REG - Rolls-Royce Holdings - 2024 Half Year Results
01/08/2024 07:00
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RNS Number : 6859Y Rolls-Royce Holdings plc 01 August 2024
This announcement contains inside information for the purposes of article
17(1) of the market abuse regulation (EU) 596/2014
1 August 2024
ROLLS-ROYCE HOLDINGS PLC - 2024 Half Year Results
Strong first half delivery gives confidence to raise guidance.
Shareholder distributions to be reinstated in respect of the full year 2024
results.
- Underlying operating profit of £1.1bn and underlying margin of 14.0% reflects
the impact of our strategic initiatives, with commercial optimisation and cost
efficiency benefits across the Group
- Free cash flow of £1.2bn driven by higher operating profit and continued LTSA
balance growth
- Return on capital 1 (#_ftn1) increased to 13.8% and represents significant
value creation
- Net debt reduced to £0.8bn driven by statutory net cash flow from operating
activities of £1.7bn
- Full year guidance raised in a challenging supply chain environment: we now
expect underlying operating profit between £2.1bn and £2.3bn and free cash
flow between £2.1bn and £2.2bn
- Reinstating shareholder distributions in respect of the full year 2024 results
starting at a 30% pay-out ratio of underlying profit after tax with an ongoing
pay-out ratio of 30-40% each year 2 (#_ftn2)
Tufan Erginbilgic, CEO said: "Our transformation of Rolls-Royce into a
high-performing, competitive, resilient, and growing business is proceeding
with pace and intensity. We are expanding the earnings and cash potential of
the business in a challenging supply chain environment, which we are
proactively managing. We are on track to deliver our mid-term targets.
Our strong first half results reflect the continued delivery of our strategic
initiatives and a relentless focus on commercial optimisation and cost
efficiencies across the Group. These results and our increased financial
resilience give us the confidence to raise our 2024 guidance and reinstate
shareholder distributions in respect of the full year 2024 results."
Half Year 2024 Group Results
Underlying Underlying H1 2023 (3) Statutory Statutory
H1 2024
H1 2023
H1 2024 3 (#_ftn3)
£ million
Revenue 8,182 6,950 8,861 7,523
Operating profit 1,149 673 1,646 797
Operating margin % 14.0% 9.7% 18.6% 10.6%
Profit before taxation 1,035 524 1,416 1,419
Basic earnings per share (pence) 8.95 4.90 13.71 14.70
Free cash flow 1,158 356
Return on capital (%) 13.8% 9.0%
Net cash flow from operating activities* 1,669 925
* H1 2023 re-presented see page 17
30 Jun 2024 31 Dec 2023
Net debt (822) (1,952)
1 (#_ftnref1)
Adjusted return on capital is defined on page 46 and is abbreviated to return on capital
2 (#_ftnref2)
Subject to final Board recommendation and shareholder approval at the 2025 Annual General Meeting. This applies to all references to the reinstatement of shareholder distributions in this document. A 30-40% payout ratio will be applied to 'underlying profit after tax' which is equal to 'Underlying profit for the period'
3 (#_ftnref3)
All underlying income statement commentary is provided on an organic basis unless otherwise stated. A reconciliation of alternative performance measures to their statutory equivalent is provided on pages 43 to 46
Half year 2024 performance summary
· Significantly higher operating profit and margins in a challenging
supply chain environment. Underlying operating profit rose by £0.5bn to
£1.1bn, a 74% increase versus the prior period. This was driven by our
transformation programme and strategic initiatives, with commercial
optimisation and cost efficiency benefits across the Group. Underlying
operating margin rose by 4.4pts to 14.0%. The largest improvement was in Civil
Aerospace, which delivered an operating margin of 18.0% (H1 2023: 12.4%). This
was driven by higher aftermarket profit from large engine LTSA (long term
service agreements) and time and materials, stronger performance in business
aviation in both original equipment (OE) and aftermarket and net contractual
margin improvements. Defence delivered an underlying operating margin of 15.5%
(H1 2023: 13.6%), driven by higher aftermarket profit in Combat and Transport.
Submarines growth was also strong in the period. Power Systems reported an
operating margin of 10.3% (H1 2023: 7.0%), driven by our pricing actions,
particularly in Power Generation where we are capturing growing demand for
data centres with improved margins. Across all divisions, our cost efficiency
actions have helped to mitigate the impact of inflation.
· Strong cash generation: Free cash flow was £1.2bn (H1 2023: £0.4bn),
driven by strong operating profit and continued LTSA balance growth. Civil net
LTSA balance growth net of risk and revenue sharing arrangements (RRSAs) of
£544m (H1 2023: £609m) in the period was supported by higher large engine
flying hours (EFH) and an improved normalised EFH rate, with LTSA invoiced
flying hour receipts of £2.9bn (H1 2023: £2.3bn). The improvement in free
cash flow versus the prior period was driven by higher underlying operating
profit and reduced working capital outflows of £228m (H1 2023: £465m), with
a reduction of inventory days of 12 versus H1 2023.
· Building resilience: Total underlying cash costs as a proportion of
underlying gross margin (TCC/GM) improved to 0.49x (H1 2023: 0.64x). Net debt
reduced to £0.8bn (2023 FY: £2.0bn). We also reduced our gross debt position
by repaying a €550 million bond from free cash flow and cancelled our last
remaining £1bn UKEF-supported undrawn loan facility, both enabled by our more
resilient and growing cash delivery. We now have drawn debt of £3.6bn, of
which $1.0bn matures in 2025, and £1.6bn of lease liabilities. Together with
cash and cash equivalents of £4.3bn, we have a robust liquidity position of
£6.8bn at 30 June 2024 (2023 FY: £7.2bn). We are significantly improving
cash flow across all core divisions, creating a more robust and less volatile
Group free cash flow delivery.
· Shareholder distributions to be reinstated in respect of the full year
2024 results: As we shared at our capital markets day in November 2023, we are
committed to reinstating regular shareholder distributions. We are making
strong progress strengthening the balance sheet and building resilience. As
such, we are reinstating shareholder distributions in respect of the full year
2024 results, starting at a 30% pay-out ratio of underlying profit after tax
to be paid in 2025. We expect over the mid-term regular shareholder
distributions to be based on a 30-40% payout ratio of underlying profit after
tax.
Transformation programme and strategic initiatives
The success of our transformation programme and strategic initiatives is
evident in our financial performance in the first half of 2024. We have made
good progress, and there is still more to do. Our strategic framework is
founded on four pillars:
· Portfolio choices & partnerships: In Civil Aerospace, deliveries of
the Pearl 700 are ramping up for the Gulfstream G700 business jet that entered
into service in April 2024. We delivered 83 Pearl engines in the first half of
the year and our commercial optimisation actions mean that business aviation
engine deliveries are now mostly profitable. We have also invested to grow our
capacity in Derby and Dahlewitz, which will allow us to deliver c.40%
additional new engines per year from 2025 compared to 2023, with increased
capacity to support rising aftermarket volumes. Last year, we identified areas
for divestment, from which we expect to generate £1.0bn-£1.5bn gross
proceeds by 2028. As part of this, we completed the disposals of our Direct
Air Capture assets in the period and, on 31 July, the off-highway engines
business in the lower power range in Power Systems.
· Advantaged businesses & strategic initiatives: In Civil Aerospace,
the Trent XWB-97 was our best-selling engine with 108 new orders placed in the
first half of the year. Our £1.0bn investment programme to improve the time
on wing of our modern engines is progressing well. Flight testing is about to
commence for the Trent 1000 TEN HPT blade. This part will more than double the
time on wing of the Trent 1000 TEN engine and is already in service on c.50%
of the Trent 7000 fleet. We completed the design of further improvements for
the Trent 1000 and 7000 that will deliver an incremental 25-30% time on wing
benefit by the end of 2025. We have also tested improvements for the Trent
XWB-84 that will further improve the fuel burn efficiency of this
best-in-class engine. We continue to drive for improved commercial terms and
lower costs across our widebody and business aviation contracts. This resulted
in total contractual margin improvements of £431m (net contractual margin
improvements were £223m including a charge of £208m largely associated with
supply chain challenges). In Defence, we were selected to partner with prime
contractor SNC to provide engines for the US Air Force Survivable Airborne
Operations Center (SAOC) programme. In Power Systems, we are capturing demand
in the fast-growing market for backup power for Data Centres with a more
competitive business model and improved margins as a result of our value-based
pricing approach.
· Efficiency & simplification: In total, we expect our Efficiency
& Simplification programme to deliver more than £250m of cumulative
savings by the end of 2024, on track to achieve our target of £400-500m of
savings in the mid-term. Within this, we are also on track to deliver c.£200m
per annum of organisational design benefits by the end of 2025. Our new
organisational design came into effect on 1 June 2024, which creates a leaner,
more focused organisation with fewer layers. In addition, we continue to focus
on driving procurement synergies across the Group. By the end of 2024, we
expect to deliver c.£0.5bn of cumulative gross third-party cost savings
against our mid-term target of £1.0bn, to partly offset inflationary
pressures. Supporting this is the roll-out of zero-based budgeting. We
successfully completed pilots in Civil Aerospace which demonstrated savings of
10-15% in third party costs in the selected areas. The approach is now being
rolled out across the Group.
· Lower carbon & digitally enabled businesses: In Power Systems, we are
developing a highly efficient hydrogen reciprocating engine which is partly
funded by the German government. In the Power Generation segment, we won major
Battery Energy Storage Systems (BESS) contracts, including a contract with
Latvia to install one of the largest BESS in the EU. Rolls-Royce SMR is one of
two companies shortlisted by Vattenfall, the Swedish power company, to deploy
a fleet of small modular reactors in the country. We continue to digitally
enable our businesses. In Civil Aerospace, we have introduced machine learning
and advanced imaging technologies to inspect turbine blades resulting in a
faster, more consistent process that reduces the cost of shop visits and
extends the time on wing of critical engine components.
These strategic initiatives and our transformation programme are expanding the
earnings and cash potential of the business.
Outlook and 2024 Guidance
Following a strong first half delivery across all divisions, we are raising
our full year 2024 guidance. This reflects the continued execution of our
strategic initiatives, notably commercial optimisation and cost efficiencies,
and is despite the impact of prolonged supply chain challenges.
2024 financial guidance Updated Previous
Underlying operating profit £2.1bn-£2.3bn £1.7bn-£2.0bn
Free cash flow £2.1bn-£2.2bn £1.7bn-£1.9bn
Our updated free cash flow guidance for full year 2024 includes a £150-200m
cash impact related to the supply chain, where parts availability remains
constrained. We anticipate a continued impact to free cash flow for a further
18-24 months as supply chain challenges persist. We are actively managing
these challenges and seek to mitigate the costs.
Our 2024 free cash flow guidance is based on civil net LTSA creditor growth at
the low end of the mid-term range (£0.8bn - £1.2bn), compared to £1.1bn in
2023. In Civil Aerospace, we continue to expect 2024 large EFHs will grow to
100-110% of 2019's level, 500-550 total original equipment (OE) deliveries and
1,300-1,400 total shop visits.
Strong progress in the early years of our plan demonstrates a front-end loaded
delivery of performance improvements. Our 2023 performance and 2024 guidance
on operating profit and free cash flow means that by the end of 2024 we expect
to deliver more than 75% of the profit and more than 65% of the free cash flow
improvement set out in our mid-term targets. As a reminder, our mid-term
targets are underlying operating profit of £2.5-2.8bn, an operating margin of
13-15%, free cash flow of £2.8-3.1bn and return on capital of 16-18%. These
targets are based upon our expectations for a 2027 timeframe.
Financial performance by business
£ million Underlying revenue Organic change (1) Underlying operating profit/(loss) Organic change (1) Underlying operating margin Organic margin change (pts)
Civil Aerospace 4,119 27% 740 85% 18.0% 5.6pt
Defence 2,219 18% 345 34% 15.5% 1.9pt
Power Systems 1,837 6% 189 56% 10.3% 3.3pt
New Markets 2 nm(2) (91) 18% nm(2) nm(2)
Other businesses 5 nm(2) - nm(2) nm(2) nm(2)
Corporate/eliminations - nm(2) (34) (3%) nm(2) nm(2)
Total 8,182 19% 1,149 74% 14.0% 4.4pt
(1 )Organic change is the measure of change at constant translational
currency applying full year 2023 average rates to 2023 and 2024. All
underlying income statement commentary is provided on an organic basis unless
otherwise stated
(2 ) nm is defined as not meaningful
Trading cash flow
£ million H1 2024 H1 2023
Civil Aerospace 1,038 401
Defence 234 76
Power Systems 121 22
New Markets (68) (42)
Other businesses (3) 8
Corporate/eliminations (33) (34)
Total trading cash flow 1,289 431
Underlying operating profit charge exceeded by contributions to defined (18) (16)
benefit schemes
Taxation (113) (59)
Total free cash flow 1,158 356
Civil Aerospace
H1 2024 key Civil Aerospace operational metrics: Large engine Business aviation/ regional Total Change
OE deliveries 120 116 236 48
LTSA engine flying hours (millions) 7.6 1.4 9.0 1.3
Total LTSA shop visits 413 211 624 33
…of which major shop visits 195 199 394 63
Significantly improved Civil Aerospace performance reflects higher large
engine aftermarket and time and materials profit, stronger business aviation
profit in both OE and aftermarket, net margin contractual improvements and the
benefits of cost efficiency actions.
In the first half of 2024, a total of 273 large engines were ordered with a
gross book-to-bill of 2.3x. Significant new orders included Indigo, Korean
Air, Delta and VietJet. With 108 orders, the Trent XWB-97 was our bestselling
engine in the period. As a result of strong order inflow, our large engine
order book increased by 9% to 1,773 engines at the end of June 2024.
Total OE deliveries rose by 26% to 236 engines, with 116 business aviation
deliveries (H1 2023: 73) and 120 total large engine deliveries (H1 2023: 115).
In the first half of 2024 we delivered 21 large spare engines (H1 2023: 18),
which represented 18% of total large engine deliveries (H1 2023: 16%). Total
shop visits increased 6% versus the prior period to 624 (H1 2023: 591), of
these 195 were large engine major shop visits (H1 2023: 144).
Underlying revenue of £4.1bn increased 27%, driven by higher shop visits
volumes, OE engine deliveries and commercial optimisation. Underlying OE
revenue grew by 27% in the period to £1.3bn and services revenue grew by 27%
to £2.8bn. LTSA revenue catch-ups were £258m (H1 2023: £23m).
Underlying operating profit was £740m (18.0% margin) versus £405m in H1 2023
(12.4% margin). The improvement versus the prior period was driven by higher
large engine aftermarket profit, reflecting increased LTSA margins and volumes
and a higher time and materials profit, combined with stronger business
aviation profit in both OE and aftermarket. Higher underlying operating profit
also reflects the benefit of net contractual margin improvements as well as
cost efficiencies which helped to mitigate the impact of inflation, with
indirect costs slightly lower versus the prior period.
Our efforts to improve the commercial terms and reduce costs across our large
engine and business aviation contracts supported total contractual margin
improvements of £431m in the period. These benefits were partially offset by
£208m of additional charges largely associated with the impact of prolonged
supply chain challenges, which were booked across onerous provisions and
contract catch-ups. As a result, net contractual margin improvements were
£223m (H1 2023: £105m), comprising contract catch-ups of £216m (H1 2023:
£70m) and net onerous provision releases of £7m (H1 2023: £35m).
We expect a lower underlying operating profit margin in H2 2024 due to higher
OE deliveries and shop visit mix, notably an increased number of Trent 1000
major shop visits.
Trading cash flow of £1,038m (H1 2023: £401m) reflects higher operating
profit and continued net LTSA balance growth net of risk and revenue sharing
arrangements (RRSAs) of £544m (H1 2023: £609m). LTSA balance growth in the
period was supported by a higher normalised EFH rate due to our commercial
actions and growth in large EFHs. Large EFHs rose by 22% versus the prior
period to 101% of 2019 levels, due to continued strong demand for travel and
our young, growing wide-body fleet. Business aviation and regional EFHs were
broadly unchanged in the period.
Defence
Higher operating profit in Defence reflects Transport and Combat aftermarket
profit growth, Submarine growth and cost efficiencies across the business.
Demand remained strong, notably across Combat and Submarines, with order
intake of £1.7bn in the period and a book-to-bill ratio of 0.8x. This brings
our order backlog to £8.5bn at the end of the period, with order cover
approaching 100% for the remainder of 2024. In the first half of the year, we
were selected to form part of the team led by prime contractor SNC, to
modernise and deliver a replacement for the United States Air Force's current
fleet of E-4B "Nightwatch" aircraft as part of the SAOC contract. This order
is expected to have a near term benefit to earnings.
Revenue increased by 18% 4 (#_ftn4) to £2.2bn (H1 2023: £1.9bn). Growth was
led by Submarines and Combat which reported growth of 84(4)% and 10%,
respectively. Total OE revenues grew by 5% versus last year to £0.9bn driven
by increased submarine volumes. Services revenues grew by 27% to £1.3bn 5
(#_ftn5) supported by a more favourable shop mix visit and improved pricing.
Operating profit was £345m (15.5% margin) versus £261m (13.6% margin) in the
prior period. The improvement in operating profit reflects strong aftermarket
profit growth in Combat and Transport, with an improved margin. Strong
submarines growth reflects the ramp up of programmes including AUKUS. Higher
operating profit was also supported by cost efficiencies, including an
increase in customer funded R&D.
We expect a lower underlying operating profit margin in H2 2024, as a result
of a less favourable aftermarket mix and increased OE deliveries.
Trading cash flow of £234m increased versus £76m prior period, driven by
higher underlying operating profit and an improved working capital
performance.
4 (#_ftnref4) Defence revenue growth of 18% and Submarines revenue
growth of 84% includes a c.£180m benefit of a one-off capital and lease
transaction. Excluding this, Defence revenue growth was 8% and Submarines
revenue growth was 40%
5 (#_ftnref5) Services revenues include a c.£180m benefit of a one-off
capital and lease transaction in Submarines
Power Systems
In Power Systems, our actions on pricing and costs have continued to drive
profitable growth, particularly in the Power Generation segment where we are
capturing the benefit of strong demand for data centres.
