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| Name | Symbol | Market | Type |
|---|---|---|---|
| Rolls-r.25 | LSE:42XB | London | Bond |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
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From May 2019 to May 2024
TIDM42XB
RNS Number : 8507Z
Rolls-Royce plc
17 March 2017
17 April 2017
Rolls-Royce plc
Publication of the Annual Report 2016
Rolls-Royce plc announces that its Annual Report for the year ended 31 December 2016 is now available on the Group's website at www.rolls-royce.com
A copy of the above document has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM
In accordance with rule 6.3.5 of the Disclosure and Transparency Rules, we set out below the following extracts from the Annual Report in unedited text. Page and note references in the text below refer to page numbers and note numbers in the Annual Report 2016.
Rolls-Royce plc has the following listed securities:
ROLLS-ROYCE PLC 6.750% GUARANTEED NOTES DUE 30/04/2019; FULLY PAID; (REPRESENTED BY NOTES TO BEARER OF GBP50,000 EACH AND INTEGRAL MULTIPLES OF GBP1,000 IN EXCESS THEREOF UP TO AND INCLUDING GBP99,000) ISIN XS0426014899
ROLLS-ROYCE PLC 2.125% NOTES DUE 18/06/2021; FULLY PAID; (REPRESENTED BY NOTES TO BEARER OF EUR100,000 AND INTEGRAL MULTIPLES OF EUR1,000 IN EXCESS THEREOF UP TO AND INCLUDING EUR199,000) ISIN XS0944838241
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ROLLS-ROYCE PLC 2.375% NOTES DUE 14/10/2020; FULLY PAID; (REPRESENTED BY NOTES TO BEARER OF US$200,000 AND INTEGRAL MULTIPLES OF US$1,000 IN EXCESS THEREOF) ISIN US77578JAA60
ROLLS-ROYCE PLC 3.625% NOTES DUE 14/10/2025; FULLY PAID; (REPRESENTED BY NOTES TO BEARER OF US$200,000 AND INTEGRAL MULTIPLES OF US$1,000 IN EXCESS THEREOF UP) ISIN US77578JAB44
Enquiries:
Investor relations:
John Dawson, Director of Investor Relations
Rolls-Royce plc
Tel: +44 (0)207 227 9087 jcdawson@rolls-royce.com
Rolls-Royce is a pre-eminent engineering company focused on world-class power and propulsion systems.
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Financial Highlights
--------------------------------------------------
2016 2015
----------------------- ------------ -----------
Order book GBP79,810m GBP76,399m
----------------------- ------------ -----------
Free cash flow GBP120m GBP166m
----------------------- ------------ -----------
Underlying* revenue GBP13,783m GBP13,354m
----------------------- ------------ -----------
Reported revenue GBP14,955m GBP13,725m
----------------------- ------------ -----------
Underlying* profit GBP813m GBP1,432m
before tax
----------------------- ------------ -----------
Reported (loss)/profit GBP(4,636)m GBP160m
before tax
----------------------- ------------ -----------
Net cash GBP(225)m GBP(111)m
----------------------- ------------ -----------
* Underlying explanation is in note 2 on page 78
All figures in the narrative of the Strategic Report are underlying unless otherwise stated
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and guidance may be updated from time to time. This report is intended to provide information to shareholders, and is not designed to be relied upon by any other party or for any other purpose, and the Company and its Directors accept no liability to any other person other than that required under English law. Latest information will be made available on the Group's website. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments.
Group at a glance
Group
The Group is organised into five customer-facing businesses: Civil Aerospace, Defence Aerospace, Power Systems, Marine and Nuclear.
Underlying revenue:
GBP13,783m
-------------------------
Underlying profit before
tax: GBP915m
-------------------------
Underlying revenue mix:
-------------------------
Civil Aerospace 51%
-------------------------
Defence Aerospace 16%
-------------------------
Power Systems 19%
-------------------------
Marine 8%
-------------------------
Nuclear 6%
-------------------------
Order book: GBP79.8bn
------------------------ ----------
Gross R&D expenditure: GBP1.3bn
------------------------ ----------
Patents applied
for: 672
------------------------ ----------
Countries: 50
------------------------ ----------
Engineers (year
end): 16,526
------------------------ ----------
Employees (year
average): 59,900
------------------------ ----------
Civil Aerospace Defence Aerospace Power Systems Marine Nuclear
------------------------------------------ ---------------- ------------------ -------------- ---------- --------
Underlying revenue: GBP7,067m GBP2,209m GBP2,655m GBP1,114m GBP777m
------------------------------------------ ---------------- ------------------ -------------- ---------- --------
Underlying profit/(loss) before GBP367m GBP384m GBP191m GBP(27)m GBP45m
financing:
------------------------------------------ ---------------- ------------------ -------------- ---------- --------
Underlying revenue mix:
------------------------------------------ ---------------- ------------------ -------------- ---------- --------
OE revenue: 48% 40% 68% 57% 46%
------------------------------------------ ---------------- ------------------ -------------- ---------- --------
Services revenue: 52% 60% 32% 43% 54%
------------------------------------------ ---------------- ------------------ -------------- ---------- --------
2016 has been an important year as we accelerated the transformation of Rolls-Royce."
Warren East Chief Executive
Chief Executive's Review
Introduction
Overall, we have performed ahead of our expectations for the year as a whole while delivering significant changes to our management and processes. We increased our large aero-engine production output by 25%, supported the needs of our customers, and made good technical progress in the final stages of the development of the three
new large engines, due to enter service over the next twelve months. At the same time we have improved manufacturing lead times for our key Civil Aerospace programmes, an important goal as we ramp up production over the next few years. Progress with our transformation programme was also better than expected, delivering over GBP60m of in-year benefits compared to our initial target of between GBP30-50m. Overall, the performance improvements have helped offset a number of changing trading conditions and higher research & development (R&D) spend.
This Strategic Report describes the business in depth and provides further information on our financial position and business performance.
-Review of 2016
How the Group performed in a year of significant change
-Priorities for 2017
Our clear focus and priorities for developing the business
-Business model
How we deliver value from our products and services
-Financial summary
Summary of our 2016 financial performance
-Business review
Reviewing each of our five customer-facing businesses; with analysis of their markets
-Financial review
Explaining our financial performance in 2016 in detail
-Sustainable business
Setting out the approach we take to ensure we are a sustainable business
-Key performance indicators
How financial and non-financial indicators are used to measure the Group
-Principal risks
Outlining our main risks together with our risk management process
REVIEW OF 2016
Performance in 2016
In 2015, we identified a number of significant headwinds that would hold back performance in 2016, including mixed market conditions and the revenue and cost impacts of some key product transitions.
Looking first at our markets, demand for our large Civil Aerospace products and services remained robust, despite some specific weaknesses for service demand in respect of older engines. At the same time, demand for new corporate jets softened, as did the aftermarket for the regional jets powered by our AE 3007 engines. Defence Aerospace markets held up well with a steady demand for our aftermarket services in particular. Offshore oil & gas markets for our Marine business continued to suffer from the consequences of low oil prices. Alongside weaker industrial demand, this also impacted Power Systems.
Other known headwinds transpired broadly as expected, led by lower Trent 700 volumes and prices, legacy civil large engine aftermarket reductions and weakness in marine markets. At the same time, we have continued to invest in products and services to support our customers and reinforce the long-term strength of our order book, valued at the end of the year at around GBP80bn.
Against this backdrop, Group underlying revenue reduced by 2% on a constant currency basis with reductions in both original equipment and aftermarket revenues, led by the Marine business where revenues were down 24%. More details are included in the Financial summary on page 14 and the Business reviews on pages 16 to 33.
Compared to 2015, underlying profit before finance charges and tax was 45% lower at GBP915m. On this basis, Civil Aerospace delivered GBP367m (2015: GBP812m); Defence Aerospace delivered GBP384m (2015: GBP393m); Power Systems delivered GBP191m (2015: GBP194m); Marine generated a loss of GBP27m (2015: GBP15m profit) and Nuclear delivered GBP45m (2015: GBP51m excluding the GBP19m R&D credit benefits highlighted in 2015). More detail on each business is
included in the Business review.
After underlying financing costs of GBP102m (2015: GBP60m including a GBP34m gain from hedging overseas dividends), underlying profit before tax was GBP813m (2015: GBP1,432m).
Since the EU referendum at the end of June, the value of sterling relative to the US dollar has fallen significantly. As a result, we have recognised a GBP4.4bn in-year non-cash mark-to-market valuation adjustment for our currency hedge book as part of our reported financing costs of GBP(4,677)m (2015: GBP(1,341)m). While reported revenue of GBP14,955m (2015: GBP13,725m) was unaffected by this adjustment, it impacted reported profit. In addition, our reported results also included a GBP671m charge for financial penalties from agreements with investigating authorities in connection with historic bribery and corruption involving intermediaries in a number of overseas markets. Our reported loss before tax was GBP(4,636)m (2015: GBP160m profit). After an underlying tax charge of GBP261m (2015: GBP351m), underlying profit after tax for the year was GBP552m (2015: GBP1,081m). With an average 1,832m shares in issue, underlying earnings per share were 30.1p (2015: 58.7p).
After a reported tax credit of GBP604m (2015: GBP76m charge), the reported loss for the year was GBP(4,032)m (2015: GBP84m profit).
A full reconciliation of underlying to reported profit can be found in note 2 on page 81.
Free cash inflow in the year was GBP120m (2015: inflow of GBP166m), better than expected, reflecting strong cash collections from a number of key customers at the very end of the period and an improvement in underlying working capital performance. While some of this positive variance is a timing impact and likely to reverse early
in 2017, improved efficiencies should drive a level of sustainable benefit.
A more detailed review of financial performance is included in the Financial summary on page 14 and the Financial review on page 34.
Agreement reached with various investigating authorities
In mid-January 2017, we announced that we had entered into Deferred Prosecution Agreements (DPAs) with the UK's Serious Fraud Office (SFO) and the US Department of Justice (DoJ) and completed a Leniency Agreement with Brazil's Ministério Público Federal (MPF). These agreements relate to bribery and corruption involving
intermediaries in a number of overseas markets, concerns about which we passed to the SFO from 2012 onwards following a request from the SFO.
The agreements are voluntary and result in the suspension of prosecution provided that the Company fulfils certain requirements, including the payment of financial penalties. The agreements will result in the total payment of around GBP671m. This is recognised within our 2016 accounts.
Under the terms of the DPA with the SFO, we agreed to pay GBP497m plus interest under a schedule lasting up to five years, plus a GBP13m payment in respect of the SFO's costs. We also agreed to make payments to the DoJ
totalling around US$170m and to the MPF totalling around US$26m. As a result, the total payment in 2017 is expected to be GBP293m (at prevailing exchange rates) with some elements having already been paid.
Payment schedule SFO DoJ MPF Total 2017 GBP119m* +GBP13m US$170m US$26m GBP293m* 2019 GBP100m* GBP100m* 2020 GBP130m* GBP130m* 2021 GBP148m* GBP148m*
It is our intention that these financial penalties will be paid from existing facilities and an improved underlying cash flow performance in the longer term.
Our focus on clear priorities for 2016 has helped deliver positive outcomes
Our 2016 priorities were threefold: to strengthen our focus on engineering, operational and aftermarket excellence
to drive long-term profitable growth; to deliver a strong start to our transformation programme; and to start rebuilding trust and confidence in our long-term growth prospects.
Increased our focus on engineering, operational and aftermarket excellence
Over the last few years, we have invested significantly in new product development and manufacturing capabilities. In engineering, in 2016 we invested over GBP1.3bn in gross R&D. The net investment of GBP937m was higher than 2015 and our expectations for 2016. A large proportion of this was focused on Civil Aerospace to support delivery of three new engine programmes which will enter service over the next 12 months: the Trent 1000 TEN
(Thrust, Efficiency, and New technology) the Trent XWB-97 and the Trent 7000. Supporting these investments was a Group-wide engineering efficiency programme, known internally as E3, which has formed part of our overarching
transformation programme. Within the engineering team, this change programme has focused on delivering a lean, resilient, lower-cost engineering function through reducing complexity, improving work prioritisation and simplifying
management structures.
In operations, over GBP1.4bn has been invested in new capital equipment since 2011 (GBP225m in 2016) in transforming our manufacturing footprint across the business.
In Civil Aerospace, these investments in state-of-the-art manufacturing facilities will enable us to meet the significant growth in engine deliveries required to match customer demand for our new Trent engines, particularly the Trent 1000, Trent XWB and Trent 7000. At the same time, the investments lower unit costs and reduce the
net cash outflows related to engine production. In Defence Aerospace, the investments have focused on modernisation of facilities such as in Indianapolis to reduce costs and improve delivery performance of both original equipment and spares to support higher standards of customer service. In Marine, new facilities will contribute to a more efficient and scalable manufacturing capability that will address the demands of our customers today, while
markets are weak, and tomorrow, when they have recovered.
The benefits of these investments are starting to be seen in improved delivery performance, lower assembly lead times, lower unit costs and increased capacity. For example, in Civil Aerospace, large engine deliveries increased by over 15% to over 355 and capacity is now in place to deliver around 500 engines in 2017; an increase of over
a third. The focus on improving aftermarket excellence has been driven business-by- business, by customer needs as well as through the broader transformation activities. In Civil Aerospace for example, this has resulted in a progressive change to the structure of our engine overhaul services, our commercial TotalCare(R) and time and materials product offerings, and management structures. These have enabled us to respond to a changing market
and maturing installed engine portfolio by adapting our resources to focus on areas of greatest value to the Group and our customers - such as supporting airframe transitions and rolling out SelectCare(TM) and TotalCare Flex(R) offerings and preparing for the launch of LessorCare(TM). In Defence Aerospace, the focus has been driven by the
customer need for more embedded support. This has included increasing our service presence at key customer facilities in the UK and overseas, improving response time and resolving a greater proportion of issues on-wing.
Transformation programme ahead of expectations
In November 2015, we announced a major transformation programme focused on simplifying the organisation, streamlining senior management, reducing fixed costs and adding greater pace and accountability to decision making. The initial target was to deliver incremental gross cost savings of between GBP150m-GBP200m per annum, with
the full benefits accruing from the end of 2017 onwards.
Against these initial objectives, which included a target of delivering in-year savings of GBP30m-50m in 2016, we have made a better than expected start. In-year savings in 2016 were above target, at over GBP60m. During the year, we also identified significant opportunities to drive sustainable cost savings from the business. As a result, we expect the in-year savings that can be delivered in 2017 to be between GBP80m-GBP110m and we are on track to achieve
the top end of the target for the programme as a whole, targeting a run rate of over GBP200m by the end 2017.
At the same time, other restructuring initiatives have delivered their expected benefits. These included programmes
to improve operational efficiency in Civil Aerospace and Defence Aerospace (announced in 2014) and Marine
(announced in May 2015), as well as a back office cost saving programme in Marine (announced in October 2015).
In December 2016, an additional reorganisation of the Marine business was announced to further rationalise
manufacturing activities in Scandinavia, targeting incremental annualised savings of GBP50m from mid-2017. Reflecting our cautious near-term outlook for the Marine business, we have also taken an exceptional charge of around GBP200m for the impairment of goodwill, principally associated with the acquisition of Vickers in 1999.
In summary, expected ongoing benefits of all current restructuring programmes initiated since 2014 will reduce costs by around GBP400m by the end of 2018, compared to a 2014 baseline.
In aggregate, ongoing divisional restructuring programmes together with the new programme announced in
November 2015 are expected to reduce costs by around GBP400m by the end of 2018, including the full benefit of the Marine restructuring announced in December 2016. The cost reduction breaks down into incremental legacy Civil Aerospace and Defence Aerospace restructuring savings of GBP80m, Marine savings of now around GBP110m and the transformation programme savings of around GBP200m.
Rebuilding trust and confidence; steady year with few major surprises
2016 out-turned ahead of expectations with only a few unexpected developments from an operational perspective, despite the challenges presented by a changing macro-environment and some known weaknesses in the business. The expected headwinds in Civil Aerospace and Marine transpired largely as forecast. In addition, the benefits of outperformance on transformation savings and foreign exchange hedging more than offset some additional programme costs in Civil Aerospace and a range of other smaller one-off items. As a result, external expectations remained largely unchanged throughout the year.
The introduction of the new revenue reporting standard, IFRS 15 Revenue from Contracts with Customers, will have a significant impact on how we present our revenues and profits, particularly for Civil Aerospace. As a result, a combination of significant in-house analysis and appropriate progressive communication was undertaken, culminating in a capital markets' event in November. This set out in some detail how we now expect the new
standard to change the presentation of our financial results, illustrated through a re-presentation of 2015 performance. All the materials from this investor event were shared at the time and are available on the
Company's website at www.rolls-royce.com.
Priorities for 2017 broadly unchanged; additional focus on developing our long-term vision and strategy
Overall, the priorities for 2017 are largely unchanged from those set out in 2016. We will continue to invest in strengthening our focus on engineering, operational and aftermarket excellence to drive long-term
profitable growth. At the same time, 2017 will be an important year to drive incremental savings from our
transformation programme.
At our capital markets' event in November 2016 we set out how our focus is turning towards the Group's long-term goals. Over the next few months, the senior leadership team will be concluding the review of our strengths and investment opportunities to define an appropriate vision for the business and the best way we can deliver sustainable shareholder value. Conclusions from this work will be shared during 2017.
Rebuilding trust and confidence in the Group and its long-term prospects remains a key priority for the management team.The focus remains on progressive, effective communication combined with strong operational delivery. While we have made a steady start, more remains to be done. The addition of new management and a
renewed focus within the business leadership teams, with clear goals and stronger accountabilities, should provide a strong platform for further progress in 2017.
Acquisition of outstanding 53.1% stake in Industria de Turbo Propulsores SA (ITP)
We were notified in early July that SENER Grupo de Ingeniería SA (SENER) had decided to exercise the put option in respect of its 53.1% stake in ITP. This decision provides us with the opportunity to effectively consolidate several key large engine risk and revenue sharing arrangements (RRSAs) into the business, strengthen our position on a number of important defence aero engine platforms and will enable us to enjoy greater benefits from future aftermarket growth.
Under the shareholder agreement, the consideration of EUR720m will be settled over a two-year period following completion in eight equal, evenly-spaced instalments. The agreement allows flexibility to settle up to 100% of the consideration in the form of Rolls-Royce shares. Final consideration as to whether the payments will be settled in
cash, shares or cash and shares will be determined by Rolls-Royce during the payment period. Completion remains subject to regulatory clearances and is expected in mid-2017.
