REG - Rolls-Royce Holdings - Rolls-Royce 2016 Full Year Results <Origin Href="QuoteRef">RR.L</Origin> - Part 2
14/02/2017 07:07
- Part 2: For the preceding part double click ID:nRSN7784Wa
competitive, capable and flexible Trent service network
to meet the changing needs of customers across the lifecycle of engines and to support the growing Trent engine fleet.
Additionally, we announced further details of a new AMC in Abu Dhabi with Mubadala Development Company, the emirate-based
investment and development organisation. This purpose built facility will carry out work on the Trent XWB.
We also announced that we are further expanding our global network of Authorised Service Centres (ASC) for business
aviation aircraft under our CorporateCare service provision for customers. Rolls-Royce now has 62 ASCs in place with key
maintenance providers worldwide.
Following the launch of SelectCare in 2016 we secured our first agreement for Trent 800 engines as part of a wide-ranging
deal with Delta Airlines.
Civil Aerospace outlook
On a constant currency basis our Civil Aerospace business should deliver modest growth in revenue and profit in 2017,
supported by large engine aftermarket growth, further life-cycle cost reductions and a higher level of R&D capitalisation.
Business jet demand is expected to weaken further, as will the demand for aftermarket services to support Rolls-Royce
powered regional aircraft. After a better year for trading cash flow in 2016, we now expect this to be broadly unchanged
year-on-year reflecting higher volumes of cash-loss making engines offsetting the positive effects of higher aftermarket
cash revenues.
We expect the TotalCare net asset to peak in the next twelve months at between £2.5bn and £2.7bn, reflecting further
targeted life cycle cost improvements and other timing differences between cost and cash.
Positive market developments continue to drive long-term growth in Civil Aerospace
The long-term positive market trends for our leading power and propulsion systems remain unchanged despite some near-term
uncertainties in Civil Aerospace that continue to impact business jet engine production volumes and service activity on
older large engines. The long-term trends driving demand for growth in large passenger aircraft, business jets, power
systems and maritime activity remain strong; in particular a growing aspirational and mobile middle-class, particularly in
Asia, and globalisation in business, trade and tourism.
While recent political and economic developments have added some uncertainty to near-term utilisation, we continue to
expect that strong widebody airframe demand - driven by the need for newer, more fuel efficient aircraft - should provide
resilience to manufacturing schedules over the next few years as the industry undergoes a strong replacement cycle.
New airframe growth and transitions are in line with expectations
Preparations for the transition of the Airbus A330ceo to A330neo models are also progressing well and once the transition
is completed, we will benefit from an exclusive position with the new Trent 7000 on the A330neo.
The roll-out of new engines, including the Trent XWB for the highly successful Airbus A350 family, will significantly grow
our market share and the installed base of new engines that will deliver strong aftermarket revenues for decades to come.
Operational Review: Defence Aerospace
Underlying Foreign
£m 2015 Change Exchange* 2016
Order book 4,316 (391) 1 3,926
Engine deliveries 649 12 - 661
Underlying revenue 2,035 17 157 2,209
Change +1% +8% +9%
Underlying OE revenue 801 22 67 890
Change +3% +8% +11%
Underlying services revenue 1,234 (5) 90 1,319
Change - +7% +7%
Underlying gross margin 579 (49) 34 564
Gross margin % 28.5% -260 bps 25.5%
Commercial and administrative costs (124) (3) (7) (134)
Restructuring (8) 18 - 10
Research and development costs (73) 5 (3) (71)
Joint ventures and associates 19 (4) - 15
Underlying profit before financing 393 (33) 24 384
Change -8% +6% -2%
Underlying operating margin 19.3% -180 bps 17.4%
Underlying: for definition see note 2 on page 35; * Translational foreign exchange impact
Financial Overview
Underlying revenue of £2,209m was up slightly on the prior year. Higher volumes for TP400 production, together with
increased Adour engine deliveries, helped original equipment (OE) revenues increase 3%. Service revenues were stable, with
lower demand for spare parts offset by increased revenues from long-term Eurofighter Typhoon and C-130J service contracts.
Gross margin declined by £49m, reflecting lower sales of spare parts, an adverse change in OE product mix, additional
expenditure of £31m on the TP400 programme and higher payroll costs. Retrospective contract margin improvements totalled
£82m, £5m lower than prior year, but ahead of early expectations. Of this, around half relates to delivering significant
cost savings benefits on the largest Eurofighter Typhoon contract, which triggered a cost-saving incentive award.
While overall R&D costs were slightly lower than the prior year; the business continued to invest in future programme
development and the Indianapolis transformation.
Restructuring costs were lower due to reduced level of severance costs and reversal of a provision for the closure of the
defence facility at Ansty through better cost recovery than expected. Underlying commercial and administrative costs and
other costs were similar to prior year.
Profit before financing of £384m was 8% lower than the prior period, driven by the lower gross margin.