Order intake in Power Systems was £2.4bn, 26% up versus the prior period,
with a book-to-bill ratio of 1.3x. OE order coverage for the remainder of 2024
is 100% and 44% for 2025. Demand remains particularly strong in Power
Generation and Governmental.
Underlying revenue was £1.8bn, an increase of 6% versus the prior period.
This was driven by Power Generation and Governmental, which reported revenue
growth of 15% and 12%, respectively. Underlying OE revenues grew by 10% to
£1.3bn. Underlying Services revenue was broadly flat versus the prior period
at £0.6bn.
Underlying operating profit grew by 56% to £189m. Underlying operating margin
rose by 3.3pts to 10.3% (H1 2023: 7.0%). The increase in underlying operating
profit reflects continued commercial optimisation benefits across all
categories, notably in Power Generation, and cost efficiencies.
We expect a higher underlying operating profit margin in H2 2024 reflecting
the typical seasonality of the business.
Trading cash flow was £121m with a conversion ratio of 64% versus £22m and
18% last year. The increase in trading cash flow was mainly due to increased
operating profit with working capital continuing to be tightly managed.
New Markets
Rolls-Royce SMR (small modular reactors) has completed step two of the Generic
Design Assessment (GDA) regulatory process in the UK and moved into the third
and final step on 30 July 2024. Rolls-Royce is the only European company to
have reached this milestone, adding to our competitive advantage. First power
is still planned in the early 2030s, which will be dependent on securing
orders from the UK Government's SMR procurement process.
Rolls-Royce SMR is one of two companies that have been shortlisted by
Vattenfall, to potentially deploy a fleet of SMRs in Sweden. The programme is
part of Vattenfall's plans to meet the rising demand for electricity, adding
nuclear capacity and helping Sweden to achieve its goal of creating a
fossil-free economy by 2045. Rolls-Royce SMR is in a range of selection
processes with a number of counterparts.
Planned cost increases in SMR to meet development milestones resulted in an
increased operating loss of £(91)m versus £(78)m in the prior period.
Trading cash flow was an outflow of £(68)m compared to £(42)m in the prior
period.
Statutory and underlying Group financial performance
H1 2024 H1 2023
£ million Statutory Impact of hedge book (1) Impact of acquisition accounting Impact of other non-underlying items Underlying Underlying
Revenue 8,861 (679) - - 8,182 6,950
Gross profit 2,108 (73) 22 (80) 1,977 1,515
Operating profit 1,646 (82) 23 (438) 1,149 673
Net financing income/(costs) (230) 54 - 62 (114) (149)
Profit before taxation 1,416 (28) 23 (376) 1,035 524
Taxation (2) (280) 7 (6) (19) (298) (120)
Profit for the period 1,136 (21) 17 (395) 737 404
Basic earnings per share (pence) 13.71 8.95 4.90
(1 ) Reflecting the impact of measuring revenue and costs at the average
exchange rate during the period and the valuation of assets and liabilities
using the period end exchange rate rather than the rate achieved on settled
foreign exchange contracts in the period or the rate expected to be achieved
by the use of the hedge book
(2 ) Statutory taxation includes the recognition of a deferred tax asset on
UK tax losses of £157m
Revenue: Underlying revenue of £8.2bn was up 19%, with strong growth in all
divisions, notably Civil Aerospace. Statutory revenue of £8.9bn was 18%
higher compared with the prior period. The difference between statutory and
underlying revenue is driven by statutory revenue being measured at average
prevailing exchange rates (H1 2024: GBP:USD 1.27; H1 2023: GBP:USD 1.23) and
underlying revenue being measured at the hedge book achieved rate during the
period (H1 2024 GBP:USD 1.48; H1 2023:GBP:USD 1.50).
Operating profit: Underlying operating profit of £1.1bn (14.0% margin) versus
£673m (9.7% margin) in the prior period. Underlying operating profit was
higher in all three core divisions, reflecting commercial optimisation and
cost efficiencies across the Group. The largest improvement in margins was in
Civil Aerospace, driven by higher LTSA aftermarket and business aviation
profits. Defence and Power Systems margins also rose materially. Statutory
operating profit was £1.6bn, higher than the £1.1bn underlying operating
profit largely due to a £545m impairment reversal related to a Civil
Aerospace programme asset impairment that was recognised in 2020 and £82m
negative impact from currency hedges in the underlying results. Charges of
£130m were excluded from the underlying results as these related to
non-underlying items comprising net transformation and restructuring charges
of £107m; and £23m relating to the amortisation of intangible assets arising
on previous acquisitions.
Profit before taxation: Underlying profit before taxation of £1.0bn included
£(114)m net financing costs comprising £128m interest receivable, £(137)m
interest payable and £(105)m of other financing charges and costs of undrawn
facilities. Statutory profit before tax of £1.4bn included £(179)m net fair
value losses on derivative contracts, £(60)m net interest payable, net
foreign exchange gains of £120m and £(111)m other financing charges and
costs of undrawn facilities.
Taxation: Underlying tax charge of £(298)m (H1 2023: £(120)m) reflects an
overall tax charge on profits of Group companies as well as a tax charge of
£(100)m on a de-grouping gain in the UK and a tax credit of £34m relating to
the recognition of some of the deferred tax asset on UK tax losses. These are
also reflected in the statutory tax charge of £(280)m (H1 2023: £(196)m)
together with an additional tax credit on the recognition of a £123m deferred
tax asset relating to UK tax losses. In addition, included in the £(280)m tax
charge is a £10m tax credit related to the reduction in the UK tax rate on
authorised pension surpluses, a tax charge of £(40)m related to unrealised
foreign exchange derivatives and a £(75)m tax charge related to other
non-underlying items.
Free cash flow
H1 2024 H1 2023
£ million Cash flow Impact of hedge book Impact of acquisition accounting Impact of other non-underlying items Funds flow Funds flow
Operating profit 1,646 (82) 23 (438) 1,149 673
Depreciation, amortisation and impairment 51 - (23) 399 427 489
Movement in provisions 38 (108) - (36) (106) (95)
Movement in Civil LTSA balance 788 (73) - - 715 727
Movement in prepayments to RRSAs for LTSA parts (272) 101 - - (171) (118)
Movement in costs to obtain contracts 6 1 - - 7 7
Settlement of excess derivatives (1) (75) - - - (75) (210)
Interest received 124 - - - 124 60
Other operating cash flows (2) (21) 11 - - (10) (74)
Operating cash flow before working capital and income tax 2,285 (150) - (75) 2,060 1,459
Working capital (3) (93) (265) - 130 (228) (465)
Cash flows on other financial assets and liabilities held for operating (410) 405 - - (5) 6
purposes
Income tax (113) - - - (113) (59)
Cash from operating activities 1,669 (10) - 55 1,714 941
Capital element of lease payments (122) 10 - - (112) (157)
Capital expenditure (291) - - - (291) (285)
Investment 17 - - - 17 17
Interest paid (157) - - - (157) (159)
Other 42 - - (55) (13) (1)
Free cash flow 1,158 - - - 1,158 356
(1 ) The funds flow to 30 June 2023 has been re-presented to disclose cash
flows on settlement of excess derivative contracts as cash flows from
operating activities. As a result, operating cash flows before working capital
and income tax during the period to 30 June 2023 have reduced by £(210)m to
£941m. Cash flows on settlement of excess derivative contracts were
previously shown after cash from operating activities in arriving at free cash
flow. There is no impact to free cash flow
(2 ) Other operating cash flows include profit/(loss) on disposal, share of
results and dividends received from joint ventures and associates, cash flows
relating to our defined benefit post-retirement schemes, and share based
payments
(3 ) Working capital includes inventory, trade and other receivables and
payables, and contract assets and liabilities (excluding Civil LTSA balances,
prepayment to RRSAs and costs to obtain contracts). Working capital was
previously defined as inventory, trade and other receivables and payables, and
contract assets and liabilities, excluding Civil LTSA balances
Free cash flow in the year was £1.2bn, an improvement of £0.8bn compared
with the prior period driven by:
Underlying operating profit of £1.1bn, £0.5bn higher than the prior period.
This reflects improved underlying operating profit and margins in all three
core divisions, notably Civil Aerospace, driven by our actions on commercial
optimisation and cost efficiencies.
Movement in provisions of £(106)m driven by movements across several
provisions held, including contract losses, warranty and guarantees and Trent
1000.
Movement in Civil LTSA balance was £715m, similar to the prior period
(£727m), driven by higher EFHs and an improved normalised EFH rate.
Movements in prepayments to RRSAs for LTSA parts of £(171)m (H1 2023:
£(118)m), higher than the prior period primarily a result of contract
restructuring to drive overall longer term benefits.
Working capital outflows of £(228)m, compared to £(465)m in the prior
period. Inventory increased by £(641)m as a result of inventory build in line
with requirements to meet demand across the divisions, along with continued
supply chain disruption. There was a net £413m inflow from receivables,
payables and contract liabilities reflecting volume growth and timing.
Income tax of £(113)m, net cash tax payments for the first half of 2024 were
higher than the prior period (£(59)m) due to timing, including final payments
made in respect of the prior year.
The capital element of lease payments was £(112)m, £45m lower than the prior
period as a result of timing of lease payments.
Capital expenditure of £(291)m, includes £(133)m of property, plant and
equipment additions and £(165)m of intangibles additions. The combined
additions were higher than the prior period as a result of investment in site
improvements across the Group.
Interest paid of £(157)m, including lease interest payments, is broadly in
line with the prior period. The reduction in interest charges, as a result of
the termination of a £1bn UKEF and £1bn term loan in 2023, has been largely
offset by higher interest charges on gross overdrafts.
Balance Sheet
£ million 30 Jun 2024 31 Dec 2023 Change
Intangible assets 4,426 4,009 417
Property, plant and equipment 3,637 3,728 (91)
Right of use assets 815 905 (90)
Joint ventures and associates 540 479 61
Civil LTSA(1) (9,868) (9,080) (788)
RRSA prepayments for LTSA parts (1) 1,592 1,320 272
Costs to obtain contracts(1) 110 116 (6)
Working capital (1) (1,265) (1,502) 237
Provisions (2,073) (2,029) (44)
Net debt (2) (822) (1,952) 1,130
Net financial assets and liabilities (2) (1,812) (2,060) 248
Net post-retirement scheme deficits (99) (253) 154
Taxation 2,527 2,605 (78)
Held for sale (3) 51 54 (3)
Other net assets and liabilities 4 31 (27)
Net liabilities (2,237) (3,629) 1,392
Other items
US$ hedge book (US$bn) 16 15
(1 ) The total of these lines represent inventory, trade receivables and
payables, contract assets and liabilities and other assets and liabilities in
the statutory balance sheet
(2 ) Net debt includes £9m (2023: £23m) of the fair value of derivatives
included in fair value hedges and the element of fair value relating to
exchange differences on the underlying principal of derivatives in cash flow
hedges
(3 ) Held for sale assets relate to the sale of the off-highway engines
business in the lower power range based in Power Systems
Key drivers of balance sheet movements were:
Intangible assets: The £0.4bn increase is a result of an impairment reversal
related to a Civil Aerospace programme asset impairment that was recognised in
2020.
Civil LTSA: The £(0.8)bn movement in the net liability balance was mainly
driven by an increase in invoiced LTSA receipts exceeding revenue recognised
in the year. This is especially prevalent on new contracts where shop visits
are not immediately scheduled.
RRSA prepayments for LTSA parts: The £0.3bn increase corresponds to the
increase seen in the Civil LTSA balance above. RRSA prepayments typically move
in line with the Civil LTSA as the RRSA prepayment represents amounts that we
have paid to Risk and Revenue Share Partners for the parts that they will
ultimately provide in support of our contracts.
Working capital: The £(1.3)bn net working capital position decreased by
£0.2bn compared to the prior period. The movement comprised £0.6bn increase
in inventory across the divisions reflecting higher sales volumes and supply
chain disruption, a decrease in contract liabilities of £0.3bn driven by
advanced payments received across the divisions partly offset by £(0.5)bn
increase in payables due to changes in operational volumes and timing of
supplier payments and £(0.2)bn reduction in receivables driven by lower
prepayments from customers and lower RRSP receivables partly offset by higher
trading volumes.
Provisions: The £44m net increase in provisions was due to a net increase in
the provision for warranty & guarantees driven by increased volumes and
trading, a net increase in contract loss provisions due to additional contract
losses being greater than contract loss reversals and utilisation, and a net
increase in provisions for severance costs related to the multi-year
transformation programme. These were partly offset by utilisation of the Trent
1000 provision.
Net debt: Decreased from £(2.0)bn to £(0.8)bn driven by a free cash inflow
of £1.2bn. Our liquidity position is strong with £6.8bn of liquidity
including cash and cash equivalents of £4.3bn and undrawn facilities of
£2.5bn. During the period, the Group repaid a €550m bond in line with its
maturity date. Net debt included £(1.6)bn of lease liabilities (2023 FY:
£(1.7)bn).
Net financial assets and liabilities: A £0.2bn reduction in the net financial
liabilities driven by contracts maturing in the period, partly offset by a
change in fair value of derivative contracts largely due to the impact of the
movement in GBP:USD exchange rates.
Taxation: The net tax asset reduced by £(78)m. The decrease relates to
£(172)m reduction in non-UK deferred tax assets, primarily driven by an
impairment reversal, £(61)m reduction in other deferred tax assets, partly
offset by the recognition of a £157m deferred tax asset relating to UK tax
losses. Deferred tax liabilities have decreased by £47m, mainly due to a
reduction in the UK tax rate applied to authorised pension surpluses. Net
current tax liabilities have increased by £(49)m.
Results meeting and webcast
Our results presentation will be held at UBS, 5 Broadgate, London EC2M 2QS and
webcast live at 10:30 (BST) today. Downloadable materials will also be
available on the Investor Relations section of the Rolls-Royce website:
https://www.rolls-royce.com/investors/results-and-events.aspx
(https://www.rolls-royce.com/investors/results-and-events.aspx)
To register for the webcast, including Q&A participation, please visit the
following link: Rolls-Royce 2024 Half Year Results - webinar.net
(https://app.webinar.net/rqENVkoVbWp)
Please use this same link to access the webcast replay which will be made
available shortly after the event concludes. Photographs and
broadcast-standard video are available at www.rolls-royce.com
(http://www.rolls-royce.com)
Enquiries:
Investors: Media:
Jeremy Bragg +44 7795 840875 Richard Wray +44 7810 850055
This results announcement contains forward-looking statements. Any statements
that express forecasts, expectations and projections are not guarantees of
future performance and will not be updated. By their nature, these statements
involve risk and uncertainty, and a number of factors could cause material
differences to the actual results or developments. This report is intended to
provide information to shareholders, is not designed to be relied upon by any
other party, or for any other purpose and Rolls-Royce Holdings plc and its
directors accept no liability to any other person other than under English
law.