The acquisition of ITP strengthens our position on Civil Aerospace large engine growth programmes by capturing
significant additional value from its long-term aftermarket revenues, including the high volume Trent 1000 and Trent XWB engines, where ITP has played a key role as a participant in RRSAs. It also enhances the Group's own manufacturing and services capabilities and adds value to the Defence Aerospace business, particularly on the
TP400 and EJ200 programmes.
Further details of its impact on the Group will be made available on completion of the acquisition.
Outlook for 2017
After a better than expected 2016, year-on-year incremental progress will be modest. Our medium-term trajectory for revenue, profit and free cash flow remains unchanged. On a constant currency basis, Group revenue for 2017 should be marginally higher than that achieved in 2016, despite expected further weakening in offshore oil & gas markets in Marine. Underlying improvements in performance should be driven largely by transformation savings and free cash flow should benefit from increased aftermarket cash revenues in Civil Aerospace, further improvements in working capital efficiency and cost savings. As a result, we expect a modest performance improvement overall and we are targeting free cash flow to be similar to that achieved in 2016. Individual outlooks
are provided in the Business review starting on page 16.
Looking further ahead: long-term outlook remains strong
We continue to see value in the underlying strengths of our business: the underlying growth of our long-term markets; the quality of our mission-critical technology and services; and the strength of customer demand for these which is reflected in our strong order book. While we have near-term challenges and some core execution priorities, these constants provide us with confidence in a strong, profitable and cash-generative future
The successful roll-out of new engines, led in particular by the Trent XWB, Trent 1000 and Trent 7000, together with a growing aftermarket, is expected to drive significant revenue growth over the coming ten years as we build towards a 50% plus share of the installed widebody passenger market. As a result, we remain confident that the important investments we are making to modernise our production will create a strong platform to drive customer
service and strong cash flows, together with the current investments in new products and the streamlining of our existing product portfolios to ensure we are providing high-value, cost-competitive products into our target end markets.
Group Trading Summary
The commentary in this section relates to the Group's operating segments and so, consistent with the requirements of accounting standards, is provided on an underlying basis which is the measurement basis used by the Group in its segmental reporting.
Underlying Foreign
GBPm 2015* Change** Exchange*** 2016
Order book 76,399 3,329 82 79,810
Underlying revenue 13,354 (296) 725 13,783
Change -2% +5% +3%
Underlying OE revenue 6,724 (112) 415 7,027
Change -2% +6% +5%
Underlying services
revenue 6,630 (184) 310 6,756
Change -3% +5% +2%
Underlying gross
margin 3,203 (577) 197 2,823
Gross Margin % 24.0% -390 bps 20.5%
Commercial and administrative
costs (1,025) (71) (67) (1,163)
Restructuring costs (39) 41 (2) -
Research and development
costs (765) (47) (50) (862)
Joint ventures and
associates 118 (11) 10 117
Underlying profit
before financing 1,492 (665) 88 915
Change -45% +6% -39%
Underlying operating
margin 11.2% -480 bps 6.6%
*2015 figures have been restated as a result of GBP21m of costs previously reported in 'cost of sales', being reclassified as 'other commercial and administrative costs' to ensure consistent treatment with 2016;
** Order book underlying change includes GBP2.1bn increase from a change to our long term US dollar planning rate;
*** Translational foreign exchange impact
Order book and order intake
During the year, our order book increased by GBP3.3bn to GBP79.8bn, led by Civil Aerospace, which, alongside strong order intake, also benefited from a GBP2.1bn uplift from a five cent decrease to our long-term US dollar planning rate. Order intake in our Marine business was poor, largely as a result of the continuing weak offshore market. Overall,
orders were also lower in Defence Aerospace, Power Systems and Nuclear, although we view the prospects for these businesses as unchanged, reflecting long-term orders won in previous years.
Underlying trading
Underlying Group revenue declined 2% in 2016 compared to 2015 on a constant currency basis, reflecting declines in both original equipment revenue (down 2%) and services (down 3%) and driven almost entirely by Marine. By business on a constant currency basis, Civil Aerospace revenue was unchanged, Defence Aerospace revenue increased 1%, Power Systems revenue decreased 1%, Marine revenue decreased 24% and Nuclear revenue
increased 11%.
Underlying profit before financing of GBP915m (2015: GBP1,492m) was 45% lower on a constant currency basis, led by a significant reduction in Civil Aerospace profit. This reflected the previously communicated volume and margin reductions on link-accounted Trent 700 engines, reduced business jet original equipment volumes, reduced large engine utilisation and increased technical costs for large engines. In addition, reported 2015 numbers included one-off benefits from a methodology change in respect of risk assessment and reversal of impairments and provisions in respect of a Trent 1000 launch customer, totalling GBP189m and GBP65m respectively. These were partially offset by
strong lifecycle cost improvements on installed engines and some provision releases. Profit in Defence Aerospace at GBP384m was 8% lower on a constant currency basis largely reflecting additional costs related to the TP400 programme. Power Systems was down 14% year-on-year principally due to volume reduction and adverse changes to product mix.
Marine profit was sharply lower led by continuing weakness in the offshore markets. Nuclear profit was 37% lower
than 2015 due to a lower margin mix in submarine projects.
Underlying gross margin was GBP2,823m, down 390 basis points to 20.5% largely reflecting the lower margins in Civil
Aerospace, Defence Aerospace and Marine. Commercial and administrative costs include accruals for employee incentive schemes in line with our current policies. Given the good performance relative to original plan, these are higher than in the prior year. This contributed to commercial and administrative costs being GBP71m higher on a constant currency basis year-on-year.
The R&D charge increased by 6% over 2015 on a constant currency basis, reflecting increased charges in Civil Aerospace and the adverse year-on-year effect of the favourable R&D credit adjustment taken in 2015 in Nuclear.
Underlying restructuring charges reduced by GBP41m reflecting the lower level of underlying restructuring as most costs in 2016 were taken as exceptional due to the nature of the restructuring activities within the Group. The exceptional charge in relation to these programmes was GBP129m in 2016. This included GBP92m for the transformation
programme launched in November 2015, which delivered in-year benefits of over GBP60m in 2016. The underlying tax rate for 2016 increased to 32.1% (2015: 24.5%). The primary reasons for the increase are the non-recognition of deferred tax assets on losses in Norway, which reflects the current uncertainty in the oil & gas markets, and a different profit mix with more profits arising in countries with higher tax rates.
Reported results
Reported results are impacted by the mark-to-market adjustments driven by movements in USD:GBP and EUR:GBP exchange rates over the year. In addition, we recognised the GBP671m charge related to the agreements reached in respect of regulatory investigations, a goodwill impairment charge of GBP219m largely reflecting a more
cautious outlook for our Marine business and GBP129m of exceptional restructuring cost. As a result, the reported loss before tax was GBP(4,636)m (2015: a profit of GBP160m).
Free cash flow
Free cash inflow in the year was GBP120m (2015: GBP166m), better than expected, reflecting strong cash collections from a number of key customers at the very end of the period and an improvement in underlying working capital performance. This helped offset the lower profit before tax and higher expenditure on property, plant and
equipment and intangibles. The latter reflects the increased capital investment in new manufacturing capacity, higher capitalised R&D, mainly related to the Trent 1000 TEN and higher certification costs on the Trent
XWB-97. More details on the movement in trading and free cash are included in the Funds flow section of the Financial review.
While some of this positive variance is a timing impact and likely to reverse early in 2017, improved efficiencies should drive a level of sustainable benefit.
Net debt and foreign currency
The Group is committed to maintaining a robust balance sheet supporting a healthy, investment-grade credit rating for its parent company. We believe this is important when selling high-performance products and support packages which will be in operation for decades. Standard & Poor's updated its rating in January 2017 to BBB+ from A-/negative outlook and Moody's maintained a rating of A3/stable.
During 2016, the Group's net debt position increased from GBP111m to GBP225m, reflecting the GBP120m free cash inflow, GBP154m for the increased investment in our approved maintenance centre joint ventures following receipt of regulatory approval for the changes to the joint venture agreements in June 2016 and movements on the balances with the parent company. In April, we increased our revolving credit facilities by GBP500m to GBP2bn to provide additional liquidity.
The Group hedges the transactional foreign exchange exposures to reduce volatility to revenues, costs and resulting margins. The hedging policy sets maximum and minimum cover ratios of hedging for net transactional foreign exchange exposure. It allows us to take advantage of attractive foreign exchange rates, whilst remaining
within the cover ratios. A level of flexibility is built into the hedging instruments to manage changes in exposure from one period to the next and to reduce volatility by smoothing the achieved rates over time.
The most significant exposure is the net US dollar income which is converted into GBP (currently approximately $5bn per year and forecast to increase significantly by 2021). Following the fall in the value of sterling, which resulted from the outcome of the EU referendum, additional cover has been taken out to benefit from the
favourable rates. This has resulted in an increase in the nominal value of the hedge book to approximately $38bn at the end of 2016 (end 2015: $29bn) together with a reduction in the average rate in the hedge book to GBP/$1.55 (end 2015: GBP/$1.59). The movement in the average achieved rate year-on-year was around two and a half cents, providing a net underlying Group benefit, after balance sheet effects (the movement in achieved rate also affects
creditor and debtor balances of hedged cash flows), of around GBP20m.
Operational Review: Civil Aerospace
Underlying Foreign
GBPm 2015 Change* Exchange** 2016
Order book 67,029 4,395 2 71,426
Engine deliveries 712 (63) 649
Underlying revenue 6,933 (27) 161 7,067
Change - +2% +2%
Underlying OE revenue 3,258 14 85 3,357
Change - +3% +3%
Underlying services
revenue 3,675 (41) 76 3,710
Change -1% +2% +1%
Underlying gross
margin 1,526 (397) 56 1,185
Gross Margin % 22.0% -570 bps 16.8%
Commercial and
administrative costs (296) (43) (3) (342)
Restructuring costs (7) (4) - (11)
Research and development
costs (515) (34) (19) (568)
Joint ventures
and associates 104 (8) 7 103
Underlying profit
before financing 812 (486) 41 367
Change -60% +5% -55%
Underlying operating
margin 11.7% -700 bps 5.2%
* Order book underlying change includes GBP2.1bn increase from a change to our long term US dollar planning rate;
** Translational foreign exchange impact
Financial overview
Overall, underlying revenue for Civil Aerospace was unchanged (up 2% at actual exchange rates). OE revenue
was unchanged, with increases from higher volumes of large engines being offset by the decline in business jet
engines and V2500 modules. Aftermarket revenue was down 1% despite strong growth from our in-production engines.
%
of Underlying Underlying Foreign % of
Change
GBPm 2015 whole Change % Exchange Whole 2016
Original Equipment 3,258 48% 14 - 85 48% 3,357
Large engine:
linked and other 1,570 23% 32 +2% 2 23% 1,604
Large engine:
unlinked installed 504 7% 237 +47% 1 10% 742
Business aviation 903 14% (228) -25% 82 11% 757
V2500 281 4% (27) -10% - 4% 254
Service 3,675 52% (41) -1% 76 52% 3,710
Large engine 2,371 34% (84) -4% 2 32% 2,289
Business aviation 425 6% (13) -3% 40 6% 452
Regional 360 5% (52) -14% 34 5% 342
V2500 519 7% 108 +21% - 9% 627
OE revenue from Large engine: linked and other* was up 2% reflecting increased volumes of Trent 900s and a higher number of spare Trent XWB engines, partly offset by Trent 700 volume and price reductions, ahead of the introduction of the Trent 7000 for the Airbus A330neo. Sales of spare engines to joint ventures, included in Large engine: linked and other*, generated revenue of GBP288m (2015: GBP189m). * See table on page 18.
OE revenue from Large engine: unlinked installed* increased 47%, led by higher volumes of Trent XWBs.
Large engine service revenue reflected double digit growth from our in-production engines which more than offset the reduction from older engines, including the expected lower year-on-year utilisation of Trent 500 and Trent 800 engines. Time and material revenue reduced, as a result of fewer overhauls of engines across the out-of-production fleet. Contract accounting effects within service revenue in 2016 were significantly lower than prior
year. As a result, while there was a small foreign exchange improvement in 2016, underlying service revenue from large engines was down 4%. Adjusting for contract accounting effects, service revenue from large engines would have been up 2%.
Revenue from business aviation* OE engine sales was, as expected, lower, particularly for the BR710 engines, reflecting general market weakness and a transition to newer non Rolls-Royce powered platforms. Volumes of our newer BR725 engine, which powers the Gulfstream G650 and G650ER, were stable. Overall, business aviation* OE revenues declined 25% while aftermarket revenue was slightly down. Service revenue from our regional *jet engines declined 14%, reflecting retirements and reduced utilisation of relevant fleets by North American operators in particular.
On the V2500* programme, which powers aircraft including the Airbus A320, revenue from OE modules declined 10% reflecting the production slow-down as Airbus transitions to the A320neo, powered by another engine provider. However, V2500* service revenues were 21% higher, reflecting price escalation on flying hour payments
together with increased overhaul activity. Overall gross margins for Civil Aerospace were 16.8% (2015: 22.0%), declining GBP397m from 2015 on a constant currency basis. The main headwinds were as forecast at the start of the year: OE reductions to the Trent 700 programme; business aviation engines and V2500 modules; reduced utilisation and fewer overhauls of our out-of-production Trent 500 and Trent 800 and RB211 engines; and the declining regional aftermarket. In addition, we also incurred programme charges of around GBP30m for engines still
in development. These were partially offset by the release, after accounting and legal review, of accruals related to the termination in prior years of intermediary services, totalling GBP53m (2015: GBPnil). Gross margin from spare engine sales to joint ventures contributed GBP97m (2015: GBP67m).
The in-year net benefit from long-term contract accounting adjustments totalled GBP90m (2015: total benefit of GBP222m, which included a GBP189m one-off benefit associated with the refinement of our methodology for risk assessment of future revenue). The GBP90m included a GBP217m benefit from lifecycle cost improvements (2015: benefit of GBP140m). We also recognised in this period a GBP35m benefit from a five cent change (2015: GBPnil) to our estimated long-term US dollar to sterling exchange rate to bring our own planning rate within updated external benchmark long-term forecast data. These benefits were offset by technical costs of GBP98m (2015: GBP24m) for large engines, including the Trent 900, relating to the need for increased shop visits in the short term, and the Trent 700, where we are upgrading the engine management system, together with a charge of GBP64m (2015: GBP83m), reflecting other operational changes.
The year-on-year change was also impacted by a one-off GBP65m write-back in 2015 of a previously recognised impairment of contractual aftermarket rights (CARs) for sales to a launch customer and the release of a related provision; in 2016 these sales were capitalised as CARs.
Costs below gross margin were GBP89m higher than the previous year at GBP818m on an underlying basis. Within this, R&D charges of GBP568m were GBP34m higher, reflecting higher spend on key programmes, particularly in respect of the Trent 7000 which are being expensed ahead of capitalisation and lower development cost contributions from risk and revenue sharing partners, partly offset by increased R&D capitalisation on the Trent 1000 TEN.
Underlying commercial and administrative costs were GBP43m higher than 2015 reflecting increased employee incentive charges. Underlying restructuring costs of GBP11m were GBP4m higher than 2015 and profits from joint
ventures and associates were down GBP8m.
As a result, profit before financing and tax was 55% down, reflecting a combination of lower overall gross margins, higher commercial and administrative, R&D and restructuring costs and reduced joint venture and associate profits. Taking account of foreign exchange effects, underlying profit before financing and tax was GBP367m (2015: GBP812m).
Trading cash flow
Trading cash flow before working capital movements of GBP22m declined year-on-year by GBP462m, driven by a reduction in underlying profit before financing of GBP445m and increased property, plant and equipment additions. There were also increased certification costs driven by the Trent XWB-97 and higher R&D capitalisation of the Trent 1000 TEN development costs, offset in part by other timing differences including provision movements.
GBPm 2016 2015 Change Underlying profit before financing 367 812 (445) Depreciation and amortisation 491 410 81 Sub-total 858 1,222 (364) CARs additions (208) (161) (47) Property, plant, equipment and other intangibles (739) (502) (237) Other timing differences* 111 (75) 186 Trading cash flow pre-working capital movements 22 484 (462) Net long-term contract debtor movements (246) (406) 160 Other working capital movements 267 (78) 345 Trading cash flow** 43 - 43
* Includes timing differences between underlying profit before financing and cash associated with: joint venture profits less dividends received; provision charges higher /(lower) than cash payments; non-underlying cash and profit timing differences (including restructuring); and, financial assets and liabilities movements including the effect of foreign exchange movements on non-cash balances.
** Trading cash flow is cash flow before: deficit contributions to the pension fund; taxes; payments to shareholders; foreign exchange on cash balances; and, acquisitions and disposals.
The overall trading cash flow improvement of GBP43m resulted largely from a significant year-on-year improvement in working capital, due mainly to differences in the timing of payments to suppliers and increased deposits, offset in part by an increase in inventory. In addition, reflecting the lower profits recorded on our linked engines such as the Trent 700, net long-term contract debtor additions were also lower.
TotalCare net assets and contractual aftermarket rights
TotalCare net assets increased in 2016 by GBP230m (2015: GBP406m) to GBP2.44bn reflecting accounting for new linked engines of GBP432m (2015: GBP521m), contract accounting adjustments taken in the year of GBP90m (2015: GBP222m) offset by the cash inflows and net other items of GBP(292)m (2015: GBP(337)m). It should be noted that the GBP230m net asset
increase is different from the GBP246m used in the trading cash flow above because of foreign exchange effects on evaluating TotalCare net debtor balance movements.
The CARs balance increased by GBP169m (2015: increase of GBP156m) to GBP574m reflecting higher sales of unlinked Trent XWB engines partly offset by engine cost improvements.
Investment and business development
Order intake of GBP14.1bn in 2016 for Civil Aerospace was GBP1.3bn higher than the previous year. The order book closed at GBP71.4bn, up GBP4.4bn or 7% from 2015, which included a GBP2.1bn benefit from the change in the long-term planning foreign exchange rate discussed previously. Excluding this, the order book was up 3%.
Significant orders in 2016 included a US$2.7bn order from Norwegian for Trent 1000 engines, an order from Garuda Indonesia worth $1.2bn for Trent 7000 engines and a $900m order from Virgin Atlantic for Trent XWB. All of these include the provision of long-term TotalCare engine services.
