TIDMRR.

RNS Number : 6258H

Rolls-Royce Holdings plc

05 August 2021

5 August 2021

ROLLS-ROYCE HOLDINGS PLC - 2021 Half Year Results

Delivering on financial priorities and looking forwards to a lower carbon future

   --        Good start to the year with improving cash flow and profits from continuing operations 

- Underlying operating profit GBP307m, up from a GBP(1,630)m loss in 2020 H1

- Free cash flow GBP(1,174)m, significantly better than prior year (2020 H1: GBP(2,862)m)

- Strong liquidity position with no maturities before 2024

   --        Focused on delivering to plan and driving results 

- Restructuring delivering results and expected to achieve >GBP1bn savings in 2021

- Disposal programme progressing well towards targeted proceeds of at least GBP2bn

- Target to turn free cash flow positive during the second half 2021

- On track to improve FY2021 free cash flow to approximately GBP(2.0)bn (2020: GBP(4.2)bn)

-- Net zero pathway launched confirming our targets and commitment to play a leading role in the transition of the markets we serve to net zero carbon emissions by 2050

Warren East, Chief Executive said: " Our continued focus on the elements within our control, together with a good performance from Defence and order intake recovery in Power Systems have enabled us to deliver solid progress in the first half. The benefits of our fundamental restructuring programme in Civil Aerospace are evident in our reduced cash outflow and improved operational efficiency. This leaner cost base together with a strong liquidity position gives us confidence in our ability to withstand uncertainties around the pace of recovery in international travel and benefit from the eventual rebound. We are making disciplined investments in the new opportunities to drive future growth, particularly in net zero power where we are leading the way with innovation and engineering excellence. Our net zero pathway and targets, announced in June, set out our plan to enable the sectors in which we operate achieve net zero by 2050 by driving step-change improvements in engine efficiency, helping accelerate the take-up of sustainable fuels and developing new technologies. "

First half 2021 Group financial performance

 
 
 GBP million                          Statutory   Statutory   Underlying   Underlying 
                                        2021 H1     2020 H1      2021 H1      2020 H1 
-----------------------------------  ----------  ----------  -----------  ----------- 
 Revenue                                  5,159       5,673        5,227        5,410 
-----------------------------------  ----------  ----------  -----------  ----------- 
 Gross profit/(loss)                        814       (590)        1,097        (965) 
-----------------------------------  ----------  ----------  -----------  ----------- 
 Operating profit/(loss)                     38     (1,617)          307      (1,630) 
-----------------------------------  ----------  ----------  -----------  ----------- 
 Profit/(loss) before taxation              114     (5,213)          133      (3,203) 
-----------------------------------  ----------  ----------  -----------  ----------- 
 Profit/(loss) from continuing 
  operations                                394     (5,261)          104      (3,293) 
-----------------------------------  ----------  ----------  -----------  ----------- 
 (Loss)/profit from discontinued 
  operations (1)                            (1)       (117)           43         (33) 
-----------------------------------  ----------  ----------  -----------  ----------- 
 Profit/(loss) for the period               393     (5,378)          147      (3,326) 
-----------------------------------  ----------  ----------  -----------  ----------- 
 Earnings/(loss) per share (pence) 
  (2)                                     4.72p    (96.12)p        1.76p     (59.44)p 
-----------------------------------  ----------  ----------  -----------  ----------- 
 
 
                                         2021 H1       2020 H1    Change 
--------------------------------------  --------  ------------  -------- 
 Group free cash flow (FCF)              (1,151)       (2,801)     1,650 
--------------------------------------  --------  ------------  -------- 
 Group free cash flow from continuing 
  operations                             (1,174)       (2,862)     1,688 
--------------------------------------  --------  ------------  -------- 
 Reported movements in net debt 
  from cash flows 
  (ex. lease liabilities)                (1,503)       (3,152)     1,649 
--------------------------------------  --------  ------------  -------- 
 
                                         30 June   31 December 
                                            2021          2020    Change 
--------------------------------------  --------  ------------  -------- 
 Net debt (ex. lease liabilities)        (3,083)       (1,533)   (1,550) 
--------------------------------------  --------  ------------  -------- 
 

For footnotes referenced in tables on pages 1-14, see page 15.

Business unit underlying performance summary

Underlying performance excludes the impact of period-end mark-to-market adjustments , the effect of acquisition accounting and business disposals, impairment of goodwill and other non-current and current assets, and exceptional items. Adjustments between the underlying income statement and the reported income statement are set out in note 2 in the condensed consolidated interim financial statements on page 28.

 
 GBP million                                  Organic       Underlying 
                                 Underlying    Change        operating 
                                    revenue       (3)    profit/(loss)   Organic Change (3) 
------------------------------  -----------  --------  ---------------  ------------------- 
 Civil Aerospace (4)                  2,168     (336)               39                1,860 
------------------------------  -----------  --------  ---------------  ------------------- 
 Defence                              1,721       266              269                   72 
------------------------------  -----------  --------  ---------------  ------------------- 
 Power Systems (5)                    1,181      (49)               41                    9 
------------------------------  -----------  --------  ---------------  ------------------- 
 Other businesses (6)                   152        21                5                   22 
------------------------------  -----------  --------  ---------------  ------------------- 
 Corporate / eliminations (7)             5        12             (47)                  (7) 
------------------------------  -----------  --------  ---------------  ------------------- 
 Continuing operations                5,227      (86)              307                1,956 
------------------------------  -----------  --------  ---------------  ------------------- 
 ITP Aero (4)                           317      (79)                7                    7 
------------------------------  -----------  --------  ---------------  ------------------- 
 Inter-segment eliminations           (171)        76             (23)                   16 
------------------------------  -----------  --------  ---------------  ------------------- 
 Total Group                          5,373      (89)              291                1,979 
------------------------------  -----------  --------  ---------------  ------------------- 
 

Group underlying revenue from continuing operations of GBP5.2bn, down 2%, reflected a more balanced contribution from the business units compared with the prior period. It included a positive GBP160m Civil Aerospace LTSA revenue catch-up compared with a GBP(866)m negative revenue catch-up in first half 2020.

Group underlying operating profit from continuing operations of GBP307m included significant cost savings from the restructuring programme, primarily in Civil Aerospace, and favourable timing and mix of activity in Defence and Power Systems. The prior period comparative underlying loss of GBP(1.6)bn included GBP(1.2)bn of one-off charges mostly related to the impact of COVID-19 on Civil Aerospace.

In Civil Aerospace, our first half operational performance saw an overall improvement with a recovery in business aviation and domestic large engine flying activity together with substantial cost benefits from our fundamental restructuring programme, which is reducing the size of our cost base by around a third. Large engine LTSA flying hours were 43% of the 2019 level, up from the 34% in H2 2020; 92 large engine major shop visits were completed and 100 large engines were delivered. We have already seen a return to 2019 levels of flying activity for our business aviation engines and for large engines operated on domestic flying routes. However, international travel is recovering more gradually, hindered by global variation in vaccination rates and ongoing travel restrictions. We are continuing to mitigate this through the actions within our control.

Our Defence business continues to perform well with resilient demand that has not been impacted by COVID-19. First half performance benefitted from improving operational performance which enabled the earlier delivery of spare engines and higher spare parts sales, which historically have been more second half weighted. This favourable timing and mix in the first half is expected to result in a stronger first half versus second half performance, hence our full year expectations for Defence are unchanged. Our strong order book in Defence gives us confidence in our outlook with GBP1.2bn order intake in period and more than 70% of 2022 expected revenues covered by the order book.

In Power Systems, revenues were broadly stable in the first half with an increase in services offset by a reduction in original equipment (OE) deliveries. Operating profit benefitted from a rise in higher-margin aftermarket spare parts, partly offset by low factory utilisation on OE manufacturing. Order intake was up 19% to GBP1.4bn (2020 H1: GBP1.2bn), with a 1.2x book-to-bill ratio, showing recovery in our end markets led by demand in marine, governmental and power generation markets. Interest in lower carbon solutions is growing and we are increasing our relative R&D investment in these products. The recovery in OE order intake is expected to be realised as revenue over the next 6-12 months.

Delivering on our commitments

Our ongoing focus on areas within our control - cost reduction, liquidity and operational improvement -enabled us to deliver a significant improvement in first half profit and cash flow while continuing to invest in new products, including new low carbon technology and solutions to decarbonise our end markets.

- Restructuring : We delivered further good progress on our fundamental restructuring programme with around 8,000 roles now having been removed and we expect to deliver more than GBP1bn of savings in FY2021 as compared with FY2019. This keeps us on track to achieve our aim of a reduction of at least 9,000 roles and run rate savings of more than GBP1.3bn by the end of 2022.

- Disposal Programme : Our disposal programme, which aims to achieve at least GBP2bn in proceeds is progressing well. The planned sale of ITP Aero is moving forwards and we continue to work closely with all key stakeholders. Although the disposal of Bergen Engines was interrupted in the first half, we remain committed to its sale and this week announced a new disposal agreement with enterprise value of EUR63m and EUR40m cash on its balance sheet will remain with the Group. We expect to complete the disposal of the Civil Nuclear Instrumentation & Control business later this year.

Strong liquidity position and improvement in free cash flow

Our liquidity position is strong with GBP7.5bn of liquidity including GBP3.0bn in cash at the end of the half year after repaying the 2021 EUR750m loan notes and the GBP300m Covid Corporate Financing Facility (CCFF) loan in the first half. Net debt (before leases) was GBP(3.1)bn at the period end. This week the Group signed an extension to the 2022 GBP1bn unused loan facility to 2024, consequently the Group has no debt maturities before 2024 (excluding ITP Aero).

Free cash outflow of GBP(1.2)bn represented a significant improvement on the prior year period of GBP(2.9)bn, which included a GBP(1.1)bn negative impact from the cessation of invoice factoring. The GBP0.6bn underlying improvement reflected good progress on cost reduction, stronger operating performance and reduced capital expenditure.

Our GBP2.0bn UKEF-backed 2025 loan facility, which we drew down in the first half, restricts us from declaring or making shareholder payments until 2023. In 2023, payments can resume provided certain conditions are satisfied. Therefore, no interim shareholder payment will be made for 2021.

Our priorities for capital allocation are to rebuild the balance sheet and to invest in the business to grow returns ahead of returning surplus cash to shareholders. We are focused on generating appropriate value on our disposals and improving free cash flow. This will reduce net debt and take us towards our ambition to return to an investment grade credit profile in the medium term.

Outlook and financial guidance

We continue to expect to turn free cash flow positive sometime during the second half of this year and to achieve an improvement in full year free cash outflow to around GBP(2.0)bn (FY2020: GBP(4.2)bn). This is driven by our actions to reduce costs, continued strength in Defence, growth in Power Systems and a gradual recovery in Civil Aerospace. Our guidance remains sensitive to the timing of OE concession outflows on already delivered widebody engines, as we previously highlighted in our full year results in March.

Looking further ahead, we are confident that when border restrictions are lifted the recovery of international travel will accelerate. Free cash flow of at least GBP750m (before disposals) is still achievable in a 12-month period when EFH exceed 80% of 2019 levels, supported by our lower cost base in Civil Aerospace which is now a third smaller. However, based on current industry forecasts for the pace of recovery in international travel, this is likely to occur beyond the initial expected timeframe of 2022. We are positive on the near-term opportunities in Defence and Power Systems and in our new business areas in electricals and small modular reactors (SMR). We will remain agile in our response to external factors , continuing to deliver on our restructuring, rebuilding our balance sheet while investing in our future.

Our net zero commitment and new low-carbon growth opportunities

In June, we announced our net zero pathway setting our short and medium-term targets and showing how we will focus our technological capabilities to play a leading role in enabling significant elements of the global economy to reach net zero carbon by 2050. To achieve this, we are developing new technologies, enabling an accelerated take-up of sustainable fuels and driving step-change improvements in fuel efficiency, within aviation, shipping and power generation. By 2030, we plan to make all our new products compatible with net zero and by 2050 all our products in operation will be compatible.

In addition to meeting the net zero challenge for our existing activities, we are also investing in new opportunities and markets, laying the foundations for future growth beyond our current portfolio.

We are at the forefront of the development of electrical aerospace propulsion systems which are opening up exciting incremental growth opportunities with significant commercial potential. Earlier this year we announced an agreement with Wideroe and Tecnam to power an electric regional aircraft by 2026. We are testing our 2.5MW power generation system for potential use in hybrid-electric aerospace propulsion. Our urban air mobility partner, Vertical Aerospace, took a step forwards in June with the announcement of its planned US listing and up to $4bn in pre-orders for up to 1,000 eVTOL aircraft.

Rolls-Royce SMR power stations have been designed to deliver low cost, net zero carbon nuclear power and are on a pathway to be connected to the UK grid in the early 2030s with the further opportunity of substantial export potential. In addition to stable base load power, they will be able to provide energy for the net-zero manufacture of green hydrogen and synthetic fuels. We are now approaching the second phase of the programme, which will include entering the UK licensing process later this year, supported by new third party investment that unlocks multi-year UK Government matched funding of GBP210m.

To enable our net zero ambitions and to drive new business growth in low-carbon technologies we are increasing the proportion of gross R&D spend on lower carbon and net zero technologies to 75% by 2025.

This announcement has been determined to contain inside information.

LSE: RR.; ADR: RYCEY; LEI: 213800EC7997ZBLZJH69

Enquiries:

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

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

A PDF copy of this report can be downloaded from www.rolls-royce.com/investors .

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

Results webcast and conference call

A webcast will be held at 08:30 (BST) today and details of how to join are provided below. Conference call details are also available for those who would prefer to dial-in. Downloadable materials will also be available on the Investor Relations section of the Rolls-Royce website.

Webcast details

To register for the webcast, including Q&A participation, please visit the following link: https://edge.media-server.com/mmc/p/4rvsdubk

Please use this same link to access the webcast replay which will be made available shortly after the event concludes.

Conference call details

UK dial-in: +44 (0) 203 009 5709 / US dial-in: +1 646 787 1226

International dial-in for all participants: +44 (0) 203 009 5709

Participant passcode: 5215 215

Downloadable materials

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

Group Statutory Results

Statutory Income Statement

 
 
GBP million                                    Statutory  Statutory 
                                                 2021 H1    2020 H1  Change 
---------------------------------------------  ---------  ---------  ------ 
Revenue                                            5,159      5,673   (514) 
---------------------------------------------  ---------  ---------  ------ 
Gross profit/(loss)                                  814      (590)   1,404 
---------------------------------------------  ---------  ---------  ------ 
Operating profit/(loss)                               38    (1,617)   1,655 
---------------------------------------------  ---------  ---------  ------ 
(Loss)/gain on acquisition/disposal                  (7)          2     (9) 
---------------------------------------------  ---------  ---------  ------ 
Financing income/(costs)                              83    (3,598)   3,681 
---------------------------------------------  ---------  ---------  ------ 
Profit/(loss) before taxation                        114    (5,213)   5,327 
---------------------------------------------  ---------  ---------  ------ 
Taxation                                             280       (48)     328 
---------------------------------------------  ---------  ---------  ------ 
Profit/(loss) for the period from continuing 
 operations                                          394    (5,261)   5,655 
---------------------------------------------  ---------  ---------  ------ 
Loss for the period from discontinued 
 operations (1)                                      (1)      (117)     116 
---------------------------------------------  ---------  ---------  ------ 
Profit/(loss) for the period                         393    (5,378)   5,771 
---------------------------------------------  ---------  ---------  ------ 
Earnings/(loss) per share (p) (2)                   4.72    (96.12)  100.84 
---------------------------------------------  ---------  ---------  ------ 
 

Statutory revenue of GBP5.2bn, down 9%, reflected a more balanced contribution from the business units compared with the prior period. Civil Aerospace revenue declined, as lower large engine OE deliveries and shop visit volumes offset the non-repeat of large negative LTSA catch-ups. Defence revenue grew strongly helped by favourable timing of high margin spare parts and spare engine sales and Power Systems revenue was broadly stable with an increase in aftermarket services offset by lower OE deliveries. Revenue included a positive GBP160m Civil Aerospace LTSA catch-up compared with a GBP(866)m negative revenue catch-up in the prior period. The large negative LTSA catch-up in 2020 H1 reflected the impact of COVID-19 on our expected flying hours and aircraft retirement risk.

Gross profit returned to profit of GBP814m compared with a prior period loss of GBP(590)m as the restructuring programme achieved substantial cost savings, particularly in Civil Aerospace, and Defence delivered strong growth in higher margin products. It also included a GBP166m Civil Aerospace LTSA catch-up to profit compared with an GBP(814)m negative charge in 2020 H1.

Operating profit improved significantly to GBP38m from a prior period GBP(1.6)bn loss. The prior period included one-off charges comprising negative catch-ups, impairments and write-offs. R&D charges decreased from GBP(678)m to GBP(390)m primarily as a consequence of one-off impairments in the prior period. Self-funded R&D expenditure was GBP(396)m, down 10%. C&A costs of GBP(424)m were broadly flat.

Profit before tax of GBP114m included higher charges from interest bearing debt and committed undrawn facilities compared with the prior year period. It also benefitted from a GBP25m non-cash profit from revaluation of the hedge book compared with a prior period revaluation loss of GBP(2.6)bn.

Profit from continuing operations of GBP394m included a tax credit of GBP280m. The tax credit mainly relates to the remeasurement of the opening UK deferred tax balances from 19% to 25%, following the enactment of the change in UK corporation tax rate, together with the tax on profits and losses in overseas jurisdictions.

Discontinued operations : ITP Aero has been classified as discontinued in the 2021 H1 results.

EPS of 4.72p (2020 H1: (96.12)p) reflected the improvement in profit and an increase in weighted average number of shares compared with the prior period, which was restated and adjusted for the bonus factor of 2.91 to reflect the bonus element of the rights issue in 2020.

Statutory Balance Sheet

 
 GBP million                                            ITP Aero 
                                                      classified 
                                                          as HfS              As Reported       Change 
                                         30 June     31 December       ITP    31 December    excluding 
                                            2021            2020      Aero           2020     ITP Aero 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Intangible assets                         4,063           4,191       954          5,145        (128) 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Property, plant and equipment             3,992           4,184       331          4,515        (192) 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Right-of-use assets                       1,266           1,391        14          1,405        (125) 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Joint ventures and associates               413             393         1            394           20 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Contact assets and liabilities          (8,836)         (8,945)        23        (8,922)          109 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Working capital (9)                       1,229             473        97            570          756 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Provisions                              (1,720)         (1,907)      (38)        (1,945)          187 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Net debt (10)                           (4,941)         (3,558)      (69)        (3,627)      (1,383) 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Net financial assets and liabilities 
  (10)                                   (2,605)         (3,077)      (34)        (3,111)          472 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Net post-retirement scheme 
  surpluses/(deficits)                     (530)           (673)         -          (673)          143 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Tax                                       1,653           1,224        71          1,295          429 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Held for sale (11)                        1,402           1,410   (1,350)             60          (8) 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Other net assets and liabilities             24              19         -             19            5 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Net liabilities                         (4,590)         (4,875)         -        (4,875)          285 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Other items 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 US$ hedge book (US$bn)                       24                                       25 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Civil LTSA asset                            847                                      726 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Civil LTSA liability                    (6,895)                                  (6,841) 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 Civil net LTSA liability                (6,048)                                  (6,115) 
--------------------------------------  --------  --------------  --------  -------------  ----------- 
 

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

Intangible assets: Net decrease of GBP(128)m included additions of GBP89m primarily related to programme development in Civil Aerospace and Power Systems, and investment in the development of software applications across the business. There was an adverse foreign exchange impact of GBP(124)m and amortisation for the period was GBP(154)m.

Property, plant and equipment: Net decrease of GBP(192)m included additions of GBP95m, more than offset by GBP(239)m depreciation and a foreign exchange impact of GBP(65)m. Additions were GBP83m lower as a result of continued focus on prioritisation of business critical infrastructure projects and efforts to reduce capital intensity in Civil Aerospace with the ongoing cost reduction programme.

Right-of-use assets: Net reduction of GBP(125)m was driven by GBP(137)m depreciation charged in the period partly offset by additions of GBP10m.

Contract assets and liabilities: The net liability balance decreased by GBP(109)m, of which GBP67m related to the Civil Aerospace net LTSA balance change, and included positive LTSA catch-ups of GBP160m, offset by LTSA revenue billed being ahead of revenue recognised in the period of GBP(52)m and foreign exchange movements of GBP(41)m.

Working capital : The GBP1,229m net current asset position reflected a GBP756m movement driven by a GBP239m increase in inventory for planned second half sales, and a GBP758m decrease in payables driven by lower concessions and Risk and Revenue Sharing Partner (RRSPs) payables in Civil Aerospace and the final financial penalty payment of GBP156m related to agreements reached in January 2017. Partly offset by a GBP(241)m decrease in receivables reflecting the phasing of trading and customer receipts.

Provisions: The GBP187m decrease primarily reflected the utilisation of restructuring provisions of GBP59m and Trent 1000 provisions of GBP148m during the period.

Net debt: Reduced by GBP(1.4)bn to GBP(4.9)bn primarily driven by free cash outflow of GBP(1.2)bn.

Net financial assets and liabilities: There was an increase of GBP472m, primarily related to settled contracts in the period of GBP333m and the fair value movement in foreign exchange and other derivatives.

Net post-retirement scheme surpluses/deficits: GBP143m movement driven by an increase in the UK scheme surplus reflecting company contributions offset by actuarial changes and a decrease in the overseas schemes deficit mainly attributable to actuarial changes and foreign exchange. See note 16.

Group Underlying Results

The commentary and income statement below describe underlying performance, with percentage and absolute change figures presented on an organic basis, unless otherwise stated. Adjustments between the underlying income statement and the reported income statement are set out in note 2 to the condensed consolidated interim financial statements on page 28.

