REG - Rolls-Royce Holdings - 2023 Half Year Results
03/08/2023 07:00
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RNS Number : 1347I Rolls-Royce Holdings plc 03 August 2023
3 August 2023
ROLLS-ROYCE HOLDINGS PLC - 2023 Half Year Results
Improved financial results and upgraded guidance helped by early successes on
transformation
● Significantly improved first half results: higher underlying operating profit
of £673m and free cash flow of £356m reflects continued end-market growth
and our focus on commercial optimisation and cost efficiencies across the
Group
● Full year guidance raised: on 26 July we upgraded 2023 guidance for underlying
operating profit to
£1.2bn-£1.4bn and free cash flow to £0.9bn-£1.0bn; transformation efforts
are accelerating our financial delivery
● Margin improvement led by Civil and Defence: driven by higher volumes,
commercial improvements, and cost efficiencies; Power Systems margins were
lower, but are expected to improve in the second half due to our pricing
actions
● Accelerated financial delivery driven by transformation: our multi-year
programme has started well with strong initial results
● Delivering in an uncertain environment: an increased focus on costs and
productivity has helped to offset the impact of inflation and supply chain
pressures
Tufan Erginbilgic, CEO, said: "Our multi-year transformation programme has
started well with progress already evident in our strong initial results and
increased full year guidance for 2023. There is much more to do to deliver
better performance and to transform Rolls-Royce into a high performing,
competitive, resilient, and growing business. We will share the outcome of our
strategy review along with medium-term goals for the Group in November.
Our people are committed, passionate and full of energy. Despite a challenging
external environment, notably supply chain constraints, we are starting to see
the early impact of our transformation in all our businesses. Better profit
and cash generation reflect greater productivity, efficiency, and improved
commercial outcomes. We have tightly managed our cost base to offset
inflationary cost pressures.
We have a strong portfolio of products and technologies in growing end markets
and have secured key contract wins that will create future value and
profitable growth. Our continued transformation will grow our business and
allow us to play a stronger role in the energy transition."
Half Year 2023 Group continuing operations
Underlying Underlying 2022 H1 Statutory Statutory
2023 H1 2023 H1 2022 H1
£ million
Revenue 6,950 5,308 7,523 5,600
Operating profit 673 125 797 223
Operating margin (%) 9.7% 2.4% 10.6% 4.0%
Profit/(loss) before taxation 524 (111) 1,419 (1,754)
Basic earnings/(loss) per share (pence) 4.90 (2.24) 14.70 (19.29)
Free cash flow 356 (68)
Net cash flow from operating activities (1) 1,135 597
(1 ) 2022 includes discontinued operations 30 Jun 2023 31 Dec 2022
Net debt (2,845) (3,251)
A reconciliation of alternative performance measures to their statutory
equivalent is provided on pages 42 to 44
2023 Half Year performance summary
· Higher profitability led by Civil Aerospace: The Group's underlying
operating margin was 9.7% versus 2.4% in the prior period. This was driven by
continued revenue growth coupled with early transformation benefits, notably
commercial optimisation and cost efficiencies across the Group. Civil
Aerospace's operating margin was 12.4% versus (3.4)% in the prior period due
to higher aftermarket profitability and increased large spare engine sales,
coupled with cost efficiencies and our commercial optimisation actions. The
13.6% Defence operating margin reflected strong revenue growth and cost
efficiencies. Power Systems' margin of 7.0% was lower than the prior period
but we expect better performance in the second half of the year because of
pricing actions, cost efficiencies and seasonally higher volumes. Losses
increased in New Markets as expected due to planned growth activities.
· Stronger cash flow: Free cash flow from continuing operations of £356m
compared to an outflow of £(68)m in the prior period. Underlying operating
profit improved from £125m to £673m in the period. A long-term service
agreement (LTSA) balance change of £727m (2022 H1: £433m) reflected large
EFH (engine flying hour) growth to 83% of 2019 levels and our commercial
optimisation actions, notably increased pricing and the anticipated collection
of overdue debts that had previously been provided against. A portion of our
LTSA receipts are payable to our RRSPs (risk and revenue sharing partners),
which reduces the amount of cash retained. Of the total LTSA balance growth of
£727m, c.£0.5bn benefited our cash flows in the period. Working capital was
an outflow of £(576)m in the first half of the year (2022 H1: £(269)m),
mainly driven by a £(0.6)bn outflow from higher inventories as a result of
supply chain challenges and to satisfy volume growth in the second half of
2023. Net debt improved to £2.8bn (2022 FY £3.3bn). We remain committed to
returning to an investment grade credit rating.
· Accelerated financial delivery: Our financial performance reflects
improved end-markets helped by the early benefits of transformation and
rigorous performance management. We have tightly managed our cost base which
has helped to offset inflationary cost pressures. Our actions on pricing
across the Group have already started to deliver results with more expected in
the second half of the year. Each business has been building and delivering
plans to address performance and deliver a step-change in operational and
financial performance.
· Capital Markets Day: We will communicate the findings of our strategic
review and set medium-term financial targets at a Capital Markets Day on 28
November in London. Further details will be provided in due course.
Outlook and 2023 Guidance
First half performance and the progress of our transformation programme give
us confidence in delivering higher profit and cash flows in 2023.
Underlying 2023 financial guidance As set on 26 July 2023 As set on 23 February 2023
Operating profit £1.2bn-£1.4bn £0.8bn-£1.0bn
Free cash flow £0.9bn-£1.0bn £0.6bn-£0.8bn
Operating profit guidance of £1.2bn-£1.4bn assumes £200m-£250m of targeted
contract improvements.
Free cash flow guidance of £0.9bn-£1.0bn comprises higher underlying
operating profit and assumes £1.0bn-£1.2bn growth in the Civil LTSA balance
(2022 FY: £792m). Of the total LTSA creditor growth, £800m-£900m is
expected to benefit our cash flows in the period. We continue to anticipate a
year-on-year headwind of c.£200m associated with legacy Boeing original
equipment (OE) concessions, an increased c.£150m adverse impact due to fires
at two suppliers' premises, and a new expected outflow of c.£100m in respect
of the outcome of a legal judgment.
Underlying financial performance by business
£ million Underlying revenue Organic Change (1) Underlying operating profit/(loss) Underlying operating margin Margin change
Organic change (1)
Civil Aerospace 3,257 38% 405 479 12.4% 15.8pt
Defence 1,913 15% 261 65 13.6% 1.9pt
Power Systems 1,774 24% 125 − 7.0% (1.7)pt
New Markets 1 nm (78) (29) nm nm
Other businesses 5 nm (5) 24 nm nm
Corporate and Inter-segment − nm (35) (8) nm nm
Total (continuing operations) 6,950 28% 673 531 9.7% 7.3pt
(1 ) Organic change is the measure of change at constant translational
currency applying full year 2022 average rates to 2022 and 2023. All
underlying income statement commentary is provided on an organic basis unless
otherwise stated
All results are shown for Group continuing operations, on an underlying basis,
excluding discontinued operations (ITP Aero). For more details, see note 2 of
the Condensed Consolidated Interim Financial Statements (page 22).
nm is defined as not meaningful.
Trading cash flow
£ million 2023 H1 2022 H1
Civil Aerospace 401 63
Defence 76 89
Power Systems 22 (76)
New Markets (42) (30)
Other businesses 8 (1)
Corporate and Inter-segment (34) (24)
Total trading cash flow (continuing operations) 431 21
Underlying operating profit charge exceeded by contributions to defined (16) (1)
benefit schemes
Taxation (59) (88)
Total free cash flow (continuing operations) 356 (68)
Civil Aerospace
2023 H1 key Civil Aerospace operational metrics: Large engine Business aviation/ Regional Total Change
OE deliveries 115 73 188 39
LTSA engine flying hours (millions) 6.2 1.5 7.7 1.6
Total LTSA shop visits 394 197 591 114
…of which major shop visits 144 187 331 68
The significantly improved Civil Aerospace margin of 12.4% (2022 H1: (3.4)%)
reflects continued large engine market recovery and growth in business
aviation, coupled with the early benefits of transformation, notably cost
efficiencies and commercial optimisation.
Large engine flying hours were up 36% versus the prior period to 6.2m, at 83%
of 2019 levels, as global travel benefited from the lifting of travel
restrictions in China. We continue to expect large engine flying hours of
80%-90% of 2019 levels for the full year. Total engine flying hours were 7.7m
in the period (2022 H1: 6.1m).
We recorded 240 large engine orders in the first half of 2023 (2022 H1: 96),
including a record order from Air India for 68 Trent XWB-97 engines to power
its A350-1000 aircraft, options for 20 more, and orders for 12
Trent XWB-84 engines. Our large engine order book at 30 June 2023 was 1,405
engines up from 1,282 at 31 December 2022. This is the first time that the
large engine order book has grown since 2018. Our guidance of
400-500 total engine deliveries for full year 2023 remains unchanged.
OE deliveries rose by 26%, with 73 business aviation deliveries (2022 H1: 71)
and 115 total large engine deliveries (2022 H1: 78). Large engine deliveries
included 18 spare large engines (2022 H1: 8). Total large spare engine
deliveries in 2023 are expected to be broadly flat year on year (2022 FY: 44).
Total LTSA shop visits were 591 versus 477 in 2022 H1, roughly half of the
total of 1,200-1,300 shop visits expected for the full year. There were 144
large engine major shop visits in the first half of 2023 versus 113 in 2022
H1, with a higher profitability per shop visit compared with the prior period.
Revenue of £3.3bn was up 38%. This comprised £1.1bn OE revenue, up 58%
driven by higher large engine deliveries, and £2.2bn Services revenue, up
30%, due to increased large engine shop visits and higher
time & materials revenues. Contractual improvements drove £23m of LTSA
catch-ups (2022 H1: £241m).
Operating profit of £405m (12.4% margin) compared to a loss of £(79m) in the
prior period. The increase in operating profit was driven by higher
aftermarket activity including increased large engine LTSA shop visit volumes
and profitability, a greater contribution from large engine time &
materials and from business aviation. Operating profit also benefited from
higher spare engines sales in the period, coupled with cost efficiencies. Our
actions to improve the profitability of LTSA margins resulted in contractual
margin improvements in the period, with an onerous provision credit of £35m
(2022 H1: £51m) and £70m of positive LTSA catch-ups (2022 H1: £219m). Civil
Aerospace operating profit in the second half of 2023 is expected to be
broadly similar to the first half.
Trading cash flow was £401m compared with £63m in the prior period.
Operating profit improved by £479m. The LTSA balance change of £727m (2022
H1: £433m) was driven by EFH growth and our commercial optimisation actions,
notably an improved average rate per flying hour driven by escalation and
customer pricing negotiations and the anticipated collection of overdue debts
that had previously been provided for. A portion of our LTSA receipts are
payable to our RRSPs, which reduces the amount of cash retained. Of the total
LTSA balance growth of £727m, c.£0.5bn benefited our cash flows in the
period. LTSA EFH receipts were £2,337m versus £1,648m in the prior period.
Working capital outflows increased versus the prior period, due to rising
inventories as a consequence of supply chain challenges and the second half
weighting of deliveries and shop visits in the year. We expect inventories to
fall in the second half of the year.
Defence
Operating profit grew by 33% in Defence, our most resilient business, driven
by strong revenue growth and higher margins. Strong revenue growth in the
period reflected increased underlying demand and a more even delivery profile
between the first half and second half of the year than in 2022. Higher
margins were driven by pricing actions, a more favourable product mix and cost
efficiencies.
Order intake was £2.7bn in the first half, with a book-to-bill of 1.4x. This
included major contract renewals in both Combat and Transport as we focused on
commercial optimisation to support profitable growth. Our order backlog at the
end of the period was £8.9bn, up from £8.5bn at the start of the year.
As the single-source provider of the power and propulsion for the UK's nuclear
powered submarines, we have been chosen to provide the reactors for
Australia's nuclear powered submarines from the early 2040s, as part of the
AUKUS trilateral agreement between Australia, the UK and the US. Customer
funded investment to expand our submarines site in Derby has already begun,
helping to grow revenue and profit.
The Bell V-280 Valor, powered by our AE1107F engines, was selected by the US
Army for the Future Long Range Assault Aircraft programme in 2022, and work
has begun this year. Following successful completion of the initial phase on
the Future Combat Air System Acquisition Programme we secured a contract
extension, which included funding for Global Combat Air Programme (GCAP)
activities. Together with the UK Government and industry partners we released
a series of technical updates about the first flying combat air demonstrator
in a generation. This included our successful intake compatibility testing at
Bristol with an EJ200 engine. These programmes, combined with robust defence
budget forecasts in most western geographies underpin the long-term outlook
for the business.
Revenue increased to £1.9bn, up 15% reflecting a more first half weighted
delivery profile than in 2022. We anticipate modest revenue growth for the
full year 2023. OE revenue was up 17% on the prior period helped by the
increase from funded development programmes in Combat and Submarines. Services
revenue increased 13%, also driven by increased activity in Submarines and
higher delivery in Combat, Transport and Naval.
Operating profit was £261m (13.6% margin) versus £189m (11.7% margin) in the
prior period. Higher operating profit was a result of higher revenues, pricing
actions, a favourable mix due to the timing of high margin spare parts in the
first half of the year and cost efficiencies.
