Rolls-Royce 2012 Full Year Results

                                                                                                                                                              14 February, 2013

 

 

ROLLS-ROYCE HOLDINGS PLC

2012 FULL YEAR RESULTS

 

Group Highlights

 

·     Order book of £60.1bn, up four per cent.

 

·     Underlying revenue of £12.2bn, up eight per cent.

 

·     Underlying profit before tax of £1.4bn, up 24 per cent.

 

·     Payment to shareholders of 19.5 pence per share, up 11 per cent.

 

 

 

£ millions	2012	2011	Change
Order book*	60,146	57,630	4%
Underlying revenue**	12,209	11,277	8%
Underlying profit before tax**	1,429	1,157	24%
Return on sales***	12.2%	10.7%	1.5pp
Underlying earnings per share	59.27p	48.54p	22%
Full year payment to shareholders	19.5p	17.5p	11%
Reported revenue	12,161	11,124	9%
Reported profit before financing	2,072	1,189	74%
Net cash	1,317	223	1,094
Average net (debt)/cash	(145)	320	-465

          

 *     Restated 2011 year-end data excluding IAE order book of £4,571m

**    See Note 2 on p.20 for explanation

***   By reference to underlying profit before financing costs and tax

 

 

John Rishton, Chief Executive, said:

 

"In the second half of the year, revenue growth increased as we delivered 23 per cent more engines than in the first half. Margins improved, reflecting volume, mix, cost control and the IAE transaction.

"In the full year, underlying profits increased for the tenth consecutive year. We have established this record of consistent delivery while continuing to invest in people, technology and facilities.

"The strength of our order book demonstrates the confidence our customers have in our products and services. Our priorities remain: delivering on the promises we have made; deciding where to grow and where not to; and improving financial performance.

"In 2013, we expect modest growth in underlying revenue and good growth in underlying profit with cash flow around break even as we continue to invest for the future.

"Sir Simon Robertson today announced his intention to retire as Chairman of Rolls-Royce at this year's Annual General Meeting. Simon has made an exceptional contribution over the past eight years. He has worked tirelessly on behalf of the company and his energy and enthusiasm have been an example to us all. I am delighted to welcome Ian Davis as our new Chairman and look forward to working closely with him".

Group Overview

 

In 2012, the order book increased by four per cent, underlying revenue by eight per cent and underlying profit by 24 per cent. We delivered a record number of power systems that, typically, produce decades of aftermarket services revenue.

 

The priorities for the business remain the same as last year:

 

1.    Deliver on the promises we have made.

2.    Decide where to grow and where not to.

3.    Improve financial performance.

In 2012 we have made progress towards these objectives:

 

1.    Deliver on the promises we have made

The quality of the products and services we supply is measured across the Group and has shown steady improvement. Increased focus on delivery has led to significant improvement in wide-body engines in Civil Aerospace and in our Marine products. Across the Group, we are investing in a wide range of projects that will improve operational performance and reduce cost. This includes  continuing investment in modernising our IT infrastructure that is a key enabler for our business.

 

Significant milestones have been achieved in our major programmes.

 

These include:

 

·     In Civil Aerospace, the certification of the Trent XWB engine (in February 2013) that will power the Airbus A350, the launch of the Trent 1000-TEN that will power Boeing 787s entering service from 2016 and the entry into service of the BR725 engine powering the new Gulfstream G650 corporate jet.

 

·     In Defence Aerospace, the Short Take Off and Vertical Landing (STOVL) variant of the F35B Lightning II Joint Strike Fighter entered service with the US Marine Corps and deliveries were made to the UK MoD.

 

·     In Marine, gas turbine power and propulsion equipment was delivered for the US Navy's Littoral Combat Ship and the UK's Queen Elizabeth class aircraft carriers.

 

·     In Energy, we expanded our fleet of gas turbine compressor units through contracts for China's West East Pipeline Project (WEPP) and the Uzbekistan section of the Asia Trans Gas (ATG) pipeline.

 

2.    Decide where to grow and where not to

We continue to invest in capacity to fulfil our order book and in technology to expand our portfolio.

 

In Civil Aerospace, we are committed to investing in the wide-body, narrow-body and corporate market segments. In Defence Aerospace, we continue to see opportunities both in developing economies and in our traditional markets, despite the pressure on government spending. In Marine, offshore oil and gas remains a fast growing market and, in Energy, we continue to invest in our Civil Nuclear business where we believe Rolls-Royce can play an important part supporting both existing and new build nuclear capacity.