LSE: RR.; ADR: RYCEY; LEI: 213800EC7997ZBLZJH69
Condensed Consolidated Interim Financial Statements
Condensed consolidated income statement
For the half-year ended 30 June 2024
( )
Half-year to 30 June 2024 Half-year to
30 June 2023
Notes £m £m
Revenue 2 8,861 7,523
Cost of sales (1,3) (6,753) (5,866)
Gross profit 2 2,108 1,657
Commercial and administrative costs 2 (641) (560)
Research and development (3) 2, 3 101 (389)
Share of results of joint ventures and associates 78 89
Operating profit 1,646 797
Gain arising on disposal of businesses - 1
Profit before financing and taxation 1,646 798
Financing income 4 306 934
Financing costs 4 (536) (313)
Net financing (costs)/income (2) (230) 621
Profit before taxation 1,416 1,419
Taxation 5 (280) (196)
Profit for the period 1,136 1,223
Attributable to:
Ordinary shareholders 1,149 1,229
Non-controlling interests (NCI) (13) (6)
Profit for the period 1,136 1,223
Other comprehensive income/(expense) 123 (226)
Total comprehensive income for the period 1,259 997
Earnings per ordinary share attributable to ordinary shareholders: 6
Basic 13.71p 14.70p
Diluted 13.63p 14.67p
(1)( ) Cost of sales includes a net charge for expected credit losses
(ECLs) of £19m (30 June 2023: £19m release). Further details can be found in
note 10
(2) Included within net financing are fair value changes on derivative
contracts. Further details can be found in notes 2, 4 and 14
(3) The impact of an exceptional impairment reversal relating to a Civil
Aerospace programme impairment that was recognised in 2020 is included within
cost of sales, £132m, and research and development, £413m. Further details
can be found in notes 2 and 7
Condensed consolidated statement of comprehensive income
For the half-year ended 30 June 2024
Half-year to 30 June 2024 Half-year to 30 June 2023
Notes £m £m
Profit for the period 1,136 1,223
Other comprehensive income/(expense) (OCI)
Actuarial movements in post-retirement schemes 16 124 (35)
Revaluation to fair value of other investments (3) 1
Share of OCI of joint ventures and associates (6) (1)
Related tax movements 35 11
Items that will not be reclassified to profit or loss 150 (24)
Foreign exchange translation differences on foreign operations (24) (227)
Movement on fair values charged to cash flow hedge reserve (CFHR) (16) (31)
Reclassified to income statement from CFHR 15 64
Share of OCI of joint ventures and associates (2) -
Related tax movements - (8)
Items that will be reclassified to profit or loss (27) (202)
Total other comprehensive income/(expense) 123 (226)
Total comprehensive income for the period 1,259 997
Attributable to:
Ordinary shareholders 1,272 1,003
NCI (13) (6)
Total comprehensive income for the period attributable to ordinary 1,259 997
shareholders
Condensed consolidated balance sheet
At 30 June 2024
30 June 31 December 2023
2024
Notes £m £m
ASSETS
Intangible assets 7 4,426 4,009
Property, plant and equipment 8 3,637 3,728
Right-of-use assets 9 815 905
Investments - joint ventures and associates 540 479
Investments - other 4 31
Other financial assets 14 314 360
Deferred tax assets 2,922 2,998
Post-retirement scheme surpluses 16 868 782
Non-current assets 13,526 13,292
Inventories 5,449 4,848
Trade receivables and other assets 10 8,194 8,123
Contract assets 11 1,364 1,242
Taxation recoverable 56 80
Other financial assets 14 39 34
Cash and cash equivalents 4,319 3,784
Current assets 19,421 18,111
Assets held for sale 19 64 109
TOTAL ASSETS 33,011 31,512
LIABILITIES
Borrowings and lease liabilities 12 (305) (809)
Other financial liabilities 14 (560) (448)
Trade payables and other liabilities 13 (7,557) (6,896)
Contract liabilities 11 (6,118) (6,098)
Current tax liabilities (168) (143)
Provisions for liabilities and charges 15 (556) (532)
Current liabilities (15,264) (14,926)
Borrowings and lease liabilities 12 (4,845) (4,950)
Other financial liabilities 14 (1,596) (1,983)
Trade payables and other liabilities 13 (1,795) (1,927)
Contract liabilities 11 (8,968) (8,438)
Deferred tax liabilities (283) (330)
Provisions for liabilities and charges 15 (1,517) (1,497)
Post-retirement scheme deficits 16 (967) (1,035)
Non-current liabilities (19,971) (20,160)
Liabilities associated with assets held for sale 19 (13) (55)
TOTAL LIABILITIES (35,248) (35,141)
NET LIABILITIES (2,237) (3,629)
EQUITY
Called-up share capital 1,701 1,684
Share premium 1,012 1,012
Capital redemption reserve 167 167
Cash flow hedge reserve 9 12
Translation reserve 610 634
Accumulated losses (5,791) (7,190)
Equity attributable to ordinary shareholders (2,292) (3,681)
Non-controlling interest (NCI) 55 52
TOTAL EQUITY (2,237) (3,629)
Condensed consolidated cash flow statement
For the half-year ended 30 June 2024
Notes Restated (1)
Half-year to Half-year to
30 June 2024
30 June 2023
Reconciliation of cash flows from operating activities
Operating profit 1,646 797
Loss/(profit) on disposal of property, plant and equipment 1 (1)
Share of results of joint ventures and associates (78) (89)
Dividends received from joint ventures and associates 15 16
Amortisation and impairment of intangible assets 7 (287) 139
Depreciation and impairment of property, plant and equipment 8 205 206
Depreciation and impairment of right-of-use assets 9 129 170
Adjustment of amounts payable under residual value guarantees within lease - (2)
liabilities
Impairment of and other movements on investments 4 -
Increase/(decrease) in provisions 38 (142)
Increase in inventories (641) (557)
Movement in trade receivables/payables and other assets/liabilities 573 (51)
Movement in contract assets/liabilities 497 1,154
Cash flows on other financial assets and liabilities held for operating (410) (516)
purposes (2)
Cash flows on settlement of excess derivative contracts (1, 3) (75) (210)
Interest received 124 60
Net defined benefit post-retirement cost recognised in profit before financing 16 21 25
Cash funding of defined benefit post-retirement schemes 16 (39) (38)
Share-based payments 59 23
Net cash inflow from operating activities before taxation 1,782 984
Taxation paid (113) (59)
Net cash inflow from operating activities 1,669 925
Cash flows from investing activities
Movement in other investments - 1
Additions of intangible assets 7 (165) (123)
Disposals of intangible assets 7 - 1
Purchases of property, plant and equipment (133) (177)
Disposals of property, plant and equipment 7 12
Acquisition of businesses 19 - (12)
Disposal of businesses (including cash flows on disposals in prior periods) 19 - 3
Movement in investments in joint ventures and associates (16) (8)
Movement in short-term investments - 11
Cash flows on other financial assets and liabilities held for non-operating (12) -
purposes
Net cash outflow from investing activities (319) (292)
Cash flows from financing activities
Repayment of loans (475) (1)
Settlement of swaps hedging fixed rate borrowings (11) -
Proceeds from increase in loans 4 1
Capital element of lease payments (122) (167)
Net cash flow from decrease in borrowings and lease liabilities (604) (167)
Interest paid (103) (94)
Interest element of lease payments (42) (42)
Fees paid on undrawn facilities (12) (23)
Transactions with NCI (4) 33 24
Net cash outflow from financing activities (728) (302)
Change in cash and cash equivalents 622 331
Cash and cash equivalents at 1 January 3,731 2,605
Exchange losses on cash and cash equivalents (40) (81)
Cash and cash equivalents at 30 June (5) 4,313 2,855
(1) The cash flow statement to 30 June 2023 has been re-presented as a
result of a change in accounting policy to disclose cash flows on settlement
of excess derivative contracts as cash flows from operating activities. As a
result, there has been a decrease in cash flows from operating activities
during the period to 30 June 2023 from £1,135m to £925m and a decrease in
cash outflow from financing activities from £(512)m to £(302)m. There is no
impact to the total change in cash and cash equivalents or to any alternative
performance measures. See note 1 for further detail
(2)( ) Predominantly relates to cash settled on derivative contracts held
for operating purposes
(3) In 2020, the Group experienced a significant decline in its medium-term
outlook and consequently a significant deterioration to its forecast net USD
cash inflows. The Group took action to reduce the size of the USD hedge book
by $11.8bn across 2020-2026 to reflect the fact that at that time, future
operating cash flows were no longer forecast to materialise. To achieve the
necessary reduction in the hedge book, a separate and distinct set of foreign
exchange derivative instruments were entered into to buy $11.8bn. The
associated cash outflow of these transactions is £1,674m and occurs over the
period 2020-2026. This action had the impact of fixing the fair value of the
over-hedged position and provided certainty over when the cash flows to settle
the position would occur in future periods. During the period, the Group
incurred a cash outflow of £75m (30 June 2023: £210m) and estimates that
future cash outflows of £71m will be incurred during the remainder of 2024
and £175m spread over 2025 and 2026
(4)( ) Relates to NCI investment received in the period, in respect of
Rolls-Royce SMR Limited
(5)( ) The Group considers overdrafts (repayable on demand) and cash held
for sale to be an integral part of its cash management activities and these
are included in cash and cash equivalents for the purposes of the cash flow
statement
Condensed consolidated cash flow statement continued
For the half-year ended 30 June 2024
In deriving the condensed consolidated cash flow statement, movements in
balance sheet line items have been adjusted for non-cash items. The cash flow
in the period includes the sale of goods and services to joint ventures and
associates - see note 18.
Half-year to 30 June 2024 Half-year to
30 June 2023
£m £m
Reconciliation of movements in cash and cash equivalents to movements in net
debt
Change in cash and cash equivalents 622 331
Cash flow from decrease in borrowings and lease liabilities 604 167
Less: settlement of related derivatives included in fair value of swaps below (11) -
Cash flow from decrease in short-term investments - (11)
Change in net debt resulting from cash flows 1,215 487
Lease additions, modifications and other non-cash adjustments on borrowings (62) (90)
and lease liabilities
Exchange (losses)/gains on net debt (26) 66
Fair value adjustments 17 78
Movement in net debt 1,144 541
Net debt at 1 January excluding the fair value of swaps (1,975) (3,337)
Net debt at 30 June excluding the fair value of swaps (831) (2,796)
Fair value of swaps hedging fixed rate borrowings 9 (49)
Net debt at 30 June (822) (2,845)
The movement in net debt (defined by the Group as including the items shown
below) is as follows:
At Funds flow Exchange differences Fair value adjustments Reclassifi-cations ( ) Other movements At
30 June
1 January
£m £m £m £m £m £m £m
2024
Cash at bank and in hand 739 9 (6) - - - 742
Money market funds 1,077 437 (4) - - - 1,510
Short-term deposits 1,968 129 (30) - - - 2,067
Cash and cash equivalents (per balance sheet) 3,784 575 (40) - - - 4,319
Overdrafts (53) 47 - - - - (6)
Cash and cash equivalents (per cash flow statement) 3,731 622 (40) - - - 4,313
Short-term investments - - - - - - -
Other current borrowings (478) 471 - 2 - 1 (4)
Non-current borrowings (3,568) - 13 15 - (2) (3,542)
Lease liabilities (1,660) 122 1 - - (61) (1,598)
Financial liabilities (5,706) 593 14 17 - (62) (5,144)
Net debt excluding the fair value of swaps (1,975) 1,215 (26) 17 - (62) (831)
Fair value of swaps hedging fixed rate borrowings (1) 23 11 (13) (12) - - 9
Net debt (1,952) 1,226 (39) 5 - (62) (822)
2023
Cash at bank and in hand 847 (76) (27) - - - 744
Money market funds 34 701 - - - - 735
Short-term deposits 1,726 (290) (54) - - - 1,382
Cash and cash equivalents (per balance sheet) 2,607 335 (81) - - - 2,861
Overdrafts (2) (4) - - - - (6)
Cash and cash equivalents (per cash flow statement) 2,605 331 (81) - - - 2,855
Short-term investments 11 (11) - - - - -
Other current borrowings (1) - - - (462) - (463)
Non-current borrowings (4,105) - 63 78 462 (2) (3,504)
Lease liabilities (1,847) 167 84 - - (88) (1,684)
Financial liabilities (5,953) 167 147 78 - (90) (5,651)
Net debt excluding fair value of swaps (3,337) 487 66 78 - (90) (2,796)
Fair value of swaps hedging fixed rate borrowings (1) 86 - (63) (72) - - (49)
Net debt (3,251) 487 3 6 - (90) (2,845)
(1)( ) Fair value of swaps hedging fixed rate borrowings reflects the impact
of derivatives on repayments of the principal amount of debt. Net debt
therefore includes the fair value of derivatives included in fair value hedges
(30 June 2024: £33m, 31 December 2023: £34m) and the element of fair value
relating to exchange differences on the underlying principal of derivatives in
cash flow hedges (30 June 2024: £(24)m, 31 December 2023: £(11)m)
Condensed consolidated statement of changes in equity
For the half-year ended 30 June 2024
Attributable to ordinary shareholders
Notes Share capital Share premium Capital redemption reserve Cash flow hedging reserve Translation reserve Accumulated losses (1) Total NCI Total equity
£m £m £m £m £m £m £m £m £m
At 1 January 2024 1,684 1,012 167 12 634 (7,190) (3,681) 52 (3,629)
Profit for the period - - - - - 1,149 1,149 (13) 1,136
Foreign exchange translation differences on foreign operations - - - - (24) - (24) - (24)
Actuarial movements on post-retirement schemes 16 - - - - - 124 124 - 124
Fair value movement on cash flow hedging reserve - - - (16) - - (16) - (16)
Reclassified to income statement from cash flow hedging reserve - - - 15 - - 15 - 15
Revaluation to fair value of other investments - - - - - (3) (3) - (3)
OCI of joint ventures and associates - - - (2) - (6) (8) - (8)
Related tax movements - - - - - 35 35 - 35
Total comprehensive income/(expense) for the period - - - (3) (24) 1,299 1,272 (13) 1,259
Issue of ordinary shares 17 - - - - - 17 - 17
Shares issued to employee share trust - - - - - (17) (17) - (17)
Share-based payments - direct to equity (2) - - - - - 39 39 - 39
Transactions with NCI (3) - - - - - 26 26 16 42
Related tax movements - - - - - 52 52 - 52
Other changes in equity in the period 17 - - - - 100 117 16 133
At 30 June 2024 1,701 1,012 167 9 610 (5,791) (2,292) 55 (2,237)
At 1 January 2023 1,674 1,012 166 26 861 (9,789) (6,050) 34 (6,016)
Profit for the period - - - - - 1,229 1,229 (6) 1,223
Foreign exchange translation differences on foreign operations - - - - (227) - (227) - (227)
Actuarial movements on post-retirement schemes - - - - - (35) (35) - (35)
Fair value movement on cash flow hedging reserve - - - (31) - - (31) - (31)
Reclassified to income statement from cash flow hedging reserve - - - 64 - - 64 - 64
Revaluation to fair value of other investments - - - - - 1 1 - 1
OCI of joint ventures and associates - - - - - (1) (1) - (1)
Related tax movements - - - (8) - 11 3 - 3
Total comprehensive income/(expense) for the period - - - 25 (227) 1,205 1,003 (6) 997
Issue of ordinary shares 10 - - - - - 10 - 10
Shares issued to employee share trust - - - - - (10) (10) - (10)
Share-based payments - direct to equity (2) - - - - - 23 23 23
Transactions with NCI (3) - - - - - 17 17 10 27
Related tax movements - - - - - 3 3 3
Other changes in equity in the period 10 - - - - 33 43 10 53
At 30 June 2023 1,684 1,012 166 51 634 (8,551) (5,004) 38 (4,966)
(1 ) At 30 June 2024, 110,852,000 ordinary shares with a net book value of
£27m (30 June 2023: 54,338,132 ordinary shares with a net book value of
£22m) were held for the purpose of share-based payment plans and included in
accumulated losses. During the period:
- 30,331,000 ordinary shares with a net book value of £13m (30 June
2023: 6,439,000 ordinary shares with a net book value of £15m) vested in
share-based payment plans;
- the Company issued 88,200,000 (30 June 2023: 49,100,000) new ordinary
shares to the Group's share trust for its employee share-based payment plans
with a net book value of £17m (30 June 2023: £10m); and
- the Company acquired none (30 June 2023: none) of its ordinary shares
via reinvestment of dividends received on its own shares and purchased 71,490
(30 June 2023: 184,336) of its ordinary shares through purchases on the London
Stock Exchange
(2)( ) Share-based payments - direct to equity is the share-based payment
charge for the period less the actual cost of vesting excluding those vesting
from own shares and cash received on share-based schemes
(3) Relates to NCI investment received in the period in respect of
Rolls-Royce SMR Limited
Notes to the Condensed Consolidated Interim Financial Statements
1 Basis of preparation and accounting policies
Reporting entity
Rolls-Royce Holdings plc (the 'Company') is a public company limited by shares
incorporated under the Companies Act 2006 and domiciled in the UK. These
Condensed Consolidated Interim Financial Statements of the Company as at and
for the six months to 30 June 2024 consist of the consolidation of the
financial statements of the Company and its subsidiaries (together referred to
as the 'Group') and include the Group's interest in jointly controlled and
associated entities.
The Consolidated Financial Statements of the Group as at and for the year
ended 31 December 2023 (2023 Annual Report) are available upon request from
the Company Secretary, Rolls-Royce Holdings plc, Kings Place, 90 York Way,
London, N1 9FX.
The Board of Directors approved the Condensed Consolidated Interim Financial
Statements on 1 August 2024.
Statement of compliance
These Condensed Consolidated Interim Financial Statements have been prepared
on the basis of the policies set out in the 2023 Annual Report, except for
changes below, and in accordance with UK adopted IAS 34 Interim Financial
Reporting and the Disclosure Guidance and Transparency Rules sourcebook of the
UK's Financial Conduct Authority. They do not include all of the information
required for full annual statements and should be read in conjunction with the
2023 Annual Report.
The interim figures up to 30 June 2024 and 2023 are unaudited. The 2023
Financial Statements, which were prepared in accordance with UK adopted
International Accounting Standards (IAS) and interpretations issued by the
IFRS interpretations Committee applicable to companies reporting under UK
adopted IAS, 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.
Revisions to IFRS applicable in 2024
Supplier Finance Arrangements
New disclosure requirements resulting from amendments to IAS 7 Statement of
Cash Flows and IFRS 7 Financial Instruments relating to Supplier Finance
Arrangements (SFAs) were effective from 1 January 2024. The objective of the
new amendments is to provide enhanced information about SFAs that enables
investors to assess the effects on an entity's liabilities, cash flows and its
exposure to liquidity risk.
The Group's suppliers have access to a supply chain financing (SCF) programme
that is considered to be within the scope of the Standard's SFA definition.
The new prescriptive disclosure requirements will necessitate some additional
information being disclosed within the 2024 Annual Report in relation to the
value of trade payables that were within the scope of the Group offered SCF
scheme. This will be presented alongside the value of received payments which
suppliers had drawn, this being information which the Group already discloses
in its Annual Report. The Group has taken the available reliefs not to provide
the additional information in these Condensed Consolidated Interim Financial
Statements.
Other
There are no other new standards or interpretations issued by the IASB that
had a significant impact on these Condensed Consolidated Interim Financial
Statements.
Change in accounting policy
When preparing the 2023 Annual Report the Directors revised the classification
of cash flows related to cash payments deferred in connection with the Group's
action taken in 2020 to reduce the size of the USD hedge book by $11.8bn
across 2020 to 2026. The Directors reassessed their judgement in line with IAS
7 Statement of Cash Flows and concluded that it would be more appropriate to
classify these cash flows as cash flows from operating activities rather than
as cash flows from financing activities.
Consistent with the above, cash flows from operating activities during the
period to 30 June 2023 have reduced by £(210)m to £925m with a corresponding
decrease in cash outflow from financing activities from £(512)m to £(302)m.
There is no impact to the total change in cash and cash equivalents or to any
alternative performance measures.
The above change resulted from a review which was prompted by an enquiry
arising from a review of the Group's 2022 Annual Report and Accounts by the
Corporate Reporting Review team of the Financial Reporting Council (FRC). The
FRC review was part of a regular review and assessment of the quality of
corporate reporting in the UK undertaken by the FRC. Further information
regarding the review of the Group's 2022 Annual Report and Accounts is set out
in the Audit Committee report in the 2023 Annual Report. The Group agreed to
make the above change within its 2023 Annual Report and Accounts. The FRC
review was limited to the published 2022 Annual Report; it did not benefit
from a detailed understanding of underlying transactions and provides no
assurance that the 2022 Annual Report is correct in all material respects.
1 Basis of preparation and accounting policies continued
Revisions to IFRS not applicable to 2024
IFRS 18
The IASB (International Accounting Standards Board) issued a new Standard,
IFRS 18 Presentation and Disclosure in Financial Statements, on 9 April 2024
that will replace IAS 1 Presentation of Financial Statements. The purpose of
the new standard is to provide more consistent presentation of financial
information across preparers as it is acknowledged that existing standards
have given flexibility to present information in different ways. IFRS 18 will
not impact the recognition or measurement of items in the financial
statements. Many of the existing presentation principles in IAS 1 are
retained, but there are some more specific requirements that will require the
Group to make some changes in its future Annual Report and Interim Financial
Statements.