   Underlying   Income Statement 
 
 GBP million                           2021 H1   2020 H1    Change   Organic    M&A      FX 
                                                                      Change    (8) 
                                                                         (3) 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Underlying revenue                      5,227     5,410     (183)      (86)     24   (121) 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Underlying OE revenue                   2,239     2,728     (489)     (466)     24    (47) 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Underlying services revenue             2,988     2,682       306       380      -    (74) 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Underlying gross profit/(loss)          1,097     (965)     2,062     2,082      8    (28) 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Gross margin %                          21.0%   (17.8%)   38.8%pt   38.7%pt 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Commercial and administration 
  costs                                  (444)     (435)       (9)       (7)    (8)       6 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Research and development 
  costs                                  (386)     (321)      (65)      (71)      -       6 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Joint ventures and associates              40        91      (51)      (48)      -     (3) 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Underlying operating profit/(loss)        307   (1,630)     1,937     1,956      -    (19) 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Underlying operating margin              5.9%   (30.1%)   36.0%pt   36.1%pt 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Financing costs                         (174)   (1,573)     1,399     1,397      -       2 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Underlying profit/(loss) 
  before tax                               133   (3,203)     3,336     3,353      -    (17) 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Taxation                                 (29)      (90)        61        61      -       - 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Profit/(loss) for the 
  period from continuing 
  operations                               104   (3,293)     3,397     3,414      -    (17) 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Profit/(loss) for the 
  period from discontinued 
  operations                                43      (33)        76        75      -       1 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Underlying profit/(loss) 
  for the period                           147   (3,326)     3,473     3,489      -    (16) 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 Underlying earnings/(loss) 
  per share (p) (2)                       1.76   (59.44)     61.20     61.42 
------------------------------------  --------  --------  --------  --------  -----  ------ 
 

Underlying revenue of GBP5.2bn reflected a more balanced contribution from our business units. Services revenue increased 14% while OE fell 17%. Services revenue included a GBP160m Civil Aerospace LTSA revenue catch-up compared with GBP(866)m in the prior period.

Underlying gross profit of GBP1.1bn reflected the benefit of cost reductions and a GBP166m Civil Aerospace LTSA catch-up . The prior period loss of GBP(965)m included GBP(1.2)bn of one-off charges, mainly relating to negative Civil Aerospace LTSA catch-ups.

Underlying operating profit was GBP307m, with a return to profit reflecting the higher gross profit in the period. The R&D charge increase demonstrates the continued focus on early stage technology and innovation. The lower JV and associates contribution reflected the impact of lower services activity on our MRO joint venture businesses.

Underlying profit before tax included financing costs of GBP(174)m with higher charges relating to interest bearing debt and committed undrawn facilities compared with the prior period. In 2020 H1, a GBP(1.5)bn one-off underlying finance charge was taken to close out over hedged positions on the USD hedge book.

Underlying profit included a tax charge of GBP(29)m (2020 H1: GBP(90)m), an underlying rate of 21.8% compared with (2.8)% in the prior period.

Underlying EPS reflected the improvement in profit and an increase in weighted average number of shares compared with the prior period, which was restated and adjusted for the bonus factor of 2.91 to reflect the bonus element of the rights issue in 2020.

Group Funds Flow Statement

 
 GBP million                                                                               2021 H1   2020 H1    Change 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Underlying operating profit/(loss) - total Group                                              291   (1,669)     1,960 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Depreciation, amortisation and impairment                                                     480       499      (19) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Lease payments (capital plus interest)                                                      (171)     (190)        19 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Expenditure on intangible assets                                                             (71)     (176)       105 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Expenditure on property, plant and equipment                                                (124)     (221)        97 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Change in inventory                                                                         (219)     (301)        82 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Movement in receivables/payables/contract balances (excluding Civil LTSA)                   (420)   (1,541)     1,121 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Civil Aerospace net LTSA balance change                                                     (108)       788     (896) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Movement on provisions                                                                      (136)       132     (268) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Cash flows on settlement of excess foreign exchange contracts                               (303)      (88)     (215) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Fees on undrawn facilities and net interest                                                 (116)      (26)      (90) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Cash flow on financial instruments net of realised losses included in operating profit       (52)      (33)      (19) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Other                                                                                         (6)      (35)        29 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Trading cash flow                                                                           (955)   (2,861)     1,906 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Contributions to defined benefit pensions in excess of underlying PBT charge                 (94)        94     (188) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Taxation paid                                                                               (102)      (34)      (68) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Group free cash flow                                                                      (1,151)   (2,801)     1,650 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Free cash flow from continuing operations                                                 (1,174)   (2,862)     1,688 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Free cash flow from discontinuing operations                                                   23        61      (38) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Shareholder payments                                                                          (2)      (90)        88 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Disposals and acquisitions                                                                   (30)         2      (32) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Exceptional group restructuring                                                             (134)      (87)      (47) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Payment of financial penalties                                                              (156)     (135)      (21) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Other                                                                                        (30)      (41)        11 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Movement in net funds from cash flows (excluding lease liabilities)                       (1,503)   (3,152)     1,649 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Capital element of lease payments                                                             147       149       (2) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Movement in net funds from cash flows                                                     (1,356)   (3,003)     1,647 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Change in short-term investments                                                              (1)         6       (7) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Net cash flow from changes in borrowings and lease liabilities                                914     2,637   (1,723) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 Statutory cash flow                                                                         (443)     (360)      (83) 
----------------------------------------------------------------------------------------  --------  --------  -------- 
 

Key changes in the funds flow items are described below:

Expenditure on intangible assets: Expenditure of GBP(71)m included GBP(42)m capitalised R&D (30 June 2020: GBP(152)m), lower than prior period reflecting the maturity of Civil Aerospace engine programmes.

Capital expenditure: Investment of GBP(124)m was GBP97m lower than prior period as a result of continued focus on prioritisation of business critical infrastructure projects and efforts to reduce capital intensity in Civil Aerospace in line with the ongoing cost reduction programme.

Increase in inventory: The GBP219m increase in the period was primarily driven by planned inventory build in Power Systems to meet expected sales volumes in the second half of the year alongside a modest increase in Civil Aerospace expected to mostly unwind in the second half.

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

The movement of GBP(420)m was primarily driven by Civil Aerospace. This included reduced deposits as well as lower amounts owed to suppliers, JVs and RRSPs, driven in part by the reduced level of OE volumes. In addition, there was a decrease in the Civil Aerospace OE engine concessions payable, due to the timing of concession payments and aircraft deliveries, albeit the decrease was lower than expected as some aircraft deliveries were delayed. It also includes increased receivables in Defence reflecting the timing of customer receipts.

Movement in underlying Civil Aerospace net LTSA creditor: In H1 2021, there was a GBP108m reduction in the net LTSA balance as revenues recognised exceeded invoiced flying hour receipts. This included GBP160m positive contract catch-ups, which increased revenue recognised during the period. These catch-ups were principally driven by improved shop visit cost expectations in Business Aviation and the impact of specific customer negotiations with airlines.

Movement on provisions: The GBP(136)m movement reflected a decrease in the provision balance primarily driven by Trent 1000 provision utilisation and progress on the restructuring programme.

Cash flows on settlement of excess derivative contracts: Relates to the cash settlement costs in the period to 30 June 2021 for the offsetting foreign exchange contracts that were entered into to reduce the size of the US Dollar hedge book. The cash settlement costs of GBP1.7bn occur across 2020-2026, of which GBP1.2bn remains to be paid in future periods.

Interest and fees: The net payment of GBP(116)m in the period was higher than the prior period, reflecting GBP(81)m of net interest paid (2020 H1: GBP(26)m) and commitment fees on undrawn facilities.

Contributions to defined benefit pensions: In H1 2021, cash contributions were GBP94m higher than the pensions charge in the income statement (H1 2020: GBP94m lower) reflecting payment deferrals from 2020 into H1 2021 .

Taxation: Net cash tax payments in 2021 H1 were GBP(102)m (2020 H1: GBP(34)m). The increase in 2021 H1 is mainly due to the timing of certain payments. Net tax payments in 2021 H2 are expected to be significantly lower.

Disposals and acquisitions: The GBP(30)m outflow related to costs associated with disposal activity.

Exceptional restructuring: Payments of GBP(134)m related to the restructuring programme and associated initiatives, of which GBP20m related to restructuring capital expenditure.

Payment of financial penalties: The final payment of GBP(156)m relating to the deferred prosecution agreement (DPA) in the UK was made in January 2021.

Other underlying adjustments: Outflow of GBP(30)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, along with other smaller items.

Net cash flow from changes in borrowings and lease liabilities: During the period, the Group drew down on its GBP2.0bn loan which is supported by an 80% guarantee from UK Export Finance and repaid GBP300m of commercial paper under the Covid Corporate Financing Facility and EUR750m (GBP639m) loan notes in line with repayment terms.

Civil Aerospace

 
 GBP million                          2021 H1   Organic Change (3)     FX   2020 H1 (4)    Change   Organic Change (3) 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 Underlying revenue                     2,168                (336)   (12)         2,516     (14%)                (13%) 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 Underlying OE revenue                    722                (466)      1         1,187     (39%)                (39%) 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 Underlying services revenue            1,446                  130   (13)         1,329        9%                  10% 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 Underlying gross profit/(loss)           380                1,940    (8)       (1,552)    (124%)               (125%) 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 Gross margin %                         17.5%              79.4%pt              (61.7%)   79.2%pt 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 Commercial and administrative 
  costs                                 (145)                   25      2         (172)     (16%)                (15%) 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 Research and development costs         (237)                 (60)      3         (180)       32%                  33% 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 Joint ventures and associates             41                 (45)    (2)            88     (53%)                (52%) 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 Underlying operating profit/(loss)        39                1,860    (5)       (1,816)    (102%)                1,860 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 Underlying operating margin %           1.8%              74.1%pt              (72.2%)   74.0%pt 
-----------------------------------  --------  -------------------  -----  ------------  --------  ------------------- 
 
 
 Key operational metrics:                    2021 H1   2020 H1   Change 
------------------------------------------  --------  --------  ------- 
 Large engine deliveries                         100       137    (27%) 
------------------------------------------  --------  --------  ------- 
 Business jet engine deliveries                   48       103    (53%) 
------------------------------------------  --------  --------  ------- 
 Total engine deliveries                         148       240    (38%) 
------------------------------------------  --------  --------  ------- 
 Large engine LTSA flying hours (million)        3.2       3.9    (18%) 
------------------------------------------  --------  --------  ------- 
 Large engine LTSA major refurbs                  92       161    (43%) 
------------------------------------------  --------  --------  ------- 
 Large engine LTSA check & repairs               192       310    (38%) 
------------------------------------------  --------  --------  ------- 
 Total large engine LTSA shop visits             284       471    (40%) 
------------------------------------------  --------  --------  ------- 
 

Civil Aerospace operational performance in the first half was in line with expectations. Large engine LTSA flying hours were 43% of the 2019 level, a 9 percentage point improvement from second half 2020. Domestic large engine flying hours exceeded 2019 levels in May and made up approximately 20% of the large engine activity in the period. Business aviation flying recovered to 2019 levels by the end of the first half. Engine deliveries were down from the prior period, reflecting the build schedules of widebody airframer customers and the transition between engine programmes for business aviation.

-- Underlying revenue of GBP2.2bn, down 13% on the prior period. OE revenue of GBP722m was down 39% reflecting the reduction in engine delivery volumes required to fulfil airframer customer build schedules. Services revenue of GBP1.4bn was up 10% on the prior year period and included GBP160m positive LTSA catch-ups (2020 H1: GBP(866)m negative contract catch-ups), offset by lower shop visit volumes.

-- Underlying gross profit of GBP380m benefitted from strong operating cost performance resulting from our restructuring programme and GBP166m positive LTSA catch-ups. The GBP(1.6)bn gross loss in 2020 H1 included GBP(1.2)bn of largely COVID-related one-time charges including GBP(814)m negative LTSA catch-ups.

-- Underlying operating profit of GBP39m reflected the good progress on restructuring cost savings, which were mostly related to direct costs, offset by the higher R&D charge and lower contribution from JVs and associates.

-- Trading cash outflow was GBP(1,064)m in the first half, a significant improvement on 2020 H1 reflecting the return to underlying profitability, including restructuring savings, as well as a reduction in working capital related outflows driven partly by the non-repeat of the H1 2020 unwind of invoice factoring. OE concession outflows were higher than the prior period, driving a GBP239m reduction in the concession liability on the balance sheet.

Outlook

The timing of civil aviation recovery, particularly for international travel, remains uncertain and sensitive to the developments of the COVID-19 virus. For 2021, we expect the recovery in business aviation and domestic flying to be sustained and a continuation of the gradual improvement in international flying, which is constrained by the border restrictions in place worldwide. We are encouraged by forward indicators, including vaccination programmes and expect the recovery to accelerate once restrictions are lifted.

Defence

 
                                          Organic                             Organic 
                                   2021    Change                              Change 
 GBP million                         H1       (3)     FX   2020 H1   Change       (3) 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 Underlying revenue               1,721       266   (98)     1,553      11%       17% 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 Underlying OE revenue              719        83   (42)       678       6%       12% 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 Underlying services 
  revenue                         1,002       183   (56)       875      15%       21% 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 Underlying gross profit            395        80   (17)       332      19%       24% 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 Gross margin %                   23.0%    1.3%pt            21.4%   1.6%pt 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 Commercial and administrative 
  costs                            (79)       (5)      2      (76)       4%        7% 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 Research and development 
  costs                            (47)         -      2      (49)     (4%)         - 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 Joint ventures and associates        -       (3)      -         3        -         - 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 Underlying operating 
  profit                            269        72   (13)       210      28%       35% 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 Underlying operating 
  margin %                        15.6%    2.0%pt            13.5%   2.1%pt 
-------------------------------  ------  --------  -----  --------  -------  -------- 
 

Our Defence business continues to perform well with resilient demand for OE and services. First half growth was helped by the earlier timing of spare engine and spare parts sales, which typically have been in the second half in prior years. This favourable timing and mix in the first half is expected to result in a stronger first half versus second half performance, and our full year expectations for Defence are unchanged. The timing of order deposits resulted in a lower cash conversion in the first half compared with the prior year period but our full year expectation is unchanged.

Order intake was GBP1.2bn, representing a book-to-bill ratio of 0.7x. The order book is strong following several years' of high intake. Order cover for 2022 is in excess of 70%.

-- Underlying revenue increased by 17% to GBP1.7bn. This was driven by improved operational performance that enabled earlier delivery of high margin spare parts and spare engine sales, historically weighted towards the second half. Actions taken to support the supply chain in 2020 have supported an improvement in on-time delivery to customers, with services revenue up 21% and OE revenue up 12%.

-- Underlying gross profit of GBP395m was 24% higher year-over-year and the gross margin expanded 1.3%pt to 23.0%. This reflected a positive mix towards higher margin spare parts and spare engine sales.

-- Underlying operating profit increased by 35% to GBP269m, with margin 2.0%pt higher at 15.6%. This reflected the beneficial phasing of revenue and profit, together with strong cost control.

Outlook

We expect revenue and profit to be broadly stable in 2021, with a stronger first half versus second half performance reflecting the earlier timing of sales in addition to an increase in R&D investment expected during the second half, in line with customer requirements and project phasing.

Our largest customers, the US DoD and the UK MoD, remain committed to the modernisation of their fleets with a particular focus on technology and an emerging interest in reducing their carbon footprint. Our work on the Tempest programme in the UK is progressing well and we have tendered a strong solution for the B-52 new engine programme in the US, which is being assessed by the DoD with a decision on selection expected in the second half of this year.

Power Systems

 
 
                                            Organic                                   Organic 
                                             Change    M&A         2020 H1             Change 
 GBP million                      2021 H1       (3)    (8)    FX       (5)   Change       (3) 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 Underlying revenue                 1,181      (49)     24   (8)     1,214     (3%)      (4%) 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 Underlying OE revenue                718     (105)     24   (5)       804    (11%)     (13%) 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 Underlying services 
  revenue                             463        56      -   (3)       410      13%       13% 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 Underlying gross profit              301        34      8   (4)       263      14%       13% 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 Gross margin %                     25.5%    3.8%pt                  21.7%   3.8%pt 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 Commercial and administrative 
  costs                             (190)      (37)    (8)     3     (148)      28%       25% 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 Research and development 
  costs                              (69)        12      -     1      (82)    (16%)     (14%) 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 Joint ventures and associates        (1)         -      -   (1)         0        -         - 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 Underlying operating 
  profit                               41         9      -   (1)        33      24%       26% 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 Underlying operating 
  margin %                           3.5%    0.8%pt                   2.7%   0.8%pt 
-------------------------------  --------  --------  -----  ----  --------  -------  -------- 
 

Power Systems saw increased activity levels during the first half with improved order intake and growth in aftermarket revenue. This encouraging start to the recovery supports our expectations for OE recovery starting in the second half.

-- Order intake of GBP1.4bn was 19% higher than the prior period and represented a book-to-bill ratio of 1.2x in the period. Year on year growth was strongest in marine, governmental and power generation end markets. Lower carbon solutions are gaining interest from customers as we continue to develop our product offerings in this area aligned with market progress and customer demand.

-- Underlying revenue broadly unchanged at GBP1.2bn with 13% growth in aftermarket services as economic activity recovers in our end markets, offset by a 13% reduction in OE revenue, in line with expectations.

-- Underlying gross profit of GBP301m was 13% higher benefitting from a positive mix effect due to the rise in higher-margin aftermarket spare parts and reallocation of certain direct costs to commercial and administrative costs. This was partly offset by lower utilisation in the period.

-- Underlying operating profit of GBP41m with a margin of 3.5%, 0.8%pts higher than prior period, reflecting the positive mix of activity. The increase in commercial and administrative costs was largely due to one-off items in the period that are not expected to repeat and timing differences which are expected to unwind as well as the reallocation of certain costs from gross profit. The reduction in R&D in the first half reflected the timing of projects and is expected to increase in the second half.

Outlook

Revenues are expected to return to growth in the second half of 2021 as the encouraging recovery in order intake converts into sales. This will help improve factory utilisation and drive margin recovery in the second half despite the expected increase in R&D spend. Our strategy to focus on market share growth in China resulted in increased order intake compared with the prior year which we expect to convert into strong sales growth in China for the full year. Our target to return to 2019 levels of revenue by 2022 is unchanged and supported by the order intake recovery we have seen year to date.

ITP Aero

ITP Aero is classified as a discontinued business and held for sale in the 2021 H1 results.

 
                                            Organic                            Organic 
                                             Change         2020 H1             Change 
 GBP million                      2021 H1       (3)    FX       (4)   Change       (3) 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 Underlying revenue                   317      (79)   (2)       398    (20%)     (20%) 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 Underlying OE revenue                271      (47)   (1)       319    (15%)     (15%) 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 Underlying services revenue           46      (32)   (1)        79    (42%)     (41%) 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 Underlying gross profit               48        12   (1)        37      30%       32% 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 Gross margin %                     15.1%    5.9%pt            9.3%   5.8%pt 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 Commercial and administrative 
  costs                              (26)       (4)     1      (23)      13%       17% 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 Research and development 
  costs                              (15)         -     -      (15)        -         - 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 Joint ventures and associates          -       (1)     -         1        -         - 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 Underlying operating 
  profit                                7         7     -         -        -         - 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 Underlying operating 
  margin %                           2.2%    2.2%pt            0.0%   2.2%pt 
-------------------------------  --------  --------  ----  --------  -------  -------- 
 

ITP Aero has performed well in challenging conditions in the first half with resilience in demand for its defence activities (approximately 30% of revenue) but low levels of demand for its civil aerospace activities (approximately 70% of revenue), impacted by the continued effect of COVID-19 on original equipment manufacturer (OEM) customers.

-- Underlying revenue was GBP317m, down 20% in 2020 H1, reflecting the continued impact of COVID-19 on the civil aerospace market. Defence revenue remained resilient.

-- Underlying gross profit of GBP48m, up 32%, benefitted from a favourable mix of higher margin products, particularly in defence.

-- Underlying operating profit was GBP7m, a small improvement on the break-even result in 2020 H1 driven mostly by the increase in gross profit and saving from headcount reductions in 2020.

-- Hucknall and fabrications: As part of the footprint review and reorganisation of the Group's Civil Aerospace activities announced in 2020, approximately 700 people and all activities carried out at Rolls-Royce's Hucknall site in the UK transferred to ITP Aero in May 2021 along with certain fabrication supply chain activities.

Notes to financial tables and commentary on pages 1-14:

(1) Discontinued operations relate to the statutory and underlying results of ITP Aero and are presented net of internal sales and related consolidation adjustments.

(2) 2020 H1 earnings per share has been adjusted to reflect the 2.91 bonus element of the rights issue that was completed on 12 November 2020.

(3) Organic change at constant translational currency (constant currency) applying FY20 average rates to 2020 H1 and 2021 H1, excluding M&A. All commentary is provided on an organic basis unless otherwise stated.

(4) The underlying results for Civil Aerospace and ITP Aero for 2020 H1 have been restated to reflect the transfer of the Hucknall site with associated fabrications activities from Civil Aerospace to ITP Aero during 2021.

(5) The underlying results for Power Systems for 2020 have been restated to reclassify the Civil Nuclear Instrumentation & Control business as other businesses, consistent with FY20.

(6) Other businesses include the results of the Bergen Engines AS business, the results of the Civil Nuclear Instrumentation & Control business, the results of the North America Civil Nuclear business until the date of disposal on 31 January 2020 and the results of the Knowledge Management System business until the date of disposal on 3 February 2020.

(7) The underlying results of Corporate and inter-segment activities includes the results of the Group's SMR, electrical and UK civil nuclear activities.

(8) M&A includes 2020 Power Systems acquisitions comprising of Kinolt Group S.A and Servowatch Systems Limited (SSL).

(9) Working capital includes inventory, trade receivables, payables and similar assets and liabilities.

