable to:
Ordinary shareholders 147 246 393
Non-controlling interests - - -
(1 ) Discontinued operations relate to the results of ITP Aero and are
presented net of intercompany trading eliminations and related consolidation
adjustments.
( )
2 Analysis by business segment continued
Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition Civil Aerospace Defence Power Systems New Markets (1) Other businesses (1) Corporate and Inter-segment (1) Total underlying
£m £m £m £m £m £m £m
For the half-year ended 30 June 2022
Original equipment recognised at a point in time 660 304 838 - - (5) 1,797
Original equipment recognised over time - 393 11 - (7) - 397
Aftermarket services recognised at a point in time 433 354 483 1 - - 1,271
Aftermarket services recognised over time 1,215 558 39 - - - 1,812
Total underlying customer contract revenue 2,308 1,609 1,371 1 (7) (5) 5,277
Other underlying revenue 31 - - - - - 31
Total underlying revenue 2,339 1,609 1,371 1 (7) (5) 5,308
For the half-year ended 30 June 2021
Original equipment recognised at a point in time 721 301 707 - 80 - 1,809
Original equipment recognised over time 1 418 11 - - - 430
Aftermarket services recognised at a point in time 193 419 404 2 75 - 1,093
Aftermarket services recognised over time 1,197 583 59 - - - 1,839
Total underlying customer contract revenue 2,112 1,721 1,181 2 155 - 5,171
Other underlying revenue 56 - - - - - 56
Total underlying revenue 2,168 1,721 1,181 2 155 - 5,227
(1 ) The underlying results of Other businesses and Corporate and
Inter-segment activities for 30 June 2021 have been restated to reclassify the
results of the Group's SMR and electrical activities as New Markets.
Total underlying Underlying adjustments and adjustments to foreign exchange Group statutory results
£m £m £m
For the half-year ended 30 June 2022
Original equipment recognised at a point in time 1,797 118 1,915
Original equipment recognised over time 397 - 397
Aftermarket services recognised at a point in time 1,271 72 1,343
Aftermarket services recognised over time 1,812 97 1,909
Total customer contract revenue 5,277 287 5,564
Other revenue 31 5 36
Total revenue 5,308 292 5,600
For the half-year ended 30 June 2021
Original equipment recognised at a point in time 1,809 (8) 1,801
Original equipment recognised over time 430 1 431
Aftermarket services recognised at a point in time 1,093 1 1,094
Aftermarket services recognised over time 1,839 (57) 1,782
Total customer contract revenue 5,171 (63) 5,108
Other revenue 56 (5) 51
Total revenue 5,227 (68) 5,159
2 Analysis by business segment continued
Underlying profit adjustments Half-year to 30 June 2021
Half-year to 30 June 2022
Revenue Profit before financing Net financing Revenue Profit before financing Net financing
£m £m £m £m £m £m
Taxation Taxation
£m £m
Total underlying performance 5,308 125 (236) (77) 5,227 307 (174) (29)
Impact of settled derivative contracts on trading transactions (1) A 292 124 (464) 7 (68) (293) 164 10
Unrealised fair value changes on derivative contracts held for trading (2) A - (5) (1,442) 230 - (4) 66 (1)
Unrealised net gain on closing future A - - - - - - (8) -
over-hedged position (3)
Realised net gain on closing future over-hedged position (3) A - - - - - - (7) -
Unrealised fair value change to derivative contracts held for financing (4) A - - 88 (24) - - 38 (10)
Exceptional programme credits (5) B - 22 (3) - - - - -
Exceptional restructuring charge (6) B - (32) - 4 - (11) - (6)
Impairment reversals (7) C - 11 - - - 1 - -
Effect of acquisition accounting (8) C - (23) - 5 - (26) - 7
Pension past-service credit (9) B - 1 - (1) - 11 - (4)
Other D - - 3 (1) - 53 4 (15)
Included in operating profit 292 98 (1,818) 220 (68) (269) 257 (19)
Gains/(losses) arising on the acquisitions C - 77 - - - (7) - -
and disposals of businesses (10)
Impact of tax rate change (11) - - - - - - - 328
Total underlying adjustments 292 175 (1,818) 220 (68) (276) 257 309
Statutory performance per condensed consolidated income statement 5,600 300 (2,054) 143 5,159 31 83 280
A - FX, B - Exceptional, C - M&A and impairment, D - Other
(1)( ) The impact of measuring revenues and costs and the impact of
valuation of assets and liabilities using the period end exchange rate rather
than the achieved rate or the exchange rate that is expected to be achieved by
the use of the hedge book increased reported revenues by £292m (30 June 2021:
reduced by £68m) and increased profit before financing and taxation by £124m
(30 June 2021: reduced profit by £293m). Underlying financing excludes the
impact of revaluing monetary assets and liabilities at the period end exchange
rate.
(2) The underlying results exclude the fair value changes on derivative
contracts held for trading. These fair value changes are subsequently
recognised in the underlying results when the contracts are settled.
(3) In 2020, the Group took action to reduce the size of the USD hedge book by
$11.8bn across 2020-2026, resulting in an underlying charge of £1.7bn at 31
December 2020. In 2021, this estimate was updated to reflect the actual cash
cost and resulted in a £15m gain to underlying finance costs in the period to
30 June 2021.
(4) Includes the losses on hedge ineffectiveness in the period of £9m (30
June 2021: losses of £2m) and net fair value gains of £97m (30 June 2021:
gains of £40m) on any interest rate swaps not designated into hedging
relationships for accounting purposes.
(5) During the period to 30 June 2022, contract loss provisions previously
recognised in respect of the Trent 1000 technical issues which were identified
in 2019 have been reversed due to a reduction in the estimated cost of
settling the obligation. See note 15 for further details.
(6) During the period to 30 June 2022, the Group recorded an exceptional
restructuring charge of £32m (30 June 2021: charge of £11m) which includes
£8m released from the provision and £40m which has been charged directly to
the income statement in relation to a number of ongoing initiatives. Further
details are provided in note 15.
(7)( ) The Group has assessed the carrying value of its assets. Further
details are provided in notes 8 and 9.
(8) The effect of acquisition accounting includes the amortisation of
intangible assets arising on previous acquisitions.
(9) The past-service credit of £1m includes a credit of £6m as a result of
a constructive obligation recognised for the offering of the Bridging Pension
Option (BPO) to other deferred members in the RR UK Pension Fund and a
settlement loss of £5m on the Rolls-Royce North America retirement scheme.
(10) Gains/(losses) arising on the acquisitions and
disposals of businesses are set out in note 19.
(11) The 2021 tax credit relates to the increase in
the UK tax rate from 19% to 25%.
2 Analysis by business segment continued
Balance sheet analysis
( ) Civil Aerospace Defence Power Systems New Markets Total reportable segments
£m £m £m £m £m
At 30 June 2022
Segment assets 16,769 3,196 3,915 105 23,985
Interests in joint ventures and associates 421 10 35 - 466
Segment liabilities (24,183) (2,922) (1,620) (47) (28,772)
Net (liabilities)/assets (6,993) 284 2,330 58 (4,321)
At 31 December 2021
Segment assets 15,846 2,766 3,531 90 22,233
Interests in joint ventures and associates 378 9 16 - 403
Segment liabilities (20,745) (2,635) (1,503) (33) (24,916)
Net (liabilities)/assets (4,521) 140 2,044 57 (2,280)
Reconciliation to the balance sheet
30 June 2022 31 December 2021
£m £m
Reportable segment assets excluding held for sale 23,985 22,233
Other businesses 7 14
Corporate and inter-segment (2,586) (2,255)
Interests in joint ventures and associates 466 403
Assets held for sale (1) 2,101 2,028
Cash and cash equivalents and short-term investments 2,748 2,629
Fair value of swaps hedging fixed rate borrowings 205 135
Deferred and income tax assets 2,530 2,339
Post-retirement scheme surpluses 1,157 1,148
Total assets 30,613 28,674
Reportable segment liabilities excluding held for sale (28,772) (24,916)
Other businesses (31) (11)
Corporate and inter-segment 2,475 2,139
Liabilities associated with assets held for sale (1) (781) (723)
Borrowings and lease liabilities (7,976) (7,776)
Fair value of swaps hedging fixed rate borrowings (103) (98)
Deferred and income tax liabilities (577) (552)
Post-retirement scheme deficits (1,109) (1,373)
Total liabilities (36,874) (33,310)
Net liabilities (6,261) (4,636)
(1) At 30 June 2022, assets and liabilities relating to ITP Aero are
classified as held for sale. At 31 December 2021, assets and liabilities
relating to ITP Aero, the investment in Airtanker Holdings and other
non-current assets related to the Group's site rationalisation activities were
classified as held for sale. For further details see note 19.