The new Standard is not yet endorsed by the UK Endorsement Board 'UKEB' but is
expected to be applicable for reporting periods beginning on or after 1
January 2027. Comparative information for 2026 will need to be restated when
the 2027 Interim Financial Statements and Annual Report and Accounts are
published and early adoption is expected to be permitted.
The Group has started an initial review of the Standard and expects changes to
the presentation of the income statement and the Group's reported operating
profit (driven by required changes such as moving 'Share of results of joint
ventures and associates' into a new investing category which will no longer
form part of operating profit in the Statutory Consolidated Income Statement).
The process of assessing the financial impact on the Consolidated Financial
Statements will continue during 2024 and 2025.
Other
Standards and interpretations issued by the IASB are only applicable if
endorsed by the UK. The Group does not consider that any other standards,
amendments or interpretations issued by the IASB, but not yet applicable will
have a significant impact on the Condensed Consolidated Interim Financial
Statements.
Post balance sheet events
The Group has taken the latest legal position in relation to any ongoing legal
proceedings and reflected these in the 30 June 2024 results as appropriate.
On 31 July 2024 the Group completed the disposal of part of Power Systems'
lower power range off-highway engines business to Deutz AG as set out in note
19. Disposal proceeds are in excess of the carrying value of the assets and
liabilities.
Climate change
In preparing the Condensed Consolidated Interim Financial Statements, the
Directors have continued to consider the impact of climate change,
particularly in the context of the disclosures made in the Strategic Report
within the 2023 Annual Report and the stated sustainability approach. The
following specific points were considered:
- The Group continues to decarbonise its operations, facilities and
business activities through continued investment in onsite renewable energy
installations; the procurement of renewable energy; and continued investment
in energy efficiency improvements. An estimate of the investment required to
meet scope 1 and 2 emission improvements is included in the forecasts that
support these Condensed Consolidated Financial Statements;
- The Group is enabling its customers to operate their products in a way
that is compatible with low or net zero carbon emissions and has demonstrated
that all the commercial aero engines it produces, and the most popular
reciprocating engines are compatible for use on sustainable fuels;
- The Group has invested in delivering new products and solutions that
can accelerate the global energy transition, including in battery energy
storage solutions in Power Systems, and in small modular reactors (SMRs); and
- The Group is responding to the climate challenge by creating the
necessary enabling environment to advocate for the necessary policy and
economic support we have identified.
In this context the Directors have assessed the impact of climate change on a
number of estimates, including those identified as being key sources of
estimation uncertainty within the financial statements such as:
- Civil Aerospace LTSA revenues;
- The estimates of future cash flows considered for trigger assessments
or used in impairment assessments for non-financial asset impairments; and
- Estimates of suitable taxable profits that will arise in the UK to
utilise the deferred tax assets recognised.
When making these assessments the Directors include consideration of the risks
associated with changing customer demand, changes in investment requirements,
and changes in costs due to carbon pricing and commodity price changes. As
details of what specific future intervention measures will be taken by
governments are not yet available, carbon pricing has been used to quantify
the potential impact of future policy changes on the Group. The approach is
consistent with that disclosed in note 1 in the 2023 Annual Report.
There have been no significant changes to assumptions, including the potential
impact of carbon prices on the Group's cost base, since the year ended 31
December 2023. Hence, these considerations did not have a material impact on
financial reporting key judgements and estimates in the period and the Group's
assessment remains that climate change is not expected to have a significant
impact on the Group's current going concern assessment nor on the viability of
the Group over the next five years.
1 Basis of preparation and accounting policies continued
Going concern
Overview
In adopting the going concern basis for preparing these condensed consolidated
financial statements, the Directors have undertaken a review of the Group's
cash flow forecasts and available liquidity, along with consideration of the
principal risks and uncertainties through to December 2025 (the 'going concern
period'). The processes for identifying and managing risk are described in the
Group's 2023 Annual Report on pages 50 to 55. As described on those pages, the
risk management process and the going concern statement are designed to
provide reasonable but not absolute assurance.
Forecasts
Recognising the challenges of reliably estimating and forecasting the impact
of external factors on the Group, the Directors have reviewed the financial
forecasts and liquidity forecasts with consideration given to the potential
impact of severe but plausible risks. Two forecasts have been modelled in the
assessment of going concern, along with a likelihood assessment of these
forecasts. The base case forecast reflects the Directors current expectations
of future trading over the going concern period. A downside forecast has also
been modelled which envisages severe but plausible downside risks.
The Group's base case forecast reflects the Directors best estimation of how
the business plans to perform over the going concern period. Macro-economic
assumptions have been modelled using externally available data based on the
most likely forecasts, considering all the markets in which we operate, with
general inflation at 2% - 3%, wage inflation at 3% - 5%, interest rates at 3%
- 4% and GDP growth at around 2% - 3%. In the base case forecast Civil large
engine EFHs exceed 2019 levels in 2024.
In modelling the impact of severe but plausible risks the Directors have
considered the current macro-economic climate and the possibility that demand
could be suppressed in the near term as a result of a Global economic
downturn, reflecting slower GDP growth in this forecast when compared with the
base case. EFHs have been modelled to remain consistent with average second
quarter 2024 levels throughout the going concern period. Ongoing supply chain
challenges have been modelled through lower spare engine sales. The model also
assumes a more pessimistic view of general inflation at around 1% - 2% higher
than the base case covering a broad range of costs including energy,
commodities, and jet fuel. Wage inflation is modelled at 1% - 5% higher (being
GDP market specific) than the base case and interest rates 1% - 2% higher.
In preparing the condensed consolidated interim financial statements, the
Directors have continued to consider the impact of climate change,
particularly in the context of disclosures made in the Strategic Report in the
2023 Annual Report. Consistent with the assessment in the 2023 Annual Report,
climate change is not expected to have a significant impact on the Group over
the going concern period. More detail can be found on page 18 of these
condensed consolidated financial statements.
Liquidity and borrowings
During the period to 30 June 2024 the Group repaid a €550m (£484m) bond at
its maturity in May 2024 and at the same time elected to cancel its undrawn
£1bn UKEF-supported bank loan facility which was due to expire in 2027.
At 30 June 2024, the Group had liquidity of £6.8bn including cash and cash
equivalents of £4.3bn and undrawn facilities of £2.5bn.
The Group's committed borrowing facilities at 30 June 2024 and 31 December
2025 are set out below. None of the facilities are subject to any financial
covenants or rating triggers which could accelerate repayment.
£m 30 June 2024 31 December 2025
Issued bond notes (1) 3,511 2,853
Revolving credit facility (undrawn) (2) 2,500 2,500
Total committed borrowing facilities 6,011 5,353
(1) The value of issued bond notes reflects the impact of derivatives on
repayments of the principal amount of debt. The bonds mature by May 2028
(2) The £2,500m Revolving Credit Facility matures in November 2026 (currently
undrawn) with two subsequent one year extension options
Taking into account the maturity of these borrowing facilities, the Group has
committed facilities of at least £5.4bn available throughout the going
concern period.
Conclusion
After reviewing the current liquidity position and the cash flow forecasts
modelled under both the base case and downside forecast, the Directors
consider that the Group has sufficient liquidity to continue in operational
existence for a period of at least 12 months from the date of this report and
are therefore satisfied that it is appropriate to adopt the going concern
basis of accounting in preparing the financial statements.
1 Basis of preparation and accounting policies continued
Key areas of judgement and sources of estimation uncertainty
The determination of the Group's accounting policies requires judgement. The
subsequent application of these policies requires estimates and the actual
outcome may differ from that calculated. The key areas of judgement and
sources of estimation uncertainty as at 31 December 2023, that were assessed
as having a significant risk of causing material adjustments to the carrying
amount of assets and liabilities, are set out in
note 1 to the Consolidated Financial Statements in the 2023 Annual Report and
are summarised below. During the period, the Group has
re-assessed these and where necessary updated the key judgements and
estimation uncertainties. Sensitivities for key sources of estimation
uncertainty are disclosed where this is appropriate and practical.
Area Key judgements Key sources of estimation uncertainty Sensitivities performed
Revenue recognition and contract assets and liabilities Whether Civil Aerospace OE and aftermarket contracts should be combined. Estimates of future revenue, including customer pricing, and costs of Based upon the stage of completion of all large engine LTSA contracts within
long-term contractual arrangements, including the impact of climate change. Civil Aerospace as at 30 June 2024, the following changes in estimate would
How performance on long-term aftermarket contracts should be measured. result in catch-up adjustments being recognised in the period in which the
estimates change (at underlying FX rates):
Whether long-term aftermarket contracts contain a significant financing
component. - A change in forecast EFHs of 1% over the remaining term of the contracts
would impact LTSA income and to a lesser extent costs, resulting in an impact
Whether any costs should be treated as wastage. of around £20m.
Whether the Civil Aerospace LTSA contracts are warranty style contacts entered - A 2% increase or decrease in our pricing to customers over the life of the
into in connection with OE sales and therefore can be accounted for under IFRS contracts would lead to a revenue
15.
catch-up adjustment in the next 12 months of around £280m.
Whether sales of spare engines to joint ventures are at fair value. - A 2% increase or decrease in LTSA costs over the life of the contracts
would lead to a revenue catch-up adjustment in the next 12 months of around
When revenue should be recognised in relation to spare engine sales.
£80m.
Risk and revenue sharing arrangements (RRSAs) Determination of the nature of entry fees received.
Taxation Estimates necessary to assess whether it is probable that sufficient suitable A 5% change in margin or shop visits (which could be driven by fewer EFHs as a
taxable profits will arise in the UK to utilise the deferred tax assets result of climate change) would result in an increase/decrease in the deferred
recognised. tax asset in respect of UK losses of around £90m.
If only 90% of assumed future cost increases from climate change are passed on
to customers, this would result in a decrease in the deferred tax asset of
around £10m, and if the potential impact of carbon prices on the Group's cost
base was to double, the recoverable value of deferred tax assets would
decrease by around £50m.
Research and development Determination of the point in time where costs incurred on an internal
programme development meet the criteria for capitalisation.
Determination of the basis for amortising capitalised development costs.
Leases Determination of the lease term.
Impairment of non-current assets Determination of cash-generating units for assessing impairment of goodwill.
Whether there are indicators of potential reversal of previous impairments of
programme-related intangible assets.
Provisions Whether any costs should be treated as wastage. Estimates of the time and cost to incorporate required modified parts into the A six-month delay in the availability of required modified parts due to supply
fleet to resolve technical issues on certain programmes (which could be chain challenges and disruption to throughput of engine overhauls could lead
Whether the criteria to recognise a transformation and restructuring exacerbated by prolonged supply chain challenges) and the implications of this to around a £30-50m charge.
provisions have been met. on forecast future costs when assessing onerous contracts.
Estimates of the future revenues and costs to fulfil onerous contracts. An increase in Civil Aerospace large engines estimates of LTSA costs of 1%
over the remaining term of the contracts could lead to a £40-60m increase in
the provision for contract losses across all programmes.
Assumptions implicit within the calculation of discount rates. A 1% change in the discount rates used could lead to around a £40-60m change
in the onerous contract provision.
Post-retirement benefits Estimates of the assumptions for valuing the net defined benefit obligation. A reduction in the discount rate of 0.25% from 5.15% could lead to an increase
in the defined benefit obligations of the RR UK Pension Fund (RRUKPF) of
approximately £160m. This would be expected to be broadly offset by changes
in the value of scheme assets, as the scheme's investment policies are
designed to mitigate this risk.
An increase in the assumed rate of inflation of 0.25% (RPI of 3.45% and CPI of
3.00%) could lead to an increase in the defined benefit obligations of the
RRUKPF of approximately £60m.
A one-year increase in life expectancy from 20.8 years (male aged 65) and from
21.5 years (male aged 45) would increase the defined benefit obligations of
the RRUKPF by approximately £145m.
2 Segmental analysis
The analysis by segment is presented in accordance with IFRS 8 Operating
Segments, on the basis of those segments whose operating results are regularly
reviewed by the Board (who acts as the Chief Operating Decision Maker as
defined by IFRS 8). The Group's four divisions are set out below.
Civil Aerospace - development, manufacture, marketing and sales of commercial aero engines
and aftermarket services
Defence - development, manufacture, marketing and sales of military aero engines,
naval engines, submarine nuclear power plants and aftermarket services
Power Systems - development, manufacture, marketing and sales of integrated solutions for
onsite power and propulsion
New Markets - development, manufacture and sales of small modular reactor (SMR) and new
electrical power solutions
Other businesses include the trading results of the UK Civil Nuclear business.
Underlying results
The Group presents the financial performance of the divisions in accordance
with IFRS 8 and consistently with the basis on which performance is
communicated to the Board each month.
Underlying results are presented by recording all relevant revenue and cost of
sales transactions at the average exchange rate achieved on effective settled
derivative contracts in the period that the cash flow occurs. The impact of
the revaluation of monetary assets and liabilities (other than lease
liabilities) using the exchange rate that is expected to be achieved by the
use of the effective hedge book is recorded within underlying cost of sales.
Underlying financing excludes the impact of revaluing monetary assets and
liabilities to period end exchange rates. Lease liabilities are not revalued
to reflect the expected exchange rates due to their
multi-year remaining term, the Directors believe that doing so would not be
the most appropriate basis to measure the in-year performance. Transactions
between segments are presented on the same basis as underlying results and
eliminated on consolidation. Unrealised fair value gains/(losses) on foreign
exchange contracts, which are recognised as they arise in the statutory
results, are excluded from underlying results. To the extent that the
previously forecast transactions are no longer expected to occur, an
appropriate portion of the unrealised fair value gain/(loss) on foreign
exchange contracts is recorded immediately in the underlying results.
Amounts receivable/(payable) on interest rate swaps which are not designated
as hedge relationships for accounting purposes are reclassified from fair
value movement on a statutory basis to interest receivable/(payable) on an
underlying basis, as if they were in an effective hedge relationship.
In the period to 30 June 2024, the Group was a net seller of USD at an
achieved exchange rate GBP:USD of 1.48
(30 June 2023: 1.50) based on the USD hedge book.
In 2020, the Group experienced a significant decline in its medium-term
outlook and consequently a significant deterioration to its forecast net USD
cash inflows. The Group took action to reduce the size of the USD hedge book
by $11.8bn across 2020-2026 to reflect the fact that, at that time, future
operating cash flows were no longer forecast to materialise. An underlying
charge of £1.7bn was recognised within the underlying finance costs in 2020
and the associated cash settlement costs occur over the period
2020-2026. The derivatives relating to this underlying charge have been
subsequently excluded from the hedge book, and therefore are also excluded
from the calculation of the average exchange rate achieved in the current and
future periods.
Underlying performance also excludes the following:
- the effect of acquisition accounting and business disposals;
- impairment of goodwill and other non-current and current assets
where the reasons for the impairment are outside of normal operating
activities;
- exceptional items; and
- certain other items which are market driven and outside of the
control of management.
Subsequent changes in items excluded from underlying performance recognised in
a prior period will also be excluded from underlying performance. All other
changes will be recognised within underlying performance.
Acquisition accounting, business disposals and impairment
The Group excludes these from underlying results so that the current period
and comparative results are directly comparable.
Exceptional items
Items are classified as exceptional where the Directors believe that
presentation of the results in this way is useful in providing an
understanding of the Group's financial performance. Exceptional items are
identified by virtue of their size, nature or incidence.
In determining whether an event or transaction is exceptional, the Directors
consider quantitative as well as qualitative factors such as the frequency or
predictability of occurrence. Examples of exceptional items include one-time
costs and charges in respect of aerospace programmes, costs of exceptional
transformation and restructuring programmes and one-time past service charges
and credits on post-retirement schemes.
Exceptional items are not allocated to segments and may not be comparable to
similarly titled measures used by other companies.
Other items
The financing component of the defined benefit pension scheme cost is
determined by market conditions and has therefore been included as a
reconciling difference between underlying and statutory performance.
The tax effects of adjustments above are excluded from the underlying tax
charge. Changes in tax rates are excluded from the underlying tax charge. In
addition, changes in the amount of recoverable deferred tax recognised are
excluded from the underlying results to the extent that their recognition or
derecognition was not originally recorded within the underlying results.
2 Segmental analysis continued
The following analysis sets out the results of the Group's businesses on the
basis described above and also includes a reconciliation of the underlying
results to those reported in the condensed consolidated income statement.
