TIDMRR.

RNS Number : 8750R

Rolls-Royce Holdings plc

11 March 2021

11 March 2021

ROLLS-ROYCE HOLDINGS PLC - 2020 Full Year Results

Decisive and effective actions to address challenging market conditions

   --       Severe impact of COVID-19 pandemic on Group performance and near-term outlook 
   --       More than GBP1bn saved in 2020 from in-year cash mitigations, compared to pre-COVID plans 

-- Strengthened liquidity to GBP9bn and protected financial position with GBP7.3bn of new debt and equity and launched programme to raise at least GBP2.0bn from disposals

   --       Strong progress on fundamental restructuring programme; around 7,000 roles removed in 2020 

-- Targeting free cash flow (FCF) to turn positive during second half 2021 and at least GBP750m as early as 2022, dependent on the pace of the recovery in engine flying hours and underpinned by the restructuring programme

Warren East, Chief Executive said :

"2020 was an unprecedented year and I would like to thank everyone at Rolls-Royce for their hard work, dedication and sacrifice to help secure the Group's future. The impact of the COVID-19 pandemic on the Group was felt most acutely by our Civil Aerospace business. In response, we took immediate actions to address our cost base, launching the largest restructuring in our recent history, consolidating our global manufacturing footprint and delivering significant cost reduction measures. We have taken decisive actions to enhance our financial resilience and permanently improve our operational efficiency, resulting in a regrettable, but unfortunately very necessary, reduction in the size of our workforce. With the support of our stakeholders we successfully secured additional liquidity with a rights issue, bond issuance and further credit facilities put in place during the year. We have made a good start on our programme of disposals and will continue with this in 2021. We continue to invest in developing market-leading technology and low carbon opportunities in all our end markets, to create value for our stakeholders and ensure we are well positioned to take advantage of the transition to a lower carbon economy and growing demand for more sustainable power solutions."

Group financial performance

 
                                          Reported    Reported   Underlying   Underlying 
  GBPmillion                                  2020        2019         2020         2019 
--------------------------------------  ----------  ----------  -----------  ----------- 
 Revenue                                    11,824      16,587       11,763       15,450 
 Gross (loss)/profit                         (210)         942        (512)        2,387 
 Operating (loss)/profit                   (2,081)       (852)      (1,972)          808 
  (Loss)/gain on acquisition/disposal         (14)         139            -            - 
                                        ----------              -----------  ----------- 
  Net losses on closing over-hedged              -           -      (1,705)            - 
   position (1) 
--------------------------------------  ----------  ----------  -----------  ----------- 
  Other financing costs                      (815)       (178)        (281)        (225) 
--------------------------------------  ----------  ----------  -----------  ----------- 
 (Loss)/profit before taxation             (2,910)       (891)      (3,958)          583 
  Taxation                                   (259)       (420)         (39)        (277) 
 (Loss)/profit for the period              (3,169)     (1,311)      (3,997)          306 
 (Loss)/earnings per share (pence) 
  (2)                                      (52.95)     (23.70)      (66.78)         5.44 
                                        ----------              -----------  ----------- 
 
 GBPm                                         2020        2019       Change 
--------------------------------------  ----------  ----------  ----------- 
 Group free cash flow (FCF)                (4,185)         873      (5,058) 
--------------------------------------  ----------  ----------  ----------- 
 Reported movements in net funds           (2,915)         701      (3,616) 
--------------------------------------  ----------  ----------  ----------- 
 Net (debt)/cash (ex. leases)              (1,533)       1,361      (2,894) 
--------------------------------------  ----------  ----------  ----------- 
 

(1) Underlying financing charge of GBP1,705m reflects the cost of closing $11.8bn over-hedged GBP/US$ position across 2020-26 (GBP1,689m) and cost of closing over-hedged jet fuel position in 2020 (GBP16m). GBP202m of the cash cost was realised in 2020 with GBP1,503m cash cost across 2021-26.

(2) 2019 EPS restated to reflect the impact of the 2020 rights issue.

Summary of 2020 financial performance and financial impact of COVID-19

Our financial performance in 2020 was significantly affected by the COVID-19 pandemic. The global spread of the virus from March resulted in a sudden deterioration of some of our end markets. A positive albeit reduced contribution from Power Systems and growth in Defence were important to the Group's overall performance, partly offsetting the severe impact to our Civil Aerospace business.

Cash flow

-- FCF of GBP(4.2)bn, reflecting deterioration in underlying performance as a result of the impact of COVID-19 on Civil Aerospace in particular, and a deterioration in working capital which included a GBP(1.1)bn impact from the cessation of invoice discounting.

-- Actions to reduce non-critical spend and payroll delivered more than GBP1bn of savings in year compared to pre-COVID plans partly mitigating the impact of lower flying hour receipts.

-- Reported movement in net funds of GBP(2.9)bn was helped by GBP2.0bn inflow from the rights issue.

Underlying performance

-- Underlying revenue of GBP11.8bn reflected lower activity and included a GBP(1.1)bn revenue impact from Civil Aerospace LTSA contract accounting catch-ups.

-- Underlying operating loss of GBP(2.0)bn included GBP(1.3)bn of one-off charges largely due to COVID-19 comprising charges for LTSA catch-ups, contracts that have become loss-making in the year and customer provisions.

-- Underlying loss before tax of GBP(4.0)bn included a GBP(1.7)bn underlying finance charge related to the FX hedge book reduction, due to lower USD receipts in 2020 and forecast future years.

Reported performance

-- Reported operating loss of GBP(2.1)bn included GBP(1.3)bn net exceptional charges, largely as a result of COVID-19, including GBP(1.4)bn from impairments and write offs, GBP(489)m from restructuring, and a GBP620m exceptional provision release on the Trent 1000 programme.

   --        A full reconciliation of reported results to underlying results is presented on page 6. 

Financial and liquidity position at year end

-- Liquidity of GBP9.0bn at year end comprised GBP3.5bn cash and GBP5.5bn undrawn credit facilities.

-- A total of GBP7.3bn additional liquidity was secured during 2020, including GBP2.0bn rights issue and GBP5.3bn new credit through bonds, bank loan facilities and commercial paper.

   --        Net debt of GBP(1.5)bn excluding leases (GBP(3.6)bn including leases). 

-- Under the terms of recent loan agreements, we are restricted from making or declaring payments to our shareholders until after 31 December 2022. Regardless of these restrictions, the Board recognises that it would be inappropriate to make payments at this time due to the Group's financial position.

2020 Business unit performance summary

 
                                                                   Underlying 
                               Underlying    Organic change         operating    Organic change 
 GBP million                     Revenue                (1)     (loss)/profit               (1) 
---------------------------  ------------  ----------------  ----------------  ---------------- 
  Civil Aerospace                   5,089           (3,025)           (2,574)           (2,612) 
---------------------------  ------------  ----------------  ----------------  ---------------- 
  Power Systems (2)                 2,745             (530)               178             (192) 
---------------------------  ------------  ----------------  ----------------  ---------------- 
  Defence                           3,366               125               448                34 
---------------------------  ------------  ----------------  ----------------  ---------------- 
  ITP Aero                            705             (240)                68              (43) 
---------------------------  ------------  ----------------  ----------------  ---------------- 
  Corporate / eliminations          (389)               192              (70)                46 
---------------------------  ------------  ----------------  ----------------  ---------------- 
  Non-core business                   247             (104)              (22)              (15) 
---------------------------  ------------  ----------------  ----------------  ---------------- 
  Total Group                      11,763           (3,582)           (1,972)           (2,782) 
---------------------------  ------------  ----------------  ----------------  ---------------- 
 

(1) Organic change at constant translational currency (constant currency) applying 2019 average rates to 2020 and excluding M&A. All commentary is provided on an organic basis unless otherwise stated.

(2) The underlying results for Power Systems for 2019 have been restated to reclassify Bergen Engines AS and the Civil Nuclear Instrumentation and Control business as non-core.

Responding to the impact of COVID-19

We reacted quickly to the outbreak and rapidly implemented a number of proactive safety measures, in line with local and national guidelines, which helped us to protect our people and ensure continuity of our operations. We also increased our focus on employee mental health and wellbeing through our Employee Assistance Programme and additional resources. Additionally, we have supported the countries and communities in which we operate, providing practical assistance including support with PPE supply, ventilator production and educational tools. Furthermore, we launched the Emergent Alliance, a global community that uses data analytics to assist the global recovery.

To help mitigate the financial impact of COVID-19, we promptly implemented a number of cash cost saving actions to reduce our cash outflow in 2020. These included tighter controls on all discretionary expenditure and a 10% salary reduction for senior managers and executives. Our early response, with many of these measures in place by April, enabled us to achieve more than GBP1.0bn in-year cash cost savings for 2020 compared to our pre-COVID-19 expectations.

The impact of COVID-19 on international travel significantly altered the near and medium-term outlook for civil aviation. In May 2020 we launched a major restructuring programme to fundamentally re-size the cost base and capital requirements of our Civil Aerospace business. In total we expect the restructuring to lead to the reduction of at least 9,000 roles by the end of 2022, most of which are in Civil Aerospace. By the end of the year, approximately 7,000 permanent and contractor roles had been removed with a significant proportion achieved through voluntary severance and natural attrition. Through these role reductions and a continued focus on costs, we expect to reduce our operating costs and capital spend by GBP1.3bn versus 2019 levels, with full run-rate savings realised by the end of 2022.

In 2020, $500m of bonds matured and we secured GBP7.3bn of additional debt and equity funding to strengthen our liquidity. Our strong liquidity position ensures that, even in a severe but plausible downside scenario (page 25) we have enough funding for our operations, business development and near-term debt maturities. In addition, in March 2021 we secured approvals for a GBP1.0bn increase, which we intend to leave undrawn, to the existing GBP2.0bn term-loan facility supported by an 80% guarantee from UK Export Finance. We are targeting at least GBP2.0bn from disposals by early 2022 and have already announced agreements to sell our Civil Nuclear Instrumentation and Control and Bergen Engines businesses. We expect the proceeds from the rights issue in 2020, together with business disposals and cash generated from operations over the next few years, to help us to return to a net cash position in the medium term.

Our recovery expectations

Our diversified portfolio helped to protect the Group's performance during the COVID-19 crisis, with support from governmental end-markets in Power Systems and Defence in particular. Looking ahead over the next couple of years, we are encouraged by the outlook for vaccinations and testing and we expect the rebound in global GDP and lifting of travel restrictions to drive our recovery.

Although the pace and timing of the air travel recovery remains outside our control, we have acted quickly to reset our cost base, particularly in Civil Aerospace, to deliver improved returns and greater operational efficiency. Our large engine LTSA flying hours (EFH) in 2021 are expected to increase to around 55% of 2019 levels (2020: 43%) with an acceleration in the second half as global vaccination programmes enable travel restrictions to be lifted. In 2022, our base case is for EFH to reach around 80% of 2019 levels (previously 90%). Large engine deliveries are expected to remain at the current lower levels for the next few years.

In Power Systems, the shorter-cycle nature of its business means that many of its end markets are expected to recover from the effects of the pandemic by the end of 2021 supporting our expectation that our revenues will be back to 2019 levels by 2022. In addition, our success in China is enabling us to continue to expand our business and win market share. Beyond 2021, we expect structural growth to be driven by global economic activity and the shift towards more sustainable, lower carbon power solutions, most notably hybrid-electric and hydrogen solutions as well as microgrids.

Our Defence business has a strong order book providing good visibility, with around 90% order cover for 2021, and steady growth into the medium term. With an installed base of more than 16,000 engines, we see potential to expand our aftermarket services with through-life upgrades for existing products. We expect broadly stable Defence revenues in the medium term, with strong cash conversion. Defence has substantial new programme opportunities, with good prospects in the US that could generate more than $7bn of lifetime revenue. We are also a key member of the Tempest programme in the UK.

Well positioned for the future

Despite the challenges we faced in 2020, we continued to invest organically and acquisitively in new opportunities, focused on technologies which enable our net zero carbon ambitions as the pace of adoption of low carbon solutions accelerates.

In 2020, approximately 7% of our research and development (R&D) spending was related to low carbon technologies (2019: 4%) and 38% towards next generation engine development with the remainder spent on delivering or enhancing our current product portfolio. The engine programmes we launched in recent years are now maturing and our investment priorities are pivoting towards lower carbon solutions as well as a more equitable balance across our business units. We intend to dedicate approximately 20% of our annual R&D expenditure to low carbon solutions including small modular reactors (SMRs), hybrid, hydrogen and electric power technologies, by 2023.

We publicly affirmed our ambition to enable the sectors we serve to achieve net zero carbon by 2050 when we joined the UN Race to Zero campaign in 2020.

Outlook and financial guidance

In this challenging environment, near-term financial forecasting is more difficult and the potential range of outcomes wider. Our expectations and targets are based on the pace of delivery of our fundamental restructuring programme and our current view of the shape and timing of the recovery.

-- We expect Group FCF in the region of GBP(2.0)bn in 2021, based on EFH at around 55% of 2019 levels, with the outflow weighted towards the first half before the Group turns cash flow positive at some point during the second half of the year.

-- Group FCF of at least GBP750m (excluding disposals) is achievable when EFH exceed 80%, on average, of 2019 levels for a 12-month period. We aim to reach this as early as 2022, underpinned by our cost reductions and management actions, however the exact timing is dependent on the pace of air travel recovery.

-- Medium-term, we aim to return to a net cash position and an investment grade credit position driven by free cash generation and our planned GBP2.0bn disposal programme.

The near-term outlook remains uncertain and highly sensitive to the developments of the COVID-19 virus and the related measures taken by governments around the world.

This announcement has been determined to contain inside information.

LEI: 213800EC7997ZBLZJH69

Enquiries:

 
 Investors                         Media : 
  : 
 Isabel Green    +44 7880 160976   Richard Wray   +44 7810 850055 
 

This announcement contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and will not be updated. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. This report is intended to provide information to shareholders, is not designed to be relied upon by any other party, or for any other purpose and Rolls-Royce Holdings plc and its directors accept no liability to any other person other than under English law.

Results webcast and conference call

A webcast and conference call will be held at 09:00 (GMT) today. To register for the webcast, including Q&A participation, please visit: https://edge.media-server.com/mmc/p/egc88ogi

A webcast replay will be made available shortly after the event concludes on the same link.

Conference call dial-in details:

UK / International: +44 203 009 5709 / US: +1 646 787 1226

Participant passcode: 549 8743

Downloadable materials

Please visit the Investor Relations section of the Rolls-Royce website to download PDF copies of our Results materials: https://www.rolls-royce.com/investors/results-and-events.aspx

Photographs and broadcast-standard video are available at www.rolls-royce.com .

Group Trading Summary

The commentary and income statement below describe underlying performance, with percentage and absolute change figures presented on an organic basis, unless otherwise stated.

Summary income statement

 
                                                                            Organic change 
  GBPm                                      2020      2019    Change (2)               (1) 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Underlying revenue                      11,763    15,450       (3,687)           (3,582) 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Underlying OE revenue                    5,887     7,456       (1,569)           (1,593) 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Underlying services revenue              5,876     7,994       (2,118)           (1,989) 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Underlying gross (loss)/profit           (512)     2,387       (2,899)           (2,872) 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Gross margin %                          (4.4)%     15.4%     (19.8)%pt         (19.9)%pt 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Commercial and administration 
   costs                                   (904)     (993)            89                63 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Research and development costs           (735)     (696)          (39)              (43) 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Joint ventures and associates              179       110            69                70 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Underlying operating (loss)/profit     (1,972)       808       (2,780)           (2,782) 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Underlying operating margin            (16.8)%      5.2%     (22.0)%pt         (22.2)%pt 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Financing costs                        (1,986)     (225)       (1,761)           (1,763) 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Underlying (loss)/profit before 
   taxation                              (3,958)       583       (4,541)           (4,545) 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Taxation                                  (39)     (277)           238               236 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Underlying (loss)/profit for 
   the period                            (3,997)       306       (4,303)           (4,309) 
-------------------------------------  ---------  --------  ------------  ---------------- 
  Underlying (loss)/earnings per 
   share (3) (p)                         (66.78)      5.44       (72.22)           (72.25) 
-------------------------------------  ---------  --------  ------------  ---------------- 
 

(1) Organic change at constant translational currency (constant currency) by applying 2019 average rates to 2020 numbers, and excluding M&A. All commentary is provided on an organic basis unless otherwise stated.

(2) The impact of M&A was GBP147m on revenue and GBP6m on underlying operating loss.

(3) 2019 earnings per share has been adjusted to reflect the 2.91 bonus element of the rights issue

Note: 2019 transactions were translated at an achieved rate of GBP$1.53, close to the average rate of our hedge book, whereas 2020 transactions were translated at GBP$1.24 in the first half and GBP$1.33 in the second half, due to not being able to utilise our hedge book in 2020.

-- Underlying revenue: Organic change of GBP(3.6)bn (23)% reflected a significant fall in both OE and services revenue largely due to the impact of COVID-19 on end-market demand. Civil Aerospace was the most impacted, down GBP(3.0)bn (37%) including GBP(1,061)m of COVID-related negative LTSA catch-ups. Power Systems was down GBP(530)m (17%) mostly due to lower OE revenue and ITP Aero was GBP(240)m lower (26%) with a reduction in OE partly offset by a small increase in services. Defence revenue increased by GBP125m (4%), showing continuity of demand from government customers and effective measures to minimise operational disruption from COVID-19.

-- Underlying gross loss: The loss of GBP(512)m was predominantly driven by a GBP(2.0)bn loss in Civil Aerospace (including GBP(1.3)bn of COVID-related charges), partly offset by savings from role reductions and cost mitigations. Power Systems, Defence and ITP Aero all contributed positively, with Defence achieving an increase on the prior year.

-- Commercial and administration costs: reduced by GBP63m, reflecting some of the savings from the Group-wide focus on cost mitigations in response to COVID-19.

-- Research and development costs: An increase of GBP43m reflected lower capitalisation due to the maturity of key aero engine programmes, partly offset by a reduction in expenditure due to our cost mitigation efforts to rephase non-critical spending.

-- Underlying operating loss: The loss of GBP(2.0)bn reflected the gross loss and a higher R&D charge, partly offset by higher profit from joint ventures and associates and a reduction in C&A costs.

-- Financing costs: Costs of GBP(2.0)bn included a one-off underlying finance charge of GBP(1.7)bn, mostly taken in the first half, to reduce the size of our USD hedge book by $11.8bn in response to a lower medium-term outlook for US$ cash receipts following COVID-19.

-- Taxation: The GBP(39)m tax charge (2019: GBP(277)m) reflected the tax on overseas profits together with the fact that we have not recognised any deferred tax on UK losses arising in 2020. In addition, GBP(51)m of the deferred tax previously recognised on UK losses was derecognised.

Group Reported Results

Consistent with past practice, we provide both reported and underlying figures. As the Group does not generally hedge account for forecast transactions in accordance with IFRS 9 Financial Instruments, we believe underlying figures are more representative of the trading performance by excluding the impact of period-end mark-to-market adjustments. In particular, the USD:GBP hedge book has a significant impact on the reported results. In 2020, the USD:GBP spot rate moved from 1.32 to 1.36 while the EUR:GBP rate moved from 1.18 to 1.11. Underlying performance also excludes the effect of acquisition accounting and business disposals, impairment of goodwill and other non-current and current assets, and exceptional items. These are included in arriving at reported results. The adjustments between the underlying income statement and the reported income statement are set out in Note 2 to the Consolidated Financial Statements. This basis of presentation has been applied consistently.

Reconciliation between underlying and reported results

 
      GBPm                                                       (Loss)/profit 
                                                                     before 
                                                                   financing 
                                                Revenue             and tax         Net financing 
      Year to 31 December                     2020      2019      2020      2019      2020    2019 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Underlying                            11,763    15,450   (1,972)       808   (1,986)   (225) 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Impact of settled derivative 
  1    contracts on trading transactions        61     1,137       998       145     (324)      80 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Unrealised fair value 
       changes on derivative 
  2    contracts held for trading                -         -         8       (1)      (85)     (6) 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Unrealised net losses 
       on closing future over-hedged 
  3    position                                  -         -         -         -     1,503       - 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Realised net losses on 
  4    closing over-hedged position              -         -         -         -       202       - 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Unrealised fair value 
       change to derivative contracts 
  5    held for financing                        -         -         -         -      (86)       1 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Exceptional programme 
  6    credits/(charges)                         -         -       620   (1,409)      (36)       - 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Impact of discount rate 
  7    changes                                   -         -         -         -         3    (40) 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Exceptional restructuring 
  8    charge                                    -         -     (489)     (136)         -       - 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
  9   Impairments                                -         -   (1,293)      (84)         -       - 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
 10   Other write-offs                           -         -     (124)         -         -       - 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Effect of acquisition 
 11    accounting                                -         -     (133)     (163)         -     (8) 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
 12   Pension past-service credit                -         -       308         -         -       - 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Other                                      -         -       (4)      (12)       (6)      20 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Gains/(loss) arising on 
       the acquisitions and disposals 
 13    of businesses                             -         -      (14)       139         -       - 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Total underlying adjustments              61     1,137     (123)   (1,521)     1,171      47 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
      Reported                              11,824    16,587   (2,095)     (713)     (815)   (178) 
---  -----------------------------------  --------  --------  --------  --------  --------  ------ 
 

The most significant items included in the reported income statement, but not in underlying, are summarised below.

(1) The impact of measuring revenues and costs and the impact of valuation of assets and liabilities using the period end exchange rate rather than the achieved rate or the exchange rate that is expected to be achieved by the use of the hedge book increased reported revenues by GBP61m (2019: GBP1,137m) and reduced loss before financing and taxation by GBP998m (2019: increased profit by GBP145m). Underlying financing excludes the impact of revaluing monetary assets and liabilities at the period end exchange rate.

(2) The underlying results exclude the fair value changes on derivative contracts held for trading. These fair value changes are subsequently recognised in the underlying results when the contracts are settled.

(3) In response to the deterioration in the medium-term outlook caused by COVID-19 and the related reduction in anticipated net US Dollar cash inflows, the Group has taken action to reduce the size of the US Dollar hedge book by $11.8bn predominately by transacting offsetting foreign exchange forward contracts across 2020-2026, resulting in a GBP1,689m charge to underlying results. The GBP1,503m included in unrealised loss (shown above) is the net cost of closing out the over-hedged position in future years. The cost related to future years has been included within the underlying performance. It is reversed in arriving at reported performance on the basis that, the cumulative fair value changes on these derivative contracts are recognised as they arise.

(4) In 2020, the Group incurred a cash outflow of GBP186m as a result of closing out $1.2bn of the $11.8bn hedge book reduction and a cash outflow of GBP16m to settle an over-hedged jet fuel position. The realised loss of GBP202m is included in underlying financing costs.

(5) Includes the losses on hedge ineffectiveness in the year of GBP11m (2019: losses GBP13m) and net fair value losses of GBP75m (2019: profit GBP14m) on any interest rate swaps not designated into hedging relationships for accounting purposes.

(6) In 2019, abnormal wastage costs were recorded in respect of the Trent 1000, related to remediation shop visit costs, customer disruption costs and contract losses. During the year, the total estimated Trent 1000 abnormal wastage costs have reduced by GBP620m as a result of COVID-19 made up of GBP390m (a gross provision release of GBP560m, offset by the impact of expected actual exchange rates and the share of the costs borne by RRSAs) related to remediation shop visit costs and customer disruption costs and an improvement of GBP230m in the position on contract losses.

(7) Discount rates have increased on exceptional contract loss provisions in relation to the Trent 900 and Trent 1000.

(8) At 31 December 2020, the Group recorded an exceptional restructuring charge of GBP489m following the announcement on 20 May 2020 to reshape and resize the Group due to the financial and operational impact of COVID-19 (see note 21 for more detail).

(9) The Group has assessed the carrying value of its assets given the financial and operational impact of COVID-19 on the Group's future cash flow forecasts. Consequently, a number of impairments and write-offs have been recorded at 31 December 2020. Impairments comprise: intangible assets GBP567m, mainly related to programme intangibles; property, plant and equipment GBP318m (including GBP219m related to site rationalisation); right-of-use assets GBP384m, comprising engines of GBP311m, GBP69m of site rationalisation and GBP4m of other impairments; and a GBP24m impairment on the carrying value of investments held.

(10) Other write-offs include GBP149m of participation fees in contract assets, GBP2m in provisions for site rationalisation, offset by GBP(27)m for RRSA deferred cost contributions in payables. These write-offs are primarily a result of the impact of COVID-19.

(11) The effect of acquisition accounting includes the amortisation of intangible assets arising on previous acquisitions.

(12) The Group recorded a past service gain of GBP308m (of which GBP248m was recorded at 30 June 2020) following changes to the pension benefits under the terms of the Rolls-Royce UK Pension Fund (RRUKPF), a defined benefit scheme. In respect of the GBP248m gain recorded at 30 June 2020, GBP127m was subsequently recognised as actuarial losses through other comprehensive income at 31 December 2020 - see note 2 and 22.

(13) Gains/(losses) arising on the acquisitions and disposals of businesses includes the acquisition of Qinous GmbH (increasing the Group's shareholding from 24% to 100%), the sale of the North America Civil Nuclear business, the sale of the Knowledge Management Systems business and the sale of Trigno Energy Srl.

Tax affecting these adjustments resulted in a tax charge of GBP(220)m (2019: GBP(143)m). The charges in 2020 and 2019 are mainly due to the non-recognition of deferred tax on UK losses arising in those years. The charge in 2020 includes a tax credit of GBP160m in respect of the change in the UK tax rate and a tax charge of GBP(276)m relating to the derecognition of some of the deferred tax asset on UK losses previously recognised. The 2019 charge included GBP(86)m relating to the derecognition of UK deferred tax assets on foreign exchange and commodity financial assets and liabilities.

Group Funds Flow

Free cash flow

Group free cash outflow of GBP(4,185)m deteriorated from a GBP873m inflow in 2019. The key drivers of this outflow were significantly lower engine flying hour receipts as global travel dramatically declined and working capital outflows, including the decision to cease invoice discounting, as our OE and aftermarket volumes declined. Trent 1000 in-services cash costs were GBP(524)m (2019: GBP(578)m).

 
 Summary funds flow statement (1)                                                  Full-year to 31 December 
------------------------------------------------------------------------------  ----------------------------- 
 GBPm                                                                                2020      2019    Change 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Underlying operating (loss)/profit                                               (1,972)       808   (2,780) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Depreciation, amortisation and impairment                                            951     1,068     (117) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Lease payments (capital plus interest)                                             (379)     (319)      (60) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Expenditure on intangible assets                                                   (316)     (591)       275 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Capital expenditure (PPE)                                                          (579)     (747)       168 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Change in inventory                                                                  588      (43)       631 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Movement in receivables/payables/contract balances (excluding Civil LTSA)        (2,207)       492   (2,699) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Civil Aerospace net LTSA balance change                                              479       754     (275) 
    Of which: underlying change                                                     (582)       654   (1,236) 
------------------------------------------------------------------------------  ---------  --------  -------- 
    Of which: impact of contract catch-ups                                          1,061       100       961 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Movement on provisions                                                             (195)     (506)       311 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Cash flows on settlement of excess derivative contracts                            (202)         -     (202) 
 Fees on undrawn facilities                                                          (97)         -      (97) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Net interest received and paid                                                      (75)      (73)       (2) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Trent 1000 insurance receipt                                                           -       173     (173) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Other                                                                              (110)        41     (151) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Trading cash flow                                                                (4,114)     1,057   (5,171) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Contributions to defined benefit pensions in excess of underlying PBT charge         160       (9)       169 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Taxation paid                                                                      (231)     (175)      (56) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Group free cash flow                                                             (4,185)       873   (5,058) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Shareholder payments                                                                (92)     (224)       132 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Rights Issue                                                                       1,972         -     1,972 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Disposals and acquisitions                                                         (119)       409     (528) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Exceptional Group restructuring                                                    (323)     (216)     (107) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Payment of financial penalties                                                     (135)     (102)      (33) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Other underlying adjustments                                                        (33)      (39)         6 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Movements in net funds from cash flows (excluding lease liabilities)             (2,915)       701   (3,616) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Capital element of lease repayments                                                  284       271        13 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Movements in net funds from cash flows                                           (2,631)       972   (3,603) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Movement in short-term investments                                                     6         -         6 
 Net cash flow from changes in borrowings and lease liabilities                     1,630   (1,385)     3,015 
------------------------------------------------------------------------------  ---------  --------  -------- 
 Reported cash flow                                                                 (995)     (413)     (582) 
------------------------------------------------------------------------------  ---------  --------  -------- 
 

(1) The derivation of the summary funds flow statement above from the reported cash flow statement is included on page 60.

Key changes in the funds flow items are described below:

Depreciation, amortisation and impairments: The decrease of GBP(117)m was largely driven by lower overall additions across intangible assets and property, plant and equipment as a result of management actions to reduce cash expenditure and a GBP102m adjustment to residual value guarantees which is non-cash and increased underlying operating profit.

Lease payments (capital plus interest): Lease payments were higher than prior year largely due to changes in FX achieved rates used to convert US dollar lease payments into GBP.

Additions of intangible assets: Expenditure included GBP(232)m capitalised R&D (2019: GBP481m), lower than 2019 due to completion of capitalisation of the Trent 1000 and Pearl 15 engine R&D, reflecting the maturity of these programmes, and no further capitalisation on the Pearl 700 programme.

Purchases of property, plant and equipment: Investment was lower than 2019 primarily as a result of management actions to reduce cash costs to mitigate the impact of COVID-19.

Decrease in inventory: The GBP588m decrease in 2020 (2019: GBP(43)m increase) was led by COVID-19 driven demand reductions as well as significant improvement measures delivered in Civil Aerospace, partly offset by certain actions to safeguard necessary parts supply in 2021.

Movement in receivables/payables/contract balances (excluding Civil LTSA):

The GBP(2,207)m movement in 2020 reflected:

-- GBP0.4bn increase in receivables reflecting the decision to cease invoice discounting (GBP(1.1)bn increase), partly offset by significantly lower trading activity especially in Civil Aerospace.

-- GBP1.8bn reduction in payables reflecting lower amounts owed to suppliers, JVs and Risk and Revenue Share Partners (RRSPs) due to COVID-19 led demand reductions. In addition, reduction in OE deposits reflecting utilisation in Civil Aerospace. This was partly offset by new deposits in Defence and an increase in the Civil Aerospace OE engine concessions payable, due to aircraft delivery delays and associated concession payment deferrals.

