Underlying revenue and underlying profit before financing costs and taxation are discussed in the relevant business sections.
Underlying financing costs declined by 11 per cent to £49m, including a small reduction in financial Risk & Revenue Sharing Partners (RRSP) costs and lower funding costs due to the settlement of the Group’s €750m Eurobond during the year.
Underlying taxation was £261m, an underlying tax rate of 22.6 per cent compared with 24.7 per cent in 2010. This reduction reflects increased profits from joint ventures (which are accounted for on post-tax basis) and some adjustments to prior year estimates.
Underlying EPS increased by 25 per cent to 48.54 pence, broadly in line with the increase in the underlying profit after tax.
Payments to shareholders At the AGM on May 4, 2012, the directors will recommend an issue of 106 C Shares with a total nominal value of 10.6 pence for each ordinary share. The final payment is payable on July 4, 2012 to shareholders on the register on April 27, 2012 and the final day of trading with entitlement to C Shares is April 24, 2012. Together with the interim issue on January 3, 2012 of 69 C Shares for each ordinary share with a total nominal value of 6.9 pence, this is the equivalent of a total annual payment to ordinary shareholders of 17.5 pence for each ordinary share.
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 Friday June 1, 2012.
Other operating income relates to programme receipts from RRSPs, which reimburse past R&D costs. These receipts decreased by 20 per cent in 2011 due to the phasing of major programmes.
Net R&D charged to the income statement increased by 10 per cent to £463m. The Group recruited an additional 1,000 engineers to develop the products of the future and to help continue to improve the in-service performance of the existing installed base of products. This investment and the 29 per cent increase in capital expenditure to £467m will prepare our infrastructure and global supply chain for significant growth in the next decade. The Group continues to expect net R&D investment to remain within four to five per cent of Group underlying revenue.
Foreign exchange rate movements influence the reported income statement, the cash flow and closing net cash balance. The average and spot rates for the principal trading currencies of the Group are shown in the table below:
USD per GBP
Year end spot rate
Average spot rate
EUR per GBP
Year end spot rate
Average spot rate
The adjustments between the underlying income statement and the reported income statement are set out in note 2 to the condensed financial statements.
Summary balance sheet - £ million
Property, plant and equipment
Net post-retirement scheme deficits (IAS19 basis)
Net working capital
Net financial assets and liabilities
Investments in joint ventures and associates
Assets held for sale
Other net assets and liabilities
USD hedge book
Net TotalCare assets
Gross customer finance contingent liabilities
Net customer finance contingent liabilities
Intangible assets relate to goodwill, certification costs, participation fees, development expenditure, recoverable engine costs, software and other costs that represent long-term assets of the Group. In aggregate, these assets remained broadly unchanged at £2.9bn: this was largely due to increased development, certification and software costs being offset by the reclassification of V2500 assets on the balance sheet as “Assets held for sale”. The carrying values of the intangible assets are assessed for impairment against the present value of forecast cash flows generated by the intangible asset. The principal risks remain: reductions in assumed market share; programme timings; increases in unit cost assumptions; and adverse movements in discount rates. There have been no impairments in 2011. Further details are given in note 6 of the condensed financial statements.
Property, plant and equipment increased by nine per cent to £2.3bn due to the ongoing development and refreshment of facilities and tooling as the Group prepares for increased production volumes.
Net post-retirement scheme deficits decreased 54 per cent to £397m, including: (i) the impact of the change in pensions’ indexing to CPI in the UK (£130m); (ii) revised healthcare benefits in certain overseas schemes (£74m); and (iii) the reduction in discount rates having a larger impact on the value of the assets than the obligations (calculated on an IAS 19 basis). Overall funding across the schemes has improved in recent years as the Group has improved funding of the schemes with an increasingly lower risk investment strategy that reduces volatility going forward and enables the funding position to remain stable: interest rate and inflation risks are largely hedged; exposure to equities has reduced to around 20 per cent of scheme assets, this has been achieved against the headwind of increasing life expectancy assumptions. In 2011, the Group made further arrangements to reduce volatility and enable future funding to be predicted with more certainty. A longevity swap was transacted with a third party to eliminate the risk of increasing life expectancy of pensioners in the largest UK defined benefit scheme. No significant change expected to the ongoing funding levels of the UK pension schemes in 2012.