Investment and business development
Order intake for 2016 was £1.5bn (2015: £1.7bn), reflecting significant follow-on export orders being delayed to 2017.
Significant activities in 2016 included winning orders for the F-35B LiftSystem, increased MRTT engines for A330 aircraft
and contract renewals for services. Deliveries of engines were slightly higher in 2016, driven by increased units for TP400
and Adour export. Services revenues were steady, reflecting higher flying hours from newer EJ200, F405 Adour and AE2100
powered aircraft in the UK, North America and the Middle-East.
The first T56 3.5 technology insertion kits delivered to the USAF for its legacy Hercules C-130 fleet have validated the
expected fuel saving and performance benefits, prompting growing interest in the upgrade.
The UK and French Governments also committed to the E2bn FCAS unmanned combat air system programme in December, enabling
progress through to the demonstrator phase of the programme in 2017. Our LibertyWorks development unit was selected to
provide the vertical lift propulsion for the new DARPA VTOL X-Plane. The unit also launched an infrared footprint
suppression module, reflecting our diverse and cutting edge technology capability.
Within the Services portfolio, the support contract for the US's C-130J transport fleet was renewed and we signed a
memorandum of understanding with Pratt & Whitney to extend support for the UK's new F-35B Lightning fleet beyond the
Rolls-Royce LiftSystem.
This strategy of strengthening our service offerings closer to our major customers saw the opening of new on-base Service
Delivery Centres in the UK (at RAF Brize Norton) and in the US (at Kingsville Texas), as well as a new joint engine support
facility for the USAF's Global Hawk fleet.
As part of the TP400 consortium, the focus was on delivering solutions to improve the on-wing reliability of the GE-Avio
gearbox. This included an on-wing exchange procedure which has greatly helped to reduce the service time and backlog.
Transformation milestones were achieved as planned, including completion of the first production cell as part of the
investment activity in Indianapolis. Further manufacturing changes are due to come on stream in the first half of 2017.
Defence Aerospace outlook
While revenues should remain steady, margins are expected to come under pressure from the essential investments in
efficiency and long-term growth. These reflect important product development and manufacturing transformation initiatives
as the business looks capitalise on its strong positions, particularly in Combat and Transport & Patrol, and the absence of
significant incentive arrangements under remaining long-term service agreements. As a result, margins and profits are
expected to soften from the recent levels.
Operational Review: Power Systems
Underlying Foreign
£m 2015* change Exchange** 2016
Order book 1,928 (113) - 1,815
Underlying revenue 2,385 (25) 295 2,655
Change -1% +12% +11%
Underlying OE revenue 1,618 (9) 201 1,810
Change -1% +12% +12%
Underlying services revenue 767 (16) 94 845
Change -2% +12% +10%
Underlying gross margin 656 (28) 79 707
Gross margin % 27.5% -90 bps 26.6%
Commercial and administrative costs (296) (9) (35) (340)
Restructuring (4) 4 - -
Research and development costs (162) 5 (20) (177)
Joint ventures and associates - 1 - 1
Underlying profit before financing 194 (27) 24 191
Change -14% +12% -2%
Underlying operating margin 8.1% -110 bps 7.2%
Underlying: for definition see note 2 on page 35; * 2015 figures have been restated as a result of costs previously
reported in 'cost of sales', being reclassified as 'other commercial and administrative costs' to ensure consistent
treatment with 2016; ** Translational foreign exchange impact
Financial overview
Underlying revenue of £2,655m was 1% lower at constant currency (11% higher including the impact of translational foreign
exchange). Overall original equipment revenue declined 1%. Growth in sales of diesel and gas products to power generation
and industrial customers offset reductions within markets where demand is linked to low oil and commodity prices, and
reduced activity in naval markets.
Service revenues reduced 2%, largely reflecting weaker marine medium speed markets, once again reflecting low oil prices.
Gross margin reduced by £28m in absolute terms and by 90 basis points, to 26.6% (2015: 27.5%) with good progress on cost
reduction generated from transformation activity offsetting some of the impact of volume reduction, adverse changes in
product mix and a reduction in the discount rate applied to the warranty provision.
Overall, underlying profit declined £27m or 14%, led by the reduction in gross margin. Costs below gross margin remained
broadly unchanged on an underlying basis. The £9m increase in commercial and administrative costs was offset by a £5m
reduction in R&D reflecting a more focused approach to future product development activity together with reduced underlying
restructuring costs. An exceptional charge of £45m has been taken for restructuring activity.
Investment and business development
Power Systems' customers span a range of markets from power generation and defence to marine, industrial and construction
markets. This end-market diversity has enabled the business to mitigate some of the weak market environments and as a
result, the order book ended the year at £1.8bn (2015: £1.9bn).
2016 order intake of £2.4bn (2015: £2.5bn) was 2% down at constant currency, with the year-on-year reduction being mainly
in oil and gas and commodity-related markets including marine, together with lower government project orders. This was
offset by improvements within power generation, agricultural and industrial markets.