Foundations for future growth are built from our investment in engineering excellence
During the year, we committed resources in order to ensure we made significant progress across all key engineering programmes in 2016. The Trent 1000 TEN engine undertook its first test flight in March and received its European Aviation Safety Agency (EASA) certification on 11 July. The Trent 1000 TEN will power all variants of
the Boeing 787 Dreamliner family and will power the first flight of the 787-10 in 2017.
In November, the latest version of the Trent XWB, the higher thrust -97 engine, successfully powered the first flight of the Airbus A350-1000 in Toulouse. The Trent 7000 engine, which will exclusively power the Airbus A330neo, undertook ground testing for the first time and we started assembly of the first flight test engines.
In respect of future technologies, the Advance3 large engine demonstrator is proceeding well. The engine will test the new core architecture for future engine families and other key technologies such as lean burn combustion, ceramic matrix composites (CMC), CastBond (specialist turbine manufacturing) plus additive layer manufacturing (or 3D printing). It is currentlyin development at our Bristol, UK, facility with all core modules advancing well.
In September, we successfully ran the world's most powerful aerospace gearbox for the first time under the joint venture Aerospace Transmission Technologies (ATT). The gearbox is designed to reach up to 100,000 horsepower and is a significant step in the development of the new UltraFan engine technology.
Supporting our commitment to research and development, we also announced a US$30m expansion into a new facility in Cypress, California, that will be dedicated to research and development of ceramic matrix composite materials and processes for use in next generation aircraft engine components.
Investing in new aerospace supply chain capabilities to help drive operational excellence
In January 2016, we announced plans to invest more than GBP30m at our site in Washington, Tyne & Wear, UK, creating a new facility to manufacture a range of aerospace discs for in-service engines. The new facility is expected to be fully operational in 2018 and will have the capacity to manufacture well over 1,500 fan and turbine discs a year for use in a wide range of existing engines.
The construction of a GBP50m extension to our wide-chord fan blade facility in Barnoldswick, UK, started in December. The expanded facility will be able to manufacture 6,000 large Trent fan blades a year, almost twice its current capacity. We also announced the creation of a centre of excellence in structures & transmissions at the same site. The new centre, supported by GBP20m of investment, will manufacture many of the complex structures that feature in all Rolls-Royce aero engines.
Good progress strengthening our aerospace aftermarket service offering
We have continued to invest in our service capabilities to support our customers with state-of-the-art facilities and relevant products and services, particularly within our portfolio of TotalCare offerings.
During the year, we completed changes to three Approved Maintenance Centre (AMC) joint ventures. This included investing GBP154m to increase our stake in both Hong Kong Aero Engine Services Limited (HAESL) and Singapore Aero Engine Services Pte Limited (SAESL) to 50%. These AMCs support our strategy to offer a competitive, capable and flexible Trent service network to meet the changing needs of customers across the lifecycle of engines and to support the growing Trent engine fleet.
Additionally, we announced further details of a new AMC in Abu Dhabi with Mubadala Development Company, the emirate-based investment and development organisation. This purpose-built facility will carry out work on the Trent XWB.
We also announced that we are further expanding our global network of Authorised Service Centres (ASC) for business aviation aircraft under our CorporateCare(R) service provision for customers. Rolls-Royce now has 62 ASCs in place with key maintenance providers worldwide.
Following the launch of SelectCare in 2016, we secured our first agreement for Trent 800 engines as part of a wide-ranging deal with Delta Airlines.
Civil Aerospace outlook
On a constant currency basis, our Civil Aerospace business should deliver modest growth in revenue and profit in 2017, supported by large engine aftermarket growth, further lifecycle cost reductions and a higher level of R&D capitalisation. Business jet demand is expected to weaken further, as will the demand for aftermarket services
to support Rolls-Royce powered regional aircraft. After a better year for trading cash flow in 2016, we now expect this to be broadly unchanged year-on-year reflecting higher volumes of cash-loss-making engines offsetting the positive effects of higher aftermarket cash revenues.
We expect the TotalCare net asset to peak in the next 12 months at between GBP2.5bn and GBP2.7bn, reflecting further targeted lifecycle cost improvements and other timing differences between cost and cash.
Positive market developments continue to drive long-term growth in Civil Aerospace
The long-term positive market trends for our leading power and propulsion systems remain unchanged despite some near-term uncertainties in Civil Aerospace that continue to impact business jet engine production volumes and service activity on older large engines. The long-term trends driving demand for growth in large passenger
aircraft, business jets, power systems and maritime activity remain strong; in particular a growing aspirational and mobile middle-class, particularly in Asia, and globalisation in business, trade and tourism.
While recent political and economic developments have added some uncertainty to near-term utilisation, we continue to expect that strong widebody airframe demand - driven by the need for newer, more fuel-efficient aircraft - should provide resilience to manufacturing schedules over the next few years as the industry undergoes a strong replacement cycle.
New airframe growth and transitions are in line with expectations
Preparations for the transition of the Airbus A330ceo to A330neo models are also progressing well and once the transition is completed we will benefit from an exclusive position with the new Trent 7000 on the A330neo.
The roll-out of new engines, including the Trent XWB for the highly successful Airbus A350 family, will significantly grow our market share and the installed base of new engines that will deliver strong aftermarket
revenues for decades to come.
Operational Review: Defence Aerospace
Underlying Foreign
GBPm 2015 Change Exchange* 2016
Order book 4,316 (391) 1 3,926
Engine deliveries 649 12 - 661
Underlying revenue 2,035 17 157 2,209
Change +1% +8% +9%
Underlying OE revenue 801 22 67 890
Change +3% +8% +11%
Underlying services
revenue 1,234 (5) 90 1,319
Change - +7% +7%
Underlying gross margin 579 (49) 34 564
Gross margin % 28.5% -260 bps 25.5%
Commercial and administrative
costs (124) (3) (7) (134)
Restructuring (8) 18 - 10
Research and development
costs (73) 5 (3) (71)
Joint ventures and
associates 19 (4) - 15
Underlying profit
before financing 393 (33) 24 384
Change -8% +6% -2%
Underlying operating
margin 19.3% -180 bps 17.4%
* Translational foreign exchange impact
Financial overview
Underlying revenue of GBP2,209m was up slightly on the prior year. Higher volumes for TP400 production, together with increased Adour engine deliveries, helped original equipment (OE) revenues increase 3%. Service revenues were stable, with lower demand for spare parts offset by increased revenues from long-term Eurofighter Typhoon and C-130J service contracts.
Gross margin declined by GBP49m, reflecting lower sales of spare parts, an adverse change in OE product mix, additional expenditure of GBP31m on the TP400 programme and higher payroll costs. Retrospective contract margin
improvements totalled GBP82m, GBP5m lower than prior year, but ahead of early expectations. Of this, around half relates to delivering significant cost saving benefits on the largest Eurofighter Typhoon contract, which triggered a
cost-saving incentive award.
While overall R&D costs were slightly lower than the prior year, the business continued to invest in future programme development and the Indianapolis transformation.
Restructuring costs were lower due to reduced level of severance costs and reversal of a provision for the closure of the defence facility at Ansty, UK, through better cost recovery than expected. Underlying commercial and administrative costs and other costs were similar to prior year.
Profit before financing of GBP384m was 8% lower than the prior period, driven by the lower gross margin.
Investment and business development
Order intake for 2016 was GBP1.5bn (2015: GBP1.7bn), reflecting significant follow-on export orders being delayed to 2017.
Significant activities in 2016 included: winning orders for the F-35B LiftSystem(TM); increased MRTT engines for A330 aircraft; and contract renewals for services. Deliveries of engines were slightly higher in 2016, driven by increased units for TP400 and Adour export. Services revenues were steady, reflecting higher flying hours from
newer EJ200, F405 Adour and AE 2100 powered aircraft in the UK, North America and the Middle East.
The first T56 Series 3.5 technology insertion kits delivered to the US Air Force (USAF) for its legacy Hercules C-130 fleet have validated the expected fuel saving and performance benefits, prompting growing interest in the upgrade.
The UK and French Governments also committed to the EUR2bn UK-France Unmanned Combat Air System (FCAS) unmanned combat air system programme in December, enabling progress through to the demonstrator phase of the programme in 2017. Our LibertyWorks development unit was selected to provide the vertical lift propulsion for the new DARPA VTOL X-Plane. The unit also launched an infrared footprint suppression module, reflecting our diverse and cutting-edge technology capability.
Within the Services portfolio, the support contract for the US C-130J transport fleet was renewed and we signed a
memorandum of understanding with Pratt & Whitney to extend support for the UK's new F-35B Lightning fleet beyond the Rolls-Royce LiftSystem.
This strategy of strengthening our service offerings closer to our major customers saw the opening of new on-base Service Delivery Centres in the UK (at RAF Brize Norton) and in the US (at Kingsville, Texas), as well as a new joint engine support facility for the USAF Global Hawk fleet.
As part of the TP400 consortium, the focus was on delivering solutions to improve the on-wing reliability of the GE-Avio gearbox. This included an on-wing exchange procedure which has greatly helped to reduce the service time and backlog.
Transformation milestones were achieved as planned, including completion of the first production cell as part of the investment activity in Indianapolis. Further manufacturing changes are due to come on stream in the first half of 2017.
Defence Aerospace outlook
While revenues should remain steady, margins are expected to come under pressure from the essential investments in efficiency and long-term growth. These reflect important product development and manufacturing transformation initiatives as the business looks to capitalise on its strong positions, particularly in combat and transport & patrol, and the absence of significant incentive arrangements under remaining long-term service agreements. As a result, margins and profits are expected to soften from the recent levels.
Operational Review: Power Systems
Underlying Foreign
GBPm 2015* change Exchange** 2016
Order book 1,928 (113) - 1,815
Underlying revenue 2,385 (25) 295 2,655
Change -1% +12% +11%
Underlying OE revenue 1,618 (9) 201 1,810
Change -1% +12% +12%
Underlying services
revenue 767 (16) 94 845
Change -2% +12% +10%
Underlying gross margin 656 (28) 79 707
Gross margin % 27.5% -90 bps 26.6%
Commercial and administrative
costs (296) (9) (35) (340)
Restructuring (4) 4 - -
Research and development
costs (162) 5 (20) (177)
Joint ventures and
associates - 1 - 1
Underlying profit
before financing 194 (27) 24 191
Change -14% +12% -2%
Underlying operating
margin 8.1% -110 bps 7.2%
* 2015 figures have been restated as a result of costs previously reported in 'cost of sales', being reclassified as 'other commercial and administrative costs' to ensure consistent treatment with 2016.
** Translational foreign exchange impact.
Financial overview
Underlying revenue of GBP2,655m was 1% lower at constant currency (11% higher including the impact of translational foreign exchange). Overall original equipment (OE) revenue declined 1%. Growth in sales of
diesel and gas products to power generation and industrial customers offset reductions within markets where demand is linked to low oil and commodity prices, and reduced activity in naval markets.
Service revenues reduced 2%, largely reflecting weaker marine medium-speed markets, once again reflecting low oil prices.
Gross margin reduced by GBP28m in absolute terms and by 90 basis points, to 26.6% (2015: 27.5%) with good progress on cost reduction generated from transformation activity offsetting some of the impact of volume
reduction, adverse changes in product mix and a reduction in the discount rate applied to the warranty provision.
Overall, underlying profit declined GBP27m or 14%, led by the reduction in gross margin. Costs below gross margin remained broadly unchanged on an underlying basis. The GBP9m increase in commercial and administrative costs was offset by a GBP5m reduction in R&D reflecting a more focused approach to future product development activity together with reduced underlying restructuring costs. An exceptional charge of GBP45m has been taken for restructuring activity.
Investment and business development
Power Systems' customers span a range of markets from power generation and defence to marine, industrial and
construction markets. This end-market diversity has enabled the business to mitigate some of the weak market
environments and as a result, the order book ended the year at GBP1.8bn (2015: GBP1.9bn).
2016 order intake of GBP2.4bn (2015: GBP2.5bn) was 2% down at constant currency, with the year-on-year reduction being mainly in oil & gas and commodity-related markets including marine, together with lower government project orders. This was offset by improvements within power generation, agricultural and industrial markets.
Within power generation markets, we delivered 200 gensets (a package of engine and generator) to the Asian VPower Group, one of our strategic partners in the region. We have continued to strengthen our position in
the growing market for back-up power for larger mission-critical applications.
Order intake later in the year was healthy for solutions to support data systems in both Europe and the US and also for independent power customers. We have also agreed to establish a 50/50 joint venture with Yuchai Machinery Company Ltd for the production under licence of MTU Series 4000 diesel engines in China, targeting the Chinese
off-highway market.
Demand for our marine products remained good. Naval orders included gensets for the UK Royal Navy's Type 26 Global Combat Ship and a supply contract for the Italian Navy relating to a new multi-purpose ocean-going patrol vessel. Within the land defence markets, there was a follow-up order for use in a German armoured vehicle.
In other areas, we continued to attract new customers in new regional markets including Japanese high-tech crane producer Kato. We also made progress within the rail market in both Europe and Asia. This included a notable order from Hitachi Rail Europe for over 100 MTU PowerPacks(R) for use in the UK and an order to remanufacture
(an in-house process, known as Reman, to refurbish and extend the life of existing systems) around 400 MTU PowerPacks for Transdev Group in Germany.
Innovation was again strong with some notable new products coming to market in the year. We launched new advanced diesel and gas propulsion systems which meet new IMO and EPA emissions standards.
At the same time, we launched advanced propulsion systems for the construction and industrial markets which satisfy new emission standards in those industries.Finally, we launched a hybrid power pack and energy pack battery system for the rail market.
Power Systems also made progress with the transformation programme, targeting reductions in product costs as well as strengthening sales and service resources and leveraging digital capabilities to develop value adding services.
Power Systems outlook
The outlook for Power Systems remains steady. The business finished the year with a strong order book for several of its key markets. Whilst some markets, particularly those impacted by oil and commodity prices,
remain difficult, we expect the business to deliver modest growth in revenue and profit in 2017.
Operational Review: Marine
Underlying Foreign
GBPm 2015 change Exchange* 2016
Order book 1,164 (337) 78 905
Underlying revenue 1,324 (312) 102 1,114
Change -24% +8% -16%
Underlying OE revenue 773 (198) 56 631
Change -26% +7% -18%
Underlying services
revenue 551 (114) 46 483
Change -21% +8% -12%
Underlying gross
margin 260 (44) 20 236
Gross margin % 19.6% +170 bps 21.2%
Commercial and administrative
costs (201) (6) (17) (224)
Restructuring (16) 19 (1) 2
Research and development
costs (28) (11) (2) (41)
Joint ventures and
associates - - - (0)
Underlying profit
before financing 15 (42) - (27)
Change -280% -280%
Underlying operating
margin 1.1% -380 bps -2.4%
* Translational foreign exchange impact
Financial overview
Underlying revenue of GBP1,114m was 24% lower on a constant currency basis. Within this, original equipment (OE) and services revenues were 26% and 21% lower respectively. This reflected continued weakness in offshore and merchant, as ship owners deferred overhaul and maintenance on the back of reduced utilisation of their vessels.
Gross margin was GBP236m, an improvement of 170 basis points versus 2015, but GBP(44)m lower in absolute terms, as a result of the lower volume. The improved gross margin percentage partly resulted from cost reduction actions. Overall this resulted in a net loss of GBP27m.
The announcement in December 2016 of further organisational changes and headcount reduction in 2017 has led to an exceptional GBP5m restructuring charge. In addition, GBP200m of the Group impairment of goodwill was in Marine and mainly related to the acquisition of Vickers in 1999.
Investment and business development
Overall, the Marine order book declined 29% during the year at constant currency, reflecting adjustments for a number of postponed or cancelled orders and very weak offshore markets. Orders for new vessels, projects and services were all sharply lower than 2015 and, as a result, order intake was only GBP715m, 29% down on the previous year at constant currency. The offshore market was extremely challenging, driven by a low oil price and
reduced capital expenditure within the upstream oil exploration and related services sectors. Several merchant segments were also subdued, reflecting generally weak conditions in the global marine industry. The business focused on using its strengths as a system integrator to leverage across adjacencies, including designing and equipping the UK's new polar research ship, RSS Sir David Attenborough. It also landed a major deal to design and equip Hurtigruten's new explorer cruise ships, along with battery solutions to make full electric propulsion possible.
The business announced a contract to supply the world's first automatic crossing system to ferry operator, Fjord 1, and also launched our new Azipull Carbon thruster with yacht builder Benetti, reflecting the increasing importance of newer technologies. The fishing segment remained strong, with contracts won for a range of vessels. The naval business was focused on further development work and supporting customers across Asia, Europe and the US. These included supporting successful sea-trials for the US Navy's most advanced warship the USS Zumwalt, further MT30 orders for new Italian helicopter landing craft and selection by the New Zealand Navy for ship design of its MSC programme.
The Marine business continues to lower its cost base and build flexibility into the organisation, particularly across back-office and operational activities. The restructuring programmes announced in 2015 have led to a reduction of around 1,100 headcount with GBP65m of annual savings recognised from 2017.
Reflecting the ongoing subdued and increasingly cost-conscious market environment, in December further
restructuring to take place in early 2017 was announced, targeting annualised savings of around GBP50m. This included a further headcount reduction of around 800 across operations and back-office functions as the business continues to shrink footprint, reduce indirect headcount, and consolidate manufacturing activity.
At the same time, investments were made in the strategic enablers of the future, including upgrading our azimuth thruster production facility in Rauma, Finland. The GBP44m project will create a state-of-theart production facility for one of our most important product groups.
The pace of technology change in the sector is accelerating, and we continue to invest in pioneering research into ship intelligence technologies focused on data-driven, value-added services that facilitate full ship automation in the long term.
Marine outlook
Overall, the outlook for Marine remains cautious. We expect that the market will continue to feel the impact of low oil prices, and the general overcapacity in several segments will take time to reach equilibrium. This will impact the demand for our products and services. We will sustain our active cost reduction programmes, focusing on manufacturing, supply chain and overhead costs, in order to drive a more competitive business adapted to the current market conditions.
