REG - Rolls-Royce Holdings - ROLLS-ROYCE HOLDINGS PLC 2016 HALF YEAR RESULTS <Origin Href="QuoteRef">RR.L</Origin> - Part 2
28/07/2016 07:07
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customers will benefit from streamlined administration and
reduced maintenance time.
Civil Aerospace outlook
We continue to expect our Civil Aerospace business to underperform 2015 underlying profit before finance and tax by around
£550m, excluding foreign exchange benefits. The significant headwind related to Trent 700 volume reductions and the
non-recurrence of a number of one-off benefits seen in 2016 remains broadly unchanged.
In the second half we expect the business to benefit from higher large engine deliveries for widebody aircraft, including
spare engines to support the growth in our fleets, further life-cycle cost improvements within our TotalCare contracts and
the benefits of our restructuring activity. We remain cautious about the weak business jet markets.
We expect the TotalCare net asset to peak in the next twelve to eighteen months at between £2.5bn and £2.7bn, reflecting
benefits of the changes to our long-term US dollar planning rate, further targeted life cycle cost improvements and other
timing differences between cost and cash.
Operational Review: Defence Aerospace
H1 Underlying Acquisitions Foreign H1
£m 2015 change & disposals Exchange* 2016
Order book ** 4,316 (163) - 3 4,156
Engine deliveries 272 19 - - 291
Underlying revenue 973 (8) - 37 1,002
Change -1% +4% +3%
Underlying OE revenue 368 28 - 16 412
Change +8% +4% +12%
Underlying services revenue 605 (36) - 21 590
Change -6% +3% -2%
Underlying gross margin 279 (76) - 8 211
Gross margin % 28.7% -760bps 21.1%
Commercial and administrative costs (63) 5 - (2) (60)
Restructuring (15) 12 - - (3)
Research and development costs (27) (1) - (1) (29)
Joint ventures and associates 10 (1) - - 9
Underlying profit before financing 184 (61) - 5 128
Change -33% +3% -30%
Underlying operating margin 18.9% -620bps 12.8%
*Translational foreign exchange impact ** 2015 year end comparative
Financial Overview
Underlying revenue of £1,002m was marginally below the prior year on an underlying basis (up 3% at actual exchange rates).
Higher volumes on both LiftSystemTM and TP400 production, together with increased Adour engine deliveries to Saudi Arabia,
helped original equipment revenues increase 8%, on an underlying basis. Service revenues were 6% lower than the prior year,
mainly due to lower spares sales on a number of legacy programmes, while long-term service contract revenues were broadly
in line with the prior year.
Gross margin declined by £76m, reflecting the lower sales of spare parts and an adverse change in OE product mix plus
expected additional expenditure of £31m on technical improvements to the TP400 programme. Retrospective margin improvements
on existing long-term contracts reflecting cost improvements totalled £44m, similar to the prior year. These improvements
are expected to be principally first half weighted.
Overall R&D costs were similar to the prior year as the business continued to invest in future programme development, while
restructuring costs were lower due to reduced level of severance costs and lower spend on the closure of the defence
facility at Ansty. Underlying commercial and administrative costs and other costs were similar to prior year despite higher
accruals for performance incentives in 2016.
Profit before financing of £128m was 33% lower than the prior period.
Investment and business development
Order intake for H1 2016 was £743m (2015: £821m). Overall, the Defence Aerospace order book declined by 4%, in part
reflecting the timing of a number of expected orders which should be received in the next few quarters. The first half saw
continued interest in our Services portfolio from major customers including the contract renewal from the US Department of
Defence to support AE 2100 engines powering its C-130J transport fleet. We also delivered the first T56 3.5 technology
insertion kits to the USAF which offer both fuel saving and performance benefits for its legacy C-130 fleet. International
interest in this technology upgrade continues to be strong.
We received a follow-on production contract for the LiftSystem for the F-35B and recently signed an memorandum of
understanding with Pratt & Whitney to extend our aftermarket support for the UK's new F-35B Lightning fleet beyond the
LiftSystem. The opening of the Kingsville Service Delivery Centre (SDC) in Texas strengthens our local service offering for
the US Navy's T-45 Goshawk trainer fleet and provides further opportunities to develop the service relationship. A number
of new SDC facilities are due to be rolled out over the next 12 months as we pursue this strategy of closer proximity to
our major customers.