Trading cash flow of £76m was 15% lower than in the first half of last year,
with higher operating profit offset by the absence of an advance payment of
£63m received in the comparative prior period. We expect stronger trading
cash flow in the second half of 2023 as a result of key milestone payments on
newer programmes and actions to reduce inventory despite the ongoing supply
chain challenges.
Power Systems
Power Systems operating profit was broadly flat versus last year but at a
lower operating margin. We anticipate a higher year on year margin for the
full year, with an increase in the second half due to the impact of pricing
actions, cost efficiencies and seasonally higher volumes.
Order intake in the Power Systems business was £1.9bn, 14% lower than the
prior period. Book to bill was 1.1x, with a record level of order cover for
the remainder of 2023 and 32% covered for 2024. Key awards in the period
included a second contract to supply mtu generator packs for the US Navy
frigate program, follow-up orders for rail power packs from Hitachi and marine
engines under a frame agreement with yacht builder Ferretti.
Revenue was £1.8bn, up 24%. OE revenue grew by 33%, driven by strong order
execution for stationary PowerGen equipment and continued strong sales of
mobile power solutions in the marine and mining segments. Services revenues
were up 10% reflecting increased end-market activity.
Operating profit was £125m with a 7.0% margin down 1.7% points on the prior
period. The decrease in margin reflected the negative impacts of product mix
effects and higher costs partly offset by the benefit of pricing increases.
Trading cash flow was £22m, a conversion ratio of 18% versus (64)% last year.
The improvement in trading cash flow reflected reduced working capital
outflows versus the prior period. An increase in inventories during the period
reflected strong volume growth in the first half of the year and in advance of
seasonally higher revenues in the second half. We expect improved cash
conversion in the second half as a result of higher revenues and operating
profit and our working capital initiatives.
New Markets
In Electrical, testing began on a new small gas turbine developed to power
hybrid-electrical flight as part of a turbogenerator system for advanced air
mobility.
Rolls-Royce SMR is progressing well through the regulatory process in the UK,
entering stage 2 of the Generic Design Assessment (GDA) process. First power
is still planned in the early 2030s, which will be dependent on securing
orders and the outcome of the final investment decision by the UK Government.
Planned cost increases in both Electrical and Small Modular Reactors (SMR) to
meet development milestones resulted in an increased operating loss of £(78)m
versus £(48)m in the prior period.
Trading cash flow was an outflow of £(42)m versus an outflow of £(30)m in
the prior period, with SMR costs largely covered by third party funding.
Statutory and underlying Group financial performance from continuing
operations
2023 H1 2022 H1
£ million Impact of hedge book (1) Impact of acquisition accounting Impact of
Statutory non-underlying items Underlying Underlying
Revenue 7,523 (573) − − 6,950 5,308
Gross profit 1,657 (162) 25 (5) 1,515 942
Operating profit 797 (165) 24 17 673 125
Gain arising on disposal of businesses 1 − − (1) − −
Profit before financing and taxation 798 (165) 24 16 673 125
Net financing income/(costs) 621 (817) − 47 (149) (236)
Profit/(loss) before taxation 1,419 (982) 24 63 524 (111)
Taxation (196) 140 (6) (58) (120) (77)
Profit/(loss) for the period from continuing operations 1,223 (842) 18 5 404 (188)
Basic earnings/(loss) per share (pence) 14.70 4.90 (2.24)
(1 ) Reflecting the impact of measuring revenue and costs at the average
exchange rate during the period and the valuation of assets and liabilities
using the period end exchange rate rather than the rate achieved on settled
foreign exchange contracts in the period or the rate expected to be achieved
by the use of the hedge book
- Revenue: Underlying revenue of £7.0bn was up 28%, largely driven by increases
across Civil Aerospace, Defence and Power Systems. Statutory revenue of
£7.5bn was 34% higher compared with the prior period. The difference between
statutory and underlying revenue is driven by statutory revenue being measured
at average prevailing exchange rates (2023 H1: GBP:USD 1.23; 2022 H1: GBP:USD
1.31) and underlying revenue being measured at the hedge book achieved rate
during the year (2023 H1: GBP:USD 1.50; 2022 H1: GBP:USD 1.50).
- Operating profit: Underlying operating profit was £673m (9.7% margin) versus
£125m (2.4% margin) in the prior period. The growth was led by Civil
Aerospace and Defence, partly offset by increased investment in
New Markets. Statutory operating profit was £797m, higher than the £673m
underlying operating profit largely due to the £165m negative impact from
currency hedges in the underlying results. Net charges of £17m were excluded
from the underlying results as these related to non-underlying items
comprising: reversals of exceptional contract loss provisions of £21m,
£(35)m of exceptional restructuring and transformation charges, including
£(31)m related to the multi-year transformation programme launched in the
period, and £(3)m of other items.
- Profit before taxation: Underlying profit before tax of £524m included
£(149)m net financing costs primarily related to net interest payable.
Statutory profit before tax of £1,419m included £415m net fair value gains
on derivative contracts, £(117)m net interest payable and a net foreign
exchange gain of £396m.
- Taxation: Underlying tax charge of £(120)m (2022 H1: £(77)m) reflects an
overall tax charge on profits of Group companies and a tax credit of £8m
relating to the re-recognition of some of the deferred tax asset on UK tax
losses. These are also reflected in the statutory tax charge of £(196)m (2022
H1: tax credit £143m) together with additional tax credits on the
re-recognition of £44m UK deferred tax assets relating to UK tax losses. In
addition, included in the £(196)m tax charge was £(140)m related to
unrealised foreign exchange derivatives which included the re-recognition of
£57m, and £20m tax credit related to other non-underlying items.
Free cash flow
2023 H1 2022 H1
£ million Cash flow Impact of hedge book Impact of acquisition accounting Impact of other non-underlying items Funds flow Funds flow
Operating profit 797 (165) 24 17 673 125
Operating profit from discontinued operations − − − − − 68
Depreciation, amortisation and impairment 513 − (24) − 489 455
Movement in provisions (142) 26 − 21 (95) (116)
Movement in Civil LTSA balance 857 (130) − − 727 433
Other operating cash flows (1) (4) (7) − (3) (14) (14)
Operating cash flow before working capital and income tax 2,021 (276) − 35 1,780 951
Working capital (excluding Civil LTSA balance) (2) (311) (256) − (9) (576) (269)
Cash flows on other financial assets and liabilities held for operating (516) 522 − − 6 35
purposes
Income tax (59) − − − (59) (88)
Cash from operating activities 1,135 (10) − 26 1,151 629
Capital element of lease payments (167) 10 − − (157) (85)
Capital expenditure (287) − − 2 (285) (167)
Investments 17 − − − 17 6
Interest paid (159) − − − (159) (172)
Settlement of excess derivatives (210) − − − (210) (265)
Other 27 − − (28) (1) (23)
Free cash flow 356 − − − 356 (77)
- of which is continuing operations 356 356 (68)
(1 ) Other operating cash flows includes profit/(loss) on disposal of
property, plant and equipment, share of results and dividends received from
joint ventures and associates, interest received, flows relating to our
defined benefit post-retirement schemes, and share-based payments
(2 ) Working capital includes inventory, trade and other receivables and
payables, and contract assets and liabilities (excluding Civil Aerospace LTSA
balances)
Free cash flow in the period was £356m, an improvement of £424m compared
with the prior period driven by:
Operating cash flow before working capital and income tax of £1.8bn, £0.8bn
higher than the prior period. The improvement at the Group level was
principally due to a stronger trading performance and higher cash receipts as
a result of EFH receipts in Civil Aerospace exceeding revenue recognised. The
movement in provisions of £(95)m largely related to utilisation of the Trent
1000 provision and contract loss provisions.
Working capital £(576)m, compared to £(269)m in the prior period. Inventory
increased by £(0.6)bn as a result of the build-up of inventory in line with
requirements to meet demand in Civil Aerospace and Power Systems, along with
continued supply chain disruption. There was a net £(0.3)bn outflow from
receivables and payables, which reflected increases of receivables of
£(0.4)bn due to volumes partly offset by increases in payables that included
a £0.2bn cash flow benefit from timing of net payments to joint ventures. In
addition, there was a £0.3bn inflow from advance payment receipts during the
period.
Income tax of £(59)m, net cash tax payments for the first half of 2023 were
lower than the prior period (£(88)m) due to timing. Tax payments in the
second half of 2023 will be higher, with full year payments expected to be
broadly in line with the prior year.
The capital element of lease payments was £(157)m, £(72)m higher than the
prior period as a result of timing of lease payments.
Capital expenditure of £(285)m, mainly £(175)m property, plant and equipment
additions and £(123)m intangibles additions. The combined additions were
higher than last year as a result of investment in site improvements across
the Group.
Interest paid of £(159)m, including lease interest payments, has decreased by
£13m as a result of the settlement of the UKEF £2bn loan facility in
September 2022 slightly offset by higher interest on gross overdrafts.
Settlement of excess derivative contracts of £(210)m, down from £(265)m in
the first half of 2022. An additional cash outflow of £179m will be incurred
in the second half of 2023, £146m will be incurred in 2024 and £175m
expected over the 2025-2026 period.
Balance Sheet
£ million 30 Jun 2023 31 Dec 2022 Change
Intangible assets 4,019 4,098 (79)
Property, plant and equipment 3,807 3,936 (129)
Right of use assets 965 1,061 (96)
Joint ventures and associates 485 422 63
Contract assets and liabilities (11,776) (10,681) (1,095)
Working capital (1) 3,112 2,297 815
Provisions (2,172) (2,333) 161
Net debt (2) (2,845) (3,251) 406
Net financial assets and liabilities (2) (2,512) (3,649) 1,137
Net post-retirement scheme deficits (411) (420) 9
Taxation 2,326 2,468 (142)
Other net assets and liabilities 36 36 −
Net liabilities (4,966) (6,016) 1,050
Other items
USD hedge book (US$bn) 16 19
Civil LTSA asset 684 885
Civil LTSA liability (8,913) (8,257)
Civil net LTSA liability (8,229) (7,372)
(1 ) Net working capital includes inventory, trade receivables and payables
and similar assets and liabilities
(2 ) Net debt includes £(49)m (2022 FY: £86m) 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
Key drivers of balance sheet movements were:
Contract assets and liabilities: The £(1.1)bn movement in the net liability
balance was mainly driven by an increase in invoiced LTSA receipts in Civil
Aerospace exceeding revenue recognised in the year and increase in deposits in
both Civil Aerospace and Defence.
Working capital: The £3.1bn net working capital position was £0.8bn higher
than prior year, with the movement comprising £0.4bn increase in inventory,
mostly in Civil Aerospace due to supply chain disruption and Power Systems to
support sales, and £0.4bn increase in net receivables/payables due to higher
trading volumes and the timing of payments. The difference between the
movements in working capital on the statutory balance sheet compared to those
described earlier in relation to the funds flow statement largely relate to
the impact of foreign exchange and other non-cash movements.
Provisions: The £0.2bn reduction related to contract loss provisions and
reflected changes in contract terms, pricing and expected future costs.
Net debt: Decreased from £(3.3)bn to £(2.8)bn driven by free cash inflow of
£0.4bn. Our liquidity position is strong with £7.4bn of liquidity including
cash and cash equivalents of £2.9bn and undrawn facilities of £4.5bn. Net
debt included £(1.7)bn of lease liabilities (2022 FY: £(1.8)bn).
Net financial assets and liabilities: A £1.1bn reduction in the net financial
liabilities driven by contracts maturing in the year and a change in fair
value of derivative contracts largely due to the impact of the movement in
GBP:USD exchange rates.
Taxation: The net tax asset reduced by £0.1bn. The decrease primarily
reflects the movement on foreign exchange derivative contracts, resulting in a
net reduction in the associated deferred tax asset of £163m. This is
partially offset by an increase in other UK deferred tax assets including the
re-recognition of £52m relating to UK tax losses.