Movement in underlying Civil Aerospace net LTSA balance: The LTSA net balance increased by GBP479m. There was a significant reduction in widebody and regional invoiced engine flying hour receipts during 2020 due to lower flying activity, resulting in a GBP(582)m underlying reduction to the net LTSA balance as revenues traded exceeded invoiced flying hour receipts. However, this was more than offset by the impact of GBP1,061m of contract catch-ups, principally driven by a forecast reduction in engine flying hour receipts due to the COVID-19 pandemic, which reduced revenue recognised during the year.

Movement on provisions: The GBP(195)m movement reflected a decrease in the provision balance driven by Trent 1000 provision utilisation during the period partly offset by new provisions charges (details on page 10), largely as a result of COVID-19 which include the impact from the up-front recognition of future losses on a small number of loss-making Civil Aerospace contracts.

Interest: The net payment of GBP(75)m in 2020 was GBP2m higher than prior year, reflecting movements in the overall total amount of debt and interest rates. GBP5.3bn of additional debt was raised during 2020. At 31 December 2020, GBP5.5bn of total debt was undrawn.

Contributions to defined benefit pensions: Cash contributions were GBP160m lower than the charge on the income statement (2019: GBP9m higher). The GBP169m year-on-year movement reflected early payment in 2019 of contributions due in 2020 and deferral of certain 2020 contributions into 2021.

Taxation: The cash tax payments in 2020 were GBP(231)m compared to GBP(175)m in 2019. The increase reflected higher payments in Germany, largely due to timing.

Payments to shareholders : The GBP(92)m interim dividend was announced in August 2019 and paid in January 2020. Reflecting the Group's financial priorities and the challenging macro environment, the Board did not recommend a final dividend in respect of 2019.

Rights issue: In November 2020, a 10:3 rights issue raised net proceeds of GBP1,972m.

Acquisitions and disposals: Net costs of GBP(119)m included the acquisitions of Qinous, Kinolt and Servowatch; offset by disposal proceeds related to Civil Nuclear North America, Knowledge Management Systems, Trigno, Exostar and a L'Orange earn-out adjustment and M&A costs.

Exceptional Group restructuring: Payments of GBP(323)m relating to the 2020 fundamental restructuring programme were made in 2020, of which GBP55m related to restructuring capital expenditure.

Payment of financial penalties: The penultimate payment of GBP(135)m relating to the deferred prosecution agreement (DPA) was made in January 2020.

Other underlying adjustments: Outflow of GBP(33)m includes timing of cash flows on a prior period disposal where the Group retains the responsibility for collecting cash before passing it on to the acquirer.

Net cash flow from changes in borrowings (excluding lease liabilities) : During the year, the Group issued GBP1,972m ($1,000m, EUR750m and GBP545m) of bond notes as well as GBP300m of commercial paper under the Covid Corporate Financing Facility. The Group also repaid a maturing $500m (GBP328m) bond.

Balance sheet

 
                                                                   31 Dec 2019    31 Dec 2019         Change 
 GBPm                                               31 Dec 2020    adj HfS (3)    as reported    adj HfS (3) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Intangible assets                                        5,145          5,431          5,442          (286) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Property, plant and equipment                            4,515          4,798          4,803          (283) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Right-of-use assets                                      1,405          2,001          2,009          (596) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Joint ventures and associates                              394            402            402            (8) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Contract assets and liabilities                        (8,922)        (8,736)        (8,745)          (186) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Working capital (1)                                        570        (1,243)        (1,136)          1,813 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Provisions                                             (1,945)        (2,780)        (2,804)            835 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Net debt (2)                                           (3,627)        (1,020)          (993)        (2,607) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Net financial assets and liabilities (2)               (3,111)        (3,275)        (3,277)            164 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Net post-retirement scheme surpluses/(deficits)          (673)          (199)          (208)          (474) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Tax                                                      1,295          1,130          1,136            165 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Held for sale                                               60            123              3           (63) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Other net assets                                            19             14             14              5 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Net liabilities                                        (4,875)        (3,354)        (3,354)        (1,521) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Other items 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 US$ hedge book (US$bn)                                      25             37             37           (12) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Civil LTSA asset                                           726          1,086          1,086          (360) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Civil LTSA liability                                   (6,841)        (6,784)        (6,784)           (57) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 Civil net LTSA liability                               (6,115)        (5,698)        (5,698)          (417) 
-------------------------------------------------  ------------  -------------  -------------  ------------- 
 

(1) Net working capital includes inventory, trade receivables and payables and similar assets and liabilities.

(2) Net debt includes GBP251m (2019: GBP243m) of the fair value of financial instruments held to hedge the fair value of borrowings.

(3) 2019 adjusted for assets held for sale (HfS) (Bergen Engines AS and Civil Nuclear Instrumentation and Control business) to aid comparability.

Key drivers of balance sheet movements (adjusted for assets held for sale) were:

Intangible assets: Net decrease of GBP(286)m included impairments of GBP(579)m, mostly related to the impact of COVID-19. Additions of GBP364m primarily related to programme development in Civil Aerospace and investment in software applications. Acquisitions of Kinolt Group, Qinous GmbH and Servowatch Systems added GBP137m. There was a GBP137m FX impact and amortisation was GBP(323)m.

Property, plant and equipment: Net decrease of GBP(283)m included impairments of GBP(332)m and depreciation of GBP(489)m partly offset by GBP38m FX impact and additions of GBP553m. The additions were lower than the prior year as spending was limited to critical infrastructure projects.

Right-of-use assets: Net reduction of GBP(596)m was driven by impairments of GBP(386)m, primarily of lease engines in Civil Aerospace and land and buildings as part of our footprint consolidation. The depreciation charge was GBP(346)m. Additions were GBP135m, GBP92m lower than the prior year.

Contract assets and liabilities: The net liability balance increased by GBP(186)m, of which GBP(417)m related to the Civil Aerospace LTSA balance and included foreign exchange of GBP62m and negative LTSA catch-ups of GBP(1,061)m. The remainder largely covered reduction in deposits in Civil Aerospace partly offset by new deposits in Defence .

Working capital : The GBP570m net current asset position reflected a GBP1.8bn change on the prior year.

-- Receivables increased by GBP0.4bn as a GBP1.1bn reduction in invoice discounting was partly offset by lower trading activity in Civil Aerospace.

-- Payables reduced by GBP1.8bn primarily due to COVID-19 led demand reductions and comparatively stronger Q4 2019 trading activity.

-- Inventory reduced by GBP0.5bn largely due to COVID-19 led demand reductions and parts rescheduling in Civil Aerospace partly offset by growth in Defence to protect 2021 deliveries and support the supply chain.

-- The movement also included a financial penalty payment of GBP135m related to agreements reached with investigating authorities in January 2017.

Provisions: The GBP835m decrease reflected net restructuring charges of GBP(373)m, of which GBP206m was utilised in 2020 and Trent 1000 provisions utilisation and release of GBP541m and GBP560m respectively.

Net debt: Increased to GBP(3.6)bn (including lease liabilities) primarily driven by free cash outflow of GBP(4.2)bn partly offset by GBP2.0bn of rights issue proceeds.

Net financial assets and liabilities: The GBP164m change was primarily driven by the utilisation of derivatives of GBP246m partially offset by the fair value movement in currency exchange rates and other derivatives.

Net post-retirement scheme surpluses/deficits: The GBP(474)m movement was driven by reduction in the UK surplus reflecting changes to members' benefits as part of restructuring the UK pension, closure of the scheme and deferral of company contributions. There have also been changes in financial and demographic assumptions across both the UK and overseas schemes. See note 22.

US$ hedge book: Due to the impact of COVID-19 on Civil Aerospace our forecast future US$ receipts reduced significantly. As a result, we took the necessary decision to reduce the size of our hedge book by $11.8bn to $25bn. Our US$ hedge book runs to 2028. The total cost of closing out the over-hedged position is GBP(1.7)bn, of which GBP(186)m was incurred in 2020. The remainder of the cash outflow will be incurred over the next six years.

Civil Aerospace

 
 
                                                                             Organic 
   GBPm                                     2020      2019       Change       Change 
-------------------------------------  ---------  --------  -----------  ----------- 
  Underlying revenue                       5,089     8,107        (37)%        (37)% 
-------------------------------------  ---------  --------  -----------  ----------- 
  Underlying OE revenue                    2,298     3,246        (29)%        (29)% 
-------------------------------------  ---------  --------  -----------  ----------- 
  Underlying services revenue              2,791     4,861        (43)%        (43)% 
-------------------------------------  ---------  --------  -----------  ----------- 
  Underlying gross (loss)/profit         (2,005)       622       (422)%       (422)% 
-------------------------------------  ---------  --------  -----------  ----------- 
  Gross margin %                         (39.4)%      7.7%    (47.1)%pt    (47.1)%pt 
-------------------------------------  ---------  --------  -----------  ----------- 
  Commercial and administration 
   costs                                   (302)     (306)         (1)%         (2)% 
-------------------------------------  ---------  --------  -----------  ----------- 
  Research and development 
   costs                                   (436)     (374)          17%          16% 
-------------------------------------  ---------  --------  -----------  ----------- 
  Joint ventures and associates              169       102          66%          66% 
-------------------------------------  ---------  --------  -----------  ----------- 
  Underlying operating (loss)/profit     (2,574)        44      (2,618)      (2,612) 
-------------------------------------  ---------  --------  -----------  ----------- 
  Underlying operating margin 
   %                                     (50.6)%      0.5%    (51.1)%pt    (51.0)%pt 
-------------------------------------  ---------  --------  -----------  ----------- 
 
 
  Key operational metrics:                  2020      2019       Change 
-------------------------------------  ---------  --------  ----------- 
  Large engine deliveries                    264       510        (48)% 
-------------------------------------  ---------  --------  ----------- 
  Business jet engine deliveries             184       219        (16)% 
-------------------------------------  ---------  --------  ----------- 
  Total engine deliveries                    448       729        (39)% 
-------------------------------------  ---------  --------  ----------- 
  Large engine LTSA flying 
   hours                                    6.6m     15.3m        (57)% 
-------------------------------------  ---------  --------  ----------- 
  Large engine LTSA major refurbs            272       306        (11)% 
-------------------------------------  ---------  --------  ----------- 
  Large engine LTSA check & 
   repairs                                   559       660        (15)% 
-------------------------------------  ---------  --------  ----------- 
  Total large engine LTSA shop 
   visits                                    831       966        (14)% 
-------------------------------------  ---------  --------  ----------- 
 
 

-- Production cuts from airframer customers resulted in substantially fewer large engine deliveries in 2020. Business jet deliveries were resilient in the first half of the year but reduced during the second half as the airframers adjusted to the impact on demand from COVID-19.

-- Large engine LTSA flying hours were 43% of 2019 level. Flying hour performance was significantly more robust in newer engine programmes than more mature types.

-- Business aviation LTSA engine flying hours were resilient, however there was a significant reduction in both regional and V2500 flying hours.

-- Large engine LTSA major service visits were 11% lower than prior year, particularly in the second half of the year when we saw a substantial reduction in activity.

-- Roles reduced by approximately 5,500 (20%), with most of the departures taking place in the second half of 2020 as a result of the fundamental restructuring programme.

   --   Agreement reached with Airbus to extend Trent XWB-84 exclusive position on A350-900 to 2030. 

-- Underlying revenue reduced by 37% to GBP5.1bn (2019: GBP8.1bn). This decline was driven by the reduction in engine delivery volumes, particularly for large engines, lower aftermarket revenues reflecting fall in shop visit volumes, and included a GBP(1.1)bn impact from negative LTSA contract catch-ups.

   --   Underlying gross loss of GBP(2.0)bn, GBP(2.6)bn lower than 2019. This reflected: 

GBP(1.3)bn of largely COVID-related one-time charges:

o LTSA catch-ups: GBP(974)m impact to profit from negative LTSA catch-ups, mainly driven by a forecast reduction in engine flying hour receipts as a result of COVID-19 and principally impacting mature engine programmes;

o up-front recognition of future losses: primarily due to COVID-19 certain contracts have either become loss-making or have seen an increase in expected losses, driving a GBP(213)m charge; and

o GBP(86)m charge: reflecting specific customer provisions due to the impact of COVID-19 on the civil aviation industry and our customers' financial positions.

A material reduction in trading performance, primarily reflecting the impact of COVID-19:

o a substantial reduction in large engine aftermarket, driven by lower shop visit volumes, adverse margin mix on LTSA shop visits, and reduced time & materials (T&M) profits;

o lower OE profits from business aviation and reduced volumes of large spare engine sales, which offset the benefit from lower installed widebody engine volumes; and

o a material impact in 2020 from under-recovery of fixed costs.

-- Commercial and administration costs were relatively unchanged year-over-year, with cost reduction actions delivered in the year reflected more heavily in cost of sales and R&D spend.

-- Research and development costs of GBP(436)m reflected a significant reduction in capitalisation during the period due to the maturity of key aero engine programmes partly offset by a reduction in expenditure due to the reducing investment burden on our new engine programmes and the rephasing of some R&D spending in light of COVID-19. Spending continued to shift towards next-generation gas turbine technology and low carbon solutions such as electric and hybrid-electric aircraft.

-- Underlying operating loss of GBP(2.6)bn reflected the fall in gross profit and slightly higher R&D charge, partly offset by an increase in profits from joint ventures and associates.

-- Trading cash flow was a GBP(4.6)bn outflow during the year (2019: GBP419m inflow). This deterioration was driven by significantly lower engine flying hour receipts as well as a material working capital outflow, including the one-time impact from the cessation of invoice factoring in 2020.

-- Trent 1000 and Trent XWB update: During 2020 in-service cash costs on Trent 1000 were in line with guidance at GBP(524)m and in June we reached our goal of zero aircraft on ground (AoG) due to the durability issues. There was a GBP620m exceptional credit reflecting a GBP390m net improvement in the outlook for future in-service cash costs, alongside a GBP230m improvement in expected future losses on our small number of loss-making contracts primarily due to the impact of COVID-19 on flying activity. Early identification and action regarding durability issues on the Trent XWB announced in August 2020 did not result in any grounded aircraft and it was not necessary to provide for any material additional costs in the year.

Outlook

The near-term environment for Civil Aerospace remains highly uncertain. We continue to plan for a range of recovery scenarios, including the risk of further setbacks to the recovery in air travel caused by new strains of the COVID-19 virus. However, our central assumption is for a gradual market recovery in 2021, with a slow start to the year but accelerating in the second half as global vaccine roll-outs progress and travel restrictions ease.

We anticipate large engine flying hours of approximately 55% of 2019 levels in 2021 (2020: 43%), with a strong second-half weighting as the recovery accelerates, and approximately 80% of 2019 levels in 2022. Engine deliveries will remain low with 200 to 250 large engines and 100 to 150 business jet engine deliveries planned for 2021.

Our severe but plausible downside scenario assumes approximately 45% EFH in 2021 and 70% in 2022, both compared to the 2019 level. More details on page 25.

Power Systems

 
 
                                                                             Organic 
   GBPm                               2020      2019 (1)      Change (2)      change 
--------------------------------  --------  ------------  --------------  ---------- 
  Underlying revenue                 2,745         3,184           (14)%       (17)% 
--------------------------------  --------  ------------  --------------  ---------- 
  Underlying OE revenue              1,794         2,183           (18)%       (21)% 
--------------------------------  --------  ------------  --------------  ---------- 
  Underlying services revenue          951         1,001            (5)%        (6)% 
--------------------------------  --------  ------------  --------------  ---------- 
  Underlying gross profit              681           878           (22)%       (25)% 
--------------------------------  --------  ------------  --------------  ---------- 
  Gross margin %                     24.8%         27.6%        (2.8)%pt    (2.7)%pt 
--------------------------------  --------  ------------  --------------  ---------- 
  Commercial and administration 
   costs                             (337)         (343)            (2)%        (6)% 
--------------------------------  --------  ------------  --------------  ---------- 
  Research and development 
   costs                             (167)         (166)              1%        (2)% 
--------------------------------  --------  ------------  --------------  ---------- 
  Joint ventures and associates          1           (2)               -           - 
--------------------------------  --------  ------------  --------------  ---------- 
  Underlying operating profit          178           367           (51)%       (52)% 
--------------------------------  --------  ------------  --------------  ---------- 
  Underlying operating margin 
   %                                  6.5%         11.5%        (5.0)%pt    (4.9)%pt 
--------------------------------  --------  ------------  --------------  ---------- 
 

(1) The underlying results for 2019 have been restated to reclassify Bergen Engines AS and the Civil Nuclear Instrumentation and Control business as non-core.

(2) The impact of M&A was GBP55m on revenue and GBPnil on underlying operating profit.

Diversified end market exposure resulted in a relatively resilient performance for Power Systems. Lower economic activity and reduced utilisation of the installed base of engines due to COVID-19 caused a substantial drop in commercial and industrial markets. However, governmental demand remained intact and we grew strongly in China, where economic conditions were better.

-- Order intake of GBP2.7bn was 17% lower year-on-year, a book-to-bill of 1.0x during 2020. Commercial marine was impacted by lower tourism and yacht production facility closures, while economic uncertainty led to a deferral of capital spending across power generation and industrial customers. However, there were signs of recovery in order intake in the second half and the underlying demand in key areas including mission-critical back-up generation remained strong.

-- Underlying revenue reduced by 17% to GBP2,745m. This reflected a fall in industrial and power generation revenues, with marine relatively stable due to strong governmental demand. OE revenue was down 21% while Services were more resilient, down just 6%.

-- Underlying gross profit of GBP681m was 25% lower year-over-year. This reflects the lower sales, reduced factory utilisation, and an adverse mix effect due to the sharper fall in high-margin aftermarket spare parts.

-- Commercial and administration costs fell 6% to GBP(337)m primarily reflecting management actions to mitigate costs.

-- Research and development costs of GBP(167)m were focused on the investment in lower carbon areas across our portfolio. This includes our expanding gas engine family, electric and hybrid-electric solutions (supported by the acquisition of battery storage company Qinous), and hydrogen solutions, such as our new co-operation with Daimler on hydrogen fuel cells.

-- Underlying operating profit of GBP178m with a margin of 6.5%, 4.9%pts lower than prior year, reflecting the drop in gross profit, partly offset by the improvements in C&A and R&D.

Outlook

Uncertainty remains over the near-term economic outlook. However, based on Power Systems' short-cycle exposures and the growth potential in key markets such as China, we expect an improvement in order intake during the first half of 2021, converting into a recovery in sales from the second half of the year with revenues returning to approximately 2019 levels in 2022. Longer term there are significant growth opportunities for Power Systems across both existing activities (notably in mission-critical back-up power and expansion in China) and in new low carbon solutions such as microgrids, hydrogen and hybrid-electric power solutions.

Defence

 
 
                                     2020                           Organic 
 GBPm                                          2019      Change      change 
--------------------------------  -------  --------  ----------  ---------- 
  Underlying revenue                3,366     3,250          4%          4% 
--------------------------------  -------  --------  ----------  ---------- 
  Underlying OE revenue             1,436     1,461        (2)%        (1)% 
--------------------------------  -------  --------  ----------  ---------- 
  Underlying services revenue       1,930     1,789          8%          8% 
--------------------------------  -------  --------  ----------  ---------- 
  Underlying gross profit             686       669          3%          3% 
--------------------------------  -------  --------  ----------  ---------- 
  Gross margin %                    20.4%     20.6%    (0.2)%pt    (0.2)%pt 
--------------------------------  -------  --------  ----------  ---------- 
  Commercial and administration 
   costs                            (151)     (158)        (4)%        (4)% 
--------------------------------  -------  --------  ----------  ---------- 
  Research and development 
   costs                             (96)     (105)        (9)%        (9)% 
--------------------------------  -------  --------  ----------  ---------- 
  Joint ventures and associates         9         9           -           - 
--------------------------------  -------  --------  ----------  ---------- 
  Underlying operating profit         448       415          8%          8% 
--------------------------------  -------  --------  ----------  ---------- 
  Underlying operating margin 
   %                                13.3%     12.8%      0.5%pt      0.5%pt 
--------------------------------  -------  --------  ----------  ---------- 
 

Defence had a strong year, with resilient financial performance despite the COVID-19 pandemic. Government customers remained supportive throughout the year, and effective business continuity plans were enacted to minimise the disruptions experienced to the supply chain and facilities.

-- Order intake was GBP2.4bn, representing a book-to-bill ratio of 0.7x. This follows on from a record order intake of GBP5.3bn in 2019 (1.6x book-to-bill) and an average book to bill ratio of 1.2x between 2015 and 2019. Order cover for 2021 is in excess of 90% and the healthy order book currently represents approximately 2.3 years of Defence sales.

-- Underlying revenue increased by 4% to GBP3.4bn. This was largely driven by higher LiftSystem aftermarket revenues as the in-fleet service expands together with international sales of the EJ200 engine powering the Eurofighter Typhoon. Naval sales and UK parts sales also improved compared to the prior year.

-- Underlying gross profit of GBP686m was 3% higher year-over-year. This reflects the higher sales volumes, with gross margin relatively stable at 20.4%.

-- Commercial and administration costs were 4% lower year-on-year at GBP(151)m despite the underlying business growth.

-- Research and development costs fell by GBP9m despite an increase in expenditure on key strategic programmes in the period to support new growth opportunities.

-- Underlying operating profit increased by 8% to GBP448m, with margins 0.5%pts higher. This reflected the stronger gross profit and modestly lower C&A and R&D charges outlined above.

Outlook

We anticipate another good year for Defence in 2021. Revenue is expected to be stable, with a strong level of order cover coming into the year. Operating margins are also expected to be broadly flat at approximately 13%. We continue to pursue large opportunities in the US which would drive a step-change in growth prospects for Defence, notably the B-52 engine replacement programme for the US Air Force and the Future Vertical Long Range Assault Aircraft competition for the US Army. We also continue to progress Project Tempest in UK air combat. Finally, we are investing in adjacent technologies such as small engines and directed energy power systems in order to drive further medium-term growth.

ITP Aero

 
                                                              Organic 
 GBPm                              2020    2019     Change     change 
-------------------------------  ------  ------  ---------  --------- 
 Underlying revenue                 705     936      (25)%      (26)% 
 Underlying OE revenue              537     782      (31)%      (32)% 
-------------------------------  ------  ------  ---------  --------- 
 Underlying services revenue        168     154         9%         8% 
-------------------------------  ------  ------  ---------  --------- 
 Underlying gross profit            133     206      (35)%      (36)% 
-------------------------------  ------  ------  ---------  --------- 
 Gross margin %                   18.9%   22.0%   (3.1)%pt   (3.2)%pt 
-------------------------------  ------  ------  ---------  --------- 
 Commercial and administration 
  costs                            (38)    (62)      (39)%      (40)% 
-------------------------------  ------  ------  ---------  --------- 
 Research and development 
  costs                            (27)    (33)      (18)%      (18)% 
-------------------------------  ------  ------  ---------  --------- 
 Underlying operating profit         68     111      (39)%      (39)% 
-------------------------------  ------  ------  ---------  --------- 
 Underlying operating margin 
  %                                9.6%   11.9%   (2.3)%pt   (2.1)%pt 
-------------------------------  ------  ------  ---------  --------- 
 

Due to ITP Aero's significant exposure to civil aviation, which accounted for around 70% of its revenues in 2020, performance was heavily negatively impacted by the COVID-19 pandemic.

-- Underlying revenue was GBP705m, down 26% versus 2019, primarily reflecting lower engine (OE) volumes on civil programmes, particularly in widebody. Defence OE revenue was more resilient, supported by EJ200 orders. Service revenue increased 8%.

-- Commercial and administration costs of GBP(38)m were 40% lower year-on-year, including some benefit from management actions to reduce discretionary costs, with headcount 13% lower at the year-end compared to 2019.

-- Research and development costs were GBP6m lower in the period mainly due to phasing of projects.

-- Underlying operating profit of GBP68m, 39% lower year-on-year, reflecting the lower OE revenues and under-utilisation of the fixed cost base.

Outlook

We expect some stabilisation in 2021 followed by a recovery in our performance from 2022 onwards reflecting the wider recovery in commercial aerospace as well as the outcomes from our actions to reduce costs to improve profitability. We remain focused on cost savings, including the workforce capacity adjustment of approximately 15% globally from 2019 levels, which is already well underway and will be completed by the end of the first half of 2021. Our planned sale of ITP Aero is progressing well with ongoing conversations with a number of potential buyers.

Condensed consolidated financial statements

Condensed consolidated income statement

For the year ended 31 December 2020

 
                                                                            2020       2019 
                                                                           Notes       GBPm       GBPm 
------------------------------------------------------------------   ---  ------  ---------  --------- 
Revenue                                                                      2       11,824     16,587 
------------------------------------------------------------------------  ------  ---------  --------- 
Cost of sales (1,2)                                                                (12,034)   (15,645) 
------------------------------------------------------------------------  ------  ---------  --------- 
Gross (loss)/profit                                                          2        (210)        942 
------------------------------------------------------------------------  ------  ---------  --------- 
Commercial and administrative costs (1)                                      2        (808)    (1,128) 
------------------------------------------------------------------------  ------  ---------  --------- 
Research and development costs (1)                                           3      (1,254)      (770) 
------------------------------------------------------------------------  ------  ---------  --------- 
Share of results of joint ventures and associates                           12          191        104 
------------------------------------------------------------------------  ------  ---------  --------- 
Operating loss                                                                      (2,081)      (852) 
------------------------------------------------------------------------  ------  ---------  --------- 
(Loss)/gain arising on acquisition and disposal of businesses (3)           24         (14)        139 
------------------------------------------------------------------------  ------  ---------  --------- 
Loss before financing and taxation                                                  (2,095)      (713) 
------------------------------------------------------------------------  ------  ---------  --------- 
 
Financing income                                                             4           67        252 
------------------------------------------------------------------------  ------  ---------  --------- 
Financing costs (4)                                                          4        (882)      (430) 
------------------------------------------------------------------------  ------  ---------  --------- 
Net financing costs                                                                   (815)      (178) 
------------------------------------------------------------------------  ------  ---------  --------- 
 
Loss before taxation (5)                                                            (2,910)      (891) 
------------------------------------------------------------------------  ------  ---------  --------- 
Taxation                                                                     5        (259)      (420) 
------------------------------------------------------------------------  ------  ---------  --------- 
Loss for the year                                                                   (3,169)    (1,311) 
------------------------------------------------------------------------  ------  ---------  --------- 
 
Attributable to: 
------------------------------------------------------------------   ---  ------  ---------  --------- 
Ordinary shareholders                                                               (3,170)    (1,315) 
------------------------------------------------------------------------  ------  ---------  --------- 
Non-controlling interests                                                                 1          4 
------------------------------------------------------------------------  ------  ---------  --------- 
Loss for the year                                                                   (3,169)    (1,311) 
------------------------------------------------------------------------  ------  ---------  --------- 
Other comprehensive expense                                                           (265)    (1,013) 
------------------------------------------------------------------------  ------  ---------  --------- 
Total comprehensive expense for the year                                            (3,434)    (2,324) 
------------------------------------------------------------------------  ------  ---------  --------- 
 
 
Loss per ordinary share attributable to ordinary shareholders:               6 
------------------------------------------------------------------------  ------  ---------  --------- 
Basic (6)                                                                          (52.95)p   (23.70)p 
------------------------------------------------------------------------  ------  ---------  --------- 
Diluted (6)                                                                        (52.95)p   (23.70)p 
------------------------------------------------------------------------  ------  ---------  --------- 
Underlying earnings per ordinary share are shown in note 6. 
------------------------------------------------------------------   ---  ------  ---------  --------- 
 
 
Payments to ordinary shareholders in respect of the year                     7 
------------------------------------------------------------------------  ------  ---------  --------- 
Pence per share (6)                                                                       -       1.6p 
------------------------------------------------------------------------  ------  ---------  --------- 
Total                                                                                     -         87 
------------------------------------------------------------------------  ------  ---------  --------- 
Underlying (loss)/profit before taxation (5)                                 2      (3,958)        583 
------------------------------------------------------------------------  ------  ---------  --------- 
 
 

(1) Included within cost of sales, commercial and administrative costs and research and development costs are: exceptional items relating to impairments and write-offs arising as a result of the financial and operational impact of COVID-19 plus other market driven events; impairments and provisions related to the fundamental restructuring activity announced on 20 May 2020 to reshape and resize the Group have also been recorded; and reflecting the impact of COVID-19 and the work we have performed to reduce fleet AOG levels and improve the availability of spare engines, the Trent 1000 provision has been reduced. In the prior year, exceptional charges related to the Trent 1000 and Trent 900 Civil Aerospace programmes and restructuring costs were included within cost of sales and commercial and administrative costs. Further details can be found in note 2.

(2) Cost of sales includes a charge for expected credit losses of GBP119m (2019: GBP54m).

(3) North America Civil Nuclear business was disposed of on 31 January 2020, Knowledge Management System business was disposed of on 3 February 2020, Trigno Energy Srl was disposed of on 7 May 2020 and Exostar LLC was disposed of on 6 July 2020. Qinous GmbH was acquired on 15 January 2020, Kinolt Group S.A was acquired on 1 July 2020 and Servowatch Systems Limited was acquired on 7 December 2020. Sales proceeds on a prior period disposal has been adjusted during the year. Commercial Marine was disposed of on 1 April 2019 and Rolls-Royce Power Development Limited was disposed of on 15 April 2019. Further details can be found in note 24.

(4) Included within financing costs are fair value changes on derivative contracts. Further details can be found in notes 2 and 4.

(5) (Loss)/profit before taxation disclosed on a statutory and underlying basis. Further details can be found in note 2.

(6) The comparative figures for earnings per share and payments to shareholders per share have been adjusted to reflect the bonus element of the rights issue - see note 6. As a result of the COVID-19 pandemic, the Directors cancelled the proposed final payment to shareholders of 2.4p (adjusted) per share.