Within power generation markets, we delivered 200 gensets (a package of engine and generator) to the Asian VPower Group,
one of our strategic partners in the region. We have continued to strengthen our position in the growing market for backup
power for larger mission critical applications. Order intake later in the year was healthy for solutions to support data
systems in both Europe and the US and also for independent power customers. We have also agreed to establish a 50/50 joint
venture with Yuchai Machinery Company Ltd for the production under licence of MTU Series 4000 diesel engines in China,
targeting the Chinese off-highway market.
Demand for our marine products remained good. Naval orders included gensets for the UK Royal Navy's Type 26 Global Combat
Ship and a supply contract for the Italian Navy relating to a new multi-purpose ocean-going patrol vessel. Within the land
defence markets there was a follow-up order for use in a German armoured vehicle.
In other areas we continued to attract new customers in new regional markets including Japanese high-tech crane producer
Kato. We also made progress within the rail market in both Europe and Asia. This included a notable order from Hitachi Rail
Europe for over 100 MTU power packs for use in the UK and an order to remanufacture (an in-house process, known as Reman,
to refurbish and extend the life of existing systems) around 400 MTU power packs for Transdev Group in Germany.
Innovation was again strong with some notable new products coming to market in the year. We launched new advanced diesel
and gas propulsion systems which meet new IMO and EPA emissions standards. At the same time, we launched advanced
propulsion systems for the construction and industrial markets which satisfy new emission standards in those industries.
Finally, we launched a hybrid power pack and energy pack battery system for the rail market.
Power Systems also made progress with the transformation programme, targeting reductions in product costs as well as
strengthening sales and service resources and leveraging digital capabilities to develop value adding services.
Power Systems outlook
The outlook for Power Systems remains steady. The business finished the year with a strong order book for several of its
key markets. Whilst some markets, particularly those impacted by oil and commodity prices remain difficult, we expect the
business to deliver modest growth in revenue and profit in 2017.
Operational Review: Marine
Underlying Foreign
£m 2015 change Exchange* 2016
Order book 1,164 (337) 78 905
Underlying revenue 1,324 (312) 102 1,114
Change -24% +8% -16%
Underlying OE revenue 773 (198) 56 631
Change -26% +7% -18%
Underlying services revenue 551 (114) 46 483
Change -21% +8% -12%
Underlying gross margin 260 (44) 20 236
Gross margin % 19.6% +170 bps 21.2%
Commercial and administrative costs (201) (6) (17) (224)
Restructuring (16) 19 (1) 2
Research and development costs (28) (11) (2) (41)
Joint ventures and associates - - - (0)
Underlying profit before financing 15 (42) - (27)
Change -280% -280%
Underlying operating margin 1.1% -380 bps -2.4%
Underlying: for definition see note 2 on page 35; * Translational foreign exchange impact
Financial overview
Underlying revenue of £1,114m was 24% lower on a constant currency basis. Within this, original equipment and services
revenues were 26% and 21% lower respectively. This reflected continued weakness in offshore and merchant, as ship owners
deferred overhaul and maintenance on the back of reduced utilisation of their vessels.
Gross margin was £236m, an improvement of 170 basis points versus 2015, but £(44)m lower in absolute terms, as a result of
the lower volume. The improved gross margin percentage partly resulted from cost reduction actions. Overall this resulted
in a net loss of £(27)m.
The announcement in December 2016 of further organisational changes and headcount reduction in 2017 has led to an
exceptional £(5)m restructuring charge. In addition, £200m of the group impairment of goodwill was in marine and mainly
related to the acquisition of Vickers in 1999.
Investment and business development
Overall, the Marine order book declined 29% during the year at constant currency, reflecting adjustments for a number of
postponed or cancelled orders and very weak offshore markets. Orders for new vessels, projects and services were all
sharply lower than 2015 and as a result order intake was only £715m, 29% down on the previous year at constant currency.
The offshore market was extremely challenging, driven by a low oil price and reduced capital expenditure within the
upstream oil exploration and related services sectors. Several merchant segments were also subdued, reflecting generally
weak conditions in the global marine industry. The business focussed on using its strengths as a system integrator to
leverage across adjacencies including designing and equipping the UK's new polar research ship RSS Sir David Attenborough.
It also landed a major deal to design and equip Hurtigruten's new explorer cruise ships, along with battery solutions to
make full electric propulsion possible.
The business announced a contract to supply the world's first automatic crossing system to ferry operator, Fjord 1, and
also launched our new Azipull Carbon thruster with yacht builder Benetti, reflecting the increasing importance of newer
technologies. The fishing segment remained strong, with contracts won for a range of vessels. The naval business was
focused on further development work and supporting customers across Asia, Europe and US. These included supporting
successful sea-trials for US Navy's most advanced warship the USS Zumwalt, further MT-30 orders for new Italian helicopter
landing craft and selection by New Zealand Navy for ship design of its MSC programme.