3 Research and development
Half-year to 30 June 2022 Half-year to 30 June 2021
£m £m
Gross research and development costs (599) (549)
Contributions and fees (1) 218 153
Expenditure in the period (381) (396)
Capitalised as intangible assets 48 41
Amortisation and impairment of capitalised costs (2) (40) (35)
Net cost recognised in the income statement (373) (390)
Underlying adjustments relating to the effects of acquisition accounting, 2 4
impairment and foreign exchange (3, 4)
Net underlying cost recognised in the income statement (371) (386)
(1) ( ) Includes government funding.
(2) ( ) See note 7 for analysis of amortisation and impairment. During the
prior period, amortisation of £5m has been incurred within the disposal group
recognised as a discontinued operation.
(3) During the period, no (30 June 2021: no) impairment of research and
development was recorded.
(4) Underlying adjustments relating to the effects of acquisition
accounting, impairment and foreign exchange have been re-presented to align
with the changes to segmental analysis. For further detail, see note 2.
4 Net financing
Half-year to 30 June 2022 Half-year to 30 June 2021
Per consolidated income statement Underlying financing (1) Per consolidated income statement Underlying financing (1)
£m £m £m £m
Interest receivable 9 9 3 3
Net fair value gains on foreign currency contracts − − 25 -
Net fair value gains on non-hedge accounted interest rate swaps (2) 97 − 40 -
Net fair value gains on commodity contracts 95 − 41 -
Financing on post-retirement scheme surpluses 14 − 7 -
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 215 9 280 18
Interest payable (171) (171) (106) (113)
Net fair value losses on foreign currency contracts (1,537) − - -
Finance charge relating to financial RRSAs (6) (6) - -
Financing on post-retirement scheme deficits (12) − (10) -
Net foreign exchange losses (464) − - -
Fees on undrawn facilities (31) (31) (35) (35)
Other financing charges (48) (37) (46) (44)
Financing costs (2,269) (245) (197) (192)
Net financing (costs)/income (2,054) (236) 83 (174)
Analysed as:
Net interest payable (162) (162) (103) (110)
Net fair value (losses)/gains on derivative contracts (1,345) − 106 15
Net post-retirement scheme financing 2 − (3) -
Net foreign exchange (losses)/gains (464) − 164 -
Net other financing (85) (74) (81) (79)
Net financing (costs)/income (2,054) (236) 83 (174)
(1) See note 2 for definition of underlying
results. Underlying financing has been re-presented to align with the changes
to segmental analysis.
(2 ) The condensed consolidated income statement shows the net fair value
gains/(losses) on any interest rate swaps not designated into hedging
relationships for accounting purposes. Underlying financing reclassifies the
fair value movements on these interest rate swaps to net interest payable.
(3) In 2020, the Group took action to reduce the size of the USD hedge book by
$11.8bn across 2020-2026, resulting in an underlying charge of £1,689m at 31
December 2020. In 2021, this estimate was updated to reflect the actual cash
settlement cost of £1,674m and resulted in a £15m gain to underlying finance
costs in the year to 31 December 2021. The cash settlement costs of £1,674m
covers the period 2020-2026, £186m was incurred in 2020, £452m was incurred
in the year to 31 December 2021 and £265m was incurred in the period to 30
June 2022. The Group estimates that future cash outflows of £61m will be
incurred in the remainder of 2022, £389m to be incurred in 2023 and £321m
spread over 2024 to 2026.
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 £143m on a statutory loss before taxation
of £1,754m (30 June 2021: tax credit of £280m on a statutory profit before
taxation of £114m), giving a statutory rate of 8.1% (30 June 2021: (245.9%)).
The key driver of the tax credit in 2022 is the increase in the UK deferred
tax asset relating to the unrealised foreign exchange losses on derivative
contracts. This is reduced by tax charges on profits, mainly in the US and
Germany. The key driver of the tax credit in 2021 was the impact of the
increase in the UK tax rate from 19% to 25% on deferred tax assets.
Tax reconciliation - continuing operations:
Half-year to 30 June 2022 Half-year to 30 June 2021
£m Tax rate £m Tax rate
(Loss)/profit before taxation (1,754) 114
Nominal tax (credit)/charge at UK corporation rate of 19% (333) 19.0% 22 19.0%
Tax losses in period not recognised in deferred tax (1) 161 (9.2%) (7) (6.1%)
Increase in deferred taxes resulting from change in UK tax rate − − (328) (287.7%)
Other 29 (1.7%) 33 28.9%
Statutory tax credit and rate (143) 8.1% (280) (245.9%)
Analysis of statutory tax credit:
Underlying items 77 29
Non-underlying items (see note 2) (220) (309)
(143) (280)
(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 the Directors' assumptions relating to the amounts
and timing of future taxable profits. The Board continually reassesses the
appropriateness of recovering deferred tax assets, 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
2022, the following sensitivities have been modelled to demonstrate the impact
of changes in assumptions on the recoverability of deferred tax assets:
- A 5% change in margin in the main Civil Aerospace large engine
programmes;
- A 5% change in the number of shop visits driven by flying hours;
and
- Assumed future cost increases from climate change expected to
pass through to customers at 100% are restricted to 90% pass through.
A 5% change in margin or shop visits (which could be driven by fewer flying
hours as a result of climate change) would result in an increase/decrease in
the deferred tax asset in respect of UK losses of around £150m, which equates
to around a £1.2bn increase/reduction in profit.
If only 90% of assumed future cost increases from climate change are passed on
to customers, this would result in a decrease in the deferred tax asset of
around £40m, and if the potential impact of carbon prices on the Group's cost
base was to double, this would be around £110m. The assumptions for carbon
prices are consistent to those at 31 December 2021.
As a consequence of the impact of COVID-19 on existing Civil Aerospace large
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 a deferred tax asset in respect of 2022 UK
losses. This includes losses arising from the IAS 37 amendment.
The reassessment of probable future taxable profits at the time the IAS 37
amendment came into effect was not materially different to the assessment
performed at 31 December 2021. This is due to the timing of the utilisation
and reflects that UK tax laws restrict the offset of carried forward losses to
50% of future profits. Therefore no deferred tax asset has been recognised on
the transitional adjustment relating to the UK. The full details of the IAS 37
amendment are set out in note 1.
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 £213m.
Both of these assessments are in line with the approach set out in note 5 of
the 2021 Annual Report, and also take into account a 25% probability of there
being a severe but plausible downside scenario.
The Group is reviewing the impact of the OECD Pillar Two (global minimum tax)
rules and the associated UK draft legislation, which was released on 20 July
2022. These rules are expected to apply from 2024.
6 Earnings per ordinary share
Basic earnings per share (EPS) is calculated by dividing the (loss)/profit
attributable to ordinary shareholders by the weighted average number of
ordinary shares in issue during the period, excluding ordinary shares held
under trust, which have been treated as if they had been cancelled.