- Civil Aerospace Defence Power Systems New Markets Other businesses Corporate and Inter-segment (1) Total underlying
£m £m £m £m £m £m £m
For the half-year ended 30 June 2024
Underlying revenue from sale of original equipment 1,329 872 1,257 1 5 - 3,464
Underlying revenue from aftermarket services 2,790 1,347 580 1 - - 4,718
Total underlying revenue 4,119 2,219 1,837 2 5 - 8,182
Gross profit 992 476 507 2 - - 1,977
Commercial and administrative costs (193) (108) (238) (20) - (34) (593)
Research and development (135) (24) (83) (73) - - (315)
Share of results of joint ventures and associates 76 1 3 - - - 80
Underlying operating profit/(loss) 740 345 189 (91) - (34) 1,149
For the half-year ended 30 June 2023
Underlying revenue from sale of original equipment 1,055 841 1,175 1 5 - 3,077
Underlying revenue from aftermarket services 2,202 1,072 599 - - - 3,873
Total underlying revenue 3,257 1,913 1,774 1 5 - 6,950
Gross profit/(loss) 690 379 452 - (5) (1) 1,515
Commercial and administrative costs (171) (86) (233) (14) - (34) (538)
Research and development (195) (34) (96) (64) - - (389)
Share of results of joint ventures and associates 81 2 2 - - - 85
Underlying operating profit/(loss) 405 261 125 (78) (5) (35) 673
(1) Corporate and Inter-segment consists of costs that are not attributable
to a specific segment and consolidation adjustments
2 Segmental analysis continued
Reconciliation to statutory results
Total underlying Underlying adjustments and adjustments to Group statutory results
foreign exchange
£m £m £m
For the half-year ended 30 June 2024
Revenue from sale of original equipment 3,464 162 3,626
Revenue from aftermarket services 4,718 517 5,235
Total revenue 8,182 679 8,861
Gross profit 1,977 131 2,108
Commercial and administrative costs (593) (48) (641)
Research and development (315) 416 101
Share of results of joint ventures and associates 80 (2) 78
Operating profit 1,149 497 1,646
Gain arising on the disposal of businesses - - -
Profit before financing and taxation 1,149 497 1,646
Net financing (114) (116) (230)
Profit before taxation 1,035 381 1,416
Taxation (298) 18 (280)
Profit for the period 737 399 1,136
Attributable to:
Ordinary shareholders 750 399 1,149
NCI (13) - (13)
For the half-year ended 30 June 2023
Revenue from sale of original equipment 3,077 212 3,289
Revenue from aftermarket services 3,873 361 4,234
Total revenue 6,950 573 7,523
Gross profit 1,515 142 1,657
Commercial and administrative costs (538) (22) (560)
Research and development (389) − (389)
Share of results of joint ventures and associates 85 4 89
Operating profit 673 124 797
Gain arising on the disposal of businesses - 1 1
Profit before financing and taxation 673 125 798
Net financing (149) 770 621
Profit before taxation 524 895 1,419
Taxation (120) (76) (196)
Profit for the period 404 819 1,223
Attributable to:
Ordinary shareholders 410 819 1,229
NCI (6) - (6)
2 Segmental analysis continued
Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition Civil Aerospace Defence Power Systems New Markets Other businesses Corporate and Inter-segment Total underlying
£m £m £m £m £m £m £m
For the half-year ended 30 June 2024
Original equipment recognised at a point in time 1,329 204 1,235 1 - - 2,769
Original equipment recognised over time - 668 22 - 5 - 695
Aftermarket services recognised at a point in time 559 478 535 1 - - 1,573
Aftermarket services recognised over time 2,180 869 45 - - - 3,094
Total underlying customer contract revenue 4,068 2,219 1,837 2 5 - 8,131
Other underlying revenue (1) 51 - - - - - 51
Total underlying revenue 4,119 2,219 1,837 2 5 - 8,182
For the half-year ended 30 June 2023
Original equipment recognised at a point in time 1,055 337 1,153 1 - - 2,546
Original equipment recognised over time - 504 22 - 5 - 531
Aftermarket services recognised at a point in time 555 390 550 - - - 1,495
Aftermarket services recognised over time 1,604 682 49 - - - 2,335
Total underlying customer contract revenue 3,214 1,913 1,774 1 5 - 6,907
Other underlying revenue (1) 43 - - - - - 43
Total underlying revenue 3,257 1,913 1,774 1 5 - 6,950
(1 ) Includes leasing revenue
Total underlying Underlying adjustments and adjustments to foreign exchange Group statutory results
£m £m £m
For the half-year ended 30 June 2024
Original equipment recognised at a point in time 2,769 162 2,931
Original equipment recognised over time 695 - 695
Aftermarket services recognised at a point in time 1,573 76 1,649
Aftermarket services recognised over time 3,094 432 3,526
Total customer contract revenue 8,131 670 8,801
Other revenue 51 9 60
Total revenue 8,182 679 8,861
For the half-year ended 30 June 2023
Original equipment recognised at a point in time 2,546 212 2,758
Original equipment recognised over time 531 - 531
Aftermarket services recognised at a point in time 1,495 97 1,592
Aftermarket services recognised over time 2,335 255 2,590
Total customer contract revenue 6,907 564 7,471
Other revenue 43 9 52
Total revenue 6,950 573 7,523
2 Segmental analysis continued
Underlying adjustments Half-year to 30 June 2023
Half-year to 30 June 2024
Revenue Profit before financing Net financing Revenue Profit before financing Net financing
£m £m £m £m £m £m
Taxation Taxation
£m £m
Underlying performance 8,182 1,149 (114) (298) 6,950 673 (149) (120)
Impact of foreign exchange differences as a result of hedging activities on A 679 85 120 (50) 573 163 396 (74)
trading transactions (1)
Unrealised fair value changes on derivative contracts held for trading (2) A - (3) (213) 53 - 2 355 (108)
Unrealised fair value change to derivative contracts held for financing (3) A - - 39 (10) - - 66 (15)
Exceptional programme credits (4) B - - - - - 21 - -
Exceptional transformation and restructuring (charges)/credits (5) B - (107) (11) 32 - (35) - 4
Impairment reversals/(charges) (6) C - 545 - (159) - - - -
Effect of acquisition accounting (7) C - (23) - 6 - (24) - 6
Other (8) D - - (51) 13 - (3) (47) 10
Gains arising on the disposals of businesses C - - - - - 1 - -
Impact of tax rate change (9) D - - - 10 - - - -
Recognition of deferred tax assets (10) D - - - 123 - - - 101
Total underlying adjustments 679 497 (116) 18 573 125 770 (76)
Statutory performance per condensed consolidated income statement 8,861 1,646 (230) (280) 7,523 798 621 (196)
A - FX and derivatives, B - Exceptional, C - M&A and impairment, D - Other
(1)( ) The impact of measuring revenues and costs at the average exchange
rate during the period and the impact of valuation of assets and liabilities
using the period end exchange rate rather than the achieved rate or the
exchange rate that is expected to be achieved by the use of the hedge book
increased statutory revenues by £679m (30 June 2023: £573m) and increased
profit before financing and taxation by £85m (30 June 2023: £163m).
Underlying financing excludes the impact of revaluing monetary assets and
liabilities at the period end exchange rate
(2) The underlying results exclude the fair value changes on derivative
contracts held for trading. These fair value changes are subsequently
recognised in the underlying results when the contracts are settled
(3) Includes net fair value gain of £34m (30 June 2023: £60m) on any
interest rate swaps not designated into hedging relationships for accounting
purposes
(4) During the prior period to 30 June 2023, £21m of Trent 1000 wastage costs
provision previously recognised in respect of estimated costs to settle
obligations were reversed to reflect the status of claims in respect of the
Trent 1000 technical issues which were identified in 2019
(5) In 2023, the Group announced a major multi-year transformation programme
which consists of seven workstreams (set out in the 2023 Annual Report).
During the period to 30 June 2024, the Group incurred charges of £107m
related to transformation and restructuring (30 June 2023: £35m). The charges
comprise of £55m related to severance costs, £20m for advisory fees and
transformation office costs and £32m related to impairments and write-offs.
(6)( ) The Group has assessed the carrying value of its assets and reviewed
for potential impairment and impairment reversal triggers. As a result, there
has been an impairment reversal of an intangible asset of £413m and of a
contract asset of £132m in relation to Civil Aerospace programme assets
during the period. Further details are provided in note 7. Details on other
impairments and impairment reversals are provided in notes 7, 8 and 9
(7) The effect of acquisition accounting includes the amortisation of
intangible assets arising on previous acquisitions
(8) Includes interest received of £44m (30 June 2023: £35m) on interest
rate swaps which are not designated into hedge relationships for statutory
purposes from interest payable on an underlying basis to fair value movement
and £nil (30 June 2023: £3m) of past-service cost on defined benefit schemes
(9 ) Represents the impact to the income statement of the reduction in the
tax rate on authorised surplus pension charges from 35% to 25%
(10) During the period to 30 June 2024, the Group recognised deferred tax
assets of £157m relating to UK tax losses of which £34m is included in
underlying performance and £123m in non-underlying. During the period to 30
June 2023, the Group recognised deferred tax assets of £100m relating to UK
tax losses and foreign exchange derivatives of which £(1)m was included in
underlying performance and £101m in non-underlying
2 Segmental analysis continued
Balance sheet analysis
At 30 June 2024 ( ) Civil Aerospace Defence Power Systems New Markets Total reportable segments
£m £m £m £m £m
Segment assets 19,250 3,729 4,043 138 27,160
Interests in joint ventures and associates 506 7 27 - 540
Segment liabilities (25,854) (3,560) (2,035) (99) (31,548)
Net (liabilities)/assets (6,098) 176 2,035 39 (3,848)
At 31 December 2023
Segment assets 17,718 3,517 3,814 115 25,164
Interests in joint ventures and associates 444 7 28 - 479
Segment liabilities (24,447) (3,376) (1,765) (88) (29,676)
Net (liabilities)/assets (6,285) 148 2,077 27 (4,033)
Reconciliation to the balance sheet
30 June 31 December
2024 2023
£m £m
Total reportable segment assets (excluding held for sale) 27,160 25,164
Other businesses 14 8
Corporate and Inter-segment (3,058) (2,010)
Interests in joint ventures and associates 540 479
Assets held for sale 64 109
Cash and cash equivalents and short-term investments 4,319 3,784
Fair value of swaps hedging fixed rate borrowings 126 118
Deferred and income tax assets 2,978 3,078
Post-retirement scheme surpluses 868 782
Total assets 33,011 31,512
Total reportable segment liabilities (excluding held for sale) (31,548) (29,676)
Other businesses (60) (58)
Corporate and Inter-segment 3,058 2,010
Liabilities associated with assets held for sale (13) (55)
Borrowings and lease liabilities (5,150) (5,759)
Fair value of swaps hedging fixed rate borrowings (117) (95)
Deferred and income tax liabilities (451) (473)
Post-retirement scheme deficits (967) (1,035)
Total liabilities (35,248) (35,141)
Net liabilities (2,237) (3,629)
3 Research and development
Half-year to 30 June 2024 Half-year to
30 June 2023
£m £m
Gross research and development expenditure (723) (684)
Contributions and fees 333 254
Net expenditure in the period (390) (430)
Capitalised as intangible assets 126 84
Amortisation and impairment of capitalised costs (1, 2) 365 (43)
Net amount recognised in the income statement 101 (389)
Underlying adjustments (2) (416) −
Net underlying cost recognised in the income statement (315) (389)
(1) See note 7 for analysis of amortisation and impairment
(2 ) Underlying adjustments include impact of acquisition accounting,
foreign exchange and an impairment reversal of £413m. See note 2 and note 7
for more information
4 Net financing
Half-year to 30 June 2024 Half-year to 30 June 2023
Statutory Underlying (1) Statutory Underlying (1)
£m £m £m £m
Interest receivable and similar income (2) 128 128 56 56
Net fair value gains on foreign currency contracts - - 407 -
Net fair value gains on non-hedge accounted interest rate swaps (3) 34 - 60 -
Net fair value gains on commodity contracts 12 - - -
Financing on post-retirement scheme surpluses 12 - 15 -
Net foreign exchange gains 120 - 396 -
Financing income 306 128 934 56
Interest payable (188) (137) (173) (133)
Net fair value losses on foreign currency contracts (225) - - -
Net fair value losses on revaluation of other investments accounted for at (24) (24) - -
FVTPL (4)
Net fair value losses on commodity contracts - - (52) -
Financing on post-retirement scheme deficits (14) - (22) -
Cost of undrawn facilities (12) (12) (32) (32)
Other financing charges (73) (69) (34) (40)
Financing costs (536) (242) (313) (205)
Net financing (costs)/income (230) (114) 621 (149)
Analysed as:
Net interest payable (60) (9) (117) (77)
Net fair value (losses)/gains on derivative contracts (179) - 415 -
Net post-retirement scheme financing (2) - (7) -
Net foreign exchange gains 120 - 396 -
Net other financing (109) (105) (66) (72)
Net financing (costs)/income (230) (114) 621 (149)
(1) See note 2 for definition of underlying results
(2 ) Includes interest income on cash balances and short-term deposits of
£88m (30 June 2023: £42m) and similar income of £40m (30 June 2023: £14m)
on money market funds
(3)( ) The condensed consolidated income statement shows the net fair value
gains on any interest rate swaps not designated into hedging relationships for
accounting purposes. Underlying financing reclassifies the realised fair value
movements on these interest rate swaps to net interest payable
(4 ) Included in the financing costs is a £24m (30 June 2023: £nil) charge
in relation to the fair value write-down of an equity accounted investment
recorded at fair value through profit or loss (FVTPL)
5 Taxation
The income tax expense has been calculated by applying the annual effective
tax rate for each jurisdiction to the half-year profits of each jurisdiction.
The tax charge for the period is £280m on a statutory profit before taxation
of £1,416m (30 June 2023: tax charge of £196m on a statutory profit before
taxation of £1,419m), giving a statutory effective tax rate of 19.8% (30 June
2023: 13.8%). The key drivers of the tax charge in the period are the profits
in key jurisdictions taxed at local rates together with a tax credit on the
recognition of UK deferred tax assets relating to tax losses and a tax charge
on a tax de-grouping gain in the UK.
Tax reconciliation:
Half-year to 30 June 2024 Half-year to 30 June 2023
£m Tax rate £m Tax rate
Profit before taxation 1,416 1,419
Nominal tax charge at UK corporation tax rate of 25.0% (30 June 2023: 23.5%) 354 25.0% 333 23.5%
Movement in UK deferred tax assets not recognised (1) (157) (11.1%) (100) (7.1%)
Tax de-grouping charge (2) 100 7.1% - -
Decrease in deferred tax liabilities resulting from change in UK tax rate (3) (10) (0.7%) - -
Other (4) (7) (0.5%) (37) (2.6%)
Statutory tax charge and rate 280 19.8% 196 13.8%
Analysis of statutory tax charge:
Underlying items 298 120
Non-underlying items (see note 2) (18) 76
280 196
(1 ) Movement in the period to 30 June 2024 primarily relates to the
recognition of UK tax losses previously not recognised. Movement in the period
to 30 June 2023 includes the re-recognition of deferred tax assets relating to
foreign exchange and commodity financial assets and liabilities and UK tax
losses
(2) The charge in the period to 30 June 2024 has arisen due to the dilution
of the Group's shareholding in Rolls-Royce SMR Limited to below 75%
(3) The period to 30 June 2024 includes the impact of the reduction in the
tax rate on authorised surplus pension payments charges from 35% to 25%
(4) Includes Pillar Two income taxes of less than £1m
Deferred tax assets are recognised to the extent it is probable that future
taxable profits will be available against which to recover the asset. Where
necessary, this is based on management's assumptions and probability
assessments relating to the amounts and timing of future taxable profits. The
Directors' continually reassess the appropriateness of recovering deferred tax
assets, which includes a consideration of the level of probable future profits
and the time period over which they will be recovered.
Based on the assessment undertaken at 30 June 2024 and taking into account the
financial results in the period to 30 June 2024, the continued good progress
made on the Group's strategic initiatives, including cost efficiencies,
commercial optimisation, and organisational design, the Group has recognised
£157m of the previously unrecognised deferred tax asset relating to UK tax
losses.
Sensitivity analyses are also performed as part of the assessment. At 30 June
2024, the following sensitivities have been modelled to demonstrate the impact
of changes in assumptions on the recoverability of deferred tax assets:
- A 5% change in margin in the main Civil Aerospace large engine
programmes
- A 5% change in the number of shop visits driven by EFHs
- Assumed future cost increases from climate change expected to pass
through to customers at 100% are restricted to 90% pass through
All of these could be driven by a number of factors, including the impact of
climate change and changes in foreign exchange rates.
A 5% change in margin or shop visits (which could be driven by fewer EFHs)
would result in an increase/decrease in the deferred tax asset of around
£90m.
If only 90% of assumed future cost increases from climate change are passed on
to customers, this would result in a decrease in the deferred tax asset of
around £10m, and if carbon prices were to double, this would be £50m. The
assumptions around carbon pricing are consistent with those at 31 December
2023.
These assessments are in line with the approach set out in note 5 of the 2023
Annual Report and take into account a 25% probability of there being a severe
but plausible downside forecast.
The statutory instrument reducing the tax rate on authorised surplus pension
payments charges from 35% to 25% effective from 6 April 2024 was enacted on 11
March 2024. The deferred tax liability on the UK pension surplus has therefore
been re-measured at 25%. The resulting credit has been recognised in OCI
except to the extent that the items were previously charged or credited to the
income statement. Accordingly, in 2024 £67m has been credited to OCI and
£10m has been credited to the income statement.
The Group is within the scope of the OECD Pillar Two (Global Minimum Tax)
model rules, which came into effect from 1 January 2024. For the period to 30
June 2024, the Group has continued to apply the mandatory exception to
recognising and disclosing information about deferred tax assets and
liabilities related to Pillar Two income taxes.
6 Earnings per ordinary share
Basic earnings per share (EPS) is calculated by dividing the profit
attributable to ordinary shareholders by the weighted average number of
ordinary shares in issue during the period, excluding ordinary shares held
under trust, which have been treated as if they had been cancelled.
Half-year to 30 June 2024 Half-year to 30 June 2023
Basic Potentially dilutive share options Diluted Basic Potentially dilutive share options Diluted
Profit attributable to ordinary shareholders (£m): 1,149 1,149 1,229 1,229
Weighted average number of ordinary shares (millions) 8,380 52 8,432 8,359 18 8,377
EPS (pence):
13.71 (0.08) 13.63 14.70 (0.03) 14.67
The reconciliation between underlying EPS and basic EPS is as follows:
Half-year to 30 June 2024 Half-year to 30 June 2023
Pence £m Pence £m
Underlying EPS / Underlying profit attributable to ordinary shareholders 8.95 750 4.90 410
Total underlying adjustments to profit before tax (note 2) 4.55 381 10.71 895
Related tax effects 0.21 18 (0.91) (76)
EPS / Profit attributable to ordinary shareholders 13.71 1,149 14.70 1,229
Diluted underlying EPS attributable to ordinary shareholders 8.89 4.89
7 Intangible assets
Goodwill Certification costs Development expenditure Customer relationships Software (1) Other (2) Total
£m £m £m £m £m £m £m
Cost:
At 1 January 2024 1,101 930 3,763 498 1,004 699 7,995
Additions - - 126 - 35 4 165
Disposals - - - - (12) (2) (14)
Exchange differences (18) (1) (36) (8) (2) (9) (74)
At 30 June 2024 1,083 929 3,853 490 1,025 692 8,072
Accumulated amortisation and impairment:
At 1 January 2024 35 467 1,976 433 718 357 3,986
Charge for the period (3) - 13 48 18 38 9 126
Impairment (4) - - (413) - - - (413)
Disposals - - - - (12) (2) (14)
Exchange differences - (1) (27) (6) (1) (4) (39)
At 30 June 2024 35 479 1,584 445 743 360 3,646
Net book value at:
30 June 2024 1,048 450 2,269 45 282 332 4,426
1 January 2024 1,066 463 1,787 65 286 342 4,009
(1)( ) Includes £81m (31 December 2023: £97m) of software under course of
construction which is not amortised
(2 ) Other intangibles includes trademarks, brands and the costs incurred
testing and analysing engines with the longest time in service (fleet leader
engines) to gather technical knowledge on engine endurance which will improve
reliability and enable us to reduce the costs of meeting our LTSA obligations
(3 ) Charged to cost of sales and commercial and administrative costs except
development costs, which are charged to research and development costs
(4 ) Includes the reversal of a Civil Aerospace programme asset impairment
recognised in 2020. The impairment reversal of £413m has been credited to
research and development within the non-underlying income statement. See
further details below
Intangible assets (including programme intangible assets) have been reviewed
for impairment in accordance with IAS 36 Impairment of Assets. Assessments
have considered potential triggers of impairment such as external factors
including climate change, significant programme changes and by analysing
latest management forecasts against those prepared in 2023 to identify any
change in performance.