The Marine business continues to lower its cost base and build flexibility into the organisation particularly across back
office and operational activities. The restructuring programmes announced in 2015 have led to a reduction of around 1,100
headcount with £65m of annual savings recognised from 2017.
Reflecting the ongoing subdued and increasingly cost-conscious market environment, in December further restructuring to
take place in early 2017 was announced, targeting annualised savings of around £50m. This included a further headcount
reduction of around 800 across operations and back-office functions as the business continues to shrink footprint, reduce
indirect headcount, and consolidate manufacturing activity.
At the same time, investments were made in the strategic enablers of the future, including upgrading our azimuth thruster
production facility in Rauma, Finland. The £44m project will create a state-of-the-art production facility for one of our
most important product groups.
The pace of technology change in the sector is accelerating, and we continue to invest in pioneering research into Ship
Intelligence technologies focused on data-driven value-added services that facilitate full ship automation in the long
term.
Marine outlook
Overall the outlook for Marine remains cautious. We expect that the market will continue to feel the impact of low oil
prices, and the general overcapacity in several segments will take time to reach equilibrium. This will impact the demand
for our products and services. We will sustain our active cost reduction programmes, focusing on manufacturing, supply
chain and overhead costs, in order to drive a more competitive business adapted to the current market conditions.
Operational Review: Nuclear
Underlying Foreign
£m 2015 change Exchange* 2016
Order book 2,168 (379) 1 1,790
Underlying revenue 687 74 16 777
Change +11% +2% +13%
Underlying OE revenue 251 95 8 354
Change +38% +3% +41%
Underlying services revenue 436 (21) 8 423
Change -5% +2% -3%
Underlying gross margin 111 6 4 121
Gross margin % 16.2% -80 bps 15.6%
Commercial and administrative costs (53) (14) (3) (70)
Restructuring (2) 2 - -
Research and development costs 14 (20) - (6)
Joint ventures and associates 0 - - -
Underlying profit before financing 70 (26) 1 45
Change -37% +1% -36%
Underlying operating margin 10.2% -440 bps 5.8%
Underlying: for definition see note 2 on page 35; * Translational foreign exchange impact
Financial overview
Underlying revenue increased by 11% to £777m, led by growth in several key programmes in the submarines business, including
support for the next generation Dreadnought class submarines (the successor to the Vanguard class), various refuelling
projects and decommissioning activities. Volumes on key civil instrumentation and control programmes in both France and
Finland were also good.
Gross margin was lower at 15.6%, reflecting the revenue mix favouring lower margin government-led submarine projects. Below
gross margin, the change in treatment of R&D credits, which significantly impacted the full year in 2015, produced an R&D
credit of £7m in 2016. This was offset by additional costs to support the higher volumes and to improve delivery
performance. In addition, there were extra payroll costs, as well as additional R&D to support the initial design phase for
small modular reactors.
As a result, underlying profit before financing excluding the R&D credit was £37m at constant currency, 27% below the prior
year (2015: £51m adjusted for the R&D credit). After the R&D credit and including a £1m foreign exchange benefit,
underlying profit was £45m.
Investment and business developments
Order intake of £385m was 8% higher than 2015. Notwithstanding, the closing order book of £1.8bn was 17% below 2015,
reflecting the business working through the large multi-year orders, particularly in submarines, received in prior years.
Submarine activities focused on continuing our support to the Royal Navy's current operational fleet of nuclear powered
submarines, as well as delivery of propulsion systems for the remaining Astute Class submarines and for the Dreadnought
programme. As well as implementing a range of performance improvement initiatives during the year, we also completed
delivery of the nuclear propulsion system for the 4th (of 7) Astute class submarine and have made good progress both in the
preparation for the refuelling programme of HMS Vanguard and for decommissioning the Naval Reactor Test Establishment in
Scotland. In conjunction with the UK's Ministry of Defence and BAE Systems, we have also advanced discussions around a
long-term alliance framework for the Dreadnought programme. Once concluded, this new framework should ensure that the
delivery structure and commercial benefits are clarified for all key partners in this £31bn investment programme.
The civil nuclear business successfully concluded the first phase of its major instrumentation and control modernisation
programme at Fortum's Loviisa plant in Finland, using our Spinline technology. It also continued with its upgrade programme
across the French nuclear fleet as part of a multi-year contract.
The UK Government announced final approval for the Hinkley Point C nuclear power station in September, where our Nuclear
business was awarded preferred bidder status for contracts covering waste treatment systems, heat exchangers and diesel
generators.
The business also announced the strengthening of the strategic collaboration, started in 2014, with the China National
Nuclear Corporation, including engineering and training services. The Chinese market is expected to sustain strong growth
and we are well positioned with relevant technology.