We continue to work on positioning ourselves to be competitive for forthcoming indigenous combat programmes, and see
further combat opportunities following the UK and French Governments' commitment to the E2bn FCAS unmanned combat air
system programme. In addition, we signed agreements with both MD Helicopters and Enstrom which offer new opportunities for
our small helicopter engines. Our commitment to development of cutting-edge technology was boosted by the selection of our
LibertyWorks development unit to provide the vertical lift propulsion for the new DARPA VTOL X-Plane.
As well as some organisational rationalisation, the transformation programme within the Defence Aerospace business has
focused on the upgrading of the Indianapolis operations facilities which will deliver both operational efficiencies and
greater development capabilities. Performance against transformation milestones ran to plan in the first half. Defence
Aerospace capital expenditure rose modestly as the investment activity in Indianapolis increased.
Defence Aerospace outlook
The business continues to invest in important product development and manufacturing transformation initiatives as it looks
capitalise on its strong positions, particularly in Combat and Transport & Patrol. As a result, margins are expected to
soften from the highs seen in 2014 and 2015.
Expectations for full year performance are unchanged. Revenues should remain steady, with margins continuing to reflect the
investments in long-term growth and additional actions to offset the TP400 expenditure.
Operational Review: Power Systems
H1 Underlying Acquisitions Foreign H1
£m 2015 change & disposals Exchange* 2016
Order book ** 1,928 65 - - 1,993
Underlying revenue 1,039 (30) - 75 1,084
Change -3% +7% +4%
Underlying OE revenue 684 (22) - 49 711
Change -3% +7% +4%
Underlying services revenue 355 (8) - 26 373
Change -2% +7% +5%
Underlying gross margin 245 (11) - 20 254
Gross margin % 23.6% -40bps 23.4%
Commercial and administrative costs (143) (3) - (12) (158)
Restructuring (2) 2 - - -
Research and development costs (82) 5 - (6) (83)
Joint ventures and associates (1) 1 - - -
Underlying profit before financing 17 (6) - 2 13
Change -35% +12% -24%
Underlying operating margin 1.6% -50bps 1.2%
*Translational foreign exchange impact ** 2015 year end comparative
Financial overview
Underlying revenue of £1,084m was 3% lower (4% higher at actual exchange rates). Original equipment revenue was 3% lower,
reflecting a lower level of naval and rail project-related sales compared to 2015 and the impact of the low oil price on
marine offshore and fracking activities in particular, with some offset from higher power generation, construction and
agriculture sales. Low oil and commodity prices were the most significant contributors to the 2% reduction in underlying
service revenues, where industrial markets were most impacted.
Gross margins were marginally lower at 23.4% (2015: 23.6%) reflecting volume reductions leading to higher overhead
allocations as well as some changes to the product mix.
Underlying profit declined £6m or 35%. Commercial & administrative costs were £3m higher. The £5m reduction in R&D reflects
a more focused approach to future product development activity. Other costs below gross margin were broadly unchanged.
Investment and business development
Our Power Systems business serves a variety of markets ranging from marine, industrial, construction & agriculture to
defence and power generation. This diversity has enabled the business to mitigate some of the weak market environment,
particularly those linked to oil and commodities.
H1 2016 order intake was £1.2bn (2015: £1.3bn) with the year-on-year reduction mainly from oil and gas and commodity
related markets together with lower rail and government project orders. Despite this, the order book closed up from the end
of 2015 at £2.0bn (2015: £1.9bn).
We have continued to develop our position in the energy segment. In March, we signed a strategic agreement with VPower
Group to strengthen our partnership in power generation markets across China and the rest of Asia. We also established a
50/50 joint venture with China Yuchai International Limited's main operating subsidiary, Yuchai Machinery Company Ltd, for
the production under licence of MTU Series 4000 diesel engines in China for the Chinese off-highway market, for power
generation and for oil and gas applications.
We have had several good contract wins for our naval and marine products. These include an order for twelve MTU diesel
gensets for the UK Royal Navy's Type 26 Global Combat Ship and a contract win for six MTU engines from Istanbul based
Bilgin Yachts. We have also been selected to supply MTU-branded engines to crane producer Kato for the first time. Winning
Kato as a customer represents our first success in the high-tech Japanese crane market and we expect Kato to source several
hundred units per year.