As there is a loss during the period, the effect of potentially dilutive
ordinary shares is anti-dilutive.
Half-year to 30 June 2022 Half-year to 30 June 2021
Basic Potentially dilutive share options Diluted Basic Potentially dilutive share options Diluted
(Loss)/profit attributable to ordinary shareholders (£m):
Continuing operations (1,610) (1,610) 394 394
Discontinued operations 56 56 (1) (1)
(1,554) (1,554) 393 393
Weighted average number of ordinary shares (millions) 8,345 − 8,345 8,331 18 8,349
EPS (pence):
Continuing operations (19.29) − (19.29) 4.73 (0.01) 4.72
Discontinued operations 0.67 − 0.67 (0.01) − (0.01)
(18.62) − (18.62) 4.72 (0.01) 4.71
The reconciliation between underlying EPS and basic EPS is as follows:
Half-year to 30 June 2022 Half-year to 30 June 2021
Pence £m Pence £m
Underlying EPS / Underlying (loss)/profit from continuing operations (2.24) (187) 1.25 104
attributable to ordinary shareholders
Total underlying adjustments to (loss)/profit before tax (note 2) (19.69) (1,643) (0.23) (19)
Related tax effects 2.64 220 3.71 309
EPS / (loss)/profit from continuing operations attributable to ordinary (19.29) (1,610) 4.73 394
shareholders
Diluted underlying EPS from continuing operations attributable to ordinary (2.24) 1.25
shareholders
7 Intangible assets
Goodwill Certification costs Development expenditure Customer relationships Software (1) Other Total
£m £m £m £m £m £m £m
Cost:
At 1 January 2022 1,060 933 3,393 475 978 833 7,672
Additions - 1 48 - 30 9 88
Disposals - - - - (22) (1) (23)
Exchange differences 48 1 35 25 8 15 132
At 30 June 2022 1,108 935 3,476 500 994 856 7,869
Accumulated amortisation and impairment:
At 1 January 2022 34 425 1,760 342 650 420 3,631
Charge for the period (2) - 11 40 18 42 16 127
Impairment - - - - 9 2 11
Disposals - - - - (17) (1) (18)
Exchange differences 3 - 24 22 6 9 64
At 30 June 2022 37 436 1,824 382 690 446 3,815
Net book value:
30 June 2022 1,071 499 1,652 118 304 410 4,054
1 January 2022 1,026 508 1,633 133 328 413 4,041
(1 ) Includes £98m (31 December 2021: £115m) of software under course of
construction which is not amortised.
(2 ) Charged to cost of sales and commercial and administrative costs except
development costs, which are charged to research and development costs.
Intangible assets (including programme intangible assets) have been reviewed
for impairment in accordance with IAS 36 Impairment of Assets. Assessments
have considered potential triggers of impairment such as external factors
including climate change, significant changes with an adverse effect on a
programme and by analysing latest management forecasts against those prepared
in 2021 to identify any deterioration in performance.
The Group believes there are significant business growth opportunities to come
from Rolls-Royce playing a leading role in the transition to net zero, whilst
at the same time climate change poses potentially significant risks. The
assumptions used by the Directors are based on past experience and external
sources of information. The main areas that have been considered are demand
for engines and their useful lives, utilisation of the products whilst in
service, and the impact of market and regulatory change. The investment
required to ensure our new products will be compatible with net zero operation
by 2030, and to achieve net zero scope 1 and 2 Greenhouse Gas (GHG) emissions
is reflected in the forecasts used.
Where a trigger event has been identified, an impairment test has been carried
out. Where an impairment was required the test was performed on the following
basis:
- The carrying values have been assessed by reference to value in use.
These have been estimated using cash flows from the most recent forecasts
prepared by the Directors, which are consistent with past experience and
external sources of information on market conditions over the lives of the
respective programmes; and
- The key assumptions underpinning cash flow projections are based on
estimates of product performance related estimates, future market share and
pricing and cost for uncontracted business. Climate risks are considered when
making these estimates consistent with the assumptions above. The uncertainty
over the recovery from COVID-19 has been modelled by including downside
forecasts at an appropriate weighting taking into account the business segment
being considered.
There have been no individually material impairment charges or reversals
recognised during the 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 2022 1,865 4,986 1,046 300 8,197
Additions 10 42 11 37 100
Disposals/write-offs (12) (80) (22) (1) (115)
Reclassifications (1) 4 54 - (58) -
Exchange differences 52 132 10 14 208
At 30 June 2022 1,919 5,134 1,045 292 8,390
Accumulated depreciation and impairment:
At 1 January 2022 614 3,244 414 8 4,280
Charge for the period (2) 33 152 27 - 212
Impairment (3) (1) (8) - - (9)
Disposals/write-offs (7) (77) (15) - (99)
Exchange differences 18 84 5 - 107
At 30 June 2022 657 3,395 431 8 4,491
Net book value at:
30 June 2022 1,262 1,739 614 284 3,899
1 January 2022 1,251 1,742 632 292 3,917
(1 ) Includes reclassifications of assets under construction to the
relevant classification in property, plant and equipment, right-of-use assets
or intangible assets when available for use.
(2 ) Depreciation is charged to cost of sales and commercial and
administrative costs or included in the cost of inventory as appropriate.
(3 ) The carrying values of property, plant and equipment have been
assessed during the period in line with IAS 36. Material items of plant and
equipment and aircraft and engines are assessed for impairment together with
other assets used in individual programmes - see assumptions in note 7. Land
and buildings are generally used across multiple programmes and are considered
based on future expectations of the use of the site, which includes any
implications from climate related risks as explained in note 7. As a result of
this assessment, there are no individually material impairment charges or
reversals in the period. The reversal in the period 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 those sites.
9 Right-of-use assets
Land and buildings Plant and equipment Aircraft and engines Total
£m £m £m £m
Cost:
At 1 January 2022 456 143 1,785 2,384
Additions/modification of leases 5 20 20 45
Disposals (25) (4) (19) (48)
Exchange differences 25 1 2 28
At 30 June 2022 461 160 1,788 2,409
Accumulated depreciation and impairment:
At 1 January 2022 186 66 929 1,181
Charge for the period 21 16 94 131
Impairment (1) (3) (1) - (4)
Disposals (7) (4) (19) (30)
Exchange differences 14 (1) 2 15
At 30 June 2022 211 76 1,006 1,293
Net book value at:
30 June 2022 250 84 782 1,116
1 January 2022 270 77 856 1,203
(1 ) The carrying values of right-of-use assets have been assessed during
the period in line with IAS 36. Material items of plant and equipment and
aircraft and engines are assessed for impairment together with other assets
used in individual programmes - see assumptions in note 7. Land and buildings
are generally used across multiple programmes and are considered based on
future expectations of the use of the site (which includes any implications
from climate related risks as explained in note 7). As a result of this
assessment, there are no individually material impairment charges or reversals
in the period. The reversal in the period 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 those sites.
10 Trade receivables and other assets
Current Non-current Total
30 June 2022 31 December 2021 30 June 2022 31 December 2021 30 June 2022 31 December 2021
£m £m £m £m £m £m
Trade receivables (1) 2,306 2,141 42 52 2,348 2,193
Receivables due on RRSAs 698 702 238 67 936 769
Amounts owed by joint ventures and associates 679 598 6 1 685 599
Costs to obtain contracts with customers 3 13 47 41 50 54
Other taxation and social security receivable 191 197 9 8 200 205
Other receivables (2) 690 593 49 20 739 613
Prepayments 619 572 416 378 1,035 950
5,186 4,816 807 567 5,993 5,383
(1) Non-current trade receivables relate to amounts not expected to be
received in the next 12 months from customers on payment plans.