Results meeting and conference call
Our results presentation will be held at UBS and webcast live at 09:00 (BST)
today. Downloadable materials will also be available on the Investors section
of the Rolls-Royce website. www.rolls-royce.com (http://www.rolls-royce.com)
To register for the webcast, including Q&A participation, please visit the
following link: https://app.webinar.net/8m6Mp2Vpzya
Please use this same link to access the webcast replay which will be made
available shortly after the event concludes. Photographs and
broadcast-standard video are available at www.rolls-royce.com
(http://www.rolls-royce.com)
Enquiries:
Investors: Media:
Isabel Green +44 7880 160976 Richard Wray +44 7810 850055
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
Condensed Consolidated Interim Financial Statements
Condensed consolidated income statement
For the half-year ended 30 June 2023
( )
Half-year to 30 June 2023 Half-year to
30 June 2022
Notes £m £m
Continuing operations
Revenue 2 7,523 5,600
Cost of sales (1) (5,866) (4,538)
Gross profit 2 1,657 1,062
Commercial and administrative costs 2 (560) (514)
Research and development costs 2, 3 (389) (373)
Share of results of joint ventures and associates 89 48
Operating profit 797 223
Gain arising on disposal of businesses 19 1 77
Profit before financing and taxation 798 300
Financing income 4 934 215
Financing costs 4 (313) (2,269)
Net financing income/(costs) (2) 621 (2,054)
Profit/(loss) before taxation 1,419 (1,754)
Taxation 5 (196) 143
Profit/(loss) for the period from continuing operations 1,223 (1,611)
Discontinued operations
Profit for the period from ordinary activities − 60
Costs of disposal of discontinued operations prior to disposal − (4)
Profit for the period from discontinued operations 19 − 56
Profit/(loss) for the period 1,223 (1,555)
Attributable to:
Ordinary shareholders 1,229 (1,554)
Non-controlling interests (NCI) (6) (1)
Profit/(loss) for the period 1,223 (1,555)
Other comprehensive (expense)/income (OCI) (226) 610
Total comprehensive income/(expense) for the period 997 (945)
Earnings/(loss) per ordinary share attributable to ordinary shareholders: 6
From continuing operations:
Basic 14.70p (19.29)p
Diluted 14.67p (19.29)p
From continuing and discontinued operations:
Basic 14.70p (18.62)p
Diluted 14.67p (18.62)p
(1)( ) Cost of sales includes a net release for expected credit losses
(ECLs) of £19m (30 June 2022: charge of £28m). Further details can be found
in note 10
(2) Included within net financing are fair value changes on derivative
contracts. Further details can be found in notes 2, 4 and 14
Condensed consolidated statement of comprehensive income
For the half-year ended 30 June 2023
Half-year to 30 June 2023 Half-year to
30 June 2022
Notes £m £m
Profit/(loss) for the period 1,223 (1,555)
Other comprehensive (expense)/income
Actuarial movements in post-retirement schemes 16 (35) 329
Revaluation to fair value of other investments 1 (5)
Share of OCI of joint ventures and associates (1) 1
Related tax movements 11 (85)
Items that will not be reclassified to profit or loss (24) 240
Foreign exchange translation differences on foreign operations (227) 375
Hedging reserves reclassified to income statement on disposal of − 62
businesses
Movement on fair values (charged)/credited to cash flow hedge reserve (31) 8
Reclassified to income statement from cash flow hedge reserve 64 (88)
Costs of hedging - 4
Related tax movements (8) 9
Items that will be reclassified to profit or loss (202) 370
Total other comprehensive (expense)/income (226) 610
Total comprehensive income/(expense) for the period 997 (945)
Attributable to:
Ordinary shareholders 1,003 (944)
NCI (6) (1)
Total comprehensive income/(expense) for the period 997 (945)
Total comprehensive income/(expense) for the period attributable to ordinary
shareholders arises from:
Continuing operations ( ) 1,003 (1,001)
Discontinued operations ( ) - 57
Total comprehensive income/(expense) for the period attributable to ordinary ( ) 1,003 (944)
shareholders
Condensed consolidated balance sheet
At 30 June 2023
30 June 31 December 2022
2023
Notes £m £m
ASSETS
Intangible assets 7 4,019 4,098
Property, plant and equipment 8 3,807 3,936
Right-of-use assets 9 965 1,061
Investments - joint ventures and associates 485 422
Investments - other 36 36
Other financial assets 14 414 542
Deferred tax assets 2,618 2,731
Post-retirement scheme surpluses 16 591 613
Non-current assets 12,935 13,439
Inventories 5,129 4,708
Trade receivables and other assets 10 7,378 6,936
Contract assets 11 1,333 1,481
Taxation recoverable 56 127
Other financial assets 14 50 141
Short-term investments - 11
Cash and cash equivalents 2,861 2,607
Current assets 16,807 16,011
TOTAL ASSETS 29,742 29,450
LIABILITIES
Borrowings and lease liabilities 12 (756) (358)
Other financial liabilities 14 (660) (1,016)
Trade payables and other liabilities 13 (7,493) (6,983)
Contract liabilities 11 (5,104) (4,825)
Current tax liabilities (84) (104)
Provisions for liabilities and charges 15 (651) (632)
Current liabilities (14,748) (13,918)
Borrowings and lease liabilities 12 (4,901) (5,597)
Other financial liabilities 14 (2,365) (3,230)
Trade payables and other liabilities 13 (1,902) (2,364)
Contract liabilities 11 (8,005) (7,337)
Deferred tax liabilities (264) (286)
Provisions for liabilities and charges 15 (1,521) (1,701)
Post-retirement scheme deficits 16 (1,002) (1,033)
Non-current liabilities (19,960) (21,548)
TOTAL LIABILITIES (34,708) (35,466)
NET LIABILITIES (4,966) (6,016)
EQUITY
Called-up share capital 1,684 1,674
Share premium 1,012 1,012
Capital redemption reserve 166 166
Hedging reserves 51 26
Translation reserve 634 861
Accumulated losses (8,551) (9,789)
Equity attributable to ordinary shareholders (5,004) (6,050)
Non-controlling interest (NCI) 38 34
TOTAL EQUITY (4,966) (6,016)
Condensed consolidated cash flow statement
For the half-year ended 30 June 2023
Notes Half-year to 30 June 2023 Half-year to
£m 30 June 2022
£m
Reconciliation of cash flows from operating activities
Operating profit from continuing operations 797 223
Operating profit from discontinued operations 19 - 68
Operating profit 797 291
(Profit)/loss on disposal of property, plant and equipment (1) 16
Share of results of joint ventures and associates (89) (48)
Dividends received from joint ventures and associates 16 19
Amortisation and impairment of intangible assets 7 139 138
Depreciation and impairment of property, plant and equipment 8 206 203
Depreciation and impairment of right-of-use assets 9 170 127
Adjustment of amounts payable under residual value guarantees within lease (2) (1)
liabilities (1)
Decrease in provisions (142) (94)
Increase in inventories (557) (692)
Movement in trade receivables/payables and other assets/liabilities (51) 183
Movement in contract assets/liabilities 1,154 682
Cash flows on other financial assets and liabilities held for operating (516) (167)
purposes (2)
Interest received 60 6
Net defined benefit post-retirement cost recognised in profit before financing 16 25 27
Cash funding of defined benefit post-retirement schemes 16 (38) (29)
Share-based payments 23 24
Net cash inflow from operating activities before taxation 1,194 685
Taxation paid (59) (88)
Net cash inflow from operating activities 1,135 597
Cash flows from investing activities
Movement in other investments 1 (5)
Additions of intangible assets 7 (123) (94)
Disposals of intangible assets 7 1 5
Purchases of property, plant and equipment (177) (125)
Disposals of property, plant and equipment 12 25
Acquisition of businesses 19 (12) −
Disposal of businesses 19 3 179
Movement in investments in joint ventures and associates (8) (14)
Movement in short-term investments 11 7
Net cash outflow from investing activities (292) (22)
Cash flows from financing activities
Repayment of loans (1) (23)
Proceeds from increase in loans 1 1
Capital element of lease payments (167) (95)
Net cash flow from decrease in borrowings and lease liabilities (167) (117)
Interest paid (94) (120)
Interest element of lease payments (42) (29)
Fees paid on undrawn facilities (23) (23)
Cash flows on settlement of excess derivative contracts (3) (210) (265)
Transactions with NCI (4) 24 25
Redemption of C Shares − (1)
Net cash outflow from financing activities (512) (530)
Change in cash and cash equivalents 331 45
Cash and cash equivalents at 1 January 2,605 2,639
Exchange (losses)/gains on cash and cash equivalents (81) 98
Cash and cash equivalents at 30 June (5) 2,855 2,782
(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)( ) Predominately relates to cash settled on derivative contracts held
for operating purposes
(3) In 2020, the Group experienced a significant decline in its medium-term
outlook and consequently a significant deterioration to its forecast net USD
cash inflows. The Group took action to reduce the size of the USD hedge book
by $11.8bn across 2020-2026 to reflect the fact that at that time, future
operating cash flows were no longer forecast to materialise. To achieve the
necessary reduction in the hedge book, a separate and distinct set of foreign
exchange derivative instruments were entered into to buy $11.8bn. The
associated cash outflow of these transactions is £1,674m and occurs over the
period 2020-2026. This action had the impact of fixing the fair value of the
over-hedged position and provided certainty over when the cash flows to settle
the position would occur in future periods. The Directors considered the
economic nature of the activities and concluded that these cash flows were
most appropriately classified as a financing activity. During the period, the
Group incurred a cash outflow of £210m (30 June 2022: £265m) and estimates
that future cash outflows of £179m will be incurred in the second half of
2023, £146m will be incurred in 2024 and £175m spread over 2025-2026
(4)( ) Relates to NCI investment received in the year, 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
Condensed consolidated cash flow statement continued
For the half-year ended 30 June 2023
In deriving the condensed consolidated cash flow statement, movements in
balance sheet line items have been adjusted for non-cash items. The cash flow
in the period includes the sale of goods and services to joint ventures and
associates - see note 18.
Half-year to 30 June 2023 Half-year to
£m 30 June 2022
£m
Reconciliation of movements in cash and cash equivalents to movements in net
debt
Change in cash and cash equivalents 331 45
Cash flow from decrease in borrowings and lease liabilities 167 117
Cash flow from decrease in short-term investments (11) (7)
Change in net debt resulting from cash flows 487 155
New leases and other non-cash adjustments on borrowings and lease liabilities (90) (67)
Exchange gains/(losses) on net debt 66 (162)
Fair value adjustments 78 24
Movement in net debt 541 (50)
Net debt at 1 January (3,337) (5,194)
Net debt at 30 June excluding the fair value of swaps (2,796) (5,244)
Fair value of swaps hedging fixed rate borrowings (49) 102
Net debt at 30 June (2,845) (5,142)
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 ( ) Other movements At 30 June
£m £m £m £m £m £m £m
2023
Cash at bank and in hand 847 (76) (27) - - - 744
Money market funds 34 701 - - - - 735
Short-term deposits 1,726 (290) (54) - - - 1,382
Cash and cash equivalents (per balance sheet) 2,607 335 (81) - - - 2,861
Overdrafts (2) (4) - - - - (6)
Cash and cash equivalents (per cash flow statement) 2,605 331 (81) - - - 2,855
Short-term investments 11 (11) - - - - -
Other current borrowings (1) - - - (462) - (463)
Non-current borrowings (4,105) - 63 78 462 (2) (3,504)
Lease liabilities (1,847) 167 84 - - (88) (1,684)
Financial liabilities (5,953) 167 147 78 - (90) (5,651)
Net debt excluding fair value of swaps (3,337) 487 66 78 - (90) (2,796)
Fair value of swaps hedging fixed rate borrowings (1) 86 - (63) (72) - - (49)
Net debt (3,251) 487 3 6 - (90) (2,845)
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 (per cash flow statement) 2,639 45 98 − − − 2,782
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 (1) 37 − 98 (33) − − 102
Net debt (5,157) 155 (64) (9) − (67) (5,142)
(1)( ) Fair value of swaps hedging fixed rate borrowings reflects the
impact of derivatives on repayments of the principal amount of debt. Net debt
therefore includes the fair value of derivatives included in fair value hedges
(30 June 2023: £(33)m, 31 December 2022: £38m) and the element of fair value
relating to exchange differences on the underlying principal of derivatives in
cash flow hedges (30 June 2023: £(16)m, 31 December 2022: £48m)
Condensed consolidated statement of changes in equity
For the half-year ended 30 June 2023
Attributable to ordinary shareholders
Notes Share capital Share premium Capital redemption reserve Hedging reserves (1) Merger reserve Translation reserve Accumulated losses (2) Total NCI Total equity
£m £m £m £m £m £m £m £m £m £m
At 1 January 2023 1,674 1,012 166 26 - 861 (9,789) (6,050) 34 (6,016)
Profit/(loss) for the period - - - - - - 1,229 1,229 (6) 1,223
Foreign exchange translation differences on foreign operations - - - - - (227) - (227) - (227)
Actuarial movements on post-retirement schemes 16 - - - - - - (35) (35) - (35)
Fair value movement on cash flow hedges - - - (31) - - - (31) - (31)
Reclassified to income statement from cash flow hedge reserve - - - 64 - - - 64 - 64
Revaluation to fair value of other investments - - - - - - 1 1 - 1
OCI of joint ventures and associates - - - - - - (1) (1) - (1)
Related tax movements - - - (8) - - 11 3 - 3
Total comprehensive income/(expense) for the period - - - 25 - (227) 1,205 1,003 (6) 997
Issue of ordinary shares 10 - - - - - - 10 - 10
Shares issued to employee share trust - - - - - - (10) (10) - (10)
Share-based payments - direct to equity (3) - - - - - - 23 23 - 23
Transactions with NCI (4) - - - - - - 17 17 10 27
Related tax movements - - - - - - 3 3 - 3
Other changes in equity in the period 10 - - - - - 33 43 10 53
At 30 June 2023 1,684 1,012 166 51 - 634 (8,551) (5,004) 38 (4,966)
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
Hedging reserves reclassified to income statement on disposal of businesses − − − 62 − − − 62 − 62
Actuarial movements 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 − − − 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 − − 1 − − − (1) − − −
Share-based payments - direct to equity (3) − − − − − − 24 24 − 24
Transactions with NCI (4) − − − − − − 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)
(1 ) Hedging reserves include the cash flow hedge reserve of £51m and the
cost of hedging reserve of £nil (31 December 2022: £26m and £nil
respectively)
(2 ) At 30 June 2023, 54,338,132 ordinary shares with a net book value of
£22m (30 June 2022: 16,297,976 ordinary shares with a net book value of
£39m) were held for the purpose of share-based payment plans and included in
accumulated losses. During the period:
- 6,349,000 ordinary shares with a net book value of £15m (30 June 2022:
13,332,079 ordinary shares with a net book value of £27m) vested in
share-based payment plans;
- the Company issued 49,100,000 (30 June 2022: none) new ordinary shares to
the Group's share trust for its employee share-based payment plans with a net
book value of £10m (30 June 2022: £nil); and
- the Company acquired none (30 June 2022: none) of its ordinary shares via
reinvestment of dividends received on its own shares and purchased 184,336
(30 June 2022: none) of its ordinary shares through purchases on the London
Stock Exchange
(3)( ) Share-based payments - direct to equity is the share-based payment
charge for the period less the actual cost of vesting excluding those vesting
from own shares and cash received on share-based schemes vesting
(4) 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 2023 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 2022 (2022 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 Interim Financial
Statements on 3 August 2023.