Impairment reversal triggers were identified for a Civil Aerospace programme
asset previously impaired as a result of the impacts of COVID-19 in 2020. The
triggers for recalculating the recoverable amount were improvements during the
period in exchange rates, the discount rate and forecast costs following
successful entry-into-service of the engine.
An impairment reversal assessment has been carried out on the following basis:
- The recoverable amount of programme assets has been estimated
using a value in use calculation. This has been estimated using cash flows
from the most recent forecasts prepared by the Directors, which are consistent
with past-experience and external sources of information on market conditions
over the lives of the respective programmes; and
- The key assumptions underpinning cash flow projections are based
on estimates of product performance related estimates, future market share,
pricing and cost for uncontracted business. Climate-related risks are
considered when making these estimates.
An intangible asset impairment reversal of £413m was recognised in research
and development costs together with a participation fee contract asset
impairment reversal of £132m (see note 11) being recognised in cost of sales
in the period as follows:
Impairment reversal Pre-tax nominal discount rate at 30 June 2024 (1)
Intangible Assets Contract Assets Total
£m
£m
£m
Civil Aerospace - Business Aviation programme assets (2) 413 132 545 13.9%
(1 ) The equivalent pre-tax nominal discount rate in 2020 when the
impairment was recognised was 11.9%. As at 31 December 2023 the discount rate
was 14.4%
(2) The actual amount reversed in local currency represents the full
impairment recognised in 2020. Any subsequent change in GBP values on
consolidation is solely due to exchange rate movements
The recoverable amount calculated now significantly exceeds the carrying value
of the assets as a result of the inclusion of passage of time benefits in
addition to those from the impairment reversal trigger drivers described
above. In making this assessment, the Directors have considered a range of
sensitivities in relation to the market, pricing, cost increases, exchange
rates and discount rates.
There have been no other individually material impairment charges or reversals
recognised during the period (31 December 2023: none).
8 Property, plant and equipment
Land and buildings Plant and equipment Aircraft and engines In course of construction Total
£m £m £m £m £m
Cost:
At 1 January 2024 1,883 4,962 1,006 412 8,263
Additions 4 32 26 80 142
Disposals/write-offs (6) (55) (11) (1) (73)
Reclassifications (1) 13 45 - (58) -
Exchange differences (14) (32) (1) (2) (49)
At 30 June 2024 1,880 4,952 1,020 431 8,283
Accumulated depreciation and impairment:
At 1 January 2024 709 3,384 434 8 4,535
Charge for the period (2) 34 129 26 - 189
Impairment (3) 1 15 - - 16
Disposals/write-offs (5) (55) (5) - (65)
Reclassifications (1) - - - - -
Exchange differences (6) (23) - - (29)
At 30 June 2024 733 3,450 455 8 4,646
Net book value at:
30 June 2024 1,147 1,502 565 423 3,637
1 January 2024 1,174 1,578 572 404 3,728
(1 ) Includes reclassifications of assets under construction to the relevant
classification in property, plant and equipment, right-of-use assets or
intangible assets when available for use
(2 ) Depreciation is charged to cost of sales and commercial and
administrative costs or included in the cost of inventory as appropriate
(3 ) The carrying values of property, plant and equipment have been assessed
during the period in line with IAS 36. Material items of plant and equipment
and aircraft and engines are assessed for impairment together with other
assets used in individual programmes - see potential triggers considered in
note 7. Land and buildings are generally used across multiple programmes and
are considered based on future expectations of the use of the site, which
includes any implications from
climate-related risks. As a result of this assessment, there are no (2023:
none) individually material impairment charges or reversals in the period
9 Right-of-use assets
Land and buildings Plant and equipment Aircraft and engines Total
£m £m £m £m
Cost:
At 1 January 2024 513 194 1,864 2,571
Additions/modification of leases 19 21 2 42
Disposals - (5) - (5)
Exchange differences (3) (2) (2) (7)
At 30 June 2024 529 208 1,864 2,601
Accumulated depreciation and impairment:
At 1 January 2024 259 109 1,298 1,666
Charge for the period (1) 21 20 86 127
Impairment (2) - 2 - 2
Disposals - (5) - (5)
Exchange differences (1) (1) (2) (4)
At 30 June 2024 279 125 1,382 1,786
Net book value at:
30 June 2024 250 83 482 815
1 January 2024 254 85 566 905
(1 ) Depreciation is charged to cost of sales and commercial and
administrative costs as appropriate
(2 ) The carrying values of right-of-use assets have been assessed during
the period in line with IAS 36. Material items of plant and equipment and
aircraft and engines are assessed for impairment together with other assets
used in individual programmes - see potential triggers considered in note 7.
Land and buildings are generally used across multiple programmes and are
considered based on future expectations of the use of the site (which includes
any implications from
climate-related risks). As a result of this assessment, the carrying values of
assets, where a trigger was identified, have been assessed by reference to
value in use considering assumptions such as estimated future cash flows,
product performance related estimates and climate-related risks. During the
period to 30 June 2024, an immaterial impairment charge of £2m has been
recognised (31 December 2023: £71m).
10 Trade receivables and other assets
Current Non-current (1) Total
30 June 31 December 2023 30 June 31 December 2023 30 June 31 December 2023
2024 £m 2024 £m 2024 £m
£m £m £m
Trade receivables 2,823 2,724 132 40 2,955 2,764
Prepayments 814 1,032 142 102 956 1,134
RRSA prepayment for LTSA parts (2) 455 236 1,137 1,084 1,592 1,320
Receivables due on RRSAs 1,005 1,159 91 193 1,096 1,352
Amounts owed by joint ventures and associates 752 731 5 10 757 741
Other taxation and social security receivable 138 160 25 13 163 173
Costs to obtain contracts with customers 4 7 106 109 110 116
Other receivables and similar assets (3) 524 478 41 45 565 523
6,515 6,527 1,679 1,596 8,194 8,123
(1) Trade receivables and other assets have been presented on the face of
the balance sheet in line with the operating cycle of the business. Further
disclosure is included in the table above and relates to amounts not expected
to be received in the next 12 months in line with specific customer payment
arrangements, including customers on payment plans
(2 ) These amounts reflect the contractual share of EFH flows from customers
paid to RRSA partners in return for the supply of parts in future periods
under long-term supply contracts
(3) Other receivables includes unbilled recoveries relating to completed
overhaul activity where the right to consideration is unconditional
The Group has adopted the simplified approach to provide for expected credit
losses (ECLs), measuring the loss allowance at a probability weighted amount
incorporated by using credit ratings which are publicly available, or through
internal risk assessments derived using the customer's latest available
financial information.
The ECLs for trade receivables and other assets has increased by £12m to
£254m (31 December 2023: decreased by £104m to £242m). This movement is
mainly driven by the Civil Aerospace business of £13m, of which £9m relates
to specific customers and £4m relates to updates to the recoverability of
other receivables.
The movements of the Group's ECLs provision are as follows:
30 June 31 December
2024 2023
£m £m
At 1 January (242) (346)
Increases in loss allowance recognised in the income statement during the (58) (80)
period
Loss allowance utilised 8 34
Releases of loss allowance previously provided 39 128
Exchange differences (1) 22
At 30 June/31 December (254) (242)
11 Contract assets and liabilities
Current Non-current (1) Total
30 June 31 December 2023 30 June 31 December 2023 30 June 31 December 2023
2024 £m 2024 £m 2024 £m
£m £m £m
Contract assets
Contract assets with customers 470 534 547 481 1,017 1,015
Participation fee contract assets 30 26 317 201 347 227
500 560 864 682 1,364 1,242
(1) Contract assets and contract liabilities have been presented on the face
of the balance sheet in line with the operating cycle of the business.
Contract liabilities are further split according to when the related
performance obligation is expected to be satisfied and therefore when revenue
is estimated to be recognised in the income statement. Further disclosure of
contract assets is provided in the table above, which shows within current the
element of consideration that will become unconditional in the next year
The balance includes £547m (31 December 2023: £494m) of Civil Aerospace LTSA
assets and £331m (31 December 2023: £410m) Defence LTSA assets.
The increase in the Civil Aerospace balance is due to lower invoicing than
revenue recognised in relation to the completion of performance obligations on
those contracts with a contract asset balance. Revenue recognised relating to
performance obligations satisfied in previous years was £(91)m (31 December
2023: £64m) in Civil Aerospace.
The decrease in the Defence balance is due to revenue recognition in relation
to performance obligations completed being higher than the payments received
from the customer.
No impairment losses in relation to these contract assets (31 December 2023:
none) have arisen during the period.
Participation fee contract assets have increased by £120m (31 December 2023:
£16m) primarily due to the exceptional Civil Aerospace programme asset
impairment reversal of £132m offset by amortisation of £10m and foreign
exchange on consolidation of £2m.
11 Contract assets and liabilities continued
Current Non-current Total
30 June 31 December 2023 30 June 31 December 2023 30 June 31 December 2023
2024 £m 2024 £m 2024 £m
£m £m £m
Contract liabilities 6,118 6,098 8,968 8,438 15,086 14,536
Contract liabilities have increased by £550m. The movement in the Group
balance is primarily as a result of increases in Civil Aerospace of £435m and
Power Systems of £124m.
The Civil Aerospace increase is primarily a result of growth in LTSA
liabilities of £841m to £10,415m (31 December 2023: £9,574m) driven by
invoicing in advance of revenue recognised mostly in respect of widebody
programmes. In 2024, contract liabilities decreased by £348m as a result of
revenue recognised in relation to performance obligations satisfied in
previous periods (31 December 2023: £168m increase). This included an
increase of £107m related to supply chain challenges and customer disruption
costs. The increase in Power Systems is from the receipt of deposits in
advance of performance obligations being completed.
12 Borrowings and lease liabilities
Current Non-current Total
30 June 31 December 2023 30 June 31 December 2023 30 June 31 December 2023
2024 £m 2024 £m 2024 £m
£m £m £m
Unsecured
Overdrafts 6 53 - - 6 53
Bank loans 4 3 - - 4 3
Loan notes - 475 3,533 3,559 3,533 4,034
Other loans - - 9 9 9 9
Total unsecured 10 531 3,542 3,568 3,552 4,099
Lease liabilities 295 278 1,303 1,382 1,598 1,660
Total borrowings and lease liabilities 305 809 4,845 4,950 5,150 5,759
All outstanding items described as loan notes above are listed on the London
Stock Exchange
The Group has access to the following undrawn committed borrowing facilities
at the end of the period:
30 June 31 December 2023
2024 £m
£m
Expiring within one year - -
Expiring after one year 2,500 3,500
Total undrawn facilities 2,500 3,500
Further details can be found in the going concern statement on page 19
During the period to 30 June 2024, the Group repaid a loan note of €550m in
May 2024 in line with its maturity date.
In May 2024 the Group cancelled its undrawn £1bn UK Export Finance (UKEF)
Sustainability-Linked loan facility which was due to expire in 2027. The
facility had remained undrawn in the period.
13 Trade payables and other liabilities
Current Non-current Total
30 June 31 December 2023 30 June 31 December 2023 30 June 31 December 2023
2024 £m 2024 £m 2024 £m
£m £m £m
Trade payables 1,699 1,608 - - 1,699 1,608
Accrued liabilities 1,897 1,134 101 96 1,998 1,230
Customer discounts (1) 1,138 1,018 684 773 1,822 1,791
Payables due on RRSAs 1,575 1,713 - - 1,575 1,713
Deferred receipts from RRSA workshare partners 81 56 735 774 816 830
Amounts owed to joint ventures and associates 467 542 - - 467 542
Government grants (2) 24 30 50 54 74 84
Other taxation and social security 110 92 - - 110 92
Other payables (3) 566 703 225 230 791 933
7,557 6,896 1,795 1,927 9,352 8,823
(1)( ) Customer discounts include customer concession credits. Revenue
recognised comprises sales to the Group's customers after such items. Customer
concession credits are discounts given to a customer upon the sale of goods or
services. A liability is recognised to correspond with the recognition of
revenue when the performance obligation is met. The largest element of the
balance, approximately £1.2bn arises when the Civil business delivers its
engines to an airframer. A concession is often payable to the end customer
(e.g. an airline) on delivery of the aircraft from the airframer. The
concession amounts are known and the payment date is reasonably certain, hence
there is no significant judgement or uncertainty associated with the timing of
these amounts
(2 ) During the period, £47m, (2023: £74m) of government grants were
released to the income statement
(3 ) Other payables includes payroll liabilities and HM Government UK levies
The Group's payment terms with suppliers vary on the products and services
being sourced, the competitive global markets the Group operates in and other
commercial aspects of suppliers' relationships. Industry average payment terms
vary between 90 to 120 days. The Group offers reduced payment terms for
smaller suppliers, who are typically on 75-day payment terms, so that they are
paid in 30 days. In line with civil aviation industry practice, the Group's
suppliers have access to a supply chain financing (SCF) programme in
partnership with banks to enable suppliers, including joint ventures who are
on 90-day standard payment terms, to receive their payments sooner. The SCF
programme is available to suppliers at their discretion and does not change
rights and obligations with suppliers nor the timing of payment of suppliers.
At 30 June 2024, suppliers had drawn £236m under the SCF scheme (31 December
2023: £418m) of which £1m (31 December 2023: £154m) was drawn by joint
ventures. The Group, in some cases, settles the costs incurred by joint
ventures as a result of them utilising either the Group offered SCF
arrangement, or an alternative SCF arrangement. During the period to 30 June
2024, the Group incurred costs of £1m (31 December 2023: £28m) to settle
amounts incurred by joint ventures as a result of them utilising the Group
offered SCF arrangement. These costs are included within other financing
charges.
14 Financial assets and liabilities
Carrying value of other financial assets and liabilities
Derivatives
Foreign exchange contracts Commodity contracts Interest rate contracts (1) Total Financial RRSAs Other C Shares Total
£m £m £m derivatives £m £m £m £m
£m
At 30 June 2024
Non-current assets 31 3 260 294 - 20 - 314
Current assets 15 7 - 22 - 17 - 39
Assets 46 10 260 316 - 37 - 353
Current liabilities (471) (7) - (478) (3) (56) (23) (560)
Non-current liabilities (1,355) (11) (110) (1,476) (6) (114) - (1,596)
Liabilities (1,826) (18) (110) (1,954) (9) (170) (23) (2,156)
(1,780) (8) 150 (1,638) (9) (133) (23) (1,803)
At 31 December 2023
Non-current assets 72 - 254 326 - 34 - 360
Current assets 10 6 8 24 - 10 - 34
Assets 82 6 262 350 - 44 - 394
Current liabilities (351) (10) (13) (374) (10) (41) (23) (448)
Non-current liabilities (1,766) (15) (73) (1,854) (7) (122) - (1,983)
Liabilities (2,117) (25) (86) (2,228) (17) (163) (23) (2,431)
(2,035) (19) 176 (1,878) (17) (119) (23) (2,037)
(1)( ) Includes the foreign exchange impact of cross-currency interest rate
swaps
14 Financial assets and liabilities continued
Derivative financial instruments
Movements in the fair value of derivative financial assets and liabilities
were as follows:
Half-year to 30 June 2024 Year-ended
£m 31 December 2023
£m
Foreign exchange instruments Commodity instruments Interest rate instruments - hedge accounted (1) Interest rate instruments - non-hedge accounted Total Total
£m £m £m £m
At 1 January (2,035) (19) 45 131 (1,878) (3,451)
Movements in fair value hedges - - (37) - (37) (71)
Movements in cash flow hedges - - (16) - (16) (78)
Movements in other derivative contracts (2) (225) 12 - 34 (179) 515
Contracts settled 480 (1) 37 (44) 472 1,207
At 30 June/31 December (1,780) (8) 29 121 (1,638) (1,878)
(1) Includes the foreign exchange impact of cross-currency interest rate
swaps
(2) Included in net financing
Financial risk and revenue sharing arrangements (RRSAs) and other financial
assets and liabilities
Movements in the carrying values were as follows:
Financial RRSAs Other level 3 assets Other level 3 liabilities
Half-year to 30 June 2024 Year-ended 31 December 2023 Half-year to 30 June 2024 Year-ended 31 December 2023 Half-year to 30 June 2024 Year-ended
£m £m £m £m £m 31 December 2023
£m
At 1 January (17) (22) 25 25 (163) (101)
Exchange adjustments included in OCI 1 1 (1) - (8) 2
Additions - - - - (3) (80)
Financing charge (1) - - - - (4) (8)
Excluded from underlying profit:
Changes in forecast payments (1) - (1) - - - -
Cash paid 7 5 - - 6 11
Other - - (11) - 2 13
At 30 June/31 December (9) (17) 13 25 (170) (163)
(1 ) Included in net financing
14 Financial assets and liabilities continued
Fair values of financial instruments equate to book values with the following
exceptions:
Half-year to 30 June 2024 Year-ended 31 December 2023
Book value Fair value Book value Fair value
£m £m £m £m
Other assets - Level 2 17 17 12 12
Borrowings - Level 1 (3,533) (3,502) (4,034) (3,977)
Borrowings - Level 2 (19) (21) (65) (67)
Financial RRSAs - Level 3 (9) (9) (17) (16)
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. There have been no transfers during the period
from or to Level 3 valuation. Fair values have been determined with reference
to available market information at the balance sheet date, using the
methodologies described below.