(2) Other receivables include unbilled recoveries relating to overhaul
activity.
The Group has adopted the simplified approach to provide for expected credit
losses, measuring the loss allowance at a probability weighted amount
incorporated by using credit ratings which are publicly available, or through
internal risk assessments derived using the customer's latest available
financial information.
The expected credit losses for trade receivables and other assets has
increased by £30m to £289m (31 December 2021: £259m). This movement is
mainly driven by the Civil Aerospace business of £33m, of which £37m relates
to specific customers and £(4)m relates to updates to the recoverability of
other receivables.
The movements of the Group's expected credit losses provision are as follows:
30 June 2022 31 December 2021
£m £m
At 1 January (259) (252)
Increases in loss allowance recognised in the income statement during the (74) (124)
period
Loss allowance utilised 22 46
Releases of loss allowance previously provided 46 46
Transferred to assets held for sale − 2
Exchange differences (24) 23
At 30 June/31 December (289) (259)
11 Contract assets and liabilities
Current Non-current (1) Total (2)
30 June 2022 31 December 2021 30 June 2022 31 December 2021 30 June 2022 31 December 2021
£m £m £m £m £m £m
Contract assets
Contract assets with customers 591 586 670 641 1,261 1,227
Participation fee contract assets 27 27 210 219 237 246
618 613 880 860 1,498 1,473
(1) Contract assets and contract liabilities have been presented on the face
of the balance sheet in line with the operating cycle of the business.
Contract liabilities are further split according to when the related
performance obligation is expected to be satisfied and therefore when revenue
is estimated to be recognised in the income statement. Further disclosure of
contract assets is provided in the table above, which shows within current the
element of consideration that will become unconditional in the next year.
(2) Contract assets are classified as non-financial instruments.
Contract assets with customers includes £928m (31 December 2021: £915m) of
Civil Aerospace LTSA assets, with most of the remaining balance relating to
Defence. The main driver of the increase in the Group balance is revenue
relating to performance obligations satisfied in previous years being adjusted
by £32m in Civil Aerospace. No impairment losses in relation to these
contract assets (31 December 2021: none) have arisen during the period to 30
June 2022.
Participation fee contract assets have reduced by £9m (31 December 2021:
reduced by £188m) due to amortisation exceeding additions by £12m. The
movement in 2021 was primarily due to ITP Aero being reclassified as a
disposal group held for sale.
Current Non-current Total
30 June 2022 31 December 2021 30 June 2022 31 December 2021 30 June 2022 31 December 2021
£m £m £m £m £m £m
Contract liabilities 4,214 3,599 6,930 6,710 11,144 10,309
Contract liabilities have increased by £835m. The movement in the Group
balance is as a result of increases in Civil Aerospace of £667m and Defence
of £168m.
The Civil Aerospace movement includes an increase in relation to LTSA
liabilities of £535m to £7,664m
(31 December 2021: £7,129m). LTSA revenue billed has been ahead of revenue
recognised in the period and together with foreign exchange movements has
increased the LTSA liabilities by £744m, offset by £209m of revenue
recognised relating to performance obligations satisfied in previous years,
which were principally driven by price escalation in business aviation and the
impact of specific customer negotiations.
The movement in Defence is due to the receipt of deposits ahead of performance
obligations being satisfied.
12 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 2022
Non-current assets 34 32 349 415 - 18 - 433
Current assets 67 58 - 125 - 11 - 136
Assets 101 90 349 540 - 29 - 569
Current liabilities (934) - - (934) (11) (23) (24) (992)
Non-current liabilities (3,318) (3) (95) (3,416) (7) (55) - (3,478)
Liabilities (4,252) (3) (95) (4,350) (18) (78) (24) (4,470)
(4,151) 87 254 (3,810) (18) (49) (24) (3,901)
At 31 December 2021
Non-current assets 159 11 176 346 - 15 - 361
Current assets 12 21 - 33 - 13 - 46
Assets 171 32 176 379 - 28 - 407
Current liabilities (629) - - (629) (7) (28) (25) (689)
Non-current liabilities (2,581) - (82) (2,663) (5) (47) - (2,715)
Liabilities (3,210) - (82) (3,292) (12) (75) (25) (3,404)
(3,039) 32 94 (2,913) (12) (47) (25) (2,997)
(1 ) Includes the foreign exchange impact of cross-currency interest rate
swaps.
Derivative financial instruments
Movements in fair value of derivative financial assets and liabilities were as
follows:
Half-year to 30 June 2022 Year-ended 31 December 2021
Foreign exchange instruments Commodity instruments Interest rate instruments - hedge accounted (1) Interest rate instruments - non-hedge accounted Total Total
£m £m £m £m £m £m
At 1 January (3,039) 32 57 37 (2,913) (2,706)
Movements in fair value hedges - - (23) - (23) (143)
Movements in cash flow hedges (42) - 91 - 49 (11)
Movements in other derivative contracts (2) (1,537) 95 - 97 (1,345) (538)
Contracts settled 467 (40) (7) 2 422 512
Reclassification to held for sale - - - - - (27)
At period/year end (4,151) 87 118 136 (3,810) (2,913)
(1) Includes the foreign exchange impact of cross-currency interest rate
swaps.
(2) Included in net financing.
Financial risk and revenue sharing arrangements (RRSAs) and other financial
assets and liabilities
Financial RRSAs Other liabilities Other assets
Half-year to 30 June 2022 Year-ended 31 December 2021 Half-year to 30 June 2022 Year-ended 31 December 2021 Half-year to 30 June 2022 Year-ended 31 December 2021
£m £m £m £m £m £m
At 1 January (12) (81) (75) (73) 15 15
Exchange adjustments included in OCI (2) 4 (2) 4 3 -
Additions - - (2) (9) − -
Financing charge (1) (6) - - (1) − -
Excluded from underlying profit:
Changes in forecast payments (1) - (7) - - − -
Cash paid 2 3 1 3 − -
Other - - - 1 − -
Reclassification to held for sale - 69 - - − -
At period/year end (18) (12) (78) (75) 18 15
(1 ) Included in net financing.
12 Financial assets and liabilities continued
Fair values of financial instruments equate to book values with the following
exceptions:
Half-year to 30 June 2022 Year-ended 31 December 2021
Book value Fair value Book value Fair value
£m £m £m £m
Borrowings - Level 1 (4,113) (3,689) (4,038) (4,106)
Borrowings - Level 2 (2,009) (2,019) (1,994) (2,122)
Financial RRSAs - Level 3 (18) (18) (12) (13)
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. There have been no transfers during the period
from or to Level 3 valuation. Fair values have been determined with reference
to available market information at the balance sheet date, using the
methodologies described below.
- Non-current investments primarily comprise unconsolidated companies where
fair value approximates to the book value. Listed investments are valued using
Level 1 methodology.
- 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 2022: £7m;
31 December 2021: £17m) 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).
- Fair values of deal contingent derivative financial assets and liabilities
are estimated by discounting expected future contractual cash flows using
prevailing interest rate curves. Amounts denominated in foreign currencies are
valued at the exchange rate prevailing at the balance sheet date. The value of
the contingent element has been considered and is dependent upon the
occurrence and time of the closing. These financial instruments 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).
- 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 2022, Level 3 assets totalled £18m (31 December 2021: £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).