(10) Net debt includes GBP57m (2020: GBP251m) of the fair value of derivatives included in fair value hedges and the element of fair value relating to exchange differences on the underlying principal of derivatives in cash flow hedges.

(11) Relates to Bergen Engines AS and the Civil Nuclear Instrumentation & Control business which were classified as disposal groups held for sale at 31 December 2020 together with ITP Aero held for sale at 30 June 2021.

Condensed consolidated interim financial statements

Condensed consolidated income statement

For the half-year ended 30 June 2021

 
                                                                                         Restated 
                                                    Half-year to 30 June 2021        Half-year to 
                                                                                 30 June 2020 (1) 
                                                             Notes                           GBPm       GBPm 
------------------------------------------   ---  ---------------------------  ------------------  --------- 
Continuing operations 
------------------------------------------   ---  ---------------------------  ------------------  --------- 
  Revenue                                                      2                            5,159      5,673 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Cost of sales (2)                                                                       (4,345)    (6,263) 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Gross profit/(loss)                                          2                              814      (590) 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Commercial and administrative costs                          2                            (424)      (421) 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Research and development costs                              2, 3                          (390)      (678) 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Share of results of joint ventures and 
   associates                                                                                  38         72 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Operating profit/(loss)                                                                      38    (1,617) 
------------------------------------------------  ---------------------------  ------------------  --------- 
  (Loss)/gain arising on acquisition and 
   disposal of businesses                                      19                             (7)          2 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Profit/(loss) before financing and taxation                                                  31    (1,615) 
------------------------------------------------  ---------------------------  ------------------  --------- 
 
  Financing income (3)                                         4                              280         23 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Financing costs (3)                                          4                            (197)    (3,621) 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Net financing income/(costs)                                                                 83    (3,598) 
------------------------------------------------  ---------------------------  ------------------  --------- 
 
  Profit/(loss) before taxation                                                               114    (5,213) 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Taxation                                                     5                              280       (48) 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Profit/(loss) for the period from continuing 
   operations                                                                                 394    (5,261) 
------------------------------------------------  ---------------------------  ------------------  --------- 
 
Discontinued operations 
------------------------------------------   ---  ---------------------------  ------------------  --------- 
  Profit/(loss) for the period                                                                 16      (117) 
------------------------------------------------  ---------------------------  ------------------  --------- 
  Costs of disposal of discontinued 
  operations                                                                                 (17)          - 
------------------------------------------   ---  ---------------------------  ------------------  --------- 
  Loss for the period from discontinued 
   operations                                                  19                             (1)      (117) 
------------------------------------------------  ---------------------------  ------------------  --------- 
 
Profit/(loss) for the period                                                                  393    (5,378) 
------------------------------------------------  ---------------------------  ------------------  --------- 
 
Attributable to: 
------------------------------------------   ---  ---------------------------  ------------------  --------- 
Ordinary shareholders                                                                         393    (5,380) 
------------------------------------------------  ---------------------------  ------------------  --------- 
Non-controlling interests                                                                       -          2 
------------------------------------------------  ---------------------------  ------------------  --------- 
Profit/(loss) for the period                                                                  393    (5,378) 
------------------------------------------------  ---------------------------  ------------------  --------- 
Other comprehensive (expense)/income                                                        (145)        683 
------------------------------------------------  ---------------------------  ------------------  --------- 
Total comprehensive income/(expense) for the 
 period                                                                                       248    (4,695) 
------------------------------------------------  ---------------------------  ------------------  --------- 
 
 
Profit/(loss) per ordinary share attributable to 
 ordinary shareholders:                                        6 
------------------------------------------------  ---------------------------  ------------------  --------- 
From continuing operations: 
------------------------------------------   ---  ---------------------------  ------------------  --------- 
Basic (4)                                                                                   4.73p   (94.03)p 
------------------------------------------------  ---------------------------  ------------------  --------- 
Diluted (4)                                                                                 4.72p   (94.03)p 
------------------------------------------------  ---------------------------  ------------------  --------- 
 
From continuing and discontinued 
operations: 
------------------------------------------   ---  ---------------------------  ------------------  --------- 
Basic (4)                                                                                   4.72p   (96.12)p 
------------------------------------------------  ---------------------------  ------------------  --------- 
Diluted (4)                                                                                 4.71p   (96.12)p 
------------------------------------------------  ---------------------------  ------------------  --------- 
Underlying earnings per ordinary share are shown 
 in note 6. 
------------------------------------------------  ---------------------------  ------------------  --------- 
 
 
 

(1) The comparative figures have been restated to reflect ITP Aero being classified as a discontinued operation. Further detail can be found in note 19.

(2) Cost of sales includes a net charge for expected credit losses of GBP48m (2020: GBP104m).

(3) Included within financing are fair value changes on derivative contracts. Further details can be found in notes 2, 4 and 13.

(4) The comparative figures for earnings per share have been adjusted to reflect the bonus element of the rights issue that completed on 12 November 2020 - see note 6. Payments to ordinary shareholders in respect of the period are GBPnil (2020: GBPnil).

Condensed consolidated statement of comprehensive income

For the half-year ended 30 June 2021

 
                                                                                                          Half-year to 
                                                                             Half-year to 30 June 2021    30 June 2020 
                                                                     Notes                        GBPm            GBPm 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Profit/(loss) for the period                                                                       393         (5,378) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Other comprehensive income (OCI) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Actuarial movements in post-retirement schemes                      16                          (12)             393 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Share of OCI of joint ventures and associates                                                    (4)             (1) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Related tax movements                                                                             16           (130) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Items that will not be reclassified to profit or loss                                                -             262 
------------------------------------------------------------------  ------  --------------------------  -------------- 
 
  Foreign exchange translation differences on foreign operations                                 (174)             444 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Reclassified to income statement on disposal of businesses                                         -               3 
------------------------------------------------------------------  ------  --------------------------  -------------- 
   Movement on fair values debited to cash flow hedge reserve                                     (41)             (6) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
   Reclassified to income statement from cash flow hedge reserve                                    38            (19) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Share of OCI of joint ventures and associates                                                     32             (9) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Related tax movements                                                                              -               8 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Items that may be reclassified to profit or loss                                               (145)             421 
------------------------------------------------------------------  ------  --------------------------  -------------- 
 
Total other comprehensive (expense)/income                                                       (145)             683 
------------------------------------------------------------------  ------  --------------------------  -------------- 
 
Total comprehensive income/(expense) for the period                                                248         (4,695) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
 
Attributable to: 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Ordinary shareholders                                                                            248         (4,697) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Non-controlling interests                                                                          -               2 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Total comprehensive income/(expense) for the period                                                248         (4,695) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
 
Total comprehensive income/(expense) for the period attributable 
to ordinary shareholders 
arises from: 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Continuing operations                                                                            316         (4,646) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
  Discontinued operations                                                                         (68)            (51) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Total comprehensive income/(expense) for the period attributable 
 to ordinary shareholders                                                                          248         (4,697) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
 

Condensed consolidated balance sheet

At 30 June 2021

 
                                                             30 June   31 December 
                                                                2021          2020 
                                                    Notes       GBPm          GBPm 
-------------------------------------------------  ------  ---------  ------------ 
ASSETS 
-------------------------------------------------  ------  ---------  ------------ 
Intangible assets                                     7        4,063         5,145 
-------------------------------------------------  ------  ---------  ------------ 
Property, plant and equipment                         8        3,992         4,515 
-------------------------------------------------  ------  ---------  ------------ 
Right-of-use assets                                   9        1,266         1,405 
-------------------------------------------------  ------  ---------  ------------ 
Investments - joint ventures and associates                      413           394 
-------------------------------------------------  ------  ---------  ------------ 
Investments - other                                               24            19 
-------------------------------------------------  ------  ---------  ------------ 
Other financial assets                               13          537           687 
-------------------------------------------------  ------  ---------  ------------ 
Deferred tax assets                                            2,062         1,826 
-------------------------------------------------  ------  ---------  ------------ 
Post-retirement scheme surpluses                     16          914           907 
-------------------------------------------------  ------  ---------  ------------ 
Non-current assets                                            13,271        14,898 
-------------------------------------------------  ------  ---------  ------------ 
Inventories                                                    3,673         3,690 
-------------------------------------------------  ------  ---------  ------------ 
Trade receivables and other assets                   10        5,068         5,455 
-------------------------------------------------  ------  ---------  ------------ 
Contract assets                                      12        1,402         1,510 
-------------------------------------------------  ------  ---------  ------------ 
Taxation recoverable                                              79           117 
-------------------------------------------------  ------  ---------  ------------ 
Other financial assets                               13           40           107 
-------------------------------------------------  ------  ---------  ------------ 
Short-term investments                                             1             - 
-------------------------------------------------  ------  ---------  ------------ 
Cash and cash equivalents                                      2,915         3,452 
-------------------------------------------------  ------  ---------  ------------ 
Current assets                                                13,178        14,331 
-------------------------------------------------  ------  ---------  ------------ 
Assets held for sale                                 19        2,306           288 
-------------------------------------------------  ------  ---------  ------------ 
TOTAL ASSETS                                                  28,755        29,517 
-------------------------------------------------  ------  ---------  ------------ 
 
LIABILITIES 
-------------------------------------------------  ------  ---------  ------------ 
Borrowings and lease liabilities                     14        (221)       (1,272) 
-------------------------------------------------  ------  ---------  ------------ 
Other financial liabilities                          13        (663)         (608) 
-------------------------------------------------  ------  ---------  ------------ 
Trade payables and other liabilities                 11      (5,720)       (6,653) 
-------------------------------------------------  ------  ---------  ------------ 
Contract liabilities                                 12      (3,811)       (4,187) 
-------------------------------------------------  ------  ---------  ------------ 
Current tax liabilities                                         (96)         (154) 
-------------------------------------------------  ------  ---------  ------------ 
Provisions for liabilities and charges               15        (568)         (826) 
-------------------------------------------------  ------  ---------  ------------ 
Current liabilities                                         (11,079)      (13,700) 
-------------------------------------------------  ------  ---------  ------------ 
Borrowings and lease liabilities                     14      (7,693)       (6,058) 
-------------------------------------------------  ------  ---------  ------------ 
Other financial liabilities                          13      (2,462)       (3,046) 
-------------------------------------------------  ------  ---------  ------------ 
Trade payables and other liabilities                 11      (1,792)       (1,922) 
-------------------------------------------------  ------  ---------  ------------ 
Contract liabilities                                 12      (6,427)       (6,245) 
-------------------------------------------------  ------  ---------  ------------ 
Deferred tax liabilities                                       (392)         (494) 
-------------------------------------------------  ------  ---------  ------------ 
Provisions for liabilities and charges               15      (1,152)       (1,119) 
-------------------------------------------------  ------  ---------  ------------ 
Post-retirement scheme deficits                      16      (1,444)       (1,580) 
-------------------------------------------------  ------  ---------  ------------ 
Non -current liabilities                                    (21,362)      (20,464) 
-------------------------------------------------  ------  ---------  ------------ 
Liabilities associated with assets held for sale     19        (904)         (228) 
-------------------------------------------------  ------  ---------  ------------ 
TOTAL LIABILITIES                                           (33,345)      (34,392) 
-------------------------------------------------  ------  ---------  ------------ 
 
NET LIABILITIES                                              (4,590)       (4,875) 
-------------------------------------------------  ------  ---------  ------------ 
 
EQUITY 
-------------------------------------------------  ------  ---------  ------------ 
Called-up share capital                                        1,674         1,674 
-------------------------------------------------  ------  ---------  ------------ 
Share premium                                                  1,012         1,012 
-------------------------------------------------  ------  ---------  ------------ 
Capital redemption reserve                                       164           162 
-------------------------------------------------  ------  ---------  ------------ 
Cash flow hedging reserve                                       (63)          (94) 
-------------------------------------------------  ------  ---------  ------------ 
Merger reserve                                                   650           650 
-------------------------------------------------  ------  ---------  ------------ 
Translation reserve                                              348           524 
-------------------------------------------------  ------  ---------  ------------ 
Accumulated losses                                           (8,399)       (8,825) 
-------------------------------------------------  ------  ---------  ------------ 
Equity attributable to ordinary shareholders                 (4,614)       (4,897) 
-------------------------------------------------  ------  ---------  ------------ 
Non-controlling interests                                         24            22 
-------------------------------------------------  ------  ---------  ------------ 
TOTAL EQUITY                                                 (4,590)       (4,875) 
-------------------------------------------------  ------  ---------  ------------ 
 

Condensed consolidated cash flow statement

For the half-year ended 30 June 2021

 
                                                                                                          Half-year to 
                                                                             Half-year to 30 June 2021    30 June 2020 
                                                                     Notes                        GBPm            GBPm 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Reconciliation of cash flows from operating activities 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Operating profit/(loss) from continuing operations                                                  38         (1,617) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Operating loss from discontinued operations                                                       (93)           (152) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Operating loss (1)                                                                                (55)         (1,769) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Loss on disposal of property, plant and equipment                                                    2              19 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Share of results of joint ventures and associates                                                 (38)            (73) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Dividends received from joint ventures and associates                                               14              28 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Amortisation and impairment of intangible assets                       7                           159             550 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Depreciation and impairment of property, plant and equipment           8                           243             495 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Depreciation and impairment of right-of-use assets                     9                           128             513 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Adjustment of amounts payable under residual value guarantees 
 within lease liabilities (2)                                                                      (3)            (42) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Impairment of and other movements on investments                                                     2              19 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Decrease in provisions                                                                           (211)           (130) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Increase in inventories                                                                          (219)           (301) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Movement in trade receivables/payables and other 
 assets/liabilities                                                                              (136)         (1,925) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Movement in contract assets/liabilities                                                          (178)             642 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Financial penalties paid (3)                                                                     (156)           (135) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Cash flows on other financial assets and liabilities held for 
 operating purposes                                                                               (45)            (35) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Interest received                                                                                    3              12 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Net defined benefit post-retirement cost/(credit) recognised in 
 loss before financing                                                16                            26           (116) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Cash funding of defined benefit post-retirement schemes               16                         (131)            (38) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Share-based payments                                                                                18               1 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Net cash outflow from operating activities before taxation                                       (577)         (2,285) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Taxation paid                                                                                    (102)            (34) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Net cash outflow from operating activities                                                       (679)         (2,319) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
 
Cash flows from investing activities 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Net movement in unlisted investments                                                               (6)            (14) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Additions of intangible assets                                         7                          (89)           (204) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Disposals of intangible assets                                         7                             2              10 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Purchases of property, plant and equipment                                                       (126)           (226) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Disposals of property, plant and equipment                                                           5               1 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Disposals of right-of-use assets                                                                     -               7 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Acquisition of businesses                                             19                             -             (8) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Disposal of businesses                                                19                           (8)              10 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Movement in investments in joint ventures and associates and other 
 movements on investments                                                                          (2)             (4) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Movement in short-term investments                                                                 (1)               - 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Net cash outflow from investing activities                                                       (225)           (428) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
 
Cash flows from financing activities 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Repayment of loans (4)                                                                           (942)            (21) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Proceeds from increase in loans (4)                                                              2,003           2,807 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Capital element of lease payments                                                                (147)           (149) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Net cash flow from increase in borrowings and leases                                               914           2,637 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Interest paid                                                                                     (84)            (38) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Interest element of lease payments                                                                (31)            (39) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Fees paid on undrawn facilities                                                                   (35)               - 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Cash flows on settlement of excess derivative contracts (5)            4                         (303)            (88) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Movement in short-term investments                                                                   -               6 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Purchase of ordinary shares                                                                          -             (1) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
NCI on formation of subsidiary                                                                       2               - 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Redemption of C Shares                                                                             (2)            (90) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Net cash inflow from financing activities                                                          461           2,387 
------------------------------------------------------------------  ------  --------------------------  -------------- 
 
Change in cash and cash equivalents                                                              (443)           (360) 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Cash and cash equivalents at 1 January                                                           3,496           4,435 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Exchange (losses)/gains on cash and cash equivalents                                              (75)             156 
------------------------------------------------------------------  ------  --------------------------  -------------- 
Cash and cash equivalents at 30 June (6)                                                         2,978           4,231 
------------------------------------------------------------------  ------  --------------------------  -------------- 
 

Condensed consolidated cash flow statement continued

For the half-year ended 30 June 2021

(1) During the period, the Group received GBP10m (30 June 2020: GBP17m) from the British Government as part of the UK furlough scheme. This was recognised within operating profit/(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) Repayment of loans includes repayment of GBP300m commercial paper under the Covid Corporate Financing Facility (CCFF) and EUR750m (GBP639m) loan notes in line with repayment terms. Proceeds from increase in loans includes the draw down of a GBP2,000m loan (supported by an 80% guarantee from UK Export Finance). Further details are provided in note 15.

(5) During the period, the Group incurred a cash outflow of GBP303m as a result of settling foreign exchange contracts that were originally in place to sell $3,297m receipts. Further detail is provided in note 4.

(6) 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 condensed consolidated cash flow statement, movements in balance sheet line items have been adjusted for non-cash items. The cash flow in the period includes the sale of goods and services to joint ventures and associates - see note 18.

 
                                                                                                          Half-year to 
                                                                             Half-year to 30 June 2021    30 June 2020 
                                                                                                  GBPm            GBPm 
--------------------------------------------------------------------------  --------------------------  -------------- 
Reconciliation of movements in cash and cash equivalents to movements in 
net debt 
--------------------------------------------------------------------------  --------------------------  -------------- 
Change in cash and cash equivalents                                                              (443)           (360) 
--------------------------------------------------------------------------  --------------------------  -------------- 
Cash flow from increase in borrowings and leases                                                 (914)         (2,637) 
--------------------------------------------------------------------------  --------------------------  -------------- 
Less: settlement of related derivatives included in fair value of swaps 
below                                                                                                6               - 
--------------------------------------------------------------------------  --------------------------  -------------- 
Cash flow from decrease/(increase) in short-term investments                                         1             (6) 
--------------------------------------------------------------------------  --------------------------  -------------- 
Change in net debt resulting from cash flows                                                   (1,350)         (3,003) 
--------------------------------------------------------------------------  --------------------------  -------------- 
New leases and other non-cash adjustments to lease liabilities and 
 borrowings                                                                                       (17)              18 
--------------------------------------------------------------------------  --------------------------  -------------- 
Exchange gains/(losses) on net debt                                                                  2             (2) 
--------------------------------------------------------------------------  --------------------------  -------------- 
Fair value adjustments                                                                             144           (302) 
--------------------------------------------------------------------------  --------------------------  -------------- 
Reclassifications                                                                                   19               - 
--------------------------------------------------------------------------  --------------------------  -------------- 
Movement in net debt                                                                           (1,202)         (3,289) 
--------------------------------------------------------------------------  --------------------------  -------------- 
Net debt at 1 January                                                                          (3,827)         (1,236) 
--------------------------------------------------------------------------  --------------------------  -------------- 
Net debt at 30 June excluding the fair value of swaps                                          (5,029)         (4,525) 
--------------------------------------------------------------------------  --------------------------  -------------- 
Fair value of swaps hedging fixed rate borrowings                                                   57             456 
--------------------------------------------------------------------------  --------------------------  -------------- 
Net debt at 30 June                                                                            (4,972)         (4,069) 
--------------------------------------------------------------------------  --------------------------  -------------- 
 

Condensed consolidated cash flow statement continued

For the half-year ended 30 June 2021

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

 
                       At 1        Funds       Exchange      Fair value    Reclassifi-cations   Other 
                       January     flow        differences   adjustments   (2)                  movements   At 30 June 
                            GBPm        GBPm          GBPm          GBPm                 GBPm        GBPm         GBPm 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
2021 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Cash at bank and in 
 hand                        940       (122)          (13)             -                 (38)           -          767 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Money market funds           669       (527)             -             -                    -           -          142 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Short-term deposits        1,843         221          (58)             -                    -           -        2,006 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Cash and cash 
 equivalents (per 
 balance sheet)            3,452       (428)          (71)             -                 (38)           -        2,915 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Cash and cash 
 equivalents 
 included within 
 assets held for 
 sale                         51        (16)           (4)             -                   38           -           69 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Overdrafts                   (7)           1             -             -                    -           -          (6) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Cash and cash 
 equivalents 
 (per cash flow 
 statement)                3,496       (443)          (75)             -                    -           -        2,978 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Short-term 
 investments                   -           1             -             -                    -           -            1 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Other current 
 borrowings              (1,006)         948             1            36                   18           -          (3) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Non-current 
 borrowings              (4,274)     (2,003)            45           108                   88         (3)      (6,039) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Borrowings included 
 within liabilities 
 held for sale                 -           -             -             -                 (77)           -         (77) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Lease liabilities        (2,043)         145            31             -                   15        (14)      (1,866) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Lease liabilities 
 included within 
 liabilities held 
 for sale                      -           2             -             -                 (25)           -         (23) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Financial 
 liabilities             (7,323)       (908)            77           144                   19        (17)      (8,008) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Net debt excluding 
 fair value of swaps     (3,827)     (1,350)             2           144                   19        (17)      (5,029) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Fair value of swaps 
 hedging fixed rate 
 borrowings (1)              251         (6)          (41)         (147)                    -           -           57 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Net debt                 (3,576)     (1,356)          (39)           (3)                   19        (17)      (4,972) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Net debt (excluding 
 lease liabilities)      (1,533)                                                                               (3,083) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
 
2020 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Cash at bank and in 
 hand                        825         110            36             -                    -           -          971 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Money market funds         1,095        (44)             -             -                    -           -        1,051 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Short-term deposits        2,523       (426)           120             -                    -           -        2,217 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Cash and cash 
 equivalents (per 
 balance sheet)            4,443       (360)           156             -                    -           -        4,239 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Overdrafts                   (8)           -             -             -                    -           -          (8) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Cash and cash 
 equivalents 
 (per cash flow 
 statement)                4,435       (360)           156             -                    -           -        4,231 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Short-term 
 investments                   6         (6)             -             -                    -           -            - 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Other current 
 borrowings                (427)       (283)           (3)          (31)                (690)           -      (1,434) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Non-current 
 borrowings              (2,896)     (2,503)           (5)         (271)                  690           -      (4,985) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Lease liabilities        (2,354)         149         (150)             -                    -          18      (2,337) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Financial 
 liabilities             (5,677)     (2,637)         (158)         (302)                    -          18      (8,756) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Net debt excluding 
 fair value of swaps     (1,236)     (3,003)           (2)         (302)                    -          18      (4,525) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Fair value of swaps 
 hedging fixed rate 
 borrowings                  243           -             -           213                    -           -          456 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Net debt                   (993)     (3,003)           (2)          (89)                    -          18      (4,069) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
Net funds/(debt) 
 (excluding lease 
 liabilities)              1,361                                                                               (1,732) 
--------------------  ----------  ----------  ------------  ------------  -------------------  ----------  ----------- 
 

(1) Fair value of swaps hedging fixed rate borrowings reflects the impact of derivatives on repayments of the principal amount of debt. Net debt therefore includes the fair value of derivatives included in fair value hedges (30 June 2021: GBP141m, 31 December 2020: GBP293m) and the element of fair value relating to exchange differences on the underlying principal of derivatives in cash flow hedges (30 June 2021: GBP(84)m, 31 December 2020: GBP(42)m).

