The pace and extent of currency movements have had a significant effect on the Group’s financial reporting in the first half of 2009, with the GBP exchange rates against the USD and the Euro having the biggest impact. These movements have influenced both the reported income statement and the cash flow and closing net cash position (as set out in the cash flow statement) in the following ways:
1. Income statement – the most significant impact was the period end mark to market of outstanding financial instruments (foreign exchange contracts, interest rate, commodity and jet fuel swaps). The principal adjustments related to the GBP~USD hedge book.
The principal spot rate movements in the first half of 2009 were as follows:
|Jan 1 2009||June 30 2009|
|Oil – Spot Brent||$49/bbl||$69/bbl|
The average rates throughout the period were:
|H1 2009||H1 2008||FY 2008|
|GBP ~ USD||£1~$1.493||£1~$1.974||£1~$1.854|
|GBP ~ Euro||£1~€1.119||£1~€1. 291||£1~€1.258|
The impact of the period end mark to market on all of the outstanding financial instruments is included within net financing in the income statement and caused a net £1,909m gain (2008 first-half £75m gain), contributing to a published profit before tax of £2,515m (compared to £389m reported in the first half of 2008). These adjustments are non-cash, accounting adjustments required under IAS 39 and do not, therefore, reflect the underlying trading performance of the Group for the period.
Underlying profit before finance costs of £478m benefited from a £47m foreign exchange benefit compared to the first half of 2008. The achieved rate on selling net USD income was two cents better in the period than in the first half of 2008, contributing £12m of the first-half underlying profit improvement, and is expected to be between two to three cents better for the full year compared to full year 2008.
In addition, the significant improvement in the average GBP~USD and GBP~Euro exchange rates, 48 and 17 cents respectively, contributed translation benefits totalling £35m of the first-half underlying profit improvement. Translation benefits for the full year are expected to reduce from the £35m reported in the first-half given improved rates experienced in the second half of 2008.
2. Balance sheet and cash flow – The Group maintains a number of currency cash balances which vary throughout the financial year. Given the significant movements in foreign exchange rates in the period, a number of these cash balances were impacted by the weaker rates at the period end causing a reduction of £194m in the periodic cash flow and hence the closing balance sheet cash position.
The firm and announced order book, at constant exchange rates, was £57.5bn (2008 year-end £55.5bn) after reflecting new order intake of £7.9bn in the period. Aftermarket services included in the order book totalled £16.2bn (2008 year-end £14.5bn).
Revenues increased by 27 per cent, compared with 2008, to £5,142m. Revenues on an underlying basis grew by 17 per cent. Payments to industrial RRSPs, charged in cost of sales, amounted to £151m (2008 first-half £117m).
Gross research and development investment was £440m (2008 first-half £399m). Net research and development investment, charged to the income statement was £200m (2008 first-half £177m) after net capitalisation of £46m (2008 first-half £45m) on development programmes in the period. Receipts from RRSPs in respect of new programme developments, shown as other operating income, were £68m (2008 first-half £13m), as key partners joined major new programmes, primarily the Trent XWB.
Restructuring costs of £37m (2008 first-half £60m) were charged, reflecting the ongoing reduction in headcount.
Underlying profit margins before financing fell by approximately 0.5 per cent to 9.7 per cent in the period, reflecting strong growth in lower margin original equipment and an increase in unit costs of around two per cent relative to 2008, partially offset by both transactional and translational foreign exchange benefits of £47m.
Net financing income was £1,922m (2008 first-half £67m) including the effects of mark to market revaluations. Underlying finance costs increased to £33m (2008 first-half £17m) reflecting lower interest rates on cash deposits.
The income statement tax charge of £658m (2008 first-half £97m), reflects the large mark to market gain caused by the revaluation of various financial instruments at the period end. The taxation charge on an underlying basis was £85m (2008 first-half £101m), representing 19.1 per cent of underlying profit before tax. The underlying rate benefited from the settlement of certain overseas tax audits and is affected by the geographical mix of profits, changes in legislation and the benefit of research and development tax credits. The 2009 full year underlying tax rate is expected to be around 21 per cent.
Underlying profit before tax was £445m (2008 first-half £410m). Underlying earnings per share increased by 15 per cent, to 19.64p (2008 first-half 17.15p) (see note 5).
Investment in intangibles during the period was £167m (2008 first-half £122m) and included £75m (2008 first-half £32m) for recoverable engine costs, £61m (2008 first-half £57m) for capitalised development costs and a further £26m (2008 first-half £25m) for certification costs and participation fees.
The continued development and replacement of operational facilities contributed to a total investment in property, plant and equipment of £109m (2008 first-half £105m). Overall investment in tangible and intangible assets for the full year 2009 is expected to be similar to 2008.
The overall net position of assets and liabilities for TotalCare packages on the balance sheet was an asset of £903m (2008 year-end £848m) and the movements include new agreements, timing of overhauls and changes in foreign exchange rates.
Provisions were £377m (2008 year-end £369m). Provisions carried forward in respect of potential customer financing exposure were unchanged at £73m.
Working capital increased by £287m during the period, with increased inventory of £123m and other financial working capital increasing by £164m. Inventory increased in the period in support of growth and partly reflecting disruption caused by programme changes. Deposits from new orders were weak given reduced order flow in the period.
Cash outflow in the period of £428m (2008 first-half £44m) included a £194m outflow (2008 first-half £48m benefit) relating to the period end revaluation of foreign currency cash balances given weaker USD and Euro exchange rates compared to the start of the period.
Continued growth in underlying profits was offset by increased cash investments of £276m (2008 first-half £227m) in plant and equipment and intangible assets and payments to shareholders of £101m (2008 first-half £58m). Tax payments increased by £18m to £50m in the period.
Average net cash for the period was £760m (2008 first-half £265m). The net cash balance at the period-end was £1,030m (2008 year-end £1,458m). The Group’s full year cash flow is expected to be affected by higher pension contributions, reduced deposits and progress payments and increased payments to shareholders which largely reflect the removal of the conversion option in 2008. In addition, the Group may be asked to provide financial support on a case by case basis to some customers and suppliers. As a result, we continue to expect that there will be a cash outflow in 2009. However, the average net cash balance is expected to increase from the 2008 full-year average of £375m.
There were no material changes to the Group’s gross and net contingent liabilities in the period. Contingent liabilities include commitments made to civil aerospace customers in the form of asset value guarantees (AVGs) and credit guarantees. At the end of June 2009, the gross level of commitments on delivered aircraft was $1,153m (£699m), including $642m for AVGs and $511m for credit guarantees. The net exposure after reflecting the level of security was $237m (£144m).
The declared interim payment to shareholders is equivalent to 6.00 pence per ordinary share (2008 interim payment 5.72p), a five per cent increase over the 2008 interim. The payment to shareholders will, as before, be made in the form of redeemable C Shares which shareholders may either choose to retain or redeem for a cash equivalent. The Registrar, on behalf of the Company, operates a C Share Reinvestment Plan (CRIP) and can, on behalf of shareholders, purchase ordinary shares from the market rather than delivering a cash payment.
The interim payment is payable on January 5, 2010 to shareholders on the register on October 30, 2009. The final day of trading with entitlement to C Shares is October 27, 2009.
Condensed consolidated income statement (pdf 93k)