Power Systems outlook
The Power Systems outlook is cautiously positive. The business finished the first half with a solid order book and good
order coverage in several key longer cycle markets including power generation and governmental, broadly consistent with the
prior year. Markets continue to be mixed, with some industrial markets remaining soft, as demonstrated by comments from
some of our customers and competitors. While there is much to do in the second half, we expect our diverse end market mix
to help mitigate this.
Operational Review: Marine
H1 Underlying Acquisitions Foreign H1
£m 2015 change & disposals Exchange* 2016
Order book ** 1,164 (259) - 87 992
Underlying revenue 695 (171) - 24 548
Change -25% +3% -21%
Underlying OE revenue 415 (124) - 12 303
Change -30% +3% -27%
Underlying services revenue 280 (47) - 12 245
Change -17% +4% -13%
Underlying gross margin 121 (18) - 5 108
Gross margin % 17.4% +220bps 19.7%
Commercial and administrative costs (100) - - (4) (104)
Restructuring (4) 3 - - (1)
Research and development costs (13) (3) - - (16)
Underlying profit before financing 4 (18) - 1 (13)
Change -450% +25% -425%
Underlying operating margin 0.6% -320bps -2.4%
*Translational foreign exchange impact ** 2015 year end comparative
Financial overview
Underlying revenue of £548m was 25% lower (down 21% at actual rates). Within this, original equipment revenues were down
30% and service revenues declined 17%, primarily due to the downturn in the offshore market.
Gross margins increased 220 basis points to just under 20% and overall gross margin was £108m, £18m lower than in 2015.
Despite the sharply lower revenues, gross margins were largely held as a result of the non-repeat of last year's £30m
contract provision which impacted the first half of 2015. As a result, the business reported an underlying loss of £(13)m,
compared to a profit of £4m in H1 2015
Investment and business development
The order book declined 22% during the first half of this year, with order intake of £362m, 36% down on H1 2015. In
particular, the offshore market has remained very weak, with the low level of OE revenues reflecting the impact of the
continued low oil price and reduced investment by oil majors. Service revenues have been more resilient, although also at
subdued activity levels.
We have continued to look for opportunities to extend our differentiated technology into non-oil related adjacent markets
including for other support, fishing and research vessels. These applications place a similar value on the high-performance
characteristics of our Marine products. One of the most interesting contract wins will be to design and equip the UK's new
polar research ship, the RRS Sir David Attenborough. In addition, there have been a number of opportunities within the
cruise ship sector, including a £25m order to design and equip up to four new Hurtigruten polar cruise vessels to operate
off the coast of Norway, announced in July (and therefore not in the closing order book).
The Naval business has continued to perform well, having a strong first half compared to the prior year. This included
delivery of the first MT30 gas turbine for the UK's new Type 26 Global Combat Ship, and the successful sea trials of the
USS Zumwalt. The MT30 was also selected by a new customer, the Italian Navy.
Product development work within the business included increasing our R&D focus on ship intelligence to develop a range of
products that can monitor equipment performance in real time, and help facilitate full ship automation in the long-term.
We have also recently announced plans for a significant investment in 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 marine restructuring programme remains on track, following last year's proposals to reduce our workforce by 1,000. By
the end of this year, we will have reduced our Marine workforce by around 20% since 2014. We continue to assess further
cost restructuring opportunities.
Marine outlook
With the continued decline with offshore oil & gas markets impacting revenues the Marine business is becoming more balanced
across its different end markets. As a result, business performance is starting to more visibly reflect the benefits of
restructuring and its strong positions in Naval and Merchant, positive features as the business looks to the next few
years.
However, in the near-term, expectations for the second half 2016 remain challenging. While the stronger Naval and Merchant
order book at the end of H1 provides some comfort for achieving expectations for the full year, when combined with the
ongoing focus on cost reduction, there are continued weaknesses in offshore oil & gas and potential order cancellations. As
a result, we continue to expect revenues and profits to be lower than those seen in the second half of 2015.