 

Areas where we have decided not to invest include the sale of our tidal power generation business to Alstom in January 2013 and the sale of a 51 per cent stake in our fuel cell business to LG.

3.    Improve financial performance

We continue to focus on margin progression. In 2012, margins at Group level improved to 12.2 per cent (10.7 per cent 2011).  The Tognum and the IAE restructuring together contributed 1.1 percentage points, with 0.4 percentage points improvement coming from the underlying business.  Overall, profits grew by 24 per cent enabling us to raise our full year distribution to shareholders to 19.5 pence, an 11 per cent increase.

 

Margin progression, cost reduction and cash generation remain areas of intense focus for the Group, as we seek to improve quality, on-time delivery and working capital, while continuing to invest to meet the rising load.  Around £50m of unit cost improvements were realised in 2012.

 

Our cash inflow of £137m, prior to acquisitions and disposals, was delivered after a heavy year of investment in technology, capability and infrastructure.

 

During 2012, we made a number of important announcements:

 

We completed the sale of our equity holding in International Aero Engines (IAE) to Pratt & Whitney. We remain a major supplier to IAE and will receive an agreed payment for each hour flown by the current installed fleet of V2500-powered aircraft for the next fifteen years.

 

Engine Holding (EH), the collaboration we formed with Daimler in 2011, assumed full management control of Tognum. We will fully consolidate the results of EH, including Tognum, from 1 January 2013.

 

We acquired the 50 per cent of the shares we did not already own in Aero Engine Controls (AEC) from Goodrich Corporation. Engine control systems play an increasingly important part in enhancing the fuel efficiency and overall performance of modern jet engines.

 

We have passed information to the Serious Fraud Office (SFO) relating to concerns about bribery and corruption involving intermediaries in overseas markets. This follows a request for information from the SFO about allegations of malpractice in Indonesia and China. We have significantly strengthened our compliance procedures in recent years, including new policies for Global Ethics and Intermediaries. We have also expanded the Compliance function. As a further measure, we have appointed Lord Gold to lead a review of current procedures and report to the Ethics Committee of the Board.

 

Group Trading Summary

 

 

£ millions	2012	2011	Change
Order book*	60,146	57,630	4%
Underlying revenue**	12,209	11,277	8%
Underlying OE revenue	5,893	5,258	12%
Underlying services revenue	6,316	6,019	5%
Underlying profit before tax**	1,429	1,157	24%
Return on sales***	12.2%	10.7%	1.5pp
Net cash	1,317	223	1,094
Average net (debt)/cash	(145)	320	-465

         

   *     Restated 2011 year-end data excluding IAE order book of £4,571m

  **    See Note 2 on p.20 for explanation

  ***   By reference to underlying profit before financing costs and tax

  

 

Order Book

 

·   The order book increased four per cent to £60.1bn, adjusted for the IAE disposal.  Order intake of £16.1bn included new orders of £10.3bn in Civil Aerospace, £1.6bn in Defence Aerospace, £3.3bn in Marine, £0.8bn in Energy and £0.4bn in EH.

 

 

Income Statement

 

·   Underlying revenue increased eight per cent to £12.2bn, including 12 per cent growth in underlying OE revenue (£5.9bn) and five per cent growth in underlying services revenue (£6.3bn).

 

·   Underlying OE revenue growth included a 23 per cent increase in deliveries of Trent and corporate engines in Civil Aerospace and a six per cent increase in military transport, combat, UAV and civil helicopter engines in Defence Aerospace. Growth was offset by the reduction in OE revenue in Marine (down three per cent), and in Energy and in Bergen's contribution to EH (both down 35 per cent).

 

·   Underlying services revenue growth included an increase of five per cent in Civil Aerospace, in line with growth in the installed base, and five per cent in Defence Aerospace. Energy and EH also saw good growth. Marine was up one per cent reflecting increased maintenance activity by customers and higher spares spend in the second half.