Statement of compliance
These Condensed Consolidated Interim Financial Statements have been prepared
on the basis of the policies set out in the 2022 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
2022 Annual Report.
The interim figures up to 30 June 2023 and 2022 are unaudited. The 2022
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
IFRS 17 Insurance Contracts
IFRS 17 issued in May 2018, establishes the principles for the recognition,
measurement, presentation and disclosure of insurance contracts within the
scope of the Standard. The Standard is effective for years beginning on or
after 1 January 2023 with a requirement to restate comparatives.
The Group has reviewed whether its arrangements meet the accounting definition
of an insurance contract. While some contracts, including Civil Aerospace
LTSAs, may transfer an element of insurance risk, they relate to warranty and
service type agreements that are issued in connection with the Group's sales
of its goods or services and therefore will remain accounted for under the
existing revenue and provisions standards. The Directors have judged that such
arrangements entered into after the original equipment sale remain
sufficiently related to the sale of the Group's goods and services to allow
the contracts to continue to be measured under IFRS 15 Revenue from Contracts
with Customers and IAS 37 Provisions, Contingent Liabilities and Contingent
Assets.
The Group has identified that the Standard will impact the results of its
captive insurance company as it issues insurance contracts, however since the
contracts insure other group companies, there is no impact on the Condensed
Consolidated Interim Financial Statements.
The Group has assessed the impact of its parent company guarantee arrangements
on the financial statements of the Group. Parent company guarantees, in the
form of financial or performance guarantees, meet the IFRS 17 definition of
insurance contracts. Whilst there could be an impact on individual sets of
financial statements of companies within the Group these have not impacted the
Condensed Consolidated Interim Financial Statements for the period to 30 June
2023 and are not expected to have an impact for the full year.
The Directors are not aware of any other contracts where IFRS 17 would have an
impact on the Condensed Consolidated Interim Financial Statements.
Other
IAS 12 Income Taxes has been amended to incorporate the following revisions
for 'Deferred Tax related to Assets and Liabilities arising from a Single
Transaction' and 'International Tax Reform: Pillar Two Model Rules'. There is
no material impact on the Group as a result of the amendments relating to
Deferred Tax related to Assets and Liabilities arising from a Single
Transaction.
The Group is within the scope of the OECD Pillar Two (Global Minimum Tax)
model rules. The legislation has been substantively enacted in some of the
jurisdictions in which the Group operates including the UK and will be
effective from 1 January 2024. An assessment of the potential impact on the
Group including the application of the transitional safe harbour rules is
currently being performed.
For the period to 30 June 2023, the Group has applied the mandatory exemption
to recognising and disclosing information about deferred tax assets and
liabilities related to Pillar Two income taxes.
Revision to IFRS not applicable in 2023
Standards and interpretations issued by the IASB are only applicable if
endorsed by the UK. The Group does not consider that any standards, amendments
or interpretations issued by the IASB, but not yet applicable will have a
significant impact on the Consolidated Financial Statements.
Other
IBOR reform transition
A number of the Group's lease liabilities have been based on a USD LIBOR
index. During the period, the majority of contracts in which the Group is a
lessee have been amended. These have been amended to USD Term SOFR (Secured
Overnight Financing Rate) plus CAS (Credit Adjustment Spread), and the impact
to the Financial Statements is not material. For contracts which have not yet
been amended, these will be based on synthetic LIBOR, which will be published
by the Financial Conduct Authority (FCA) until 2024, in the period between
LIBOR ceasing and the contract being amended. The Group has taken the
practical expedient available to account for the lease modification required
by the IBOR reform by applying IFRS 16 Leases paragraph 42.
Post balance sheet events
The Group has taken the latest legal position in relation to any ongoing legal
proceedings and reflected these in the 30 June 2023 results as appropriate.
See note 15.
1 Basis of preparation and accounting policies continued
Going concern
Overview
In adopting the going concern basis for preparing these Condensed Consolidated
Interim Financial Statements, the Directors have undertaken a review of the
Group's cash flow forecasts and available liquidity, along with consideration
of the principal risks and uncertainties over an 18-month period to February
2025. The Directors consider an 18-month going concern period to be
appropriate. This 18-month period includes the repayment at maturity of a
€550m (£484m) bond in May 2024.
The processes for identifying and managing risk are described in the Group's
2022 Annual Report on pages 42 to 47. As described on those pages, the risk
management process and the going concern statement are designed to provide
reasonable but not absolute assurance. The principal risks and uncertainties
are summarised on page 45.
Forecasts
Recognising the challenges of reliably estimating and forecasting the impact
of external factors on the Group, the Directors have reviewed the financial
forecasts and liquidity forecasts with consideration given to the potential
impact of severe but plausible risks. Two forecasts have been modelled in the
assessment of going concern, along with a likelihood assessment of these
forecasts. The base case forecast reflects the Directors' current expectations
of future trading over the 18-month period. A stressed downside forecast has
also been modelled which envisages a 'stress' or 'downside' situation that is
considered severe but plausible.
The Group's base case forecast reflects the Directors' best estimation of how
the business plans to perform over the 18-month period.
Macro-economic assumptions have been modelled using externally available data
based on the most likely forecasts, considering all of the markets in which we
operate, with inflation at 3% - 4%, interest rates at 4% - 6% and GDP growth
at around 2%. In the base case forecast Civil Aerospace large engine flying
hours (EFHs) are expected to recover to 2019 levels by the end of 2024.
In modelling the stressed downside forecast the Directors have considered the
current macro-economic climate and the possibility that demand could be
supressed in the near term as a result of a Global economic downturn,
reflecting slower GDP growth in this forecast when compared with the base
case. EFHs have been modelled to remain at average second quarter 2023 levels
throughout the 18-month period to February 2025. The stressed downside also
assumes a more pessimistic view of inflation at around 6% higher than the base
case covering a broad range of costs including energy, commodities, and jet
fuel. Interest rates are 1% - 2% higher than the base case. The stressed
downside also considers lower demand and load reduction through our factories,
and increased supply chain challenges.
In preparing the Condensed Consolidated Interim Financial Statements, the
Directors have continued to consider the impact of climate change,
particularly in the context of disclosures made in the Strategic Report in the
2022 Annual Report and the Climate Review 2022. Consistent with our assessment
in the 2022 Annual Report, climate change is not expected to have a
significant impact on the Group's going concern assessment to February 2025.
More detail can be found on page 18 of these Condensed Consolidated Interim
Financial Statements.
Liquidity and borrowings
During the period to 30 June 2023, the Group cancelled its undrawn £1bn bank
loan facility which was due to expire in January 2024.
At 30 June 2023, the Group had liquidity of £7.4bn including cash and cash
equivalents of £2.9bn and undrawn facilities of £4.5bn.
The Group's committed borrowing facilities at 30 June 2023 and 28 February
2025 are set out below. None of the facilities are subject to any financial
covenants or rating triggers which could accelerate repayment.
£m 30 June 2023 28 February 2025
Issued Bond Notes (1) 3,995 3,511
UKEF £1bn loan (undrawn) (2) 1,000 1,000
UKEF £1bn loan (undrawn) (3) 1,000 1,000
Revolving Credit Facility (undrawn) (4) 2,500 2,500
Total committed borrowing facilities 8,495 8,011
(1) The value of Issued Bond Notes reflects the impact of derivatives on
repayments of the principal amount of debt. The bonds mature in tranches over
the period to May 2028
(2) The £1,000m UKEF loan matures in March 2026 (currently undrawn)
(3) The £1,000m UKEF loan matures in September 2027 (currently undrawn)
(4) The £2,500m Revolving Credit Facility matures in April 2025 (currently
undrawn)
Taking into account the maturity of these borrowing facilities, the Group has
committed facilities of at least £8.0bn available throughout the period to 28
February 2025.
Conclusion
After reviewing the current liquidity position and the cash flow forecasts
modelled under both the base case and stressed downside, the Directors
consider that the Group has sufficient liquidity to continue in operational
existence for a period of at least 18 months from the date of this report and
are therefore satisfied that it is appropriate to adopt the going concern
basis of accounting in preparing the financial statements.
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 2022 Annual Report and the Climate Review 2022. 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 2025 nor on 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 more
efficient engines, testing of sustainable aviation fuels, small modular
reactor (SMR) and hybrid and fully electric propulsion; and
- The Group continues to invest in onsite renewable energy
generation solutions and procurement of green energy for the Group's
facilities and investment is included in the five-year forecasts to enable the
Group to meet its 2030 target for net-zero greenhouse gas emissions (scope 1
and 2) from our buildings, facilities and manufacturing processes (excluding
product testing).
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.
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 2022 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 2023 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 2022.
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 2022, 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 Consolidated Financial Statements in the 2022 Annual Report and
are summarised below. During the period, the Group has
re-assessed 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 2023, 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 change (at underlying rates):
Whether any costs should be treated as wastage. - A change in forecast EFHs of 1% over the remaining term of the contracts
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. of around £20m.
When revenue should be recognised in relation to spare engine sales. - A 2% increase or decrease in our pricing to customers over the life of the
contracts would lead to a revenue
Whether the Civil Aerospace LTSA contracts are warranty style contracts
catch-up adjustment in the next 12 months of around £260-280m.
entered into in connection with OE sales and therefore can be accounted for
under IFRS 15. - A 2% increase or decrease in shop visit costs over the life of the
contracts would lead to a revenue catch-up adjustment in the next 12 months of
around
£70-90m.
Risk and revenue sharing arrangements (RRSAs) Determination of the nature of entry fees received.
Taxation Estimates necessary to assess whether it is probable that sufficient suitable A 5% change in margin or shop visits (which could be driven by fewer EFHs as a
taxable profits will arise in the UK to utilise the deferred tax assets result of climate change) would result in an increase/decrease in the deferred
recognised. tax asset in respect of UK losses of around £130m.
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 £50m, and if the potential impact of carbon prices on the Group's cost
base was to double, the recoverable value of deferred tax assets would
decrease by around £80m.
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.
Impairment of Determination of cash-generating units for assessing impairment of goodwill.
non-current assets
Leases Determination of the lease term. Estimates of the payments required to meet residual value guarantees at the The lease liability at 30 June 2023 included £432m relating to the cost of
end of engine leases. meeting these residual value guarantees in the Civil Aerospace business. Up to
£90m is payable in the next 12 months, £216m is due over the following four
years and the remaining balance after five years.
Provisions Whether any costs should be treated as wastage. Estimates of the time to resolve the technical issues on the Trent 1000, A 12-month delay in the availability of the modified HPT blade could lead to a
including the development of the modified high-pressure turbine (HPT) blade
£40-70m charge in relation to the Trent 1000 programme.
and estimates of the expenditure required to settle the obligation relating to
Trent 1000 An increase in Civil Aerospace large engines estimates of LTSA costs of 1%
long-term contracts assessed as onerous. over the remaining term of the contracts could lead to a £60-100m increase in
the provision for contract losses across all programmes.
Estimates of the future revenues and costs to fulfil onerous contracts.
A 1% change in the discount rates used could lead to around a £60-80m change
Assumptions implicit within the calculation of discount rates. in the provision.
Post-retirement benefits Estimates of the assumptions for valuing the net defined benefit obligation. A reduction in the discount rate of 0.25% from 5.15% could lead to an increase
in the defined benefit obligations of the RR UK Pension Fund (RRUKPF) of
approximately £190m. 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% (RPI of 3.60% and CPI of
3.05%) could lead to an increase in the defined benefit obligations of the
RRUKPF of approximately £65m.
A one-year increase in life expectancy from 21.9 years (male aged 65) and from
23.2 years (male aged 45) would increase the defined benefit obligations of
the RRUKPF by approximately £150m.
2 Segmental analysis
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 (which acts as the Chief Operating Decision
Maker as defined by IFRS 8). The Group's four businesses 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 UK Civil Nuclear business.
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 (other than lease
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. Lease liabilities are not revalued
to reflect the expected exchange rates as due to their
multi-year remaining terms, the Directors believe that doing so would not be
the most appropriate basis to measure the in-year performance. 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 2023, the Group was a net seller of USD at an
achieved exchange rate GBP:USD of 1.50
(30 June 2022: 1.50) based on the USD hedge book.
