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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(END) Dow Jones Newswires
March 11, 2021 02:00 ET (07:00 GMT)
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