During the year we started an R&D programme, together with a number of partners, to scope out the initial design phase for
small modular reactors (known as SMRs). These smaller, more flexible nuclear power generation units offer the potential for
a more flexible power generation in future decades and directly build on the knowledge and specialist skills of our Nuclear
business. Any significant further development work will be dependent on government support for this technology.
Nuclear outlook
The long-term outlook for Nuclear remains positive, supported by confirmation from the UK Government of the ongoing
investment in the Dreadnought class submarines. Together with renewed activities in the civil market, particularly in the
UK and China, these provide encouraging growth opportunities.
Performance in 2017 will be impacted by the loss of R&D credits on investments and further modest increases in the
investment in SMR technology. As a result, profit is expected to be around half that achieved in 2016.
Financial review
Underlying income statementYear to 31 December£m 2016 2015 Change
Revenue - 2015 exchange rates 13,058 13,354 -296
Translation to 2016 exchange rates 725
Revenue 13,783 13,354 +429
Gross profit 2,626 3,203 -577
Commercial and administrative costs (1,096) (1,025) -71
Restructuring 2 (39) +41
Research and development costs (812) (765) -47
Share of results of joint ventures and associates 107 118 -11
Profit before financing at 2015 exchange rates 827 1,492 -665
Translation to 2016 exchange rates 88
Profit before financing 915 1,492 -577
Net financing (102) (60) -42
Profit before tax 813 1,432 -619
Tax (261) (351) +90
Profit for the year 552 1,081 -529
Earnings per share (EPS) 30.13p 58.73p -28.60p
Payments to shareholders 11.70p 16.37p -4.67p
Gross R&D expenditure (1,331) (1,240) -91
Net R&D charge (862) (765) -97
Segmental analysisYear to 31 December Revenue Gross profit Profit before financing
£m 2016 2015 Change 2016 2015 Change 2016 2015 Change
Civil 6,906 6,933 -27 1,129 1,526 -397 326 812 -486
Defence 2,052 2,035 +17 530 579 -49 360 393 -33
Power Systems 2,360 2,385 -25 628 656 -28 167 194 -27
Marine 1,012 1,324 -312 216 260 -44 (27) 15 -42
Nuclear 761 687 +74 117 111 +6 44 70 -26
Other 35 96 -61 6 64 -58 1 52 -51
Intra-segment (68) (106) +38 - 7 -7 - 7 -7
Central costs (44) (51) +7
Group at 2015 exchange rates 13,058 13,354 -296 2,626 3,203 -577 827 1,492 -665
Translation to 2016 exchange rates 725 422 88
Group 13,783 13,354 +429 3,048 3,203 -155 915 1,492 -577
Underlying revenue and underlying profit before financing are discussed in the Review of 2016 (page 4), the Group Trading
Summary (page 9) and the Operational Reviews (from page 12).
Underlying financing costs increased by £42m to £102m. Net interest payable increased by £4m to £63m. Other underlying
financing costs increased by £38m to £39m, principally due to the non-recurrence of an underlying foreign exchange gain
recognised in 2015, which arose from the realised gains on foreign exchange contracts settled to translate overseas
dividends in to sterling.
Underlying taxation was £261m (2015: £351m), an underlying rate of 32.1% compared with 24.5% in 2015. The primary reasons
for the increase are the non-recognition of deferred tax assets on losses in Norway, which reflects the current uncertainty
in the oil & gas market, and a different profit mix with more profits arising in countries with higher tax rates.
Underlying EPS decreased 49% to 30.13p, reflecting the reduction in profit for the year.
At the Annual General Meeting on 4 May 2017, the directors will recommend an issue of 71 C Shares with a total nominal
value of 7.1 pence for each ordinary share. Together with the interim issue on 4 January 2017 of 46 C Shares for each
ordinary share with a total nominal value of 4.6 pence, this is the equivalent of a total annual payment to ordinary
shareholders of 11.7 pence for each ordinary share. Further details are included on pages 8 and 48.
Reported income statementYear to 31 December£m 2016 20151
Revenue 14,955 13,725
Gross profit 3,048 3,277
Other operating income 5 10
Commercial and administrative costs2 (2,208) (1,070)
Research and development costs (918) (818)
Share of results of joint ventures and associates 117 100
Operating profit 44 1,499
(Loss)/profit on disposal of businesses (3) 2
Profit before financing 41 1,501
Net financing (4,677) (1,341)
(Loss)/profit before tax (4,636) 160
Tax 604 (76)
(Loss)/profit for the year (4,032) 84
Earnings per share (EPS) (220.08)p 4.51p
1 2015 figures have been restated as a result of £11m costs previously reported in 'cost of sales', being reclassified as
'commercial and administrative costs' to ensure consistent treatment with 2016.
2 In 2016, 'commercial and administrative costs' include £671m for financial penalties from agreements with investigating
bodies and £306m for the restructuring of the UK pension schemes.
