Financial Review – 2010 Performance

Foreign exchange

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 biggest influence.  These movements have affected the reported income statement, the cash flow and the closing net cash position (as set out in the financial statements) 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 2009Dec 31 2010

The average rates throughout the year were:

Average rate movements
GBP ~ USD£1~$1.57£1~$1.54
GBP ~ Euro£1~€1.12£1~€1.17

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 £(432)m (2009 £1,785m net financing income). This contributed to a published profit before tax of £702m (compared to a profit before tax of £2,957m in 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 £955m included £74m of foreign exchange benefits.  The achieved rate on selling net USD income was around nine cents better in 2010 than 2009, contributing £72m of transactional benefits. 

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 £17m 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 £59.2bn (2009 £58.3bn) after reflecting new order intake of £12.3bn in the period.  Aftermarket services included in the order book totalled £18.1bn (2009 year-end £16.5bn). 

Revenues increased by six per cent compared with 2009 to £11,085m.  Revenues on an underlying basis grew by seven per cent.  Payments to industrial Risk and Revenue Sharing Partners (RRSP’s), charged in cost of sales, amounted to £198m (2009 £231m). 

Gross research and development investment was £923m (2009 £864m).  Net research and development investment, charged to the income statement, was £422m (2009 £379m) after net capitalisation of £84m (2009 £92m) on development programmes in the period.  Receipts from RRSPs in respect of new programme developments, shown as other operating income, were £95m (2009 £89m), as key partners joined major new programmes, primarily the Trent XWB.  Receipts are expected to be around £20m lower in 2011 reflecting the phasing of milestones on major programmes

Restructuring costs of £46m (2009 £55m) were charged, reflecting the ongoing improvement programmes designed to improve future operational performance.

The amortisation and depreciation charge in the year was £367m (2009 £315m) and is expected to increase by a similar amount in 2011 as the historical investment in programme related costs and new operational facilities come into service.

Underlying profit margins before financing fell by approximately 0.4 per cent to 9.3 per cent in the period, reflecting mix changes in revenue, increased research and development charges, provisions relating to the Trent 900 failure and the industrial Trent retrofit charges.  These headwinds were partially offset by both transactional and translational foreign exchange benefits of £74m, a number of one-off benefits, improving operational performance and lower restructuring charges.

Net financing costs were £432m (2009 £1,785m net financing income) including the effects of mark-to-market revaluations.  Underlying finance costs were £55m (2009 £68m), reflecting reduced financing charges on financial RRSP arrangements which more than offset lower yields on cash deposits.

Underlying profit before tax was £955m (2009 £915m).  Underlying earnings per share reduced by two per cent, to 38.73p (2009 39.67p) (see note 4 on page 29), after an increase in the effective rate of underlying tax, to 24.7 per cent (2009 20.4 per cent).

The income statement tax charge was £159m (2009 £740m), reflecting the large mark-to-market adjustment caused by the spot revaluation of various financial instruments at the period-end.  The taxation charge on an underlying basis was £236m (2009 £187m), representing 24.7 per cent of underlying profit before tax.  The 2011 underlying tax rate is expected to be around 25 per cent.

Balance sheet

Investment in intangibles during the period was £325m (2009 £342m) and included £111m (2009 £123m) for recoverable engine costs, £111m (2009 £121m) for capitalised development costs and a further £57m (2009 £66m) 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 £361m (2009 £291m).  Overall, 2011 investment in tangible and intangible assets is expected to be slightly above the 2010 level of £686m.

The overall net position of assets and liabilities for TotalCare packages on the balance sheet was an asset of £920m (2009 £970m).  The movements reflect new agreements, timing of overhauls and changes in foreign exchange rates.

Provisions were £544m (2009 £442m), including increased provisions against warranties and guarantees, reflecting higher volumes.  Provisions carried forward in respect of potential customer financing exposure were £78m (2009 £71m). 

Cash flow

Overall working capital was reduced by £366m in the period due to a combination of reduced overdue debtors and higher trade payables and accruals. 

The cash inflow in the period of £258m (2009 outflow £183m) included a £17m benefit (2009 £141m 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 £283m better 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 £960m (2009 £635m).  The net cash balance at the period-end was £1,533m (2009 £1,275m). 

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 period end, the gross level of commitments on delivered aircraft was $991m (£633m), comprising $618m for AVGs and $373m for credit guarantees.  The net exposure after reflecting the level of security was $190m (£121m). 

The proposed final payment to shareholders is equivalent to 9.60 pence per ordinary share (2009 9.00 pence), a 6.7 per cent increase over the 2009 final payment making a total of 16.00 pence per ordinary share for 2010.  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.  Shareholders wishing to redeem their C Shares or else redeem and participate in the CRIP must ensure that their instructions are lodged with the Registrar, Computershare Investor Services Plc, no later than 5pm on June 6, 2011.

The final payment is payable on July 5, 2011 to shareholders on the register on April 26, 2011 and the final day of trading with entitlement to C Shares is April 19, 2011.  This final payment will be made by the new listed entity, New Holdco, subject to the Scheme of Arrangement becoming effective.

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

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