Condensed consolidated statement of comprehensive income

For the year ended 31 December 2020

 
                                                                                         2020      2019 
                                                                              Notes      GBPm      GBPm 
-------------------------------------------------------------------------    ------  --------  -------- 
Loss for the year                                                                     (3,169)   (1,311) 
---------------------------------------------------------------------------  ------  --------  -------- 
Other comprehensive income (OCI) 
-------------------------------------------------------------------------    ------  --------  -------- 
  Actuarial movements in post-retirement schemes (1)                           22       (590)     (934) 
---------------------------------------------------------------------------  ------  --------  -------- 
  Share of OCI of joint ventures and associates                                12         (1)       (1) 
---------------------------------------------------------------------------  ------  --------  -------- 
  Related tax movements                                                                   195       324 
---------------------------------------------------------------------------  ------  --------  -------- 
  Items that will not be reclassified to profit or loss                                 (396)     (611) 
---------------------------------------------------------------------------  ------  --------  -------- 
 
  Foreign exchange translation differences on foreign operations                          121     (313) 
---------------------------------------------------------------------------  ------  --------  -------- 
  Reclassified to income statement on disposal of businesses                   24           6      (98) 
---------------------------------------------------------------------------  ------  --------  -------- 
   Movement on fair values (debited)/credited to cash flow hedge reserve                 (16)        12 
---------------------------------------------------------------------------  ------  --------  -------- 
   Reclassified to income statement from cash flow hedge reserve                           26        10 
---------------------------------------------------------------------------  ------  --------  -------- 
  Share of OCI of joint ventures and associates                                12         (4)       (7) 
---------------------------------------------------------------------------  ------  --------  -------- 
  Related tax movements                                                                   (2)       (6) 
---------------------------------------------------------------------------  ------  --------  -------- 
  Items that may be reclassified to profit or loss                                        131     (402) 
---------------------------------------------------------------------------  ------  --------  -------- 
 
Total other comprehensive expense                                                       (265)   (1,013) 
---------------------------------------------------------------------------  ------  --------  -------- 
 
Total comprehensive expense for the year                                              (3,434)   (2,324) 
---------------------------------------------------------------------------  ------  --------  -------- 
 
Attributable to: 
-------------------------------------------------------------------------    ------  --------  -------- 
  Ordinary shareholders                                                               (3,435)   (2,328) 
---------------------------------------------------------------------------  ------  --------  -------- 
  Non-controlling interests                                                                 1         4 
---------------------------------------------------------------------------  ------  --------  -------- 
Total comprehensive expense for the year                                              (3,434)   (2,324) 
---------------------------------------------------------------------------  ------  --------  -------- 
 

(1) Included in actuarial movements in post-retirement schemes is an experience loss of GBP188m which includes the impact of updated membership data and members leaving on voluntary severance. Included in the prior period is an asset re-measurement net loss estimated at GBP600m following the agreement to transfer the future pension obligation of circa 33,000 pensioners in the UK scheme to Legal & General Assurance Society Limited. See note 22 for further information.

Condensed consolidated balance sheet

At 31 December 2020

 
                                                            31 December   31 December 
                                                                   2020          2019 
                                                    Notes          GBPm          GBPm 
-------------------------------------------------  ------  ------------  ------------ 
ASSETS 
-------------------------------------------------  ------  ------------  ------------ 
Intangible assets                                     9           5,145         5,442 
-------------------------------------------------  ------  ------------  ------------ 
Property, plant and equipment                        10           4,515         4,803 
-------------------------------------------------  ------  ------------  ------------ 
Right-of-use assets                                  11           1,405         2,009 
-------------------------------------------------  ------  ------------  ------------ 
Investments - joint ventures and associates          12             394           402 
-------------------------------------------------  ------  ------------  ------------ 
Investments - other                                  12              19            14 
-------------------------------------------------  ------  ------------  ------------ 
Other financial assets                               18             687           467 
-------------------------------------------------  ------  ------------  ------------ 
Deferred tax assets                                   5           1,826         1,887 
-------------------------------------------------  ------  ------------  ------------ 
Post-retirement scheme surpluses                     22             907         1,170 
-------------------------------------------------  ------  ------------  ------------ 
Non-current assets                                               14,898        16,194 
-------------------------------------------------  ------  ------------  ------------ 
Inventories                                          13           3,690         4,320 
-------------------------------------------------  ------  ------------  ------------ 
Trade receivables and other assets                   14           5,455         5,065 
-------------------------------------------------  ------  ------------  ------------ 
Contract assets                                      17           1,510         2,095 
-------------------------------------------------  ------  ------------  ------------ 
Taxation recoverable                                                117            39 
-------------------------------------------------  ------  ------------  ------------ 
Other financial assets                               18             107            86 
-------------------------------------------------  ------  ------------  ------------ 
Short-term investments                                                -             6 
-------------------------------------------------  ------  ------------  ------------ 
Cash and cash equivalents                            15           3,452         4,443 
-------------------------------------------------  ------  ------------  ------------ 
Current assets                                                   14,331        16,054 
-------------------------------------------------  ------  ------------  ------------ 
Assets held for sale                                 24             288            18 
-------------------------------------------------  ------  ------------  ------------ 
TOTAL ASSETS                                                     29,517        32,266 
-------------------------------------------------  ------  ------------  ------------ 
 
LIABILITIES 
-------------------------------------------------  ------  ------------  ------------ 
Borrowings and lease liabilities                     19         (1,272)         (775) 
-------------------------------------------------  ------  ------------  ------------ 
Other financial liabilities                          18           (608)         (493) 
-------------------------------------------------  ------  ------------  ------------ 
Trade payables and other liabilities                 16         (6,653)       (8,450) 
-------------------------------------------------  ------  ------------  ------------ 
Contract liabilities                                 17         (4,187)       (4,228) 
-------------------------------------------------  ------  ------------  ------------ 
Current tax liabilities                                           (154)         (172) 
-------------------------------------------------  ------  ------------  ------------ 
Provisions for liabilities and charges               21           (826)         (858) 
-------------------------------------------------  ------  ------------  ------------ 
Current liabilities                                            (13,700)      (14,976) 
-------------------------------------------------  ------  ------------  ------------ 
Borrowings and lease liabilities                     19         (6,058)       (4,910) 
-------------------------------------------------  ------  ------------  ------------ 
Other financial liabilities                          18         (3,046)       (3,094) 
-------------------------------------------------  ------  ------------  ------------ 
Trade payables and other liabilities                 16         (1,922)       (2,071) 
-------------------------------------------------  ------  ------------  ------------ 
Contract liabilities                                 17         (6,245)       (6,612) 
-------------------------------------------------  ------  ------------  ------------ 
Deferred tax liabilities                              5           (494)         (618) 
-------------------------------------------------  ------  ------------  ------------ 
Provisions for liabilities and charges               21         (1,119)       (1,946) 
-------------------------------------------------  ------  ------------  ------------ 
Post-retirement scheme deficits                      22         (1,580)       (1,378) 
-------------------------------------------------  ------  ------------  ------------ 
Non -current liabilities                                       (20,464)      (20,629) 
-------------------------------------------------  ------  ------------  ------------ 
Liabilities associated with assets held for sale     24           (228)          (15) 
-------------------------------------------------  ------  ------------  ------------ 
TOTAL LIABILITIES                                              (34,392)      (35,620) 
-------------------------------------------------  ------  ------------  ------------ 
 
NET LIABILITIES                                                 (4,875)       (3,354) 
-------------------------------------------------  ------  ------------  ------------ 
 
EQUITY 
-------------------------------------------------  ------  ------------  ------------ 
Called-up share capital                                           1,674           386 
-------------------------------------------------  ------  ------------  ------------ 
Share premium                                                     1,012           319 
-------------------------------------------------  ------  ------------  ------------ 
Capital redemption reserve                                          162           159 
-------------------------------------------------  ------  ------------  ------------ 
Cash flow hedging reserve                                          (94)          (96) 
-------------------------------------------------  ------  ------------  ------------ 
Merger reserve                                                      650           650 
-------------------------------------------------  ------  ------------  ------------ 
Translation reserve                                                 524           397 
-------------------------------------------------  ------  ------------  ------------ 
Accumulated losses                                              (8,825)       (5,191) 
-------------------------------------------------  ------  ------------  ------------ 
Equity attributable to ordinary shareholders                    (4,897)       (3,376) 
-------------------------------------------------  ------  ------------  ------------ 
Non-controlling interests                                            22            22 
-------------------------------------------------  ------  ------------  ------------ 
TOTAL EQUITY                                                    (4,875)       (3,354) 
-------------------------------------------------  ------  ------------  ------------ 
 

Condensed consolidated cash flow statement

For the year ended 31 December 2020

 
                                                                                                        2020      2019 
                                                                                             Notes      GBPm      GBPm 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Reconciliation of cash flows from operating activities 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Operating loss (1)                                                                                   (2,081)     (852) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Loss/(profit) on disposal of property, plant and equipment                                                37      (13) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Share of results of joint ventures and associates                                             12       (191)     (104) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Dividends received from joint ventures and associates                                         12          60        92 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Amortisation and impairment of intangible assets                                               9         902       372 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Depreciation and impairment of property, plant and equipment                                  10         821       532 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Depreciation and impairment of right-of-use assets                                            11         732       411 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Adjustment of amounts payable under residual value guarantees within lease liabilities (2)             (102)         - 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Impairment of and other movements on investments                                                          24         1 
------------------------------------------------------------------------------------------  ------  --------  -------- 
(Decrease)/increase in provisions                                                                      (801)     1,108 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Decrease/(Increase) in inventories                                                                       588      (43) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Movement in trade receivables/payables and other assets/liabilities                                  (2,655)        73 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Movement in contract assets/liabilities                                                                  259     1,737 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Financial penalties paid (3)                                                                           (135)     (102) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Cash flows on other financial assets and liabilities held for operating purposes                       (126)     (757) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Interest received                                                                                         13        31 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Net defined benefit post-retirement (credit)/cost recognised in loss before financing         22        (68)       222 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Cash funding of defined benefit post-retirement schemes                                       22        (80)     (266) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Share-based payments                                                                                      25        30 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Net cash (outflow)/inflow from operating activities before taxation                                  (2,778)     2,472 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Taxation paid                                                                                          (231)     (175) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Net cash (outflow)/inflow from operating activities                                                  (3,009)     2,297 
------------------------------------------------------------------------------------------  ------  --------  -------- 
 
Cash flows from investing activities 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Net movement in unlisted investments                                                                     (5)         3 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Additions of intangible assets                                                                 9       (365)     (640) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Disposals of intangible assets                                                                 9          18        13 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Purchases of property, plant and equipment                                                             (585)     (747) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Disposals of property, plant and equipment                                                                23        50 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Acquisition of businesses                                                                     24       (106)      (43) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Disposal of businesses (4)                                                                    24          23       453 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Movement in investments in joint ventures and associates and other movements on 
 investments                                                                                            (19)       (7) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Decrease in short-term investments                                                                         6         - 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Net cash outflow from investing activities                                                           (1,010)     (918) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
 
Cash flows from financing activities 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Repayment of loans (5)                                                                               (2,884)   (1,136) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Proceeds from increase in loans (5)                                                                    4,774        22 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Capital element of lease payments                                                                      (284)     (271) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Net cash flow from increase/(decrease) in borrowings and leases                                        1,606   (1,385) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Interest paid                                                                                           (88)     (104) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Interest element of lease payments                                                                      (74)      (88) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Fees paid on undrawn facilities                                                                         (97)         - 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Cash flows on settlement of excess derivative contracts (6)                                            (202)         - 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Issue of ordinary shares - rights issue (net of expenses and rights taken by share trust)              1,972         - 
 (7) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Issue of ordinary shares - other (net of expenses)                                                         -        24 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Purchase of ordinary shares                                                                              (1)      (15) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Dividends to NCI                                                                                         (1)       (4) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Redemption of C Shares                                                                                  (91)     (220) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Net cash inflow/(outflow) from financing activities                                                    3,024   (1,792) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
 
Change in cash and cash equivalents                                                                    (995)     (413) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Cash and cash equivalents at 1 January                                                                 4,435     4,952 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Exchange gains/(losses) on cash and cash equivalents                                                      56     (104) 
------------------------------------------------------------------------------------------  ------  --------  -------- 
Cash and cash equivalents at 31 December (8)                                                           3,496     4,435 
------------------------------------------------------------------------------------------  ------  --------  -------- 
 

Condensed consolidated cash flow statement continued

For the year ended 31 December 2020

(1) During the year, the Group received GBP47m from the British Government as part of the UK furlough scheme. This was recognised within operating loss.

(2) Where the cost of meeting residual value guarantees is less than that previously estimated, as costs have been mitigated or liabilities waived by the lessor, the lease liability has been remeasured. Where the value of this remeasurement exceeds the value of the right-of-use asset, the reduction in the lease liability is credited to cost of sales.

   (3)   Relates to penalties paid on agreements with investigating bodies. 

(4) Includes GBP5m adjustment of cash consideration on prior period disposal paid during the year. Further detail is provided in note 24.

(5) Repayment of loans includes repayment of the GBP2.5bn revolving credit facility. Proceeds for increase in loans includes the drawdown of GBP2.5bn revolving credit facility, proceeds of GBP2.0bn from new unsecured loan notes and GBP0.3bn cash received from the Covid Corporate Financing Facility (CCFF). Further detail is provided in note 19.

(6) The impact of COVID-19 on the aerospace industry resulted in a deterioration in net US Dollar receipts across the Group leading to a net US Dollar outflow in the period. During the year, the Group incurred a cash outflow of GBP186m as a result of needing to buy US Dollars to settle $1,211m of foreign exchange contracts that were originally in place to sell US Dollar receipts. The Group also incurred a cash outflow of GBP16m to settle excess jet fuel hedges. Further detail is provided in notes 2 and 4.

(7) Expenses of GBP79m, of which GBP1m was unpaid at 31 December 2020, and the cost of the Employee Share Trust subscribing for the new shares of GBP10m have been deducted off the gross proceeds of GBP2,060m.

(8) The Group considers overdrafts (repayable on demand) and cash held for sale to be an integral part of its cash management activities and these are included in cash and cash equivalents for the purposes of the cash flow statement.

In deriving the 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 12.

 
                                                                                                2020      2019 
                                                                                                GBPm      GBPm 
------------------------------------------------------------------------------------------  --------  -------- 
Reconciliation of movements in cash and cash equivalents to movements in net funds/(debt) 
------------------------------------------------------------------------------------------  --------  -------- 
Change in cash and cash equivalents                                                            (995)     (413) 
------------------------------------------------------------------------------------------  --------  -------- 
Cash flow from (increase)/decrease in borrowings and leases                                  (1,606)     1,385 
------------------------------------------------------------------------------------------  --------  -------- 
Less: settlement of related derivatives included in fair value of swaps below                     50         - 
------------------------------------------------------------------------------------------  --------  -------- 
Cash flow from decrease in short-term investments                                                (6)         - 
------------------------------------------------------------------------------------------  --------  -------- 
Change in net (debt)/funds resulting from cash flows                                         (2,557)       972 
------------------------------------------------------------------------------------------  --------  -------- 
New leases and other non-cash adjustments to lease liabilities and borrowings                   (38)     (217) 
------------------------------------------------------------------------------------------  --------  -------- 
Net debt (excluding cash and cash equivalents) of previously unconsolidated subsidiary             -       (1) 
------------------------------------------------------------------------------------------  --------  -------- 
Exchange gains/(losses) on net funds/(debt)                                                      143      (32) 
------------------------------------------------------------------------------------------  --------  -------- 
Fair value adjustments                                                                         (126)        48 
------------------------------------------------------------------------------------------  --------  -------- 
Debt assumed on acquisition of business                                                         (24)         - 
------------------------------------------------------------------------------------------  --------  -------- 
Transferred to liabilities associated with assets held for sale                                   11         3 
------------------------------------------------------------------------------------------  --------  -------- 
Movement in net (debt)/funds                                                                 (2,591)       773 
------------------------------------------------------------------------------------------  --------  -------- 
Net (debt)/funds at 1 January excluding the fair value of swaps (as previously reported)     (1,236)       318 
------------------------------------------------------------------------------------------  --------  -------- 
Reclassifications (1)                                                                              -      (79) 
------------------------------------------------------------------------------------------  --------  -------- 
Adoption of IFRS 16                                                                                -   (2,248) 
------------------------------------------------------------------------------------------  --------  -------- 
Net debt at 1 January                                                                        (1,236)   (2,009) 
------------------------------------------------------------------------------------------  --------  -------- 
Net debt at 31 December excluding the fair value of swaps                                    (3,827)   (1,236) 
------------------------------------------------------------------------------------------  --------  -------- 
Fair value of swaps hedging fixed rate borrowings                                                251       243 
------------------------------------------------------------------------------------------  --------  -------- 
Net debt at 31 December                                                                      (3,576)     (993) 
------------------------------------------------------------------------------------------  --------  -------- 
 

(1) In 2019, the Group reclassified GBP79m as borrowings previously included in other financial liabilities. These borrowings mature during periods up to 2029.

Condensed consolidated cash flow statement continued

For the year ended 31 December 2020

The movement in net debt (defined by the Group as including the items shown below) is as follows:

 
                       At 1                Net funds on 
                       January   Funds     acquisition/   Exchange      Fair value                         Other       At 31 
                       (2)       flow      disposal       differences   adjustments   Reclassifi-cations   movements   December 
                          GBPm      GBPm           GBPm          GBPm          GBPm                 GBPm        GBPm       GBPm 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
2020 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Cash at bank and in 
 hand                      825       163              -             3             -                 (51)           -        940 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Money market funds       1,095     (426)              -             -             -                    -           -        669 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Short-term deposits      2,523     (733)              -            53             -                    -           -      1,843 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Cash and cash 
 equivalents (per 
 balance sheet)          4,443     (996)              -            56             -                 (51)           -      3,452 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Cash and cash 
 equivalents 
 included within 
 assets held for 
 sale                        -         -              -             -             -                   51           -         51 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Overdrafts                 (8)         1              -             -             -                    -           -        (7) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Cash and cash 
 equivalents 
 (per cash flow 
 statement)              4,435     (995)              -            56             -                    -           -      3,496 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Short-term 
 investments                 6       (6)              -             -             -                    -           -          - 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Other current 
 borrowings              (427)       134           (24)           (1)             -                (686)         (2)    (1,006) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Non-current 
 borrowings            (2,896)   (1,974)              -            38         (126)                  686         (2)    (4,274) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Lease liabilities      (2,354)       284              -            50             -                   11        (34)    (2,043) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Financial 
 liabilities           (5,677)   (1,556)           (24)            87         (126)                   11        (38)    (7,323) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Net debt excluding 
 fair value of swaps   (1,236)   (2,557)           (24)           143         (126)                   11        (38)    (3,827) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Fair value of swaps 
 hedging fixed rate 
 borrowings (1)            243      (50)              -          (42)           114                 (14)           -        251 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Net debt                 (993)   (2,607)           (24)           101          (12)                  (3)        (38)    (3,576) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Net funds/(debt) 
 (excluding lease 
 liabilities)            1,361                                                                                          (1,533) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
 
2019 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Cash at bank and in 
 hand                    1,023     (179)              -          (19)             -                    -           -        825 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Money market funds       1,222     (124)              -           (3)             -                    -           -      1,095 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Short-term deposits      2,729     (124)              -          (82)             -                    -           -      2,523 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Cash and cash 
 equivalents (per 
 balance sheet) (3)      4,974     (427)              -         (104)             -                    -           -      4,443 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Overdrafts                (22)        14              -             -             -                    -           -        (8) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Cash and cash 
 equivalents 
 (per cash flow 
 statement)              4,952     (413)                        (104)             -                    -           -      4,435 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Short-term 
 investments                 6         -              -             -             -                    -           -          6 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Other current 
 borrowings              (816)       799              -             2             5                (417)           -      (427) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Non-current 
 borrowings            (3,674)       315            (1)             4            43                  417           -    (2,896) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Lease liabilities      (2,477)       271              -            66             -                    3       (217)    (2,354) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Financial 
 liabilities           (6,967)     1,385            (1)            72            48                    3       (217)    (5,677) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Net debt excluding 
 fair value of swaps   (2,009)       972            (1)          (32)            48                    3       (217)    (1,236) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Fair value of swaps 
 hedging fixed rate 
 borrowings                293         -              -             -          (50)                    -           -        243 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Net debt               (1,716)       972            (1)          (32)           (2)                    3       (217)      (993) 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
Net funds (excluding 
 lease liabilities)        761                                                                                            1,361 
--------------------  --------  --------  -------------  ------------  ------------  -------------------  ----------  --------- 
 

(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 (2020 GBP293m, 2019 GBP229m) and the element of fair value relating to exchange differences on the underlying principal of derivatives in cash flow hedges (2020 GBP(42)m and 2019 GBPnil). During the year, the Group reclassified GBP14m relating to the fair value of derivatives for which hedge accounting was not applied as these relate to the future payments of interest only.

(2) In 2019, the Group reclassified GBP79m as borrowings previously included in other financial liabilities. These borrowings mature during periods up to 2029.

   (3)   Includes Trent 1000 insurance receipts of GBP173m. 

1

Condensed consolidated statement of changes in equity

For the year ended 31 December 2020

 
                                             Attributable to ordinary shareholders 
                                                      Cash 
                                         Capital      flow 
                     Share     Share     redemption   hedging   Merger    Translation   Accumulated            Non-controlling   Total 
                     capital   premium   reserve      reserve   reserve   reserve       losses (1)    Total    interests (NCI)   equity 
                        GBPm      GBPm         GBPm      GBPm      GBPm          GBPm          GBPm     GBPm              GBPm     GBPm 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
At 1 January 2020        386       319          159      (96)       650           397       (5,191)  (3,376)                22  (3,354) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Loss for the year          -         -            -         -         -             -       (3,170)  (3,170)                 1  (3,169) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Foreign exchange 
 translation 
 differences on 
 foreign 
 operations                -         -            -         -         -           121             -      121                 -      121 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Reclassified to 
 income statement 
 on disposal of 
 businesses                -         -            -         -         -             6             -        6                 -        6 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Movement on 
 post-retirement 
 schemes                   -         -            -         -         -             -         (590)    (590)                 -    (590) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Fair value 
 movement on cash 
 flow hedges               -         -            -      (16)         -             -             -     (16)                 -     (16) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Reclassified to 
 income statement 
 from cash flow 
 hedge reserve             -         -            -        26         -             -             -       26                 -       26 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
OCI of joint 
 ventures and 
 associates                -         -            -       (4)         -             -           (1)      (5)                 -      (5) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Related tax 
 movements                 -         -            -       (4)         -             -           197      193                 -      193 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Total 
 comprehensive 
 income/(expense) 
 for the year              -         -            -         2         -           127       (3,564)  (3,435)                 1  (3,434) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Issues of ordinary 
shares 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
 - Rights issue 
  (2)                  1,288       693            -         -         -             -          (10)    1,971                 -    1,971 
                    --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Issue of C Shares 
 (3)                       -         -         (89)         -         -             -             1     (88)                 -     (88) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Redemption of C 
 Shares                    -         -           92         -         -             -          (92)        -                 -        - 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Ordinary shares 
 purchased                 -         -            -         -         -             -           (1)      (1)                 -      (1) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Share-based 
 payments - direct 
 to equity (4)             -         -            -         -         -             -            27       27                 -       27 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Transactions with 
 NCI                       -         -            -         -         -             -             -        -               (1)      (1) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Related tax 
 movements                 -         -            -         -         -             -             5        5                 -        5 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Other changes in 
 equity in the 
 year                  1,288       693            3         -         -             -          (70)    1,914               (1)    1,913 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
At 31 December 
 2020                  1,674     1,012          162      (94)       650           524       (8,825)  (4,897)                22  (4,875) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
 
At 1 January 2019 
 including the 
 impact of IFRS 16       379       268          161     (106)       406           809       (3,031)  (1,114)                22  (1,092) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Loss for the year          -         -            -         -         -             -       (1,315)  (1,315)                 4  (1,311) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Foreign exchange 
 translation 
 differences on 
 foreign 
 operations                -         -            -         -         -         (313)             -    (313)                 -    (313) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Reclassified to 
 the income 
 statement on 
 disposal of 
 Commercial Marine         -         -            -         -         -          (98)             -     (98)                 -     (98) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Movement on 
 post-retirement 
 schemes                   -         -            -         -         -             -         (934)    (934)                 -    (934) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Fair value 
 movement on cash 
 flow hedges               -         -            -        12         -             -             -       12                 -       12 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Reclassified to 
 income statement 
 from cash flow 
 hedge reserve                       -            -        10         -             -             -       10                 -       10 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
OCI of joint 
 ventures and 
 associates                -         -            -       (7)         -             -           (1)      (8)                 -      (8) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Related tax 
 movements                 -         -            -       (5)         -           (1)           324      318                 -      318 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Total 
 comprehensive 
 income/(expense) 
 for the year              -         -            -        10         -         (412)       (1,926)  (2,328)                 4  (2,324) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Arising on issues 
 of ordinary 
 shares                    1        51            -         -         -             -             -       52                 -       52 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Shares issued in 
 respect of 
 acquisition of 
 ITP Aero (5)              6         -            -         -       244             -             -      250                 -      250 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Issue of C Shares 
 (3)                       -         -        (222)         -         -             -             1    (221)                 -    (221) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Redemption of C 
 Shares                    -         -          220         -         -             -         (220)        -                 -        - 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Ordinary shares 
 purchased                 -         -            -         -         -             -          (15)     (15)                 -     (15) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Shares issued to 
 employee share 
 trust                     -         -            -         -         -             -          (51)     (51)                 -     (51) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Share-based 
 payments - direct 
 to equity (4)             -         -            -         -         -             -            50       50                 -       50 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Transactions with 
 NCI                       -         -            -         -         -             -             -        -               (4)      (4) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Related tax 
 movements                 -         -            -         -         -             -             1        1                 -        1 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Other changes in 
 equity in the 
 year                      7        51          (2)         -       244             -         (234)       66               (4)       62 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
At 31 December 
 2019                    386       319          159      (96)       650           397       (5,191)  (3,376)                22  (3,354) 
------------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
 
 

Condensed consolidated statement of changes in equity continued

For the year ended 31 December 2020

(1) At 31 December 2020, 39,866,717 ordinary shares with a net book value of GBP89m (2019:12,476,576 ordinary shares with a net book value of GBP108m) were held for the purpose of share-based payment plans and included in accumulated losses. During the year, 3,458,865 ordinary shares with a net book value of GBP29m (2019: 8,984,219 ordinary shares with a net book value of GBP82m) vested in share-based payment plans. During the year, the Company acquired 85,724 (2019: 118,831) of its ordinary shares via reinvestment of dividends received on its own shares and purchased 30,763,282 (2019: 1,673,143) of its ordinary shares through purchases on the London Stock Exchange. During the year, the Company issued no new ordinary shares (2019: 7,803,043) to the Group's share trust for its employee share-based payment plans with a net book value of nil (2019: GBP66m).

(2) During the year, the Company issued 6,436,601,676 new ordinary shares and the Employee Share Trust subscribed for new shares at a value of GBP10m relating to the November 2020 rights issue. The amount credited to share premium is net of GBP79m in relation to transaction costs associated with the rights issue.

(3) In Rolls-Royce Holdings plc's own Financial Statements, C Shares are issued from the merger reserve. This reserve was created by a scheme of arrangement in 2011. As this reserve is eliminated on consolidation, in the consolidated financial statements, the C Shares are shown as being issued from the capital redemption reserve.

(4) Share-based payments - direct to equity is the share-based payment charge for the year less the actual cost of vesting excluding those vesting from own shares and cash received on share-based schemes vesting.

(5) During 2019, the Company issued 28,973,262 new ordinary shares relating to the final three (of eight) instalments for the acquisition of ITP Aero.

Notes to the year-end financial statements

   1     Basis of preparation and accounting policies 

Reporting entity

Rolls-Royce Holdings plc (the 'Company') is a public company incorporated under the Companies Act 2006 and domiciled in the United Kingdom. The Condensed Consolidated Financial Statements of the Company for the year ended 31 December 2020 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 2020 (2020 Annual Report) are available upon request from the Company Secretary, Rolls-Royce Holdings plc, Kings Place, 90 York Way, London, N1 9FX.

Statement of compliance

These Condensed Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS). They do not include all of the information required for full annual statements and should be read in conjunction with the 2020 Annual Report.

The comparative figures for the financial year 31 December 2019 have been extracted from the Group's statutory accounts for that financial year. The Group Financial Statements for the year ended 31 December 2020 were approved by the Board on 11 March 2021. They have been reported on by the Group's auditors and will be delivered to the registrar of companies in due course. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The Board of directors approved the Condensed Consolidated Financial Statements on 11 March 2021. They are not statutory accounts within the meaning of section 435 of the Companies Act 2006.

Significant accounting policies

The accounting policies applied by the Group in these Condensed Consolidated Financial Statements are the same as those that were applied to the Consolidated Financial Statements of the Group for the year ended 31 December 2019 (International Financial Reporting Standards issued by the International Accounting Standards Board (IASB), effective at 31 December 2019).

Other than IFRS 17 Insurance Contracts described below, 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.

Post balance sheet events

The Group have taken the latest legal position in relation to ongoing legal proceedings and reflected these in the 2020 results as appropriate. In addition, the Group entered into an agreement to sell Bergen Engines on 1 February 2021. Further details are included in note 24. The Spring Budget 2021 announced that the UK corporation tax rate will increase to 25% from 1 April 2023. Further details are included in note 5.

   1     Basis of preparation and accounting policies continued 

Going concern

The Group operates an annual planning process. The Group's plans and risks to their achievement are reviewed by the Board and once approved, are used as the basis for monitoring the Group's performance, incentivising employees and providing external guidance to shareholders.

The risk management process, and the going concern and viability statements, are designed to provide reasonable but not absolute assurance.

Given the economic uncertainty of the COVID-19 pandemic, and taking into account the recent guidance issued by the FRC, the Directors have undertaken a comprehensive going concern review over an eighteen-month period to September 2022, considering the forecast cash flows of the Group and the liquidity headroom available over that eighteen-month period. The Group has modelled two scenarios in its assessment of going concern which have been considered by the Directors, along with a likelihood assessment of these scenarios, being:

- base case, which reflects the Directors' current expectations of future trading; and

- severe but plausible downside scenario, which envisages a 'stress' or 'downside' situation.

Further details, including the analysis performed and conclusion reached, are set out below.

Background

The COVID-19 pandemic has had a significant impact on the Group, with the Civil Aerospace and ITP Aero businesses being the most significantly impacted. Uncertainty remains over the severity, extent and duration of the disruption caused by the COVID-19 pandemic and therefore the timing of recovery to pre-crisis levels. Safeguarding the health and wellbeing of our people and protecting our business have been at the heart of our decision-making from the outset of this pandemic. During 2020, we have taken decisive action to reduce cash expenditure and maintain liquidity through the following measures:

- A number of proactive steps starting in March 2020, to conserve cash, which delivered more than GBP1.0bn in-year cash cost savings compared to our pre COVID-19 cash costs in 2020. These savings were delivered through cutting non-critical capital expenditure, minimising discretionary costs, including projects, consulting spend, professional fees and sub-contractor costs, reviewing and rephasing R&D spend, together with a temporary 10% salary reduction for our senior management, and making use of the UK Government's Coronavirus Job Retention Scheme.