The changes in 2016 resulting from underlying trading are described in the previous sections.
Consistent with past practice and IFRS, we provide both reported and underlying figures. As the Group does not hedge
account in accordance with IAS 39 Financial Instruments, we believe underlying figures are more representative of the
trading performance, by excluding the impact of year-end mark-to-market adjustments, principally the USD:GBP hedge book,
which has had a significant impact on the reported results in 2016 as the USD:GBP rate has fallen from 1.48 to 1.23 and the
EUR:GBP has fallen from 1.36 to 1.17. The adjustments between the underlying income statement and the reported income
statement are set out in note 2 to the condensed consolidated financial statements. This basis of presentation has been
applied consistently.
The most significant items included in the reported income statement, but not in underlying are summarised below.
Profit before financing
The impact of measuring revenues and costs at spot rates rather than rates achieved on hedging transactions. This increased
revenues by £1,172m (2015: £371m) and increased profit before financing by £570m (2015: £265m).
The effects of acquisition accounting £115m (2015: £124m), principally relating to the amortisation of intangible assets
arising on the acquisition of Power Systems in 2013.
The impairment of goodwill of £219m (2015: £75m), principally relating to the Marine business as a result of the continued
weakness in the oil & gas market (see note 8).
Exceptional restructuring costs of £129m (2015: £49m). These are costs associated with the substantial closure or exit of a
site, facility or activity and increased as a result on the ongoing transformation programme.
Financial penalties of £671m from agreements with investigating bodies (page 5).
Costs of restructuring the UK pension schemes in 2016 of £306m, principally a settlement charge on the transfer of the
Vickers Group Pension Scheme to an insurance company (see note 11).
Financing and taxation
The mark to market adjustments on the Group's hedge book of £4,420m (2015: £1,306m). These reflect: the large hedge book
held by the Group (eg. USD $38bn); and the weakening of sterling, particularly against the US dollar and the euro, as noted
above. At each year end, our foreign exchange hedge book is included in the balance sheet at fair value ('mark to market')
and the movement in the year included in reported financing costs.
Appropriate tax rates are applied to these additional items included in the reported results, leading to an additional tax
credit of £865m (2015: £275m), largely as a result of the mark to market adjustments.
Reconciliation between underlying and reported results
Year to 31 December Revenue Profit before financing Financing Profit/(loss) before tax
£m 2016 2015 2016 2015 2016 2015 2016 2015
Underlying 13,783 13,354 915 1,492 (102) (60) 813 1,432
Revenue recognised at exchange rate on date of transaction 1,172 371 - - - - - -
Mark-to-market adjustments on derivatives - - - (9) (4,420) (1,306) (4,420) (1,315)
Related foreign exchange adjustments - - 570 265 (151) (15) 419 250
Movements on other financial instruments - - - - (8) 8 (8) 8
Effects of acquisition accounting - - (115) (124) - - (115) (124)
Impairment of goodwill - - (219) (75) - - (219) (75)
Exceptional restructuring - - (129) (49) - - (129) (49)
Acquisitions and disposals - - (3) 2 - - (3) 2
Financial penalties - - (671) - - - (671) -
Post-retirement schemes - - (306) - 3 32 (303) 32
Other - - (1) (1) 1 - - (1)
Reported 14,955 13,725 41 1,501 (4,677) (1,341) (4,636) 160
Intangible assets 5,080 4,645
Property, plant and equipment 4,114 3,490
Joint ventures and associates 844 576
Net working capital1 (1,553) (501)
Net funds2 (225) (111)
Provisions (759) (640)
Net post-retirement scheme deficits (29) (77)
Net financial assets and liabilities2 (5,751) (1,883)
Other net assets and liabilities3 143 (483)
Net assets 1,864 5,016
Other items
US$ hedge book (US$bn) 37.8 28.8
TotalCare assets 3,348 2,994
TotalCare liabilities (907) (783)
Net TotalCare assets 2,441 2,211
Gross customer finance commitments 238 269
Net customer finance commitments 61 54
Net customer finance commitments
61
54
1 Net working capital includes inventories, trade and other receivables, trade and other payables and current tax assets
and liabilities.
2 Net funds includes £358m (2015 £13m) of the fair value of financial instruments which are held to hedge the fair value
of borrowings.
3 Other includes other investments and deferred tax assets and liabilities.
Intangible assets (note 8) increased by £435m mainly due to exchange differences of £438m. Additions of £631m (including
£154m of certification and participation fees, £100m of development costs and £208m of contractual aftermarket rights) were
largely offset by amortisation of £406m and impairment of £222m (including £200m on Marine goodwill).
The carrying values of the intangible assets are assessed for impairment against the present value of forecast cash flows
generated by the intangible asset. The principal risks remain: reductions in assumed market share; programme timings;
increases in unit cost assumptions; and adverse movements in discount rates.