Operational Review: Nuclear
Underlying Foreign
GBPm 2015 change Exchange* 2016
Order book 2,168 (379) 1 1,790
Underlying revenue 687 74 16 777
Change +11% +2% +13%
Underlying OE revenue 251 95 8 354
Change +38% +3% +41%
Underlying services
revenue 436 (21) 8 423
Change -5% +2% -3%
Underlying gross
margin 111 6 4 121
Gross margin % 16.2% -80 bps 15.6%
Commercial and administrative
costs (53) (14) (3) (70)
Restructuring (2) 2 - -
Research and development
costs 14 (20) - (6)
Joint ventures and
associates 0 - - -
Underlying profit
before financing 70 (26) 1 45
Change -37% +1% -36%
Underlying operating
margin 10.2% -440 bps 5.8%
* Translational foreign exchange impact
Financial overview
Underlying revenue increased by 11% to GBP777m, led by growth in several key programmes in the submarines business, including support for the next generation Dreadnought class submarines (the successor to the Vanguard class), various refuelling projects and decommissioning activities. Volumes on key civil instrumentation and control
programmes in both France and Finland were also good.
Gross margin was lower at 15.6%, reflecting the revenue mix favouring lower margin government-led submarine projects. Below gross margin, the change in treatment of R&D credits, which significantly impacted the full year in 2015, produced an R&D credit of GBP7m in 2016. This was offset by additional costs to support the higher volumes and to improve delivery performance. In addition, there were extra payroll costs, as well as additional R&D to support the initial design phase for small modular reactors (SMRs).
As a result, underlying profit before financing excluding the R&D credit was GBP37m at constant currency, 27% below
the prior year (2015: GBP51m adjusted for the R&D credit). After the R&D credit and including a GBP1m foreign
exchange benefit, underlying profit was GBP45m.
Investment and business developments
Order intake of GBP385m was 8% higher than 2015. Notwithstanding, the closing order book of GBP1.8bn was 17% below 2015, reflecting the business working through the large multi-year orders, particularly in submarines, received in prior years.
Submarine activities focused on continuing our support to the Royal Navy's current operational fleet of nuclear-powered submarines, as well as delivery of propulsion systems for the remaining Astute class submarines and for the Dreadnought programme. As well as implementing a range of performance improvement initiatives during the year, we also completed delivery of the nuclear propulsion system for the fourth (of seven) Astute class submarine and have made good progress both in the preparation for the refuelling programme of HMS Vanguard and for decommissioning the Naval Reactor Test Establishment in Scotland. In conjunction with the UK's Ministry of Defence and BAE Systems, we have also advanced discussions around a long-term alliance framework for the
Dreadnought programme. Once concluded, this new framework should ensure that the delivery structure and commercial benefits are clarified for all key partners in this GBP31bn investment programme.
The civil nuclear business successfully concluded the first phase of its major instrumentation and control modernisation programme at Fortum's Loviisa plant in Finland, using our Spinline(R) technology. It also continued with its upgrade programme across the French civil nuclear fleet as part of a multi-year contract.
The UK government announced final approval for the Hinkley Point C nuclear power station in September, where our Nuclear business was awarded preferred bidder status for contracts covering waste treatment systems, heat exchangers and diesel generators.
The business also announced the strengthening of the strategic collaboration, started in 2014, with the China National Nuclear Corporation, including engineering and training services. The Chinese market is expected to sustain strong growth and we are well positioned with relevant technology.
During the year we started an R&D programme, together with a number of partners, to scope out the initial design
phase for SMRs. These smaller, more flexible nuclear power generation units offer the potential for a more flexible power generation in future decades and directly build on the knowledge and specialist skills of our Nuclear business. Any significant further development work will be dependent on government support for this technology
Nuclear outlook
The long-term outlook for Nuclear remains positive, supported by confirmation from the UK Government of the ongoing investment in the Dreadnought class submarines. Together with renewed activities in the civil market,
particularly in the UK and China, these provide encouraging growth opportunities.
Performance in 2017 will be impacted by the loss of R&D credits on investments and further modest increases in the investment in SMR technology. As a result, profit is expected to be around half that achieved in 2016.
Financial review
Underlying income statement Year to 31 December GBPm 2016 2015 Change Revenue - 2015 exchange rates 13,058 13,354 -296 Translation to 2016 exchange rates 725 Revenue 13,783 13,354 +429 Gross profit 2,626 3,203 -577 Commercial and administrative costs (1,096) (1,025) -71 Restructuring 2 (39) +41 Research and development costs (812) (765) -47 Share of results of joint ventures and associates 107 118 -11 Profit before financing at 2015 exchange rates 827 1,492 -665 Translation to 2016 exchange rates 88 Profit before financing 915 1,492 -577 Net financing (102) (60) -42 Profit before tax 813 1,432 -619 Tax (261) (351) +90 Profit for the year 552 1,081 -529 Gross R&D expenditure (1,331) (1,240) -91
Net R&D charge (862) (765) -97 Segmental analysis Year to 31 December Revenue Gross profit Profit before financing GBPm 2016 2015 Change 2016 2015 Change 2016 2015 Change Civil 6,906 6,933 -27 1,129 1,526 -397 326 812 -486 Defence 2,052 2,035 +17 530 579 -49 360 393 -33 Power Systems 2,360 2,385 -25 628 656 -28 167 194 -27 Marine 1,012 1,324 -312 216 260 -44 (27) 15 -42 Nuclear 761 687 +74 117 111 +6 44 70 -26 Other 35 96 -61 6 64 -58 1 52 -51 Intra-segment (68) (106) +38 - 7 -7 - 7 -7 Central costs (44) (51) +7 Group at 2015 exchange rates 13,058 13,354 -296 2,626 3,203 -577 827 1,492 -665 Translation to 2016 exchange rates 725 422 88 Group 13,783 13,354 +429 3,048 3,203 -155 915 1,492 -577
* 2015 figures have been restated as a result of GBP21m of costs previously reported in 'cost of sales', being reclassified as 'other commercial and administrative costs' to ensure consistent treatment with 2016.
Underlying revenue and underlying profit before financing are discussed in the Review of 2016 (page 5), the Financial summary (page 14) and the Business reviews (pages 16 to 33).
Underlying financing costs increased by GBP42m to GBP102m. Net interest payable increased by GBP4m to GBP63m. Other underlying financing costs increased by GBP38m to GBP39m, principally due to the non-recurrence of an underlying foreign exchange gain recognised in 2015, which arose from the realised gains on foreign exchange contracts
settled to translate overseas dividends into sterling.
Underlying taxation was GBP261m (2015: GBP351m), an underlying rate of 32.1% compared with 24.5% in 2015. The primary reasons for the increase are the non-recognition of deferred tax assets on losses in Norway, which reflects the current uncertainty in the oil & gas market, and a different profit mix with more profits arising in countries with higher tax rates.
No dividend is proposed.
Reported income statement Year to 31 December GBPm 2016 2015(1) Revenue 14,955 13,725 Gross profit 3,048 3,277 Other operating income 5 10 Commercial and administrative costs(2) (2,208) (1,070) Research and development costs (918) (818) Share of results of joint ventures and associates 117 100 Operating profit 44 1,499 (Loss)/profit on disposal of businesses (3) 2 Profit before financing 41 1,501 Net financing (4,677) (1,341) (Loss)/profit before tax (4,636) 160 Tax 604 (76) (Loss)/profit for the year (4,032) 84
(1) 2015 figures have been restated as a result of GBP11m costs previously reported in 'cost of sales', being reclassified as 'commercial and administrative costs' to ensure consistent treatment with 2016.
(2) In 2016, 'commercial and administrative costs' include GBP671m for financial penalties from agreements with investigating bodies and GBP306m for the restructuring of the UK pension schemes.
Reported results
The changes in 2016 resulting from underlying trading are described in the previous sections.
Consistent with past practice and IFRS, we provide both reported and underlying figures. As the Group does not hedge account in accordance with IAS 39 Financial Instruments, we believe underlying figures are more representative of the trading performance, by excluding the impact of year-end mark-to-market adjustments, principally the USD:GBP hedge book, which has had a significant impact on the reported results in 2016 as the USD:GBP rate has fallen from 1.48 to 1.23 and the EUR:GBP has fallen from 1.36 to 1.17. The adjustments between the underlying income statement and the reported income statement are set out in note 2 to the Consolidated financial statements. This basis of presentation has been applied consistently.
The most significant items included in the reported income statement, but not in underlying, are summarised below.
Profit before financing
The impact of measuring revenues and costs at spot rates rather than rates achieved on hedging transactions. This increased revenues by GBP1,172m (2015: GBP371m) and increased profit before financing by GBP570m (2015: GBP265m).
The effects of acquisition accounting GBP115m (2015: GBP124m), principally relating to the amortisation of intangible assets arising on the acquisition of Power Systems in 2013.
The impairment of goodwill of GBP219m (2015: GBP75m), principally relating to the Marine business as a result of the continued weakness in the oil & gas market (see note 8).
Exceptional restructuring costs of GBP129m (2015: GBP49m). These are costs associated with the substantial closure or exit of a site, facility or activity and increased as a result of the ongoing transformation programme. Financial penalties of GBP671m from agreements with investigating bodies (see page 6). Costs of restructuring the UK pension
schemes in 2016 of GBP306m, principally a settlement charge on the transfer of the Vickers Group Pension Scheme to an insurance company (see note 18).
Financing and taxation
The mark-to-market adjustments on the Group's hedge book of GBP4,420m (2015: GBP1,306m). These reflect: the large hedge book held by the Group (eg. US$38bn); and the weakening of sterling, particularly against the US dollar and the euro, as noted above. At each year end, our foreign exchange hedge book is included in the balance sheet at fair value (mark-to-market) and the movement in the year included in reported financing costs.
Appropriate tax rates are applied to these additional items included in the reported results, leading to an additional tax credit of GBP865m (2015: GBP275m), largely as a result of the mark-to-market adjustments.
Reconciliation between underlying and reported results Year to 31 December Revenue Profit before financing Financing Profit/(loss) before tax GBPm 2016 2015 2016 2015 2016 2015 2016 2015 Underlying 13,783 13,354 915 1,492 (102) (60) 813 1,432 Revenue recognised at exchange rate on date of transaction 1,172 371 - - - - - - Mark-to-market adjustments on derivatives - - - (9) (4,420) (1,306) (4,420) (1,315) Related foreign exchange adjustments - - 570 265 (151) (15) 419 250 Movements on other financial instruments - - - - (8) 8 (8) 8 Effects of acquisition accounting - - (115) (124) - - (115) (124) Impairment of goodwill - - (219) (75) - - (219) (75) Exceptional restructuring - - (129) (49) - - (129) (49) Acquisitions and disposals - - (3) 2 - - (3) 2 Financial penalties - - (671) - - - (671) - Post-retirement schemes - - (306) - 3 32 (303) 32 Other - - (1) (1) 1 - - (1) Reported 14,955 13,725 41 1,501 (4,677) (1,341) (4,636) 160 Summary balance sheet At 31 December GBPm 2016 2015 Intangible assets 5,080 4,645 Property, plant and equipment 4,114 3,490 Joint ventures and associates 844 576 Net working capital(1) (1,553) (501) Net funds(2) (225) (111) Provisions (759) (640) Net post-retirement scheme deficits (29) (77) Net financial assets and liabilities(2) (5,723) (1,854) Other net assets and liabilities(3) 143 (483) Net assets 3,457 6,289 Other items US$ hedge book (US$bn) 37.8 28.8 TotalCare assets 3,348 2,994 TotalCare liabilities (907) (783) Net TotalCare assets 2,441 2,211 Gross customer finance commitments 238 269 Net customer finance commitments 61 54
(1) Net working capital includes inventories, trade and other receivables, trade and other payables and current tax assets and liabilities.
(2) Net funds includes GBP358m (2015 GBP13m) of the fair value of financial instruments which are held to hedge the fair value of borrowings.
(3) Other includes other investments and deferred tax assets and liabilities.
Balance sheet
Intangible assets (note 8) increased by GBP435m mainly due to exchange differences of GBP438m. Additions of GBP631m (including GBP154m of certification and participation fees, GBP100m of development costs and GBP208m of contractual aftermarket rights) were largely offset by amortisation of GBP406m and impairment of GBP222m (including GBP200m on Marine goodwill).
The carrying values of the intangible assets are assessed for impairment against the present value of forecast cash flows generated by the intangible asset. The principal risks remain: reductions in assumed market share; programme timings; increases in unit cost assumptions; and adverse movements in discount rates.
Property, plant and equipment (note 9) increased by GBP624m, around half of which was caused by exchange differences of GBP330m. Additions of GBP701m (including GBP75m of TotalCare Flex engines) were offset by depreciation of GBP424m and GBP41m was added from the reclassification of joint ventures to joint operations.
Investments in joint ventures and associates (note 10) increased by GBP268m, including an increase of GBP154m in the Group's share of authorised maintenance centre joint ventures. The other main movements were: exchange gains of GBP107m; and the Group's share of retained profit of GBP43m; offset by a GBP57m reclassification of certain joint ventures to joint operations. Movements in net funds are shown opposite.
Net working capital reduced by GBP1,052m, including a GBP671m accrual for financial penalties, GBP134m increased deposits and GBP265m of foreign exchange movements. This was partially offset by higher inventory of GBP194m.
Provisions (note 17) largely relate to warranties and guarantees provided to secure the sale of OE and services.
The increase of GBP119m includes reclassifications from accruals of GBP92m, following a review of accounting consistency during the period. The remaining increase of GBP27m includes net additional charges of GBP271m (including
GBP147m for warranties and guarantees), and foreign exchange movements of GBP75m, offset by utilisation of GBP227m.
Net post-retirement scheme deficits (note 18) have reduced by GBP48m.
In the UK (increase in surplus of GBP293m), changes in actuarial estimates increased the value of the obligations GBP1.8bn, largely due to the discount rate reducing from 3.6% to 2.7%. This was more than offset by returns (in excess of those assumed) on the scheme assets of GBP2.3bn. This return is largely due to the liability-driven investment policy of the assets being invested to match changes in value of the obligations (on a proxy solvency basis, which is more onerous than the accounting valuation). The net increase in surplus was reduced by the
recognition of a settlement charge of GBP301m on the insurance buy-out of the Vickers Group Pension Scheme.
The principal movements in overseas schemes (increase in deficit of GBP245m) were exchange differences of GBP208m.
Net financial assets and liabilities (note 16) principally relate to the fair value of foreign exchange, commodity and interest rate contracts. All contracts continue to be held for hedging purposes. The fair value of foreign exchange derivatives is a net financial liability of GBP5.6bn, an increase of GBP3.9bn in the period, mainly a result of the
weakening of sterling against the US dollar and euro.
The US$ hedge book increased by 31% to US$37.8bn. This represents around 5 1/2 years of net exposure and has an average book rate of GBP1 to US$1.55
Net TotalCare assets relate to long-term service agreement (LTSA) contracts in the Civil Aerospace business, including the flagship services product TotalCare. These assets represent the timing difference between the recognition of income and costs in the income statement and cash receipts and payments.
Customer financing facilitates the sale of OE and services by providing financing support to certain customers. Where such support is provided by the Group, it is generally to customers of the Civil Aerospace business and takes the form of various types of credit and asset value guarantees. These exposures produce contingent liabilities that are outlined in note 22. The contingent liabilities represent the maximum aggregate discounted gross
and net exposure in respect of delivered aircraft, regardless of the point in time at which such exposures may arise. The reduction in gross exposures is a result of guarantees expiring.
Summary funds flow statement(1) Year to 31 December GBPm 2016 2015 Change Opening net (debt)/funds (111) 666 Closing net debt (225) (111) Change in net funds (114) (777) Underlying profit before tax 813 1,432 -619 Depreciation and amortisation 720 613 +107 Movement in net working capital (55) (544) +489 Expenditure on property, plant and equipment and intangible assets (1,201) (887) -314 Other 67 (229) +276 Trading cash flow 344 372 -28 Contributions to defined benefit pensions in excess of underlying PBT charge (67) (46) -21 Taxation paid (157) (160) +3 Free cash flow 120 166 -46 Shareholder payments (321) (822) +501 Acquisitions and disposals (153) (3) -150 Discontinued operations - (121) +121 Foreign exchange 240 3 +237 Change in net funds (114) (777)
(1) The derivation of the summary funds flow statement above from the reported cash flow statement is included in note 25 of the condensed consolidated financial statements.
Funds flow
Movement in working capital - the GBP55m increase in working capital includes an increase in inventory, partially offset by a net reduction in financial working capital. These movements are largely driven by the increased sales volumes during 2016.
Expenditure on property, plant and equipment and intangibles - the major increases are: GBP98m higher PPE expenditure as we build the supply chain; GBP37m software costs relating to systems development; GBP81m certification costs driven by the Trent XWB-97 programme; GBP45m capitalised development costs largely relating to the Trent 1000 TEN; and GBP46m higher contractual aftermarket rights, mainly on Trent XWB sales.
Pensions - the increase in pension contributions in excess of the underlying income statement largely reflects changes in net past service costs of GBP13m.
Acquisitions and disposals include the GBP154m increase in stake in joint ventures described on the opposite page.
Condensed consolidated income statement
For the year ended 31 December 2016
2016 2015(1)
Notes GBPm GBPm
-------------------------------------------------- ------ --------- ---------
Revenue 2 14,955 13,725
------------------------------------------------------- ------ --------- ---------
Cost of sales (11,907) (10,448)
------------------------------------------------------- ------ --------- ---------
Gross profit 3,048 3,277
------------------------------------------------------- ------ --------- ---------
Other operating income 5 10
------------------------------------------------------- ------ --------- ---------
Commercial and administrative costs(2) (2,208) (1,070)
------------------------------------------------------- ------ --------- ---------
Research and development costs 3 (918) (818)
------------------------------------------------------- ------ --------- ---------
Share of results of joint ventures and associates 117 100
------------------------------------------------------- ------ --------- ---------
Operating profit 44 1,499
------------------------------------------------------- ------ --------- ---------
(Loss)/profit on disposal of businesses (3) 2
------------------------------------------------------- ------ --------- ---------
Profit before financing and taxation 41 1,501
------------------------------------------------------- ------ --------- ---------
Financing income 4 96 115
------------------------------------------------------- ------ --------- ---------
Financing costs 4 (4,773) (1,456)
------------------------------------------------------- ------ --------- ---------
Net financing (4,677) (1,341)
------------------------------------------------------- ------ --------- ---------
(Loss)/profit before taxation(*) (4,636) 160
------------------------------------------------------- ------ --------- --------- Taxation 5 604 (76) ------------------------------------------------------- ------ --------- --------- (Loss)/profit for the year (4,032) 84 ------------------------------------------------------- ------ --------- --------- Attributable to: ================================================== ====== ========= ========= Ordinary shareholders (4,032) 83 ======================================================= ====== ========= ========= Non-controlling interests - 1 ------------------------------------------------------- ------ --------- --------- (Loss)/profit for the year (4,032) 84 ------------------------------------------------------- ------ --------- --------- (*) Underlying profit before taxation 2 813 1,432 ------------------------------------------------------- ------ --------- ---------
(1) 2015 figures have been restated as a result of GBP11m of Power Systems costs previously reported in cost of sales, being reclassified as commercial and administrative costs to ensure consistent treatment with 2016. The applicable notes have been restated.