(2) Reclassifications include the transfer of ITP Aero to held for sale and fees of GBP29m paid in previous periods for the GBP2,000m loan (supported by an 80% guarantee from UK Export Finance) that have been reclassified to borrowings on the draw down of the facility during the current period.

Condensed consolidated statement of changes in equity

For the half-year ended 30 June 2021

 
                                            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 2021     1,674     1,012          162      (94)       650           524       (8,825)  (4,897)                22  (4,875) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Profit for the 
 period                   -         -            -         -         -             -           393      393                 -      393 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Foreign exchange 
 translation 
 differences on 
 foreign 
 operations               -         -            -         -         -         (174)             -    (174)                 -    (174) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Movement on 
 post-retirement 
 schemes                  -         -            -         -         -             -          (12)     (12)                 -     (12) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Fair value 
 movement on cash 
 flow hedges              -         -            -      (41)         -             -             -     (41)                 -     (41) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Reclassified to 
 income statement 
 from cash flow 
 hedge reserve            -         -            -        38         -             -             -       38                 -       38 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
OCI of joint 
 ventures and 
 associates               -         -            -        32         -             -           (4)       28                 -       28 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Related tax 
 movements                -         -            -         2         -           (2)            16       16                 -       16 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Total 
 comprehensive 
 income/(expense) 
 for the period           -         -            -        31         -         (176)           393      248                 -      248 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Issues of 
ordinary shares           -         -            -         -         -             -             -        -                 -        - 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Redemption of C 
 Shares (2)               -         -            2         -         -             -           (2)        -                 -        - 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Share-based 
 payments - 
 direct to equity 
 (3)                      -         -            -         -         -             -            18       18                 -       18 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
NCI on formation 
 of subsidiary            -         -            -         -         -             -             -        -                 2        2 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Related tax 
 movements                -         -            -         -         -             -            17       17                 -       17 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Other changes in 
 equity in the 
 period                   -         -            2         -         -             -            33       35                 2       37 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
At 30 June 2021       1,674     1,012          164      (63)       650           348       (8,399)  (4,614)                24  (4,590) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
 
At 1 January 2020       386       319          159      (96)       650           397       (5,191)  (3,376)                22  (3,354) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
(Loss)/profit for 
 the period               -         -            -         -         -             -       (5,380)  (5,380)                 2  (5,378) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Foreign exchange 
 translation 
 differences on 
 foreign 
 operations               -         -            -         -         -           444             -      444                 -      444 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Reclassified to 
 the income 
 statement on 
 disposal of 
 businesses               -         -            -         -         -             3             -        3                 -        3 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Movement on 
 post-retirement 
 schemes                  -         -            -         -         -             -           393      393                 -      393 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Fair value 
 movement on cash 
 flow hedges              -         -            -       (6)         -             -             -      (6)                 -      (6) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Reclassified to 
 income statement 
 from cash flow 
 hedge reserve            -         -            -      (19)         -             -             -     (19)                 -     (19) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
OCI of joint 
 ventures and 
 associates               -         -            -       (9)         -             -           (1)     (10)                 -     (10) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Related tax 
 movements                -         -            -         6         -             2         (130)    (122)                 -    (122) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Total 
 comprehensive 
 income/(expense) 
 for the period           -         -            -      (28)         -           449       (5,118)  (4,697)                 2  (4,695) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Arising on issues 
of ordinary 
shares                    -         -            -         -         -             -             -        -                 -        - 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Issue of C Shares 
 (2)                      -         -         (89)         -         -             -             1     (88)                 -     (88) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Redemption of C 
 Shares                   -         -           91         -         -             -          (91)        -                 -        - 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Ordinary shares 
 purchased                -         -            -         -         -             -           (1)      (1)                 -      (1) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Shares issued to 
employee share 
trust                     -         -            -         -         -             -             -        -                 -        - 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Share-based 
 payments - 
 direct to equity 
 (3)                      -         -            -         -         -             -             1        1                 -        1 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Related tax 
 movements                -         -            -         -         -             -            13       13                 -       13 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
Other changes in 
 equity in the 
 period                   -         -            2         -         -             -          (77)     (75)                 -     (75) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
At 30 June 2020         386       319          161     (124)       650           846      (10,386)  (8,148)                24  (8,124) 
-----------------  --------  --------  -----------  --------  --------  ------------  ------------  -------  ----------------  ------- 
 
 

(1) At 30 June 2021, 34,938,153 ordinary shares with a net book value of GBP78m (30 June 2020: 9,345,059 ordinary shares with a net book value of GBP80m) were held for the purpose of share-based payment plans and included in accumulated losses. During the period, 4,928,564 ordinary shares with a net book value of GBP11m (30 June 2020: 3,217,241 ordinary shares with a net book value of GBP28m) vested in share-based payment plans. During the period, the Company acquired none (30 June 2020: 85,724) of its ordinary shares via reinvestment of dividends received on its own shares and purchased none (30 June 2020: none) of its ordinary shares through purchases on the London Stock Exchange.

(2) 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.

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

Notes to the interim financial statements

   1     Basis of preparation and accounting policies 

Reporting entity

Rolls-Royce Holdings plc (the 'Company') is a public company incorporated under the Companies Act 2006 and domiciled in the UK. These condensed consolidated interim financial statements of the Group as at and for the six months ended 30 June 2021 consist of the consolidation of the financial statements of the Group 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 (Annual Report 2020) are available upon request from the Company Secretary, Rolls-Royce Holdings plc, Kings Place, 90 York Way, London, N1 9FX. The Board of Directors approved the condensed consolidated interim financial statements on 5 August 2021.

Statement of compliance

These condensed consolidated interim financial statements have been prepared on the basis of the policies set out in the 2020 Annual Report and in accordance with UK adopted IAS 34 Interim Financial Reporting and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority. They do not include all of the information required for full annual statements and should be read in conjunction with the 2020 Annual Report.

The interim figures up to 30 June 2021 and 2020 are unaudited. The 2020 financial statements, which were prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, have been reported on by the Group's auditors and delivered to the registrar of companies. There are no differences for the Group in applying each of these accounting frameworks. 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 financial statements for the year ending 31 December 2021 will be prepared in accordance with IFRS as adopted by the UK Endorsement Board. This change in basis of preparation is required by UK company law for the purposes of financial reporting as a result of the UK's exit from the EU on 31 January 2020 and the cessation of the transition period on 31 December 2020. This change does not constitute a change in accounting policy, rather a change in framework which is required to group the use of IFRS in company law. There is no impact on the recognition, measurement or disclosure between the two frameworks in the period reported.

Changes to accounting policies

In April 2021 the IFRS Interpretations Committee published its final agenda decision on Configuration and Customisation costs in a Cloud Computing Arrangement. The agenda decision considers how a customer accounts for configuration or customisation costs where an intangible asset is not recognised in a cloud computing arrangement. The agenda decision does not have a material impact on the Group in respect of the current period or prior periods.

During 2021, a transition project, in relation to IBOR reform, to assess and implement changes to systems, processes, risk and valuation models, as well as managing related tax and accounting implications has been initiated. The Group's risk exposure that is directly affected by the interest rate benchmark reform is its portfolio of long-term borrowings of GBP6.1bn and a number of its foreign exchange contracts. The borrowings are hedged, using interest rate swaps and cross-currency interest rate swaps, for changes in fair value and cash flows attributable to the relevant benchmark interest rate. The Group will be making amendments to the contractual terms of IBOR-referenced floating-rate debt, swaps and foreign exchange contracts, and updating any relevant hedge designations in the second half of the year. A number of the Group's lease liabilities are based on a LIBOR index. These are predominantly referencing USD LIBOR which is not expected to cease until 2023. These contracts will be amended in due course.

Discontinued operations

A discontinued operation is defined in IFRS 5 Non-current assets held for sale and discontinued operations as a component of an entity that has been disposed of or is classified as held for sale, represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are required to be presented separately in the statement of profit or loss with the comparative period restated to show results attributable to continuing operations.

Assets and businesses are classified as held for sale when their carrying amounts are recovered through sale rather than through continuing use.

As at 30 June 2021, the ITP Aero business has been classified as held for sale following activities undertaken in the period to transfer assets (including the Civil Aerospace Hucknall site with associated fabrications activities) within the Group from Civil Aerospace to ITP Aero in preparation for sale. The comparative balance sheet has not been restated. ITP Aero continues to be disclosed as an operating segment of the business in line with IFRS 8 Operating Segments and consequently has been classified as a discontinued operation at 30 June 2021. See notes 2 and 19 for more detail. Bergen Engines AS and Civil Nuclear Instrumentation & Control are recognised as disposal groups held for sale but do not meet the criteria of a discontinued operation.

Post balance sheet events

The Group entered into an agreement to sell Bergen Engines on 3 August 2021. Further detail is included in note 19. On 4 August 2021, the Group finalised an amendment to extend a GBP1bn bank loan facility from a maturity date of 15 October 2022 to a maturity date of 15 January 2024.

   1     Basis of preparation and accounting policies continued 

Going concern

In assessing the adoption of the going concern basis in the condensed consolidated interim financial statements, the Directors have considered the Group's forecast cash flows and available liquidity over an eighteen-month period to February 2023, taking into account the Group's principal risks and uncertainties.

The COVID-19 pandemic continues to have an impact on the Group due to ongoing global travel restrictions. The speed of vaccination programmes and efficacy of vaccines against different variants of the virus means that uncertainty remains in the short-term over the timing of recovery of demand, in particular in relation to the civil aviation industry. This has been considered by the Directors in assessing the adoption of the going concern basis in the condensed consolidated interim financial statements. Recognising the challenges of reliably estimating and forecasting the timing of recovery of demand, the Directors have considered a base case forecast (reflecting the Directors current expectations of future trading) and a severe but plausible downside forecast (which envisages a "stress" or "downside" situation).

Since the start of the pandemic the Group has taken action to reduce cash expenditure and maintain liquidity. A major restructuring programme was launched in 2020 to reshape and resize the Group to deliver forecast annualised savings of at least GBP1.3bn by the end of 2022, with a plan to remove at least 9,000 roles across the Group. At 30 June 2021, approximately 8,000 roles had been removed. The Group raised GBP7.3bn of additional funding during 2020 through a combination of equity and debt and in March 2021, secured a further GBP1bn term-loan facility, 80% of which is guaranteed by UK Export Finance (UKEF), repayable in March 2026.

Liquidity and borrowings

At 30 June 2021, the Group had liquidity of GBP7.5bn including cash and cash equivalents of GBP3.0bn and undrawn facilities of GBP4.5bn.

On 4 August 2021, the Group finalised an amendment to extend the GBP1bn bank loan facility (currently undrawn) from a maturity date of 15 October 2022 to a maturity date of 15 January 2024.

The Group's committed borrowing facilities at 30 June 2021 and 28 February 2023 are set out below. None of the facilities are subject to any financial covenants or rating triggers which could accelerate repayment.

 
 (GBPm)                                                     30 June 2021   28 February 2023 
---------------------------------------------------------  -------------  ----------------- 
 Issued Bond Notes (1)                                             3,995              3,995 
---------------------------------------------------------  -------------  ----------------- 
 Other loans                                                          81                 37 
---------------------------------------------------------  -------------  ----------------- 
 UKEF GBP2bn loan (2) and UKEF GBP1bn loan (undrawn) (3)           3,000              3,000 
---------------------------------------------------------  -------------  ----------------- 
 Revolving Credit Facility (undrawn) (4)                           2,500              2,500 
---------------------------------------------------------  -------------  ----------------- 
 Bank Loan Facility (undrawn) (5)                                  1,000              1,000 
---------------------------------------------------------  -------------  ----------------- 
 Total committed borrowing facilities                             10,576             10,532 
---------------------------------------------------------  -------------  ----------------- 
 

(1) The value of Issued Bond Notes reflects the impact of derivatives on repayments of the principal amount of debt. The bonds mature by May 2028.

(2) The GBP2,000m UKEF loan matures in August 2025.

(3) The GBP1,000m UKEF loan maturities in March 2026 (currently undrawn).

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

(5) The GBP1,000m Bank Loan Facility matures in January 2024 (currently undrawn).

Taking into account the maturity of borrowing facilities, the Group has committed facilities of at least GBP10.5bn available throughout the period to 28 February 2023.

Forecasts

The Group's base case forecast assumes the continuation of a steady recovery in customer confidence in the aftermath of the COVID-19 pandemic. Vaccination programmes are rolled out but the efficacy of vaccines over different variants and differing governmental quarantine and testing requirements and travel restrictions are expected to hinder the recovery of demand in the short term, in particular in relation to the civil aviation industry.

The downside forecast assumes that Civil widebody engine flying hours (EFHs) remain at current levels when compared with 2019 EFHs over the 18-month period to February 2023, with recovery subdued due to ongoing infection rates and an increase in new variants of the virus, resulting in caution in opening borders to international travel and no upward trend in EFH until March 2023, resulting in a much slower recovery in demand compared with the base case.

The proceeds of at least GBP2bn from planned disposals, as announced in August 2020, have not been included when assessing the going concern, although completion of these disposals is anticipated within the eighteen-month period being considered.

Conclusion

After reviewing the current liquidity position, the cash flow forecasts modelled under both the base case and downside, and the stress testing of potential risks and uncertainties, the Directors consider that the Group has sufficient liquidity 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.

   1     Basis of preparation and accounting policies continued 

Climate change

In preparing the condensed consolidated interim financial statements, the Directors have considered the impact of climate change, particularly in the context of the disclosures included in the Strategic Report in the 2020 Annual Report 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 February 2023 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, small modular reactors (SMRs) and hybrid and fully electric propulsion.

- The Group continues to invest in onsite renewable energy generation solutions for the Group's facilities and investment is included in the five year forecasts to enable the Group to meet it's 2030 target for zero greenhouse gas emissions (scope 1 and 2) from 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);

- the estimates of future profitability used in assessing the recoverability of deferred tax assets in the UK (see note 5); and

- the long-term contract accounting assumptions, such as the level of EFHs assumed, which consider the future expectations of consumer and airline customer behaviour (see note 12).

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. During the period, the Group has reassessed these and where necessary updated the key judgements and estimation uncertainties. Sensitivities for key sources of estimation uncertainty are disclosed where this is appropriate and practicable.

 
 Area              Key judgements    Key sources of estimation      Sensitivities performed 
                                      uncertainty 
----------------  ----------------  -----------------------------  ------------------------------------------------------------ 
 Revenue           Whether Civil     Estimates of future            Based upon the stage 
 recognition       Aerospace OE       revenue and costs             of completion of all 
 and contract      and aftermarket    of long-term contractual      widebody LTSA contracts 
 assets and        contracts          arrangements.                 within Civil Aerospace 
 liabilities       should             Uncertainty remains           as at 30 June 2021, 
                   be combined.       in the short-term             the following changes 
                   How performance    over the timing of            in estimate would result 
                   on long-term       recovery of demand,           in catch-up adjustments 
                   aftermarket        in particular in              being recognised in 
                   contracts          relation to the civil         the period in which 
                   should be          aviation industry,            the estimates change 
                   measured.          in the aftermath              (at underlying rates): 
                   Whether any        of the COVID-19 pandemic.      *    A reduction in forecast EFHs of 15% over the 
                   costs              Estimates of future                 remaining term of the contracts would decrease LTSA 
                   should be          revenue within Civil                income and to a lesser extent costs, resulting in a 
                   treated            Aerospace are based                 catch-up adjustment of GBP100m - GBP130m. An 
                   as wastage.        upon future EFH forecasts,          estimated 90% of this would be expected to be a 
                   Whether sales      influenced by assumptions           reduction in revenue with the remainder relating to 
                   of spare           over the time period                onerous contracts which would be an increase in cost 
                   engines            and profile over                    of sales. 
                   to joint           which the aerospace 
                   ventures           industry will recover. 
                   are at fair                                       *    A 5% increase or decrease in shop visit costs over 
                   value.                                                 the life of the contracts would lead to a catch-up 
                                                                          adjustment of GBP140m. 
 
 
                                                                     *    A 2% increase or decrease in revenue over the life of 
                                                                          the contracts would lead to a catch-up adjustment of 
                                                                          GBP200m. 
----------------  ----------------  -----------------------------  ------------------------------------------------------------ 
 Risk and          Determination 
 revenue            of the nature 
 sharing            of entry fees 
 arrangements       received. 
----------------  ----------------  -----------------------------  ------------------------------------------------------------ 
 Taxation                            Estimates are necessary        A 5% change in margin 
                                      to assess whether              in the main Civil Aerospace 
                                      it is probable that            widebody programmes 
                                      sufficient suitable            or a 5% change in the 
                                      taxable profits will           number of shop visits 
                                      arise in the UK to             (driven by EFHs which 
                                      utilise the deferred           are influenced by a 
                                      tax assets. This               number of factors including 
                                      is largely driven              climate change) over 
                                      by the Civil Aerospace         the remaining life of 
                                      business and the               the programmes, would 
                                      estimates described            result in an increase/decrease 
                                      above in 'revenue              in the deferred tax 
                                      recognition'.                  asset recognised by 
                                                                     around GBP150m, which 
                                                                     equates to around a 
                                                                     GBP1.2bn change in profit. 
----------------  ----------------  -----------------------------  ------------------------------------------------------------ 
 Business          Identification 
 combinations      of acquired 
                   assets 
                   and 
                   liabilities. 
----------------  ----------------  -----------------------------  ------------------------------------------------------------ 
 Discontinued      Whether the ITP 
  operations       Aero business 
  and assets       meets the 
  held for sale    criteria 
                   to be 
                   classified 
                   as held for 
                   sale 
                   and a 
                   discontinued 
                   operation. 
----------------  ----------------  -----------------------------  ------------------------------------------------------------ 
 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               The lease liability 
                    of the lease      payments required              at 30 June 2021 included 
                    term.             to meet residual               GBP339m relating to 
                                      value guarantees               the cost of meeting 
                                      at the end of engine           these residual value 
                                      leases. Amounts due            guarantees in the Civil 
                                      can vary depending             Aerospace business. 
                                      on the level of utilisation    Up to GBP13m is payable 
                                      of the engines, overhaul       in the next 12 months, 
                                      activity prior to              GBP139m is due over 
                                      the end of the contract,       the following four years 
                                      and decisions taken            and the remaining balance 
                                      on whether ongoing             after five years. 
                                      access to the assets 
                                      is required at the 
                                      end of the lease 
                                      term. 
----------------  ----------------  -----------------------------  ------------------------------------------------------------ 
 Impairment        Determination     The carrying value             A slower than expected 
  of non-current   of                of intangible assets           recovery in the aftermath 
  assets           cash-generating   (including programme-related   of the COVID-19 pandemic 
                   units for         intangible assets)             could result in a deterioration 
                   assessing         is dependent on the            in future cash flow 
                   impairment of     estimates of future            forecasts that support 
                   goodwill.         cash flows which               programme intangible 
                                     are influenced by              assets. A 5% deterioration 
                                     assumptions over               in EFHs (and hence future 
                                     the recovery of the            cash flows) across the 
                                     industries in which            life of the Civil Aerospace 
                                     the Group operate              programmes would result 
                                     and the discount               in programme intangible 
                                     rates applied.                 assets that have previously 
                                                                    been subject to impairment 
                                                                    incurring an additional 
                                                                    impairment of GBP50m. 
                                                                    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 engine sales that are forecast but not 
                                                                          contracted by 64%. 
 