Property, plant and equipment (note 9) increased by £624m, around half of which was caused by exchange differences of
£330m. Additions of £701m (including £75m of TotalCare Flex engines) were offset by depreciation of £424m and £41m was
added from the reclassification of joint ventures to joint operations.
Investments in joint ventures and associates increased by £268m, including an increase of £154m in the Group's share of
authorised maintenance centre joint ventures. The other main movements were: exchange gains of £109m; and the Group's share
of retained profit of £43m; offset by a £57m reclassification of certain joint ventures to joint operations.
Movements in net funds are shown overleaf.
Net working capital reduced by £1,052m, including a £671m accrual for financial penalties, £134m increased deposits and
£265m of foreign exchange movements. This was partially offset by higher inventory of £194m.
Provisions largely relate to warranties and guarantees provided to secure the sale of OE and services. The increase of
£119m includes reclassifications from accruals of £92m, following a review of accounting consistency during the period. The
remaining increase of £27m includes net additional charges of £271m (including £147m for warranties and), and foreign
exchange movements of £75m, offset by utilisation of £227m.
Net post-retirement scheme deficits (note 11) have reduced by £48m.
In the UK (increase in surplus of £293m), changes in actuarial estimates increased the value of the obligations £1.8bn,
largely due to the discount rate reducing from 3.6% to 2.7%. This was more than offset by returns (in excess of those
assumed) on the scheme assets of £2.3bn. This return is largely due to the liability driven investment policy of the assets
being invested to match changes in value of the obligations (on a proxy solvency basis, which is more onerous than the
accounting valuation). The net increase in surplus was reduced by the recognition of a settlement charge of £301m on the
insurance buy-out of the Vickers Group Pension Scheme.
The principal movements in overseas schemes (increase in deficit of £245m) were exchange differences of £208m.
Net financial assets and liabilities principally relate to the fair value of foreign exchange, commodity and interest rate
contracts, set out in detail in note 10. All contracts continue to be held for hedging purposes. The fair value of foreign
exchange derivatives is a net financial liability of £5.6bn, an increase of £3.9bn in the period, mainly a result of the
weakening of sterling against the US dollar and euro.
The US$ hedge book increased by 31% to US$37.8bn. This represents around 5½ years of net exposure and has an average book
rate of £1 to US$1.55.
Net TotalCare assets relate to Long-Term Service Agreement (LTSA) contracts in the Civil Aerospace business, including the
flagship services product TotalCare. These assets represent the timing difference between the recognition of income and
costs in the income statement and cash receipts and payments.
Customer financing facilitates the sale of OE and services by providing financing support to certain customers. Where such
support is provided by the Group, it is generally to customers of the Civil Aerospace business and takes the form of
various types of credit and asset value guarantees. These exposures produce contingent liabilities that are outlined in
note 12. The contingent liabilities represent the maximum aggregate discounted gross and net exposure in respect of
delivered aircraft, regardless of the point in time at which such exposures may arise. The reduction in gross exposures is
a result of guarantees expiring.
Summary funds flow statement1Year to 31 December£m 2016 2015 Change
Opening net (debt)/funds (111) 666
Closing net debt (225) (111)
Change in net funds (114) (777)
Underlying profit before tax 813 1,432 -619
Depreciation and amortisation 720 613 +107
Movement in net working capital (55) (544) +489
Expenditure on property, plant and equipment and intangible assets (1,201) (887) -314
Other 47 (229) +276
Trading cash flow 324 385 -61
Contributions to defined benefit pensions in excess of underlying PBT charge (67) (46) -21
Taxation paid (157) (160) +3
Free cash flow 100 179 -79
Shareholder payments (301) (421) +120
Share buyback - (414) +414
Acquisitions and disposals (153) (3) -150
Discontinued operations - (121) +121
Foreign exchange 240 3 +237
Change in net funds (114) (777)
1 The derivation of the summary funds flow statement above from the reported cash flow statement is included in note 14 of
the condensed consolidated financial statements.
Movement in working capital - the £55m increase in working capital includes an increase in inventory, partially offset by a
net reduction in financial working capital. These movements are largely driven by the increased sales volumes during 2016.
Expenditure on property, plant and equipment and intangibles - the major increases are: £98m higher property plant and
equipment expenditure as we build the supply chain; £37m software costs relating to systems development; £81m certification
costs driven by the Trent XWB-97 programme; £45m capitalised development costs largely relating to the Trent 1000 TEN; and
£46m higher contractual aftermarket rights, mainly on Trent XWB sales.
Pensions - the increase in pension contributions in excess of the underlying income statement largely reflects changes in
net past service costs £13m.
Shareholder payments - the change in shareholder payments reflects the difference between the 2014 and 2015 payments, which
are paid in the following year.
Acquisitions and disposals include the £154m increase in stake in joint ventures described above.