(2) In 2016, commercial and administrative costs include GBP671m for financial penalties from agreements with investigating bodies and GBP306m for the restructuring of the UK pension schemes.
All activities comprise continuing operations.
Condensed consolidated statement of comprehensive income
For the year ended 31 December 2016
2016 2015
Notes GBPm GBPm
----------------------------------------------------------------- ------ -------- ------
(Loss)/profit for the period (4,032) 84
------------------------------------------------------------------- ------ -------- ------
Other comprehensive income (OCI)
----------------------------------------------------------------- ------ -------- ------
Items that will not be reclassified to profit or loss
----------------------------------------------------------------- ------ -------- ------
Movements in post-retirement schemes 9 495 (722)
------------------------------------------------------------------- ------ -------- ------
Share of OCI of joint ventures and associates (2) -
----------------------------------------------------------------- ------ -------- ------
Related tax movements (179) 257
------------------------------------------------------------------- ------ -------- ------
314 (465)
----------------------------------------------------------------- ------ -------- ------
Items that may be reclassified to profit or loss
----------------------------------------------------------------- ------ -------- ------
Foreign exchange translation differences on foreign operations 861 (129)
------------------------------------------------------------------- ------ -------- ------
Reclassification to income statement on disposal of businesses - 1
------------------------------------------------------------------- ------ -------- ------
Share of OCI of joint ventures and associates (7) (19)
------------------------------------------------------------------- ------ -------- ------
Related tax movements 4 (2)
------------------------------------------------------------------- ------ -------- ------
858 (149)
----------------------------------------------------------------- ------ -------- ------
Total comprehensive income for the year (2,860) (530)
------------------------------------------------------------------- ------ -------- ------
Attributable to:
----------------------------------------------------------------- ------ -------- ------
Ordinary shareholders (2,860) (530)
------------------------------------------------------------------- ------ -------- ------
Non-controlling interests - -
----------------------------------------------------------------- ------ -------- ------
Total comprehensive expense for the year (2,860) (530)
------------------------------------------------------------------- ------ -------- ------
Condensed consolidated balance sheet
At 31 December 2016
2016 2015
Notes GBPm GBPm
-------------------------------------------- ------ --------- ---------
ASSETS
-------------------------------------------- ------ --------- ---------
Non-current assets
-------------------------------------------- ------ --------- ---------
Intangible assets 6 5,080 4,645
-------------------------------------------- ------ --------- ---------
Property, plant and equipment 7 4,114 3,490
-------------------------------------------- ------ --------- ---------
Investments - joint ventures and associates 844 576
-------------------------------------------- ------ --------- ---------
Investments - other 38 33
-------------------------------------------- ------ --------- ---------
Other financial assets 8 382 83
-------------------------------------------- ------ --------- ---------
Deferred tax assets 876 318
-------------------------------------------- ------ --------- ---------
Post-retirement scheme surpluses 9 1,346 1,063
-------------------------------------------- ------ --------- ---------
12,680 10,208
-------------------------------------------- ------ --------- ---------
Current assets
============================================ ====== ========= =========
Inventories 3,086 2,637
============================================ ====== ========= =========
Trade and other receivables 9,506 7,985
============================================ ====== ========= =========
Taxation recoverable 32 23
============================================ ====== ========= =========
Other financial assets 8 5 29
============================================ ====== ========= =========
Short-term investments 3 2
============================================ ====== ========= =========
Cash and cash equivalents 2,771 3,176
============================================ ====== ========= =========
Assets held for sale 5 5
-------------------------------------------- ------ --------- ---------
15,408 13,857
-------------------------------------------- ------ --------- ---------
Total assets 28,088 24,065
-------------------------------------------- ------ --------- ---------
LIABILITIES
-------------------------------------------- ------ --------- ---------
Current liabilities
-------------------------------------------- ------ --------- ---------
Borrowings (172) (419)
-------------------------------------------- ------ --------- ---------
Other financial liabilities 8 (623) (302)
-------------------------------------------- ------ --------- ---------
Trade and other payables (8,942) (7,420)
-------------------------------------------- ------ --------- ---------
Tax liabilities (211) (164)
-------------------------------------------- ------ --------- ---------
Provisions for liabilities and charges (543) (336)
-------------------------------------------- ------ --------- ---------
(10,491) (8,641)
-------------------------------------------- ------ --------- ---------
Non-current liabilities
-------------------------------------------- ------ --------- ---------
Borrowings (3,185) (2,883)
-------------------------------------------- ------ --------- ---------
Other financial liabilities 8 (5,129) (1,651)
-------------------------------------------- ------ --------- ---------
Trade and other payables (3,459) (2,317)
-------------------------------------------- ------ --------- ---------
Tax liabilities - (1)
-------------------------------------------- ------ --------- ---------
Deferred tax liabilities (776) (839)
-------------------------------------------- ------ --------- ---------
Provisions for liabilities and charges (216) (304)
-------------------------------------------- ------ --------- ---------
Post-retirement scheme deficits 9 (1,375) (1,140)
-------------------------------------------- ------ --------- ---------
(14,140) (9,135)
-------------------------------------------- ------ --------- ---------
Total liabilities (24,631) (17,776)
-------------------------------------------- ------ --------- ---------
Net assets 3,457 6,289
-------------------------------------------- ------ --------- ---------
EQUITY
-------------------------------------------- ------ --------- ---------
Attributable to ordinary shareholders
-------------------------------------------- ------ --------- ---------
Called-up share capital 326 326
-------------------------------------------- ------ --------- ---------
Share premium account 631 631
-------------------------------------------- ------ --------- ---------
Cash flow hedging reserve (107) (100)
-------------------------------------------- ------ --------- ---------
Other reserves 811 (54)
-------------------------------------------- ------ --------- ---------
Retained earnings 1,794 5,484
-------------------------------------------- ------ --------- ---------
3,455 6,287
-------------------------------------------- ------ --------- ---------
Non-controlling interests 2 2
-------------------------------------------- ------ --------- ---------
Total equity 3,457 6,289
-------------------------------------------- ------ --------- ---------
Condensed consolidated cash flow statement
For the year ended 31 December 2016
2016 2015
Notes GBPm GBPm
--------------------------------------------------------------------------------- ------ -------- ------
Reconciliation of cash flows from operating activities
--------------------------------------------------------------------------------- ------ -------- ------
Operating profit 44 1,499
--------------------------------------------------------------------------------- ------ -------- ------
Loss on disposal of property, plant and equipment 5 8
--------------------------------------------------------------------------------- ------ -------- ------
Share of results of joint ventures and associates (117) (100)
--------------------------------------------------------------------------------- ------ -------- ------
Dividends received from joint ventures and associates 74 63
--------------------------------------------------------------------------------- ------ -------- ------
Amortisation and impairment of intangible assets 6 628 432
--------------------------------------------------------------------------------- ------ -------- ------
Depreciation and impairment of property, plant and equipment 7 426 378
--------------------------------------------------------------------------------- ------ -------- ------
Impairment of investments - 2
--------------------------------------------------------------------------------- ------ -------- ------
Increase/(decrease) in provisions 44 (151)
--------------------------------------------------------------------------------- ------ -------- ------
(Increase)/decrease in inventories (161) 63
--------------------------------------------------------------------------------- ------ -------- ------
Decrease/(increase) in trade and other receivables 54 (836)
--------------------------------------------------------------------------------- ------ -------- ------
Accruals for financial penalties from agreements with investigating bodies 671 -
--------------------------------------------------------------------------------- ------ -------- ------
Other increase in trade and other payables 234 240
--------------------------------------------------------------------------------- ------ -------- ------
Cash flows on other financial assets and liabilities held for operating purposes (608) (305)
--------------------------------------------------------------------------------- ------ -------- ------
Net defined benefit post-retirement cost recognised in profit before financing 9 510 213
--------------------------------------------------------------------------------- ------ -------- ------
Cash funding of defined benefit post-retirement schemes 9 (271) (259)
--------------------------------------------------------------------------------- ------ -------- ------
Share-based payments 35 5
--------------------------------------------------------------------------------- ------ -------- ------
Net cash inflow from operating activities before taxation 1,568 1,252
--------------------------------------------------------------------------------- ------ -------- ------
Taxation paid (157) (160)
--------------------------------------------------------------------------------- ------ -------- ------
Net cash inflow from operating activities 1,411 1,092
--------------------------------------------------------------------------------- ------ -------- ------
Cash flows from investing activities
--------------------------------------------------------------------------------- ------ -------- ------
Additions of unlisted investments - (6)
--------------------------------------------------------------------------------- ------ -------- ------
Additions of intangible assets 6 (631) (408)
--------------------------------------------------------------------------------- ------ -------- ------
Disposals of intangible assets 8 4
--------------------------------------------------------------------------------- ------ -------- ------
Purchases of property, plant and equipment (585) (487)
--------------------------------------------------------------------------------- ------ -------- ------
Government grants received 15 8
--------------------------------------------------------------------------------- ------ -------- ------
Disposals of property, plant and equipment 8 33
--------------------------------------------------------------------------------- ------ -------- ------
Acquisitions of businesses (6) (5)
--------------------------------------------------------------------------------- ------ -------- ------
Disposal of discontinued operations - (121)
--------------------------------------------------------------------------------- ------ -------- ------
Disposals of other businesses 7 2
--------------------------------------------------------------------------------- ------ -------- ------
Increase in share in joint ventures (154) -
--------------------------------------------------------------------------------- ------ -------- ------
Other investments in joint ventures and associates (30) (15)
--------------------------------------------------------------------------------- ------ -------- ------
Cash and cash equivalents in joint ventures reclassified as joint operations 5 -
--------------------------------------------------------------------------------- ------ -------- ------
Net cash outflow from investing activities (1,363) (995)
--------------------------------------------------------------------------------- ------ -------- ------
Cash flows from financing activities
--------------------------------------------------------------------------------- ------ -------- ------
Repayment of loans 8 (434) (54)
--------------------------------------------------------------------------------- ------ -------- ------
Proceeds from increase in loans and finance leases 93 1,150
--------------------------------------------------------------------------------- ------ -------- ------
Capital element of finance lease payments (4) (1)
--------------------------------------------------------------------------------- ------ -------- ------
Net cash flow from (decrease)/increase in borrowings and finance leases (345) 1,095
--------------------------------------------------------------------------------- ------ -------- ------
Interest received 14 5
--------------------------------------------------------------------------------- ------ -------- ------
Interest paid (84) (58)
--------------------------------------------------------------------------------- ------ -------- ------
Interest element of finance lease payments (2) (2)
--------------------------------------------------------------------------------- ------ -------- ------
(Increase)/decrease in short-term investments (1) 5
--------------------------------------------------------------------------------- ------ -------- ------
Movement on balances with parent company (321) (822)
--------------------------------------------------------------------------------- ------ -------- ------
Net cash (outflow)/inflow from financing activities (739) 221
--------------------------------------------------------------------------------- ------ -------- ------
Change in cash and cash equivalents (691) 320
--------------------------------------------------------------------------------- ------ -------- ------
Cash and cash equivalents at 1 January 3,176 2,862
--------------------------------------------------------------------------------- ------ -------- ------
Exchange gains/(losses) on cash and cash equivalents 286 (6)
--------------------------------------------------------------------------------- ------ -------- ------
Cash and cash equivalents at 31 December 2,771 3,176
--------------------------------------------------------------------------------- ------ -------- ------
2016 2015
GBPm GBPm
-------------------------------------------------------------------------------------------------- ------ --------
Reconciliation of movements in cash and cash equivalents to movements in net debt
-------------------------------------------------------------------------------------------------- ------ --------
Change in cash and cash equivalents (691) 320
-------------------------------------------------------------------------------------------------- ------ --------
Cash flow from decrease/(increase) in borrowings and finance leases 345 (1,095)
-------------------------------------------------------------------------------------------------- ------ --------
Cash flow from increase/(decrease) in short-term investments 1 (5)
-------------------------------------------------------------------------------------------------- ------ --------
Change in net debt resulting from cash flows (345) (780)
-------------------------------------------------------------------------------------------------- ------ --------
Net debt (excluding cash and cash equivalents) of joint ventures reclassified to joint operations (9) -
-------------------------------------------------------------------------------------------------- ------ --------
Exchange gains on net debt 240 3
-------------------------------------------------------------------------------------------------- ------ --------
Fair value adjustments (345) 45
-------------------------------------------------------------------------------------------------- ------ --------
Movement in net debt (459) (732)
-------------------------------------------------------------------------------------------------- ------ --------
Net debt at 1 January excluding the fair value of swaps (124) 608
-------------------------------------------------------------------------------------------------- ------ --------
Net debt at 31 December excluding the fair value of swaps (583) (124)
-------------------------------------------------------------------------------------------------- ------ --------
Fair value of swaps hedging fixed rate borrowings 358 13
-------------------------------------------------------------------------------------------------- ------ --------
Net debt at 31 December (225) (111)
-------------------------------------------------------------------------------------------------- ------ --------
The movement in net funds (defined by the Group as including the items shown below) is as follows:
Reclassification
At 1 of joint At 31
January ventures to Exchange Fair value December
2016 Funds flow joint operations differences adjustments Reclassifications 2016
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Cash at bank
and in hand 662 96 5 109 - - 872
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Money market
funds 783 (260) -- 29 - - 552
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Short-term
deposits 1,731 (532) - 148 - - 1,347
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Cash and
cash
equivalents 3,176 (696) 5 286 - - 2,771
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Short-term
investments 2 1 - - - - 3
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Current
borrowings (417) 350 (9) (24) - (69) (169)
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Non-current
borrowings (2,833) (1) - (11) (345) 69 (3,121)
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Finance
leases (52) (4) - (11) - - (67)
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Net debt
excluding
the fair
value of
swaps (124) (350) (4) 240 (345) - (583)
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Fair value
of swaps
hedging
fixed rate
borrowings 13 345 358
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Net debt (111) (350) (4) 240 - - (225)
------------ ---------- ----------- ----------------- ------------- ------------ ------------------ -----------
Condensed consolidated statement of changes in equity
For the year ended 31 December 2016
Attributable to ordinary shareholders
---------------------------------------------------------------------
Cash flow
Share Share hedging Other Retained Non-controlling Total
capital premium reserve reserves earnings Total interests (NCI) equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
At 1 January
2015 326 631 (81) 75 5,875 6,826 5 6,331
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
Profit for the
year - - - - 83 83 1 84
================ =========== =========== ========== ========== ========== ======= ================ ===========
Foreign exchange
translation
differences on
foreign
operations - - - (128) - (128) (1) (129)
================ =========== =========== ========== ========== ========== ======= ================ ===========
Reclassified to
income
statement on
disposal of
business - - - 1 - 1 - 1
================ =========== =========== ========== ========== ========== ======= ================ ===========
Movements on
post-retirement
schemes - - - - (722) (722) - (722)
================ =========== =========== ========== ========== ========== ======= ================ ===========
Share of
comprehensive
income of joint
ventures and
associates - - (19) - - (19) - (19)
================ =========== =========== ========== ========== ========== ======= ================ ===========
Related tax
movements - - - (2) 257 255 - 255
================ =========== =========== ========== ========== ========== ======= ================ ===========
Total
comprehensive
income for the
year - - (19) (129) (382) (530) - (530)
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
Share-based
payments -
direct to
equity(1) - - - - (3) (3) - (3)
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
Transactions
with NCI - - - - - - (3) (3)
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
Related tax
movements - - - - (6) (6) - (6)
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
Other changes in
equity in the
year - - - - (9) (9) (3) (12)
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
At 1 January
2016 326 631 (100) (54) 5,484 6,287 2 6,289
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
Loss for the
year - - - - (4,032) (4,032) - (4,032)
================ =========== =========== ========== ========== ========== ======= ================ ===========
Foreign exchange
translation
differences on
foreign
operations - - - 861 - 861 - 861
================ =========== =========== ========== ========== ========== ======= ================ ===========
Movements on
post-retirement
schemes - - - - 495 495 - 495
================ =========== =========== ========== ========== ========== ======= ================ ===========
Share of
comprehensive
income of joint
ventures and
associates - - (7) - (2) (9) - (9)
================ =========== =========== ========== ========== ========== ======= ================ ===========
Related tax
movements - - - 4 (179) (175) - (175)
================ =========== =========== ========== ========== ========== ======= ================ ===========
Total
comprehensive
income for the
year - - (7) 865 (3,718) (2,860) - (2,860)
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
Share-based
payments -
direct to
equity(1) - - - - 30 30 - 30
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
Related tax
movements - - - - (2) (2) - (2)
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
Other changes in
equity in the
year - - - - 28 28 - 28
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
At 31 December
2016 326 631 (107) 811 1,794 3,455 2 3,457
---------------- ----------- ----------- ---------- ---------- ---------- ------- ---------------- -----------
(1) Share-based payments - direct to equity is the net of the credit to equity in respect of the share-based payment charge to the income statement and the actual cost of shares vesting in the period, excluding those vesting from own shares.
1 Basis of preparation and accounting policies
Reporting entity
Rolls--Royce plc is a company domiciled in the UK. These condensed consolidated year financial statements of the Company as at and for the year ended 31 December 2016 comprise the Company and its subsidiaries (together referred to as the "Group") and the Group's interests in joint arrangements and associates.
The consolidated financial statements of the Group as at and for the year ended 31 December 2015 (2015 Annual Report) are available upon request from the Company Secretary, Rolls-----Royce plc, 62 Buckingham Gate, London SW1E 6AT.
Statement of compliance
These condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the EU. They do not include all of the information required for full annual statements, and should be read in conjunction with the 2016 Annual Report.
The comparative figures for the financial year 31 December 2015 are not the Group's statutory accounts for that financial year. Those accounts have been reported on by the Group's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
The Board of directors approved the condensed consolidated year financial statements on 13 February 2017.