 
                                                                     *    An increase in costs of 8%. 
----------------  ----------------  -----------------------------  ------------------------------------------------------------ 
 Provisions        Whether any       Estimates of the               A 12-month delay in 
                   costs              time to resolve the            the availability of 
                   should be          technical issues               the modified HPT blade 
                   treated            on the Trent 1000,             could lead to a GBP60m-GBP100m 
                   as wastage.        including the development      increase in the Trent 
                                      of the modified HPT            1000 exceptional costs 
                                      blade and estimates            provision. 
                                      to Trent 1000 long-term        A reduction in Civil 
                                      contracts assessed             Aerospace widebody flying 
                                      as onerous.                    hours of 15% over the 
                                      Estimates of the               remaining term of the 
                                      future revenues and            contracts and the associated 
                                      costs to fulfil onerous        decrease in revenues 
                                      contracts.                     and costs could lead 
                                                                     to a GBP10m - GBP15m 
                                                                     increase in the provision 
                                                                     for contract losses. 
----------------  ----------------  -----------------------------  ------------------------------------------------------------ 
 Post-retirement                     The valuation of               A reduction in the discount 
  benefits                            the Group's defined            rate from 1.95% to 1.70% 
                                      benefit pension schemes        could lead to an increase 
                                      are based on assumptions       in the defined benefit 
                                      determined with independent    obligations of the RR 
                                      actuarial advice.              UK Pension Fund of approximately 
                                      The size of the net            GBP425m. This would 
                                      surplus is sensitive           be expected to be broadly 
                                      to the actuarial               offset by changes in 
                                      assumptions, which             the value of scheme 
                                      include the discount           assets, as the scheme's 
                                      rate used to determine         investment policies 
                                      the present value              are designed to mitigate 
                                      of the future obligation,      this risk. 
                                      longevity, and the             A one-year increase 
                                      number of plan members         in life expectancy from 
                                      who take the option            21.7 years (male aged 
                                      to transfer their              65) and from 23.1 years 
                                      pension to a lump              (male aged 45) would 
                                      sum on retirement              increase the defined 
                                      or who choose to               benefit obligations 
                                      take the Bridging              of the RR UK Pension 
                                      Pension Option.                Fund by approximately 
                                                                     GBP380m. 
                                                                     Where applicable, it 
                                                                     is assumed that 40% 
                                                                     (31 December 2020: 40%) 
                                                                     of members of the RR 
                                                                     UK Pension Fund will 
                                                                     transfer out of the 
                                                                     fund on retirement with 
                                                                     a share of funds transfer 
                                                                     value. An increase of 
                                                                     5% in this assumption 
                                                                     would increase the defined 
                                                                     benefit obligation by 
                                                                     GBP30m. 
----------------  ----------------  -----------------------------  ------------------------------------------------------------ 
 
   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). The Group's four divisions are set out below.

 
 Civil Aerospace 
                     *    development, manufacture, marketing and sales of 
                          commercial aero engines and aftermarket services 
 Power Systems 
                     *    development, manufacture, marketing and sales of 
                          reciprocating engines, power systems and nuclear 
                          systems for civil power generation 
 Defence 
                     *    development, manufacture, marketing and sales of 
                          military aero engines, naval engines, submarine 
                          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 
 

For the year ended 31 December 2020, the four divisions set out above were identified as core businesses, with other smaller businesses identified as non-core businesses. From 1 January 2021, the identification of core and non-core businesses has ceased with non-core businesses now included within the category of 'other businesses'. The figures in the segmental analysis are shown in total to include other businesses.

Other businesses include the trading results of the Bergen Engines AS business (the Group signed a sales agreement on 3 August 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 and the results of the Knowledge Management System business until the date of disposal on 3 February 2020. The segmental analysis for 2020 has been restated to reflect the 2021 definition of other businesses.

During the period to 30 June 2021, activity previously managed as part of the Civil Aerospace segment has been transferred to ITP Aero. The activity transferred from Civil Aerospace to ITP Aero relates to the change in ownership of the Hucknall site with associated fabrications activities. This transfers the production of fabrications, combustors and fan outlet guide vanes manufactured in Hucknall from Civil Aerospace to ITP Aero. The segmental analysis for 2020 has been restated to reflect these activities in the ITP Aero segment in line with 2021. As a result of this transfer and the commitment to sell ITP Aero, it has been classified as held for sale at 30 June 2021 and as a discontinued operation for both statutory and underlying results.

Underlying results

The Group presents the financial performance of the businesses in accordance with IFRS 8 and consistently with the basis on which performance is communicated to the Board each month.

Underlying results are presented by recording all relevant revenue and cost of sales transactions at the average exchange rate achieved on effective settled derivative contracts in the period that the cash flow occurs. The impact of the revaluation of monetary assets and liabilities using the exchange rate that is expected to be achieved by the use of the effective hedge book is recorded within underlying cost of sales. Underlying financing excludes the impact of revaluing monetary assets and liabilities to period end exchange rates. 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 statutory results, are excluded from underlying results. To the extent that the previously forecast transactions are no longer expected to occur, an appropriate portion of the unrealised fair value gain/(loss) on foreign exchange contracts is recorded immediately in the underlying results.

   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 statutory basis to interest receivable/(payable) on an underlying basis, as if they were in an effective hedge relationship.

In the period to 30 June 2021, the Group was a net purchaser (30 June 2020: net purchaser) of USD, with the consequence that the achieved exchange rate GBP:USD of 1.39 (30 June 2020: 1.24) on settled contracts was similar to the average spot rate in the period. In the second half of 2021, the Group expects to return to being a net seller of USD, at an expected achieved exchange rate GBP:USD of 1.59 based on the USD hedge book.

Estimates of future USD cash flows have been determined using the Group's base-case forecast. These USD cash flows have been used to establish the extent of future USD hedge requirements. In 2020, the Group took action to reduce the size of the USD hedge book by $11.8bn across 2020-2026, resulting in an underlying charge of GBP1.7bn being recognised within underlying finance costs and the associated cash settlement costs occurring over the period 2020-2026. In the period to 30 June 2021, the Group took the opportunity to further reduce the size of the USD hedge book by an additional $0.9bn by settling the mark-to market at zero cost. The derivatives relating to this underlying charge have been subsequently excluded from the effective hedge book, and therefore are also excluded from the calculation of the average exchange rate achieved in the current and future periods. This charge was reversed in arriving at statutory performance on the basis that the cumulative fair value changes on these derivative contracts are recognised as they arise.

In the period to 30 June 2021, cash settlement costs of GBP303m were incurred (30 June 2020: GBP88m).

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

These are excluded from underlying results so that the current period and comparative results are directly comparable.

Exceptional items

Items are classified as exceptional where the Directors believe that presentation of the results in this way is more relevant to an understanding of the Group's 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 post-retirement schemes.

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

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

Other items

The financing component of the defined benefit pension scheme cost is determined by market conditions and has therefore been included as a reconciling difference between underlying performance and statutory 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 31 for the reconciliation between underlying performance and statutory performance.

   2     Analysis by business segment continued 

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

 
                                                                                       Corporate and  Total underlying 
                     Civil Aerospace                                                   inter-segment   from continuing 
-                                (1)  Power Systems (2)  Defence  Other businesses               (3)        operations 
                                GBPm               GBPm     GBPm              GBPm              GBPm              GBPm 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
For the half-year 
ended 30 June 
2021 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Underlying 
 revenue from 
 sale of original 
 equipment                       722                718      719                79                 1             2,239 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Underlying 
 revenue from 
 aftermarket 
 services                      1,446                463    1,002                73                 4             2,988 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Total underlying 
 revenue                       2,168              1,181    1,721               152                 5             5,227 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Gross profit                     380                301      395                20                 1             1,097 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Commercial and 
 administrative 
 costs                         (145)              (190)     (79)              (10)              (20)             (444) 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Research and 
 development 
 costs                         (237)               (69)     (47)               (5)              (28)             (386) 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Share of results 
 of joint 
 ventures and 
 associates                       41                (1)        -                 -                 -                40 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Underlying 
 operating 
 profit/(loss)                    39                 41      269                 5              (47)               307 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
 
For the half-year 
ended 30 June 
2020 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Underlying 
 revenue from 
 sale of original 
 equipment                     1,187                804      678                64               (5)             2,728 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Underlying 
 revenue from 
 aftermarket 
 services                      1,329                410      875                70               (2)             2,682 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Total underlying 
 revenue                       2,516              1,214    1,553               134               (7)             5,410 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Gross 
 (loss)/profit               (1,552)                263      332                 9              (17)             (965) 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Commercial and 
 administrative 
 costs                         (172)              (148)     (76)              (16)              (23)             (435) 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Research and 
 development 
 costs                         (180)               (82)     (49)              (10)                 -             (321) 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Share of results 
 of joint 
 ventures and 
 associates                       88                  -        3                 -                 -                91 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
Underlying 
 operating 
 (loss)/profit               (1,816)                 33      210              (17)              (40)           (1,630) 
-----------------  -----------------  -----------------  -------  ----------------  ----------------  ---------------- 
 

(1) The underlying results for Civil Aerospace and ITP Aero (shown as underlying results from discontinued operations below) for 30 June 2020 have been restated to reflect the changes to activity during 2021 as described above.

(2) The underlying results for Power Systems for 30 June 2020 have been restated to reclassify the Civil Nuclear Instrumentation & Control business as Other businesses.

(3) The underlying results of Corporate and inter-segment activities include the results of the Group's SMR, electrical and UK nuclear activities. As the Group increases its investment in these important new technologies it is anticipated that the result of these activities will be combined and presented as an additional segment in the full-year financial statements in line with how performance will be reviewed by the entity's Chief Operating Decision Maker.

   2     Analysis by business segment continued 

Reconciliation to statutory results

 
 
                                   Discontinued operations 
                          Total 
                     underlying                                                Underlying 
                           from                                           adjustments and  Discontinued        Group 
                     continuing                                    Total      adjustments    operations    statutory 
                     operations    ITP Aero  Inter-segment    underlying            to FX           (1)      results 
                           GBPm        GBPm           GBPm          GBPm             GBPm          GBPm         GBPm 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
For the half-year 
ended 30 June 2021 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Revenue from sale 
 of original 
 equipment                2,239         271          (139)         2,371              (4)         (132)        2,235 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Revenue from 
 aftermarket 
 services                 2,988          46           (32)         3,002             (64)          (14)        2,924 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Total revenue             5,227         317          (171)         5,373             (68)         (146)        5,159 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Gross 
 profit/(loss)            1,097          48           (23)         1,122            (340)            32          814 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Commercial and 
 administrative 
 costs                    (444)        (26)              -         (470)                3            43        (424) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Research and 
 development costs        (386)        (15)              -         (401)              (7)            18        (390) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Share of results 
 of joint ventures 
 and associates              40           -              -            40              (2)             -           38 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Operating 
 profit/(loss)              307           7           (23)           291            (346)            93           38 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Loss arising on 
 the acquisition 
 and disposal of 
 businesses                   -           -              -             -              (7)             -          (7) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Profit/(loss) 
 before financing 
 and taxation               307           7           (23)           291            (353)            93           31 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Net financing             (174)           1              -         (173)              257           (1)           83 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Profit/(loss) 
 before taxation            133           8           (23)           118             (96)            92          114 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Taxation                   (29)          54              4            29              342          (91)          280 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Discontinued 
 operations                   -           -              -             -                -           (1)          (1) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Profit/(loss) for 
 the period                 104          62           (19)           147              246             -          393 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Profit for the 
 period from 
 continuing 
 operations                                                          104                                         394 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Profit/(loss) for 
 the period from 
 discontinued 
 operations                                                           43                                         (1) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Attributable to: 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
  Ordinary 
   shareholders                                                      147              246             -          393 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
  Non-controlling 
  interests                                                            -                -             -            - 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
 
For the half-year 
ended 30 June 2020 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Revenue from sale 
 of original 
 equipment                2,728         319          (197)         2,850             (36)         (122)        2,692 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Revenue from 
 aftermarket 
 services                 2,682          79           (50)         2,711              299          (29)        2,981 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Total revenue             5,410         398          (247)         5,561              263         (151)        5,673 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Gross 
 (loss)/profit            (965)          37           (39)         (967)              280            97        (590) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Commercial and 
 administrative 
 costs                    (435)        (23)              -         (458)               15            22        (421) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Research and 
 development costs        (321)        (15)              -         (336)            (376)            34        (678) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Share of results 
 of joint ventures 
 and associates              91           1              -            92             (19)           (1)           72 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Operating 
 (loss)/profit          (1,630)           -           (39)       (1,669)            (100)           152      (1,617) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Gain on the 
 disposal of 
 businesses                   -           -              -             -                2             -            2 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
(Loss)/profit 
 before financing 
 and taxation           (1,630)           -           (39)       (1,669)             (98)           152      (1,615) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Net financing           (1,573)         (2)              -       (1,575)          (2,025)             2      (3,598) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
(Loss)/profit 
 before taxation        (3,203)         (2)           (39)       (3,244)          (2,123)           154      (5,213) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Taxation                   (90)           1              7          (82)               71          (37)         (48) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Discontinued 
 operations                   -           -              -             -                -         (117)        (117) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Loss for the 
 period                 (3,293)         (1)           (32)       (3,326)          (2,052)             -      (5,378) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Loss for the 
 period from 
 continuing 
 operations                                                      (3,293)                                     (5,261) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Loss for the 
 period from 
 discontinued 
 operations                                                         (33)                                       (117) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
Attributable to: 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
  Ordinary 
   shareholders                                                  (3,327)          (2,053)             -      (5,380) 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
  Non-controlling 
   interests                                                           1                1             -            2 
------------------  -----------  ----------  -------------  ------------  ---------------  ------------  ----------- 
 
 

(1) Discontinued operations relate to the statutory results of ITP Aero and are presented net of internal sales, internal margin and related consolidation adjustments. Included within the operating loss of GBP93m is GBP17m of costs of disposal incurred related to the disposal group.

   2     Analysis by business segment continued 

Disaggregation of revenue from contracts with customers

 
Analysis by type                                                                                    Total underlying 
and basis of        Civil Aerospace     Power Systems                                Corporate and   from continuing 
recognition                     (1)               (2)  Defence  Other businesses     inter-segment        operations 
                               GBPm              GBPm     GBPm              GBPm              GBPm              GBPm 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
For the half-year 
ended 30 June 
2021 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Original 
 equipment 
 recognised at a 
 point in time                  721               707      301                79                 1             1,809 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Original 
 equipment 
 recognised over 
 time                             1                11      418                 -                 -               430 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Aftermarket 
 services 
 recognised at a 
 point in time                  193               404      419                73                 4             1,093 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Aftermarket 
 services 
 recognised over 
 time                         1,197                59      583                 -                 -             1,839 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Total underlying 
 customer 
 contract revenue             2,112             1,181    1,721               152                 5             5,171 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Other underlying 
 revenue                         56                 -        -                 -                 -                56 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Total underlying 
 revenue                      2,168             1,181    1,721               152                 5             5,227 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
 
For the half-year 
ended 30 June 
2020 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Original 
 equipment 
 recognised at a 
 point in time                1,187               786      248                64               (5)             2,280 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Original 
 equipment 
 recognised over 
 time                             -                18      430                 -                 -               448 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Aftermarket 
 services 
 recognised at a 
 point in time                  746               351      364                70               (2)             1,529 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Aftermarket 
 services 
 recognised over 
 time                           477                59      511                 -                 -             1,047 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Total underlying 
 customer 
 contract revenue             2,410             1,214    1,553               134               (7)             5,304 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Other underlying 
 revenue                        106                 -        -                 -                 -               106 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
Total underlying 
 revenue                      2,516             1,214    1,553               134               (7)             5,410 
-----------------  ----------------  ----------------  -------  ----------------  ----------------  ---------------- 
 
 

(1) The underlying results for Civil Aerospace and ITP Aero (shown as underlying results from discontinued operations below) for 30 June 2020 have been restated to reflect the changes to activity during 2021 as described above.

(2) The underlying results for Power Systems for 30 June 2020 have been restated to reclassify the Civil Nuclear Instrumentation & Control business as Other businesses.

 
 
                                 Discontinued operations 
                        Total                                             Underlying 
                   underlying                                            adjustments 
                         from                                                    and                           Group 
                   continuing                                   Total    adjustments    Discontinued       statutory 
                   operations   ITP Aero   Inter-segment   underlying          to FX  operations (1)         results 
                         GBPm       GBPm            GBPm         GBPm           GBPm            GBPm            GBPm 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
For the 
half-year 
ended 30 June 
2021 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Original 
 equipment 
 recognised at 
 a point in 
 time                   1,809        247           (129)        1,927            (8)           (118)           1,801 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Original 
 equipment 
 recognised 
 over time                430         24            (10)          444              1            (14)             431 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Aftermarket 
 services 
 recognised at 
 a point in 
 time                   1,093         15             (3)        1,105              1            (12)           1,094 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Aftermarket 
 services 
 recognised 
 over time              1,839         31            (29)        1,841           (57)             (2)           1,782 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Total customer 
 contract 
 revenue                5,171        317           (171)        5,317           (63)           (146)           5,108 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Other revenue              56          -               -           56            (5)               -              51 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Total revenue           5,227        317           (171)        5,373           (68)           (146)           5,159 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
 
For the 
half-year 
ended 30 June 
2020 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Original 
 equipment 
 recognised at 
 a point in 
 time                   2,280        296           (181)        2,395           (36)           (115)           2,244 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Original 
 equipment 
 recognised 
 over time                448         23            (16)          455              -             (7)             448 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Aftermarket 
 services 
 recognised at 
 a point in 
 time                   1,529         48            (39)        1,538             73             (9)           1,602 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Aftermarket 
 services 
 recognised 
 over time              1,047         31            (11)        1,067            226            (20)           1,273 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Total customer 
 contract 
 revenue                5,304        398           (247)        5,455            263           (151)           5,567 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Other revenue             106          -               -          106              -               -             106 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
Total revenue           5,410        398           (247)        5,561            263           (151)           5,673 
--------------  -------------  ---------  --------------  -----------  -------------  --------------  -------------- 
 
 

(1) Discontinued operations relate to the statutory results of ITP Aero and are presented net of internal sales and related consolidation adjustments.

   2     Analysis by business segment continued 
 
Underlying profit 
adjustments                        Half-year to 30 June 2021                      Half-year to 30 June 2020 
                         ---------------------------------------------  --------------------------------------------- 
                                  Profit/(loss)                                  (Loss)/profit 
                                         before        Net                              before        Net 
                         Revenue      financing  financing    Taxation  Revenue      financing  financing    Taxation 
                            GBPm           GBPm       GBPm        GBPm     GBPm           GBPm       GBPm        GBPm 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Total underlying 
 performance               5,373            291      (173)          29    5,561        (1,669)    (1,575)        (82) 
-----------------------  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Impact of settled 
 derivative 
 contracts on 
 trading 
 transactions (1)     A     (68)          (297)        164          10      263            664      (669)         (2) 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Unrealised fair 
 value changes on 
 derivative 
 contracts held 
 for trading (2)      A        -            (4)         66         (1)        -            (4)    (2,729)         191 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Unrealised net 
 (gain)/losses on 
 closing future 
 over-hedged 
 position (3)         A        -              -        (8)           -        -              -      1,369       (106) 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Realised net 
 (gain)/losses on 
 closing future 
 over-hedged 
 position (3)         A        -              -        (7)           -        -              -         88           - 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Unrealised fair 
 value change to 
 derivative 
 contracts held 
 for financing (4)    A        -              -         38        (10)        -              -       (88)           - 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Exceptional 
 programme 
 credits/(charges) 
 (5)                  B        -              -          -           -        -            498       (21)           - 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Impact of discount 
rate changes (6)      B        -              -          -           -        -              -         30           - 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Exceptional 
 restructuring 
 charge (7)           B        -           (10)          -         (6)        -          (366)          -           9 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Impairments (8)       C        -              1          -           -        -          (966)          -         125 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Other write-offs      C        -              -          -           -        -           (99)          -          39 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Effect of 
 acquisition 
 accounting (9)       C        -           (50)          -          13        -           (66)          -          17 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Pension 
 past-service 
 credit (10)          D        -             11          -         (4)        -            248          -        (87) 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Other                 D        -              3          4         (6)        -            (9)        (5)           1 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Included in operating 
 (loss)/profit              (68)          (346)        257         (4)      263          (100)    (2,025)         187 
-----------------------  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
(Loss)/gains 
 arising on the 
 acquisitions 
 and disposals of 
 businesses (11)      C        -            (7)          -           -        -              2          -           - 
------------------  ---  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Impact of tax rate 
 change (12)                   -              -          -         346        -              -          -         160 
-----------------------  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
De-recognition of UK 
 losses                        -              -          -           -        -              -          -       (276) 
-----------------------  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Total underlying 
 adjustments                (68)          (353)        257         342      263           (98)    (2,025)          71 
-----------------------  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Discontinued operations    (146)             93        (1)        (91)    (151)            152          2        (37) 
-----------------------  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
Statutory performance 
 per condensed 
 consolidated income 
 statement                 5,159             31         83         280    5,673        (1,615)    (3,598)        (48) 
-----------------------  -------  -------------  ---------  ----------  -------  -------------  ---------  ---------- 
 

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 reduced statutory revenues by GBP68m (30 June 2020: increased revenues by GBP263m) and reduced profit before financing and taxation by GBP297m (30 June 2020: reduced loss by GBP664m). 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 2020, the Group took action to reduce the size of the USD hedge book by $11.8bn across 2020-2026, resulting in an underlying charge of GBP1.7bn at 31 December 2020 (30 June 2020: GBP1.5bn). In 2021, this estimate was updated to reflect the actual cash cost and resulted in a GBP15m gain to underlying finance costs in the period to 30 June 2021. Further detail is provided in note 4.

(4) Includes the losses on hedge ineffectiveness in the year of GBP2m (30 June 2020: losses of GBP15m) and net fair value gains of GBP40m (30 June 2020: losses of GBP73m) on any interest rate swaps not designated into hedging relationships for accounting purposes.

(5) In the comparative period at 30 June 2020, the estimated Trent 1000 abnormal wastage costs reduced by GBP498m as a result of COVID-19, with improvements in the position on contract losses and lower expected costs associated with remediation shop visits and customer disruption.

(6) During the period to 30 June 2021, the movement in discount rates on onerous contracts has resulted in an immaterial charge which has been recognised in underlying profit.

(7) During the period to 30 June 2021, the Group recorded an exceptional restructuring charge of GBP10m which included a charge of GBP38m associated with initiatives to enable the restructuring which have been charged directly to the income statement. Further details are provided in note 15.

(8) The Group has assessed the carrying value of its assets. Further details are provided in notes 7, 8 and 9.

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

(10) A past service credit of GBP7m has been recorded following the final details on the additional transitional protections being agreed during the period and GBP4m as a result of transferring employment of 236 employees in anticipation of a business disposal.