- The final shareholder payment in respect of 2019 was not recommended and there will be no shareholder payment in respect of 2020.

- In May 2020, the Group launched a major restructuring programme to reshape and resize the Group and in particular, the Civil Aerospace business. This will remove at least 9,000 roles across the Group, with forecast annualised savings of over GBP1.3bn by the end of 2022. At 31 December 2020, approximately 7,000 roles had been removed across the Group.

- In August 2020, the Group secured a GBP2bn term-loan facility, 80% of which is guaranteed by UK Export Finance (UKEF). This is repayable in August 2025.

- In October 2020, the Group launched a rights issue which was completed in November 2020, raising GBP2bn of proceeds.

- In October 2020, the Group completed a GBP2bn bond issuance with maturities in 2026 and 2027 and secured a new GBP1bn loan facility that matures in October 2022.

Whilst vaccination programmes are now underway across the globe, uncertainties remain in respect of more contagious variants of the virus and the potential impact of this on the timing of recovery of demand, in particular in relation to the civil aviation industry. The actions we have taken during 2020 have been necessary to right-size the business to achieve a longer-term sustainable cost base that is fit for purpose in a post COVID-19 environment, as well as securing additional funding to provide sufficient liquidity headroom for the Group.

   1     Basis of preparation and accounting policies continued 

Going concern assessment

In assessing the adoption of the going concern basis of accounting in the Company and Consolidated Financial Statements, the Directors have considered the FRC Company Guidance (updated 20 May 2020) (COVID-19), which has encouraged companies to assess current forecasts with more vigour, and to consider the impact of different potential scenarios along with a likelihood assessment, taking into account both the uncertainty and the likely success of any realistic mitigations. In adopting this more vigorous approach, the Directors have assessed the Group's future financial performance, cash flows and liquidity headroom available over an eighteen-month period to September 2022, taking into account a base case and a severe but plausible downside scenario. The Directors have paid attention to the impact of the COVID-19 pandemic on the Group, particularly on the Civil Aerospace and ITP Aero businesses, which have been the most significantly impacted, recognising the challenges of reliably estimating and forecasting the effects of COVID-19 on the civil aviation industry, as well as the extent and timing of recovery to pre-crisis levels. Key areas of estimation uncertainty include:

- The magnitude of the impact on EFHs and consequently cashflows from the aftermarket business. The estimates in respect of EFHs and future recovery are influenced by assumptions in respect of:

- the roll-out of vaccination programmes across the globe and their ability to deal with different variants of the COVID-19 virus;

- the extent and timing of the easing of restrictions on cross-border movement, including quarantine rules; and

- the recovery rate of flying hours with a potential growth in the number of people holidaying in their home country, and the increased use of video conferencing reducing the need for business travel.

- The extent of the impact of the pandemic on our customers, and consequently the purchase new aircraft, and/or renew of aftermarket contracts in the future.

- A shift towards more efficient, lower-cost aircraft as airlines look to recover post COVID-19, leading to a risk of higher aircraft retirements in the future.

- Right-sizing the business is underpinned by the assumed size needed to meet future demand.

Given these estimation uncertainties, the Directors believe it is appropriate to provide additional disclosure of the key COVID-19 related assumptions underpinning the base case and severe but plausible downside scenario, as set out below.

Base case scenario

The Group's base case scenario assumes a deep impact on the Civil Aerospace and ITP Aero businesses, with a slow and gradual recovery in demand in 2021. Whilst new variants of the COVID-19 virus create some uncertainty, vaccination programmes are successfully rolled out and/or mass airport testing is introduced to alleviate quarantine restrictions in place across many countries. Widebody flying hours returns to 55% of the pre-crisis baseline in 2021 and approximately 80% in 2022, with slower growth to a full recovery to 2019 levels of widebody activity by the end of 2024 based on industry data.

The Civil Aerospace and ITP Aero forecast assumes:

- flying hours of widebody aircraft are 55% of 2019 level in 2021 recovering to 80% of 2019 level in 2022 (based on year averages);

- flying hours of business aviation are 2% above 2019 level in 2021 and increase to 10% above the 2019 level in 2022 (based on year averages);

- widebody OE engine sales reduce from 450 in 2019 to 187 in 2021 (42% of 2019 level) before increasing to 204 in 2022 (45% of 2019 level);

- widebody spare engine sales are 80% of 2019 level in 2021 and 75% of 2019 level in 2022;

- business aviation engine sales are 54% of 2019 level in 2021 increasing to 88% of 2019 level in 2022;

- newer aircraft fleets (A350, A330neo and 787) recover at a faster pace than older fleets due to the economics and investment value of the aircraft;

- older aircraft fleets (A330, A380 and 777) recover on a slower, more varied profile taking into account regional market recovery and unique market dynamics; and

- the pressure on the transitions market, driven by new aircraft delivery and volume of surplus assets, results in an elongation in transition time to 24 months.

   1     Basis of preparation and accounting policies continued 

Severe but plausible downside scenario

As noted above, due to the inherent uncertainty over the extent and duration of the disruption caused by the COVID-19 pandemic and therefore the timing of recovery of civil aviation to pre-crisis levels, the Directors have also considered a severe but plausible downside scenario.

This severe but plausible downside is based in principle on a general assumption that recovery remains subdued due to ongoing infection rates and an increase in new variants of the COVID-19 virus, with a slower recovery in demand compared with the base case. Restrictions on travel between countries remain in place across many parts of the world during the first part of 2021, with a gradual recovery of the global economy and the Group taking place once those restrictions are lifted.

The resulting key underlying COVID-19 specific assumptions included in the severe but plausible downside scenario in relation to each of the Civil Aerospace and ITP Aero businesses are as follows:

- flying hours of widebody aircraft are 45% of 2019 level in 2021, recovering to 70% of 2019 level in 2022 (based on year averages);

- flying hours of business aviation are 1% above 2019 level in 2021 and increase to 8% above 2019 level in 2022 (based on year averages);

- widebody OE engine sales are 28% of 2019 level in 2021 before falling to 26% of 2019 level in 2022;

- widebody spare engine sales are 20% of 2019 in 2021 and remain at 20% of 2019 in 2022;

- business aviation engine sales are 54% of 2019 level in 2021 increasing to 80% of 2019 level in 2022;

- newer aircraft fleets (A350, A330neo and 787) recover at a faster pace than older fleets due to the economics and investment value of the aircraft;

- older aircraft fleets (A330, A380 and 777) recover on a slower, more varied profile taking into account regional market recovery and unique market dynamics; and

- the pressure on the transitions market, driven by new aircraft delivery and volume of surplus assets, results in an elongation in transition time to 24 months.

Liquidity and borrowings

At 31 December 2020, the Group had liquidity of GBP9.0bn, including cash and cash equivalents of GBP3.5bn and undrawn facilities of GBP5.5bn.

The Group's committed borrowing facilities at 31 December 2020, March 2021 and September 2022 are set out below. None of the facilities are subject to any financial covenants or rating triggers which could accelerate repayment.

 
 (GBPm)                                  31 December   March 2021   September 
                                                2020                     2022 
--------------------------------------  ------------  -----------  ---------- 
 Issued Bond Notes (1)                         4,634        4,634       3,995 
--------------------------------------  ------------  -----------  ---------- 
 Bank of England Commercial Paper                300            -           - 
  (2) 
--------------------------------------  ------------  -----------  ---------- 
 Other loans                                      87           87          61 
--------------------------------------  ------------  -----------  ---------- 
 UKEF loan (3)                                 2,000        2,000       2,000 
--------------------------------------  ------------  -----------  ---------- 
 Revolving Credit Facility (4)                 2,500        2,500       2,500 
--------------------------------------  ------------  -----------  ---------- 
 Bank Loan Facility (5)                        1,000        1,000       1,000 
--------------------------------------  ------------  -----------  ---------- 
 Total committed borrowing facilities         10,521       10,221       9,556 
--------------------------------------  ------------  -----------  ---------- 
 

(1) The value of Issued Bond Notes reflects the impact of derivatives on repayments of the principal amount of debt. A EUR750m (GBP639m) bond matures in June 2021, a EUR550m bond matures in May 2024, and the remainder of the bonds mature between October 2025 and May 2028.

(2) The GBP300m CCFF facility matures in March 2021.

(3) The GBP2,000m UKEF loan matures in August 2025 (currently undrawn).

(4) The GBP2,500m Revolving Credit Facility matures in April 2025 (currently undrawn).

(5) The GBP1,000m bank loan facility matures in October 2022 (currently undrawn).

Taking into account the maturity of borrowing facilities the Group had committed facilities of GBP10.5bn at 31 December 2020, GBP10.2bn at the end of March 2021 and GBP9.6bn will be available throughout the period to September 2022.

Under both of the scenarios modelled by the Directors (as detailed above), the projections indicate that the Group will continue to operate within its available committed borrowing facilities for the next eighteen months to September 2022 whilst maintaining a sufficient level of liquidity headroom when taking into account debt maturities across this eighteen-month period.

   1     Basis of preparation and accounting policies continued 

Mitigating actions

Mitigations that are within the control of the Directors and deliverable over the short term have been considered by the Directors. Such mitigations include the restriction of capital and other expenditure to only committed and essential levels, reduce or eliminate discretionary spend, reinstate the implementation of pay deferrals and undertake further restructuring.

Other mitigations that could be considered in more severe circumstances, which are not directly in the control of the Directors, include raising other new funding through the bond or bank markets, pursuing a GBP1bn increase in the existing GBP2bn UKEF-backed loan and raising further equity. The anticipated GBP2bn proceeds from business disposals announced in August 2020 have not been included when assessing the going concern, although completion of these disposals is anticipated during 2022 and within the eighteen-month period being considered. Further potential business disposals could be considered if required.

Conclusion

After due consideration of the matters set out above, the Directors consider that the Group has sufficient liquidity headroom to continue in operational existence for a period of at least eighteen months from the date of this report and are therefore satisfied that it is appropriate to adopt the going concern basis of accounting in preparing the financial statements.

Climate Change

In preparing the Consolidated Financial Statements management has considered the impact of climate change, particularly in the context of the disclosures included in the Strategic Report this year and the stated net zero targets. These considerations did not have a material impact on the financial reporting judgements and estimates, consistent with the assessment that climate change is not expected to have a significant impact on the Group's going concern assessment to September 2022 nor the viability of the Group over the next five years. The following specific points were considered:

- The Group continues to invest in new technologies including hybrid electric solutions in Power Systems, continued development of the more efficient UltraFan aero engine, testing of sustainable aviation fuels, SMRs and hybrid and fully electric propulsion.

- The Group continues to invest in onsite renewable energy generation solutions for our facilities and investment is included in our five year forecasts to enable us to meet our 2030 target for zero greenhouse gas emissions (scope 1 and 2) from our operations and facilities.

- Management has considered the impact of climate change on a number of key estimates within the financial statements, including:

- the estimates of future cash flows used in impairment assessments of the carrying value of non-current assets (such as programme intangible assets and goodwill) (see note 8);

- the estimates of future profitability used in our assessment of 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 our future expectations of consumer and airline customer behaviour (see note 17).

Key areas of judgement and sources of estimation uncertainty

The determination of the Group's accounting policies requires judgement. The subsequent application of these policies requires estimates and the actual outcome may differ from that calculated. The key areas of judgement and sources of estimation uncertainty as at 31 December 2020, that were assessed as having a significant risk of causing material adjustment to the carrying amounts of assets and liabilities are set out in note 1 to the Financial Statements in the 2020 Annual Report and are summarised below. Sensitivities for key sources of estimation uncertainty are disclosed where this is appropriate and practicable.

 
 Area               Key judgements     Key sources of      Sensitivities performed 
                                       estimation 
                                       uncertainty 
-----------------  -----------------  ------------------  ------------------------------------------------------------ 
 Revenue            Whether Civil      Estimates of        Based upon the stage 
 recognition        Aerospace OE and   future              of completion of all 
 and contract       aftermarket        revenue and costs   widebody LTSA contracts 
 assets and         contracts          of long-term        within Civil Aerospace 
 liabilities        should be          contractual         as at 31 December 2020, 
                    combined.          arrangements.       the following changes 
                    How performance    The COVID-19        in estimate would result 
                    on long-term       pandemic            in catch-up adjustments 
                    aftermarket        has resulted in     being recognised in 
                    contracts should   significant         the period in which 
                    be measured.       uncertainty         the estimates change 
                    Whether any        across the          (at underlying rates): 
                    costs              aerospace            *    A further reduction in forecast EFHs of 15% over the 
                    should be          industry. Airline         remaining term of the contracts would decrease LTSA 
                    treated            customers have            income and to a lesser extent costs, resulting in a 
                    as wastage.        grounded a                catch-up adjustment of GBP100m - GBP300m. An 
                    Whether sales      significant               estimated 90% of this would be expected to be a 
                    of spare engines   number of their           reduction in revenue with the remainder relating to 
                    to joint           aircraft in               onerous contracts which would be an increase in cost 
                    ventures           response                  of sales. 
                    are at fair        to COVID-19 which 
                    value.             has resulted in 
                                       a reduction to       *    A 5% increase or decrease in shop visit costs over 
                                       engine flying             the life of the contracts would lead to a catch-up 
                                       hours (EFHs) in           adjustment of GBP200m. 
                                       Civil Aerospace 
                                       during 2020. 
                                       Further              *    A 2% increase or decrease in revenue over the life of 
                                       details have been         the contracts would lead to a catch-up adjustment of 
                                       included in the           GBP150m. 
                                       'going concern' 
                                       disclosure above. 
                                       Estimates of 
                                       future 
                                       revenue within 
                                       Civil Aerospace 
                                       are based upon 
                                       future EFH 
                                       forecasts, 
                                       influenced by 
                                       assumptions over 
                                       the time period 
                                       and profile over 
                                       which the 
                                       aerospace 
                                       industry will 
                                       recover. 
-----------------  -----------------  ------------------  ------------------------------------------------------------ 
 Risk and revenue   Determination 
 sharing             of the nature 
 arrangements        of entry fees 
                     received. 
-----------------  -----------------  ------------------  ------------------------------------------------------------ 
 Taxation                              Estimates are       A 5% change in margin 
                                       necessary to         in the main Civil Aerospace 
                                       assess               widebody programmes 
                                       whether it is        or a 5% change in the 
                                       probable that        number of shop visits 
                                       sufficient           (driven by EFHs which 
                                       suitable             are influenced by a 
                                       taxable profits      number of factors including 
                                       will arise in        climate change) over 
                                       the UK to utilise    the remaining life of 
                                       the deferred tax     the programmes, would 
                                       assets. This is      result in an increase/decrease 
                                       largely driven       in the deferred tax 
                                       by the Civil         asset by around GBP100m. 
                                       Aerospace 
                                       business and the 
                                       estimates 
                                       described 
                                       above in 'revenue 
                                       recognition'. 
-----------------  -----------------  ------------------  ------------------------------------------------------------ 
 Business           Identification 
 combinations       of acquired 
                    assets 
                    and liabilities. 
-----------------  -----------------  ------------------  ------------------------------------------------------------ 
 Research and       Determination 
  development       of the point in 
                    time where costs 
                    incurred on an 
                    internal 
                    programme 
                    development meet 
                    the criteria for 
                    capitalisation 
                    or ceasing 
                    capitalisation. 
                    Determination 
                    of the basis for 
                    amortising 
                    capitalised 
                    development 
                    costs. 
-----------------  -----------------  ------------------  ------------------------------------------------------------ 
 Leases             Determination      Estimates of the    During the year, adjustments 
                    of the lease       payments required    to return conditions 
                    term.              to meet residual     at the end of leases 
                                       value guarantees     resulted in a credit 
                                       at the end of        of GBP102m to the income 
                                       engine leases.       statement. The lease 
                                       Amounts due can      liability at 31 December 
                                       vary depending       2020 in cluded GBP347m 
                                       on the level of      relating to the cost 
                                       utilisation of       of meeting these residual 
                                       the engines,         value guarantees in 
                                       overhaul             the Civil Aerospace 
                                       activity prior       business. Up to GBP19m 
                                       to the end of        is payable in the next 
                                       the contract,        12 months, GBP133m is 
                                       and decisions        due over the following 
                                       taken on whether     four years and the remaining 
                                       ongoing access       balance after five years. 
                                       to the assets 
                                       is required at 
                                       the end of the 
                                       lease term. 
-----------------  -----------------  ------------------  ------------------------------------------------------------ 
 Impairment of      Determination      In accordance       A weaker than expected 
 non-current        of                 with IAS 36,        recovery could result 
 assets             cash-generating    COVID-19            in a deterioration in 
                    units for          is considered       future cash flow forecasts 
                    assessing          to be a trigger     that support programme 
                    impairment of      event to reassess   intangible assets. A 
                    goodwill           whether an asset    5% deterioration in 
                                       is impaired. The    EFHs (and hence future 
                                       carrying value      cash flows) across the 
                                       of intangible       life of the Civil Aerospace 
                                       assets (including   programmes would result 
                                       programme-related   in programme intangible 
                                       intangible          assets that have previously 
                                       assets)             been subject to impairment 
                                       is dependent on     incurring an additional 
                                       the estimates       impairment of GBP50m. 
                                       of future cash      For programmes that 
                                       flows which are     have not been previously 
                                       influenced by       impaired, but where 
                                       assumptions over    there is existing headroom 
                                       the recovery of     that could be significantly 
                                       the industries      reduced over the next 
                                       in which we         12 months, any of the 
                                       operate             following individual 
                                       and the discount    changes in assumptions 
                                       rates applied.      would cause the recoverable 
                                       Details of the      amount of the programme 
                                       review performed    assets to equal the 
                                       have been           carrying value: 
                                       disclosed 
                                       in note 42.          *    An increase in costs of 2% 
 
 
                                                            *    A reduction in engine sales that are forecast but not 
                                                                 contracted by 14% 
 
 
                                                            *    An increase in discount rates of 1% 
-----------------  -----------------  ------------------  ------------------------------------------------------------ 
 Provisions         Whether any        Estimates of the    A 12-month delay in 
                    costs              time to resolve      the availability of 
                    should be          the technical        the modified HPT blade 
                    treated            issues on the        could lead to a GBP60m-GBP100m 
                    as wastage.        Trent 1000,          increase in the Trent 
                                       including            1000 exceptional costs 
                                       the development      provision. 
                                       of the modified      A reduction in Civil 
                                       HPT blade and        Aerospace widebody flying 
                                       estimates of the     hours of 15% over the 
                                       expenditure          remaining term of the 
                                       required             contracts and the associated 
                                       to settle the        decrease in revenues 
                                       obligation           and costs could lead 
                                       relating             to a GBP10m - GBP15m 
                                       to Trent 1000        increase in the provision 
                                       claims and to        for contract losses. 
                                       settle Trent 1000 
                                       long-term 
                                       contracts 
                                       assessed as 
                                       onerous. 
                                       Estimates of the 
                                       future revenues 
                                       and costs to 
                                       fulfil 
                                       onerous 
                                       contracts. 
                                       Further details 
                                       have been 
                                       included 
                                       in the going 
                                       concern 
                                       disclosure above. 
-----------------  -----------------  ------------------  ------------------------------------------------------------ 
 Post-retirement                       The valuation       A reduction in the discount 
  benefits                             of the Group's       rate from 1.45% by 0.25% 
                                       defined benefit      could lead to an increase 
                                       pension schemes      in the defined benefit 
                                       are based on         obligations of the RR 
                                       assumptions          UK Pension Fund of approximately 
                                       determined with      GBP530m. This would 
                                       independent          be expected to be broadly 
                                       actuarial            offset by changes in 
                                       advice. The size     the value of scheme 
                                       of the net           assets, as the scheme's 
                                       surplus              investment policies 
                                       is sensitive to      are designed to mitigate 
                                       the actuarial        this risk. 
                                       assumptions,         A one-year increase 
                                       which                in life expectancy from 
                                       include the          21.8 years (male aged 
                                       discount             65) and from 23.2 years 
                                       rate used to         (male aged 45) would 
                                       determine            increase the defined 
                                       the present value    benefit obligations 
                                       of the future        of the RR UK Pension 
                                       obligation,          Fund by approximately 
                                       longevity,           GBP455m. 
                                       and the number 
                                       of plan members      It is assumed that 40% 
                                       who take the         (31 December 2019: 45%) 
                                       option               of members of the RR 
                                       to transfer their    UK Pension Fund will 
                                       pension to a lump    transfer out of the 
                                       sum on retirement    fund on retirement. 
                                       or who choose        The reduction in this 
                                       to take the newly    assumption is a result 
                                       implemented          of the introduction 
                                       Bridging             of the Bridging Pension 
                                       Pension Option.      Option. An increase 
                                                            of 5% in this assumption 
                                                            would increase the defined 
                                                            benefit obligation by 
                                                            GBP45m. 
-----------------  -----------------  ------------------  ------------------------------------------------------------ 
 
   2     Analysis by business segment 

The analysis by business segment is presented in accordance with IFRS 8 Operating Segments, on the basis of those segments whose operating results are regularly reviewed by the Board (who act as the Chief Operating Decision Maker as defined by IFRS 8). Our four divisions are set out below and referred to collectively as the core businesses.

 
 Civil Aerospace 
                     *    development, manufacture, marketing and sales of 
                          commercial aero engines and aftermarket services 
 Power Systems 
                     *    development, manufacture, marketing and sales of 
                          reciprocating engines and power systems 
 Defence 
                     *    development, manufacture, marketing and sales of 
                          military aero engines, naval engines, submarines 
                          nuclear power plants and aftermarket services 
 ITP Aero 
                     *    design, research and development, manufacture and 
                          casting, assembly and test of aeronautical engines 
                          and gas turbines, and maintenance, repair and 
                          overhaul (MRO) services 
 

Non-core businesses include the trading results of the Bergen Engines AS business (the Group signed a sales agreement on 1 February 2021), the results of the Civil Nuclear Instrumentation & Control business (the Group signed a sales agreement on 7 December 2020), the results of the North America Civil Nuclear business until the date of disposal on 31 January 2020, the results of the Knowledge Management System business until the date of disposal on 3 February 2020, the Commercial Marine business until the date of disposal on 1 April 2019, Rolls-Royce Power Development Limited (RRPD) until the date of disposal on 15 April 2019 and other smaller businesses including former Energy businesses not included in the disposal to Siemens in 2014 (Retained Energy). The segmental analysis for 2019 has been restated to reflect the 2020 definition of non-core.

From 1 January 2021, all non-core businesses will be referred to as other businesses, and the reporting of core and non-core will cease.

Underlying results

We present the financial performance of our 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 settled derivative contracts in the period that the cash flow occurs. The impact of the revaluation of monetary assets and liabilities using the exchange rate that is expected to be achieved by the use of the hedge book is recorded within underlying cost of sales. Underlying financing excludes the impact of revaluing monetary assets and liabilities to period end exchange rates. Transactions between segments are presented on the same basis as underlying results and eliminated on consolidation. Unrealised fair value gains and losses on foreign exchange contracts, which are recognised as they arise in the reported results, are excluded from underlying results. To the extent that the previously forecast transactions are no longer expected to occur, an appropriate portion of the unrealised fair value gain/(loss) on foreign exchange contracts is recorded immediately in the underlying results.

   2     Analysis by business segment continued 

Amounts receivable/(payable) on interest rate swaps which are not designated as hedge relationships for accounting purposes are reclassified from fair value movement on a reported basis to interest receivable/(payable) on an underlying basis, as if they were in an effective hedge relationship.

As a result of the reduction in Civil Aerospace US Dollar (USD) receipts, in the first half of the year the Group was a net purchaser of USD, with the consequence that the achieved exchange rate GBP:USD of 1.24 on settled contracts was similar to the average spot rate in the period. In the second half of 2020 the Group remained a net purchaser of USD with the consequence that the achieved exchange rate of GBP:USD of 1.33 on settled contracts was similar to the average spot rate in the period.

Estimates of future USD cash flows have been determined using the Group's base-case forecast, significantly influenced by the estimate of future EFH forecasts. These USD cash flows have been used to establish the extent of future USD hedge requirements and determine the need to close-out any over-hedged positions. In response to the deterioration in the medium-term outlook caused by COVID-19 and the related reduction in anticipated net USD cash inflows, the Group took action to reduce the size of the USD hedge book by $11.8bn across 2020-2026. An underlying charge of GBP1,689m relating to the total $11.8bn reduction in the size of the USD hedge book is included within underlying financing costs at 31 December 2020. Further detail on this is included within note 4.

Underlying performance excludes the following:

- the effect of acquisition accounting and business disposals;

- impairment of goodwill and other non-current and current assets where the reasons for the impairment are outside of normal operating activities;

- exceptional items; and

- other items which are market driven and outside of the control of management.

Acquisition accounting, business disposals and impairment

We exclude these from underlying results so that the current year and comparative results are directly comparable.

Exceptional items

We classify items as exceptional where the Directors believe that presentation of our results in this way is more relevant to an understanding of our financial performance, as exceptional items are identified by virtue of their size, nature or incidence.

In determining whether an event or transaction is exceptional, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. Examples of exceptional items include one-time costs and charges in respect of aerospace programmes, costs of restructuring programmes and one-time past service charges and credits on our post-retirement schemes.

A risk-free discount rate is applied to exceptional onerous contract provisions. The risk-free rate is subject to movements in US bonds. Changes in the risk-free rate are market driven and the impact of any increase or decrease in the rate is included as a reconciling difference between underlying performance and reported performance.

Subsequent changes in exceptional items recognised in a prior period will also be recognised as exceptional. All other changes will be recognised within underlying performance.

Exceptional items are not allocated to segments and may not be comparable to similarly titled measures used by other companies.

Other items

The financing component of the defined benefit pension scheme cost is determined by market conditions and has therefore been included as a reconciling difference between underlying performance and reported performance.

Penalties paid on agreements with investigating bodies are considered to be one-off in nature and are therefore excluded from underlying performance.

The tax effects of the adjustments above are excluded from the underlying tax charge. In addition, changes in tax rates or changes in the amount of recoverable advance corporation tax recognised are also excluded.

See page 36 for the reconciliation between underlying performance and reported performance.

   2     Analysis by business segment continued 

The following analysis sets out the results of the core businesses on the basis described above and also includes a reconciliation of the underlying results to those reported in the condensed consolidated income statement.

 
                                                                                        Corporate and 
-                       Civil Aerospace  Power Systems (1)  Defence  ITP Aero           inter-segment  Core businesses 
                                   GBPm               GBPm     GBPm      GBPm                    GBPm             GBPm 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Year ended 31 December 
2020 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Underlying revenue 
 from sale of original 
 equipment                        2,298              1,794    1,436       537                   (293)            5,772 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Underlying revenue 
 from aftermarket 
 services                         2,791                951    1,930       168                    (96)            5,744 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Total underlying 
 revenue                          5,089              2,745    3,366       705                   (389)           11,516 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Gross (loss)/profit             (2,005)                681      686       133                    (18)            (523) 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Commercial and 
 administrative costs             (302)              (337)    (151)      (38)                    (52)            (880) 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Research and 
 development costs                (436)              (167)     (96)      (27)                       -            (726) 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Share of results of 
 joint ventures and 
 associates                         169                  1        9         -                       -              179 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Underlying operating 
 (loss)/profit                  (2,574)                178      448        68                    (70)          (1,950) 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
 
Year ended 31 December 
2020 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Segment assets                   16,723              3,497    3,127     1,988                 (3,102)           22,233 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Interests in joint 
 ventures and 
 associates                         363                 11       19         1                       -              394 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Segment liabilities            (22,331)            (1,358)  (3,085)   (1,036)                   3,251         (24,559) 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Net 
 (liabilities)/assets           (5,245)              2,150       61       953                     149          (1,932) 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
 
Year ended 31 December 
2019 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Underlying revenue 
 from sale of original 
 equipment                        3,246              2,183    1,461       782                   (502)            7,170 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Underlying revenue 
 from aftermarket 
 services                         4,861              1,001    1,789       154                    (75)            7,730 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Total underlying 
 revenue                          8,107              3,184    3,250       936                   (577)           14,900 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Gross profit/(loss)                 622                878      669       206                    (64)            2,311 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Commercial and 
 administrative costs             (306)              (343)    (158)      (62)                    (53)            (922) 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Research and 
 development costs                (374)              (166)    (105)      (33)                       -            (678) 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Share of results of 
 joint ventures and 
 associates                         102                (2)        9         -                       -              109 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Underlying operating 
 profit/(loss)                       44                367      415       111                   (117)              820 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
 
Year ended 31 December 
2019 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Segment assets                   17,954              3,312    2,743     2,160                 (2,476)           23,693 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Interests in joint 
 ventures and 
 associates                         365                 18       19         -                       -              402 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Segment liabilities            (24,819)            (1,089)  (2,950)   (1,129)                   2,645         (27,342) 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
Net 
 (liabilities)/assets           (6,500)              2,241    (188)     1,031                     169          (3,247) 
----------------------  ---------------  -----------------  -------  --------  ----------------------  --------------- 
 

(1) The underlying results for Power Systems for 31 December 2019 have been restated to reflect the 2020 non-core businesses as described above.