12 Financial assets and liabilities continued
Effect of hedging instruments on the financial position and performance
During the period to 30 June 2022, the Group has entered into transaction
dependent foreign currency forward contracts (deal contingent forwards) with a
nominal amount of €1,500m to manage the foreign exchange risk in Euro
proceeds expected from the disposal of ITP Aero (hedged item). These contracts
have been designated as the hedging instrument in cash flow hedges with hedge
relationships of 1:1. At inception and on a continuing basis, the existence of
an economic relationship between the hedged item and the hedging instrument is
verified. Both the spot component and the contingent element were designated
as the hedging instrument. There was ineffectiveness of £4m recognised in net
financing in the period. The forward element and basis were excluded from the
hedging instrument designation and are separately accounted for in the equity
reserve for cost of hedging.
Hedged item Hedging instrument (1) Hedging reserves
Nominal FV movement in the period Nominal Carrying amount FV movement in the period Hedge ineffectiveness in the period Weighted average FX rate Amount recognised in cash flow hedge reserve Amount recognised in cost of hedging reserve
(liability)
( ) £m £m £m £m £m £m £m £m
At 30 June 2022
Euro 1,252 38 (1,252) (42) (42) (4) 1.20 (42) 4
(1 ) Hedging instruments are included in other financial assets and
liabilities in the balance sheet.
13 Borrowings and lease liabilities
Current Non-current Total
30 June 2022 31 December 2021 30 June 2022 31 December 2021 30 June 2022 31 December 2021
£m £m £m £m £m £m
Unsecured
Overdrafts 2 7 - - 2 7
Bank loans 1 2 1,996 1,975 1,997 1,977
Loan notes (1) - - 4,113 4,038 4,113 4,038
Other loans - - 10 10 10 10
Total unsecured 3 9 6,119 6,023 6,122 6,032
Lease liabilities 318 270 1,536 1,474 1,854 1,744
Total borrowings and lease liabilities 321 279 7,655 7,497 7,976 7,776
(1 ) All outstanding items described above as notes are listed on the
London Stock Exchange.
Under the terms of certain recent loan facilities, the Company is restricted
from declaring, making or paying distributions to shareholders on or prior to
31 December 2022 and from declaring, making or paying distributions to
shareholders from
1 January 2023 unless certain conditions are satisfied. The restrictions on
distributions do not prevent shareholders from redeeming C Shares issued in
January 2020 or earlier.
14 Trade payables and other liabilities
Current Non-current Total
30 June 2022 31 December 2021 30 June 2022 31 December 2021 30 June 2022 31 December 2021
£m £m £m £m £m £m
Trade payables 1,669 1,272 - - 1,669 1,272
Payables due on RRSAs 1,025 739 - - 1,025 739
Amounts owed to joint ventures and associates 612 486 - - 612 486
Customer concession credits 854 1,106 726 399 1,580 1,505
Warranty credits 325 201 168 161 493 362
Accruals 1,412 1,361 199 192 1,611 1,553
Deferred receipts from RRSA workshare partners 15 23 490 484 505 507
Government grants 18 28 44 39 62 67
Other taxation and social security 41 40 - - 41 40
Other payables (1) 710 760 261 300 971 1,060
6,681 6,016 1,888 1,575 8,569 7,591
(1 ) Other payables includes parts purchase obligations, payroll
liabilities, HM UK Government levies and payables associated with business
disposals.
The Group's payment terms with suppliers vary on the products and services
being sourced, the competitive global markets the Group operates in and other
commercial aspects of suppliers' relationships. Industry average payment terms
vary between 90-120 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 to suppliers.
At 30 June 2022, suppliers had drawn £524m under the SCF scheme
(31 December 2021: £540m).
15 Provisions for liabilities and charges
At 31 December 2021 as previously reported On adoption of amendment to IAS 37 At Charged to income statement (1) Reversed Utilised Exchange differences At 30 June 2022
1 January 2022
£m £m £m £m £m £m £m £m
Trent 1000 wastage costs 157 - 157 64 - (36) - 185
Contract losses 845 723 1,568 181 (229) (37) 3 1,486
Restructuring 21 - 21 - (8) (6) 1 8
Warranty and guarantees 305 - 305 33 (5) (45) 12 300
Customer financing 17 - 17 - - (8) - 9
Insurance 52 - 52 16 (5) (6) - 57
Tax related interest and penalties 14 - 14 - - (1) 1 14
Employer liability claims 47 - 47 - - - - 47
Other 124 - 124 22 (3) (4) 3 142
1,582 723 2,305 316 (250) (143) 20 2,248
Current liabilities 475 513 567
Non-current liabilities 1,107 1,792 1,681
(1 ) The charge to the income statement includes £15m (30 June 2021: £16m)
as a result of the unwinding of the discounting of provisions previously
recognised.
15 Provisions for liabilities and charges continued
Trent 1000 wastage costs
In November 2019, the Group announced the outcome of testing and a thorough
technical and financial review of the Trent 1000 TEN programme, following
technical issues which were identified in 2019, resulting in a revised
timeline and a more conservative estimate of durability for the improved HP
turbine blade for the TEN variant. During the period, the Group has utilised
£36m of the Trent 1000 wastage costs provision. This represents customer
disruption costs settled in cash and credit notes, and remediation shop visit
costs. During the period, additional Trent 1000 costs of £64m relating to
wastage have been recognised reflecting delays in certification which have led
to revised cost and timing estimates. The value of the remaining provision
reflects the single most likely outcome and is expected to be utilised over
the period 2022 to 2024.
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. As a result
of the amendment to IAS 37 for Onerous Contracts, from 1 January 2022
provisions for contract losses have been measured on a fully costed basis
resulting in an increase of the total contract loss provision by £723m as at
1 January 2022 (see note 1 for details). During the period, additional
contract losses for the Group of £181m have been recognised as a result of
changes in future cost estimates, primarily in relation to LTSA shop visits.
Contract losses of £229m previously recognised have been reversed following
improvements to cost estimates across various large engine programmes as a
result of commercial and operational improvements and updates to the discount
rate. The Group continues to monitor the contract loss provision for changes
in the market and revises the provision as required. The value of the
remaining contract loss provisions reflect, in each case, the single most
likely outcome. The provisions are expected to be utilised over the term of
the customer contracts, typically within 8 to 16 years.
Warranty and guarantees
Provisions for warranties and guarantees primarily relate to products sold and
are calculated based on an assessment of the remediation costs related to
future claims based on past experience. The provision generally covers a
period of up to three years.
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 $1.4bn (31 December 2021: $1.7bn) (on a
discounted basis) to provide facilities to enable customers to purchase
aircraft (of which approximately $360m could be called during 2022). These
facilities may only be used if the customer is unable to obtain financing
elsewhere and are priced at a premium to the market rate. Significant events
impacting the international aircraft financing market, 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.
Gross commitments of £33m (31 December 2021: £32m) are offset by £11m (31
December 2021: £10m) for the value of security and £1m (31 December 2021:
£2m) of guarantees. 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 values of aircraft providing security are based on advice
from a specialist aircraft appraiser.
Other
At 30 June 2022, other provisions includes £30m for costs related to the
termination of a contract under which the Group now has an obligation to enter
an onerous lease, as well as others (predominantly supplier claims), where the
related legal proceedings are ongoing and utilisation will depend upon their
resolution. The value of the provision reflects the single most likely outcome
in each case.
16 Pensions and other post-retirement and long-term employee benefits
The net post-retirement scheme surplus as at 30 June 2022 is calculated on a
year to date basis, using the latest valuation as at 31 December 2021, updated
to 30 June 2022 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 2022 1,118 (1,343) (225)
Exchange adjustments - (59) (59)
Current service cost and administrative expenses (4) (24) (28)
Past service credit 6 - 6
Settlement cost (1) - (5) (5)
Financing recognised in the income statement 11 (9) 2
Contributions by employer - 29 29
Actuarial gains recognised in OCI (2) 2,449 505 2,954
Returns on plan assets excluding financing recognised in OCI (2) (2,446) (179) (2,625)
Transfers - (1) (1)
At 30 June 2022 1,134 (1,086) 48
Post-retirement scheme surpluses - included in non-current assets (3) 1,134 23 1,157
Post-retirement scheme deficits - included in non-current liabilities - (1,109) (1,109)
1,134 (1,086) 48
(1 ) During the period, the Group undertook a lump sum exercise with
participants of the Rolls-Royce North America salaried retirement plan as part
of the anticipated termination in the second half of the year. This resulted
in a settlement cost of £5m recognised in the period to 30 June 2022.