Operational Review: Nuclear
H1 Underlying Acquisitions Foreign H1
£m 2015 change & disposals Exchange* 2016
Order book ** 2,168 (210) - 2 1,960
Underlying revenue 309 44 - 3 356
Change +14% +1% +15%
Underlying OE revenue 110 30 - 1 141
Change +27% +1% +28%
Underlying services revenue 199 14 - 2 215
Change +7% +1% +8%
Underlying gross margin 49 1 - 1 51
Gross margin % 15.9% -170bps 14.3%
Commercial and administrative costs (25) (8) - - (33)
Restructuring (1) 1 - - -
Research and development costs (3) 3 - - -
Underlying profit before financing 20 (3) - 1 18
Change -15% +5% -10%
Underlying operating margin 6.5% -170bps 5.1%
*Translational foreign exchange impact ** 2015 year end comparative
Financial overview
Underlying revenue increased 14%, led by growth particularly in original equipment activities in the submarines business.
This reflects the phasing of programmes across next generation and refuelling projects as well as acceleration of the
Vulcan test facility decommissioning.
Gross margin was lower at 14.3%, reflecting the product mix favouring lower margin government-led submarine projects. Below
gross margin, the change in treatment of R&D tax credits, which significantly impacted the full year in 2015, produced an
R&D credit of £3m in the first half (H1 2015: nil), offset by increased costs to support the increased volumes and higher
performance incentives within commercial and administrative costs. As a result, underlying profit before financing was £3m
lower than the prior year, at £18m.
Investment and business developments
While order intake of £144m was £49m higher than the prior period, the order book was £210m lower at £2.0bn, reflecting the
phasing of MoD order releases and both delays and contract phasing within civil nuclear programmes in the UK, North America
and Europe.
Our civil nuclear business, which focuses on multi-year engineering projects and specialist technical services,
concentrated its first half activities on its long-term instrumentation & controls retrofit contracts in France and
Finland, together with the integration of the US R.O.V. Technologies business (a provider of complementary remote visual
inspection services) acquired last year. In March, Nuclear also announced the strengthening of the strategic collaboration
started in 2014 with the China National Nuclear Corporation, CNNC. This includes specific engineering, consultancy and
training services to be provided by Rolls-Royce in a market expected to continue to grow strongly and where we have a
strong technology presence.
Our submarine activities focused on performance improvement initiatives to support its long-term contracts for the UK Royal
Navy's nuclear submarine fleet, including delivery of the nuclear propulsion system to power the Astute class submarines.
Development work on the new PWR3 power plant for Successor (the next generation of Trident submarines) continues with
contract extensions agreed in preparation ahead of the government final investment decision. Work on the older
Vanguard-class Trident submarines included implementing a refuelling programme. In addition, progress continues on the
decommissioning of the Naval Reactor Test Establishment, HMS Vulcan, in Scotland.
An R&D programme was initiated together with a number of partners to scope out the initial design phase for Small Modular
Reactors. These smaller, more flexible units offer the potential for lower cost/lower scale and more flexible power
generation in future decades and directly build on the knowledge and specialist skills of our Rolls-Royce Nuclear
business.
Transformation projects within the Nuclear business have focused on operational improvements and on people and culture. The
organisational design and management reduction is on track to deliver against committed cost saving targets.
Nuclear outlook
The long-term outlook for Nuclear remains positive, with both the civil and submarine businesses focused on delivering
cost-effective and value-added products and services with on time deliveries to their core customers under long-term secure
aftermarket contracts. Confirmation by the UK Government of the ongoing investment in the Successor submarine programme to
replace Trident, together with renewed activities in the civil market, particularly in China, provide encouraging growth
opportunities.
In the near term, our focus is on sustaining the recent operational improvements at our key UK facility to improve delivery
performance. At the same time we will be making the modest investments set out above to explore the technical and market
opportunities for Small Modular Reactors. As a result, while revenues and gross margins are expected to be largely
unchanged year on year, full year profit is expected to be lower.