   2     Analysis by business segment continued 

Reconciliation to reported results

 
                                                                                       Underlying 
                                                                                  adjustments and 
                                       Non-core businesses                         adjustments to      Group at actual 
                      Core businesses                  (1)  Total underlying     foreign exchange       exchange rates 
                                 GBPm                 GBPm              GBPm                 GBPm                 GBPm 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Year ended 31 
December 2020 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Revenue from sale of 
 original equipment             5,772                  115             5,887                 (68)                5,819 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Revenue from 
 aftermarket 
 services                       5,744                  132             5,876                  129                6,005 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Total revenue                  11,516                  247            11,763                   61               11,824 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Gross (loss)/profit             (523)                   11             (512)                  302                (210) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Commercial and 
 administrative 
 costs                          (880)                 (24)             (904)                   96                (808) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Research and 
 development costs              (726)                  (9)             (735)                (519)              (1,254) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Share of results of 
 joint ventures and 
 associates                       179                    -               179                   12                  191 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Operating loss                (1,950)                 (22)           (1,972)                (109)              (2,081) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Loss arising on the 
 acquisition and 
 disposal of 
 businesses                         -                    -                 -                 (14)                 (14) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Loss before 
 financing and 
 taxation                     (1,950)                 (22)           (1,972)                (123)              (2,095) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Net financing                 (1,982)                  (4)           (1,986)                1,171                (815) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Loss before taxation          (3,932)                 (26)           (3,958)                1,048              (2,910) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Taxation                         (37)                  (2)              (39)                (220)                (259) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Loss for the year             (3,969)                 (28)           (3,997)                  828              (3,169) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Attributable to: 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
  Ordinary 
   shareholders                                                      (3,998)                  828              (3,170) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
  Non-controlling 
   interests                                                               1                    -                    1 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
 
Year ended 31 
December 2019 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Revenue from sale of 
 original equipment             7,170                  286             7,456                  596                8,052 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Revenue from 
 aftermarket 
 services                       7,730                  264             7,994                  541                8,535 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Total revenue                  14,900                  550            15,450                1,137               16,587 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Gross profit/(loss)             2,311                   76             2,387              (1,445)                  942 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Commercial and 
 administrative 
 costs                          (922)                 (71)             (993)                (135)              (1,128) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Research and 
 development costs              (678)                 (18)             (696)                 (74)                (770) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Share of results of 
 joint ventures and 
 associates                       109                    1               110                  (6)                  104 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Operating 
 profit/(loss)                    820                 (12)               808              (1,660)                (852) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Gain on the disposal 
 of businesses                      -                    -                 -                  139                  139 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Profit/(loss) before 
 financing and 
 taxation                         820                 (12)               808              (1,521)                (713) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Net financing                   (221)                  (4)             (225)                   47                (178) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Profit/(loss) before 
 taxation                         599                 (16)               583              (1,474)                (891) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Taxation                        (280)                    3             (277)                (143)                (420) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Profit/(loss) for 
 the year                         319                 (13)               306              (1,617)              (1,311) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
Attributable to: 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
  Ordinary 
   shareholders                                                          302              (1,617)              (1,315) 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
  Non-controlling 
   interests                                                               4                    -                    4 
--------------------  ---------------  -------------------  ----------------  -------------------  ------------------- 
 

(1) Non-core businesses are set out above. The underlying results for 31 December 2019 have been restated to reflect the 2020 non-core businesses.

   2     Analysis by business segment continued 

Disaggregation of revenue from contracts with customers

 
Analysis by type 
and basis of                                                                    Corporate and 
recognition         Civil Aerospace  Power Systems (1)  Defence  ITP Aero       inter-segment  Core businesses 
                               GBPm               GBPm     GBPm      GBPm                GBPm             GBPm 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Year ended 31 
December 2020 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Original equipment 
 recognised at a 
 point in time                2,293              1,771      523       471               (262)            4,796 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Original equipment 
 recognised over 
 time                             4                 23      912        66                (32)              973 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Aftermarket 
 services 
 recognised at a 
 point in time                1,170                827      797        85                (58)            2,821 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Aftermarket 
 services 
 recognised over 
 time                         1,398                123    1,132        83                (37)            2,699 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Total underlying 
 customer contract 
 revenue (2)                  4,865              2,744    3,364       705               (389)           11,289 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Other underlying 
 revenue                        224                  1        2         -                   -              227 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Total underlying 
 revenue                      5,089              2,745    3,366       705               (389)           11,516 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
 
Year ended 31 
December 2019 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Original equipment 
 recognised at a 
 point in time                3,246              2,108      567       702               (478)            6,145 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Original equipment 
 recognised over 
 time                             -                 75      894        80                (24)            1,025 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Aftermarket 
 services 
 recognised at a 
 point in time                1,599                874      696        48                (32)            3,185 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Aftermarket 
 services 
 recognised over 
 time                         3,138                127    1,093       106                (43)            4,421 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Total underlying 
 customer contract 
 revenue (2)                  7,983              3,184    3,250       936               (577)           14,776 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Other underlying 
 revenue                        124                  -        -         -                   -              124 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
Total underlying 
 revenue                      8,107              3,184    3,250       936               (577)           14,900 
------------------  ---------------  -----------------  -------  --------  ------------------  --------------- 
 
 

(1) The underlying results for Power Systems for 31 December 2019 have been restated to reflect the 2020 non-core businesses as described above.

(2) Includes GBP(1,012)m (2019: GBP(93)m) of revenue recognised in the year relating to performance obligations satisfied in previous years.

 
                                                                                      Underlying 
                                                                                 adjustments and 
                                          Non-core businesses        Total        adjustments to       Group at actual 
                       Core businesses                    (1)   underlying      foreign exchange        exchange rates 
                                  GBPm                   GBPm         GBPm                  GBPm                  GBPm 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Year ended 31 
December 2020 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Original equipment 
 recognised at a 
 point in time                   4,796                    114        4,910                  (63)                 4,847 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Original equipment 
 recognised over time              973                      -          973                   (6)                   967 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Aftermarket services 
 recognised at a 
 point in time                   2,821                    133        2,954                    53                 3,007 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Aftermarket services 
 recognised over time            2,699                      -        2,699                   110                 2,809 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Total customer 
 contract revenue (2)           11,289                    247       11,536                    94                11,630 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Other revenue                      227                      -          227                  (33)                   194 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Total revenue                   11,516                    247       11,763                    61                11,824 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
 
Year ended 31 
December 2019 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Original equipment 
 recognised at a 
 point in time                   6,145                    217        6,362                   596                 6,958 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Original equipment 
 recognised over time            1,025                     69        1,094                     -                 1,094 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Aftermarket services 
 recognised at a 
 point in time                   3,185                    246        3,431                   313                 3,744 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Aftermarket services 
 recognised over time            4,421                     18        4,439                   228                 4,667 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Total customer 
 contract revenue (2)           14,776                    550       15,326                 1,137                16,463 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Other revenue                      124                      -          124                     -                   124 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
Total revenue                   14,900                    550       15,450                 1,137                16,587 
---------------------  ---------------  ---------------------  -----------  --------------------  -------------------- 
 

(1) Non-core businesses are set out above. The underlying results for 31 December 2019 have been restated to reflect the 2020 non-core businesses.

(2) Includes GBPnil (2019: GBP(187)m) of revenue recognised in the year relating to performance obligations satisfied in previous years over and above that in underlying revenue.

   2     Analysis by business segment continued 
 
Underlying profit 
adjustments                                 2020                                     2019 
                         -------------------------------------------  ----------------------------------  ---------- 
 
                                        Loss                                   Profit/(loss) 
                                      before         Net    Taxation                  before         Net    Taxation 
                         Revenue   financing   financing        (14)  Revenue      financing   financing        GBPm 
                            GBPm        GBPm        GBPm        GBPm     GBPm           GBPm        GBPm 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Underlying performance    11,763     (1,972)     (1,986)        (39)   15,450            808       (225)       (277) 
-----------------------  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Impact of settled 
 derivative 
 contracts on 
 trading 
 transactions (1)     A       61         998       (324)        (40)    1,137            145          80       (100) 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Unrealised fair 
 value changes on 
 derivative 
 contracts held 
 for trading (2)      A        -           8        (85)       (182)        -            (1)         (6)        (88) 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Unrealised net 
 losses on closing 
 future 
 over-hedged 
 position (3)         A        -           -       1,503       (106)        -              -           -           - 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Realised net 
 losses on closing 
 over-hedged 
 position (4)         A        -           -         202        (38)        -              -           -           - 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Unrealised fair 
 value change to 
 derivative 
 contracts held 
 for financing (5)    A        -           -        (86)           -        -              -           1           - 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Exceptional 
 programme 
 credits/(charges) 
 (6)                  B        -         620        (36)           -        -        (1,409)           -           - 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Impact of discount 
 rate changes (7)     B        -           -           3           -        -              -        (40)           - 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Exceptional 
 restructuring 
 charge (8)           B        -       (489)           -          37        -          (136)           -          17 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Impairments (9)       C        -     (1,293)           -         273        -           (84)           -           7 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Other write-offs 
 (10)                 C        -       (124)           -          30        -              -           -           - 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Effect of 
 acquisition 
 accounting (11)      C        -       (133)           -          34        -          (163)         (8)          41 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Pension 
 past-service 
 credit (12)          D        -         308           -       (108)        -                                      - 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Other                 D        -         (4)         (6)         (7)        -           (12)          20        (20) 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
(Loss)/gains 
 arising on the 
 acquisitions 
 and disposals of 
 businesses (13)      C        -        (14)           -           3        -            139           -           - 
------------------  ---  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Impact of tax rate 
 change                        -           -           -         160        -              -           -           - 
-----------------------  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
De-recognition of UK 
 losses                        -           -           -       (276)        -              -           -           - 
-----------------------  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Total underlying 
 adjustments                  61       (123)       1,171       (220)    1,137        (1,521)          47       (143) 
-----------------------  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
Reported performance 
 per consolidated 
 income statement         11,824     (2,095)       (815)       (259)   16,587          (713)       (178)       (420) 
-----------------------  -------  ----------  ----------  ----------  -------  -------------  ----------  ---------- 
 

A - FX, B Exceptional, C - M&A and impairment, D - Other

(1) The impact of measuring revenues and costs and the impact of valuation of assets and liabilities using the period end exchange rate rather than the achieved rate or the exchange rate that is expected to be achieved by the use of the hedge book increased reported revenues by GBP61m (2019: GBP1,137m) and reduced loss before financing and taxation by GBP998m (2019: increased profit by GBP145m). Underlying financing excludes the impact of revaluing monetary assets and liabilities at the period end exchange rate.

(2) The underlying results exclude the fair value changes on derivative contracts held for trading. These fair value changes are subsequently recognised in the underlying results when the contracts are settled.

(3) In response to the deterioration in the medium-term outlook caused by COVID-19 and the related reduction in anticipated net USD cash inflows, the Group has taken action to reduce the size of the USD hedge book by $11.8bn predominately by transacting offsetting foreign exchange forward contracts across 2020-2026, resulting in a GBP1,689m charge to underlying results. The GBP1,503m included in unrealised loss (shown above) is the net cost of closing out the over-hedged position in future years. The cost related to future years has been included within the underlying performance. It is reversed in arriving at reported performance on the basis that, the cumulative fair value changes on these derivative contracts are recognised as they arise. Further detail is provided in note 4.

(4) In 2020, the Group incurred cash outflows of GBP186m as a result of closing out $1.2bn of the $11.8bn hedge book reduction above and GBP16m to settle an over-hedged jet fuel position. The realised loss of GBP202m is included in underlying financing costs.

(5) Includes the losses on hedge ineffectiveness in the year of GBP11m (2019: losses GBP13m) and net fair value losses of GBP75m (2019: profit GBP14m) on any interest rate swaps not designated into hedging relationships for accounting purposes.

(6) In 2019, abnormal wastage costs were recorded in respect of the Trent 1000, related to remediation shop visit costs, customer disruption costs and contract losses. During the year ended 31 December 2020, the total estimated Trent 1000 abnormal wastage costs have reduced by GBP620m as a result of COVID-19 and the work we have performed to reduce fleet AOG levels and improve the availability of spare engines, made up of GBP390m (a gross provision release of GBP560m, offset by the impact of expected actual exchange rates and the share of the costs borne by RRSAs) related to remediation shop visit costs and customer disruption costs, and an improvement of GBP230m in the position on contract losses.

(7) Discount rates have increased on exceptional contract loss provisions in relation to the Trent 900 and Trent 1000.

(8) At 31 December 2020, the Group recorded an exceptional charge of GBP489m following the announcement on 20 May 2020 of a fundamental restructuring to reshape and resize the Group due to the financial and operational impact of COVID-19 (see note 21 for more detail).

(9) The Group has assessed the carrying value of its assets given the financial and operational impact of COVID-19 on the Group's future cash flow forecasts. Consequently, a number of impairments and write-offs have been recorded at 31 December 2020. Impairments comprise: intangible assets GBP567m, mainly related to programme intangibles; property, plant and equipment GBP318m (including GBP219m related to site rationalisation); right-of-use assets GBP384m, comprising engines of GBP311m, GBP69m of site rationalisation and GBP4m of other impairments; and a GBP24m impairment of the carrying value of investments held. Further details are provided in notes 8, 9, 10, 11 and 12.

(10) Other write-offs include GBP149m of participation fees in contract assets, GBP2m in provisions for site rationalisation, offset by GBP(27)m for RRSA deferred cost contributions in payables. These write-offs are primarily a result of the impact of COVID-19.

(11) The effect of acquisition accounting includes the amortisation of intangible assets arising on previous acquisitions.

(12) The Group recorded a past service gain of GBP308m (of which GBP248m was recorded at 30 June 2020) following changes to the pension benefits under the terms of the Rolls-Royce UK Pension Fund (RRUKPF), a defined benefit scheme. Of the GBP308m gain, GBP79m related to the restructuring described in footnote 8 above. The gain also comprises GBP134m on introduction of the Bridging Pension Option, GBP67m as a result of the scheme closure and GBP35m as a result of manager consultation offset by a GBP7m past-service cost. In respect of the GBP248m gain recorded at 30 June 2020, GBP127m was subsequently recognised as actuarial losses through other comprehensive income at 31 December 2020 - see note 22.

(13) Gains/(losses) arising on the acquisitions and disposals of businesses includes the acquisition of Qinous GmbH (increasing the Group's shareholding from 24% to 100%), the sale of the North America Civil Nuclear business, the sale of the Knowledge Management Systems business and the sale of Trigno Energy Srl. During the year, sales proceeds received on the disposal of L'Orange in a prior period. See note 24 for further details.

(14) Appropriate rates of tax have been applied to adjustments made to (loss)/profit before tax in the table above. Adjustments in 2020 which impact the UK tax loss have an effective tax rate of zero. See note 5 for more details. The total underlying adjustments to loss before tax in 2020 are a charge of GBP220m (2019: GBP143m). The overall charge in 2020 includes a tax credit of GBP160m in respect of the change in the UK tax rate and a tax charge of GBP276m relating to the derecognition of some of the deferred tax asset on UK losses previously recognised.

   2     Analysis by business segment continued 

Reconciliation to the balance sheet

 
                                                               2020        2019 
                                                               GBPm        GBPm 
-----------------------------------------------------      --------  ---------- 
Reportable segment assets                                    22,233      23,693 
---------------------------------------------------------  --------  ---------- 
Interests in joint ventures and associates                      394         402 
---------------------------------------------------------  --------  ---------- 
Non-core businesses                                               7         359 
---------------------------------------------------------  --------  ---------- 
Assets held for sale                                            288          18 
---------------------------------------------------------  --------  ---------- 
Cash and cash equivalents and short-term investments          3,452       4,449 
---------------------------------------------------------  --------  ---------- 
Fair value of swaps hedging fixed rate borrowings               293         249 
---------------------------------------------------------  --------  ---------- 
Deferred and income tax assets                                1,943       1,926 
---------------------------------------------------------  --------  ---------- 
Post-retirement scheme surpluses                                907       1,170 
---------------------------------------------------------  --------  ---------- 
Total assets                                                 29,517      32,266 
---------------------------------------------------------  --------  ---------- 
Reportable segment liabilities                             (24,559)    (27,342) 
---------------------------------------------------------  --------  ---------- 
Non-core businesses                                             (5)       (404) 
---------------------------------------------------------  --------  ---------- 
Liabilities associated with assets held for sale              (228)        (15) 
---------------------------------------------------------  --------  ---------- 
Borrowings and lease liabilities                            (7,330)     (5,685) 
---------------------------------------------------------  --------  ---------- 
Fair value of swaps hedging fixed rate borrowings              (42)         (6) 
---------------------------------------------------------  --------  ---------- 
Deferred and income tax liabilities                           (648)       (790) 
---------------------------------------------------------  --------  ---------- 
Post-retirement scheme deficits                             (1,580)     (1,378) 
---------------------------------------------------------  --------  ---------- 
Total liabilities                                          (34,392)    (35,620) 
---------------------------------------------------------  --------  ---------- 
Net liabilities                                             (4,875)     (3,354) 
---------------------------------------------------------  --------  ---------- 
 
   3     Research and development 
 
                                                                                                       2020      2019 
                                                                                                       GBPm      GBPm 
-------------------------------------------------------------------------------------------------  --------  -------- 
Gross research and development costs                                                                (1,252)   (1,459) 
-------------------------------------------------------------------------------------------------  --------  -------- 
Contributions and fees (1)                                                                              353       341 
-------------------------------------------------------------------------------------------------  --------  -------- 
Expenditure in the year                                                                               (899)   (1,118) 
-------------------------------------------------------------------------------------------------  --------  -------- 
Capitalised as intangible assets                                                                        232       481 
-------------------------------------------------------------------------------------------------  --------  -------- 
Amortisation and impairment of capitalised costs (2)                                                  (587)     (133) 
-------------------------------------------------------------------------------------------------  --------  -------- 
Net cost recognised in the income statement                                                         (1,254)     (770) 
-------------------------------------------------------------------------------------------------  --------  -------- 
Underlying adjustments relating to the effects of acquisition accounting, impairment and foreign 
 exchange (3)                                                                                           519        74 
-------------------------------------------------------------------------------------------------  --------  -------- 
Net underlying cost recognised in the income statement                                                (735)     (696) 
-------------------------------------------------------------------------------------------------  --------  -------- 
 

(1) Includes funding from local government.

(2) See note 9 for analysis of amortisation and impairment.

(3) During the year, impairment of research and development of GBP481m was recorded. Of this GBP1m was charged to underlying results and GBP480m was charged as exceptional. See note 2 and 9 for more information.

   4     Net financing 
 
                                             2020                                            2019 
                        ---------------------------------------------- 
                              Per consolidated    Underlying financing        Per consolidated    Underlying financing 
                              income statement                     (1)        income statement                     (1) 
                                          GBPm                    GBPm                    GBPm                    GBPm 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Interest receivable                         22                      22                      31                      31 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value gains                         -                       -                      14                       - 
on non-hedge accounted 
interest rate swaps 
(2) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financial RRSAs - 
 foreign exchange 
 differences and 
 changes in forecast 
 payments                                   17                       -                      11                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value gains                         -                       -                      36                       - 
on commodity contracts 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing on 
 post-retirement 
 scheme surpluses                           28                       -                      60                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net foreign exchange                         -                       -                     100                       - 
gains 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing income                            67                      22                     252                      31 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Interest payable                         (180)                   (175)                   (182)                   (163) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value losses 
 on foreign currency 
 contracts                                (23)                       -                    (43)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value losses                     (75)                       -                       -                       - 
on non-hedge accounted 
interest rate swaps 
(2) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Unrealised net losses                        -                 (1,503)                       -                       - 
on closing future 
over-hedged position 
(3) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Realised net losses on                       -                   (202)                       -                       - 
closing over-hedged 
position (4) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financial RRSAs - 
 foreign exchange 
 differences and 
 changes in forecast 
 payments                                 (20)                       -                    (10)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financial charge 
 relating to financial 
 RRSAs                                     (3)                     (3)                     (3)                     (3) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value losses                     (62)                       -                       -                       - 
on commodity contracts 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing on 
 post-retirement 
 scheme deficits                          (29)                       -                    (37)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net foreign exchange                     (324)                       -                       -                       - 
losses 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Other financing 
 charges                                 (166)                   (125)                   (155)                    (90) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing costs                          (882)                 (2,008)                   (430)                   (256) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Net financing costs                      (815)                 (1,986)                   (178)                   (225) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Analysed as: 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net interest payable                     (158)                   (153)                   (151)                   (132) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value 
 (losses)/gains on 
 derivative contracts                    (160)                 (1,705)                       7                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net post-retirement 
 scheme financing                          (1)                       -                      23                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net foreign exchange 
 (losses)/gains                          (324)                       -                     100                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net other financing                      (172)                   (128)                   (157)                    (93) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net financing costs                      (815)                 (1,986)                   (178)                   (225) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 

(1) See note 2 for definition of underlying results.

(2) The condensed consolidated income statement shows the net fair value gain/(loss) on any interest rate swaps not designated into hedging relationships for accounting purposes. Underlying financing reclassifies the interest payable (2019: receivable) on these interest rates swaps from fair value movement to interest payable.

(3) In response to the deterioration in the medium-term outlook caused by COVID-19 and the related reduction in anticipated net US Dollar cash inflows, the Group took action during the year to reduce the size of the US Dollar hedge book by $11bn by transacting offsetting foreign exchange contracts across 2020-2026. A further $0.8bn of hedges have also been closed out in early 2021. An underlying charge of GBP1,689m relating to the total $11.8bn reduction in the size of the US Dollar hedge book is included within underlying financing costs. These costs are already recognised in the reported results as fair value losses on foreign currency contacts.

(4) In 2020, the Group incurred a cash outflow of GBP186m as a result of closing out an over-hedged position of $1,211m and a cash outflow of GBP16m to settle an over-hedged jet fuel position. The realised loss of GBP202m is included in underlying financing costs.

In response to the deterioration in the medium-term outlook caused by COVID-19 and the related reduction in anticipated net US Dollar cash inflows, the Group took action during the year to reduce the size of the US Dollar hedge book by $11bn by transacting offsetting foreign exchange contracts across 2020-2026. A further $0.8bn of hedges have also been closed out in early 2021. An underlying charge of GBP1,689m relating to the total $11.8bn reduction in the size of the US Dollar hedge book is included within underlying financing costs. These costs are already recognised in the reported results as fair value losses on foreign currency contacts. The cash settlement costs of the GBP1,689m will occur over the period 2020-2026, including GBP186m of cash costs incurred in 2020. The Group estimates that future cash outflows of GBP460m will occur in 2021, GBP327m in 2022, and GBP716m spread over 2023 to 2026. Subsequent to year-end, the Group took action to align the contractual settlement of derivatives in future periods with the forecast of net US Dollar cash inflows by extending $2bn of GBP/US Dollar hedging contracts from 2024-26 into 2027.

After taking into account the actions described above, the Group is forecast to be 100% hedged from 2021 to 2026 and approximately 90% hedged in 2027, based on Board approved forecasts. In the severe but plausible downside scenario forecast, the Group has modelled a further reduction in net US Dollar cash inflows. This would lead to an additional charge to underlying finance costs of GBP222m, with the associated cash cost unwinding across 2021-2027.

   4     Net financing  continued 

The expected maturity analysis of derivative financial assets and liabilities, after taking into account closing the over-hedge position, is as follows:

 
                                                        Gross values 
                       ------------------------------------------------------------------------------- 
                                          Between one and two   Between two and five 
                       Within one year                  years                  years  After five years  Carrying value 
                                  GBPm                   GBPm                   GBPm              GBPm            GBPm 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
At 31 December 2020 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
Derivative financial 
assets: 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
Cash inflows                     2,153                    984                  6,358             2,777 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
Cash outflows                  (2,038)                  (937)                (6,122)           (2,634) 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
Other net cash flows 
 (1)                                18                     20                     35                12 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
                                   133                     67                    271               155             766 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
Derivative financial 
liabilities: 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
Cash inflows                     5,019                  5,810                 13,308             4,340 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
Cash outflows                  (5,557)                (6,398)               (15,189)           (4,993) 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
Other net cash flows 
 (1)                              (36)                   (27)                   (40)               (4) 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
                                 (574)                  (615)                (1,921)             (657)         (3,472) 
---------------------  ---------------  ---------------------  ---------------------  ----------------  -------------- 
 

(1) Derivative financial assets and liabilities are settled on a net cash basis.

   5     Taxation 
 
                                                                   UK       Overseas         Total 
                                                              ------------                           ----- 
                                                               2020   2019      2020   2019    2020   2019 
                                                               GBPm   GBPm      GBPm   GBPm    GBPm   GBPm 
------------------------------------------------------------  -----  -----  --------  -----   -----  ----- 
Current tax charge for the year                                  12     15       167    228     179    243 
------------------------------------------------------------  -----  -----  --------  -----   -----  ----- 
Adjustments in respect of prior years                             -    (4)      (27)    (3)    (27)    (7) 
------------------------------------------------------------  -----  -----  --------  -----   -----  ----- 
Current tax                                                      12     11       140    225     152    236 
------------------------------------------------------------  -----  -----  --------  -----   -----  ----- 
 
Deferred tax charge/(credit) for the year                       177    117     (373)   (24)   (196)     93 
------------------------------------------------------------  -----  -----  --------  -----   -----  ----- 
Adjustments in respect of prior years                          (12)     20        42   (15)      30      5 
------------------------------------------------------------  -----  -----  --------  -----   -----  ----- 
Derecognition of deferred tax                                   433     86         -      -     433     86 
------------------------------------------------------------  -----  -----  --------  -----   -----  ----- 
Deferred tax credit resulting from increase in UK tax rates   (160)      -         -      -   (160)      - 
------------------------------------------------------------  -----  -----  --------  -----   -----  ----- 
Deferred tax                                                    438    223     (331)   (39)     107    184 
------------------------------------------------------------  -----  -----  --------  -----   -----  ----- 
 
Charged/(credited) in the income statement                      450    234     (191)    186     259    420 
------------------------------------------------------------  -----  -----  --------  -----   -----  ----- 
 
 

Deferred taxation assets and liabilities

 
                                                    2020    2019 
                                                    GBPm    GBPm 
------------------------------------------------  ------  ------ 
At 1 January                                       1,269   1,130 
------------------------------------------------  ------  ------ 
  Impact of adopting of IFRS 16                        -       8 
------------------------------------------------  ------  ------ 
  Amount charged to income statement               (107)   (184) 
------------------------------------------------  ------  ------ 
  Amount credited to other comprehensive income      197     323 
------------------------------------------------  ------  ------ 
  Amount charged to cash flow hedge reserve          (4)     (5) 
------------------------------------------------  ------  ------ 
  Amount credited to equity                            5       1 
------------------------------------------------  ------  ------ 
  On disposal/acquisition of businesses (1)         (20)     (3) 
------------------------------------------------  ------  ------ 
  Transferred to assets held for sale (2)            (4)     (2) 
------------------------------------------------  ------  ------ 
  Exchange differences                               (4)       1 
------------------------------------------------  ------  ------ 
At 31 December                                     1,332   1,269 
------------------------------------------------  ------  ------ 
Deferred tax assets                                1,826   1,887 
------------------------------------------------  ------  ------ 
Deferred tax liabilities                           (494)   (618) 
------------------------------------------------  ------  ------ 
                                                   1,332   1,269 
------------------------------------------------  ------  ------ 
 

(1) The 2020 deferred tax relates to the acquisition of businesses detailed in note 24. The 2019 deferred tax on disposal of businesses relates to Commercial Marine.

(2) The 2020 deferred tax transferred to assets held for sale relates to the Bergen Engines AS and Civil Nuclear Instrumentation & Control business. The 2019 deferred tax transferred to assets held for sale relates to the North America Civil Nuclear business.

   5     Taxation continued 

Deferred tax assets of GBP1,826m include GBP801m (2019: GBP1,010m) relating to UK tax losses and GBP163m (2019: GBP163m) relating to Advance Corporation Tax (ACT). These assets have been recognised based on the expectation that the business will generate taxable profits and tax liabilities in the future against which the losses and ACT can be utilised.

Most of the tax losses relate to the Civil Aerospace widebody business which makes initial losses through the investment period of a programme and then makes a profit through its contracts for services. The programme lifecycles typically range between 30 and 55 years with more of the widebody engine programmes forecast at the upper end of that range. In the past few years there have been four new engines that have entered into service (Trent 1000-TEN, Trent 7000 and Trent XWB-84 and Trent XWB-97).

Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be utilised. A recoverability assessment has been undertaken, taking account of deferred tax liabilities against which the reversal can be offset and using latest UK forecasts, which are mainly driven by the Civil Aerospace widebody business, to assess the level of future taxable profits.

The recoverability of deferred tax assets relating to tax losses and ACT has been assessed in 2020 on the following basis:

- Using the most recent UK profit forecasts prepared by management, which are consistent with past experience and external sources on market conditions. These forecasts cover the next five years;

- The long-term forecast profit profile of certain of the major widebody engine programmes which is typically between 30 and 55 years from initial investment to retirement of the fleet, including the aftermarket revenues earned from airline customers; and

- The long-term forecast profit and cost profile of the other parts of the business.

The assessment takes into account UK tax laws that, in broad terms, restrict the offset of the carried forward tax losses to 50% of current year profits.

Based on this assessment, the Group has recognised a deferred tax asset of GBP801m relating to losses and GBP163m relating to ACT. This reflects the conclusions that:

- It is probable that the business will generate taxable income and tax liabilities in the future against which these losses and the ACT can be utilised.

- Based on current forecasts and using various scenarios these losses and the ACT will be used in full within the expected widebody engine programme lifecycles.

- The Group has not recognised any deferred tax assets in respect of 2020 UK losses and de-recognised GBP327m of the deferred tax asset on the balance sheet at 31 December 2019. Of the total charge, GBP51m is underlying with the balance of GBP276m non-underlying.

- This is based on management's assumptions relating to the amounts and timing of future taxable profits and takes into account the impact of COVID-19 and climate change on existing widebody engine programmes.

Changes in future profits will impact the recoverability of the deferred tax assets and as explained in note 1, the key assumptions impact contract margins. A 5% change in such margins over the remaining life of the programmes, against which the recovery of the tax losses and ACT is assessed, would result in a variance of around GBP100m in the related deferred tax balances recorded on the balance sheet, assuming a 19% tax rate and the 50% loss offset restriction mentioned above.

The assessment also considered the potential impact of climate change on profit forecasts, including additional taxes and levies that could arise and changes in consumer behaviour which could result in a reduction in shop visits (driven by EFHs, which are influenced by a number of factors including climate change). A 5% reduction in shop visits over the remaining life of the programmes would result in a variance of around GBP100m in the related deferred tax balances.

The Group has also reassessed the recovery of other deferred tax assets, including those arising on unrealised losses on derivative contracts.

Any future changes in tax law or the structure of the Group could have a significant effect on the use of losses and ACT, including the period over which they can be used. In view of this and the significant judgement involved the Board continuously reassess this area.

In 2020 a net DTA also arises for the first time in respect of tax losses and other deductible temporary differences arising in Rolls-Royce Deutschland Ltd & Co KG, where the main business is Business Aviation. The total net DTA is GBP252m which has been recognised in full as it is considered probable that the business will generate taxable income in the future against which these assets can be utilised.

The Spring Budget 2020 announced that the UK corporation tax rate would remain at 19% rather than reducing to 17% from 1 April 2020. The new law was substantively enacted on 17 March 2020. The prior year UK deferred tax assets and liabilities were calculated at 17%, as this was the enacted rate at the 2019 balance sheet date. As the 19% rate has been substantively enacted before 31 December 2020, the UK deferred tax assets and liabilities have been re-measured at 19%.

The resulting credits and charges have been recognised in the income statement except to the extent that they relate to items previously credited or charged to equity. Accordingly, in 2020, GBP160m has been credited to the income statement and GBP6m has been credited directly to equity.