 

·   Underlying profit before tax increased 24 per cent to £1.4bn, reflecting revenue growth, improved revenue mix, unit cost reduction and net trading contributions of £77m from Tognum and £92m related to the IAE restructuring. These benefits were partially offset in Civil Aerospace by higher R&D charges and lower entry fees associated with major new programmes, and in Defence Aerospace by the non recurrence of the £60m Strategic Defence Security Review (SDSR) settlement.  Underlying earnings per share (UEPS) improved 22 per cent.

 

 

Balance Sheet

 

·    The year-end cash position of £1.3bn (£223m in 2011) includes the contributions of £942m for IAE and £167m for Bergen. The average net debt in 2012 of £145m (average net cash of £320m in 2011) reflects the timing of the acquisition of Tognum in 2011 and the sale of our interest in IAE in 2012. Excluding the effects of acquisitions and disposals, average net cash of £725m in 2012 compared with £805m in 2011.

 

·    In April, Standard & Poor's Ratings Services raised its long- and short-term corporate credit ratings for the Group to 'A/A-1' from 'A-/A-2'.

 

·    The Group continued to have good liquidity with £3.6bn of cash and committed facilities. Debt maturities remain well spread through to 2019.

 

·    Pension liabilities increased by £148m on an accounting basis, largely due to a reduction in the discount rate. On an economic basis, funding requirements remain stable following the series of measures taken in recent years to achieve greater certainty for our major UK schemes.

 

 

Cash Flow

 

·      A cash inflow of £1.1bn during 2012 included £942m from the disposal of IAE and £167m for the contribution of Bergen to EH. Excluding acquisitions, disposals and foreign exchange, the inflow of £137m reflects the continued investment programme in future growth and the increase in net working capital required ahead of OE volume growth, predominantly in Civil Aerospace.

 

Group Prospects

 

Full year 2013 Group guidance excluding Engine Holding:

 

For the full year 2013, we expect the Group to see modest growth in underlying revenue and good growth in underlying profit, with cash flow around breakeven as we continue to invest for future growth.

 

This guidance excludes the impact of Engine Holding, for which further information is given below.

 

 

Full year 2013 segmental guidance:

 

For the full year 2013, we expect underlying revenue and underlying profit for our business segments as follows:

 

In Civil Aerospace, we anticipate modest growth in revenue and strong growth in profit. In Defence Aerospace we expect modest growth in revenue and a modest reduction in profit. In Marine we expect modest growth in revenue and profit. And in Energy we expect some improvement in revenue and profit.

 

 

The implications of Engine Holding on 2013 performance:

 

Engine Holding comprises Bergen and Tognum. The Group cannot provide financial guidance for Tognum while it is still listed. Tognum also reports its 2012 results today. These can be accessed at www.tognum.de/investors.

 

 

 

Enquiries:

 

Investors:                                                                    Media:

 

Simon Goodson                                                        Josh Rosenstock

Director - Investor Relations                                      Director of External Communications

Rolls-Royce plc                                                          Rolls-Royce plc

Tel: +44 (0)20 7227 9237                                           Tel: +44 (0)20 7227 9163

[email protected]                              [email protected]

 

 

 

Photographs and broadcast-standard video are available at www.rolls-royce.com.  

 

A PDF copy of this report can be downloaded from www.rolls-royce.com/investors.

 

This Full Year Results Announcement contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and will not be updated. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. This report is intended to provide information to shareholders, is not designed to be relied upon by any other party, or for any other purpose and the Company and its directors accept no liability to any other person other than under English law.

Business Segment Reviews 

 

Civil Aerospace

 

£ millions	2012	2011	Change
Order book*	49,608	47,370	5%
Engine deliveries*	668	544	23%
Underlying revenue	6,437	5,572	16%
Underlying OE revenue	2,934	2,232	31%
Underlying services revenue	3,503	3,340	5%
Underlying profit before financing	727	499	46%
Return on sales**	11.3%	9.0%	2.3pp

                     

   *    Restated 2011 year-end data excluding IAE order book of £4,571m and 418 V2500 deliveries

   **   By reference to underlying profit before financing costs and tax

 

Financial          

 

·     The order book increased by five per cent including new orders of £10.3bn (£11.0bn in 2011). We continue to grow our wide-body market share, with Trent engines making up around 75 per cent of our order book. We remain committed to the mid-size market both as a supplier to IAE and via our planned joint venture with the IAE partners to develop the next generation of engines for this market segment. Our continued success in the corporate market is being driven primarily by our BR700 series of engines for large cabin Gulfstream and Bombardier aircraft.