(11) (Losses)/gains arising on the acquisitions and disposals of businesses are set out in note 19.

(12) The increase in the UK tax rate from 19% to 25% has been substantively enacted at the balance sheet date. The opening UK deferred tax balances have therefore been re-measured at 25%. This results in a credit to the income statement in 2021 of GBP328m, with an additional GBP18m credit arising in discontinued operations. The 2020 tax credit relates to the increase in the UK tax rate from 17% to 19%. Included in the GBP160m credit in 2020 is GBP1m that relates to discontinued operations.

   2     Analysis by business segment continued 

Balance sheet analysis

 
                                                                                                                 Total 
                                                                                             ITP Aero       reportable 
                                                                                          transferred         segments 
                                  Civil                              ITP         Total        to held        excluding 
                              Aerospace      Power                  Aero    reportable       for sale         held for 
                                    (1)    Systems    Defence        (1)      segments            (2)             sale 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 At 30 June 2021 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 Segment assets                  15,673      3,461      3,274      1,931        24,339        (1,859)           22,480 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 Interests in joint 
  ventures and 
  associates                        357         11         45          1           414            (1)              413 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 Segment liabilities           (20,495)    (1,459)    (2,889)      (958)      (25,801)            538         (25,263) 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 Net 
  (liabilities)/assets          (4,465)      2,013        430        974       (1,048)        (1,322)          (2,370) 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 
 At 31 December 
  2020 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 Segment assets                  16,632      3,497      3,116      2,090        25,335              -           25,335 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 Interests in joint 
  ventures and 
  associates                        363         11         19          1           394              -              394 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 Segment liabilities           (22,331)    (1,358)    (3,085)    (1,036)      (27,810)              -         (27,810) 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 Net 
  (liabilities)/assets          (5,336)      2,150         50      1,055       (2,081)              -          (2,081) 
----------------------  ---------------  ---------  ---------  ---------  ------------  -------------  --------------- 
 

(1) The financial position for Civil Aerospace and ITP Aero for 31 December 2020 have been restated to reflect the transfer of activity during 2021 as described above.

(2) ITP Aero segmental net assets transferred to held for sale exclude intercompany balances.

Reconciliation to the balance sheet

 
                                                              30 June 
                                                                 2021  31 December 2020 
                                                                 GBPm              GBPm 
-------------------------------------------------------      --------  ---------------- 
Reportable segment assets excluding held for sale              22,480            25,335 
-----------------------------------------------------------  --------  ---------------- 
Other businesses                                                    5                 7 
-----------------------------------------------------------  --------  ---------------- 
Corporate and inter-segment                                   (2,566)           (3,102) 
-----------------------------------------------------------  --------  ---------------- 
Interests in joint ventures and associates                        413               394 
-----------------------------------------------------------  --------  ---------------- 
Assets held for sale (1)                                        2,306               288 
-----------------------------------------------------------  --------  ---------------- 
Cash and cash equivalents                                       2,915             3,452 
-----------------------------------------------------------  --------  ---------------- 
Short-term investments                                              1                 - 
-----------------------------------------------------------  --------  ---------------- 
Fair value of swaps hedging fixed rate borrowings                 146               293 
-----------------------------------------------------------  --------  ---------------- 
Deferred and income tax assets                                  2,141             1,943 
-----------------------------------------------------------  --------  ---------------- 
Post-retirement scheme surpluses                                  914               907 
-----------------------------------------------------------  --------  ---------------- 
Total assets                                                   28,755            29,517 
-----------------------------------------------------------  --------  ---------------- 
Reportable segment liabilities excluding held for sale       (25,263)          (27,810) 
-----------------------------------------------------------  --------  ---------------- 
Other businesses                                                  (6)               (5) 
-----------------------------------------------------------  --------  ---------------- 
Corporate and inter-segment                                     2,763             3,251 
-----------------------------------------------------------  --------  ---------------- 
Liabilities associated with assets held for sale (1)            (904)             (228) 
-----------------------------------------------------------  --------  ---------------- 
Borrowings and lease liabilities                              (7,914)           (7,330) 
-----------------------------------------------------------  --------  ---------------- 
Fair value of swaps hedging fixed rate borrowings                (89)              (42) 
-----------------------------------------------------------  --------  ---------------- 
Deferred and income tax liabilities                             (488)             (648) 
-----------------------------------------------------------  --------  ---------------- 
Post-retirement scheme deficits                               (1,444)           (1,580) 
-----------------------------------------------------------  --------  ---------------- 
Total liabilities                                            (33,345)          (34,392) 
-----------------------------------------------------------  --------  ---------------- 
Net liabilities                                               (4,590)           (4,875) 
-----------------------------------------------------------  --------  ---------------- 
 

(1) As at 30 June 2021, assets and liabilities relating to ITP Aero, Bergen Engines AS and Civil Nuclear Instrumentation & Control have been classified as held for sale. For further details see note 19.

   3     Research and development 
 
                                                        Half-year to 30 June 2021   Restated Half-year to 30 June 2020 
                                                                             GBPm                                 GBPm 
-----------------------------------------------------  --------------------------  ----------------------------------- 
Gross research and development costs                                        (549)                                (580) 
-----------------------------------------------------  --------------------------  ----------------------------------- 
Contributions and fees (1)                                                    153                                  138 
-----------------------------------------------------  --------------------------  ----------------------------------- 
Expenditure in the period                                                   (396)                                (442) 
-----------------------------------------------------  --------------------------  ----------------------------------- 
Capitalised as intangible assets                                               41                                  150 
-----------------------------------------------------  --------------------------  ----------------------------------- 
Amortisation and impairment of capitalised costs (2)                         (35)                                (386) 
-----------------------------------------------------  --------------------------  ----------------------------------- 
Net cost recognised in the income statement                                 (390)                                (678) 
-----------------------------------------------------  --------------------------  ----------------------------------- 
Underlying adjustments relating to the effects of 
 acquisition accounting, impairment and foreign 
 exchange (3)                                                                   7                                  376 
-----------------------------------------------------  --------------------------  ----------------------------------- 
Discontinued operations                                                      (18)                                 (34) 
-----------------------------------------------------  --------------------------  ----------------------------------- 
Net underlying cost recognised in the income 
 statement                                                                  (401)                                (336) 
-----------------------------------------------------  --------------------------  ----------------------------------- 
 

(1) Includes government funding.

(2) See note 7 for analysis of amortisation and impairment. During the period, amortisation of GBP5m has been incurred within the disposal group recognised as a discontinued operation.

(3) During the period to 30 June 2021, no impairment of research and development was recorded. In the comparative period to 30 June 2020, impairment charges of GBP351m were recorded, relating to the financial and operational impact of COVID-19.

   4     Net financing 
 
                                                                                           Restated 
                                   Half-year to 30 June 2021                       Half-year to 30 June 2020 
                        ---------------------------------------------- 
                              Per consolidated    Underlying financing        Per consolidated    Underlying financing 
                              income statement                     (1)        income statement                     (1) 
                                          GBPm                    GBPm                    GBPm                    GBPm 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Interest receivable                          3                       3                      10                      11 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value gains 
on foreign currency 
contracts                                   25                       -                       -                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value gains 
on non-hedge accounted 
interest rate swaps 
(2)                                         40                       -                       -                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value gains 
on commodity contracts                      41                       -                       -                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing on 
 post-retirement 
 scheme surpluses                            7                       -                      13                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net foreign exchange 
gains                                      164                       -                       -                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Realised net gains on 
closing over-hedged 
position (3)                                 -                       7                       -                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Unrealised net gains 
on closing over-hedged 
position (3)                                 -                       8                       -                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing income                           280                      18                      23                      11 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Interest payable                         (106)                   (112)                    (79)                    (74) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value losses 
on foreign currency 
contracts                                    -                       -                 (2,631)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value losses 
on non-hedge accounted 
interest rate swaps 
(2)                                          -                       -                    (73)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Unrealised net losses 
 on closing future 
 over-hedged position                        -                       -                       -                 (1,369) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Realised net losses on 
 closing over-hedged 
 position                                    -                       -                       -                    (88) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financial charge 
 relating to financial 
 RRSAs                                       -                       -                     (1)                     (1) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value losses 
on commodity contracts                       -                       -                    (98)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing on 
 post-retirement 
 scheme deficits                          (10)                       -                    (14)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net foreign exchange 
losses                                       -                       -                   (669)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Fees on undrawn 
 facilities                               (35)                    (35)                     (9)                     (9) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Other financing 
 charges                                  (46)                    (44)                    (47)                    (45) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Financing costs                          (197)                   (191)                 (3,621)                 (1,586) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Net financing 
 income/(costs)                             83                   (173)                 (3,598)                 (1,575) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 
Analysed as: 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net interest payable                     (103)                   (109)                    (69)                    (63) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net fair value 
 gains/(losses) on 
 derivative contracts                      106                      15                 (2,802)                 (1,457) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net post-retirement 
 scheme financing                          (3)                       -                     (1)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net foreign exchange 
 gains/(losses)                            164                       -                   (669)                       - 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net other financing                       (81)                    (79)                    (57)                    (55) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
Net financing 
 income/(costs)                             83                   (173)                 (3,598)                 (1,575) 
----------------------  ----------------------  ----------------------  ----------------------  ---------------------- 
 

(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 (30 June 2020: payable) on these interest rates swaps from fair value movement to interest payable.

(3) The GBP15m gain recognised relates to the actual cost of the reduction in the size of the USD hedge book in the period. For further detail, see below.

In 2020, 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 to reduce the size of the US Dollar hedge book by $11.8bn by transacting offsetting foreign exchange contracts across 2020-2026. An underlying charge of GBP1,689m relating to the total $11.8bn reduction in the size of the US Dollar hedge book was included within underlying financing costs in 2020.

In 2021, this estimate was updated to reflect the actual cash cost of GBP1,674m resulting in a GBP15m credit included within underlying financing costs.

The cash settlement costs of GBP1,674m will occur over the period 2020-2026, GBP186m was incurred in 2020 and GBP303m was incurred in the period to 30 June 2021. The Group estimates that future cash outflows of GBP149m will occur in the remainder of 2021, GBP326m in 2022, and GBP710m spread over 2023 to 2026.

The Group also took action to reduce the size of the US Dollar hedge book by an additional $0.9bn by settling the mark-to market at zero cost.

   5     Taxation 

The income tax expense has been calculated by applying the annual effective tax rate for each jurisdiction to the half-year profits of each jurisdiction.

The tax credit for the half-year is GBP280m on a statutory profit before taxation of GBP114m (30 June 2020: tax charge of GBP48m on a statutory loss before taxation of GBP5,213m), giving a statutory rate of (245.6%) (30 June 2020: (0.9%)). The key driver of the tax credit in 2021 is the impact of the increase in the UK tax rate. The key driver of the tax charge in 2020 is the non-recognition of deferred tax on UK losses arising in the year, partially offset by the credit arising on the change in the UK tax rate. Additionally, in 2020 some of the deferred tax asset relating to UK losses previously recognised has been derecognised.

Tax reconciliation - continuing operations:

 
                                                                                                    Restated 
                                                             Half-year to 30 June 2021      Half-year to 30 June 2020 
                                                           ----------------------------  ----------------------------- 
                                                                  GBPm         Tax rate           GBPm        Tax rate 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
 
Profit/(loss) before taxation                                      114                         (5,213) 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
 
Nominal tax charge/(credit) at UK corporation tax rate of 
 19%                                                                22            19.0%          (990)           19.0% 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
Tax losses in year not recognised in deferred tax (1)              (7)           (6.1%)            707         (13.6%) 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
Derecognition of deferred tax                                        -             0.0%            433          (8.3%) 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
Increase in deferred taxes resulting from change in UK 
 tax rate                                                        (328)         (287.6%)          (159)            3.1% 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
Other                                                               33            29.1%             57          (1.1%) 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
Statutory tax (credit)/charge and rate                           (280)         (245.6%)             48          (0.9%) 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
 
Analysis of statutory tax (credit)/charge: 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
Underlying items                                                  (29)                              82 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
Non-underlying items (see note 2)                                (342)                            (71) 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
Discontinued operations (see note 19)                               91                              37 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
                                                                 (280)                              48 
---------------------------------------------------------  -----------  ---------------  -------------  -------------- 
 

(1) Includes UK losses not recognised and movement on unrecognised deferred tax assets relating to foreign exchange and commodity financial assets and liabilities.

Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which to recover the asset. Where necessary, this is based on management's assumptions relating to the amounts and timing of future taxable profits. The Board continually reassesses the appropriateness of recovering deferred tax assets relating to losses and other tax credits, which includes a consideration of the level of future profits and the time period over which they are recovered.

Sensitivity analyses are also performed as part of the assessment. At 30 June 2021, sensitivity analyses showed that either a 5% reduction in margins across all applicable Civil widebody programmes or a 5% reduction in shop visit volumes, which could be driven by fewer flying hours as a result of climate change, would result in a decrease in the deferred tax asset in respect of UK losses by around GBP150m, which equates to around a GBP1.2bn reduction in profit.

As a consequence of the impact of COVID-19 on existing Civil Aerospace widebody engine programmes, taking into account the sensitivity analyses performed, and in light of the inherent uncertainty in estimating such long-term forecasts, the Group has not recognised any deferred tax assets in respect of 2021 UK losses.

Deferred tax assets arising on additional unrealised losses on derivative contracts that remain hedged have also been assessed resulting in a net increase in the deferred tax asset of GBP43m, mainly driven by the change in UK corporate tax rate.

Both of these assessments are in line with the approach set out in note 5 of the 2020 Annual Report, and also take into account a 25% probability of there being a severe but plausible downside scenario in relation to the commercial aviation industry. The Spring Budget 2021 announced that the UK corporation tax rate will increase from 19% to 25% from 1 April 2023. The tax rate increase was substantively enacted on 24 May 2021. The prior year UK deferred tax assets and liabilities were calculated at 19%, as this was the enacted rate at the 2020 balance sheet date. As the 25% rate has been substantively enacted before 30 June 2021, the UK deferred tax assets and liabilities have been remeasured at 25%.

The resulting credits or 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 2021, GBP328m has been credited to the income statement and GBP18m has been credited directly to equity.

The unrecognised deferred tax assets on UK losses, foreign exchange financial assets and liabilities and other deductible temporary differences have increased by GBP373m, GBP116m, and GBP11m respectively due to the increase in the UK tax rate to 25%.

   6     Earnings per ordinary share 

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

In the current period, the potentially dilutive share options element has been assessed as 18 million shares. Where a continuing loss is recognised, the effect of potentially dilutive ordinary shares is anti-dilutive.

 
                                    Half-year to 30 June 2021                     Half-year to 30 June 2020 
-------------------------  -------------------------------------------  -------------------------------------------- 
                                        Potentially dilutive                          Potentially dilutive 
                             Basic             share options   Diluted     Basic             share options   Diluted 
-------------------------  -------  ------------------------  --------  --------  ------------------------  -------- 
Profit/(loss) 
attributable to ordinary 
shareholders (GBPm): 
-------------------------  -------  ------------------------  --------  --------  ------------------------  -------- 
  Continuing operations        394                                 394   (5,263)                             (5,263) 
-------------------------  -------  ------------------------  --------  --------  ------------------------  -------- 
  Discontinued operations      (1)                                 (1)     (117)                               (117) 
-------------------------  -------  ------------------------  --------  --------  ------------------------  -------- 
                               393                                 393   (5,380)                             (5,380) 
-------------------------  -------  ------------------------  --------  --------  ------------------------  -------- 
Weighted average number 
 of ordinary shares 
 (millions)                  8,331                        18     8,349     5,597                         -     5,597 
-------------------------  -------  ------------------------  --------  --------  ------------------------  -------- 
EPS (pence): 
-------------------------  -------  ------------------------  --------  --------  ------------------------  -------- 
  Continuing operations       4.73                    (0.01)      4.72   (94.03)                         -   (94.03) 
-------------------------  -------  ------------------------  --------  --------  ------------------------  -------- 
  Discontinued operations   (0.01)                         -    (0.01)    (2.09)                         -    (2.09) 
-------------------------  -------  ------------------------  --------  --------  ------------------------  -------- 
                              4.72                    (0.01)      4.71   (96.12)                         -   (96.12) 
-------------------------  -------  ------------------------  --------  --------  ------------------------  -------- 
 

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

 
                                                            Half-year to 30 June 2021     Half-year to 30 June 2020 
                                                          ----------------------------  ---------------------------- 
                                                                     Pence        GBPm          Pence           GBPm 
--------------------------------------------------------  ----------------  ----------  -------------  ------------- 
Underlying EPS / Underlying profit/(loss) attributable 
 to ordinary shareholders                                             1.76         147        (59.44)        (3,327) 
--------------------------------------------------------  ----------------  ----------  -------------  ------------- 
Total underlying adjustments to profit/(loss) before tax 
 (note 2)                                                           (1.15)        (96)        (37.93)        (2,123) 
--------------------------------------------------------  ----------------  ----------  -------------  ------------- 
Related tax effects                                                   4.11         342           1.27             71 
--------------------------------------------------------  ----------------  ----------  -------------  ------------- 
Related NCI effects                                                      -           -         (0.02)            (1) 
--------------------------------------------------------  ----------------  ----------  -------------  ------------- 
EPS / profit/(loss) attributable to ordinary 
 shareholders                                                         4.72         393        (96.12)        (5,380) 
--------------------------------------------------------  ----------------  ----------  -------------  ------------- 
Diluted underlying EPS                                                1.76                    (59.44) 
--------------------------------------------------------  ----------------  ----------  -------------  ------------- 
 

Basic and diluted earnings per share figures for the comparative period 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 30 June 2020 were (280.06)p basic and diluted earnings per share and (173.19)p basic and diluted underlying earnings per share.

   7     Intangible assets 
 
                                   Certification         Development            Customer 
                    Goodwill               costs         expenditure       relationships  Software (3)  Other    Total 
                        GBPm                GBPm                GBPm                GBPm          GBPm   GBPm     GBPm 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Cost: 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
At 1 January 2021      1,112                 963               3,564               1,403           968    893    8,903 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Additions                  -                   1                  42                   -            28     18       89 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Transferred to 
 assets held for 
 sale (1)                  -                 (6)               (179)               (868)          (15)   (59)  (1,127) 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Disposals                  -                (22)                   -                   -           (3)    (1)     (26) 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Reclassifications          -                   -                   -                   -             6    (6)        - 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Reclassifications 
 from PPE                  -                   -                   -                   -             6      -        6 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Exchange 
 differences            (41)                 (2)                (72)                (58)           (5)   (26)    (204) 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
At 30 June 2021        1,071                 934               3,355                 477           985    819    7,641 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
 
 
Accumulated amortisation and 
impairment: 
----------------------------  ------------------  ------------------  ------------------  ------------  -----  ------- 
At 1 January 2021         38                 429               1,803                 478           607    403    3,758 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Charge for the 
 period (2)                -                  11                  40                  42            47     14      154 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Impairment                 -                   -                   -                   -             -      5        5 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Transferred to 
 assets held for 
 sale (1)                  -                 (4)                (51)               (176)          (10)      -    (241) 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Disposals                  -                (21)                   -                   -           (2)    (1)     (24) 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Reclassifications          -                   -                 (1)                   -             -      1        - 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Reclassifications 
 from PPE                  -                   -                   -                   -             6      -        6 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
Exchange 
 differences               -                 (1)                (48)                (17)           (3)   (11)     (80) 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
At 30 June 2021           38                 414               1,743                 327           645    411    3,578 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
 
Net book value: 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
30 June 2021           1,033                 520               1,612                 150           340    408    4,063 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
1 January 2021         1,074                 534               1,761                 925           361    490    5,145 
------------------  --------  ------------------  ------------------  ------------------  ------------  -----  ------- 
 

(1) Bergen Engines AS, the Civil Nuclear Instrumentation & Control business and ITP Aero have been classified as disposal groups held for sale at 30 June 2021. Bergen Engines AS and the Civil Nuclear Instrumentation & Control business were classified as held for sale at 31 December 2020 - see note 19.

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

(3) Includes GBP103m (31 December 2020: GBP110m) of software under course of construction which is not amortised.

Intangible assets have been reviewed for impairment in accordance with IAS 36 Impairment of Assets. Assessments have considered potential triggers of impairment such as external factors including climate change, significant changes with an adverse effect on a programme and by analysing latest management forecasts against those prepared in 2020 to identify any deterioration in performance. Where a trigger event has been identified, an impairment test has been carried out. Where an impairment was required the test was performed on the following basis:

- The carrying values have been assessed by reference to value in use. These have been estimated using cash flows from the most recent forecasts prepared by management, which are consistent with past experience and external sources of information on market conditions over the lives of the respective programmes.

- The key assumptions underlying cash flow projections are based on estimates of market share, trading assumptions and long-term economic forecasts. The uncertainty over the recovery from COVID-19 has been modelled by including downside forecasts at an appropriate weighting taking into account the business segment being considered.

There have been no individually material impairment charges or reversals recognised in the period.