   5     Taxation continued 

The Spring Budget 2021 announced that the UK corporation tax rate will increase to 25% from 1 April 2023. The deferred tax assets and liabilities of UK companies within the Group have been calculated at 19% as this rate has been substantively enacted at the Balance Sheet date. Had the 25% rate been substantively enacted on or before 31 December 2020 it would have had the effect of increasing the net deferred tax asset by GBP342m.

The temporary differences associated with investments in subsidiaries, joint ventures and associates, for which a deferred tax liability has not been recognised, aggregate to GBP907m (2019 restated: GBP770m). No deferred tax liability has been recognised on the potential withholding tax due on the remittance of undistributed profits as the Group is able to control the timing of such remittances and it is probable that consent will not be given in the foreseeable future.

   6     Earnings per ordinary share 

Basic earnings per share (EPS) is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares held under trust, which have been treated as if they had been cancelled.

As there is a loss, the effect of potentially dilutive ordinary shares is anti-dilutive.

 
                                              2020                                    2019 (restated) 
------------------------  -------------------------------------------  --------------------------------------------- 
                                       Potentially dilutive                          Potentially dilutive 
                             Basic            share options   Diluted      Basic            share options    Diluted 
------------------------  --------  -----------------------  --------  ---------  -----------------------  --------- 
Loss attributable to 
 ordinary shareholders 
 (GBPm)                    (3,170)                        -   (3,170)    (1,315)                        -    (1,315) 
------------------------  --------  -----------------------  --------  ---------  -----------------------  --------- 
Weighted average number 
 of ordinary shares 
 (millions)                  5,987                        -     5,987      5,548                        -      5,548 
------------------------  --------  -----------------------  --------  ---------  -----------------------  --------- 
EPS (pence)                (52.95)                        -   (52.95)   (23.70)p                        -   (23.70)p 
------------------------  --------  -----------------------  --------  ---------  -----------------------  --------- 
 

The reconciliation between underlying EPS and basic EPS is as follows:

 
                                                                                     2020           2019 (restated) 
                                                                              ------------------  ------------------ 
                                                                                 Pence      GBPm     Pence      GBPm 
----------------------------------------------------------------------------  --------  --------  --------  -------- 
Underlying EPS / Underlying (loss)/profit attributable to ordinary 
 shareholders                                                                  (66.78)   (3,998)      5.44       302 
----------------------------------------------------------------------------  --------  --------  --------  -------- 
Total underlying adjustments to loss/profit before tax (note 2)                  17.50     1,048   (26.56)   (1,474) 
----------------------------------------------------------------------------  --------  --------  --------  -------- 
Related tax effects                                                             (3.67)     (220)    (2.58)     (143) 
----------------------------------------------------------------------------  --------  --------  --------  -------- 
EPS / loss attributable to ordinary shareholders                               (52.95)   (3,170)   (23.70)   (1,315) 
----------------------------------------------------------------------------  --------  --------  --------  -------- 
Diluted underlying EPS                                                         (66.78)                5.44 
----------------------------------------------------------------------------  --------  --------  --------  -------- 
 

Basic and diluted earnings per share figures for the comparative periods have been restated and adjusted for the bonus factor of 2.91 to reflect the bonus element of the November 2020 rights issue, in accordance with IAS 33 Earnings per Share. Amounts as originally stated at 31 December 2019 were (69.07)p basic and diluted earnings per share and 15.86p basic and diluted underlying earnings per share.

   7     Payments to shareholders in respect of the period 

Payments to shareholders in respect of the period represent the value of C Shares to be issued in respect of the results for that period. In light of the ongoing COVID-19 pandemic, no issue of C Shares were declared for the year to 31 December 2020.

 
                                        2020             2019 
                                   --------------- 
                                   Pence per        Pence per 
                                       share  GBPm      share  GBPm 
--------------------------------   ---------  ----  ---------  ---- 
Interim (issued in January) (1)            -     -        1.6    87 
---------------------------------  ---------  ----  ---------  ---- 
Final (issued in July) (1)                 -     -          -     - 
--------------------------------   ---------  ----  ---------  ---- 
                                           -     -        1.6    87 
 --------------------------------  ---------  ----  ---------  ---- 
 

(1) On the 6 April 2020, the Group announced that the final shareholder payment of 7.1 pence per share in respect of 2019 would not be paid. This decision was in response to the macro-economic situation and uncertainty caused by COVID-19, preserving GBP137m of cash.

8 Impairment of intangible assets, property, plant and equipment, right-of-use assets and investments

a) Summary

An impairment charge of GBP1,321m (2019: GBP108m) was recognised in the year. This was due to the impact of COVID-19, other market driven events and adverse foreign exchange movements reducing the recoverable amount of certain assets, as a result of reductions in the estimated original equipment (OE) volumes and aftermarket volumes (e.g. from lower EFHs) within the forecasts of future cash flows of each programme or CGU. These cashflow forecasts are discounted to generate the value in use of the programme intangible assets, lease engines (within property, plant and equipment), right-of-use assets and investments. The recoverable amount of other property, plant and equipment has been measured on a fair value less cost of disposal basis.

 
                                      Impairment charge in the year 
                    ----------------------------------------------------------------- 
                                                                                                         Discount rate 
                                                                                                        at 31 December 
                                   Other  Property,                                                               2020 
                              intangible  plant and  Right-of-use                      Recoverable  (31 December 2019) 
                    Goodwill      assets  equipment        assets  Investments  Total       amount                 (1) 
                        GBPm        GBPm       GBPm          GBPm         GBPm   GBPm         GBPm                GBPm 
------------------  --------  ----------  ---------  ------------  -----------  -----  -----------  ------------------ 
 
Civil Aerospace 
 -Trent programme 
 assets (where 
 impairment 
 recognised)               -          39         86           311            -    436            -         11.0% (12%) 
------------------  --------  ----------  ---------  ------------  -----------  -----  -----------  ------------------ 
Civil Aerospace - 
 Business Aviation 
 programme assets 
 (where impairment 
 recognised)               -         437          -             -            -    437          108         11.9% (11%) 
------------------  --------  ----------  ---------  ------------  -----------  -----  -----------  ------------------ 
Civil Aerospace - 
 Specific assets           -           -        219            69           15    303          397       n/a (2) (n/a) 
------------------  --------  ----------  ---------  ------------  -----------  -----  -----------  ------------------ 
Power Systems - 
 Specific assets           -          35          7             1            9     52           96         11.7% (n/a) 
------------------  --------  ----------  ---------  ------------  -----------  -----  -----------  ------------------ 
ITP Aero - 
 Specific assets           -          49         11             -            -     60          229         10.6% (11%) 
------------------  --------  ----------  ---------  ------------  -----------  -----  -----------  ------------------ 
Other                      8          11          9             5            -     33            -             Various 
------------------  --------  ----------  ---------  ------------  -----------  -----  -----------  ------------------ 
Total                      8         571        332           386           24  1,321 
------------------  --------  ----------  ---------  ------------  -----------  ----- 
 
 

(1) Discount rate for 31 December 2019 disclosed where an impairment test was performed.

(2) The impairment charge for Civil Aerospace specific assets, other than investments (10.5% discount rate), has been calculated on a fair value less cost of disposal basis.

(3) The impairment charge of GBP1,321m includes GBP28m charged to the income statement through underlying and GBP1,293m charged to non-underlying.

b) Intangible assets (see note 9)

Goodwill

Goodwill of GBP1,074m (31 December 2019: GBP994m) has been tested for impairment during 2020 on the following basis:

- The carrying values of goodwill have been assessed by reference to value in use, estimated using the expected cash flow approach allowable under IAS 36 Impairment of Assets. Cash flow forecasts used to derive value in use have been prepared by management using the most recent forecasts, which are consistent with external sources of information on market conditions. These forecasts generally cover the next five years, with cash flows beyond this period based on a growth rate of 2.0% that reflects the products, industries and countries in which the relevant CGU or group of CGUs operate. Whilst these forecasts represent management's best estimate, in addition, the impact on the cash flows of (i) a severe but plausible downside scenario and (ii) various sensitivities have also been considered.

- The key assumptions for the impairment tests are the discount rate and, in the cash flow projections, the programme assumptions, the growth rates and the impact of foreign exchange rates on the relationship between selling prices and costs. Impairment tests are performed using prevailing exchange rates.

The principal value in use assumptions for goodwill balances considered to be individually significant are:

Rolls-Royce Power Systems AG

- Trading assumptions (e.g. volume of equipment deliveries, pricing achieved and cost escalation) that are based on current and known future programmes, estimates of market share and long-term economic forecasts;

   -     Plausible downside scenario included with a 15% weighting; 
   -     Cash flows beyond the five-year forecasts that are assumed to grow at 2.0% (2019: 1.0%); and 
   -     Pre-tax discount rate of 11.7% (2019: 12.0%). 

The Directors do not consider that any reasonably possible changes in the key assumptions would cause the value in use of the goodwill to fall below its carrying value.

Rolls-Royce Deutschland Ltd & Co KG

- Trading assumptions (e.g. volume of engine deliveries, flying hours of installed fleet, including assumptions on the recovery of the aerospace industry, and cost escalation) that are based on current and known future programmes, estimates of market share and long-term economic forecasts;

   -     Plausible downside scenario included with a 25% weighting; 
   -     Cash flows beyond the five-year forecasts that are assumed to grow at 2.0% (2019: 1.0%); and 
   -     Pre-tax discount rate of 11.9% (2019: 12.0%). 

The Directors do not consider that any reasonably possible changes in the key assumptions would cause the value in use of the goodwill to fall below its carrying value.

8 Impairment of intangible assets, property, plant and equipment, right-of-use assets and investments continued

Other cash generating units

Goodwill balances across the Group that are not considered to be individually significant were also tested for impairment, resulting in an impairment charge of GBP8m being recognised at 31 December 2020 (31 December 2019: GBP18m).

Other intangible assets (including programme-related intangible assets)

As a result of the impact of COVID-19 on expected OE and aftermarket volumes and adverse foreign exchange movements, o ther intangible assets have been reviewed for impairment in accordance with the requirements of IAS 36. Where there is a triggering event, and for indefinite life brand assets, impairment tests have been performed on the following basis:

- The carrying values have been assessed by reference to value in use as this represents the highest value to the Group in terms of the future cash flows that it can generate. Values in use have been estimated using the expected cash flow approach allowable under IAS 36. Cash flow forecast scenarios have been prepared by management using the most recent forecasts, which are consistent with external sources of information on market conditions over the lives of the respective programmes and incorporate management's best estimate of key assumptions utilising a stochastic analysis to allow for variation in the actual outcome where appropriate. A severe but plausible scenario was also modelled and, in order to risk adjust the cash flows, a weighting (25%/15% downside for Civil Aerospace/Power Systems respectively) was taken between the two scenarios based on management judgement.

- These forecasts include contracted business and management's expectation of speculative business over the life of the programme, together with the cash outflows that are necessary to maintain the current level of economic benefit expected to arise from the asset in its current condition.

- The key programme assumptions underlying the cash flow projections are forecast market share and pricing, programme timings, unit cost assumptions, EFHs, number of shop visits, cost of each shop visit, R&D, capital investment, discount rates and foreign exchange rates.

- The pre-tax cash flow projections have been discounted at 9.6%-11.9% (31 December 2019: 7.0%-15.0%), based on the weighted average cost of capital of the relevant business.

It remains possible that a weaker than expected recovery could result in a deterioration in the future cash flow forecasts that support Civil Aerospace programme intangible assets:

- For intangible assets that have been impaired, a 5% deterioration in EFHs (and hence future cash flows) across the life of the programmes would result in these intangible assets incurring an additional impairment of GBP50m. An increase in the discount rate of 1% would cause the reduce the recoverable amount of the programme assets (GBP108m) to nil.

- For intangible assets where there is existing headroom in the impairment test (and thus no impairment) but where deteriorations in key assumptions over the next 12 months could lead to an impairment, any of the following individual changes in assumptions would cause the recoverable amount of the programme assets to equal the carrying value:

   -     A reduction in engines sales that are forecast but not contracted by 14%; 
   -     An increase in costs of 2%; or 
   -     An increase in discount rates of 1%. 

c) Property, plant and equipment ( see note 10)

Property, plant and equipment has been reviewed for impairment in accordance with the requirements of IAS 36. Following the announcement on the 20 May 2020 to reshape and resize the Group given the financial and operational impact of COVID-19, a strategic review of the Group's sites has been performed. Where the Group expects to exit a Civil Aerospace site, the carrying value of the land and buildings and related plant and equipment have been impaired to their recoverable amount by reference to their fair value (based on professional advice - Level 3 in the IFRS 13 hierarchy) less cost of disposal. The Group has also reviewed whether plant and equipment and assets under construction relating to these locations can be relocated to other parts of the Group for future use. Where no alternative use has been identified, the carrying value of these assets have been impaired to their recoverable amount by reference to their scrap values. An impairment charge of GBP219m has been recognised.

Impairment tests were also considered necessary for Civil Aerospace and ITP Aero engines. An impairment charge of GBP97m was recognised. The impairment tests were performed on the following basis:

- The carrying value of assets have been assessed by reference to their value in use, together with other assets as part of a larger CGU. These have been estimated using the expected cash flow approach allowable under IAS 36 as set out in note 8b above.

- The key assumptions underlying cash flow projections in relation to engines are utilisation of the asset, lease rate, condition of the engine and cost of maintaining, discount rates and foreign exchange rates.

- The pre-tax cash flow projections have been discounted at 10.6%-11.0% based on the weighted average cost of capital of the relevant business.

Other smaller impairments totalling GBP16m were also recognised.

8 Impairment of intangible assets, property, plant and equipment, right-of-use assets and investments continued

d) Right-of-use assets (see note 11)

Right-of-use (RoU) assets have been reviewed for impairment in accordance with the requirements of IAS 36. RoU assets have typically been assessed together with other assets as part of a larger CGU. Other than the items referred to below there have been no impairments of RoU assets.

Impairment tests were considered necessary for lease engines as a result of the impact of COVID-19 on expected future EFHs, operators' fleet plans and the resultant requirement for fewer lease engines to support the aircraft fleets. An impairment charge of GBP311m was recognised against lease engine RoU assets.

Impairment tests were performed on the following basis:

- The carrying values of assets have been assessed by reference to their value in use as set out in note 8b above.

- The key assumptions underlying cash flow projections in relation to the lease engines are utilisation of the asset, lease rate, condition of the engine and cost of maintaining, discount rates and foreign exchange rates.

- The pre-tax cash flow projections have been discounted at 11.0% based on the weighted average cost of capital of the relevant business.

The Civil Aerospace specific asset impairments in the period of GBP69m primarily relate to land and buildings and are a consequence of the strategic review of the Group's sites described above . Assets have been written down to reflect the higher of their revised value in use (11.0% discount rate) or fair value less cost of disposal.

Other smaller impairments totalling GBP6m were also recognised.

e) Investments (see note 12)

As a result of reduced EFHs caused by COVID-19, joint venture investments in Civil Aerospace repair and overhaul facilities were tested for impairment. The value in use was estimated by discounting expected future dividends at 10.5% (cost of equity for the Civil Aerospace business). An impairment of GBP15m was recognised.

As a result of changes in the local market due to climate regulations impacting the offered product, and the impact of COVID-19 on market demand and the liquidity of the business, a Power Systems joint venture was tested for impairment. The value in use of the investment was estimated using the expected cash flow approach. The pre-tax cash flow projections were discounted at 11.7%. An impairment of GBP9m was recognised.

   9     Intangible assets 
 
                                                           Development            Customer 
                     Goodwill  Certification costs         expenditure       relationships  Software (4)  Other  Total 
                         GBPm                 GBPm                GBPm                GBPm          GBPm   GBPm   GBPm 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Cost: 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
At 1 January 2020       1,024                  962               3,294               1,303           967    803  8,353 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Additions                   -                    3                 232                   -            89     40    364 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Acquisition of 
 businesses (see 
 note 24)                  57                    -                   3                  41             -     36    137 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Transferred to 
 assets held for 
 sale (1)                 (3)                    -                (33)                   -          (12)    (4)   (52) 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Disposals                   -                  (1)                   -                   -          (93)    (2)   (96) 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Reclassifications           4                  (4)                 (8)                   -            15    (6)      1 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Exchange 
 differences               30                    3                  76                  59             2     26    196 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
At 31 December 2020     1,112                  963               3,564               1,403           968    893  8,903 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
 
Accumulated amortisation and 
impairment: 
-----------------------------  -------------------  ------------------  ------------------  ------------  -----  ----- 
At 1 January 2020          30                  392               1,201                 354           605    329  2,911 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Charge for the year 
 (2)                        -                   21                 106                  82            81     33    323 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Impairment (3)              8                   17                 481                  31             5     37    579 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Transferred to 
 assets held for 
 sale (1)                   -                    -                (20)                   -          (12)    (4)   (36) 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Disposals                   -                  (1)                   -                   -          (75)    (2)   (78) 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Reclassifications           -                    -                 (2)                   -             2      -      - 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
Exchange 
 differences                -                    -                  37                  11             1     10     59 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
At 31 December 2020        38                  429               1,803                 478           607    403  3,758 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
 
Net book value at: 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
31 December 2020        1,074                  534               1,761                 925           361    490  5,145 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
1 January 2020            994                  570               2,093                 949           362    474  5,442 
-------------------  --------  -------------------  ------------------  ------------------  ------------  -----  ----- 
 

(1) Bergen Engines AS and the Civil Nuclear Instrumentation & Control business have been classified as disposal groups held for sale at 31 December 2020. The North America Civil Nuclear business was classified as a disposal group held for sale on 26 September 2019, prior to this an impairment of goodwill of GBP15m was recognised - see note 24.

(2) Charged to cost of sales and commercial and administrative costs except development costs, which are charged to research and development costs.

(3) As a result of the financial and operational impact of COVID-19 the Group has assessed the carrying value of its intangible assets. Consequently, impairments have been recorded at 31 December 2020. The impairment of development expenditure has arisen as a result of the anticipated reduction in OE volumes and future engine flying hours, and the consequential recoverability of these assets. The impairment charge of GBP579m includes GBP12m charged to the income statement through underlying and GBP567m charged to non-underlying. See note 8 for further details.

(4) Includes GBP110m (2019: GBP129m) of software under course of construction which is not amortised.(.)

   10    Property, plant and equipment 
 
                                                                                                   In course of 
                         Land and buildings  Plant and equipment  Aircraft and engines             construction  Total 
                                       GBPm                 GBPm                  GBPm                     GBPm   GBPm 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Cost: 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
At 1 January 2020                     2,020                5,497                   876                      401  8,794 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Additions                                14                  145                   162                      232    553 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Acquisition of 
 businesses                               9                    7                     -                        1     17 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Transferred to assets 
 held for sale (1)                     (32)                 (77)                     -                      (9)  (118) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Disposals of businesses                   -                 (19)                     -                        -   (19) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Disposals/write offs                   (52)                (264)                  (19)                     (24)  (359) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Reclassifications (2)                    25                  117                     3                    (150)    (5) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Exchange differences                     10                   36                     3                        -     49 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
At 31 December 2020                   1,994                5,442                 1,025                      451  8,912 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
 
Accumulated 
depreciation and 
impairment: 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
At 1 January 2020                       590                3,167                   223                       11  3,991 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Charge for the year (3)                  71                  362                    56                        -    489 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Impairment (4)                           71                  137                    97                       27    332 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Transferred to assets 
 held for sale (1)                     (29)                 (74)                     -                      (8)  (111) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Disposals of businesses                   -                 (19)                     -                        -   (19) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Disposals/write offs                   (33)                (248)                   (2)                     (13)  (296) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Reclassifications (2)                    10                  (1)                     -                      (9)      - 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Exchange differences                    (1)                   12                     -                        -     11 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
At 31 December 2020                     679                3,336                   374                        8  4,397 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
 
Net book value at: 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
31 December 2020                      1,315                2,106                   651                      443  4,515 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
1 January 2020                        1,430                2,330                   653                      390  4,803 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
 

(1) Bergen Engines AS and the Civil Nuclear Instrumentation & Control business have been classified as disposal groups held for sale at 31 December 2020. In 2019, the North America Civil Nuclear business was classified as a disposal group held for sale on 26 September 2019 - see note 24.

(2) Includes reclassifications of assets under construction to the relevant classification in property, plant and equipment or intangible assets when available for use.

(3) Depreciation charged during the year is presented in the income statement or included in the cost of inventory as appropriate.

(4) As a result of the financial and operational impact of COVID-19 the Group has assessed the carrying value of its property, plant and equipment. In addition, following the announcement on 20 May 2020 to reshape and resize the Group due to the financial and operational impact of COVID-19, certain assets have been impaired to their recoverable amount where the Group expects to exit the site. The impairment of GBP332m includes GBP14m charged to the income statement through underlying and GBP318m charged to non-underlying. See note 8 for further details.

   11    Right-of-use assets 
 
                                           Land and buildings  Plant and equipment  Aircraft and engines  Total 
                                                         GBPm                 GBPm                  GBPm   GBPm 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Cost: 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
At 1 January 2020                                         504                  128                 1,767  2,399 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Additions/modification of leases                         (27)                   33                   129    135 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Acquisition of business                                     -                    1                     -      1 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Transferred to assets held for sale (1)                  (13)                  (3)                     -   (16) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Disposals                                                (18)                 (10)                  (67)   (95) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Exchange differences                                        1                    1                     4      6 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
At 31 December 2020                                       447                  150                 1,833  2,430 
-----------------------------------------  ------------------  -------------------  -------------------- 
 
Accumulated depreciation and impairment: 
At 1 January 2020                                          55                   29                   306    390 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Charge for the year                                        56                   35                   255    346 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Impairment (2)                                             66                    9                   311    386 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Transferred to assets held for sale (1)                   (5)                  (2)                     -    (7) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Disposals                                                (10)                 (10)                  (67)   (87) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Exchange differences                                      (3)                  (1)                     1    (3) 
-----------------------------------------  ------------------  -------------------  -------------------- 
At 31 December 2020                                       159                   60                   806  1,025 
 
Net book value at: 
----------------------------------------- 
31 December 2020                                          288                   90                 1,027  1,405 
-----------------------------------------  ------------------  -------------------  -------------------- 
1 January 2020                                            449                   99                 1,461  2,009 
-----------------------------------------  ------------------  ------------------- 
 

(1) Bergen Engines AS and the Civil Nuclear Instrumentation & Control business have been classified as disposal groups held for sale at 31 December 2020. In 2019, the North America Civil Nuclear business was classified as a disposal group held for sale on 26 September 2019 - see note 24.

(2) The impairment of GBP386m includes GBP2m charged to the income statement through underlying and GBP384m charged to non-underlying and is a result of the impact of COVID-19. See note 8 for further details.

   12    Investments 

Equity accounted and other investments

 
                                                                       Equity accounted              Other 
                                                               Joint ventures  Associates  Total  Unlisted 
                                                                         GBPm        GBPm   GBPm      GBPm 
At 1 January 2020                                                         402           -    402        14 
  Additions (1)                                                            19           -     19         5 
  Disposals (2)                                                           (6)           -    (6)         - 
  Impairment (3)                                                         (24)           -   (24)         - 
  Share of retained profit (4)                                            130           1    131         - 
  Reclassification of deferred profit to deferred income (5)             (96)           -   (96)         - 
  Transfer to subsidiary (2)                                              (4)           -    (4)         - 
  Exchange differences                                                   (23)           -   (23)         - 
  Share of OCI                                                            (5)           -    (5)         - 
At 31 December 2020                                                       393           1    394        19 
 

(1) On 18 May 2020, the Group increased its shareholding in Reaction Engines Limited from 2% to 10.1%.

(2) On 15 January 2020, the Group completed the acquisition of Qinous GmbH (increasing its shareholding from 24% to 100%). On 6 July 2020, the Group completed the disposal of its 18% shareholding in Exostar LLC. See note 24.

(3) During the year, the Group recognised an impairment of GBP24m charge to the income statement through non-underlying. See note 8.

   (4)   See table below. 

(5) The Group's share of unrealised profit on sales to joint ventures is eliminated against the carrying value of the investment in the entity. Any excess amount once the carrying value is reduced to nil is recorded as deferred income.

Reconciliation of share of retained profit/(loss) to the income statement and cash flow statement:

 
                                                                                      2020   2019 
                                                                                      GBPm   GBPm 
-----------------------------------------------------------------------------------  -----  ----- 
Share of results of joint ventures and associates                                      133    141 
Adjustments for intercompany trading (1)                                                58   (37) 
Share of results of joint venture and associates to the Group (income statement)       191    104 
Dividends paid by joint ventures and associates to the Group (cash flow statement)    (60)   (92) 
Share of retained profit above                                                         131     12 
 

(1) During the year, the Group sold spare engines to Rolls-Royce & Partners Finance, a joint venture company. The Group's share of the profit on these sales is deferred and released to match the depreciation of the engines in the joint venture's financial statements. In 2020, profit deferred on the sale of engines was lower than the release of that deferred in prior years.

   13    Inventories 
 
                       2020   2019 
                       GBPm   GBPm 
Raw materials           417    522 
Work in progress      1,139  1,652 
Finished goods        2,111  2,119 
Payments on account      23     27 
                      3,690  4,320 
 
   14    Trade receivables and other assets 
 
                                                                   Current        Non-current    Total 
                                                                                                        -------- 
                                                                2020  2019 (4)   2020  2019 (4)   2020  2019 (4) 
                                                                GBPm      GBPm   GBPm      GBPm   GBPm      GBPm 
Trade receivables (1)                                          2,479     2,354      -         -  2,479     2,354 
Receivables due on risk and revenue sharing arrangements 
 (RRSAs)                                                         603       719     82       150    685       869 
Amounts owed by joint ventures and associates (1)                486       197     16        12    502       209 
Costs to obtain contracts with customers (2)                      12        12     50        33     62        45 
Other taxation and social security receivable                    225       187      6        29    231       216 
Other receivables (3)                                            639       766     20         2    659       768 
Prepayments                                                      412       356    425       248    837       604 
                                                               4,856     4,591    599       474  5,455     5,065 
 
 

(1) Includes GBP577m (2019: GBP267m) of trade receivables held to collect or sell and GBP361m (2019: GBP76m) of receivables from joint ventures and associates held to collect or sell.

(2) These are amortised over the term of the related contact, resulting in amortisation of GBP10m (2019: GBP8m). There were no impairment losses.

(3) Includes GBP2m owed by the UK Government at 31 December 2020 for amounts claimed by the Group under furlough arrangements. In addition, other receivables includes unbilled recoveries relating to overhaul activity.

(4) During the year the presentation of trade receivables and other assets have been analysed in greater detail, without changing the total amount previously reported. As a consequence some comparative balances and currency movements have been represented in additional and more appropriate line items. Trade receivables have decreased by GBP184m, costs to obtain contracts with customers have increased by GBP2m and other receivables have decreased by GBP903m. Receivables due on RRSAs and other taxation & social security receivable totalling GBP1,085m are now presented as separate lines. This has also resulted in an associated re-presentation between financial and non-financial assets, with an increase of non-financial instruments of GBP2m and a decrease in financial instruments of GBP2m (trade receivables and similar items GBP(91)m and other non-derivative financial assets GBP89m). The total amount of trade receivables and other assets from 2019 remains unchanged.

The Group has historically undertaken the sale of trade receivables, without recourse, to banks (commonly known as invoice discounting or factoring). This activity has previously been used to normalise customer receipts as certain aerospace customers have extended their payment terms. This in turn has helped normalise Group cash flows in line with physical delivery volumes. During the year to 31 December 2020, invoice discounting has substantially reduced. At 31 December 2020, GBP54m was drawn under factoring facilities, a decrease of GBP1,063m compared to December 2019, representing cash collected before it was contractually due from the customer. Trade receivables factored are generally due within the following quarter.

The expected credit losses for trade receivables and other assets has increased by GBP114m to GBP252m (31 December 2019: GBP138m). This increase is mainly driven by the impact of COVID-19 on the Civil Aerospace business of GBP97m, of which GBP46m relates to the deterioration of the market credit ratings of customers and GBP51m relates to updates to the recoverability of other receivables.

15 Cash and cash equivalents

 
                                                               2020   2019 
                                                               GBPm   GBPm 
Cash at bank and in hand                                        940    825 
Money-market funds                                              669  1,095 
Short-term deposits                                           1,843  2,523 
Cash and cash equivalents per the balance sheet               3,452  4,443 
Cash and cash equivalents within assets held for sale            51      - 
Cash and cash equivalents per net funds                       3,503  4,443 
Overdrafts (note 19)                                            (7)    (8) 
Cash and cash equivalents per cash flow statement (page 20)   3,496  4,435 
 

Cash and cash equivalents at 31 December 2020 includes GBP143m (2019: GBP34m) that is not available for general use by the Group. This balance includes GBP103m which is held in an account that is exclusively for the general use of Rolls-Royce Submarines Limited. This cash is not available for use by other entities within the Group. The remaining balance relates to cash held in non-wholly owned subsidiaries and joint arrangements.

Balances are presented on a net basis when the Group has both a legal right of offset and the intention to either settle on a net basis or realise the asset and settle the liability simultaneously.

   16    Trade payables and other liabilities 
 
                                                     Current        Non-current    Total 
                                                                                          -------- 
                                                  2020  2019 (3)   2020  2019 (3)   2020  2019 (3) 
                                                  GBPm      GBPm   GBPm      GBPm   GBPm      GBPm 
Trade payables                                   1,418     1,906      -        62  1,418     1,968 
Payables due on RRSAs                              697     1,029      -         -    697     1,029 
Amounts owed to joint ventures and associates      583       916      -        36    583       952 
Customer concession credits                      1,536     1,463    514       495  2,050     1,958 
Warranty credits                                   173       185    196       218    369       403 
Accruals                                         1,322     1,712    117        89  1,439     1,801 
Deferred receipts from RRSA workshare partners      17        17    507       516    524       533 
Government grants (1)                               16        12     66        71     82        83 
Other taxation and social security                 127       128      7         -    134       128 
Other payables (2)                                 764     1,082    515       584  1,279     1,666 
                                                 6,653     8,450  1,922     2,071  8,575    10,521 
 
 

(1) During the year, GBP10m (2019: GBP12m) of government grants were released to the income statement.

(2) Other payables includes financial penalties from agreements with investigating bodies, parts purchase obligations, payroll liabilities, HMG levies and deferred consideration for recent acquisitions.