(2 ) A net gain of £329m has been recognised in OCI in the period to 30
June 2022 which has been driven by market conditions at 30 June 2022, in
particular due to higher discount rates across the various schemes.
(3 ) 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
As at 30 June 2022, a constructive obligation has been recognised for the
offering of the Bridging Pension Option (BPO) to other deferred members. As a
result, a past service credit of £6m has been recognised within
non-underlying.
Sensitivities
A reduction in the discount rate from 3.90% to 3.65% could lead to an increase
in the defined benefit obligations of the RR UK Pension Fund of approximately
£260m. 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.
An increase in the assumed rate of inflation of 0.25% from RPI of 3.5% and CPI
of 2.95% could lead to an increase in the defined benefit obligations of the
RR UK Pension Fund of approximately £90m.
A one-year increase in life expectancy from 21.8 years (male aged 65) and from
23.2 years (male aged 45) would increase the defined benefit obligations of
the RR UK Pension Fund by approximately £215m.
Where applicable, it is assumed that 50% (31 December 2021: 50%) of members of
the RR UK Pension Fund will transfer out of the fund on retirement with a
share of funds transfer. An increase of 5% in this assumption would increase
the defined benefit obligation by £20m.
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. The terms of both DPAs have now expired; the DPA with the DoJ was
dismissed by the US District Court on 19 May 2020 and the SFO filed notice of
discontinuance of proceedings with the UK Court on 18 January 2022. Certain
authorities are investigating members of the Group for matters relating to
misconduct in relation to historical matters. The Group is responding
appropriately. Action may be taken by further authorities against the Company
or individuals. In addition, the Group could still be affected by actions from
customers and customers' financiers. The Directors are not currently aware of
any matters that are likely to lead to a material financial loss over and
above the penalties imposed to date, but cannot anticipate all the possible
actions that may be taken or their potential consequences.
Contingent liabilities exist in respect of guarantees provided by the Group in
the ordinary course of business for product delivery, commitments made for
future service demand in respect of maintenance, repair and overhaul, and
performance and reliability. The Group has, in the normal course of business,
entered into arrangements in respect of export finance, performance bonds,
countertrade obligations and minor miscellaneous items. Various Group
undertakings are parties to legal actions and claims (including with tax
authorities) which arise in the ordinary course of business, some of which are
for substantial amounts. As a consequence of the insolvency of an insurer as
previously reported, the Group is no longer fully insured against known and
potential claims from employees who worked for certain of the Group's UK based
businesses for a period prior to the acquisition of those businesses by the
Group.
Since the invasion of Ukraine by Russia on 24 February 2022, the Group has
responded appropriately to comply with a
fast-moving international sanctions and export control regime, and also to
implement our business decision to exit from Russia. The Group could be
subject to action by impacted customers and other contract parties.
While the outcome of the above 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 party transactions
Half-year to 30 June 2022 Half-year to 30 June 2021
£m £m
Sale of goods and services to related parties (1) 1,312 1,434
Purchases of goods and services from related parties (1) (2,340) (1,772)
(1) Sales of goods and services to related parties and purchases of goods and
services from related parties, including joint ventures and associates, are
included at the average exchange rate, consistent with the statutory income
statement.
Included in sales of goods and services to related parties are sales of spare
engines amounting to £nil (30 June 2021: £6m). Profit recognised in the
period on such sales amounted to £19m (30 June 2021: £13m), including profit
on current period sales and recognition of profit deferred on similar sales in
previous years.
19 Disposals, businesses held for sale and discontinued operations
Disposals
On 13 September 2021, the Group signed an agreement with Equitix Investment
Management Limited to dispose its 23.1% shareholding in AirTanker Holdings Ltd
for a cash consideration of £189m. In accordance with IFRS 5, the Group
classified £47m of the AirTanker assets as held for sale at 31 December 2021.
The sale completed on 9 February 2022 for a value of £189m. On disposal, the
Group has recycled the Group's share of cash flow hedge reserve through the
income statement in the period to 30 June 2022.
Airtanker
£m
Proceeds
Cash consideration 189
Net cash consideration 189
Investments 34
Trade receivables and other assets 14
Less: Net assets disposed 48
Profit on disposal before disposal costs and continuing obligations 141
Cash flow hedge reserve loss (62)
Disposal costs (3)
Non-underlying profit before tax 76
Disposal completed in prior periods
On 1 June 2018, the Group sold its L'Orange business, part of Rolls-Royce
Power Systems, to Woodward Inc. for €673m. Under the sale agreement, the
cash consideration may be adjusted by up to +/-€44m, based on L'Orange
aftermarket sales over the five-year period to 31 May 2023. A liability of
€18m is recognised for amounts that are expected to be payable for years
through to 2023 (31 December 2021: €28m). Cash of €10m has been paid
during the period. The maximum adjustment to sales proceeds has now been
provided for in all future years to 2023.
Reconciliation of profit to the income statement: Total
£m
Profit on disposal (see above) 76
Adjustment to consideration on disposals completed in prior periods 1
Profit on disposal of businesses per income statement 77
Reconciliation of cash flow on disposal of businesses to the cash flow Total
statement:
£m
Proceeds on disposal of businesses (see above) 189
Disposal costs paid (3)
Cash outflow on disposals completed in prior periods (7)
Cash flow on disposal of businesses per cash flow statement 179
19 Disposals, businesses held for sale and discontinued operations
continued
Businesses held for sale
On 27 August 2020, the Group announced its intention to sell ITP Aero. During
the period to 30 June 2021, the Hucknall site with associated fabrications
activities, that were previously reported as part of the Civil Aerospace
segment, were transferred to ITP Aero and other preparatory work had been
performed such that as at 30 June 2021 the business was classified as a
disposal group held for sale. On 27 September 2021, the Group signed an
agreement for the sale of ITP Aero to Bain Capital for £1.3bn and
consequently, in accordance with IFRS 5, the business continues to be
classified as a disposal group held for sale at 30 June 2022. The disposal
process has received regulatory clearance and is progressing towards
completion. The assets of ITP Aero have been assessed for impairment in line
with the requirements of IFRS 5 and no impairment is required at 30 June 2022.
ITP Aero had an additional £94m of cash which was held by another Group
company and net intercompany trading creditor of £290m at 30 June 2022 which
are not included in the disposal group as the resulting
intra-group balances are eliminated on consolidation.
The table below summarises the categories of assets and liabilities classified
as held for sale at 30 June 2022 and
31 December 2021.
30 June 2022 31 December 2021
( ) ITP Aero ITP Aero Other (1) Total
£m £m £m £m
Intangible assets 897 872 - 872
Property, plant and equipment 328 313 26 339
Right-of-use assets 13 12 - 12
Investment in associates and joint ventures 1 1 34 35
Deferred tax assets 172 167 - 167
Inventory 269 222 - 222
Trade receivables and other assets 384 342 14 356
Cash and cash equivalents 37 25 - 25
Assets held for sale 2,101 1,954 74 2,028
Trade payables and other liabilities (623) (540) (7) (547)
Provisions for liabilities and charges (22) (22) - (22)
Borrowings and lease liabilities (53) (72) - (72)
Deferred tax liabilities (83) (82) - (82)
Liabilities associated with assets held for sale (781) (716) (7) (723)
Net assets held for sale 1,320 1,238 67 1,305
(1 ) Other assets and liabilities held for sale at 31 December 2021
comprised: investment in joint venture and accrued interest with Airtanker
Holdings Limited; and assets and associated government grant related to the
Group's site rationalisation
activities.( )
19 Disposals, businesses held for sale and discontinued operations
continued
Discontinued operations
ITP Aero represents a separate major line of business and is classified as a
disposal group held for sale. Therefore, in line with IFRS 5, ITP Aero has
been classified as a discontinued operation.