Significant accounting policies
No new accounting policies had a significant impact in 2016.
During the year, the Group has reassessed the categorisation of joint arrangements. As a result of this review, certain entities, previously classified as joint ventures, have been reclassified as joint operations from 1 January 2016. This reclassification does not affect profit before tax or net assets, but the Group's share of the individual income statement and balance sheet categories are included on a proportional basis, rather than as a single figure. The adjustment to the opening balance was to reclassify GBP57m of investments in joint ventures to: property, plant and equipment (GBP41m), inventory (GBP19m), receivables (GBP18m), cash (GBP5m), payables (GBP17m) and borrowings (GBP9m). Prior figures have not been restated. In addition, following a review of consistency, GBP92m of accruals have been reclassified as provisions.
Forthcoming accounting standards
IFRS 15 Revenue from Contracts with Customers (effective for the year beginning 1 January 2018), provides a single, principles-based five-step model to be applied to all sales contracts, based on the transfer of control of goods and services to customers. It replaces the separate models for goods, services and construction contracts currently included in IAS 11 Construction Contracts and IAS 18 Revenue.
The Group has undertaken significant analysis of how IFRS 15 should be implemented and has taken tentative accounting policy decisions. Based on this analysis, we expect that adoption of IFRS 15 will have a significant impact on the timing of recognition of revenue on individual long-term contracts, most particularly in the Civil Aerospace business. The most significant changes are:
-- IFRS 15 contains more specific requirements on the combination of contracts. Contracts can only be combined if they are with the same counterparty or related counterparties. The existing standards require contracts with different counterparties to be combined where that reflects the overall substance of a transaction. As a result, it will no longer be possible to link contracts entered into at the same time (with an airframer) for installed original equipment (OE) with long-term contracts (with the aircraft operator) for aftermarket services (LTSAs) relating to that OE.
-- For similar reasons, it will no longer be possible to recognise an intangible asset in respect of contractual aftermarket rights (relating to future aftermarket business with an operator) when OE is sold to an airframer.
-- For each performance obligation identified, IFRS 15 requires revenue to be recognised based on the transfer of control of the relevant goods or services. In contrast, under the existing standards, revenue is recognised based on when risk and reward is transferred. As a result it will no longer be possible to use flying hours (or equivalent) as a basis for measuring the stage of completion of LTSAs.
-- Compared to IAS 11, IFRS 15 includes only limited guidance on accounting for costs incurred to fulfil a performance obligation and in general these will be recognised as incurred. It is no longer possible to defer or accrue costs to report a consistent margin percentage over the term of the LTSAs.
In summary, the impact of these changes will be that upon adoption of IFRS 15:
-- Revenues and costs relating to deliveries of engines will be recognised when OE is delivered. The revenue recognised will comprise that included in the contract with the airframer reduced (if applicable) by any OE concession agreed with the operator (which IFRS 15 describes as a payment to "a customer's customer"). Consequently, the revenues and costs recognised on OE deliveries will more closely match the related cash flows. No contractual aftermarket revenue will be allocated to the OE delivery (where contracts are currently combined - 'linked accounting') and no intangible asset will be recognised (where contracts are not currently combined - 'unlinked accounting'). This will result in a loss being recognised on engine deliveries when the direct costs exceed the direct revenues.
-- Revenues on LTSAs will be recognised as services are performed rather than as the equipment is used (engine flying hours) as is the case under the current accounting policy. The stage of completion will be measured using the actual costs incurred to date compared to the estimated costs to complete the performance obligation. In practice the bulk of the revenue and costs will relate to overhaul activity which occurs at distinct points of time during the period of the LTSA. As the first major overhaul typically occurs some years after delivery, this change will generally defer the recognition of revenue on LTSAs, as compared to the current accounting policy.
Taken together, had IFRS 15 been applicable with effect from 1 January 2015, the Group currently estimates the results for the year ended 31 December 2015 would have been as follows:
IAS 11 and IAS 18 IFRS 15
-------------------- --------------------
Reported Underlying Reported Underlying
GBPbn GBPbn GBPbn GBPbn
------------------------------------- -------- ---------- -------- ----------
Revenue
===================================== ======== ========== ======== ==========
Civil Aerospace original equipment 3.3 2.6
====================================== ======== ========== ======== ==========
Civil Aerospace aftermarket services 3.7 3.5
====================================== ======== ========== ======== ==========
Other 6.4 6.4
-------------------------------------- -------- ---------- -------- ----------
Total revenue 13.7 13.4 12.8 12.5
-------------------------------------- -------- ---------- -------- ----------
Gross profit
===================================== ======== ========== ======== ==========
Civil Aerospace 1.5 0.6
====================================== ======== ========== ======== ==========
Other 1.7 1.7
-------------------------------------- -------- ---------- -------- ----------
Total gross profit 3.3 3.2 2.4 2.3
-------------------------------------- -------- ---------- -------- ----------
Profit before financing and taxation 1.5 1.5 0.6 0.6
====================================== ======== ========== ======== ==========
Net financing (1.3) (0.1) (1.3) (0.1)
====================================== ======== ========== ======== ==========
Taxation (0.1) (0.3) 0.1 (0.1)
-------------------------------------- -------- ---------- -------- ----------
Profit for the year 0.1 1.1 (0.6) 0.4
-------------------------------------- -------- ---------- -------- ----------
Net assets 6.3 3.3
-------------------------------------- -------- ---------- -------- ----------
The Group plans to adopt IFRS 15 in 2018 using the 'full' retrospective approach. The comparative 2017 results included in the 2018 financial statements will be restated, with an adjustment to equity as at 1 January 2017.
The Group will continue to work during 2017 to design, implement and refine procedures to apply the new requirements of IFRS 15 and to finalise accounting policy choices. As a result of this ongoing work, it is possible that some changes to the impact above may result.
2 Analysis by business segment
The analysis by Divisions (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 (the Chief Operating Decision Maker as defined by IFRS 8).
Civil development, manufacture, marketing and sales of commercial aero engines and aftermarket services.
Defence development, manufacture, marketing and sales of military aero engines and aftermarket services.
Power Systems development, manufacture, marketing and sales of reciprocating engines and power systems.
Marine development, manufacture, marketing and sales of marine-power propulsion systems and aftermarket services.
Nuclear development, manufacture, marketing and sales of nuclear systems for civil power generation and naval propulsion systems.
The operating results are prepared on an underlying basis, which the Board considers reflects better the economic substance of the Group's trading during the year and provides financial measures that, together with the results prepared in accordance with Adopted IFRS, allow better analysis of the factors affecting the year's results compared to the prior period. The principles adopted to determine the underlying results are:
Underlying revenues and costs - Where revenues and costs are denominated in a currency other than the functional currency of the Group undertaking and the Group hedges the net exposure, these reflect the achieved exchange rates arising on derivative contracts settled to cover the net exposure. These achieved exchange rates are applied to all relevant revenues and costs, including those for which there is a natural offsetting position, rather than translating the offsetting transactions at spot rates. The underlying profits would be the same under both approaches, but the Board considers that the approach taken provides a better indication of trends over time.
Underlying profit before financing - In addition to impact of exchange rates on revenues and costs above, adjustments have been made to exclude one-off past service credits on post-retirement schemes, exceptional restructuring costs (associated with the substantial closure or exit of a site, facility or line of business, or other major transformation activities), the effect of acquisition accounting, the effect of business disposals, the impairment of goodwill, and in 2016 financial penalties from agreements with investigating bodies.
Underlying profit before taxation - In addition to those adjustments in underlying profit before financing:
-- includes amounts realised from settled derivative contracts and revaluation of relevant assets and liabilities to exchange rates forecast to be achieved from future settlement of derivative contracts; and
-- excludes unrealised amounts arising from revaluations required by IAS 39 Financial Instruments: Recognition and Measurement, changes in value of financial RRSA contracts arising from changes in forecast payments, and the net impact of financing costs related to post-retirement scheme benefits.
Taxation - the tax effect of the adjustments above are excluded from the underlying tax charge. In addition changes in the amount of recoverable advance corporation tax recognised and the impact of changes in tax rates are also excluded.
This analysis also includes a reconciliation of the underlying results to those reported in the consolidated income statement.
The 2016 underlying results below are shown at 2015 exchange rates, with the adjustment to 2016 exchange rates shown separately.
Civil Defence Power Systems Marine Nuclear Inter-segment Total reportable segments
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
For the year ended 31
December 2016
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
original equipment 3,272 823 1,609 575 346 (33) 6,592
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
aftermarket services 3,634 1,229 751 437 415 (35) 6,431
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Total underlying revenue at
2015 exchange rates 6,906 2,052 2,360 1,012 761 (68) 13,023
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Translation to 2016 exchange
rates 161 157 295 102 16 (8) 723
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Total underlying revenue 7,067 2,209 2,655 1,114 777 (76) 13,746
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Gross profit 1,129 530 628 216 117 - 2,620
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Commercial and
administrative costs (339) (127) (305) (207) (67) - (1,045)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Restructuring (11) 10 - 3 - - 2
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Research and development
costs (549) (68) (157) (39) (6) - (819)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Share of results of joint
ventures and associates 96 15 1 - - - 112
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying profit before
financing and taxation at
2015 exchange rates 326 360 167 (27) 44 - 870
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Translation to 2016 exchange
rates 41 24 24 - 1 - 90
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying profit before
financing and taxation 367 384 191 (27) 45 - 960
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
For the year ended 31
December 2015
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
original equipment 3,258 801 1,618 773 251 (53) 6,648
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying revenue from
aftermarket services 3,675 1,234 767 551 436 (53) 6,610
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Total underlying revenue 6,933 2,035 2,385 1,324 687 (106) 13,258
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Gross profit 1,526 579 656 260 111 7 3,139
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Commercial and
administrative costs (296) (124) (296) (201) (53) - (970)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Restructuring (7) (8) (4) (16) (2) - (37)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Research and development
costs (515) (73) (162) (28) 14 - (764)
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Share of results of joint
ventures and associates 104 19 - - - - 123
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Underlying profit before
financing and taxation 812 393 194 15 70 7 1,491
---------------------------- ----- ------- ------------- ------ ------- ------------- -------------------------
Reconciliation to Total reportable Other businesses* Underlying
reported results segments and corporate Total underlying adjustments Reported results
GBPm GBPm GBPm GBPm GBPm
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
For the year ended
31 December 2016
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
original equipment 6,592 20 6,612 976 7,588
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Revenue from
aftermarket
services 6,431 15 6,446 921 7,367
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Total underlying
revenue at 2015
exchange rates 13,023 35 13,058 1,897 14,955
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Translation to 2016
exchange rates 723 2 725 (725) -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Total revenue 13,746 37 13,783 1,172 14,955
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Gross profit 2,620 6 2,626 422 3,048
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Other operating
income - - - 5 5
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Commercial and
administrative
costs (1,045) (51) (1,096) (1,112) (2,208)
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Restructuring 2 - 2 (2) -
------------------- ------------------- ------------------- ---------------- ------------------- ----------------
Research and
development costs (819) 7 (812) (106) (918) ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Share of results of joint ventures and associates 112 (5) 107 10 117 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Profit before financing and taxation at 2015 exchange rates 870 (43) 827 (783) 44 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Translation to 2016 exchange rates 90 (2) 88 (88) - ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Loss on disposal of businesses - - - (3) (3) ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Profit before financing and taxation 960 (45) 915 (874) 41 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Net financing (102) (102) (4,575) (4,677) ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Profit/(loss) before taxation (147) 813 (5,449) (4,636) ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Taxation (261) (261) 865 604 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Profit/(loss) for the period 552 (4,584) (4,032) ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Attributable to: ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Ordinary shareholders 552 (4,584) (4,032) ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Non-controlling interests - - - ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- For the year ended 31 December 2015 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Revenue from original equipment 6,648 76 6,724 215 6,939 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Revenue from aftermarket services 6,610 20 6,630 156 6,786 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Total revenue 13,258 96 13,354 371 13,725 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Gross profit 3,139 64 3,203 74 3,277 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Other operating income - - - 10 10 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Commercial and administrative costs (970) (55) (1,025) (45) (1,070) ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Restructuring (37) (2) (39) 39 - ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Research and development costs (764) (1) (765) (53) (818) ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Share of results of joint ventures and associates 123 (5) 118 (18) 100 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Profit on disposal of businesses - - - 2 2 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Profit before financing and taxation 1,491 1 1,492 9 1,501 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Net financing (60) (60) (1,281) (1,341) ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- (Loss)/profit before taxation (59) 1,432 (1,272) 160 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Taxation (351) (351) 275 (76) ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- (Loss)/profit for the period (410) 1,081 (997) 84 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Attributable to: ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Ordinary shareholders 1,080 (997) 83 ------------------- ------------------- ------------------- ---------------- ------------------- ---------------- Non-controlling interests 1 - 1 ------------------- ------------------- ------------------- ---------------- ------------------- ----------------
* Other businesses comprise former Energy businesses not included in the disposal to Siemens in 2014.
Total assets Total liabilities Net assets/(liabilities)
-----
2016 2015 2016 2015 2016 2015
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Civil 15,438 12,836 (15,104) (8,995) 334 3,841
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Defence 2,243 1,780 (2,178) (1,787) 65 (7)
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Power Systems 3,888 3,419 (1,170) (1,026) 2,718 2,393
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Marine 1,774 1,697 (998) (839) 776 858
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Nuclear 531 407 (502) (352) 29 55
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Inter-segment (1,223) (850) 1,223 850 - -
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Reportable segments 22,651 19,289 (18,729) (12,149) 3,922 7,140
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Other businesses and
corporate 51 120 (183) (120) (132) -
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Net funds/(debt) 3,132 3,252 (3,357) (3,363) (225) (111)
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Tax assets/(liabilities) 908 341 (987) (1,004) (79) (663)
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Post-retirement scheme
surpluses/(deficits) 1,346 1,063 (1,375) (1,140) (29) (77)
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
28,088 24,065 (24,631) (17,776) 3,457 6,289
--------------------------- ------- ------ ----------------- -------- ------------------------ -----
Group employees average during the year 2016 2015
---------------------------------------- ------ ------
Civil 23,800 23,100
---------------------------------------- ------ ------
Defence 6,000 6,300
---------------------------------------- ------ ------
Power Systems 10,300 10,600
---------------------------------------- ------ ------
Marine 5,300 6,000
---------------------------------------- ------ ------
Nuclear 4,300 4,100
---------------------------------------- ------ ------
Other businesses and corporate(1,2) 200 400
---------------------------------------- ------ ------
49,900 50,500
---------------------------------------- ------ ------
(1) Other businesses and corporate includes the Energy businesses not sold to Siemens in 2014 and corporate employees who do not provide a shared service to the segments. Where corporate functions provide such a service, employees have been allocated to the segments on an appropriate basis. 2015 figures have been restated on this basis.
(2) As described in Note 1, the Group has reclassified certain joint ventures to joint operations from 1 January 2016. This increased the reported Group employees by 800.
Underlying
adjustments 2016 2015
Profit
before Profit before
Revenue financing Net financing Taxation Revenue financing Net financing Taxation
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Underlying
performance 13,783 915 (102) (261) 13,354 1,492 (60) (351)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Recognise revenue
at exchange rate
on date of
transaction 1,172 - - - 371 - - -
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Realised
losses/(gains)
on settled
derivative
contracts(1) - 426 162 (107) - 287 (35) (51)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Net unrealised
fair value
changes to
derivative
contracts(2) - - (4,420) 792 - (9) (1,306) 270
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Effect of
currency on
contract
accounting - 77 - (14) - (9) - 2
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Revaluation of
trading assets
and liabilities - 67 (313) 56 - (13) 20 (6)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Financial RRSAs -
exchange
differences and
changes in
forecast
payments - - (8) (1) - - 8 (1)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Effect of
acquisition
accounting(3) - (115) - 35 - (124) - 31
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Impairment of
goodwill - (219) - - - (75) - -
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Pension
restructuring(4) - (306) - 107
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Net
post-retirement
scheme financing - - 3 (2) - - 32 (12)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Disposal of
business - (3) - - - 2 - 15
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Exceptional
restructuring - (129) - 34 - (49) - 11
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Financial
penalties from
agreements with
investigating
bodies - (671) - - - - - -
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Other - (1) 1 (5) - (1) - (2)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Reduction in rate
of UK
corporation tax - - - (30) - - - 18
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Total underlying
adjustments 1,172 (874) (4,575) 865 371 9 (1,281) 275
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
Reported per
consolidated
income statement 14,955 41 (4,677) 604 13,725 1,501 (1,341) (76)
----------------- -------- ------------ ------------- -------- -------- ------------- ------------- --------
(1) The adjustments for realised losses/(gains) on settled derivative contracts include adjustments to reflect the losses/(gains) in the same period as the related trading cash flows.
(2) The adjustments for unrealised fair value changes to derivative contracts include those of equity accounted joint ventures and exclude those for which the related trading contracts have been cancelled when the fair value changes are recognised immediately in underlying profit.
(3) The adjustment eliminates charges recognised as a result of recognising assets in acquired businesses at fair value.
(4) In the UK, tax is provided on pension surpluses at a rate of 35%, which is the relevant rate if the surpluses were to be return to the Group.