(3) During the year the presentation of trade payables and other liabilities have been analysed in greater detail, without changing the total amount previously reported. As a consequence some comparative balances and currency movements have been represented in additional and more appropriate line items. Trade payables have decreased by GBP332m, amounts owed to joint ventures and associates increased by GBP118m, accruals have decreased by GBP39m and other payables have decreased by GBP3,137m. Payables due on RRSAs, customer concession credits and warranty credits totalling GBP3,390m are now presented as separate lines. This has also resulted in an associated representation between financial and non-financial liabilities, with an increase of financial instruments of GBP1,655m (trade payables and similar items GBP(83)m and other non-derivative financial liabilities GBP1,738m) and a decrease in non-financial instruments of GBP1,655m. The total amount of trade payables and other liabilities from 2019 remains unchanged.

Our payment terms with suppliers vary on the products and services being sourced, the competitive global markets we operate in and other commercial aspects of suppliers' relationships. Industry average payment terms vary between 90-120 days. We offer reduced payment terms for smaller suppliers, so that they are paid in 30 days. In line with aerospace industry practice, we offer a supply chain financing (SCF) programme in partnership with banks to enable suppliers, including joint ventures, who are on our standard 75-day payment terms to receive their payments sooner. The SCF programme is available to suppliers at their discretion and does not change our rights and obligations with suppliers nor the timing of our payment of suppliers. At 31 December 2020 suppliers had drawn GBP582m under the SCF scheme (31 December 2019: GBP859m).

   17    Contract assets and liabilities 
 
                                      Current      Non-current (1)   Total (2) 
                                                                                ----- 
                                     2020   2019      2020     2019       2020   2019 
                                     GBPm   GBPm      GBPm     GBPm       GBPm   GBPm 
Contract assets 
Contract assets with customers        416    404       660    1,092      1,076  1,496 
Participation fee contract assets      48     57       386      542        434    599 
                                      464    461     1,046    1,634      1,510  2,095 
 
 

(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 is further split according to when the related performance obligation is expected to be satisfied and therefore when revenue is estimated to be recognised in the income statement. Further disclosure of contract assets is provided in the table above, which shows within current the element of consideration that will become unconditional in the next year.

   (2)   Contract assets are classified as non-financial instruments. 

Contract assets with customers includes GBP726m (31 December 2019: GBP1,086m) of Civil Aerospace LTSA assets, with most of the remainder relating to Defence. The main driver of the decrease in the Group balance is a result of revenue relating to performance obligations satisfied in previous years being adjusted by GBP599m in Civil Aerospace, primarily as a result of COVID-19 reducing engine flying hours (resulting in a reduction in contract price) below the levels previously estimated over the term of the contracts with a corresponding reduction in the contract asset.

Participation fee contract assets have reduced by GBP(165)m (31 December 2019: reduced by GBP55m) due to the impairment of engine programme participation fees of GBP(149)m, amortisation exceeding additions by GBP(36)m and foreign exchange on consolidation of overseas entities of GBP20m.

The absolute value of expected credit losses for contract assets has increased by GBP1m to GBP14m (31 December 2019: GBP13m).

No impairment losses of contract assets (31 December 2019: none) have arisen during the year to 31 December 2020.

   17    Contract assets and liabilities continued 
 
                         Current      Non-current   Total 
                                                            ------ 
                        2020   2019    2020   2019    2020    2019 
                        GBPm   GBPm    GBPm   GBPm    GBPm    GBPm 
Contract liabilities   4,187  4,228   6,245  6,612  10,432  10,840 
 
 

During the year GBP2,792m (2019: GBP3,491m) of the opening contract liability was recognised as revenue. Contract liabilities have decreased by GBP408m. The main driver of the change in the Group balance is as a result of a reduction in deposits held, reflecting utilisation of amounts received in previous years as engines and aftermarket services were delivered in 2020. As a result of COVID-19 the level of new deposits received were at lower than normal levels.

The Civil Aerospace LTSA liabilities increased by GBP58m to GBP6,841m (2019: GBP6,783m). LTSA revenue recognised as the performance obligations have been completed has exceeded cash receipts in the year due to the lower level of flying hours that drive cash receipts, decreasing the contract liability. This has been offset due to the 54% decrease in current year Civil Aerospace engine flying hours, together with a phased recovery, resulting in revenue relating to performance obligations satisfied in previous years being adjusted downwards by GBP462m which increases the contract liability.

   18    Financial assets and liabilities 

Carrying value of other financial assets and liabilities

 
                                       Derivatives 
                      Foreign 
                     exchange      Commodity  Interest rate         Total      Financial 
                    contracts      contracts  contracts (1)   derivatives          RRSAs  Other  C Shares    Total 
                         GBPm           GBPm           GBPm          GBPm           GBPm   GBPm      GBPm     GBPm 
At 31 December 
2020 
Non-current 
 assets                   396             18            258           672              -     15         -      687 
Current assets             45              7             42            94              -     13         -      107 
Assets                    441             25            300           766              -     28         -      794 
Current 
 liabilities            (522)           (17)           (11)         (550)            (5)   (25)      (28)    (608) 
Non-current 
 liabilities          (2,790)           (19)          (113)       (2,922)           (76)   (48)         -  (3,046) 
Liabilities           (3,312)           (36)          (124)       (3,472)           (81)   (73)      (28)  (3,654) 
                      (2,871)           (11)            176       (2,706)           (81)   (45)      (28)  (2,860) 
 
At 31 December 
2019 
Non-current 
 assets                   234             14            203           451              -     16         -      467 
Current assets             16              9             49            74              -     12         -       86 
Assets                    250             23            252           525              -     28         -      553 
Current 
 liabilities            (394)            (5)              -         (399)           (31)   (32)      (31)    (493) 
Non-current 
 liabilities          (2,960)            (6)            (9)       (2,975)           (79)   (40)         -  (3,094) 
Liabilities           (3,354)           (11)            (9)       (3,374)          (110)   (72)      (31)  (3,587) 
                      (3,104)             12            243       (2,849)          (110)   (44)      (31)  (3,034) 
 
 
   (1)   Includes the foreign exchange impact of cross-currency interest rate swaps. 

Derivative financial instruments

Movements in fair value of derivative financial assets and liabilities were as follows:

 
                                                           Interest rate       Interest rate 
                                                           instruments -       instruments - 
                 Foreign exchange          Commodity     hedge accounted           non-hedge 
                      instruments        instruments                 (2)           accounted             Total 
                2020         2019   2020        2019   2020         2019   2020         2019     2020     2019 
                GBPm         GBPm   GBPm        GBPm   GBPm         GBPm   GBPm         GBPm     GBPm     GBPm 
At 1 
 January     (3,104)      (3,764)     12        (34)    229          292     14            -  (2,849)  (3,506) 
Movements 
 in fair 
 value 
 hedges            -            -      -           -    139         (27)      -            -      139     (27) 
Movements 
 in cash 
 flow 
 hedges           18          (4)      6          13   (60)            -      -            -     (36)        9 
Movements 
 in other 
 derivative 
 contracts 
 (1)            (23)         (43)   (62)          36      -            -   (75)           14    (160)        7 
Contracts 
 settled         238          707     33         (3)   (75)         (36)      4            -      200      668 
At 31 
 December    (2,871)      (3,104)   (11)          12    233          229   (57)           14  (2,706)  (2,849) 
 
 
   (1)   Included in net financing. 
   (2)   Includes the foreign exchange impact of cross-currency interest rate swaps. 
   18    Financial assets and liabilities continued 

Financial risk and revenue sharing arrangements (RRSAs) and other financial assets and liabilities

 
                                             Financial RRSAs    Other liabilities    Other assets 
                                                2020     2019       2020      2019    2020    2019 
                                                GBPm     GBPm       GBPm      GBPm    GBPm    GBPm 
At 1 January as previously reported            (110)    (227)       (72)      (62)      16       - 
 
  Reclassification to borrowings (1)               -       79          -         -       -       - 
 
At 1 January restated                          (110)    (148)       (72)      (62)      16       - 
 
  Exchange adjustments included in OCI           (6)       10        (2)         1       -       - 
 
  Additions                                        -      (4)       (17)      (37)       -       - 
 
  Financing charge (2)                           (3)      (3)       (13)       (3)       -       - 
 
  Excluded from underlying profit: 
 
    Changes in forecast payments (2)             (3)        1          -         -       -       - 
 
    Exchange adjustments (2)                       -        6          -         -       -       - 
 
  Cash paid                                       39       28         18        29     (1)       - 
 
  Other                                            -        -         13         -       -       - 
 
  Reclassification from trade receivables          -        -          -         -       -      16 
 
  Reclassification to held for sale                2        -          -         -       -       - 
 
At 31 December                                  (81)    (110)       (73)      (72)      15      16 
 
 

(1) In 2019, the Group reclassified GBP79m as borrowings previously included in other financial liabilities.

(2) Included in financing.

Fair values of financial instruments equate to book values with the following exceptions:

 
                                2020                    2019 
                       Book value  Fair value  Book value  Fair value 
                             GBPm        GBPm        GBPm        GBPm 
Borrowings - Level 1      (4,886)     (4,814)     (3,206)     (3,147) 
Borrowings - Level 2        (401)       (403)       (125)       (130) 
Financial RRSAs              (81)        (89)       (110)       (112) 
 

Fair values

The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms-length transaction. Fair values have been determined with reference to available market information at the balance sheet date, using the methodologies described below.

- Non-current investments - other comprise unconsolidated companies and are measured at fair value.

- Money market funds, included within cash and cash equivalents, are valued using Level 1 methodology. Fair values are assumed to approximately equal cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not exceeding six months.

- The fair values of held to collect trade receivables and similar items, trade payables and other similar items, other non-derivative financial assets and liabilities, short-term investments and cash and cash equivalents are assumed to approximate to cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not exceeding six months.

- Fair values of derivative financial assets and liabilities and trade receivable held to collect or sell (31 December 2020: GBP938m; 31 December 2019: GBP344m) 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 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 31 December 2020, Level 3 assets totalled GBP15m (31 December 2019: GBP16m).

- 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).

   19    Borrowings and lease liabilities 
 
                                           Current      Non-current   Total 
                                                                             ----- 
                                          2020   2019    2020   2019   2020   2019 
                                          GBPm   GBPm    GBPm   GBPm   GBPm   GBPm 
Unsecured 
Overdrafts                                   7      8       -      -      7      8 
Bank loans                                   9     27      10     16     19     43 
Commercial paper (1)                       300      -       -      -    300      - 
2.375% Notes 2020 US$500m (2)                -    378       -      -      -    378 
2.125% Notes 2021 EUR750m (2)              680      -       -    655    680    655 
0.875% Notes 2024 EUR550m (3)                -      -     511    481    511    481 
3.625% Notes 2025 US$1,000m (3)              -      -     800    781    800    781 
3.375% Notes 2026 GBP375m (4)                -      -     420    410    420    410 
4.625% Notes 2026 EUR750m (5)                -      -     667      -    667      - 
5.75% Notes 2027 $1,000m (5)                 -      -     724      -    724      - 
5.75% Notes 2027 GBP545m                     -      -     539      -    539      - 
1.625% Notes 2028 EUR550m (3)                -      -     545    501    545    501 
Other loans                                 17     22      58     52     75     74 
Total unsecured                          1,013    435   4,274  2,896  5,287  3,331 
 
Lease liabilities                          259    340   1,784  2,014  2,043  2,354 
 
Total borrowings and lease liabilities   1,272    775   6,058  4,910  7,330  5,685 
 
 

All outstanding items described above as notes are listed on the London Stock Exchange.

(1) On the 27 April 2020, the Group issued Commercial paper of GBP300m to the Covid Corporate Financing Facility (CCFF), a fund operated by the Bank of England on behalf of HM Treasury. The borrowings are repayable on 17 March 2021 and are held on the balance sheet at amortised cost.

(2) These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay oating rates of GBP interest, which form a fair value hedge.

(3) These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay oating rates of GBP interest, which form a fair value hedge. They are also subject to interest rate swap agreements under which the Group has undertaken to pay fixed rates of interest, which are classified as fair value through profit and loss.

(4) These notes are the subject of interest rate swap agreements under which the Group has undertaken to pay oating rates of interest, which form a fair value hedge. They are also subject to interest rate swap agreements under which the Group has undertaken to pay fixed rates of interest, which are classified as fair value through profit and loss.

(5) These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay fixed rates of GBP interest, which form a cash flow hedge.

During the year, the Group issued $1,000m, EUR750m and GBP545m of bond notes, EUR750m of which matures in 2026 and $1,000m and GBP545m in 2027. The Group also repaid a $500m bond during the year. The Group issued GBP300m of commercial paper under the Covid Corporate Financing Facility made available by the Bank of England in response to COVID-19.

The Group also entered into a new GBP1,000m bank loan maturing in 2022 and a new committed GBP2,000m loan maturing in 2025 (supported by an 80% guarantee from UK Export Finance and available to draw until June 2021). Also during 2020 the Group extended the maturity of the GBP2,500m committed revolving credit facility from 2024 to 2025. These facilities were undrawn at the year end. None of these facilities are subject to any financial covenant.

Under the terms of certain of its recent loan facilities, the Company is restricted from declaring, making or paying distributions to shareholders on or prior to 31 December 2022 and from declaring, making or paying distributions to shareholders from 1 January 2023 unless certain conditions are satisfied. The restrictions on distributions do not prevent shareholders from redeeming C Shares issued in January 2020 or prior to that.

   20    Leases 

Leases as lessee

The net book value of lease right-of-use assets at 31 December 2020 was GBP1,405m (2019: GBP2,009m), with a lease liability of GBP2,043m (2019: GBP2,354m) (as per note 19). The condensed consolidated income statement shows the following amounts relating to leases:

 
                                                                                                          2020   2019 
                                                                                                          GBPm   GBPm 
Land and buildings depreciation and impairment (1)                                                       (122)   (59) 
Plant and equipment depreciation (2)                                                                      (44)   (33) 
Aircraft and engines depreciation and impairment (3)                                                     (566)  (319) 
Total depreciation and impairment charge for right-of-use assets                                         (732)  (411) 
Adjustment of amounts payable under residual value guarantees within lease liabilities (3, 
 4)                                                                                                        102      - 
Expense relating to short-term leases of 12 months or less recognised as an expense on a straight-line 
 basis (2)                                                                                                (18)   (23) 
Expense relating to variable lease payments not included in lease liabilities (3,5)                        (1)    (1) 
Total operating costs                                                                                    (649)  (435) 
Interest expense (6)                                                                                      (74)   (88) 
Total lease expense                                                                                      (723)  (523) 
Income from sub-leasing right-of-use assets                                                                 97     79 
Total amount recognised in income statement                                                              (626)  (444) 
 

(1) Included in cost of sales and commercial and administration costs depending on the nature and use of the right-of-use asset.

(2) Included in cost of sales, commercial and administration costs, or research and development depending on the nature and use of the right-of-use asset.

   (3)   Included in cost of sales. 

(4) Where the cost of meeting residual value guarantees is less than that previously estimated, as costs have been mitigated or liabilities waived by the lessor, the lease liability has been remeasured. Where the value of this remeasurement exceeds the value of the right-of use asset, the reduction in the lease liability is credited to cost of sales.

(5) Variable lease payments primarily arise on a small number of contracts where engine lease payments are solely dependent upon utilisation rather than a periodic charge.

   (6)   Included in financing costs. 

The total cash outflow for leases in 2020 was GBP377m (2019: GBP383m). Of this GBP358m related to leases reflected in the lease liability, GBP18m to short-term leases where lease payments are expensed on a straight-line basis and GBP1m for variable lease payments where obligations are only due when the assets are used. The timing difference between income statement charge and cash flow relates to costs incurred at the end of leases for residual value guarantees and restoration costs that are recognised within depreciation over the term of the lease, the most significant amounts relate to engine leases.

   21    Provisions 
 
                                             Charged to 
                           At                    income                        Transfers                       At 31 
                    1 January     Business    statement                      to held for      Exchange      December 
                         2020  acquisition          (1)  Reversed  Utilised         sale   differences          2020 
                         GBPm         GBPm         GBPm      GBPm      GBPm         GBPm          GBPm          GBPm 
Trent 1000 
 exceptional 
 costs                  1,382            -           40     (560)     (541)            -             -           321 
Contract losses           773            -          438     (345)      (58)          (4)             4           808 
Restructuring              68            -          411      (38)     (206)            -             1           236 
Warranties and 
 guarantees               345            3           95       (9)     (104)         (14)            11           327 
Customer 
 financing                 22            -            -       (5)         -            -             -            17 
Insurance                  70            -           10      (12)       (8)            -             -            60 
Tax related 
 interest and 
 penalties                 55            -           16      (24)      (15)            -             1            33 
Employer 
 liability 
 claims                    49            -            4       (1)       (2)            -             -            50 
Other                      40            1           97      (15)      (29)            -           (1)            93 
                        2,804            4        1,111   (1,009)     (963)         (18)            16         1,945 
Current 
 liabilities              858                                                                                    826 
Non-current 
 liabilities            1,946                                                                                  1,119 
 

(1) The charge to the income statement includes GBP48m as a result of the unwinding of the discounting of provisions previously recognised of which GBP15m has been charged to underlying and GBP33m charged to non-underlying.

   21    Provisions continued 

Trent 1000 exceptional costs

In November 2019, we 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. An exceptional charge of GBP1,361m (at underlying exchange rates) was recorded in 2019, GBP1,531m at prevailing exchange rates and net of GBP203m reflecting insurance receipts and contract accounting adjustments. Of the charge, GBP1,275m was recorded in relation to Trent 1000 exceptional costs, and GBP459m in relation to contract losses (see below).During the year ended 31 December 2020, and reflecting the impact of COVID-19 and the work we have performed to reduce fleet AOG levels and improve the availability of spare engines, the total estimated Trent 1000 cash costs relating to remediation shop visits and customer disruption reduced the provision by GBP560m, taking into account the expected underlying exchange rates and a share of the costs borne by the RRSAs the income statement impact was GBP390m (see note 2). In the year we have utilised GBP541m of the Trent 1000 exceptional costs provision. This represents customer disruption costs settled in cash and credit notes, and remediation shop visit costs. The remaining provision is expected to be utilised over the period 2021 to 2023. A 12-month delay in the availability of the modified HPT

blade could lead to a GBP60-100m increase in the Trent 1000 exceptional costs provision.

Contract losses

Provisions for contract losses are recorded when the direct costs to fulfil a contract are assessed as being greater than the expected revenue. Provisions for contract losses are expected to be utilised over the term of the customer contracts, typically within 10-15 years.

During 2019, contract losses of GBP459m (at prevailing exchange rates) were recognised relating to the upfront recognition of future losses on a small number of contracts which became loss-making as a result of the margin impact of the updated HP turbine durability expectations on the Trent 1000 TEN. During the year, these Trent 1000 TEN loss-making contracts have improved by GBP230m (see note 2). For these contracts, a reduction in EFHs resulting from COVID-19 has allowed for a reassessment of shop visits required and the cost savings identified have more than offset the reduction in future revenue leading to an improvement in the overall position of these contracts.

EFHs have reduced as a result of the impact of COVID-19. For certain Civil Aerospace contracts, the impact of this reduction across the contract term has been to significantly reduce revenue without an associated reduction in shop visit costs. Consequently, during the year there have been an increased number of contracts that have become loss-making. A reduction in Civil Aerospace widebody engine flying hours of 15% and the associated decrease in revenues and costs could lead to a GBP10m-GBP15m increase in the onerous contract provision.

Additional contract losses for the Group of GBP406m have been recognised in the year, together with GBP36m relating to changes in foreign exchange and the effect of discounting.

Warranties and guarantees

Provisions for warranties and guarantees primarily relate to products sold and generally cover a period of up to three years.

Restructuring

In May 2020, the Group announced a fundamental restructuring programme in response to the financial and operational impact caused by COVID-19. This activity will reshape and resize the Group with an anticipated headcount reduction of at least 9,000. As a consequence of this announcement, and based on the detailed plans communicated during 2020, a provision (net of reversals) of GBP373m has been recorded and recognised in cost of sales and commercial and administrative costs. During the year, GBP206m has been utilised as part of these plans. At 31 December 2020, the provision of GBP236m is expected to be utilised over the period 2021-2022. Included within the exceptional charge of GBP489m are costs of GBP116m associated with other initiatives to enable the restructuring which have been charged directly to the income statement.

Customer financing

Customer financing provisions have been made to cover guarantees provided for asset value and/or financing where it is probable that a payment will be made.

In addition to the provisions recognised, the Group has contingent liabilities for customer financing arrangements where they payment is not probable as described below.

In connection with the sale of its products the Group will, on some occasions, provide financing support for its customers, generally in respect of civil aircraft. The Group's commitments relating to these financing arrangements are spread over many years, relate to a number of customers and a broad product portfolio and are generally secured on the asset subject to the financing. These include commitments of $1.9bn (2019: $2.8bn) (on a discounted basis) to provide facilities to enable customers to purchase aircraft (of which approximately $630m could be called during 2021). These facilities may only be used if the customer is unable to obtain financing elsewhere and are priced at a premium to the market rate. Significant events impacting the international aircraft financing market, including the COVID-19 pandemic, the failure by customers to meet their obligations under such financing agreements, or inadequate provisions for customer financing liabilities may adversely affect the Group's financial position.

   21    Provisions continued 

Commitments on delivered aircraft in excess of the amounts provided are shown in the table below. These are reported on a discounted basis at the Group's borrowing rate to better reflect the time span over which these exposures could arise. These amounts do not represent values that are expected to crystallise. The commitments are denominated in US Dollars. As the Group does not generally adopt cash flow hedge accounting for future foreign exchange transactions, this amount is reported together with the sterling equivalent at the reporting date spot rate. The values of aircraft providing security are based on advice from a specialist aircraft appraiser.

 
                                                      2020        2019 
                                                   GBPm    $m  GBPm    $m 
Gross commitments                                    38    52    60    79 
Value of security                                  (14)  (19)   (9)  (11) 
Guarantees                                          (5)   (6)   (8)  (11) 
Net commitments                                      19    27    43    57 
Net commitments with security reduced by 20% (1)     22    30    43    57 
 

(1) Although sensitivity calculations are complex, the reduction of the relevant security by 20% illustrates the sensitivity of the contingent liability to changes in this assumption.

Insurance

The Group's captive insurance company retains a portion of the exposures it insures on behalf of the remainder of the Group. Significant delays 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. Provisions for outstanding claims are established to cover the outstanding expected liability as well as claims incurred but not yet reported.

Tax related interest and penalties

Provisions for tax related interest and penalties relate to uncertain tax positions in some of the jurisdictions in which the Group operates. Utilisation of the provisions will depend on the timing of resolution of the issues with the relevant tax authorities.

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.

Other

Other provisions comprise a number of liabilities with varying expected utilisation rates.

   22    Pensions and other post-retirement and long-term employee benefits 

Amounts recognised in the income statement

 
                                                    2020                                      2019 
                                                   Overseas schemes  Total                   Overseas schemes  Total 
                                  UK schemes GBPm              GBPm   GBPm  UK schemes GBPm              GBPm   GBPm 
Defined benefit schemes: 
  Current service cost and 
   administrative expenses                    153                67    220              164                52    216 
  Other past service 
   (credit)/cost (1)                        (308)                20  (288)                -                 6      6 
                                            (155)                87   (68)              164                58    222 
Defined contribution schemes                   80                84    164               66                91    157 
Operating (credit)/cost                      (75)               171     96              230               149    379 
Net financing (credit)/charge in 
 respect of defined benefit 
 schemes                                     (26)                27      1             (59)                36   (23) 
Total income statement 
 (credit)/charge                            (101)               198     97              171               185    356 
 

(1) The UK past-service credit of GBP308m comprises: GBP213m arising from the restructuring programme and the introduction of the Bridging Pension Option (BPO) - see above; GBP67m as a result of the closure of the scheme to future accrual - see above; GBP35m as a result of the manager consultation - see above; offset by a GBP7m past-service cost recognised as a result of the 20 November High Court judgement that previous statutory transfer values including guaranteed minimum pensions built up between May 1990 and April 1997 must be equalised between men and women.

   22    Pensions and other post-retirement and long-term employee benefits continued 

Amounts recognised in the balance sheet in respect of defined benefit schemes

 
                                                        2020                                   2019 
                                        UK schemes  Overseas schemes    Total  UK schemes  Overseas schemes    Total 
                                              GBPm              GBPm     GBPm        GBPm              GBPm     GBPm 
At 1 January                                 1,141           (1,349)    (208)       1,926           (1,312)      614 
  Exchange adjustments                           -              (32)     (32)           -                54       54 
  Current service cost and 
   administrative expenses                   (153)              (67)    (220)       (164)              (52)    (216) 
  Other past service credit                    308              (20)      288           -               (6)      (6) 
  Financing recognised in the income 
   statement                                    26              (27)      (1)          59              (36)       23 
  Contributions by employer                     24                56       80         199                67      266 
  Actuarial (losses)/gains recognised 
   in OCI                                  (1,629)             (219)  (1,848)     (1,335)             (161)  (1,496) 
  Returns on plan assets excluding 
   financing recognised in OCI               1,166                92    1,258         456               106      562 
  Disposal of businesses                         -                 -        -           -                28       28 
  Transfers                                      -               (3)      (3)           -              (37)     (37) 
At 31 December                                 883           (1,569)    (686)       1,141           (1,349)    (208) 
Post-retirement scheme surpluses - 
 included in non-current assets (1)            883                24      907       1,141                29    1,170 
Post-retirement scheme deficits - 
 included in non-current liabilities             -           (1,580)  (1,580)           -           (1,378)  (1,378) 
Post-retirement scheme deficits - 
 liabilities held for sale                       -              (13)     (13)           -                 -        - 
                                               883           (1,569)    (686)       1,141           (1,349)    (208) 
 

(1) The surplus in the Rolls-Royce UK Pension Fund ( RRUKPF) is recognised as, on ultimate wind-up when there are no longer any remaining members, any surplus would be returned to the Group, which has the power to prevent the surplus being used for other purposes in advance of this event.

Changes to UK defined benefit scheme

On 5 June 2019, the Group entered into a partial buy-in with Legal and General Assurance Society Limited covering the benefits of circa 33,000 in-payment pensioners. The buy-in was in anticipation of a buy-out, the final 10% of which concluded on 1 February 2020. Pension assets and liabilities of GBP422m were derecognised from the Group's balance sheet on this date and this had no impact on the income statement or OCI in the current period. In relation to this transaction, at 31 December 2019, an asset remeasurement net loss estimated at GBP600m was recognised within the line - 'Actuarial gains/(losses) recognised in OCI'.

A consultation with active managers in the UK scheme was concluded in January 2020. The consultation process agreed certain changes for the relevant manager group which would mitigate future funding cost increases. The changes gave rise to a past service gain of GBP35m which has been recognised as a non-underlying profit (see note 2).

On the 20 May 2020, the Group announced its intention to reshape and resize the Group due to the financial and operational impact of COVID-19. As part of this restructuring programme, a voluntary severance programme was offered to certain UK employees and pension liabilities were remeasured as at 30 June 2020 to reflect the number of members who were expected to leave the scheme. In addition, the Group agreed with the Trustee of the RRUKPF to offer a new BPO to both active members and also those members leaving on severance. This option allows members to take a larger proportion of their pension prior to reaching the state retirement age and a lower amount thereafter. The accounting impact of these changes gave rise to a past service gain of GBP213m which was been recognised as a non-underlying profit in the period to 30 June 2020 (see note 2). The assumptions for members remaining employed have subsequently been updated to reflect actual experience, resulting in a demographic loss of GBP80m, which is included in Actuarial gains/(losses) recognised in OCI. In addition, for members leaving on severance, an experience loss of GBP47m is also included in Actuarial gains/(losses) recognised in OCI.

On the 29 July 2020, the Group announced a consultation with the active members of the UK scheme on a proposal to close the scheme to future accrual on 31 December 2020. Following the conclusion of this consultation, the closure of the scheme was confirmed, which gave rise to a non-underlying past-service credit of GBP67m. This primarily arises from the breakage of the link between accrued pensions and salaries for non-manager members (this link had already been largely broken for manager members as a result of the January 2020 consultation described below). Following the confirmation of the scheme closure, the Group is in discussions with the employees' representatives and the Trustee regarding possible additional transitional protections that could be granted from the scheme. Based on the progress of the talks up to 31 December 2020, the Group has allowed for some reductions in the change to the obligation recognised at 31 December. The final details are expected to be agreed in 2021 when any differences will be recognised.

Sensitivities

A reduction in the discount rate from 1.45% by 0.25% could lead to an increase in the defined benefit obligations of the RR UK Pension Fund of approximately GBP530m. This would be expected to be broadly offset by changes in the value of scheme assets, as the scheme's investment policies are designed to mitigate this risk.

A one-year increase in life expectancy from 21.8 years (male aged 65) and from 23.2 years (male aged 45) would increase the defined benefit obligations of the RR UK Pension Fund by approximately GBP455m.

It is assumed that 40% (31 December 2019: 45%) of members of the RR UK Pension Fund will transfer out of the fund on retirement. The reduction in this assumption is a result of the introduction of the Bridging Pension Option. An increase of 5% in this assumption would increase the defined benefit obligation by GBP45m.

   22    Pensions and other post-retirement and long-term employee benefits continued 

Future contributions

The Group expects to contribute approximately GBP160m to its defined benefit schemes in 2021 (2020: GBP170m): UK: GBP100m, Overseas: GBP60m (2019: UK: GBP100m, Overseas: GBP70m).

In the UK, the funding is based on a statutory triennial funding valuation process. This includes a negotiation between the Group and the Trustee on actuarial assumptions used to value obligations (Technical Provisions) which may differ from those used for accounting set out above. The assumptions used to value Technical Provisions must be prudent rather than a best estimate of the liability. Most notably, the Technical Provision discount rate is currently based upon UK Government yields plus a margin (0.5% at the 31 March 2017 valuation) rather than being based on yields of AA corporate bonds. Following the triennial valuation process, a Schedule of Contributions (SoC) must be agreed which sets out the agreed rate of cash contributions and any contributions from the employer to eliminate a deficit. The most recent valuation, as at 31 March 2017, agreed by the Trustee in December 2017, showed that the UK scheme was estimated to be 112% funded on the Technical Provisions basis. Following the closure of the scheme to future accrual on 31 December 2020, no contributions will be made in respect of future accrual and there are no deficit reduction contributions. The 2021 contributions included above are in respect of 2020 accrual, payment of some of which were deferred in agreement with the Trustee as a result of the COVID-19 pandemic. The current SoC (amended in 2020) includes an arrangement for potential contributions during 2024 to 2027 (capped at GBP48.3m a year) if the Technical Provisions funding position is below 107% at 31 March 2023. As at 31 December 2020 discussions on the 31 March 2020 triennial valuation were ongoing and the Technical Provisions funding position cannot be estimated until these discussions are concluded in the first half of 2021.