 

Significant orders in 2012 included:

 

o  Trent 700 engines and TotalCare for 54 Airbus A330s for China Eastern, Etihad, Avianca, Synergy, Garuda Indonesia, Air Pacific and Skymark.

o  Trent 900 engines and TotalCare for 11 A380s for Singapore Airlines and Skymark.

o  Trent 1000 engines and TotalCare for five Boeing 787s for Avianca and Air New Zealand.

o  Trent XWB engines and TotalCare for 30 A350s for Cathay Pacific and Singapore Airlines.

 

·     Revenue increased by 16 per cent. There was a 31 per cent growth in OE revenue, primarily reflecting higher deliveries of Trent and corporate engines. Services revenue grew by five per cent consistent with growth in the installed base of thrust.

 

·     Profit increased by 46 per cent, including £92m related to the restructured trading arrangements with IAE. Excluding these, profit increased by 27 per cent due to increased OE volume, better OE mix, services growth and unit cost improvements. This growth was tempered by a higher R&D charge due to higher spend and lower capitalisation related to major new programme activity, and by lower entry fees related to the current maturity of the Trent XWB programme.

 

Portfolio

 

·     The Trent XWB gained certification in February 2013 following a successful flight test programme on an Airbus A380 test aircraft. The Trent XWB is the world's most efficient large jet engine and is the fastest-selling Trent engine, with orders for more than 1,200 engines already received.

 

·     We launched the Trent 1000-TEN that is due to enter service in 2016. This engine, which incorporates proven next generation technology from the Trent XWB, will be capable of powering all versions of the Boeing 787.

 

·     The BR725-powered Gulfstream G650 entered service early in 2013, and the AE3007C-powered Cessna Citation TEN is due to enter service later this year.

 

Defence Aerospace

 

£ millions	2012	2011	Change
Order book	5,157	6,035	-15%
Engine deliveries	864	814	6%
Underlying revenue	2,417	2,235	8%
Underlying OE revenue	1,231	1,102	12%
Underlying services revenue	1,186	1,133	5%
Underlying profit before financing	404	376	7%
Return on sales*	16.7%	16.8%	-0.1pp

 

  *   By reference to underlying profit before financing costs and tax

 

Financial

 

·     The order book contracted by 15 per cent reflecting the budgetary pressures on our major customers in Europe and North America.  The net order intake of £1.6bn (£1.8bn in 2011) includes cancellations of £0.4bn, principally the proposed cancellations of a number of contracts for C-27J aircraft, including those by the US Department of Defense (DoD). Despite the challenging environment, we continue to see opportunities both in our traditional markets and the developing economies.

 

Significant orders in 2012 included:

 

o  US$1bn of contracts for OE and services for military transport, trainer and helicopter engines for the US Army, US Air Force, US Marine Corps and US Navy.

o  A US$315m contract from Pratt & Whitney for 17 LiftSystem sets for the F-35B STOVL variant of the Lightning II Joint Strike Fighter.

o  A £100m contract extension to maintain the engines for the UK MoD's fleets of C-130 military transport and VC10 tanker aircraft.

o  A contract with the Royal Australian Air Force to help improve the fuel efficiency of its C-130 military transport aircraft.

 

·      Revenue increased by eight per cent, reflecting a 12 per cent increase in OE revenue and a five per cent increase in services revenue. However, adjusted for the non-recurrence of the £60m SDSR benefit in 2011, services revenue increased by 11 per cent. This highlights how our large installed base continues to provide services opportunities as customers seek to optimise the efficiency of their aircraft.

 

·      Profit increased by seven per cent. Adjusted for the SDSR benefit in 2011, profit increased by 28 per cent due to increased OE volumes and mix, growth in services, unit cost improvements and a lower R&D charge.  

 

 

Portfolio

 

·     The F-35B STOVL variant of the JSF entered service with the US and the first deliveries were made to the UK MoD. This followed a successful flight test programme for the F-35B that included over 500 short take-offs and landings.

 

·     Engine deliveries for the first production Airbus A400M transport aircraft began in 2012 ahead of entry into service in 2013.

 

·     Flight testing completed successfully with the US Air Force of the Series 3.5 enhanced T56 engine. The reduced fuel consumption and reliability improvements will enable the US Air Force to operate its C130H military transport aircraft until 2040, with improved performance, reduced emissions and significant cost savings.