3 Research and development
2016 2015
GBPm GBPm
---------------------------------------------------------------------------------------------- ------ ------
Expenditure in the year (937) (831)
---------------------------------------------------------------------------------------------- ------ ------
Capitalised as intangible assets 99 51
---------------------------------------------------------------------------------------------- ------ ------
Amortisation of capitalised costs (147) (136)
============================================================================================== ====== ======
Impairment of capitalised costs (2) -
---------------------------------------------------------------------------------------------- ------ ------
Net cost (987) (916)
---------------------------------------------------------------------------------------------- ------ ------
Entry fees received 73 83
---------------------------------------------------------------------------------------------- ------ ------
Entry fees deferred in respect of charges in future periods (40) (28)
---------------------------------------------------------------------------------------------- ------ ------
Recognition of previously deferred entry fees 36 43
---------------------------------------------------------------------------------------------- ------ ------
Net cost recognised in the income statement (918) (818)
---------------------------------------------------------------------------------------------- ------ ------
Underlying adjustments relating to the effects of acquisition accounting and foreign exchange 56 53
---------------------------------------------------------------------------------------------- ------ ------
Net underlying cost recognised in the income statement (862) (765)
============================================================================================== ====== ======
Translation to 2015 exchange rates 50 -
---------------------------------------------------------------------------------------------- ------ ------
Net underlying cost at 2015 exchange rates (812) (765)
---------------------------------------------------------------------------------------------- ------ ------
4 Net financing
2016 2015
Per consolidated Per consolidated
income statement Underlying financing income statement Underlying financing
GBPm GBPm GBPm GBPm
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financing income
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Interest receivable 14 14 12 12
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net fair value gains on
foreign currency
contracts 1 - - -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financial RRSAs -
foreign exchange
differences and
changes in forecast
payments 23 - 21 -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net fair value gains on
commodity contracts 16 - - -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financing on
post-retirement scheme
surpluses 42 - 65 -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net foreign exchange
gains - - 17 32
----------------------- ---------------------- --------------------- ----------------------- ---------------------
96 14 115 44
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financing costs
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Interest payable (77) (77) (71) (71)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net fair value losses
on foreign currency
contracts (4,437) - (1,217) -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financial RRSAs -
foreign exchange
differences and
changes in forecast
payments (31) - (13) -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financial charge
relating to financial
RRSAs (6) (6) (8) (8)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net fair value losses
on commodity contracts - - (89) -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Financing on
post-retirement scheme
deficits (39) - (33) -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net foreign exchange
losses (145) - - -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Other financing charges (38) (33) (25) (25)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
(4,773) (116) (1,456) (104)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net financing (4,677) (102) (1,341) (60)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Analysed as:
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net interest payable (63) (63) (59) (59)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net fair value losses
on derivative
contracts (4,420) - (1,306) -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net post-retirement
scheme financing 3 - 32 -
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net other financing (197) (39) (8) (1)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
Net financing (4,677) (102) (1,341) (60)
----------------------- ---------------------- --------------------- ----------------------- ---------------------
5 Taxation
The effective reported tax rate for the year is 13.0% (2015 47.5%). The 2016 reported loss before tax largely relates to the mark to market adjustment on the foreign currency derivatives which arise mainly in the UK and the key driver of the reported rate is therefore the UK tax rate. The financial penalties and goodwill impairments on which no tax relief is available then have the effect of reducing the rate. The 2015 reported rate was high due to the low level of reported profit before tax and the higher proportion of those profits arising in higher tax countries such as the US and items that impact the tax charge having a more distortive effect.
Following announcements in the Summer Budget 2015 and the Budget 2016, the UK corporation tax rate will reduce to 19% from 1 April 2017 and 17% from 1 April 2020. The Summer Budget 2015 had originally announced that the rate would reduce to 18% from 1 April 2020. This reduction was substantively enacted on 26 October 2015 and so the prior year deferred tax assets and liabilities were calculated at this rate. The subsequent announcement in the Budget 2016 that the rate will reduce to 17% from 1 April 2020 was substantively enacted on 6 September 2016. As this reduction was substantively enacted prior to the year end, the closing deferred tax assets and liabilities have been calculated at this rate.
The resulting charges or credits have been recognised in the income statement except to the extent that they relate to items previously charged or credited to OCI or equity. Accordingly, in 2016, GBP30m has been charged to the income statement (2015: GBP18m credited) and GBP2m has been charged directly to equity (2015: GBP3m).
6 Intangible assets
Certification
costs and Contractual
participation Development aftermarket Customer
Goodwill fees expenditure rights relationships Software Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Cost:
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 1 January
2016 1,589 1,145 1,730 799 456 616 543 6,878
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Exchange
differences 284 26 116 - 84 16 66 592
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Additions - 154 100 208 - 116 53 631
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Acquisitions of
businesses 1 - - - - - 1 2
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Disposals - - (2) - - (6) - (8)
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 31 December
2016 1,874 1,325 1,944 1,007 540 742 663 8,095
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Accumulated
amortisation:
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 1 January
2016 86 373 691 394 139 325 225 2,233
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Exchange
differences 32 3 48 - 28 8 35 154
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Charge for the
year - 64 147 39 42 81 33 406
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Impairment 219 - 2 - - - 1 222
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
At 31 December
2016 337 440 888 433 209 414 294 3,015
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Net book value
at:
================ ======== =============== =============== =============== =============== ======== ===== =====
31 December 2016 1,537 885 1,056 574 331 328 369 5,080
================ ======== =============== =============== =============== =============== ======== ===== =====
31 December 2015 1,503 772 1,039 405 317 291 318 4,645
---------------- -------- --------------- --------------- --------------- --------------- -------- ----- -----
Goodwill has been tested for impairment during 2016 on the following basis:
-- The carrying values of goodwill 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. Given the long-term and established nature of many of the Group's products (product lives are often measured in decades), these forecasts generally cover the next five-ten years. Growth rates for the period not covered by the forecasts are based on a range of growth rates (2.0-3.5%) that reflect the products, industries and countries in which the relevant CGU or group of CGUs operate.
-- The key assumptions for the impairment tests are the discount rate and, in the cash flow projections, the programme assumptions, the growth rates and the impact of foreign exchange rates on the relationship between selling prices and costs. Impairment tests are performed using prevailing exchange rates.
Prior to 2016, goodwill in the Marine business was considered as separate CGUs, based on the original acquisitions (comprising ODIM ASA, Scandinavian Electric Holdings and Vinters Limited (formerly Vickers plc)). However, following re-organisations, including those resulting from the current transformation programme, we now consider that the Marine business (excluding the UK marine defence business) is a single CGU.
The Marine business has continued to be impacted by the low crude oil price and over supply of vessels to its offshore support customers. The downturn has been deeper and more prolonged than forecast a year ago and, as a consequence, the Group has recognised an impairment loss of GBP200m to the carrying value of goodwill of the CGU. This is included in cost of sales in the income statement, but excluded from the underlying results. The impairment loss is based on a value in use calculation using cash flows forecast over a ten-year period (which are considered to take account of the cyclicality of the market). The impairment test indicated a recoverable amount of GBP473m (including allowance for identified risks of GBP18m) compared with a pre-impairment carrying value of GBP673m.
The Group has also recognised other impairments to goodwill of GBP19m, including GBP14m in relation to its North American civil nuclear business. This reflects the current weakness in the services market, although the Directors expect these to recover in the medium term.
Certification costs and participation fees, development expenditure and contractual aftermarket rights have been reviewed for impairment in accordance with the requirements of IAS 36 Impairment of Assets. Where an impairment test was considered necessary, it has been 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 assumed market share, programme timings, unit cost assumptions, discount rates, and foreign exchange rates.
-- The pre-tax cash flow projections have been discounted at 9-13% (2015: 9-13%), based on the Group's weighted average cost of capital, adjusted for the estimated programme risk, for example taking account of whether or not the forecast cash flows arise from contracted business.
No impairment is required on this basis. However, a combination of adverse changes in assumptions (eg. market size and share, unit costs and programme delays) and other variables (eg. discount rate and foreign exchange rates), could result in impairment in future years.
7 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 2016 1,375 3,894 339 708 6,316
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Exchange differences 141 352 12 55 560
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Reclassification of
joint ventures to
joint operations 7 87 - - 94
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Additions - purchased 25 124 51 426 626
----------------------- ------------------ ------------------- -------------------- ----------------------- -----
Additions arising from
TotalCare Flex arrangements (non-cash) - - 75 - 75 ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Disposal of businesses (1) (3) - - (4) ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Reclassifications 131 230 63 (424) - ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Disposals/write-offs (11) (85) (49) - (145) ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- At 31 December 2016 1,667 4,599 491 765 7,522 ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Accumulated amortisation: ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- At 1 January 2016 416 2,284 125 1 2,826 ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Exchange differences 44 182 4 - 230 ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Reclassification of joint ventures to joint operations 1 52 - - 53 ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Charge for the year 63 333 28 - 424 ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Impairment 1 - - 1 2 ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Disposal of businesses - (2) - - (2) ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Reclassifications - (9) 9 - - ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Disposals/write-offs (10) (75) (40) - (125) ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- At 31 December 2016 515 2,765 126 2 3,408 ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- Net book value at: ======================= ================== =================== ==================== ======================= ===== 31 December 2016 1,152 1,834 365 763 4,114 ======================= ================== =================== ==================== ======================= ===== 31 December 2015 959 1,610 214 707 3,490 ----------------------- ------------------ ------------------- -------------------- ----------------------- ----- 8 Financial assets and liabilities
Other financial assets and liabilities comprise:
Derivatives
---------------------------------------------------------
Foreign
exchange Commodity Interest rate Financial
contracts contracts contracts Total RRSAs TotalCare Flex Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
At 31 December
2016
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
Non-current
assets 13 5 364 382 - - 382
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
Current assets 4 1 - 5 - - 5
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
Current
liabilities (566) (24) - (590) (33) - (623)
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
Non-current
liabilities (5,002) (38) (6) (5,046) (68) (15) (5,129)
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
(5,551) (56) 358 (5,249) (101) (15) (5,365)
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
At 31 December
2015
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
Non-current
assets 3 - 80 83 - - 83
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
Current assets 29 - - 29 - - 29
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
Current
liabilities (244) (39) - (283) (19) - (302)
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
Non-current
liabilities (1,428) (65) (67) (1,560) (91) - (1,651)
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
(1,640) (104) 13 (1,731) (110) - (1,841)
--------------- -------------- --------------- -------------- -------- --------------- --------------- --------
Derivative financial instruments 2016 2015
-------------------------------------------------------
Foreign exchange Commodity Interest rate Total Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ----------------- ---------- -------------- -------- --------
At January 1 (1,640) (104) 13 (1,731) (630)
---------------------------------------- ----------------- ---------- -------------- -------- --------
Currency options at inception(1) (33) - - (33) (20)
---------------------------------------- ----------------- ---------- -------------- -------- --------
Movements in fair value hedges - - 345 345 (35)
---------------------------------------- ----------------- ---------- -------------- -------- --------
Movements in other derivative contracts (4,436) 16 - (4,420) (1,306)
---------------------------------------- ----------------- ---------- -------------- -------- --------
Contracts settled 558 32 - 590 260
---------------------------------------- ----------------- ---------- -------------- -------- --------
At 31 December (5,551) (56) 358 (5,249) (1,731)
---------------------------------------- ----------------- ---------- -------------- -------- --------
(1) The Group wrote currency options to sell USD and buy GBP as part of a commercial agreement. The fair value of this option on inception was treated as a discount to the customer.
Financial risk and revenue sharing arrangements (RRSAs) and other financial
liabilities Financial RRSAs TotalCare Flex
------------------
2016 2015 2016
GBPm GBPm GBPm
--------------------------------------------------------------------------------- -------- -------- ---------------
At January 1 (110) (145) --
--------------------------------------------------------------------------------- -------- -------- ---------------
Exchange adjustments included in OCI 5 - -
--------------------------------------------------------------------------------- -------- -------- ---------------
Additions - - (14)
--------------------------------------------------------------------------------- -------- -------- ---------------
Financing charge(1) (6) (8) (1)
--------------------------------------------------------------------------------- -------- -------- ---------------
Excluded from underlying profit
--------------------------------------------------------------------------------- -------- -------- ---------------
Changes in forecast payments(1) 5 11
--------------------------------------------------------------------------------- -------- -------- ---------------
Exchange adjustments(1) (13) (3) (3)
--------------------------------------------------------------------------------- -------- -------- ---------------
Cash paid to partners 18 35 -
--------------------------------------------------------------------------------- -------- -------- ---------------
Other - - 3
--------------------------------------------------------------------------------- -------- -------- ---------------
At period end (101) (110) (15)
--------------------------------------------------------------------------------- -------- -------- ---------------
(1) Included in net financing.
Fair values of financial instruments equate to book values with the following exceptions:
2016 2015
------------------------ ------------------------
Book value Fair value Book value Fair value
GBPm GBPm GBPm GBPm
---------------- ----------- ----------- ----------- -----------
Borrowings (3,357) (3,413) (3,302) (3,312)
================ =========== =========== =========== ===========
Financial RRSAs (101) (109) (110) (110)
---------------- ----------- ----------- ----------- -----------
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.
-- Unlisted non-current investments primarily comprise bank deposits where the fair value approximates to the book value.
-- The fair values of trade receivables and payables, 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 are estimated by discounting expected future contractual cash flows using prevailing interest rate curves. 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).
-- Borrowing, financial RRSAs and TotalCare Flex liabilities are carried at amortised cost. Fair values are estimated by discounting expected future contractual cash flows using prevailing interest rate curves. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. For financial RRSAs, the contractual cash flows are based on future trading activity, which is estimated based on latest forecasts.
Borrowings
During the year, the Group has repaid GBP434m of short-term borrowings, including the GBP200m 7(3) /(8) % Notes, which matured in June.
9 Pensions and other post-retirement benefits
Movements in the net post-retirement position recognised in the balance sheet were as follows:
UK schemes Overseas schemes Total
GBPm GBPm GBPm
---------------------------------------------------------------------- ---------- ---------------- -------
At 1 January 2016 1,043 (1,120) (77)
====================================================================== ========== ================ =======
Exchange adjustments - (208) (208)
====================================================================== ========== ================ =======
Current service cost and administrative expenses(1) (169) (50) (219)
====================================================================== ========== ================ =======
Past service credit/(cost) 22 (1) 21
====================================================================== ========== ================ =======
Settlements(1) (302) (10) (312)
====================================================================== ========== ================ =======
Financing recognised in the income statement 41 (38) 3
====================================================================== ========== ================ =======
Contributions by employer 185 86 271
====================================================================== ========== ================ =======
Actuarial gains/(losses) recognised in OCI(2) (1,810) (26) (1,836)
====================================================================== ========== ================ =======
Returns on plan assets excluding financing recognised in OCI(2) 2,326 5 2,331
====================================================================== ========== ================ =======
Other - (3) (3)
---------------------------------------------------------------------- ---------- ---------------- -------
At 31 December 2016 1,336 (1,365) (29)
---------------------------------------------------------------------- ---------- ---------------- -------
Analysed as:
====================================================================== ========== ================ =======
Post-retirement scheme surpluses - included in non-current assets 1,336 10 1,346
====================================================================== ========== ================ =======
Post-retirement scheme deficits - included in non-current liabilities - (1,375) (1,375)
---------------------------------------------------------------------- ---------- ---------------- -------
1,336 (1,365) (29)
---------------------------------------------------------------------- ---------- ---------------- -------
(1) GBP306m of costs have been excluded from the underlying results, comprising: GBP301m settlement cost on the buy-out if the Vickers Group Pension Scheme; GBP3m of administrative expenses on the restructuring all the UK defined benefit plans; and GBP2m settlement cost in relation winding-up lump sums on small pensions as a consequence of the restructuring.
(2) The net actuarial gains in the UK arose principally due to changes in the yield curves used to value the assets and the liabilities.
10 Contingent liabilities
On 6 December 2012, the Company announced that it had passed information to the Serious Fraud Office (SFO), following a request from the SFO for information about allegations of malpractice in overseas markets. On 23 December 2013, the Company announced that it had been informed by the SFO that it had commenced a formal investigation. Since the initial announcement, the Company continued its investigations and engaged with the SFO and other authorities in the UK, the US and elsewhere in relation to the matters of concern.
In January 2017, after full cooperation, the Company concluded deferred prosecution agreements with the SFO and the US Department of Justice and a leniency agreement with the MPF, the Brazilian federal prosecutors. Prosecutions of individuals may follow and investigations may be commenced in other jurisdictions. In addition, we could still be affected by actions from customers and customers' financiers. The Directors are not currently aware of any matters that are likely to lead to a financial loss, but cannot anticipate all the possible actions that may be taken or their potential consequences.
In connection with the sale of its products the Group will, on some occasions, provide nancing support for its customers - generally in respect of civil aircraft. The Group's commitments relating to these nancing arrangements, which 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 $US3.2bn (31 December 2015: US$3.1bn) to provide borrowing facilities to enable customers to purchase aircraft (of which approximately US$421m could be called in 2017). 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. Consequently the directors do not consider that there is a significant exposure arising from the provision of these facilities.
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 re ect better the time span over which these exposures could arise. These amounts do not represent values that are expected to crystallise. The commitments are denominated in US dollars. As the Group does not generally adopt cash flow hedge accounting for future foreign exchange transactions, this amount is reported, together with the sterling equivalent at the reporting date spot rate. The values of aircraft providing security are based on advice from a specialist aircraft appraiser.
31 December 2016 31 December 2015
------------------ ------------------
GBPm $m GBPm $m
------------------------------------------------------- -------- -------- -------- --------
Gross contingent liabilities 238 293 269 399
------------------------------------------------------- -------- -------- -------- --------
Value of security(1) (103) (126) (136) (201)
------------------------------------------------------- -------- -------- -------- --------
Indemnities (74) (91) (79) (118)
------------------------------------------------------- -------- -------- -------- --------
Net commitments 61 76 54 80
------------------------------------------------------- -------- -------- -------- --------
Net commitments with security reduced by 20%(2) 86 106 78 115
------------------------------------------------------- -------- -------- -------- --------
(1) Security includes unrestricted cash collateral of: 38 47 35 52
------------------------------------------------------- -------- -------- -------- --------
(2) 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.
Contingent liabilities exist in respect of guarantees provided by the Group in the ordinary course of business for product delivery, performance and reliability. The Group has, in the normal course of business, entered into arrangements in respect of export finance, performance bonds, countertrade obligations and minor miscellaneous items. Various Group undertakings are parties to legal actions and claims which arise in the ordinary course of business, some of which are for substantial amounts. As a consequence of the insolvency of an insurer as previously reported, the Group is no longer fully insured against known and potential claims from employees who worked for certain of the Group's UK-based businesses for a period prior to the acquisition of those businesses by the Group. While the outcome of some of these matters cannot precisely be foreseen, the directors do not expect any of these arrangements, legal actions or claims, after allowing for provisions already made, to result in significant loss to the Group.
On 11 July 2016, the Group announced that it will purchase the outstanding 53.1% shareholding in ITP owned by SENER Grupo de Ingeniería SA ("SENER"). This follows a decision by SENER to exercise its put option. On 28 November 2016, and following due diligence, the Group confirmed the valuation of EUR720m. Under the agreement, consideration will be settled over a two-year period following completion in eight evenly spaced instalments of equal value. The updated agreement allows flexibility to settle the consideration either in cash, in the form of Rolls-Royce shares or any mixture of the two, as preferred by Rolls-Royce. A decision as to whether each payment will be settled in cash, shares or cash and shares will be determined by Rolls-Royce during the payment period.