- Non-current investments primarily comprise unconsolidated
companies where fair value approximates to the book value. Listed investments
are valued using Level 1 methodology.
- Money market funds, included within cash and cash equivalents,
are valued using Level 1 methodology. Fair values are assumed to approximately
equal cost either due to the short-term maturity of the instruments or because
the interest rate of the investments is reset after periods not exceeding six
months.
- The fair values of held to collect trade receivables and similar
items, trade payables and other similar items, other
non-derivative financial assets and liabilities, short-term investments and
cash and cash equivalents are assumed to approximate to cost either due to the
short-term maturity of the instruments or because the interest rate of the
investments is reset after periods not exceeding six months.
- Fair values of derivative financial assets and liabilities and
trade receivables held to collect or sell are estimated by discounting
expected future contractual cash flows using prevailing interest rate curves
or cost of borrowing, as appropriate. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the balance sheet
date. These financial instruments are included on the balance sheet at fair
value, derived from observable market prices (Level 2 as defined by IFRS 13
Fair Value Measurement).
- Borrowings are carried at amortised cost. Amounts denominated in
foreign currencies are valued at the exchange rate prevailing at the balance
sheet date. The fair value of borrowings is estimated using quoted prices
(Level 1 as defined by IFRS 13) or by discounting contractual future cash
flows (Level 2 as defined by IFRS 13).
- The fair values of RRSAs and other liabilities, which primarily
includes royalties to be paid to airframers, are estimated by discounting
expected future cash flows. The contractual cash flows are based on future
trading activity, which is estimated based on latest forecasts (Level 3 as
defined by IFRS 13).
- Other assets and borrowings are carried at amortised cost.
Amounts denominated in foreign currencies are valued at the exchange rate
prevailing at the balance sheet date. The fair value of borrowings is
estimated by discounting contractual future cash flows (Level 2).
- Other assets are included on the balance sheet at fair value,
derived from observable market prices or latest forecast (Level 2/3 as defined
by IFRS 13). At 30 June 2024, Level 3 assets totalled £13m (31 December 2023:
£25m).
- The fair value of lease liabilities are estimated by discounting
future contractual cash flows using either the interest rate implicit in the
lease or the Group's incremental cost of borrowing (Level 2 as defined by IFRS
13).
15 Provisions for liabilities and charges
At Charged to income statement (1) Reversed Utilised Reclassif- Exchange differences At
ications
1 January 2024 30 June
2024
£m £m £m £m £m £m £m
Contract losses 1,472 333 (195) (107) - (1) 1,502
Warranty and guarantees 306 82 (7) (43) - (6) 332
Trent 1000 wastage costs 116 1 - (42) - - 75
Employer liability claims 24 - - - - - 24
Transformation and restructuring (2) 9 53 - (28) - - 34
Tax related interest and penalties 22 1 - - - - 23
Claims and litigation 43 15 (7) (7) (5) - 39
Other (2) 37 9 (1) (6) 5 - 44
2,029 494 (210) (233) - (7) 2,073
Current liabilities 532 556
Non-current liabilities 1,497 1,517
(1)( ) The charge to the income statement includes £25m (30 June 2023:
£2m) within net financing as a result of the unwinding of the discounting of
provisions previously recognised
(2 ) At 31 December 2023 the transformation and restructuring provision was
included within other provisions
Contract losses
Provisions for contract losses are recorded when the direct costs to fulfil a
contract are assessed as being greater than the expected recoverable amount.
Provisions for contract losses are measured on a fully costed basis and during
the period £107m of the provisions have been utilised. Additional contract
losses for the Group of £333m have been recognised. These are a result of
increases in the estimate of future LTSA costs including the impact of
prolonged supply chain challenges and customer disruption costs. Contract
losses of £195m previously recognised have been reversed following
improvements to cost estimates and time on wing across various engine
programmes as a result of operational improvements and contractual extensions.
The Group continues to monitor the contract loss provisions for changes in the
market and revises the provision as required. The value of the remaining
contract loss provisions reflect, in each case, the single most likely
outcome. The provisions are expected to be utilised over the term of the
customer contracts, typically within eight to 16 years.
IAS 37 requires a company to recognise any impairment loss that has occurred
on assets used in fulfilling the contract before recognising a separate
provision for an onerous contract. No impairments were required for any of the
assets solely used in the fulfilment of onerous contracts. The Trent 1000
intangible assets (certification costs and development costs) and Trent 1000
spare engines (right of use and owned) are tested for impairment as part of
the Trent 1000 Cash generating unit (CGU) and no impairment was required.
Warranty and guarantees
Provisions for warranty and guarantees relate to products sold and are
calculated based on an assessment of the remediation costs related to future
claims based on past experience. During the period, £82m of additional
provisions have been recognised representing the single best estimate of
warranty and guarantee costs to be incurred on relevant sales and £43m of
previously recognised costs have been utilised. The provision generally covers
a period of up to three years.
Trent 1000 wastage costs
In November 2019, the Group announced the outcome of testing and a thorough
technical and financial review of the Trent 1000 TEN programme, following
technical issues which were identified in 2019, resulting in a revised
timeline and a more conservative estimate of durability for the improved HP
turbine blade for the TEN variant. During the period, the Group has utilised
£42m of the Trent 1000 wastage costs provision. This represents customer
disruption costs and remediation shop visit costs attributable to the wastage
costs provision. During the period, a net charge to the provision of £1m has
been recognised reflecting the discount unwind and updates to forecasted costs
based on the latest available information. The value of the remaining
provision reflects the single most likely outcome and is expected to be
utilised in 2025.
Employer liability claims
The provision relating to employer healthcare liability claims is as a result
of an historical insolvency of the previous provider and is expected to be
utilised over the next 30 years.
Transformation and restructuring
In 2023, the Group announced a major multi-year transformation programme which
consists of seven workstreams that are set out in the 2023 Annual Report. The
Group has made good progress on these workstreams and as a result of the
details communicated to employees during the period, a provision of £53m has
been recorded and recognised in cost of sales and commercial and
administration costs related to severance costs. During the period £28m has
been utilised as part of these plans and a further £2m has been charged
directly to the income statement. The remaining provision is expected to be
utilised by 31 December 2024. Included within the exceptional charge of £107m
(see note 2) are costs of £52m associated with other initiatives to enable
the restructuring which have been charged directly to the income statement.
15 Provisions for liabilities and charges continued
Tax related interest and penalties
Provisions for tax related interest and penalties relate to uncertain tax
positions in some of the jurisdictions in which the Group operates.
Utilisation of the provisions will depend on the timing of resolution of the
issues with the relevant tax authorities.
Claims and litigation
Provisions for claims and litigation represent ongoing matters where the
outcome for the Group may be unfavourable.
The balance also includes the best estimate of any retained exposure by the
Group's captive insurance company for any claims that have been incurred but
not yet reported to the Group, as that entity retains a portion of the
exposures it insures on behalf of the remainder of the Group. Such exposures
include policies for aviation claims, employer liabilities and healthcare
claims. Significant delays can occur in the notification and settlement of
claims, and judgement is involved in assessing outstanding liabilities, the
ultimate cost and timing of which cannot be known with certainty at the
balance sheet date. The insurance provisions are based on information
currently available, however, it is inherent in the nature of the business
that ultimate liabilities may vary if the frequency or severity of claims
differs from estimated.
Other
Other items are individually immaterial. The value of any remaining provisions
reflects the single most likely outcome in each case.
16 Post-retirement benefits
The net post-retirement scheme surplus/(deficit) as at 30 June 2024 is
calculated on a year to date basis, using the latest valuation as at 31 March
2023, updated to 30 June 2024 where relevant.
Amounts recognised in the balance sheet in respect of defined benefit schemes
UK schemes Overseas schemes Total
£m £m £m
At 1 January 2024 767 (1,020) (253)
Exchange adjustments - 14 14
Current service cost and administrative expenses (2) (19) (21)
Financing recognised in the income statement 17 (19) (2)
Contributions by employer - 39 39
Actuarial gains recognised in OCI (1) 387 69 456
Returns on plan assets excluding financing recognised in OCI (312) (20) (332)
At 30 June 2024 857 (956) (99)
Post-retirement scheme surpluses - included in non-current assets (2) 857 11 868
Post-retirement scheme deficits - included in non-current liabilities - (967) (967)
(1 ) Actuarial gains recognised in OCI on the UK scheme (Rolls-Royce UK
Pension Fund - RRUKPF) are primarily driven by movements in the discount rate
and inflation
(2 ) The surplus in the UK Scheme is recognised as, on ultimate wind-up when
there are no longer any remaining members, any surplus would be returned to
the Group which has the power to prevent the surplus being used for other
purposes in advance of this event
Other
The Group is aware of a UK High Court legal ruling in June 2023 between Virgin
Media Limited and NTL Pension Trustees II Limited, which decided that certain
historic rule amendments were invalid if they were not accompanied by
actuarial certifications. The ruling was subject to an appeal with a judgment
delivered on 25 July 2024. The Court of Appeal unanimously upheld the decision
of the High Court and concluded that the pre-April 2013 conditions applied to
amendments to both future and past service. Whilst this ruling was in respect
of another scheme, this judgment will need to be reviewed for its relevance to
the RRUKPF scheme, and other UK schemes. As the Court of Appeal has only just
delivered its verdict, the RRUKPF pension advisers have not yet completed any
analysis and no adjustments have been made to the Condensed Consolidated
Interim Financial Statements at 30 June 2024.
17 Contingent liabilities and commitments
In January 2017, after full cooperation, the Company concluded deferred
prosecution agreements (DPA) with the SFO and the US Department of Justice
(DoJ) and a leniency agreement with the MPF, the Brazilian federal
prosecutors. The terms of both DPAs have now expired. The Company has
submitted a final report to the Comptroller General of Brazil under the terms
of a two-year leniency agreement signed in October 2021 relating to the same
historical matters. Certain authorities are investigating members of the Group
for matters relating to misconduct in relation to historical matters. The
Company has met all of its obligations under the leniency agreement and, in
April 2024, the Comptroller General of Brazil confirmed that the Company would
no longer be subject to compliance monitorship. The Group is responding
appropriately. Action may be taken by further authorities against the Group or
individuals. In addition, the Group could still be affected by actions from
other parties, including customers, customers' financiers and the Company's
current and former investors, including certain potential claims in respect of
the Group's historical ethics and compliance disclosures which have been
notified to the Group. The Directors are not currently aware of any matters
that are likely to lead to a material financial loss over and above the
penalties imposed to date, but cannot anticipate all the possible actions that
may be taken or their potential consequences.
The Group has, in the normal course of business, entered into arrangements in
respect of export finance, performance bonds, grant funding, countertrade
obligations and minor miscellaneous items, which could result in potential
outflows if the requirements related to those arrangements are not met.
Various Group undertakings are party to legal actions and claims (including
with tax authorities) which arise in the ordinary course of business, some of
which are for substantial amounts.
In connection with the sale of its products, the Group will, on some
occasions, provide financing support for its customers, generally in respect
of civil aircraft. The Group's commitments relating to these financing
arrangements are spread over many years, they 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 $0.6bn (31 December 2023:
$0.9bn) (on a discounted basis) to provide facilities to enable customers to
purchase aircraft (of which approximately $0.3bn could be called during 2024).
These facilities may only be used if the customer is unable to obtain
financing elsewhere and are priced at a premium to the market rate.
Significant events impacting the international aircraft financing market, the
failure by customers to meet their obligations under such financing
agreements, or inadequate provisions for customer financing liabilities may
adversely affect the Group's financial position.
Customer financing provisions are made to cover guarantees provided for asset
value and/or financing where it is probable that a payment will be made. These
are reported on a discounted basis at the Group's borrowing rate to better
reflect the time span over which these exposures could arise. The values of
aircraft providing security are based on advice from a specialist aircraft
appraiser. There were no provisions for customer financing provisions at 30
June 2024 or 31 December 2023.
The Group has responded appropriately to the Russia-Ukraine conflict to comply
with international sanctions and export control regime, and to continue to
implement the business decision to exit from Russia. The Group could be
subject to action by impacted customers, suppliers and other contract parties.
While the outcome of the above 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.
18 Related party transactions
Half-year Half-year
to 30 June 2023
to 30 June 2024
£m
£m
Sale of goods and services (1) 3,583 3,297
Purchases of goods and services (1) (4,420) (3,901)
(1) The Group has both sales and purchasing arrangements with its maintenance,
repair and overhaul joint ventures. As part of these arrangements, the Group
issues and receives credit notes usable against amounts receivable and payable
to these related parties. From 31 December 2023, purchases and sales of goods
and services from related parties have been presented to be shown gross of
these concessions. Purchases and sales from related parties that occurred
during the period to 30 June 2023 have been re-presented resulting in an
increase to purchases of £1,209m and an increase to sales of £1,141m
Included in sales of goods and services to related parties are sales of spare
engines amounting to £24m
(30 June 2023: £1m). Profit recognised in the period on such sales amounted
to £29m (30 June 2023: £30m), including profit on current year sales and
recognition of profit deferred on similar sales in previous years. Cash
receipts relating to the sale of spare engines amounted to £24m (30 June
2023: £nil).
Included in other financing charges in the income statement are interest costs
of £4m (30 June 2023: £15m) incurred during the period which have been
settled by the Group on behalf of joint ventures, including the £1m of costs
incurred as a result of them using the Group offered SCF arrangement set out
in note 13.
19 Businesses held for sale
Businesses held for sale
At 31 December 2023 the Group had classified the assets and liabilities
related to part of the Power Systems' lower power range off-highway engines
business as held for sale as, in line with IFRS 5, the business was available
for sale in its current condition and the sale was considered highly probable.
On the 28 March 2024 the Group's Power Systems division and Deutz AG signed a
disposal agreement. Completion took place on 31 July 2024. At 30 June 2024 the
assets and liabilities continued to be disclosed as held for sale pending
completion. They are measured at the lower of their carrying value or fair
value less costs to sell as summarised below.
The table below summarises the categories of assets and liabilities of the
lower power range business classified as held for sale at 30 June 2024.
30 June 31 December
2024
2023
£m £m
Intangible assets 50 51
Inventory 13 11
Trade receivables and other assets 1 47
Assets held for sale 64 109
Trade payables and other liabilities - (41)
Contract liabilities (4) (4)
Provisions for liabilities and charges (8) (8)
Post-retirement scheme deficits (1) (2)
Liabilities associated with assets held for sale (13) (55)
Net assets held for sale 51 54
20 Derivation of summary funds flow statement
Half-year to 30 June 2024 Half-year to
30 June 2023
Cash flow Impact of hedge book Impact of acquisition accounting Impact of other non-underlying items Funds flow Funds flow
£m £m £m £m £m £m
Operating profit/loss 1,646 (82) 23 (438) 1,149 673
Loss/(profit) on disposal of property, plant and equipment (1) 1 - - - 1 (1)
Joint venture trading (1) (63) - - - (63) (73)
Depreciation, amortisation and impairment 51 - (23) 399 427 489
Movement in provisions 38 (108) - (36) (106) (95)
Increase in inventories (3) (641) - - - (641) (557)
Movement in prepayments to RRSAs for LTSA parts (272) 101 - - (171) (118)
Movement in cost to obtain contracts 6 1 - - 7 7
Movement in trade receivables/payables and other assets/liabilities (3, 4) 424 (336) - (2) 86 (854)
Revaluation of trading assets (3) 10 (13) - - (3) 91
Realised derivatives in financing (3) 405 - - - 405 522
Movement in Civil LTSA balance 788 (73) - - 715 727
Movement in contract assets/liabilities (excluding Civil LTSA) (3) (291) 84 - 132 (75) 333
Settlement of excess derivatives (75) - - - (75) (210)
Interest received 124 - - - 124 60
Contributions to defined benefit schemes in excess of underlying operating (18) - - - (18) (16)
profit charge (1)
Cash flows on other financial assets and liabilities held for operating (410) 405 - - (5) 6
purposes
Share-based payments (1) 59 - - - 59 23
Other (1) - 11 - - 11 (7)
Income tax (113) - - - (113) (59)
Cash from operating activities (2) 1,669 (10) - 55 1,714 941
Capital element of lease payments (122) 10 - - (112) (157)
Capital expenditure (291) - - - (291) (285)
Investment 17 - - - 17 17
Interest paid (157) - - - (157) (159)
Other (M&A, restructuring and exceptional transformation costs) 42 - - (55) (13) (1)
Free cash flow 1,158 1,158 356
(1) Included in other operating cash flows in the summarised free cash flow
on page 8
(2 ) The funds flow to 30 June 2023 has been re-presented to disclose cash
flows on settlement of excess derivative contracts as cash flows from
operating activities. As a result, operating cash flows before working capital
and income tax during the period to 30 June 2023 have reduced by £(210)m to
£941m. Cash flows on settlement of excess derivative contracts were
previously shown after cash from operating activities in arriving at free cash
flow. There is no impact to free cash flow
(3) Included in working capital (excluding Civil LTSA balance) in the
summarised free cash flow on page 8
(4 ) Movement in trade receivables/payables and other assets/liabilities
excludes movements in prepayments to RRSAs for LTSA parts and movements in
costs to obtain contracts which have been presented as separate line items
The comparative information to 30 June 2023 has been presented in a different
format to align to the current year presentation. In some instances, the
groupings of items may have changed.
Free cash flow is a measure of the financial performance of the businesses'
cash flows which is consistent with the way in which performance is
communicated to the Board. Free cash flow is defined as cash flows from
operating activities including capital expenditure and movements in
investments, capital elements of lease payments, interest paid, amounts paid
relating to the settlement of excess derivatives and excluding amounts spent
or received on activity related to business acquisitions or disposals and
other material exceptional or one-off cash flows. The Board considers that
free cash flow reflects cash generated from the Group's underlying trading.