Financial review
Underlying income statement
Six months to June£m 2016 2015 Change
Revenue at 2015 exchange rates 5,960 6,256 -296
Translation to 2016 exchange rates 183 -
Revenue 6,143 6,256 -113
Gross profit 984 1,332 -348
Commercial and administrative costs (518) (496) -22
Restructuring (6) (45) +39
Research and development costs (366) (378) +12
Share of results of joint ventures and associates 45 43 +2
Profit before financing at 2015 exchange rates 139 456 -317
Translation to 2016 exchange rates 19 -
Profit before financing 158 456 -298
Net financing (54) (17) -37
Profit before tax 104 439 -335
Tax (27) (102) +75
Profit for the year 77 337 -260
Earnings per share (EPS) 4.20p 18.27p -14.07p
Payments to shareholders 4.60p 9.27p -4.67p
Gross R&D investment 638 580 +58
Net R&D charge 380 378 +2
Segmental analysis
Revenue Gross profit Profit before financing
Six months to June£m 2016 2015 Change 2016 2015 Change 2016 2015 Change
Civil 3,126 3,285 -159 385 628 -243 22 248 -226
Defence 965 973 -8 203 279 -76 123 184 -61
Power Systems 1,009 1,039 -30 234 245 -11 11 17 -6
Marine 524 695 -171 103 121 -18 (14) 4 -18
Nuclear 353 309 +44 50 49 +1 17 20 -3
Other 20 27 -7 11 7 +4 11 5 +6
Intra-segment (37) (72) +35 (2) 3 -5 (2) 3 -5
Central costs (29) (25) -4
Group at 2015 exchange rates 5,960 6,256 -296 984 1,332 -348 139 456 -317
Translation to 2016 exchange rates 183 49 19
Group 6,143 6,256 -113 1,033 1,332 -299 158 456 -298
Underlying revenue and underlying profit before financing are discussed in the Business Highlights (page 3), the Group
Trading Summary (page 9) and the Operational Reviews (page11).
Underlying financing costs increased by £37m to £54m. Net interest payable increased by £7m to £35m due to the issue of
$1.5bn of debt in the second half of 2015 and other underlying financing costs increased by £6m to £19m. In addition, an
underlying gain of £24m in 2015 on realised foreign exchange contracts which were settled to convert overseas dividends
into sterling did not recur.
Underlying taxation was £27m, an underlying tax rate of 26% compared with 23% in 2015.
Underlying EPS decreased 77% to 4.20p, in line with profit for the period.
Payments to shareholders are made in the form of C Shares, details of which are set out on page 41. An interim payment of
4.6p per share will be made.
Reported income statement
Six months to June£m 2016 2015
Revenue 6,462 6,370
Gross profit 1,193 1,269
Other operating income 2 5
Commercial and administrative costs (605) (522)
Research and development costs (404) (404)
Share of results of joint ventures and associates 51 31
Operating profit 237 -379
Loss on disposal of businesses (1) -
Profit before financing 236 379
Net financing (2,386) (69)
Profit before tax (2,150) 310
Tax 378 50
Profit for the year (1,772) 360
Earnings per share (EPS) (96.72p) 19.51p
The changes in 2016 resulting from underlying trading are described in the previous sections.
Consistent with past practice and IFRS, the Group provides both reported and underlying figures. We believe underlying
figures are more representative of the trading performance, by excluding the impact of period-end mark-to-market
adjustments, principally the GBP:USD hedge book. In addition, post-retirement financing and the effects of acquisition
accounting are excluded. The adjustments between the underlying income statement and the reported income statement are set
out below and in more detail in note 2 to the Condensed Financial Statements. This basis of presentation has been applied
consistently.
Reconciliation between underlying and reported results
Six months to 30 June £m 2016 2015
Underlying revenue 6,143 6,256
Recognise revenue at exchange rate on date of transaction 319 114
Reported revenue 6,462 6,370
Profit before financing Financing Profit before tax
Six months to 30 June £m 2016 2015 2016 2015 2016 2015
Underlying 158 456 (54) (17) 104 439
Mark-to-market adjustments on derivatives 4 (12) (2,155) (89) (2,151) (101)
Related foreign exchange adjustments 203 87 (171) 27 32 114
Movements on other financial instruments - - (8) (3) (8) (3)
Effects of acquisition accounting (62) (63) - - (62) (63)
Impairment of goodwill - (69) - - - (69)
Exceptional restructuring (68) (11) - - (68) (11)
Acquisitions and disposals (1) (3) - - (1) (3)
Post-retirement schemes - - 3 13 3 13
Other 2 (6) (1) - 1 (6)
Reported 236 379 (2,386) (69) (2,150) 310
The mark to market adjustments are principally driven by movements in the GBP:USD and EUR:USD exchange rates which moved
from 1.48 to 1.34 and from 1.09 to 1.11 respectively during the period 1 January 2016 to 30 June 2016. At each reporting
date our foreign exchange hedge book is included in the balance sheet at fair value ('mark-to-market'). The movement in
this valuation during the period, after taking account of contracts settled, is included in the reported profit. As the
Group has a large hedge book ($35bn), the movements can be significant, depending on changes in exchange rate. In H1 2016
this resulted in a charge of £2,155m.