The financial performance and cash flow information presented reflects the
operations for the period that have been classified as discontinued
operations.
Half-year to 30 June 2022 Half-year to 30 June 2021
£m £m
Revenue 207 146
Operating profit/(loss) (1) 72 (76)
Profit/(loss) before taxation (1) 67 (75)
Income tax (charge)/credit (1) (7) 91
Profit for the period from discontinued operations on ordinary activities 60 16
Costs on disposal of discontinued operations (4) (17)
Profit/(loss) for the period from discontinued operations 56 (1)
Net cash inflow from operating activities (2) 56 4
Net cash outflow from investing activities (14) (12)
Net cash outflow from financing activities (32) (1)
Exchange gains 1 3
Net change in cash and cash equivalents 11 (6)
(1 ) Profit/(loss) from discontinued operations on ordinary activities is
presented net of intercompany trading eliminations, related consolidation
adjustments and amortisation of intangible assets arising on previous
acquisition (prior to classification to held for sale). Operating profit of
£72m (30 June 2021: loss of £76m) has improved as a result of increased
volume and performance in addition to the cessation of depreciation and
amortisation charges following classification to held for sale.
(2 ) Cash flows from operating activities include £1m (30 June 2021:
£17m) costs of disposal paid during the period to 30 June 2022 that are not a
movement in the cash balance of the disposal group as they were borne
centrally.
20 Derivation of summary funds flow statement from statutory cash flow
statement
Half-year ended 30 June 2022 Half-year ended
30 June 2021
£m £m £m £m Source
Underlying operating profit from continuing operations 125 307 Note 2
Operating profit/(loss) from discontinued operations 68 (93) Note 19
Amortisation and impairment of intangible assets 138 159 Cash flow statement (CFS)
Depreciation and impairment of PPE 203 243 CFS
Depreciation and impairment of right-of-use assets 127 128 CFS
Adjustment to residual value guarantees in lease liabilities (1) (3) CFS
Impairment of joint ventures, associates and other investments − 2
Reversal of non-underlying impairments of non-current assets 11 1 Reversal of underlying adjustment (note 2)
Acquisition accounting (23) (26) Reversal of underlying adjustment (note 2)
Depreciation, amortisation and impairment 455 504
Additions of intangible assets (82) (71) CFS less exceptional restructuring
Purchases of PPE (115) (124) CFS less exceptional restructuring
Lease payments (capital plus interest) (114) (171) CFS (capital and interest payments adjusted for foreign exchange (FX))
Movement in inventories (692) (219) CFS
Movement in receivables/payables 320 (203) CFS adjusted for the impact of exceptional programme charges and exceptional
restructuring shown on the basis of the FX rate achieved on settled derivative
contracts
Movement in contract balances (excluding Civil LTSA) 287 (88) 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 433 (108) Movement in Civil LTSA balances within movement of contract balances in CFS
less impact of FX
Revaluation of trading assets (excluding exceptional items) (386) (154) Adjustment to reflect the impact of the FX contracts held on
receivables/payables
Realised derivatives in financing 202 45 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 856 (508)
Movement on provisions (116) (136) CFS adjusted for the impact of exceptional programme charges and anticipated
recoveries, exceptional restructuring and FX contracts held
Net interest received and paid (114) (81) CFS
Fees paid on undrawn facilities (23) (35) CFS
Cash flows on settlement of excess derivative contracts (265) (303) CFS
Cash flows on financial instruments net of realised losses included in 35 (52) 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) 27 Principally disposals of non-current assets, joint venture trading and the
effect of share-based payments
Trading cash flow 12 (955)
Trading cash flow from continuing operations 21 (979)
Contributions to defined benefit schemes in excess of underlying operating (1) (94) CFS
profit charge
Tax (88) (102) CFS
Free cash flow (77) (1,151)
Free cash flow from continuing operations (68) (1,174)
The comparative information for the period ended 30 June 2021 has been
re-presented to be on a comparable basis with the definition of underlying
results. There is no change to trading or group free cash flow.
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.
Cash flow from operating activities is determined to be the nearest statutory
measure to free cash flow. The reconciliation between free cash flow and cash
flow from operating activities can be found on page 53.
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent
Alternative Performance Measures (APMs)
Business performance is reviewed and managed on an underlying basis. These
alternative performance measures reflect the economic substance of trading in
the period, including the impact of the Group's foreign exchange activities.
In addition, a number of other APMs are utilised to measure and monitor the
Group's performance.
Definitions and reconciliations to the relevant statutory measure are included
below. All comparative periods relate to 30 June 2021.
Underlying results from continuing operations
Underlying results include underlying revenue, underlying operating profit and
underlying EPS. Underlying results are presented by recording all relevant
revenue and cost of sales transactions at the average exchange rate achieved
on effective settled derivative contracts in the period that the cash flow
occurs. Underlying results also exclude: the effect of acquisition accounting
and business disposals, impairment of goodwill and other non-current assets
where the reasons for the impairment are outside of normal operating
activities, exceptional items and certain other items which are market driven
and outside of managements control. Statutory results have been adjusted for
discontinued operations and underlying results from continuing operations have
been presented on the same basis. Further detail can be found in note 2 and
note 19.
Notes 2022 2021
£m £m
Revenue from continuing operations
Statutory revenue 5,600 5,159
Derivative & FX adjustments 2 (292) 68
Underlying revenue 5,308 5,227
Operating profit/(loss) from continuing operations
Statutory operating profit 223 38
Derivative & FX adjustments 2 (119) 297
Programme exceptional charges 2 (22) −
Restructuring exceptional charges 2 32 11
Acquisition accounting & M&A 2 23 26
Impairment reversals 2 (11) (1)
Pension past service credit 2 (1) (11)
Other underlying adjustments 2 − (53)
Underlying operating profit 125 307
Notes 2022 2021
pence pence
Basic EPS from continuing operations
Statutory basic EPS 6 (19.29) 4.73
Effect of underlying adjustments to (loss)/profit before tax 6 19.69 0.23
Related tax effects 6 (2.64) (3.71)
Basic underlying EPS (2.24) 1.25
Underlying results from discontinued operations
Notes 2022 2021
£m £m
Results from discontinued operations
Profit for the period from discontinued operations on ordinary activities 19 60 16
Costs of disposal on discontinued operations 19 (4) (17)
Statutory loss from discontinued operations 56 (1)
Acquisition accounting & M&A 1 41
Derivative & FX adjustments 2 4
Restructuring exceptional charges − (1)
Other − 32
Related tax effects − (91)
Underlying profit from discontinued operations 59 (16)
Trading cash flow
Trading cash flow is defined as free cash flow (as defined on page 51) before
the deduction of recurring tax and
post-employment benefit expenses. Trading cash flow per segment is used as a
measure of business performance for the relevant segments. For a
reconciliation of group trading cash flow to free cash flow, see note 20.