In 2020, the Group experienced a significant decline in its medium-term
outlook and consequently a significant deterioration to its forecast net USD
cash inflows. The Group took action to reduce the size of the USD hedge book
by $11.8bn across 2020-2026 to reflect the fact that at that time, future
operating cash flows were no longer forecast to materialise. An underlying
charge of £1,674m was recognised within the underlying finance costs in 2020
and the associated cash settlement costs occur 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.
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
The Group exclude these 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 and statutory performance.
The tax effects of adjustments above are excluded from the underlying tax
charge. Changes in tax rates are excluded from the underlying tax charge. In
addition, changes in the amount of recoverable deferred tax or advance
corporation tax recognised are excluded from the underlying results to the
extent that their recognition or derecognition was not originally recorded
within the underlying results.
2 Segmental analysis 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 Other businesses Corporate and Inter-segment Total underlying
£m £m £m £m £m £m £m
For the half-year ended 30 June 2023
Underlying revenue from sale of original equipment 1,055 841 1,175 1 5 - 3,077
Underlying revenue from aftermarket services 2,202 1,072 599 - - - 3,873
Total underlying revenue 3,257 1,913 1,774 1 5 - 6,950
Gross profit/(loss) 690 379 452 - (5) (1) 1,515
Commercial and administrative costs (171) (86) (233) (14) - (34) (538)
Research and development costs (195) (34) (96) (64) - - (389)
Share of results of joint ventures and associates 81 2 2 - - - 85
Underlying operating profit/(loss) 405 261 125 (78) (5) (35) 673
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
2 Segmental analysis continued
Reconciliation to statutory results
Total underlying Underlying adjustments and adjustments to Group statutory results
foreign exchange
£m £m £m
For the half-year ended 30 June 2023
Continuing operations
Revenue from sale of original equipment 3,077 212 3,289
Revenue from aftermarket services 3,873 361 4,234
Total revenue 6,950 573 7,523
Gross profit 1,515 142 1,657
Commercial and administrative costs (538) (22) (560)
Research and development costs (389) − (389)
Share of results of joint ventures and associates 85 4 89
Operating profit 673 124 797
Gain arising on the disposal of businesses - 1 1
Profit before financing and taxation 673 125 798
Net financing (149) 770 621
Profit before taxation 524 895 1,419
Taxation (120) (76) (196)
Profit for the period 404 819 1,223
Attributable to:
Ordinary shareholders 410 819 1,229
NCI (6) - (6)
For the half-year ended 30 June 2022
Continuing operations
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)
NCI (1) − (1)
(1)( ) Discontinued operations relate to the results of ITP Aero and are
presented net of intercompany trading eliminations and related consolidation
adjustments
( )
2 Segmental analysis continued
Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition Civil Aerospace Defence Power Systems New Markets Other businesses Corporate and Inter-segment Total underlying
£m £m £m £m £m £m £m
For the half-year ended 30 June 2023
Original equipment recognised at a point in time 1,055 337 1,153 1 - - 2,546
Original equipment recognised over time - 504 22 - 5 - 531
Aftermarket services recognised at a point in time 555 390 550 - - - 1,495
Aftermarket services recognised over time 1,604 682 49 - - - 2,335
Total underlying customer contract revenue 3,214 1,913 1,774 1 5 - 6,907
Other underlying revenue 43 - - - - - 43
Total underlying revenue 3,257 1,913 1,774 1 5 - 6,950
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
Total underlying Underlying adjustments and adjustments to foreign exchange Group statutory results
£m £m £m
For the half-year ended 30 June 2023
Original equipment recognised at a point in time 2,546 212 2,758
Original equipment recognised over time 531 - 531
Aftermarket services recognised at a point in time 1,495 97 1,592
Aftermarket services recognised over time 2,335 255 2,590
Total customer contract revenue 6,907 564 7,471
Other revenue 43 9 52
Total revenue 6,950 573 7,523
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
2 Segmental analysis continued
Underlying adjustments Half-year to 30 June 2022
Half-year to 30 June 2023
Revenue Profit before financing Net financing Revenue Profit before financing Net financing
£m £m £m £m £m £m
Taxation Taxation
£m £m
Underlying performance 6,950 673 (149) (120) 5,308 125 (236) (77)
Impact of foreign exchange differences as a result of hedging activities on A 573 163 396 (74) 292 124 (464) 7
trading transactions (1)
Unrealised fair value changes on derivative contracts held for trading (2) A - 2 355 (108) - (5) (1,442) 230
Unrealised fair value change to derivative contracts held for financing (3) A - - 66 (15) - - 88 (24)
Exceptional programme credits/(charges) (4) B - 21 - - - 22 (3) -
Exceptional restructuring and transformation charges (5) B - (35) - 4 - (32) - 4
Impairment reversals (6) C - - - - - 11 - -
Effect of acquisition accounting (7) C - (24) - 6 - (23) - 5
Other (8) D - (3) (47) 10 - 1 3 (2)
Gains arising on the disposals of businesses C - 1 - - - 77 - -
Re-recognition of deferred tax assets (9) D - - - 101 - - - -
Total underlying adjustments 573 125 770 (76) 292 175 (1,818) 220
Statutory performance per condensed consolidated income statement 7,523 798 621 (196) 5,600 300 (2,054) 143
A - FX and derivatives, B - Exceptional, C - M&A and impairment, D - Other
(1)( ) The impact of measuring revenues and costs at the average exchange
rate during the period 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 £573m (30 June 2022: £292m) and increased
profit before financing and taxation by £163m (30 June 2022: £124m).
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) Primarily includes net fair value gains of £60m (30 June 2022: £97m) on
any interest rate swaps not designated into hedging relationships for
accounting purposes
(4) During the period to 30 June 2023 and 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
(5) During the period to 30 June 2023, the Group incurred transformation and
restructuring related charges of £35m (30 June 2022: £32m). In 2023, the
Group announced a major multi-year transformation programme which consists of
seven workstreams that were set out in the 2022 Annual Report. During the
period £31m was incurred in relation to this multi-year programme, comprising
£15m for advisory fees and £16m related to impairments and provisions as a
result of strategic choices to cease specific projects. In the period to 30
June 2022 a £32m charge related to initiatives to enable restructuring
(6)( ) The Group has assessed the carrying value of its assets. Further
details are provided in notes 7,8 and 9
(7) The effect of acquisition accounting includes the amortisation of
intangible assets arising on previous acquisitions
(8) Includes interest received of £35m (30 June 2022: interest paid of
£2m) on interest rate swaps which are not designated into hedging
relationships for statutory purposes from interest payable on an underlying
basis to fair value movement and £3m (30 June 2022: credit of £1m) of
past-service cost on defined benefit schemes
(9) The re-recognition of deferred tax assets includes £57m relating to
foreign exchange derivatives and £44m relating to UK tax losses. Further
details are provided in note 5
2 Segmental analysis continued
Balance sheet analysis
( ) Civil Aerospace Defence Power Systems New Markets Total reportable segments
£m £m £m £m £m
At 30 June 2023
Segment assets 18,069 3,497 4,130 126 25,822
Interests in joint ventures and associates 455 7 23 - 485
Segment liabilities (25,163) (3,193) (1,852) (92) (30,300)
Net (liabilities)/assets (6,639) 311 2,301 34 (3,993)
At 31 December 2022
Segment assets 17,537 3,430 4,084 135 25,186
Interests in joint ventures and associates 387 4 31 - 422
Segment liabilities (25,357) (3,146) (1,802) (97) (30,402)
Net (liabilities)/assets (7,433) 288 2,313 38 (4,794)
Reconciliation to the balance sheet
30 June 2023 31 December 2022
£m £m
Total reportable segment assets 25,822 25,186
Other businesses 10 19
Corporate and inter-segment (2,810) (2,460)
Interests in joint ventures and associates 485 422
Cash and cash equivalents and short-term investments 2,861 2,618
Fair value of swaps hedging fixed rate borrowings 109 194
Deferred and income tax assets 2,674 2,858
Post-retirement scheme surpluses 591 613
Total assets 29,742 29,450
Total reportable segment liabilities (30,300) (30,402)
Other businesses (53) (34)
Corporate and inter-segment 2,810 2,456
Borrowings and lease liabilities (5,657) (5,955)
Fair value of swaps hedging fixed rate borrowings (158) (108)
Deferred and income tax liabilities (348) (390)
Post-retirement scheme deficits (1,002) (1,033)
Total liabilities (34,708) (35,466)
Net liabilities (4,966) (6,016)
3 Research and development
Half-year to 30 June 2023 Half-year to 30 June 2022
£m £m
Gross research and development costs (684) (599)
Contributions and fees (1) 254 218
Expenditure in the period (430) (381)
Capitalised as intangible assets 84 48
Amortisation and impairment of capitalised costs (43) (40)
Net cost recognised in the income statement (389) (373)
Underlying adjustments relating to the effects of acquisition accounting and − 2
foreign exchange
Net underlying cost recognised in the income statement (389) (371)
(1) ( ) Includes government funding
4 Net financing
Half-year to 30 June 2023 Half-year to 30 June 2022
Statutory Underlying (1) Statutory Underlying (1)
£m £m £m £m
Interest receivable 56 56 9 9
Net fair value gains on foreign currency contracts 407 - − −
Net fair value gains on non-hedge accounted interest rate swaps (2) 60 - 97 −
Net fair value gains on commodity contracts - - 95 −
Financing on post-retirement scheme surpluses 15 - 14 −
Net foreign exchange gains 396 - − −
Financing income 934 56 215 9
Interest payable (173) (133) (171) (171)
Net fair value losses on foreign currency contracts - - (1,537) −
Financial charge relating to RRSAs - - (6) (6)
Net fair value losses on commodity contracts (52) - − −
Financing on post-retirement scheme deficits (22) - (12) −
Net foreign exchange losses - - (464) −
Cost of undrawn facilities (32) (32) (31) (31)
Other financing charges (34) (40) (48) (37)
Financing costs (313) (205) (2,269) (245)
Net financing income/(costs) 621 (149) (2,054) (236)
Analysed as:
Net interest payable (117) (77) (162) (162)
Net fair value gains/(losses) on derivative contracts 415 - (1,345) −
Net post-retirement scheme financing (7) - 2 −
Net foreign exchange gains/(losses) 396 - (464) −
Net other financing (66) (72) (85) (74)
Net financing income/(costs) 621 (149) (2,054) (236)
(1) See note 2 for definition of underlying results
(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
realised fair value movements on these interest rate swaps to net interest
payable
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 charge for the half-year is £196m on a statutory profit before
taxation of £1,419m (30 June 2022: tax credit of £143m on a statutory loss
before taxation of £1,754m), giving a statutory rate of 13.8% (30 June 2022:
8.1%). The key drivers of the tax charge in 2023 are the profits in key
jurisdictions taxed at local rates together with the impact of the
re-recognition of UK deferred tax assets relating to the unrealised foreign
exchange losses on derivative contracts and tax losses.
Tax reconciliation - continuing operations:
Half-year to 30 June 2023 Half-year to 30 June 2022
£m Tax rate £m Tax rate
Profit/(loss) before taxation 1,419 (1,754)
Nominal tax charge/(credit) at UK corporation tax rate of 23.5% 333 23.5% (333) 19.0%
(30 June 2022: 19%)
Movement in UK deferred tax assets not recognised (1) (100) (7.1%) 161 (9.2%)
Other (37) (2.6%) 29 (1.7%)
Statutory tax charge/(credit) and rate 196 13.8% (143) 8.1%
Analysis of statutory tax charge/(credit):
Underlying items 120 77
Non-underlying items (see note 2) 76 (220)
196 (143)
(1) Half-year to 30 June 2023 includes the re-recognition of deferred tax
assets relating to foreign exchange and commodity financial assets and
liabilities and UK tax losses. Half-year to 30 June 2022 mainly relates to UK
tax losses not recognised
Deferred tax assets are recognised to the extent it is probable that future
taxable profits will be available against which to recover the asset. Where
necessary, this is based on management's assumptions and probability
assessments relating to the amounts and timing of future taxable profits. The
Directors' continually reassess 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.
Based on the assessment undertaken at 30 June 2023 and taking into account the
financial results in the period to 30 June 2023, new contracts announced in
that period and the emerging benefits from transformation, the Group has
re-recognised £52m of the previously derecognised deferred tax asset relating
to UK tax losses.
Sensitivity analyses are also performed as part of the assessment. At 30 June
2023, 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 EFHs
- Assumed future cost increases from climate change expected to pass
through to customers at 100% are restricted to 90% pass through
All of these could be driven by a number of factors, including the impact of
climate change and changes in foreign exchange rates.
A 5% change in margin or shop visits (which could be driven by fewer EFHs due
to climate change) would result in an increase/decrease in the deferred tax
asset of around £130m.
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 £50m, and if carbon prices were to double, this would be £80m. The
assumptions around carbon pricing are consistent with those at 31 December
2022.
The deferred tax asset arising on unrealised losses on derivative contracts
that remain hedged has also been assessed resulting in a decrease in the
deferred tax asset of £163m. This is net of the re-recognition of a deferred
tax asset of £57m based on the assessment undertaken at 30 June 2023.