The hedge book is held to manage the impact of changes in exchange rates on future foreign currency income. Accordingly,
non-cash changes in its value are excluded from the underlying results as they do not relate to the trading in the period.
Movements on other financial instruments relate to exchange differences on risk and revenue sharing arrangements.
The effects of acquisition accounting in accordance with IFRS 3 are excluded from underlying profit so that all businesses
are measured on an equivalent basis. In addition, the impairment charge in Marine of £69m was excluded in 2015.
Costs associated with the substantial closure or exit of a site, facility or activity and significant organisation
transformation are classified as exceptional restructuring and excluded. In 2016, these increased by £57m primarily
representing costs of the transformation programme.
Profits and losses arising on acquisitions and disposals during the year are excluded.
Net financing on post-retirement schemes is excluded from underlying profit.
Appropriate tax rates are applied to these adjustments, depending on the relevant tax jurisdiction, the net effect of which
was a reduction of £405m to the underlying tax charge (2015 £152m reduction). In 2016, the most significant tax
adjustment was £377m in relation to mark-to-market adjustments of £2,155m. These are predominantly held in the UK.
Summary balance sheet
£m 30 June 2016 31 December 2015
Intangible assets 4,990 4,645
Property, plant and equipment 3,718 3,490
Net working capital 1 (125) (501)
Net funds 2 (712) (111)
Provisions (777) (640)
Net post-retirement scheme surplus/(deficit) 141 (77)
Net financial assets and liabilities 2 (3,954) (1,883)
Joint ventures and associates 765 576
Other net assets and liabilities 3 (204) (483)
Net assets 3,842 5,016
Other items
US$ hedge book (US$bn) 34.6 28.8
TotalCare assets 3,275 2,994
TotalCare liabilities (915) (783)
Net TotalCare assets 2,360 2,211
Gross customer finance commitments 253 269
Net customer finance commitments 62 54
1 Net working capital includes inventories, trade and other receivables, trade and other payables and tax assets and
liabilities (other than deferred).
2 Net funds includes an asset of £332m (2015 asset £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 £345m mainly due to exchange differences of £314m. Additions of £232m (including
£39m of certification and participation fees, £54m of development costs and £90m of contractual aftermarket rights) were
largely offset by amortisation of £199m.
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 £228m. Additions of £191m were largely offset by depreciation of
£195m. Exchange differences were £206m and £41m was added from the reclassification of joint ventures to joint
operations.
The net post-retirement scheme deficit surplus/(deficit) (note 11) has increased by £218m largely due to movements on
discount rates in the period. In the UK, the discount rate reduced from 3.6% to 2.7%, which was the main component of an
increase in pension liabilities of £1.7bn. As the pension assets are managed to hedge changes in the valuation of the
liabilities, these increased by £2.2bn, a net movement in the UK of £0.5bn. The deficit on overseas schemes increased by
£0.3bn (including £0.1bn of foreign exchange) as many of these (most significantly in Germany and US healthcare schemes)
are unfunded and consequently the reduction in the discount rate increases the post-retirement liabilities with no
off-setting change in assets.
Movements in net funds are shown overleaf.
Investments in joint ventures and associates increased by £189m largely due to a £154m increase in the Group's share of
Approved Maintenance Centre joint ventures. The reclassification of joint ventures to joint operations (£57m, see page31),
was broadly offset by exchange gains of £47m.
Provisions largely relate to warranties and guarantees provided to secure the sale of OE and services. The increase of
£137m includes reclassifications from accruals of £92m, following a review of accounting consistency during the period.