2022 2021
£m £m
Civil Aerospace 63 (1,064)
Defence 89 89
Power Systems (76) 71
New Markets (30) (31)
Total reportable segments trading cash flow 46 (935)
Other businesses (1) (22)
Central and Inter-segment (24) (22)
Trading cash flow from continuing operations 21 (979)
Discontinued operations (9) 24
Trading cash flow 12 (955)
Underlying operating profit charge exceeded by contributions to defined (1) (94)
benefit schemes
Tax (1) (88) (102)
Free cash flow (77) (1,151)
(1) See page 17 for tax paid in the statutory cash flow statement.
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
Free cash flow
Free cash flow is a measure of financial performance of the businesses' cash
flow to see what is available for distribution among those stakeholders
funding the business (including debt holders and shareholders). Free cash flow
is cash flows from operating activities including capital expenditure and
movements in investments, capital elements of lease payments, interest paid
and excluding amounts spent or received on activity related to business
acquisitions or disposals, financial penalties paid and exceptional
restructuring payments. Free cash flow from continuing operations has been
presented to remove free cash flow from discontinued operations as defined in
note 19. For further detail, see note 20.
Free cash flow from cash flows from operating activities
2022 2021
£m £m
Statutory cash flows from operating activities 597 (679)
Capital expenditure (including investment from NCI and movement in joint (213) (223)
ventures, associates and other investments)
Capital element of lease payments (95) (147)
Interest paid (172) (150)
Settlement of excess derivatives (265) (303)
Exceptional restructuring costs 48 134
M&A costs 18 22
Financial penalties paid - 156
Other 5 39
Free cash flow (77) (1,151)
Discontinued operations free cash flow (1) 9 (23)
Free cash flow from continuing operations (68) (1,174)
(1 ) Discontinued operations free cash excludes: transactions with parent
company of £(34)m (2021: £(16)m), movements in borrowings of £25m (2021:
nil), exceptional restructuring costs of nil (2021: £7m), M&A costs of
£(2)m (2021: £19m) and other of £(8)m (2021: £(27)m).
Group R&D expenditure
R&D expenditure during the period excluding the impact of contributions
and fees, including government funding, amortisation and impairment of
capitalised costs and amounts capitalised during the period.
Notes 2022 2021
£m £m
Statutory research and development costs (373) (390)
Amortisation and impairment of capitalised cost 3 40 35
Capitalised as intangible assets (48) (41)
Contributions and fees (218) (153)
Gross R&D expenditure (599) (549)
Principal risks and uncertainties
Our risk management system is described on page 52 of our 2021 Annual Report
as a continuous process that requires risk owners to constantly reassess risks
and include learning from incidents to drive improvements in our control
environment.
We continue to review our principal risks and how we manage them to reflect
their evolving nature. We have reviewed our risks in light of changes to the
internal and external environment, in particular external uncertainties
including challenges around the pace of market recovery, the current political
situation including the war in Ukraine, global supply chain disruption and
rising inflation. Despite the rigorous supply chain management, leaner
manufacturing, strategic partnerships, application of contractual pricing
protection, utilisation of our hedge book and continued focus on pricing,
productivity and costs we believe the risk levels for Financial shock, Market
shock, Business Continuity and Political risk have increased over the last six
months. The principal risks facing the Group for the remaining six months of
the financial year are reported on pages 54 to 57 of our Annual Report 2021
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 or other regulatory requirements Existing products: failure to achieve cost reduction, contracted technical
in the heavily regulated environment in which we operate (for example, export specification, product (or component) life or falling significantly short of
controls; data privacy; use of controlled chemicals and substances; customer expectations, would have potentially significant adverse financial
anti-bribery and corruption; and tax and customs legislation). This could and reputational consequences, including the risk of impairment of the
affect our ability to conduct business in certain jurisdictions and would carrying value of the Group's intangible assets and the impact of potential
potentially expose the Group to: reputational damage; financial penalties; litigation.
debarment from government contracts for a period of time; and suspension of
export privileges (including export credit financing), each of which could New programmes: failure to deliver an NPI project on time, within budget, to
have a material adverse effect. technical specification or falling significantly short of customer
expectations would have potentially significant adverse financial and
Cyber threat reputational consequences.
An attempt to cause harm to the Group, its customers, suppliers and partners Disruptive technologies (or new entrants with alternative business models):
through the unauthorised access, manipulation, corruption, or destruction of could reduce our ability to sustainably win future business, achieve operating
data, systems or products through cyberspace. results and realise future growth opportunities.
Financial shock Market shock
The Group is exposed to a number of financial risks, some of which are of a The Group is exposed to a number of market risks, some of which are of a
macroeconomic nature (for example, foreign currency, oil price, interest macroeconomic nature (e.g. economic growth rates) and some of which are more
rates) and some of which are more specific to the Group (for example, specific to the Group (for example, reduction in air travel or defence
liquidity and credit risks). Significant extraneous market events could also spending, or disruption to other customer operations). A large proportion of
materially damage the Group's competitiveness and/or creditworthiness and our our business is reliant on the civil aviation industry, which is cyclical in
ability to access funding. This would affect operational results or the nature.
outcomes of financial transactions.
Demand for our products and services could be adversely affected by factors
Strategic transformation such as current and predicted air traffic, fuel prices and age/replacement
rates of customer fleets.
We see significant opportunities in leading the transition to net zero by
pioneering the power that matters. Our strategy is to focus on delivering our Political risk
plans for existing and nascent businesses and to focus on exploiting
opportunities to grow into new net zero areas, both organically and Geopolitical factors that lead to an unfavourable business climate and
inorganically. Failure to execute this plan will prevent us from achieving our significant tensions between major trading parties or blocs which could impact
longer-term ambitions. the Group's operations. Examples include: changes in key political
relationships; explicit trade protectionism, differing tax or regulatory
Disruptive technologies (or new entrants with alternative business models): regimes, potential for conflict or broader political issues; and heightened
could reduce our ability to sustainably win future business, achieve operating political tensions.
results and realise future growth opportunities.
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
As previously reported, some of our loan facilities place restrictions and
conditions on payments to shareholders. In 2021, as a result of these
restrictions, the Board was not able to recommend shareholder payments.
However, the Board may recommend shareholder payments from 2023, subject to
satisfaction of the conditions and our consideration of progress made to
strengthen the balance sheet. We aim to be able to recommend shareholder
payments in the medium-term. The restrictions on distributions do not prevent
shareholders from redeeming C Shares issued in January 2020 or prior to that.
Shareholders wishing to redeem their existing C Shares must lodge instructions
with the Registrar to arrive no later than 5.00pm on 01 December 2022 (CREST
holders must submit their election in CREST by 2.55pm). The payment of C Share
redemption monies will be made on 05 January 2023 and the CRIP purchase will
begin as soon as practicable after 06 January 2023.
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.
By order of the Board
Warren East
Panos Kakoullis
Chief Executive
Chief
Financial Officer
4 August
2022
4 August 2022
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 2022 Half
Year Results of Rolls-Royce Holdings plc for the 6 month period ended
30 June 2022 (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.
The interim financial statements comprise:
· the Condensed consolidated balance sheet as at 30 June 2022;
· 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 2022 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.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410, 'Review of Interim Financial Information Performed by
the Independent Auditor of the Entity' issued by the Financial Reporting
Council 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 2022 Half Year Results and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on the review
procedures performed in accordance with this ISRE. However, future events or
conditions may cause the group to cease to continue as a going concern.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The 2022 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 2022 Half Year Results in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. In preparing the 2022 Half Year Results,
including the interim financial statements, the directors are responsible for
assessing the group's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the group or to
cease operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim financial
statements in the 2022 Half Year Results based on our review. Our conclusion,
including our Conclusions relating to going concern, is based on procedures
that are less extensive than audit procedures, as described in the Basis for
conclusion paragraph of this report. 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.
PricewaterhouseCoopers LLP
Chartered Accountants
London
4 August 2022
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