These assessments are in line with the approach set out in note 5 of the 2022
Annual Report and take into account a 25% probability of there being a severe
but plausible downside scenario.
IAS 12 Income Taxes has been amended to incorporate the following revisions:
- Deferred Tax related to Assets and Liabilities arising from a
Single Transaction; and
- International Tax Reform: Pillar Two Model Rules
There is no material impact on the Group as a result of the amendments
relating to Deferred Tax related to Assets and Liabilities arising from a
Single Transaction.
The Group is within the scope of the OECD Pillar Two (Global Minimum Tax)
model rules. The legislation has been substantively enacted in some of the
jurisdictions in which the Group operates including the UK and will be
effective from 1 January 2024. An assessment of the potential impact on the
Group including the application of the transitional safe harbour rules is
currently being performed.
For the period to 30 June 2023, the Group has applied the mandatory exemption
for recognising and disclosing information about deferred tax assets and
liabilities related to Pillar Two income taxes.
6 Earnings per ordinary share
Basic earnings per share (EPS) is calculated by dividing the profit/(loss)
attributable to ordinary shareholders by the weighted average number of
ordinary shares in issue during the period, excluding ordinary shares held
under trust, which have been treated as if they had been cancelled.
If there is a continuing loss during the period, the effect of potentially
dilutive ordinary shares is anti-dilutive.
Half-year to 30 June 2023 Half-year to 30 June 2022
Basic Potentially dilutive share options Diluted Basic Potentially dilutive share options Diluted
Profit/(loss) attributable to ordinary shareholders (£m):
Continuing operations 1,229 1,229 (1,610) (1,610)
Discontinued operations − − 56 56
1,229 1,229 (1,554) (1,554)
Weighted average number of ordinary shares (millions) 8,359 18 8,377 8,345 − 8,345
EPS (pence):
Continuing operations 14.70 (0.03) 14.67 (19.29) − (19.29)
Discontinued operations − − − 0.67 − 0.67
14.70 (0.03) 14.67 (18.62) − (18.62)
The reconciliation between underlying EPS and basic EPS is as follows:
Half-year to 30 June 2023 Half-year to 30 June 2022
Pence £m Pence £m
Underlying EPS / Underlying profit/(loss) from continuing operations 4.90 410 (2.24) (187)
attributable to ordinary shareholders
Total underlying adjustments to profit/(loss) before tax (note 2) 10.71 895 (19.69) (1,643)
Related tax effects (0.91) (76) 2.64 220
EPS / profit/(loss) from continuing operations attributable to ordinary 14.70 1,229 (19.29) (1,610)
shareholders
Diluted underlying EPS from continuing operations attributable to ordinary 4.89 (2.24)
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 2023 1,135 935 3,604 512 978 886 8,050
Additions - - 84 - 34 5 123
Acquisition of businesses (see note 19) - - - - - 5 5
Disposals - (4) - - (12) (2) (18)
Reclassifications (2) - - 1 - 1 (1) 1
Exchange differences (41) (1) (48) (20) (8) (20) (138)
At 30 June 2023 1,094 930 3,641 492 993 873 8,023
Accumulated amortisation and impairment:
At 1 January 2023 36 447 1,912 406 675 476 3,952
Charge for the period (3) - 12 43 19 42 19 135
Impairment - - - - - 4 4
Disposals - (4) - - (11) (2) (17)
Reclassifications (2) - - 1 - - (1) -
Exchange differences (1) - (37) (16) (5) (11) (70)
At 30 June 2023 35 455 1,919 409 701 485 4,004
Net book value at:
30 June 2023 1,059 475 1,722 83 292 388 4,019
1 January 2023 1,099 488 1,692 106 303 410 4,098
(1)( ) Includes £93m (31 December 2022: £93m) of software under course of
construction which is not amortised
(2 ) Includes reclassifications within intangible assets or from property,
plant and equipment when available for use
(3) ( ) Charged to cost of sales and commercial and administrative costs
except development costs, which are charged to research and development costs
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 2022 to identify any deterioration in performance. There have been no (31
December 2022: 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 2023 1,936 5,225 999 400 8,560
Additions 4 48 35 71 158
Disposals/write-offs (3) (86) (7) (8) (104)
Reclassifications (1) 23 37 12 (58) 14
Exchange differences (38) (97) (7) (12) (154)
At 30 June 2023 1,922 5,127 1,032 393 8,474
Accumulated depreciation and impairment:
At 1 January 2023 695 3,507 413 9 4,624
Charge for the period (2) 35 141 30 - 206
Impairment (3) - (1) 1 - -
Disposals/write-offs (3) (86) (4) - (93)
Reclassifications (1) 1 8 8 (8) 9
Exchange differences (13) (63) (3) - (79)
At 30 June 2023 715 3,506 445 1 4,667
Net book value at:
30 June 2023 1,207 1,621 587 392 3,807
1 January 2023 1,241 1,718 586 391 3,936
(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 potential triggers considered
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 a result of this assessment, there are no (31
December 2022: none) individually material impairment charges or reversals in
the period
9 Right-of-use assets
Land and buildings Plant and equipment Aircraft and engines Total
£m £m £m £m
Cost:
At 1 January 2023 506 162 1,827 2,495
Additions/modification of leases 3 35 52 90
Disposals (2) (5) - (7)
Reclassifications from PPE (5) - (10) (15)
Exchange differences (17) (3) (3) (23)
At 30 June 2023 485 189 1,866 2,540
Accumulated depreciation and impairment:
At 1 January 2023 230 84 1,120 1,434
Charge for the period 21 22 95 138
Impairment (1) - 5 27 32
Disposals (2) (5) - (7)
Reclassifications from PPE (1) - (8) (9)
Exchange differences (9) (2) (2) (13)
At 30 June 2023 239 104 1,232 1,575
Net book value at:
30 June 2023 246 85 634 965
1 January 2023 276 78 707 1,061
(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 potential triggers considered 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 a result of this assessment, the carrying values of
assets where a trigger was identified have been assessed by reference to value
in use considering assumptions such as estimated future cash flows, product
performance related estimates and climate-related risks. An impairment charge
of £32m has been recognised, which includes £27m in relation to lease
engines that have been returned following the termination of the lease by the
lessee
(31 December 2022: no individually material impairment charges or reversals)
10 Trade receivables and other assets
Current Non-current Total
30 June 2023 31 December 2022 30 June 2023 31 December 2022 30 June 2023 31 December 2022
£m £m £m £m £m £m
Trade receivables (1) 2,596 2,376 112 43 2,708 2,419
Prepayments 868 886 1,083 893 1,951 1,779
Receivables due on RRSAs 1,012 928 207 255 1,219 1,183
Amounts owed by joint ventures and associates 749 632 11 16 760 648
Other taxation and social security receivable 138 147 26 9 164 156
Costs to obtain contracts with customers 2 12 69 67 71 79
Other receivables (2) 455 617 50 55 505 672
5,820 5,598 1,558 1,338 7,378 6,936
(1) Non-current trade receivables relate to amounts not expected to be
received in the next 12 months in line with specific customer payment
arrangements, including customers on payment plans
(2) Other receivables includes unbilled recoveries relating to completed
overhaul activity where the right to consideration is unconditional
The Group has adopted the simplified approach to provide for expected credit
losses (ECLs), 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 ECLs for trade receivables and other assets has decreased by £53m to
£293m (31 December 2022: increased by £87m to £346m). This movement is
mainly driven by the Civil Aerospace business of £57m, of which £51m relates
to specific customers and £6m relates to updates to the recoverability of
other receivables.
The movements of the Group's ECLs provision are as follows:
30 June 2023 31 December 2022
£m £m
At 1 January (346) (259)
Increases in loss allowance recognised in the income statement during the (51) (118)
period
Loss allowance utilised 15 22
Releases of loss allowance previously provided 70 45
Exchange differences 19 (36)
At 30 June/31 December (293) (346)
11 Contract assets and liabilities
Current Non-current (1) Total
30 June 2023 31 December 2022 30 June 2023 31 December 2022 30 June 2023 31 December 2022
£m £m £m £m £m £m
Contract assets
Contract assets with customers 566 621 537 617 1,103 1,238
Participation fee contract assets 26 28 204 215 230 243
592 649 741 832 1,333 1,481
(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
The balance includes £684m (31 December 2022: £885m) of Civil Aerospace LTSA
assets, with most of the remaining balance relating to Defence. The decrease
in the Civil Aerospace balance is due to the collection of higher cash
receipts than revenue recognised in relation to the completion of performance
obligations on those contracts with a contract asset balance. Revenue
recognised in the period in Civil Aerospace was adjusted by £(37)m (31
December 2022: £26m) in relation to performance obligations satisfied in
previous years. No impairment losses in relation to these contract assets
(31 December 2022: none) have arisen during the period.
Participation fee contract assets have reduced by £13m (31 December 2022:
£3m) due to amounts recognised in revenue exceeding additions by £10m, and
foreign exchange on consolidation of £3m.
11 Contract assets and liabilities continued
Current Non-current Total
30 June 2023 31 December 2022 30 June 2023 31 December 2022 30 June 31 December 2022
£m £m £m £m 2023 £m
£m
Contract liabilities 5,104 4,825 8,005 7,337 13,109 12,162
Contract liabilities have increased by £947m. The movement in the Group
balance is largely as a result of increases in Civil Aerospace of £825m and
Defence of £62m. The main reason for the Civil Aerospace increase is a growth
in LTSA liabilities of £656m to £8,913m (31 December 2022: £8,257m) and is
driven by growth in customer payments as EFHs continue to rise and price
escalation. In addition, commercial discipline has resulted in additional
invoicing through EFH reconciliations and recovery of contractual fees. This
has been partly offset by revenue being recognised in relation to performance
obligations satisfied in previous years of £60m (31 December 2022: £334m) as
contract performance improves, which decreases the contract liability. An
increase in Defence is from the receipt of deposits in advance of performance
obligations being completed.
12 Borrowings and lease liabilities
Current Non-current Total
30 June 2023 31 December 2022 30 June 2023 31 December 2022 30 June 2023 31 December 2022
£m £m £m £m £m £m
Unsecured
Overdrafts 6 2 - - 6 2
Bank loans 1 1 - - 1 1
Loan notes 462 - 3,495 4,095 3,957 4,095
Other loans - - 9 10 9 10
Total unsecured 469 3 3,504 4,105 3,973 4,108
Lease liabilities 287 355 1,397 1,492 1,684 1,847
Total borrowings and lease liabilities 756 358 4,901 5,597 5,657 5,955
All outstanding items described as loan notes above are listed on the London
Stock Exchange
The Group has access to the following undrawn committed borrowing facilities
at the end of the period:
30 June 2023 31 December 2022
£m £m
Expiring within one year − −
Expiring after one year 4,500 5,500
Total undrawn facilities 4,500 5,500
Further details can be found in the going concern statement on page 17
During the period to 30 June 2023, the Group cancelled its undrawn £1bn bank
loan facility which was due to expire in January 2024. The facility had
remained undrawn during the period.
Under the terms of certain recent loan facilities, the Company is restricted
from declaring, making or paying distributions to shareholders from 1 January
2023 unless certain conditions are satisfied. The conditions attached to these
loan facilities are linked to free cash flow performance in the prior year,
and actual and forecast minimum liquidity levels. In addition, the conditions
restrict the value of distributions that could be made. These loan facilities
expire in 2026 and 2027. The restrictions on distributions do not prevent the
Company from redeeming any unredeemed C Shares issued prior to March 2021.
13 Trade payables and other liabilities
Current Non-current Total
30 June 2023 31 December 2022 30 June 2023 31 December 2022 30 June 2023 31 December 2022
£m £m £m £m £m £m
Trade payables 1,767 1,735 - - 1,767 1,735
Accruals 1,313 1,477 59 199 1,372 1,676
Customer discounts (1) 944 828 767 1,016 1,711 1,844
Payables due on RRSAs 1,746 1,392 - - 1,746 1,392
Deferred receipts from RRSA workshare partners 43 32 804 829 847 861
Amounts owed to joint ventures and associates 822 567 - - 822 567
Government grants 39 21 54 41 93 62
Other taxation and social security 93 88 - - 93 88
Other payables (2) 726 843 218 279 944 1,122
7,493 6,983 1,902 2,364 9,395 9,347
(1)( ) Customer discounts include OE concessions given to airframers and
operators, discounts given to customers based on performance of engines
compared to their specification, and discounts on aftermarket parts. Revenue
recognised comprises sales to the Group's customers after such items. Warranty
credits and customer concessions have been represented at 30 June 2023 to be
included within customer discounts to better reflect the nature of these
balances
(2)( ) Other payables includes parts purchase obligations, payroll
liabilities and HM Government UK levies
The Group's payment terms with suppliers vary on the products and services
being sourced, the competitive global markets the Group operates in and other
commercial aspects of suppliers' relationships. Industry average payment terms
vary between 90 to 120 days. The Group offers reduced payment terms for
smaller suppliers, who are typically on 75-day payment terms, so that they are
paid in 30 days. In line with civil aviation industry practice, the Group
offers a supply chain financing (SCF) programme in partnership with banks to
enable suppliers, including joint ventures who are on 90-day standard payment
terms, to receive their payments sooner. The SCF programme is available to
suppliers at their discretion and does not change rights and obligations with
suppliers nor the timing of payment of suppliers. At 30 June 2023, suppliers
had drawn £802m under the SCF scheme (31 December 2022: £422m) of which
£573m (31 December 2022: £180m) is drawn by joint ventures. The Group, in
some cases, settles the costs incurred by the joint venture as a result of
them utilising either the Group offered SCF arrangement, or an alternative SCF
arrangement. During the period to 30 June 2023, the Group incurred costs of
£12m (30 June 2022: £5m) to settle the costs incurred by joint ventures as a
result of them utilising the Group offered SCF arrangement, these costs are
included within other financing charges.