The remaining increase of £45m includes additional charges of £132m, principally for warranty and guarantees and
restructuring, and foreign exchange movements of £50m, offset by utilisation of £100m.
Net financial assets and liabilities relate to the fair value of foreign exchange, commodity and interest rate contracts,
financial RRSAs, 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 financial liability of £3.7bn, an increase of £2.1bn in the period, mainly a result of
the strengthening of the US dollar.
The US$ hedge book increased by 20% to US$35bn. This represents around 5½ years of net exposure and has an average book
rate of £1 to US$1.57.
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 statement
Six months to 30 June£m 2016 2015 Change
Underlying profit before tax 104 439 -335
Depreciation and amortisation 335 317 +18
Movement in net working capital (235) (747) +512
Expenditure on property, plant and equipment and intangible assets (539) (391) -148
Other 8 (90) +98
Trading cash flow (327) (472) +145
Contributions to defined benefit pensions in excess of PBT charge (10) (25) +15
Taxation paid (62) (79) +17
Free cash flow (399) (576) +177
Exceptional restructuring expenditure (15) - -15
Shareholder payments (168) (165) -3
Share buyback - (433) +433
Increase in share of joint ventures (154) - -154
Other acquisitions/disposals 7 (104) +111
Foreign exchange 128 (31) +159
Change in net funds (601) (1,309)
Opening net funds (111) 666
Closing net funds (712) (643)
Movement in working capital - the £235m increase includes higher levels of inventory due to a forecast increase in
deliveries in the second half of the year, partly offset by an increase in deposits and advance payments. The increase is
lower than the previous year, reflecting the increase in deposits and a reversal of the payables reduction experienced in
2015 due to the timing of sales and purchases.
Expenditure on property, plant and equipment and intangibles - the increase largely reflects higher capital spend (£50m),
certification costs (£23m), capitalised development costs (£45m) and contractual aftermarket rights (£16m).
Pensions - the reduction in pension contributions in excess of the income statement charge arose principally in the UK due
to a reduction of deficit reduction payments and the non-recurrence of a past-service credit in 2015.
Shareholder payments - the change in shareholder payments reflects the difference between the 2014 and 2015 interim
payments, which are paid in the following January. The reduction in shareholder payments announced in February 2016 will
be reflected in cash from the second half of 2016.
The derivation of the summary funds flow statement above from the reported cash flow statement is included in the
appendix.
Condensed consolidated income statement
For the half-year ended 30 June 2016
Half-year Half-year Year to
to 30 June to 30 June 31 December
2016 2015 2015
Notes £m £m £m
Revenue 2 6,462 6,370 13,725
Cost of sales (5,269) (5,101) (10,459)
Gross profit 1,193 1,269 3,266
Other operating income 2 5 10
Commercial and administrative costs (605) (522) (1,059)
Research and development costs 3 (404) (404) (818)
Share of results of joint ventures and associates 51 31 100
Operating profit 237 379 1,499
(Loss)/profit on disposal of businesses (1) - 2
Profit before financing and taxation 236 379 1,501
Financing income 4 36 86 115
Financing costs 4 (2,422) (155) (1,456)
Net financing (2,386) (69) (1,341)
Profit before taxation 1 (2,150) 310 160
Taxation 5 378 50 (76)
Profit for the period (1,772) 360 84
Attributable to:
Ordinary shareholders (1,772) 360 83
Non-controlling interests - - 1
Profit for the period (1,772) 360 84
Earnings per ordinary share attributable to shareholders 6
Basic (96.72p) 19.51p 4.51p
Diluted (96.72p) 19.35p 4.48p
Underlying earnings per ordinary share are shown in note 6.
Payments to ordinary shareholders in respect of the period 7
Pence per share 4.60p 9.27p 16.37p
Total 85 170 301
1 Underlying profit before taxation 2 104 439 1,432
All activities comprise continuing operations.