 

Marine

 

£ millions	2012	2011*	Change
Order book	3,954	2,737	44%
Underlying revenue	2,249	2,271	-1%
Underlying OE revenue	1,288	1,322	-3%
Underlying services revenue	961	949	1%
Underlying profit before financing	294	287	2%
Return on sales**	13.1%	12.6%	0.5pp

 

   *    2011 restated due to the transfer of Bergen to Engine Holding on 2 January as per Note 2 on p.20

  **   By reference to underlying profit before financing costs and tax

 

Financial

 

·      The order book increased 44 per cent including new orders of £3.3bn (£2.1bn in 2011). These include the £1.1bn order by the UK MoD to deliver reactor cores for its future fleet of nuclear-powered submarines. Offshore orders reflected improved demand in the Oil & Gas sector, especially for drillships and support vessels in Brazil. This was partially offset by continued weak order flow in the Merchant sector.

 

Significant orders in 2012 also included:

 

o  £147m of contracts in Brazil to design and equip 18 drillships, Offshore Supply Vessels (OSVs) and Platform Supply Vessels (PSVs) for Atlantico Sul on behalf of Petrobras, Navegação São Miguel and Bravante Group.

o  £119m of contracts to design and equip 10 OSVs for Norway's Farstad Shipping, China's COSCO and Korea's Hyundai.

o  A contract for MT7 gas turbine engines to power the US Navy's future fleet of up to 73 hovercraft, known as the Ship-to-Shore Connector, working with Textron.

o  A contract with the US Navy to supply MT30 gas turbines and propulsion systems for the two latest vessels in the Littoral Combat Ship programme.

o  A contract with the Republic of Korea's Navy to supply the MT30 to power a new FFX frigate. This is the first order for the MT30 in Asia.

 

·     Revenue reduced by one per cent, reflecting increased pricing pressure and adverse foreign exchange movements. Both OE and services revenue improved in the second half reflecting improvement in the offshore sector and better capture of the services market resulting from the recent expansion of our global network of services centres.  

 

·      Profit increased by two per cent due to better revenue mix and cost reduction, partially offset by pricing pressures and adverse foreign exchange movement.

 

 

Portfolio

 

·     The reactor core contract with the UK MoD includes the regeneration of the manufacturing facility in Derby. The phased re-build will provide a leading-edge manufacturing facility with the highest standards of safety to support future programme needs.

 

·     Our innovative commercial ship design capability was extended with a new team formed to design ships for navies, coastguards and other maritime agencies. Ship design enhances our ability to offer integrated systems solutions.

 

·     Our market leading LNG-fuelled C engine was approved for sale in the US by the Environmental Protection Agency (EPA). The C engine positions us well for opportunities that will arise from stricter environmental standards from 2016.

 

Energy

 

£ millions	2012	2011*	Change
Order book	1,290	1,420	-9%
Underlying revenue	962	1,083	-11%
Underlying OE revenue	344	527	-35%
Underlying services revenue	618	556	11%
Underlying profit before financing	21	16	31%
Return on sales**	2.2%	1.5%	0.7pp

 

   *    2011 restated due to the transfer of Bergen to Engine Holding on 2 January as per Note 2 on p.20

   **   By reference to underlying profit before financing costs and tax

 

Financial

 

·     The order book reduced by nine per cent, with new orders of £0.8bn (£1.3bn in 2011). In the oil & gas market, high oil prices and global growth continue to sustain bid activity, albeit with pricing pressures and order deferrals by some customers. While the power generation market in mature economies remains suppressed, we are seeing growth in developing countries. We continue to invest for future growth in Civil Nuclear.

 

Significant orders in 2012 included:

 

o  A contract with Petrochina to supply a further six RB211 gas turbine compression packages for Line 3 of the West-East Pipeline Project (WEPP).

o  A contract with Uzbekistan to supply three RB211 units for the Uzbekistan section of the Asia Trans Gas (ATG) pipeline to transport gas from Turkmenistan to China.

o  A contract to supply two industrial Trent 60 WLE gas turbines to generate power for LUKOIL's plant in Russia.

o  A contract to supply a Trent 60 WLE gas turbine to supply power for the El Alto plant in the Kenko Zone that will power over 100,000 homes in and around La Paz, Bolivia.

o  A contract to supply an RB211 to operate PTT's Ethane Separation Plant in Thailand.