Cash flow from operating activities is determined to be the nearest statutory
measure to free cash flow. The reconciliation between free cash flow and cash
flow from operating activities can be found on page 45.
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent
Alternative Performance Measures (APMs)
Business performance is reviewed and managed on an underlying basis. These
alternative performance measures reflect the economic substance of trading in
the period. In addition, a number of other APMs are utilised to measure and
monitor the Group's performance.
Definitions and reconciliations to the relevant statutory measure are included
below.
Underlying results
Underlying results are presented by recording all relevant revenue and cost of
sales transactions at the average exchange rate achieved on effective settled
derivative contracts in the period that the cash flow occurs. Underlying
results also exclude: the effect of acquisition accounting and business
disposals, impairment of goodwill and other non-current assets where the
reasons for the impairment are outside of normal operating activities,
exceptional items and certain other items which are market driven and outside
of management's control. Further detail can be found in note 2.
Half-year to 30 June 2024 Half-year to 30 June 2023
£m £m
Revenue
Statutory revenue 8,861 7,523
Derivative and FX adjustments (679) (573)
Underlying revenue 8,182 6,950
Gross profit
Statutory gross profit 2,108 1,657
Derivative and FX adjustments (73) (162)
Programme exceptional credits - (21)
Exceptional transformation and restructuring charges 52 16
Acquisition accounting 22 25
Civil Aerospace programme asset impairment reversal (132) -
Underlying gross profit 1,977 1,515
Commercial and administrative costs
Statutory commercial and administrative (C&A) costs (641) (560)
Derivative and FX adjustments 1 1
Exceptional transformation and restructuring charges 47 18
Other underlying adjustments - 3
Underlying C&A Costs (593) (538)
Research and development
Statutory research and development (R&D) 101 (389)
Derivative and FX adjustments (12) -
Exceptional transformation and restructuring charges 8 1
Acquisition accounting 1 (1)
Civil Aerospace programme asset impairment reversal (413) -
Underlying R&D costs (315) (389)
Operating profit
Statutory operating profit 1,646 797
Derivative and FX adjustments (82) (165)
Programme exceptional credits - (21)
Exceptional transformation and restructuring charges 107 35
Acquisition accounting 23 24
Civil Aerospace programme asset impairment reversal (545) -
Other underlying adjustments - 3
Underlying operating profit 1,149 673
Underlying operating profit margin 14.0% 9.7%
Half-year to 30 June 2024 Half-year to 30 June 2023
pence pence
Basic EPS
Statutory basic EPS 13.71 14.70
Effect of underlying adjustments to profit before tax (4.55) (10.71)
Related tax effects (0.21) 0.91
Basic underlying EPS 8.95 4.90
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
Organic change
Organic change is the measure of change at constant translational currency
applying full year 2023 average rates to 2023 and 2024. The movement in
underlying change to organic change is reconciled below.
All amounts below are shown on an underlying basis and reconciled to the
nearest statutory measure above. All comparative periods relate to half-year
to 30 June 2023.
Total Group income statement 2024 2023 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 8,182 6,950 1,232 (103) 1,335 19%
Underlying gross profit 1,977 1,515 462 (29) 491 33%
Underlying operating profit 1,149 673 476 (17) 493 74%
Net financing costs (114) (149) 35 1 34 (23%)
Underlying profit before taxation 1,035 524 511 (16) 527 101%
Taxation (298) (120) (178) 1 (179) 149%
Underlying profit for the period 737 404 333 (15) 348 87%
Civil Aerospace 2024 2023 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 4,119 3,257 862 (26) 888 27%
Underlying OE revenue 1,329 1,055 274 (11) 285 27%
Underlying services revenue 2,790 2,202 588 (15) 603 27%
Underlying gross profit 992 690 302 (11) 313 45%
Commercial and administrative costs (193) (171) (22) 1 (23) 13%
Research and development (135) (195) 60 2 58 (30%)
Joint ventures and associates 76 81 (5) - (5) (6%)
Underlying operating profit 740 405 335 (8) 343 85%
Defence 2024 2023 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 2,219 1,913 306 (29) 335 18%
Underlying OE revenue 872 841 31 (11) 42 5%
Underlying services revenue 1,347 1,072 275 (18) 293 27%
Underlying gross profit 476 379 97 (5) 102 27%
Commercial and administrative costs (108) (86) (22) - (22) 26%
Research and development (24) (34) 10 - 10 (29%)
Joint ventures and associates 1 2 (1) - (1) (50%)
Underlying operating profit 345 261 84 (5) 89 34%
Power Systems 2024 2023 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 1,837 1,774 63 (48) 111 6%
Underlying OE revenue 1,257 1,175 82 (33) 115 10%
Underlying services revenue 580 599 (19) (15) (4) (1%)
Underlying gross profit 507 452 55 (13) 68 15%
Commercial and administrative costs (238) (233) (5) 7 (12) 5%
Research and development (83) (96) 13 2 11 (12%)
Joint ventures and associates 3 2 1 (1) 2 200%
Underlying operating profit 189 125 64 (5) 69 56%
New Markets 2024 2023 Change FX Organic Change Organic Change
£m £m £m £m £m %
Underlying revenue 2 1 1 - 1 100%
Underlying OE revenue 1 1 - - - -
Underlying services revenue 1 - 1 - 1 nm(1)
Underlying gross profit/(loss) 2 - 2 - 2 nm(1)
Commercial and administrative costs (20) (14) (6) - (6) 43%
Research and development (73) (64) (9) 1 (10) 16%
Underlying operating loss (91) (78) (13) 1 (14) 18%
(1 ) nm is defined as not meaningful
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
Trading cash flow
Trading cash flow is defined as free cash flow (as defined below) before the
deduction of recurring tax and post-employment benefit expenses. Trading cash
flow per segment is used as a measure of business performance for the relevant
segments.
Half-year to 30 June 2024 Half-year to 30 June 2023
£m £m
Civil Aerospace 1,038 401
Defence 234 76
Power Systems 121 22
New Markets (68) (42)
Total reportable segments trading cash flow 1,325 457
Other businesses (3) 8
Central and Inter-segment (33) (34)
Trading cash flow 1,289 431
Underlying operating profit charge exceeded by contributions to defined (18) (16)
benefit schemes
Tax (1) (113) (59)
Free cash flow 1,158 356
(1) See page 14 for tax paid in the statutory cash flow statement
Free cash flow
Free cash flow is a measure of the financial performance of the businesses'
cash flows which is consistent with the way in which performance is
communicated with the Board. Free cash flow is defined as cash flows from
operating activities including capital expenditure and movements in
investments, capital elements of lease payments, interest paid and excluding
amounts spent or received on activity related to business acquisitions or
disposals and other material exceptional or one-off cash flows.
Half-year to 30 June Half-year to 30 June 2023
2024 £m
£m
Statutory cash flows from operating activities (1) 1,669 925
Capital expenditure (291) (287)
Investment (including investment from NCI and movement in joint ventures, 17 17
associates and other investments)
Capital element of lease payments (122) (167)
Interest paid (157) (159)
Exceptional transformation and restructuring costs 55 28
Other (13) (1)
Free cash flow 1,158 356
(1 ) Statutory cash flows from operating activities at 30 June 2023 have
been re-presented. See note 1
Gross R&D expenditure
In period gross cash expenditure on R&D excludes contributions and fees,
amortisation and impairment of capitalised costs and amounts capitalised
during the period. For further detail, see note 3.
Gross capital expenditure
Gross capital expenditure during the period excluding capital expenditure from
discontinued operations. All proposed investments are subject to rigorous
review to ensure that they are consistent with forecast activity and provide
value for money. The Group measures annual capital expenditure as the cash
purchases of PPE acquired during the period.
Half-year to 30 June Half-year to 30 June 2023
2024 £m
£m
Purchases of PPE (cash flow statement) 133 177
Reconciliation of Alternative Performance Measures (APMs) to their statutory
equivalent continued
Key performance indicators
The following measures are key performance indicators and are calculated using
APMs or statutory results. See below for calculation of these key performance
indicators.
Order backlog
Order backlog, also known as unrecognised revenue, is the amount of revenue on
current contracts that is expected to be recognised in future periods. Civil
Aerospace OE orders where the customer has retained the right to cancel (for
deliveries in the next seven to 12 months) are excluded.
Adjusted return on capital (abbreviated to return on capital)
Return on capital is defined as 12-month net operating profit after tax
('NOPAT') as a percentage of average invested capital. NOPAT is defined as
underlying net profit excluding net finance costs and the tax shield on net
finance costs. Invested capital is defined as current and non-current assets
less current liabilities. It excludes pension assets, cash and cash
equivalents, and borrowings and lease liabilities. Return on capital assesses
the efficiency in allocating capital to profitable investments.
Year-ended 30 June 2024 Year-ended 30 June 2023
£m £m
Underlying operating profit 917 527
Less: taxation (1) - 48
Underlying operating profit (post-taxation) (6-month period ended 31 December) 917 575
Underlying operating profit 1,149 673
Less: taxation (1) (331) (154)
Underlying operating profit (post-taxation) (6-month period ended 30 June) 818 519
Total underlying operating profit (post-taxation) 1,735 1,094
Total assets 33,011 29,742
Less: post-retirement scheme surpluses (868) (591)
Less: cash and cash equivalents (4,319) (2,861)
Current liabilities (15,264) (14,748)
Liabilities held for sale (13) −
Less: borrowings and lease liabilities 305 756
Invested capital (closing) 12,852 12,298
Invested capital (average) 12,575 12,170
% %
Return on capital 13.8 9.0
(1 ) Excluding underlying taxation on underlying finance income/(costs) of
£33m (30 June 2023: £15m)
Total underlying cash costs as a proportion of underlying gross margin
(abbreviated to TCC/GM)
Total underlying cash costs during the period (represented by underlying
research and development (R&D) expenditure and underlying commercial and
administrative (C&A) costs) as a proportion of underlying gross profit.
This measure provides an indicator of total cash costs relative to gross
profit. A reduction in total cash costs relative to gross profit indicates how
effective the business is at managing and/or reducing its costs.
Half-year to 30 June Half-year to 30 June 2023
2024 £m
£m
Underlying R&D expenditure (1) 380 429
Underlying C&A 593 538
Total cash costs 973 967
Underlying gross profit 1,977 1,515
Total cash costs as a proportion of underlying gross profit 0.49 0.64
(1 ) Excludes £10m (30 June 2023: £1m) impact of derivative and FX
adjustments
Principal risks and uncertainties
Our approach to risk management is described on pages 50 to 57 of our 2023
Annual Report. It sets out requirements for managing risk across the
organisation, in a continuous process where risk owners define, quantify,
control, assure and respond to risks, including ongoing monitoring and
oversight. Our risks are categorised as either a 'pillar' or a 'driver', with
drivers being those risks that could cause one or more risk pillars to happen
and/or make them worse if they do. All principal risks facing the Group are
summarised below and reported in detail on pages 52 to 57 of our 2023 Annual
Report.
Principal risk pillars
Safety
Failure to: i) provide safe products; or ii) create a place to work which
minimises the risk of harm to our people, those who work with us, and the
environment, would adversely affect our reputation and long-term
sustainability.
Compliance
Non-compliance by the Group with legislation or other regulatory requirements
in the heavily regulated environment in which we operate (e.g. export
controls; data privacy; use of controlled chemicals and substances;
anti-bribery and corruption; human rights; and tax and customs legislation).
This could affect our ability to conduct business in certain jurisdictions and
would potentially expose us to: reputational damage; financial penalties;
debarment from government contracts for a period of time; and suspension of
export privileges (including export credit financing), each of which could
have a material adverse effect.
Strategy
Failure to develop an optimal strategy and continuously evolve it, investing
in key areas for performance improvement and growth (taking into account risk
reward), making difficult decisions for competitive advantage and the right
portfolio and partnership choices, could result in us underperforming against
our competitors and significantly reduce our ability to build a high
performing, competitive, resilient and growing company.
Execution
Failure to deliver as One Rolls-Royce on short- to medium-term financial
plans, including efficient and effective delivery of quality products,
services and programmes, or falling significantly short of customer
expectations, would reduce our resilience and have potentially significant
adverse financial and reputational consequences, including the risk of
impairment of the carrying value of the Group's intangible assets and the
impact of potential litigation.
Business interruption
A major disruption of our operations and ability to deliver our products,
services and programmes could have an adverse impact on our people, internal
facilities or external supply chain which could result in failure to meet
agreed customer commitments and damage our prospects of winning future orders.
Disruption could be caused by a range of events, e.g. extreme weather or
natural hazards (e.g. earthquakes or floods) which could increase in severity
or frequency given the impact of climate change; political events; financial
insolvency of a critical supplier; scarcity of materials; loss of data; fire;
pandemic or other infectious disease.
Principal risk drivers
Climate change
Failure to become a net zero company by 2050, leveraging technology to
transition from carbon intensive products and services at pace could impact
our ability to win future business; achieve operating results; attract and
retain talent; secure access to funding; realise future growth opportunities;
or force government intervention to limit emissions.
In addition, physical risks from extreme weather events (and/or natural
hazards) could potentially materialise, which may result in disruption.
Information and data
Failure to protect the integrity and availability of data, both physical and
digital, from attempts to cause us harm, such as through a cyber attack.
Potential impacts include hindering data driven decision making, disrupting
internal business operations and services for customers, or a data breach, all
of which could damage our reputation, reduce resilience, and cause financial
loss.
Causes include ransomware threats, unauthorised access to property or systems
for the extraction, corruption, destruction of data, or availability of access
to critical data and intellectual property.
Market and Financial shock
The Group is exposed to market and financial risks, some of which are of a
macroeconomic nature (e.g. economic growth rates, foreign currency, oil price,
interest rates) and some of which are more specific to us (e.g. reduction in
air travel or defence spending, disruption to other customer operations,
liquidity and credit risks).
Significant extraneous market events could also materially damage our
competitiveness and/or creditworthiness and our ability to access funding.
This would affect operational results or the outcomes of financial
transactions.
Demand for our products and services could be adversely affected by factors
such as current and predicted air traffic, fuel prices and age/replacement
rates of customer fleets. A large proportion of our business is reliant on the
civil aviation industry, which is cyclical in nature.
Political risk
Geopolitical factors leading to an unfavourable business climate and
significant tensions between major trading parties or blocs could impact our
strategy, execution, resilience, safety and compliance. Examples include:
changes in key political relationships, explicit trade protectionism,
differing tax or regulatory regimes, potential for conflict or broader
political issues, and heightened political tensions.
Talent and capability
Failure to create a company where our people can build a successful career
with better choices for development and personal growth will hinder our
ability to identify, attract, retain and apply the critical capabilities and
skills needed in appropriate numbers for the successful execution of our
business strategy.
Technology
Failure to become a digitally enabled business using tools including AI could
hinder our ability to enhance the customer experience, drive the transition to
lower carbon, accelerate product design, improve manufacturing and empower our
people with new tools to improve productivity, as well as preventing us from
creating new growth opportunities.
Payments to shareholders
Shareholder distributions to be reinstated in respect of the full year 2024
results: As we shared at our capital markets day in November 2023, we are
committed to reinstating regular shareholder distributions. We are making
strong progress strengthening the balance sheet and building resilience. As
such, we are reinstating shareholder distributions in respect of the full year
2024 results, starting at a 30% pay-out ratio of underlying profit after tax.
Going forward, the regular shareholder distribution policy will be to
distribute 30-40% of underlying profit after tax.
Shareholders wishing to redeem their existing C Shares, or participate in the
CRIP must lodge instructions with the Registrar to arrive no later than 5.00pm
on 16 December 2024 (CREST holders must submit their election in CREST by
2.55pm). The payment of C Share redemption monies will be made on 9 January
2025 and the CRIP purchase will begin as soon as practicable after 9 January
2025.
Statement of Directors' responsibilities
The Directors confirm that, to the best of their knowledge:
• the Condensed Consolidated Interim Financial Statements have been prepared
in accordance with IAS 34 Interim Financial Reporting as adopted by the UK;
• the interim management report includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication
of important events that have occurred during the first six months of the
financial year and their impact on the Condensed Consolidated Interim
Financial Statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the entity during that period; and any changes in the related
party transactions described in the last Annual Report that could do so.
By order of the Board
Tufan Erginbilgic Helen McCabe
Chief Executive Chief Financial Officer
1 August 2024 1 August 2024
Independent review report to Rolls-Royce Holdings plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed Rolls-Royce Holdings plc's condensed consolidated interim
financial statements (the "interim financial statements") in the 2024 Half
Year Results of Rolls-Royce Holdings plc for the 6 month period ended
30 June 2024 (the "period").
Based on our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
The interim financial statements comprise:
· the Condensed consolidated balance sheet as at 30 June 2024;
· the Condensed consolidated income statement and Condensed
consolidated statement of comprehensive income for the period then ended;
· the Condensed consolidated cash flow statement for the period then
ended;
· the Condensed consolidated statement of changes in equity for the
period then ended; and
· the explanatory notes to the interim financial statements.
The interim financial statements included in the 2024 Half Year Results of
Rolls-Royce Holdings plc have been prepared in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting' and the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410, 'Review of Interim Financial Information Performed by
the Independent Auditor of the Entity' issued by the Financial Reporting
Council for use in the United Kingdom ("ISRE (UK) 2410"). A review of interim
financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and, consequently, does not
enable us to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do not express
an audit opinion.
We have read the other information contained in the 2024 Half Year Results and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on the review
procedures performed in accordance with ISRE (UK) 2410. However, future events
or conditions may cause the group to cease to continue as a going concern.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The 2024 Half Year Results, including the interim financial statements, is the
responsibility of, and has been approved by the directors. The directors are
responsible for preparing the 2024 Half Year Results in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. In preparing the 2024 Half Year Results,
including the interim financial statements, the directors are responsible for
assessing the group's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the group or to
cease operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim financial
statements in the 2024 Half Year Results based on our review. Our conclusion,
including our Conclusions relating to going concern, is based on procedures
that are less extensive than audit procedures, as described in the Basis for
conclusion paragraph of this report. This report, including the conclusion,
has been prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We do not, in
giving this conclusion, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London
1 August 2024
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