Condensed consolidated statement of comprehensive income
For the half-year ended 30 June 2016
Half-year Half-year Year to
to 30 June to 30 June 31 December
2016 2015 2015
Notes £m £m £m
Profit/(loss) for the period (1,772) 360 84
Other comprehensive income (OCI)
Items that will not be reclassified to profit or loss
Movements in post-retirement schemes 11 346 (722) (722)
Share of OCI of joint ventures and associates (2) - -
Related tax movements (123) 250 257
221 (472) (465)
Items that may be reclassified to profit or loss
Foreign exchange translation differences on foreign operations 557 (280) (129)
Reclassification to income statement on disposal of businesses - - 1
Share of OCI of joint ventures and associates (6) (12) (19)
Related tax movements 3 (3) (2)
554 (295) (149)
Total comprehensive income for the period (997) (407) (530)
Attributable to:
Ordinary shareholders (997) (407) (530)
Non-controlling interests - - -
Total comprehensive expense for the period (997) (407) (530)
(530)
Condensed consolidated balance sheet
At 30 June 2016
30 June 30 June 31 December
2016 2015 2015
Notes £m £m £m
ASSETS
Non-current assets
Intangible assets 8 4,990 4,476 4,645
Property, plant and equipment 9 3,718 3,312 3,490
Investments - joint ventures and associates 765 532 576
Investments - other 37 29 33
Other financial assets 10 351 185 83
Deferred tax assets 617 419 318
Post-retirement scheme surpluses 11 1,545 1,016 1,063
12,023 9,969 10,208
Current assets
Inventories 3,165 2,930 2,637
Trade and other receivables 7,145 5,624 6,244
Taxation recoverable 16 16 23
Other financial assets 10 45 47 29
Short-term investments 1 7 2
Cash and cash equivalents 2,287 1,581 3,176
Assets held for sale 5 3 5
12,664 10,208 12,116
Total assets 24,687 20,177 22,324
LIABILITIES
Current liabilities
Borrowings (120) (269) (419)
Other financial liabilities 10 (521) (218) (331)
Trade and other payables (7,524) (6,555) (6,923)
Tax liabilities (119) (159) (164)
Provisions for liabilities and charges (408) (418) (336)
(8,692) (7,619) (8,173)
Non-current liabilities
Borrowings (3,212) (1,937) (2,883)
Other financial liabilities 10 (3,497) (895) (1,651)
Trade and other payables (2,807) (2,002) (2,317)
Tax liabilities (1) (10) (1)
Deferred tax liabilities (863) (906) (839)
Provisions for liabilities and charges (369) (314) (304)
Post-retirement scheme deficits 11 (1,404) (1,084) (1,140)
(12,153) (7,148) (9,135)
Total liabilities (20,845) (14,767) (17,308)
Net assets 3,842 5,410 5,016
EQUITY
Attributable to ordinary shareholders
Called-up share capital 367 367 367
Share premium account 180 180 180
Capital redemption reserve 159 164 161
Cash flow hedging reserve (105) (93) (100)
Other reserves 508 (205) (51)
Retained earnings 2,731 4,992 4,457
3,840 5,405 5,014
Non-controlling interests 2 5 2
Total equity 3,842 5,410 5,016
5,016
Condensed consolidated cash flow statement
For the half-year ended 30 June 2016
Notes Half-yearto 30 June2016£m Half-yearto 30 June2015£m Year to31 December2015£m
Reconciliation of cash flows from operating activities
Operating profit 237 379 1,499
Loss on disposal of property, plant and equipment 2 - 8
Share of results of joint ventures and associates (51) (31) (100)
Dividends received from joint ventures and associates 14 16 63
Amortisation of intangible assets 8 201 268 432
Depreciation of property, plant and equipment 9 196 181 378
Impairment of investments - - 2
Increase/(decrease) in provisions 86 (44) (151)
(Increase)/decrease in inventories (339) (260) 63
Increase in trade and other receivables (459) (234) (836)
Increase/(decrease) in trade and other payables 514 (227) 242
Cash flows on other financial assets and liabilities (139) (122) (305)
Net defined benefit post-retirement cost recognised in operating profit 11 118 102 213
Cash funding of defined benefit post-retirement schemes 11 (128) (127) (259)
Share-based payments 14 5 5
Net cash inflow/(outflow) from operating activities before taxation 266 (94) 1,254
Taxation paid (62) (79) (160)
Net cash inflow /(outflow) from operating activities 204 (173) 1,094
Cash flows from investing activities
Additions of unlisted investments -
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