 

·      Revenue fell by 11 per cent due to a significant reduction in OE revenue and adverse revenue mix in Oil & Gas and in Power Generation. The OE reduction was partially offset by an 11 per cent increase in services revenue. Services revenue, particularly in Oil & Gas, benefited from a better penetration of the aftermarket for the installed base across all sectors.

 

·      Profit increased by five million pounds.

 

 

Portfolio

 

·      Agreements were signed with Areva and Hitachi to collaborate further on civil nuclear new build projects for which we will manufacture complex components and provide technical services.

 

·      The RB211-Gzero was launched as a retrofit upgrade product to provide increased power to many existing users of industrial RB211 aero-derivative gas turbine engines.

 

·      LG acquired a 51 per cent stake in Rolls-Royce Fuel Systems (US) Inc. that will enable the business to further develop and industrialise fuel cell technology. In January 2013, we sold Tidal Generation Ltd. to Alstom.

 

·       Construction of a new purpose-built gas turbine package, assembly and test facility in Santa Cruz in Brazil is well advanced. The facility is expected to start production in 2013.

 

Additional Financial Information

 

Income statement

 

Underlying income statement extracts - £ millions	2012	2011	Change
Revenue	12,209	11,277	8%
Civil Aerospace	6,437	5,572	16%
Defence Aerospace	2,417	2,235	8%
Marine	2,249	2,271	-1%
Energy	962	1,083	-11%
Engine Holding	287	331	-13%
Intra-segment	(143)	(215)
Profit before financing costs and taxation	1,490	1,206	24%
Civil Aerospace	727	499	46%
Defence Aerospace	404	376	7%
Marine	294	287	2%
Energy	21	16	31%
Engine Holding	109	80	36%
Intra-segment	(11)	-
Central costs	(54)	(52)
Net financing costs	(61)	(49)	24%
Profit before taxation	1,429	1,157	24%
Taxation	(318)	(261)	22%
Profit for the period	1,111	896	24%
EPS	59.27p	48.54p	22%
Payment to shareholders	19.5p	17.5p	11%
Other items
Other operating income	33	70
Gross R&D investment	919	908
Net R&D charged to the income statement	589	463

 

·    Engine Holding (EH), our joint venture with Daimler, owns Bergen and over 99 per cent of Tognum. Management control of Tognum was taken on 1 January 2013 from which date we will fully consolidate EH's results, together with Daimler's 50 per cent non-controlling interest. EH's contribution of £287m to 2012 revenue came wholly from Bergen. EH's profit contribution of £109m comprised £32m from Bergen and £77m from the equity accounted contribution from Tognum. The transfer of Bergen to EH during 2012 also resulted in a £167m cash benefit to the Group. Further details are provided in Note 12 on p.27.

 

·    Underlying revenue increased eight per cent to £12.2 bn. This includes a five per cent growth in services revenue to £6.3bn and a 12 per cent increase in OE revenue to £5.9bn. OE performance included strong 31 per cent growth in Civil Aerospace and 12 per cent growth in Defence Aerospace offset by reductions in OE revenue in each of Marine, Energy and EH. Underlying services revenue continues to represent more than half (52 per cent) of the Group's underlying revenue. In 2012, services revenue grew in all businesses as the installed base of products continued to grow and the services network expanded.

 

·    Underlying profit before financing costs and taxation increased 24 per cent to £1.5bn. This was due to a number of factors: increased revenue; better mix; unit cost reduction; a full year's benefit from Tognum (compared to four months' contribution to Group results in 2011); and improved trading following the IAE restructuring settlement completed during the year. These improvements were partly offset by a significant increase in the R&D charge and lower other operating income. Further discussion of trading is included in the business segment reports on p.6 to p.9.

 

·    Underlying financing costs increased 24 per cent to £61m, including an increase in net interest charges reflecting lower average net funds after funding the Tognum acquisition in the second half of 2011.

 

·     Underlying taxation was £318m, an underlying tax rate of 22.3 per cent compared with 22.6 per cent in 2011.

 

·     Underlying EPS increased 22 per cent to 59.27 pence, in line with the increase in the underlying profit after tax.