14 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 2023
Non-current assets 15 3 374 392 - 22 - 414
Current assets 4 12 23 39 - 11 - 50
Assets 19 15 397 431 - 33 - 464
Current liabilities (573) (6) (28) (607) (7) (22) (24) (660)
Non-current liabilities (2,158) (9) (106) (2,273) (10) (82) - (2,365)
Liabilities (2,731) (15) (134) (2,880) (17) (104) (24) (3,025)
(2,712) - 263 (2,449) (17) (71) (24) (2,561)
At 31 December 2022
Non-current assets 58 25 436 519 - 23 - 542
Current assets 87 40 2 129 - 12 - 141
Assets 145 65 438 648 - 35 - 683
Current liabilities (966) (1) (2) (969) (8) (15) (24) (1,016)
Non-current liabilities (3,030) (2) (98) (3,130) (14) (86) - (3,230)
Liabilities (3,996) (3) (100) (4,099) (22) (101) (24) (4,246)
(3,851) 62 338 (3,451) (22) (66) (24) (3,563)
(1)( ) Includes the foreign exchange impact of cross-currency interest rate
swaps
14 Financial assets and liabilities continued
Derivative financial instruments
Movements in fair value of derivative financial assets and liabilities were as
follows:
Half-year to 30 June 2023 Year-ended
£m 31 December 2022
£m
Foreign exchange instruments Commodity instruments Interest rate instruments - hedge accounted (1) Interest rate instruments - non-hedge accounted Total Total
£m £m £m £m
At 1 January (3,851) 62 125 213 (3,451) (2,913)
Movements in fair value hedges - - (98) - (98) (74)
Movements in cash flow hedges - - (30) - (30) 86
Movements in other derivative contracts (2) 407 (52) - 60 415 (1,579)
Contracts settled 732 (10) 28 (35) 715 1,029
At 30 June/31 December (2,712) - 25 238 (2,449) (3,451)
(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
Movements in the carrying values were as follows:
Financial RRSAs Other - assets Other - liabilities
Half-year to 30 June 2023 Year-ended 31 December 2022 Half-year to 30 June 2023 Year-ended 31 December 2022 Half-year to 30 June 2023 Year-ended
£m £m £m £m £m 31 December 2022
£m
At 1 January (22) (12) 25 15 (101) (75)
Exchange adjustments included in OCI 1 (2) (1) 2 3 (4)
Additions - (6) - 11 (7) (35)
Financing charge (1) - - - - - (4)
Excluded from underlying profit:
Changes in forecast payments (1) - (7) - - - -
Cash paid 4 5 - (3) 1 8
Other - - - - - 9
At 30 June/31 December (17) (22) 24 25 (104) (101)
(1 ) Included in net financing
14 Financial assets and liabilities continued
Fair values of financial instruments equate to book values with the following
exceptions:
Half-year to 30 June 2023 Year-ended 31 December 2022
Book value Fair value Book value Fair value
£m £m £m £m
Borrowings - Level 1 (3,957) (3,806) (4,095) (3,812)
Borrowings - Level 2 (16) (18) (13) (15)
Financial RRSAs - Level 3 (17) (17) (22) (22)
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 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).
- 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, which primarily includes
royalties to be paid to airframers, 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 2023, Level 3 assets totalled £24m (31 December 2022: £25m).
- 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).
15 Provisions for liabilities and charges
At Charged to income statement (1) Reversed Utilised Exchange differences At 30 June 2023
1 January 2023
£m £m £m £m £m £m
Contract losses 1,592 177 (235) (86) (3) 1,445
Warranty and guarantees 317 55 (3) (52) (11) 306
Trent 1000 wastage costs 179 43 (29) (44) - 149
Insurance 40 12 (2) (4) - 46
Employer liability claims 33 - - - - 33
Restructuring 6 12 - - (1) 17
Tax related interest and penalties 16 - - (1) - 15
Claims and litigation 82 47 (1) (5) - 123
Other 68 9 (5) (33) (1) 38
2,333 355 (275) (225) (16) 2,172
Current liabilities 632 651
Non-current liabilities 1,701 1,521
(1)( ) The charge to the income statement includes £2m (30 June 2022:
£15m) as a result of the unwinding of the discounting of provisions
previously recognised
Contract losses
Provisions for contract losses are recorded when the direct costs to fulfil a
contract are assessed as being greater than the expected recoverable amount.
Provisions for contract losses are measured on a fully costed basis and during
the period, additional contract losses for the Group of £177m have been
recognised as a result of changes in future cost estimates and number of shop
visits. Contract losses of £235m previously recognised have been reversed as
a result of changes in future estimates, contractual improvements and
extensions. 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 warranty and guarantees 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.
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
£44m of the Trent 1000 wastage costs provision. This represents customer
disruption costs and remediation shop visit costs. During the period,
additional Trent 1000 costs of £43m 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 2023-2024.
Insurance
The Group's captive insurance company retains a portion of the exposures it
insures on behalf of the remainder of the Group which include policies for
aviation claims, employer liabilities and healthcare claims. Significant
delays can occur in the notification and settlement of claims and judgement is
involved in assessing outstanding liabilities, the ultimate cost and timing of
which cannot be known with certainty at the balance sheet date. The insurance
provisions are based on information currently available, however it is
inherent in the nature of the business that ultimate liabilities may vary if
the frequency or severity of claims differs from estimated. Provisions for
outstanding claims are established to cover the outstanding expected liability
as well as claims incurred but not yet reported.
Employer liability claims
The provision relating to employer healthcare liability claims is as a result
of an historical insolvency of the previous provider and is expected to be
utilised over the next 30 years.
Claims and litigation
Provisions for claims and litigation represent ongoing matters where the
outcome for the Group may be unfavourable. Included in the provision is a
legal claim for £98m where judgment was rendered by the High Court on 3 July
2023, resulting in a charge to the income statement of £34m to reflect the
expected sum due. The provision for this claim is expected to be utilised in
the second half of the year. The value of any remaining provisions reflects
the single most likely outcome in each case.
Other
Other provisions predominately include other items that are individually
immaterial. The value of any remaining provisions reflects the single most
likely outcome in each case.
16 Post-retirement benefits
The net post-retirement surplus/(deficit) as at 30 June 2023 is calculated on
a year to date basis, using the latest valuation as at 30 March 2020, updated
to 30 June 2023 for the principal schemes.
Amounts recognised in the balance sheet in respect of defined benefit schemes
UK schemes Overseas schemes Total
£m £m £m
At 1 January 2023 594 (1,014) (420)
Exchange adjustments - 38 38
Current service cost and administrative expenses (4) (18) (22)
Past service cost - (3) (3)
Financing recognised in the income statement 14 (21) (7)
Contributions by employer - 38 38
Actuarial gains/(losses) recognised in OCI (1) 219 (21) 198
Returns on plan assets excluding financing recognised in OCI (1) (249) 16 (233)
At 30 June 2023 574 (985) (411)
Post-retirement scheme surpluses - included in non-current assets (2) 574 17 591
Post-retirement scheme deficits - included in non-current liabilities - (1,002) (1,002)
(1 ) Actuarial gains and losses and returns on plan assets recognised in OCI
on the UK scheme are primarily driven by movements in discount rate increases,
which the movements in the fair value of the scheme assets predominately
offset
(2 ) The surplus in the Rolls-Royce UK Pension Fund (RRUKPF) is recognised
as, on ultimate wind-up when there are no longer any remaining members, any
surplus would be returned to the Group, which has the power to prevent the
surplus being used for other purposes in advance of this event
Changes to defined benefit schemes
During the period, Power Systems continued to replace a number of their
existing defined benefit schemes with a new company pension scheme to offer
payment options at time of retirement for other employee populations not
included in 2022. The new system, which is similar in structure to a defined
contribution scheme with a guarantee from the Company in accordance with
German legislation, significantly reduces interest risks and longevity risks
for the employer for future commitments. A past service cost of £3m has been
recognised within non-underlying operating profit.
17 Contingent liabilities and commitments
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 Company continues to
co-operate with the Controller General, Brazil (CGU) under the terms of a
two-year leniency agreement signed in October 2021 relating to the same
historical matters. 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 other parties, including customers, customers'
financiers and the Company's current and former investors, including certain
potential claims in respect of the Group's historical ethics and compliance
disclosures which have been notified to the Company. 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 party 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.
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 $1.1bn (31 December 2022: $1.2bn) (on
a discounted basis) to provide facilities to enable customers to purchase
aircraft (of which approximately $0.3bn could be called during 2023). 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.
Customer financing provisions are made to cover guarantees provided for asset
value and/or financing where it is probable that a payment will be made. 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. The values of
aircraft providing security are based on advice from a specialist aircraft
appraiser. There were no provisions for customer financing provisions at 30
June 2023 or 31 December 2022.
The Group has responded appropriately to the Russia-Ukraine conflict to comply
with international sanctions and export control regime, and also to implement
the 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 Half-year to 30 June 2022
to 30 June 2023 £m
£m
Sale of goods and services (1) 2,156 1,312
Purchases of goods and services (1) (2,692) (2,340)
(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 £1m (30 June 2022: £nil). Profit recognised in the
period on such sales amounted to £30m (30 June 2022: £19m), including profit
on current year sales and recognition of profit deferred on similar sales in
previous years. Cash receipts relating to the sale of spare engines amounted
to £nil (30 June 2022: £nil).
Included in other financing charges are interest costs of £15m (30 June 2022:
£6m) incurred during the period which have been settled by the Group on
behalf of joint ventures, including the costs incurred using the Group offered
SCF arrangement set out in note 13.
19 Acquisitions, disposals and discontinued operations
Acquisitions
On 30 June 2023, the Group completed their acquisition of Team Italia Marine
S.R.L for a cash consideration of £12m. Team Italia specialises in yacht
bridges and marine navigation and automation systems. The acquisition will
provide key technology for marine automation systems and will strengthen Power
Systems' position as a yacht market leader. Of the acquisition cost of £12m,
£5m has been allocated to identifiable intangible assets and £7m to other
current assets and liabilities. As permitted by IFRS 3 Business Combinations,
the fair value of acquired identifiable assets and liabilities have been
presented on a provisional basis.
Disposals
During the period, the Group divested its 49% shareholding in its joint
venture, Shanxi North MTU Diesel Co. Limited to the current JV partner for
proceeds of £5m. The carrying value of the Group's share in its joint venture
disposed was £5m which has been derecognised on the disposal resulting in nil
profit on disposal.
Reconciliation of profit on disposal of businesses in continuing operations to Total
the income statement:
£m
Profit before taxation on disposal −
Adjustment to consideration on disposals completed in prior periods 1
Profit on disposal of businesses per income statement 1
Reconciliation of cash flow on acquisition and disposal of businesses to the Total
cash flow statement:
£m
Proceeds on disposal (see above) 5
Cash outflow on acquisitions (12)
Cash outflow on disposals completed in prior periods (2)
Cash flow on acquisition and disposal of businesses per cash flow statement (9)
Discontinued operations
ITP Aero represented a separate major line of business and was classified as a
disposal group held for sale up to the date of disposal. Therefore the results
up to 15 September 2022, in line with IFRS 5, had been presented as
discontinued operations.
The financial performance and cash flow information presented reflects the
operations for the period that have been classified as discontinued
operations.
