Financial Review – 2010 First-half performance

Foreign exchange

The pace and extent of currency movements had a material effect on the Group’s reported financial performance in 2010, with the GBP exchange rates against the USD, EUR and the NOK having the largest effect. These movements have influenced the reported income statement, the cash flow and the 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 year were as follows:

Principal spot rate movements
Dec 31 2009June 30 2010
GBP~USD£1~$1.62£1~$1.50
GBP~Euro£1~€1.13£1~€1.22
GBP~NOK£1~NOK9.33£1~NOK9.73

The average rates throughout the first-half-year were:

Average rate movements
 H1 2009H1 2010
GBP ~ USD£1~$1.49£1~$1.52
GBP ~ Euro£1~€1.12£1~€1.15
GBP ~ NOK£1~NOK9.96£1~NOK9.21

The impact of the period-end mark-to-market on all of the outstanding financial instruments is the principal element included within net financing costs in the income statement of £1,069m (2009 £1,922m net financing income), contributing to a published loss before tax of £475m (compared to a profit before tax of £2,515m in the first-half of 2009). 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 £465m benefited from £37m of foreign exchange benefits compared to 2009. The achieved rate on selling net USD income was around seven cents better in 2010 than the same period of 2009, contributing £28m of transactional benefits. In addition translation benefits, mainly from the Norwegian Krone, contributed £9m to underlying profit before tax in the first-half.

2. Balance sheet and cash flow – The Group maintains a number of currency cash balances which vary throughout the financial year. These were impacted by the movements in exchange rates during the period, causing a small improvement of £6m 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 £58.4bn (2009 year-end £58.3bn) after reflecting new order intake of £5.9bn in the period. Aftermarket services included in the order book totalled £17.9bn (2009 year-end £16.5bn).

Revenues increased by five per cent compared with 2009 to £5,421m. Revenues on an underlying basis grew by seven per cent. Payments to industrial RRSPs, charged in cost of sales, amounted to £127m (2009 first-half £134m).

Gross research and development investment was £436m (2009 first-half £440m). Net research and development investment, charged to the income statement, was £192m (2009 first-half £200m) after net capitalisation of £46m (2009 first-half £46m) on development programmes in the period. Receipts from RRSPs in respect of new programme developments, shown as other operating income, were £82m (2009 first-half £68m), as key partners joined major new programmes, primarily the Trent XWB.

Restructuring costs of £24m (2009 first-half £37m) were charged, reflecting the ongoing improvement programmes designed to improve future operational performance.

Underlying profit margins before financing fell by approximately 0.3 per cent to 9.4 per cent in the period, impacted specifically by strong growth in lower margin original equipment revenues and retrofit charges within the Energy business, partially offset by both transactional and translational foreign exchange benefits of £37m.

Net financing costs were £1,069m (2009 first-half income £1,922m) including the effects of mark-to-market revaluations. Underlying finance costs were £29m (2009 first-half £33m), reflecting lower interest rates on cash deposits offset by reduced financing charges on financial RRSP arrangements.

Underlying profit before tax was £465m (2009 first-half £445m). Underlying earnings per share reduced by five per cent, to 18.72p (2009 first-half 19.64p) (see note 5 on page 23), reflecting an increase in the effective rate of underlying tax compared to 2009.

The income statement tax credit was £144m (2009 first-half charge £658m), reflecting the large mark-to-market loss caused by the revaluation of various financial instruments at the period-end. The taxation charge on an underlying basis was £116m (2009 £85m), representing 24.9 per cent of underlying profit before tax. The 2010 full-year underlying tax rate is expected to be around 25 per cent.

Balance sheet:

Investment in intangibles during the period was £181m (2009 first-half £167m) and included £69m (2009 first-half £75m) for recoverable engine costs, £60m (2009 first-half £61m) for capitalised development costs and a further £38m (2009 first-half £26m) for certification costs and participation fees. In addition a total of £211m of goodwill and other intangibles were recognised on the acquisition of ODIM ASA.

The continued development and replacement of operational facilities contributed to a total investment in property, plant and equipment of £139m (2009 first-half £106m). Overall, 2010 investment in tangible and intangible assets, excluding those related to the ODIM acquisition, are expected to be slightly above the 2009 level of £633m.

The overall net position of assets and liabilities for TotalCare packages on the balance sheet was an asset of £998m (2009 year-end £970m). The movements reflect new agreements, timing of overhauls and changes in foreign exchange rates.

Provisions were £489m (2009 year-end £442m), including increased provisions against warranties and guarantees reflecting higher volumes. Provisions carried forward in respect of potential customer financing exposure were £83m (2009 year-end £71m).

Cash flow:

Overall working capital reduced by £279m in the period.

The cash inflow in the period of £113m (2009 first-half outflow £428m) included a £6m benefit (2009 first-half £194m outflow) relating to the period-end revaluation of foreign currency cash balances.

Excluding the effects of period-end revaluations, cash flow for the period was £341m higher than 2009. The improvement from 2009 primarily reflected a better performance on deposits and other financial working capital.

Average net cash for the period was £915m (2009 first-half £760m). The net cash balance at the period-end was £1,388m (2009 first-half £1,030m).

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 2010, the gross level of commitments on delivered aircraft was $1,129m (£699m), comprising $641m for AVGs and $488m for credit guarantees. The net exposure after reflecting the level of security was $207m (£128m).

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 to shareholders is equivalent to 6.40 pence per ordinary share (2009 6.00 pence), a 6.7 per cent increase over the first-half of 2009.

The interim payment is payable on January 5, 2011 to shareholders on the register on October 29, 2010. The final day of trading with entitlement to C Shares is October 26, 2010.

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

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