Financial Review – 2009 Performance

Foreign exchange

The pace and extent of currency movements had a material effect on the Group’s reported financial performance in 2009, with the GBP exchange rates against the USD and the Euro having the largest effect. 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 meaningful 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 year were as follows:

Principal spot rate movements
Jan 1 2009Dec 31 2009

The average rates throughout the year were:

Average rate movements
 H1 2008FY 2009
GBP ~ USD£1~$1.854£1~$1.566
GBP ~ Euro£1~€1.258£1~€1.123

The impact of the period-end mark-to-market on all of the outstanding financial instruments is the principal element included within net financing income in the income statement of £1,785m (2008 £2,754m net financing charge), contributing to a published profit before tax of £2,957m (compared to a loss before tax of £1,892m in 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 tax of £915m benefited from £71m of foreign exchange benefits compared to 2008. The achieved rate on selling net USD income was around one and a half cents better in 2009 than 2008, contributing £16m of transactional benefits. In addition, the improvement in the average GBP~USD and GBP ~ Euro exchange rates, 29 and 14 cents respectively, contributed translation benefits totalling £55m to underlying profit before tax in the year.

2. Balance sheet and cash flow – The Group maintains a number of currency cash balances which vary throughout the financial year. Given the movements in foreign exchange rates in the period, a number of these cash balances were impacted by the stronger GBP exchange rates at the period-end, causing a reduction of £141m in the periodic cash flow and hence the closing balance sheet cash position.

Income statement

The firm and announced order book, at constant exchange rates, was £58.3bn (2008 £55.5bn) after reflecting new order intake of £13.4bn in the period. Aftermarket services included in the order book totalled £16.5bn (2008 £14.5bn).

Revenues increased by 15 per cent, compared with 2008, to £10,414m. Revenues on an underlying basis grew by 11 per cent. Payments to industrial RRSPs, charged in cost of sales, amounted to £231m (2008 £268m).

Gross research and development investment was £864m (2008 £885m). Net research and development investment, charged to the income statement was £379m (2008 £403m) after net capitalisation of £92m (2008 £87m) on development programmes in the period. Receipts from RRSPs in respect of new programme developments, shown as other operating income, were £89m (2008 £79m), as key partners joined major new programmes, primarily the Trent XWB.

Restructuring costs of £55m (2008 £82m) were charged, reflecting the ongoing reduction in headcount and improvement programmes designed to improve future operational performance.

Underlying profit margins before financing fell by approximately 0.3 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 three per cent relative to 2008, partially offset by both transactional and translational foreign exchange benefits of £71m.

Net financing income was £1,785m (2008 charge of £2,754m) including the effects of mark to market revaluations. Underlying finance costs increased to £68m (2008 £39m), reflecting lower interest rates on cash deposits and increased funding costs associated with the £500m GBP bond issued in 2009.

Underlying profit before tax was £915m (2008 £880m). Underlying earnings per share increased by eight per cent, to 39.67p (2008 36.70p) (see note 3 on page 25).

The income statement tax charge of £740m (2008 credit of £547m), 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 £187m (2008 £217m), representing 20.4 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 2010 full year underlying tax rate is expected to be around 24 per cent.

Balance sheet

Investment in intangibles during the period was £342m (2008 £393m) and included £123m (2008 £97m) for recoverable engine costs, £121m (2008 £113m) for capitalised development costs and a further £66m (2008 £55m) 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 £291m (2008 £283m). Overall investment in tangible and intangible assets for the full year 2010 is expected to be similar to 2009.

The overall net position of assets and liabilities for TotalCare packages on the balance sheet was an asset of £970m (2008 £848m). The movements reflect new agreements, timing of overhauls and changes in foreign exchange rates.

Provisions were £442m (2008 £369m), including increased provisions against warranties and guarantees reflecting increased volumes. Provisions carried forward in respect of potential customer financing exposure were similar to 2008 at £71m.

Cash flow

Working capital increased by £78m during the period. Lower inventory levels, reduced by £119m, partially offset financial working capital which increased by £197m.

Cash outflow in the period of £183m (2008 inflow £570m) included a £141m outflow (2008 £439m benefit), relating to the period end revaluation of foreign currency cash balances.

Cash flow for the period was £173m lower than 2008, excluding the effects of period end revaluations. The main changes from 2008 included increased cash payments to shareholders, higher pension scheme contributions and reduced customer deposits.

Average net cash for the period was £635m (2008 £375m). The net cash balance at the period-end was £1,275m (2008 £1,458m).

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 2009, the gross level of commitments on delivered aircraft was $1,137m (£704m), including $628m for AVGs and $509m for credit guarantees. The net exposure after reflecting the level of security was $217m (£134m).

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 proposed final payment to shareholders is equivalent to 9.00 pence per ordinary share (2008 8.58 pence), a five per cent increase over 2008, bringing the full year payment to 15 pence per share.

The final payment is payable on July 1, 2010 to shareholders on the register on April 23, 2010. The final day of trading with entitlement to C Shares is April 20, 2010.

Please see the financial statements Link opens in a new window  for more information

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