 

·     Payments to shareholders: at the AGM on 2 May 2013, the directors will recommend an issue of 119 C Shares with a total nominal value of 11.9 pence for each ordinary share. The final issue of C shares will be made on 1 July 2013 to shareholders on the register on 26 April, 2013 and the final day of trading with entitlement to C Shares is 23 April 2012. Together with the interim issue on 2 January 2013 of 76 C Shares for each ordinary share with a total nominal value of 7.6 pence, this is the equivalent of a total annual payment to ordinary shareholders of 19.5 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 3 June 2013. Redemption will take place on 3 July 2013.

 

·    Other operating income relates to programme receipts from RRSPs, which reimburse past expenditure. These receipts decreased by 53 per cent in 2012 due to the phasing of major programmes such as the Trent XWB.

 

·    Net R&D charged to the income statement increased by 27 per cent to £589m reflecting a combination of increased spend of £57m and lower net capitalisation of £70m due to the phasing of major new programmes. This investment and the ten per cent increase in capital expenditure including software to £610m will prepare our infrastructure and global supply chain for significant growth in the next decade. The Group continues to expect the net R&D spend 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:

 

		2012	2011
USD per GBP	Closing spot rate	1.63	1.55
	Average spot rate	1.59	1.60
EUR per GBP	Closing spot rate	1.23	1.20
	Average spot rate	1.23	1.15

 

·    The adjustments between the underlying income statement and the reported income statement are set out in Note 2 to the condensed financial statements on p.20.

 

 

Balance sheet

 

Summary balance sheet - £ millions	2012	2011
Intangible assets	2,901	2,882
Property, plant and equipment	2,564	2,338
Net post-retirement scheme deficits	(545)	(397)
Net working capital	(1,100)	(1,098)
Net funds	1,317	223
Provisions	(461)	(502)
Net financial assets and liabilities	(127)	(718)
Investment in joint ventures and associates	1,800	1,680
Assets held for sale	4	178
Other net assets and liabilities	(248)	(67)
Net assets	6,105	4,519
Other items
USD hedge book	$22,500	$22,000
Net TotalCare assets	1,312	956
Gross customer finance contingent liabilities	569	612
Net customer finance contingent liabilities	70	124

 

·    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 with additional development, recoverable engine, certification and software costs being offset by annual amortisation charges. 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 significant impairments in 2012. Further details are given in Note 6 to the condensed financial statements on p.24.

 

·    Property, plant and equipment increased by 10 per cent to £2.6bn due to the ongoing development and refreshment of facilities and tooling as the Group prepares for increased production volumes.

 

·    Net post-retirement scheme deficits increased 37 per cent to £545m. This was principally due to the movements in the assumptions used to value the underlying assets and liabilities in accordance with IAS 19 - in particular the discount rate which is derived from AA corporate bond yields. The impact of the revisions to IAS 19 is described in Note 9 to the condensed financial statements on p.26.

 

Overall funding across the schemes has improved in recent years as the Group has adopted a 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; and exposure to equities has reduced to around 12 per cent of scheme assets. This has been achieved against the headwind of increasing life expectancy assumptions. A modest reduction in the Group's cash contribution to the overall funding level of the schemes is expected in 2013.

 

·     Net funds increased by £1.1bn to £1.3bn largely due to the £0.9bn proceeds received on the restructuring of IAE. Average net funds fell by £465m to (£145m) due to the timing of the Tognum acquisition in the second half of 2011 and the restructuring of IAE in June 2012.

 

·    Investment - joint ventures and associates increased by seven per cent, largely as a result of the capitalisation of a loan to Engine Holding in respect of the acquisition of Tognum.

 

·     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 the fair value of foreign exchange, commodity and interest rate contracts and financial RRSPs and the put option on Bergen Engine AS, 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 and the inclusion of the put option (£167m) for the first time.

 

·     The USD hedge book increased two per cent to US$22.5bn. This represents around five 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 original equipment (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 on p.26 and p.27. 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 2012, the Group's gross exposure remained stable at £569m. On a net basis, exposure reduced by £54m to £70m predominantly due to an indemnity from United Technologies for all A320 commitments following the restructuring of IAE.

 

Whilst some banks, particularly European institutions, continue to find circumstances challenging and offer limited participation in financing new aircraft deliveries, the Group expects that other providers of US dollar funding and ongoing support from the export credit agencies will largely fill the gap left by these banks.