Condensed consolidated income statement
For the year ended 31 December 2016
2016 20151
Notes £m £m
Revenue 2 14,955 13,725
Cost of sales (11,907) (10,448)
Gross profit 3,048 3,277
Other operating income 5 10
Commercial and administrative costs2 (2,208) (1,070)
Research and development costs 3 (918) (818)
Share of results of joint ventures and associates 117 100
Operating profit 44 1,499
(Loss)/profit on disposal of businesses (3) 2
Profit before financing and taxation 41 1,501
Financing income 4 96 115
Financing costs 4 (4,773) (1,456)
Net financing (4,677) (1,341)
(Loss)/profit before taxation* (4,636) 160
Taxation 5 604 (76)
(Loss)/profit for the year (4,032) 84
Attributable to:
Ordinary shareholders (4,032) 83
Non-controlling interests - 1
(Loss)/profit for the year (4,032) 84
Earnings per ordinary share attributable to shareholders 6
Basic (220.08)p 4.51p
Diluted (220.08)p 4.48p
Underlying earnings per ordinary share are shown in note 6.
Payments to ordinary shareholders in respect of the year 7
Pence per share 11.70p 16.37p
Total 215 301
* Underlying profit before taxation 2 813 1,432
1,432
1 2015 figures have been restated as a result of £11m of Power Systems costs previously reported in cost of sales, being
reclassified as commercial and administrative costs to ensure consistent treatment with 2016. The applicable notes have
been restated.
2 In 2016, commercial and administrative costs include £671m for financial penalties from agreements with investigating
bodies (see note 12) and £306m for the restructuring of the UK pension schemes (see note 11).
All activities comprise continuing operations.
Condensed consolidated statement of comprehensive income
For the year ended 31 December 2016
2016 2015
Notes £m £m
(Loss)/profit for the period (4,032) 84
Other comprehensive income (OCI)
Items that will not be reclassified to profit or loss
Movements in post-retirement schemes 11 495 (722)
Share of OCI of joint ventures and associates (2) -
Related tax movements (179) 257
314 (465)
Items that may be reclassified to profit or loss
Foreign exchange translation differences on foreign operations 861 (129)
Reclassification to income statement on disposal of businesses - 1
Share of OCI of joint ventures and associates (7) (19)
Related tax movements 4 (2)
858 (149)
Total comprehensive income for the year (2,860) (530)
Attributable to:
Ordinary shareholders (2,860) (530)
Non-controlling interests - -
Total comprehensive expense for the year (2,860) (530)
Condensed consolidated balance sheet
At 31 December 2016
2016 2015
Notes £m £m
ASSETS
Non-current assets
Intangible assets 8 5,080 4,645
Property, plant and equipment 9 4,114 3,490
Investments - joint ventures and associates 844 576
Investments - other 38 33
Other financial assets 10 382 83
Deferred tax assets 876 318
Post-retirement scheme surpluses 11 1,346 1,063
12,680 10,208
Current assets
Inventories 3,086 2,637
Trade and other receivables 6,956 6,244
Taxation recoverable 32 23
Other financial assets 10 5 29
Short-term investments 3 2
Cash and cash equivalents 2,771 3,176
Assets held for sale 5 5
12,858 12,116
Total assets 25,538 22,324
LIABILITIES
Current liabilities
Borrowings (172) (419)
Other financial liabilities 10 (651) (331)
Trade and other payables (7,957) (6,923)
Tax liabilities (211) (164)
Provisions for liabilities and charges (543) (336)
(9,534) (8,173)
Non-current liabilities
Borrowings (3,185) (2,883)
Other financial liabilities 10 (5,129) (1,651)
Trade and other payables (3,459) (2,317)
Tax liabilities - (1)
Deferred tax liabilities (776) (839)
Provisions for liabilities and charges (216) (304)
Post-retirement scheme deficits 11 (1,375) (1,140)
(14,140) (9,135)
Total liabilities (23,674) (17,308)
Net assets 1,864 5,016
EQUITY
Attributable to ordinary shareholders
Called-up share capital 367 367
Share premium account 181 180
Capital redemption reserve 162 161
Cash flow hedging reserve (107) (100)
Other reserves 814 (51)
Retained earnings 445 4,457
1,862 5,014
Non-controlling interests 2 2
Total equity 1,864 5,016
Condensed consolidated cash flow statement
For the year ended 31 December 2016
Notes 2016£m 2015£m
Reconciliation of cash flows from operating activities
Operating profit 44 1,499
Loss on disposal of property, plant and equipment 5 8
Share of results of joint ventures and associates (117) (100)
Dividends received from joint ventures and associates 74 63
Amortisation and impairment of intangible assets 8 628 432
Depreciation and impairment of property, plant and equipment 9 426 378
Impairment of investments - 2
Increase/(decrease) in provisions 44 (151)
(Increase)/decrease in inventories (161) 63
Decrease/(increase) in trade and other receivables 54 (836)
Accruals for financial penalties from agreements with investigating bodies 671 -
Other increase in trade and other
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