   23    Contingent liabilities 

Contingent liabilities in respect of customer financing commitments are described in note 21.

In January 2017, after full cooperation, the Company concluded deferred prosecution agreements (DPA) with the SFO and the US Department of Justice (DoJ) and a leniency agreement with the MPF, the Brazilian federal prosecutors. Following the expiry of its term the DPA with the DoJ was dismissed by the US District Court on 19 May 2020. Certain authorities are investigating members of the Group for matters relating to misconduct in relation to historical matters. The Group is responding appropriately. Action may be taken by further authorities against the Company or individuals. In addition, we could still be affected by actions from customers and customers' financiers. The Directors are not currently aware of any matters that are likely to lead to a material financial loss over and above the penalties imposed to date, but cannot anticipate all the possible actions that may be taken or their potential consequences.

Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for product delivery, commitments made for future service demand in respect of maintenance, repair and overhaul, and performance and reliability. The Group has, in the normal course of business, entered into arrangements in respect of export nance, performance bonds, countertrade obligations and minor miscellaneous items. Various Group undertakings are parties to legal actions and claims which arise in the ordinary course of business, some of which are for substantial amounts. As a consequence of the insolvency of an insurer as previously reported, the Group is no longer fully insured against known and potential claims from employees who worked for certain of the Group's UK based businesses for a period prior to the acquisition of those businesses by the Group. While the outcome of some of these matters cannot precisely be foreseen, the Directors do not expect any of these arrangements, legal actions or claims, after allowing for provisions already made, to result in signi cant loss to the Group.

The Group's share of equity accounted entities' contingent liabilities is nil (2019: nil).

   24    Acquisitions and disposals 

Acquisitions

On 15 January 2020, the Group completed the acquisition of Qinous GmbH (increasing its shareholding from 24% to 100%) for a cash consideration of EUR15m, of which EUR10m was paid on completion. A further EUR2m is payable in September 2021 and EUR3m in September 2023. Under the sale agreement, the cash consideration may be adjusted up by EUR3m to EUR18m based on a revenue target being achieved by 31 December 2023. In accordance with IFRS 3 Business Combinations the pre -- acquisition shareholding of 24% has been re-measured to fair value of EUR5m and a revaluation gain of EUR2m has been recognised in the income statement.

On the 7 March 2020, the Group signed an agreement to acquire 100% of the shares of Kinolt Group S.A., a Belgium company which designs and manufactures uninterruptible power supply systems. The transaction was completed on 1 July 2020 for net proceeds of EUR115m. The acquisition of Kinolt Group S.A. completes the Group's power supply product offering, accelerates its strategy of offering integrated solutions and enables the Group to strengthen its market position in safety critical applications with a leader in dynamic uninterruptible power supply. Provisional fair values are determined on the basis of an assessment performed by an independent professional expert, using measurement techniques and estimation of future cash flows to assess the values of identifiable assets and liabilities at the date of acquisition. The total fair value of acquired identifiable assets and liabilities was EUR65m, primarily related technology and customer relationships. Goodwill of EUR50m was recognised on acquisition in relation to workforce, future products, synergies and access to new customers and markets.

On 18 May 2020, the Group entered into an agreement to increase its shareholding in Reaction Engines Ltd from 2.0% to 10.1% for a cash consideration of GBP20m. The consideration is payable (and the associated shares acquired) in four instalments that will be made between July 2020 - January 2022. Reaction Engines is accounted for as an investment.

   24    Acquisitions and disposals continued 

On the 7 December 2020, the Group completed the acquisition of Servowatch Systems Limited (SSL) for a cash consideration of GBP5m. The acquisition will provide key technology within Power Systems for the Naval and Commercial Marine markets. The Group has performed a final assessment to determine the fair values of the identifiable assets and liabilities acquired in accordance with IFRS 3 and has identified intangible assets amounting to GBP5m and GBP(4)m of other assets and liabilities. Goodwill of GBP4m was recognised on acquisition in relation to workforce and synergies.

 
                                                                              Qinous  Kinolt  Servowatch  Total 
                                                                                GBPm    GBPm        GBPm   GBPm 
Recognised amounts of identifiable assets acquired and liabilities assumed 
Intangible assets                                                                 14      61           5     80 
Property, plant and equipment                                                      -      17           -     17 
Right-of-use assets                                                                -       1           -      1 
Inventory                                                                          3      42           1     46 
Trade receivables and other assets                                                 1      17           1     19 
Cash and cash equivalents                                                          -      11           -     11 
Trade payables and other liabilities                                             (5)    (47)         (5)   (57) 
Provisions                                                                         -     (4)           -    (4) 
Borrowings and lease liabilities                                                   -    (24)           -   (24) 
Deferred tax                                                                     (3)    (16)         (1)   (20) 
Total identifiable assets and liabilities                                         10      58           1     69 
Goodwill arising                                                                   7      46           4     57 
Total consideration                                                               17     104           5    126 
 
Consideration satisfied by: 
Existing shareholding                                                              4       -           -      4 
Cash                                                                               8     104           5    117 
Deferred consideration                                                             5       -           -      5 
                                                                                  17     104           5    126 
Net cash outflow arising on acquisition: 
Cash and cash equivalents                                                          8     104           5    117 
less: Cash and cash equivalents acquired                                           -    (11)           -   (11) 
                                                                                   8      93           5    106 
 
Identifiable intangible assets comprise 
Customer relationships                                                             -      37           4     41 
Development expenditure                                                            -       2           1      3 
Technology assets                                                                 14      22           -     36 
                                                                                  14      61           5     80 
 

The gross contractual value of trade receivables acquired was GBP15m. At the acquisition dates, it was estimated that contractual cash flows of GBP1m would not be collected.

The acquisitions of Qinous and Kinolt contributed GBP5m and GBP50m to revenue respectively and Qinous contributed GBP(10)m to loss before tax (including amortisation of the acquisition accounting adjustments) for the period between the date of acquisition and the 31 December 2020. If the acquisitions had been completed on 1 January 2020, the contribution to the Group's revenues and loss before tax due to Qinous would have been GBP5m and GBP(10)m respectively and due to Kinolt would have been GBP68m and GBP(4)m respectively.

Transaction costs of GBP3m have been expensed during the year relating to the acquisitions of Qinous, Kinolt and Servowatch.

Disposals

On the 31 January 2020, the Group completed the sale of its North America Civil Nuclear (NACN) business to Westinghouse Electric Company LLC. for $25m. The business was disclosed as a disposal group held for sale at 31 December 2019. In our 2019 financial statements, the Group reported an impairment charge of GBP25m as a result of the decision to classify NACN as a business held for sale. Upon the disposal of NACN on 31 January 2020, and in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates, the Group have recycled the cumulative currency translation reserve through the income statement in 2020. This has resulted in a cumulative currency translation loss of GBP7m.

On the 3 February 2020, the Group sold its Knowledge Management Systems (KMS) business to Valsoft Corp. for a cash consideration of $3m. Upon the disposal of KMS, and in accordance with IAS 21 the Group have recycled the cumulative currency translation reserve through the income statement in 2020. This has resulted in a cumulative currency translation gain of GBP3m.

On the 7 May 2020, the Group sold Trigno Energy Srl (Trigno) to Pilkington Italia S.p.A for a cash consideration of EUR6m. Upon the disposal of Trigno, and in accordance with IAS 21 we have recycled the cumulative currency translation reserve through the income statement in 2020. This has resulted in a cumulative currency translation gain of GBP1m.

On the 17 May 2020, the Group signed an agreement to sell its 18% shareholding in Exostar LLC for an initial cash consideration of $23m. The transaction was completed on 6 July 2020. Upon the disposal of Exostar, and in accordance with IAS 21 we have recycled the cumulative currency translation reserve through the income statement in 2020. This has resulted in a cumulative currency translation loss of GBP3m.

   24    Acquisitions and disposals continued 

Disposal completed in prior periods

 
                                                          NACN    KMS  Trigno  Total subsidiaries  Exostar GBPm  Total 
                                                          GBPm   GBPm    GBPm                GBPm                 GBPm 
Proceeds 
Cash consideration                                          19      2       4                  25            18     43 
Cash and cash equivalents disposed                         (9)    (2)     (4)                (15)             -   (15) 
Net cash consideration per cash flow statement              10      -       -                  10            18     28 
Less: Net (assets)/liabilities disposed                    (4)      1     (2)                 (5)           (6)   (11) 
Profit/(loss) on disposal before disposal costs and 
 continuing obligations                                      6      1     (2)                   5            12     17 
Cumulative currency translation (loss)/gain                (7)      3       1                 (3)           (3)    (6) 
Disposal costs                                             (1)      -       -                 (1)             -    (1) 
Non-underlying (loss)/profit before tax                    (2)      4     (1)                   1             9     10 
 

On 1 June 2018, the Group sold its L'Orange business, part of Rolls-Royce Power Systems, to Woodward Inc. for EUR673m. Under the sale agreement, the cash consideration may be adjusted by up to +/-EUR44m, based on L'Orange aftermarket sales over the five-year period to 31 May 2023. This is reviewed at each reporting date over the adjustment period, based on actual sales. Cash consideration has been adjusted by GBP5m which has been paid during the year. During the year, a liability of EUR29m has been recognised for amounts that are now expected to be payable in relation to the years 2020 - 2023 as a result of a reduction in aftermarket sales as a consequence of the impact of COVID-19. This EUR29m liability has been reflected as an adjustment to sales proceeds.

 
Reconciliation of loss on acquisition & disposal of 
 businesses per the income statement                         Total 
                                                              GBPm 
Profit on disposal 
 of businesses                                                  10 
Gain on revaluation 
 of Qinous                                                       1 
Adjustment to L'Orange 
sales proceeds                                                (25) 
Loss on acquisition & disposal of businesses (income 
 statement - non-underlying)                                  (14) 
 

Businesses held for sale

On 28 February 2020 the Group announced the decision to carry out a strategic review of Bergen, our medium-speed gas and diesel engine business. Bergen formed part of the Power Systems business and from 2020 it has been reclassified as non-core following the announcement of the strategic review. On 1 February 2021, the Group signed an agreement for the sale of Bergen to TMH Group for a cash consideration of approximately EUR150m (subject to closing adjustments) which is expected to complete in the second half of 2021. Consequently, in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, Bergen has been classified as held for sale at 31 December 2020. As at 31 December 2020, Bergen had an additional GBP25m of cash which, as part of bank pooling arrangements, was held by another Group company and consequently is not included in the disposal group as the resulting intra-group balances are eliminated on consolidation. On completion, such cash will be included in the disposal group.

On 7 December 2020 the Group signed an agreement for the sale of Civil Nuclear Instrumentation & Control business to Framatome. Consequently, in accordance with IFRS 5, the business has been classified as held for sale at 31 December 2020 and its carrying value assessed against the anticipated proceeds and disposal costs.

   24    Acquisitions and disposals continued 

The table below summarises the categories of assets and liabilities classified as held for sale.

 
                                                      Civil 
                                           Bergen   Nuclear  Total 
                                             GBPm      GBPm   GBPm 
Intangible assets                               -        16     16 
Property, plant and equipment                   3         4      7 
Right-of-use assets                             2         7      9 
Deferred tax assets                             2         4      6 
Cash and cash equivalents                      25        26     51 
Inventory                                      97        14    111 
Trade receivables and other 
 assets                                        50        38     88 
Assets held for sale                          179       109    288 
Trade payables and other liabilities        (100)      (84)  (184) 
Provisions for liabilities and 
 charges                                     (11)       (7)   (18) 
Borrowings and lease liabilities              (4)       (7)   (11) 
Deferred tax 
 liabilities                                  (2)         -    (2) 
Post-retirement scheme deficits                 -      (13)   (13) 
Liabilities associated with assets 
 held for sale                              (117)     (111)  (228) 
Net assets held for sale                       62       (2)     60 
 

During the year, the Group announced its intention to sell ITP Aero. At 31 December 2020, ITP Aero was not available for immediate sale in its present condition and therefore, in line with IFRS 5 has not been classified as a disposal group. The assets of ITP Aero have been assessed for impairment in accordance with IAS 36 on a value in use basis which assumes the value will be realised over the long-term .

   25    Derivation of summary funds flow statement from reported cash flow statement 
 
                                                   2020            2019 
                                                GBPm     GBPm   GBPm   GBPm  Source 
Underlying operating (loss)/profit (see 
 note 2)                                              (1,972)           808  Note 2 
Amortisation and impairment of intangible 
 assets                                          902             372         Cash flow statement (CFS) 
Depreciation and impairment of property, 
 plant and equipment                             821             532         CFS 
Depreciation and impairment of right-of-use 
 assets                                          732             411         CFS 
Adjustment to residual value guarantees in 
 lease liabilities                             (102)               -         CFS 
Impairment of joint ventures                      24               -         Note 13 
Reversal of non-underlying impairments of                                    Reversal of underlying adjustment (note 
non-current assets                           (1,293)            (84)         2) 
                                                                             Reversal of underlying adjustment (note 
Acquisition accounting                         (133)           (163)         2) 
Depreciation and amortisation                             951         1,068 
                                                                             CFS less exceptional restructuring (see 
Additions of intangible assets                          (316)         (591)  below) 
Purchases of property, plant and equipment              (579)         (747)  CFS 
                                                                             CFS (capital and interest payments 
Lease payments (capital plus interest)                  (379)         (319)  adjusted for foreign exchange (FX)) 
Decrease/(increase) in inventories                        588          (43)  CFS 
                                                                             CFS adjusted for the impact of 
                                                                             exceptional programme charges and 
                                                                             exceptional restructuring 
                                                                             shown on the basis of the FX rate 
Movement in receivables/payables             (2,332)            (33)         achieved on settled derivative contracts 
                                                                             CFS adjusted for the impact of 
                                                                             exceptional programme charges and FX and 
                                                                             excluding Civil LTSAs 
Movement in contract balances                  (276)             526         (shown separately below) 
                                                                             Movement in Civil LTSA balances within 
                                                                             movement of contract balances in CFS less 
Underlying movement in Civil Aerospace LTSA                                  impact of 
contract balances                                479             754         FX 
Revaluation of trading assets (excluding                                     Adjustment to reflect the impact of the 
exceptional items)                             (299)             265         FX contracts held on receivables/payables 
                                                                             Realised cash flows on FX contracts not 
                                                                             included in underlying operating profit 
                                                                             less cash 
                                                                             flows on settlement of excess derivative 
Realised derivatives in financing                700           (266)         contracts 
Movement on receivables/payables/contract 
 balances                                             (1,728)         1,246 
                                                                             CFS adjusted for the impact of 
                                                                             exceptional programme charges and 
                                                                             anticipated recoveries, exceptional 
Movement on provisions                                  (195)         (506)  restructuring and FX contracts held 
Net interest received and paid                           (75)          (73)  CFS 
Fees paid on undrawn facilities                          (97)             -  CFS 
Cash flows on settlement of excess 
 derivative contracts                                   (202)             -  CFS 
                                                                             Cash flows on other financial instruments 
                                                                             (CFS) not allocated to lease payments or 
Cash flows on financial instruments net of                                   exceptional 
realised losses included in operating                                        programme expenditure adjusted for the 
profit                                                    (8)          (15)  impact of FX not held for trading . 
                                                                             Included in movements in payables and 
Trent 1000 insurance                                                    173  provisions in CFS 
                                                                             Principally disposals of non-current 
                                                                             assets, joint venture trading and the 
                                                                             effect of share-based 
Other                                                   (102)            56  payments 
Trading cash flow                                     (4,114)         1,057 
Underlying operating profit charge in 
excess of contributions to defined benefit                                   CFS excluding additional contribution of 
schemes                                                   160           (9)  GBP35m shown below 
Tax                                                     (231)         (175)  CFS 
Free cash flow                                        (4,185)           873 
Shareholder payments                                     (92)         (224)  CFS (includes dividends to NCI) 
Rights issue                                            1,972             -  CFS 
Acquisition of businesses                               (130)          (43)  CFS 
Disposal of businesses                                     23           453  CFS 
                                                                             GBP268m related to severance costs and 
                                                                             GBP55m capital expenditure (2019: GBP167m 
                                                                             and GBP49m 
Exceptional restructuring costs                         (323)         (216)  respectively) 
DPA payments                                            (135)         (102)  CFS 
Pension fund contribution                                   -          (35)  CFS 
Difference in fair values of derivative 
 contracts held for financing                            (26)           (2)  CFS 
Payments of lease principal less new leases 
 and other non-cash adjustments to lease 
 liabilities                                              311           123  CFS adjusted for the impact of FX 
Foreign exchange                                           51          (98)  CFS less allocation to leases above 
                                                                             Cash outflow on M&A spend and timing of 
                                                                             cash flows on a prior period disposal. 
Other                                                    (49)           (6)  See below. 
Change in net (debt)/funds                            (2,583)           723 
 
Change in net (debt)/funds                            (2,583)           723 
Non-cash lease impact                                   (311)         (123) 
Reclassification of other financial 
 liabilities to borrowings                                  -          (79) 
Change in net (debt)/funds excluding lease 
 liabilities                                          (2,894)           521 
 
   25    Derivation of summary funds flow statement from reported cash flow statement continued 

The comparative information for the year ended 31 December 2019 has been re-presented to be on a comparable basis with the presentation adopted for the year ended 31 December 2020. There is no change to trading or group free cash flow. In summary: (i) 'cash flows on financial instruments net of realised losses included in operating profit' previously included in 'other' within 'trading cash flow', have been shown separately; and (ii) foreign exchange transactions have been represented within line items to be consistent with presentation throughout the financial statements.

Free cash flow is a measure of financial performance of the business' cash flow to see what is available for distribution among those stakeholders funding the business (including debt holders and shareholders). Free cash flow is calculated as trading cash flow less recurring tax and post-employment benefit expenses. It excludes payments made to shareholders, amounts spent (or received) on business acquisitions, SFO payments and foreign exchange changes on net funds. The Board considers that free cash flow reflects cash generated from the Group's underlying trading.

The table below shows a reconciliation of free cash flow to the change in cash and cash equivalents presented in the condensed consolidated cash flow statement on page 20.

 
 
                                                   2020             2019 
                                                GBPm     GBPm   GBPm   GBPm                   Source 
Change in cash and cash equivalents            (995)           (413)         CFS 
Net cash flow from changes in borrowings                                     CFS excluding repayment of debt acquired. 
 and lease liabilities                       (1,630)           1,385         See below. 
Decrease in short-term investments               (6)               -         CFS 
Movement in net (debt)/funds from cash 
 flows                                       (2,631)             972 
Exclude: Capital element of lease 
 repayments                                    (284)           (271)         CFS 
Movement in net (debt)/funds from cash 
 flows (excluding lease liabilities)                  (2,915)           701 
Rights issue                                          (1,972)             -  CFS 
Returns to shareholders                                    92           224  CFS 
  Acquisition of businesses                      130              43         CFS including repayment of debt acquired 
  Disposal of businesses                        (23)           (453)         CFS 
                                                                             GBP12m related to costs incurred on 
  Other acquisitions and disposals                12               1         central M&A activity 
Changes in group structure                                119         (409) 
Penalties paid on agreements with 
 investigating bodies                                     135           102  CFS 
                                                                             GBP268m related to severance costs and 
                                                                             GBP55m capital expenditure (2019: GBP167m 
                                                                             and GBP49m 
Exceptional restructuring costs                           323           216  respectively) 
                                                                             Additional contribution in connection 
Pension fund contribution                                   -            35  with the pensioner buy-out (note 23) 
                                                                             Timing of cash flows on a prior period 
                                                                             disposal where the Group retains the 
                                                                             responsibility 
                                                                             for collecting cash before passing it on 
Other                                                      33             4  to the acquirer 
Free cash flow                                        (4,185)           873 
 
 
Principal risks and uncertainties 
The following table describes the principal risks facing the Group, 
 notwithstanding that there are other risks that may occur and may 
 impact the achievement of the Group's objectives: 
 
 
RISK                                              HOW WE MANAGE IT 
Safety                                            Product 
 Failure to: i) meet the expectations               *    Our product safety management system includes 
 of our customers to provide safe                        activities designed to reduce our safety risks as far 
 products; or ii) create a place                         as is reasonably practicable and to meet or exceed 
 to work which minimises the risk                        relevant company, legal, regulatory and industry 
 of harm to our people, those who                        requirements. 
 work with us, and the environment, 
 would adversely affect our reputation 
 and long-term sustainability.                      *    We verify and approve product design. 
 
 
                                                    *    We test adherence to quality standards during 
                                                         manufacturing. 
 
 
                                                    *    We validate conformance to specification for our own 
                                                         products and those of our suppliers. 
 
 
                                                    *    We mandate safety awareness training. 
 
 
                                                    *    We use engine health monitoring to provide early 
                                                         warning of product issues. 
 
 
                                                    *    We take out relevant and appropriate insurance. 
                                                  People 
                                                    *    Our HSE management system includes activities 
                                                         designed to reduce our safety risks as far as is 
                                                         reasonably practicable and to meet or exceed relevant 
                                                         company, legal, regulatory and industry requirements. 
 
 
                                                    *    We reinforce our journey to Zero Harm. 
 
 
                                                    *    We use our crisis management framework 
Business continuity 
 The major disruption of the Group's                *    We invest in capacity, equipment and facilities, dual 
 operations, which results in our                        sources of supply and in researching alternative 
 failure to meet agreed customer                         materials. 
 commitments and damages our prospects 
 of winning future orders. Disruption 
 could be caused by a range of events,              *    We provide supplier finance in partnership with banks 
 for example: extreme weather or                         to enable our suppliers to access funds at low 
 natural hazards (for example earthquakes,               interest rates. 
 floods); political events; financial 
 insolvency of a critical supplier; 
 scarcity of materials; loss of data;               *    We hold safety stock. 
 fire; or infectious disease. The 
 consequences of these events could 
 have an adverse impact on our people,              *    We plan and practice IT disaster recovery, business 
 our internal facilities or our external                 continuity and crisis management exercises. 
 supply chain. 
 
                                                    *    We undertake supplier diligence. We take out relevant 
                                                         and appropriate insurance. 
Climate change 
 We recognise the urgency of the                    *    We invest in i) reducing carbon impact of existing 
 climate challenge and have committed                    products; and ii) zero carbon technologies to replace 
 to net zero carbon by 2050. The                         our existing products. 
 principal risk to meeting these 
 commitments is the need to transition 
 our products and services to a lower               *    We balance our portfolio of products, customers and 
 carbon economy. Failure to transition                   revenue streams to reduce our dependence on any one 
 from carbon-intensive products and                      product, customer or carbon emitting fuel source. 
 services at pace could impact our 
 ability to win future business; 
 achieve operating results; attract                 *    We acknowledge and communicate our role in the 
 and retain talent; secure access                        problem and the solution, and the actions we are 
 to funding; realise future growth                       taking to enact a credible plan of action in line 
 opportunities; or force government                      with societal expectations. 
 intervention to limit emissions. 
Competitive environment 
 Existing competitors: the presence                 *    We review product life cycles. 
 of competitors in the majority of 
 our markets means that the Group 
 is susceptible to significant price                *    We make investment choices to improve the quality, 
 pressure for original equipment                         delivery and durability of our existing products and 
 or services. Our main competitors                       services and to develop new technologies and service 
 have access to significant government                   offering to differentiate us competitively. 
 funding programmes as well as the 
 ability to invest heavily in technology 
 and industrial capability.                         *    We protect our intellectual property (e.g. through 
                                                         patents). 
 Existing products: failure to achieve 
 cost reduction, contracted technical 
 specification, product (or component)              *    We monitor our performance against plans. 
 life or falling significantly short 
 of customer expectations, would 
 have potentially significant adverse               *    We scan the horizon for emerging technology and other 
 financial and reputational consequences,                competitive threats, including through patent 
 including the risk of impairment                        searches. 
 of the carrying value of the Group's 
 intangible assets and the impact 
 of potential litigation. 
 
 New programmes: failure to deliver 
 an NPI project on time, within budget, 
 to technical specification or falling 
 significantly short of customer 
 expectations would have potentially 
 significant adverse financial and 
 reputational consequences. 
 
 Disruptive technologies (or new 
 entrants with alternative business 
 models): could reduce our ability 
 to sustainably win future business, 
 achieve operating results and realise 
 future growth opportunities. 
Cyber threat 
 An attempt to cause harm to the                    *    We deploy web gateways, filtering, firewalls, 
 Group, its customers, suppliers                         intrusion, advanced persistent threat detectors and 
 and partners through the unauthorised                   integrated reporting. 
 access, manipulation, corruption, 
 or destruction of data, systems 
 or products through cyberspace.                    *    We test software. 
 
 
                                                    *    We use our crisis management framework. 
Market shock 
 The Group is exposed to a number                   *    We monitor trends, market demand and future market 
 of market risks, some of which are                      forecasts and make investment choices to maximise the 
 of a macroeconomic nature (e.g.                         related opportunities. 
 economic growth rates) and some 
 of which are more specific to the 
 Group (for example, reduction in                   *    We incorporate trends, demand and other dependencies 
 air travel or defence spending,                         in our financial forecasts. 
 or disruption to other customer 
 operations). A large proportion 
 of our business is reliant on the                  *    We balance our portfolio with the sale of original 
 civil aviation industry, which is                       equipment and aftermarket services, providing a broad 
 cyclical in nature.                                     product range and addressing diverse markets that 
                                                         have differing business cycles. 
 Demand for our products and services 
 could be adversely affected by factors 
 such as current and predicted air 
 traffic, fuel prices and age/replacement 
 rates of customer fleets. 
Financial shock 
 The Group is exposed to a number                   *    Our financial control framework activities are 
 of financial risks, some of which                       designed to reduce financial reporting risks. 
 are of a macroeconomic nature (for 
 example, foreign currency, oil price, 
 interest rates) and some of which                  *    Group strategic planning process. 
 are more specific to the Group (for 
 example, liquidity and credit risks). 
                                                    *    We incorporate trends, demand and other dependencies 
 Significant extraneous market events                    in our financial forecasts. 
 could also materially damage the 
 Group's competitiveness and/or creditworthiness 
 and our ability to access funding.                 *    We analyse currency and credit exposures and include 
 This would affect operational results                   in sourcing and funding decisions. 
 or the outcomes of financial transactions. 
 
                                                    *    We develop, review and communicate treasury policies 
                                                         that are designed to hedge residual risks using 
                                                         financial derivatives (covering foreign exchange, 
                                                         interest rates and commodity price risk). 
 
 
                                                    *    We raise finance through debt and equity programmes. 
 
 
                                                    *    We hedge with reference to volatility in external 
                                                         financial markets. 
Political risk 
 Geopolitical factors that lead to                  *    We develop Group and country strategies and consider 
 an unfavourable business climate                        associated dependencies. 
 and significant tensions between 
 major trading parties or blocs which 
 could impact the Group's operations.               *    We horizon scan for political implications and 
 Examples include: changes in key                        dependencies including around Brexit. 
 political relationships; explicit 
 trade protectionism, differing tax 
 or regulatory regimes, potential                   *    We include diversification considerations in our 
 for conflict or broader political                       investment and procurement choices. 
 issues; and heightened political 
 tensions. 
Restructuring 
 Failure to deliver our restructuring,                *    We develop, implement and review status of 
 including changing our behaviours                         restructuring programme and project plans including 
 could result in: missed opportunities;                    on M&A, transformation and restructuring activities. 
 dissatisfied customers; disengaged 
 employees; ineffective use of our 
 scarce resources; and increasing                     *    We maintain knowledge management systems. 
 the likelihood of other principal 
 risks occurring. This could lead 
 to a business that is overly dependent               *    We simplify the processes in our management systems 
 on a small number of products and                         whilst ensuring we comply with our legal, contractual 
 customers; failure to achieve our                         and regulatory requirements. 
 vision; non-delivery of financial 
 targets; and not meeting investor 
 expectations. 
Talent and capability 
 Inability to identify, attract,                    *    We undertake succession planning and monitor the 
 retain and apply the critical capabilities              talent pipeline. 
 and skills needed in appropriate 
 numbers to effectively organise, 
 deploy and incentivise our people                  *    We survey employee opinion. 
 would threaten the delivery of our 
 strategies. 
                                                    *    We develop, implement and review strategic resourcing 
                                                         plans. 
 

Annual General Meeting

This year's AGM will be held at 11.00am on Thursday 13 May 2021 at King's Place, 90 York Way, London, N1 9FX, full details of which will be set out in our Notice of Meeting which will be made available to shareholders on 31 March 2021

Payments to shareholders

The Board decided in 2020 that, given the uncertain macro outlook, they would not recommend a final shareholder payment for 2019 or make an interim shareholder payment for 2020. In addition, under the terms of certain of its recent loan facilities, the Company is restricted from declaring, making or paying distributions to shareholders on or prior to 31 December 2022 and from declaring, making or paying distributions to shareholders from 1 January 2023 unless certain conditions are satisfied. The restrictions on distributions do not prevent shareholders from redeeming C Shares issued in January 2020 or prior to that.

Shareholders wishing to redeem their existing C Shares must lodge instructions with the Registrar to arrive no later than 5.00pm on 1 June 2021 (CREST holders must submit their election in CREST by 2.55pm). The payment of C Share redemption monies will be made on 5 July 2021 and the CRIP purchase will begin as soon as practicable after 5 July 2021.

Annual report and financial statements

The statements below have been prepared in connection with the Company's full Annual Report for the year ended 31 December 2020. Certain parts thereof are not included in this announcement.

Directors' confirmations

The Directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and parent company's position and performance, business model and strategy.

Each of the Directors, whose names and functions are listed in the Directors' Report, confirm that to the best of his or her knowledge:

-- the Group Financial Statements, which have been prepared in accordance with IFRSs, give a true and fair view of the assets, liabilities, financial position and loss of the Group;

-- the parent company Financial Statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 Reduced Disclosure Framework, and applicable law), give a true and fair view of the assets, liabilities, financial position and result of the Company;

-- the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and parent company, together with a description of the principal risks and uncertainties that it faces; and

-- there is no relevant audit information of which the Company's auditor is unaware. Each Director has taken all steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

By order of the Board

   Warren East                                          Stephen Daintith 
   Chief Executive                                   Chief Financial Officer 

11 March 2021

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FR DKKBQDBKBOND

(END) Dow Jones Newswires

March 11, 2021 02:00 ET (07:00 GMT)

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