   8     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 2021                     1,994                5,442                 1,025                      451  8,912 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Additions                                 4                   27                     -                       64     95 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Transferred to assets 
 held for sale (1)                    (122)                (301)                  (22)                      (8)  (453) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Disposals/write-offs                   (11)                 (96)                   (1)                        -  (108) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Reclassifications (2)                    91                  102                     -                    (193)      - 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Reclassifications to 
 intangible assets (2)                    -                  (6)                     -                        -    (6) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Exchange differences                   (32)                 (83)                   (5)                      (4)  (124) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
At 30 June 2021                       1,924                5,085                   997                      310  8,316 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
 
Accumulated 
depreciation and 
impairment: 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
At 1 January 2021                       679                3,336                   374                        8  4,397 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Charge for the period 
 (3)                                     36                  176                    27                        -    239 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Impairment (4)                          (1)                  (1)                     -                        2      - 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Transferred to assets 
 held for sale (1)                     (22)                (123)                   (5)                        -  (150) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Disposals/write-offs                    (5)                 (92)                     -                        -   (97) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Reclassifications (2)                  (13)                   12                     -                        1      - 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Reclassifications to 
 intangible assets (2)                    -                  (6)                     -                        -    (6) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
Exchange differences                    (9)                 (49)                   (1)                        -   (59) 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
At 30 June 2021                         665                3,253                   395                       11  4,324 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
 
Net book value at: 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
30 June 2021                          1,259                1,832                   602                      299  3,992 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
1 January 2021                        1,315                2,106                   651                      443  4,515 
-----------------------  ------------------  -------------------  --------------------  -----------------------  ----- 
 

(1) Bergen Engines AS, the Civil Nuclear Instrumentation & Control business and ITP Aero have been classified as disposal groups held for sale at 30 June 2021. Bergen Engines AS and the Civil Nuclear Instrumentation & Control business were classified as held for sale at 31 December 2020 - see note 19.

(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 is charged to cost of sales and commercial and administrative costs or included in the cost of inventory as appropriate.

(4) The carrying values of tangible assets have been assessed during the period in line with IAS 36. As a result of this assessment(,) there are no individually material impairment charges or reversals in the period.

   9     Right-of-use assets 
 
                                           Land and buildings  Plant and equipment  Aircraft and engines  Total 
                                                         GBPm                 GBPm                  GBPm   GBPm 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Cost: 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
At 1 January 2021                                         447                  150                 1,833  2,430 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Additions/modification of leases                            9                    4                   (3)     10 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Transferred to assets held for sale (1)                  (16)                  (2)                     -   (18) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Disposals                                                 (8)                  (4)                     -   (12) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Exchange differences                                      (6)                  (3)                   (3)   (12) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
At 30 June 2021                                           426                  145                 1,827  2,398 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
 
Accumulated depreciation and impairment: 
=========================================  ==================  ===================  ====================  ===== 
At 1 January 2021                                         159                   60                   806  1,025 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Charge for the period                                      22                   15                   100    137 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Impairment (2)                                            (3)                  (6)                     -    (9) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Transferred to assets held for sale (1)                   (4)                  (1)                     -    (5) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Disposals                                                 (8)                  (4)                     -   (12) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
Exchange differences                                      (2)                  (1)                   (1)    (4) 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
At 30 June 2021                                           164                   63                   905  1,132 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
 
Net book value at: 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
30 June 2021                                              262                   82                   922  1,266 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
1 January 2021                                            288                   90                 1,027  1,405 
-----------------------------------------  ------------------  -------------------  --------------------  ----- 
 

(1) Bergen Engines AS, the Civil Nuclear Instrumentation & Control business and ITP Aero have been classified as disposal groups held for sale at 30 June 2021. Bergen Engines AS and the Civil Nuclear Instrumentation & Control business were classified as held for sale at 31 December 2020 - see note 19.

(2) The carrying values of right-of-use assets have been assessed during the period in line with IAS 36. As a result of this assessment, an impairment reversal of GBP9m has been recognised through non-underlying profit. The reversal relates to an element of the non-underlying impairments recorded in 2020 in Civil Aerospace for site rationalisation where there has been a subsequent change in strategy to continue production on that site.

   10    Trade receivables and other assets 
 
                             Current                       Non-current               Total 
----------------  ------------------------------  ------------------------------  ------------  ---------------- 
                  30 June 2021  31 December 2020  30 June 2021  31 December 2020  30 June 2021  31 December 2020 
                          GBPm              GBPm          GBPm              GBPm          GBPm              GBPm 
----------------  ------------  ----------------  ------------  ----------------  ------------  ---------------- 
Trade 
 receivables             2,347             2,479             -                 -         2,347             2,479 
----------------  ------------  ----------------  ------------  ----------------  ------------  ---------------- 
Receivables due 
 on risk and 
 revenue sharing 
 arrangements 
 (RRSAs)                   716               603            13                82           729               685 
----------------  ------------  ----------------  ------------  ----------------  ------------  ---------------- 
Amounts owed by 
 joint ventures 
 and associates            456               486            13                16           469               502 
----------------  ------------  ----------------  ------------  ----------------  ------------  ---------------- 
Costs to obtain 
 contracts with 
 customers                  16                12            44                50            60                62 
----------------  ------------  ----------------  ------------  ----------------  ------------  ---------------- 
Other taxation 
 and social 
 security 
 receivable                178               225            22                 6           200               231 
----------------  ------------  ----------------  ------------  ----------------  ------------  ---------------- 
Other 
 receivables (1)           554               639            19                20           573               659 
----------------  ------------  ----------------  ------------  ----------------  ------------  ---------------- 
Prepayments                339               412           351               425           690               837 
----------------  ------------  ----------------  ------------  ----------------  ------------  ---------------- 
                         4,606             4,856           462               599         5,068             5,455 
----------------  ------------  ----------------  ------------  ----------------  ------------  ---------------- 
 
 
   (1)   Other receivables include unbilled recoveries relating to overhaul activity. 

The expected credit losses for trade receivables and other assets has increased by GBP29m to GBP281m (31 December 2020: GBP252m). This increase is mainly driven by the Civil Aerospace business of GBP27m, of which GBP14m relates to specific customers and GBP13m relates to updates to the recoverability of other receivables.

The Group's expected credit loss provision movements are as follows:

 
                                                               Half-year to 30 June 2021   Year-ended 31 December 2020 
                                                                                    GBPm                          GBPm 
------------------------------------------------------------  -------------------------- 
At 1 January                                                                       (252)                         (138) 
Increases in loss allowance recognised in the income 
 statement during the period                                                        (81)                         (119) 
Loss allowance utilised                                                               15                             5 
Releases of loss allowance previously provided                                        33                            13 
Other net movements                                                                    2                          (13) 
Transferred to held for sale                                                           2                             - 
------------------------------------------------------------ 
At 30 June                                                                         (281)                         (252) 
------------------------------------------------------------ 
 
   11    Trade payables and other liabilities 
 
                               Current                       Non-current                        Total 
                    30 June 2021  31 December 2020  30 June 2021  31 December 2020  30 June 2021  31 December 2020 
                            GBPm              GBPm          GBPm              GBPm          GBPm              GBPm 
Trade payables             1,247             1,418             -                 -         1,247             1,418 
------------------                ----------------  ------------  ----------------  ------------ 
Payables due on 
 RRSAs                       500               697             -                 -           500               697 
------------------                ----------------  ------------  ----------------  ------------ 
Amounts owed to 
 joint ventures 
 and associates              657               583             -                 -           657               583 
------------------                ----------------  ------------  ----------------  ------------ 
Customer 
 concession 
 credits                   1,254             1,536           557               514         1,811             2,050 
------------------                ----------------  ------------  ----------------  ------------ 
Warranty credits             123               173           228               196           351               369 
------------------                ----------------  ------------  ----------------  ------------ 
Accruals                   1,069             1,322           110               117         1,179             1,439 
------------------                ----------------  ------------  ----------------  ------------ 
Deferred receipts 
 from RRSA 
 workshare 
 partners                     26                17           491               507           517               524 
------------------                ----------------  ------------  ----------------  ------------ 
Government grants             11                16            56                66            67                82 
------------------                ----------------  ------------  ----------------  ------------ 
Other taxation and 
 social security             117               127             6                 7           123               134 
------------------                ----------------  ------------  ----------------  ------------ 
Other payables (1)           716               764           344               515         1,060             1,279 
------------------                ----------------  ------------  ----------------  ------------ 
                           5,720             6,653         1,792             1,922         7,512             8,575 
------------------                ----------------  ------------  ----------------  ------------ 
 

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

The Group's payment terms with suppliers vary on the products and services being sourced, the competitive global markets the Group operates in and other commercial aspects of suppliers' relationships. Industry average payment terms vary between 90-120 days. The Group offers reduced payment terms for smaller suppliers, so that they are paid in 30 days. In line with aerospace industry practice, the Group offers a supply chain financing (SCF) programme in partnership with banks to enable suppliers, including joint ventures, who are on standard 75-day payment terms to receive their payments sooner. The SCF programme is available to suppliers at their discretion and does not change rights and obligations with suppliers nor the timing of payment of suppliers. At 30 June 2021, suppliers had drawn GBP449m under the SCF scheme (31 December 2020: GBP582m).

   12    Contract assets and liabilities 
 
                               Current                     Non-current (1)                      Total 
                    30 June 2021  31 December 2020  30 June 2021  31 December 2020  30 June 2021  31 December 2020 
                            GBPm              GBPm          GBPm              GBPm          GBPm              GBPm 
Contract assets 
Contract assets 
 with customers              496               416           651               660         1,147             1,076 
------------------                ----------------  ------------  ----------------  ------------ 
Participation fee 
 contract assets              24                48           231               386           255               434 
------------------                ----------------  ------------  ----------------  ------------ 
                             520               464           882             1,046         1,402             1,510 
 

(1) Contract assets and contract liabilities have been presented on the face of the balance sheet in line with the operating cycle of the business. Contract liabilities are further split according to when the related performance obligation is expected to be satisfied and therefore when revenue is estimated to be recognised in the income statement. Further disclosure of contract assets is provided in the table above, which shows within current the element of consideration that will become unconditional in the next year.

Contract assets with customers include GBP847m (31 December 2020: GBP726m) of Civil Aerospace LTSA assets, with most of the remaining balance relating to Defence. The main drivers of the increase in the Group balance are: recognition of revenue relating to performance obligations satisfied in previous years of GBP31m in Civil Aerospace (as the level of variable consideration that will be received has increased as uncertainty has reduced following commercial negotiations); and revenue recognised in Civil Aerospace in the period exceeding amounts billed by GBP41m. No impairment losses in relation to these contract assets (31 December 2020: none) have arisen during the period to 30 June 2021.

Participation fee contract assets have reduced by GBP179m (31 December 2020: reduced by GBP165m) due to ITP Aero being reclassified as a disposal group held for sale which had an impact of GBP153m, amortisation exceeding additions by GBP12m and foreign exchange on consolidation of overseas entities of GBP14m. No impairment losses of participation fee contract assets (31 December 2020: none) have arisen during the period to 30 June 2021.

 
                               Current                       Non-current                        Total 
                    30 June 2021  31 December 2020  30 June 2021  31 December 2020  30 June 2021  31 December 2020 
                            GBPm              GBPm          GBPm              GBPm          GBPm              GBPm 
Contract 
 liabilities               3,811             4,187         6,427             6,245        10,238            10,432 
                                  ----------------  ------------  ----------------  ------------ 
 

Contract liabilities have decreased by GBP194m. The main driver of the change in the Group balance is a result of ITP Aero contract liabilities being reclassified as a disposal group held for sale having an impact of GBP173m.

Civil Aerospace contract liabilities have increased by GBP15m. This consists of an increase in relation to LTSA liabilities of GBP54m to GBP6,895m (31 December 2020: GBP6,841m), offset by the utilisation of deposits. LTSA revenue billed has been ahead of revenue recognised in the period and together with foreign exchange movements have increased the LTSA liabilities by GBP183m, offset by GBP129m of LTSA revenue recognised relating to performance obligations satisfied in previous years, which were principally driven by improved shop visit cost expectations in Business Aviation and the impact of specific customer negotiations with airlines.

   13    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 30 June 
2021 
Non-current 
 assets                   361              9            152           522              -     15         -      537 
Current assets             16             11              1            28              -     12         -       40 
Assets                    377             20            153           550              -     27         -      577 
Current 
 liabilities            (607)            (1)            (1)         (609)            (1)   (27)      (26)    (663) 
Non-current 
 liabilities          (2,293)            (1)          (117)       (2,411)            (6)   (45)         -  (2,462) 
Liabilities           (2,900)            (2)          (118)       (3,020)            (7)   (72)      (26)  (3,125) 
                      (2,523)             18             35       (2,470)            (7)   (45)      (26)  (2,548) 
 
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) 
 
 
   (1)   Includes the foreign exchange impact of cross-currency interest rate swaps. 
   13    Financial assets and liabilities continued 

Derivative financial instruments

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

 
                                                                                                       Year-ended 
                                            Half-year to 30 June 2021                            31 December 2020 
                                                       Interest rate    Interest rate 
                           Foreign                     instruments -    instruments - 
                          exchange        Commodity  hedge accounted        non-hedge 
                       instruments        contracts              (2)        accounted    Total              Total 
                              GBPm             GBPm             GBPm             GBPm     GBPm               GBPm 
At 1 January               (2,871)             (11)              233             (57)  (2,706)            (2,849) 
Movements in fair 
 value hedges                    -                -            (129)                -    (129)                139 
Movements in cash 
 flow hedges                  (13)                4             (38)                -     (47)               (36) 
Movements in 
 other derivative 
 contracts (1)                  25               41                -               40      106              (160) 
Contracts settled              348              (1)             (21)                7      333                200 
Reclassification 
 to held for sale             (12)             (15)                -                -     (27)                  - 
At period/year 
 end                       (2,523)               18               45             (10)  (2,470)            (2,706) 
 
 
   (1)   Included in net financing. 
   (2)   Includes the foreign exchange impact of cross-currency interest rate swaps. 

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

 
                            Financial RRSAs                Other liabilities                 Other assets 
                                         Year-ended 
                       Half-year to     31 December    Half-year to  Year-ended 31    Half-year to   Year-ended 31 
                       30 June 2021            2020    30 June 2021  December 2020    30 June 2021   December 2020 
                               GBPm            GBPm            GBPm           GBPm            GBPm            GBPm 
At 1 January                   (81)           (110)            (73)           (72)              15              16 
  Exchange 
   adjustments 
   included in OCI                3             (6)               3            (2)               -               - 
  Additions                       -               -             (2)           (17)               -               - 
  Financing charge 
   (1)                            -             (3)               -           (13)               -               - 
  Excluded from 
  underlying 
  profit: 
    Changes in 
     forecast 
     payments (1)                 -             (3)               -              -               -               - 
    Exchange 
    adjustments (1)               -               -               -              -               -               - 
  Cash paid                       2              39               -             18               -             (1) 
  Other                           -               -               -             13               -               - 
  Reclassification 
   to held for sale              69               2               -              -               -               - 
At period/year end              (7)            (81)            (72)           (73)              15              15 
 

(1) Included in financing.

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

 
                             Half-year to 30 June 2021    Year-ended 31 December 2020 
                               Book value    Fair value      Book value     Fair value 
                                     GBPm          GBPm            GBPm           GBPm 
Borrowings - Level 1              (4,057)       (4,070)         (4,886)        (4,814) 
Borrowings - Level 2              (1,991)       (2,071)           (401)          (403) 
Financial RRSAs - Level 3             (7)          (10)            (81)           (89) 
 
   13    Financial assets and liabilities continued 

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 (30 June 2021: GBP11m; 31 December 2020: GBP938m) 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). During the period to 30 June 2021, the Group reassessed which trade receivables are held to collect or sell. The Group's intent is to no longer utilise invoice discounting and consequently, balances are generally not classified as held to collect or sell. A small amount of invoice discounting has continued within Power Systems at the request and cost of the customer.

- 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 30 June 2021, Level 3 assets totalled GBP15m (31 December 2020: GBP15m).

- 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).

In 2019, the Group adopted the 'Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform' issued in September 2019. In calculating the change in fair value attributable to the hedged risk for the fixed-rate borrowings, the Group has made the following assumptions that reflect its current expectations:

- The Group has assumed that pre-existing fallback provisions in the borrowings do not apply to IBOR reform;

- Borrowings move to a risk free rate during 2022, and the spread will be similar to the spread included in the interest rate swaps used as hedging instruments; and

- No other changes to the terms of the hedged borrowings are anticipated.

   14    Borrowings and lease liabilities 
 
                               Current                       Non-current                        Total 
                                                    ------------------------------ 
                    30 June 2021  31 December 2020  30 June 2021  31 December 2020  30 June 2021  31 December 2020 
                            GBPm              GBPm          GBPm              GBPm          GBPm              GBPm 
Unsecured 
 
Overdrafts                     6                 7             -                 -             6                 7 
 
Bank loans (1)                 3                 9         1,972                10         1,975                19 
 
Commercial paper 
 (2)                           -               300             -                 -             -               300 
 
Loan notes (3)                 -               680         4,057             4,206         4,057             4,886 
 
Other loans                    -                17            10                58            10                75 
 
Total unsecured                9             1,013         6,039             4,274         6,048             5,287 
 
 
Lease liabilities            212               259         1,654             1,784         1,866             2,043 
 
 
Total borrowings 
 and lease 
 liabilities                 221             1,272         7,693             6,058         7,914             7,330 
 
 

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

(1) On the 15 June 2021, the Group drew down the GBP2,000m loan maturing in 2025 (supported by an 80% guarantee from UK Export Finance).

(2) 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. These borrowings were repaid on 17 March 2021.

(3) On the 18 June 2021, the Group repaid EUR 750m (GBP639m) loan notes in line with repayment terms.

During the period, the Group entered into a new GBP1,000m loan maturing in 2026 (supported by an 80% guarantee from UK Export Finance and available to draw until March 2025). This facility was undrawn at 30 June 2021.

Under the terms of certain 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.

   15    Provisions 
 
                                        Charged to 
                               At           income                       Transferred to         Exchange  At 30 June 
                   1 January 2021    statement (1)  Reversed  Utilised    held for sale      differences        2021 
                             GBPm             GBPm      GBPm      GBPm             GBPm             GBPm        GBPm 
Trent 1000 
 exceptional 
 costs                        321               24         -     (148)                -                -         197 
Contract losses               808               84      (30)      (16)             (13)              (4)         829 
Restructuring                 236                3      (28)      (59)              (5)              (3)         144 
Warranties and 
 guarantees                   327               50       (3)      (43)             (11)             (12)         308 
Customer 
 financing                     17                -         -         -                -                -          17 
Insurance                      60               10      (16)       (5)                -                -          49 
Tax related 
 interest and 
 penalties                     33                -         -         -                -                -          33 
Employer 
 liability 
 claims                        50                1         -       (1)              (1)                -          49 
Other                          93               14       (1)       (9)                -              (3)          94 
                            1,945              186      (78)     (281)             (30)             (22)       1,720 
Current 
 liabilities                  826                                                                                568 
Non-current 
 liabilities                1,119                                                                              1,152 
 

(1) The charge to the income statement includes GBP16m in underlying profit/(loss) as a result of the unwinding of the discounting of provisions previously recognised.

Trent 1000 exceptional costs

In November 2019, the Group announced the outcome of testing and a thorough technical and financial review of the

Trent 1000 TEN programme, following technical issues which were identified in 2019, resulting in a revised timeline and a more conservative estimate of durability for the improved HP turbine blade for the TEN variant. In the period, the Group has utilised GBP148m 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.

   15    Provisions continued 

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. In the period, additional contract losses for the Group of GBP84m have been recognised as a result of a change in future cost estimates. The Group continues to monitor the contract loss provision for changes in the market and revises the provision as required. Provisions for contract losses are expected to be utilised over the term of the customer contracts, typically within 10-15 years.

Restructuring

In May 2020, the Group announced a fundamental restructuring programme in response to the financial and operational impact caused by COVID-19 with a plan to remove 9,000 roles across the Group. During the period, GBP59m of the provision was utilised as part of these plans and GBP28m of the provision released following reassessment of the anticipated cost per role. The provision is expected to be utilised by the end of 2022.

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 the 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 $1.8bn (31 December 2020: $1.9bn) (on a discounted basis) to provide facilities to enable customers to purchase aircraft (of which approximately $307m 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.

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 USD. 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.

 
                                                    At 30 June 2021    At 31 December 2020 
                                                       GBPm       $m        GBPm         $m 
Gross commitments                                        31       43          38         52 
Value of security                                      (10)     (14)        (14)       (19) 
Guarantees                                              (2)      (2)         (5)        (6) 
Net commitments                                          19       27          19         27 
Net commitments with security reduced by 20% (1)         21       29          22         30 
 

(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.

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

The net post-retirement scheme deficit as at 30 June 2021 is calculated on a year to date basis, using the latest valuation as at 31 December 2020, updated to 30 June 2021 for the principal schemes.

Movements in the net post-retirement position recognised in the balance sheet were as follows:

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

 
                                                                          UK schemes  Overseas schemes    Total 
                                                                                GBPm              GBPm     GBPm 
At 1 January 2021                                                                883           (1,569)    (686) 
  Exchange adjustments                                                             -                54       54 
  Current service cost and administrative expenses                               (4)              (33)     (37) 
  Past service credit                                                             11                 -       11 
  Financing recognised in the income statement                                     7              (10)      (3) 
  Contributions by employer                                                       99                32      131 
  Actuarial gains recognised in OCI (1)                                          501               142      643 
  Returns on plan assets excluding financing recognised in OCI (1)             (609)              (46)    (655) 
  Transfers                                                                        -               (1)      (1) 
At 30 June 2021                                                                  888           (1,431)    (543) 
Post-retirement scheme surpluses - included in non-current assets (2)            888                26      914 
Post-retirement scheme deficits - included in non-current liabilities              -           (1,444)  (1,444) 
Post-retirement scheme deficits - included in liabilities held for sale            -              (13)     (13) 
                                                                                 888           (1,431)    (543) 
 

(1) The UK scheme recognised a net loss of GBP108m in OCI in the period to 30 June 2021 which has been driven by a higher discount rate offset by returns on plan assets.

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

Changes to UK defined benefit scheme

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. As at 31 December 2020, a non-underlying past-service credit of GBP67m was recognised. Following the confirmation of the scheme closure, the Group held discussions with the employees' representatives and the Trustee regarding additional transitional protections that could be granted from the scheme. At 30 June 2021, GBP7m has been recognised as a non-underlying past service credit which relates to the differences between the final details agreed and the obligation estimated at 31 December 2020.