Completion remains subject to regulatory clearances and is expected in 2017.
11 Related party transactions
Transactions with related parties are shown on page 112 of the 2016 Annual Report. Significant transactions in the current financial period are as follows:
2016 2015
GBPm GBPm
------------------------------------------------------------------- ------- -------
Sales of goods and services to joint ventures and associates 2,022 1,896
------------------------------------------------------------------- ------- -------
Purchases of goods and services from joint ventures and associates (1,881) (2,266)
------------------------------------------------------------------- ------- -------
Included in sales of goods and services to joint ventures and associates are sales of spare engines amounting to GBP356m (2015: GBP189m).
Profit recognised in the year on such sales amounted to GBP119m (2015: GBP71m), including profit on current year sales and recognition of profit deferred on similar sales in previous years. On an underlying basis (at actual achieved rates on settled derivative transactions), the amounts were GBP97m (2015: GBP67m).
12 Derivation of summary funds flow statement
The table below shows the derivation of the summary funds flow statement (lines marked *) on page [x] from the cash flow statement on page [x].
2016 2015
=== ======================================= ---------------- -------------- ======================================
GBPm GBPm GBPm GBPm Source
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Underlying profit before tax (PBT) -
* below 813 1,432
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Depreciation of property, plant and
equipment 426 378 Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Amortisation of intangible assets 628 432 Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Reversal of underlying adjustment
Impairment of goodwill (219) (75) (above)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Impairment of investments - 2 Cash flow statement
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Reversal of underlying adjustment
Acquisition accounting (115) (124) (above)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
* Depreciation and amortisation 720 613
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
(Increase)/decrease in inventories (161) 63 Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Cash flow statement adjusted for
Decrease/(increase) in trade and other non-underlying exchanges differences
receivables 312 (836) of GBP258m
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Cash flow statement adjusted for
(Decrease)/increase in trade and other non-underlying exchanges differences
payables (273) 240 of GBP507m
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Reversal of underlying adjustment
Revaluation of trading assets 67 (13) (above)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
* Movement on net working capital (55) (546)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Additions of intangible assets (631) (408) Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Purchases of property, plant and equipment (585) (487) Cash flow statement
------------------------------------------- ====== -------- ====== ------ --------------------------------------
Government grants received 15 8 Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Expenditure on property, plant and
* equipment and intangible assets (1,201) (887)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Reversal of underlying adjustment
Realised losses on hedging instruments 426 287 (above)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Net unrealised fair value to changes Reversal of underlying adjustment
to derivatives - (9) (above)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Foreign exchange on contract Reversal of underlying adjustment
accounting 77 (9) (above)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Reversal of underlying adjustment
Exceptional restructuring (129) (49) (above)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Reversal of underlying adjustment
Other (1) (1) (above)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Reversal of charge in underlying PBT
Underlying financing 102 60 (above)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Non-underlying exchange differences on
receivables (258) - Reversal of adjustment above
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Non-underlying exchange differences on
payables 507 - Reversal of adjustment above
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Loss on disposal of property, plant and
equipment 5 8 Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Joint venture dividends less share of
Joint ventures (43) (37) results - cash flow statement
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Increase/(decrease) in provisions 44 (151) Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Cash flows on other financial assets and
liabilities (608) (305) Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Share based payments 35 5 Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Additions of unlisted investments - (6) Cash flow statement
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Disposal of intangible assets 8 4 Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Disposal of property, plant and equipment 8 33 Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Investments in joint ventures and
associates (30) (15) Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Interest received and paid - cash
Net interest (72) (55) flow statement
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Net funds of joint ventures Net cash and borrowings reclassified
reclassified to joint operations (4) - - cash flow statement
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
* Other 67 (240)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
* Trading cash flow 344 372
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Net defined benefit plans - underlying
operating charge 204 213 Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Cash funding of defined benefit plans (271) (259) Cash flow statement
------------------------------------------- ------ -------- ------ ------ --------------------------------------
Contributions to defined benefit
schemes in excess of underlying PBT
* charge (67) (46)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
* Tax (157) (160) Cash flow statement
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
* Free cash flow 120 166
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Movements on balances with parent
* company (321) (822)
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Increase in share in joint ventures
* and other acquisitions and disposals (153) (3) Cash flow statement
--- --------------------------------------- ------ -------- ------ ------ --------------------------------------
* Discontinued operations - (121) Cash flow statement
--- --------------------------------------- ------ -------- ------ ------ -------------------------------------- * Foreign exchange 240 3 Cash flow statement --- --------------------------------------- ------ -------- ------ ------ -------------------------------------- * Change in net debt (114) (777) --- --------------------------------------- ------ -------- ------ ------ --------------------------------------
Free cash flow is a measure of financial performance of the business's 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 excluding capital expenditures and excludes payments made to shareholders, amounts spent (or received) on business acquisitions, exceptional restructuring costs and foreign exchange changes on net funds. The Board considers that free cash flow reflects cash generated from the Group's underlying trading.
2016 2015
========================================== --------------- -------------- =========================================
GBPm GBPm GBPm GBPm Source
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Reported operating profit 44 1,499
--------------------------------------------------- ------ ------ ------ -----------------------------------------
Reported to underlying adjustment (note
Realised losses on hedging instruments (426) (287) 2)
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Net unrealised fair value to changes to Reported to underlying adjustment (note
derivatives - 9 2)
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Reported to underlying adjustment (note
Foreign exchange on contract accounting (77) 9 2)
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Revaluation of trading assets and Reported to underlying adjustment (note
liabilities (67) 13 2)
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Reported to underlying adjustment (note
Effect of acquisition accounting 115 124 2)
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Reported to underlying adjustment (note
UK pension restructuring 306 - 2)
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Reported to underlying adjustment (note
Impairment of goodwill 219 75 2)
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Reported to underlying adjustment (note
Exceptional restructuring 129 49 2)
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Financial penalties from agreements with Reported to underlying adjustment (note
investigating bodies 671 - 2)
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Reported to underlying adjustment (note
Other 1 1 2)
------------------------------------------ ------- ------ ------ ------ -----------------------------------------
Adjustments to reported operating profit 871 (7)
--------------------------------------------------- ------ ------ ------ -----------------------------------------
Underlying profit before financing 915 1,492
--------------------------------------------------- ------ ------ ------ -----------------------------------------
Underlying financing (102) (60) Underlying income statement (note 2)
--------------------------------------------------- ------ ------ ------ -----------------------------------------
Underlying profit before tax 813 1,432
--------------------------------------------------- ------ ------ ------ -----------------------------------------
The table below shows a reconciliation of free cash flow to the change in cash and cash equivalents presented in the Consolidated cash flow statement.
2016 2015
----------- -------------
GBPm GBPm GBPm GBPm
------------------------------------------------------------ ---- ----- ---- -------
Change in cash and cash equivalents (691) 320
------------------------------------------------------------ ---- ----- ---- -------
Movement on balances with parent company 321 822
------------------------------------------------------------ ---- ----- ---- -------
Net cash flow from changes in borrowings and finance leases 345 (1,095)
------------------------------------------------------------ ---- ----- ---- -------
Increase/decrease in short-term investments 1 (5)
------------------------------------------------------------ ---- ----- ---- -------
Increase in share in joint ventures 154 -
------------------------------------------------------------ ---- ----- ---- -------
Debt of joint ventures reclassified as joint operations (9) -
------------------------------------------------------------ ---- ----- ---- -------
Disposal of discontinued operations - 121
------------------------------------------------------------ ---- ----- ---- -------
Acquisition of businesses 6 5
------------------------------------------------------------ ---- ----- ---- -------
Disposal of other businesses (7) (2)
------------------------------------------------------------ ---- ----- ---- -------
Changes in group structure 144 124
------------------------------------------------------------ ---- ----- ---- -------
Free cash flow 120 166
------------------------------------------------------------ ---- ----- ---- -------
Principal risks and uncertainties
The following table describes the principal risks facing the Group, notwithstanding that there are other risks that may occur and may impact the achievement of the Group's objectives:
Risk or uncertainty How we manage it
and potential impact
Disruptive technologies -- Horizon and emerging technology
and business models scanning, and understanding our
Disruptive technologies, competitors, including patent searches.
new entrants with alternative -- Investing in innovation and
business models or disruptions new technologies.
to key markets or customers -- Focusing on enhancing our skills
could reduce our ability and capabilities to maintain our
to win sustainable future technology leadership.
business, achieve operating -- Forming strategic partnerships
results and realise and conducting joint research programmes.
future growth opportunities. -- Establishing our digital business.
Product failure -- Ensuring a culture that puts
Product not meeting safety first.
safety expectations, -- Applying our engineering design
or causing significant and validation process from initial
impact to customers design, through production and
or the into service.
environment through -- Reviewing the scope and effectiveness
failure in quality control. of the Group's product safety policies
to ensure that they operate to
the highest industry standards.
-- Operating a safety management
system (SMS), governed by the product
safety review board, and subject
to continual improvement based
on experience and industry best
practice.
-- Product safety training is an
integral part of our SMS.
-- Improving our supply chain quality.
Business continuity -- Continuing our investment in
Breakdown of external adequate capacity and modern equipment
supply chain or internal and facilities.
facilities that could -- Identifying and assessing points
be caused by destruction of weakness in our internal and
of key facilities, natural external supply chain, our IT systems
disaster, regional conflict, and the skills of our people.
financial insolvency -- Selecting stronger suppliers,
of a critical supplier developing dual sources or dual
or scarcity of materials capability.
which would reduce the -- Developing and testing site-level
ability to meet customer incident management and business
commitments, win future recovery plans.
business or achieve -- Providing improved response
operational results. to supply chain disruption through
customer excellence centres.
-- Understanding potential changes
to supply chain responsiveness
and resilience resulting from Brexit
and change to the US administration
(eg. due to logistics delays).
IT vulnerability -- Implementing 'defence in depth'
Breach of IT security through deployment of multiple
causing controlled or layers of software and processes
critical data to be including web gateways, filtering,
lost, made inaccessible, firewalls, intrusion, advanced
corrupted or accessed persistent threat detectors and
by unauthorised users. integrated reporting.
-- Running security and network
operations centres.
-- Actively sharing IT security
information through industry, government
and security forums.
Competitive position -- Accessing and developing key
The presence of large, technologies and service offerings
financially strong competitors which differentiate us competitively.
in the majority of our -- Focusing on being responsive
markets means that the to our customers and improving
Group is susceptible the quality, delivery and reliability
to significant price of our products and services.
pressure for original -- Partnering with others effectively.
equipment or services -- Driving down cost and improving
even where our markets margins.
are mature or the competitors -- Protecting credit lines.
few. Our main competitors -- Investing in innovation, manufacturing
have access to significant and production, and continuing
government funding programmes governance of technology programmes.
as well as the ability -- Maintaining a healthy balance
to invest heavily in sheet to enable access to cost-effective
technology and industrial sources of third-party funding.
capability. -- Understanding our competitors.
-- Understanding the potential
implications on our competitiveness
resulting from Brexit and change
to the US administration.
Political risk -- Where possible, locating our
Geopolitical factors facilities and supply chain in
that lead to an unfavourable countries with a low level of political
business climate and risk and/or ensuring that we maintain
significant tensions dual capability.
between major trading -- Diversifying global operations
parties or blocs which to avoid excessive concentration
could impact the Group's of risks in particular areas.
operations. For example: -- The Group's international network
explicit trade protectionism, and its businesses proactively
differing tax or regulatory monitoring local situations.
regimes, potential for -- Maintaining a balanced business
conflict; or broader portfolio with high barriers to
political issues. entry and a diverse customer base.
-- Proactively influencing regulation
where it affects us.
-- Steering committee, chaired
by Group President, to co-ordinate
activities across the Group and
minimise the impact of Brexit.
-- Monitoring the potential impact
of changes following the change
to the US administration, relating
to tax policy, trade and relationships
with the UK government.
Major programme delivery -- Major programmes are subject
Failure to deliver a to Board approval.
major programme on time, -- Reviewing major programmes at
within budget, to specification, levels and frequencies appropriate
or technical performance to their criticality and performance,
falling significantly against key financial and non-financial
short of customer expectations, deliverables and potential risks
or not delivering the throughout the programmes lifecycles.
planned business benefits, -- Conducting technical audits
would have potentially at pre-defined points which are
significant adverse performed by a team that is independent
financial and reputational from the programme.
consequences, including -- Requiring programmes to address
the risk of impairment the actions arising from reviews,
of the carrying value and audits and then monitoring
of the Group's intangible and controlling progress through
assets and the impact to closure.
of potential litigation. -- Applying knowledge management
principles to provide benefit to
current and future programmes.
Compliance -- Taking an uncompromising approach
Non-compliance by the to compliance.
Group with legislation -- Operating an extensive compliance
or other regulatory programme. This programme and the
requirements in the Global Code of Conduct are disseminated
heavily regulated environment throughout the Group and are updated
in which it operates from time to time to ensure their
(for example: export continued relevance, and to ensure
controls; use of controlled that they are complied with, both
chemicals and substances; in spirit and to the letter. The
and anti-bribery and Global Code of Conduct and the
corruption legislation) Group's compliance programme are
compromising the ability supported by appropriate training.
to conduct business -- Strengthening of the ethics,
in certain jurisdictions anti-bribery and corruption, compliance
and exposing the Group and export control teams.
to potential: reputational -- A legal team is in place to
damage; financial penalties; manage regulatory investigations.
debarment from government -- Engaging with external regulatory
contracts for a period authorities.
of time; and/or suspension -- Implementing a comprehensive
of export privileges Registration, Evaluation, Authorisation
(including export credit and restriction of CHemicals (REACH)
financing), each of compliance programme. This includes
which could have a material establishing appropriate data systems
adverse effect and processes, working with our
suppliers, customers and trade
associations and conducting research
on alternative materials.
Market and financial -- Maintaining a healthy balance
shock sheet, through managing cash balances
The Group is exposed and debt levels and maturities.
to a number of market -- Providing financial flexibility
risks, some of which by maintaining high levels of liquidity
are of a macro-economic and an investment grade credit
nature (eg. oil price, rating.
exchange rates) and -- Sustaining a balanced portfolio
some of which are more through earning revenue both from
specific to the Group the sale of original equipment
(eg. liquidity and credit and aftermarket services, providing
risks, credit rating, a broad product range and addressing
profitability post IFRS diverse markets that have differing
15, reduction in air business cycles.
travel or disruption -- Deciding where and what currencies
to other customer operations). to source in, and where and how
Significant extraneous much credit risk is extended or
market events could taken. The Group has a number of
also materially damage treasury policies that are designed
the Group's competitiveness to hedge residual risks using financial
and/or creditworthiness. derivatives (foreign exchange,
This would affect operational interest rates and commodity price
results or the outcomes risk.
of financial transactions. -- Review debt financing and hedging
in light of volatility in external
financial markets caused by external
events, such as Brexit and change
of US administration.
Talent and capability -- Attracting, rewarding and retaining
Inability to attract the right people with the right
and retain the critical skills globally in a planned and
capabilities and skills targeted way, including regular
needed in sufficient benchmarking of remuneration.
numbers and to effectively -- Developing and enhancing organisational,
organise, deploy and leadership, technical and functional
incentivise our people capability to deliver global programmes
to deliver our strategy, and transformational change.
business plan and projects. -- Continuing a strong focus on
individual development and succession
planning.
-- Proactively monitoring retirement
in key areas and actively managing
the development and career paths
of our people with a special focus
on employees with the highest potential.
-- Embedding a lean, agile high
performance culture that tightly
aligns Group strategy with individual
and team objectives.
-- Retaining, incentivising and
effectively deploying the critical
capabilities, skills and people
needed to deliver our strategic
priorities, plans and projects
whilst implementing the Group's
major programme to transform its
business, to be resilient and to
act with pace and simplicity.
-- Tracking engagement through
our annual employee opinion survey
and a commitment to drive year-on-year
improvement to the employee experience
and communications.
-- Reviewing employee mobility
as part of Brexit steering group.
Annual report and financial statements
The statements below have been prepared in connection with the Company's full Annual Report for the year ended 31 December 2016. Certain parts thereof are not included in this announcement.
Going concern
The going concern assessment considers whether it is appropriate to prepare the financial statements on a going concern basis.
As described on page 142, the Group meets its funding requirements through a mixture of shareholders' funds, bank borrowings, bonds and notes. At 31 December 2016, the Group had borrowing facilities of GBP5.3bn and total liquidity of GBP5.1bn, including cash and cash equivalents of GBP2.8bn and undrawn facilities of GBP2.3bn. GBP170m of the facilities mature in 2017.
At 31 December 2016, the Company had net liabilities of GBP642m (page 115). In accordance with section 656 of the Companies Act 2006, the Directors called a general meeting of the Company, which was held on 13 February 2017, to consider whether any, and if so what, steps should be taken to deal with the situation. The meeting
considered that the net liabilities had arisen largely as a result of the requirement under IAS 39 Financial Instruments: Recognition and Measurement to value foreign exchange derivatives (principally those entered into to hedge future US$ cash flows) at fair value. At the foreign exchange rates prevailing on 31 December 2016, this
fair value was a liability of GBP5.4bn. However, accounting standards do not permit the recognition of a corresponding asset in respect of the forecast US$ cash flows which have been hedged, and which will, when received, be valued at equivalent rates, offsetting the liability recognised at 31 December 2016. Based on these considerations, the meeting concluded that no further steps should be taken.
The Group's forecasts and projections, taking into account reasonably possible changes in trading performance and the deficit on the Company's net assets noted above, show that the Company and the Group have sufficient financial resources. The Directors have reasonable expectations that the Company and the Group are well placed to manage business risks and to continue in operational existence for the foreseeable future (which accounting standards require to be at least a year from the date of this report) and have not identified any material uncertainties to the Company's and the Group's ability to do so.
On the basis described above, the Directors consider it appropriate to adopt the going concern basis in preparing the consolidated financial statements (in accordance with the 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting' published by the Financial Reporting Council in September 2014).
Responsibility statements under the Disclosure Guidance and Transparency Rules
Each of the persons who is a Director at the date of approval of this report confirms that to the best of his or her knowledge:
i. each of the Group and parent company financial statements, prepared in accordance with IFRS and UK Accounting Standards respectively, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
ii. the Strategic Report on pages 2 to 51 and Directors' Report on pages 52 to 60 include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
iii. the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR GGUGWWUPMGCM
(END) Dow Jones Newswires
March 17, 2017 10:39 ET (14:39 GMT)
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