Half-year Half-year
to 30 June 2023 to 30 June 2022
£m £m
Revenue − 207
Operating profit (1) − 72
Profit before taxation (1) − 67
Income tax charge (1) − (7)
Profit for the period from discontinued operations on ordinary activities − 60
Costs on disposal of discontinued operations (2) − (4)
Profit for the period from discontinued operations − 56
Net cash inflow from operating activities (2) − 56
Net cash outflow from investing activities (2) − (14)
Net cash outflow from financing activities − (32)
Exchange gains − 1
Net change in cash and cash equivalents − 11
(1 ) Profit/(loss) from discontinued operations on ordinary activities is
presented net of intercompany trading eliminations and related consolidation
adjustments
(2 ) Cash flows from investing activities include £nil (30 June 2022:
included in operating activities of £1m) costs of disposal paid during the
period 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
Half-year to 30 June 2023 Half-year to
30 June 2022
Cash flow Impact of hedge book Impact of acquisition accounting Impact of other non-underlying items Funds flow Funds flow
£m £m £m £m £m £m
Operating profit 797 (165) 24 17 673 125
Operating profit from discontinued operations − − − − − 68
Depreciation, amortisation and impairment 513 − (24) − 489 455
Movement in provisions (142) 26 − 21 (95) (116)
Movement in Civil LTSA balance 857 (130) − − 727 433
(Profit)/loss on disposal of property, plant and equipment (1) − − − (1) 16
Joint venture trading (73) − − − (73) (29)
Interest received 60 − − − 60 6
Contributions to defined benefit schemes in excess of underlying operating (13) − − (3) (16) (1)
profit charge
Share-based payments 23 − − − 23 24
Other − (7) − − (7) (30)
Operating cash flow before working capital and taxation 2,021 (276) − 35 1,780 951
Increase in inventories (557) − − − (557) (692)
Movement in trade receivables/payables and other assets/liabilities (666) (290) − (9) (965) 320
Movement in contract assets/liabilities 297 36 − − 333 287
(excluding Civil LTSA)
Revaluation of trading assets 93 (2) − − 91 (386)
(excluding exceptional items) (1)
Realised derivatives in financing (1) 522 − − − 522 202
Cash flows on other financial assets and liabilities held for operating (516) 522 − − 6 35
purposes
Income tax (59) − − − (59) (88)
Cash from operating activities 1,135 (10) − 26 1,151 629
Capital element of lease payments (167) 10 − − (157) (85)
Capital expenditure (287) − − 2 (285) (167)
Investment 17 − − − 17 6
Interest paid (159) − − − (159) (172)
Settlement of excess derivatives (210) − − − (210) (265)
Other (M&A, restructuring and exceptional transformation costs) 27 − − (28) (1) (23)
Free cash flow 356 − − − 356 (77)
Of which is continuing operations 356 356 (68)
(1) Included in working capital
The comparative information to 30 June 2022 has been presented in a different
format to align to the current year presentation. In some instances, the
groupings of items may have changed. All comparative figures remain unchanged
versus those reported in the 2022 Condensed Consolidated Interim Financial
Statements.
Free cash flow is a measure of the financial performance of the businesses'
cash flows which is consistent with the way in which performance is
communicated with the Board. Free cash flow is defined as cash flows from
operating activities including capital expenditure and movements in
investments, capital elements of lease payments, interest paid, amounts paid
relating to the settlement of excess derivatives and excluding amounts spent
or received on activity related to business acquisitions or disposals and
other material exceptional or one-off cash flows.
Cash flow from operating activities is determined to be the nearest statutory
measure to free cash flow.
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. 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 2022.
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.
2023 2022
£m £m
Revenue from continuing operations
Statutory revenue 7,523 5,600
Derivative and FX adjustments (573) (292)
Underlying revenue 6,950 5,308
Operating profit from continuing operations
Statutory operating profit 797 223
Derivative and FX adjustments (165) (119)
Programme exceptional credits (21) (22)
Exceptional restructuring and transformation charges 35 32
Acquisition accounting and M&A 24 23
Impairments - (11)
Other underlying adjustments 3 (1)
Underlying operating profit 673 125
2023 2022
pence pence
Basic EPS from continuing operations
Statutory basic EPS 14.70 (19.29)
Effect of underlying adjustments to profit/(loss) before tax (10.71) 19.69
Related tax effects 0.91 (2.64)
Basic underlying EPS 4.90 (2.24)
Underlying results from discontinued operations
2023 2022
£m £m
Results from discontinued operations
Profit for the period on ordinary activities − 60
Costs of disposal of discontinued operations − (4)
Statutory operating profit − 56
Acquisition accounting and M&A − 1
Derivative and FX adjustments − 2
Underlying operating profit − 59
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
Organic change
Organic change is the measure of change at constant translational currency
applying full year 2022 average rates to 2023. The movement in underlying
change to organic change is reconciled below.
All amounts below are shown on an underlying basis and reconciled to the
nearest statutory measure above.
Total Group income statement
2023 2022 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 6,950 5,308 1,642 155 1,487 28%
Underlying gross profit 1,515 942 573 38 535 55%
Underlying operating profit 673 125 548 17 531 382%
Net financing costs (149) (236) 87 1 86 (36)%
Underlying profit/(loss) before taxation 524 (111) 635 18 617 (636)%
Taxation (120) (77) (43) (1) (42) 55%
Underlying profit/(loss) for the period (continuing operations) 404 (188) 592 17 575 (330)%
Civil Aerospace
2023 2022 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 3,257 2,339 918 26 892 38%
Underlying OE revenue 1,055 660 395 10 385 58%
Underlying services revenue 2,202 1,679 523 16 507 30%
Underlying gross profit 690 256 434 9 425 162%
Commercial and administrative costs (171) (183) 12 (1) 13 (7)%
Research and development costs (195) (202) 7 (5) 12 (6)%
Joint ventures and associates 81 50 31 2 29 56%
Underlying operating profit/(loss) 405 (79) 484 5 479 (656)%
Defence
2023 2022 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 1,913 1,609 304 60 244 15%
Underlying OE revenue 841 697 144 23 121 17%
Underlying services revenue 1,072 912 160 37 123 13%
Underlying gross profit 379 326 53 10 43 13%
Commercial and administrative costs (86) (86) - (1) 1 (1)%
Research and development costs (34) (53) 19 (2) 21 (38)%
Joint ventures and associates 2 2 - - - -
Underlying operating profit 261 189 72 7 65 33%
Power Systems
2023 2022 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 1,774 1,371 403 69 334 24%
Underlying OE revenue 1,175 849 326 45 281 33%
Underlying services revenue 599 522 77 24 53 10%
Underlying gross profit 452 401 51 19 32 8%
Commercial and administrative costs (233) (204) (29) (10) (19) 9%
Research and development costs (96) (79) (17) (4) (13) 16%
Joint ventures and associates 2 1 1 1 - -
Underlying operating profit 125 119 6 6 - -
New Markets
2023 2022 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 1 1 - - - -
Underlying OE revenue 1 − 1 - 1 -
Underlying services revenue − 1 (1) - (1) (100)%
Underlying gross loss − (2) 2 - 2 (100)%
Commercial and administrative costs (14) (9) (5) - (5) 56%
Research and development costs (64) (37) (27) (1) (26) 70%
Underlying operating loss (78) (48) (30) (1) (29) 60%
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
Trading cash flow
Trading cash flow is defined as free cash flow (as defined below) 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.
2023 2022
£m £m
Civil Aerospace 401 63
Defence 76 89
Power Systems 22 (76)
New Markets (42) (30)
Total reportable segments trading cash flow 457 46
Other businesses 8 (1)
Central and inter-segment (34) (24)
Trading cash flow from continuing operations 431 21
Discontinued operations - (9)
Trading cash flow 431 12
Underlying operating profit charge exceeded by contributions to defined (16) (1)
benefit schemes
Tax (1) (59) (88)
Free cash flow 356 (77)
(1) See page 13 for tax paid in the statutory cash flow statement
Free cash flow
Free cash flow is a measure of the financial performance of the businesses'
cash flows which is consistent with the way in which performance is
communicated with the Board. Free cash flow is defined as cash flows from
operating activities including capital expenditure and movements in
investments, capital elements of lease payments, interest paid, amounts paid
relating to the settlement of excess derivatives and excluding amounts spent
or received on activity related to business acquisitions or disposals and
other material exceptional or one-off cash flows. 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.
2023 2022
£m £m
Statutory cash flows from operating activities 1,135 597
Capital expenditure (287) (189)
Investment (including investment from NCI and movement in joint ventures, 17 6
associates and other investments)
Capital element of lease payments (167) (95)
Interest paid (159) (172)
Settlement of excess derivatives (210) (265)
Exceptional restructuring and transformation costs 28 48
M&A costs - 18
Other (1) (25)
Free cash flow 356 (77)
Discontinued operations free cash flow (1) - 9
Free cash flow from continuing operations 356 (68)
(1 ) Discontinued operations free cash excludes: transactions with parent
company of £nil (30 June 2022: £(34)m), movements in borrowings of £nil
(30 June 2022: £25m), exceptional restructuring costs of £nil (30 June 2022:
£nil), M&A costs of £nil (30 June 2022: £(2)m) and other of £nil (30
June 2022: £(8)m)
Gross 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. For further
detail, see note 3.
2023 2022
£m £m
Statutory research and development costs (389) (373)
Amortisation and impairment of capitalised cost 43 40
Capitalised as intangible assets (84) (48)
Contributions and fees (254) (218)
Gross R&D expenditure (684) (599)
Principal risks and uncertainties
Our risk management system is described on pages 42 to 47 of our 2022 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 review our risks in light of changes to the internal
and external environment, in particular external pressures including inflation
and supply chain constraints. We also focus on costs and productivity, tightly
managing our cost base and making investment choices to deliver better
performance, remain resilient and achieve our objectives. As part of the
strategy review we are considering the principal risks facing the Group which
are reported on pages 42 to 47 of our Annual Report 2022 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) which
could increase in severity or frequency given the impact of climate change;
Climate change political events; financial insolvency of a critical supplier; scarcity of
materials; loss of data; fire; or infectious disease. The consequences of
We recognise the urgency of the climate challenge and have committed to net these events could have an adverse impact on our people, our internal
zero carbon by 2050. The principal risk to meeting these commitments is the facilities or our external supply chain.
need to continue our transformation which will grow our business and allow us
to play a stronger role in the energy transition. Failure to transition from Competitive environment
carbon intensive products and services at pace could impact our ability to win
future business; achieve operating results; attract and retain talent; secure Existing competitors: the presence of competitors in the majority of our
access to funding; realise future growth opportunities; or force government markets means that the Group is susceptible to significant price pressure for
intervention to limit emissions. In addition, physical risks from extreme original equipment or services and we may have to absorb cost increases caused
weather events (and/or natural hazards) could potentially materialise, which by high inflation. Our main competitors have access to significant government
may result in disruption for funding programmes as well as the ability to invest heavily in technology and
Rolls-Royce. industrial capability.
Compliance Existing products: failure to achieve cost reduction, contracted technical
specification, product (or component) life or falling significantly short of
Non-compliance by the Group with legislation or other regulatory requirements customer expectations, would have potentially significant adverse financial
in the heavily regulated environment in which we operate (for example export and reputational consequences, including the risk of impairment of the
controls, data privacy, use of controlled chemicals and substances, carrying value of the Group's intangible assets and the impact of potential
anti-bribery and corruption, human rights, and tax and customs legislation). litigation.
This could affect our ability to conduct business in certain jurisdictions and
would potentially expose the Group to: reputational damage; financial New programmes and projects: failure to deliver key projects on time, within
penalties; debarment from government contracts for a period of time; and budget, to technical specification or falling significantly short of customer
suspension of export privileges (including export credit financing), each of expectations would have potentially significant adverse financial and
which could have a material adverse effect. reputational consequences.
Cyber threat Disruptive technologies (or new entrants with alternative business models):
could reduce our ability to sustainably win future business, achieve operating
An attempt to cause harm to the Group, its customers, suppliers and partners results and realise future growth opportunities.
through the unauthorised access, manipulation, corruption, or destruction of
data, systems or products through cyberspace. Market shock
Financial shock The Group is exposed to a number of market risks, some of which are of a
macroeconomic nature (for example economic growth rates) and some of which are
The Group is exposed to a number of financial risks, some of which are of a more specific to the Group (for example, reduction in air travel or defence
macroeconomic nature (for example foreign currency, interest rates, high spending, or disruption to other customer operations). A large proportion of
inflation) and some of which are more specific to the Group (for example our business is reliant on the civil aviation industry, which is cyclical in
liquidity and credit risks). nature.
Significant extraneous market events could also materially damage the Group's Demand for our products and services could be adversely affected by factors
competitiveness and/or creditworthiness and our ability to access funding. such as current and predicted air traffic, fuel prices and age/replacement
This would affect operational results or the outcomes of financial rates of customer fleets.
transactions.
Political risk
Strategic transformation
Geopolitical factors that lead to an unfavourable business climate and
We see significant opportunities in playing a stronger role in the energy significant tensions between major trading parties or blocs which could impact
transition. Our strategy is to focus on delivering on our plans for existing the Group's operations. Examples include changes in key political
and nascent business and to focus on exploiting opportunities to grow into new relationships, explicit trade protectionism, differing tax or regulatory
net zero areas, both organically and inorganically. Failure to execute this regimes, potential for conflict or broader political issues; and heightened
plan will prevent us from achieving our longer term ambitions. political tensions.
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
We had a ten year track record of payments to shareholders prior to the
pandemic but had to cease payments in 2020 to protect our balance sheet. We
are still restricted by some of the conditions attached to our loan facilities
from making payments to shareholders at this time. We are committed to
returning to an investment grade credit rating through performance improvement
and to resuming shareholder payments.
Shareholders wishing to redeem their existing C Shares must lodge instructions
with the Registrar to arrive no later than 5.00pm on 1 December 2023 (CREST
holders must submit their election in CREST by 2.55pm). The payment of C Share
redemption monies will be made on 4 January 2024 and the CRIP purchase will
begin as soon as practicable after 5 January 2024.
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
Tufan Erginbilgic Panos Kakoullis
Chief Executive Chief Financial Officer
2 August 2023 2 August 2023
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 2023 Half
Year Results of Rolls-Royce Holdings plc for the 6 month period ended
30 June 2023 (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 2023;
· 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 2023 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 ("ISRE (UK) 2410"). 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 2023 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 ISRE (UK) 2410. 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 2023 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 2023 Half Year Results in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. In preparing the 2023 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 2023 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
2 August 2023
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