Net funds reduced to £223m largely due to the £1.5bn consideration paid during the year for the Group’s shared investment in Tognum AG. As a result, average net funds fell by £640m to £320m (£805m excluding acquisitions). The Group continues to have access to good liquidity with £1.2bn undrawn committed facilities and bond proceeds of £1.1bn, providing total liquidity of £2.5bn when net funds of £223m are taken into consideration.
Investment – joint ventures and associates increased in the year as a result of the investment in Tognum.
Assets held for sale represent the assets and liabilities expected to be derecognised as a result of the anticipated restructuring of IAE.
Provisions largely relate to warranties and guarantees provided to secure the sale of OE and services. These provisions reduced modestly during the year.
Net financial assets and liabilities relate to financial RRSPs and the fair value of foreign exchange, commodity and interest rate contracts, set out in detail in note 7 to the condensed financial statements. The change largely reflects the impact of the change in the GBP/USD exchange rate on the valuation of foreign exchange contracts.
The USD hedge book increased five per cent to US$22.0bn. This represents around four and a half years of net exposure and has an average book rate of £1 to US$1.60. Current forward market exchange rates are similar to current average book rates.
Net TotalCare assets relate to Long Term Service Agreement (LTSA) contracts in the Civil Aerospace business, including the flagship services product TotalCare. These assets represent the timing difference between the recognition of income and costs in the income statement and cash receipts and payments.
Customer financing facilitates the sale of OE and services by providing financing support to certain customers. Where such support is provided by the Group, it is generally to customers of the Civil Aerospace business and takes the form of various types of credit and asset value guarantees. These exposures produce contingent liabilities that are outlined in note 10 to the condensed financial statements. The contingent liabilities represent the maximum aggregate discounted gross and net exposure in respect of delivered aircraft, regardless of the point in time at which such exposures may arise. During 2011, the Group’s exposure remained stable with gross and net exposures of £612m and £124m respectively. As has been well publicised, some banks that have been active in recent years in providing funds for aircraft financing have chosen during 2011 to substantially reduce their exposure in this market segment. Although this may have some effect on the terms and pricing of new aircraft finance transactions in the near future, the Group expects that other providers of USD funding and ongoing support from the export credit agencies will largely fill the gap left by these banks.
Group 2012 Guidance
Excluding the impact of the Tognum acquisition and the proposed IAE transaction, in 2012 the Group expects to see good growth in underlying revenue and underlying profit with a cash flow around breakeven as we continue to invest for future growth.
In Civil Aerospace, we anticipate good growth in underlying revenue and strong growth in underlying profit. In Defence Aerospace we expect modest growth in underlying revenue and profit. In Marine we expect a modest increase in underlying revenue, with underlying profit broadly flat. And in Energy we see growth in revenue and some improvement in profit.
Other relevant data
Foreign exchange: neutral.
R&D: a modest increase in expenditure combined with lower net capitalisation and higher amortisation due to the phasing of new programmes.
Taxation: the underlying tax rate is expected to be around 24 per cent.
Capital expenditure: a modest increase, including increased investment in IT.
Intangible assets: modest increase compared with 2011 due to a modest increase in recoverable engine costs partially offset by a decrease in development costs due to the phasing of new programmes.
Property, plant and equipment: modest increase compared with 2011 as we continue to invest in capability and infrastructure.
Pensions: no material changes expected to funding levels.
Tognum and IAE transactions
Tognum is expected to contribute in the first half to the Group’s share of results of joint ventures and associates. Tognum’s results are expected to be fully consolidated around the half year with Daimler’s 50 per cent share of the result recorded as a non-controlling interest. For 2012, Tognum will be reported as a separate segment. As Tognum remains a listed company, the Group is not permitted to provide guidance at this time. Tognum will issue their preliminary results on 8 March, 2012.
The sale of the Group’s 32.5 per cent shareholding in IAE is expected to receive regulatory approval during the first half of 2012, at which time the initial cash consideration of $1.5bn will be received. For the first full year following settlement, the impact of the sale on subsequent trading will have a small negative effect on underlying revenue and a positive effect of around £140m on underlying profit. The impact on the order book will be a reduction of around £4bn.