In the period to 30 June 2021, 236 employed deferred members have transferred employment in anticipation of a business disposal. As a consequence of this, a GBP4m non-underlying past service credit has been recognised.

Sensitivities

A reduction in the discount rate from 1.95% to 1.70% could lead to an increase in the defined benefit obligations of the RR UK Pension Fund of approximately GBP425m. 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 21.7 years (male aged 65) and from 23.1 years (male aged 45) would increase the defined benefit obligations of the RR UK Pension Fund by approximately GBP380m.

Where applicable, it is assumed that 40% (31 December 2020: 40%) of members of the RR UK Pension Fund will transfer out of the fund on retirement with a share of funds transfer value. An increase of 5% in this assumption would increase the defined benefit obligation by GBP30m.

   17    Contingent liabilities 

Contingent liabilities in respect of customer financing commitments are described in note 15.

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, the Group 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 (including with tax authorities) which arise in the ordinary course of business, some of which are for substantial amounts. As a consequence of the insolvency of an insurer as previously reported, the Group is no longer fully insured against known and potential claims from employees who worked for certain of the Group's UK based businesses for a period prior to the acquisition of those businesses by the Group. 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.

   18    Related parties 
 
                                                                       Half-year to  Half-year to 30 June 2020 
                                                                       30 June 2021                       GBPm 
                                                                               GBPm 
Sales of goods and services to joint ventures and associates                  1,434                      2,171 
Purchases of goods and services from joint ventures and associates          (1,772)                    (2,514) 
 

(1) Sales of goods and services to joint ventures and associates and purchases of goods and services from joint ventures and associates are included at the average exchange rate, consistent with the statutory income statement. In prior periods these have been included at the achieved rate on settled derivative contracts, consistent with note 2.

Included in sales of goods and services to joint ventures and associates are sales of spare engines amounting to GBP6m (30 June 2020: GBP20m). Profit recognised in the period on such sales amounted to GBP13m (30 June 2020: GBP30m), including profit on current period sales and recognition of profit deferred on similar sales in previous periods. On an underlying basis (at actual achieved rates on settled derivative transactions), the amounts were GBP13m (30 June 2020: GBP31m).

   19    Disposals, businesses held for sale and discontinued operations 

Disposals

Disposal completed in prior periods

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. A liability of EUR28m (31 December 2020: EUR29m) is recognised for amounts that are expected to be payable in relation to the years 2021-2023. Cash of EUR9m has been paid during the period with an increase in the liability of EUR8m (GBP7m) reflected as an adjustment to the sales proceeds. The maximum adjustment to sales proceeds has now been provided for in all future years to 2023.

Businesses held for sale

On 28 February 2020, the Group announced the decision to carry out a strategic review of Bergen Engines AS, the Group's medium-speed gas and diesel engine business. Bergen formed part of the Power Systems business and from 31 December 2020 it has been classified as held for sale. After the termination of the sale with TMH Group in March 2021, the sales process recommenced, and on 3 August 2021 the Group signed an agreement to sell Bergen to global engineering group Langley Holdings plc for an enterprise value of EUR63m. The agreement is subject to the satisfaction of certain closing conditions and the Norwegian government have been notified of the proposed sale. Effective completion is scheduled for 31 December 2021. Bergen has been assessed for impairment in line with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations with reference to its fair value less costs to sell. An impairment of GBP8m has been recognised of which GBP5m has been charged to non-underlying profit. As at 30 June 2021, Bergen had an additional GBP27m 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, it is expected that EUR40m of cash will be retained by Rolls-Royce and any remaining amount will be included in the disposal group.

   19    Businesses held for sale and discontinued operations continued 

.

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 30 June 2021 and its carrying value assessed against the anticipated proceeds and disposal costs. The sale is expected to complete in the second half of the year.

On 27 August 2020, the Group announced its intention to sell ITP Aero. During the period to 30 June 2021, the Hucknall site with associated fabrications activities, that were previously reported as part of the Civil Aerospace segment, have been transferred to ITP Aero (see note 2 for more detail) and other preparatory work has been performed such that as at 30 June 2021 ITP Aero was available for immediate sale in its present condition and there is an active programme to locate a buyer and complete the planned sale, as such, the business has been classified as a disposal group held for sale. The assets of ITP Aero have been assessed for impairment in line with the requirements of IFRS 5 and no impairment has been recognised. ITP Aero had an additional GBP315m of cash which was held by another Group company at 30 June 2021 and consequently is not included in the disposal group as the resulting intra-group balances are eliminated on consolidation. On completion, such cash is expected to be included in the disposal group.

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

 
                                            ITP             Civil 
                                           Aero  Bergen   Nuclear  Total 
                                           GBPm    GBPm      GBPm   GBPm 
Intangible assets                           886       -        16    902 
Property, plant and equipment               303       -         6    309 
Right-of-use assets                          13       -         7     20 
Investment in associates and 
 joint ventures                               1       -         -      1 
Deferred tax assets                         222       2         4    228 
Inventory                                   237      91        15    343 
Trade receivables and other 
 assets                                     345      52        37    434 
Cash and cash equivalents                    38      27         4     69 
Assets held for sale                      2,045     172        89  2,306 
Trade payables and other liabilities      (487)    (93)      (71)  (651) 
Provisions for liabilities and 
 charges                                   (30)    (12)       (4)   (46) 
Borrowings and lease liabilities           (92)     (3)       (5)  (100) 
Deferred tax 
 liabilities                               (92)     (2)         -   (94) 
Post-retirement scheme deficits               -       -      (13)   (13) 
Liabilities associated with assets 
 held for sale                            (701)   (110)      (93)  (904) 
Net assets/(liabilities) held 
 for sale                                 1,344      62       (4)  1,402 
 

Discontinued operations

ITP Aero represents a separate major line of business and has been managed as a separate operating segment up to 30 June 2021 (see note 2). For the period ended 30 June 2021, following ITP Aero being classified as a disposal group held for sale and in line with IFRS 5, ITP Aero has been classified as a discontinued operation.

The financial performance and cash flow information presented reflects the operations for the period that have been classified as discontinued operations.

 
                                                       Half-year   Half-year 
                                                           to 30       to 30 
                                                       June 2021   June 2020 
                                                            GBPm        GBPm 
 Revenue                                                     146         151 
 Operating loss (1)                                         (76)       (152) 
 Loss before taxation (1)                                   (75)       (154) 
 Income tax credit (1)                                        91          37 
 Profit/(loss) for the period from discontinued 
  operations on ordinary activities                           16       (117) 
 Costs on disposal of discontinued operations               (17)           - 
 Loss for the period from discontinued operations            (1)       (117) 
 
 Net cash inflow from operating activities 
  (2)                                                          4           8 
 Net cash outflow from investing activities                 (12)        (13) 
 Net cash outflow from financing activities                  (1)         (9) 
 Exchange gains/losses                                         3         (5) 
 Net change in cash and cash equivalents                     (6)        (19) 
 

(1) Profit/(loss) from discontinued operations on ordinary activities is presented net of internal margin, related consolidation adjustments and amortisation of intangible assets arising on previous acquisition. The tax credit in 2021 includes a credit relating to the recognition of a deferred tax asset on losses. In the period to 30 June 2020, results included a number of write-offs and programme impairments.

(2) Cash flows from operating activities include GBP17m costs of disposal paid during the period to 30 June 2021 that were not a movement in the cash balance of the disposal group.

   20    Derivation of summary funds flow statement from statutory cash flow statement 
 
                                 Half-year to 30 June 2021    Half-year to 30 June 2020 
                                       GBPm            GBPm           GBPm          GBPm  Source 
Underlying operating 
 profit/(loss) from continuing 
 operations                             307                        (1,630)                Note 2 
Underlying operating loss from 
 discontinued operations               (16)                           (39)                Note 2 
Underlying operating 
 profit/(loss) (see note 2)                             291                      (1,669)  Note 2 
Amortisation and impairment of 
 intangible assets                      159                            550                Cash flow statement (CFS) 
Depreciation and impairment of 
 property, plant and equipment          243                            495                CFS 
Depreciation and impairment of 
 right-of-use assets                    128                            513                CFS 
Adjustment to residual value 
 guarantees in lease 
 liabilities                            (3)                           (42)                CFS 
Impairment of joint ventures              2                             15                Note 13 
Reversal of non-underlying 
impairments of non-current                                                                Reversal of underlying 
assets                                    1                          (966)                adjustment (note 2) 
                                                                                          Reversal of underlying 
Acquisition accounting                 (50)                           (66)                adjustment (note 2) 
Depreciation and amortisation                           480                          499 
                                                                                          CFS less exceptional 
Additions of intangible assets                         (71)                        (176)  restructuring (see below) 
Purchases of property, plant 
 and equipment                                        (124)                        (221)  CFS 
                                                                                          CFS (capital and interest 
Lease payments (capital plus                                                              payments adjusted for 
interest)                                             (171)                        (190)  foreign exchange (FX)) 
Increase in inventories                               (219)                        (301)  CFS 
                                                                                          CFS adjusted for the impact 
                                                                                          of exceptional programme 
                                                                                          charges and exceptional 
                                                                                          restructuring 
                                                                                          shown on the basis of the FX 
Movement in                                                                               rate achieved on settled 
receivables/payables                  (223)                        (1,313)                derivative contracts 
                                                                                          CFS adjusted for the impact 
                                                                                          of exceptional programme 
                                                                                          charges and FX and excluding 
                                                                                          Civil LTSAs 
Movement in contract balances          (88)                          (150)                (shown separately below) 
                                                                                          Movement in Civil LTSA 
                                                                                          balances within movement of 
Underlying movement in Civil                                                              contract balances in CFS 
Aerospace LTSA contract                                                                   less impact of 
balances                              (108)                            788                FX 
                                                                                          Adjustment to reflect the 
Revaluation of trading assets                                                             impact of the FX contracts 
(excluding exceptional items)         (154)                          (152)                held on receivables/payables 
                                                                                          Realised cash flows on FX 
                                                                                          contracts not included in 
                                                                                          underlying operating profit 
                                                                                          less cash 
Realised derivatives in                                                                   flows on settlement of 
financing                                45                             74                excess derivative contracts 
Movement on 
 receivables/payables/contract 
 balances                                             (528)                        (753) 
                                                                                          CFS adjusted for the impact 
                                                                                          of exceptional programme 
                                                                                          charges and anticipated 
                                                                                          recoveries, exceptional 
                                                                                          restructuring and FX 
Movement on provisions                                (136)                          132  contracts held 
Net interest received and paid                         (81)                         (26)  CFS 
Fees paid on undrawn 
 facilities                                            (35)                            -  CFS 
Cash flows on settlement of 
 excess derivative contracts                          (303)                         (88)  CFS 
                                                                                          Cash flows on other 
                                                                                          financial instruments (CFS) 
                                                                                          not allocated to lease 
Cash flows on financial                                                                   payments or exceptional 
instruments net of realised                                                               programme expenditure 
losses included in operating                                                              adjusted for the impact of 
profit                                                 (52)                         (33)  FX not held for trading 
                                                                                          Principally disposals of 
                                                                                          non-current assets, joint 
                                                                                          venture trading and the 
                                                                                          effect of share-based 
Other                                                   (6)                         (35)  payments 
Trading cash flow                                     (955)                      (2,861) 
Underlying operating profit 
 charge in excess of 
 contributions to defined 
 benefit schemes                                       (94)                           94  CFS 
Tax                                                   (102)                         (34)  CFS 
Group free cash flow                                (1,151)                      (2,801) 
Free cash flow from continuing 
 operations                                         (1,174)                      (2,862) 
Free cash flow from 
 discontinued operations                                 23                           61 
                                                                                          CFS (includes dividends to 
Shareholder payments                                    (2)                         (90)  NCI) 
Acquisition of businesses                                 -                          (8)  CFS 
Disposal of businesses                                  (8)                           10  CFS 
                                                                                          GBP114m related to severance 
                                                                                          costs and GBP20m capital 
                                                                                          expenditure (30 June 2020: 
Exceptional restructuring                                                                 GBP54m and 
costs                                                 (134)                         (87)  GBP33m respectively) 
DPA payments                                          (156)                        (135)  CFS 
Difference in fair values of 
 derivative contracts held for 
 financing                                              (3)                         (89)  CFS 
Payments of lease principal 
 less new leases and other 
 non-cash adjustments to lease                                                            CFS adjusted for the impact 
 liabilities                                            154                          167  of FX 
                                                                                          CFS less allocation to 
Foreign exchange                                       (70)                          (2)  leases above 
                                                                                          Cash outflow on M&A spend 
                                                                                          and timing of cash flows on 
                                                                                          a prior period disposal. See 
Other                                                  (26)                         (41)  below. 
Change in net debt                                  (1,396)                      (3,076) 
 
Change in net debt                                  (1,396)                      (3,076) 
Non-cash lease impact                                 (154)                        (167) 
Reclassification of other 
 financial liabilities to 
 borrowings                                               -                          150 
Change in net debt excluding 
 lease liabilities                                  (1,550)                      (3,093) 
 
   20    Derivation of summary funds flow statement from statutory cash flow statement continued 

The information for the period ended 30 June 2020 has been re-presented to be on a comparable basis with the presentation adopted at the period ended 30 June 2021. There is no change to trading or free cash flow. In summary, 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, financial penalties paid 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 19.

 
 
                                Half-year to 30 June 2021      Half-year to 30 June 2020 
                                        GBPm          GBPm            GBPm           GBPm            Source 
Change in cash and cash 
 equivalents                           (443)                         (360)                 CFS 
Net cash flow from changes in 
 borrowings and lease 
 liabilities                           (914)                       (2,637)                 CFS 
Movement in short-term 
 investments                               1                           (6)                 CFS 
Movement in net debt from 
 cash flows                          (1,356)                       (3,003) 
Exclude: Capital element of 
 lease repayments                      (147)                         (149)                 CFS 
Movement in net debt from 
 cash flows (excluding lease 
 liabilities)                                      (1,503)                        (3,152) 
Returns to shareholders                                  2                             90  CFS 
  Acquisition of businesses                -                             8                 CFS 
  Disposal of businesses                   8                          (10)                 CFS 
                                                                                           GBP22m related to costs 
  Other acquisitions and                                                                   incurred on central M&A 
  disposals                               22                             -                 activity 
Changes in group structure                              30                            (2) 
Penalties paid on agreements 
 with investigating bodies                             156                            135  CFS 
                                                                                           GBP114m related to 
                                                                                           severance costs and GBP20m 
                                                                                           capital expenditure (30 
Exceptional restructuring                                                                  June 2020: GBP54m and 
costs                                                  134                             87  GBP33m respectively) 
                                                                                           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 and other smaller 
Other                                                   30                             41  items 
Group free cash flow                               (1,151)                        (2,801) 
 
 
Principal risks and uncertainties 
Our risk management system is described on pages 46 and 47 of our 
 2020 Annual Report as a continuous process that requires risk owners 
 to constantly reassess risks and include learning from incidents 
 to drive improvements in our control environment. 
 We continue to review our principal risks and how we manage them 
 to reflect the evolving nature of the COVID-19 pandemic. The principal 
 risks facing the Group for the remaining six months of the financial 
 year are reported on pages 47 to 51 of our Annual Report 2020 and 
 are summarised below: 
 
 
Safety                                       Business continuity 
 Failure to: i) meet the expectations         The major disruption of the Group's 
 of our customers to provide safe             operations, which results in our 
 products; or ii) create a place              failure to meet agreed customer 
 to work which minimises the risk             commitments and damages our prospects 
 of harm to our people, those who             of winning future orders. Disruption 
 work with us, and the environment,           could be caused by a range of events, 
 would adversely affect our reputation        for example: extreme weather or 
 and long-term sustainability.                natural hazards (for example earthquakes, 
 Climate change                               floods); political events; financial 
 We recognise the urgency of the              insolvency of a critical supplier; 
 climate challenge and have committed         scarcity of materials; loss of data; 
 to net zero carbon by 2050. The              fire; or infectious disease. The 
 principal risk to meeting these              consequences of these events could 
 commitments is the need to transition        have an adverse impact on our people, 
 our products and services to a               our internal facilities or our external 
 lower carbon economy. Failure to             supply chain. 
 transition from carbon-intensive             Competitive environment 
 products and services at pace could          Existing competitors: the presence 
 impact our ability to win future             of competitors in the majority of 
 business; achieve operating results;         our markets means that the Group 
 attract and retain talent; secure            is susceptible to significant price 
 access to funding; realise future            pressure for original equipment 
 growth opportunities; or force               or services. Our main competitors 
 government intervention to limit             have access to significant government 
 emissions.                                   funding programmes as well as the 
 Compliance                                   ability to invest heavily in technology 
 Non-compliance by the Group with             and industrial capability. 
 legislation, the terms of DPAs               Existing products: failure to achieve 
 or other regulatory requirements             cost reduction, contracted technical 
 in the heavily regulated environment         specification, product (or component) 
 in which we operate (for example,            life or falling significantly short 
 export controls; data privacy;               of customer expectations, would 
 use of controlled chemicals and              have potentially significant adverse 
 substances; anti-bribery and corruption;     financial and reputational consequences, 
 and tax and customs legislation).            including the risk of impairment 
 This could affect our ability to             of the carrying value of the Group's 
 conduct business in certain jurisdictions    intangible assets and the impact 
 and would potentially expose the             of potential litigation. 
 Group to: reputational damage;               New programmes: failure to deliver 
 financial penalties; debarment               an NPI project on time, within budget, 
 from government contracts for a              to technical specification or falling 
 period of time; and suspension               significantly short of customer 
 of export privileges (including              expectations would have potentially 
 export credit financing), each               significant adverse financial and 
 of which could have a material               reputational consequences. 
 adverse effect.                              Disruptive technologies (or new 
                                              entrants with alternative business 
 Cyber threat                                 models): could reduce our ability 
 An attempt to cause harm to the              to sustainably win future business, 
 Group, its customers, suppliers              achieve operating results and realise 
 and partners through the unauthorised        future growth opportunities. 
 access, manipulation, corruption,            Market shock 
 or destruction of data, systems              The Group is exposed to a number 
 or products through cyberspace.              of market risks, some of which are 
                                              of a macroeconomic nature (e.g. 
 Financial shock                              economic growth rates) and some 
 The Group is exposed to a number             of which are more specific to the 
 of financial risks, some of which            Group (for example, reduction in 
 are of a macroeconomic nature (for           air travel or defence spending, 
 example, foreign currency, oil               or disruption to other customer 
 price, interest rates) and some              operations). A large proportion 
 of which are more specific to the            of our business is reliant on the 
 Group (for example, liquidity and            civil aviation industry, which is 
 credit risks). Significant extraneous        cyclical in nature. 
 market events could also materially 
 damage the Group's competitiveness           Demand for our products and services 
 and/or creditworthiness and our              could be adversely affected by factors 
 ability to access funding. This              such as current and predicted air 
 would affect operational results             traffic, fuel prices and age/replacement 
 or the outcomes of financial transactions.   rates of customer fleets. 
 
 Restructuring                                Political risk 
 Failure to deliver our restructuring,        Geopolitical factors that lead to 
 including changing our behaviours            an unfavourable business climate 
 could result in: missed opportunities;       and significant tensions between 
 dissatisfied customers; disengaged           major trading parties or blocs which 
 employees; ineffective use of our            could impact the Group's operations. 
 scarce resources; and increasing             Examples include: changes in key 
 the likelihood of other principal            political relationships; explicit 
 risks occurring. This could lead             trade protectionism, differing tax 
 to a business that is overly dependent       or regulatory regimes, potential 
 on a small number of products and            for conflict or broader political 
 customers; failure to achieve our            issues; and heightened political 
 vision; non-delivery of financial            tensions. 
 targets; and not meeting investor 
 expectations.                                Talent and capability 
                                              Inability to identify, attract, 
                                              retain and apply the critical capabilities 
                                              and skills needed in appropriate 
                                              numbers to effectively organise, 
                                              deploy and incentivise our people 
                                              would threaten the delivery of our 
                                              strategies. 
 

Payments to shareholders

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 December 2021 (CREST holders must submit their election in CREST by 2.55pm). The payment of C Share redemption monies will be made on 5 January 2022 and the CRIP purchase will begin as soon as practicable after 6 January 2022.

Statement of Directors' responsibilities

The Directors confirm that, to the best of their knowledge:

-- the condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the UK;

   --    the interim management report includes a fair review of the information required by: 

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed consolidated interim financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

The Directors of Rolls-Royce Holdings plc at 11 March 2021 are listed in its Annual Report 2020 on pages 64 to 66. Subsequently, Stephen Daintith resigned as a Director on 19 March 2021 and Frank Chapman, Lewis Booth and Jasmin Staiblin resigned on 13 May 2021. Panos Kakoullis was appointed as a Director on 3 May 2021 and Anita Frew was appointed on 1 July 2021.

By order of the Board

   Warren East                                         Panos Kakoullis 
   Chief Executive                                    Chief Financial Officer 
   5 August 2021                                      5 August 2021 

Independent review report to Rolls-Royce Holdings plc

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Rolls-Royce Holdings plc's condensed consolidated interim financial statements (the "interim financial statements") in the 2021 Half Year Results of Rolls-Royce Holdings plc for the 6 month period ended 30 June 2021 (the "period").

Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

   --    the Condensed consolidated balance sheet as at 30 June 2021; 

-- the Condensed consolidated income statement and Condensed consolidated statement of comprehensive income for the period then ended;

   --    the Condensed consolidated cash flow statement for the period then ended; 
   --    the Condensed consolidated statement of changes in equity for the period then ended; and 
   --    the explanatory notes to the interim financial statements. 

The interim financial statements included in the 2021 Half Year Results of Rolls-Royce Holdings plc have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The 2021 Half Year Results, including the interim financial statements, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the 2021 Half Year Results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the 2021 Half Year Results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the 2021 Half Year Results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

London

5 August 2021

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